Regal Beloit Corporation (RBC Quick QuoteRBC - Free Report) delivered better-than-expected results for the third quarter of 2020, with earnings surpassing estimates by 39.52%. This was the company’s fifth consecutive quarter of impressive earnings results. Also, its quarterly sales beat estimates by 6.80%. The company’s shares gained 4.7% yesterday, ending the trading session at $98.53.

Adjusted earnings in the reported quarter were $1.73 per share, surpassing the Zacks Consensus Estimate of $1.24. Also, the bottom line grew 28.1% from the year-ago quarter’s reported figure of $1.35 on improvement in operating results that more than offset the sales decline.

Revenue Details

In the reported quarter, Regal Beloit’s net sales were $758.2 million, declining 1.8% year over year due to the adverse impacts of the pandemic. Organic sales in the quarter fell 1.5%, while forex woes and divestments had adverse impacts of 0.2% and 0.1%, respectively.

However, the top line surpassed the Zacks Consensus Estimate of $710 million.

Excluding the impacts of divested businesses, the company’s adjusted net sales in the reported quarter were $758.2 million, down 1.7% year over year.

Regal Beloit reports results under four segments — Climate Solutions, Commercial Systems, Industrial Systems and Power Transmission Solutions. A brief discussion is provided below:

Revenues from Climate Solutions totaled $234 million, rising 1.3% year over year. It represented 30.9% of net sales. The results were adversely impacted by forex woes of 0.8% and divestiture impact of 0.4%, while gained from organic sales growth of 2.5%.

Commercial Systems’ revenues, representing 28.8% of net sales, were $218.5 million, up 1.7% year over year. Organic sales in the reported quarter increased 1.3%, while movement in foreign currencies benefited by 0.5%.

Industrial Systems generated revenues of $138.8 million, reflecting a year-over-year decline of 3.5%. It represented 18.3% of the quarter’s net sales. Organic sales decreased 2.9% year over year and forex woes hurt results by 0.6%.

Power Transmission Solutions’ revenues, representing 22% of net sales, were $166.9 million, down 8.7% year over year. Organic sales dipped 8.9% and movement in foreign currencies benefited results by 0.2%.

Margin Picture

In the reported quarter, Regal Beloit’s cost of sales declined 5.9% year over year to $536.6 million. It represented 70.8% of net sales versus 73.9% recorded in the year-ago quarter. Gross profit increased 9.8% year over year to $221.6 million, while margin increased 310 basis points (bps) to 29.2%. Operating expenses of $131.6 million increased 1.9% year over year and represented 17.4% of net sales in the quarter.

Adjusted operating profit was $97 million, up 19.3% year over year, while margin increased 230 bps to 12.8%. Interest expenses in the quarter were down 33.3% year over year to $9 million. Adjusted effective tax rate in the quarter was 20.5% versus 16.3% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the third quarter of 2020, Regal Beloit had cash and cash equivalents of $487.5 million, reflecting a 12.8% increase from $432.2 million recorded in the last reported quarter. Long-term debt decreased 25.3% sequentially to $840.2 million.

In the quarter, the company’s net repayments under the revolving credit facility totaled $5.3 million and that for long-term debts was $50 million.

In the first three quarters of 2020, Regal Beloit generated net cash of $309.9 million from operating activities, reflecting year-over-year growth of 14.3%. The company’s capital investment for purchasing property, plant and equipment decreased 61.6% from the year-ago figure to $29.7 million. Free cash flow was $280.2 million, increasing 44.5% in the year-ago comparable period.

Free cash flow (as a % of adjusted net income) was 170.8% in the third quarter and 197% in the first three quarters of 2020.

During the first three quarters of 2020, the company paid out dividends totaling $36.5 million to shareholders and repurchased shares worth $25 million (no buybacks were made in the second and third quarters). Notably, it decided to restart its buyback activities.

Outlook

The company provided financial projections for the fourth quarter of 2020. It predicts earnings per share of $1.46-$1.66 for the quarter, suggesting a mid-point increase of 25% from the year-ago quarter’s reported figure. Based on fourth-quarter estimates and results for the first three quarters of 2020, the earnings guidance for 2020 is pegged at $5.45-$5.65, suggesting an increase from the previous year’s reported figure.

Capital expenditure in the year is expected to be $45 million (down from $50 million mentioned earlier); adjusted effective tax rate will likely be 21% (maintained), and restructuring and related costs will probably be $29 million (higher than $25 million stated earlier). Free cash flow (as a percentage of adjusted net income) will likely be more than 150% versus the previously mentioned 125%.