NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 2, 2016
(Unaudited
)
1.
BASIS OF PRESENTATION
The accompanying (a) condensed consolidated balance sheet of Regal Beloit Corporation (the “Company”) as of
January 2, 2016
, which has been derived from audited consolidated financial statements, and (b) unaudited interim condensed consolidated financial statements as of
April 2, 2016
and for the
three months ended
April 2, 2016
and
April 4, 2015
, 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 ("GAAP"), have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s
2015
Annual Report on Form 10-K filed on
March 2, 2016
.
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 months ended
April 2, 2016
are not necessarily indicative of the results that may be expected for the entire fiscal year ending
December 31, 2016
.
The condensed consolidated financial statements have been prepared in accordance with GAAP, which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company uses estimates in accounting for, among other items, allowance for doubtful accounts; excess and obsolete inventory; share-based compensation; acquisitions; product warranty obligations; pension and post retirement assets and liabilities; derivative fair values; goodwill and other asset impairments; health care reserves; retirement benefits; rebates and incentives; litigation claims and contingencies, including environmental matters; and income taxes. The Company accounts for changes to estimates and assumptions when warranted by factually based experience.
The Company operates on a
52/53
week fiscal year ending on the Saturday closest to
December 31
.
Change in Accounting Principle
As of the beginning of its fiscal year 2016, the Company changed its inventory valuation method for the U.S. inventory of the recently acquired Power Transmission Solutions (“PTS”) business to the last-in, first-out ("LIFO") method from the first-in, first-out ("FIFO") method. This change affects approximately
9%
of the Company’s inventory. The Company believes this change in accounting principle is preferable under the circumstances because LIFO will better match current costs with current revenues since the cost of raw materials has been volatile in recent years, results in greater consistency in inventory costing across the organization since LIFO is the method used for the majority of the Company's other U.S. inventory, and better aligns with how management assesses the performance of the business. Because this change in accounting principle was immaterial in all annual or interim prior periods, it was not applied retrospectively. The change did not have a material impact on the consolidated financial statements as of and for the quarter ended April 2, 2016.
Also, as of the beginning of its fiscal year 2016, the Company changed its method of calculating LIFO inventories, which represents approximately
51%
of the Company’s inventory. The Company reduced the number of LIFO inventory pools to
three
to align with the Company’s reportable segments. Previously, the Company had
10
LIFO inventory pools, some of which crossed reportable segments. The Company believes this change in accounting principle is preferable under the circumstances because fewer pools will simplify the LIFO calculations, combine inventory items with similarities within a reportable segment, and better align with how management assesses the performance of the businesses. The Company determined that it has the data needed to apply this change in accounting principle prospectively as of the beginning of its fiscal year 2014, but that full retrospective application is impracticable because the data is not available to determine the cumulative effect of the change. Because the effect of applying the change prospectively as of the beginning of fiscal 2014 is immaterial in any annual or interim period in fiscal years 2014 or 2015, the Company has applied this change in accounting principle prospectively from the first day of fiscal year 2016.
New Accounting Standards
In March, 2016 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The
ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. Implementation and administration may present challenges for companies with significant share-based payment activities and there are various transition methods. The Company is required to adopt the new requirements in the first quarter of fiscal 2017. The Company is currently evaluating the impact of the new requirements to its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross versus
Net)
, which amends the principal-versus-agent implementation guidance in ASU No. 2014-09 (Topic 606),
Revenue from Contracts with Customers,
issued by the FASB in May 2014. ASU No. 2016-08 clarifies the principal-versus-agent guidance in Topic 606 and requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. ASU 2014-09 is a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. This update requires the Company to recognize revenue at amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services at the time of transfer. In doing so, the Company will need to use more judgment and make more estimates than under today’s guidance. Such estimates include identifying performance obligations in the contracts, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company can either apply a full retrospective adoption or a modified retrospective adoption. The Company is required to adopt the new requirements in the first quarter of fiscal 2018. The Company is currently evaluating the impact of the new requirements to its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases.
The core principle of ASU 2016-02 is that an entity should recognize on its balance sheet assets and liabilities arising from a lease. In accordance with that principle, ASU 2016-02 requires that a lessee recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying leased asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on the lease classification as a finance or operating lease. This new accounting guidance is effective for public companies for fiscal years beginning after December 15, 2018 under a modified retrospective approach and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements.
2.
OTHER FINANCIAL INFORMATION
Inventories
The approximate percentage distribution between major classes of inventories was as follows:
|
|
|
|
|
|
April 2,
2016
|
|
January 2,
2016
|
Raw Material and Work in Process
|
45%
|
|
45%
|
Finished Goods and Purchased Parts
|
55%
|
|
55%
|
Inventories are stated at cost, which is not in excess of market. Cost for approximately
52%
of the Company's inventory at April 2, 2016, and
42%
at January 2, 2016 was determined using the LIFO method.
Property, Plant and Equipment
Property, plant, and equipment by major classification was as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life in Years
|
|
April 2,
2016
|
|
January 2,
2016
|
Land and Improvements
|
|
|
$
|
81.6
|
|
|
$
|
80.7
|
|
Buildings and Improvements
|
3 - 50
|
|
277.0
|
|
|
276.9
|
|
Machinery and Equipment
|
3 - 15
|
|
943.0
|
|
|
926.7
|
|
Property, Plant and Equipment
|
|
|
1,301.6
|
|
|
1,284.3
|
|
Less: Accumulated Depreciation
|
|
|
(628.2
|
)
|
|
(605.8
|
)
|
Net Property, Plant and Equipment
|
|
|
$
|
673.4
|
|
|
$
|
678.5
|
|
3.
ACQUISITIONS
The results of operations for acquired businesses are included in the Condensed Consolidated Financial Statements from the dates of acquisition. There were no acquisition related expenses for the three months ended April 2, 2016. Acquisition related expenses were
$9.2 million
for the
three months ended
April 4, 2015
. Acquisition related expenses are recorded in operating expenses as incurred.
2016 Acquisitions
Elco Purchase
On January 18, 2016, the Company purchased the remaining shares owned by the joint venture partner in its Elco Group B.V. (“Elco”) joint venture increasing the Company’s ownership from
55.0%
to
100.0%
. for
$19.6 million
. The Company consolidated the results of Elco into the Company's consolidated financial statements in the Climate Solutions segment.
2015 Acquisitions
PTS
On
January 30, 2015
, the Company acquired PTS for
$1,408.9 million
in cash through a combination of stock and asset purchases. PTS is a global leader in highly engineered power transmission products and solutions. The business manufactures, sells and services bearings, couplings, gearing, drive components and conveyor systems. PTS is included in the Power Transmission Solutions segment. The Company acquired PTS because management believes it diversifies the Company's end market exposure, provides complementary products, expands and balances the Company's product portfolio, and enhances its margin profile.
The acquisition of PTS was accounted for as a purchase in accordance with FASB Accounting Standards Codification ("ASC") Topic 805,
Business Combinations.
Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The fair values of identifiable intangible assets, which were primarily customer relationships, trade names, and technology, were based on valuations using the income approach. The excess of the purchase price over the estimated fair values of tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The goodwill is attributable to expected synergies and expected growth opportunities. Approximately
65%
of goodwill will be deductible for United States income tax purposes.
The purchase price allocation for PTS was as follows (in millions):
|
|
|
|
|
|
As of January 30, 2015
|
Current assets
|
$
|
22.5
|
|
Trade receivables
|
67.2
|
|
Inventories
|
108.8
|
|
Property, plant and equipment
|
184.4
|
|
Intangible assets
|
648.2
|
|
Goodwill
|
564.3
|
|
Total assets acquired
|
1,595.4
|
|
Accounts payable
|
57.2
|
|
Current liabilities assumed
|
32.3
|
|
Long-term liabilities assumed
|
97.0
|
|
Net assets acquired
|
$
|
1,408.9
|
|
The valuation of the net assets acquired of
$1,408.9 million
was classified as Level 3 in the valuation hierarchy (Note 14 of the Notes to the Condensed Consolidated Financial Statements for the definition of Level 3 inputs). The Company valued property, plant and equipment using both a market approach and a cost approach depending on the asset. Intangible assets were valued using the present value of projected future cash flows and significant assumptions included royalty rates, discount rates, customer attrition and obsolescence factors.
The components of Intangible Assets included as part of the PTS acquisition was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Weighted Average Amortization Period (Years)
|
|
Gross Value
|
Amortizable intangible assets
|
|
|
|
|
Customer Relationships
|
|
17.0
|
|
$
|
462.8
|
|
Technology
|
|
14.5
|
|
63.5
|
|
Intangible assets subject to amortization
|
|
16.7
|
|
526.3
|
|
Non-amortizable intangible assets
|
|
|
|
|
Trade Names
|
|
-
|
|
121.9
|
|
Intangible assets
|
|
|
|
$
|
648.2
|
|
Net sales from PTS were
$132.6 million
and
$106.8 million
for the three months ended April 2, 2016 and April 4, 2015, respectively. Operating income (loss) from PTS was
$12.3 million
and
($11.9) million
for the three months ended April 2, 2016 and April 4, 2015, respectively. Purchase accounting inventory adjustments and transaction costs of
$22.7
million were included in the PTS operating income for the three months ended April 4, 2015.
Pro Forma Consolidated Results for PTS Acquisition
The following supplemental pro forma financial information presents the financial results for the
three months ended
April 4, 2015
, as if the acquisition of PTS had occurred at the beginning of fiscal year 2015. The pro forma financial information includes, where applicable, adjustments for: (i) the estimated amortization of acquired intangible assets, (ii) estimated additional interest expense on acquisition related borrowings, and (iii) the income tax effect on the pro forma adjustments using an estimated effective tax rate. The pro forma financial information excludes, where applicable, adjustments for: (i) the estimated impact of inventory purchase accounting adjustments and (ii) the estimated closing costs on the acquisition and (iii) any estimated cost synergies or other effects of the integration of the acquisition. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the acquisition been completed as of the date indicated or the results that may be obtained in the future (in millions, except per share amounts):
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 4,
2015
|
|
Pro forma net sales
|
|
$
|
960.3
|
|
|
Pro forma net income attributable to the Company
|
|
38.1
|
|
|
|
|
|
|
Basic earnings per share as reported
|
|
$
|
0.81
|
|
|
Pro forma basic earnings per share
|
|
0.85
|
|
|
|
|
|
|
Diluted earnings per share as reported
|
|
$
|
0.81
|
|
|
Pro forma diluted earnings per share
|
|
0.85
|
|
|
4.
ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustments, hedging activities and pension and post retirement benefit adjustments are included in Equity in Accumulated Other Comprehensive Loss ("AOCI").
The changes in AOCI by component for the
three months ended
April 2, 2016
and
April 4, 2015
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 2, 2016
|
|
Hedging Activities
|
|
Pension and Post Retirement Benefit Adjustments
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Beginning balance
|
$
|
(47.5
|
)
|
|
$
|
(35.4
|
)
|
|
$
|
(172.1
|
)
|
|
$
|
(255.0
|
)
|
Other comprehensive income (loss) before reclassifications
|
3.6
|
|
|
—
|
|
|
25.3
|
|
|
28.9
|
|
Tax impact
|
(1.3
|
)
|
|
—
|
|
|
—
|
|
|
(1.3
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
13.1
|
|
|
0.9
|
|
|
—
|
|
|
14.0
|
|
Tax impact
|
(5.0
|
)
|
|
(0.2
|
)
|
|
—
|
|
|
(5.2
|
)
|
Net current period other comprehensive income (loss)
|
10.4
|
|
|
0.7
|
|
|
25.3
|
|
|
36.4
|
|
Purchase of subsidiary shares from noncontrolling interest
|
—
|
|
|
—
|
|
|
(2.7
|
)
|
|
(2.7
|
)
|
Ending balance
|
$
|
(37.1
|
)
|
|
$
|
(34.7
|
)
|
|
$
|
(149.5
|
)
|
|
$
|
(221.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 4, 2015
|
|
Hedging Activities
|
|
Pension Benefit Adjustments
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Beginning balance
|
$
|
(31.0
|
)
|
|
$
|
(39.5
|
)
|
|
$
|
(80.5
|
)
|
|
$
|
(151.0
|
)
|
Other comprehensive income (loss) before reclassifications
|
(6.3
|
)
|
|
—
|
|
|
(21.7
|
)
|
|
(28.0
|
)
|
Tax impact
|
2.4
|
|
|
—
|
|
|
—
|
|
|
2.4
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
6.0
|
|
|
1.2
|
|
|
—
|
|
|
7.2
|
|
Tax impact
|
(2.3
|
)
|
|
(0.4
|
)
|
|
—
|
|
|
(2.7
|
)
|
Net current period other comprehensive income (loss)
|
(0.2
|
)
|
|
0.8
|
|
|
(21.7
|
)
|
|
(21.1
|
)
|
Ending balance
|
$
|
(31.2
|
)
|
|
$
|
(38.7
|
)
|
|
$
|
(102.2
|
)
|
|
$
|
(172.1
|
)
|
The Condensed Consolidated Statements of Income line items affected by the hedging activities reclassified from accumulated other comprehensive loss in the tables above are disclosed in Note 13 of Notes to Condensed Consolidated Financial Statements.
The reclassification amounts for pension and post retirement benefit adjustments in the tables above are part of net periodic benefit costs recorded in Operating Expenses (see Note 8 of Notes to Condensed Consolidated Financial Statements).
5.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
As required, the Company performs an annual impairment test of goodwill as of the end of the October fiscal month or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting units below their carrying value.
The following information presents changes to goodwill during the
three months ended
April 2, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Commercial and Industrial Systems
|
|
Climate Solutions
|
|
Power Transmission Solutions
|
Balance as of January 2, 2016
|
$
|
1,465.6
|
|
|
$
|
547.7
|
|
|
$
|
342.8
|
|
|
$
|
575.1
|
|
Acquisition and valuation adjustments
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
Translation adjustments
|
7.1
|
|
|
2.5
|
|
|
0.3
|
|
|
4.3
|
|
Balance as of April 2, 2016
|
$
|
1,472.4
|
|
|
$
|
550.2
|
|
|
$
|
343.1
|
|
|
$
|
579.1
|
|
|
|
|
|
|
|
|
|
Cumulative goodwill impairment charges
|
$
|
275.7
|
|
|
$
|
244.8
|
|
|
$
|
7.7
|
|
|
$
|
23.2
|
|
Intangible Assets
Intangible assets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2, 2016
|
|
January 2, 2016
|
|
|
Weighted Average Amortization Period (Years)
|
|
Gross Value
|
|
Accumulated
Amortization
|
|
Gross Value
|
|
Accumulated
Amortization
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
15
|
|
$
|
715.2
|
|
|
$
|
173.6
|
|
|
$
|
709.0
|
|
|
$
|
161.4
|
|
Technology
|
|
11
|
|
191.8
|
|
|
97.5
|
|
|
191.1
|
|
|
92.9
|
|
Trademarks
|
|
12
|
|
32.5
|
|
|
22.6
|
|
|
32.1
|
|
|
21.8
|
|
Patent and engineering drawings
|
|
5
|
|
16.6
|
|
|
16.6
|
|
|
16.6
|
|
|
16.6
|
|
Non-compete agreements
|
|
5
|
|
8.5
|
|
|
8.2
|
|
|
8.5
|
|
|
8.1
|
|
|
|
|
|
964.6
|
|
|
318.5
|
|
|
957.3
|
|
|
300.8
|
|
Non-amortizable Trade Names
|
|
|
|
121.9
|
|
|
—
|
|
|
121.3
|
|
|
—
|
|
|
|
|
|
$
|
1,086.5
|
|
|
$
|
318.5
|
|
|
$
|
1,078.6
|
|
|
$
|
300.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded
for the
three months ended
April 2, 2016
and
April 4, 2015
was
$15.6 million
and
$14.3 million
, respectively. Amortization expense for 2016 is estimated to be
$62.1 million
.
6.
BUSINESS SEGMENTS
The following sets forth certain financial information attributable to the Company's reporting segments as of and for the
three months ended
April 2, 2016 and April 4, 2015 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Systems
|
|
Climate Solutions
|
|
Power Transmission Solutions
|
|
Eliminations
|
|
Total
|
As of and for Three Months Ended April 2, 2016
|
|
|
|
|
|
|
|
|
|
External sales
|
$
|
377.6
|
|
|
$
|
239.8
|
|
|
$
|
200.8
|
|
|
$
|
—
|
|
|
$
|
818.2
|
|
Intersegment sales
|
11.3
|
|
|
5.2
|
|
|
0.9
|
|
|
(17.4
|
)
|
|
—
|
|
Total sales
|
388.9
|
|
|
245.0
|
|
|
201.7
|
|
|
(17.4
|
)
|
|
818.2
|
|
Gross profit
|
93.6
|
|
|
56.2
|
|
|
67.6
|
|
|
—
|
|
|
217.4
|
|
Operating expenses
|
71.9
|
|
|
31.6
|
|
|
44.6
|
|
|
—
|
|
|
148.1
|
|
Income from operations
|
21.7
|
|
|
24.6
|
|
|
23.0
|
|
|
—
|
|
|
69.3
|
|
Depreciation and amortization
|
19.7
|
|
|
6.2
|
|
|
14.2
|
|
|
—
|
|
|
40.1
|
|
Capital expenditures
|
7.3
|
|
|
3.9
|
|
|
3.7
|
|
|
—
|
|
|
14.9
|
|
Identifiable assets
|
1,949.7
|
|
|
948.1
|
|
|
1,702.4
|
|
|
—
|
|
|
4,600.2
|
|
As of and for Three Months Ended April 4, 2015
|
|
|
|
|
|
|
|
|
|
External sales
|
$
|
456.4
|
|
|
$
|
280.4
|
|
|
174.9
|
|
|
$
|
—
|
|
|
$
|
911.7
|
|
Intersegment sales
|
23.9
|
|
|
7.1
|
|
|
1.1
|
|
|
(32.1
|
)
|
|
—
|
|
Total sales
|
480.3
|
|
|
287.5
|
|
|
176.0
|
|
|
(32.1
|
)
|
|
911.7
|
|
Gross profit
|
112.9
|
|
|
63.7
|
|
|
44.3
|
|
|
—
|
|
|
220.9
|
|
Operating expenses
|
79.6
|
|
|
30.3
|
|
|
47.4
|
|
|
—
|
|
|
157.3
|
|
Income from operations
|
33.3
|
|
|
33.4
|
|
|
(3.1
|
)
|
|
—
|
|
|
63.6
|
|
Depreciation and amortization
|
19.5
|
|
|
7.0
|
|
|
9.4
|
|
|
—
|
|
|
35.9
|
|
Capital expenditures
|
15.7
|
|
|
4.6
|
|
|
0.9
|
|
|
—
|
|
|
21.2
|
|
Identifiable assets
|
2,440.6
|
|
|
880.8
|
|
|
1,646.1
|
|
|
—
|
|
|
4,967.5
|
|
The Commercial and Industrial Systems segment produces medium and large electric motors, power generation products, high-performance drives and controls, and starters. Applications include general commercial and industrial equipment, commercial HVAC, power generation, and oil and gas.
The Climate Solutions segment produces small motors, controls and air moving solutions. Applications include residential and light commercial HVAC, commercial refrigeration and water heaters.
The Power Transmission Solutions segment produces power transmission gearing, hydraulic pump drives, large open gearing and specialty mechanical products. Applications include material handling, industrial equipment, energy and off-road equipment.
The Company evaluates performance based on the segment's income from operations. Corporate costs have been allocated to each segment based on the net sales of each segment. The reported external net sales of each segment are from external customers.
7.
DEBT AND BANK CREDIT FACILITIES
The Company’s indebtedness as of
April 2, 2016
and
January 2, 2016
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
April 2,
2016
|
|
January 2,
2016
|
Term facility
|
$
|
1,068.1
|
|
|
$
|
1,118.1
|
|
Senior notes
|
600.0
|
|
|
600.0
|
|
Multicurrency revolving facility
|
36.0
|
|
|
3.0
|
|
Other
|
15.1
|
|
|
15.5
|
|
Less: Debt issuance costs
|
(13.8
|
)
|
|
(14.7
|
)
|
|
1,705.4
|
|
|
1,721.9
|
|
Less: Current maturities
|
6.1
|
|
|
6.3
|
|
Non-current portion
|
$
|
1,699.3
|
|
|
$
|
1,715.6
|
|
The Credit Agreement
In connection with the PTS Acquisition, on January 30, 2015, the Company entered into a new Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent and the lenders named therein, providing for a (i)
5
-year unsecured term loan facility in the principal amount of
$1.25 billion
(the “Term Facility”) and (ii) a
5
-year unsecured multicurrency revolving facility in the principal amount of
$500.0 million
(the “Multicurrency Revolving Facility”) available for general corporate purposes.
The Term Facility was drawn in full on January 30, 2015 in connection with the closing of the PTS Acquisition. The loans under the Term Facility require quarterly amortization at a rate starting at
5.0%
per annum, increasing to
7.5%
per annum after two years and further increasing to
10.0%
per annum for the last two years of the Term Facility. At April 2, 2016 the Company had borrowings under the Multicurrency Revolving Facility in the amount of
$36.0 million
,
$34.6 million
of standby letters of credit issued under the facility, and
$429.4 million
of available borrowing capacity.
Borrowings under the Credit Agreement bear interest at floating rates based upon indices determined by the currency of the borrowing, plus an applicable margin determined by reference to the Company's consolidated funded debt to consolidated EBITDA ratio or at an alternative base rate. The weighted average interest rate on the Multicurrency Revolving Facility was
1.9%
for the three months ended April 2, 2016 and April 4, 2015. The weighted average interest rate on the Term Facility was
1.9%
for the three months ended April 2, 2016 and April 4, 2015. The Company pays a non-use fee on the aggregate unused amount of the Multicurrency Revolving Facility at a rate determined by reference to its consolidated funded debt to consolidated EBITDA ratio.
The Credit Agreement requires the Company prepay the loans under the Term Facility with 100% of the net cash proceeds received from specified asset sales and borrowed money indebtedness, subject to certain exceptions.
Senior Notes
At
April 2, 2016
, the Company had
$600.0 million
of senior notes (the “Notes”) outstanding. The Notes consist of (i)
$500.0 million
in senior notes (the “2011 Notes”) in a private placement which were issued in
seven
tranches with maturities from
seven
to
twelve
years and carry fixed interest rates and (ii)
$100.0 million
in senior notes (the “2007 Notes”) issued in 2007 with a floating interest rate based on a margin over the London Inter-Bank Offered Rate (“LIBOR”).
Details on the Notes at
April 2, 2016
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
Interest Rate
|
|
Maturity
|
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
|
|
|
$
|
600.0
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Interest rates vary as LIBOR varies. At April 2, 2016, the interest rate was 1.3%. At January 2, 2016, the interest rate was 1.1%
|
The Company has interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk (see also Note 13 of Notes to the Condensed Consolidated Financial Statements).
Financial Covenants
The Credit Agreement and the Notes require the Company to meet specified financial ratios and to satisfy certain financial condition tests.
Other Notes Payable
At April 2, 2016, other notes payable of approximately
$15.1 million
were outstanding with a weighted average interest rate of
2.7%
. At January 2, 2016, other notes payable of approximately
$15.5 million
were outstanding with a weighted average rate of
2.5%
.
Based on rates for instruments with comparable maturities and credit quality, which are classified as Level 2 inputs (see also Note 14 of Notes to the Condensed Consolidated Financial Statements), the approximate fair value of the Company's total debt was
$1,743.1 million
and
$1,758.2 million
as of April 2, 2016 and January 2, 2016, respectively.
8.
POST RETIREMENT PLANS
The Company’s net periodic benefit cost was comprised of the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 2,
2016
|
|
April 4,
2015
|
|
Service cost
|
$
|
2.1
|
|
|
$
|
0.7
|
|
|
Interest cost
|
2.4
|
|
|
4.3
|
|
|
Expected return on plan assets
|
(3.0
|
)
|
|
(2.2
|
)
|
|
Amortization of prior service cost and net actuarial loss
|
0.9
|
|
|
1.2
|
|
|
Net periodic benefit cost
|
$
|
2.4
|
|
|
$
|
4.0
|
|
|
The
estimated net actuarial loss
and
prior service cost
for post retirement plans that will be amortized from AOCI into net periodic benefit cost during the
2016 fiscal year
is
$3.1 million
and
$0.2 million
, respectively.
For the
three months ended
April 2, 2016
and
April 4, 2015
, the Company contributed
$1.1 million
and
$0.8 million
, respectively, to post retirement plans. The Company expects to make total contributions of
$4.6 million
in
2016
. The Company contributed a total of
$4.7 million
in fiscal
2015
. The assumptions used in the valuation of the Company’s post retirement plans and in the target investment allocation have remained the same as those disclosed in the Company’s
2015
Annual Report on Form 10-K filed on
March 2, 2016
.
Beginning in 2016, the Company changed the method used to estimate the service and interest cost components of the net periodic pension and other post retirement benefit costs. The new method uses the spot yield curve approach to estimate the service and interest costs by applying the specific spot rates along the yield curve used to determine the benefit obligations to relevant projected cash outflows. The change will not affect the measurement of the total benefit obligations as the change in service and interest costs is offset in the actuarial gains and losses recorded in other comprehensive income. The methodology of selecting a discount rate that matches each plan's cash flows to that of a theoretical bond portfolio yield curve will continue be used to value the benefit obligation at the end of each year. The Company changed to the new method to provide a more precise measure of interest and service costs by improving the correlation between the projected benefit cash flows and the discrete spot yield curve rates. The Company has accounted for this change as a change in estimate prospectively and is expected to result in a
$2.9 million
reduction in expense for fiscal 2016 as compared to the previous method.
9.
SHAREHOLDERS’ EQUITY
Common Stock
The Board of Directors has approved a repurchase program 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. There were
no
purchases under this program during the three months ended ending April 2, 2016.
There are approximately
2.3 million
shares of our common stock available for repurchase under this program.
Share-Based Compensation
The majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter.
The Company recognized approximately
$3.3 million
and
$3.0 million
in
share-based compensation expense
for the
three months ended
April 2, 2016
and
April 4, 2015
, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award. The
total excess income tax benefit recognized relating to share-based compensation
was immaterial for the
three months ended
April 2, 2016
and was approximately
$0.7 million
for the three months ended
April 4, 2015
.
As of
April 2, 2016
,
total unrecognized compensation cost related to share-based compensation awards
was approximately
$21.3 million
, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately
1.9
years.
Approximately
2.0 million
shares were available for future grant under the 2013 Equity Incentive Plan at
April 2, 2016
.
Options and Stock Appreciation Rights
The Company uses several forms of share-based incentive awards, including non-qualified stock options, incentive stock options, and stock settled stock appreciation rights (“SARs”). Options and SARs generally vest over
5
years and expire
10
years from the grant date. All grants are made at prices equal to the fair market value of the stock on the grant date. For the three months ended April 2, 2016 and April 4, 2015, expired and canceled shares were immaterial.
The table below presents share-based compensation activity for the
three months ended
April 2, 2016
and
April 4, 2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
April 2,
2016
|
|
April 4,
2015
|
Total intrinsic value of share-based incentive awards exercised
|
|
$
|
0.1
|
|
|
$
|
2.8
|
|
Cash received from stock option exercises
|
|
0.5
|
|
|
3.0
|
|
Income tax benefit from the exercise of stock options
|
|
0.1
|
|
|
1.1
|
|
Following is a summary of share-based incentive plan grant activity (options and SARs) for the
three months ended
April 2, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares Under Options and SARs
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (years)
|
|
Aggregate Intrinsic Value (in millions)
|
Exercisable at January 2, 2016
|
1,548,266
|
|
|
$
|
63.09
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(14,506
|
)
|
|
46.67
|
|
|
|
|
|
Forfeited
|
(1,933
|
)
|
|
75.75
|
|
|
|
|
|
Expired
|
(700
|
)
|
|
71.51
|
|
|
|
|
|
Outstanding at April 2, 2016
|
1,531,127
|
|
|
$
|
63.23
|
|
|
5.5
|
|
$
|
7.7
|
|
Exercisable at April 2, 2016
|
938,291
|
|
|
$
|
57.38
|
|
|
4.1
|
|
$
|
7.6
|
|
Compensation expense recognized related to Options and SARs was
$1.2 million
for the three months ended April 2, 2016.
As of April 2, 2016, there was
$9.8 million
of unrecognized compensation cost related to non-vested options and SARs that is expected to be recognized as a change to earnings over a weighted average period of
3.0 years
.
The amount of options expected to vest is materially consistent with those outstanding and not yet exercisable.
Restricted Stock Awards and Restricted Stock Units
Restricted stock awards ("RSA") and restricted stock units ("RSU") consist of shares or the rights to shares of the Company's stock. The awards are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other
transfer. As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, or death, disability or normal retirement of the grantee.
Following is a summary of RSA award activity for the
three months ended
April 2, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Fair Value at Grant Date
|
|
Weighted Average Remaining Contractual Term (years)
|
Unvested RSAs at January 2, 2016
|
|
14,400
|
|
|
$
|
78.15
|
|
|
0.4
|
Granted
|
|
—
|
|
|
—
|
|
|
|
Vested
|
|
—
|
|
|
—
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
Unvested RSAs April 2, 2016
|
|
14,400
|
|
|
$
|
78.15
|
|
|
0.1
|
RSAs vest on either the first (for RSAs granted in 2013 and later) or the third (for RSAs granted prior to 2013) anniversary of the grant date, provided the holder of the shares is continuously employed by or in the service of the Company until the vesting date. Compensation expense recognized related to the RSAs was
$0.3 million
for the
three months ended
April 2, 2016
.
As of April 2, 2016, there was
$0.1 million
of unrecognized compensation cost related to non-vested RSAs that is expected to be recognized as a charge to earnings over a weighted average period of
0.1 years
.
Following is a summary of RSU award activity for the
three months ended
April 2, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Fair Value at Grant Date
|
|
Weighted Average Remaining Contractual Term (years)
|
Unvested RSUs at January 2, 2016
|
|
268,655
|
|
|
$
|
72.91
|
|
|
1.8
|
Granted
|
|
—
|
|
|
—
|
|
|
|
Vested
|
|
(420
|
)
|
|
72.65
|
|
|
|
Forfeited
|
|
(4,215
|
)
|
|
71.52
|
|
|
|
Unvested RSUs at April 2, 2016
|
|
264,020
|
|
|
$
|
72.94
|
|
|
1.6
|
RSU shares vest on the third anniversary of the grant date, provided the holder of the shares is continuously employed by the Company until the vesting date. Compensation expense recognized related to the RSUs was
$1.3 million
for the
three months ended
April 2, 2016
.
As of April 2, 2016, there was
$8.6 million
of unrecognized compensation cost related to non-vested RSUs that is expected to be recognized as a charge to earnings over a weighted average period of
1.6 years
.
Performance Share Units
Performance share unit ("PSU") awards consist of shares or the rights to shares of the Company's stock which are awarded to employees of the Company. These shares are payable upon the determination that the Company achieved certain established performance targets and can range from
0%
to
200%
of the targeted payout based on the actual results. PSU's have a performance period of
3 years
. As set forth in the individual grant agreements, acceleration of vesting may occur under a change in control, death or disability. There are no voting rights with these instruments until vesting occurs and a share of stock is issued. Some of the PSU awards are valued using a Monte Carlo simulation method as of the grant date while others are valued using the closing market price as of the grant date depending on the performance criteria for the award.
Following is a summary of PSU award activity for the
three months ended
April 2, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Fair Value at Grant Date
|
|
Weighted Average Remaining Contractual Term (years)
|
Unvested PSUs at January 2, 2016
|
|
87,895
|
|
|
$
|
75.81
|
|
|
1.9
|
Granted
|
|
—
|
|
|
—
|
|
|
|
Vested
|
|
—
|
|
|
—
|
|
|
|
Forfeited
|
|
(235
|
)
|
|
87.85
|
|
|
|
Unvested PSUs April 2, 2016
|
|
87,660
|
|
|
$
|
75.78
|
|
|
1.7
|
Compensation expense for awards granted are recognized based on the targeted payout of
100.0%
, net of estimated forfeitures. Compensation expense recognized related to PSUs was
$0.5 million
for the
three months ended
April 2, 2016
. Total unrecognized compensation expense for all PSUs granted as of April 2, 2016 is estimated to be
$2.8 million
recognized as a charge to earnings over a weighted average period of
1.7 years
.
10.
INCOME TAXES
The effective tax rate for the
three months ended
April 2, 2016
was
23.0%
versus
26.0%
for the
three months ended
April 4, 2015
. The change in the effective tax rate for the three months ended April 2, 2016 was primarily driven by the mix of earnings. The lower effective rate as compared to the
35.0%
statutory Federal income tax rate is driven by lower foreign tax rates.
As of
April 2, 2016
and
January 2, 2016
, the Company had approximately
$8.8 million
and
$8.3 million
, respectively, of unrecognized tax benefits, all of which would impact the effective income tax rate if recognized. Potential interest and penalties related to unrecognized tax benefits are recorded in income tax expense.
With few exceptions, the Company is no longer subject to U.S. Federal and state/local income tax examinations by tax authorities for years prior to
2011
, and the Company is no longer subject to non-U.S. income tax examinations by tax authorities for years prior to
2009
.
11.
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 the anti-dilutive shares were
1.2 million
and
0.2 million
for the
three months ended
April 2, 2016
and
April 4, 2015
, respectively. The following table reconciles the basic and diluted shares used in EPS calculations for the
three months ended
April 2, 2016
and
April 4, 2015
(in millions):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 2,
2016
|
|
April 4,
2015
|
|
Denominator for basic EPS
|
44.7
|
|
|
44.7
|
|
|
Effect of dilutive securities
|
0.3
|
|
|
0.4
|
|
|
Denominator for diluted EPS
|
45.0
|
|
|
45.1
|
|
|
12.
CONTINGENCIES
One
of the Company’s subsidiaries that it acquired in
2008
is subject to numerous claims filed in various jurisdictions relating to certain sub-fractional motors that were primarily manufactured through
2005
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 condensed 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 months ended
April 2, 2016
and
April 4, 2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 2,
2016
|
|
April 4,
2015
|
|
Beginning balance
|
$
|
19.1
|
|
|
$
|
19.3
|
|
|
Less: Payments
|
(5.1
|
)
|
|
(4.7
|
)
|
|
Provisions
|
3.5
|
|
|
5.5
|
|
|
Acquisition
|
—
|
|
|
0.8
|
|
|
Ending balance
|
$
|
17.5
|
|
|
$
|
20.9
|
|
|
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
April 2, 2016
.
Cash flow hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive 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
April 2, 2016
, the Company had
$(7.2) million
, net of tax, of derivative losses on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings. At
January 2, 2016
, the Company had
$(7.4) 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
April 2, 2016
, the Company had the following currency forward contracts outstanding (with maturities extending through
December 2018
) to hedge forecasted foreign currency cash flows (in millions):
|
|
|
|
|
|
Notional
Amount (in U.S. Dollars)
|
Chinese Renminbi
|
$
|
210.0
|
|
Mexican Peso
|
251.4
|
|
Euro
|
37.8
|
|
Indian Rupee
|
48.8
|
|
Canadian Dollar
|
20.3
|
|
Australian Dollar
|
8.5
|
|
Japanese Yen
|
2.7
|
|
Thai Baht
|
4.3
|
|
As of
April 2, 2016
, the Company had the following commodity forward contracts outstanding (with maturities extending through
September 2017
) to hedge forecasted purchases of commodities (notional amounts expressed in terms of the dollar value of the hedged item (in millions):
|
|
|
|
|
|
Notional
Amount
|
Copper
|
$
|
57.4
|
|
Aluminum
|
3.3
|
|
As of
April 2, 2016
, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swap was
$100.0 million
(with maturity in
August 2017
).
Fair values of derivative instruments as of
April 2, 2016
and
January 2, 2016
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2, 2016
|
|
Prepaid
Expenses and Other Current Assets
|
|
Other
Noncurrent
Assets
|
|
Hedging
Obligations
(current)
|
|
Hedging
Obligations (non-current)
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7.0
|
|
Currency contracts
|
1.0
|
|
|
0.9
|
|
|
24.9
|
|
|
14.9
|
|
Commodity contracts
|
0.8
|
|
|
0.3
|
|
|
4.3
|
|
|
0.1
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
Currency contracts
|
0.7
|
|
|
—
|
|
|
1.9
|
|
|
—
|
|
Commodity contracts
|
2.9
|
|
|
—
|
|
|
3.0
|
|
|
—
|
|
Total Derivatives
|
$
|
5.4
|
|
|
$
|
1.2
|
|
|
$
|
34.1
|
|
|
$
|
22.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2016
|
|
Prepaid
Expenses and Other Current Assets
|
|
Other
Noncurrent
Assets
|
|
Hedging
Obligations
(current)
|
|
Hedging
Obligations (non-current)
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7.8
|
|
Currency contracts
|
0.7
|
|
|
0.4
|
|
|
29.9
|
|
|
19.5
|
|
Commodity contracts
|
0.1
|
|
|
—
|
|
|
8.7
|
|
|
—
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
Currency contracts
|
0.5
|
|
|
0.6
|
|
|
0.9
|
|
|
0.3
|
|
Commodity contracts
|
5.1
|
|
|
—
|
|
|
5.2
|
|
|
—
|
|
Total Derivatives
|
$
|
6.4
|
|
|
$
|
1.0
|
|
|
$
|
44.7
|
|
|
$
|
27.6
|
|
The effect of derivative instruments on the Condensed Consolidated Statements of Income and Comprehensive Income (pre-tax) was as follows (in millions):
Derivatives Designated as Cash Flow Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 2, 2016
|
|
April 4, 2015
|
|
Commodity
Forwards
|
|
Currency
Forwards
|
|
Interest
Rate
Swaps
|
|
Total
|
|
Commodity
Forwards
|
|
Currency
Forwards
|
|
Interest
Rate
Swaps
|
|
Total
|
Gain (Loss) recognized in Other Comprehensive Income (Loss)
|
$
|
1.4
|
|
|
$
|
2.6
|
|
|
$
|
(0.4
|
)
|
|
$
|
3.6
|
|
|
$
|
(4.6
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(6.3
|
)
|
Amounts reclassified from Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss recognized in Cost of Sales
|
(5.4
|
)
|
|
(6.5
|
)
|
|
—
|
|
|
(11.9
|
)
|
|
(3.1
|
)
|
|
(1.6
|
)
|
|
—
|
|
|
(4.7
|
)
|
Loss recognized in Interest Expense
|
—
|
|
|
—
|
|
|
(1.2
|
)
|
|
(1.2
|
)
|
|
—
|
|
|
—
|
|
|
(1.3
|
)
|
|
(1.3
|
)
|
The ineffective portion of hedging instruments recognized during the
three months ended
April 2, 2016
and
April 4, 2015
, respectively, was immaterial.
Derivatives Not Designated as Cash Flow Hedging Instruments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 2, 2016
|
|
April 4, 2015
|
|
Commodity Forwards
|
|
Currency Forwards
|
|
Commodity Forwards
|
|
Currency Forwards
|
Gain (Loss) recognized in Cost of Sales
|
$
|
—
|
|
|
$
|
0.9
|
|
|
$
|
—
|
|
|
$
|
(2.2
|
)
|
Gain recognized in Operating Expenses
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
The
net AOCI hedging component balance of
$(37.1) million
loss at
April 2, 2016
includes
$(20.8) 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
April 2, 2016
and
January 2, 2016
.
The following table presents the derivative assets and derivative liabilities presented on a net basis under enforceable master netting agreements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2, 2016
|
|
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
|
$
|
1.7
|
|
|
$
|
(1.3
|
)
|
|
$
|
0.4
|
|
Derivative Commodity Contracts
|
3.7
|
|
|
(3.7
|
)
|
|
—
|
|
Other Noncurrent Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
0.9
|
|
|
(0.5
|
)
|
|
0.4
|
|
Derivative Commodity Contracts
|
0.3
|
|
|
—
|
|
|
0.3
|
|
Hedging Obligations (Current):
|
|
|
|
|
|
Derivative Currency Contracts
|
26.8
|
|
|
(1.3
|
)
|
|
25.5
|
|
Derivative Commodity Contracts
|
7.3
|
|
|
(3.7
|
)
|
|
3.6
|
|
Hedging Obligations:
|
|
|
|
|
|
Derivative Currency Contracts
|
14.9
|
|
|
(0.5
|
)
|
|
14.4
|
|
Derivative Commodity Contracts
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2016
|
|
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
|
$
|
1.2
|
|
|
$
|
(1.2
|
)
|
|
$
|
—
|
|
Derivative Commodity Contracts
|
5.2
|
|
|
(5.2
|
)
|
|
—
|
|
Other Noncurrent Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
1.0
|
|
|
(1.0
|
)
|
|
—
|
|
Hedging Obligations (Current):
|
|
|
|
|
|
Derivative Currency Contracts
|
30.8
|
|
|
(1.2
|
)
|
|
29.6
|
|
Derivative Commodity Contracts
|
13.9
|
|
|
(5.2
|
)
|
|
8.7
|
|
Hedging Obligations:
|
|
|
|
|
|
Derivative Currency Contracts
|
19.8
|
|
|
(1.0
|
)
|
|
18.8
|
|
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 values of cash equivalents and term deposits approximate their carrying values as of
April 2, 2016
and
January 2, 2016
, due to the short period of time to maturity and are classified using Level 1 inputs. The fair values of trade receivables and accounts payable approximate the carrying values due to the short period of time to maturity. See Note 7 of Notes to Condensed Consolidated Financial Statements for disclosure of the approximate fair value of the Company's debt at
April 2, 2016
and
January 2, 2016
.
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
April 2, 2016
and
January 2, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
April 2,
2016
|
|
January 2,
2016
|
|
Classification
|
Assets:
|
|
|
|
|
|
Prepaid Expenses and Other Current Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
$
|
1.7
|
|
|
$
|
1.2
|
|
|
Level 2
|
Derivative Commodity Contracts
|
3.7
|
|
|
5.2
|
|
|
Level 2
|
Other Noncurrent Assets:
|
|
|
|
|
|
Assets Held in Rabbi Trust
|
5.2
|
|
|
5.2
|
|
|
Level 1
|
Derivative Currency Contracts
|
0.9
|
|
|
1.0
|
|
|
Level 2
|
Derivative Commodity Contracts
|
0.3
|
|
|
—
|
|
|
Level 2
|
Liabilities:
|
|
|
|
|
|
Hedging Obligations (current):
|
|
|
|
|
|
Derivative Currency Contracts
|
26.8
|
|
|
30.8
|
|
|
Level 2
|
Derivative Commodity Contracts
|
7.3
|
|
|
13.9
|
|
|
Level 2
|
Hedging Obligations:
|
|
|
|
|
|
Interest Rate Swap
|
7.0
|
|
|
7.8
|
|
|
Level 2
|
Derivative Currency Contracts
|
14.9
|
|
|
19.8
|
|
|
Level 2
|
Derivative Commodity Contracts
|
0.1
|
|
|
—
|
|
|
Level 2
|
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 1 inputs based on quoted market prices for identical 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
three months ended
April 2, 2016
, there were no transfers between classification Levels 1, 2 or 3.
15.
RESTRUCTURING AND RELATED COSTS
Beginning in 2014, the Company announced the closure of several of its manufacturing and warehouse facilities and consolidation into existing facilities to simplify manufacturing operations in its Commercial and Industrial Systems, Climate Solutions and Power Transmission Solutions segments. As a result of these closures, the Company incurred restructuring and restructuring-related costs. Restructuring costs includes employee termination and plant relocation costs. Restructuring-related costs includes costs directly associated with actions resulting from our simplification initiatives, such as asset write-downs or accelerated depreciation due to shortened useful lives in connection with site closures, discretionary employment benefit costs and other facility rationalization costs. Restructuring costs for employee termination expenses are generally required to be accrued over the employees remaining service period while restructuring costs for plant relocation costs and restructuring-related costs are generally required to be expensed as incurred.
The following is a reconciliation of provisions and payments for the restructuring projects for the
three months ended
April 2, 2016
and
April 4, 2015
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 2,
2016
|
|
April 4,
2015
|
|
Beginning balance
|
$
|
1.3
|
|
|
$
|
6.1
|
|
|
Provision
|
1.4
|
|
|
1.2
|
|
|
Less: Payments
|
1.7
|
|
|
3.3
|
|
|
Ending Balance
|
$
|
1.0
|
|
|
$
|
4.0
|
|
|
The following is a reconciliation of restructuring and restructuring-related costs for the restructuring projects for the three months ended April 2, 2016 and April 4, 2015, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 2, 2016
|
|
April 4, 2015
|
Restructuring Costs:
|
Cost of Sales
|
Operating Expenses
|
Total
|
|
Cost of Sales
|
Operating Expenses
|
Total
|
Employee termination expenses
|
$
|
0.2
|
|
$
|
—
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
$
|
—
|
|
$
|
0.2
|
|
Facility related costs
|
0.1
|
|
—
|
|
0.1
|
|
|
0.1
|
|
0.1
|
|
0.2
|
|
Other expenses
|
—
|
|
—
|
|
—
|
|
|
—
|
|
0.8
|
|
0.8
|
|
Total restructuring costs
|
$
|
0.3
|
|
$
|
—
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
$
|
0.9
|
|
$
|
1.2
|
|
Restructuring-related costs:
|
|
|
|
|
|
|
|
Other employment benefit expenses
|
$
|
0.5
|
|
$
|
0.6
|
|
$
|
1.1
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Total restructuring-related costs
|
$
|
0.5
|
|
$
|
0.6
|
|
$
|
1.1
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Total restructuring and restructuring-related costs
|
$
|
0.8
|
|
$
|
0.6
|
|
$
|
1.4
|
|
|
$
|
0.3
|
|
$
|
0.9
|
|
$
|
1.2
|
|
The Company's current restructuring activities are expected to conclude by the end of the first quarter of fiscal 2017. The Company expects to record aggregate future charges relating to previously announced restructuring activities of approximately
$14.3 million
which includes
$5.2 million
of employee termination expenses and
$9.1 million
of facility related and other costs.
16.
SUBSEQUENT EVENT
On April 28, 2016 the Company entered into an agreement to sell its Mastergear Worldwide ("Mastergear") business to Rotork PLC for
$25.0 million
. The sale is expected to close in the second quarter of 2016. Mastergear is included in the Company's Power Transmission Solutions segment.