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RBC > SEC Filings for RBC > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for REGAL BELOIT CORP

Form 10-Q for REGAL BELOIT CORP


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context requires otherwise, references in this Item 2 to "we," "us," "our" or the "Company" refer collectively to Regal Beloit Corporation and its subsidiaries.
Overview
Over the past several years, as part of our strategic growth plans, we have typically acquired multiple businesses in any given fiscal year. When we refer to the financial impact of the "recently acquired businesses," we are referring to the results of operations of acquired businesses prior to the first anniversary of their acquisition.

On an ongoing basis, we focus on a variety of key indicators to monitor business performance. These indicators include organic and total sales growth (including volume and price components), gross profit margin, operating profit, net income and earnings per share, and measures to optimize the management of working capital, capital expenditures, cash flow and Return On Invested Capital ("ROIC"). We monitor these indicators, as well as our corporate governance practices (including our Code of Business Conduct and Ethics), to ensure that we maintain business health and strong internal controls.

To achieve our financial objectives, we are focused on initiatives to drive and fund growth. We seek to capture significant opportunities for growth by identifying and meeting customer product needs within our core product categories, developing new products, and identifying category expansion opportunities. We meet these customer product needs through focused product research and development efforts as well as through a disciplined acquisition strategy. Our acquisition strategy emphasizes acquiring companies that offer market growth potential as a result of geographic base, technology or synergy opportunities. The cash flow needed to fund our growth is developed through continuous, corporate-wide initiatives to lower costs and increase effective asset utilization.

We also prioritize investments that generate higher return on capital. Our management team is compensated based on a modified Economic Value Added ("EVA") program which reinforces capital allocation disciplines that drive increases in shareholder value. The key metrics in our program include total sales growth, organic sales growth, operating margin percent, operating cash flow as a percent of net income, and ROIC.

Given the current global economic uncertainty, we anticipate that the near-term operating environment will remain challenging. Slower economic growth or recessions in the U.S. and international markets may reduce the demand for our products. In particular, we are seeing recent declines in sales of our products used in commercial, industrial, power generation and residential HVAC applications. We believe these sales declines are due to slower economic growth, recession or uncertainty about future economic conditions in the markets in which we compete.

Net sales for the third quarter 2012 increased 5.8% to $779.5 million compared to $736.9 million in the third quarter 2011. Net sales for the third quarter 2012 included $105.7 million of incremental net sales from recently acquired businesses.
Net Income Attributable to Regal Beloit Corporation increased 18.8% to $54.3 million for the third quarter 2012 compared to $45.7 million for the third quarter 2011. Diluted earnings per share increased to $1.29 for the third quarter 2012 compared to $1.13 for the third quarter 2011.


Net cash provided by operating activities was $276.2 million for the nine months ended September 29, 2012, an increase of $100.0 million from the comparable prior year period.


Results of Operations
Net Sales

                            Three Months Ended                 Nine Months Ended
                       September 29,     October 1,      September 29,      October 1,
                           2012             2011              2012             2011
                                            (Dollars in Millions)
Net Sales             $      779.5      $     736.9     $      2,451.3     $  2,081.3
 Sales growth rate             5.8 %           24.7 %             17.8 %         23.7 %

Net Sales by Segment:
 Electrical segment   $      708.3      $     667.5     $      2,223.3     $  1,873.0
   Sales growth rate           6.1 %           26.5 %             18.7 %         24.2 %
 Mechanical segment   $       71.2      $      69.4     $        228.0     $    208.3
   Sales growth rate           2.6 %           10.2 %              9.5 %         19.4 %

Three Months Ended September 29, 2012
Net sales for the third quarter 2012 included $105.7 million of incremental net sales from the recently acquired businesses. Excluding the recently acquired businesses, net sales for the third quarter 2012 decreased 8.6% and reflected
(i) price decreases of approximately 0.1%, (ii) a decrease of approximately 6.7% related to volume and mix changes and (iii) a decrease from foreign currency translation of approximately 1.7%. In the Electrical segment, net sales for the third quarter 2012 included $94.6 million of incremental net sales from the recently acquired businesses. Excluding the recently acquired businesses, Electrical segment net sales declined 8.1%. Electrical North American residential HVAC motor net sales, excluding the recently acquired businesses, increased 0.4% in the third quarter 2012. North American commercial and industrial motor net sales, adjusted for the divested pool and spa business, decreased 6.4% in the third quarter 2012 from the third quarter 2011. Mechanical segment net sales included incremental sales from the recently acquired business of $11.1 million in the third quarter of 2012. Excluding the recently acquired business, Mechanical segment sales in North America for the third quarter of 2012 decreased 0.9% compared to the third quarter 2011. Net sales of high efficiency products were 21.8% of total net sales in the third quarter 2012 compared to 15.4% in the third quarter 2011. The impact of foreign currency exchange rates decreased total net sales by approximately 1.7% for the third quarter 2012 compared to a 1.8% positive impact for the third quarter 2011. Net sales to regions outside of the United States decreased 9.4% compared to the third quarter 2011 and represented 31.4% of total net sales in the third quarter 2012 compared to 35.9% in the third quarter 2011. Nine Months Ended September 29, 2012
Net sales for the nine months ended September 29, 2012 included $533.9 million of incremental net sales from the recently acquired businesses. Excluding the recently acquired businesses, net sales for the nine months ended September 29, 2012 decreased 7.9% and reflected (i) price increases of approximately 1.2% to offset increased material costs, (ii) a decrease of approximately 7.7% related to volume and mix changes and (iii) a decrease from foreign currency translation of approximately 1.4%.
In the Electrical segment, net sales for the nine months ended September 29, 2012 included $501.8 million of incremental net sales from the recently acquired businesses. North American residential HVAC motor net sales, excluding the recently acquired businesses, decreased 14.8% in the nine months ended September 29, 2012 from the nine months ended October 1, 2011. North American commercial and industrial motor net sales, adjusted for the divested pool and spa business, decreased 0.9% in the nine months ended September 29, 2012 from the nine months ended October 1, 2011.
Mechanical segment net sales included incremental sales from the recently acquired business of $22.3 million for the nine months ended September 29, 2012. Excluding the recently acquired business, Mechanical segment sales in North America for the nine months ended September 29, 2012 increased 6.1% compared to the nine months ended October 1, 2011.


Net sales of high efficiency products were 20.1% of total net sales in the nine months ended September 29, 2012 compared to 17.0% in the nine months ended October 1, 2011. The impact of foreign currency exchange rates decreased total net sales by approximately 1.4% for the nine months ended September 29, 2012 compared to a 1.7% positive impact for the nine months ended October 1, 2011. Net sales to regions outside the United States increased 4.0% for the nine months ended September 29, 2012 compared to the nine months ended October 1, 2011 and represented 32.4% of total net sales for the nine months ended September 29, 2012 compared to 36.5% for the nine months ended October 1, 2011.

Gross Profit
                                 Three Months Ended                 Nine Months Ended
                            September 29,     October 1,      September 29,     October 1,
                                2012             2011             2012             2011
                                                 (Dollars in Millions)
Gross Profit               $      192.6      $     179.6     $       610.3     $     495.1
 Gross profit percentage           24.7 %           24.4 %            24.9 %          23.8 %

Gross Profit by Segment:
 Electrical segment        $      173.2      $     160.0     $       549.3     $     436.0
   Gross profit percentage         24.5 %           24.0 %            24.7 %          23.3 %
 Mechanical segment        $       19.4      $      19.6     $        61.0     $      59.1
   Gross profit percentage         27.2 %           28.2 %            26.8 %          28.4 %

Three Months Ended September 29, 2012
Gross profit margin for the third quarter 2012 was 24.7% compared to 24.4% for the third quarter 2011.
Electrical segment gross profit margin was 24.5% for the third quarter 2012, compared to 24.0% for the third quarter 2011. Gross profit for the Electrical segment included $2.8 million of restructuring expenses in 2012 while third quarter 2011 gross profit included EPC purchase accounting inventory adjustments of $10.3 million.
Gross profit margin for the Mechanical segment was 27.2% for the third quarter 2012, compared to 28.2% in the third quarter 2011. Nine Months Ended September 29, 2012
Gross profit margin for the nine months ended September 29, 2012 was 24.9% compared to 23.8% for the nine months ended October 1, 2011.
Gross profit margin for the Electrical segment was 24.7% for the nine months ended September 29, 2012, compared to 23.3% for the nine months ended October 1, 2011. Gross profit for the Electrical segment for the nine months ended September 29, 2012 included $3.3 million of restructuring costs. Electrical segment gross profit for the nine months ended October 1, 2011 included $28.0 million from a previously disclosed warranty expense item and $10.3 million of EPC purchase accounting inventory adjustments that negatively impacted gross profit margin.
Gross profit margin for the Mechanical segment was 26.8% for the nine months ended September 29, 2012, compared to 28.4% in the nine months ended October 1, 2011. The decrease in the gross profit margin for the Mechanical segment for the nine months ended September 29, 2012 included $0.7 million of inventory purchase accounting adjustments related to the acquisition of Milwaukee Gear Company.


Operating Expenses
                                        Three Months Ended                  Nine Months Ended
                                  September 29,       October 1,      September 29,      October 1,
                                       2012              2011             2012              2011
                                                        (Dollars in Millions)
Operating Expenses               $       109.3       $     101.5     $       344.6      $     298.0
 As a percentage of net sales             14.0 %            13.8 %            14.1 %           14.3 %

Operating Expenses by Segment:
 Electrical segment              $        99.9       $      90.7     $       315.2      $     266.1
 As a percentage of net sales             14.1 %            13.6 %            14.2 %           14.2 %
 Mechanical segment              $         9.4       $      10.8     $        29.4      $      31.9
 As a percentage of net sales             13.2 %            15.6 %            12.9 %           15.3 %

Three Months Ended September 29, 2012
Operating expenses for the third quarter 2012 increased $7.8 million driven by an incremental $9.5 million related to the recently acquired businesses. Electrical segment operating expenses for the third quarter 2012 included an incremental $8.5 million related to the recently acquired businesses, restructuring expenses of $2.4 million and minimal acquisition related expenses. In the third quarter 2011, Electrical segment acquisition expenses of $5.9 million were offset by a gain of $6.5 million on the divested business. Mechanical segment operating expenses included an incremental $1.0 million related to the recently acquired business. Nine Months Ended September 29, 2012
Operating expenses for the nine months ended September 29, 2012 increased $46.6 million driven by $55.2 million related to the recently acquired businesses. Electrical segment operating expenses for the nine months ended September 29, 2012 included $52.1 million related to the recently acquired businesses, restructuring expenses of $2.4 million and minimal acquisition related expenses. In the nine months ended 2011, Electrical segment operating expenses included acquisition related expenses of $16.0 million partially offset by a $6.5 million gain on the divested business.
Mechanical segment operating expenses for the nine months ended September 29, 2012 included $3.1 million related to the recently acquired business and reflected an incremental gain on sale of assets of $1.5 million.


Income from Operations
                                         Three Months Ended                  Nine Months Ended
                                   September 29,       October 1,      September 29,      October 1,
                                        2012              2011             2012              2011
                                                         (Dollars in Millions)
Income from Operations            $        83.3       $      78.1     $       265.7      $     197.1
 As a percentage of net sales              10.7 %            10.6 %            10.8 %            9.5 %

Income from Operations by Segment
 Electrical segment               $        73.3       $      69.3     $       234.1      $     169.8
 As a percentage of net sales              10.3 %            10.4 %            10.5 %            9.1 %
 Mechanical segment               $        10.0       $       8.8     $        31.6      $      27.3
 As a percentage of net sales              14.2 %            12.6 %            13.9 %           13.1 %

Three Months Ended September 29, 2012
Income from operations was $83.3 million for the third quarter 2012 compared to $78.2 million for the third quarter 2011. As a percentage of sales, income from operations was 10.7% for the third quarter 2012 compared to 10.6% for the third quarter 2011. Income from operations for the third quarter 2012 included $5.2 million of restructuring expenses
Electrical segment income from operations was 10.3% of net sales for the third quarter 2012 compared to 10.4% of net sales for the third quarter 2011. Income from operations for the third quarter 2012 included $5.2 million of restructuring expenses. Income from operations for the third quarter 2011 included EPC purchase accounting inventory adjustments of $10.3 million and $5.9 million of acquisition related expenses offset by a $6.5 million gain on the divested business.
Mechanical segment income from operations was 14.2% of net sales for the third quarter 2012 compared to 12.6% of net sales for the third quarter 2011. Nine Months Ended September 29, 2012
Income from operations was $265.7 million for the nine months ended September 29, 2012 compared to $197.1 million for the nine months ended October 1, 2011. As a percentage of sales, income from operations was 10.8% for the nine months ended September 29, 2012 compared to 9.5% for the nine months ended October 1, 2011. Income from operations for the nine months ended September 29, 2012 included $5.7 million of restructuring expenses.
Electrical segment income from operations for the nine months ended September 29, 2012 included $5.7 million of restructuring expenses. Income from operations for the nine months ended October 1, 2011 included $28.0 million from a previously disclosed warranty expense item, $10.3 million of EPC purchase accounting inventory adjustments and acquisition related costs of $16.0 million partially offset by a $6.5 million gain on the divested business.

Mechanical segment income from operations was 13.9% of net sales for the nine months ended September 29, 2012 compared to 13.1% of net sales for the nine months ended October 1, 2011.

Interest Expense, Net
                             Three Months Ended                  Nine Months Ended
                        September 29,       October 1,      September 29,      October 1,
                             2012              2011             2012              2011
                                             (Dollars in Millions)
Interest Expense, Net $     10.2           $      10.0    $     32.4          $      19.2


Three Months Ended September 29, 2012
Net interest expense for the third quarter of 2012 was flat compared to the
third quarter of 2011.
Nine Months Ended September 29, 2012
Net interest expense for the nine months ended September 29, 2012 was $32.4
million compared to $19.2 million for the nine months ended October 1, 2011.
During 2012, the Company's net interest expense increased driven by higher debt
outstanding to fund the August 2011 acquisition of the Electrical Products
Company of A.O. Smith Corporation.
Provision for Income Taxes
                                 Three Months Ended                Nine Months Ended
                            September 29,      October 1,     September 29,     October 1,
                                2012              2011            2012             2011
                                                (Dollars in Millions)
Income Taxes               $       17.9       $     20.6     $       63.9      $     53.6
 Effective Tax Rate                24.5 %           30.3 %           27.4 %          30.1 %

Three Months Ended September 29, 2012
The effective tax rate for the third quarter 2012 was 24.5% compared to 30.3% for the third quarter 2011 driven primarily by the qualification in China of a high technology tax incentive for two of our facilities that resulted in a retroactive benefit of $2.3 million.
Nine Months Ended September 29, 2012
The effective tax rate for the nine months ended September 29, 2012 was 27.4% compared to 30.1% for the nine months ended October 1, 2011 driven primarily by the global mix of earnings and the qualification in China of a high technology tax incentive for two of our facilities that resulted in a retroactive benefit of $2.3 million.

Net Income Attributable to Regal
Beloit Corporation and Earnings
Per Share

                                       Three Months Ended                   Nine Months Ended
                                 September 29,      October 1,       September 29,        October 1,
                                      2012             2011              2012                2011
                                             (Amounts in Millions, Except Per Share Data)
Net Income Attributable to Regal
Beloit Corporation               $       54.3      $      45.7     $      165.7         $      118.8
 Fully Diluted Earnings Per
Share                            $       1.29      $      1.13     $       3.94         $       3.00
 Average Number of Diluted
Shares                                   42.0             40.4             42.0                 39.6

Three Months Ended September 29, 2012
Net Income Attributable to Regal Beloit Corporation for the third quarter 2012 was $54.3 million, an increase of 18.8% compared to $45.7 million for the third quarter 2011. Fully diluted earnings per share was $1.29 for the third quarter 2012 compared to $1.13 for the first quarter 2011. The average number of diluted shares was 42.0 million during the third quarter 2012 compared to 40.4 million during the third quarter 2011.
Nine Months Ended September 29, 2012
Net Income Attributable to Regal Beloit Corporation for the nine months ended September 29, 2012 was $165.7 million, an increase of 39.5% compared to $118.8 million for the nine months ended October 1, 2011. Fully diluted earnings per share was $3.94 for the nine months ended September 29, 2012 compared to $3.00 for the nine months ended October 1, 2011. The average number of diluted shares was 42.0 million during the nine months ended September 29, 2012 compared to 39.6 million during the nine months ended October 1, 2011.


Liquidity and Capital Resources
Our principal source of liquidity is operating cash flow. In addition to operating income, other significant factors affect our liquidity including working capital levels, capital expenditures, dividends, acquisitions, availability of debt financing, and the ability to attract long-term capital on acceptable terms.
Cash flow provided by operating activities ("operating cash flow") was $276.2 million for the nine months ended September 29, 2012, a $100.0 million increase from the nine months ended October 1, 2011. The increase in operating cash flow was driven by higher sales volume and earnings from 2011 acquisitions reflected in full nine month 2012 operating results. Net income was $45.1 million higher for the nine months ended September 29, 2012 compared to the nine months ended October 1, 2011.
Cash flow used in investing activities was $162.5 million for the nine months ended September 29, 2012, a $575.6 million decrease from the nine months ended October 1, 2011 primarily due to the prior year acquisition of EPC. Capital expenditures were $66.1 million in the nine months ended September 29, 2012 compared to $44.3 million in the nine months ended October 1, 2011. Business acquisitions were $103.0 million for the nine months ended September 29, 2012, driven by the acquisition of Milwaukee Gear Company, compared to $764.9 million for the nine months ended October 1, 2011 which included the EPC acquisition. Cash flow used in financing activities for the nine months ended September 29, 2012 was $71.4 million compared to cash flow provided by financing activities of $512.2 million in the nine months ended October 1, 2011, primarily due to the $500.0 million of long-term borrowings in 2011 and the $75.0 million repayment of long-term borrowings in 2012.
Working capital was $795.7 million at September 29, 2012, an increase of 3.8% from $766.6 million at December 31, 2011.
The following table presents selected financial information and ratios as of September 29, 2012 and December 31, 2011 (in millions):

                               September 29,      December 31,
                                    2012              2011
Cash and Cash Equivalents     $         185.8    $       142.6
Trade Receivables, Net                  466.5            424.2
Inventories, Net                        594.9            575.8
Working Capital                         795.7            766.6
Current Ratio                           2.3:1            2.5:1

A significant amount of operating income is earned in jurisdictions where it is deemed to be permanently reinvested. Our most prominent jurisdiction of operation is the U.S. We currently do not intend nor foresee a need to repatriate funds to the U.S., and no provision for U.S. income taxes has been made with respect to such earnings. It is expected that existing cash and cash equivalents available to the U.S., the cash generated by U.S. operations, committed credit lines as well as the expected ability to access the capital markets will be sufficient to fund U.S. operating and capital needs for at least the next twelve months and thereafter for the foreseeable future. There are no current trends, demands or uncertainties that are believed reasonably likely to require repatriation or to have a material impact on our ability to fund our U.S. operations.
At September 29, 2012, we had $750.0 million of senior notes (the "Notes") outstanding. Details on the senior notes at September 29, 2012 were (in millions):

                                        Principal        Interest Rate      Maturity
Floating Rate Series 2007A           $        150.0      Floating (1)     August 2014
Floating Rate Series 2007A                    100.0      Floating (1)     August 2017
Fixed Rate Series 2011A                       100.0          4.1%          July 2018
Fixed Rate Series 2011A                       230.0       4.8 to 5.0%      July 2021
Fixed Rate Series 2011A                       170.0       4.9 to 5.1%      July 2023
                                     $        750.0

(1) Interest rates vary as LIBOR
varies. At September 29, 2012, the
interest rate was between 1.0% and
1.2%.


We have interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk.
In 2008, we entered into a Term Loan Agreement ("Term Loan") with certain financial institutions, pursuant to which we borrowed an aggregate principal amount of $165.0 million. During 2011, we repaid $20.0 million of the Term Loan. In the third quarter of 2012, the Company repaid an additional $75.0 million of the Term Loan. The Term Loan matures in June 2013, and borrowings generally bear interest at a variable rate equal to a margin over LIBOR which varies with the ratio of our total funded debt to consolidated earnings before interest, taxes, depreciation, and amortization ("EBITDA") as defined in the Term Loan. These interest rates also vary as LIBOR varies. At September 29, 2012, the interest rate of 1.2% was based on a margin over LIBOR.
We also have a $500.0 million revolving credit facility that matures in 2016. The Facility permits borrowing at interest rates based upon a margin above LIBOR. The margin varies with the ratio of total funded debt to EBITDA as defined in the Facility. These interest rates also vary as LIBOR varies. At September 29, 2012, there was $27.0 million outstanding on the Facility. We had $445.1 million of available borrowing capacity under the Facility at September 29, 2012.
The Notes, the Term Loan and the Facility require us to meet specified financial ratios and to satisfy certain financial condition tests. We were in compliance with all financial debt covenants as of September 29, 2012.

Critical Accounting Policies and Estimates

Our disclosures of critical accounting policies, which are contained in its Annual Report on Form 10-K for the year ended December 31, 2011, have not materially changed since that report was filed.

. . .

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