Industrial goods manufacturer Regal Beloit Corporation RBC reported solid second-quarter 2015 results as earnings beat estimates despite numerous formidable headwinds like slowing markets in China and difficult conditions in oil and gas. Adjusted earnings for the quarter came in at $1.53 per share, exceeding both the year-ago quarter tally of $1.29 and the Zacks Consensus Estimate of $1.52.
Net income came in at $62.8 million or $1.39 per share compared with $56.2 million or $1.24 per share in the year-ago quarter. The year-over-year improvement was driven by top line growth and the company’s simplification initiatives.
Net sales improved 10.8% year over year to $942.2 million in the quarter, led by astounding growth in the firm’s Power Transmission segment, partially offset by weak performance in other segments and adverse foreign currency translation effect. However, quarterly revenues lagged the Zacks Consensus Estimate of $986 million.
Segment Analysis
Revenues from the Power Transmission segment continued to impress, increasing an astounding 217% year over year to $215 million, buoyed by inorganic growth. Adjusted operating profit margin improved to 11.8% from 11.2% in the year-ago quarter, driven by higher volume, benefits from the simplification initiative and the PTS acquisition.
Net sales in the Commercial and Industrial Systems segment were $441 million, down 8% from the prior-year quarter. The weakness was attributable to softness in industrial markets in China, oil and gas troubles and negative foreign currency translation effect of 3%. Despite such headwinds, the company managed to keep segment adjusted operating profit margin unchanged from the prior-year period at 9.9%, helped by successful cost cutting initiatives.
Net sales from the Climate Solutions segment also showed softness and were down 6% year over year to $286 million, dragged down by the SEER 13 pre-build and currency headwinds, which was partially offset by strong performance in the Middle East and India. However, despite the weak sales, adjusted operating profit margin increased 330 basis points year over year to 15.2% owing to benefits from the simplification initiative.
Balance Sheet and Cash Flow
At quarter end, Regal Beloit’s cash and cash equivalents were $247.6 million, compared with $445.3 million a year ago. Long-term debt stood at $1,817.4 million, up from $625.4 at year-end 2014.
Net cash from operating activities during the quarter aggregated $118.2 million, up from $99.5 million in the year-ago period.
Guidance
Regal Beloit has embarked on a three-year plan to revive its growth momentum. The company is confident of the current business conditions in its North American operations. However, unfavorable currency translation, uncertain European markets and a decline in oil and gas investments are expected to be headwinds in 2015. Also, weakness in certain end markets is expected to continue to put pressure on revenues.
In light of such headwinds, Regal Beloit revised its 2015 guidance downward. It now expects adjusted earnings per share in 2015 to be in the range of $5.40 to $5.60, down from earlier projections of $5.45 to $5.75. The guidance still represents year-over-year growth of 25%–30%, driven by accretion from the PTS acquisition.
Moving Forward
Regal Beloit is striving to counter the muted growth environment by focusing on improving productivity and conducting heavy restructuring across its portfolio by streamlining its operations and shedding underperforming assets. These initiatives are expected to boost the company’s operational efficiency and lend strength to its bottom line. The company remains upbeat about its margin expansion initiatives that will likely enable it to achieve the first year targets for its legacy businesses.
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 flow generation is another positive, providing it the leeway to seek accretive acquisitions and unlock value.
Regal Beloit currently has a Zacks Rank #4 (Sell). Other stocks in the electrical machinery industry that look promising and are worth a look include AZZ incorporated AZZ, EnerSys ENS and AO Smith Corp AOS. While AZZ and AO Smith hold a Zacks Rank #1 (Strong Buy), EnerSys carries a Zacks #2 (Buy).
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