NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 28, 2013
(Unaudited
)
1.
BASIS OF PRESENTATION
The accompanying (a) condensed consolidated balance sheet of Regal Beloit Corporation (the “Company”) as of
December 29, 2012
, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of
September 28, 2013
and for the
three and nine months ended
September 28, 2013
and
September 29, 2012
, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s
2012
Annual Report on Form 10-K/A filed on March 26, 2013.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the
three and nine months ended
September 28, 2013
are not necessarily indicative of the results that may be expected for the entire fiscal year ending
December 28, 2013
.
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, 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, litigation claims and contingencies and income taxes. The Company accounts for changes to estimates and assumptions when warranted by factually based experience.
The Company operates on a
52/53
week fiscal year ending on the Saturday closest to
December 31
.
As of the beginning of
2013
, the Company adopted new guidance that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This information enables users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements with certain financial instruments and derivative instruments. This new guidance is applicable to the Company's derivative instruments. See Note 13 of Notes to Condensed Consolidated Financial Statements.
As of the beginning of
2013
, the Company adopted new guidance that requires footnote disclosures on a prospective basis regarding the changes in accumulated other comprehensive loss by component and the line items affected in the statements of income. See Note 4 of Notes to Condensed Consolidated Financial Statements.
As of the beginning of
2013
, the Company changed its inventory valuation method for the finished goods of recently acquired North American businesses to the LIFO method from the FIFO method. The Company believes the change to the LIFO method is preferable because it will improve matching of current costs with revenues when there is volatility in the cost of raw materials, and is consistent with the method used for the majority of the Company’s other North American finished goods inventory. Prior period consolidated financial statements have not been retrospectively adjusted. The cumulative effect of this change was immaterial.
2.
OTHER FINANCIAL INFORMATION
Inventories
Inventories are valued at last-in, first-out (LIFO) for approximately
51%
and
31%
of the Company’s inventory as of
September 28, 2013
and
December 29, 2012
, respectively.
The approximate percentage distribution between major classes of inventories was as follows:
|
|
|
|
|
|
|
|
September 28,
2013
|
|
December 29,
2012
|
Raw Material and Work in Process
|
43
|
%
|
|
43
|
%
|
Finished Goods and Purchased Parts
|
57
|
%
|
|
57
|
%
|
Property, Plant and Equipment
Property, plant, and equipment by major classification was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
September 28,
2013
|
|
December 29,
2012
|
Land and Improvements
|
$
|
71.8
|
|
|
$
|
76.2
|
|
Buildings and Improvements
|
225.8
|
|
|
212.7
|
|
Machinery and Equipment
|
783.6
|
|
|
747.5
|
|
Property, Plant and Equipment
|
1,081.2
|
|
|
1,036.4
|
|
Less: Accumulated Depreciation
|
(508.6
|
)
|
|
(463.3
|
)
|
Net Property, Plant and Equipment
|
$
|
572.6
|
|
|
$
|
573.1
|
|
3.
ACQUISITIONS
The results of operations for acquired businesses are included in the Condensed Consolidated Financial Statements from the dates of acquisition. Acquisition related expenses, which were recorded in operating expenses, were immaterial for the
three months ended
September 28, 2013
and were
$3.2 million
for the
nine months ended
September 28, 2013
. Acquisition expenses were immaterial for the
three and nine months ended
September 29, 2012
.
2013 Acquisitions
On September 3, 2013, the Company purchased additional shares owned by the noncontrolling interest in its joint venture in a South African distribution business.
On
February 8, 2013
, the Company acquired 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 and is reported in the Electrical segment.
2012 Acquisitions
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.
4.
ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustments, hedging activities and pension benefit adjustments are included in Equity in Accumulated Other Comprehensive Loss.
The changes in accumulated other comprehensive loss by component, net of tax, for the
three and nine months ended
September 28, 2013
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 28, 2013
|
|
Hedging Activities
|
|
Pension Benefit Adjustments
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Beginning balance
|
$
|
(25.1
|
)
|
|
$
|
(41.3
|
)
|
|
$
|
(33.8
|
)
|
|
$
|
(100.2
|
)
|
Other comprehensive income before reclassifications
|
4.4
|
|
|
—
|
|
|
5.5
|
|
|
9.9
|
|
Amounts reclassified from accumulated other comprehensive income
|
4.0
|
|
|
0.5
|
|
|
—
|
|
|
4.5
|
|
Purchase of subsidiary shares from noncontrolling interest
|
—
|
|
|
—
|
|
|
1.1
|
|
|
1.1
|
|
Net current period other comprehensive income
|
8.4
|
|
|
0.5
|
|
|
6.6
|
|
|
15.5
|
|
Ending balance
|
$
|
(16.7
|
)
|
|
$
|
(40.8
|
)
|
|
$
|
(27.2
|
)
|
|
$
|
(84.7
|
)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 28, 2013
|
|
Hedging Activities
|
|
Pension Benefit Adjustments
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Beginning balance
|
$
|
(17.4
|
)
|
|
$
|
(41.9
|
)
|
|
$
|
(6.0
|
)
|
|
$
|
(65.3
|
)
|
Other comprehensive income (loss) before reclassifications
|
(4.8
|
)
|
|
—
|
|
|
(22.3
|
)
|
|
(27.1
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
5.5
|
|
|
1.1
|
|
|
—
|
|
|
6.6
|
|
Purchase of subsidiary shares from noncontrolling interest
|
—
|
|
|
—
|
|
|
1.1
|
|
|
1.1
|
|
Net current period other comprehensive income (loss)
|
0.7
|
|
|
1.1
|
|
|
(21.2
|
)
|
|
(19.4
|
)
|
Ending balance
|
$
|
(16.7
|
)
|
|
$
|
(40.8
|
)
|
|
$
|
(27.2
|
)
|
|
$
|
(84.7
|
)
|
The condensed consolidated income statement line item affected by the cash flow hedge amounts reclassified from accumulated other comprehensive loss in the table above are disclosed in Note 13 of Notes to Condensed Consolidated Financial Statements.
The reclassification amounts for defined benefit pension items in the table above are included as part of net periodic pension costs; see Note 8 of Notes to Condensed Consolidated Financial Statements.
5.
BUSINESS SEGMENTS
The Company has two reportable segments: Mechanical and Electrical. Segment detail was (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
|
|
Mechanical
|
|
Eliminations
|
|
Total
|
Three months ended September 28, 2013
|
|
|
|
|
|
|
|
External sales
|
$
|
707.5
|
|
|
$
|
60.7
|
|
|
$
|
—
|
|
|
$
|
768.2
|
|
Intersegment sales
|
1.2
|
|
|
1.2
|
|
|
(2.4
|
)
|
|
—
|
|
Total sales
|
708.7
|
|
|
61.9
|
|
|
(2.4
|
)
|
|
768.2
|
|
Income from operations
|
71.1
|
|
|
7.7
|
|
|
—
|
|
|
78.8
|
|
Identifiable assets
|
3,483.1
|
|
|
226.2
|
|
|
—
|
|
|
3,709.3
|
|
Depreciation and amortization
|
28.5
|
|
|
3.2
|
|
|
—
|
|
|
31.7
|
|
Three months ended September 29, 2012
|
|
|
|
|
|
|
|
External sales
|
$
|
708.3
|
|
|
$
|
71.2
|
|
|
$
|
—
|
|
|
$
|
779.5
|
|
Intersegment sales
|
0.9
|
|
|
1.3
|
|
|
(2.2
|
)
|
|
—
|
|
Total sales
|
709.2
|
|
|
72.5
|
|
|
(2.2
|
)
|
|
779.5
|
|
Income from operations
|
73.2
|
|
|
10.1
|
|
|
—
|
|
|
83.3
|
|
Identifiable assets
|
3,216.1
|
|
|
207.6
|
|
|
—
|
|
|
3,423.7
|
|
Depreciation and amortization
|
32.3
|
|
|
2.1
|
|
|
—
|
|
|
34.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
|
|
Mechanical
|
|
Eliminations
|
|
Total
|
Nine months ended September 28, 2013
|
|
|
|
|
|
|
|
External sales
|
$
|
2,171.8
|
|
|
$
|
196.6
|
|
|
$
|
—
|
|
|
$
|
2,368.4
|
|
Intersegment sales
|
3.2
|
|
|
4.0
|
|
|
(7.2
|
)
|
|
—
|
|
Total sales
|
2,175.0
|
|
|
200.6
|
|
|
(7.2
|
)
|
|
2,368.4
|
|
Income from operations
|
211.1
|
|
|
24.7
|
|
|
—
|
|
|
235.8
|
|
Identifiable assets
|
3,483.1
|
|
|
226.2
|
|
|
—
|
|
|
3,709.3
|
|
Depreciation and amortization
|
85.6
|
|
|
9.5
|
|
|
—
|
|
|
95.1
|
|
Nine months ended September 29, 2012
|
|
|
|
|
|
|
|
External Sales
|
$
|
2,223.3
|
|
|
$
|
228.0
|
|
|
$
|
—
|
|
|
$
|
2,451.3
|
|
Intersegment sales
|
2.7
|
|
|
2.9
|
|
|
(5.6
|
)
|
|
—
|
|
Total sales
|
2,226.0
|
|
|
230.9
|
|
|
(5.6
|
)
|
|
2,451.3
|
|
Income from operations
|
234.1
|
|
|
31.6
|
|
|
—
|
|
|
265.7
|
|
Identifiable assets
|
3,216.1
|
|
|
207.6
|
|
|
—
|
|
|
3,423.7
|
|
Depreciation and amortization
|
87.3
|
|
|
7.7
|
|
|
—
|
|
|
95.0
|
|
6.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
As required, the Company performs an annual impairment test of goodwill during the fourth quarter or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting units below their carrying value.
The following information presents changes to goodwill during the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Electrical
Segment
|
|
Mechanical
Segment
|
Balance as of December 31, 2011
|
$
|
1,117.6
|
|
|
$
|
1,105.0
|
|
|
$
|
12.6
|
|
Acquisitions and Valuation Adjustments
|
25.9
|
|
|
2.7
|
|
|
23.2
|
|
Foreign Currency Translation Adjustments
|
7.5
|
|
|
4.0
|
|
|
3.5
|
|
Balance as of December 29, 2012
|
1,151.0
|
|
|
1,111.7
|
|
|
39.3
|
|
Foreign Currency Translation Adjustments
|
(7.1
|
)
|
|
(6.9
|
)
|
|
(0.2
|
)
|
Balance as of September 28, 2013
|
$
|
1,143.9
|
|
|
$
|
1,104.8
|
|
|
$
|
39.1
|
|
Intangible Assets
Intangible assets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2013
|
|
December 29, 2012
|
|
Useful Life
(years)
|
|
Gross Value
|
|
Accumulated
Amortization
|
|
Gross Value
|
|
Accumulated
Amortization
|
Customer Relationships
|
3 - 14
|
|
$
|
244.0
|
|
|
$
|
(95.7
|
)
|
|
$
|
244.9
|
|
|
$
|
(78.7
|
)
|
Technology
|
3 - 9
|
|
130.3
|
|
|
(53.8
|
)
|
|
130.3
|
|
|
(41.8
|
)
|
Trademarks
|
3 - 20
|
|
32.3
|
|
|
(17.4
|
)
|
|
32.7
|
|
|
(15.7
|
)
|
In-process Research and Development
|
N/A
|
|
17.2
|
|
|
—
|
|
|
17.2
|
|
|
—
|
|
Patent and Engineering Drawings
|
10
|
|
16.6
|
|
|
(14.6
|
)
|
|
16.6
|
|
|
(13.3
|
)
|
Non-compete Agreements
|
3 - 5
|
|
8.3
|
|
|
(7.6
|
)
|
|
8.2
|
|
|
(7.2
|
)
|
|
|
|
$
|
448.7
|
|
|
(189.1
|
)
|
|
$
|
449.9
|
|
|
(156.7
|
)
|
Net Values
|
|
|
|
|
$
|
259.6
|
|
|
|
|
$
|
293.2
|
|
The estimated expected future annual amortization for intangible assets is as follows (in millions):
|
|
|
|
|
Year
|
Estimated
Amortization
|
2013
|
$
|
43.9
|
|
2014
|
42.4
|
|
2015
|
35.0
|
|
2016
|
30.4
|
|
2017
|
24.2
|
|
Amortization expense recorded
for the
three and nine months ended
September 28, 2013
was
$10.9 million
and
$33.0 million
respectively. Amortization expense for the
three and nine months ended
September 29, 2012
was
$11.1 million
and
$32.8 million
, respectively.
In-process research and development projects are estimated to be completed by the end of
2015
and amortization will begin upon project completion.
7.
DEBT AND BANK CREDIT FACILITIES
The Company’s indebtedness as of
September 28, 2013
and
December 29, 2012
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
September 28,
2013
|
|
December 29,
2012
|
Senior notes
|
$
|
750.0
|
|
|
$
|
750.0
|
|
Term loan
|
—
|
|
|
55.0
|
|
Other
|
18.7
|
|
|
13.5
|
|
|
768.7
|
|
|
818.5
|
|
Less: Current maturities
|
(159.6
|
)
|
|
(63.8
|
)
|
Non-current portion
|
$
|
609.1
|
|
|
$
|
754.7
|
|
At
September 28, 2013
, the Company had
$750.0 million
of senior notes
(the “Notes”) outstanding. Details on the senior notes are (in millions):
|
|
|
|
|
|
|
|
|
|
Principal
|
|
Interest Rate
|
|
Maturity
|
Floating Rate Series 2007A
|
$
|
150.0
|
|
|
Floating
(1)
|
|
August 2014
|
Floating Rate Series 2007A
|
100.0
|
|
|
Floating
(1)
|
|
August 2017
|
Fixed Rate Series 2011A
|
100.0
|
|
|
4.1%
|
|
July 2018
|
Fixed Rate Series 2011A
|
230.0
|
|
|
4.8 to 5.0%
|
|
July 2021
|
Fixed Rate Series 2011A
|
170.0
|
|
|
4.9 to 5.1%
|
|
July 2023
|
|
$
|
750.0
|
|
|
|
|
|
|
|
(1)
|
Interest rates vary as LIBOR varies. At
September 28, 2013
, the interest rate was
0.9%
.
|
In
2008
, the Company entered into a Term Loan Agreement (“Term Loan”) with certain financial institutions, whereby it borrowed an aggregate
principal amount of
$165.0 million
. Prior to
2013
, the Company repaid
$110.0 million
of the Term Loan. The final
$55.0 million
payment was made in
June 2013
when the loan matured.
The Company has a
$500.0 million
revolving credit facility
(the “Facility”) that matures in
June 2016
. The Facility permits the Company to borrow at interest rates based upon a margin above LIBOR. The margin varies with the ratio of total funded debt to EBITDA, net of specified cash, as defined in the Facility. These interest rates also vary as LIBOR varies. The Company pays a commitment fee on the unused amount of the Facility, which also varies with the ratio of total funded debt to EBITDA. At
September 28, 2013
, the Company had no outstanding balance on the Facility,
$23.5 million
of standby letters of credit issued under the Facility and
$476.5 million
of available borrowing capacity.
Based on rates for instruments with comparable maturities, credit risks, and terms, which are classified as Level 2 inputs, the
approximate fair value
of the Company's debt was
$785.5 million
and
$859.6 million
as of
September 28, 2013
and
December 29, 2012
, respectively.
At
September 28, 2013
, other notes payable of
$18.7 million
were outstanding with a
weighted average interest rate of
2.7%
.
The Notes 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 debt covenants as of
September 28, 2013
.
The Company entered into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. (See also Note 13 of Notes to Condensed Consolidated Financial Statements.)
8.
PENSION PLANS
The Company’s net periodic defined benefit pension cost is comprised of the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 28,
2013
|
|
September 29,
2012
|
|
September 28,
2013
|
|
September 29,
2012
|
Service cost
|
$
|
0.7
|
|
|
$
|
0.6
|
|
|
$
|
2.1
|
|
|
$
|
1.8
|
|
Interest cost
|
1.8
|
|
|
1.9
|
|
|
5.4
|
|
|
5.6
|
|
Expected return on plan assets
|
(2.1
|
)
|
|
(1.8
|
)
|
|
(6.1
|
)
|
|
(5.5
|
)
|
Amortization of prior service cost and net actuarial loss
|
1.1
|
|
|
0.9
|
|
|
3.2
|
|
|
2.8
|
|
Net periodic benefit expense
|
$
|
1.5
|
|
|
$
|
1.6
|
|
|
$
|
4.6
|
|
|
$
|
4.7
|
|
The
estimated net actuarial loss
and
prior service cost
for defined benefit pension plans that will be amortized from Accumulated Other Comprehensive Loss into net periodic benefit cost during the
2013 fiscal year
is
$4.0 million
and
$0.2 million
, respectively.
During the first
nine months
of
2013
and
2012
, the Company contributed
$4.4 million
and
$10.9 million
, respectively, to defined benefit pension plans. The Company expects to make contributions of
$4.9 million
in
2013
. The Company contributed a total of
$11.7 million
in
2012
. The assumptions used in the valuation of the Company’s pension plans and in the target investment allocation have remained the same as those disclosed in the Company’s
2012
Annual Report on Form 10-K/A filed on March 26, 2013.
9.
SHAREHOLDERS’ EQUITY
The Company recognized approximately
$2.9 million
and
$2.3 million
in
share-based compensation expense
for the
three months ended
September 28, 2013
and
September 29, 2012
, respectively. Share based compensation expense for the
nine months ended
September 28, 2013
and September 29, 2012 was
$8.3 million
and
$6.7 million
, respectively. The
total excess income tax benefit recognized relating to share-based compensation
for the
nine months ended
September 28, 2013
and
September 29, 2012
was approximately
$0.7 million
and
$1.7 million
, 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
September 28, 2013
,
total unrecognized compensation cost related to share-based compensation awards
was approximately
$25.9 million
, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately
2.6
years.
On April 29, 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
3.0 million
shares were available for future grant or payment under the 2013 Plan at
September 28, 2013
.
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”). All grants are made at prices equal to the fair market value of the stock on the grant dates, and expire
10
years from the grant date.
The majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter. For the
nine month period ended
September 28, 2013
, and
September 29, 2012
, respectively,
174,775
and
255,225
share-based incentive awards were granted. The per share weighted average fair value of share-based incentive awards granted during those respective periods was
$23.01
and
$22.45
.
The assumptions used in the Black-Scholes valuation related to grants were as follows:
|
|
|
|
|
|
|
|
|
|
September 28,
2013
|
|
September 29,
2012
|
Risk-free interest rate
|
|
1.1
|
%
|
|
1.3
|
%
|
Expected life (years)
|
|
7.0
|
|
|
7.0
|
|
Expected volatility
|
|
38.5
|
%
|
|
37.6
|
%
|
Expected dividend yield
|
|
1.2
|
%
|
|
1.2
|
%
|
A summary of share-based awards (options and SARs) as of
September 28, 2013
follows below. Forfeitures of share-based awards during the
nine months ended
September 28, 2013
were immaterial.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
(years)
|
|
Aggregate Intrinsic
Value (in
millions)
|
Outstanding
|
1,591,490
|
|
|
$
|
55.97
|
|
|
6.4
|
|
$
|
20.1
|
|
Exercisable
|
796,700
|
|
|
48.13
|
|
|
4.7
|
|
16.3
|
|
Restricted Stock Awards, Restricted Stock Units and Performance Units
The Company also grants equity-based awards including restricted stock (“RSA”) awards, restricted stock unit (“RSU”) awards and performance unit (“PSU”) awards. Such awards are valued using the closing price of the Company's common stock on the date of grant or, for PSUs, based on a Monte Carlo simulation value. Restrictions generally lapse three years after the date of grant (or one year in the case of certain RSA grants to directors).
Changes in restricted stock awards for the
nine months ended
September 28, 2013
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Value
|
|
|
Unvested RSUs, RSAs and PSUs, December 29, 2012
|
199,941
|
|
|
$
|
64.92
|
|
|
Granted
|
150,482
|
|
|
63.05
|
|
|
Vested
|
(36,035
|
)
|
|
61.70
|
|
|
Forfeited
|
(7,920
|
)
|
|
62.39
|
|
|
Unvested RSUs, RSAs and PSUs, September 28, 2013
|
306,468
|
|
|
$
|
64.45
|
|
10.
INCOME TAXES
The effective tax rate for the
three months ended
September 28, 2013
was
21.6%
versus
24.5%
for the
three months ended
September 29, 2012
. The effective tax rate for the
nine months ended
September 28, 2013
was
23.3%
versus
27.4%
for the
nine months ended
September 29, 2012
. The change in the third quarter effective rate was primarily driven by the favorable adjustments related to the finalization of the 2012 U.S. Federal income tax return and the global distribution of earnings, compared to the third quarter 2012. The change in the nine month effective rate was driven by the same factors as the third quarter as well as the by the 2012 research and development retroactive reinstatement which was recorded in the first quarter of 2013. The lower effective rate as compared to the
35.0%
statutory Federal income tax rate is driven by lower foreign tax rates.
As of
September 28, 2013
and
December 29, 2012
, the Company had approximately
$4.5 million
and
$5.7 million
, respectively, of unrecognized tax benefits, all of which would affect its effective tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. U.S. federal tax returns from
2010
through
2012
and various state and foreign tax returns remain subject to income tax examinations by tax authorities.
11.
EARNINGS PER SHARE ("EPS")
The numerator for the calculation of basic and diluted earnings per share is Net Income Attributable to Regal Beloit Corporation. The denominator is computed as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 28,
2013
|
|
September 29,
2012
|
|
September 28,
2013
|
|
September 29,
2012
|
Denominator for basic EPS (weighted average)
|
45.1
|
|
|
41.7
|
|
|
45.0
|
|
|
41.7
|
|
Effect of dilutive securities
|
0.3
|
|
|
0.3
|
|
|
0.3
|
|
|
0.3
|
|
Denominator for diluted EPS (weighted average)
|
45.4
|
|
|
42.0
|
|
|
45.3
|
|
|
42.0
|
|
The “Effect of dilutive securities” represents the dilution impact of equity awards.
For the
three months ended
September 28, 2013
and
September 29, 2012
, respectively, there were
0.7 million
and
0.3 million
o
ptions where the exercise price was above the average market price, and which were excluded from the calculation of the effect of dilutive shares as the effect of such options was anti-dilutive. For the
nine months ended
September 28, 2013
and
September 29, 2012
, there were
0.7 million
and
0.3 million
options, respectively, where the exercise price was above the average market price and which were excluded from the calculation of the effect of dilutive shares as the effect of such options was anti-dilutive.
12.
CONTINGENCIES
One of the Company’s subsidiaries that it acquired in
2007
is subject to numerous claims filed in various jurisdictions relating to certain sub-fractional motors that were primarily manufactured through
2004
and that were included as components of residential and commercial ventilation units 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 interim consolidated financial statements as a whole.
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 the
three and nine months ended
September 28, 2013
and
September 29, 2012
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 28,
2013
|
|
September 29,
2012
|
|
September 28,
2013
|
|
September 29,
2012
|
Beginning balance
|
$
|
21.9
|
|
|
$
|
26.0
|
|
|
$
|
20.9
|
|
|
$
|
24.2
|
|
Payments
|
(5.2
|
)
|
|
(5.9
|
)
|
|
(13.7
|
)
|
|
(19.3
|
)
|
Provision
|
4.8
|
|
|
7.1
|
|
|
13.2
|
|
|
22.3
|
|
Acquisition
|
—
|
|
|
—
|
|
|
1.2
|
|
|
0.1
|
|
Translation Adjustments
|
—
|
|
|
0.1
|
|
|
(0.1
|
)
|
|
—
|
|
Ending balance
|
$
|
21.5
|
|
|
$
|
27.3
|
|
|
$
|
21.5
|
|
|
$
|
27.3
|
|
13.
DERIVATIVE INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are commodity price, currency exchange 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 must recognize all derivative instruments as either assets or liabilities at fair value in the condensed 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
September 28, 2013
.
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 other comprehensive income or 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. All derivative instruments used by the Company impact operating cash flows.
At
September 28, 2013
, the Company had
$(1.8) million
, net of tax, of
derivative losses on closed hedge instruments in Accumulated Other Comprehensive Income (Loss) (“AOCI”)
that will be realized in earnings when the hedged items impact earnings. At
December 29, 2012
, the Company had
$(0.3) million
, net of tax, of
derivative losses on closed hedge instruments in AOCI
that was realized in earnings when the hedged items impacted earnings.
As of
September 28, 2013
, the Company had outstanding the following commodity forward contracts (with maturities extending through
December 2014
) to hedge forecasted purchases of commodities (notional amounts expressed in terms of the dollar value of the hedged item in millions):
|
|
|
|
|
|
Notional
Amount
|
Copper
|
$
|
130.5
|
|
Aluminum
|
10.0
|
|
As of
September 28, 2013
, the Company had outstanding the following currency forward contracts (with maturities extending through December 2015) to hedge forecasted foreign currency cash flows (in millions):
|
|
|
|
|
|
Notional
Amount
|
Mexican Peso
|
$
|
219.3
|
|
Chinese Renminbi
|
132.7
|
|
Indian Rupee
|
38.0
|
|
Thai Baht
|
5.9
|
|
Australian Dollar
|
1.7
|
|
As of
September 28, 2013
, 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 as of
September 28, 2013
and
December 29, 2012
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2013
|
|
Prepaid
Expenses and Other Current Assets
|
|
Other
Noncurrent
Assets
|
|
Hedging
Obligations
(current)
|
|
Hedging
Obligations
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7.6
|
|
|
$
|
17.4
|
|
Foreign exchange contracts
|
7.3
|
|
|
0.9
|
|
|
3.2
|
|
|
2.2
|
|
Commodity contracts
|
2.8
|
|
|
0.1
|
|
|
4.6
|
|
|
0.1
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
Commodity contracts
|
0.2
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
Total Derivatives
|
$
|
10.3
|
|
|
$
|
1.0
|
|
|
$
|
15.7
|
|
|
$
|
19.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2012
|
|
Prepaid
Expenses and Other Current Assets
|
|
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
|
|
The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income (pre-tax) for the
three and nine months ended
September 28, 2013
and
September 29, 2012
, was (in millions):
Derivatives Designated as Cash Flow Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 28, 2013
|
|
September 29, 2012
|
|
Commodity
Forwards
|
|
Currency
Forwards
|
|
Interest
Rate
Swaps
|
|
Total
|
|
Commodity
Forwards
|
|
Currency
Forwards
|
|
Interest
Rate
Swaps
|
|
Total
|
Gain (loss) recognized in Other Comprehensive Income (Loss)
|
$
|
10.3
|
|
|
$
|
(2.4
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
7.0
|
|
|
$
|
9.2
|
|
|
$
|
8.6
|
|
|
$
|
(1.4
|
)
|
|
$
|
16.4
|
|
Amounts reclassified from Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss recognized in Net Sales
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
Gain (loss) recognized in Cost of Sales
|
(4.9
|
)
|
|
1.7
|
|
|
—
|
|
|
(3.2
|
)
|
|
(2.6
|
)
|
|
(2.7
|
)
|
|
—
|
|
|
(5.3
|
)
|
Loss recognized in Interest Expense
|
—
|
|
|
—
|
|
|
(3.2
|
)
|
|
(3.2
|
)
|
|
—
|
|
|
—
|
|
|
(2.4
|
)
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 28, 2013
|
|
September 29, 2012
|
|
Commodity
Forwards
|
|
Currency
Forwards
|
|
Interest
Rate
Swaps
|
|
Total
|
|
Commodity
Forwards
|
|
Currency
Forwards
|
|
Interest
Rate
Swaps
|
|
Total
|
Gain (Loss) recognized in Other Comprehensive Income (Loss)
|
$
|
(12.5
|
)
|
|
$
|
3.9
|
|
|
$
|
0.8
|
|
|
$
|
(7.8
|
)
|
|
$
|
13.0
|
|
|
$
|
23.7
|
|
|
$
|
(5.6
|
)
|
|
$
|
31.1
|
|
Amounts reclassified from Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss recognized in Net Sales
|
—
|
|
|
(0.6
|
)
|
|
—
|
|
|
(0.6
|
)
|
|
—
|
|
|
(1.2
|
)
|
|
—
|
|
|
(1.2
|
)
|
Gain (loss) recognized in Cost of Sales
|
(4.5
|
)
|
|
5.8
|
|
|
—
|
|
|
1.3
|
|
|
(9.1
|
)
|
|
(3.1
|
)
|
|
—
|
|
|
(12.2
|
)
|
Loss recognized in Interest Expense
|
—
|
|
|
—
|
|
|
(9.6
|
)
|
|
(9.6
|
)
|
|
—
|
|
|
—
|
|
|
(9.2
|
)
|
|
(9.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The ineffective portion of hedging instruments recognized during the
three and nine months ended
September 28, 2013
and
September 29, 2012
was immaterial.
Derivatives Not Designated as Cash Flow Hedging Instruments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 28,
2013
|
|
September 29,
2012
|
|
Commodity Forwards
|
|
Currency Forwards
|
|
Commodity Forwards
|
|
Currency Forwards
|
Gain (loss) recognized in Cost of Sales
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.4
|
|
|
$
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 28,
2013
|
|
September 29,
2012
|
|
Commodity Forwards
|
|
Currency Forwards
|
|
Commodity Forwards
|
|
Currency Forwards
|
Gain (loss) recognized in Cost of Sales
|
$
|
(0.1
|
)
|
|
$
|
0.6
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
The
net AOCI hedging component balance of
$(16.7) million
loss at
September 28, 2013
includes
$(6.6) million
of
net current deferred losses expected to be realized in the next twelve months
.
The Company's commodity and currency derivative contracts are subject to master netting agreements with the respective counterparties which allow the Company to net settle transactions with a single net amount payable by one party to another party. The Company has elected to present the derivative assets and derivative liabilities on the Condensed Consolidated Balance Sheets on a gross basis for the periods ended
September 28, 2013
and
December 29, 2012
.
The following table presents the derivative assets and derivative liabilities presented on a net basis under enforceable master netting agreements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2013
|
|
Gross Amounts as Presented in the Condensed Consolidated Balance Sheet
|
|
Derivative Contract Amounts Subject to Right of Offset
|
|
Derivative Contracts as Presented on a Net Basis
|
Prepaid Expenses and Other Current Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
$
|
7.3
|
|
|
$
|
(0.5
|
)
|
|
$
|
6.8
|
|
Derivative Commodity Contracts
|
3.0
|
|
|
(3.0
|
)
|
|
—
|
|
Other Noncurrent Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
0.9
|
|
|
(0.2
|
)
|
|
0.7
|
|
Derivative Commodity Contracts
|
0.1
|
|
|
(0.1
|
)
|
|
—
|
|
Hedging Obligations Current:
|
|
|
|
|
|
Derivative Currency Contracts
|
3.2
|
|
|
(0.5
|
)
|
|
2.7
|
|
Derivative Commodity Contracts
|
4.9
|
|
|
(3.0
|
)
|
|
1.9
|
|
Hedging Obligations:
|
|
|
|
|
|
Derivative Currency Contracts
|
2.2
|
|
|
(0.2
|
)
|
|
2.0
|
|
Derivative Commodity Contracts
|
0.1
|
|
|
(0.1
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2012
|
|
Gross Amounts as Presented in the Condensed Consolidated Balance Sheet
|
|
Derivative Contract Amounts Subject to Right of Offset
|
|
Derivative Contracts as Presented on a Net Basis
|
Prepaid Expenses and Other Current Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
$
|
6.8
|
|
|
$
|
(1.5
|
)
|
|
$
|
5.3
|
|
Derivative Commodity Contracts
|
4.2
|
|
|
(1.3
|
)
|
|
2.9
|
|
Other Noncurrent Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
2.3
|
|
|
—
|
|
|
2.3
|
|
Derivative Commodity Contracts
|
0.2
|
|
|
—
|
|
|
0.2
|
|
Hedging Obligations Current:
|
|
|
|
|
|
Derivative Currency Contracts
|
4.6
|
|
|
(1.6
|
)
|
|
3.0
|
|
Derivative Commodity Contracts
|
1.7
|
|
|
(1.2
|
)
|
|
0.5
|
|
Hedging Obligations:
|
|
|
|
|
|
Derivative Currency Contracts
|
0.3
|
|
|
—
|
|
|
0.3
|
|
14.
FAIR VALUE
The Company uses a three-tier hierarchy to assess the inputs used to measure the fair value of financial assets and liabilities.
|
|
|
Level 1
|
Unadjusted quoted prices in active markets for identical assets or liabilities
|
Level 2
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or
|
|
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
|
|
Inputs other than quoted prices that are observable for the asset or liability
|
Level 3
|
Unobservable inputs for the asset or liability
|
The Company uses the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The fair value of the Company's cash equivalents, term deposits, accounts receivable and accounts payable approximated book value as of
September 28, 2013
and
December 29, 2012
, respectively, due to their short-term nature. See Note 7 of Notes to Condensed Consolidated Financial Statements for disclosure of the approximate fair value of the Company's debt at
September 28, 2013
and
December 29, 2012
.
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
September 28, 2013
and
December 29, 2012
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
September 28,
2013
|
|
December 29,
2012
|
|
Classification
|
Assets:
|
|
|
|
|
|
Prepaid Expenses and Other Current Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
$
|
7.3
|
|
|
$
|
6.8
|
|
|
Level 2
|
Derivative Commodity Contracts
|
3.0
|
|
|
4.2
|
|
|
Level 2
|
Investments
|
8.6
|
|
|
8.3
|
|
|
Level 2
|
Other Noncurrent Assets:
|
|
|
|
|
|
Assets Held in Rabbi Trust
|
5.1
|
|
|
2.6
|
|
|
Level 1
|
Derivative Currency Contracts
|
0.9
|
|
|
2.3
|
|
|
Level 2
|
Derivative Commodity Contracts
|
0.1
|
|
|
0.2
|
|
|
Level 2
|
Liabilities:
|
|
|
|
|
|
Other Accrued Expenses:
|
|
|
|
|
|
Deferred Contingent Purchase Price
|
7.9
|
|
|
—
|
|
|
Level 3
|
Hedging Obligations (current):
|
|
|
|
|
|
Interest Rate Swap
|
7.6
|
|
|
—
|
|
|
Level 2
|
Derivative Currency Contracts
|
3.2
|
|
|
4.6
|
|
|
Level 2
|
Derivative Commodity Contracts
|
4.9
|
|
|
1.7
|
|
|
Level 2
|
Hedging Obligations:
|
|
|
|
|
|
Interest Rate Swap
|
17.4
|
|
|
35.4
|
|
|
Level 2
|
Derivative Currency Contracts
|
2.2
|
|
|
0.3
|
|
|
Level 2
|
Derivative Commodity Contracts
|
0.1
|
|
|
—
|
|
|
Level 2
|
Other Noncurrent Liabilities:
|
|
|
|
|
|
Deferred Contingent Purchase Price
|
13.7
|
|
|
21.1
|
|
|
Level 3
|
The Company’s derivative contracts are valued at fair value using the market or income approaches. The Company measures the fair value of foreign currency exchange contracts using Level 2 inputs based on observable spot and forward rates in active markets. The Company measures the fair value of commodity contracts using Level 2 inputs through observable market transactions in active markets provided by financial institutions. The Company measures the fair value of investments using Level 2 inputs based on quoted market prices for similar instruments in active markets. The Company measures the fair value of interest rate swaps using Level 2 inputs in an income approach for valuation based on expected interest rate yield curves over the remaining duration of the interest rate swaps. During the
nine months ended
September 28, 2013
, there were no transfers between classification Levels 1, 2 or 3.
The table below sets forth a summary of changes in fair market value of the Company’s Level 3 liabilities for the
three and nine months ended
September 28, 2013
and
September 29, 2012
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 28,
2013
|
|
September 29,
2012
|
|
September 28,
2013
|
|
September 29,
2012
|
Beginning Balance
|
$
|
21.6
|
|
|
$
|
23.2
|
|
|
$
|
21.1
|
|
|
$
|
23.5
|
|
Valuation Adjustments
|
0.3
|
|
|
0.3
|
|
|
0.8
|
|
|
0.9
|
|
Acquisitions
|
—
|
|
|
0.4
|
|
|
—
|
|
|
0.4
|
|
Payments
|
(0.3
|
)
|
|
(3.1
|
)
|
|
(0.3
|
)
|
|
(4.0
|
)
|
Ending Balance
|
$
|
21.6
|
|
|
$
|
20.8
|
|
|
$
|
21.6
|
|
|
$
|
20.8
|
|
The Level 3 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 contingent consideration, payable in cash, is based upon sales or earnings before interest and income taxes for the acquired businesses for the applicable contingency period. The fair value of the contingent consideration is a Level 3 input; the measurement of which is derived using a probability weighted discounted cash flow analysis. The Company has estimated that the maximum contingent amount will be paid under all agreements so the key assumption is the estimated timing of the payments and the discount rates. The discounted cash flow utilized risk-based
discount rates
ranging from approximately
5.0%
to
8.0%
.
15.
SUBSEQUENT EVENT
On
October 29, 2013
, the Company announced it has reached an agreement to acquire Cemp s.r.l. ("Cemp"), an Italy based electric motor company. Cemp is a leading designer, manufacturer and marketer of flameproof electric motors.