Regal Beloit Corporation 10-Q Summary
Reporting period: Fiscal quarter and nine months ended September 29, 2018, compared primarily with September 30, 2017. The filing identifies the registrant as Regal Beloit Corporation, not Regal Rexnord Corporation. Financial statements are unaudited and prepared under U.S. GAAP.
Business Context
Regal Beloit manufactures electric motors, electrical motion controls, power generation products and power transmission products through three segments: Commercial and Industrial Systems, Climate Solutions, and Power Transmission Solutions.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $925.4 million | $856.9 million | $2,763.9 million | $2,539.6 million |
| Gross profit | $242.6 million | $226.9 million | $724.9 million | $665.2 million |
| Gross margin | 26.2% | 26.5% | 26.2% | 26.2% |
| Income from operations | $69.4 million | $94.3 million | $257.2 million | $252.5 million |
| Operating margin | 7.5% | 11.0% | 9.3% | 9.9% |
| Net income attributable to Regal | $51.3 million | $62.2 million | $175.6 million | $161.5 million |
| Diluted EPS | $1.17 | $1.39 | $3.98 | $3.59 |
| Cash dividends declared per share | $0.28 | $0.26 | $0.82 | $0.76 |
- Q3 sales increased 8.0%; nine-month sales increased 8.8%.
- Q3 operating income declined 26.4%, principally because of $18.2 million of goodwill and other asset impairments and additional exit-related costs in Climate Solutions.
- Q3 net income attributable to Regal declined 17.5%, while nine-month net income increased 8.7%.
- The effective tax rate was 6.4% in Q3 and 17.3% for the nine-month period, compared with 21.7% and 21.9%, respectively, in the prior-year periods. The reduction was primarily related to the Tax Cuts and Jobs Act and earnings mix.
- Nine-month operating cash flow was $250.3 million, compared with $235.0 million in the prior-year period. Capital expenditures were $59.2 million.
Liquidity, Debt and Capital Allocation
| Balance-sheet item | September 29, 2018 | December 30, 2017 |
|---|---|---|
| Cash and equivalents | $184.4 million | $139.6 million |
| Working capital | $1,068.2 million | $862.4 million |
| Current ratio | 2.6:1 | 2.2:1 |
| Total debt, net of issuance costs | $1,278.9 million | $1,141.1 million |
| Long-term debt | $1,278.3 million | $1,039.9 million |
- Cash increased by $44.8 million during the first nine months.
- Investing cash outflow was $215.8 million, including the $161.5 million acquisition of Nicotra Gebhardt and $59.2 million of capital expenditures.
- Financing activities provided $16.2 million, including net debt borrowings, offset by $35.1 million of dividends and $78.3 million of share repurchases.
- On August 27, 2018, the company replaced its prior credit agreement with a $900.0 million five-year term facility and a $500.0 million multicurrency revolving facility. The company had $45.4 million drawn on the revolver and $453.9 million of available borrowing capacity at quarter-end.
- The company had $400.0 million of fixed-rate senior notes outstanding, maturing in 2021 and 2023, and was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Commercial and Industrial Systems sales increased 13.3% in Q3 and 12.4% for nine months, supported by organic growth and the Nicotra Gebhardt acquisition.
- Power Transmission Solutions sales increased 7.7% in Q3 and 10.1% for nine months, driven by oil and gas, distribution and material-handling demand.
- Climate Solutions sales were essentially flat in Q3, but segment operating margin fell to 2.3% from 15.3% because of the Hermetic Climate exit and related charges.
- Organic sales growth was 5.2% in Q3 and 5.8% for nine months. Acquisition growth contributed 4.1% in Q3 and 2.6% for nine months; foreign currency translation was negative in Q3 and positive for the nine-month period.
- Shares outstanding declined, reflecting $78.3 million of nine-month repurchases. The board authorized a new $250.0 million repurchase program in July 2018, of which $3.6 million had been used by quarter-end.
Guidance, Outlook, Risks and Unusual Items
- Management reported positive order trends and continued to expect low-single-digit organic sales growth for full-year 2018. No earnings-per-share or revenue guidance was provided in the filing.
- Following a customer decision to wind down operations, the company accelerated the exit of its Hermetic Climate business. It recorded $34.9 million of exit and exit-related charges, including $9.5 million of goodwill impairment, $5.5 million of customer-relationship intangible impairment, $2.1 million of technology impairment and $1.1 million of fixed-asset impairment.
- The company expects approximately $2.5 million of additional future restructuring charges, including $0.3 million of employee termination costs and $2.2 million of facility-related and other costs.
- Risks include commodity inflation, foreign exchange movements, variable interest rates, global manufacturing and supply-chain disruptions, cyclical capital-goods demand, customer concentration, acquisition integration, goodwill impairment, product liability and warranty claims, litigation, cybersecurity and the ability to execute restructuring plans.
- A subsidiary faces numerous claims involving sub-fractional motors allegedly associated with fires in third-party ventilation units. The company has recorded an estimated liability but states that potential costs, including possible regulatory or remedial actions, could be significant.
- The company held $181.6 million of cash at foreign subsidiaries. It recorded a provisional $29.7 million deferred tax liability related to historical unremitted foreign earnings under the Tax Cuts and Jobs Act.
Important Facts for Investors to Verify
- Confirm the intended issuer identity: the supplied filing is for Regal Beloit Corporation, whereas the request names Regal Rexnord Corp.
- Assess the recurring earnings impact of the Hermetic Climate exit, including remaining charges and lost revenue.
- Review debt amortization requirements, floating-rate exposure and the effect of the August 2018 refinancing on future interest expense and liquidity.
- Evaluate whether sales growth and margin performance are sustainable after separating organic growth, acquisition contribution, pricing, commodity inflation and foreign exchange effects.
- Monitor the product-liability claims and any CPSC or other regulatory actions related to the historical motor products.
- Verify the final accounting effects of the Tax Cuts and Jobs Act, provisional tax amounts, and the pending adoption of the new lease standard.