HELD FOR SALE, ACQUISITIONS AND DIVESTITURES

9 Months Ended

Sep. 30, 2023

Business Combination and Asset Acquisition [Abstract]

HELD FOR SALE, ACQUISITIONS AND DIVESTITURES

HELD FOR SALE, ACQUISITIONS AND DIVESTITURES

Assets and Liabilities Held for Sale - Industrial Systems

On September 23, 2023, the Company signed an agreement to sell its industrial motors and generators businesses which represent the majority of the Industrial Systems segment for total consideration of $400 million plus cash transferred at close, subject to working capital and other customary purchase price adjustments. This transaction is expected to close in the first half of 2024. The assets and liabilities related to these businesses have been reclassified to Assets Held for Sale, Noncurrent Assets Held for Sale, Liabilities Held for Sale and Noncurrent Liabilities Held for Sale on the Company's Condensed Consolidated Balance Sheet as of September 30, 2023 as shown in the table below:

	September 30, 2023
Assets Held for Sale
Cash and Cash Equivalents	$	58.2
Trade Receivables, Less Allowances	97.6
Inventories	209.6
Prepaid Expenses and Other Current Assets	15.0
Total Current Assets Held for Sale	$	380.4
Net Property, Plant and Equipment	90.9
Operating Lease Assets	19.1
Goodwill	53.9
Intangible Assets, Net of Amortization	2.2
Other Noncurrent Assets	21.9
Loss on Assets Held for Sale	(112.7)
Total Noncurrent Assets Held for Sale	$	75.3
Liabilities Held for Sale
Accounts Payable	$	70.2
Accrued Compensation and Employee Benefits	12.8
Other Accrued Expenses	18.9
Current Operating Lease Liabilities	3.6
Total Current Liabilities Held for Sale	$	105.5
Deferred Income Taxes	4.6
Pension and Other Post Retirement Benefits	0.2
Noncurrent Operating Lease Liabilities	16.4
Other Noncurrent Liabilities	3.8
Total Noncurrent Liabilities Held for Sale	$	25.0

The sale of the industrial motors and generators businesses does not represent a strategic shift that will have a major effect on the Company's operations and financial results and, therefore, did not qualify for presentation as discontinued operations. The Company recorded a goodwill impairment of $57.3 million and a loss on assets held for sale of $112.7 million in the Condensed Consolidated Statements of Income (Loss) during the three and nine months ended September 30, 2023. The loss on assets held for sale primarily relates to foreign currency translation losses to be reclassified out of accumulated other comprehensive income into earnings at closing of the transaction.

In addition to the assets and liabilities of the industrial motors and generators businesses, there are other assets recorded in Assets Held for Sale on the Company's Consolidated Balance Sheet as of September 30, 2023, which are not material.

Altra Transaction

On October 26, 2022, the Company entered into an Agreement and Plan of Merger (the “Altra Merger Agreement”) by and among the Company, Altra Industrial Motion Corp., a Delaware corporation (“Altra”), and Aspen Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”). On March 27, 2023, in accordance with the terms and conditions of the Altra Merger Agreement, Merger Sub merged with (the "Altra Merger") and into Altra, with Altra surviving the Altra Merger as a wholly owned subsidiary of the Company (the “Altra Transaction”).

Pursuant to the Altra Merger Agreement, at the effective time of the Altra Merger (the “Effective Time”), each of Altra’s issued and outstanding shares of common stock, par value $0.001 per share (“Altra Common Stock”) (other than (i) any shares held by either the Company, Altra or Merger Sub, (ii) shares owned by any direct or indirect wholly owned subsidiary of Altra or the Company, (iii) shares for which appraisal rights had been properly demanded according to Section 262 of the Delaware General Corporation Law and (iv) restricted shares of Altra Common Stock granted under Altra’s 2014 Omnibus Incentive Plan and subject to forfeiture conditions) were converted into $62.00 in cash, without interest (the “Altra Merger Consideration”). The Altra Merger Agreement generally provided that (1) each vested Altra stock option outstanding immediately prior to the Effective Time was canceled and converted into a cash payment equal to the intrinsic value of such option based on the Altra Merger Consideration, (2) each unvested Altra stock option outstanding, immediately prior to the Effective Time, was converted into an award of stock options with respect to the Company's common stock, par value $0.01 per share ("Common Stock") with an intrinsic value equivalent to the intrinsic value of the Altra stock option based on the Altra Merger Consideration, (3) each unvested Altra restricted stock unit outstanding, as of the Effective Time, that was subject solely to time-based vesting conditions was converted into an award of restricted stock units with respect to Common Stock with an equivalent value based on the Altra Merger Consideration on substantially similar terms and conditions, (4) each unvested award of Altra restricted shares was converted into an award of cash of equivalent value based on the Altra Merger Consideration on substantially similar terms and conditions, (5) each unvested Altra restricted stock unit outstanding, as of the Effective Time, that was subject to performance-based vesting conditions was converted into an award of time-based restricted stock with an equivalent value based on the Altra Merger Consideration on substantially similar terms and conditions (with performance goals being deemed satisfied at specified levels) and (6) each vested Altra restricted stock unit outstanding as of Effective Time was converted into the right to receive a cash payment based on the Altra Merger Consideration.

The Company's management determined that the Company is the accounting acquirer in the Altra 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 Altra, which have been measured at estimated fair value as of the date of the business combination.

The preliminary purchase price for the acquisition of Altra was approximately $5.1 billion, subject to the finalization of purchase accounting.

The preliminary purchase price of Altra consisted of the following:

	As of September 30, 2023
Cash paid for outstanding Altra Common Stock(1)	$	4,051.0
Stock based compensation(2)	23.1
Payment of Altra debt(3)	1,061.0
Pre-existing relationships(4)	(0.5)
Preliminary purchase price	$	5,134.6

(1) Cash paid for the common stock component of the preliminary purchase price was based on 65.3 million shares of outstanding Altra Common Stock as of March 27, 2023 at $62.00 per share, in accordance with the Altra Merger Agreement.

(2) Represents fair value of replacement equity-based awards and Company common stock issued in settlement of other Altra share based awards. The portion of the fair value attributable to pre-acquisition service was recorded as part of the consideration transferred in the Altra Transaction of which $17.3 million was paid in cash during the second quarter of 2023.

(3) Cash paid by the Company to settle (a) the term loan facility, (b) the revolving credit facility and (c) 95.28% of the 6.125% senior notes due 2026 of Stevens Holding Company, Inc., a wholly owned subsidiary of Altra (the "Altra Notes"). $18.1 million of the Altra Notes remained outstanding following the closing of the Altra Transaction. See Note 7 - Debt and Bank Credit Facilities for more information.

(4) Represents effective settlement of outstanding payables and receivables between the Company and Altra. No gain or loss was recognized on this settlement.

Purchase Price Allocation

Altra’s assets and liabilities were measured at estimated fair values at March 27, 2023, 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, 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 Altra Transaction and the nature of the net assets acquired, as of September 30, 2023, the valuation process to determine the fair values is not complete and further adjustments are expected in fiscal year 2023. 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 valuation 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 and subsequent measurement period adjustments of the assets acquired and liabilities assumed were as follows:

	As Reported as of March 31, 2023		Measurement period adjustments		As of September 30, 2023
Cash and Cash Equivalents	$	259.1	$	—	$	259.1
Trade Receivables	258.1		(0.1)		258.0
Inventories	436.4		(47.4)		389.0
Prepaid Expenses and Other Current Assets	33.0		—		33.0
Property, Plant and Equipment	411.8		(4.3)		407.5
Intangible Assets	2,224.0		(82.0)		2,142.0
Deferred Income Tax Benefits	0.7		—		0.7
Operating Lease Assets	42.3		4.5		46.8
Other Noncurrent Assets	21.6		0.2		21.8
Accounts Payable	(183.2)		—		(183.2)
Accrued Compensation and Benefits	(66.1)		—		(66.1)
Other Accrued Expenses(1)	(145.7)		0.6		(145.1)
Current Operating Lease Liabilities	(12.5)		0.2		(12.3)
Current Maturities of Long-Term Debt	(0.4)		—		(0.4)
Long-Term Debt	(25.3)		—		(25.3)
Deferred Income Taxes	(560.7)		25.7		(535.0)
Pension and Other Post Retirement Benefits	(19.8)		—		(19.8)
Noncurrent Operating Lease Liabilities	(29.7)		0.7		(29.0)
Other Noncurrent Liabilities	(8.3)		—		(8.3)
Total Identifiable Net Assets	2,635.3		(101.9)		2,533.4
Goodwill	2,499.3		101.9		2,601.2
Preliminary purchase price	$	5,134.6	$	—	$	5,134.6

(1) Includes $60.1 million related to Altra Transaction costs paid by the Company at the closing of the Altra Transaction.

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 using either the cost approach, which relies on an estimate of replacement costs of the new assets and estimated accrued depreciation, or the market approach.

Identifiable Intangible Assets

The preliminary fair value and weighted average useful life of the identifiable intangible assets are as follows:

	Fair Value		Weighted Average Useful Life (Years)
Customer Relationships(1)	$	1,710.0	14.0
Trademarks(2)	330.0		10.0
Technology(3)	102.0		13.0
Total Identifiable Intangible Assets	$	2,142.0

(1) 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 Altra's existing customer base.

(2) The Altra Trademarks were valued using the relief from royalty method, which considers both the market approach and the income approach.

(3) The Altra Technology was 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.

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

Lease liabilities were measured as of the effective date of the acquisition 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.

Deferred Income Tax Assets and Liabilities

The acquisition was structured as a merger, and therefore the Company assumed the historical tax basis of Altra’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 10 - Income Taxes for further information related to income taxes.

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. Accounts receivable 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 Altra. The goodwill created in the acquisition is not expected to be deductible for tax purposes.

Transaction Costs

The Company incurred transaction-related costs in connection with the Altra Transaction of approximately $7.5 million and $82.5 million during the three and nine months ended September 30, 2023, respectively, which include legal and professional services and certain employee compensation costs, including severance and retention, that were recognized as Operating Expenses in the Company's Condensed Consolidated Statements of Income (Loss). There were $1.0 million of transaction-related costs in connection with the Altra Transaction recognized during the three and nine months ended September 30, 2022. During the year ended December 31, 2022 the Company incurred $14.7 million of costs related to the Altra Transaction.

The Company also incurred $15.7 million of share-based compensation expense during the first quarter of 2023 related to the accelerated vesting of awards for certain former Altra employees. See Note 9 – Shareholders' Equity for additional information.

In connection with the Altra Transaction, the Company incurred additional costs due to the entry into certain financing arrangements. Such financing arrangements are described in Note 7 – Debt and Bank Credit Facilities.

Unaudited Pro Forma Information

The following unaudited supplemental pro forma financial information presents the Company's financial results for the three and nine months ended September 30, 2023 and September 30, 2022, respectively, as if the Altra Transaction had occurred on January 2, 2022, the first day of the Company's fiscal year ended December 31, 2022. 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 less interest income earned on the investment of proceeds from borrowings prior to the close of the Altra Transaction, (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, including share-based compensation expense related to the accelerated vesting of awards for certain former Altra employees, which reduced expenses by $7.5 million and $98.2 million for the three and nine months ended September 30, 2023, respectively, and increased expenses by $4.2 million and $111.9 million for the three and nine months ended September 30, 2022, respectively, (v) additional cost of sales related to the inventory valuation adjustment which reduced expenses by $8.8 million and $52.9 million for the three and nine months ended September 30, 2023, respectively, and increased expenses by zero and $52.9 million for the three and nine months ended September 30, 2022, respectively and (vi) the estimated income tax effect on the pro forma adjustments.

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 Altra Transaction been completed as of the date indicated or the results that may be obtained in the future.

	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Net Sales	$	1,649.8	$	1,791.6	$	5,093.6	$	5,449.3
Net (Loss) Income Attributable to Regal Rexnord Corporation	$	(126.7)	$	66.8	$	(7.2)	$	80.5
(Loss) Earnings Per Share Attributable to Regal Rexnord Corporation:
Basic	$	(1.91)	$	1.01	$	(0.11)	$	1.21
Assuming Dilution	$	(1.91)	$	1.00	$	(0.11)	$	1.20