Regal Rexnord Corporation — Q1 2023 Form 10-Q Summary
Business context and reporting period
Regal Rexnord is a global manufacturer of factory automation subsystems, industrial powertrain solutions, automation and motion-control products, electric motors, electronic controls, air-moving products, and specialty electrical components. The filing covers the unaudited three months ended March 31, 2023, compared with the same period in 2022.
On March 27, 2023, the Company completed its approximately $5.1 billion acquisition of Altra Industrial Motion Corp. Altra’s post-acquisition operating results were immaterial for the quarter and are expected to be reflected beginning in the quarter ended June 30, 2023. The Company realigned its reportable segments as Industrial Powertrain Solutions, Power Efficiency Solutions, Automation & Motion Control, and Industrial Systems.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $1,224.1 million | $1,298.5 million | Down 5.7% |
| Gross profit | $398.1 million | $421.9 million | Down 5.6% |
| Gross margin | 32.5% | 32.5% | Flat |
| Income from operations | $68.9 million | $169.9 million | Down 59.4% |
| Operating margin | 5.6% | 13.1% | Down 7.5 percentage points |
| Interest expense | $95.4 million | $9.0 million | Significantly higher |
| Net income attributable to Regal Rexnord | $(5.9) million | $125.6 million | Shifted to loss |
| Diluted EPS | $(0.09) | $1.85 | Declined |
| Operating cash flow | $106.2 million | $(5.9) million | Improved by $112.1 million |
| Capital expenditures | $18.7 million | $13.4 million | Higher |
Sales declined due to negative organic growth of 4.1% and unfavorable foreign-currency translation of 1.6%. Gross profit was pressured by lower volumes and higher material costs, offset by lower freight and restructuring costs. Operating expenses increased 30.6% to $329.2 million, primarily because of Altra transaction costs and higher employee compensation.
- Industrial Powertrain Solutions: Sales of $414.4 million, down 0.5%; operating income of $25.9 million, versus $46.3 million.
- Power Efficiency Solutions: Sales of $469.5 million, down 17.2%; operating income of $45.4 million, versus $104.4 million. Weakness reflected lower demand in North American pool pump, residential and light-commercial HVAC, and general industrial markets.
- Automation & Motion Control: Sales of $203.2 million, up 10.3%; operating loss of $5.2 million, versus operating income of $12.3 million, primarily reflecting acquisition-related costs and compensation.
- Industrial Systems: Sales of $137.0 million, up 4.8%; operating income of $2.8 million, versus $6.9 million.
Cash and cash equivalents were $1,143.3 million at March 31, 2023, compared with $688.5 million at December 31, 2022. Working capital was $2,703.3 million and the current ratio was 2.9:1. Cash held by foreign subsidiaries totaled $668.2 million.
Total debt, net of issuance costs, was $7,284.8 million at March 31, 2023, compared with $2,023.5 million at year-end 2022. Long-term debt was $7,210.6 million, and the Company had $870.0 million of available capacity under its multicurrency revolving facility. The Company was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Altra was acquired for a preliminary purchase price of $5,134.6 million, including $4,051.0 million paid for Altra common stock and $1,061.0 million used to settle Altra debt.
- The acquisition added approximately $2,499.3 million of preliminary goodwill and $2,224.0 million of identifiable intangible assets. Purchase accounting remained preliminary and may be adjusted during the measurement period.
- The Company issued $4.7 billion of senior notes in January 2023, increased its term facility by $840.0 million, increased revolving commitments by $570.0 million, and repaid $500.0 million of private placement notes.
- Interest expense increased by $86.4 million, partly offset by $31.9 million of interest income generated from invested financing proceeds.
- Operating cash flow improved to $106.2 million, but investing cash flow was $(4,865.5) million, primarily because of the Altra acquisition. Financing activities provided $5,203.6 million.
- The effective tax rate increased to 180.9% from 22.2%, mainly because of nondeductible Altra transaction costs and withholding taxes related to repatriation of foreign earnings.
- No share repurchases occurred in Q1 2023, compared with $114.2 million of repurchases in Q1 2022. The remaining repurchase authorization was $195.0 million.
Guidance, outlook, commentary, risks and unusual items
Management continued to expect a low-single-digit percentage decline in 2023 organic sales and earnings per share. Expected merger and acquisition synergies, improved product mix, 80/20 initiatives, and productivity actions are expected to be more than offset by lower volumes, material and non-material inflation, strategic growth investments, a higher tax rate, and higher net interest expense.
Management expects approximately $150 million of 2023 capital expenditures, funded primarily with operating cash flow. Current restructuring activities are expected to continue through 2023, with approximately $60 million of aggregate future restructuring charges expected during the year. The Company is also evaluating strategic alternatives for the Industrial Systems segment, including a potential divestiture, but no decision had been made.
Altra-related transaction costs were approximately $65.6 million in Q1 2023, and accelerated vesting of former Altra employee awards generated $15.7 million of share-based compensation expense. The Company also incurred $17.0 million of bridge facility fees in interest expense during the quarter.
Key risks include substantial post-acquisition indebtedness and refinancing needs, floating-rate exposure, integration and synergy execution, supply-chain and commodity-cost pressures, cyclical end-market demand, inflation, foreign exchange, litigation and product-liability claims, environmental and asbestos matters, potential goodwill impairment, cybersecurity, geopolitical instability, and the possibility that the Industrial Systems strategic review may result in adverse costs or liabilities. The filing states that the Company’s disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Track post-close Altra revenue, earnings contribution, integration costs, synergy realization, and final purchase-price accounting beginning in Q2 2023.
- Assess deleveraging progress against approximately $7.3 billion of debt, including scheduled maturities and the effect of variable interest rates.
- Reconcile reported earnings with transaction costs, financing fees, accelerated equity compensation, restructuring charges, amortization, and tax effects.
- Monitor Power Efficiency Solutions demand, particularly residential and light-commercial HVAC and pool-pump markets, as well as material-cost and volume trends.
- Evaluate whether operating cash flow can fund approximately $150 million of capital expenditures, interest obligations, dividends, and targeted debt reduction.
- Follow the Industrial Systems strategic review and any resulting divestiture, impairment, restructuring, or contingent liabilities.
- Review unresolved product-safety, environmental, asbestos, warranty, and other litigation exposures, including the extent of third-party indemnification and insurance coverage.