REGAL REXNORD CORPORATION Unless the context requires otherwise, references in this Item 2 to "we," "us," "our" or the "Company" refer collectively toRegal Rexnord Corporation , formerly known asRegal Beloit Corporation , and its subsidiaries. OverviewRegal Rexnord Corporation (NYSE: RRX), based inBeloit, Wisconsin (USA), is a leading manufacturer of electric motors, electrical motion controls, power generation and power transmission products serving markets throughout the world.
Operating Segments
Our company is comprised of four operating segments: Commercial Systems,
Industrial Systems, Climate Solutions and Power Transmission Solutions.
Effective as of
A description of the four operating segments is as follows:
•Commercial Systems segment 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.
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•Industrial Systems segment produces integral motors, generators, 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 produces small motors, electronic variable speed controls and air moving solutions serving markets including residential and light commercial HVAC, water heaters and commercial refrigeration.
•Power Transmission Solutions segment produces, sells and services belt and chain drives, helical and worm gearing, mounted and unmounted bearings, couplings, modular plastic belts, conveying chains and components, hydraulic pump drives, large open gearing and specialty mechanical products serving markets including e-commerce, alternative energy, beverage, bulk handling, metals, special machinery, 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 Power Transmission 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. 39 -------------------------------------------------------------------------------- Our general and administrative expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses related to our executive, finance, human resource, information technology, legal and operations functions; (ii) occupancy expenses; (iii) technology related costs; (iv) depreciation and amortization; and (v) corporate-related travel. The majority of our general and administrative costs are for salaries and related personnel expenses. These costs can vary by business given the location of our different manufacturing operations. Our sales and marketing expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses related to our sales and marketing function; (ii) internal and external sales commissions and bonuses; (iii) travel, lodging and other out-of-pocket expenses associated with our selling efforts; and (iv) other related overhead. 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. While these costs make up an insignificant portion of our operating expenses in the Power Transmission Solutions segment, they are more substantial in our Commercial Systems, Industrial Systems and Climate Solutions segments. 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. 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 required to be accrued over the employees remaining service period while restructuring costs for plant relocation costs and restructuring-related costs are generally required to be expensed as incurred. COVID-19 Pandemic COVID-19 evolved during the first quarter of 2020 into a global pandemic, resulting in a severe global health crisis that drove a dramatic slowdown in global economic and social activity. 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 grew, 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; 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
OnOctober 4, 2021 , in accordance with the terms and conditions of the Agreement and Plan of Merger, datedFebruary 15, 2021 (the "Merger Agreement"), the Company completed its combination with the Process & Motion Control business ("PMC Business") of Zurn Water Solutions Corporation (formerly known asRexnord Corporation ) ("Zurn") in aReverse Morris Trust transaction (the "Rexnord Transaction"). Pursuant to the Rexnord Transaction and subject to the terms and conditions of the Merger agreements and the other definitive agreements entered into in connection with the Rexnord Transaction, (1) Zurn 40 -------------------------------------------------------------------------------- transferred to its then-subsidiaryLand Newco, Inc. ("Land") substantially all of the assets, and Land assumed substantially all of the liabilities, of the 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 for no consideration, the "Spin-Off") and (3) 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 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 PMC Business, became a wholly owned subsidiary of the Company and was combined with the Company's Power Transmission Solutions operating segment to form its new Motion Control Solutions operating segment. 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
In connection with the Rexnord Transaction, we have entered into certain financing arrangements, which are described below under "Liquidity and Capital Resources".
OnOctober 19, 2021 , we entered into a definitive agreement to acquireArrowhead Systems, LLC ("Arrowhead"), 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. The$300 million all-cash transaction, which is subject to customary working capital and other adjustments, has been approved by our Board of Directors and is expected to close in the fourth quarter of 2021, subject to customary closing conditions and regulatory approvals. (the "Arrowhead Transaction" and, together with the Rexnord Transaction, the "Transactions").
Change in Fiscal Year End
At a meeting of the Board of Directors ofRegal Rexnord Corporation onOctober 26, 2021 , the Board approved a change in the fiscal year end from a 52-53 week year ending on the Saturday closest toDecember 31 to a calendar year ending onDecember 31 , effective beginning with fiscal year 2022. We expect to make the fiscal year change on a prospective basis and will not adjust operating results for prior periods. The change to our fiscal year will not impact our results for the year endedJanuary 1, 2022 . 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.
Outlook
We are projecting increased sales growth for the remainder of the year which assumes no material decline in production capacity or the ability to conduct commercial operations, either from COVID-related disruptions, or other factors, including supply chain disruptions, versus levels as of the date of this report. Results of Operations Three Months EndedOctober 2, 2021 Compared toSeptember 26, 2020 Net sales increased$134.5 million or 17.7% for the third quarter 2021 compared to the third quarter 2020. The increase consisted of positive organic sales of 16.3% and positive foreign currency translation of 1.4%. The increase was primarily driven by sales increases in North American markets and a resurgence inChina . Gross profit increased$33.0 million or 14.9% for the third quarter 2021 as compared to the third quarter 2020. The increase in gross profit was driven by increase in volume and partially offset by increased freight and material costs. Total operating expenses for the third quarter 2021 increased$15.6 million or 11.9% as compared to the third quarter 2020. The increase was primarily driven by higher employee related wage and benefit costs and transaction costs which were partially offset by foreign exchange gains. Commercial Systems segment net sales for the third quarter 2021 were$268.7 million , an increase of$50.2 million or 23.0% as compared to the third quarter 2020. The increase consisted of positive organic sales of 20.9% and positive foreign currency translation of 2.1%. The increase was primarily driven by strong growth in general industry and theAsia Pacific market as well 41 -------------------------------------------------------------------------------- as solid gains in the pool pump business. Gross profit increased$10.1 million or 16.6% as compared to the third quarter 2020. The increase in gross profit was primarily driven by the increase in volume and favorable product mix, partially offset by increased freight and tariff costs. Total operating expenses for the third quarter 2021 were$40.4 million compared to$36.1 million in the third quarter 2020. The$4.3 million or 11.9% increase was primarily driven by higher employee related wage and benefit costs as well as inflation. Industrial Systems segment net sales for the third quarter 2021 were$148.0 million , an increase of$9.2 million or 6.6% as compared to the third quarter 2020. The increase consisted of positive organic sales of 3.6% and positive foreign currency translation of 3.0%. The increase was primarily driven by strength in the data center market for generators and demand for industrial motors inNorth America andChina . Gross profit decreased$6.0 million or 18.8% as compared to the third quarter 2020. The decrease in gross profit was primarily driven by material inflation and, increased inventory provisions, offset by price realization and commodity hedges. Total operating expenses for the third quarter 2021 and 2020 were$19.5 million and$24.6 million , respectively. The decrease in operating expenses was due to general cost savings initiatives and foreign exchange gains partially offset by employee related wage and benefit costs, higher variable selling costs on stronger sales volume, and increased administrative costs. Climate Solutions segment net sales were$268.4 million , an increase of$34.4 million or 14.7% as compared to the third quarter 2020. The increase consisted of positive organic sales of 14.2% and positive foreign currency translation of 0.5%. The increase was primarily due to continued strong demand in North American residential HVAC and combustion markets, recovering demand in EMEA andAsia Pacific . Gross profit increased$12.1 million or 17.5% compared to the third quarter 2020. The increase in gross profit was primarily driven by increased volume, favorable mix and 80/20 actions. Total operating expenses for the third quarter 2021 were$29.1 million compared to$29.9 million in the third quarter 2020. The slight decrease was primarily due to higher expenses related to commissions (higher volume), travel and professional services, which were offset by favorable foreign currency. Power Transmission Solutions segment net sales for the third quarter 2021 were$207.6 million , an increase of$40.7 million or 24.4% compared to third quarter 2020 net sales of$166.9 million . The increase consisted of positive organic sales of 23.7% and positive foreign currency of 0.7%. The increase was primarily driven by strength in alternative energy, theNorth America general industrial market, the conveying business, and improving demand inEurope in addition to meaningful share gains tied to our industrial powertrain offering. Gross profit for the third quarter 2021 increased$16.8 million or 28.0%. The increase was driven by higher sales volume with favorable mix and lower overhead cost driven by cost reduction initiatives. Total operating expenses for the third quarter 2021 increased$17.2 million as compared to the third quarter 2020, primarily due to transaction costs related to the Rexnord Transaction and asset impairment related to a restructuring project. Nine Months EndedOctober 2, 2021 Compared toSeptember 26, 2020 Net sales increased$467.2 million or 22.0% for the nine months endedOctober 2, 2021 compared to the nine months endedSeptember 26, 2020 . The increase consisted of positive organic sales of 19.7% and positive foreign currency translation of 2.3%. The increase was primarily driven by sales increases inNorth America ,China and recovering demand in EMEA andAsia Pacific . Gross profit increased$156.3 million or 26.3% for the nine months endedOctober 2, 2021 as compared to the nine months endedSeptember 26, 2020 . The increase in gross profit was driven by increase in volume, partially offset by increased freight and material costs. Total operating expenses for the nine months endedOctober 2, 2021 increased$48.7 million or 12.5% as compared to the nine months endedSeptember 26, 2020 . The increase was primarily driven by transaction costs, higher employee related wage and benefit costs, partially offset by foreign exchange gains. Commercial Systems segment net sales for the nine months endedOctober 2, 2021 were$775.0 million , an increase of$181.2 million or 30.5% as compared to the nine months endedSeptember 26, 2020 . The increase consisted of positive organic sales of 27.3% and positive foreign currency translation of 3.2%. The increase was primarily driven by strong growth in theAsia Pacific market as well as the general industry and pool pump business. Gross profit increased$50.4 million or 32.9% as compared to the nine months endedSeptember 26, 2020 . The increase in gross profit was primarily driven by the increase in volume, partially offset by increased freight and tariff costs. Total operating expenses for the nine months endedOctober 2, 2021 were$120.5 million compared to$110.5 million in the nine months endedSeptember 26, 2020 . The$10.0 million or 9.0% increase was primarily driven by higher employee related wage and benefit costs, inflation and increased engineering expenses. Industrial Systems segment net sales for the nine months endedOctober 2, 2021 were$429.6 million , an increase of$40.6 million or 10.4% as compared to the nine months endedSeptember 26, 2020 . The increase consisted of positive organic sales of 5.7% and positive foreign currency translation of 4.7%. The increase was primarily driven by strength in the generator business, strong growth inChina and inIndia markets, and improving demand in theNorth America industrial motors business. Gross profit decreased$0.9 million or 1.1% for the nine months endedOctober 2, 2021 as compared to the nine months endedSeptember 26, 2020 . The decrease in gross profit was primarily driven by material inflation partially offset by strong volumes, favorable mix and positive price realization. Total operating expenses for the nine months endedOctober 2, 2021 and 42 --------------------------------------------------------------------------------September 26, 2020 were$65.7 million and$69.4 million , respectively. The decrease of (5.3)% in operating expenses stems from general cost savings initiatives and foreign exchange gains partially offset by variable selling costs on higher sales volumes and increased administrative costs. Climate Solutions segment net sales were$764.8 million , an increase of$142.5 million or 22.9% as compared to the nine months endedSeptember 26, 2020 . The increase consisted of positive organic sales of 22.4% and positive foreign currency translation of 0.5%. The increase was primarily due to continued strong demand in North American residential HVAC market and recovering demand in EMEA andAsia Pacific . Gross profit increased$53.3 million or 30.3% compared to the nine months endedSeptember 26, 2020 . The increase in gross profit was primarily driven by volume, favorable product mix and 80/20 actions, partially offset by material inflation. Total operating expenses for the nine months endedOctober 2, 2021 were$87.3 million compared to$87.2 million in the nine months endedSeptember 26, 2020 . The increase was primarily due to 2020 cost savings as a result of non-recurring furloughs and operating expenses, offset by gains in foreign currency. Power Transmission Solutions segment net sales for the nine months endedOctober 2, 2021 were$624.3 million , an increase of$102.9 million or 19.7% compared to nine months endedSeptember 26, 2020 net sales of$166.9 million . The increase consisted of positive organic sales of 18.1% and positive foreign currency of 1.6%. The increase was primarily driven by strength in the North American general industrial and alternative-energy end markets, prior year project wins in the aerospace end market and strength in the conveying business. Gross profit for the nine months endedOctober 2, 2021 increased$53.5 million or 28.7%. The increase was driven by higher sales volume, favorable product mix and lower overhead cost driven by cost reduction initiatives. Total operating expenses for the nine months endedOctober 2, 2021 increased$42.3 million as compared to the nine months endedSeptember 26, 2020 , primarily due to transaction costs related to the Rexnord Transaction, asset write down related to a restructuring project, and the normalizing of the business as it recovers from the pandemic. 43 --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 26, September 26,
October 2, 2021 2020 October 2, 2021 2020(Dollars in Millions)Net Sales : Commercial Systems$ 268.7 $ 218.5 $ 775.0 $ 593.8 Industrial Systems 148.0 138.8 429.6 389.0 Climate Solutions 268.4 234.0 764.8 622.3 Power Transmission Solutions 207.6 166.9 624.3 521.4 Consolidated$ 892.7 $ 758.2 $ 2,593.7 $ 2,126.5
Gross Profit as a Percent of
Commercial Systems 26.3 % 27.8 % 26.3 % 25.8 % Industrial Systems 17.5 % 23.0 % 18.4 % 20.5 % Climate Solutions 30.3 % 29.5 % 30.0 % 28.3 % Power Transmission Solutions 36.9 % 35.9 % 38.4 % 35.7 % Consolidated 28.5 % 29.2 % 29.0 % 28.0 % Operating Expenses as a Percent ofNet Sales : Commercial Systems 15.0 % 16.5 % 15.3 % 18.2 % Industrial Systems 13.2 % 17.7 % 15.3 % 17.8 % Climate Solutions 10.8 % 12.8 % 11.3 % 13.8 % Power Transmission Solutions 26.7 % 24.6 % 25.9 % 23.4 % Consolidated 16.2 % 17.4 % 16.7 % 18.1 % Income from Operations as a Percent ofNet Sales : Commercial Systems 11.3 % 11.3 % 10.7 % 7.2 % Industrial Systems 4.3 % 5.3 % 3.1 % 2.7 % Climate Solutions 19.4 % 16.8 % 18.6 % 14.3 % Power Transmission Solutions 8.9 % 11.3 % 12.0 % 12.3 % Consolidated 12.0 % 11.9 % 12.1 % 9.7 % Income from Operations$ 107.4 $ 90.0 $ 313.5 $ 205.9 Other Income, Net (1.2) (1.1) (3.6) (3.3) Interest Expense 22.0 9.0 46.1 31.2 Interest Income (2.3) (1.3) (5.5) (3.8) Income before Taxes 88.9 83.4 276.5 181.8 Provision for Income Taxes 17.8 17.1 57.2 39.5 Net Income 71.1 66.3 219.3 142.3 Less: Net Income Attributable to Noncontrolling Interests 1.6 1.3 4.6 3.4 Net Income Attributable to Regal Rexnord Corporation $ 69.5$ 65.0 $ 214.7 $ 138.9 The effective tax rate for the three months endedOctober 2, 2021 was 20.0% versus 20.5% for the three months endedSeptember 26, 2020 . The effective tax rate for the nine months endedOctober 2, 2021 andSeptember 26, 2020 was 20.7% and 21.7%, respectively. The change in the effective tax rate for the three and nine months endedOctober 2, 2021 was primarily driven by the mix of earnings. The make-whole payment of$12.7 million for early debt cancellation was included in interest expense for the three and nine months endedOctober 2, 2021 . 44 -------------------------------------------------------------------------------- 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$258.1 million for the nine months endedOctober 2, 2021 , a$51.8 million decrease from the nine months endedSeptember 26, 2020 . The change is a result of an increase in inventory, early debt extinguishment charge and accounts receivable which is partially offset by an increase in accounts payable for the nine months endedOctober 2, 2021 compared to the nine months endedSeptember 26, 2020 . Cash flow used in investing activities was$37.5 million for the nine months endedOctober 2, 2021 as compared to cash flow used in investing activities of$21.8 million for the nine months endedSeptember 26, 2020 . The change was driven primarily by lower proceeds received from sales of property, plant and equipment and cash used for capital purchases and business acquisitions in the current year compared to the prior year. Cash flow used in financing activities was$500.8 million for the nine months endedOctober 2, 2021 , compared to$135.2 million used in financing activities for the nine months endedSeptember 26, 2020 . We had net debt repayments of$422.4 million during the nine months endedOctober 2, 2021 , compared to net debt repayments of$67.8 million during the nine months endedSeptember 26, 2020 . There were no share repurchases for the nine months endedOctober 2, 2021 , compared to$25.0 million for the nine months endedSeptember 26, 2020 . There were$17.0 million in financing fees paid for the nine months endedOctober 2, 2021 , compared to no fees in the prior year. Our working capital was$1,067.6 million atOctober 2, 2021 , compared to$1,029.3 million atJanuary 2, 2021 . AtOctober 2, 2021 andJanuary 2, 2021 , our current ratio (which is the ratio of our current assets to current liabilities) was 2.4:1 and 2.3:1, respectively. Our working capital increased primarily due to the increase in accounts receivables and inventory offset by an increase in accounts payable and decrease in cash.
The following table presents selected financial information and statistics as of
October 2, 2021 January 2, 2021
Cash and Cash Equivalents $ 328.6 $ 611.3
Trade Receivables, Net 560.9 432.0
Inventories 808.2 690.3
Working Capital 1,067.6 1,029.3
Current Ratio 2.4:1 2.3:1
As of October 2, 2021 , $325.9 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.
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Credit Agreement
On March 17, 2021 , we entered into an amendment (the "First Amendment") with our
lenders to the Amended and Restated Credit Agreement, dated August 27, 2018 (the
"Credit Agreement") with JPMorgan Chase Bank, N.A ., as Administrative Agent and
the lenders named therein. The First Amendment amended the Credit Agreement to,
among other things, (i) permit the consummation of the Rexnord Transaction, (ii)
permit the incurrence of indebtedness to finance the special dividend that was
paid in connection with the Rexnord Transaction (the "Special Dividend"), and,
(iii) provide an increase of $250.0 million in the aggregate principal amount of
the revolving commitments under the Credit Agreement. The amendment is subject
to customary and market provisions. In connection with the closing of the
Rexnord Transaction subsequent to the quarter end, we drew upon the Credit
Agreement to finance the $284.4 million payment of the Special Dividend.
Prior to the First Amendment, the Credit Agreement provided for a (i) 5-year
unsecured term loan facility in an original aggregate principal amount of $900.0
million (the "Term Facility") and (ii) a 5-year unsecured multicurrency
revolving facility in an aggregate principal amount of $500.0 million (increased
as of the effectiveness of the First Amendment to $750.0 million ) (the
"Multicurrency Revolving Facility"), including a $50.0 million letter of credit
sub facility, available for general corporate purposes. Borrowings under the
Credit Agreement bear interest at floating rates based upon indices determined
by the currency of the borrowing, plus an applicable margin determined by
reference to our consolidated funded debt to consolidated EBITDA ratio or at an
alternative base rate. On November 4, 2021 we exercised an option to expand the
size of the Multicurrency Revolving Facility commitments under the Credit
Agreement by $250.0 million . After the exercise the Multicurrency Revolving
Facility commitment totals $1.0 billion .
The Term Facility under the Credit Agreement was drawn in full on August 27,
2018 with the proceeds settling the amounts owed under prior borrowings. The
Term Facility requires quarterly amortization at a rate starting at 5.0% per
annum, increasing to 7.5% per annum after three years and further increasing to
10.0% per annum for the last year of the Term Facility, unless previously
prepaid. Per the terms of the agreement, prepayments can be made without penalty
and be applied to the next payment due. After the prepayment is considered, the
next payment in the amortization schedule is not due within one year and
therefore no current maturities of debt will be recognized for this agreement.
The weighted average interest rate on the Term Facility for the three months
ended October 2, 2021 and September 26, 2020 was 1.3% and 1.5%, respectively.
The weighted average interest rate on the Term Facility for the nine months
ended October 2, 2021 and September 26, 2020 was 1.4% and 2.1%, respectively.
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 October 2, 2021 , we had $27.8 million borrowings under the Multicurrency
Revolving Facility, $0.2 million of standby letters of credit issued under the
facility and $722.0 million of available borrowing capacity. For the three
months ended October 2, 2021 and September 26, 2020 under the Multicurrency
Revolving Facility, the average daily balance in borrowings was $106.5 million
and $51.4 million , respectively and the weighted average interest rate was 1.3%
and 1.5%, respectively. For the nine months ended October 2, 2021 and
September 26, 2020 under the Multicurrency Revolving Facility, the average daily
balance in borrowings was $38.8 million and $189.7 million , respectively, and
the weighted average interest rate was 1.4% and 2.1%, 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.
Immediately following the completion of the Rexnord Transaction subsequent to
quarter end, we had approximately $1.5 billion outstanding under the Credit
Agreement comprised of approximately $380.0 million outstanding under the
revolving commitments, approximately $620.0 million outstanding under the term
loan commitments under the Credit Agreement, and $486.0 million under the A&R
Land Credit Agreement.
Senior Notes
In connection with the closing of the Rexnord Transaction, on September 30,
2021 , we redeemed in full our senior notes due 2023 under the note purchase
agreement, dated July 14, 2011 (as amended), by and between us and the
purchasers thereto (the "Note Purchase Agreement"). Inclusive of principal,
interest and the applicable make-whole payment, the total amount paid by us to
redeem such senior notes was approximately $184.0 million . The make-whole
payment of $12.7 million was included in interest expense. We funded this amount
with a combination of cash on hand and drawings under the Credit Agreement. We
also redeemed in the quarter our senior notes due July 2021 under the Note
Purchase Agreement with a combination of cash on hand and drawings under the
Multicurrency Revolving Facility.
We have an interest rate swap agreement to manage fluctuations in cash flows
resulting from interest rate risk (see also Note 14 of Notes to the Condensed
Consolidated Financial Statements).
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--------------------------------------------------------------------------------Compliance with Financial Covenants
The Credit Agreement require us to meet specified financial ratios and to
satisfy certain financial condition tests. We were in compliance with all
financial covenants contained in the Credit Agreement as of
Other Notes Payable
At
Financing Arrangements Related to Rexnord Transaction
In connection with the Rexnord Transaction, onFebruary 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. In connection with the Rexnord Transaction, onMay 14, 2021 , Land entered into a Credit Agreement withJPMorgan Chase Bank, N.A ., as Administrative Agent and the lenders named therein (the "Land Credit Agreement"), providing for a delayed draw term loan facility with commitments thereunder in an aggregate principal amount of$487.0 million , maturing onAugust 25, 2023 (the "DDTL Facility"). The proceeds of the DDTL Facility were drawn by Land in a single drawing to fund a payment from Land to a subsidiary of Zurn in connection with the Rexnord Transaction. Upon consummation of the Rexnord Transaction, Land became our indirect wholly owned subsidiary and, in connection therewith, the Land Credit Agreement was amended and restated (the "A&R Land Credit Agreement") to add us as a party to the A&R Land Credit Agreement and as a guarantor of the obligations of Land thereunder. Our subsidiaries that provided a guaranty of the obligations under the Credit Agreement also entered into a subsidiary guaranty agreement with respect to the obligations under the A&R Land Credit Agreement. Additionally, Land and any subsidiary of Land that provided a guaranty under the DDTL Facility have also entered into the subsidiary guaranty agreement with respect to the Credit Agreement. The loans under the DDTL Facility will bear interest at floating rates based upon a reserve adjusted LIBOR rate or, at our election, an alternate base rate plus, in each case an applicable margin determined by reference to our consolidated funded debt (net of certain cash and cash equivalents) to EBITDA ratio.
Other Disclosures
Based on rates for instruments with comparable maturities and credit quality, which are classified as Level 2 inputs (see also Note 15 of Notes to the Condensed Consolidated Financial Statements), the approximate fair value of our total debt was$648.3 million and$1,085.8 million as ofOctober 2, 2021 andJanuary 2, 2021 , 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
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