Regal Rexnord Corporation — Fiscal 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report rather than a standalone fourth-quarter filing. Fiscal 2022 was the first calendar-year reporting period following the change from a 52/53-week fiscal year. Regal Rexnord manufactures industrial powertrain solutions, electric motors, controls, air-moving products, power-transmission components and related systems across four segments.
Key Financial Metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Net sales | $5,217.9 million | $3,810.3 million | +36.9% |
| Gross profit | $1,669.7 million | $1,111.6 million | +50.2% |
| Gross margin | 32.0% | 29.2% | +280 basis points |
| Income from operations | $690.4 million | $358.3 million | +92.7% |
| Operating margin | 13.2% | 9.4% | +380 basis points |
| Net income attributable to Regal Rexnord | $488.9 million | $229.6 million | +112.9% |
| Diluted EPS | $7.29 | $4.81 | +51.6% |
| Operating cash flow | $436.2 million | $357.7 million | +21.9% |
| Capital expenditures | $83.8 million | $54.5 million | +53.8% |
| Interest expense | $87.2 million | $60.4 million | +44.4% |
| Effective tax rate | 19.4% | 24.1% | Lower by 470 basis points |
Segment Performance
| Segment | 2022 Sales | Sales Change | 2022 Operating Margin |
|---|---|---|---|
| Commercial Systems | $1,145.4 million | +11.0% | 14.5% |
| Industrial Systems | $616.0 million | +6.9% | 8.9% |
| Climate Solutions | $1,081.8 million | +5.0% | 14.9% |
| Motion Control Solutions | $2,374.7 million | +102.7% | 13.0% |
Consolidated organic sales growth was 9.3%, acquisition growth was 29.9%, and foreign-currency translation reduced sales by 2.2%. Motion Control Solutions benefited substantially from the Rexnord Process & Motion Control and Arrowhead acquisitions.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $688.5 million at December 31, 2022, including $681.6 million held by foreign subsidiaries.
- Working capital was $1,998.3 million, compared with $1,713.3 million at the prior year-end; the current ratio improved to 3.0:1 from 2.6:1.
- Total debt, net of debt issuance costs, was $2,023.5 million, compared with $1,918.5 million at January 1, 2022. Gross aggregate debt was approximately $2.0 billion.
- Debt included $536.3 million under the Term Facility, $486.8 million under the Land Term Facility, $429.0 million under the multicurrency revolver and $500.0 million of private placement notes.
- The company had $571.0 million of available revolving-credit capacity at year-end and was in compliance with its financial covenants.
- Fiscal 2022 financing cash flow used was $274.2 million, including $239.2 million of share repurchases, $90.9 million of dividends, $106.5 million of net debt repayments and $40.6 million of financing fees.
- The company expects approximately $120.0 million of fiscal 2023 capital expenditures, funded primarily with operating cash flow.
- In January 2023, the company issued $4.7 billion of net proceeds from senior notes with maturities from 2026 through 2033. Proceeds were intended to fund the Altra transaction, repay debt and related expenses, and refinance other obligations.
Material Changes Versus the Prior Comparable Period
- Sales and earnings increased materially, primarily because fiscal 2022 included a full year of the Rexnord PMC and Arrowhead businesses, whereas fiscal 2021 included only partial-period results.
- Gross margin expanded to 32.0% from 29.2%, supported by pricing, volume, 80/20 initiatives, acquisitions and cost actions, partly offset by material, freight and restructuring costs.
- Climate Solutions profitability weakened: gross profit declined $29.4 million, primarily because of material and freight inflation, lower volumes and restructuring costs.
- Industrial Systems operating results improved substantially; fiscal 2021 included a $33.0 million goodwill impairment, while fiscal 2022 had no goodwill impairment.
- Restructuring costs rose to $46.8 million from $14.0 million. The company expects approximately $26.8 million of additional restructuring charges in 2023.
- Amortization increased to $185.5 million from $77.4 million, primarily due to acquired intangible assets.
- The company changed certain inventory accounting from LIFO to FIFO and retrospectively adjusted prior periods. For fiscal 2022, FIFO increased reported net income attributable to Regal Rexnord by $51.9 million versus the LIFO result presented in the filing.
- Backlog increased to $1,242.7 million at December 31, 2022 from $1,214.5 million, with virtually all expected to ship in fiscal 2023.
Guidance, Outlook and Unusual Items
- Management expects fiscal 2023 organic revenue to be slightly down at the midpoint of its range.
- Fiscal 2023 diluted EPS guidance is $5.64 to $6.44, based on a 21.5% effective tax rate. The guidance includes financing costs and interest expense on recently issued senior notes but excludes other financial effects of the Altra transaction.
- On October 26, 2022, Regal Rexnord agreed to acquire Altra Industrial Motion for $62.00 per share in cash, with a preliminary purchase price of approximately $4.95 billion. Closing was expected in the first half of 2023, subject to regulatory and other conditions.
- The company incurred $14.7 million of Altra transaction costs in fiscal 2022 and retained $4.16 billion of bridge-facility commitments at year-end. The bridge facility was terminated after the January 2023 senior-notes issuance.
- Management is evaluating strategic alternatives for the global motors and generators portion of Industrial Systems, which represents the majority of that segment’s sales. The review may or may not result in a divestiture.
- Management expects inflation in labor, energy, freight, logistics and supplier components to continue through 2023. China COVID-19 restrictions disrupted manufacturing and regional demand during 2022.
- No goodwill impairment was recorded in fiscal 2022. Goodwill totaled $4,018.8 million, making future impairment assumptions, including discount rates and EBITDA forecasts, important valuation sensitivities.
Principal Risks and Contingencies
- Completion, financing, regulatory approval and integration risks related to the Altra transaction, including potential delays, failure to realize synergies and a possible $200 million termination fee under specified circumstances.
- Substantially higher leverage and variable-rate exposure following the Altra financing. A hypothetical 10% change in the weighted average borrowing rate on year-end variable-rate debt would have changed after-tax annualized earnings by approximately $8.2 million.
- Supply-chain disruption, commodity inflation, labor costs, tariffs, foreign exchange, interest rates, recession and geopolitical instability, including the Russia-Ukraine conflict and potential further China disruptions.
- Customer concentration in the Commercial Systems and Climate Solutions businesses, despite no individual customer exceeding 10% of consolidated sales.
- Product liability and recall exposure, including legacy claims involving sub-fractional motors alleged to have contributed to fires in third-party ventilation units.
- Environmental and asbestos litigation associated with legacy Rexnord PMC businesses. The company reports substantial indemnification and insurance coverage but cannot assure that future costs will not be material.
- Potential impairment of goodwill and other long-lived assets, cybersecurity and data-privacy incidents, pension funding requirements, tax disputes and execution risks from restructuring and facility consolidation.
Facts an Investor Should Verify
- Actual closing date, final purchase price, financing structure and post-closing leverage resulting from the Altra transaction.
- Whether fiscal 2023 revenue and diluted EPS guidance are achieved, particularly given the expected slight decline in organic revenue.
- Cash conversion, working-capital requirements and the company’s ability to reduce debt after the Altra transaction.
- Underlying organic growth and margins excluding Rexnord PMC, Arrowhead and other acquisition effects.
- Progress and final outcome of the strategic review of the global motors and generators business.
- Restructuring charges, expected savings and potential operational disruption from footprint changes.
- Developments in legacy product-liability, environmental and asbestos claims and the continued availability of indemnification and insurance coverage.
- Goodwill valuation assumptions and impairment sensitivity, particularly for the Global Industrial Motors and Motion Control Solutions Aerospace reporting units.
Audit and controls: Deloitte & Touche LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022.