Regal Rexnord Corporation — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
Regal Rexnord manufactures industrial powertrain solutions, power transmission components, electric motors, electronic controls, air-moving products and specialty electrical systems. The filing covers the three months ended March 31, 2022, compared with the three months ended April 3, 2021. Beginning in 2022, the Company changed its fiscal year-end to December 31, which may affect quarter-to-quarter comparability.
The results include the Rexnord Process & Motion Control business acquired on October 4, 2021, and Arrowhead Systems acquired on November 23, 2021. The Company reports four segments: Commercial Systems, Industrial Systems, Climate Solutions and Motion Control Solutions.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $1,298.5 million | $814.1 million | +59.5% |
| Gross profit | $421.9 million | $249.8 million | +68.9% |
| Gross margin | 32.5% | 30.7% | +180 basis points |
| Income from operations | $169.9 million | $101.5 million | +67.4% |
| Operating margin | 13.1% | 12.5% | +60 basis points |
| Net income attributable to Regal Rexnord | $125.6 million | $68.9 million | +82.3% |
| Diluted earnings per share | $1.85 | $1.68 | +10.1% |
| Cash flow from operations | $(5.9) million | $49.5 million | $(55.4) million |
Net sales growth comprised 45.1% acquisition growth, 15.2% organic growth and negative foreign-currency translation of 0.8%. Gross profit benefited from higher volume and acquisitions but was partially offset by increased freight and material costs. Operating expenses rose 69.9%, primarily because of the acquisitions, higher wages and benefits, and transaction costs.
- Commercial Systems sales increased 23.8% to $293.3 million; operating margin was 18.0% versus 12.2%.
- Industrial Systems sales increased 6.1% to $144.7 million; operating margin was 5.5% versus 3.6%.
- Climate Solutions sales increased 14.6% to $273.9 million; operating margin was 18.8% versus 18.7%.
- Motion Control Solutions sales increased 191.0% to $586.6 million, primarily from the Rexnord PMC and Arrowhead acquisitions; operating margin was 9.8% versus 11.5%.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $624.7 million at March 31, 2022, down from $672.8 million at January 1, 2022.
- Working capital was $1,915.8 million, compared with $1,713.3 million at year-end; the current ratio improved to 2.8:1 from 2.6:1.
- Total debt was approximately $2,060.6 million, up from $1,918.5 million. Long-term debt was $2,057.4 million.
- The Company had $955.0 million drawn on its $1.0 billion revolving facility, $0.1 million of standby letters of credit and $44.9 million of remaining borrowing capacity.
- The March 28, 2022 credit agreement includes a $550.0 million term facility, a $486.8 million Land Term Facility and a $1.0 billion multicurrency revolving facility, all generally maturing March 28, 2027.
- The Company was in compliance with all financial covenants at March 31, 2022.
- On April 7, 2022, the Company agreed to issue $500.0 million of 3.90% senior notes due April 7, 2032, for general corporate purposes.
Cash Flow, Capital Allocation and Other Metrics
- Operating cash flow was negative $5.9 million, primarily because of increased working capital, including higher receivables and inventories.
- Investing cash outflow was $47.0 million, including $13.4 million of capital expenditures and $35.0 million paid in connection with finalizing Rexnord acquisition-date working capital.
- Financing cash flow was positive $3.7 million, reflecting net debt borrowings and offsetting dividends, financing fees and $114.2 million of share repurchases.
- The Company repurchased 731,194 shares for $114.2 million during the quarter, with approximately $320.0 million remaining under the repurchase authorization.
- Quarterly dividends declared were $0.33 per share.
- Depreciation and amortization was $77.9 million, including $47.3 million of intangible amortization.
Material Changes and Unusual Items
- The Rexnord PMC acquisition had a preliminary purchase price of approximately $4.0 billion. Purchase accounting remained subject to further measurement-period adjustments; a $17.3 million increase in goodwill was recorded during the quarter.
- The Company changed certain inventory valuation from LIFO to FIFO effective January 2, 2022, retrospectively increasing January 1, 2022 retained earnings by $58.1 million relative to amounts originally reported and increasing inventory by $85.8 million.
- Restructuring costs were $16.8 million versus $1.7 million in the prior-year quarter, largely related to integration and cost-synergy initiatives. The Company expects current restructuring activities to continue through 2023 and expects approximately $43.3 million of additional charges in 2022.
- The Company terminated two interest-rate swaps in March 2022 and received $16.2 million. The proceeds will reduce interest expense through July 2025.
- No material asset impairments were recorded during either comparative quarter.
Guidance, Outlook and Risks
Management forecasts mid-single-digit to high-single-digit sales growth and expects positive contributions from the acquisitions and new products. Management also cited continued demand in several North American markets, but noted inflation in materials, freight and labor costs.
- Key risks include supply-chain disruptions, dependence on suppliers, commodity and raw-material inflation, labor costs, customer demand cyclicality and the ongoing effects of COVID-19.
- The Company has substantial variable-rate debt exposure. At March 31, 2022, approximately $1,992.0 million of debt was variable-rate debt excluding interest-rate swaps; a hypothetical 10% change in the weighted-average borrowing rate would change after-tax annualized earnings by approximately $3.5 million.
- International operations expose the Company to currency, trade, tariff, political, public-health and geopolitical risks. The Russia-Ukraine conflict had not materially affected results through the filing date, but management warned of potential supply, inflation, financing and foreign-exchange effects.
- Material contingencies include product-safety claims involving sub-fractional motors, environmental matters and asbestos-related litigation. The Company has recorded estimated liabilities and expects indemnification and insurance to cover certain acquired-business matters, but some potential exposures could be significant.
- The Rexnord transaction tax matters agreement imposes restrictions on certain corporate actions during the applicable period, and the purchase accounting and integration processes remain subject to uncertainty.
Most Important Facts to Verify
- Whether the Company can convert strong acquisition-driven sales growth into sustained organic growth and improved Motion Control Solutions margins.
- Progress toward the stated synergy and restructuring objectives, including the expected approximately $43.3 million of 2022 restructuring charges.
- Working-capital performance and the recovery of operating cash flow, which was negative despite higher reported earnings.
- Debt reduction, available revolver capacity and the effect of the subsequent $500.0 million senior-notes issuance on leverage and interest expense.
- Exposure to material, freight and labor inflation, supply-chain disruption, interest-rate increases and geopolitical risks.
- Final purchase accounting for the Rexnord PMC acquisition and any resulting changes to goodwill, intangible assets, depreciation, amortization or deferred taxes.
- Developments in product-safety, environmental and asbestos-related contingencies and the continued availability of indemnification and insurance coverage.