Business Context and Reporting Period
Regal Beloit Corporation (the filing identifies the registrant as Regal Beloit, not Regal Rexnord) filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2012, compared with July 2, 2011. The company operates in Electrical and Mechanical segments serving global electric motor, power generation, gearing and mechanical motion-control markets.
Results include the Electrical Products Company acquisition completed in August 2011 and Milwaukee Gear Company, acquired February 3, 2012. The fiscal year ends December 29, 2012.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2012 | Three Months Ended July 2, 2011 | Six Months Ended June 30, 2012 | Six Months Ended July 2, 2011 |
|---|---|---|---|---|
| Net sales | $863.9 million | $681.8 million | $1,671.8 million | $1,344.4 million |
| Gross profit | $220.1 million | $150.7 million | $417.7 million | $315.5 million |
| Gross margin | 25.5% | 22.1% | 25.0% | 23.5% |
| Operating income | $103.3 million | $54.8 million | $182.4 million | $118.9 million |
| Operating margin | 12.0% | 8.0% | 10.9% | 8.9% |
| Net income attributable to Regal Beloit | $62.7 million | $34.3 million | $111.4 million | $73.2 million |
| Diluted EPS | $1.49 | $0.88 | $2.65 | $1.87 |
- Second-quarter sales increased 26.7%; six-month sales increased 24.4%.
- Net interest expense increased to $10.8 million in the quarter and $22.2 million for six months, principally because of acquisition-related debt.
- Effective tax rates were 30.5% for the quarter and 28.7% for six months, compared with 28.6% and 30.0%, respectively, in the prior periods.
- Six-month operating cash flow was $204.4 million, compared with $109.6 million in the prior-year period.
- Capital expenditures were $44.8 million and acquisition spending was $95.3 million during the first six months.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $190.9 million at June 30, 2012, versus $142.6 million at December 31, 2011.
- Working capital was $820.5 million, up from $766.6 million; the current ratio was 2.3:1 versus 2.5:1.
- Total debt was $910.9 million, including $750.0 million of senior notes, $145.0 million of term debt and $15.9 million of other debt. Net debt was approximately $720.0 million before considering other adjustments.
- The $500.0 million revolving credit facility had no borrowings outstanding and $473.8 million of available capacity at quarter-end. The term loan matures in June 2013 and management stated it intends and is able to refinance it using facility availability.
- The company was in compliance with all debt covenants. Fixed charges were covered 6.4 times for the six months ended June 30, 2012.
Material Changes Versus the Prior Comparable Period
- Reported growth was substantially acquisition-driven. Second-quarter sales included approximately $225.1 million of incremental acquired-business sales; six-month sales included approximately $428.1 million.
- Excluding acquisitions, second-quarter sales reflected approximately 1.3% of pricing, a 5.5% decline from volume and mix, and a 2.1% foreign-currency headwind. For six months, pricing contributed approximately 1.9%, while volume and mix declined 8.1% and currency reduced sales 1.3%.
- Electrical segment sales increased 28.2% in the quarter and 25.7% for six months. Mechanical sales increased 13.9% and 13.0%, respectively.
- Operating margin improved materially, partly because the prior-year period included a $28.0 million warranty expense item. The 2012 quarter and six months included only $0.5 million of restructuring costs.
- Acquisition-related expenses declined by $3.5 million in the quarter and $10.1 million for six months versus the prior-year periods.
- Residential HVAC motor sales declined 11.9% in the quarter and 21.0% for six months, excluding acquired businesses, primarily due to the R22 dry-ship conversion and weak U.S. housing conditions.
- Net income attributable to Regal Beloit increased 82.8% in the quarter and 52.2% for six months. Diluted shares increased to 42.0 million from 39.2 million, reflecting the acquisition-related stock issuance and other equity activity.
Outlook, Risks, Contingencies and Unusual Items
Management stated that global economic uncertainty is expected to keep the near-term operating environment challenging. The filing does not provide explicit earnings or sales guidance. Management highlighted potential demand weakness from slower economic growth or recession, particularly in residential HVAC markets.
- Key risks include competition, technology and product acceptance, commodity and raw-material prices, significant-customer concentration, supplier disruptions, acquisition integration, higher debt, foreign exchange, interest rates, global economic conditions, product liability, warranty costs and foreign operations.
- The company carries $23.2 million of fair-value contingent purchase-price liabilities related to acquisitions and had a $13.7 million liability for deferred contingent consideration associated with Ramu.
- Accrued warranty costs were $26.0 million at June 30, 2012. The prior-year balance included the previously disclosed $28.0 million warranty expense item.
- Accumulated other comprehensive loss was $94.8 million, including net hedging losses. Approximately $14.5 million of current deferred hedging losses was expected to be realized in earnings within twelve months.
- Outstanding hedges covered copper and aluminum purchases, foreign-currency cash flows and $250.0 million of interest-rate swaps. The company does not use derivatives for speculative purposes.
- The company faces numerous product, warranty, environmental, employment and other legal claims, including fire-related claims involving certain sub-fractional motors manufactured primarily through 2004. Management did not expect these matters to have a material effect on the interim consolidated financial statements.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Separate organic performance from acquisition contributions, particularly the impact of the Electrical Products Company and Milwaukee Gear acquisitions.
- Assess whether residential HVAC weakness, the R22 conversion and volume/mix declines persist or improve.
- Review the sustainability of margin expansion given the favorable comparison against the prior-year $28.0 million warranty charge.
- Confirm the company’s ability to refinance the $145.0 million term loan maturing in June 2013 and maintain covenant compliance.
- Monitor cash conversion, working-capital growth, acquisition spending and leverage as integration continues.
- Evaluate exposure to commodity prices, foreign currencies, floating interest rates and the $39.5 million interest-rate-swap liability.
- Review contingent consideration, warranty reserves and outstanding litigation for changes that could require additional cash or expense.