Regal Beloit Corporation — Fiscal 2011 Form 10-K Summary
Business context and reporting period
Regal Beloit Corporation, now operating as Regal Rexnord, manufactured electric motors and controls, generators and controls, and mechanical motion-control products through its Electrical and Mechanical segments. The filing covers the 52-week fiscal year ended December 31, 2011, with comparisons to the 52-week fiscal year ended January 1, 2011.
The company completed its largest acquisition, Electrical Products Company (“EPC”) from A.O. Smith, on August 22, 2011, for $756.1 million in cash and 2,834,026 shares. Other 2011 acquisitions included AFMC, Ramu and Hargil. EPC contributed $246.2 million of post-acquisition sales.
Financial performance and key metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Net sales | $2.808 billion | $2.238 billion | +25.5% |
| Gross profit | $666.0 million | $549.4 million | +21.2% |
| Gross margin | 23.7% | 24.5% | Down 80 basis points |
| Operating income | $255.7 million | $237.7 million | +7.6% |
| Operating margin | 9.1% | 10.6% | Down 150 basis points |
| Net income attributable to Regal | $152.3 million | $149.4 million | +1.9% |
| Diluted EPS | $3.79 | $3.84 | Down $0.05 |
| Operating cash flow | $265.3 million | $175.4 million | +51.3% |
| Capital expenditures | $57.6 million | $45.0 million | +28.1% |
Electrical segment sales increased 26.5% to $2.533 billion, while operating income increased to $222.6 million, but the segment margin declined to 8.8% from 10.5%. Mechanical segment sales increased 16.5% to $275.0 million, and operating income increased 20.5% to $33.1 million; its operating margin improved to 12.1% from 11.7%.
Fourth-quarter 2011 sales were $727.0 million, compared with $555.7 million in the fourth quarter of 2010. Fourth-quarter operating income was $58.6 million versus $38.3 million, and net income attributable to Regal was $33.5 million versus $25.2 million. Diluted EPS was $0.80 versus $0.65.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $142.6 million at December 31, 2011, compared with $174.5 million at January 1, 2011.
- Working capital was $766.6 million, with a current ratio of 2.5:1.
- Total debt was $919.2 million, compared with $436.9 million at the prior year-end, primarily reflecting financing for the EPC acquisition.
- Long-term debt was $909.2 million. Debt consisted principally of $750.0 million of senior notes, a $145.0 million term loan and $9.0 million drawn under the revolving credit facility.
- The revolving facility had $441.5 million of available borrowing capacity after approximately $49.5 million of standby letters of credit.
- The company reported compliance with all debt covenants. Debt-to-EBITDA was approximately 1.8:1 versus a maximum covenant of 3.75:1, and interest coverage was approximately 16.3:1 versus a minimum covenant of 3.0:1.
- Fiscal 2011 financing cash flow of $455.8 million included $500.0 million of long-term borrowings. Investing cash flow used $752.1 million, including $765.9 million for acquisitions.
Material changes versus the prior comparable period
- Growth was acquisition-led: recently acquired businesses contributed $494.3 million of incremental fiscal 2011 sales, including $484.3 million in Electrical.
- Reported sales also reflected approximately 6% pricing benefits, a 4% unfavorable volume and mix impact, and approximately 1% favorable foreign-currency translation.
- Margins declined because of $25.8 million of EPC inventory purchase-accounting adjustments, $12.6 million of incremental warranty expense from a production flaw, higher acquisition-related expenses, and a mix shift toward lower-efficiency HVAC motors.
- U.S. residential HVAC motor sales declined 7.1%, affected by weak housing markets, reduced federal tax incentives for high-efficiency products and increased industry sales of R22 systems.
- Commercial and industrial motor sales in North America increased 12.1%, and global generator sales increased 25.6%, aided by demand for backup and primary power after global natural disasters.
- Sales outside the United States exceeded $1 billion and represented 36.0% of total sales, up from 31.6% in fiscal 2010.
- Goodwill increased to $1.118 billion from $775.4 million, and net intangible assets increased to $316.3 million from $175.5 million, primarily due to acquisitions.
- Shares outstanding increased following the issuance of 2.834 million shares as part of the EPC consideration, contributing to lower diluted EPS despite higher net income.
Guidance, outlook, risks and unusual items
Management stated that the near-term operating environment was expected to remain challenging because of global economic uncertainty and volatility in copper, steel and aluminum costs. The filing does not provide a specific revenue or earnings forecast.
- Fiscal 2012 capital spending was expected to increase to approximately $120.0 million, including construction and relocation of two factories in China. Management expected to fund this spending with operating cash flow and revolving-facility borrowings.
- Backlog was $372.4 million at December 31, 2011, compared with $340.2 million at January 1, 2011; substantially all was expected to ship in 2012.
- Milwaukee Gear Company was acquired on February 3, 2012 for $83.8 million in cash, funded with revolving-facility borrowings. Initial purchase accounting was incomplete at filing.
- Warranty reserves increased to $24.2 million from $12.8 million, including the $12.6 million provision related to a corrected production flaw.
- A subsidiary acquired in 2007 faced numerous claims involving motors allegedly associated with fires in ventilation units. Management did not believe the claims were materially adverse based on current facts, but stated that potential remediation and related costs could be significant.
- Principal risks include commodity-price inflation, customer concentration in HVAC, supply disruptions, acquisition integration, elevated leverage, interest-rate and foreign-currency exposure, product liability, litigation, goodwill impairment, international operations, seasonality and economic cyclicality.
- The company had a pension funding deficit of approximately $64.2 million and expected to contribute $7.7 million to defined-benefit plans in 2012.
Most important facts for investors to verify
- Whether EPC integration delivers expected synergies and offsets purchase-accounting, warranty and acquisition-related costs.
- Whether operating margins recover after the fiscal 2011 decline, particularly in the Electrical segment.
- The pace of debt reduction following the EPC and Milwaukee Gear acquisitions and the company’s continued covenant compliance.
- Exposure to copper, steel and aluminum prices, including the effectiveness and fair values of commodity hedges.
- Demand trends in residential HVAC, commercial and industrial motors, generators and Mechanical segment end markets.
- The ultimate cost and resolution of warranty, product-liability, fire-related and other litigation claims.
- Goodwill and intangible-asset valuation, especially given goodwill of $1.118 billion and the acquisition-heavy growth strategy.
- Execution of the planned $120.0 million fiscal 2012 capital program and the China factory relocations.