Regal Beloit Corporation: Fiscal 2014 Form 10-K Summary
Business context and reporting period
Regal Beloit Corporation was a global manufacturer of electric motors and controls, generators and controls, drives, and power transmission products. Fiscal 2014 ended January 3, 2015 and included 53 weeks, compared with 52 weeks in fiscal 2013. The company reorganized reporting into Commercial and Industrial Systems, Climate Solutions, and Power Transmission Solutions, with prior periods retrospectively presented under the new structure.
Fiscal 2014 included acquisitions of Hy-Bon Engineering for $78.0 million and Benshaw for $51.0 million. The substantially larger Power Transmission Solutions acquisition from Emerson closed on January 30, 2015, after year-end, for approximately $1.4 billion in cash plus assumed liabilities of approximately $40 million.
Key financial metrics
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Net sales | $3,257.1 million | $3,095.7 million | 5.2% increase |
| Gross profit | $797.3 million | $783.2 million | 1.8% increase |
| Gross margin | 24.5% | 25.3% | Down 80 basis points |
| Income from operations | $121.5 million | $208.0 million | 41.6% decrease |
| Operating margin | 3.7% | 6.7% | Down 300 basis points |
| Net income attributable to Regal Beloit | $31.0 million | $120.0 million | 74.2% decrease |
| Diluted EPS | $0.69 | $2.64 | 74% decrease |
| Operating cash flow | $298.2 million | $305.0 million | 2.2% decrease |
Fourth-quarter fiscal 2014 sales were $775.6 million, compared with $727.2 million in the prior-year quarter. Fourth-quarter operating loss was $110.6 million and net loss attributable to Regal Beloit was $116.5 million, principally reflecting impairment charges. Fiscal 2014 income before taxes was $90.3 million and the effective tax rate was 60.0%, versus 26.1% in fiscal 2013, primarily because goodwill impairment charges were generally not deductible for federal tax purposes.
- Commercial and Industrial Systems sales were $1,856.1 million, up 6.3%; operating margin was 1.8%, down from 4.7%.
- Climate Solutions sales were $1,134.8 million, up 3.3%; operating margin was 8.8%, down from 9.9%.
- Power Transmission Solutions sales were $266.2 million, up 6.3%; operating margin was negative 4.4%, down from 6.7%.
At January 3, 2015, cash and cash equivalents were $334.1 million, working capital was $1,090.7 million, and the current ratio was 2.9 to 1. Total debt was $633.8 million, including $625.4 million of long-term debt. Available borrowings under the then-current revolving facility were approximately $455.8 million, net of approximately $27.2 million of standby letters of credit.
Fiscal 2014 investing cash outflows were $204.9 million, including $128.2 million for acquisitions and $83.6 million of capital expenditures. Financing cash outflows were $218.0 million, including $150.4 million of debt repayments, $37.8 million of dividends, and $35.0 million of common-stock repurchases. Management expected fiscal 2015 capital expenditures of approximately $100 million to $105 million, funded from operating cash flow.
Material changes versus the prior comparable period
- Sales growth reflected 4.2% acquisition growth and 1.6% organic growth, partly offset by 0.6% unfavorable foreign-currency translation.
- Margins declined because of unfavorable product mix, foreign-currency effects, restructuring costs, and weaker conditions in selected markets.
- Operating results included $119.5 million of goodwill impairment and $40.0 million of long-lived-asset and other impairment charges in fiscal 2014, compared with $76.3 million and $4.7 million, respectively, in fiscal 2013.
- The fourth-quarter 2014 impairment charges totaled $158.5 million before tax, including $118.5 million of goodwill impairment and $40.0 million of asset impairment and other charges. The filing states these charges reduced fiscal 2014 operating income by approximately $159.5 million and net income attributable to Regal Beloit by approximately $147.3 million, including the earlier $1.0 million goodwill charge.
- Fiscal 2014 included a $10.4 million Venezuelan currency-devaluation charge after the company changed its remeasurement rate from the official rate to the SICAD2 rate.
- Pension and other post-retirement liabilities increased to $65.0 million from $39.7 million, primarily because of lower discount-rate assumptions and increased life-expectancy assumptions.
Guidance, outlook, management commentary, and risks
Management indicated that virtually all of the $400.2 million year-end backlog was expected to ship in 2015 and that existing manufacturing capacity was adequate for 2015. Current restructuring activities were expected to conclude by the end of 2015, with approximately $7.9 million of additional charges anticipated.
The PTS acquisition was expected to broaden and balance the product portfolio, provide cross-selling opportunities, and enhance the company’s margin profile. However, the acquisition was financed with a new $1.25 billion five-year unsecured term facility, drawn in full at closing, plus a $500.0 million multicurrency revolving facility. As of February 7, 2015, the company reported approximately $1.9 billion of aggregate debt, $212.2 million of cash and investments, and approximately $392.0 million of available revolving borrowings.
- Debt service, refinancing, floating interest rates, financial covenants, and integration costs following the PTS acquisition.
- Goodwill and intangible-asset impairment risk, particularly in oil and gas, hydraulic fracturing, Venezuela, and other underperforming reporting units.
- Commodity costs for steel, copper, aluminum, magnets, electronics, and other components, with potential effects on gross margins.
- Foreign-currency volatility, Venezuelan currency restrictions and further devaluation, and delayed collection of Venezuelan receivables.
- Global economic cyclicality, customer concentration among major OEMs, competitive pricing pressure, and seasonal HVAC demand.
- Execution risk from facility consolidations, restructuring, global ERP implementation, supply disruptions, product warranty and liability claims, and acquired-business liabilities.
The company disclosed litigation involving motors manufactured primarily before 2004 that were incorporated into third-party ventilation units alleged to have caused fires. Management did not believe the claims were material based on current information but could not predict potential remedial actions or costs.
Important facts for investors to verify
- Reconcile reported fiscal 2014 earnings with the $159.5 million of impairment charges and the $10.4 million Venezuela devaluation charge.
- Assess post-acquisition leverage, interest expense, required term-loan amortization, and compliance with the funded-debt-to-EBITDA covenant.
- Review the final purchase-price allocation, goodwill, intangible assets, and pro forma results for the PTS acquisition.
- Evaluate whether restructuring savings and expected PTS synergies offset integration costs and operating-margin pressure.
- Monitor oil and gas exposure, Venezuela collections and currency rates, commodity prices, foreign exchange, and customer demand.
- Confirm cash availability, the portion held by foreign subsidiaries, capital-expenditure requirements, and the sustainability of dividends.
- Review impairment-testing sensitivity to discount rates, growth assumptions, oil and gas activity, and regional operating performance.