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
PART I — FINANCIAL INFORMATION
Item 1 —	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Statements of Income	5
	Condensed Consolidated Statements of Comprehensive Income	6
	Condensed Consolidated Balance Sheets	7
	Condensed Consolidated Statements of Equity	8
	Condensed Consolidated Statements of Cash Flows	9
	Notes to Condensed Consolidated Financial Statements	10
Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3 —	Quantitative and Qualitative Disclosures about Market Risk	40
Item 4 —	Controls and Procedures	42
PART II — OTHER INFORMATION
Item 1 —	Legal Proceedings	42
Item 1A —	Risk Factors	42
Item 2 —	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 6 —	Exhibits	44
Signature		45

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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.

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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.

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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.

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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	)

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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.

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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.

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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