BELOIT, Wis. — Regal Rexnord Corp. announced it has completed the acquisition of Altra Industrial Motion Corp., closing the deal that was signed on Oct. 26, 2022.
"I am thrilled to welcome Altra associates to Regal Rexnord, and incredibly excited about all that we expect to accomplish as one, enhanced Regal Rexnord team. Together, we have clear lines of sight to faster growth, higher margins, stronger free cash flow and improved ROIC," CEO Louis Pinkham said. " Altra's Automation & Specialty platform transforms our existing automation portfolio into a meaningful, global automation solutions provider. Altra's Power Transmission Technologies business significantly enhances our legacy power transmission portfolio, in particular our industrial powertrain offering, by adding complementary products in brakes, gears, and clutches. The combined power transmission, automation and powertrain capabilities of the new Regal Rexnord offer customers a significantly enhanced value proposition across a wider range of end markets – many with highly attractive secular growth tailwinds.
"I am highly confident that our well-aligned cultures and firmly-held shared values, hallmarks of both organizations, will lead to great success. Associates at both Regal Rexnord and Altra prioritize and value putting safety first, acting with integrity, driving purposeful innovation, offering an excellent customer experience and embracing a continuous improvement mindset. Together, we can create even more value for our customers, our fellow associates, and our shareholders."
The acquisition of Altra is expected to:
- Benefit customers: The aggregate capabilities of the pro forma business across power transmission and automation – including a more expansive global sales channel and aftermarket support network – position Regal Rexnord to offer more robust sub-systems, including industrial powertrains, and to do so across a wider range of end markets. Examples of end markets with enhanced capabilities include medical, warehouse & logistics, food & beverage, aerospace, and alternative energy, among others.
Notably, much of the pro forma business offers automation products that sit adjacent to its industrial powertrain content in many end user applications, putting Regal Rexnord in a unique position to offer customers a wider and more value-added range of services, including up-front design, performance optimization, and diagnostic support.
The service offering is further enhanced when including Regal Rexnord's suite of IIoT and data analytics capabilities, marketed under the PerceptivTM brand, which are supported by proprietary data from its power transmission, automation and motor components related to how they inter-operate as part of a larger sub-system. Regal Rexnord is now better positioned for Industry 4.0, which will be critical to future new product development efforts.
Accelerate organic growth: A broader offering, stronger channel, increased global presence, and an enhanced customer value proposition should support stronger organic growth. In particular, Regal Rexnord envisions a significant opportunity to accelerate growth by leveraging its 80/20 tools to focus resources on its most profitable opportunities – a practice that has gained significant momentum in the legacy Regal Rexnord business.
The pro forma business has higher exposure to end markets with secular growth tailwinds, which are expected to represent over 40% of sales by 2025 and more than 50% when considering exposure to residential HVAC. In particular, the pro forma Automation & Motion Control business, with 2022 sales of ~$1.7 billion, is anticipated to have at least 70% of its sales generated in end markets with secular growth characteristics. It is anticipated that a significant share of new product development investments will be directed to support the needs of customers in these markets. - Enable sizable margin gains: Regal Rexnord sees a path to an adjusted gross margin of approximately 40% in 2025, up from 33% in 2022 for legacy Regal Rexnord and compared to its prior expectation of reaching a 37% adjusted gross margin by 2025. Adjusted EBITDA margins are expected to rise to at least 25% in 2025, up from 21% in 2022. Principal drivers of this anticipated margin expansion are $160 million of annual run-rate cost synergies related to the Altra transaction and improved mix, with much of the anticipated mix improvement tied to introducing a host of margin accretive new products.
Expected synergies are anticipated to be driven by procurement savings, distribution efficiencies, footprint rationalization, and SG&A reductions. Actions to realize the synergies are expected to be completed by year four. Furthermore, leveraging Regal Rexnord's competencies in 80/20 and lean, and building on its successful integration of Rexnord PMC, Regal Rexnord sees an opportunity to further optimize the combined company's global operating model, which can support greater investment in the business to drive profitable growth.
Be accretive to adjusted EPS: The moderate accretion anticipated in the first year post closing is expected to rise materially in the coming years as cost synergies grow, sales synergies are executed, de-leveraging is achieved, and Regal Rexnord's cash tax rate normalizes. - Strengthen free cash flow: The pro forma enterprise is expected to generate substantial free cash flow, which in the coming years should support a strong pace of debt reduction. Pro forma free cash flow is expected to approximate $1.1 billion by 2025 and to reach ~$1.4 billion by 2026, aided by cost and sales synergies, working capital improvements, accelerated de-leveraging and a normalizing cash tax rate. Regal Rexnord expects to lower its net debt/adjusted EBITDA ratio to between 2.5x and 3.0x in 2024, and to below 2.5x thereafter. Pro forma free cash flow conversion rates are expected to approximate 100% in future periods.
- Generate attractive ROIC: Return on invested capital is expected to exceed 10% in Year 5, driven by synergies, working capital improvements, and capital expenditure efficiencies.
- Create opportunities for associates: Stronger anticipated growth, plus new investments needed to drive and support this growth, are expected to open up a wide range of new opportunities for associates.
New Segment Structure
In conjunction with the closing, Regal Rexnord announced today that, beginning with its first quarter 2023 earnings release, it plans to establish a new segment structure for reporting purposes. The new structure reflects a corresponding change in leadership as well as the manner in which the CEO reviews financial information to allocate resources and assess performance. Additionally, this new structure better supports the strategic focus by the pro forma business on driving above-market growth, primarily by leveraging its deep application expertise and technology leadership across a select range of end markets, to provide customers with differentiated, and highly energy-efficient sub-systems. The new operating segments are: Industrial Powertrain Solutions (IPS), Power Efficiency Solutions (PES), Automation & Motion Control (AMC) and Industrial Systems.
Industrial Powertrain Solutions (~37% of 2022 pro forma sales) is expected to consist of the majority of the current Motion Control Solutions (MCS) segment, excluding the conveying and aerospace business units, plus Altra's Power Transmission Technologies segment. The segment will be led by Jerry Morton, Executive Vice President and President, Industrial Powertrain Solutions, who most recently served as President - Integration for MCS. Morton's prior experience includes four years leading the legacy Regal PTS business prior to the 2021 merger with Rexnord PMC, and 28 years in various management and leadership roles at Emerson.
Power Efficiency Solutions (~31%) is expected to consist of the current Climate Solutions and Commercial Systems businesses. The segment will be led by Scott Brown, Executive Vice President and President, Power Efficiency Solutions. Brown joined Regal Beloit Corporation in August 2005, after spending 17 years with General Electric in operations and various business leadership roles, and became President, Commercial Systems in June 2019.
Automation & Motion Control (~24%) is expected to consist of the current MCS aerospace and conveying business units, Altra's Automation & Specialty (A&S) segment, and the Regal Rexnord Thomson business that is currently part of the Industrial Systems segment. Kevin Zaba, Executive Vice President and President, Automation & Motion Control, will become the leader of AMC. Zaba spent the past 8 years running Rexnord PMC and then the Regal Rexnord MCS business, which was formed out of the 2021 merger between legacy Regal's PTS business and Rexnord PMC. Prior to joining Rexnord, Zaba spent 24 years working in various commercial and general management roles at Rockwell Automation.
Industrial Systems (~8%) is expected to consist of its current operations, excluding the Thomson business. The segment will continue to operate with regional North American and Asian leadership team members reporting together to the CEO, while the Company continues its strategic review of the Global Motors and Generators businesses.
Transaction Summary
Regal Rexnord acquired 100% of the issued and outstanding shares of Altra common stock in an all cash transaction for $62.00 per share. The transaction values Altra at $4.95 billion1, representing 13.1x Altra's 2022 Adjusted EBITDA, or 9.2x after factoring estimated run-rate cost synergies.
