ENGINEERED
TO MOVE THE
FUTURE.
2015 ANNUAL REPORT
engineered verb 1. arranged, managed or carried through by skill
Financial Results
Net Sales
(in billions)
Adjusted Diluted*
Earnings Per Share
Free Cash Flow*
(in millions)
5
.
3
$
3
.
3
$
3
3
.
5
$
1
7
.
4
$
3
7
.
4
$
6
3
.
4
$
1
3
.
4
$
2
.
3
$
1
.
3
$
8
.
2
$
.
9
8
8
2
$
.
4
9
6
2
7 $
.
7
0
2
$
9
.
3
2
2
$
.
6
4
1
2
$
Dividends Per Share
0
9
0
$
.
4
8
0
$
.
8
7
.
0
$
4
7
.
0
$
0
7
.
0
$
‘11
‘12
‘13
‘14
‘15
‘11
‘12
‘13
‘14
‘15
‘11
‘12
‘13
‘14
‘15
‘11
‘12
‘13
‘14
‘15
Non-GAAP Measures Referenced Above
*Management presents these non-GAAP measures to provide investors with additional information regarding our operations and to compare our financial results
across fiscal years and to our peers. Please see the reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures included in
this Annual Report.
To Our Shareholders
2015 was a transformative year for Regal. On January 30 we closed the acquisition
of Power Transmission Solutions (PTS) which was one of the largest and most
complex acquisitions ever for Regal. Today, I am proud to say that the integration
has been a tremendous success and we are now operating as “One Regal.” The
PTS Team performed well in 2015, taking on the enormous task of integrating our
businesses while facing difficult global market conditions. With PTS, we are a bigger,
stronger and more diversified company and we are thrilled with the talent that came
with the acquisition.
While we were integrating the PTS business, we were also busy improving the performance
of our core operations. In 2015, we delivered margin rate improvement in every quarter in
spite of tepid global demand. Additionally, Regal continued to generate robust cash flow.
For the fifth year in a row, Regal ended the year with free cash flow exceeding adjusted net
income*. Finally, the company increased its dividend for the tenth time over the last eleven
years and has paid a dividend for 222 consecutive quarters.
In summary, we marked our 60th year in business with record sales of $3.5 billion and record
adjusted earnings per share of $5.33.*
A year of transformation.
Throughout 2015, our focus on Simplification continued to pay off in operating performance
and customer care improvements. We consolidated six more factories, simplified our fourth
engineering design platform, exited five more warehouses and converted five more ERPs to
a common platform. Additionally, we celebrated and welcomed our new PTS employees into
new offices and design centers in Pune, Manila, Shanghai and Mississauga. In China, we put
an exclamation point on our new factory in Wuxi by opening a new product showroom, and
we established a new sales center in Dubai that will serve customers throughout the Middle
East. And while all these transitions were taking place, we launched 45 more new products
and improved our customer and employee survey scores. As you can see, the pace of change
at Regal has been transformational and the improvements are being felt by both our customers
and our investors.
Now three years into our Operational Excellence journey, we enhanced the program in 2015
by including the best practices from our newly acquired PTS team. Learning and utilizing
the best ideas from acquisitions is part of our culture and makes us a better company. Our
continuous improvement platform is now called “Performance Excellence,” and we are
expanding the target beyond our manufacturing operations. We believe that by focusing our
talent and continuous improvement tools on the entire customer value stream we can better
meet our customers’ needs. Performance Excellence is making us a better company and, more
importantly, becoming a key part of our culture.
Ultimately it is a company’s culture that will differentiate it from its competitors. At Regal, we
believe our culture is unique. It’s what makes 84% of our employees agree with the statement,
“I enjoy working for Regal.” Maybe it’s our integrity. Maybe it’s our transparency. Maybe it’s
the candor in our feedback sessions. Perhaps it’s all of the above. But in any case, we think our
culture is special and we think it’s working.
“We marked our 60th
year in business
with record sales
and record adjusted
earnings per share.”
2015 Annual Report i
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“I work for Regal because Regal
works for me.”
ii 2015 Annual Report
Our work is recognized.
In 2015 we received five notable supplier performance awards. One of these awards
recognized our Changzhou, China operation which earned Supplier Gold certification
from United Technologies Corporation (UTC). This prestigious award requires
suppliers to meet and sustain world-class levels in quality, delivery, process control
and customer satisfaction. Regal is proud to be the only motor supplier to have ever
received this demanding award of excellence from UTC.
Sustainability is of growing importance to our customers and employees, and Regal
is in a perfect position to both help our customers meet the demanding requirements
for higher energy efficiency regulations and to be the employer of choice for those
wanting a rewarding career with a company that is making a difference for our
planet. In 2015, Regal joined the Carbon Disclosure Project (CDP), holding ourselves
publicly accountable to continuously reduce the impact our operations have on the
environment. Regal is on a journey to not only design and produce products that
help our environment but to produce them in a way that is sustainable to our planet.
While we are not there yet, sustainability is becoming a key part of what Regal offers
to our customers and to our employees. Delivering on our core purpose to “convert
power into motion to help the world run more efficiently,” our innovative engineering
solutions are being used in alternative energy applications like wind and solar, and
are also being used to help reduce the energy consumption of necessary everyday
applications, including air conditioning, heating and refrigeration. Our employees
work every day to improve efficiency and reduce waste in our facilities and, in their
down time, they are giving back to their home communities by donating their time,
talent and resources to local charities.
Moving forward.
As we look forward, 2016 appears to be a year of challenging market conditions, with
continued expected weakness in oil and gas markets, in China, and from currency
fluctuations. At Regal, we will meet these challenges by focusing on three key
goals. First, we will work to continue the tremendous progress we made in 2015
on improving our operating margins. We will strive to achieve this goal by further
simplifying our operations globally. Second, we will focus our efforts on achieving
organic growth by pursuing new markets and innovating new products. Third, we
will improve our use of working capital, making even more cash available to deploy
for our shareholders. We exited 2015 with great momentum; and with the challenges
we are facing in our end markets, we’ll need that momentum as we enter 2016. The
company has never been better positioned; we’ve never been stronger. With all the
transformation that has occurred in the company, Regal is engineered to move the future.
Thank you to our global family of over 26,000 employees that wake up every day
wanting to make a difference for our customers, colleagues and our shareholders.
Finally, thank you to our shareholders. Your continued trust in Regal drives us
to perform.
Sincerely,
Mark J. Gliebe, Chairman and CEO
At Regal, our work results in movement and energy. Our engineering
and designs lead to efficiency and productivity. At Regal, the
future is not something we can wait for and react to. Instead, we
are putting the future into motion now.
What does it mean to move the future? At Regal, it means we are
meeting the challenges of the future today—with innovative, high
efficiency solutions for our customers.
Our drive to innovate is turning the world’s
demands for efficiency and sustainability into
solutions for customers and opportunities for
Regal. As far as we can see into the future, our
world will continue to be challenged to both
preserve the limited resources of our planet
and improve the environment in which
we live. Through the innovation of new
products, systems and solutions, Regal’s
employees are meeting these challenges,
solving these problems and moving the
future to a better place.
2015 Annual Report iii
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UTC Supplier Gold Award
The Regal team in Changzhou, China is the only motor
manufacturer to earn the “Supplier Gold” distinction from
UTC. This team is proud to be recognized for its yearlong
performance excellence in quality, delivery, process control
and customer satisfaction.
iv 2015 Annual Report
We are a company that focuses on continuous improvement, which means that we constantly
challenge existing processes and try to identify best practices to improve on those processes.
As an example, we launched our Operational Excellence program in 2013 with the goal of
achieving excellent performance in our factories through a focus on improving key leading
indicators such as employee engagement. Our acquisition of PTS in 2015 gave us the
opportunity to learn from another great company and include its best practices in our program.
This synergy of best practices has created an even stronger continuous improvement process
for our businesses, which we have renamed “Performance Excellence.”
Our commitment to customers is to deliver world-class performance through innovation,
quality, delivery, responsiveness and cost. We achieved another year of improving customer
survey scores, and five major customer awards helped publicly recognize our progress.
Putting Excellence to Work.
Doing well while doing good.
From innovating high efficiency products to being good stewards of our communities through
energy, water and waste reduction in our facilities, we’re helping to meet the growing global
demand for energy efficiency and conservation.
In 2015, we began reporting
our carbon emissions data
to the CDP. By measuring our
environmental impact, we can
make lasting improvements in our
own facilities.
Our teams strive to earn Regal “Five Star” recognition.
This award recognizes our facilities that fully employ
and meet Performance Excellence.
Wuxi, China is home to our largest and newest facility. Industrial motors produced in Wuxi are shipped to customers around the globe.
2015 Annual Report v
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Innovation with Impact.
The Earth moves on products made by Regal. By some estimates, 45% of the electrical
energy that the world produces is consumed by the conversion of power into motion.
From food processing and agriculture to comfort conditioning and industrial
production, the solutions we create touch nearly every aspect of life.
By asking the right questions of our end users and listening to their challenges and
opportunities, we are designing systems that meet their needs today and in the
future. We are using small entrepreneurial teams to develop solutions that improve
efficiency and help lower system costs for our customers. These focused, nimble
teams are quick-to-market with technologies that can make a lasting impact for both
our customers and our shareholders.
“It’s an engineer’s dream environment.”
-Nate Snell, Product Manager - Pump Marketing, Tipp City, Ohio
vi 2015 Annual Report
The installation of new solar farms had a sizable impact on Regal’s business in 2015. This new gearing product helps improve the control of
solar panels as they track the sun. The growth of solar farms is expected to help Regal grow in the future.
Regal solutions are helping data centers optimize uptime, performance, reliability and security. Regal equipment controls the supply of
electricity to data centers from either the primary utility source or the backup medium voltage generators. Customers depend on Regal for
these critical applications in this high growth industry.
2015 Annual Report vii
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Our People in Action.
We used our “Lend Forward” approach to help the Regal Kolkata
facility make significant improvements in cost, quality and delivery in
2015. Lend Forward teams bring together resources from around the
company to lend expertise to other Regal facilities with the goal of quickly
improving operations. The teams are trained in Lean Six Sigma tools and
are empowered to make lasting changes to processes, procedures and their
working environments. When the work of the Lend Forward team is complete,
employees from the target site are encouraged to spread what they have
learned throughout their facility and to then Lend Forward their new expertise
to other Regal locations.
We believe that employees who are closest to the action can make the most significant
and long term improvements. That’s why Regal employees are trained in the right
skills and empowered to make the best decisions for the benefit of our company and
our shareholders.
Our High Energy Team (HET) approach engages not just the hands but also the hearts
and minds of our nearly 20,000 production operators. HET has made such a positive
impact on delivery, productivity and quality that Regal has experienced an 80%
improvement in the measured quality of our products over the past five years.
“With Regal’s emphasis on Performance
Excellence, there is no problem that we
can’t solve.”
-Oscar Lugo, Sr. Engineer, Manufacturing Process Improvements, Juarez, Mexico
viii 2015 Annual Report
Regal Beloit Corporation
200 State Street
Beloit, WI 53511
(608) 364-8800
2015 Annual Report
on Form 10-K
2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2016
Commission File number 1-7283
Regal Beloit Corporation
(Exact Name of Registrant as Specified in Its Charter)
Wisconsin
(State of Incorporation)
39-0875718
(IRS Employer Identification No.)
200 State Street, Beloit, Wisconsin 53511
(Address of principal executive offices)
(608) 364-8800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock ($.01 Par Value)
Securities registered pursuant to
Section 12 (g) of the Act
Name of Each Exchange on
Which Registered
New York Stock Exchange
None
(Title of Class)
Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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 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 (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company
(Do not check if a smaller reporting company)
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the voting stock held by non-affiliates of the registrant as of July 4, 2015 was approximately $3.2 billion.
On February 26, 2016, the registrant had outstanding 44,668,940 shares of common stock, $.01 par value, which is registrant's only class of
common stock.
Certain information contained in the Proxy Statement for the Annual Meeting of Shareholders to be held on April 25, 2016 is incorporated by
reference into Part III hereof.
DOCUMENTS INCORPORATED BY REFERENCE
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REGAL BELOIT CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED JANUARY 2, 2016
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operation
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executives Compensation
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedule
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
SIGNATURES
4
CAUTIONARY STATEMENT
Certain statements made in this Annual Report on Form 10-K 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 Annual Report on Form 10-K,
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;
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;
product liability and other litigation, or the failure of our products to perform as anticipated, particularly in high volume
applications;
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, foreign government policies and other external factors that we cannot
control;
unanticipated liabilities of acquired businesses, including PTS;
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 this Annual Report on Form
10-K and from time to time in our reports filed with U.S. Securities and Exchange Commission.
All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly
qualified in their entirety by the applicable cautionary statements. The forward-looking statements included in this Annual Report
on Form 10-K are made only as of their respective dates, and we undertake no obligation to update these statements to reflect
subsequent events or circumstances. See also “Risk Factors.”
5
PART I
Unless the context requires otherwise, references in this Annual Report on Form 10-K to “we,” “us,” “our” or the “Company”
refer collectively to Regal Beloit Corporation and its subsidiaries.
References in an Item of this Annual Report on Form 10-K to information contained in our Proxy Statement for the Annual Meeting
of Shareholders to be held on April 25, 2016 (the "2016 Proxy Statement”), or to information contained in specific sections of the
2016 Proxy Statement, incorporate the information into that Item by reference.
We operate on a 52/53 week fiscal year ending on the Saturday closest to December 31. We refer to the fiscal year ended January
2, 2016 as “fiscal 2015,” the fiscal year ended January 3, 2015 as “fiscal 2014,” and the fiscal year ended December 28, 2013 as
“fiscal 2013.”
ITEM 1 - BUSINESS
Our Company
Regal Beloit Corporation is a leading manufacturer of electric motors, electrical motion controls, power generation and power
transmission products serving markets throughout the world. Our company is comprised of three reporting segments: Commercial
and Industrial Systems, Climate Solutions and Power Transmission Solutions. Financial information on our reporting segments for
fiscal 2015, fiscal 2014 and fiscal 2013 is contained in Note 6 of Notes to the Consolidated Financial Statements.
General
Commercial and Industrial Systems Segment
Our Commercial and Industrial Systems segment designs, manufactures and sells primarily:
• Fractional, integral and large horsepower AC and DC motors and controls for commercial and industrial ("C&I") applications.
These motors are sold directly to original equipment manufacturer ("OEM") and end-user customers and through our network
of direct and independent sales representatives as well as through regional and national distributors. Typical applications
include pumps, fans, compressors, conveyors, augers, blowers, and irrigation equipment. Our customers tend to be the leaders
in their industries, and their desire for more efficient motor based solutions is providing an increasing opportunity to add more
value to their applications with energy efficient motor and integrated electronic control solutions.
• Fractional and integral horsepower motors, electronic variable speed controls and blowers used in commercial heating,
ventilation, and air conditioning (“HVAC”) products. Our primary customers for these products are manufacturers of
commercial HVAC and refrigeration systems as well as national and regional distributors of aftermarket products for the repair
of these systems.
• Solid state and electro-mechanical starters, contactors, relays, variable frequency drives and motors, artificial lift system
pumping equipment, and total integrated solutions of these components. The market for these control solutions is driven
primarily by applications requiring effective compression, pumping, air moving and conveying systems. Our products are sold
primarily to OEM customers and systems integrators, and used in C&I markets such as oil and gas, mining, metals, chemical,
water waste water, machinery, marine, buildings, cement & glass, pulp and paper.
• Precision stator and rotor kits from five to 2,900 horsepower for air conditioning, heat pump and refrigeration compressor
applications, which are sold primarily directly to OEM customers.
• Hazardous duty motors, including low and medium voltage explosion proof motors as well as ATEX and IEC-Ex certified
explosion proof motors. These motors are sold primarily into general industrial applications in potentially hazardous conditions
such as oil and gas, paint booths, tunnels, and mining.
• Electric generators from five kilowatts through four megawatts, automatic transfer switches, power generation and distribution
switch gear, components and system controls. These products and systems are used in applications including health care, cloud
and enterprise data centers, oil and gas, marine, agriculture, transportation, government, construction and other applications.
The demand for electric power generation systems is driven by the need for electrical power on demand in cases where
utility/grid power is lost or stressed or in prime power applications where utility power is unavailable.
Climate Solutions Segment
Our Climate Solutions segment designs, manufactures and sells primarily:
• Fractional motors, electronic variable speed controls and blowers used in a variety of residential and light commercial air
moving applications including HVAC systems and commercial refrigeration. These motors and blowers are vital components
of an HVAC system and are used to move air into and away from furnaces, heat pumps, air conditioners, ventilators, fan filter
boxes, water heaters and humidifiers. A majority of our HVAC motors replace existing motors, are installed as part of a new
HVAC system that replaces an existing HVAC system, or are used in an HVAC system for new home construction. The business
enjoys a large installed base of equipment and long-term relationships with its major customers.
6
• Fractional motors and blowers used across a wide range of other applications including white goods, water heating equipment,
small pumps and compressors. Demand for these products is driven primarily by consumer and light commercial market
segments.
• Precision stator and rotor sets from 1.5 to 5 horsepower that are assembled into compressors for air conditioning, heat pump
and refrigeration applications.
• Capacitors for use in HVAC systems, high intensity lighting and other applications.
Power Transmission Solutions Segment
• Our Power Transmission Solutions segment designs, manufactures and sells primarily:
• Mounted and unmounted bearings. Unmounted bearings are offered in a variety of types and styles. These include cam
followers, radial bearings, and thrust bearings. Mounted bearings include industry specific designs that aim to solve customer
problems. They are all available with a variety of options and sizes and include aerospace and specialty bearings, mounted
bearings, unmounted bearings, and corrosion resistant bearings.
• High quality conveyor products including chains, belts, sprockets, components and guide rails and wear strips. Conveying
components assists in these areas: efficiency, noise reduction, wash-down maintenance, lubrication reduction and energy
conservation. Our products are highly engineered from industry expert input.
• High performance disc, patented diaphragm and gear couplings for applications including turbines, compressors, generators
and pumps in many industries including petrochemical, refinery, power generation, gas pipeline and LNG. We also produce
flexible couplings and transmission elements. Products include gear, grid, jaw, elastomer, disc, and universal joints.
• Mechanical power transmission drives, components and bearings including: belt drives, bushings, chain and sprockets, drive
tighteners and idlers, mechanical CAM clutches, and torque overload devices. Our products serve a wide range of industries
and applications, such as the following: aggregate, forestry & wood products, grain & biofuels, power generation, food &
beverage, HVACR.
• Gearboxes for motion control within complex equipment and systems used for a variety of applications. We provide a wide
array of gear types, shaft configurations, ratios, housing materials and mounting methods. Right angle worm gear and bevel
units can be specified for less than 100 inch lbs. of torque to over 132,000 inch lbs. of torque. Helical gear units are offered
from 100 inch lbs. to over 500,000 inch lbs. of torque. Our products include worm gearing, shaft mount reducers, helical
concentric and right angle, bevel and miter gearing, center pivot gearing, and open gearing. This gearing reduces the speed
and increases the torque from an electric motor or other prime mover to meet the requirements of equipment.
• Many of our products are originally sold and installed into OEM equipment within these industries. Our reputation and long
history of providing highly reliable products creates an end user specification for replacement through the distribution
channel. We also provide application and design assistance based on our deep knowledge of our products and their applications.
OEMs and end users of a variety of motion control and other industrial applications typically combine the types of motors, controls
and power transmission products we offer. We seek to take advantage of this practice and to enhance our product penetration by
leveraging cross-marketing and product line combination opportunities between our Commercial and Industrial Systems, Climate
Solutions and Power Transmission Solution products. Our growth strategy also includes (i) driving organic growth through the
introduction of innovative new products, (ii) establishing and maintaining new customers, as well as developing new opportunities
with existing customers, (iii) participating in higher growth geographic markets, and (iv) identifying and consummating strategic,
value creating acquisitions.
Acquisitions
On January 18, 2016, subsequent to our fiscal 2015 year end, we purchased the remaining shares owned by the noncontrolling
interest in our Elco Group B.V. joint venture, increasing our ownership from 55.0% to 100.0% for $18.5 million.
In 2015, we completed one acquisition in the Power Transmissions Solutions segment.
• On January 30, 2015, we acquired the Power Transmissions Solutions business from Emerson Electric Co. ("PTS" and the
"PTS Acquisition") for $1,408.9 million. PTS designs, manufactures, and sells and services belt and chain drives, helical and
worm gearing, mounted and unmounted bearings, standard and highly engineered, high performance couplings, modular plastic
belts and conveying chains and components.
• In 2014, we completed two acquisitions in the Commercial and Industrial Systems segment.
• On June 30, 2014, we acquired Benshaw Inc., a Pittsburgh, Pennsylvania based manufacturer of custom low and medium
voltage drives and soft starters, for $51.0 million.
• On February 7, 2014, we acquired Hy-Bon Engineering Company, Inc., a Midland, Texas based manufacturer of vapor recovery
solutions for oil and gas applications, for $78.0 million.
• In 2013, we completed the following acquisitions in the Commercial and Industrial Systems segment.
7
• On November 19, 2013, we acquired Cemp s.r.l. ("Cemp"), an Italy based electric motor company for $34.6 million, net of
cash. Cemp is a leading designer, manufacturer and marketer of flameproof electric motors.
• On February 8, 2013, we acquired the RAM motor business previously owned by Schneider Electric for $6.0 million. The
business manufactures hermetic motors from 250 horsepower to 2,500 horsepower for commercial HVAC applications.
• On September 3, 2013 we purchased additional shares owned by the noncontrolling interest in our joint venture in a South
African distribution business for $1.7 million.
Sales, Marketing and Distribution
We sell our products directly to OEMs, distributors and end-users. We have multiple business units and each unit typically has its
own branded product offering and sales organization. These sales organizations consist of varying combinations of our own internal
direct sales people as well as exclusive and non-exclusive manufacturers' representative organizations.
We operate large distribution facilities in Indianapolis, Indiana; Florence, Kentucky; and LaVergne, Tennessee which serve as hubs
for our North American distribution and logistics operations. Products are shipped from these facilities to our customers utilizing
common carriers and our limited fleet of trucks and trailers. We also operate numerous warehouse and distribution facilities in our
global markets to service the needs of our customers. In addition, we have many manufacturer representatives' warehouses located
in specific geographic areas to serve local customers.
We derive a significant portion of revenue from our OEM customers. In our HVAC business, our reliance on sales to key OEM
customers makes our relationship with each of these customers important to our business, and we expect this customer concentration
will continue for the foreseeable future in this portion of our business. Despite this relative concentration, we had no customer that
accounted for more than 10% of our consolidated net sales in fiscal 2015, fiscal 2014 or fiscal 2013.
Many of our motors are incorporated into residential applications that OEMs sell to end users. The number of installations of new
and replacement HVAC systems, pool pumps and related components is higher during the spring and summer seasons due to the
increased use of air conditioning and swimming pools during warmer months. As a result, our revenues tend to be higher in the
second and third quarters.
Competition
Commercial and Industrial Systems Segment and the Climate Solutions Segment
Electric motor manufacturing is a highly competitive global industry in which there is emphasis on quality, reliability, technological
capabilities such as energy efficiency, delivery performance, price and service. We compete with a growing number of domestic
and international competitors due in part to the nature of the products we manufacture and the wide variety of applications and
customers we serve. Many manufacturers of electric motors operate production facilities in many different countries, producing
products for both the domestic and export markets. On balance, the demarcation between domestic U.S. and foreign manufacturers
is blurring as competition becomes more and more global. Electric motor manufacturers from abroad, particularly those located in
Europe, Brazil, China, India and elsewhere in Asia, provide increased competition as they expand their market penetration around
the world, especially in North America.
Our major competitors in the Commercial and Industrial Systems segment include Welling Holding Limited, Kirloskar Brothers
Limited, Crompton Greaves Limited, Lafert, ABB Ltd., Johnson Electric Holdings Limited, Siemens AG, Toshiba Corporation,
Cummins, Inc., Panasonic Corporation, Leroy-Somer (a subsidiary of Emerson Electric Company), Tech-top, Weg S.A., Hyundai,
and TECO Electric & Machinery Co., Ltd.
Our major competitors in the Climate Solutions segment include Broad-Ocean Motor Co., ebm-papst Mulfingen GmbH & Co.KG,
Toshiba Corporation, Panasonic Corporation, Bluffton Motor Works and U.S. Motors (a division of Nidec Corporation).
Power Transmission Solutions Segment
The power transmission products market is fragmented. Many competitors in the market offer limited product lines or serve specific
applications, industries or geographic markets. Other larger competitors offer broader product lines that serve multiple end uses in
multiple geographies. Competition in the power transmission segment is based on several factors including quality, lead times,
custom engineering capability, pricing, reliability, and customer and engineering support. Our major competitors in the Power
Transmission Solutions segment include Altra Industrial Motion, Inc., Dodge (a subsidiary of ABB Ltd.), Rexnord Corporation,
The Timken Company and SEW Eurodrive GmbH & Co.
Engineering, Research and Development
We believe that innovation is critical to our future growth and success and are committed to investing in new products, technologies
and processes that deliver real value to our customers. Our research and development expenses consist primarily of costs for (i)
salaries and related 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 gain additional market share, whether in new or existing segments.
8
We believe the key driver of our innovation strategy is the development of products that include energy efficiency, embedded
intelligence and variable speed technology solutions. With our emphasis on product development and innovation, our businesses
filed 43 Non-Provisional United States patents, four Provisional United States patents and an additional 85 Non-Provisional foreign
patents in fiscal 2015.
Each of our business units has its own, as well as shared, product development and design teams that continuously work to enhance
our existing products and develop new products for our growing base of customers that require custom and standard solutions. We
believe we have state of the art product development and testing laboratories. We believe these capabilities provide a significant
competitive advantage in the development of high quality motors, electric generators, controls and mechanical products
incorporating leading design characteristics such as low vibration, low noise, improved safety, reliability, sustainability and
enhanced energy efficiency.
We are continuing to expand our business by developing new, differentiated products in each of our business units. We work closely
with our customers to develop new products or enhancements to existing products that improve performance and meet their needs.
For fiscal 2015, 2014 and 2013, research and development expenses, which are solely focused on products or processes that are
entirely innovative to our Company or to our industry, were $30.1 million, $32.9 million and $28.3 million, respectively. For the
same periods, total research and development and other engineering expenses, which include product and process improvements,
were $78.7 million, $85.0 million and $84.4 million, respectively.
Manufacturing and Operations
We have developed and acquired global operations in locations such as China, Mexico, India and Thailand so that we can sell our
products in these faster growing markets, follow our multinational customers, take advantage of global talent and complement our
flexible, rapid response operations in the United States, Canada and Europe. Our vertically integrated manufacturing operations,
including our own aluminum die casting and steel stamping operations, are an important element of our rapid response capabilities.
In addition, we have an extensive internal logistics operation and a network of distribution facilities with the capability to modify
stock products to quickly meet specific customer requirements in many instances. This gives us the ability to efficiently and
promptly deliver a customer's unique product to the desired location.
We manufacture a majority of the products that we sell, but also strategically outsource components and finished goods from an
established global network of suppliers. We aggressively pursue global sourcing to reduce our overall costs. We generally maintain
a dual sourcing capability in our existing domestic facilities to ensure a reliable supply source for our customers, although we do
depend on a limited number of key suppliers for certain materials and components. We regularly invest in machinery and equipment
to improve and maintain our facilities. Additionally, we have typically obtained significant amounts of quality capital equipment as
part of our acquisitions, often increasing overall capacity and capability. Base materials for our products consist primarily of steel,
copper and aluminum. Additionally, significant components of our product costs consist of bearings, electronics, permanent
magnets and ferrous and non-ferrous castings.
We use our Compass™ operating system to drive Performance Excellence. Compass™ provides us with a common language and
a common set of business processes, disciplines and Lean Six Sigma tools. It consists of a set of standard reviews throughout the
year to assess team progress in serving our customers, shareholders and employees. It is a significant part of our culture and fuels
our continuous performance improvements. We believe our people are at the core of everything we do, and their deployment of
these tools lead to operational excellence. We have invested in training hundreds of high energy teams, which have generated
significant benefits and driven improvements in safety, speed, quality and cost.
Facilities
We have manufacturing, sales and service facilities in the United States, Mexico, China, Europe, India and Australia, as well as a
number of other locations throughout the world. Our Commercial and Industrial Systems segment currently includes 105
manufacturing, service, office and distribution facilities of which 39 are principal manufacturing facilities. The Commercial and
Industrial Systems segment's present operating facilities contain a total of approximately 7.9 million square feet of space, of which
approximately 33% are leased. Our Climate Solutions segment includes 41 manufacturing, service, office and distribution facilities,
of which 17 are principal manufacturing facilities. The Climate Solutions segment's present operating facilities contain a total of
approximately 3.2 million square feet of space, of which approximately 49% are leased. The Power Transmission Solutions
segment's present operating facilities (including facilities acquired in the PTS Acquisition) contain a total of approximately 2.7
million square feet of space which currently includes 35 manufacturing, service and distribution facilities, of which 18 are principal
manufacturing facilities. Approximately 13% of the Power Transmission Solutions segment's facilities are leased. Our principal
executive offices are located in Beloit, Wisconsin in an approximately 50,000 square foot owned office building. We believe our
equipment and facilities are well maintained and adequate for our present needs.
Backlog
Our business units have historically shipped the majority of their products in the month the order is received. As of January 2,
2016, our backlog was $372.7 million, as compared to $400.2 million on January 3, 2015. We believe that virtually all of our
backlog will be shipped in 2016.
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Patents, Trademarks and Licenses
We own a number of United States patents and foreign patents relating to our businesses. While we believe that our patents provide
certain competitive advantages, we do not consider any one patent or group of patents essential to our business as a whole. We also
use various registered and unregistered trademarks, and we believe these trademarks are significant in the marketing of most of our
products. However, we believe the successful manufacture and sale of our products generally depends more upon our technological,
manufacturing and marketing skills.
Employees
At the end of fiscal 2015, we employed approximately 26,200 employees worldwide. Of those employees, approximately 10,600
were located in Mexico; approximately 6,100 in the United States; approximately 4,300 in China; approximately 2,300 in India;
and approximately 2,900 in the rest of the world. We consider our employee relations to be very good.
Executive Officers
The names, ages, and positions of our executive officers as February 29, 2016 are listed below along with their business experience
during the past five years. Officers are elected annually by the Board of Directors. There are no family relationships among these
officers, nor any arrangements of understanding between any officer and any other persons pursuant to which the officer was
elected.
Executive
Officer
Age
Position
Business Experience and Principal Occupation
Mark J. Gliebe
55
Chairman and
Chief Executive
Officer
Jonathan J.
Schlemmer
50 Chief Operating
Officer
Charles A.
Hinrichs
62 Vice President
and Chief
Financial Officer
Elected Chairman of the Board on December 31, 2011. Elected President and Chief
Executive Officer in May 2011. Previously elected President and Chief Operating Officer
in December 2005. Joined the Company in January 2005 as Vice President and President -
Electric Motors Group, following the acquisition of the HVAC motors and capacitors
businesses from GE. Previously employed by GE as the General Manager of GE Motors &
Controls in the GE Consumer & Industrial business unit from June 2000 to December 2004.
Elected Chief Operating Officer in May 2011. Prior thereto served as the Company's Senior
Vice President - Asia Pacific from January 2010 to May 2011. Prior thereto, served as the
Company's Vice President - Technology from 2005 to January 2010. Before joining the
company, worked for GE in its electric motors business in a variety of roles including
quality, Six Sigma and engineering.
Joined the Company and was elected Vice President, Chief Financial Officer in September
2010. Prior to joining the Company, Mr. Hinrichs was Senior Vice President and Chief
Financial Officer at Smurfit-Stone Container Corporation, where he worked from 1995 to
2009. On January 26, 2009, Smurfit- Stone Container Corporation and its primary operating
subsidiaries filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court in Wilmington, Delaware, and
emerged from bankruptcy in July 2010.
Peter C.
Underwood
46 Vice President,
General Counsel
and Secretary
Joined the Company and was elected Vice President, General Counsel and Secretary in
September 2010. Prior to joining the Company, Mr. Underwood was a partner with the law
firm of Foley & Lardner LLP from 2005 to 2010 and an associate from 1996 to 2005.
Terry R.
Colvin
60 Vice President
Corporate
Human
Resources
John M.
Avampato
55 Vice President
and Chief
Information
Officer
Joined the Company in September 2006 and was elected Corporate Vice President of Human
Resources in January 2007 for Regal Beloit. Prior to joining the Company, Mr. Colvin was
an employee of Sigma-Aldrich Corporation for over seventeen years. He served in several
human resources positions for Sigma-Aldrich, most recently as Vice President of Human
Resources from 1995 to 2003.
Joined the Company in 2006 as Vice President Information Technology. Appointed Vice
President and Chief Information Officer in January 2008. In April 2010, Mr. Avampato was
elected Officer of the Company. Prior to joining the Company, Mr. Avampato was with
Newell Rubbermaid from 1984 to 2006 where he was Vice President, Chief Information
Officer from 1999 to 2006.
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Website Disclosure
Our Internet address is www.regalbeloit.com. We make available free of charge (other than an investor's own Internet access
charges) through our Internet website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or
furnish such material to, the Securities and Exchange Commission. In addition, we have adopted a Code of Business Conduct and
Ethics that applies to our officers, directors and employees which satisfies the requirements of the New York Stock Exchange
regarding a “code of business conduct.” We have also adopted Corporate Governance Guidelines addressing the subjects required
by the New York Stock Exchange. We make copies of the foregoing, as well as the charters of our Board committees, available
free of charge on our website. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments
to, or waivers from, our Code of Business Conduct and Ethics by posting such information on our web site at the address stated
above. We are not including the information contained on or available through our website as a part of, or incorporating such
information by reference into, this Annual Report on Form 10-K.
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ITEM 1A -
RISK FACTORS
You should carefully consider each of the risks described below, together with all of the other information contained in this Annual
Report on Form 10-K, before making an investment decision with respect to our securities. If any of the following risks develop
into actual events, our business, financial condition, results of operations, or cash flow could be materially and adversely affected
and you may lose all or part of your investment.
We expect to incur costs and charges as a result of restructuring activities such as facilities and operations consolidations
and workforce reductions that we expect will reduce on-going costs, and those restructuring activities also may be disruptive
to our business and may not result in anticipated cost savings.
We have been consolidating facilities and operations in an effort to make our business more efficient and expect to continue to
review our overall manufacturing footprint. We have incurred, and expect in the future to incur, additional costs and restructuring
charges in connection with such consolidations, workforce reductions and other cost reduction measures that have adversely
affected and, to the extent incurred in the future would adversely affect, our future earnings and cash flows. Furthermore, such
actions may be disruptive to our business. This may result in production inefficiencies, product quality issues, late product deliveries
or lost orders as we begin production at consolidated facilities, which would adversely impact our sales levels, operating results
and operating margins. In addition, we may not realize the cost savings that we expect to realize as a result of such actions.
As a result of the increase in our debt levels and debt service obligations in connection with our acquisition of the Power
Transmission Solutions business (“PTS”), we may have less cash flow available for our business operations, we could become
increasingly vulnerable to general adverse economic and industry conditions and interest rate trends, and our ability to
obtain future financing may be limited.
At the beginning of fiscal 2015, we significantly increased our overall debt levels in connection with financing the acquisition of
PTS. As of January 2, 2016, we had $1.7 billion in aggregate debt outstanding under our various financing arrangements, $252.9
million in cash and cash equivalents and $464.1 million in available borrowings under our current revolving credit facility. Our
ability to make required payments of principal and interest on our increased debt levels will depend on our future performance,
which, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control. We
cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available
under our current credit facilities in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity
needs. In addition, our credit facilities contain financial and restrictive covenants that could limit our ability to, among other things,
borrow additional funds or take advantage of business opportunities. Our failure to comply with such covenants could result in an
event of default that, if not cured or waived, could result in the acceleration of all our indebtedness or otherwise have a material
adverse effect on our business, financial condition, results of operations and debt service capability. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.” Our increased indebtedness may
have important consequences. For example, it could:
• make it more challenging for us to obtain additional financing to fund our business strategy and acquisitions, debt service
requirements, capital expenditures and working capital;
• increase our vulnerability to interest rate changes and general adverse economic and industry conditions;
• require us to dedicate a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the
availability of our cash flow to finance acquisitions and to fund working capital, capital expenditures, manufacturing capacity
expansion, business integration, research and development efforts and other general corporate activities;
• limit our flexibility in planning for, or reacting to, changes in our business and our markets; and
• place us at a competitive disadvantage relative to our competitors that have less debt.
In addition, our credit facilities require us to maintain specified financial ratios and satisfy certain financial condition tests, which
may require that we take action to reduce our debt or to act in a manner contrary to our business strategies. If an event of default
under our credit facility or senior notes were to occur then, the lenders could elect to declare all amounts outstanding under the
applicable agreement, together with accrued interest, to be immediately due and payable.
We operate in the highly competitive global electric motor, drives and controls, power generation and power transmission
industries.
The global electric motors, drives and controls, power generation and power transmission industries are highly competitive. We
encounter a wide variety of domestic and international competitors due in part to the nature of the products we manufacture and the
wide variety of applications and customers we serve. In order to compete effectively, we must retain relationships with major
customers and establish relationships with new customers, including those in developing countries. Moreover, in certain
applications, customers exercise significant power over business terms. It may be difficult in the short-term for us to obtain new
sales to replace any decline in the sale of existing products that may be lost to competitors. Our failure to compete effectively may
reduce our revenues, profitability and cash flow, and pricing pressures resulting from competition may adversely impact our
profitability.
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We have also witnessed a trend with certain customers who are attempting to reduce the number of vendors from which they
purchase product in order to reduce their costs and diversify their risk. As a result, we may lose market share to our competitors in
some of the markets in which we compete.
In addition, some of our competitors are larger and have greater financial and other resources than we do. There can be no assurance
that our products will be able to compete successfully with the products of these other companies.
Our ability to establish, grow and maintain customer relationships depends in part on our ability to develop new products
and product enhancements based on technological innovation.
The electric motor and power transmission industries in recent years have seen significant evolution and innovation, particularly
with respect to increasing energy efficiency and control enhancements. Our ability to effectively compete in these industries depends
in part on our ability to continue to develop new technologies and innovative products and product enhancements. Further, many
large customers in these industries generally desire to purchase from companies that can offer a broad product range, which means
we must continue to develop our expertise in order to design, manufacture and sell these products successfully. This requires that
we make significant investments in engineering, manufacturing, customer service, and support, research and development and
intellectual property protection, and there can be no assurance that in the future we will have sufficient resources to continue to
make such investments. If we are unable to meet the needs of our customers for innovative products or product variety, or if our
products become technologically obsolete over time due to the development by our competitors of technological breakthroughs or
otherwise, our revenues and results of operations may be adversely affected. In addition, we may incur significant costs and devote
significant resources to the development of products that ultimately are not accepted in the marketplace, do not provide anticipated
enhancements, or do not lead to significant revenue, which may adversely impact our results of operations.
Our dependence on, and the price of, raw materials may adversely affect our gross margins.
Many of the products we produce contain key materials such as steel, copper, aluminum and rare earth metals. Market prices for
those materials can be volatile due to changes in supply and demand, manufacturing and other costs, regulations and tariffs,
economic conditions and other circumstances. We may not be able to offset any increase in commodity costs through pricing
actions, productivity enhancements or other means, and increasing commodity costs may have an adverse impact on our gross
margins, which could adversely affect our results of operations and financial condition.
In our Climate Solutions segment and Commercial and Industrial Systems segment, we depend on revenues from several
significant customers, and any loss, cancellation or reduction of, or delay in, purchases by these customers may have a
material adverse effect on our business.
We derive a significant portion of the revenues of our motor businesses from several key OEM customers. Our success will depend
on our continued ability to develop and manage relationships with these customers. We expect this customer concentration will
continue for the foreseeable future. Our reliance on sales from customers makes our relationship with each of these customers
important to our business. We cannot assure you that we will be able to retain these key customers. Some of our customers may
in the future shift some or all of their purchases of products from us to our competitors or to other sources. The loss of one or more
of our large customers, any reduction or delay in sales to these customers, our inability to develop relationships successfully with
additional customers, or future price concessions that we may make could have a material adverse effect on our results of operations
and financial condition.
We may encounter difficulties in integrating the operations of acquired businesses such as PTS, which may have a material
adverse impact on our future growth and operating performance.
Over the past several years, as part of our strategic growth plans, we have typically acquired multiple businesses in any given year.
Some of those acquisitions have been significant to our overall growth, such as the acquisition of PTS in fiscal 2015. The full
realization of the expected benefits and synergies of PTS and other acquisitions will require integration over time of certain aspects
of the manufacturing, engineering, administrative, sales and marketing and distribution functions of the acquired businesses, as
well as some integration of information systems platforms and processes. Complete and successful integration of PTS and other
acquired businesses, and realization of expected synergies, can be a long and difficult process and may require substantial attention
from our management team and involve substantial expenditures and include additional operational expenses. Even if we are able
to successfully integrate the operations of acquired businesses, we may not be able to realize the expected benefits and synergies of
the acquisition, either in the amount of time or within the expected time frame, or at all, and the costs of achieving these benefits
may be higher than, and the timing may differ from, what we initially expect. Our ability to realize anticipated benefits and synergies
from the acquisitions may be affected by a number of factors, including:
• The use of more cash or other financial resources, and additional management time, attention and distraction, on integration
and implementation activities than we expect, including restructuring and other exit costs;
• increases in other expenses related to an acquisition, which may offset any potential cost savings and other synergies from the
acquisition;
• our ability to realize anticipated levels of sales in emerging markets like China and India;
• our ability to avoid labor disruptions or disputes in connection with any integration;
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• the timing and impact of purchase accounting adjustments;
• difficulties in employee or management integration; and
• unanticipated liabilities associated with acquired businesses.
Any potential cost-saving opportunities may take at least several quarters following an acquisition to implement, and any results of
these actions may not be realized for at least several quarters following implementation. We cannot assure you that we will be able
to successfully integrate the operations of our acquired businesses, that we will be able to realize any anticipated benefits and
synergies from acquisitions or that we will be able to operate acquired businesses as profitably as anticipated.
A small portion of our total sales comes directly from customers in the oil and gas industry. A significant or prolonged
decline in oil and gas prices could result in lower capital expenditures by those customers, which could have a material
adverse effect on our results of operations and financial condition.
A small portion of our total sales is dependent directly upon the level of capital expenditures by customers in the oil and gas industry.
A significant or prolonged drop in the prevailing market price of oil or gas, such as the drop in oil prices experienced in 2015, may
result in some of those customers delaying, canceling or modifying projects, or may result in nonpayment of, amounts that are owed
to us. These effects could have a material adverse effect on our results of operations and financial condition.
We are subject to litigation, including product liability and warranty claims that may adversely affect our financial condition
and results of operations.
We are, from time to time, a party to litigation that arises in the normal course of our business operations, including product warranty
and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters. We face an inherent
business risk of exposure to product liability and warranty claims in the event that the use of our products is alleged to have resulted
in injury or other damage. While we currently maintain general liability and product liability insurance coverage in amounts that
we believe are adequate, we cannot assure you that we will be able to maintain this insurance on acceptable terms or that this
insurance will provide sufficient coverage against potential liabilities that may arise. Any claims brought against us, with or without
merit, may have an adverse effect on our business and results of operations as a result of potential adverse outcomes, the expenses
associated with defending such claims, the diversion of our management's resources and time and the potential adverse effect to
our business reputation.
We depend on certain key suppliers, and any loss of those suppliers or their failure to meet commitments may adversely
affect our business and results of operations.
We are dependent on a single or limited number of suppliers for some materials or components required in the manufacture of our
products. If any of those suppliers fail to meet their commitments to us in terms of delivery or quality, we may experience supply
shortages that could result in our inability to meet our customers' requirements, or could otherwise experience an interruption in
our operations that could negatively impact our business and results of operations.
Infringement of our intellectual property by third parties may harm our competitive position, and we may incur significant
costs associated with the protection and preservation of our intellectual property.
We own or otherwise have rights in a number of patents and trademarks relating to the products we manufacture, which have been
obtained over a period of years, and we continue to actively pursue patents in connection with new product development and to
acquire additional patents and trademarks through the acquisitions of other businesses. These patents and trademarks have been of
value in the growth of our business and may continue to be of value in the future. Our inability to protect this intellectual property
generally, or the illegal breach of some or a large group of our intellectual property rights, would have an adverse effect on our
business. In addition, there can be no assurance that our intellectual property will not be challenged, invalidated, circumvented or
designed-around, particularly in countries where intellectual property rights are not highly developed or protected. We have
incurred in the past and may incur in the future significant costs associated with defending challenges to our intellectual property
or enforcing our intellectual property rights, which could adversely impact our cash flow and results of operations.
Third parties may claim that we are infringing their intellectual property rights and we could incur significant costs and
expenses or be prevented from selling certain products.
We may be subject to claims from third parties that our products or technologies infringe on their intellectual property rights or that
we have misappropriated intellectual property rights. If we are involved in a dispute or litigation relating to infringement of third
party intellectual property rights, we could incur significant costs in defending against those claims. Our intellectual property
portfolio may not be useful in asserting a counterclaim, or negotiating a license, in response to a claim of infringement or
misappropriation. In addition, as a result of such claims of infringement or misappropriation, we could lose our rights to technology
that are important to our business, or be required to pay damages or license fees with respect to the infringed rights or be required
to redesign our products at substantial cost, any of which could adversely impact our cash flows and results of operations.
We sell certain products for high volume applications, and any failure of those products to perform as anticipated could
result in significant liability that may adversely affect our business and results of operations.
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We manufacture and sell a number of products for high volume applications, including motors used in pools and spas, residential
and commercial heating, ventilation, air conditioning and refrigeration equipment. Any failure of those products to perform as
anticipated could result in significant product liability, product recall or rework, or other costs. The costs of product recalls and
reworks are not generally covered by insurance. If we were to experience a product recall or rework in connection with products
of high volume applications, our financial condition or results of operations could be materially adversely affected.
We increasingly manufacture our products outside the United States, where political, societal or economic instability may
present additional risks to our business.
Approximately 20,100 of our approximate 26,200 total employees and 55 of our principal manufacturing and warehouse facilities
are located outside the United States. International operations generally are subject to various risks, including political, societal
and economic instability, local labor market conditions, the imposition of foreign tariffs and other trade restrictions, lack or reliable
legal systems, ownership restrictions, the impact of foreign government regulations, the effects of income and withholding taxes,
governmental expropriation or nationalization, and differences in business practices. We may incur increased costs and experience
delays or disruptions in product deliveries and payments in connection with international manufacturing and sales that could cause
loss of revenue. Unfavorable changes in the political, regulatory and business climates in countries where we have operations could
have a material adverse effect on our financial condition, results of operations and cash flows.
We may suffer losses as a result of foreign currency fluctuations.
The net assets, net earnings and cash flows from our foreign subsidiaries are based on the U.S. dollar equivalent of such amounts
measured in the applicable functional currency. These foreign operations have the potential to impact our financial position due to
fluctuations in the local currency arising from the process of re-measuring the local functional currency in the U.S. dollar. Any
increase in the value of the U.S. dollar in relation to the value of the local currency, whether by means of market conditions or
governmental actions such as currency devaluations, will adversely affect our revenues from our foreign operations when translated
into U.S. dollars. Similarly, any decrease in the value of the U.S. dollar in relation to the value of the local currency will increase
our operating costs in foreign operations, to the extent such costs are payable in foreign currency, when translated into U.S. dollars.
Businesses that we have acquired, such as PTS, or that we may acquire in the future may have liabilities which are not
known to us.
We have assumed liabilities of other acquired businesses including PTS, and may assume liabilities of businesses that we acquire
in the future. There may be liabilities or risks that we fail, or are unable, to discover, or that we underestimate, in the course of
performing our due diligence investigations of acquired businesses. Additionally, businesses that we have acquired or may acquire
in the future may have made previous acquisitions, and we will be subject to certain liabilities and risks relating to these prior
acquisitions as well. We cannot assure you that our rights to indemnification contained in definitive acquisition agreements that we
have entered or may enter into will be sufficient in amount, scope or duration to fully offset the possible liabilities associated with
the business or property acquired. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our
business, financial condition or results of operations. As we begin to operate acquired businesses, we may learn additional
information about them that adversely affects us, such as unknown or contingent liabilities, issues relating to compliance with
applicable laws or issues related to ongoing customer relationships or order demand.
Goodwill and indefinite-lived tradename intangibles comprise a significant portion of our total assets, and if we determine
that goodwill and indefinite-lived tradename intangibles have become impaired in the future, our results of operations and
financial condition in such years may be materially and adversely affected.
Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. Indefinite-lived
tradename intangibles represent long-standing brands acquired in business combinations and assumed to have indefinite lives. We
review goodwill and indefinite-lived tradename intangibles at least annually for impairment and any excess in carrying value over
the estimated fair value is charged to the results of operations. Our estimates of fair value are based on assumptions about the future
operating cash flows, growth rates, discount rates applied to these cash flows and current market estimates of value. A reduction
in net income resulting from the write down or impairment of goodwill or indefinite-lived tradename intangibles would affect
financial results and could have a material and adverse impact upon the market price of our common stock. If we are required to
record a significant charge to earnings in our consolidated financial statements because an impairment of goodwill or indefinite-
lived tradename intangibles is determined, our results of operations and financial condition could be materially and adversely
affected.
Commodity, currency and interest rate hedging activities may adversely impact our financial performance as a result of
changes in global commodity prices, interest rates and currency rates.
We use derivative financial instruments in order to reduce the substantial effects of currency and commodity fluctuations and interest
rate exposure on our cash flow and financial condition. These instruments may include foreign currency and commodity forward
contracts, currency swap agreements and currency option contracts, as well as interest rate swap agreements. We have entered into,
and expect to continue to enter into, such hedging arrangements. While limiting to some degree our risk fluctuations in currency
exchange, commodity price and interest rates by utilizing such hedging instruments, we potentially forgo benefits that might result
from other fluctuations in currency exchange, commodity and interest rates. We also are exposed to the risk that counterparties to
15
hedging contracts will default on their obligations. We manage exposure to counterparty credit risk by limiting our counterparties
to major international banks and financial institutions meeting established credit guidelines. However, any default by such
counterparties might have an adverse effect on us.
We may incur costs or suffer reputational damage due to improper conduct of our employees, agents or business partners.
We are subject to a variety of domestic and foreign laws, rules and regulations relating to improper payments to government
officials, bribery, anti-kickback and false claims rules, competition, export and import compliance, money laundering and data
privacy. If our employees, agents or business partners engage in activities in violation of these laws, rules or regulations, we may
be subject to civil or criminal fines or penalties or other sanctions, may incur costs associated with government investigations, or
may suffer damage to our reputation.
Sales of products incorporated into HVAC systems and other residential applications are seasonal and affected by the
weather; mild or cooler weather could have an adverse effect on our operating performance.
Many of our motors are incorporated into HVAC systems and other residential applications that OEMs sell to end users. The
number of installations of new and replacement HVAC systems or components and other residential applications is higher during
the spring and summer seasons due to the increased use of air conditioning during warmer months. Mild or cooler weather
conditions during the spring and summer season often result in end users deferring the purchase of new or replacement HVAC
systems or components. As a result, prolonged periods of mild or cooler weather conditions in the spring or summer season in
broad geographical areas could have a negative impact on the demand for our HVAC motors and, therefore, could have an adverse
effect on our operating performance. In addition, due to variations in weather conditions from year to year, our operating
performance in any single year may not be indicative of our performance in any future year.
We may be adversely impacted by an inability to identify and complete acquisitions.
A substantial portion of our growth has come through acquisitions, and an important part of our growth strategy is based upon our
ability to execute future acquisitions. We may not be able to identify and successfully negotiate suitable acquisitions, obtain
financing for future acquisitions on satisfactory terms or otherwise complete acquisitions in the future. If we are unable to
successfully complete acquisitions, our ability to grow our company may be limited.
Our success is highly dependent on qualified and sufficient staffing. Our failure to attract or retain qualified personnel could
lead to a loss of revenue or profitability.
Our success depends, in part, on the efforts and abilities of our senior management team and key employees. Their skills, experience
and industry contacts significantly benefit our operations and administration. The failure to attract or retain members of our senior
management team and key employees could have a negative effect on our operating results.
Our operations are highly dependent on information technology infrastructure and failures could significantly affect our
business.
We depend heavily on our information technology infrastructure in order to achieve our business objectives. If we experience a
problem that impairs this infrastructure, such as a computer virus, a problem with the functioning of an important IT application,
or an intentional disruption of our IT systems by a third party, the resulting disruptions could impede our ability to record or process
orders, manufacture and ship in a timely manner, or otherwise carry on our business in the ordinary course. Any such events could
cause us to lose customers or revenue and could require us to incur significant expense to eliminate these problems and address
related security concerns.
We are in the process of implementing a global Enterprise Resource Planning (“ERP”) system that will redesign and deploy a
common information system over a period of several years. The process of implementation can be costly and can divert the attention
of management from the day-to-day operations of the business. As we implement the ERP system, the new system may not perform
as expected. This could have an adverse effect on our business.
Worldwide economic conditions may adversely affect our industry, business and results of operations.
General economic conditions and conditions in the global financial markets can affect our results of operations. Deterioration in
the global economy could lead to higher unemployment, lower consumer spending and reduced investment by businesses, and
could lead our customers to slow spending on our products or make it difficult for our customers, our vendors and us to accurately
forecast and plan future business activities. Worsening economic conditions could also affect the financial viability of our suppliers,
some of which we may consider key suppliers. If the commercial and industrial, residential HVAC, power generation and power
transmission markets significantly deteriorate, our business, financial condition and results of operations will likely be materially
and adversely affected. Additionally, our stock price could decrease if investors have concerns that our business, financial condition
and results of operations will be negatively impacted by a worldwide economic downturn.
We may be adversely affected by environmental, health and safety laws and regulations.
We are subject to various laws and regulations relating to the protection of the environment and human health and safety and have
incurred and will continue to incur capital and other expenditures to comply with these regulations. Failure to comply with any
16
environmental regulations, including more stringent environmental laws that may be imposed in the future, could subject us to
future liabilities, fines or penalties or the suspension of production.
Our operations can be negatively impacted by natural disasters, terrorism, acts of war, international conflict, political and
governmental actions which could harm our business.
Natural disasters, acts or threats of war or terrorism, international conflicts, and the actions taken by the United States and other
governments in response to such events could cause damage or disrupt our business operations, our suppliers, or our customers,
and could create political or economic instability, any of which could have an adverse effect on our business. Although it is not
possible to predict such events or their consequences, these events could decrease demand for our products, could make it difficult
or impossible for us to deliver products, or could disrupt our supply chain. We may also be negatively impacted by actions by
foreign governments, including currency devaluation, tariffs and nationalization, where our facilities are located which could disrupt
manufacturing and commercial operations.
We are subject to changes in legislative, regulatory and legal developments involving income taxes.
We are subject to U.S. Federal, state, and international income, payroll, property, sales and use, fuel, and other types of taxes.
Changes in tax rates, enactment of new tax laws, revisions of tax regulations, and claims or litigation with taxing authorities could
result in substantially higher taxes and, therefore, could have a significant adverse effect on our results or operations, financial
conditions and liquidity. Currently, a significant amount of our revenue is generated from customers located outside of the United
States, and an increasingly greater portion of our assets and employees are located outside of the United States. U.S. income tax
and foreign withholding taxes have not been provided on undistributed earnings for certain non-U.S. subsidiaries, because such
earnings are intended to be indefinitely reinvested in the operations of those subsidiaries.
Future legislation may substantially reduce (or have the effect of substantially reducing) our ability to defer U.S. taxes on profit
permanently reinvested outside the United States. Additionally, they could have a negative impact on our ability to compete in the
global marketplace.
We are subject to tax laws and regulations in many jurisdictions and the inability to successfully defend claims from taxing
authorities related to our current and/or acquired businesses could adversely affect our operating results and financial
position.
We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those taxing
jurisdictions. Due to the subjectivity of tax laws between those jurisdictions as well as the subjectivity of factual interpretations,
our estimates of income tax liabilities may differ from actual payments or assessments. Claims from taxing authorities related to
these differences could have an adverse impact on our operating results and financial position.
Our stock may be subject to significant fluctuations and volatility.
The market price of shares of our common stock may be volatile. Among the factors that could affect our common stock price are
those discussed above under “Risk Factors” as well as:
• domestic and international economic and political factors unrelated to our performance;
• quarterly fluctuation in our operating income and earnings per share results;
• decline in demand for our products;
• significant strategic actions by our competitors, including new product introductions or technological advances;
• fluctuations in interest rates;
• cost increases in energy, raw materials, intermediate components or materials, or labor; and
• changes in revenue or earnings estimates or publication of research reports by analysts.
In addition, stock markets may experience extreme volatility that may be unrelated to the operating performance of particular
companies. These broad market fluctuations may adversely affect the trading price of our common stock.
ITEM 1B -
UNRESOLVED STAFF COMMENTS
None.
ITEM 2 -
Properties
Our principal executive offices are located in Beloit, Wisconsin in an owned office building with approximately 50,000 square feet.
We have manufacturing, sales and service facilities throughout the United States and in Mexico, China, India and Europe.
Our Commercial and Industrial Systems segment currently includes 105 facilities, of which 39 are principal manufacturing facilities
and 10 are principal warehouse facilities. The Commercial and Industrial Systems segment's present operating facilities contain a
total of approximately 7.9 million square feet of space, of which approximately 33% are leased.
17
The following represents our principal manufacturing and warehouse facilities in the Commercial and Industrial Systems segment
(square footage in millions):
U.S.
Mexico
China
India
Europe
Other
Facilities
14
11
8
3
3
10
49
Total
2.1
1.3
1.8
0.5
0.2
0.6
6.5
Square Footage
Owned
1.2
0.8
1.7
0.5
0.2
0.1
4.5
Leased
0.9
0.5
0.1
—
—
0.5
2.0
Our Climate Solutions segment currently includes 41 facilities, of which 17 are principal manufacturing facilities. The Climate
Solutions segment shares several warehouses with the Commercial and Industrial Systems segment. The Climate Solutions
segment's present operating facilities contain a total of approximately 3.2 million square feet of space, of which approximately 51%
are owned. Of our principal manufacturing facilities in the Climate Solutions segment, seven are located in Mexico, seven in the
U.S., one in Brazil, one in China and one in India.
Our Power Transmission Solutions segment currently includes 35 manufacturing, service and distribution facilities of which 18 are
principal manufacturing facilities. The Power Transmission segment's present operating facilities contain a total of approximately
2.7 million square feet of space, of which approximately 87% are owned. Our principal manufacturing facilities in the Power
Transmission segment are primarily located in the U.S.
ITEM 3 -
Legal Proceedings
One of our subsidiaries that we 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 marketed by a third party. These claims generally allege that the ventilation units were the cause of
fires. Based on the current facts, we do not believe these claims, individually or in the aggregate, will have a material adverse effect
on our results of operations or financial condition. However, we cannot predict with certainty the outcome of these claims, the
nature or extent of remedial actions, if any, we may need to undertake with respect to motors that remain in the field, or the costs
we may incur, some of which could be significant.
We are, from time to time, party to other litigation that arises in the normal course of our business operations, including product
warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters. Our products
are used in a variety of industrial, commercial and residential applications that subject us to claims that the use of our products is
alleged to have resulted in injury or other damage. We accrue for exposures in amounts that we believe are adequate, and we do
not believe that the outcome of any such lawsuit will have a material effect on our results of operations, financial position or cash
flows.
ITEM 4 -
Mine Safety Disclosures
Not applicable.
18
ITEM 5 - Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
PART II
Securities
General
Our common stock, $.01 par value per share, is traded on the New York Stock Exchange under the symbol “RBC.” The following
table sets forth the range of high and low closing sales prices for our common stock for the period from December 29, 2013 through
January 2, 2016.
2015 Price Range
2014 Price Range
Quarter
1st
2nd
3rd
4th
High
Low
Dividends
Declared
High
Low
$
80.20 $
80.95
72.74
65.24
68.75 $
71.82
55.46
56.78
$
0.22
0.23
0.23
0.23
80.41 $
80.22
79.86
76.73
Dividends
Declared
0.20
0.22
0.22
0.22
69.65 $
70.59
65.11
62.15
We have paid 222 consecutive quarterly dividends through January 2016. The number of registered holders of common stock as
of February 18, 2016 was 417.
The following table contains detail related to the repurchase of our common stock based on the date of trade during the quarter
ended January 2, 2016.
2015 Fiscal Month
October 4 to November 7
November 8 to December 5
December 6 to January 2
Total
Total
Maximum Number of
Number of
Shares
Purchased
Average
Price Paid
per Share
Shares that May be
Purchased Under the
Plans or Programs
— $
—
—
—
—
—
—
2,320,000
2,320,000
2,320,000
There were no shares purchased as a part of a publicly announced plan or program.
Under our equity incentive plans, participants may satisfy the statutory minimum or a portion of the federal, state and local
withholding tax obligations arising in connection with plan awards by electing to (a) have the Company withhold shares of common
stock otherwise issuable under the award, (b) tender back shares received in connection with such award or (c) deliver other
previously owned shares of common stock, in each case having a value equal to the amount to be withheld.
The Board of Directors has approved a repurchase program for up to 3.0 million shares of our common stock, which repurchase
authority has no expiration date. Management is authorized to effect purchases from time to time in the open market or through
privately negotiated transactions. From time to time, we may enter into a Rule10b5-1 trading plan for the purpose of repurchasing
shares under this authorization. Pursuant to this authorization, there were 180,000 shares acquired in fiscal 2015 and 500,000 shares
acquired in fiscal 2014. There are approximately 2.3 million shares of our common stock available for repurchase under this
program.
Item 12 of this Annual Report on Form 10-K contains certain information relating to our equity compensation plans.
Stock Performance
The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be
“filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 (the “Exchange Act”) or to
the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933 or the Exchange Act.
The following graph compares the hypothetical total shareholder return (including reinvestment of dividends) on an investment in
(1) our common stock, (2) the Standard & Poor's Mid Cap 400 Index, and (3) the Standard & Poor's 400 Electrical Components
and Equipment Index, for the period January 2, 2011 through January 2, 2016. In each case, the graph assumes the investment of
$100.00 on January 2, 2011.
19
Company / Index
2011
2012
Years Ended
2013
2014
2015
INDEXED RETURNS
Regal Beloit Corporation
S&P MidCap 400 Index
S&P 400 Electrical Components & Equipment
$
77.31 $
98.27
99.87
105.41 $
114.01
132.63
114.18 $ 118.29 $
153.92
176.47
169.65
190.91
93.13
166.09
230.90
20
ITEM 6 -
Selected Financial Data
The selected statements of income data for fiscal 2015, 2014 and 2013, and the selected balance sheet data at January 2, 2016 and
January 3, 2015 are derived from, and are qualified by reference to, the audited consolidated financial statements included elsewhere
in this Annual Report on Form 10-K. The selected statement of income data for fiscal 2012 and 2011 are derived from audited
consolidated financial statements not included herein. The selected balance sheet data at December 28, 2013, December 29, 2012,
and December 31, 2011 are derived from audited consolidated financial statements not included herein, and are revised to conform
with the changes resulting from the implementation of new accounting standards that were adopted retrospectively as of January 2,
2016.
Fiscal
2015
Fiscal
2014
Fiscal
2013
Fiscal
2012
Fiscal
2011
(In Millions, Except Per Share Data)
Net Sales
$
3,509.7 $
3,257.1 $
Cost of Sales
Gross Profit
Operating Expenses
Goodwill Impairment
Asset Impairments and Other, Net
Total Operating Expenses
Income from Operations
Net Income
Net Income Attributable to Regal Beloit
Corporation
Total Assets
Total Debt
Long-term Debt
Regal Beloit Shareholders' Equity
Per Share Data:
Earnings - Basic
Earnings - Assuming Dilution
Cash Dividends Declared
Shareholders' Equity
Weighted Average Shares Outstanding:
Basic
Assuming Dilution
2,576.5
933.2
600.5
79.9
—
680.4
252.8
148.5
143.3
4,591.7
1,721.9
1,715.6
1,937.3
2,459.8
797.3
516.3
119.5
40.0
675.8
121.5
36.1
31.0
3,357.2
632.5
624.7
1,934.4
2,395.9
771.0
458.2
—
—
3,095.7 $ 3,166.9 $
2,312.5
783.2
494.2
76.3
4.7
575.2
208.0
126.0
458.2
312.8
200.3
2,808.3
2,142.3
666.0
410.3
—
—
410.3
255.7
158.0
120.0
3,611.3
765.5
607.7
2,056.2
195.6
152.3
3,526.5
3,218.9
815.7
752.5
916.0
906.9
1,953.4
1,535.9
$
3.21 $
3.18
0.91
44.32
0.69 $
0.69
0.86
44.02
2.66 $
2.64
0.79
46.72
4.68 $
4.64
0.75
46.73
44.7
45.1
45.0
45.3
45.0
45.4
41.8
42.1
3.84
3.79
0.71
38.70
39.7
40.1
We have completed various acquisitions that affect the comparability of the selected financial data shown above. The results of
operations for acquisitions are included in our consolidated financial results for the period subsequent to their acquisition date.
Significant acquisitions included the acquisition of the Power Transmission Solutions business from Emerson Electric Co. (January
2015) and Electrical Products Company of A.O. Smith Corporation (August 2011).
In the fourth quarter of fiscal 2015, non-cash impairment charges of $79.9 million for goodwill were recorded in the Commercial
and Industrial Systems segment, reducing Income from Operations by $79.9 million and Net Income Attributable to Regal Beloit
Corporation by $58.1 million.
In the fourth quarter of fiscal 2014, non-cash impairment charges of $118.5 million for goodwill and $40.0 million for long-lived
assets and in the second quarter of 2014 non-cash impairment charges of $1.0 million of goodwill, reduced Income from Operations
by $159.5 million and Net Income Attributable to Regal Beloit Corporation by $147.3 million. The impairment charges were
recorded in certain reporting units in all three of our reportable segments.
In the fourth quarter of fiscal 2013, a non-cash impairment charges of $76.3 million of goodwill and $4.7 million of asset impairment
and other, net, related to certain reporting units in our Commercial and Industrial Systems and Power Transmission Solutions
segments, reduced Income from Operations by $81.0 million and Net Income Attributable to Regal Beloit Corporation by $74.7
million.
21
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
We operate on a 52/53 week fiscal year ending on the Saturday closest to December 31. We refer to the fiscal year ended January
2, 2016 as “fiscal 2015,” the fiscal year ended January 3, 2015 as “fiscal 2014,” the fiscal year ended December 28, 2013 as
“fiscal 2013.” Fiscal 2015 had 52 weeks, fiscal 2014 had 53 weeks and fiscal 2013 had 52 weeks.
Overview
General
Regal Beloit Corporation (NYSE: RBC) (“we,” “us,” “our” or the “Company”), 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. As of the end of fiscal 2015, the Company, including its subsidiaries, employs approximately 26,200 people
in its manufacturing, sales, and service facilities and corporate offices throughout the United States, Canada, Mexico, Europe and
Asia. In 2015, we reported annual net sales of $3.5 billion compared to $3.3 billion in 2014.
Our company is comprised of three reporting segments: Commercial and Industrial Systems, Climate Solutions and Power
Transmission Solutions.
A description of the three reportable 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 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.
On January 30, 2015, we closed the acquisition of the Power Transmission Solutions (“PTS”) business from Emerson Electric Co.
(the “PTS Acquisition”). The purchase price for the PTS Acquisition was $1.4 billion in cash and the assumption of $43 million of
liabilities. PTS has over 3,200 employees around the world, and effective on the closing date became part of the Power Transmission
Solutions segment.
Venezuela
We have a subsidiary in Venezuela using accounting for highly inflationary economies. Currency restrictions enacted by the
Venezuelan government have the potential to impact the ability of the Company's subsidiary to obtain U.S. dollars in exchange for
Venezuelan bolivares fuertes ("Bolivars") at the official foreign exchange rate. In 2014, the Venezuelan government announced the
expansion of its auction-based foreign exchange system (SICAD1). The Venezuelan government also introduced an additional
auction-based foreign exchange system (SICAD2) which permits all companies incorporated or domiciled in Venezuela to bid for
U.S. dollars. Effective January 3, 2015, we concluded that it was appropriate to apply the SICAD2 exchange rate of 51.0 Bolivars
per U.S. Dollar as we believe that this rate best represented the economics of our business activity in Venezuela at that time.
During the first quarter of fiscal 2015, the Venezuelan government announced changes to its exchange rate system that included the
launch of a new, market-based system known as the SIMADI. We adopted the SIMADI rate after its introduction. The SIMADI
exchange rate was approximately 193 Bolivars to the U.S. dollar as of April 4, 2015. The adoption of the SIMADI resulted in a
$1.5 million pretax devaluation charge during the first quarter of fiscal 2015.
During fiscal 2015, controls were imposed by the Venezuelan government which included import authorization controls, currency
exchange and payment controls, price controls and labor rate controls. While government restrictions and exchange rate
mechanisms placed some limits on our business decisions, the consolidated financial statements reflect our Venezuela operations
as a controlled subsidiary. We continue to experience delays in collecting payment on our receivables from certain customers in
Venezuela. None of these receivables are in dispute. In the fourth quarter of fiscal 2015, management decided to wind down
operations of our Venezuelan subsidiary that resulted in recording write-offs of $12.8 million including the net book value of
accounts receivable and inventory. If any recoveries occur, such amounts will be recorded as gains in the period of collection.
The Company does not expect material operating losses from its Venezuelan business in the future. However, there may be
unanticipated contract claims or litigation which could have further adverse impact on the results of operations or financial condition
of the Venezuelan business.
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
22
equipment manufacturers (“OEMs”) 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
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 has 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.
23
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.
Goodwill & Other Asset Impairments
We recorded non-cash charges in Operating Expenses related to goodwill impairments in fiscal 2015 (“2015 Impairment”), and
goodwill and other asset impairments in fiscal 2014 (“2014 Impairment”) and fiscal 2013 (“2013 Impairment”) as detailed below
(in millions). See also Note 3 of Notes to the Consolidated Financial Statements.
Commercial and
Industrial
Systems
Climate
Solutions
Power
Transmission
Solutions
Total
Impairments during 2015:
Goodwill Impairments
Goodwill Impairments
$
$
Impairments during 2014:
Goodwill Impairments
Impairment of Intangible Assets
Impairment of Other Long-Lived Assets
Goodwill and Asset Impairments and Other, Net $
Impairments during 2013:
Goodwill Impairments
Impairment of Technology Intangible Assets
Less: Gain from Adjustment to the Fair Value of a
Contingent Consideration Liability
Goodwill and Asset Impairments and Other, Net $
Outlook
79.9 $
79.9 $
100.7
—
—
100.7 $
64.2
17.0
12.3
68.9 $
— $
— $
7.7
7.8
6.0
21.5 $
—
—
—
— $
— $
— $
11.1
11.1
15.1
37.3 $
12.1
—
—
12.1 $
79.9
79.9
119.5
18.9
21.1
159.5
76.3
17.0
12.3
81.0
Our outlook for 2016 assumes that the weak demand from many of our end markets experienced during the second half of fiscal
2015 will continue through fiscal 2016, putting pressure on our net sales and earnings.
24
Results of Operations
The following table sets forth selected information for the years indicated.
(Dollars in Millions)
Net Sales:
Commercial and Industrial Systems
Climate Solutions
Power Transmission Solutions
Consolidated
Gross Profit as a Percent of Net Sales:
Commercial and Industrial Systems
Climate Solutions
Power Transmission Solutions
Consolidated
Operating Expenses as a Percent of Net Sales:
Commercial and Industrial Systems
Climate Solutions
Power Transmission Solutions
Consolidated
Income from Operations as a Percent of Net Sales:
Commercial and Industrial Systems
Climate Solutions
Power Transmission Solutions
Consolidated
Income from Operations
Interest Expense
Interest Income
Income before Taxes
Provision for Income Taxes
Net Income
Net Income Attributable to Noncontrolling Interests
$
$
$
2015
2014
2013
1,694.9
1,041.2
773.6
3,509.7
$
$
1,856.1
1,134.8
266.2
3,257.1
$
$
1,746.6
1,098.6
250.5
3,095.7
26.0%
25.2%
29.7%
26.6%
22.8%
11.1%
23.0%
19.4%
3.2%
14.1%
6.8%
7.2%
$
252.8
60.2
4.3
196.9
48.4
148.5
5.2
25.2 %
22.8 %
26.4 %
24.5 %
23.4 %
14.0 %
30.8 %
20.7 %
1.8 %
8.8 %
(4.4 )%
3.7 %
$
121.5
39.1
7.9
90.3
54.2
36.1
5.1
26.4%
23.0%
27.3%
25.3%
21.8%
13.1%
20.6%
18.6%
4.7%
9.9%
6.7%
6.7%
208.0
42.4
4.9
170.5
44.5
126.0
6.0
120.0
Net Income Attributable to Regal Beloit Corporation
$
143.3
$
31.0
$
Fiscal Year Ended 2015 Compared to Fiscal Year Ended 2014
Net sales for fiscal 2015 were $3.5 billion, a 7.8% increase compared to fiscal 2014 net sales of $3.3 billion. The increase consisted
of 16.6% acquisition growth, net of dispositions, partially offset by an organic decrease of 6.0% which includes the impact of three
fewer shipping days in the fiscal 2015 as compared to the fiscal 2014, and a negative foreign currency translation impact of 2.8%.
Gross profit increased $135.9 million or 17.0% primarily due to the recently acquired PTS business as well as the execution of a
number of our simplification programs. In addition, gross profit benefited from $4.9 million in tariff refunds related to the
Generalized System of Preferences ("GSP"), of which $3.8 million is attributable to the 2013 and 2014 fiscal years, and $1.1 million
is attributable to first and second quarters of the 2015 fiscal year. Gross profit also included the recognition of the inventory step
up in cost of goods sold of $20.7 million due to purchase accounting adjustments related to the PTS acquisition and restructuring
expenses of $7.7 million. Operating expenses increased $4.6 million or 0.7% primarily due to incremental operating expenses
associated with the recently acquired PTS business. Operating expenses included the unfavorable impact of goodwill impairment
charges of $79.9 million, the impact of the Venezuelan asset write down of $12.8 million, acquisition related transaction costs of
$9.1 million, and restructuring expenses of $1.2 million. These unfavorable impacts were partially offset by a gain on sale of real
estate of $3.4 million, benefits of the simplification initiative and tighter cost controls compared to the prior year.
25
Net sales for the Commercial and Industrial Systems segment for fiscal 2015 were $1.7 billion, an 8.7% decrease compared to fiscal
2014 net sales of $1.9 billion. The decrease consisted of 6.3% negative organic growth and 3.9% unfavorable foreign currency
translation partially offset by 1.5% acquisition growth. Organic sales declines were primarily driven by decreased volume in the
oil and gas end markets and weaker demand in Asia. Gross profit decreased $27.1 million or 5.8% primarily due to lower sales,
product mix and the impact of lower production on the absorption of costs, largely offset by simplification programs and a benefit
of $0.9 million in duty refunds related to the GSP tariff rebate. Gross profit also included restructuring expenses of $6.0 million.
Operating expenses decreased $47.5 million or 10.9%. Operating expenses included the unfavorable impact of goodwill impairment
charges of $79.9 million, the impact of the Venezuelan asset write down of $12.8 million, and restructuring expenses of $0.8 million.
These unfavorable impacts were partially offset by the benefits of the simplification initiative, tighter cost controls, lower
compensation expense and amortization expense compared to the same period in the prior year.
Net sales for the Climate Solutions segment for fiscal 2015 were $1.0 billion, an 8.2% decrease compared to fiscal 2014 net sales
of $1.1 billion. The decrease consisted of 6.7% negative organic growth and 1.6% unfavorable foreign currency translation. Organic
sales declines were primarily driven by the impact of the SEER 13 pre-build and the impact of lower commodity costs on our two-
way material price contracts. Gross profit increased $3.4 million or 1.3% primarily due to benefits from the simplification initiative,
a benefit of $3.8 million in duty refunds related to the GSP tariff rebate, and higher production costs and operating inefficiencies
experienced in 2014, partially offset by restructuring expenses of $1.3 million. Operating expenses decreased $43.6 million or
27.4% primarily due to benefits of the simplification initiative, tighter cost controls, lower compensation expense, lower
amortization expense, and no impairment charges compared to the same period in the prior year. Operating expenses included the
unfavorable impact of restructuring expenses of $0.2 million offset by the favorable impact of a gain on the sale of real estate of
$3.4 million.
Net sales for the Power Transmission Solutions segment for fiscal 2015 were $773.6 million, a 190.6% increase compared to fiscal
2014 net sales of $266.2 million. The increase was driven by acquisition growth of 192.6%, partially offset by 1.1% negative
organic growth and 1.0% unfavorable foreign currency translation. Gross profit increased $159.6 million or 227.0% primarily due
to the PTS Acquisition partially offset by the recognition of the inventory step up in cost of goods sold of $20.7 million due to
purchase accounting adjustments related to the PTS acquisition, and restructuring expenses of $0.4 million. Operating expenses
increased $95.7 million or 116.7% driven primarily by incremental operating expenses associated with the PTS acquisition, as well
as $9.1 million of acquisition related transaction costs and $0.2 million of restructuring expenses partially offset by prior year
impairment charges that did not recur in fiscal 2015.
The increase in interest expense was due primarily to a higher level of borrowings to finance acquisitions in fiscal 2015. The
decrease in interest income was due primarily to a decrease in invested cash.
The effective tax rate for fiscal 2015 was 24.6% compared to 60.0% for fiscal 2014. The decrease in the effective tax rate was due
primarily to the fiscal 2014 non-deductible goodwill impairment. The lower effective tax rate in fiscal 2015 as compared to the
35% statutory U.S. Federal income tax rate is driven by the mix of earnings and lower foreign tax rates.
Fiscal Year Ended 2014 Compared to Fiscal Year Ended 2013
Net sales for fiscal 2014 were $3.3 billion, a 5.2% increase compared to fiscal 2013 net sales of $3.1 billion. The increase consisted
of 4.2% of acquisition growth and 1.6% organic growth, offset by 0.6% from unfavorable foreign currency translation. Organic
growth was driven by positive market conditions in North America and the pre-build of SEER 13 products due to regulatory
standards changes effective in 2015.
Net sales for the Commercial and Industrial Systems segment for fiscal 2014 were $1.9 billion, a 6.3% increase compared to fiscal
2013 net sales of $1.7 billion. The increase consisted of 7.4% of acquisition growth from our acquisitions of Benshaw, Hy-Bon
Engineering, Inc. and Cemp SRL, partially offset by 0.2% negative organic growth and 0.9% from unfavorable foreign currency
translation. The negative organic growth was due primarily to the slowing of shipments to Venezuela and weakness in Asia Pacific.
The decrease in gross margin was due primarily to unfavorable product mix and the negative impact of foreign currency translation.
The increase in operating expenses was due primarily to the 2014 Impairment, incremental operating expenses from acquisitions,
and an increase in accounts receivable write offs, partially offset by a gain on the sale of property in China.
Net sales for the Climate Solutions segment for fiscal 2014 were $1.1 billion, a 3.3% increase compared to fiscal 2013 net sales of
$1.1 billion. The increase consisted of 3.5% organic growth, partially offset by 0.2% from unfavorable foreign currency translation.
The increase in organic sales was due primarily to positive market conditions in North America and the pre-build of SEER 13
products due to regulatory standards changes effective in 2015. Gross margin was relatively flat compared to the prior year as
increased restructuring charges were offset by savings due to our simplification initiative. The increase in operating expenses was
due primarily to the 2014 Impairment.
Net sales for the Power Transmission Solutions segment for fiscal 2014 were $266.2 million, a 6.3% increase compared to fiscal
2013 net sales of $250.5 million. The increase was entirely organic sales and was due primarily to positive market conditions in
North America. The decrease in gross margin was due primarily to unfavorable product mix. The increase in operating expenses
was due primarily to the 2014 Impairment and costs associated with acquisition due diligence.
26
The decrease in interest expense was due primarily to a lower level of borrowings outstanding in fiscal 2014. The increase in
interest income was due primarily to an increase in invested cash.
The effective tax rate for fiscal 2014 was 60.0% compared to 26.1% for fiscal 2013. The increase in the effective tax rate was due
primarily to the fiscal 2014 goodwill impairment of 42.9% which was not deductible for U.S. Federal income taxes. The lower
effective tax rate in fiscal 2013 as compared to the 35% statutory U.S. Federal income tax rate is driven by lower foreign tax rates.
Liquidity and Capital Resources
General
Our principal source of liquidity is cash flow provided by operating activities. In addition to operating income, other significant
factors affecting our operating cash flow include working capital levels, capital expenditures, dividends, share repurchases,
acquisitions, availability of debt financing, and the ability to attract long-term capital at acceptable terms.
Cash flow provided by operating activities was $381.1 million for fiscal 2015, a $82.9 million increase from fiscal 2014. The
increase was primarily the result of the lower investment in net working capital and increased net income from PTS in fiscal 2015
as compared to fiscal 2014.
Cash flow provided by operating activities was $298.2 million for fiscal 2014, a $6.8 million decrease from fiscal 2013. The
decrease was primarily the result of the higher investment in net working capital in fiscal 2014 as compared to fiscal 2013.
Cash flow used in investing activities was $1.5 billion for fiscal 2015, compared to $204.9 million used in fiscal 2014. The $1.3
billion increase was primarily due to the higher investment in acquisitions. Business acquisitions were $1.4 billion in fiscal 2015
compared to $128.2 million in fiscal 2014. Capital expenditures were $92.2 million in fiscal 2015 compared to $83.6 million in
fiscal 2014.
Cash flow used in investing activities was $204.9 million for fiscal 2014, compared to $125.4 million used in fiscal 2013. The $79.5
million increase was primarily due to the higher investment in acquisitions. Business acquisitions were $128.2 million in fiscal
2014 compared to $38.4 million in fiscal 2013. Capital expenditures were $83.6 million in fiscal 2014 compared to $82.7 million
in fiscal 2013.
Our commitments for property, plant and equipment as of January 2, 2016 were approximately $9.7 million. In fiscal 2016, we
anticipate capital spending to be approximately $85.0 million. We believe that our present manufacturing facilities will be sufficient
to provide adequate capacity for our operations in fiscal 2016. We anticipate funding fiscal 2016 capital spending with operating
cash flows.
Cash flow provided by financing activities was $1.0 billion for fiscal 2015, compared to cash flow used in financing activities of
$218.0 million for fiscal 2014. Fiscal 2015 financing cash inflows was driven by long term debt borrowings of $1.3 billion offset
by debt repayments of $132.3 million. We paid $40.2 million in dividends to shareholders in fiscal 2015, compared to $37.8 million
in fiscal 2014.
Cash flow used in financing activities was $218.0 million for fiscal 2014, compared to cash flow used in financing activity of $90.9
million for fiscal 2013. Fiscal 2014 financing cash flows was driven by debt repayments of $150.4 million and share repurchases
of $35 million. We paid $37.8 million in dividends to shareholders in fiscal 2014, compared to $35.1 million in fiscal 2013.
Our working capital was $1.0 billion at January 2, 2016 and January 3, 2015. At January 2, 2016, our current ratio (which is the
ratio of our current assets to current liabilities) was 2.7:1 compared to 2.8:1 at January 3, 2015. Our current ratio decreased primarily
due to lower cash balances of $81.2 million at January 2, 2016.
The following table presents selected financial information and statistics as of January 2, 2016 and January 3, 2015 (in millions):
Cash and Cash Equivalents
Trade Receivables, Net
Inventories, Net
Working Capital
Current Ratio
$
January 2,
2016
January 3,
2015
252.9 $
462.0
775.0
1,022.4
2.7:1
334.1
447.5
691.7
1,023.8
2.8:1
At January 2, 2016, our cash and cash equivalents totaled $252.9 million. At January 2, 2016, $238.6 million of our cash was held
by foreign subsidiaries and could be used in our domestic operations if necessary, but would be subject to repatriation taxes. There
are no current trends, demands or uncertainties that we believe are reasonably likely to require repatriation or to have a material
impact on our ability to fund U.S. operations.
Predominately all of our expenses are paid in cash, often with payment term provisions that include early payment discounts and
time elements. We believe that our ability to generate positive cash flow coupled with our available revolving credit balance will
27
be sufficient to fund our operations for the foreseeable future. We focus on optimizing our investment in working capital through
improved and enforced payment terms, maintaining an optimal level of inventory and operational efficiencies. Additionally, we
believe that our capital expenditures for maintenance of equipment and facilities will be consistent with prior levels and not present
a funding challenge.
We will, from time to time, maintain excess cash balances which may be used to (i) fund operations, (ii) repay outstanding debt,
(iii) fund acquisitions, (iv) pay dividends, (v) make investments in new product development programs, (vi) repurchase our common
stock, or (vii) fund other corporate objectives.
Pension Liabilities and Other Post Retirement Benefits
Pension and other post retirement benefits of $105.9 million at January 2, 2016 increased $40.9 million from $65.0 million at
January 3, 2015 primarily due to (i) the PTS Acquisition and assumption of $42.6 million of pension liabilities and other post
retirement benefits and (ii) a 40 basis point increase in the weighted average discount rate from 4.2% to 4.6%.
The New Credit Agreement
In connection with the PTS Acquisition, on January 30, 2015, we entered into a new 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”) available for general corporate purposes.
The Credit Agreement replaced the Prior Credit Agreement, and the Multicurrency Revolving Facility replaced the Prior Revolving
Facility (further discussed below).
The Term Facility was drawn in full on January 30, 2015 in connection with the closing of the PTS Acquisition. The loans under
the Term Facility require 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. At January 2, 2016 we had borrowings under
the Multicurrency Revolving Facility in the amount of $3.0 million, $32.9 million of standby letters of credit issued under the
facility, and $464.1 million of available borrowing capacity.
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 our consolidated funded debt to consolidated EBITDA ratio or at
an alternative base rate. The average daily balance in borrowings under the Multicurrency Revolving Facility was $48.2 million
and the weighted average interest rate on the Multicurrency Revolving Facility was 1.9% for the year ended January 2, 2016. The
weighted average interest rate on the Term Facility was 1.8% for the year ended January 2, 2016. We pay 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.
The Credit Agreement requires that we 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.
Senior Notes
At January 2, 2016, we 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”).
Details on the Notes at January 2, 2016 were (in millions):
Floating Rate Series 2007A
Fixed Rate Series 2011A
Fixed Rate Series 2011A
Fixed Rate Series 2011A
Principal
Interest Rate
Maturity
100.0
100.0
230.0
170.0
600.0
Floating (1)
4.1%
4.8 to 5.0%
4.9 to 5.1%
August 1, 2017
July 1, 2018
July 1, 2021
July 1, 2023
$
(1) Interest rates vary as LIBOR varies. At January 2, 2016, the interest rate was 1.1%.
We have interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk (see also Note 13 of
Notes to the Consolidated Financial Statements).
Compliance With Financial Covenants
The Credit Agreement and the Notes require us to meet specified financial ratios and to satisfy certain financial condition tests. We
were in compliance with all financial covenants contained in the Notes and the Credit Agreement as of January 2, 2016.
28
The Prior Credit Agreement and Prior Revolving Facility
On June 30, 2011, we entered into a revolving credit agreement (the “Prior Credit Agreement”) that provided for an aggregate
amount of availability under a revolving credit facility of $500.0 million, including a $100.0 million letter of credit subfacility (the
“Prior Revolving Facility”). The Prior Credit Agreement and Prior Revolving Facility were replaced with the new Credit Agreement
(discussed above).
The Prior Revolving Facility permitted borrowing at interest rates based upon a margin above LIBOR. At January 3, 2015, we had
$17.0 million outstanding on the Prior Revolving Facility. The balance on the Prior Revolving Facility was fully paid on January
27, 2015.
Other Notes Payable
At January 2, 2016, other notes payable of approximately $15.5 million were outstanding with a weighted average interest rate of
2.5%. At January 3, 2015, other notes payable of approximately $16.8 million were outstanding with a weighted average rate of
2.5%.
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 Consolidated Financial Statements), the approximate fair value of our total debt was $1,758.2 million and $666.8
million as of January 2, 2016 and January 3, 2015, respectively.
Litigation
One of our subsidiaries that we 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 marketed by a third party. These claims generally allege that the ventilation units were the cause of
fires. Based on the current facts, we do not believe these claims, individually or in the aggregate, will have a material adverse effect
on our results of operations or financial condition. However, we cannot predict the outcome of these claims, the nature or extent
of remedial actions, if any, we may need to undertake with respect to motors that remain in the field, or the costs we many incur,
some of which could be significant.
We are, from time to time, party to other litigation that arises in the normal course of our business operations, including product
warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters. Our products
are used in a variety of industrial, commercial and residential applications that subject us to claims that the use of our products is
alleged to have resulted in injury or other damage. We accrue for anticipated costs in defending against such lawsuits in amounts
that we believe are adequate, and we do not believe that the outcome of any such lawsuit will have a material effect on our results
of operations, financial position or cash flows.
Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments
The following is a summary of our contractual obligations and payments due by period as of January 2, 2016 (in millions):
Payments Due by Period
(1)
$
Less than one
year
1 - 3 years
3 - 5 years
More than 5 years
Debt Including
Estimated
Interest
Payments (2)
Operating
Leases
Pension
Obligations
Purchase and
Other
Obligations
Total
Contractual
Obligations
57.9
$
22.1 $
4.6 $
267.7
$
502.0
963.6
430.9
22.8
8.3
7.0
7.9
8.6
18.0
—
—
—
352.3
532.7
980.5
455.9
Total
$
1,954.4 $
60.2 $
39.1 $
267.7 $
2,321.4
(1) The timing and future spot prices affect the settlement values of our hedge obligations related to commodities, currency and interest rate swap
agreements. Accordingly, these obligations are not included above in the table of contractual obligations. The timing of settlement of our tax
contingent liabilities cannot be reasonably determined and they are not included above in the table of contractual obligations. Future pension
obligation payments after 2016 are subject to revaluation based on changes in the benefit population and/or changes in the value of pension assets
based on market conditions that are not determinable as of January 2, 2016.
(2) Variable rate debt based on January 2, 2016 rates. Subsequent to January 2, 2016, and in conjunction with the acquisition of PTS, we entered
into a $1.25 billion Credit Agreement that has a LIBOR-based floating rate. See also Note 7 of Notes to the Consolidated Financial Statements.
29
We utilize blanket purchase orders (“blankets”) to communicate expected annual requirements to many of our suppliers.
Requirements under blankets generally do not become “firm” until a varying number of weeks before our scheduled production.
The purchase obligations shown in the above table represent the value we consider “firm.”
At January 2, 2016, we had outstanding standby letters of credit totaling approximately $32.9 million. We had no other material
commercial commitments.
We did not have any material variable interest entities as of January 2, 2016 or January 3, 2015. Other than disclosed in the table
above and the previous paragraph, we had no other material off-balance sheet arrangements.
Critical Accounting Policies
The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United
States requires us to make estimates and assumptions affecting 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. We believe the following critical accounting policies could have the most significant effect on our reported results.
Purchase Accounting and Business Combinations
Assets acquired and the liabilities assumed as part of a business combination are recognized separately from goodwill at their
acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net
of the acquisition date fair values of the assets acquired and the liabilities assumed. We, with the assistance of outside specialists as
necessary, use estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well
as contingent consideration, where applicable. We may refine these estimates during the measurement period which may be up to
one year from the acquisition date. As a result, during the measurement period, we record adjustments to the assets acquired and
liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination
of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our
Consolidated Statements of Income.
Goodwill
We evaluate the carrying amount of goodwill annually or more frequently if events or circumstances indicate that an asset might be
impaired. When applying the accounting guidance, we use estimates to determine when it might be necessary to take an impairment
charge. Factors that could trigger an impairment review include significant underperformance relative to historical or forecasted
operating results, a significant decrease in the market value of an asset or significant negative industry or economic trends. We
perform our required annual goodwill impairment test as of the end of the October fiscal month.
We use a weighting of the market approach and the income approach (discounted cash flow method) in testing goodwill for
impairment. In the market approach, we apply performance multiples from comparable public companies, adjusted for relative
risk, profitability, and growth considerations, to our reporting units to estimate fair value. The key assumptions used in the
discounted cash flow method used to estimate fair value include discount rates, revenue and operating income projections and
terminal value rates because such assumptions are the most sensitive and susceptible to change as they require significant
management judgment. Discount rates are determined by using a weighted average cost of capital (“WACC”). The WACC
considers market and industry data as well as company-specific risk factors for each reporting unit in determining the appropriate
discount rate to be used. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to
receive for investing in such a business. Terminal value rate determination follows common methodology of capturing the present
value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and long-term growth rates.
The calculated fair values for our 2015 impairment testing exceeded the carrying values of the reporting units for a majority of our
reporting units. Our three largest reporting units comprise approximately 80.4% of consolidated goodwill and had a combined
estimated fair value 37.4% higher than carrying value. There were certain reporting units (representing 8.2% of goodwill before
impairment) where the calculated fair values were less than the carrying values. The Commercial and Industrial Systems segment
includes reporting units that have significant exposure to the volatility in the oil and gas industry. Crude oil prices remained
depressed throughout 2015 with pronounced declines in the fourth quarter of 2015 and into 2016. Expected cash flows were also
negatively impacted by lower gas and oil prices as lower prices decreased the capital spending of customers these reporting units
serve. Weak economic conditions in China have contributed to the reduced expected cash flows for one of our reporting units in
this region. An implied goodwill amount was calculated as a required second step in the testing, using the estimated fair value of
all assets and liabilities of the reporting unit as if the unit had been acquired in a business combination. The resulting implied fair
value of goodwill is a Level 3 asset measured at fair value on a non-recurring basis (see also Note 14 of the Notes to the Consolidated
Financial Statements for fair value definitions). The total goodwill impairment charge related to these reporting units was $79.9
million and was recorded in Goodwill Impairment within the Consolidated Statements of Income. Except for the reporting units
described above, there were no reporting units that had an estimated fair value less than 10% over carrying value.
The calculated fair values for our 2014 impairment testing exceeded the carrying values of the reporting units for a majority of our
reporting units. Our three highest reporting units comprise approximately 71% of consolidated goodwill and had a combined
estimated fair value 37% higher than carrying value. There were certain reporting units (representing 12.7% of goodwill before
30
impairment) where the calculated fair values were less than the carrying values. There were certain reporting units where the
calculated fair values were less than the carrying values. The Commercial and Industrial Systems segment and the Power
Transmission Solutions segment include reporting units that have significant exposure to the volatility in the oil and gas industry.
Crude oil prices saw a sharp decline in the latter part of 2014. Expected cash flows were also negatively impacted by lower gas and
oil prices as lower prices decreased the capital spending of customers these reporting units serve. Weak economic conditions in
regions such as Australia and New Zealand as well as currency devaluations in Venezuela have contributed to the reduced expected
cash flows for our reporting units in these regions. In the Climate Solutions segment, unfavorable customer dynamics impacted one
reporting unit's expected cash flows. An implied goodwill amount was then calculated as a required second step in the testing, using
the estimated fair value of all assets and liabilities of the reporting unit as if the unit had been acquired in a business combination.
The resulting implied fair value of goodwill is a Level 3 asset measured at fair value on a non-recurring basis (see also Note 14 of
the Notes to the Consolidated Financial Statements for fair value definitions). Additionally, our reporting unit related to technology
that had been deemed substantially impaired during the fourth quarter of 2013 was deemed fully impaired during 2014 as a result
of the closing of the facility. This resulted in a $1.0 million impairment charge to goodwill. The total goodwill impairment charge
related to these reporting units was $119.5 million and was recorded in Goodwill Impairment within the Consolidated Statements
of Income. Except for the reporting units described above, there were no reporting units that had an estimated fair value less than
10% over carrying value.
We aggregate our business units by segment for reporting purposes and the majority of our goodwill is within our Power
Transmissions Solutions segment (see also Note 5 of Notes to the Consolidated Financial Statements).
Long-Lived Assets
We evaluate the recoverability of the carrying amount of intangible assets whenever events or changes in circumstance indicate that
the carrying amount of an asset may not be fully recoverable through future cash flows. When applying the accounting guidance
we use estimates to determine when an impairment is necessary. Factors that could trigger an impairment review include a
significant decrease in the market value of an asset or significant negative or economic trends (see also Note 5 of Notes to the
Consolidated Financial Statements). For definite-lived intangible assets, the Company uses an estimate of the related undiscounted
cash flows over the remaining life of the primary asset to estimate recoverability.
During 2015, due primarily to the continued decline in crude oil prices that was more pronounced in the fourth quarter of 2015 as
well as weak economic conditions in China, indicators related to the future expected cash flows triggered an undiscounted cash
flow test of long-lived assets for certain asset groups. The undiscounted cash flows of each asset group tested exceeded its respective
carrying value. As a result, no impairment was indicated.
During 2014, due primarily to the sharp decline in the price of oil and other commodities, the carrying amounts of intangible and
other long-lived assets for two reporting units within the Commercial and Industrial Systems and Power Transmission Solutions
segments were deemed to be not fully recoverable. Undiscounted cash flows were determined using the Company's internal
projections which are Level 3 measurements (see also Note 14 of Notes to the Consolidated Financial Statements for fair value
definitions). As a result, intangible and other long-lived assets of $26.2 million related to hydraulic fracturing equipment used in
the oil and gas end markets were impaired. Additionally, technology and other long-lived assets related to products used in hermetic
climate applications of $13.8 million were impaired.
Indefinite-Lived Assets
Indefinite-lived intangible assets consist of the trade names associated with the acquired PTS business. They were evaluated for
impairment as of November 7, 2015 using a relief from royalty method to determine whether their fair values exceed their respective
carrying amounts. The Company determined the fair value of these assets using a royalty relief methodology similar to that
employed when the associated assets were acquired, but using updated estimates of future sales, cash flows and profitability. For
2015, the fair value of indefinite lived intangible assets exceeded the respective carrying value.
Retirement Plans
Most of our domestic employees are participants in defined contribution plans and/or defined benefit pension plans. The defined
benefit pension plans covering a majority of our domestic employees have been closed to new employees and frozen for existing
employees. Most of our foreign employees are covered by government sponsored plans in the countries in which they are employed.
Our obligations under our defined benefit pension plans are determined with the assistance of actuarial firms. The actuaries make
certain assumptions regarding such factors as withdrawal rates and mortality rates. The actuaries also provide information and
recommendations from which management makes further assumptions on such factors as the long-term expected rate of return on
plan assets, the discount rate on benefit obligations and where applicable, the rate of annual compensation increases.
Based upon the assumptions made, the investments made by the plans, overall conditions and movement in financial markets,
particularly the stock market and how actual withdrawal rates, life-spans of benefit recipients and other factors differ from
assumptions, annual expenses and recorded assets or liabilities of these defined benefit pension plans may change significantly
from year to year.
31
We will be changing the method used to estimate the service and interest cost components of the net periodic pension and other
postretirement benefit costs beginning in 2016. The new method uses the spot yield curve approach to estimate the service and
interest costs by applying the specific spot rates along the yield curve used to determine the benefit obligations to relevant projected
cash outflows. The current methodology for selecting the discount rate was to match the plan's cash flows to that of a theoretical
bond portfolio yield curve used to measure the benefit obligation at the beginning of the period. The change will not affect the
measurement of the total benefit obligations as the change in service and interest costs is offset in the actuarial gains and losses
recorded in other comprehensive income. We are changing to the method to provide a more precise measure of interest and service
costs by improving the correlation between the projected benefit cash flows and the discrete spot yield curve rates.
Further discussion of our accounting policies is contained in Note 3 of Notes to the Consolidated Financial Statements.
ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk relating to our operations due to changes in interest rates, foreign currency exchange rates and
commodity prices of purchased raw materials. We manage the exposure to these risks through a combination of normal operating
and financing activities and derivative financial instruments such as interest rate swaps, commodity cash flow hedges and foreign
currency forward exchange contracts. All hedging transactions are authorized and executed pursuant to clearly defined policies and
procedures, which strictly prohibit the use of financial instruments for speculative purposes.
All hedges are recorded on the balance sheet at fair value and are accounted for as cash flow hedges, with changes in fair value
recorded in accumulated other comprehensive income (loss) (“AOCI”) in each accounting period. An ineffective portion of the
hedges change in fair value, if any, is recorded in earnings in the period of change.
Interest Rate Risk
We are exposed to interest rate risk on certain of our short-term and long-term debt obligations used to finance our operations and
acquisitions. At January 2, 2016, excluding the impact of interest rate swaps, we had $505.6 million of fixed rate debt and $1,231.0
million of variable rate debt. At January 3, 2015, excluding the impact of interest rate swaps, we had $506.1 million of fixed rate
debt and $127.7 million of variable rate debt. We utilize interest rate swaps to manage fluctuations in cash flows resulting from
exposure to interest rate risk on forecasted variable rate interest payments.
We have LIBOR-based floating rate borrowings, which expose us to variability in interest payments due to changes in interest rates.
A hypothetical 10% change in our weighted average borrowing rate on outstanding variable rate debt at January 2, 2016 would
result in a $1.3 million change in after-tax annualized earnings. We have entered into pay fixed/receive LIBOR-based floating
interest rate swaps to manage fluctuations in cash flows resulting from interest rate risk. These interest rate swaps have been
designated as cash flow hedges against forecasted LIBOR-based interest payments.
Details regarding the instruments, as of January 2, 2016, are as follows (in millions):
Instrument
Swap
Notional Amount
$100.0
Maturity
August 23, 2017
Rate Paid
5.4%
Rate Received
LIBOR (3 month)
Fair Value (Loss)
(7.8)
$
As of January 2, 2016, the interest rate swap liability of $(7.8) million was included in Hedging Obligations. As of January 3, 2015,
the interest rate swap liability of $(11.9) million was included in Hedging Obligations. The unrealized loss on the effective portion
of the contracts net of tax of $(4.9) million and $(7.4) million as of January 2, 2016 and January 3, 2015, respectively, was recorded
in AOCI.
Foreign Currency Risk
We are also exposed to foreign currency risks that arise from normal business operations. These risks include the translation of
local currency balances of foreign subsidiaries, intercompany loans with foreign subsidiaries and transactions denominated in
foreign currencies. Our objective is to minimize our exposure to these risks through a combination of normal operating activities
and the utilization of foreign currency exchange contracts to manage our exposure on the forecasted transactions denominated in
currencies other than the applicable functional currency. Contracts are executed with creditworthy banks and are denominated in
currencies of major industrial countries. We do not hedge our exposure to the translation of reported results of foreign subsidiaries
from local currency to United States dollars.
As of January 2, 2016, derivative currency assets (liabilities) of $1.2 million, $1.0 million, $(30.8) million and $(19.8) million, are
recorded in Prepaid Expenses and Other Current Assets, Other Noncurrent Assets, Hedging Obligations (current), and Hedging
Obligations (noncurrent), respectively. As of January 3 2015, derivative currency assets (liabilities) of $1.6 million, $(17.5) million
and $(10.5) million, are recorded in Prepaid Expenses and Other Current Assets, Hedging Obligations (current), and Hedging
Obligations (noncurrent), respectively. The unrealized losses on the effective portion of the contracts of $(29.8) million net of tax,
and $(15.2) million net of tax, as of January 2, 2016 and January 3, 2015, was recorded in AOCI. At January 2, 2016, we had $(3.8)
million, net of tax, of currency losses on closed hedge instruments in AOCI that will be realized in earnings when the hedged items
impact earnings.
32
The following table quantifies the outstanding currency forward and the corresponding impact on the value of these instruments
assuming a hypothetical 10% appreciation/depreciation of their counter currency on January 2, 2016 (dollars in millions):
Currency
Mexican Peso
Chinese Renminbi
Indian Rupee
Euro
Canadian Dollar
Australian Dollar
Thai Baht
Japanese Yen
Great Britain Pound
Singapore Dollar
Notional
Amount
Fair
Value
10% Appreciation of
Counter Currency
10% Depreciation of
Counter Currency
Foreign Exchange Gain (Loss) From:
$
339.4 $
233.9
54.5
68.5
6.2
10.8
3.7
2.7
4.8
0.5
(40.9) $
(7.2)
0.1
0.5
(0.4)
(0.3)
(0.1)
—
(0.1)
—
33.9 $
23.4
5.5
6.9
0.6
1.1
0.4
0.3
0.5
0.1
(33.9)
(23.4)
(5.5)
(6.9)
(0.6)
(1.1)
(0.4)
(0.3)
(0.5)
(0.1)
Gains and losses indicated in the sensitivity analysis would be offset by gains and losses on the underlying receivables and payables.
Commodity Price Risk
We periodically enter into commodity hedging transactions to reduce the impact of changing prices for certain commodities such
as copper and aluminum based upon forecasted purchases of such commodities. These transactions are designated as cash flow
hedges and the contract terms of commodity hedge instruments generally mirror those of the hedged item, providing a high degree
of risk reduction and correlation.
Derivative commodity assets (liabilities) of $5.2 million and $(13.9) million are recorded in Prepaid Expenses and Hedging
Obligations (current) respectively, at January 2, 2016. Derivative commodity assets (liabilities) of $2.3 million, $(12.2) million and
$(0.1) million are recorded in Prepaid Expenses, Hedging Obligations (current) and Hedging Obligations (noncurrent), respectively,
at January 3, 2015. The unrealized (loss) gain on the effective portion of the contracts of $(5.4) million net of tax and $(6.2) million
net of tax, as of January 2, 2016 and January 3, 2015, respectively, was recorded in AOCI. At January 2, 2016, we had an additional
$(3.6) million, net of tax, of derivative commodity losses on closed hedge instruments in AOCI that will be realized in earnings
when the hedged items impact earnings.
The following table quantifies the outstanding commodity contracts intended to hedge raw material commodity prices and the
corresponding impact on the value of these instruments assuming a hypothetical 10% appreciation/depreciation of their prices on
January 2, 2016 (dollars in millions):
Gain (Loss) From:
Commodity
Copper
Aluminum
Notional
Amount
Fair
Value
10% Appreciation of
Commodity Prices
10% Depreciation of
Commodity Prices
$
59.4 $
4.2
(8.4) $
(0.3)
5.9 $
0.4
(5.9)
(0.4)
Gains and losses indicated in the sensitivity analysis would be offset by the actual prices of the commodities.
The net AOCI balance related to hedging activities of $(47.5) million loss at January 2 2016 includes $(26.6) million of net current
deferred losses expected to be realized in the next twelve months.
Counterparty Risk
We are exposed to credit losses in the event of non-performance by the counterparties to various financial agreements, including
our interest rate swap agreements, foreign currency exchange contracts and commodity hedging transactions. We manage exposure
to counterparty credit risk by limiting our counterparties to major international banks and financial institutions meeting established
credit guidelines and continually monitoring their compliance with the credit guidelines. We do not obtain collateral or other
security to support financial instruments subject to credit risk. We do not anticipate non-performance by our counterparties, but
cannot provide assurances.
33
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly Financial Information
(Unaudited)
(Amounts in Millions, Except per Share Data)
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Net Sales
Gross Profit
Income (Loss) from
Operations
Net Income (Loss)
Net Income (Loss)
Attributable to Regal Beloit
Corporation(2), (3)
Earnings (Loss) per Share
Attributable to Regal Beloit
Corporation (4):
Basic
Assuming Dilution
Weighted Average Number of
Shares Outstanding
Basic
Assuming Dilution
Net Sales (1)
Commercial and Industrial
Systems
2014
2015
2014
$ 911.7 $ 801.2 $ 942.2 $ 850.4 $ 882.3 $ 829.8 $ 773.5 $ 775.6
188.1
219.8
220.9
251.4
203.8
194.4
241.1
211.0
2015
2014
2015
2014
2015
63.6
69.7
103.2
87.7
100.1
74.7
(14.1)
(110.6)
37.9
45.0
64.9
58.1
64.3
48.8
(18.6)
(115.8)
36.4
43.8
62.8
56.2
63.4
47.5
(19.3)
(116.5)
0.81
0.81
0.97
0.96
1.40
1.39
1.24
1.24
1.42
1.41
1.06
1.05
(0.43)
(0.43)
(2.61)
(2.61)
44.7
45.1
45.1
45.4
44.8
45.2
45.2
45.5
44.8
45.1
44.9
45.2
44.7
44.7
44.7
44.7
$ 456.4
$ 453.5 $ 441.0 $ 479.0 $ 426.8 $ 472.3
$ 370.7 $ 451.2
Climate Solutions
280.4
285.1
286.1
303.5
264.4
290.0
210.3
256.2
Power Transmission
Solutions
Income (Loss) from
Operations
Commercial and Industrial
Systems
174.9
62.6
215.1
67.9
191.1
67.5
192.5
68.2
33.3
37.2
41.5
47.0
38.8
33.6
(59.7)
(84.2)
Climate Solutions
33.4
26.3
43.7
33.1
40.7
33.1
28.9
7.1
Power Transmission
Solutions
(3.1 )
6.2
18.0
7.6
20.6
8.0
16.7
(33.5)
(1) Effective September 28, 2014, the Company reorganized its reportable segments to align with its new management reporting structure
and business activities. Prior to this reorganization, the Company was comprised of two reportable segments for financial reporting
purposes: Electrical and Mechanical. As a result of this change, the Company is now comprised of three reportable segments: Commercial
and Industrial Systems, Climate Solutions and Power Transmission Solutions and previously reported information for prior periods have
been restated.
(2) Included in the fourth quarter 2015 results was a goodwill impairment of $79.9 million ($58.1 million after tax).
(3) Included in the fourth quarter 2014 results were goodwill impairments of $118.5 million and asset impairments and other, net of $40.0
million ($146.3 million after tax). A goodwill impairment of $1.0 million was recorded earlier in 2014.
(4) Due to the weighting of both earnings and the weighted average number of shares outstanding, the sum of the quarterly earnings per
share may not equal the annual earnings per share.
34
Management's Annual Report on Internal Control Over Financial Reporting
The management of Regal Beloit Corporation (the “Company”) is responsible for the accuracy and internal consistency of the
preparation of the consolidated financial statements and footnotes contained in this annual report.
The Company's management is also responsible for establishing and maintaining adequate internal control over financial reporting.
The Company operates under a system of internal accounting controls designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of published financial statements in accordance with generally accepted
accounting principles. The internal accounting control system is evaluated for effectiveness by management and is tested,
monitored and revised as necessary. All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation
and presentation.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of January 2,
2016. In making its assessment, the Company's management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on the results of its
evaluation, the Company's management concluded that, as of January 2, 2016, the Company's internal control over financial
reporting is effective at the reasonable assurance level based on those criteria. Management excluded from its assessment the
internal control over financial reporting at the Power Transmission Solutions business ("PTS"), which was acquired on January 30,
2015 and whose financial statements constitute 34.3% of total assets, 14.6% of net sales, and 5.7% of net operating income of the
total consolidated financial statement amounts as of and for the year ended January 2, 2016.
Our internal control over financial reporting as of January 2, 2016 has been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report which is included herein.
March 2, 2016
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Regal Beloit Corporation
Beloit, Wisconsin
We have audited the accompanying consolidated balance sheets of Regal Beloit Corporation and subsidiaries (the "Company") as
of January 2, 2016 and January 3, 2015 and the related consolidated statements of income, comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended January 2, 2016. Our audits also included the financial
statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Regal Beloit
Corporation and subsidiaries as of January 2, 2016 and January 3, 2015, and the results of their operations and their cash flows for
each of the three years in the period ended January 2, 2016, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of January 2, 2016, based on the criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 2, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Milwaukee, WI
March 2, 2016
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Regal Beloit Corporation
Beloit, Wisconsin
We have audited the internal control over financial reporting of Regal Beloit Corporation and subsidiaries (the "Company") as of
January 2, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control Over Financial
Reporting, management excluded from its assessment the internal control over financial reporting at the Power Transmission
Solutions business ("PTS"), which was acquired on January 30, 2015 and whose financial statements constitute 34.3% of total
assets, 14.6% of net sales, and 5.7% of operating income of the total consolidated financial statement amounts as of and for the
year ended January 2, 2016. Accordingly, our audit did not include the internal control over financial reporting at PTS. The
Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject
to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 2,
2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement schedule as of and for the year ended January 2, 2016 of the Company
and our report dated March 2, 2016 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Milwaukee, WI
March 2, 2016
37
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Millions, Except Per Share Data)
Net Sales
Cost of Sales
Gross Profit
Operating Expenses
Goodwill Impairment
Asset Impairments and Other, Net
Total Operating Expenses
Income from Operations
Interest Expense
Interest Income
Income before Taxes
Provision for Income Taxes
Net Income
Less: Net Income Attributable to Noncontrolling Interests
Net Income Attributable to Regal Beloit Corporation
Earnings Per Share Attributable to Regal Beloit Corporation:
Basic
Assuming Dilution
Weighted Average Number of Shares Outstanding:
Basic
Assuming Dilution
For the Year Ended
January 2,
2016
January 3,
2015
December 28,
2013
$
$
$
$
3,509.7 $
2,576.5
933.2
600.5
79.9
—
680.4
252.8
60.2
4.3
196.9
48.4
148.5
5.2
143.3 $
3.21 $
3.18 $
44.7
45.1
3,257.1 $
2,459.8
797.3
516.3
119.5
40.0
675.8
121.5
39.1
7.9
90.3
54.2
36.1
5.1
31.0 $
0.69 $
0.69 $
45.0
45.3
3,095.7
2,312.5
783.2
494.2
76.3
4.7
575.2
208.0
42.4
4.9
170.5
44.5
126.0
6.0
120.0
2.66
2.64
45.0
45.4
See accompanying Notes to the Consolidated Financial Statements
38
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Millions)
Net Income
Other Comprehensive Income (Loss) Net
of Tax:
Translation:
Foreign currency translation adjustments
Reclassification of Foreign Currency
Translation Adjustments included in Net
Income, Net of Immaterial Tax Effects
Hedging Activities:
Increase (Decrease) in Fair Value of
Hedging Activities, Net of Tax Effects of
$(26.6) million in 2015, $(16.9) million
in 2014 and $(0.7) million in 2013
Reclassification of Losses Included in
Net Income, Net of Tax Effects of $16.5
million in 2015, $3.7 million in 2014, and
$5.5 million in 2013
Pension and Post Retirement Plans:
Decrease (Increase) in Prior Service Cost
and Unrecognized Gain (Loss), Net of
Tax Effects of $1.8 million in 2015,
$(10.2) million in 2014 and $9.7 million
in 2013
Amortization of Prior Service Cost and
Unrecognized Loss Included in Net
Periodic Pension Cost, Net of Tax Effects
of $1.6 million in 2015, $1.1 million in
2014 and $1.7 million in 2013
Other Comprehensive Income (Loss)
Comprehensive Income (Loss)
Less: Comprehensive Income
Attributable to Noncontrolling Interest
Comprehensive Income
(Loss)Attributable to Regal Beloit
For the Year Ended
January 2, 2016
January 3, 2015
December 28, 2013
$
148.5
$
36.1
$
126.0
(94.5)
(55.5)
(22.2)
—
(1.0)
—
$
(43.3)
$
(27.6)
$
(1.1)
26.8
(16.5)
6.1
(21.5)
9.0
7.9
1.2
(17.6)
16.0
2.9
4.1
1.4
(16.2)
2.6
(106.9)
41.6
2.3
(94.2)
(58.1)
2.1
18.6
4.3
130.3
5.9
$
39.3
$
(60.2)
$
124.4
See accompanying Notes to the Consolidated Financial Statements
39
REGAL BELOIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
January 2, 2016
January 3, 2015
ASSETS
Current Assets:
Cash and Cash Equivalents
Trade Receivables, less Allowances of $11.3 million in 2015 and $11.6
million in 2014
Inventories
Prepaid Expenses and Other Current Assets
Total Current Assets
Net Property, Plant and Equipment
Goodwill
Intangible Assets, Net of Amortization
Deferred Income Tax Benefits
Other Noncurrent Assets
Total Assets
LIABILITIES AND EQUITY
Current Liabilities:
Accounts Payable
Dividends Payable
Hedging Obligations
Accrued Compensation and Employee Benefits
Other Accrued Expenses
Current Maturities of Long-Term Debt
Total Current Liabilities
Long-Term Debt
Deferred Income Taxes
Hedging Obligations
Pension and Other Post Retirement Benefits
Other Noncurrent Liabilities
Contingencies and Commitments (see Note 11)
Equity:
Regal Beloit Corporation Shareholders' Equity:
Common Stock, $.01 par value, 100.0 million shares authorized, 44.7
million and 44.7 million shares issued and outstanding at 2015 and 2014,
respectively
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Regal Beloit Corporation Shareholders' Equity
Noncontrolling Interests
Total Equity
Total Liabilities and Equity
$
$
$
$
252.9 $
462.0
775.0
145.3
1,635.2
678.5
1,465.6
777.8
18.6
16.0
4,591.7 $
336.2 $
10.3
44.7
80.6
134.7
6.3
612.8
1,715.6
100.9
27.6
105.9
46.1
0.4
900.8
1,291.1
(255.0)
1,937.3
45.5
1,982.8
4,591.7 $
334.1
447.5
691.7
111.2
1,584.5
531.5
1,004.0
202.3
17.9
17.0
3,357.2
312.2
9.8
29.7
75.7
125.5
7.8
560.7
624.7
66.9
22.5
65.0
38.1
0.4
896.1
1,188.9
(151.0)
1,934.4
44.9
1,979.3
3,357.2
See accompanying Notes to the Consolidated Financial Statements
40
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in Millions, Except Per Share Data)
Common Stock $.01
Par Value
Additional Paid-In
Capital
Retained Earnings
Accumulated Other
Comprehensive
Income (Loss)
Noncontrolling
Interests
Total
Equity
Balance as of
December 29, 2012
$
Net Income
Other Comprehensive
Income (Loss)
Dividends Declared
($0.79 per share)
Stock Options
Exercised, including
Income Tax Benefit
and Share
Cancellations
Share-based
Compensation
Purchase of
Subsidiary Shares
from Noncontrolling
Interest
Balance as of
December 28, 2013
$
Net Income
Other Comprehensive
Income (Loss)
Dividends Declared
($0.86 per share)
Stock Options
Exercised, including
Income Tax Benefit
and Share
Cancellations
Share-based
Compensation
Stock Repurchase
Sale of Joint Venture
Dividends Declared to
Noncontrolling
Interests
Balance as of January
3, 2015
$
Net Income
Other Comprehensive
Income (Loss)
Dividends Declared
($0.91 per share)
Stock Options
Exercised, including
Income Tax Benefit
and Share
Cancellations
Share-based
Compensation
Stock Repurchase
Purchase of
Subsidiary Shares
from Noncontrolling
Interest
Dividends Declared to
Noncontrolling
Interests
Balance as of January
2, 2016
$
0.4 $
—
—
0.1
—
—
0.5 $
—
—
—
—
—
(0.1)
—
—
0.4 $
—
—
—
—
—
—
—
—
0.4 $
903.3 $
—
—
1.4
11.4
—
1,115
$
120.0
(35.6)
—
—
—
(65.3) $
—
4.4
—
—
—
1.1
916.1 $
1,199.4
$
(59.8) $
—
—
—
0.1
11.9
(32.0)
—
—
31.0
—
(38.6)
—
—
(2.9)
—
—
—
(91.2)
—
—
—
—
—
896.1 $
1,188.9
$
(151.0) $
—
—
—
2.4
13.9
(11.6)
—
—
143.3
—
(40.7)
—
—
(0.4)
—
—
—
(104.0)
—
—
—
—
—
900.8 $
1,291.1
$
(255.0) $
See accompanying Notes to the Consolidated Financial Statements
43.1 $
6.0
(0.1)
—
—
—
(2.8)
46.2 $
5.1
(3.0)
—
—
—
(3.1)
(0.3)
44.9 $
5.2
(2.9)
—
—
—
(1.4)
(0.3)
45.5 $
1,996.5
126.0
4.3
(35.6)
1.5
11.4
(1.7)
2,102.4
36.1
(94.2)
(38.6)
0.1
11.9
(35.0)
(3.1)
(0.3)
1,979.3
148.5
(106.9)
(40.7)
2.4
13.9
(12.0)
(1.4)
(0.3)
1,982.8
41
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities (net of Acquisitions):
Depreciation
Amortization
Goodwill Impairment
Asset Impairments and Other, Net
Share-based Compensation Expense
Benefit from Deferred Income Taxes
Excess Tax Benefits from Share-based Compensation
Loss on Venezuela Currency Devaluation
Loss (Gain) on Disposition of Assets
Loss on Sale of Consolidated Joint Venture
Provision for Losses on Receivables
Change in Operating Assets and Liabilities, net of Acquisitions
Receivables
Inventories
Accounts Payable
Current Liabilities and Other
Net Cash Provided by Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property, Plant and Equipment
Purchases of Investment Securities
Sales of Investment Securities
Business Acquisitions, net of Cash Acquired
Additions of Equipment for Operating Leases
Grants Received for Capital Expenditures
Proceeds from Sale of Consolidated Joint Venture
Proceeds from Sale of Assets
Net Cash Used in Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Revolving Credit Facility
Repayments under Revolving Credit Facility
Proceeds from Short-Term Borrowings
Repayments of Short-Term Borrowings
Proceeds from Long-Term Debt
Repayments of Long-Term Debt
Dividends Paid to Shareholders
Proceeds from the Exercise of Stock Options
Excess Tax Benefits from Share-based Compensation
Payments of Deferred Purchase Price
Purchase of Subsidiary Shares from Noncontrolling Interest
Financing Fees Paid
Repurchase of Common Stock
Payments of Contingent Consideration
Distribution to Noncontrolling Interests
Net Cash Provided By (Used In) Financing Activities
EFFECT OF EXCHANGE RATES ON CASH and CASH EQUIVALENTS
Net (decrease) increase in Cash and Cash Equivalents
Cash and Cash Equivalents at beginning of period
Cash and Cash Equivalents at end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for :
Interest
Income Taxes
January 2,
2016
For the Year Ended
January 3,
2015
December 28,
2013
$
148.5
$
36.1 $
126.0
95.5
63.9
79.9
—
13.9
(10.4)
(1.3)
1.5
2.4
—
12.2
28.6
11.1
(22.3)
(42.4)
381.1
(92.2)
(55.4)
45.6
(1,401.4)
—
—
—
15.8
(1,487.6)
512.0
(526.0)
126.1
(126.7)
1,250.0
(132.3)
(40.2)
4.1
1.3
—
(1.4)
(18.0)
(12.0)
—
(0.3)
1,036.6
(11.3)
(81.2)
334.1
252.9
54.6
70.1
$
$
$
$
92.0
46.7
119.5
40.0
11.9
(26.4)
(1.3)
10.4
(12.1)
1.9
19.5
(3.4)
(55.4)
6.9
11.9
298.2
(83.6)
(46.7)
44.8
(128.2)
(4.6)
—
0.9
12.5
(204.9)
296.2
(279.2)
62.1
(61.9)
—
(150.4)
(37.8)
0.9
1.3
(5.3)
—
—
(35.0)
(8.6)
(0.3)
(218.0)
(7.2)
(131.9)
466.0
$
334.1
39.9 $
58.2
84.4
44.1
76.3
4.7
11.4
(5.5)
(0.8)
3.6
2.0
—
2.7
(19.6)
(52.7)
44.5
(16.1)
305.0
(82.7)
(32.2)
32.9
(38.4)
(8.3)
1.6
—
1.7
(125.4)
20.0
(20.0)
46.0
(46.5)
—
(55.9)
(35.1)
1.5
0.8
—
(1.7)
—
—
—
—
(90.9)
2
90.7
375.3
466.0
41.7
49.6
See accompanying Notes to the Consolidated Financial Statements
42
(1) Nature of Operations
Notes to the Consolidated Financial Statements
Regal Beloit Corporation (the “Company”) is a United States based multi-national corporation. The Company reports in three
segments; the Commercial and Industrial Systems segment, with its principal line of business in medium and large electric motors,
power generation products, high-performance drives and controls and capacitors; the Climate Solutions segment, with its principal
line of business in small motors, controls and air moving products; and the Power Transmission Solutions segment, with its principal
line of business in power transmission gearing, hydraulic pump drives, large open gearing and specialty mechanical products which
control motion and torque.
(2) Basis of Presentation
The Company operates on a 52/53 week fiscal year ending on the Saturday closest to December 31. The fiscal year ended January 2,
2016 was 52 weeks, the fiscal year ended January 3, 2015 was 53 weeks and the fiscal year ended December 28, 2013 was 52
weeks.
(3) Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries.
In addition, the Company has joint ventures that are consolidated in accordance with consolidation accounting guidance. All
intercompany accounts and transactions are eliminated.
Accounting for Highly Inflationary Economies
The Company has a subsidiary in Venezuela using accounting for highly inflationary economies. Currency restrictions enacted by
the Venezuelan government have the potential to impact the ability of the Company's subsidiary to obtain U.S. dollars in exchange
for Venezuelan bolivares fuertes ("Bolivars") at the official foreign exchange rate. In 2014, the Venezuelan government announced
the expansion of its auction-based foreign exchange system (SICAD1). The Venezuelan government also introduced an additional
auction-based foreign exchange system (SICAD2) which permitted all companies incorporated or domiciled in Venezuela to bid
for U.S. dollars. Effective January 3, 2015, the Company concluded that it was appropriate to apply the SICAD2 exchange rate of
51.0 Bolivars per U.S. dollar as the Company believed that this rate best represented the economics of the business activity in
Venezuela at that time. As a result, the Company recorded a $10.4 million pretax devaluation charge in the fourth quarter of 2014.
During the first quarter of 2015, the Venezuelan government announced changes to its exchange rate system that included the launch
of a new, market-based system known as the SIMADI. The Company adopted the SIMADI rate after its introduction. The SIMADI
exchange rate was approximately 193 Venezuelan Bolivars to the U.S. dollar as of April 4, 2015. The adoption of the SIMADI
resulted in a $1.5 million pretax devaluation charge during the first quarter 2015.
Controls imposed by the Venezuelan government include import authorization controls, currency exchange and payment controls,
price controls and recently enacted labor rate controls. While government restrictions and exchange rate mechanisms place some
limits on the Company's business decisions, the consolidated financial statements reflect the Venezuela operations as a controlled
subsidiary. The Company will continue to monitor developments in Venezuela to assess if government restrictions and exchange
rate controls evolve such that the Company no longer has effective control of business operations.
In late 2015, the Company decided to wind down its business in Venezuela due to inability of collecting payments on its receivables
from certain customers in Venezuela, the difficulties in obtaining local currency and the increased economic uncertainty in that
country. In the fourth quarter of fiscal 2015 in connection with the decision to wind down the business in Venezuela, the Company
wrote off net assets of $12.8 million.
Use of Estimates
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States (“U.S. 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.
Acquisitions
The Company recognizes assets acquired, liabilities assumed, contractual contingencies and contingent consideration at their fair
value on the acquisition date. The operating results of the acquired companies are included in the Company’s consolidated financial
statements from the date of acquisition.
43
Acquisition-related costs are expensed as incurred, restructuring costs are recognized as post-acquisition expense and changes in
deferred tax asset valuation allowances and income tax uncertainties after the measurement period are recorded in income tax
expense.
Revenue Recognition
The Company generally recognizes revenue upon transfer of title, which generally occurs upon shipment of the product to the
customer. The pricing of products sold is generally supported by customer purchase orders, and accounts receivable collection is
reasonably assured at the time of shipment. Estimated discounts and rebates are recorded as a reduction of gross sales in the same
period revenue is recognized. Product returns and credits are estimated and recorded at the time of shipment based upon historical
experience. Shipping and handling costs are recorded as revenue when billed to the customers. The costs incurred from shipping
are recorded in Cost of Sales and handling costs incurred in connection with selling and distribution activities are recorded in
Operating Expenses.
The Company has certain operating leases in the oil and gas industry where revenue is recognized over the term of the lease. The
lease revenue is not material for all fiscal periods presented. The related net leased assets were not material at January 2, 2016 or
January 3, 2015 and were included in Other Noncurrent Assets.
The Company derives a significant portion of its revenues from several original equipment manufacturing customers. Despite this
relative concentration, there were no customers that accounted for more than 10% of consolidated net sales in fiscal 2015, fiscal
2014 or fiscal 2013.
Research and Development
The Company performs research and development activities relating to new product development and the improvement of current
products. The Company's research and development expenses consist primarily of costs for: (i) salaries and related personnel
expenses; (ii) the design and development of new energy efficient products and enhancements; (iii) quality assurance and testing;
and (iv) other related overhead. The Company's research and development efforts tend to be targeted toward developing new
products that would allow it to gain additional market share, whether in new or existing segments. While these costs make up an
insignificant portion of operating expenses in the Power Transmission Solutions segment, they are more substantial in the Climate
Solutions and Commercial and Industrial Systems segments. In particular, a large driver of research and development efforts in the
Climate Solutions and Commercial and Industrial Systems segments is energy efficiency.
Research and development costs are expensed as incurred. For fiscal 2015, 2014 and 2013, research and development costs were
$30.1 million, $32.9 million and $28.3 million, respectively. Research and development costs are recorded in Operating Expenses.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments which are readily convertible to cash, present insignificant risk of changes in
value due to interest rate fluctuations and have original or purchased maturities of three months or less.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash
equivalents. The Company has material deposits with a global financial institution. It performs periodic evaluations of the relative
credit standing of its financial institutions and monitors the amount of exposure.
Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers and their
dispersion across many geographic areas. The Company monitors credit risk associated with its trade receivables.
Investments
Investments include term deposits which have original maturities of greater than three months and remaining maturities of less than
one year. The fair value of term deposits approximates their carrying value. These investments are included in Prepaid Expenses
and Other Current Assets on the Company's Consolidated Balance Sheets.
Trade Receivables
Trade receivables are stated at estimated net realizable value. Trade receivables are comprised of balances due from customers, net
of estimated allowances. In estimating losses inherent in trade receivables the Company uses historical loss experiences and applies
them to a related aging analysis. Determination of the proper level of allowances requires management to exercise significant
judgment about the timing, frequency and severity of losses. The allowances for doubtful accounts take into consideration numerous
quantitative and qualitative factors, including historical loss experience, collection experience, delinquency trends and economic
conditions.
44
In circumstances where the Company is aware of a specific customer's inability to meet its obligation, a specific reserve is recorded
against amounts receivable to reduce the net recognized receivable to the amount reasonably expected to be collected. Additions to
the allowances for doubtful accounts are maintained through adjustments to the provision for doubtful accounts, which are charged
to current period earnings; amounts determined to be uncollectable are charged directly against the allowances, while amounts
recovered on previously charged-off accounts benefit current period earnings.
Inventories
The approximate percentage distribution between major classes of inventory at year end is as follows:
Raw Material and Work In Process
Finished Goods and Purchased Parts
January 2, 2016
January 3, 2015
45%
55%
45%
55%
Inventories are stated at cost, which is not in excess of market. Cost for approximately 42% of the Company's inventory at January 2,
2016 and 52% at January 3, 2015 was determined using the LIFO method. If all inventories were valued on the FIFO method, they
would have increased by $28.0 million and $47.2 million as of January 2, 2016 and January 3, 2015, respectively. Material, labor
and factory overhead costs are included in the inventories.
The Company reviews inventories for excess and obsolete products or components. Based on an analysis of historical usage and
management's evaluation of estimated future demand, market conditions and alternative uses for possible excess or obsolete parts,
the Company records an excess and obsolete reserve.
Intangible Assets
Intangible assets with finite lives are amortized over their estimated useful lives using the straight line method.
The Company evaluates amortizing intangibles whenever events or circumstances have occurred that may indicate that carrying
values may not be recoverable. If an indicator is present, the Company evaluates carrying values as compared to undiscounted
estimated future cash flows. If such estimated future cash flows are less than carrying value, an impairment would be recognized.
See also "Long-Lived Assets" in this footnote for the results and additional details of the impairment of certain long-lived assets
and related charges in fiscal 2014.
Indefinite-lived intangible assets consist of trade names associated with the acquired Power Transmission Solutions business.
They were evaluated for impairment as of November 7, 2015 using a relief from royalty method to determine whether their fair
values exceed their respective carrying amounts. The Company determined the fair value of these assets using a royalty relief
methodology similar to that employed when the associated assets were acquired, but using updated estimates of future sales, cash
flows and profitability. For 2015, the fair value of indefinite lived intangible assets exceeded their respective carrying value.
Property, Plant and Equipment
Property, Plant and Equipment are stated at cost. Depreciation of plant and equipment is provided principally on a straight-line
basis over the estimated useful lives (3 to 50 years) of the depreciable assets. Accelerated methods are used for income tax
purposes.
Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures which extend the useful lives of
existing equipment are capitalized and depreciated.
Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized. Leasehold improvements are capitalized and amortized over the lesser of
the life of the lease or the estimated useful life of the asset.
The Company evaluates property, plant and equipment whenever events or circumstances have occurred that may indicate that
carrying values may not be recoverable. If an indicator is present, the Company evaluates carrying values as compared to
undiscounted estimated future cash flows. If such estimated future cash flows are less than carrying value, an impairment would
be recognized. See also "Long-Lived Assets" in this footnote for the results and additional details of the impairment of certain
long-lived assets and related charges in fiscal 2014.
45
Property, plant and equipment by major classification was as follows (in millions):
Land and Improvements
Buildings and Improvements
Machinery and Equipment
Property, Plant and Equipment
Less: Accumulated Depreciation
Net Property, Plant and Equipment
Useful Life (In Years)
January 2,
2016
January 3,
2015
3-50
3-15
$
$
80.7 $
276.9
926.7
1,284.3
(605.8)
678.5 $
68.8
235.4
812.1
1,116.3
(584.8)
531.5
Commitments for property, plant and equipment purchases were $9.7 million at January 2, 2016.
Goodwill
The Company evaluates the carrying amount of goodwill annually or more frequently if events or circumstances indicate that the
goodwill might be impaired. Factors that could trigger an impairment review include significant underperformance relative to
historical or forecasted operating results, a significant decrease in the market value of an asset or significant negative industry or
economic trends. The Company performs the required annual goodwill impairment test as of the end of the October fiscal month.
The Company uses a weighting of the market approach and the income approach (discounted cash flow method) in testing goodwill
for impairment. In the market approach, the Company applies performance multiples from comparable public companies, adjusted
for relative risk, profitability, and growth considerations, to the reporting units to estimate fair value. The key assumptions used in
the discounted cash flow method used to estimate fair value include discount rates, revenue and operating income projections and
terminal value rates because such assumptions are the most sensitive and susceptible to change as they require significant
management judgment. Discount rates are determined by using a weighted average cost of capital (“WACC”). The WACC
considers market and industry data as well as Company-specific risk factors for each reporting unit in determining the appropriate
discount rate to be used. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to
receive for investing in such a business. Terminal value rate determination follows common methodology of capturing the present
value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and long-term growth rates.
The calculated fair values for the Company's 2015 impairment testing exceeded the carrying values of the reporting units for a
majority of the Company's reporting units. There were certain reporting units where the calculated fair values were less than the
carrying values. The Commercial and Industrial Systems segment includes reporting units that have significant exposure to the
volatility in the oil and gas industry. Crude oil prices remained depressed throughout 2015 with pronounced declines in the fourth
quarter of 2015 and into 2016. Expected cash flows were also negatively impacted by lower gas and oil prices as lower prices
decreased the capital spending of customers these reporting units serve. Weak economic conditions in China have contributed to
the reduced expected cash flows for one of the reporting units in this region. An implied goodwill amount was calculated as a
required second step in the testing, using the estimated fair value of all assets and liabilities of the reporting unit as if the unit had
been acquired in a business combination. The resulting implied fair value of goodwill is a Level 3 asset measured at fair value on a
non-recurring basis (see also Note 14 of the Notes to the Consolidated Financial Statements for fair value definitions). The total
goodwill impairment charge related to these reporting units was $79.9 million and was recorded in Goodwill Impairment within
the Consolidated Statements of Income.
The calculated fair values for the Company’s 2014 impairment testing exceeded the carrying values of the reporting units for a
majority of the Company's reporting units. There were certain reporting units where the calculated fair values were less than the
carrying values. The Commercial and Industrial Systems segment and the Power Transmission Solutions segment include reporting
units that have significant exposure to the volatility in the oil and gas industry. Crude oil prices saw a sharp decline in the latter
part of 2014. Expected cash flows were also negatively impacted by lower gas and oil prices as lower prices decreased the capital
spending of customers these reporting units serve. Weak economic conditions in regions such as Australia and New Zealand as well
as currency devaluations in Venezuela have contributed to the reduced expected cash flows for our reporting units in these regions.
In the Climate Solutions segment, unfavorable customer dynamics impacted one reporting unit's expected cash flows. An implied
goodwill amount was then calculated as a required second step in the testing, using the estimated fair value of all assets and liabilities
of the reporting unit as if the unit had been acquired in a business combination. The resulting implied fair value of goodwill is a
Level 3 asset measured at fair value on a non-recurring basis (see also Note 14 of the Notes to the Consolidated Financial Statements
for fair value definitions). Additionally, the Company’s reporting unit related to technology that had been deemed substantially
impaired during the fourth quarter of 2013 was deemed fully impaired during 2014 as a result of the closing of the facility. This
resulted in a $1.0 million impairment charge to goodwill. The total goodwill impairment charge related to these reporting units was
$119.5 million and was recorded in Goodwill Impairment within the Consolidated Statements of Income.
46
The calculated fair values for the Company's 2013 impairment testing exceeded the carrying values of the reporting units for a
majority of the Company's reporting units. There were certain reporting units where the calculated fair values were less than the
carrying values. Reporting units within the Commercial and Industrial Systems and Climate Solutions segments experienced
declines in sales and profitability that were more pronounced in the latter part of fiscal 2013, combined with reduced expected cash
flow from weak economic conditions in regions such as Australia, India and Europe. Another reporting unit had reduced future cash
flows from a slower than expected adoption of switched reluctance motor technology. In the Power Transmission Solutions segment,
a reporting unit's expected cash flows were reduced by weak sales for the hydraulic fracturing market within the oil and gas industry.
An implied goodwill amount was then calculated as a required second step in the testing, using the estimated fair value of all assets
and liabilities of the reporting unit as if the unit had been acquired in a business combination. The resulting implied fair value of
goodwill is a Level 3 asset measured at fair value on a non-recurring basis (see also Note 14 of the Notes to the Consolidated
Financial Statements for fair value definitions). The total goodwill impairment charge related to these reporting units was $76.3
million and was recorded in Goodwill Impairment within the Consolidated Statements of Income.
Long-Lived Assets
The Company evaluates the recoverability of the carrying amount of property, plant and equipment and amortizing intangible assets
(collectively, "long-lived assets") whenever events or changes in circumstance indicate that the carrying amount of an asset may
not be fully recoverable through future cash flows. Factors that could trigger an impairment review include a significant decrease
in the market value of an asset or significant negative or economic trends. For long-lived assets, the Company uses an estimate of
the related undiscounted cash flows over the remaining life of the primary asset to estimate recoverability of the asset group. If the
asset is not recoverable, the asset is written down to fair value.
During 2015, due primarily to the continued decline in crude oil prices that was more pronounced in the fourth quarter of 2015 as
well as weak economic conditions in China, indicators related to the future expected cash flows triggered an undiscounted cash
flow test of long-lived assets for certain asset groups. The undiscounted cash flows of each asset group tested exceeded its respective
carrying value. As a result, no impairment was indicated.
During 2014, due primarily to unfavorable customer dynamics and the effects of the sharp decline in the price of oil, the carrying
amounts of intangible and other long-lived assets for two reporting units within the Climate Solutions and Power Transmission
Solutions segments were deemed to be not fully recoverable. Fair value was determined using the discounted cash flows from the
Company's internal cash flow projections and a discount rate indicative of the return an investor would expect to receive for
investing in the asset which are Level 3 measurements. As a result, intangible and other long-lived asset impairments of $26.2
million were recognized related to hydraulic fracturing equipment used in the oil and gas end markets. Technology and other long-
lived asset impairments were recognized related to products used in hermetic climate applications of $13.8 million. Such
impairments were recognized in Asset Impairments and Other, Net.
During 2013 indicators related to the future expected cash flows of certain reporting units in the Commercial and Industrial Systems
segment triggered a detailed undiscounted cash flow test of long-lived assets, which included intangible assets. Discounted cash
flows were determined as discussed above, which are Level 3 measurements. As a result, in-process research and development
technology intangible impairments totaling $16.2 million, related to switched reluctance technology, and $0.8 million of customer
relationship intangible impairments related to a European motor distribution reporting unit were impaired and recognized in Asset
Impairments and Other, Net.
During the year ended December 28, 2013, the Company recognized a loss on certain intangible asset impairments as discussed
above, which was netted with a related gain of $12.3 million from a fair value adjustment for a contingent consideration liability
related to one of the reporting units (see Note 14 of Notes to the Consolidated Financial Statements).
47
The details were as follows (in millions):
Impairments during 2014:
Impairment of Intangible Assets
Impairment of Property, Plant and Equipment
Asset Impairments and Other, Net
Impairments during 2013:
Impairment of Technology Intangible Assets
Impairment of Customer Relationships Intangible
Assets
Less: Gain from Adjustment to the Fair Value of a
Contingent Consideration Liability
Asset Impairments and Other, Net
$
$
$
$
Earnings per Share (“EPS”)
Commercial
& Industrial
Systems
Climate
Solutions
Power
Transmission
Solutions
Total
— $
—
— $
16.2 $
0.8
12.3
4.7 $
7.8 $
6.0
13.8 $
— $
—
—
— $
11.1 $
15.1
26.2 $
— $
—
—
— $
18.9
21.1
40.0
16.2
0.8
12.3
4.7
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 these shares were 0.7 million in 2015, 0.3 million in 2014 and 0.7 million in 2013. The following table
reconciles the basic and diluted shares used in EPS calculations for the years ended (in millions):
Denominator for Basic EPS
Effect of Dilutive Securities
Denominator for Diluted EPS
Retirement and Post Retirement Plans
2015
2014
2013
44.7
0.4
45.1
45.0
0.3
45.3
45.0
0.4
45.4
The Company's domestic employees are covered by defined contribution plans and approximately half of the Company's employees
are covered by defined benefit plans. The defined benefit pension plans have been closed to new employees and frozen for existing
employees. Most of the Company's foreign employees are covered by government sponsored plans in the countries in which they
are employed. The Company's obligations under its defined benefit pension and other post retirement plans are determined with
the assistance of actuarial firms. The actuaries, under management's direction, make certain assumptions regarding such factors as
withdrawal rates and mortality rates. The actuaries also provide information and recommendations from which management makes
further assumptions on such factors as the long-term expected rate of return on plan assets, the discount rate on benefit obligations
and where applicable, the rate of annual compensation increases and health care cost trend rates.
Based upon the assumptions made, the investments made by the plans, overall conditions and movement in financial markets, life-
spans of benefit recipients and other factors, annual expenses and recorded assets or liabilities of these defined benefit pension plans
may change significantly from year to year.
Derivative Financial Instruments
Derivative instruments are recorded on the Consolidated Balance Sheets at fair value. Any fair value changes are recorded in Net
Income or Accumulated Other Comprehensive Loss as determined under accounting guidance that establishes criteria for
designation and effectiveness of the hedging relationships.
The Company uses derivative instruments to manage its exposure to fluctuations in certain raw material commodity pricing,
fluctuations in the cost of forecasted foreign currency transactions, and variability in interest rate exposure on floating rate
borrowings. The majority of derivative instruments have been designated as cash flow hedges (see also Note 13 of Notes to the
Consolidated Financial Statements).
48
Income Taxes
The Company operates in numerous taxing jurisdictions and is subject to regular examinations by various U.S. Federal, state and
foreign jurisdictions for various tax periods. Its income tax positions are based on research and interpretations of the income tax
laws and rulings in each of the jurisdictions in which it does business. Due to the subjectivity of interpretations of laws and rulings
in each jurisdiction, the differences and interplay in tax laws between those jurisdictions as well as the inherent uncertainty in
estimating the final resolution of complex tax audit matters, estimates of income tax liabilities may differ from actual payments or
assessments.
Foreign Currency Translation
For those operations using a functional currency other than the U.S. dollar, assets and liabilities are translated into U.S. dollars at
year-end exchange rates, and revenues and expenses are translated at weighted-average exchange rates. The resulting translation
adjustments are recorded as a separate component of Shareholders' Equity. Pursuant to accounting rules guiding highly inflationary
currency, the Company does not translate its Venezuelan subsidiary's financial statements as its functional currency is the U.S.
dollar.
Product Warranty Reserves
The Company maintains reserves for product warranty to cover the stated warranty periods for its products. Such reserves are
established based on an evaluation of historical warranty experience and specific significant warranty matters when they become
known and can reasonably be estimated.
Accumulated Other Comprehensive Loss
Foreign currency translation adjustments, unrealized gains and losses on derivative instruments designated as hedges and pension
liability adjustments are included in Shareholders' Equity under Accumulated Other Comprehensive Loss.
The components of the ending balances of Accumulated Other Comprehensive Loss ("AOCI") are as follows (in millions):
Foreign Currency Translation Adjustments
Hedging Activities, net of tax of $(29.1) in 2015 and $(19.0) in 2014
Pension and Post Retirement Benefits, net of tax of $(19.8) in 2015 and $(23.4) in 2014
Total
2015
2014
$
$
(172.1) $
(47.5)
(35.4)
(255.0) $
(80.5)
(31.0)
(39.5)
(151.0)
Legal Claims
The Company records expenses and liabilities when the Company believes that an obligation of the Company or a subsidiary on a
specific matter is probable and there is a basis to reasonably estimate the value of the obligation. This methodology is used for legal
claims that are filed against the Company or a subsidiary from time to time. The uncertainty that is associated with such matters
frequently requires adjustments to the liabilities previously recorded.
Fair Values of Financial Instruments
The fair values of cash equivalents and term deposits approximate their carrying values 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. The fair value of debt is estimated using discounted cash flows based on rates for
instruments with comparable maturities and credit ratings as further described in Note 7 of Notes to the Consolidated Financial
Statements. The fair value of pension assets, derivative instruments and contingent purchase price obligations is determined based
on the methods disclosed in Notes 8 and 14 of Notes to the Consolidated Financial Statements.
Recent Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-
17, Balance Sheet Classification of Deferred Taxes. This ASU requires deferred tax liabilities and assets to be classified as
noncurrent in the consolidated financial statements instead of separating deferred taxes into current and noncurrent amounts. ASU
2015-17 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, and early
adoption is permitted. The Company adopted ASU 2015-17 retrospectively as of October 4, 2015. The Consolidated Balance Sheet
as of January 3, 2015 has been recast to conform to the provisions of ASU 2015-17 and current Deferred Income Tax Benefits of
$67.0 million were reclassified to non-current Deferred Income Tax Benefits and non-current Deferred Income Taxes.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments to simplify
the accounting for measurement-period adjustments. This ASU was issued in response to stakeholder feedback that restatements of
49
prior periods to reflect adjustments made to provisional amounts recognized in a business combination increase the cost and
complexity of financial reporting but do not significantly improve the usefulness of the information. Under the ASU, in a business
combination, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in
the reporting period in which the adjustment amounts are determined. The ASU also requires acquirers to present separately on the
face of the income statement, or disclose in the notes, the portion of the amount recorded in current period earnings by line item
that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as
of the acquisition date. The Company is required to apply these new requirements prospectively for fiscal years beginning after
December 15, 2015, including interim periods therein. The Company is currently evaluating the impact of the new requirements to
its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. Under this ASU, companies are required
to measure inventory using the lower of cost and net realizable value, which is defined as the estimated selling price in the normal
course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU impacts companies who
use the first-in, first-out method (FIFO), the average costing method, or methods of inventory measurement other than the last-in,
first-out (LIFO) and retail inventory methods, which have been excluded from the scope of this ASU due to the substantial cost and
burden of transitioning these methods. The Company is required to apply these new requirements prospectively for fiscal years
beginning after December 15, 2016, including the interim periods therein. The adoption of this standard is not expected to have a
material impact on the Company's consolidated financial statements.
In May 2015, the FASB issued ASU 2015-07, Disclosures for Investment in Certain Entities That Calculate Net Asset Value per
Share ("NAV") (or its Equivalent). This ASU removes from the fair value hierarchy investments for which the practical expedient is
used to measure fair value at NAV. Instead, an entity is required to include those investments as a reconciling line item so that the
total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. Further, entities must
provide the disclosure only for investments for which they elect to use the NAV practical expedient to determine fair value. This
ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early
adoption is permitted. The ASU should be applied retrospectively to all periods presented. The adoption of this standard is not
expected to have a material impact on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU 2015-04, Practical Expedient for the Measurement Date of an Employer's Defined Benefit
Obligation and Plan Assets, which permits a reporting entity with a fiscal year-end that does not coincide with a month-end to
measure defined benefit plan assets and obligations using the month-end that is closest to the entity's fiscal year-end and apply that
practical expedient consistently from year to year. The standard is effective for fiscal years beginning after December 15, 2015, and
interim periods within those fiscal years. Early adoption is permitted. The new guidance should be applied on a prospective basis.
The Company adopted this ASU on a prospective basis as of and for the year-ended January 2, 2016. The adoption of this ASU did
not have a material impact on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU 2015-
03 require that debt issuance cost related to a recognized debt liability be presented in the balance sheet as a direct deduction from
the carrying amount of that debt. ASU 2015-03 is effective for the Company on January 3, 2016, with early adoption permitted.
The Company adopted ASU 2015-03 on a retrospective basis as of and for the year-ended January 2, 2016. The adoption of this
standard resulted in a $1.3 million reduction of Total Assets which reduced outstanding debt on the January 3, 2015 Consolidated
Balance Sheet.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, a comprehensive new revenue recognition
standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. 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. In doing so, the Company will need to use more judgment and make more estimates than
under today’s guidance. Such estimates include identifying performance obligations in the contracts, estimating the amount of
variable consideration to include in the transaction price and allocating the transaction price to each separate performance
obligation. The Company can either apply a full retrospective adoption or a modified retrospective adoption. The Company is
required to adopt the new requirements in the first quarter of fiscal 2018. The Company is currently evaluating the impact of the
new requirements to its consolidated financial statements.
(4) Acquisitions and Divestitures
The results of operations for acquired businesses are included in the Consolidated Financial Statements from the dates of acquisition.
Acquisition-related expenses were $9.1 million during 2015, $5.8 million during 2014 and $3.9 million during 2013.
2015 Acquisitions
PTS
On January 30, 2015, the Company acquired the Power Transmission Solutions business of Emerson Electric Co. ("PTS") for
$1,408.9 million in cash through a combination of stock and asset purchases. PTS is a global leader in highly engineered power
transmission products and solutions. The business manufactures, sells and services bearings, couplings, gearing, drive components
50
and conveyor systems. PTS is included in the Power Transmission Solutions segment. The Company acquired PTS because
management believes it diversifies the Company's end market exposure, provides complementary products, expands and balances
the Company's product portfolio, and enhances its margin profile.
On January 30, 2015, the Company entered into a Credit Agreement for a 5-year unsecured term loan facility in the principal amount
of $1.25 billion, which was drawn in full by the Company on January 30, 2015, in connection with the closing of the acquisition of
PTS (see also Note 7 of Notes to the Consolidated Financial Statements).
The acquisition of PTS was accounted for as a purchase in accordance with FASB Accounting Standards Codification ("ASC")
Topic 805, Business Combinations. Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition
date. The fair values of identifiable intangible assets, which were primarily customer relationships, trade names, and technology,
were based on valuations using the income approach. The excess of the purchase price over the estimated fair values of tangible
assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The goodwill is attributable to expected
synergies and expected growth opportunities. The Company estimates approximately 65% of goodwill will be deductible for United
States income tax purposes. The allocation of purchase price is preliminary as the Company has not completed its analysis
estimating certain contingent and environmental liabilities.
The preliminary purchase price allocation for PTS was as follows (in millions):
Current assets
Trade receivables
Inventories
Property, plant and equipment
Intangible assets
Goodwill
Total assets acquired
Accounts payable
Current liabilities assumed
Long-term liabilities assumed
Net assets acquired
As of January 30, 2015
20.3
69.4
108.8
184.4
648.2
564.6
1,595.7
57.2
31.6
98.0
1,408.9
$
$
The valuation of the net assets acquired of $1,408.9 million was classified as Level 3 in the valuation hierarchy (Note 14 of the
Notes to the Consolidated Financial Statements for the definition of Level 3 inputs). The Company valued property, plant and
equipment using both a market approach and a cost approach depending on the asset. Intangible assets were valued using the present
value of projected future cash flows and significant assumptions included royalty rates, discount rates, customer attrition and
obsolescence factors.
The components of Intangible Assets included as part of the PTS acquisition was as follows (in millions):
Amortizable intangible assets
Customer Relationships
Technology
Intangible assets subject to amortization
Non-amortizable intangible assets
Trade Names
Intangible assets
Weighted Average
Amortization Period (Years) Gross Value
17.0
14.5
16.7
-
$
$
462.8
63.5
526.3
121.9
648.2
Net sales from PTS were $512.9 million for the year ended January 2, 2016. Operating income from PTS was $14.5 million for the
year ended January 2, 2016. Purchase accounting inventory adjustments and transaction costs of $29.8 million were included in the
PTS operating income for the year ended January 2, 2016.
2014 Acquisitions
Benshaw
On June 30, 2014, the Company acquired all of the stock of Benshaw. Inc. ("Benshaw") for $51.0 million in cash. The Company
financed the transaction with existing cash. Benshaw is a manufacturer of custom low and medium voltage variable frequency
drives and soft starters. It is reported in the Commercial and Industrial Systems segment. The Company acquired Benshaw because
management determined it was a strategic fit for the Commercial and Industrial Systems segment.
The acquisition of Benshaw was accounted for as a purchase in accordance with FASB ASC Topic 805, Business Combinations.
Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The fair values of identifiable
51
intangible assets, which were primarily customer relationships and technology, were based on valuations using the income approach.
The excess of the purchase price over the estimated fair values of tangible assets, identifiable intangible assets and assumed
liabilities was recorded as goodwill. The goodwill is attributable to expected synergies and expected growth opportunities. The
Company expects goodwill will be deductible for U.S. income tax purposes.
The purchase price allocation for Benshaw was as follows (in millions):
Current assets
Trade receivables
Inventories
Property, plant and equipment
Intangible assets, subject to amortization
Goodwill
Total assets acquired
Accounts payable
Current liabilities assumed
Long-term liabilities assumed
Net assets acquired
Hy-Bon
As of June 30, 2014
0.5
10.4
22.4
4.5
14.6
4.7
57.1
3.7
2.2
0.2
51.0
$
$
On February 7, 2014, the Company acquired the stock of Hy-Bon Engineering Company, Inc. ("Hy-Bon") for $78.0 million in cash.
The Company financed the transaction with existing cash. Hy-Bon is a leader in vapor recovery solutions for oil and gas
applications. It is reported in the Commercial and Industrial Systems segment. The Company acquired Hy-Bon because
management determined it was a strategic fit for the Commercial and Industrial Systems segment.
The acquisition of Hy-Bon was accounted for as a purchase in accordance with the FASB ASC Topic 805, Business Combinations.
Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The fair values of identifiable
intangible assets, which were primarily customer relationships, were based on valuations using the income approach. The excess
of the purchase price over the estimated fair values of tangible assets, identifiable intangible assets and assumed liabilities was
recorded as goodwill. The goodwill is attributable to expected synergies and other growth opportunities. The Company does not
expect goodwill will be deductible for U.S. income tax purposes.
The purchase price allocation for Hy-Bon was as follows (in millions):
As of February 7, 2014
Current assets
Trade receivables
Inventories
Property, plant and equipment
Intangible assets, subject to amortization
Goodwill
Other assets
Total assets acquired
Accounts payable
Current liabilities assumed
Long-term liabilities assumed
Net assets acquired
2013 Acquisitions
Cemp s.r.l.
$
$
1.7
11.5
14.3
8.1
13.4
40.6
0.1
89.7
5.5
5.1
1.1
78.0
On November 19, 2013, the Company acquired the stock of Cemp s.r.l. ("Cemp"), an Italy based electric motor company for $34.6
million, net of cash. Cemp is a leading designer, manufacturer and marketer of flameproof electric motors, and is reported in the
Commercial and Industrial Systems segment. The Company acquired Cemp because management determined it was a strategic fit
for the Commercial and Industrial Systems segment.
The acquisition of Cemp was accounted for as a purchase in accordance with the FASB ASC Topic 805, Business Combinations.
Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The fair values of identifiable
intangible assets, which were primarily customer relationships, were based on valuations using the income approach. The excess
of the purchase price over the estimated fair values of tangible assets, identifiable intangible assets and assumed liabilities was
52
recorded as goodwill. The goodwill is attributable to expected synergies and other growth opportunities. The Company does not
expect the amount of goodwill be deductible for income tax purposes under current Italian tax law.
The purchase price allocation for Cemp was as follows:
Current assets
Trade receivables
Inventories
Property, plant and equipment
Intangible assets, subject to amortization
Goodwill
Total assets acquired
Accounts payable
Current liabilities assumed
Long-term liabilities assumed
Net assets acquired
RAM
November 19, 2013
3.1
6.6
7.8
3.7
12.6
14.8
48.6
5.5
3.0
5.5
34.6
$
$
On February 8, 2013, the Company acquired the RAM motor business previously owned by Schneider Electric for $6.0 million.
This business manufactures hermetic motors from 250 horsepower to 2,500 horsepower for commercial HVAC applications and is
reported in the Commercial and Industrial Systems segment. The Company acquired RAM because management determined it was
a strategic fit for the Commercial and Industrial Systems segment.
The acquisition of RAM was accounted for as a purchase in accordance with the FASB ASC Topic 805, Business Combinations.
Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The fair values of identifiable
intangible assets, which were primarily customer relationships, were based on valuations using the income approach.
The purchase price allocation for RAM was as follows:
Current assets
Trade receivables
Inventories
Property, plant and equipment
Other assets
Total assets acquired
Accounts payable
Current liabilities assumed
Long-term liabilities assumed
Net assets acquired
Joint Venture
February 8, 2013
1.2
1.9
7.7
2.1
0.1
13.0
1.1
5.4
0.5
6.0
$
$
On September 3, 2013, the Company purchased additional shares owned by the noncontrolling interest in its joint venture in a South
African distribution business increasing its ownership from 60.0% to 80.0% for $1.7 million. The Company consolidates the results
of the South African distribution business into the Company's consolidated financial statements in the Commercial and Industrial
Systems segment and presents the portion of its investment not owned by the Company as noncontrolling interest. The
noncontrolling interest in the South African distribution business was reduced to 20.0% as of September 3, 2013.
Unaudited Pro Forma Consolidated Financial Information
The following unaudited pro forma financial information presents the financial results for the fiscal years 2015 and 2014 as if the
acquisition of PTS had occurred on December 29, 2013. As a practical expedient, the Company has used the audited stand-alone
financial statements of PTS for the year ended September 30, 2014 to estimate pro-forma results for the year ended January 3, 2015.
The pro forma financial information includes, where applicable, adjustments for: (i) the estimated amortization of acquired
intangible assets, (ii) estimated additional interest expense on acquisition related borrowings, and (iii) the income tax effect on the
pro forma adjustments using an estimated effective tax rate. The pro forma financial information excludes, where applicable,
adjustments for: (i) the estimated impact of inventory purchase accounting adjustments and (ii) the estimated closing costs on the
acquisition and (iii) any estimated cost synergies or other effects of the integration of the acquisition. The pro forma financial
information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been
achieved had the acquisition been completed as of the date indicated or the results that may be obtained in the future (in millions,
except per share amounts):
53
Pro forma net sales
Pro forma net income attributable to the Company
Basic earnings per share as reported
Pro forma basic earnings per share
Diluted earnings per share as reported
Pro forma diluted earnings per share
$
$
$
Fiscal 2015
Fiscal 2014
3,864.4
63.1
3,558.3 $
174.8
3.21 $
3.91
3.18 $
3.88
0.69
1.40
0.69
1.39
The following unaudited pro forma financial information presents the financial results for the fiscal years 2014 and 2013. Presented
are the financial results for 2014 and 2013 as if the acquisitions of Benshaw, Hy-Bon, Cemp and RAM had occurred on December
30, 2012. The pro forma financial information includes, where applicable, adjustments for: (i) the estimated amortization of acquired
intangible assets, (ii) estimated additional interest expense on acquisition related borrowings, and (iii) the income tax effect on the
pro forma adjustments using an estimated effective tax rate. The pro forma financial information excludes, where applicable,
adjustments for: (i) the estimated impact of inventory purchase accounting adjustments and (ii) the estimated closing costs on the
acquisition and (iii) any estimated cost synergies or other effects of the integration of the acquisition. The pro forma financial
information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been
achieved had the acquisitions been completed as of the date indicated or the results that may be obtained in the future (in millions,
except per share amounts):
Pro forma net sales
Pro forma net income attributable to the Company
Basic earnings per share as reported
Pro forma basic earnings per share
Diluted earnings per share as reported
Pro forma diluted earnings per share
Divestitures
$
$
$
Fiscal 2014
3,291.2 $
28.8
Fiscal 2013
3,240.4
123.8
0.69 $
0.64
0.69 $
0.64
2.66
2.75
2.64
2.73
The Company sold its shares of a joint venture located in Shanghai, China ("Jinling") on September 11, 2014 which was previously
accounted for as a consolidated joint venture and was reported in the Commercial and Industrial Systems segment. The disposal of
Jinling was determined to not qualify for presentation as discontinued operations in the Company's Condensed Consolidated
Financial Statements, in accordance with ASU 2014-08. A loss of approximately $1.9 million was recorded in Operating Expenses
in the Condensed Consolidated Statements of Income in fiscal 2014.
(5) Goodwill and Intangible Assets
Goodwill
As described in Note 3 of Notes to the Consolidated Financial Statements, the Company evaluates the carrying amount of goodwill
annually or more frequently if events or circumstances indicate that the goodwill might be impaired. As a result of the annual
review, there were certain reporting units where the carrying value, exceeded fair value. See Note 3 of Notes to the Consolidated
Financial Statements, "Goodwill" and "Long-Lived Assets" for additional details of the impairments.
The Commercial and Industrial Systems segment includes reporting units that have significant exposure to the volatility in the oil
and gas industry. Crude oil prices remained depressed throughout 2015 with pronounced declines in the fourth quarter of 2015 and
into 2016. Expected cash flows were also negatively impacted by lower gas and oil prices as lower prices decreased the capital
spending of customers these reporting units serve. Weak economic conditions in China have contributed to the reduced expected
cash flows for one of our reporting units in this region.
The Commercial and Industrial Systems segment and the Power Transmission Solutions segment include reporting units that have
significant exposure to the volatility in the oil and gas industry. These markets saw a sharp decline in the latter part of 2014, leading
to declines in sales and profitability and thereby reducing expected cash flows. Expected cash flows were also negatively impacted
by lower gas and oil prices as lower prices decreased the capital spending of customers these reporting units serve. Weak economic
conditions in regions such as Australia and New Zealand as well as currency devaluations in Venezuela have contributed to the
reduced expected cash flows for the Company's reporting units in these regions. In the Climate Solutions segment, unfavorable
customer dynamics impacted one reporting unit's expected cash flows. Additionally, the Company's reporting unit related to
technology that had been deemed substantially impaired during the fourth quarter of 2013 was deemed fully impaired during 2014
as a result of the closing of the facility.
54
The following table presents changes to goodwill during the periods indicated (in millions):
Commercial
and
Industrial
Systems
Climate
Solutions
Power
Transmission
Solutions
Total
1,081.9 $
54.5
119.5
(12.9)
1,004.0 $
559.4
79.9
(17.9)
1,465.6 $
703.2 $
54.5
100.7
(11.6)
645.4 $
(5.2)
79.9
(12.6)
547.7 $
275.7 $
244.8 $
353.6 $
—
7.7
(1.3)
344.6 $
—
—
(1.8)
342.8 $
7.7 $
25.1
—
11.1
—
14.0
564.6
—
(3.5)
575.1
23.2
Balance as of December 28, 2013
Acquisitions and valuation adjustments
Less: Impairment charges
Translation adjustments
Balance as of January 3, 2015
Acquisitions and valuation adjustments
Less: Impairment charges
Translation adjustments
Balance as of January 2, 2016
Cumulative goodwill impairment charges
$
$
$
$
Intangible Assets
Gross intangible assets consist of the following (in millions):
Customer Relationships
Technology
Trademarks
Patent and Engineering Drawings
Non-compete Agreements
Non-amortizable Trade Names
Total Gross Intangibles
Weighted Average
Amortization
Period (Years)
15
11
12
5
5
January 3,
2015
Acquisitions
Translation
Adjustments
January 2,
2016
$
$
256.8 $
129.4
33.1
16.6
8.6
444.5
—
444.5 $
462.8 $
63.5
—
—
—
526.3
121.9
648.2 $
(10.6) $
(1.8)
(1.0)
—
(0.1)
(13.5)
(0.6)
(14.1) $
709.0
191.1
32.1
16.6
8.5
957.3
121.3
1,078.6
Accumulated amortization on intangible assets consists of the following:
January 3, 2015
$
Amortization
Translation
Adjustments
Customer Relationships
Technology
Trademarks
Patent and Engineering Drawings
Non-compete Agreements
Total Accumulated Amortization
Intangible Assets, Net of Amortization
$
$
122.6 $
74.9
20.1
16.6
8.0
242.2 $
202.3
42.2 $
19.0
2.4
—
0.3
63.9 $
January 2, 2016
161.4
92.9
21.8
16.6
8.1
300.8
777.8
(3.4) $
(1.0)
(0.7)
—
(0.2)
(5.3) $
$
The Company's contractual customer relationships are generally short-term in nature. Useful lives are established at acquisition
based on historical attrition rates.
Amortization expense was $63.9 million in fiscal 2015, $46.7 million in fiscal 2014 and $44.1 million in fiscal 2013.
The following table presents estimated future amortization expense (in millions):
Year
2016
2017
2018
2019
2020
Estimated Amortization
$
61.1
54.7
52.9
52.4
49.8
55
(6) Segment Information
The following sets forth certain financial information attributable to the Company's reporting segments for fiscal 2015, fiscal 2014
and fiscal 2013, respectively (in millions):
Commercial
and Industrial
Systems
Climate
Solutions
Power
Transmission
Solutions
Eliminations
Total
$
$
$
Fiscal 2015
External sales
Intersegment sales
Total sales
Gross profit
Operating expenses
Goodwill impairment
Income from operations
Depreciation and amortization
Capital expenditures
Identifiable assets
Fiscal 2014
External sales
Intersegment sales
Total sales
Gross profit
Operating expenses
Goodwill impairment
Asset impairments and other, net
Income (loss) from operations
Depreciation and amortization
Capital expenditures
Identifiable assets
Fiscal 2013
External sales
Intersegment sales
Total sales
Gross profit
Operating expenses
Goodwill impairment
Asset impairments and other, net
Income from operations
Depreciation and amortization
Capital expenditures
Identifiable assets
1,694.9 $
71.2
1,766.1
441.1
307.2
79.9
54.0
77.5
52.3
1,959.5
1,856.1 $
78.2
1,934.3
468.2
333.9
100.7
—
33.6
81.5
59.6
2,371.7
1,746.6 $
73.6
1,820.2
461.8
311.1
64.2
4.7
81.8
67.3
56.4
2,591.8
1,041.2 $
24.1
1,065.3
262.2
115.6
—
146.6
28.6
18.5
937.2
1,134.8 $
19.2
1,154.0
258.8
137.7
7.7
13.8
99.6
45.0
16.8
842.6
1,098.6 $
16.6
1,115.2
252.9
143.6
—
—
109.3
49.0
17.9
816.2
773.6 $
4.0
777.6
229.9
177.7
—
52.2
53.3
21.4
1,695.0
266.2 $
5.1
271.3
70.3
44.7
11.1
26.2
(11.7)
12.2
7.2
142.9
250.5 $
5.0
255.5
68.5
39.5
12.1
—
16.9
12.2
8.4
203.3
— $
(99.3)
(99.3)
—
—
—
—
—
—
—
— $
(102.5)
(102.5)
—
—
—
—
—
—
—
—
— $
(95.2)
(95.2)
—
—
—
—
—
—
—
—
3,509.7
—
3,509.7
933.2
600.5
79.9
252.8
159.4
92.2
4,591.7
3,257.1
—
3,257.1
797.3
516.3
119.5
40.0
121.5
138.7
83.6
3,357.2
3,095.7
—
3,095.7
783.2
494.2
76.3
4.7
208.0
128.5
82.7
3,611.3
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.
56
The following sets forth net sales by country in which the Company operates for fiscal 2015, fiscal 2014 and fiscal 2013,
respectively (in millions):
Geographic Information:
United States
Rest of the World
2015
Net Sales
2014
$
$
2,374.3 $
1,135.4
3,509.7 $
2,359.3 $
897.8
3,257.1 $
2013
2,017.6
1,078.1
3,095.7
U.S. net sales for 2015, 2014 and 2013 represented 67.6%, 72.4% and 65.2% of total net sales, respectively. No individual foreign
country represented a material portion of total net sales for any of the years presented.
The following sets forth long-lived assets (net property, plant and equipment) by country in which the Company operates for fiscal
2015 and fiscal 2014, respectively (in millions):
Geographic Information:
United States
Mexico
China
Rest of the World
Long-lived Assets
2015
2014
$
$
339.8 $
114.6
107.9
116.2
678.5 $
293.5
33.5
107.9
96.6
531.5
No other individual foreign country represented a material portion of long-lived assets for any of the years presented.
(7) Debt and Bank Credit Facilities
The Company's indebtedness as of January 2, 2016 and January 3, 2015 was as follows (in millions):
Term Facility
Senior Notes
Multicurrency Revolving Facility
Revolving Credit Facility
Other
Less: Debt Issuance Costs
Less: Current Maturities
Non-current Portion
The New Credit Agreement
January 2,
2016
January 3,
2015
1,118.1 $
600.0
3.0
—
15.5
(14.7)
1,721.9
6.3
1,715.6 $
—
600.0
—
17.0
16.8
(1.3)
632.5
7.8
624.7
$
$
In connection with the PTS Acquisition, on January 30, 2015, the Company entered into a new 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”) available for general corporate
purposes. The Credit Agreement replaced the Prior Credit Agreement, and the Multicurrency Revolving Facility replaced the Prior
Revolving Facility (further discussed below).
The Term Facility was drawn in full on January 30, 2015 in connection with the closing of the PTS Acquisition. The loans under
the Term Facility require 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. At January 2, 2016 the Company had
borrowings under the Multicurrency Revolving Facility in the amount of $3.0 million, $32.9 million of standby letters of credit
issued under the facility, and $464.1 million of available borrowing capacity.
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 average daily balance in borrowings under the Multicurrency Revolving Facility was $48.2
million and the weighted average interest rate on the Multicurrency Revolving Facility was 1.9% for the year ended January 2,
57
2016. The weighted average interest rate on the Term Facility was 1.8% for the year ended January 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.
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.
Senior Notes
At January 2, 2016, 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”).
Details on the Notes at January 2, 2016 were (in millions):
Floating Rate Series 2007A
Fixed Rate Series 2011A
Fixed Rate Series 2011A
Fixed Rate Series 2011A
Principal
100.0
100.0
230.0
170.0
600.0
$
Interest Rate
Floating (1)
4.1%
4.8 to 5.0%
4.9 to 5.1%
Maturity
August 1, 2017
July 1, 2018
July 1, 2021
July 1, 2023
(1) Interest rates vary as LIBOR varies. At January 2, 2016, the interest rate was 1.1%.
The Company has interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk (see also Note
13 of Notes to the Consolidated 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 Prior Credit Agreement and Prior Revolving Facility
On June 30, 2011, the Company entered into a revolving credit agreement (the “Prior Credit Agreement”) that provided for an
aggregate amount of availability under a revolving credit facility of $500.0 million, including a $100.0 million letter of credit
subfacility (the “Prior Revolving Facility”). The Prior Credit Agreement and Prior Revolving Facility were replaced with the new
Credit Agreement (discussed above).
The Prior Revolving Facility permitted borrowing at interest rates based upon a margin above LIBOR. The average balance in
borrowings under the Prior Revolving Facility was $20.3 million and the average interest rate was 1.4% in fiscal 2014. At January 3,
2015, the Company had $17.0 million outstanding on the Prior Revolving Facility. The balance on the Prior Revolving Facility
was fully paid on January 27, 2015.
Other Notes Payable
At January 2, 2016, other notes payable of approximately $15.5 million were outstanding with a weighted average interest rate of
2.5%. At January 3, 2015, other notes payable of approximately $16.8 million were outstanding with a weighted average rate of
2.5%.
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 Consolidated Financial Statements), the approximate fair value of the Company's total debt was $1,758.2 million
and $666.8 million as of January 2, 2016 and January 3, 2015, respectively.
Maturities of long-term debt, excluding debt issuance costs, are as follows (in millions):
Year
2016
2017
2018
2019
2020
Thereafter
Total
58
Amount of Maturity
10.3
$
190.4
225.5
125.4
781.6
403.4
1,736.6
$
(8) Retirement and Post Retirement Plans
Retirement Plans
The Company's domestic employees are participants in defined benefit pension plans and/or defined contribution plans. The
majority of the Company's defined benefit pension plans covering the Company's domestic employees have been closed to new
employees and frozen for existing employees. Most foreign employees are covered by government sponsored plans in the countries
in which they are employed. The domestic employee plans include defined contribution plans and defined benefit pension plans.
The defined contribution plans provide for Company contributions based, depending on the plan, upon one or more of participant
contributions, service and profits. Company contributions to domestic defined contribution plans totaled $9.9 million, $8.8 million,
and $9.1 million in 2015, 2014 and 2013, respectively. Company contributions to non-U.S. defined contribution plans were $9.2
million, $12.6 million and $12.4 million in 2015, 2014, and 2013, respectively.
Benefits provided under defined benefit pension plans are based, depending on the plan, on employees' average earnings and years
of credited service, or a benefit multiplier times years of service. Funding of these qualified defined benefit pension plans is in
accordance with federal laws and regulations. The actuarial valuation measurement date for pension plans is as of the 2014 fiscal
year end for the year ended January 3, 2015 and pursuant to ASU 2015-04, the calendar year end for the year ended January 2,
2016.
The Company's target allocation, target return and actual weighted-average asset allocation by asset category are as follows:
Equity investments
Fixed income
Other
Total
Target
Actual Allocation
Allocation
Return
2015
2014
76 %
19 %
5 %
100 %
6.7 - 8.4 %
3.7 - 4.4%
7.0%
7.2%
70%
26%
4%
100%
71%
24%
5%
100%
The Company's investment strategy for its defined benefit pension plans is to achieve moderately aggressive growth, earning a
long-term rate of return sufficient to allow the plans to reach fully funded status. Accordingly, allocation targets have been
established to fit this strategy, with a heavier long-term weighting of investments in equity securities. The long-term rate of return
assumptions consider historic returns and volatilities adjusted for changes in overall economic conditions that may affect future
returns and a weighting of each investment class.
The following table presents a reconciliation of the funded status of the defined benefit pension plans (in millions):
Change in projected benefit obligation:
Obligation at beginning of period
Service cost
Interest cost
Actuarial (gain) loss
Less: Benefits paid
Foreign currency translation
Acquisitions
Obligation at end of period:
Change in fair value of plan assets:
Fair value of plan assets at beginning of period
Actual return on plan assets
Employer contributions
Less: Benefits paid
Foreign currency translation
Acquisitions
Fair value of plan assets at end of period
Funded status
2015
2014
194.3 $
10.0
10.7
(18.2)
11.7
(0.8)
70.8
255.1 $
126.6
(1.0)
4.7
11.7
(0.4)
43.9
162.1 $
(93.0) $
170.8
2.5
8.3
27.2
13.3
(1.2)
—
194.3
128.6
8.8
3.1
13.3
(0.6)
—
126.6
(67.7)
$
$
$
$
Pension Assets
The Company classifies the pension plan investments into Level 1, which refers to securities valued using quoted prices from active
markets for identical assets, Level 2, which refers to securities not traded on an active market but for which observable market
inputs are readily available, and Level 3, which refers to securities valued based on significant unobservable inputs. Common stocks
and mutual funds are valued at the unadjusted quoted market prices for the securities. Real estate fund values are determined using
59
model-based techniques that include relative value analysis and discounted cash flow techniques. Common collective trust funds
and limited partnership interests are valued based on the net asset value ("NAV") as provided by the administrator of the fund as a
practical expedient to estimate fair value. The NAV is based on the value of the underlying assets owned by the fund, minus its
liabilities, and then divided by the number of shares outstanding. Investments in units of collective trust funds and short-term
investment funds, comprised of cash and money market funds, are valued at their respective NAVs as reported by the funds daily.
Pension assets by type and level are as follows (in millions):
Total
Level 1
Level 2
Level 3
January 2, 2016
$
4.5 $
4.5 $
Cash and cash equivalents
Common stocks:
Domestic equities
International equities
Common collective trust funds:
Fixed income funds
U.S. equity funds
Mutual funds:
U.S. equity funds
Balanced funds
International equity funds
Fixed income funds
Other
Real estate fund
Global emerging markets fund limited partnership
Total
Cash and cash equivalents
Common stocks:
Domestic equities
International equities
Common collective trust funds:
Fixed income funds
U.S. equity funds
Mutual funds:
U.S. equity funds
Balanced funds
International equity funds
$
$
Fixed income funds
Other
Real estate fund
Global emerging markets fund limited partnership
Total
$
24.9
9.6
12.4
31.4
22.3
9.7
16.8
15.0
1.0
8.1
6.4
162.1 $
24.9
9.6
—
—
22.3
9.7
16.8
15.0
1.0
—
—
103.8 $
— $
—
—
12.4
31.4
—
—
—
—
—
—
—
43.8 $
—
—
—
—
—
—
—
—
—
—
8.1
6.4
14.5
Total
Level 1
Level 2
Level 3
January 3, 2015
3.1 $
3.1 $
20.6
8.0
9.5
23.9
16.8
6.1
13.8
12.3
1.0
6.2
5.3
126.6 $
20.6
8.0
—
—
16.8
6.1
13.8
12.3
1.0
—
—
81.7 $
— $
—
—
9.5
23.9
—
—
—
—
—
—
33.4 $
—
—
—
—
—
—
—
—
6.2
5.3
11.5
The common collective trust funds are investments in the Northern Trust Collective S&P 500 Index Fund and the Northern Trust
Collective Aggregate Bond Index Fund. The Northern Trust Collective S&P 500 Index Fund seeks to provide investment results
that approximate the overall performance of the common stocks in that index. The Northern Trust Collective Aggregate Bond Index
Fund seeks to provide investment results that approximate the overall performance of the Barclays Capital U.S. Aggregate Index
by investing primarily, but not exclusively, in securities that comprise that index. The common collective trust funds are available
for immediate redemption.
60
The Level 3 assets noted below represent investments in real estate funds managed by a major U.S. insurance company and a global
emerging markets fund limited partnership. Estimated values provided by fund management approximate the cost of the
investments. In determining the reasonableness of the methodology used to value the Level 3 investments, the Company evaluates
a variety of factors including reviews of economic conditions, industry and market developments, and overall credit ratings.
The global emerging markets fund limited partnership interest is an investment in the Vontobel Global Emerging Markets Fund,
which seeks to provide capital appreciation by investing in a diversified portfolio consisting primarily of equity based securities.
The real estate fund can be redeemed on a quarterly basis and paid within two weeks of the request for redemption. The global
emerging markets fund limited partnership interest can be redeemed on a monthly basis with immediate payment.
The table below sets forth a summary of changes in the Company's Level 3 assets in its pension plan investments as of January 2,
2016 and January 3, 2015 (in millions).
Beginning balance
Acquisition
Net purchases
Net gains
Ending balance
January 2, 2016
$
$
11.5 $
1.0
1.9
0.1
14.5 $
January 3, 2015
10.1
—
0.7
0.7
11.5
The following table sets forth a summary of quantitative information about the significant unobservable inputs used in the fair value
measurement of the Level 3 real estate fund as of January 2, 2016 (in millions).
$
Fair Value
Significant Unobservable Inputs
8.1
Exit Capitalization Rate
Discount Rate
4.9% to 7.0%
6.6% to 8.3%
The following table sets forth a summary of quantitative information about the significant unobservable inputs used in the fair
value measurement of the Level 3 real estate fund as of January 3, 2015 (in millions).
Fair Value
Significant Unobservable Inputs
$
6.2
Exit Capitalization Rate
Discount Rate
5.3% to 7.5%
6.8% to 9.5%
The Company recognized the funded status of its defined benefit pension plans on the Balance Sheet as follows (in millions):
Accrued Compensation and Employee Benefits
Pension and Other Post Retirement Benefits
Amounts recognized in Accumulated Other Comprehensive Loss
Net actuarial loss
Prior service cost
2015
2014
$
$
$
$
2.7 $
90.3
93.0 $
51.1 $
1.2
52.3 $
2.7
65.0
67.7
61.5
1.4
62.9
The accumulated benefit obligation for all defined benefit pension plans was $226.9 million and $182.3 million at January 2, 2016
and January 3, 2015, respectively.
The accumulated plan benefit obligation exceeded plan assets for all pension plans as of January 2, 2016 and January 3, 2015.
The following weighted average assumptions were used to determine the projected benefit obligation at January 2, 2016 and
January 3, 2015, respectively.
Discount rate
2015
4.6%
2014
4.2%
The objective of the discount rate assumption is to reflect the rate at which the pension benefits could be effectively settled. In
making the determination, the Company takes into account the timing and amount of benefits that would be available under the
plans. The methodology for selecting the discount rate was to match the plan's cash flows to that of a theoretical bond portfolio
yield curve.
61
Certain of the Company's defined benefit pension plan obligations are based on years of service rather than on projected
compensation percentage increases. For those plans that use compensation increases in the calculation of benefit obligations and
net periodic pension cost, the Company used an assumed rate of compensation increase of 3.0% for the years ended January 2, 2016
and January 3, 2015.
Net periodic pension benefit costs and the net actuarial loss and prior service cost recognized in other comprehensive income
(“OCI”) for the defined benefit pension plans were as follows (in millions):
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Amortization of prior service cost
Net periodic benefit cost
Change in benefit obligations recognized in OCI, net of tax
Prior service cost
Net actuarial loss
Total recognized in OCI
2015
2014
2013
$
$
$
$
10.0 $
10.7
(11.5)
4.3
0.2
13.7 $
0.1 $
2.8
2.9 $
2.5 $
8.3
(9.2)
2.3
0.2
4.1 $
0.1 $
1.3
1.4 $
2.9
7.6
(8.7)
4.1
0.2
6.1
0.1
2.5
2.6
The estimated prior service cost and net actuarial loss for the defined benefit pension plans that will be amortized from AOCI into
net periodic benefit cost during the 2016 fiscal year are $0.2 million, and $3.0 million respectively.
As permitted under relevant accounting guidance, the amortization of any prior service cost is determined using a straight-line
amortization of the cost over the average remaining service period of employees expected to receive benefits under the plans.
The following weighted average assumptions were used to determine net periodic pension cost for fiscal years 2015, 2014 and
2013, respectively.
Discount rate
Expected long-term rate of return on assets
2015
4.2%
7.5%
2014
5.0%
8.0%
2013
4.2%
8.0%
The Company made contributions to its defined benefit plan of $4.7 million and $3.1 million for the fiscal years ended January 2,
2016 and January 3, 2015, respectively.
The Company estimates that in 2016 it will make contributions in the amount of $3.4 million to fund its defined benefit pension
plans.
The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in
millions):
Year
2016
2017
2018
2019
2020
2021 - 2025
$
Expected Payments
12.2
12.7
13.4
14.4
15.1
83.3
Post Retirement Health Care Plan
In connection with the PTS acquisition, the Company established an unfunded post retirement health care plan for certain domestic
retirees and their dependents.
62
The following table presents a reconciliation of the benefit obligation of the post retirement health care plan (in millions):
Change in accumulated post retirement benefit obligation
Obligation at beginning of period
Service cost
Interest cost
Actuarial loss
Participant contributions
Less: Benefits paid
Acquisitions
Obligation at end of period
2015
—
0.1
0.5
2.9
0.6
3.1
15.8
16.8
$
$
The Company recognized the funded status of its post retirement health care plan on the balance sheet as follows (in millions):
Accrued Compensation and Employee Benefits
Pension and Other Post Retirement Benefits
Amounts recognized in Accumulated Other Comprehensive Loss
Net actuarial loss
Net periodic benefit costs for the post retirement health care plan were as follows (in millions):
Service cost
Interest cost
Net periodic benefit cost
2015
2015
1.2
15.6
16.8
2.9
0.1
0.5
0.6
$
$
$
$
$
The estimated net actuarial loss for the post retirement health care plan that will be amortized from AOCI into net periodic benefit
cost during the 2016 fiscal year is $0.2 million.
The discount rate used to measure the benefit as of January 2, 2016 was 4.0%. The health care cost trend rate for 2016 is 7.0% for
pre-65 participants and 5.4% for post-65 participants, decreasing to 4.5% in 2025. A one percentage point change in the health care
cost trend rate assumption would have a $0.5 million impact on the benefit obligation and an immaterial impact on post retirement
benefits expense.
In 2015, the Company contributed $2.5 million to the post retirement health care plan. The Company estimates that, in 2016, it will
make contributions of $1.2 million to the post retirement health care plan.
The following post retirement benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in
millions):
Year
2016
2017
2018
2019
2020
2021 - 2025
(9) Shareholders' Equity
Common Stock
$
Expected Payments
1.2
1.4
1.5
1.6
1.6
7.1
The Company acquired and retired 180,000 shares of its common stock in the quarter ended October 3, 2015 at an average cost of
$66.56 per share for a total of $12.0 million. The Company acquired and retired 500,000 shares of its common stock in the third
quarter of 2014 at an average cost of $69.94 per share for a total of $35.0 million. The repurchases were under the 3.0 million share
repurchase program approved by the Company's Board of Directors. There are approximately 2.3 million shares of our common
stock available for repurchase under this program.
63
Share Based Compensation
The Company recognized approximately $13.9 million, $11.9 million and $11.4 million in share-based compensation expense in
2015, 2014 and 2013, 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 January 2, 2016, total unrecognized compensation cost related
to share-based compensation awards was approximately $24.5 million, net of estimated forfeitures, which the Company expects to
recognize over a weighted average period of approximately 2.1 years.
During 2013, the Company's shareholders approved the 2013 Equity Incentive Plan ("2013 Plan"). The 2013 Plan authorizes the
issuance of 3.5 million shares of common stock for equity-based awards, and terminates any further grants under prior equity plans.
Approximately 2.0 million shares were available for future grant or payment under the 2013 Plan at January 2, 2016.
Options and Stock Appreciation Rights
The Company uses several forms of share-based incentive awards, including non-qualified stock options, incentive 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. All grants are made at prices equal to the fair market value of the stock on the grant date. The majority of the Company’s
annual share-based incentive awards are made in the fiscal second quarter. For both years ended January 2, 2016 and January 3,
2015, expired and canceled shares were immaterial.
The table below presents share-based compensation activity for the three fiscal years ended 2015, 2014 and 2013 (in millions):
Total intrinsic value of share-based incentive awards exercised
Cash received from stock option exercises
Income tax benefit from the exercise of stock options
Total fair value of share-based incentive awards vested
$
4.3 $
4.1
1.6
4.9
5.2 $
1.9
2.0
5.5
4.0
1.5
0.8
8.5
2015
2014
2013
The assumptions used in the Company's Black-Scholes valuation related to grants for options and SARs were as follows:
Per share weighted average fair value of grants $
Risk-free interest rate
Expected life (years)
Expected volatility
Expected dividend yield
2015
2014
2013
27.15
$
28.01
$
1.9%
7.0
35.6%
1.2%
2.0%
7.0
37.7%
1.2%
23.01
1.1%
7.0
38.5%
1.2%
The average risk-free interest rate is based on U.S. Treasury security rates in effect 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.
Following is a summary of share-based incentive plan grant activity (options and SARs) for fiscal 2015.
Number of Shares Under Options and SARs
Exercisable at January 3, 2015
Granted
Exercised
Forfeited
Expired
Outstanding at January 2, 2016
Exercisable at January 2, 2016
Shares
1,488,832 $
206,500
(129,366)
(14,925)
(2,775)
1,548,266 $
953,347 $
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Term
(years)
Aggregate Intrinsic
Value (in millions)
59.34
78.15
43.32
66.61
71.30
63.09
57.22
5.7
4.3
$
5.7
5.7
Compensation expense recognized related to Options and SARs was $5.1 million for fiscal 2015.
As of January 2, 2016, there was $10.9 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 3.2 years.
The amount of Options and SARs expected to vest is materially consistent with those outstanding and not yet exercisable.
64
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 award activity for fiscal 2015:
Unvested RSAs at January 3, 2015
Granted
Vested
Forfeited
Unvested RSAs January 2, 2016
Weighted
Average Fair
Value at Grant
Date
Shares
24,814 $
14,400
(24,814)
—
14,400 $
69.53
78.15
69.53
—
78.15
Weighted Average
Remaining
Contractual Term
(years)
0.3
0.4
RSAs vest on either the first (for RSAs granted in 2013 and later) or the third (for RSAs granted prior to 2013) 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 RSA's was $1.1 million for fiscal 2015.
As of January 2, 2016, there was $0.4 million of unrecognized compensation cost related to non-vested RSA's that is expected to
be recognized as a charge to earnings over a weighted average period of 0.4 years.
Following is a summary of RSU award activity for fiscal 2015:
Unvested RSUs at January 3, 2015
Granted
Vested
Forfeited
Unvested RSUs at January 2, 2016
Shares
Weighted Average
Fair Value at Grant
Date
237,946 $
106,600
(67,701)
(8,190)
268,655 $
68.28
77.38
63.86
71.01
72.91
Weighted Average
Remaining
Contractual Term
(years)
1.8
1.8
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 RSU's was $5.9 million for fiscal 2015.
As of January 2, 2016, there was $9.9 million of unrecognized compensation cost related to non-vested RSU's that is expected to
be recognized as a charge to earnings over a weighted average period of 1.8 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. PSU's have a performance
period of 3 years. As set forth in the individual grant agreements, acceleration of vesting may occur under a change in control, death
or disability. There are no voting rights with these instruments 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.
Following is a summary of PSU award activity for fiscal 2015:
Unvested PSUs at January 3, 2015
Granted
Vested
Forfeited
Unvested PSUs January 2, 2016
Shares
Weighted Average
Fair Value at Grant
Date
59,115 $
30,845
—
(2,065)
87,895 $
68.25
89.98
—
70.97
75.81
Weighted Average
Remaining
Contractual Term
(years)
2.0
1.9
65
Compensation expense for awards granted are recognized based on the targeted payout of 100.0%, net of estimated forfeitures.
Compensation expense recognized related to PSUs was $1.8 million for fiscal 2015 and $1.0 million for fiscal 2014. Total
unrecognized compensation expense for all PSUs granted as of January 2, 2016 was $3.3 million and it is expected to be recognized
as a charge to earnings over a weighted average period of 1.9 years.
(10) Income Taxes
Income (loss) before taxes consisted of the following (in millions):
United States
Foreign
Total
2015
2014
2013
$
$
25.8 $
171.1
196.9 $
(11.2) $
101.5
90.3 $
The provision for income taxes is summarized as follows (in millions):
2015
2014
2013
Current
Federal
State
Foreign
Deferred
Federal
State
Foreign
Total
$
$
$
$
13.5 $
0.2
45.1
58.8 $
(2.0) $
(0.9)
(7.5)
(10.4)
48.4 $
37.8 $
1.5
41.3
80.6 $
(21.2) $
(2.0)
(3.2)
(26.4)
54.2 $
75.4
95.1
170.5
15.4
4.8
29.8
50.0
6.3
0.1
(11.9)
(5.5)
44.5
A reconciliation of the statutory Federal income tax rate and the effective tax rate reflected in the consolidated statements of
income follows:
2015
2014
2013
Federal statutory rate
State income taxes, net of federal benefit
Domestic production activities deduction
Foreign rate differential - China
Foreign rate differential - All Other
Research and development credit
Statutory tax rate change
Goodwill impairment
Valuation allowance
Adjustments to tax accruals and reserves
Write down of Venezuelan assets
Other
Effective tax rate
35.0 %
(0.2)%
(1.0)%
(3.3)%
(7.2)%
(4.1)%
— %
4.0 %
— %
2.1 %
2.3 %
(3.0)%
24.6 %
35.0 %
(0.4)%
(2.7)%
(7.7)%
(4.8)%
(7.4)%
— %
42.9 %
4.2 %
2.4 %
— %
(1.5)%
60.0 %
35.0 %
1.9 %
(1.4)%
(4.4)%
(9.2)%
(4.5)%
(2.6)%
13.2 %
1.7 %
(0.2)%
— %
(3.4)%
26.1 %
Deferred taxes arise primarily from differences in amounts reported for tax and financial statement purposes. The Company's net
deferred tax liability was $(82.3) million as of January 2, 2016, classified on the consolidated Balance Sheet as a net non-current
deferred income tax benefit of $18.6 million and a net non-current deferred income tax liability of $100.9 million. As of January 3,
2015, the Company's net deferred tax liability was $(49.0) million classified on the consolidated Balance Sheet as a net non-current
deferred income tax benefit of $17.9 million and a net non-current deferred income tax liability of $66.9 million.
66
The components of this net deferred tax liability are as follows (in millions):
January 2, 2016
January 3, 2015
Accrued employee benefits
Bad debt allowances
Warranty accruals
Inventory
Accrued liabilities
Derivative instruments
Tax loss carryforward
Valuation allowance
Other
Deferred tax assets
Property related
Intangible items
Deferred tax liabilities
Net deferred tax liability
$
$
72.9 $
4.9
4.9
22.5
7.4
30.3
14.4
(8.2)
4.7
153.8
(46.1)
(190.0)
(236.1)
(82.3) $
Following is a reconciliation of the beginning and ending amount of unrecognized tax benefits (in millions):
Unrecognized tax benefits, December 29, 2012
Gross increases from prior period tax positions
Gross increases from current period tax positions
Settlements with taxing authorities
Lapse of statute of limitations
Unrecognized tax benefits, December 28, 2013
Gross increases from prior period tax positions
Gross increases from current period tax positions
Settlements with taxing authorities
Lapse of statute of limitations
Unrecognized tax benefits, January 3, 2015
Gross increases from prior period tax positions
Gross increases from current period tax positions
Settlements with taxing authorities
Lapse of statute of limitations
Unrecognized tax benefits, January 2, 2016
$
$
$
$
60.5
8.8
4.7
9.7
9.5
19.7
16.6
(10.1)
2.8
122.2
(37.1)
(134.1)
(171.2)
(49.0)
5.7
1.1
0.3
(2.1)
(0.6)
4.4
0.1
3.6
(2.1)
(0.2)
5.8
—
4.0
(1.3)
(0.2)
8.3
Unrecognized tax benefits as of January 2, 2016 amount to $8.3 million, 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. During fiscal 2015, 2014
and 2013, the Company recognized approximately $0.6 million, $(0.2) million and $0.2 million in net interest (income) expense,
respectively. The Company had approximately $1.7 million, $1.1 million and $1.3 million of accrued interest as of January 2, 2016,
January 3, 2015 and December 28, 2013, respectively.
Due to statute expirations, approximately $0.3 million of the unrecognized tax benefits, including accrued interest, could reasonably
change in the coming year.
With few exceptions, the Company is no longer subject to U.S. Federal and state/local income tax examinations by tax authorities
for years prior to 2011, and the Company is no longer subject to non-U.S. income tax examinations by tax authorities for years prior
to 2009.
At January 2, 2016, the Company had approximately $14.4 million of tax effected net operating losses in various jurisdictions with
a portion expiring over a period of up to 15 years and the remaining without expiration. At January 3, 2015, the Company had
approximately $16.6 million of tax effected net operating losses in various jurisdictions with a portion expiring over a period up to
15 years and the remaining without expiration.
Valuation allowances totaling $8.2 million and $10.1 million as of January 2, 2016 and January 3, 2015, respectively, have been
established for deferred income tax assets primarily related to certain subsidiary loss carryforwards that may not be realized.
Realization of the net deferred income tax assets is dependent on generating sufficient taxable income prior to their expiration.
Although realization is not assured, management believes it is more-likely-than-not that the net deferred income tax assets will be
67
realized. The amount of the net deferred income tax assets considered realizable, however, could change in the near term if future
taxable income during the carryforward period fluctuates.
The Company has been granted a tax holiday for some of its Chinese subsidiaries. This tax holiday expires in 2016-2017 and is
renewable subject to certain conditions with which the Company expects to comply.
The Company considers the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the
basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and its specific plans
for reinvestment of those subsidiary earnings. The Company has not recorded a deferred tax liability of approximately $133.9
million related to the U.S. federal and state income taxes and foreign withholding taxes on approximately $626.9 million of
undistributed earnings of foreign subsidiaries indefinitely invested outside the United States. Should the Company decide to
repatriate the foreign earnings, it would need to adjust its income tax provision in the period it determined that the earnings will no
longer be indefinitely invested outside the United States.
(11) Contingencies and Commitments
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 marketed by a third party. These claims generally allege that the ventilation units were the cause
of fires. Based on the current facts, the Company does not believe these claims, individually or in the aggregate, will have a material
effect on its results of operations, financial condition or cash flows.
The Company is, from time to time, party to litigation that arises in the normal course of its business operations, including product
warranty and liability claims, contract disputes and environmental, asbestos, 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. 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 2015 and 2014 (in
millions):
January 2, 2016
January 3, 2015
Beginning balance
Less: Payments
Provisions
Acquisitions
Translation adjustments
Ending balance
(12) Leases and Rental Commitments
$
$
19.3 $
21.5
20.5
0.8
—
19.1 $
19.3
20.2
19.6
0.7
(0.1)
19.3
Rental expenses charged to operations amounted to $45.1 million in 2015, $38.3 million in 2014 and $39.5 million in 2013. The
Company has future minimum rental commitments under operating leases as shown in the following table (in millions):
Year
2016
2017
2018
2019
2020
Thereafter
Expected Payments
22.1
$
12.5
10.3
5.5
2.8
7.0
(13) Derivative Financial 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.
68
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
January 2, 2016.
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 January 2, 2016 and January 3, 2015 the Company
had $(7.4) million and $(2.2) 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.
The Company had outstanding the following notional amounts to hedge forecasted purchases of commodities (in millions):
Copper
Aluminum
January 2, 2016 January 3, 2015
137.4
$
5.2
59.4 $
4.2
As of January 2, 2016, the maturities of commodity forward contracts extended through June 2017.
The Company had outstanding the following notional amounts of currency forward contracts (in millions):
Mexican Peso
Chinese Renminbi
Indian Rupee
Euro
Canadian Dollar
Australian Dollar
Thai Baht
Japanese Yen
Great Britain Pound
Singapore Dollar
$
January 2, 2016 January 3, 2015
324.1
206.1
51.7
17.8
8.6
4.3
3.5
—
—
—
339.4 $
233.9
54.5
68.5
6.2
10.8
3.7
2.7
4.8
0.5
As of January 2, 2016, the maturities of currency forward contracts extended through December 2018.
As of January 2, 2016 and January 3, 2015, the total notional amount of the Company's receive-variable/pay-fixed interest rate
swap was $100.0 million (with maturities extending to August 2017).
Fair values of derivative instruments were (in millions):
Prepaid
Expenses
Other Noncurrent
Assets
Hedging Obligations
(Current)
Hedging Obligations
(Noncurrent)
January 2, 2016
Designated as hedging
instruments:
Interest rate swap contracts
Currency contracts
Commodity contracts
Not designated as hedging
instruments:
Currency contracts
Commodity contracts
Total Derivatives
$
$
— $
0.7
0.1
0.5
5.1
6.4 $
— $
0.4
—
0.6
—
1.0 $
— $
29.9
8.7
0.9
5.2
44.7 $
7.8
19.5
—
0.3
—
27.6
69
Prepaid
Expenses
Other Noncurrent
Assets
Hedging Obligations
(Current)
Hedging Obligations
(Noncurrent)
January 3, 2015
Designated as hedging
instruments:
Interest rate swap contracts
Currency contracts
Commodity contracts
Not designated as hedging
instruments:
Currency contracts
Commodity contracts
Total Derivatives
$
$
— $
1.6
—
—
2.3
3.9 $
— $
—
—
—
—
— $
— $
15.9
9.8
1.6
2.4
29.7 $
11.9
10.3
0.1
0.2
—
22.5
Derivatives Designated as Cash Flow Hedging Instruments
The effect of derivative instruments on the consolidated statements of income and comprehensive income for fiscal 2015, 2014 and
2013 were (in millions):
Commodity
Forwards
Currency
Forwards
Interest Rate
Swaps
Total
Fiscal 2015
$
Gain (Loss) recognized in Other
Comprehensive Income (Loss)
Amounts reclassified from Other
Comprehensive Income (Loss):
Gain recognized in Net Sales
Loss recognized in Cost of Sales
Loss recognized in Interest
Expense
(22.3) $
(46.5) $
(1.1) $
—
(19.8)
—
0.2
(18.5)
—
—
—
(5.2)
(69.9)
0.2
(38.3)
(5.2)
Gain (Loss) recognized in Other
Comprehensive Income (Loss)
Amounts reclassified from Other
Comprehensive Income (Loss):
(Loss) Gain recognized in Cost
of Sales
Loss recognized in Interest
Expense
Gain (Loss) recognized in Other
Comprehensive Income (Loss)
Amounts reclassified from Other
Comprehensive Income (Loss):
Loss recognized in Net Sales
(Loss) Gain recognized in Cost
of Sales
Loss recognized in Interest
Expense
Commodity
Forwards
Currency
Forwards
Interest Rate
Swaps
Total
Fiscal 2014
$
(18.8) $
(25.2) $
(0.5) $
(44.5)
(7.1)
—
7.6
—
—
(10.3)
Commodity
Forwards
Currency
Forwards
Interest Rate
Swaps
Total
Fiscal 2013
$
(11.3) $
8.8 $
0.7
$
—
(8.3)
—
(0.9)
7.5
—
—
—
(12.8)
0.5
(10.3)
(1.8)
(0.9)
(0.8)
(12.8)
The ineffective portion of hedging instruments recognized was immaterial for all periods presented.
70
Derivatives Not Designated as Cash Flow Hedging Instruments
The effect of derivative instruments on the consolidated statements of income for fiscal 2015, 2014 and 2013 were (in millions):
Loss recognized in Operating Expenses
Loss recognized in Cost of Sales
(Loss) Gain recognized in Cost of Sales
Fiscal 2015
Commodity
Forwards
Currency Forwards
Total
— $
(8.8) $
(8.8)
Fiscal 2014
Commodity
Forwards
Currency Forwards
Total
— $
(1.3) $
(1.3)
Fiscal 2013
Commodity
Forwards
Currency Forwards
Total
(0.1) $
0.5 $
0.4
$
$
$
The net AOCI balance related to hedging activities of $(47.5) million losses at January 2, 2016 includes $(26.6) million of net
deferred losses expected to be reclassified to the Statement of Income in the next twelve months. There were no gains or losses
reclassified from AOCI to earnings based on the probability that the forecasted transaction would not occur.
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 Consolidated Balance Sheets on a gross
basis for the periods ended January 2, 2016 and January 3, 2015.
71
The following table presents the derivative assets and derivative liabilities presented on a net basis under enforceable master netting
agreements (in millions):
Gross Amounts as
Presented in the
Consolidated
Balance Sheet
January 2, 2016
Derivative
Contract
Amounts Subject
to Right of Offset
Derivative Contracts as
Presented on a Net Basis
$
$
1.2 $
5.2
1.0
30.8
13.9
19.8
(1.2) $
(5.2)
(1.0)
(1.2)
(5.2)
(1.0)
—
—
—
29.6
8.7
18.8
Gross Amounts as
Presented in the
Consolidated
Balance Sheet
January 3, 2015
Derivative
Contract
Amounts Subject
to Right of Offset
Derivative Contracts as
Presented on a Net
Basis
1.6 $
2.3
17.5
12.2
10.5
0.1
(1.3) $
(2.3)
(1.3)
(2.3)
—
—
0.3
—
16.2
9.9
10.5
0.1
Prepaid Expenses and Other Current Assets:
Derivative Currency Contracts
Derivative Commodity Contracts
Other Noncurrent Assets:
Derivative Currency Contracts
Hedging Obligations Current:
Derivative Currency Contracts
Derivative Commodity Contracts
Hedging Obligations:
Derivative Currency Contracts
Prepaid Expenses and Other Current Assets:
Derivative Currency Contracts
Derivative Commodity Contracts
Hedging Obligations Current:
Derivative Currency Contracts
Derivative Commodity Contracts
Hedging Obligations:
Derivative Currency Contracts
Derivative Commodity Contracts
(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
Level 2
Level 3
Unadjusted quoted prices in active markets for identical assets or liabilities
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
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 following table sets forth the
Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of January 2, 2016 and
January 3, 2015, respectively (in millions):
72
Assets:
Prepaid expenses and other current assets:
Derivative currency contracts
Derivative commodity contracts
Other noncurrent assets:
Assets Held in Rabbi Trust
Derivative currency contracts
Liabilities:
Hedging obligations current:
Derivative currency contracts
Derivative commodity contracts
Hedging obligations:
Interest rate swap
Derivative currency contracts
Derivative commodity contracts
January 2, 2016
January 3, 2015
Classification
$
1.2 $
5.2
5.2
1.0
30.8
13.9
7.8
19.8
—
1.6
2.3
5.2
—
17.5
12.2
11.9
10.5
0.1
Level 2
Level 2
Level 1
Level 2
Level 2
Level 2
Level 2
Level 2
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. Fair value of debt was estimated based on rates for instruments with comparable maturities and credit quality.
Level 3 liabilities are comprised entirely of the deferred contingent purchase price of the Company's acquisitions. The fair value
was determined using valuation techniques based on risk and probability adjusted discounted cash flows.
The Company did not change its valuation techniques during fiscal 2015.
The table below sets forth a summary of changes in fair value of the Company's liabilities for deferred contingent purchase price
from the Company's acquisitions as of January 2, 2016 and January 3, 2015, respectively (in millions):
Year Ended
Beginning balance
Expense
Fair value adjustment
Payments
Ending balance
$
$
January 2, 2016
January 3, 2015
9.7
—
(1.1)
(8.6)
—
— $
—
—
—
— $
During 2014, the Commercial and Industrial Systems segment reporting unit with slower than expected adoption of switched
reluctance motor technology had a deferred contingent purchase price liability that was adjusted as a result of changes in future
performance expectations that reduced discounted cash flows and increased risk and probability adjustments.
(15) Related Party Transactions
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 2014 compensation was received, and as a result, payments of
$5.3 million were made to the seller in 2014.
(16) Restructuring Activities
Beginning in 2014, the Company announced the closure of several of its manufacturing and warehouse facilities and consolidation
into existing facilities to simplify manufacturing operations in its Commercial and Industrial Systems and Climate Solutions
segments. As a result of these closures, the Company incurred expenses including employee termination and plant relocation costs.
The employee termination expenses are accrued over the employees remaining service period while the plant relocation costs are
expensed as incurred.
73
The following is a reconciliation of provisions and payments for the restructuring projects for 2015 and 2014 (in millions):
Beginning balance
Provision
Less: Payments
Ending Balance
January 2,
2016
January 3,
2015
$
$
6.1 $
8.9
13.7
1.3 $
The following is a reconciliation of expenses by type for the restructuring projects in 2015 and 2014 (in millions):
Employee termination expenses
Facility related costs
Other expenses
Total restructuring expenses
2015
2014
$
$
0.6 $
5.0
3.3
8.9 $
3.9
13.2
11.0
6.1
6.5
4.2
2.5
13.2
For fiscal 2015, restructuring charges of $7.7 million and $1.2 million were recorded in Cost of Sales and Operating Expenses,
respectively, respectively, in the Consolidated Statements of Income. For fiscal 2014, restructuring charges of $12.9 million and
$0.3 million were recorded in Cost of Sales and Operating Expenses, respectively, in the Consolidated Statements of Income.
The following table shows the allocation of Restructuring Expenses by segment for 2015 and 2014 (in millions):
Restructuring Expenses - 2015
Restructuring Expenses - 2014
Commercial
and
Industrial
Systems
Climate
Solutions
Power
Transmission
Solutions
6.8 $
1.6 $
1.5 $
11.4 $
0.6
0.2
Total
$
$
8.9 $
13.2 $
The Company's current restructuring activities are expected to conclude by the end of 2016. The Company expects to record
aggregate future charges of approximately $9.7 million which includes $3.2 million of employee termination expenses and $6.5
million of facility related and other costs.
(17) Subsequent Event
On January 18, 2016, the Company purchased the remaining shares owned by the noncontrolling interest in its Elco Group B.V.
(“Elco”) joint venture increasing the Company’s ownership from 55.0% to 100.0% for $18.5 million. The Company consolidates
the results of Elco into the Company's consolidated financial statements in the Climate Solutions Segment.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A - Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), our management evaluated, with
the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-15(d) and 15(e) under the Exchange Act) as of the end of the year
ended January 2, 2016. Based upon their evaluation of these disclosure controls and procedures, our Chief Executive Officer and
Chief Financial Officer concluded that the disclosure controls and procedures were effective as of January 2, 2016 to ensure that
(a) information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and
(b) information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting.
The report of management required under this Item 9A is contained in Item 8 of Part II of this Annual Report on Form 10-K under
the heading “Management's Annual Report on Internal Control over Financial Reporting.”
74
Report of Independent Registered Public Accounting Firm.
The attestation report required under this Item 9A is contained in Item 8 of Part II of this Annual Report on Form 10-K under the
heading “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Controls.
There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended January 2,
2016 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial
reporting.
ITEM 9B - OTHER INFORMATION
None.
75
PART III
ITEM 10 -
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information in the sections titled “Proposal 1: Election of Directors,” “Board of Directors” and “Section 16(a) Beneficial
Ownership Reporting Compliance” in our proxy statement for the 2016 annual meeting of shareholders (the “2016 Proxy
Statement”) is incorporated by reference herein. Information with respect to our executive officers appears in Part I of this Annual
Report on Form 10-K.
We have adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all our directors, officers and employees. The
Code is available on our website, along with our current Corporate Governance Guidelines, at www.regalbeloit.com. The Code
and our Corporate Governance Guidelines are also available in print to any shareholder who requests a copy in writing from the
Secretary of Regal Beloit Corporation. We intend to disclose through our website any amendments to, or waivers from, the
provisions of these codes.
Item 11 - Executive Compensation
The information in the sections titled “Compensation Discussion and Analysis,” “Executive Compensation,” “Report of the
Compensation and Human Resources Committee,” and “Director Compensation” in the 2016 Proxy Statement is incorporated by
reference herein.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information in the sections titled “Stock Ownership” in the 2016 Proxy Statement is incorporated by reference herein.
Equity Compensation Plan Information
The following table provides information about our equity compensation plans as of January 2, 2016.
Number of Securities
to be Issued upon the
Exercise of
Outstanding Options,
Warrants and Rights
(1)
Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(excluding securities
reflected in the column 1)
1,548,266
$
63.09
2,034,203
—
1,548,266
—
2,034,203
Equity compensation plans
approved by security holders
Equity compensation plans
not approved by security
holders
Total
(1) Represents options to purchase our Common Stock and stock-settled appreciation rights granted under our 1998 Stock
Option Plan, 2003 Equity Incentive Stock Option Plan, 2007 Equity Incentive Plan and 2013 Equity Incentive Plan.
Item 13 - Certain Relationships and Related Transactions and Director Independence
The information in the section titled “Board of Directors” in the 2016 Proxy Statement is incorporated by reference herein.
Item 14 - Principal Accountant Fees and Services
The information in the section titled “Proposal 4: Ratification of Deloitte & Touche LLP as our Independent Registered Public
Accounting Firm for the year ending December 31, 2016” in the 2016 Proxy Statement is incorporated by reference herein.
76
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE
PART IV
(a) 1. Financial statements - The financial statements listed in the accompanying index to financial statements and financial
statement schedule are filed as part of this Annual Report on Form 10-K.
2. Financial statement schedule - The financial statement schedule listed in the accompanying index to financial statements
and financial statement schedule are filed as part of this Annual Report on Form 10-K.
3. Exhibits - The exhibits listed in the accompanying index to exhibits are filed as part of this Annual Report on Form 10-K.
(b) Exhibits- see Exhibit Index.
(c) See (a)(2) above.
77
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 2nd day of March, 2016.
SIGNATURES
REGAL BELOIT CORPORATION
By:
/s/ CHARLES A. HINRICHS
Charles A. Hinrichs
Vice President and Chief Financial Officer
(Principal Financial Officer)
By:
/s/ ROBERT J. REHARD
Robert J. Rehard
Vice President and Corporate Controller
(Principal Accounting Officer)
78
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated:
/s/ MARK J. GLIEBE
Mark J. Gliebe
Chairman and Chief Executive Officer
(Principal Executive Officer)
March 2, 2016
/s/ STEPHEN M. BURT
Stephen M. Burt
Director
/s/ CHRISTOPHER L. DOERR Director
Christopher L. Doerr
/s/ THOMAS J. FISCHER
Thomas J. Fischer
Director
/s/ DEAN A. FOATE
Dean A. Foate
Director
/s/ HENRY W. KNUEPPEL
Henry W. Knueppel
Director
/s/ RAKESH SACHDEV
Rakesh Sachdev
Director
/s/ ANESA T. CHAIBI
Anesa Chaibi
Director
/s/ CURTIS W. STOELTING
Curtis W. Stoelting
Director
/s/ JANE L. WARNER
Jane L. Warner
Director
March 2, 2016
March 2, 2016
March 2, 2016
March 2, 2016
March 2, 2016
March 2, 2016
March 2, 2016
March 2, 2016
March 2, 2016
79
REGAL BELOIT CORPORATION
Index to Financial Statements
And Financial Statement Schedule
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the fiscal years ended
January 2, 2016, January 3, 2015 and December 28, 2013
Consolidated Statements of Comprehensive Income for the fiscal years ended January
2, 2016, January 3, 2015 and December 28, 2013
Consolidated Balance Sheets at January 2, 2016 and January 3, 2015
Consolidated Statements of Equity for the fiscal years ended January 2, 2016, January
3, 2015 and December 28, 2013
Consolidated Statements of Cash Flows for the fiscal years ended January 2, 2016,
January 3, 2015 and December 28, 2013
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedule:
For the fiscal years ended January 2, 2016, January 3, 2015 and December 28, 2013
Schedule II -Valuation and Qualifying Accounts
Page(s) In
Form 10-K
37
38
39
40
41
42
43
77
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or
notes thereto.
80
SCHEDULE II
REGAL BELOIT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Balance
Beginning
of Year
Charged
to
Expenses
Deductions
(a)
Adjustments
(b)
(Dollars in Millions)
Balance
End of
Year
$
$
11.6
11.5
10.2
19.3
19.3
20.9
12.2
19.5
2.7
20.5
19.6
16.5
(12.4)
(19.2)
(1.9)
(21.5)
(20.2)
(19.4)
$
$
(0.1)
(0.2)
0.5
0.8
0.6
1.3
11.3
11.6
11.5
19.1
19.3
19.3
Allowance for receivables:
Fiscal 2015
Fiscal 2014
Fiscal 2013
Allowance for warranty
Fiscal 2015
Fiscal 2014
Fiscal 2013
(a) Deductions consist of write offs charged against the allowance for doubtful accounts and warranty claim costs.
(b) Adjustments related to acquisitions and translation.
81
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
10.1*
10.2*
10.3*
10.4*
10.5*
Exhibit Index
Exhibit Description
Asset and Stock Purchase Agreement, dated as of December 13, 2014, by and between Regal Beloit
Corporation and Emerson Electric Co. [Incorporated by reference to Exhibit 2.1 to Regal Beloit Corporation's
Current Report on Form 8-K filed on December 15, 2014]
Amended and Restated Articles of Incorporation of Regal Beloit Corporation. [Incorporated by reference to
Exhibit 3 to Regal Beloit Corporation's Current Report on Form 8-K filed on May 1, 2015]
Amended and Restated Bylaws of Regal Beloit Corporation. [Incorporated by reference to Exhibit 3.1 to Regal
Beloit Corporation's Current Report on Form 8-K filed on November 6, 2014]
Amended and Restated Articles of Incorporation and Amended and Restated Bylaws of Regal Beloit
Corporation [Incorporated by reference to Exhibits 3.1 and 3.2 hereto]
Credit Agreement, dated as of June 30, 2011, among Regal Beloit Corporation, the financial institutions party
thereto, Bank of America, N.A., as syndication agent, Wells Fargo Bank, N.A., U.S. Bank National Association
and Fifth Third Bank, as co-documentation agents, JPMorgan Chase Bank, N.A., as administrative agent, and
J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers
and joint book managers. [Incorporated by reference to Exhibit 4.1 to Regal Beloit Corporation's Current
Report on Form 8-K filed on July 7, 2011]
First Amendment, dated as of June 30, 2011, among Regal Beloit Corporation, the financial institutions party
thereto, U.S. Bank National Association and Wells Fargo Bank, N.A., as co-documentation agents, Bank of
America, N.A., as administrative agent, and JPMorgan Chase Bank, N.A., as syndication agent, to Term Loan
Agreement, dated as of June 16, 2008, among Regal Beloit Corporation, the financial institutions party thereto,
U.S. Bank National Association and Wells Fargo Bank, N.A., as co-documentation agents, Bank of America,
N.A., as administrative agent, and JPMorgan Chase Bank, N.A., as syndication agent. [Incorporated by
reference to Exhibit 4.2 to Regal Beloit Corporation's Current Report on Form 8-K filed on July 7, 2011]
Note Purchase Agreement, dated as of August 23, 2007, by and among Regal Beloit Corporation and
Purchasers listed in Schedule A attached thereto. [Incorporated by reference to Exhibit 4.1 to Regal Beloit
Corporation's Current Report on Form 8-K filed on August 24, 2007]
Subsidiary Guaranty Agreement, dated as of August 23, 2007, from certain subsidiaries of Regal Beloit
Corporation. [Incorporated by reference to Exhibit 4.2 to Regal Beloit Corporation's Current Report on Form
8-K filed on August 24, 2007]
Note Purchase Agreement, dated as of July 14, 2011, by and among Regal-Beloit Corporation and Purchasers
listed in Schedule A attached thereto. [Incorporated by reference to Exhibit 4.1 to Regal Beloit Corporation's
Current Report on Form 8-K filed on July 20, 2011]
Subsidiary Guaranty Agreement, dated as of July 14, 2011, from certain subsidiaries of Regal-Beloit
Corporation [Incorporated by reference to Exhibit 4.2 to Regal Beloit Corporation's Current Report on Form
8-K filed on July 20, 2011]
First Amendment, dated as of August 16, 2011, to Note Purchase Agreement dated as of July 14, 2011, by and
among Regal-Beloit Corporation, certain subsidiaries of Regal-Beloit Corporation and the Purchasers listed on
the signature pages thereto. [Incorporated by reference to Exhibit 4.2 to Regal Beloit Corporation's Current
Report on Form 8-K filed on August 22, 2011]
Credit Agreement, dated as of January 30, 2015, by and among Regal Beloit Corporation, certain of its
subsidiaries, JPMorgan Chase Bank, N.A., as Administrative Agent, and the lenders named therein.
[Incorporated by reference to Exhibit 10.1 to Regal Beloit Corporation’s Quarterly Report on Form 10-Q for
the quarterly period ended April 4, 2015]
1998 Stock Option Plan, as amended [Incorporated by reference to Exhibit 99 to Regal Beloit Corporation's
Registration Statement on Form S-8 (Reg. No. 333-84779)]
2003 Equity Incentive Plan [Incorporated by reference to Exhibit B to Regal Beloit Corporation's Definitive
Proxy Statement on Schedule 14A for the 2003 Annual Meeting of Shareholders]
Regal Beloit Corporation 2007 Equity Incentive Plan [incorporated by reference to Appendix B to Regal Beloit
Corporation's definitive proxy statement on Schedule 14A for the Regal Beloit Corporation 2007 annual
meeting of shareholders held April 20, 2007]
Regal Beloit Corporation 2013 Equity Incentive Plan. [Incorporated by reference to Appendix A to Regal
Beloit Corporation’s definitive proxy statement on Schedule 14A for the Regal Beloit Corporation 2013 annual
meeting of shareholders held April 29, 2013].
Form of Key Executive Employment and Severance Agreement between Regal Beloit Corporation and Mark
J. Gliebe. [Incorporated by reference to Exhibit 10.6 to Regal Beloit Corporation's Annual Report on Form 10-
K for the year ended December 29, 2007]
82
10.6*
10.7*
10.8*
10.9*
10.11*
10.16*
10.15*
10.14*
10.13*
10.12*
10.10*
Form of Key Executive Employment and Severance Agreement between Regal Beloit Corporation and Terry
R. Colvin. [Incorporated by reference to Exhibit 10.7 to Regal Beloit Corporation's Annual Report on Form
10-K for the year ended December 29, 2007]
Form of Key Executive Employment and Severance Agreement between Regal Beloit Corporation and each
of Jonathan J. Schlemmer, Charles A Hinrichs, Peter C. Underwood and John M. Avampato. [Incorporated by
reference to Exhibit 10.1 to Regal Beloit Corporation's Current Report on Form 8-K filed on November 2,
Form of Agreement for Stock Option Grant. [Incorporated by reference to Exhibit 10.9 to Regal Beloit
Corporation's Annual Report on Form 10-K for the year ended December 31, 2005]
Form of Restricted Stock Agreement. [Incorporated by reference to Exhibit 10.10 to Regal Beloit Corporation's
Annual Report on Form 10-K for the year ended December 31, 2005]
Form of Restricted Stock Unit Award Agreement under the Regal Beloit Corporation 2003 Equity Incentive
Plan. [Incorporated by reference to Exhibit 10.10 to Regal Beloit Corporation's Annual Report on Form 10-K
for the year ended December 29, 2007]
Form of Stock Option Award Agreement under the Regal Beloit Corporation 2007 Equity Incentive Plan.
[Incorporated by reference to Exhibit 10.2 to Regal Beloit Corporation's Current Report on Form 8-K filed on
April 25, 2007]
Form of Restricted Stock Award Agreement under the Regal Beloit Corporation 2007 Equity Incentive Plan.
[Incorporated by reference to Exhibit 10.3 to Regal Beloit Corporation's Current Report on Form 8-K filed on
April 25, 2007]
Form of Restricted Stock Unit Award Agreement under the Regal Beloit Corporation 2007 Equity Incentive
Plan. [Incorporated by reference to Exhibit 10.4 to Regal Beloit Corporation's Current Report on Form 8-K
filed on April 25, 2007]
Form of Stock Appreciation Right Award Agreement under the Regal Beloit Corporation 2007 Equity Incentive
Plan. [Incorporated by reference to Exhibit 10.5 to Regal Beloit Corporation's Current Report on Form 8-K
filed on April 25, 2007]
Target Supplemental Retirement Plan for designated Officers and Key Employees, as amended and restated.
[Incorporated by reference to Exhibit 10.2 to Regal Beloit Corporation's Current Report on Form 8-K dated
November 2, 2010]
Form of Participation Agreement for Target Supplemental Retirement Plan. [Incorporated by reference to
Exhibit 10.12 to Regal Beloit Corporation's Annual Report on Form 10-K for the year ended December 31,
Regal Beloit Corporation Shareholder Value Added (SVA) Executive Officers Incentive Compensation Plan.
[Incorporated by reference to Exhibit 10.17 to Regal Beloit Corporation's Annual Report on Form 10-K for
the year ended January 1, 2011]
Form of Stock Appreciation Rights Award Agreement under the Regal Beloit Corporation 2013 Equity
Incentive Plan. [Incorporated by reference to Exhibit 10.2 to Regal Beloit Corporation’s Current Report on
Form 8-K filed on May 2, 2013].
Form of Restricted Stock Unit Award Agreement under the Regal Beloit Corporation 2013 Equity Incentive
Plan. [Incorporated by reference to Exhibit 10.3 to Regal Beloit Corporation’s Current Report on Form 8-K
filed on May 2, 2013].
Form of TSR Based Performance Share Unit Award Agreement under the Regal Beloit Corporation 2013
Equity Incentive Plan. [Incorporated by reference to Exhibit 10.4 to Regal Beloit Corporation’s Current
Report on Form 8-K filed on May 2, 2013].
Form of EBIT Based Performance Share Unit Award Agreement under the Regal Beloit Corporation 2013
Equity Incentive Plan.
Computation of Ratio of Earnings to Fixed Charges.
Significant Subsidiaries of Regal Beloit Corporation.
Consent of Independent Registered Public Accounting Firm.
Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Section 1350 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.**
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE
12
21
23
31.1
31.2
32
XBRL Taxonomy Extension Presentation Linkbase
10.21*
10.17*
10.18*
10.19*
10.20*
________________________
* A management contract or compensatory plan or arrangement.
** Furnished herewith.
83
CASH DIVIDENDS AND STOCK SPLITS
PUBLIC INFORMATION AND REPORTS
During 2015, four quarterly cash dividends were declared on
Regal Beloit Corporation common stock. If you have not
received all dividends to which you are entitled, please write or
call Computershare at the address above.
Regal Beloit paid its first cash dividend in January 1961. Since
that date, Regal Beloit has paid 222 consecutive quarterly
dividends through January 2016. The Company has increased
cash dividends 43 times in the 55 years these dividends have
been paid. The dividend has never been reduced. The Company
has also declared and issued 15 stock splits/dividends since
inception.
NOTICE OF ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 9:00am
CDT, on Monday, April 25, 2016 at Regal Beloit Corporation
Headquarters, Packard Learning Center, 200 State Street,
Beloit, WI 53511-6254.
AUDITORS
Deloitte & Touche LLP, Milwaukee, Wisconsin
Shareholders can view Company documents on the internet on
the Company’s website at www.regalbeloit.com that also
includes a link to the Security and Exchange Commission’s
EDGAR website. From the website, shareholders may also
request copies of news releases of Forms 10-K and 10-Q as
filed by the Company with the Securities and Exchange
Commission.
Please direct information request to:
Regal Beloit Corporation
Attn: Investor Relations
200 State Street
Beloit, WI 53511-6254
Email: investor@regalbeloit.com
www.regalbeloit.com
TRANSFER AGENT
Computershare Investor Services
PO Box 30170
College Station, TX 77842-3170
Regal Beloit Corporation is a Wisconsin corporation listed on
the NYSE under the symbol RBC.
ADDITIONAL INFORMATION FOR NON-GAAP MEASURES
We prepare financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). We
also periodically disclose certain financial measures that may be considered “non-GAAP” financial measures. We believe that these
non-GAAP financial measures are useful measures for providing investors with additional information regarding our results of
operations and for helping investors understand and compare our operating results across fiscal years and compared to our peers.
This additional information is not meant to be considered in isolation or as a substitute for our results of operations prepared and
presented in accordance with GAAP.
ADJUSTED DILUTED EARNINGS PER SHARE
Diluted Earnings Per Share
Incremental Warranty Expense
Goodwill Impairment
Asset Impairments and Other, Net
Purchase Accounting and Transaction Costs
Restructuring Costs
Venezuelan Currency Devaluation
Venezuelan Asset Write Down
Gain on Disposal of Real Estate
Prior Year Tax Benefit
(Gain) Loss on Divestiture Bankruptcy
Loss on Sale of Joint Venture
Adjusted Diluted Earnings Per Share
Dec 31, 2011
3.79
$
0.19
-
-
0.73
0.10
-
-
-
-
(0.10)
-
4.71
$
Twelve Months Ended
Dec 29, 2012
4.64
$
-
-
-
0.01
0.15
-
-
(0.02)
(0.05)
-
-
4.73
$
Dec 28, 2013
2.64
$
-
1.55
0.10
0.02
0.09
-
-
-
(0.04)
-
-
4.36
$
Jan 3, 2015
0.69
$
-
2.59
0.66
0.14
0.18
0.15
-
(0.23)
-
0.09
0.04
4.31
$
Jan 2, 2016
3.18
$
-
1.29
-
0.47
0.13
0.02
0.28
(0.04)
-
-
-
5.33
$
(Dollars in Millions)
FREE CASH FLOW
Net Cash Provided by Operating Activities
Additions to Property Plant and Equipment
Grants Received for Capital Expenditures
Free Cash Flow
Twelve Months Ended
Dec 31, 2011
$
265.3
(57.6)
-
207.7
$
Dec 29, 2012
$
351.7
(91.0)
8.7
269.4
$
Dec 28, 2013
$
305.0
(82.7)
1.6
223.9
$
Jan 3, 2015
$
298.2
(83.6)
-
214.6
$
Jan 2, 2016
$
381.1
(92.2)
-
288.9
$
84
Corporate Information
Company Officers: (standing left to right) Peter Underwood, John Avampato,
Terry Colvin. (seated left to right) Chuck Hinrichs, Mark Gliebe, Jon Schlemmer.
Board of Directors
Stephen M. Burt (2)(3)
Managing Director
Duff & Phelps
Director since 2010
Henry W. Knueppel
Former Chairman and Chief Executive Officer
Regal Beloit Corporation
Director since 1987
Anesa T. Chaibi (3)
Former President and Chief Executive Officer
HD Supply Facilities Maintenance
Director since 2014
Rakesh Sachdev (3)*
Chief Executive Officer
Platform Specialty Products Corporation
Director since 2007
Christopher L. Doerr (2)*
Co-Chief Executive Officer
Passage Partners LLC
Former President—Co-Chief Executive Officer
LEESON Electric Corporation
Director since 2003
Thomas J. Fischer (1)*
Former Managing Partner, Milwaukee Office
Arthur Andersen LLP
Director since 2004
Dean A. Foate (2)
President and Chief Executive Officer
Plexus Corporation
Director since 2005
Mark J. Gliebe
Chairman and Chief Executive Officer
Regal Beloit Corporation
Director since 2007
Curtis W. Stoelting (1) (4)
President and Chief Operating Officer
Roadrunner Transportation Systems, Inc.
Director since 2005
Jane L. Warner (1)
Former Executive Vice President
Decorative Surfaces and Finishing Systems
Illinois Tool Works
Director since 2013
Committee assignments as of November 2014
(1) Member of Audit Committee
(2) Member of Compensation and
Human Resources Committee
(3) Member of Corporate Governance
and Director Affairs Committee
(4) Presiding Director
* Committee Chairman
Company Officers
John Avampato
VP Chief Information Officer
Terry Colvin
VP Corporate Human Resources
Mark Gliebe
Chairman and Chief Executive Officer
Chuck Hinrichs
VP Chief Financial Officer
Jon Schlemmer
Chief Operating Officer
Peter Underwood
VP General Counsel & Secretary
2015 Annual Report
Regal Beloit Corporation
200 State Street
Beloit, Wisconsin 53511-6254
Phone: (608) 364-8800
regalbeloit.com