Regal Rexnord Corporation — Fiscal 2023 Form 10-K Summary
Business context and reporting period
Regal Rexnord is a global manufacturer of factory automation subsystems, industrial powertrain solutions, mechanical power transmission components, electric motors, controls, air-moving products and specialty electrical systems. The filing covers the 52-week fiscal year ended December 31, 2023. Fiscal 2022 was also a 52-week calendar year, following the Company’s change from a Saturday-based fiscal year-end.
The Company operated through four segments: Industrial Powertrain Solutions, Power Efficiency Solutions, Automation & Motion Control, and Industrial Systems. On March 27, 2023, Regal Rexnord completed its approximately $5.1 billion acquisition of Altra Industrial Motion Corp.; Altra contributed 23.5% of consolidated revenue for fiscal 2023.
Financial performance and key metrics
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Net sales | $6,250.7 million | $5,217.9 million | 19.8% increase |
| Gross profit | $2,067.3 million | $1,669.7 million | 23.8% increase |
| Gross margin | 33.1% | 32.0% | 110 basis-point increase |
| Income from operations | $377.1 million | $690.4 million | 45.4% decrease |
| Operating margin | 6.0% | 13.2% | 720 basis-point decrease |
| Net income attributable to Regal Rexnord | $(57.4) million | $488.9 million | Decline to loss |
| Diluted earnings per share | $(0.87) | $7.29 | Decline to loss |
| Cash flow from operations | $715.3 million | $436.2 million | 64.0% increase |
| Capital expenditures | $119.1 million | $83.8 million | Increase |
Reported sales growth was driven by 28.2% acquisition growth, primarily from Altra, partly offset by an 8.0% organic sales decline and a 0.3% unfavorable foreign-currency effect. Segment sales were $2,403.5 million for IPS, $1,808.9 million for PES, $1,516.8 million for AMC and $521.5 million for Industrial Systems.
- IPS sales increased 44.2%, but operating margin declined to 6.3% from 14.5%, largely reflecting acquisition-related amortization, transaction and integration costs.
- PES sales declined 18.8% because of lower demand and channel inventory destocking in pool pumps, residential and light-commercial HVAC and general industrial markets. Operating margin was 12.0% versus 14.7%.
- AMC sales increased 96.4%, supported by Altra, aerospace and data-center share gains. Operating margin declined modestly to 9.2% from 10.1%.
- Industrial Systems sales declined 5.5% and reported an operating loss of $131.1 million, primarily due to impairment charges and the proposed divestiture.
Fiscal 2023 included $57.3 million of goodwill impairment, $7.8 million of other asset impairments and an $87.7 million loss on assets held for sale. Interest expense increased to $431.0 million from $87.2 million following debt financing for the Altra acquisition. The effective tax rate was distorted by nondeductible impairment and held-for-sale charges; the filing reports a rate of (3,293.8)%.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $574.0 million at December 31, 2023, compared with $688.5 million at December 31, 2022. Including cash classified within assets held for sale, cash at year-end was $635.3 million.
- Working capital was $2,057.6 million and the current ratio was 2.6:1, compared with $1,998.3 million and 3.0:1, respectively, in 2022.
- Total debt, net of debt issuance costs, was $6,380.9 million, compared with $2,023.5 million in 2022. Gross debt outstanding excluding issuance costs was approximately $6.4 billion.
- Debt included $4.7 billion of senior notes issued in January 2023, with maturities from 2026 through 2033, $1,053.5 million under the term facility, $486.8 million under the Land term facility and $98.1 million under the revolving facility.
- Revolving-facility availability was $1,471.9 million at year-end. The Company was in compliance with all financial covenants.
- Net cash used in investing activities was $4,983.0 million, including $4,870.2 million for the Altra acquisition. Net cash provided by financing activities was $4,203.6 million, primarily reflecting acquisition-related borrowings.
- The Company paid $92.8 million in dividends and made no share repurchases during fiscal 2023. Approximately $195.0 million remained available under the repurchase authorization.
Material changes versus the prior comparable period
- Altra materially increased revenue, goodwill, intangible assets and debt, while also increasing amortization, interest expense and integration costs.
- Organic sales weakened substantially, particularly in PES, reversing the broad-based organic growth reported in 2022.
- Gross margin improved to 33.1%, but operating margin fell sharply because of higher acquisition-related costs, amortization, impairments and the held-for-sale loss.
- Operating cash flow increased by $279.1 million, aided by working-capital improvements, despite the reported net loss.
- Backlog increased to $1,884.4 million from $1,242.7 million; management expects most of the backlog to ship in fiscal 2024.
- Research, development and engineering expense increased to $171.0 million from $106.6 million.
Guidance, outlook, risks and unusual items
For fiscal 2024, management provided diluted EPS guidance of $4.58 to $5.38, based on a 24% effective tax rate. The guidance excludes financial impacts from the proposed sale of the industrial motors and generators businesses. Capital expenditures are expected to be approximately $150 million, funded with operating cash flow. The Company expects approximately $38.0 million of additional restructuring charges in 2024.
Regal Rexnord 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. The transaction was expected to close in the first half of 2024. The assets and liabilities were classified as held for sale but were not presented as discontinued operations.
Key risks include substantial leverage and variable-rate debt, the need to reduce indebtedness, integration and synergy execution risk related to Altra, cyclical demand and channel destocking, commodity and supply-chain volatility, customer concentration, international and geopolitical exposure, tariffs and foreign exchange, cybersecurity, product liability and warranty claims, asbestos and environmental contingencies, goodwill impairment, pension funding, and execution of the proposed divestiture. Management stated that cybersecurity threats had not materially affected, and were not reasonably likely to materially affect, the Company as of the filing date.
The filing identifies unresolved claims involving legacy ventilation motors and alleged fires, asbestos-related litigation associated with legacy Rexnord PMC products, and environmental matters. The Company reports indemnification and insurance coverage for certain matters but states that outcomes remain uncertain.
Important facts for investors to verify
- Whether Altra produces the expected revenue, cost synergies, margin improvement and free cash flow, and whether integration costs remain within expectations.
- The pace of debt reduction, refinancing requirements beginning in 2026, interest-rate sensitivity and compliance with credit covenants.
- Execution, closing conditions, proceeds and debt-repayment use of funds for the industrial motors and generators divestiture.
- Whether PES demand and channel inventories recover and whether organic sales growth resumes.
- The sustainability of operating cash flow after acquisition-related working-capital benefits and with increased interest payments.
- Potential additional goodwill, asset-impairment, restructuring, product-liability, asbestos, environmental or tax charges.
- The Company’s ability to complete the Altra purchase-price allocation and integrate Altra into internal control systems; management excluded Altra from its 2023 internal-control assessment because it was acquired during the year.