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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 June 29, 2019 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  x    No  o
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  x    No  o

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  ý
On August 5, 2019 the registrant had outstanding 41,934,921 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:

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;
issues and costs arising from the integration of acquired companies and businesses and the timing and impact of purchase accounting adjustments;
our overall debt levels and our ability to repay principal and interest on our outstanding debt;
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;
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;
effects on earnings of any significant impairment of goodwill or intangible assets;
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 “Risk Factors” in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 26, 2019 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 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 Securities and Exchange Commission on February 26, 2019.


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
 
Six Months Ended
 
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Net Sales
$
873.7

 
$
959.7

 
$
1,727.5

 
$
1,838.5

Cost of Sales
639.7

 
712.3

 
1,258.9

 
1,356.2

Gross Profit
234.0

 
247.4

 
468.6

 
482.3

Operating Expenses
142.2

 
147.8

 
287.4

 
294.5

Gain on Divestiture of Businesses
(4.2
)
 

 
(45.4
)
 

Impairments

 

 
10.0

 

       Total Operating Expenses
138.0

 
147.8

 
252.0

 
294.5

Income from Operations
96.0

 
99.6

 
216.6

 
187.8

Other Expenses, net
0.2

 
0.4

 
0.3

 
0.8

Interest Expense
13.4

 
14.2

 
27.0

 
27.2

Interest Income
1.4

 
0.6

 
2.5

 
0.8

Income Before Taxes
83.8

 
85.6

 
191.8

 
160.6

Provision For Income Taxes
16.4

 
18.3

 
37.6

 
34.0

Net Income
67.4

 
67.3

 
154.2

 
126.6

Less: Net Income Attributable to Noncontrolling Interests
0.8

 
1.4

 
1.7

 
2.3

Net Income Attributable to Regal Beloit Corporation
$
66.6

 
$
65.9

 
$
152.5

 
$
124.3

Earnings Per Share Attributable to Regal Beloit Corporation:
 
 
 
 
 
 
 
Basic
$
1.56

 
$
1.51

 
$
3.57

 
$
2.83

Assuming Dilution
$
1.55

 
$
1.50

 
$
3.54

 
$
2.81

Weighted Average Number of Shares Outstanding:
 
 
 
 
 
 
 
Basic
42.6

 
43.8

 
42.7

 
44.0

Assuming Dilution
43.0

 
44.1

 
43.0

 
44.3


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
 
Six Months Ended
 
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Net Income
$
67.4

 
$
67.3

 
$
154.2

 
$
126.6

Other Comprehensive Income (Loss) Net of Tax:
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
(4.4
)
 
(68.8
)
 
6.8

 
(38.2
)
Reclassification of Foreign Currency Translation Adjustments included in Net Income, Net of $0.0 Million Tax Effects for the Three and Six Months Ended June 29, 2019 and June 30, 2018, Respectively
(0.6
)
 

 
1.6

 

Hedging Activities:
 
 
 
 
 
 
 
Increase (Decrease) in Fair Value of Hedging Activities, Net of Tax Effects of $(1.4) Million and $(3.9) Million for the Three Months Ended June 29, 2019 and June 30, 2018 and $3.0 Million and $(0.2) Million for the Six Months Ended June 29, 2019 and June 30, 2018, Respectively
(4.8
)
 
(12.3
)
 
9.3

 
(0.8
)
Reclassification of Losses included in Net Income, Net of Tax Effects of $(0.1) Million and $(2.8) Million for the Three Months Ended June 29, 2019 and June 30, 2018 and $0.0 Million and $(3.4) Million for the Six Months Ended June 29, 2019 and June 30, 2018, Respectively
(0.3
)
 
(8.5
)
 

 
(10.3
)
Pension and Post Retirement Plans:
 
 
 
 
 
 
 
Reclassification Adjustments for Pension and Post Retirement Benefits included in Net Income, Net of Tax Effects of $0.1 Million and $0.2 Million for the Three Months Ended June 29, 2019 and June 30, 2018 and $0.2 Million and $0.4 Million for the Six Months Ended June 29, 2019 and June 30, 2018, Respectively
0.5

 
0.7

 
0.9

 
1.5

Other Comprehensive Income (Loss)
(9.6
)
 
(88.9
)
 
18.6

 
(47.8
)
Comprehensive Income (Loss)
57.8

 
(21.6
)
 
172.8

 
78.8

Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interests
0.3

 
(0.4
)
 
1.7

 
1.5

Comprehensive Income (Loss) Attributable to Regal Beloit Corporation
$
57.5

 
$
(21.2
)
 
$
171.1

 
$
77.3

See accompanying Notes to Condensed Consolidated Financial Statements


6



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions, Except Per Share Data)
 
 
June 29,
2019
 
December 29,
2018
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
291.3

 
$
248.6

Trade Receivables, Less Allowances of $9.2 Million in 2019 and $13.3 Million in 2018
547.8

 
551.9

Inventories
765.3

 
767.2

Prepaid Expenses and Other Current Assets
163.1

 
157.9

Assets of Businesses Held for Sale
35.4

 
92.1

Total Current Assets
1,802.9

 
1,817.7

Net Property, Plant, and Equipment
622.3

 
615.5

Operating Lease Assets
79.6

 

Goodwill
1,506.7

 
1,509.2

Intangible Assets, Net of Amortization
594.7

 
625.5

Deferred Income Tax Benefits
31.6

 
34.2

Other Noncurrent Assets
22.5

 
21.7

Total Assets
$
4,660.3

 
$
4,623.8

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts Payable
$
416.7

 
$
424.8

Dividends Payable
12.6

 
12.0

Current Hedging Obligations
5.4

 
11.3

Accrued Compensation and Employee Benefits
71.0

 
81.9

Other Accrued Expenses
103.2

 
136.0

Liabilities of Businesses Held for Sale
12.5

 
17.0

Current Operating Lease Liabilities
23.3

 

Current Maturities of Long-Term Debt
0.6

 
0.5

Total Current Liabilities
645.3

 
683.5

Long-Term Debt
1,222.7

 
1,306.6

Deferred Income Taxes
158.8

 
148.3

Noncurrent Hedging Obligations
1.7

 
1.2

Pension and Other Post Retirement Benefits
93.2

 
96.2

Noncurrent Operating Lease Liabilities
57.9

 

Other Noncurrent Liabilities
50.3

 
49.5

Contingencies (see Note 13)

 

Equity:
 
 
 
Regal Beloit Corporation Shareholders' Equity:
 
 
 
Common Stock, $0.01 par value, 100.0 Million Shares Authorized, 42.2 Million and 42.8 Million Shares Issued and Outstanding for 2019 and 2018, Respectively
0.4

 
0.4

Additional Paid-In Capital
750.7

 
783.6

Retained Earnings
1,882.7

 
1,777.9

Accumulated Other Comprehensive Loss
(232.8
)
 
(251.4
)
Total Regal Beloit Corporation Shareholders' Equity
2,401.0

 
2,310.5

Noncontrolling Interests
29.4

 
28.0

Total Equity
2,430.4

 
2,338.5

Total Liabilities and Equity
$
4,660.3

 
$
4,623.8

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
March 31, 2018
$
0.4

 
$
857.5

 
$
1,655.1

 
$
(123.9
)
 
$
31.1

 
$
2,420.2

Net Income

 

 
65.9

 

 
1.4

 
67.3

Other Comprehensive Income (Loss)

 

 

 
(87.1
)
 
(1.8
)
 
(88.9
)
Dividends Declared ($0.28 Per Share)

 

 
(12.2
)
 

 

 
(12.2
)
Stock Options Exercised

 
(3.4
)
 

 

 

 
(3.4
)
Stock Repurchase

 
(37.1
)
 
(9.0
)
 

 

 
(46.1
)
Share-Based Compensation

 
3.8

 

 

 

 
3.8

Adoption of Accounting Pronouncement ASU 2018-02

 

 
4.6

 
(4.6
)
 

 

June 30, 2018
$
0.4

 
$
820.8

 
$
1,704.4

 
$
(215.6
)
 
$
30.7

 
$
2,340.7

 
 
 
 
 
 
 
 
 
 
 
 
March 30, 2019
$
0.4

 
$
786.4

 
$
1,851.8

 
$
(223.7
)
 
$
29.1

 
$
2,444.0

Net Income

 

 
66.6

 

 
0.8

 
67.4

Other Comprehensive Income (Loss)

 

 

 
(9.1
)
 
(0.5
)
 
(9.6
)
Dividends Declared ($0.30 Per Share)

 

 
(12.6
)
 

 

 
(12.6
)
Stock Options Exercised

 
(6.0
)
 

 

 

 
(6.0
)
Stock Repurchase

 
(32.8
)
 
(23.1
)
 

 

 
(55.9
)
Share-Based Compensation

 
3.1

 

 

 

 
3.1

June 29, 2019
$
0.4

 
$
750.7

 
$
1,882.7

 
$
(232.8
)
 
$
29.4

 
$
2,430.4

 

8



 
Six Months Ended
 
Common
Stock
$0.01 Par
Value
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
Total
Equity
December 30, 2017
$
0.4

 
$
877.5

 
$
1,611.6

 
$
(164.0
)
 
$
29.2

 
$
2,354.7

Net Income

 

 
124.3

 

 
2.3

 
126.6

Other Comprehensive Income (Loss)

 

 

 
(47.0
)
 
(0.8
)
 
(47.8
)
Dividends Declared ($0.54 Per Share)

 

 
(23.6
)
 

 

 
(23.6
)
Stock Options Exercised

 
(4.3
)
 

 

 

 
(4.3
)
Stock Repurchase

 
(59.6
)
 
(12.5
)
 

 

 
(72.1
)
Share-Based Compensation

 
7.2

 

 

 

 
7.2

Adoption of Accounting Pronouncement ASU 2018-02

 

 
4.6

 
(4.6
)
 

 

June 30, 2018
$
0.4

 
$
820.8

 
$
1,704.4

 
$
(215.6
)
 
$
30.7

 
$
2,340.7

 
 
 
 
 
 
 
 
 
 
 
 
December 29, 2018
$
0.4

 
$
783.6

 
$
1,777.9

 
$
(251.4
)
 
$
28.0

 
$
2,338.5

Net Income

 

 
152.5

 

 
1.7

 
154.2

Other Comprehensive Income (Loss)

 

 

 
18.6

 

 
18.6

Dividends Declared ($0.58 Per Share)

 

 
(24.6
)
 

 

 
(24.6
)
Stock Options Exercised

 
(7.5
)
 

 

 

 
(7.5
)
Stock Repurchase

 
(32.8
)
 
(23.1
)
 

 

 
(55.9
)
Share Based Compensation

 
7.4

 

 

 

 
7.4

Dividends Declared to Noncontrolling Interests

 

 

 

 
(0.3
)
 
(0.3
)
June 29, 2019
$
0.4

 
$
750.7

 
$
1,882.7

 
$
(232.8
)
 
$
29.4

 
$
2,430.4

See accompanying Notes to Condensed Consolidated Financial Statements.

9



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
 
Six Months Ended
 
June 29,
2019
 
June 30,
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
154.2

 
$
126.6

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities (Net of Acquisitions and Divestitures):
 
 
 
Depreciation and Amortization
66.5

 
71.0

Impairments
10.0

 

Noncash Lease Expense
14.3

 

Loss on Sale or Disposition of Assets, Net
0.4

 
2.4

Share-Based Compensation Expense
7.4

 
7.2

Gain on Divestiture of Businesses
(45.4
)
 

Change in Operating Assets and Liabilities
(76.8
)
 
(62.9
)
Net Cash Provided by Operating Activities
130.6

 
144.3

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Additions to Property, Plant and Equipment
(56.2
)
 
(40.5
)
Sales of Investment Securities

 
0.5

Business Acquisitions, Net of Cash Acquired

 
(161.5
)
Proceeds from Divestiture of Businesses
138.2

 

Proceeds from Sale of Assets
1.7

 
0.4

Net Cash Provided by (Used In) Investing Activities
83.7

 
(201.1
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings Under Revolving Credit Facility
590.1

 
692.1

Repayments Under Revolving Credit Facility
(650.5
)
 
(498.2
)
Proceeds from Short-Term Borrowings
24.2

 
9.4

Repayments of Short-Term Borrowings
(24.2
)
 
(10.1
)
Proceeds from Long-Term Borrowings

 
0.2

Repayments of Long-Term Borrowings
(24.2
)
 
(0.1
)
Dividends Paid to Shareholders
(24.0
)
 
(22.9
)
Shares Surrendered for Taxes
(7.5
)
 
(2.9
)
Repurchase of Common Stock
(55.9
)
 
(71.1
)
Distributions to Noncontrolling Interests
(0.3
)
 

Net Cash (Used In) Provided by Financing Activities
(172.3
)
 
96.4

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
0.7

 
(3.6
)
Net Increase in Cash and Cash Equivalents
42.7

 
36.0

Cash and Cash Equivalents at Beginning of Period
248.6

 
139.6

Cash and Cash Equivalents at End of Period
$
291.3

 
$
175.6

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash Paid For:
 
 
 
 Interest
$
26.3

 
$
25.4

 Income taxes
$
20.6

 
$
42.5


See accompanying Notes to Condensed Consolidated Financial Statements.

10



REGAL BELOIT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 29, 2019
(Unaudited)

1. BASIS OF PRESENTATION
The accompanying (a) Condensed Consolidated Balance Sheet of Regal Beloit Corporation (the “Company”) as of December 29, 2018, which has been derived from audited Consolidated Financial Statements, and (b) unaudited interim Condensed Consolidated Financial Statements as of June 29, 2019 and for the three and six months ended June 29, 2019 and June 30, 2018, 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 2018 Annual Report on Form 10-K filed on February 26, 2019.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the three and six months ended June 29, 2019 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 28, 2019.
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.
New Accounting Standards
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20). The ASU addresses modifications to the disclosure requirements for Defined Benefit Plans. Under ASU 2018-14 the disclosure requirements that can be removed are amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, amount and timing of plan assets expected to be returned to the employer, and the effects of a one-percentage-point change in assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic benefit costs and benefit obligations for postretirement health care benefits. Additional disclosures are required for the weighted -average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation for significant gains and losses related to the changes in the benefit obligation for the period. If a defined benefit pension plan has a projected benefit obligation greater than plan assets the projected benefit obligation and fair value of plan assets should be disclosed. This additional disclosure is also required when comparing the accumulated benefit obligation to plan assets. This ASU becomes effective for fiscal years ending after December 15, 2020 on a retrospective basis for all years presented. Early adoption is permitted. The Company is evaluating the effect of adopting this new accounting guidance, but does not anticipate a material impact on the financial statement disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU focuses on updates around disclosures of Level 3 fair value measurements and it presents modifications to current disclosure requirements. The additional requirements under this ASU include disclosure for the changes in unrealized gains and losses included in other comprehensive income ("OCI") held at the end of the reporting period and the range and weighted average used to develop significant unobservable inputs. The ASU is also eliminating the disclosure requirement for the amount and reason for transfers between Level 1 and Level 2 fair value measurement, valuation processes for Level 3 measurements, and policy for timing of transfers between levels of the fair value hierarchy. In addition, the ASU modifies the disclosure requirements for investments that are valued based on net asset value. The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption

11



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. All other amendments described in this ASU must be applied retrospectively to all periods presented. The Company is evaluating the effect of adopting this new accounting guidance, but does not anticipate a material impact on the financial statement disclosures.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities. The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The Company adopted this ASU as of December 30, 2018, the beginning of fiscal 2019, 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. Adoption of the standard will be by a modified retrospective approach allowing a cumulative effect adjustment to the opening balance of Retained Earnings. The Company is evaluating the effect of adopting this new accounting guidance, but does not anticipate a material impact on the Company's Condensed Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, Leases. The core principle of ASU 2016-02 is that an entity should recognize assets and liabilities arising from an operating lease on its Balance Sheet. In accordance with that principle, ASU 2016-02 requires that a lessee recognize a liability to make lease payments, the lease liability, and a right-of-use asset representing its right to use the underlying leased asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on the lease classification as a finance or operating lease. In July 2018, the FASB amended its guidance by issuing ASU 2018-11 to provide an additional transition method, allowing a cumulative effect adjustment to the opening balance of Retained Earnings during the period of adoption. The Company adopted the standard as of December 30, 2018, the beginning of fiscal 2019, under the modified retrospective method. Comparative periods prior to the adoption of the standard have not been adjusted give effect to the standard.

The Company elected the package of practical expedients permitted under the relief package within the new standard which allows the Company to carryforward the historical lease accounting of expired or existing leases with respect to lease identification, lease classification and accounting treatment for initial direct costs as of the adoption date. The Company also elected the practical expedient related to lease versus non-lease components, allowing the Company to recognize lease and non-lease components as a single lease.

Adoption of the new standard resulted in the recording of right-of-use assets and lease liabilities of $93.0 million as of December 30, 2018. No cumulative effect adjustment to Retained Earnings was recognized upon adoption of the new standard. The standard did not materially impact the Company's consolidated net income and had no impact on cash flows. See Note 9 for additional disclosures.

2. OTHER FINANCIAL INFORMATION
Inventories
The following table presents approximate percentage distribution between major classes of inventories:
 
June 29, 2019
 
December 29, 2018
Raw Material and Work in Process
45%
 
45%
Finished Goods and Purchased Parts
55%
 
55%


Inventories are stated at cost, which is not in excess of market. Cost for approximately 56% of the Company's inventory at June 29, 2019, and 54% at December 29, 2018 was determined using the last-in, first-out ("LIFO") method.


12



Property, Plant, and Equipment
The following table presents property, plant, and equipment by major classification (dollars in millions):
 
Useful Life in Years
 
June 29, 2019
 
December 29, 2018
Land and Improvements
 
 
$
82.9

 
$
82.1

Buildings and Improvements
3 - 50
 
305.1

 
302.8

Machinery and Equipment
3 - 15
 
985.6

 
971.9

Property, Plant and Equipment
 
 
1,373.6

 
1,356.8

Less: Accumulated Depreciation
 
 
(751.3
)
 
(741.3
)
Net Property, Plant and Equipment
 
 
$
622.3

 
$
615.5



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 three operating segments: Commercial and Industrial Systems, Climate Solutions and Power Transmission Solutions. See Note 6 for a description of the different segments.
Nature of Performance Obligations
The Company’s contracts with customers typically consist of purchase orders, invoices and master supply agreements. At contract inception, across all three 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 systems/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.

13



Payment Terms
The arrangement with the customer states the final terms of the sale, including the description, quantity, and price of each product or service purchased. Payment terms vary by customer but typically range from due upon delivery to 120 days after delivery. For contracts recognized at a point in time, revenue and billing typically occur simultaneously. The Company generally has payment terms with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider the time value of money. For contracts recognized using the cost-based input method, revenue recognized in excess of customer billings and billings in excess of revenue recognized are reviewed to determine the net asset or net liability position and classified as such on the Condensed Consolidated Balance Sheet.
Returns, Refunds, and Warranties
The Company’s contracts do not explicitly offer a “general” right of return to its customers (e.g. customers ordered excess products and return unused items). Warranties are classified as either assurance type or service type warranties. A warranty is considered an assurance type warranty if it provides the customer with assurance that the product will function as intended. A warranty that goes above and beyond ensuring basic functionality is considered a service type warranty. The Company generally only offers limited warranties which are considered to be assurance type warranties and are not accounted for as separate performance obligations. Customers generally receive repair or replacement on products that do not function to specification. Estimated product warranties are provided for specific product groups and the Company accrues for estimated future warranty cost in the period in which the sale is recognized. The Company estimates the accrual requirements based on historical warranty loss experience and the cost is included in Cost of Sales.
Volume Rebates
In some cases, the nature of the Company’s contract may give rise to variable consideration including volume based sales incentives. If the customer achieves specific sales targets, they are entitled to rebates. The Company estimates the projected amount of the rebates that will be achieved and recognizes the estimated costs as a reduction to Net Sales as revenue is recognized.
Disaggregation of Revenue
The following tables presents the Company’s revenues disaggregated by geographical region (in millions):
Three Months Ended June 29, 2019
 
Commercial and Industrial Systems
 
Climate Solutions
 
Power Transmission Solutions
 
Total
North America
 
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