NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 27, 2020
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying (a) Condensed Consolidated Balance Sheet of Regal Beloit Corporation (the “Company”) as of December 28, 2019, which has been derived from audited Consolidated Financial Statements, and (b) unaudited interim Condensed Consolidated Financial Statements as of June 27, 2020 and for the three and six months ended June 27, 2020 and 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 Statements be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s 2019 Annual Report on Form 10-K filed on 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 six months ended June 27, 2020 are not necessarily indicative of the results that may be expected for the entire fiscal year ending January 2, 2021.
The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP, which requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Condensed 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.
Recently Issued Accounting Standards
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-14, 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 timing of plan assets expected to be returned to the employer, and the effects of a 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 becomes effective for fiscal years ending after December 15, 2020 on a retrospective basis for all years presented. Early adoption is permitted. The Company is evaluating the effect of adopting this new accounting guidance, but does not anticipate a material impact on the financial statement disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, and clarifies and amends existing guidance to improve consistent application. This ASU becomes effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance.
Adopted Accounting Standards
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional transition guidance, for a limited time, to companies that have contracts, hedging relationships or other transactions that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate which is expected to be discontinued 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 this 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 allow the Company to continue to assert that LIBOR-based interest remains probable, despite the sunset of LIBOR at the end of 2021 in the current quarter with no impact on the Company's Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU 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 include disclosure for the 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 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 policy for timing of transfers 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 measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. This ASU is effective for fiscal years beginning after December 15, 2019, 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 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 adopted the standard as of December 29, 2019, the beginning of fiscal 2020, with no material impact on the Company's Condensed Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326). 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 of such losses. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods therein. The Company adopted the standard as of December 29, 2019, the beginning of fiscal 2020, under the modified retrospective approach. The Company recorded a $3.4 million increase in the allowance for credit losses and a $2.7 million net decrease to retained earnings as of December 29, 2019 for the cumulative effect of adopting ASU 2016-13.
2. OTHER FINANCIAL INFORMATION
Inventories
The following table presents approximate percentage distribution between major classes of inventories:
|
|
|
|
|
|
June 27, 2020
|
|
December 28, 2019
|
Raw Material and Work in Process
|
50%
|
|
48%
|
Finished Goods and Purchased Parts
|
50%
|
|
52%
|
Inventories are stated at cost, which is not in excess of market. Cost for approximately 51% of the Company's inventory at June 27, 2020, and 53% at December 28, 2019 was determined using the last-in, first-out ("LIFO") method.
Property, Plant, and Equipment
The following table presents property, plant, and equipment by major classification (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
|
|
For 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 zero and $5.1 million, respectively, of asset of impairments related to the transfer of assets to held for sale.
Revenue 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 product 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 four operating segments: Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions. See Note 6 for a description of the different 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 four 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 Company's product sales, the Company determines that the 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 contract 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 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 accrues 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 reduction to Net Sales as revenue is recognized.
Disaggregation of Revenue
The following tables presents the Company’s revenues disaggregated by geographical region (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 were 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 Company sold its Regal Drive Technologies business and received proceeds of $0.3 million in the first quarter of 2020 and $119.9 million in 2019. Regal Drive Technologies was included in the Company's Commercial Systems segment. The Company recognized a gain on sale of $0.1 million in the first quarter of 2020 and $41.0 million in 2019 in the Condensed Consolidated Statements of Income.
Velvet Drive
On April 1, 2019, the Company sold its Velvet Drive business and received proceeds of $8.9 million. This business was included in the Company's Power Transmissions Solutions segment. The Company recognized a loss on sale of $0.5 million in the Condensed Consolidated Statements of Income.
CapCom
On April 1, 2019, the Company sold its CapCom business and 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.
Vapor Recovery
On July 1, 2019, the Company sold its Vapor Recovery business and received proceeds of $19.2 million. The business was included in the Company's Commercial Systems segment. The Company recognized a loss on sale of $1.9 million in the Condensed Consolidated Statements of Income.
4. ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustments, hedging activities and pension and post retirement benefit adjustments are included in AOCI, a component of Total Equity.
The following tables present changes in AOCI by component for the three and six months ended June 27, 2020 and June 29, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
June 27, 2020
|
|
Hedging Activities
|
|
Pension and Post Retirement Benefit Adjustments
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Beginning Balance
|
|
$
|
8.0
|
|
|
$
|
(31.0
|
)
|
|
$
|
(214.8
|
)
|
|
$
|
(237.8
|
)
|
Other Comprehensive Income (Loss) before Reclassifications
|
|
(24.1
|
)
|
|
0.3
|
|
|
(39.0
|
)
|
|
(62.8
|
)
|
Tax Impact
|
|
5.8
|
|
|
—
|
|
|
—
|
|
|
5.8
|
|
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
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
Net Current Period Other Comprehensive Income
|
|
9.3
|
|
|
0.7
|
|
|
8.6
|
|
|
18.6
|
|
Ending Balance
|
|
$
|
3.9
|
|
|
$
|
(37.5
|
)
|
|
$
|
(199.2
|
)
|
|
$
|
(232.8
|
)
|
The Condensed Consolidated Statements of Income line items affected by the hedging activities reclassified from AOCI in the tables above are disclosed in Note 14.
The reclassification amounts for pension and post retirement benefit adjustments in the tables above are part of net periodic benefit costs recorded in Other (Income) Expenses, net (see also Note 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 table presents changes to goodwill during the six months ended June 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
|
|
Intangible Assets
The following table presents intangible assets (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
|
|
|
|
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 six months ended June 27, 2020 was $12.2 million and $24.4 million, respectively. Amortization expense recorded for the three and six months ended June 29, 2019 was $12.6 million and $25.4 million, respectively. Amortization expense for fiscal year 2020 is estimated to be $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 (in millions):
|
|
|
|
|
|
Year
|
|
Estimated Amortization
|
2021
|
|
$
|
42.6
|
|
2022
|
|
40.9
|
|
2023
|
|
40.8
|
|
2024
|
|
40.2
|
|
2025
|
|
38.2
|
|
6. SEGMENT INFORMATION
The Company is comprised of four operating segments: Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions.
Commercial Systems segment produces fractional to approximately 5 horsepower AC and DC motors, electronic variable speed controls, fans, and blowers for commercial applications. These products serve markets including commercial building ventilation and HVAC, pool and spa, irrigation, dewatering, agriculture, and general 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, 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 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 six months ended June 27, 2020 and June 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The following table presents identifiable assets information attributable to the Company's operating segments as of June 27, 2020 and December 28, 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
|
|
7. DEBT AND BANK CREDIT FACILITIES
The following table presents the Company’s indebtedness as of June 27, 2020 and December 28, 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
|
|
Credit Agreement
On August 27, 2018 the Company entered into an 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 $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 $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 August 27, 2018 with the proceeds settling the amounts owed under prior borrowings. The Term Facility requires quarterly amortization at a rate starting at 5.0% per annum, increasing to 7.5% per annum after three years and further increasing to 10.0% per annum for the last year of the Term Facility, unless previously prepaid. The weighted average interest rate on the Term Facility for the three months ended June 27, 2020 and June 29, 2019 was 1.6% and 3.8%, respectively. The weighted average interest rate on the Term Facility for the six months ended 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 June 27, 2020, the Company had borrowings under the Multicurrency Revolving Facility in the amount of $5.3 million, $0.3 million of standby letters of credit issued under the facility, and $494.4 million of available borrowing capacity. For 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 $258.8 million and $73.4 million, respectively, and the weighted average interest rate of 2.4% and 3.8%, respectively. The Company pays a non-use fee on the aggregate unused amount of the Multicurrency Revolving Facility at a rate determined by reference to its consolidated funded debt to consolidated EBITDA ratio.
Senior Notes
At June 27, 2020, the Company had $400.0 million of senior notes (the “Notes”) outstanding. The Notes consist of $400.0 million in senior notes in a private placement which were issued in five tranches with maturities from ten to twelve years and carry fixed interest rates. As of June 27, 2020, $400.0 million of the Notes are included in Long-Term Debt on the Condensed Consolidated Balance Sheets.
The following table presents details on the Notes at June 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
|
|
|
|
|
|
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 June 27, 2020.
Other Notes Payable
At June 27, 2020, other notes payable of approximately $4.5 million were outstanding with a weighted average interest rate of 4.9%. At December 28, 2019, other notes payable of approximately $4.5 million were outstanding with a weighted average rate of 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 15), the approximate fair value of the Company's total debt was $1,146.4 million and $1,162.1 million as of June 27, 2020 and December 28, 2019, respectively.
8. RETIREMENT AND POST RETIREMENT HEALTH CARE PLANS
The following table presents the Company’s net periodic benefit cost (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
|
|
The service cost component is included in Cost of Sales and Operating Expenses. All other components of net periodic benefit costs are included in Other (Income) Expenses, net on the Company's Condensed Consolidated Statements of Income.
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 2020 fiscal year are $1.2 million and $(0.6) million, respectively.
For the three months ended June 27, 2020 and June 29, 2019, the Company contributed $1.2 million and $4.1 million, respectively, to post retirement plans. For the six months ended June 27, 2020 and June 29, 2019, the Company contributed $2.3 million and $4.9 million, respectively. The Company expects to make total contributions of $10.6 million in 2020. The Company contributed a total of $10.8 million in fiscal 2019.
9. LEASES
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
At 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 repurchased and retired 315,072 shares of its common stock at an average cost of $79.38 per share for a total cost of $25.0 million. For the six months ended June 29, 2019, the Company repurchased and retired 731,745 shares of its common stock at an average cost of $76.42 for a total cost of $55.9 million under the July 2018 program.
As of June 27, 2020, there was approximately $210.0 million in common stock available for repurchase under 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 had historically been granted in the second fiscal quarter. Beginning in fiscal 2020, the Company moved its granting of share-based incentive awards to the first fiscal quarter.
The Company recognized approximately $2.8 million and $3.1 million in share-based compensation expense for the three months ended June 27, 2020 and June 29, 2019, respectively. Share-based compensation expense was $5.5 million and $7.4 million for the six months ended June 27, 2020 and June 29, 2019, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Income for share-based compensation expense was $0.2 million and $0.6 million for the three months ended June 27, 2020 and June 29, 2019, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Income for share-based compensation expense was $0.4 million and $1.5 million for the six months ended June 27, 2020 and 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 June 27, 2020, total unrecognized compensation cost related to share-based compensation awards was approximately $24.0 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 2.0 years.
Approximately 1.8 million shares were available for future grant under the 2018 Equity Incentive Plan at 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. Shares granted prior to fiscal 2020 generally vest over five years on 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 six months ended June 27, 2020 and June 29, 2019, expired and canceled shares were immaterial.
The following table presents share-based compensation activity for the six months ended June 27, 2020 and June 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
|
|
The following table presents assumptions used in the Company's Black-Scholes valuation related to grants 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
|
%
|
The average risk-free interest rate is based on the US Treasury security rate 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.
The following table presents a summary of share-based incentive plan grant activity the six months ended 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
|
|
Compensation expense recognized related to SARs was $1.5 million for the six months ended June 27, 2020.
As of June 27, 2020, there was $7.4 million of unrecognized compensation cost related to non-vested SARs that is expected to be recognized as a charge to earnings over a weighted average period of 2.9 years.
The number of SARs expected to vest is materially consistent with those outstanding and not yet exercisable.
Restricted Stock Awards and Restricted Stock Units
Restricted stock awards ("RSA") and restricted stock units ("RSU") consist of shares or the rights to shares of the Company's stock. The awards are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer. As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, death or disability.
The following table presents a summary of RSA award activity for the six months ended 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
|
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 $0.6 million for the six months ended June 27, 2020.
As of June 27, 2020, there was $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 0.8 years.
The following table presents a summary of RSU award activity for the six months ended 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
|
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 $2.4 million for the six months ended June 27, 2020.
As of June 27, 2020, there was $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 2.1 years.
Performance Share Units
Performance share units ("PSU") consist of shares or the rights to shares of the Company's stock which are awarded to employees of the Company. These shares are payable upon the determination that the Company achieved certain established performance targets and can range from 0% to 200% of the targeted payout based on the actual results. PSUs have a performance period of 3 years and vest 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 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
|
%
|
The following table presents a summary of PSU activity for the six months ended 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
|
Compensation expense for awards granted is recognized based on the grant 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 $1.0 million for the six months ended June 27, 2020. Total unrecognized compensation expense for all PSUs granted as of June 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 2.2 years.
11. INCOME TAXES
The effective tax rate for the three months ended June 27, 2020 was 22.5% versus 19.6% for the three months ended June 29, 2019. The effective tax rate for the six months ended June 27, 2020 was 22.8% versus 19.6% for the six months ended June 29, 2019. The change in the effective tax rate for the three and six months ended June 27, 2020 was primarily driven by the 2019 expiration of the China Hi-Technology incentives and the mix of earnings. The Company is in the process of renewing these incentives and the impact will be recorded once approval is received.
On March 27, 2020, the CARES Act (the "Act") was enacted in response to the COVID-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 Act and currently expects to benefit from the deferral of certain payroll taxes and relief for retaining employees.
As of June 27, 2020 and December 28, 2019, the Company had approximately $6.9 million 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 2014, and the Company is no longer subject to non-US income tax examinations by tax authorities for years prior to 2012.
12. EARNINGS PER SHARE
Diluted earnings per share is calculated 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. The amount of the anti-dilutive shares were 0.6 million and 0.5 million for the three months ended June 27, 2020 and June 29, 2019, respectively. The amount of the anti-dilutive shares were 0.5 million and 0.5 million for the six months ended June 27, 2020 and June 29, 2019, respectively. The following table reconciles the basic and diluted shares used in earnings per share calculations for the three and six months ended June 27, 2020 and June 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
|
|
13. CONTINGENCIES
One of the Company's subsidiaries that it acquired in 2007 is subject to numerous claims filed in various jurisdictions relating to certain sub-fractional motors that were primarily manufactured through 2004 and that were included as components of residential and commercial ventilation units manufactured and sold in high volumes by a third party. These ventilation units are subject to product safety requirements and other potential regulation of their performance by government agencies such as the US Consumer Product Safety Commission (“CPSC”). The claims generally allege that the ventilation units were the cause of fires. The Company has recorded an estimated liability for incurred claims. Based on the current facts, the Company cannot assure that these claims, individually or in the aggregate, will not have a material adverse effect on its subsidiary's financial condition. The Company's subsidiary cannot reasonably predict the outcome of these claims, the nature or extent of any CPSC or other remedial actions, if any, that the Company's subsidiary may need to undertake with respect to motors that remain in the field, or the costs that may be incurred, some of which could be significant.
The Company is, from time to time, party to litigation and other legal or regulatory proceedings that arise in the normal course of its business operations and the outcomes of which are subject to significant uncertainty, including product warranty and liability claims, contract disputes and environmental, asbestos, intellectual property, employment and other litigation matters. The Company's products are used in a variety of industrial, commercial and residential applications that subject the Company to claims that the use of its products is alleged to have resulted in injury or other damage. Many of these matters will only be resolved when one or more future events occur or fail to occur. Management conducts regular reviews, including updates from legal counsel, to assess the need for accounting recognition or disclosure of these contingencies, and such assessment inherently involves an exercise in judgment. The Company accrues for exposures in amounts that it believes are adequate, and the Company does not believe that the outcome of any such lawsuit individually or collectively will have a material effect on the Company's financial position, 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 table presents a reconciliation of the changes in accrued warranty costs for the three and six months ended June 27, 2020 and June 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
|
|
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 are 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 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 June 27, 2020 or June 29, 2019.
Cash Flow Hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into 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 June 27, 2020, the Company had $(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 28, 2019, the Company had $1.3 million, net of tax, of derivative gains on closed hedge instruments in AOCI that was subsequently realized in earnings when the hedged items impacted earnings.
As of June 27, 2020, the Company had the following currency forward contracts outstanding (with maturities extending through 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
|
|
As of June 27, 2020, the Company had the following commodity forward contracts outstanding (with maturities extending through 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.
The Company entered into two 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.
The following table presents the fair values of derivative instruments as of June 27, 2020 and December 28, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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) (in millions):
Derivatives Designated as Cash Flow Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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
|
)
|
The net AOCI hedging component balance of a $(10.7) million loss at June 27, 2020 includes $(3.5) million of net current deferred loss expected to be realized in the next twelve 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 June 27, 2020 and December 28, 2019.
The following table presents the derivative assets and derivative liabilities presented on a net basis under enforceable master netting agreements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Prepaid Expenses and Other Current Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
$
|
13.0
|
|
|
$
|
(3.8
|
)
|
|
$
|
9.2
|
|
Derivative Commodity Contracts
|
5.0
|
|
|
(0.3
|
)
|
|
4.7
|
|
Other Noncurrent Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
1.1
|
|
|
(0.3
|
)
|
|
0.8
|
|
Current Hedging Obligations:
|
|
|
|
|
|
Derivative Currency Contracts
|
11.7
|
|
|
(3.8
|
)
|
|
7.9
|
|
Derivative Commodity Contracts
|
0.3
|
|
|
(0.3
|
)
|
|
—
|
|
Noncurrent Hedging Obligations:
|
|
|
|
|
|
Derivative Currency Contracts
|
1.6
|
|
|
(0.3
|
)
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
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
|
$
|
8.9
|
|
|
$
|
(2.5
|
)
|
|
$
|
6.4
|
|
Derivative Commodity Contracts
|
2.6
|
|
|
(0.3
|
)
|
|
2.3
|
|
Other Noncurrent Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
10.3
|
|
|
(0.1
|
)
|
|
10.2
|
|
Derivative Commodity Contracts
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Current Hedging Obligations:
|
|
|
|
|
|
Derivative Currency Contracts
|
3.1
|
|
|
(2.5
|
)
|
|
0.6
|
|
Derivative Commodity Contracts
|
0.3
|
|
|
(0.3
|
)
|
|
—
|
|
Noncurrent Hedging Obligations:
|
|
|
|
|
|
Derivative Currency Contracts
|
0.2
|
|
|
(0.1
|
)
|
|
0.1
|
|
15. FAIR VALUE
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
|
|
|
Level 1
|
Unadjusted quoted prices in active markets for identical assets or liabilities
|
Level 2
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or
|
|
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
|
|
Inputs other than quoted prices that are observable for the asset or liability
|
Level 3
|
Unobservable inputs for the asset or liability
|
The Company uses the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The fair values of cash equivalents and short-term deposits approximate their carrying values as of June 27, 2020 and December 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 for disclosure of the approximate fair value of the Company's debt at June 27, 2020 and December 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 June 27, 2020 and December 28, 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
|
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.
16. RESTRUCTURING ACTIVITIES
The Company incurred restructuring and restructuring related costs on projects 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 the 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 table presents a reconciliation of provisions and payments for the restructuring projects for the three and six months ended June 27, 2020 and June 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
|
|
The following table presents a reconciliation of restructuring and restructuring-related costs for restructuring projects for the three and six months ended June 27, 2020 and June 29, 2019, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three 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
|
$
|
1.4
|
|
|
$
|
2.6
|
|
|
$
|
4.0
|
|
|
$
|
0.2
|
|
|
$
|
1.3
|
|
|
$
|
1.5
|
|
Facility Related Costs
|
3.2
|
|
|
0.4
|
|
|
3.6
|
|
|
0.7
|
|
|
1.4
|
|
|
2.1
|
|
Other Expenses
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Restructuring Costs
|
$
|
4.8
|
|
|
$
|
3.0
|
|
|
$
|
7.8
|
|
|
$
|
0.9
|
|
|
$
|
2.7
|
|
|
$
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The following table presents the allocation of Restructuring Costs by segment for the three and six months ended June 27, 2020 and June 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
|
|
The Company's current restructuring activities are expected to continue. The Company expects to record aggregate future charges of approximately $13.9 million which includes $4.3 million of employee termination expenses and $9.6 million of facility related costs.
17. SUBSEQUENT EVENT
The Company has evaluated subsequent events since June 27, 2020, the date of these financial statements, and is not aware of any events to disclose.