Regal Beloit Corporation — Form 10-Q Summary
Reporting period: Three months ended April 3, 2021, compared with the three months ended March 28, 2020. The filing identifies the registrant as Regal Beloit Corporation; the company is now known as Regal Rexnord Corporation.
Business Context
The company manufactures electric motors, electrical motion controls, power generation products and power transmission products through four segments: Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions. Operations are affected by economic cycles, commodity costs, supply-chain conditions, seasonality and COVID-19-related disruptions.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $814.1 million | $734.2 million | Up 10.9% |
| Gross profit | $245.4 million | $203.3 million | Up 20.7% |
| Gross margin | 30.1% | 27.7% | Up 240 bps |
| Income from operations | $97.1 million | $70.0 million | Up 38.7% |
| Operating margin | 11.9% | 9.5% | Up 240 bps |
| Net income | $67.0 million | $46.7 million | Up 43.5% |
| Net income attributable to Regal Beloit | $65.6 million | $45.8 million | Up 43.2% |
| Diluted EPS | $1.60 | $1.12 | Up 42.9% |
| Operating cash flow | $49.5 million | $102.7 million | Down $53.2 million |
Management attributed sales growth to 9.1% organic growth and 1.8% favorable foreign-currency translation. Gross-profit expansion reflected higher volume, partly offset by increased freight and material costs. The effective tax rate was 23.2%, compared with 22.9% in the prior-year quarter.
Segment Performance
| Segment | Q1 2021 Sales | Year-over-year sales change | Q1 2021 operating margin |
|---|---|---|---|
| Commercial Systems | $237.0 million | Up 18.9% | 11.6% |
| Industrial Systems | $136.4 million | Up 5.2% | 2.7% |
| Climate Solutions | $239.1 million | Up 13.8% | 18.1% |
| Power Transmission Solutions | $201.6 million | Up 3.3% | 11.2% |
Commercial Systems benefited from China and Asia-Pacific growth, commercial HVAC and pool-pump demand. Climate Solutions benefited from North American residential HVAC demand and recovering international and refrigeration markets. Power Transmission Solutions operating margin declined principally because of Rexnord transaction due-diligence costs.
Liquidity, Cash Flow and Debt
- Cash and equivalents were $566.4 million at April 3, 2021, down from $611.3 million at January 2, 2021.
- Working capital was $1,055.4 million and the current ratio was 2.2:1.
- Operating cash flow declined primarily because of increased receivables, inventories and prepaid expenses.
- Capital expenditures were $10.7 million; investing cash flow used was $11.7 million.
- Financing cash flow used was $76.7 million, including $50.1 million of long-term debt repayments, $12.2 million of dividends and $12.4 million of financing fees.
- Total debt was $1,017.7 million, comprising $620.0 million under the term facility, $400.0 million of senior notes and $4.2 million of other debt, less $6.5 million of debt issuance costs.
- The company had $749.8 million of available revolving borrowing capacity and was in compliance with its debt covenants.
- A $230.0 million senior-notes tranche matures July 14, 2021; management expected to fund repayment with revolving capacity and/or operating cash flow.
Material Changes and Unusual Items
- On February 15, 2021, the company agreed to acquire Rexnord Corporation’s Process & Motion Control business through a Reverse Morris Trust transaction, subject to shareholder, regulatory and other closing conditions.
- The potential special dividend to Regal shareholders could range from zero to approximately $2.0 billion. Its amount remained uncertain at quarter-end.
- Financing commitments included approximately $2.1 billion of bridge financing for the transaction and approximately $487 million of bridge financing for the Land cash payment. The transaction was not reflected as a completed acquisition in the quarter-end financial statements.
- Operating expenses included increased due-diligence costs related to the Rexnord Transaction. The company paid $12.4 million of related financing fees during the quarter.
- Restructuring costs were $1.7 million, compared with $5.1 million in the prior-year quarter. The company expected approximately $2.9 million of additional charges on approved projects and approximately $16.0 million of restructuring costs for fiscal 2021, excluding Rexnord transaction costs.
- Other comprehensive loss was $15.5 million, primarily reflecting a $21.7 million foreign-currency translation loss, partly offset by hedging gains.
Guidance, Outlook and Risks
Management projected increased sales growth for the second quarter, assuming no material deterioration in production capacity or commercial operations from COVID-19 or supply-chain disruptions. The outlook excluded costs, expenses and other effects of the Rexnord Transaction.
Principal risks include COVID-19 effects on demand, employees, suppliers and logistics; supply-chain and electronics constraints; commodity and freight inflation; customer concentration; product liability and warranty claims; cyclical capital-goods markets; foreign-exchange and interest-rate exposure; debt repayment and leverage following the Rexnord Transaction; transaction approval and integration risks; potential failure to realize synergies; and the uncertain transition away from LIBOR.
A subsidiary continues to face claims alleging that older motors used in third-party ventilation units contributed to fires. The company has recorded an estimated liability but stated that the ultimate costs, including possible regulatory or remedial actions, could be significant. Management did not believe other litigation was likely to materially affect financial position, results or cash flows.
Investor Verification Checklist
- Verify completion status, final consideration, financing, leverage and integration performance of the Rexnord Process & Motion Control transaction.
- Verify the final amount and funding source of any special dividend, which could be as high as approximately $2.0 billion.
- Monitor repayment or refinancing of the $230.0 million senior-notes maturity due July 2021 and resulting interest expense.
- Assess whether working-capital investment and lower operating cash flow persist as sales grow.
- Track commodity, freight and electronics costs, pricing actions and their effect on gross margins.
- Review developments in the legacy product-liability claims and any related CPSC or other regulatory actions.
- Compare second-quarter performance with management’s sales-growth outlook, excluding Rexnord transaction effects.