Regal Beloit Corporation (now Regal Rexnord) — Q3 2019 Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended September 28, 2019, compared with September 29, 2018. The filing was dated November 6, 2019. Regal Beloit manufactured electric motors, electrical motion controls, power generation and power transmission products through Commercial and Industrial Systems, Climate Solutions and Power Transmission Solutions.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $772.3 million | $925.4 million | $2,499.8 million | $2,763.9 million |
| Gross profit | $201.9 million | $242.6 million | $670.5 million | $724.9 million |
| Gross margin | 26.1% | 26.2% | 26.8% | 26.2% |
| Income from operations | $72.8 million | $69.4 million | $289.4 million | $257.2 million |
| Operating margin | 9.4% | 7.5% | 11.6% | 9.3% |
| Net income attributable to Regal Beloit | $49.7 million | $51.3 million | $202.2 million | $175.6 million |
| Diluted EPS | $1.19 | $1.17 | $4.75 | $3.98 |
Q3 sales declined 16.5% and nine-month sales declined 9.6%. Q3 operating income increased 4.9%, while nine-month operating income increased 12.5%, reflecting lower operating expenses, divestitures, productivity improvements and simplification programs. The effective tax rate was 16.3% in Q3 and 18.8% for the nine months, compared with 6.4% and 17.3%, respectively, in the prior-year periods.
Cash flow, liquidity and capital structure
- Operating cash flow for the nine months was $271.2 million, compared with $250.3 million in the prior-year period.
- Capital expenditures were $77.3 million, compared with $59.2 million; free cash flow before divestiture proceeds was therefore approximately $193.9 million.
- Investing activities provided $84.0 million, including $159.6 million of divestiture proceeds. The prior-year period included $161.5 million of acquisition spending.
- Financing activities used $303.8 million, including $107.3 million of net debt repayments, $150.1 million of share repurchases and $36.6 million of dividends paid.
- Cash and equivalents were $293.0 million at September 28, 2019, versus $248.6 million at December 29, 2018. Approximately $292.9 million was held by foreign subsidiaries.
- Working capital was $1,078.7 million and the current ratio was 2.8:1, compared with $1,134.2 million and 2.7:1 at year-end 2018.
- Total debt was $1,200.9 million, including $786.0 million under the term facility, $400.0 million of senior notes and $15.3 million under the revolving facility. Revolving availability was $484.3 million, net of $0.4 million of letters of credit.
- The company was in compliance with all debt covenants. Senior notes mature in 2021 and 2023, with fixed rates ranging from 4.8% to 5.1%.
Material changes versus the prior comparable period
- Sales weakness was concentrated in Commercial and Industrial Systems, where Q3 sales fell 22.4%, and Power Transmission Solutions, where Q3 sales fell 12.0%. Climate Solutions sales declined 9.6%.
- Management attributed the Q3 decline to negative organic sales of 9.6%, unfavorable foreign currency translation of 0.7% and a 6.2% reduction from businesses divested or being exited.
- Commercial and Industrial Systems was affected by weakness in North American pool pumps, China, commercial HVAC and power generation. Power Transmission Solutions experienced weaker North American industrial markets and customer destocking.
- Climate Solutions gross profit increased despite lower sales, supported by sales mix and productivity gains; the prior-year period included inventory write-downs and exit-related costs.
- The company sold Regal Drive Technologies, Velvet Drive, CapCom and Vapor Recovery during 2019, receiving total proceeds of approximately $159.6 million and recording a net gain on divestitures of $45.2 million for the nine months.
- The Hermetic Climate business continued to wind down and was expected to exit by the end of fiscal 2019. Its Q3 2019 sales were $0.9 million, versus $11.0 million in Q3 2018.
- Restructuring costs increased to $13.2 million for the nine months, compared with $5.5 million in the prior-year period. The company expected approximately $8.4 million of additional future restructuring charges.
- The company repurchased 2.0 million shares for $150.1 million during the nine months, compared with $78.3 million in the prior-year period. Shares outstanding declined to approximately 40.9 million at November 1, 2019.
- Operating lease assets and liabilities were recognized following adoption of the new lease standard; the adoption recorded approximately $93.0 million of right-of-use assets and lease liabilities without a material earnings or cash-flow impact.
Guidance, outlook, risks and unusual items
Management stated that order rates had slightly improved but expected full-year organic sales growth to be down mid-single digits. The filing did not provide a clear full-year revenue, earnings or EPS forecast.
- Key risks include global economic and capital-goods cyclicality, reduced demand in HVAC, refrigeration, power generation, oil and gas, material handling and water heating, commodity and raw-material inflation, tariffs and trade policy, foreign exchange movements, supply disruptions and dependence on significant customers.
- Debt levels and the company’s ability to repay principal and interest remain material considerations, although covenant compliance and revolving liquidity were reported as adequate at quarter-end.
- A subsidiary faces numerous product-liability claims relating to sub-fractional motors manufactured primarily through 2004 and used in ventilation units allegedly associated with fires. The company has accrued an estimated liability but stated that potential costs could be significant and cannot be predicted reliably.
- Other contingencies include product warranty, environmental, asbestos, intellectual-property, employment and contract matters. Management did not believe the currently disclosed matters would materially affect consolidated financial position, results or cash flows, but litigation outcomes remain uncertain.
- Foreign currency translation produced a $31.7 million year-to-date loss in other comprehensive income, and total accumulated other comprehensive loss was $277.8 million at quarter-end.
- Subsequent to quarter-end, on October 25, 2019, the board replaced the existing share-repurchase authorization with a new authorization to purchase up to $250.0 million of shares.
Important facts for investors to verify
- Whether the projected mid-single-digit full-year organic sales decline and expected fiscal 2019 Hermetic Climate exit were achieved.
- The sustainability of operating-margin improvement after excluding the $45.2 million divestiture gain and considering ongoing restructuring charges.
- Organic demand trends, customer destocking and market exposure in Commercial and Industrial Systems and Power Transmission Solutions.
- Debt repayment requirements, floating-rate exposure, refinancing needs and the effect of future asset-sale proceeds on the term facility.
- The ultimate cost and resolution of the legacy ventilation-motor product-liability claims and other legal contingencies.
- Cash availability at domestic subsidiaries, capital allocation between debt reduction, repurchases, dividends and acquisitions, and remaining authorization under the repurchase program.