REGAL REXNORD CORP MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
Unless the context requires otherwise, references in this Item 2 to "we," "us," "our" or the "Company" refer collectively to
Regal Rexnord Corporationand its subsidiaries. Overview Regal Rexnord Corporation(NYSE: RRX), based in Beloit, Wisconsin(USA), is a global leader in the engineering and manufacturing of industrial powertrain solutions, power transmission components, electrical motors and electronic controls, air moving products and specialty electrical components and systems, serving customers around the world. Through longstanding technology leadership and an intentional focus on producing more energy-efficient products and systems, we help create a better tomorrow - for our customers and for the planet.
Our company is comprised of four operating segments: Commercial Systems, Industrial Systems, Climate Solutions and Motion Control Solutions.
Here is a description of our four operating segments:
•Commercial Systems segment designs and produces fractional to approximately 5 horsepower AC and DC motors, electronic variable speed controls, fans, and blowers for commercial applications. These products serve markets including commercial building ventilation and HVAC, pool and spa, irrigation, dewatering, agriculture, and general commercial equipment. •Industrial Systems segment designs and produces integral motors, automatic transfer switches, alternators and switchgear for industrial applications, along with aftermarket parts and kits to support such products. These products serve markets including agriculture, marine, mining, oil and gas, food and beverage, data centers, healthcare, prime and standby power, and general industrial equipment.
•The Climate Solutions segment designs and produces small motors, variable speed electronic controls and air circulation solutions serving markets such as residential and light commercial HVAC, water heaters and commercial refrigeration.
•Motion Control Solutions segment designs, produces and services mounted and unmounted bearings, conveyor products, conveying automation solutions, couplings, mechanical power transmission drives and components, gearboxes and gear motors, aerospace components, special components products and industrial powertrain components and solutions serving a broad range of markets including food and beverage, bulk handling, eCommerce/warehouse distribution, energy, aerospace and general industrial. 32 --------------------------------------------------------------------------------
Components of profit and loss
Net Sales. We sell our products to a variety of manufacturers, distributors and end users. Our customers consist of a large cross-section of businesses, ranging from Fortune 100 companies to small businesses. A number of our products are sold to Original Equipment Manufacturers ("OEMs"), who incorporate our products, such as electric motors, into products they manufacture, and many of our products are built to the requirements of our customers. The majority of our sales derive from direct sales to customers by sales personnel employed by the Company, however, a significant portion of our sales are derived from sales made by manufacturer's representatives, who are paid exclusively on commission. Our product sales are made via purchase order, long-term contract, and, in some instances, one-time purchases. Many of our products have broad customer bases, with the levels of concentration of revenues varying from business unit to business unit. Our level of net sales for any given period is dependent upon a number of factors, including (i) the demand for our products; (ii) the strength of the economy generally and the end markets in which we compete; (iii) our customers' perceptions of our product quality at any given time; (iv) our ability to timely meet customer demands; (v) the selling price of our products; and (vi) the weather. As a result, our total revenue has tended to experience quarterly variations and our total revenue for any particular quarter may not be indicative of future results. We use the term "organic sales" to refer to sales from existing operations excluding (i) sales from acquired businesses recorded prior to the first anniversary of the acquisition ("Acquisition Sales"), (ii) less the amount of sales attributable to any businesses divested/to be exited, and (iii) the impact of foreign currency translation. The impact of foreign currency translation is determined by translating the respective period's organic sales using the same currency exchange rates that were in effect during the prior year periods. We use the term "organic sales growth" to refer to the increase in our sales between periods that is attributable to organic sales. We use the term "acquisition growth" to refer to the increase in our sales between periods that is attributable to Acquisition Sales. Gross Profit. Our gross profit is impacted by our levels of net sales and cost of sales. Our cost of sales consists of costs for, among other things (i) raw materials, including copper, steel and aluminum; (ii) components such as castings, bars, tools, bearings and electronics; (iii) wages and related personnel expenses for fabrication, assembly and logistics personnel; (iv) manufacturing facilities, including depreciation on our manufacturing facilities and equipment, insurance and utilities; and (v) shipping. The majority of our cost of sales consists of raw materials and components. The price we pay for commodities and components can be subject to commodity price fluctuations. We attempt to mitigate this through fixed-price agreements with suppliers and our hedging strategies. When we experience commodity price increases, we have tended to announce price increase to our customers who purchase via purchase order, with such increases generally taking effect a period of time after the public announcements. For those sales we make under long-term contracts, we tend to include material price formulas that specify quarterly or semi-annual price adjustments based on a variety of factors, including commodity prices. Outside of general economic cyclicality, our business units experience different levels of variation in gross profit from quarter to quarter based on factors specific to each business. For example, a portion of our Climate Solutions segment manufactures products that are used in air conditioning applications. As a result, our sales for that business tend to be lower in the first and fourth quarters and higher in the second and third quarters. In contrast, our Commercial Systems segment, Industrial Systems segment and Motion Control Solutions segment have a broad customer base and a variety of applications, thereby helping to mitigate large quarter-to-quarter fluctuations outside of general economic conditions. Operating Expenses. Our operating expenses consist primarily of (i) general and administrative expenses; (ii) sales and marketing expenses; (iii) general engineering and research and development expenses; and (iv) handling costs incurred in conjunction with distribution activities. Personnel related costs are our largest operating expense. Our general and administrative expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses related to our executive, finance, human resource, information technology, legal and operations functions; (ii) occupancy expenses; (iii) technology related costs; (iv) depreciation and amortization; and (v) corporate-related travel. The majority of our general and administrative costs are for salaries and related personnel expenses. These costs can vary by business given the location of our different manufacturing operations. Our sales and marketing expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses related to our sales and marketing function; (ii) internal and external sales commissions and bonuses; (iii) travel, lodging and other out-of-pocket expenses associated with our selling efforts; and (iv) other related overhead. 33 -------------------------------------------------------------------------------- Our general engineering and research and development expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses; (ii) the design and development of new energy efficiency products and enhancements; (iii) quality assurance and testing; and (iv) other related overhead. Our research and development efforts tend to be targeted toward developing new products that would allow us to maintain or gain additional market share, whether in new or existing applications. In particular, a large driver of our research and development efforts in those three segments is energy efficiency, which generally means using less electrical power to produce more mechanical power. Operating Profit. Our operating profit consists of the segment gross profit less the segment operating expenses. In addition, there are shared operating costs that cover corporate and information technology expenses that are consistently allocated to the operating segments and are included in the segment operating expenses. Operating profit is a key metric used to measure year over year improvement of the segments. Restructuring and Restructuring Related Costs. We incurred restructuring-related costs on employee termination and plant relocation costs including cost synergies related to the Rexnord Transaction. Restructuring related costs includes costs directly associated with actions resulting from our simplification initiatives, such as asset write-downs or accelerated depreciation due to shortened useful lives in connection with site closures, discretionary employment benefit costs and other facility rationalization costs. Restructuring costs for employee termination expenses are generally recognized when the severance liability is determined to be probable of being paid and reasonably estimable while plant relocation costs and related costs are generally required to be expensed as incurred.
COVID-19 has evolved in 2020 into a global pandemic, resulting in a severe global health crisis that has led to a dramatic slowdown in global economic and social activity. As the COVID-19 pandemic continues, health risks remain.
In the face of this global crisis, our first priority has been the health and safety of our associates. In response, we implemented a host of measures to help our associates stay safe, measures that have been enhanced and refined as impacts from COVID-19 evolved, and as our knowledge about how to enhance their effectiveness improved. Factors deriving from the COVID-19 response that have or may negatively impact sales and operating profit in the future include, but are not limited to: limitations on the ability of our suppliers to manufacture, or procure from manufacturers, components and raw materials used in our products, or to meet delivery requirements and commitments; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to remain at home; inconsistent criteria in certain international jurisdictions for establishing the essentiality of our business; limitations on the ability of carriers to deliver our products to customers; limitations on the ability of our customers to conduct their business and purchase our products and services; reductions in demands of our customers; and limitations on the ability of our customers to pay us on a timely basis.
We continue to monitor the pandemic and make necessary adjustments to the business to address any limitations or negative impacts.
Rexnord and Arrowhead Transactions
October 4, 2021, in accordance with the terms and conditions of the Agreement and Plan of Merger, dated February 15, 2021(the "Merger Agreement"), we completed our combination with the Rexnord PMC business of Zurn Water Solutions Corporation (formerly known as Rexnord Corporation) ("Zurn") in a Reverse Morris Trusttransaction (the "Rexnord Transaction"). Pursuant to the Rexnord Transaction, (1) Zurn transferred to its then-subsidiary Land Newco, Inc.("Land") substantially all of the assets, and Land assumed substantially all of the liabilities, of the Rexnord PMC business (the "Reorganization"), (2) after which, all of the issued and outstanding shares of common stock, $0.01par value per share, of Land ("Land common stock") held by a subsidiary of Zurn were distributed in a series of distributions to Zurn's stockholders (the distributions, and the final distribution of Land common stock from Zurn to Zurn's stockholders, which was made pro rata for no consideration, the "Spin-Off") and (3) immediately after the Spin-Off, one of our subsidiaries ("Merger Sub") merged with and into Land (the "Merger") and all shares of Land common stock (other than those held by Zurn, Land, the Company, Merger Sub or their respective subsidiaries) were converted into the right to receive 0.22296103 shares of our common stock, $0.01par value per share("Company common stock"), as calculated in the Merger Agreement. When the Merger was completed, Land which held the Rexnord PMC business, became our wholly owned subsidiary. 34 -------------------------------------------------------------------------------- Pursuant to the Merger, we issued 27,055,945 shares of common stock to holders of Land common stock, which represented approximately 39.9% of the 67,756,732 outstanding shares of Company common stock immediately following the completion of the Merger.
In addition, shareholders registered in the
In connection with the transaction with Rexnord, we have entered into certain financing arrangements, which are described below under the heading “Liquidity and Capital Resources”.
At a meeting of the Board of Directors of
Regal Rexnord Corporationon October 26, 2021, the Board approved a change in the fiscal year end from a 52-53 week year ending on the Saturday closest to December 31to a calendar year ending on December 31, effective beginning with fiscal year 2022. We made the fiscal year change on a prospective basis and will not adjust operating results for prior periods. However, the change will impact the prior year comparability of each of the fiscal quarters and the annual period in 2022 and in future filings. We believe this change will provide numerous benefits, including aligning its reporting periods to be more consistent with peer companies.
Change in accounting principle
We expect mid-single-digit high-single-digit sales growth. We expect to see a positive impact from our transactions and new products.
Three months completed
Net sales increased
$484.4 millionor 59.5% for the first quarter 2022 compared to the first quarter 2021. The increase consisted of positive impact from acquisitions of 45.1% and positive organic sales of 15.2% offset by negative foreign currency translation of 0.8%. The increase was primarily driven by sales increases in North American markets and the acquisitions of the Rexnord PMC and Arrowhead businesses. Gross profit increased $172.1 millionor 68.9% for the first quarter 2022 as compared to the first quarter 2021. The increase in gross profit was driven by increase in volume and the acquisitions of the Rexnord PMC and Arrowhead businesses, partially offset by increased freight and material costs. Total operating expenses for the first quarter 2022 increased $103.7 millionor 69.9% as compared to the first quarter 2021. The increase was primarily driven by the acquisitions of the Rexnord PMC and Arrowhead businesses, higher employee related wage and benefit costs and transaction costs. Commercial Systems segment net sales for the first quarter 2022 were $293.3 million, an increase of $56.3 millionor 23.8% as compared to the first quarter 2021. The increase consisted of positive organic sales of 24.8% offset by negative foreign currency translation of 1.0%. The increase was primarily driven by strong growth in general industry in North Americaas well as solid gains in the pool pump business. Gross profit increased $27.5 millionor 41.2% as compared to the first quarter 2021. The increase in gross profit was primarily driven by the increase in price, volume and favorable product mix, partially offset by higher material costs due to inflation. Total operating expenses for the first quarter 2022 were $41.4 millioncompared to $38.0 millionin the first quarter 2021. The $3.4 millionor 8.9% increase was primarily driven by higher employee related wage and benefit costs as well as inflation.
Revenue for the Industrial Systems segment for the first quarter of 2022 is
35 -------------------------------------------------------------------------------- translation of 1.0%. The increase was primarily driven by strength in the data center market for generators and demand for industrial motors in
North America. Gross profit increased $3.3 millionor 11.8% as compared to the first quarter 2021. The increase in gross profit was primarily driven by the increase in volume and price realization, partially offset by material inflation. Total operating expenses for the first quarter 2022 and 2021 were $23.4 millionand $23.1 million, respectively. The slight increase in operating expenses was due to employee related wage and benefit costs, higher variable selling costs on stronger sales volume, and increased administrative costs. Climate Solutions segment net sales were $273.9 million, an increase of $34.8 millionor 14.6% as compared to the first quarter 2021. The increase consisted of positive organic sales of 14.9% offset by negative foreign currency translation of 0.3%. The increase was primarily due to continued strong demand in North American residential HVAC and combustion markets and recovering demand in EMEA. Gross profit increased $7.8 millionor 10.3% compared to the first quarter 2021. The increase in gross profit was primarily driven by increased volume, favorable mix and 80/20 actions, partially offset by material and freight inflation. Total operating expenses for the first quarter 2022 were $31.7 millioncompared to $30.7 millionin the first quarter 2021. The slight increase was primarily due to higher expenses related to commissions (higher volume), travel, compensation and benefits. Motion Control Solutions segment net sales for the first quarter 2022 were $586.6 million, an increase of $385.0 millionor 191.0% compared to first quarter 2021 net sales of $201.6 million. The increase consisted of positive impact from acquisitions of 182.1% and positive organic sales of 9.9% offset by negative foreign currency of 1.0%. The increase was primarily driven by the acquisitions of the Rexnord PMC and Arrowhead businesses in addition to strength in alternative energy, the North Americageneral industrial market, the conveying business, and improving demand in Europein addition to meaningful share gains tied to our industrial powertrain offering. Gross profit for the first quarter 2022 increased $133.5 millionor 167.7%. The increase was driven by the acquisitions of the Rexnord PMC and Arrowhead businesses, higher sales volume with favorable mix and lower overhead cost driven by cost reduction initiatives. Total operating expenses for the first quarter 2022 increased $99.0 millionas compared to the first quarter 2021, primarily due to the acquisitions of the Rexnord PMC and Arrowhead businesses. 36 --------------------------------------------------------------------------------
Three months completed
March 31, 2022 April 3, 2021 (Dollars in Millions) Net Sales: Commercial Systems
$ 293.3 $ 237.0Industrial Systems 144.7 136.4 Climate Solutions 273.9 239.1 Motion Control Solutions 586.6 201.6 Consolidated $ 1,298.5 $ 814.1
Gross profit as a percentage of
Commercial Systems 32.2 % 28.2 % Industrial Systems 21.6 % 20.5 % Climate Solutions 30.4 % 31.5 % Motion Control Solutions 36.3 % 39.5 % Consolidated 32.5 % 30.7 %
Operating expenses as a percentage of
Commercial Systems 14.1 % 16.0 % Industrial Systems 16.2 % 16.9 % Climate Solutions 11.6 % 12.8 % Motion Control Solutions 26.5 % 28.0 % Consolidated 19.4 % 18.2 %
Operating income as a percentage of
Commercial Systems 18.0 % 12.2 % Industrial Systems 5.5 % 3.6 % Climate Solutions 18.8 % 18.7 % Motion Control Solutions 9.8 % 11.5 % Consolidated 13.1 % 12.5 % Income from Operations
$ 169.9 $ 101.5Other Income, Net (1.3) (1.2) Interest Expense 9.0 12.6 Interest Income (1.1) (1.5) Income before Taxes 163.3 91.6 Provision for Income Taxes 36.2 21.3 Net Income 127.1 70.3 Less: Net Income Attributable to Noncontrolling Interests 1.5 1.4 Net Income Attributable to Regal Rexnord Corporation $ 125.6 $ 68.9The effective tax rate for the three months ended March 31, 2022was 22.2% versus 23.3% for the three months ended April 3, 2021. The effective tax rate for the three months ended March 31, 2022was lower than the same period in the prior year due to additional tax reserves in the three months ended April 3, 2021for the repatriation of foreign earnings. The reduction in the effective rate for the three months ended March 31, 2022was partially offset by the impacts of the Rexnord Transaction in fiscal 2021. 37 --------------------------------------------------------------------------------
Cash and capital resources
Our principal source of liquidity is cash flow provided by operating activities. In addition to operating income, other significant factors affecting our cash flow include working capital levels, capital expenditures, dividends, share repurchases, acquisitions and divestitures, availability of debt financing and the ability to attract long-term capital at acceptable terms. Cash flow used in operating activities was
$5.9 millionfor the three months ended March 31, 2022, a $55.4 milliondecrease from the three months ended April 3, 2021. The change is a result of an increase in working capital which is partially offset by proceeds received from the early termination of interest rate swaps for the three months ended March 31, 2022compared to the three months ended April 3, 2021. Cash flow used in investing activities was $47.0 millionfor the three months ended March 31, 2022as compared to cash flow used in investing activities of $11.7 millionfor the three months ended April 3, 2021. The change was driven primarily by higher cash used for capital purchases and business acquisitions in the current year compared to the prior year. Cash flow provided by financing activities was $3.7 millionfor the three months ended March 31, 2022, compared to $76.7 millionused in financing activities for the three months ended April 3, 2021. We had net debt borrowings of $145.7 millionduring the three months ended March 31, 2022, compared to net debt repayments of $50.3 millionduring the three months ended April 3, 2021. There were $114.2 millionshare repurchases for the three months ended March 31, 2022, compared to no shares repurchases for the three months ended April 3, 2021. There were $22.3 millionof dividends paid for the three months ended March 31, 2022, compared to $12.2 millionof dividends in the prior year. There were $4.5 millionin financing fees paid for the three months ended March 31, 2022, compared to $12.4 millionof fees in the prior year. Our working capital was $1,915.8 millionat March 31, 2022, compared to $1,713.3 millionat January 1, 2022. At March 31, 2022and January 1, 2022, our current ratio (which is the ratio of our current assets to current liabilities) was 2.8:1 and 2.6:1, respectively. Our working capital increased primarily due to the increase in accounts receivables and inventory offset by an increase in accounts payable and decrease in cash.
The following table presents selected financial information and statistics at
March 31, 2022 January 1, 2022 Cash and Cash Equivalents
$ 624.7$ 672.8 Trade Receivables, Net 832.2 785.8 Inventories 1,336.9 1,192.4 Working Capital 1,915.8 1,713.3 Current Ratio 2.8:1 2.6:1 As of March 31, 2022, $580.8 millionof our cash was held by foreign subsidiaries and could be used in our domestic operations if necessary. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We regularly assess our cash needs and the available sources to fund these needs which includes repatriation of foreign earnings which may be subject to withholding taxes. Under current law, we do not expect restrictions or taxes on repatriation of cash held outside of the United Statesto have a material effect on our overall liquidity, financial condition or the results of operations for the foreseeable future. We will, from time to time, maintain excess cash balances which may be used to (i) fund operations, (ii) repay outstanding debt, (iii) fund acquisitions, (iv) pay dividends, (v) make investments in new product development programs, (vi) repurchase our common stock, or (vii) fund other corporate objectives.
March 28, 2022, we entered into a Second Amended and Restated Credit Agreement with our lenders (the "Credit Agreement") with JPMorgan Chase Bank, N.A., as Administrative Agent and the lenders named therein. The Credit Agreement (i) replaces in its entirety the Amended and Restated Credit Agreement, dated as of August 27, 2018, as amended by that First Amendment, dated March 17, 2021, among the Company and other parties thereto and (ii) amends and restates in its entirety the Amended and Restated Credit Agreement, dated as of October 4, 2021, among Land and the other parties thereto (collectively, the "Former Credit Agreements"). 38 -------------------------------------------------------------------------------- The Credit Agreement provides for, among other things, an extension of the maturity date of the revolving credit facility and term loans provided under the Former Credit Agreements. The credit facilities extended under the Credit Agreement consist of (i) an unsecured term loan facility in the initial principal amount of up to $550,000,000, maturing on March 28, 2027(the "Term Facility"); (ii) an unsecured term loan facility in the initial principal amount of $486,827,669, under which Land remains the sole borrower, maturing on March 28, 2027(the "Land Term Facility"); and (iii) an unsecured revolving loan in the initial principal amount of up to $1,000,000,000, maturing on March 28, 2027(the "Multicurrency Revolving Facility"). Interest for benchmark rate loans is calculated based on a SOFR benchmark rate, plus a margin spread to be adjusted quarterly based on our funded debt to EBITDA ratio. The Credit Agreement is subject to customary and market provisions. Our subsidiaries that provide a guaranty of our and Land's obligations under the Former Credit Agreements also entered into subsidiary guaranty agreements with respect to the obligations under the Credit Agreement. The Term Facility was drawn in full on March 28, 2022to refinance the Former Credit Agreements, pay fees, costs, and other expenses incurred therewith, to fund working capital needs and for our general corporate purposes. The Term Facility requires quarterly amortization at 5.0% per annum, unless previously prepaid. Per the terms of the Credit Agreement, prepayments can be made without penalty and be applied to the next payment due. After the prepayment is considered, the next payment in the amortization schedule is not due within one year and therefore no current maturities of debt will be recognized for this agreement. The Credit Agreement requires that we prepay the loans under the Term Facility with 100% of the net cash proceeds received from specified asset sales and borrowed money indebtedness, subject to certain exceptions. At March 31, 2022, we had $955.0 millionof borrowings under the Multicurrency Revolving Facility, $0.1 millionof standby letters of credit issued under the facility, and $44.9 millionof available borrowing capacity. For the three months ended March 31, 2022and April 3, 2021under the Multicurrency Revolving Facility, the average daily balance in borrowings was $773.7 millionand $7.4 million, respectively, and the weighted average interest rate was 1.7% and 1.4%, respectively. We pay a non-use fee on the aggregate unused amount of the Multicurrency Revolving Facility at a rate determined by reference to its consolidated funded debt to consolidated EBITDA ratio. As of March 31, 2022, we had $486.8 millionof borrowings under the Land Term Facility. The Land Term Facility has no required amortization. The weighted average interest rate on the Land Term Facility for three months ended March 31, 2022was 1.7%. In connection with the Rexnord Transaction, on February 15, 2021, we entered into a debt commitment letter (the "Bridge Commitment Letter") and related fee letters with Barclays Bank PLC ("Barclays"), pursuant to which, and subject to the terms and conditions set forth therein, Barclays committed to provide approximately $2.1 billionin an aggregate principal amount of senior bridge loans under a 364-day senior bridge loan credit facility (the "Bridge Facility"). As the Rexnord Transaction was consummated and the payments of amounts in connection therewith occurred without the use of the Bridge Facility, the commitments under the Bridge Commitment Letter were terminated in connection with the closing of the Rexnord Transaction.
Compliance with financial clauses
The credit agreement requires us to meet specified financial ratios and meet certain financial condition tests. We complied with all financial covenants contained in the credit agreement at the
Other notes payable
Based on rates for instruments with comparable maturities and credit quality, which are classified as Level 2 inputs (see also Note 14 of Notes to the Condensed Consolidated Financial Statements), the approximate fair value of our total debt was
$2,060.6 millionand $1,918.5 millionas of March 31, 2022and January 1, 2022, respectively.
Critical accounting policies
Our disclosures of critical accounting policies, which are contained in our Annual Report on Form 10-K for the fiscal year ended
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