Regal Beloit Beats, Profit Improved

Regal Beloit Corporation (RBC - Snapshot Report), a leading manufacturer of electrical and mechanical motion control products posted its first quarter 2012 financial results on May 1, 2012. Diluted earnings per share reported in the quarter were $1.16; beating both the Zacks Consensus Estimate of $1.10 and the year-ago earnings of 99 cents per share. The results were ahead of the company’s guidance range of $1.07 to $1.13 per share.

The record performance in the quarter was attributed to the development in its North American commercial and industrial, mechanical and global Unico businesses which neutralized the downturn in HVAC and China market. The company benefited from minimized income tax spending and the sale of assets.

Revenue

Net sales spiked 22% year over year to $807.9 million, although the sales missed the Zacks Consensus Estimate of $823 million. The growth was triggered by the company’s recent acquisitions and expanded operations. The negative foreign currency translation reduced the net sales by 0.6% from the year-ago quarter.

Segment Analysis

Revenues from the Electrical segment climbed 23.1% year over year to $731.4 million, driven by its business acquisition. However, excluding the business acquirement, the North American residential HVAC motor sales declined by 30.2% due to a declining trend in its demand for residential HVAC equipment and unfavorable effect of the R22 dry ship. The North American commercial and industrial motor net sales jumped 7% year over year in the quarter.

Net sales in the mechanical segment hiked 11.9% year over year to $76.5 million, driven by the growth of its acquired businesses. Sales from the North America Mechanical segment improved 8.7%, offsetting the downturn in the market of Europe and Asia. The sales outside the United States grew 13.2% year over year.

Margins

Gross profit in the quarter was $197.6 million, up 20% year over year while gross margin dropped to 24.5% in the first quarter from 24.9% a year ago. The margin decline was led by weak HVAC motor sales and the mix effect of R22 dry ship conversion. Operating margin in the quarter was 9.8% as compared to 9.7% in the year-ago quarter.

On a segmental basis, the gross margin of the Electrical Segment was reduced by 0.1% to 24.4% from the year-ago quarter. The Mechanical Segment’s gross margin showed a decline from 28.1% in year-ago quarter to 24.5% in the current quarter.

Operating margin of the Electrical Segment in the quarter surged from 9.3% to 9.5%. Mechanical Segment reported 12.7% operating margin versus 12.6% in the year-ago quarter.

Balance Sheet and Cash flows

Exiting the first quarter, Regal Beloit’s cash and cash equivalents proliferated by 15.1% sequentially to $164.2 million. Long-term debt at the end of 1Q12 was $971.0 million versus $909.2 million at the end of 4Q11.

Net cash flow from operating activities in the quarter was $68.2 million, up 22% from the year-ago quarter. The effective tax rate was 26.3% versus 31.2% in the prior year quarter.

Dividend

Regal Beloit Corporation declared a dividend of 19 cents per share, which increased by 1 cent per share from the prior dividend. The dividend will be paid on July 13, 2012 to shareholders of record as on June 29, 2012.

Guidance

Management expects that the Commercial and Industrial sectors would grow in the second quarter 2012. Additionally, revenues for the HVAC segment are expected to be low in the upcoming quarter due to the adverse effect of R22 mix. Regal Beloit also expects the earnings per share to be within the $1.42 to $1.48 range for the second quarter of fiscal 2012.

Our Recommendation

Regal Beloit currently has a Zacks Rank# 4 which implies a short-term (1-3 months) ‘Sell’ rating on the stock.