RRX

Regal Beloit Corporation - Q1 2008 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 29, 2008. Regal Beloit Corporation operates two strategic reportable segments: Mechanical and Electrical. The company designs, manufactures, and markets a broad range of motors, drives, and mechanical power transmission products. The reporting period includes the full impact of four acquisitions completed in late 2007 (Fasco, Jakel, Morrill, and Alstom).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 28.1% year-over-year. This growth was driven primarily by $111.9 million in sales from the four businesses acquired in 2007.
  • Electrical Segment: Sales rose 32.2% (including acquisitions). Organic growth was seen in global generators (+17.5%) and industrial motors (+6.8%), offset by declines in residential HVAC and commercial motor products.
  • Mechanical Segment: Sales increased 1.0%.
• Profitability: Net income increased 20.1% to $32.2 million. Diluted EPS rose 21.3% to $0.97.
  • Margins: Gross margin compressed slightly to 22.8% from 23.2% due to raw material inflation ($7.7 million impact), partially offset by price increases and productivity gains. Operating margin decreased to 10.7% from 11.3%.
• Expenses: Operating expenses increased to $64.5 million (12.0% of sales) from $49.9 million (11.9% of sales). Interest expense rose to $7.2 million from $5.1 million due to higher debt levels supporting acquisitions.
• Liquidity: Working capital increased 8.1% to $450.4 million. The current ratio improved to 2.4:1 from 2.3:1.

Outlook, Risks, and Unusual Items

• Acquisitions: The company completed the acquisition of Hwada (Wuxi Hwada Motor Co.) in China on April 25, 2008, for approximately $27.6 million in cash plus $8.0 million in assumed liabilities. This is a subsequent event not included in Q1 results.
• Capital Allocation: The company repurchased 110,000 shares of common stock for $4.2 million during the quarter. A cash dividend of $0.15 per share was declared.
• Market Risks:
  • Commodity Prices: Exposure to copper and aluminum prices is managed via futures and options hedging. Unrealized gains on commodity hedges were $11.7 million (net of tax) in AOCI.
  • Interest Rates: The company has $182.3 million in variable rate debt. Interest rate swaps are used to hedge exposure. A hypothetical 10% rate change would impact after-tax earnings by approximately $0.3 million annually.
  • Currency: Foreign sales represented 25.6% of total sales. The company uses forward contracts to hedge transactional currency risk.
• Legal Contingencies: The U.S. EPA has filed an action seeking reimbursement for remediation costs at a former Illinois site. The company disputes its status as a potentially responsible party (PRP) and believes recorded amounts are not material.
• Tax Rate: The effective tax rate increased to 35.5% from 34.7%, attributed to the expiration of the U.S. Research and Engineering tax credit and higher statutory rates in Mexico and China.

Investor Verification Checklist

• Acquisition Integration: Verify the realization of synergies and revenue contributions from the four 2007 acquisitions (Fasco, Jakel, Morrill, Alstom) and the new Hwada acquisition.
• Margin Pressure: Monitor the ability to pass on raw material cost inflation (copper, aluminum) to customers to stabilize gross margins.
• Debt Covenants: Confirm continued compliance with financial ratios required by the $250 million senior notes and $500 million revolving credit facility.
• Environmental Liability: Track the status of the U.S. EPA litigation regarding the Illinois site to ensure no material accruals are required.
• Foreign Exposure: Assess the impact of currency fluctuations on the 25.6% of sales generated outside the U.S., particularly in China.