Regal Beloit Corporation — Form 10-Q Summary
Filing and period: Quarterly report for the three and nine months ended October 2, 2010, compared with September 26, 2009. The provided filing identifies the registrant as Regal Beloit Corporation; the request metadata refers to Regal Rexnord Corp.
Business context
The company operates through Mechanical and Electrical segments serving motor, generator, HVAC, commercial refrigeration, industrial, and related markets. Management reported improving global economic conditions and strong demand for high-efficiency products, but also experienced supply-chain disruptions that caused vendor qualification, labor inefficiency, and expedited transportation costs.
Financial performance
| Metric | Q3 2010 | Q3 2009 | First 9 months 2010 | First 9 months 2009 |
|---|---|---|---|---|
| Net sales | $590.8 million | $465.2 million | $1,682.3 million | $1,363.0 million |
| Gross profit | $144.7 million | $113.9 million | $419.1 million | $299.1 million |
| Gross margin | 24.5% | 24.5% | 24.9% | 21.9% |
| Operating income | $69.9 million | $48.3 million | $199.4 million | $106.0 million |
| Operating margin | 11.8% | 10.4% | 11.9% | 7.8% |
| Net income attributable to Regal Beloit | $44.7 million | $31.2 million | $124.1 million | $60.4 million |
| Diluted EPS | $1.14 | $0.82 | $3.19 | $1.71 |
- Third-quarter sales increased 27.0%; nine-month sales increased 23.4%.
- Third-quarter attributable net income increased 43.4%; nine-month attributable net income increased 105.6%.
- Electrical segment sales increased 25.1% in the quarter and 23.5% year to date. Mechanical segment sales increased 45.9% and 22.5%, respectively.
- Operating income benefited from higher volumes, cost reductions, and a mix shift toward higher-efficiency products.
- Third-quarter Electrical margin declined to 24.2% from 24.6% because of raw-material and supply-chain costs. Mechanical margin improved to 26.5% from 23.3%.
- The effective tax rate rose to 30.2% in the quarter and 31.2% year to date, versus 26.9% and 28.9%, respectively, primarily because of changes in the global distribution of taxable income.
Cash flow, liquidity, and capital structure
- Nine-month operating cash flow was $148.6 million, down from $235.6 million, as higher earnings were more than offset by lower cash generated from working capital.
- Investing cash outflow was $213.6 million, including $107.3 million for acquisitions, $30.0 million of capital expenditures, and a net $76.4 million used for investment securities.
- Financing cash outflow was $64.7 million, including $39.2 million of convertible-debt repayments, $18.5 million of dividends, and $12.0 million of other debt repayments, partially offset by stock-option proceeds.
- Cash and equivalents declined to $134.1 million from $262.4 million at January 2, 2010, while trading securities increased to $194.1 million from $117.6 million.
- Working capital was $725.3 million, up from $670.3 million; the current ratio declined to 2.8:1 from 3.2:1.
- Total debt was approximately $432.9 million, consisting primarily of $250.0 million of senior notes and a $165.0 million term loan. Long-term debt was $425.9 million.
- The company had no convertible notes outstanding at October 2, 2010. Its $500.0 million revolving facility had no borrowings outstanding, and the company was in compliance with all debt covenants.
- Senior notes mature in 2014 and 2017; the term loan matures in 2013 and the revolving facility in 2012. Substantially all borrowings were exposed to variable-rate or hedged interest-rate arrangements.
Material changes, acquisitions, and unusual items
- Rotor B.V. was acquired on September 1, 2010 for approximately $36.4 million. CMG Engineering Group was acquired on April 6, 2010 for approximately $83.5 million.
- The acquisitions contributed $33.5 million of third-quarter sales and $61.8 million of nine-month sales, and increased goodwill to $711.2 million from $663.9 million at year-end 2009.
- On November 1, 2010, after the reporting date, the company acquired 55% of Elco Group B.V.; the filing provides no purchase price.
- Foreign-currency translation reduced third-quarter comprehensive income, which was $27.9 million versus $46.5 million in the prior-year quarter. Accumulated other comprehensive loss was $16.8 million at October 2, 2010.
- Dividend declarations increased to $0.17 per share in the quarter and $0.50 per share year to date, compared with $0.16 and $0.48 in the prior comparable periods.
Guidance, outlook, risks, and contingencies
The filing does not provide a specific quantitative earnings or sales forecast. Management cited continued growth in high-efficiency products and improving end markets, while noting that results may be affected by supply-chain disruptions, raw-material and commodity costs, economic cyclicality, foreign exchange, interest rates, customer demand, competition, acquisition integration, and foreign-operation execution.
- Commodity, currency, and interest-rate derivatives are used to hedge exposures. Outstanding interest-rate swap notional value was $250.0 million; commodity and currency hedges covered significant forecast purchases and cash flows.
- Nordyne litigation involves alleged infringement and validity of the company’s ECM motor patent. Management does not currently expect a material financial impact.
- The company remains subject to ordinary-course product liability, warranty, contract, environmental, employment, and other litigation; management believes existing accruals are adequate and outcomes will not be material.
- Federal tax returns for 2007 through 2009 and various state returns remain subject to examination. Unrecognized tax benefits were approximately $6.0 million.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Investor verification checklist
- Verify the registrant identity and corporate name, since the filing is for Regal Beloit Corporation rather than the metadata name Regal Rexnord Corp.
- Assess whether supply-chain disruption costs, raw-material inflation, and vendor changes affected subsequent margins.
- Reconcile acquisition-related sales, goodwill, intangible assets, and integration costs for Rotor, CMG, and the post-period Elco transaction.
- Review working-capital growth, particularly receivables and inventories, against operating cash flow.
- Confirm debt maturities, variable-rate exposure, covenant compliance, and the availability of the revolving facility.
- Monitor the Nordyne patent litigation, tax examinations, warranty claims, and other contingencies.
- Determine whether the reported improvement in operating margins is sustainable after accounting for acquisitions, volume leverage, product mix, and temporary cost effects.