Regal Rexnord Corporation — 2022 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2022, compared with July 3, 2021. Regal Rexnord manufactures industrial powertrain solutions, power transmission components, electric motors, electronic controls, air-moving products and specialty electrical systems through Commercial Systems, Industrial Systems, Climate Solutions and Motion Control Solutions.
Comparability is significantly affected by the October 2021 acquisition of the Rexnord Process & Motion Control business and the November 2021 acquisition of Arrowhead Systems. The Company also changed to a calendar year-end beginning in 2022 and retrospectively changed certain inventory valuation from LIFO to FIFO.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $1,349.4 million | $886.9 million | $2,647.9 million | $1,701.0 million |
| Gross profit | $433.5 million | $257.7 million | $855.4 million | $507.5 million |
| Gross margin | 32.1% | 29.1% | 32.3% | 29.8% |
| Income from operations | $194.9 million | $115.2 million | $364.8 million | $216.7 million |
| Operating margin | 14.4% | 13.0% | 13.8% | 12.7% |
| Net income attributable to Regal Rexnord | $142.0 million | $84.4 million | $267.6 million | $153.3 million |
| Diluted EPS | $2.12 | $2.06 | $3.96 | $3.74 |
Q2 sales increased 52.1%, including 42.2% from acquisitions, 11.8% organic growth and a 1.9% foreign-currency headwind. Six-month sales increased 55.7%, including 43.6% from acquisitions, 13.4% organic growth and a 1.4% foreign-currency headwind.
- Q2 net margin attributable to Regal Rexnord was approximately 10.5%, compared with approximately 9.5% in the prior-year quarter.
- Six-month net margin attributable to Regal Rexnord was approximately 10.1%, compared with approximately 9.0% in the prior-year period.
- Q2 segment sales were $301.9 million for Commercial Systems, $154.7 million for Industrial Systems, $293.5 million for Climate Solutions and $599.3 million for Motion Control Solutions.
- Motion Control Solutions drove most of the reported growth, reflecting the Rexnord PMC and Arrowhead acquisitions, while all four segments reported higher sales.
Cash flow, liquidity and debt
- Six-month operating cash flow was $104.9 million, down from $136.6 million, primarily because of increased working capital.
- Investing cash flow was an outflow of $62.1 million, including $32.6 million of capital expenditures and $35.0 million paid in connection with the Rexnord acquisition working-capital adjustment.
- Financing cash flow was $10.2 million provided, including net debt borrowings of approximately $249.7 million, $184.0 million of share repurchases and $44.3 million of dividends paid.
- Cash and cash equivalents were $702.5 million at June 30, 2022, versus $672.8 million at January 1, 2022. Working capital was $1,976.7 million and the current ratio was 2.8:1.
- Total debt was $2,163.1 million, including $560.0 million drawn on the revolving facility, $550.0 million under the Term Facility, $486.8 million under the Land Term Facility and $500.0 million of senior notes. Approximate debt fair value was $2,125.9 million.
- The revolving facility had $439.8 million of available borrowing capacity, net of $0.1 million of standby letters of credit. The Company reported compliance with all debt covenants.
- The Company issued 3.90% senior notes due April 7, 2032 and entered into a credit agreement with facilities maturing March 28, 2027.
Material changes versus the prior comparable period
- Acquisitions materially expanded the business, particularly Motion Control Solutions, and increased depreciation and amortization to $156.3 million for the first six months from $62.3 million.
- Gross margin improved to 32.1% in Q2 from 29.1%, and operating margin improved to 14.4% from 13.0%, despite higher freight, material, wage and benefit costs.
- Climate Solutions Q2 gross profit declined 1.2% because material and freight inflation offset volume and mix benefits; its six-month gross profit increased 4.6%.
- Interest expense increased to $13.4 million in Q2 from $11.5 million, while the effective tax rate rose to 22.1% from 19.3%.
- Foreign currency translation produced a $120.8 million after-tax loss in Q2 and contributed to a $158.9 million decline in other comprehensive income, resulting in a $14.6 million comprehensive loss attributable to Regal Rexnord despite positive net income.
- The Company repurchased 1.3 million shares for $184.0 million during the first six months; approximately $250.3 million remained available under the authorization at June 30.
Guidance, outlook, risks and unusual items
Management forecast high-single-digit organic sales growth, supported by transaction benefits, price realization, new products and other growth initiatives. The filing does not provide a specific earnings, margin or cash-flow guidance range.
- Restructuring activities related to the Rexnord transaction and operating simplification are expected to continue through 2023. The Company expects approximately $45.7 million of aggregate restructuring charges in 2022; $15.8 million was recorded in the first six months.
- Key risks include supply-chain disruption, commodity and freight inflation, foreign exchange, rising interest rates, COVID-19 impacts, geopolitical instability including the Russia-Ukraine conflict, cyclical capital-goods demand, acquisition integration and failure to achieve expected synergies.
- Goodwill was $4,026.0 million and intangible assets were $2,326.6 million at June 30, 2022. The Rexnord purchase-price allocation remained preliminary, with additional measurement-period adjustments possible.
- The Company is subject to product liability, environmental and asbestos claims. A subsidiary faces claims involving motors allegedly associated with fires, and acquired businesses face environmental and asbestos matters. Recorded liabilities and indemnities are described, but the filing states that certain exposures could be significant and outcomes cannot be predicted.
- Variable-rate debt, commodity prices and foreign currencies are managed with derivatives. A hypothetical 10% change in the weighted-average borrowing rate on variable-rate debt would change annualized after-tax earnings by approximately $2.0 million.
- Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting.
Important facts for investors to verify
- Separate organic growth and acquisition contributions, particularly in Motion Control Solutions, and assess the sustainability of reported growth after acquisition anniversaries.
- Reconcile operating cash flow with earnings and monitor receivables, inventories and working-capital consumption.
- Track leverage, variable-rate exposure, covenant headroom and the use of the remaining revolving capacity.
- Evaluate whether price realization and productivity actions offset inflation, freight costs and foreign-exchange pressure.
- Verify the timing, amount and realization of expected restructuring savings against the remaining 2022 and 2023 restructuring charges.
- Monitor completion of the Rexnord purchase-price allocation and any resulting goodwill, intangible-asset or tax adjustments.
- Review developments in product liability, environmental and asbestos contingencies, including the extent of indemnification and insurance recovery.