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Income
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(Exact
name of registrant as specified in its charter)
iWisconsin
i39-0875718
(State
or other jurisdiction of incorporation)
(IRS Employer Identification No.)
i200 State Street, iBeloit, iWisconsini53511
(Address of principal executive office)
(i608) i364-8800
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol
Name of each exchange on which registered
iCommon
Stock
iRRX
iNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions
of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
iLarge
Accelerated Filer
☒
Accelerated Filer
☐
Non-accelerated filer
☐
Smaller Reporting Company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No i☒
This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the Company’s current estimates, expectations and projections about the Company’s future results, performance, prospects and opportunities. Such forward-looking statements may include, among other things, statements relating to the merger with the Rexnord Process & Motion Control business (the "Rexnord PMC business") (the "Rexnord Transaction") or the acquisition of Arrowhead Systems, LLC ("Arrowhead") (the "Arrowhead Transaction" and, together with the Rexnord Transaction, the "Transactions"), and the benefits
and synergies of the Transactions, future opportunities for the Company, and any other statements regarding the Company’s future operations, anticipated business levels, future earnings, planned activities, anticipated growth, market opportunities, strategies, competition and other expectations and estimates for future periods.Forward-looking statements include statements that are not historical facts and can be identified by forward-looking words such as “anticipate,”“believe,”“confident,”“estimate,”“expect,”“intend,”“plan,”“may,”“will,”“project,”“forecast,”"would,""could,""should," and similar expressions. These forward-looking statements are based
upon information currently available to the Company and are subject to a number of risks, uncertainties, and other factors that could cause actual results, performance, prospects, or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Important factors that could cause actual results to differ materially from the results referred to in the forward-looking statements the Company makes in this report include:
•dependence on key suppliers and the potential effects of supply disruptions;
•fluctuations in commodity prices and raw material costs;
•any
unforeseen changes to or the effects on liabilities, future capital expenditures, revenue, expenses, synergies, indebtedness, financial condition, losses and future prospects;
•the possibility that the Company may be unable to achieve expected synergies and operating efficiencies in connection with the Transactions within the expected time-frames or at all and to successfully integrate the Rexnord PMC and Arrowhead businesses;
•expected or targeted future financial and operating performance and results;
•operating costs, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers) being
greater than expected following the Transactions;
•the Company's ability to retain key executives and employees;
•the continued financial and operational impacts of and uncertainties relating to the COVID-19 pandemic on customers and suppliers and the geographies in which they operate;
•uncertainties regarding the ability to execute restructuring plans within expected costs and timing;
•challenges to the tax treatment that was elected with respect to the Rexnord Transaction and related transactions;
•requirements to abide by potentially significant restrictions
with respect to the tax treatment of the Rexnord Transaction which could limit the Company’s ability to undertake certain corporate actions that otherwise could be advantageous;
•actions taken by competitors and their ability to effectively compete in the increasingly competitive global electric motor, drives and controls, power generation and power transmission industries;
•the ability to develop new products based on technological innovation, such as the Internet of Things, and marketplace acceptance of new and existing products, including products related to technology not yet adopted or utilized in geographic locations in which the Company does business;
•dependence
on significant customers;
•seasonal impact on sales of products into HVAC systems and other residential applications;
•risks associated with global manufacturing, including risks associated with public health crises and political, societal or economic instability, including instability caused by the conflict between Russia and Ukraine;
•issues and costs arising from the integration of acquired companies and businesses and the timing and impact of purchase accounting adjustments;
•the Company's overall debt levels and its ability to repay principal and interest on its outstanding debt;
3
•prolonged
declines in one or more markets, such as heating, ventilation, air conditioning, refrigeration, power generation, oil and gas, unit material handling, water heating and aerospace;
•economic changes in global markets, such as reduced demand for products, currency exchange rates, inflation rates, interest rates, recession, government policies, including policy changes affecting taxation, trade, tariffs, immigration, customs, border actions and the like, and other external factors that the Company cannot control;
•product liability, asbestos and other litigation, or claims by end users, government agencies or others that products or customers' applications failed to perform as anticipated, particularly in high volume applications or where such failures are
alleged to be the cause of property or casualty claims;
•unanticipated liabilities of acquired businesses;
•unanticipated adverse effects or liabilities from business exits or divestitures;
•unanticipated costs or expenses that may be incurred related to product warranty issues;
•infringement of intellectual property by third parties, challenges to intellectual property and claims of infringement on third party technologies;
•effects on earnings of any significant impairment of goodwill;
•losses from failures, breaches, attacks or disclosures involving information technology
infrastructure and data;
•cyclical downturns affecting the global market for capital goods;
•and other risks and uncertainties including, but not limited, to those described in the Company's Annual Report on Form 10-K on file with the SEC and from time to time in other filed reports including the Company's Quarterly Reports on Form 10-Q. For a more detailed description of the risk factors associated with the Company, please refer to Part I, Item 1A in the Company's Annual Report on Form 10-K for the fiscal
year ended January 1, 2022 on file with the SEC and subsequent SEC filings.
Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this report are made only as of the date of this report, and the Company undertakes no obligation to update any forward-looking information contained in this report to reflect subsequent events or circumstances.
Increase (Decrease) in Fair Value of Hedging Activities, Net of Tax Effects of $(i10.5) Million and $i4.2
Million for the Three Months Ended June 30, 2022 and July 3, 2021 and $(i2.2) Million and $i8.8
Million for the Six Months Ended June 30, 2022 and July 3, 2021, Respectively
(i32.9)
i13.3
(i6.8)
i27.9
Reclassification
of (Gains) Losses included in Net Income, Net of Tax Effects of $(i1.5) Million and $(i2.7)
Million for the Three Months Ended June 30, 2022 and July 3, 2021 and $(i3.5) Million and $(i5.5)
Million for the Six Months Ended June 30, 2022 and July 3, 2021, Respectively
(i5.3)
(i8.6)
(i11.3)
(i17.3)
Pension
and Post Retirement Plans:
Reclassification Adjustments for Pension and Post Retirement Benefits included in Net Income, Net of Tax Effects of $i0.1
Million and $i0.1 Million for the Three Months Ended June 30, 2022 and July 3, 2021 and $i0.1
Million and $i0.2 Million for the Six Months Ended June 30, 2022 and July 3, 2021, Respectively
i0.1
i0.4
i0.3
i0.7
Other
Comprehensive (Loss) Income
(i158.9)
i15.1
(i139.0)
(i0.4)
Comprehensive
(Loss) Income
(i15.7)
i101.1
i131.3
i155.9
Less:
Comprehensive (Loss) Income Attributable to Noncontrolling Interests
(i1.1)
i2.3
i0.8
i3.4
Comprehensive
(Loss) Income Attributable to Regal Rexnord Corporation
$
(i14.6)
$
i98.8
$
i130.5
$
i152.5
See
Accompanying Notes to Condensed Consolidated Financial Statements
Trade
Receivables, Less Allowances of $i18.7 Million and $i18.7 Million in 2022 and 2021, Respectively
i854.8
i785.8
Inventories
i1,388.4
i1,192.4
Prepaid
Expenses and Other Current Assets
i141.2
i145.1
Assets
Held for Sale
i10.6
i12.5
Total
Current Assets
i3,097.5
i2,808.6
Net
Property, Plant and Equipment
i822.0
i908.5
Operating
Lease Assets
i114.4
i112.4
Goodwill
i4,026.0
i4,039.2
Intangible
Assets, Net of Amortization
i2,326.6
i2,429.2
Deferred
Income Tax Benefits
i35.7
i35.7
Other
Noncurrent Assets
i36.3
i33.8
Total Assets
$
i10,458.5
$
i10,367.4
LIABILITIES
AND EQUITY
Current Liabilities:
Accounts Payable
$
i652.8
$
i643.8
Dividends
Payable
i23.3
i22.3
Accrued
Compensation and Employee Benefits
i124.8
i143.9
Other
Accrued Expenses
i261.9
i253.2
Current
Operating Lease Liabilities
i27.4
i27.2
Current
Maturities of Long-Term Debt
i30.6
i4.9
Total Current
Liabilities
i1,120.8
i1,095.3
Long-Term
Debt
i2,132.5
i1,913.6
Deferred
Income Taxes
i620.1
i679.7
Pension
and Other Post Retirement Benefits
i102.9
i111.7
Noncurrent
Operating Lease Liabilities
i90.5
i89.5
Other
Noncurrent Liabilities
i76.0
i69.4
Contingencies
(see Note 12)
i
i
Equity:
Regal
Rexnord Corporation Shareholders' Equity:
Common Stock, $ii0.01/
par value, ii100.0/ Million Shares Authorized, ii66.5/
Million and ii67.6/ Million Shares Issued and Outstanding for 2022 and 2021, Respectively
i0.7
i0.7
Additional
Paid-In Capital
i4,611.6
i4,651.8
Retained
Earnings
i1,996.6
i1,912.6
Accumulated
Other Comprehensive Loss
(i332.2)
(i195.1)
Total
Regal Rexnord Corporation Shareholders' Equity
i6,276.7
i6,370.0
Noncontrolling
Interests
i39.0
i38.2
Total Equity
i6,315.7
i6,408.2
Total
Liabilities and Equity
$
i10,458.5
$
i10,367.4
See
Accompanying Notes to Condensed Consolidated Financial Statements.
The accompanying (a) Condensed Consolidated Balance Sheet of Regal Rexnord Corporation (the “Company”), as of January 1, 2022, which has been derived from audited Consolidated Financial Statements, and (b) unaudited interim Condensed Consolidated Financial Statements as of June 30, 2022 and for the three and six months ended June 30, 2022 and July 3, 2021, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), have been condensed or omitted pursuant
to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s 2021 Annual Report on Form 10-K filed on March 2, 2022.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the three and six months ended June 30,
2022 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2022.
The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP, which requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Condensed Consolidated Financial Statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company uses estimates in accounting for, among other items, allowance for doubtful accounts; excess and obsolete inventory; share-based compensation; acquisitions; product warranty obligations; pension and post
retirement assets and liabilities; derivative fair values; goodwill and other asset impairments; health care reserves; retirement benefits; rebates and incentives; litigation claims and contingencies, including environmental matters; and income taxes. The Company accounts for changes to estimates and assumptions when warranted by factually based experience.
Effective for fiscal year 2022, the Company approved a change in the fiscal year end from a 52-53 week year ending on the Saturday closest to December 31 to a calendar year ending on December 31. The Company made the fiscal year change on a prospective basis and did not adjust operating results for prior periods. While this change
will impact the comparability of future results with each of the fiscal quarters and the annual fiscal period in 2022, the impact is not expected to be material to our quarterly or annual results.
i
Change in Accounting Principle
As of January 2, 2022, the Company changed its methodology for valuing certain inventories to the first-in, first-out ("FIFO") cost method from the last-in, first-out ("LIFO") cost method. The effects of
this change have been retrospectively applied to all periods presented. See Note 2 for additional information.
i
Recently Issued Accounting Standards
In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2021-08, Business Combinations (Topic 805) Accounting for Contract Assets and Contract
Liabilities from Contracts with Customers. The ASU improves the accounting for acquired revenue contracts with customers in a business combination. This ASU becomes effective for fiscal years beginning after December 31, 2022, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance.
2. iOTHER
FINANCIAL INFORMATION
Inventories
As of January 2, 2022, the Company changed its method for valuing certain inventories to the FIFO cost method from the LIFO cost method. The Company believes that this change in accounting is preferable as it provides a better matching of costs and revenues, more closely resembles the physical flow of inventory, better reflects acquisition cost of inventory on the balance sheet, conforms the Company's method of inventory valuation to a single method, results in improved comparability with industry peers and reduces the administrative burden of determining the
LIFO valuation.
11
The effects of this change have been retrospectively applied to all periods presented. This change resulted in an increase to retained earnings of $i38.4 million as of January 2, 2021.
iIn
addition, certain financial statement line items in our Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 3, 2021, Condensed Consolidated Statements of Cash Flows for the six months ended July 3, 2021 and our Condensed Consolidated Balance Sheet as of January 1, 2022, were adjusted as follows (dollars in millions):
12
As
Originally Reported
Effect of Change
As Adjusted
Condensed Consolidated Statement of Operations for the three months ended July 3, 2021
Cost of Sales
$
i635.4
$
(i6.2)
$
i629.2
Provision
for Income Taxes
$
i19.2
$
i1.4
$
i20.6
Net
income attributable to Regal Rexnord Corporation
$
i79.6
$
i4.8
$
i84.4
Earnings
Per Share Attributable to Regal Rexnord Corporation:
Basic
$
i1.96
$
i0.12
$
i2.07
Assuming
Dilution
$
i1.94
$
i0.12
$
i2.06
Condensed
Consolidated Statement of Operations for the six months ended July 3, 2021
Cost of Sales
$
i1,204.1
$
(i10.6)
$
i1,193.5
Provision
for Income Taxes
$
i39.4
$
i2.5
$
i41.9
Net
income attributable to Regal Rexnord Corporation
$
i145.2
$
i8.1
$
i153.3
Earnings
Per Share Attributable to Regal Rexnord Corporation:
Condensed
Consolidated Statement of Cash Flows for the six months ended July 3, 2021
Net Income
$
i148.2
$
i8.1
$
i156.3
Change
in Operating Assets and Liabilities
$
(i105.5)
$
(i8.1)
$
(i113.6)
Condensed
Consolidated Statement of Comprehensive Income for the three months ended July 3, 2021
Comprehensive income attributable to Regal Rexnord Corporation
$
i94.0
$
i4.8
$
i98.8
Condensed
Consolidated Statement of Comprehensive Income for the six months ended July 3, 2021
Comprehensive income attributable to Regal Rexnord Corporation
$
i144.4
$
i8.1
$
i152.5
iThe
following table presents approximate percentage distribution between major classes of inventories inclusive of the accounting method change discussed above:
For
the three and six months ended June 30, 2022, the Company recognized iino/
material asset impairments. For the three and six months ended July 3, 2021, the Company recognized $ii2.3/
million of asset impairments related to the transfer of assets to held for sale.
Revenue Recognition
The Company recognizes revenue from the sale of electric motors, electrical motion controls, power generation and power transmission products. The Company recognizes revenue when control of the product passes to the customer or the service is provided and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services.
Nature of Goods and Services
The
Company sells products with multiple applications as well as customized products that have a single application such as those manufactured for its OEM customers. The Company reports in ifour operating segments: Commercial Systems, Industrial Systems, Climate Solutions and Motion Control Solutions. See Note 6 for a description of the different segments.
Nature of Performance Obligations
The
Company’s contracts with customers typically consist of purchase orders, invoices and master supply agreements. At contract inception, across all ifour segments, the Company assesses the goods and services promised in its sales arrangements with customers and identifies a performance obligation for each
promise to transfer to the customer a good or service that is distinct. The Company’s primary performance obligations consist of product sales and customized system/solutions.
Product:
The nature of products varies from segment to segment but across all segments, individual products are not integrated and represent separate performance obligations.
Customized system/solutions:
The Company provides customized system/solutions which consist of multiple products engineered and designed to specific customer specification, combined or integrated into one combined solution for a specific customer application. The goods are transferred
to the customer and revenue is typically recognized over time as the performance obligations are satisfied.
When Performance Obligations are Satisfied
14
For performance obligations related to substantially all of the Company's product sales, the Company determines that the customer obtains control upon shipment and recognizes revenue accordingly. Once a product has shipped, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from the asset. The
Company considers control to have transferred upon shipment because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.
For a limited number of contracts, the Company transfers control and recognizes revenue over time. The Company satisfies its performance obligations over time and the
Company uses a cost-based input method to measure progress. In applying the cost-based method of revenue recognition, the Company uses actual costs incurred to date relative to the total estimated costs for the contract in conjunction with the customer's commitment to perform in determining the amount of revenue and cost to recognize. The Company has determined that the cost-based input method provides a faithful depiction of the transfer of goods to the customer.
Payment Terms
The arrangement with the customer states the final terms of the sale, including the description, quantity, and price of each product or service purchased.
iPayment terms vary by customer but typically range from due upon delivery to 120 days after delivery. For contracts recognized at a point in time, revenue and billing typically occur simultaneously.The Company generally has payment terms with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider
the time value of money. For contracts recognized using the cost-based input method, revenue recognized in excess of customer billings and billings in excess of revenue recognized are reviewed to determine the net asset or net liability position and classified as such on the Condensed Consolidated Balance Sheets.
Returns, Refunds, and Warranties
The Company’s contracts do not explicitly offer a “general” right of return to its customers (e.g., customers ordered excess products and return unused items). Warranties are classified as either assurance type or service type warranties. A warranty is considered an assurance
type warranty if it provides the customer with assurance that the product will function as intended. A warranty that goes above and beyond ensuring basic functionality is considered a service type warranty. The Company generally only offers limited warranties which are considered to be assurance type warranties and are not accounted for as separate performance obligations. Customers generally receive repair or replacement on products that do not function to specification. Estimated product warranties are provided for specific product groups and the Company accrues for estimated future warranty cost in the period in which the sale is recognized. The Company estimates the accrual requirements based on historical warranty loss
experience and the cost is included in Cost of Sales.
Volume Rebates
In some cases, the nature of the Company’s contract may give rise to variable consideration including volume based sales incentives. If the customer achieves specific sales targets, they are entitled to rebates. The Company estimates the projected amount of the rebates that will be achieved and recognizes the estimated costs as a reduction to Net Sales as revenue is recognized.
15
Disaggregation
of Revenue
i
The following tables presents the Company’s revenues disaggregated by geographical region (in millions):
The balances that were classified as Assets Held for Sale as of June 30, 2022 and January 1, 2022 were $i10.6
million and $i12.5 million, respectively.
2021 Acquisitions
Rexnord Transaction
On October 4, 2021, in accordance with the terms and conditions of the Agreement and Plan of Merger,
dated as of February 15, 2021 (the “Merger Agreement”), the Company completed its combination with the Rexnord Process & Motion Control business (“Rexnord PMC business”) of Zurn Elkay Water Solutions Corporation (formerly known as Rexnord Corporation) (“Zurn”) in a Reverse Morris Trust transaction (the “Rexnord Transaction”). Pursuant to the Rexnord Transaction, (i) 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”), (ii) after which all of the issued and outstanding shares of common stock, $i0.01
par 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 (iii) immediately after the Spin-Off, a subsidiary of the Company (“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 as of the effective time of the Merger (the “Effective Time”) into the right to receive i0.22296103
shares of common stock, $i0.01 par value per share, of the Company (“Company common stock”), as calculated in the Merger Agreement.
As of the Effective Time, Land, which held the Rexnord PMC business, became a wholly owned subsidiary of the Company.
Pursuant to the
Merger, the Company issued approximately i27,055,945 shares of Company common stock to holders of Land common stock, which represents approximately i39.9%
of the approximately i67,756,732 outstanding shares of Company common stock immediately following the Effective Time. In addition, holders of record of Company common stock as of October 1, 2021 received $i6.99
per share of Company common stock pursuant to a previously announced special dividend in connection with the Transactions (the “Special Dividend”).
In connection with the Rexnord Transaction, two directors designated by Zurn were appointed to the Company's Board of Directors. The current chief executive officer of the Company continued as the chief executive officer of the combined company after the Rexnord Transaction and a majority of the senior management of the Company immediately prior the consummation of the Rexnord Transaction remained executive officers of the
Company immediately after the Rexnord Transaction. The Company's management determined that the Company is the accounting acquirer in the Rexnord Transaction based on the facts and circumstances noted within this section and other relevant factors. As such, the Company applied the acquisition method of accounting to the identifiable assets and liabilities of Rexnord PMC business, which have been measured at estimated fair value as of the date of the business combination.
In connection with the Rexnord Transaction, the Company entered into certain
financing arrangements, which are described in Note 7.
The tax matters agreement the Company entered into in connection with the Rexnord Transaction imposes certain restrictions on the Company, Land and Zurn during the two-year period following the Spin-Off, subject to certain exceptions, with respect to actions that could cause the Reorganization and the Distributions to fail to qualify for the intended tax treatment. As a result of these restrictions, the Company's and Land’s ability to engage in certain transactions, such as the issuance or purchase of stock or certain business combinations, may be limited.
The
total consideration transferred for the acquisition of Land was approximately $i4.0 billion subject to finalization of purchase accounting adjustments. The total assets and liabilities assumed will be adjusted, based on the final balances per the terms included within the Separation and Distribution Agreement.
iThe
preliminary purchase price of the Rexnord PMC business consisted of the following (in millions):
(a)
Represents approximately i27 million new shares of Company common stock issued to Zurn stockholders in the exchange offer, based on the Company's October 4, 2021, closing share price of $i151.00,
less the Special Dividend amount of $i6.99, which the Zurn stockholders were not entitled to receive.
(b) Represents fair value of replacement equity-based awards and Company common stock issued in settlement of other Zurn share based awards. The portion of the fair value attributable to pre-Merger service was recorded as part of the consideration transferred in the Merger - see Note 10.
(c) Represents working capital adjustment pursuant to the terms of the purchase agreement.
The entire amount was settled and paid in cash by the Company as of March 31, 2022.
(d) Represents financing fees paid by the Company for the Bridge Facility and Land Term Facility (as defined in Note 7) that were determined to be costs of Zurn.
(e) Represents effective settlement of outstanding payables and receivables between the Company and the Rexnord PMC business. No gain or loss was recognized on this settlement.
Purchase Price Allocation
The
Rexnord PMC business’s assets and liabilities were measured at estimated fair values at October 4, 2021, primarily using Level 3 inputs. Estimates of fair value represent management’s best estimate of assumptions about future events and uncertainties, including significant judgments related to future cash flows, discount rates, competitive trends, margin and revenue growth assumptions including royalty rates and customer attrition rates and others. Inputs used were generally obtained from historical data supplemented by current and anticipated market conditions and growth rates expected as of the acquisition date.
Due to the timing of the business combinationand the nature of the net assets acquired, at June 30, 2022, the valuation process
to determine the fair values is not complete and further adjustments are expected during the measurement period. The Company has estimated the preliminary fair value of net assets acquired based on information currently available and will continue to adjust those estimates as additional information becomes available, including the refinement of market participant assumptions. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price allocation adjustments will be recorded during the measurement period, but no later than one year from the date of the acquisition. The Company will reflect measurement period adjustments in the period in which the adjustments are determined.
18
i
The
preliminary fair value and subsequent measurement period adjustments of the assets acquired and liabilities and noncontrolling interests assumed were as follows (in millions):
During
six months ended June 30, 2022, the Company made a cash payment of $i35.0 million to Zurn in connection with finalizing the acquisition date trade working capital. The preliminary purchase price allocations were also adjusted by the refinement of the estimated fair value of the assets received and liabilities assumed. The cumulative impact of the adjustments during the six months ended June 30,
2022 resulted in $i26.1 million of additional goodwill.
Results of the Rexnord PMC business Subsequent to the Acquisition
The financial results of the Rexnord PMC business have been included in the Company's Motion Control Solutions segment from the date of acquisition.
Arrowhead
Transaction
On November 23, 2021, the Company acquired all of the outstanding equity interests of Arrowhead Systems, LLC ("Arrowhead") (the "Arrowhead Transaction"), for $i315.6 million in cash, net of $i1.1 million
of cash acquired. Arrowhead is a global leader in providing industrial process automation solutions including conveyors and (de)palletizers to the food & beverage, aluminum can, and consumer staples end markets, among others. Arrowhead is now part of the Automation Solutions division of the Company's Motion Control Solutions segment.
The Consolidated Statements of Income include the results of operations of Arrowhead since the date of acquisition, and such results are reflected in the Motion Control Solutions segment.
Purchase Price Allocation
Arrowhead's assets and liabilities were measured at estimated fair values at November
23, 2021. Estimates of fair value represent management’s best estimate of assumptions about future events and uncertainties, including significant judgments related to future cash flows, discount rates, competitive trends, margin and revenue growth assumptions including royalty rates
19
and customer attrition rates and others. Inputs used were generally obtained from historical data supplemented by current and anticipated market conditions and growth rates expected as of the acquisition date.
The preliminary fair value of the assets acquired and liabilities assumed were as follows (in millions):
(1)
Includes $i124.0 million related to Customer Relationships, $i18.0 million
related to Trademarks and $i18.0 million related to Technology.
The allocation of purchase price is subject to finalization during a period not to exceed one year from the acquisition date.Adjustments to the preliminary allocation of purchase price may occur related
to finalization of the working capital adjustment,finalization of the valuation of intangibles and other long-lived assets, adjustment to income tax assets and liabilities and other changes related to the valuation of assets acquired and liabilities assumed. The cumulative impact of the adjustments during the six months ended June 30, 2022 resulted in $i0.3 million of additional goodwill.
20
4.
iACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments, hedging activities and pension and post-retirement benefit adjustments are included in Accumulated Other Comprehensive Income (Loss) ("AOCI") a component of Total Equity.
i
The
following tables present changes in AOCI by component for the three and six months ended June 30, 2022 and July 3, 2021 (in millions):
Other
Comprehensive Income (Loss) before Reclassifications
i36.7
i—
(i12.1)
i24.6
Tax
Impact
(i8.8)
i—
i—
(i8.8)
Amounts
Reclassified from Accumulated Other Comprehensive Income (Loss)
(i22.8)
i0.9
i—
(i21.9)
Tax
Impact
i5.5
(i0.2)
i—
i5.3
Net
Current Period Other Comprehensive Income (Loss)
i10.6
i0.7
(i12.1)
(i0.8)
Ending
Balance
$
i34.1
$
(i30.4)
$
(i167.8)
$
(i164.1)
The
Condensed Consolidated Statements of Income line items affected by the hedging activities reclassified from AOCI in the tables above are disclosed in Note 13.
The reclassification amounts for pension and post-retirement benefit adjustments in the tables above are part of net periodic benefit costs recorded in Other Income, Net (see also Note 8).
5. iGOODWILL
AND INTANGIBLE ASSETS
Goodwill
As required, the Company performs an annual impairment test of goodwill as of the end of the October fiscal month or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting units below their carrying value.
22
i
The
following table presents changes to goodwill during the six months ended June 30, 2022 (in millions):
Amortization
expense recorded for the three and six months ended June 30, 2022 was $i46.5 million and $i93.8 million,
respectively. Amortization expense recorded for the three and six months ended July 3, 2021 was $i11.1 million and $i22.3
million, respectively. Amortization expense for fiscal year 2022 is estimated to be $i187.0 million. There were iiiino///
intangible asset impairments during the three and six months ended June 30, 2022 and July 3, 2021, respectively.
i
The following table presents future estimated annual amortization for intangible assets (in millions):
Year
Estimated
Amortization
2023
$
i186.4
2024
i185.8
2025
i183.7
2026
i180.3
2027
i145.7
/
6.
iSEGMENT INFORMATION
The Company is comprised of ifour
operating segments: Commercial Systems, Industrial Systems, Climate Solutions and Motion Control Solutions.
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.
23
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.
Climate Solutions segment designs and produces small motors, electronic variable speed controls and air moving solutions serving markets including 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.
The
Company evaluates performance based on the segment's income from operations. Corporate costs have been allocated to each segment based on the net sales of each segment. The reported external net sales of each segment are from external customers.
i
The following sets forth certain financial information attributable to the Company's operating segments for the three and six months ended June 30,
2022 and July 3, 2021 (in millions):
The
following table presents identifiable assets information attributable to the Company's operating segments as of June 30, 2022 and January 1, 2022 (in millions):
*Includes
the retrospective effect of changing accounting methods for valuing certain inventories to the FIFO cost method from the LIFO cost method. See Note 2 for additional information.
On March 28, 2022, the Company entered into a Second Amended and Restated Credit Agreement with the Company's 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”).
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 $i550,000,000,
maturing on March 28, 2027 (the "Term Facility"); (ii) an unsecured term loan facility in the initial principal amount of $i486,827,669, 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 $i1,000,000,000,
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 the Company’s funded debt to EBITDA ratio. The Credit Agreement is subject to customary and market provisions. The subsidiaries of the Company that provided a guaranty of the Company's and Land's obligations under the Former Credit Agreement 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, 2022 to refinance the Former Credit Agreements, pay fees, costs, and other expenses incurred therewith, to fund working capital needs and for general corporate purposes of the Company and its subsidiaries. The Term Facility requires quarterly amortization at i5.0% 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.
The weighted average interest rate on the Term Facility for the three months ended June 30, 2022 and July 3, 2021 was i2.1% and i1.4%,
respectively. The weighted average interest rate on the Term Facility for the six months ended June 30, 2022 and July 3, 2021 was i1.7% and i1.5%,
respectively. The Credit Agreement requires that the Company prepay the loans under the Term Facility with i100% of the net cash proceeds received from specified asset sales and borrowed money indebtedness, subject to certain exceptions.
At June 30, 2022, the
Company had $i560.0 million of borrowings under the Multicurrency Revolving Facility, $i0.1 million of standby letters of credit issued under the facility, and $i439.8
million of available borrowing capacity. For the three months ended June 30, 2022 and July 3, 2021 under the Multicurrency Revolving Facility, the average daily balance in borrowings was $i730.0 million and $i2.4
million, respectively, and the weighted average interest rate was i2.1% and i1.4%, respectively. For the six months ended June 30,
2022 and July 3, 2021 under the Multicurrency Revolving Facility, the average daily balance in borrowings was $i765.2 million and $i4.9
million, respectively, and the weighted average interest rate was i1.7% and i1.4%, respectively. The
Company pays 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 June 30, 2022, the Company had $i486.8 million of 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 June 30, 2022 was i2.1%. The weighted average interest rate on the Land Term Facility for six months ended June 30, 2022 was i1.7%.
26
In
connection with the Rexnord Transaction, on February 15, 2021, the Company 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 $i2.1 billion in an aggregate principal amount of senior bridge loans under a i364-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.
Senior Notes
On April 7, 2022, the Company entered into a Note Purchase Agreement with certain institutional accredited investors (the "Note Purchase Agreement") for the issuance and sale of $i500,000,000
aggregate principal amount of i3.90% senior notes due April 7, 2032 (the "Senior Notes"), in an offering exempt from the registration requirements of the Securities Act of 1933, as amended. The Company expects to use the net proceeds from the offering for general corporate purposes.
The Note Purchase Agreement is subject to customary and market provisions. The subsidiaries
of the Company that provided a guaranty of the Company’s and Land’s obligations under the Credit Agreement also entered into subsidiary guaranty agreements with respect to the obligations under the Note Purchase Agreement. The Company may, at its option, prepay at any time all, or from time to time any part of, the Senior Notes, subject to a make-whole amount and certain other restrictions set forth in the Note Purchase Agreement.
Compliance with Financial Covenants
The Credit Agreement requires the Company to meet specified
financial ratios and to satisfy certain financial condition tests. The Note Purchase Agreement contains financial covenants consistent with the financial covenants in the Credit Agreement. The Company was in compliance with all financial covenants contained in the Credit Agreement and Note Purchase Agreement as of June 30, 2022.
Other Notes Payable
At June 30, 2022, other notes payable of approximately $i75.2
million were outstanding with a weighted average interest rate of i5.1%. At January 1, 2022, other notes payable of approximately $i78.7
million were outstanding with a weighted average rate of i5.2%.
Other Disclosures
Based on rates for instruments with comparable maturities and credit quality, which are classified as Level 2 inputs (see also Note 14), the approximate fair value of the Company's total debt was $i2,125.9
million and $i1,918.5 million as of June 30, 2022 and January 1, 2022, respectively.
8. iRETIREMENT
AND POST RETIREMENT HEALTH CARE PLANS
i
The following table presents the Company’s net periodic benefit cost (income) components (in millions):
Amortization
of Prior Service Cost and Net Actuarial Loss
i0.2
i0.5
i0.4
i0.9
Net
Periodic Benefit Income
$
(i1.0)
$
(i0.9)
$
(i2.0)
$
(i1.8)
/
The
service cost component is included in Cost of Sales and Operating Expenses. All other components of net periodic benefit costs are included in Other Income, Net on the Company's Condensed Consolidated Statements of Income.
million and $i2.8 million, respectively. The Company expects to make total contributions of $i7.6
million in 2022. The Company contributed a total of $i6.0 million in fiscal 2021.
9. iSHAREHOLDERS’
EQUITY
Repurchase of Common Stock
At a meeting of the Board of Directors on October 26, 2021, the Company's Board of Directors approved the authorization to purchase up to $i500.0 million of shares. During the three
and six months ended June 30, 2022, the Company purchased i575,042 shares or $i69.8 million
and i1,306,236 shares or $i184.0 million of common stock, respectively.The
Company did inot repurchase and retire any common stock during the six months ended July 3, 2021.
As of June 30, 2022, there was approximately $i250.3
million in common stock available for repurchase under the October 2021 program.
Share-Based Compensation
The Company recognized approximately $i4.9 million and $i4.5
million in share-based compensation expense for the three months ended June 30, 2022 and July 3, 2021, respectively, and approximately $i11.2 million and $i7.8
million for the six months ended June 30, 2022 and July 3, 2021, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Income for share-based compensation expense was $i1.2 million and $i0.7
million for the three months ended June 30, 2022 and July 3, 2021, respectively, and $i2.7 million and $i1.3
million for the six months ended June 30, 2022 and July 3, 2021, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award.
i
During
the six months ended June 30, 2022, the Company granted the following share-based incentive awards:
Award Type
Number of Awards
Weighted Average Grant-Date Fair Value
Options
and SARs
i135,816
$
i42.21
Restricted
Stock Awards
i10,287
$
i131.27
Restricted
Stock Units
i85,017
$
i149.66
Performance
Share Units
i40,763
$
i174.91
/
See
Note 9, Shareholders' Equity, to the audited consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended January 1, 2022, for further information regarding share-based compensation.
10. iINCOME TAXES
The
effective tax rate for the three months ended June 30, 2022 was i22.1% versus i19.3% for the three months ended July 3,
2021. The effective tax rate for the six months ended June 30, 2022 and July 3, 2021 was i22.1% and i21.1%,
respectively. The effective tax rate for the three and six months ended June 30, 2022 was higher than the same period in the prior year primarily driven by the jurisdictional mix of earnings related to the impact of the Rexnord Transaction in fiscal 2021.
As of June 30, 2022 and January 1, 2022, the Company had approximately $i8.6
million and $i8.8 million of unrecognized tax benefits, all of which would impact the effective income tax rate if recognized. Potential interest and penalties related to unrecognized tax benefits are recorded in income tax expense. The Company had approximately $i1.2 million
and $i1.3 million of accrued interest as of June 30, 2022 and January 1, 2022, respectively.
With few exceptions, the Company is no longer subject to US Federal and state/local income tax examinations by tax authorities for years prior to 2018, and the
Company is no longer subject to non-US income tax examinations by tax authorities for years prior to 2015.
28
11. iEARNINGS PER SHARE
Diluted earnings
per share is calculated based upon earnings applicable to common shares divided by the weighted-average number of common shares outstanding during the period adjusted for the effect of other dilutive securities. The amount of the anti-dilutive shares were i0.4 million and i0.1
million for the three months ended June 30, 2022 and July 3, 2021, respectively. The amount of the anti-dilutive shares were i0.2 million and i0.1
million for the six months ended June 30, 2022 and July 3, 2021, respectively. iThe following table reconciles the basic and diluted shares used in earnings per share calculations for the three and six months ended June 30, 2022 and July 3, 2021 (in millions):
iOne of the
Company's subsidiaries that it acquired in 2007 is subject to numerous claims filed in various jurisdictions relating to certain sub-fractional motors that were primarily manufactured through 2004 and that were included as components of residential and commercial ventilation units manufactured and sold in high volumes by a third party. These ventilation units are subject to product safety requirements and other potential regulation of their performance by government agencies such as the US Consumer Product Safety Commission (“CPSC”). The claims generally allege that the ventilation units were the cause of fires. The Company has recorded an estimated liability for incurred claims. Based on the current facts, the
Company cannot assure that these claims, individually or in the aggregate, will not have a material adverse effect on its subsidiary's financial condition. The Company's subsidiary cannot reasonably predict the outcome of these claims, the nature or extent of any CPSC or other remedial actions, if any, that the Company's subsidiary may need to undertake with respect to motors that remain in the field, or the costs that may be incurred, some of which could be significant.
As a result of the Company's acquisition of the Rexnord PMC business, it is entitled to indemnification from third parties to agreements with the Rexnord PMC business against certain contingent liabilities of
the Rexnord PMC business, including certain pre-closing environmental liabilities.
The Company believes that, pursuant to the transaction documents related to the Rexnord PMC business' acquisition of the Stearns business from Invensys plc ("Invensys"), Invensys (now known as Schneider Electric) is obligated to defend and indemnify us with respect to the matters described below relating to the Ellsworth Industrial Park Site and to various asbestos claims. The indemnity obligations relating to the matters described below are subject, together with indemnity obligations relating to other matters, to an overall dollar cap equal to the purchase price, which is an amount in excess of $i900 million.
In the event that the Company is unable to recover from Invensys with respect to the matters below, it may be entitled to indemnification from Zurn, subject to certain limitations. The following paragraphs summarize the most significant actions and proceedings:
•In 2002, the Company's subsidiary, Rexnord Industries, LLC ("Rexnord Industries") was named as a potentially responsible party ("PRP"), together with at least ten other companies, at the Ellsworth Industrial Park Site, Downers Grove, DuPage County, Illinois (the "Site"), by the United States Environmental Protection Agency ("USEPA"), and the Illinois Environmental Protection Agency ("IEPA"). Rexnord Industries'
Downers Grove property is situated within the Ellsworth Industrial Complex. The USEPA and IEPA allege there have been one or more releases or threatened releases of chlorinated solvents and other hazardous substances, pollutants or contaminants at the Site, allegedly including but not limited to a release or threatened release on or from Rexnord Industries' property. The relief sought by the USEPA and IEPA includes further investigation and potential remediation of the Site and reimbursement of USEPA's past costs. In early 2020, Rexnord Industries entered into an administrative order with the USEPA to do remediation work on its Downers Grove property. Rexnord Industries' allocated share of past and future costs related to the Site, including for investigation and/or remediation, could be significant. All previously pending property damage and personal injury lawsuits against Rexnord Industries related to the Site have been settled or dismissed. Pursuant to its indemnity
obligation, Invensys continues to defend Rexnord Industries in known matters related to the Site, including the costs of the remediation work pursuant to the 2020 administrative order, and has paid i100% of the costs to date. This indemnification right would not protect Rexnord Industries against liabilities related to
29
environmental conditions that were unknown to Invensys at the time of the acquisition
of the Stearns business from Invensys.
•Multiple lawsuits (with approximately i300 claimants) are pending in state or federal court in numerous jurisdictions relating to alleged personal injuries due to the alleged presence of asbestos in certain brakes and clutches previously manufactured by the Rexnord PMC business' Stearns brand of brakes and clutches and/or its predecessor owners. Invensys and FMC, prior owners of the Stearns business, have
paid i100% of the costs to date related to the Stearns lawsuits. Similarly, the Rexnord PMC business' Prager subsidiary is the subject of claims by multiple claimants alleging personal injuries due to the alleged presence of asbestos in a product allegedly manufactured by Prager. However, all these claims are currently on the Texas Multi-district Litigation inactive docket, and the Company does not believe that they will become active in the future. To date, the Rexnord PMC business' insurance providers have paid i100%
of the costs related to the Prager asbestos matters. We believe that the combination of the Company's insurance coverage and the Invensys indemnity obligations will cover any future costs of these matters.
In connection with the Company's acquisition of the Rexnord PMC business, transaction documents related to the Rexnord PMC business’ acquisition of The Falk Corporation from Hamilton Sundstrand Corporation were assigned to Rexnord Industries, and provide Rexnord Industries with indemnification against certain products related asbestos exposure liabilities. The Company believes that, pursuant to such indemnity obligations, Hamilton Sundstrand is
obligated to defend and indemnify Rexnord Industries with respect to asbestos claims described below, and that, with respect to these claims, such indemnity obligations are not subject to any time or dollar limitations.
The following paragraph summarizes the most significant actions and proceedings for which Hamilton Sundstrand has accepted responsibility:
•Rexnord Industries is a defendant in multiple lawsuits pending in state or federal court in numerous jurisdictions relating to alleged personal injuries due to the alleged presence of asbestos in certain clutches and drives previously manufactured by The Falk Corporation. The ultimate outcome of these lawsuits cannot presently be determined. Hamilton Sundstrand is defending Rexnord Industries in these lawsuits pursuant to its indemnity
obligations and has paid i100% of the costs to date.
The Company is, from time to time, party to litigation and other legal or regulatory proceedings that arise in the normal course of its business operations and the outcomes of which are subject to significant uncertainty, including product warranty and liability claims, contract disputes and environmental,
asbestos, intellectual property, employment and other litigation matters. The Company's products are used in a variety of industrial, commercial and residential applications that subject the Company to claims that the use of its products is alleged to have resulted in injury or other damage. Many of these matters will only be resolved when one or more future events occur or fail to occur. Management conducts regular reviews, including updates from legal counsel, to assess the need for accounting recognition or disclosure of these contingencies, and such assessment inherently involves an exercise in judgment. The Company accrues for exposures in amounts that it believes are adequate, and the
Company does not believe that the outcome of any such lawsuit individually or collectively will have a material effect on the Company's financial position, its results of operations or its cash flows.
The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience. iThe
following table presents a reconciliation of the changes in accrued warranty costs for the three and six months ended June 30, 2022 and July 3, 2021 (in millions):
These
liabilities are included in Other Accrued Expenses and Other Noncurrent Liabilities on the Condensed Consolidated Balance Sheets.
30
13. iDERIVATIVE FINANCIAL
INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed using derivative instruments are commodity price risk, currency exchange risk, and interest rate risk. Forward contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company's manufacturing process. Forward contracts on certain currencies are entered into to manage forecasted cash flows in certain foreign currencies. Interest rate swaps are utilized to manage interest rate risk
associated with the Company's floating rate borrowings.
The Company is exposed to credit losses in the event of non-performance by the counterparties to various financial agreements, including its commodity hedging transactions, foreign currency exchange contracts and interest rate swap agreements. Exposure to counterparty credit risk is managed by limiting counterparties to major international banks and financial institutions meeting established credit guidelines and continually monitoring their compliance with the credit guidelines. The Company does not obtain collateral or other security
to support financial instruments subject to credit risk. The Company does not anticipate non-performance by its counterparties, but cannot provide assurances.
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets. The Company designates commodity forward contracts as cash flow hedges of forecasted purchases of commodities, currency forward contracts as cash flow hedges of forecasted foreign currency cash flows and interest
rate swaps as cash flow hedges of forecasted SOFR-based interest payments. There were no significant collateral deposits on derivative financial instruments as of June 30, 2022 or July 3, 2021.
Cash Flow Hedges
The effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into the same line within the Condensed Consolidated Statement of Income as the earnings effect of the hedged item in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or changes in market value of derivatives not designated as hedges are recognized in current earnings.
At June 30,
2022, the Company had $i16.7 million, net of tax, of derivative gains on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings. At January 1, 2022, the Company had $i5.6
million, net of tax, of derivative gains on closed hedge instruments in AOCI that was subsequently realized in earnings when the hedged items impacted earnings.
i
As of June 30, 2022, the Company had the following currency forward contracts outstanding (with maturities extending through December
2023) to hedge forecasted foreign currency cash flows (in millions):
Notional Amount (in US Dollars)
Chinese Renminbi
$
i249.5
Mexican
Peso
i204.1
Euro
i208.7
Indian
Rupee
i79.4
Australian Dollar
i14.1
British
Pound
i1.8
Thai Baht
i0.5
As
of June 30, 2022, the Company had the following commodity forward contracts outstanding (with maturities extending through November 2023) to hedge forecasted purchases of commodities (notional amounts expressed in terms of the dollar value of the hedged item (in millions)):
Notional Amount
Copper
$
i145.3
Aluminum
i7.1
/
The
Company entered into iitwo/
receive variable/pay-fixed forward starting non-amortizing interest rate swaps in June 2020, with a total notional amount of $ii250.0/ million,
which were subsequently terminated in March 2022. The cash proceeds of $i16.2 million received to settle the terminated swaps will be recognized as a reduction of interest expense via the effective
31
interest rate method through July 2025 when the terminated swaps were scheduled to expire. The
Company entered into iitwo/
additional receive variable/pay-fixed forward starting non-amortizing interest rate swaps in May 2022, with a total notional amount of $ii250.0/ million.
These swaps will expire in March 2027.
i
The following table presents the fair values of derivative instruments as of June 30, 2022 and January 1, 2022 (in millions):
The
following table presents the effect of derivative instruments on the Condensed Consolidated Statements of Income and Condensed Consolidated Statement of Comprehensive Income (pre-tax) (in millions):
Derivatives Designated as Cash Flow Hedging Instruments
The
net AOCI hedging component balance of a $i2.9 million gain at June 30, 2022 includes $(i2.1)
million of net current deferred losses expected to be realized in the next twelve months. The gain/loss reclassified from AOCI into earnings on such derivatives will be recognized in the same period in which the related item affects earnings.
The Company's commodity and currency derivative contracts are subject to master netting agreements with the respective counterparties which allow the Company to net settle transactions with a single net amount payable by one party to another party. The Company has elected to present the derivative assets and derivative liabilities on the Condensed Consolidated
Balance Sheets on a gross basis for the periods ended June 30, 2022 and January 1, 2022.
i
The following table presents the derivative assets and derivative liabilities presented on a net basis under enforceable master netting agreements (in millions):
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
Level 1
Unadjusted
quoted prices in active markets for identical assets or liabilities
Level 2
Unadjusted quoted prices in active markets for similar assets or liabilities, or
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
Inputs other than quoted prices that are observable for the asset or liability
Level 3
Unobservable inputs for the asset or liability
The Company uses the best available
information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The fair values of cash equivalents and short-term deposits approximate their carrying values as of June 30, 2022 and January 1, 2022, due to the short period of time to maturity and are classified using Level 1 inputs. The fair values of trade receivables and accounts payable approximate the carrying values due to the short period of time to maturity. See Note 7 for disclosure of the approximate fair value of the Company's debt at June 30, 2022 and January 1, 2022.
i
The
following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2022 and January 1, 2022 (in millions):
Level 1 fair value measurements for assets held in a Rabbi Trust are unadjusted quoted prices.
Level 2 fair value measurements for derivative assets and liabilities are measured using quoted prices in active markets for similar assets and liabilities. Interest rate swaps are valued based on the discounted cash flows for the SOFR forward yield curve for a swap
with similar contractual terms. Foreign currency forwards are valued based on exchange rates quoted by domestic and foreign banks for similar instruments. Commodity forwards are valued based on observable market transactions of forward commodity prices.
35
15. iRESTRUCTURING
ACTIVITIES
The Company incurred restructuring and restructuring-related costs on projects during fiscal 2022 and 2021. In conjunction with the Rexnord Transaction, the Company initiated a restructuring plan to achieve cost synergies from procurement, distribution efficiencies, footprint rationalization and other general cost savings measures. Restructuring costs include employee termination and plant relocation costs. Restructuring-related costs also include costs directly associated with actions resulting from the Company's 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.
i
The following table presents a reconciliation of provisions and payments for the restructuring projects for the three and six months ended June 30,
2022 and July 3, 2021 (in millions):
The
following table presents a reconciliation of restructuring and restructuring-related costs for restructuring projects for the three and six months ended June 30, 2022 and July 3, 2021, respectively (in millions):
The
following table presents the allocation of restructuring and restructuring-related costs by segment for the three and six months ended June 30, 2022 and July 3, 2021 (in millions):
The
Company's current restructuring activities are expected to continue through 2023. The Company expects to record aggregate future charges of approximately $i45.7 million in 2022. The Company continues to evaluate operating efficiencies and anticipates incurring additional costs in future periods in connection with these activities.
16.
iSUBSEQUENT EVENT
The Company has evaluated subsequent events since June 30, 2022, the date of these financial statements, and is not aware of any events to disclose.
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this Item 2 to “we,”“us,”“our” or the “Company” refer collectively to Regal Rexnord Corporation and 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.
Operating Segments
Our company is comprised of four operating segments: Commercial Systems, Industrial Systems, Climate Solutions and Motion Control Solutions.
A description of our four operating segments is as follows:
•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.
37
•Climate Solutions segment designs and produces small motors, electronic variable speed controls and air moving solutions serving markets including 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.
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;
38
(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.
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 Pandemic
COVID-19 evolved during 2020 into a global pandemic,
resulting in a severe global health crisis that drove 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 adjustments to the business as necessary to address any limitations or negative impacts.
Rexnord and Arrowhead Transactions
On
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 Elkay Water Solutions Corporation (formerly known as Rexnord Corporation) (“Zurn”) in a Reverse Morris Trust transaction (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, $0.01 par 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
39
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, $0.01 par 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.
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 of record as of October 1, 2021 received a special dividend of $6.99 per share (or approximately $284.4 million in aggregate) pursuant to a special dividend in connection with the Rexnord Transaction.
In
connection with the Rexnord Transaction, we entered into certain financing arrangements, which are described below under “Liquidity and Capital Resources”.
On November 23, 2021, we acquired Arrowhead Systems, LLC, ("Arrowhead") for $315.6 million in cash, net of $1.1 million of cash acquired (the "Arrowhead Transaction"). Arrowhead is a global leader in providing industrial process automation solutions, including conveyors and (de)palletizers to the food & beverage, aluminum can, and consumer staples end markets, among others. Arrowhead is a division of our Motion Control Solutions segment, and its financials have been included in results for that segment from the date of acquisition.
Change in Fiscal Year End
At
a meeting of the Board of Directors of Regal Rexnord Corporation on 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 31 to 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
As of January
2, 2022, we changed our methodology for valuing certain inventories to the first-in, first-out ("FIFO") cost method from the last-in, first-out ("LIFO") cost method. The effects of this change have been retrospectively applied to all periods presented.
Outlook
We are forecasting high single digit organic sales growth. We expect to see positive impacts from our transactions, price realization and from our new products and other growth initiatives.
Net sales increased $462.5 million or 52.1% for the second quarter
2022 compared to the second quarter 2021. The increase consisted of positive impact from acquisitions of 42.2% and positive organic sales of 11.8% offset by negative foreign currency translation of 1.9%. 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 $175.8 million or 68.2% for the second quarter 2022 as compared to the second 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 second quarter 2022 increased $96.1 million or 67.4% as compared to the second 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 second quarter 2022 were $301.9 million, an increase of $32.6 million or 12.1% as compared to the second quarter 2021. The increase consisted of positive organic sales of 14.6% offset by negative foreign currency translation of 2.4%. The increase was primarily driven by strong growth in general industry in North America as well as solid growth in the pool pump business. Gross profit increased $12.6 million or 18.1% as compared to the second quarter
40
2021. The increase in gross profit was primarily driven by the increase in price partially offset by higher material costs due to inflation. Total operating expenses for the second quarter 2022 were $40.4 million compared to $42.1 million in the second quarter 2021. The $1.7 million or 4.0%
decrease was primarily driven by foreign exchange gains.
Industrial Systems segment net sales for the second quarter 2022 were $154.7 million, an increase of $9.5 million or 6.5% as compared to the second quarter 2021. The increase consisted of positive organic sales of 9.4% offset by negative foreign currency translation of 2.9%. The increase was primarily driven by a higher demand for industrial motors and generators in North America. Gross profit increased $16.6 million or 60.6% as compared to the second 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 second quarter 2022 and 2021 were $22.8 million and $23.1 million, respectively. The slight decrease in operating expenses was primarily driven by foreign exchange gains.
Climate Solutions segment
net sales were $293.5 million, an increase of $36.2 million or 14.1% as compared to the second quarter 2021. The increase consisted of positive organic sales of 14.8% offset by negative foreign currency translation of 0.7%. The increase was primarily due to continued strong demand in North American residential HVAC and combustion markets and recovering demand in EMEA. Gross profit decreased $0.9 million or 1.2% compared to the second quarter 2021. The decrease in gross profit was primarily driven by material and freight inflation, partially offset by increased volume, favorable mix and 80/20 actions. Total operating expenses for the second quarter 2022 were $30.3 million compared to $27.5 million in the second 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 second quarter 2022
were $599.3 million, an increase of $384.2 million or 178.6% compared to second quarter 2021 net sales of $215.1 million. The increase consisted of positive impact from acquisitions of 174.1% and positive organic sales of 6.4% offset by negative foreign currency of 1.9%. The increase was primarily driven by the acquisitions of the Rexnord PMC and Arrowhead businesses in addition to strength in alternative energy, the North America general industrial market, the conveying business, and improving demand in Europe in addition to meaningful share gains tied to our industrial powertrain offering. Gross profit for the second quarter 2022 increased $147.5 million or 172.9%. 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 second quarter 2022 increased $95.3 million as compared to the second quarter 2021,
primarily due to the acquisitions of the Rexnord PMC and Arrowhead businesses.
Net sales increased $946.9 million or 55.7% for the six months ended June 30, 2022 compared to the six months ended July 3, 2021. The increase consisted of positive impact of acquisitions of 43.6% and positive organic sales of 13.4% offset by negative foreign currency translation of 1.4%. 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 $347.9 million or 68.6% for the six months ended June 30,
2022 as compared to the six months ended July 3, 2021. The increase in gross profit was driven by increase in volume, the acquisitions of the Rexnord PMC and Arrowhead businesses and 80/20 actions, partially offset by increased freight and material costs. Total operating expenses for the six months ended June 30, 2022 increased $199.8 million or 68.7% as compared to the six months ended July 3, 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 six months ended June 30, 2022 were $595.2 million, an increase of $88.9 million or 17.6% as compared to the six months
ended July 3, 2021. The increase consisted of positive organic sales of 19.4% and offset by negative foreign currency translation of 1.8%. The increase was primarily driven by strong growth in general industry in North America as well as solid gains in the pool pump business. Gross profit increased $40.1 million or 29.4% as compared to the six months ended July 3, 2021. The increase in gross profit was primarily driven by the increase in price partially offset by higher material costs due to inflation. Total operating expenses for the six months ended June 30, 2022 were $81.8 million compared to $80.1 million in the six months ended July 3, 2021. The $1.7 million or 2.1% increase was primarily driven by higher employee related wage and benefit costs partially offset by foreign
exchange gains.
Industrial Systems segment net sales for the six months ended June 30, 2022 were $299.4 million, an increase of $17.8 million or 6.3% as compared to the six months ended July 3, 2021. The increase consisted of positive organic sales of 8.3% and offset by negative foreign currency translation of 2.0%. 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 $19.9 million or 35.9% for the six months ended June 30, 2022 as compared to the six months ended July 3, 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 six months ended June 30, 2022 and July 3, 2021 were $46.2 million and $46.2 million, respectively.
41
Climate Solutions segment net sales were $567.4 million, an increase of $71.0 million or 14.3% as compared to the six months ended July 3, 2021. The increase consisted of positive organic sales of 14.8% offset by negative foreign currency translation of 0.5%. The increase was primarily due to continued strong demand in North American residential HVAC market and combustion markets and recovering demand in EMEA. Gross profit increased $6.9 million or 4.6% compared to the six months ended July 3,
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 six months ended June 30, 2022 were $62.0 million compared to $58.2 million in the six months ended July 3, 2021. The increase was primarily due to higher expenses related to commissions (higher volume), travel, compensation and benefits.
Motion Control Solutions segment net sales for the six months ended June 30, 2022 were $1,185.9 million, an increase of $769.2 million or 184.6% compared to six months ended July 3, 2021 net sales of $416.7 million. The increase consisted of positive impact from acquisitions of 178.0% and positive
organic sales of 8.1% offset by negative foreign currency of 1.4%. The increase was primarily driven by the acquisitions of the Rexnord PMC and Arrowhead businesses in addition to strength in alternative energy, the North America general industrial market, the conveying business, and improving demand in Europe in addition to meaningful share gains tied to our industrial powertrain offering. Gross profit for the six months ended June 30, 2022 increased $281.0 million or 170.4%. 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 six months ended June 30, 2022 increased $194.3 million as compared to the six months ended July 3, 2021, primarily due to the
acquisitions of the Rexnord PMC and Arrowhead businesses.
Less: Net Income
Attributable to Noncontrolling Interests
1.2
1.6
2.7
3.0
Net Income Attributable to Regal Rexnord Corporation
$
142.0
$
84.4
$
267.6
$
153.3
The
effective tax rate for the three months ended June 30, 2022 was 22.1% versus 19.3% for the three months ended July 3, 2021. The effective tax rate for the six months ended June 30, 2022 was 22.1% versus 21.1% for the six months ended July 3, 2021. The effective tax rate for the three and six months ended June 30, 2022 was higher than the same period in the prior year primarily driven by the jurisdictional mix of earnings related to the impact of the Rexnord transaction in fiscal 2021.
43
Liquidity
and Capital Resources
General
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 provided by operating activities was $104.9 million for the six months ended June 30, 2022, a $31.7 million decrease from the six months ended July 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 six months ended June 30, 2022 compared to the six months ended July 3, 2021.
Cash flow used in investing activities was $62.1 million for the six months ended June 30, 2022 as compared to cash flow used in investing activities of $26.3 million for the six months ended July 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 $10.2 million for the six months ended June 30, 2022, compared
to $102.1 million used in financing activities for the six months ended July 3, 2021. We had net debt borrowings of $249.7 million during the six months ended June 30, 2022, compared to net debt repayments of $50.2 million during the six months ended July 3, 2021. There were $184.0 million share repurchases for the six months ended June 30, 2022, compared to no shares repurchases for the six months ended July 3, 2021. There were $44.3 million of dividends paid for the six months ended June 30, 2022, compared to $24.4 million of dividends in the prior year. There were $6.5 million in financing fees paid for the six months ended June 30,
2022, compared to $17.0 million of fees in the prior year.
Our working capital was $1,976.7 million at June 30, 2022, compared to $1,713.3 million at January 1, 2022. At June 30, 2022 and 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 cash, accounts receivables and inventory offset by an increase in accounts payable.
The following table presents selected financial information and statistics as of June 30, 2022
and January 1, 2022 (in millions):
As
of June 30, 2022, $686.7 million of 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 States to 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.
Credit Agreement
On 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”).
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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, 2022 to 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.
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 June 30, 2022, we had $560.0 million of borrowings
under the Multicurrency Revolving Facility, $0.1 million of standby letters of credit issued under the facility, and $439.8 million of available borrowing capacity. For the three months ended June 30, 2022 and July 3, 2021 under the Multicurrency Revolving Facility, the average daily balance in borrowings was $730.0 million and $2.4 million, respectively, and the weighted average interest rate was 2.1% and 1.4%, respectively. For the six months ended June 30, 2022 and July 3, 2021 under the Multicurrency Revolving Facility, the average daily balance in borrowings was $765.2 million and $4.9 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 June 30, 2022, we had $486.8 million of 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 June 30, 2022 was 2.1%. The weighted average interest rate on the Land Term Facility for six months ended June 30, 2022 was 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 billion in 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.
Senior Notes
On April 7, 2022, we entered into a Note Purchase Agreement with certain institutional accredited investors (the "Note Purchase Agreement") for the issuance and sale of $500,000,000 aggregate principal amount of 3.90% senior
notes due April 7, 2032 (the "Senior Notes"), in an offering exempt from the registration requirements of the Securities Act of 1933, as amended. We expect to use the net proceeds from the offering for general corporate purposes.
The Note Purchase Agreement is subject to customary and market provisions. Our subsidiaries that provided a guaranty of the obligations under the Credit Agreement also entered into subsidiary guaranty agreements with respect to the obligations under the Note Purchase Agreement. We may, at our option, prepay at any time all, or from time to time any part of, the Senior Notes, subject to a make-whole amount and certain other restrictions set forth in the Note Purchase Agreement.
Compliance
with Financial Covenants
The Credit Agreement require us to meet specified financial ratios and to satisfy certain financial condition tests. The Note Purchase Agreement contains financial covenants consistent with the financial covenants in the Credit Agreement. We were in compliance with all financial covenants contained in the Credit Agreement and Note Purchase Agreement as of June 30, 2022.
Other Notes Payable
At June 30, 2022, other notes payable of approximately $75.2 million were outstanding with a weighted average interest rate of 5.1%. At January 1, 2022, other notes payable of approximately $78.7 million
were outstanding with a weighted average rate of 5.2%.
45
Other Disclosures
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 $2,125.9 million and $1,918.5 million as of June 30, 2022 and 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 year ended January 1, 2022, have not materially changed since that report was filed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk relating to our operations due to changes in interest rates, foreign currency exchange rates and commodity prices of purchased raw materials. We manage the exposure to these risks through a combination of normal operating and financing activities and derivative financial instruments such as interest rate swaps, commodity cash flow hedges
and foreign currency forward exchange contracts. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which prohibit the use of financial instruments for speculative purposes.
Generally hedges are recorded on the balance sheet at fair value and are accounted for as cash flow hedges, with changes in fair value recorded in Accumulated Other comprehensive Income (Loss) (“AOCI”) in each accounting period. An ineffective portion of the hedges change in fair value, if any, is recorded in earnings in the period of change.
Interest Rate Risk
We are exposed to interest rate risk on certain of our outstanding debt obligations used to finance our operations and acquisitions. Loans under the Credit
Agreement bear interest at variable rates plus a margin, based on our consolidated net leverage ratio. At June 30, 2022, excluding the impact of interest rate swaps, we had $575.3 million of fixed rate debt and $1,596.7 million of variable rate debt. We utilize interest rate swaps to manage fluctuations in cash flows resulting from exposure to interest rate risk on forecasted variable rate interest payments.
We have floating rate borrowings, which expose us to variability in interest payments due to changes in interest rates. A hypothetical 10% change in our weighted average borrowing rate on outstanding variable rate debt at June 30, 2022 would result in a $2.0 million change in after-tax annualized earnings. We
entered into two forward starting pay fixed/receive floating non-amortizing interest rate swaps in June 2020, with a total notional amount of $250.0 million to manage fluctuations in cash flows from interest rate risk related to floating rate interest. These swaps were terminated in March 2022 upon closing the Credit Agreement. The cash proceeds of $16.2 million received to settle the terminated swaps will be recognized into interest expense via the effective interest rate method through July 2025 when the terminated swaps were scheduled to expire. We also entered into two forward starting pay fixed/receive floating non-amortizing interest rate swaps in May 2022, with a total notional amount of $250.0 million to manage fluctuations in cash flows from interest rate risk related to floating rate interest. Upon inception, the swaps were designated as a cash flow hedges against forecasted interest payments with gains and losses, net of tax, measured on an ongoing basis,
recorded in AOCI.
Details regarding the instruments as of June 30, 2022 are as follows (in millions):
Instrument
Notional Amount
Maturity
Rate Paid
Rate Received
Fair Value
Swap
$250.0
March
2027
3.0%
SOFR (3 month)
$
(1.8)
As of June 30, 2022, the $1.8 million interest rate swap liability was included in Other Noncurrent Liabilities. At January 1, 2022, a $5.3 million interest rate swap asset was included in Other Noncurrent Assets. There was an unrealized gain of $11.0 million (a $12.3 million gain on the terminated swaps and a $1.3 million loss on the active swaps) and $4.0 million, net of tax, at June 30, 2022 and January 1,
2022, respectively, that was recorded in AOCI for the effective portion of the hedges.
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Foreign Currency Risk
We are exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances of foreign subsidiaries, intercompany loans with foreign subsidiaries and transactions denominated in foreign currencies. Our objective is to minimize our exposure to these risks through a combination of normal operating activities and the utilization of foreign currency exchange contracts
to manage our exposure on the forecasted transactions denominated in currencies other than the applicable functional currency. Contracts are executed with credit worthy banks and are denominated in currencies of major industrial countries. We do not hedge our exposure to the translation of reported results of foreign subsidiaries from local currency to United States dollars.
As of June 30, 2022, derivative currency assets (liabilities) of $9.0 million, $0.8 million, $(3.5) million and $(0.5) million, are recorded in Prepaid Expenses and Other Current Assets, Other Noncurrent Assets, Other Accrued Expenses and Other Noncurrent Liabilities, respectively.
As of January 1, 2022, derivative currency assets (liabilities) of $8.6 million, $0.7 million and $(1.7) million, are recorded in Prepaid Expenses and Other Current Assets, Other Noncurrent Assets and Other Accrued Expenses, respectively. The unrealized gains on the effective portions of the hedges of $4.4 million net of tax, and $5.8 million net of tax, as of June 30, 2022 and January 1, 2022 respectively, were recorded in AOCI. At June 30, 2022, we had $2.4 million, net of tax, of derivative currency gains on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings. At January 1, 2022,
we had $1.9 million, net of tax, currency gains on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings.
The following table quantifies the outstanding foreign exchange contracts intended to hedge non-US dollar denominated receivables and payables and the corresponding impact on the value of these instruments assuming a hypothetical 10% appreciation/depreciation of their counter currency on June 30, 2022 (in millions):
Gain (Loss) From
Currency
Notional
Amount
Fair Value
10% Appreciation of Counter Currency
10% Depreciation of Counter Currency
Chinese Renminbi
$
249.5
$
(1.4)
$
25.0
$
(25.0)
Mexican
Peso
204.1
8.3
20.4
(20.4)
Euro
208.7
0.2
20.9
(20.9)
Indian
Rupee
79.4
(1.1)
7.9
(7.9)
Australian Dollar
14.1
(0.2)
1.4
(1.4)
British
Pound
1.8
—
0.2
(0.2)
Thai Baht
0.5
—
0.1
(0.1)
Gains
and losses indicated in the sensitivity analysis would be offset by gains and losses on the underlying forecasted non-US dollar denominated cash flows.
Commodity Price Risk
We periodically enter into commodity hedging transactions to reduce the impact of changing prices for certain commodities such as copper and aluminum based upon forecasted purchases of such commodities. The contract terms of commodity hedge instruments generally mirror those of the hedged item, providing a high degree of risk reduction and correlation.
Derivative commodity assets (liabilities) of $0.5 million, $(19.6) million and $(3.4) million were recorded in Prepaid Expenses and Other Current Assets, Other Accrued Expenses and Other Noncurrent Liabilities at June 30,
2022. Derivative commodity assets of $9.3 million, $0.1 million, $(1.2) million and $(0.6) million were recorded in Prepaid Expenses and Other Current Assets, Other Noncurrent Assets, Other Accrued Expenses and Other Noncurrent Liabilities, respectively as of at January 1, 2022. The unrealized loss on the effective portion of the hedges of $(16.9) million net of tax and the unrealized gain on the effective portion of the hedges of $5.6 million net of tax, as of June 30, 2022 and January 1, 2022, respectively, was recorded in AOCI. At June 30, 2022, we had $2.0 million, net of tax, of derivative commodity gains on closed hedge instruments in AOCI that will
be realized in earnings when the hedged items impact earnings. At January 1, 2022, there was an additional $3.7 million, net of tax, of derivative commodity gain on closed hedge instruments in AOCI that were realized into earnings when the hedged items impacted earnings.
47
The following table quantifies the outstanding commodity contracts intended to hedge raw material commodity prices and the corresponding impact on the value of these instruments assuming a hypothetical 10% appreciation/depreciation of their prices on June 30, 2022 (in millions):
Gain (Loss) From
Commodity
Notional
Amount
Fair Value
10% Appreciation of Commodity Prices
10% Depreciation of Commodity Prices
Copper
$
145.3
$
(21.4)
$
14.5
$
(14.5)
Aluminum
7.1
(1.1)
0.7
(0.7)
Gains
and losses indicated in the sensitivity analysis would be offset by the actual prices of the commodities.
The net AOCI hedging component balance of $2.9 million of gains at June 30, 2022 includes $(2.1) million of net current deferred losses expected to be realized in the next twelve months. The gain/loss reclassified from AOCI into earnings on such derivatives will be recognized in the same period in which the related item affects earnings.
Counterparty Risk
We are exposed to credit losses in the event of non-performance by the counterparties to various financial agreements, including our interest rate swap agreements, foreign currency exchange contracts
and commodity hedging transactions. We manage exposure to counterparty credit risk by limiting our counterparties to major international banks and financial institutions meeting established credit guidelines and continually monitoring their compliance with the credit guidelines. We do not obtain collateral or other security to support financial instruments subject to credit risk. We do not anticipate non-performance by our counterparties, but cannot provide assurances.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective to ensure that (a) information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (b) information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal
Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in the legal matters described in Part I,
Item 3 in our Annual Report on Form 10-K for the year ended January 1, 2022, which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
Our business and financial results are subject to numerous risks and uncertainties. These risks and uncertainties have not changed materially from those reported in Part I, Item 1A in our Annual Report on Form 10-K for the year ended January 1, 2022, as supplemented by Part II, Item 1A in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, which are
incorporated herein by reference.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table contains detail related to the repurchase of our common stock based on the date of trade during the quarter ended June 30, 2022.
2022
Fiscal Month
Total Number of Shares Purchased
Average Price Paid per Share
Total Value of Shares Purchased as a Part of Publicly Announced Plans or Programs
Maximum Value of Shares that May be Purchased Under the Plans or Programs
Apr 1 to Apr 30
—
$
—
$
—
$
319,982,853
May
1 to May 31
396,996
125.97
50,007,727
269,975,126
Jun 1 to Jun 30
178,046
110.75
19,717,824
250,257,302
575,042
$
69,725,551
Under
our equity incentive plans, participants may pay the exercise price or satisfy all or a portion of the federal, state and local withholding tax obligations arising in connection with plan awards by electing to (a) have the Company withhold shares of common stock otherwise issuable under the award, (b) tender back shares received in connection with such award or (c) deliver other previously owned shares of common stock, in each case having a value equal to the exercise price or the amount to be withheld. During the quarter ended June 30, 2022, we purchased 575,042 shares or $69.8 million in shares pursuant to the October 26, 2021 repurchase authorization.
At a meeting of the
Board of Directors on October 26, 2021, the Company's Board of Directors approved the authorization to purchase up to $500.0 million of shares under the Company's share repurchase program. The new authorization has no expiration date.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.