Notes to the Consolidated Financial Statements
(1) Nature of Operations
Regal Beloit Corporation (the “Company”) is a United States-based multinational corporation. The Company reports in two segments; the Electrical segment, with its principal line of business in electric motors and power generation products, and the Mechanical segment, with its principal line of business in mechanical products which control motion and torque. The principal markets for the Company's products and technologies are within the United States.
(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 29, 2012
,
December 31, 2011
and
January 1, 2011
were all 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 rules. All intercompany accounts and transactions are eliminated.
Use of Estimates
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company uses estimates in accounting for, among other items, allowance for doubtful accounts; excess and obsolete inventory; share-based compensation; acquisitions; product warranty obligations, pension assets and liabilities, derivative fair values, goodwill impairment, health care, retirement benefits, rebates and incentives, litigation claims and contingencies, including environmental matters, and income taxes. The Company accounts for changes to estimates and assumptions when warranted by factually based experience.
Acquisitions
The Company accounts for acquisitions under the acquisition method, in which assets acquired and liabilities assumed are recorded at fair value as of the date of acquisition. The operating results of the acquired companies are included in the Company’s consolidated financial statements from the date of acquisition.
The Company recognizes assets acquired, liabilities assumed, contractual contingencies and contingent consideration at their fair value on the acquisition date. Acquisition-related costs are expensed as incurred, restructuring costs are recognized as post-acquisition expense and changes in deferred tax asset valuation allowances and income tax uncertainties after the measurement period are recorded in income tax expense.
Revenue Recognition
The Company recognizes revenue upon transfer of title, which generally occurs upon shipment of the product to the customer. The pricing of products sold is generally supported by customer purchase orders, and accounts receivable collection is reasonably assured at the time of shipment. Estimated discounts and rebates are recorded as a reduction of gross sales in the same period revenue is recognized. Product returns and credits are estimated and recorded at the time of shipment based upon historical experience. Shipping and handling costs are recorded as revenue when billed to the customers. The costs incurred from shipping and handling are recorded in Cost of Sales.
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 2012, fiscal 2011 or fiscal 2010.
Research and Development
The Company performs research and development activities relating to new product development and the improvement of current products. Research and development costs are expensed as incurred. Research and development costs were
$28.5 million
,
$21.8 million
and
$10.4 million
for fiscal
2012
,
2011
and
2010
, 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 and trade accounts receivable.
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 maintains cash and cash equivalents, and other financial instruments, with various major financial institutions.
The Company has material deposits with a global financial institution. It performs periodic evaluations of the relative credit standing of its financial institutions and monitors the amount of exposure.
The Company continues to monitor credit risk associated with its trade receivables, especially during this period of continued global economic uncertainty.
Investments
Investments include trading securities and fixed deposits which have original maturities of greater than three months and remaining maturities of less than one year. Investments with maturities greater than one year may be classified as short-term based on their highly liquid nature and their availability to fund future investing activities. 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 Condensed 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 experience 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 takes 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 current period earnings; amounts determined to be uncollectable are charged directly against the allowances, while amounts recovered on previously charged-off accounts benefit current period earnings.
Inventories
The approximate percentage distribution between major classes of inventory at year end is as follows:
|
|
|
|
|
|
|
|
December 29,
2012
|
|
December 31,
2011
|
Raw Material and Work In Process
|
43
|
%
|
|
38
|
%
|
Finished Goods and Purchased Parts
|
57
|
%
|
|
62
|
%
|
Inventories are stated at cost, which is not in excess of market. Cost for approximately
31%
of the Company's inventory at
December 29, 2012
and
45%
at
December 31, 2011
was determined using the last-in, first-out (LIFO) method. If all inventories were valued on the first-in, first-out ("FIFO") method, they would have increased by
$60.0 million
and
$57.0 million
as of
December 29, 2012
and
December 31, 2011
, 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 inventories at net realizable value.
Property, Plant and Equipment
Property, Plant and Equipment are stated at cost. Depreciation of plant and equipment is provided principally on a straight-line basis over the estimated useful lives (3 to 50 years) of the depreciable assets. Accelerated methods are used for income tax purposes.
Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures which extend the useful lives of existing equipment are capitalized and depreciated.
Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized. Leasehold improvements are capitalized and amortized over the lesser of the life of the lease or the estimated useful life of the asset.
Commitments for property, plant and equipment purchases were
$17.8 million
at
December 29, 2012
.
Property, plant and equipment by major classification was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
December 29,
2012
|
|
December 31,
2011
|
Land and Improvements
|
$
|
76.2
|
|
|
$
|
74.1
|
|
Buildings and Improvements
|
212.7
|
|
|
189.3
|
|
Machinery and Equipment
|
747.5
|
|
|
667.2
|
|
Property, Plant and Equipment
|
1,036.4
|
|
|
930.6
|
|
Less: Accumulated Depreciation
|
(463.3
|
)
|
|
(396.6
|
)
|
Net Property, Plant and Equipment
|
$
|
573.1
|
|
|
$
|
534.0
|
|
Goodwill
The Company evaluates the carrying amount of goodwill annually or more frequently if events or circumstances indicate that an asset might be impaired. Factors that could trigger an impairment review include significant underperformance relative to historical or forecasted operating results, a significant decrease in the market value of an asset or significant negative industry or economic trends. The Company performs the required annual goodwill impairment test as of the end of the October fiscal month each year.
The Company uses a weighting of the market approach method and the income approach discounted cash flow method in testing goodwill for impairment. In the market approach, the Company applies performance multiples from comparable guideline 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 growth rates, terminal growth rates and cash flow projections. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment. Discount rates are determined by using a weighted average cost of capital (“WACC”). The WACC considers market and industry data as well as Company-specific risk factors for each reporting unit in determining the appropriate discount rate to be used. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business. Terminal growth rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and long-term growth rates.
Intangible Assets
The Company evaluates the recoverability of the carrying amount of intangible assets whenever events or changes in circumstance indicate that the carrying amount of an asset may not be fully recoverable through future cash flows. 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 Note 5 of Notes to the Consolidated Financial Statements).
The Company also in-process research and development ("IPRD") included in intangible assets. IPRD is not currently being amortized however amortization will commence when the related technology revenues are realized.
Impairment of Long-Lived Assets
Property, Plant and Equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the Company determines that an asset is impaired, it measures the impairment using the discounted expected future cash flows derived from the asset as compared to its carrying value. Such analyses necessarily involve significant estimates.
Earnings per Share (“EPS”)
Diluted earnings per share is computed based upon earnings applicable to common shares divided by the weighted-average number of common shares outstanding during the period adjusted for the effect of other dilutive securities. Options for common shares where the exercise price was above the market price have been excluded from the calculation of effect of dilutive securities shown below; the amount of these shares were
0.3 million
in
2012
,
0.7 million
in
2011
and
0.3 million
in
2010
. The following table reconciles the basic and diluted shares used in EPS calculations for the years ended (in millions):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Denominator for Basic EPS
|
41.8
|
|
|
39.7
|
|
|
38.2
|
|
Effect of Dilutive Securities
|
0.3
|
|
|
0.4
|
|
|
0.7
|
|
Denominator for Diluted EPS
|
42.1
|
|
|
40.1
|
|
|
38.9
|
|
The “Effect of Dilutive Securities” represents the dilution impact of equity awards and the convertible notes (fully converted in fiscal 2010). The dilutive effect of conversion of the Company's convertible notes into shares of common stock was approximately
0.3 million
shares for the fiscal
2010
.
Retirement Plans
Approximately half of the Company's domestic employees are covered by defined benefit pension plans with the remaining employees covered by defined contribution plans. The defined benefit pension plans covering a majority of the Company's domestic employees have been closed to new employees and frozen for existing employees. Most of the Company's foreign employees are covered by government sponsored plans in the countries in which they are employed. The Company's obligations under its defined benefit pension 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.
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 differ from assumptions, annual expenses and recorded assets or liabilities of these defined benefit pension plans may change significantly from year to year.
Derivative Financial Instruments
Derivative instruments are recorded on the consolidated balance sheet at fair value. Any fair value changes are recorded in net earnings or Accumulated Other Comprehensive Loss as determined under accounting guidance that establishes criteria for designation and effectiveness of the hedging relationships.
The Company uses derivative instruments to manage its exposure to fluctuations in certain raw material commodity pricing, fluctuations in the cost of forecasted foreign currency transactions, and variability in interest rate exposure on floating rate borrowings. The majority of derivative instruments have been designated as cash flow hedges (see Note 13 to the Consolidated Financial Statements).
Income Taxes
The Company operates in numerous taxing jurisdictions and is subject to regular examinations by various U.S. Federal, state and foreign jurisdictions for various tax periods. Its income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which it does business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions as well as the inherent uncertainty in estimating the final resolution of complex tax audit matters, estimates of income tax liabilities may differ from actual payments or assessments.
Foreign Currency Translation
For those operations using a functional currency other than the U.S. dollar, assets and liabilities are translated into U.S. dollars at year-end exchange rates, and revenues and expenses are translated at weighted-average exchange rates. The resulting translation adjustments are recorded as a separate component of shareholders' equity.
Product Warranty Reserves
The Company maintains reserves for product warranty to cover the stated warranty periods for its products. Such reserves are established based on an evaluation of historical warranty experience and specific significant warranty matters when they become known and can reasonably be estimated.
Accumulated Other Comprehensive Loss
Foreign currency translation adjustments, unrealized gains and losses on derivative instruments designated as hedges and pension liability adjustments are included in shareholders' equity under accumulated other comprehensive loss.
The components of the ending balances of Accumulated Other Comprehensive Loss are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Translation Adjustments
|
$
|
(6.0
|
)
|
|
$
|
(20.0
|
)
|
Hedging Activities, net of tax of $(10.7) million in 2012 and $(31.1) million in 2011
|
(17.4
|
)
|
|
(50.8
|
)
|
Pension and Post Retirement Benefits, net of tax of $(25.7) million in 2012 and $(21.1) million in 2011
|
(41.9
|
)
|
|
(34.4
|
)
|
Total
|
$
|
(65.3
|
)
|
|
$
|
(105.2
|
)
|
Legal Claims
The Company records expenses and liabilities when the Company believes that an obligation of the Company on a specific matter is probable and there is a basis to reasonably estimate the value of the obligation. This methodology is used for legal claims that are filed against the Company from time to time. The uncertainty that is associated with such matters frequently requires adjustments to the liabilities previously recorded.
Fair Values
The fair values of cash equivalents, investments, trade receivables and accounts payable approximate the carrying values due to the short period of time to maturity. The fair value of long-term debt is estimated using discounted cash flows based on rates for instruments with comparable maturities and credit ratings. The fair value of investments, pension assets, derivative instruments and contingent purchase price obligations is determined based on inputs as defined in Note 14 to the Consolidated Financial Statements.
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) amended the guidance regarding fair value measurement and disclosure. The amended guidance clarifies the application of existing fair value measurement and disclosure requirements and requires more detailed disclosure about the activity within Level 3 fair value measurements.The amendment became effective for the Company in fiscal 2012 with no significant impact to the Company's consolidated financial statements.
In June 2011, the FASB amended ASC Topic 220, Comprehensive income guidance to require all non-owner changes in shareholders’ equity to be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Under this amendment, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. An entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. An entity will no longer be permitted to present the components of other comprehensive income as part of the statement of equity. The amendment was effective for the Company at the beginning of fiscal 2012 and changed the presentation of the Company's consolidated financial statements.
In December 2011, the FASB issued guidance enhancing disclosure requirements about the nature of an entity's right to offset and related arrangements associated with its financial instruments and derivative instruments. The new guidance requires the disclosure of the gross amounts subject to rights of set-off, amounts offset in accordance with the accounting standards followed, and the related net exposure. The new guidance is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not anticipate material impacts on its consolidated financial statements upon adoption.
In September 2011, the FASB issued guidance to simplify the rules related to testing goodwill for impairment. The revised guidance allows an entity to make an initial qualitative evaluation, based on the entity's events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The results of this qualitative assessment determine whether it is necessary to perform the currently required two-step impairment test. The new guidance was effective in fiscal 2012. The adoption of this guidance had no impact on the Company's consolidated financial statements.
(4) Acquisitions
The results of operations for acquired businesses are included in the Consolidated Financial Statements from the dates of acquisition. Acquisition related expenses were
$0.4 million
during
2012
,
$16.1 million
during
2011
and
$6.6 million
during
2010
.
2012 Acquisitions
On
November 30, 2012
, the Company acquired Remco Products Limited for
$3.7 million
. Remco is a UK supplier of a broad range of AC fractional horsepower electric motors and fans for replacement use in heating, ventilation, refrigeration and air conditioning industries located in West Sussex, England. The acquisition added greater access to the European replacement motor business and is expected to generate growth to the Company's overall European business. Remco is reported as a part of the Company's Electrical segment.
On
October 2, 2012
, the Company acquired Marlin Coast Motor Rewinding ("MCMR") for
$3.4 million
. MCMR, based in Cairns, North Queensland, Australia, is a leader in the supply, service and overhaul of electric machines. MCMR is reported as a part of the Company’s Electrical segment.
On
April 30, 2012
, the Company acquired Tecnojar, a Mexico based electrical products company, for
$1.6 million
. Tecnojar is reported as a part of the Company's Electrical segment.
On
February 3, 2012
, the Company acquired Milwaukee Gear Company (“MGC”), a Wisconsin-based leading manufacturer of highly engineered gearing components for oil and gas applications as well as a wide variety of other commercial and industrial applications. The purchase price of MGC was
$80.3 million
paid in cash, net of cash acquired. MGC is reported as a part of the Company's Mechanical segment.
EPC Acquisition
On
August 22, 2011
, the Company completed its acquisition of the Electrical Products Company (“EPC”) of A.O. Smith Corporation (NYSE: AOS). EPC manufactures and sells a full line of motors for hermetic, pump, distribution, heating, ventilation and air conditioning (“HVAC”) and general industrial applications. EPC is based in Tipp City, Ohio and has operations in the United States, Mexico, China and the United Kingdom. The acquisition added technology and global capacity that will bring value to the Company's customers with energy saving products, broader product offerings and better operating efficiencies. The purchase price included
$756.1 million
in cash and
2,834,026
shares of Company common stock. EPC is reported as part of the Company's Electrical segment.
The following summarizes the allocation of the fair value of the assets acquired and liabilities assumed at the date of acquisition.
|
|
|
|
|
|
As of August 22, 2011
|
Current assets
|
$
|
367.8
|
|
Property, plant and equipment
|
145.8
|
|
Intangible assets subject to amortization
|
155.1
|
|
Goodwill
|
340.9
|
|
Other assets
|
0.3
|
|
Total assets acquired
|
1,009.9
|
|
Current liabilities assumed
|
(96.9
|
)
|
Long-term liabilities assumed
|
(16.0
|
)
|
Net assets acquired
|
$
|
897.0
|
|
The acquired intangible assets of
$155.1 million
are comprised of customer relationships of
$87.7 million
and technology of
$67.4 million
, with useful lives ranging from eight to fifteen years. The majority of the goodwill is estimated to be deductible for tax purposes.
Pro Forma Financial Information
The following pro forma financial information shows the results of continuing operations for the years ended December 31, 2011, and January 1, 2011, respectively, as though the acquisition of EPC occurred at the beginning of fiscal 2010. The pro forma financial information has been adjusted, where applicable, for: (i) the amortization of acquired intangible assets, (ii) additional interest expense on acquisition related borrowings, and (iii) the income tax effect on the pro forma adjustments. 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 above, or the results that may be obtained in the future, (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
Fiscal 2011
|
Fiscal 2010
|
Pro forma net sales
|
$
|
3,342.7
|
|
$
|
2,943.8
|
|
Pro forma net income
|
213.0
|
|
147.6
|
|
|
|
|
Basic earnings per share as reported
|
$
|
3.84
|
|
$
|
3.91
|
|
Pro forma basic earnings per share
|
5.13
|
|
3.59
|
|
|
|
|
Diluted earnings per share as reported
|
$
|
3.79
|
|
$
|
3.84
|
|
Pro forma diluted earnings per share
|
5.08
|
|
3.54
|
|
Other 2011 Acquisitions
On
June 1, 2011
, the Company acquired Australian Fan and Motor Company (“AFMC”) located in Melbourne, Australia. AFMC manufactures and distributes a wide range of direct drive blowers, fan decks, axial fans and sub-fractional motors for sales in Australia and New Zealand. The purchase price of
$5.7 million
was paid in cash, net of acquired debt and cash. AFMC is reported as part of the Company's Electrical segment.
On
April 5, 2011
, the Company acquired Ramu, Inc. (“Ramu”) located in Blacksburg, Virginia. Ramu is a motor and control technology company with a research and development team dedicated to the development of switched reluctance motor technology. The purchase price included
$5.3 million
paid in cash, net of acquired debt and cash, and an additional amount should certain future performance expectations be met. At
December 29, 2012
, the Company had recorded a liability of
$13.7 million
for this deferred contingent purchase price. Ramu is reported as part of the Company's Electrical segment.
On
March 7, 2011
, the Company acquired Hargil Dynamics Pty. Ltd. (“Hargil”) located in Sydney, Australia. Hargil is a distributor of mechanical power transmission components and solutions. Hargil is reported as part of the Company's Mechanical segment.
2010 Acquisitions
On
December 23, 2010
, the Company acquired Unico, Inc. (“Unico”), located in Franksville, Wisconsin. Unico manufactures a full range of AC and DC drives, motor controllers and other accessories for most commercial and industrial applications. Unico has developed proprietary technology in the fields of oil and gas recovery technology, commercial HVAC technology, test stand
automation and other applications. The preliminary purchase price of
$105.1 million
was paid in cash, net of acquired debt and cash. In addition to the cash paid, the Company agreed to pay an additional amount should certain performance thresholds be met. At
December 31, 2011
, the Company had recorded a liability of $9.8 million for this consideration. Unico is reported as part of the Company’s Electrical segment.
On December 1, 2010, the Company acquired South Pacific Rewinders (“SPR”), located in Auckland, New Zealand. SPR operates as a motor rewinder and distributor in the Pacific region.
On
November 1, 2010
, the Company acquired
55.0%
of Elco Group B.V. (“Elco”), located in Milan, Italy. Elco manufactures and sells motors, fans and blowers and has manufacturing facilities in Italy, China and Brazil. The purchase price was $26.9 million, net of acquired debt and cash. The purchase price includes
$4.6 million
in cash, net of acquired debt and cash, paid at closing and
$22.3 million
to be paid in four semi-annual payments. See Note 15 - Related Party Transactions for detail of payments made through fiscal 2012.
On
September 1, 2010
, the Company acquired Rotor B.V. (“Rotor”), located in Eibergen, the Netherlands. Rotor sells standard and special electric motors to a variety of industries including the marine industry, ship building and offshore oil and gas. In addition to the Netherlands, Rotor also sells throughout Europe, the United Kingdom and Japan. The purchase price of
$36.4 million
was paid in cash, net of acquired debt and cash. Rotor is reported as part of the Company’s Electrical segment.
On May 4, 2010, the Company acquired Air-Con Technology (“Air-Con”), located in Mississauga, Ontario, Canada. Air-Con is a distributor of HVAC electric motors.
On
April 6, 2010
, the Company acquired CMG Engineering Group Pty, Ltd. (“CMG”), located in Melbourne, Australia. CMG
manufactures and sells fractional horsepower industrial motors, blower systems, and industrial metal products with operations in Australia, New Zealand, South Africa, Malaysia, Singapore, the United Kingdom and the Middle East. The business also distributes integral horsepower industrial motors, mechanical power transmission products, material handling equipment, electrical insulation
materials, magnet wire and specialty conductors in Australia and New Zealand. The purchase price was
$82.6 million
, net of acquired debt and cash. The purchase price was paid
$76.5 million
in cash and
$6.1 million
in shares of Company common stock. CMG is reported as part of the Company’s Electrical and Mechanical segments.
(5) Goodwill and Intangible Assets
Goodwill
As described in Note 4 to the Consolidated Financial Statements, the Company acquired four businesses in both 2012 and in 2011. The excess of purchase price over estimated fair value was assigned to goodwill.
The following table presents changes to goodwill during the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Electrical Segment
|
|
Mechanical Segment
|
Balance as of January 1, 2011
|
$
|
775.7
|
|
|
$
|
763.5
|
|
|
$
|
12.2
|
|
Acquisitions and valuation adjustments
|
350.5
|
|
|
350.4
|
|
|
0.1
|
|
Translation adjustments
|
(8.6
|
)
|
|
(8.9
|
)
|
|
0.3
|
|
Balance as of December 31, 2011
|
$
|
1,117.6
|
|
|
$
|
1,105.0
|
|
|
$
|
12.6
|
|
|
|
|
|
|
|
Acquisitions and valuation adjustments
|
25.9
|
|
|
2.7
|
|
|
23.2
|
|
Translation adjustments
|
7.5
|
|
|
4.0
|
|
|
3.5
|
|
Balance as of December 29, 2012
|
$
|
1,151.0
|
|
|
$
|
1,111.7
|
|
|
$
|
39.3
|
|
Intangible Assets
Gross intangible assets consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life (years)
|
|
December 31,
2011
|
|
Acquisitions
|
|
Translation Adjustments
|
|
December 29, 2012
|
Customer Relationships
|
3 - 14
|
|
$
|
227.5
|
|
|
$
|
16.2
|
|
|
$
|
1.2
|
|
|
$
|
244.9
|
|
Technology
|
3 - 9
|
|
128.2
|
|
|
1.7
|
|
|
0.4
|
|
|
130.3
|
|
Trademarks
|
3 - 20
|
|
30.9
|
|
|
1.6
|
|
|
0.2
|
|
|
32.7
|
|
IPRD
|
N/A
|
|
17.2
|
|
|
—
|
|
|
—
|
|
|
17.2
|
|
Patent and Engineering Drawings
|
10
|
|
16.6
|
|
|
—
|
|
|
—
|
|
|
16.6
|
|
Non-compete Agreements
|
3 - 5
|
|
8.1
|
|
|
0.1
|
|
|
—
|
|
|
8.2
|
|
Total Gross Intangibles
|
|
|
$
|
428.5
|
|
|
$
|
19.6
|
|
|
$
|
1.8
|
|
|
$
|
449.9
|
|
Accumulated amortization on intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2011
|
|
Amortization
|
|
Translation Adjustments
|
|
December 29,
2012
|
Customer Relationships
|
|
$
|
(56.4
|
)
|
|
$
|
(22.0
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(78.7
|
)
|
Technology
|
|
(24.7
|
)
|
|
(17.0
|
)
|
|
(0.1
|
)
|
|
(41.8
|
)
|
Trademarks
|
|
(12.8
|
)
|
|
(2.8
|
)
|
|
(0.1
|
)
|
|
(15.7
|
)
|
Patent and Engineering Drawings
|
|
(11.6
|
)
|
|
(1.7
|
)
|
|
—
|
|
|
(13.3
|
)
|
Non-compete Agreements
|
|
(6.7
|
)
|
|
(0.5
|
)
|
|
—
|
|
|
(7.2
|
)
|
Total Accumulated Amortization
|
|
$
|
(112.2
|
)
|
|
$
|
(44.0
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
(156.7
|
)
|
Intangible Assets, Net of Amortization
|
|
$
|
316.3
|
|
|
|
|
|
|
$
|
293.2
|
|
In-process research and development projects are estimated to be completed within three years. Amortization will begin upon project completion.
The Company's customer relationships are generally long-term in nature with useful lives established at acquisition based on historical attrition rates.
Amortization expense was
$44.0 million
in fiscal
2012
,
$33.2 million
in fiscal
2011
and
$20.0 million
in fiscal
2010
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Amortization
|
Year
|
|
|
2013
|
|
|
$
|
44.1
|
|
2014
|
|
|
42.8
|
|
2015
|
|
|
35.0
|
|
2016
|
|
|
30.8
|
|
2017
|
|
|
24.4
|
|
(6) Industry Segment Information
The following sets forth certain financial information attributable to the Company's reporting segments for fiscal
2012
, fiscal
2011
and fiscal
2010
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
|
|
Mechanical
|
|
Eliminations
|
|
Total
|
Fiscal 2012
|
|
|
|
|
|
|
|
|
External sales
|
|
$
|
2,870.2
|
|
|
$
|
296.7
|
|
|
$
|
—
|
|
|
$
|
3,166.9
|
|
Intersegment sales
|
|
3.5
|
|
|
3.9
|
|
|
(7.4
|
)
|
|
—
|
|
Total sales
|
|
2,873.7
|
|
|
300.6
|
|
|
(7.4
|
)
|
|
3,166.9
|
|
Segment income from operations
|
|
273.7
|
|
|
39.1
|
|
|
—
|
|
|
312.8
|
|
Identifiable assets
|
|
3,323.6
|
|
|
245.5
|
|
|
—
|
|
|
3,569.1
|
|
Depreciation and amortization
|
|
114.0
|
|
|
12.0
|
|
|
—
|
|
|
126.0
|
|
Capital expenditures
|
|
82.2
|
|
|
8.8
|
|
|
—
|
|
|
91.0
|
|
Fiscal 2011
|
|
|
|
|
|
|
|
|
External Sales
|
|
$
|
2,533.3
|
|
|
$
|
275.0
|
|
|
$
|
—
|
|
|
$
|
2,808.3
|
|
Intersegment sales
|
|
8.8
|
|
|
2.5
|
|
|
(11.3
|
)
|
|
—
|
|
Total sales
|
|
2,542.1
|
|
|
277.5
|
|
|
(11.3
|
)
|
|
2,808.3
|
|
Segment income from operations
|
|
222.6
|
|
|
33.1
|
|
|
—
|
|
|
255.7
|
|
Identifiable assets
|
|
3,139.3
|
|
|
127.2
|
|
|
—
|
|
|
3,266.5
|
|
Depreciation and amortization
|
|
92.0
|
|
|
6.2
|
|
|
—
|
|
|
98.2
|
|
Capital expenditures
|
|
53.8
|
|
|
3.8
|
|
|
—
|
|
|
57.6
|
|
Fiscal 2010
|
|
|
|
|
|
|
|
|
External sales
|
|
$
|
2,002.0
|
|
|
$
|
236.0
|
|
|
$
|
—
|
|
|
$
|
2,238.0
|
|
Intersegment sales
|
|
12.5
|
|
|
2.0
|
|
|
(14.5
|
)
|
|
—
|
|
Total sales
|
|
2,014.5
|
|
|
238.0
|
|
|
(14.5
|
)
|
|
2,238.0
|
|
Segment income from operations
|
|
210.2
|
|
|
27.6
|
|
|
—
|
|
|
237.8
|
|
Identifiable assets
|
|
2,323.1
|
|
|
126.0
|
|
|
—
|
|
|
2,449.1
|
|
Depreciation and amortization
|
|
66.8
|
|
|
6.1
|
|
|
—
|
|
|
72.9
|
|
Capital expenditures
|
|
41.1
|
|
3.9
|
|
|
—
|
|
|
45.0
|
|
The Electrical segment manufactures and markets AC and DC commercial, industrial, commercial refrigeration, and HVAC electric motors and blowers. These products range in size from sub-fractional and fractional to small integral horsepower motors to larger commercial and industrial motors up to approximately 6,500 horsepower. The Company provides a comprehensive offering of stock models of electric motors in addition to the motors it produces to specific customer specifications. The Company also produces and markets precision servo motors, electric generators and controls ranging in size from five kilowatts through four megawatts, automatic transfer switches and paralleling switchgear to interconnect and control electric power generation equipment. Additionally, the Electrical segment manufactures and markets a full line of AC and DC variable speed drives and controllers and other accessories for a variety of commercial and industrial applications. The Company manufactures capacitors for use in HVAC systems, high intensity lighting and other applications. It sells its Electrical segment's products to original equipment manufacturers, distributors and end users across many markets.
The Mechanical segment manufactures and markets a broad array of mechanical motion control products including standard and custom worm gears, bevel gears, helical gears and concentric shaft gearboxes; marine transmissions; custom gearing; gearmotors; manual valve actuators; and electrical connecting devices. Gear and transmission related products primarily control motion by transmitting power from a source, such as an electric motor, to an end use, such as a conveyor belt, usually reducing speed and increasing torque in the process. Valve actuators are used primarily in oil and gas, water distribution and treatment and chemical processing applications. Mechanical products are sold to original equipment manufacturers, distributors and end users across many industry segments.
The Company evaluates performance based on the segment's income from operations. Corporate costs have been allocated to each segment based primarily on the net sales of each segment. The reported net sales of each segment are from external customers.
The following sets forth net sales by country in which the Company operates for fiscal
2012
, fiscal
2011
and fiscal
2010
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
2012
|
|
2011
|
|
2010
|
Geographic Information:
|
|
|
|
|
|
|
United States
|
|
$
|
2,127.2
|
|
|
$
|
1,798.2
|
|
|
$
|
1,530.9
|
|
Rest of the World
|
|
1,039.7
|
|
|
1,010.1
|
|
|
707.1
|
|
|
|
|
|
$
|
3,166.9
|
|
|
$
|
2,808.3
|
|
|
$
|
2,238.0
|
|
U.S. net sales for
2012
,
2011
and
2010
represented
67.2%
,
64.0%
and
68.4%
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 in which the Company operates for fiscal
2012
and fiscal
2011
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
Long-lived Assets
|
|
2012
|
|
2011
|
Geographic Information:
|
|
|
|
United States
|
$
|
232.7
|
|
|
$
|
211.4
|
|
Mexico
|
117.2
|
|
|
115.1
|
|
China
|
107.5
|
|
|
87.6
|
|
Rest of the World
|
115.7
|
|
|
119.9
|
|
|
$
|
573.1
|
|
|
$
|
534.0
|
|
No other individual foreign country represented a material portion of long-lived assets for any of the years presented.
Subsequent to the issuance of the Company's consolidated financial statements for the year ended
December 31, 2011
, the Company determined that it had erroneously not separately disclosed two countries (Mexico and China) within the disclosure. Accordingly, the fiscal 2011 disclosure of long-lived assets has been corrected, in that information that had previously been excluded from the financial statements is now included. Also, long-lived assets attributable to certain geographic regions are no longer disclosed as they did not meet disclosure thresholds.
(7) Debt and Bank Credit Facilities
The Company's indebtedness as of
December 29, 2012
and
December 31, 2011
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 29,
2012
|
|
December 31,
2011
|
|
|
Senior Notes
|
$
|
750.0
|
|
|
$
|
750.0
|
|
|
Term Loan
|
55.0
|
|
|
145.0
|
|
|
Revolving Credit Facility
|
—
|
|
|
9.0
|
|
|
Other
|
13.5
|
|
|
15.2
|
|
|
|
818.5
|
|
|
919.2
|
|
|
Less: Current Maturities
|
(63.8
|
)
|
|
(10.0
|
)
|
|
Non-current Portion
|
$
|
754.7
|
|
|
$
|
909.2
|
|
At
December 29, 2012
, the Company had
$750.0 million
of senior notes (the “Notes”) outstanding. During 2011, the Company issued
$500.0 million
in senior notes (the “2011 Notes”) in a private placement. The 2011 Notes were issued in seven tranches with maturities from seven to twelve years and carry fixed interest rates. The Company also has
$250.0 million
in senior notes (the “2007 Notes”) issued in two tranches with floating interest rates based on a margin over the London Inter-Bank Offered Rate (“LIBOR”). Details on the Notes at
December 29, 2012
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
Interest Rate
|
|
Maturity
|
Floating Rate Series 2007A
|
|
$
|
150.0
|
|
|
Floating (1)
|
|
August 1, 2014
|
Floating Rate Series 2007A
|
|
100.0
|
|
|
Floating (1)
|
|
August 1, 2017
|
Fixed Rate Series 2011A
|
|
100.0
|
|
|
4.1%
|
|
July 1, 2018
|
Fixed Rate Series 2011A
|
|
230.0
|
|
|
4.8 to 5.0%
|
|
July 1, 2021
|
Fixed Rate Series 2011A
|
|
170.0
|
|
|
4.9 to 5.1%
|
|
July 1, 2023
|
|
|
$
|
750.0
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Interest rates vary as LIBOR varies. At December 29, 2012, the interest rate was between 0.9% and 1.0%.
|
The Company has interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk (see Note 13 to the Consolidated Financial Statements).
In 2008, the Company entered into a Term Loan Agreement (“Term Loan”) with certain financial institutions, whereby the Company borrowed an aggregate principal amount of
$165.0 million
. During 2011, the Company repaid
$20.0 million
of the outstanding Term Loan. During 2012, the Company repaid an additional
$90.0 million
of the Term Loan. The Term Loan matures in June 2013 and borrowings generally bear interest at a variable rate equal to a margin over LIBOR. This margin varies with the ratio of the Company's total funded debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) as defined in the Term Loan. These interest rates also vary as LIBOR varies. At
December 29, 2012
, the interest rate of
1.3%
was based on a margin over LIBOR.
The Company also has a
$500.0 million
revolving credit facility that matures in 2016. The Facility permits borrowing at interest rates based upon a margin above LIBOR. The margin varies with the ratio of total funded debt to EBITDA as defined in the Facility. These interest rates also vary as LIBOR varies. At
December 29, 2012
there were no borrowings on the Facility. At
December 31, 2011
, there was
$9.0 million
outstanding on the Facility. The average balance in direct borrowings under the Facility was
$30.6 million
and
$10.7 million
in 2012 and 2011, respectively. The average interest rate paid under the Facility was
1.6%
in 2012 and
1.6%
in 2011. At
December 29, 2012
, the Company had approximately
$28.0 million
in standby letters of credit issued under the Facility and
$472.0 million
in available borrowings under the Facility.
Based on rates for instruments with comparable maturities and credit quality, which are classified as Level 2 inputs (See Note 14 to the Consolidated Financial Statements), the approximate fair value of the Company's total debt was
$859.6 million
and
$951.0 million
as of
December 29, 2012
and
December 31, 2011
, respectively.
The Notes, the Term Loan and the Facility require the Company to meet specified financial ratios and to satisfy certain financial condition tests. The Company was in compliance with all financial covenants as of
December 29, 2012
.
At
December 29, 2012
, other notes payable of approximately
$13.5 million
were outstanding with a weighted average interest rate of
2.4%
. At
December 31, 2011
, other notes payable of approximately
$15.2 million
were outstanding with a weighted average rate of
2.2%
.
Maturities of long-term debt are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
Amount of Maturity
|
2013
|
|
|
|
|
|
$
|
63.8
|
|
2014
|
|
|
|
|
|
150.2
|
|
2015
|
|
|
|
|
|
0.2
|
|
2016
|
|
|
|
|
|
3.0
|
|
2017
|
|
|
|
|
|
100.3
|
|
Thereafter
|
|
|
|
|
|
501.0
|
|
Total
|
|
|
|
|
|
$
|
818.5
|
|
(8) Retirement Plans
Most of the Company's domestic employees are participants in defined benefit pension plans and/or defined contribution plans.
The defined benefit pension plans were closed to new employees as of January 1, 2006, and benefits under those plans were frozen for existing employees as of December 31, 2008. Most foreign employees are covered by government sponsored plans in the countries in which they are employed. The domestic employee plans include defined contribution plans and defined benefit pension plans. The defined contribution plans provide for Company contributions based, depending on the plan, upon one or more of participant contributions, service and profits. Company contributions to domestic defined contribution plans totaled
$9.8 million
,
$5.8 million
, and
$4.3 million
in
2012
,
2011
and
2010
, respectively. The Company also contributes to foreign defined contribution plans.
Benefits provided under defined benefit pension plans are based, depending on the plan, on employees' average earnings and years of credited service, or a benefit multiplier times years of service. Funding of these qualified defined benefit pension plans is in accordance with federal laws and regulations. The actuarial valuation measurement date for pension plans is as of fiscal year end for all periods.
The Company's target allocation, target return and actual weighted-average asset allocation by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
Actual Allocation
|
|
Allocation
|
|
Return
|
|
2012
|
|
2011
|
Equity investments
|
73
|
%
|
|
8 - 11 %
|
|
|
69
|
%
|
|
70
|
%
|
Fixed income
|
17
|
%
|
|
3.5 - 4.5%
|
|
|
23
|
%
|
|
22
|
%
|
Other
|
10
|
%
|
|
6 - 8%
|
|
|
8
|
%
|
|
8
|
%
|
Total
|
100
|
%
|
|
8.0
|
%
|
|
100
|
%
|
|
100
|
%
|
The Company's investment strategy for its defined benefit pension plans is to achieve moderately aggressive growth, earning a long-term rate of return sufficient to allow the plans to reach fully funded status. Accordingly, allocation targets have been established to fit this strategy, with a heavier long-term weighting of investments in equity securities. The long-term rate of return assumptions consider historic returns and volatilities adjusted for changes in overall economic conditions that may affect future returns and a weighting of each investment class.
The following table presents a reconciliation of the funded status of the defined benefit pension plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Change in projected benefit obligation:
|
|
|
|
Obligation at beginning of period
|
$
|
158.6
|
|
|
$
|
147.2
|
|
Service cost
|
2.5
|
|
|
2.5
|
|
Interest cost
|
7.9
|
|
|
7.9
|
|
Actuarial loss
|
19.1
|
|
|
7.3
|
|
Plan amendments
|
0.1
|
|
|
0.1
|
|
Benefits paid
|
(7.3
|
)
|
|
(5.6
|
)
|
Curtailment gain
|
—
|
|
|
(1.7
|
)
|
Foreign currency translation
|
0.3
|
|
|
(0.6
|
)
|
Acquisitions/other
|
—
|
|
|
1.5
|
|
Obligation at end of period:
|
$
|
181.2
|
|
|
$
|
158.6
|
|
Change in fair value of plan assets:
|
|
|
|
Fair value of plan assets at beginning of period
|
94.4
|
|
|
94.5
|
|
Actual return on plan assets
|
10.5
|
|
|
(0.6
|
)
|
Employer contributions
|
11.7
|
|
|
6.5
|
|
Benefits paid
|
(7.3
|
)
|
|
(5.6
|
)
|
Foreign currency translation
|
0.2
|
|
|
(0.4
|
)
|
Fair value of plan assets at end of period
|
$
|
109.5
|
|
|
$
|
94.4
|
|
Funded status
|
$
|
(71.7
|
)
|
|
$
|
(64.2
|
)
|
Pension Assets
The valuation methodologies used for the Company's pension plans' investments measured at fair value are as follows:
Common stock and traded mutual funds - valued at the closing price reported on the active market on which the individual securities are traded.
Common collective trusts and other mutual funds - valued at the net asset value (“NAV”) as determined by the custodian of the fund. The NAV is based on the fair value of the underlying assets owned by the fund, minus its liabilities, divided by the number of units outstanding.
The Company did not change its valuation techniques during fiscal 2012. The fair value of plan assets is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2012
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and cash equivalents
|
$
|
2.1
|
|
|
$
|
2.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Common stocks
|
|
|
|
|
|
|
|
Domestic equities
|
16.5
|
|
|
16.5
|
|
|
—
|
|
|
—
|
|
International equities
|
6.8
|
|
|
—
|
|
|
6.8
|
|
|
—
|
|
Common collective trust funds
|
|
|
|
|
|
|
|
Fixed income funds
|
18.4
|
|
|
—
|
|
|
18.4
|
|
|
—
|
|
U.S. equity funds
|
23.1
|
|
|
—
|
|
|
23.1
|
|
|
—
|
|
International equity funds
|
6.9
|
|
|
—
|
|
|
6.9
|
|
|
—
|
|
Mutual funds
|
|
|
|
|
|
|
|
U.S. equity funds
|
11.9
|
|
|
11.9
|
|
|
—
|
|
|
—
|
|
Balanced funds
|
9.6
|
|
|
9.6
|
|
|
—
|
|
|
—
|
|
International equity funds
|
5.0
|
|
|
5.0
|
|
|
—
|
|
|
—
|
|
Other
|
9.2
|
|
|
—
|
|
|
—
|
|
|
9.2
|
|
Total
|
$
|
109.5
|
|
|
$
|
45.1
|
|
|
$
|
55.2
|
|
|
$
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and cash equivalents
|
$
|
1.7
|
|
|
$
|
1.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Common stocks
|
|
|
|
|
|
|
|
Domestic equities
|
14.3
|
|
|
14.3
|
|
|
—
|
|
|
—
|
|
International equities
|
5.3
|
|
|
—
|
|
|
5.3
|
|
|
—
|
|
Common collective trust funds
|
|
|
|
|
|
|
|
Fixed income funds
|
18.8
|
|
|
—
|
|
|
18.8
|
|
|
—
|
|
U.S. equity funds
|
19.4
|
|
|
—
|
|
|
19.4
|
|
|
—
|
|
International equity funds
|
6.5
|
|
|
6.5
|
|
|
—
|
|
|
—
|
|
Mutual funds
|
|
|
|
|
|
|
|
U.S. equity funds
|
9.6
|
|
|
9.6
|
|
|
—
|
|
|
—
|
|
Balanced funds
|
4.2
|
|
|
4.2
|
|
|
—
|
|
|
|
International equity funds
|
7.2
|
|
|
7.2
|
|
|
—
|
|
|
|
Other
|
7.4
|
|
|
—
|
|
|
—
|
|
|
7.4
|
|
Total
|
$
|
94.4
|
|
|
$
|
43.5
|
|
|
43.5
|
|
|
$
|
7.4
|
|
The Level 3 assets noted below represent investments in a real estate fund managed by a major U.S. insurance company and a global emerging markets fund limited partnership. Estimated values provided by fund management approximate cost of the
investments. Management regularly reviews fund performance for Level 3 plan assets and performs qualitative analysis to corroborate the reasonableness of the reported fair market values.
The table below sets forth a summary of changes in the Company's Level 3 assets in its plan investments as of
December 29, 2012
and
December 31, 2011
(in millions).
|
|
|
|
|
|
|
|
|
|
|
|
December 29,
2012
|
|
December 31,
2011
|
Beginning balance
|
|
$
|
7.4
|
|
|
$
|
—
|
|
Net purchases and sales
|
|
0.9
|
|
|
7.5
|
|
Net gains and losses
|
|
0.9
|
|
|
(0.1
|
)
|
Ending balance
|
|
$
|
9.2
|
|
|
$
|
7.4
|
|
The Company recognized the funded status of its defined benefit pension plans on the balance sheet as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Accrued compensation and employee benefits
|
|
$
|
(2.5
|
)
|
|
$
|
(3.6
|
)
|
Pension and other post retirement benefits
|
|
(69.2
|
)
|
|
(60.6
|
)
|
|
|
$
|
(71.7
|
)
|
|
$
|
(64.2
|
)
|
Amounts recognized in Accumulated Other Comprehensive Loss
|
|
|
|
|
Net actuarial loss
|
|
$
|
64.9
|
|
|
51.1
|
|
Prior service cost
|
|
1.8
|
|
|
1.9
|
|
|
|
$
|
66.7
|
|
|
$
|
53.0
|
|
The accumulated benefit obligation for all defined benefit pension plans was
$169.1 million
and
$150.0 million
at
December 29, 2012
and
December 31, 2011
, respectively.
The accumulated benefit obligation exceeds assets for all plans.
The following assumptions were used to determine the projected benefit obligation at
December 29, 2012
and
December 31, 2011
, respectively.
|
|
|
|
|
|
2012
|
|
2011
|
Discount rate
|
3.5% to 4.5%
|
|
4.4% to 5.3%
|
Expected long-term rate of return on assets
|
8.0%
|
|
8.25%
|
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 29, 2012
and
December 31, 2011
.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Service cost
|
|
$
|
2.5
|
|
|
$
|
2.5
|
|
|
$
|
2.1
|
|
Interest cost
|
|
7.9
|
|
|
7.9
|
|
|
6.9
|
|
Expected return on plan assets
|
|
(8.0
|
)
|
|
(7.3
|
)
|
|
(6.4
|
)
|
Amortization of net actuarial loss
|
|
3.6
|
|
|
3.2
|
|
|
2.4
|
|
Amortization of prior service cost
|
|
0.2
|
|
|
0.2
|
|
|
0.4
|
|
Curtailment gain
|
|
—
|
|
|
(1.7
|
)
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
6.2
|
|
|
$
|
4.8
|
|
|
$
|
5.4
|
|
|
|
|
|
|
|
|
Change in benefit obligations recognized in OCI, net of tax
|
|
|
|
|
|
|
Prior service credit
|
|
$
|
(0.3
|
)
|
|
$
|
0.2
|
|
|
$
|
0.1
|
|
Net gain
|
|
3.6
|
|
|
3.7
|
|
|
2.2
|
|
Total recognized in OCI
|
|
$
|
3.3
|
|
|
$
|
3.9
|
|
|
$
|
2.3
|
|
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 2013 fiscal year are
$4.0 million
and
$0.2 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 assumptions were used to determine net periodic pension cost for fiscal years
2012
,
2011
and
2010
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Discount rate
|
|
4.4% to 5.3%
|
|
5.2% to 5.9%
|
|
5.7% to 6.3%
|
Expected long-term rate of return on assets
|
|
8.25
|
%
|
|
8.25
|
%
|
|
8.25
|
%
|
For those plans that use compensation increases in the calculation of net periodic pension cost, the Company used an assumed rate of compensation increase of
3.0%
for fiscal years
2012
,
2011
and
2010
.
The Company made contributions to its defined benefit plan of
$11.7 million
and
$6.5 million
for the fiscal years ended December 29, 2012 and December 31, 2011, respectively.
The Company estimates that in 2013 it will make contributions in the amount of
$3.0 million
to fund its defined benefit pension plans.
The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in millions):
|
|
|
|
|
|
|
|
Expected Payments
|
Year
|
|
2013
|
|
$
|
7.9
|
|
2014
|
|
8.2
|
|
2015
|
|
8.9
|
|
2016
|
|
9.3
|
|
2017
|
|
9.8
|
|
2018 - 2022
|
|
58.0
|
|
(9) Shareholders' Equity
The Company recognized approximately
$9.0 million
,
$14.3 million
and
$6.7 million
in share-based compensation expense in
2012
,
2011
and
2010
, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award. As of
December 29, 2012
, total unrecognized compensation cost related to share-based compensation awards was approximately
$22.2 million
, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately
2.7
years.
Under the Company's stock plans, the Company was authorized as of
December 29, 2012
to deliver up to
5.0 million
shares of common stock upon exercise of non-qualified stock options or incentive stock options, or upon grant or in payment of stock appreciation rights, and restricted stock. Approximately
1.0 million
shares were available for future grant or payment under the various plans at
December 29, 2012
.
During 2012, the Company sold
3.2 million
shares of common stock for general corporate purposes, working capital and the potential funding of acquisitions.
During
2011
, the Company issued
2.8 million
shares of common stock in connection with the acquisition of EPC.
During 2010, the Company issued
0.1 million
shares of common stock in connection with the acquisition of CMG.
During
2010
, the Company issued approximately
0.9 million
shares to former Convertible Note holders in settlement of the conversion premium of their redemption.
Share-based Incentive Awards
The Company uses several forms of share-based incentive awards, including non-qualified stock options, incentive stock options, and stock appreciation rights (“SARs”). Options and SARs generally vest over 5 years and expire 10 years from the grant date. All grants are made at prices equal to the fair market value of the stock on the grant dates, and expire ten years from the grant date. The Company values restricted stock awards at the closing market value of its common stock on the date of grant and restrictions generally lapse two to three years after the date of grant. The majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter. For both years ended
December 29, 2012
and
December 31, 2011
, expired and canceled shares were immaterial.
The assumptions used in the Company's Black-Scholes valuation related to grants for options and SARs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Per share weighted average fair value of grants
|
$
|
22.45
|
|
|
$
|
25.80
|
|
|
$
|
22.62
|
|
Risk-free interest rate
|
1.3
|
%
|
|
2.3
|
%
|
|
2.8
|
%
|
Expected life (years)
|
7.0
|
|
|
7.0
|
|
|
7.0
|
|
Expected volatility
|
37.6
|
%
|
|
35.6
|
%
|
|
34.8
|
%
|
Expected dividend yield
|
1.2
|
%
|
|
1.0
|
%
|
|
1.1
|
%
|
The average risk-free interest rate is based on U.S. Treasury security rates in effect as of the grant date. The expected dividend yield is based on the projected annual dividend as a percentage of the estimated market value of the Company's common stock as of the grant date. The Company estimated the expected volatility using a weighted average of daily historical volatility of the Company's stock price over the expected term of the award. The Company estimated the expected term using historical data adjusted for the estimated exercise dates of unexercised awards.
Following is a summary of share-based incentive plan grant activity (options and SARs) for fiscal
2012
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares Under Option
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (years)
|
|
Aggregate Intrinsic Value (in millions)
|
Outstanding at December 31, 2011
|
1,747,255
|
|
|
$
|
49.94
|
|
|
|
|
|
Granted
|
255,225
|
|
|
63.56
|
|
|
|
|
|
Exercised
|
(403,765
|
)
|
|
41.14
|
|
|
|
|
|
Forfeited
|
(30,290
|
)
|
|
56.79
|
|
|
|
|
|
Outstanding at December 29, 2012
|
1,568,425
|
|
|
54.02
|
|
|
6.6
|
|
$
|
23.9
|
|
Exercisable at December 29, 2012
|
654,810
|
|
|
42.00
|
|
|
4.5
|
|
17.5
|
|
The amount of options expected to vest is materially consistent with those outstanding and not yet exercisable.
The table below presents share-based compensation activity for the three fiscal years ended
2012
,
2011
and
2010
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Total intrinsic value of share-based incentive awards exercised
|
|
$
|
11.1
|
|
|
$
|
2.9
|
|
|
$
|
7.4
|
|
Cash received from stock option exercises
|
|
4.2
|
|
|
1.9
|
|
|
3.8
|
|
Income tax benefit from the exercise of stock options
|
|
2.2
|
|
|
1.4
|
|
|
1.7
|
|
Total fair value of share-based incentive awards vested
|
|
6.6
|
|
|
13.3
|
|
|
7.0
|
|
Restricted Stock
The Company also granted restricted stock awards to certain employees. The restrictions generally lapse in three years after the date of the grant. The Company values restricted stock awards at the closing market value of its common stock on the date of grant.
A summary of restricted stock activity for fiscal
2012
:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Fair Value at Grant Date
|
Restricted stock balance at December 31, 2011
|
|
138,330
|
|
|
$
|
60.67
|
|
Granted
|
|
95,916
|
|
|
63.72
|
|
Vested
|
|
(32,720
|
)
|
|
43.73
|
|
Forfeited
|
|
(1,585
|
)
|
|
58.04
|
|
Restricted stock balance at December 29, 2012
|
|
199,941
|
|
|
$
|
64.92
|
|
There have been no significant modifications to terms of any of the Company's share-based incentive award programs.
Treasury Stock
The Board of Directors has approved repurchase programs of up to
3.0 million
common shares of Company stock. Management is authorized to effect purchases from time to time in the open market or through privately negotiated transactions.
(10) Income Taxes
Income before taxes consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
United States
|
|
$
|
121.3
|
|
|
$
|
137.0
|
|
|
$
|
170.5
|
|
Foreign
|
|
148.6
|
|
|
89.3
|
|
|
50.2
|
|
Total
|
|
$
|
269.9
|
|
|
$
|
226.3
|
|
|
$
|
220.7
|
|
The provision for income taxes is summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
24.5
|
|
|
$
|
41.6
|
|
|
$
|
44.7
|
|
State
|
|
7.2
|
|
|
5.7
|
|
|
6.3
|
|
Foreign
|
|
31.4
|
|
|
18.7
|
|
|
14.3
|
|
|
|
63.1
|
|
|
66.0
|
|
|
65.3
|
|
Deferred
|
|
6.5
|
|
|
2.3
|
|
|
0.7
|
|
Total
|
|
$
|
69.6
|
|
|
$
|
68.3
|
|
|
$
|
66.0
|
|
A reconciliation of the statutory Federal income tax rate and the effective tax rate reflected in the consolidated statements of income follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Federal statutory rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
|
2.0
|
%
|
|
1.7
|
%
|
|
2.2
|
%
|
Domestic production activities deduction
|
|
(1.0
|
)%
|
|
(1.7
|
)%
|
|
(1.0
|
)%
|
Foreign rate differential
|
|
(11.4
|
)%
|
|
(5.6
|
)%
|
|
(3.9
|
)%
|
Adjustments to tax accruals and reserves
|
|
0.5
|
%
|
|
0.7
|
%
|
|
(0.9
|
)%
|
Other, net
|
|
0.7
|
%
|
|
0.1
|
%
|
|
(1.5
|
)%
|
Effective tax rate
|
|
25.8
|
%
|
|
30.2
|
%
|
|
29.9
|
%
|
Deferred taxes arise primarily from differences in amounts reported for tax and financial statement purposes. The Company's net deferred tax liability as of
December 29, 2012
of
$(83.3) million
is classified on the consolidated balance sheet as a net current deferred income tax benefit of
$48.7 million
and a net non-current deferred income tax liability of
$132.0 million
. The components of this net deferred tax liability are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29,
2012
|
|
December 31,
2011
|
Accrued employee benefits
|
|
$
|
43.1
|
|
|
$
|
31.5
|
|
Bad debt allowances
|
|
1.0
|
|
|
2.9
|
|
Warranty accruals
|
|
5.7
|
|
|
6.7
|
|
Inventory
|
|
9.3
|
|
|
6.9
|
|
Accrued liabilities
|
|
11.7
|
|
|
12.6
|
|
Derivative instruments
|
|
10.7
|
|
|
30.9
|
|
Other
|
|
8.5
|
|
|
8.0
|
|
Deferred tax assets
|
|
90.0
|
|
|
99.5
|
|
Property related
|
|
(39.6
|
)
|
|
(37.4
|
)
|
Intangible items
|
|
(133.7
|
)
|
|
(113.6
|
)
|
Deferred tax liabilities
|
|
(173.3
|
)
|
|
(151.0
|
)
|
Net deferred tax liability
|
|
$
|
(83.3
|
)
|
|
$
|
(51.5
|
)
|
Following is a reconciliation of the beginning and ending amount of unrecognized tax benefits (in millions):
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits, January 2, 2010
|
|
$
|
6.6
|
|
Gross increases from prior period tax positions
|
|
0.8
|
|
Gross increases from current period tax positions
|
|
0.1
|
|
Settlements with taxing authorities
|
|
—
|
|
Lapse of statute of limitations
|
|
(2.0
|
)
|
Unrecognized tax benefits, January 1, 2011
|
|
$
|
5.5
|
|
Gross increases from prior period tax positions
|
|
1.6
|
|
Gross increases from current period tax positions
|
|
0.2
|
|
Settlements with taxing authorities
|
|
(0.2
|
)
|
Lapse of statute of limitations
|
|
—
|
|
Unrecognized tax benefits, December 31, 2011
|
|
$
|
7.1
|
|
Gross increases from prior period tax positions
|
|
0.7
|
|
Gross increases from current period tax positions
|
|
—
|
|
Settlements with taxing authorities
|
|
(1.6
|
)
|
Lapse of statute of limitations
|
|
(0.5
|
)
|
Unrecognized tax benefits, December 29, 2012
|
|
$
|
5.7
|
|
Unrecognized tax benefits as of
December 29, 2012
amount to
$5.7 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
2012
and
2010
the Company recognized approximately
$0.1 million
and
$0.1 million
in net interest expense, respectively. The Company did not recognize any net interest expense in fiscal
2011
. The Company had approximately
$1.1 million
,
$1.1 million
and
$1.0 million
of accrued interest as of
December 29, 2012
,
December 31, 2011
and
January 1, 2011
, respectively.
Due to statute expirations, approximately
$1.2 million
of the unrecognized tax benefits, including accrued interest, could reasonably change in the coming year.
With few exceptions, the Company is no longer subject to U.S. Federal and state/local income tax examinations by tax authorities for years prior to 2009, and the Company is no longer subject to non-U.S. income tax examinations by tax authorities for years prior to 2007.
At
December 29, 2012
the Company had approximately
$8.3 million
of net operating losses in various jurisdictions which expire over a period of up to 15 years.
At
December 29, 2012
the estimated amount of total unremitted non-U.S. subsidiary earnings was
$335.5 million
. No U.S. deferred taxes have been provided on the undistributed non-U.S. subsidiary earnings because they are considered to be permanently invested given the Company's acquisition and growth initiatives. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.
(11) Contingencies and Commitments
One of the Company's subsidiaries that it acquired in 2007 is subject to numerous claims filed in various jurisdictions relating to certain sub-fractional motors that were primarily manufactured through 2004 and that were included as components of residential and commercial ventilation units marketed by a third party. These claims generally allege that the ventilation units were the cause of fires. Based on the current facts, the Company does not believe these claims, individually or in the aggregate, will have a material effect on its results of operations, financial condition or cash flows.
The Company is, from time to time, party to litigation that arises in the normal course of its business operations, including product warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters. The Company's products are used in a variety of industrial, commercial and residential applications that subject the Company to claims that the use of its products is alleged to have resulted in injury or other damage. The Company accrues for exposures in amounts that it believes are adequate, and the Company does not believe that the outcome of any such lawsuit individually or collectively will have a material effect on the Company's financial position, its results of operations or its cash flows.
The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience. The following is a reconciliation of the changes in accrued warranty costs for 2012 and 2011 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 29,
2012
|
|
December 31,
2011
|
Beginning balance
|
|
$
|
24.2
|
|
|
$
|
12.8
|
|
Payments
|
|
(33.4
|
)
|
|
(18.1
|
)
|
Provisions
|
|
30.0
|
|
|
25.8
|
|
Acquisitions
|
|
0.1
|
|
|
3.9
|
|
Translation adjustments
|
|
—
|
|
|
(0.2
|
)
|
Ending balance
|
|
$
|
20.9
|
|
|
$
|
24.2
|
|
(12) Leases and Rental Commitments
Rental expenses charged to operations amounted to
$36.7 million
in
2012
,
$32.2 million
in
2011
and
$24.6 million
in
2010
. The Company has future minimum rental commitments under operating leases as shown in the following table (in millions):
|
|
|
|
|
|
|
|
|
Year
|
|
Expected Payments
|
2013
|
|
$
|
28.1
|
|
2014
|
|
21.7
|
|
2015
|
|
17.6
|
|
2016
|
|
13.7
|
|
2017
|
|
11.6
|
|
Thereafter
|
|
22.1
|
|
(13) Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed using derivative instruments are commodity price risk, currency exchange risk, and interest rate risk. Forward contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company's manufacturing process. Forward contracts on certain currencies are entered into to manage forecasted cash flows in certain foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with the Company's floating rate borrowings.
The Company is exposed to credit losses in the event of non-performance by the counterparties to various financial agreements, including its commodity hedging transactions, foreign currency exchange contracts and interest rate swap agreements. Exposure to counterparty credit risk is managed by limiting counterparties to major international banks and financial institutions meeting established credit guidelines and continually monitoring their compliance with the credit guidelines. The Company does not obtain collateral or other security to support financial instruments subject to credit risk. The Company does not anticipate non-performance by its counterparties, but cannot provide assurances.
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the statement of financial position. The Company designates commodity forward contracts as cash flow hedges of forecasted purchases of commodities, currency forward contracts as cash flow hedges of forecasted foreign currency cash flows and interest rate swaps as cash flow hedges of forecasted LIBOR-based interest payments. There were no significant collateral deposits on derivative financial instruments as of
December 29, 2012
.
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 accumulated other comprehensive income (loss) 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 29, 2012
and
December 31, 2011
the Company had
$0.3 million
and
$(2.5) million
, net of tax, of derivative (losses) gains on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings.
The Company had outstanding the following notional amounts to hedge forecasted purchases of commodities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2012
|
|
December 31, 2011
|
|
|
|
Copper
|
|
$
|
132.8
|
|
|
$
|
221.7
|
|
Aluminum
|
|
8.5
|
|
|
13.2
|
|
Natural Gas
|
|
—
|
|
|
0.2
|
|
As of
December 29, 2012
, the maturities of commodity forward contracts extended through March, 2014.
The Company had outstanding the following notional amounts of currency forward contracts (in millions):
|
|
|
|
|
|
|
|
|
|
December 29, 2012
|
|
December 31, 2011
|
|
|
|
Mexican Peso
|
|
174.8
|
|
|
237.5
|
|
Chinese Renminbi
|
|
108.6
|
|
|
34.3
|
|
Indian Rupee
|
|
37.4
|
|
|
37.0
|
|
Thai Baht
|
|
17.3
|
|
|
6.3
|
|
Australian Dollar
|
|
7.1
|
|
|
—
|
|
As of
December 29, 2012
, the maturities of currency forward contracts extended through June 2015.
As of
December 29, 2012
and
December 31, 2011
, the total notional amount of the Company's receive-variable/pay-fixed interest rate swaps was
$250.0 million
(with maturities extending to August 2017).
Fair values of derivative instruments were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2012
|
|
|
Prepaid Expenses
|
|
Other Noncurrent Assets
|
|
Hedging Obligations (Current)
|
|
Hedging Obligations
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35.4
|
|
Foreign exchange contracts
|
|
6.8
|
|
|
2.3
|
|
|
4.6
|
|
|
0.3
|
|
Commodity contracts
|
|
3.6
|
|
|
0.2
|
|
|
1.2
|
|
|
—
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
0.6
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
Total Derivatives
|
|
$
|
11.0
|
|
|
$
|
2.5
|
|
|
$
|
6.3
|
|
|
$
|
35.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
Prepaid Expenses
|
|
Other Noncurrent Assets
|
|
Hedging Obligations (Current)
|
|
Hedging Obligations
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42.0
|
|
Foreign exchange contracts
|
|
0.4
|
|
|
0.1
|
|
|
13.6
|
|
|
11.7
|
|
Commodity contracts
|
|
2.1
|
|
|
1.0
|
|
|
12.2
|
|
|
1.4
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commodity contracts
|
|
0.2
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
Total Derivatives
|
|
$
|
2.8
|
|
|
$
|
1.1
|
|
|
$
|
26.1
|
|
|
$
|
55.1
|
|
Derivatives Designated as Cash Flow Hedging Instruments
The effect of derivative instruments on the consolidated statements of equity and income for the three fiscal years in the period ended
December 29, 2012
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2012
|
|
|
|
|
|
|
Interest
|
|
|
|
|
Commodity
|
|
Currency
|
|
Rate
|
|
|
|
|
Forwards
|
|
Forwards
|
|
Swaps
|
|
Total
|
Gain (Loss) recognized in Other Comprehensive Income (Loss)
|
|
$
|
8.5
|
|
|
$
|
23.9
|
|
|
$
|
(5.7
|
)
|
|
$
|
26.7
|
|
Amounts reclassified from Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
Gain recognized in Net Sales
|
|
—
|
|
|
(1.6
|
)
|
|
—
|
|
|
(1.6
|
)
|
Loss recognized in Cost of Sales
|
|
(9.7
|
)
|
|
(3.4
|
)
|
|
—
|
|
|
(13.1
|
)
|
Loss recognized in Interest Expense
|
|
—
|
|
|
—
|
|
|
(12.4
|
)
|
|
(12.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011
|
|
|
|
|
|
|
Interest
|
|
|
|
|
Commodity
|
|
Currency
|
|
Rate
|
|
|
|
|
Forwards
|
|
Forwards
|
|
Swaps
|
|
Total
|
Loss recognized in Other Comprehensive Income (Loss)
|
|
$
|
(29.4
|
)
|
|
$
|
(26.7
|
)
|
|
$
|
(16.0
|
)
|
|
$
|
(72.1
|
)
|
Amounts reclassified from Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
Gain recognized in Net Sales
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
Gain recognized in Cost of Sales
|
|
21.4
|
|
|
5.7
|
|
|
—
|
|
|
27.1
|
|
Loss recognized in Interest Expense
|
|
—
|
|
|
—
|
|
|
(13.1
|
)
|
|
(13.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
|
|
|
|
|
Interest
|
|
|
|
|
Commodity
|
|
Currency
|
|
Rate
|
|
|
|
|
Forwards
|
|
Forwards
|
|
Swaps
|
|
Total
|
Gain (Loss) recognized in Other Comprehensive Income (Loss)
|
|
$
|
38.5
|
|
|
$
|
11.1
|
|
|
$
|
(20.5
|
)
|
|
$
|
29.1
|
|
Amounts reclassified from Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
Gain (Loss) recognized in Cost of Sales
|
|
10.1
|
|
|
(2.7
|
)
|
|
—
|
|
|
7.4
|
|
Loss recognized in Interest Expense
|
|
—
|
|
|
—
|
|
|
(12.7
|
)
|
|
(12.7
|
)
|
The ineffective portion of hedging instruments recognized was immaterial for all periods presented.
Derivatives Not Designated as Cash Flow Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2012
|
|
|
|
|
Commodity Forwards
|
|
Currency Forwards
|
|
Total
|
Gain recognized in Cost of Sales
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011
|
|
|
|
|
Commodity Forwards
|
|
Currency Forwards
|
|
Total
|
Loss recognized in Cost of Sales
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
|
|
|
Commodity Forwards
|
|
Currency Forwards
|
|
Total
|
Gain (Loss) recognized in Cost of Sales
|
|
$
|
(0.6
|
)
|
|
$
|
0.2
|
|
|
$
|
(0.4
|
)
|
The net AOCI balance related to hedging activities of
$(17.4) million
losses at
December 29, 2012
includes
$(5.0) million
of net current deferred losses expected to be reclassified to the statement of income in the next twelve months. There were no gains or losses reclassified from AOCI to earnings based on the probability that the forecasted transaction would not occur.
(14) Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
|
|
|
|
|
|
|
|
Level 1
|
Unadjusted quoted prices in active markets for identical assets or liabilities
|
Level 2
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or
|
|
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
|
|
Inputs other than quoted prices that are observable for the asset or liability
|
Level 3
|
Unobservable inputs for the asset or liability
|
The Company uses the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The 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 29, 2012
and
December 31, 2011
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2012
|
|
December 31, 2011
|
|
|
|
|
|
Classification
|
Assets:
|
|
|
|
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
Derivative currency contracts
|
$
|
6.8
|
|
|
$
|
0.5
|
|
|
Level 2
|
Derivative commodity contracts
|
4.2
|
|
|
2.6
|
|
|
Level 2
|
Other noncurrent assets:
|
|
|
|
|
|
Assets Held in Rabbi Trust
|
2.6
|
|
|
—
|
|
|
Level 1
|
Derivative currency contracts
|
2.3
|
|
|
0.1
|
|
|
Level 2
|
Derivative commodity contracts
|
0.2
|
|
|
1.0
|
|
|
Level 2
|
Liabilities:
|
|
|
|
|
|
Other accrued expenses:
|
|
|
|
|
|
Deferred contingent purchase price
|
—
|
|
|
2.0
|
|
|
Level 3
|
Hedging obligations current:
|
|
|
|
|
|
Derivative currency contracts
|
4.6
|
|
|
13.6
|
|
|
Level 2
|
Derivative commodity contracts
|
1.7
|
|
|
12.5
|
|
|
Level 2
|
Hedging obligations:
|
|
|
|
|
|
Interest rate swap
|
35.4
|
|
|
42.0
|
|
|
Level 2
|
Derivative currency contracts
|
0.3
|
|
|
11.7
|
|
|
Level 2
|
Derivative commodity contracts
|
—
|
|
|
1.4
|
|
|
Level 2
|
Other noncurrent liabilities:
|
|
|
|
|
|
Deferred contingent purchase price
|
21.1
|
|
|
21.5
|
|
|
Level 3
|
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 participants at the measurement date.
Level 1 fair value measurements are carried at market value. As of
December 29, 2012
, market value for Level 1 assets approximates cost.
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 six-month LIBOR swap rate for similar instruments. Foreign currency forwards are valued based on exchange rates quoted by domestic and foreign banks for similar instruments. Fair value of debt was estimated using Level 2 fair value measurements based on quoted market values. The carrying value of debt includes adjustments related to fair value hedges (see Note 7 of Notes to the Consolidated Financial Statements for the fair value estimate of debt).
Level 3 liabilities are comprised entirely of the deferred contingent purchase price of the Company's acquisitions and are measured using Level 3 inputs. The fair value was determined using valuation techniques based on risk and probability adjusted discounted cash flows.
The fair value of all other financial instruments including cash equivalents, trade and other accounts receivable, accounts payable and other financial instruments approximates such instruments' carrying value due to their short-term nature.
The Company did not change its valuation techniques during fiscal
2012
.
The table below sets forth a summary of changes in fair market value of the Company's Level 3 liabilities as of
December 29, 2012
and
December 31, 2011
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 29, 2012
|
|
December 31, 2011
|
|
|
|
|
Beginning balance
|
|
$
|
23.5
|
|
|
$
|
11.0
|
|
Expense
|
|
1.2
|
|
|
—
|
|
Acquisitions
|
|
0.4
|
|
|
12.5
|
|
Payments
|
|
(4.0
|
)
|
|
—
|
|
Ending balance
|
|
$
|
21.1
|
|
|
$
|
23.5
|
|
The liabilities described above are comprised entirely of the deferred contingent purchase price of the Company's acquisitions and are measured using Level 3 inputs. The fair value was determined using valuation techniques based on risk and probability adjusted discounted cash flows.
(15) Related Party Transactions
As part of the consideration paid for the acquisition of Elco on November 1, 2010, the Company assumed
$22.3 million
payable to an entity that is affiliated with its Elco Group B.V. joint venture partner resulting from a bankruptcy proceeding involving Elco. A total of
$10.5 million
was paid during
2012
representing the final payments to the affiliate.
(16) Subsequent Event
On February 8, 2013 (during fiscal 2013) the Company
announced i
t had completed the acquisition of the RAM motor business previously owned by Schneider Electric. This business manufactures hermetic motors from 250 hp to 2,500 hp for commercial HVAC applications. RAM will be reported in the Company's Electrical segment.