Regal Beloit Corporation (now Regal Rexnord) — Fiscal 2020 Form 10-K
Reporting period: Fiscal year ended January 2, 2021, comprising 53 weeks, compared with the 52-week fiscal year ended December 28, 2019. The filing identifies the registrant as Regal Beloit Corporation; the requested company name is Regal Rexnord Corp.
Business context
Regal manufactures electric motors, electrical motion controls, power-generation equipment and power-transmission products through four segments: Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions. The company serves OEMs, distributors and end users globally, with approximately 23,000 employees and no customer representing more than 10% of consolidated sales.
Key financial metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $2,907.0 million | $3,238.0 million | Down 10.2% |
| Gross profit | $808.7 million | $860.7 million | Down 6.0% |
| Gross margin | 27.8% | 26.6% | Up 120 basis points |
| Income from operations | $280.1 million | $351.1 million | Down 20.2% |
| Operating margin | 9.6% | 10.8% | Down 120 basis points |
| Net income attributable to Regal | $189.3 million | $238.9 million | Down 20.8% |
| Diluted EPS | $4.64 | $5.66 | Down 18.0% |
| Operating cash flow | $435.4 million | $408.5 million | Up $26.9 million |
| Capital expenditures | $47.5 million | $92.4 million | Down $44.9 million |
Fiscal 2020 net sales declined from negative organic sales of 8.4%, unfavorable foreign-currency translation of 0.4% and a 1.4% reduction from divested or exited businesses. Gross margin improved primarily through productivity and simplification initiatives, despite lower volume.
Fourth-quarter 2020 sales were $780.5 million, compared with $738.2 million in the prior-year quarter. Fourth-quarter operating income was $74.2 million versus $61.7 million, net income attributable to Regal was $50.4 million versus $36.7 million, and diluted EPS was $1.23 versus $0.89.
Segment performance
| Segment | Fiscal 2020 sales | Year-over-year sales change | Operating margin |
|---|---|---|---|
| Commercial Systems | $820.2 million | Down 9.4% | 8.1% |
| Industrial Systems | $528.8 million | Down 8.1% | (1.1)% |
| Climate Solutions | $846.8 million | Down 12.6% | 15.4% |
| Power Transmission Solutions | $711.2 million | Down 9.8% | 12.6% |
COVID-19 disrupted demand and manufacturing, particularly in the first half of the year, while oil and gas weakness affected Industrial Systems. Management reported improving order rates in the second half and manufacturing operations running closer to full capacity by year-end. Account pruning under the company’s 80/20 initiatives and prior divestitures also reduced sales.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $611.3 million at year-end, including $603.5 million held by foreign subsidiaries.
- Working capital was $1,029.3 million and the current ratio was 2.3:1, compared with 2.9:1 at the prior year-end.
- Total debt was $1,071.4 million, down from $1,137.5 million. Debt included a $670.0 million term facility, $400.0 million of senior notes and $4.6 million of other debt.
- The company had no revolver borrowings and $499.8 million of available revolving capacity, subject to the facility’s terms.
- $231.0 million of debt was classified as current, principally senior notes maturing July 2021. Management expected to fund repayment through cash from operations and/or revolver capacity.
- Fiscal 2020 financing uses included $67.7 million of net debt repayments, $48.7 million of dividends and $25.0 million of share repurchases. Approximately $210.0 million remained authorized for repurchases at year-end.
- Management expected approximately $57.0 million of fiscal 2021 capital expenditures, funded by operating cash flow.
Material changes and unusual items
- Fiscal 2020 included $10.5 million of goodwill impairment in the global industrial motors reporting unit and $5.3 million of other asset impairments.
- Restructuring costs were $26.6 million, including associate termination and facility-related costs; approximately $1.6 million of additional charges were expected for announced projects.
- Goodwill was $1,518.2 million and the indefinite-lived trade name was $122.8 million. The commercial air moving reporting unit had less than 10% excess fair value over carrying value, increasing sensitivity to future impairment.
- The company adopted the current expected credit loss standard at the beginning of fiscal 2020, recording a $2.7 million reduction to retained earnings.
- Fiscal 2019 benefited from a $44.7 million net gain on divestitures, making year-over-year operating comparisons less favorable.
Outlook, transaction and risks
Management forecast mid-single-digit sales growth for the first quarter of fiscal 2021 and diluted EPS of $1.32 to $1.52, based on a 21% effective tax rate. The filing does not provide full-year fiscal 2021 sales or EPS guidance beyond this commentary.
On February 15, 2021, after the reporting date, Regal entered into agreements to acquire Rexnord’s Process & Motion Control business through a Reverse Morris Trust transaction. Closing required shareholder, regulatory and other approvals. Financing commitments included approximately $2.1 billion of bridge financing for a potential special dividend, debt refinancing and transaction expenses, up to approximately $1.1 billion of backstop financing, and approximately $487.0 million of debt to be incurred by the acquired business. The special dividend could range from zero to approximately $2.0 billion, and the number of shares to be issued was uncertain.
Principal risks include continued COVID-19 effects, cyclical and end-market weakness, raw-material inflation, supply-chain disruption, customer concentration, foreign-currency and interest-rate exposure, LIBOR replacement, goodwill impairment, restructuring execution, product liability claims and the financing, approval and integration risks associated with the Rexnord transaction. A subsidiary also faces numerous claims relating to historical motors used in ventilation units alleged to have caused fires; the potential outcome and costs cannot be reasonably predicted.
Investor verification points
- Confirm the final terms, approval status, financing, share issuance, special dividend and leverage impact of the Rexnord transaction.
- Assess whether the company can sustain forecast sales recovery and margin improvement after COVID-19-related disruptions.
- Review Industrial Systems’ return to profitability and the sensitivity of Commercial Systems goodwill to operating forecasts and discount rates.
- Verify the scheduled repayment or refinancing of the $231.0 million of debt maturing in 2021 and compliance with debt covenants.
- Monitor restructuring charges, remaining facility actions and whether anticipated savings are realized.
- Evaluate exposure from the historical product-liability claims, commodity costs, supply constraints and LIBOR transition.