Regal Beloit(RRX) - 2022 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Condensed Consolidated Financial Statements (Unaudited) The unaudited condensed consolidated financial statements for the period ended September 30, 2022, show significant year-over-year growth in revenue and net income, largely driven by recent acquisitions Condensed Consolidated Statements of Income The income statement reflects substantial increases in net sales, gross profit, and net income for the three and nine months ended September 30, 2022 Key Income Statement Data (in Millions) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Oct 2, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Oct 2, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,325.3 | $892.7 | $3,973.2 | $2,593.7 | | Gross Profit | $407.7 | $268.1 | $1,263.1 | $775.6 | | Income from Operations | $173.9 | $120.9 | $538.7 | $337.6 | | Net Income Attributable to Regal Rexnord | $119.8 | $79.8 | $387.4 | $233.1 | | Diluted EPS | $1.80 | $1.95 | $5.76 | $5.69 | Condensed Consolidated Balance Sheets The balance sheet shows an increase in cash and inventories, a slight decrease in total assets, and an increase in long-term debt as of September 30, 2022 Key Balance Sheet Data (in Millions) | Metric | September 30, 2022 | January 1, 2022 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $723.6 | $672.8 | | Inventories | $1,361.5 | $1,192.4 | | Goodwill | $3,968.8 | $4,039.2 | | Total Assets | $10,249.0 | $10,367.4 | | Long-Term Debt | $2,165.2 | $1,913.6 | | Total Equity | $6,171.8 | $6,408.2 | Condensed Consolidated Statements of Cash Flows Cash flow from operating activities decreased for the nine months ended September 30, 2022, while cash and cash equivalents at period-end increased Cash Flow Summary (in Millions) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Oct 2, 2021 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $238.0 | $258.1 | | Net Cash Used in Investing Activities | $(84.1) | $(37.5) | | Net Cash Used in Financing Activities | $(41.4) | $(500.8) | | Effect of Exchange Rates on Cash | $(61.7) | $(2.5) | | Net Increase (Decrease) in Cash | $50.8 | $(282.7) | | Cash and Cash Equivalents at End of Period | $723.6 | $328.6 | Notes to Condensed Consolidated Financial Statements Key notes include a fiscal year-end change, a retrospective inventory accounting method change, and details on significant acquisitions - Effective in fiscal year 2022, the company changed its fiscal year-end to a calendar year ending December 31[30] - As of January 2, 2022, the company changed its inventory valuation method from LIFO to FIFO, retrospectively applying the change to all presented periods[31][34] - On October 4, 2021, the company completed its combination with the Rexnord PMC business in a Reverse Morris Trust transaction, with total consideration of approximately $4.0 billion[55][61] - On November 23, 2021, the company acquired Arrowhead Systems, LLC for $315.6 million in cash[71] - On October 26, 2022, the company entered into a definitive agreement to acquire Altra Industrial Motion Corp. for an enterprise value of approximately $4.95 billion[141] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant increase in net sales for Q3 2022 primarily to the acquisitions of Rexnord PMC and Arrowhead, alongside organic sales growth Q3 2022 vs Q3 2021 Performance Summary | Metric | Q3 2022 | Q3 2021 | Change | Drivers | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,325.3M | $892.7M | +48.5% | Acquisitions (+42.8%), Organic Growth (+8.2%), FX (-2.5%) | | Gross Profit | $407.7M | $268.1M | +52.1% | Acquisitions, price realization, offset by inflation & restructuring | | Operating Income | $173.9M | $120.9M | +43.8% | Acquisitions, offset by higher operating expenses | - The Motion Control Solutions segment's net sales surged by 185.5% in Q3 2022, primarily due to the acquisitions of the Rexnord PMC and Arrowhead businesses[174] - The company expects to continue to see high single-digit organic sales growth for the full year 2022, driven by price realization and growth initiatives, despite inflation and supply chain challenges[169] - Cash flow from operations decreased to $238.0 million for the first nine months of 2022 from $258.1 million in the prior year, mainly due to an increase in working capital[183] - In connection with the pending Altra acquisition, the company has secured a debt commitment for a senior bridge loan facility of approximately $5.5 billion[142][190] Quantitative and Qualitative Disclosures about Market Risk The company manages market risks from interest rates, foreign currency exchange rates, and commodity prices through derivative financial instruments - The company manages market risk through derivative instruments, with policies prohibiting their use for speculative purposes[204] - A hypothetical 10% change in the weighted average borrowing rate on the $1.63 billion of variable rate debt would result in a $7.2 million change in after-tax annualized earnings[207][208] Foreign Exchange Contract Exposure (Notional Amounts, in Millions) | Currency | Notional Amount (USD) | | :--- | :--- | | Chinese Renminbi | $201.4 | | Mexican Peso | $181.0 | | Euro | $204.7 | | Indian Rupee | $49.3 | Commodity Contract Exposure (Notional Amounts, in Millions) | Commodity | Notional Amount (USD) | | :--- | :--- | | Copper | $126.4 | | Aluminum | $5.5 | Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal controls - 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 reporting period[219] - No material changes to the company's internal control over financial reporting were identified during the third fiscal quarter of 2022[220] PART II — OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered sales of equity securities, and exhibits Legal Proceedings There have been no material changes in the legal matters previously disclosed in the company's Annual Report on Form 10-K for the year ended January 1, 2022 - No material changes in legal proceedings have occurred since the filing of the 2021 Annual Report on Form 10-K[222] Risk Factors The company has identified new significant risks related to the pending acquisition of Altra Industrial Motion Corp., including transaction completion, increased debt, and integration challenges - The consummation of the Altra Transaction is subject to numerous conditions, including shareholder and regulatory approvals, and there is no assurance it will be completed[224][225] - The company expects to incur substantial new indebtedness (up to ~$7.5 billion) to fund the Altra Transaction, which will significantly increase debt levels and service obligations[228][229] - Potential difficulties in integrating Altra's business, systems, and personnel could prevent the company from realizing the anticipated benefits and synergies of the acquisition[232][233] - The company will incur significant one-time costs for financing, transaction, and integration related to the Altra acquisition, which could adversely affect liquidity and operating results[236] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2022, the company repurchased 391,991 shares of common stock for $55.3 million under its authorized share repurchase program Share Repurchase Activity (Q3 2022) | Period | Total Shares Purchased | Average Price Paid per Share | Total Value (in millions) | | :--- | :--- | :--- | :--- | | Jul 2022 | 47,953 | $110.25 | $5.3 | | Aug 2022 | 344,038 | $145.35 | $50.0 | | Sep 2022 | — | — | — | | Total Q3 | 391,991 | N/A | $55.3 | - The share repurchases were conducted under the $500.0 million authorization approved by the Board of Directors in October 2021, which has no expiration date[241] Exhibits This section lists the exhibits filed with the Form 10-Q, including separation agreements and required certifications - Exhibits filed include separation and retirement agreements for John C. Kunze[243] - Required CEO and CFO certifications pursuant to Section 302 and Section 1350 of the Sarbanes-Oxley Act are included as exhibits[243]