Held For Sale, Divestitures and Acquisitions

12 Months Ended

Jan. 01, 2022

Business Combination and Asset Acquisition [Abstract]

Held For Sale, Divestitures and Acquisitions

Held For Sale, Divestitures and Acquisitions

Assets Held for Sale

As of January 1, 2022 and January 2, 2021, the Company presented $12.5 million and $9.1 million, respectively, of certain assets held for sale as the Company had both the intent and ability to sell these assets.

2019 Divestitures

Regal Drive Technologies

On January 7, 2019, the Company sold its drive technologies business and received proceeds of $0.3 million in the first quarter of 2020 and $119.9 million in 2019. The drive technologies business was included in the Company's Commercial Systems segment. The Company recognized a gain on sale of $0.1 million in the first quarter of 2020 and $41.0 million in 2019 in the Consolidated Statements of Income.

Velvet Drive

On April 1, 2019, the Company sold its marine transmission business and received proceeds of $8.9 million. This business was included in the Company's Motion Control Solutions segment. The Company recognized a loss on sale of $0.5 million in the Consolidated Statements of Income.

CapCom

On April 1, 2019, the Company sold its capacitor business and received proceeds of $9.9 million. This business was included in the Company's Climate Solutions segment. The Company recognized a gain on sale of $6.0 million in the Consolidated Statements of Income.

Vapor Recovery

On July 1, 2019, the Company sold its vapor recovery business and received proceeds of $19.2 million. The business was included in the Company's Commercial Systems segment. The Company recognized a loss on sale of $1.9 million in the Consolidated Statements of Income.

2021 Acquisitions

Rexnord Transaction

On October 4, 2021, in accordance with the terms and conditions of the Agreement and Plan of Merger, dated as of February 15, 2021 (the “Merger Agreement”), the Company completed its combination with the Rexnord Process & Motion Control business (“Rexnord PMC business”) of Rexnord Corporation (which changed its name on October 4, 2021 to Zurn Water Solutions Corporation) (“Zurn”) in a Reverse Morris Trust transaction (the “Rexnord Transaction”). Pursuant to the Rexnord Transaction, (i) 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”), (ii) 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 (iii) 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 as of the effective time of the Merger (the “Effective Time”) into the right to receive 0.22296103 shares of common stock, $0.01 par value per share, of the Company (“Company common stock”), as calculated in the Merger Agreement.

As of the Effective Time, Land, which held the Rexnord PMC business, became a wholly owned subsidiary of the Company.

Pursuant to the Merger, the Company issued approximately 27,055,945 shares of Company common stock to holders of Land common stock, which represents approximately 39.9% of the approximately 67,756,732 outstanding shares of Company common stock immediately following the Effective Time. In addition, holders of record of Company common stock as of October 1, 2021 received $6.99 per share of Company common stock pursuant to a previously announced special dividend in connection with the Transactions (the “Special Dividend”).

In connection with the Rexnord Transaction, membership on the Company's Board of Directors was increased to 11 directors, in which two directors designated by Zurn were appointed to the board. The current chief executive officer of the Company continued as the chief executive officer of the combined company after the Rexnord Transaction and a majority of the senior management of the Company immediately prior the consummation of the Rexnord Transaction remained executive officers of the Company immediately after the Rexnord Transaction. The Company's management determined that the Company is the accounting acquirer in the Rexnord Transaction based on the facts and circumstances noted within this section and other relevant factors. As such, the Company applied the acquisition method of accounting to the identifiable assets and liabilities of Rexnord PMC business, which have been measured at estimated fair value as of the date of the business combination.

In connection with the Rexnord Transaction, the Company has entered into certain financing arrangements, which are described in Note 7.

The tax matters agreement the Company entered into in connection with the Rexnord Transaction imposes certain restrictions on the Company, Land and Zurn during the two-year period following the Spin-Off, subject to certain exceptions, with respect

to actions that could cause the Reorganization and the Distributions to fail to qualify for the intended tax treatment. As a result of these restrictions, the Company's and Land’s ability to engage in certain transactions, such as the issuance or purchase of stock or certain business combinations, may be limited.

The total consideration transferred for the acquisition of Land was approximately $4.0 billion subject to finalization of purchase accounting and working capital adjustments. The total assets and liabilities assumed will be adjusted, based on the final balances per the terms included within the Separation and Distribution Agreement.

The preliminary purchase price of the Rexnord PMC business consisted of the following (in millions):

Fair value of Company common stock issued to Zurn (a)	$	3,896.3
Stock based compensation (b)	47.1
Adjustment amount (c)	30.9
Land Financing Fees paid by the Company (d)	3.9
Preexisting Relationships (e)	(0.8)
Preliminary purchase price	$	3,977.4

(a) Represents approximately 27 million new shares of Company common stock issued to Zurn stockholders in the exchange offer, based on the Company's October 4, 2021, closing share price of $151.00, less the Special Dividend amount of $6.99, which the Zurn stockholders were not entitled to receive.

(b) Represents fair value of replacement equity-based awards and Company common stock issued in settlement of other Zurn share based awards. The portion of the fair value attributable to pre-Merger service was recorded as part of the consideration transferred in the Merger - see Note 10.

(c) Represents estimated working capital adjustment pursuant to the terms of the purchase agreement.

(d) Represents financing fees paid by the Company for the Bridge Facility and Land Term Facility (as defined in Note 7) that were determined to be costs of Zurn.

(e) Represents effective settlement of outstanding payables and receivables between the Company and the Rexnord PMC business. No gain or loss was recognized on this settlement.

Purchase Price Allocation

The Rexnord PMC business’s assets and liabilities were measured at estimated fair values at October 4, 2021, primarily using Level 3 inputs. Estimates of fair value represent management’s best estimate of assumptions about future events and uncertainties, including significant judgments related to future cash flows, discount rates, competitive trends, margin and revenue growth assumptions including royalty rates and customer attrition rates and others. Inputs used were generally obtained from historical data supplemented by current and anticipated market conditions and growth rates expected as of the acquisition date.

Due to the timing of the business combination and the nature of the net assets acquired, at January 1, 2022, the valuation process to determine the fair values is not complete and further adjustments are expected in fiscal year 2022. The Company has estimated the preliminary fair value of net assets acquired based on information currently available and will continue to adjust those estimates as additional information becomes available, including the refinement of market participant assumptions. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price allocation adjustments will be recorded during the measurement period, but no later than one year from the date of the acquisition. The Company will reflect measurement period adjustments in the period in which the adjustments are determined.

The preliminary fair value of the assets acquired and liabilities and noncontrolling interests assumed were as follows (in millions):

	as of October 4, 2021
Cash and Cash Equivalents	$	192.8
Trade Receivables	186.9
Inventories	262.5
Prepaid Expenses and Other Current Assets	21.0
Assets Held for Sale	1.4
Deferred Income Tax Benefits	8.8
Property, Plant and Equipment	412.3
Operating Lease Assets	46.4
Intangible Assets	1,831.0
Other Noncurrent Assets	12.3
Accounts Payable	(121.1)
Accrued Compensation and Benefits	(44.0)
Other Accrued Expenses	(55.7)
Current Operating Lease Liabilities	(8.1)
Current Maturities of Long-Term Debt	(2.5)
Long-Term Debt	(558.2)
Deferred Income Taxes	(508.2)
Pension and Other Post Retirement Benefits	(75.1)
Noncurrent Operating Lease Liabilities	(38.0)
Other Noncurrent Liabilities	(17.0)
Total Identifiable Net Assets	1,547.5
Goodwill	2,433.2
Noncontrolling Interests	(3.3)
Preliminary purchase price	$	3,977.4

Summary of Significant Fair Value Methods

The methods used to determine the fair value of significant identifiable assets and liabilities included in the allocation of purchase price are discussed below.

Inventories

Acquired inventory was comprised of finished goods, work in process and raw materials. The fair value of finished goods was calculated as the estimated selling price, adjusted for costs of the selling effort and a reasonable profit allowance relating to the selling effort. The fair value of work in process inventory was primarily calculated as the estimated selling price, adjusted for estimated costs to complete the manufacturing, estimated costs of the selling effort, as well as a reasonable profit margin on the remaining manufacturing and selling effort. The fair value of raw materials and supplies was determined based on replacement cost which approximates historical carrying value.

Property, Plant and Equipment

The preliminary fair value of Property, Plant, and Equipment was determined based on assumptions that market participants would use in pricing an asset.

Identifiable Intangible Assets

The fair value and weighted average useful life of the identifiable intangible assets are as follows (in millions):

	Fair Value		Weighted Average Useful Life (Years)
Trademarks(1)	$	225.0	10
Customer Relationships(2)	1,519.0		17
Technology(3)	87.0		12
Total Identifiable Intangible Assets	$	1,831.0

The fair value estimates for identifiable intangible assets are preliminary and are based upon assumptions that market participants would use in pricing an asset.

(1) The Rexnord PMC business Trademarks were valued using the relief from royalty method, which considers both the market approach and the income approach.

(2) The fair value of Customer Relationships was valued using a multi-period excess earnings method, a form of the income approach, which incorporates the estimated future cash flows to be generated from the Rexnord PMC business's existing customer base.

(3) The Rexnord PMC business Technology were valued using the relief from royalty method, which considers both the market approach and the income approach.

The intangible assets related to definite-lived customer relationships, trademarks and technology are amortized over their estimated useful lives, which had estimated weighted-average useful lives of 17 years, 10 years and 12 years, respectively, at acquisition.

The Company believes that the amounts of purchased intangible assets recorded represent the preliminary fair values and approximates the amounts a market participant would pay for these intangible assets as of the acquisition date.

Leases, including right-of-use ("ROU") assets and lease liabilities

Lease liabilities were measured as of the acquisition date at the present value of future minimum lease payments over the remaining lease term and the incremental borrowing rate of the Company as if the acquired leases were new leases as of the acquisition date. ROU assets recorded within “Operating Lease Assets” are equal to the amount of the lease liability at the acquisition date adjusted for any off-market terms of the lease. The remaining lease term was based on the remaining term at the acquisition date plus any renewal or extension options that the Company is reasonably certain will be exercised.

Pension and Other Post Retirement Benefits

The Rexnord PMC business recognized a pretax net liability representing the net funded status of the Rexnord PMC business’s defined-benefit pension and other postretirement benefit (“OPEB”) plans. See Note 8 for further information on the pension and OPEB arrangements.

Long-Term Debt

In connection with the Rexnord Transaction, the Company entered into certain financing arrangements as indicated in Note 7. The proceeds of the Land Term Facility, $487.0 million, 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.

The fair value for long term debt was determined based on the total indebtedness as the debt consummated at the time of closing of the acquisition.

Deferred Income Tax Assets and Liabilities

The acquisition was structured as a merger and therefore, the Company assumed the historical tax basis of the Rexnord PMC business’s assets and liabilities. The deferred income tax assets and liabilities include the expected future federal, state, and foreign tax consequences associated with temporary differences between the fair values of the assets acquired and liabilities assumed and the respective tax bases. Tax rates utilized in calculating deferred income taxes generally represent the enacted statutory tax rates at the effective date of the acquisition in the jurisdictions in which legal title of the underlying asset or liability resides. See Note 11 for further information related to income taxes.

Noncontrolling Interests

As of the date of acquisition, the Company assumed the noncontrolling interest in two subsidiaries. The carrying values of the noncontrolling interests approximates the fair value of as of the acquisition date.

Other Assets Acquired and Liabilities Assumed (excluding Goodwill)

The Company utilized the carrying values, net of allowances, to value accounts receivable and accounts payable as well as other current assets and liabilities as it was determined that carrying values represented the fair value of those items at the acquisition date. With the exception of the receivable allowance to align Rexnord PMC business's reserve policy to the Company's policy, to reflect the best estimate at the acquisition date of the contractual cash flows expected to be collected

Goodwill

The excess of the consideration for the acquisition over the fair value of net assets acquired was recorded as goodwill. The goodwill is attributable to expected synergies and expanded market opportunities from combining the Company’s operations with those of the Rexnord PMC business. The goodwill created in the acquisition is not expected to be deductible for tax purposes.

Transaction Costs

The Company incurred transaction-related costs of approximately $64.4 million for the year ended January 1, 2022. These costs were associated with legal and professional services and were recognized as Operating expenses in our Consolidated Statements of Income.

Results of the Rexnord PMC business Subsequent to the Acquisition

The Rexnord PMC business had Net Sales and Net Income of $340.4 million and $2.3 million, respectively, which include the impact of purchase accounting adjustments, are included in the Consolidated Statements of Income for the period from October 4, 2021 through January 1, 2022. The financial results of the Rexnord PMC business have been included in the Company's Motion Control Solutions segment from the date of acquisition.

Unaudited Pro Forma Information

The following unaudited supplemental pro forma financial information presents the financial results for the fiscal years 2021 and 2020 as if the Rexnord Transaction had occurred on December 29, 2019. The pro forma financial information includes, where applicable, adjustments for: (i) additional amortization expense that would have been recognized related to the acquired intangible assets, (ii) additional interest expense on transaction related borrowings, (iii) additional depreciation expense that would have been recognized related to the acquired property, plant, and equipment, (iv) transaction costs and other one-time non-recurring costs which reduced expenses by $64.4 million for the year ended January 1, 2022 and increased expenses by $64.4 million for the year ended January 2, 2021, (v) additional cost of sales related to the inventory valuation adjustment which reduced expenses by $24.1 million for the year ended January 1, 2022 and increased expenses by $26.9 million for the year ended January 2, 2021, and (vi) the estimated income tax effect on the pro forma adjustments. The pro forma financial information excludes adjustments for estimated cost synergies or other effects of the integration of the Rexnord Transaction.

The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the Rexnord Transaction been completed as of the date indicated or the results that may be obtained in the future.

Unaudited Supplemental Pro Forma Financial Information

	For the Year Ended January 1, 2022		For the Year Ended January 2, 2021
Net Sales	$	4,780.7	$	4,136.8
Net Income Attributable to Regal Rexnord Corporation	$	347.3	$	84.8
Earnings Per Share Attributable to Regal Rexnord Corporation:
Basic	$	5.13	$	1.25
Assuming Dilution	$	5.09	$	1.25

Arrowhead Systems-Automation Solutions

On November 23, 2021, the Company acquired all of the outstanding equity interests of Arrowhead Systems, LLC, which the Company now refers to as its Automation Solutions business, for $315.6 million in cash, net of $1.1 million of cash acquired. Arrowhead 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. The Automation Solutions business is a division of the Company's Motion Control Solutions segment.

The Consolidated Statements of Income include the results of operations of the Automation Solutions business since the date of acquisition, and such results are reflected in the Motion Control Solutions segment. Results of operations since the date of acquisition and supplemental pro forma financial information have not been presented for the acquisition of the Automation Solutions business as such information is not material to the results of operations.

Transaction costs incurred in connection with the Transactions were $6.9 million in fiscal 2021. These costs were primarily comprised of professional fees, recorded in general, administrative and other expenses.

Purchase Price Allocation

Arrowhead Systems’ assets and liabilities were measured at estimated fair values at November 23, 2021. Estimates of fair value represent management’s best estimate of assumptions about future events and uncertainties, including significant judgments related to future cash flows, discount rates, competitive trends, margin and revenue growth assumptions including royalty rates and customer attrition rates and others. Inputs used were generally obtained from historical data supplemented by current and anticipated market conditions and growth rates expected as of the acquisition date.

The preliminary fair value of the assets acquired and liabilities assumed were as follows (in millions):

	as of November 23, 2021
Cash and Cash Equivalents	$	1.1
Trade Receivables	19.1
Inventories	12.8
Prepaid Expenses and Other Current Assets	7.6
Property, Plant and Equipment	3.7
Intangible Assets(1)	160.0
Accounts Payable	(4.7)
Accrued Compensation and Benefits	(2.6)
Other Accrued Expenses	(25.0)
Total Identifiable Net Assets	172.0
Goodwill	143.6
Preliminary purchase price	$	315.6

(1) Includes $124.0 million related to Customer Relationships, $18.0 million related to Trademarks and $18.0 million related to Technology.

The allocation of purchase price is subject to finalization during a period not to exceed one year from the acquisition date. Adjustments to the preliminary allocation of purchase price may occur related to finalization of the working capital adjustment, finalization of the valuation of intangibles and other long-lived assets, adjustment to income tax assets and liabilities and other changes related to the valuation of assets acquired and liabilities assumed.

The goodwill is attributable to expected synergies and expanded market opportunities from combining the Company's operations with those of the Automation Solutions business. Goodwill was deductible for tax purposes.

The intangible assets related to definite-lived customer relationships, trademarks and technology and are amortized over their estimated useful lives, which had estimated weighted-average useful lives of 15 years, 10 years and 12 years, respectively, at acquisition.