Regal Beloit Corporation (now identified in request metadata as Regal Rexnord) — Form 10-Q Summary
Business context and reporting period
This filing covers the unaudited three months ended March 29, 2014, compared with the three months ended March 30, 2013. The company reported two segments: Electrical and Mechanical. The filing identifies the registrant as Regal Beloit Corporation, not Regal Rexnord Corporation.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $801.2 million | $778.2 million | +3.0% |
| Gross profit | $194.4 million | $199.5 million | -2.6% |
| Gross margin | 24.3% | 25.6% | -130 bps |
| Income from operations | $69.7 million | $75.9 million | -8.2% |
| Operating margin | 8.7% | 9.8% | -110 bps |
| Net income attributable to Regal Beloit | $43.8 million | $49.5 million | -11.5% |
| Diluted EPS | $0.96 | $1.09 | -$0.13 |
| Operating cash flow | $45.8 million | $66.0 million | -$20.2 million |
Net interest expense declined to $8.7 million from $9.9 million. The effective tax rate increased to 26.2% from 23.2%, primarily because Q1 2013 benefited from the retroactive reinstatement of the research and development tax credit. The company declared a quarterly dividend of $0.20 per share, compared with $0.19 in the prior-year quarter.
At March 29, 2014, cash and cash equivalents were $406.4 million, working capital was $1,003.9 million, and the current ratio was 2.3:1. Total debt was approximately $767.8 million, consisting primarily of $750.0 million of senior notes. The company had no borrowings under its $500.0 million revolving facility, $23.5 million of standby letters of credit, and $476.5 million of available borrowing capacity.
Material changes versus the prior comparable period
- Reported sales increased 3.0%, but sales excluding businesses acquired during the prior twelve months decreased 0.1%. Acquired businesses contributed $23.4 million of incremental sales.
- Electrical segment sales increased 3.6% to $736.8 million, while Mechanical segment sales decreased 4.2% to $64.4 million.
- Gross margin declined because of $4.2 million of restructuring costs, $1.0 million of purchase accounting adjustments, and operational inefficiencies related to plant relocations. Q1 2013 included $0.5 million of restructuring costs.
- Operating cash flow declined because of lower earnings and increased working-capital requirements. Cash used in investing activities increased to $94.7 million, primarily because of the $77.3 million acquisition-related cash outflow.
- On February 7, 2014, the company acquired Hy-Bon Engineering Company for $77.0 million net of cash. Hy-Bon provides vapor-recovery solutions for oil and gas applications and is reported in the Electrical segment.
- Cash declined by $59.6 million during the quarter to $406.4 million, principally reflecting the Hy-Bon acquisition, capital expenditures of $22.3 million, dividends of $9.0 million, and operating cash generation.
Guidance, outlook, risks, contingencies, and unusual items
- Management described the U.S. operating environment as slow-growing and challenging, with pressure on organic sales in commercial and industrial markets.
- Management expected residential HVAC revenue to be negatively affected by up to $10 million over the following two quarters because of customer and product-market dynamics, although new products, other customers, and mix changes could offset some or all of the decline.
- Gross margin was expected to remain under pressure in the next quarter from operational inefficiencies associated with plant relocations. Current restructuring activities were expected to conclude by Q4 2014.
- The company had $150.0 million of senior notes maturing in August 2014 and expected to repay them using existing cash and borrowings under the revolving credit facility.
- Venezuelan currency restrictions created potential exposure. The company continued to use the official rate of 6.3 bolivars per U.S. dollar and reported approximately $12 million of Bolivar-denominated net monetary assets. A future exchange-rate revaluation could produce a financial impact.
- Key ongoing risks include commodity prices, foreign exchange, interest rates, supply disruptions, customer concentration, competition, acquisition integration, product liability and litigation, impairment of goodwill or intangible assets, cyclical capital-goods demand, and debt repayment.
- The company reported numerous claims involving sub-fractional motors manufactured by an acquired subsidiary, but stated that the claims were not expected to have a material effect on the interim consolidated financial statements.
- Accumulated other comprehensive loss increased to $69.8 million from $59.8 million, primarily reflecting unfavorable hedging and foreign-currency translation adjustments.
Most important facts for investors to verify
- Confirm the corporate identity: the supplied filing is for Regal Beloit Corporation, while the request metadata names Regal Rexnord Corp.
- Assess whether the reported sales growth is sustainable after excluding the $23.4 million contribution from recent acquisitions.
- Monitor whether restructuring, plant-relocation inefficiencies, and purchase accounting adjustments continue to depress gross margin.
- Review liquidity and refinancing plans for the $150.0 million August 2014 maturity, including use of cash and the revolving facility.
- Evaluate working-capital trends, particularly the increases in receivables and inventories and the decline in operating cash flow.
- Track exposure to Venezuelan currency restrictions, commodity prices, foreign exchange, and floating-rate debt.
- Review acquisition integration, contingent purchase-price liabilities, litigation claims, and the company’s cumulative goodwill impairment history.