Regal Rexnord Corporation — Fiscal 2021 Form 10-K
Business context and reporting period
Regal Rexnord designs and manufactures industrial powertrain solutions, electric motors, controls, air-moving products and specialty electrical systems. The filing covers the 52-week fiscal year ended January 1, 2022, compared with the 53-week fiscal year ended January 2, 2021.
The company operates through Commercial Systems, Industrial Systems, Climate Solutions and Motion Control Solutions. Fiscal 2021 included the October 4, 2021 acquisition of the Rexnord Process & Motion Control business and the November 23, 2021 acquisition of Automation Solutions, formerly Arrowhead Systems.
Key financial metrics
| Metric | Fiscal 2021 | Fiscal 2020 |
|---|---|---|
| Net sales | $3,810.3 million | $2,907.0 million |
| Gross profit | $1,085.7 million | $808.7 million |
| Gross margin | 28.5% | 27.8% |
| Income from operations | $332.4 million | $280.1 million |
| Operating margin | 8.7% | 9.6% |
| Net income attributable to Regal Rexnord | $209.9 million | $189.3 million |
| Diluted EPS | $4.40 | $4.64 |
| Cash flow from operations | $357.7 million | $435.4 million |
| Capital expenditures | $54.5 million | $47.5 million |
| Cash and cash equivalents | $672.8 million | $611.3 million |
| Total debt | $1,918.5 million | $1,071.4 million |
| Working capital | $1,627.5 million | $1,029.3 million |
Fourth-quarter fiscal 2021 sales were $1,216.6 million, compared with $780.5 million in the prior-year quarter. Fourth-quarter operating income was $18.9 million versus $74.2 million, and net income attributable to Regal Rexnord was a loss of $4.8 million versus income of $50.4 million.
Fiscal 2021 sales increased 31.1%, consisting of 17.4% organic growth, 12.0% acquisition growth and 1.7% favorable foreign-currency translation. Gross profit increased 34.3%, but operating expenses increased to $714.7 million from $512.9 million. The effective tax rate rose to 24.1% from 22.7%.
Segment performance
| Segment | 2021 Sales | Year-over-year sales change | 2021 operating margin |
|---|---|---|---|
| Commercial Systems | $1,032.1 million | +25.8% | 9.6% |
| Industrial Systems | $576.3 million | +9.0% | (2.4%) |
| Climate Solutions | $1,030.6 million | +21.7% | 18.3% |
| Motion Control Solutions | $1,171.3 million | +64.7% | 4.9% |
Motion Control Solutions provided the largest sales increase because of the Rexnord PMC and Automation Solutions acquisitions, although integration and transaction costs materially reduced its operating margin. Industrial Systems remained unprofitable at the operating level.
Material changes versus the prior comparable period
- The Rexnord PMC acquisition had approximately $4.0 billion of preliminary consideration, including approximately 27.1 million shares issued. The transaction added $340.4 million of sales and $2.3 million of net income after acquisition.
- Automation Solutions was acquired for $315.6 million in cash, net of cash acquired. Its contribution was not material enough for separate pro forma disclosure.
- Fiscal 2021 goodwill increased to $4,039.2 million from $1,518.2 million, while intangible assets increased to $2,429.2 million from $530.3 million, primarily because of the acquisitions.
- The company recorded $33.0 million of goodwill impairment in the global industrial motors reporting unit and $5.6 million of other asset impairments, compared with total impairments of $15.8 million in fiscal 2020.
- Transaction-related costs totaled approximately $64.4 million for the Rexnord transaction, in addition to $6.9 million of transaction costs associated with the Transactions generally.
- Operating cash flow declined $77.7 million, principally because receivables and inventories increased by $154.5 million and $148.5 million, respectively.
- Debt increased substantially to $1.9 billion following the transactions. The company redeemed its senior notes and ended the year with $736.7 million drawn under its revolving facility and $486.8 million under the Land Term Facility.
- The company paid $335.6 million of dividends, including the $284.4 million special dividend related to the Rexnord transaction, compared with $48.7 million in fiscal 2020.
Liquidity, outlook and unusual items
The company reported a 2.5-to-1 current ratio and $263.2 million of available revolving borrowing capacity at year end. Management stated that operating cash flow is expected to fund short-term obligations and anticipated fiscal 2022 capital expenditures of approximately $110 million. The company was in compliance with its debt covenants at January 1, 2022.
Management forecast fiscal 2022 sales growth in the mid-single-digit to high-single-digit range and diluted EPS of $6.95 to $7.55, based on a 23% effective tax rate. The company expects benefits from the acquisitions and new products, but also expects restructuring activities to continue; the full extent of related expenses was not yet estimable.
Primary risks include supply-chain disruption, inflation and commodity costs, COVID-19 impacts, customer concentration in certain motor businesses, cyclical end markets, foreign-currency and interest-rate exposure, integration and synergy execution, elevated debt, LIBOR transition, goodwill impairment, product liability and asbestos claims, cybersecurity, and potential tax liabilities associated with the Rexnord transaction. The company also faces restrictions under the tax matters agreement for two years after the spin-off.
Legal contingencies include legacy ventilation-motor fire claims, environmental remediation at the Ellsworth Industrial Park Site, and asbestos litigation. The company has recorded estimated liabilities and generally expects insurance or third-party indemnification to cover significant portions, but states that some outcomes and potential costs cannot be predicted.
Management and Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. However, management excluded the recently acquired Rexnord PMC and Automation Solutions businesses from its internal-control assessment; together they represented 11% of consolidated assets excluding goodwill and intangibles and 9% of consolidated revenue.
Important facts for investors to verify
- Whether the acquired businesses deliver the projected synergies and improve Motion Control Solutions margins after integration and transaction costs subside.
- The pace of debt reduction, interest-rate sensitivity and compliance with the 4.00-to-1 maximum leverage covenant under the Land financing agreement.
- Whether working-capital requirements normalize, particularly the large increases in receivables and inventories.
- The sustainability of the fiscal 2022 sales and EPS guidance amid supply constraints, inflation, commodity prices and cyclical demand.
- Potential additional goodwill or asset impairments, especially in the Industrial Systems reporting unit.
- The final purchase-accounting adjustments for both acquisitions and their effect on goodwill, intangible assets, amortization and deferred taxes.
- The ultimate cost and insurance or indemnification recovery associated with product liability, environmental and asbestos matters.
- The impact of LIBOR replacement, floating-rate debt and foreign-currency movements on future interest expense and earnings.