Regal Rexnord Corporation — Q3 2023 Form 10-Q Summary
Business Context and Reporting Period
Regal Rexnord is a global manufacturer of industrial powertrain, automation and motion-control, power-efficiency, electric motor, air-moving and specialty electrical products. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, with comparative periods ended September 30, 2022.
The March 27, 2023 acquisition of Altra Industrial Motion materially increased reported revenue, goodwill, intangible assets and debt. The company now reports four segments: Industrial Powertrain Solutions (IPS), Power Efficiency Solutions (PES), Automation & Motion Control (AMC), and Industrial Systems.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $1,649.8 million | $1,325.3 million | $4,642.5 million | $3,973.2 million |
| Gross profit | $542.2 million | $407.7 million | $1,504.1 million | $1,263.1 million |
| Gross margin | 32.9% | 30.8% | 32.4% | 31.8% |
| Operating income (loss) | $(20.4) million | $173.9 million | $200.1 million | $538.7 million |
| Operating margin | (1.2)% | 13.1% | 4.3% | 13.6% |
| Net income attributable to Regal Rexnord | $(139.5) million | $119.8 million | $(113.3) million | $387.4 million |
| Diluted EPS | $(2.10) | $1.80 | $(1.71) | $5.76 |
- Q3 revenue increased 24.5%, driven primarily by Altra acquisition revenue; acquisition growth was 34.9%, while organic sales declined 10.8%.
- For the first nine months, revenue increased 16.8%, consisting of 25.5% acquisition growth, an 8.0% organic decline and a 0.6% unfavorable foreign-currency impact.
- Operating results included a $57.3 million goodwill impairment, $112.7 million loss on assets held for sale and $3.7 million of other asset impairments in Q3. The assets-held-for-sale loss and goodwill impairment related primarily to the planned sale of the industrial motors and generators businesses.
- Interest expense rose to $111.5 million in Q3 and $323.3 million for nine months, versus $21.4 million and $43.8 million, respectively, in the prior-year periods.
- Operating cash flow was $514.0 million for nine months, compared with $238.0 million in the prior-year period. Capital expenditures were $88.7 million, and cash paid for acquisitions was $4,870.2 million.
- Cash and cash equivalents were $540.6 million at September 30, 2023, compared with $688.5 million at December 31, 2022. Including cash classified within assets held for sale, total cash was $598.8 million.
- Total debt was $6,497.6 million, net of debt issuance costs, compared with $2,023.5 million at December 31, 2022. Debt increased primarily to finance the Altra acquisition.
- The company had $1,553.5 million of available borrowing capacity under its multicurrency revolving facility and was in compliance with all financial covenants.
Segment Performance
| Segment | Q3 2023 Sales | Q3 Sales Change | Q3 Operating Margin |
|---|---|---|---|
| Industrial Powertrain Solutions | $640.7 million | +54.2% | 6.1% |
| Power Efficiency Solutions | $461.3 million | (18.9)% | 14.1% |
| Automation & Motion Control | $419.8 million | +118.0% | 10.3% |
| Industrial Systems | $128.0 million | (13.5)% | (131.2)% |
IPS and AMC benefited substantially from Altra-related acquisition revenue. PES declined due to lower demand in North American pool pump, residential and light-commercial HVAC, and general industrial markets. Industrial Systems was affected by lower North American motor demand and weaker Chinese motors and generators activity, as well as the impairment and held-for-sale charges.
Material Changes Versus the Prior Comparable Period
- The Altra transaction added approximately $5.1 billion of preliminary purchase price, $2.6 billion of goodwill and $2.1 billion of identifiable intangible assets. Purchase accounting remains preliminary and may be adjusted through the measurement period.
- Debt increased by approximately $4.5 billion from year-end 2022. The company issued $4.7 billion of senior notes, increased its term facility by $840.0 million and increased revolving commitments by $570.0 million.
- Reported profitability deteriorated sharply despite higher sales. Q3 operating income changed from $173.9 million to a $20.4 million loss, and nine-month net income attributable to Regal Rexnord changed from $387.4 million to a $113.3 million loss.
- Gross margin improved, but operating expenses increased substantially because of the Altra acquisition, transaction and integration costs, higher compensation, impairments and the held-for-sale loss.
- No common-stock repurchases occurred during the nine months ended September 30, 2023, compared with $239.2 million of repurchases in the prior-year period. The company paid $69.6 million of shareholder dividends.
Guidance, Outlook, Risks and Unusual Items
- Management expects a mid-single-digit percentage decline in organic sales and a loss per share for fiscal 2023. Expected synergy, product-mix and productivity benefits are anticipated to be offset by lower volumes, inflation, growth investments, higher taxes, interest expense and depreciation.
- The company expects approximately $24 million of additional restructuring charges in Q4 2023. Current restructuring activities are expected to continue through 2023, with additional costs possible thereafter.
- The company agreed to sell the industrial motors and generators businesses, representing most of Industrial Systems, for $400 million plus cash transferred at closing, subject to customary adjustments. Closing is expected in the first half of 2024. The transaction did not qualify for discontinued-operations presentation.
- Management expects approximately $40 million of additional capital expenditures during the remainder of fiscal 2023 and intends to fund them with operating cash flow. It also plans to use sale proceeds and operating cash flow to reduce debt.
- Key risks include substantial leverage and higher floating interest rates, execution and integration of Altra, achievement of expected synergies, cyclical industrial demand, inflation and commodity costs, supply disruptions, foreign exchange, litigation and product liability, environmental and asbestos matters, cybersecurity, impairment risk and uncertainty surrounding the planned divestiture.
- Product-safety claims involving motors used in ventilation units could have a material adverse effect on the affected subsidiary, although the ultimate exposure is not predictable. The company also faces asbestos and environmental matters that are generally subject to indemnification or insurance, but recoveries are not assured.
Investor Verification Checklist
- Verify the final Altra purchase-price allocation, including goodwill, intangible values, deferred taxes and any remaining measurement-period adjustments.
- Monitor leverage reduction, interest expense, refinancing requirements and compliance with debt covenants.
- Assess whether organic demand stabilizes, particularly in PES and Industrial Systems, and whether IPS and AMC acquisition growth translates into sustainable margins.
- Confirm the timing, proceeds and working-capital adjustments associated with the planned Industrial Systems divestiture.
- Reconcile management’s fiscal 2023 outlook with subsequent quarterly organic sales, earnings, cash flow and restructuring charges.
- Review the status and potential exposure of product-liability, asbestos, environmental and other contingent claims, including the availability and limits of indemnification and insurance.
- Evaluate whether reported cash generation is sufficient to fund dividends, capital expenditures, integration costs and planned debt reduction.