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EX-12 - EXHIBIT 12 - REGAL BELOIT CORPrbc-20151003xex12.htm
EX-32.1 - EXHIBIT 32.1 - REGAL BELOIT CORPrbc-20151003xex321.htm
EX-31.1 - EXHIBIT 31.1 - REGAL BELOIT CORPrbc-20151003xex311.htm
EX-31.2 - EXHIBIT 31.2 - REGAL BELOIT CORPrbc-20151003xex312.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended October 3, 2015
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-07283
 
 
REGAL BELOIT CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Wisconsin
 
39-0875718
(State of other jurisdiction of
incorporation)
 
(IRS Employer
Identification No.)
200 State Street, Beloit, Wisconsin 53511
(Address of principal executive office)
(608) 364-8800
Registrant’s telephone number, including area code
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a “smaller reporting company.” See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer
 
ý
 
Accelerated Filer
 
¨
Non-accelerated filer
o  (Do not check if a smaller reporting company)
 
Smaller Reporting Company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES  ¨    NO  ý
As of November 10, 2015 there were 44,661,403 shares of the registrant’s common stock, $.01 par value per share, outstanding.





REGAL BELOIT CORPORATION
INDEX
 
 
Page
 
Item 1 —
 
 
 
 
 
 
 
Item 2 —
Item 3 —
Item 4 —
 
 
 
 
Item 1 —
Item 1A —
Item 2 —
Item 6 —
 
 
 


2



CAUTIONARY STATEMENT

Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based on management’s expectations, beliefs, current assumptions, and projections.  When used in this Quarterly Report on Form 10-Q, words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project” or “plan” or the negative thereof or similar words are intended to identify forward-looking statements.  These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Those factors include, but are not limited to:

uncertainties regarding our ability to execute our restructuring plans within expected costs and timing;
increases in our overall debt levels as a result of the acquisition of the Power Transmission Solutions business of Emerson Electric Co. ("PTS"), or otherwise and our ability to repay principal and interest on our outstanding debt;
actions taken by our competitors and our ability to effectively compete in the increasingly competitive global electric motor, drives and controls, power generation and mechanical motion control industries;
our ability to develop new products based on technological innovation and marketplace acceptance of new and existing products;
fluctuations in commodity prices and raw material costs;
our dependence on significant customers;
prolonged declines in oil and gas up stream capital spending;
issues and costs arising from the integration of acquired companies and businesses including PTS, and the timing and impact of purchase accounting adjustments;
challenges in our Venezuelan operations, including potential currency devaluations, non-payment of receivables, governmental restrictions such as labor, price and margin controls, as well as other difficult operating conditions;
unanticipated costs or expenses we may incur related to product warranty issues;
our dependence on key suppliers and the potential effects of supply disruptions;
infringement of our intellectual property by third parties, challenges to our intellectual property and claims of infringement by us of third party technologies;
product liability and other litigation, or the failure of our products to perform as anticipated, particularly in high volume applications;
economic changes in global markets where we do business, such as reduced demand for the products we sell, currency exchange rates, inflation rates, interest rates, recession, foreign government policies and other external factors that we cannot control;
unanticipated liabilities of acquired businesses, including PTS;
effects on earnings of any significant impairment of goodwill or intangible assets;
cyclical downturns affecting the global market for capital goods;
difficulties associated with managing foreign operations; and
other risks and uncertainties including but not limited to those described in “Risk Factors” in this Quarterly Report on Form 10-Q and from time to time in our reports filed with U.S. Securities and Exchange Commission.


Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report, and we undertake no obligation to update these statements to reflect subsequent events or circumstances.  Additional information regarding these and other risks and factors is included in Part I - Item 1A - Risk Factors in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 4, 2015.


3



PART I—FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in Millions, Except Per Share Data)
 
 
Three Months Ended
 
Nine Months Ended
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Net Sales
$
882.3

 
$
829.8

 
$
2,736.2

 
$
2,481.4

Cost of Sales
641.2

 
626.0

 
2,022.8

 
1,872.2

Gross Profit
241.1

 
203.8

 
713.4

 
609.2

Operating Expenses
141.0

 
129.1

 
446.5

 
376.1

Goodwill Impairment

 

 

 
1.0

           Total Operating Expenses
141.0

 
129.1

 
446.5

 
377.1

Income From Operations
100.1

 
74.7

 
266.9

 
232.1

Interest Expense
15.1

 
9.8

 
45.1

 
30.5

Interest Income
1.0

 
2.0

 
3.1

 
5.4

Income Before Taxes
86.0

 
66.9

 
224.9

 
207.0

Provision For Income Taxes
21.7

 
18.1

 
57.8

 
55.1

Net Income
64.3

 
48.8

 
167.1

 
151.9

Less: Net Income Attributable to Noncontrolling Interests
0.9

 
1.3

 
4.5

 
4.4

Net Income Attributable to Regal Beloit Corporation
$
63.4

 
$
47.5

 
$
162.6

 
$
147.5

Earnings Per Share Attributable to Regal Beloit Corporation:
 
 
 
 
 
 
 
Basic
$
1.42

 
$
1.06

 
$
3.63

 
$
3.27

Assuming Dilution
$
1.41

 
$
1.05

 
$
3.61

 
$
3.25

Cash Dividends Declared Per Share
$
0.23

 
$
0.22

 
$
0.68

 
$
0.64

Weighted Average Number of Shares Outstanding:
 
 
 
 
 
 
 
Basic
44.8

 
44.9

 
44.8

 
45.1

Assuming Dilution
45.1

 
45.2

 
45.1

 
45.4


See accompanying Notes to Condensed Consolidated Financial Statements


4



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Millions)
 
 
Three Months Ended
 
Nine Months Ended
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Net Income
$
64.3

 
$
48.8

 
$
167.1

 
$
151.9

Other comprehensive income (loss) net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(36.8
)
 
(17.2
)
 
(67.3
)
 
(19.0
)
Reclassification of foreign currency translation adjustments included in net income, net of immaterial tax effects for the three and nine months ended October 3, 2015 and September 27, 2014

 
(1.0
)
 

 
(1.0
)
Hedging Activities:
 
 
 
 
 
 
 
(Decrease) in fair value of hedging activities, net of tax effects of $(14.5) million and $(2.2) million for the three months ended October 3, 2015 and September 27, 2014 and $(21.9) million and $(3.5) million for the nine months ended October 3, 2015 and September 27, 2014, respectively
(23.6
)
 
(3.7
)
 
(35.7
)
 
(5.7
)
Reclassification of losses included in net income, net of tax effects of $4.1 million and $0.4 million for the three months ended October 3, 2015 and September 27, 2014, respectively and $10.6 million and $3.6 million for the nine months ended October 3, 2015 and September 27, 2014, respectively
6.9

 
0.8

 
17.4

 
5.9

Defined benefit pension plans:
 
 
 
 
 
 
 
Increase in prior service cost and unrecognized loss, net of immaterial tax effects for the three and nine months ended October 3, 2015 and September 27, 2014

 

 

 
(0.5
)
Reclassification adjustments for pension benefits included in net income, net of tax effects of $0.3 million and $0.3 million for the three months ended October 3, 2015 and September 27, 2014 and $1.8 million and $0.7 million for the nine months ended October 3, 2015 and September 27, 2014, respectively
0.7

 
0.5

 
1.2

 
1.2

Other comprehensive income (loss)
(52.8
)
 
(20.6
)
 
(84.4
)
 
(19.1
)
Comprehensive income
11.5

 
28.2

 
82.7

 
132.8

Less: Comprehensive income (loss) attributable to noncontrolling interests
(0.1
)
 
0.6

 
2.3

 
2.8

Comprehensive income attributable to Regal Beloit Corporation
$
11.6

 
$
27.6

 
$
80.4

 
$
130.0

See accompanying Notes to Condensed Consolidated Financial Statements


5



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions, Except Per Share Data)
 
 
October 3,
2015
 
January 3,
2015
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
254.6

 
$
334.1

Trade Receivables, less allowances of $11.8 million in 2015 and $11.6 million in fiscal 2014
551.0

 
447.5

Inventories
745.8

 
691.7

Prepaid Expenses and Other Current Assets
135.6

 
111.7

Deferred Income Tax Benefits
98.3

 
67.0

Total Current Assets
1,785.3

 
1,652.0

Net Property, Plant and Equipment
694.8

 
531.5

Goodwill
1,564.0

 
1,004.0

Intangible Assets, net of Amortization
804.9

 
202.3

Other Noncurrent Assets
29.4

 
17.8

Total Assets
$
4,878.4

 
$
3,407.6

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts Payable
$
353.3

 
$
312.2

Dividends Payable
10.3

 
9.8

Hedging Obligations
47.6

 
29.7

Accrued Compensation and Employee Benefits
88.4

 
75.7

Other Accrued Expenses
131.8

 
125.5

Current Maturities of Long-Term Debt
49.0

 
8.4

Total Current Liabilities
680.4

 
561.3

Long-Term Debt
1,764.7

 
625.4

Deferred Income Taxes
223.6

 
116.0

Hedging Obligations
31.5

 
22.5

Pension and Other Postretirement Benefits
109.2

 
65.0

Other Noncurrent Liabilities
38.5

 
38.1

Commitments and Contingencies (see Note 12)

 

Equity:
 
 
 
Regal Beloit Corporation Shareholders' Equity:
 
 
 
Common Stock, $.01 par value, 100.0 million shares authorized, 44.8 million and 44.7 million shares issued and outstanding in 2015 and fiscal 2014, respectively
0.4

 
0.4

Additional Paid-In Capital
897.1

 
896.1

Retained Earnings
1,320.7

 
1,188.9

Accumulated Other Comprehensive Loss
(233.2
)
 
(151.0
)
Total Regal Beloit Corporation Shareholders' Equity
1,985.0

 
1,934.4

Noncontrolling Interests
45.5

 
44.9

Total Equity
2,030.5

 
1,979.3

Total Liabilities and Equity
$
4,878.4

 
$
3,407.6

See accompanying Notes to Condensed Consolidated Financial Statements.

6



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(Dollars in Millions, Except Per Share Data)
 
 
Common
Stock
$.01 Par
Value
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interests
 
Total
Equity
Balance as of December 28, 2013
$
0.5

 
$
916.1

 
$
1,199.4

 
$
(59.8
)
 
$
46.2

 
$
2,102.4

Net Income

 

 
147.5

 

 
4.4

 
151.9

Other Comprehensive Loss

 

 

 
(17.5
)
 
(1.6
)
 
(19.1
)
Dividends Declared ($0.64 per share)

 

 
(28.8
)
 

 

 
(28.8
)
Stock Options Exercised, including income tax benefit and share cancellations

 
0.2

 

 

 

 
0.2

Stock Repurchase
(0.1
)
 
(34.9
)
 

 
 
 
 
 
(35.0
)
Sale of Joint Venture

 

 

 

 
(3.1
)
 
(3.1
)
Dividends Declared to Non-controlling Interests

 

 

 

 
(0.3
)
 
(0.3
)
Share-based Compensation

 
8.5

 

 

 

 
8.5

Balance as of September 27, 2014
$
0.4

 
$
889.9

 
$
1,318.1

 
$
(77.3
)
 
$
45.6

 
$
2,176.7

 
 
Common
Stock
$.01 Par
Value
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interests
 
Total
Equity
Balance as of January 3, 2015
$
0.4

 
$
896.1

 
$
1,188.9

 
$
(151.0
)
 
$
44.9

 
$
1,979.3

Net Income

 

 
162.6

 

 
4.5

 
167.1

Other Comprehensive Loss

 

 

 
(82.2
)
 
(2.2
)
 
(84.4
)
Dividends Declared ($0.68 per share)

 

 
(30.4
)
 

 

 
(30.4
)
Stock Options Exercised, including income tax benefit and share cancellations

 
2.0

 

 

 

 
2.0

Stock Repurchase

 
(11.6
)
 
(0.4
)
 

 

 
(12.0
)
Dividends Declared to Non-controlling Interests

 

 

 

 
(0.3
)
 
(0.3
)
Share-based Compensation

 
10.6

 

 

 

 
10.6

Purchase of Subsidiary Shares from Noncontrolling Interest

 

 

 

 
(1.4
)
 
(1.4
)
Balance as of October 3, 2015
$
0.4

 
$
897.1

 
$
1,320.7

 
$
(233.2
)
 
$
45.5

 
$
2,030.5

See accompanying Notes to Condensed Consolidated Financial Statements.

7



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
  
Nine Months Ended
 
October 3,
2015
 
September 27,
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
167.1

 
$
151.9

Adjustments to reconcile net income to net cash provided by operating activities (net of acquisitions):
 
 
 
Depreciation and amortization
120.1

 
103.6

Goodwill impairment

 
1.0

Excess tax benefits from share-based compensation
(1.3
)
 
(1.2
)
Loss on sale or disposition of assets, net
1.8

 
0.4

Share-based compensation expense
10.6

 
8.5

Loss on Venezuela currency devaluation
1.5

 

Loss on sale of consolidated joint venture

 
1.9

Change in operating assets and liabilities
(32.6
)
 
(39.0
)
Net cash provided by operating activities
267.2

 
227.1

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Additions to property, plant and equipment
(65.4
)
 
(60.5
)
Sales of investment securities
30.3

 
28.1

Purchases of investment securities
(36.0
)
 
(38.0
)
Business acquisitions, net of cash acquired
(1,400.7
)
 
(128.2
)
Additions of equipment on operating leases

 
(4.5
)
Proceeds from sale of consolidated joint venture

 
0.7

Proceeds from sale of assets
7.8

 
0.1

Net cash used in investing activities
(1,464.0
)
 
(202.3
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from revolving credit facility
400.0

 
128.0

Repayments of the revolving credit facility
(401.0
)
 
(68.0
)
Proceeds from short-term borrowings
112.1

 
18.8

Repayments of short-term borrowings
(108.6
)
 
(19.1
)
Proceeds from long-term borrowings
1,250.0

 

Repayments of long-term borrowings
(72.2
)
 
(150.1
)
Dividends paid to shareholders
(29.9
)
 
(28.0
)
Payments of contingent consideration

 
(8.6
)
Proceeds from the exercise of stock options
3.8

 
0.8

Excess tax benefits from share-based compensation
1.3

 
1.2

Repurchase of common stock
(12.0
)
 
(35.0
)
Distributions to noncontrolling interests
(0.3
)
 
(0.3
)
Purchase of subsidiary shares from noncontrolling interest
(1.4
)
 

Financing fees paid
(17.8
)
 

Net cash provided by or (used in) financing activities
1,124.0

 
(160.3
)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
(6.7
)
 
(3.2
)
Net decrease in cash and cash equivalents
(79.5
)
 
(138.7
)
Cash and cash equivalents at beginning of period
334.1

 
466.0

Cash and cash equivalents at end of period
$
254.6

 
$
327.3

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid for:
 
 
 
 Interest
$
47.2

 
$
37.3

 Income taxes
$
57.5

 
$
34.3

See accompanying Notes to Condensed Consolidated Financial Statements.

8



REGAL BELOIT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 3, 2015
(Unaudited)

1. BASIS OF PRESENTATION
The accompanying (a) condensed consolidated balance sheet of Regal Beloit Corporation (the “Company”) as of January 3, 2015, which has been derived from audited consolidated financial statements, and (b) unaudited interim condensed consolidated financial statements as of October 3, 2015 and for the three and nine months ended October 3, 2015 and September 27, 2014, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 2014 Annual Report on Form 10-K filed on March 4, 2015.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the three and nine months ended October 3, 2015 are not necessarily indicative of the results that may be expected for the entire fiscal year ending January 2, 2016.
The condensed consolidated financial statements have been prepared in accordance with GAAP, which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company uses estimates in accounting for, among other items, allowance for doubtful accounts; excess and obsolete inventory; share-based compensation; acquisitions; product warranty obligations; pension assets and liabilities; derivative fair values; goodwill and other asset impairments; health care reserves; retirement benefits; rebates and incentives; litigation claims and contingencies, including environmental matters; and income taxes. The Company accounts for changes to estimates and assumptions when warranted by factually based experience.
The Company operates on a 52/53 week fiscal year ending on the Saturday closest to December 31.
Accounting for Highly Inflationary Economies
The Company has a subsidiary in Venezuela using accounting for highly inflationary economies. Currency restrictions enacted by the Venezuelan government have the potential to impact the ability of the Company's subsidiary to obtain U.S. dollars in exchange for Venezuelan bolivares fuertes ("Bolivars") at the official foreign exchange rate. In 2014, the Venezuelan government announced the expansion of its auction-based foreign exchange system (SICAD1). The Venezuelan government also introduced an additional auction-based foreign exchange system (SICAD2) which permits all companies incorporated or domiciled in Venezuela to bid for U.S. dollars. Effective January 3, 2015, the Company concluded that it was appropriate to apply the SICAD2 exchange rate of 51.0 Bolivars per U.S. Dollar as management concluded that this rate best represented the economics of the Company's business activity in Venezuela at that time.

On February 12, 2015, the Venezuelan government replaced SICAD 2 with a new foreign exchange market mechanism (“SIMADI”). The Company expects to be able to access U.S. dollars through the SIMADI market. SIMADI has significantly higher foreign exchange rates than those available through the other foreign exchange mechanisms. The Company adopted the SIMADI rate after its introduction. The SIMADI exchange rate was approximately 193 Venezuelan Bolivars to the U.S. dollar as of April 4, 2015. The adoption of the SIMADI resulted in a $1.5 million pretax devaluation charge during the first quarter 2015. As of October 3, 2015 the SIMADI rate was approximately 199 Venezuelan Bolivars to the U.S. dollar. The change in rates resulted in an insignificant translation difference, and accordingly, no corresponding devaluation was recorded in the results for the third quarter ended October 3, 2015.
Controls imposed by the Venezuelan government include import authorization controls, currency exchange and payment controls, price controls and recently enacted labor rate controls. While government restrictions and exchange rate mechanisms place some limits on our business decisions, the consolidated financial statements reflect our Venezuela operations as a controlled subsidiary. The Company will continue to monitor developments in Venezuela to assess if government restrictions and exchange rate controls evolve such that we no longer have effective control of business operations.


9




New Accounting Standards
In September, 2015, the Financial Accounting Standards Board ("FASB") released Accounting Standards Update (“ASU”) 2015-16, Simplifying the Accounting for Measurement-Period Adjustments to simplify the accounting for measurement-period adjustments. This ASU was issued in response to stakeholder feedback that restatements of prior periods to reflect adjustments made to provisional amounts recognized in a business combination increase the cost and complexity of financial reporting but do not significantly improve the usefulness of the information. Under the ASU, in a business combination, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The ASU also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The Company is required to apply these new requirements prospectively for fiscal years beginning after December 15, 2015, including interim periods therein. The Company is currently evaluating the impact the application of this update will have on its consolidated financial statements.
In August, 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated With Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting to clarify the SEC staff's position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the absence of authoritative guidance on this topic in ASU 2015-03. The SEC staff has announced that it would "not object to any entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement". The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements
In July, 2015, the FASB released ASU 2015-11, Simplifying the Measurement of Inventory. Under this ASU, companies are required to measure inventory using the lower of cost and net realizable value, which is defined as the estimated selling price in the normal course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU impacts companies who use the first-in, first-out method (FIFO), the average costing method, or methods of inventory measurement other than the last-in, first-out (LIFO) and retail inventory methods, which have been excluded from the scope of this ASU due to the substantial cost and burden of transitioning these methods. The Company is required to apply these new requirements prospectively for fiscal years beginning after December 15, 2016, including the interim periods therein. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.
In April, 2015, the FASB issued ASU 2015-07, Disclosures for Investment in Certain Entities That Calculate Net Asset Value per Share ("NAV") (or its Equivalent). This ASU removes from the fair value hierarchy, investments for which the practical expedient is used to measure fair value at NAV. Instead, an entity is required to include those investments as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. Further, entities must provide the disclosure only for investments for which they elect to use the NAV practical expedient to determine fair value. For public companies, this ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early adoption is permitted. The ASU should be applied retrospectively to all periods presented. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.
In April, 2015, the FASB issued ASU 2015-04, Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets, which permits a reporting entity with a fiscal year-end that does not coincide with a month-end to measure defined benefit plan assets and obligations using the month-end that is closest to the entity's fiscal year-end and apply that practical expedient consistently from year to year. The standard is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The new guidance should be applied on a prospective basis. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.

In April, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The standard is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The new guidance will be applied on a retrospective basis. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.

In May, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP. This update requires the Company to recognize revenue at amounts that reflect the consideration to which the Company expects to be entitled in exchange for those

10



goods or services at the time of transfer. In doing so, the Company will need to use more judgment and make more estimates than under today’s guidance. Such estimates include identifying performance obligations in the contracts, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company can either apply a full retrospective adoption or a modified retrospective adoption. The Company is required to adopt the new requirements in the first quarter of fiscal 2018. The Company is currently evaluating the impact of the new requirements to its consolidated financial statements.
2. OTHER FINANCIAL INFORMATION
Inventories
The approximate percentage distribution between major classes of inventories was as follows:
 
October 3,
2015
 
January 3,
2015
Raw Material and Work in Process
47%
 
45%
Finished Goods and Purchased Parts
53%
 
55%

Inventories are stated at cost, which is not in excess of market. Cost for approximately 45% of the Company's inventory at October 3, 2015, and 52% at January 3, 2015 was determined using the LIFO method.
Property, Plant and Equipment
Property, plant, and equipment by major classification was as follows (dollars in millions):
 
Useful Life in Years
 
October 3,
2015
 
January 3,
2015
Land and Improvements
 
 
$
84.5

 
$
68.8

Buildings and Improvements
3 - 50
 
286.4

 
235.4

Machinery and Equipment
3 - 15
 
939.8

 
812.1

Property, Plant and Equipment
 
 
1,310.7

 
1,116.3

Less: Accumulated Depreciation
 
 
(615.9
)
 
(584.8
)
Net Property, Plant and Equipment
 
 
$
694.8

 
$
531.5


3.    ACQUISITIONS
Acquisitions
The results of operations for acquired businesses are included in the Condensed Consolidated Financial Statements from the dates of acquisition. There were no acquisition related expenses for the three months ended October 3, 2015 and acquisition related expenses were $0.2 million for the three months ended September 27, 2014. Acquisition related expenses were $9.2 million and $1.3 million for the nine months ended October 3, 2015 and September 27, 2014, respectively. Acquisition related expenses are recorded in operating expenses as incurred.
2015 Acquisitions
PTS
On January 30, 2015, the Company acquired the Power Transmission Solutions business of Emerson Electric Co. ("PTS") for $1,408.2 million in cash through a combination of stock and asset purchases. PTS is a global leader in highly engineered power transmission products and solutions. The business manufactures, sells and services bearings, couplings, gearing, drive components and conveyor systems. PTS is included in the Power Transmission Solutions segment. The Company acquired PTS because management believes it diversifies the Company's end market exposure, provides complementary products, expands and balances the Company's product portfolio, and enhances its margin profile.
On January 30, 2015, the Company entered into a Credit Agreement for a 5-year unsecured term loan facility in the principal amount of $1.25 billion, which was drawn in full by the Company on January 30, 2015, in connection with the closing of the acquisition of PTS (see Note 7 of Notes to the Condensed Consolidated Financial Statements).

11



The acquisition of PTS was accounted for as a purchase in accordance with FASB Accounting Standards Codification ("ASC") Topic 805, Business Combinations. Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The fair values of identifiable intangible assets, which were primarily customer relationships, trade names, and technology, were based on valuations using the income approach. The excess of the purchase price over the estimated fair values of tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The goodwill is attributable to expected synergies and expected growth opportunities. The Company estimates a majority of goodwill will be deductible for United States income tax purposes. The allocation of purchase price is preliminary as the Company has not completed its analysis estimating the fair value of property, plant, and equipment, intangible assets, income tax liabilities and certain contingent liabilities.
The preliminary purchase price allocation for PTS was as follows (in millions):
 
As of January 30, 2015
Current assets
$
10.4

Trade receivables
69.4

Inventories
108.8

Property, plant and equipment
191.4

Intangible assets
653.4

Goodwill
573.9

Total assets acquired
$
1,607.3

Accounts payable
50.6

Current liabilities assumed
21.5

Long-term liabilities assumed
127.0

Net assets acquired
$
1,408.2

The valuation of the net assets acquired of $1,408.2 million was classified as Level 3 in the valuation hierarchy (See Note 14 of the Notes to the Condensed Consolidated Financial Statements for the definition of Level 3 inputs).

The components of Intangible Assets included as part of the PTS acquisition was as follows (in millions):
 
 
Weighted Average Amortization Period (Years)
 
Gross Value
Amortizable intangible assets
 
 
 
 
  Customer Relationships
 
17.0
 
$
467.9

  Technology
 
14.5
 
63.6

 
 
16.7
 
531.5

Non-amortizable intangible assets
 
 
 
 
  Trademarks
 
-
 
121.9

Intangible assets
 

 
$
653.4


Net sales from PTS were $128.9 million and $384.7 million for the three and nine months ended October 3, 2015, respectively. Operating income from PTS was $10.7 million and $7.7 million for the three and nine months ended October 3, 2015, respectively. There were no purchase accounting adjustments and transaction costs for the three months ended October 3, 2015. Purchase accounting adjustments and transaction costs of $29.8 million were included in the PTS operating income for the nine months ended October 3, 2015.

12



Pro Forma Consolidated Results for PTS Acquisition

The following supplemental pro forma financial information presents the financial results for the three and nine months ended October 3, 2015 and September 27, 2014, as if the acquisition of PTS had occurred at the beginning of fiscal year 2014. As a practical expedient, the Company has used the audited stand-alone financial statements of PTS for the period ending September 30, 2014 to estimate pro-forma results for the three and nine months ended October 3, 2015 and September 27, 2014. The pro forma financial information includes, where applicable, adjustments for: (i) the estimated amortization of acquired intangible assets, (ii) estimated additional interest expense on acquisition related borrowings, and (iii) the income tax effect on the pro forma adjustments using an estimated effective tax rate. The pro forma financial information excludes, where applicable, adjustments for: (i) the estimated impact of inventory purchase accounting adjustments and (ii) the estimated closing costs on the acquisition and (iii) any estimated cost synergies or other effects of the integration of the acquisition. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the acquisition been completed as of the date indicated or the results that may be obtained in the future (in millions, except per share amounts):

 
Three Months Ended
 
Nine Months Ended
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Pro forma net sales
$
882.3

 
$
981.7

 
$
2,784.8

 
$
2,937.0

Pro forma net income attributable to the Company
63.4

 
56.5

 
164.3

 
174.5

 
 
 
 
 
 
 
 
Basic earnings per share as reported
$
1.42

 
$
1.06

 
$
3.63

 
$
3.27

Pro forma basic earnings per share
1.42

 
1.26

 
3.67

 
3.87

 
 
 
 
 
 
 
 
Diluted earnings per share as reported
$
1.41

 
$
1.05

 
$
3.61

 
$
3.25

Pro forma diluted earnings per share
1.41

 
1.25

 
3.65

 
3.84


13




2014 Acquisitions
Benshaw
On June 30, 2014, the Company acquired all of the stock of Benshaw. Inc. ("Benshaw") for $51.0 million in cash. The Company financed the transaction with existing cash. Benshaw is a manufacturer of custom low and medium voltage variable frequency drives and soft starters. It is reported in the Commercial and Industrial Systems segment. The Company acquired Benshaw because management determined it was a strategic fit for the Commercial and Industrial Systems segment.
The acquisition of Benshaw was accounted for as a purchase in accordance with FASB ASC Topic 805, Business Combinations. Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The fair values of identifiable intangible assets, which were primarily customer relationships and technology, were based on valuations using the income approach. The excess of the purchase price over the estimated fair values of tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The goodwill is attributable to expected synergies and expected growth opportunities. The Company expects goodwill will be deductible for U.S. income tax purposes.
The purchase price allocation for Benshaw was as follows (in millions):
 
As of June 30, 2014
Current assets
$
0.5

Trade receivables
10.4

Inventories
22.4

Property, plant and equipment
4.5

Intangible assets, subject to amortization
14.6

Goodwill
4.7

Total assets acquired
57.1

Accounts payable
3.7

Current liabilities assumed
2.2

Long-term liabilities assumed
0.2

Net assets acquired
$
51.0

Hy-Bon
On February 7, 2014, the Company acquired Hy-Bon Engineering Company, Inc. ("Hy-Bon") for $78.0 million in cash. The Company financed the transaction with existing cash. Hy-Bon is a leader in vapor recovery solutions for oil and gas applications. It is reported in the Commercial and Industrial Systems segment. The Company acquired Hy-Bon because management determined it was a strategic fit for the Commercial and Industrial Systems segment.
The acquisition of Hy-Bon was accounted for as a purchase in accordance with the FASB ASC Topic 805, Business Combinations. Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The fair values of identifiable intangible assets, which were primarily customer relationships, were based on valuations using the income approach. The excess of the purchase price over the estimated fair values of tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The goodwill is attributable to expected synergies and other growth opportunities. The Company does not expect goodwill will be deductible for U.S. income tax purposes.

14



The purchase price allocation for Hy-Bon was as follows (in millions):
 
As of February 7, 2014
Current assets
$
1.7

Trade receivables
11.5

Inventories
14.3

Property, plant and equipment
8.1

Intangible assets, subject to amortization
13.4

Goodwill
40.6

Other assets
0.1

Total assets acquired
89.7

Accounts payable
5.5

Current liabilities assumed
5.1

Long-term liabilities assumed
1.1

Net assets acquired
$
78.0

Pro Forma Consolidated Results for 2014 Acquisitions

The following supplemental pro forma information presents the financial results for the nine months ended September 27, 2014, as if the acquisitions of Benshaw and Hy-Bon had occurred at the beginning of fiscal year 2014. Based upon the timing of the Company's fiscal 2014 acquisitions, financial results for the three months ended September 27, 2014 and the three and nine months ended October 3, 2015 included the financial results of the acquisitions of Benshaw and Hy-Bon.

The pro forma amounts do not include any estimated cost synergies or other effects of the integration of the acquisitions. Accordingly, the pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisitions been completed on the dates indicated. Pro forma amounts are also not necessarily indicative of any future consolidated operating results of the Company (see Note 5 of Notes to the Condensed Consolidated Financial Statements for amortization expense related to intangible assets acquired) (in millions, except per share amounts).
 
 
Nine Months Ended
 
 
September 27,
2014
Pro forma net sales
 
$
2,515.4

Pro forma net income attributable to the Company
 
145.2

 
 
 
Basic earnings per share as reported
 
$
3.27

Pro forma basic earnings per share
 
3.23

 
 
 
Diluted earnings per share as reported
 
$
3.25

Pro forma diluted earnings per share
 
3.20



2014 Divestitures

The Company sold its shares of a joint venture located in Shanghai, China ("Jinling") on September 11, 2014 which was previously accounted for as a consolidated joint venture and was reported in the Electrical segment. The disposal of Jinling was determined to not qualify for presentation as discontinued operations in the Company's Condensed Consolidated Financial Statements, in accordance with ASU 2014-08. A loss of approximately $1.9 million was recorded in Operating Expenses in the Condensed Consolidated Statements of Income for the three and nine months ended September 27, 2014.

4. ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustments, hedging activities and pension benefit adjustments are included in Equity in Accumulated Other Comprehensive Loss.

15



The changes in accumulated other comprehensive loss by component for the three and nine months ended October 3, 2015 and September 27, 2014 was as follows (in millions):
 
Three Months Ended
 
October 3, 2015
 
Hedging Activities
 
Pension Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
(32.6
)
 
$
(39.0
)
 
$
(109.8
)
 
$
(181.4
)
Other comprehensive income (loss) before reclassifications
(38.1
)
 

 
(35.8
)
 
(73.9
)
Tax (expense) benefit
14.5

 

 

 
14.5

Amounts reclassified from accumulated other comprehensive income (loss)
11.0

 
1.0

 

 
12.0

Tax (expense) benefit
(4.1
)
 
(0.3
)
 

 
(4.4
)
Net current period other comprehensive income (loss)
(16.7
)
 
0.7

 
(35.8
)
 
(51.8
)
Ending balance
$
(49.3
)
 
$
(38.3
)
 
$
(145.6
)
 
$
(233.2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
September 27, 2014
 
Hedging Activities
 
Pension Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
(6.4
)
 
$
(23.1
)
 
$
(27.9
)
 
$
(57.4
)
Other comprehensive income (loss) before reclassifications
(5.9
)
 

 
(16.5
)
 
(22.4
)
Tax (expense) benefit
2.2

 

 

 
2.2

Amounts reclassified from accumulated other comprehensive income (loss)
1.2

 
0.8

 
(1.0
)
 
1.0

Tax (expense) benefit
(0.4
)
 
(0.3
)
 

 
(0.7
)
  Net current period other comprehensive income (loss)
(2.9
)
 
0.5

 
(17.5
)
 
(19.9
)
Ending balance
$
(9.3
)
 
$
(22.6
)
 
$
(45.4
)
 
$
(77.3
)


16



 
Nine Months Ended
 
October 3, 2015
 
Hedging Activities
 
Pension Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
(31.0
)
 
$
(39.5
)
 
$
(80.5
)
 
$
(151.0
)
Other comprehensive income (loss) before reclassifications
(57.6
)
 

 
(65.1
)
 
(122.7
)
Tax (expense) benefit
21.9

 

 

 
21.9

Amounts reclassified from accumulated other comprehensive income (loss)
28.0

 
3.0

 

 
31.0

Tax (expense) benefit
(10.6
)
 
(1.8
)
 

 
(12.4
)
Net current period other comprehensive income (loss)
(18.3
)
 
1.2

 
(65.1
)
 
(82.2
)
Ending balance
$
(49.3
)
 
$
(38.3
)
 
$
(145.6
)
 
$
(233.2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
September 27, 2014
 
Hedging Activities
 
Pension Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
(9.5
)
 
$
(23.3
)
 
$
(27.0
)
 
$
(59.8
)
Other comprehensive income (loss) before reclassifications
(9.2
)
 
(0.5
)
 
(17.4
)
 
(27.1
)
Tax (expense) benefit
3.5

 

 

 
3.5

Amounts reclassified from accumulated other comprehensive income (loss)
9.5

 
1.9

 
(1.0
)
 
10.4

Tax (expense) benefit
(3.6
)
 
(0.7
)
 

 
(4.3
)
Net current period other comprehensive income (loss)
0.2

 
0.7

 
(18.4
)
 
$
(17.5
)
Ending balance
$
(9.3
)
 
$
(22.6
)
 
$
(45.4
)
 
$
(77.3
)


The Condensed Consolidated Statements of Income line items affected by the hedging activities reclassified from accumulated other comprehensive loss in the tables above are disclosed in Note 13 of Notes to Condensed Consolidated Financial Statements.
The reclassification amounts for pension benefit adjustments in the tables above are part of net periodic pension costs recorded in Operating Expenses (see Note 8 of Notes to Condensed Consolidated Financial Statements).

5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
As required, the Company performs an annual impairment test of goodwill as of the end of the October fiscal month or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting units below their carrying value.

17



The following information presents changes to goodwill during the nine months ended October 3, 2015 (in millions):
 
Total
 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
Balance as of January 3, 2015
$
1,004.0

 
$
645.4

 
$
344.6

 
$
14.0

Acquisition and valuation adjustments
568.7

 
(5.2
)
 

 
573.9

Translation adjustments
(8.7
)
 
(9.5
)
 
(1.0
)
 
1.8

Balance as of October 3, 2015
$
1,564.0

 
$
630.7

 
$
343.6

 
$
589.7

 
 
 
 
 
 
 
 
Cumulative goodwill impairment charges
$
195.8

 
$
164.9

 
$
7.7

 
$
23.2

Intangible Assets
Intangible assets consisted of the following (in millions):  
 
 
 
 
October 3, 2015
 
January 3, 2015
 
 
Weighted Average Amortization Period (Years)
 
Gross Value
 
Accumulated
Amortization
 
Gross Value
 
Accumulated
Amortization
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
  Customer relationships
 
15
 
$
719.8

 
$
151.5

 
$
256.8

 
$
122.6

  Technology
 
11
 
191.8

 
88.5

 
129.4

 
74.9

  Trademarks
 
12
 
32.2

 
21.2

 
33.1

 
20.1

  Patent and engineering drawings
 
5
 
16.6

 
16.6

 
16.6

 
16.6

  Non-compete agreements
 
5
 
8.5

 
8.1

 
8.6

 
8.0

 
 
 
 
968.9

 
285.9

 
444.5

 
242.2

Non-amortizable trademarks
 
 
 
121.9

 

 

 

 
 
 
 
$
1,090.8

 
$
285.9

 
$
444.5

 
$
242.2

 
 
 
 
 
 
 
 
 
 
 
The estimated expected future annual amortization for intangible assets is as follows (in millions):
 
Year
Estimated
Amortization
2016
$
62.1

2017
55.4

2018
53.6

2019
53.1

2020
50.4


Amortization expense recorded for the three and nine months ended October 3, 2015 was $16.7 million and $47.7 million, respectively. Amortization expense recorded for the three and nine months ended September 27, 2014 was $11.8 million and $34.7 million, respectively. Amortization expense for 2015 is estimated to be $64.2 million.


18



6. BUSINESS SEGMENTS
The following sets forth certain financial information attributable to the Company's reporting segments as of and for the three and nine months ended October 3, 2015 and September 27, 2014 (in millions):
 
 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Eliminations
 
Total
As of and for Three Months Ended October 3, 2015
 
 
 
 
 
 
 
 
 
External sales
$
426.8

 
$
264.4

 
$
191.1

 
$

 
$
882.3

Intersegment sales
14.4

 
6.0

 
0.8

 
(21.2
)
 

  Total sales
441.2

 
270.4

 
191.9

 
(21.2
)
 
882.3

Gross profit
110.3

 
70.8

 
60.0

 

 
241.1

Total operating expenses
71.6

 
30.1

 
39.3

 

 
141.0

Income from operations
38.8

 
40.7

 
20.6

 

 
100.1

Depreciation and amortization
19.6

 
7.1

 
15.3

 

 
42.0

Capital expenditures
10.4

 
4.6

 
5.7

 

 
20.7

Identifiable assets
2,380.2

 
888.2

 
1,610.0

 

 
4,878.4

As of and for Three Months Ended September 27, 2014
 
 
 
 
 
 
 
 
 
External sales
$
472.3

 
$
290.0

 
67.5

 
$

 
$
829.8

Intersegment sales
21.5

 
4.4

 
1.5

 
(27.4
)
 

  Total sales
493.8

 
294.4

 
69.0

 
(27.4
)
 
829.8

Gross profit
117.6

 
67.9

 
18.3

 

 
203.8

Total operating expenses
83.9

 
34.9

 
10.3

 

 
129.1

Income from operations
33.6

 
33.1

 
8.0

 

 
74.7

Depreciation and amortization
21.4

 
11.0

 
3.2

 

 
35.6

Capital expenditures
13.7

 
2.4

 
1.5

 

 
17.6

Identifiable assets
2,598.8

 
886.7

 
185.9

 

 
3,671.4



19



 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Eliminations
 
Total
As of and for Nine Months Ended October 3, 2015
 
 
 
 
 
 
 
 
 
External sales
$
1,324.2

 
$
830.9

 
$
581.1

 
$

 
$
2,736.2

Intersegment sales
60.7

 
18.9

 
3.1

 
(82.7
)
 

  Total sales
1,384.9

 
849.8

 
584.2

 
(82.7
)
 
2,736.2

Gross profit
336.8

 
207.5

 
169.1

 

 
713.4

Total operating expenses
223.2

 
89.7

 
133.6

 

 
446.5

Income from operations
113.6

 
117.8

 
35.5

 

 
266.9

Depreciation and amortization
58.4

 
21.7

 
40.0

 

 
120.1

Capital expenditures
38.5

 
13.3

 
13.6

 

 
65.4

Identifiable assets
2,380.2

 
888.2

 
1,610.0

 

 
4,878.4

As of and for Nine Months Ended September 27, 2014
 
 
 
 
 
 
 
 
 
External sales
$
1,404.8

 
$
878.6

 
198.0

 
$

 
$
2,481.4

Intersegment sales
38.0

 
8.5

 
2.5

 
(49.0
)
 

  Total sales
1,442.8

 
887.1

 
200.5

 
(49.0
)
 
2,481.4

Gross profit
357.9

 
199.2

 
52.1

 

 
609.2

Total operating expenses
240.2

 
106.6

 
30.3

 

 
377.1

Income from operations
117.8

 
92.5

 
21.8

 

 
232.1

Depreciation and amortization
60.2

 
34.3

 
9.1

 

 
103.6

Capital expenditures
42.0

 
12.9

 
5.6

 

 
60.5

Identifiable assets
2,598.8

 
886.7

 
185.9

 

 
3,671.4



In the fourth quarter of 2014, the Company reorganized its reportable segments to align with its new management reporting structure and business activities. Prior to this reorganization, the Company was comprised of two reportable segments for financial reporting purposes: Electrical and Mechanical. As a result of this change, the Company is now comprised of three reportable segments: Commercial & Industrial Systems, Climate Solutions and Power Transmission Solutions. Historical financial information has been revised on a basis consistent with these segments.
The Commercial and Industrial Systems segment produces medium and large motors, generators and customer drives, controls and systems. Applications include commercial and industrial equipment, commercial HVAC, pool and spa, standby and critical power and oil and gas systems.
The Climate Solutions segment produces small motors, controls and air moving solutions. Applications include residential and light commercial HVAC, commercial refrigeration and water heaters.
The Power Transmission Solutions segment produces power transmission gearing, hydraulic pump drives, large open gearing and specialty mechanical products. Applications include material handling, industrial equipment, energy and off-road equipment.
The Company evaluates performance based on the segment's income from operations. Corporate costs have been allocated to each segment based on the net sales of each segment. The reported external net sales of each segment are from external customers.



20



7. DEBT AND BANK CREDIT FACILITIES
The Company’s indebtedness as of October 3, 2015 and January 3, 2015 was as follows (in millions):
 
October 3,
2015
 
January 3,
2015
Term facility
$
1,178.1

 
$

Senior notes
600.0

 
600.0

Multicurrency revolving facility
16.0

 

Revolving facility

 
17.0

Other
19.6

 
16.8

 
1,813.7

 
633.8

Less: Current maturities
49.0

 
8.4

Non-current portion
$
1,764.7

 
$
625.4


The New Credit Agreement
In connection with the PTS Acquisition, on January 30, 2015, the Company entered into a new Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent and the lenders named therein, providing for a (i) 5-year unsecured term loan facility in the principal amount of $1.25 billion (the “Term Facility”) and (ii) a 5-year unsecured multicurrency revolving facility in the principal amount of $500.0 million (the “Multicurrency Revolving Facility”) available for general corporate purposes. The Credit Agreement replaced the Prior Credit Agreement, and the Multicurrency Revolving Facility replaced the Prior Revolving Facility (further discussed below).
The Term Facility was drawn in full on January 30, 2015 in connection with the closing of the PTS Acquisition.  The loans under the Term Facility require quarterly amortization at a rate starting at 5.0% per annum, increasing to 7.5% per annum after two years and further increasing to 10.0% per annum for the last two years of the Term Facility. At October 3, 2015 the Company had borrowings under the Multicurrency Revolving Facility in the amount of $16.0 million, $32.9 million of standby letters of credit issued under the facility, and $451.1 million of available borrowing capacity.
Borrowings under the Credit Agreement bear interest at floating rates based upon indices determined by the currency of the borrowing, plus an applicable margin determined by reference to the Company's consolidated funded debt to consolidated EBITDA ratio or at an alternative base rate. The weighted average interest rate on the Credit Agreement was 1.9% during the nine months ended October 3, 2015. The Company pays a non-use fee on the aggregate unused amount of the Multicurrency Revolving Facility at a rate determined by reference to its consolidated funded debt to consolidated EBITDA ratio.
The Credit Agreement requires the Company prepay the loans under the Term Facility with 100% of the net cash proceeds received from specified asset sales and in currencies of borrowed money indebtedness, subject to certain exceptions.


21



Senior Notes
At October 3, 2015, the Company had $600.0 million of senior notes (the “Notes”) outstanding. The Notes consist of (i) $500.0 million in senior notes (the “2011 Notes”) in a private placement which were issued in seven tranches with maturities from seven to twelve years and carry fixed interest rates and (ii) $100.0 million in senior notes (the “2007 Notes”) issued in 2007 with a floating interest rate based on a margin over the London Inter-Bank Offered Rate (“LIBOR”).
Details on the Notes at October 3, 2015 were (in millions):
 
Principal
 
Interest Rate
 
Maturity
Floating Rate Series 2007A
$
100.0

 
Floating (1)
 
August 23, 2017
Fixed Rate Series 2011A
100.0

 
4.1%
 
July 14, 2018
Fixed Rate Series 2011A
230.0

 
4.8 to 5.0%
 
July 14, 2021
Fixed Rate Series 2011A
170.0

 
4.9 to 5.1%
 
July 14, 2023
 
$
600.0

 
 
 
 
 
(1)
Interest rates vary as LIBOR varies. At October 3, 2015, the interest rate was 1.0%, and at January 3, 2015 the interest rate was 0.9%.
The Company has interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk (see also Note 13 of Notes to the Condensed Consolidated Financial Statements).
The Prior Credit Agreement and Prior Revolving Facility
On June 30, 2011, the Company entered into a revolving credit agreement (the “Prior Credit Agreement”) that provided for an aggregate amount of availability under a revolving credit facility of $500.0 million, including a $100.0 million letter of credit subfacility (the “Prior Revolving Facility”). The Prior Credit Agreement and Prior Revolving Facility were replaced with the new Credit Agreement (discussed above).
The Prior Revolving Facility permitted borrowing at interest rates based upon a margin above LIBOR. At January 3, 2015, the Company had $17.0 million outstanding on the Prior Revolving Facility. The balance on the Prior Revolving Facility was fully paid on January 27, 2015.
Other Notes Payable
At October 3, 2015, other notes payable of $19.6 million were outstanding with a weighted average interest rate of 2.6%. At January 3, 2015, other notes payable of approximately $16.8 million were outstanding with a weighted average interest rate of 2.5%.
Fair Value
Based on rates for instruments with comparable maturities and credit quality, which are classified as Level 2 inputs (see also Note 14 of Notes to the Condensed Consolidated Financial Statements), the approximate fair value of the Company's total debt was $1,849.9 million and $666.8 million as of October 3, 2015 and January 3, 2015, respectively.
Compliance with Financial Covenants
The Credit Agreement contains customary affirmative and negative covenants and events of default for an unsecured financing arrangement, including, among other things, limitations on consolidations, mergers and sales of assets. The Credit Agreement and the Notes require the Company to meet specified financial ratios and to satisfy certain financial condition tests. The Company was in compliance with all financial covenants contained in the Credit Agreement and the Notes as of October 3, 2015.

22




8. PENSION PLANS
The Company’s net periodic benefit pension cost was comprised of the following components (in millions):
 
 
Three Months Ended
 
Nine Months Ended
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Service cost
$
2.7

 
$
0.6

 
$
7.4

 
$
1.8

Interest cost
2.9

 
1.9

 
8.3

 
5.9

Expected return on plan assets
(2.8
)
 
(2.2
)
 
(8.0
)
 
(6.7
)
Amortization of prior service cost and net actuarial loss
1.0

 
0.6

 
3.0

 
1.7

Net periodic benefit cost
$
3.8

 
$
0.9

 
$
10.7

 
$
2.7


The estimated net actuarial loss and prior service cost for defined benefit pension plans that will be amortized from Accumulated Other Comprehensive Loss into net periodic benefit cost during the 2015 fiscal year is $4.6 million and $0.2 million, respectively.
For the three months ended October 3, 2015 and September 27, 2014, the Company contributed $0.8 million and $0.9 million, respectively, to defined benefit pension plans. For the nine months ended October 3, 2015 and September 27, 2014, the Company contributed $2.3 million and $2.0 million, respectively, to defined benefit pension plans. The Company expects to make total contributions of $3.3 million in 2015. The Company contributed a total of $3.1 million in fiscal 2014. The assumptions used in the valuation of the Company’s pension plans and in the target investment allocation have remained the same as those disclosed in the Company’s 2014 Annual Report on Form 10-K filed on March 4, 2015.

9. SHAREHOLDERS’ EQUITY
Repurchase of Common Stock

The Company acquired and retired 180,000 shares of its common stock in the quarter ended October 3, 2015 at an average cost of $66.56 per share for a total use of cash of $12.0 million. The repurchases were under the 3.0 million share repurchase program approved by the Company's Board of Directors. There are approximately 2.3 million shares of our common stock available for repurchase under this program.

Share-Based Compensation

The majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter.

The Company recognized approximately $3.5 million and $2.2 million in share-based compensation expense for the three months ended October 3, 2015 and September 27, 2014, respectively. Share-based compensation expense for the nine months ended October 3, 2015 and September 27, 2014, was $10.6 million and $8.5 million, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award. The total excess income tax benefit recognized relating to share-based compensation for the nine months ended October 3, 2015 and September 27, 2014 was approximately $1.3 million and $1.2 million, respectively. As of October 3, 2015, total unrecognized compensation cost related to share-based compensation awards was approximately $27.5 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 2.3 years.

Approximately 2.0 million shares were available for future grant under the 2013 Equity Incentive Plan at October 3, 2015.

Options and Stock Appreciation Rights
The Company uses several forms of share-based incentive awards, including non-qualified stock options, incentive stock options, and stock appreciation rights (“SAR's”). Options and SAR's generally vest over 5 years and expire 10 years from the grant date. All grants are made at prices equal to the fair market value of the stock on the grant date. The majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter. For the nine months ended October 3, 2015 and September 27, 2014, expired and canceled shares were immaterial.

23



The table below presents share-based compensation activity for the nine months ended October 3, 2015 and September 27, 2014 (in millions):
 
 
2015
 
2014
Total intrinsic value of share-based incentive awards exercised
 
$
4.0

 
$
5.0

Cash received from stock option exercises
 
2.5

 
1.8

Income tax benefit from the exercise of stock options
 
1.5

 
1.9

Total fair value of share-based incentive awards vested
 
4.8

 
5.3


The assumptions used in the Company's Black-Scholes valuation related to grants for options and SAR's were as follows:
 
2015
 
2014
 
2013
Per share weighted average fair value of grants
$
27.16

 
$
28.01

 
$
23.01

Risk-free interest rate
1.9
%
 
2.0
%
 
1.1
%
Expected life (years)
7.0

 
7.0

 
7.0

Expected volatility
35.6
%
 
37.7
%
 
38.5
%
Expected dividend yield
1.2
%
 
1.2
%
 
1.2
%
The average risk-free interest rate is based on U.S. 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 adjusted for the estimated exercise dates of unexercised awards.
Following is a summary of share-based incentive plan grant activity (options and SAR's) for the nine months ended October 3, 2015.
Number of Shares Under Options and SAR's
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (years)
 
Aggregate Intrinsic Value (in millions)
Outstanding at January 3, 2015
1,488,832

 
$
59.34

 
 
 
 
Granted
206,500

 
78.15

 
 
 
 
Exercised
(121,208
)
 
43.82

 
 
 
 
Forfeited
(17,500
)
 
66.53

 
 
 
 
Outstanding at October 3, 2015
1,556,624

 
$
62.95

 
5.9
 
$
5.4

Exercisable at October 3, 2015
958,541

 
$
57.05

 
4.5
 
$
5.4


Compensation expense recognized related to Options and SAR's was $3.9 million for the nine months ended October 3, 2015.
As of October 3, 2015, there was $12.0 million of unrecognized compensation cost related to non-vested options and SAR's that is expected to be recognized as a change to earnings over a weighted average period of 3.3 years.

The amount of options expected to vest is materially consistent with those outstanding and not yet exercisable.
Restricted Stock Awards and Restricted Stock Units
Restricted stock awards ("RSA") and restricted stock units ("RSU") consist of shares or the rights to shares of the Company's stock. The awards are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer. As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, or death, disability or normal retirement of the grantee.
Following is a summary of RSA award activity for the nine months ended October 3, 2015:

24



 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (years)
Unvested RSAs at January 3, 2015
 
24,814

 
$
69.53

 
0.3
Granted
 
14,400

 
78.15

 
 
Vested
 
(24,814
)
 
69.53

 
 
Forfeited
 

 

 
 
Unvested RSAs October 3, 2015
 
14,400

 
$
78.15

 
0.6

RSAs vest on either the first (for RSAs granted in 2013 and later) or the third (for RSAs granted prior to 2013) anniversary of the grant date, provided the holder of the shares is continuously employed by or in the service of the Company until the vesting date. Compensation expense recognized related to the RSAs was $0.8 million for the nine months ended October 3, 2015.
As of October 3, 2015, there was $0.7 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 0.6 years.
Following is a summary of RSU award activity for the nine months ended October 3, 2015:

 
 
 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (years)
Unvested RSUs at January 3, 2015
 
237,946

 
$
68.28

 
1.8
Granted
 
106,600

 
77.38

 
 
Vested
 
(67,701
)
 
63.86

 
 
Forfeited
 
(7,830
)
 
71.00

 
 
Unvested RSUs at October 3, 2015
 
269,015

 
$
72.91

 
2.0

RSU shares vest on the third anniversary of the grant date, provided the holder of the shares is continuously employed by the Company until the vesting date. Compensation expense recognized related to the RSUs was $4.6 million for the nine months ended October 3, 2015.
As of October 3, 2015, there was $11.1 million of unrecognized compensation cost related to non-vested RSUs that is expected to be recognized as a charge to earnings over a weighted average period of 2.0 years.
Performance Share Units
Performance share unit ("PSU") awards consist of shares or the rights to shares of the Company's stock which are awarded to employees of the Company. These shares are payable upon the determination that the Company achieved certain established performance targets and can range from 0% to 200% of the targeted payout based on the actual results. PSUs have a performance period of 3 years. As set forth in the individual grant agreements, acceleration of vesting may occur under a change in control, death or disability. There are no voting rights with these instruments until vesting occurs and a share of stock is issued. The PSU awards are valued using a Monte Carlo simulation method as of the grant date.
The assumptions used in the Company's Monte Carlo simulation related to grants for performance share units were as follows:
 
October 3, 2015
 
September 27, 2014
Risk-free interest rate
1.0
%
 
0.9
%
Expected life (years)
3.0

 
3.0

Expected volatility
25.0
%
 
32.0
%
Expected dividend yield
1.2
%
 
1.1
%

25




Following is a summary of PSU award activity for the nine months ended October 3, 2015:
 
 
 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (years)
Unvested PSUs at January 3, 2015
 
59,115

 
$
68.25

 
2.0
Granted
 
30,845

 
89.98

 
 
Vested
 

 

 
 
Forfeited
 
(2,065
)
 
70.97

 
 
Unvested PSUs October 3, 2015
 
87,895

 
$
75.81

 
2.1
Compensation expense for awards granted are recognized based on the targeted payout of 100.0%, net of estimated forfeitures. Compensation expense recognized related to PSUs was $1.3 million for the nine months ended October 3, 2015. Total unrecognized compensation expense for all PSUs granted as of October 3, 2015 is estimated to be $3.7 million recognized as a charge to earnings over a weighted average period of 2.1 years.


10. INCOME TAXES
The effective tax rate for the three months ended October 3, 2015 was 25.2% versus 27.1% for the three months ended September 27, 2014. The effective tax rate for the nine months ended