Regal Beloit Corporation Announces Third Quarter 2019 Financial Results

BELOIT, Wis., Nov. 4, 2019 /PRNewswire/ -- Regal Beloit Corporation (NYSE: RBC), a global leader in the engineering and manufacturing of high-efficiency electric motors and power transmission products, reported third quarter 2019 diluted earnings per share of $1.19. Third quarter 2019 adjusted diluted earnings per share* were $1.35.

Key financial results for the third quarter 2019 included:

• Total net sales of $772.3 million decreased 16.5% from the prior year and included a negative 0.7% impact from foreign currency and a negative 6.2% impact from businesses divested/to be exited. The result was a negative organic sales growth rate of 9.6%.
• Income from operations was $72.8 million or 9.4% of net sales, up 190 basis points from prior year. Adjusted income from operations was $81.3 million or 10.5% of adjusted net sales, down 110 basis points from prior year.
• Adjusted income from operations delevered at 20.7% from prior year.
• Inventories down $39.6 million from the end of the second quarter 2019.
• Net cash provided by operating activities was $140.6 million and capital expenditures totaled $21.1 million, resulting in free cash flow of $119.5 million or 239.5% of adjusted net income.
• Purchased 1,282,037 shares for a total of $94.1 million.
• The Board of Directors on October 25, 2019 approved a new $250 million share purchase authorization replacing the previous authorization.

Third quarter 2019 segment results versus the prior year third quarter:

• Commercial and Industrial Systems segment net sales were $358.6 million, a decrease of 22.4%. Businesses divested/to be exited had a negative 8.6% impact, and foreign currency had a negative 1.1% impact. The result was a negative organic sales growth rate of 12.7% driven by continued inventory de-stocking in the North American pool pump market, weakness in China industrial demand, a slowdown in the commercial HVAC market combined with account pruning, and continued power generation project delays due to end market overcapacity. Operating margin was 4.0%. Excluding adjustments of $5.8 million, adjusted operating margin was 5.6% of adjusted net sales.
• Climate Solutions segment net sales were $230.9 million, a decrease of 9.6%. The businesses divested/to be exited had a negative 4.6% impact, and foreign currency had a negative 0.2% impact. The result was a negative organic sales growth rate of 4.8% driven by the impact from the FER pre-buy in residential HVAC in the first half of the year, OEM destocking, and mild weather in the third quarter. Additionally, there was weakness in commercial refrigeration and ongoing account pruning efforts in the segment, which were partially offset by improving demand in both the Asia Pacific and European end markets. Operating margin was 16.3%. Excluding net adjustments of $1.8 million, adjusted operating margin was 17.1% of adjusted net sales.
• Power Transmission Solutions segment net sales were $182.8 million, a decrease of 12.0%. The businesses divested/to be exited had a negative 2.1% impact, and foreign currency had a negative 0.6% impact. The result was a negative organic sales growth rate of 9.3% driven by a slowdown in North American industrial end markets and continued de-stocking of inventory in the distribution channel. There was also significant weakness in upstream oil & gas, agriculture, and beverage end markets, which were partially offset by strong demand in renewable energy. Operating margin was 11.4%. Excluding net adjustments of $0.9 million, adjusted operating margin was 11.9% of adjusted net sales.

*This earnings release includes non-GAAP financial measures. Descriptions of why we believe these non-GAAP measures are useful and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included with this earnings release.

"While the third quarter top line was challenging for Regal, our ability to quickly accelerate cost-out initiatives illustrates the opportunity to improve the long-term profitability of the business. Our financial results reflected lower than expected demand due to the slowdown in industrial markets, the ongoing global trade uncertainties, and the reduction in customer inventories. Despite these headwinds, Regal delevered at a below normal rate in the quarter and saw free cash flow of 240% of adjusted net income. I am very proud of our teams' efforts," said Regal CEO Louis Pinkham.

2019 Outlook

"We are increasing our free cash flow to adjusted net income guidance to over 115% for the year. For EPS, we are lowering our adjusted diluted earnings per share guidance to $5.45 to $5.55, a reduction of 2.7% at the midpoint. We believe this reduction reflects current market conditions. We continue to accelerate cost-out activities focused on three main initiatives; (1) 80/20 simplification efforts, (2) plant consolidations, of which five have been announced, and (3) product rationalization efforts, particularly in our Commercial and Industrial segment. This, along with growth plans that I have recently reviewed with our teams during the strategic planning process, are compelling value creation opportunities we have at Regal," continued Mr. Pinkham.

The Company forecasts 2019 GAAP diluted earnings per share of $5.85 to $5.95. The difference between the GAAP diluted earnings per share guidance and the adjusted diluted earnings per share guidance relates to expected restructuring and related costs of $0.34 per share, gain on businesses divested and assets to be exited of $0.70 per share, net income from businesses to be divested/exited of $0.08 per share, and CEO transition costs of $0.04 per share.

The Company's 2019 guidance excludes the sales and earnings from a number of businesses that have been or are expected to be divested or exited. Please see the table in the appendix for details.

As stated in the second quarter 2019 earnings release, the Company closed on July 2, 2019 the divestiture of a vapor recovery business previously included in the Commercial and Industrial Systems segment. The results from the business were included in the Company's second quarter financial statements but excluded from the Company's full year 2019 guidance. The Company's adjusted results for the nine months ended September 28, 2019 exclude this business, which had adjusted diluted earnings per share of $0.06 in 2019, prior to the divestiture.

Conference Call

Regal will hold a conference call to discuss the earnings release at 9:00 AM CST (10:00 AM EST) on Monday, November 4, 2019. To listen to the live audio and view the presentation during the call, please visit Regal's Investors website: https://investors.regalbeloit.com. To listen by phone or to ask the presenters a question, dial 1.888.317.6003 (U.S. callers) or +1.412.317.6061 (international callers) and enter 8512252# when prompted.

A webcast replay will be available at the link above, and a telephone replay will be available at 1.877.344.7529 (U.S. callers) or +1.412.317.0088 (international callers), using a replay access code of 10135317#. Both will be accessible until February 4, 2020.

About the Company

Regal Beloit Corporation (NYSE: RBC) is a global leader in the engineering and manufacturing of electric motors and controls, power generation products and power transmission serving customers throughout the world. We create a better tomorrow by developing and responsibly producing energy-efficient products and systems.

Our company is comprised of three operating segments: Commercial and Industrial Systems, Climate Solutions and Power Transmission Solutions. Regal is headquartered in Beloit, Wisconsin and has manufacturing, sales and service facilities worldwide. For more information, visit RegalBeloit.com.

CAUTIONARY STATEMENT

The following is a cautionary statement made under the Private Securities Litigation Reform Act of 1995: With the exception of historical facts, the statements contained in this release may be forward-looking statements. Forward-looking statements represent our management's judgment regarding future events. In many cases, you can identify forward-looking statements by terminology such as "may," "will," "expect," "intend," "estimate," "forecast," "anticipate," "believe," "should," "project" or "plan" or the negative of these terms or other similar words. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including but not limited to: uncertainties regarding our ability to execute our restructuring plans within expected costs and timing; actions taken by our competitors and our ability to effectively compete in the increasingly competitive global electric motor, drives and controls, power generation and power transmission industries; our ability to develop new products based on technological innovation, such as the Internet of Things, and marketplace acceptance of new and existing products, including products related to technology not yet adopted or utilized in certain geographic locations in which we do business; fluctuations in commodity prices and raw material costs; our dependence on significant customers; risks associated with global manufacturing; issues and costs arising from the integration of acquired companies and businesses and the timing and impact of purchase accounting adjustments; our overall debt levels and our ability to repay principal and interest on our outstanding debt; prolonged declines in one or more markets we serve, such as heating, ventilation, air conditioning, refrigeration, power generation, oil and gas, unit material handling or water heating; economic changes in global markets where we do business, such as reduced demand for the products we sell, currency exchange rates, inflation rates, interest rates, recession, government policies, including policy changes affecting taxation, trade, tariffs, immigration, customs, border actions and the like, and other external factors that we cannot control; product liability and other litigation, or claims by end users, government agencies or others that our products or our customers' applications failed to perform as anticipated, particularly in high volume applications or where such failures are alleged to be the cause of property or casualty claims; unanticipated liabilities of acquired businesses; unanticipated adverse effects or liabilities from business exits or divestitures; unanticipated costs or expenses we may incur related to product warranty issues; our dependence on key suppliers and the potential effects of supply disruptions; infringement of our intellectual property by third parties, challenges to our intellectual property, and claims of infringement by us of third party technologies; effects on earnings of any significant impairment of goodwill or intangible assets; losses from failures, breaches, attacks or disclosures involving our information technology infrastructure and data; cyclical downturns affecting the global market for capital goods; and other risks and uncertainties including but not limited to those described in "Item 1A-Risk Factors" of the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 26, 2019 and from time to time in other filed reports. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements. The forward-looking statements included in this release are made only as of their respective dates, and we undertake no obligation to update these statements to reflect subsequent events or circumstances.

NON-GAAP MEASURES AND OTHER DEFINITIONS
Unaudited
(Dollars in Millions, Except per Share Data)

We prepare financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"). We also periodically disclose certain financial measures in our quarterly earnings releases, on investor conference calls, and in investor presentations and similar events that may be considered "non-GAAP" financial measures. This additional information is not meant to be considered in isolation or as a substitute for our results of operations prepared and presented in accordance with GAAP.

In this earnings release, we disclose the following non-GAAP financial measures, and we reconcile these measures in the tables below to the most directly comparable GAAP financial measures: adjusted diluted earnings per share (both historical and projected), adjusted income from operations, adjusted operating margin, adjusted net sales, net debt, adjusted EBITDA, adjusted operating leverage, adjusted net income attributable to Regal Beloit Corporation, free cash flow, free cash flow as a percentage of adjusted net income attributable to Regal Beloit Corporation, adjusted income before taxes, adjusted provision for income taxes, adjusted effective tax rate, net sales from ongoing business, adjusted income from operations of ongoing business, ongoing business adjusted operating margin and adjusted diluted earnings per share for ongoing business. We believe that these non-GAAP financial measures are useful measures for providing investors with additional information regarding our results of operations and for helping investors understand and compare our operating results across accounting periods and compared to our peers. Our management primarily uses adjusted income from operations, adjusted operating income, adjusted operating margin, and adjusted operating leverage to help us manage and evaluate our business and make operating decisions, while adjusted diluted earnings per share, net debt, adjusted EBITDA, adjusted net sales, adjusted net income attributable to Regal Beloit Corporation, free cash flow, free cash flow as a percentage of adjusted net income attributable to Regal Beloit Corporation, adjusted income before taxes, adjusted provision for income taxes, adjusted effective tax rate, net sales from ongoing business, adjusted income from operations of ongoing business, ongoing business adjusted operating margin and adjusted diluted earnings per share for ongoing business are primarily used to help us evaluate our business and forecast our future results. Accordingly, we believe disclosing and reconciling each of these measures helps investors evaluate our business in the same manner as management.

In addition to these non-GAAP measures, we also use the term "organic sales" to refer to GAAP sales from existing operations excluding any sales from acquired businesses recorded prior to the first anniversary of the acquisition ("net sales from business acquired") and excluding any sales from business divested/to be exited ("net sales from business divested/to be exited") recorded prior to the first anniversary of the exit and excluding the impact of foreign currency translation. The impact of foreign currency translation is determined by translating the respective period's organic sales using the currency exchange rates that were in effect during the prior year periods. We use the term "organic sales growth" to refer to the increase in our sales between periods that is attributable to organic sales. For further clarification, we may use the term "acquisition growth" to refer to the increase in our sales between periods that is attributable to acquisition sales.