REGAL BELOIT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017June 27, 2020
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying (a) condensed consolidated balance sheetCondensed Consolidated Balance Sheet of Regal Beloit Corporation (the “Company”) as of December 31, 2016,28, 2019, which has been derived from audited consolidated financial statements,Consolidated Financial Statements, and (b) unaudited interim condensed consolidated financial statementsCondensed Consolidated Financial Statements as of September 30, 2017June 27, 2020 and for the three and ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016,June 29, 2019, 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 of America ("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 statementsCondensed Consolidated Financial Statements be read in conjunction with the consolidated financial statementsConsolidated Financial Statements and the notesNotes thereto included in the Company’s 20162019 Annual Report on Form 10-K filed on March 1, 2017.February 26, 2020.
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 ninesix months ended September 30, 2017June 27, 2020 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 30, 2017.January 2, 2021.
The condensed consolidated financial statementsCondensed Consolidated Financial Statements have been prepared in accordance with GAAP, which requirerequires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statementsCondensed 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 31.31.
New
Recently Issued Accounting Standards
In August 2017,2018, the Financial Accounting Standards Board (the "FASB"("FASB") issued Accounting Standards Update ("ASU") 2017-12, Derivatives2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20). The ASU addresses modifications to the disclosure requirements for Defined Benefit Plans. Under ASU 2018-14 the disclosure requirements that can be removed are amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, amount and Hedging (Topic 815) - Targeted Improvementstiming of plan assets expected to Accounting for Hedging Activities. The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changesbe returned to both the designation and measurement guidance for qualifying hedging relationshipsemployer, and the presentationeffects of hedge results. Thea one-percentage-point change in assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic benefit costs and benefit obligations for postretirement health care benefits. Additional disclosures are required for the weighted -average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation for significant gains and losses related to the changes in the benefit obligation for the period. If a defined benefit pension plan has a projected benefit obligation greater than plan assets the projected benefit obligation and fair value of plan assets should be disclosed. This additional disclosure is also required when comparing the accumulated benefit obligation to plan assets. This ASU isbecomes effective for annual periods beginningfiscal years ending after December 15, 2018, and interim periods within those annual periods. The Company plans to adopt this pronouncement2020 on a retrospective basis for fiscalall years beginning December 30, 2018.presented. Early adoption is permitted. The Company is currently evaluating the effect of adopting this new accounting guidance, but does not anticipate a material impact ofon the pending adoption of this standard on its consolidated financial statements.statement disclosures.
In May 2017,December 2019, the FASB issued ASU 2017-09, Stock Compensation - Scope of Modification Accounting. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes.The ASU amendssimplifies the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changesincome taxes by removing certain exceptions to the terms or conditionsgeneral principles of share-based payment awardsTopic 740, and clarifies and amends existing guidance to which an entity would be required to apply modification accounting under Accounting Standards Codification ("ASC") 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. Theimprove consistent application. This ASU isbecomes effective for annual periodsfiscal years beginning after December 15, 2017, and interim periods within those annual periods. Early2020, with early adoption is permitted and prospective application is required.permitted. The Company plans to adoptis evaluating the effect of adopting this pronouncement for fiscal years beginning December 31, 2017 and will consider the impact that this standard may have on future share based award changes, should they occur.new accounting guidance.
Adopted Accounting Standards
In February 2017,March 2020, the FASB issued ASU 2017-07, Compensation - Retirement Benefits: Improving2020-04, Reference Rate Reform (Topic 848) Facilitation of the PresentationEffects of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Reference Rate Reform on Financial Reporting. The ASU amends currentprovides optional transition guidance, for a limited time, to require employerscompanies that present a measure of operating income in their statement of income to include onlyhave contracts, hedging relationships or other transactions that reference the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, areLondon Inter-bank Offered Rate (“LIBOR”) or another reference rate which is expected to be includeddiscontinued because of reference rate reform. The amendments provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions if certain criteria are met. The amendments in nonoperating expenses. Employersthis update are effective as of March 12, 2020 through December 31, 2022. The Company has adopted this standard prospectively and is applying those expedients that do not present a measureallow the Company to continue to assert that LIBOR-based interest remains probable, despite the sunset of operating income are required to includeLIBOR at the service cost componentend of 2021 in the same line item as other employee compensation costs. The ASU also stipulates that onlycurrent quarter with no impact on the Company's Condensed Consolidated Financial Statements.
service cost component of net benefit cost is eligible for capitalization. The changes, which respond to input from financial statement users, are intended to classify costs according to their natures, and better align the effect of defined benefit plans on operating income with International Financial Reporting Standards. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company plans to adopt this pronouncement for fiscal years beginning December 31, 2017. The ASU will impact the components of income before taxes but will not impact the amount of income before taxes.
In February 2016,August 2018, the FASB issued ASU 2016-02, Leases. 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The core principleASU focuses on updates around disclosures of Level 3 fair value measurements and it presents modifications to current disclosure requirements. The additional requirements under this 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 assetinclude disclosure for the lease term.changes in unrealized gains and losses included in other comprehensive income ("OCI") held at the end of the reporting period and the range and weighted average used to develop significant unobservable inputs. The recognition,ASU is also eliminating the disclosure requirement for the amount and reason for transfers between Level 1 and Level 2 fair value measurement, valuation processes for Level 3 measurements, and presentationpolicy for timing of expenses and cash flows arising from a lease by a lessee will dependtransfers between levels of the fair value hierarchy. In addition, the ASU modifies the disclosure requirements for investments that are valued based on net asset value. The amendments clarify that the lease classificationmeasurement uncertainty disclosure is to communicate information about the uncertainty in measurement as a finance or operating lease.of the reporting date. This new accounting guidanceASU is effective for fiscal years beginning after December 15, 2018 under a modified retrospective approach2019, including interim periods therein. The ASU requires prospective application for only the most recent interim or annual period presented in the year of adoption for changes in unrealized gains and early adoption is permitted.losses included in OCI, the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements, and the narrative description of measurement uncertainty. The Company has identified a six step process to successfully implementadopted the new Lease standard: Form a task force to become experts and takestandard as of December 29, 2019, the leadbeginning of fiscal 2020, with no material impact on understanding and implementing the new Lease standard; Update lease inventories; Decide on transition method; Review legal agreements and debt covenants; Consider IT needs; Discuss with stakeholders. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements and has commenced the first step of identifying a task force to take the lead in implementing the new Lease standard.Company's Condensed Consolidated Financial Statements.
In May 2014,June 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers2016-13, Financial Instruments Credit Losses (Topic 606), a comprehensive new revenue326). The focus of this ASU is to require businesses to adjust their allowance for lifetime expected credit losses rather than incurred losses. It is believed that the change will result in more timely recognition standard that supersedes current revenue recognition requirements.of such losses. This update requires the Company to recognize revenue at amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services at the time of transfer. The new standard will also require additional qualitative and quantitative disclosures about contracts with customers, significant judgments made in applying the revenue guidance, and assets recognized from the costs to obtain or fulfill a contract. ASU No. 2014-09 (and related updates) will becomeis effective for fiscal years beginning after December 15, 2019, including interim periods therein. The Company adopted the Company atstandard as of December 29, 2019, the beginning of its 2018 fiscal year. The standard allows the option of using either a full retrospective or a modified retrospective approach for the adoption of the standard. The Company plans to adopt this accounting standard update using2020, under the modified retrospective method which will resultapproach. The Company recorded a $3.4 million increase in the allowance for credit losses and a cumulative effect adjustment$2.7 million net decrease to retained earnings as of January 1, 2018.
The Company has identified a four step process to implementDecember 29, 2019 for the new revenue standard - data gathering, assessment, solution development, and solution implementation. The Company has substantially completed step one, data gathering and step two, assessment. The Company expects to be complete with step three, solution development and step four, solution implementation by the first quarter of 2018. The Company has not finalized the impact on reported revenues and earningscumulative effect of adopting the new standard, however, the Company does not expect the new revenue standard to have a material impact on the Company's pattern of revenue recognition, operating revenue, results of operations or financial position. The Company is in the process of drafting updated accounting policies, evaluating new disclosure requirements, and identifying and implementing appropriate changes to its business processes, systems and controls to support revenue recognition and disclosure under the new guidance.ASU 2016-13.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The new guidance includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. The provisions include:
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a. | recording all tax effects associated with stock-based compensation through the income statement, as opposed to recording certain amounts in other paid-in capital, which eliminates the requirement to calculate a "windfall pool"; |
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b. | allowing entities to withhold shares to satisfy the employer's statutory tax withholding requirement up to the highest marginal tax rate applicable to employees rather than the employer's minimum statutory rate, without requiring liability classification for the award; |
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c. | modifying the requirement to estimate the number of awards that will ultimately vest by providing an accounting policy election to either estimate the number of forfeitures or recognize forfeitures as they occur; |
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d. | changing certain presentation requirements in the statement of cash flows, including removing the requirement to present excess tax benefits as an inflow from financing activities and an outflow from operating activities, and requiring the cash paid to taxing authorities arising from withheld shares to be classified as a financing activity; and |
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e. | the assumed proceeds from applying the treasury stock method when computing earnings per share is amended to exclude the amount of excess tax benefits that previously would have been recognized in additional paid-in capital. |
The Company adopted the provisions of ASU 2016-09 on January 1, 2017. As a result of adopting the standard, the Changes in Operating Assets and Liabilities, Net of Acquisitions and Divestitures line in the Cash Flows From Operating Activities section on the Condensed Consolidated Statements of Cash Flows and the Shares Surrendered for Taxes line in the Cash Flows from Financing Activities section were both adjusted by $2.2 million for 2016. The presentation on the Condensed Consolidated Statements of Cash Flows for shares surrendered by employees to meet the minimum statutory withholding requirement and excess
tax benefits were applied retrospectively. In addition, the Excess Tax Expense from Share-Based Compensation lines in the Cash Flows from Operating Activities section and the Cash Flows from Financing Activities section were removed. The Company removed the excess tax benefits from the calculation of dilutive shares on a prospective basis. In addition, the Company began recording all tax effects associated with stock-based compensation through the income statement on a prospective basis. The Company did not have any awards classified as liability awards due to the statutory tax withholding requirements as of January 1, 2017. The Company made an accounting policy election to continue to estimate forfeitures as it had previously.
2. OTHER FINANCIAL INFORMATION
Inventories
The following table presents approximate percentage distribution between major classes of inventories was as follows:inventories:
|
| | | |
| | June 27, 2020 | | December 28, 2019 |
| Raw Material and Work in Process | 50% | | 48% |
| Finished Goods and Purchased Parts | 50% | | 52% |
|
| | | |
| | September 30,
2017 | | December 31,
2016 |
| Raw Material and Work in Process | 48% | | 45% |
| Finished Goods and Purchased Parts | 52% | | 55% |
Inventories are stated at cost, which is not in excess of market. Cost for approximately 53%51% of the Company's inventory at September 30, 2017,June 27, 2020, and 55%53% at December 31, 201628, 2019 was determined using the LIFOlast-in, first-out ("LIFO") method.
Property, Plant, and Equipment
Property,The following table presents property, plant, and equipment by major classification was as follows (dollars in millions):
|
| | | | | | | | | |
| | Useful Life in Years | | June 27, 2020 | | December 28, 2019 |
| Land and Improvements | | | $ | 74.0 |
| | $ | 80.3 |
|
| Buildings and Improvements | 3 - 50 | | 282.3 |
| | 305.2 |
|
| Machinery and Equipment | 3 - 15 | | 963.7 |
| | 988.2 |
|
| Property, Plant and Equipment | | | 1,320.0 |
| | 1,373.7 |
|
| Less: Accumulated Depreciation | | | (763.3 | ) | | (768.7 | ) |
| Net Property, Plant and Equipment | | | $ | 556.7 |
| | $ | 605.0 |
|
|
| | | | | | | | | |
| | Useful Life in Years | | September 30,
2017 | | December 31,
2016 |
| Land and Improvements | | | $ | 78.9 |
| | $ | 76.7 |
|
| Buildings and Improvements | 3 - 50 | | 294.8 |
| | 280.4 |
|
| Machinery and Equipment | 3 - 15 | | 979.2 |
| | 929.9 |
|
| Property, Plant and Equipment | | | 1,352.9 |
| | 1,287.0 |
|
| Less: Accumulated Depreciation | | | (719.2 | ) | | (659.5 | ) |
| Net Property, Plant and Equipment | | | $ | 633.7 |
| | $ | 627.5 |
|
OtherFor the three and six months ended June 27, 2020, the Company recognized $2.8 million and $4.3 million, respectively, of asset impairments related to the transfer of assets to held for sale. For the three and six months ended June 29, 2019, the Company recognized 0 and $5.1 million, respectively, of asset of impairments related to the transfer of assets to held for sale.
As partRevenue Recognition
The Company recognizes revenue from the sale of electric motors, electrical motion controls, power generation and power transmission products. The Company recognizes revenue when control of the purchase agreementproduct passes to the customer or the service is provided and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services.
Nature of Goods and Services
The Company sells products with multiple applications as well as customized products that have a single application such as those manufactured for its OEM’s customers. The Company reports in 4 operating segments: Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions. See Note 6 for a description of the 2008 acquisitiondifferent segments.
Nature of Performance Obligations
The Company’s contracts with customers typically consist of purchase orders, invoices and master supply agreements. At contract inception, across all 4 segments, the Company assesses the goods and services promised in its sales arrangements with customers and identifies a performance obligation for each promise to transfer to the customer a good or service that is distinct. The Company’s primary performance obligations consist of product sales and customized system/solutions.
Product:
The nature of products varies from segment to segment but across all segments, individual products are not integrated and represent separate performance obligations.
Customized system/solutions:
The Company provides customized system/solutions which consist of multiple products engineered and designed to specific customer specification, combined or integrated into one combined solution for a specific customer application. The goods are transferred to the customer and revenue is typically recognized over time as the performance obligations are satisfied.
When Performance Obligations are Satisfied
For performance obligations related to substantially all of the Wuxi Hwada Motor Co.,Company's product sales, the Company agreeddetermines that if certain relocation compensation was receivedthe customer obtains control upon shipment and recognizes revenue accordingly. Once a product has shipped, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from the asset. The Company considers control to have transferred upon shipment because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.
For a limited number of contracts, the Company transfers control and recognizes revenue over time. The Company satisfies its performance obligations over time and the Company uses a cost-based input method to measure progress. In applying the cost-based method of revenue recognition, the Company uses actual costs incurred to date relative to the total estimated costs for the relocationcontract in conjunction with the customer's commitment to perform in determining the amount of revenue and cost to recognize. The Company has determined that the cost-based input method provides a faithful depiction of the business,transfer of goods to the customer.
Payment Terms
The arrangement with the customer states the final terms of the sale, including the description, quantity, and price of each product or service purchased. Payment terms vary by customer but typically range from due upon delivery to 120 days after delivery. For contracts recognized at a point in time, revenue and billing typically occur simultaneously. The Company generally has payment terms with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider the time value of money. For contracts recognized using the cost-based input method, revenue recognized in excess of customer billings and billings in excess of revenue recognized are reviewed to determine the net asset or net liability position and classified as such on the Condensed Consolidated Balance Sheet.
Returns, Refunds, and Warranties
The Company’s contracts do not explicitly offer a “general” right of return to its customers (e.g. customers ordered excess products and return unused items). Warranties are classified as either assurance type or service type warranties. A warranty is considered an assurance type warranty if it provides the customer with assurance that the product will function as intended. A warranty that goes above and beyond ensuring basic functionality is considered a service type warranty. The Company generally only offers limited warranties which are considered to be assurance type warranties and are not accounted for as separate performance obligations. Customers generally receive repair or replacement on products that do not function to specification. Estimated product warranties are provided for specific product groups and the Company would payaccrues for estimated future warranty cost in the period in which the sale is recognized. The Company estimates the accrual requirements based on historical warranty loss experience and the cost is included in Cost of Sales.
Volume Rebates
In some cases, the nature of the Company’s contract may give rise to variable consideration including volume based sales incentives. If the customer achieves specific sales targets, they are entitled to rebates. The Company estimates the projected amount of the rebates that will be achieved and recognizes the estimated costs as a portionreduction to Net Sales as revenue is recognized.
Disaggregation of Revenue
The following tables presents the Company’s revenues disaggregated by geographical region (in millions):
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| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| June 27, 2020 | | Commercial Systems | | Industrial Systems | | Climate Solutions | | Power Transmission Solutions | | Total |
| North America | | $ | 112.5 |
| | $ | 69.2 |
| | $ | 158.8 |
|
| $ | 123.2 |
| | $ | 463.7 |
|
| Asia | | 28.9 |
| | 36.6 |
| | 1.0 |
| | 7.5 |
| | 74.0 |
|
| Europe | | 25.5 |
| | 14.7 |
| | 7.5 |
| | 22.2 |
| | 69.9 |
|
| Rest-of-World | | 9.0 |
| | 0.1 |
| | 10.9 |
| | 6.5 |
| | 26.5 |
|
| Total | | $ | 175.9 |
| | $ | 120.6 |
| | $ | 178.2 |
| | $ | 159.4 |
| | $ | 634.1 |
|
| | | | | | | | | | | |
| June 29, 2019 | | Commercial Systems | | Industrial Systems | | Climate Solutions | | Power Transmission Solutions | | Total |
| North America | | $ | 176.4 |
| | $ | 87.2 |
| | $ | 235.3 |
| | $ | 166.8 |
| | $ | 665.7 |
|
| Asia | | 28.8 |
| | 42.6 |
| | 10.8 |
| | 7.2 |
| | 89.4 |
|
| Europe | | 35.5 |
| | 14.1 |
| | 10.7 |
| | 22.5 |
| | 82.8 |
|
| Rest-of-World | | 5.6 |
| | 11.6 |
| | 11.1 |
| | 7.5 |
| | 35.8 |
|
| Total | | $ | 246.3 |
| | $ | 155.5 |
| | $ | 267.9 |
| | $ | 204.0 |
| | $ | 873.7 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended |
| June 27, 2020 | | Commercial Systems | | Industrial Systems | | Climate Solutions | | Power Transmission Solutions | | Total |
| North America | | $ | 255.9 |
| | $ | 142.1 |
| | $ | 343.4 |
| | $ | 284.1 |
| | $ | 1,025.5 |
|
| Asia | | 52.3 |
| | 73.4 |
| | 9.6 |
| | 12.4 |
| | 147.7 |
|
| Europe | | 54.0 |
| | 27.9 |
| | 15.1 |
| | 46.1 |
| | 143.1 |
|
| Rest-of-World | | 13.1 |
| | 6.8 |
| | 20.2 |
| | 11.9 |
| | 52.0 |
|
| Total | | $ | 375.3 |
| | $ | 250.2 |
| | $ | 388.3 |
| | $ | 354.5 |
| | $ | 1,368.3 |
|
| | | | | | | | | | | |
| June 29, 2019 | | Commercial Systems | | Industrial Systems | | Climate Solutions | | Power Transmission Solutions | | Total |
| North America | | $ | 352.1 |
| | $ | 159.2 |
| | $ | 466.7 |
| | $ | 339.5 |
| | $ | 1,317.5 |
|
| Asia | | 55.0 |
| | 84.1 |
| | 21.2 |
| | 14.6 |
| | 174.9 |
|
| Europe | | 69.7 |
| | 27.4 |
| | 22.2 |
| | 47.2 |
| | 166.5 |
|
| Rest-of-World | | 11.7 |
| | 22.9 |
| | 21.1 |
| | 12.9 |
| | 68.6 |
|
| Total | | $ | 488.5 |
| | $ | 293.6 |
| | $ | 531.2 |
| | $ | 414.2 |
| | $ | 1,727.5 |
|
3. HELD FOR SALE, DIVESTITURES AND ACQUISITIONS
Assets Held for Sale
The balances that compensationwere classified as Assets Held for Sale as of June 27, 2020 and December 28, 2019 were $5.3 million and $2.8 million, respectively, as the Company has both the intent and ability to sell these assets.
2019 Divestitures
Regal Drive Technologies
On January 7, 2019, the seller as partCompany sold its Regal Drive Technologies business and received proceeds of a deferred contingent purchase price. During$0.3 million in the first quarter of 2017,2020 and $119.9 million in 2019. Regal Drive Technologies was included in the Company's Commercial Systems segment. The Company recognized a final deferred contingent purchase price paymentgain on sale of $5.3$0.1 million was made under this agreement.in the first quarter of 2020 and $41.0 million in 2019 in the Condensed Consolidated Statements of Income.
Velvet Drive
3. ACQUISITIONS AND DIVESTITURES
There were no acquisition related expenses for the nine months ended September 30, 2017 and October 1, 2016.
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 purchase price of Elco is reflected as a component of equity.
2016 Divestitures
Mastergear Worldwide
On JuneApril 1, 2016,2019, the Company sold its Mastergear Worldwide ("Mastergear")Velvet Drive business to Rotork PLC for a purchase priceand received proceeds of $25.7$8.9 million. MastergearThis business was included in the Company's Power TransmissionTransmissions Solutions segment. Gains related to theThe Company recognized a loss on sale of $0.1$0.5 million and $11.6 million were recorded as a reduction to Operating Expenses in the Condensed Consolidated Statements of Income during fiscal 2017Income.
CapCom
On April 1, 2019, the Company sold its CapCom business and 2016, respectively.received proceeds of $9.9 million. This business was included in the Company's Climate Solutions segment. The Company recognized a gain on sale of $6.0 million in the Condensed Consolidated Statements of Income.
Venezuelan Subsidiary
Vapor Recovery
On July 7, 2016,1, 2019, the Company sold the assetsits Vapor Recovery business and received proceeds of its Venezuelan subsidiary, which had been$19.2 million. The business was included in the Company's Commercial and Industrial Systems segment, to a private company for $3.0 million. Of this amount, $1.0 million was received on the transaction closing date and $2.0 million is being received in 24 monthly installments.segment. The Company may receive additional amountsrecognized a loss on sale of $1.9 million in the future related to certain accounts receivableCondensed Consolidated Statements of this business. The gains will be recognized as the cash is received. The Company wrote down its investment and ceased operations of this subsidiary in 2015.Income.
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").AOCI, a component of Total Equity.
The following tables present changes in AOCI by component for the three and ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016 were as followsJune 29, 2019 (in millions):
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| | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| June 27, 2020 | | Hedging Activities | | Pension and Post Retirement Benefit Adjustments | | Foreign Currency Translation Adjustments | | Total |
| Beginning Balance | | $ | (23.6 | ) | | $ | (30.5 | ) | | $ | (272.0 | ) | | $ | (326.1 | ) |
| Other Comprehensive Income (Loss) before Reclassifications | | 14.9 |
| | (0.1 | ) | | 18.2 |
| | 33.0 |
|
| Tax Impact | | (3.6 | ) | | — |
| | — |
| | (3.6 | ) |
| Amounts Reclassified from Accumulated Other Comprehensive Income | | 2.1 |
| | 0.2 |
| | — |
| | 2.3 |
|
| Tax Impact | | (0.5 | ) | | (0.1 | ) | | — |
| | (0.6 | ) |
| Net Current Period Other Comprehensive Income | | 12.9 |
| | — |
| | 18.2 |
| | 31.1 |
|
| Ending Balance | | $ | (10.7 | ) | | $ | (30.5 | ) | | $ | (253.8 | ) | | $ | (295.0 | ) |
| | | | | | | | | |
| June 29, 2019 | | Hedging Activities | | Pension and Post Retirement Benefit Adjustments | | Foreign Currency Translation Adjustments | | Total |
| Beginning Balance | | $ | 9.0 |
| | $ | (38.0 | ) | | $ | (194.7 | ) | | $ | (223.7 | ) |
| Other Comprehensive Loss before Reclassifications | | (6.2 | ) | | — |
| | (3.9 | ) | | (10.1 | ) |
| Tax Impact | | 1.4 |
| | — |
| | — |
| | 1.4 |
|
| Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | (0.4 | ) | | 0.6 |
| | (0.6 | ) | | (0.4 | ) |
| Tax Impact | | 0.1 |
| | (0.1 | ) | | — |
| | — |
|
| Net Current Period Other Comprehensive Income (Loss) | | (5.1 | ) | | 0.5 |
| | (4.5 | ) | | (9.1 | ) |
| Ending Balance | | $ | 3.9 |
| | $ | (37.5 | ) | | $ | (199.2 | ) | | $ | (232.8 | ) |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2017 |
| | Hedging Activities | | Pension and Post Retirement Benefit Adjustments | | Foreign Currency Translation Adjustments | | Total |
| Beginning Balance | $ | (1.7 | ) | | $ | (35.5 | ) | | $ | (173.2 | ) | | $ | (210.4 | ) |
| Other Comprehensive Income (Loss) before Reclassifications | 14.3 |
| | (0.2 | ) | | 24.2 |
| | 38.3 |
|
| Tax Impact | (5.5 | ) | | — |
| | — |
| | (5.5 | ) |
| Amounts Reclassified from Accumulated Other Comprehensive Loss | (0.3 | ) | | 0.6 |
| | — |
| | 0.3 |
|
| Tax Impact | 0.2 |
| | (0.2 | ) | | — |
| | — |
|
| Net Current Period Other Comprehensive Income | 8.7 |
| | 0.2 |
| | 24.2 |
| | 33.1 |
|
| Ending Balance | $ | 7.0 |
| | $ | (35.3 | ) | | $ | (149.0 | ) | | $ | (177.3 | ) |
| | | | | | | | |
| | | | | | | | |
| | Three Months Ended |
| | October 1, 2016 |
| | Hedging Activities | | Pension and Post Retirement Benefit Adjustments | | Foreign Currency Translation Adjustments | | Total |
| Beginning Balance | $ | (40.6 | ) | | $ | (33.6 | ) | | $ | (181.6 | ) | | $ | (255.8 | ) |
| Other Comprehensive Income (Loss) before Reclassifications | (10.1 | ) | | 0.1 |
| | (2.6 | ) | | (12.6 | ) |
| Tax Impact | 3.8 |
| | — |
| | — |
| | 3.8 |
|
| Amounts Reclassified from Accumulated Other Comprehensive Loss | 12.3 |
| | 0.8 |
| | — |
| | 13.1 |
|
| Tax Impact | (4.6 | ) | | (0.3 | ) | | — |
| | (4.9 | ) |
| Net Current Period Other Comprehensive Income (Loss) | 1.4 |
| | 0.6 |
| | (2.6 | ) | | (0.6 | ) |
| Ending Balance | $ | (39.2 | ) | | $ | (33.0 | ) | | $ | (184.2 | ) | | $ | (256.4 | ) |
| | | | Nine Months Ended | | Six Months Ended |
| | September 30, 2017 | |
| | Hedging Activities | | Pension and Post Retirement Benefit Adjustments | | Foreign Currency Translation Adjustments | | Total | |
| June 27, 2020 | | | Hedging Activities | | Pension and Post Retirement Benefit Adjustments | | Foreign Currency Translation Adjustments | | Total |
| Beginning Balance | $ | (41.1 | ) | | $ | (36.0 | ) | | $ | (241.0 | ) | | $ | (318.1 | ) | | $ | 8.0 |
| | $ | (31.0 | ) | | $ | (214.8 | ) | | $ | (237.8 | ) |
| Other Comprehensive Income (Loss) before Reclassifications | 61.7 |
| | (0.5 | ) | | 92.0 |
| | 153.2 |
| | (24.1 | ) | | 0.3 |
| | (39.0 | ) | | (62.8 | ) |
| Tax Impact | (23.5 | ) | | — |
| | — |
| | (23.5 | ) | | 5.8 |
| | — |
| | — |
| | 5.8 |
|
| Amounts Reclassified from Accumulated Other Comprehensive Loss | 15.9 |
| | 1.8 |
| | — |
| | 17.7 |
| |
| Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | | (0.5 | ) | | 0.3 |
| | — |
| | (0.2 | ) |
| Tax Impact | | | 0.1 |
| | (0.1 | ) | | — |
| | — |
|
| Net Current Period Other Comprehensive Income (Loss) | | | (18.7 | ) | | 0.5 |
| | (39.0 | ) | | (57.2 | ) |
| Ending Balance | | | $ | (10.7 | ) | | $ | (30.5 | ) | | $ | (253.8 | ) | | $ | (295.0 | ) |
| | | | | | | | | | |
| June 29, 2019 | | | Hedging Activities | | Pension and Post Retirement Benefit Adjustments | | Foreign Currency Translation Adjustments | | Total |
| Beginning balance | | | $ | (5.4 | ) | | $ | (38.2 | ) | | $ | (207.8 | ) | | $ | (251.4 | ) |
| Other Comprehensive Income (Loss) before Reclassifications | | | 12.3 |
| | (0.2 | ) | | 7.0 |
| | 19.1 |
|
| Tax Impact | | | (3.0 | ) | | — |
| | — |
| | (3.0 | ) |
| Amounts Reclassified from Accumulated Other Comprehensive Income | | | — |
| | 1.1 |
| | 1.6 |
| | 2.7 |
|
| Tax Impact | (6.0 | ) | | (0.6 | ) | | — |
| | (6.6 | ) | | — |
| | (0.2 | ) | | — |
| | (0.2 | ) |
| Net Current Period Other Comprehensive Income | 48.1 |
| | 0.7 |
| | 92.0 |
| | 140.8 |
| | 9.3 |
| | 0.7 |
| | 8.6 |
| | 18.6 |
|
| Ending Balance | $ | 7.0 |
| | $ | (35.3 | ) | | $ | (149.0 | ) | | $ | (177.3 | ) | | $ | 3.9 |
| | $ | (37.5 | ) | | $ | (199.2 | ) | | $ | (232.8 | ) |
| | | | | | | | | |
| | | | | | | | | |
| | Nine Months Ended | |
| | October 1, 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 | (24.3 | ) | | 0.6 |
| | (9.4 | ) | | (33.1 | ) | |
| Tax Impact | 9.2 |
| | — |
| | — |
| | 9.2 |
| |
| Amounts Reclassified from Accumulated Other Comprehensive Loss | 37.7 |
| | 2.7 |
| | — |
| | 40.4 |
| |
| Tax Impact | (14.3 | ) | | (0.9 | ) | | — |
| | (15.2 | ) | |
| Net Current Period Other Comprehensive Income (Loss) | 8.3 |
| | 2.4 |
| | (9.4 | ) | | 1.3 |
| |
| Purchase of Subsidiary Shares from Noncontrolling Interest | — |
| | — |
| | (2.7 | ) | | (2.7 | ) | |
| Ending Balance | $ | (39.2 | ) | | $ | (33.0 | ) | | $ | (184.2 | ) | | $ | (256.4 | ) | |
The Condensed Consolidated Statements of Income line items affected by the hedging activities reclassified from accumulated other comprehensive lossAOCI in the tables above are disclosed in Note 13 of Notes to Condensed Consolidated Financial Statements.14.
The reclassification amounts for pension and post retirement benefit adjustments in the tables above are part of net periodic benefit costs recorded in OperatingOther (Income) Expenses, net (see also Note 8 of Notes to Condensed Consolidated Financial Statements)8).
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.
In the fourth quarter 2019, in conjunction with the Company's annual goodwill impairment test, the Company concluded that the excess fair value over carrying value for the global industrial motors, commercial air moving and power switch reporting units were less than 10 percent. In the second quarter 2020, the Company performed an interim impairment analysis for the global industrial motors reporting unit triggered by events primarily driven by the economic uncertainty caused by COVID-19. The excess fair value over carrying value continues to be less than 10 percent for the global industrial motors reporting unit.
The Company developed assumptions for the potential impact of COVID-19 given the uncertainty related to supply and demand disruptions on operating results for the global industrial motors reporting unit.
While the Company is committed to the strategic actions necessary to realize the long-term forecasted revenues and EBITDA margins a worsening economic outlook could result in future impairment charges.
A lack of recovery or further deterioration in market conditions, a sustained trend of weaker than expected financial performance or a lack of recovery or further decline in the Company's market capitalization, among other factors, as a result of the COVID-19 pandemic could result in an impairment charge in future periods which could have a material adverse effect on the Company's financial statements.
The global industrial motors reporting unit had goodwill of $122.5 million as of June 27, 2020.
The following informationtable presents changes to goodwill during the ninesix months ended September 30, 2017June 27, 2020 (in millions): |
| | | | | | | | | | | | | | | | | | | |
| | Total | | Commercial Systems | | Industrial Systems | | Climate Solutions | | Power Transmission Solutions |
| Balance as of December 28, 2019 | $ | 1,501.3 |
| | $ | 426.6 |
| | $ | 170.8 |
| | $ | 331.2 |
| | $ | 572.7 |
|
| Translation Adjustments | (3.0 | ) | | (4.3 | ) | | (0.1 | ) | | (1.5 | ) | | 2.9 |
|
| Balance as of June 27, 2020 | $ | 1,498.3 |
| | $ | 422.3 |
| | $ | 170.7 |
| | $ | 329.7 |
| | $ | 575.6 |
|
| | | | | | | | | | |
| Cumulative Goodwill Impairment Charges | $ | 285.2 |
| | $ | 183.2 |
| | $ | 61.6 |
| | $ | 17.2 |
| | $ | 23.2 |
|
|
| | | | | | | | | | | | | | | |
| | Total | | Commercial and Industrial Systems | | Climate Solutions | | Power Transmission Solutions |
| Balance as of December 31, 2016 | $ | 1,453.2 |
| | $ | 540.6 |
| | $ | 341.8 |
| | $ | 570.8 |
|
| Translation Adjustments | 22.0 |
| | 8.9 |
| | 1.1 |
| | 12.0 |
|
| Balance as of September 30, 2017 | $ | 1,475.2 |
| | $ | 549.5 |
| | $ | 342.9 |
| | $ | 582.8 |
|
| | | | | | | | |
| Cumulative Goodwill Impairment Charges | $ | 275.7 |
| | $ | 244.8 |
| | $ | 7.7 |
| | $ | 23.2 |
|
Intangible Assets
IntangibleThe following table presents intangible assets consisted of the following (in millions):
|
| | | | | | | | | | | | | | | | | | |
| | | | | June 27, 2020 | | December 28, 2019 |
| | | Weighted Average Amortization Period (Years) | | Gross Value | | Accumulated Amortization | | Gross Value | | Accumulated Amortization |
| Amortizable Intangible Assets: | | | | | | | | | | |
| Customer Relationships | | 17 | | $ | 691.9 |
| | $ | 321.4 |
| | $ | 692.1 |
| | $ | 302.4 |
|
| Technology | | 14 | | 143.7 |
| | 103.0 |
| | 144.0 |
| | 99.0 |
|
| Trademarks | | 14 | | 35.9 |
| | 25.8 |
| | 35.9 |
| | 25.0 |
|
| Patent and Engineering Drawings | | 5 | | 16.6 |
| | 16.6 |
| | 16.6 |
| | 16.6 |
|
| | | | | 888.1 |
| | 466.8 |
| | 888.6 |
| | 443.0 |
|
| Non-Amortizable Trade Name | | | | 121.6 |
| | — |
| | 121.6 |
| | — |
|
| | | | | $ | 1,009.7 |
| | $ | 466.8 |
| | $ | 1,010.2 |
| | $ | 443.0 |
|
| | | | | | | | | | | |
| Intangible Assets, Net of Amortization | | | | $ | 542.9 |
| | | | $ | 567.2 |
| | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | September 30, 2017 | | December 31, 2016 |
| | | Weighted Average Amortization Period (Years) | | Gross Value | | Accumulated Amortization | | Gross Value | | Accumulated Amortization |
| Amortizable Intangible Assets: | | | | | | | | | | |
| Customer Relationships | | 16 | | $ | 718.8 |
| | $ | 240.1 |
| | $ | 703.6 |
| | $ | 201.6 |
|
| Technology | | 13 | | 191.8 |
| | 118.0 |
| | 189.7 |
| | 109.5 |
|
| Trademarks | | 15 | | 32.7 |
| | 25.3 |
| | 31.8 |
| | 23.3 |
|
| Patent and Engineering Drawings | | 5 | | 16.6 |
| | 16.6 |
| | 16.6 |
| | 16.6 |
|
| Non-Compete Agreements | | 8 | | 8.4 |
| | 8.3 |
| | 8.3 |
| | 8.1 |
|
| | | | | 968.3 |
| | 408.3 |
| | 950.0 |
| | 359.1 |
|
| Non-Amortizable Trade Names | | | | 122.4 |
| | — |
| | 120.8 |
| | — |
|
| | | | | $ | 1,090.7 |
| | $ | 408.3 |
| | $ | 1,070.8 |
| | $ | 359.1 |
|
| | | | | | | | | | | |
In the second quarter 2020, the Company performed an interim impairment analysis on its indefinite-lived trade name associated with the PTS acquisition triggered by events primarily driven by the economic uncertainty caused by COVID-19. The Company concluded the trade name was not impaired.
Amortization expense recorded for the three and ninesix months ended September 30, 2017June 27, 2020 was $13.9$12.2 million and $41.9$24.4 million, respectively. Amortization expense recorded for the three and ninesix months ended October 1, 2016June 29, 2019 was $15.6$12.6 million and $47.0$25.4 million, respectively. Amortization expense for 2017fiscal year 2020 is estimated to be $55.9$47.3 million. Amortization expense does not include any impairment recognized during the respective periods. For the six months ended June 29, 2019, the Company recognized $4.9 million of customer relationships intangible asset impairments related to the transfer of assets to held for sale.
The following table presents future estimated annual amortization for intangible assets is as follows (in millions):
|
| | | | |
| Year | | Estimated Amortization |
| 2021 | | $ | 42.6 |
|
| 2022 | | 40.9 |
|
| 2023 | | 40.8 |
|
| 2024 | | 40.2 |
|
| 2025 | | 38.2 |
|
|
| | | | |
| Year | | Estimated Amortization |
| 2018 | | $ | 53.9 |
|
| 2019 | | 53.5 |
|
| 2020 | | 50.4 |
|
| 2021 | | 42.6 |
|
| 2022 | | 41.0 |
|
6. SEGMENT INFORMATION
6. BUSINESS SEGMENTS
The Company is comprised of 4 operating segments: Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions.
Commercial Systems segment produces fractional to approximately 5 horsepower AC and Industrial Systems produces mediumDC motors, electronic variable speed controls, fans, and large motors,blowers for commercial and industrial equipment, generator and custom drives and systems.applications. These products serve markets including commercial Heating, Ventilation,building ventilation and Air Conditioning ("HVAC"),HVAC, pool and spa, standbyirrigation, dewatering, agriculture, and critical powergeneral commercial equipment.
Industrial Systems segment produces integral motors, generators, alternators and switchgear for industrial applications, along with aftermarket parts and kits to support such products. These products serve markets including agriculture, marine, mining, oil and gas, systems.food and beverage, data centers, healthcare, prime and standby power, and general industrial equipment.
Climate Solutions segment produces small motors, electronic variable speed controls and air moving solutions serving markets including residential and light commercial HVAC, water heaters and commercial refrigeration.
Power Transmission Solutions manufactures,segment produces, sells and services belt and chain drives, helical and worm gearing, mounted and unmounted bearings, couplings, modular plastic belts, conveying chains and components, hydraulic pump drives, large open gearing and specialty mechanical products serving markets including beverage, bulk handling, metals, special machinery, energy, aerospace and general industrial.
The Company evaluates performance based on the segment's income from operations. Corporate costs have been allocated to each segment based on the net sales of each segment. The reported external net sales of each segment are from external customers.
The following sets forth certain financial information attributable to the Company's operating segments for the three and ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016June 29, 2019 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| June 27, 2020 | Commercial Systems | | Industrial Systems | | Climate Solutions | | Power Transmission Solutions | | Eliminations | | Total |
| External Sales | $ | 175.9 |
| | $ | 120.6 |
| | $ | 178.2 |
| | $ | 159.4 |
| | $ | — |
| | $ | 634.1 |
|
| Intersegment Sales | 16.9 |
| | 9.1 |
| | 3.9 |
| | 0.6 |
| | (30.5 | ) | | — |
|
| Total Sales | 192.8 |
| | 129.7 |
| | 182.1 |
| | 160.0 |
| | (30.5 | ) | | 634.1 |
|
| Gross Profit | 42.4 |
| | 24.9 |
| | 47.4 |
| | 55.6 |
| | — |
| | 170.3 |
|
| Operating Expenses | 34.2 |
| | 21.7 |
| | 26.6 |
| | 39.1 |
| | — |
| | 121.6 |
|
| Asset Impairments | 2.0 |
| | — |
| | 0.8 |
| | — |
| | — |
| | 2.8 |
|
| Income from Operations | 6.2 |
| | 3.2 |
| | 20.0 |
| | 16.5 |
| | — |
| | 45.9 |
|
| Depreciation and Amortization | 8.3 |
| | 6.0 |
| | 5.0 |
| | 14.0 |
| | — |
| | 33.3 |
|
| Capital Expenditures | 2.2 |
| | 2.3 |
| | 2.6 |
| | 2.4 |
| | — |
| | 9.5 |
|
| | | | | | | | | | | | |
| June 29, 2019 | | | | | | | | | | | |
| External Sales | $ | 246.3 |
| | $ | 155.5 |
| | $ | 267.9 |
| | $ | 204.0 |
| | $ | — |
| | $ | 873.7 |
|
| Intersegment Sales | 13.4 |
| | 10.4 |
| | 4.5 |
| | 6.7 |
| | (35.0 | ) | | — |
|
| Total Sales | 259.7 |
| | 165.9 |
| | 272.4 |
| | 210.7 |
| | (35.0 | ) | | 873.7 |
|
| Gross Profit | 65.3 |
| | 27.7 |
| | 74.8 |
| | 66.2 |
| | — |
| | 234.0 |
|
| Operating Expenses | 42.7 |
| | 29.0 |
| | 29.2 |
| | 41.3 |
| | — |
| | 142.2 |
|
| (Gain) Loss on Divestitures | 1.8 |
| | — |
| | (6.1 | ) | | 0.1 |
| | — |
| | (4.2 | ) |
| Income (Loss) from Operations | 20.8 |
| | (1.3 | ) | | 51.7 |
| | 24.8 |
| | — |
| | 96.0 |
|
| Depreciation and Amortization | 8.4 |
| | 5.6 |
| | 4.5 |
| | 13.7 |
| | — |
| | 32.2 |
|
| Capital Expenditures | 10.7 |
| | 7.5 |
| | 9.7 |
| | 8.1 |
| | — |
| | 36.0 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Commercial and Industrial Systems | | Climate Solutions | | Power Transmission Solutions | | Eliminations | | Total |
| Three Months Ended September 30, 2017 | | | | | | | | | |
| External Sales | $ | 408.0 |
| | $ | 256.0 |
| | $ | 192.9 |
| | $ | — |
| | $ | 856.9 |
|
| Intersegment Sales | 16.4 |
| | 5.0 |
| | 0.5 |
| | (21.9 | ) | | — |
|
| Total Sales | 424.4 |
| | 261.0 |
| | 193.4 |
| | (21.9 | ) | | 856.9 |
|
| Gross Profit | 98.0 |
| | 65.8 |
| | 63.2 |
| | — |
| | 227.0 |
|
| Operating Expenses | 68.4 |
| | 27.0 |
| | 37.6 |
| | — |
| | 133.0 |
|
| Income from Operations | 29.6 |
| | 38.8 |
| | 25.6 |
| | — |
| | 94.0 |
|
| Depreciation and Amortization | 15.2 |
| | 5.5 |
| | 13.6 |
| | — |
| | 34.3 |
|
| Capital Expenditures | 8.6 |
| | 3.1 |
| | 3.6 |
| | — |
| | 15.3 |
|
| Three Months Ended October 1, 2016 | | | | | | | | | |
| External Sales | $ | 389.4 |
| | $ | 250.5 |
| | $ | 169.7 |
| | $ | — |
| | $ | 809.6 |
|
| Intersegment Sales | 10.8 |
| | 5.7 |
| | 1.1 |
| | (17.6 | ) | | — |
|
| Total Sales | 400.2 |
| | 256.2 |
| | 170.8 |
| | (17.6 | ) | | 809.6 |
|
| Gross Profit | 105.4 |
| | 71.4 |
| | 54.9 |
| | — |
| | 231.7 |
|
| Operating Expenses | 69.2 |
| | 29.2 |
| | 43.5 |
| | — |
| | 141.9 |
|
| Income from Operations | 36.2 |
| | 42.2 |
| | 11.4 |
| | — |
| | 89.8 |
|
| Depreciation and Amortization | 17.7 |
| | 4.9 |
| | 15.0 |
| | — |
| | 37.6 |
|
| Capital Expenditures | 9.6 |
| | 2.6 |
| | 2.2 |
| | — |
| | 14.4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended |
| June 27, 2020 | Commercial Systems | | Industrial Systems | | Climate Solutions | | Power Transmission Solutions | | Eliminations | | Total |
| External Sales | $ | 375.3 |
| | $ | 250.2 |
| | $ | 388.3 |
| | $ | 354.5 |
| | $ | — |
| | $ | 1,368.3 |
|
| Intersegment Sales | 28.7 |
| | 15.8 |
| | 8.4 |
| | 1.3 |
| | (54.2 | ) | | — |
|
| Total Sales | 404.0 |
| | 266.0 |
| | 396.7 |
| | 355.8 |
| | (54.2 | ) | | 1,368.3 |
|
| Gross Profit | 93.1 |
| | 47.5 |
| | 106.8 |
| | 126.2 |
| | — |
| | 373.6 |
|
| Operating Expenses | 71.7 |
| | 44.6 |
| | 56.0 |
| | 81.2 |
| | — |
| | 253.5 |
|
| Gain on Divestiture of Businesses | (0.1 | ) | | — |
| | — |
| | — |
| | — |
| | (0.1 | ) |
| Asset Impairments | 2.8 |
| | 0.2 |
| | 1.3 |
| | — |
| | — |
| | 4.3 |
|
| Income from Operations | 18.7 |
| | 2.7 |
| | 49.5 |
| | 45.0 |
| | — |
| | 115.9 |
|
| Depreciation and Amortization | 16.6 |
| | 11.9 |
| | 9.7 |
| | 27.7 |
| | — |
| | 65.9 |
|
| Capital Expenditures | 5.3 |
| | 4.3 |
| | 6.2 |
| | 4.6 |
| | — |
| | 20.4 |
|
| | | | | | | | | | | | |
| June 29, 2019 | | | | | | | | | | | |
| External Sales | $ | 488.5 |
| | $ | 293.6 |
| | $ | 531.2 |
| | $ | 414.2 |
| | $ | — |
| | $ | 1,727.5 |
|
| Intersegment Sales | 23.9 |
| | 19.8 |
| | 9.0 |
| | 12.6 |
| | (65.3 | ) | | — |
|
| Total Sales | 512.4 |
| | 313.4 |
| | 540.2 |
| | 426.8 |
| | (65.3 | ) | | 1,727.5 |
|
| Gross Profit | 130.8 |
| | 51.6 |
| | 145.5 |
| | 140.7 |
| | — |
| | 468.6 |
|
| Operating Expenses | 85.0 |
| | 56.2 |
| | 59.7 |
| | 86.5 |
| | — |
| | 287.4 |
|
| (Gain) Loss on Divestiture of Businesses | (39.5 | ) | | 0.1 |
| | (6.1 | ) | | 0.1 |
| | — |
| | (45.4 | ) |
| Asset Impairments | 6.7 |
| | 0.9 |
| | 1.3 |
| | 1.1 |
| | — |
| | 10.0 |
|
| Income (Loss) from Operations | 78.6 |
| | (5.6 | ) | | 90.6 |
| | 53.0 |
| | — |
| | 216.6 |
|
| Depreciation and Amortization | 17.8 |
| | 11.7 |
| | 9.4 |
| | 27.6 |
| | — |
| | 66.5 |
|
| Capital Expenditures | 17.4 |
| | 13.9 |
| | 12.6 |
| | 12.3 |
| | — |
| | 56.2 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Commercial and Industrial Systems | | Climate Solutions | | Power Transmission Solutions | | Eliminations | | Total |
| Nine Months Ended September 30, 2017 | | | | | | | | | |
| External Sales | $ | 1,196.6 |
| | $ | 774.2 |
| | $ | 568.8 |
| | $ | — |
| | $ | 2,539.6 |
|
| Intersegment Sales | 52.2 |
| | 19.2 |
| | 3.4 |
| | (74.8 | ) | | — |
|
| Total Sales | 1,248.8 |
| | 793.4 |
| | 572.2 |
| | (74.8 | ) | | 2,539.6 |
|
| Gross Profit | 285.5 |
| | 194.8 |
| | 185.3 |
| | — |
| | 665.6 |
|
| Operating Expenses | 209.5 |
| | 84.6 |
| | 119.7 |
| | — |
| | 413.8 |
|
| Income from Operations | 76.0 |
| | 110.2 |
| | 65.6 |
| | — |
| | 251.8 |
|
| Depreciation and Amortization | 45.2 |
| | 16.6 |
| | 41.3 |
| | — |
| | 103.1 |
|
| Capital Expenditures | 30.3 |
| | 9.7 |
| | 9.0 |
| | — |
| | 49.0 |
|
| Nine Months Ended October 1, 2016 | | | | | | | | |
|
| External Sales | $ | 1,161.7 |
| | $ | 744.8 |
| | $ | 559.9 |
| | $ | — |
| | $ | 2,466.4 |
|
| Intersegment Sales | 33.5 |
| | 17.9 |
| | 3.1 |
| | (54.5 | ) | | — |
|
| Total Sales | 1,195.2 |
| | 762.7 |
| | 563.0 |
| | (54.5 | ) | | 2,466.4 |
|
| Gross Profit | 295.2 |
| | 192.3 |
| | 184.5 |
| | — |
| | 672.0 |
|
| Operating Expenses | 212.2 |
| | 89.4 |
| | 119.9 |
| | — |
| | 421.5 |
|
| Income from Operations | 83.0 |
| | 102.9 |
| | 64.6 |
| | — |
| | 250.5 |
|
| Depreciation and Amortization | 56.6 |
| | 17.6 |
| | 42.4 |
| | — |
| | 116.6 |
|
| Capital Expenditures | 26.5 |
| | 10.1 |
| | 9.5 |
| | — |
| | 46.1 |
|
The following table presents identifiable assets information attributable to the Company's operating segments as of September 30, 2017June 27, 2020 and December 31, 201628, 2019 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Commercial Systems | | Industrial Systems | | Climate Solutions | | Power Transmission Solutions | | Total |
| Identifiable Assets as of June 27, 2020 | $ | 1,208.5 |
| | $ | 801.9 |
| | $ | 861.8 |
| | $ | 1,535.9 |
| | $ | 4,408.1 |
|
| Identifiable Assets as of December 28, 2019 | $ | 1,198.5 |
| | $ | 802.8 |
| | $ | 878.3 |
| | $ | 1,551.1 |
| | $ | 4,430.7 |
|
|
| | | | | | | | | | | | | | | |
| | Commercial and Industrial Systems | | Climate Solutions | | Power Transmission Solutions | | Total |
| Identifiable Assets as of September 30, 2017 | $ | 1,905.7 |
| | $ | 934.8 |
| | $ | 1,623.5 |
| | $ | 4,464.0 |
|
| Identifiable Assets as of December 31, 2016 | $ | 1,872.7 |
| | $ | 881.8 |
| | $ | 1,604.0 |
| | $ | 4,358.5 |
|
7. DEBT AND BANK CREDIT FACILITIES
The following table presents the Company’s indebtedness as of September 30, 2017June 27, 2020 and December 31, 2016 was as follows28, 2019 (in millions):
|
| | | | | | | |
| | June 27, 2020 | | December 28, 2019 |
| Term Facility | $ | 720.0 |
| | $ | 720.0 |
|
| Senior Notes | 400.0 |
| | 400.0 |
|
| Multicurrency Revolving Facility | 5.3 |
| | 17.7 |
|
| Other | 4.5 |
| | 4.5 |
|
| Less: Debt Issuance Costs | (4.1 | ) | | (4.7 | ) |
| Total | 1,125.7 |
| | 1,137.5 |
|
| Less: Current Maturities | 0.6 |
| | 0.6 |
|
| Long-Term Debt | $ | 1,125.1 |
| | $ | 1,136.9 |
|
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Term Facility | $ | 686.1 |
| | $ | 798.1 |
|
| Senior Notes | 500.0 |
| | 600.0 |
|
| Multicurrency Revolving Facility | 29.6 |
| | 18.0 |
|
| Other | 5.1 |
| | 5.1 |
|
| Less: Debt Issuance costs | (6.4 | ) | | (9.7 | ) |
| | 1,214.4 |
| | 1,411.5 |
|
| Less: Current Maturities | 100.6 |
| | 100.6 |
|
| Non-Current Portion | $ | 1,113.8 |
| | $ | 1,310.9 |
|
The Credit Agreement
In connection with the Company's acquisition of the Power Transmission Solutions business of Emerson Electric Co. (the "PTS Acquisition"), on January 30, 2015,On August 27, 2018 the Company entered into aan Amended and Restated 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$900.0 million (the “Term Facility”) and (ii) a 5-year unsecured multicurrency revolving facility in the principal amount of $500.0 million (the “Multicurrency Revolving Facility”), including a $100.0$50.0 million letter of credit sub facility, available for general corporate purposes. Borrowings under the Credit Agreement bear interest at floating rates based upon indices determined by the currency of the borrowing, plus an applicable margin determined by reference to the Company's consolidated funded debt to consolidated EBITDA ratio or at an alternative base rate.
The Term Facility was drawn in full on January 30, 2015 in connectionAugust 27, 2018 with the closing ofproceeds settling the PTS Acquisition.amounts owed under prior borrowings. The loan under the Term Facility requires quarterly amortization at a rate starting at 5.0% per annum, increasing to 7.5% per annum after twothree years and further increasing to 10.0% per annum for the last two yearsyear of the Term Facility, unless previously prepaid. The weighted average interest rate on the Term Facility was 2.7% and 2.5% for the three and nine months ended September 30, 2017June 27, 2020 and 2.0%June 29, 2019 was 1.6% and 3.8%, respectively. The weighted average interest rate on the Term Facility for the three and ninesix months ended October 1, 2016.June 27, 2020 and June 29, 2019 was 2.9% and 3.8%, respectively. The Credit Agreement requires that 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.
At September 30, 2017,June 27, 2020, the Company had borrowings under the Multicurrency Revolving Facility in the amount of $29.6$5.3 million, $29.8$0.3 million of standby letters of credit issued under the facility, and $440.6$494.4 million of available borrowing capacity. TheFor the three months ended June 27, 2020 and June 29, 2019 under the Multicurrency Revolving Facility, the average daily balance in borrowings was $408.7 million and $82.5 million, respectively, and weighted average interest rate of 1.9% and 3.8%, respectively. For the six months ended June 27, 2020 and June 29, 2019 under the Multicurrency Revolving Facility, the average daily balance in borrowings was $97.8$258.8 million and $105.4$73.4 million, respectively, and the weighted average interest rate on the Multicurrency Revolving Facility was 2.7%of 2.4% and 2.5% for the three and nine months ended September 30, 2017,3.8%, respectively. The average daily balance in borrowings under the Multicurrency Revolving Facility was $29.7 million and $45.1 million and the weighted average interest rate on the Multicurrency Revolving Facility was 1.9% for the three and nine months ended October 1, 2016. The Company pays a non-use fee on the aggregate unused amount of the Multicurrency Revolving Facility at a rate determined by reference to its consolidated funded debt to consolidated EBITDA ratio.
Senior Notes
At September 30, 2017,June 27, 2020, the Company had $500.0$400.0 million of senior notes (the “Notes”) outstanding. The Notes consist of $500.0$400.0 million in senior notes (the “2011 Notes”) in a private placement which were issued in seven5 tranches with maturities from seventen to twelve years and carry fixed interest rates. As of September 30, 2017,June 27, 2020, $400.0 million of the 2011 Notes are included in Long-Term Debt and $100.0 million of the 2011 Notes are included in Current Maturities of Long-Term Debt on the Condensed Consolidated Balance Sheets.
The Company repaid the remaining $100.0 million of its 2007 Notes in August, 2017.
Detailsfollowing table presents details on the Notes at September 30, 2017 wereJune 27, 2020 (in millions):
|
| | | | | | | | |
| | | Principal | | Interest Rate | | Maturity |
| Fixed Rate Series 2011A | | $ | 230.0 |
| | 4.8 to 5.0% | | July 14, 2021 |
| Fixed Rate Series 2011A | | 170.0 |
| | 4.9 to 5.1% | | July 14, 2023 |
| | | $ | 400.0 |
| | | | |
|
| | | | | | | | |
| | | Principal | | Interest Rate | | Maturity |
| Fixed Rate Series 2011A | | 100.0 |
| | 4.1% | | July 14, 2018 |
| Fixed Rate Series 2011A | | 230.0 |
| | 4.8 to 5.0% | | July 14, 2021 |
| Fixed Rate Series 2011A | | 170.0 |
| | 4.9 to 5.1% | | July 14, 2023 |
| | | $ | 500.0 |
| | | | |
The Company had an interest rate swap agreement to manage fluctuations in cash flows resulting from interest rate risk (see also Note 13 of Notes to the Condensed Financial Statements). The remaining interest rate swap agreement terminated in August, 2017.
Compliance with Financial Covenants
The Credit Agreement and the Notes require the Company to meet specified financial ratios and to satisfy certain financial condition tests. The Company was in compliance with all financial covenants contained in the Notes and the Credit Agreement as of September 30, 2017.June 27, 2020.
Other Notes Payable
At September 30, 2017,June 27, 2020, other notes payable of approximately $5.1$4.5 million were outstanding with a weighted average interest rate of 5.2%4.9%. At December 31, 2016,28, 2019, other notes payable of approximately $5.1$4.5 million were outstanding with a weighted average rate of 5.6%5.0%.
Other Disclosures
Based on rates for instruments with comparable maturities and credit quality, which are classified as Level 2 inputs (see also Note 14 of Notes to the Condensed Consolidated Financial Statements)15), the approximate fair value of the Company's total debt was $1,244.2$1,146.4 million and $1,433.4$1,162.1 million as of September 30, 2017June 27, 2020 and December 31, 2016,28, 2019, respectively.
8. RETIREMENT AND POST RETIREMENT HEALTH CARE PLANS
The following table presents the Company’s net periodic benefit cost was comprised of the following(income) components (in millions):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 27, 2020 | | June 29, 2019 | | June 27, 2020 | | June 29, 2019 |
| Service Cost | $ | 0.3 |
| | $ | 1.5 |
| | $ | 1.1 |
| | $ | 3.1 |
|
| Interest Cost | 2.0 |
| | 2.7 |
| | 4.1 |
| | 5.4 |
|
| Expected Return on Plan Assets | (3.3 | ) | | (3.1 | ) | | (6.6 | ) | | (6.2 | ) |
| Amortization of Prior Service Cost and Net Actuarial Loss | 0.2 |
| | 0.6 |
| | 0.3 |
| | 1.1 |
|
| Net Periodic Benefit Cost (Income) | $ | (0.8 | ) | | $ | 1.7 |
| | $ | (1.1 | ) | | $ | 3.4 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 |
| Service Cost | $ | 1.8 |
| | $ | 2.0 |
| | $ | 5.4 |
| | $ | 6.1 |
|
| Interest Cost | 2.5 |
| | 2.6 |
| | 7.3 |
| | 7.7 |
|
| Expected Return on Plan Assets | (2.8 | ) | | (3.0 | ) | | (8.4 | ) | | (8.9 | ) |
| Amortization of Prior Service Cost and Net Actuarial Loss | 0.6 |
| | 0.8 |
| | 1.8 |
| | 2.7 |
|
| Net Periodic Benefit Cost | $ | 2.1 |
| | $ | 2.4 |
| | $ | 6.1 |
| | $ | 7.6 |
|
The estimated net actuarial loss and prior service cost (income) for post retirement plans that will be amortized from AOCI into net periodic benefit cost during the 20172020 fiscal year is $2.2 are $1.2 million and $0.2$(0.6) million, respectively.
For the three months ended September 30, 2017June 27, 2020 and October 1, 2016,June 29, 2019, the Company contributed $6.0$1.2 million and $6.8$4.1 million, respectively, to post retirement plans. For the ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016,June 29, 2019, the Company contributed $8.2$2.3 million and $9.0$4.9 million, respectively, to post retirement plans.respectively. The Company expects to make total contributions of $9.4$10.6 million in 2017.2020. The Company contributed a total of $10.4$10.8 million in fiscal 2016. 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 2016 Annual Report on Form 10-K filed on March 1, 2017.2019.
9.LEASES
9.
The Company leases certain manufacturing facilities, warehouses/distribution centers, office space, machinery, equipment, IT assets, and vehicles. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, it is considered to be or contain a lease. Right-of-use ("ROU") assets and lease liabilities are recognized at lease commencement date based on the present value of the future lease payments over the expected lease term.
As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The incremental borrowing rate is calculated based upon the sovereign treasury rate for the currency in which the lease liability is denominated when the Company takes possession of the leased asset, adjusted for various factors, such as term and internal credit spread. The ROU asset also includes any lease payments made and excludes lease incentive and initial direct costs incurred.
Leases entered into may include one or more options to renew. The renewal terms can extend the lease term from one to twenty-five years. The exercise of lease renewal options is at the Company's sole discretion. Renewal option periods are included in the measurement of the ROU asset and lease liability when the exercise is reasonably certain to occur. Some leases include options to terminate the lease upon breach of contract and are remeasured at that point in time.
The depreciable life of leased assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Some of the Company's lease agreements include rental payments adjusted periodically for inflation or are based on an index rate. These increases are reflected as variable lease payments and are included in the measurement of the ROU asset and lease liability. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating leases are included in the following asset and liability accounts on the Company's Condensed Consolidated Balance Sheet: Operating Lease Assets, Current Operating Lease Liabilities, and Noncurrent Operating Lease Liabilities. ROU assets and liabilities arising from finance leases are included in the following asset and liability accounts on the Company's Condensed Consolidated Balance Sheet: Net Property, Plant and Equipment, Current Maturities of Long-Term Debt, and Long-Term Debt.
Short-term and variable lease expenses were immaterial. The components of lease expense were as follows (in millions):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 27, 2020 | | June 29, 2019 | | June 27, 2020 | | June 29, 2019 |
| Operating Lease Cost | $ | 7.6 |
| | $ | 8.0 |
| | $ | 15.3 |
| | $ | 17.1 |
|
| Finance Lease Cost: | | | | | | | |
| Amortization of ROU Assets | 0.1 |
| | 0.1 |
| | 0.2 |
| | 0.2 |
|
| Interest on Lease Liabilities | — |
| | — |
| | 0.1 |
| | 0.1 |
|
| Total Lease Expense | $ | 7.7 |
| | 8.1 |
| | $ | 15.6 |
| | $ | 17.4 |
|
Maturity of lease liabilities as of June 27, 2020 were as follows (in millions):
|
| | | | | | | | | | | |
| | Operating Leases | | Finance Leases | | Total |
| Remainder of 2020 | $ | 13.9 |
| | $ | 0.2 |
| | $ | 14.1 |
|
| 2021 | 24.4 |
| | 0.5 |
| | 24.9 |
|
| 2022 | 17.7 |
| | 0.6 |
| | 18.3 |
|
| 2023 | 11.7 |
| | 0.6 |
| | 12.3 |
|
| 2024 | 7.7 |
| | 0.6 |
| | 8.3 |
|
| Thereafter | 21.7 |
| | 1.9 |
| | 23.6 |
|
| Total Lease Payments | $ | 97.1 |
| | $ | 4.4 |
| | $ | 101.5 |
|
| Less: Interest | (17.4 | ) | | (0.8 | ) | | (18.2 | ) |
| Present Value of Lease Liabilities | $ | 79.7 |
| | $ | 3.6 |
| | $ | 83.3 |
|
Other information related to leases was as follows (in millions):
|
| | | | | | | |
| | Six Months Ended |
| Supplemental Cash Flows Information | June 27, 2020 | | June 29, 2019 |
| Cash Paid for Amounts Included in the Measurement of Lease Liabilities: | | | |
| Operating Cash Flows from Operating Leases | $ | 14.8 |
| | $ | 14.3 |
|
| Operating Cash Flows from Finance Leases | 0.1 |
| | 0.1 |
|
| Financing Cash Flows from Finance Leases | 0.2 |
| | 0.2 |
|
| Leased Assets Obtained in Exchange for New Operating Lease Liabilities | 18.3 |
| | 8.5 |
|
| Weighted Average Remaining Lease Term | | | |
| Operating Leases | 5.2 years |
| | 4.6 years |
|
| Finance Leases | 7.8 years |
| | 8.8 years |
|
| Weighted Average Discount Rate | | | |
| Operating Leases | 8.3 | % | | 8.2 | % |
| Finance Leases | 5.9 | % | | 5.9 | % |
As of June 27, 2020, the Company has additional operating leases that have not yet commenced for future lease payments of $2.2 million. These operating leases will commence during fiscal year 2020 with lease terms of one to 7.5 years. The Company had no finance leases that had not yet commenced nor entered into during the quarter.
10. SHAREHOLDERS’ EQUITY
Repurchase of Common Stock
TheAt a meeting of the Board of Directors on July 24, 2018, the Company's Board of Directors approved the extinguishment of the existing 3.0 million share repurchase program that was approved in November 2013 and replaced it with an authorization to purchase up to $250.0 million of shares. At a meeting of the Board of Directors on October 25, 2019, the July 2018 repurchase authorization was extinguished and replaced with an authorization to purchase up to $250.0 million of shares. For the six months ended June 27, 2020, the Company acquiredrepurchased and retired 300,000315,072 shares of its common stock in the quarter ended September 30, 2017, at an average cost of $77.84$79.38 per share for a total cost of $23.4$25.0 million. TheFor the six months endedJune 29, 2019, the Company acquiredrepurchased and retired 576,804731,745 shares of its common stock in the nine months ended September 30, 2017, at an average cost of $78.12 per share$76.42 for a total cost of $45.1 million. The repurchases were made$55.9 million under the 3.0July 2018 program.
As of June 27, 2020, there was approximately $210.0 million share repurchase program approved by the Company’s Board of Directors in November, 2013. There are approximately 1.7 million shares of the Company's common stock available for repurchase under this program.the October 2019 program. The Company suspended the share repurchase program during the first quarter of 2020. The existing share repurchase program remains authorized by the Company's Board of Directors and the Company may resume share repurchases at any time.
Share-Based Compensation
The majority of the Company’s annual share-based incentive awards are madehad historically been granted in the second fiscal secondquarter. Beginning in fiscal 2020, the Company moved its granting of share-based incentive awards to the first fiscal quarter.
The Company recognized approximately $3.3$2.8 million and $3.0$3.1 million in share-based compensation expense for the three months ended September 30, 2017June 27, 2020 and October 1, 2016,June 29, 2019, respectively. Share-based compensation expense was $10.3$5.5 million and $10.1$7.4 million for the ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016,June 29, 2019, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Income for share-based compensation expense was $1.3$0.2 million and $1.1$0.6 million for the three months ended September 30, 2017June 27, 2020 and October 1, 2016,June 29, 2019, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Income for share-based compensation expense was $3.9$0.4 million and $3.8$1.5 million for the ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016,June 29, 2019, 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 30, 2017,June 27, 2020, total unrecognized compensation cost related to share-based compensation awards was approximately $27.9$24.0 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 2.22.0 years.
Approximately 1.01.8 million shares were available for future grant under the 20132018 Equity Incentive Plan at September 30, 2017.June 27, 2020.
Stock Appreciation Rights
The Company uses stock settled stock appreciation rights (“SARs”) as a form of share-based incentive awards. SARs are the right to receive stock in an amount equal to the appreciation in value of a share of stock over the base price per share thatshare. Shares granted prior to fiscal 2020 generally vest over 5five years andon the anniversary date while shares granted in fiscal 2020 generally vest over three years on the anniversary date of the grant date. Generally all grants 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 ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016,June 29, 2019, expired and canceled shares were immaterial.
The following table below presents share-based compensation activity for the ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016June 29, 2019 (in millions):
|
| | | | | | | | |
| | | June 27, 2020 | | June 29, 2019 |
| Total Intrinsic Value of Share-Based Incentive Awards Exercised | | $ | 3.1 |
| | $ | 3.9 |
|
| Cash Received from Stock Option Exercises | | 0.2 |
| | — |
|
| Income Tax Benefit from the Exercise of SARs | | 0.4 |
| | 0.2 |
|
| Total Fair Value of Share-Based Incentive Awards Vested | | 1.8 |
| | 5.3 |
|
|
| | | | | | | | |
| | | September 30,
2017 | | October 1,
2016 |
| Total intrinsic value of share-based incentive awards exercised | | $ | 3.7 |
| | $ | 1.1 |
|
| Cash received from stock option exercises | | 0.4 |
| | 0.5 |
|
| Income tax benefit (expense) from the exercise of stock options | | 0.7 |
| | (0.2 | ) |
| Total fair value of share-based incentive awards vested | | 4.3 |
| | 4.9 |
|
The following table presents assumptions used in the Company's Black-Scholes valuation related to grants for options and SARs were as follows:of SARs:
|
| | | | | | | |
| | 2020 | | 2019 |
| Per share weighted average fair value of grants | $ | 21.23 |
| | $ | 20.84 |
|
| Risk-free interest rate | 1.5 | % | | 2.4 | % |
| Expected life (years) | 7.0 |
| | 7.0 |
|
| Expected volatility | 25.2 | % | | 25.0 | % |
| Expected dividend yield | 1.4 | % | | 1.5 | % |
|
| | | | | | | |
| | 2017 | | 2016 |
| Per share weighted average fair value of grants | $ | 23.73 |
| | $ | 15.22 |
|
| Risk-free interest rate | 2.0 | % | | 1.4 | % |
| Expected life (years) | 7.0 |
| | 7.0 |
|
| Expected volatility | 27.9 | % | | 29.6 | % |
| Expected dividend yield | 1.2 | % | | 1.7 | % |
The average risk-free interest rate is based on the US Treasury security rates in effectrate as of the grant date. The expected dividend yield is based on the projected annual dividend as a percentage of the estimated market value of the Company's common stock as of the grant date. The Company estimated the expected volatility using a weighted average of daily historical volatility of the Company's stock price over the expected term of the award. The Company estimated the expected term using historical data adjusted for the estimated exercise dates of unexercised awards.data.
Following is
The following table presents a summary of share-based incentive plan grant activity (options and SARs) for the ninesix months ended September 30, 2017.June 27, 2020.
|
| | | | | | | | | | | | | |
| Number of Shares Under SARs | | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (in millions) |
| Outstanding as of December 28, 2019 | | 817,790 |
| | $ | 73.34 |
| | 6.0 | | $ | 9.9 |
|
| Granted | | 181,177 |
| | 88.25 |
| | | | |
| Exercised | | (189,749 | ) | | 69.29 |
| | | | |
| Forfeited | | (74,355 | ) | | 76.55 |
| | | | |
| Expired | | (3,058 | ) | | 66.98 |
| | | | |
| Outstanding as of June 27, 2020 | | 731,805 |
| | $ | 77.78 |
| | 7.0 | | $ | 5.5 |
|
| Exercisable as of June 27, 2020 | | 306,295 |
| | $ | 70.78 |
| | 4.4 | | $ | 4.1 |
|
|
| | | | | | | | | | | | |
| 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 December 31, 2016 | 1,610,499 |
| | $ | 63.16 |
| | | | |
| Granted | 195,207 |
| | 80.72 |
| | | | |
| Exercised | (160,771 | ) | | 53.18 |
| | | | |
| Forfeited | (10,239 | ) | | 65.13 |
| | | | |
| Expired | (9,485 | ) | | 64.21 |
| | | | |
| Outstanding at September 30, 2017 | 1,625,211 |
| | $ | 66.24 |
| | 5.9 | | $ | 20.9 |
|
| Exercisable at September 30, 2017 | 964,171 |
| | $ | 64.14 |
| | 4.1 | | $ | 14.3 |
|
Compensation expense recognized related to options and SARs was $3.2$1.5 million for the ninesix months ended September 30, 2017.June 27, 2020.
As of September 30, 2017,June 27, 2020, there was $11.0$7.4 million of unrecognized compensation cost related to non-vested options and SARs that is expected to be recognized as a charge to earnings over a weighted average period of 3.52.9 years.
The amountnumber of optionsSARs 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, death or death, disability or normal retirement of the grantee.disability.
Following isThe following table presents a summary of RSA award activity for the ninesix months ended September 30, 2017:June 27, 2020:
|
| | | | | | | | | |
| | | Shares | | Weighted Average Fair Value at Grant Date | | Weighted Average Remaining Contractual Term (Years) |
| Unvested RSAs as of December 28, 2019 | | 15,571 |
| | $ | 80.41 |
| | 0.4 |
| Granted | | 16,280 |
| | 70.05 |
| | |
| Vested | | (14,176 | ) | | 80.68 |
| | |
| Unvested RSAs as of June 27, 2020 | | 17,675 |
| | $ | 70.65 |
| | 0.8 |
|
| | | | | | | | | |
| | | Shares | | Weighted Average Fair Value at Grant Date | | Weighted Average Remaining Contractual Term (years) |
| Unvested RSAs at December 31, 2016 | | 19,593 |
| | $ | 57.43 |
| | 0.4 |
| Granted | | 13,941 |
| | 80.70 |
| | |
| Vested | | (19,593 | ) | | 57.43 |
| | |
| Unvested RSAs at September 30, 2017 | | 13,941 |
| | $ | 80.70 |
| | 0.6 |
RSAs vest on the first 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 $0.8$0.6 million for the ninesix months ended September 30, 2017.June 27, 2020.
As of September 30, 2017,June 27, 2020, there was $0.7$1.0 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 0.60.8 years.
Following isThe following table presents a summary of RSU award activity for the ninesix months ended September 30, 2017:June 27, 2020:
|
| | | | | | | | | |
| | | Shares | | Weighted Average Fair Value at Grant Date | | Weighted Average Remaining Contractual Term (Years) |
| Unvested RSUs as of December 28, 2019 | | 175,025 |
| | $ | 78.19 |
| | 1.9 |
| Granted | | 66,446 |
| | 85.65 |
| | |
| Vested | | (48,401 | ) | | 80.24 |
| | |
| Forfeited | | (20,685 | ) | | 77.98 |
| | |
| Unvested RSUs as of June 27, 2020 | | 172,385 |
| | $ | 80.52 |
| | 2.1 |
|
| | | | | | | | | | | |
| | | | | Shares | | Weighted Average Fair Value at Grant Date | | Weighted Average Remaining Contractual Term (years) |
| Unvested RSUs at December 31, 2016 | | 277,863 |
| | $ | 69.23 |
| | 1.7 |
| Granted | | 75,905 |
| | 80.48 |
| | |
| Vested | | (81,265 | ) | | 74.98 |
| | |
| Forfeited | | (7,508 | ) | | 67.92 |
| | |
| Unvested RSUs at September 30, 2017 | | 264,995 |
| | $ | 70.72 |
| | 1.9 |
RSUs granted prior to fiscal 2020 vest on the third anniversary of the grant date while RSUs granted in fiscal 2020 vest one third each year on the anniversary of the grant date, provided the holder of the RSUs is continuously employed by the Company until the vesting date. Compensation expense recognized related to the RSUs was $4.7$2.4 million for the ninesix months ended September 30, 2017.June 27, 2020.
As of September 30, 2017,June 27, 2020, there was $10.0$9.4 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 1.92.1 years.
Performance Share Units
Performance share unitunits ("PSU") awards consist of shares or the rights to shares of the Company's stock which are awarded to employees of the Company. These shares are payable upon the determination that the Company achieved certain established performance targets and can range from 0% to 200% of the targeted payout based on the actual results. PSUs have a performance period of 3 years.years and vest 3 years from the grant date. The PSUs have performance criteria based on a return on invested capital metric or they have performance criteria using returns relative to the Company's peer group. As set forth in the individual award agreements, acceleration of vesting may occur under a change in control, death or disability. There are no voting rights associated with PSUs until vesting occurs and a share of stock is issued. Some of the PSU awards are valued using a Monte Carlo simulation method as of the grant date while others are valued using the closing market price as of the grant date depending on the performance criteria for the award.
The assumptions used in the Company's Monte Carlo simulation related to grants for performance share units were as follows:
|
| | | | | |
| | 2020 | | 2019 |
| Risk-free interest rate | 1.4 | % | | 2.3 | % |
| Expected life (years) | 3.0 |
| | 3.0 |
|
| Expected volatility | 24.0 | % | | 25.0 | % |
| Expected dividend yield | 1.4 | % | | 1.5 | % |
|
| | | | | |
| | September 30,
2017 | | October 1,
2016 |
| Risk-free interest rate | 1.6 | % | | 0.9 | % |
| Expected life (years) | 3.0 |
| | 3.0 |
|
| Expected volatility | 24.0 | % | | 23.0 | % |
| Expected dividend yield | 1.3 | % | | 1.7 | % |
Following isThe following table presents a summary of PSU award activity for the ninesix months ended September 30, 2017:June 27, 2020:
|
| | | | | | | | | |
| | | Shares | | Weighted Average Fair Value at Grant Date | | Weighted Average Remaining Contractual Term (Years) |
| Unvested PSUs as of December 28, 2019 | | 90,565 |
| | $ | 86.35 |
| | 1.9 |
| Granted | | 42,677 |
| | 99.74 |
| | |
| Vested | | (7,430 | ) | | 95.30 |
| | |
| Forfeited | | (27,014 | ) | | 86.85 |
| | |
| Unvested PSUs as of June 27, 2020 | | 98,798 |
| | $ | 91.32 |
| | 2.2 |
|
| | | | | | | | | | | |
| | | | | Shares | | Weighted Average Fair Value at Grant Date | | Weighted Average Remaining Contractual Term (years) |
| Unvested PSUs at December 31, 2016 | | 133,340 |
| | $ | 65.28 |
| | 2.0 |
| Granted | | 48,666 |
| | 90.82 |
| | |
| Vested | | (110 | ) | | 83.74 |
| | |
| Forfeited | | (26,780 | ) | | 81.76 |
| | |
| Unvested PSUs at September 30, 2017 | | 155,116 |
| | $ | 70.43 |
| | 2.1 |
Compensation expense for awards granted is recognized based on the Monte Carlo simulationgrant issuance value or the expected payout ratio depending upon the performance criterion for the award, net of estimated forfeitures. Compensation expense recognized related to PSUs was $1.6$1.0 million for the ninesix months ended September 30, 2017.June 27, 2020. Total unrecognized compensation expense for all PSUs granted as of September 30, 2017June 27, 2020 is estimated to be $6.2 million which is expected to be recognized as a charge to earnings over a weighted average period of 2.12.2 years.
10. 11. INCOME TAXES
The effective tax rate for the three months endedSeptember 30, 2017 June 27, 2020 was 21.7%22.5% versus 20.2%19.6% for the three months endedOctober 1, 2016. June 29, 2019. The effective tax rate for the ninesix months ended September 30, 2017June 27, 2020 was 21.9%22.8% versus 22.7%19.6% for the ninesix months ended October 1, 2016.June 29, 2019. The change in the effective tax rate for the three and six months ended September 30, 2017June 27, 2020 was primarily driven by the mix of earnings and the favorable adjustments related to the finalization2019 expiration of the 2015 US federal income tax return. The change in the effective tax rate for the nine months ended September 30, 2017 was primarily driven byChina Hi-Technology incentives and the mix of earningsearnings. The Company is in the process of renewing these incentives and the favorable adjustments relatedimpact will be recorded once approval is received.
On March 27, 2020, the CARES Act (the "Act") was enacted in response to the 2016 finalizationCOVID-19 pandemic, and among other things, provides tax relief to businesses. The Act includes provisions relating to net operating loss carrybacks, modification to the net interest deduction limitations, deferral of certain payroll taxes, relief for retaining employees, and other provisions. The Company is evaluating the impact of the 2015 US federal income tax return, partially offset by the 2016 gain derivedAct and currently expects to benefit from the saledeferral of the Mastergear business. The lower effective rate as compared to the 35.0% statutory Federal income tax rate is driven by lower foreign tax rates.certain payroll taxes and relief for retaining employees.
As of September 30, 2017June 27, 2020 and December 31, 2016,28, 2019, the Company had approximately $10.4$6.9 million and $10.0 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 US Federal and state/local income tax examinations by tax authorities for years prior to 2012,2014, and the Company is no longer subject to non-US income tax examinations by tax authorities for years prior to 2010.2012.
12. EARNINGS PER SHARE
Diluted earnings per share is computedcalculated 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. OptionsThe amount of the anti-dilutive shares were 0.6 million and 0.5 million 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; thethree months ended June 27, 2020 and June 29, 2019, respectively. The amount of the anti-dilutive shares were 0.5 million and 1.40.5 million for the threesix months ended September 30, 2017June 27, 2020 and October 1, 2016, respectively, and 0.4 million and 1.3 million for the nine months ended September 30, 2017 and October 1, 2016,June 29, 2019, respectively. The following table reconciles the basic and diluted shares used in earnings per share calculations for the three and ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016June 29, 2019 (in millions):
|
| | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 27, 2020 | | June 29, 2019 | | June 27, 2020 | | June 29, 2019 |
| Denominator for Basic Earnings Per Share | 40.5 |
| | 42.6 |
| | 40.6 |
| | 42.7 |
|
| Effect of Dilutive Securities | 0.2 |
| | 0.4 |
| | 0.1 |
| | 0.3 |
|
| Denominator for Diluted Earnings Per Share | 40.7 |
| | 43.0 |
| | 40.7 |
| | 43.0 |
|
|
| | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 |
| Denominator for Basic Earnings Per Share | 44.4 |
| | 44.8 |
| | 44.7 |
| | 44.7 |
|
| Effect of Dilutive Securities | 0.4 |
| | 0.2 |
| | 0.3 |
| | 0.3 |
|
| Denominator for Diluted Earnings Per Share | 44.8 |
| | 45.0 |
| | 45.0 |
| | 45.0 |
|
12. 13. CONTINGENCIES
OneNaN of the Company's subsidiaries that it acquired in 2007 is subject to numerous claims filed in various jurisdictions relating to certain sub-fractional motors that were primarily manufactured through 2004 and that were included as components of residential and commercial ventilation units manufactured and sold in high volumes by a third party. These ventilation units are subject to product safety requirements and other potential regulation of their performance by government agencies such as the US Consumer Product Safety Commission (“CPSC”). The claims generally allege that the ventilation units were the cause of fires. The Company has recorded an estimated liability for incurred claims. Based on the current facts, the Company cannot assure that these claims, individually or in the aggregate, will not have a material adverse effect on its subsidiary's financial condition. The Company's subsidiary cannot reasonably predict the outcome of these claims, the nature or extent of any CPSC or other remedial actions, if any, that the Company's subsidiary may need to undertake with respect to motors that remain in the field, or the costs that may be incurred, some of which could be significant.
The Company is, from time to time, party to litigation and other legal or regulatory proceedings that arise in the normal course of its business operations and the outcomes of which are subject to significant uncertainty, including product warranty and liability claims, contract disputes and environmental, asbestos, intellectual property, employment and other litigation matters. The Company's products are used in a variety of industrial, commercial and residential applications that subject the Company to claims that the use of its products is alleged to have resulted in injury or other damage. Many of these matters will only be resolved when one or more future events occur or fail to occur. Management conducts regular reviews, including updates from legal counsel, to assess the need for accounting recognition or disclosure of these contingencies, and such assessment inherently involves an exercise in judgment. The Company accrues for exposures in amounts that it believes are adequate, and the Company does not believe that the outcome of any such lawsuit individually or collectively will have a material effect on the Company's financial position, 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 istable presents a reconciliation of the changes in accrued warranty costs for the three and ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016June 29, 2019 (in millions):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 27, 2020 | | June 29, 2019 | | June 27, 2020 | | June 29, 2019 |
| Beginning Balance | $ | 15.4 |
| | $ | 16.0 |
| | $ | 15.1 |
| | $ | 14.8 |
|
| Less: Payments | (3.3 | ) | | (1.0 | ) | | (6.9 | ) | | (4.7 | ) |
| Provisions | 3.5 |
| | 1.4 |
| | 7.5 |
| | 6.7 |
|
| Held for Sale | — |
| | — |
| | — |
| | (0.4 | ) |
| Translation Adjustments | 0.1 |
| | — |
| | — |
| | — |
|
| Ending Balance | $ | 15.7 |
| | $ | 16.4 |
| | $ | 15.7 |
| | $ | 16.4 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 |
| Beginning Balance | $ | 18.1 |
| | $ | 19.2 |
| | $ | 20.3 |
| | $ | 19.1 |
|
| Less: Payments | (4.7 | ) | | (5.9 | ) | | (17.5 | ) | | (15.6 | ) |
| Provisions | 4.0 |
| | 7.2 |
| | 14.5 |
| | 17.0 |
|
| Translation Adjustments | 0.1 |
| | — |
| | 0.2 |
| | — |
|
| Ending Balance | $ | 17.5 |
| | $ | 20.5 |
| | $ | 17.5 |
| | $ | 20.5 |
|
These liabilities are included in Other Accrued Expenses and Other Noncurrent Liabilities on the Condensed Consolidated Balance Sheet.
14. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed using derivative instruments are commodity price risk, currency exchange risk, and interest rate risk. Forward contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company's manufacturing process. Forward contracts on certain currencies are entered into to manage forecasted cash flows in certain foreign currencies. Interest rate swaps were previouslyare utilized to manage interest rate risk associated with the Company's floating rate borrowings.
The Company is exposed to credit losses in the event of non-performance by the counterparties to various financial agreements, including its commodity hedging transactions, foreign currency exchange contracts and interest rate swap agreements. Exposure to counterparty credit risk is managed by limiting counterparties to major international banks and financial institutions meeting established credit guidelines and continually monitoring their compliance with the credit guidelines. The Company does not obtain collateral or other security to support financial instruments subject to credit risk. The Company does not anticipate non-performance by its counterparties, but cannot provide assurances.
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the statement of financial position.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 30, 2017.June 27, 2020 or June 29, 2019.
Cash flow hedgesFlow Hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into the same line within the Condensed Consolidated Statement of Income as the earnings effect of the hedged item in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or changes in market value of derivatives not designated as hedges are recognized in current earnings.
At September 30, 2017June 27, 2020, the Company had $(0.1)$(6.0) 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 December 31, 2016,28, 2019, the Company had $(7.5)1.3 million, net of tax, of derivative lossesgains on closed hedge instruments in AOCI that was subsequently realized in earnings when the hedged items impacted earnings.
As of September 30, 2017,June 27, 2020, the Company had the following currency forward contracts outstanding (with maturities extending through October 2019)January 2022) to hedge forecasted foreign currency cash flows (in millions):
|
| | | |
| | Notional Amount (in US Dollars) |
| Chinese Renminbi | $ | 62.8 |
|
| Mexican Peso | 120.9 |
|
| Euro | 109.9 |
|
| Indian Rupee | 33.2 |
|
| Canadian Dollar | 3.8 |
|
| Australian Dollar | 17.1 |
|
| British Pound | 11.2 |
|
| Thai Baht | 5.7 |
|
|
| | | |
| | Notional Amount (in US Dollars) |
| Chinese Renminbi | $ | 218.0 |
|
| Mexican Peso | 164.9 |
|
| Euro | 63.8 |
|
| Indian Rupee | 37.7 |
|
| Canadian Dollar | 51.3 |
|
| Australian Dollar | 13.2 |
|
| Thai Baht | 7.1 |
|
| British Pound | 9.9 |
|
As of September 30, 2017,June 27, 2020, the Company had the following commodity forward contracts outstanding (with maturities extending through December 2018)June 2021) to hedge forecasted purchases of commodities (notional amounts expressed in terms of the dollar value of the hedged item (in millions)):
|
| | | |
| | Notional Amount |
| Copper | $ | 50.6 |
|
| Aluminum | 3.3 |
|
As of June 27, 2020, the total notional amount of the Company's receive variable/pay-fixed interest rate swap was $88.4 million with a maturity of April 12, 2021.
|
| | | |
| | Notional Amount |
| Copper | $ | 64.0 |
|
| Aluminum | 4.5 |
|
The Company entered into 2 forward starting non-amortizing swaps in June 2020, with a total notional amount of $250.0 million to convert variable rate debt to fixed rate debt. These swaps become effective July 2021 and will expire in July 2025.
FairThe following table presents the fair values of derivative instruments as of September 30, 2017June 27, 2020 and December 31, 2016 were28, 2019 (in millions):
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | Prepaid Expenses and Other Current Assets | | Other Noncurrent Assets | | Current Hedging Obligations
| | Noncurrent Hedging Obligations |
| Designated as hedging instruments: | | | | | | | |
| Currency contracts | $ | 9.5 |
| | $ | 4.9 |
| | $ | 8.2 |
| | $ | 0.6 |
|
| Commodity contracts | 6.5 |
| | 0.2 |
| | 0.3 |
| | — |
|
| Not designated as hedging instruments: | | | | | | | |
| Currency contracts | 3.4 |
| | — |
| | 0.6 |
| | — |
|
| Commodity contracts | 0.1 |
| | — |
| | — |
| | — |
|
| Total Derivatives | $ | 19.5 |
| | $ | 5.1 |
| | $ | 9.1 |
| | $ | 0.6 |
|
|
| | | | | | | | | | | | | | | |
| | June 27, 2020 |
| | Prepaid Expenses and Other Current Assets | | Other Noncurrent Assets | | Current Hedging Obligations | | Noncurrent Hedging Obligations |
| Designated as Hedging Instruments: | | | | | | | |
| Interest Rate Swap Contracts | $ | — |
| | $ | — |
| | $ | 1.8 |
| | $ | 1.0 |
|
| Currency Contracts | 11.6 |
| | 1.1 |
| | 11.7 |
| | 1.6 |
|
| Commodity Contracts | 5.0 |
| | — |
| | 0.2 |
| | — |
|
| Not Designated as Hedging Instruments: | | | | | | | |
| Currency Contracts | 1.4 |
| | — |
| | — |
| | — |
|
| Commodity Contracts | — |
| | — |
| | 0.1 |
| | — |
|
| Total Derivatives | $ | 18.0 |
| | $ | 1.1 |
| | $ | 13.8 |
| | $ | 2.6 |
|
|
| | | | | | | | | | | | | | | |
| | December 28, 2019 |
| | Prepaid Expenses and Other Current Assets | | Other Noncurrent Assets | | Current Hedging Obligations | | Noncurrent Hedging Obligations |
| Designated as Hedging Instruments: | | | | | | | |
| Interest Rate Swap Contracts | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1.0 |
|
| Currency Contracts | 8.8 |
| | 10.3 |
| | 3.0 |
| | 0.2 |
|
| Commodity Contracts | 2.6 |
| | 0.1 |
| | 0.2 |
| | — |
|
| Not Designated as Hedging Instruments: | | | | | | | |
| Currency Contracts | 0.1 |
| | — |
| | 0.1 |
| | — |
|
| Commodity Contracts | — |
| | — |
| | 0.1 |
| | — |
|
| Total Derivatives | $ | 11.5 |
| | $ | 10.4 |
| | $ | 3.4 |
| | $ | 1.2 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Prepaid Expenses and Other Current Assets | | Other Noncurrent Assets | | Current Hedging
Obligations
| | Noncurrent Hedging
Obligations |
| Designated as hedging instruments: | | | | | | | |
| Interest rate swap contracts | $ | — |
| | $ | — |
| | $ | 3.3 |
| | $ | — |
|
| Currency contracts | 1.3 |
| | 0.4 |
| | 39.7 |
| | 17.6 |
|
| Commodity contracts | 4.7 |
| | — |
| | — |
| | — |
|
| Not designated as hedging instruments: | | | | | | | |
| Currency contracts | 1.5 |
| | — |
| | 6.0 |
| | — |
|
| Commodity contracts | 2.6 |
| | — |
| | — |
| | — |
|
| Total Derivatives | $ | 10.1 |
| | $ | 0.4 |
| | $ | 49.0 |
| | $ | 17.6 |
|
The following table presents the effect of derivative instruments on the Condensed Consolidated Statements of Income and Condensed Consolidated Statement of Comprehensive Income (pre-tax) was as follows (in millions):
Derivatives Designated as Cash Flow Hedging Instruments
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2017 | | October 1, 2016 |
| | Commodity Forwards | | Currency Forwards | | Interest Rate Swaps | | Total | | Commodity Forwards | | Currency Forwards | | Interest Rate Swaps | | Total |
| Gain (Loss) recognized in Other Comprehensive Income (Loss) | $ | 6.8 |
| | $ | 7.0 |
| | $ | 0.5 |
| | $ | 14.3 |
| | $ | (0.5 | ) | | $ | (9.9 | ) | | $ | 0.3 |
| | $ | (10.1 | ) |
| Amounts reclassified from Other Comprehensive Income (Loss): | | | | | | | | |
|
| |
|
| |
|
| |
|
|
| Gain recognized in Net Sales | — |
| | 0.3 |
| | — |
| | 0.3 |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
|
| Gain (Loss) recognized in Cost of Sales | 2.8 |
| | (2.2 | ) | | — |
| | 0.6 |
| | (2.4 | ) | | (8.8 | ) | | — |
| | (11.2 | ) |
| Loss recognized in Interest Expense | — |
| | — |
| | (0.6 | ) | | (0.6 | ) | | — |
| | — |
| | (1.2 | ) | | (1.2 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | June 27, 2020 | | June 29, 2019 |
| | Commodity Forwards | | Currency Forwards | | Interest Rate Swaps | | Total | | Commodity Forwards | | Currency Forwards | | Interest Rate Swaps | | Total |
| Gain (Loss) Recognized in Other Comprehensive Income (Loss) | $ | 12.6 |
| | $ | 2.8 |
| | $ | (0.5 | ) | | $ | 14.9 |
| | $ | (7.5 | ) | | $ | 1.5 |
| | $ | (0.2 | ) | | $ | (6.2 | ) |
| Amounts Reclassified from Other Comprehensive Income (Loss): | | | | | | | | |
|
| |
|
| |
|
| |
|
|
| Gain (Loss) recognized in Net Sales | — |
| | (0.1 | ) | | — |
| | (0.1 | ) | | — |
| | 0.2 |
| | — |
| | 0.2 |
|
| Gain (Loss) Recognized in Cost of Sales | (0.9 | ) | | 0.3 |
| | — |
| | (0.6 | ) | | (1.4 | ) | | 2.2 |
| | — |
| | 0.8 |
|
Loss Recognized in Operating Expenses
| — |
| | (1.6 | ) | | — |
| | (1.6 | ) | | — |
| | (1.1 | ) | | — |
| | (1.1 | ) |
| Gain Recognized in Interest Expense | — |
| | — |
| | 0.2 |
| | 0.2 |
| | — |
| | — |
| | 0.5 |
| | 0.5 |
|
| | | | | | | | | | | | | | | | |
| Six Months Ended |
| June 27, 2020 | | June 29, 2019 |
| Commodity Forwards | | Currency Forwards | | Interest Rate Swaps | | Total | | Commodity Forwards | | Currency Forwards | | Interest Rate Swaps | | Total |
| Gain (Loss) Recognized in Other Comprehensive Income (Loss) | $ | (0.7 | ) | | $ | (22.3 | ) | | $ | (1.1 | ) | | $ | (24.1 | ) | | $ | 0.6 |
| | $ | 11.7 |
| | $ | — |
| | $ | 12.3 |
|
| Amounts Reclassified from Other Comprehensive Income (Loss): |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Gain Recognized in Net Sales | — |
| | — |
| | — |
| | — |
| | — |
| | 0.2 |
| | — |
| | 0.2 |
|
| Gain (Loss) Recognized in Cost of Sales | (2.0 | ) | | 2.8 |
| | — |
| | 0.8 |
| | (3.6 | ) | | 1.8 |
| | — |
| | (1.8 | ) |
| Gain (Loss) Recognized in Operating Expenses | — |
| | (0.9 | ) | | — |
| | (0.9 | ) | | — |
| | 0.4 |
| | — |
| | 0.4 |
|
| Gain Recognized in Interest Expense | — |
| | — |
| | 0.6 |
| | 0.6 |
| | — |
| | — |
| | 1.2 |
| | 1.2 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, 2017 | | October 1, 2016 |
| | Commodity Forwards | | Currency Forwards | | Interest Rate Swaps | | Total | | Commodity Forwards | | Currency Forwards | | Interest Rate Swaps | | Total |
| Gain (Loss) recognized in Other Comprehensive Income (Loss) | $ | 11.3 |
| | $ | 49.9 |
| | $ | 0.5 |
| | $ | 61.7 |
| | $ | 1.6 |
| | $ | (25.5 | ) | | $ | (0.4 | ) | | $ | (24.3 | ) |
| Amounts reclassified from Other Comprehensive Income (Loss): | | | | | | |
|
| |
|
| |
|
| |
|
| | |
| Gain recognized in Net Sales | — |
| | 0.7 |
| | — |
| | 0.7 |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
|
| Gain (Loss) recognized in Cost of Sales | 7.5 |
| | (21.3 | ) | | — |
| | (13.8 | ) | | (12.1 | ) | | (22.0 | ) | | — |
| | (34.1 | ) |
| Loss recognized in Interest Expense | — |
| | — |
| | (2.8 | ) | | (2.8 | ) | | — |
| | — |
| | (3.7 | ) | | (3.7 | ) |
The ineffective portion of hedging instruments recognized during the three and nine months ended September 30, 2017 and October 1, 2016, respectively, was immaterial.
Derivatives Not Designated as Cash Flow Hedging Instruments (in millions):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | June 27, 2020 | | June 29, 2019 |
| | Commodity Forwards | | Currency Forwards | | Commodity Forwards | | Currency Forwards |
| Gain (Loss) recognized in Cost of Sales | $ | 0.1 |
| | $ | — |
| | $ | (0.1 | ) | | $ | — |
|
| Gain (Loss) recognized in Operating Expenses | $ | — |
| | $ | 2.1 |
| | $ | — |
| | $ | (0.1 | ) |
| | | | | | | | |
| | Six Months Ended |
| | June 27, 2020 | | June 29, 2019 |
| | Commodity Forwards | | Currency Forwards | | Commodity Forwards | | Currency Forwards |
| Gain recognized in Cost of Sales | $ | — |
| | $ | — |
| | $ | 0.1 |
| | $ | — |
|
| Loss recognized in Operating Expenses | — |
| | (1.3 | ) | | — |
| | (0.5 | ) |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2017 | | October 1, 2016 |
| | Commodity Forwards | | Currency Forwards | | Commodity Forwards | | Currency Forwards |
| Gain (Loss) recognized in Cost of Sales | $ | (0.8 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
| Gain (Loss) recognized in Operating Expenses | — |
| | 2.9 |
| | — |
| | — |
|
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, 2017 | | October 1, 2016 |
| | Commodity Forwards | | Currency Forwards | | Commodity Forwards | | Currency Forwards |
| Gain (Loss) recognized in Cost of Sales | $ | (0.6 | ) | | $ | — |
| | $ | 0.2 |
| | $ | — |
|
| Gain (Loss) recognized in Operating Expenses | — |
| | 10.6 |
| | — |
| | (0.7 | ) |
The net AOCI hedging component balance of$7.0 a $(10.7) million gain loss at September 30, 2017June 27, 2020 includes $6.5$(3.5) million of net current deferred gainsloss expected to be realized in the next twelve months.months. The gain/loss reclassified from AOCI into earnings on such derivatives will be recognized in the same period in which the related item affects earnings.
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 30, 2017June 27, 2020 and December 31, 2016.28, 2019.
The following table presents the derivative assets and derivative liabilities presented on a net basis under enforceable master netting agreements (in millions):
| | | | September 30, 2017 | June 27, 2020 |
| | 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 | 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 | $ | 12.9 |
| | $ | (5.4 | ) | | $ | 7.5 |
| $ | 13.0 |
| | $ | (3.8 | ) | | $ | 9.2 |
|
| Derivative Commodity Contracts | 6.6 |
| | (0.3 | ) | | 6.3 |
| 5.0 |
| | (0.3 | ) | | 4.7 |
|
| Other Noncurrent Assets: | | | | | | | | | | |
| Derivative Currency Contracts | 4.9 |
| | (0.5 | ) | | 4.4 |
| 1.1 |
| | (0.3 | ) | | 0.8 |
|
| Derivative Commodity Contracts | 0.2 |
| | — |
| | 0.2 |
| |
| Current Hedging Obligations: | | | | | | | | | | |
| Derivative Currency Contracts | 8.8 |
| | (5.4 | ) | | 3.4 |
| 11.7 |
| | (3.8 | ) | | 7.9 |
|
| Derivative Commodity Contracts | 0.3 |
| | (0.3 | ) | | — |
| 0.3 |
| | (0.3 | ) | | — |
|
| Noncurrent Hedging Obligations: | | | | | | | | | | |
| Derivative Currency Contracts | 0.6 |
| | (0.5 | ) | | 0.1 |
| 1.6 |
| | (0.3 | ) | | 1.3 |
|
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
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 short-term deposits approximate their carrying values as of September 30, 2017June 27, 2020 and December 31, 2016,28, 2019, 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 September 30, 2017June 27, 2020 and December 31, 2016.28, 2019.
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 30, 2017June 27, 2020 and December 31, 201628, 2019 (in millions):
|
| | | | | | | | | |
| | June 27, 2020 | | December 28, 2019 | | Classification |
| Assets: | | | | | |
| Prepaid Expenses and Other Current Assets: | | | | | |
| Derivative Currency Contracts | $ | 13.0 |
| | $ | 8.9 |
| | Level 2 |
| Derivative Commodity Contracts | 5.0 |
| | 2.6 |
| | Level 2 |
| Other Noncurrent Assets: | | | | | |
| Assets Held in Rabbi Trust | 6.1 |
| | 6.1 |
| | Level 1 |
| Derivative Currency Contracts | 1.1 |
| | 10.3 |
| | Level 2 |
| Derivative Commodity Contracts | — |
| | 0.1 |
| | Level 2 |
| Liabilities: | | | | | |
| Current Hedging Obligations: | | | | | |
| Interest Rate Swap | 1.8 |
| | — |
| | Level 2 |
| Derivative Currency Contracts | 11.7 |
| | 3.1 |
| | Level 2 |
| Derivative Commodity Contracts | 0.3 |
| | 0.3 |
| | Level 2 |
| Noncurrent Hedging Obligations: | | | | | |
| Interest Rate Swap | 1.0 |
| | 1.0 |
| | Level 2 |
| Derivative Currency Contracts | 1.6 |
| | 0.2 |
| | Level 2 |
|
| | | | | | | | | |
| | September 30,
2017 | | December 31,
2016 | | Classification |
| Assets: | | | | | |
| Prepaid Expenses and Other Current Assets: | | | | | |
| Derivative Currency Contracts | $ | 12.9 |
| | $ | 2.8 |
| | Level 2 |
| Derivative Commodity Contracts | 6.6 |
| | 7.3 |
| | Level 2 |
| Other Noncurrent Assets: | | | | | |
| Assets Held in Rabbi Trust | 5.6 |
| | 5.4 |
| | Level 1 |
| Derivative Currency Contracts | 4.9 |
| | 0.4 |
| | Level 2 |
| Derivative Commodity Contracts | 0.2 |
| | — |
| | Level 2 |
| Liabilities: | | | | | |
| Current Hedging Obligations: | | | | | |
| Interest Rate Swap | — |
| | 3.3 |
| | Level 2 |
| Derivative Currency Contracts | 8.8 |
| | 45.7 |
| | Level 2 |
| Derivative Commodity Contracts | 0.3 |
| | — |
| | Level 2 |
| Noncurrent Hedging Obligations: | | | | | |
| Derivative Currency Contracts | 0.6 |
| | 17.6 |
| | Level 2 |
Level 1 fair value measurements for assets held in a Rabbi Trust are unadjusted quoted prices.
Level 2 fair value measurements for derivative assets and liabilities are measured using quoted prices in active markets for similar assets and liabilities. Interest rate swaps are valued based on the discounted cash flows for the LIBOR forward yield curve for a swap with similar contractual terms. Foreign currency forwards are valued based on exchange rates quoted by domestic and foreign banks for similar instruments. Commodity forwards are valued based on observable market transactions of forward commodity prices.
During the nine months ended September 30, 2017, there were no transfers between classification Levels 1, 2 or 3.
16. RESTRUCTURING AND RELATED COSTSACTIVITIES
The Company incurred restructuring and restructuring related costs on projects beginning in 2014.during fiscal 2020 and 2019. Restructuring costs include employee termination and plant relocation costs. Restructuring-related costs include costs directly associated with actions resulting from ourthe Company's 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 istable presents a reconciliation of provisions and payments for the restructuring projects for the three and ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016June 29, 2019 (in millions):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 27, 2020 | | June 29, 2019 | | June 27, 2020 | | June 29, 2019 |
| Beginning Balance | $ | 2.4 |
| | $ | — |
| | $ | 0.9 |
| | $ | 0.2 |
|
| Provision | 7.8 |
| | 3.6 |
| | 12.9 |
| | 5.9 |
|
| Less: Payments | 7.3 |
| | 2.9 |
| | 10.9 |
| | 5.4 |
|
| Ending Balance | $ | 2.9 |
|
| $ | 0.7 |
| | $ | 2.9 |
| | $ | 0.7 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 |
| Beginning Balance | $ | 1.3 |
| | $ | 1.4 |
| | $ | 0.6 |
| | $ | 1.3 |
|
| Provision | 1.6 |
| | 1.1 |
| | 12.5 |
| | 4.2 |
|
| Less: Payments | (1.7 | ) | | (1.3 | ) | | (11.9 | ) | | (4.3 | ) |
| Ending Balance | $ | 1.2 |
| | $ | 1.2 |
| | $ | 1.2 |
| | $ | 1.2 |
|
The following istable presents a reconciliation of restructuring and restructuring-related costs for the restructuring projects for the three and ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016,June 29, 2019, respectively (in millions):
| | | | Three Months Ended | Three Months Ended |
| | September 30, 2017 | | October 1, 2016 | June 27, 2020 | | June 29, 2019 |
| Restructuring Costs: | Cost of Sales | Operating Expenses | Total | | Cost of Sales | Operating Expenses | Total | Cost of Sales | | Operating Expenses | | Total | | Cost of Sales | | Operating Expenses | | Total |
| Employee Termination Expenses | $ | 0.1 |
| $ | 0.1 |
| $ | 0.2 |
| | $ | — |
| $ | (0.1 | ) | $ | (0.1 | ) | $ | 1.4 |
| | $ | 2.6 |
| | $ | 4.0 |
| | $ | 0.2 |
| | $ | 1.3 |
| | $ | 1.5 |
|
| Facility Related Costs | 1.1 |
| 0.2 |
| 1.3 |
| | (0.1 | ) | 1.1 |
| 1.0 |
| 3.2 |
| | 0.4 |
| | 3.6 |
| | 0.7 |
| | 1.4 |
| | 2.1 |
|
| Other Expenses | — |
| 0.1 |
| 0.1 |
| | 0.2 |
| — |
| 0.2 |
| 0.2 |
| | — |
| | 0.2 |
| | — |
| | — |
| | — |
|
| Total Restructuring Costs | $ | 1.2 |
| $ | 0.4 |
| $ | 1.6 |
| | $ | 0.1 |
| $ | 1.0 |
| $ | 1.1 |
| $ | 4.8 |
| | $ | 3.0 |
| | $ | 7.8 |
| | $ | 0.9 |
| | $ | 2.7 |
| | $ | 3.6 |
|
| Restructuring Related Costs: | | | | |
| Other Employment Benefit Expenses | $ | — |
| $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| |
| Total Restructuring Related Costs | $ | — |
| $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| |
| Total Restructuring and Restructuring Related Costs | $ | 1.2 |
| $ | 0.4 |
| $ | 1.6 |
| | $ | 0.1 |
| $ | 1.0 |
| $ | 1.1 |
| |
| | | | | | | | | | | | | |
| | Six Months Ended |
| | June 27, 2020 | | June 29, 2019 |
| Restructuring Costs: | | Cost of Sales | | Operating Expenses | | Total | | Cost of Sales | | Operating Expenses | | Total |
| Employee Termination Expenses | | $ | 2.9 |
| | $ | 3.0 |
| | $ | 5.9 |
| | $ | 0.4 |
| | $ | 1.5 |
| | $ | 1.9 |
|
| Facility Related Costs | | 5.9 |
| | 0.8 |
| | 6.7 |
| | 1.3 |
| | 2.7 |
| | 4.0 |
|
| Other Expenses | | 0.3 |
| | — |
| | 0.3 |
| | — |
| | — |
| | — |
|
| Total Restructuring Costs | | $ | 9.1 |
| | $ | 3.8 |
| | $ | 12.9 |
| | $ | 1.7 |
| | $ | 4.2 |
| | $ | 5.9 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, 2017 | | October 1, 2016 |
| Restructuring Costs: | Cost of Sales | Operating Expenses | Total | | Cost of Sales | Operating Expenses | Total |
| Employee Termination Expenses | $ | 2.5 |
| $ | 1.4 |
| $ | 3.9 |
| | $ | 0.4 |
| $ | — |
| $ | 0.4 |
|
| Facility Related Costs | 3.4 |
| 0.5 |
| 3.9 |
| | 0.4 |
| 1.5 |
| 1.9 |
|
| Other Expenses | 3.9 |
| 0.1 |
| 4.0 |
| | 0.8 |
| — |
| 0.8 |
|
| Total Restructuring Costs | $ | 9.8 |
| $ | 2.0 |
| $ | 11.8 |
| | $ | 1.6 |
| $ | 1.5 |
| $ | 3.1 |
|
| Restructuring Related Costs: | | | | | | | |
| Other Employment Benefit Expenses | $ | 0.7 |
| $ | — |
| $ | 0.7 |
| | $ | 0.5 |
| $ | 0.6 |
| $ | 1.1 |
|
| Total Restructuring Related Costs | $ | 0.7 |
| $ | — |
| $ | 0.7 |
| | $ | 0.5 |
| $ | 0.6 |
| $ | 1.1 |
|
| Total Restructuring and Restructuring Related Costs | $ | 10.5 |
| $ | 2.0 |
| $ | 12.5 |
| | $ | 2.1 |
| $ | 2.1 |
| $ | 4.2 |
|
The following table showspresents the allocation of Restructuring Costs by segment for the three and ninesix months ended September 30, 2017June 27, 2020 and October 1, 2016June 29, 2019 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| Restructuring Costs - Three Months Ended | Total | | Commercial Systems | | Industrial Systems | | Climate Solutions | | Power Transmission Solutions |
| June 27, 2020 | $ | 7.8 |
| | $ | 2.3 |
| | $ | 2.0 |
| | $ | 1.3 |
| | $ | 2.2 |
|
| June 29, 2019 | $ | 3.6 |
| | $ | 1.2 |
| | $ | 1.4 |
| | $ | 0.6 |
| | $ | 0.4 |
|
| | | | | | | | | | |
| Restructuring Costs - Six Months Ended | Total | | Commercial Systems | | Industrial Systems | | Climate Solutions | | Power Transmission Solutions |
| June 27, 2020 | $ | 12.9 |
| | $ | 4.1 |
| | $ | 2.9 |
| | $ | 2.4 |
| | $ | 3.5 |
|
| June 29, 2019 | $ | 5.9 |
| | $ | 2.3 |
| | $ | 2.4 |
| | $ | 0.7 |
| | $ | 0.5 |
|
|
| | | | | | | | | | | | | | | |
| | Total | | Commercial and Industrial Systems | | Climate Solutions | | Power Transmission Solutions |
| Restructuring Costs - Three Months Ended September 30, 2017 | $ | 1.6 |
| | $ | 1.2 |
| | $ | 0.3 |
| | $ | 0.1 |
|
| Restructuring Costs - Three Months Ended October 1, 2016 | $ | 1.1 |
| | $ | 0.2 |
| | $ | 0.2 |
| | $ | 0.7 |
|
|
| | | | | | | | | | | | | | | |
| | Total | | Commercial and Industrial Systems | | Climate Solutions | | Power Transmission Solutions |
| Restructuring Costs - Nine Months Ended September 30, 2017 | $ | 12.5 |
| | $ | 9.8 |
| | $ | 2.0 |
| | $ | 0.7 |
|
| Restructuring Costs - Nine Months Ended October 1, 2016 | $ | 4.2 |
| | $ | 1.0 |
| | $ | 2.0 |
| | $ | 1.2 |
|
The Company's current restructuring activities are expected to continue into 2018.continue. The Company expects to record aggregate future charges of approximately $8.3$13.9 million which includes $1.3$4.3 million of employee termination expenses and $7.0$9.6 million of facility related and other costs.
16. 17. SUBSEQUENT EVENT
The Company has evaluated subsequent events from September 30, 2017 throughsince June 27, 2020, the date of this report. The Companythese financial statements, and is not aware of any subsequent events that would require recognition or disclosure.to disclose.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this Item 2 to “we,” “us,” “our” or the “Company” refer collectively to Regal Beloit Corporation and its subsidiaries.
Overview
Regal Beloit Corporation (NYSE: RBC), based in Beloit, Wisconsin (USA), is a leading manufacturer of electric motors, electrical motion controls, power generation and power transmission products serving markets throughout the world.
Operating Segments
Our company is comprised of threefour operating segments: Commercial andSystems, Industrial Systems, Climate Solutions and Power Transmission Solutions.
A description of the threefour operating segments is as follows:
Commercial Systems segment produces fractional to approximately 5 horsepower AC and Industrial Systems produces mediumDC motors, electronic variable speed controls, fans, and large motors,blowers for commercial and industrial equipment, generator and custom drives and systems.applications. These products serve markets including commercial Heating, Ventilation,building ventilation and Air Conditioning ("HVAC"),HVAC, pool and spa, standbyirrigation, dewatering, agriculture, and critical powergeneral commercial equipment.
Industrial Systems segment produces integral motors, generators, alternators and switchgear for industrial applications, along with aftermarket parts and kits to support such products. These products serve markets including agriculture, marine, mining, oil and gas, systems.food and beverage, data centers, healthcare, prime and standby power, and general industrial equipment.
Climate Solutions segment produces small motors, electronic variable speed controls and air moving solutions serving markets including residential and light commercial HVAC, water heaters and commercial refrigeration.
Power Transmission Solutions manufactures,segment produces, sells and services belt and chain drives, helical and worm gearing, mounted and unmounted bearings, couplings, modular plastic belts, conveying chains and components, hydraulic pump
drives, large open gearing and specialty mechanical products serving markets including beverage, bulk handling, metals, special machinery, energy, aerospace and general industrial.
Components of Profit and Loss
Net Sales. We sell our products to a variety of manufacturers, distributors and end users. Our customers consist of a large cross-section of businesses, ranging from Fortune 100 companies to small businesses. A number of our products are sold to Original Equipment Manufacturers ("OEM's"OEMs"), who incorporate our products, such as electric motors, into products they manufacture, and many of our products are built to the requirements of our customers. The majority of our sales derive from direct sales, but a significant portion derives from sales made by manufacturer’s representatives, who are paid exclusively on commission. Our product sales are made via purchase order, long-term contract, and, in some instances, one-time purchases. Many of our products have broad customer bases, with the levels of concentration of revenues varying from divisionbusiness unit to division.business unit.
Our level of net sales for any given period is dependent upon a number of factors, including (i) the demand for our products; (ii) the strength of the economy generally and the end markets in which we compete; (iii) our customers’ perceptions of our product quality at any given time; (iv) our ability to timely meet customer demands; (v) the selling price of our products; and (vi) the weather. As a result, our total revenue has tended to experience quarterly variations and our total revenue for any particular quarter may not be indicative of future results.
We use the term “organic sales" to refer to sales from existing operations excluding (i) sales from acquired businesses recorded prior to the first anniversary of the acquisition (“Acquisition Sales”), (ii) less the amount of sales attributable to any divested businesses (“acquisition sales”),divested/to be exited, and (ii)(iii) the impact of foreign currency translation. The impact of foreign currency translation is determined by translating the respective period’s organic sales (excluding acquisition sales) using the same currency exchange rates that were in effect during the prior year periods. We use the term “organic sales growth” to refer to the increase in our sales between periods that is attributable to organic sales. We use the term “acquisition growth” to refer to the increase in our sales between periods that is attributable to acquisition sales.Acquisition Sales.
Gross Profit. Our gross profit is impacted by our levels of net sales and cost of sales. Our cost of sales consists of costs for, among other things (i) raw materials, including copper, steel and aluminum; (ii) components such as castings, bars, tools, bearings and electronics; (iii) wages and related personnel expenses for fabrication, assembly and logistics personnel; (iv) manufacturing facilities, including depreciation on our manufacturing facilities and equipment, taxes, insurance and utilities; and (v) shipping. The majority of our cost of sales consists of raw materials and components. The price we pay for commodities and components can be subject to commodity price fluctuations. We attempt to mitigate this through fixed-price agreements with suppliers and our hedging strategies. We are currently reducing the number of our suppliers we use in order to leverage the better prices and terms that can be obtained with higher volume orders. A large amount of our suppliers are in North America. As we expand production and our geographic footprint, we expect it may be advantageous to increase our use of foreign suppliers. When we experience commodity price increases, we have tended to announce price increasesincrease to our customers who purchase via purchase order, with such increases generally taking effect a period of time after the public announcements. For those sales we make under long-term contracts, we tend to include material price formulas that specify quarterly or semi-annual price adjustments based on a variety of factors, including commodity prices.
Outside of general economic cyclicality, our different business units experience different levels of variation in gross marginprofit from quarter to quarter based on factors specific to each division.business. For example, a portion of our Climate Solutions segment manufactures products that are used in air conditioning applications. As a result, our sales for that business tend to be lower in the first and fourth quarters and higher in the second and third quarters. In contrast, our Commercial andSystems segment, Industrial Systems segment and our Power Transmission Solutions segment have a broad customer base and a variety of applications, thereby helping to mitigate large quarter-to-quarter fluctuations outside of general economic conditions.
Operating Expenses. Our operating expenses consist primarily of (i) general and administrative expenses; (ii) sales and marketing expenses; (iii) general engineering and research and development expenses; and (iv) handling costs incurred in conjunction with distribution activities. Personnel related costs are our largest operating expense.
Our general and administrative expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses related to our executive, finance, human resource, information technology, legal and operations functions; (ii) occupancy expenses; (iii) technology related costs; (iv) depreciation and amortization; and (v) corporate-related travel. The majority of our general and administrative costs are for salaries and related personnel expenses. These costs can vary by divisionbusiness given the location of our different manufacturing operations.
Our sales and marketing expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses related to our sales and marketing function; (ii) internal and external sales commissions and bonuses; (iii) travel, lodging and other out-of-pocket expenses associated with our selling efforts; and (iv) other related overhead.
Our general engineering and research and development expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses; (ii) the design and development of new energy efficiency products and enhancements; (iii) quality assurance and testing; and (iv) other related overhead. Our research and development efforts tend to be targeted toward developing new products that would allow us to maintain or gain additional market share, whether in new or existing applications. While these costs make up an insignificant portion of our operating expenses in the Power Transmission Solutions segment, they are more substantial in our Commercial andSystems, Industrial Systems and Climate Solutions segments. In particular, a large driver of our research and development efforts in these twothose three segments is energy efficiency, which generally means using less electrical power to produce more mechanical power.
Operating Profit. Our operating profit consists of the segment gross profit less the segment operating expenses. In addition, there are shared operating costs that cover corporate engineering and ITinformation technology expenses that are consistently allocated to the operating segments and are included in the segment operating expenses. Operating profit is a key metric used to measure year over year improvement of the segments.
Restructuring and Restructuring Related Costs. Beginning in 2014, we announced the closure of several of our manufacturing and warehouse facilities and consolidation into existing facilities to simplify manufacturing operations in our Commercial and Industrial Systems, Climate Solutions and Power Transmission Solutions segments. As a result of these closures, weWe incurred restructuring and restructuring-related costs. Restructuring costs includeson employee termination and plant relocation costs. Restructuring-relatedRestructuring 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.
COVID-19 Pandemic
COVID-19 evolved during the first quarter of 2020 from its epicenter in China into a global pandemic, resulting in a severe global health crisis that drove a dramatic slowdown in global economic and social activity. COVID-19 started to impact our businesses in China early in the first quarter of this year, and as the virus spread and the quarter progressed, the virus increasingly impacted our business on a global scale.
Impacts from COVID-19 on our business became more severe during the first half of the second quarter in terms of weakening demand in many of our end markets, which are weighted to North America, and its impact on our manufacturing operations, particularly in Mexico and India. As the second quarter progressed, pressure on our order rates started to abate, and previously disrupted manufacturing operations improved. Currently, our manufacturing operations are, on average, running closer to full capacity. We acknowledge that in many regions confirmed cases of COVID-19 are increasing, including in much of the United States and in India.
We are an essential business, and as such have worked to ensure that our global facilities have remained operational. Our products are essential components in a range of applications used in the food & beverage, pharmaceutical, medical, transportation, and data communications industries, among many others. Certain global manufacturing operations have been impacted with plant closures or plants running at reduced rates at various points during the first six months of the fiscal year.
In the face of this global crisis, our first priority has been the health and safety of our associates. In response, we implemented a host of measures to help our associates stay safe, measures that have been enhanced and refined as impacts from COVID-19 grew, and as our knowledge about how to enhance their effectiveness improved.
Factors deriving from the COVID-19 response that have or may negatively impact sales and operating profit in the future include, but are not limited to: limitations on the ability of our suppliers to manufacture, or procure from manufacturers, components and raw materials used in our products, or to meet delivery requirements and commitments; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver our products to customers; limitations on the ability of our customers to conduct their business and purchase our products and services; reductions in demands of our customers; and limitations on the ability of our customers to pay us on a timely basis.
As part of our initial response to the impacts of COVID-19, we have taken additional cost actions, in addition to the substantial restructuring, supply chain, and 80/20 reorganization efforts that were already underway prior to the start of the COVID-19 pandemic, and also beyond actions announced when we reported first quarter results. These additional actions included an organization reduction in force and a voluntary early retirement program. We will consider making further changes to our cost structure as the implications of COVID-19 continue to evolve.
Outlook
Our order trends remain positive,For the third quarter of 2020, we expect net sales to decline as compared to the prior year third quarter and for operating margins to decline as a result of the lower sales volumes. This outlook reflects our cost initiatives, current backlog, July results, and estimated demand levels for August and September 2020.
In light of continued uncertainty created by the COVID-19 pandemic, in particular as it relates to the demand for our products, combined with the inherently short-cycle nature of our business, which results in limited backlog, we continuefeel we are not currently in a position to expect low single digit organic sales growth forprovide useful outlook commentary beyond the full year. third quarter.
Results of Operations
Three Months Ended September 30, 2017June 27, 2020 Compared to October 1, 2016June 29, 2019
Net sales increased $47.3decreased $239.6 million or 5.8%27.4% for the thirdsecond quarter 20172020 compared to the thirdsecond quarter 2016.2019. The increasedecrease consisted of annegative organic sales growth increase of 5.2% and a positive24.7%, negative foreign currency translation impact of 0.7%1.2%, and a negative 1.5% from the businesses divested/to be exited. The decrease was primarily driven by sales declines across the segments due to the lower customer demand and production disruptions caused by the COVID-19 pandemic. Gross profit decreased $63.7 million or 27.2% for the second quarter 2020 as compared to the second quarter 2019 primarily due to lower sales volumes partially offset by productivity improvements and simplification programs. Operating expenses for the second quarter 2020 decreased $20.6 million or 14.5% as compared to the second quarter 2019. The decrease was primarily driven by lower variable selling costs, salary and wage related actions to address the COVID-19 pandemic and general cost saving initiatives.
Commercial Systems Segment net sales for the second quarter 2020 were $175.9 million, a decrease of $70.4 million or 28.6% as compared to the second quarter 2019. The decrease consisted of negative organic sales of 23.6%, a decline of 3.8% from the businesses divested/to be exited and negative foreign currency translation of 1.2%. Gross profit decreased $4.7$22.9 million or 210 basis points as a percentage of net sales for the third quarter 201735.1% as compared to the thirdsecond quarter 20162019 primarily due to an increasedriven largely by COVID-related pressures on the North American general industrial and commercial HVAC end markets, and on the Europe air moving end market, combined with proactive account pruning efforts. Partially offsetting these headwinds were share gains in the last-in, first-out (“LIFO”) reserve of $2.7 million and commodity inflation, partially offset byChina motors business. During the sales volume increase.quarter, production recovery at the Company’s China factories, combined with strong end user demand, drove improved performance in pool pumps. Operating expenses for the thirdsecond quarter 2017 decreased $8.92020 were $34.2 million compared to $42.7 million in the second quarter 2019. The $8.5 million or 6.3% as compared to the same period in the prior year19.9% decrease was primarily due to a $2.8 million gain on sale of assets, lower amortization expense and leveraging ofvariable selling costs on the increasedlower sales volume.volumes, salary and wage related actions to address COVID-19 and general cost savings initiatives.
Commercial and Industrial Systems Segment net sales for the thirdsecond quarter 20172020 were $408.0$120.6 million, an increasea decrease of $18.6$34.9 million or 4.8%22.4% as compared to the thirdsecond quarter 2016.2019. The increasedecrease consisted of annegative organic sales growth increase of 4.0% driven by broad strength in the North American commercial19.8% and industrial end markets, growth in Asia and improvement in oil and gas. In addition,negative foreign currency translation had a positive impact of 0.8%2.6%. Gross profit decreased $7.4$2.8 million or 310 basis points as a percentage of net sales for the third quarter 201710.1% as compared to the thirdsecond quarter 20162019 primarily driven by an increase inheadwinds related to the LIFO reserve of $1.5 millionCOVID-19 pandemic impacting sales into the North American general industrial, oil and commodity inflation, which weregas, and non-residential construction end markets, combined with proactive account pruning; partially offset by share gains in the sales volume increase.data center market. Operating expenses for the thirdsecond quarter 20172020 were $68.4$21.7 million which was 1.2% lower as compared to the same period$29.0 million in the prior year mainlysecond quarter 2019. The $7.3 million or 25.2% decrease was primarily due to lower amortization expensevariable selling costs on the lower sales volumes, salary and lower discretionary spending.wage related actions to address COVID-19 and general cost savings initiatives.
Climate Solutions Segment net sales were $256.0$178.2 million, an increasea decrease of 2.2%$89.7 million or 33.5% as compared to thirdthe second quarter 2016.2019. The increasedecrease consisted of annegative organic sales growth increase of 1.9% driven by growth31.4%, a decline of 1.4% from the businesses divested/to be exited and negative foreign currency translation of 0.7%. Gross profit decreased $27.4 million or 36.6% compared to the second quarter 2019. The decrease was primarily due to headwinds related to COVID-19 pandemic, in particular de-stocking in the North American residential HVAC new equipment up modestly and strengthchannel, weak demand in hospitality end markets in Europe, Middle East and Asia. Foreign currency translation hadto a positive 0.3% impact on the net sales for the third quarter 2017. Gross profit decreased $5.6 million or 280 basis points as a percentage of net sales as compared to the prior year primarily driven by an increase in the LIFO reserve of $1.2 million and commodity inflation, which were partially offset by the sales volume increase.lesser extent ongoing account pruning efforts. Operating expenses for the thirdsecond quarter 20172020 were $27.0$26.6 million compared to $29.2 million in the thirdsecond quarter 2016.2019. The $2.2 million or 120 basis point as a percent of net sales decrease was primarily due to the leveraging oflower variable selling costs on the increasedlower sales volumevolumes, salary and lower discretionary spending.wage related actions to address COVID-19 and general cost savings initiatives.
Power Transmission Solutions Segment net sales for the thirdsecond quarter 20172020 were $192.9$159.4 million, a decrease of $44.6 million or a 13.7% increase21.9% compared to thirdsecond quarter 20162019 net sales of $169.7$204.0 million. The increasedecrease consisted of annegative organic sales growth increase of 12.8% primarily driven by strength in oil21.1%, negative businesses divested/to be exited of 0.1%, and gas, distribution and renewable energy. Foreignunfavorable foreign currency translation had a positive impact of 0.9%0.7%.
Gross profit for the thirdsecond quarter 2017 increased $8.32020 decreased $10.6 million or 15.1%16.0% primarily due to the increasedecrease in sales volume.volume driven by significant COVID-19 related declines in United States general industrial and upstream oil & gas end markets in addition to ongoing proactive account pruning activities, partially offset by tailwinds in the United States midstream oil and gas, China general industrial and North America agriculture end markets. Operating expenses for the thirdsecond quarter 20172020 decreased $5.9$2.2 million as compared to the thirdsecond quarter 20162019 primarily due to a $2.8 million gain on sale of assets, decreasereduction in restructuring charges,variable selling related costs along with cost savings initiatives including salary and lower discretionary spending.wage related actions to address COVID-19.
Six Months Ended September 30, 2017June 27, 2020 Compared to October 1, 2016June 29, 2019
Net sales increased $73.2decreased $359.2 million or 3.0%20.8% for the ninesix months ended September 30, 2017June 27, 2020 compared to the ninesix months ended October 1, 2016.June 29, 2019. The increasedecrease consisted of annegative organic sales growth increase of 3.5%17.4%, offset by a negative impact from sales of the divested Mastergear Worldwide (“Mastergear”) business of 0.4% and a negative foreign currency translation impact of 0.2%.1.0%, and a negative 2.4% from the businesses divested/to be exited. The decrease was primarily driven by sales declines across the segments due to lower demand and production delays associated with the COVID-19 pandemic. Gross profit decreased $95.0 million or 20.3% for the ninesix months ended September 30, 2017 decreased $6.4 million or 1.0%June 27, 2020 as compared to the ninesix months ended October 1, 2016June 29, 2019 primarily due to increased restructuring charges and an increase in the LIFO reserve of $2.7 million,lower sales volumes partially offset by the increase in sales volume.productivity improvements and simplification programs. Operating expenses for the ninesix months ended September 30, 2017June 27, 2020 decreased $7.7$33.9 million or 80 basis point as a percent of net sales11.8% as compared to the same periodsix months ended June 29, 2019. The decrease was primarily driven by cost savings initiatives including second quarter wage related actions to address COVID-19 and the businesses divested/to be exited.
Commercial Systems Segment net sales for the six months ended June 27, 2020 were $375.3 million, a decrease of $113.2 million or 23.2% as compared to the six months ended June 29, 2019. The decrease consisted of negative organic sales of 18.1%, a decline of 4.2% from the businesses divested/to be exited and negative foreign currency translation of 0.9%. Gross profit decreased $37.7 million or 28.8% as compared to the six months ended June 29, 2019 primarily driven by lower sales volumes as a result of COVID-19 related production delays, headwinds in commercial HVAC and COVID-19 related pressure on Europe air moving, combined with account pruning partially offset by share gains in China markets. Operating expenses for the six months ended June 27, 2020 were $71.7 million compared to $85.0 million in the prior yearsix months ended June 29, 2019. The $13.3 million or 15.6% decrease was primarily due to a $3.5 million gain on sale of assets, decrease in amortization expense, lower discretionary spending and leveraging ofvariable selling costs on the increasedlower sales volume. The prior year included a $11.6 million gain onvolumes, the saleremoval of costs related to the Mastergear business.businesses divested/to be exited, second quarter wage related actions to address COVID-19 and general cost savings initiatives.
Commercial and Industrial Systems Segment net sales increased $34.9for the six months ended June 27, 2020 were $250.2 million, a decrease of $43.4 million or 3.0% for the nine months ended September 30, 201714.8% as compared to the ninesix months ended October 1, 2016.June 29, 2019. The increasedecrease consisted of annegative organic sales growth increase of 3.3% that was offset by a12.6% and negative foreign currency translation impact of 0.3%2.2%. The organic sales increase wasGross profit decreased $4.1 million or 7.9% as compared to the six months ended June 29, 2019 primarily driven by strengthlower sales volumes as a result of headwinds in Asia, North American oil and gas and industrial end market demand. Gross profit for nine months ended 2017 decreased $9.7 million or 3.3% primarily duemarkets, combined with account pruning, and overall headwinds related to the impact of increased restructuring charges resulting from the exit of a non-core business and an increaseCOVID-19 pandemic, partially offset by share gains in the LIFO reserve of $1.5 million that was offset by the increased sales volume.data center market. Operating expenses for the ninesix months ended September 30, 2017 decreased $2.7June 27, 2020 were $44.6 million compared to $56.2 million in the six months ended June 29, 2019. The $11.6 million or 1.3% compared to the nine months ended October 1, 201620.6% decrease was primarily due to a $0.7 million gainlower variable selling costs on sale of assets,the lower amortization expensessales volumes, second quarter wage related actions to address COVID-19 and lower discretionary spending.general cost savings initiatives.
Climate Solutions Segment net sales increased $29.4were $388.3 million, a decrease of $142.9 million or 3.9% for the nine months ended September 30, 201726.9% as compared to the ninesix months ended October 1, 2016.June 29, 2019. The increasedecrease consisted of annegative organic sales growth increase of 4.0%23.3%, a decline of 3.1% from the businesses divested/to be exited and a negative foreign currency translation impact of 0.1%0.5%. Gross profit decreased $38.7 million or 26.6% compared to the six months ended June 29, 2019. The organic sales increasedecrease was primarily due to lower sales volumes driven by growthweakness in the North American residential HVAC Europechannel, in addition to ongoing account pruning efforts in the segment, and Asia. Gross profit increased $2.5 million or 1.3% primarily dueoverall headwinds related to higher volumes.the COVID-19 pandemic. Operating expenses for the ninesix months ended September 30, 2017 decreased $4.8June 27, 2020 were $56.0 million or 110 basis point as a percent of net sales as compared to $59.7 million in the ninesix months ended October 1, 2016June 29, 2019. The decrease was primarily due to lower amortization expenses, lower discretionary spending and leveraging ofvariable selling costs on the increasedlower sales volume.volumes, second quarter wage related actions to address COVID-19 and general cost savings initiatives.
Power Transmission Solutions Segment net sales increased $8.9for the six months ended June 27, 2020 were $354.5 million, a decrease of $59.7 million or 1.6% for the nine14.4% compared to six months ended September 30, 2017 compared to the nine months ended October 1, 2016.June 29, 2019. The increasedecrease consisted of annegative organic sales growth increase of 3.3% that was offset by12.6%, a negative 1.2% from the businesses divested/to be exited and unfavorable foreign currency translation impact of 0.1% and a negative impact from sales of the divested Mastergear business of 1.6%0.6%. Improved oil and gas and renewable energy end market demand contributed to the organic sales increase. Gross profit for the ninesix months ended September 30, 2017 increased $0.8June 27, 2020 decreased $14.5 million or 0.4% compared to the nine months ended October 1, 201610.3% primarily due to the higherdecrease in sales volume.volume driven by COVID-19 driven declines in oil & gas end markets, in addition to ongoing proactive account pruning activities in the segment. Operating expenses for the ninesix months ended September 30, 2017June 27, 2020 decreased $0.2$5.3 million or 40 basis point as a percent of net salescompared to the six months ended June 29, 2019 primarily due to a $2.8 million gain on the sale of assets, decreasereduction in restructuring chargesvariable selling related costs along with second quarter wage related actions to address COVID-19 and leveraging of costs on the increased sales volume. The prior year included a $11.6 million gain on the sale of the Mastergear business.general cost savings initiatives.
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 | June 27, 2020 | | June 29, 2019 | | June 27, 2020 | | June 29, 2019 |
| (Dollars in Millions) | | | | | | | | | | | | | | |
| Net Sales: | | | | | | | | | | | | | | |
| Commercial and Industrial Systems | $ | 408.0 |
| | $ | 389.4 |
| | $ | 1,196.6 |
| | $ | 1,161.7 |
| |
| Commercial Systems | | $ | 175.9 |
| | $ | 246.3 |
| | $ | 375.3 |
| | $ | 488.5 |
|
| Industrial Systems | | 120.6 |
| | 155.5 |
| | 250.2 |
| | 293.6 |
|
| Climate Solutions | 256.0 |
| | 250.5 |
| | 774.2 |
| | 744.8 |
| 178.2 |
| | 267.9 |
| | 388.3 |
| | 531.2 |
|
| Power Transmission Solutions | 192.9 |
| | 169.7 |
| | 568.8 |
| | 559.9 |
| 159.4 |
| | 204.0 |
| | 354.5 |
| | 414.2 |
|
| Consolidated | $ | 856.9 |
| | $ | 809.6 |
| | $ | 2,539.6 |
| | $ | 2,466.4 |
| $ | 634.1 |
| | $ | 873.7 |
| | $ | 1,368.3 |
| | $ | 1,727.5 |
|
| | | | | | | | | | | | | | | |
| Gross Profit as a Percent of Net Sales: | | | | | | | | | | | | | | |
| Commercial and Industrial Systems | 24.0 | % | | 27.1 | % | | 23.9 | % | | 25.4 | % | |
| Commercial Systems | | 24.1 | % | | 26.5 | % | | 24.8 | % | | 26.8 | % |
| Industrial Systems | | 20.6 | % | | 17.8 | % | | 19.0 | % | | 17.6 | % |
| Climate Solutions | 25.7 | % | | 28.5 | % | | 25.2 | % | | 25.8 | % | 26.6 | % | | 27.9 | % | | 27.5 | % | | 27.4 | % |
| Power Transmission Solutions | 32.8 | % | | 32.4 | % | | 32.6 | % | | 33.0 | % | 34.9 | % | | 32.5 | % | | 35.6 | % | | 34.0 | % |
| Consolidated | 26.5 | % | | 28.6 | % | | 26.2 | % | | 27.2 | % | 26.9 | % | | 26.8 | % | | 27.3 | % | | 27.1 | % |
| | | | | | | | | | | | | | | |
| Operating Expenses as a Percent of Net Sales: | | | | | | | | | | | | | | |
| Commercial and Industrial Systems | 16.8 | % | | 17.8 | % | | 17.5 | % | | 18.3 | % | |
| Commercial Systems | | 19.4 | % | | 17.3 | % | | 19.1 | % | | 17.4 | % |
| Industrial Systems | | 18.0 | % | | 18.6 | % | | 17.8 | % | | 19.1 | % |
| Climate Solutions | 10.5 | % | | 11.7 | % | | 10.9 | % | | 12.0 | % | 14.9 | % | | 10.9 | % | | 14.4 | % | | 11.2 | % |
| Power Transmission Solutions | 19.5 | % | | 25.6 | % | | 21.0 | % | | 21.4 | % | 24.5 | % | | 20.2 | % | | 22.9 | % | | 20.9 | % |
| Consolidated | 15.5 | % | | 17.5 | % | | 16.3 | % | | 17.1 | % | 19.2 | % | | 16.3 | % | | 18.5 | % | | 16.6 | % |
| | | | | | | | | | | | | | | |
| Income from Operations as a Percent of Net Sales: | | | | | | | | |
| Commercial and Industrial Systems | 7.3 | % | | 9.3 | % | | 6.4 | % | | 7.1 | % | |
| Climate Solutions | 15.2 | % | | 16.8 | % | | 14.2 | % | | 13.8 | % | |
| Income (Loss) from Operations as a Percent of Net Sales: | | | | | | | | |
| Commercial Systems* | | 3.5 | % | | 8.4 | % | | 5.0 | % | | 16.1 | % |
| Industrial Systems | | 2.7 | % | | (0.8 | )% | | 1.1 | % | | (1.9 | )% |
| Climate Solutions** | | 11.2 | % | | 19.3 | % | | 12.7 | % | | 17.1 | % |
| Power Transmission Solutions | 13.3 | % | | 6.7 | % | | 11.5 | % | | 11.5 | % | 10.4 | % | | 12.2 | % | | 12.7 | % | | 12.8 | % |
| Consolidated | 11.0 | % | | 11.1 | % | | 9.9 | % | | 10.2 | % | 7.2 | % | | 11.0 | % | | 8.5 | % | | 12.5 | % |
| | | | | | | | | | | | | | | |
| Income from Operations | $ | 94.0 |
| | $ | 89.8 |
| | $ | 251.8 |
| | $ | 250.5 |
| $ | 45.9 |
| | $ | 96.0 |
| | $ | 115.9 |
| | $ | 216.6 |
|
| Other (Income) Expenses, net | | (1.1 | ) | | 0.2 |
| | (2.2 | ) | | 0.3 |
|
| Interest Expense | 13.5 |
| | 14.4 |
| | 42.6 |
| | 44.2 |
| 10.6 |
| | 13.4 |
| | 22.2 |
| | 27.0 |
|
| Interest Income | 0.7 |
| | 1.1 |
| | 2.7 |
| | 3.4 |
| 1.4 |
| | 1.4 |
| | 2.5 |
| | 2.5 |
|
| Income before Taxes | 81.2 |
| | 76.5 |
| | 211.9 |
| | 209.7 |
| 37.8 |
| | 83.8 |
| | 98.4 |
| | 191.8 |
|
| Provision for Income Taxes | 17.6 |
| | 15.4 |
| | 46.4 |
| | 47.5 |
| 8.5 |
| | 16.4 |
| | 22.4 |
| | 37.6 |
|
| Net Income | 63.6 |
| | 61.1 |
| | 165.5 |
| | 162.2 |
| 29.3 |
| | 67.4 |
| | 76.0 |
| | 154.2 |
|
| Less: Net Income Attributable to Noncontrolling Interests | 1.4 |
| | 1.5 |
| | 4.0 |
| | 4.4 |
| 1.2 |
| | 0.8 |
| | 2.1 |
| | 1.7 |
|
| Net Income Attributable to Regal Beloit Corporation | $ | 62.2 |
| | $ | 59.6 |
| | $ | 161.5 |
| | $ | 157.8 |
| $ | 28.1 |
| | $ | 66.6 |
| | $ | 73.9 |
| | $ | 152.5 |
|
Our principal source of liquidity is cash flow provided by operating activities. In addition to operating income, other significant factors affecting our cash flow include working capital levels, capital expenditures, dividends, share repurchases, acquisitions and divestitures, availability of debt financing and the ability to attract long-term capital at acceptable terms.
The following table presents selected financial information and statistics as of September 30, 2017June 27, 2020 and December 31, 201628, 2019 (in millions):