Business Context and Reporting Period
Regal Rexnord Corporation, formerly Regal Beloit Corporation, filed this unaudited Form 10-Q for the three and nine months ended October 2, 2021, compared with September 26, 2020. The company manufactures electric motors, electrical motion controls, power generation and power transmission products through Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions. The Power Transmission Solutions segment was renamed Motion Control Solutions effective October 4, 2021.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $892.7 million | $758.2 million | $2,593.7 million | $2,126.5 million |
| Gross profit | $254.6 million | $221.6 million | $751.5 million | $595.2 million |
| Gross margin | 28.5% | 29.2% | 29.0% | 28.0% |
| Income from operations | $107.4 million | $90.0 million | $313.5 million | $205.9 million |
| Operating margin | 12.0% | 11.9% | 12.1% | 9.7% |
| Net income | $71.1 million | $66.3 million | $219.3 million | $142.3 million |
| Net income attributable to Regal Rexnord | $69.5 million | $65.0 million | $214.7 million | $138.9 million |
| Diluted EPS | $1.70 | $1.60 | $5.24 | $3.41 |
Q3 net sales increased 17.7%, including 16.3% organic growth and 1.4% favorable foreign-currency translation. Nine-month sales increased 22.0%, including 19.7% organic growth and 2.3% favorable translation. Q3 net income attributable to Regal Rexnord rose 6.9%, while nine-month income rose 54.6%. The Q3 effective tax rate was 20.0%, compared with 20.5%; the nine-month rate was 20.7%, compared with 21.7%.
Q3 segment sales were $268.7 million for Commercial Systems, $148.0 million for Industrial Systems, $268.4 million for Climate Solutions and $207.6 million for Power Transmission Solutions. Q3 operating margins were 11.3%, 4.3%, 19.4% and 8.9%, respectively.
Cash Flow, Balance Sheet, Debt and Liquidity
- Operating cash flow for the first nine months was $258.1 million, down from $309.9 million, primarily because of increased inventory and receivables, partly offset by higher accounts payable.
- Capital expenditures were $37.5 million versus $29.7 million. Investing cash flow was negative $37.5 million.
- Financing cash flow was negative $500.8 million, including $422.4 million of net debt repayments, $37.8 million of dividends paid, $17.0 million of financing fees and $12.7 million of early debt-extinguishment payments.
- Cash and cash equivalents were $328.6 million at October 2, 2021, compared with $611.3 million at January 2, 2021. Approximately $325.9 million was held by foreign subsidiaries.
- Working capital was $1,067.6 million and the current ratio was 2.4:1, compared with $1,029.3 million and 2.3:1 at January 2, 2021.
- Debt was $648.3 million at October 2, 2021, compared with $1,071.4 million at January 2, 2021. The company had $27.8 million drawn under its revolving facility, $0.2 million of standby letters of credit and $722.0 million of available borrowing capacity at quarter-end.
- The company redeemed its senior notes, paying approximately $184.0 million, including a $12.7 million make-whole payment recorded in interest expense. It was in compliance with its financial covenants at October 2, 2021.
Material Changes Versus the Prior Comparable Period
- Growth was broad-based, led by Commercial Systems and Power Transmission Solutions. Climate Solutions benefited from strong North American residential HVAC demand, while Industrial Systems experienced margin pressure from material inflation and increased inventory provisions.
- Gross margin declined 70 basis points in Q3 because higher freight and material costs partly offset volume gains; nine-month gross margin improved 100 basis points.
- Q3 operating expenses increased 11.9%, primarily from higher wages, benefits and transaction costs, although operating margin was broadly stable. Nine-month operating margin improved substantially because of volume, mix, cost savings and lower expense ratios.
- Foreign currency translation reduced other comprehensive income by $15.6 million in Q3 and $27.3 million for the first nine months, contributing to a $193.7 million accumulated other comprehensive loss at quarter-end.
- Restructuring costs were $2.2 million in Q3 and $5.4 million year to date. The company expected approximately $4.2 million of additional charges on approved projects and approximately $16.0 million of fiscal 2021 restructuring costs, excluding Rexnord Transaction costs.
Guidance, Outlook, Risks and Unusual Items
Management projected increased sales growth for the remainder of 2021, assuming no material deterioration in production capacity or commercial operations from COVID-19 or supply-chain disruptions. The filing does not provide a specific full-year revenue or earnings target.
- On October 4, 2021, after the reporting date, the company completed the Reverse Morris Trust acquisition of the Process & Motion Control business. It issued 27,055,945 shares, approximately 39.9% of post-transaction shares, paid a $6.99-per-share special dividend totaling approximately $284.4 million and estimated consideration of approximately $3.9 billion. Purchase accounting was incomplete, and pro forma revenue and earnings were not presented.
- Immediately after closing, approximately $1.5 billion was outstanding under the combined credit arrangements, including approximately $380.0 million of revolver borrowings, $620.0 million of term loans and $486.0 million under the Land facility.
- On October 19, 2021, the company agreed to acquire Arrowhead Systems for approximately $300.0 million in cash, subject to customary conditions and regulatory approvals. Closing was expected in the fourth quarter of 2021.
- The board authorized a new $500.0 million share-repurchase program on October 26, 2021. No shares were repurchased during the quarter.
- The company changed its fiscal year-end to December 31 beginning in fiscal 2022 and expanded its revolving commitments to $1.0 billion on November 4, 2021.
- Principal risks include COVID-19 and supply-chain disruption, commodity and labor inflation, dependence on key suppliers and customers, integration and synergy execution, substantially higher post-transaction leverage, variable interest rates and LIBOR transition, product liability and warranty claims, cybersecurity, foreign currency exposure, and potential tax liabilities under the Rexnord transaction agreements.
- A subsidiary faces numerous claims involving historical sub-fractional motors allegedly associated with fires in third-party ventilation units. The company has recorded an estimated liability but cannot predict the ultimate costs, which could be significant.
Investor Verification Priorities
- Verify the final purchase accounting, acquired assets and liabilities, goodwill, intangible assets and pro forma results for the Rexnord Transaction.
- Reconcile post-closing debt, cash, liquidity, interest expense and covenant compliance after the special dividend and Land financing.
- Assess whether pricing, hedging and productivity actions offset continuing copper, aluminum, steel, freight, labor and other inflationary pressures.
- Monitor supply-chain, COVID-19 and customer-demand conditions, particularly in HVAC, industrial, power transmission and other cyclical markets.
- Evaluate the closing, financing and integration risks associated with the Arrowhead acquisition and the expected synergies from both transactions.
- Review the potential exposure from product-liability claims, tax indemnification obligations and restrictions intended to preserve the tax treatment of the Rexnord transaction.