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EX-32.1 - EXHIBIT 32.1 - REGAL BELOIT CORPrbc-2018630xex321.htm
EX-31.2 - EXHIBIT 31.2 - REGAL BELOIT CORPrbc-2018630xex312.htm
EX-31.1 - EXHIBIT 31.1 - REGAL BELOIT CORPrbc-2018630xex311.htm
EX-12 - EXHIBIT 12 - REGAL BELOIT CORPrbc-2018630xex12.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 June 30, 2018 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 August 3, 2018 there were 43,454,347 shares of the registrant’s common stock, $0.01 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,” “forecast,” “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 power transmission 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;
risks associated with global manufacturing;
issues and costs arising from the integration of acquired companies and businesses 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;
losses from failures, breaches, attacks or disclosures involving our information technology infrastructure and data;
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 February 27, 2018.


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
 
Six Months Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Net Sales
$
959.7

 
$
869.2

 
$
1,838.5

 
$
1,682.7

Cost of Sales
712.3

 
646.4

 
1,356.2

 
1,244.4

Gross Profit
247.4

 
222.8

 
482.3

 
438.3

Operating Expenses
147.8

 
139.6

 
294.5

 
280.1

Income From Operations
99.6

 
83.2

 
187.8

 
158.2

Other Expenses, net
0.4

 
0.2

 
0.8

 
0.4

Interest Expense
14.2

 
14.7

 
27.2

 
29.1

Interest Income
0.6

 
1.0

 
0.8

 
2.0

Income Before Taxes
85.6

 
69.3

 
160.6

 
130.7

Provision For Income Taxes
18.3

 
15.0

 
34.0

 
28.8

Net Income
67.3

 
54.3

 
126.6

 
101.9

Less: Net Income Attributable to Noncontrolling Interests
1.4

 
1.3

 
2.3

 
2.6

Net Income Attributable to Regal Beloit Corporation
$
65.9

 
$
53.0

 
$
124.3

 
$
99.3

Earnings Per Share Attributable to Regal Beloit Corporation:
 
 
 
 
 
 
 
Basic
$
1.51

 
$
1.19

 
$
2.83

 
$
2.22

Assuming Dilution
$
1.50

 
$
1.18

 
$
2.81

 
$
2.20

Cash Dividends Declared Per Share
$
0.28

 
$
0.26

 
$
0.54

 
$
0.50

Weighted Average Number of Shares Outstanding:
 
 
 
 
 
 
 
Basic
43.8

 
44.7

 
44.0

 
44.8

Assuming Dilution
44.1

 
45.1

 
44.3

 
45.1


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
 
Six Months Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Net Income
$
67.3

 
$
54.3

 
$
126.6

 
$
101.9

Other Comprehensive Income (Loss) Net of Tax:
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
(68.8
)
 
39.1

 
(38.2
)
 
68.5

Hedging Activities:
 
 
 
 
 
 
 
Increase (Decrease) in Fair Value of Hedging Activities, Net of Tax Effects of $(3.9) Million and $6.1 Million for the Three Months ended June 30, 2018 and July 1, 2017 and $(0.2) Million and $18.0 Million for the Six Months ended June 30, 2018 and July 1, 2017, Respectively
(12.3
)
 
10.0

 
(0.8
)
 
29.4

Reclassification of (Gains) Losses included in Net Income, Net of Tax Effects of $(2.8) Million and $1.8 Million for the Three Months ended June 30, 2018 and July 1, 2017 and $(3.4) Million and $6.2 Million for the Six Months ended June 30, 2018 and July 1, 2017, Respectively
(8.5
)
 
2.7

 
(10.3
)
 
10.0

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 June 30, 2018 and July 1, 2017 and $0.4 Million and $0.4 Million for the Six Months Ended June 30, 2018 and July 1, 2017, Respectively
0.7

 
0.4

 
1.5

 
0.8

Other Comprehensive Income (Loss)
(88.9
)
 
52.2

 
(47.8
)
 
108.7

Comprehensive Income (Loss)
(21.6
)
 
106.5

 
78.8

 
210.6

Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interests
(0.4
)
 
1.8

 
1.5

 
3.6

Comprehensive Income (Loss) Attributable to Regal Beloit Corporation
$
(21.2
)
 
$
104.7

 
$
77.3

 
$
207.0

See accompanying Notes to Condensed Consolidated Financial Statements


5



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions, Except Per Share Data)
 
 
June 30,
2018
 
December 30,
2017
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
175.6

 
$
139.6

Trade Receivables, Less Allowances of $11.4 Million in 2018 and $11.3 Million in 2017
607.7

 
506.3

Inventories
785.3

 
757.1

Prepaid Expenses and Other Current Assets
155.7

 
171.4

Total Current Assets
1,724.3

 
1,574.4

Net Property, Plant and Equipment
650.2

 
623.0

Goodwill
1,535.1

 
1,477.1

Intangible Assets, Net of Amortization
676.6

 
670.5

Deferred Income Tax Benefits
27.4

 
28.5

Other Noncurrent Assets
21.1

 
14.7

Total Assets
$
4,634.7

 
$
4,388.2

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts Payable
$
438.6

 
$
384.3

Dividends Payable
12.2

 
11.5

Current Hedging Obligations
13.9

 
8.1

Accrued Compensation and Employee Benefits
74.4

 
74.2

Other Accrued Expenses
128.5

 
132.7

Current Maturities of Long-Term Debt
100.5

 
101.2

Total Current Liabilities
768.1

 
712.0

Long-Term Debt
1,235.1

 
1,039.9

Deferred Income Taxes
143.8

 
135.3

Noncurrent Hedging Obligations
2.2

 
0.9

Pension and Other Post Retirement Benefits
95.8

 
101.0

Other Noncurrent Liabilities
49.0

 
44.4

Contingencies (see Note 12)

 

Equity:
 
 
 
Regal Beloit Corporation Shareholders' Equity:
 
 
 
Common Stock, $0.01 par value, 100.0 Million Shares Authorized, 43.5 Million and 44.3 Million Shares Issued and Outstanding in 2018 and 2017, Respectively
0.4

 
0.4

Additional Paid-In Capital
820.8

 
877.5

Retained Earnings
1,704.4

 
1,611.6

Accumulated Other Comprehensive Loss
(215.6
)
 
(164.0
)
Total Regal Beloit Corporation Shareholders' Equity
2,310.0

 
2,325.5

Noncontrolling Interests
30.7

 
29.2

Total Equity
2,340.7

 
2,354.7

Total Liabilities and Equity
$
4,634.7

 
$
4,388.2

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
$0.01 Par
Value
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
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

 

 
99.3

 

 
2.6

 
101.9

Other Comprehensive Income

 

 

 
107.7

 
1.0

 
108.7

Dividends Declared ($0.50 Per Share)

 

 
(22.3
)
 

 

 
(22.3
)
Stock Options Exercised

 
(3.1
)
 

 

 

 
(3.1
)
Stock Repurchase

 
(17.7
)
 
(4.0
)
 

 

 
(21.7
)
Share-Based Compensation

 
7.1

 

 

 

 
7.1

Balance as of July 1, 2017
$
0.4

 
$
890.8

 
$
1,525.0

 
$
(210.4
)
 
$
43.0

 
$
2,248.8

 
 
Common
Stock
$0.01 Par
Value
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
Total
Equity
Balance as of December 30, 2017
$
0.4

 
$
877.5

 
$
1,611.6

 
$
(164.0
)
 
$
29.2

 
$
2,354.7

Net Income

 

 
124.3

 

 
2.3

 
126.6

Other Comprehensive Loss

 

 

 
(47.0
)
 
(0.8
)
 
(47.8
)
Dividends Declared ($0.54 Per Share)

 

 
(23.6
)
 

 

 
(23.6
)
Stock Options Exercised

 
(4.3
)
 

 

 

 
(4.3
)
Stock Repurchase

 
(59.6
)
 
(12.5
)
 

 

 
(72.1
)
Share-Based Compensation

 
7.2

 

 

 

 
7.2

Adoption of Accounting Pronouncement ASU 2018-02

 

 
4.6

 
(4.6
)
 

 

Balance as of June 30, 2018
$
0.4

 
$
820.8

 
$
1,704.4

 
$
(215.6
)
 
$
30.7

 
$
2,340.7

See accompanying Notes to Condensed Consolidated Financial Statements.

7



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
  
Six Months Ended
 
June 30,
2018
 
July 1,
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
126.6

 
$
101.9

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities (Net of Acquisitions and Divestitures):
 
 
 
Depreciation and Amortization
71.0

 
68.8

(Gain) Loss on Sale or Disposition of Assets, Net
2.4

 
(0.3
)
Share-Based Compensation Expense
7.2

 
7.1

Exit of Business

 
3.9

Gain on Sale of Businesses

 
(0.1
)
Change in Operating Assets and Liabilities
(62.9
)
 
(32.4
)
Net Cash Provided By Operating Activities
144.3

 
148.9

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Additions to Property, Plant and Equipment
(40.5
)
 
(33.7
)
Sales of Investment Securities
0.5

 
0.5

Purchases of Investment Securities

 
(0.5
)
Business Acquisitions, Net of Cash Acquired
(161.5
)
 

Proceeds from Sale of Businesses

 
0.5

Proceeds from Sale of Assets
0.4

 
1.3

Net Cash Used In Investing Activities
(201.1
)
 
(31.9
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings Under Revolving Credit Facility
692.1

 
492.2

Repayments Under Revolving Credit Facility
(498.2
)
 
(494.3
)
Proceeds from Short-Term Borrowings
9.4

 
15.1

Repayments of Short-Term Borrowings
(10.1
)
 
(15.0
)
Proceeds from Long-Term Borrowings
0.2

 
0.3

Repayments of Long-Term Borrowings
(0.1
)
 
(112.1
)
Dividends Paid to Shareholders
(22.9
)
 
(21.4
)
Shares Surrendered for Taxes
(2.9
)
 
(3.4
)
Proceeds from the Exercise of Stock Options

 
0.4

Payments of Contingent Consideration

 
(5.3
)
Repurchase of Common Stock
(71.1
)
 
(21.0
)
Net Cash Provided By (Used In) Financing Activities
96.4

 
(164.5
)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
(3.6
)
 
6.7

Net Increase (Decrease) in Cash and Cash Equivalents
36.0

 
(40.8
)
Cash and Cash Equivalents at Beginning of Period
139.6

 
284.5

Cash and Cash Equivalents at End of Period
$
175.6

 
$
243.7

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash Paid For:
 
 
 
 Interest
$
25.4

 
$
26.8

 Income taxes
$
42.5

 
$
30.6


See accompanying Notes to Condensed Consolidated Financial Statements.

8



REGAL BELOIT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(Unaudited)

1. BASIS OF PRESENTATION
The accompanying (a) Condensed Consolidated Balance Sheet of Regal Beloit Corporation (the “Company”) as of December 30, 2017, which has been derived from audited Consolidated Financial Statements, and (b) unaudited interim Condensed Consolidated Financial Statements as of June 30, 2018 and for the six months ended June 30, 2018 and July 1, 2017, 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 of America ("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.
It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s 2017 Annual Report on Form 10-K filed on February 27, 2018.
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 and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 29, 2018.
The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP, which requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Condensed 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 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU addresses the income tax effects of items in Accumulated Other Comprehensive Loss (“AOCI”) which were originally recognized in other comprehensive income, rather than in income from continuing operations. Specifically, it permits a reclassification from AOCI to Retained Earnings for the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate resulting from the US tax law changes enacted in December 2017. It also requires certain disclosures about these reclassifications. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The new guidance must be applied either on a prospective basis in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the US federal corporate income tax rate in the US tax law changes are recognized. The Company has elected to early adopt this standard as of April 1, 2018. During the second quarter, the Company has elected to reclassify the stranded effects from the US tax law changes from AOCI to Retained Earnings on a prospective basis. As a result of the adoption of ASU 2018-02, the Company has reclassified $4.6 million from AOCI to Retained Earnings. The adoption did not have a material impact on the Company's Condensed Consolidated Financial Statements. See Note 4 of Notes to Condensed Consolidated Financial Statements for a breakout of the impact by component.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities. The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. The Company plans to adopt this pronouncement for its fiscal year beginning December 30, 2018. The Company is currently evaluating the impact of the pending adoption of this standard on its Condensed Consolidated Financial Statements.

In May 2017, the FASB issued ASU 2017-09, Stock Compensation - Scope of Modification Accounting. The ASU amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to

9



the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification ("ASC") 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Prospective application is required. The Company prospectively adopted ASU 2017-09 for its fiscal year beginning on December 31, 2017 and it did not have a material impact on the Company's Condensed Consolidated Financial Statements.

In February 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires companies to present the service cost component of net periodic benefit cost in the same income statement line item as other compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization. Additionally, the ASU requires that companies present the other components of the net periodic benefit cost separately from the line item that includes the service cost and outside of any subtotal of Income from Operations. This ASU is effective for annual periods beginning after December 15, 2017. The amendments in the ASU are to be applied retrospectively for presentation in the Condensed Consolidated Statements of Income and prospectively for the capitalization of the service cost component of net periodic pension cost and net periodic post retirement benefit. A practical expedient allows the Company to use the amount disclosed for net periodic benefit costs for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company retrospectively adopted the ASU on December 31, 2017. As a result of adopting the ASU, non-service cost related net periodic benefit income of $0.2 million and $0.3 million and non-service cost related net periodic benefit costs of $0.4 million and $0.7 million were reclassified from Cost of Sales and Operating Expenses, respectively, to Other Expenses, net for the three and six month period ended July 1, 2017, respectively, on the Condensed Consolidated Statements of Income to conform to the current year presentation using the practical expedient allowed under this ASU.

In February 2016, the FASB issued ASU 2016-02, Leases. The core principle of ASU 2016-02 is that an entity should recognize assets and liabilities arising from a lease on its balance sheet. 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. In July 2018, the FASB amended its guidance by issuing ASU 2018-11 to provide an additional transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. The amendment will also allow lessors the option to make a policy election to treat lease and non-lease components as a single lease component under certain conditions. The Company is currently evaluating its options related to this update. The new lease standard is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. The Company expects the new lease standard to increase its total assets and liabilities, however, it is currently evaluating the magnitude of the impact. The Company is currently evaluating the impact on its Condensed Consolidated Statements of Income. The Company formed a team to implement the new lease standard and is working with its third-party software program to upload information to track and store its leases.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), 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. The new standard also requires additional qualitative and quantitative disclosures about contracts with customers, significant judgments made in applying the revenue guidance, and assets recognized from the costs to obtain or fulfill a contract. The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and its related updates, effective December 31, 2017 using the modified retrospective approach. Results for reporting periods beginning after December 30, 2017 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605.

The majority of the Company’s sales are recognized when products are shipped from its manufacturing or distribution facilities to customers. For a limited number of contracts, the Company recognized revenue over time in proportion to costs incurred. Under the new standard, the Company continues to recognize revenue at a single point-in-time when control is transferred to the customer. In addition, for those contracts in which the Company recognizes revenue over time, the cost-to-cost measure of progress continues to best depict the transfer of control of assets to the customer, which occurs as the Company incurs costs.

The Company completed a comprehensive assessment of ASC 606 and its potential impacts on the Company and concluded that as a result of applying the modified retrospective method, the cumulative effect adjustment to Retained Earnings as of December 31, 2017, was immaterial. Consequently, the Company did not record an adjustment for such a cumulative effect to Retained Earnings. Further, the impact of adopting the new revenue standard does not have a material impact on the Company’s pattern of revenue recognition, results of operations, or financial position. The Company has also completed the process of updating

10



accounting policies, evaluating new disclosure requirements, and identifying and implementing changes to its business processes, systems and controls to support revenue recognition and disclosure under the new guidance.

2. OTHER FINANCIAL INFORMATION
Inventories
The following table presents approximate percentage distribution between major classes of inventories:
 
June 30,
2018
 
December 30,
2017
Raw Material and Work in Process
49%
 
47%
Finished Goods and Purchased Parts
51%
 
53%

Inventories are stated at cost, which is not in excess of market. Cost for approximately 52% of the Company's inventory at June 30, 2018, and 52% at December 30, 2017 was determined using the last-in, first-out ("LIFO") method.
Property, Plant and Equipment
The following table presents property, plant, and equipment by major classification (dollars in millions):
 
Useful Life in Years
 
June 30,
2018
 
December 30,
2017
Land and Improvements
 
 
$
85.1

 
$
78.2

Buildings and Improvements
3 - 50
 
316.7

 
294.5

Machinery and Equipment
3 - 15
 
1,010.6

 
986.8

Property, Plant and Equipment
 
 
1,412.4

 
1,359.5

Less: Accumulated Depreciation
 
 
(762.2
)
 
(736.5
)
Net Property, Plant and Equipment
 
 
$
650.2

 
$
623.0

Revenue Recognition

The Company recognizes revenue from the sale of electric motors, electrical motion controls, power generation and power transmission products. The Company recognizes revenue when control of the product passes to the customer or the service is provided and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services.
Nature of Goods and Services
The Company derives revenue from the sale of electric motors, electrical motion controls, power generation and power transmission products. The Company sells products with multiple applications as well as customized products that have a single application such as those manufactured for its OEM’s customers. The Company reports in three operating segments: Commercial and Industrial Systems, Climate Solutions and Power Transmission Solutions.
Commercial and Industrial Systems - This segment primarily serves commercial HVAC, pool and spa, standby and critical power and oil and gas markets. Products in this segment include medium and large electric motors, commercial and industrial equipment, power generation products, high-performance drives and controls and capacitors.
Climate Solutions - This segment primarily serves the residential, light commercial HVAC, water heaters and commercial refrigeration markets. Products in this segment include small motors, controls and air moving solutions.
Power Transmission Solutions - This segment primarily serves the beverage, bulk handling, metals, special machinery, energy and aerospace markets. Products in this segment include 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.
Nature of Performance Obligations

11



The Company’s contracts with customers typically consist of purchase orders, invoices and master supply agreements. At contract inception, across all three segments, the Company assesses the goods and services promised in its sales arrangements with customers and identifies a performance obligation for each promise to transfer to the customer a good or service that is distinct. The Company’s primary performance obligations consist of product sales and customized system/solutions.
Product:
The nature of products varies from segment to segment but across all segments, individual products are not integrated and represent separate performance obligations. Revenue from product sales is typically recognized at the time of product shipment.
Customized systems/solutions:
The Company provides customized system/solutions which consist of multiple products engineered and designed to specific customer specification, combined or integrated into one combined solution for a specific customer application. The performance obligation is typically satisfied as goods are transferred to the customer and revenue is recognized over-time.
When Performance Obligations are Satisfied
For performance obligations related to product sales, the Company determines that the customer obtains control upon shipment and recognizes revenue accordingly. Once a product has shipped, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from the asset. The Company considers control to have transferred upon shipment because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.
For a limited number of contracts, the Company transfers control and recognizes revenue over time. The Company satisfies its performance obligations as goods are transferred to the customer and uses a cost-based input method to measure progress. In applying the cost-based method of revenue recognition, the Company uses actual costs incurred to date relative to the total estimated costs for the contract in conjunction with the customer's commitment to perform in determining the amount of revenue and cost to recognize. The Company has determined that the cost-based input method provides a faithful depiction of the transfer of goods to the customer.
Payment Terms
The arrangement with the customer states the final terms of the sale, including the description, quantity, and price of each product or service purchased. Payment terms vary by customer but typically range from due upon delivery to 120 days after delivery. For contracts recognized at a point in time, revenue and billing typically occur simultaneously. The Company generally has payment terms with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider the time value of money. For contracts recognized using the cost-based input method, revenue recognized in excess of customer billings and billings in excess of revenue recognized are reviewed to determine the net asset or net liability position and classified as such on the Condensed Consolidated Balance Sheet.
Returns, Refunds, and Warranties
The Company’s contracts do not explicitly offer a “general” right of return to its customers (e.g. customers ordered excess products and return unused items). Warranties are classified as either assurance type or service type warranties. A warranty is considered an assurance type warranty if it provides the customer with assurance that the product will function as intended. A warranty that goes above and beyond ensuring basic functionality is considered a service type warranty. The Company generally only offers limited warranties which are considered to be assurance type warranties and are not accounted for as separate performance obligations under the revenue model. Customers generally receive repair or replacement on products that do not function to specification and are treated under warranty accrual. Estimated product warranties are provided for specific product groups and the Company accrues for estimated future warranty cost in the period in which the sale is recognized. The Company estimates the accrual requirements based on historical warranty loss experience and the cost is included in Cost of Sales.
Volume Rebates
In some cases, the nature of the Company’s contract may give rise to variable consideration including volume based sales incentives. If the customer achieves specific sales targets, they are entitled to rebates. The Company estimates the projected amount of the rebates that will be achieved and recognizes the estimated costs as a reduction to Net Sales as revenue is recognized.
Disaggregation of Revenue
The following tables presents the Company’s revenues disaggregated by geographical region for the three and six month period ended June 30, 2018 (in millions):

12



Three Months Ended June 30, 2018
 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Total
North America
 
$
303.4

 
$
240.9


$
188.7

 
$
733.0

Asia
 
93.0

 
11.2

 
5.0

 
109.2

Europe
 
52.6

 
13.7

 
14.5

 
80.8

Rest-of-World
 
20.0

 
11.5

 
5.2

 
36.7

Total
 
$
469.0

 
$
277.3

 
$
213.4

 
$
959.7

Six Months Ended June 30, 2018
 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Total
North America
 
$
591.9

 
$
460.3

 
$
356.1

 
$
1,408.3

Asia
 
160.0

 
23.8

 
9.7

 
193.5

Europe
 
71.6

 
24.6

 
39.4

 
135.6

Rest-of-World
 
59.5

 
28.5

 
13.1

 
101.1

Total
 
$
883.0

 
$
537.2

 
$
418.3

 
$
1,838.5

Practical Expedients and Exemptions
The Company typically expenses incremental direct costs of obtaining a contract, primarily sales commissions, as incurred because the amortization period is expected to be 12 months or less. Contract costs are included in Operating Expenses on the accompanying Condensed Consolidated Statements of Earnings.
Due to the short nature of the Company’s contracts, the Company has adopted a practical expedient to not disclose revenue allocated to remaining performance obligations as substantially all of its contracts have original terms of 12 months or less.
The Company typically does not include in its transaction price any amounts collected from customers for sales taxes.
The Company has elected to account for shipping and handling costs as fulfillment activities and expense the costs as incurred.
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 six months ended July 1, 2017, a final deferred contingent purchase price payment of $5.3 million was made under this agreement.

3. ACQUISITIONS AND DIVESTITURES
The results of operations of acquired businesses are included in the Condensed Consolidated Financial Statements from the date of acquisition. Acquisition and acquisition related expenses of $1.2 million were recorded in Operating Expenses for the three and six months ended June 30, 2018. There were no acquisition and acquisition related expenses for the three and six months ended July 1, 2017.
2018 Acquisitions

Nicotra Gebhardt

On April 10, 2018, the Company acquired Nicotra Gebhardt S.p.A ("NG") for $161.5 million in cash, net of cash acquired. NG is a leader in critical, energy-efficient systems for ventilation and air quality. NG manufactures, sells and services fans and blowers under the industry leading brands of Nicotra and Gebhardt. The financial results of NG have been included in the Company's Commercial & Industrial Systems segment from the date of acquisition.

The Company has not yet completed its full analysis of the fair value of tangible assets acquired and liabilities assumed and the allocation of any excess acquisition cost over the fair value of the net tangible assets acquired to any separately identifiable intangible assets. As a result, the initial accounting is incomplete. The Company booked provisional amounts at the acquisition date and will adjust the provisional amounts retrospectively during the allowed measurement period. The Company is in process of valuing property, plant and equipment using both a market approach and a cost approach depending on the asset. Intangible

13



assets are being valued using the present value of projected future cash flows. Significant assumptions include royalty rates, discount rates and customer attrition. None of the goodwill is expected to be deductible for tax purposes.

The following table summarizes the provisional fair value of assets acquired and liabilities assumed:

 
 
 
 
 
As of April 10, 2018
Current Assets
 
 
 
 
$
17.2

Trade Receivables
 
 
 
 
28.0

Inventories
 
 
 
 
22.0

Property, Plant and Equipment
 
 
 
 
41.0

Intangible Assets
 
 
 
 
38.7

Goodwill
 
 
 
 
67.6

Other Noncurrent Assets
 
 
 
 
2.7

Total Assets Acquired
 
 
 
 
217.2

Accounts Payable
 
 
 
 
16.7

Current Liabilities Assumed
 
 
 
 
14.2

Long-Term Liabilities Assumed
 
 
 
 
16.3

Net Assets Acquired
 
 
 
 
$
170.0


Other Disclosures

The Condensed Consolidated Statements of Income include the results of operations of NG since the date of acquisition, and such results are reflected in the Commercial and Industrial Systems segment. Results of operations since the date of acquisition and supplemental pro forma financial information have not been presented for the NG acquisition as such information is not material to the results of operations.

4. ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustments, hedging activities and pension and post retirement benefit adjustments are included in AOCI, a component of Total Equity.

14



The following table presents changes in AOCI by component for the three and six months ended June 30, 2018 and July 1, 2017 (in millions):
 
Three Months Ended
 
June 30, 2018
 
Hedging Activities
 
Pension and Post Retirement Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning Balance
$
18.3

 
$
(32.1
)
 
$
(110.1
)
 
$
(123.9
)
Other Comprehensive Income (Loss) before Reclassifications
(16.2
)
 
0.3

 
(67.3
)
 
(83.2
)
Tax Impact
3.9

 

 

 
3.9

Amounts Reclassified from Accumulated Other Comprehensive Loss
(11.3
)
 
0.9

 

 
(10.4
)
Tax Impact
2.8

 
(0.2
)
 

 
2.6

Net Current Period Other Comprehensive Income (Loss)
(20.8
)
 
1.0

 
(67.3
)
 
(87.1
)
Adoption of Accounting Pronouncement ASU 2018-02
2.0

 
(6.6
)
 

 
(4.6
)
Ending Balance
$
(0.5
)
 
$
(37.7
)
 
$
(177.4
)
 
$
(215.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
July 1, 2017
 
Hedging Activities
 
Pension and Post Retirement Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning Balance
$
(14.4
)
 
$
(35.8
)
 
$
(211.9
)
 
$
(262.1
)
Other Comprehensive Income (Loss) before Reclassifications
16.1

 
(0.1
)
 
38.7

 
54.7

Tax Impact
(6.1
)
 

 

 
(6.1
)
Amounts Reclassified from Accumulated Other Comprehensive Loss
4.5

 
0.6

 

 
5.1

Tax Impact
(1.8
)
 
(0.2
)
 

 
(2.0
)
Net Current Period Other Comprehensive Income
12.7

 
0.3

 
38.7

 
51.7

Ending Balance
$
(1.7
)
 
$
(35.5
)
 
$
(173.2
)
 
$
(210.4
)

15



 
Six Months Ended
 
June 30, 2018
 
Hedging Activities
 
Pension and Post Retirement Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning Balance
$
8.6

 
$
(32.6
)
 
$
(140.0
)
 
$
(164.0
)
Other Comprehensive Loss before Reclassifications
(1.0
)
 

 
(37.4
)
 
(38.4
)
Tax Impact
0.2

 

 

 
0.2

Amounts Reclassified from Accumulated Other Comprehensive Loss
(13.7
)
 
1.9

 

 
(11.8
)
Tax Impact
3.4

 
(0.4
)
 

 
3.0

Net Current Period Other Comprehensive Income (Loss)
(11.1
)
 
1.5

 
(37.4
)
 
(47.0
)
Adoption of Accounting Pronouncement ASU 2018-02
2.0

 
(6.6
)
 

 
(4.6
)
Ending Balance
$
(0.5
)
 
$
(37.7
)
 
$
(177.4
)
 
$
(215.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
July 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
47.4

 
(0.3
)
 
67.8

 
114.9

Tax Impact
(18.0
)
 

 

 
(18.0
)
Amounts Reclassified from Accumulated Other Comprehensive Loss
16.2

 
1.2

 

 
17.4

Tax Impact
(6.2
)
 
(0.4
)
 

 
(6.6
)
Net Current Period Other Comprehensive Income
39.4

 
0.5

 
67.8

 
107.7

Ending Balance
$
(1.7
)
 
$
(35.5
)
 
$
(173.2
)
 
$
(210.4
)
The Condensed Consolidated Statements of Income line items affected by the hedging activities reclassified from AOCI 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 also 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.

16



The following table presents changes to goodwill during the six months ended June 30, 2018 (in millions):
 
Total
 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
Balance as of December 30, 2017
$
1,477.1

 
$
548.8

 
$
342.4

 
$
585.9

Acquisition and Valuation Adjustments
67.6

 
67.6

 

 

Translation Adjustments
(9.6
)
 
(5.9
)
 
(0.8
)
 
(2.9
)
Balance as of June 30, 2018
$
1,535.1

 
$
610.5

 
$
341.6

 
$
583.0

 
 
 
 
 
 
 
 
Cumulative Goodwill Impairment Charges
$
275.7

 
$
244.8

 
$
7.7

 
$
23.2

Intangible Assets
The following table presents intangible assets (in millions):
 
 
 
 
June 30, 2018
 
December 30, 2017
 
 
Weighted Average Amortization Period (Years)
 
Gross Value
 
Accumulated
Amortization
 
Gross Value
 
Accumulated
Amortization
Amortizable Intangible Assets:
 
 
 
 
 
 
 
 
 
 
  Customer Relationships
 
16
 
$
744.2

 
$
270.1

 
$
720.9

 
$
249.6

  Technology
 
13
 
191.6

 
126.5

 
192.3

 
122.8

  Trademarks
 
13
 
41.2

 
26.1

 
32.8

 
25.7

  Patent and Engineering Drawings
 
5
 
16.6

 
16.6

 
16.6

 
16.6

  Non-Compete Agreements
 
8
 
8.4

 
8.3

 
8.5

 
8.4

 
 
 
 
1,002.0

 
447.6

 
971.1

 
423.1

Non-Amortizable Trade Names
 
 
 
122.2

 

 
122.5

 

 
 
 
 
$
1,124.2

 
$
447.6

 
$
1,093.6

 
$
423.1

 
 
 
 
 
 
 
 
 
 
 

Amortization expense recorded for the three and six months ended June 30, 2018 was $14.0 million and $27.6 million, respectively. Amortization expense recorded for the three and six months ended July 1, 2017 was $13.9 million and $28.0 million, respectively. Amortization expense for 2018 is estimated to be $55.5 million.
The following table presents future annual amortization for intangible assets (in millions):

 Year
 
Estimated Amortization
2019
 
$
55.6

2020
 
52.7

2021
 
45.3

2022
 
43.7

2023
 
43.7




17




6. SEGMENT INFORMATION

The Company is comprised of three operating segments: Commercial and Industrial Systems, Climate Solutions, and Power Transmission Solutions.
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.
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.
The following sets forth certain financial information attributable to the Company's operating segments for the three and six months ended June 30, 2018 and July 1, 2017 (in millions):
 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Eliminations
 
Total
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
External Sales
$
469.0

 
$
277.3

 
$
213.4

 
$

 
$
959.7

Intersegment Sales
12.5

 
5.8

 
7.4

 
(25.7
)
 

  Total Sales
481.5

 
283.1

 
220.8

 
(25.7
)
 
959.7

Gross Profit
105.7

 
72.9

 
68.8

 

 
247.4

Operating Expenses
75.2

 
28.9

 
43.7

 

 
147.8

Income From Operations
30.5

 
44.0

 
25.1

 

 
99.6

Depreciation and Amortization
17.2

 
5.2

 
13.8

 

 
36.2

Capital Expenditures
8.9

 
7.9

 
4.4

 

 
21.2

Three Months Ended July 1, 2017
 
 
 
 
 
 
 
 
 
External Sales
$
407.4

 
$
270.5

 
$
191.3

 
$

 
$
869.2

Intersegment Sales
19.9

 
6.0

 
2.2

 
(28.1
)
 

  Total Sales
427.3

 
276.5

 
193.5

 
(28.1
)
 
869.2

Gross Profit
91.8

 
68.2

 
62.8

 

 
222.8

Operating Expenses
71.2

 
27.8

 
40.6

 

 
139.6

Income From Operations
20.6

 
40.4

 
22.2

 

 
83.2

Depreciation and Amortization
14.8

 
5.6

 
14.0

 

 
34.4

Capital Expenditures
11.1

 
2.3

 
3.3

 

 
16.7


18



 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Eliminations
 
Total
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
External Sales
$
883.0

 
$
537.2

 
$
418.3

 
$

 
$
1,838.5

Intersegment Sales
27.6

 
11.3

 
12.0

 
(50.9
)
 

  Total Sales
910.6

 
548.5

 
430.3

 
(50.9
)
 
1,838.5

Gross Profit
205.5

 
136.6

 
140.2

 

 
482.3

Operating Expenses
145.9

 
60.3

 
88.3

 

 
294.5

Income From Operations
59.6

 
76.3

 
51.9

 

 
187.8

Depreciation and Amortization
32.6

 
10.6

 
27.8

 

 
71.0

Capital Expenditures
19.9

 
12.4

 
8.2

 

 
40.5

Six Months Ended July 1, 2017
 
 
 
 
 
 
 
 

External Sales
$
788.6

 
$
518.2

 
$
375.9

 
$

 
$
1,682.7

Intersegment Sales
35.8

 
14.2

 
2.9

 
(52.9
)
 

  Total Sales
824.4

 
532.4

 
378.8

 
(52.9
)
 
1,682.7

Gross Profit
187.3

 
129.0

 
122.0

 

 
438.3

Operating Expenses
141.0

 
57.2

 
81.9

 

 
280.1

Income From Operations
46.3

 
71.8

 
40.1

 

 
158.2

Depreciation and Amortization
30.0

 
11.1

 
27.7

 

 
68.8

Capital Expenditures
21.7

 
6.6

 
5.4

 

 
33.7


The following table presents identifiable assets information attributable to the Company's operating segments as of June 30, 2018 and December 30, 2017 (in millions):
 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Total
Identifiable Assets as of June 30, 2018
$
2,085.1

 
$
927.1

 
$
1,622.5

 
$
4,634.7

Identifiable Assets as of December 30, 2017
$
1,854.1

 
$
909.9

 
$
1,624.2

 
$
4,388.2


7. DEBT AND BANK CREDIT FACILITIES
The following table presents the Company’s indebtedness as of June 30, 2018 and December 30, 2017 (in millions):
 
June 30,
2018
 
December 30,
2017
Term Facility
$
621.1

 
$
621.1

Senior Notes
500.0

 
500.0

Multicurrency Revolving Facility
213.7

 
19.7

Other
5.0

 
5.7

Less: Debt Issuance Costs
(4.2
)
 
(5.4
)
Total
1,335.6

 
1,141.1

Less: Current Maturities
100.5

 
101.2

Non-Current Portion
$
1,235.1

 
$
1,039.9


The Credit Agreement

19



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 3.3% and 3.2% for the three and six months ended June 30, 2018, respectively and 2.5% and 2.4% for the three and six months ended July 1, 2017, respectively. 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 June 30, 2018, the Company had borrowings under the Multicurrency Revolving Facility in the amount of $213.7 million, $0.2 million of standby letters of credit issued under the facility, and $286.1 million of available borrowing capacity. The average daily balance in borrowings under the Multicurrency Revolving Facility was $241.0 million and $185.9 million, and the weighted average interest rate on the Multicurrency Revolving Facility was 3.2% and 3.1% for the three and six months ended June 30, 2018, respectively. The average daily balance in borrowings under the Multicurrency Revolving Facility was $114.8 million and $109.2 million and the weighted average interest rate on the Multicurrency Revolving Facility was 2.5% and 2.4% for the three and six months ended July 1, 2017. 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 June 30, 2018, the Company had $500.0 million of senior notes (the “Notes”) outstanding. The Notes consist of $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. As of June 30, 2018, $400.0 million of the 2011 Notes are included in Long-Term Debt and $100.0 million of the 2011 Notes are included in Current Maturities of Long-Term Debt on the Condensed Consolidated Balance Sheets.
The following table presents details on the Notes at June 30, 2018 (in millions):
 
 
Principal
 
Interest Rate
 
Maturity
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
 
 
$
500.0

 
 
 
 

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 Financial Statements).

Compliance with 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 June 30, 2018.
 
Other Notes Payable

At June 30, 2018, other notes payable of approximately $5.0 million were outstanding with a weighted average interest rate of 4.9%. At December 30, 2017, other notes payable of approximately $5.7 million were outstanding with a weighted average rate of 5.7%.


20



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 $1,351.0 million and $1,165.4 million as of June 30, 2018 and December 30, 2017, respectively.

8. RETIREMENT AND POST RETIREMENT HEALTH CARE PLANS
The following table presents the Company’s net periodic benefit cost components (in millions):
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Service Cost
$
1.9

 
$
1.8

 
$
3.7

 
$
3.6

Interest Cost
2.4

 
2.4

 
4.8

 
4.8

Expected Return on Plan Assets
(2.9
)
 
(2.8
)
 
(5.9
)
 
(5.6
)
Amortization of Prior Service Cost and Net Actuarial Loss
0.9

 
0.6

 
1.9

 
1.2

Net Periodic Benefit Cost
$
2.3

 
$
2.0

 
$
4.5

 
$
4.0


The service cost component is included in Cost of Sales and Operating Expenses. All other components of net period benefit costs are included in Other Expenses, net on the Company's Condensed Consolidated Statements of Income.
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 2018 fiscal year are $3.5 million and $0.2 million, respectively.
For the three months ended June 30, 2018 and July 1, 2017, the Company contributed $6.0 million and $1.4 million, respectively, to post retirement plans. For the six months ended June 30, 2018 and July 1, 2017, the Company contributed $6.9 million and $2.2 million, respectively, to post retirement plans. The Company expects to make total contributions of $9.2 million in 2018. The Company contributed a total of $8.6 million in fiscal 2017. 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 2017 Annual Report on Form 10-K filed on February 27, 2018.

9. SHAREHOLDERS’ EQUITY
Repurchase of Common Stock

The Company acquired and retired 579,005 shares of its common stock in the quarter ended June 30, 2018, at an average cost of$79.60 per share for a total cost of $46.1 million. The Company acquired and retired 930,005 shares of its common stock for the six months ended June 30, 2018, at an average cost of $77.55 per share for a total cost of $72.1 million. The repurchases were made under the 3.0 million share repurchase program approved by the Company’s Board of Directors in November, 2013. There were approximately 0.8 million shares of the Company's common stock available for repurchase under this program at June 30, 2018. At a meeting of the Board of Directors on July 24, 2018, this repurchase program was extinguished and replaced with an authorization to purchase up to $250.0 million of shares.

Share-Based Compensation

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

The Company recognized approximately $3.8 million and $4.1 million in share-based compensation expense for the three months ended June 30, 2018 and July 1, 2017, respectively. Share-based compensation expense was $7.2 million and $7.1 million for the six months ended June 30, 2018 and July 1, 2017, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Income for share-based compensation expense was $0.9 million and $1.6 million for the three months ended June 30, 2018 and July 1, 2017, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Income for share-based compensation expense was $1.7 million and $2.7 million for the six months ended June 30, 2018 and July 1, 2017, 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 June 30, 2018, total unrecognized compensation cost

21



related to share-based compensation awards was approximately $30.0 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 2.4 years.

Approximately 2.6 million shares were available for future grant under the 2018 Equity Incentive Plan at June 30, 2018.

Stock Appreciation Rights
The Company uses stock settled stock appreciation rights (“SARs”) as a form of share-based incentive awards. SARs are the right to receive stock in an amount equal to the appreciation in value of a share of stock over the base price per share that generally vest over 5 years and expire 10 years from the grant date. All grants are made at prices equal to the fair market value of the stock on the grant date. For the six months ended June 30, 2018 and July 1, 2017, expired and canceled shares were immaterial.
The following table presents share-based compensation activity for the six months ended June 30, 2018 and July 1, 2017 (in millions):
 
 
June 30,
2018
 
July 1,
2017
Total Intrinsic Value of Share-Based Incentive Awards Exercised
 
$
3.6

 
$
3.1

Cash Received from Stock Option Exercises
 

 
0.4

Income Tax Benefit (Expense) from the Exercise of Stock Options
 
(0.1
)
 
0.7

Total Fair Value of Share-Based Incentive Awards Vested
 
4.0

 
4.3


The following table presents assumptions used in the Company's Black-Scholes valuation related to grants of SARs:
 
2018
 
2017
Per Share Weighted Average Fair Value of Grants
$
22.73

 
$
23.31

Risk-Free Interest Rate
2.9
%
 
2.1
%
Expected Life (Years)
7.0

 
7.0

Expected Volatility
27.8
%
 
28.6
%
Expected Dividend Yield
1.4
%
 
1.3
%
The average risk-free interest rate is based on the US Treasury security rate as of the grant date. The expected dividend yield is based on the projected annual dividend as a percentage of the estimated market value of the Company's common stock as of the grant date. The Company estimated the expected volatility using a weighted average of daily historical volatility of the Company's stock price over the expected term of the award. The Company estimated the expected term using historical data adjusted for the estimated exercise dates of unexercised awards.
The following table presents a summary of share-based incentive plan grant activity (SARs) for the six months ended June 30, 2018.
Number of Shares Under SARs
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value (in millions)
Exercisable at December 30, 2017
1,601,791

 
$
66.46

 
 
 
 
Granted
193,357

 
77.60

 
 
 
 
Exercised
(205,740
)
 
60.26

 
 
 
 
Forfeited
(5,206
)
 
70.30

 
 
 
 
Expired
(1,250
)
 
54.28

 
 
 
 
Outstanding at June 30, 2018
1,582,952

 
$
68.63

 
5.9
 
$
20.9

Exercisable at June 30, 2018
972,381

 
$
65.63

 
4.2
 
$
15.7


Compensation expense recognized related to SARs was $1.8 million for the six months ended June 30, 2018.
As of June 30, 2018, there was $11.4 million of unrecognized compensation cost related to non-vested SARs that is expected to be recognized as a charge to earnings over a weighted average period of 3.6 years.

22




The number of SARs expected to vest is materially consistent with those outstanding and not yet exercisable.
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, death, disability or normal retirement of the grantee.
The following table presents a summary of RSA award activity for the six months ended June 30, 2018:
 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (Years)
Unvested RSAs at December 30, 2017
 
13,941

 
$
80.70

 
0.4
Granted
 
15,660

 
74.38

 
 
Vested
 
(13,941
)
 
80.70

 
 
Unvested RSAs at June 30, 2018
 
15,660

 
$
74.38

 
0.9

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 $0.6 million for the six months ended June 30, 2018.
As of June 30, 2018, there was $1.0 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 0.9 years.
The following table presents a summary of RSU award activity for the six months ended June 30, 2018:
 
 
 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (Years)
Unvested RSUs at December 30, 2017
 
260,533

 
$
70.81

 
1.7
Granted
 
77,426

 
74.45

 
 
Vested
 
(97,650
)
 
76.35

 
 
Forfeited
 
(4,609
)
 
69.74

 
 
Unvested RSUs at June 30, 2018
 
235,700

 
$
69.73

 
2.1
RSUs vest on the third anniversary of the grant date, provided the holder of the RSUs is continuously employed by the Company until the vesting date. Compensation expense recognized related to the RSUs was $3.7 million for the six months ended June 30, 2018.
As of June 30, 2018, there was $10.1 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 2.1 years.
Performance Share Units
Performance share units ("PSU") 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 and vest 3 years from the grant date. The PSUs have performance criteria based on a return on invested capital metric or they have performance criteria using returns relative to the Company's peer group. 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.

23



The following table presents the assumptions used in the Company's Monte Carlo simulation:
 
June 30,
2018
 
July 1,
2017
Risk-Free Interest Rate
2.7
%
 
1.6
%
Expected Life (Years)
3.0

 
3.0

Expected Volatility
25.0
%
 
24.0
%
Expected Dividend Yield
1.4
%
 
1.3
%

The following table presents a summary of PSU activity for the six months ended June 30, 2018:
 
 
 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (Years)
Unvested PSUs at December 30, 2017
 
155,116

 
$
70.43

 
2.0
Granted
 
50,659

 
83.80

 
 
Vested
 
(1,359
)
 
57.43

 
 
Forfeited
 
(36,576
)
 
83.55

 
 
Unvested PSUs at June 30, 2018
 
167,840

 
$
71.71

 
2.2
Compensation expense for awards granted is recognized based on the grant issuance 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 $1.1 million for the six months ended June 30, 2018. Total unrecognized compensation expense for all PSUs granted as of June 30, 2018 is estimated to be $7.5 million which is expected to be recognized as a charge to earnings over a weighted average period of 2.2 years.

10. INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law revising the US corporate income tax. Changes included, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the elimination of certain deductions and imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries. The primary impacts of the Act reflected in the Condensed Consolidated Financial Statements relate to the remeasurement of deferred tax assets and liabilities resulting from the change in the corporate tax rate; a one-time mandatory transition tax on undistributed earnings of foreign affiliates; and deferred taxes in connection with a change in the Company’s intent to permanently reinvest the historical undistributed earnings of its foreign affiliates. The Securities and Exchange Commission (the “SEC”) provided guidance that allows the Company to record provisional amounts if the accounting assessment is incomplete for impacts of the Act, with the requirement that the accounting be finalized in a period not to exceed one year from the date of enactment. The Company recorded a net $1.0 million provisional reduction in tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional benefit recognized related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse was $51.0 million. The provisional expense recognized related to the one-time tax on the mandatory deemed repatriation of foreign earnings was $40.0 million of which the Company will elect to pay over a period of eight years. On August 1, 2018, the U.S. Department of Treasury released proposed rules related to the one-time transition tax. The Company is currently evaluation the potential impact of the proposed rules on the Condensed Consolidated Financial Statements. The Company also recognized a provisional expense of $10.0 million for local withholding taxes on foreign earnings not deemed permanently reinvested. The Company continues to believe this is a reasonable estimate related to the Act using all analysis, interpretations and guidance available at this time. The Company continues to assess the impact of the Act, and the final impact may differ from this estimate, possibly materially, due to, changes in interpretations, assumptions, and/or guidance that may be issued in the near future or actions the Company may take as a result, among other things. The Act also subjects US shareholders to tax on Global Intangible Low Taxed Income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for GILTI, states than an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, the Company is still evaluating the effects of the GILTI provisions and has not yet determined an accounting policy. As of June 30, 2018, the Company has included GILTI related to current year earnings only in its estimated annual effective tax rate and has not provided additional GILTI on deferred items.

24



The effective tax rate for the three months ended June 30, 2018 was 21.4% versus 21.6% for the three months ended July 1, 2017. The effective tax rate for the six months ended June 30, 2018 was 21.2% versus 22.0% for the six months ended July 1, 2017. The change in the effective tax rate for the three months ended June 30, 2018 was primarily driven by the mix of earnings and the impact of the Act. The change in the effective tax rate for the six months ended June 30, 2018 was primarily driven by the mix of earnings and the impact of the Act.
As of June 30, 2018 and December 30, 2017, the Company had approximately $7.6 million and $6.7 million, respectively, 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 2013, and the Company is no longer subject to non-US income tax examinations by tax authorities for years prior to 2011.
11. EARNINGS PER SHARE
Diluted earnings per share is calculated 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. The amount of the anti-dilutive shares were 0.7 million and 0.4 million for the three months ended June 30, 2018 and July 1, 2017, respectively, and 0.6 million and 0.4 million for the six months ended June 30, 2018 and July 1, 2017, respectively. The following table reconciles the basic and diluted shares used in earnings per share calculations for the three and six months ended June 30, 2018 and July 1, 2017 (in millions):
 
Three Months Ended
 
Six Months Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Denominator for Basic Earnings Per Share
43.8

 
44.7

 
44.0

 
44.8

Effect of Dilutive Securities
0.3

 
0.4

 
0.3

 
0.3

Denominator for Diluted Earnings Per Share
44.1

 
45.1

 
44.3

 
45.1


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 product safety requirements and other potential regulation of their performance by government agencies such as the US 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, 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.

25



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 table presents a reconciliation of the changes in accrued warranty costs for the three and six months ended June 30, 2018 and July 1, 2017 (in millions):
 
Three Months Ended
 
Six Months Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Beginning Balance
$
15.6

 
$
18.2

 
$
16.0

 
$
20.3

Less: Payments
(4.9
)