# REGAL REXNORD CORP (RRX) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from REGAL REXNORD CORP's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/82811/000008281122000069/rbc-20220101.htm
Accession: 0000082811-22-000069
Filing date: 2022-03-02
Report date: 2022-01-01
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/RRX/
All MD&A years: /company/RRX/mda/
Next year: /company/RRX/mda/fy2022/ (FY 2022)

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We operate on a 52/53 week fiscal year ending on the Saturday closest to December 31. We refer to the fiscal year ended January 1, 2022 as “fiscal 2021", the fiscal year ended January 2, 2021 as “fiscal 2020" and the fiscal year ended December 28, 2019 as “fiscal 2019".

Overview

General

Regal Rexnord Corporation (NYSE: RRX) (“we,” “us,” “our” or the “Company”) 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.

We are headquartered in Beloit, Wisconsin and have manufacturing, sales and service facilities worldwide. As of the end of fiscal 2021, the Company, including its subsidiaries, employed approximately 30,000 people in its global manufacturing, sales, and service facilities and corporate offices. In fiscal 2021, we reported annual net sales of $3.8 billion compared to $2.9 billion in fiscal 2020.

Our company is comprised of four operating segments: Commercial Systems, Industrial Systems, Climate Solutions and Motion Control Solutions. Our new Motion Control Solutions operating segment consists of our legacy Power Transmission Solutions operating segment, the Rexnord Process & Motion Control business (the “Rexnord PMC business”), which we acquired on October 4, 2021, and Arrowhead Systems, which we acquired on November 23, 2021. We now refer to Arrowhead Systems as our Automation Solutions business.

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.

•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 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 are derived 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.

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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 ("Business 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 portions of the commodity price fluctuations through fixed-price agreements with suppliers and our hedging strategies. When we experience commodity price increases, we have tended to announce price increases 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 arrangements, 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 sales 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; (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 is energy efficiency, which generally means using less electrical power to produce more mechanical power.

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Goodwill & Other Asset Impairments. In the fourth quarter of 2021, we recorded goodwill impairment of $33.0 million in our global industrial motors reporting unit. During fiscal 2021, we recognized $5.6 million of asset impairments related to the transfer of assets to held for sale.

During fiscal 2020, we recorded goodwill impairment of $10.5 million in our global industrial motors reporting unit. During fiscal 2020, we recognized $5.3 million of asset impairments related to the transfer of assets to held for sale.

In the first quarter of 2019, we transferred assets to held for sale which resulted in the recognition of $5.1 million of fixed asset impairments and $4.9 million of customer relationships intangible asset impairments.

The following table presents impairments by segment as of January 1, 2022, January 2, 2021 and December 28, 2019 (in millions):

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[[/GREPCENT_TABLE]]

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, engineering and IT 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.

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.

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Rexnord and Automation Solutions 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”), the Company completed its combination with the Rexnord PMC business of Zurn 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 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 Rexnord PMC business, became a wholly owned subsidiary of the Company.

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 have entered into certain financing arrangements, which are described below under “Liquidity and Capital Resources”.

On November 23, 2021, we acquired Arrowhead Systems, LLC, which we now refer to as our Automation Solutions business, for $315.6 million in cash, net of $1.1 million of cash acquired (the "Automation Solutions Transaction"). Our Automation Solutions business 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. Our Automation Solutions business 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 Company's Board of Directors 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 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 ended January 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. In fiscal 2022, we are forecasting mid-single digit to high-single digit sales growth. We expect to see positive impact from our transactions and new products. In fiscal 2022, we expect diluted earnings per share to be $6.95 to $7.55. Our fiscal 2022 diluted earnings per share guidance is based on an effective tax rate of 23%.

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Results of Operations

The following table sets forth selected information for the years indicated:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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Fiscal Year 2021 Compared to Fiscal Year 2020

Net sales for fiscal 2021 were $3.8 billion, a 31.1% increase as compared to fiscal 2020 net sales of $2.9 billion. The increase consisted of positive organic sales of 17.4%, positive impact from acquisitions of 12.0% and positive foreign currency translation of 1.7%. The increase was primarily driven by sales increases in North America, China and recovering demand in EMEA and Asia Pacific and the acquisitions of the Rexnord PMC and Automation Solutions businesses. Gross profit increased $277.0 million or 34.3% as compared to the prior year. The increase from the prior year was driven primarily due to increases in volume and the acquisitions of the Rexnord PMC and Automation Solutions businesses, partially offset by increased freight and material costs. Operating expenses were $714.7 million which was a $201.8 million increase from fiscal 2020. The increase was primarily driven by acquisitions of the Rexnord PMC and Automation Solutions businesses transaction costs, higher employee related wage and benefit costs, partially offset by foreign exchange gains. The Company recognized goodwill and other asset impairments of $38.6 million, a $22.8 million increase from the prior year.

Net sales for the Commercial Systems segment for fiscal 2021 were $1,032.1 million, a 25.8% increase compared to fiscal 2020 net sales of $820.2 million. The increase consisted of positive organic sales of 23.3% and positive 2.5% foreign currency translation. The increase was primarily driven by strong growth in the Asia Pacific market as well as the general industry and pool pump business. Gross profit increased $49.7 million or 23.4% primarily driven by the increase in volume, partially offset by increased freight and tariff costs. Operating expenses for fiscal 2021 increased $16.2 million as compared to fiscal 2020. The increase was primarily driven by higher employee-related wage and benefit costs, rising logistics costs and increased engineering expenses.

Net sales for the Industrial Systems segment for fiscal 2021 were $576.3 million, a 9.0% increase compared to fiscal 2020 net sales of $528.8 million. The increase consisted of positive organic sales of 5.4% and positive foreign currency translation of 3.6%, strength in the generator business, strong growth in China and in India markets, and improving demand in the North America industrial motors business. Gross profit increased $9.1 million or 9.3% primarily driven by strong volumes, favorable mix and positive price realization, partially offset by material inflation. Operating expenses for fiscal 2021 decreased $3.6 million as compared to fiscal 2020. The decrease was primarily due to general cost savings initiatives and foreign exchange gains partially offset by variable selling costs on higher sales volumes and increased administrative costs.

Net sales for the Climate Solutions segment for fiscal 2021 were $1,030.6 million, a 21.7% increase compared to fiscal 2020 net sales of $846.8 million. The increase consisted of positive organic sales of 21.3% and positive foreign currency translation of 0.4%. The increase was primarily due to continued strong demand in North American residential HVAC market and recovering demand in EMEA and Asia Pacific. Gross profit increased $58.3 million or 23.6% primarily driven by volume, favorable product mix and 80/20 actions, partially offset by material and freight inflation. Operating expenses for fiscal 2021 were flat as compared to the prior year primarily due to 2020 cost savings, non-recurring furloughs and operating expenses, offset by gains in foreign currency.

Net sales for the Motion Control Solutions segment for fiscal 2021 were $1,171.3 million, a 64.7% increase compared to fiscal 2020 net sales of $711.2 million. The increase consisted of positive impact from acquisitions of 49.0%, positive organic sales of 14.6% and positive foreign currency translation of 1.1%. 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, strength in the conveying business and the acquisitions of the Rexnord PMC and Automation Solutions businesses. Gross profit for fiscal 2021 increased $159.9 million or 63.6% primarily due to higher sales volume, favorable product mix, lower overhead cost driven by cost reduction initiatives and the acquisitions of the Rexnord PMC and Automation Solutions businesses. Operating expenses for fiscal 2021 increased $189.2 million due to transaction costs related to the Rexnord Transaction, asset write-downs related to a restructuring project, and the normalizing of the business as it recovers from the pandemic.

The effective tax rate for fiscal 2021 was 24.1% compared to 22.7% for fiscal 2020. The increase in the effective rate was primarily due to the impact of nondeductible impairment charges and nondeductible transaction costs related to the Rexnord Transaction.

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Fiscal Year 2020 Compared to Fiscal Year 2019

Net sales for fiscal 2020 were $2.9 billion, a 10.2% decrease as compared to fiscal 2019 net sales of $3.2 billion. The decrease consisted of negative organic sales of 8.4%, negative foreign currency translation of 0.4% and a negative 1.4% impact from the businesses divested/to be exited. Gross profit decreased $52.0 million or 6.0% as compared to the prior year. The decrease from the prior year was driven primarily due to lower sales volumes, partially offset by productivity improvements and simplification programs. Operating expenses were $512.9 million which was a $31.4 million decrease from fiscal 2019. The decrease was primarily driven by lower variable selling costs and lower employee related wage and benefit costs. The Company recognized goodwill and other asset impairments of $15.8 million, a $5.8 million increase from the prior year.

Net sales for the Commercial Systems segment for fiscal 2020 were $820.2 million, a 9.4% decrease compared to fiscal 2019 net sales of $905.3 million. The decrease consisted of negative organic sales of 6.9% and a negative 2.6% impact from the businesses divested/to be exited partially offset by a positive 0.1% foreign currency translation. The organic sales decrease was primarily driven by decline in market demand as well as COVID related pressures on production along with ongoing intentional account pruning actions. Gross profit decreased $22.8 million or 9.6% primarily due to lower sales volumes partially offset by simplification programs and selective pricing on lower margin accounts. Operating expenses for fiscal 2020 decreased $17.5 million as compared to fiscal 2019. The decrease was primarily due to lower variable selling costs on lower sales, lower employee related wage and benefit costs and lower facility costs.

Net sales for the Industrial Systems segment for fiscal 2020 were $528.8 million, a 8.1% decrease compared to fiscal 2019 net sales of $575.4 million. The decrease consisted of negative organic sales of 7.1% and negative foreign currency translation of 1.0%. The organic sales decrease was driven by COVID related pressures on production, the oil & gas downturn and the impact of 80/20 account pruning. Gross profit increased $1.1 million or 1.2% primarily due to sales mix with higher sales volumes related to power generation projects, simplification programs and selective pricing on lower margin accounts. Operating expenses for fiscal 2020 decreased $16.0 million as compared to fiscal 2019. The decrease was primarily due to lower employee related wage and benefit costs and lower variable selling costs on lower sales.

Net sales for the Climate Solutions segment for fiscal 2020 were $846.8 million, a 12.6% decrease compared to fiscal 2019 net sales of $968.5 million. The decrease consisted of negative organic sales of 9.9%, negative foreign currency translation of 0.6% and a negative 2.1% impact from the businesses divested/to be exited. The organic sales decrease was driven by COVID related pressure in North America and Europe and 80/20 account pruning efforts. Gross profit decreased $23.0 million or 8.5% primarily due to sales mix and productivity gains. Operating expenses for fiscal 2020 increased $4.9 million as compared to the prior year primarily due to professional fees.

Net sales for the Power Transmission Solutions segment for fiscal 2020 were $711.2 million, a 9.8% decrease compared to fiscal 2019 net sales of $788.8 million. The decrease consisted of negative organic sales of 9.1%, negative foreign currency translation of 0.1% and a negative 0.6% impact from the businesses divested/to be exited. The organic sales decrease was driven by COVID related pressures on general industrial, upstream oil & gas end markets and 80/20 account pruning efforts. Gross profit for fiscal 2020 decreased $7.3 million or 2.8% primarily due to lower sales volumes partially offset by the change in sales mix and productivity gains. Operating expenses for fiscal 2020 decreased $2.8 million due to lower employee related wage and benefit costs and lower variable selling costs on the lower sales.

The effective tax rate for fiscal 2020 was 22.7% compared to 20.1% for fiscal 2019. The increase in the effective rate was due to the mix of earnings during the year.

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 flows 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 $357.7 million for fiscal 2021, a $77.7 million decrease from fiscal 2020. The decrease was primarily the result of increased working capital.

Cash flow provided by operating activities was $435.4 million for fiscal 2020, a $26.9 million increase from fiscal 2019. The increase was primarily the result of a reduction in working capital.

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Our working capital was $1,627.5 million and $1,029.3 million as of January 1, 2022 and January 2, 2021, respectively. As of January 1, 2022 and January 2, 2021, our current ratio (which is the ratio of our current assets to current liabilities) was 2.5:1 and 2.3:1, respectively. We intend to use operating cash flow to meet our current debt repayment obligations.

Cash flow used in investing activities was $175.7 million for fiscal 2021, compared to $37.0 million in fiscal 2020. The change was driven primarily by the acquisition of our Automation Solutions business in fiscal 2021 partially offset by lower divestiture proceeds. Capital expenditures were $54.5 million in fiscal 2021, compared to $47.5 million in fiscal 2021.

Cash flow provided by investing activities was $37.0 million for fiscal 2020, compared to $74.3 million used in fiscal 2019. The change was driven primarily by the divestiture proceeds received in fiscal 2019 partially offset by lower capital expenditures. Capital expenditures were $47.5 million in fiscal 2020, compared to $92.4 million in fiscal 2019.

In fiscal 2022, we anticipate capital spending for property, plant and equipment to be approximately $110.0 million. We believe that our present manufacturing facilities will be sufficient to provide adequate capacity for our operations in fiscal 2022. We anticipate funding fiscal 2022 capital spending with operating cash flows.

Cash flow used in financing activities was $117.6 million for fiscal 2021, compared to $147.6 million in fiscal 2020. Net debt repayments totaled $287.1 million in fiscal 2021, compared to net debt repayments of $67.7 million in fiscal 2020. We also repurchased $25.8 million of our common stock during fiscal 2021 compared to $25.0 million in fiscal 2020. We paid $335.6 million in dividends to shareholders in fiscal 2021 compared to $48.7 million in fiscal 2020. The increase was driven by the special dividend that was issued to shareholders in connection with the Rexnord Transaction. In fiscal 2021, we paid distributions of $4.5 million to noncontrolling interests compared to $2.8 million in fiscal 2020. We also paid $32.5 million of early debt extinguishment payments and deferred financing fees during fiscal 2021.

Cash flow used in financing activities was $147.6 million for fiscal 2020, compared to $397.4 million for fiscal 2019. Net debt repayments totaled $67.7 million in fiscal 2020, compared to net debt repayments of $171.0 million in fiscal 2019. We also repurchased $25.0 million of our common stock during fiscal 2020 compared to $165.1 million in fiscal 2019. We paid $48.7 million in dividends to shareholders in fiscal 2020 compared to $48.9 million in fiscal 2019. In fiscal 2020, we paid distributions of $2.8 million to noncontrolling interests compared to $1.8 million in fiscal 2019.

The following table presents selected financial information and statistics as of January 1, 2022 and January 2, 2021 (in millions):

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

As of January 1, 2022, $671.4 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.

Pension Liabilities and Other Post Retirement Benefits

Accrued pension and other post-retirement benefits of $116.7 million and $74.1 million as of January 1, 2022 and January 2, 2021, respectively.

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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 First Amendment is subject to customary and market provisions. In connection with the closing of the Rexnord Transaction, 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 the 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 was 1.2% and 2.0% for the fiscal years ended January 1, 2022 and January 2, 2021, respectively. The Credit Agreement requires us to 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. We repaid $50.0 million and $50.0 million under the Term Facility in fiscal 2021 and 2020, respectively. The amount outstanding for fiscal years ended January 1, 2022 and January 2, 2021 was $620.0 million and $670.0 million, respectively.

As of January 1, 2022 we had $736.7 million of borrowings under the Multicurrency Revolving Facility, $0.1 million of standby letters of credit and $263.2 million of available borrowing capacity. The average daily balance in borrowings under the Multicurrency Revolving Facility was $163.6 million and $150.4 million, and the weighted average interest rate on the Multicurrency Revolving Facility was 1.2% and 1.9% for the fiscal years ended January 1, 2022 and January 2, 2021, 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.

Compliance with Financial Covenants

The Credit Agreement contain covenants under which we agree to maintain specified financial ratios and to satisfy certain financial condition tests. We were in compliance with all financial covenants contained in the Notes and the Credit Agreement as of January 1, 2022.

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.

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Other Notes Payable

As of January 1, 2022, other notes payable of $78.7 million were outstanding with a weighted average interest rate of 5.2%. As of January 2, 2021, other notes payable of $4.6 million were outstanding with a weighted average rate of 4.9%. See Note 9 for more information on the Company's finance leases.

Financing Arrangements Related to Rexnord Transaction

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.

In connection with the Rexnord Transaction, on May 14, 2021, Land entered into a Credit Agreement with JPMorgan 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 on August 25, 2023 (the "Land Term Facility"). The proceeds of the Land Term facility were drawn by Land to fund a payment from Land to a subsidiary of Zurn in connection with the Rexnord Transaction. Upon the consummation the Rexnord Transaction, the indebtedness contemplated by the Land Credit Agreement became indebtedness of our 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 Land Term Facility have also entered into the subsidiary guaranty agreement with respect to the Credit Agreement. The loans under the Land Term Facility will bear interest at floating rates based upon a reserve adjusted LIBOR rate or, 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. The A&R Land Credit Agreement contains customary events of default and financial and other covenants, including (i) a maximum leverage ratio (defined as, with certain adjustments, the ratio of our consolidated funded debt to EBITDA) as of the last day of any fiscal quarter of 4.00 to 1.00; and (ii) a minimum interest coverage ratio (defined as, with certain adjustments, the ratio of EBITDA to our consolidated cash interest expense) of 3.00 to 1.00 as of the last day of any fiscal quarter.

As of January 1, 2022, we had $486.8 million of borrowings under the Land Term Facility. The weighted average interest rate on the Land Term Facility was 1.3% during the fiscal year ended January 1, 2022.

Other Disclosures

Based on rates for instruments with comparable maturities and credit quality, the approximate fair value of our total debt was $1,918.5 million and $1,085.8 million as of January 1, 2022 and January 2, 2021, respectively.

Litigation

See Part 1 - Item 3 - Legal Proceedings for additional details.

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Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments

The following is a summary of our contractual obligations and payments due by period as of January 1, 2022 (in millions):

[[GREPCENT_TABLE]]
[["Payments Due by Period (1)","","Debt Including Estimated Interest Payments (2)","","Operating Leases","","Finance Leases","","Pension Obligations","","Purchase and Other Obligations","","Total Contractual Obligations"],["Less than one year","","$","24.9","","","$","34.8","","","$","6.8","","","$","7.5","","","$","709.7","","","$","783.7"],["1 - 3 years","","1,858.9","","","47.4","","","13.9","","","8.1","","","\u2014","","","1,928.3"],["3 - 5 years","","0.2","","","29.6","","","14.0","","","8.0","","","\u2014","","","51.8"],["More than 5 years","","\u2014","","","36.0","","","83.0","","","14.2","","","\u2014","","","133.2"],["Total","","$","1,884.0","","","$","147.8","","","$","117.7","","","$","37.8","","","$","709.7","","","$","2,897.0"]]
[[/GREPCENT_TABLE]]

(1) The timing and future spot prices affect the settlement values of our hedge obligations related to commodities and currency exchange rates. Accordingly, these obligations are not included above in the table of contractual obligations (See also Item 7A and Note 13 of Notes to the Consolidated Financial Statements). The timing of settlement of our tax contingent liabilities cannot be reasonably determined and they are not included above in the table of contractual obligations. Future pension obligation payments after fiscal 2021 are subject to revaluation based on changes in the benefit population and/or changes in the value of pension assets based on market conditions that are not determinable as of January 1, 2022.

(2) Variable rate debt based on January 1, 2022 rates. See also Note 7 of Notes to the Consolidated Financial Statements.

We utilize blanket purchase orders (“Blankets”) to communicate expected annual requirements to many of our suppliers. Requirements under Blankets generally do not become “firm” until a varying number of weeks before our scheduled production. The purchase obligations shown in the above table represent the value we consider “firm.”

Critical Accounting Policies

The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States ("US") requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. We believe the following critical accounting policies could have the most significant effect on our reported results.

Purchase Accounting and Business Combinations

Assets acquired and the liabilities assumed as part of a business combination are recognized separately from goodwill at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. We, with the assistance of outside specialists as necessary, use estimates and assumptions to value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable. We may refine these estimates during the measurement period which may be up to one year from the acquisition date. As a result, during the measurement period, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our Consolidated Statements of Income.

Goodwill

We evaluate the carrying amount of goodwill annually, or more frequently if events or circumstances indicate that an asset might be impaired. When applying the accounting guidance, we use estimates to determine when it might be necessary to take an impairment charge. Factors that could trigger an impairment review include significant underperformance relative to historical or forecasted operating results, a significant decrease in the market value of an asset or significant negative industry or economic trends. For goodwill, we may perform a qualitative test to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. We perform our required annual goodwill impairment test as of the end of the October fiscal month.

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We use a weighting of the market approach and the income approach (discounted cash flow method) in testing goodwill for impairment. In the market approach, we apply performance multiples from comparable public companies, adjusted for relative risk, profitability, and growth considerations, to the reporting units to estimate fair value. The key assumptions used in the discounted cash flow method used to estimate fair value include discount rates, revenue and EBITDA margin projections and terminal value rates because such assumptions are the most sensitive and susceptible to change as they require significant management judgment. Discount rates are determined by using market and industry data as well as Company-specific risk factors for each reporting unit. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant discount rate and long-term growth rates.

In the fourth quarter of fiscal 2021, we recorded goodwill impairment of $33.0 million in our global industrial motors reporting unit. The global industrial motors reporting unit had goodwill of $80.1 million as of January 1, 2022 and is included in our Industrial Systems segment. Some of the key considerations used in our impairment testing included (i) market pricing of guideline publicly traded companies (ii) cost of capital, including the risk-free interest rate, and (iii) recent historical and projected operating results of the subject reporting unit. There is inherent uncertainty included in the assumptions used in goodwill impairment testing. A change to any of the assumptions could lead to a future impairment that could be material.

We aggregate our business units by segment for reporting purposes (see also Note 6 of Notes to the Consolidated Financial Statements).

Long-Lived Assets

We evaluate the recoverability of the carrying amount of long-lived assets whenever events or changes in circumstance indicate that the carrying amount of an asset may not be fully recoverable through future cash flows. When applying the accounting guidance, we use estimates to determine when an impairment is necessary. Factors that could trigger an impairment review include a significant decrease in the market value of an asset or significant negative or economic trends (see also Note 5 of Notes to the Consolidated Financial Statements). For long-lived assets, the Company uses an estimate of the related undiscounted cash flows over the remaining life of the primary asset to estimate recoverability.

Retirement and Post Retirement Plans

Most of our domestic associates are participants in defined contribution plans and/or defined benefit pension plans. The majority of the defined benefit pension plans covering our domestic associates have been closed to new associates and frozen for existing associates, however, however certain employees represented by collective bargaining continue to earn benefits. Certain associates are covered by a post-retirement health care plan. Most of our foreign associates are covered by government sponsored plans in the countries in which they are employed. Our obligations under our defined benefit pension plans are determined with the assistance of actuarial firms. The actuaries make certain assumptions regarding such factors as withdrawal rates and mortality rates. The actuaries also provide information and recommendations from which management makes further assumptions on such factors as the long-term expected rate of return on plan assets, the discount rate on benefit obligations and where applicable, the rate of annual compensation increases.

Based upon the assumptions made, the investments made by the plans, overall conditions and movement in financial markets, particularly the stock market and how actual withdrawal rates, life-spans of benefit recipients and other factors differ from assumptions, annual expenses and recorded assets or liabilities of these defined benefit pension plans may change significantly from year to year.