Business Context and Reporting Period
Registrant: Regal Beloit Corporation, now associated with the requested Regal Rexnord company. This unaudited Form 10-Q covers the quarter and nine months ended October 1, 2011, compared with periods ended October 2, 2010. The company operated through Electrical and Mechanical segments and reported 41.5 million common shares outstanding as of November 7, 2011.
Financial Highlights
| Metric | Three Months Ended October 1, 2011 | Year-over-Year Change | Nine Months Ended October 1, 2011 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $736.9 million | 24.7% increase | $2.081 billion | 23.7% increase |
| Gross profit | $179.6 million | 24.2% increase | $495.1 million | 18.1% increase |
| Gross margin | 24.4% | Down 0.1 percentage point | 23.8% | Down 1.1 percentage points |
| Income from operations | $78.1 million | 11.8% increase | $197.1 million | 1.2% decrease |
| Operating margin | 10.6% | Down 1.2 percentage points | 9.5% | Down 2.4 percentage points |
| Net income attributable to Regal Beloit | $45.7 million | 2.3% increase | $118.8 million | 4.3% decrease |
| Diluted EPS | $1.13 | Compared with $1.14 | $3.00 | Compared with $3.19 |
| Net interest expense | $10.0 million | Up from $4.2 million | $19.2 million | Up from $12.6 million |
Cash Flow, Liquidity, and Capital Structure
- Operating cash flow was $176.3 million for the first nine months, up from $148.6 million in the prior-year period.
- Investing cash flow was negative $738.1 million, including $764.9 million for acquisitions and $44.4 million of capital expenditures.
- Financing cash flow was positive $512.1 million, primarily reflecting $500.0 million of long-term borrowings used partly to fund acquisitions.
- Cash and cash equivalents were $124.4 million at October 1, 2011, versus $174.5 million at January 1, 2011. The current ratio was 2.3:1, compared with 2.7:1 at year-end 2010.
- Total debt was approximately $968.4 million, including $750.0 million of senior notes, $165.0 million of term debt, $28.0 million drawn under the revolving facility, and $25.4 million of other debt. Long-term debt increased from $428.3 million at January 1, 2011 to $955.1 million.
- The company had a $500.0 million revolving credit facility maturing in June 2016 and was in compliance with all debt covenants at October 1, 2011.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven substantially by acquisitions, pricing actions, improving commercial and industrial demand, energy-efficient products, and a recovery in the generator business. Acquired businesses contributed $144.5 million of third-quarter sales and $295.7 million for the first nine months.
- The August 22, 2011 acquisition of Electrical Products Company from A.O. Smith added $748.7 million of cash consideration and 2,834,026 shares of common stock. The preliminary purchase-price allocation included $357.2 million of goodwill and $122.5 million of amortizable intangible assets.
- Residential HVAC motor sales weakened, primarily because of reduced federal tax incentives, weak U.S. residential construction and replacement demand, and a shift toward lower-efficiency products.
- Operating expenses increased to 13.8% of sales in the quarter and 14.3% for the first nine months, versus 12.7% and 13.1%, respectively. Acquired businesses and acquisition-related costs were major contributors.
- Quarterly margins were affected by $10.3 million of EPC purchase-accounting inventory adjustments. Nine-month margins also included a $28.0 million incremental warranty provision related to a corrected production flaw in certain standard motors.
- Accumulated other comprehensive loss increased to $96.3 million from $1.7 million at year-end, primarily reflecting currency translation and hedge-related losses.
- Electrical segment operating margin declined to 10.4% in the quarter and 9.1% for the first nine months, while Mechanical segment operating margin improved to 12.6% and 13.1%, respectively.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management described global economic conditions as sluggish and uncertain but noted continued above-average growth in high-efficiency products and improving demand in later-cycle end markets.
- The filing does not provide explicit quantitative full-year earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of the full fiscal year.
- Key risks include cyclical capital-goods demand, competition, commodity and raw-material costs, significant-customer concentration, supply disruptions, foreign-exchange movements, interest rates, acquisition integration, debt repayment, product liability, warranty costs, intellectual-property claims, and foreign operations.
- The company hedged commodity, currency, and interest-rate exposure. At October 1, 2011, variable-rate debt was approximately $459.7 million net of swaps, and a hypothetical 10% change in the weighted-average borrowing rate was estimated to affect annualized after-tax earnings by approximately $0.3 million.
- Warranty accruals totaled $41.4 million at October 1, 2011, including the $28.0 million production-flaw provision expected to be paid within twelve months.
- Patent litigation with Nordyne was settled in August 2011 for an undisclosed payment to the company. Separately, claims involving older sub-fractional motors and alleged ventilation-unit fires remain unresolved; the company cannot estimate potential losses, which could be significant.
- Acquisition accounting remained preliminary, and final valuation changes could materially affect goodwill, intangible assets, liabilities, amortization, and reported results.
- Internal controls were assessed as effective, although the company was still integrating EPC controls and processes into its financial-reporting framework.
Important Facts for Investors to Verify
- Confirm the requested company identity and historical name: the filing is for Regal Beloit Corporation, not a registrant identified in the filing as Regal Rexnord Corporation.
- Assess whether EPC and other acquisitions can deliver sustainable earnings after purchase-accounting adjustments, integration costs, and increased amortization.
- Evaluate leverage, covenant headroom, refinancing requirements, and exposure to floating interest rates following the substantial debt increase.
- Determine the recurring impact of the $28.0 million warranty provision and whether additional product-related claims or costs may arise.
- Review Electrical segment margin recovery, residential HVAC demand, pricing effectiveness, and commodity-cost trends.
- Monitor unresolved fire-related litigation, contingent acquisition payments of $25.9 million, and the finalization of EPC’s purchase-price allocation.