Regal Rexnord Corporation — Q2 2023 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2023, compared with the corresponding 2022 periods. The statements are unaudited and prepared under U.S. GAAP. The March 27, 2023 acquisition of Altra Industrial Motion Corp. materially affects comparability.
Business Context
Regal Rexnord manufactures electric motors, electronic controls, factory automation subsystems, industrial powertrain and mechanical power transmission products, air-moving products, and specialty electrical systems. Following the Altra acquisition, the company reports four segments: Industrial Powertrain Solutions, Power Efficiency Solutions, Automation & Motion Control, and Industrial Systems.
Management is evaluating strategic alternatives for the global motors and generators portion of Industrial Systems; the review remained ongoing at the filing date.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Net sales | $1,768.6 million | $1,349.4 million | $2,992.7 million | $2,647.9 million |
| Gross profit | $563.8 million | $433.5 million | $961.9 million | $855.4 million |
| Gross margin | 31.9% | 32.1% | 32.1% | 32.3% |
| Income from operations | $151.6 million | $194.9 million | $220.5 million | $364.8 million |
| Operating margin | 8.6% | 14.4% | 7.4% | 13.8% |
| Net income attributable to Regal Rexnord | $32.1 million | $142.0 million | $26.2 million | $267.6 million |
| Diluted EPS | $0.48 | $2.12 | $0.39 | $3.96 |
| Operating cash flow | Not separately provided | Not separately provided | $327.3 million | $104.9 million |
Balance sheet and liquidity at June 30, 2023: Cash and equivalents were $659.6 million; trade receivables were $1,013.9 million; inventories were $1,576.1 million; working capital was $2,093.9 million; and the current ratio was 2.5:1. Foreign subsidiaries held $631.3 million of cash.
Debt: Total debt was $6,682.3 million, including $4,700.0 million of senior notes, $1,341.5 million under the term facility, $486.8 million under the Land Term Facility, $115.0 million under the revolving facility, and $18.1 million of Altra notes. The company had $1,455.0 million of available revolving borrowing capacity and was in compliance with its financial covenants.
Capital allocation: Six-month capital expenditures were $63.5 million; fiscal 2023 capital spending is expected to be approximately $170 million. The company paid $46.4 million in dividends and made no share repurchases during the first six months.
Material Changes Versus the Prior Comparable Period
- Net sales increased 31.1% in Q2 and 13.0% for the first six months, primarily because of the Altra acquisition. Q2 acquisition growth was 40.9%, offset by negative organic growth of 9.1% and unfavorable currency translation of 0.7%.
- Operating income declined 22.2% in Q2 and 39.6% for the first six months. Operating margin fell 580 basis points in Q2 and 640 basis points year to date.
- Net income attributable to Regal Rexnord declined 77.4% in Q2 and 90.2% for the first six months. Results were pressured by substantially higher interest expense, transaction and restructuring costs, higher amortization, and a higher year-to-date tax rate.
- Interest expense rose to $116.4 million in Q2 from $13.4 million and to $211.8 million for the first six months from $22.4 million, reflecting debt issued to fund the Altra transaction and higher borrowing rates.
- Operating cash flow increased to $327.3 million from $104.9 million, primarily from improved working-capital cash flows. Investing cash outflow was $4,927.6 million, including $4,870.2 million paid for Altra.
- Power Efficiency Solutions sales declined 22.7% in Q2 and 20.0% year to date, driven by lower volumes in North American pool pump, residential and light commercial HVAC, and general industrial markets.
- Automation & Motion Control sales increased 143.7% in Q2 and 78.7% year to date, primarily from Altra, price realization, and aerospace and conveying share gains. Industrial Powertrain Solutions also benefited substantially from Altra.
Acquisition, Outlook, Risks and Unusual Items
Altra acquisition: The preliminary purchase price was approximately $5.1 billion. The transaction added approximately $2.6 billion of goodwill and $2.1 billion of identifiable intangible assets. Purchase accounting remained preliminary, and further measurement-period adjustments were expected during 2023. Transaction-related costs were $9.5 million in Q2 and $75.0 million for the first six months; the company also recorded $15.7 million of accelerated vesting-related share compensation in the first quarter.
Outlook: Management continued to expect a low-single-digit percentage decline in fiscal 2023 organic sales and earnings per share. Expected synergies, product mix, 80/20 initiatives, and productivity improvements were expected to be more than offset by lower volumes, inflation, strategic growth investments, higher taxes, higher interest expense, and higher depreciation.
Restructuring: Restructuring costs were $14.0 million in Q2 and $19.0 million for the first six months. Management expected approximately $53 million of additional restructuring charges in the second half of 2023.
Key risks: Major risks include substantial acquisition-related indebtedness, execution of debt reduction, integration and synergy realization, supplier and commodity disruptions, interest-rate and currency exposure, cyclical end-market weakness, inflation, litigation and product liability, potential goodwill impairment, cybersecurity and data privacy matters, and possible losses or non-cash impairment charges from a divestiture of Industrial Systems businesses.
Contingencies: The company disclosed product-safety claims involving sub-fractional motors, environmental matters, and asbestos-related litigation. Certain matters are covered by insurance or indemnities, but the company stated that some potential costs could be significant and outcomes cannot presently be determined.
Investor Verification Checklist
- Verify the final purchase-price allocation for Altra, including goodwill, intangible assets, deferred taxes, and any subsequent measurement-period adjustments.
- Assess leverage, refinancing requirements, floating-rate exposure, covenant compliance, and the company’s ability to reduce debt using operating cash flow.
- Reconcile reported sales growth with acquisition, organic, pricing, volume, and foreign-currency effects by segment.
- Monitor the sustained weakness in Power Efficiency Solutions and the margin effects of lower volumes, inflation, restructuring, and integration costs.
- Evaluate whether the projected Altra synergies and productivity initiatives offset higher interest, amortization, depreciation, tax, and restructuring costs.
- Follow the Industrial Systems strategic review and assess potential impairment or divestiture losses.
- Review product-safety, asbestos, environmental, warranty, and other litigation exposures, including the extent and limits of indemnification and insurance coverage.