Regal Beloit(RRX) - 2022 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION This section encompasses the company's unaudited financial statements, management's analysis, market risk disclosures, and internal controls Item 1 — Condensed Consolidated Financial Statements (Unaudited) Unaudited condensed consolidated financial statements show significant increases in net sales and income, reflecting recent acquisitions and an accounting method change Q1 2022 vs Q1 2021 Performance Summary | Metric | Three Months Ended March 31, 2022 | Three Months Ended April 3, 2021 | | :--- | :--- | :--- | | Net Sales | $1,298.5 million | $814.1 million | | Gross Profit | $421.9 million | $249.8 million | | Income from Operations | $169.9 million | $101.5 million | | Net Income Attributable to Regal Rexnord | $125.6 million | $68.9 million | | Diluted EPS | $1.85 | $1.68 | - The company changed its inventory valuation method from Last-In, First-Out (LIFO) to First-In, First-Out (FIFO) as of January 2, 2022, believing it provides a better matching of costs and revenues and improves comparability, with this change applied retrospectively to all presented periods[29][31] - Effective for fiscal year 2022, the company changed its fiscal year-end from a 52-53 week structure to a calendar year ending on December 31[28] Notes to Condensed Consolidated Financial Statements This section provides detailed notes to the financial statements, including information on acquisitions, goodwill, financing activities, and tax rates - On October 4, 2021, the company completed its combination with the Rexnord Process & Motion Control (PMC) business in a Reverse Morris Trust transaction, with the total preliminary purchase price approximately $4.0 billion[46][52] - On November 23, 2021, the company acquired Arrowhead Systems, LLC for $315.6 million in cash, now part of the Motion Control Solutions segment[62] Goodwill by Segment (as of March 31, 2022) | Segment | Goodwill (in millions) | | :--- | :--- | | Commercial Systems | $428.9 | | Industrial Systems | $128.7 | | Climate Solutions | $330.4 | | Motion Control Solutions | $3,163.3 | | Total | $4,051.3 | - On March 28, 2022, the company entered into a Second Amended and Restated Credit Agreement, which includes a $550.0 million Term Facility, a $486.8 million Land Term Facility, and a $1.0 billion Multicurrency Revolving Facility, all maturing in 2027[81][82] - During Q1 2022, the company repurchased 731,194 shares of its common stock for $114.2 million under its authorized share repurchase program[93] - The effective tax rate for Q1 2022 was 22.2%, down from 23.3% in Q1 2021, primarily due to additional tax reserves for foreign earnings repatriation in the prior-year period[97] Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses significant Q1 2022 net sales growth from acquisitions and organic expansion, alongside decreased operating cash flow due to increased working capital Q1 2022 Net Sales Growth Components | Component | Percentage Change | | :--- | :--- | | Acquisitions | +45.1% | | Organic Sales | +15.2% | | Foreign Currency Translation | -0.8% | | Total Net Sales Increase | +59.5% | Segment Net Sales (Q1 2022 vs Q1 2021) | Segment | Q1 2022 Net Sales (in millions) | Q1 2021 Net Sales (in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Commercial Systems | $293.3 | $237.0 | +23.8% | | Industrial Systems | $144.7 | $136.4 | +6.1% | | Climate Solutions | $273.9 | $239.1 | +14.6% | | Motion Control Solutions | $586.6 | $201.6 | +191.0% | - Cash flow used in operating activities was $5.9 million, a decrease of $55.4 million from the prior year, primarily due to an increase in working capital[162] - Working capital increased to $1,915.8 million at March 31, 2022, from $1,713.3 million at January 1, 2022, mainly due to higher accounts receivable and inventory levels[165] Item 3 — Quantitative and Qualitative Disclosures about Market Risk The company discloses its exposure to market risks from interest rates, foreign currency, and commodity prices, and its use of derivatives to manage these risks - The company manages interest rate risk on its $1,992.0 million of variable rate debt, where a hypothetical 10% change in the average borrowing rate would result in a $3.5 million change in after-tax annualized earnings[180][181] - Foreign currency risk is managed using forward exchange contracts, with outstanding contracts as of March 31, 2022, having notional amounts of $264.0 million for Chinese Renminbi, $210.4 million for Mexican Peso, and $209.3 million for Euro, among others[183][185] - Commodity price risk for materials like copper and aluminum is hedged with forward contracts, including a notional amount of $158.6 million for copper outstanding at quarter-end[186][188] Item 4 — Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[191] - No changes in internal control over financial reporting occurred during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls[192] PART II — OTHER INFORMATION This section provides updates on legal proceedings, discusses additional risk factors, details equity security sales, and lists filed exhibits Item 1 — Legal Proceedings The company reports no material changes in its legal proceedings since the filing of its Annual Report on Form 10-K - There have been no material changes in the legal matters described in the company's Annual Report on Form 10-K for the year ended January 1, 2022[194] Item 1A — Risk Factors This section supplements existing risk factors, highlighting risks from significant international operations and the potential impacts of the Russia-Ukraine conflict - The company highlights risks associated with its significant international manufacturing presence, with approximately 24,000 of its 30,000 total associates and 61 principal facilities located outside the U.S[196] - The conflict between Russia and Ukraine is cited as a specific risk that could negatively impact the global economy, leading to supply chain disruptions, significant inflationary pressure on raw materials, and other adverse effects on the company's financial condition[197][198] Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchases during Q1 2022, totaling 731,194 shares for $114.2 million, under its authorized repurchase program Share Repurchases in Q1 2022 | Period | Total Shares Purchased | Average Price Paid per Share | Total Value (in millions) | | :--- | :--- | :--- | :--- | | Jan 2022 | 108,867 | $153.64 | $16.7 | | Feb 2022 | 224,970 | $156.62 | $35.2 | | Mar 2022 | 397,357 | $156.73 | $62.3 | | Total | 731,194 | - | $114.2 | - The Board of Directors approved a $500.0 million share repurchase authorization on October 26, 2021, which has no expiration date[201] Item 6 — Exhibits This section lists the exhibits filed with the Form 10-Q, including the credit agreement, accounting principle change letter, and CEO/CFO certifications - Key exhibits filed with this report include the Second Amended and Restated Credit Agreement, a preferability letter for the change in inventory accounting, and CEO/CFO certifications pursuant to the Sarbanes-Oxley Act[203]