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REGAL REXNORD CORP - Quarter Report: 2020 March (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended March 28, 2020 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
 
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock
RBC
New York Stock Exchange
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      No  
Indicate by check mark whether the registrant has submitted electronically 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      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:
Large Accelerated Filer
 

 
Accelerated Filer
 
Non-accelerated filer
 
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  
On April 27, 2020 the registrant had outstanding 40,519,715 shares of common stock, $0.01 par value per share.





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


3



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:

the continued financial and operational impacts of and uncertainties relating to the COVID-19 pandemic on us and our customers and supplier and the geographies in which we operate;
uncertainties regarding our ability to execute our restructuring plans within expected costs and timing;
actions taken by our competitors and our ability to effectively compete in the increasingly competitive global electric motor, drives and controls, power generation and power transmission industries;
our ability to develop new products based on technological innovation, such as the Internet of Things, and marketplace acceptance of new and existing products, including products related to technology not yet adopted or utilized in certain geographic locations in which we do business;
fluctuations in commodity prices and raw material costs;
our dependence on significant customers;
risks associated with global manufacturing, including risks associated with public health crises;
issues and costs arising from the integration of acquired companies and businesses and the timing and impact of purchase accounting adjustments;
effects on earnings of any significant impairment of goodwill or intangible assets;
prolonged declines or disruption in one or more markets we serve, such as heating, ventilation, air conditioning ("HVAC"), refrigeration, power generation, oil and gas, unit material handling or water heating;
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, tariffs, immigration, customs, border actions 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;
our overall debt levels and our ability to repay principal and interest on our outstanding debt;
changes in the method of determining London Interbank Offered Rate ("LIBOR"), or the replacement of LIBOR with an alternative reference rate;
unanticipated liabilities of acquired businesses;
unanticipated adverse effects or liabilities from business exits or divestitures;
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;
losses from failures, breaches, attacks or disclosures involving our information technology infrastructure and data;
cyclical downturns affecting the global market for capital goods; and
other risks and uncertainties including but not limited to those described in “Part I - Item 1A - Risk Factors” in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") on February 26, 2020 and from time to time in other filed reports.

Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and are 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 uncertainties is included in "Part I - Item 1A - Risk Factors" in our Annual Report on Form 10-K filed with the SEC on February 26, 2020 and within this Quarterly Report on Form 10-Q.


4



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
 
March 28, 2020
 
March 30, 2019
Net Sales
$
734.2

 
$
853.8

Cost of Sales
530.9

 
619.2

Gross Profit
203.3

 
234.6

Operating Expenses
131.9

 
145.2

Gain on Divestiture of Businesses
(0.1
)
 
(41.2
)
Asset Impairments
1.5

 
10.0

       Total Operating Expenses
133.3

 
114.0

Income from Operations
70.0

 
120.6

Other (Income) Expenses, net
(1.1
)
 
0.1

Interest Expense
11.6

 
13.6

Interest Income
1.1

 
1.1

Income before Taxes
60.6

 
108.0

Provision for Income Taxes
13.9

 
21.2

Net Income
46.7

 
86.8

Less: Net Income Attributable to Noncontrolling Interests
0.9

 
0.9

Net Income Attributable to Regal Beloit Corporation
$
45.8

 
$
85.9

Earnings Per Share Attributable to Regal Beloit Corporation:
 
 
 
Basic
$
1.13

 
$
2.01

Assuming Dilution
$
1.12

 
$
1.99

Weighted Average Number of Shares Outstanding:
 
 
 
Basic
40.6

 
42.8

Assuming Dilution
40.8

 
43.1


See accompanying Notes to Condensed Consolidated Financial Statements


5



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Millions)
 
 
Three Months Ended
 
March 28, 2020
 
March 30, 2019
Net Income
$
46.7

 
$
86.8

Other Comprehensive Income (Loss) Net of Tax:
 
 
 
Foreign Currency Translation Adjustments
(57.5
)
 
11.2

Reclassification of Foreign Currency Translation Adjustments included in Net Income, Net of $0.0 Million Tax Effects for the Three Months Ended March 28, 2020 and March 30, 2019, Respectively

 
2.2

Hedging Activities:
 
 
 
Increase (Decrease) in Fair Value of Hedging Activities, Net of Tax Effects of $(9.4) Million and $4.4 Million for the Three Months Ended March 28, 2020 and March 30, 2019, Respectively
(29.6
)
 
14.1

Reclassification of Losses (Gains) included in Net Income, Net of Tax Effects of $(0.6) Million and $0.1 Million for the Three Months Ended March 28, 2020 and March 30, 2019, Respectively
(2.0
)
 
0.3

Pension and Post Retirement Plans:
 
 
 
Reclassification Adjustments for Pension and Post Retirement Benefits included in Net Income, Net of Tax Effects of $0.0 Million and $0.1 Million for the Three Months Ended March 28, 2020 and March 30, 2019, Respectively
0.1

 
0.4

Other Comprehensive Income (Loss)
(89.0
)
 
28.2

Comprehensive Income (Loss)
(42.3
)
 
115.0

Less: Comprehensive Income Attributable to Noncontrolling Interests
0.2

 
1.4

Comprehensive Income (Loss) Attributable to Regal Beloit Corporation
$
(42.5
)
 
$
113.6

See accompanying Notes to Condensed Consolidated Financial Statements


6



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions, Except Per Share Data)
 
 
March 28, 2020
 
December 28, 2019
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
604.5

 
$
331.4

Trade Receivables, Less Allowances of $12.1 Million in 2020 and $9.7 Million in 2019
464.0

 
461.4

Inventories
655.3

 
678.4

Prepaid Expenses and Other Current Assets
104.0

 
133.7

Assets Held for Sale
6.6

 
2.8

Total Current Assets
1,834.4

 
1,607.7

Net Property, Plant, and Equipment
570.3

 
605.0

Operating Lease Assets
71.4

 
71.0

Goodwill
1,494.0

 
1,501.3

Intangible Assets, Net of Amortization
552.8

 
567.2

Deferred Income Tax Benefits
41.8

 
58.4

Other Noncurrent Assets
21.2

 
20.1

Total Assets
$
4,585.9

 
$
4,430.7

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts Payable
$
340.3

 
$
337.0

Dividends Payable
12.1

 
12.2

Current Hedging Obligations
29.5

 
3.4

Accrued Compensation and Employee Benefits
63.2

 
67.3

Other Accrued Expenses
112.8

 
118.4

Current Operating Lease Liabilities
21.8

 
21.6

Current Maturities of Long-Term Debt
0.6

 
0.6

Total Current Liabilities
580.3

 
560.5

Long-Term Debt
1,364.3

 
1,136.9

Deferred Income Taxes
161.3

 
171.9

Noncurrent Hedging Obligations
7.0

 
1.2

Pension and Other Post Retirement Benefits
78.4

 
80.8

Noncurrent Operating Lease Liabilities
51.4

 
51.0

Other Noncurrent Liabilities
43.1

 
48.0

Contingencies (see Note 13)

 

Equity:
 
 
 
Regal Beloit Corporation Shareholders' Equity:
 
 
 
Common Stock, $0.01 par value, 100.0 Million Shares Authorized, 40.5 Million and 40.8 Million Shares Issued and Outstanding for 2020 and 2019, Respectively
0.4

 
0.4

Additional Paid-In Capital
692.5

 
701.8

Retained Earnings
1,903.8

 
1,886.7

Accumulated Other Comprehensive Loss
(326.1
)
 
(237.8
)
Total Regal Beloit Corporation Shareholders' Equity
2,270.6

 
2,351.1

Noncontrolling Interests
29.5

 
29.3

Total Equity
2,300.1

 
2,380.4

Total Liabilities and Equity
$
4,585.9

 
$
4,430.7

See accompanying Notes to Condensed Consolidated Financial Statements.

7



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(Dollars in Millions, Except Per Share Data)
 
 
Three Months Ended
 
Common Stock $0.01 Par Value
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Noncontrolling Interests
 
Total Equity
December 28, 2019
$
0.4

 
$
701.8

 
$
1,886.7

 
$
(237.8
)
 
$
29.3

 
$
2,380.4

Net Income

 

 
45.8

 

 
0.9

 
46.7

Other Comprehensive Loss

 

 

 
(88.3
)
 
(0.7
)
 
(89.0
)
Dividends Declared ($0.30 Per Share)

 

 
(12.1
)
 

 

 
(12.1
)
Stock Options Exercised

 
(0.9
)
 

 

 

 
(0.9
)
Stock Repurchase

 
(11.1
)
 
(13.9
)
 

 

 
(25.0
)
Share-Based Compensation

 
2.7

 

 

 

 
2.7

Adoption of ASU 2016-13

 

 
(2.7
)
 

 

 
(2.7
)
March 28, 2020
$
0.4

 
$
692.5

 
$
1,903.8

 
$
(326.1
)
 
$
29.5

 
$
2,300.1

 
 
 
 
 
 
 
 
 
 
 
 
December 29, 2018
$
0.4

 
$
783.6

 
$
1,777.9

 
$
(251.4
)
 
$
28.0

 
$
2,338.5

Net Income

 

 
85.9

 

 
0.9

 
86.8

Other Comprehensive Income

 

 

 
27.7

 
0.5

 
28.2

Dividends Declared ($0.28 Per Share)

 

 
(12.0
)
 

 

 
(12.0
)
Stock Options Exercised

 
(1.5
)
 

 

 

 
(1.5
)
Share-Based Compensation

 
4.3

 

 

 

 
4.3

Dividends Declared to Noncontrolling Interests

 

 

 

 
(0.3
)
 
(0.3
)
March 30, 2019
$
0.4

 
$
786.4

 
$
1,851.8

 
$
(223.7
)
 
$
29.1

 
$
2,444.0

 
See accompanying Notes to Condensed Consolidated Financial Statements.

8



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
 
Three Months Ended
 
March 28, 2020
 
March 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
46.7

 
$
86.8

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities (Net of Acquisitions and Divestitures):
 
 
 
Depreciation and Amortization
32.6

 
34.3

Asset Impairments
1.5

 
10.0

Noncash Lease Expense
7.6

 
3.9

Loss on Sale or Disposition of Assets, Net
0.7

 
0.1

Share-Based Compensation Expense
2.7

 
4.3

Gain on Divestiture of Businesses
(0.1
)
 
(41.2
)
Change in Operating Assets and Liabilities
11.0

 
(79.9
)
Net Cash Provided by Operating Activities
102.7

 
18.3

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Additions to Property, Plant and Equipment
(10.9
)
 
(20.2
)
Proceeds Received from Sales of Property, Plant and Equipment
2.7

 

Proceeds from Divestiture of Businesses
0.3

 
119.4

Net Cash (Used In) Provided by Investing Activities
(7.9
)
 
99.2

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings Under Revolving Credit Facility
409.7

 
302.7

Repayments Under Revolving Credit Facility
(182.6
)
 
(372.3
)
Proceeds from Short-Term Borrowings
1.5

 
13.2

Repayments of Short-Term Borrowings
(1.5
)
 
(11.6
)
Repayments of Long-Term Borrowings
(0.1
)
 
(24.1
)
Dividends Paid to Shareholders
(12.2
)
 
(12.0
)
Shares Surrendered for Taxes
(1.1
)
 
(1.6
)
Repurchase of Common Stock
(25.0
)
 

Distributions to Noncontrolling Interests

 
(0.3
)
Net Cash Provided by (Used In) Financing Activities
188.7

 
(106.0
)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
(10.4
)
 
4.2

Net Increase in Cash and Cash Equivalents
273.1

 
15.7

Cash and Cash Equivalents at Beginning of Period
331.4

 
248.6

Cash and Cash Equivalents at End of Period
$
604.5

 
$
264.3

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash Paid For:
 
 
 
 Interest
$
16.1

 
$
18.1

 Income taxes
$
7.3

 
$
7.0


See accompanying Notes to Condensed Consolidated Financial Statements.

9



REGAL BELOIT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 28, 2020
(Unaudited)

1. BASIS OF PRESENTATION
The accompanying (a) Condensed Consolidated Balance Sheet of Regal Beloit Corporation (the “Company”) as of December 28, 2019, which has been derived from audited Consolidated Financial Statements, and (b) unaudited interim Condensed Consolidated Financial Statements as of March 28, 2020 and for the three months ended March 28, 2020 and March 30, 2019, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s 2019 Annual Report on Form 10-K filed on February 26, 2020.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the three months ended March 28, 2020 are not necessarily indicative of the results that may be expected for the entire fiscal year ending January 2, 2021.
The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP, which requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Condensed Consolidated Financial Statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company uses estimates in accounting for, among other items, allowance for doubtful accounts; excess and obsolete inventory; share-based compensation; acquisitions; product warranty obligations; pension and post retirement assets and liabilities; derivative fair values; goodwill and other asset impairments; health care reserves; retirement benefits; rebates and incentives; litigation claims and contingencies, including environmental matters; and income taxes. The Company accounts for changes to estimates and assumptions when warranted by factually based experience.
The Company operates on a 52/53 week fiscal year ending on the Saturday closest to December 31.
Recently Issued Accounting Standards
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20). The ASU addresses modifications to the disclosure requirements for Defined Benefit Plans. Under ASU 2018-14 the disclosure requirements that can be removed are amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, amount and timing of plan assets expected to be returned to the employer, and the effects of a one-percentage-point change in assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic benefit costs and benefit obligations for postretirement health care benefits. Additional disclosures are required for the weighted -average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation for significant gains and losses related to the changes in the benefit obligation for the period. If a defined benefit pension plan has a projected benefit obligation greater than plan assets the projected benefit obligation and fair value of plan assets should be disclosed. This additional disclosure is also required when comparing the accumulated benefit obligation to plan assets. This ASU becomes effective for fiscal years ending after December 15, 2020 on a retrospective basis for all years presented. Early adoption is permitted. The Company is evaluating the effect of adopting this new accounting guidance, but does not anticipate a material impact on the financial statement disclosures.

Adopted Accounting Standards

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU focuses on updates around disclosures of Level 3 fair value measurements and it presents modifications to current disclosure requirements. The additional requirements under this ASU include disclosure for the changes in unrealized gains and losses included in other comprehensive income ("OCI") held at the end of the reporting period and the range and weighted average used to develop significant unobservable inputs. The ASU is also eliminating the disclosure requirement for the amount and reason for transfers between Level 1 and Level 2 fair value measurement, valuation processes for Level 3 measurements, and policy for timing of transfers between levels of the fair value hierarchy. In addition, the ASU modifies the disclosure requirements for investments that are valued based on net asset value. The amendments clarify that

10



the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU. The ASU requires prospective application for only the most recent interim or annual period presented in the year of adoption for changes in unrealized gains and losses included in OCI, the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements, and the narrative description of measurement uncertainty. The Company adopted the standard as of December 29, 2019, the beginning of fiscal 2020, with no material impact on the Company's Condensed Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326). The focus of this ASU is to require businesses to adjust their allowance for lifetime expected credit losses rather than incurred losses. It is believed that the change will result in more timely recognition of such losses. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods therein. The Company adopted the standard as of December 29, 2019, the beginning of fiscal 2020, under the modified retrospective approach. The Company recorded a $3.4 million increase in the allowance for credit losses and a $2.7 million net decrease to retained earnings as of December 29, 2019 for the cumulative effect of adopting ASU 2016-13.

2. OTHER FINANCIAL INFORMATION
Inventories
The following table presents approximate percentage distribution between major classes of inventories:
 
March 28, 2020
 
December 28, 2019
Raw Material and Work in Process
49%
 
48%
Finished Goods and Purchased Parts
51%
 
52%


Inventories are stated at cost, which is not in excess of market. Cost for approximately 52% of the Company's inventory at March 28, 2020, and 53% at December 28, 2019 was determined using the last-in, first-out ("LIFO") method.
Property, Plant, and Equipment
The following table presents property, plant, and equipment by major classification (dollars in millions):
 
Useful Life in Years
 
March 28, 2020
 
December 28, 2019
Land and Improvements
 
 
$
75.1

 
$
80.3

Buildings and Improvements
3 - 50
 
285.2

 
305.2

Machinery and Equipment
3 - 15
 
973.5

 
988.2

Property, Plant and Equipment
 
 
1,333.8

 
1,373.7

Less: Accumulated Depreciation
 
 
(763.5
)
 
(768.7
)
Net Property, Plant and Equipment
 
 
$
570.3

 
$
605.0



For the three months ended March 28, 2020, the Company recognized $1.5 million of asset impairments related to the transfer of assets to held for sale.

Revenue Recognition

The Company recognizes revenue from the sale of electric motors, electrical motion controls, power generation and power transmission products. The Company recognizes revenue when control of the product passes to the customer or the service is provided and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services.
Nature of Goods and Services
The Company sells products with multiple applications as well as customized products that have a single application such as those manufactured for its OEM’s customers. The Company reports in four operating segments: Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions. See Note 6 for a description of the different segments.

11



Nature of Performance Obligations
The Company’s contracts with customers typically consist of purchase orders, invoices and master supply agreements. At contract inception, across all four segments, the Company assesses the goods and services promised in its sales arrangements with customers and identifies a performance obligation for each promise to transfer to the customer a good or service that is distinct. The Company’s primary performance obligations consist of product sales and customized system/solutions.
Product:
The nature of products varies from segment to segment but across all segments, individual products are not integrated and represent separate performance obligations.
Customized system/solutions:
The Company provides customized system/solutions which consist of multiple products engineered and designed to specific customer specification, combined or integrated into one combined solution for a specific customer application. The goods are transferred to the customer and revenue is typically recognized over time as the performance obligations are satisfied.
When Performance Obligations are Satisfied
For performance obligations related to substantially all of the Company's product sales, the Company determines that the customer obtains control upon shipment and recognizes revenue accordingly. Once a product has shipped, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from the asset. The Company considers control to have transferred upon shipment because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.
For a limited number of contracts, the Company transfers control and recognizes revenue over time. The Company satisfies its performance obligations over time and the Company uses a cost-based input method to measure progress. In applying the cost-based method of revenue recognition, the Company uses actual costs incurred to date relative to the total estimated costs for the contract in conjunction with the customer's commitment to perform in determining the amount of revenue and cost to recognize. The Company has determined that the cost-based input method provides a faithful depiction of the transfer of goods to the customer.
Payment Terms
The arrangement with the customer states the final terms of the sale, including the description, quantity, and price of each product or service purchased. Payment terms vary by customer but typically range from due upon delivery to 120 days after delivery. For contracts recognized at a point in time, revenue and billing typically occur simultaneously. The Company generally has payment terms with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider the time value of money. For contracts recognized using the cost-based input method, revenue recognized in excess of customer billings and billings in excess of revenue recognized are reviewed to determine the net asset or net liability position and classified as such on the Condensed Consolidated Balance Sheet.
Returns, Refunds, and Warranties
The Company’s contracts do not explicitly offer a “general” right of return to its customers (e.g. customers ordered excess products and return unused items). Warranties are classified as either assurance type or service type warranties. A warranty is considered an assurance type warranty if it provides the customer with assurance that the product will function as intended. A warranty that goes above and beyond ensuring basic functionality is considered a service type warranty. The Company generally only offers limited warranties which are considered to be assurance type warranties and are not accounted for as separate performance obligations. Customers generally receive repair or replacement on products that do not function to specification. Estimated product warranties are provided for specific product groups and the Company accrues for estimated future warranty cost in the period in which the sale is recognized. The Company estimates the accrual requirements based on historical warranty loss experience and the cost is included in Cost of Sales.
Volume Rebates
In some cases, the nature of the Company’s contract may give rise to variable consideration including volume based sales incentives. If the customer achieves specific sales targets, they are entitled to rebates. The Company estimates the projected amount of the rebates that will be achieved and recognizes the estimated costs as a reduction to Net Sales as revenue is recognized.

12



Disaggregation of Revenue
The following tables presents the Company’s revenues disaggregated by geographical region (in millions):
 
 
Three Months Ended
March 28, 2020
 
Commercial Systems
 
Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Total
North America
 
$
143.4

 
$
72.9

 
$
184.6


$
160.9

 
$
561.8

Asia
 
23.4

 
36.8

 
8.6

 
4.9

 
73.7

Europe
 
28.5

 
13.2

 
7.6

 
23.9

 
73.2

Rest-of-World
 
4.1

 
6.7

 
9.3

 
5.4

 
25.5

Total
 
$
199.4

 
$
129.6

 
$
210.1

 
$
195.1

 
$
734.2

 
 
 
 
 
 
 
 
 
 
 
March 30, 2019
 
Commercial Systems
 
Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Total
North America
 
$
175.6

 
$
72.0

 
$
231.4

 
$
172.7

 
$
651.7

Asia
 
26.2

 
41.5

 
10.4

 
7.4

 
85.5

Europe
 
34.2

 
13.3

 
11.5

 
24.7

 
83.7

Rest-of-World
 
6.2

 
11.3

 
10.0

 
5.4

 
32.9

Total
 
$
242.2

 
$
138.1

 
$
263.3

 
$
210.2

 
$
853.8


Practical Expedients and Exemptions

The Company typically expenses incremental direct costs of obtaining a contract, primarily sales commissions, as incurred because the amortization period is expected to be 12 months or less. Contract costs are included in Operating Expenses on the accompanying Condensed Consolidated Statements of Income.
Due to the short term nature of the Company’s contracts, the Company has adopted a practical expedient to not disclose revenue allocated to remaining performance obligations as substantially all of its contracts have original terms of 12 months or less.
The Company typically does not include in its transaction price any amounts collected from customers for sales taxes.
The Company has elected to account for shipping and handling costs as fulfillment activities and expense the costs as incurred as part of Cost of Sales.

3. HELD FOR SALE, DIVESTITURES AND ACQUISITIONS
Assets Held for Sale

The balances that were classified as Assets Held for Sale as of March 28, 2020 and December 28, 2019 were $6.6 million and $2.8 million, respectively, as the Company has both the intent and ability to sell these assets.

2019 Divestitures

Regal Drive Technologies

On January 7, 2019, the Company sold its Regal Drive Technologies business and received proceeds of $0.3 million in the current quarter and $119.9 million in the prior year. Regal Drive Technologies was included in the Company's Commercial Systems segment. The Company recognized a gain on sale of $0.1 million in the current quarter and $41.0 million in the prior year in the Condensed Consolidated Statements of Income.


13



Velvet Drive

On April 1, 2019, the Company sold its Velvet Drive business and received proceeds of $8.9 million. This business was included in the Company's Power Transmissions Solutions segment. The Company recognized a loss on sale of $0.5 million in the Condensed Consolidated Statements of Income.

CapCom

On April 1, 2019, the Company sold its CapCom business and received proceeds of $9.9 million. This business was included in the Company's Climate Solutions segment and considered a non-core business. The Company recognized a gain on sale of $6.0 million in the Condensed Consolidated Statements of Income.

Vapor Recovery

On July 1, 2019, the Company sold its Vapor Recovery business and received proceeds of $19.2 million. The business was included in the Company's Commercial Systems segment. The Company recognized a loss on sale of $1.9 million in the Condensed Consolidated Statements of Income.

4. ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustments, hedging activities and pension and post retirement benefit adjustments are included in AOCI, a component of Total Equity.
The following tables present changes in AOCI by component for the three months ended March 28, 2020 and March 30, 2019 (in millions):
 
Three Months Ended
March 28, 2020
Hedging Activities
 
Pension and Post Retirement Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning Balance
$
8.0

 
$
(31.0
)
 
$
(214.8
)
 
$
(237.8
)
Other Comprehensive Loss before Reclassifications
(39.0
)
 
0.4

 
(57.2
)
 
(95.8
)
Tax Impact
9.4

 

 

 
9.4

Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
(2.6
)
 
0.1

 

 
(2.5
)
Tax Impact
0.6

 

 

 
0.6

Net Current Period Other Comprehensive Income (Loss)
(31.6
)
 
0.5

 
(57.2
)
 
(88.3
)
Ending Balance
$
(23.6
)
 
$
(30.5
)
 
$
(272.0
)
 
$
(326.1
)
 
 
 
 
 
 
 
 
March 30, 2019
Hedging Activities
 
Pension and Post Retirement Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning Balance
$
(5.4
)
 
$
(38.2
)
 
$
(207.8
)
 
$
(251.4
)
Other Comprehensive Income (Loss) before Reclassifications
18.5

 
(0.2
)
 
10.9

 
29.2

Tax Impact
(4.4
)
 

 

 
(4.4
)
Amounts Reclassified from Accumulated Other Comprehensive Income
0.4

 
0.5

 
2.2

 
3.1

Tax Impact
(0.1
)
 
(0.1
)
 

 
(0.2
)
Net Current Period Other Comprehensive Income
14.4

 
0.2

 
13.1

 
27.7

Ending Balance
$
9.0

 
$
(38.0
)
 
$
(194.7
)
 
$
(223.7
)
 
 
 
 
 
 
 
 

14



The Condensed Consolidated Statements of Income line items affected by the hedging activities reclassified from AOCI in the tables above are disclosed in Note 14.
The reclassification amounts for pension and post retirement benefit adjustments in the tables above are part of net periodic benefit costs recorded in Other (Income) Expenses, net (see also Note 8).


5. GOODWILL AND INTANGIBLE ASSETS

Goodwill

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

In the fourth quarter 2019, in conjunction with the Company's annual goodwill impairment test, the Company concluded that the excess fair value over carrying value for the global industrial motors, commercial air moving and power switch reporting units, along with the trade name associated with the PTS acquisition, were less than 10 percent. In the first quarter 2020, the Company reviewed triggering events primarily driven by the economic uncertainty caused by COVID-19 for the global industrial motors, commercial air moving and commercial hermetic motors reporting units. The excess fair value over carrying value continues to be less than 10 percent for the global industrial motors reporting unit and the reporting unit continues to be at risk for impairment.

The Company developed assumptions for the potential impact of COVID-19 given the uncertainty related to supply and demand disruptions on operating results for the global industrial motors, commercial air moving and commercial hermetic motors reporting units.

While the Company is committed to the strategic actions necessary to realize the long-term forecasted revenues and EBITDA margins of these reporting units, a worsening economic outlook for these reporting units could result in future impairment charges.

A lack of recovery or further deterioration in market conditions, a sustained trend of weaker than expected financial performance or a lack of recovery or further decline in the Company's market capitalization, among other factors, as a result of the COVID-19 pandemic could result in an impairment charge in future periods which could have a material adverse effect on the Company's financial statements.

The global industrial motors reporting unit had goodwill of $121.9 million, the commercial air moving reporting unit had goodwill of $37.8 million and the commercial hermetic motors reporting unit had goodwill of $49.3 million as of March 28, 2020.


15



The following table presents changes to goodwill during the three months ended March 28, 2020 (in millions):
 
Total
 
Commercial Systems
 
Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
Balance as of December 28, 2019
$
1,501.3

 
$
426.6

 
$
170.8

 
$
331.2

 
$
572.7

Translation Adjustments
(7.3
)
 
(6.0
)
 
(0.9
)
 
(1.5
)
 
1.1

Balance as of March 28, 2020
$
1,494.0

 
$
420.6

 
$
169.9

 
$
329.7

 
$
573.8

 
 
 
 
 
 
 
 
 
 
Cumulative Goodwill Impairment Charges
$
285.2

 
$
183.2

 
$
61.6

 
$
17.2

 
$
23.2


Intangible Assets
The following table presents intangible assets (in millions):
 
 
 
 
March 28, 2020
 
December 28, 2019
 
 
Weighted Average Amortization Period (Years)
 
Gross Value
 
Accumulated Amortization
 
Gross Value
 
Accumulated Amortization
Amortizable Intangible Assets:
 
 
 
 
 
 
 
 
 
 
  Customer Relationships
 
17
 
$
687.8

 
$
309.4

 
$
692.1

 
$
302.4

  Technology
 
14
 
143.2

 
100.3

 
144.0

 
99.0

  Trademarks
 
14
 
35.2

 
25.0

 
35.9

 
25.0

  Patent and Engineering Drawings
 
5
 
16.6

 
16.6

 
16.6

 
16.6

 
 
 
 
882.8

 
451.3

 
888.6

 
443.0

Non-Amortizable Trade Name
 
 
 
121.3

 

 
121.6

 

 
 
 
 
$
1,004.1

 
$
451.3

 
$
1,010.2

 
$
443.0

 
 
 
 
 
 
 
 
 
 
 
Intangible Assets, Net of Amortization
 
 
 
$
552.8

 
 
 
$
567.2

 
 


Amortization expense recorded for the three months ended March 28, 2020 was $12.2 million. Amortization expense recorded for the three months ended March 30, 2019 was $12.8 million. Amortization expense for fiscal year 2020 is estimated to be $47.3 million. Amortization expense does not include any impairment recognized during the respective periods. For the three months ended March 30, 2019, the Company recognized $4.9 million of customer relationships intangible asset impairments related to the transfer of assets to held for sale.
The following table presents future estimated annual amortization for intangible assets (in millions):
 Year
 
Estimated Amortization
2021
 
$
42.4

2022
 
40.7

2023
 
40.6

2024
 
40.0

2025
 
38.0




6. SEGMENT INFORMATION

The Company is comprised of four operating segments are: Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions.


16



Commercial Systems segment produces fractional to approximately 5 horsepower AC and DC motors, electronic variable speed controls, fans, and blowers for commercial applications. These products serve markets including commercial building ventilation and HVAC, pool and spa, irrigation, dewatering, agriculture, and general commercial equipment.

Industrial Systems segment produces integral motors, generators, alternators and switchgear for industrial applications, along with aftermarket parts and kits to support such products. These products serve markets including agriculture, marine, mining, oil and gas, food and beverage, data centers, healthcare, prime and standby power, and general industrial equipment.

Climate Solutions segment produces small motors, electronic variable speed controls and air moving solutions serving markets including residential and light commercial HVAC, water heaters and commercial refrigeration.

Power Transmission Solutions segment produces, sells and services belt and chain drives, helical and worm gearing, mounted and unmounted bearings, couplings, modular plastic belts, conveying chains and components, hydraulic pump drives, large open gearing and specialty mechanical products serving markets including beverage, bulk handling, metals, special machinery, energy, aerospace and general industrial.

The Company evaluates performance based on the segment's income from operations. Corporate costs have been allocated to each segment based on the net sales of each segment. The reported external net sales of each segment are from external customers.
The following sets forth certain financial information attributable to the Company's operating segments for the three months ended March 28, 2020 and March 30, 2019 (in millions):
 
Three Months Ended
 
Commercial Systems
 
Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Eliminations
 
Total
March 28, 2020
 
 
 
 
 
 
 
 
 
 
 
External Sales
$
199.4

 
$
129.6

 
$
210.1

 
$
195.1

 
$

 
$
734.2

Intersegment Sales
11.8

 
6.7

 
4.5

 
0.7

 
(23.7
)
 

  Total Sales
211.2

 
136.3

 
214.6

 
195.8

 
(23.7
)
 
734.2

Gross Profit
50.7

 
22.6

 
59.4

 
70.6

 

 
203.3

Operating Expenses
37.5

 
22.9

 
29.4

 
42.1

 

 
131.9

Gain on Divestiture of Businesses
(0.1
)
 

 

 

 

 
(0.1
)
Asset Impairments
0.8

 
0.2

 
0.5

 

 

 
1.5

Income (Loss) from Operations
12.5

 
(0.5
)
 
29.5

 
28.5

 

 
70.0

Depreciation and Amortization
8.3

 
5.9

 
4.7

 
13.7

 

 
32.6

Capital Expenditures
3.1

 
2.0

 
3.6

 
2.2

 

 
10.9

 
 
 
 
 
 
 
 
 
 
 
 
March 30, 2019
 
 
 
 
 
 
 
 
 
 
 
External Sales
$
242.2

 
$
138.1

 
$
263.3

 
$
210.2

 
$

 
$
853.8

Intersegment Sales
10.5

 
9.4

 
4.5

 
5.9

 
(30.3
)
 

  Total Sales
252.7

 
147.5

 
267.8

 
216.1

 
(30.3
)
 
853.8

Gross Profit
65.5

 
23.9

 
70.7

 
74.5

 

 
234.6

Operating Expenses
42.3

 
27.2

 
30.5

 
45.2

 

 
145.2

(Gain) Loss on Divestitures
(41.3
)
 
0.1

 

 

 

 
(41.2
)
Asset Impairments
6.7

 
0.9

 
1.3

 
1.1

 

 
10.0

Income (Loss) from Operations
57.8

 
(4.3
)
 
38.9

 
28.2

 

 
120.6

Depreciation and Amortization
9.4

 
6.1

 
4.9

 
13.9

 

 
34.3

Capital Expenditures
6.7

 
6.4

 
2.9

 
4.2

 

 
20.2




17



The following table presents identifiable assets information attributable to the Company's operating segments as of March 28, 2020 and December 28, 2019 (in millions):
 
Commercial Systems
 
Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Total
Identifiable Assets as of March 28, 2020
$
1,246.9

 
$
818.4

 
$
923.5

 
$
1,597.1

 
$
4,585.9

Identifiable Assets as of December 28, 2019
$
1,198.5

 
$
802.8

 
$
878.3

 
$
1,551.1

 
$
4,430.7




18



7. DEBT AND BANK CREDIT FACILITIES

The following table presents the Company’s indebtedness as of March 28, 2020 and December 28, 2019 (in millions):
 
March 28, 2020
 
December 28, 2019
Term Facility
$
720.0

 
$
720.0

Senior Notes
400.0

 
400.0

Multicurrency Revolving Facility
244.8

 
17.7

Other
4.4

 
4.5

Less: Debt Issuance Costs
(4.3
)
 
(4.7
)
Total
1,364.9

 
1,137.5

Less: Current Maturities
0.6

 
0.6

Long-Term Debt
$
1,364.3

 
$
1,136.9


Credit Agreement
On August 27, 2018 the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent and the lenders named therein, providing for a (i) 5-year unsecured term loan facility in the principal amount of $900.0 million (the “Term Facility”) and (ii) a 5-year unsecured multicurrency revolving facility in the principal amount of $500.0 million (the “Multicurrency Revolving Facility”), including a $50.0 million letter of credit sub facility, available for general corporate purposes. Borrowings under the Credit Agreement bear interest at floating rates based upon indices determined by the currency of the borrowing, plus an applicable margin determined by reference to the Company's consolidated funded debt to consolidated EBITDA ratio or at an alternative base rate.
The Term Facility was drawn in full on August 27, 2018 with the proceeds settling the amounts owed under prior borrowings. The Term Facility requires quarterly amortization at a rate starting at 5.0% per annum, increasing to 7.5% per annum after three years and further increasing to 10.0% per annum for the last year of the Term Facility, unless previously prepaid. The weighted average interest rate on the Term Facility for the three months ended March 28, 2020 and March 30, 2019 was 3.0% and 3.9%, respectively. The Credit Agreement requires that the Company prepay the loans under the Term Facility with 100% of the net cash proceeds received from specified asset sales and borrowed money indebtedness, subject to certain exceptions.
At March 28, 2020, the Company had borrowings under the Multicurrency Revolving Facility in the amount of $244.8 million, $0.4 million of standby letters of credit issued under the facility, and $254.8 million of available borrowing capacity. For the three months ended March 28, 2020 and March 30, 2019 under the Multicurrency Revolving Facility, the average daily balance in borrowings was $109.8 million and $64.3 million, respectively, and weighted average interest rate of 2.8% and 3.8%, respectively. The Company pays a non-use fee on the aggregate unused amount of the Multicurrency Revolving Facility at a rate determined by reference to its consolidated funded debt to consolidated EBITDA ratio.
Senior Notes
At March 28, 2020, the Company had $400.0 million of senior notes (the “Notes”) outstanding. The Notes consist of $400.0 million in senior notes in a private placement which were issued in five tranches with maturities from ten to twelve years and carry fixed interest rates. As of March 28, 2020, $400.0 million of the Notes are included in Long-Term Debt on the Condensed Consolidated Balance Sheets.
The following table presents details on the Notes at March 28, 2020 (in millions):
 
 
Principal
 
Interest Rate
 
Maturity
Fixed Rate Series 2011A
 
$
230.0

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

 
4.9 to 5.1%
 
July 14, 2023
 
 
$
400.0

 
 
 
 


Compliance with Financial Covenants

The Credit Agreement and the Notes require the Company to meet specified financial ratios and to satisfy certain financial condition tests. The Company was in compliance with all financial covenants contained in the Notes and the Credit Agreement as of March 28, 2020.

19



 
Other Notes Payable

At March 28, 2020, other notes payable of approximately $4.4 million were outstanding with a weighted average interest rate of 5.0%. At December 28, 2019, other notes payable of approximately $4.5 million were outstanding with a weighted average rate of 5.0%.

Other Disclosures

Based on rates for instruments with comparable maturities and credit quality, which are classified as Level 2 inputs (see also Note 15), the approximate fair value of the Company's total debt was $1,376.3 million and $1,162.1 million as of March 28, 2020 and December 28, 2019, respectively.

8. RETIREMENT AND POST RETIREMENT HEALTH CARE PLANS

The following table presents the Company’s net periodic benefit cost components (in millions):
 
Three Months Ended
 
March 28, 2020
 
March 30, 2019
Service Cost
$
0.8

 
$
1.6

Interest Cost
2.1

 
2.7

Expected Return on Plan Assets
(3.3
)
 
(3.1
)
Amortization of Prior Service Cost and Net Actuarial Loss
0.1

 
0.5

Net Periodic Benefit Cost
$
(0.3
)
 
$
1.7



The service cost component is included in Cost of Sales and Operating Expenses. All other components of net periodic benefit costs are included in Other (Income) Expenses, net on the Company's Condensed Consolidated Statements of Income.
The estimated net actuarial loss and prior service cost (income) for post retirement plans that will be amortized from AOCI into net periodic benefit cost during the 2020 fiscal year are $1.2 million and $(0.6) million, respectively.
For the three months ended March 28, 2020 and March 30, 2019, the Company contributed $1.1 million and $0.8 million, respectively, to post retirement plans. The Company expects to make total contributions of $10.6 million in 2020. The Company contributed a total of $10.8 million in fiscal 2019.

9. LEASES

The Company leases certain manufacturing facilities, warehouses/distribution centers, office space, machinery, equipment, IT assets, and vehicles. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, it is considered to be or contain a lease. Right-of-use ("ROU") assets and lease liabilities are recognized at lease commencement date based on the present value of the future lease payments over the expected lease term.

As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The incremental borrowing rate is calculated based upon the sovereign treasury rate for the currency in which the lease liability is denominated when the Company takes possession of the leased asset, adjusted for various factors, such as term and internal credit spread. The ROU asset also includes any lease payments made and excludes lease incentive and initial direct costs incurred.

Leases entered into may include one or more options to renew. The renewal terms can extend the lease term from one to twenty-five years. The exercise of lease renewal options is at the Company's sole discretion. Renewal option periods are included in the measurement of the ROU asset and lease liability when the exercise is reasonably certain to occur. Some leases include options to terminate the lease upon breach of contract and are remeasured at that point in time.

The depreciable life of leased assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

20




Some of the Company's lease agreements include rental payments adjusted periodically for inflation or are based on an index rate. These increases are reflected as variable lease payments and are included in the measurement of the ROU asset and lease liability. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Operating leases are included in the following asset and liability accounts on the Company's Condensed Consolidated Balance Sheet: Operating Lease Assets, Current Operating Lease Liabilities, and Noncurrent Operating Lease Liabilities. ROU assets and liabilities arising from finance leases are included in the following asset and liability accounts on the Company's Condensed Consolidated Balance Sheet: Net Property, Plant and Equipment, Current Maturities of Long-Term Debt, and Long-Term Debt.

Short-term and variable lease expenses were immaterial. The components of lease expense were as follows (in millions):
 
Three Months Ended
 
March 28, 2020
 
March 30, 2019
Operating Lease Cost
$
7.7

 
$
9.3

Finance Lease Cost:
 
 
 
   Amortization of ROU Assets
0.1

 
0.1

   Interest on Lease Liabilities
0.1

 
0.1

Total Lease Expense
$
7.9

 
9.5



Maturity of lease liabilities as of March 28, 2020 were as follows (in millions):
 
Operating Leases
 
Finance Leases
 
Total
Remainder of 2020
$
20.4

 
$
0.4

 
$
20.8

2021
22.6

 
0.5

 
23.1

2022
16.1

 
0.6

 
16.7

2023
10.0

 
0.6

 
10.6

2024
6.0

 
0.6

 
6.6

Thereafter
13.0

 
1.9

 
14.9

Total Lease Payments
$
88.1

 
$
4.6

 
$
92.7

Less: Interest
(14.9
)
 
(1.0
)
 
(15.9
)
Present Value of Lease Liabilities
$
73.2

 
$
3.6

 
$
76.8


Other information related to leases was as follows (in millions):
 
Three Months Ended
Supplemental Cash Flows Information
March 28, 2020
 
March 30, 2019
Cash Paid for Amounts Included in the Measurement of Lease Liabilities:
 
 
 
  Operating Cash Flows from Operating Leases
$
7.6

 
$
9.2

  Operating Cash Flows from Finance Leases
0.1

 
0.1

  Financing Cash Flows from Finance Leases
0.1

 
0.1

Leased Assets Obtained in Exchange for New Operating Lease Liabilities
6.6

 
3.2

Weighted Average Remaining Lease Term
 
 
 
Operating Leases
4.5 years

 
4.6 years

Finance Leases
8.0 years

 
9.0 years

Weighted Average Discount Rate
 
 
 
Operating Leases
8.6
%
 
8.4
%
Finance Leases
5.9
%
 
5.9
%



21



As of March 28, 2020, the Company has additional operating leases that have not yet commenced for future lease payments of $10.9 million. These operating leases will commence during fiscal year 2020 with lease terms of one to 10.5 years. The Company had no finance leases that had not yet commenced nor entered into during the quarter.

10. SHAREHOLDERS’ EQUITY

Repurchase of Common Stock

At a meeting of the Board of Directors on July 24, 2018, the Company's Board of Directors approved the extinguishment of the existing 3.0 million share repurchase program that was approved in November 2013 and replaced it with an authorization to purchase up to $250.0 million of shares. At a meeting of the Board of Directors on October 25, 2019, the July 2018 repurchase authorization was extinguished and replaced with an authorization to purchase up to $250.0 million of shares. For the three months ended March 28, 2020, the Company repurchased and retired 315,072 shares of its common stock at an average cost of $79.38 per share for a total cost of $25.0 million. For the three months ended March 30, 2019, there were no repurchases under the July 2018 program.

As of March 28, 2020, there was approximately $210.0 million in common stock available for repurchase under the October 2019 program.

Share-Based Compensation

The majority of the Company’s annual share-based incentive awards had historically been granted in the second fiscal quarter. Beginning in fiscal 2020, the Company changed its process to move the granting of share-based incentive awards to the first fiscal quarter.

The Company recognized approximately $2.7 million and $4.3 million in share-based compensation expense for the three months ended March 28, 2020 and March 30, 2019, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Income for share-based compensation expense was $0.2 million and $0.9 million for the three months ended March 28, 2020 and March 30, 2019, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award. As of March 28, 2020, total unrecognized compensation cost related to share-based compensation awards was approximately $26.8 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 2.3 years.

Approximately 1.8 million shares were available for future grant under the 2018 Equity Incentive Plan at March 28, 2020.

Stock Appreciation Rights
The Company uses stock settled stock appreciation rights (“SARs”) as a form of share-based incentive awards. SARs are the right to receive stock in an amount equal to the appreciation in value of a share of stock over the base price per share. Shares granted prior to fiscal 2020 generally vest over five years on the anniversary date while shares granted in fiscal 2020 generally vest over three years on the anniversary date of the grant date. Generally all grants expire 10 years from the grant date. All grants are made at prices equal to the fair market value of the stock on the grant date. For the three months ended March 28, 2020 and March 30, 2019, expired and canceled shares were immaterial.
The following table presents share-based compensation activity for the three months ended March 28, 2020 and March 30, 2019 (in millions):
 
 
March 28, 2020
 
March 30, 2019
Total Intrinsic Value of Share-Based Incentive Awards Exercised
 
$
2.0

 
$
3.7

Income Tax (Expense) Benefit from the Exercise of SARs
 
0.5

 
(0.2
)
Total Fair Value of Share-Based Incentive Awards Vested
 

 
0.3




22



The following table presents assumptions used in the Company's Black-Scholes valuation related to grants of SARs:
 
2020
 
2019
Per share weighted average fair value of grants
$
21.23

 
$
20.84

Risk-free interest rate
1.5
%
 
2.4
%
Expected life (years)
7.0

 
7.0

Expected volatility
25.2
%
 
25.0
%
Expected dividend yield
1.4
%
 
1.5
%


The average risk-free interest rate is based on the US Treasury security rate as of the grant date. The expected dividend yield is based on the projected annual dividend as a percentage of the estimated market value of the Company's common stock as of the grant date. The Company estimated the expected volatility using a weighted average of daily historical volatility of the Company's stock price over the expected term of the award. The Company estimated the expected term using historical data.

The following table presents a summary of share-based incentive plan grant activity the three months ended March 28, 2020.
Number of Shares Under SARs
 
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value (in millions)
Outstanding as of December 28, 2019
 
817,790

 
$
73.34

 
6.0
 
$
9.9

Granted
 
181,177

 
88.25

 
 
 
 
Exercised
 
(127,014
)
 
70.26

 
 
 
 
Forfeited
 
(71,186
)
 
76.16

 
 
 
 
Expired
 
(1,158
)
 
73.83

 
 
 
 
Outstanding as of March 28, 2020
 
799,609

 
$
76.95

 
6.9
 
$
0.2

Exercisable as of March 28, 2020
 
291,228

 
$
69.33

 
3.6
 
$
0.1



Compensation expense recognized related to SARs was $0.7 million for the three months ended March 28, 2020.
As of March 28, 2020, there was $8.4 million of unrecognized compensation cost related to non-vested SARs that is expected to be recognized as a charge to earnings over a weighted average period of 3.1 years.

The number of SARs expected to vest is materially consistent with those outstanding and not yet exercisable.
Restricted Stock Awards and Restricted Stock Units
Restricted stock awards ("RSA") and restricted stock units ("RSU") consist of shares or the rights to shares of the Company's stock. The awards are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer. As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, death or disability.
The following table presents a summary of RSA award activity for the three months ended March 28, 2020:
 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (Years)
Unvested RSAs as of December 28, 2019
 
15,571

 
$
80.41

 
0.4
Unvested RSAs as of March 28, 2020
 
15,571

 
$
80.41

 
0.2


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 $0.3 million for the three months ended March 28, 2020.
As of March 28, 2020, there was $0.2 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 0.2 years.

23



The following table presents a summary of RSU award activity for the three months ended March 28, 2020:
 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (Years)
Unvested RSUs as of December 28, 2019
 
175,025

 
$
78.19

 
1.9
Granted
 
66,446

 
85.65

 
 
Vested
 
(8,182
)
 
77.80

 
 
Forfeited
 
(18,717
)
 
77.77

 
 
Unvested RSUs as of March 28, 2020
 
214,572

 
$
80.55

 
2.3

RSUs granted prior to fiscal 2020 vest on the third anniversary of the grant date while RSUs granted in fiscal 2020 vest one third each year on the anniversary of the grant date, provided the holder of the RSUs is continuously employed by the Company until the vesting date. Compensation expense recognized related to the RSUs was $1.0 million for the three months ended March 28, 2020.
As of March 28, 2020, there was $11.0 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 2.3 years.
Performance Share Units
Performance share units ("PSU") consist of shares or the rights to shares of the Company's stock which are awarded to employees of the Company. These shares are payable upon the determination that the Company achieved certain established performance targets and can range from 0% to 200% of the targeted payout based on the actual results. PSUs have a performance period of 3 years and vest 3 years from the grant date. The PSUs have performance criteria based on a return on invested capital metric or they have performance criteria using returns relative to the Company's peer group. As set forth in the individual award agreements, acceleration of vesting may occur under a change in control, death or disability. There are no voting rights associated with PSUs until vesting occurs and a share of stock is issued. Some of the PSU awards are valued using a Monte Carlo simulation method as of the grant date while others are valued using the closing market price as of the grant date depending on the performance criteria for the award.

The assumptions used in the Company's Monte Carlo simulation were as follows:
 
2020
 
2019
Risk-free interest rate
1.4
%
 
2.3
%
Expected life (years)
3.0

 
3.0

Expected volatility
24.0
%
 
25.0
%
Expected dividend yield
1.4
%
 
1.5
%



The following table presents a summary of PSU activity for the three months ended March 28, 2020:
 
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (Years)
Unvested PSUs as of December 28, 2019
 
90,565

 
$
86.35

 
1.9
Granted
 
42,677

 
99.74

 
 
Forfeited
 
(16,558
)
 
86.60

 
 
Unvested PSUs as of March 28, 2020
 
116,684

 
$
91.21

 
2.4

Compensation expense for awards granted is recognized based on the grant issuance value or the expected payout ratio depending upon the performance criterion for the award, net of estimated forfeitures. Compensation expense recognized related to PSUs was $0.7 million for the three months ended March 28, 2020. Total unrecognized compensation expense for all PSUs granted as of March 28, 2020 is estimated to be $7.2 million which is expected to be recognized as a charge to earnings over a weighted average period of 2.4 years.


24



11. INCOME TAXES
The effective tax rate for the three months ended March 28, 2020 was 22.9% versus 19.6% for the three months ended March 30, 2019. The change in the effective tax rate for the three months ended March 28, 2020 was primarily driven by the 2019 expiration of the China Hi-Technology incentives. The Company is in the process of renewing these incentives and the impact will be recorded once approval is received.
On March 27, 2020, the CARES Act (the "Act") was enacted in response to the COVID-19 pandemic, and among other things, provides tax relief to businesses. The Act includes provisions relating to net operating loss carrybacks, modification to the net interest deduction limitations, deferral of certain payroll taxes, relief for retaining employees, and other provisions. The Company is evaluating the impact of the Act and currently expects to benefit from the deferral of certain payroll taxes and relief for retaining employees.
As of March 28, 2020 and December 28, 2019, the Company had approximately $9.3 million and $6.9 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 2014, and the Company is no longer subject to non-US income tax examinations by tax authorities for years prior to 2012.

12. EARNINGS PER SHARE

Diluted earnings per share is calculated based upon earnings applicable to common shares divided by the weighted-average number of common shares outstanding during the period adjusted for the effect of other dilutive securities. The amount of the anti-dilutive shares were 0.4 million and 0.5 million for the three months ended March 28, 2020 and March 30, 2019, respectively. The following table reconciles the basic and diluted shares used in earnings per share calculations for the three months ended March 28, 2020 and March 30, 2019 (in millions):
 
Three Months Ended
 
March 28, 2020
 
March 30, 2019
Denominator for Basic Earnings Per Share
40.6

 
42.8

Effect of Dilutive Securities
0.2

 
0.3

Denominator for Diluted Earnings Per Share
40.8

 
43.1



13. CONTINGENCIES
One of the Company's subsidiaries that it acquired in 2007 is subject to numerous claims filed in various jurisdictions relating to certain sub-fractional motors that were primarily manufactured through 2004 and that were included as components of residential and commercial ventilation units manufactured and sold in high volumes by a third party. These ventilation units are subject to product safety requirements and other potential regulation of their performance by government agencies such as the US Consumer Product Safety Commission (“CPSC”). The claims generally allege that the ventilation units were the cause of fires. The Company has recorded an estimated liability for incurred claims. Based on the current facts, the Company cannot assure that these claims, individually or in the aggregate, will not have a material adverse effect on its subsidiary's financial condition. The Company's subsidiary cannot reasonably predict the outcome of these claims, the nature or extent of any CPSC or other remedial actions, if any, that the Company's subsidiary may need to undertake with respect to motors that remain in the field, or the costs that may be incurred, some of which could be significant.
The Company is, from time to time, party to litigation and other legal or regulatory proceedings that arise in the normal course of its business operations and the outcomes of which are subject to significant uncertainty, including product warranty and liability claims, contract disputes and environmental, asbestos, intellectual property, employment and other litigation matters. The Company's products are used in a variety of industrial, commercial and residential applications that subject the Company to claims that the use of its products is alleged to have resulted in injury or other damage. Many of these matters will only be resolved when one or more future events occur or fail to occur. Management conducts regular reviews, including updates from legal counsel, to assess the need for accounting recognition or disclosure of these contingencies, and such assessment inherently involves an exercise in judgment. The Company accrues for exposures in amounts that it believes are adequate, and the Company does not believe that

25



the outcome of any such lawsuit individually or collectively will have a material effect on the Company's financial position, its results of operations or its cash flows.
The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience. The following table presents a reconciliation of the changes in accrued warranty costs for the three months ended March 28, 2020 and March 30, 2019 (in millions):
 
Three Months Ended
 
March 28, 2020
 
March 30, 2019
Beginning Balance
$
15.1

 
$
14.8

Less: Payments
(3.6
)
 
(3.7
)
Provisions
4.0

 
5.3

Held for Sale

 
(0.4
)
Translation Adjustments
(0.1
)
 

Ending Balance
$
15.4

 
$
16.0


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

14. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed using derivative instruments are commodity price risk, currency exchange risk, and interest rate risk. Forward contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company's manufacturing process. Forward contracts on certain currencies are entered into to manage forecasted cash flows in certain foreign currencies. Interest rate swaps are utilized to manage interest rate risk associated with the Company's floating rate borrowings.
The Company is exposed to credit losses in the event of non-performance by the counterparties to various financial agreements, including its commodity hedging transactions, foreign currency exchange contracts and interest rate swap agreements. Exposure to counterparty credit risk is managed by limiting counterparties to major international banks and financial institutions meeting established credit guidelines and continually monitoring their compliance with the credit guidelines. The Company does not obtain collateral or other security to support financial instruments subject to credit risk. The Company does not anticipate non-performance by its counterparties, but cannot provide assurances.
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets. The Company designates commodity forward contracts as cash flow hedges of forecasted purchases of commodities, currency forward contracts as cash flow hedges of forecasted foreign currency cash flows and interest rate swaps as cash flow hedges of forecasted LIBOR-based interest payments. There were no significant collateral deposits on derivative financial instruments as of March 28, 2020 or March 30, 2019.
Cash Flow Hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into the same line within the Condensed Consolidated Statement of Income as the earnings effect of the hedged item in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or changes in market value of derivatives not designated as hedges are recognized in current earnings.
At March 28, 2020, the Company had $(0.6) million, net of tax, of derivative losses on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings. At December 28, 2019, the Company had $1.3 million, net of tax, of derivative gains on closed hedge instruments in AOCI that was subsequently realized in earnings when the hedged items impacted earnings.

26



As of March 28, 2020, the Company had the following currency forward contracts outstanding (with maturities extending through October 2021) to hedge forecasted foreign currency cash flows (in millions):
 
Notional Amount (in US Dollars)
Chinese Renminbi
$
96.3

Mexican Peso
122.8

Euro
68.7

Indian Rupee
43.2

Canadian Dollar
6.8

Australian Dollar
17.4

British Pound
10.4

Thai Baht
6.6



As of March 28, 2020, the Company had the following commodity forward contracts outstanding (with maturities extending through June 2021) to hedge forecasted purchases of commodities (notional amounts expressed in terms of the dollar value of the hedged item (in millions)):
 
Notional Amount
Copper
$
73.5

Aluminum
4.7



As of March 28, 2020, the total notional amount of the Company's receive variable/pay-fixed interest rate swap was $88.4 million with a maturity of April 12, 2021.

27



The following table presents the fair values of derivative instruments as of March 28, 2020 and December 28, 2019 (in millions):
 
March 28, 2020
 
Prepaid Expenses and Other Current Assets
 
Other Noncurrent Assets
 
Current Hedging Obligations
 
Noncurrent Hedging Obligations
Designated as Hedging Instruments:
 
 
 
 
 
 
 
Interest Rate Swap Contracts
$

 
$

 
$

 
$
2.0

Currency Contracts
1.7

 
11.1

 
17.8

 
4.4

Commodity Contracts
0.4

 
0.1

 
9.5

 
0.6

Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
Currency Contracts
0.3

 

 
2.0

 

Commodity Contracts

 

 
0.2

 

Total Derivatives
$
2.4

 
$
11.2

 
$
29.5

 
$
7.0

 
December 28, 2019
 
Prepaid Expenses and Other Current Assets
 
Other Noncurrent Assets
 
Current Hedging Obligations
 
Noncurrent Hedging Obligations
Designated as Hedging Instruments:
 
 
 
 
 
 
 
Interest Rate Swap Contracts
$

 
$

 
$

 
$
1.0

Currency Contracts
8.8

 
10.3

 
3.0

 
0.2

Commodity Contracts
2.6

 
0.1

 
0.2

 

Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
Currency Contracts
0.1

 

 
0.1

 

Commodity Contracts

 

 
0.1

 

Total Derivatives
$
11.5

 
$
10.4

 
$
3.4

 
$
1.2




28



The following table presents the effect of derivative instruments on the Condensed Consolidated Statements of Income and Condensed Consolidated Statement of Comprehensive Income (pre-tax) (in millions):
Derivatives Designated as Cash Flow Hedging Instruments
 
Three Months Ended
 
March 28, 2020
 
March 30, 2019
 
Commodity Forwards
 
Currency Forwards
 
Interest Rate Swaps
 
Total
 
Commodity Forwards
 
Currency Forwards
 
Interest Rate Swaps
 
Total
Gain (Loss) Recognized in Other Comprehensive Income (Loss)
$
(13.3
)
 
$
(25.1
)
 
$
(0.6
)
 
$
(39.0
)
 
$
8.1

 
$
10.2

 
$
0.2

 
$
18.5

Amounts Reclassified from Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
 


 


 


 


Gain Recognized in Net Sales

 
0.1

 

 
0.1

 

 

 

 

Gain (Loss) Recognized in Cost of Sales
(1.1
)
 
2.5

 

 
1.4

 
(2.2
)
 
(0.4
)
 

 
(2.6
)
Gain Recognized in Operating Expenses

 
0.7

 

 
0.7

 

 
1.5

 

 
1.5

Gain Recognized in Interest Expense

 

 
0.4

 
0.4

 

 

 
0.7

 
0.7


Derivatives Not Designated as Cash Flow Hedging Instruments (in millions):
 
Three Months Ended
 
March 28, 2020
 
March 30, 2019
 
Commodity Forwards
 
Currency Forwards
 
Commodity Forwards
 
Currency Forwards
Gain (Loss) recognized in Cost of Sales
$
(0.1
)
 
$

 
$
0.2

 
$

Loss recognized in Operating Expenses
$

 
$
(3.4
)
 
$

 
$
(0.4
)

The net AOCI hedging component balance of a $23.6 million loss at March 28, 2020 includes $19.2 million of net current deferred loss expected to be realized in the next twelve months. The gain/loss reclassified from AOCI into earnings on such derivatives will be recognized in the same period in which the related item affects earnings.
The Company's commodity and currency derivative contracts are subject to master netting agreements with the respective counterparties which allow the Company to net settle transactions with a single net amount payable by one party to another party. The Company has elected to present the derivative assets and derivative liabilities on the Condensed Consolidated Balance Sheets on a gross basis for the periods ended March 28, 2020 and December 28, 2019.

29



The following table presents the derivative assets and derivative liabilities presented on a net basis under enforceable master netting agreements (in millions):
 
March 28, 2020
 
Gross Amounts as Presented in the Condensed Consolidated Balance Sheet
 
Derivative Contract Amounts Subject to Right of Offset
 
Derivative Contracts as Presented on a Net Basis
Prepaid Expenses and Other Current Assets:
 
 
 
 
 
Derivative Currency Contracts
$
2.0

 
$
(2.0
)
 
$

Derivative Commodity Contracts
0.4

 
(0.4
)
 

Other Noncurrent Assets:
 
 
 
 
 
Derivative Currency Contracts
11.1

 
(2.0
)
 
9.1

Derivative Commodity Contracts
0.1

 
(0.1
)
 

Current Hedging Obligations:
 
 
 
 
 
Derivative Currency Contracts
19.8

 
(2.0
)
 
17.8

Derivative Commodity Contracts
9.7

 
(0.4
)
 
9.3

Noncurrent Hedging Obligations:
 
 
 
 
 
Derivative Currency Contracts
4.4

 
(2.0
)
 
2.4

Derivative Commodity Contracts
0.6

 
(0.1
)
 
0.5

 
December 28, 2019
 
Gross Amounts as Presented in the Condensed Consolidated Balance Sheet
 
Derivative Contract Amounts Subject to Right of Offset
 
Derivative Contracts as Presented on a Net Basis
Prepaid Expenses and Other Current Assets:
 
 
 
 
 
Derivative Currency Contracts
$
8.9

 
$
(2.5
)
 
$
6.4

Derivative Commodity Contracts
2.6

 
(0.3
)
 
2.3

Other Noncurrent Assets:
 
 
 
 
 
Derivative Currency Contracts
10.3

 
(0.1
)
 
10.2

Derivative Commodity Contracts
0.1

 

 
0.1

Current Hedging Obligations:
 
 
 
 
 
Derivative Currency Contracts
3.1

 
(2.5
)
 
0.6

Derivative Commodity Contracts
0.3

 
(0.3
)
 

Noncurrent Hedging Obligations:
 
 
 
 
 
Derivative Currency Contracts
0.2

 
(0.1
)
 
0.1




30



15. FAIR VALUE
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2
Unadjusted quoted prices in active markets for similar assets or liabilities, or
 
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
 
Inputs other than quoted prices that are observable for the asset or liability
Level 3
Unobservable inputs for the asset or liability
The Company uses the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The fair values of cash equivalents and short-term deposits approximate their carrying values as of March 28, 2020 and December 28, 2019, due to the short period of time to maturity and are classified using Level 1 inputs. The fair values of trade receivables and accounts payable approximate the carrying values due to the short period of time to maturity. See Note 7 for disclosure of the approximate fair value of the Company's debt at March 28, 2020 and December 28, 2019.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 28, 2020 and December 28, 2019 (in millions):
 
March 28, 2020
 
December 28, 2019
 
Classification
Assets:
 
 
 
 
 
Prepaid Expenses and Other Current Assets:
 
 
 
 
 
Derivative Currency Contracts
$
2.0

 
$
8.9

 
Level 2
Derivative Commodity Contracts
0.4

 
2.6

 
Level 2
Other Noncurrent Assets:
 
 
 
 
 
Assets Held in Rabbi Trust
6.0

 
6.1

 
Level 1
Derivative Currency Contracts
11.1

 
10.3

 
Level 2
Derivative Commodity Contracts
0.1

 
0.1

 
Level 2
Liabilities:
 
 
 
 
 
Current Hedging Obligations:
 
 
 
 
 
Derivative Currency Contracts
19.8

 
3.1

 
Level 2
Derivative Commodity Contracts
9.7

 
0.3

 
Level 2
Noncurrent Hedging Obligations:
 
 
 
 
 
Interest Rate Swap
2.0

 
1.0

 
Level 2
Derivative Currency Contracts
4.4

 
0.2

 
Level 2
Derivative Commodity Contracts
0.6

 

 
Level 2

Level 1 fair value measurements for assets held in a Rabbi Trust are unadjusted quoted prices.
Level 2 fair value measurements for derivative assets and liabilities are measured using quoted prices in active markets for similar assets and liabilities. Interest rate swaps are valued based on the discounted cash flows for the LIBOR forward yield curve for a swap with similar contractual terms. Foreign currency forwards are valued based on exchange rates quoted by domestic and foreign banks for similar instruments. Commodity forwards are valued based on observable market transactions of forward commodity prices.


31



16. RESTRUCTURING ACTIVITIES
The Company incurred restructuring and restructuring related costs on projects during fiscal 2020 and 2019. Restructuring costs include employee termination and plant relocation costs. Restructuring-related costs include costs directly associated with actions resulting from the Company's Simplification initiatives, such as asset write-downs or accelerated depreciation due to shortened useful lives in connection with site closures, discretionary employment benefit costs and other facility rationalization costs. Restructuring costs for employee termination expenses are generally required to be accrued over the employees remaining service period while restructuring costs for plant relocation costs and restructuring-related costs are generally required to be expensed as incurred.

The following table presents a reconciliation of provisions and payments for the restructuring projects for the three months ended March 28, 2020 and March 30, 2019 (in millions):
 
Three Months Ended
 
March 28, 2020
 
March 30, 2019
Beginning Balance
$
0.9

 
$
0.2

Provision
5.1

 
2.3

Less: Payments
3.6

 
2.5

Ending Balance
$
2.4


$



The following table presents a reconciliation of restructuring and restructuring-related costs for restructuring projects for the three months ended March 28, 2020 and March 30, 2019, respectively (in millions):
 
Three Months Ended
 
March 28, 2020
 
March 30, 2019
Restructuring Costs:
Cost of Sales
 
Operating Expenses
 
Total
 
Cost of Sales
 
Operating Expenses
 
Total
Employee Termination Expenses
$
1.5

 
$
0.4

 
$
1.9

 
$
0.2

 
$
0.2

 
$
0.4

Facility Related Costs
2.7

 
0.4

 
3.1

 
0.6

 
1.3

 
1.9

Other Expenses
0.1

 

 
0.1

 

 

 

  Total Restructuring Costs
$
4.3

 
$
0.8

 
$
5.1

 
$
0.8

 
$
1.5

 
$
2.3


The following table presents the allocation of Restructuring Costs by segment for the three months ended March 28, 2020 and March 30, 2019 (in millions):
Restructuring Costs - Three Months Ended
Total
 
Commercial Systems
 
Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
March 28, 2020
$
5.1

 
$
1.8

 
$
0.9

 
$
1.1

 
$
1.3

March 30, 2019
$
2.3

 
$
1.2

 
$
1.0

 
$
0.1

 
$



The Company's current restructuring activities are expected to continue. The Company expects to record aggregate future charges of approximately $16.8 million which includes $5.9 million of employee termination expenses, $10.9 million of facility related costs.

17. SUBSEQUENT EVENT
The Company has evaluated subsequent events since March 28, 2020, the date of these financial statements.
On April 1, 2020, the Company borrowed $254.8 million under its Credit Agreement. Combined with prior borrowings, the Company has borrowed the full $500.0 million under the Multicurrency Revolving Facility; accordingly, there remains no additional borrowing capacity under the Multicurrency Revolving Facility.
The Company has suspended its share repurchase program at this time. The existing share repurchase program remains authorized by the Company's Board of Directors and the Company may resume share repurchases at any time.


32



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this Item 2 to “we,” “us,” “our” or the “Company” refer collectively to Regal Beloit Corporation and its subsidiaries.
Overview
Regal Beloit Corporation (NYSE: RBC), based in Beloit, Wisconsin (USA), is a leading manufacturer of electric motors, electrical motion controls, power generation and power transmission products serving markets throughout the world.

Operating Segments

Our company is comprised of four operating segments: Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions.

A description of the four operating segments is as follows:

Commercial Systems segment produces fractional to approximately 5 horsepower AC and DC motors, electronic variable speed controls, fans, and blowers for commercial applications. These products serve markets including commercial building ventilation and HVAC, pool and spa, irrigation, dewatering, agriculture, and general commercial equipment.

Industrial Systems segment produces integral motors, generators, alternators and switchgear for industrial applications, along with aftermarket parts and kits to support such products. These products serve markets including agriculture, marine, mining, oil and gas, food and beverage, data centers, healthcare, prime and standby power, and general industrial equipment.

Climate Solutions segment produces small motors, electronic variable speed controls and air moving solutions serving markets including residential and light commercial HVAC, water heaters and commercial refrigeration.

Power Transmission Solutions segment produces, sells and services belt and chain drives, helical and worm gearing, mounted and unmounted bearings, couplings, modular plastic belts, conveying chains and components, hydraulic pump drives, large open gearing and specialty mechanical products serving markets including beverage, bulk handling, metals, special machinery, energy, aerospace and general industrial.

Components of Profit and Loss

Net Sales. We sell our products to a variety of manufacturers, distributors and end users. Our customers consist of a large cross-section of businesses, ranging from Fortune 100 companies to small businesses. A number of our products are sold to Original Equipment Manufacturers ("OEMs"), who incorporate our products, such as electric motors, into products they manufacture, and many of our products are built to the requirements of our customers. The majority of our sales derive from direct sales, but a significant portion derives from sales made by manufacturer’s representatives, who are paid exclusively on commission. Our product sales are made via purchase order, long-term contract, and, in some instances, one-time purchases. Many of our products have broad customer bases, with the levels of concentration of revenues varying from business unit to business unit.

Our level of net sales for any given period is dependent upon a number of factors, including (i) the demand for our products; (ii) the strength of the economy generally and the end markets in which we compete; (iii) our customers’ perceptions of our product quality at any given time; (iv) our ability to timely meet customer demands; (v) the selling price of our products; and (vi) the weather. As a result, our total revenue has tended to experience quarterly variations and our total revenue for any particular quarter may not be indicative of future results.

We use the term “organic sales" to refer to sales from existing operations excluding (i) sales from acquired businesses recorded prior to the first anniversary of the acquisition (“Acquisition Sales”), (ii) less the amount of sales attributable to any businesses divested/to be exited, and (iii) the impact of foreign currency translation. The impact of foreign currency translation is determined by translating the respective period’s organic sales using the same currency exchange rates that were in effect during the prior year periods. We use the term “organic sales growth” to refer to the increase in our sales between periods that is attributable to organic sales. We use the term “acquisition growth” to refer to the increase in our sales between periods that is attributable to Acquisition Sales.


33



Gross Profit. Our gross profit is impacted by our levels of net sales and cost of sales. Our cost of sales consists of costs for, among other things (i) raw materials, including copper, steel and aluminum; (ii) components such as castings, bars, tools, bearings and electronics; (iii) wages and related personnel expenses for fabrication, assembly and logistics personnel; (iv) manufacturing facilities, including depreciation on our manufacturing facilities and equipment, insurance and utilities; and (v) shipping. The majority of our cost of sales consists of raw materials and components. The price we pay for commodities and components can be subject to commodity price fluctuations. We attempt to mitigate this through fixed-price agreements with suppliers and our hedging strategies. When we experience commodity price increases, we have tended to announce price increase to our customers who purchase via purchase order, with such increases generally taking effect a period of time after the public announcements. For those sales we make under long-term contracts, we tend to include material price formulas that specify quarterly or semi-annual price adjustments based on a variety of factors, including commodity prices.

Outside of general economic cyclicality, our business units experience different levels of variation in gross profit from quarter to quarter based on factors specific to each business. For example, a portion of our Climate Solutions segment manufactures products that are used in air conditioning applications. As a result, our sales for that business tend to be lower in the first and fourth quarters and higher in the second and third quarters. In contrast, our Commercial Systems segment, Industrial Systems segment and Power Transmission Solutions segment have a broad customer base and a variety of applications, thereby helping to mitigate large quarter-to-quarter fluctuations outside of general economic conditions.

Operating Expenses. Our operating expenses consist primarily of (i) general and administrative expenses; (ii) sales and marketing expenses; (iii) general engineering and research and development expenses; and (iv) handling costs incurred in conjunction with distribution activities. Personnel related costs are our largest operating expense.

Our general and administrative expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses related to our executive, finance, human resource, information technology, legal and operations functions; (ii) occupancy expenses; (iii) technology related costs; (iv) depreciation and amortization; and (v) corporate-related travel. The majority of our general and administrative costs are for salaries and related personnel expenses. These costs can vary by business given the location of our different manufacturing operations.

Our sales and marketing expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses related to our sales and marketing function; (ii) internal and external sales commissions and bonuses; (iii) travel, lodging and other out-of-pocket expenses associated with our selling efforts; and (iv) other related overhead.

Our general engineering and research and development expenses consist primarily of costs for (i) salaries, benefits and other personnel expenses; (ii) the design and development of new energy efficiency products and enhancements; (iii) quality assurance and testing; and (iv) other related overhead. Our research and development efforts tend to be targeted toward developing new products that would allow us to maintain or gain additional market share, whether in new or existing applications. While these costs make up an insignificant portion of our operating expenses in the Power Transmission Solutions segment, they are more substantial in our Commercial Systems, Industrial Systems and Climate Solutions segments. In particular, a large driver of our research and development efforts in those three segments is energy efficiency, which generally means using less electrical power to produce more mechanical power.

Operating Profit. Our operating profit consists of the segment gross profit less the segment operating expenses. In addition, there are shared operating costs that cover corporate and information technology expenses that are consistently allocated to the operating segments and are included in the segment operating expenses. Operating profit is a key metric used to measure year over year improvement of the segments.

Restructuring and Restructuring Related Costs. We incurred restructuring-related costs on employee termination and plant relocation costs. Restructuring related costs includes costs directly associated with actions resulting from our simplification initiatives, such as asset write-downs or accelerated depreciation due to shortened useful lives in connection with site closures, discretionary employment benefit costs and other facility rationalization costs. Restructuring costs for employee termination expenses are generally required to be accrued over the employees remaining service period while restructuring costs for plant relocation costs and restructuring-related costs are generally required to be expensed as incurred.


34



COVID-19 Pandemic
The 2019 coronavirus ("COVID-19") evolved into a global pandemic during the first quarter of 2020 from its epicenter in China. This has resulted in a severe global health crisis that drove a dramatic slowdown in global economic and social activity. COVID-19 started to impact our businesses in China early in the first quarter, and as the virus spread and the quarter progressed, the virus increasingly impacted our business on a global scale.

We are an essential business, and as such have worked to ensure that our global facilities have remained operational. Our products are essential components in a range of applications used in the food & beverage, pharmaceutical, medical, transportation, and data communications industries, among many others. Certain global manufacturing operations have been impacted with plant closures or plants running at reduced rates.

In the face of this global crisis, our first priority has been the health and safety of our associates. In response, we implemented a host of measures to help our associates stay safe - such as practicing social distancing, making face masks mandatory across our sites globally, having associates work from home where possible, and conducting temperature checks, at all manufacturing facilities, as permitted by local laws.

Factors deriving from the COVID-19 response that have or may negatively impact sales and operating profit in the future include, but are not limited to: limitations on the ability of our suppliers to manufacture, or procure from manufacturers, components and raw materials used in our products, or to meet delivery requirements and commitments; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver our products to customers; limitations on the ability of our customers to conduct their business and purchase our products and services; reductions in demands of our customers; and limitations on the ability of our customers to pay us on a timely basis.

As part of our initial response to the impacts of COVID-19, we have taken additional cost actions, on top of restructuring, supply chain, and 80/20 reorganization efforts that were already underway prior to the existence of the virus. These additional actions include reducing discretionary spending across the organization, deferring new hires outside of mission critical roles, implementing a series of compensation reductions and furloughs on a global basis, and a temporary reduction of the cash component of board compensation. We will consider making more permanent changes to our cost structure as implications of COVID-19 continue to evolve. In addition, we have suspended our share repurchase program at this time. The existing share repurchase program remains authorized by our Board of Directors and we may resume share repurchases at any time.

Outlook
In light of the COVID-19 pandemic, which creates uncertainty around the demand environment in the near- and mid-term, we will be vigilantly monitoring the impacts of COVID-19 on our end markets, manufacturing footprint and supply chain. As the recovery of these areas becomes clearer we will resume providing a more detailed outlook.

On April 1st, we drew down the remaining $254.8 million available under our revolving credit facility. Combined with prior borrowings, we have now borrowed the full $500.0 million available under the revolver. See Liquidity and Capital Resources for additional information.

Results of Operations
Three Months Ended March 28, 2020 Compared to March 30, 2019
Net sales decreased $119.6 million or 14.0% for the first quarter 2020 compared to the first quarter 2019. The decrease consisted of negative organic sales of 9.8%, negative foreign currency translation of 0.7%, and a negative 3.5% from the businesses divested/to be exited. The decrease was primarily driven by sales declines across the segments due to the COVID-19 pandemic. Gross profit decreased $31.3 million or 13.3% for the first quarter 2020 as compared to the first quarter 2019 primarily due to lower sales volumes partially offset by productivity improvements and simplification programs. Operating expenses for the first quarter 2020 decreased $13.3 million or 9.2% as compared to the first quarter 2019. The decrease was primarily driven by cost savings initiatives and the businesses divested/to be exited.
Commercial Systems Segment net sales for the first quarter 2020 were $199.4 million, a decrease of $42.8 million or 17.7% as compared to the first quarter 2019. The decrease consisted of negative organic sales of 12.5%, a decline of 4.5% from the businesses divested/to be exited and negative foreign currency translation of 0.7%. Gross profit decreased $14.8 million or 22.6% as compared to the first quarter 2019 primarily driven by lower sales volumes as a result of COVID-19 related production delays in pool pump, headwinds in commercial HVAC and COVID-19 related pressure on Europe air moving, combined with account pruning partially

35



offset by share gains in China agriculture and air moving markets. Operating expenses for the first quarter 2020 were $37.5 million compared to $42.3 million in the first quarter 2019. The $4.8 million or 11.3% decrease was primarily due to lower variable selling costs on the lower sales volumes, the removal of costs related to the businesses divested/to be exited and cost savings initiatives.
Industrial Systems Segment net sales for the first quarter 2020 were 129.6 million, a decrease of $8.5 million or 6.2% as compared to the first quarter 2019. The decrease consisted of negative organic sales of 4.5% and negative foreign currency translation of 1.7%. Gross profit decreased $1.3 million or 5.4% as compared to the first quarter 2019 primarily driven by lower sales volumes as a result of headwinds in power generation and industrial end markets, combined with account pruning, and rising headwinds related to the COVID-19 pandemic, partially offset by share gains in the data center market. Operating expenses for the first quarter 2020 were $22.9 million compared to $27.2 million in the first quarter 2019. The $4.3 million or 15.8% decrease was primarily due to lower variable selling costs on the lower sales volumes and cost savings initiatives.
Climate Solutions Segment net sales were $210.1 million, a decrease of $53.2 million or 20.2% as compared to the first quarter 2019. The decrease consisted of negative organic sales of 14.8%, a decline of 5.0% from the businesses divested/to be exited and negative foreign currency translation of 0.4%. Gross profit decreased $11.3 million or 16.0% compared to the first quarter 2019. The decrease was primarily due to lower sales volumes driven by mild weather in the quarter, in addition to ongoing account pruning efforts in the segment, and rising headwinds related to the COVID-19 pandemic. Operating expenses for the first quarter 2020 were $29.4 million compared to $30.5 million in the first quarter 2019. The decrease was primarily due to lower variable selling costs on the lower sales volumes and cost savings initiatives.
Power Transmission Solutions Segment net sales for the first quarter 2020 were $195.1 million, a decrease of $15.1 million or 7.2% compared to first quarter 2019 net sales of $210.2 million. The decrease consisted of negative organic sales of 4.2%, a negative 2.5% from the businesses divested/to be exited and unfavorable foreign currency of 0.5%. Gross profit for the first quarter 2020 decreased $3.9 million or 5.2% primarily due to the decrease in sales volume driven by significant COVID-19 related declines in oil & gas end markets, in addition to ongoing proactive account pruning activities in the segment, partially offset by share gains in alternative energy markets. Operating expenses for the first quarter 2020 decreased $3.1 million as compared to the first quarter 2019 primarily due to a reduction in variable selling related costs along with cost savings initiatives.


36



 
Three Months Ended
 
March 28, 2020
 
March 30, 2019
(Dollars in Millions)
 
 
 
Net Sales:
 
 
 
  Commercial Systems
$
199.4

 
$
242.2

  Industrial Systems
129.6

 
138.1

  Climate Solutions
210.1

 
263.3

  Power Transmission Solutions
195.1

 
210.2

Consolidated
$
734.2

 
$
853.8

 
 
 
 
Gross Profit as a Percent of Net Sales:
 
 
 
  Commercial Systems
25.4
 %
 
27.0
 %
  Industrial Systems
17.4
 %
 
17.3
 %
  Climate Solutions
28.3
 %
 
26.9
 %
  Power Transmission Solutions
36.2
 %
 
35.4
 %
Consolidated
27.7
 %
 
27.5
 %
 
 
 
 
Operating Expenses as a Percent of Net Sales:
 
 
 
  Commercial Systems
18.8
 %
 
17.5
 %
  Industrial Systems
17.7
 %
 
19.7
 %
  Climate Solutions
14.0
 %
 
11.6
 %
  Power Transmission Solutions
21.6
 %
 
21.5
 %
Consolidated
18.0
 %
 
17.0
 %
 
 
 
 
Income (Loss) from Operations as a Percent of Net Sales:
 
 
 
  Commercial Systems*
6.3
 %
 
23.9
 %
  Industrial Systems
(0.4
)%
 
(3.1
)%
  Climate Solutions
14.0
 %
 
14.8
 %
  Power Transmission Solutions
14.6
 %
 
13.4
 %
Consolidated
9.5
 %
 
14.1
 %
 
 
 
 
Income from Operations
$
70.0

 
$
120.6

Other (Income) Expenses, net
(1.1
)
 
0.1

Interest Expense
11.6

 
13.6

Interest Income
1.1

 
1.1

  Income before Taxes
60.6

 
108.0

Provision for Income Taxes
13.9

 
21.2

  Net Income
46.7

 
86.8

Less: Net Income Attributable to Noncontrolling Interests
0.9

 
0.9

  Net Income Attributable to Regal Beloit Corporation
$
45.8

 
$
85.9

* The 2019 results included a gain on divestiture of $41.3 million.

The effective tax rate for the three months ended March 28, 2020 was 22.9% versus 19.6% for the three months ended March 30, 2019. The change in the effective tax rate for the three months ended March 28, 2020 was primarily driven by the 2019 expiration of the China Hi-Technology incentives.


37



Liquidity and Capital Resources
General
Our principal source of liquidity is cash flow provided by operating activities. In addition to operating income, other significant factors affecting our cash flow include working capital levels, capital expenditures, dividends, share repurchases, acquisitions and divestitures, availability of debt financing and the ability to attract long-term capital at acceptable terms.

Cash flow provided by operating activities was $102.7 million for the three months ended March 28, 2020, a $84.4 million increase from the three months ended March 30, 2019. The increase was due to cash being provided by a reduction in inventory for the three months ended March 28, 2020 versus an increase in inventory for the three months ended March 30, 2019.

Cash flow used in investing activities was $7.9 million for the three months ended March 28, 2020 versus cash flow provided by investing activities of $99.2 million for the three months ended March 30, 2019. The change was driven by $119.4 million of divestiture proceeds received in the prior year.

Cash flow provided by financing activities was $188.7 million for the three months ended March 28, 2020, compared to $106.0 million used in financing activities for the three months ended March 30, 2019. We held excess cash and borrowed an additional $125.0 million which led to net debt borrowings of $227.0 million during the three months ended March 28, 2020, compared to net debt repayments of $92.1 million during the three months ended March 30, 2019. We paid $12.2 million of dividends to shareholders during the three months ended March 28, 2020, compared to $12.0 million for the three months ended March 30, 2019. There were $25.0 million of share repurchases for the three months ended March 28, 2020, compared to none for the three months ended March 30, 2019.

Our working capital was $1,254.1 million at March 28, 2020, compared to $1,047.2 million at December 28, 2019. At March 28, 2020 and December 28, 2019, our current ratio (which is the ratio of our current assets to current liabilities) was 3.2:1 and 2.9:1, respectively. Our working capital increased primarily due to the increase in cash which was acquired from additional long-term borrowings.

The following table presents selected financial information and statistics as of March 28, 2020 and December 28, 2019 (in millions):
 
 
 
March 28, 2020
 
December 28, 2019
Cash and Cash Equivalents
 
 
$
604.5

 
$
331.4

Trade Receivables, Net
 
 
464.0

 
461.4

Inventories
 
 
655.3

 
678.4

Working Capital
 
 
1,254.1

 
1,047.2

Current Ratio
 
 
3.2
:1
 
2.9
:1

At March 28, 2020 our cash and cash equivalents totaled $604.5 million, of which $427.4 million was held by foreign subsidiaries and could be used in our domestic operations if necessary. We periodically evaluate our cash held outside the US and may pursue opportunities to repatriate certain foreign cash amounts. As a result of the Tax Cuts and Jobs Act of 2017, dividends to the US no longer incur US tax.

We will, from time to time, maintain excess cash balances which may be used to (i) fund operations, (ii) repay outstanding debt, (iii) fund acquisitions, (iv) pay dividends, (v) make investments in new product development programs, (vi) repurchase our common stock, or (vii) fund other corporate objectives.
On April 1, 2020, we proactively borrowed the remaining $254.8 million under our Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent and the lenders named therein as a precautionary measure. These recent borrowings were done as a proactive measure to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. Combined with prior borrowings, we have now borrowed the full $500.0 million available under the revolver.
Cash and cash investments were approximately $862.0 million immediately following the draw down.


38



Credit Agreement
On August 27, 2018 we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent and the lenders named therein, providing for a (i) 5-year unsecured term loan facility in the principal amount of $900.0 million (the “Term Facility”) and (ii) a 5-year unsecured multicurrency revolving facility in the principal amount of $500.0 million (the “Multicurrency Revolving Facility”), including a $50.0 million letter of credit sub facility, available for general corporate purposes. Borrowings under the Credit Agreement bear interest at floating rates based upon indices determined by the currency of the borrowing, plus an applicable margin determined by reference to our consolidated funded debt to consolidated EBITDA ratio or at an alternative base rate.
The Term Facility was drawn in full on August 27, 2018 with the proceeds settling the amounts owed under prior borrowings. The Term Facility requires quarterly amortization at a rate starting at 5.0% per annum, increasing to 7.5% per annum after three years and further increasing to 10.0% per annum for the last year of the Term Facility, unless previously prepaid. The weighted average interest rate on the Term Facility for the three months ended March 28, 2020 and March 30, 2019 was 3.0% and 3.9%, respectively. The Credit Agreement requires that we 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 March 28, 2020, we had borrowings under the Multicurrency Revolving Facility in the amount of $244.8 million, $0.4 million of standby letters of credit issued under the facility, and $254.8 million of available borrowing capacity. For the three months ended March 28, 2020 and March 30, 2019 under the Multicurrency Revolving Facility, the average daily balance in borrowings was $109.8 million and $64.3 million, respectively and weighted average interest rate of 2.8% and 3.8%, respectively. We pay a non-use fee on the aggregate unused amount of the Multicurrency Revolving Facility at a rate determined by reference to its consolidated funded debt to consolidated EBITDA ratio.
Senior Notes
At March 28, 2020, we had $400.0 million of senior notes (the “Notes”) outstanding. The Notes consist of $400.0 million in senior notes in a private placement which were issued in five tranches with maturities from ten to twelve years and carry fixed interest rates. As of March 28, 2020, $400.0 million of the Notes are included in Long-Term Debt on the Condensed Consolidated Balance Sheets.
The following table presents details on the Notes at March 28, 2020 (in millions):
 
 
Principal
 
Interest Rate
 
Maturity
Fixed Rate Series 2011A
 
$
230.0

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

 
4.9 to 5.1%
 
July 14, 2023
 
 
$
400.0

 
 
 
 
We have an interest rate swap agreement to manage fluctuations in cash flows resulting from interest rate risk (see also Note 14 of Notes to the Condensed Consolidated Financial Statements).

Compliance with Financial Covenants

The Credit Agreement and the Notes require us to meet specified financial ratios and to satisfy certain financial condition tests. We were in compliance with all financial covenants contained in the Notes and the Credit Agreement as of March 28, 2020.

Other Notes Payable

At March 28, 2020, other notes payable of approximately $4.4 million were outstanding with a weighted average interest rate of 5.0%. At December 28, 2019, other notes payable of approximately $4.5 million were outstanding with a weighted average rate of 5.0%.

Other Disclosures

Based on rates for instruments with comparable maturities and credit quality, which are classified as Level 2 inputs (see also Note 15 of Notes to the Condensed Consolidated Financial Statements), the approximate fair value of our total debt was $1,376.3 million and $1,162.1 million as of March 28, 2020 and December 28, 2019, respectively.


39



Critical Accounting Policies
Our disclosures of critical accounting policies, which are contained in our Annual Report on Form 10-K for the year ended December 28, 2019, have not materially changed since that report was filed.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk relating to our operations due to changes in interest rates, foreign currency exchange rates and commodity prices of purchased raw materials. We manage the exposure to these risks through a combination of normal operating and financing activities and derivative financial instruments such as interest rate swaps, commodity cash flow hedges and foreign currency forward exchange contracts. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which prohibit the use of financial instruments for speculative purposes.
All qualified hedges are recorded on the balance sheet at fair value and are accounted for as cash flow hedges, with changes in fair value recorded in Accumulated Other comprehensive Income (Loss) (“AOCI”) in each accounting period. An ineffective portion of the hedges change in fair value, if any, is recorded in earnings in the period of change.
Interest Rate Risk
We are exposed to interest rate risk on certain of our short-term and long-term debt obligations used to finance our operations and acquisitions. At March 28, 2020, excluding the impact of interest rate swaps, we had $404.1 million of fixed rate debt and $965.1 million of variable rate debt. We utilize interest rate swaps to manage fluctuations in cash flows resulting from exposure to interest rate risk on forecasted variable rate interest payments.
We have floating rate borrowings, which expose us to variability in interest payments due to changes in interest rates. A hypothetical 10% change in our weighted average borrowing rate on outstanding variable rate debt at March 28, 2020 would result in a $2.2 million change in after-tax annualized earnings. We have entered into a pay fixed/receive floating interest rate swap to manage fluctuations in cash flows resulting from interest rate risk related to the floating rate interest on our Term Facility. This interest rate swap has been designated as a cash flow hedge against forecasted interest payments.
Details regarding the instruments as of March 28, 2020 are as follows (in millions):
Instrument
Notional Amount
Maturity
Rate Paid
Rate Received
Fair Value
Swap
$88.4
April 12, 2021
2.5%
LIBOR (1 month)
$(2.0)
As of March 28, 2020, the interest rate swap liability of $2.0 million was included in Other Noncurrent Hedging Obligations. The unrealized loss on the effective portion of the contract net of tax of $(1.6) million was recorded in AOCI. At December 28, 2019, a $1.0 million interest rate swap liability was included in Noncurrent Hedging Obligations.
In July 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. We have material exposure to LIBOR through our revolving credit facility, certain lines of credit and interest rate swaps that are indexed to USD-LIBOR. It is expected that LIBOR will be discontinued and, while we believe an acceptable replacement to LIBOR will be available, if LIBOR is discontinued, we cannot reasonably estimate the impact, if any, on such discontinuation.
Foreign Currency Risk
We are exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances of foreign subsidiaries, intercompany loans with foreign subsidiaries and transactions denominated in foreign currencies. Our objective is to minimize our exposure to these risks through a combination of normal operating activities and the utilization of foreign currency exchange contracts to manage our exposure on the forecasted transactions denominated in currencies other than the applicable functional currency. Contracts are executed with credit worthy banks and are denominated in currencies of major industrial countries. We do not hedge our exposure to the translation of reported results of foreign subsidiaries from local currency to United States dollars.

40



Derivatives
As of March 28, 2020, derivative currency assets (liabilities) of $2.0 million, $11.1 million, $(19.8) million and $(4.4) million, are recorded in Prepaid Expenses and Other Current Assets, Other Noncurrent Assets, Current Hedging Obligations, and Noncurrent Hedging Obligations, respectively. As of December 28, 2019, derivative currency assets (liabilities) of $8.9 million, $10.3 million, $(3.1) million and $(0.2) million, are recorded in Prepaid Expenses and Other Current Assets, Other Noncurrent Assets, Current Hedging Obligations and Noncurrent Hedging Obligations, respectively. The unrealized (losses) gains on the effective portions of the hedges of $(14.1) million net of tax, and $5.7 million net of tax, as of March 28, 2020 and December 28, 2019 respectively, were recorded in AOCI. At March 28, 2020, we had $0.4 million, net of tax, of derivative currency gains on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings. At December 28, 2019, we had $2.1 million, net of tax, currency gains on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings.
The following table quantifies the outstanding foreign exchange contracts intended to hedge non-US dollar denominated receivables and payables and the corresponding impact on the value of these instruments assuming a hypothetical 10% appreciation/depreciation of their counter currency on March 28, 2020 (in millions):
 
 
 
 
 
 
Gain (Loss) From
Currency
 
Notional Amount
 
Fair Value
 
10% Appreciation of Counter Currency
 
10% Depreciation of Counter Currency
Chinese Renminbi
 
$
96.3

 
$
(2.1
)
 
$
9.6

 
$
(9.6
)
Mexican Peso
 
122.8

 
(18.0
)
 
12.3

 
(12.3
)
Euro
 
68.7

 
8.9

 
6.9

 
(6.9
)
Indian Rupee
 
43.2

 
(1.9
)
 
4.3

 
(4.3
)
Canadian Dollar
 
6.8

 
0.4

 
0.7

 
(0.7
)
Australian Dollar
 
17.4

 
0.9

 
1.7

 
(1.7
)
British Pound
 
10.4

 
0.2

 
1.0

 
(1.0
)
Thai Baht
 
6.6

 
0.5

 
0.7

 
(0.7
)
Gains and losses indicated in the sensitivity analysis would be offset by gains and losses on the underlying forecasted non-US dollar denominated cash flows.
Commodity Price Risk
We periodically enter into commodity hedging transactions to reduce the impact of changing prices for certain commodities such as copper and aluminum based upon forecasted purchases of such commodities. Qualified hedge transactions are designated as cash flow hedges and the contract terms of commodity hedge instruments generally mirror those of the hedged item, providing a high degree of risk reduction and correlation.
Derivatives
Derivative commodity assets (liabilities) of $0.4 million, $0.1 million, $(9.7) million and $(0.6) million were recorded in Prepaid Expenses and Other Current Assets, Current Hedging Obligations, Other Noncurrent Assets and Noncurrent Hedging Obligations, respectively, at March 28, 2020. Derivative commodity assets (liabilities) of $2.6 million, $0.1 million and $(0.3) million were recorded in Prepaid Expenses, Other Noncurrent Assets and Current Hedging Obligations, respectively, at December 28, 2019. The unrealized gain(loss) on the effective portion of the hedges of $(7.3) million net of tax and $1.8 million net of tax, as of March 28, 2020 and December 28, 2019, respectively, was recorded in AOCI. At March 28, 2020, we had $(1.0) million, net of tax, of derivative commodity losses on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings. At December 28, 2019, there was an additional $(0.8) million, net of tax, of derivative commodity losses on closed hedge instruments in AOCI that were realized into earnings when the hedged items impacted earnings.

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The following table quantifies the outstanding commodity contracts intended to hedge raw material commodity prices and the corresponding impact on the value of these instruments assuming a hypothetical 10% appreciation/depreciation of their prices on March 28, 2020 (in millions):
 
 
 
 
 
 
Gain (Loss) From
Commodity
 
Notional Amount
 
Fair Value
 
10% Appreciation of Commodity Prices
 
10% Depreciation of Commodity Prices
Copper
 
$
73.5

 
$
(9.3
)
 
$
7.4

 
$
(7.4
)
Aluminum
 
4.7

 
(0.5
)
 
0.5

 
(0.5
)
Gains and losses indicated in the sensitivity analysis would be offset by the actual prices of the commodities.
The net AOCI hedging component balance of a $23.6 million loss at March 28, 2020 includes $19.2 million of net current deferred losses expected to be realized in the next twelve months. The gain/loss reclassified from AOCI into earnings on such derivatives will be recognized in the same period in which the related item affects earnings.
Counterparty Risk
We are exposed to credit losses in the event of non-performance by the counterparties to various financial agreements, including our interest rate swap agreements, foreign currency exchange contracts and commodity hedging transactions. We manage exposure to counterparty credit risk by limiting our counterparties to major international banks and financial institutions meeting established credit guidelines and continually monitoring their compliance with the credit guidelines. We do not obtain collateral or other security to support financial instruments subject to credit risk. We do not anticipate non-performance by our counterparties, but cannot provide assurances.

ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective to ensure that (a) information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (b) information required to be disclosed by us in the reports the Company files or submits under the Exchange Act is accumulated and communicated to our management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in the legal matters described in Part I, Item 3 in our Annual Report on Form 10-K for the year ended December 28, 2019, which is incorporated herein by reference.

ITEM 1A. RISK FACTORS
Our business and financial results are subject to numerous risks and uncertainties. The following risk factor supplements the risk factors reported in Part I, Item 1A in our 2019 Annual Report on Form 10-K for the year ended December 28, 2019, which is incorporated herein by reference.
The recent COVID-19 outbreak has adversely impacted our business and could, in the future, have a material adverse impact on our business, results of operation, financial condition, liquidity, customers, suppliers, and the geographies in which we operate.

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The global outbreak of the COVID-19 has significantly increased economic, demand and operational uncertainty. We have global operations, customers and suppliers, including in countries most impacted by COVID-19. Authorities around the world have taken a variety of measures to slow the spread of COVID-19, including travel bans or restrictions, increased border controls or closures, quarantines, shelter-in-place orders and business shutdowns and such authorities may impose additional restrictions. We have also taken actions to protect our employees and to mitigate the spread of COVID-19, including embracing guidelines set by the World Health Organization and the U.S. Centers for Disease Control and Prevention on social distancing, good hygiene, restrictions on employee travel and in-person meetings, and changes to employee work arrangements including remote work arrangements where feasible. The actions taken around the world to slow the spread of COVID-19 have also impacted our customers and suppliers, and future developments could cause further disruptions to us due to the interconnected nature of our business relationships.
The impact of COVID-19 on the global economy and our customers, as well as recent volatility in commodity markets, has negatively impacted demand for our products and could continue to do so in the future. Its effects could also result in further disruptions to our manufacturing operations, including higher rates of employee absenteeism, and supply chain, which could continue to negatively impact our ability to meet customer demand. Additionally, the potential deterioration and volatility of credit and financial markets could limit our ability to obtain external financing. The extent to which COVID-19 will impact our business, results of operations, financial condition or liquidity is highly uncertain and will depend on future developments, including the spread and duration of the virus, potential actions taken by governmental authorities, and how quickly economic conditions stabilize and recover.
For additional information regarding risks and uncertainties facing the Company, please also see the information provided under the header “Cautionary Statement” contained in this Quarterly Report on Form 10-Q.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table contains detail related to the repurchase of our common stock based on the date of trade during the quarter ended March 28, 2020. 
2020 Fiscal Month
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Value of Shares Purchased as a Part of Publicly Announced Plans or Programs
 
Maximum Value of Shares that May be Purchased Under the Plans or Programs
Dec 29 to Feb 1
 
173,819

 
$
86.33

 
$
15,005,142

 
$
219,989,485

Feb 2 to Feb 29
 

 

 

 
219,989,485

Mar 1 to Mar 28
 
141,253

 
70.82

 
10,004,193

 
209,985,292

 
 
315,072

 
 
 
$
25,009,335

 
 
Under our equity incentive plans, participants may pay the exercise price or satisfy all or a portion of the federal, state and local withholding tax obligations arising in connection with plan awards by electing to (a) have the Company withhold shares of common stock otherwise issuable under the award, (b) tender back shares received in connection with such award or (c) deliver other previously owned shares of common stock, in each case having a value equal to the exercise price or the amount to be withheld. During the quarter ended March 28, 2020, we acquired 1,761 shares in connection with transactions pursuant to equity incentive plans.
At a meeting of the Board of Directors on July 24, 2018, the Company's Board of Directors approved the extinguishment of the existing 3.0 million share repurchase program that was approved in November 2013 and replaced it with an authorization to purchase up to $250.0 million of shares. At a meeting of the Board of Directors on October 25, 2019, the July 2018 repurchase authorization was extinguished and replaced with an authorization to purchase up to $250.0 million of shares.

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ITEM 6. EXHIBITS
 
Exhibit Number
  
Exhibit Description
31.1
  
 
 
31.2
  
 
 
32.1
  
 
 
101.INS
  
XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
104
 
Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101).





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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
REGAL BELOIT CORPORATION
(Registrant)
 
 
 
/s/ Robert J. Rehard
 
Robert J. Rehard
Vice President
Chief Financial Officer
(Principal Financial Officer)
 
 
 
/s/ Jason R. Longley
 
Jason R. Longley
Vice President
Corporate Controller
(Principal Accounting Officer)
 
 
Date: May 7, 2020
 




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