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Description of Business and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2022

Basis of Preparation and Description of Business

Headquartered in Braintree, Massachusetts, Altra Industrial Motion Corp. (the “Company”) is a leading global designer, producer and marketer of a wide range of electro-mechanical power transmission motion control (“PTMC”) products. The Company brings together strong brands with production facilities in 17 countries. Altra’s leading brands currently include Ameridrives Couplings, Bauer Gear Motor, Bibby Turboflex, Boston Gear, Delroyd Worm Gear, Formsprag Clutch, Guardian Couplings, Huco, Industrial Clutch, Inertia Dynamics, Kilian Manufacturing, Kollmorgen, Lamiflex Couplings, Marland Clutch, Matrix, Nook Industries, Nuttall Gear, Stieber Clutch, Stromag, Svendborg Brakes, Portescap, TB Wood’s, Thomson, Twiflex, Warner Electric, Warner Linear, and Wichita Clutch.

On October 26, 2022, we entered into an Agreement and Plan of Merger (the “Regal Rexnord Merger Agreement”) with Regal Rexnord Corporation, a Wisconsin corporation (“Regal Rexnord”), and Aspen Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Regal Rexnord (“Merger Sub”), pursuant to which, and upon the terms and subject to the conditions described therein, Merger Sub will merge with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Regal Rexnord (the “Regal Rexnord Merger”). Under the Regal Rexnord Merger Agreement, at the closing of the Regal Rexnord Merger, each issued and outstanding share of our common stock (other than (i) shares owned by the Company, any subsidiary of the Company, Regal Rexnord, Merger Sub or any other subsidiary of Regal Rexnord, (ii) shares owned by stockholders of the Company who have validly exercised their statutory rights of appraisal under the General Corporation Law of the State of Delaware (“DGCL”) and (iii) Company Restricted Shares (as defined in the Regal Rexnord Merger Agreement) will be converted into the right to receive $62.00 in cash, without interest and subject to any required withholding of taxes. As announced in our Current Report on Form 8-K filed with the SEC on January 18, 2023, the Regal Rexnord Merger was approved by our shareholders.

The consummation of the Regal Rexnord Merger is subject to customary closing conditions and is expected to occur in the first half of 2023 and potentially in the first quarter of 2023. If the Regal Rexnord Merger Agreement is terminated under specified circumstances, we will be required to pay Regal Rexnord a termination fee of $100 million. The Regal Rexnord Merger Agreement also provides that, in connection with the termination of the Regal Rexnord Merger Agreement under specified antitrust or foreign direct investment related circumstances, Regal Rexnord will be required to pay us a “reverse termination fee” of $200 million.

During the twelve months ended December 31, 2022, the Company incurred approximately $9.9 million of costs in connection with the proposed merger. These costs related primarily to investment banking and legal fees and are included in transaction-related costs in the consolidated condensed statement of operations. The Company has not recognized any transaction-related costs that are contingent upon the consummation of the proposed merger, including contingent investment banking fees, legal costs, management retention bonuses, acceleration of stock compensation costs, and other costs.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Net Income/(Loss) Per Share

Basic earnings per share is based on the weighted average number of shares of common stock outstanding and diluted earnings per share is based on the weighted average number of shares of common stock outstanding and all potentially dilutive common stock equivalents outstanding. Common stock equivalent shares are included in the per share calculations when the effect of their inclusion is dilutive.

The following is a reconciliation of basic to diluted shares outstanding:


	Years Ended December 31,
	2022		2021		2020
Shares used in net income per common share - basic		65.1		64.8		64.6
Effect of dilutive shares		0.3		0.6		—
Shares used in net income per common share - diluted		65.4		65.4		64.6
Shares excluded as their inclusion would be anti-dilutive		—		—		0.2

Fair Value of Financial Instruments

Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:

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Level 1- Quoted prices in active markets for identical assets or liabilities.

•

Level 2- Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived.

•

Level 3- Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents and are classified as Level 1. The carrying values of financial instruments, including accounts receivable, cash equivalents, accounts payable, and other accrued liabilities are carried at cost, which approximates fair value, and are classified as Level 1. Debt under the Altra Credit Agreement (as defined herein) is classified as Level 2 and is comprised of the Term Loan Facility and the Revolving Credit Facility (both as defined herein). The carrying amount of the Term Loan Facility of $390.0 million and the Revolving Credit Facility of $265.0 million approximates fair value due to the fact that the interest rate on the debt is based on variable interest rates. The carrying amount of the Notes (as defined herein) was $383.7 million and the estimated fair value of the Notes was $384.7 million at December 31, 2022. The Notes are classified as Level 2.

The Company determines the fair value of financial instruments using quoted market prices whenever available and classifies these investments as Level 1. When quoted market prices are not available for various types of financial instruments (such as derivative instruments), the Company uses standard models with market-based inputs, which take into account the present value of estimated future cash flows and the ability of the Company or the financial counterparty to perform. These investments are classified as Level 2. For cross-currency interest rate swaps and interest rate swaps, the significant inputs to these models are interest rate curves for discounting future cash flows and are adjusted for credit risk. See additional discussion of the Company’s use of financial instruments including cross-currency interest rate swaps and interest rate swaps included in Note 15.

During 2022, the company recorded an impairment of $3.0 million related to a building expected to be sold upon the closing of its facility in Dessau, Germany. The Company estimated the fair value of the building based on appraisals and sales prices of like properties (Level 2). The net book value of the building is classified as an asset held for sale as part of “Prepaid expenses and Other current assets” in the consolidated balance sheet, as the Company expects it to be sold within the next twelve months.

In December 2020 and May 2022, the Company invested approximately $5.0 million and $4.6 million, respectively, for a minority equity interest in a privately held manufacturing software company, MTEK Industry AB (“MTEK”), over which the Company does not exert significant influence. The equity investments do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value using the net asset value per share. Therefore, in accordance with ASU 2016-01, the Company elected to measure the investments at their cost less impairment, if any, adjusted for observable price changes in orderly transactions for identical or a similar investment of the same issuer. These investments are considered Level 3 assets based on the lack of observable inputs and are classified within other non-current assets in the consolidated balance sheets. The Company monitors its equity investment in MTEK for indicators of impairment or upward adjustments on an ongoing basis. If the Company determines that such an indicator is present, an adjustment will be recorded, which will be measured as the difference between the carrying value and estimated fair value. During the quarter ended June 30, 2022, the Company reassessed the value of its December 2020 investment and recognized a $0.7 million unrealized holding gain as a result of an observable price change from the additional investment made in May 2022. As of December 31, 2022, there were no other indicators that support an adjustment to MTEK’s carrying value.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the financial statements. Actual results could differ from those estimates.

Foreign Currency Translation

Assets and liabilities of subsidiaries operating outside of the United States with a functional currency other than the U.S. Dollar are translated into U.S. Dollars using exchange rates at the end of the respective period. Revenues and expenses are translated at average exchange rates effective during the respective period.

Foreign currency translation adjustments are included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. Net foreign currency transaction gains and losses are included in the results of operations in the period incurred and included in other non-operating expense (income), net in the accompanying consolidated statements of operations. Net foreign currency transaction gains and losses for the years ended December 31, 2022, 2021 and 2020 were inconsequential.

Trade Receivables

All trade account receivables are reported net of allowances for credit losses. The allowance for credit losses represents the Company’s best estimate of the credit losses expected from our trade account receivables over the life of the underlying assets. Assets with similar risk characteristics are pooled together for determination of their current expected credit losses. The Company regularly performs detailed reviews of its pooled assets to evaluate the collectability of receivables based on a combination of past, current, and future financial and qualitative factors that may affect customers’ ability to pay. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the recognized receivable to the amount reasonably expected to be collected.

Inventories

Inventories are generally stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method.

The carrying value of inventories acquired by the Company in its acquisitions reflects fair value at the date of acquisition as determined by the Company based on the replacement cost of raw materials, the sales price of the finished goods less an appropriate amount representing the expected profitability from selling efforts, and for work-in-process the sales price of the finished goods less an appropriate amount representing the expected profitability from selling efforts and costs to complete.

The Company periodically reviews its quantities of inventories on hand and compares these amounts to the expected usage of each particular product or product line. The Company records a charge to cost of sales for any amounts required to reduce the carrying value of inventories to its estimated net realizable value.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, net of accumulated depreciation.

Depreciation of property, plant and equipment, including finance leases, is provided using the straight-line method over the estimated useful life of the asset, as follows:


Buildings and improvements		7 to 45 years
Machinery and equipment		2 to 15 years
Finance leases		Life of lease

Leasehold improvements are depreciated on a straight-line basis over the estimated life of the asset or the life of the lease, if shorter.

Improvements and replacements are capitalized to the extent that they increase the useful economic life or increase the expected economic benefit of the underlying asset. Repairs and maintenance expenditures are charged to expense as incurred.

Lease Accounting Policy

Arrangements that are determined to be leases at inception are recognized in operating lease right of use (ROU) assets, current lease liabilities, and long-term lease liabilities in the consolidated balance sheet. Operating lease liabilities are recognized based on the present value of the future fixed lease payments over the lease term at lease commencement date. As the Company’s leases typically do not provide an implicit rate, the Company applies its incremental borrowing rate based on the economic environment at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease prepayments made and initial direct costs incurred and is reduced by lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases are recognized on a straight-line basis over the lease term.

Intangible Assets

Intangible assets represent product technology, patents, tradenames, trademarks and customer relationships. Product technology, patents and customer relationships are amortized on a straight-line basis over 4 to 29 years, which approximates the period of economic benefit. Trademarks and the majority of our trade names are considered indefinite-lived assets and are not being amortized. Intangibles are stated at fair value on the date of acquisition. Intangibles are stated net of accumulated amortization.

Goodwill

Goodwill represents the excess of the purchase price paid by the Company over the fair value of the net assets acquired in each of the Company’s acquisitions.

Impairment of Goodwill and Indefinite-Lived Intangible Assets

The Company conducts an annual impairment review of goodwill and indefinite-lived intangible assets in October of each year, unless events occur which trigger the need for an interim impairment review.

In connection with the Company’s annual impairment review, goodwill is assessed for impairment by comparing the fair value of the reporting unit to the carrying value. The Company’s measurement date is October 31st. The Company determines the fair value of its reporting units using a combination of the discounted cash flow model as well as a market-based approach relying on the Company’s market multiples. The determination of the fair value using the discounted cash flow model requires management to make significant estimates and assumptions related to forecasts of future revenues, profit margins, and discount rates. The determination of the fair value using the market approach requires management to make significant assumptions related to earnings before interest, taxes, depreciation, amortization (EBITDA) multiples and revenue multiples. The Company estimates future cash flows based upon historical results and current market projections, discounted at a market comparable rate. An impairment loss would be recognized to the extent that a reporting unit’s carrying amount exceeded its deemed fair value. Refer to Note 7 for additional discussion of the Company’s annual impairment review.

For the Company's indefinite-lived intangible assets, mainly trademarks, the Company estimated the fair value first by estimating the total revenue attributable to the trademarks. Second, the Company estimated an appropriate royalty rate using the return on assets method by estimating the required financial return on our assets, excluding trademarks, less the overall return generated by our total asset base. The return as a percentage of revenue provides an indication of our royalty rate (between 1.0% and 2.0%). The Company compared the estimated fair value of our trademarks with the carrying value of the trademarks. Refer to Note 7 for additional discussion of the Company’s annual impairment review.

Preparation of forecasts of revenue and profitability growth for use in the long-range plan and the discount rate require significant use of judgment. Changes to the discount rate and the forecasted cash flows could affect the estimated fair value of one or more of the Company’s reporting units and intangible assets and could result in an impairment charge in a future period.

Impairment of Long-Lived Assets Other Than Goodwill and Indefinite-Lived Intangible Assets

Long-lived assets, including definite-lived intangible assets are reviewed for impairment when events or circumstances indicate that the carrying amount of a long-lived asset may not be recovered. Long-lived assets are considered to be impaired if the carrying amount of the asset exceeds the undiscounted future cash flows expected to be generated by the asset over its remaining useful life. If an asset is considered to be impaired, the impairment is measured by the amount by which the carrying amount of the asset exceeds its fair value, and is charged to results of operations at that time.

Held for Sale

Assets and liabilities to be disposed of by sale (“disposal groups”) are reclassified into “held for sale” if their carrying amounts are principally expected to be recovered through a sale transaction rather than through continuing use. The reclassification occurs when the disposal group is available for immediate sale and the sale is probable. These criteria are generally met when an agreement to sell exists, or management has committed to a plan to sell the assets within one year. Disposal groups are measured at the lower of carrying amount or fair value less costs to sell and are not depreciated or amortized. When the net realizable value of a disposal group increases during a period, a gain can be recognized to the extent that it does not increase the value of the disposal group beyond its original carrying value when the disposal group was reclassified as held for sale. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the disposal group. Refer to Financial Note 3, “Acquisitions and Divestitures,” for more information.

Revenue Recognition

The Company recognizes revenue under the core principle of depicting the transfer of control to the Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. In order to achieve that core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

Our sales revenue for product sales is recognized based on a point in time model, when control transfers to our customers, which is generally when products are shipped from our manufacturing facilities or when delivered to the customer’s named location. Certain large distribution customers receive annual volume discounts, which are estimated at the time the sale is recorded based on the estimated annual sales. Product return reserves are accrued at the time of sale based on the historical relationship between shipments and returns and are recorded as a reduction of net sales. When the Company performs shipping and handling activities after the transfer of control to the customer (e.g., when control transfers prior to delivery), they are considered as fulfillment activities and, accordingly, the costs are accrued for when the related revenue is recognized. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues. See Note 2 (Revenue Recognition) to the consolidated financial statements for further disclosures regarding revenue.

Warranty Costs

Estimated expenses related to product warranties are accrued at the time products are sold to customers. Estimates are established using historical information as to the nature, frequency, and average costs of warranty claims.

Self-Insurance

Certain exposures are self-insured up to pre-determined amounts, above which third-party insurance applies, including exposures for medical claims, workers’ compensation, vehicle insurance, product liability costs and general liability exposure. The accompanying balance sheets include reserves for the estimated costs associated with these self-insured risks, based on historic experience factors and management’s estimates for known and anticipated claims. A portion of medical insurance costs are offset by charging employees a premium equivalent to group insurance rates. The costs of retained loss for the self-insurance programs, at each balance sheet date, have not been material in any period.

Research and Development

Research and development costs are expensed as incurred.

Advertising

Advertising costs are charged to selling, general and administrative expenses as incurred and amounted to approximately $7.2 million, $6.0 million and $5.0 million, for the years ended December 31, 2022, 2021 and 2020, respectively.

Income Taxes

The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The Company evaluates the realizability of its net deferred tax assets and assesses the need for a valuation allowance on a quarterly basis. The future benefit to be derived from its deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income to realize the assets. The Company records a valuation allowance to reduce its net deferred tax assets to the amount that may be more likely than not to be realized.

To the extent the Company establishes a valuation allowance on net deferred tax assets generated from operations, an expense will be recorded within the provision for income taxes. In periods subsequent to establishing a valuation allowance on net deferred assets from operations, if the Company were to determine that it would be able to realize its net deferred tax assets in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded as a reduction to income tax expense in the period such determination was made.

We assess our income tax positions and record tax benefits for all years subject to examination, based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, we record the amount that has a greater than 50% likelihood of being realized upon settlement with the taxing authority that has full knowledge of all relevant information. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense in the consolidated statement of operations and included in accruals and other long-term liabilities in the Company’s consolidated balance sheet, when applicable. If we do not believe that it is more likely than not that a tax benefit will be sustained, no tax benefit is recognized.

Changes in Accumulated Other Comprehensive Income (Loss) by Component

The following is a reconciliation of changes in Accumulated Other Comprehensive Income (Loss) for the periods presented:


	Gains and (Losses) on Cash Flow Hedges			Pension & Other Post Retirement Benefit Plans			Cumulative Foreign Currency Translation Adjustment			Total
Accumulated other comprehensive income/(loss) by component, January 1, 2020	$	(16.5	)	$	(1.5	)	$	(71.9	)	$	(89.9	)
Change in fair value of interest rate swap, net of tax		(11.9	)		—			—			(11.9	)
Reclassification of interest rate swap to income, net of tax		6.9			—			—			6.9
Pension adjustments, net of tax		—			(2.6	)		—			(2.6	)
Reclassification of pension adjustments, net of tax		—			0.4			—			0.4
Foreign currency translation adjustments		—			—			87.0			87.0
Change in fair value of net investment hedge, net of tax		—			—			31.2			31.2
Net current-period other comprehensive income/(loss)		(5.0	)		(2.2	)		118.2			111.0
Accumulated other comprehensive income/(loss) by component, December 31, 2020	$	(21.5	)	$	(3.7	)	$	46.3		$	21.1
Reclassification of interest rate swap to income, net of tax		21.5			—			—			21.5
Pension & other post retirement benefit obligation adjustment, net of tax		—			3.3			—			3.3
Reclassification of pension adjustments, net of tax		—			0.6			—			0.6
Foreign currency translation adjustments		—			—			(57.5	)		(57.5	)
Net current-period other comprehensive income/(loss)		21.5			3.9			(57.5	)		(32.1	)
Accumulated other comprehensive income/(loss) by component, December 31, 2021	$	—		$	0.2		$	(11.2	)	$	(11.0	)
Pension & other post retirement benefit obligation adjustment, net of tax		—			7.4			—			7.4
Reclassification of pension adjustments, net of tax		—			0.1			—			0.1
Foreign currency translation adjustments		—			—			(103.5	)		(103.5	)
Net current-period other comprehensive income/(loss)		—			7.5			(103.5	)		(96.0	)
Accumulated other comprehensive income/(loss) by component, December 31, 2022	$	—		$	7.7		$	(114.7	)	$	(107.0	)

Recent Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). This ASU provides relief from certain accounting consequences that could result from the global markets’ anticipated transition away from the use of the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The relief provided by this ASU is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The optional amendments are effective as of March 12, 2020 through December 31, 2022. The Company evaluated the optional relief guidance provided within this ASU and concluded it will not have a material impact because the Company’s financial instruments potentially affected by this standard include language allowing for a rate other than LIBOR to be applied upon transition.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends the accounting related to contract assets and liabilities acquired in business combinations. Under current GAAP, an entity generally recognizes assets and liabilities acquired in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU 2021-08 requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination in

accordance with ASC Topic 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to business combinations occurring on or after the effective date of the amendment. Early adoption is permitted, including adoption in an interim period. The Company does not expect adoption of this standard to have a significant impact on the consolidated financial statements.

Shipping and Handling Costs [Member]

Cost of sales

Shipping and Handling Costs

Shipping and handling costs associated with sales are classified as a component of cost of sales. Amounts collected from our customers for shipping and handling are recognized as revenue.