Business Context and Reporting Period
The filing is Regal Beloit Corporation’s unaudited Form 10-Q for the three and six months ended June 27, 2020, compared with June 29, 2019. The company manufactures electric motors, electrical motion controls, power generation and power transmission products through four segments: Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions. The filing predates the company’s later name change to Regal Rexnord Corporation.
Financial Performance and Liquidity
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Net sales | $634.1 million | $873.7 million | $1,368.3 million | $1,727.5 million |
| Gross profit | $170.3 million | $234.0 million | $373.6 million | $468.6 million |
| Gross margin | 26.9% | 26.8% | 27.3% | 27.1% |
| Income from operations | $45.9 million | $96.0 million | $115.9 million | $216.6 million |
| Operating margin | 7.2% | 11.0% | 8.5% | 12.5% |
| Net income attributable to Regal Beloit | $28.1 million | $66.6 million | $73.9 million | $152.5 million |
| Diluted EPS | $0.69 | $1.55 | $1.81 | $3.54 |
| Net cash from operating activities | Not separately provided | Not separately provided | $189.6 million | $130.6 million |
Second-quarter net sales declined 27.4%, while six-month sales declined 20.8%. Management attributed the declines primarily to COVID-19-related demand weakness and production disruptions. Gross margin was broadly stable, but operating margin contracted because of lower volume and restructuring-related pressures. The effective tax rate increased to 22.5% in the quarter and 22.8% for the six-month period, from 19.6% in both prior-year periods.
- Cash and cash equivalents were $432.2 million at June 27, 2020, compared with $331.4 million at December 28, 2019.
- Working capital was $1,097.3 million and the current ratio was 2.9:1.
- Total debt was $1,125.7 million, including a $720.0 million term facility, $400.0 million of senior notes and $5.3 million drawn under the revolving facility.
- The company had $494.4 million of available revolving borrowing capacity, excluding $0.3 million of issued standby letters of credit, and was in compliance with its debt covenants.
- Capital expenditures were $20.4 million for the first six months, compared with $56.2 million in the prior-year period.
- The company paid $24.3 million of dividends and repurchased $25.0 million of common stock during the first six months. The repurchase program was suspended during the first quarter.
Material Changes Versus the Prior Comparable Period
- All four segments experienced lower second-quarter sales: Commercial Systems declined 28.6%, Industrial Systems 22.4%, Climate Solutions 33.5% and Power Transmission Solutions 21.9%.
- Six-month organic sales declined 17.4%, with an additional 1.0% reduction from foreign currency translation and 2.4% from businesses divested or exited.
- Operating expenses fell 14.5% in the quarter and 11.8% year to date due to lower variable selling costs, wage and salary actions, and other cost reductions.
- Prior-year results benefited from a $45.4 million gain on divestitures for the six-month period, including gains related to Regal Drive Technologies and CapCom. This makes year-over-year operating income comparisons less comparable.
- Restructuring costs increased to $7.8 million in the quarter and $12.9 million year to date, compared with $3.6 million and $5.9 million, respectively, in the prior-year periods. Approximately $13.9 million of additional future restructuring charges were expected.
- Operating cash flow increased despite lower earnings, primarily because of a reduction in trade receivables and improved working-capital movements.
- The company adopted the expected-credit-loss standard, recording a $3.4 million increase in credit-loss allowance and a $2.7 million reduction to retained earnings.
Guidance, Outlook, Risks and Unusual Items
Management expected third-quarter 2020 net sales and operating margins to decline versus the prior-year third quarter because of lower sales volumes. The outlook incorporated cost initiatives, current backlog, July results and estimated August and September demand. Management did not provide outlook commentary beyond the third quarter because of COVID-19 uncertainty, limited backlog and the short-cycle nature of the business.
- COVID-19 caused demand weakness, plant closures or reduced production rates, supply-chain constraints and customer payment risks. Manufacturing operations had generally improved and were operating closer to full capacity by quarter-end, but cases were increasing in parts of the United States and India.
- Goodwill at the global industrial motors reporting unit was $122.5 million. Its estimated fair value exceeded carrying value by less than 10%, creating heightened impairment risk if market conditions deteriorate.
- The company recorded $2.8 million of second-quarter asset impairments and $4.3 million year to date, primarily related to assets transferred to held-for-sale status. The company concluded that a related indefinite-lived trade name was not impaired.
- The company had $400.0 million of senior notes, including $230.0 million maturing in July 2021 and $170.0 million maturing in July 2023. Management expected to fund the 2021 maturity with revolving-facility capacity.
- Variable-rate debt, interest-rate swaps and other contracts had exposure to LIBOR discontinuation. Two forward-starting swaps with a total notional amount of $250.0 million were entered into in June 2020 and become effective in July 2021.
- The company faces legacy product-liability claims involving sub-fractional motors manufactured through 2004 and used in ventilation units alleged to have caused fires. Although liabilities were accrued, the company could not assure that the claims or potential regulatory actions would not be material.
- Other risks include commodity prices, foreign currency, key suppliers, customer concentration, competition, cyber incidents, litigation, product warranties, restructuring execution and cyclical capital-goods markets.
Important Facts for Investors to Verify
- Whether COVID-19 demand and production disruptions persist or worsen and how quickly end markets recover.
- Progress against the expected $13.9 million of additional restructuring charges and the related savings.
- Goodwill impairment sensitivity for the global industrial motors reporting unit and other reporting units with limited fair-value cushions.
- Liquidity available to address the $230.0 million senior-note maturity in July 2021 while maintaining covenant compliance.
- Developments, reserves and potential regulatory actions related to the legacy ventilation-motor product-liability claims.
- Whether the company resumes share repurchases and whether cash held by foreign subsidiaries can be efficiently used for domestic obligations.