Regal Beloit(RRX) - 2023 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the first quarter of 2023 Condensed Consolidated Financial Statements (Unaudited) For Q1 2023, Regal Rexnord reported a net loss of $5.9 million, a significant decline from the prior year, driven by decreased sales and increased expenses due to the Altra acquisition, which also expanded the balance sheet with increased assets and debt Condensed Consolidated Statements of Income The company reported a net loss of $5.9 million in Q1 2023, a significant decrease from $125.6 million net income in Q1 2022, primarily due to higher interest expenses Condensed Consolidated Statements of Income (Q1 2023 vs Q1 2022) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net Sales | $1,224.1 M | $1,298.5 M | | Gross Profit | $398.1 M | $421.9 M | | Income from Operations | $68.9 M | $169.9 M | | Income before Taxes | $6.8 M | $163.3 M | | Net (Loss) Income Attributable to Regal Rexnord | $(5.9) M | $125.6 M | | (Loss) Earnings Per Share (Diluted) | $(0.09) | $1.85 | - Interest expense increased significantly to $95.4 million in Q1 2023 from $9.0 million in Q1 2022, largely due to financing for the Altra acquisition[13] Condensed Consolidated Balance Sheets Total assets increased to $16.5 billion from $10.3 billion, and long-term debt rose to $7.2 billion, primarily due to the Altra acquisition Key Balance Sheet Items (As of March 31, 2023 vs Dec 31, 2022) | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $4,109.1 M | $3,000.5 M | | Goodwill | $6,526.7 M | $4,018.8 M | | Intangible Assets, Net | $4,414.6 M | $2,229.9 M | | Total Assets | $16,547.4 M | $10,268.9 M | | Long-Term Debt | $7,210.6 M | $1,989.7 M | | Total Equity | $6,455.7 M | $6,422.6 M | - The significant increase in assets, goodwill, intangible assets, and long-term debt is primarily attributable to the acquisition of Altra Industrial Motion Corp. in March 2023[17][39] Condensed Consolidated Statements of Cash Flows Operating cash flow improved to $106.2 million, while investing activities saw a $4.87 billion outflow and financing activities a $5.2 billion inflow, both driven by the Altra acquisition Cash Flow Summary (Q1 2023 vs Q1 2022) | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net Cash Provided by (Used in) Operating Activities | $106.2 M | $(5.9) M | | Net Cash Used in Investing Activities | $(4,865.5) M | $(47.0) M | | Net Cash Provided By Financing Activities | $5,203.6 M | $3.7 M | | Net Increase (Decrease) in Cash | $454.8 M | $(48.1) M | - Cash used in investing activities surged to $4.87 billion, primarily due to $4.85 billion spent on business acquisitions, net of cash acquired, reflecting the Altra transaction[22] - Cash from financing activities was $5.2 billion, driven by proceeds from long-term borrowings of $5.53 billion used to fund the Altra acquisition[22] Notes to Condensed Consolidated Financial Statements The company realigned its operating segments and completed the Altra Industrial Motion Corp. acquisition for approximately $5.1 billion, financed by $4.7 billion in Senior Notes and an upsized Term Loan - Effective Q1 2023, in conjunction with the Altra acquisition, the company realigned its operating segments into: Industrial Powertrain Solutions (IPS), Power Efficiency Solutions (PES), Automation & Motion Control (AMC), and Industrial Systems; prior period information has been reclassified accordingly[28] - On March 27, 2023, the company completed its acquisition of Altra Industrial Motion Corp. for a preliminary purchase price of approximately $5.1 billion[39][42] - To finance the Altra transaction, the company issued $4.7 billion in Senior Notes in January 2023 and upsized its Term Loan facility by $840.0 million in March 2023[79][84] Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales decreased by 5.7% in Q1 2023 due to organic declines and currency effects, with varied segment performance and significant acquisition-related costs impacting operating income Overview and Segment Realignment The company realigned its business into four new operating segments following the Altra acquisition and is considering strategic alternatives for its Industrial Systems segment - Following the Altra acquisition, the company realigned its business into four new operating segments: Industrial Powertrain Solutions (IPS), Power Efficiency Solutions (PES), Automation & Motion Control (AMC), and Industrial Systems[131] - The company is currently considering a full range of strategic alternatives for its Industrial Systems operating segment, which may or may not lead to a divestiture[132] Altra Transaction and 2023 Outlook The Altra acquisition was completed in March 2023, and the company anticipates a low single-digit organic sales decline for 2023, with synergies offset by headwinds - The acquisition of Altra Industrial Motion Corp. was completed on March 27, 2023, making Altra a wholly owned subsidiary[144] - For 2023, the company expects a low single-digit percentage decline in organic sales; benefits from synergies and productivity initiatives are expected to be more than offset by headwinds from lower volumes, inflation, and higher interest and tax expenses[146] Results of Operations Consolidated net sales decreased by 5.7% in Q1 2023, with operating expenses rising due to acquisition costs and the effective tax rate significantly increasing - Consolidated net sales decreased by 5.7% to $1,224.1 million in Q1 2023, comprising a 4.1% decline in organic sales and a 1.6% negative impact from foreign currency translation[149] Segment Net Sales (Q1 2023 vs Q1 2022) | Segment | Q1 2023 Net Sales | Q1 2022 Net Sales | % Change | | :--- | :--- | :--- | :--- | | Industrial Powertrain Solutions | $414.4 M | $416.3 M | -0.5% | | Power Efficiency Solutions | $469.5 M | $567.2 M | -17.2% | | Automation & Motion Control | $203.2 M | $184.3 M | +10.3% | | Industrial Systems | $137.0 M | $130.7 M | +4.8% | - Operating expenses increased by 30.6% to $77.2 million, primarily due to higher acquisition costs from the Altra Transaction and increased employee compensation[150] - The effective tax rate rose to 180.9% in Q1 2023 from 22.2% in Q1 2022, mainly due to non-deductible transaction costs associated with the Altra acquisition[155] Liquidity and Capital Resources Operating cash flow improved to $106.2 million, while net debt borrowings of $5.28 billion primarily funded the Altra acquisition, with $870.0 million available under the revolving facility - Cash flow from operating activities increased to $106.2 million for Q1 2023, up from a use of $5.9 million in Q1 2022, driven by improvements in working capital[159] - Net debt borrowings were $5.28 billion in Q1 2023, primarily to fund the Altra acquisition, including the issuance of $4.7 billion in Senior Notes[162] - As of March 31, 2023, the company had $870.0 million of available borrowing capacity under its Multicurrency Revolving Facility[168] - The company anticipates capital spending of approximately $150 million in fiscal 2023, to be funded by operating cash flows[161] Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate, foreign currency, and commodity price risks using derivatives, with $2.5 billion in variable rate debt and significant notional amounts in foreign currency and commodity hedges - The company manages market risks related to interest rates, foreign currency, and commodity prices through derivative financial instruments, including swaps and forward contracts[171] - As of March 31, 2023, the company had $2,545.8 million of variable rate debt; a hypothetical 10% change in the weighted average borrowing rate would change after-tax annualized earnings by $14.7 million[173][174] - The company uses foreign currency forward contracts to hedge forecasted transactions; outstanding contracts as of March 31, 2023, had notional amounts of $251.4 million (CNY), $189.1 million (MXN), and $342.3 million (EUR), among others[113][179] - Commodity hedging is used for materials like copper and aluminum; as of March 31, 2023, outstanding copper forward contracts had a notional value of $67.4 million[113][182] Controls and Procedures Management concluded that disclosure controls were effective as of March 31, 2023, with no material changes to internal controls, and Altra's operations are being integrated into the control framework - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report (March 31, 2023)[185] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[186] - The company is actively incorporating its controls and procedures into the newly acquired Altra operations as part of the ongoing integration process[187] PART II — OTHER INFORMATION This section provides updates on legal proceedings, risk factors, equity security sales, and a list of exhibits filed with the Form 10-Q Legal Proceedings There have been no material changes in the company's legal proceedings since the 2022 Annual Report on Form 10-K - No material changes have occurred in the legal matters previously described in the company's 2022 Annual Report on Form 10-K[189] Risk Factors The company's risk factors have not materially changed from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022 - The company's risk factors have not changed materially from those reported in the Annual Report on Form 10-K for the year ended December 31, 2022[190] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase common stock in Q1 2023, with $195.0 million remaining available under its share repurchase program - There were no repurchases of common stock during the first quarter of 2023[192] - As of March 31, 2023, the maximum value of shares available for purchase under the company's share repurchase program is $195.0 million[192] Exhibits This section lists the exhibits filed with the Form 10-Q, including Indenture and Registration Rights Agreement for Senior Notes, and CEO/CFO certifications - Exhibits filed include the Indenture and Registration Rights Agreement related to the Senior Notes issued in January 2023[193] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002 are included as exhibits[193]