RBC RBC Bearings Incorporated

Regal Beloit Corporation (RBC) posted its earnings per share (excluding the incremental warranty accrual) of $1.32 in the second quarter of fiscal 2011 compared with $10.7 per share in the year-earlier quarter, ahead of management’s guidance range of  $1.22 - $1.28 and the Zacks Consensus Estimates of $1.25.

Including the impact of incremental warranty accrual, the company’s earnings per share were 88 cents.

Revenues

The company generated net sales of $681.8 million, up 16.7% from the year-earlier quarter; missed the Zacks Consensus Estimate of $715 million. The growth was powered by a rise in demand for North American commercial and industrial motors, generators, and mechanical products.

Of the total sales, $60 million was attributed to the businesses acquired in 2010.

On a segmental basis, revenues from Electrical segment sales improved 16.9% from the year-earlier quarter to $611.3 million, led by a growth in North American commercial and industrial businesses partially offset by a decrease in revenues from North American residential HVAC (Heating, Ventilation, and Air Conditioning).

Mechanical segment sales were up 14.8% from the year-earlier quarter to $70.5 million, reflecting improvement in later cycle end markets.

Regal Beloit’s international operations continued to grow, which led to an increase in international sales to 36.6% of total sales from 31.7% of total sales in the year-earlier quarter.

Margins

Gross margin declined to 22.1%, from 24.6% in the year- earlier quarter, due to an incremental warranty expense, which in turn contracted gross margin of the Electrical segment.

Operating margin also fell 340 basis points from the year-earlier quarter to 6.9%, due to an expense pertaining to the acquired businesses and lower gross margins.

Balance Sheet and Cash flows

Regal Beloit ended the year with cash, cash equivalents and investments of $275.3 million, up from $259.5 million at the end of the previous quarter. As of July 2, 2011, long-term debt was $428 million, down from $430.8 million at the end of the previous quarter.

During the quarter, the company generated $53.4 million of cash from operating activities and used $10.8 million for capital expenditure.

Acquisition

During the quarter, Regal Beloit Corporation acquired Australian Fan and Motor Company, which manufactures and distributes an extensive range of direct drive blowers, fan decks, axial fans and sub fractional motors.

The company also acquired Virginia-based Ramu Inc., a motor and control technology company controlled by the venture capital firm Khosla Ventures.

Guidance

With expectations of improvement in its commercial and industrial and mechanical businesses and considering its weakness in the HVAC business, Regal Beloit projected earnings per share in the range of $1.11 to $1.17 for the third quarter of fiscal 2011.

Management stated that the company expects to close the acquisition of Electrical Products Company from A.O. Smith Corporation (AOS) in the month of August.

Headquartered in Beloit, Wisconsin, Regal Beloit is a leading manufacturer of electrical and mechanical motion control products, with manufacturing, sales, and service facilities throughout the U.S., Canada, Mexico, Europe, and Asia.

We are encouraged by the company’s strategic acquisition activities, but remain concerned about the pressure on margins. We continue to maintain a Neutral recommendation on Regal Beloit, supported by Zacks #3 Rank (short-term Hold rating).

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