Regal Beloit Misses Q3 Earnings Estimates, Guidance Weak - Analyst Blog

Industrial equipment manufacturer Regal Beloit Corporation (RBC) reported tepid third-quarter results as earnings missed estimates despite robust revenue growth. Adjusted earnings for the quarter came in at $1.15 per share, down 2.5% year over year and missing the Zacks Consensus Estimate by a penny. In spite of decent sales growth, margin contraction led by higher expenses hurt the company's bottom line.

The company's guidance for the fourth quarter reflected its expectation of continued fragility in earnings.

Net sales improved 8% year over year to $829.8 million, beating the Zacks Consensus Estimate of $815 million. Notable performance by the company's residential heating, ventilation and air conditioning (HVAC) and mechanical businesses contributed to the revenue beat.

Segment Analysis

Revenues from the Electrical segment continued to show strength, increasing 7.5% year over year to $760.6 million, of which $42.6 million was contributed by last-year acquisitions. Revenues were buoyed by the North American residential HVAC sub-segment sales (up 8.4% year over year) driven by the improving demand scenario. However, the North American commercial and industrial motor sub-segment continue to show weakness, declining 1.3% from the prior-year quarter, hurt by weaker demand from commercial and industrial refrigeration as well as irrigation.

Net sales in the Mechanical segment were $69.2 million, up 14% from $60.7 million in the prior-year quarter. North American sales for the segment witnessed considerable growth, increasing 18% year over year boosted by strength in the power transmission distribution channel and the energy end market.

By geographic divisions, international sales accounted for 35% of total revenues and improved 8.2% year over year. By product class, sales of high efficiency products increased 7% year over year, contributing 21.5% to total sales.

Margins

Regal Beloit's gross profit for the quarter rose 3.7% year over year to $203.8 million. Gross profit from the Electrical segment increased 3% year over year to $185.5 million, while that from the Mechanical segment rose 11.6% to $18.3 million. However, gross margin for the company declined 100 basis points year over year to 24.6%.

Operating income was $74.7 million, down 5.2% from $78.8 million in the year-ago quarter. By segments, operating income in the Electrical segment was $66 million, down 7.2% from $71.1 million in the year-ago quarter. Mechanical segment's operating income fared better, increasing 13% from the prior-year figure to $8.7 million.

Acquisitions

Early in the quarter, Regal Beloit acquired Benshaw Inc., a maker of custom-made low and medium voltage drives and soft starters, as part of its efforts to streamline its manufacturing footprint. The custom drives expand Regal Beloit's existing portfolio of electronic drives and controls, and also complement Unico, its wholly-owned subsidiary that offers innovative motion-control solutions.

The transaction is expected to be accretive to 2015 earnings by 6 to 9 cents per share.

Balance Sheet and Cash Flow

At quarter end, Regal Beloit's cash and cash equivalents were $327.3 million, compared with $466 million at 2013 year end. Long-term debt stood at $668.6 million, up from $609 million at December end.

Net cash from operating activities was $81.8 million, marginally higher than $81.2 million in the year-ago period. Free cash flow declined marginally to $64.2 million from $64.6 million in the year-ago period, and represented 135.2% of the company's net income.

Last week, the company announced a quarterly dividend of 22 cents. Regal Beloit's long-term strategy features a steady dividend payout, in order to provide persistent risk-adjusted returns to its stockholders. In addition, decent dividend increases at periodic intervals have been one of the company's most attractive traits.

Guidance

In the fourth quarter, management anticipates sustained growth in residential HVAC and mechanical business, while commercial and industrial motor businesses are expected to remain flat. The company expects fourth-quarter adjusted earnings to lie in the range of 90 cents – 98 cents. The Zacks Consensus Estimate for the upcoming quarter presently stands at 93 cents.

Our Take

Regal Beloit's performance in this quarter was led by strong numbers in the residential HVAC and mechanical businesses, and these segments are expected to make more headway in the coming quarters. However, its other units are expected to be a drag on the company's top line, going forward.

Regal Beloit is undergoing a restructuring phase wherein it is streamlining its operations and shedding underperforming assets. As part of this initiative, the company recently divested a joint venture in China. We are encouraged by the company's efforts to reform its business structure, pursue growth and drive operating margin expansion across the board.

The company's strong free cash generation is another positive for the company, providing it the leeway to seek accretive acquisitions and unlock value.

Regal Beloit currently holds a Zacks Rank #3 (Hold). Other stocks in the industrial products sector that look promising include ACCO Brands Corporation (ACCO), Worthington Industries, Inc. (WOR) and ARC Document Solutions, Inc. (ARC), each carrying a Zacks Rank #1 (Strong Buy).