Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - REGAL BELOIT CORPrbc-201771xex321.htm
EX-31.2 - EXHIBIT 31.2 - REGAL BELOIT CORPrbc-201771xex312.htm
EX-31.1 - EXHIBIT 31.1 - REGAL BELOIT CORPrbc-201771xex311.htm
EX-12 - EXHIBIT 12 - REGAL BELOIT CORPrbc-201771xex12.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 July 1, 2017 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth 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
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 August 4, 2017 there were 44,596,861 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,” “forecast,” “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;
issues and costs arising from the integration of acquired companies and businesses including PTS and the timing and impact of purchase accounting adjustments;
prolonged declines in oil and gas up stream capital spending;
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, government policies, including policy changes affecting taxation, trade, immigration and the like, and other external factors that we cannot control;
product liability and other litigation, or claims by end users, government agencies or others that our products or our customers’ applications failed to perform as anticipated, particularly in high volume applications or where such failures are alleged to be the cause of property or casualty claims;
unanticipated liabilities of acquired businesses;
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;
effects on earnings of any significant impairment of goodwill or intangible assets;
cyclical downturns affecting the global market for capital goods; and
other risks and uncertainties including but not limited to those described in “Risk Factors” in our Annual Report on Form 10-K and from time to time in our reports filed with US 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 1, 2017.


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
 
Six Months Ended
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Net Sales
$
869.2

 
$
838.6

 
$
1,682.7

 
$
1,656.8

Cost of Sales
646.2

 
615.7

 
1,244.1

 
1,216.5

Gross Profit
223.0

 
222.9

 
438.6

 
440.3

Operating Expenses
140.0

 
131.5

 
280.8

 
279.6

Income From Operations
83.0

 
91.4

 
157.8

 
160.7

Interest Expense
14.7

 
14.8

 
29.1

 
29.8

Interest Income
1.0

 
1.2

 
2.0

 
2.3

Income Before Taxes
69.3

 
77.8

 
130.7

 
133.2

Provision For Income Taxes
15.0

 
19.4

 
28.8

 
32.1

Net Income
54.3

 
58.4

 
101.9

 
101.1

Less: Net Income Attributable to Noncontrolling Interests
1.3

 
1.8

 
2.6

 
2.9

Net Income Attributable to Regal Beloit Corporation
$
53.0

 
$
56.6

 
$
99.3

 
$
98.2

Earnings Per Share Attributable to Regal Beloit Corporation:
 
 
 
 
 
 
 
Basic
$
1.19

 
$
1.27

 
$
2.22

 
$
2.20

Assuming Dilution
$
1.18

 
$
1.26

 
$
2.20

 
$
2.19

Cash Dividends Declared Per Share
$
0.26

 
$
0.24

 
$
0.50

 
$
0.47

Weighted Average Number of Shares Outstanding:
 
 
 
 
 
 
 
Basic
44.7

 
44.7

 
44.8

 
44.7

Assuming Dilution
45.1

 
45.0

 
45.1

 
45.0


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
 
Six Months Ended
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Net Income
$
54.3

 
$
58.4

 
$
101.9

 
$
101.1

Other Comprehensive Income (Loss) Net of Tax:
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
39.1

 
(32.5
)
 
68.5

 
(6.8
)
Hedging Activities:
 
 
 
 
 
 
 
Increase (Decrease) in Fair Value of Hedging Activities, Net of Tax Effects of $ 6.1 Million and $(6.7) Million for the Three Months ended July 1, 2017 and July 2, 2016 and $18.0 Million and $(5.4) Million for the Six Months ended July 1, 2017 and July 2, 2016 Respectively
10.0

 
(11.1
)
 
29.4

 
(8.8
)
Reclassification of Losses included in Net Income, Net of Tax Effects of $1.8 Million and $4.7 Million for the Three Months ended July 1, 2017 and July 2, 2016 and $6.2 Million and $9.7 Million for the Six Months ended July 1, 2017 and July 2, 2016 Respectively
2.7

 
7.6

 
10.0

 
15.7

Pension and Post Retirement Plans:
 
 
 
 
 
 
 
Reclassification Adjustments for Pension and Post Retirement Benefits included in Net Income, Net of Tax Effects of $0.2 Million and $0.4 Million for the Three Months Ended July 1, 2017 and July 2, 2016 and $0.4 Million and $0.6 Million for the Six Months Ended July 1, 2017 and July 2, 2016, Respectively
0.4

 
0.6

 
0.8

 
1.3

Other Comprehensive Income (Loss)
52.2

 
(35.4
)
 
108.7

 
1.4

Comprehensive Income
106.5

 
23.0

 
210.6

 
102.5

Less: Comprehensive Income Attributable to Noncontrolling Interests
1.8

 
0.9

 
3.6

 
2.4

Comprehensive Income Attributable to Regal Beloit Corporation
$
104.7

 
$
22.1

 
$
207.0

 
$
100.1

See accompanying Notes to Condensed Consolidated Financial Statements


5



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions, Except Per Share Data)
 
 
July 1,
2017
 
December 31,
2016
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
243.7

 
$
284.5

Trade Receivables, Less Allowances of $10.4 Million in 2017 and $11.5 Million in 2016
544.5

 
462.2

Inventories
698.2

 
660.8

Prepaid Expenses and Other Current Assets
156.7

 
124.5

Total Current Assets
1,643.1

 
1,532.0

Net Property, Plant and Equipment
637.3

 
627.5

Goodwill
1,469.0

 
1,453.2

Intangible Assets, Net of Amortization
692.3

 
711.7

Deferred Income Tax Benefits
27.5

 
22.4

Other Noncurrent Assets
13.8

 
11.7

Total Assets
$
4,483.0

 
$
4,358.5

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts Payable
$
406.5

 
$
334.2

Dividends Payable
11.6

 
10.7

Current Hedging Obligations
14.5

 
49.0

Accrued Compensation and Employee Benefits
75.7

 
70.1

Other Accrued Expenses
123.8

 
137.0

Current Maturities of Long-Term Debt
100.7

 
100.6

Total Current Liabilities
732.8

 
701.6

Long-Term Debt
1,199.5

 
1,310.9

Deferred Income Taxes
142.4

 
97.7

Noncurrent Hedging Obligations
1.1

 
17.6

Pension and Other Post Retirement Benefits
107.4

 
106.5

Other Noncurrent Liabilities
51.0

 
46.0

Commitments and Contingencies (see Note 12)

 

Equity:
 
 
 
Regal Beloit Corporation Shareholders' Equity:
 
 
 
Common Stock, $.01 par value, 100.0 Million Shares Authorized, 44.6 Million and 44.8 Million Shares Issued and Outstanding in 2017 and 2016, Respectively
0.4

 
0.4

Additional Paid-In Capital
890.8

 
904.5

Retained Earnings
1,525.0

 
1,452.0

Accumulated Other Comprehensive Loss
(210.4
)
 
(318.1
)
Total Regal Beloit Corporation Shareholders' Equity
2,205.8

 
2,038.8

Noncontrolling Interests
43.0

 
39.4

Total Equity
2,248.8

 
2,078.2

Total Liabilities and Equity
$
4,483.0

 
$
4,358.5

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 January 2, 2016
$
0.4

 
$
900.8

 
$
1,291.1

 
$
(255.0
)
 
$
45.5

 
$
1,982.8

Net Income

 

 
98.2

 

 
2.9

 
101.1

Other Comprehensive Income (Loss)

 

 

 
1.9

 
(0.5
)
 
1.4

Dividends Declared ($0.47 Per Share)

 

 
(20.9
)
 

 

 
(20.9
)
Stock Options Exercised, Including Income Tax Benefit and Share Cancellations

 
(1.7
)
 

 

 

 
(1.7
)
Dividends Declared to Noncontrolling Interests

 

 

 

 
(0.3
)
 
(0.3
)
Share-based Compensation

 
7.1

 

 

 

 
7.1

Purchase of Subsidiary Shares from Noncontrolling Interest

 
(7.2
)
 

 
(2.7
)
 
(9.7
)
 
$
(19.6
)
Balance as of July 2, 2016
$
0.4

 
$
899.0

 
$
1,368.4

 
$
(255.8
)
 
$
37.9

 
$
2,049.9

 
 
Common
Stock
$.01 Par
Value
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interests
 
Total
Equity
Balance as of December 31, 2016
$
0.4

 
$
904.5

 
$
1,452.0

 
$
(318.1
)
 
$
39.4

 
$
2,078.2

Net Income

 

 
99.3

 

 
2.6

 
101.9

Other Comprehensive Income

 

 

 
107.7

 
1.0

 
108.7

Dividends Declared ($0.50 Per Share)

 

 
(22.3
)
 

 

 
(22.3
)
Stock Options Exercised

 
(3.1
)
 

 

 

 
(3.1
)
Stock Repurchase

 
(17.7
)
 
(4.0
)
 

 

 
(21.7
)
Share-based Compensation

 
7.1

 

 

 

 
7.1

Balance as of July 1, 2017
$
0.4

 
$
890.8

 
$
1,525.0

 
$
(210.4
)
 
$
43.0

 
$
2,248.8

See accompanying Notes to Condensed Consolidated Financial Statements.

7



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
  
Six Months Ended
 
July 1,
2017
 
July 2,
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
101.9

 
$
101.1

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities (Net of Acquisitions and Divestitures):
 
 
 
Depreciation and Amortization
68.8

 
79.0

(Gain) Loss on Sale or Disposition of Assets, Net
(0.3
)
 
1.0

Share-Based Compensation Expense
7.1

 
7.1

Exit of Business
3.9

 

Gain on Sale of Businesses
(0.1
)
 
(11.6
)
Change in Operating Assets and Liabilities, Net of Acquisitions and Divestitures
(32.4
)
 
(0.5
)
Net Cash Provided By Operating Activities
148.9

 
176.1

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Additions to Property, Plant and Equipment
(33.7
)
 
(31.7
)
Sales of Investment Securities
0.5

 
30.3

Purchases of Investment Securities
(0.5
)
 
(25.8
)
Proceeds from Sale of Businesses
0.5

 
25.0

Proceeds from Sale of Assets
1.3

 
0.1

Net Cash Used In Investing Activities
(31.9
)
 
(2.1
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings Under Revolving Credit Facility
492.2

 
360.0

Repayments Under Revolving Credit Facility
(494.3
)
 
(338.0
)
Proceeds from Short-Term Borrowings
15.1

 
20.8

Repayments of Short-Term Borrowings
(15.0
)
 
(27.5
)
Proceeds from Long-Term Borrowings
0.3

 

Repayments of Long-Term Borrowings
(112.1
)
 
(125.2
)
Dividends Paid to Shareholders
(21.4
)
 
(20.5
)
Shares Surrendered for Taxes
(3.4
)
 
(1.9
)
Proceeds from the Exercise of Stock Options
0.4

 
0.5

Payments of Contingent Consideration
(5.3
)
 

Repurchase of Common Stock
(21.0
)
 

Distributions to Noncontrolling Interests

 
(0.3
)
Purchase of Subsidiary Shares from Noncontrolling Interest

 
(19.6
)
Net Cash Used In Financing Activities
(164.5
)
 
(151.7
)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
6.7

 
(3.7
)
Net Increase (Decrease) in Cash and Cash Equivalents
(40.8
)
 
18.6

Cash and Cash Equivalents at Beginning of Period
284.5

 
252.9

Cash and Cash Equivalents at End of Period
$
243.7

 
$
271.5

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash Paid For:
 
 
 
 Interest
$
26.8

 
$
27.3

 Income taxes
$
30.6

 
$
40.5


See accompanying Notes to Condensed Consolidated Financial Statements.

8



REGAL BELOIT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 1, 2017
(Unaudited)

1. BASIS OF PRESENTATION
The accompanying (a) condensed consolidated balance sheet of Regal Beloit Corporation (the “Company”) as of December 31, 2016, which has been derived from audited consolidated financial statements, and (b) unaudited interim condensed consolidated financial statements as of July 1, 2017 and for the three and six months ended July 1, 2017 and July 2, 2016, 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 2016 Annual Report on Form 10-K filed on March 1, 2017.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the three and six months ended July 1, 2017 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 30, 2017.
The condensed consolidated financial statements have been prepared in accordance with GAAP, which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company uses estimates in accounting for, among other items, allowance for doubtful accounts; excess and obsolete inventory; share-based compensation; acquisitions; product warranty obligations; pension and post retirement assets and liabilities; derivative fair values; goodwill and other asset impairments; health care reserves; retirement benefits; rebates and incentives; litigation claims and contingencies, including environmental matters; and income taxes. The Company accounts for changes to estimates and assumptions when warranted by factually based experience.
The Company operates on a 52/53 week fiscal year ending on the Saturday closest to December 31.
New Accounting Standards
In May 2017, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2017-09, Stock Compensation - Scope of Modification Accounting. The ASU amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification ("ASC") 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted and prospective application is required. The Company plans to adopt this pronouncement for fiscal years beginning December 31, 2017 and will consider the impact that this standard may have on future share based award changes, should they occur.

In February 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU amends current guidance to require employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in nonoperating expenses. Employers that do not present a measure of operating income are required to include the service cost component in the same line item as other employee compensation costs. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. The changes, which respond to input from financial statement users, are intended to classify costs according to their natures, and better align the effect of defined benefit plans on operating income with International Financial Reporting Standards. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The ASU will impact the components of income before taxes but will not impact the amount of income before taxes.

In February 2016, the FASB issued ASU 2016-02, Leases. The core principle of ASU 2016-02 is that an entity should recognize on its balance sheet assets and liabilities arising from a lease. In accordance with that principle, ASU 2016-02 requires that a lessee

9



recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying leased asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on the lease classification as a finance or operating lease. This new accounting guidance is effective for fiscal years beginning after December 15, 2018 under a modified retrospective approach and early adoption is permitted. The Company has identified a six step process to successfully implement the new Lease standard: Form a task force to become experts and take the lead on understanding and implementing the new Lease standard; Update lease inventories; Decide on transition method; Review legal agreements and debt covenants; Consider IT needs; Discuss with stakeholders. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements and has commenced the first step of identifying a task force to take the lead in implementing the new Lease standard.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, a comprehensive new revenue recognition standard that supersedes current revenue recognition requirements. This update requires the Company to recognize revenue at amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services at the time of transfer. ASU No. 2014-09 (and related updates) will become effective for the Company at the beginning of its 2018 fiscal year. The standard allows the option of using either a full retrospective or a modified retrospective approach for the adoption of the standard. The Company has identified a four step process to successfully implement the new revenue standard - data gathering, assessment, solution development, and solution implementation. The Company has completed Step one, data gathering, and is currently finishing the assessment phase. The Company is in the process of evaluating and quantifying the materiality of the standard’s impact on its consolidated financial statements. The Company plans to adopt this accounting standard update using the modified retrospective method, with the cumulative effect of initially applying this update recognized in the first reporting period of 2018. The Company is in the process of drafting an updated accounting policy, evaluating new disclosure requirements and identifying and implementing appropriate changes to its business processes, systems and controls to support recognition and disclosure under the new guidance.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The new guidance includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. The provisions include:
a.
recording all tax effects associated with stock-based compensation through the income statement, as opposed to recording certain amounts in other paid-in capital, which eliminates the requirement to calculate a "windfall pool";
b.
allowing entities to withhold shares to satisfy the employer's statutory tax withholding requirement up to the highest marginal tax rate applicable to employees rather than the employer's minimum statutory rate, without requiring liability classification for the award;
c.
modifying the requirement to estimate the number of awards that will ultimately vest by providing an accounting policy election to either estimate the number of forfeitures or recognize forfeitures as they occur;
d.
changing certain presentation requirements in the statement of cash flows, including removing the requirement to present excess tax benefits as an inflow from financing activities and an outflow from operating activities, and requiring the cash paid to taxing authorities arising from withheld shares to be classified as a financing activity; and
e.
the assumed proceeds from applying the treasury stock method when computing earnings per share is amended to exclude the amount of excess tax benefits that previously would have been recognized in additional paid-in capital.

The Company adopted the provisions of ASU 2016-09 on January 1, 2017. As a result of adopting the standard, the Changes in Operating Assets and Liabilities, Net of Acquisitions and Divestitures line in the Cash Flows From Operating Activities section on the Condensed Consolidated Statements of Cash Flows and the Shares Surrendered for Taxes line in the Cash Flows from Financing Activities section were both adjusted by $1.9 million for 2016. The presentation on the Condensed Consolidated Statements of Cash Flows for shares surrendered by employees to meet the minimum statutory withholding requirement and excess tax benefits were applied retrospectively. In addition, the Excess Tax Expense from Share-Based Compensation lines in the Cash Flows from Operating Activities section and the Cash Flows from Financing Activities section were removed. The Company removed the excess tax benefits from the calculation of dilutive shares on a prospective basis. In addition, the Company began recording all tax effects associated with stock-based compensation through the income statement on a prospective basis. The Company did not have any awards classified as liability awards due to the statutory tax withholding requirements as of January 1, 2017. The Company made an accounting policy election to continue to estimate forfeitures as it had previously.






10



2. OTHER FINANCIAL INFORMATION
Inventories
The approximate percentage distribution between major classes of inventories was as follows:
 
July 1,
2017
 
December 31,
2016
Raw Material and Work in Process
48%
 
45%
Finished Goods and Purchased Parts
52%
 
55%

Inventories are stated at cost, which is not in excess of market. Cost for approximately 50% of the Company's inventory at July 1, 2017, and 55% at December 31, 2016 was determined using the LIFO method.
Property, Plant and Equipment
Property, plant, and equipment by major classification was as follows (dollars in millions):
 
Useful Life in Years
 
July 1,
2017
 
December 31,
2016
Land and Improvements
 
 
$
79.6

 
$
76.7

Buildings and Improvements
3 - 50
 
292.2

 
280.4

Machinery and Equipment
3 - 15
 
970.8

 
929.9

Property, Plant and Equipment
 
 
1,342.6

 
1,287.0

Less: Accumulated Depreciation
 
 
(705.3
)
 
(659.5
)
Net Property, Plant and Equipment
 
 
$
637.3

 
$
627.5

Other

As part of the purchase agreement of the 2008 acquisition of the Wuxi Hwada Motor Co., the Company agreed that if certain relocation compensation was received for the relocation of the business, the Company would pay a portion of that compensation to the seller as part of a deferred contingent purchase price. During the six months ended July 1, 2017, a final deferred contingent purchase price payment of $5.3 million was made under this agreement.


3. ACQUISITIONS AND DIVESTITURES
There were no acquisition related expenses for the six months ended July 1, 2017 and July 2, 2016.
2016 Acquisitions

Elco Purchase
On January 18, 2016, the Company purchased the remaining shares owned by the joint venture partner in its Elco Group B.V. (“Elco”) joint venture increasing the Company’s ownership from 55.0% to 100.0% for $19.6 million. The purchase price of Elco is reflected as a component of equity.
2016 Divestitures

Mastergear Worldwide
On June 1, 2016, the Company sold its Mastergear Worldwide ("Mastergear") business to Rotork PLC for a purchase price of $25.1 million, subject to customary finalization. Mastergear was included in the Company's Power Transmission Solutions segment. Gains related to the sale of $0.1 million and $11.6 million were recorded as a reduction to Operating Expenses in the Condensed Consolidated Statements of Income during fiscal 2017 and 2016, respectively.
Venezuelan Subsidiary
On July 7, 2016, the Company sold the assets of its Venezuelan subsidiary, which had been included in the Company's Commercial and Industrial Systems segment, to a private company for $3.0 million. Of this amount, $1.0 million was received on the transaction

11



closing date and $2.0 million is to be received in 24 monthly installments. The Company may receive additional amounts in the future related to certain accounts receivable of this business. The gains will be recognized as the cash is received. The Company wrote down its investment and ceased operations of this subsidiary in 2015.

4. ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustments, hedging activities and pension and post retirement benefit adjustments are included in Equity in Accumulated Other Comprehensive Loss ("AOCI").
The changes in AOCI by component for the three and six months ended July 1, 2017 and July 2, 2016 were as follows (in millions):
 
Three Months Ended
 
July 1, 2017
 
Hedging Activities
 
Pension and Post Retirement Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning Balance
$
(14.4
)
 
$
(35.8
)
 
$
(211.9
)
 
$
(262.1
)
Other Comprehensive Income (Loss) before Reclassifications
16.1

 
(0.1
)
 
38.7

 
54.7

Tax Impact
(6.1
)
 

 

 
(6.1
)
Amounts Reclassified from Accumulated Other Comprehensive Loss
4.5

 
0.6

 

 
5.1

Tax Impact
(1.8
)
 
(0.2
)
 

 
(2.0
)
Net Current Period Other Comprehensive Income
12.7

 
0.3

 
38.7

 
51.7

Ending Balance
$
(1.7
)
 
$
(35.5
)
 
$
(173.2
)
 
$
(210.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
July 2, 2016
 
Hedging Activities
 
Pension and Post Retirement Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning Balance
$
(37.1
)
 
$
(34.7
)
 
$
(149.5
)
 
$
(221.3
)
Other Comprehensive Income (Loss) before Reclassifications
(17.8
)
 
0.5

 
(32.1
)
 
(49.4
)
Tax Impact
6.7

 

 

 
6.7

Amounts Reclassified from Accumulated Other Comprehensive Loss
12.3

 
1.0

 

 
13.3

Tax Impact
(4.7
)
 
(0.4
)
 

 
(5.1
)
  Net Current Period Other Comprehensive Income (Loss)
(3.5
)
 
1.1

 
(32.1
)
 
(34.5
)
Ending Balance
$
(40.6
)
 
$
(33.6
)
 
$
(181.6
)
 
$
(255.8
)

12



 
Six Months Ended
 
July 1, 2017
 
Hedging Activities
 
Pension and Post Retirement Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning Balance
$
(41.1
)
 
$
(36.0
)
 
$
(241.0
)
 
$
(318.1
)
Other Comprehensive Income (Loss) before Reclassifications
47.4

 
(0.3
)
 
67.8

 
114.9

Tax Impact
(18.0
)
 

 

 
(18.0
)
Amounts Reclassified from Accumulated Other Comprehensive Loss
16.2

 
1.2

 

 
17.4

Tax Impact
(6.2
)
 
(0.4
)
 

 
(6.6
)
Net Current Period Other Comprehensive Income
39.4

 
0.5

 
67.8

 
107.7

Ending Balance
$
(1.7
)
 
$
(35.5
)
 
$
(173.2
)
 
$
(210.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
July 2, 2016
 
Hedging Activities
 
Pension and Post Retirement Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning Balance
$
(47.5
)
 
$
(35.4
)
 
$
(172.1
)
 
$
(255.0
)
Other Comprehensive Income (Loss) before Reclassifications
(14.2
)
 
0.5

 
(6.8
)
 
(20.5
)
Tax Impact
5.4

 

 

 
5.4

Amounts Reclassified from Accumulated Other Comprehensive Loss
25.4

 
1.9

 

 
27.3

Tax Impact
(9.7
)
 
(0.6
)
 

 
(10.3
)
Net Current Period Other Comprehensive Income (Loss)
6.9

 
1.8

 
(6.8
)
 
1.9

Purchase of Subsidiary Shares from Noncontrolling Interest

 

 
(2.7
)
 
(2.7
)
Ending Balance
$
(40.6
)
 
$
(33.6
)
 
$
(181.6
)
 
$
(255.8
)

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

13



The following information presents changes to goodwill during the six months ended July 1, 2017 (in millions):
 
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
15.8

 
6.6

 
1.2

 
8.0

Balance as of July 1, 2017
$
1,469.0

 
$
547.2

 
$
343.0

 
$
578.8

 
 
 
 
 
 
 
 
Cumulative Goodwill Impairment Charges
$
275.7

 
$
244.8

 
$
7.7

 
$
23.2

Intangible Assets
Intangible assets consisted of the following (in millions):  
 
 
 
 
July 1, 2017
 
December 31, 2016
 
 
Weighted Average Amortization Period (Years)
 
Gross Value
 
Accumulated
Amortization
 
Gross Value
 
Accumulated
Amortization
Amortizable Intangible Assets:
 
 
 
 
 
 
 
 
 
 
  Customer Relationships
 
15
 
$
714.0

 
$
226.1

 
$
703.6

 
$
201.6

  Technology
 
11
 
191.1

 
116.5

 
189.7

 
109.5

  Trademarks
 
12
 
32.4

 
24.7

 
31.8

 
23.3

  Patent and Engineering Drawings
 
5
 
16.6

 
16.6

 
16.6

 
16.6

  Non-Compete Agreements
 
5
 
8.4

 
8.2

 
8.3

 
8.1

 
 
 
 
962.5

 
392.1

 
950.0

 
359.1

Non-Amortizable Trade Names
 
 
 
121.9

 

 
120.8

 

 
 
 
 
$
1,084.4

 
$
392.1

 
$
1,070.8

 
$
359.1

 
 
 
 
 
 
 
 
 
 
 

Amortization expense recorded for the three and six months ended July 1, 2017 was $13.9 million and $28.0 million, respectively. Amortization expense recorded for the three and six months ended July 2, 2016 was $15.8 million and $31.4 million, respectively. Amortization expense for 2017 is estimated to be $55.3 million.
Estimated expected future annual amortization for intangible assets is as follows (in millions):

 Year
 
Estimated Amortization
2018
 
$
53.3

2019
 
52.9

2020
 
49.8

2021
 
42.1

2022
 
40.4




6. BUSINESS SEGMENTS
The Commercial and Industrial Systems segment produces medium and large electric motors, power generation products, high-performance drives and controls, and starters. Applications include general commercial and industrial equipment, commercial HVAC, power generation, and oil and gas.
The Climate Solutions segment produces small motors, controls and air moving solutions. Applications include residential and

14



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.
The following sets forth certain financial information attributable to the Company's operating segments as of and for the three and six months ended July 1, 2017 and July 2, 2016 (in millions):
 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Eliminations
 
Total
As of and for Three Months Ended July 1, 2017
 
 
 
 
 
 
 
 
 
External Sales
$
407.4

 
$
270.5

 
$
191.3

 
$

 
$
869.2

Intersegment Sales
19.9

 
6.0

 
2.2

 
(28.1
)
 

  Total Sales
427.3

 
276.5

 
193.5

 
(28.1
)
 
869.2

Gross Profit
91.9

 
68.3

 
62.8

 

 
223.0

Operating Expenses
71.3

 
28.1

 
40.6

 

 
140.0

Income from Operations
20.6

 
40.2

 
22.2

 

 
83.0

Depreciation and Amortization
14.8

 
5.6

 
14.0

 

 
34.4

Capital Expenditures
11.1

 
2.3

 
3.3

 

 
16.7

As of and for Three Months Ended July 2, 2016
 
 
 
 
 
 
 
 
 
External Sales
$
394.7

 
$
254.5

 
189.4

 
$

 
$
838.6

Intersegment Sales
11.4

 
7.0

 
1.1

 
(19.5
)
 

  Total Sales
406.1

 
261.5

 
190.5

 
(19.5
)
 
838.6

Gross Profit
96.2

 
64.7

 
62.0

 

 
222.9

Operating Expenses
71.1

 
28.6

 
31.8

 

 
131.5

Income from Operations
25.1

 
36.1

 
30.2

 

 
91.4

Depreciation and Amortization
19.2

 
6.5

 
13.2

 

 
38.9

Capital Expenditures
9.6

 
3.6

 
3.6

 

 
16.8


15



 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Eliminations
 
Total
As of and for Six Months Ended July 1, 2017
 
 
 
 
 
 
 
 
 
External Sales
$
788.6

 
$
518.2

 
$
375.9

 
$

 
$
1,682.7

Intersegment Sales
35.8

 
14.2

 
2.9

 
(52.9
)
 

  Total Sales
824.4

 
532.4

 
378.8

 
(52.9
)
 
1,682.7

Gross Profit
187.5

 
129.0

 
122.1

 

 
438.6

Operating Expenses
141.1

 
57.6

 
82.1

 

 
280.8

Income from Operations
46.4

 
71.4

 
40.0

 

 
157.8

Depreciation and Amortization
30.0

 
11.1

 
27.7

 

 
68.8

Capital Expenditures
21.7

 
6.6

 
5.4

 

 
33.7

As of and for Six Months Ended July 2, 2016
 
 
 
 
 
 
 
 

External Sales
$
772.3

 
$
494.3

 
390.2

 
$

 
$
1,656.8

Intersegment Sales
22.7

 
12.2

 
2.0

 
(36.9
)
 

  Total Sales
795.0

 
506.5

 
392.2

 
(36.9
)
 
1,656.8

Gross Profit
189.8

 
120.9

 
129.6

 

 
440.3

Operating Expenses
143.0

 
60.2

 
76.4

 

 
279.6

Income from Operations
46.8

 
60.7

 
53.2

 

 
160.7

Depreciation and Amortization
38.9

 
12.7

 
27.4

 

 
79.0

Capital Expenditures
16.9

 
7.5

 
7.3

 

 
31.7



The following table presents identifiable assets information attributable to the Company's operating segments as of July 1, 2017 and December 31, 2016 (in millions):
 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Total
Identifiable Assets as of July 1, 2017
$
1,926.2

 
$
946.1

 
$
1,610.7

 
$
4,483.0

Identifiable Assets as of December 31, 2016
$
1,872.7

 
$
881.8

 
$
1,604.0

 
$
4,358.5


7. DEBT AND BANK CREDIT FACILITIES
The Company’s indebtedness as of July 1, 2017 and December 31, 2016 was as follows (in millions):
 
July 1,
2017
 
December 31,
2016
Term Facility
$
686.1

 
$
798.1

Senior Notes
600.0

 
600.0

Multicurrency Revolving Facility
15.9

 
18.0

Other
5.3

 
5.1

Less: Debt Issuance costs
(7.1
)
 
(9.7
)
 
1,300.2

 
1,411.5

Less: Current Maturities
100.7

 
100.6

Non-Current Portion
$
1,199.5

 
$
1,310.9





16



The Credit Agreement
In connection with the Company's acquisition of the Power Transmission Solutions business of Emerson Electric Co. (the "PTS Acquisition"), on January 30, 2015, the Company entered into a 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”), including a $100.0 million letter of credit sub facility, available for general corporate purposes. Borrowings under the Credit Agreement bear interest at floating rates based upon indices determined by the currency of the borrowing, plus an applicable margin determined by reference to the Company's consolidated funded debt to consolidated EBITDA ratio or at an alternative base rate.
The Term Facility was drawn in full on January 30, 2015 in connection with the closing of the PTS Acquisition. The loan under the Term Facility requires quarterly amortization at a rate starting at 5.0% per annum, increasing to 7.5% per annum after two years and further increasing to 10.0% per annum for the last two years of the Term Facility, unless previously prepaid. The weighted average interest rate on the Term Facility was 2.5% and 2.4% for the three and six months ended July 1, 2017 and 1.9% for the three and six months ended July 2, 2016. The Credit Agreement requires the Company prepay the loans under the Term Facility with 100% of the net cash proceeds received from specified asset sales and borrowed money indebtedness, subject to certain exceptions.
At July 1, 2017, the Company had borrowings under the Multicurrency Revolving Facility in the amount of $15.9 million, $32.3 million of standby letters of credit issued under the facility, and $451.8 million of available borrowing capacity. The average daily balance in borrowings under the Multicurrency Revolving Facility was $114.8 million and $109.2 million, and the weighted average interest rate on the Multicurrency Revolving Facility was 2.5% and 2.4% for the three and six months ended July 1, 2017, respectively. The average daily balance in borrowings under the Multicurrency Revolving Facility was $29.8 million and $52.7 million and the weighted average interest rate on the Multicurrency Revolving Facility was 1.9% for the three and six months ended July 2, 2016. The Company pays a non-use fee on the aggregate unused amount of the Multicurrency Revolving Facility at a rate determined by reference to its consolidated funded debt to consolidated EBITDA ratio.
Senior Notes
At July 1, 2017, 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”). The 2011 Notes are included in Long-Term Debt and the 2007 Notes are included in Current Maturities of Long-Term Debt on the Condensed Consolidated Balance Sheets.
Details on the Notes at July 1, 2017 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 July 1, 2017, the interest rate was 1.9%. At December 31, 2016, the interest rate was 1.6%
The Company has interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk (see also Note 13 of Notes to the Condensed Consolidated Financial Statements).
Financial Covenants

The Credit Agreement and the Notes require the Company to meet specified financial ratios and to satisfy certain financial condition tests. The Company was in compliance with all financial covenants contained in the Notes and the Credit Agreement as of July 1, 2017.
 
Other Notes Payable


17



At July 1, 2017, other notes payable of approximately $5.3 million were outstanding with a weighted average interest rate of 5.1%. At December 31, 2016, other notes payable of approximately $5.1 million were outstanding with a weighted average rate of 5.6%.

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 $1,325.3 million and $1,433.4 million as of July 1, 2017 and December 31, 2016, respectively.

8. POST RETIREMENT PLANS
The Company’s net periodic benefit cost was comprised of the following components (in millions):
 
 
Three Months Ended
 
Six Months Ended
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Service Cost
$
1.8

 
$
2.0

 
$
3.6

 
$
4.1

Interest Cost
2.4

 
2.7

 
4.8

 
5.1

Expected Return on Plan Assets
(2.8
)
 
(2.9
)
 
(5.6
)
 
(5.9
)
Amortization of Prior Service Cost and Net Actuarial Loss
0.6

 
1.0

 
1.2

 
1.9

Net Periodic Benefit Cost
$
2.0

 
$
2.8

 
$
4.0

 
$
5.2


The estimated net actuarial loss and prior service cost for post retirement plans that will be amortized from AOCI into net periodic benefit cost during the 2017 fiscal year is $2.2 million and $0.2 million, respectively.
For the three months ended July 1, 2017 and July 2, 2016, the Company contributed $1.4 million and $1.1 million, respectively, to post retirement plans. For the six months ended July 1, 2017 and July 2, 2016, the Company contributed $2.2 million and $2.2 million, respectively, to post retirement plans. The Company expects to make total contributions of $4.4 million in 2017. The Company contributed a total of $10.4 million in fiscal 2016. The assumptions used in the valuation of the Company’s post retirement plans and in the target investment allocation have remained the same as those disclosed in the Company’s 2016 Annual Report on Form 10-K filed on March 1, 2017.

9. SHAREHOLDERS’ EQUITY
Repurchase of Common Stock

The Company acquired and retired 276,804 shares of its common stock in the quarter ended July 1, 2017, at an average cost of $78.42 per share for a total cost of $21.7 million. The repurchases were under the 3.0 million share repurchase program approved by the Company’s Board of Directors in November, 2013. There are approximately 2.0 million shares of the Company's 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 $4.1 million and $3.8 million in share-based compensation expense for the three months ended July 1, 2017 and July 2, 2016, respectively. Share-based compensation expense was $7.1 million for the six months ended July 1, 2017 and July 2, 2016. The total income tax benefit recognized in the Consolidated Statements of Income for share-based compensation expense was $1.6 million and $1.4 million for the three months ended July 1, 2017 and July 2, 2016, respectively. The total income tax benefit recognized in the Consolidated Statements of Income for share-based compensation expense was $2.7 million for the six months ended July 1, 2017 and July 2, 2016. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award. As of July 1, 2017, total unrecognized compensation cost related to share-based compensation awards was approximately $31.3 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 2.4 years.

Approximately 0.9 million shares were available for future grant under the 2013 Equity Incentive Plan at July 1, 2017.


18



Options and Stock Appreciation Rights
The Company uses stock settled stock appreciation rights (“SARs”) as a form of share-based incentive awards. SARs are the right to receive stock in an amount equal to the appreciation in value of a share of stock over the base price per share that generally vest over 5 years and expire 10 years from the grant date. All grants are made at prices equal to the fair market value of the stock on the grant date. For the six months ended July 1, 2017 and July 2, 2016, expired and canceled shares were immaterial.
The table below presents share-based compensation activity for the six months ended July 1, 2017 and July 2, 2016 (in millions):
 
 
July 1,
2017
 
July 2,
2016
Total intrinsic value of share-based incentive awards exercised
 
$
3.1

 
$
0.3

Cash received from stock option exercises
 
0.4

 
0.5

Income tax benefit (expense) from the exercise of stock options
 
0.7

 
(0.1
)
Total fair value of share-based incentive awards vested
 
4.3

 
4.8


The assumptions used in the Company's Black-Scholes valuation related to grants for options and SARs were as follows:
 
2017
 
2016
Per share weighted average fair value of grants
$
23.31

 
$
15.22

Risk-free interest rate
2.1
%
 
1.4
%
Expected life (years)
7.0

 
7.0

Expected volatility
28.6
%
 
29.6
%
Expected dividend yield
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 adjusted for the estimated exercise dates of unexercised awards.
Following is a summary of share-based incentive plan grant activity (options and SARs) for the six months ended July 1, 2017.
Number of Shares Under Options and SARs
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (years)
 
Aggregate Intrinsic Value (in millions)
Exercisable at December 31, 2016
1,610,499

 
$
63.16

 
 
 
 
Granted
194,142

 
80.70

 
 
 
 
Exercised
(134,991
)
 
52.67

 
 
 
 
Forfeited
(1,180
)
 
54.61

 
 
 
 
Expired
(9,485
)
 
64.21

 
 
 
 
Outstanding at July 1, 2017
1,658,985

 
$
66.07

 
6.1
 
$
25.4

Exercisable at July 1, 2017
989,761

 
$
63.93

 
4.3
 
$
17.4


Compensation expense recognized related to options and SARs was $2.2 million for the six months ended July 1, 2017.
As of July 1, 2017, there was $12.0 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 3.6 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

19



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 six months ended July 1, 2017:
 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (years)
Unvested RSAs at December 31, 2016
 
19,593

 
$
57.43

 
0.4
Granted
 
13,941

 
80.70

 
 
Vested
 
(19,593
)
 
57.43

 
 
Unvested RSAs at July 1, 2017
 
13,941

 
$
80.70

 
0.9

RSAs vest on the first anniversary of the grant date, provided the holder of the shares is continuously employed by or in the service of the Company until the vesting date. Compensation expense recognized related to the RSAs was $0.6 million for the six months ended July 1, 2017.
As of July 1, 2017, there was $1.0 million of unrecognized compensation cost related to non-vested RSAs that is expected to be recognized as a charge to earnings over a weighted average period of 0.9 years.
Following is a summary of RSU award activity for the six months ended July 1, 2017:
 
 
 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (years)
Unvested RSUs at December 31, 2016
 
277,863

 
$
69.23

 
1.7
Granted
 
75,614

 
80.46

 
 
Vested
 
(78,625
)
 
75.15

 
 
Forfeited
 
(1,634
)
 
67.90

 
 
Unvested RSUs at July 1, 2017
 
273,218

 
$
70.64

 
2.1
RSUs vest on the third anniversary of the grant date, provided the holder of the RSUs is continuously employed by the Company until the vesting date. Compensation expense recognized related to the RSUs was $3.3 million for the six months ended July 1, 2017.
As of July 1, 2017, there was $11.4 million of unrecognized compensation cost related to non-vested RSUs that is expected to be recognized as a charge to earnings over a weighted average period of 2.1 years.
Performance Share Units
Performance share 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 award agreements, acceleration of vesting may occur under a change in control, death or disability. There are no voting rights associated with PSUs until vesting occurs and a share of stock is issued. Some of the PSU awards are valued using a Monte Carlo simulation method as of the grant date while others are valued using the closing market price as of the grant date depending on the performance criteria for the award.
The assumptions used in the Company's Monte Carlo simulation related to grants for performance share units were as follows:
 
July 1, 2017
 
July 2, 2016
Risk-free interest rate
1.6
%
 
0.9
%
Expected life (years)
3.0

 
3.0

Expected volatility
24.0
%
 
23.0
%
Expected dividend yield
1.3
%
 
1.7
%

20




Following is a summary of PSU award activity for the six months ended July 1, 2017:
 
 
 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (years)
Unvested PSUs at December 31, 2016
 
133,340

 
$
65.28

 
2.0
Granted
 
48,403

 
90.80

 
 
Vested
 
(110
)
 
83.74

 
 
Forfeited
 
(24,705
)
 
83.21

 
 
Unvested PSUs at July 1, 2017
 
156,928

 
$
70.31

 
2.4
Compensation expense for awards granted is 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 $1.0 million for the six months ended July 1, 2017. Total unrecognized compensation expense for all PSUs granted as of July 1, 2017 is estimated to be $6.9 million recognized as a charge to earnings over a weighted average period of 2.4 years.

10. INCOME TAXES
The effective tax rate for the three months ended July 1, 2017 was 21.6% versus 24.9% for the three months ended July 2, 2016. The effective tax rate for the six months ended July 1, 2017 was 22.0% versus 24.1% for the six months ended July 2, 2016. The change in the effective tax rate for the three months and six months ended July 1, 2017 was primarily driven by the mix of earnings and the 2016 gain derived from the sale of the Mastergear business. The lower effective rate as compared to the 35.0% statutory Federal income tax rate is driven by lower foreign tax rates.
As of July 1, 2017 and December 31, 2016, the Company had approximately $10.2 million and $10.0 million, respectively, of unrecognized tax benefits, all of which would impact the effective income tax rate if recognized. Potential interest and penalties related to unrecognized tax benefits are recorded in income tax expense.
With few exceptions, the Company is no longer subject to US Federal and state/local income tax examinations by tax authorities for years prior to 2012, and the Company is no longer subject to non-US income tax examinations by tax authorities for years prior to 2010.
11. 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. Options for common shares where the exercise price was above the market price have been excluded from the calculation of effect of dilutive securities shown below; the amount of the anti-dilutive shares were 0.4 million and 1.3 million for the three months ended July 1, 2017 and July 2, 2016, respectively, and 0.4 million and 1.2 million for the six months ended July 1, 2017 and July 2, 2016, respectively. The following table reconciles the basic and diluted shares used in earnings per share calculations for the three and six months ended July 1, 2017 and July 2, 2016 (in millions):
 
Three Months Ended
 
Six Months Ended
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Denominator for Basic Earnings Per Share
44.7

 
44.7

 
44.8

 
44.7

Effect of Dilutive Securities
0.4

 
0.3

 
0.3

 
0.3

Denominator for Diluted Earnings Per Share
45.1

 
45.0

 
45.1

 
45.0



21



12. CONTINGENCIES
One of the Company's subsidiaries that it acquired in 2007 is subject to numerous claims filed in various jurisdictions relating to certain sub-fractional motors that were primarily manufactured through 2004 and that were included as components of residential and commercial ventilation units manufactured and sold in high volumes by a third party. These ventilation units are subject to 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. The Company has recorded an estimated liability for incurred claims. Based on the current facts, the Company cannot assure that these claims, individually or in the aggregate, will not have a material adverse effect on its subsidiary's financial condition. The Company's subsidiary cannot reasonably predict the outcome of these claims, the nature or extent of any CPSC or other remedial actions, if any, that the Company's subsidiary may need to undertake with respect to motors that remain in the field, or the costs that may be incurred, some of which could be significant.
The Company is, from time to time, party to litigation and other legal or regulatory proceedings that arise in the normal course of its business operations and the outcomes of which are subject to significant uncertainty, including product warranty and liability claims, contract disputes and environmental, asbestos, intellectual property, employment and other litigation matters. The Company's products are used in a variety of industrial, commercial and residential applications that subject the Company to claims that the use of its products is alleged to have resulted in injury or other damage. Many of these matters will only be resolved when one or more future events occur or fail to occur. Management conducts regular reviews, including updates from legal counsel, to assess the need for accounting recognition or disclosure of these contingencies, and such assessment inherently involves an exercise in judgment. The Company accrues for exposures in amounts that it believes are adequate, and the Company does not believe that the outcome of any such lawsuit individually or collectively will have a material effect on the Company's financial position, its results of operations or its cash flows.
The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience. The following is a reconciliation of the changes in accrued warranty costs for the three and six months ended July 1, 2017 and July 2, 2016 (in millions):
 
Three Months Ended
 
Six Months Ended
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Beginning Balance
$
18.2

 
$
17.5

 
$
20.3

 
$
19.1

Less: Payments
(4.5
)
 
(4.6
)
 
(12.8
)
 
(9.7
)
Provisions
4.4

 
6.3

 
10.5

 
9.8

Translation Adjustments

 

 
0.1

 

Ending Balance
$
18.1

 
$
19.2

 
$
18.1

 
$
19.2

These liabilities are included in Other Accrued Expenses and Other Noncurrent Liabilities on the Consolidated Balance Sheet.

13. DERIVATIVE 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 entered into 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.

22



The Company recognizes all derivative instruments as either assets or liabilities at fair value in the statement of financial position. The Company designates commodity forward contracts as cash flow hedges of forecasted purchases of commodities, currency forward contracts as cash flow hedges of forecasted foreign currency cash flows and interest rate swaps as cash flow hedges of forecasted LIBOR-based interest payments. There were no significant collateral deposits on derivative financial instruments as of July 1, 2017.
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.
At July 1, 2017, the Company had $(2.1) million, net of tax, of derivative losses on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings. At December 31, 2016, the Company had $(7.5) million, net of tax, of derivative losses on closed hedge instruments in AOCI that was subsequently realized in earnings when the hedged items impacted earnings.
As of July 1, 2017, the Company had the following currency forward contracts outstanding (with maturities extending through October 2019) to hedge forecasted foreign currency cash flows (in millions):
 
Notional
Amount (in US Dollars)
Chinese Renminbi
$
324.2

Mexican Peso
229.8

Euro
59.8

Indian Rupee
40.7

Canadian Dollar
37.1

Australian Dollar
13.7

Thai Baht
6.2

British Pound
7.8


As of July 1, 2017, the Company had the following commodity forward contracts outstanding (with maturities extending through December 2018) to hedge forecasted purchases of commodities (notional amounts expressed in terms of the dollar value of the hedged item (in millions):
 
Notional
Amount
Copper
$
62.9

Aluminum
5.3



23



As of July 1, 2017, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swap was $100.0 million (with maturity in August 2017).
Fair values of derivative instruments as of July 1, 2017 and December 31, 2016 were (in millions):

 
July 1, 2017
 
Prepaid
Expenses and Other Current Assets
 
Other
Noncurrent
Assets
 
Current Hedging
Obligations

 
Noncurrent Hedging
Obligations
Designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap contracts
$

 
$

 
$
1.1

 
$

Currency contracts
6.9

 
5.1

 
12.8

 
1.1

Commodity contracts
5.1

 
0.2

 
0.2

 

Not designated as hedging instruments:
 
 
 
 
 
 
 
Currency contracts
3.2

 

 
0.4

 

Commodity contracts
0.1

 

 

 

Total Derivatives
$
15.3

 
$
5.3

 
$
14.5

 
$
1.1

 
 
December 31, 2016
 
Prepaid
Expenses and Other Current Assets
 
Other
Noncurrent
Assets
 
Current Hedging
Obligations
 
Noncurrent Hedging
Obligations
Designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap contracts
$

 
$

 
$
3.3

 
$

Currency contracts
1.3

 
0.4

 
39.7

 
17.6

Commodity contracts
4.7

 

 

 

Not designated as hedging instruments:
 
 
 
 
 
 
 
Currency contracts
1.5

 

 
6.0

 

Commodity contracts
2.6

 

 

 

Total Derivatives
$
10.1

 
$
0.4

 
$
49.0

 
$
17.6



24



The effect of derivative instruments on the Condensed Consolidated Statements of Income and Comprehensive Income (pre-tax) was as follows (in millions):

Derivatives Designated as Cash Flow Hedging Instruments
 
 
Three Months Ended
 
July 1, 2017
 
July 2, 2016
 
Commodity
Forwards
 
Currency
Forwards
 
Interest
Rate
Swaps
 
Total
 
Commodity
Forwards
 
Currency
Forwards
 
Interest
Rate
Swaps
 
Total
Gain (Loss) recognized in Other Comprehensive Income (Loss)
$
2.2

 
$
13.9

 
$