PART I
Unless the context requires otherwise, references in this Annual Report on Form 10-K to “we,” “us,” “our” or the “Company” refer collectively to Regal Beloit Corporation and its subsidiaries.
References in an Item of this Annual Report on Form 10-K to information contained in the 20192021 Proxy Statement, or to information contained in specific sections of the 20192021 Proxy Statement, incorporate the information into that Item by reference.
We operate on a 52/53 week fiscal year ending on the Saturday closest to December 31. We refer to the fiscal year ended December 29, 2018January 2, 2021 as “fiscal 2018"2020", the fiscal year ended December 30, 201728, 2019 as “fiscal 2017",2019" and the fiscal year ended December 31, 201629, 2018 as “fiscal 2016"2018".
ITEM 1 - BUSINESS
Our Company
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. Our company is comprised of threefour operating segments:segments are: Commercial andSystems, Industrial Systems, Climate Solutions and Power Transmission Solutions.
General
Commercial and Industrial Systems Segment
Our Commercial and Industrial Systems segment designs, manufactures and sells primarily:
•Precision stator and rotor kits from 5 to 2,900 horsepower for air conditioning, heat pump and refrigeration compressor applications, which are sold primarily directly to OEM customers.
Our Industrial Systems segment designs, manufactures and sells primarily:
•Integral and large AC motors from approximately 1 to 12,000 horsepower (up to 10,000 volts) for industrial applications, along with aftermarket parts and kits to support such products. These products are sold directly to OEMs and end-user customers through our distribution network and our network of direct and independent sales representatives. Our manufacturing and selling capabilities extend across the globe, serving four strategic verticals: distribution, pump and compressors, HVAC and air moving, and general industries and large motors. Within these verticals are several end-market applications, including lowagriculture, marine, mining, oil and medium voltage explosion proof motorsgas, petrol chem, pulp and paper, and food and beverage, as well as ATEXother process applications.
•Electric alternators for prime and IEC-Ex certified explosion proof motors. These motors are sold primarily into general industrialstandby power applications in potentially hazardous conditions such as oil and gas, paint booths, tunnels, and mining.
•Low and medium voltage paralleling switchgear, switchboards and control systems and commercial refrigeration.for power generation systems. These motors and blowers are vital components of an HVAC system and are used to move air into and away from furnaces, heat pumps, air conditioners, ventilators, fan filter boxes and water heaters. A majority of our HVAC motors and blowers, are installed as part of a new HVAC system that replaces an existing HVAC system, or are used in an HVAC system for new home construction. The business enjoys a large installed base of equipment and long-term relationships with its major customers.
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•A complete lineup of transfer switches, with standard designs in stock for quick shipment and gear couplingscustomized engineered options for applications including turbines, compressors, generatorsspecialized requirements. We offer these transfer switch power solutions for residential, commercial, industrial and pumps in many industries including petrochemical, refinery, power generation, gas pipeline and liquid natural gas. We also produce flexible couplings and transmission elements. Products include gear, grid, jaw, elastomer, disc, and universal joints.
Climate Solutions Segment
Our Climate Solutions segment designs, manufactures and sells primarily:
•Fractional horsepower motors, electronic variable speed controls and blowers used in a variety of residential and light commercial air moving applications including HVAC systems and commercial refrigeration. These motors and blowers are vital components of an HVAC system and are used to move air into and away from furnaces, heat pumps, air conditioners, ventilators, fan filter boxes and water heaters. A majority of our HVAC motors and blowers, are installed as part of a new HVAC system that replaces an existing HVAC system, or are used in an HVAC system for new home construction. The business enjoys a large installed base of equipment and long-term relationships with its major customers. We also manufacture and supply replacement motors and blowers for these systems once installed. Customers include major HVAC distributors.
•Fractional horsepower motors and blowers are also used across a wide range of other applications including white goods, water heating equipment, small pumps, compressors, and fans, and other small appliances. Demand for these products is driven primarily by consumer and light commercial market segments.
Power Transmission Solutions Segment
Our Power Transmission Solutions segment designs, manufactures and sells primarily:
•Mounted and unmounted bearings. Unmounted bearings are offered in a variety of types and styles. These include cam followers, radial bearings, and thrust bearings. Mounted bearings include industry specific designs that aim to solve customer problems. They are all available with a variety of options and sizes and include aerospace and specialty bearings, mounted bearings, unmounted bearings, and corrosion resistant bearings.
•High-quality conveyor products including chains, belts, sprockets, components, guide rails and wear strips. Conveying components enhance the efficiency, noise reduction, wash-down maintenance, lubrication reduction and energy conservation of conveying systems. Our products are highly engineered with input from industry experts.
•High-performance disc, diaphragm and gear couplings for applications including turbines, compressors, generators and pumps in many industries including petrochemical, refinery, power generation, gas pipeline and liquid natural gas. We also produce flexible couplings and transmission elements. Products include universal joints and gear, grid, jaw, elastomer, and disc couplings.
•Mechanical power transmission drives and components including: belt drives, bushings, chain and sprockets, drive tighteners and idlers, mechanical clutches, and torque overload devices. Our products serve a wide range of industries and applications, such as the following: aggregate, forestry and wood products, grain and biofuels, power generation, food and beverage, commercial HVAC, and refrigeration.
•Gearboxes for motion control within complex equipment and systems used for a variety of applications. We provide a wide array of gear types, shaft configurations, ratios, housing materials and mounting methods. Right angle worm gear and bevel units can be specified for less than 100 inch lbs. of torque to over 132,000 inch lbs. of torque. Helical gear units are offered from 100 inch lbs. to over 500,000 inch lbs. of torque. Our products include worm gearing, helical offset, concentric, and right angle, bevel and miter gearing, and spur gearing. This gearing reduces the speed and increases the torque from an electric motor or other prime mover to meet the requirements of equipment.
Many of our products are originally sold and installed into OEM equipment within various industries. Our reputation and long history of providing highly reliable products creates an end user specification for replacement through the distribution channel. We also provide application and design assistance based on our deep knowledge of our products and their applications.
OEMs and end users of a variety of motion control and other industrial applications typically combine the types of motors, controls and power transmission products we offer. We seek to take advantage of this practice and to enhance our product penetration by leveraging cross-marketing and product line combination opportunities between our Commercial Systems,
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Industrial Systems, Climate Solutions and Power Transmission Solutions products. Our growth strategy also includes (i) driving organic sales growth through the introduction of innovative new products, (ii) establishing and maintaining new customers, as well as developing new opportunities with existing customers, (iii) participating in higher growth geographic markets, and (iv) identifying and consummating strategic, value creating acquisitions.
Pending Transaction
On February 15, 2021, we entered into definitive agreements with Rexnord, Land Newco, Inc., a wholly owned indirect subsidiary of Rexnord (“Land”), and Phoenix 2021, Inc., our wholly owned subsidiary (“Merger Sub”), with respect to a Reverse Morris Trust transaction pursuant to which, immediately after Rexnord undergoes an internal reorganization and spin-off of its PMC Business to Land, Merger Sub will merge with and into Land and all shares of Land common stock (other than those held by Rexnord, Land, the Company, Merger Sub or their respective subsidiaries) will be converted into the right to receive shares of our common stock, $0.01 par value per share, as calculated and subject to adjustment as set forth in the merger agreement for the Rexnord Transaction.When the merger is completed, Land (which at that time will hold the PMC business) will be our wholly owned subsidiary.
Closing of the Rexnord Transaction is subject to various closing conditions, including the receipt of the approval of our and Rexnord's shareholders, the receipt of regulatory approvals and other customary closing conditions.
The Rexnord Transaction is described more fully below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview” and our Current Report on Form 8-K filed with the SEC on February 19, 2021 (the "Rexnord 8-K"). This description is qualified in its entirety by the description set forth in the Rexnord 8-K.
Acquisitions
In fiscal 2018, we completed one acquisition in the Commercial Systems segment.
•On April 10, 2018, we acquired Nicotra Gebhardt S.p.A. ("NG") for $161.5 million in cash, net of $8.5 million of cash acquired. NG is a leader in critical, energy-efficient systems for ventilation and air quality. NG manufactures, sells and services fans and blowers under the industry leading brands of Nicotra and Gebhardt. The financial results of NG have been included in our Commercial Systems segment from the date of acquisition.
Divestitures
In fiscal 2019, we completed two divestitures in the Commercial Systems segment.
•On January 7, 2019, we sold our Regal Drive Technologies business and received proceeds of $119.9 million. We recognized a gain on sale of $41.0 million in the Consolidated Statements of Income.
•On July 1, 2019, we sold our Vapor Recovery business and received proceeds of $19.2 million. We recognized a loss on sale of $1.9 million in the Consolidated Statements of Income.
In fiscal 2019, we completed one divestiture in the Climate Solutions segment.
•On April 1, 2019, we sold our CapCom business and received proceeds of $9.9 million. We recognized a gain on sale of $6.0 million in the Consolidated Statements of Income.
In fiscal 2019, we completed one divestiture in the Power Transmission Solutions segment.
•On April 1, 2019, we sold our Velvet Drive business and received proceeds of $8.9 million. We recognized a loss on sale of $0.5 million in the Consolidated Statements of Income.
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Sales, Marketing and Distribution
We sell our products directly to OEMs, distributors and end-users. We have multiple business units that promote our brands across their respective sales organizations. These sales organizations consist of varying combinations of our own internal direct sales people as well as exclusive and non-exclusive manufacturers' representative organizations.
We operate large distribution facilities in Plainfield, Indiana; El Paso and McAllen, Texas; LaVergne, Tennessee; Florence, Kentucky; and Monterrey, Mexico which serve as hubs for our North American distribution and logistics operations. Products are shipped from these facilities to our customers utilizing common carriers. We also operate numerous warehouse and distribution facilities in our global markets to service the needs of our customers. In addition, we have many manufacturer representatives' warehouses located in specific geographic areas to serve local customers.
We derive a significant portion of revenue from our OEM customers. In our HVAC business, a large portion of our sales are to key OEM customers which makes our relationship with each of these customers important to our business. We have long standing relationships with these customers and we expect these customer relationships will continue for the foreseeable future. Despite this relative concentration, we had no customer that accounted for more than 10% of our consolidated net sales in fiscal 2020, fiscal 2019 or fiscal 2018.
Many of our motors are incorporated into residential applications that OEMs sell to end users. The number of installations of new and replacement HVAC systems, pool pumps and related components is higher during the spring and summer seasons due to the increased use of air conditioning and swimming pools during warmer months. As a result, our revenues tend to be higher in the second and third quarters.
Competition
Commercial Systems Segment
Electric motor manufacturing is a highly competitive global industry in which there is emphasis on quality, reliability, and technological capabilities such as energy efficiency, delivery performance, price and service. We compete with a large number of domestic and international competitors due in part to the nature of the products we manufacture and the wide variety of applications and customers we serve. Many manufacturers of electric motors operate production facilities in many different countries, producing products for both the domestic and export markets. Global electric motor manufacturers, particularly those located in Europe, Brazil, China, India and elsewhere in Asia, compete with us as they attempt to expand their market penetration around the world, especially in North America.
Our major competitors in the Commercial Systems segment include Broad-Ocean Motor Co., Lafert, ABB Ltd., Siemens AG, Nidec Corporation, Ziehl-Abegg, Weg S.A., and ebm-papst Mulfingen GmbH & Co.KG.
Industrial Systems Segment
Our major competitors in the Industrial Systems segment include Wolong Electric Group Ltd., Kirloskar Brothers Limited, Crompton Greaves Limited, Lafert, ABB Ltd., Siemens AG, Toshiba Corporation, Cummins, Inc., Nidec Corporation, TECHTOP Electric Motors, Weg S.A., Hyundai, and Teco-Westinghouse Motor Company.
Climate Solutions Segment
Our major competitors in the Climate Solutions segment include Nidec Corporation, Broad-Ocean Motor Co., ebm-papst Mulfingen GmbH & Co.KG, Welling Holding Ltd., McMillan Motors, and Panasonic Corporation.
Power Transmission Solutions Segment
The power transmission products market is fragmented. Many competitors in the market offer limited product lines or serve specific applications, industries or geographic markets. Other larger competitors offer broader product lines that serve multiple end uses in multiple geographies. Competition in the Power Transmission Solutions segment is based on several factors including quality, lead times, custom engineering capability, pricing, reliability, and customer and engineering support.
Our major competitors in the Power Transmission Solutions segment include Altra Industrial Motion, Inc., Dodge (a subsidiary of ABB Ltd.), Rexnord Corporation, SKF and Timken Company.
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Engineering, Research and Development
We believe that innovation is critical to our future growth and success and are committed to investing in new products, technologies and processes that deliver real value to our customers. Our research and development expenses consist primarily of costs for (i) salaries and related 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 gain additional market share, whether in new or existing segments.
We believe the key driver of our innovation strategy is the development of products that include energy efficiency, embedded intelligence and variable speed technology solutions. With our emphasis on product development and innovation, our businesses filed 4021 Non-Provisional United States ("US") patents, 26 Provisional US patents and an additional 6030 Non-Provisional foreign patents in fiscal 2018.2020.
Each of our business units has its own, as well as shared, product development and design teams that continuously work to enhance our existing products and develop new products for our growing base of customers that require custom and standard solutions. We believe we have state of the art product development and testing laboratories. We believe these capabilities provide a significant competitive advantage in the development of high quality motors, electric generators, and mechanical products incorporating leading design characteristics such as low vibration, low noise, improved safety, reliability, sustainability and enhanced energy efficiency. Increasingly, our research and development and other engineering efforts have focused on smart products that communicate and allow for monitoring, diagnostics and predictive maintenance.
Manufacturing and Operations
We have developed and acquired global operations in locations such as China, Mexico, Europe, India, Mexico and Thailand so that we can sell our products in these markets, follow our multinational customers, take advantage of global talent and complement our flexible, rapid response operations in the US, Canada and Europe. Our vertically integrated manufacturing operations, including our own aluminum die casting and steel stamping operations, are an important element of our rapid response capabilities. In addition, we have an extensive internal logistics operation and a network of distribution facilities with the capability to modify stock products to quickly meet specific customer requirements in many instances.requirements. This gives us the ability to efficiently and promptly deliver a customer's unique product to the desired location.
We manufacture a majority of the products that we sell, but also strategically outsourcesource components and finished goods from an established global network of suppliers. We aggressively pursue global sourcing to reduce our overall costs.costs and lead-time. We generally maintain a dual sourcing capability to ensure a reliable supply source for our customers, although we do depend on a limited number of keysingle source suppliers for certain materials and components. We regularly invest in machinery and equipment to improve and maintain our facilities. Additionally, we have typically obtained significant amounts of quality capital equipment as part of our acquisitions, often increasing overall capacity and capability. Base materials for our products consist primarily of steel, copper and aluminum. Additionally, significant components of our product costs consist of bearings, electronics,electronic assemblies, permanent magnets and ferrous and non-ferrous castings.
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Facilities
We have manufacturing, sales and service facilities in the US, Mexico, China, Europe, India, Thailand, and Australia, as well as a number of other locations throughout the world. Our Commercial and Industrial Systems segment currently includes 10646 manufacturing, service, office and distribution facilities of which 4614 are principal manufacturing facilities and 213 are principal warehouse facilities. The Commercial Systems segment's present operating facilities contain a total of approximately 4 million square feet of space, of which approximately 31% are leased. Our Industrial Systems segment currently includes 25 manufacturing, service, office and distribution facilities of which 11 are principal manufacturing facilities and 1 is a principal warehouse facility. The Industrial Systems segment's present operating facilities contain a total of approximately 7.92.8 million square feet of space, of which approximately 33%26% are leased. Our Climate Solutions segment includes 3429 manufacturing, service, office and distribution facilities, of which 139 are principal manufacturing facilities and 43 are principal warehouse facilities. The Climate Solutions segment's present operating facilities contain a total of approximately 3.02.5 million square feet of space, of which approximately 55%54% are leased. Our Power Transmission Solutions segment currently includes 2925 manufacturing, service, office and distribution facilities of which 1713 are principal manufacturing facilities and 3 are1 is a principal warehouse facilities.facility. The Power Transmission Solutions segment's present operating facilities contain a total of approximately 3.12.5 million square feet of space, of which approximately 10%24% are leased. Our principal executivecorporate offices are located in Beloit, Wisconsin in an approximately 50,000 square foot owned office building and in Rosemont, Illinois in an approximately 12,100 square foot rented office building. We believe our equipment and facilities are well maintained and adequate for our present needs.
Backlog
Our business units have historically shipped the majority of their products in thewithin a month from when the order iswas received. As of December 29, 2018,January 2, 2021, our backlog was $493.4$444.8 million, as compared to $447.2$415.9 million on December 30, 2017.28, 2019. We believe that virtually all of our backlog will be shipped in fiscal 2019.2021.
Patents, Trademarks and Licenses
We own a number of US patents and foreign patents relating to our businesses. While we believe that our patents provide certain competitive advantages, we do not consider any one patent or group of patents essential to our business as a whole. We also use various registered and unregistered trademarks, and we believe these trademarks are significant in the marketing of most of our products. However, we believe the successful manufacture and sale of our products generally depends more upon our technological, manufacturing and marketing skills.
At the end of fiscal 2018,2020, we employed approximately 24,600 employees23,000 full-time associates worldwide. Of those employees,associates, approximately 11,35511,000 were located in Mexico; approximately 5,3203,700 in the US; approximately 3,6603,000 in China; approximately 1,3602,200 in India; and approximately 2,9053,100 in the rest of the world.
We feel that our associates are our most valuable assets, and consider our employeeassociate relations to be very good. We take Our objective is to create a high-performing organization by attracting and retaining high-quality, diverse talent and creating an environment in which all associates have the opportunity to reach their full potential.
The core goal of our performance management process is to develop and maintain a high-performing organization that is positioned to meet our business objectives. Creating a high-performing organization requires associates and managers to exhibit transparency in their day-to-day interactions, and use data to drive decision-making and accountability. Our performance management process focuses on enabling associates and managers to gain alignment through:
•a structured annual goal-setting process where managers and associates work collaboratively to develop specific, measurable, achievable, relevant and time bound (SMART) goals that align with our overarching business objectives and our company values;
•clear, organization-wide expectations that managers and associates monitor progress toward completion of their SMART goals with regular coaching sessions and periodic evaluations; and
•an annual employee surveyperformance assessment that provides a direct link between the associate’s pay and in fiscal 2018, 96%performance.
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In addition to our focus on performance, we also have a strong commitment to our company values of integrity, responsibility, diversity and inclusion, customer success, innovation with purpose, continuous improvement, performance, and a passion to win, all with a sense of urgency. We regularly promote these values from the top down. In 2020, both our executive leadership team and some of our employees tookassociates participated in a series of videos that communicated the surveyimportance our values to our global workforce. In addition to instilling our corporate values as a key part of associate life, we promote a commitment to ethics and 88%compliance among our workforce through our Code of respondents answered favorablyBusiness Conduct and Ethics. In 2020, 98.6% of our global workforce completed training on the Code of Business Conduct and Ethics.
As mentioned above, diversity and inclusion are rooted in our company values. We believe that we are at our best when we bring to bear the unique perspectives, experiences, backgrounds and ideas of our associates. We seek a workforce that reflects the communities in which we operate, and strive to create diverse, equal and inclusive workplaces where all of our associates have the opportunity to achieve their full potential.
We are also committed to improving the health and well-being of our associates. Regal’s US wellness program was established in 2008 and is continuously evolving to better educate, motivate and reward our associates for maintaining and achieving healthy measures. During our wellness plan year running from October 1, 2019 through September 30, 2020, 35% of our US associates participated in on-site biometric screening that provides them with key metrics such as BMI, blood pressure, and triglyceride, cholesterol and blood glucose levels.
As a company, we believe that our value of responsibility requires community engagement, and we encourage our associates to share in our commitment to the question "Do you enjoy working at Regal?".communities where we operate. We have an established charitable foundation, which is governed by an advisory board comprised of our associates. The Regal Charitable Foundation focuses on supporting the United Way and other 501(c)(3) nonprofit organizations in the areas of health and human services, education and the arts, and civic and disaster relief, and prioritizes requests that are submitted by our associates. In fiscal 2020, the Regal Charitable Foundation provided $570,481 of support to organizations in the communities where our associates live and work.
Information About Our Executive Officers
The names, ages, and positions of our executive officers as of February 26, 2019March 2, 2021 are listed below along with their business experience during the past five years. Officers are elected annually by the Board of Directors. There are no family relationships among these officers, nor any arrangements or understanding between any officer and any other persons pursuant to which the officer was elected.
| Executive Officer | Age | Position | Business Experience and Principal Occupation | |||||||||||||||||
| Robert J. Rehard | Vice President, | Joined the Company in January 2015, as Vice President, Corporate Controller and Principal Accounting Officer and | ||||||||||||||||||
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| Thomas E. Valentyn | Vice President, General Counsel and Secretary | Joined the Company in December 2013, as Associate General Counsel and | ||||||||||||||||||
| Vice President, | Joined the Company in | |||||||||||||||||||
| Cheryl A. Lewis | 52 | Vice President, Chief Human Resources Officer | Joined the Company in March 2020, as Vice President, Chief Human Resources Officer. Prior to | |||||||||||||||||
| Scott D. Brown | 61 | President, Commercial Systems Segment | Joined the Company in August 2005 and became President, Commercial Systems Segment in June 2019. Prior to being promoted to his current position, Mr. Brown, in successive roles, served as Vice President, Business Leader of Commercial Motors, Vice President, Business Leader of Control Solutions, and Vice President, Manufacturing. Prior to joining the Company, Mr. Brown spent 17 years with General Electric in operations and various business leadership roles. | |||||||||||||||||
| Eric S. McGinnis | 50 | President, Industrial Systems Segment | Joined the Company in August 2005 and became President, Industrial Systems Segment in June 2019. Prior to being promoted to his current position, Mr. McGinnis served as Vice President, Business Development and Vice President, Industrial Motors. Prior to joining the Company, Mr. McGinnis spent 12 years with General Electric in various business leadership roles. | |||||||||||||||||
| John C. Kunze | 58 | President, Climate Solutions Segment | Joined the Company in September 2007 and became President, Climate Solutions Segment in June 2019. Prior to being promoted to his current position, Mr. Kunze served as Vice President, Business Leader of Climate Solutions, and, before that, Vice President, Business Leader of Air Moving. From 2000-2007, Mr. Kunze served as Chief Operating Officer of Jakel, Inc. He began his career with Invensys and Emerson. | |||||||||||||||||
| Jerrald R. Morton | 59 | President, Power Transmission Solutions Segment | Joined the Company in February 2015 and became President, Power Transmission Solutions Segment in June 2019. Prior to being promoted to his current position, Mr. Morton served as Vice President, Business Leader of Power Transmission Solutions from 2017-2019, and led the global operations for Regal’s power transmission business from 2015-2017. Prior to joining the Company, Mr. Morton spent 28 years with Emerson in a variety of roles in Quality, Technology, and Operations and was Vice President, Global Operations of Emerson’s power transmission business at the time Regal Beloit Corporation acquired that business. | |||||||||||||||||
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As previously reported, Mr. Charles A. HinrichsJonathan J. Schlemmer retired as Vice President and Chief Financial Officer on March 31, 2018, and Mr. Rehard was promoted to the role of Vice President and Chief FinancialOperating Officer effective April 1, 2018.January 31, 2020, consistent with a reorganization of the Company’s leadership that resulted in the elimination of the Chief Operating Officer position.
Website Disclosure
Our Internet address is www.regalbeloit.com. We make available free of charge (other than an investor's own Internet access charges) through our Internet website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. In addition, we have adopted a Code of Business Conduct and Ethics that applies to our officers, directors and employeesassociates which satisfies the requirements of the New York Stock Exchange regarding a “code of business conduct.” We have also adopted Corporate Governance Guidelines addressing the subjects required by the New York Stock Exchange. In fiscal 2019,September 2020, we produced our first everupdated Sustainability Report. We make copies of the foregoing, as well as the charters of our Board committees, available free of charge on our website. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers from, our Code of Business Conduct and Ethics by posting such information on our web site at the address stated above. We are not including the information contained on or available through our website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.
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ITEM 1A - RISK FACTORS
You should carefully consider each of the risks described below, together with all of the other information contained in this Annual Report on Form 10-K, before making an investment decision with respect to our securities. If any of the following risks develop into actual events, our business, financial condition, results of operations, or cash flow could be materially and adversely affected and you may lose all or part of your investment.
Risks Relating to Our Operations and Strategy
The COVID-19 pandemic has adversely impacted our business and could continue to have a material adverse impact on our business, results of operation, financial condition, liquidity, customers, suppliers, and the geographies in which we operate.
The COVID-19 pandemic has significantly increased economic, demand and operational uncertainty. We have global operations, customers and suppliers, including in countries most impacted by COVID-19. Authorities around the world have taken a variety of measures to slow the spread of COVID-19, including travel bans or restrictions, increased border controls or closures, quarantines, shelter-in-place orders and business shutdowns and such authorities may impose additional restrictions. We have also taken actions to protect our employees and to mitigate the spread of COVID-19, including embracing guidelines set by the World Health Organization and the U.S. Centers for Disease Control and Prevention on social distancing, good hygiene, restrictions on employee travel and in-person meetings, and changes to employee work arrangements including remote work arrangements where feasible. The actions taken around the world to slow the spread of COVID-19 have also impacted our customers and suppliers, and future developments could cause further disruptions to us due to the interconnected nature of our business relationships.
The impact of COVID-19 on the global economy and our customers, as well as recent volatility in commodity markets, has negatively impacted demand for our products and could continue to do so in the future. Its effects could also result in further disruptions to our manufacturing operations, including higher rates of employee absenteeism, and supply chain, which could continue to negatively impact our ability to meet customer demand. Additionally, the potential deterioration and volatility of credit and financial markets could limit our ability to obtain external financing. The extent to which COVID-19 will impact our business, results of operations, financial condition or liquidity is highly uncertain and will depend on future developments, including the spread and duration of the virus, potential actions taken by governmental authorities, and how quickly economic conditions stabilize and recover.
We expect to incur costs and charges as a result of restructuring activities such as facilities and operations consolidations and workforce reductions that we expect will reduce on-going costs, and those restructuring activities also may be disruptive to our business and may not result in anticipated cost savings.
We have been consolidating facilities and operations in an effort to make our business more efficient and expect to continue to review our overall manufacturing footprint. We have incurred, and expect in the future to incur, additional costs and restructuring charges in connection with such consolidations, workforce reductions and other cost reduction measures that have adversely affected and, to the extent incurred in the future would adversely affect, our future earnings and cash flows. Furthermore, such actions may be disruptive to our business. This may result in production inefficiencies, product quality issues, late product deliveries or lost orders as we begin production at consolidated facilities, which would adversely impact our sales levels, operating results and operating margins. In addition, we may not realize the cost savings that we expect to realize as a result of such actions.
Our ability to establish, grow and maintain customer relationships depends in part on our ability to develop new products and product enhancements based on technological innovation, such as IoT, and marketplace acceptance of new and existing products, including products related to technology not yet adopted or utilized in certain geographic locations in which we do business.
The electric motor and power transmission industries in recent years have seen significant evolution and innovation, particularly with respect to increasing energy efficiency and control enhancements. Our ability to effectively compete in these industries depends in part on our ability to continue to develop new technologies and innovative products and product enhancements, including enhancements based on technological innovation such as IoT. Further, many large customers in these industries generally desire to purchase from companies that can offer a broad product range, which means we must continue to develop our expertise in order to design, manufacture and sell these products successfully. This requires that we make significant investments in engineering, manufacturing, customer service and support, research and development and intellectual property protection, and there can be no assurance that in the future we will have sufficient resources to continue to make such investments. If we are unable to meet the needs of our customers for innovative products or product variety, or if our products
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become technologically obsolete over time due to the development by our competitors of technological breakthroughs or otherwise, our revenues and results of operations may be adversely affected. In addition, we may incur significant costs and devote significant resources to the development of products that ultimately are not accepted in the marketplace, do not provide anticipated enhancements, or do not lead to significant revenue, which may adversely impact our results of operations.
Our dependence on, and the price of, raw materials may adversely affect our gross margins.
Many of the products we produce contain key materials such as steel, copper, aluminum and electronics. Market prices for those materials can be volatile due to changes in supply and demand, manufacturing and other costs, regulations and tariffs, economic conditions and other circumstances. We may not be able to offset any increase in commodity costs through pricing actions, productivity enhancements or other means, and increasing commodity costs may have an adverse impact on our gross margins, which could adversely affect our results of operations and financial condition.
In each of our Climate Solutions and Commercial and Industrial Systems segments, we depend on revenues from several significant customers, and any loss, cancellation or reduction of, or delay in, purchases by these customers may have a material adverse effect on our business.
We derive a significant portion of the revenues of our motor businesses from several key OEM customers. Our success will depend on our continued ability to develop and manage relationships with these customers. We have long standing relationships with these customers and we expect these customer relationships will continue for the foreseeable future. Our reliance on sales from customers makes our relationship with each of these customers important to our business. We cannot assure you that we will be able to retain these key customers. Some of our customers may in the future shift some or all of their purchases of products from us to our competitors or to other sources. The loss of one or more of our large customers, any reduction or delay in sales to these customers, our inability to develop relationships successfully with additional customers, or future price concessions that we may make could have a material adverse effect on our results of operations and financial condition.
As of December 29, 2018,January 2, 2021, we had $1.3 billiongoodwill of $1,518.2 million and an indefinite-lived trade name of $122.8 million. Goodwill represents the excess of cost over the fair market value of net assets acquired in aggregate debt outstanding underbusiness combinations. The indefinite-lived trade name intangible represents a long-standing brand acquired in a business combination and is assumed to have indefinite life. We review goodwill and the indefinite-lived trade name intangible at least annually for impairment and any excess in carrying value over the estimated fair value is charged to the results of operations. Our estimates of fair value are based on assumptions about the future operating cash flows, growth rates, discount rates applied to these cash flows and current market estimates of value. A reduction in net income resulting from the write down or impairment of goodwill or the indefinite-lived trade name intangible would affect financial results. If we are required to record a significant charge to earnings in our various financing arrangements, $248.6 million in cash and cash equivalents and $401.2 million in available borrowings underconsolidated financial statements because an impairment of goodwill or the indefinite-lived trade name intangible is determined, our current revolving credit facility. Our ability to make required payments of principal and interest on our increased debt levels will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations or that future borrowings will be available under our current credit facilities in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. In addition, our credit facilities contain financial and restrictive covenants that could limit our ability to, among other things, borrow additional funds or take advantage of business opportunities. Our failure to comply with such covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all our indebtedness or otherwise have a material adverse effect on our business, financial condition, results of operations and debt service capability. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.” Our indebtedness may have important consequences. For example, it could:
Portions of our total sales come directly from customers in key markets and industries. A significant or prolonged decline or disruption in one of those markets or industries could result in lower capital expenditures by such customers, which could have a material adverse effect on our results of operations and financial condition.
Portions of our total sales are dependent directly upon the level of capital expenditures by customers in key markets and industries, such as HVAC, refrigeration, power generation, oil and gas, and unit material handling or water heating. A significant or prolonged decline or disruption in one of those markets or industries may result in some of such customers delaying, canceling or modifying projects, or may result in nonpayment of amounts that are owed to us. These effects could have a material adverse effect on our results of operations and financial condition.
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We sell certain products for high volume applications, and any failure of those products to perform as anticipated could result in significant liability and expenses that may adversely affect our business and results of operations.
We manufacture and sell a number of products for high volume applications, including electric motors used in pools and spas, residential and commercial heating, ventilation and air conditioning and refrigeration equipment. Any failure of those products to perform as anticipated could result in significant product liability, product recall or rework, or other costs. The costs of product recalls and reworks are not generally covered by insurance. If we were to experience a product recall or rework in connection with products of high volume applications, our financial condition or results of operations could be materially adversely affected.
One of our subsidiaries that we 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 regulation 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. Based on the current facts, we cannot assure you that these claims, individually or in the aggregate, will not have a material adverse effect on our subsidiary's results of operations, financial condition or cash flows. We cannot reasonably predict the outcome of these claims, the nature or extent of any CPSC or other remedial actions, if any, that our subsidiary or we on their behalf 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.
Our business may not generate cash flow from operations in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs, we could become increasingly vulnerable to general adverse economic and industry conditions and interest rate trends, and our ability to obtain future financing may be limited.
As of January 2, 2021, we had $1.1 billion in aggregate debt outstanding under our various financing arrangements, $611.3 million in cash and cash equivalents and $499.8 million in available borrowings under our current revolving credit facility. Our ability to make required payments of principal and interest on our debt levels will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations or that future borrowings will be available under our current credit facilities in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. In addition, our credit facilities contain financial and restrictive covenants that could limit our ability to, among other things, borrow additional funds or take advantage of business opportunities. Our failure to comply with such covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all our indebtedness or otherwise have a material adverse effect on our business, financial condition, results of operations and debt service capability. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.” Our indebtedness may have important consequences. For example, it could:
•make it more challenging for us to obtain additional financing to fund our business strategy and acquisitions, debt service requirements, capital expenditures and working capital;
•increase our vulnerability to interest rate changes and general adverse economic and industry conditions;
•require us to dedicate a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the availability of our cash flow to finance acquisitions and to fund working capital, capital expenditures, manufacturing capacity expansion, business integration, research and development efforts and other general corporate activities;
•limit our flexibility in planning for, or reacting to, changes in our business and our markets; and/or
•place us at a competitive disadvantage relative to our competitors that have less debt.
In addition, our credit facilities require us to maintain specified financial ratios and satisfy certain financial condition tests, which may require that we take action to reduce our debt or to act in a manner contrary to our business strategies. If an event of default under our credit facility or senior notes were to occur, the lenders could elect to declare all amounts outstanding under the applicable agreement, together with accrued interest, to be immediately due and payable.
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We depend on certain key suppliers, and any loss of those suppliers or their failure to meet commitments may adversely affect our business and results of operations.
We are dependent on a single or limited number of suppliers for some materials or components required in the manufacture of our products. If any of those suppliers fail to meet their commitments to us in terms of delivery or quality, we may experience supply shortages that could result in our inability to meet our customers' requirements, or could otherwise experience an interruption in our operations that could negatively impact our business and results of operations.
Sales of products incorporated into HVAC systems and other residential applications are seasonal and affected by the weather; mild or cooler weather could have an adverse effect on our operating performance.
Many of our motors are incorporated into HVAC systems and other residential applications that OEMs sell to end users. The number of installations of new and replacement HVAC systems or components and other residential applications is higher during the spring and summer seasons due to the increased use of air conditioning during warmer months. Mild or cooler weather conditions during the spring and summer season often result in end users deferring the purchase of new or replacement HVAC systems or components. As a result, prolonged periods of mild or cooler weather conditions in the spring or summer season in broad geographical areas could have a negative impact on the demand for our HVAC motors and, therefore, could have an adverse effect on our operating performance. In addition, due to variations in weather conditions from year to year, our operating performance in any single year may not be indicative of our performance in any future year.
Our success is highly dependent on qualified and sufficient staffing. Our failure to attract or retain qualified personnel, including our senior management team, could lead to a loss of revenue or profitability.
Our success depends, in part, on the efforts and abilities of our senior management team and key associates and the contributions of talented associates in various operations and functions, such as engineering, finance, sales, marketing, manufacturing, etc. The skills, experience and industry contacts of our senior management team significantly benefit our operations and administration. The failure to attract or retain members of our senior management team and key talent could have a negative effect on our operating results.
Risks Relating to Our Global Footprint
We operate in the highly competitive global electric motors and controls, power generation and power transmission industries.
The global electric motors and controls, power generation and power transmission industries are highly competitive. We encounter a wide variety of domestic and international competitors due in part to the nature of the products we manufacture and the wide variety of applications and customers we serve. In order to compete effectively, we must retain relationships with major customers and establish relationships with new customers, including those in developing countries. Moreover, in certain applications, customers exercise significant power over business terms. It may be difficult in the short-term for us to obtain new sales to replace any decline in the sale of existing products that may be lost to competitors. Our failure to compete effectively may reduce our revenues, profitability and cash flow, and pricing pressures resulting from competition may adversely impact our profitability.
We have continued to see a trend with certain customers who are attempting to reduce the number of vendors from which they purchase product in order to reduce their costs and diversify their risk. As a result, we may lose market share to our competitors in some of the markets in which we compete.
In addition, some of our competitors are larger and have greater financial and other resources than we do. There can be no assurance that our products will be able to compete successfully with the products of these other companies.
We may also choose to exit certain businesses, markets, or channels based on a variety of factors including our 80/20 initiatives.
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We manufacture a significant portion of our products outside the US, and political, societal or economic instability or public health crises may present additional risks to our business.
Approximately 19,300 of our approximate 23,000 total associates and 35 of our principal manufacturing and warehouse facilities are located outside the US. International operations generally are subject to various risks, including political, societal and economic instability, local labor market conditions, public health crises, breakdowns in trade relations, the imposition of tariffs and other trade restrictions, lack of reliable legal systems, ownership restrictions, the impact of government regulations, the effects of income and withholding taxes, governmental expropriation or nationalization, and differences in business practices. We may incur increased costs and experience delays or disruptions in product deliveries and payments in connection with international manufacturing and sales that could cause loss of revenue.
Unfavorable changes in the political, regulatory and business climates in countries where we have operations could have a material adverse effect on our financial condition, results of operations and cash flows, including, for example, the uncertainty surrounding the effect of the United Kingdom’s exit from the European Union, commonly referred to as “Brexit,” trade relations between the US and China, the implementation of the United States-Mexico-Canada Agreement (the "USMCA"), or the change in labor rates in Mexico.
In addition, as described in more detail above, the continued global spread of COVID-19 could have a material adverse effect on our financial condition, results of operations and cash flows.
We may suffer losses as a result of foreign currency fluctuations.
The net assets, net earnings and cash flows from our foreign subsidiaries are based on the US dollar equivalent of such amounts measured in the applicable functional currency. These foreign operations have the potential to impact our financial position due to fluctuations in the local currency arising from the process of re-measuring the local functional currency in the US dollar. Any increase in the value of the US dollar in relation to the value of the local currency, whether by means of market conditions or governmental actions such as currency devaluations, will adversely affect our revenues from our foreign operations when translated into US dollars. Similarly, any decrease in the value of the US dollar in relation to the value of the local currency will increase our operating costs in foreign operations, to the extent such costs are payable in foreign currency, when translated into US dollars.
Commodity, currency and interest rate hedging activities may adversely impact our financial performance as a result of changes in global commodity prices, interest rates and currency rates.
We use derivative financial instruments in order to reduce the substantial effects of currency and commodity fluctuations and interest rate exposure on our cash flow and financial condition. These instruments may include foreign currency and commodity forward contracts, currency swap agreements and currency option contracts, as well as interest rate swap agreements. We have entered into, and expect to continue to enter into, such hedging arrangements. By utilizing hedging instruments, we may forgo benefits that might result from fluctuations in currency exchange, commodity and interest rates. We also are exposed to the risk that counterparties to hedging contracts will default on their obligations. Any default by such counterparties might have an adverse effect on us.
Worldwide economic conditions may adversely affect our industry, business and results of operations.
General economic conditions and conditions in the global financial markets can affect our results of operations. Deterioration in the global economy could lead to higher unemployment, lower consumer spending and reduced investment by businesses, and could lead our customers to slow spending on our products or make it difficult for our customers, our vendors and us to accurately forecast and plan future business activities. Worsening economic conditions could also affect the financial viability of our suppliers, some of which we may consider key suppliers. If the commercial, industrial, residential HVAC, power generation and power transmission markets significantly deteriorate, our business, financial condition and results of operations will likely be materially and adversely affected. Additionally, our stock price could decrease if investors have concerns that our business, financial condition and results of operations will be negatively impacted by a worldwide economic downturn.
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We are subject to tax laws and regulations in many jurisdictions and the inability to successfully defend claims from taxing authorities related to our current and/or acquired businesses could adversely affect our operating results and financial position.
A significant amount of our revenue is generated from customers located outside of the US, and an increasingly greater portion of our assets and associates are located outside of the US which requires us to interpret the income tax laws and rulings in each of those taxing jurisdictions. Due to the subjectivity of tax laws between those jurisdictions as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may differ from actual payments or assessments. Claims from taxing authorities related to these differences could have an adverse impact on our operating results and financial position.
Risks Relating to the Legal and Regulatory Environment
We are subject to litigation, including product liability and warranty claims that may adversely affect our financial condition and results of operations.
We are, from time to time, a party to litigation that arises in the normal course of our business operations, including product warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters. We face an inherent business risk of exposure to product liability and warranty claims in the event that the use of our products is alleged to have resulted in injury or other damage. While we currently maintain general liability and product liability insurance coverage in amounts that we believe are adequate, we cannot assure you that we will be able to maintain this insurance on acceptable terms or that this insurance will provide sufficient coverage against potential liabilities that may arise. Any product liability claim may also include the imposition of punitive damages, the award of which, pursuant to certain state laws, may not be covered by insurance.Any claims brought against us, with or without merit, may have an adverse effect on our business and results of operations as a result of potential adverse outcomes, the expenses associated with defending such claims, the diversion of our management's resources and time and the potential adverse effect to our business reputation.
Infringement of our intellectual property by third parties may harm our competitive position, and we may incur significant costs associated with the protection and preservation of our intellectual property.
We own or otherwise have rights in a number of patents and trademarks relating to the products we manufacture, which have been obtained over a period of years, and we continue to actively pursue patents in connection with new product development and to acquire additional patents and trademarks through the acquisitions of other businesses. These patents and trademarks have been of value in the growth of our business and may continue to be of value in the future. Our inability to protect this intellectual property generally, or the illegal breach of some or a large group of our intellectual property rights, would have an adverse effect on our business. In addition, there can be no assurance that our intellectual property will not be challenged, invalidated, circumvented or designed-around, particularly in countries where intellectual property rights are not highly developed or protected. We have incurred in the past and may incur in the future significant costs associated with defending challenges to our intellectual property or enforcing our intellectual property rights, which could adversely impact our cash flow and results of operations.
Third parties may claim that we are infringing their intellectual property rights and we could incur significant costs and expenses or be prevented from selling certain products.
We may be subject to claims from third parties that our products or technologies infringe on their intellectual property rights or that we have misappropriated intellectual property rights. If we are involved in a dispute or litigation relating to infringement of third party intellectual property rights, we could incur significant costs in defending against those claims. Our intellectual property portfolio may not be useful in asserting a counterclaim, or negotiating a license, in response to a claim of infringement or misappropriation. In addition, as a result of such claims of infringement or misappropriation, we could lose our rights to technology that are important to our business, or be required to pay damages or license fees with respect to the infringed rights or be required to redesign our products at substantial cost, any of which could adversely impact our cash flows and results of operations.
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We may incur costs or suffer lossesreputational damage due to improper conduct of our associates, agents or business partners.
We are subject to a variety of domestic and foreign laws, rules and regulations relating to improper payments to government officials, bribery, anti-kickback and false claims rules, competition, export and import compliance, money laundering and data privacy. If our associates, agents or business partners engage in activities in violation of these laws, rules or regulations, we may be subject to civil or criminal fines or penalties or other sanctions, may incur costs associated with government investigations, or may suffer damage to our reputation.
Our operations are highly dependent on information technology infrastructure, and failures, attacks or breaches could significantly affect our business.
We depend heavily on our information technology infrastructure in order to achieve our business objectives. If we experience a problem that impairs this infrastructure, such as a computer virus, a problem with the functioning of an important IT application, or an intentional disruption of our IT systems by a third party, the resulting disruptions could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on our business in the ordinary course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to eliminate these problems and address related security concerns, including costs relating to investigation and remediation actions.
IT security threats via computer malware and other “cyber-attacks,” which are increasing in both frequency and sophistication, could also result in unauthorized disclosures of information, such as customer data, personally identifiable information or other confidential or proprietary material, and create financial liability, subject us to legal or regulatory sanctions, or damage our reputation. Moreover, because the techniques used to gain access to or sabotage systems often are not recognized until launched against a target, we may be unable to anticipate the methods necessary to defend against these types of attacks, and we cannot predict the extent, frequency or impact these attacks may have on us. While we continuously seek to maintain robust information security mechanisms and controls, the impact of a material IT event could have a material adverse effect on our competitive position, results of operations, financial condition and cash flow.
We have substantially completed the implementation of a global Enterprise Resource Planning (the “ERP”) system that redesigned and deployed a common information system. We will continue to implement the ERP system throughout the business. The process of implementation can be costly and can divert the attention of management from the day-to-day operations of the business. As we implement the ERP system, some elements may not perform as expected. This could have an adverse effect on our business.
We may be adversely affected by environmental, health and safety laws and regulations.
We are subject to various laws and regulations relating to the protection of the environment and human health and safety and have incurred and will continue to incur capital and other expenditures to comply with these regulations. Failure to comply with any environmental regulations, including more stringent environmental laws that may be imposed in the future, could subject us to future liabilities, fines or penalties or the suspension of production. In addition, if environmental and human health and safety laws and regulations are repealed, made less burdensome or implemented at a later date, demand for our products designed to comply with such regulations may be unfavorably impacted.
We are subject to changes in legislative, regulatory and legal developments involving income and other taxes.
We are subject to US federal, state, and international income, payroll, property, sales and use, fuel, and other types of taxes. Changes in tax rates, enactment of new tax laws, revisions of tax regulations, and claims or litigation with taxing authorities, including claims or litigation related to our interpretation and application of tax laws and regulations, could result in substantially higher taxes, could have a negative impact on our ability to compete in the global marketplace, and could have a significant adverse effect on our results or operations, financial conditions and liquidity.
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Risks Relating to Our Merger, Acquisition and Divestiture Activity
We and Rexnord may be unable to satisfy the conditions or obtain the approvals required to complete the Rexnord Transaction.
The consummation of the Rexnord Transaction is subject to numerous conditions, including consummation of certain transactions contemplated by the Agreement and Plan of Merger, by and among Rexnord, Land, Merger Sub and us (the “Merger Agreement”) and the Separation and Distribution Agreement by and among Rexnord, Land and us, the receipt of the approval of Rexnord's and our shareholders, the receipt of regulatory approvals, and other closing conditions. Neither Rexnord nor we can make any assurances that the Rexnord Transaction will be consummated on the terms or timeline currently contemplated, or at all. Both Rexnord and we have and will continue to expend time and resources and incur expenses related to the proposed Rexnord Transaction.
Governmental agencies may not approve the Rexnord Transaction or may impose conditions to the approval of the Rexnord Transaction or require changes to the terms of the Rexnord Transaction. Any such conditions or changes could have the effect of delaying completion of the Rexnord Transaction, imposing costs on or limiting the revenues of the combined company following the completion of the Rexnord Transaction or otherwise reducing the anticipated benefits of the Rexnord Transaction. Any condition or change which results in a “Burdensome Condition,” as such term is defined in the Merger Agreement might cause Rexnord and/or us to restructure or terminate the Rexnord Transaction.
Both we and Land will need to obtain debt financing to complete the Rexnord Transaction. Although commitment letters have been obtained from various lenders, the obligations of the lenders under the commitment letters are subject to the satisfaction or waiver of customary conditions, including, among others, the absence of any material adverse effect. Accordingly, there can be no assurance that these conditions will be satisfied or, if not satisfied, waived by the lenders. If we are not able to obtain alternative financing on commercially reasonable terms, it could prevent the consummation of the Rexnord Transaction or materially and adversely affect our business, liquidity, financial condition and results of operations if the Rexnord Transaction is ultimately consummated.
The extent of the dividend, if any, that we may pay, and the number of shares of our common stock that we may issue, in the Rexnord Transaction are uncertain.
The Merger Agreement provides that, in order to preserve the tax-free nature of the Rexnord Transaction, the number of shares of our common stock that may be issued in the Rexnord Transaction is subject to increase at closing such that former shareholders of Land (together with certain “overlapping shareholders” of ours and former shareholders of Land), own at least 50.8% of our outstanding common stock immediately following consummation of the transaction for tax purposes (or, in certain other circumstances in which overlapping shareholders are not being counted for this purpose, 50.1% of such shares).
In addition, in connection with the Rexnord Transaction, the parties have agreed that Rexnord will seek a U.S. Internal Revenue Service (“IRS”) private letter ruling with respect to certain tax aspects of the Rexnord Transaction, including matters relating to the nature and extent of shareholders who may be counted as overlapping shareholders for purposes of determining the exchange ratio in the merger of Merger Sub with and into Land (the “Merger”). The extent of the overlapping shareholders that may be counted in determining the exchange ratio for the Merger will depend on whether an IRS ruling is received and the contents of such IRS ruling.
In the event that the number of shares that we issue at the closing of the Rexnord Transaction is increased in the manner described above, including as a result of foreign currency fluctuations.our failure to be able to count our and Rexnord's overlapping shareholders, the Merger Agreement also provides that we will declare a special dividend to our shareholders in an amount that will depend on the number of shares being issued, but which may range in amount between zero and approximately $2.0 billion.
The net assets, net earningsextent of our and Rexnord's overlapping shareholders of is outside of our and Rexnord's control of and will not be known until the closing occurs. In addition, the grant of the IRS ruling is within the discretion of the IRS. We can offer no assurance concerning the extent of our and Rexnord's overlapping shareholdings at any closing of the Rexnord Transaction or assurance that the IRS ruling will be received.
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The amount of debt that we may incur in connection with the Rexnord Transaction is uncertain and may be substantial.
In connection with the Rexnord Transaction, we have agreed that the entity we would acquire in the transaction, which we refer to as Land, will prior to its spin-off by Rexnord incur approximately $487.0 million of indebtedness in order to fund a cash flows frompayment to a subsidiary of Rexnord. Following the closing, this indebtedness would be indebtedness of our foreign subsidiaries are basedwholly owned subsidiary. In addition, as part of the Rexnord Transaction, we have agreed to assume approximately $92.0 million of unfunded pension liabilities of the PMC business. Further, as part of the Rexnord Transaction, we may be required pay a cash dividend to our shareholders in an amount between zero and approximately $2.0 billion, depending on the US dollar equivalentnumber of such amounts measuredadditional shares of Company common stock that may be issued in connection with the Rexnord Transaction in order to satisfy tax requirements applicable to a Reverse Morris Trust transaction. If a special dividend is paid, we expect to fund it with new indebtedness, and we have entered into a debt commitment letter to fund that amount, which is described in more detail under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”. The size of the dividend that will ultimately be declared is uncertain and will remain so until the closing. We have also entered into other financing arrangements in connection with the Rexnord Transaction and expect to pay substantial fees and expenses in connection with them.
In the event that our debt levels and debt service obligations increase substantially in connection with the Rexnord Transaction, we will have less cash flow available for our business operations, we could become increasingly vulnerable to general adverse economic and industry conditions and interest rate trends, and our ability to obtain future financing may be limited.
Our ability to make required payments of principal and interest on our increased debt levels, and our ability to comply with financial and restrictive covenants with our lenders will be subject to the risks described above under “Risk Factors - Risks Relating to Our Operations and Strategy - Our business may not generate cash flow from operations in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs, we could become increasingly vulnerable to general adverse economic and industry conditions and interest rate trends, and our ability to obtain future financing may be limited”.
Our failure to successfully integrate the PMC Business and any future acquisitions into its business within its expected timetable could adversely affect the combined company’s future results and the market price of our common stock following the completion of the Rexnord Transaction.
The success of the Rexnord Transaction will depend, in large part, on our ability, as a combined company following the completion of the Rexnord Transaction, to realize the anticipated benefits of the Rexnord Transaction and on the sales and profitability of the combined company. To realize these anticipated benefits, the combined company must successfully integrate its businesses. This integration will be complex and time-consuming. The failure to successfully integrate and manage the challenges presented by the integration process may result in our failure to achieve some or all of the anticipated benefits of the Rexnord Transaction.
Potential difficulties that may be encountered in the applicable functional currency. These foreign operations have integration process include, among others:
•the potentialfailure to impactimplement our financial position due to fluctuations inbusiness plan for the local currency arising from the processcombined company;
•lost sales and customers as a result of re-measuring the local functional currency in the US dollar. Any increase in the valueour customers or customers of the US dollar in relationPMC Business deciding not to do business with the valuecombined company;
•risks associated with managing the larger and more complex combined company;
•integrating our personnel and the personnel of the local currency, whether by meansPMC Business while maintaining focus on providing consistent, high-quality products and service to customers;
•the loss of marketkey employees;
•unanticipated issues in integrating manufacturing, logistics, information, communications and other systems;
•unexpected liabilities of the PMC Business;
•possible inconsistencies in standards, controls, procedures, policies and compensation structures; and
•the impact on our internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002;
•and potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the Rexnord Transaction.
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If any of these events were to occur, our ability to maintain relationships with customers, suppliers and employees or governmental actions such as currency devaluations, willour ability to achieve the anticipated benefits of the Rexnord Transaction could be adversely affected, or could reduce our sales or earnings or otherwise adversely affect our revenuesbusiness and financial results after the Rexnord Transaction and, as a result, adversely affect the market price of our common stock.
Apart from the Rexnord Transaction, as part of our foreign operations when translated into US dollars. Similarly,growth strategy, we have made and expect to continue to make, acquisitions. Our company’s continued growth may depend on our ability to identify and acquire companies that complement or enhance our business on acceptable terms, but we may not be able to identify or complete future acquisitions. We may not be able to integrate successfully its recent acquisitions, or any decreasefuture acquisitions, operate these acquired companies profitably, or realize the potential benefits from these acquisitions.
The Company will incur significant costs related to the Rexnord Transaction that could have an adverse effect on its liquidity, cash flows and operating results.
The Company expects to incur significant one-time costs in connection with the Rexnord Transaction, including the cost of financing and other transaction costs, integration costs, and other costs that Company management believes are necessary to realize the anticipated synergies from the Rexnord Transaction. The incurrence of these costs may have a material adverse effect on the Company’s liquidity, cash flows and operating results in the value of the US dollarperiods in relation to the value of the local currency will increase our operating costs in foreign operations, to the extent such costswhich they are payable in foreign currency, when translated into US dollars.incurred.
Businesses that we have acquired or that we may acquire in the future, including the PMC Business, may have liabilities which are not known to us.
We have assumed liabilities of acquired businesses and may assume liabilities of businesses that we acquire in the future.future, including the PMC Business. There may be liabilities or risks that we fail, or are unable, to discover, or that we underestimate, in the course of performing our due diligence investigations of acquired businesses. Additionally, businesses that we have acquired or may acquire in the future may have made previous acquisitions, and we will be subject to certain liabilities and risks relating to these prior acquisitions as well. We cannot assure you that our rights to indemnification contained in definitive acquisition agreements that we have entered or may enter into will be sufficient in amount, scope or duration to fully offset the possible liabilities associated with the business or property acquired. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition or results of operations. As we begin to operate acquired businesses, we may learn additional information about them that adversely affects us, such as unknown or contingent liabilities, issues relating to compliance with applicable laws or issues related to ongoing customer relationships or order demand.
Divestitures of some of our businesses or product lines may have a material adverse effect on our results of operations, financial position and cash flows.
We continually evaluate the strategic fit of our businesses and products, which may result in divestitures. Any divestiture may result in write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our financial position. In addition, divestitures may result in asset impairment charges, including those related to goodwill and other intangible assets, which could have a material adverse effect on our financial condition and results of operations. Divestitures could involve additional risks, including difficulties in the separation of operations, products and personnel, the diversion of management’s attention, the disruption of our business and the potential loss of key employees.associates. There can be no assurance that we will be successful in addressing these or any other significant risks associated with divestitures.
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General Risks
Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest expense related to attract or retain qualified personnel, including our senior management team, could leadoutstanding debt.
Amounts drawn under our credit facility may bear interest rates in relation to a loss of revenue or profitability.
Our operations can be negatively impacted by natural disasters, terrorism, acts of war, international conflict, political and governmental actions which could harm our business.
Natural disasters, acts or threats of war or terrorism, international conflicts, and the actions taken by the US and other governments in response to such events could cause damage or disrupt our business operations, our suppliers, or our customers, and could create political or economic instability, any of which could have an adverse effect on our business. Although it is not possible to predict such events or their consequences, these events could decrease demand for our products, could make it difficult or impossible for us to deliver products, or could disrupt our supply chain. We may also be negatively impacted by actions by the US or foreign governments which could disrupt manufacturing and commercial operations, including policy changes affecting taxation, trade, immigration, currency devaluation, tariffs, customs, border actions and the like, including, for example, the uncertainty surrounding the effect of the United Kingdom’s impending exit from the European Union, commonly referred to as “Brexit,” trade relations between the US and China, the implementation of the USMCA, or the change in labor rates in Mexico.
Our stock may be subject to significant fluctuations and volatility.
The market price of shares of our common stock may be volatile. Among the factors that could affect our common stock price are those discussed above under “Risk Factors” as well as:
•domestic and international economic and political factors unrelated to our performance;
•quarterly fluctuation in our operating income and earnings per share results;
•decline in demand for our products;
•significant strategic actions by our competitors, including new product introductions or technological advances;
•fluctuations in interest rates;
•cost increases in energy, raw materials, intermediate components or materials, or labor; and
•changes in revenue or earnings estimates or publication of research reports by analysts.
In addition, stock markets may experience extreme volatility that may be unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
ITEM 1B - UNRESOLVED STAFF COMMENTS
None.
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ITEM 2 - PROPERTIES
Our principal executivecorporate offices are located in Beloit, Wisconsin in an approximately 50,000 square foot owned office building withand in Rosemont, Illinois in an approximately 50,00012,100 square feet.foot rented office building. We have manufacturing, sales and service facilities throughout the US and in Mexico, China, Europe, India Thailand, and Australia.Thailand.
Our Commercial and Industrial Systems segment currently includes 10646 facilities, of which 4614 are principal manufacturing facilities and 213 are principal warehouse facilities. The Commercial and Industrial Systems segment's present operating facilities contain a total of approximately 7.94.0 million square feet of space, of which approximately 33%31% are leased.
The following represents our principal manufacturing and warehouse facilities in the Commercial Systems segment (square footage in millions):
| Square Footage | ||||||||||||||||||||||||||
| Location | Facilities | Total | Owned | Leased | ||||||||||||||||||||||
| US | 5 | 1.1 | 0.6 | 0.5 | ||||||||||||||||||||||
| Mexico | 4 | 0.8 | 0.6 | 0.2 | ||||||||||||||||||||||
| China | 4 | 0.9 | 0.8 | 0.1 | ||||||||||||||||||||||
| Europe | 1 | 0.1 | 0.1 | — | ||||||||||||||||||||||
| Other | 3 | 0.4 | 0.2 | 0.2 | ||||||||||||||||||||||
| Total | 17 | 3.3 | 2.3 | 1.0 | ||||||||||||||||||||||
Our Industrial Systems segment currently includes 25 facilities, of which 11 are principal manufacturing facilities and 1 are principal warehouse facilities. The Industrial Systems segment's present operating facilities contain a total of approximately 2.8 million square feet of space, of which approximately 26% are leased.
The following represents our principal manufacturing and warehouse facilities in the Industrial Systems segment (square footage in millions):
| Square Footage | ||||||||||||||||||||||||||
| Location | Facilities | Total | Owned | Leased | ||||||||||||||||||||||
| US | 2 | 0.7 | 0.7 | — | ||||||||||||||||||||||
| Mexico | 2 | 0.3 | — | 0.3 | ||||||||||||||||||||||
| China | 2 | 0.6 | 0.6 | — | ||||||||||||||||||||||
| India | 2 | 0.3 | 0.2 | 0.1 | ||||||||||||||||||||||
| Europe | 1 | 0.2 | 0.2 | — | ||||||||||||||||||||||
| Other | 3 | 0.3 | 0.1 | 0.2 | ||||||||||||||||||||||
| Total | 12 | 2.4 | 1.8 | 0.6 | ||||||||||||||||||||||
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| Square Footage | ||||||||
| Location | Facilities | Total | Owned | Leased | ||||
| US | 12 | 2.3 | 1.4 | 0.9 | ||||
| Mexico | 8 | 1.2 | 0.7 | 0.5 | ||||
| China | 8 | 1.5 | 1.5 | — | ||||
| India | 3 | 0.6 | 0.5 | 0.1 | ||||
| Europe | 12 | 0.4 | 0.3 | 0.1 | ||||
| Other | 24 | 1.2 | 0.4 | 0.8 | ||||
| Total | 67 | 7.2 | 4.8 | 2.4 | ||||
Our Climate Solutions segment currently includes 3429 facilities, of which 139 are principal manufacturing facilities and 43 are principal warehouse facilities. The Climate Solutions segment's present operating facilities contain a total of approximately 3.02.5 million square feet of space, of which approximately 55%54% are leased.
The following represents our principal manufacturing and warehouse facilities in the Climate Solutions segment (square footage in millions):
| Square Footage | ||||||||||||||||||||||||||
| Location | Facilities | Total | Owned | Leased | ||||||||||||||||||||||
| US | 4 | 0.8 | 0.4 | 0.4 | ||||||||||||||||||||||
| Mexico | 4 | 0.7 | 0.3 | 0.4 | ||||||||||||||||||||||
| China | 2 | 0.3 | — | 0.3 | ||||||||||||||||||||||
| India | 1 | 0.4 | 0.4 | — | ||||||||||||||||||||||
| Other | 1 | 0.1 | — | 0.1 | ||||||||||||||||||||||
| Total | 12 | 2.3 | 1.1 | 1.2 | ||||||||||||||||||||||
| Square Footage | ||||||||
| Location | Facilities | Total | Owned | Leased | ||||
| US | 6 | 0.9 | 0.5 | 0.4 | ||||
| Mexico | 6 | 0.8 | 0.3 | 0.5 | ||||
| China | 1 | 0.2 | — | 0.2 | ||||
| India | 2 | 0.2 | 0.2 | — | ||||
| Europe | 1 | 0.2 | — | 0.2 | ||||
| Other | 1 | 0.1 | — | 0.1 | ||||
| Total | 17 | 2.4 | 1.0 | 1.4 | ||||
Our Power Transmission Solutions segment currently includes 2925 facilities, of which 1713 are principal manufacturing facilities and 3 are1 is a principal warehouse facilities.facility. The Power Transmission Solutions segment's present operating facilities contain a total of approximately 3.12.5 million square feet of space, of which approximately 10%24% are leased.
The following represents our principal manufacturing and warehouse facilities in the Power Transmission Solutions segment (square footage in millions):
| Square Footage | ||||||||||||||||||||||||||
| Location | Facilities | Total | Owned | Leased | ||||||||||||||||||||||
| US | 9 | 1.0 | 0.7 | 0.3 | ||||||||||||||||||||||
| Mexico | 2 | 0.3 | 0.3 | — | ||||||||||||||||||||||
| China | 1 | 0.2 | — | 0.2 | ||||||||||||||||||||||
| Europe | 2 | 0.3 | 0.3 | — | ||||||||||||||||||||||
| Total | 14 | 1.8 | 1.3 | 0.5 | ||||||||||||||||||||||
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| Square Footage | ||||||||
| Location | Facilities | Total | Owned | Leased | ||||
| US | 11 | 1.7 | 1.5 | 0.2 | ||||
| Mexico | 2 | 0.4 | 0.4 | — | ||||
| China | 1 | 0.1 | — | 0.1 | ||||
| Europe | 6 | 0.4 | 0.4 | �� | — | |||
| Total | 20 | 2.6 | 2.3 | 0.3 | ||||
ITEM 3 - LEGAL PROCEEDINGS
A subsidiary that we 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. We have recorded an estimated liability for incurred claims. Based on the current facts, we cannot assure that these claims, individually or in the aggregate, will not have a material adverse effect on our subsidiary's financial condition. Our subsidiary cannot reasonably predict the outcome of these claims, the nature or extent of any CPSC or other remedial actions, if any, that our 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.
We are from time to time, party to litigation and other legal or regulatory proceedings that arise in the normal course of our 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. Our products are used in a variety of industrial, commercial and residential applications that subject us to claims that the use of our 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. Our 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. We accrue for exposures in amounts that we believe are adequate, and we do not believe that the outcome of any such lawsuit individually or collectively will have a material effect on our financial position, results of operations or cash flows.
ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
General
Our common stock, $0.01 par value per share, is traded on the New York Stock Exchange under the symbol “RBC.” The number of registered holders of common stock as of January 25, 201922, 2021 was 356.309.
| Total | Total Value of Shares | Maximum Value of | |||||||||||||
| Number of | Average | Purchased as a Part | Shares that May be | ||||||||||||
| Shares | Price Paid | of Publicly Announced | Purchased Under the | ||||||||||||
| 2018 Fiscal Month | Purchased | per Share | Plans or Program | Plans or Programs | |||||||||||
| September 30 to November 3 | 277,450 | $ | 78.27 | $ | 21,715,434 | $ | 224,645,324 | ||||||||
| November 4 to December 1 | 109,994 | 75.50 | 8,304,765 | 216,340,559 | |||||||||||
| December 2 to December 29 | 257,905 | 75.40 | 19,446,026 | 196,894,533 | |||||||||||
| Total | 645,349 | $ | 49,466,225 | ||||||||||||
Under our equity incentive plans, participants may pay the exercise price or satisfy all or a portion of the federal, state and local withholding tax obligations arising in connection with plan awards by electing to (a) have the Company withhold shares of common stock otherwise issuable under the award, (b) tender back shares received in connection with such award or (c) deliver other previously owned shares of common stock, in each case having a value equal to the exercise price or the amount to be withheld. During the quarter ended December 29, 2018,January 2, 2021, we did not acquire any shares in connection with transactions pursuant to equity incentive plans.
At a meeting of the Board of Directors on July 24, 2018, thisthe 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 repurchase 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. The new authorization has no expiration date. Management is authorized to effect purchases from time to time in the open market or through privately negotiated transactions. From time to time, we enter into a Rule 10b5-1 trading plan for the purpose of repurchasing shares. DuringFor fiscal 2020, we purchased 315,072 shares or $25.0 million in shares pursuant to the quarter ended December 29, 2018,October 25, 2019 repurchase authorization. For fiscal 2019, we acquired $49.5purchased 180,763 shares or $15.0 million in shares pursuant to the October 25, 2019 repurchase authorization and 2,013,782 shares or $150.1 million in shares pursuant to the July 24, 2018 repurchase authorization. For fiscal 2018, we purchased 1,652,887 shares or $127.8 million in shares. For fiscal 2017, we purchased 576,804 shares or $45.1 million in shares. The maximum value of shares of our common stock available to be purchased as of December 29, 2018January 2, 2021 is $196.9$210.0 million.
Item 12 of this Annual Report on Form 10-K contains certain information relating to our equity compensation plans.
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Stock Performance
The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 (the “Exchange Act”) or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act.
The following graph compares the hypothetical total shareholder return (including reinvestment of dividends) on an investment in (1) our common stock, (2) the Standard & Poor's Mid Cap 400 Index, and (3) the Standard & Poor's 400 Electrical Components and Equipment Index, for the period December 29, 2013January 3, 2016 through December 29, 2018.January 2, 2021. In each case, the graph assumes the investment of $100.00 on December 28, 2013.January 2, 2016.
| INDEXED RETURNS | ||||||||||||||||||||||||||||||||
| Years Ended | ||||||||||||||||||||||||||||||||
| Company / Index | 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||||||||||||||
| Regal Beloit Corporation | $ | 120.22 | $ | 134.74 | $ | 125.01 | $ | 154.74 | $ | 225.68 | ||||||||||||||||||||||
| S&P MidCap 400 Index | 120.74 | 140.35 | 123.53 | 157.40 | 179.00 | |||||||||||||||||||||||||||
| S&P 400 Electrical Components & Equipment | 116.94 | 128.12 | 111.28 | 142.28 | 187.71 | |||||||||||||||||||||||||||
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| INDEXED RETURNS | ||||||||||||||||||||
| Years Ended | ||||||||||||||||||||
| Company / Index | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||||||||
| Regal Beloit Corporation | $ | 103.56 | $ | 81.54 | $ | 98.02 | $ | 109.86 | $ | 101.94 | ||||||||||
| S&P MidCap 400 Index | 110.40 | 108.08 | 130.50 | 151.69 | 133.51 | |||||||||||||||
| S&P 400 Electrical Components & Equipment | 109.70 | 132.68 | 155.16 | 170.00 | 148.44 | |||||||||||||||
ITEM 6 - SELECTED FINANCIAL DATA
The selected statements of income data for fiscal years 2018, 20172020, 2019 and 2016,2018, and the selected balance sheet data as of December 29, 2018January 2, 2021 and December 30, 2017 are28, 2019 is derived from, and are qualified by reference to, the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected statement of income data for fiscal years 20152017 and 20142016 and the selected balance sheet data as of December 29, 2018, December 30, 2017 and December 31, 2016 January 2, 2016, and January 3, 2015 areis derived from audited consolidated financial statements not included herein.
| Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||
| (In Millions, Except per Share Data) | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 2,907.0 | $ | 3,238.0 | $ | 3,645.6 | $ | 3,360.3 | $ | 3,224.5 | ||||||||||||||||||||||
| Cost of Sales | 2,098.3 | 2,377.3 | 2,681.0 | 2,476.7 | 2,359.5 | |||||||||||||||||||||||||||
| Gross Profit | 808.7 | 860.7 | 964.6 | 883.6 | 865.0 | |||||||||||||||||||||||||||
| Operating Expenses | 512.9 | 544.3 | 599.4 | 552.6 | 542.5 | |||||||||||||||||||||||||||
| Goodwill Impairment | 10.5 | — | 9.5 | — | — | |||||||||||||||||||||||||||
| Asset Impairments | 5.3 | 10.0 | 8.7 | — | — | |||||||||||||||||||||||||||
| Gain on Sale of Businesses | (0.1) | (44.7) | — | (0.1) | — | |||||||||||||||||||||||||||
| Total Operating Expenses | 528.6 | 509.6 | 617.6 | 552.5 | 542.5 | |||||||||||||||||||||||||||
| Income from Operations | 280.1 | 351.1 | 347.0 | 331.1 | 322.5 | |||||||||||||||||||||||||||
| Net Income | 193.8 | 242.6 | 235.8 | 218.1 | 209.3 | |||||||||||||||||||||||||||
| Net Income Attributable to Regal Beloit Corporation | 189.3 | 238.9 | 231.2 | 213.0 | 203.4 | |||||||||||||||||||||||||||
| Total Assets | 4,589.0 | 4,430.7 | 4,623.8 | 4,388.2 | 4,358.5 | |||||||||||||||||||||||||||
| Total Debt | 1,071.4 | 1,137.5 | 1,307.1 | 1,141.1 | 1,411.5 | |||||||||||||||||||||||||||
| Long-Term Debt | 840.4 | 1,136.9 | 1,306.6 | 1,039.9 | 1,310.9 | |||||||||||||||||||||||||||
| Regal Beloit Shareholders' Equity | 2,544.4 | 2,351.1 | 2,310.5 | 2,325.5 | 2,038.8 | |||||||||||||||||||||||||||
| Per Share Data: | ||||||||||||||||||||||||||||||||
| Earnings - Basic | $ | 4.66 | $ | 5.69 | $ | 5.30 | $ | 4.78 | $ | 4.55 | ||||||||||||||||||||||
| Earnings - Assuming Dilution | 4.64 | 5.66 | 5.26 | 4.74 | 4.52 | |||||||||||||||||||||||||||
| Cash Dividends Declared | 1.20 | 1.18 | 1.10 | 1.02 | 0.95 | |||||||||||||||||||||||||||
| Shareholders' Equity | 62.67 | 54.59 | 53.62 | 52.83 | 46.46 | |||||||||||||||||||||||||||
| Weighted Average Shares Outstanding: | ||||||||||||||||||||||||||||||||
| Basic | 40.6 | 42.0 | 43.6 | 44.6 | 44.7 | |||||||||||||||||||||||||||
| Assuming Dilution | 40.8 | 42.2 | 43.9 | 44.9 | 45.0 | |||||||||||||||||||||||||||
| Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | ||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
| (In Millions, Except per Share Data) | ||||||||||||||||||||
| Net Sales | $ | 3,645.6 | $ | 3,360.3 | $ | 3,224.5 | $ | 3,509.7 | $ | 3,257.1 | ||||||||||
| Cost of Sales | 2,681.0 | 2,476.7 | 2,359.5 | 2,576.0 | 2,459.1 | |||||||||||||||
| Gross Profit | 964.6 | 883.6 | 865.0 | 933.7 | 798.0 | |||||||||||||||
| Operating Expenses | 599.4 | 552.5 | 542.5 | 596.8 | 515.4 | |||||||||||||||
| Goodwill Impairment | 9.5 | — | — | 79.9 | 119.5 | |||||||||||||||
| Asset Impairments | 8.7 | — | — | — | 40.0 | |||||||||||||||
| Total Operating Expenses | 617.6 | 552.5 | 542.5 | 676.7 | 674.9 | |||||||||||||||
| Income from Operations | 347.0 | 331.1 | 322.5 | 257.0 | 123.1 | |||||||||||||||
| Net Income | 235.8 | 218.1 | 209.3 | 148.5 | 36.1 | |||||||||||||||
| Net Income Attributable to Regal Beloit Corporation | 231.2 | 213.0 | 203.4 | 143.3 | 31.0 | |||||||||||||||
| Total Assets | 4,623.8 | 4,388.2 | 4,358.5 | 4,591.7 | 3,357.2 | |||||||||||||||
| Total Debt | 1,307.1 | 1,141.1 | 1,411.5 | 1,721.9 | 632.5 | |||||||||||||||
| Long-Term Debt | 1,306.6 | 1,039.9 | 1,310.9 | 1,715.6 | 624.7 | |||||||||||||||
| Regal Beloit Shareholders' Equity | 2,310.5 | 2,325.5 | 2,038.8 | 1,937.3 | 1,934.4 | |||||||||||||||
| Per Share Data: | ||||||||||||||||||||
| Earnings - Basic | $ | 5.30 | $ | 4.78 | $ | 4.55 | $ | 3.21 | $ | 0.69 | ||||||||||
| Earnings - Assuming Dilution | 5.26 | 4.74 | 4.52 | 3.18 | 0.69 | |||||||||||||||
| Cash Dividends Declared | 1.10 | 1.02 | 0.95 | 0.91 | 0.86 | |||||||||||||||
| Shareholders' Equity | 53.62 | 52.83 | 46.46 | 44.32 | 44.02 | |||||||||||||||
| Weighted Average Shares Outstanding: | ||||||||||||||||||||
| Basic | 43.6 | 44.6 | 44.7 | 44.7 | 45.0 | |||||||||||||||
| Assuming Dilution | 43.9 | 44.9 | 45.0 | 45.1 | 45.3 | |||||||||||||||
We have completed various acquisitions and divestitures that affect the comparability of the selected financial data shown above. The results of operations for acquisitions are included in our consolidated financial results for the period subsequent to their acquisition date. SignificantThe results of operations for divestitures are included in our consolidated financial results for the period prior to their divestiture date.
During fiscal 2019, we divested several businesses which resulted in a gain on sale for the fiscal year of $44.7 million. See Note 4 of Notes to the Consolidated Financial Statements for the details of each business that was divested.
On April 10, 2018, we acquired NG for $161.5 million in cash, net of $8.5 million of cash acquired. NG is a leader in critical, energy-efficient systems for ventilation and air quality. NG manufactures, sells and services fans and blowers under the industry leading brands of Nicotra and Gebhardt. The financial results of NG have been included in our Commercial Systems segment from the date of acquisition.
31
In addition to those acquisitions include the acquisition of the Power Transmission Solutions business from Emerson Electric Co.and divestitures, on January 30, 2015 (the "PTS Acquisition").
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We operate on a 52/53 week fiscal year ending on the Saturday closest to December 31. We refer to the fiscal year ended December 29, 2018 as "fiscal 2018", December 30, 2017January 2, 2021 as “fiscal 2017"2020", the fiscal year ended December 28, 2019 as “fiscal 2019" and the fiscal year ended December 31, 201629, 2018 as “fiscal 2016"2018". Fiscal 2018, fiscal 2017, and fiscal 2016 all had 52 weeks.
Overview
General
Regal Beloit Corporation (NYSE: RBC) (“we,” “us,” “our” or the “Company”), 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. As of the end of fiscal 2018,2020, the Company, including its subsidiaries, employsemployed approximately 24,60023,000 people in its manufacturing, sales, and service facilities and corporate offices throughout the US, Canada, Mexico, Europe and Asia. In fiscal 2018,2020, we reported annual net sales of $3.6$2.9 billion compared to $3.4$3.2 billion in fiscal 2017.2019.
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, alternators, motors and controls and air moving solutions.applications. These products serve markets including commercial building ventilation and 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 e-commerce, alternative energy, 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 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 are derived from direct sales to customers by sales personnel employed by the Company, however, a significant portion of our sales are derived 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 business unit to 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.
33
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 businesses divested/to be exited ("Business To Be Exited"), and (iii) the impact of foreign currency translation. The impact of foreign currency translation is determined by translating the respective period’s organic 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.
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, 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 portions of the commodity price fluctuations through fixed-price agreements with suppliers and our hedging strategies. When we experience commodity price increases, we have tended to announce price increases 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 arrangements, 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 business units experience different levels of variation in gross profitsales from quarter to quarter based on factors specific to each 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 business 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 those twothree segments is energy efficiency, which generally means using less electrical power to produce more mechanical power.
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Goodwill & Other Asset Impairments.In the fourth quarter of 2020, we recorded goodwill impairment of $10.5 million in our global industrial motors reporting unit. During fiscal 2020, we recognized $5.3 million of asset impairments related to the transfer of assets to held for sale.
In the first quarter of 2019, we transferred assets to held for sale which resulted in the recognition of $5.1 million of fixed asset impairments and $4.9 million of customer relationships intangible asset impairments.
On July 31, 2018, we received notification from a customer of our Hermetic Climatehermetic climate business that it would wind down operations. As a result of this notification, we accelerated our plans to exit the Hermetic Climatehermetic climate business. We will be winding down our operations over the next few months and as a result, we recognized exit and exit related charges of $34.9 million during fiscal 2018.2019. The charges included goodwill impairment of $9.5 million, customer relationship intangible asset impairment of $5.5 million, technology intangible asset impairment of $2.1 million and fixed asset impairment of $1.1 million. In addition to the asset impairments, the Company took charges on accounts receivable and inventory along with recognizing other expenses related to exiting the business.
| Commercial Systems | Industrial Systems | Climate Solutions | Power Transmission Solutions | Total | |||||||||||||||||||||||||
| Fiscal 2020 | |||||||||||||||||||||||||||||
| Goodwill Impairments | $ | — | $ | 10.5 | $ | — | $ | — | $ | 10.5 | |||||||||||||||||||
| Impairment of Other Long-Lived Assets | 2.8 | 0.2 | 1.3 | 1.0 | $ | 5.3 | |||||||||||||||||||||||
| Total Impairments | $ | 2.8 | $ | 10.7 | $ | 1.3 | $ | 1.0 | $ | 15.8 | |||||||||||||||||||
| Fiscal 2019 | |||||||||||||||||||||||||||||
| Impairment of Intangible Assets | $ | 4.9 | $ | — | $ | — | $ | — | $ | 4.9 | |||||||||||||||||||
| Impairment of Other Long-Lived Assets | 1.8 | 0.9 | 1.3 | 1.1 | 5.1 | ||||||||||||||||||||||||
| Total Impairments | $ | 6.7 | $ | 0.9 | $ | 1.3 | $ | 1.1 | $ | 10.0 | |||||||||||||||||||
| Fiscal 2018 | |||||||||||||||||||||||||||||
| Goodwill Impairments | $ | — | $ | — | $ | 9.5 | $ | — | $ | 9.5 | |||||||||||||||||||
| Impairment of Intangible Assets | — | — | 7.6 | — | 7.6 | ||||||||||||||||||||||||
| Impairment of Other Long-Lived Assets | — | — | 1.1 | — | 1.1 | ||||||||||||||||||||||||
| Total Impairments | $ | — | $ | — | $ | 18.2 | $ | — | $ | 18.2 | |||||||||||||||||||
| Commercial and Industrial Systems | Climate Solutions | Power Transmission Solutions | Total | ||||||||||||
| Impairments during fiscal 2018: | |||||||||||||||
| Goodwill Impairments | $ | — | $ | 9.5 | $ | — | $ | 9.5 | |||||||
| Impairment of Intangible Asset | — | 7.6 | — | 7.6 | |||||||||||
| Impairment of Other Long-Lived Assets | — | 1.1 | — | 1.1 | |||||||||||
| Total Impairments | $ | — | $ | 18.2 | $ | — | $ | 18.2 | |||||||
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 IT 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.
COVID-19 evolved during the first quarter of 2020 into a global pandemic, resulting in a severe global health crisis that drove a dramatic slowdown in global economic and social activity. 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. Our order rates started to push back into positive territory in the third quarter. This trend continued throughout the fourth quarter of the year. Currently, our manufacturing operations are, on average, running closer to full capacity.
We believe that 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 fiscal year.
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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; inconsistent criteria in certain international jurisdictions for establishing the essentiality of our business; 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.
We have taken actions to manage costs including an organization wide reduction in force and voluntary early retirement program. We will continue to assess the actual and expected impacts of COVID-19 and consider making further changes to our cost structure as the implications of COVID-19 continue to evolve.
Rexnord Transaction
On February 15, 2021, we entered into definitive agreements with Rexnord Corporation (“Rexnord”), Land Newco, Inc., a wholly owned indirect subsidiary of Rexnord (“Land”), and Phoenix 2021, Inc., our wholly owned subsidiary (“Merger Sub”), with respect to a Reverse Morris Trust transaction (the “Rexnord Transaction”) pursuant to which, and subject to the terms and conditions of those definitive agreements discussed below, (1) Rexnord will transfer (or cause to be transferred) to Land substantially all of the assets, and Land will assume substantially all of the liabilities, of Rexnord’s Process & Motion Control business (“PMC Business”) (the “Reorganization”), (2) after which, all of the issued and outstanding shares of common stock, $0.01 par value per share, of Land (“Land common stock”) held by a subsidiary of Rexnord will be distributed in a series of distributions to Rexnord’s stockholders (the “Distributions”, and the final distribution of Land common stock from Rexnord to Rexnord’s stockholders, which is to be made pro rata for no consideration, the “Spin-Off”) and (3) immediately after the Spin-Off, Merger Sub will merge with and into Land (the “Merger”) and all shares of Land common stock (other than those held by Rexnord, Land, the Company, Merger Sub or their respective subsidiaries) will be converted into the right to receive shares of our common stock, $0.01 par value per share (“Company common stock”), as calculated and subject to adjustment as set forth in the Merger Agreement (as defined below).When the Merger is completed, Land (which at that time will hold the PMC business) will be our wholly owned subsidiary.
The definitive agreements we entered into in connection with the Rexnord Transaction include an Agreement and Plan of Merger, by and among Rexnord, Land, Merger Sub and us (the “Merger Agreement”), a Separation and Distribution Agreement, by and among Rexnord, Land and us and certain ancillary agreements.
In connection with the Rexnord Transaction, the Merger Agreement provides that we shall, to the extent required by the Merger Agreement, in certain circumstances in which additional shares of Company common stock are issued at closing to holders of Land common stock, declare a special dividend to our stockholders immediately prior to the consummation of the Merger (the “Company Special Dividend”).The existence and magnitude of the dividend will depend on whether and to what extent we are able to count certain overlapping shareholders of us and Rexnord in satisfying the tax requirements applicable to a Reverse Morris Trust transaction.In the event that the Company Special Dividend is required to be paid, it could range in amount between zero and approximately $2.0 billion.
In connection with the Rexnord Transaction, we have entered into certain financing arrangements, which are described below under “Liquidity and Capital Resources”.
Closing of the Rexnord Transaction is subject to various closing conditions, including the receipt of the approval of our and Rexnord's shareholders, the receipt of regulatory approvals and other customary closing conditions.
The Rexnord Transaction is described more fully in our Current Report on Form 8-K filed with the SEC on February 19, 2021 and this description is qualified in its entirety by the description set forth therein.
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Outlook. In the first quarter of fiscal 2019,2021, we are forecasting low toa mid-single digit organic sales growth, and we expect to improve our operating margin.growth. We expect to see positive impact from our new products targeted forproducts. In the upcoming energy efficiency regulations. In fiscal 2019,first quarter of 2021, we expect diluted earnings per share to be $6.59$1.32 to $6.99.$1.52. Our fiscal 20192021 diluted earnings per share guidance is based on an effective tax rate of 21%.
Results of Operations
The following table sets forth selected information for the years indicated:
| 2020 | 2019 | 2018 | |||||||||||||||
| (Dollars in Millions) | |||||||||||||||||
| Net Sales: | |||||||||||||||||
| Commercial Systems | $ | 820.2 | $ | 905.3 | $ | 1,110.9 | |||||||||||
| Industrial Systems | 528.8 | 575.4 | 671.1 | ||||||||||||||
| Climate Solutions | 846.8 | 968.5 | 1,024.8 | ||||||||||||||
| Power Transmission Solutions | 711.2 | 788.8 | 838.8 | ||||||||||||||
| Consolidated | $ | 2,907.0 | $ | 3,238.0 | $ | 3,645.6 | |||||||||||
| Gross Profit as a Percent of Net Sales: | |||||||||||||||||
| Commercial Systems | 26.1 | % | 26.1 | % | 25.8 | % | |||||||||||
| Industrial Systems | 18.3 | % | 16.6 | % | 20.3 | % | |||||||||||
| Climate Solutions | 29.1 | % | 27.9 | % | 25.6 | % | |||||||||||
| Power Transmission Solutions | 35.3 | % | 32.8 | % | 33.2 | % | |||||||||||
| Consolidated | 27.8 | % | 26.6 | % | 26.5 | % | |||||||||||
| Operating Expenses as a Percent of Net Sales: | |||||||||||||||||
| Commercial Systems | 17.7 | % | 17.9 | % | 16.6 | % | |||||||||||
| Industrial Systems | 17.3 | % | 18.7 | % | 16.6 | % | |||||||||||
| Climate Solutions | 13.6 | % | 11.4 | % | 12.6 | % | |||||||||||
| Power Transmission Solutions | 22.6 | % | 20.8 | % | 20.8 | % | |||||||||||
| Consolidated | 17.6 | % | 16.8 | % | 16.4 | % | |||||||||||
| Income (Loss) from Operations as a Percent of Net Sales: | |||||||||||||||||
| Commercial Systems | 8.1 | % | 11.8 | % | 9.2 | % | |||||||||||
| Industrial Systems | (1.1) | % | (2.3) | % | 3.7 | % | |||||||||||
| Climate Solutions | 15.4 | % | 16.9 | % | 11.3 | % | |||||||||||
| Power Transmission Solutions | 12.6 | % | 11.8 | % | 12.4 | % | |||||||||||
| Consolidated | 9.6 | % | 10.8 | % | 9.5 | % | |||||||||||
| Income from Operations | $ | 280.1 | $ | 351.1 | $ | 347.0 | |||||||||||
| Other (Income) Expenses, net | (4.4) | (0.1) | 1.5 | ||||||||||||||
| Interest Expense | 39.8 | 53.0 | 55.2 | ||||||||||||||
| Interest Income | 5.9 | 5.6 | 1.9 | ||||||||||||||
| Income before Taxes | 250.6 | 303.8 | 292.2 | ||||||||||||||
| Provision for Income Taxes | 56.8 | 61.2 | 56.4 | ||||||||||||||
| Net Income | 193.8 | 242.6 | 235.8 | ||||||||||||||
| Net Income Attributable to Noncontrolling Interests | 4.5 | 3.7 | 4.6 | ||||||||||||||
| Net Income Attributable to Regal Beloit Corporation | $ | 189.3 | $ | 238.9 | $ | 231.2 | |||||||||||
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| 2018 | 2017 | 2016 | |||||||||||
| (Dollars in Millions) | |||||||||||||
| Net Sales: | |||||||||||||
| Commercial and Industrial Systems | $ | 1,782.0 | $ | 1,604.3 | $ | 1,530.9 | |||||||
| Climate Solutions | 1,024.8 | 990.6 | 960.0 | ||||||||||
| Power Transmission Solutions | 838.8 | 765.4 | 733.6 | ||||||||||
| Consolidated | $ | 3,645.6 | $ | 3,360.3 | $ | 3,224.5 | |||||||
| Gross Profit as a Percent of Net Sales: | |||||||||||||
| Commercial and Industrial Systems | 23.8 | % | 23.5 | % | 24.7 | % | |||||||
| Climate Solutions | 25.6 | % | 25.8 | % | 25.6 | % | |||||||
| Power Transmission Solutions | 33.2 | % | 32.8 | % | 32.9 | % | |||||||
| Consolidated | 26.5 | % | 26.3 | % | 26.8 | % | |||||||
| Operating Expenses as a Percent of Net Sales: | |||||||||||||
| Commercial and Industrial Systems | 16.6 | % | 17.3 | % | 18.0 | % | |||||||
| Climate Solutions | 12.6 | % | 11.5 | % | 11.9 | % | |||||||
| Power Transmission Solutions | 20.8 | % | 21.1 | % | 20.8 | % | |||||||
| Consolidated | 16.4 | % | 16.4 | % | 16.8 | % | |||||||
| Income from Operations as a Percent of Net Sales: | |||||||||||||
| Commercial and Industrial Systems | 7.1 | % | 6.2 | % | 6.7 | % | |||||||
| Climate Solutions | 11.3 | % | 14.3 | % | 13.6 | % | |||||||
| Power Transmission Solutions | 12.4 | % | 11.7 | % | 12.1 | % | |||||||
| Consolidated | 9.5 | % | 9.9 | % | 10.0 | % | |||||||
| Income from Operations | $ | 347.0 | $ | 331.1 | $ | 322.5 | |||||||
| Other Expenses, net | 1.5 | 1.5 | 1.0 | 1.0 | 1.9 | ||||||||
| Interest Expense | 55.2 | 56.1 | 58.7 | ||||||||||
| Interest Income | 1.9 | 3.2 | 4.5 | ||||||||||
| Income before Taxes | 292.2 | 277.2 | 266.4 | ||||||||||
| Provision for Income Taxes | 56.4 | 59.1 | 57.1 | ||||||||||
| Net Income | 235.8 | 218.1 | 209.3 | ||||||||||
| Net Income Attributable to Noncontrolling Interests | 4.6 | 5.1 | 5.9 | ||||||||||
| Net Income Attributable to Regal Beloit Corporation | $ | 231.2 | $ | 213.0 | $ | 203.4 | |||||||
Fiscal Year 20182020 Compared to Fiscal Year 20172019
Net sales for fiscal 20182020 were $3.6$2.9 billion, a 8.5% increase10.2% decrease as compared to fiscal 20172019 net sales of $3.4$3.2 billion. The increasedecrease consisted mainly of 5.7% positivenegative organic sales growthof 8.4%, negative foreign currency translation of 0.4% and a positive 2.9% sales growth related negative 1.4% impact from the businesses divested/to the acquisition of Nicotra Gebhardt S.p.A. ("NG").be exited. Gross profit increased $81.0decreased $52.0 million or 9.2%6.0% as compared to the prior year. The increasedecrease from the prior year was driven primarily due to higherlower sales volumes, incremental price realization and productivity gains, partially offset by material price increases primarily from commodity inflation, inventory write-downs associated with the exit of the Hermetic Climate businessproductivity improvements and purchase accounting charges attributable to acquired inventory.simplification programs. Operating expenses were $599.4$512.9 million which was a $46.9$31.4 million decrease from fiscal 2019. The decrease was primarily driven by lower variable selling costs and lower employee related wage and benefit costs. The Company recognized goodwill and other asset impairments of $15.8 million, a $5.8 million increase from fiscal 2017 due primarily to increased compensation and benefits expenses resulting from both wage inflation and investments in the Company’s commercial sales teams, higher variable expenses, such as commissions,
Net sales for the Commercial Systems segment for fiscal 2020 were $820.2 million, a 9.4% decrease compared to fiscal 2019 net sales of $905.3 million. The decrease consisted of negative organic sales of 6.9% and a negative 2.6% impact from the businesses divested/to be exited partially offset by a positive 0.1% foreign currency translation. The organic sales decrease was primarily driven by decline in market demand as well as COVID related pressures on production along with ongoing intentional account pruning actions. Gross profit decreased $22.8 million or 9.6% primarily due to lower sales volumes partially offset by simplification programs and selective pricing on lower margin accounts. Operating expenses for fiscal 2020 decreased $17.5 million as compared to fiscal 2019. The decrease was primarily due to lower variable selling costs on lower sales, lower employee related wage and benefit costs and lower facility costs.
Net sales for the Industrial Systems segment for fiscal 20182020 were $1.8 billion, an 11.1% increase$528.8 million, a 8.1% decrease compared to fiscal 20172019 net sales of $1.6 billion.$575.4 million. The increasedecrease consisted of 4.7% positivenegative organic growthsales of 7.1% and positive 6.0% growth related to NG.negative foreign currency translation of 1.0%. The organic sales increasedecrease was primarily driven by commercial HVAC,COVID related pressures on production, the oil & gas downturn and power generation.the impact of 80/20 account pruning. Gross profit increased $46.6$1.1 million or 12.4%1.2% primarily due to sales mix with higher sales volumes incremental price realization,related to power generation projects, simplification programs and selective pricing on lower restructuring charges and productivity gains offset by purchase accounting charges attributable to acquired inventory.margin accounts. Operating expenses for fiscal 2018 increased $19.42020 decreased $16.0 million as compared to fiscal 2017.2019. The increasedecrease was primarily due to increased compensationlower employee related wage and benefit costs the inclusion of NG,and lower variable selling related costs and acquisition related costs. Operating expenses as a percentage of sales decreased 70 basis points as compared to fiscal 2017.on lower sales.
Net sales for the Climate Solutions segment for fiscal 20182020 were $1,024.8$846.8 million, a 3.5% increase12.6% decrease compared to fiscal 20172019 net sales of $990.6$968.5 million. The increasedecrease consisted of annegative organic sales of 9.9%, negative foreign currency translation of 0.6% and a negative 2.1% impact from the businesses divested/to be exited. The organic sales decrease was driven by COVID related pressure in North America and Europe and 80/20 account pruning efforts. Gross profit decreased $23.0 million or 8.5% primarily due to sales mix and productivity gains. Operating expenses for fiscal 2020 increased $4.9 million as compared to the prior year primarily due to professional fees.
Net sales for the Power Transmission Solutions segment for fiscal 2020 were $711.2 million, a 9.8% decrease compared to fiscal 2019 net sales of $788.8 million. The decrease consisted of negative organic sales of 9.1%, negative foreign currency translation of 0.1% and a negative 0.6% impact from the businesses divested/to be exited. The organic sales decrease was driven by COVID related pressures on general industrial, upstream oil & gas end markets and 80/20 account pruning efforts. Gross profit for fiscal 2020 decreased $7.3 million or 2.8% primarily due to lower sales volumes partially offset by the change in sales mix and productivity gains. Operating expenses for fiscal 2020 decreased $2.8 million due to lower employee related wage and benefit costs and lower variable selling costs on the lower sales.
The effective tax rate for fiscal 2020 was 22.7% compared to 20.1% for fiscal 2019. The increase in the effective rate was due to the mix of 4.6%earnings during the year.
Fiscal Year 2019 Compared to Fiscal Year 2018
Net sales for fiscal 2019 were $3.2 billion, a decrease of 11.2% compared to fiscal 2018 net sales of $3.6 billion. The decrease consisted of negative organic sales of 5.7%, negative foreign currency translation of 1.1% and a negative 5.3% impact from the businesses divested/to be exited partially offset by a positive 0.9% sales growth related to the acquisition of Nicotra Gebhardt S.p.A ("NG"). Gross profit decreased $103.9 million or 10.8% as compared to the prior year. The decrease from the prior year was driven primarily due to lower sales volumes, partially offset by productivity improvements and simplification programs. Operating expenses were $544.3 million which was a $55.1 million decrease from fiscal 2018 due primarily to businesses divested/to be exited.
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Net sales for the Commercial Systems segment for fiscal 2019 were $905.3 million, a 18.5% decrease compared to fiscal 2018 net sales of 1.1%$1.1 billion. The decrease consisted of negative organic sales of 8.1%, negative foreign currency translation of 1.2% and a negative 12.6% impact from Hermetic Climate.businesses divested/to be exited partially offset by a positive 3.4% sales growth related to the acquisition of NG. The organic sales increasedecrease was primarily driven by growththe continued inventory destocking in the North American pool pump market, weakness in North American residential HVAC.general industry and the impact of 80/20 account pruning. Gross profit increased $7.3decreased $50.4 million or 2.9%17.6% primarily due to higherlower sales volumes partially offset by simplification programs and incremental price realization.selective pricing on lower margin accounts. Operating expenses for fiscal 2019 decreased $22.4 million as compared to fiscal 2018. The decrease was primarily due to lower variable selling costs on lower sales and the removal of costs related to businesses divested/to be exited.
Net sales for the Industrial Systems segment for fiscal 2019 were $575.4 million, a 14.3% decrease compared to fiscal 2018 net sales of $671.1 million. The decrease consisted of negative organic sales of 11.4%, negative foreign currency translation of 2.1% and a negative 0.8% impact from the businesses divested/to be exited. The organic sales decrease was driven by delays in power generation projects due to end market overcapacity and the oil & gas downturn, weak North American and China industrial demand due to trade uncertainty and the impact of 80/20 account pruning. Gross profit decreased $40.8 million or 29.9% primarily due to lower sales volumes related to power generation projects, partially offset by simplification programs and selective pricing on lower margin accounts. Operating expenses for fiscal 2019 decreased $4.0 million as compared to fiscal 2018. The decrease was primarily due to lower variable selling costs on lower sales.
Net sales for the Climate Solutions segment for fiscal 2019 were $968.5 million, a 5.5% decrease compared to fiscal 2018 net sales of $1,024.8 million. The decrease consisted of negative organic sales of 1.2%, negative foreign currency translation of 0.6% and a negative 3.7% impact from the businesses divested/to be exited. The organic sales decrease was driven by inventory destocking by HVAC OEM customers and 80/20 account pruning efforts. Gross profit increased $15.0$7.1 million or 2.7% primarily due to sales mix and productivity gains. Operating expenses for fiscal 2019 decreased $18.3 million as compared to the prior year primarily due to the removal of costs associated with the exit of the Hermetic Climate business and higher compensation and benefit costs.related to businesses divested/to be exited.
Net sales for the Power Transmission Solutions segment for fiscal 20182019 were $838.8$788.8 million, a 9.6% increase6.0% decrease compared to fiscal 20172018 net sales of $765.4$838.8 million. The increasedecrease consisted of annegative organic sales increase of 9.1% and a positive3.5%, negative foreign currency translation of 0.9% and a negative 1.6% impact of 0.5%.from the businesses divested/to be exited. The organic sales increasedecrease was primarily driven by North American oilcontinued weakness in the industrial distribution channel and gas, renewable energy and material handling.80/20 account pruning efforts. Gross profit for fiscal 2018 increased $27.12019 decreased $19.8 million or 10.8%7.1% primarily due to higherthe change in sales volumesmix and productivity gains.gains partially offset by the lower sales volume. Operating expenses for fiscal 2018 increased $12.52019 decreased $10.4 million due to increasedlower variable expenses to support the higher sales volume, increased compensation and benefits expenses resulting from both wage inflation and investments in the Company’s commercial sales teams, and a prior year $2.8 million gainselling costs on the salelower sales and the removal of assets.costs related to the businesses divested/to be exited.
The effective tax rate for fiscal 20182019 was 19.3%20.1% compared to 21.3%19.3% for fiscal 2017.2018. The decreaseincrease in the effective rate was due to the tax effectmix of earnings during the costs associated with the exit of the Hermetic Climate business.year. The lower effective tax rate in fiscal 20182019 as compared to the 21% statutory US federal income tax rate is driven by a mix of earnings, adjustments to reflect updates to our accounting for changes as a result of Tax Cuts and Jobs Act of 2017 ("the Act") and lower foreign tax rates.
Liquidity and Capital Resources
General
Our principal source of liquidity is cash flow provided by operating activities. In addition to operating income, other significant factors affecting our cash flows 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.
Cash flow provided by operating activities was $362.7$435.4 million for fiscal 2018,2020, a $70.8$26.9 million increase from fiscal 2017.2019. The increase was primarily the result of the higher net income year over year and the increasea reduction in accounts payable in fiscal 2018.working capital.
Cash flow provided by operating activities was $291.9$408.5 million for fiscal 2017,2019, a $150.4$45.8 million decreaseincrease from fiscal 2016.2018. The decreaseincrease was primarily the result of a reduction in working capital and the higher investment in inventory in fiscal 2017.net income year over year.
Our working capital was $1,029.3 million and $1,047.2 million as of January 2, 2021 and December 28, 2019, respectively. As of January 2, 2021 and December 28, 2019, our current ratio (which is the ratio of our current assets to current liabilities) was 2.3:1 and 2.9:1, respectively. We intend to use operating cash flow to meet our current debt repayment obligations.
Cash flow used in investing activities was $227.9$37.0 million for fiscal 2018,2020, compared to $57.8cash flows provided by $74.3 million used in fiscal 2017.2019. The change was driven primarily by the acquisition of NG.divestiture proceeds received in fiscal 2019 partially offset by lower capital expenditures. Capital expenditures were $77.6$47.5 million in fiscal 2018,2020, compared to $65.2$92.4 million in fiscal 2017.2019.
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Cash flow used inprovided by investing activities was $57.8$74.3 million for fiscal 2017,2019, compared to $19.6$227.9 million used in fiscal 2016.2018. The change was driven primarily by the $24.6 milliondivestiture proceeds received for the sale of our Mastergear business in fiscal 2016. The proceeds from2019 versus the saleacquisition of Mastergear were used to reduce debt obligations.NG in fiscal 2018. Capital expenditures were $65.2$92.4 million in both fiscal 2017 and2019, compared to $77.6 million in fiscal 2016.2018.
Cash flow used in financing activities was $17.7$147.6 million for fiscal 2018,2020, compared to $390.6$397.4 million in fiscal 2017.2019. Net debt borrowingsrepayments totaled $166.7$67.7 million in fiscal 2018,2020, compared to net debt repayments of $274.7$171.0 million in fiscal 2017.2019. We also repurchased $25.0 million of our common stock during fiscal 2020 compared to $165.1 million in fiscal 2019. We paid $47.2$48.7 million in dividends to shareholders in fiscal 20182020 compared to $44.5$48.9 million in fiscal 2017.2019. In fiscal 20182020, we paid distributions of $1.6$2.8 million to noncontrolling interests compared to $17.4$1.8 million in fiscal 2017. We also repurchased $127.8 million of our common stock during fiscal 2018 compared to $45.1 million in fiscal 2017.2019.
Cash flow used in financing activities was $390.6$397.4 million for fiscal 2017,2019, compared to $379.5$17.7 million for fiscal 2016.2018. Net debt repayments totaled $274.7$171.0 million in fiscal 2017,2019, compared to net debt repaymentsborrowings of $315.3$166.7 million in fiscal 2016.2018. We also repurchased $165.1 million of our common stock during fiscal 2019 compared to $127.8 million in fiscal 2018. We paid $44.5
$48.9 million in dividends to shareholders in fiscal 20172019 compared to $42.1$47.2 million in fiscal 2016.2018. In fiscal 20172019, we paid distributions of $17.4$1.8 million to noncontrolling interests compared to $0.3$1.6 million in fiscal 2016. We also repurchased $45.1 million of our common stock during fiscal 2017. Cash used to purchase additional interest in a joint venture was $19.6 million in fiscal 2016.2018.
The following table presents selected financial information and statistics as of December 29, 2018January 2, 2021 and December 30, 201728, 2019 (in millions):
| January 2, 2021 | December 28, 2019 | ||||||||||||||||
| Cash and Cash Equivalents | $ | 611.3 | $ | 331.4 | |||||||||||||
| Trade Receivables, Net | 432.0 | 461.4 | |||||||||||||||
| Inventories | 690.3 | 678.4 | |||||||||||||||
| Working Capital | 1,029.3 | 1,047.2 | |||||||||||||||
| Current Ratio | 2.3:1 | 2.9:1 | |||||||||||||||
| December 29, 2018 | December 30, 2017 | ||||||||
| Cash and Cash Equivalents | $ | 248.6 | $ | 139.6 | |||||
| Trade Receivables, Net | 551.9 | 506.3 | |||||||
| Inventories | 767.2 | 757.1 | |||||||
| Working Capital | 1,134.2 | 862.4 | |||||||
| Current Ratio | 2.7:1 | 2.2:1 | |||||||
As of December 29, 2018, our cash and cash equivalents totaled $248.6 million. As of December 29, 2018, $243.8January 2, 2021, $603.5 million of our cash was held by foreign subsidiaries and could be used in our domestic operations if necessary. We periodically evaluateanticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We regularly assess our cash held outsideneeds and the US and may pursue opportunitiesavailable sources to repatriate certain foreign cash amounts. We repatriated $14.4 million of foreign cash in fiscal 2018. As a result of the Act, dividends to the US no longer incur US tax however a one-time tax on the mandatory deemedfund these needs which includes repatriation of foreign earnings payable over eight years was included in the Act. We recognized a chargewhich may be subject to withholding taxes. Under current law, we do not expect restrictions or taxes on repatriation of $29.8 million related to the historical unremitted earnings as a resultcash held outside of the Act and electedUnited States to pay over eight years.have a material effect on our overall liquidity, financial condition or the results of operations for the foreseeable future.
We will, from time to time, maintain excess cash balances which may be used to (i) fund operations, (ii) repay outstanding debt, (iii) fund acquisitions, (iv) pay dividends, (v) make investments in new product development programs, (vi) repurchase our common stock, or (vii) fund other corporate objectives.
Pension Liabilities and Other Post Retirement Benefits
Accrued pension and other post retirement benefits of $100.3$74.1 million and $85.3 million as of January 2, 2021 and December 29, 2018 was consistent with the prior year amount of $104.8 million as of December 30, 2017.28, 2019, respectively.
Credit Agreement
On August 27, 2018, the Company replaced the Prior Credit Agreement by enteringwe 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'sour consolidated funded debt to consolidated EBITDA ratio or at an alternative base rate.
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The Term Facility was drawn in full on August 27, 2018 with the proceeds settling the amounts owed under the Prior Term Facility and Prior Multicurrency Revolving Facility. 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 years of the Term Facility,
unless previously prepaid. The weighted average interest rate on the Term Facility was 2.0% and Prior Term Facility was 3.4% and 2.6%3.6% for the fiscal years ended December 29, 2018January 2, 2021 and December 30, 2017,28, 2019, respectively. The Credit Agreement requires the Companyus to 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. The CompanyWe repaid $50.0 million and $90.0 million under the Term Facility in 2018fiscal 2020 and $177.02019, respectively. The amount outstanding for fiscal years ended January 2, 2021 and December 28, 2019 was $670.0 million in 2017.and $720.0 million, respectively.
As of December 29, 2018, the CompanyJanuary 2, 2021 we had no borrowings under the Multicurrency Revolving Facility, in the amount of $98.4 million, $0.4$0.2 million of standby letters of credit and $401.2$499.8 million of available borrowing capacity. The average daily balance in borrowings under the Multicurrency Revolving Facility and Prior Multicurrency Revolving Facility was $171.5$150.4 million and $111.2$91.7 million, respectively, and the weighted average interest rate on the Multicurrency Revolving Facility was 1.9% and Prior Multicurrency Revolving Facility was 3.3% and 2.6%3.6% for the fiscal years ended December 29, 2018January 2, 2021 and December 30, 2017,28, 2019, respectively. The Company paysWe pay 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
As of December 29, 2018, the CompanyJanuary 2, 2021, we had $400.0 million of unsecured 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 December 29, 2018, $400.0January 2, 2021, $230.0 million and $170.0 million of the Notes are included in Current Maturities of Long-Term Debt and Long-Term Debt, respectively, on the Consolidated Balance Sheets. The Notes maturing in 2021 will be paid using capacity on our Multicurrency Revolving Facility and/or cash from operations.
Details on the Notes as of December 29, 2018January 2, 2021 were (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 | |||||||||||||||||
| Total | $ | 400.0 | ||||||||||||||||||
| 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 | |||||
| Total | $ | 400.0 | ||||||
Compliance with Financial Covenants
The Credit Agreement and the Notes require uscontain covenants under which we agree to meet specified financial ratiosmaintain a minimum EBITDA-to-interest coverage ratio and to satisfy certain financial condition tests.maximum Debt-to-EBITDA ratio. We were in compliance with all financial covenants contained in the Notes and the Credit Agreement as of December 29, 2018.January 2, 2021.
Other Notes Payable
As of December 29, 2018,January 2, 2021, other notes payable of $4.9$4.6 million were outstanding with a weighted average interest rate of 5.0%4.9%. As of December 30, 2017,28, 2019, other notes payable of $5.7$4.5 million were outstanding with a weighted average rate of 5.7%5.0%.
Financing Arrangements Related to Rexnord Transaction
In connection with the Rexnord Transaction, on February 15, 2021, we entered into a debt commitment letter (the “Bridge Commitment Letter”) and related fee letters with Barclays Bank PLC (“Barclays”), pursuant to which, and subject to the terms and conditions set forth therein, Barclays committed to provide approximately $2.1 billion in an aggregate principal amount of senior bridge loans under a 364-day senior bridge loan credit facility (“Bridge Facility”). The proceeds of the loans under the Bridge Facility may be used by us to (i) pay the Company Special Dividend, (ii) redeem the Notes due in 2023 and (iii) to pay fees and expenses in connection with the Rexnord Transaction.
Further, we entered into an additional debt commitment letter (the “Backstop Commitment Letter”) and related fee letters with Barclays, pursuant to which, and subject to the terms and conditions set forth therein. In the event, we do not obtain certain required consents from the lenders under the Credit Agreement, we may enter into a 364-day senior bridge loan credit facility in an aggregate principal amount of up to approximately $1.1 billion to prepay in full the aggregate principal amount of loans outstanding under the Credit Agreement and accrued and unpaid interest thereon.
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In connection with the Rexnord Transaction, Land also entered into a debt commitment letter (the “Land Commitment Letter”) and related fee letters with Barclays, pursuant to which, and subject to the terms and conditions set forth therein, Barclays committed to provide approximately $487.0 million of bridge loans under a 364-day senior bridge loan facility to be used to pay a dividend to a subsidiary of Rexnord required prior to the Reorganization.If the Rexnord Transaction is consummated, the indebtedness contemplated by the Land Commitment Letter will become indebtedness of a wholly-owned subsidiary of the Company.
We anticipate incurring significant fees and expenses in connection with the Rexnord Transaction, the amount of which is uncertain. In addition, the amount of the Company Special Dividend depends on the number of additional shares of our common stock that must be issued in connection with the Rexnord Transaction in order to satisfy tax requirements applicable to a Reverse Morris Trust transaction. The size of the dividend that will ultimately be declared is uncertain and will remain so until the closing.
Other Disclosures
Based on rates for instruments with comparable maturities and credit quality, the approximate fair value of our total debt was $1,323.6$1,085.8 million and $1,165.4$1,162.1 million as of December 29, 2018January 2, 2021 and December 30, 2017,28, 2019, respectively.
Litigation
Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments
The following is a summary of our contractual obligations and payments due by period as of December 29, 2018January 2, 2021 (in millions):
Payments Due by Period (1) | Debt Including Estimated Interest Payments (2) | Operating Leases | Pension Obligations | Purchase and Other Obligations | Total Contractual Obligations | |||||||||||||||||||||||||||
| Less than one year | $ | 244.5 | $ | 26.7 | $ | 4.5 | $ | 309.9 | $ | 585.6 | ||||||||||||||||||||||
| 1 - 3 years | 862.5 | 32.9 | 7.5 | — | 902.9 | |||||||||||||||||||||||||||
| 3 - 5 years | 1.2 | 16.0 | 7.4 | — | 24.6 | |||||||||||||||||||||||||||
| More than 5 years | 1.3 | 18.4 | 14.6 | — | 34.3 | |||||||||||||||||||||||||||
| Total | $ | 1,109.5 | $ | 94.0 | $ | 34.0 | $ | 309.9 | $ | 1,547.4 | ||||||||||||||||||||||
Payments Due by Period (1) | Debt Including Estimated Interest Payments (2) | Operating Leases | Pension Obligations | Purchase and Other Obligations | Total Contractual Obligations | ||||||||||||||||
| Less than one year | $ | 24.1 | $ | 30.8 | $ | 11.0 | $ | 296.4 | $ | 362.3 | |||||||||||
| 1 - 3 years | 354.2 | 43.9 | 6.8 | — | 404.9 | ||||||||||||||||
| 3 - 5 years | 1,036.1 | 18.2 | 6.5 | — | 1,060.8 | ||||||||||||||||
| More than 5 years | 2.7 | 16.2 | 15.8 | — | 34.7 | ||||||||||||||||
| Total | $ | 1,417.1 | $ | 109.1 | $ | 40.1 | $ | 296.4 | $ | 1,862.7 | |||||||||||
(1) The timing and future spot prices affect the settlement values of our hedge obligations related to commodities and currency exchange rates. Accordingly, these obligations are not included above in the table of contractual obligations (See also Item 7A and Note 149 of Notes to the Consolidated Financial Statements). The timing of settlement of our tax contingent liabilities cannot be reasonably determined and they are not included above in the table of contractual obligations. Future pension obligation payments after fiscal 20182020 are subject to revaluation based on changes in the benefit population and/or changes in the value of pension assets based on market conditions that are not determinable as of December 29, 2018.January 2, 2021.
(2) Variable rate debt based on December 29, 2018January 2, 2021 rates. See also Note 7 of Notes to the Consolidated Financial Statements.
We utilize blanket purchase orders (“Blankets”) to communicate expected annual requirements to many of our suppliers. Requirements under Blankets generally do not become “firm” until a varying number of weeks before our scheduled production. The purchase obligations shown in the above table represent the value we consider “firm.”
As of December 29, 2018,January 2, 2021, we had outstanding standby letters of credit totaling approximately $21.5$0.2 million. We had no other material commercial commitments.
We did not have any material variable interest entities as of December 29, 2018January 2, 2021 or December 30, 2017.28, 2019. Other than disclosed in the table above and the previous paragraph, we had no other material off-balance sheet arrangements.
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Critical Accounting Policies
The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States ("US") requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. We believe the following critical accounting policies could have the most significant effect on our reported results.
Purchase Accounting and Business Combinations
Assets acquired and the liabilities assumed as part of a business combination are recognized separately from goodwill at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. We, with the assistance of outside specialists as necessary, use estimates and assumptions to value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable. We may refine these estimates during the measurement period which may be up to one year from the acquisition date. As a result, during the measurement period, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our Consolidated Statements of Income.
Goodwill
We evaluate the carrying amount of goodwill annually, or more frequently if events or circumstances indicate that an asset might be impaired. When applying the accounting guidance, we use estimates to determine when it might be necessary to take an impairment charge. Factors that could trigger an impairment review include significant underperformance relative to historical or forecasted operating results, a significant decrease in the market value of an asset or significant negative industry or economic trends. For goodwill, we may perform a qualitative test to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. We perform our required annual goodwill impairment test as of the end of the October fiscal month.
We use a weighting of the market approach and the income approach (discounted cash flow method) in testing goodwill for impairment. In the market approach, we apply performance multiples from comparable public companies, adjusted for relative risk, profitability, and growth considerations, to the reporting units to estimate fair value. The key assumptions used in the discounted cash flow method used to estimate fair value include discount rates, revenue and operating incomeEBITDA margin projections and terminal value rates because such assumptions are the most sensitive and susceptible to change as they require significant management judgment. Discount rates are determined by using market and industry data as well as Company-specific risk factors for each reporting unit. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant discount rate and long-term growth rates.
In the fourth quarter of fiscal 2020, we recorded goodwill impairment of $10.5 million in our global industrial motors reporting unit. The global industrial motors reporting unit had goodwill of $114.9 million as of January 2, 2021 and is included in our Industrial Systems segment. The calculated excess fair valuesvalue over carrying value for our fiscal 2018commercial air moving reporting unit was less than 10% of its carrying value. The commercial air moving reporting unit had goodwill of $43.8 million as of January 2, 2021 and fiscal 2017 impairment testing exceeded the carrying values by at least 10% for all ofis included in our reporting units.Commercial Systems segment. Some of the key considerations used in our impairment testing included (i) market pricing of guideline publicly traded companies (ii) cost of capital, including the risk-free interest rate, and (iii) recent historical and projected performanceoperating results of the subject reporting unit.units. There is inherent uncertainty included in the assumptions used in goodwill impairment testing. A change to any of the assumptions could lead to a future impairment.impairment that could be material.
We aggregate our business units by segment for reporting purposes and the majority of our goodwill is within our Power Transmissions Solutions segment (see also Note 6 of Notes to the Consolidated Financial Statements).
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Long-Lived Assets
We evaluate the recoverability of the carrying amount of long-lived assets whenever events or changes in circumstance indicate that the carrying amount of an asset may not be fully recoverable through future cash flows. When applying the accounting guidance, we use estimates to determine when an impairment is necessary. Factors that could trigger an impairment review include a significant decrease in the market value of an asset or significant negative or economic trends (see also Note 5 of Notes to the Consolidated Financial Statements). For long-lived assets, the Company uses an estimate of the related undiscounted cash flows over the remaining life of the primary asset to estimate recoverability.
Indefinite-Lived Assets
Indefinite-lived intangible assets consist of thea trade namesname associated with the PTS Acquisition. They wereIt was evaluated for impairment using fiscalin October 2018 information using a relief from royalty method to determine whether their fair values exceed their respective carrying amounts. The Company2020. We determined the fair value of these assetsthis asset using a royalty relief methodology similar to that employedthe methodology used when the associated assets wereasset was acquired, but using updated assumptions and estimates of future sales cash flows and profitability. For fiscal 20182020 and fiscal 2017,2019, the fair value of the indefinite lived intangible assetsasset exceeded theirits respective carrying value.value, however, in fiscal 2019 the fair value of the indefinite lived intangible asset exceeded its respective carrying value by less than 10%. Some of the key considerations used in our impairment testing included (i) cost of capital, including the risk-free interest rate, (ii) royalty rate, and (iii) recent historical and projected performance of the subject reporting unit.operating performance. There is inherent uncertainty included in the assumptions used in indefinite-lived intangible asset testing. A change to any of the assumptions could lead to a future impairment.impairment that could be material.
Retirement and Post Retirement Plans
Most of our domestic employeesassociates are participants in defined contribution plans and/or defined benefit pension plans. The majority of the defined benefit pension plans covering a majority of our domestic employeesassociates have been closed to new employeesassociates and frozen for existing employees.associates. Certain employeesassociates are covered by a post retirement health care plan. Most of our foreign employeesassociates are covered by government sponsored plans in the countries in which they are employed. Our obligations under our defined benefit pension plans are determined with the assistance of actuarial firms. The actuaries make certain assumptions regarding such factors as withdrawal rates and mortality rates. The actuaries also provide information and recommendations from which management makes further assumptions on such factors as the long-term expected rate of return on plan assets, the discount rate on benefit obligations and where applicable, the rate of annual compensation increases.
Based upon the assumptions made, the investments made by the plans, overall conditions and movement in financial markets, particularly the stock market and how actual withdrawal rates, life-spans of benefit recipients and other factors differ from assumptions, annual expenses and recorded assets or liabilities of these defined benefit pension plans may change significantly from year to year.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk relating to our operations due to changes in interest rates, foreign currency exchange rates and commodity prices of purchased raw materials. We manage the exposure to these risks through a combination of normal operating and financing activities and derivative financial instruments such as interest rate swaps, commodity cash flow hedges and foreign currency forward exchange contracts. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which prohibit the use of financial instruments for speculative purposes.
All qualified hedges are recorded on the balance sheet at fair value and are accounted for as cash flow hedges, with changes in fair value recorded in Accumulated Other Comprehensive Loss (“AOCI”) in each accounting period. An ineffective portion of the hedges' change in fair value, if any, is recorded in earnings in the period of change.
Interest Rate Risk
We are exposed to interest rate risk on certain of our short-term and long-term debt obligations used to finance our operations and acquisitions. As of December 29, 2018,January 2, 2021, we had $404.7$404.1 million of fixed rate debt and $908.6$670.5 million of variable rate debt. As of December 30, 2017,28, 2019, we had $504.7$404.3 million of fixed rate debt and $641.8$737.9 million of variable rate debt. We utilize interest rate swaps to manage fluctuations in cash flows resulting from exposure to interest rate risk on forecasted variable rate interest payments.
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We have floating rate borrowings, which expose us to variability in interest payments due to changes in interest rates. A hypothetical 10% change in our weighted average borrowing rate on outstanding variable rate debt as of December 29, 2018January 2, 2021 would result in a $0.3$0.7 million change in after-tax annualized earnings. We have enteredIn April 2018, we entered into a spot, non-amortizing interest rate swap to pay fixed/receive floating interest rate swapwith a notional amount of $88.4 million to manage fluctuations in cash flows resulting from interest rate risk related to the floating rate interest on our Multicurrency Revolving Facility. Suchinterest. The swap expires in April 2021. We also entered into two forward starting pay fixed/receive floating non-amortizing interest rate swap has beenswaps in June 2020, with a total notional amount of $250.0 million to manage fluctuations in cash flows from interest rate risk related to floating rate interest. These swaps become effective July 2021 and will expire in July 2025. Upon inception, the swaps were designated as a cash flow hedgehedges against forecasted interest payments.payments under ASU 2017-12, with gains and losses, net of tax, measured on an ongoing basis, recorded in AOCI.
Details regarding the instruments as of December 29, 2018January 2, 2021 are as follows (in millions):
| Instrument | Notional Amount | Maturity | Rate Paid | Rate Received | Fair Value | ||||||||||||
| Swap | $88.4 | April 2021 | 2.5% | LIBOR (1 month) | $(0.7) | ||||||||||||
| Swap | $250.0 | July 2025 | 0.6% | LIBOR (1 month) | $(1.4) | ||||||||||||
| Instrument | Notional Amount | Maturity | Rate Paid | Rate Received |
| Swap | $88.4 | April 12, 2021 | 2.5% | LIBOR (1 month) |
As of December 29, 2018, an immaterialJanuary 2, 2021, a $(0.7) million interest rate swap assetliability was included in Other Accrued Expenses and $(1.4) million in Other Noncurrent Liabilities. As of December 28, 2019, a $(1.0) million interest rate swap was included in Other Noncurrent Assets. The immaterialLiabilities. There was an unrealized gain onloss of $(1.6) million, net of tax, for fiscal 2020 and $(0.8) million for 2019 that was recorded in AOCI for the effective portion of the contract net of tax was recorded on AOCI. There were no interest swap rate contracts outstanding as of December 30, 2017.hedge.
In July 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. We have material exposure to LIBOR through our revolving credit facility, certain lines of credit and interest rate swaps that are indexed to USD-LIBORUSD-LIBOR. It is expected that LIBOR will be discontinued and, while we are monitoring this activity and evaluatingbelieve an acceptable replacement to LIBOR will be available, if LIBOR is discontinued, we cannot reasonably estimate the related risks and options.impact, if any, on such discontinuation.
Foreign Currency Risk
We are exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances of foreign subsidiaries, intercompany loans with foreign subsidiaries and transactions denominated in foreign currencies. Our objective is to minimize our exposure to these risks through a combination of normal operating activities and the utilization of foreign currency exchange contracts to manage our exposure on the forecasted transactions denominated in currencies other than the applicable functional currency. Contracts are executed with credit worthy banks and are denominated in currencies of major industrial countries. We do not hedge our exposure to the translation of reported results of foreign subsidiaries from local currency to United States dollars.
As of December 29, 2018,January 2, 2021, derivative currency assets (liabilities) of $6.6$16.6 million, $7.2$1.6 million, $(5.0)$(1.0) million and $(1.1)$(0.1) million, are recorded in Prepaid Expenses and Other Current Assets, Other Noncurrent Assets, Current Hedging Obligations,Other Accrued Expenses and Other Noncurrent Hedging Obligations,Liabilities, respectively. As of December 30, 2017,28, 2019, derivative currency assets (liabilities) of $15.6$8.9 million, $2.5$10.3 million, $(8.1)$(3.1) million and $(0.9)$(0.2) million, are recorded in Prepaid Expenses and Other Current Assets, Other Noncurrent Assets, Current Hedging Obligations,Other Accrued Expenses and Other Noncurrent Hedging Obligations,Liabilities, respectively. The unrealized gains (losses) on the effective portionportions of the contractshedges of $1.3$12.7 million net of tax and $3.3$5.7 million net of tax, as of December 29, 2018January 2, 2021 and December 30, 2017,28, 2019, respectively, was recorded in AOCI. As of December 29, 2018,January 2, 2021, we had $(0.7)$1.1 million, net of tax, of currency lossesgains on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings. As of December 30, 2017,28, 2019, we had $(4.7)$2.1 million, net of tax, of currency lossesgains on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings.
The following table quantifies the outstanding foreign exchange contracts intended to hedge non-US dollar denominated receivables and payables and the corresponding impact on the value of these instruments assuming a hypothetical 10% appreciation/depreciation of their counter currency on December 29, 2018January 2, 2021 (dollars in millions):
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| Gain (Loss) From: | Gain (Loss) From: | |||||||||||||||||||||||||||||||||||||||||
| Notional | Fair | 10% Appreciation of | 10% Depreciation of | Notional | Fair | 10% Appreciation of | 10% Depreciation of | |||||||||||||||||||||||||||||||||||
| Currency | Amount | Value | Counter Currency | Counter Currency | Currency | Amount | Value | Counter Currency | Counter Currency | |||||||||||||||||||||||||||||||||
| Mexican Peso | $ | 182.3 | $ | 2.0 | $ | 18.2 | $ | (18.2 | ) | Mexican Peso | $ | 174.6 | $ | 12.2 | $ | 17.5 | $ | (17.5) | ||||||||||||||||||||||||
| Chinese Renminbi | 125.5 | (2.0 | ) | 12.6 | (12.6 | ) | Chinese Renminbi | 188.5 | 3.6 | 18.9 | (18.9) | |||||||||||||||||||||||||||||||
| Indian Rupee | 44.0 | 0.9 | 4.4 | (4.4 | ) | Indian Rupee | 37.8 | 0.7 | 3.8 | (3.8) | ||||||||||||||||||||||||||||||||
| Euro | 225.7 | 5.6 | 22.6 | (22.6 | ) | Euro | 231.7 | 1.2 | 23.2 | (23.2) | ||||||||||||||||||||||||||||||||
| Canadian Dollar | 11.4 | 0.5 | 1.1 | (1.1 | ) | Canadian Dollar | 2.0 | 0.1 | 0.2 | (0.2) | ||||||||||||||||||||||||||||||||
| Australian Dollar | 13.2 | 0.4 | 1.3 | (1.3 | ) | Australian Dollar | 21.2 | (0.3) | 2.1 | (2.1) | ||||||||||||||||||||||||||||||||
| Thai Baht | 6.7 | 0.3 | 0.7 | (0.7 | ) | Thai Baht | 15.3 | (0.5) | 1.5 | (1.5) | ||||||||||||||||||||||||||||||||
| British Pound | 15.3 | — | 1.5 | (1.5 | ) | British Pound | 11.7 | 0.1 | 1.2 | (1.2) | ||||||||||||||||||||||||||||||||
Gains and losses indicated in the sensitivity analysis would be largely offset by gains and losses on the underlying forecasted non-US dollar denominated cash flows.
Commodity Price Risk
We periodically enter into commodity hedging transactions to reduce the impact of changing prices for certain commodities such as copper and aluminum based upon forecasted purchases of such commodities. Qualified hedge transactions are designated as cash flow hedges and the contract terms of commodity hedge instruments generally mirror those of the hedged item, providing a high degree of risk reduction and correlation.
Derivative commodity assets (liabilities) of $0.1 million, $(6.3)$11.4 million and $(0.1)$0.1 million are recorded in Prepaid Expenses and Other Current Hedging ObligationsAssets and Other Noncurrent Hedging Obligations,Assets, respectively as of December 29, 2018.January 2, 2021. Derivative commodity assets (liabilities) of $0.0$2.6 million. $0.1 million are recorded in Other Noncurrent Assets as of December 29, 2018. Derivative commodity assets of $11.0and $(0.3) million are recorded in Prepaid Expenses and Other Current Assets, Other Noncurrent Assets and Other Accrued Expenses, respectively as of December 30, 2017. Derivative commodity assets of $0.7 million are recorded in Other Noncurrent Assets as of December 30, 2017.28, 2019. The unrealized gain (loss) on the effective portion of the contractshedges of $(4.6)$8.7 million net of tax and $7.3$1.8 million net of tax, as of December 29, 2018January 2, 2021 and December 30, 2017,28, 2019, respectively, was recorded in AOCI. As of December 29, 2018,January 2, 2021, we had an additional $(1.4)$2.6 million, net of tax, of derivative commodity gain on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings. As of December 28, 2019, we had an additional $(0.8) million, net of tax, of derivative commodity losses on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings. As of December 30, 2017, we had an additional $2.7 million, net of tax, of derivative commodity gains on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings.
The following table quantifies the outstanding commodity contracts intended to hedge raw material commodity prices and the corresponding impact on the value of these instruments assuming a hypothetical 10% appreciation/depreciation of their prices on December 29, 2018January 2, 2021 (dollars in millions):
| Gain (Loss) From: | ||||||||||||||||||||||||||
| Notional | Fair | 10% Appreciation of | 10% Depreciation of | |||||||||||||||||||||||
| Commodity | Amount | Value | Commodity Prices | Commodity Prices | ||||||||||||||||||||||
| Copper | $ | 47.0 | $ | 11.1 | $ | 4.7 | $ | (4.7) | ||||||||||||||||||
| Aluminum | 3.6 | 0.4 | 0.4 | (0.4) | ||||||||||||||||||||||
| Gain (Loss) From: | ||||||||||||||||
| Notional | Fair | 10% Appreciation of | 10% Depreciation of | |||||||||||||
| Commodity | Amount | Value | Commodity Prices | Commodity Prices | ||||||||||||
| Copper | $ | 95.4 | $ | (5.4 | ) | $ | 9.5 | $ | (9.5 | ) | ||||||
| Aluminum | 10.0 | (0.9 | ) | 1.0 | (1.0 | ) | ||||||||||
Gains and losses indicated in the sensitivity analysis would be largely offset by the actual prices of the commodities.
The net AOCI balance related to hedging activities of $(5.4)$23.5 million loss as of December 29, 2018January 2, 2021 includes $(3.2)$20.2 million of net current deferred lossesgains expected to be realized in the next twelve months.
Counterparty Risk
We are exposed to credit losses in the event of non-performance by the counterparties to various financial agreements, including our interest rate swap agreements, foreign currency exchange contracts and commodity hedging transactions. We manage exposure to counterparty credit risk by limiting our counterparties to major international banks and financial institutions meeting established credit guidelines and continually monitoring their compliance with the credit guidelines. We do not obtain collateral or other security to support financial instruments subject to credit risk. We do not anticipate non-performance by our counterparties, but cannot provide assurances.
46
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly Financial Information
(Unaudited)
(Amounts in Millions, Except per Share Data)
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| Net Sales | $ | 734.2 | $ | 853.8 | $ | 634.1 | $ | 873.7 | $ | 758.2 | $ | 772.3 | $ | 780.5 | $ | 738.2 | |||||||||||||||||||||||||||||||
| Gross Profit | 203.3 | 234.6 | 170.3 | 234.0 | 221.6 | 201.9 | 213.5 | 190.2 | |||||||||||||||||||||||||||||||||||||||
Income from Operations (1) | 70.0 | 120.6 | 45.9 | 96.0 | 90.0 | 72.8 | 74.2 | 61.7 | |||||||||||||||||||||||||||||||||||||||
| Net Income | 46.7 | 86.8 | 29.3 | 67.4 | 66.3 | 50.8 | 51.5 | 37.6 | |||||||||||||||||||||||||||||||||||||||
| Net Income Attributable to Regal Beloit Corporation | 45.8 | 85.9 | 28.1 | 66.6 | 65.0 | 49.7 | 50.4 | 36.7 | |||||||||||||||||||||||||||||||||||||||
Earnings Per Share Attributable to Regal Beloit Corporation (2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Basic | 1.13 | 2.01 | 0.69 | 1.56 | 1.60 | 1.20 | 1.24 | 0.90 | |||||||||||||||||||||||||||||||||||||||
| Assuming Dilution | 1.12 | 1.99 | 0.69 | 1.55 | 1.60 | 1.19 | 1.23 | 0.89 | |||||||||||||||||||||||||||||||||||||||
| Weighted Average Number of Shares Outstanding | |||||||||||||||||||||||||||||||||||||||||||||||
| Basic | 40.6 | 42.8 | 40.5 | 42.6 | 40.6 | 41.5 | 40.6 | 40.9 | |||||||||||||||||||||||||||||||||||||||
| Assuming Dilution | 40.8 | 43.1 | 40.7 | 43.0 | 40.8 | 41.7 | 40.9 | 41.1 | |||||||||||||||||||||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial Systems | $ | 199.4 | $ | 242.2 | $ | 175.9 | $ | 246.3 | $ | 218.5 | $ | 214.8 | $ | 226.4 | $ | 202.0 | |||||||||||||||||||||||||||||||
| Industrial Systems | 129.6 | 138.1 | 120.6 | 155.5 | 138.8 | 143.8 | 139.8 | 138.0 | |||||||||||||||||||||||||||||||||||||||
| Climate Solutions | 210.1 | 263.3 | 178.2 | 267.9 | 234.0 | 230.9 | 224.5 | 206.4 | |||||||||||||||||||||||||||||||||||||||
| Power Transmission Solutions | 195.1 | 210.2 | 159.4 | 204.0 | 166.9 | 182.8 | 189.8 | 191.8 | |||||||||||||||||||||||||||||||||||||||
| Income (Loss) from Operations | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial Systems (3) | 12.1 | 59.4 | 6.2 | 19.6 | 24.6 | 16.9 | 22.2 | 10.9 | |||||||||||||||||||||||||||||||||||||||
Industrial Systems (3) | (0.1) | (5.9) | 3.2 | (0.1) | 7.3 | (2.6) | (14.9) | (4.4) | |||||||||||||||||||||||||||||||||||||||
| Climate Solutions | 29.5 | 38.9 | 20.0 | 51.7 | 39.2 | 37.6 | 41.3 | 35.7 | |||||||||||||||||||||||||||||||||||||||
| Power Transmission Solutions | 28.5 | 28.2 | 16.5 | 24.8 | 18.9 | 20.9 | 25.6 | 19.5 | |||||||||||||||||||||||||||||||||||||||
(1) The first quarter 2019 results included a gain on divestiture of $41.2 million included in the Commercial Systems segment. | |||||||||||||||||||||||||||||||||||||||||||||||
(2) Due to the weighting of both earnings and the weighted average number of shares outstanding, the sum of the quarterly earnings per share may not equal the annual earnings per share. | |||||||||||||||||||||||||||||||||||||||||||||||
(3) Retrospectively adjusted due to change in accounting principle related to LIFO inventories as discussed in Note 3. | |||||||||||||||||||||||||||||||||||||||||||||||
47
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
| Net Sales | $ | 878.8 | $ | 813.5 | $ | 959.7 | $ | 869.2 | $ | 925.4 | $ | 856.9 | $ | 881.7 | $ | 820.7 | |||||||||||||||
| Gross Profit | 234.9 | 215.5 | 247.4 | 222.8 | 242.6 | 226.9 | 239.7 | 218.4 | |||||||||||||||||||||||
| Income from Operations | 88.2 | 75.0 | 99.6 | 83.2 | 69.4 | 94.3 | 89.8 | 78.6 | |||||||||||||||||||||||
| Net Income | 59.3 | 47.6 | 67.3 | 54.3 | 52.7 | 63.6 | 56.5 | 52.6 | |||||||||||||||||||||||
| Net Income Attributable to Regal Beloit Corporation | 58.4 | 46.3 | 65.9 | 53.0 | 51.3 | 62.2 | 55.6 | 51.5 | |||||||||||||||||||||||
Earnings Per Share Attributable to Regal Beloit Corporation (1) | |||||||||||||||||||||||||||||||
| Basic | 1.32 | 1.03 | 1.51 | 1.19 | 1.18 | 1.40 | 1.29 | 1.16 | |||||||||||||||||||||||
| Assuming Dilution | 1.31 | 1.02 | 1.50 | 1.18 | 1.17 | 1.39 | 1.28 | 1.15 | |||||||||||||||||||||||
| Weighted Average Number of Shares Outstanding | |||||||||||||||||||||||||||||||
| Basic | 44.2 | 44.8 | 43.8 | 44.7 | 43.4 | 44.4 | 43.1 | 44.3 | |||||||||||||||||||||||
| Assuming Dilution | 44.5 | 45.1 | 44.1 | 45.1 | 43.8 | 44.8 | 43.4 | 44.7 | |||||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||||||||||
| Commercial and Industrial Systems | $ | 414.0 | $ | 381.2 | $ | 469.0 | $ | 407.4 | $ | 462.3 | $ | 408.0 | $ | 436.7 | $ | 407.7 | |||||||||||||||
| Climate Solutions | 259.9 | 247.7 | 277.3 | 270.5 | 255.4 | 256.0 | 232.2 | 216.4 | |||||||||||||||||||||||
| Power Transmission Solutions | 204.9 | 184.6 | 213.4 | 191.3 | 207.7 | 192.9 | 212.8 | 196.6 | |||||||||||||||||||||||
| Income from Operations | |||||||||||||||||||||||||||||||
| Commercial and Industrial Systems | 29.1 | 25.7 | 30.5 | 20.6 | 35.3 | 29.5 | 32.1 | 24.0 | |||||||||||||||||||||||
| Climate Solutions | 32.3 | 31.4 | 44.0 | 40.4 | 6.0 | 39.1 | 33.3 | 30.6 | |||||||||||||||||||||||
| Power Transmission Solutions | 26.8 | 17.9 | 25.1 | 22.2 | 28.1 | 25.7 | 24.4 | 24.0 | |||||||||||||||||||||||
(1) Due to the weighting of both earnings and the weighted average number of shares outstanding, the sum of the quarterly earnings per share may not equal the annual earnings per share. | |||||||||||||||||||||||||||||||
Management's Annual Report on Internal Control Over Financial Reporting
The management of Regal Beloit Corporation (the “Company”) is responsible for the accuracy and internal consistency of the preparation of the consolidated financial statements and footnotes contained in this annual report.
The Company's management is also responsible for establishing and maintaining adequate internal control over financial reporting. The Company operates under a system of internal accounting controls designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. The internal accounting control system is evaluated for effectiveness by management and is tested, monitored and revised as necessary. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 29, 2018.January 2, 2021. In making its assessment, the Company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). As allowed by SEC guidance, management excluded from its assessment Nicotra Gebhardt S.p.A., which was acquired in 2018 and constituted 4.0% and 6.6% of total and net assets, respectively, as of December 29, 2018 and 2.6% and (0.2)% of net sales and net income respectively for the year then ended. Based on the results of its evaluation, the Company's management concluded that, as of December 29, 2018,January 2, 2021, the Company's internal control over financial reporting is effective at the reasonable assurance level based on those criteria.
Our internal control over financial reporting as of December 29, 2018January 2, 2021 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
March 2, 2021
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Regal Beloit Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Regal Beloit Corporation and subsidiaries (the "Company") as of December 29, 2018January 2, 2021 and December 30, 2017,28, 2019, the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows, for each of the three years in the period ended December 29, 2018,January 2, 2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 29, 2018January 2, 2021 and December 30, 2017,28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2018,January 2, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 29, 2018,January 2, 2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2019,January 2, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Adoption of a New Accounting Standard
As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for leases in the year ended December 28, 2019, due to the adoption of Accounting Standard Update No. 2016-02, Leases (Topic ASC 842), under the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Valuation – Global Industrial Motors & Commercial Air Moving Reporting Units – Refer to Notes 3 and 5 to the Financial Statements
Critical Audit Matter Description
The Company performed an impairment evaluation of the goodwill for the Global Industrial Motors and Commercial Air Moving reporting units by comparing the estimated fair value of each of these reporting units to its carrying value. In order to estimate the fair value of these reporting units, management is required to make significant estimates and assumptions related to discount rates and forecasts of future revenues and Earnings Before Interest Taxes Depreciation & Amortization (“EBITDA”) margins. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The goodwill balance was $1,518 million as of January 2, 2021, of which $114.9 million and $43.8
49
million related to the Global Industrial Motors and Commercial Air Moving reporting units, respectively. As of October 31, 2020, the Company’s measurement date, the Company determined that the carrying value for the Global Industrial Motors reporting unit was in excess of fair value and recorded a $10.5 million goodwill impairment. The fair value of the Commercial Air Moving reporting unit exceeded its carrying value and therefore no impairment was recognized.
We identified the impairment evaluation of goodwill for the Global Industrial Motors and Commercial Air Moving reporting units as a critical audit matter because of the inherent subjectivity involved in management’s estimates and assumptions related to discount rates and forecasts of future revenues and EBITDA margins. The audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of the discount rates and forecast of future revenues and EBITDA margins required a high degree of auditor judgement and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the selection of discount rates and forecasts of future revenues and EBITDA margins for the Global Industrial Motors and Commercial Air Moving reporting units included the following, among others:
•We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the selection of the discount rates and management’s development of forecasts of future revenues and EBITDA margins.
•We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) forecasted information included in analyst and industry reports for the Company and certain of its peer companies.
•We evaluated the impact of changes in management’s forecasts from the October 31, 2020, annual measurement date to January 2, 2021.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rates by:
◦Tested the source information underlying management’s determination of the discount rates.
◦Tested the mathematical accuracy of management’s calculations.
◦Developed a range of independent estimates and compared those to the discount rates selected by management.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
We have served as the Company's auditor since 2002.
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Regal Beloit Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Regal Beloit Corporation and subsidiaries (the "Company"“Company”) as of December 29, 2018,January 2, 2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 29, 2018,January 2, 2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 29, 2018,January 2, 2021, of the Company and our report dated February 26, 2019,March 2, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
March 2, 2021
51
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Millions, Except Per Share Data)
| For the Year Ended | For the Year Ended | ||||||||||||||||||||||||||||||||
| December 29, 2018 | December 30, 2017 | December 31, 2016 | January 2, 2021 | December 28, 2019 | December 29, 2018 | ||||||||||||||||||||||||||||
| Net Sales | $ | 3,645.6 | $ | 3,360.3 | $ | 3,224.5 | Net Sales | $ | 2,907.0 | $ | 3,238.0 | $ | 3,645.6 | ||||||||||||||||||||
| Cost of Sales | 2,681.0 | 2,476.7 | 2,359.5 | Cost of Sales | 2,098.3 | 2,377.3 | 2,681.0 | ||||||||||||||||||||||||||
| Gross Profit | 964.6 | 883.6 | 865.0 | Gross Profit | 808.7 | 860.7 | 964.6 | ||||||||||||||||||||||||||
| Operating Expenses | 599.4 | 552.5 | 542.5 | Operating Expenses | 512.9 | 544.3 | 599.4 | ||||||||||||||||||||||||||
| Goodwill Impairment | 9.5 | — | — | Goodwill Impairment | 10.5 | 0 | 9.5 | ||||||||||||||||||||||||||
| Asset Impairments | 8.7 | — | — | Asset Impairments | 5.3 | 10.0 | 8.7 | ||||||||||||||||||||||||||
| Gain on Sale of Businesses | Gain on Sale of Businesses | (0.1) | (44.7) | 0 | |||||||||||||||||||||||||||||
| Total Operating Expenses | 617.6 | 552.5 | 542.5 | Total Operating Expenses | 528.6 | 509.6 | 617.6 | ||||||||||||||||||||||||||
| Income from Operations | 347.0 | 331.1 | 322.5 | Income from Operations | 280.1 | 351.1 | 347.0 | ||||||||||||||||||||||||||
| Other Expenses, net | 1.5 | 1.0 | 1.9 | ||||||||||||||||||||||||||||||
| Other (Income) Expenses, net | Other (Income) Expenses, net | (4.4) | (0.1) | 1.5 | |||||||||||||||||||||||||||||
| Interest Expense | 55.2 | 56.1 | 58.7 | Interest Expense | 39.8 | 53.0 | 55.2 | ||||||||||||||||||||||||||
| Interest Income | 1.9 | 3.2 | 4.5 | Interest Income | 5.9 | 5.6 | 1.9 | ||||||||||||||||||||||||||
| Income before Taxes | 292.2 | 277.2 | 266.4 | Income before Taxes | 250.6 | 303.8 | 292.2 | ||||||||||||||||||||||||||
| Provision for Income Taxes | 56.4 | 59.1 | 57.1 | Provision for Income Taxes | 56.8 | 61.2 | 56.4 | ||||||||||||||||||||||||||
| Net Income | 235.8 | 218.1 | 209.3 | Net Income | 193.8 | 242.6 | 235.8 | ||||||||||||||||||||||||||
| Less: Net Income Attributable to Noncontrolling Interests | 4.6 | 5.1 | 5.9 | Less: Net Income Attributable to Noncontrolling Interests | 4.5 | 3.7 | 4.6 | ||||||||||||||||||||||||||
| Net Income Attributable to Regal Beloit Corporation | $ | 231.2 | $ | 213.0 | $ | 203.4 | Net Income Attributable to Regal Beloit Corporation | $ | 189.3 | $ | 238.9 | $ | 231.2 | ||||||||||||||||||||
| Earnings Per Share Attributable to Regal Beloit Corporation: | Earnings Per Share Attributable to Regal Beloit Corporation: | ||||||||||||||||||||||||||||||||
| Basic | $ | 5.30 | $ | 4.78 | $ | 4.55 | Basic | $ | 4.66 | $ | 5.69 | $ | 5.30 | ||||||||||||||||||||
| Assuming Dilution | $ | 5.26 | $ | 4.74 | $ | 4.52 | Assuming Dilution | $ | 4.64 | $ | 5.66 | $ | 5.26 | ||||||||||||||||||||
| Weighted Average Number of Shares Outstanding: | Weighted Average Number of Shares Outstanding: | ||||||||||||||||||||||||||||||||
| Basic | 43.6 | 44.6 | 44.7 | Basic | 40.6 | 42.0 | 43.6 | ||||||||||||||||||||||||||
| Assuming Dilution | 43.9 | 44.9 | 45.0 | Assuming Dilution | 40.8 | 42.2 | 43.9 | ||||||||||||||||||||||||||
See accompanying Notes to the Consolidated Financial Statements.
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Millions)
| For the Year Ended | |||||||||||||||||||||||
| December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||||||||||||||
| Net Income | $ | 235.8 | $ | 218.1 | $ | 209.3 | |||||||||||||||||
| Other Comprehensive Income (Loss) Net of Tax: | |||||||||||||||||||||||
| Translation: | |||||||||||||||||||||||
| Foreign Currency Translation Adjustments | (71.2 | ) | 103.1 | (68.2 | ) | ||||||||||||||||||
| Hedging Activities: | |||||||||||||||||||||||
Increase (Decrease) in Fair Value of Hedging Activities, Net of Tax Effects of $(1.2) Million in 2018, $26.1 Million in 2017 and $(15.2) Million in 2016 | $ | (4.0 | ) | $ | 42.4 | $ | (24.8 | ) | |||||||||||||||
| Reclassification of (Gains) Losses Included in Net Income, Net of Tax Effects of $(3.8) Million in 2018, $4.5 Million in 2017, and $19.1 Million in 2016 | (12.0 | ) | (16.0 | ) | 7.3 | 49.7 | 31.2 | 6.4 | |||||||||||||||
| Pension and Post Retirement Plans: | |||||||||||||||||||||||
| Decrease (Increase) in Prior Service Cost and Unrecognized Gain (Loss), Net of Tax Effects of $(0.6) Million in 2018, $0.4 Million in 2017 and $(1.5) Million in 2016 | (1.9 | ) | 1.8 | (2.8 | ) | ||||||||||||||||||
| Amortization of Prior Service Cost and Unrecognized Loss Included in Net Periodic Pension Cost, Net of Tax Effects of $0.8 Million in 2018, $0.9 Million in 2017 and $1.2 Million in 2016 | 2.9 | 1.0 | 1.6 | 3.4 | 2.2 | (0.6 | ) | ||||||||||||||||
| Other Comprehensive Income (Loss) | (86.2 | ) | 156.2 | (62.4 | ) | ||||||||||||||||||
| Comprehensive Income | 149.6 | 374.3 | 146.9 | ||||||||||||||||||||
| Less: Comprehensive Income Attributable to Noncontrolling Interest | 2.8 | 7.2 | 3.9 | ||||||||||||||||||||
| Comprehensive Income Attributable to Regal Beloit Corporation | $ | 146.8 | $ | 367.1 | $ | 143.0 | |||||||||||||||||
| December 29, 2018 | December 30, 2017 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and Cash Equivalents | $ | 248.6 | $ | 139.6 | ||||
| Trade Receivables, Less Allowances of $13.3 Million in 2018 and $11.3 Million in 2017 | 551.9 | 506.3 | ||||||
| Inventories | 767.2 | 757.1 | ||||||
| Prepaid Expenses and Other Current Assets | 157.9 | 171.4 | ||||||
| Assets of Businesses Held for Sale | 92.1 | — | ||||||
| Total Current Assets | 1,817.7 | 1,574.4 | ||||||
| Net Property, Plant and Equipment | 615.5 | 623.0 | ||||||
| Goodwill | 1,509.2 | 1,477.1 | ||||||
| Intangible Assets, Net of Amortization | 625.5 | 670.5 | ||||||
| Deferred Income Tax Benefits | 34.2 | 28.5 | ||||||
| Other Noncurrent Assets | 21.7 | 14.7 | ||||||
| Total Assets | $ | 4,623.8 | $ | 4,388.2 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | 424.8 | $ | 384.3 | ||||
| Dividends Payable | 12.0 | 11.5 | ||||||
| Current Hedging Obligations | 11.3 | 8.1 | ||||||
| Accrued Compensation and Employee Benefits | 81.9 | 74.2 | ||||||
| Other Accrued Expenses | 136.0 | 132.7 | ||||||
| Liabilities of Businesses Held for Sale | 17.0 | — | ||||||
| Current Maturities of Long-Term Debt | 0.5 | 101.2 | ||||||
| Total Current Liabilities | 683.5 | 712.0 | ||||||
| Long-Term Debt | 1,306.6 | 1,039.9 | ||||||
| Deferred Income Taxes | 148.3 | 135.3 | ||||||
| Noncurrent Hedging Obligations | 1.2 | 0.9 | ||||||
| Pension and Other Post Retirement Benefits | 96.2 | 101.0 | ||||||
| Other Noncurrent Liabilities | 49.5 | 44.4 | ||||||
| Contingencies (see Note 11) | ||||||||
| Equity: | ||||||||
| Regal Beloit Corporation Shareholders' Equity: | ||||||||
| Common Stock, $0.01 Par Value, 100.0 Million Shares Authorized, 42.8 Million and 44.3 Million Shares Issued and Outstanding at 2018 and 2017, Respectively | 0.4 | 0.4 | ||||||
| Additional Paid-In Capital | 783.6 | 877.5 | ||||||
| Retained Earnings | 1,777.9 | 1,611.6 | ||||||
| Accumulated Other Comprehensive Loss | (251.4 | ) | (164.0 | ) | ||||
| Total Regal Beloit Corporation Shareholders' Equity | 2,310.5 | 2,325.5 | ||||||
| Noncontrolling Interests | 28.0 | 29.2 | ||||||
| Total Equity | 2,338.5 | 2,354.7 | ||||||
| Total Liabilities and Equity | $ | 4,623.8 | $ | 4,388.2 | ||||
| For the Year Ended | |||||||||||||||||||||||||||||||||||
| January 2, 2021 | December 28, 2019 | December 29, 2018 | |||||||||||||||||||||||||||||||||
| Net Income | $ | 193.8 | $ | 242.6 | $ | 235.8 | |||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) Net of Tax: | |||||||||||||||||||||||||||||||||||
| Translation: | |||||||||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustments | 60.7 | (9.2) | (71.2) | ||||||||||||||||||||||||||||||||
| Reclassification of Foreign Currency Translation Adjustments Included in Net Income, Net of $0 Million Tax Effects in 2020, 2019 and 2018 | 0 | 1.6 | 0 | ||||||||||||||||||||||||||||||||
| Hedging Activities: | |||||||||||||||||||||||||||||||||||
Increase (Decrease) in Fair Value of Hedging Activities, Net of Tax Effects of $2.8 Million in 2020, $4.6 Million in 2019 and $(1.2) Million in 2018 | $ | 8.6 | $ | 14.7 | $ | (4.0) | |||||||||||||||||||||||||||||
| Reclassification of Losses (Gains) Included in Net Income, Net of Tax Effects of $2.2 Million in 2020, $(0.4) Million in 2019 and $(3.8) Million in 2018 | 6.9 | 15.5 | (1.3) | 13.4 | (12.0) | (16.0) | |||||||||||||||||||||||||||||
| Pension and Post Retirement Plans: | |||||||||||||||||||||||||||||||||||
| (Increase) Decrease in Prior Service Cost and Unrecognized Gain (Loss), Net of Tax Effects of $(0.1) Million in 2020, $1.8 Million in 2019 and $(0.6) Million in 2018 | (0.6) | 5.7 | (1.9) | ||||||||||||||||||||||||||||||||
| Amortization of Prior Service Cost and Unrecognized Loss Included in Net Periodic Pension Cost, Net of Tax Effects of $0.2 Million in 2020, $0.5 Million in 2019 and $0.8 Million in 2018 | 0.5 | (0.1) | 1.5 | 7.2 | 2.9 | 1.0 | |||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | 76.1 | 13.0 | (86.2) | ||||||||||||||||||||||||||||||||
| Comprehensive Income | 269.9 | 255.6 | 149.6 | ||||||||||||||||||||||||||||||||
| Less: Comprehensive Income Attributable to Noncontrolling Interest | 6.1 | 3.1 | 2.8 | ||||||||||||||||||||||||||||||||
| Comprehensive Income Attributable to Regal Beloit Corporation | $ | 263.8 | $ | 252.5 | $ | 146.8 | |||||||||||||||||||||||||||||
See accompanying Notes to the Consolidated Financial Statements.
53
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF EQUITYBALANCE SHEETS
(Dollars in Millions, Except Per Share Data)
| Common Stock $0.01 Par Value | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | Total Equity | ||||||||||||||||||
| Balance as of January 2, 2016 | $ | 0.4 | $ | 900.8 | $ | 1,291.1 | $ | (255.0 | ) | $ | 45.5 | $ | 1,982.8 | ||||||||||
| Net Income | — | — | 203.4 | — | 5.9 | 209.3 | |||||||||||||||||
| Other Comprehensive Loss | — | — | — | (60.4 | ) | (2.0 | ) | (62.4 | ) | ||||||||||||||
| Dividends Declared ($0.95 Per Share) | — | — | (42.5 | ) | — | — | (42.5 | ) | |||||||||||||||
| Stock Options Exercised, Including Income Tax Benefit and Share Cancellations | — | (2.4 | ) | — | — | — | (2.4 | ) | |||||||||||||||
| Share-Based Compensation | — | 13.3 | — | — | — | 13.3 | |||||||||||||||||
| Purchase of Subsidiary Shares from Noncontrolling Interest | — | (7.2 | ) | — | (2.7 | ) | (9.7 | ) | (19.6 | ) | |||||||||||||
| Dividends Declared to Noncontrolling Interests | — | — | — | — | (0.3 | ) | (0.3 | ) | |||||||||||||||
| Balance as of December 31, 2016 | $ | 0.4 | $ | 904.5 | $ | 1,452.0 | $ | (318.1 | ) | $ | 39.4 | $ | 2,078.2 | ||||||||||
| Net Income | — | — | 213.0 | — | 5.1 | 218.1 | |||||||||||||||||
| Other Comprehensive Income | — | — | — | 154.1 | 2.1 | 156.2 | |||||||||||||||||
| Dividends Declared ($1.02 Per Share) | — | — | (45.3 | ) | — | — | (45.3 | ) | |||||||||||||||
| Stock Options Exercised | — | (3.6 | ) | — | — | — | (3.6 | ) | |||||||||||||||
| Share-Based Compensation | — | 13.6 | — | — | — | 13.6 | |||||||||||||||||
| Stock Repurchase | — | (37.0 | ) | (8.1 | ) | (45.1 | ) | ||||||||||||||||
| Dividends Declared to Noncontrolling Interests | — | — | — | — | (17.4 | ) | (17.4 | ) | |||||||||||||||
| Balance as of December 30, 2017 | $ | 0.4 | $ | 877.5 | $ | 1,611.6 | $ | (164.0 | ) | $ | 29.2 | $ | 2,354.7 | ||||||||||
| Net Income | — | — | 231.2 | — | 4.6 | 235.8 | |||||||||||||||||
| Other Comprehensive Loss | — | — | — | (84.4 | ) | (1.8 | ) | (86.2 | ) | ||||||||||||||
| Dividends Declared ($1.10 Per Share) | — | — | (47.7 | ) | — | — | (47.7 | ) | |||||||||||||||
| Stock Options Exercised | — | (4.8 | ) | — | — | — | (4.8 | ) | |||||||||||||||
| Share-Based Compensation | — | 16.9 | — | — | — | 16.9 | |||||||||||||||||
| Stock Repurchase | — | (106.0 | ) | (21.8 | ) | — | — | (127.8 | ) | ||||||||||||||
| Adoption of Accounting Pronouncement ASU 2018-02 | — | — | 4.6 | (4.6 | ) | — | — | ||||||||||||||||
| Purchase of Subsidiary Shares from Noncontrolling Interest | — | — | — | 1.6 | (2.4 | ) | (0.8 | ) | |||||||||||||||
| Dividends Declared to Noncontrolling Interests | — | — | — | — | (1.6 | ) | (1.6 | ) | |||||||||||||||
| Balance as of December 29, 2018 | $ | 0.4 | $ | 783.6 | $ | 1,777.9 | $ | (251.4 | ) | $ | 28.0 | $ | 2,338.5 | ||||||||||
| January 2, 2021 | December 28, 2019 | |||||||||||||
| ASSETS | ||||||||||||||
| Current Assets: | ||||||||||||||
| Cash and Cash Equivalents | $ | 611.3 | $ | 331.4 | ||||||||||
| Trade Receivables, Less Allowances of $18.3 Million in 2020 and $9.7 Million in 2019 | 432.0 | 461.4 | ||||||||||||
| Inventories | 690.3 | 678.4 | ||||||||||||
| Prepaid Expenses and Other Current Assets | 108.6 | 133.7 | ||||||||||||
| Assets Held for Sale | 9.1 | 2.8 | ||||||||||||
| Total Current Assets | 1,851.3 | 1,607.7 | ||||||||||||
| Net Property, Plant and Equipment | 555.5 | 605.0 | ||||||||||||
| Operating Lease Assets | 73.4 | 71.0 | ||||||||||||
| Goodwill | 1,518.2 | 1,501.3 | ||||||||||||
| Intangible Assets, Net of Amortization | 530.3 | 567.2 | ||||||||||||
| Deferred Income Tax Benefits | 43.9 | 58.4 | ||||||||||||
| Other Noncurrent Assets | 16.4 | 20.1 | ||||||||||||
| Total Assets | $ | 4,589.0 | $ | 4,430.7 | ||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| Current Liabilities: | ||||||||||||||
| Accounts Payable | $ | 360.1 | $ | 337.0 | ||||||||||
| Dividends Payable | 12.2 | 12.2 | ||||||||||||
| Accrued Compensation and Benefits | 76.6 | 67.3 | ||||||||||||
| Other Accrued Expenses | 120.5 | 121.8 | ||||||||||||
| Current Operating Lease Liabilities | 21.6 | 21.6 | ||||||||||||
| Current Maturities of Long-Term Debt | 231.0 | 0.6 | ||||||||||||
| Total Current Liabilities | 822.0 | 560.5 | ||||||||||||
| Long-Term Debt | 840.4 | 1,136.9 | ||||||||||||
| Deferred Income Taxes | 172.0 | 171.9 | ||||||||||||
| Pension and Other Post Retirement Benefits | 69.5 | 80.8 | ||||||||||||
| Noncurrent Operating Lease Liabilities | 55.1 | 51.0 | ||||||||||||
| Other Noncurrent Liabilities | 53.0 | 49.2 | ||||||||||||
| Contingencies (see Note 12) | 0 | 0 | ||||||||||||
| Equity: | ||||||||||||||
| Regal Beloit Corporation Shareholders' Equity: | ||||||||||||||
| Common Stock, $0.01 Par Value, 100.0 Million Shares Authorized, 40.6 Million and 40.8 Million Shares Issued and Outstanding at 2020 and 2019, Respectively | 0.4 | 0.4 | ||||||||||||
| Additional Paid-In Capital | 696.6 | 701.8 | ||||||||||||
| Retained Earnings | 2,010.7 | 1,886.7 | ||||||||||||
| Accumulated Other Comprehensive Loss | (163.3) | (237.8) | ||||||||||||
| Total Regal Beloit Corporation Shareholders' Equity | 2,544.4 | 2,351.1 | ||||||||||||
| Noncontrolling Interests | 32.6 | 29.3 | ||||||||||||
| Total Equity | 2,577.0 | 2,380.4 | ||||||||||||
| Total Liabilities and Equity | $ | 4,589.0 | $ | 4,430.7 | ||||||||||
See accompanying Notes to the Consolidated Financial Statements.
54
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in Millions, Except Per Share Data)
| Common Stock $0.01 Par Value | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||
| Balance as of December 30, 2017 | $ | 0.4 | $ | 877.5 | $ | 1,611.6 | $ | (164.0) | $ | 29.2 | $ | 2,354.7 | |||||||||||||||||||||||
| Net Income | — | — | 231.2 | — | 4.6 | 235.8 | |||||||||||||||||||||||||||||
| Other Comprehensive Loss | — | — | — | (84.4) | (1.8) | (86.2) | |||||||||||||||||||||||||||||
| Dividends Declared ($1.10 Per Share) | — | — | (47.7) | — | — | (47.7) | |||||||||||||||||||||||||||||
| Stock Options Exercised, Including Income Tax Benefit and Share Cancellations | — | (4.8) | — | — | — | (4.8) | |||||||||||||||||||||||||||||
| Share-Based Compensation | — | 16.9 | — | — | — | 16.9 | |||||||||||||||||||||||||||||
| Stock Repurchase | — | (106.0) | (21.8) | — | — | (127.8) | |||||||||||||||||||||||||||||
| Adoption of Accounting Pronouncement ASU 2018-02 | — | — | 4.6 | (4.6) | — | 0 | |||||||||||||||||||||||||||||
| Purchase of Subsidiary Shares from Noncontrolling Interest | — | — | — | 1.6 | (2.4) | (0.8) | |||||||||||||||||||||||||||||
| Dividends Declared to Noncontrolling Interests | — | — | — | — | (1.6) | (1.6) | |||||||||||||||||||||||||||||
| Balance as of December 29, 2018 | $ | 0.4 | $ | 783.6 | $ | 1,777.9 | $ | (251.4) | $ | 28.0 | $ | 2,338.5 | |||||||||||||||||||||||
| Net Income | — | — | 238.9 | — | 3.7 | 242.6 | |||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | — | — | — | 13.6 | (0.6) | 13.0 | |||||||||||||||||||||||||||||
| Dividends Declared ($1.18 Per Share) | — | — | (49.1) | — | — | (49.1) | |||||||||||||||||||||||||||||
| Stock Options Exercised | — | (10.7) | — | — | — | (10.7) | |||||||||||||||||||||||||||||
| Share-Based Compensation | — | 13.0 | — | — | — | 13.0 | |||||||||||||||||||||||||||||
| Stock Repurchase | — | (84.1) | (81.0) | — | — | (165.1) | |||||||||||||||||||||||||||||
| Dividends Declared to Noncontrolling Interests | — | — | — | — | (1.8) | (1.8) | |||||||||||||||||||||||||||||
| Balance as of December 28, 2019 | $ | 0.4 | $ | 701.8 | $ | 1,886.7 | $ | (237.8) | $ | 29.3 | $ | 2,380.4 | |||||||||||||||||||||||
| Net Income | — | — | 189.3 | — | 4.5 | 193.8 | |||||||||||||||||||||||||||||
| Other Comprehensive Income | — | — | — | 74.5 | 1.6 | 76.1 | |||||||||||||||||||||||||||||
| Dividends Declared ($1.20 Per Share) | — | — | (48.7) | — | — | (48.7) | |||||||||||||||||||||||||||||
| Stock Options Exercised | — | (3.3) | — | — | — | (3.3) | |||||||||||||||||||||||||||||
| Share-Based Compensation | — | 9.2 | — | — | — | 9.2 | |||||||||||||||||||||||||||||
| Stock Repurchase | — | (11.1) | (13.9) | — | — | (25.0) | |||||||||||||||||||||||||||||
| Adoption of ASU 2016-13 | — | — | (2.7) | — | — | (2.7) | |||||||||||||||||||||||||||||
| Dividends Declared to Noncontrolling Interests | — | — | — | — | (2.8) | (2.8) | |||||||||||||||||||||||||||||
| Balance as of January 2, 2021 | $ | 0.4 | $ | 696.6 | $ | 2,010.7 | $ | (163.3) | $ | 32.6 | $ | 2,577.0 | |||||||||||||||||||||||
See accompanying Notes to the Consolidated Financial Statements.
55
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
| For the Year Ended | For the Year Ended | |||||||||||||||||||||||||||||||
| December 29, 2018 | December 30, 2017 | December 31, 2016 | January 2, 2021 | December 28, 2019 | December 29, 2018 | |||||||||||||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||||||||||||||||||||||
| Net Income | $ | 235.8 | $ | 218.1 | $ | 209.3 | Net Income | $ | 193.8 | $ | 242.6 | $ | 235.8 | |||||||||||||||||||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities (Net of Acquisitions and Divestitures): | Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities (Net of Acquisitions and Divestitures): | |||||||||||||||||||||||||||||||
| Depreciation | 87.5 | 82.0 | 93.4 | Depreciation | 84.1 | 84.2 | 87.5 | |||||||||||||||||||||||||
| Amortization | 54.9 | 55.2 | 62.0 | Amortization | 47.3 | 50.3 | 54.9 | |||||||||||||||||||||||||
| Goodwill Impairment | 9.5 | — | — | Goodwill Impairment | 10.5 | 0 | 9.5 | |||||||||||||||||||||||||
| Asset Impairments | 8.7 | — | — | Asset Impairments | 5.3 | 10.0 | 8.7 | |||||||||||||||||||||||||
| Noncash Lease Expense | Noncash Lease Expense | 24.5 | 30.6 | 0 | ||||||||||||||||||||||||||||
| Share-Based Compensation Expense | 16.9 | 13.6 | 13.3 | Share-Based Compensation Expense | 9.2 | 13.0 | 16.9 | |||||||||||||||||||||||||
| Expense (Benefit) from Deferred Income Taxes | 13.2 | (9.7 | ) | (1.6 | ) | Expense (Benefit) from Deferred Income Taxes | (16.5) | 22.4 | 13.2 | |||||||||||||||||||||||
| Loss on Exit of Business | — | 3.9 | — | |||||||||||||||||||||||||||||
| Exit Related Costs | 16.7 | — | — | Exit Related Costs | 0 | 0 | 16.7 | |||||||||||||||||||||||||
| Loss (Gain) on Disposition of Assets | 1.1 | (2.5 | ) | 1.1 | Loss (Gain) on Disposition of Assets | 3.0 | (0.7) | 1.1 | ||||||||||||||||||||||||
| Other Non-Cash Changes | 3.0 | 1.3 | 1.6 | Other Non-Cash Changes | 5.8 | 4.0 | 3.0 | |||||||||||||||||||||||||
| Gain on Sale of Businesses | — | (0.1 | ) | (11.6 | ) | Gain on Sale of Businesses | (0.1) | (44.7) | 0 | |||||||||||||||||||||||
| Change in Operating Assets and Liabilities, Net of Acquisitions and Divestitures | Change in Operating Assets and Liabilities, Net of Acquisitions and Divestitures | |||||||||||||||||||||||||||||||
| Receivables | (56.5 | ) | (31.0 | ) | (10.4 | ) | Receivables | 29.6 | 70.3 | (56.5) | ||||||||||||||||||||||
| Inventories | (42.7 | ) | (83.0 | ) | 100.4 | Inventories | (3.7) | 68.6 | (42.7) | |||||||||||||||||||||||
| Accounts Payable | 41.1 | 37.7 | 7.6 | Accounts Payable | 15.2 | (80.3) | 41.1 | |||||||||||||||||||||||||
| Current Liabilities and Other | (26.5 | ) | 6.4 | (22.8 | ) | Current Liabilities and Other | 27.4 | (61.8) | (26.5) | |||||||||||||||||||||||
| Net Cash Provided by Operating Activities | 362.7 | 291.9 | 442.3 | Net Cash Provided by Operating Activities | 435.4 | 408.5 | 362.7 | |||||||||||||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||||||||||||||||||||||
| Additions to Property, Plant and Equipment | (77.6 | ) | (65.2 | ) | (65.2 | ) | Additions to Property, Plant and Equipment | (47.5) | (92.4) | (77.6) | ||||||||||||||||||||||
| Purchases of Investment Securities | — | (0.9 | ) | (53.7 | ) | |||||||||||||||||||||||||||
| Sales of Investment Securities | 0.5 | 0.9 | 72.6 | Sales of Investment Securities | 0 | 0 | 0.5 | |||||||||||||||||||||||||
| Business Acquisitions, Net of Cash Acquired | (161.5 | ) | — | — | Business Acquisitions, Net of Cash Acquired | 0 | 0 | (161.5) | ||||||||||||||||||||||||
| Proceeds from Sale of Businesses | 0.7 | 1.1 | 24.6 | Proceeds from Sale of Businesses | 0.3 | 157.9 | 0.7 | |||||||||||||||||||||||||
| Proceeds from Sale of Assets | 10.0 | 6.3 | 2.1 | Proceeds from Sale of Assets | 10.2 | 8.8 | 10.0 | |||||||||||||||||||||||||
| Net Cash Used in Investing Activities | (227.9 | ) | (57.8 | ) | (19.6 | ) | ||||||||||||||||||||||||||
| Net Cash Provided by (Used in) Investing Activities | Net Cash Provided by (Used in) Investing Activities | (37.0) | 74.3 | (227.9) | ||||||||||||||||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||||||||||||||||||||
| Borrowings Under Revolving Credit Facility | 1,350.3 | 1,247.6 | 583.7 | Borrowings Under Revolving Credit Facility | 1,088.5 | 1,150.1 | 1,350.3 | |||||||||||||||||||||||||
| Repayments Under Revolving Credit Facility | (1,271.7 | ) | (1,245.8 | ) | (568.7 | ) | Repayments Under Revolving Credit Facility | (1,106.2) | (1,230.8) | (1,271.7) | ||||||||||||||||||||||
| Proceeds from Short-Term Borrowings | 19.0 | 25.2 | 23.8 | Proceeds from Short-Term Borrowings | 2.6 | 27.5 | 19.0 | |||||||||||||||||||||||||
| Repayments of Short-Term Borrowings | (19.7 | ) | (24.7 | ) | (30.5 | ) | Repayments of Short-Term Borrowings | (2.3) | (27.5) | (19.7) | ||||||||||||||||||||||
| Proceeds from Long-Term Borrowings | 900.2 | 0.3 | 0.2 | Proceeds from Long-Term Borrowings | 0.1 | 0 | 900.2 | |||||||||||||||||||||||||
| Repayments of Long-Term Borrowings | (811.4 | ) | (277.3 | ) | (323.8 | ) | Repayments of Long-Term Borrowings | (50.4) | (90.3) | (811.4) | ||||||||||||||||||||||
| Dividends Paid to Shareholders | (47.2 | ) | (44.5 | ) | (42.1 | ) | Dividends Paid to Shareholders | (48.7) | (48.9) | (47.2) | ||||||||||||||||||||||
| Proceeds from the Exercise of Stock Options | — | 0.4 | 0.5 | Proceeds from the Exercise of Stock Options | 0.2 | 0.3 | 0 | |||||||||||||||||||||||||
| Shares Surrendered for Taxes | (3.5 | ) | (4.0 | ) | (2.7 | ) | Shares Surrendered for Taxes | (3.6) | (10.9) | (3.5) | ||||||||||||||||||||||
| Purchase of Subsidiary Shares from Noncontrolling Interest | (0.8 | ) | — | (19.6 | ) | Purchase of Subsidiary Shares from Noncontrolling Interest | 0 | 0 | (0.8) | |||||||||||||||||||||||
| Financing Fees Paid | (3.5 | ) | — | — | Financing Fees Paid | 0 | 0 | (3.5) | ||||||||||||||||||||||||
| Repurchase of Common Stock | (127.8 | ) | (45.1 | ) | — | Repurchase of Common Stock | (25.0) | (165.1) | (127.8) | |||||||||||||||||||||||
| Payments of Contingent Consideration | — | (5.3 | ) | — | ||||||||||||||||||||||||||||
| Distributions to Noncontrolling Interests | (1.6 | ) | (17.4 | ) | (0.3 | ) | Distributions to Noncontrolling Interests | (2.8) | (1.8) | (1.6) | ||||||||||||||||||||||
| Net Cash Used in Financing Activities | (17.7 | ) | (390.6 | ) | (379.5 | ) | Net Cash Used in Financing Activities | (147.6) | (397.4) | (17.7) | ||||||||||||||||||||||
| EFFECT OF EXCHANGE RATES ON CASH and CASH EQUIVALENTS | (8.1 | ) | 11.6 | (11.6 | ) | EFFECT OF EXCHANGE RATES ON CASH and CASH EQUIVALENTS | 29.1 | (2.6) | (8.1) | |||||||||||||||||||||||
| Net Increase (Decrease) in Cash and Cash Equivalents | 109.0 | (144.9 | ) | 31.6 | ||||||||||||||||||||||||||||
| Net Increase in Cash and Cash Equivalents | Net Increase in Cash and Cash Equivalents | 279.9 | 82.8 | 109.0 | ||||||||||||||||||||||||||||
| Cash and Cash Equivalents at Beginning of Period | 139.6 | 284.5 | 252.9 | Cash and Cash Equivalents at Beginning of Period | 331.4 | 248.6 | 139.6 | |||||||||||||||||||||||||
| Cash and Cash Equivalents at End of Period | $ | 248.6 | $ | 139.6 | $ | 284.5 | Cash and Cash Equivalents at End of Period | $ | 611.3 | $ | 331.4 | $ | 248.6 | |||||||||||||||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |||||||||||||||||||||||||||||||
| Cash Paid During the Year for: | Cash Paid During the Year for: | |||||||||||||||||||||||||||||||
| Interest | $ | 54.2 | $ | 53.2 | $ | 53.7 | Interest | $ | 38.6 | $ | 51.7 | $ | 54.2 | |||||||||||||||||||
| Income Taxes | 81.2 | 59.7 | 66.9 | Income Taxes | 44.3 | 42.3 | 81.2 | |||||||||||||||||||||||||
See accompanying Notes to the Consolidated Financial Statements.
Notes to the Consolidated Financial Statements
(1) Nature of Operations
Regal Beloit Corporation (the “Company”) is a United States based multi-national corporation. The Company reports in threeis comprised of 4 operating segments: the Commercial Systems segment produces fractional to approximately 5 horsepower AC and DC motors, electronic variable speed controls, fans, and blowers for commercial applications; the Industrial Systems segment produces mediumintegral motors, generators, alternators and large motors, commercialswitchgear for industrial applications, along with aftermarket parts and industrial equipment, alternators, motors and controls and air moving solutions;kits to support such products; the Climate Solutions segment produces small motors, electronic variable speed controls and air moving solutions; and the Power Transmission Solutions segment manufactures,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.
(2) Basis of Presentation
The Company operates on a 52/53 week fiscal year ending on the Saturday closest to December 31. The fiscal year ended January 2, 2021 was 53 weeks and the fiscal years ended December 29, 2018, December 30, 2017,28, 2019 and December 31, 201629, 2018 were 52 weeks.
(3) Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. In addition, the Company has joint ventures that are consolidated in accordance with consolidation accounting guidance. All intercompany accounts and transactions are eliminated.
Use of Estimates
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company uses estimates in accounting for, among other items, allowance for doubtful accounts;credit losses; excess and obsolete inventory; share-based compensation; acquisitions; product warranty obligations; pension and post retirementpost-retirement assets and liabilities; derivative fair values; goodwill and other asset impairments; health care reserves; rebates and incentives; litigation claims and contingencies, including environmental matters; and income taxes. The Company accounts for changes to estimates and assumptions when warranted by factually based experience.
Acquisitions
The Company recognizes assets acquired, liabilities assumed, contractual contingencies and contingent consideration at their fair value on the acquisition date. The operating results of the acquired companies are included in the Company’s consolidated financial statements from the date of acquisition.
Acquisition-related costs are expensed as incurred, restructuring costs are recognized as post-acquisition expense and changes in deferred tax asset valuation allowances and income tax uncertainties after the measurement period are recorded in Provision for Income Taxes.
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.
For a limited number of contracts, the Company recognizes revenue over time in proportion to costs incurred. The pricing of products sold is generally supported by customer purchase orders, and accounts receivable collection is reasonably assured. Estimated discounts and rebates are recorded as a reduction of gross sales in the same period revenue is recognized. Product returns and credits are estimated and recorded at the time of shipment based upon historical experience. Shipping and handling costs are recorded as revenue when billed to the customers. The costs incurred from shipping are recorded in Cost of Sales and handling costs incurred in connection with selling and distribution activities are recorded in Operating Expenses.
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The Company derives a significant portion of its revenues from several original equipment manufacturing customers. Despite this relative concentration, there were no customers that accounted for more than 10% of consolidated net sales in fiscal 2018,2020, fiscal 20172019 or fiscal 2016.2018.
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’sOEM customers. The Company reports in three4 operating segments: Commercial andSystems, 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 three4 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 systems/solutions.
Product:
The nature of products varies from segment to segment but across all segments, individual products are generally not integrated and represent separate performance obligations.
Customized systems/solutions:
The Company provides customized systems/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 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.
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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 areit is 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 table presents the Company’s revenues disaggregated by geographical region for the fiscal yearyears ended January 2, 2021, December 28, 2019 and December 29, 2018, respectively, (in millions):
| January 2, 2021 | Commercial Systems | Industrial Systems | Climate Solutions | Power Transmission Solutions | Total | ||||||||||||||||||||||||
| North America | $ | 566.9 | $ | 291.4 | $ | 752.7 | $ | 572.4 | $ | 2,183.4 | |||||||||||||||||||
| Asia | 124.9 | 150.9 | 27.7 | 27.5 | 331.0 | ||||||||||||||||||||||||
| Europe | 86.1 | 44.8 | 30.3 | 86.4 | 247.6 | ||||||||||||||||||||||||
| Rest-of-World | 42.3 | 41.7 | 36.1 | 24.9 | 145.0 | ||||||||||||||||||||||||
| Total | $ | 820.2 | $ | 528.8 | $ | 846.8 | $ | 711.2 | $ | 2,907.0 | |||||||||||||||||||
| Commercial and Industrial Systems | Climate Solutions | Power Transmission Solutions | Total | |||||||||||||||||||||||||||||||||||||||||
| December 28, 2019 | December 28, 2019 | Commercial Systems | Industrial Systems | Climate Solutions | Power Transmission Solutions | Total | ||||||||||||||||||||||||||||||||||||||
| North America | $ | 1,173.5 | $ | 891.9 | $ | 686.4 | $ | 2,751.8 | North America | $ | 643.0 | $ | 313.5 | $ | 848.6 | $ | 639.9 | $ | 2,445.0 | |||||||||||||||||||||||||
| Asia | 269.6 | 39.5 | 24.1 | 333.2 | Asia | 107.2 | 167.0 | 37.7 | 30.4 | 342.3 | ||||||||||||||||||||||||||||||||||
| Europe | 177.2 | 50.5 | 96.9 | 324.6 | Europe | 135.5 | 49.2 | 40.5 | 91.5 | 316.7 | ||||||||||||||||||||||||||||||||||
| Rest-of-World | 161.7 | 42.9 | 31.4 | 236.0 | Rest-of-World | 19.6 | 45.7 | 41.7 | 27.0 | 134.0 | ||||||||||||||||||||||||||||||||||
| Total | $ | 1,782.0 | $ | 1,024.8 | $ | 838.8 | $ | 3,645.6 | Total | $ | 905.3 | $ | 575.4 | $ | 968.5 | $ | 788.8 | $ | 3,238.0 | |||||||||||||||||||||||||
| December 29, 2018 | Commercial Systems | Industrial Systems | Climate Solutions | Power Transmission Solutions | Total | ||||||||||||||||||||||||
| North America | $ | 813.6 | $ | 360.0 | $ | 891.9 | $ | 686.4 | $ | 2,751.9 | |||||||||||||||||||
| Asia | 142.7 | 194.8 | 39.5 | 24.1 | 401.1 | ||||||||||||||||||||||||
| Europe | 122.1 | 55.1 | 50.5 | 96.9 | 324.6 | ||||||||||||||||||||||||
| Rest-of-World | 32.5 | 61.2 | 42.9 | 31.4 | 168.0 | ||||||||||||||||||||||||
| Total | $ | 1,110.9 | $ | 671.1 | $ | 1,024.8 | $ | 838.8 | $ | 3,645.6 | |||||||||||||||||||
Practical Expedients and Exemptions
The Company typically expenses incremental direct costs of obtaining a contract, primarily sales commissions, as incurred because the amortization period is expected to be 12 months or less. Contract costs are included in Operating Expenses in the accompanying Consolidated Statements of Income.
Due to the short nature of the Company’s contracts, the Company has adopted a practical expedient to not disclose revenue allocated to remaining performance obligations as substantially all of its contracts have original terms of 12 months or less.
The Company typically does not include in its transaction price any amounts collected from customers for sales taxes.
The Company has elected to account for shipping and handling costs as fulfillment activities and expense the costs as incurred as part of Cost of Sales.
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Research and Development
The Company performs research and development activities relating to new product development and the improvement of current products. The Company's research and development expenses consist primarily of costs for: (i) salaries and related personnel expenses; (ii) the design and development of new energy efficient products and enhancements; (iii) quality assurance and testing; and (iv) other related overhead. The Company's research and development efforts tend to be targeted toward developing new products that would allow it to gain additional market share, whether in new or existing segments. While these costs make up an insignificant portion of operating expenses in the Power Transmission Solutions segment, they are more substantial in the Climate Solutions, and Commercial Systems and Industrial Systems segments. In particular, a large driver of research and development efforts in the Climate Solutions, and Commercial Systems and Industrial Systems segments is energy efficiency.
Research and development costs are expensed as incurred. For fiscal 2018, 2017 and 2016, research and development costs were $29.3 million, $29.9 million and $29.5 million, respectively. Research and developmentThe costs are recorded in Operating Expenses.Expenses in the fiscal year as follows as noted in the table below:
| January 2, 2021 | December 28, 2019 | December 29, 2018 | ||||||||||||||||||
| Research and Development Costs | $ | 34.7 | $ | 22.5 | $ | 29.3 | ||||||||||||||
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments which are readily convertible to cash, present insignificant risk of changes in value due to interest rate fluctuations and have original or purchased maturities of three months or less.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents. The Company has material deposits with global financial institutions. The Company performs periodic evaluations of the relative credit standing of its financial institutions and monitors the amount of exposure.
Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers and their dispersion across many geographic areas. The Company monitors credit risk associated with its trade receivables.
Trade Receivables
The Company's policy for estimating the allowance for credit losses on trade receivables considers several factors including historical write-off experience, overall customer credit quality in relation to general economic and market conditions, and specific customer account analyses to estimate expected credit losses. The specific customer account analysis consider such items as, credit worthiness, payment history, and historical bad debt experience. Trade receivables are stated at estimated net realizable value. Trade receivableswritten off after exhaustive collection efforts occur and the receivable is deemed uncollectible. Adjustments to the allowance for credit losses are comprisedrecorded in Operating Expenses.
Inventories
The Company changed its method of balances due from customers, netcalculating last-in, first-out ("LIFO") inventories, which represented approximately 50.0% of estimated allowances. In estimating losses inherent in trade receivables,the Company’s inventory as of January 2, 2021. The Company increased the number of LIFO inventory pools to 4 to align with the Company’s operating and reporting segments. Previously, the Company uses historical loss experienceshad 3 LIFO inventory pools, which aligned with the Company's operating and applies themreporting segments prior to the fiscal year 2020. The Company believes this change in accounting principle is preferable under the circumstances because it combines inventory items with similarities within a related aging analysis. Determinationsegment and better aligns revenue with expenses based on the four segment structure as well as how management manages and assesses the performance of the proper levelbusinesses. The Company determined that it had the data needed to apply this change in accounting principle as of allowances requires managementthe beginning of its fiscal year 2019, but it was impracticable to exercise significant judgment aboutapply the timing, frequencychange in periods prior to then. The change in accounting principle has been reflected in fiscal years 2019 and severity of losses.2020. The allowanceschange did not have a material impact on the consolidated financial statements for doubtful accounts take into consideration numerous quantitativethe years ended January 2, 2021 and qualitative factors, including historical loss experience, collection experience, delinquency trends and economic conditions.December 28, 2019. See Note 6 for details.
The major classes of inventory at year end are as follows:
| January 2, 2021 | December 28, 2019 | ||||||||||
| Raw Material and Work in Process | 48.7% | 48.0% | |||||||||
| Finished Goods and Purchased Parts | 51.3% | 52.0% | |||||||||
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| December 29, 2018 | December 30, 2017 | ||
| Raw Material and Work in Process | 45% | 47% | |
| Finished Goods and Purchased Parts | 55% | 53% | |
Inventories are stated at cost, which is not in excess of market. Cost for approximately 54%50.0% of the Company's inventory as of December 29, 2018January 2, 2021 and 52%53.0% as of December 30, 201728, 2019 was determined using the last-in, first-out method. If all inventories were valued on the first-in, first-out method, they would have increased by $65.5$60.0 million and $46.0$62.0 million as of January 2, 2021 and December 29, 2018 and December 30, 2017,28, 2019, respectively. Material, labor and factory overhead costs are included in the inventories.
The Company reviews inventories for excess and obsolete products or components. Based on an analysis of historical usage and management's evaluation of estimated future demand, market conditions and alternative uses for possible excess or obsolete parts, the Company records an excess and obsolete reserve.
| December 29, 2018 | |||
| Trade Receivables | $ | 19.2 | |
| Inventories | 34.7 | ||
| Prepaid Expenses and Other Current Assets | 5.0 | ||
| Property, Plant and Equipment | 19.9 | ||
| Intangible Assets | 12.0 | ||
| Goodwill | 1.3 | ||
| Assets of Businesses Held for Sale | $ | 92.1 | |
| Accounts Payable | $ | 8.1 | |
| Accrued Compensation and Employee Benefits | 0.5 | ||
| Other Accrued Expenses | 7.3 | ||
| Other Noncurrent Liabilities | 1.1 | ||
| Liabilities of Businesses Held for Sale | $ | 17.0 | |
Property, Plant and Equipment
Property, Plant and Equipment are stated at cost. Depreciation of plant and equipment is provided principally on a straight-line basis over the estimated useful lives (3 to 50 years) of the depreciable assets. Accelerated methods are used for income tax purposes.
Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures which extend the useful lives of existing equipment are capitalized and depreciated.
Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized. Leasehold improvements are capitalized and amortized over the lesser of the life of the lease or the estimated useful life of the asset.
Property, plant and equipment by major classification was as follows (in millions):
| Useful Life (In Years) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Land and Improvements | $ | 76.1 | $ | 80.3 | |||||||||||||
| Buildings and Improvements | 3-50 | 290.7 | 305.2 | ||||||||||||||
| Machinery and Equipment | 3-15 | 978.2 | 988.2 | ||||||||||||||
| Property, Plant and Equipment | 1,345.0 | 1,373.7 | |||||||||||||||
| Less: Accumulated Depreciation | (789.5) | (768.7) | |||||||||||||||
| Net Property, Plant and Equipment | $ | 555.5 | $ | 605.0 | |||||||||||||
| Useful Life (In Years) | December 29, 2018 | December 30, 2017 | |||||||
| Land and Improvements | $ | 82.1 | $ | 78.2 | |||||
| Buildings and Improvements | 3-50 | 302.8 | 294.5 | ||||||
| Machinery and Equipment | 3-15 | 971.9 | 986.8 | ||||||
| Property, Plant and Equipment | 1,356.8 | 1,359.5 | |||||||
| Less: Accumulated Depreciation | (741.3 | ) | (736.5 | ) | |||||
| Net Property, Plant and Equipment | $ | 615.5 | $ | 623.0 | |||||
During fiscal 2020, the Company recognized $5.3 million of asset impairments related to the transfer of assets to held for sale. For fiscal 2019, the Company recognized $5.1 million of asset impairments related to the transfer of assets to held for sale in the first quarter of 2019.
Goodwill
The Company evaluates the carrying amount of goodwill annually or more frequently if events or circumstances indicate that the goodwill might be impaired. Factors that could trigger an impairment review include significant underperformance relative to historical or forecasted operating results, a significant decrease in the market value of an asset or significant negative industry or economic trends. For goodwill, the Company may perform a qualitative test to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. The Company performed quantitative impairment testing for all reporting units in 2018.fiscal 2020. The Company performs the required annual goodwill impairment testing as of the end of the October fiscal month.
The Company uses a weighting of the market approach and the income approach (discounted cash flow method) in testing goodwill for impairment. In the market approach, the Company applies performance multiples from comparable public companies, adjusted for relative risk, profitability, and growth considerations, to the reporting units to estimate fair value. The key assumptions used in the discounted cash flow method used to estimate fair value include discount rates, revenue and operating incomeEBITDA margin projections and terminal value rates because such assumptions are the most sensitive and susceptible to change as they require significant management judgment. Discount rates are determined by using market and industry data as well as Company-specific risk factors for each reporting unit. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant discount rate and long-term growth rates.
In the fourth quarter of 2020, the Company recorded goodwill impairment of $10.5 million in its global industrial motors reporting unit. The global industrial motors reporting unit fair values forhad goodwill of $114.9 million as of January 2, 2021 and is included
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in the Company's fiscal 2018 and fiscal 2017 impairment testing exceeded theIndustrial Systems segment. The calculated excess fair value over carrying values by at leastvalue for our commercial air moving reporting unit was less than 10% for all of its carrying value. The commercial air moving reporting units.unit had goodwill of $43.8 million as of January 2, 2021 and is included in the Company's Commercial Systems segment. Some of the key considerations used in the Company's impairment testing included (i) market pricing of guideline publicly traded companies (ii) cost of capital, including the risk-free interest rate, and (iii) recent historical and projected performanceoperating results of the subject reporting unit. There is inherent uncertainty included in the assumptions used in goodwill impairment testing. A change to any of the assumptions could lead to a future impairment.
Intangible Assets
Intangible assets with finite lives are amortized over their estimated useful lives using the straight line method. The Company evaluates amortizing intangibles whenever events or circumstances have occurred that may indicate that carrying values may not be recoverable. If an indicator is present, the Company evaluates carrying values as compareduses an estimate of the related undiscounted cash flows over the remaining life of the primary asset to undiscounted estimated future cash flows.estimate recoverability of the asset group. If such estimated future cash flows are less than carrying value, an impairment would be recognized. There was 0 impairment of intangible assets during fiscal 2020. The Company recorded impairments for its customer relationship intangible asset of $5.5$4.9 million and technology intangible assetin fiscal 2019 as the result of $2.1 million duetransferring to the winding down of the Hermetic Climate business described above.
assets held for sale.
Indefinite-lived intangible assets are not amortized. The Company evaluates the carrying amount of indefinite-lived intangible assets annually or more frequently if events or circumstances indicate that the assets might be impaired. The Company performs the required annual impairment testing as of the end of the October fiscal month.
Long-Lived Assets
The Company evaluates the recoverability of the carrying amount of property, plant and equipment assets (collectively, "long-lived assets") whenever events or changes in circumstance indicate that the carrying amount of an asset may not be fully recoverable through future cash flows. Factors that could trigger an impairment review include a significant decrease in the market value of an asset or significant negative economic trends. For long-lived assets, the Company uses an estimate of the related undiscounted cash flows over the remaining life of the primary asset to estimate recoverability of the asset group. If the asset is not recoverable, the asset is written down to fair value. In fiscal 2020, the Company concluded it had asset impairments related to the transfer of assets to held for sale of $5.3 million. The Company concluded it had an impairment of $1.1$5.1 million in long-lived assets in fiscal 20182019 due to the winding downtransfer of the Hermetic Climate business described above.assets to held for sale.
Earnings Per Share
Diluted earnings per share is computed based upon earnings applicable to common shares divided by the weighted-average number of common shares outstanding during the period adjusted for the effect of other dilutive securities. Share based compensation awards for common shares where the exercise price was above the market price have been excluded from the calculation of the effect of dilutive securities shown below; the amount of these shares were 0.4 million in fiscal 2020, 0.4 million in fiscal 2019 and 0.6 million in fiscal 2018, 0.5 million in fiscal 2017 and 1.3 million in fiscal 2016.2018. The following table reconciles the basic and diluted shares used in earnings per share calculations for the fiscal years ended (in millions):
| 2020 | 2019 | 2018 | |||||||||||||||
| Denominator for Basic Earnings Per Share | 40.6 | 42.0 | 43.6 | ||||||||||||||
| Effect of Dilutive Securities | 0.2 | 0.2 | 0.3 | ||||||||||||||
| Denominator for Diluted Earnings Per Share | 40.8 | 42.2 | 43.9 | ||||||||||||||
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| 2018 | 2017 | 2016 | ||||||
| Denominator for Basic Earnings Per Share | 43.6 | 44.6 | 44.7 | |||||
| Effect of Dilutive Securities | 0.3 | 0.3 | 0.3 | |||||
| Denominator for Diluted Earnings Per Share | 43.9 | 44.9 | 45.0 | |||||
Retirement and Post RetirementPost-Retirement Plans
The Company's domestic employeesassociates are covered by defined contribution plans and approximately half of the Company's domestic employeesassociates are covered by defined benefit pension plans. The majority of the defined benefit pension plans covering the Company's domestic employeesassociates have been closed to new employeesassociates and frozen for existing employees.associates. Certain employeesassociates are covered by a post retirement health care plan. Most of the Company's foreign employeesassociates are covered by government sponsored plans in the countries in which they are employed. The Company's obligations under its defined benefit pension and other post retirementpost-retirement plans are determined with the assistance of actuarial firms. The actuaries, under management's direction, make certain assumptions regarding such factors as withdrawal rates and mortality rates. The actuaries also provide information and recommendations from which management makes further assumptions on such factors as the long-term expected rate of return on plan assets, the discount rate on benefit obligations and where applicable, the rate of annual compensation increases and health care cost trend rates.
Based upon the assumptions made, the investments made by the plans, overall conditions and movement in financial markets, life-spans of benefit recipients and other factors, annual expenses and recorded assets or liabilities of these defined benefit plans may change significantly from year to year.
The service cost component of the Company's net periodic benefit cost 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 Consolidated Statements of Income.
Derivative Financial Instruments
Derivative instruments are recorded on the Consolidated Balance Sheets at fair value. Any fair value changes are recorded in Net Income or Accumulated Other Comprehensive Loss ("AOCI") as determined under accounting guidance that establishes criteria for designation and effectiveness of the hedging relationships.
The Company uses derivative instruments to manage its exposure to fluctuations in certain raw material commodity pricing, fluctuations in the cost of forecasted foreign currency transactions, and variability in interest rate exposure on floating rate borrowings. The majority of derivative instruments have been designated as cash flow hedges (see also Note 13).
Income Taxes
The Company operates in numerous taxing jurisdictions and is subject to regular examinations by various US federal, state and foreign jurisdictions for various tax periods. The Company's income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which it does business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions as well as the inherent uncertainty in estimating the final resolution of complex tax audit matters, estimates of income tax liabilities may differ from actual payments or assessments.
Foreign Currency Translation
For those operations using a functional currency other than the US dollar, assets and liabilities are translated into US dollars at year-end exchange rates, and revenues and expenses are translated at weighted-average exchange rates. The resulting translation adjustments are recorded as a separate component of Shareholders' Equity.
Product Warranty Reserves
The Company maintains reserves for product warranty to cover the stated warranty periods for its products. Such reserves are established based on an evaluation of historical warranty experience and specific significant warranty matters when they become known and can reasonably be estimated.
Accumulated Other Comprehensive Loss
Foreign currency translation adjustments, unrealized gains and losses on derivative instruments designated as hedges and pension and post retirement liability adjustments are included in Shareholders' Equity under AOCI. As a result of adopting ASU 2018-02 on April 1, 2018 on a prospective basis, the Company reclassified $6.6 million of stranded tax benefits related to Pension and Post Retirement Benefits and $2.0 million of stranded tax expense related to Hedging Activities to Retained Earnings. This resulted in a $4.6 million increase in Retained Earnings.
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The components of the ending balances of AOCI are as follows (in millions):
| 2018 | 2017 | 2020 | 2019 | |||||||||||||||
| Foreign Currency Translation Adjustments | $ | (207.8 | ) | $ | (140.0 | ) | Foreign Currency Translation Adjustments | $ | (155.7) | $ | (214.8) | |||||||
| Hedging Activities, Net of Tax of $(1.7) in 2018 and $5.4 in 2017 | (5.4 | ) | 8.6 | |||||||||||||||
| Pension and Post Retirement Benefits, Net of Tax of $(11.8) in 2018 and $(18.8) in 2017 | (38.2 | ) | (32.6 | ) | ||||||||||||||
| Hedging Activities, Net of Tax of $7.5 in 2020 and $2.5 in 2019 | Hedging Activities, Net of Tax of $7.5 in 2020 and $2.5 in 2019 | 23.5 | 8.0 | |||||||||||||||
| Pension and Post-Retirement Benefits, Net of Tax of $(9.4) in 2020 and $(9.5) in 2019 | Pension and Post-Retirement Benefits, Net of Tax of $(9.4) in 2020 and $(9.5) in 2019 | (31.1) | (31.0) | |||||||||||||||
| Total | $ | (251.4 | ) | $ | (164.0 | ) | Total | $ | (163.3) | $ | (237.8) | |||||||
Legal Claims and Contingent Liabilities
The Company is subject to various legal proceedings, claims and regulatory matters, the outcomes of which are subject to significant uncertainty and 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. The Company records expenses and liabilities when the Company believes that an obligation of the Company or a subsidiary on a specific matter is probable and there is a basis to reasonably estimate the value of the obligation, and such assessment inherently involves an exercise in judgment. This methodology is used for legal claims that are filed against the Company or a subsidiary from time to time. The uncertainty that is associated with such matters frequently requires adjustments to the liabilities previously recorded.
Fair Values of Financial Instruments
The fair values of cash equivalents, term deposits, trade receivables and accounts payable approximate their carrying values due to the short period of time to maturity. The fair value of debt is estimated using discounted cash flows based on rates for instruments with comparable maturities and credit ratings as further described in Note 7. The fair value of pension assets and derivative instruments is determined based on the methods disclosed in Notes 8 and 14.13.
Recent Accounting Pronouncements
Recently Issued Accounting Standards
In February 2018,December 2019, the FASB issued Accounting Standards Update ("ASU") 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 June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02, Income Statement - Reporting Comprehensive IncomeASU 2016-13, Financial Instruments Credit Losses (Topic 220), Reclassification326). The focus of Certain Tax Effects from Accumulated Other Comprehensive Income. Thisthis ASU addresses the income tax effects of items in Accumulated Other Comprehensive Loss (“AOCI”) which were originally recognized in other comprehensive income,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 income from continuing operations. Specifically, it permits a reclassification from AOCI to Retained Earnings for the adjustmentmore timely recognition of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate resulting from the US tax law changes enacted in December 2017. It also requires certain disclosures about these reclassifications.such losses. This ASU is effective for fiscal years beginning after December 15, 2018, and2019, including interim periods within those fiscal years, with early adoption permitted. The new guidance must be applied either on a prospective basis in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the US federal corporate income tax rate in the US tax law changes are recognized.therein. The Company elected to early adopt thisadopted the standard as of April 1, 2018. DuringDecember 29, 2019, the second quarter,beginning of fiscal 2020, under the Company elected to reclassify the stranded effects from the US tax law changes from AOCI to Retained Earnings on a prospective basis. As a result of the adoption of ASU 2018-02, the Company reclassified $4.6 million from AOCI to Retained Earnings. The adoption did not have a material impact on the Company's Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new leasing standard establishes acore principle of ASU 216-02 is that an entity should recognize right of use ("ROU") modelassets and lease liabilities arising from an operating lease on its Balance Sheet. In accordance with that principle, ASU 2016-02 requires that a lessee recognize a liability to recordmake lease payments, the lease liability, and a ROU asset and arepresenting its right to use the underlying leased asset for the lease liability on the balance sheet for all leases with terms longer than 12 months.term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on the lease classification as a finance or operating lease. In July 2018, the FASB amended its guidance by issuing ASU 2018-11 to provide an additional transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings
during the period of adoption. The amendment also allows lessors the option to make a policy election to treat lease and nonlease components as a single lease component under certain conditions.
The Company adopted the standard as of December 30, 2018, the beginning of fiscal 2019, under the modified retrospective method in whichmethod. Comparative periods prior to the Company will record a cumulativeadoption of the standard have not been adjusted given the effect adjustment. to the standard.
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The Company elected the package of practical expedients permitted under the relief package within the new standard, which among other things, allows the Company to carryforward the historical lease accounting of expired or existing leases with respect to lease identification, lease classification and accounting treatment for initial direct costs as of the adoption date. The Company also elected the practical expedient related to lease versus nonlease components, allowing the Company to recognize lease and nonlease components as a single lease.
Adoption of the new standard will resultresulted in the recognitionrecording of ROUthe right-of-use assets and lease liabilities of approximately $85.0$93.0 million as of December 30, 2018. No cumulative effect adjustment to$105.0 million based on the present value retained earnings was recognized upon adoption of the remaining lease payments. As thisnew standard. The standard is non-cash in nature,did not materially impact the Company does not believe the standard will have anCompany's Consolidated Net Income and had no impact on its cash flows and the impact to the results of operations is still being evaluated. The adoption is not expected to have any impact on its debt-covenant compliance under the current credit agreements.Cash Flows. See Note 9 for additional disclosures.
In May 2014,August 2018, the FASB issued ASU 2014-09, Revenue from Contracts2018-13, 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 Customersno material impact on the Company's Consolidated Financial Statements.
In August 2018, the FASB issued 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. The Company adopted the standard in the fourth quarter of fiscal 2020 on a retrospective basis for all years presented with no material impact to the Company's Consolidated Financial Statement.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 606),848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional transition guidance, for a comprehensive new revenue recognitionlimited 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. In the second quarter of fiscal year 2020, the Company adopted this standard prospectively and is applying those expedients that supersedes current revenue recognition requirements. This update requiresallow the Company to recognize revenuecontinue to assert that LIBOR-based interest remains probable, despite the sunset of LIBOR at amounts that reflect the consideration to whichend of 2021 with no impact on the Company's Consolidated Financial Statements.
(4) Held For Sale, Divestitures and Acquisitions
Assets Held for Sale
As of January 2, 2021 and December 28, 2019, the Company expects to be entitled in exchangepresented $9.1 million and $2.8 million, respectively, of certain assets held for those goods or services at the time of transfer. The new standard also requires 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. The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and its related updates, effective December 31, 2017 using the modified retrospective approach. Results for reporting periods beginning after December 30, 2017 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605. The Company completed a comprehensive assessment of ASC 606 and its potential impacts onsale as the Company had both the intent and concluded that as a result of applying the modified retrospective method, the cumulative effect adjustmentability to Retained Earnings as of December 31, 2017, was immaterial. Consequently,sell these assets.
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2019 Divestitures
Regal Drive Technologies
On January 7, 2019, the Company did not record an adjustment for such a cumulative effect to Retained Earnings.
Velvet Drive
On April 1, 2019, the dateCompany sold its Velvet Drive business and received proceeds of acquisition. Acquisition$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 Consolidated Statements of Income.
CapCom
On April 1, 2019, the Company sold its CapCom business and acquisition related expensesreceived proceeds of $1.5$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 were recorded in Operating Expenses for the fiscal year ended December 29, 2018. There were no acquisition-related expensesConsolidated 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 fiscal 2017 or fiscal 2016. See Note 3 for information regarding planned 2019 divestitures and exits.the Company's Commercial Systems segment. The Company recognized a loss on sale of $1.9 million in the Consolidated Statements of Income.
2018 AcquisitionsAcquisition
Nicotra Gebhardt
On April 10, 2018, the Company acquired Nicotra Gebhardt S.p.A. ("NG") for $161.5 million in cash, net of $8.5 million of cash acquired. NG is a leader in critical, energy-efficient systems for ventilation and air quality. NG manufactures, sells and services fans and blowers under the industry leading brands of Nicotra and Gebhardt. The financial results of NG have been included in the Company's Commercial & Industrial Systems segment from the date of acquisition.
| As of April 10, 2018 | |||
| Other Current Assets | $ | 17.2 | |
| Trade Receivables | 28.0 | ||
| Inventories | 22.1 | ||
| Property, Plant and Equipment | 44.6 | ||
| Intangible Assets | 37.8 | ||
| Goodwill | 58.7 | ||
| Other Noncurrent Assets | 2.5 | ||
| Total Assets Acquired | $ | 210.9 | |
| Accounts Payable | 16.7 | ||
| Current Liabilities | 14.2 | ||
| Long-Term Liabilities | 10.0 | ||
| Net Assets Acquired | $ | 170.0 | |
(5) Goodwill and Intangible Assets
Goodwill
The excess of purchase price over estimated fair value of net assets acquired is assigned to goodwill. See Note 3 for additional details. During the third quarter of 2018, the Company accelerated its plans to exit the Hermetic Climate business. This decision resulted in an impairment charge of $9.5 million.
The following information presents changes to goodwill during the periods indicated (in millions):
| Total | Commercial Systems | Industrial Systems | Climate Solutions | Power Transmission Solutions | |||||||||||||||||||||||||
| Balance as of December 29, 2018 | $ | 1,509.2 | $ | 427.4 | $ | 171.5 | $ | 330.6 | $ | 579.7 | |||||||||||||||||||
| Divestiture | (2.8) | 0 | 0 | 0 | (2.8) | ||||||||||||||||||||||||
| Translation and Other | (5.1) | (0.8) | (0.7) | 0.6 | (4.2) | ||||||||||||||||||||||||
| Balance as of December 28, 2019 | $ | 1,501.3 | $ | 426.6 | $ | 170.8 | $ | 331.2 | $ | 572.7 | |||||||||||||||||||
| Impairment Charge | (10.5) | 0 | (10.5) | 0 | 0 | ||||||||||||||||||||||||
| Translation and Other | 27.4 | 6.7 | 3.4 | (0.4) | 17.7 | ||||||||||||||||||||||||
| Balance as of January 2, 2021 | $ | 1,518.2 | $ | 433.3 | $ | 163.7 | $ | 330.8 | $ | 590.4 | |||||||||||||||||||
| Cumulative Goodwill Impairment Charges | $ | 295.7 | $ | 183.2 | $ | 72.1 | $ | 17.2 | $ | 23.2 | |||||||||||||||||||
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| 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 | 23.9 | 8.2 | 0.6 | 15.1 | |||||||||||
| Balance as of December 30, 2017 | $ | 1,477.1 | $ | 548.8 | $ | 342.4 | $ | 585.9 | |||||||
| Acquisitions | 58.7 | 58.7 | — | — | |||||||||||
| Less: Impairment charges | (9.5 | ) | — | (9.5 | ) | — | |||||||||
| Less: Held for Sale | (1.3 | ) | — | (1.3 | ) | — | |||||||||
| Translation Adjustments | (15.8 | ) | (8.6 | ) | (1.0 | ) | (6.2 | ) | |||||||
| Balance as of December 29, 2018 | $ | 1,509.2 | $ | 598.9 | $ | 330.6 | $ | 579.7 | |||||||
| Cumulative Goodwill Impairment Charges | $ | 285.2 | $ | 244.8 | $ | 17.2 | $ | 23.2 | |||||||
Intangible Assets
Intangible assets consist of the following (in millions):
| Weighted Average Amortization Period (Years) | December 30, 2017 | Acquisition | Held for Sale | Impairment Charges | Translation Adjustments | December 29, 2018 | Weighted Average Amortization Period (Years) | December 28, 2019 | Translation Adjustments | January 2, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Customer Relationships | 17 | $ | 720.9 | $ | 28.3 | $ | (18.7 | ) | $ | (10.8 | ) | $ | (10.9 | ) | $ | 708.8 | Customer Relationships | 17 | $ | 692.1 | $ | 16.5 | $ | 708.6 | ||||||||||||||||||||||||||||||||||||
| Technology | 14 | 192.3 | — | (32.2 | ) | (14.1 | ) | (1.5 | ) | 144.5 | Technology | 14 | 144.0 | 2.3 | 146.3 | |||||||||||||||||||||||||||||||||||||||||||||
| Trademarks | 14 | 32.8 | 9.5 | (4.0 | ) | — | (1.3 | ) | 37.0 | Trademarks | 14 | 35.9 | 1.8 | 37.7 | ||||||||||||||||||||||||||||||||||||||||||||||
| Patent and Engineering Drawings | 5 | 16.6 | — | — | — | — | 16.6 | Patent and Engineering Drawings | 5 | 16.6 | 0 | 16.6 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Non-Compete Agreements | 8 | 8.5 | — | (1.1 | ) | — | (0.2 | ) | 7.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 971.1 | 37.8 | (56.0 | ) | (24.9 | ) | (13.9 | ) | 914.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-Amortizable Trade Names | 122.5 | — | — | — | (0.6 | ) | 121.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 888.6 | 20.6 | 909.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-Amortizable Trade Name | Non-Amortizable Trade Name | 121.6 | 1.2 | 122.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Gross Intangibles | $ | 1,093.6 | $ | 37.8 | $ | (56.0 | ) | $ | (24.9 | ) | $ | (14.5 | ) | $ | 1,036.0 | Total Gross Intangibles | $ | 1,010.2 | $ | 21.8 | $ | 1,032.0 | ||||||||||||||||||||||||||||||||||||||
Accumulated amortization onof intangible assets consists of the following:
| December 28, 2019 | Amortization | Translation Adjustments | January 2, 2021 | |||||||||||||||||||||||||||||||||||
| Customer Relationships | $ | 302.4 | $ | 38.6 | $ | 8.4 | $ | 349.4 | ||||||||||||||||||||||||||||||
| Technology | 99.0 | 7.1 | 1.9 | 108.0 | ||||||||||||||||||||||||||||||||||
| Trademarks | 25.0 | 1.6 | 1.1 | 27.7 | ||||||||||||||||||||||||||||||||||
| Patent and Engineering Drawings | 16.6 | 0 | 0 | 16.6 | ||||||||||||||||||||||||||||||||||
| Total Accumulated Amortization | $ | 443.0 | $ | 47.3 | $ | 11.4 | $ | 501.7 | ||||||||||||||||||||||||||||||
| Intangible Assets, Net of Amortization | $ | 567.2 | $ | 530.3 | ||||||||||||||||||||||||||||||||||
| December 30, 2017 | Amortization | Held for Sale | Impairment Charges | Translation Adjustments | December 29, 2018 | |||||||||||||||||||
| Customer Relationships | $ | 249.6 | $ | 43.5 | $ | (11.1 | ) | $ | (5.3 | ) | $ | (4.3 | ) | $ | 272.4 | |||||||||
| Technology | 122.8 | 9.5 | (29.1 | ) | (12.0 | ) | (1.1 | ) | 90.1 | |||||||||||||||
| Trademarks | 25.7 | 1.8 | (2.7 | ) | — | (0.6 | ) | 24.2 | ||||||||||||||||
| Patent and Engineering Drawings | 16.6 | — | — | — | — | 16.6 | ||||||||||||||||||
| Non-Compete Agreements | 8.4 | 0.1 | (1.1 | ) | — | (0.2 | ) | 7.2 | ||||||||||||||||
| Total Accumulated Amortization | $ | 423.1 | $ | 54.9 | $ | (44.0 | ) | $ | (17.3 | ) | $ | (6.2 | ) | $ | 410.5 | |||||||||
| Intangible Assets, Net of Amortization | $ | 670.5 | $ | 625.5 | ||||||||||||||||||||
While the Company believes its customer relationships are long-term in nature, the Company's contractual customer relationships are generally short-term. Useful lives are established at acquisition based on historical attrition rates.
Amortization expense was $54.9$47.3 million in fiscal 2018, $55.22020, $50.3 million in fiscal 20172019 and $62.0$54.9 million in fiscal 2016.2018. Amortization expense does not include any impairment recognized during the respective periods. The Company recognized impairment$4.9 million of its customer relationships and technology intangible assets of $5.5 million and $2.1 million, respectively,asset impairment related to its decisionthe transfer of assets to exitheld for sale during the Hermetic Climate Business at the endfirst quarter of its fiscal 2018 third quarter.2019.
The following table presents estimated future amortization expense (in millions):
| Estimated Amortization | |||||||||||||||||||||||||||||
| Year | |||||||||||||||||||||||||||||
| 2021 | $ | 43.6 | |||||||||||||||||||||||||||
| 2022 | 41.8 | ||||||||||||||||||||||||||||
| 2023 | 41.7 | ||||||||||||||||||||||||||||
| 2024 | 41.1 | ||||||||||||||||||||||||||||
| 2025 | 39.0 | ||||||||||||||||||||||||||||
| Estimated Amortization | |||||||||||
| Year | |||||||||||
| 2019 | $ | 50.9 | |||||||||
| 2020 | 48.3 | ||||||||||
| 2021 | 43.1 | ||||||||||
| 2022 | 41.5 | ||||||||||
| 2023 | 41.4 | ||||||||||
(6) Segment Information
The Company is comprised of threeCompany's 4 operating segments:segments are: Commercial andSystems, 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, alternators, motors and controls and air moving solutions.applications. These products serve markets including commercial building ventilation and HVAC, pool and spa, standbyirrigation, dewatering, agriculture, and critical powergeneral commercial equipment.
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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 e-commerce, alternative energy, beverage, bulk handling, metals, special machinery, energy, aerospace and general industrial.
The effect of the change in accounting policy related to LIFO as discussed in Note 3 for fiscal 2020 and 2019 on a per quarter basis is as follows (in millions):
| Commercial Systems | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 Fiscal Quarter | 2019 | 2020 Fiscal Quarter | ||||||||||||||||||||||||||||||||||||||||||||||||
| 1st | 2nd | 3rd | 4th | Total | 1st | 2nd | 3rd | |||||||||||||||||||||||||||||||||||||||||||
| Gross Profit As Reported | $ | 65.5 | $ | 65.2 | $ | 53.6 | $ | 48.6 | $ | 232.9 | $ | 50.7 | $ | 42.3 | $ | 61.4 | ||||||||||||||||||||||||||||||||||
| Adjustment for Change in Accounting Principle | 1.6 | (1.2) | 0.3 | 3.0 | 3.7 | (0.4) | 0 | (0.7) | ||||||||||||||||||||||||||||||||||||||||||
| Gross Profit Adjusted for Change in Accounting Principle | $ | 67.1 | $ | 64.0 | $ | 53.9 | $ | 51.6 | $ | 236.6 | $ | 50.4 | $ | 42.3 | $ | 60.7 | ||||||||||||||||||||||||||||||||||
| Income from Operations as Adjusted for Change in Accounting Principle | $ | 59.4 | $ | 19.6 | $ | 16.9 | $ | 10.9 | $ | 106.8 | $ | 12.1 | $ | 6.2 | $ | 24.6 | ||||||||||||||||||||||||||||||||||
| Industrial Systems | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 Fiscal Quarter | 2019 | 2020 Fiscal Quarter | ||||||||||||||||||||||||||||||||||||||||||||||||
| 1st | 2nd | 3rd | 4th | Total | 1st | 2nd | 3rd | |||||||||||||||||||||||||||||||||||||||||||
| Gross Profit As Reported | $ | 23.9 | $ | 27.8 | $ | 23.7 | $ | 24.0 | $ | 99.3 | $ | 22.6 | $ | 24.9 | $ | 31.2 | ||||||||||||||||||||||||||||||||||
| Adjustment for Change in Accounting Principle | (1.6) | 1.2 | (0.3) | (3.0) | (3.7) | 0.4 | 0 | 0.7 | ||||||||||||||||||||||||||||||||||||||||||
| Gross Profit Adjusted for Change in Accounting Principle | $ | 22.3 | $ | 29.0 | $ | 23.4 | $ | 21.0 | $ | 95.6 | $ | 23.0 | $ | 24.8 | $ | 31.9 | ||||||||||||||||||||||||||||||||||
| Income (Loss) from Operations as Adjusted for Change in Accounting Principle | $ | (5.9) | $ | (0.1) | $ | (2.6) | $ | (4.4) | $ | (13.0) | $ | (0.1) | $ | 3.2 | $ | 7.3 | ||||||||||||||||||||||||||||||||||
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.
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The following sets forth certain financial information attributable to the Company's operating segments for fiscal 2018,2020, fiscal 20172019 and fiscal 2016,2018, respectively (in millions):
| Commercial Systems | Industrial Systems | Climate Solutions | Power Transmission Solutions | Eliminations | Total | |||||||||||||||||||||||||||||||||
| Fiscal 2020 | ||||||||||||||||||||||||||||||||||||||
| External Sales | $ | 820.2 | $ | 528.8 | $ | 846.8 | $ | 711.2 | $ | — | $ | 2,907.0 | ||||||||||||||||||||||||||
| Intersegment Sales | 62.5 | 27.7 | 18.8 | 2.5 | (111.5) | — | ||||||||||||||||||||||||||||||||
| Total Sales | 882.7 | 556.5 | 865.6 | 713.7 | (111.5) | 2,907.0 | ||||||||||||||||||||||||||||||||
| Gross Profit | 213.8 | 96.7 | 246.8 | 251.4 | — | 808.7 | ||||||||||||||||||||||||||||||||
| Operating Expenses | 144.9 | 91.6 | 115.5 | 160.9 | — | 512.9 | ||||||||||||||||||||||||||||||||
| Goodwill Impairment | 0 | 10.5 | 0 | 0 | — | 10.5 | ||||||||||||||||||||||||||||||||
| Gain on Sale of Businesses | (0.1) | 0 | 0 | 0 | — | (0.1) | ||||||||||||||||||||||||||||||||
| Asset Impairments | 2.8 | 0.2 | 1.3 | 1.0 | — | 5.3 | ||||||||||||||||||||||||||||||||
| Income (Loss) from Operations | 66.2 | (5.6) | 130.0 | 89.5 | — | 280.1 | ||||||||||||||||||||||||||||||||
| Depreciation and Amortization | 32.6 | 23.9 | 19.6 | 55.3 | — | 131.4 | ||||||||||||||||||||||||||||||||
| Capital Expenditures | 15.3 | 8.1 | 12.1 | 12.0 | — | 47.5 | ||||||||||||||||||||||||||||||||
| Fiscal 2019 | ||||||||||||||||||||||||||||||||||||||
| External Sales | $ | 905.3 | $ | 575.4 | $ | 968.5 | $ | 788.8 | $ | — | $ | 3,238.0 | ||||||||||||||||||||||||||
| Intersegment Sales | 46.9 | 35.9 | 17.4 | 4.3 | (104.5) | — | ||||||||||||||||||||||||||||||||
| Total Sales | 952.2 | 611.3 | 985.9 | 793.1 | (104.5) | 3,238.0 | ||||||||||||||||||||||||||||||||
| Gross Profit | 236.6 | 95.6 | 269.8 | 258.7 | — | 860.7 | ||||||||||||||||||||||||||||||||
| Operating Expenses | 162.4 | 107.6 | 110.6 | 163.7 | — | 544.3 | ||||||||||||||||||||||||||||||||
| Asset Impairments | 6.7 | 0.9 | 1.3 | 1.1 | — | 10.0 | ||||||||||||||||||||||||||||||||
| (Gain) Loss on Sale of Businesses | (39.3) | 0.1 | (6.0) | 0.5 | — | (44.7) | ||||||||||||||||||||||||||||||||
| Income (Loss) from Operations | 106.8 | (13.0) | 163.9 | 93.4 | — | 351.1 | ||||||||||||||||||||||||||||||||
| Depreciation and Amortization | 34.6 | 24.4 | 19.8 | 55.7 | — | 134.5 | ||||||||||||||||||||||||||||||||
| Capital Expenditures | 29.9 | 21.0 | 23.3 | 18.2 | — | 92.4 | ||||||||||||||||||||||||||||||||
| Fiscal 2018 | ||||||||||||||||||||||||||||||||||||||
| External Sales | $ | 1,110.9 | $ | 671.1 | $ | 1,024.8 | $ | 838.8 | $ | — | $ | 3,645.6 | ||||||||||||||||||||||||||
| Intersegment Sales | 47.3 | 31.9 | 22.1 | 24.1 | (125.4) | — | ||||||||||||||||||||||||||||||||
| Total Sales | 1,158.2 | 703.0 | 1,046.9 | 862.9 | (125.4) | 3,645.6 | ||||||||||||||||||||||||||||||||
| Gross Profit | 287.0 | 136.4 | 262.7 | 278.5 | — | 964.6 | ||||||||||||||||||||||||||||||||
| Operating Expenses | 184.8 | 111.6 | 128.9 | 174.1 | — | 599.4 | ||||||||||||||||||||||||||||||||
| Goodwill Impairment | 0 | 0 | 9.5 | 0 | — | 9.5 | ||||||||||||||||||||||||||||||||
| Asset Impairments | 0 | 0 | 8.7 | 0 | — | 8.7 | ||||||||||||||||||||||||||||||||
| Income from Operations | 102.2 | 24.8 | 115.6 | 104.4 | — | 347.0 | ||||||||||||||||||||||||||||||||
| Depreciation and Amortization | 40.3 | 26.7 | 21.0 | 54.4 | — | 142.4 | ||||||||||||||||||||||||||||||||
| Capital Expenditures | 24.6 | 17.2 | 17.7 | 18.1 | — | 77.6 | ||||||||||||||||||||||||||||||||
69
| Commercial and Industrial Systems | Climate Solutions | Power Transmission Solutions | Eliminations | Total | ||||||||||||||||
| Fiscal 2018 | ||||||||||||||||||||
| External Sales | $ | 1,782.0 | $ | 1,024.8 | $ | 838.8 | $ | — | $ | 3,645.6 | ||||||||||
| Intersegment Sales | 50.9 | 22.1 | 24.1 | (97.1 | ) | — | ||||||||||||||
| Total Sales | 1,832.9 | 1,046.9 | 862.9 | (97.1 | ) | 3,645.6 | ||||||||||||||
| Gross Profit | 423.4 | 262.7 | 278.5 | — | 964.6 | |||||||||||||||
| Operating Expenses | 296.4 | 128.9 | 174.1 | — | 599.4 | |||||||||||||||
| Goodwill Impairment | — | 9.5 | — | — | 9.5 | |||||||||||||||
| Asset Impairments | — | 8.7 | — | — | 8.7 | |||||||||||||||
| Income from Operations | 127.0 | 115.6 | 104.4 | — | 347.0 | |||||||||||||||
| Depreciation and Amortization | 67.0 | 21.0 | 54.4 | — | 142.4 | |||||||||||||||
| Capital Expenditures | 41.8 | 17.7 | 18.1 | — | 77.6 | |||||||||||||||
| Fiscal 2017 | ||||||||||||||||||||
| External Sales | $ | 1,604.3 | $ | 990.6 | $ | 765.4 | $ | — | $ | 3,360.3 | ||||||||||
| Intersegment Sales | 66.5 | 24.9 | 4.5 | (95.9 | ) | — | ||||||||||||||
| Total Sales | 1,670.8 | 1,015.5 | 769.9 | (95.9 | ) | 3,360.3 | ||||||||||||||
| Gross Profit | 376.8 | 255.4 | 251.4 | — | 883.6 | |||||||||||||||
| Operating Expenses | 277.0 | 113.9 | 161.6 | — | 552.5 | |||||||||||||||
| Income from Operations | 99.8 | 141.5 | 89.8 | — | 331.1 | |||||||||||||||
| Depreciation and Amortization | 59.8 | 22.1 | 55.3 | — | 137.2 | |||||||||||||||
| Capital Expenditures | 39.2 | 13.4 | 12.6 | — | 65.2 | |||||||||||||||
| Fiscal 2016 | ||||||||||||||||||||
| External Sales | $ | 1,530.9 | $ | 960.0 | $ | 733.6 | $ | — | $ | 3,224.5 | ||||||||||
| Intersegment Sales | 49.2 | 24.1 | 4.3 | (77.6 | ) | — | ||||||||||||||
| Total Sales | 1,580.1 | 984.1 | 737.9 | (77.6 | ) | 3,224.5 | ||||||||||||||
| Gross Profit | 378.7 | 245.3 | 241.0 | — | 865.0 | |||||||||||||||
| Operating Expenses | 275.4 | 114.5 | 152.6 | — | 542.5 | |||||||||||||||
| Income from Operations | 103.3 | 130.8 | 88.4 | — | 322.5 | |||||||||||||||
| Depreciation and Amortization | 74.7 | 24.4 | 56.3 | — | 155.4 | |||||||||||||||
| Capital Expenditures | 36.6 | 15.0 | 13.6 | — | 65.2 | |||||||||||||||
The following table presents identifiable assets information attributable to the Company's operating segmentssegments. The identifiable assets as of the December 28, 2019 have been retrospectively adjusted to reflect the change in accounting principle related to LIFO inventories as discussed in Note 3. The changes reflected in assets as of December 29, 2018, December 30, 2017,28, 2019 are an increase of $5.4 million for Commercial Systems and a decrease of $5.4 million for Industrial Systems. The table presents identifiable assets information as of January 2, 2021 and December 31, 201628, 2019 (in millions):
| Commercial Systems | Industrial Systems | Climate Solutions | Power Transmission Solutions | Total | |||||||||||||||||||||||||
| Identifiable Assets as of January 2, 2021 | $ | 1,319.6 | $ | 837.5 | $ | 890.4 | $ | 1,541.5 | $ | 4,589.0 | |||||||||||||||||||
| Identifiable Assets as of December 28, 2019 | 1,203.9 | 797.4 | 878.3 | 1,551.1 | 4,430.7 | ||||||||||||||||||||||||
| Commercial and Industrial Systems | Climate Solutions | Power Transmission Solutions | Total | ||||||||||||
| Identifiable Assets as of December 29, 2018 | $ | 2,108.0 | $ | 907.7 | $ | 1,608.1 | $ | 4,623.8 | |||||||
| Identifiable Assets as of December 30, 2017 | 1,854.1 | 909.9 | 1,624.2 | 4,388.2 | |||||||||||
| Identifiable Assets as of December 31, 2016 | 1,872.7 | 881.8 | 1,604.0 | 4,358.5 | |||||||||||
The following sets forth net sales by country in which the Company operates for fiscal 2018,2020, fiscal 20172019 and fiscal 2016,2018, respectively (in millions):
| Net Sales | ||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||
| United States | $ | 1,885.1 | $ | 2,071.9 | $ | 2,402.9 | ||||||||||||||||||||
| Rest of the World | 1,021.9 | 1,166.1 | 1,242.7 | |||||||||||||||||||||||
| Total | $ | 2,907.0 | $ | 3,238.0 | $ | 3,645.6 | ||||||||||||||||||||
| Net Sales | ||||||||||||||
| 2018 | 2017 | 2016 | ||||||||||||
| United States | $ | 2,402.9 | $ | 2,267.2 | $ | 2,212.6 | ||||||||
| Rest of the World | 1,242.7 | 1,093.1 | 1,011.9 | |||||||||||
| Total | $ | 3,645.6 | $ | 3,360.3 | $ | 3,224.5 | ||||||||
The following sets forth long-lived assets (net property, plant and equipment) by country in which the Company operates for fiscal 20182020 and fiscal 2017,2019, respectively (in millions):
| Long-lived Assets | |||||||||||
| 2020 | 2019 | ||||||||||
| United States | $ | 200.5 | $ | 237.6 | |||||||
| Mexico | 141.2 | 149.0 | |||||||||
| China | 85.7 | 84.9 | |||||||||
| Rest of the World | 128.1 | 133.5 | |||||||||
| Total | $ | 555.5 | $ | 605.0 | |||||||
| Long-lived Assets | |||||||
| 2018 | 2017 | ||||||
| United States | $ | 242.7 | $ | 263.6 | |||
| Mexico | 139.7 | 136.3 | |||||
| China | 90.2 | 99.5 | |||||
| Rest of the World | 142.9 | 123.6 | |||||
| Total | $ | 615.5 | $ | 623.0 | |||
No other individual foreign country represented a material portion of long-lived assets for any of the years presented.
(7) Debt and Bank Credit Facilities
The Company's indebtedness as of December 29, 2018January 2, 2021 and December 30, 201728, 2019 was as follows (in millions):
| January 2, 2021 | December 28, 2019 | ||||||||||
| Term Facility | $ | 670.0 | $ | 720.0 | |||||||
| Senior Notes | 400.0 | 400.0 | |||||||||
| Multicurrency Revolving Facility | 0 | 17.7 | |||||||||
| Other | 4.6 | 4.5 | |||||||||
| Less: Debt Issuance Costs | (3.2) | (4.7) | |||||||||
| Total | 1,071.4 | 1,137.5 | |||||||||
| Less: Current Maturities | 231.0 | 0.6 | |||||||||
| Non-Current Portion | $ | 840.4 | $ | 1,136.9 | |||||||
70
| December 29, 2018 | December 30, 2017 | |||||||
| Term Facility | $ | 810.0 | $ | — | ||||
| Senior Notes | 400.0 | 500.0 | ||||||
| Multicurrency Revolving Facility | 98.4 | — | ||||||
| Prior Term Facility | — | 621.1 | ||||||
| Prior Multicurrency Revolving Facility | — | 19.7 | ||||||
| Other | 4.9 | 5.7 | ||||||
| Less: Debt Issuance Costs | (6.2 | ) | (5.4 | ) | ||||
| Total | 1,307.1 | 1,141.1 | ||||||
| Less: Current Maturities | 0.5 | 101.2 | ||||||
| Non-Current Portion | $ | 1,306.6 | $ | 1,039.9 | ||||
Credit Agreement
On August 27, 2018, the Company replaced the Prior Credit Agreement by entering 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 the Prior Term Facility and Prior Multicurrency Revolving Facility. 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 years of the Term Facility, unless previously prepaid. The weighted average interest rate on the Term Facility was 2.0% and Prior Term Facility was 3.4% and 2.6%3.6% for the fiscal years ended December 29, 2018January 2, 2021 and December 30, 2017,28, 2019, respectively. The Credit Agreement requires the Company to 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. The Company repaid $50.0 million and $90.0 million under the Term Facility in fiscal 20182020 and $177.0 million under the Prior Term Facility in fiscal 2017.2019, respectively.
As of December 29, 2018January 2, 2021 the Company had no borrowings under the Multicurrency Revolving Facility, in the amount of $98.4 million, $0.4$0.2 million of standby letters of credit and $401.2$499.8 million of available borrowing capacity. The average daily balance in borrowings under the Multicurrency Revolving Facility and Prior Multicurrency Revolving Facility was $171.5$150.4 million and $111.2$91.7 million, respectively, and the weighted average interest rate on the Multicurrency Revolving Facility was 1.9% and Prior Multicurrency Revolving Facility was 3.3% and 2.6%3.6% for the fiscal years ended December 29, 2018January 2, 2021 and December 30, 2017,28, 2019, 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
As of December 29, 2018,January 2, 2021, the Company had $400.0 million of unsecured senior notes (the “Notes”) outstanding. The Notes consist of $400.0 million in senior notes in a private placement which were issued in five5 tranches with maturities from ten to twelve years and carry fixed interest rates. As of December 29, 2018, $400.0January 2, 2021, $230.0 million and $170.0 million of the Notes are included in Current Maturities of Long-Term Debt and Long-Term Debt, respectively, on the Consolidated Balance Sheets.
Details on the Notes as of December 29, 2018January 2, 2021 were (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 | |||||||||||||||||
| Total | $ | 400.0 | ||||||||||||||||||
| 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 | |||||
| Total | $ | 400.0 | ||||||
Compliance with Financial Covenants
The Credit Agreement and the Notes requirecontain covenants under which the Company agrees to meet specified financial ratiosmaintain a minimum EBITDA-to-interest coverage ratio and to satisfy certain financial condition tests.maximum Debt-to-EBITDA ratio. The Company was in compliance with all financial covenants contained in the Notes and the Credit Agreement as of December 29, 2018.January 2, 2021.
Other Notes Payable
As of December 29, 2018,January 2, 2021, other notes payable of $4.9$4.6 million were outstanding with a weighted average interest rate of 4.9%. As of December 28, 2019, other notes payable of $4.5 million were outstanding with a weighted average interest rate of 5.0%. As of December 30, 2017, other notes payable of $5.7 million were outstanding with a weighted average interest rate of 5.7%.
Other Disclosures
Based on rates for instruments with comparable maturities and credit quality, which are classified as Level 2 inputs (see also Note 14), the approximate fair value of the Company's total debt was $1,323.6$1,085.8 million and $1,165.4$1,162.1 million as of December 29, 2018January 2, 2021 and December 30, 2017,28, 2019, respectively.
71
Maturities of long-term debt, excluding debt issuance costs, are as follows (in millions):
| Year | Amount of Maturity | |||||||||||||||||||
| 2021 | $ | 231.0 | ||||||||||||||||||
| 2022 | 18.0 | |||||||||||||||||||
| 2023 | 823.0 | |||||||||||||||||||
| 2024 | 0.6 | |||||||||||||||||||
| 2025 | 0.6 | |||||||||||||||||||
| Thereafter | 1.4 | |||||||||||||||||||
| Total | $ | 1,074.6 | ||||||||||||||||||
| Year | Amount of Maturity | |||||||
| 2019 | $ | 0.5 | ||||||
| 2020 | 22.9 | |||||||
| 2021 | 286.7 | |||||||
| 2022 | 79.2 | |||||||
| 2023 | 921.4 | |||||||
| Thereafter | 2.6 | |||||||
| Total | $ | 1,313.3 | ||||||
(8) Retirement and Post RetirementPost-Retirement Health Care Plans
Retirement Plans
The Company's domestic employeesassociates are participants in defined benefit pension plans and/or defined contribution plans. The majority of the Company's defined benefit pension plans covering the Company's domestic employeesassociates have been closed to new employeesassociates and frozen for existing employees.associates. Most foreign employeesassociates are covered by government sponsored plans in the countries in which they are employed. The defined contribution plans provide for Company contributions based, depending on the plan, upon one or more of participant contributions, service and profits. Company contributions to domestic defined contribution plans totaled $10.1$7.6 million, $9.3$8.9 million and $8.7$10.1 million in fiscal 2018,2020, fiscal 20172019 and fiscal 2016,2018, respectively. Company contributions to non-US defined contribution plans were $11.8$5.5 million, $9.4$10.6 million and $10.4$11.8 million in fiscal 2018,2020, fiscal 2017,2019 and fiscal 2016,2018, respectively.
Benefits provided under defined benefit pension plans are based, depending on the plan, on employees'associates' average earnings and years of credited service, or a benefit multiplier times years of service. Funding of these qualified defined benefit pension plans is in accordance with federal laws and regulations. The actuarial valuation measurement date for pension plans is the calendar year end of each year.
The Company's target allocation, target return and actual weighted-average asset allocation by asset category are as follows:
| Target | Actual Allocation | Target | Actual Allocation | |||||||||||||||||||||||||||
| Allocation | Return | 2018 | 2017 | Allocation | Return | 2020 | 2019 | |||||||||||||||||||||||
| Equity Investments | 73% | 6.5 - 8.3% | 68% | 71% | Equity Investments | 70.4% | 6.2 - 7.8% | 72.4% | 70.0% | |||||||||||||||||||||
| Fixed Income | 22% | 3.7 - 6.1% | 27% | 24% | Fixed Income | 24.8% | 1.5 - 4.8% | 26.8% | 25.0% | |||||||||||||||||||||
| Other | 5% | 5.4% | 5% | 5% | Other | 4.8% | 5.6% | 0.8% | 5.0% | |||||||||||||||||||||
| Total | 100% | 7.0% | 100% | 100% | Total | 100.0% | 6.2% | 100.0% | 100.0% | |||||||||||||||||||||
The Company's investment strategy for its defined benefit pension plans is to achieve moderately aggressive growth, earning a long-term rate of return sufficient to allow the plans to reach fully funded status. Accordingly, allocation targets have been established to fit this strategy, with a heavier long-term weighting of investments in equity securities. The long-term rate of return assumptions consider historic returns and volatilities adjusted for changes in overall economic conditions that may affect future returns and a weighting of each investment class.
72
The following table presents a reconciliation of the funded status of the defined benefit pension plans (in millions):
| 2020 | 2019 | ||||||||||||||||||||||
| Change in Projected Benefit Obligation: | |||||||||||||||||||||||
| Obligation at Beginning of Period | $ | 282.8 | $ | 265.1 | |||||||||||||||||||
| Service Cost | 2.0 | 6.2 | |||||||||||||||||||||
| Interest Cost | 8.0 | 10.6 | |||||||||||||||||||||
| Actuarial Loss | 21.2 | 34.9 | |||||||||||||||||||||
Curtailment Gain (1) | 0 | (19.4) | |||||||||||||||||||||
| Less: Benefits Paid | 15.9 | 14.8 | |||||||||||||||||||||
| Foreign Currency Translation | 0.3 | 0.2 | |||||||||||||||||||||
| Obligation at End of Period | $ | 298.4 | $ | 282.8 | |||||||||||||||||||
| Change in Fair Value of Plan Assets: | |||||||||||||||||||||||
| Fair Value of Plan Assets at Beginning of Period | $ | 203.4 | $ | 174.0 | |||||||||||||||||||
| Actual Return on Plan Assets | 33.7 | 33.1 | |||||||||||||||||||||
| Employer Contributions | 8.5 | 10.8 | |||||||||||||||||||||
| Less: Benefits Paid | 15.9 | 14.8 | |||||||||||||||||||||
| Foreign Currency Translation | 0.5 | 0.3 | |||||||||||||||||||||
| Fair Value of Plan Assets at End of Period | $ | 230.2 | $ | 203.4 | |||||||||||||||||||
| Funded Status | $ | (68.2) | $ | (79.4) | |||||||||||||||||||
(1) The curtailment gain is the result of a plan freeze announced to associates during the fourth quarter of fiscal 2019. | |||||||||||||||||||||||
| 2018 | 2017 | |||||||||
| Change in Projected Benefit Obligation: | ||||||||||
| Obligation at Beginning of Period | $ | 278.0 | $ | 256.9 | ||||||
| Service Cost | 7.3 | 7.2 | ||||||||
| Interest Cost | 9.3 | 9.3 | ||||||||
| Actuarial (Gain) Loss | (14.9 | ) | 16.2 | |||||||
| Less: Benefits Paid | 13.3 | 13.2 | ||||||||
| Foreign Currency Translation | (1.3 | ) | 1.6 | |||||||
| Obligation at End of Period | $ | 265.1 | $ | 278.0 | ||||||
| Change in Fair Value of Plan Assets: | ||||||||||
| Fair Value of Plan Assets at Beginning of Period | 185.3 | 160.3 | ||||||||
| Actual Return on Plan Assets | (8.2 | ) | 28.7 | |||||||
| Employer Contributions | 10.9 | 8.6 | ||||||||
| Less: Benefits Paid | 13.3 | 13.2 | ||||||||
| Foreign Currency Translation | (0.7 | ) | 0.9 | |||||||
| Fair Value of Plan Assets at End of Period | $ | 174.0 | $ | 185.3 | ||||||
| Funded Status | $ | (91.1 | ) | $ | (92.7 | ) | ||||
The funded status as of December 29, 2018January 2, 2021 included domestic plans of $82.4$(62.6) million and international plans of $8.7$(5.6) million. The funded status as of December 30, 201728, 2019 included domestic plans of $83.7$(71.2) million and international plans of $9.0$(8.2) million.
Pension Assets
The Company classifies the pension plan investments into Level 1, which refers to securities valued using quoted prices from active markets for identical assets, Level 2, which refers to securities not traded on an active market but for which observable market inputs are readily available, and Level 3, which refers to securities valued based on significant unobservable inputs. Common stocks and mutual funds are valued at the unadjusted quoted market prices for the securities. Real estate fund values are determined using model-based techniques that include relative value analysis and discounted cash flow techniques. Certain common collective trust funds and limited partnership interests are valued based on the net asset value ("NAV") as provided by the administrator of the fund as a practical expedient to estimate fair value. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. Investments in units of short-term investment funds, comprised of cash and money market funds, are valued at their respective NAVs as reported by the funds daily.
73
Pension assets by type and level are as follows (in millions):
| January 2, 2021 | |||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Cash and Cash Equivalents | $ | 1.3 | $ | 1.3 | $ | 0 | $ | 0 | |||||||||||||||
| Mutual Funds: | |||||||||||||||||||||||
| US Equity Funds | 1.6 | 1.6 | 0 | 0 | |||||||||||||||||||
| International Equity Funds | 3.5 | 3.5 | 0 | 0 | |||||||||||||||||||
| Fixed Income Funds | 3.0 | 3.0 | 0 | 0 | |||||||||||||||||||
| Other | 1.8 | 1.8 | 0 | 0 | |||||||||||||||||||
| Real Estate Fund | 10.0 | 0 | 0 | 10.0 | |||||||||||||||||||
| $ | 21.2 | $ | 11.2 | $ | 0 | $ | 10.0 | ||||||||||||||||
| Investments Measured at Net Asset Value | 209.0 | ||||||||||||||||||||||
| Total | $ | 230.2 | |||||||||||||||||||||
| December 28, 2019 | |||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Cash and Cash Equivalents | $ | 5.1 | $ | 5.1 | $ | 0 | $ | 0 | |||||||||||||||
| Common Stocks: | |||||||||||||||||||||||
| Domestic Equities | 26.4 | 26.4 | 0 | 0 | |||||||||||||||||||
| International Equities | 19.2 | 19.2 | 0 | 0 | |||||||||||||||||||
| Mutual Funds: | |||||||||||||||||||||||
| US Equity Funds | 30.1 | 30.1 | 0 | 0 | |||||||||||||||||||
| International Equity Funds | 3.1 | 3.1 | 0 | 0 | |||||||||||||||||||
| Balanced Funds | 9.5 | 9.5 | 0 | 0 | |||||||||||||||||||
| Fixed Income Funds | 18.0 | 18.0 | 0 | 0 | |||||||||||||||||||
| Other | 1.7 | 1.7 | 0 | 0 | |||||||||||||||||||
| Limited Liability Company | 8.3 | 0 | 8.3 | 0 | |||||||||||||||||||
| Real Estate Fund | 9.9 | 0 | 0 | 9.9 | |||||||||||||||||||
| $ | 131.3 | $ | 113.1 | $ | 8.3 | $ | 9.9 | ||||||||||||||||
| Investments Measured at Net Asset Value | 72.1 | ||||||||||||||||||||||
| Total | $ | 203.4 | |||||||||||||||||||||
| December 29, 2018 | |||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Cash and Cash Equivalents | $ | 3.9 | $ | 3.9 | $ | — | $ | — | |||||||
| Common Stocks: | |||||||||||||||
| Domestic Equities | 22.4 | 22.4 | — | — | |||||||||||
| International Equities | 13.7 | 13.7 | — | — | |||||||||||
| Mutual Funds: | |||||||||||||||
| US Equity Funds | 24.8 | 24.8 | — | — | |||||||||||
| International Equity Funds | 2.5 | 2.5 | — | — | |||||||||||
| Balanced Funds | 8.5 | 8.5 | — | — | |||||||||||
| Fixed Income Funds | 17.3 | 17.3 | — | — | |||||||||||
| Other | 1.5 | 1.5 | — | — | |||||||||||
| Real Estate Fund | 10.3 | — | — | 10.3 | |||||||||||
| $ | 104.9 | $ | 94.6 | $ | — | $ | 10.3 | ||||||||
| Investments Measured at Net Asset Value | 69.1 | ||||||||||||||
| Total | $ | 174.0 | |||||||||||||
| December 30, 2017 | |||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Cash and Cash Equivalents | $ | 4.4 | $ | 4.4 | $ | — | $ | — | |||||||
| Common Stocks: | |||||||||||||||
| Domestic Equities | 27.1 | 27.1 | — | — | |||||||||||
| International Equities | 14.6 | 14.6 | — | — | |||||||||||
| Mutual Funds: | |||||||||||||||
| US Equity Funds | 25.4 | 25.4 | — | — | |||||||||||
| International Equity Funds | 19.0 | 19.0 | — | — | |||||||||||
| Balanced Funds | 8.3 | 8.3 | — | — | |||||||||||
| Fixed Income Funds | 15.1 | 15.1 | — | — | |||||||||||
| Other | 1.5 | 1.5 | — | — | |||||||||||
| Real Estate Fund | 9.6 | — | — | 9.6 | |||||||||||
| $ | 125.0 | $ | 115.4 | $ | — | $ | 9.6 | ||||||||
| Investments Measured at Net Asset Value | 60.3 | ||||||||||||||
| Total | $ | 185.3 | |||||||||||||
The following table sets forth additional disclosures for the fair value measurement of the fair value of pension plan assets that calculate fair value based on NAV per share practical expedient as of December 29, 2018January 2, 2021 and December 30, 201728, 2019 (in millions):
| 2020 | 2019 | ||||||||||||||||||||||
| Common Collective Trust Funds | $ | 209.0 | $ | 72.1 | |||||||||||||||||||
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| 2018 | 2017 | |||||||||
| Common Collective Trust Funds | $ | 61.7 | $ | 51.7 | ||||||
| Global Emerging Markets Fund Limited Partnership | 7.4 | 8.6 | ||||||||
| Total | $ | 69.1 | $ | 60.3 | ||||||
The 2020 common collective trust funds are investments in the Mercer US Small/Midcap Equity Portfolio, the Mercer US Core Fixed Income Portfolio, the Mercer Non-US Core Equity Portfolio, the Mercer Global Low Volatility Equity Portfolio, the Mercer US Large Cap Passive Equity Portfolio, the Mercer Long Duration Passive Fixed Income Portfolio, the Mercer Emerging Markets Equity Portfolio, the Mercer Active Long Corporate Fixed Income Portfolio, and the Mercer Opportunistic Fixed Income Portfolio. The Mercer US Small/Midcap Equity Portfolio seeks to provide long term total returns comprised primarily of capital appreciation by investing in equity securities issued by small to medium capitalization US companies. The Mercer US Core Fixed Income Portfolio seeks to provide total return, consisting of both current income and capital appreciation, by investing in fixed income securities. The Mercer Non-US Core Equity Portfolio seeks to provide long term total return, which includes capital appreciation and income, by investing in equity securities of non-US companies. The Mercer Global Low Volatility Equity Portfolio seeks to provide long term total return, which includes capital appreciation and income, by investing in equity securities of US and foreign issuers. The Mercer US Large Cap Passive Equity Portfolio seeks to approximate, as closely as possible, the performance of the S&P 500 Index over the long term by investing in the equity securities comprising the index in approximately the same proportions as they are represented in the index. The Mercer Long Duration Passive Fixed Income Portfolio seeks to approximate as closely as practicable, before expenses, the performance of the Bloomberg Barclays Capital US Long Government Bond Index over the long term by investing in securities that comprise the index in the same proportions as they are represented in the index. The Mercer Emerging Markets Equity Portfolio seeks to provide long term total return, which includes capital appreciation and income, by investing equity securities of companies that are located in emerging markets, other investments that are tied economically to emerging markets, as well as in American, European and Global Depository Receipts. The Mercer Active Long Corporate Fixed Income Portfolio seeks to maximize long term total return by investing on high quality US corporate bonds. The Mercer Opportunistic Fixed Income Portfolio seeks to provide long term total return, which includes capital appreciation and income, by investing in high yield bonds and emerging markets debt. The 2020 common collective trust funds are available for immediate redemption.
The 2019 common collective trust funds were investments in the Northern Trust Collective S&P 500 Index Fund, the Northern Trust Collective Aggregate Bond Index Fund and the American Century Non-US Growth Fund. The Northern Trust Collective S&P 500 Index Fund seeks to provide investment results that approximate the overall performance of the common stocks in that index. The Northern Trust Collective Aggregate Bond Index Fund seeks to provide investment results that approximate the overall performance of the Barclays Capital US Aggregate Index by investing primarily, but not exclusively, in securities that comprise that index. The American Century Non-US Growth Fund is broadly invested in a diversified portfolio of non-US stocks. The 2019 common collective trust funds arewere available for immediate redemption. The global emerging markets fund limited partnership interest is an investment in the Vontobel Global Emerging Markets Fund, which seeks to provide capital appreciation by investing in a diversified portfolio consisting primarily of equity based securities. The global emerging markets fund limited partnership interest can be redeemed on a monthly basis with immediate payment.
The Level 3 assetsasset noted below represent investmentsrepresents an investment in a real estate funds managed by a major US insurance company and a global emerging markets fund limited partnership.fund. Estimated values provided by fund management approximate the cost of the investments. In determining the reasonableness of the methodology used to value the Level 3 investments, the Company evaluates a variety of factors including reviews of economic conditions, industry and market developments, and overall credit ratings. The real estate fund can be redeemed on a quarterly basis and paid within two weeks of the request for redemption.
The table below sets forth a summary of changes in the Company's Level 3 assets in its pension plan investments as of January 2, 2021 and December 29, 2018 and December 30, 201728, 2019 (in millions):
| 2020 | 2019 | |||||||||||||
| Beginning Balance | $ | 9.9 | $ | 10.3 | ||||||||||
| Net Purchases (Sales) | 0 | (1.6) | ||||||||||||
| Net Gains | 0.1 | 1.2 | ||||||||||||
| Ending Balance | $ | 10.0 | $ | 9.9 | ||||||||||
The following table sets forth a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of the Level 3 real estate fund as of January 2, 2021 (in millions):
| Fair Value | Significant Unobservable Inputs | |||||||||||||
| Inputs | Range | Weighted Average | ||||||||||||
| $10.0 | Exit Capitalization Rate | 4.5% to 7.0% | 5.1% | |||||||||||
| Discount Rate | 5.8% to 8.5% | 6.3% | ||||||||||||
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| 2018 | 2017 | |||||||
| Beginning Balance | $ | 9.6 | $ | 10.0 | ||||
| Net Purchases (Sales) | 0.6 | (0.5 | ) | |||||
| Net Gains | 0.1 | 0.1 | ||||||
| Ending Balance | $ | 10.3 | $ | 9.6 | ||||
The following table sets forth a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of the Level 3 real estate fund as of December 29, 201828, 2019 (in millions):
| Fair Value | Significant Unobservable Inputs | ||||||||||
| $ | Exit Capitalization Rate | ||||||||||
| Discount Rate | |||||||
Funded Status and Expense
The Company recognized the funded status of its defined benefit pension plans on the Consolidated Balance Sheets as follows (in millions):
| 2020 | 2019 | |||||||||||||
| Accrued Compensation and Benefits | $ | 4.1 | $ | 4.0 | ||||||||||
| Pension and Other Post Retirement Benefits | 64.1 | 75.4 | ||||||||||||
| Total | $ | 68.2 | $ | 79.4 | ||||||||||
| Amounts Recognized in Accumulated Other Comprehensive Loss | ||||||||||||||
| Net Actuarial Gain | $ | 43.7 | $ | 45.2 | ||||||||||
| Prior Service Cost | 0.9 | 1.1 | ||||||||||||
| Total | $ | 44.6 | $ | 46.3 | ||||||||||
| 2018 | 2017 | |||||||
| Accrued Compensation and Employee Benefits | $ | 3.4 | $ | 2.9 | ||||
| Pension and Other Post Retirement Benefits | 87.7 | 89.8 | ||||||
| Total | $ | 91.1 | $ | 92.7 | ||||
| Amounts Recognized in Accumulated Other Comprehensive Loss | ||||||||
| Net Actuarial Loss | $ | 52.3 | $ | 51.3 | ||||
| Prior Service Cost | 1.4 | 1.0 | ||||||
| Total | $ | 53.7 | $ | 52.3 | ||||
The accumulated benefit obligation for all defined benefit pension plans was $244.0$292.8 million and $251.7$276.3 million as of January 2, 2021 and December 29, 2018 and December 30, 2017,28, 2019, respectively.
The accumulated benefit obligation exceeded plan assets for all pension plans as of December 29, 2018January 2, 2021 and December 30, 2017.28, 2019.
The following weighted average assumptions were used to determine the projected benefit obligation as of January 2, 2021 and December 29, 2018 and December 30, 2017,28, 2019, respectively:
| 2020 | 2019 | ||||||||||
| Discount Rate | 2.6% | 3.3% | |||||||||
| 2018 | 2017 | ||
| Discount Rate | 4.4% | 3.8% | |
The objective of the discount rate assumption is to reflect the rate at which the pension benefits could be effectively settled. In making the determination, the Company takes into account the timing and amount of benefits that would be available under the plans. The methodology for selecting the discount rate was to match the plan's cash flows to that of a theoretical bond portfolio yield curve.
Certain of the Company's defined benefit pension plan obligations are based on years of service rather than on projected compensation percentage increases. For those plans that use compensation increases in the calculation of benefit obligations and net periodic pension cost, the Company used an assumed rate of compensation increase of 3.0% for the fiscal years ended January 2, 2021 and December 29, 2018 and December 30, 2017.28, 2019.
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Net periodic pension benefit costs and the net actuarial loss and prior service cost recognized in other comprehensive income (“OCI”)OCI for the defined benefit pension plans were as follows (in millions):
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Service Cost | $ | 2.0 | $ | 6.2 | $ | 7.3 | ||||||||||||||
| Interest Cost | 8.0 | 10.6 | 9.3 | |||||||||||||||||
| Expected Return on Plan Assets | (13.3) | (12.5) | (11.9) | |||||||||||||||||
| Amortization of Net Actuarial Loss | 1.9 | 2.2 | 3.5 | |||||||||||||||||
| Amortization of Prior Service Cost | 0.3 | 0.3 | 0.2 | |||||||||||||||||
| Net Periodic Benefit Cost | $ | (1.1) | $ | 6.8 | $ | 8.4 | ||||||||||||||
| Change in Obligations Recognized in OCI, Net of Tax | ||||||||||||||||||||
| Prior Service Cost | $ | 0.2 | $ | 0.2 | $ | 0.2 | ||||||||||||||
| Net Actuarial Loss | 1.5 | 1.7 | 2.7 | |||||||||||||||||
| Total Recognized in OCI | $ | 1.7 | $ | 1.9 | $ | 2.9 | ||||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Service Cost | $ | 7.3 | $ | 7.2 | $ | 8.1 | ||||||
| Interest Cost | 9.3 | 9.3 | 9.8 | |||||||||
| Expected Return on Plan Assets | (11.9 | ) | (11.2 | ) | (11.9 | ) | ||||||
| Amortization of Net Actuarial Loss | 3.5 | 2.3 | 3.1 | |||||||||
| Amortization of Prior Service Cost | 0.2 | 0.2 | 0.2 | |||||||||
| Net Periodic Benefit Cost | $ | 8.4 | $ | 7.8 | $ | 9.3 | ||||||
| Change in Obligations Recognized in OCI, Net of Tax | ||||||||||||
| Prior Service Cost | $ | 0.2 | $ | 0.1 | $ | 0.1 | ||||||
| Net Actuarial Loss | 2.7 | 1.5 | 2.0 | |||||||||
| Total Recognized in OCI | $ | 2.9 | $ | 1.6 | $ | 2.1 | ||||||
As permitted under relevant accounting guidance, the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employeesassociates expected to receive benefits under the plans.
The following weighted average assumptions were used to determine net periodic pension cost for fiscal years 2018, 20172020, 2019 and 2016,2018, respectively.
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Discount Rate | 3.3% | 4.4% | 3.8% | |||||||||||||||||
| Expected Long-Term Rate of Return on Assets | 7.0% | 7.0% | 6.9% | |||||||||||||||||
| 2018 | 2017 | 2016 | ||||
| Discount Rate | 3.8% | 4.3% | 4.6% | |||
| Expected Long-Term Rate of Return on Assets | 6.9% | 7.0% | 7.2% | |||
The Company made contributions to its defined benefit plan of $10.9$8.5 million and $8.6$10.8 million for the fiscal years ended December 29, 2018January 2, 2021 and December 30, 2017,28, 2019, respectively.
The Company estimates that in fiscal 20192021 it will make contributions in the amount of $10.4$5.3 million to fund its defined benefit pension plans.
The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in millions):
| Year | Expected Payments | |||||||
| 2021 | $ | 17.3 | ||||||
| 2022 | 16.0 | |||||||
| 2023 | 16.4 | |||||||
| 2024 | 16.6 | |||||||
| 2025 | 17.0 | |||||||
| 2026-2029 | 81.5 | |||||||
| Year | Expected Payments | |||
| 2019 | $ | 15.4 | ||
| 2020 | 15.8 | |||
| 2021 | 16.4 | |||
| 2022 | 16.5 | |||
| 2023 | 16.9 | |||
| 2024-2027 | 88.7 | |||
In connection with the acquisition of the Power Transmission Solutions business from Emerson Electric Co. in 2015, the Company established an unfunded post retirementpost-retirement health care plan for certain domestic retirees and their dependents.
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The following table presents a reconciliation of the accumulated benefit obligation of the post retirementpost-retirement health care plan (in millions):
| Change in Accumulated Post Retirement Benefit Obligation | 2020 | 2019 | ||||||||||||
| Obligation at Beginning of Period | $ | 5.9 | $ | 9.2 | ||||||||||
| Interest Cost | 0.2 | 0.3 | ||||||||||||
| Actuarial (Gain) Loss | 0.1 | (0.7) | ||||||||||||
| Amendments | 0 | (1.9) | ||||||||||||
| Curtailment Gain | 0 | (0.5) | ||||||||||||
| Participant Contributions | 0.2 | 0.2 | ||||||||||||
| Less: Benefits Paid | 0.5 | 0.7 | ||||||||||||
| Obligation at End of Period | $ | 5.9 | $ | 5.9 | ||||||||||
| Change in Accumulated Post Retirement Benefit Obligation | 2018 | 2017 | ||||||
| Obligation at Beginning of Period | $ | 12.1 | $ | 13.8 | ||||
| Service Cost | 0.1 | 0.1 | ||||||
| Interest Cost | 0.4 | 0.4 | ||||||
| Actuarial Gain | (2.8 | ) | (1.3 | ) | ||||
| Participant Contributions | 0.4 | 0.5 | ||||||
| Less: Benefits Paid | 1.0 | 1.4 | ||||||
| Obligation at End of Period | $ | 9.2 | $ | 12.1 | ||||
The Company recognized the funded status of its post retirementpost-retirement health care plan on the balance sheet as follows (in millions):
| 2020 | 2019 | |||||||||||||
| Accrued Compensation and Benefits | $ | 0.5 | $ | 0.5 | ||||||||||
| Pension and Other Post Retirement Benefits | 5.4 | 5.4 | ||||||||||||
| Total | $ | 5.9 | $ | 5.9 | ||||||||||
| Amounts Recognized in Accumulated Other Comprehensive Loss | ||||||||||||||
| Net Actuarial Gain | $ | (3.2) | $ | (4.1) | ||||||||||
| Prior Service Cost | (0.9) | (1.7) | ||||||||||||
| Total | $ | (4.1) | $ | (5.8) | ||||||||||
| 2018 | 2017 | |||||||
| Accrued Compensation and Employee Benefits | $ | 0.7 | $ | 0.9 | ||||
| Pension and Other Post Retirement Benefits | 8.5 | 11.2 | ||||||
| Total | $ | 9.2 | $ | 12.1 | ||||
| Amounts Recognized in Accumulated Other Comprehensive Loss | ||||||||
| Net Actuarial (Gain) Loss | $ | (3.7 | ) | $ | (0.9 | ) | ||
The following assumptions were used to determine the accumulated post-retirement benefit obligation as of January 2, 2021 and December 28, 2019, respectively.
| 2020 | 2019 | |||||||||||||
| Discount Rate | 2.5% | 3.2% | ||||||||||||
Net periodic post retirement health care benefit costs for the post retirementpost-retirement health care plan were as follows (in millions):
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Service Cost | $ | 0 | $ | 0 | $ | 0.1 | ||||||||||||||
| Interest Cost | 0.2 | 0.3 | 0.4 | |||||||||||||||||
| Amortization of Net Actuarial Gain | (0.6) | (0.4) | 0 | |||||||||||||||||
| Amortization of Prior Service Cost | (0.9) | (0.1) | 0 | |||||||||||||||||
| Curtailment Gain | 0 | (0.5) | 0 | |||||||||||||||||
| Net Periodic Post Retirement Health Care Benefit Cost | $ | (1.3) | $ | (0.7) | $ | 0.5 | ||||||||||||||
| Change in Obligations Recognized in OCI, Net of Tax | ||||||||||||||||||||
| Prior Service Gain | $ | (0.7) | $ | (0.1) | $ | 0 | ||||||||||||||
| Net Actuarial Gain | (0.5) | (0.3) | 0 | |||||||||||||||||
| Total Recognized in OCI | $ | (1.2) | $ | (0.4) | $ | 0 | ||||||||||||||
| 2018 | 2017 | |||||||
| Service Cost | $ | 0.1 | $ | 0.1 | ||||
| Interest Cost | 0.4 | 0.4 | ||||||
| Net Periodic Benefit Cost | $ | 0.5 | $ | 0.5 | ||||
The following assumptions were used to determine the projectednet periodic post-retirement health care benefit obligation as of December 29,cost for fiscal years 2020, 2019 and 2018, and December 30, 2017, respectively.
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Discount Rate | 3.2% | 4.2% | 3.5% | |||||||||||||||||
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| 2018 | 2017 | |||
| Discount Rate | 4.2% | 3.5% | ||
The health care cost trend rate for fiscal 2020, 2019 and 2018, respectively, is 5.8%, 6.8% and 7.6% for pre-65 participants and 5.6%, 5.1% and 5.3% for post-65 participants, decreasing to 4.5% for all years in fiscal 2026,2031, the year that the health care cost trend rate reaches the assumed ultimate rate. The health care cost trend rate for fiscal 2018 is 8.0% for pre-65 participants and 5.4% for post-65 participants, decreasing to 4.5% in fiscal 2026. A one percentage point change in the health care cost trend rate assumption would have an immaterial impact on both the benefit obligation and on post retirement benefits expense.
The Company contributed $0.6$0.3 million and $0.9$0.4 million to the post retirementpost-retirement health care plan in fiscal 20182020 and fiscal 2017,2019, respectively. The Company estimates that in fiscal 20192021 it will make contributions of $0.7$0.5 million to the post retirement health care plan.
The following post retirementpost-retirement benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in millions):
| Year | Expected Payments | |||||||
| 2021 | $ | 0.5 | ||||||
| 2022 | 0.4 | |||||||
| 2023 | 0.4 | |||||||
| 2024 | 0.4 | |||||||
| 2025 | 0.4 | |||||||
| 2026-2029 | 1.6 | |||||||
(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 estimated 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 1 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 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 Consolidated Balance Sheet: Net Property, Plant and Equipment, Current Maturities of Long-Term Debt and Long-Term Debt.
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| Year | Expected Payments | |||
| 2019 | $ | 0.7 | ||
| 2020 | 0.8 | |||
| 2021 | 0.9 | |||
| 2022 | 0.9 | |||
| 2023 | 0.9 | |||
| 2024-2027 | 3.8 | |||
| January 2, 2021 | December 28, 2019 | ||||||||||
| Operating Lease Cost | $ | 30.9 | $ | 31.1 | |||||||
| Finance Lease Cost: | |||||||||||
| Amortization of ROU Assets | 0.3 | 0.3 | |||||||||
| Interest on Lease Liabilities | 0.2 | 0.2 | |||||||||
| Total Lease Expense | $ | 31.4 | $ | 31.6 | |||||||
| Operating Leases | Finance Leases | Total | |||||||||||||||
| 2021 | $ | 26.7 | $ | 0.5 | $ | 27.2 | |||||||||||
| 2022 | 19.6 | 0.5 | 20.1 | ||||||||||||||
| 2023 | 13.3 | 0.6 | 13.9 | ||||||||||||||
| 2024 | 9.0 | 0.6 | 9.6 | ||||||||||||||
| 2025 | 7.0 | 0.6 | 7.6 | ||||||||||||||
| Thereafter | 18.4 | 1.3 | 19.7 | ||||||||||||||
| Total Lease Payments | $ | 94.0 | $ | 4.1 | $ | 98.1 | |||||||||||
| Less: Interest | (17.3) | (0.8) | (18.1) | ||||||||||||||
| Present Value of Lease Liabilities | $ | 76.7 | $ | 3.3 | $ | 80 | |||||||||||
Other information related to leases was as follows (in millions):
| Supplemental Cash Flows Information | January 2, 2021 | December 28, 2019 | |||||||||
| Cash Paid for Amounts Included in the Measurement of Lease Liabilities: | |||||||||||
| Operating Cash Flows from Operating Leases | $ | 29.7 | $ | 30.6 | |||||||
| Operating Cash Flows from Finance Leases | 0.3 | 0.3 | |||||||||
| Financing Cash Flows from Finance Leases | 0.2 | 0.2 | |||||||||
| Leased Assets Obtained in Exchange for New Operating Lease Liabilities | 24.3 | 13.6 | |||||||||
| Weighted Average Remaining Lease Term | |||||||||||
| Operating Leases | 5.2 years | 4.7 years | |||||||||
| Finance Leases | 7.3 years | 8.3 years | |||||||||
| Weighted Average Discount Rate | |||||||||||
| Operating Leases | 8.2 | % | 8.8 | % | |||||||
| Finance Leases | 5.9 | % | 5.9 | % | |||||||
As of January 2, 2021, the Company has additional operating leases with future lease payments of $1.7 million that have not yet commenced. These operating leases will commence during fiscal year 2021 with lease terms of one to 5 years. The Company had no finance leases that had not yet commenced nor entered into as of January 2, 2021.
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(10) Shareholders' Equity
Common Stock
The Company announced it had suspended the share repurchase program starting in the first quarter of 2020. The Company has re-instated the share purchase program starting in the fourth quarter of 2020. The existing share repurchase program remains authorized by the Company's Board of Directors. There is approximately $196.9$210.0 million in common stock available for repurchase under this programthe October 25, 2019 repurchase authorization as of December 29, 2018January 2, 2021.
Share-Based Compensation
The Company recognized approximately $16.9$9.2 million, $13.6$13.0 million and $13.3$16.9 million in share-based compensation expense in fiscal years 2018, 20172020, 2019 and 2016,2018, respectively. The total income tax benefit recognized in the Consolidated Statements of Income for share-based compensation expense was $4.1$2.2 million, $5.2$3.1 million and $5.1$4.1 million in fiscal years 2018, 20172020, 2019 and 2016,2018, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award. The total fair value of shares and options vested was $12.8$7.7 million, $11.9$23.0 million and $11.3$12.8 million in fiscal years 2018, 20172020, 2019 and 2016,2018, respectively. On October 10, 2018, the Company entered into a retirement agreement with the prior CEO resulting in the modification of the prior CEO's unvested awards. The Company expects to recognizeexpensed the modified awards over the modified service term. The modification increased the amount of unrecognized compensation cost and reduced the weighted average period in which the Company recognized compensation cost. On December 27, 2019, the Company entered into a retirement agreement with the COO resulting in the modification of certain of the COO's unvested awards. The Company recognized the modified award values over the modified service term. The modification increased the amount of unrecognized compensation cost and reduced the weighted average period in which the Company expects to recognizerecognized the unrecognized compensation cost.
Total unrecognized compensation cost related to share-based compensation awards was approximately $19.5$17.9 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 1.8 years as of December 29, 2018.January 2, 2021.
During 2018, the Company's shareholders approved the 2018 Equity Incentive Plan ("2018 Plan"). The 2018 Plan authorizes the issuance of 2.1 million shares of common stock, plus the number of shares reserved under the prior 2013 Equity Incentive Plan that are not the subject of outstanding awards for equity-based awards and terminates any further grants under prior equity plans. Approximately 2.63.4 million shares were available for future grant or payment under the 2018 PlanPlans as of December 29, 2018.January 2, 2021.
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 fiscal years ended January 2, 2021, December 28, 2019 and December 29, 2018, December 30, 2017, and December 31, 2016, expired and canceled shares were immaterial.
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The table below presents SARs share-based compensation activity for the fiscal years ended 2018, 20172020, 2019 and 20162018 (in millions):
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Total Intrinsic Value of Share-Based Incentive Awards Exercised | $6.7 | $11.7 | $5.2 | |||||||||||||||||
| Cash Received from Stock Option Exercises | 0.2 | 0.1 | 0 | |||||||||||||||||
| Total Fair Value of Share-Based Incentive Awards Vested | 2.1 | 5.4 | 3.9 | |||||||||||||||||
| 2018 | 2017 | 2016 | ||||
| Total Intrinsic Value of Share-Based Incentive Awards Exercised | $5.2 | $4.3 | $2.5 | |||
| Cash Received from Stock Option Exercises | — | 0.4 | 0.5 | |||
| Total Fair Value of Share-Based Incentive Awards Vested | 3.9 | 4.3 | 4.9 | |||
The weighted average assumptions used in the Company's Black-Scholes valuation related to grants for SARs were as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Per Share Weighted Average Fair Value of Grants | $21.23 | $20.84 | $22.73 | ||||||||||||||
| Risk-Free Interest Rate | 1.5% | 2.4% | 2.9% | ||||||||||||||
| Expected Life (Years) | 7.0 | 7.0 | 7.0 | ||||||||||||||
| Expected Volatility | 25.2% | 25.0% | 27.8% | ||||||||||||||
| Expected Dividend Yield | 1.4% | 1.5% | 1.4% | ||||||||||||||
| 2018 | 2017 | 2016 | |||
| Per Share Weighted Average Fair Value of Grants | $22.73 | $23.31 | $15.22 | ||
| Risk-Free Interest Rate | 2.9% | 2.1% | 1.4% | ||
| Expected Life (Years) | 7.0 | 7.0 | 7.0 | ||
| Expected Volatility | 27.8% | 28.6% | 29.6% | ||
| Expected Dividend Yield | 1.4% | 1.3% | 1.7% | ||
The average risk-free interest rate is based on US Treasury security rates in effect as of the grant date. The expected dividend yield is based on the projected annual dividend as a percentage of the estimated market value of the Company's common stock as of the grant date. The Company estimated the expected volatility using a weighted average of daily historical volatility of the Company's stock price over the expected term of the award. The Company estimated the expected term using historical data.
Following is a summary of share-based incentive plan activity (options and SARs) for fiscal 2018:2020:
| 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 | ||||||||||||||||||||
| Granted | 181,177 | 88.25 | |||||||||||||||||||||
| Exercised | (322,820) | 69.86 | |||||||||||||||||||||
| Forfeited | (95,330) | 77.26 | |||||||||||||||||||||
| Expired | (3,308) | 67.38 | |||||||||||||||||||||
| Outstanding as of January 2, 2021 | 577,509 | $ | 79.35 | 7.0 | $ | 25.1 | |||||||||||||||||
| Exercisable as of January 2, 2021 | 180,146 | $ | 71.22 | 4.2 | $ | 9.3 | |||||||||||||||||
| Number of Shares Under Options and SARs | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (in millions) | |||||||
| Outstanding as of December 30, 2017 | 1,601,791 | $ | 66.46 | ||||||||
| Granted | 193,357 | 77.60 | |||||||||
| Exercised | (249,324) | 57.54 | |||||||||
| Forfeited | (5,206) | 70.30 | |||||||||
| Expired | (1,250) | 54.28 | |||||||||
| Outstanding as of December 29, 2018 | 1,539,368 | $ | 69.31 | 5.6 | $ | 16.0 | |||||
| Exercisable as of December 29, 2018 | 928,987 | $ | 66.61 | 3.9 | $ | 12.0 | |||||
Compensation expense recognized related to options and SARs was $2.8 million, $2.7 million and $4.7 million for fiscal December 29, 2018.years 2020, 2019 and 2018, respectively.
As of December 29, 2018,January 2, 2021, there was $6.4$5.6 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 3.12.5 years.
The amount of options and SARs expected to vest is materially consistent with those outstanding and not yet exercisable.
Restricted Stock Awards and Restricted Stock Units
Restricted stock awards ("RSAs") and restricted stock units ("RSUs") consist of shares or the rights to shares of the Company's stock. The awards are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer. As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, or death, disability or normal retirement of the grantee.
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Following is the summary of RSAs activity for fiscal 2018:2020:
| 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 | (15,571) | 80.41 | ||||||||||||||||||
| Unvested RSAs as of January 2, 2021 | 16,280 | $ | 70.05 | 0.3 | ||||||||||||||||
| Shares | Weighted Average Fair Value at Grant Date | Weighted Average Remaining Contractual Term (years) | ||||||
| Unvested RSAs as of December 30, 2017 | 13,941 | $ | 80.70 | 0.4 | ||||
| Granted | 16,490 | 74.68 | ||||||
| Vested | (13,941) | 80.70 | ||||||
| Forfeited | (830) | 80.25 | ||||||
| Unvested RSAs as of December 29, 2018 | 15,660 | $ | 74.38 | 0.4 | ||||
The weighted average grant date fair value of awards granted was $74.68, $80.70$70.05, $80.41 and $57.43$74.68 in fiscal years 2018, 20172020, 2019 and 2016,2018, respectively.
RSAs vest on the one year 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 $1.2 million for fiscal 2018.2020, 2019 and 2018, respectively.
As of December 29, 2018,January 2, 2021, there was $0.4 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 0.40.3 years.
Following is the summary of RSUs activity for fiscal 2018:2020:
| 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 | 69,331 | 86.70 | |||||||||||||||||||||
| Vested | (50,565) | 80.20 | |||||||||||||||||||||
| Forfeited | (29,393) | 78.23 | |||||||||||||||||||||
| Unvested RSUs as of January 2, 2021 | 164,398 | $ | 81.16 | 1.7 | |||||||||||||||||||
| Shares | Weighted Average Fair Value at Grant Date | Weighted Average Remaining Contractual Term (years) | ||||||||
| Unvested RSUs as of December 30, 2017 | 260,533 | $ | 70.81 | 1.7 | ||||||
| Granted | 78,140 | 74.51 | ||||||||
| Vested | (98,636) | 76.25 | ||||||||
| Forfeited | (5,213) | 69.71 | ||||||||
| Unvested RSUs as of December 29, 2018 | 234,824 | $ | 69.78 | 1.6 | ||||||
The weighted average grant date fair value of awards granted was $74.51, $80.48$86.70, $78.98 and $57.50$74.51 in fiscal years 2018, 20172020, 2019 and 2016,2018, respectively.
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 shares is continuously employed by the Company until the vesting date. Compensation expense recognized related to the RSUs was $3.8 million, $6.2 million and $7.8 million for fiscal 2018.2020, 2019 and 2018, respectively.
As of December 29, 2018,January 2, 2021, there was $6.8$7.2 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 1.61.7 years.
Performance Share Units
Performance share unit awards ("PSUs") awards consist of shares or the rights to shares of the Company's stock which are awarded to employeesassociates 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 three years from the grant date.date and are issued at a performance target of 100%. 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 grant agreements, acceleration of vesting may occur under a change in control, death or disability. There are no voting rights with these instruments until vesting occurs and a share of stock is issued. Some of the PSU awards are valued using a Monte Carlo simulation method as of the grant date while others are valued using the closing market price less NPVnet present value of dividends as of the grant date depending on the performance criteria for the award.
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The assumptions used in the Company's Monte Carlo simulation related to grants for performance share units were as follows:
| January 2, 2021 | December 28, 2019 | December 29, 2018 | |||||||||||||||
| Risk-free interest rate | 1.4% | 2.3% | 2.7% | ||||||||||||||
| Expected life (years) | 3.0 | 3.0 | 3.0 | ||||||||||||||
| Expected volatility | 24.0% | 25.0% | 25.0% | ||||||||||||||
| Expected dividend yield | 1.4% | 1.5% | 1.4% | ||||||||||||||
| December 29, 2018 | December 30, 2017 | ||
| Risk-free interest rate | 2.7% | 1.6% | |
| Expected life (years) | 3.0 | 3.0 | |
| Expected volatility | 25.0% | 24.0% | |
| Expected dividend yield | 1.4% | 1.3% | |
Following is the summary of PSUs activity for fiscal 2018:2020:
| 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 | 36,556 | 117.63 | |||||||||||||||||||||
| Vested | (7,545) | 95.33 | |||||||||||||||||||||
| Forfeited | (32,054) | 86.54 | |||||||||||||||||||||
| Unvested PSUs as of January 2, 2021 | 87,522 | $ | 97.59 | 1.8 | |||||||||||||||||||
| Shares | Weighted Average Fair Value at Grant Date | Weighted Average Remaining Contractual Term (years) | ||||||||
| Unvested PSUs as of December 30, 2017 | 155,116 | $ | 70.43 | 2.0 | ||||||
| Granted | 50,659 | 83.80 | ||||||||
| Vested | (1,359) | 57.43 | ||||||||
| Forfeited | (36,576) | 83.55 | ||||||||
| Unvested PSUs as of December 29, 2018 | 167,840 | $ | 71.71 | 1.8 | ||||||
The weighted average grant date fair value of awards granted was $83.80, $90.82$117.63, $85.54 and $51.84$83.80 in fiscal years 2018, 20172020, 2019 and 2016,2018, respectively.
Compensation expense for awards granted are recognized based on the Monte Carlo simulation 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 $1.4 million, $2.9 million and $3.2 million for fiscal 2018.2020, 2019 and 2018, respectively. Total unrecognized compensation expense for all PSUs granted as of December 29, 2018January 2, 2021 was $5.8$4.7 million and it is expected to be recognized as a charge to earnings over a weighted average period of 1.8 years.
Income before taxes consisted of the following (in millions):
| 2018 | 2017 | 2016 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| United States | $ | 121.5 | $ | 147.4 | $ | 143.4 | United States | $ | 80.2 | $ | 126.7 | $ | 121.5 | |||||||||||||||||||
| Foreign | 170.7 | 129.8 | 123.0 | Foreign | 170.4 | 177.1 | 170.7 | |||||||||||||||||||||||||
| Total | $ | 292.2 | $ | 277.2 | $ | 266.4 | Total | $ | 250.6 | $ | 303.8 | $ | 292.2 | |||||||||||||||||||
The provision for income taxes is summarized as follows (in millions):
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Current | ||||||||||||||||||||
| Federal | $ | 7.1 | $ | 1.8 | $ | 4.5 | ||||||||||||||
| State | 2.7 | 1.1 | 0.8 | |||||||||||||||||
| Foreign | 63.5 | 35.9 | 37.9 | |||||||||||||||||
| $ | 73.3 | $ | 38.8 | $ | 43.2 | |||||||||||||||
| Deferred | ||||||||||||||||||||
| Federal | $ | (2.0) | $ | 20.4 | $ | 16.6 | ||||||||||||||
| State | (0.3) | 2.6 | 2.1 | |||||||||||||||||
| Foreign | (14.2) | (0.6) | (5.5) | |||||||||||||||||
| (16.5) | 22.4 | 13.2 | ||||||||||||||||||
| Total | $ | 56.8 | $ | 61.2 | $ | 56.4 | ||||||||||||||
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| 2018 | 2017 | 2016 | ||||||||||
| Current | ||||||||||||
| Federal | $ | 4.5 | $ | 36.9 | $ | 23.1 | ||||||
| State | 0.8 | (0.3 | ) | 3.5 | ||||||||
| Foreign | 37.9 | 32.2 | 30.4 | |||||||||
| $ | 43.2 | $ | 68.8 | $ | 57.0 | |||||||
| Deferred | ||||||||||||
| Federal | $ | 16.6 | $ | (7.2 | ) | $ | 5.6 | |||||
| State | 2.1 | 2.2 | 1.8 | |||||||||
| Foreign | (5.5 | ) | (4.7 | ) | (7.3 | ) | ||||||
| 13.2 | (9.7 | ) | 0.1 | |||||||||
| Total | $ | 56.4 | $ | 59.1 | $ | 57.1 | ||||||
A reconciliation of the statutory federal income tax rate and the effective tax rate reflected in the consolidated statements of income follows:
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Federal Statutory Rate | 21.0% | 21.0% | 21.0% | |||||||||||||||||
| State Income Taxes, Net of Federal Benefit | 0.8% | 1.3% | 1.1% | |||||||||||||||||
| Foreign Rate Differential - China | 1.2% | 0.9% | 0.9% | |||||||||||||||||
| Foreign Rate Differential - All Other | (0.4)% | (2.8)% | (1.4)% | |||||||||||||||||
| Research and Development Credit | (3.0)% | (2.5)% | (2.5)% | |||||||||||||||||
| Valuation Allowance | (0.1)% | 0.8% | (0.3)% | |||||||||||||||||
| Tax Cuts and Jobs Act of 2017 | 0% | 0% | (1.3)% | |||||||||||||||||
| Tax on Repatriation | 1.2% | 3.4% | 1.3% | |||||||||||||||||
| Adjustments to Tax Accruals and Reserves | 0.1% | 0.3% | 0% | |||||||||||||||||
| Tax Impact of Divestitures | 0% | (1.7)% | 0% | |||||||||||||||||
| Other | 1.9% | (0.6)% | 0.5% | |||||||||||||||||
| Effective Tax Rate | 22.7% | 20.1% | 19.3% | |||||||||||||||||
| 2018 | 2017 | 2016 | ||||
| Federal Statutory Rate | 21.0% | 35.0% | 35.0% | |||
| State Income Taxes, Net of Federal Benefit | 1.1% | 0.3% | 1.5% | |||
| Domestic Production Activities Deduction | —% | (1.0)% | (1.1)% | |||
| Foreign Rate Differential - China | 0.9% | (2.1)% | (2.0)% | |||
| Foreign Rate Differential - All Other | (1.4)% | (4.3)% | (6.0)% | |||
| Research and Development Credit | (2.5)% | (3.0)% | (2.3)% | |||
| Valuation Allowance | (0.3)% | (0.6)% | —% | |||
| Tax Cuts and Jobs Act of 2017 | (1.3)% | (0.4)% | —% | |||
| Tax on Repatriation | 1.3% | —% | —% | |||
| Adjustments to Tax Accruals and Reserves | —% | (1.9)% | 0.7% | |||
| Other | 0.5% | (0.7)% | (4.4)% | |||
| Effective Tax Rate | 19.3% | 21.3% | 21.4% | |||
Deferred taxes arise primarily from differences in amounts reported for tax and financial statement purposes. The Company's net deferred tax liability was $(114.1)$(128.1) million as of December 29, 2018,January 2, 2021, classified on the consolidated Balance Sheet as a net non-current deferred tax asset of $34.2$43.9 million and a net non-current deferred income tax liability of $(148.3)$(172.0) million. As of December 30, 2017,28, 2019, the Company's net deferred tax liability was $(106.8)$(113.5) million classified on the consolidated Balance Sheet as a net non-current deferred income tax benefitasset of $28.5$58.4 million and a net non-current deferred income tax liability of $(135.3)$(171.9) million.
The components of this net deferred tax liability are as follows (in millions):
| January 2, 2021 | December 28, 2019 | |||||||||||||||||||
| Accrued Benefits | $ | 36.8 | $ | 54.3 | ||||||||||||||||
| Bad Debt Allowances | 4.9 | 2.0 | ||||||||||||||||||
| Warranty Accruals | 3.4 | 2.5 | ||||||||||||||||||
| Inventory | 10.4 | 7.3 | ||||||||||||||||||
| Accrued Liabilities | (8.8) | (2.6) | ||||||||||||||||||
| Derivative Instruments | (7.5) | 1.4 | ||||||||||||||||||
| Tax Loss Carryforward | 9.2 | 35.4 | ||||||||||||||||||
| Valuation Allowance | (7.4) | (12.9) | ||||||||||||||||||
| Operating Lease Liability | 18.8 | 17.2 | ||||||||||||||||||
| Other | 34.6 | 18.0 | ||||||||||||||||||
| Deferred Tax Assets | 94.4 | 122.6 | ||||||||||||||||||
| Property Related | (33.7) | (36.1) | ||||||||||||||||||
| Intangible Items | (170.9) | (182.8) | ||||||||||||||||||
| Operating Lease Asset | (17.9) | (17.2) | ||||||||||||||||||
| Deferred Tax Liabilities | (222.5) | (236.1) | ||||||||||||||||||
| Net Deferred Tax Liability | $ | (128.1) | $ | (113.5) | ||||||||||||||||
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| December 29, 2018 | December 30, 2017 | |||||||||
| Accrued Employee Benefits | $ | 53.9 | $ | 53.4 | ||||||
| Bad Debt Allowances | 2.2 | 2.3 | ||||||||
| Warranty Accruals | 3.6 | 3.1 | ||||||||
| Inventory | 14.6 | 12.9 | ||||||||
| Accrued Liabilities | (8.0 | ) | (5.3 | ) | ||||||
| Derivative Instruments | 1.8 | (4.3 | ) | |||||||
| Tax Loss Carryforward | 13.1 | 12.9 | ||||||||
| Valuation Allowance | (4.9 | ) | (5.9 | ) | ||||||
| Other | 14.0 | 1.2 | ||||||||
| Deferred Tax Assets | 90.3 | 70.3 | ||||||||
| Property Related | (32.2 | ) | (26.2 | ) | ||||||
| Intangible Items | (172.2 | ) | (150.9 | ) | ||||||
| Deferred Tax Liabilities | (204.4 | ) | (177.1 | ) | ||||||
| Net Deferred Tax Liability | $ | (114.1 | ) | $ | (106.8 | ) | ||||
Following is a reconciliation of the beginning and ending amount of unrecognized tax benefits (in millions):
| Unrecognized Tax Benefits, December 30, 2017 | $ | 6.7 | ||||||||||||||||||
| Gross Increases from Prior Period Tax Positions | 0 | |||||||||||||||||||
| Gross Increases from Current Period Tax Positions | 0.3 | |||||||||||||||||||
| Settlements with Taxing Authorities | (0.1) | |||||||||||||||||||
| Lapse of Statute of Limitations | (0.4) | |||||||||||||||||||
| Unrecognized Tax Benefits, December 29, 2018 | $ | 6.5 | ||||||||||||||||||
| Gross Increases from Prior Period Tax Positions | 0 | |||||||||||||||||||
| Gross Increases from Current Period Tax Positions | 0.7 | |||||||||||||||||||
| Settlements with Taxing Authorities | 0 | |||||||||||||||||||
| Lapse of Statute of Limitations | (0.3) | |||||||||||||||||||
| Unrecognized Tax Benefits, December 28, 2019 | $ | 6.9 | ||||||||||||||||||
| Gross Increases from Prior Period Tax Positions | 0 | |||||||||||||||||||
| Gross Increases from Current Period Tax Positions | 0.2 | |||||||||||||||||||
| Settlements with Taxing Authorities | 0 | |||||||||||||||||||
| Lapse of Statute of Limitations | (0.3) | |||||||||||||||||||
| Unrecognized Tax Benefits, January 2, 2021 | $ | 6.8 | ||||||||||||||||||
| Unrecognized Tax Benefits, January 2, 2016 | $ | 8.3 | ||||||
| Gross Increases from Prior Period Tax Positions | — | |||||||
| Gross Increases from Current Period Tax Positions | 2.0 | |||||||
| Settlements with Taxing Authorities | — | |||||||
| Lapse of Statute of Limitations | (0.3 | ) | ||||||
| Unrecognized Tax Benefits, December 31, 2016 | $ | 10.0 | ||||||
| Gross Increases from Prior Period Tax Positions | — | |||||||
| Gross Increases from Current Period Tax Positions | 2.7 | |||||||
| Settlements with Taxing Authorities | (5.3 | ) | ||||||
| Lapse of Statute of Limitations | (0.7 | ) | ||||||
| Unrecognized Tax Benefits, December 30, 2017 | $ | 6.7 | ||||||
| Gross Increases from Prior Period Tax Positions | — | |||||||
| Gross Increases from Current Period Tax Positions | 0.3 | |||||||
| Settlements with Taxing Authorities | (0.1 | ) | ||||||
| Lapse of Statute of Limitations | (0.4 | ) | ||||||
| Unrecognized Tax Benefits, December 29, 2018 | $ | 6.5 | ||||||
Unrecognized tax benefits as of December 29, 2018January 2, 2021 amount to $6.5$6.8 million, all of which would impact the effective income tax rate if recognized.
Potential interest and penalties related to unrecognized tax benefits are recorded in income tax expense. During fiscal years 2018, 20172020, 2019 and 2016,2018, the Company recognized approximately $0.2$0.4 million, $(0.2)$0.5 million and $0.2 million in net interest (income) expense, respectively. The Company had approximately $1.9$2.7 million, $1.7$2.3 million and $1.9 million of accrued interest as of January 2, 2021, December 28, 2019 and December 29, 2018, December 30, 2017 and December 31, 2016, respectively.
Due to statute expirations, approximately $0.4$1.3 million of the unrecognized tax benefits, including accrued interest, could reasonably change in the coming year.
With few exceptions, the Company is no longer subject to US federal and state/local income tax examinations by tax authorities for years prior to 2013,2014, and the Company is no longer subject to non-US income tax examinations by tax authorities for years prior to 2011.2012.
As of December 29, 2018,January 2, 2021, the Company had approximately $13.1$9.2 million of tax effected net operating losses in various jurisdictions with a portion expiring over a period of up to 15 years and the remaining without expiration. As of December 30, 2017,28, 2019, the Company had approximately $12.9$35.4 million of tax effected net operating losses in various jurisdictions with a portion expiring over a period up to 15 years and the remaining without expiration.
Valuation allowances totaling $4.9$7.4 million and $5.9$12.9 million as of December 29, 2018January 2, 2021 and December 30, 2017,28, 2019, respectively, have been established for deferred income tax assets primarily related to certain subsidiary loss carryforwards that may not be realized. Realization of the net deferred income tax assets is dependent on generating sufficient taxable income prior to their expiration. Although realization is not assured, management believes it is more-likely-than-not that the net deferred income tax assets will be realized. The amount of the net deferred income tax assets considered realizable, however, could change in the near term if future taxable income during the carryforward period fluctuates.
The Company has been granted tax holidays for some of its Chinese subsidiaries. TheseThe majority of these tax holidays expire in 2020 and are renewableexpired at the end of 2020. All tax holidays will be renewed subject to certain conditions with which the Company expects to comply. In 2018,2020, these holidays decreased the Provision for Income Taxes by $4.7$4.1 million.
The Company continues to treat approximately $103.5$149.6 million of earnings from certain foreign entities as permanently reinvested and has not recorded a deferred tax liability for the local withholding taxes of approximately $15.8$15.2 million on those earnings.
(12) Contingencies
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, results of operations or cash flows.
The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience. The following is a reconciliation of the changes in accrued warranty costs for fiscal 20182020 and fiscal 20172019 (in millions):
| January 2, 2021 | December 28, 2019 | |||||||||||||
| Beginning Balance | $ | 15.1 | $ | 14.8 | ||||||||||
| Less: Payments | 16.7 | 14.5 | ||||||||||||
| Provisions | 16.9 | 15.2 | ||||||||||||
| Held for Sale | 0 | (0.4) | ||||||||||||
| Translation Adjustments | 0.2 | 0 | ||||||||||||
| Ending Balance | $ | 15.5 | $ | 15.1 | ||||||||||
| December 29, 2018 | December 30, 2017 | |||||||
| Beginning Balance | $ | 16.0 | $ | 20.3 | ||||
| Less: Payments | 20.1 | 23.5 | ||||||
| Provisions | 20.2 | 19.0 | ||||||
| Acquisitions | 0.3 | — | ||||||
| Held for Sale | (1.4 | ) | — | |||||
| Translation Adjustments | (0.2 | ) | 0.2 | |||||
| Ending Balance | $ | 14.8 | $ | 16.0 | ||||
These liabilities are included in Other Accrued Expenses and Other Noncurrent Liabilities on the Consolidated Balance Sheets.
| Year | Expected Payments | ||||||
| 2019 | $ | 30.8 | |||||
| 2020 | 24.7 | ||||||
| 2021 | 19.2 | ||||||
| 2022 | 11.7 | ||||||
| 2023 | 6.5 | ||||||
| Thereafter | 16.2 | ||||||
(13) Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed using derivative instruments are commodity price risk, currency exchange risk, and interest rate risk. Forward contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company's manufacturing process. Forward contracts on certain currencies are entered into to manage forecasted cash flows in certain foreign currencies. Interest rate swaps are 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 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
87
hedges of forecasted LIBOR-based interest payments. There were no significant collateral deposits on derivative financial instruments as of December 29, 2018January 2, 2021 or December 30, 2017.28, 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 earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or changes in market value of derivatives not designated as hedges are recognized in current earnings.
As of January 2, 2021 and December 29, 2018 and December 30, 2017,28, 2019, the Company had $(2.1)$3.7 million and $(2.0)$1.3 million,, net of tax, of derivative lossesgains on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings.
| January 2, 2021 | December 28, 2019 | |||||||||||||
| Copper | $ | 47.0 | $ | 49.3 | ||||||||||
| Aluminum | 3.6 | 3.4 | ||||||||||||
| December 29, 2018 | December 30, 2017 | |||||||
| Copper | $ | 95.4 | $ | 80.8 | ||||
| Aluminum | 10.0 | 7.7 | ||||||
| January 2, 2021 | December 28, 2019 | |||||||||||||
| Mexican Peso | $ | 174.6 | $ | 160.2 | ||||||||||
| Chinese Renminbi | 188.5 | 104.6 | ||||||||||||
| Indian Rupee | 37.8 | 36.7 | ||||||||||||
| Euro | 231.7 | 127.0 | ||||||||||||
| Canadian Dollar | 2.0 | 9.4 | ||||||||||||
| Australian Dollar | 21.2 | 11.4 | ||||||||||||
| Thai Baht | 15.3 | 5.7 | ||||||||||||
| Swedish Krona | 0 | 2.4 | ||||||||||||
| British Pound | 11.7 | 15.4 | ||||||||||||
| December 29, 2018 | December 30, 2017 | |||||||
| Mexican Peso | $ | 182.3 | $ | 137.1 | ||||
| Chinese Renminbi | 125.5 | 214.9 | ||||||
| Indian Rupee | 44.0 | 35.8 | ||||||
| Euro | 225.7 | 26.4 | ||||||
| Canadian Dollar | 11.4 | 47.7 | ||||||
| Australian Dollar | 13.2 | 14.9 | ||||||
| Thai Baht | 6.7 | 7.5 | ||||||
| British Pound | 15.3 | 2.7 | ||||||
As of December 29, 2018,January 2, 2021, 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 2 receive variable/pay-fixed forward starting non-amortizing interest rate swaps in June 2020, with a total notional amount of $250.0 million. These swaps become effective July 2021 and will expire in July 2025.
88
Fair values of derivative instruments as of December 29, 2018January 2, 2021 and December 30, 201728, 2019 were (in millions):
| January 2, 2021 | ||||||||||||||||||||||||||
| Prepaid Expenses and Other Current Assets | Other Noncurrent Assets | Other Accrued Expenses | Other Noncurrent Liabilities | |||||||||||||||||||||||
| Designated as Hedging Instruments: | ||||||||||||||||||||||||||
| Interest Rate Swap Contracts | $ | 0 | $ | 0 | $ | 0.7 | $ | 1.4 | ||||||||||||||||||
| Currency Contracts | 16.4 | 1.6 | 1.0 | 0.1 | ||||||||||||||||||||||
| Commodity Contracts | 11.3 | 0.1 | 0 | 0 | ||||||||||||||||||||||
| Not Designated as Hedging Instruments: | ||||||||||||||||||||||||||
| Currency Contracts | 0.2 | 0 | 0 | 0 | ||||||||||||||||||||||
| Commodity Contracts | 0.1 | 0 | 0 | 0 | ||||||||||||||||||||||
| Total Derivatives | $ | 28.0 | $ | 1.7 | $ | 1.7 | $ | 1.5 | ||||||||||||||||||
| December 29, 2018 | December 28, 2019 | |||||||||||||||||||||||||||||||||||||||||
| Prepaid Expenses and Other Current Assets | Other Noncurrent Assets | Current Hedging Obligations | Noncurrent Hedging Obligations | Prepaid Expenses and Other Current Assets | Other Noncurrent Assets | Other Accrued Expenses | Other Noncurrent Liabilities | |||||||||||||||||||||||||||||||||||
| Designated as Hedging Instruments: | Designated as Hedging Instruments: | |||||||||||||||||||||||||||||||||||||||||
| Interest Rate Swap Contracts | Interest Rate Swap Contracts | $ | 0 | $ | 0 | $ | 0 | $ | 1.0 | |||||||||||||||||||||||||||||||||
| Currency Contracts | $ | 6.0 | $ | 7.2 | $ | 4.3 | $ | 1.1 | Currency Contracts | 8.8 | 10.3 | 3.0 | 0.2 | |||||||||||||||||||||||||||||
| Commodity Contracts | 0.1 | — | 6.0 | 0.1 | Commodity Contracts | 2.6 | 0.1 | 0.2 | 0 | |||||||||||||||||||||||||||||||||
| Not Designated as Hedging Instruments: | Not Designated as Hedging Instruments: | |||||||||||||||||||||||||||||||||||||||||
| Currency Contracts | 0.6 | — | 0.7 | — | Currency Contracts | 0.1 | 0 | 0.1 | 0 | |||||||||||||||||||||||||||||||||
| Commodity Contracts | — | — | 0.3 | — | Commodity Contracts | 0 | 0 | 0.1 | 0 | |||||||||||||||||||||||||||||||||
| Total Derivatives | $ | 6.7 | $ | 7.2 | $ | 11.3 | $ | 1.2 | Total Derivatives | $ | 11.5 | $ | 10.4 | $ | 3.4 | $ | 1.2 | |||||||||||||||||||||||||
| December 30, 2017 | ||||||||||||||||
| Prepaid Expenses and Other Current Assets | Other Noncurrent Assets | Current Hedging Obligations | Noncurrent Hedging Obligations | |||||||||||||
| Designated as Hedging Instruments: | ||||||||||||||||
| Currency Contracts | $ | 11.5 | $ | 2.5 | $ | 7.9 | $ | 0.9 | ||||||||
| Commodity Contracts | 10.8 | 0.7 | — | — | ||||||||||||
| Not Designated as Hedging Instruments: | ||||||||||||||||
| Currency Contracts | 4.1 | — | 0.2 | — | ||||||||||||
| Commodity Contracts | 0.2 | — | — | — | ||||||||||||
| Total Derivatives | $ | 26.6 | $ | 3.2 | $ | 8.1 | $ | 0.9 | ||||||||
Derivatives Designated as Cash Flow Hedging Instruments
The effect of derivative instruments designated as cash flow hedges on the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income for fiscal years 2018, 20172020, 2019 and 20162018 were (in millions):
| Fiscal 2020 | ||||||||||||||||||||||||||
| Interest | ||||||||||||||||||||||||||
| Commodity | Currency | Rate | ||||||||||||||||||||||||
| Forwards | Forwards | Swaps | Total | |||||||||||||||||||||||
| Gain (Loss) Recognized in Other Comprehensive Income | $ | 14.8 | $ | (3.2) | $ | (0.2) | $ | 11.4 | ||||||||||||||||||
| Amounts Reclassified from Other Comprehensive Income (Loss): | ||||||||||||||||||||||||||
| Gain (Loss) Recognized in Cost of Sales | 1.2 | (2.9) | 0 | (1.7) | ||||||||||||||||||||||
| Loss Recognized in Operating Expense | 0 | (8.3) | 0 | (8.3) | ||||||||||||||||||||||
| Gain Recognized in Interest Expense | 0 | 0 | 0.9 | 0.9 | ||||||||||||||||||||||
89
| Fiscal 2019 | ||||||||||||||||||||||||||||||||||||||||||
| Fiscal 2018 | Interest | |||||||||||||||||||||||||||||||||||||||||
| Interest | Commodity | Currency | Rate | |||||||||||||||||||||||||||||||||||||||
| Commodity | Currency | Rate | Forwards | Forwards | Swaps | Total | ||||||||||||||||||||||||||||||||||||
| Forwards | Forwards | Swaps | Total | |||||||||||||||||||||||||||||||||||||||
| Gain (Loss) Recognized in Other Comprehensive Income | $ | (17.9 | ) | $ | 11.0 | $ | 1.7 | $ | (5.2 | ) | ||||||||||||||||||||||||||||||||
| Gain Recognized in Other Comprehensive Loss | Gain Recognized in Other Comprehensive Loss | $ | 1.5 | $ | 16.5 | $ | 1.3 | $ | 19.3 | |||||||||||||||||||||||||||||||||
| Amounts Reclassified from Other Comprehensive Income (Loss): | Amounts Reclassified from Other Comprehensive Income (Loss): | |||||||||||||||||||||||||||||||||||||||||
| Gain Recognized in Net Sales | — | 0.2 | — | 0.2 | Gain Recognized in Net Sales | 0 | 0.3 | 0 | 0.3 | |||||||||||||||||||||||||||||||||
| Gain Recognized in Cost of Sales | 5.0 | 2.9 | — | 7.9 | ||||||||||||||||||||||||||||||||||||||
| Gain (Loss) Recognized in Cost of Sales | Gain (Loss) Recognized in Cost of Sales | (7.7) | 4.2 | 0 | (3.5) | |||||||||||||||||||||||||||||||||||||
| Gain Recognized in Operating Expense | — | 6.1 | — | 6.1 | Gain Recognized in Operating Expense | 0 | 2.5 | 0 | 2.5 | |||||||||||||||||||||||||||||||||
| Gain Recognized in Interest Expense | — | — | 1.6 | 1.6 | Gain Recognized in Interest Expense | 0 | 0 | 2.4 | 2.4 | |||||||||||||||||||||||||||||||||
| Fiscal 2018 | ||||||||||||||||||||||||||
| Interest | ||||||||||||||||||||||||||
| Commodity | Currency | Rate | ||||||||||||||||||||||||
| Forwards | Forwards | Swaps | Total | |||||||||||||||||||||||
| Gain (Loss) Recognized in Other Comprehensive Loss | $ | (17.9) | $ | 11.0 | $ | 1.7 | $ | (5.2) | ||||||||||||||||||
| Amounts Reclassified from Other Comprehensive Income (Loss): | ||||||||||||||||||||||||||
| Gain Recognized in Net Sales | 0 | 0.2 | 0 | 0.2 | ||||||||||||||||||||||
| Gain Recognized in Cost of Sales | 5.0 | 2.9 | 0 | 7.9 | ||||||||||||||||||||||
| Gain Recognized in Operating Expense | 0 | 6.1 | 0 | 6.1 | ||||||||||||||||||||||
| Gain Recognized in Interest Expense | 0 | 0 | 1.6 | 1.6 | ||||||||||||||||||||||
| Fiscal 2017 | ||||||||||||||||
| Interest | ||||||||||||||||
| Commodity | Currency | Rate | ||||||||||||||
| Forwards | Forwards | Swaps | Total | |||||||||||||
| Gain Recognized in Other Comprehensive Loss | $ | 21.7 | $ | 46.3 | $ | 0.5 | $ | 68.5 | ||||||||
| Amounts Reclassified from Other Comprehensive Income (Loss): | ||||||||||||||||
| Gain Recognized in Net Sales | — | 0.9 | — | 0.9 | ||||||||||||
| Gain (Loss) Recognized in Cost of Sales | 12.2 | (22.1 | ) | — | (9.9 | ) | ||||||||||
| Loss Recognized in Interest Expense | — | — | (2.8 | ) | (2.8 | ) | ||||||||||
| Fiscal 2016 | ||||||||||||||||
| Interest | ||||||||||||||||
| Commodity | Currency | Rate | ||||||||||||||
| Forwards | Forwards | Swaps | Total | |||||||||||||
| Gain (Loss) Recognized in Other Comprehensive Loss | $ | 6.4 | $ | (46.1 | ) | $ | (0.3 | ) | $ | (40.0 | ) | |||||
| Amounts Reclassified from Other Comprehensive Income (Loss): | ||||||||||||||||
| Gain Recognized in Net Sales | — | 0.2 | — | 0.2 | ||||||||||||
| Loss Recognized in Cost of Sales | (13.6 | ) | (32.1 | ) | — | (45.7 | ) | |||||||||
| Loss Recognized in Interest Expense | — | — | (4.8 | ) | (4.8 | ) | ||||||||||
The ineffective portion of hedging instruments recognized was immaterial for all periods presented.
Derivatives Not Designated as Cash Flow Hedging Instruments
The effect of derivative instruments not designated as cash flow hedges on the Consolidated Statements of Income for fiscal years 2018, 20172020, 2019 and 20162018 were (in millions):
| Fiscal 2020 | ||||||||||||||||||||||||||
| Commodity Forwards | Currency Forwards | Total | ||||||||||||||||||||||||
| Gain Recognized in Cost of Sales | $ | 0.2 | $ | 0 | $ | 0.2 | ||||||||||||||||||||
| Loss Recognized in Operating Expenses | 0 | (8.6) | (8.6) | |||||||||||||||||||||||
| Fiscal 2019 | ||||||||||||||||||||||||||
| Commodity Forwards | Currency Forwards | Total | ||||||||||||||||||||||||
| Gain Recognized in Cost of Sales | $ | 0.2 | $ | 0 | $ | 0.2 | ||||||||||||||||||||
| Loss Recognized in Operating Expenses | 0 | (1.1) | (1.1) | |||||||||||||||||||||||
90
| Fiscal 2018 | Fiscal 2018 | |||||||||||||||||||||||||||||||||||||||
| Commodity Forwards | Currency Forwards | Total | Commodity Forwards | Currency Forwards | Total | |||||||||||||||||||||||||||||||||||
| Loss Recognized in Cost of Sales | Loss Recognized in Cost of Sales | $ | (0.5 | ) | $ | — | $ | (0.5 | ) | Loss Recognized in Cost of Sales | $ | (0.5) | $ | 0 | $ | (0.5) | ||||||||||||||||||||||||
| Loss Recognized in Operating Expenses | Loss Recognized in Operating Expenses | — | (6.8 | ) | (6.8 | ) | Loss Recognized in Operating Expenses | 0 | (6.8) | (6.8) | ||||||||||||||||||||||||||||||
| Fiscal 2017 | ||||||||||||||
| Commodity Forwards | Currency Forwards | Total | ||||||||||||
| Loss Recognized in Cost of Sales | $ | (1.1 | ) | $ | — | $ | (1.1 | ) | ||||||
| Gain Recognized in Operating Expenses | — | 14.3 | 14.3 | |||||||||||
| Fiscal 2016 | ||||||||||||||
| Commodity Forwards | Currency Forwards | Total | ||||||||||||
| Gain Recognized in Cost of Sales | $ | 2.6 | $ | — | $ | 2.6 | ||||||||
| Loss Recognized in Operating Expenses | — | (5.2 | ) | (5.2 | ) | |||||||||
The net AOCI balance related to hedging activities of a $(5.4)$23.5 million gain as of December 29, 2018January 2, 2021 includes $(3.2)$20.2 million of net deferred lossesgains expected to be reclassified to the Consolidated Statement of Comprehensive Income in the next twelve months. There were no gains or losses reclassified from AOCI to earnings based on the probability that the forecasted transaction would not occur.
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 Consolidated Balance Sheets on a gross basis for the periods ended December 29, 2018January 2, 2021 and December 30, 2017.28, 2019.
The following table presents the derivative assets and derivative liabilities presented on a net basis under enforceable master netting agreements (in millions):
| January 2, 2021 | ||||||||||||||||||||
| Gross Amounts as Presented in the 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 | $ | 16.6 | $ | (1.0) | $ | 15.6 | ||||||||||||||
| Derivative Commodity Contracts | 11.4 | 0 | 11.4 | |||||||||||||||||
| Other Noncurrent Assets: | ||||||||||||||||||||
| Derivative Currency Contracts | 1.6 | 0 | 1.6 | |||||||||||||||||
| Derivative Commodity Contracts | 0.1 | 0 | 0.1 | |||||||||||||||||
| Other Accrued Expenses: | ||||||||||||||||||||
| Derivative Currency Contracts | 1.0 | (1.0) | 0 | |||||||||||||||||
| Other Noncurrent Liabilities: | ||||||||||||||||||||
| Derivative Currency Contracts | 0.1 | 0 | 0.1 | |||||||||||||||||
| December 28, 2019 | ||||||||||||||||||||
| Gross Amounts as Presented in the 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 | 0.1 | |||||||||||||||||
| Other Accrued Expenses: | ||||||||||||||||||||
| Derivative Currency Contracts | 3.1 | (2.5) | 0.6 | |||||||||||||||||
| Derivative Commodity Contracts | 0.3 | (0.3) | 0 | |||||||||||||||||
| Other Noncurrent Liabilities: | ||||||||||||||||||||
| Derivative Currency Contracts | 0.2 | (0.1) | 0.1 | |||||||||||||||||
91
| December 29, 2018 | ||||||||||||
| Gross Amounts as Presented in the Consolidated Balance Sheet | Derivative Contract Amounts Subject to Right of Offset | Derivative Contracts as Presented on a Net Basis | ||||||||||
| Prepaid Expenses and Other Current Assets: | ||||||||||||
| Derivative Currency Contracts | $ | 6.6 | $ | (3.6 | ) | $ | 3.0 | |||||
| Derivative Commodity Contracts | 0.1 | (0.1 | ) | — | ||||||||
| Other Noncurrent Assets: | ||||||||||||
| Derivative Currency Contracts | 7.2 | (0.6 | ) | 6.6 | ||||||||
| Current Hedging Obligations: | ||||||||||||
| Derivative Currency Contracts | 5.0 | (3.6 | ) | 1.4 | ||||||||
| Derivative Commodity Contracts | 6.3 | (0.1 | ) | 6.2 | ||||||||
| Noncurrent Hedging Obligations: | ||||||||||||
| Derivative Currency Contracts | 1.1 | (0.6 | ) | 0.5 | ||||||||
| Derivative Commodity Contracts | 0.1 | — | 0.1 | |||||||||
| December 30, 2017 | ||||||||||||
| Gross Amounts as Presented in the 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 | $ | 15.6 | $ | (5.9 | ) | $ | 9.7 | |||||
| Derivative Commodity Contracts | 11.0 | — | 11.0 | |||||||||
| Other Noncurrent Assets: | ||||||||||||
| Derivative Currency Contracts | 2.5 | (0.7 | ) | 1.8 | ||||||||
| Derivative Commodity Contracts | 0.7 | — | 0.7 | |||||||||
| Current Hedging Obligations: | ||||||||||||
| Derivative Currency Contracts | 8.1 | (5.9 | ) | 2.2 | ||||||||
| Noncurrent Hedging Obligations: | ||||||||||||
| Derivative Currency Contracts | 0.9 | (0.7 | ) | 0.2 | ||||||||
(14) Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities | |||||||||||||||||||
| Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or | |||||||||||||||||||
| Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or | ||||||||||||||||||||
| Inputs other than quoted prices that are observable for the asset or liability | ||||||||||||||||||||
| Level 3 | Unobservable inputs for the asset or liability | |||||||||||||||||||
The Company uses the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of January 2, 2021 and December 29, 2018 and December 30, 2017,28, 2019, respectively (in millions):
| January 2, 2021 | December 28, 2019 | ||||||||||||||||
| Classification | |||||||||||||||||
| Assets: | |||||||||||||||||
| Prepaid Expenses and Other Current Assets: | |||||||||||||||||
| Derivative Currency Contracts | $ | 16.6 | $ | 8.9 | Level 2 | ||||||||||||
| Derivative Commodity Contracts | 11.4 | 2.6 | Level 2 | ||||||||||||||
| Other Noncurrent Assets: | |||||||||||||||||
| Assets Held in Rabbi Trust | 6.5 | 6.1 | Level 1 | ||||||||||||||
| Derivative Currency Contracts | 1.6 | 10.3 | Level 2 | ||||||||||||||
| Derivative Commodity Contracts | 0.1 | 0.1 | Level 2 | ||||||||||||||
| Liabilities: | |||||||||||||||||
| Other Accrued Expenses: | |||||||||||||||||
| Interest Rate Swap | 0.7 | 0 | Level 2 | ||||||||||||||
| Derivative Currency Contracts | 1.0 | 3.1 | Level 2 | ||||||||||||||
| Derivative Commodity Contracts | 0 | 0.3 | Level 2 | ||||||||||||||
| Other Noncurrent Liabilities: | |||||||||||||||||
| Interest Rate Swap | 1.4 | 1.0 | Level 2 | ||||||||||||||
| Derivative Currency Contracts | 0.1 | 0.2 | Level 2 | ||||||||||||||
| December 29, 2018 | December 30, 2017 | ||||||||
| Classification | |||||||||
| Assets: | |||||||||
| Prepaid Expenses and Other Current Assets: | |||||||||
| Derivative Currency Contracts | $ | 6.6 | $ | 15.6 | Level 2 | ||||
| Derivative Commodity Contracts | 0.1 | 11.0 | Level 2 | ||||||
| Other Noncurrent Assets: | |||||||||
| Assets Held in Rabbi Trust | 5.6 | 5.7 | Level 1 | ||||||
| Derivative Currency Contracts | 7.2 | 2.5 | Level 2 | ||||||
| Derivative Commodity Contracts | — | 0.7 | Level 2 | ||||||
| Liabilities: | |||||||||
| Current Hedging Obligations: | |||||||||
| Derivative Currency Contracts | 5.0 | 8.1 | Level 2 | ||||||
| Derivative Commodity Contracts | 6.3 | — | Level 2 | ||||||
| Noncurrent Hedging Obligations: | |||||||||
| Derivative Currency Contracts | 1.1 | 0.9 | Level 2 | ||||||
| Derivative Commodity Contracts | 0.1 | — | 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 using the LIBOR forward yield curve for an instrument 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.
The Company did not change its valuation techniques during fiscal 2018.2020.
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(15) Restructuring Activities
The Company incurred restructuring and restructuring-related costs on projects beginning in 2014.during fiscal 2020, 2019 and 2018. Restructuring costs include employeeassociate termination and plant relocation costs. Restructuring-related costs include costs directly associated with actions resulting from the Company's Simplificationsimplification 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 employeeassociate termination expenses are generally required to be accrued over the employeesassociate's remaining service period while restructuring costs for plant relocation costs and restructuring-related costs are generally required to be expensed as incurred.
The following is a reconciliation of provisions and payments for the restructuring projects for fiscal 20182020 and fiscal 20172019 (in millions):
| January 2, 2021 | December 28, 2019 | |||||||||||||
| Beginning Balance | $ | 0.9 | $ | 0.2 | ||||||||||
| Provision | 26.6 | 21.6 | ||||||||||||
| Less: Payments | 25.5 | 20.9 | ||||||||||||
| Ending Balance | $ | 2.0 | $ | 0.9 | ||||||||||
| December 29, 2018 | December 30, 2017 | |||||||
| Beginning Balance | $ | 1.2 | $ | 0.6 | ||||
| Provision | 7.7 | 14.1 | ||||||
| Less: Payments | 8.7 | 13.5 | ||||||
| Ending Balance | $ | 0.2 | $ | 1.2 | ||||
The following is a reconciliation of expenses by type for the restructuring projects in fiscal years 2018, 20172020, 2019 and 20162018 (in millions):
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| Restructuring Costs: | Cost of Sales | Operating Expenses | Total | Cost of Sales | Operating Expenses | Total | Cost of Sales | Operating Expenses | Total | ||||||||||||||||||||||||||
| Associate Termination Expenses | $ | 6.2 | $ | 5.6 | $ | 11.8 | $ | 5.7 | $ | 6.5 | $ | 12.2 | $ | 0 | $ | 0.3 | $ | 0.3 | |||||||||||||||||
| Facility Related Costs | 11.7 | 3.1 | 14.8 | 5.0 | 4.4 | 9.4 | 2.3 | 3.4 | 5.7 | ||||||||||||||||||||||||||
| Other Expenses | 0.3 | (0.3) | 0 | 0 | 0 | 0 | 0.8 | 0.8 | 1.6 | ||||||||||||||||||||||||||
| Total Restructuring Costs | $ | 18.2 | $ | 8.4 | $ | 26.6 | $ | 10.7 | $ | 10.9 | $ | 21.6 | $ | 3.1 | $ | 4.5 | $ | 7.6 | |||||||||||||||||
| Restructuring-Related Costs: | |||||||||||||||||||||||||||||||||||
| Other Employment Benefit Expenses | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0.1 | $ | 0 | $ | 0.1 | |||||||||||||||||
| Total Restructuring-Related Costs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0.1 | $ | 0 | $ | 0.1 | |||||||||||||||||
| Total Restructuring and Restructuring-Related Costs | $ | 18.2 | $ | 8.4 | $ | 26.6 | $ | 10.7 | $ | 10.9 | $ | 21.6 | $ | 3.2 | $ | 4.5 | $ | 7.7 | |||||||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||||||||||||||||
| Restructuring Costs: | Cost of Sales | Operating Expenses | Total | Cost of Sales | Operating Expenses | Total | Cost of Sales | Operating Expenses | Total | ||||||||||||||||||||
| Employee Termination Expenses | $ | — | $ | 0.3 | $ | 0.3 | $ | 2.6 | $ | 1.7 | $ | 4.3 | $ | 0.5 | $ | 0.3 | $ | 0.8 | |||||||||||
| Facility Related Costs | 2.3 | 3.4 | 5.7 | 4.3 | 0.9 | 5.2 | 2.9 | 0.3 | 3.2 | ||||||||||||||||||||
| Other Expenses | 0.8 | 0.8 | 1.6 | 3.9 | — | 3.9 | 0.8 | 0.9 | 1.7 | ||||||||||||||||||||
| Total Restructuring Costs | $ | 3.1 | $ | 4.5 | $ | 7.6 | $ | 10.8 | $ | 2.6 | $ | 13.4 | $ | 4.2 | $ | 1.5 | $ | 5.7 | |||||||||||
| Restructuring-Related Costs: | |||||||||||||||||||||||||||||
| Other Employment Benefit Expenses | $ | 0.1 | $ | — | $ | 0.1 | $ | 0.7 | $ | — | $ | 0.7 | $ | 0.5 | $ | 0.6 | $ | 1.1 | |||||||||||
| Total Restructuring-Related Costs | $ | 0.1 | $ | — | $ | 0.1 | $ | 0.7 | $ | — | $ | 0.7 | $ | 0.5 | $ | 0.6 | $ | 1.1 | |||||||||||
| Total Restructuring and Restructuring-Related Costs | $ | 3.2 | $ | 4.5 | $ | 7.7 | $ | 11.5 | $ | 2.6 | $ | 14.1 | $ | 4.7 | $ | 2.1 | $ | 6.8 | |||||||||||
The following table shows the allocation of Restructuring Expenses by segment for fiscal years 2018, 20172020, 2019 and 20162018 (in millions):
| Total | Commercial Systems | Industrial Systems | Climate Solutions | Power Transmission Solutions | |||||||||||||||||||||||||
| Restructuring Expenses - 2020 | $ | 26.6 | $ | 6.3 | $ | 8.7 | $ | 3.7 | $ | 7.9 | |||||||||||||||||||
| Restructuring Expenses - 2019 | $ | 21.6 | $ | 9.5 | $ | 7.2 | $ | 2.2 | $ | 2.7 | |||||||||||||||||||
| Restructuring Expenses - 2018 | $ | 7.7 | $ | 2.9 | $ | 2.7 | $ | 1.8 | $ | 0.3 | |||||||||||||||||||
| Total | Commercial and Industrial Systems | Climate Solutions | Power Transmission Solutions | ||||||||||||
| Restructuring Expenses - 2018 | $ | 7.7 | $ | 5.6 | $ | 1.8 | $ | 0.3 | |||||||
| Restructuring Expenses - 2017 | $ | 14.1 | $ | 10.9 | $ | 2.5 | $ | 0.7 | |||||||
| Restructuring Expenses - 2016 | $ | 6.8 | $ | 2.5 | $ | 2.6 | $ | 1.7 | |||||||
The Company's current restructuring activities are expected to continue into fiscal 2019.2021. The Company expects to record aggregate future charges of approximately $2.2$1.6 million related to announced projects as of year-end fiscal 2018,2020, which includes $0.8$0.9 million of employeeassociate termination expenses and $1.4$0.7 million of facility related and other costs.
(16) Subsequent Events
On February 16, 2021, the Company signedentered into definitive agreements with Rexnord, Land Newco, Inc., a wholly owned indirect subsidiary of Rexnord (“Land”), and Phoenix 2021, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), with respect to a Reverse Morris Trust transaction pursuant to which, immediately after Rexnord undergoes an agreementinternal reorganization and spin-off of its PMC Business to sell its engineered drivesLand, Merger Sub will merge with and controls systems business includedinto Land and all shares of Land common stock (other than those held by Rexnord, Land, the Company, Merger Sub or their respective subsidiaries) will be converted into the right to receive shares of the common stock, $0.01 par value per share, of the Company, as calculated and subject to adjustment as set forth in the Company's Commercialmerger agreement for the Rexnord Transaction.When the merger is completed, Land (which at that time will hold the PMC business) will be a wholly owned subsidiary of the Company.
Closing of the Rexnord Transaction is subject to various closing conditions, including the receipt of the approval of the shareholders of Rexnord and Industrial Systems segment. This transaction closed in January 2019. Also in January 2019, the Company, signed an agreement to sell its capacitors business which had been included in the Company's Climate Solutions segment. This transaction is expected to close in the second quarterreceipt of 2019. The assetsregulatory approvals and liabilities related to these businesses have been reclassified to Assets of Businesses Held for Sale and Liabilities of Businesses Held for Sale on the Company's Consolidated Balance Sheets as of December 29, 2018. These businesses are being divested as they are considered non-core to the Company's operations.other customary closing conditions.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A - CONTROLS AND PROCEDURES
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(d) and 15(e) under the Exchange Act) as of the end of the year ended December 29, 2018.January 2, 2021. Based upon their evaluation of these disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of December 29, 2018January 2, 2021 to ensure that (a) information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (b) information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting.
The report of management required under this Item 9A is contained in Item 8 of Part II of this Annual Report on Form 10-K under the heading “Management's Annual Report on Internal Control over Financial Reporting.”
Report of Independent Registered Public Accounting Firm.
The attestation report required under this Item 9A is contained in Item 8 of Part II of this Annual Report on Form 10-K under the heading “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Controls.
There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended December 29, 2018January 2, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B - OTHER INFORMATION
None.
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PART III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information in the sections titled “Proposal 1: Election of Directors,” “Board of Directors”Directors,” "Other Matters-Delinquent Section 16(a) Reports" and “Stock Ownership” in the 20192021 Proxy Statement is incorporated by reference herein. Information with respect to our executive officers appears in Part I of this Annual Report on Form 10-K.
We have adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all our directors, officers and employees.associates. The Code is available on our website, along with our current Corporate Governance Guidelines, at www.regalbeloit.com. The Code and our Corporate Governance Guidelines are also available in print to any shareholder who requests a copy in writing from the Secretary of Regal Beloit Corporation. We intend to disclose through our website any amendments to, or waivers from, the provisions of these codes.
ITEM 11 - EXECUTIVE COMPENSATION
The information in the sections titled “Compensation Discussion and Analysis,” “Executive Compensation,” “Report of the Compensation and Human Resources Committee,” “Director Compensation,” and "Compensation Committee Interlocks and Insider Participation" in the 20192021 Proxy Statement is incorporated by reference herein.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the sections titled “Stock Ownership” in the 20192021 Proxy Statement is incorporated by reference herein.
Equity Compensation Plan Information
The following table provides information about our equity compensation plans as of December 29, 2018.January 2, 2021.
| Number of Securities to be Issued upon the Exercise of Outstanding Options, Warrants and Rights (1) | Weighted-average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in the column 1) | ||||||||||||||||||
| Equity Compensation Plans Approved by Security Holders | 577,509 | $ | 79.35 | 3,428,715 | ||||||||||||||||
| Equity Compensation Plans Not Approved by Security Holders | — | — | — | |||||||||||||||||
| Total | 577,509 | 3,428,715 | ||||||||||||||||||
| (1) Represents options to purchase our Common Stock and stock-settled appreciation rights granted under our 2013 Equity Incentive Plan and 2018 Equity Incentive Plan. | ||||||||||||||||||||
| Number of Securities to be Issued upon the Exercise of Outstanding Options, Warrants and Rights (1) | Weighted-average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in the column 1) | |||||||||
| Equity Compensation Plans Approved by Security Holders | 1,539,368 | $ | 69.31 | 2,561,613 | |||||||
| Equity Compensation Plans Not Approved by Security Holders | — | — | — | ||||||||
| Total | 1,539,368 | 2,561,613 | |||||||||
| (1) Represents options to purchase our Common Stock and stock-settled appreciation rights granted under our 2013 Equity Incentive Plan and 2018 Equity Incentive Plan. | |||||||||||
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information inthe section titled “Board of Directors” in the 20192021 Proxy Statement is incorporated by reference herein.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information in the section titled “Proposal 3: Ratification of Deloitte & Touche LLP as our Independent Registered Public Accounting Firm for 2019”2021” in the 20192021 Proxy Statement is incorporated by reference herein.
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PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE
(a) 1. Financial statements - The financial statements listed in the accompanying index to financial statements and financial statement schedule are filed as part of this Annual Report on Form 10‑K.
2. Financial statement schedule - The financial statement schedule listed in the accompanying index to financial statements and financial statement schedule are filed as part of this Annual Report on Form 10‑K.
3. Exhibits required by Item 601 of Regulation S-K:
Exhibit Index
| Exhibit Number | Exhibit Description | |||||||||
| 2.1 | ||||||||||
| Amended and Restated Articles of Incorporation and Amended and Restated Bylaws of Regal Beloit Corporation [Incorporated by reference to Exhibits 3.1 and 3.2 hereto] | ||||||||||
| 10.2* | ||||||||||
| 10.3* | ||||||||||
| 10.4* | ||||||||||
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97
| 10.37 | ||||||||
| 21.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 101.INS | XBRL Instance Document | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |||||||
| 104 | Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101). |
________________________
* A management contract or compensatory plan or arrangement.
** Furnished herewith.
(b) Exhibits- see (a)3., above.
(c) See (a)(2)2., above.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 26th2nd day of February 2019.
March 2021.
| REGAL BELOIT CORPORATION | ||||||||
| By: | /s/ ROBERT J. REHARD | |||||||
| Robert J. Rehard | ||||||||
| Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||||
| By: | ||||||||
| /s/ JASON R. LONGLEY | ||||||||
| Jason R. Longley | ||||||||
Vice President and Corporate Controller (Principal Accounting Officer) | ||||||||
99
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| /s/ | ||||||||
| (Principal Executive Officer) | ||||||||
| /s/ JAN A. BERTSCH | Director | March 2, 2021 | ||||||
| Jan A. Bertsch | ||||||||
| /s/ STEPHEN M. BURT | Director | |||||||
| Stephen M. Burt | ||||||||
| /s/ ANESA T. CHAIBI | Director | March 2, 2021 | ||||||
| Anesa T. Chaibi | ||||||||
| /s/ CHRISTOPHER L. DOERR | Director | |||||||
| Christopher L. Doerr | ||||||||
| /s/ DEAN A. FOATE | Director | |||||||
| Dean A. Foate | ||||||||
| /s/ | Director | |||||||
| /s/ RAKESH SACHDEV | Director, Chairman | |||||||
| Rakesh Sachdev | ||||||||
| /s/ CURTIS W. STOELTING | Director | |||||||
| Curtis W. Stoelting | ||||||||
100
REGAL BELOIT CORPORATION
Index to Financial Statements
And Financial Statement Schedule
| Page(s) In | |||||||||||
| Form 10-K | |||||||||||
| (1) | Financial Statements: | ||||||||||
| Report of Independent Registered Public Accounting Firm | |||||||||||
| Consolidated Statements of Income for the fiscal years ended | |||||||||||
| January 2, 2021, December 28, 2019 and December 29, 2018 | |||||||||||
| Consolidated Statements of Comprehensive Income for the fiscal years ended January 2, 2021, December 28, 2019 and December 29, 2018 | |||||||||||
| Consolidated Balance Sheets as of | |||||||||||
| Consolidated Statements of Equity for the fiscal years ended January 2, 2021, December 28, 2019 and December 29, 2018 | |||||||||||
| Consolidated Statements of Cash Flows for the fiscal years ended January 2, 2021, December 28, 2019 and December 29, 2018 | |||||||||||
| Notes to the Consolidated Financial Statements | |||||||||||
| (2) | Financial Statement Schedule: | ||||||||||
For the fiscal years ended January 2, 2021, December 28, 2019 and December 29, 2018 Schedule II -Valuation and Qualifying Accounts | |||||||||||
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
101
SCHEDULE II
REGAL BELOIT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
| Balance Beginning of Year | Charged to Expenses | Deductions (a) | Adjustments (b) | Balance End of Year | ||||||||||||||||||||||||||||
| (Dollars in Millions) | ||||||||||||||||||||||||||||||||
| Allowance for Receivables: | ||||||||||||||||||||||||||||||||
| Fiscal 2020 | $ | 9.7 | $ | 5.8 | $ | (2.0) | $ | 4.8 | $ | 18.3 | ||||||||||||||||||||||
| Fiscal 2019 | 13.3 | 4.0 | (7.5) | (0.1) | 9.7 | |||||||||||||||||||||||||||
| Fiscal 2018 | 11.3 | 6.9 | (2.1) | (2.8) | 13.3 | |||||||||||||||||||||||||||
| Balance Beginning of Year | Charged to Expenses | Deductions (a) | Adjustments (b) | Balance End of Year | |||||||||||||
| (Dollars in Millions) | |||||||||||||||||
| Allowance for Receivables: | |||||||||||||||||
| Fiscal 2018 | $ | 11.3 | 6.9 | (2.1 | ) | (2.8 | ) | $ | 13.3 | ||||||||
| Fiscal 2017 | 11.5 | 1.3 | (2.8 | ) | 1.3 | 11.3 | |||||||||||
| Fiscal 2016 | 11.3 | 1.6 | (1.2 | ) | (0.2 | ) | 11.5 | ||||||||||
(a) Deductions consist of write offs charged against the allowance for doubtful accounts.
(b) Adjustments consist of balances moved to held for sale, translation and translation.adoption of ASC 2016-13 Financial Instruments for Credit Losses.
102
ITEM 16 - FORM 10-K SUMMARY
Not Applicable
103