Regal Beloit Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 29, 2012; comparative quarter ended October 1, 2011. Nine-month results are also presented. The filing identifies the registrant as Regal Beloit Corporation, not Regal Rexnord Corporation.
Business Context and Reporting Period
The company operates in two reportable segments: Electrical and Mechanical. Management describes a challenging global environment, including slower demand in commercial, industrial, power-generation and residential HVAC applications. Results include the full-period contribution from the 2011 Electrical Products Company acquisition and the 2012 Milwaukee Gear Company acquisition.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | Change |
|---|---|---|---|
| Net sales | $779.5 million | $736.9 million | 5.8% increase |
| Gross profit | $192.6 million | $179.6 million | 7.2% increase |
| Gross margin | 24.7% | 24.4% | 30 basis-point increase |
| Income from operations | $83.3 million | $78.1 million | 6.7% increase |
| Operating margin | 10.7% | 10.6% | 10 basis-point increase |
| Net income attributable to Regal | $54.3 million | $45.7 million | 18.8% increase |
| Diluted EPS | $1.29 | $1.13 | 14.2% increase |
| Effective tax rate | 24.5% | 30.3% | Lower by 580 basis points |
| Metric | Nine months 2012 | Nine months 2011 | Change |
|---|---|---|---|
| Net sales | $2,451.3 million | $2,081.3 million | 17.8% increase |
| Income from operations | $265.7 million | $197.1 million | 34.8% increase |
| Operating margin | 10.8% | 9.5% | 130 basis-point increase |
| Net income attributable to Regal | $165.7 million | $118.8 million | 39.5% increase |
| Diluted EPS | $3.94 | $3.00 | 31.3% increase |
| Operating cash flow | $276.2 million | $176.2 million | $100.0 million increase |
- Segment performance: Q3 Electrical sales were $708.3 million, up 6.1%; Mechanical sales were $71.2 million, up 2.6%. Nine-month Electrical sales were $2,223.3 million, up 18.7%; Mechanical sales were $228.0 million, up 9.5%.
- Cash and liquidity: Cash and equivalents were $185.8 million at September 29, 2012, versus $142.6 million at December 31, 2011. Working capital was $795.7 million and the current ratio was 2.3 to 1.
- Debt: Total debt was $865.5 million, including $750.0 million of senior notes, $70.0 million of term debt, $27.0 million drawn on the revolving facility and $18.5 million of other debt. The company had $445.1 million of available revolving capacity and was in compliance with all debt covenants.
- Capital deployment: Capital expenditures were $66.1 million and acquisitions used $103.0 million during the first nine months. Dividends declared were $0.19 per share in Q3 and $0.56 per share year to date.
Material Changes Versus the Prior Comparable Period
- Reported sales growth was largely acquisition-driven. Q3 included $105.7 million of incremental sales from recently acquired businesses; excluding those businesses, sales declined 8.6%, reflecting lower volume and mix, foreign-exchange effects and slightly lower pricing.
- For the first nine months, acquired businesses contributed $533.9 million of incremental sales; excluding those businesses, sales declined 7.9%.
- Gross and operating margins improved partly because the 2011 comparison included a $28.0 million warranty expense item and $10.3 million of EPC purchase-accounting inventory adjustments. The 2012 results included $5.2 million of Q3 restructuring expense and $5.7 million year to date.
- Net interest expense increased to $32.4 million for the first nine months from $19.2 million, primarily because of debt incurred to fund the EPC acquisition.
- The effective tax rate benefited from a $2.3 million retroactive Chinese high-technology tax incentive and from the global mix of earnings.
- The company repaid $75.0 million of its term loan during Q3. The remaining term loan matures in June 2013.
Outlook, Risks and Unusual Items
Management expects the near-term operating environment to remain challenging because of global economic uncertainty and potential recessionary effects. The filing does not provide specific revenue, earnings or margin guidance.
- Key risks include reduced demand, cyclical capital-goods markets, commodity prices, foreign-exchange movements, interest rates, significant-customer concentration, supplier disruptions and competition.
- Acquisition integration, purchase-accounting adjustments, unanticipated liabilities and increased debt remain material considerations.
- The company is consolidating several manufacturing facilities in North America and Europe; $5.7 million of restructuring provisions were recorded through nine months, with $1.0 million paid.
- Warranty accruals were $27.3 million at September 29, 2012, compared with $41.4 million a year earlier. The filing also describes ongoing product-liability and other litigation, but management does not expect the disclosed matters to have a material effect.
- Goodwill was $1,144.9 million. The annual impairment test was scheduled for the fourth quarter, and management did not expect the 2012 accounting adoption relating to goodwill testing to have a material impact.
- On October 2, 2012, the company acquired Marlin Coast Motor Rewinding for an immaterial purchase price.
Investor Verification Checklist
- Verify the sustainability of reported growth after separating acquisition contributions from organic demand, particularly in Electrical and HVAC-related markets.
- Assess the effect of the June 2013 term-loan maturity and the company’s refinancing or repayment plan.
- Monitor restructuring execution, facility-consolidation costs and resulting savings.
- Reconcile margin improvement against the unusually adverse 2011 warranty and purchase-accounting comparisons.
- Review goodwill, acquired intangible assets and contingent purchase-price liabilities for impairment or cash-payment risk.
- Track commodity, currency and interest-rate exposure, including the $250.0 million notional interest-rate swaps and hedging obligations.
- Confirm the impact of the China tax incentive and whether the lower effective tax rate is recurring.