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Regal Beloit's 3Q Below Estimate

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Regal Beloit Corporation (RBC - Snapshot Report) reported adjusted diluted earnings per share of $1.32 in the third quarter of 2012 compared to $1.31 per share in the year-ago quarter and $1.50 in the second quarter of 2012. The annual rise in the earnings was driven by the company’s improved operational performance during the quarter.

The results surpassed the company’s previously provided guidance range of $1.22 to $1.30 per share but failed to meet the Zacks Consensus Estimate of $1.37 per share.

Revenue

Net sales spiked 5.8% year over year but down 9.8% sequentially to $779.5 million, although the sales missed the Zacks Consensus Estimate of $840 million. The company has witnessed sequential decline in its sales due to a clouded fiscal scenario. Although the company’s residential HVAC business grew slightly during the quarter, Regal Beloit witnessed low demand in its other businesses. The foreign currency translation reduced the net sales by 1.7% from the year-ago quarter.

Segment Analysis

Revenues from the Electrical segment climbed 6.1% year over year $708.3 million mostly driven by its business acquisition activity, but was down 9.6% sequentially. Excluding the company’s business acquisitions, the Electrical segment’s sales dropped 9.2% year over year due to the fall in the revenues accrued from Regal Beloit’s Commercial, Industrial and Asian businesses. The North American residential HVAC motor sales surged 0.4% year over year. The North American commercial and industrial motor sales declined 6.4% year over year in the quarter.

Net sales in the mechanical segment hiked 2.6% year over year but declined 11.3% sequentially to $71.2 million. Sales from the North America Mechanical segment (the company’s acquired and divested businesses excluded) declined 0.9% from the year-ago quarter. The sales outside the United States decreased 9.4% year over year.

Margins

Gross profit in the quarter was $192.6 million, up 7.2% year over year while gross margin increased to 24.7% in the third quarter of 2012 from 24.4% a year ago. Operating margin in the quarter was 10.7% compared to 10.6% in the year-ago quarter and 12.0% in the prior quarter.

On a segmental basis, the gross margin of the Electrical Segment was 24.5% in the quarter versus 24.0% in the year-ago quarter. The Mechanical Segment’s gross margin declined 100 basis points year over year to 27.2%.

Operating margin of the Electrical Segment in the quarter was 10.3%, declining from 10.4% in the prior year quarter. Mechanical Segment reported a 14.2% operating margin in the quarter versus 12.7% in the year-ago quarter.

Balance Sheet and Cash flows

Exiting the third quarter, Regal Beloit’s cash and cash equivalents were $185.8 million versus $190.9 million in the previous quarter. Inventories were $594.9 million compared with $583.9 million in the second quarter of 2012. Long-term debt at the end of 3Q12 was $781.7 million versus $899.8 million at the end of the previous quarter. 

Net cash provided by operating activities in the quarter was $71.8 million compared with $66.7 million in the prior-year quarter. The effective tax rate in the quarter was 24.5% versus 30.3% in the prior year quarter.

Guidance

Management expects that the clouded fiscal scenario and weak demand in the market would continue to affect the company’s financial as well as operating performance. However, the company’s HVAC business is expected to improve in the fourth quarter of 2012. Additionally, the company would focus more on its restructuring actions to improve its profitability.

Regal Beloit expects that the earnings per share (including the restructuring charges of 9 cents per share) will be within the range of 58 cents to 66 cents per share for the fourth quarter of 2012.

Our Recommendation

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

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