Regal Beloit Corporation (now identified in metadata as Regal Rexnord) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 30, 2019; comparable period ended March 31, 2018. The filing entity is Regal Beloit Corporation, headquartered in Beloit, Wisconsin. The company manufactures 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 | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $853.8 million | $878.8 million | Down 2.8% |
| Gross profit | $234.6 million | $234.9 million | Down 0.1% |
| Gross margin | 27.5% | 26.7% | Up 80 basis points |
| Income from operations | $120.6 million | $88.2 million | Up 36.7% |
| Operating margin | 14.1% | 10.0% | Up 410 basis points |
| Net income | $86.8 million | $59.3 million | Up 46.4% |
| Net income attributable to Regal Beloit | $85.9 million | $58.4 million | Up 47.1% |
| Diluted EPS | $1.99 | $1.31 | Up $0.68 |
| Operating cash flow | $18.3 million | $42.5 million | Down $24.2 million |
| Capital expenditures | $20.2 million | $19.3 million | Up $0.9 million |
Liquidity, debt and balance sheet
- Cash and cash equivalents were $264.3 million at March 30, 2019, compared with $248.6 million at December 29, 2018. Approximately $261.3 million was held by foreign subsidiaries.
- Working capital was $1,160.0 million and the current ratio was 2.7:1. Inventories increased to $803.8 million from $767.2 million at year-end.
- Total debt was approximately $1,215.3 million, down from $1,307.1 million at December 29, 2018. Debt consisted primarily of a $786.0 million term facility, $400.0 million of senior notes and $28.8 million drawn under the revolving facility.
- The company had $470.8 million of available revolving borrowing capacity, excluding $0.4 million of standby letters of credit, and was in compliance with all debt covenants.
- Cash flow from investing activities was $99.2 million, including $119.4 million of proceeds from the Regal Drive Technologies divestiture. Financing activities used $106.0 million, including $92.1 million of net debt repayments and $12.0 million of shareholder dividends.
Material changes versus the prior comparable period
- Sales declined $25.0 million. Management attributed the change to negative organic growth of 1.0%, unfavorable foreign currency translation of 1.7%, and a 4.0% reduction from divested or exiting businesses, partly offset by 3.9% acquisition growth from Nicotra Gebhardt.
- Income from operations benefited from a $41.2 million gain on the sale of Regal Drive Technologies, partly offset by $10.0 million of impairments. Excluding these unusual items, the filing does not provide a single adjusted operating profit measure.
- Gross margin improved due to productivity improvements and simplification programs despite lower sales volume.
- Commercial and Industrial Systems sales fell 8.1%, primarily because of lower power-generation project volumes and divestitures. Climate Solutions sales increased 1.3%, supported by North American residential HVAC. Power Transmission Solutions sales increased 2.6%, driven by oil and gas, distribution and material handling demand.
- Net cash from operations declined because of higher working-capital investment. The company made no share repurchases during the quarter, compared with $26.0 million of repurchases in Q1 2018.
Outlook, unusual items and risks
- Management maintained its expectation for low single-digit organic sales growth for fiscal 2019 and stated that order trends remained positive.
- The company adopted the new lease accounting standard on December 30, 2018, recording $93.0 million of right-of-use assets and lease liabilities without a material effect on net income or cash flow.
- Non-core business exits continued. The Regal Drive Technologies sale closed in January 2019. The capacitors business and custom marine and industrial transmissions business were subsequently sold in April 2019. Businesses classified as held for sale had Q1 2019 sales of $20.7 million and operating income of $2.1 million.
- The Hermetic Climate business is being wound down following a customer decision to cease operations; completion was expected by the end of the third quarter of fiscal 2019. Q1 sales were $12.7 million, compared with $15.6 million in Q1 2018.
- Restructuring costs were $2.3 million in Q1 2019, and management expected approximately $8.9 million of additional future restructuring charges.
- A subsidiary faces product-liability and fire-related claims involving sub-fractional motors manufactured primarily through 2004. An estimated liability has been recorded, but the company stated that potential costs, including possible regulatory or remedial actions, could be significant and cannot reasonably be predicted.
- Principal risk areas include commodity prices, foreign currency, interest rates, global manufacturing and supply-chain disruptions, customer concentration, cyclical capital-goods markets, competition, acquisition integration, debt repayment, product liability, warranty claims, impairment risk, cybersecurity and restructuring execution.
Most important facts for investors to verify
- Reconcile reported operating earnings and EPS to results excluding the $41.2 million divestiture gain and $10.0 million of impairments.
- Assess whether the $18.3 million of operating cash flow adequately supports capital expenditures, dividends and scheduled debt amortization, particularly as inventories increased.
- Monitor the Commercial and Industrial Systems downturn, the Hermetic Climate exit and the remaining non-core divestitures.
- Verify the timing and amount of the expected $8.9 million of additional restructuring charges.
- Review debt maturities, floating-rate exposure and covenant headroom; the filing reports $816.5 million of variable-rate debt before interest-rate swaps.
- Follow developments in the inherited product-liability claims and any related regulatory or remediation costs.
- Confirm subsequent April 2019 business sales and their effect on revenue, earnings, assets held for sale and liquidity.