Regal Rexnord (RRX) Risk Analysis

A significant amount of our revenue is generated from customers located outside of the US, and a substantial portion of our assets and associates are located outside of the US which requires us to interpret the income tax laws and rulings in each of those taxing jurisdictions. Due to the subjectivity of tax laws between those jurisdictions as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may differ from actual payments or assessments. Claims from taxing authorities related to these differences could have an adverse impact on our business, results of operations and financial condition.

The effects of climate change could create financial, reputational or other risks to our business. For example, the effects of climate change could disrupt our operations by impacting the availability and the cost of materials needed for manufacturing, exacerbate existing risks to our supply chain and increase insurance and other operating costs, including energy costs impacted by carbon prices or offsets. These factors may impact our decisions to construct new facilities or maintain existing facilities in areas most prone to physical climate risks. We could also face indirect financial risks passed through the supply chain and disruptions that could result in increased prices for our products and the resources needed to produce them. Additionally, we are subject to environmental laws that could impose significant costs on us. See "We are subject to environmental laws that could impose significant costs on us and the failure to comply with such laws could subject us to sanctions and material fines and expenses" in these Risk Factors for more information. There continues to be a lack of consistent climate regulation, which creates economic and regulatory uncertainty. Increased international, regional, state, and/or federal requirements or other stakeholder expectations have and could further mandate more restrictive or expansive standards, more prescriptive reporting of environmental, social and governance metrics than the voluntary commitments we have adopted, or require related changes on a more accelerated time frame than we anticipate. For example, we continue to be subject to the European Union's Corporate Sustainability Reporting Directive ("CSRD") and California's climate disclosure rules, should the current scope and compliance deadline remain in effect for each. These regulations are inconsistent, and are rapidly emerging and evolving, and have increased, and are expected to continue to increase, our compliance costs. For example, the CSRD has established extensive ESG-related disclosure requirements based on the European Sustainability Reporting Standards, including certain assurance obligations. These mandatory disclosure requirements will require us to assess and report on key quantitative and qualitative metrics related to a range of topics, including governance, strategy, and our process for identifying and assessing material sustainability issues. In addition, a number of governmental bodies have finalized, proposed or are contemplating legislative and regulatory changes in response to the potential effect of climate change. These regulations may affect our operations, supply chain, and overall business strategy, potentially leading to increased expenses, operational disruptions or limitations on our ability to compete in certain markets. If our product portfolio does not align with these regulations, we may be required to make increased research and development and other capital expenditures to improve our product portfolio in order to meet new regulations and standards. Further, our customers and the markets we serve may impose emissions or other environmental standards through regulation, market-based emissions policies or consumer preference that we may not be able to meet due to the level of capital investment or technological advancement. While we are committed to continuous improvements to our product portfolio to meet and exceed anticipated regulations and preferences, there can be no assurance that our commitments will be successful, that our products will be accepted by the market, that proposed regulation or deregulation will not have a negative competitive impact, or that economic returns will reflect our investments in new product development. As of the date of this filing, we have made several public commitments regarding our intended reduction of carbon emissions, including commitments to achieve absolute Scope 1 and Scope 2 carbon emission neutrality by 2032, and net zero across Scope 1, 2 and 3 emissions longer term. Although we intend to meet these commitments, we have expended resources and we may be required to further expend significant resources to do so, which could increase our operational costs. If we either are unable to meet these commitments, or progress toward our commitments more slowly than expected, or if such commitments are criticized by certain groups, then we could incur adverse publicity and reaction from investors, activist groups and other stakeholders, which could adversely impact the perception of our brands and our products by current and potential customers, as well as investors, which would in turn adversely impact our results of operations. Moreover, we may determine that it is in the best interest of the Company and our shareholders to prioritize other business investments over the achievement of our current sustainability commitments based on economic or technological developments, regulatory and social factors, business strategy or pressure from investors, activists, or other stakeholders.

We have a material amount of goodwill and other long-lived assets, including intangible assets, property, plant and equipment and lease assets. We assess our goodwill at least annually for impairment. Our estimates of fair value are based on assumptions about future operating cash flows, growth rates, discount rates applied to these cash flows and current market estimates of value. We evaluate the recoverability of the carrying value of long-lived assets to be held and used whenever events or circumstances indicating a potential impairment exist, such as, but not limited to, adverse market conditions or business climate, a change in the extent or manner in which assets are being used, or a negative long-term performance outlook. An impairment would require us to reduce the carrying value of goodwill or other long-lived asset to fair value through a non-cash impairment charge in our results of operations, which could be material. See Note 4 – Goodwill and Intangible Assets of the Notes to the Consolidated Financial Statements for more information.

We expect to continue reviewing our overall manufacturing footprint and margin improvement initiatives in our operations in an effort to make our business more efficient. We have incurred and expect to continue to incur additional costs and restructuring charges in connection with such consolidations, divestitures, workforce reductions and other cost reduction measures that could, in certain instances, adversely affect our future earnings and cash flows. Furthermore, such actions may be disruptive to our business, and this may result in production inefficiencies, product quality issues, late product deliveries or lost orders as we begin production at consolidated facilities, which could adversely impact our sales levels, operating results and operating margins. In addition, we may not realize the cost savings that we expect to realize as a result of such actions. These activities require substantial management time and attention and may divert management from other important work or result in a failure to meet operational targets. Divestitures may also give rise to obligations to buyers or other parties that could have a financial effect after a transaction is completed. Moreover, we could encounter changes to, or delays in executing, any restructuring or divestiture plans, any of which could cause disruption and additional unanticipated expense.

The potential introduction of evolving technologies into new and existing offerings may result in new or expanded risks and liabilities, including enhanced governmental or regulatory scrutiny, litigation, compliance issues, ethical concerns, confidentiality, or security risks, as well as other factors that could adversely affect our business, reputation, and results or operations and financial condition. In addition, our vendors may incorporate AI tools into their offerings, and, despite our vendor due diligence, these tools may not meet existing or rapidly evolving regulatory or industry standards and may inhibit our or our vendors' ability to maintain an adequate level of service and experience. The use of AI can lead to unintended consequences, including generating factually inaccurate content, misleading or otherwise flawed information, or unintended biases and skewed outcomes, which could expose us to risks related to inaccuracies or errors in the output of such technologies. We also face risks of competitive disadvantage if our competitors more effectively use AI to create new or enhanced products or services that we are unable to compete against. Malicious actors may also use generative AI to strengthen social engineering capabilities or create more targeted phishing narratives or otherwise, which may increase the threat of a cybersecurity incident. If we, or our vendors, experience an actual or perceived breach or security incident because of the use of generative AI, we may lose valuable intellectual property and confidential information and our reputation and the public perception of the effectiveness of our security measures could be harmed. In addition, many US and international governmental bodies and regulators have proposed, or are in the process of developing, new regulations related to the use of AI and machine-learning technologies. The final form of these regulations may impose obligations related to our development, offering, and use of AI technologies and expose us to increased risk of regulatory enforcement and litigation.

We may be subject to claims from third parties that our products or technologies infringe on their intellectual property rights or that we have misappropriated intellectual property rights. If we are involved in a dispute or litigation relating to infringement of third-party intellectual property rights, we could incur significant costs in defending against those claims. Our intellectual property portfolio may not be useful in asserting a counterclaim, or negotiating a license, in response to a claim of infringement or misappropriation. In addition, as a result of such claims of infringement or misappropriation, we could lose our rights to technology that is important to our business, or be required to pay damages or license fees with respect to the infringed rights or be required to redesign our products at substantial cost, any of which could adversely impact our business, results of operations and financial condition.

Natural disasters, acts or threats of war or terrorism, pandemic outbreaks such as COVID-19, international conflicts, worldwide economic conditions, and the actions taken by the US and other governments in response to such events could cause damage or disrupt our business operations, our suppliers, or our customers, and could create political or economic instability, any of which could have an adverse effect on global financial markets, and our business. Although it is not possible to predict such events or their consequences, these events could decrease demand for our products, could make it difficult or impossible for us to deliver products, could disrupt our supply chain or could result in disruption of our manufacturing processes. Deterioration in the global economy could lead to higher unemployment, lower consumer spending and reduced investment by businesses, and could lead our customers to slow spending on our products or make it difficult for our customers, our vendors and us to accurately forecast and plan future business activities. Worsening economic conditions could also affect the financial viability of our suppliers, some of which could be considered key suppliers. Additionally, our stock price could decrease if investors have concerns that our business, results of operations and financial condition will be negatively impacted by a worldwide economic downturn. We may also be negatively impacted by actions or uncertainty caused by the US or foreign governments that could disrupt manufacturing and commercial operations, such as policy changes affecting taxation, trade, immigration, currency devaluation, tariffs, import and export controls, customs, border actions, trade relations between the US and China, and ongoing geopolitical tensions and conflicts. These disruptions and their related impacts on our business, including impacts on our management's time and attention, could be exacerbated by uncertainty in or sudden changes or reversals in policy. Similarly, unplanned equipment outages or failures, including those due to natural disasters or acts of terrorism, could result in the disruption of our manufacturing processes. Any interruption in our manufacturing processes would create challenges in meeting customer demands through the fulfillment of orders or otherwise reduce our income and cash flow and could result in a material adverse effect on our business, results of operations and financial condition, as well as our reputation and competitive positioning.

The net assets, net earnings and cash flows from our foreign subsidiaries are based on the US Dollar equivalent of such amounts measured in the applicable functional currency. These foreign operations have the potential to impact our financial position due to fluctuations in the local currency arising from the process of re-measuring the local functional currency in US Dollars. Any increase in the value of the US Dollar in relation to the value of the local currency, whether by means of market conditions or governmental actions such as currency devaluations, will adversely affect our revenues from our foreign operations when translated into US Dollars. Similarly, any decrease in the value of the US Dollar in relation to the value of the local currency will increase our operating costs in foreign operations, to the extent such costs are payable in foreign currency, when translated into US Dollars.

We are subject to risks in connection with the sale of the industrial motors and generators businesses (the "Sale"), including the inability to eliminate certain corporate overhead costs that were previously allocated to the Industrial Systems segment. In addition, the Company may face continuing financial and commercial challenges associated with brand transitions and the disposition of certain proprietary assets that were transferred in the Sale. Any or all of these risks could impact the Company's business, operating results or financial condition. Economic and Financial Risks