Regal Beloit Corporation — Q3 2017 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017, compared with October 1, 2016. The filing identifies the registrant as Regal Beloit Corporation; the request metadata identifies Regal Rexnord Corp. The filing was dated November 6, 2017.
Business Context
Regal Beloit manufactures electric motors, electrical motion controls, power generation and power transmission products. Its operating segments are Commercial and Industrial Systems, Climate Solutions, and Power Transmission Solutions.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $856.9 million | $809.6 million | $2,539.6 million | $2,466.4 million |
| Gross profit | $227.0 million | $231.7 million | $665.6 million | $672.0 million |
| Gross margin | 26.5% | 28.6% | 26.2% | 27.2% |
| Operating income | $94.0 million | $89.8 million | $251.8 million | $250.5 million |
| Operating margin | 11.0% | 11.1% | 9.9% | 10.2% |
| Net income attributable to Regal | $62.2 million | $59.6 million | $161.5 million | $157.8 million |
| Diluted EPS | $1.39 | $1.32 | $3.59 | $3.51 |
Q3 sales increased 5.8%, while net income attributable to Regal increased 4.4%. Nine-month sales increased 3.0% and diluted EPS increased 2.3%. The effective tax rate was 21.7% in Q3 and 21.9% for the nine months, compared with 20.2% and 22.7%, respectively, in the prior-year periods.
Cash Flow, Liquidity and Debt
- Operating cash flow was $235.0 million for the nine months, down from $330.4 million, primarily because of increased working-capital investment.
- Capital expenditures were $49.0 million, compared with $46.1 million in the prior-year period.
- Cash and cash equivalents were $186.6 million at September 30, 2017, down from $284.5 million at December 31, 2016.
- Working capital was $895.3 million and the current ratio was 2.2:1. Receivables increased $65.1 million and inventories increased $74.1 million from year-end.
- Total debt was $1,214.4 million, including $100.6 million of current maturities, compared with $1,411.5 million at December 31, 2016. The company repaid the remaining $100.0 million of its 2007 notes in August 2017.
- The revolving facility had $29.6 million drawn, $29.8 million of letters of credit outstanding and $440.6 million of available borrowing capacity. The company was in compliance with all debt covenants.
- Financing cash use was $298.9 million, including $200.4 million of net debt repayments, $33.1 million of dividends and $45.1 million of share repurchases.
Material Changes Versus Prior Comparable Period
- Q3 organic sales growth was 5.2%, with a 0.7% favorable foreign-currency translation impact. Nine-month organic growth was 3.5%, partly offset by the divestiture of Mastergear and unfavorable currency translation.
- Power Transmission Solutions was the strongest Q3 segment, with sales up 13.7% and operating income up substantially to $25.6 million from $11.4 million, supported by oil and gas, distribution and renewable-energy demand.
- Commercial and Industrial Systems sales rose 4.8%, but operating income declined to $29.6 million from $36.2 million as commodity inflation and higher LIFO reserves reduced gross margin.
- Climate Solutions sales rose 2.2%, while operating income declined to $38.8 million from $42.2 million, also reflecting commodity inflation and higher LIFO reserves.
- Consolidated gross margin declined 210 basis points in Q3 and 100 basis points for the nine months. Drivers included commodity inflation, a $2.7 million increase in the LIFO reserve and higher restructuring costs.
- Operating expenses declined $8.9 million in Q3 and $7.7 million for the nine months, helped by lower amortization, cost leverage, lower discretionary spending and gains on asset sales.
Outlook, Unusual Items and Risks
- Management reported positive order trends and continued to expect low-single-digit organic sales growth for the full year.
- Restructuring charges were $12.5 million for the nine months, compared with $4.2 million in the prior-year period. Current restructuring activities are expected to continue into 2018, with approximately $8.3 million of additional aggregate charges expected.
- The company recorded a $2.8 million Q3 gain on asset sales and a $3.5 million nine-month gain on asset sales. The prior-year nine-month period included an $11.6 million gain from the Mastergear divestiture.
- A subsidiary faces numerous claims involving sub-fractional motors allegedly associated with fires in ventilation units. The company has accrued an estimated liability but cannot assure that the claims or potential regulatory actions will not have a material adverse effect on the subsidiary.
- Key risks include debt repayment and refinancing, integration and acquisition-related costs, restructuring execution, commodity prices, foreign exchange, interest rates, customer and supplier concentration, product liability, warranty claims, litigation, goodwill impairment and cyclical capital-goods markets.
- The company adopted stock-compensation accounting guidance in 2017. It planned adoption of the new revenue-recognition standard at the beginning of fiscal 2018 using the modified retrospective method and did not expect a material impact, although the impact had not been finalized.
Investor Verification Points
- Verify the identity and corporate lineage of the filing issuer, since the filing names Regal Beloit Corporation rather than Regal Rexnord Corp.
- Assess whether working-capital growth, particularly receivables and inventories, converts into operating cash flow.
- Review the margin impact of commodity inflation, LIFO adjustments and pricing actions.
- Monitor the $100.0 million note maturity in July 2018, remaining term-facility amortization and future debt-repayment requirements.
- Track the expected $8.3 million of additional restructuring charges and the execution of facility closures and business exits.
- Evaluate potential exposure from the ventilation-unit product-liability claims and related regulatory actions.
- Confirm the eventual impact of adopting the revenue-recognition and lease accounting standards.