Regal Beloit Corporation (now identified in request metadata as Regal Rexnord) — Q1 2015 Form 10-Q
Reporting period: Three months ended April 4, 2015, compared with three months ended March 29, 2014. The filing was dated May 14, 2015. Amounts are in millions except per-share data.
Business context and reporting period
The company operated three reportable segments: Commercial and Industrial Systems, Climate Solutions, and Power Transmission Solutions. On January 30, 2015, it acquired Emerson Electric’s Power Transmission Solutions business for $1.408 billion in cash. The acquisition materially increased reported sales, assets, debt, amortization, and operating expenses.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $911.7 | $801.2 | 13.8% increase |
| Gross profit | $220.9 | $194.4 | 13.6% increase |
| Gross margin | 24.2% | 24.3% | 10 basis-point decline |
| Income from operations | $63.6 | $69.7 | 8.8% decrease |
| Operating margin | 7.0% | 8.7% | 170 basis-point decline |
| Net income | $37.9 | $45.0 | 15.8% decrease |
| Net income attributable to Regal | $36.4 | $43.8 | 16.9% decrease |
| Diluted EPS | $0.81 | $0.96 | 15.6% decrease |
| Operating cash flow | $17.5 | $45.8 | $28.3 decrease |
Interest expense increased to $13.6 million from $10.4 million, primarily because of acquisition-related borrowings. The effective tax rate was 26.0%, compared with 26.2%.
Segment external sales were $456.4 million for Commercial and Industrial Systems, $280.4 million for Climate Solutions, and $174.9 million for Power Transmission Solutions. Power Transmission Solutions generated an operating loss of $3.1 million, including acquisition-related transaction costs and purchase-accounting effects.
Cash flow, liquidity, debt, and balance sheet
- Cash and cash equivalents were $229.7 million at April 4, 2015, down from $334.1 million at January 3, 2015.
- Cash used in investing activities was $1.408 billion, including $1.393 billion for business acquisitions and $21.2 million of capital expenditures.
- Cash provided by financing activities was $1.288 billion, including $1.250 billion of term borrowings and net revolving-facility borrowings of $76.5 million.
- Total debt was $1.947 billion, compared with $633.8 million at January 3, 2015. The debt included $1.234 billion under the term facility, $600.0 million of senior notes, $93.5 million under the multicurrency revolver, and $19.0 million of other debt.
- The new five-year revolving facility had $378.0 million of available borrowing capacity after $93.5 million of borrowings and $28.5 million of standby letters of credit.
- Working capital was $1.079 billion and the current ratio was 2.5:1, compared with $1.091 billion and 2.9:1 at January 3, 2015.
- Management stated that operating cash flow and available revolving capacity should be sufficient to fund operations for the foreseeable future. Approximately $218.8 million of cash was held by foreign subsidiaries and could be subject to repatriation taxes.
Material changes versus the prior comparable period
- Reported sales increased 13.8%, consisting of $129.3 million of acquisition growth, 0.9% organic growth, and a negative 3.3% foreign-currency translation impact.
- The PTS acquisition contributed $106.8 million of reported sales and $10.8 million of earnings before purchase-accounting adjustments and transaction costs.
- Operating profit declined despite higher sales, reflecting higher operating expenses, acquisition-related costs, purchase-accounting impacts, and increased interest expense.
- Acquisition-related expenses increased to $9.2 million from $0.5 million.
- Goodwill increased to $1.561 billion from $1.004 billion, and net intangible assets increased to $856.5 million from $202.3 million, primarily due to PTS.
- Comprehensive income attributable to Regal declined to $15.3 million from $33.8 million, primarily because of foreign-currency translation losses.
- Restructuring expense declined to $1.2 million from $4.2 million. The company expected approximately $7.5 million of additional charges from previously announced restructuring activities, with completion expected by the end of 2015.
Guidance, outlook, commentary, risks, and unusual items
Management expected 2015 net sales to increase significantly, driven primarily by acquisition growth. Organic growth was expected to be challenged by declining oil and gas-related demand and weaker sales trends in China, while currency translation was expected to negatively affect sales. Management expected full-year EPS to increase because of the PTS acquisition and benefits from the simplification initiative.
- Venezuela transitioned to the SIMADI exchange rate, resulting in a $1.5 million pretax currency devaluation loss. Venezuelan net receivables were $9.8 million, and management disclosed collection delays and the possibility of future write-downs.
- Debt increased substantially to finance PTS, increasing exposure to interest rates, refinancing, covenant, and repayment risks. The company was in compliance with its financial covenants at quarter-end.
- At April 4, 2015, the company had $1.441 billion of variable-rate debt, excluding the effect of its interest-rate swap. A hypothetical 10% change in the weighted-average borrowing rate would have changed annualized after-tax earnings by approximately $1.6 million.
- Key ongoing risks included acquisition integration and purchase-accounting adjustments, restructuring execution, commodity prices, foreign exchange, oil and gas capital spending, China demand, significant customers, suppliers, product liability and warranty claims, litigation, goodwill impairment, and Venezuelan operating conditions.
- The filing stated that existing legal proceedings, including claims involving certain sub-fractional motors, were not expected to have a material effect on the consolidated financial statements.
Important facts for investors to verify
- Confirm the final purchase-price allocation, integration costs, synergies, and sustainable earnings contribution of the PTS acquisition.
- Assess leverage, mandatory term-loan amortization, floating-rate exposure, covenant headroom, and available revolver capacity.
- Reconcile reported sales growth with acquisition growth, organic growth, and currency effects, particularly in Power Transmission Solutions.
- Monitor whether oil and gas weakness, China demand, and foreign-exchange movements pressure organic sales and margins.
- Track Venezuelan receivable collections, currency rates, and any additional devaluation or impairment charges.
- Evaluate expected restructuring charges, completion timing, and the operational benefits of the simplification initiative.
- Review the preliminary nature of the PTS purchase-price allocation and the resulting goodwill and intangible-asset impairment exposure.