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2017
ANNUAL REPORT
Creating
a better tomorrow ™...
Employees want to work for a company that makes a difference. That is why in 2017
we updated our business purpose to an aspirational statement that reflects our culture.
Our new company purpose is “We create a better tomorrow by efficiently converting
power into motion.” This statement describes how our employees and products make
a difference in the world—how we are all “Creating a better tomorrow™…”
Cr eati ng a bet ter t omor row ™. ..
5
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5
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1
3
.
4
$
7
8
.
4
$
4
4
.
4
$
0
0
.
1
$
4
9
.
0
$
0
9
.
0
$
4
8
.
0
$
%
5
8
1
%
6
3
1
%
0
2
1
%
6
0
1
2014
2015
2016 2017
2014
2015
2016 2017
2014 2015
2016 2017
2014 2015
2016 2017
NET SALES
(IN BILLIONS)
ADJUSTED DILUTED
EARNINGS PER SHARE*
DIVIDENDS
PER SHARE PAID
FREE CASH FLOW
AS A PERCENTAGE
OF ADJUSTED NET
INCOME*
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.
2
What to expect from us.
Whether you are an investor, a customer, or a supplier, when you interact
with Regal employees here’s what you can expect:
Responsibility
We have a responsibility to keep employees safe and our
environment clean. We are motivated by the fact that the
products we make create a better tomorrow by reducing demands
for energy. Locally, we encourage and celebrate our employees’
active roles in the communities where we work and live.
Transparency
We have a unique culture built on the core ideas of
transparency, candor and best practice sharing. Our
leadership team is accessible, and open to all ideas.
Performance
Our customers, employees and shareholders all have
choices. Our performance determines if they choose us.
We set ambitious goals and deliver results.
Integrity
Integrity is what we value most.
We are honest and trustworthy.
Inclusion
We believe in a globally inclusive and
diverse work environment. Our teams
contribute their own unique skills,
perspectives and experiences to develop
innovative solutions for our customers.
Engagement
Our people are energized and engaged in
their work and empowered to accomplish our
objectives. Together we work as a team to
make Regal successful.
...This is our culture.
3
To our SHAR EHOL DERS
Regal’s performance in 2017 laid solid groundwork for
our future. Early in the year, we communicated our
Enterprise Strategy and defined three-year targets on
our key financial metrics: organic sales growth, adjusted
operating margins, return on invested capital (ROIC),
and free cash flow. In 2017, Regal made meaningful
progress on all four key metrics. We grew organic sales
in every segment of the company and achieved total
sales of $3.36B—up 4.3 percent. Our adjusted operating
margins improved 40 basis points, and we improved
our ROIC by 70 basis points. Finally, for the seventh
consecutive year we achieved our goal of free cash flow
to net income at a ratio greater than 100 percent.
Our Enterprise Strategy outlines the long-term direction
of the company. Not only will it deliver continued
improvements in key financial metrics, it will also help
create a better tomorrow for our customers, employees
and shareholders.
THE REGAL ENTERPRISE STRATEGY
Our strategy to win is based on three simple themes:
Focus, Simplify and Innovate.
We focus our resources on businesses which have the
greatest opportunities to meet customers’ expectations,
while we simultaneously grow the profitability of our
company. Last year, we increased investments in the
front end of our core businesses by hiring more feet on
the street, and by adding more digital content. These
investments enable our customers to more easily
market and apply our products.
Complexity can be a barrier to growth. We are on a
continuous journey to simplify every aspect of our
operations to increase speed, improve responsiveness,
4
and reduce costs. Last year, we invested $14 million to
restructure our operations, seventy percent of which
was targeted at improvements in the Commercial and
Industrial Systems segment. We reduced four more
factory rooftops and converted three more enterprise
resource planning systems to our common global
platform. Simplification efforts have the dual benefits of
improving the efficiencies of operations while “making
it easier for the customer.”
We continue to innovate our products around the
long-term growth trends of energy efficiency and smart
products. Our engineers employ disruptive technology
to deliver differentiated value to our customers.
Regal is well positioned to help meet the energy
efficiency challenges our customers will face in the
future. Regal’s patented axial motor technology
delivers significant energy efficiency savings and is
now featured in Commercial Refrigeration, Commercial
Boiler, Commercial HVAC and Residential HVAC
applications. These products provide customers with
breakthroughs in size, weight, noise, efficiency and
airflow performance.
We are excited about the rapidly expanding internet
of things. It provides very significant opportunities for
Regal and our customers. Each of our businesses is
investing in new product developments, software tools,
and application knowledge. Regal will be ready to meet
tomorrow’s connected product needs.
Regal’s Enterprise Strategy not only sets forth financial
targets that promise to deliver stronger shareholder
returns but it also establishes a long-term direction that
delivers increased value to our customers and a better
tomorrow for our employees and for the communities
where we work.
CREATING A BETTER TOMORROW™…
The aspiration of our purpose statement says it all. “We
create a better tomorrow by efficiently converting power
into motion.” Every year at every Regal location, we
set targets to decrease our footprint by reducing our
usage of energy and water, and limiting the generation
of hazardous and non-hazardous waste. Over the past
FOCUS We will focus our resources where we have the greatest
opportunities to meet customers’ expectations, while we grow the
company’s sales and profitability. Smaller, high efficiency motors
with integrated controls, larger energy efficient motors and power
transmission products are what we do best.
F O C U S
REGAL
ENTERPRISE
STRATEGY
I N N O VAT E
INNOVATE Regal has a reputation for innovation. We
will continue to innovate around the central theme of
“making it easier for our customers.” We view energy
efficiency and the internet of things as long-term
growth opportunities for innovation.
three years, we’ve made progress on all fronts. We
have reduced water usage across the company by over
45 percent, saving over 400 million gallons. While we
drive to reduce our footprint every year, we also work
hard to increase the impact of our handprint through
more sustainable products that offer customers energy
efficiency solutions. At Regal, we believe that decreasing
our footprint and increasing our handprint are important
steps in Creating a better tomorrow™...
I N N O VAT E
WHAT TO EXPECT FROM US
Current social, political and economic times can
lead people to question the thoughts and motives of
people they work with daily. At Regal, we want all
stakeholders to know exactly what to expect from us,
regardless of the business situation, political climate or
cultural environment. In every interaction with Regal
you can expect the highest Integrity and broadest
Inclusion. Expect that we will be Engaged with our
team members, and we will take Responsibility for the
products we make and the way we make them. Finally,
in your interactions with us, we will be Transparent in
our communications, and we will do everything we
can to Perform to your expectations. “What To Expect
From Us” was developed by our people, for our people.
It defines our culture and helps set us apart from our
competition.
LOOKING FORWARD
We finished 2017 with great momentum. As we look to
2018 and beyond, we are optimistic about the economic
backdrop and Regal’s competitive position in the
marketplace. We see positive megatrends in the global
economy that align with Regal’s core: a growing global
REGAL
ENTERPRISE
STRATEGY
S I M P L I F Y
SIMPLIFY We are on a continuous journey to simplify
every aspect of our operations to increase speed,
improve responsiveness, and reduce costs.
F O C U S
population, investments in infrastructure, the increasing
need to conserve natural resources, and a more
connected world. These all play to Regal’s strengths.
REGAL
ENTERPRISE
STRATEGY
Before closing, I would like to recognize and thank
Chuck Hinrichs, our outgoing Chief Financial Officer
(CFO), who will be retiring from Regal at the end of the
first quarter 2018. Chuck has been our CFO for nearly
eight years. He has been a great asset to Regal, and was
a trusted advisor to me. We will miss Chuck’s passion
for Regal, his sound advice, leadership and warmth. We
wish Chuck and his wife Linda all the best.
S I M P L I F Y
I am deeply grateful for the opportunities given to
Regal by our customers, the talent and dedication of
our employees, the guidance and support from our
board of directors and the ongoing confidence of our
shareholders.
Sincerely,
Mark J. Gliebe, Chairman and CEO
FOCUS
INNOVATE
SIMPLIFY
5
COMMERCIAL &
INDUSTRIAL SYSTEMS
CL IMATE
SOL UT I ON S
Medium and large motors, power
controls, generators, and custom drives.
Small motors, small variable-speed motors
and controls, and air moving solutions.
SALES BY END MARKET
SALES BY END MARKET
OIL &
GAS
GENERAL
INDUSTRY
GENERAL
INDUSTRY
WATER
HEATING
POWER
GEN.
PUMP
COMMERCIAL
HVAC
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COMM.
REF.
DISTRIBUTION
AFTERMARKET
RESIDENTIAL
& LIGHT
COMMERCIAL
HVAC
3
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9
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Our UlteMAX™ motor uses
innovative axial technology
to reduce electric motor
size and weight by 50–75
percent while significantly
improving energy efficiency.
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.
Our innovative Genteq®
3
3
DEC Star® blower system
7
$
provides up to 35 percent
energy savings while
reducing size and weight.
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
TOTAL NET SALES
(MILLIONS)
TOTAL NET SALES
TOTAL NET SALES
(MILLIONS)
(MILLIONS)
TOTAL NET SALES
TOTAL NET SALES
(MILLIONS)
(MILLIONS)
TOTAL NET SALES
(MILLIONS)
6
POWER TRANSMISSION
SOLUTIONS
Gearing, bearings, couplings,
and conveying components.
SALES BY END MARKET
OTHER
HVAC
GENERAL
INDUSTRY
OIL &
GAS
METALS
BEVERAGE
MATERIAL
HANDLING
3
.
4
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Our new, patented
Sealmaster® Time
Saving™ Bearing
reduces maintenance
costs by 50 percent.
2016
2017
2016
2017
2016
2017
TOTAL NET SALES
TOTAL NET SALES
(MILLIONS)
(MILLIONS)
TOTAL NET SALES
(MILLIONS)
7
PRODUCTS AND SOLUTIONS ENGINEERED FOR GLOBAL DEMAND. Our broad range of electric motors and complementary power transmission solutions is meeting the increasing demand for innovation and energy efficiency.
Increasing our handprint.
THE BENEFITS ADD UP
QUICKLY. Over the past 15 years
our draft inducer blowers have
helped reduce CO2 discharged by
more than 23 million tons. That
is the equivalent of taking over
4,500,000 cars off the road for a year.
BETTER TOMORROWS START RIGHT
BETTER TOMORROWS START RIGHT
HERE AT HOME.
HERE AT HOME. In millions of homes, warm
air furnaces and hot water heaters accumulate
thousands of hours of operation annually.
High efficiency furnaces and water heaters
using Regal’s draft inducer blower technology
burn less fossil fuel and produce fewer
greenhouse gases.
8
Reducing our footprint.
Using less EN ERGY
In every Regal facility we are
working to save energy. In 2017,
our company reduced our energy
usage by 15 million Btus.*
Co ns e rvin g WATER
Water used in Regal manufacturing
processes is reduced and recycled
to minimize the use of this precious
resource. Over the past three years
our facilities have saved over 400
million gallons of water.
Re duc ing WAST E
Generating less waste avoids the
use of natural resources and helps
keep the communities where we
work and live cleaner. In 2017, Regal
reduced waste in our facilities by
more than six percent.*
Across China, we are upgrading to
LED lighting, improving equipment
efficiency by installing variable speed
controls, and simplifying production
operations. In 2017 Regal’s China
operations reduced energy usage an
average of 13 percent.*
In Reynosa and Piedras Negras,
Mexico, we installed water treatment
systems that are saving over 1 million
gallons of water annually.
In Wausau, USA, 36 tons of fiber
material are no longer hauled
away for disposal. Rather, it is
converted into biomass and used
as fuel at a local power plant.
That is how we create a better tomorrow.
*per million sales
9
PERFORMANCE EXCELLENCE. It is a journey of
continuous improvement, and each of our facilities is
challenged to reach new heights. It starts by empowering
our people who collaborate in High Energy Teams. These
teams learn and apply problem-solving skills using lean
methodologies. The goal? Gleaming, five-star facilities that
continuously improve safety, quality, delivery and cost.
Our Five Star Journey to Performance Excellence
To achieve even a one-star rating, a Regal facility must demonstrate exceptional employee engagement,
rigorous application of continuous improvement tools, and meet customer KPI performance standards.
1 STAR FACILITIES
• Black River Falls
• Bowling Green
• Changzhou
• Faridabad
• Morehead
• Bangkok
• Juarez, Motor Shafts
2 STAR FACILITIES
3 STAR FACILITIES
• Piedras Negras, Motors
• Juarez, Die-Cast Parts
• Reynosa
• West Plains
• Juarez, Pump Motors
• Monterrey, Generators
• Juarez, Commercial Motors
• Yueyang
• Monterrey, Industrial Motors
10
Regal Beloit Corporation
200 State Street
Beloit, WI 53511
(608) 364-8800
2017 Annual Report
on Form 10-K
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 December 30, 2017
Commission File number 1-7283
Regal Beloit Corporation
(Exact Name of Registrant as Specified in Its Charter)
Wisconsin
39-0875718
(State of Incorporation)
(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, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in
Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated Filer
Smaller Reporting Company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the voting stock held by non-affiliates of the registrant as of July 1, 2017 was approximately $3.6 billion.
On February 23, 2018, the registrant had outstanding 44,318,825 shares of common stock, $.01 par value, which is registrant's only class of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Proxy Statement for the Annual Meeting of Shareholders to be held on April 30, 2018 is incorporated by reference into Part
III hereof.
1
REGAL BELOIT CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 30, 2017
TABLE OF CONTENTS
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
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
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
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
Item 16
Form 10-K Summary
Page
4
12
19
20
21
21
22
23
25
34
37
80
80
80
81
81
81
81
81
82
85
2
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;
risks associated with foreign manufacturing;
issues and costs arising from the integration of acquired companies and businesses and the timing and impact of purchase accounting
adjustments;
prolonged declines in oil and gas up stream capital spending;
economic changes in global markets where we do business, such as reduced demand for the products we sell, currency exchange
rates, inflation rates, interest rates, recession, government policies, including policy changes affecting taxation, trade, immigration
and the like, and other external factors that we cannot control;
product liability and other litigation, or claims by end users, government agencies or others that our products or our customers’
applications failed to perform as anticipated, particularly in high volume applications or where such failures are alleged to be the
cause of property or casualty claims;
unanticipated liabilities of acquired businesses;
unanticipated costs or expenses we may incur related to product warranty issues;
our dependence on key suppliers and the potential effects of supply disruptions;
infringement of our intellectual property by third parties, challenges to our intellectual property and claims of infringement by us of
third party technologies;
effects on earnings of any significant impairment of goodwill or intangible assets;
losses from failures, breaches, attacks or disclosures involving our information technology infrastructure and data;
cyclical downturns affecting the global market for capital goods; and
other risks and uncertainties including but not limited to those described in “Risk Factors” in this Annual Report on Form 10-K and
from time to time in our reports filed with US 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.”
3
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 30, 2018 (the "2018 Proxy Statement”), or to information contained in specific sections of the 2018 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 December 30, 2017
as “fiscal 2017", December 31, 2016 as “fiscal 2016", and the fiscal year ended January 2, 2016 as “fiscal 2015".
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 operating segments: Commercial and Industrial Systems,
Climate Solutions and Power Transmission Solutions. Financial information on our operating segments for fiscal 2017, fiscal 2016, and fiscal
2015 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 manufacturers ("OEMs") 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 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, machinery, marine, buildings, cement and glass, and pulp and paper.
•
Precision stator and rotor kits from 5 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 5 kilowatts through 4 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.
4
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.
•
Fractional motors and blowers used across a wide range of other applications including white goods, water heating equipment, and
small pumps and compressors and other small appliances. 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 assist 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 Liquid Natural Gas ("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 and wood products, grain and biofuels, power generation, food and beverage,
and Heating, Ventilation, Air Conditioning, and Refrigeration ("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.
5
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 sales 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
In 2016, we completed one acquisition in the Climate Solutions segment.
• On January 18, 2016, the Company purchased the remaining shares owned by the joint venture partner in its Elco Group B.V. (“Elco”)
joint venture increasing the Company’s ownership from 55.0% to 100.0% for $19.6 million. The purchase price of Elco is reflected
as a component of equity.
In 2015, we completed one acquisition in the Power Transmissions Solutions segment.
• On January 30, 2015, we acquired the Power Transmissions Solutions ("PTS") business from Emerson Electric Co. ("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.
Divestitures
In 2016, we completed two divestitures.
• On June 1, 2016, the Company sold its Mastergear Worldwide ("Mastergear") business to Rotork PLC for a purchase price of $25.7
million. Mastergear was included in the Company's Power Transmission Solutions segment. Gains related to the sale of $0.1 million
and $11.6 million were recorded as a reduction to Operating Expenses in the Consolidated Statements of Income during fiscal 2017
and 2016, respectively.
• On July 7, 2016, the Company sold the assets of its Venezuelan subsidiary, which had been included in the Company's Commercial
and Industrial Systems segment, to a private company for $3.0 million. Of this amount, $1.0 million was received on the transaction
closing date and $2.0 million will be paid in 24 monthly installments. The Company may receive additional amounts in the future
related to certain accounts receivable of this business. The gains will be recognized as the cash is received. The Company wrote down
its investment and ceased operations of this subsidiary in 2015.
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 Plainfield, Indiana; McAllen, Texas; LaVergne, Tennessee; Florence, Kentucky; and Monterrey,
Mexico 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 2017, fiscal 2016 or fiscal 2015.
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.
6
Competition
Commercial and Industrial Systems Segment
Electric motor manufacturing is a highly competitive global industry in which there is emphasis on quality, reliability, and 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 US and foreign manufacturers is blurring as competition becomes increasingly
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 Wolong Electric Group Ltd., Kirloskar Brothers Limited,
Crompton Greaves Limited, Lafert, ABB Ltd., Johnson Electric Holdings Limited, Siemens AG, Toshiba Corporation, Cummins, Inc., Leroy-
Somer (a division of Nidec Corporation), TECHTOP Electric Motors, Weg S.A., Hyundai, Ziehl-Abegg, and Teco-Westinghouse Motor
Company.
Climate Solutions Segment
Our major competitors in the Climate Solutions segment include US Motors (a division of Nidec Corporation), Broad-Ocean Motor Co., ebm-
papst Mulfingen GmbH & Co.KG, Welling Holding Ltd., McMillan Motors, Panasonic Corporation, and Bluffton Motor Works.
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 Solutions 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, and Timken Company.
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.
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 46 Non-Provisional
United States patents, 14 Provisional United States patents and an additional 77 Non-Provisional foreign patents in fiscal 2017.
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.
For fiscal 2017, 2016 and 2015, research and development expenses, which are solely focused on products or processes that are entirely
innovative to our Company or to our industry, were $29.9 million, $29.5 million and $30.1 million, respectively. For the same periods, total
research and development and other engineering expenses, which include product and process improvements, were $80.2 million, $77.3 million
and $78.7 million, respectively.
7
Manufacturing and Operations
We have developed and acquired global operations in locations such as China, Mexico, Europe, 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 Regal Business System to drive Performance Excellence. Our Regal Business System 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, Thailand, and Australia, as well as a
number of other locations throughout the world. Our Commercial and Industrial Systems segment currently includes 99 manufacturing, service,
office and distribution facilities of which 39 are principal manufacturing facilities and 15 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. Our Climate Solutions segment includes 37 manufacturing, service, office and distribution facilities, of which
17 are principal manufacturing facilities and 5 are principal warehouse facilities. The Climate Solutions segment's present operating facilities
contain a total of approximately 3.0 million square feet of space, of which approximately 51% are leased. Our Power Transmission Solutions
segment currently includes 30 manufacturing, service, office and distribution facilities of which 17 are principal manufacturing facilities and 3
are principal warehouse facilities. The Power Transmission Solutions segment's present operating facilities contain a total of approximately 3.2
million square feet of space, of which approximately 13% 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 December 30, 2017, our
backlog was $447.2 million, as compared to $355.8 million on December 31, 2016. We believe that virtually all of our backlog will be shipped
in 2018.
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.
8
Employees
At the end of fiscal 2017, we employed approximately 23,600 employees worldwide. Of those employees, approximately 10,500 were located
in Mexico; approximately 5,400 in the United States; approximately 3,800 in China; approximately 1,300 in India; and approximately 2,600 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 of February 27, 2018 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.
9
Executive Officer
Age
Position
Business Experience and Principal Occupation
Mark J. Gliebe
57
Chairman and Chief
Executive Officer
Jonathan J. Schlemmer
52
Chief Operating
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 General Electric. 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,
Mr. Schlemmer worked for General Electric in its electric motors
business in a variety of roles including quality, Six Sigma and
engineering.
Charles A. Hinrichs
64
Vice President and
Chief Financial
Officer
Joined the Company and was elected Vice President and 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.
Thomas E. Valentyn
58
Vice President,
General Counsel
and Secretary
Terry R. Colvin
62
Vice President,
Corporate Human
Resources
John M. Avampato
57
Vice President and
Chief Information
Officer
Joined the Company in December 2013 as Associate General Counsel
and was elected Vice President, General Counsel and Secretary in May
2016. Prior to joining the Company, Mr. Valentyn was General Counsel
with Twin Disc, Inc. from 2007 to 2013. From 2000 to 2007 he served as
Vice President and General Counsel with Norlight Telecommunications;
prior thereto he served as in-house counsel with Johnson Controls, Inc.
from 1991-2000.
Joined the Company in September 2006 and was elected Vice President,
Corporate Human Resources in January 2007. 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 as an officer of the
Company. Prior to joining the Company, Mr. Avampato was employed
with Newell Rubbermaid from 1984 to 2006 where he was Vice
President, Chief Information Officer from 1999 to 2006.
As previously reported, Mr. Hinrichs will retire as Vice President and Chief Financial Officer on March 31, 2018, and Mr. Robert J. Rehard,
currently Vice President Financial Planning & Analysis, will be promoted to the role of Vice President and Chief Financial Officer effective
April 1, 2018.
10
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.
11
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, 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
December 30, 2017, we had $1.1 billion in aggregate debt outstanding under our various financing arrangements, $139.6 million in cash and
cash equivalents and $475.0 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
12
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.
We have continued to see 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 each of our Climate Solutions and Commercial and Industrial Systems segments, 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 manufacture a significant portion of our products outside the United States, and political, societal or economic instability may
present additional risks to our business.
Approximately 18,200 of our approximate 23,600 total employees and 63 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, breakdowns in trade relations, the imposition of tariffs and other trade restrictions, lack of reliable legal systems,
ownership restrictions, the impact of 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.
13
We may encounter difficulties in integrating the operations of acquired businesses 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 acquired multiple businesses. 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 requires 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 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;
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 2015-2016, 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 sell certain products for high volume applications, and any failure of those products to perform as anticipated could result in
significant liability and expenses that may adversely affect our business and results of operations.
We manufacture and sell a number of products for high volume applications, including electric motors used in pools and spas, residential and
commercial heating, ventilation and 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.
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
manufactured and sold in high volumes by a third party. These ventilation units are subject to regulation by government agencies such as the
US Consumer Product Safety Commission (“CPSC”). The claims generally allege that the ventilation units were the cause of fires. Based on
the current facts, we cannot assure you that these claims, individually or in the aggregate, will not have a material adverse effect on our
subsidiary's results of operations, financial condition or cash flows. We cannot reasonably predict the outcome of these claims, the nature or
extent of any CPSC or other remedial actions, if any, that our subsidiary or we on their behalf may need to undertake with respect to motors
that remain in the field, or the costs that may be incurred, some of which could be significant.
14
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 product liability claim may also include the imposition of punitive damages, the award of which, pursuant
to certain state laws, may not be covered by insurance. 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 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 US dollar equivalent of such amounts measured in
the applicable functional currency. These foreign operations have the potential to impact our financial position due to fluctuations in the local
currency arising from the process of re-measuring the local functional currency in the US dollar. Any increase in the value of the US dollar in
relation to the value of the local currency, whether by means of market conditions or governmental actions such as currency devaluations, will
adversely affect our revenues from our foreign operations when translated into US dollars. Similarly, any decrease in the value of the US dollar
in relation to the value of the local currency will increase our operating costs in foreign operations, to the extent such costs are payable in
foreign currency, when translated into US dollars.
15
Businesses that we have acquired or that we may acquire in the future may have liabilities which are not known to us.
We have assumed liabilities of acquired businesses 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 trade name intangibles comprise a significant portion of our total assets, and if we determine that goodwill
and indefinite-lived trade name 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 trade name
intangibles represent long-standing brands acquired in business combinations and assumed to have indefinite lives. We review goodwill and
indefinite-lived trade name 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 trade name 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 trade name 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 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.
16
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, attacks or breaches 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.
IT security threats via computer malware and other “cyber attacks,” which are increasing in both frequency and sophistication, could also result
in unauthorized disclosures of information and create financial liability, subject us to legal or regulatory sanctions, or damage our reputation.
While we continuously seek to maintain robust information security mechanisms and controls, the impact of a material IT event could have a
material adverse effect on our competitive position, results of operations, financial condition and cash flow.
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, some elements 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 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. In addition, if environmental and human health and safety laws and regulations are repealed, made less burdensome
or implemented at a later date, demand for our products designed to comply with such regulations may be unfavorably impacted.
17
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 the United States or foreign governments which could disrupt
manufacturing and commercial operations, including policy changes affecting taxation, trade, immigration, currency devaluation, tariffs and
the like.
We are subject to changes in legislative, regulatory and legal developments involving income and other taxes.
We are subject to US 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, could have a negative impact on our ability to compete in the global marketplace, and could have a significant adverse effect on our
results or operations, financial conditions and liquidity.
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.
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 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.
The effect of recent US Tax Reform legislation is subject to continued regulatory and interpretive guidance, which could impact our
financial results.
On December 22, 2017, the US government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the
“Act”). The Act contains significant changes to corporate taxation including, among other things, reduction of the US corporate tax rate from
a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense (except for certain small businesses),
limitation of the deduction for future net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks,
one time taxation of foreign earnings at reduced rates regardless of whether they are repatriated, elimination of US tax on foreign earnings
(subject to certain exceptions), immediate deductions for certain new investments instead of deductions over time, and modifying or repealing
many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax
law is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various
states will conform to the newly enacted federal tax law. Financial results for fiscal 2017 reflect provisional estimates based on our initial
analysis and current interpretation of the legislation. Given the complexity of the legislation, anticipated guidance from the US Treasury, and
the potential for additional guidance from the SEC or the Financial Accounting Standards Board, these provisional estimates may be adjusted
during fiscal 2018.
18
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.
19
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, Europe, India, Thailand, and Australia.
Our Commercial and Industrial Systems segment currently includes 99 facilities, of which 39 are principal manufacturing facilities and 15 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.
The following represents our principal manufacturing and warehouse facilities in the Commercial and Industrial Systems segment (square
footage in millions):
Location
US
Mexico
China
India
Europe
Other
Total
Facilities
Total
Owned
Leased
Square Footage
12
11
8
3
2
18
54
2.3
1.3
1.8
0.6
0.2
0.8
7.0
1.4
0.7
1.7
0.5
0.2
0.3
4.8
0.9
0.6
0.1
0.1
—
0.5
2.2
Our Climate Solutions segment currently includes 37 facilities, of which 17 are principal manufacturing facilities and 5 are principal warehouse
facilities. The Climate Solutions segment's present operating facilities contain a total of approximately 3.0 million square feet of space, of which
approximately 51% are leased.
The following represents our principal manufacturing and warehouse facilities in the Climate Solutions segment (square footage in millions):
Location
US
Mexico
China
India
Europe
Other
Total
Facilities
Total
Owned
Leased
Square Footage
10
8
1
1
1
1
22
1.1
1.0
0.2
0.2
0.2
0.1
2.8
0.7
0.5
—
0.2
—
—
1.4
0.4
0.5
0.2
—
0.2
0.1
1.4
Our Power Transmission Solutions segment currently includes 30 facilities, of which 17 are principal manufacturing facilities and 3 are principal
warehouse facilities. The Power Transmission Solutions segment's present operating facilities contain a total of approximately 3.2 million
square feet of space, of which approximately 13% are leased.
20
The following represents our principal manufacturing and warehouse facilities in the Power Transmission Solutions segment (square footage
in millions):
Location
US
Mexico
China
Europe
Total
Facilities
Total
Owned
Leased
Square Footage
11
2
1
6
20
1.7
0.3
0.1
0.4
2.5
1.5
0.3
—
0.4
2.2
0.2
—
0.1
—
0.3
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
manufactured and sold in high volumes by a third party. These ventilation units are subject to product safety requirements and other potential
regulation of their performance by government agencies such as the US Consumer Product Safety Commission (“CPSC”). The claims generally
allege that the ventilation units were the cause of fires. We have recorded an estimated liability for incurred claims. Based on the current facts,
we cannot assure that these claims, individually or in the aggregate, will not have a material adverse effect on its subsidiary's financial condition.
Our subsidiary cannot reasonably predict the outcome of these claims, the nature or extent of any CPSC or other remedial actions, if any, that
our subsidiary may need to undertake with respect to motors that remain in the field, or the costs that may be incurred, some of which could be
significant.
We are from time to time, party to litigation and other legal or regulatory proceedings that arise in the normal course of our business operations
and the outcomes of which are subject to significant uncertainty, including product warranty and liability claims, contract disputes and
environmental, asbestos, intellectual property, employment and other litigation matters. 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. Many of these matters will only be resolved when one or more future events occur or fail to occur. Our management conducts regular
reviews, including updates from legal counsel, to assess the need for accounting recognition or disclosure of these contingencies, and such
assessment inherently involves an exercise in judgment. We accrue for exposures in amounts that we believe are adequate, and we do not
believe that the outcome of any such lawsuit individually or collectively will have a material effect on our financial position, results of operations
or cash flows.
ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
21
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY 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 January 4, 2016 through December 29, 2017.
2017 Price Range
2016 Price Range
Quarter
High
Low
Dividends
Declared
High
Low
Dividends
Declared
1st
2nd
3rd
4th
$
$
75.51
82.56
86.47
81.40
$
68.77
73.57
72.56
73.80
$
0.24
0.26
0.26
0.26
$
63.39
67.91
64.18
75.10
$
49.38
51.81
54.51
56.90
0.23
0.24
0.24
0.24
We have paid 230 consecutive quarterly dividends through January 2018. The number of registered holders of common stock as of January 26,
2018 was 375.
The following table contains detail related to the repurchase of our common stock based on the date of trade during the quarter ended December
30, 2017.
2017 Fiscal Month
October 1 to November 4
November 5 to December 2
December 3 to December 30
Total
Maximum
Number of
Shares that May be
Purchased Under the
Plans or Programs
1,743,196
1,743,196
1,743,196
Average
Price Paid
per Share
—
—
—
Total
Number of
Shares
Purchased
—
$
—
—
—
There were no shares purchased as a part of a publicly announced plan or program during the quarter.
Under our equity incentive plans, participants may pay the exercise price or satisfy all 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 exercise price or the amount to be withheld. During the quarter ended December 30, 2017, we did not
acquire any shares in connection with transactions pursuant to equity incentive plans.
In November 2013, the Board of Directors approved the repurchase of 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. We have entered into a Rule 10b5-1 trading plan for the purpose of repurchasing shares under this authorization. During the quarter
ended December 30, 2017, we did not acquire any shares pursuant to this authorization. Pursuant to this authorization, there were 576,804
shares acquired in fiscal 2017 and no shares acquired in fiscal 2016. There are approximately 1.7 million shares of our common stock available
for repurchase under this authorization.
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.
22
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 1, 2013 through December 31, 2017. In each case, the graph assumes the investment of $100.00 on January 1, 2013.
INDEXED RETURNS
Years Ended
Company / Index
2013
2014
2015
2016
2017
Regal Beloit Corporation
S&P MidCap 400 Index
S&P 400 Electrical Components & Equipment
$
108.33
135.01
133.06
$
$
112.22
148.81
143.95
88.35
145.68
174.10
$
106.21
175.89
203.59
$
119.02
204.47
223.06
ITEM 6 - SELECTED FINANCIAL DATA
The selected statements of income data for fiscal 2017, 2016 and 2015, and the selected balance sheet data at December 30, 2017 and December
31, 2016 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 2014 and 2013 are derived from audited consolidated financial statements
not included herein. The selected balance sheet data at January 2, 2016, January 3, 2015, and December 28, 2013 are derived from audited
consolidated financial statements not included herein.
23
Net Sales
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
Fiscal
2017
Fiscal
2016
Fiscal
2015
Fiscal
2014
Fiscal
2013
(In Millions, Except per Share Data)
$
3,360.3 $
2,476.2
884.1
554.0
—
—
554.0
330.1
218.1
213.0
4,388.2
1,141.1
1,039.9
2,325.5
3,224.5 $
2,359.3
865.2
544.6
—
—
544.6
320.6
209.3
203.4
4,358.5
1,411.5
1,310.9
2,038.8
$
4.78 $
4.74
1.02
52.83
4.55 $
4.52
0.95
46.46
44.6
44.9
44.7
45.0
$
$
3,509.7
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
3.21
3.18
0.91
44.32
44.7
45.1
$
$
3,257.1
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
0.69
0.69
0.86
44.02
45.0
45.3
3,095.7
2,312.5
783.2
494.2
76.3
4.7
575.2
208.0
126.0
120.0
3,611.3
765.5
607.7
2,056.2
2.66
2.64
0.79
46.72
45.0
45.4
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 include
the acquisition of the Power Transmission Solutions business from Emerson Electric Co. (January 2015).
For fiscal 2017 and 2016, there were no impairment charges or significant acquisitions.
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 of asset impairment and
other, net, 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, 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.
24
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 December 30, 2017
as "fiscal 2017", December 31, 2016 as “fiscal 2016", and the fiscal year ended January 2, 2016 as “fiscal 2015". Fiscal 2017, fiscal 2016, and
fiscal 2015 all 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 2017, the Company, including its subsidiaries, employs approximately 23,600 people in its manufacturing, sales, and service
facilities and corporate offices throughout the United States, Canada, Mexico, Europe and Asia. In 2017, we reported annual net sales of $3.4
billion compared to $3.2 billion in 2016.
Our company is comprised of three operating segments: Commercial and Industrial Systems, Climate Solutions and Power Transmission
Solutions.
A description of the three operating segments is as follows:
• Commercial and Industrial Systems produces medium and large motors, commercial and industrial equipment, generator and
custom drives and systems. These products serve markets including commercial Heating, Ventilation, and Air Conditioning
("HVAC"), pool and spa, standby and critical power and oil and gas systems.
• Climate Solutions produces small motors, controls and air moving solutions serving markets including residential and light
•
commercial HVAC, water heaters and commercial refrigeration.
Power Transmission Solutions manufactures, sells and services belt and chain drives, helical and worm gearing, mounted and
unmounted bearings, couplings, modular plastic belts, conveying chains and components, hydraulic pump drives, large open
gearing and specialty mechanical products serving markets including beverage, bulk handling, metals, special machinery, energy,
aerospace and general industrial.
On January 30, 2015, we closed the acquisition of the Power Transmission Solutions (“PTS”) business from Emerson Electric Co. The purchase
price for PTS was $1.4 billion in cash and the assumption of $43.0 million of liabilities. PTS had over 3,200 employees around the world, and
effective on the closing date became part of the Power Transmission Solutions segment.
Components of Profit and Loss
Net Sales. We sell our products to a variety of manufacturers, distributors and end users. Our customers consist of a large cross-section of
businesses, ranging from Fortune 100 companies to small businesses. A number of our products are sold to original equipment manufacturers,
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.
25
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 arrangements, 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 profit from quarter to
quarter based on factors specific to each division. For example, a portion of our Climate Solutions segment manufactures products that are used
in air conditioning applications. As a result, our sales for that business tend to be lower in the first and fourth quarters and higher in the second
and third quarters. In contrast, our Commercial and Industrial Systems segment and our Power Transmission Solutions segment have a broad
customer base and a variety of applications, thereby helping to mitigate large quarter-to-quarter fluctuations outside of general economic
conditions.
Operating Expenses. Our operating expenses consist primarily of (i) general and administrative expenses; (ii) sales and marketing expenses;
(iii) general engineering and research and development expenses; and (iv) handling costs incurred in conjunction with distribution activities.
Personnel related costs are our largest operating expense.
Our general and administrative expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses related to our executive,
finance, human resource, information technology, legal and operations functions; (ii) occupancy expenses; (iii) technology related costs; (iv)
depreciation and amortization; and (v) corporate-related travel. The majority of our general and administrative costs are for salaries and related
personnel expenses. These costs can vary by division given the location of our different manufacturing operations.
Our sales and marketing expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses related to our sales and
marketing function; (ii) internal and external sales commissions and bonuses; (iii) travel, lodging and other out-of-pocket expenses associated
with our selling efforts; and (iv) other related overhead.
Our general engineering and research and development expenses consist primarily of costs for (i) salaries, benefits and other personnel
expenses; (ii) the design and development of new energy efficiency products and enhancements; (iii) quality assurance and testing; and (iv)
other related overhead. Our research and development efforts tend to be targeted toward developing new products that would allow us to
maintain or gain additional market share, whether in new or existing applications. While these costs make up an insignificant portion of our
operating expenses in the Power Transmission Solutions segment, they are more substantial in our Commercial and Industrial Systems and
Climate Solutions segments. In particular, a large driver of our research and development efforts in these two segments is energy efficiency,
which generally means using less electrical power to produce more mechanical power.
Goodwill & Other Asset Impairments. We did not record any goodwill or other asset impairments in fiscal 2017 or fiscal 2016; however, we
recorded non-cash charges in Operating Expenses related to goodwill impairments in fiscal 2015 (“2015 Impairment”) as detailed below (in
millions). See also Note 3 of Notes to the Consolidated Financial Statements.
Impairments during 2015:
Goodwill and Asset Impairments
$
79.9
$
—
$
—
$
79.9
Commercial
and Industrial
Systems
Climate
Solutions
Power
Transmission
Solutions
Total
26
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.
Outlook
In 2018, we are forecasting another year of low to mid-single digit organic sales growth, and we expect to improve our operating margin. We
expect the benefits from our price actions and simplification projects will more than offset the commodity inflation headwind. In 2018, we
expect diluted earnings per share to be $5.19 to $5.59. Our 2018 diluted earnings per share guidance is based on an effective tax rate of 21%,
which includes the impact of the Act.
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
Net Income Attributable to Regal Beloit Corporation
2017
2016
2015
$
$
1,604.3
990.6
765.4
3,360.3
$
$
1,530.9
960.0
733.6
3,224.5
$
$
1,694.9
1,041.2
773.6
3,509.7
23.5 %
25.8 %
32.9 %
26.3 %
17.3 %
11.6 %
21.2 %
16.5 %
6.2 %
14.2 %
11.7 %
9.8 %
330.1
56.1
3.2
277.2
59.1
218.1
5.1
213.0
$
$
24.8 %
25.5 %
32.8 %
26.8 %
18.0 %
12.0 %
21.0 %
16.9 %
6.8 %
13.5 %
11.9 %
9.9 %
320.6
58.7
4.5
266.4
57.1
209.3
5.9
203.4
$
$
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
143.3
$
$
27
Fiscal Year Ended 2017 Compared to Fiscal Year Ended 2016
Net sales for fiscal 2017 were $3.4 billion, a 4.2% increase as compared to fiscal 2016 net sales of $3.2 billion. The increase consisted of an
organic sales increase of 4.3% and a positive foreign currency translation impact of 0.1% that was offset by a negative 0.3% impact from sales
of the divested Mastergear Worldwide (“Mastergear”) business in fiscal 2016. Gross profit increased $18.9 million or 2.2% as compared to the
prior year. The increase was largely driven by the increased sales volume that was partially offset by a $5.4 million charge from an increase in
the last-in, first-out ("LIFO") reserve and an increase in restructuring and related charges. The prior year included a $14.5 million charge from
an increase in the LIFO reserve. Total operating expenses were $554.0 million which was a $9.4 million increase from 2016 due primarily to
increased compensation and benefits expenses resulting from both wage inflation and investments in the Company’s commercial sales teams
as well as increased variable expenses, such as commissions, on higher sales volume. These increases were partially offset with reductions in
amortization expense as well as other discretionary spending. Operating expenses for 2017 as a percent of sales was 16.5% as compared to
16.9% for the same period in the prior year. The prior year operating expenses contained a $11.6 million gain on the sale of the Mastergear
business.
Net sales for the Commercial and Industrial Systems segment for fiscal 2017 were $1.6 billion, a 4.8% increase compared to fiscal 2016 net
sales of $1.5 billion. The increase consisted of 4.6% positive organic growth and 0.2% favorable foreign currency translation. The organic sales
increase was primarily driven by broad based global strength in industrial demand for electric motors and higher sales through our distribution
channels. Gross profit decreased $1.9 million or 0.5% primarily due to the impact of increased restructuring charges resulting from the exit of
a non-core business and an increase in the LIFO reserve which resulted in a charge of $12.7 million that was offset by the increased sales
volume. The prior year included a charge of $8.4 million due to an increase in the LIFO reserve. Operating expenses for fiscal 2017 increased
$1.6 million as compared to fiscal 2016. Operating expenses as a percentage of sales decreased 70 basis points as compared to fiscal 2016 with
increased expenses to support the higher sales volume for commissions and compensation and benefits that were partially offset by a $1.1
million gain on the sale of assets and lower amortization expenses.
Net sales for the Climate Solutions segment for fiscal 2017 were $990.6 million, a 3.2% increase compared to fiscal 2016 net sales of $960.0
million. The increase consisted of an organic sales increase of 3.1% and a positive foreign currency translation impact of 0.1%. The organic
sales increase was primarily driven by growth in North American residential HVAC, Europe and Asia. Gross profit increased $10.1 million or
4.1% primarily due to higher volumes and a $4.9 million benefit due to a reduction in the LIFO reserve. The prior year included a benefit of
$6.3 million due to an increase in the LIFO reserve. Operating expenses for 2017 decreased $0.6 million as compared to the prior year due to
leveraging of costs on the higher sales volume and lower discretionary spending.
Net sales for the Power Transmission Solutions segment for fiscal 2017 were $765.4 million, a 4.3% increase compared to fiscal 2016 net sales
of $733.6 million. The increase consisted of an organic sales increase of 5.3% and a positive foreign currency translation impact of 0.2% that
was offset by a negative impact from sales of the divested Mastergear business of 1.2%. The organic sales increase was primarily driven by
increased North American industrial demand for power transmission products including improved oil and gas and renewable energy end market
demand. Gross profit for 2017 increased $10.7 million or 4.4% primarily due to higher volumes and a benefit of $2.4 million due to a reduction
in the LIFO reserve. The prior year included a benefit of $0.2 million due to a decrease in the LIFO reserve. Operating expenses for 2017
increased $8.4 million due to increased variable expenses to support the higher sales volume and increased compensation and benefits expenses
resulting from both wage inflation and investments in the Company’s commercial sales teams that was partially offset by a $2.8 million gain
on the sale of assets. The prior year operating expenses included a $11.6 million gain on the sale of the Mastergear business.
The effective tax rate for fiscal 2017 was 21.3% compared to 21.4% for fiscal 2016. The decrease in the effective rate was due to the Tax Cuts
and Jobs Act of 2017 (the “Act”) that was offset by other discrete items. The lower effective tax rate in fiscal 2017 as compared to the 35%
statutory US federal income tax rate is driven by a mix of earnings and lower foreign tax rates.
The Act was signed into law on December 22, 2017. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21%
effective for tax years beginning after December 31, 2017 and dividends to the US no longer incur tax, however, a one-time tax on the mandatory
deemed repatriation of foreign earnings payable over eight years was included. The Company has calculated its best estimate of the impact of
the Act in its year end income tax provision based on the Company's understanding of the Act and guidance available at the date of this filing.
The Company recorded a $1.0 million reduction in tax expense in the fourth quarter of 2017, the period in which the legislation was enacted.
The provisional benefit related to the remeasurement of certain deferred tax assets and liabilities was $51.0 million. The provisional expense
related to the one-time tax on the mandatory deemed repatriation of foreign earnings was $40.0 million. The Company also recorded a
provisional expense of $10.0 million for local withholding taxes on foreign earnings not deemed permanently reinvested.
28
Fiscal Year Ended 2016 Compared to Fiscal Year Ended 2015
Net sales for fiscal 2016 were $3.2 billion, an 8.1% decrease compared to fiscal 2015 net sales of $3.5 billion. The decrease consisted of an
organic sales decline of 7.9%, and a negative foreign currency translation impact of 0.9% that was partially offset with acquisition growth, net
of dispositions of 0.7%. Gross profit decreased $68.0 million or 7.3% as compared to the prior year. The decrease was largely driven by lower
sales volume, and a $14.5 million LIFO expense which was partially offset by the benefits of the Simplification and cost control initiatives
which helped to improve gross profit as a percentage of sales by 20 basis points in 2016 as compared to 2015. The prior year included non-
recurring expenses related to the recognition of the inventory step up in cost of goods sold of $20.7 million due to purchase accounting
adjustments associated with the acquired PTS business, $4.9 million in duty refunds related to the Generalized System of Preferences ("GSP"),
a tariff system, which expired in July 2013 and was retroactively renewed in July 2015, and a LIFO benefit of $18.8 million. Total operating
expenses were $544.6 million which was a $135.8 million decrease from 2015 due primarily to the $11.6 million gain on the sale of the
Mastergear business in 2016. In addition, 2015 included goodwill impairments of $79.9 million, $9.1 million of acquisition related transaction
costs, $12.8 million impact of the Venezuelan asset write down, and a $3.4 million benefit from the sale of real estate. Additional decreases
were due to reduced salaries, commissions, and travel expenses associated with lower sales volume, along with cost controls.
Net sales for the Commercial and Industrial Systems segment for fiscal 2016 were $1.5 billion, a 9.6% decrease compared to fiscal 2015 net
sales of $1.7 billion. The decrease consisted of 8.3% negative organic growth and 1.3% unfavorable foreign currency translation. Organic sales
declines were primarily driven by decreased volume in the oil and gas end markets and weaker demand in the North American and Asian
industrial markets. Gross profit decreased $61.9 million or 14.0% primarily due to the impact of weaker demand in the industrial markets, and
$8.4 million of LIFO expense, that was partially offset by benefits from the Simplification and cost control initiatives. Gross profit in 2015 was
impacted by an $8.0 million LIFO benefit and a $0.9 million duty refund associated with the GSP tariff rebate noted above. Gross profit as a
percentage of sales in 2016 decreased 120 basis points from the prior year primarily due to the favorable non-recurring items that impacted
2015. Operating expenses for 2016 decreased $111.4 million or 28.8% from 2015 primarily due to reduced salaries, commissions, and travel
expenses associated with lower sales volumes, along with cost controls. Operating expenses in 2015 included a $79.9 million goodwill
impairment and the $12.8 million impact of the Venezuelan asset write down, both of which did not reoccur in 2016.
Net sales for the Climate Solutions segment for fiscal 2016 were $960.0 million, a 7.8% decrease compared to fiscal 2015 net sales of $1.0
billion. The decrease consisted of an organic sales decline of 7.1%, and a negative foreign currency translation impact of 0.7%. Organic sales
declines were primarily driven by a downturn in the Middle East HVAC market and the effect of contractual two-way material price formulas
that was partially offset by stronger demand in the last half of the year for North American residential HVAC products. Gross profit decreased
$17.1 million primarily due to lower volume and a $6.3 million LIFO expense, partially offset by benefits from the Simplification and cost
control initiatives and stronger North American residential HVAC demand in the last six months of 2016. Gross profit in 2015 benefited from
a $9.8 million LIFO benefit and a $3.8 million duty refund associated with the GSP tariff rebate noted above. Gross profit as a percentage of
sales in 2016 increased 30 basis points as compared to 2015. Operating expenses for 2016 decreased $0.4 million as compared to the prior year
with 2015 including a $3.4 million benefit from the sale of real estate.
Net sales for the Power Transmission Solutions segment for fiscal 2016 were $733.6 million, a 5.1% decrease compared to fiscal 2015 net sales
of $773.6 million. The decrease consisted of an organic sales decline of 8.1% and a negative foreign currency translation impact of 0.2%.
Acquisitions net of divestitures benefited 2016 sales by 3.2% as compared to 2015. Organic sales declines were primarily driven by lower
demand from the industrial distribution channel, and weak oil and gas, metals and agricultural end markets. Gross profit for 2016 increased
$11.0 million primarily due to the inventory step up in cost of goods sold of $20.7 million related to the acquired PTS business included in the
prior year, and $1.0 million of LIFO benefit in 2015. LIFO for 2016 was a slight benefit of $0.2 million. Gross profit as a percent of sales
increased 310 basis points as compared to the prior year. Operating expenses for 2016 decreased $24.0 million due primarily to the $9.1 million
of acquisition fees incurred in 2015 and the $11.6 million gain on the sale of the Mastergear business in 2016 as compared to 2015. In addition,
current year operating expenses included one month of incremental operating expenses associated with the acquired PTS business.
The effective tax rate for fiscal 2016 was 21.4% compared to 24.6% for fiscal 2015. The decrease in the effective tax rate was due primarily to
the fiscal 2015 non-deductible goodwill impairment. The lower effective tax rate in fiscal 2016 as compared to the 35% statutory US federal
income tax rate is driven by the mix of earnings and lower foreign tax rates.
29
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 cash flows include working capital levels, capital expenditures, dividends, share repurchases, acquisitions, and divestitures, availability of
debt financing, and the ability to attract long-term capital at acceptable terms.
Cash flow provided by operating activities was $291.9 million for fiscal 2017, a $150.4 million decrease from fiscal 2016. The decrease was
primarily the result of the higher investment in inventory in fiscal 2017.
Cash flow provided by operating activities was $442.3 million for fiscal 2016, a $58.0 million increase from fiscal 2015. The increase was
primarily the result of the lower investment in net working capital driven by the planned reduction in inventory during fiscal 2016.
Cash flow used in investing activities was $57.8 million for fiscal 2017, compared to $19.6 million used in fiscal 2016. The change was driven
primarily by the $24.6 million received for the sale of our Mastergear business in 2016. The proceeds from the sale of Mastergear were used to
reduce debt obligations. Capital expenditures were $65.2 million both in fiscal 2017 and in fiscal 2016.
Cash flow used in investing activities was $19.6 million for fiscal 2016, compared to $1.5 billion used in fiscal 2015. The change was driven
by the purchase of PTS for $1.4 billion, net of cash acquired, in fiscal 2015 versus the $24.6 million received for the sale of our Mastergear
business in 2016. The proceeds from the sale of Mastergear were used to reduce debt obligations. Capital expenditures were $65.2 million in
fiscal 2016 compared to $92.2 million in fiscal 2015.
Our commitments for property, plant and equipment as of December 30, 2017 were approximately $4.6 million. In fiscal 2018, we anticipate
capital spending to be approximately $75.0 million. We believe that our present manufacturing facilities will be sufficient to provide adequate
capacity for our operations in fiscal 2018. We anticipate funding fiscal 2018 capital spending with operating cash flows.
Cash flow used in financing activities was $390.6 million for fiscal 2017, compared to $379.5 million in fiscal 2016. Net debt repayments
totaled $274.7 million in fiscal 2017, compared to net debt repayments of $315.3 million in fiscal 2016. We paid $44.5 million in dividends to
shareholders in fiscal 2017 compared to $42.1 million in fiscal 2016. In fiscal 2017 we paid distributions of $17.4 million to noncontrolling
interests compared to $0.3 million in fiscal 2016. We also repurchased $45.1 million of our common stock during fiscal 2017. Cash used to
purchase additional interest in a joint venture was $19.6 in fiscal 2016.
Cash flow used in financing activities was $379.5 million for fiscal 2016, compared to cash flow provided by financing activities of $1.0 billion
for fiscal 2015. A $1,250.0 million term loan was taken out to finance the acquisition of PTS in fiscal 2015 versus net repayments of $315.3
million in fiscal 2016. We paid $42.1 million in dividends to shareholders in fiscal 2016 compared to $40.2 million in fiscal 2015.
Our working capital was $862.4 million and $830.4 million at December 30, 2017 and December 31, 2016, respectively. At December 30, 2017
and December 31, 2016, our current ratio (which is the ratio of our current assets to current liabilities) was 2.2:1. The Company intends to use
operating cash flow to meet its current debt repayment obligations.
The following table presents selected financial information and statistics as of December 30, 2017 and December 31, 2016 (in millions):
Cash and Cash Equivalents
Trade Receivables, Net
Inventories
Working Capital
Current Ratio
$
December 30, 2017
139.6
506.3
757.1
862.4
2.2:1
$
December 31, 2016
284.5
462.2
660.8
830.4
2.2:1
At December 30, 2017, our cash and cash equivalents totaled $139.6 million. At December 30, 2017, $135.9 million of our cash was held by
foreign subsidiaries and could be used in our domestic operations if necessary. We periodically evaluate our cash held outside the US and may
pursue opportunities to repatriate certain foreign cash amounts. We repatriated $244.3 million of foreign cash in fiscal 2017. As a result of the
Tax Cuts and Jobs Act of 2017 (the “Act”), dividends to the US no longer incur US tax however a one-time tax on the mandatory deemed
repatriation of foreign earnings payable over eight years was included in the Act. We recognized a provisional charge of $40.0 million related
to the historical unremitted earnings as a result of the Act payable over eight years.
30
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
Accrued Pension and other post retirement benefits of $104.8 million at December 30, 2017 was consistent with the prior year amount of $110.4
million at December 31, 2016.
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”), including a $100 million letter of credit sub facility available for general corporate purposes.
Borrowings under the Credit Agreement bear interest at floating rates based upon indices determined by the currency of the borrowing, plus an
applicable margin determined by reference to our consolidated funded debt to consolidated EBITDA ratio, or at an alternative base rate.
The Term Facility was drawn in full on January 30, 2015 in connection with the closing of the PTS Acquisition. The loan under the Term
Facility requires quarterly amortization at a rate starting at 5.0% per annum, increasing to 7.5% per annum after two years and further increasing
to 10.0% per annum for the last two years of the Term Facility, unless previously prepaid. The weighted average interest rate on the Term
Facility was 2.6% and 2.3% for the years ended December 30, 2017 and December 31, 2016, respectively. The Credit Agreement requires 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.
At December 30, 2017, we had borrowings under the Multicurrency Revolving Facility in the amount of $19.7 million, $5.3 million of standby
letters of credit issued under the facility, and $475.0 million of available borrowing capacity. The average daily balance in borrowings under
the Multicurrency Revolving Facility was $111.2 and $21.0 million, and the weighted average interest rate on the Multicurrency Revolving
Facility was 2.6% and 2.2% for the years ended December 30, 2017 and December 31, 2016, respectively. 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.
Senior Notes
At December 30, 2017, we had $500.0 million of unsecured senior notes (the “Notes”) outstanding. The Notes consist of $500.0 million in
senior notes (the “2011 Notes”) in a private placement which were issued in seven tranches with maturities from seven to twelve years and
carry fixed interest rates. As of December 30, 2017, $400.0 million of the 2011 Notes are included in Long-Term Debt and $100.0 million of
the 2011 Notes are included in Current Maturities of Long-Term Debt on the Consolidated Balance Sheets. We repaid the remaining $100.0
million of the 2007 Notes in August 2017.
Details on the Notes at December 30, 2017 were (in millions):
Fixed Rate Series 2011A
Fixed Rate Series 2011A
Fixed Rate Series 2011A
Total
Compliance with Financial Covenants
Principal
Interest Rate
Maturity
100.0
230.0
170.0
500.0
4.1%
4.8 to 5.0%
4.9 to 5.1%
July 14, 2018
July 14, 2021
July 14, 2023
$
$
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 December 30, 2017.
31
Other Notes Payable
At December 30, 2017, other notes payable of $5.7 million were outstanding with a weighted average interest rate of 5.7%. At December 31,
2016, other notes payable of $5.1 million were outstanding with a weighted average rate of 5.6%.
Based on rates for instruments with comparable maturities and credit quality. The approximate fair value of our total debt was $1,165.4 million
and $1,433.4 million as of December 30, 2017 and December 31, 2016, 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
manufactured and sold in high volumes by a third party. These ventilation units are subject to product safety requirements and other potential
regulation of their performance by government agencies such as the US Consumer Product Safety Commission (“CPSC”). The claims generally
allege that the ventilation units were the cause of fires. We have recorded an estimated liability for incurred claims. Based on the current facts,
we cannot assure that these claims, individually or in the aggregate, will not have a material adverse effect on its subsidiary's financial condition.
Our subsidiary cannot reasonably predict the outcome of these claims, the nature or extent of any CPSC or other remedial actions, if any, that
our subsidiary may need to undertake with respect to motors that remain in the field, or the costs that may be incurred, some of which could be
significant.
We are from time to time, party to litigation and other legal or regulatory proceedings that arise in the normal course of our business operations
and the outcomes of which are subject to significant uncertainty, including product warranty and liability claims, contract disputes and
environmental, asbestos, intellectual property, employment and other litigation matters. 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. Many of these matters will only be resolved when one or more future events occur or fail to occur. Our management conducts regular
reviews, including updates from legal counsel, to assess the need for accounting recognition or disclosure of these contingencies, and such
assessment inherently involves an exercise in judgment. We accrue for exposures in amounts that we believe are adequate, and we do not
believe that the outcome of any such lawsuit individually or collectively will have a material effect on our financial position, results of operations
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 December 30, 2017 (in millions):
Payments Due by
Period (1)
Debt Including
Estimated Interest
Payments (2)
Operating
Leases
Pension
Obligations
Purchase and
Other Obligations
Total Contractual
Obligations
Less than one year
$
1 - 3 years
3 - 5 years
More than 5 years
Total
$
142.7
701.7
253.7
177.6
1,275.7
$
$
23.6
22.6
11.7
12.9
70.8
$
$
9.3
7.2
6.9
16.7
40.1
$
$
282.0
—
—
—
282.0
$
$
457.6
731.5
272.3
207.2
1,668.6
(1) The timing and future spot prices affect the settlement values of our hedge obligations related to commodities and currency exchange rates. Accordingly, these
obligations are not included above in the table of contractual obligations (See also Item 7A and Note 13 of Notes to the Consolidated Financial Statements). 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. The
one-time mandatory transition tax on undistributed earnings of foreign affiliates, which is payable over eight years pursuant to the timeline outlined in the Act,
is a provisional estimate and therefore the related payments are not included in the above table of contractual obligations. Future pension obligation payments
after fiscal 2017 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 December 30, 2017.
(2) Variable rate debt based on December 30, 2017 rates. See also Note 7 of Notes to the Consolidated Financial Statements.
32
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 December 30, 2017, we had outstanding standby letters of credit totaling approximately $29.8 million. We had no other material commercial
commitments.
We did not have any material variable interest entities as of December 30, 2017 or December 31, 2016. 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. For goodwill, we may perform a qualitative test to
determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining
whether it is necessary to perform the quantitative goodwill impairment test. 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 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 market and industry data
as well as Company-specific risk factors for each reporting unit. 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 discount rate and long-term growth
rates.
The calculated fair values for our 2017 impairment testing exceeded the carrying values by at least 10% for all of our reporting units. Some of
the key considerations used in our impairment testing included (i) market pricing of guideline publicly traded companies (ii) cost of capital,
including the risk-free interest rate, and (iii) recent historical and projected performance of the subject reporting unit. There is inherent
uncertainty included in the assumptions used in goodwill impairment testing. A change to any of the assumptions could lead to a future
impairment.
The calculated fair values for our 2016 impairment testing exceeded the carrying values of the reporting units for all of our reporting units. The
excess exceeded 10% of the carrying value for all reporting units except for the PTS reporting unit, which is a combination of the acquired PTS
business from Emerson Electric and the Company's legacy PTS business. Throughout 2016, the PTS reporting unit was impacted by declines
in the oil and gas, distribution, and agricultural end-markets. The PTS reporting unit had goodwill of $570.8 million as of December 31, 2016.
Our impairment test indicated the reporting unit’s implied fair value exceeded its book value by approximately 2%. Some of the key
considerations used in our impairment testing included (i) market pricing of guideline publicly traded companies (ii) cost of capital, including
the risk-free interest rate, and (iii) recent historical and projected performance of the subject reporting unit. There is inherent uncertainty
included in the assumptions used in goodwill impairment testing. A change to any of the assumptions could lead to a future impairment.
33
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 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. 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 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.
Indefinite-Lived Assets
Indefinite-lived intangible assets consist of the trade names associated with the acquired PTS business. They were evaluated for impairment
using fiscal October 2017 information 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 2016 and 2017, the fair value of indefinite
lived intangible assets exceeded their respective carrying value. Some of the key considerations used in our impairment testing included (i) cost
of capital, including the risk-free interest rate, (ii) royalty rate, and (iii) recent historical and projected performance of the subject reporting unit.
There is inherent uncertainty included in the assumptions used in indefinite-lived intangible asset testing. A change to any of the assumptions
could lead to a future impairment.
Retirement and Post 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. Certain employees
are covered by a post retirement health care plan. 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.
We changed the method used to estimate the service and interest cost components of the net periodic pension and other post retirement 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 changed 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. The Company has accounted for this change as a change in estimate prospectively and resulted in a $2.9 million reduction in
expense for fiscal 2016 as compared to the previous method.
Further discussion of our accounting policies is contained in Note 3 of Notes to the Consolidated Financial Statements.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 prohibit the use of financial
instruments for speculative purposes.
All qualified 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 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.
34
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 December 30, 2017, we had $504.7 million of fixed rate debt and $641.8 million of variable rate debt. At December 31, 2016, excluding the
impact of interest rate swaps, we had $504.7 million of fixed rate debt and $916.5 million of variable rate debt. We have previously utilized
interest rate swaps to manage fluctuations in cash flows resulting from exposure to interest rate risk on forecasted variable rate interest payments.
The remaining interest rate swap agreement terminated in August 2017.
We have 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 December 30, 2017 would result in a $1.7 million change
in after-tax annualized earnings. We had entered into a pay fixed/receive floating interest rate swap to manage fluctuations in cash flows
resulting from interest rate risk related to the floating rate interest on our 2007 Notes which were paid in August 2017. This interest rate swap
had been designated as a cash flow hedge against forecasted interest payments.
As of December 31, 2016, an interest rate swap liability of $(3.3) million was included in Current Hedging Obligations. The unrealized loss on
the effective portion of the contract, net of tax, of $(2.1) million as of December 31, 2016, was recorded in AOCI. The interest rate swap matured
in August 2017.
Foreign Currency Risk
We are 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 credit worthy 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 December 30, 2017, derivative currency assets (liabilities) of $15.6 million, $2.5 million, $(8.1) million and $(0.9) million, are recorded
in Prepaid Expenses and Other Current Assets, Other Noncurrent Assets, Current Hedging Obligations, and Noncurrent Hedging Obligations,
respectively. As of December 31, 2016, derivative currency assets (liabilities) of $2.8 million, $0.4 million, $(45.7) million and $(17.6) million,
are recorded in Prepaid Expenses and Other Current Assets, Other Noncurrent Assets, Current Hedging Obligations, and Noncurrent Hedging
Obligations, respectively. The unrealized gains (losses) on the effective portion of the contracts of $3.3 million net of tax, and $(34.4) million
net of tax, as of December 30, 2017 and December 31, 2016, was recorded in AOCI. At December 30, 2017, we had $(4.7) 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. At December
31, 2016, we had $(8.0) 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.
The following table quantifies the outstanding foreign exchange contracts intended to hedge non-US dollar denominated receivables and
payables and the corresponding impact on the value of these instruments assuming a hypothetical 10% appreciation/depreciation of their counter
currency on December 30, 2017 (dollars in millions):
Currency
Mexican Peso
Chinese Renminbi
Indian Rupee
Euro
Canadian Dollar
Australian Dollar
Thai Baht
British Pound
Notional
Amount
Fair
Value
10% Appreciation of
Counter Currency
10% Depreciation of
Counter Currency
Gain (Loss) From:
$
$
137.1
214.9
35.8
26.4
47.7
14.9
7.5
2.7
$
(6.3 )
12.6
2.5
0.3
0.3
(0.4 )
0.1
—
$
13.7
21.5
3.6
2.6
4.8
1.5
0.8
0.3
(13.7 )
(21.5 )
(3.6 )
(2.6 )
(4.8 )
(1.5 )
(0.8 )
(0.3 )
Gains and losses indicated in the sensitivity analysis would be offset by gains and losses on the underlying forecasted non-US dollar
denominated cash flows.
35
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. Qualified hedge 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 of $11.0 million are recorded in Prepaid Expenses at December 30, 2017. Derivative commodity assets of $0.7
million are recorded in Other Noncurrent Assets at December 30, 2017. Derivative commodity assets of $7.3 million are recorded in Prepaid
Expenses at December 31, 2016. The unrealized gain (loss) on the effective portion of the contracts of $7.3 million net of tax and $2.9 million
net of tax, as of December 30, 2017 and December 31, 2016, respectively, was recorded in AOCI. At December 30, 2017, we had an additional
$2.7 million, net of tax, of derivative commodity gains on closed hedge instruments in AOCI that will be realized in earnings when the hedged
items impact earnings. At December 31, 2016, we had an additional $0.5 million, net of tax, of derivative commodity gains 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 December 30, 2017 (dollars
in millions):
Commodity
Copper
Aluminum
Notional
Amount
Fair
Value
10% Appreciation of
Commodity Prices
10% Depreciation of
Commodity Prices
$
80.8
7.7
$
10.9
0.8
$
$
8.1
0.8
(8.1 )
(0.8 )
Gain (Loss) From:
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 $8.6 million gain at December 30, 2017 includes $11.0 million of net current deferred
gains 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.
36
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly Financial Information
(Unaudited)
(Amounts in Millions, Except per Share Data)
Net Sales
Gross Profit
Income from Operations
Net Income
Net Income Attributable to Regal
Beloit Corporation
Earnings Per Share Attributable to
Regal Beloit Corporation (1)
Basic
Assuming Dilution
Weighted Average Number of
Shares Outstanding
Basic
Assuming Dilution
Net Sales
Commercial and Industrial
Systems
Climate Solutions
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2017
$ 813.5
215.6
74.8
47.6
2016
$ 818.2
217.4
69.3
42.7
2017
$ 869.2
223.0
83.0
54.3
2016
$ 838.6
222.9
91.4
58.4
2017
$ 856.9
227.0
94.0
63.6
2016
$ 809.6
231.7
89.8
61.1
2017
$ 820.7
218.5
78.3
52.6
2016
$ 758.1
193.2
70.1
47.1
46.3
41.6
53.0
56.6
62.2
59.6
51.5
45.6
1.03
1.02
44.8
45.1
0.93
0.93
44.7
45.0
1.19
1.18
44.7
45.1
1.27
1.26
44.7
45.0
1.40
1.39
44.4
44.8
1.33
1.32
44.8
45.0
1.16
1.15
44.3
44.7
1.02
1.01
44.8
45.1
$ 381.2
247.7
$ 377.6
239.8
$ 407.4
270.5
$ 394.7
254.5
$ 408.0
256.0
$ 389.4
250.5
$ 407.7
216.4
$ 369.2
215.2
Power Transmission Solutions
184.6
200.8
191.3
189.4
192.9
169.7
196.6
173.7
Income from Operations
Commercial and Industrial
Systems
Climate Solutions
25.8
31.2
21.7
24.6
20.6
40.2
25.1
36.1
29.6
38.8
36.2
42.2
24.0
30.4
20.5
27.0
Power Transmission Solutions
17.8
23.0
22.2
30.2
25.6
11.4
23.9
22.6
(1) 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.
37
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 December 30, 2017. 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 December 30, 2017, the Company's internal control over financial reporting is effective at the reasonable assurance level
based on those criteria.
Our internal control over financial reporting as of December 30, 2017 has been audited by Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report which is included herein.
February 27, 2018
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Regal Beloit Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Regal Beloit Corporation and subsidiaries (the "Company") as of December
30, 2017 and December 31, 2016, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of
the three years in the period ended December 30, 2017, and the related notes and the schedule listed in the Index at Item 15 (collectively referred
to as the "financial statements"). We also have audited the Company's internal control over financial reporting as of December 30, 2017, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 30, 2017 and December 31, 2016, and the results of its operations and its cash flows for each of the three years in the period ended
December 30, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, 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 Annual
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an
opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud and whether
effective internal control over financial reporting was maintained in all material respects.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
39
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
February 27, 2018
We have served as the Company's auditor since 2002.
40
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
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
December 30,
2017
December 31,
2016
January 2, 2016
$
$
$
$
3,360.3
2,476.2
884.1
554.0
—
554.0
330.1
56.1
3.2
277.2
59.1
218.1
5.1
213.0
$
$
4.78
4.74
$
$
44.6
44.9
3,224.5
2,359.3
865.2
544.6
—
544.6
320.6
58.7
4.5
266.4
57.1
209.3
5.9
203.4
$
$
4.55
4.52
$
$
44.7
45.0
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
See accompanying Notes to the Consolidated Financial Statements.
41
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
Hedging Activities:
Increase (Decrease) in Fair Value of Hedging
Activities, Net of Tax Effects of $26.1 Million in
2017, $(15.2) Million in 2016 and $(26.6) Million in
2015
Reclassification of Gains (Losses) Included in Net
Income, Net of Tax Effects of $4.5 Million in 2017,
$19.1 Million in 2016, and $16.5 Million in 2015
Pension and Post Retirement Plans:
Decrease (Increase) in Prior Service Cost and
Unrecognized Gain (Loss), Net of Tax Effects of $0.4
Million in 2017, $(1.5) Million in 2016 and $1.8
Million in 2015
Amortization of Prior Service Cost and Unrecognized
Loss Included in Net Periodic Pension Cost, Net of
Tax Effects of $0.9 Million in 2017, $1.2 Million in
2016 and $1.6 Million in 2015
Other Comprehensive Income (Loss)
Comprehensive Income
Less: Comprehensive Income Attributable to
Noncontrolling Interest
Comprehensive Income Attributable to Regal Beloit
Corporation
For the Year Ended
December 30, 2017
December 31, 2016
January 2, 2016
$
218.1
$
209.3
$
148.5
103.1
(68.2 )
(94.5 )
$
42.4
$
(24.8 )
$
(43.3 )
7.3
49.7
31.2
6.4
26.8
(16.5 )
1.8
1.6
(2.8 )
1.2
3.4
156.2
374.3
7.2
2.2
(0.6 )
2.9
(62.4 )
146.9
3.9
4.1
(106.9 )
41.6
2.3
$
367.1
$
143.0
$
39.3
See accompanying Notes to the Consolidated Financial Statements.
42
REGAL BELOIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, Except Per Share Data)
December 30, 2017
December 31, 2016
ASSETS
Current Assets:
Cash and Cash Equivalents
Trade Receivables, Less Allowances of $11.3 Million in 2017 and $11.5 Million in
2016
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
Current 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
Noncurrent Hedging Obligations
Pension and Other Post Retirement Benefits
Other Noncurrent Liabilities
Contingencies (see Note 11)
Equity:
Regal Beloit Corporation Shareholders' Equity:
Common Stock, $.01 Par Value, 100.0 Million Shares Authorized, 44.3 Million and
44.8 Million Shares Issued and Outstanding at 2017 and 2016, 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
$
139.6
$
$
$
506.3
757.1
171.4
1,574.4
623.0
1,477.1
670.5
28.5
14.7
4,388.2
384.3
11.5
8.1
74.2
132.7
101.2
712.0
1,039.9
135.3
0.9
101.0
44.4
0.4
877.5
1,611.6
(164.0 )
2,325.5
29.2
2,354.7
4,388.2
$
$
$
$
284.5
462.2
660.8
124.5
1,532.0
627.5
1,453.2
711.7
22.4
11.7
4,358.5
334.2
10.7
49.0
70.1
137.0
100.6
701.6
1,310.9
97.7
17.6
106.5
46.0
0.4
904.5
1,452.0
(318.1 )
2,038.8
39.4
2,078.2
4,358.5
See accompanying Notes to the Consolidated Financial Statements.
43
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 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
$
Net Income
Other Comprehensive
Income (Loss)
Dividends Declared
($0.95 Per Share)
Stock Options Exercised,
Including Income Tax
Benefit and Share
Cancellations
Share-Based
Compensation
Purchase of Subsidiary
Shares from
Noncontrolling Interest
Dividends Declared to
Noncontrolling Interests
Balance as of December
31, 2016
$
Net Income
Other Comprehensive
Income (Loss)
Dividends Declared
($1.02 Per Share)
Stock Options Exercised
Share-Based
Compensation
Stock Repurchase
Dividends Declared to
Non-Controlling Interests
Balance as of December
30, 2017
$
$
0.4
—
—
—
—
—
—
—
—
$
0.4
—
—
—
—
—
—
—
$
0.4
—
—
—
—
—
—
—
0.4
$
896.1
$
—
—
—
2.4
13.9
(11.6 )
—
—
900.8
$
—
—
—
(2.4 )
13.3
(7.2 )
—
904.5
$
—
—
—
(3.6 )
13.6
(37.0 )
—
877.5
$
$
1,188.9
143.3
—
(40.7 )
—
—
(0.4 )
—
—
$
1,291.1
203.4
—
(42.5 )
—
—
—
—
$
1,452.0
213.0
—
(45.3 )
—
—
(8.1 )
—
(151.0 ) $
—
(104.0 )
—
—
—
—
—
—
(255.0 ) $
—
(60.4 )
—
—
—
(2.7 )
—
(318.1 ) $
—
154.1
—
—
—
—
—
1,611.6
$
(164.0 ) $
See accompanying Notes to the Consolidated Financial Statements.
44
$
44.9
5.2
(2.9 )
—
—
—
—
(1.4 )
(0.3 )
$
45.5
5.9
(2.0 )
—
—
—
(9.7 )
(0.3 )
$
39.4
5.1
2.1
—
—
—
—
(17.4 )
29.2
$
1,979.3
148.5
(106.9 )
(40.7 )
2.4
13.9
(12.0 )
(1.4 )
(0.3 )
1,982.8
209.3
(62.4 )
(42.5 )
(2.4 )
13.3
(19.6 )
(0.3 )
2,078.2
218.1
156.2
(45.3 )
(3.6 )
13.6
(45.1 )
(17.4 )
2,354.7
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
For the Year Ended
December 30,
2017
December 31,
2016
January 2,
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities (Net of Acquisitions and Divestitures):
Depreciation
Amortization
Goodwill Impairment
Share-Based Compensation Expense
Benefit from Deferred Income Taxes
Loss on Venezuela Currency Devaluation
Loss on Exit of Business
Loss (Gain) on Disposition of Assets
Provision for Losses on Receivables
Gain on Sale of Businesses
Change in Operating Assets and Liabilities, Net of Acquisitions and Divestitures
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
Proceeds from Sale of Businesses
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 Borrowings
Repayments of Long-Term Borrowings
Dividends Paid to Shareholders
Proceeds from the Exercise of Stock Options
Shares Surrendered for Taxes
Purchase of Subsidiary Shares from Noncontrolling Interest
Financing Fees Paid
Repurchase of Common Stock
Payments of Contingent Consideration
Distributions 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
$
218.1 $
209.3 $
82.0
55.2
—
13.6
(9.7 )
—
3.9
(2.5 )
1.3
(0.1 )
(31.0 )
(83.0 )
37.7
6.4
291.9
(65.2 )
(0.9 )
0.9
—
1.1
6.3
(57.8 )
1,247.6
(1,245.8 )
25.2
(24.7 )
0.3
(277.3 )
(44.5 )
0.4
(4.0 )
—
—
(45.1 )
(5.3 )
(17.4 )
(390.6 )
11.6
(144.9 )
284.5
139.6 $
53.2 $
59.7
93.4
62.0
—
13.3
(1.6 )
—
—
1.1
1.6
(11.6 )
(10.4 )
100.4
7.6
(22.8 )
442.3
(65.2 )
(53.7 )
72.6
—
24.6
2.1
(19.6 )
583.7
(568.7 )
23.8
(30.5 )
0.2
(323.8 )
(42.1 )
0.5
(2.7 )
(19.6 )
—
—
—
(0.3 )
(379.5 )
(11.6 )
31.6
252.9
284.5 $
53.7 $
66.9
$
$
148.5
95.5
63.9
79.9
13.9
(10.4 )
1.5
—
2.4
12.2
—
28.6
11.1
(22.3 )
(40.5 )
384.3
(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
(1.9 )
(1.4 )
(18.0 )
(12.0 )
—
(0.3 )
1,033.4
(11.3 )
(81.2 )
334.1
252.9
54.6
70.1
See accompanying Notes to the Consolidated Financial Statements.
45
Notes to the Consolidated Financial Statements
(1) Nature of Operations
Regal Beloit Corporation (the “Company”) is a United States based multi-national corporation. The Company reports in three operating
segments: the Commercial and Industrial Systems segment, with its principal lines 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 lines of business
in small motors, controls and air moving products; and the Power Transmission Solutions segment, with its principal lines 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 years ended December 30, 2017,
December 31, 2016, and January 2, 2016 were 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 had a subsidiary in Venezuela using accounting for highly inflationary economies. Currency restrictions enacted by the
Venezuelan government impacted the ability of the Company's subsidiary to obtain US dollars in exchange for Venezuelan bolivars fuertes
("Bolivars") at the official foreign exchange rate.
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 US dollar as of April 4, 2015. The adoption of the SIMADI resulted in a $1.5 million pretax
devaluation charge included in Operating Expenses during the first quarter 2015.
In late 2015, the Company decided to cease doing business in Venezuela due to the 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 cease doing 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
(“US 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; 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.
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 Provision for Income Taxes.
46
Revenue Recognition
The Company generally recognizes revenue upon transfer of title, which generally occurs upon shipment of the product to the customer. For a
limited number of contracts, the Company recognizes revenue over time in proportion to costs incurred. 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 December 30, 2017 or December 31, 2016 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 2017, fiscal 2016 or fiscal 2015.
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 2017, 2016 and 2015, research and development costs were $29.9 million,
$29.5 million and $30.1 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 global financial institutions. The Company 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.
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 Operating Expenses in the
current period; amounts determined to be uncollectable are charged directly against the allowances, while amounts recovered on previously
charged-off accounts benefit current period earnings.
47
Inventories
The major classes of inventory at year end are as follows:
Raw Material and Work in Process
Finished Goods and Purchased Parts
December 30,
2017
December 31,
2016
47 %
53 %
45 %
55 %
Inventories are stated at cost, which is not in excess of market. Cost for approximately 52% of the Company's inventory at December 30, 2017
and 55% at December 31, 2016 was determined using the last-in, first-out method. If all inventories were valued on the first-in, first-out method,
they would have increased by $46.0 million and $43.7 million as of December 30, 2017 and December 31, 2016, 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.
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.
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
Goodwill
Useful Life
(In Years)
December 30,
2017
December 31,
2016
3-50
3-15
$
$
$
78.2
294.5
986.8
1,359.5
(736.5 )
623.0
$
76.7
280.4
929.9
1,287.0
(659.5 )
627.5
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. For goodwill, the
Company may perform a qualitative test to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its
carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. Based on prior goodwill
impairment testing, the Company determined the performance of the quantitative impairment test was required for all reporting units in 2017.
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 market and industry data as well as Company-specific risk factors for each reporting unit. 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
48
common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant
discount rate and long-term growth rates.
The calculated fair values for the Company's 2017 impairment testing exceeded the carrying values by at least 10% for all of its reporting units.
Some of the key considerations used in the Company's impairment testing included (i) market pricing of guideline publicly traded companies
(ii) cost of capital, including the risk-free interest rate, and (iii) recent historical and projected performance of the subject reporting unit. There
is inherent uncertainty included in the assumptions used in goodwill impairment testing. A change to any of the assumptions could lead to a
future impairment.
The calculated fair values for the Company's 2016 impairment testing exceeded the carrying values of the reporting units for all of the
Company's reporting units. The excess exceeded 10% of the carrying value for all reporting units except the PTS reporting unit, which is a
combination of the acquired PTS business from Emerson Electric and the Company's legacy PTS business. Throughout 2016, the Company's
PTS reporting unit was impacted by declines in the oil and gas, distribution, and agricultural end-markets. The PTS reporting unit had goodwill
of $570.8 million as of December 31, 2016. The Company's impairment test indicated the reporting unit’s implied fair value exceeded its book
value by approximately 2%. Some of the key considerations used in the Company's impairment testing included (i) market pricing of guideline
publicly traded companies (ii) cost of capital, including the risk-free interest rate, and (iii) recent historical and projected performance of the
subject reporting unit. There is inherent uncertainty included in the assumptions used in goodwill impairment testing. A change to any of the
assumptions could lead to a future impairment.
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.
Indefinite-lived intangible assets are not amortized. The Company evaluates the carrying amount of indefinite-lived intangible assets annually
or more frequently if events or circumstances indicate that the assets might be impaired. The Company performs the required annual impairment
test as of the end of the October fiscal month.
Indefinite-lived intangible assets consist of trade names associated with the acquired Power Transmission Solutions business. They were
evaluated for impairment 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 2016 and 2017, the fair value of indefinite lived
intangible assets exceeded their respective carrying value. Some of the key considerations used in our impairment testing included (i) cost of
capital, including the risk-free interest rate, (ii) royalty rate and (iii) recent historical and projected performance of the subject reporting unit.
There is inherent uncertainty included in the assumptions used in indefinite-lived intangible asset testing. A change to any of the assumptions
could lead to a future impairment.
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. The Company concluded it did not have any impairments of long-lived assets in 2017.
49
Earnings Per Share
Diluted earnings per share is computed based upon earnings applicable to common shares divided by the weighted-average number of common
shares outstanding during the period adjusted for the effect of other dilutive securities. Share based compensation awards for common shares
where the exercise price was above the market price have been excluded from the calculation of the effect of dilutive securities shown below;
the amount of these shares were 0.5 million in 2017, 1.3 million in 2016 and 0.7 million in 2015. The following table reconciles the basic and
diluted shares used in earnings per share calculations for the years ended (in millions):
Denominator for Basic Earnings Per Share
Effect of Dilutive Securities
Denominator for Diluted Earnings Per Share
Retirement and Post Retirement Plans
2017
2016
2015
44.6
0.3
44.9
44.7
0.3
45.0
44.7
0.4
45.1
The Company's domestic employees are covered by defined contribution plans and approximately half of the Company's domestic employees
are covered by defined benefit pension plans. The majority of the defined benefit pension plans covering the Company's domestic employees
have been closed to new employees and frozen for existing employees. Certain employees are covered by a post retirement health care plan.
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 plans may change significantly
from year to year.
Beginning in 2016, the Company changed the method used to estimate the service and interest cost components of the net periodic pension and
other post retirement benefit costs. 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 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. The methodology of selecting a discount rate that matches each plan's cash flows to that of a
theoretical bond portfolio yield curve will continue to be used to value the benefit obligation at the end of each year. The Company changed to
the new 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. The Company has accounted for this change as a change in estimate prospectively and it resulted
in a $2.9 million reduction in expense for fiscal 2016 as compared to the previous method.
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 ("AOCI") 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).
Income Taxes
The Company operates in numerous taxing jurisdictions and is subject to regular examinations by various US federal, state and foreign
jurisdictions for various tax periods. The Company's 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.
50
Foreign Currency Translation
For those operations using a functional currency other than the US dollar, assets and liabilities are translated into US 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.
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 and post
retirement liability adjustments are included in Shareholders' Equity under AOCI.
The components of the ending balances of AOCI are as follows (in millions):
Foreign Currency Translation Adjustments
Hedging Activities, Net of Tax of $5.4 in 2017 and $(25.2) in 2016
Pension and Post Retirement Benefits, Net of Tax of $(18.8) in 2017 and $(20.1) in 2016
Total
Legal Claims and Contingent Liabilities
2017
2016
$
(140.0 ) $
8.6
(32.6 )
(241.0 )
(41.1 )
(36.0 )
$
(164.0 ) $
(318.1 )
The Company is subject to various legal proceedings, claims and regulatory matters, the outcomes of which are subject to significant uncertainty
and will only be resolved when one or more future events occur or fail to occur. Management conducts regular reviews, including updates from
legal counsel, to assess the need for accounting recognition or disclosure of these contingencies. 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, and such assessment inherently involves an exercise in judgment. 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, term deposits, trade receivables and accounts payable approximate their 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
and derivative instruments is determined based on the methods disclosed in Notes 8 and 14 of Notes to the Consolidated Financial Statements.
Recent Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2017-12, Derivatives
and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities. The amendments in this update better align an entity’s
risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance
for qualifying hedging relationships and the presentation of hedge results. The ASU is effective for annual periods beginning after December
15, 2018, and interim periods within those annual periods. The Company plans to adopt this pronouncement for fiscal years beginning December
30, 2018. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Stock Compensation - Scope of Modification Accounting. The ASU amends the scope of
modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions
of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification
("ASC") 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the
awards are the same immediately before and after the modification. The ASU is effective for annual periods beginning after December 15,
2017, and interim periods within those annual periods. Early adoption is permitted and prospective application is required. The Company plans
to adopt this pronouncement for fiscal years beginning December 31, 2017 and will consider the impact that this standard may have on future
share based award changes, should they occur.
51
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Postretirement Benefit Cost. The ASU amends current guidance to require employers that present a measure of operating
income in their statement of income to include only the service cost component of net periodic pension cost and net periodic postretirement
benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including
amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in nonoperating expenses. Employers that
do not present a measure of operating income are required to include the service cost component in the same line item as other employee
compensation costs. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. The changes,
which respond to input from financial statement users, are intended to classify costs according to their natures, and better align the effect of
defined benefit plans on operating income with International Financial Reporting Standards. The ASU is effective for annual periods beginning
after December 15, 2017, and interim periods within those annual periods. The ASU will impact the components of income before taxes but
will not impact the amount of income before taxes. The adoption of this ASU is not expected to have a material impact on the Company's
consolidated financial statements. Upon the Company's retrospective adoption of this ASU, post retirement benefit costs, excluding the service
cost component, will be reflected in Other Expense (Income) in the Consolidated Statements of Income. Currently, all components of benefit
costs are reported in Cost of Sales and Operating Expenses in the Consolidated Statements of Income.
In February 2016, the FASB issued ASU 2016-02, Leases. The core principle of ASU 2016-02 is that an entity should recognize on its balance
sheet assets and liabilities arising from a lease. In accordance with that principle, ASU 2016-02 requires that a lessee recognize a liability to
make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying leased asset for the lease term. The
recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on the lease classification
as a finance or operating lease. This new accounting guidance is effective for fiscal years beginning after December 15, 2018 under a modified
retrospective approach and early adoption is permitted. The Company has identified a six step process to successfully implement the new Lease
standard: Form a task force to become proficient and take the lead on understanding and implementing the new Lease standard; Update lease
inventories; Decide on transition method; Review legal agreements and debt covenants; Consider IT needs; Discuss with stakeholders. The
Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements. The Company has
identified a task force to take the lead in implementing the new Lease standard and has started the process of building an inventory of leases.
The Company plans to adopt this pronouncement for its fiscal year beginning December 31, 2018.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), a comprehensive new revenue recognition
standard that supersedes current revenue recognition requirements. This update requires the Company to recognize revenue at amounts that
reflect the consideration to which the Company expects to be entitled in exchange for those goods or services at the time of transfer. The new
standard will also require additional qualitative and quantitative disclosures about contracts with customers, significant judgments made in
applying the revenue guidance, and assets recognized from the costs to obtain or fulfill a contract. The Company will adopt ASU No. 2014-09
(and related updates) at the beginning of its 2018 fiscal year on December 31, 2017. Accordingly, the Company will recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled
in exchange for those goods or services. To achieve that core principle, the new model requires financial statement preparers to apply the
following five steps:
Step 1: Identify the contract with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognize revenue when the entity satisfies a performance obligation
The standard allows the option of using either a full retrospective or a modified retrospective approach for the adoption of the standard. The
Company has decided to adopt this accounting standard update using the modified retrospective method.
The Company completed a comprehensive project plan that included a global cross-functional team of representatives to conduct an assessment
of Topic 606 and its potential impacts on the Company. The Company identified and completed a four-step process to implement the new
revenue standard - data gathering, assessment, solution development, and solution implementation.
52
The majority of the Company’s sales are recognized when products are shipped from its manufacturing or distribution facilities to customers.
For a limited number of contracts, the Company recognizes revenue over time in proportion to costs incurred. Under the new standard, the
Company will continue to recognize revenue at a single Point-in-Time when control is transferred to the customer. In addition, for those
contracts in which the Company currently recognizes revenue over time, the cost-to-cost measure of progress continues to best depict the
transfer of control of assets to the customer, which occurs as the Company incurs costs.
In addition, the Company's performance obligations under the new standard are not materially different from the existing standard. The
accounting for the estimate of variable consideration (i.e. Warranties, Rebates, and Returns) under the new standard is not materially different
compared to the Company's current practice.
Based upon the results of the implementation plan, the Company does not expect the new revenue standard to have a material impact on the
Company’s pattern of revenue recognition, operating revenue, results of operations, or financial position. In reaching this conclusion, the
Company evaluated its different contracting practices including Master Agreements and Purchase Orders. The project plan included analyzing
the standard’s impact on the Company’s revenue streams and above mentioned contracting practices.
The Company has determined that as a result of applying the modified retrospective method, the cumulative effect adjustment to retained
earnings as of December 31, 2017 was immaterial.
The Company has also completed the process of updating accounting policies, evaluating new disclosure requirements, and identifying and
implementing changes to its business processes, systems and controls to support revenue recognition and disclosure under the new guidance.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment
Accounting. The new guidance includes multiple provisions intended to simplify various aspects of the accounting for share-based payments.
The provisions include:
•
•
recording all tax effects associated with stock-based compensation through the income statement, as opposed recording certain
amounts in other paid-in capital, which eliminates the requirement to calculate a "windfall pool";
allowing entities to withhold shares to satisfy the employer's statutory tax withholding requirement up to the highest marginal tax rate
applicable to employees rather than the employer's minimum statutory rate, without requiring liability classification for the award;
• modifying the requirement to estimate the number of awards that will ultimately vest by providing an accounting policy election to
•
•
either estimate the number of forfeitures or recognize forfeitures as they occur;
changing certain presentation requirements in the statement of cash flows, including removing the requirement to present excess tax
benefits as an inflow from financing activities and an outflow from operating activities, and requiring the cash paid to taxing
authorities arising from withheld shares to be classified as a financing activity; and
the assumed proceeds from applying the treasury stock method when computing earnings per share is amended to exclude the amount
of excess tax benefits that previously would have been recognized in additional paid-in capital.
The Company adopted the provisions of ASU 2016-09 on January 1, 2017. As a result of adopting the standard, the Changes in Operating
Assets and Liabilities, Net of Acquisitions and Divestitures line in the Cash Flows From Operating Activities section on the Consolidated
Statements of Cash Flows and the Shares Surrendered for Taxes line in the Cash Flows from Financing Activities section were both adjusted
by $2.7 million and $1.9 million for 2016 and 2015, respectively. The presentation on the Consolidated Statements of Cash Flows for shares
surrendered by employees to meet the minimum statutory withholding requirement and excess tax benefits were applied retrospectively. In
addition, the Excess Tax Expense from Share-Based Compensation lines in the Cash Flows from Operating Activities section and the Cash
Flows from Financing Activities section were removed. The Company removed the excess tax benefits from the calculation of dilutive shares
on a prospective basis. In addition, the Company began recording all tax effects associated with stock-based compensation through the income
statement on a prospective basis. The Company did not have any awards classified as liability awards due to the statutory tax withholding
requirements as of January 1, 2017. The Company made an accounting policy election to continue to estimate forfeitures as it had previously.
(4) Acquisitions and Divestitures
There were no acquisition-related expenses in 2017 and 2016. 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.
53
2016 Acquisitions
Elco Purchase
On January 18, 2016, the Company purchased the remaining shares owned by the joint venture partner in its Elco Group B.V. (“Elco”) joint
venture, increasing the Company’s ownership from 55.0% to 100.0%, for a purchase price of $19.6 million. The purchase price of Elco is
reflected as a component of equity.
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 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 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 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
22.5
67.2
108.8
184.4
648.2
564.3
1,595.4
57.2
32.3
97.0
1,408.9
$
$
The valuation of the net assets acquired of $1,408.9 million was classified as Level 3 in the valuation hierarchy (See 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.
54
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.
Unaudited Pro Forma Consolidated Financial Information
The following unaudited pro forma financial information presents the financial results for the fiscal year 2015 as if the acquisition of PTS had
occurred on 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):
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
2016 Divestitures
Mastergear Worldwide
$
Fiscal 2015
3,558.3
174.8
$
$
3.21
3.91
3.18
3.88
On June 1, 2016, the Company sold its Mastergear Worldwide ("Mastergear") business to Rotork PLC for a purchase price of $25.7 million.
Mastergear was included in the Company's Power Transmission Solutions segment. Gains related to the sale of $0.1 million and $11.6 million
were recorded as a reduction to Operating Expenses in the Consolidated Statements of Income during fiscal 2017 and 2016, respectively.
Venezuelan Subsidiary
On July 7, 2016, the Company sold the assets of its Venezuelan subsidiary, which had been included in the Company's Commercial and
Industrial Systems segment, to a private company for $3.0 million. Of this amount, $1.0 million was received on the transaction closing date
55
and $2.0 million is to be received in 24 monthly installments. The Company may receive additional amounts in the future related to certain
accounts receivable of this business. The gains are recognized as the cash is received. The Company received cash and recorded gains of $1.1
million in fiscal 2017 and $1.7 million in fiscal 2016. The Company wrote down its investment and ceased operations of this subsidiary in
2015.
(5) Goodwill and Intangible Assets
Goodwill
The excess of purchase price over estimated fair value is assigned to goodwill. See Note 3 of Notes to the Consolidated Financial Statements,
"Goodwill" and "Long-Lived Assets" for additional details.
The following information presents changes to goodwill during the periods indicated (in millions):
Commercial
and Industrial
Systems
Climate
Solutions
Power
Transmission
Solutions
Total
$
$
$
$
1,465.6
$
(0.3 )
(12.1 )
1,453.2
$
23.9
1,477.1
$
275.7
$
$
547.7
—
(7.1 )
540.6
$
8.2
548.8
$
244.8
$
342.8 $
—
(1.0 )
341.8 $
0.6
342.4 $
7.7
$
575.1
(0.3 )
(4.0 )
570.8
15.1
585.9
23.2
Balance as of January 2, 2016
Acquisitions and Valuation Adjustments
Translation Adjustments
Balance as of December 31, 2016
Translation Adjustments
Balance as of December 30, 2017
Cumulative Goodwill Impairment Charges
Intangible Assets
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)
December 31,
2016
Translation
Adjustments
December 30,
2017
16
13
15
5
8
$
$
703.6
189.7
31.8
16.6
8.3
950.0
120.8
1,070.8
$
$
17.3
2.6
1.0
—
0.2
21.1
1.7
22.8
$
$
720.9
192.3
32.8
16.6
8.5
971.1
122.5
1,093.6
56
Accumulated amortization on intangible assets consists of the following:
Customer Relationships
Technology
Trademarks
Patent and Engineering Drawings
Non-Compete Agreements
Total Accumulated Amortization
Intangible Assets, Net of Amortization
$
December 31, 2016
201.6
109.5
23.3
16.6
8.1
359.1
711.7
$
$
Amortization
Translation
Adjustments
$
$
41.8
11.8
1.5
—
0.1
55.2
$
$
6.2
1.5
0.9
—
0.2
8.8
$
December 30, 2017
249.6
122.8
25.7
16.6
8.4
423.1
670.5
$
$
While the Company believes its customer relationships are long-term in nature, the Company's contractual customer relationships are generally
short-term. Useful lives are established at acquisition based on historical attrition rates.
Amortization expense was $55.2 million in fiscal 2017, $62.0 million in fiscal 2016 and $63.9 million in fiscal 2015.
The following table presents estimated future amortization expense (in millions):
Year
2018
2019
2020
2021
2022
$
Estimated
Amortization
54.1
53.6
50.7
43.2
41.6
(6) Segment Information
The Company is comprised of three operating segments: Commercial and Industrial Systems, Climate Solutions and Power Transmission
Solutions.
Commercial and Industrial Systems produces medium and large motors, commercial and industrial equipment, generator and custom drives
and systems. These products serve markets including commercial Heating, Ventilation, and Air Conditioning ("HVAC"), pool and spa, standby
and critical power and oil and gas systems.
Climate Solutions produces small motors, controls and air moving solutions serving markets including residential and light commercial HVAC,
water heaters and commercial refrigeration.
Power Transmission Solutions manufactures, sells and services belt and chain drives, helical and worm gearing, mounted and unmounted
bearings, couplings, modular plastic belts, conveying chains and components, hydraulic pump drives, large open gearing and specialty
mechanical products serving markets including beverage, bulk handling, metals, special machinery, energy, aerospace and general industrial.
The Company evaluates performance based on the segment's income from operations. Corporate costs have been allocated to each segment
based on the net sales of each segment. The reported external net sales of each segment are from external customers.
57
The following sets forth certain financial information attributable to the Company's operating segments for fiscal 2017, fiscal 2016 and fiscal
2015, respectively (in millions):
Fiscal 2017
External Sales
Intersegment Sales
Total Sales
Gross Profit
Operating Expenses
Income from Operations
Depreciation and Amortization
Capital Expenditures
Fiscal 2016
External Sales
Intersegment Sales
Total Sales
Gross Profit
Operating Expenses
Income from Operations
Depreciation and Amortization
Capital Expenditures
Fiscal 2015
External Sales
Intersegment Sales
Total Sales
Gross Profit
Operating Expenses
Goodwill Impairment
Income from Operations
Depreciation and Amortization
Capital Expenditures
Commercial
and
Industrial
Systems
Climate
Solutions
Power
Transmission
Solutions
Eliminations
Total
$
$
$
$
$
$
1,604.3
66.5
1,670.8
377.3
277.3
100.0
59.8
39.2
1,530.9
49.2
1,580.1
379.2
275.7
103.5
74.7
36.6
1,694.9
71.2
1,766.1
441.1
307.2
79.9
54.0
77.5
52.3
$
$
$
990.6
24.9
1,015.5
255.2
114.6
140.6
22.1
13.4
960.0
24.1
984.1
245.1
115.2
129.9
24.4
15.0
1,041.2
24.1
1,065.3
262.2
115.6
—
146.6
28.6
18.5
765.4
4.5
769.9
251.6
162.1
89.5
55.3
12.6
733.6
4.3
737.9
240.9
153.7
87.2
56.3
13.6
773.6
4.0
777.6
229.9
177.7
—
52.2
53.3
21.4
$
—
$
(95.9 )
(95.9 )
—
—
—
—
—
$
—
$
(77.6 )
(77.6 )
—
—
—
—
—
$
—
$
(99.3 )
(99.3 )
—
—
—
—
—
—
3,360.3
—
3,360.3
884.1
554.0
330.1
137.2
65.2
3,224.5
—
3,224.5
865.2
544.6
320.6
155.4
65.2
3,509.7
—
3,509.7
933.2
600.5
79.9
252.8
159.4
92.2
The following table presents identifiable assets information attributable to the Company's operating segments as of December 30, 2017,
December 31, 2016, and January 2, 2016 (in millions):
Identifiable Assets as of December 30, 2017
Identifiable Assets as of December 31, 2016
Identifiable Assets as of January 2, 2016
Commercial
and Industrial
Systems
Climate
Solutions
Power
Transmission
Solutions
$
$
$
1,854.1 $
1,872.7 $
1,959.5 $
909.9
881.8
937.2
$
$
$
1,624.2 $
1,604.0 $
1,695.0 $
Total
4,388.2
4,358.5
4,591.7
58
The following sets forth net sales by country in which the Company operates for fiscal 2017, fiscal 2016 and fiscal 2015, respectively (in
millions):
United States
Rest of the World
Total
2017
2,267.2
1,093.1
3,360.3
$
$
$
$
Net Sales
2016
2,212.6
1,011.9
3,224.5
$
$
2015
2,374.3
1,135.4
3,509.7
US net sales for 2017, 2016 and 2015 represented 67.5%, 68.6% and 67.6% 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 2017 and
fiscal 2016, respectively (in millions):
United States
Mexico
China
Rest of the World
Total
Long-lived Assets
2017
2016
263.6
136.3
99.5
123.6
623.0
$
$
290.3
120.2
99.6
117.4
627.5
$
$
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 December 30, 2017 and December 31, 2016 was as follows (in millions):
Term Facility
Senior Notes
Multicurrency Revolving Facility
Other
Less: Debt Issuance Costs
Total
Less: Current Maturities
Non-Current Portion
Credit Agreement
December 30,
2017
December 31,
2016
$
$
$
621.1
500.0
19.7
5.7
(5.4 )
1,141.1
101.2
1,039.9
$
798.1
600.0
18.0
5.1
(9.7 )
1,411.5
100.6
1,310.9
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”), including a $100 million letter of credit sub facility available for general
corporate purposes. Borrowings under the Credit Agreement bear interest at floating rates based upon indices determined by the currency of
the borrowing, plus an applicable margin determined by reference to the Company's consolidated funded debt to consolidated EBITDA ratio or
at an alternative base rate.
59
The Term Facility was drawn in full on January 30, 2015 in connection with the closing of the PTS Acquisition. The loan under the Term
Facility requires quarterly amortization at a rate starting at 5.0% per annum, increasing to 7.5% per annum after two years and further increasing
to 10.0% per annum for the last two years of the Term Facility, unless previously prepaid. The weighted average interest rate on the Term
Facility was 2.6% and 2.3% for the years ended December 30, 2017 and December 31, 2016, respectively. The Credit Agreement requires the
Company to 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. The Company repaid $177.0 million in 2017 and $320.0 million in 2016.
At December 30, 2017 the Company had borrowings under the Multicurrency Revolving Facility in the amount of $19.7 million, $5.3 million
of standby letters of credit issued under the facility, and $475.0 million of available borrowing capacity. The average daily balance in borrowings
under the Multicurrency Revolving Facility was $111.2 million and $21.0 million, and the weighted average interest rate on the Multicurrency
Revolving Facility was 2.6% and 2.2% for the years ended December 30, 2017 and December 31, 2016, respectively. 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 December 30, 2017, the Company had $500.0 million of unsecured senior notes (the “Notes”) outstanding. The Notes consist of $500.0
million in senior notes (the “2011 Notes”) in a private placement which were issued in seven tranches with maturities from seven to twelve
years and carry fixed interest rates. As of December 30, 2017, $400.0 million of the 2011 Notes are included in Long-Term Debt and $100.0
million of the 2011 Notes are included in Current Maturities of Long-Term Debt on the Consolidated Balance Sheets. The Company repaid the
remaining $100.0 million of the 2007 Notes in August 2017.
Details on the Notes at December 30, 2017 were (in millions):
Fixed Rate Series 2011A
Fixed Rate Series 2011A
Fixed Rate Series 2011A
Total
Compliance with Financial Covenants
Principal
Interest Rate
Maturity
100.0
230.0
170.0
500.0
4.1%
4.8 to 5.0%
4.9 to 5.1%
July 14, 2018
July 14, 2021
July 14, 2023
$
$
The Credit Agreement and the Notes require the Company to meet specified financial ratios and to satisfy certain financial condition tests. The
Company was in compliance with all financial covenants contained in the Notes and the Credit Agreement as of December 30, 2017.
Other Notes Payable
At December 30, 2017, other notes payable of $5.7 million were outstanding with a weighted average interest rate of 5.7%. At December 31,
2016, other notes payable of $5.1 million were outstanding with a weighted average rate of 5.6%.
Other Disclosures
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 $1,165.4 million and $1,433.4 million
as of December 30, 2017 and December 31, 2016, respectively.
60
Maturities of long-term debt, excluding debt issuance costs, are as follows (in millions):
Year
2018
2019
2020
2021
2022
Thereafter
Total
$
Amount of Maturity
101.2
20.0
621.5
230.4
0.5
172.9
1,146.5
$
(8) Retirement and Post Retirement Health Care 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
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 $9.3 million, $8.7 million, and $9.9 million in 2017,
2016 and 2015, respectively. Company contributions to non-US defined contribution plans were $9.4 million, $10.4 million and $9.2 million
in 2017, 2016, and 2015, respectively.
Beginning in 2016, the Company changed the method used to estimate the service and interest cost components of the net periodic pension and
other post retirement benefit costs. 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 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. The methodology of selecting a discount rate that matches each plan's cash flows to that of a
theoretical bond portfolio yield curve will continue to be used to value the benefit obligation at the end of each year. The Company changed to
the new 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. The Company has accounted for this change as a change in estimate prospectively and it resulted
in a $2.9 million reduction in expense for fiscal 2016 as compared to the previous method.
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 the calendar year end of each year.
The Company's target allocation, target return and actual weighted-average asset allocation by asset category are as follows:
Target
Actual Allocation
Allocation
Return
2017
2016
Equity Investments
Fixed Income
Other
Total
76 %
19 %
5 %
100 %
6.3 - 7.5 %
3.6 - 4.5%
5.4 %
6.9 %
71 %
24 %
5 %
100 %
70 %
25 %
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.
61
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 Loss
Less: Benefits Paid (1)
Foreign Currency Translation
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 (1)
Foreign Currency Translation
Fair Value of Plan Assets at End of Period
Funded Status
2017
2016
256.9
7.2
9.3
16.2
13.2
1.6
278.0
160.3
28.7
8.6
13.2
0.9
185.3
$
$
$
255.1
8.1
9.8
3.6
18.9
(0.8 )
256.9
162.1
7.9
9.2
18.9
—
160.3
(92.7 ) $
(96.6 )
$
$
$
$
(1) 2016 benefit payments included $6.6 million of non-recurring lump sum benefit payments.
The Funded Status for fiscal 2017 included domestic plans of $83.7 million and international plans of $9.0 million. The Funded Status for
fiscal 2016 included domestic plans of $87.0 million and international plans of $9.6 million.
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 model-based techniques that include
relative value analysis and discounted cash flow techniques. Certain 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 short-term investment funds, comprised of cash and money market funds, are valued at their respective NAVs as reported
by the funds daily.
62
Pension assets by type and level are as follows (in millions):
Cash and Cash Equivalents
Common Stocks:
Domestic Equities
International Equities
Mutual Funds:
US Equity Funds
International Equity Funds
Balanced Funds
Fixed Income Funds
Other
Real Estate Fund
Investments Measured at Net Asset Value
Total
Cash and Cash Equivalents
Common Stocks:
Domestic Equities
International Equities
Mutual Funds:
US Equity Funds
Balanced funds
International Equity Funds
Fixed Income Funds
Other
Real Estate Fund
Investments Measured at Net Asset Value
Total
December 30, 2017
Total
Level 1
Level 2
Level 3
$
4.4
$
4.4
$
—
$
27.1
14.6
25.4
19.0
8.3
15.1
1.5
—
115.4
$
—
—
—
—
—
—
—
—
—
$
27.1
14.6
25.4
19.0
8.3
15.1
1.5
9.6
125.0
60.3
185.3
$
—
—
—
—
—
—
—
—
9.6
9.6
December 31, 2016
Total
Level 1
Level 2
Level 3
3.5
$
3.5
$
—
$
22.9
12.6
18.8
8.4
16.2
15.1
1.3
—
98.8
$
—
—
—
—
—
—
—
—
—
$
22.9
12.6
18.8
8.4
16.2
15.1
1.3
10.0
108.8
51.5
160.3
$
—
—
—
—
—
—
—
—
10.0
10.0
$
$
$
$
$
The following table sets forth additional disclosures for the fair value measurement of the fair value of pension plan assets that calculate fair
value based on NAV per share practical expedient as of December 30, 2017 and December 31, 2016 (in millions):
Common Collective Trust Funds
Global Emerging Markets Fund Limited Partnership
Total
63
2017
2016
51.7
8.6
60.3
$
$
45.1
6.4
51.5
$
$
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 US Aggregate Index by investing primarily, but not exclusively, in
securities that comprise that index. The common collective trust funds are available for immediate redemption. 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 global emerging markets fund limited partnership
interest can be redeemed on a monthly basis with immediate payment.
The Level 3 assets noted below represent investments in real estate funds managed by a major US 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 real estate fund can be redeemed on a quarterly basis
and paid within two weeks of the request for redemption.
The table below sets forth a summary of changes in the Company's Level 3 assets in its pension plan investments as of December 30, 2017 and
December 31, 2016 (in millions):
December 30,
2017
December 31,
2016
Beginning Balance
Net Purchases (Sales)
Net Gains
Ending Balance
$
$
$
10.0
(0.5 )
0.1
9.6
$
8.1
1.7
0.2
10.0
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 December 30, 2017 (in millions):
$
Fair Value
Significant Unobservable Inputs
9.6
Exit Capitalization Rate
Discount Rate
4.9% to 7.0%
6.6% to 8.0%
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 December 31, 2016 (in millions):
Fair Value
Significant Unobservable Inputs
$
Funded Status and Expense
10.0
Exit Capitalization Rate
Discount Rate
4.9% to 7.0%
6.6% to 8.0%
The Company recognized the funded status of its defined benefit pension plans on the Consolidated Balance Sheets as follows (in millions):
Accrued Compensation and Employee Benefits
Pension and Other Post Retirement Benefits
Total
Amounts Recognized in Accumulated Other Comprehensive Loss
Net Actuarial Loss
Prior Service Cost
Total
2017
2016
2.9
89.8
92.7
$
$
51.3
1.0
52.3
$
$
2.8
93.8
96.6
54.5
1.2
55.7
$
$
$
$
The accumulated benefit obligation for all defined benefit pension plans was $251.7 million and $232.9 million at December 30, 2017 and
December 31, 2016, respectively.
64
The accumulated benefit obligation exceeded plan assets for all pension plans as of December 30, 2017 and December 31, 2016.
The following weighted average assumptions were used to determine the projected benefit obligation at December 30, 2017 and December 31,
2016, respectively:
Discount Rate
2017
3.8%
2016
4.3%
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.
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 December 30, 2017 and December 31, 2016.
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 Obligations Recognized in OCI, Net of Tax
Prior Service Cost
Net Actuarial Loss
Total Recognized in OCI
2017
2016
2015
$
7.2
9.3
(11.2 )
2.3
0.2
7.8
$
0.1
1.5
1.6
$
$
$
8.1
9.8
(11.9 )
3.1
0.2
9.3
$
0.1
2.0
2.1
$
$
10.0
10.7
(11.5 )
4.3
0.2
13.7
0.1
2.8
2.9
$
$
$
$
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 2018 fiscal year are $0.2 million, and $3.5 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 2017, 2016 and 2015,
respectively.
Discount Rate
Expected Long-Term Rate of Return on Assets
2017
4.3%
7.0%
2016
4.6%
7.2%
2015
4.2%
7.5%
The Company made contributions to its defined benefit plan of $8.6 million and $9.2 million for the fiscal years ended December 30, 2017 and
December 31, 2016, respectively.
The Company estimates that in 2018 it will make contributions in the amount of $8.3 million to fund its defined benefit pension plans.
65
The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in millions):
Year
2018
2019
2020
2021
2022
2023-2027
Post Retirement Health Care Plan
Expected Payments
$
14.1
13.9
14.6
15.6
15.2
84.6
In connection with the PTS acquisition, the Company established an unfunded post retirement health care plan for certain domestic retirees and
their dependents.
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
2017
2016
Obligation at Beginning of Period
Service Cost
Interest Cost
Actuarial Gain
Participant Contributions
Less: Benefits Paid
Obligation at End of Period
$
$
13.8 $
0.1
0.4
(1.3 )
0.5
1.4
12.1 $
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
Total
Amounts Recognized in Accumulated Other Comprehensive Loss
Net Actuarial (Gain) Loss
2017
2016
$
$
$
0.9 $
11.2
12.1 $
(0.9 ) $
Net periodic benefit costs for the post retirement health care plan were as follows (in millions):
16.8
0.1
0.5
(2.4 )
0.2
1.4
13.8
1.1
12.7
13.8
0.4
Service Cost
Interest Cost
Amortization of Net Actuarial Loss
Net Periodic Benefit Cost
2017
2016
0.1 $
0.4
—
0.5 $
0.1
0.5
0.2
0.8
$
$
There was no amortization of prior service cost recognized in OCI, net of tax, for fiscal 2017. There will be no amortization of net actuarial
loss for the post retirement health care plan from OCI into net periodic benefit cost during the 2018 fiscal year.
66
The following assumptions were used to determine the projected benefit obligation at December 30, 2017 and December 31, 2016, respectively.
Discount Rate
2017
3.5%
2016
3.9%
The health care cost trend rate for 2018 is 8.0% for pre-65 participants and 5.4% for post-65 participants, decreasing to 4.5% in 2026. The
health care cost trend rate for 2017 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 $0.3 million impact on the benefit obligation and an
immaterial impact on post retirement benefits expense.
The Company contributed $0.9 million and $1.2 million to the post retirement health care plan in 2017 and 2016, respectively. The Company
estimates that in 2018 it will make contributions of $0.9 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
2018
2019
2020
2021
2022
2023-2027
(9) Shareholders' Equity
Common Stock
Expected Payments
$
0.9
1.0
1.1
1.1
1.1
4.6
The Company acquired and retired 576,804 shares of its common stock in fiscal 2017, at an average cost of $78.12 per share for a total cost of
$45.1 million. The Company acquired and retired 180,000 shares of its common stock in fiscal 2015 at an average cost of $66.56 per share for
a total cost of $12.0 million. The repurchases were under the 3.0 million share repurchase program approved by the Company's Board of
Directors. There are approximately 1.7 million shares of common stock available for repurchase under this program.
Share Based Compensation
The Company recognized approximately $13.6 million, $13.3 million and $13.9 million in share-based compensation expense in 2017, 2016
and 2015, respectively. The total income tax benefit recognized in the Consolidated Statements of Income for share-based compensation expense
was $5.2 million, $5.1 million, and $5.3 million in 2017, 2016 and 2015, 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. The total fair value of shares and
options vested was $11.9 million, $11.3 million, and $10.9 million in 2017, 2016 and 2015, respectively. As of December 30, 2017, total
unrecognized compensation cost related to share-based compensation awards was approximately $24.8 million, net of estimated forfeitures,
which the Company expects to recognize over a weighted average period of approximately 2.0 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 1.0
million shares were available for future grant or payment under the 2013 Plan at December 30, 2017.
Options and Stock Appreciation Rights
The Company uses stock settled stock appreciation rights (“SARs”) as a form of share-based incentive awards. SARs are the right to receive
stock in an amount equal to the appreciation in value of a share of stock over the base price per share that generally vest over 5 years and expire
10 years from the grant date. All grants are made at prices equal to the fair market value of the stock on the grant date. For years ended
December 30, 2017, December 31, 2016, and January 2, 2016, expired and canceled shares were immaterial.
67
The table below presents share-based compensation activity for the three fiscal years ended 2017, 2016 and 2015 (in millions):
Total Intrinsic Value of Share-Based Incentive Awards Exercised
$
Cash Received from Stock Option Exercises
Total Fair Value of Share-Based Incentive Awards Vested
2017
2016
2015
$
4.3
0.4
4.3
$
2.5
0.5
4.9
4.3
4.1
4.9
The weighted average assumptions used in the Company's Black-Scholes valuation related to grants for SARs were as follows:
2017
2016
2015
Per Share Weighted Average Fair Value of Grants
$
23.31
$
15.22
$
Risk-Free Interest Rate
Expected Life (Years)
Expected Volatility
Expected Dividend Yield
2.1 %
7.0
28.6 %
1.3 %
1.4 %
7.0
29.6 %
1.7 %
27.15
1.9 %
7.0
35.6 %
1.2 %
The average risk-free interest rate is based on US 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.
Following is a summary of share-based incentive plan activity (options and SARs) for fiscal 2017:
Number of Shares Under Options and SARs
Exercisable at December 31, 2016
Granted
Exercised
Forfeited
Expired
Outstanding at December 30, 2017
Exercisable at December 30, 2017
Shares
1,610,499
195,207
$
(184,191 )
(10,239 )
(9,485 )
1,601,791
940,751
$
$
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Term
(years)
Aggregate
Intrinsic Value (in
millions)
63.16
80.72
52.89
65.13
64.21
66.46
64.47
5.7
3.9
$
$
17.2
11.5
Compensation expense recognized related to options and SARs was $4.1 million for fiscal 2017.
As of December 30, 2017, there was $10.1 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 3.3 years.
The amount of options and SARs expected to vest is materially consistent with those outstanding and not yet exercisable.
Restricted Stock Awards and Restricted Stock Units
Restricted stock awards ("RSA") and restricted stock units ("RSU") consist of shares or the rights to shares of the Company's stock. The awards
are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer. As defined in the
individual grant agreements, acceleration of vesting may occur under a change in control, or death, disability or normal retirement of the grantee.
68
Following is a summary of RSA activity for fiscal 2017:
Unvested RSAs at December 31, 2016
Granted
Vested
Unvested RSAs December 30, 2017
Weighted
Average Fair
Value at Grant
Date
Weighted Average
Remaining
Contractual Term
(years)
57.43
80.70
57.43
80.70
0.4
0.4
Shares
$
19,593
13,941
(19,593 )
13,941
$
The weighted average grant date fair value of awards granted was $80.70, $57.43 and $78.15 in 2017, 2016 and 2015, respectively.
RSAs vest on the one year anniversary of the grant date, provided the holder of the shares is continuously employed by or in the service of the
Company until the vesting date. Compensation expense recognized related to the RSAs was $1.1 million for fiscal 2017.
As of December 30, 2017, there was $0.4 million of unrecognized compensation cost related to non-vested RSAs that is expected to be
recognized as a charge to earnings over a weighted average period of 0.4 years.
Following is a summary of RSU activity for fiscal 2017:
Unvested RSUs at December 31, 2016
Granted
Vested
Forfeited
Unvested RSUs at December 30, 2017
Shares
Weighted Average Fair
Value at Grant Date
Weighted Average
Remaining Contractual
Term (years)
$
277,863
76,030
(85,790 )
(7,570 )
260,533
$
69.23
80.48
74.50
68.02
70.81
1.7
1.7
The weighted average grant date fair value of awards granted was $80.48, $57.50 and $77.38 in 2017, 2016 and 2015, respectively.
RSUs vest on the third anniversary of the grant date, provided the holder of the shares is continuously employed by the Company until the
vesting date. Compensation expense recognized related to the RSUs was $6.2 million for fiscal 2017.
As of December 30, 2017, there was $8.8 million of unrecognized compensation cost related to non-vested RSUs that is expected to be
recognized as a charge to earnings over a weighted average period of 1.7 years.
Performance Share Units
Performance share unit ("PSU") awards consist of shares or the rights to shares of the Company's stock which are awarded to employees of the
Company. These shares are payable upon the determination that the Company achieved certain established performance targets and can range
from 0% to 200% of the targeted payout based on the actual results. PSUs have a performance period of 3 years. and vest three years from the
grant date. The PSUs have performance criteria based on a return on invested capital metric or they have performance criteria using returns
relative to the Company's peer group. As set forth in the individual 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.
The assumptions used in the Company's Monte Carlo simulation related to grants for performance share units were as follows:
Risk-free interest rate
Expected life (years)
Expected volatility
Expected dividend yield
69
December 30,
2017
December 31,
2016
1.6 %
3.0
24.0 %
1.3 %
0.9 %
3.0
23.0 %
1.7 %
Following is a summary of PSU activity for fiscal 2017:
Unvested PSUs at December 31, 2016
Granted
Vested
Forfeited
Unvested PSUs December 30, 2017
Shares
Weighted Average Fair
Value at Grant Date
Weighted Average
Remaining Contractual
Term (years)
$
133,340
48,666
(110 )
(26,780 )
155,116
$
65.28
90.82
83.74
81.76
70.43
2.0
2.0
The weighted average grant date fair value of awards granted was $90.82, $51.84 and $89.98 in 2017, 2016 and 2015, respectively.
Compensation expense for awards granted are recognized based on the Monte Carlo simulation value or the expected payout ratio depending
upon the performance criterion for the award, net of estimated forfeitures. Compensation expense recognized related to PSUs was $2.2 million
for fiscal 2017. Total unrecognized compensation expense for all PSUs granted as of December 30, 2017 was $5.5 million and it is expected to
be recognized as a charge to earnings over a weighted average period of 2.0 years.
(10) Income Taxes
Income before taxes consisted of the following (in millions):
United States
Foreign
Total
2017
2016
2015
$
$
147.4
129.8
277.2
$
$
143.4
123.0
266.4
$
$
The provision for income taxes is summarized as follows (in millions):
2017
2016
2015
Current
Federal
State
Foreign
Deferred
Federal
State
Foreign
Total
$
$
$
$
36.9
$
(0.3 )
32.2
68.8
$
(7.2 ) $
2.2
(4.7 )
(9.7 )
59.1
$
$
$
$
23.1
3.5
30.4
57.0
5.6
1.8
(7.3 )
0.1
57.1
$
25.8
171.1
196.9
13.5
0.2
45.1
58.8
(2.0 )
(0.9 )
(7.5 )
(10.4 )
48.4
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law revising the US corporate income tax. Changes
include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the
elimination of certain deductions and imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries. The primary impacts
of the Act reflected in the consolidated financial statements relate to the remeasurement of deferred tax assets and liabilities resulting from the
change in the corporate tax rate; a one-time mandatory transition tax on undistributed earnings of foreign affiliates; and deferred taxes in
connection with a change in the Company’s intent to permanently reinvest the historical undistributed earnings of its foreign affiliates. The SEC
provided guidance that allows the Company to record provisional amounts if the accounting assessment is incomplete for impacts of the Act,
with the requirement that the accounting be finalized in a period not to exceed one year from the date of enactment. As of December 30, 2017,
the Company has not completed the accounting for the tax effects of the Act. Therefore, the Company has recorded provisional amounts for
certain effects of the Act. These estimates may be impacted by the need for further analysis and future clarification and guidance regarding
70
available tax accounting methods and elections, earnings and profits computations and state conformity to federal changes. The Act also creates
a new requirement that certain income earned by controlled foreign corporations must be included currently in gross income of the controlled
foreign corporations’ US shareholder. Due to the complexity of the new Global Intangible Low Taxed Income tax rules, the Company is
currently evaluating this provision of the Act and its application under the applicable accounting guidance. Therefore, the Company has not
recognized any provisional amounts for this provision of the Act in its consolidated financial statements.
The Company recorded a net $1.0 million reduction in tax expense in the fourth quarter of 2017, the period in which the legislation was enacted.
The provisional benefit recognized related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they
are expected to reverse was $51.0 million. The provisional expense recognized related to the one-time tax on the mandatory deemed repatriation
of foreign earnings was $40.0 million of which the Company will elect to pay the one-time tax over a period of eight years. The Company also
recognized a provisional expense of $10.0 million for local withholding taxes on foreign earnings not deemed permanently reinvested.
Additional analysis of historical foreign earnings is necessary to finalize the tax impact of the Act and any subsequent adjustment to these
amounts will be recorded as current tax expense in the quarter of 2018 in which the analysis is complete.
On February 13, 2018 the Internal Revenue Service issued Revenue Proclamation 2018-17 modifying existing procedures for changing the
annual accounting period of certain foreign corporations whose US shareholders are subject to the new mandatory deemed repatriation of
deferred foreign earnings. The Company is currently analyzing the impact of Revenue Proclamation 2018-17 and anticipates the impact to tax
expense to be between $4.0 million to $5.0 million. As the Revenue Proclamation was issued after the Company’s fiscal year end, the current
consolidated financial statements do not reflect this impact.
A reconciliation of the statutory federal income tax rate and the effective tax rate reflected in the consolidated statements of income follows:
2017
2016
2015
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
Goodwill Impairment
Valuation Allowance
Tax Cuts and Jobs Act of 2017
Adjustments to Tax Accruals and Reserves
Write Down of Venezuelan Assets
Other
Effective Tax Rate
35.0 %
0.3 %
(1.0 )%
(2.1 )%
(4.3 )%
(3.0 )%
— %
(0.6 )%
(0.4 )%
(1.9 )%
— %
(0.7 )%
21.3 %
35.0 %
1.5 %
(1.1 )%
(2.0 )%
(6.0 )%
(2.3 )%
— %
— %
— %
0.7 %
— %
(4.4 )%
21.4 %
35.0 %
(0.2 )%
(1.0 )%
(3.3 )%
(7.2 )%
(4.1 )%
4.0 %
— %
— %
2.1 %
2.3 %
(3.0 )%
24.6 %
Deferred taxes arise primarily from differences in amounts reported for tax and financial statement purposes. The Company's net deferred tax
liability was $(106.8) million as of December 30, 2017, classified on the consolidated Balance Sheet as a net non-current deferred tax asset of
$28.5 million and a net non-current deferred income tax liability of $(135.3) million. As of December 31, 2016, the Company's net deferred tax
liability was $(75.3) million classified on the consolidated Balance Sheet as a net non-current deferred income tax benefit of $22.4 million and
a net non-current deferred income tax liability of $(97.7) million. The Company remeasured its US deferred assets and liabilities at the
applicable tax rate of 21% in accordance with the Act. The remeasurement resulted in a decrease of $51.0 million to the net deferred tax liability.
71
The components of this net deferred tax liability are as follows (in millions):
December 30,
2017
December 31,
2016
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
$
$
$
53.4
2.3
3.1
12.9
(5.3 )
(4.3 )
12.9
(5.9 )
1.2
70.3
(26.2 )
(150.9 )
(177.1 )
(106.8 ) $
Following is a reconciliation of the beginning and ending amount of unrecognized tax benefits (in millions):
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
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 31, 2016
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 30, 2017
$
$
$
$
75.1
2.7
5.5
21.3
9.2
25.9
12.4
(6.8 )
5.0
150.3
(31.4 )
(194.2 )
(225.6 )
(75.3 )
5.8
—
4.0
(1.3 )
(0.2 )
8.3
—
2.0
—
(0.3 )
10.0
—
2.7
(5.3 )
(0.7 )
6.7
Unrecognized tax benefits as of December 30, 2017 amount to $6.7 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 2017, 2016 and 2015, the
Company recognized approximately $(0.2) million, $0.2 million and $0.6 million in net interest (income) expense, respectively. The Company
had approximately $1.7 million, $1.9 million and $1.7 million of accrued interest as of December 30, 2017, December 31, 2016 and January 2,
2016, respectively.
Due to statute expirations, approximately $0.4 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 US federal and state/local income tax examinations by tax authorities for years prior
to 2012, and the Company is no longer subject to non-US income tax examinations by tax authorities for years prior to 2010.
72
At December 30, 2017, the Company had approximately $12.9 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 December 31, 2016, the Company had approximately $12.4
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 $5.9 million and $6.8 million as of December 30, 2017 and December 31, 2016, 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 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 tax holidays for some of its Chinese subsidiaries. These tax holidays expire in 2020 and are renewable subject
to certain conditions with which the Company expects to comply. In 2017, these holidays decreased the Provision for Income Taxes by $4.2
million.
The Act included a mandatory one-time tax on all accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted
earnings for which no US tax liability had been accrued have now been subject to US tax. The Company recognized a provisional one-time tax
of $40.0 million and a provisional expense of $10.0 million for local withholding taxes on foreign earnings not deemed permanently reinvested.
As a result, earnings in foreign jurisdictions are available for distribution without incremental US tax cost.
(11) Contingencies
One of the Company's subsidiaries that it acquired in 2007 is subject to numerous claims filed in various jurisdictions relating to certain sub-
fractional motors that were primarily manufactured through 2004 and that were included as components of residential and commercial
ventilation units manufactured and sold in high volumes by a third party. These ventilation units are subject to product safety requirements and
other potential regulation of their performance by government agencies such as the US Consumer Product Safety Commission (“CPSC”). The
claims generally allege that the ventilation units were the cause of fires. The Company has recorded an estimated liability for incurred claims.
Based on the current facts, the Company cannot assure that these claims, individually or in the aggregate, will not have a material adverse effect
on its subsidiary's financial condition. The Company's subsidiary cannot reasonably predict the outcome of these claims, the nature or extent
of any CPSC or other remedial actions, if any, that the Company's subsidiary may need to undertake with respect to motors that remain in the
field, or the costs that may be incurred, some of which could be significant.
The Company is, from time to time, party to litigation and other legal or regulatory proceedings that arise in the normal course of its business
operations and the outcomes of which are subject to significant uncertainty, including product warranty and liability claims, contract disputes
and environmental, asbestos, intellectual property, employment and other litigation matters. The Company's products are used in a variety of
industrial, commercial and residential applications that subject the Company to claims that the use of its products is alleged to have resulted in
injury or other damage. Many of these matters will only be resolved when one or more future events occur or fail to occur. Management
conducts regular reviews, including updates from legal counsel, to assess the need for accounting recognition or disclosure of these
contingencies, and such assessment inherently involves an exercise in judgment. The Company accrues for exposures in amounts that it believes
are adequate, and the Company does not believe that the outcome of any such lawsuit individually or collectively will have a material effect on
the Company's financial position, results of operations or 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 2017 and 2016 (in millions):
Beginning Balance
Less: Payments
Provisions
Translation Adjustments
Ending Balance
December 30,
2017
December 31,
2016
$
$
20.3
23.5
19.0
0.2
16.0
$
$
19.1
20.6
21.9
(0.1 )
20.3
These liabilities are included in Other Accrued Expenses and Other Noncurrent Liabilities on the Consolidated Balance Sheet.
73
(12) Leases and Rental Commitments
Rental expenses charged to operations amounted to $35.1 million in 2017, $31.9 million in 2016 and $45.1 million in 2015. The Company has
future minimum rental commitments under operating leases as shown in the following table (in millions):
Year
Expected Payments
2018
2019
2020
2021
2022
Thereafter
$
23.6
13.0
9.6
6.9
4.8
12.9
(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 were previously utilized to manage
interest rate risk associated with the Company's floating rate borrowings.
The Company is exposed to credit losses in the event of non-performance by the counterparties to various financial agreements, including its
commodity hedging transactions, foreign currency exchange contracts and interest rate swap agreements. Exposure to counterparty credit risk
is managed by limiting counterparties to major international banks and financial institutions meeting established credit guidelines and
continually monitoring their compliance with the credit guidelines. The Company does not obtain collateral or other security to support financial
instruments subject to credit risk. The Company does not anticipate non-performance by its counterparties, but cannot provide assurances.
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets. 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 December 30, 2017 or December 31, 2016.
Cash flow hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is
reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects
earnings. Gains and losses on the derivative representing either hedge ineffectiveness or changes in market value of derivatives not designated
as hedges are recognized in current earnings.
At December 30, 2017 and December 31, 2016, the Company had $(2.0) million and $(7.5) 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.
As of December 30, 2017, the Company had the following commodity forward contracts outstanding (with maturities extending through June
2019) to hedge forecasted purchases of commodities (notional amounts expressed in terms of the dollar value of the hedged item (in millions):
Copper
Aluminum
$
December 30, 2017
80.8
7.7
$
December 31, 2016
50.7
4.9
74
As of December 30, 2017, the Company had the following currency forward contracts outstanding (with maturities extending through October
2019) to hedge forecasted foreign currency cash flows (in millions):
Mexican Peso
Chinese Renminbi
Indian Rupee
Euro
Canadian Dollar
Australian Dollar
Thai Baht
Japanese Yen
British Pound
$
December 30, 2017
137.1
214.9
35.8
26.4
47.7
14.9
7.5
—
2.7
$
December 31, 2016
230.1
275.5
43.6
69.0
41.8
12.1
4.9
2.8
4.3
As of December 31, 2016, the total notional amount of the Company's receive-variable/pay-fixed interest rate swap was $100.0 million. The
interest rate swap agreement matured in August 2017.
Fair values of derivative instruments as of December 30, 2017 and December 31, 2016 were (in millions):
December 30, 2017
Prepaid
Expenses and
Other Current
Assets
Other Noncurrent
Assets
Current Hedging
Obligations
Noncurrent Hedging
Obligations
Designated as Hedging Instruments:
Currency Contracts
$
Commodity Contracts
Not Designated as Hedging
Instruments:
Currency Contracts
Commodity Contracts
Total Derivatives
$
$
11.5
10.8
4.1
0.2
26.6
$
$
2.5
0.7
—
—
3.2
$
$
7.9
—
0.2
—
8.1
$
0.9
—
—
—
0.9
December 31, 2016
Prepaid
Expenses and
Other
Current
Assets
Other Noncurrent
Assets
Current Hedging
Obligations
Noncurrent Hedging
Obligations
Designated as Hedging Instruments:
Interest Rate Swap Contracts
$
Currency Contracts
Commodity Contracts
Not Designated as Hedging
Instruments:
Currency Contracts
Commodity Contracts
Total Derivatives
$
$
—
1.3
4.7
1.5
2.6
10.1
$
—
0.4
—
—
—
0.4
$
$
75
$
3.3
39.7
—
6.0
—
49.0
$
—
17.6
—
—
—
17.6
Derivatives Designated as Cash Flow Hedging Instruments
The effect of derivative instruments designated as cash flow hedges on the Consolidated Statements of Income and Consolidated Statements of
Comprehensive Income for fiscal 2017, 2016 and 2015 were (in millions):
Gain Recognized in Other
Comprehensive Income
Amounts Reclassified from Other
Comprehensive Income (Loss):
Gain Recognized in Net Sales
Gain (Loss) Recognized in Cost of
Sales
Loss Recognized in Interest Expense
Commodity
Forwards
Currency
Forwards
Fiscal 2017
Interest
Rate
Swaps
Total
$
21.7
$
46.3
$
0.5
$
68.5
—
12.2
—
0.9
(22.1 )
—
—
—
(2.8 )
0.9
(9.9 )
(2.8 )
Commodity
Forwards
Currency
Forwards
Fiscal 2016
Interest
Rate
Swaps
Total
$
6.4
$
(46.1 ) $
(0.3 ) $
(40.0 )
Gain (Loss) Recognized in Other
Comprehensive Loss
Amounts Reclassified from Other
Comprehensive Income (Loss):
Gain Recognized in Net Sales
Loss Recognized in Cost of Sales
(13.6 )
(32.1 )
—
0.2
Loss Recognized in Interest Expense
—
—
(4.8 )
—
—
—
—
0.2
(45.7 )
(4.8 )
0.2
(38.3 )
(5.2 )
Commodity
Forwards
Currency
Forwards
Fiscal 2015
Interest
Rate
Swaps
Total
$
(22.3 ) $
(46.5 ) $
(1.1 ) $
(69.9 )
Loss Recognized in Other
Comprehensive Loss
Amounts Reclassified from Other
Comprehensive Income (Loss):
Gain Recognized in Net Sales
Loss Recognized in Cost of Sales
(19.8 )
(18.5 )
—
0.2
Loss Recognized in Interest Expense
—
—
(5.2 )
The ineffective portion of hedging instruments recognized was immaterial for all periods presented.
76
Derivatives Not Designated as Cash Flow Hedging Instruments
The effect of derivative instruments not designated as cash flow hedges on the Consolidated Statements of Income for fiscal 2017, 2016 and
2015 were (in millions):
Loss Recognized in Cost of Sales
Gain Recognized in Operating Expenses
Gain Recognized in Cost of Sales
Loss Recognized in Operating Expenses
Loss Recognized in Cost of Sales
Commodity
Forwards
$
$
(1.1 ) $
—
$
Fiscal 2017
Currency
Forwards
—
14.3
$
$
Total
(1.1 )
14.3
Commodity
Forwards
Fiscal 2016
Currency
Forwards
2.6
—
$
$
—
$
(5.2 ) $
Total
2.6
(5.2 )
Commodity
Forwards
Fiscal 2015
Currency
Forwards
Total
—
$
(8.8 ) $
(8.8 )
$
$
$
The net AOCI balance related to hedging activities of a $8.6 million gain at December 30, 2017 includes $11.0 million of net deferred gains
expected to be reclassified to the Consolidated Statement of Comprehensive 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 December 30, 2017
and December 31, 2016.
The following table presents the derivative assets and derivative liabilities presented on a net basis under enforceable master netting agreements
(in millions):
December 30, 2017
Gross Amounts as
Presented in the
Consolidated
Balance Sheet
Derivative Contract
Amounts Subject to
Right of Offset
Derivative
Contracts as
Presented on a Net
Basis
Prepaid Expenses and Other Current Assets:
Derivative Currency Contracts
Derivative Commodity Contracts
$
$
15.6
11.0
Other Noncurrent Assets:
Derivative Currency Contracts
Derivative Commodity Contracts
Current Hedging Obligations:
Derivative Currency Contracts
Noncurrent Hedging Obligations:
Derivative Currency Contracts
2.5
0.7
8.1
0.9
77
(5.9 ) $
—
(0.7 )
—
(5.9 )
(0.7 )
9.7
11.0
1.8
0.7
2.2
0.2
December 31, 2016
Gross Amounts as
Presented in the
Consolidated
Balance Sheet
Derivative
Contract Amounts
Subject to Right of
Offset
Derivative Contracts as
Presented on a Net
Basis
$
$
2.8
7.3
0.4
45.7
17.6
(1.7 ) $
—
(0.2 )
(1.7 )
(0.2 )
1.1
7.3
0.2
44.0
17.4
Prepaid Expenses and Other Current Assets:
Derivative Currency Contracts
Derivative Commodity Contracts
Other Noncurrent Assets:
Derivative Currency Contracts
Current Hedging Obligations:
Derivative Currency Contracts
Noncurrent Hedging Obligations:
Derivative Currency 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
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
Level 3
Unobservable inputs for the asset or liability
The Company uses the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based
on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company's financial assets and
liabilities that were accounted for at fair value on a recurring basis as of December 30, 2017 and December 31, 2016, respectively (in millions):
Assets:
Prepaid Expenses and Other Current Assets:
Derivative Currency Contracts
Derivative Commodity Contracts
Other Noncurrent Assets:
Assets Held in Rabbi Trust
Derivative Currency Contracts
Derivative Commodity Contracts
Liabilities:
Current Hedging Obligations:
Interest Rate Swap
Derivative Currency Contracts
Noncurrent Hedging Obligations:
Derivative Currency Contracts
December 30, 2017
December 31, 2016
Classification
$
$
15.6
11.0
5.7
2.5
0.7
—
8.1
0.9
2.8
7.3
5.4
0.4
—
3.3
45.7
17.6
Level 2
Level 2
Level 1
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.
78
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 using the LIBOR forward yield curve for an instrument 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.
The Company did not change its valuation techniques during fiscal 2017.
(15) Restructuring Activities
The Company incurred restructuring and restructuring related costs on projects beginning in 2014. Restructuring costs include employee
termination and plant relocation costs. Restructuring-related costs include costs directly associated with actions resulting from our
Simplification initiatives, such as asset write-downs or accelerated depreciation due to shortened useful lives in connection with site closures,
discretionary employment benefit costs and other facility rationalization costs. Restructuring costs for employee termination expenses are
generally required to be accrued over the employees remaining service period while restructuring costs for plant relocation costs and
restructuring-related costs are generally required to be expensed as incurred.
The following is a reconciliation of provisions and payments for the restructuring projects for 2017 and 2016 (in millions):
Beginning Balance
Provision
Less: Payments
Ending Balance
December 30,
2017
December 31,
2016
$
$
0.6 $
14.1
13.5
1.2 $
1.3
6.8
7.5
0.6
The following is a reconciliation of expenses by type for the restructuring projects in fiscal 2017 and fiscal 2016 (in millions):
Restructuring Costs:
Employee Termination Expenses
Facility Related Costs
Other Expenses
Total Restructuring Costs
Restructuring Related Costs:
Other Employment Benefit Expenses
Total Restructuring Related Costs
Total Restructuring and Restructuring Related Costs
2017
2016
Cost of
Sales
Operating
Expenses
Total
Cost of
Sales
Operating
Expenses
Total
$
$
$
$
$
2.6 $
4.3
3.9
10.8 $
0.7 $
0.7 $
1.7 $
0.9
—
2.6 $
— $
— $
4.3 $
5.2
3.9
13.4
$
0.7
$
0.7 $
0.5 $
2.9
0.8
4.2 $
0.5 $
0.5 $
0.3 $
0.3
0.9
1.5 $
0.6 $
0.6 $
11.5
$
2.6
$
14.1
$
4.7
$
2.1
$
0.8
3.2
1.7
5.7
1.1
1.1
6.8
The following table shows the allocation of Restructuring Expenses by segment for fiscal 2017 and fiscal 2016 (in millions):
Restructuring Expenses - 2017
Restructuring Expenses - 2016
Commercial
and Industrial
Systems
Climate
Solutions
Power
Transmission
Solutions
Total
$
$
14.1 $
6.8 $
10.9
2.5
$
$
2.5 $
2.6 $
0.7
1.7
The Company's current restructuring activities are expected to continue into 2018. The Company expects to record aggregate future charges of
approximately $5.3 million related to announced projects as of year-end fiscal 2017, which includes $0.5 million of employee termination
expenses and $4.8 million of facility related and other costs.
79
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 December 30, 2017.
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 December 30, 2017 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.”
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 December 30, 2017
that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B - OTHER INFORMATION
None.
80
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information in the sections titled “Proposal 1: Election of Directors,” “Board of Directors” and “Stock Ownership” in our proxy statement
for the 2018 annual meeting of shareholders (the “2018 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 2018 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 2018 Proxy Statement is incorporated by reference herein.
Equity Compensation Plan Information
The following table provides information about our equity compensation plans as of December 30, 2017.
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)
Equity Compensation Plans
Approved by Security Holders
Equity Compensation Plans Not
Approved by Security Holders
Total
1,601,791
$
66.46
970,324
—
1,601,791
—
970,324
(1) Represents options to purchase our Common Stock and stock-settled appreciation rights granted under our 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 2018 Proxy Statement is incorporated by reference herein.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information in the section titled “Proposal 3: Ratification of Deloitte & Touche LLP as our Independent Registered Public Accounting Firm
for the year ending December 29, 2018” in the 2018 Proxy Statement is incorporated by reference herein.
81
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 required by Item 601 of Regulation S-K:
Exhibit
Number
Exhibit Index
Exhibit Description
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 October 30, 2017]
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., US 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, US
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, US 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]
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
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]
10.1*
10.2*
10.3*
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]
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
12
21
23
31.1
31.2
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]
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, 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, 2010]
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, 2005]
Regal Beloit Corporation 2016 Incentive Compensation Plan. [Incorporated by reference to Appendix A to Regal Beloit
Corporation's definitive proxy statement on Schedule 14A for the 2016 annual meeting of shareholders held April 25,
2016]
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. [Incorporated by reference to Exhibit 10.21 to Regal Beloit Corporation’s Annual Report on Form 10-K
filed on March 2, 2016]
Form of ROIC Based Performance Share Unit Award Agreement under the Regal Beloit Corporation 2013 Equity
Incentive Plan [Incorporated by reference to Exhibit 10.22 to Regal Beloit Corporation’s Annual Report on Form 10-K
filed on March 1, 2017]
Key Executive Employment and Severance Agreement, dated as of October 26, 2016, between Regal Beloit Corporation
and Thomas E. Valentyn [Incorporated by reference to Exhibit 10.23 to Regal Beloit Corporation’s Annual Report on
Form 10-K filed on March 1, 2017]
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.
83
32
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
XBRL Taxonomy Extension Presentation Linkbase
________________________
* A management contract or compensatory plan or arrangement.
** Furnished herewith.
(b) Exhibits- see (a)(3) above.
(c) See (a)(2) above.
84
ITEM 16 - FORM 10-K SUMMARY
Not Applicable
85
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 27th day of February 2018.
SIGNATURES
REGAL BELOIT CORPORATION
By:
/s/ CHARLES A. HINRICHS
Charles A. Hinrichs
Vice President and Chief Financial Officer
(Principal Financial Officer)
By:
/s/ ROBERT A. LAZZERINI
Robert A. Lazzerini
Vice President and Corporate Controller
(Principal Accounting Officer)
86
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
Chairman and Chief Executive Officer
February 27, 2018
Mark J. Gliebe
(Principal Executive Officer)
/s/ STEPHEN M. BURT
Director
Stephen M. Burt
February 27, 2018
/s/ CHRISTOPHER L. DOERR
Director
February 27, 2018
Christopher L. Doerr
/s/ THOMAS J. FISCHER
Director
Thomas J. Fischer
/s/ DEAN A. FOATE
Director
Dean A. Foate
/s/ HENRY W. KNUEPPEL
Director
Henry W. Knueppel
February 27, 2018
February 27, 2018
February 27, 2018
/s/ RAKESH SACHDEV
Director
February 27, 2018
Rakesh Sachdev
/s/ ANESA T. CHAIBI
Director
February 27, 2018
Anesa Chaibi
/s/ CURTIS W. STOELTING
Director
February 27, 2018
Curtis W. Stoelting
/s/ JANE L. WARNER
Director
Jane L. Warner
February 27, 2018
87
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
December 30, 2017, December 31, 2016, and January 2, 2016
Consolidated Statements of Comprehensive Income for the fiscal years ended December 30,
2017, December 31, 2016, and January 2, 2016
Consolidated Balance Sheets at December 30, 2017 and December 31, 2016
Consolidated Statements of Equity for the fiscal years ended December 30, 2017, December 31,
2016 and January 2, 2016
Consolidated Statements of Cash Flows for the fiscal years ended December 30, 2017, December
31, 2016, and January 2, 2016
Notes to the Consolidated Financial Statements
Page(s) In
Form 10-K
39
41
42
43
44
45
46
(2) Financial Statement Schedule:
For the fiscal years ended December 30, 2017, December 31, 2016, and January 2, 2016
Schedule II -Valuation and Qualifying Accounts
88*
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
*Due to page breaks different from the Form 10-K filing, this schedule appears on page 89 below.
88
SCHEDULE II
REGAL BELOIT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Balance
Beginning of
Year
Charged to
Expenses
Deductions (a)
Adjustments (b)
Balance End of
Year
(Dollars in Millions)
Allowance for Receivables:
Fiscal 2017
Fiscal 2016
Fiscal 2015
$
11.5
11.3
11.6
1.3
1.6
12.2
(2.8 )
(1.2 )
(12.4 )
$
1.3
(0.2 )
(0.1 )
11.3
11.5
11.3
(a) Deductions consist of write offs charged against the allowance for doubtful accounts and warranty claim costs.
(b) Adjustments related to acquisitions and translation.
89
CASH DIVIDENDS AND STOCK SPLITS
During 2017, 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 the Company’s Transfer Agent.
Regal has paid a cash dividend every quarter since January
1961. We have increased the amount of our cash dividend 45
times in the 57 years these dividends have been paid. The
dividend has never been reduced. We have 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 30, 2018, at Regal Beloit Corporation
Headquarters, Packard Learning Center, 200 State Street,
Beloit, WI 53511-6254.
AUDITORS
Deloitte & Touche LLP, Milwaukee, Wisconsin
PUBLIC INFORMATION AND REPORTS
Shareholders can view Company documents 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 and
Forms 10-K and 10-Q as filed by the Company with the Securities and
Exchange Commission.
Please direct information requests 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 in our quarterly earnings releases, on investor conference calls, and in investor presentations
and similar events 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 accounting periods and compared to our peers. In addition, since our management often uses these
non-GAAP financial measures to manage and evaluate our business, make operating decisions, and forecast our future results, we believe
disclosing these measures helps investors evaluate our business in the same manner as management. 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
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
Loss on Divestiture Bankruptcy
Loss (Gain) on Disposal of Business
Provisional Benefit of the New US Tax Legislation
Adjusted Diluted Earnings Per Share
(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
(Dollars in Millions)
ADJUSTED NET INCOME
Twelve Months Ended
Jan 3, 2015
Jan 2, 2016
Dec 31, 2016
Dec 30, 2017
$
0.69
$
3.18
$
4.52
$
4.74
2.59
0.66
0.14
0.18
0.15
-
(0.23)
0.09
0.04
-
1.29
-
0.47
0.13
0.02
0.28
(0.04)
-
-
-
-
-
-
-
-
-
0.10
0.22
-
-
-
-
-
-
-
-
(0.18)
-
(0.07)
(0.02)
$
4.31
$
5.33
$
4.44
$
4.87
Dec 28, 2013
Jan 3, 2015
Dec 31, 2016
Dec 30, 2017
Twelve Months Ended
Jan 2, 2016
$
305.0
$
298.2
$
384.3
$
442.3
$
291.9
(82.7)
1.6
(83.6)
-
(92.2)
-
(65.2)
-
(65.2)
-
$
223.9
$
214.6
$
292.1
$
377.1
$
226.7
Dec 28, 2013
Jan 3, 2015
Dec 31, 2016
Dec 30, 2017
Twelve Months Ended
Jan 2, 2016
GAAP Net Income Attributable to Regal Beloit Corporation
$
120.0
$
31.0
$
143.3
$
203.4
$
213.0
Goodwill and Asset Impairments and Other, Net
Tax Effect from Goodwill and Asset Impairments and Other, Net
81.0
(6.4)
159.5
(12.3)
92.7
(21.8)
-
-
-
-
Adjusted Net Income Attributable to Regal Beloit Corporation
$
194.6
$
178.2
$
214.2
$
203.4
$
213.0
Free Cash Flow as a Percentage of Adjusted Net Income
Attributable to Regal Beloit Corporation
115.1%
120.4%
136.4%
185.4%
106.4%
90
Company Officers:
(standing left to right)
John Avampato
Tom Valentyn
Terry Colvin
(seated left to right)
Chuck Hinrichs
Mark Gliebe
Jon Schlemmer
C orporate Informa tion
BOARD OF DIRECTORS
Stephen M. Burt (1)*
Managing Director
Duff & Phelps
Director since 2010
Anesa T. Chaibi (3)
Chief Executive Officer
Optimas OE Solutions LLC
Director since 2014
Christopher L. Doerr (2)
Chief Executive Officer
Passage Partners LLC
Former President and 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 (1)(3)
Director and
Chairman of the Board
Plexus Corporation
Director since 2005
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
Tom Valentyn
VP General Counsel & Secretary
Mark J. Gliebe
Chairman and Chief Executive Officer
Regal Beloit Corporation
Director since 2007
Henry W. Knueppel
Former Chairman and Chief Executive
Officer
Regal Beloit Corporation
Director since 1987
Rakesh Sachdev (2)(4)
Chief Executive Officer
Platform Specialty Products Corporation
Director since 2007
Curtis W. Stoelting (2)*
Chief Executive Officer
Roadrunner Transportation Systems, Inc.
Director since 2005
Jane L. Warner (3)*
Former Executive Vice President
Decorative Surfaces and Finishing Systems
Illinois Tool Works
Director since 2013
Committee assignments as of April 2017
(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 Chairperson
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Regal Beloit Corporation
200 State Street
Beloit, Wisconsin 53511
608-364-8800
regalbeloit.com