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EX-32.1 - EXHIBIT 32.1 - REGAL BELOIT CORPrbc-201741xex321.htm
EX-31.2 - EXHIBIT 31.2 - REGAL BELOIT CORPrbc-201741xex312.htm
EX-31.1 - EXHIBIT 31.1 - REGAL BELOIT CORPrbc-201741xex311.htm
EX-12 - EXHIBIT 12 - REGAL BELOIT CORPrbc-201741xex12.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended April 1, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-07283
 
 
REGAL BELOIT CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Wisconsin
 
39-0875718
(State of other jurisdiction of
incorporation)
 
(IRS Employer
Identification No.)
200 State Street, Beloit, Wisconsin 53511
(Address of principal executive office)
(608) 364-8800
Registrant’s telephone number, including area code
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
 
ý
 
Accelerated Filer
 
¨
Non-accelerated filer
o  (Do not check if a smaller reporting company)
 
Smaller Reporting Company
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES  ¨    NO  ý
As of May 8, 2017 there were 44,809,486 shares of the registrant’s common stock, $.01 par value per share, outstanding.





REGAL BELOIT CORPORATION
INDEX
 
 
Page
 
Item 1 —
 
 
 
 
 
 
 
Item 2 —
Item 3 —
Item 4 —
 
 
 
 
Item 1 —
Item 1A —
Item 2 —
Item 6 —
 
 
 


2



CAUTIONARY STATEMENT

Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s expectations, beliefs, current assumptions, and projections. When used in this Quarterly Report on Form 10-Q, words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project” or “plan” or the negative thereof or similar words are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Those factors include, but are not limited to:

uncertainties regarding our ability to execute our restructuring plans within expected costs and timing;
increases in our overall debt levels as a result of the acquisition of the Power Transmission Solutions business of Emerson Electric Co. ("PTS"), or otherwise and our ability to repay principal and interest on our outstanding debt;
actions taken by our competitors and our ability to effectively compete in the increasingly competitive global electric motor, drives and controls, power generation and mechanical motion control industries;
our ability to develop new products based on technological innovation and marketplace acceptance of new and existing products;
fluctuations in commodity prices and raw material costs;
our dependence on significant customers;
issues and costs arising from the integration of acquired companies and businesses including PTS, and the timing and impact of purchase accounting adjustments;
prolonged declines in oil and gas up stream capital spending;
economic changes in global markets where we do business, such as reduced demand for the products we sell, currency exchange rates, inflation rates, interest rates, recession, government policies, including policy changes affecting taxation, trade, immigration and the like, and other external factors that we cannot control;
product liability and other litigation, or claims by end users, government agencies or others that our products or our customers’ applications failed to perform as anticipated, particularly in high volume applications or where such failures are alleged to be the cause of property or casualty claims;
unanticipated liabilities of acquired businesses;
unanticipated costs or expenses we may incur related to product warranty issues;
our dependence on key suppliers and the potential effects of supply disruptions;
infringement of our intellectual property by third parties, challenges to our intellectual property and claims of infringement by us of third party technologies;
effects on earnings of any significant impairment of goodwill or intangible assets;
cyclical downturns affecting the global market for capital goods; and
other risks and uncertainties including but not limited to those described in “Risk Factors” in our Annual Report on Form 10-K and from time to time in our reports filed with US Securities and Exchange Commission.

Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report, and we undertake no obligation to update these statements to reflect subsequent events or circumstances. Additional information regarding these and other risks and factors is included in Part I - Item 1A - Risk Factors in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2017.


3



PART I—FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in Millions, Except Per Share Data)
 
 
Three Months Ended
 
 
April 1,
2017
 
April 2,
2016
 
Net Sales
$
813.5

 
$
818.2

 
Cost of Sales
597.9

 
600.8

 
Gross Profit
215.6

 
217.4

 
Operating Expenses
140.8

 
148.1

 
Income From Operations
74.8

 
69.3

 
Interest Expense
14.4

 
15.0

 
Interest Income
1.0

 
1.1

 
Income Before Taxes
61.4

 
55.4

 
Provision For Income Taxes
13.8

 
12.7

 
Net Income
47.6

 
42.7

 
Less: Net Income Attributable to Noncontrolling Interests
1.3

 
1.1

 
Net Income Attributable to Regal Beloit Corporation
$
46.3

 
$
41.6

 
Earnings Per Share Attributable to Regal Beloit Corporation:
 
 
 
 
Basic
$
1.03

 
$
0.93

 
Assuming Dilution
$
1.02

 
$
0.93

 
Cash Dividends Declared Per Share
$
0.24

 
$
0.23

 
Weighted Average Number of Shares Outstanding:
 
 
 
 
Basic
44.8

 
44.7

 
Assuming Dilution
45.1

 
45.0

 

See accompanying Notes to Condensed Consolidated Financial Statements.


4



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Millions)
 
 
Three Months Ended
 
 
April 1,
2017
 
April 2,
2016
 
Net Income
$
47.6

 
$
42.7

 
Other Comprehensive Income Net of Tax:
 
 
 
 
Foreign Currency Translation Adjustments
29.4

 
25.7

 
Hedging Activities:
 
 
 
 
Increase in Fair Value of Hedging Activities, Net of Tax Effects of $11.9 Million and $1.3 Million for the Three Months Ended April 1, 2017 and April 2, 2016, Respectively
19.4

 
2.3

 
Reclassification of Losses Included in Net Income, Net of Tax Effects of $4.4 Million and $5.0 Million for the Three Months Ended April 1, 2017 and April 2, 2016, Respectively
7.3

 
8.1

 
Pension and Post Retirement Plans:
 
 
 
 
Reclassification Adjustments for Pension and Post Retirement Benefits Included in Net Income, Net of Tax Effects of $0.2 Million and $0.2 Million for the Three Months Ended April 1, 2017 and April 2, 2016, Respectively
0.4

 
0.7

 
Other Comprehensive Income
56.5

 
36.8

 
Comprehensive Income
104.1

 
79.5

 
Less: Comprehensive Income Attributable to Noncontrolling Interests
1.8

 
1.5

 
Comprehensive Income Attributable to Regal Beloit Corporation
$
102.3

 
$
78.0

 
See accompanying Notes to Condensed Consolidated Financial Statements.


5



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions, Except Per Share Data)
 
 
April 1,
2017
 
December 31,
2016
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
262.3

 
$
284.5

Trade Receivables, Less Allowances of $11.9 Million in 2017 and $11.5 Million in 2016
509.0

 
462.2

Inventories
687.9

 
660.8

Prepaid Expenses and Other Current Assets
156.2

 
124.5

Total Current Assets
1,615.4

 
1,532.0

Net Property, Plant and Equipment
633.2

 
627.5

Goodwill
1,457.4

 
1,453.2

Intangible Assets, Net of Amortization
699.5

 
711.7

Deferred Income Tax Benefits
24.3

 
22.4

Other Noncurrent Assets
14.6

 
11.7

Total Assets
$
4,444.4

 
$
4,358.5

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts Payable
$
393.8

 
$
334.2

Dividends Payable
10.7

 
10.7

Current Hedging Obligations
26.1

 
49.0

Accrued Compensation and Employee Benefits
70.0

 
70.1

Other Accrued Expenses
113.0

 
137.0

Current Maturities of Long-Term Debt
100.4

 
100.6

Total Current Liabilities
714.0

 
701.6

Long-Term Debt
1,269.1

 
1,310.9

Deferred Income Taxes
127.5

 
97.7

Noncurrent Hedging Obligations
4.0

 
17.6

Pension and Other Post Retirement Benefits
106.9

 
106.5

Other Noncurrent Liabilities
49.1

 
46.0

Contingencies and Commitments (see Note 12)

 

Equity:
 
 
 
Regal Beloit Corporation Shareholders' Equity:
 
 
 
Common Stock, $.01 Par Value, 100.0 Million Shares Authorized, 44.8 Million and 44.8 Million Shares Issued and Outstanding in 2017 and 2016, Respectively
0.4

 
0.4

Additional Paid-In Capital
906.8

 
904.5

Retained Earnings
1,487.5

 
1,452.0

Accumulated Other Comprehensive Loss
(262.1
)
 
(318.1
)
Total Regal Beloit Corporation Shareholders' Equity
2,132.6

 
2,038.8

Noncontrolling Interests
41.2

 
39.4

Total Equity
2,173.8

 
2,078.2

Total Liabilities and Equity
$
4,444.4

 
$
4,358.5

See accompanying Notes to Condensed Consolidated Financial Statements.

6



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(Dollars in Millions, Except Per Share Data)
 
 
Common
Stock
$.01 Par
Value
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interests
 
Total
Equity
Balance as of January 2, 2016
$
0.4

 
$
900.8

 
$
1,291.1

 
$
(255.0
)
 
$
45.5

 
$
1,982.8

Net Income

 

 
41.6

 

 
1.1

 
42.7

Other Comprehensive Income

 

 

 
36.4

 
0.4

 
36.8

Dividends Declared ($0.23 Per Share)

 

 
(10.2
)
 

 

 
(10.2
)
Stock Options Exercised, Including Income Tax Benefit and Share Cancellations

 
0.4

 

 

 

 
0.4

Share-based Compensation

 
3.3

 

 

 

 
3.3

Purchase of Subsidiary Shares from Noncontrolling Interest

 
(7.2
)
 

 
(2.7
)
 
(9.7
)
 
$
(19.6
)
Balance as of April 2, 2016
$
0.4

 
$
897.3

 
$
1,322.5

 
$
(221.3
)
 
$
37.3

 
$
2,036.2

 
 
Common
Stock
$.01 Par
Value
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interests
 
Total
Equity
Balance as of December 31, 2016
$
0.4

 
$
904.5

 
$
1,452.0

 
$
(318.1
)
 
$
39.4

 
$
2,078.2

Net Income

 

 
46.3

 

 
1.3

 
47.6

Other Comprehensive Income

 

 

 
56.0

 
0.5

 
56.5

Dividends Declared ($0.24 Per Share)

 

 
(10.8
)
 

 

 
(10.8
)
Stock Options Exercised and Share Cancellations

 
(0.7
)
 

 

 

 
(0.7
)
Share-based Compensation

 
3.0

 

 

 

 
3.0

Balance as of April 1, 2017
$
0.4

 
$
906.8

 
$
1,487.5

 
$
(262.1
)
 
$
41.2

 
$
2,173.8

See accompanying Notes to Condensed Consolidated Financial Statements.

7



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
  
Three Months Ended
 
April 1,
2017
 
April 2,
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
47.6

 
$
42.7

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities (Net of Acquisitions and Divestitures):
 
 
 
Depreciation and Amortization
34.4

 
40.1

(Gain) Loss on Sale or Disposition of Assets
(0.1
)
 
0.6

Share-Based Compensation Expense
3.0

 
3.3

Gain on Disposal of Businesses
(0.1
)
 

Change in Operating Assets and Liabilities, Net of Acquisitions and Divestitures
(34.3
)
 
(28.1
)
Net Cash Provided by Operating Activities
50.5

 
58.6

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Additions to Property, Plant and Equipment
(17.0
)
 
(14.9
)
Sales of Investment Securities
0.5

 
19.3

Purchases of Investment Securities
(0.5
)
 
(21.0
)
Proceeds Received from Disposal of Businesses
0.5

 

Proceeds from Sale of Assets
1.0

 

Net Cash Used in Investing Activities
(15.5
)
 
(16.6
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings Under Revolving Credit Facility
208.8

 
221.0

Repayments Under Revolving Credit Facility
(202.0
)
 
(188.0
)
Proceeds from Short-Term Borrowings
13.9

 
12.7

Repayments of Short-Term Borrowings
(14.1
)
 
(12.9
)
Repayments of Long-Term Borrowings
(50.1
)
 
(50.1
)
Dividends Paid to Shareholders
(10.8
)
 
(10.2
)
Payments of Contingent Consideration
(5.3
)
 

Proceeds from the Exercise of Stock Options
0.4

 
0.5

Shares Surrendered for Taxes
(1.1
)
 
(0.4
)
Purchase of Subsidiary Shares from Noncontrolling Interest

 
(19.6
)
Net Cash Used In Financing Activities
(60.3
)
 
(47.0
)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
3.1

 
1.2

Net Decrease in Cash and Cash Equivalents
(22.2
)
 
(3.8
)
Cash and Cash Equivalents at Beginning of Period
284.5

 
252.9

Cash and Cash Equivalents at End of Period
$
262.3

 
$
249.1

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid for:
 
 
 
 Interest
$
19.1

 
$
19.7

 Income Taxes
$
13.8

 
$
13.0

See accompanying Notes to Condensed Consolidated Financial Statements.

8



REGAL BELOIT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 1, 2017
(Unaudited)

1. BASIS OF PRESENTATION
The accompanying (a) condensed consolidated balance sheet of Regal Beloit Corporation (the “Company”) as of December 31, 2016, which has been derived from audited consolidated financial statements, and (b) unaudited interim condensed consolidated financial statements as of April 1, 2017 and for the three months ended April 1, 2017 and April 2, 2016, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
The Company suggests that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 2016 Annual Report on Form 10-K filed on March 1, 2017.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the three months ended April 1, 2017 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 30, 2017.
The condensed consolidated financial statements have been prepared in accordance with GAAP, which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company uses estimates in accounting for, among other items, allowance for doubtful accounts; excess and obsolete inventory; share-based compensation; acquisitions; product warranty obligations; pension and post retirement assets and liabilities; derivative fair values; goodwill and other asset impairments; health care reserves; retirement benefits; rebates and incentives; litigation claims and contingencies, including environmental matters; and income taxes. The Company accounts for changes to estimates and assumptions when warranted by factually based experience.
The Company operates on a 52/53 week fiscal year ending on the Saturday closest to December 31.
New Accounting Standards
In February 2017, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2017-07, Compensation—Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU amends current guidance to require employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in nonoperating expenses. Employers that do not present a measure of operating income are required to include the service cost component in the same line item as other employee compensation costs. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. The changes, which respond to input from financial statement users, are intended to classify costs according to their natures, and better align the effect of defined benefit plans on operating income with International Financial Reporting Standards. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The ASU will impact the components of income before taxes but will not impact the amount of income before taxes.

In February 2016, the FASB issued ASU 2016-02, Leases. The core principle of ASU 2016-02 is that an entity should recognize on its balance sheet assets and liabilities arising from a lease. In accordance with that principle, ASU 2016-02 requires that a lessee recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying leased asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on the lease classification as a finance or operating lease. This new accounting guidance is effective for fiscal years beginning after December 15, 2018 under a modified retrospective approach and early adoption is permitted. The Company has identified a six step process to successfully implement the new Lease standard - Form a task force to become experts and take the lead on understanding and implementing the new Lease standard; Update lease inventories; Decide on transition method; Review legal agreements and debt covenants; Consider IT needs; Discuss with stakeholders. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements and has commenced the first step of identifying a task force to take the lead in implementing the new Lease standard.

9




In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, a comprehensive new revenue recognition standard that supersedes current revenue recognition requirements. This update requires the Company to recognize revenue at amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services at the time of transfer. ASU No. 2014-09 (and related updates) will become effective for the Company at the beginning of its 2018 fiscal year. The standard allows the option of using either a full retrospective or a modified retrospective approach for the adoption of the standard. The Company has not yet selected which approach to apply. The Company has identified a four step process to successfully implement the new Revenue standard - data gathering, assessment, solution development, and solution implementation. The Company has completed step one, data gathering, and is currently finishing the assessment phase. The Company is in the process of evaluating and quantifying the materiality of the standard’s impact on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The new guidance includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. The provisions include:
a.
recording all tax effects associated with stock-based compensation through the income statement, as opposed to recording certain amounts in other paid-in capital, which eliminates the requirement to calculate a "windfall pool";
b.
allowing entities to withhold shares to satisfy the employer's statutory tax withholding requirement up to the highest marginal tax rate applicable to employees rather than the employer's minimum statutory rate, without requiring liability classification for the award;
c.
modifying the requirement to estimate the number of awards that will ultimately vest by providing an accounting policy election to either estimate the number of forfeitures or recognize forfeitures as they occur;
d.
changing certain presentation requirements in the statement of cash flows, including removing the requirement to present excess tax benefits as an inflow from financing activities and an outflow from operating activities, and requiring the cash paid to taxing authorities arising from withheld shares to be classified as a financing activity; and
e.
the assumed proceeds from applying the treasury stock method when computing earnings per share is amended to exclude the amount of excess tax benefits that previously would have been recognized in additional paid-in capital.

The Company adopted the provisions of ASU 2016-09 on January 1, 2017. The presentation of the Condensed Consolidated Statements of Cash Flows for shares surrendered by employees to meet the minimum statutory withholding requirement and excess tax benefits were applied retrospectively. As a result of adopting the standard, the Changes in Operating Assets and Liabilities, Net of Acquisitions and Divestitures line in the Cash Flows From Operating Activities section on the Condensed Consolidated Statements of Cash Flows and the Shares Surrendered for Taxes line in the Cash Flows from Financing Activities section were both adjusted by $0.4 million for 2016. The Company removed the excess tax benefits from the calculation of dilutive shares on a prospective basis. In addition, the Company began recording all tax effects associated with stock-based compensation through the income statement on a prospective basis. The Company did not have any awards classified as liability awards due to the statutory tax withholding requirements as of January 1, 2017. The Company made an accounting policy election to continue to estimate forfeitures as it has previously.


2. OTHER FINANCIAL INFORMATION
Inventories
The approximate percentage distribution between major classes of inventories was as follows:
 
April 1,
2017
 
December 31,
2016
Raw Material and Work in Process
48%
 
45%
Finished Goods and Purchased Parts
52%
 
55%

Inventories are stated at cost, which is not in excess of market. Cost for approximately 54% of the Company's inventory at April 1, 2017, and 55% at December 31, 2016 was determined using the LIFO method.

10



Property, Plant and Equipment
Property, plant, and equipment by major classification was as follows (dollars in millions):
 
Useful Life in Years
 
April 1,
2017
 
December 31,
2016
Land and Improvements
 
 
$
78.8

 
$
76.7

Buildings and Improvements
3 - 50
 
286.6

 
280.4

Machinery and Equipment
3 - 15
 
949.5

 
929.9

Property, Plant and Equipment
 
 
1,314.9

 
1,287.0

Less: Accumulated Depreciation
 
 
(681.7
)
 
(659.5
)
Net Property, Plant and Equipment
 
 
$
633.2

 
$
627.5

Other

As part of the purchase agreement of the 2008 acquisition of the Wuxi Hwada Motor Co., the Company agreed that if certain relocation compensation was received for the relocation of the business, the Company would pay a portion of that compensation to the seller as part of a deferred contingent purchase price. During the three months ended April 1, 2017, a final deferred contingent purchase price payment of $5.3 million was made under this agreement.


3. ACQUISITIONS AND DIVESTITURES
There were no acquisition related expenses for the three months ended April 1, 2017 and April 2, 2016.
2016 Acquisitions

Elco Purchase
On January 18, 2016, the Company purchased the remaining shares owned by the joint venture partner in its Elco Group B.V. (“Elco”) joint venture increasing the Company’s ownership from 55.0% to 100.0% for $19.6 million. The purchase price of Elco is reflected as a component of equity.
2016 Divestitures

Mastergear Worldwide
On June 1, 2016, the Company sold its Mastergear Worldwide ("Mastergear") business to Rotork PLC for a purchase price of $25.1 million, subject to customary finalization. Mastergear was included in the Company's Power Transmission Solutions segment. Gains related to the sale of $0.1 million and $11.6 million were recorded as a reduction to Operating Expenses in the Condensed Consolidated Statements of Income during fiscal 2017 and 2016, respectively.
Venezuelan Subsidiary
On July 7, 2016, the Company sold the assets of its Venezuelan subsidiary, which had been included in the Company's Commercial and Industrial Systems segment, to a private company for $3.0 million. Of this amount, $1.0 million was received on the transaction closing date and $2.0 million is to be received in 24 monthly installments. The Company may receive additional amounts in the future related to certain accounts receivable of this business. The gains will be recognized as the cash is received. The Company wrote down its investment and ceased operations of this subsidiary in 2015.

4. ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustments, hedging activities and pension and post retirement benefit adjustments are included in Equity in Accumulated Other Comprehensive Loss ("AOCI").
The changes in AOCI by component for the three months ended April 1, 2017 and April 2, 2016 were as follows (in millions):

11



 
Three Months Ended
 
April 1, 2017
 
Hedging Activities
 
Pension and Post Retirement Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning Balance
$
(41.1
)
 
$
(36.0
)
 
$
(241.0
)
 
$
(318.1
)
Other Comprehensive Income (Loss) before Reclassifications
31.3

 
(0.2
)
 
29.1

 
60.2

Tax Impact
(11.9
)
 

 

 
(11.9
)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
11.7

 
0.6

 

 
12.3

Tax Impact
(4.4
)
 
(0.2
)
 

 
(4.6
)
Net Current Period Other Comprehensive Income (Loss)
26.7

 
0.2

 
29.1

 
56.0

Ending Balance
$
(14.4
)
 
$
(35.8
)
 
$
(211.9
)
 
$
(262.1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
April 2, 2016
 
Hedging Activities
 
Pension Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning Balance
$
(47.5
)
 
$
(35.4
)
 
$
(172.1
)
 
$
(255.0
)
Other Comprehensive Income (Loss) before Reclassifications
3.6

 

 
25.3

 
28.9

Tax Impact
(1.3
)
 

 

 
(1.3
)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
13.1

 
0.9

 

 
14.0

Tax Impact
(5.0
)
 
(0.2
)
 

 
(5.2
)
  Net Current Period Other Comprehensive Income (Loss)
10.4

 
0.7

 
25.3

 
36.4

Purchase of Subsidiary Shares from Noncontrolling Interest

 

 
(2.7
)
 
(2.7
)
Ending Balance
$
(37.1
)
 
$
(34.7
)
 
$
(149.5
)
 
$
(221.3
)
The Condensed Consolidated Statements of Income line items affected by the hedging activities reclassified from Accumulated Other Comprehensive Loss in the tables above are disclosed in Note 13 of Notes to Condensed Consolidated Financial Statements.
The reclassification amounts for pension and post retirement benefit adjustments in the tables above are part of net periodic benefit costs recorded in Operating Expenses (see Note 8 of Notes to Condensed Consolidated Financial Statements).

5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
As required, the Company performs an annual impairment test of goodwill as of the end of the October fiscal month or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting units below their carrying value.

12



The following information presents changes to goodwill during the three months ended April 1, 2017 (in millions):
 
Total
 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
Balance as of December 31, 2016
$
1,453.2

 
$
540.6

 
$
341.8

 
$
570.8

Translation Adjustments
4.2

 
2.6

 
0.9

 
0.7

Balance as of April 1, 2017
$
1,457.4

 
$
543.2

 
$
342.7

 
$
571.5

 
 
 
 
 
 
 
 
Cumulative Goodwill Impairment Charges
$
275.7

 
$
244.8

 
$
7.7

 
$
23.2

Intangible Assets
Intangible assets consisted of the following (in millions):  
 
 
 
 
April 1, 2017
 
December 31, 2016
 
 
Weighted Average Amortization Period (Years)
 
Gross Value
 
Accumulated
Amortization
 
Gross Value
 
Accumulated
Amortization
Amortizable Intangible Assets:
 
 
 
 
 
 
 
 
 
 
  Customer Relationships
 
15
 
$
706.2

 
$
213.3

 
$
703.6

 
$
201.6

  Technology
 
11
 
190.2

 
113.0

 
189.7

 
109.5

  Trademarks
 
12
 
32.1

 
24.0

 
31.8

 
23.3

  Patent and Engineering Drawings
 
5
 
16.6

 
16.6

 
16.6

 
16.6

  Non-Compete Agreements
 
5
 
8.3

 
8.1

 
8.3

 
8.1

 
 
 
 
953.4

 
375.0

 
950.0

 
359.1

Non-Amortizable Trade Names
 
 
 
121.1

 

 
120.8

 

 
 
 
 
$
1,074.5

 
$
375.0

 
$
1,070.8

 
$
359.1

 
 
 
 
 
 
 
 
 
 
 

Amortization expense recorded for the three months ended April 1, 2017 and April 2, 2016 was $14.1 million and $15.6 million, respectively. Amortization expense for 2017 is estimated to be $55.1 million.
Estimated expected future annual amortization for intangible assets is as follows (in millions):

 Year
 
Estimated Amortization
2018
 
$
53.1

2019
 
52.7

2020
 
49.6

2021
 
42.0

2022
 
40.3



13



6. BUSINESS SEGMENTS
The following sets forth certain financial information attributable to the Company's operating segments as of and for the three months ended April 1, 2017 and April 2, 2016 (in millions):
 
 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Eliminations
 
Total
As of and for Three Months Ended April 1, 2017
 
 
 
 
 
 
 
 
 
External Sales
$
381.2

 
$
247.7

 
$
184.6

 
$

 
$
813.5

Intersegment Sales
15.9

 
8.2

 
0.7

 
(24.8
)
 

  Total Sales
397.1

 
255.9

 
185.3

 
(24.8
)
 
813.5

Gross Profit
95.6

 
60.7

 
59.3

 

 
215.6

Operating Expenses
69.8

 
29.5

 
41.5

 

 
140.8

Income from Operations
25.8

 
31.2

 
17.8

 

 
74.8

Depreciation and Amortization
15.2

 
5.5

 
13.7

 

 
34.4

Capital Expenditures
10.6

 
4.3

 
2.1

 

 
17.0

Identifiable Assets
1,907.3

 
926.0

 
1,611.1

 

 
4,444.4

As of and for Three Months Ended April 2, 2016
 
 
 
 
 
 
 
 
 
External Sales
$
377.6

 
$
239.8

 
$
200.8

 
$

 
$
818.2

Intersegment Sales
11.3

 
5.2

 
0.9

 
(17.4
)
 

  Total Sales
388.9

 
245.0

 
201.7

 
(17.4
)
 
818.2

Gross Profit
93.6

 
56.2

 
67.6

 

 
217.4

Operating Expenses
71.9

 
31.6

 
44.6

 

 
148.1

Income from Operations
21.7

 
24.6

 
23.0

 

 
69.3

Depreciation and Amortization
19.7

 
6.2

 
14.2

 

 
40.1

Capital Expenditures
7.3

 
3.9

 
3.7

 

 
14.9

Identifiable Assets
1,949.7

 
948.1

 
1,702.4

 

 
4,600.2


The Commercial and Industrial Systems segment produces medium and large electric motors, power generation products, high-performance drives and controls, and starters. Applications include general commercial and industrial equipment, commercial HVAC, power generation, and oil and gas.
The Climate Solutions segment produces small motors, controls and air moving solutions. Applications include residential and light commercial HVAC, commercial refrigeration and water heaters.
The Power Transmission Solutions segment produces power transmission gearing, hydraulic pump drives, large open gearing and specialty mechanical products. Applications include material handling, industrial equipment, energy and off-road equipment.
The Company evaluates performance based on the segment's income from operations. Corporate costs have been allocated to each segment based on the net sales of each segment. The reported external net sales of each segment are from external customers.


14



7. DEBT AND BANK CREDIT FACILITIES
The Company’s indebtedness as of April 1, 2017 and December 31, 2016 was as follows (in millions):
 
April 1,
2017
 
December 31,
2016
Term Facility
$
748.1

 
$
798.1

Senior Notes
600.0

 
600.0

Multicurrency Revolving Facility
24.8

 
18.0

Other
4.8

 
5.1

Less: Debt Issuance Costs
(8.2
)
 
(9.7
)
 
1,369.5

 
1,411.5

Less: Current Maturities
100.4

 
100.6

Non-Current Portion
$
1,269.1

 
$
1,310.9


Credit Agreement
In connection with the Company's acquisition of the Power Transmission Solutions business of Emerson Electric Co. (the "PTS Acquisition"), on January 30, 2015, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent and the lenders named therein, providing for a (i) 5-year unsecured term loan facility in the principal amount of $1.25 billion (the “Term Facility”) and (ii) a 5-year unsecured multicurrency revolving facility in the principal amount of $500.0 million (the “Multicurrency Revolving Facility”), including a $100.0 million letter of credit sub facility, available for general corporate purposes. Borrowings under the Credit Agreement bear interest at floating rates based upon indices determined by the currency of the borrowing, plus an applicable margin determined by reference to the Company's consolidated funded debt to consolidated EBITDA ratio or at an alternative base rate.
The Term Facility was drawn in full on January 30, 2015 in connection with the closing of the PTS Acquisition. The loan under the Term Facility requires quarterly amortization at a rate starting at 5.0% per annum, increasing to 7.5% per annum after two years and further increasing to 10.0% per annum for the last two years of the Term Facility, unless previously prepaid. The weighted average interest rate on the Term Facility was 2.3% for the three months ended April 1, 2017 and 1.9% for the three months ended April 2, 2016. The Credit Agreement requires the Company prepay the loans under the Term Facility with 100% of the net cash proceeds received from specified asset sales and borrowed money indebtedness, subject to certain exceptions.
At April 1, 2017, the Company had borrowings under the Multicurrency Revolving Facility in the amount of $24.8 million, $32.2 million of standby letters of credit issued under the facility, and $443.0 million of available borrowing capacity. The average daily balance in borrowings under the Multicurrency Revolving Facility was $103.6 million and the weighted average interest rate on the Multicurrency Revolving Facility was 2.4% for the three months ended April 1, 2017. The average daily balance in borrowings under the Multicurrency Revolving Facility was $75.7 million and the weighted average interest rate on the Multicurrency Revolving Facility was 1.9% for the three months ended April 2, 2016. The Company pays a non-use fee on the aggregate unused amount of the Multicurrency Revolving Facility at a rate determined by reference to its consolidated funded debt to consolidated EBITDA ratio.
Senior Notes
At April 1, 2017, the Company had $600.0 million of senior notes (the “Notes”) outstanding. The Notes consist of (i) $500.0 million in senior notes (the “2011 Notes”) in a private placement which were issued in seven tranches with maturities from seven to twelve years and carry fixed interest rates and (ii) $100.0 million in senior notes (the “2007 Notes”) issued in 2007 with a floating interest rate based on a margin over the London Inter-Bank Offered Rate (“LIBOR”). The 2011 Notes are included in Long-Term Debt and the 2007 Notes are included in Current Maturities of Long-Term Debt on the Condensed Consolidated Balance Sheets.
Details on the Notes at April 1, 2017 were (in millions):

15



 
 
Principal
 
Interest Rate
 
Maturity
Floating Rate Series 2007A
 
100.0

 
Floating (1)
 
August 23, 2017
Fixed Rate Series 2011A
 
100.0

 
4.1%
 
July 14, 2018
Fixed Rate Series 2011A
 
230.0

 
4.8 to 5.0%
 
July 14, 2021
Fixed Rate Series 2011A
 
170.0

 
4.9 to 5.1%
 
July 14, 2023
 
 
$
600.0

 
 
 
 

(1) Interest rates vary as LIBOR varies. At April 1, 2017, the interest rate was 1.8%. At December 31, 2016, the interest rate was 1.6%
The Company has an interest rate swap agreement to manage fluctuations in cash flows resulting from interest rate risk (see also Note 13 of Notes to the Condensed Consolidated Financial Statements).
Financial Covenants

The Credit Agreement and the Notes require the Company to meet specified financial ratios and to satisfy certain financial condition tests. The Company was in compliance with all financial covenants contained in the Notes and the Credit Agreement as of April 1, 2017.

Other Notes Payable

At April 1, 2017, other notes payable of approximately $4.8 million were outstanding with a weighted average interest rate of 5.5%. At December 31, 2016, other notes payable of approximately $5.1 million were outstanding with a weighted average rate of 5.6%.

Based on rates for instruments with comparable maturities and credit quality, which are classified as Level 2 inputs (see also Note 14 of Notes to the Condensed Consolidated Financial Statements), the approximate fair value of the Company's total debt was $1,388.6 million and $1,433.4 million as of April 1, 2017 and December 31, 2016, respectively.

8. POST RETIREMENT PLANS
The Company’s net periodic benefit cost was comprised of the following components (in millions):
 
 
Three Months Ended
 
 
April 1,
2017
 
April 2,
2016
 
Service Cost
$
1.8

 
$
2.1

 
Interest Cost
2.4

 
2.4

 
Expected Return on Plan Assets
(2.8
)
 
(3.0
)
 
Amortization of Prior Service Cost and Net Actuarial Loss
0.6

 
0.9

 
Net Periodic Benefit Cost
$
2.0

 
$
2.4

 

The estimated net actuarial loss and prior service cost for post retirement plans that will be amortized from AOCI into net periodic benefit cost during the 2017 fiscal year is $2.2 million and $0.2 million, respectively.
For the three months ended April 1, 2017 and April 2, 2016, the Company contributed $0.8 million and $1.1 million to post retirement plans, respectively. The Company expects to make total contributions of $4.4 million in 2017. The Company contributed a total of $10.4 million in fiscal 2016. The assumptions used in the valuation of the Company’s post retirement plans and in the target investment allocation have remained the same as those disclosed in the Company’s 2016 Annual Report on Form 10-K filed on March 1, 2017.

9. SHAREHOLDERS’ EQUITY
Common Stock
The Board of Directors has approved a repurchase program of up to 3.0 million common shares of Company stock. Management is authorized to purchase shares from time to time in the open market or through privately negotiated transactions. There were no

16



purchases under this program during the three months ended ending April 1, 2017. There are approximately 2.3 million shares of our common stock available for repurchase under this program.

Share-Based Compensation

The majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter.

The Company recognized approximately $3.0 million and $3.3 million in share-based compensation expense for the three months ended April 1, 2017 and April 2, 2016, respectively. The total income tax benefit recognized in the Consolidated Statements of Income for share-based compensation expense was $1.1 million and $1.3 million for the three months ended April 1, 2017 and April 2, 2016, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award. As of April 1, 2017, total unrecognized compensation cost related to share-based compensation awards was approximately $20.7 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 1.8 years.

Approximately 1.4 million shares were available for future grant under the 2013 Equity Incentive Plan at April 1, 2017.

Options and Stock Appreciation Rights
The Company uses several forms of share-based incentive awards, including non-qualified stock options, and stock settled stock appreciation rights (“SARs”). Options and SARs generally vest over 5 years and expire 10 years from the grant date. The majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter. All grants are made at prices equal to the fair market value of the stock on the grant date. For the three months ended April 1, 2017 and April 2, 2016, expired and canceled shares were immaterial.
The table below presents share-based compensation activity for the three months ended April 1, 2017 and April 2, 2016 (in millions):
 
 
April 1,
2017
 
April 2,
2016
Total Intrinsic Value of Share-Based Incentive Awards Exercised
 
$
2.5

 
$
0.1

Cash Received from Stock Option Exercises
 
0.4

 
0.5

Income Tax Benefit from the Exercise of Stock Options
 
0.4

 
0.1

Total fair value of share-based incentive awards vested
 
0.1

 


Following is a summary of share-based incentive plan activity (options and SARs) for the three months ended April 1, 2017:
Number of Shares Under Options and SARs
 
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (years)
 
Aggregate Intrinsic Value (in millions)
Exercisable at December 31, 2016
 
1,610,499

 
$
63.16

 
 
 
 
Granted
 

 

 
 
 
 
Exercised
 
(98,091
)
 
49.04

 
 
 
 
Forfeited
 
(1,180
)
 
54.61

 
 
 
 
Expired
 
(410
)
 
75.76

 
 
 
 
Outstanding at April 1, 2017
 
1,510,818

 
$
64.08

 
5.7
 
$
17.8

Exercisable at April 1, 2017
 
867,775

 
$
62.31

 
4.0
 
$
11.6


Compensation expense recognized related to options and SARs was $1.0 million for the three months ended April 1, 2017.
As of April 1, 2017, there was $8.9 million of unrecognized compensation cost related to non-vested options and SARs that is expected to be recognized as a charge to earnings over a weighted average period of 3.1 years.

The amount of options expected to vest is materially consistent with those outstanding and not yet exercisable.

17




Restricted Stock Awards and Restricted Stock Units
Restricted stock awards ("RSA") and restricted stock units ("RSU") consist of shares or the rights to shares of the Company's stock. The awards are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer. As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, or death, disability or normal retirement of the grantee.
Following is a summary of RSA activity for the three months ended April 1, 2017:
 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (years)
Unvested RSAs at December 31, 2016
 
19,593

 
$
57.43

 
0.4
Granted
 

 

 
 
Vested
 

 

 
 
Forfeited
 

 

 
 
Unvested RSAs at April 1, 2017
 
19,593

 
$
57.43

 
0.1

RSAs vest on the first anniversary of the grant date, provided the holder of the shares is continuously employed by or in the service of the Company until the vesting date. Compensation expense recognized related to the RSAs was $0.3 million for the three months ended April 1, 2017.
As of April 1, 2017, there was $0.1 million of unrecognized compensation cost related to non-vested RSAs that is expected to be recognized as a charge to earnings over a weighted average period of 0.1 years.
Following is a summary of RSU activity for the three months ended April 1, 2017:

 
 
 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (years)
Unvested RSUs at December 31, 2016
 
277,863

 
$
69.23

 
1.7
Granted
 
1,700

 
70.13

 
 
Vested
 
(10,530
)
 
71.42

 
 
Forfeited
 
(615
)
 
63.90

 
 
Unvested RSUs at April 1, 2017
 
268,418

 
$
69.16

 
1.5

RSU shares vest on the third anniversary of the grant date, provided the holder of the shares is continuously employed by the Company until the vesting date. Compensation expense recognized related to the RSUs was $1.3 million for the three months ended April 1, 2017.
As of April 1, 2017, there was $8.1 million of unrecognized compensation cost related to non-vested RSUs that is expected to be recognized as a charge to earnings over a weighted average period of 1.5 years.
Performance Share Units
Performance share unit ("PSU") awards consist of shares or the rights to shares of the Company's stock which are awarded to employees of the Company. These shares are payable upon the determination that the Company achieved certain established performance targets and can range from 0% to 200% of the targeted payout based on the actual results. PSUs have a performance period of 3 years. As set forth in the individual award agreements, acceleration of vesting may occur under a change in control, death or disability. There are no voting rights associated with PSUs until vesting occurs and a share of stock is issued. Some of the PSU awards are valued using a Monte Carlo simulation method as of the grant date while others are valued using the closing market price as of the grant date depending on the performance criteria for the award.

18



Following is a summary of PSU activity for the three months ended April 1, 2017:
 
 
 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (years)
Unvested PSUs at December 31, 2016
 
133,340

 
$
65.28

 
2.0
Granted
 

 

 
 
Vested
 

 

 
 
Forfeited
 
(2,525
)
 
78.56

 
 
Unvested PSUs April 1, 2017
 
130,815

 
$
65.02

 
1.9
Compensation expense for awards granted is recognized based on the Monte Carlo simulation value or the expected payout ratio depending upon the performance criterion for the award, net of estimated forfeitures. Compensation expense recognized related to PSUs was $0.4 million for the three months ended April 1, 2017. Total unrecognized compensation expense for all PSUs granted as of April 1, 2017 is estimated to be $3.6 million recognized as a charge to earnings over a weighted average period of 1.9 years.

10. INCOME TAXES
The effective tax rate for the three months ended April 1, 2017 was 22.5% compared to 23.0% for the three months ended April 2, 2016. The change in the effective tax rate for the three months ended April 1, 2017 was primarily driven by the mix of earnings. The lower effective rate as compared to the 35.0% statutory Federal income tax rate is driven by lower foreign tax rates.
As of April 1, 2017 and December 31, 2016, the Company had approximately $10.0 million of unrecognized tax benefits, all of which would impact the effective income tax rate if recognized. Potential interest and penalties related to unrecognized tax benefits are recorded in income tax expense.
With few exceptions, the Company is no longer subject to US Federal and state/local income tax examinations by tax authorities for years prior to 2012, and the Company is no longer subject to non-US income tax examinations by tax authorities for years prior to 2010.
11. EARNINGS PER SHARE
Diluted earnings per share is computed based upon earnings applicable to common shares divided by the weighted-average number of common shares outstanding during the period adjusted for the effect of other dilutive securities. Options for common shares where the exercise price was above the market price have been excluded from the calculation of effect of dilutive securities shown below; the amount of the anti-dilutive shares were 0.3 million and 1.2 million for the three months ended April 1, 2017 and April 2, 2016, respectively. The following table reconciles the basic and diluted shares used in earnings per share calculations for the three months ended April 1, 2017 and April 2, 2016 (in millions):
 
Three Months Ended
 
 
April 1,
2017
 
April 2,
2016
 
Denominator for Basic Earnings Per Share
44.8

 
44.7

 
Effect of Dilutive Securities
0.3

 
0.3

 
Denominator for Diluted Earnings Per Share
45.1

 
45.0

 

12. CONTINGENCIES
One of the Company's subsidiaries that it acquired in 2007 is subject to numerous claims filed in various jurisdictions relating to certain sub-fractional motors that were primarily manufactured through 2004 and that were included as components of residential and commercial ventilation units manufactured and sold in high volumes by a third party. These ventilation units are subject to regulation by government agencies such as the U.S. Consumer Product Safety Commission (“CPSC”). The claims generally allege that the ventilation units were the cause of fires. The Company has recorded an estimated liability for incurred claims. Based on the current facts, the Company cannot assure that these claims, individually or in the aggregate, will not have a material adverse effect on its subsidiary's financial condition. The Company's subsidiary cannot reasonably predict the outcome of these claims,

19



the nature or extent of any CPSC or other remedial actions, if any, that the Company's subsidiary may need to undertake with respect to motors that remain in the field, or the costs that may be incurred, some of which could be significant.
The Company is, from time to time, party to litigation and other legal or regulatory proceedings that arise in the normal course of its business operations and the outcomes of which are subject to significant uncertainty, including product warranty and liability claims, contract disputes and environmental, asbestos, intellectual property, employment and other litigation matters. The Company's products are used in a variety of industrial, commercial and residential applications that subject the Company to claims that the use of its products is alleged to have resulted in injury or other damage. Many of these matters will only be resolved when one or more future events occur or fail to occur. Management conducts regular reviews, including updates from legal counsel, to assess the need for accounting recognition or disclosure of these contingencies, and such assessment inherently involves an exercise in judgment. The Company accrues for exposures in amounts that it believes are adequate, and the Company does not believe that the outcome of any such lawsuit individually or collectively will have a material effect on the Company's financial position, its results of operations or its cash flows.
The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience. The following is a reconciliation of the changes in accrued warranty costs for the three months ended April 1, 2017 and April 2, 2016 (in millions):
 
Three Months Ended
 
 
April 1,
2017
 
April 2,
2016
 
Beginning Balance
$
20.3

 
$
19.1

 
Less: Payments
(8.3
)
 
(5.1
)
 
Provisions
6.1

 
3.5

 
Translation Adjustments
0.1

 

 
Ending Balance
$
18.2

 
$
17.5

 
These liabilities are included in Other Accrued Expenses and Other Noncurrent Liabilities on the Consolidated Balance Sheet.

13. DERIVATIVE INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed using derivative instruments are commodity price risk, currency exchange risk, and interest rate risk. Forward contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company's manufacturing process. Forward contracts on certain currencies are entered into to manage forecasted cash flows in certain foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with the Company's floating rate borrowings.
The Company is exposed to credit losses in the event of non-performance by the counterparties to various financial agreements, including its commodity hedging transactions, foreign currency exchange contracts and interest rate swap agreements. Exposure to counterparty credit risk is managed by limiting counterparties to major international banks and financial institutions meeting established credit guidelines and continually monitoring their compliance with the credit guidelines. The Company does not obtain collateral or other security to support financial instruments subject to credit risk. The Company does not anticipate non-performance by its counterparties, but cannot provide assurances.
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the statement of financial position. The Company designates commodity forward contracts as cash flow hedges of forecasted purchases of commodities, currency forward contracts as cash flow hedges of forecasted foreign currency cash flows and interest rate swaps as cash flow hedges of forecasted LIBOR-based interest payments. There were no significant collateral deposits on derivative financial instruments as of April 1, 2017.
Cash flow hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or changes in market value of derivatives not designated as hedges are recognized in current earnings.
At April 1, 2017, the Company had $(3.6) million, net of tax, of derivative losses on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings. At December 31, 2016, the Company had $(7.5) million, net of

20



tax, of derivative losses on closed hedge instruments in AOCI that was realized in earnings when the hedged items impacted earnings.
As of April 1, 2017, the Company had the following currency forward contracts outstanding (with maturities extending through October 2019) to hedge forecasted foreign currency cash flows (in millions):
 
Notional
Amount (in US Dollars)
Chinese Renminbi
$
322.4

Mexican Peso
238.0

Euro
35.3

Indian Rupee
44.8

Canadian Dollar
39.7

Australian Dollar
14.0

Great Britain Pound
6.3

Thai Baht
5.4


As of April 1, 2017, the Company had the following commodity forward contracts outstanding (with maturities extending through June 2018) to hedge forecasted purchases of commodities (notional amounts expressed in terms of the dollar value of the hedged item (in millions):
 
Notional
Amount
Copper
$
59.8

Aluminum
6.2


As of April 1, 2017, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swap was $100.0 million (with maturity in August 2017).
Fair values of derivative instruments as of April 1, 2017 and December 31, 2016 were (in millions):

 
April 1, 2017
 
Prepaid
Expenses and Other Current Assets
 
Other
Noncurrent
Assets
 
Current Hedging
Obligations

 
Noncurrent Hedging
Obligations
Designated as Hedging Instruments:
 
 
 
 
 
 
 
Interest Rate Swap Contracts
$

 
$

 
$
2.2

 
$

Currency Contracts
4.5

 
2.6

 
22.6

 
4.0

Commodity Contracts
4.5

 

 
0.3

 

Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
Currency Contracts
4.5

 

 
1.0

 

Commodity Contracts
2.9

 

 

 

Total Derivatives
$
16.4

 
$
2.6

 
$
26.1

 
$
4.0

 

21



 
December 31, 2016
 
Prepaid
Expenses and Other Current Assets
 
Other
Noncurrent
Assets
 
Current Hedging
Obligations

 
Noncurrent Hedging
Obligations
Designated as Hedging Instruments:
 
 
 
 
 
 
 
Interest Rate Swap Contracts
$

 
$

 
$
3.3

 
$

Currency Contracts
1.3

 
0.4

 
39.7

 
17.6

Commodity Contracts
4.7

 

 

 

Not designated as Hedging Instruments:
 
 
 
 
 
 
 
Currency Contracts
1.5

 

 
6.0

 

Commodity Contracts
2.6

 

 

 

Total Derivatives
$
10.1

 
$
0.4

 
$
49.0

 
$
17.6


The effect of derivative instruments on the Condensed Consolidated Statements of Income and Comprehensive Income (pre-tax) was as follows (in millions):

Derivatives Designated as Cash Flow Hedging Instruments (in millions):
 
 
Three Months Ended
 
April 1, 2017
 
April 2, 2016
 
Commodity
Forwards
 
Currency
Forwards
 
Interest
Rate
Swaps
 
Total
 
Commodity
Forwards
 
Currency
Forwards
 
Interest
Rate
Swaps
 
Total
Gain (Loss) Recognized in Other Comprehensive Income (Loss)
$
2.3

 
$
29.0

 
$

 
$
31.3

 
$
1.4

 
$
2.6

 
$
(0.4
)
 
$
3.6

Amounts Reclassified from Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
 


 


 


 


Gain recognized in Net Sales

 
0.1

 

 
0.1

 

 

 

 

 Gain (Loss) Recognized in Cost of Sales
0.9

 
(11.6
)
 

 
(10.7
)
 
(5.4
)
 
(6.5
)
 

 
(11.9
)
Loss Recognized in Interest Expense

 

 
(1.1
)
 
(1.1
)
 

 

 
(1.2
)
 
(1.2
)

The ineffective portion of hedging instruments recognized during the three months ended April 1, 2017 and April 2, 2016, respectively, was immaterial.
Derivatives Not Designated as Cash Flow Hedging Instruments (in millions):
 
Three Months Ended
 
April 1, 2017
 
April 2, 2016
 
Commodity Forwards
 
Currency Forwards
 
Commodity Forwards
 
Currency Forwards
Gain Recognized in Cost of Sales
$
1.6

 
$

 
$

 
$
0.9

Gain Recognized in Operating Expenses

 
4.4

 
0.1

 

The net AOCI hedging component balance of $(14.4) million loss at April 1, 2017 includes $(6.0) million of net current deferred losses expected to be realized in the next twelve months.

22



The Company's commodity and currency derivative contracts are subject to master netting agreements with the respective counterparties which allow the Company to net settle transactions with a single net amount payable by one party to another party. The Company has elected to present the derivative assets and derivative liabilities on the Condensed Consolidated Balance Sheets on a gross basis for the periods ended April 1, 2017 and December 31, 2016.
The following table presents the derivative assets and derivative liabilities presented on a net basis under enforceable master netting agreements (in millions):
 
April 1, 2017
 
Gross Amounts as Presented in the Condensed Consolidated Balance Sheet
 
Derivative Contract Amounts Subject to Right of Offset
 
Derivative Contracts as Presented on a Net Basis
Prepaid Expenses and Other Current Assets:
 
 
 
 
 
Derivative Currency Contracts
$
9.0

 
$
(4.9
)
 
$
4.1

Derivative Commodity Contracts
7.4

 
(0.3
)
 
7.1

Other Noncurrent Assets:
 
 
 
 
 
Derivative Currency Contracts
2.6

 
(1.6
)
 
1.0

Current Hedging Obligations:
 
 
 
 
 
Derivative Currency Contracts
23.6

 
(4.9
)
 
18.7

Derivative Commodity Contracts
0.3

 
(0.3
)
 

Noncurrent Hedging Obligations:
 
 
 
 
 
Derivative Currency Contracts
4.0

 
(1.6
)
 
2.4

 
December 31, 2016
 
Gross Amounts as Presented in the Condensed Consolidated Balance Sheet
 
Derivative Contract Amounts Subject to Right of Offset
 
Derivative Contracts as Presented on a Net Basis
Prepaid Expenses and Other Current Assets:
 
 
 
 
 
Derivative Currency Contracts
$
2.8

 
$
(1.7
)
 
$
1.1

Derivative Commodity Contracts
7.3

 

 
7.3

Other Noncurrent Assets:
 
 
 
 
 
Derivative Currency Contracts
0.4

 
(0.2
)
 
0.2

Current Hedging Obligations:
 
 
 
 
 
Derivative Currency Contracts
45.7

 
(1.7
)
 
44.0

Noncurrent Hedging Obligations:
 
 
 
 
 
Derivative Currency Contracts
17.6

 
(0.2
)
 
17.4



23



14. FAIR VALUE

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2
Unadjusted quoted prices in active markets for similar assets or liabilities, or
 
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
 
Inputs other than quoted prices that are observable for the asset or liability
Level 3
Unobservable inputs for the asset or liability

The Company uses the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The fair values of cash equivalents and term deposits approximate their carrying values as of April 1, 2017 and December 31, 2016, due to the short period of time to maturity and are classified using Level 1 inputs. The fair values of trade receivables and accounts payable approximate the carrying values due to the short period of time to maturity. See Note 7 of Notes to Condensed Consolidated Financial Statements for disclosure of the approximate fair value of the Company's debt at April 1, 2017 and December 31, 2016.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of April 1, 2017 and December 31, 2016 (in millions):
 
 
April 1,
2017
 
December 31,
2016
 
Classification
Assets:
 
 
 
 
 
Prepaid Expenses and Other Current Assets:
 
 
 
 
 
Derivative Currency Contracts
$
9.0

 
$
2.8

 
Level 2
Derivative Commodity Contracts
7.4

 
7.3

 
Level 2
Other Noncurrent Assets:
 
 
 
 
 
Assets Held in Rabbi Trust
5.5

 
5.4

 
Level 1
Derivative Currency Contracts
2.6

 
0.4

 
Level 2
Liabilities:
 
 
 
 
 
Current Hedging Obligations:
 
 
 
 
 
Interest Rate Swap
2.2

 
3.3

 
Level 2
Derivative Currency Contracts
23.6

 
45.7

 
Level 2
Derivative Commodity Contracts
0.3

 

 
Level 2
Noncurrent Hedging Obligations:
 
 
 
 
 
Derivative Currency Contracts
4.0

 
17.6

 
Level 2

Level 1 fair value measurements for assets held in a Rabbi Trust are unadjusted quoted prices.
Level 2 fair value measurements for derivative assets and liabilities are measured using quoted prices in active markets for similar assets and liabilities. Interest rate swaps are valued based on the discounted cash flows for the LIBOR forward yield curve for a swap with similar contractual terms. Foreign currency forwards are valued based on exchange rates quoted by domestic and foreign banks for similar instruments. Commodity forwards are valued based on observable market transactions of forward commodity prices.
During the three months ended April 1, 2017, there were no transfers between classification Levels 1, 2 or 3.



24



15. RESTRUCTURING AND RELATED COSTS
The Company incurred restructuring and restructuring related costs on projects beginning in 2014. Restructuring costs include employee termination and plant relocation costs. Restructuring-related costs include costs directly associated with actions resulting from our Simplification initiatives, such as asset write-downs or accelerated depreciation due to shortened useful lives in connection with site closures, discretionary employment benefit costs and other facility rationalization costs. Restructuring costs for employee termination expenses are generally required to be accrued over the employees remaining service period while restructuring costs for plant relocation costs and restructuring-related costs are generally required to be expensed as incurred.

The following is a reconciliation of provisions and payments for the restructuring projects for the three months ended April 1, 2017 and April 2, 2016, respectively (in millions):
 
Three Months Ended
 
 
April 1,
2017
 
April 2,
2016
 
Beginning Balance
$
0.6

 
$
1.3

 
Provision
3.2

 
1.4

 
Less: Payments
2.8

 
1.7

 
Ending Balance
$
1.0

 
$
1.0

 

The following is a reconciliation of restructuring and restructuring-related costs for the restructuring projects for the three months ended April 1, 2017 and April 2, 2016, respectively (in millions):
 
 
Three Months Ended
 
April 1, 2017
 
April 2, 2016
Restructuring Costs:
Cost of Sales
Operating Expenses
Total
 
Cost of Sales
Operating Expenses
Total
Employee Termination Expenses
$
1.2

$
0.6

$
1.8

 
$
0.2

$

$
0.2

Facility Related Costs
0.7

0.2

0.9

 
0.1


0.1

  Total Restructuring Costs
$
1.9

$
0.8

$
2.7

 
$
0.3

$

$
0.3

Restructuring Related Costs:
 
 
 
 
 
 
 
Other Employment Benefit Expenses
$
0.5

$

$
0.5

 
$
0.5

$
0.6

$
1.1

  Total Restructuring Related Costs
$
0.5

$

$
0.5

 
$
0.5

$
0.6

$
1.1

Total Restructuring and Restructuring Related Costs
$
2.4

$
0.8

$
3.2

 
$
0.8

$
0.6

$
1.4


The following table shows the allocation of Restructuring Costs by segment for the three months ended April 1, 2017 and April 2, 2016. (in millions):
 
Total
 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
Restructuring Costs - Three Months Ended April 1, 2017
$
3.2

 
$
1.7

 
$
1.1

 
$
0.4

Restructuring Costs - Three Months Ended April 2, 2016
$
1.4

 
$
0.1

 
$
1.3

 
$


The Company's current restructuring activities are expected to continue into 2018. The Company expects to record aggregate future charges of approximately $10.5 million which includes $3.5 million of employee termination expenses and $7.0 million of facility related and other costs.

16. SUBSEQUENT EVENT
The Company has evaluated subsequent events from April 1, 2017 through the date of this report. The Company is not aware of any subsequent events that would require recognition or disclosure.

25





ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this Item 2 to “we,” “us,” “our” or the “Company” refer collectively to Regal Beloit Corporation and its subsidiaries.
Overview
Regal Beloit Corporation (NYSE: RBC), based in Beloit, Wisconsin (USA), is a leading manufacturer of electric motors, electrical motion controls, power generation and power transmission products serving markets throughout the world.

Operating Segments

Our company is comprised of three operating segments: Commercial and Industrial Systems, Climate Solutions and Power Transmission Solutions.

A description of the three operating segments is as follows:

Commercial and Industrial Systems produces medium and large motors, commercial and industrial equipment, generator and custom drives and systems. These products serve markets including commercial Heating, Ventilation, and Air Conditioning ("HVAC"), pool and spa, standby and critical power and oil and gas systems.
Climate Solutions produces small motors, controls and air moving solutions serving markets including residential and light commercial HVAC, water heaters and commercial refrigeration.
Power Transmission Solutions manufactures, sells and services belt and chain drives, helical and worm gearing, mounted and unmounted bearings, couplings, modular plastic belts, conveying chains and components, hydraulic pump drives, large open gearing and specialty mechanical products serving markets including beverage, bulk handling, metals, special machinery, energy, aerospace and general industrial.

Components of Profit and Loss
Net Sales. We sell our products to a variety of manufacturers, distributors and end users. Our customers consist of a large cross-section of businesses, ranging from Fortune 100 companies to small businesses. A number of our products are sold to Original Equipment Manufacturers ("OEM's"), who incorporate our products, such as electric motors, into products they manufacture, and many of our products are built to the requirements of our customers. The majority of our sales derive from direct sales, but a significant portion derives from sales made by manufacturer’s representatives, who are paid exclusively on commission. Our product sales are made via purchase order, long-term contract, and, in some instances, one-time purchases. Many of our products have broad customer bases, with the levels of concentration of revenues varying from division to division.

Our level of net sales for any given period is dependent upon a number of factors, including (i) the demand for our products; (ii) the strength of the economy generally and the end markets in which we compete; (iii) our customers’ perceptions of our product quality at any given time; (iv) our ability to timely meet customer demands; (v) the selling price of our products; and (vi) the weather. As a result, our total revenue has tended to experience quarterly variations and our total revenue for any particular quarter may not be indicative of future results.

We use the term “organic sales" to refer to sales from existing operations excluding (i) sales from acquired businesses recorded prior to the first anniversary of the acquisition less the amount of sales attributable to any divested businesses (“acquisition sales”), and (ii) the impact of foreign currency translation. The impact of foreign currency translation is determined by translating the respective period’s sales (excluding acquisition sales) using the same currency exchange rates that were in effect during the prior year periods. We use the term “organic sales growth” to refer to the increase in our sales between periods that is attributable to organic sales. We use the term “acquisition growth” to refer to the increase in our sales between periods that is attributable to acquisition sales.

Gross Profit. Our gross profit is impacted by our levels of net sales and cost of sales. Our cost of sales consists of costs for, among other things (i) raw materials, including copper, steel and aluminum; (ii) components such as castings, bars, tools, bearings and electronics; (iii) wages and related personnel expenses for fabrication, assembly and logistics personnel; (iv) manufacturing facilities, including depreciation on our manufacturing facilities and equipment, taxes, insurance and utilities; and (v) shipping. The majority of our cost of sales consists of raw materials and components. The price we pay for commodities and components can be subject to commodity price fluctuations. We attempt to mitigate this through fixed-price agreements with suppliers and our

26



hedging strategies. We are currently reducing the number of our suppliers we use in order to leverage the better prices and terms that can be obtained with higher volume orders. A large amount of our suppliers are in North America. As we expand production and our geographic footprint, we expect it may be advantageous to increase our use of foreign suppliers. When we experience commodity price increases, we have tended to announce price increases to our customers who purchase via purchase order, with such increases generally taking effect a period of time after the public announcements. For those sales we make under long-term contracts, we tend to include material price formulas that specify quarterly or semi-annual price adjustments based on a variety of factors, including commodity prices.

Outside of general economic cyclicality, our different business units experience different levels of variation in gross margin from quarter to quarter based on factors specific to each division. For example, a portion of our Climate Solutions segment manufactures products that are used in air conditioning applications. As a result, our sales for that business tend to be lower in the first and fourth quarters and higher in the second and third quarters. In contrast, our Commercial and Industrial Systems segment and our Power Transmission Solutions segment have a broad customer base and a variety of applications, thereby helping to mitigate large quarter-to-quarter fluctuations outside of general economic conditions.

Operating Expenses. Our operating expenses consist primarily of (i) general and administrative expenses; (ii) sales and marketing expenses; (iii) general engineering and research and development expenses; and (iv) handling costs incurred in conjunction with distribution activities. Personnel related costs are our largest operating expense.

Our general and administrative expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses related to our executive, finance, human resource, information technology, legal and operations functions; (ii) occupancy expenses; (iii) technology related costs; (iv) depreciation and amortization; and (v) corporate-related travel. The majority of our general and administrative costs are for salaries and related personnel expenses. These costs can vary by division given the location of our different manufacturing operations.

Our sales and marketing expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses related to our sales and marketing function; (ii) internal and external sales commissions and bonuses; (iii) travel, lodging and other out-of-pocket expenses associated with our selling efforts; and (iv) other related overhead.

Our general engineering and research and development expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses; (ii) the design and development of new energy efficiency products and enhancements; (iii) quality assurance and testing; and (iv) other related overhead. Our research and development efforts tend to be targeted toward developing new products that would allow us to maintain or gain additional market share, whether in new or existing applications. While these costs make up an insignificant portion of our operating expenses in the Power Transmission Solutions segment, they are more substantial in our Commercial and Industrial Systems and Climate Solutions segments. In particular, a large driver of our research and development efforts in these two segments is energy efficiency, which generally means using less electrical power to produce more mechanical power.

Operating Profit. Our operating profit consists of the segment gross profit less the segment operating expenses. In addition, there are shared operating costs that cover corporate, engineering and IT expenses that are consistently allocated to the operating segments and are included in the segment operating expenses. Operating profit is a key metric used to measure year over year improvement of the segments.

Restructuring and Related Costs. Beginning in 2014, we announced the closure of several of our manufacturing and warehouse facilities and consolidation into existing facilities to simplify manufacturing operations in our Commercial and Industrial Systems, Climate Solutions and Power Transmission Solutions segments. As a result of these closures, we incurred restructuring and restructuring-related costs. Restructuring costs includes employee termination and plant relocation costs. Restructuring-related costs includes costs directly associated with actions resulting from our simplification initiatives, such as asset write-downs or accelerated depreciation due to shortened useful lives in connection with site closures, discretionary employment benefit costs and other facility rationalization costs. Restructuring costs for employee termination expenses are generally required to be accrued over the employees remaining service period while restructuring costs for plant relocation costs and restructuring-related costs are generally required to be expensed as incurred.

Outlook
Throughout the first quarter, our orders strengthened, and we expect positive organic sales growth in 2017. We expect improved margins from both volume growth and our simplification efforts to more than offset the continued challenges from commodity inflation.


27



Results of Operations
Three Months Ended April 1, 2017 Compared to April 2, 2016
Net sales for the first quarter 2017 were $813.5 million, a 0.6% decrease compared to first quarter 2016 net sales of $818.2 million. The decrease consisted of a negative foreign currency translation impact of 0.6% and a negative divestiture impact of 0.6%, offset by a favorable impact from organic sales growth of 0.7%. Gross profit for the first quarter 2017 decreased $1.8 million or 0.8% compared to the first quarter 2016 due to the sales volume decrease in the Power Transmission Solutions segment, offset by increases in both the Commercial and Industrial Systems and Climate Solutions segments, resulting in gross profit as a percentage of sales remaining flat. Operating expenses for the first quarter 2017 decreased $7.3 million or 80 basis points as a percentage of net sales compared to the same period in the prior year primarily due to cost controls, including lower amortization and depreciation expenses.
Commercial and Industrial Systems segment net sales for the first quarter 2017 were $381.2 million, a 1.0% increase compared to first quarter 2016 net sales of $377.6 million. The increase consisted of an organic sales increase of 1.7% driven by growth in Asia and in the power generation businesses. Foreign currency translation had a negative impact of 0.8%. Gross profit for the first quarter 2017 increased $2.0 million or 2.1% as compared to 2016 primarily due to an increase in sales volume. Operating expenses for the first quarter 2017 decreased by $2.1 million or 2.9% as compared to 2016 primarily due to cost controls, including lower amortization and depreciation expenses.
Climate Solutions segment net sales for the first quarter 2017 were $247.7 million, a 3.3% increase compared to first quarter 2016 net sales of $239.8 million. The increase consisted of an organic sales increase of 3.7% driven by growth in North American residential HVAC, partially offset by diminishing weakness in Middle East end markets. Foreign currency translation had a negative impact of 0.4%. Gross profit for the first quarter 2017 increased by $4.5 million or 110 basis points as a percentage of net sales primarily due to an increase in sales volume as compared to 2016. Operating expenses for the first quarter 2017 decreased by $2.1 million or 6.6% as compared to 2016 primarily due to cost controls, including lower amortization expenses.
Power Transmission Solutions segment net sales for the first quarter 2017 were $184.6 million or an 8.1% decrease compared to first quarter 2016 net sales of $200.8 million. The decrease consisted of an organic sales growth decrease of 5.0%, a negative impact from the divestiture of 2.6%, and a negative foreign currency translation impact of 0.5%. Organic sales declines were primarily driven by renewable energy demand patterns and diminishing weakness in oil & gas end markets. Gross profit for the first quarter 2017 decreased $8.3 million or 12.3% primarily due to a decrease in sales volume. Operating expenses for the first quarter 2017 decreased $3.1 million or 7.0% as compared to 2016 primarily due to cost controls.




28



 
 
 
 
 
 
Three Months Ended
 
 
April 1, 2017
 
April 2, 2016
 
(Dollars in Millions)
 
 
 
 
Net Sales:
 
 
 
 
  Commercial and Industrial Systems
$
381.2

 
$
377.6

 
  Climate Solutions
247.7

 
239.8

 
  Power Transmission Solutions
184.6

 
200.8

 
Consolidated
$
813.5

 
$
818.2

 
 
 
 
 
 
Gross Profit as a Percent of Net Sales:
 
 
 
 
  Commercial and Industrial Systems
25.1
%
 
24.8
%