Earnings Per Share
Diluted earnings per share is computed based upon earnings applicable to common shares divided by the weighted-average number of common shares outstanding during the period adjusted for the effect of other dilutive securities. Share based compensation awards for common shares where the exercise price was above the market price have been excluded from the calculation of the effect of dilutive securities shown below; the amount of these shares were
0.5 million
in
2017
,
1.3 million
in
2016
and
0.7 million
in
2015
. The following table reconciles the basic and diluted shares used in earnings per share calculations for the years ended (in millions):
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Denominator for Basic Earnings Per Share
|
44.6
|
|
|
44.7
|
|
|
44.7
|
|
Effect of Dilutive Securities
|
0.3
|
|
|
0.3
|
|
|
0.4
|
|
Denominator for Diluted Earnings Per Share
|
44.9
|
|
|
45.0
|
|
|
45.1
|
|
Retirement and Post Retirement Plans
The Company's domestic employees are covered by defined contribution plans and approximately half of the Company's domestic employees are covered by defined benefit pension plans. The majority of the defined benefit pension plans covering the Company's domestic employees have been closed to new employees and frozen for existing employees. Certain employees are covered by a post retirement health care plan. Most of the Company's foreign employees are covered by government sponsored plans in the countries in which they are employed. The Company's obligations under its defined benefit pension and other post retirement plans are determined with the assistance of actuarial firms. The actuaries, under management's direction, make certain assumptions regarding such factors as withdrawal rates and mortality rates. The actuaries also provide information and recommendations from which management makes further assumptions on such factors as the long-term expected rate of return on plan assets, the discount rate on benefit obligations and where applicable, the rate of annual compensation increases and health care cost trend rates.
Based upon the assumptions made, the investments made by the plans, overall conditions and movement in financial markets, life-spans of benefit recipients and other factors, annual expenses and recorded assets or liabilities of these defined benefit plans may change significantly from year to year.
Beginning in 2016, the Company changed the method used to estimate the service and interest cost components of the net periodic pension and other post retirement benefit costs. The new method uses the spot yield curve approach to estimate the service and interest costs by applying the specific spot rates along the yield curve used to determine the benefit obligations to relevant projected cash outflows. The change will not affect the measurement of the total benefit obligations as the change in service and interest costs is offset in the actuarial gains and losses recorded in other comprehensive income. The methodology of selecting a discount rate that matches each plan's cash flows to that of a theoretical bond portfolio yield curve will continue to be used to value the benefit obligation at the end of each year. The Company changed to the new method to provide a more precise measure of interest and service costs by improving the correlation between the projected benefit cash flows and the discrete spot yield curve rates. The Company has accounted for this change as a change in estimate prospectively and it resulted in a
$2.9 million
reduction in expense for fiscal 2016 as compared to the previous method.
Derivative Financial Instruments
Derivative instruments are recorded on the Consolidated Balance Sheets at fair value. Any fair value changes are recorded in Net Income or Accumulated Other Comprehensive Loss ("AOCI") as determined under accounting guidance that establishes criteria for designation and effectiveness of the hedging relationships.
The Company uses derivative instruments to manage its exposure to fluctuations in certain raw material commodity pricing, fluctuations in the cost of forecasted foreign currency transactions, and variability in interest rate exposure on floating rate borrowings. The majority of derivative instruments have been designated as cash flow hedges (see also Note 13 of Notes to the Consolidated Financial Statements).
Income Taxes
The Company operates in numerous taxing jurisdictions and is subject to regular examinations by various US federal, state and foreign jurisdictions for various tax periods. The Company's income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which it does business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions as well as the inherent uncertainty in estimating the final resolution of complex tax audit matters, estimates of income tax liabilities may differ from actual payments or assessments.
Foreign Currency Translation
For those operations using a functional currency other than the US dollar, assets and liabilities are translated into US dollars at year-end exchange rates, and revenues and expenses are translated at weighted-average exchange rates. The resulting translation adjustments are recorded as a separate component of Shareholders' Equity.
Product Warranty Reserves
The Company maintains reserves for product warranty to cover the stated warranty periods for its products. Such reserves are established based on an evaluation of historical warranty experience and specific significant warranty matters when they become known and can reasonably be estimated.
Accumulated Other Comprehensive Loss
Foreign currency translation adjustments, unrealized gains and losses on derivative instruments designated as hedges and pension and post retirement liability adjustments are included in Shareholders' Equity under AOCI.
The components of the ending balances of AOCI are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Foreign Currency Translation Adjustments
|
$
|
(140.0
|
)
|
|
$
|
(241.0
|
)
|
Hedging Activities, Net of Tax of $5.4 in 2017 and $(25.2) in 2016
|
8.6
|
|
|
(41.1
|
)
|
Pension and Post Retirement Benefits, Net of Tax of $(18.8) in 2017 and $(20.1) in 2016
|
(32.6
|
)
|
|
(36.0
|
)
|
Total
|
$
|
(164.0
|
)
|
|
$
|
(318.1
|
)
|
Legal Claims and Contingent Liabilities
The Company is subject to various legal proceedings, claims and regulatory matters, the outcomes of which are subject to significant uncertainty and 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. The Company records expenses and liabilities when the Company believes that an obligation of the Company or a subsidiary on a specific matter is probable and there is a basis to reasonably estimate the value of the obligation, and such assessment inherently involves an exercise in judgment. This methodology is used for legal claims that are filed against the Company or a subsidiary from time to time. The uncertainty that is associated with such matters frequently requires adjustments to the liabilities previously recorded.
Fair Values of Financial Instruments
The fair values of cash equivalents, term deposits, trade receivables and accounts payable approximate their carrying values due to the short period of time to maturity. The fair value of debt is estimated using discounted cash flows based on rates for instruments with comparable maturities and credit ratings as further described in Note 7 of Notes to the Consolidated Financial Statements. The fair value of pension assets and derivative instruments is determined based on the methods disclosed in Notes 8 and 14 of Notes to the Consolidated Financial Statements.
Recent Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("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 ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Company plans to adopt this pronouncement for fiscal years beginning December 30, 2018. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09,
Stock Compensation - Scope of Modification Accounting.
The ASU amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification ("ASC") 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted and prospective application is required. The Company plans to adopt this pronouncement for fiscal years beginning December 31, 2017 and will consider the impact that this standard may have on future share based award changes, should they occur.
In March 2017, the FASB issued ASU 2017-07,
Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
The ASU amends current guidance to require employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in nonoperating expenses. Employers that do not present a measure of operating income are required to include the service cost component in the same line item as other employee compensation costs. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. The changes, which respond to input from financial statement users, are intended to classify costs according to their natures, and better align the effect of defined benefit plans on operating income with International Financial Reporting Standards. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The ASU will impact the components of income before taxes but will not impact the amount of income before taxes. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements. Upon the Company's retrospective adoption of this ASU, post retirement benefit costs, excluding the service cost component, will be reflected in Other Expense (Income) in the Consolidated Statements of Income. Currently, all components of benefit costs are reported in Cost of Sales and Operating Expenses in the Consolidated Statements of Income.
In February 2016, the FASB issued ASU 2016-02,
Leases.
The core principle of ASU 2016-02 is that an entity should recognize on its balance sheet assets and liabilities arising from a lease. In accordance with that principle, ASU 2016-02 requires that a lessee recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying leased asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on the lease classification as a finance or operating lease. This new accounting guidance is effective for fiscal years beginning after December 15, 2018 under a modified retrospective approach and early adoption is permitted. The Company has identified a six step process to successfully implement the new Lease standard: Form a task force to become proficient and take the lead on understanding and implementing the new Lease standard; Update lease inventories; Decide on transition method; Review legal agreements and debt covenants; Consider IT needs; Discuss with stakeholders. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements. The Company has identified a task force to take the lead in implementing the new Lease standard and has started the process of building an inventory of leases. The Company plans to adopt this pronouncement for its fiscal year beginning December 31, 2018.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, a comprehensive new revenue recognition standard that supersedes current revenue recognition requirements. This update requires the Company to recognize revenue at amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services at the time of transfer. The new standard will also require additional qualitative and quantitative disclosures about contracts with customers, significant judgments made in applying the revenue guidance, and assets recognized from the costs to obtain or fulfill a contract. The Company will adopt ASU No. 2014-09 (and related updates) at the beginning of its 2018 fiscal year on December 31, 2017. Accordingly, the Company will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To achieve that core principle, the new model requires financial statement preparers to apply the following five steps:
Step 1: Identify the contract with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognize revenue when the entity satisfies a performance obligation
The standard allows the option of using either a full retrospective or a modified retrospective approach for the adoption of the standard. The Company has decided to adopt this accounting standard update using the modified retrospective method.
The Company completed a comprehensive project plan that included a global cross-functional team of representatives to conduct an assessment of Topic 606 and its potential impacts on the Company. The Company identified and completed a four-step process to implement the new revenue standard - data gathering, assessment, solution development, and solution implementation.
The majority of the Company’s sales are recognized when products are shipped from its manufacturing or distribution facilities to customers. For a limited number of contracts, the Company recognizes revenue over time in proportion to costs incurred. Under the new standard, the Company will continue to recognize revenue at a single Point-in-Time when control is transferred to the
customer. In addition, for those contracts in which the Company currently recognizes revenue over time, the cost-to-cost measure of progress continues to best depict the transfer of control of assets to the customer, which occurs as the Company incurs costs.
In addition, the Company's performance obligations under the new standard are not materially different from the existing standard. The accounting for the estimate of variable consideration (i.e. Warranties, Rebates, and Returns) under the new standard is not materially different compared to the Company's current practice.
Based upon the results of the implementation plan, the Company does not expect the new revenue standard to have a material impact on the Company’s pattern of revenue recognition, operating revenue, results of operations, or financial position. In reaching this conclusion, the Company evaluated its different contracting practices including Master Agreements and Purchase Orders. The project plan included analyzing the standard’s impact on the Company’s revenue streams and above mentioned contracting practices.
The Company has determined that as a result of applying the modified retrospective method, the cumulative effect adjustment to retained earnings as of December 31, 2017 was immaterial.
The Company has also completed the process of updating accounting policies, evaluating new disclosure requirements, and identifying and implementing changes to its business processes, systems and controls to support revenue recognition and disclosure under the new guidance.
In March 2016, the FASB issued ASU 2016-09,
Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
The new guidance includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. The provisions include:
|
|
•
|
recording all tax effects associated with stock-based compensation through the income statement, as opposed recording certain amounts in other paid-in capital, which eliminates the requirement to calculate a "windfall pool";
|
|
|
•
|
allowing entities to withhold shares to satisfy the employer's statutory tax withholding requirement up to the highest marginal tax rate applicable to employees rather than the employer's minimum statutory rate, without requiring liability classification for the award;
|
|
|
•
|
modifying the requirement to estimate the number of awards that will ultimately vest by providing an accounting policy election to either estimate the number of forfeitures or recognize forfeitures as they occur;
|
|
|
•
|
changing certain presentation requirements in the statement of cash flows, including removing the requirement to present excess tax benefits as an inflow from financing activities and an outflow from operating activities, and requiring the cash paid to taxing authorities arising from withheld shares to be classified as a financing activity; and
|
|
|
•
|
the assumed proceeds from applying the treasury stock method when computing earnings per share is amended to exclude the amount of excess tax benefits that previously would have been recognized in additional paid-in capital.
|
The Company adopted the provisions of ASU 2016-09 on January 1, 2017. As a result of adopting the standard, the Changes in Operating Assets and Liabilities, Net of Acquisitions and Divestitures line in the Cash Flows From Operating Activities section on the Consolidated Statements of Cash Flows and the Shares Surrendered for Taxes line in the Cash Flows from Financing Activities section were both adjusted by
$2.7 million
and
$1.9 million
for 2016 and 2015, respectively. The presentation on the Consolidated Statements of Cash Flows for shares surrendered by employees to meet the minimum statutory withholding requirement and excess tax benefits were applied retrospectively. In addition, the Excess Tax Expense from Share-Based Compensation lines in the Cash Flows from Operating Activities section and the Cash Flows from Financing Activities section were removed. The Company removed the excess tax benefits from the calculation of dilutive shares on a prospective basis. In addition, the Company began recording all tax effects associated with stock-based compensation through the income statement on a prospective basis. The Company did not have any awards classified as liability awards due to the statutory tax withholding requirements as of January 1, 2017. The Company made an accounting policy election to continue to estimate forfeitures as it had previously.
(4) Acquisitions and Divestitures
There were
no
acquisition-related expenses in 2017 and 2016. The results of operations for acquired businesses are included in the consolidated financial statements from the dates of acquisition. Acquisition-related expenses were
$9.1 million
during
2015
.
2016 Acquisitions
Elco Purchase
On January 18, 2016, the Company purchased the remaining shares owned by the joint venture partner in its Elco Group B.V. (“Elco”) joint venture, increasing the Company’s ownership from
55.0%
to
100.0%
, for a purchase price of
$19.6 million
. The purchase price of Elco is reflected as a component of equity.
2015 Acquisitions
PTS
On January 30, 2015, the Company acquired the Power Transmission Solutions business of Emerson Electric Co. ("PTS") for
$1,408.9 million
in cash through a combination of stock and asset purchases. PTS is a global leader in highly engineered power transmission products and solutions. The business manufactures, sells and services bearings, couplings, gearing, drive components and conveyor systems. PTS is included in the Power Transmission Solutions segment. The Company acquired PTS because management believes it diversifies the Company's end market exposure, provides complementary products, expands and balances the Company's product portfolio, and enhances its margin profile.
On January 30, 2015, the Company entered into a Credit Agreement for a
5
-year unsecured term loan facility in the principal amount of
$1.25 billion
, which was drawn in full by the Company on January 30, 2015, in connection with the closing of the acquisition of PTS (see also Note 7 of Notes to the Consolidated Financial Statements).
The acquisition of PTS was accounted for as a purchase in accordance with FASB ASC Topic 805,
Business Combinations.
Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The fair values of identifiable intangible assets, which were primarily customer relationships, trade names, and technology, were based on valuations using the income approach. The excess of the purchase price over the estimated fair values of tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The goodwill is attributable to expected synergies and expected growth opportunities. The Company estimates approximately
65%
of goodwill will be deductible for United States income tax purposes.
The purchase price allocation for PTS was as follows (in millions):
|
|
|
|
|
|
As of January 30, 2015
|
Current Assets
|
$
|
22.5
|
|
Trade Receivables
|
67.2
|
|
Inventories
|
108.8
|
|
Property, Plant and Equipment
|
184.4
|
|
Intangible Assets
|
648.2
|
|
Goodwill
|
564.3
|
|
Total Assets Acquired
|
1,595.4
|
|
Accounts Payable
|
57.2
|
|
Current Liabilities Assumed
|
32.3
|
|
Long-Term Liabilities Assumed
|
97.0
|
|
Net Assets Acquired
|
$
|
1,408.9
|
|
The valuation of the net assets acquired of
$1,408.9 million
was classified as Level 3 in the valuation hierarchy (See Note 14 of the Notes to the Consolidated Financial Statements for the definition of Level 3 inputs). The Company valued property, plant and equipment using both a market approach and a cost approach depending on the asset. Intangible assets were valued using the present value of projected future cash flows and significant assumptions included royalty rates, discount rates, customer attrition and obsolescence factors.
The components of Intangible Assets included as part of the PTS acquisition was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Weighted Average Amortization Period (Years)
|
|
Gross Value
|
Amortizable Intangible Assets
|
|
|
|
|
Customer Relationships
|
|
17.0
|
|
$
|
462.8
|
|
Technology
|
|
14.5
|
|
63.5
|
|
Intangible Assets Subject to Amortization
|
|
16.7
|
|
526.3
|
|
Non-Amortizable Intangible Assets
|
|
|
|
|
Trade Names
|
|
-
|
|
121.9
|
|
Intangible Assets
|
|
|
|
$
|
648.2
|
|
Net sales from PTS were
$512.9 million
for the year ended January 2, 2016. Operating income from PTS was
$14.5 million
for the year ended January 2, 2016. Purchase accounting inventory adjustments and transaction costs of
$29.8 million
were included in the PTS operating income for the year ended January 2, 2016.
Unaudited Pro Forma Consolidated Financial Information
The following unaudited pro forma financial information presents the financial results for the fiscal year 2015 as if the acquisition of PTS had occurred on January 3, 2015. The pro forma financial information includes, where applicable, adjustments for: (i) the estimated amortization of acquired intangible assets, (ii) estimated additional interest expense on acquisition related borrowings, and (iii) the income tax effect on the pro forma adjustments using an estimated effective tax rate. The pro forma financial information excludes, where applicable, adjustments for: (i) the estimated impact of inventory purchase accounting adjustments and (ii) the estimated closing costs on the acquisition and (iii) any estimated cost synergies or other effects of the integration of the acquisition. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the acquisition been completed as of the date indicated or the results that may be obtained in the future (in millions, except per share amounts):
|
|
|
|
|
|
Fiscal 2015
|
Pro Forma Net Sales
|
$
|
3,558.3
|
|
Pro Forma Net Income Attributable to the Company
|
174.8
|
|
|
|
Basic Earnings Per Share as Reported
|
$
|
3.21
|
|
Pro Forma Basic Earnings Per Share
|
3.91
|
|
|
|
Diluted Earnings Per Share as Reported
|
$
|
3.18
|
|
Pro Forma Diluted Earnings Per Share
|
3.88
|
|
2016 Divestitures
Mastergear Worldwide
On June 1, 2016, the Company sold its Mastergear Worldwide ("Mastergear") business to Rotork PLC for a purchase price of
$25.7 million
. Mastergear was included in the Company's Power Transmission Solutions segment. Gains related to the sale of
$0.1 million
and
$11.6 million
were recorded as a reduction to Operating Expenses in the Consolidated Statements of Income during fiscal 2017 and 2016, respectively.
Venezuelan Subsidiary
On July 7, 2016, the Company sold the assets of its Venezuelan subsidiary, which had been included in the Company's Commercial and Industrial Systems segment, to a private company for
$3.0 million
. Of this amount,
$1.0 million
was received on the transaction closing date and
$2.0 million
is to be received in
24
monthly installments. The Company may receive additional amounts in the
future related to certain accounts receivable of this business. The gains are recognized as the cash is received. The Company received cash and recorded gains of
$1.1 million
in fiscal 2017 and
$1.7 million
in fiscal 2016. The Company wrote down its investment and ceased operations of this subsidiary in 2015.
(5) Goodwill and Intangible Assets
Goodwill
The excess of purchase price over estimated fair value is assigned to goodwill. See Note 3 of Notes to the Consolidated Financial Statements, "Goodwill" and "Long-Lived Assets" for additional details.
The following information presents changes to goodwill during the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Commercial and Industrial Systems
|
|
Climate Solutions
|
|
Power Transmission Solutions
|
Balance as of January 2, 2016
|
$
|
1,465.6
|
|
|
$
|
547.7
|
|
|
$
|
342.8
|
|
|
$
|
575.1
|
|
Acquisitions and Valuation Adjustments
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
Translation Adjustments
|
(12.1
|
)
|
|
(7.1
|
)
|
|
(1.0
|
)
|
|
(4.0
|
)
|
Balance as of December 31, 2016
|
$
|
1,453.2
|
|
|
$
|
540.6
|
|
|
$
|
341.8
|
|
|
$
|
570.8
|
|
|
|
|
|
|
|
|
|
Translation Adjustments
|
23.9
|
|
|
8.2
|
|
|
0.6
|
|
|
15.1
|
|
Balance as of December 30, 2017
|
$
|
1,477.1
|
|
|
$
|
548.8
|
|
|
$
|
342.4
|
|
|
$
|
585.9
|
|
|
|
|
|
|
|
|
|
Cumulative Goodwill Impairment Charges
|
$
|
275.7
|
|
|
$
|
244.8
|
|
|
$
|
7.7
|
|
|
$
|
23.2
|
|
Intangible Assets
Intangible assets consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Amortization Period (Years)
|
|
December 31,
2016
|
|
Translation Adjustments
|
|
December 30, 2017
|
Customer Relationships
|
16
|
|
$
|
703.6
|
|
|
$
|
17.3
|
|
|
$
|
720.9
|
|
Technology
|
13
|
|
189.7
|
|
|
2.6
|
|
|
192.3
|
|
Trademarks
|
15
|
|
31.8
|
|
|
1.0
|
|
|
32.8
|
|
Patent and Engineering Drawings
|
5
|
|
16.6
|
|
|
—
|
|
|
16.6
|
|
Non-Compete Agreements
|
8
|
|
8.3
|
|
|
0.2
|
|
|
8.5
|
|
|
|
|
950.0
|
|
|
21.1
|
|
|
971.1
|
|
Non-Amortizable Trade Names
|
|
|
120.8
|
|
|
1.7
|
|
|
122.5
|
|
Total Gross Intangibles
|
|
|
$
|
1,070.8
|
|
|
$
|
22.8
|
|
|
$
|
1,093.6
|
|
Accumulated amortization on intangible assets consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Amortization
|
|
Translation Adjustments
|
|
December 30, 2017
|
Customer Relationships
|
|
$
|
201.6
|
|
|
$
|
41.8
|
|
|
$
|
6.2
|
|
|
$
|
249.6
|
|
Technology
|
|
109.5
|
|
|
11.8
|
|
|
1.5
|
|
|
122.8
|
|
Trademarks
|
|
23.3
|
|
|
1.5
|
|
|
0.9
|
|
|
25.7
|
|
Patent and Engineering Drawings
|
|
16.6
|
|
|
—
|
|
|
—
|
|
|
16.6
|
|
Non-Compete Agreements
|
|
8.1
|
|
|
0.1
|
|
|
0.2
|
|
|
8.4
|
|
Total Accumulated Amortization
|
|
$
|
359.1
|
|
|
$
|
55.2
|
|
|
$
|
8.8
|
|
|
$
|
423.1
|
|
Intangible Assets, Net of Amortization
|
|
$
|
711.7
|
|
|
|
|
|
|
$
|
670.5
|
|
While the Company believes its customer relationships are long-term in nature, the Company's contractual customer relationships are generally short-term. Useful lives are established at acquisition based on historical attrition rates.
Amortization expense was
$55.2 million
in fiscal
2017
,
$62.0 million
in fiscal
2016
and
$63.9 million
in fiscal
2015
.
The following table presents estimated future amortization expense (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Amortization
|
Year
|
|
|
2018
|
|
|
$
|
54.1
|
|
2019
|
|
|
53.6
|
|
2020
|
|
|
50.7
|
|
2021
|
|
|
43.2
|
|
2022
|
|
|
41.6
|
|
(6) Segment Information
The Company is comprised of three operating segments: Commercial and Industrial Systems, Climate Solutions and Power Transmission Solutions.
Commercial and Industrial Systems produces medium and large motors, commercial and industrial equipment, generator and custom drives and systems. These products serve markets including commercial Heating, Ventilation, and Air Conditioning ("HVAC"), pool and spa, standby and critical power and oil and gas systems.
Climate Solutions produces small motors, controls and air moving solutions serving markets including residential and light commercial HVAC, water heaters and commercial refrigeration.
Power Transmission Solutions manufactures, 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 fiscal
2017
, fiscal
2016
and fiscal
2015
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Systems
|
|
Climate Solutions
|
|
Power Transmission Solutions
|
|
Eliminations
|
|
Total
|
Fiscal 2017
|
|
|
|
|
|
|
|
|
|
|
External Sales
|
|
$
|
1,604.3
|
|
|
$
|
990.6
|
|
|
$
|
765.4
|
|
|
$
|
—
|
|
|
$
|
3,360.3
|
|
Intersegment Sales
|
|
66.5
|
|
|
24.9
|
|
|
4.5
|
|
|
(95.9
|
)
|
|
—
|
|
Total Sales
|
|
1,670.8
|
|
|
1,015.5
|
|
|
769.9
|
|
|
(95.9
|
)
|
|
3,360.3
|
|
Gross Profit
|
|
377.3
|
|
|
255.2
|
|
|
251.6
|
|
|
—
|
|
|
884.1
|
|
Operating Expenses
|
|
277.3
|
|
|
114.6
|
|
|
162.1
|
|
|
—
|
|
|
554.0
|
|
Income from Operations
|
|
100.0
|
|
|
140.6
|
|
|
89.5
|
|
|
—
|
|
|
330.1
|
|
Depreciation and Amortization
|
|
59.8
|
|
|
22.1
|
|
|
55.3
|
|
|
—
|
|
|
137.2
|
|
Capital Expenditures
|
|
39.2
|
|
|
13.4
|
|
|
12.6
|
|
|
—
|
|
|
65.2
|
|
Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
External Sales
|
|
$
|
1,530.9
|
|
|
$
|
960.0
|
|
|
$
|
733.6
|
|
|
$
|
—
|
|
|
$
|
3,224.5
|
|
Intersegment Sales
|
|
49.2
|
|
|
24.1
|
|
|
4.3
|
|
|
(77.6
|
)
|
|
—
|
|
Total Sales
|
|
1,580.1
|
|
|
984.1
|
|
|
737.9
|
|
|
(77.6
|
)
|
|
3,224.5
|
|
Gross Profit
|
|
379.2
|
|
|
245.1
|
|
|
240.9
|
|
|
—
|
|
|
865.2
|
|
Operating Expenses
|
|
275.7
|
|
|
115.2
|
|
|
153.7
|
|
|
—
|
|
|
544.6
|
|
Income from Operations
|
|
103.5
|
|
|
129.9
|
|
|
87.2
|
|
|
—
|
|
|
320.6
|
|
Depreciation and Amortization
|
|
74.7
|
|
|
24.4
|
|
|
56.3
|
|
|
—
|
|
|
155.4
|
|
Capital Expenditures
|
|
36.6
|
|
|
15.0
|
|
|
13.6
|
|
|
—
|
|
|
65.2
|
|
Fiscal 2015
|
|
|
|
|
|
|
|
|
|
|
External Sales
|
|
$
|
1,694.9
|
|
|
$
|
1,041.2
|
|
|
$
|
773.6
|
|
|
$
|
—
|
|
|
$
|
3,509.7
|
|
Intersegment Sales
|
|
71.2
|
|
|
24.1
|
|
|
4.0
|
|
|
(99.3
|
)
|
|
—
|
|
Total Sales
|
|
1,766.1
|
|
|
1,065.3
|
|
|
777.6
|
|
|
(99.3
|
)
|
|
3,509.7
|
|
Gross Profit
|
|
441.1
|
|
|
262.2
|
|
|
229.9
|
|
|
—
|
|
|
933.2
|
|
Operating Expenses
|
|
307.2
|
|
|
115.6
|
|
|
177.7
|
|
|
—
|
|
|
600.5
|
|
Goodwill Impairment
|
|
79.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
79.9
|
|
Income from Operations
|
|
54.0
|
|
|
146.6
|
|
|
52.2
|
|
|
—
|
|
|
252.8
|
|
Depreciation and Amortization
|
|
77.5
|
|
|
28.6
|
|
|
53.3
|
|
|
—
|
|
|
159.4
|
|
Capital Expenditures
|
|
52.3
|
|
|
18.5
|
|
|
21.4
|
|
|
—
|
|
|
92.2
|
|
The following table presents identifiable assets information attributable to the Company's operating segments as of December 30, 2017, December 31, 2016, and January 2, 2016 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial Systems
|
|
Climate Solutions
|
|
Power Transmission Solutions
|
|
Total
|
Identifiable Assets as of December 30, 2017
|
$
|
1,854.1
|
|
|
$
|
909.9
|
|
|
$
|
1,624.2
|
|
|
$
|
4,388.2
|
|
Identifiable Assets as of December 31, 2016
|
$
|
1,872.7
|
|
|
$
|
881.8
|
|
|
$
|
1,604.0
|
|
|
$
|
4,358.5
|
|
Identifiable Assets as of January 2, 2016
|
$
|
1,959.5
|
|
|
$
|
937.2
|
|
|
$
|
1,695.0
|
|
|
$
|
4,591.7
|
|
The following sets forth net sales by country in which the Company operates for fiscal
2017
, fiscal
2016
and fiscal
2015
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
2017
|
|
2016
|
|
2015
|
United States
|
|
$
|
2,267.2
|
|
|
$
|
2,212.6
|
|
|
$
|
2,374.3
|
|
Rest of the World
|
|
1,093.1
|
|
|
1,011.9
|
|
|
1,135.4
|
|
Total
|
|
|
|
$
|
3,360.3
|
|
|
$
|
3,224.5
|
|
|
$
|
3,509.7
|
|
US net sales for
2017
,
2016
and
2015
represented
67.5%
,
68.6%
and
67.6%
of total net sales, respectively. No individual foreign country represented a material portion of total net sales for any of the years presented.
The following sets forth long-lived assets (net property, plant and equipment) by country in which the Company operates for fiscal
2017
and fiscal
2016
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
Long-lived Assets
|
|
2017
|
|
2016
|
United States
|
$
|
263.6
|
|
|
$
|
290.3
|
|
Mexico
|
136.3
|
|
|
120.2
|
|
China
|
99.5
|
|
|
99.6
|
|
Rest of the World
|
123.6
|
|
|
117.4
|
|
Total
|
$
|
623.0
|
|
|
$
|
627.5
|
|
No other individual foreign country represented a material portion of long-lived assets for any of the years presented.
(7) Debt and Bank Credit Facilities
The Company's indebtedness as of
December 30, 2017
and
December 31, 2016
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
|
|
Term Facility
|
$
|
621.1
|
|
|
$
|
798.1
|
|
|
Senior Notes
|
500.0
|
|
|
600.0
|
|
|
Multicurrency Revolving Facility
|
19.7
|
|
|
18.0
|
|
|
Other
|
5.7
|
|
|
5.1
|
|
|
Less: Debt Issuance Costs
|
(5.4
|
)
|
|
(9.7
|
)
|
|
Total
|
1,141.1
|
|
|
1,411.5
|
|
|
Less: Current Maturities
|
101.2
|
|
|
100.6
|
|
|
Non-Current Portion
|
$
|
1,039.9
|
|
|
$
|
1,310.9
|
|
Credit Agreement
In connection with the PTS Acquisition, on January 30, 2015, the Company entered into a new Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent and the lenders named therein, providing for a (i)
5
-year unsecured term loan facility in the principal amount of
$1.25 billion
(the “Term Facility”) and (ii) a
5
-year unsecured multicurrency revolving facility in the principal amount of
$500.0 million
(the “Multicurrency Revolving Facility”), including a
$100 million
letter of credit sub facility available for general corporate purposes. Borrowings under the Credit Agreement bear interest at floating rates based upon indices determined by the currency of the borrowing, plus an applicable margin determined by reference to the Company's consolidated funded debt to consolidated EBITDA ratio or at an alternative base rate.
The Term Facility was drawn in full on January 30, 2015 in connection with the closing of the PTS Acquisition. The loan under the Term Facility requires quarterly amortization at a rate starting at
5.0%
per annum, increasing to
7.5%
per annum after two years and further increasing to
10.0%
per annum for the last two years of the Term Facility, unless previously prepaid. The weighted average interest rate on the Term Facility was
2.6%
and
2.3%
for the years ended
December 30, 2017
and
December 31, 2016
, respectively. The Credit Agreement requires the Company to 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. The Company repaid
$177.0 million
in 2017 and
$320.0 million
in 2016.
At
December 30, 2017
the Company had borrowings under the Multicurrency Revolving Facility in the amount of
$19.7 million
,
$5.3 million
of standby letters of credit issued under the facility, and
$475.0 million
of available borrowing capacity. The average daily balance in borrowings under the Multicurrency Revolving Facility was
$111.2 million
and
$21.0 million
, and the weighted average interest rate on the Multicurrency Revolving Facility was
2.6%
and
2.2%
for the years ended
December 30, 2017
and
December 31, 2016
, 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.
The Credit Agreement requires the Company prepay the loans under the Term Facility with
100%
of the net cash proceeds received from specified asset sales and borrowed money indebtedness, subject to certain exceptions.
Senior Notes
At
December 30, 2017
, the Company had
$500.0 million
of unsecured senior notes (the “Notes”) outstanding. The Notes consist of
$500.0 million
in senior notes (the “2011 Notes”) in a private placement which were issued in
seven
tranches with maturities from
seven
to
twelve
years and carry fixed interest rates. As of
December 30, 2017
,
$400.0 million
of the 2011 Notes are included in Long-Term Debt and
$100.0 million
of the 2011 Notes are included in Current Maturities of Long-Term Debt on the Consolidated Balance Sheets. The Company repaid the remaining
$100.0 million
of the 2007 Notes in August 2017.
Details on the Notes at
December 30, 2017
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
Interest Rate
|
|
Maturity
|
Fixed Rate Series 2011A
|
|
$
|
100.0
|
|
|
4.1%
|
|
July 14, 2018
|
Fixed Rate Series 2011A
|
|
230.0
|
|
|
4.8 to 5.0%
|
|
July 14, 2021
|
Fixed Rate Series 2011A
|
|
170.0
|
|
|
4.9 to 5.1%
|
|
July 14, 2023
|
Total
|
|
$
|
500.0
|
|
|
|
|
|
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
December 30, 2017
.
Other Notes Payable
At
December 30, 2017
, other notes payable of
$5.7 million
were outstanding with a weighted average interest rate of
5.7%
. At
December 31, 2016
, other notes payable of
$5.1 million
were outstanding with a weighted average rate of
5.6%
.
Other Disclosures
Based on rates for instruments with comparable maturities and credit quality, which are classified as Level 2 inputs (see also Note 14 of Notes to the Consolidated Financial Statements), the approximate fair value of the Company's total debt was
$1,165.4 million
and
$1,433.4 million
as of
December 30, 2017
and
December 31, 2016
, respectively.
Maturities of long-term debt, excluding debt issuance costs, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
Amount of Maturity
|
2018
|
|
|
|
|
|
$
|
101.2
|
|
2019
|
|
|
|
|
|
20.0
|
|
2020
|
|
|
|
|
|
621.5
|
|
2021
|
|
|
|
|
|
230.4
|
|
2022
|
|
|
|
|
|
0.5
|
|
Thereafter
|
|
|
|
|
|
172.9
|
|
Total
|
|
|
|
|
|
$
|
1,146.5
|
|
(8) Retirement and Post Retirement Health Care Plans
Retirement Plans
The Company's domestic employees are participants in defined benefit pension plans and/or defined contribution plans. The majority of the Company's defined benefit pension plans covering the Company's domestic employees have been closed to new employees and frozen for existing employees. Most foreign employees are covered by government sponsored plans in the countries in which they are employed. The defined contribution plans provide for Company contributions based, depending on the plan, upon one or more of participant contributions, service and profits. Company contributions to domestic defined contribution plans totaled
$9.3 million
,
$8.7 million
, and
$9.9 million
in
2017
,
2016
and
2015
, respectively. Company contributions to non-US defined contribution plans were
$9.4 million
,
$10.4 million
and
$9.2 million
in
2017
,
2016
, and
2015
, respectively.
Beginning in 2016, the Company changed the method used to estimate the service and interest cost components of the net periodic pension and other post retirement benefit costs. The new method uses the spot yield curve approach to estimate the service and interest costs by applying the specific spot rates along the yield curve used to determine the benefit obligations to relevant projected cash outflows. The change will not affect the measurement of the total benefit obligations as the change in service and interest costs is offset in the actuarial gains and losses recorded in other comprehensive income. The methodology of selecting a discount rate that matches each plan's cash flows to that of a theoretical bond portfolio yield curve will continue to be used to value the benefit obligation at the end of each year. The Company changed to the new method to provide a more precise measure of interest and service costs by improving the correlation between the projected benefit cash flows and the discrete spot yield curve rates. The Company has accounted for this change as a change in estimate prospectively and it resulted in a
$2.9 million
reduction in expense for fiscal 2016 as compared to the previous method.
Benefits provided under defined benefit pension plans are based, depending on the plan, on employees' average earnings and years of credited service, or a benefit multiplier times years of service. Funding of these qualified defined benefit pension plans is in accordance with federal laws and regulations. The actuarial valuation measurement date for pension plans is the calendar year end of each year.
The Company's target allocation, target return and actual weighted-average asset allocation by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
Actual Allocation
|
|
Allocation
|
|
Return
|
|
2017
|
|
2016
|
Equity Investments
|
76
|
%
|
|
6.3 - 7.5 %
|
|
|
71
|
%
|
|
70
|
%
|
Fixed Income
|
19
|
%
|
|
3.6 - 4.5%
|
|
|
24
|
%
|
|
25
|
%
|
Other
|
5
|
%
|
|
5.4
|
%
|
|
5
|
%
|
|
5
|
%
|
Total
|
100
|
%
|
|
6.9
|
%
|
|
100
|
%
|
|
100
|
%
|
The Company's investment strategy for its defined benefit pension plans is to achieve moderately aggressive growth, earning a long-term rate of return sufficient to allow the plans to reach fully funded status. Accordingly, allocation targets have been established to fit this strategy, with a heavier long-term weighting of investments in equity securities. The long-term rate of return assumptions consider historic returns and volatilities adjusted for changes in overall economic conditions that may affect future returns and a weighting of each investment class.
The following table presents a reconciliation of the funded status of the defined benefit pension plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Change in Projected Benefit Obligation:
|
|
|
|
Obligation at Beginning of Period
|
$
|
256.9
|
|
|
$
|
255.1
|
|
Service Cost
|
7.2
|
|
|
8.1
|
|
Interest Cost
|
9.3
|
|
|
9.8
|
|
Actuarial Loss
|
16.2
|
|
|
3.6
|
|
Less: Benefits Paid
(1)
|
13.2
|
|
|
18.9
|
|
Foreign Currency Translation
|
1.6
|
|
|
(0.8
|
)
|
Obligation at End of Period:
|
$
|
278.0
|
|
|
$
|
256.9
|
|
Change in Fair Value of Plan Assets:
|
|
|
|
Fair Value of Plan Assets at Beginning of Period
|
160.3
|
|
|
162.1
|
|
Actual Return on Plan Assets
|
28.7
|
|
|
7.9
|
|
Employer Contributions
|
8.6
|
|
|
9.2
|
|
Less: Benefits Paid
(1)
|
13.2
|
|
|
18.9
|
|
Foreign Currency Translation
|
0.9
|
|
|
—
|
|
Fair Value of Plan Assets at End of Period
|
$
|
185.3
|
|
|
$
|
160.3
|
|
Funded Status
|
$
|
(92.7
|
)
|
|
$
|
(96.6
|
)
|
(1)
2016 benefit payments included
$6.6 million
of non-recurring lump sum benefit payments.
The Funded Status for fiscal 2017 included domestic plans of
$83.7 million
and international plans of
$9.0 million
. The Funded Status for fiscal 2016 included domestic plans of
$87.0 million
and international plans of
$9.6 million
.
Pension Assets
The Company classifies the pension plan investments into Level 1, which refers to securities valued using quoted prices from active markets for identical assets, Level 2, which refers to securities not traded on an active market but for which observable market inputs are readily available, and Level 3, which refers to securities valued based on significant unobservable inputs. Common stocks and mutual funds are valued at the unadjusted quoted market prices for the securities. Real estate fund values are determined using model-based techniques that include relative value analysis and discounted cash flow techniques. Certain common collective trust funds and limited partnership interests are valued based on the net asset value ("NAV") as provided by the administrator of the fund as a practical expedient to estimate fair value. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. Investments in units of short-term investment funds, comprised of cash and money market funds, are valued at their respective NAVs as reported by the funds daily.
Pension assets by type and level are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and Cash Equivalents
|
$
|
4.4
|
|
|
$
|
4.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Common Stocks:
|
|
|
|
|
|
|
|
Domestic Equities
|
27.1
|
|
|
27.1
|
|
|
—
|
|
|
—
|
|
International Equities
|
14.6
|
|
|
14.6
|
|
|
—
|
|
|
—
|
|
Mutual Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Equity Funds
|
25.4
|
|
|
25.4
|
|
|
—
|
|
|
—
|
|
International Equity Funds
|
19.0
|
|
|
19.0
|
|
|
—
|
|
|
—
|
|
Balanced Funds
|
8.3
|
|
|
8.3
|
|
|
—
|
|
|
—
|
|
Fixed Income Funds
|
15.1
|
|
|
15.1
|
|
|
—
|
|
|
—
|
|
Other
|
1.5
|
|
|
1.5
|
|
|
—
|
|
|
—
|
|
Real Estate Fund
|
9.6
|
|
|
—
|
|
|
—
|
|
|
9.6
|
|
|
$
|
125.0
|
|
|
$
|
115.4
|
|
|
$
|
—
|
|
|
$
|
9.6
|
|
Investments Measured at Net Asset Value
|
60.3
|
|
|
|
|
|
|
|
Total
|
$
|
185.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and Cash Equivalents
|
$
|
3.5
|
|
|
$
|
3.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Common Stocks:
|
|
|
|
|
|
|
|
Domestic Equities
|
22.9
|
|
|
22.9
|
|
|
—
|
|
|
—
|
|
International Equities
|
12.6
|
|
|
12.6
|
|
|
—
|
|
|
—
|
|
Mutual Funds:
|
|
|
|
|
|
|
|
US Equity Funds
|
18.8
|
|
|
18.8
|
|
|
—
|
|
|
—
|
|
Balanced funds
|
8.4
|
|
|
8.4
|
|
|
—
|
|
|
—
|
|
International Equity Funds
|
16.2
|
|
|
16.2
|
|
|
—
|
|
|
—
|
|
Fixed Income Funds
|
15.1
|
|
|
15.1
|
|
|
—
|
|
|
—
|
|
Other
|
1.3
|
|
|
1.3
|
|
|
—
|
|
|
—
|
|
Real Estate Fund
|
10.0
|
|
|
—
|
|
|
—
|
|
|
10.0
|
|
|
$
|
108.8
|
|
|
$
|
98.8
|
|
|
$
|
—
|
|
|
$
|
10.0
|
|
Investments Measured at Net Asset Value
|
51.5
|
|
|
|
|
|
|
|
Total
|
$
|
160.3
|
|
|
|
|
|
|
|
The following table sets forth additional disclosures for the fair value measurement of the fair value of pension plan assets that calculate fair value based on NAV per share practical expedient as of December 30, 2017 and December 31, 2016 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Common Collective Trust Funds
|
$
|
51.7
|
|
|
$
|
45.1
|
|
Global Emerging Markets Fund Limited Partnership
|
8.6
|
|
|
6.4
|
|
Total
|
$
|
60.3
|
|
|
$
|
51.5
|
|
The common collective trust funds are investments in the Northern Trust Collective S&P 500 Index Fund and the Northern Trust Collective Aggregate Bond Index Fund. The Northern Trust Collective S&P 500 Index Fund seeks to provide investment results that approximate the overall performance of the common stocks in that index. The Northern Trust Collective Aggregate Bond Index Fund seeks to provide investment results that approximate the overall performance of the Barclays Capital US Aggregate Index by investing primarily, but not exclusively, in securities that comprise that index. The common collective trust funds are available for immediate redemption. The global emerging markets fund limited partnership interest is an investment in the Vontobel Global Emerging Markets Fund, which seeks to provide capital appreciation by investing in a diversified portfolio consisting primarily of equity based securities. The global emerging markets fund limited partnership interest can be redeemed on a monthly basis with immediate payment.
The Level 3 assets noted below represent investments in real estate funds managed by a major US insurance company and a global emerging markets fund limited partnership. Estimated values provided by fund management approximate the cost of the investments. In determining the reasonableness of the methodology used to value the Level 3 investments, the Company evaluates a variety of factors including reviews of economic conditions, industry and market developments, and overall credit ratings. The real estate fund can be redeemed on a quarterly basis and paid within two weeks of the request for redemption.
The table below sets forth a summary of changes in the Company's Level 3 assets in its pension plan investments as of
December 30, 2017
and
December 31, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
Beginning Balance
|
|
$
|
10.0
|
|
|
$
|
8.1
|
|
Net Purchases (Sales)
|
|
(0.5
|
)
|
|
1.7
|
|
Net Gains
|
|
0.1
|
|
|
0.2
|
|
Ending Balance
|
|
$
|
9.6
|
|
|
$
|
10.0
|
|
The following table sets forth a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of the Level 3 real estate fund as of
December 30, 2017
(in millions):
|
|
|
|
|
|
|
Fair Value
|
|
Significant Unobservable Inputs
|
$
|
9.6
|
|
|
Exit Capitalization Rate
|
4.9% to 7.0%
|
|
|
Discount Rate
|
6.6% to 8.0%
|
The following table sets forth a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of the Level 3 real estate fund as of
December 31, 2016
(in millions):
|
|
|
|
|
|
|
Fair Value
|
|
Significant Unobservable Inputs
|
$
|
10.0
|
|
|
Exit Capitalization Rate
|
4.9% to 7.0%
|
|
|
Discount Rate
|
6.6% to 8.0%
|
Funded Status and Expense
The Company recognized the funded status of its defined benefit pension plans on the Consolidated Balance Sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Accrued Compensation and Employee Benefits
|
|
$
|
2.9
|
|
|
$
|
2.8
|
|
Pension and Other Post Retirement Benefits
|
|
89.8
|
|
|
93.8
|
|
Total
|
|
$
|
92.7
|
|
|
$
|
96.6
|
|
|
|
|
|
|
Amounts Recognized in Accumulated Other Comprehensive Loss
|
|
|
|
|
Net Actuarial Loss
|
|
$
|
51.3
|
|
|
$
|
54.5
|
|
Prior Service Cost
|
|
1.0
|
|
|
1.2
|
|
Total
|
|
$
|
52.3
|
|
|
$
|
55.7
|
|
The accumulated benefit obligation for all defined benefit pension plans was
$251.7 million
and
$232.9 million
at
December 30, 2017
and
December 31, 2016
, respectively.
The accumulated benefit obligation exceeded plan assets for all pension plans as of
December 30, 2017
and
December 31, 2016
.
The following weighted average assumptions were used to determine the projected benefit obligation at
December 30, 2017
and
December 31, 2016
, respectively:
|
|
|
|
|
|
2017
|
|
2016
|
Discount Rate
|
3.8%
|
|
4.3%
|
The objective of the discount rate assumption is to reflect the rate at which the pension benefits could be effectively settled. In making the determination, the Company takes into account the timing and amount of benefits that would be available under the plans. The methodology for selecting the discount rate was to match the plan's cash flows to that of a theoretical bond portfolio yield curve.
Certain of the Company's defined benefit pension plan obligations are based on years of service rather than on projected compensation percentage increases. For those plans that use compensation increases in the calculation of benefit obligations and net periodic pension cost, the Company used an assumed rate of compensation increase of
3.0%
for the years ended
December 30, 2017
and
December 31, 2016
.
Net periodic pension benefit costs and the net actuarial loss and prior service cost recognized in other comprehensive income (“OCI”) for the defined benefit pension plans were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Service Cost
|
|
$
|
7.2
|
|
|
$
|
8.1
|
|
|
$
|
10.0
|
|
Interest Cost
|
|
9.3
|
|
|
9.8
|
|
|
10.7
|
|
Expected Return on Plan Assets
|
|
(11.2
|
)
|
|
(11.9
|
)
|
|
(11.5
|
)
|
Amortization of Net Actuarial Loss
|
|
2.3
|
|
|
3.1
|
|
|
4.3
|
|
Amortization of Prior Service Cost
|
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
Net Periodic Benefit Cost
|
|
$
|
7.8
|
|
|
$
|
9.3
|
|
|
$
|
13.7
|
|
|
|
|
|
|
|
|
Change in Obligations Recognized in OCI, Net of Tax
|
|
|
|
|
|
|
Prior Service Cost
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Net Actuarial Loss
|
|
1.5
|
|
|
2.0
|
|
|
2.8
|
|
Total Recognized in OCI
|
|
$
|
1.6
|
|
|
$
|
2.1
|
|
|
$
|
2.9
|
|
The estimated prior service cost and net actuarial loss for the defined benefit pension plans that will be amortized from AOCI into net periodic benefit cost during the
2018
fiscal year are
$0.2 million
, and
$3.5 million
respectively.
As permitted under relevant accounting guidance, the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plans.
The following weighted average assumptions were used to determine net periodic pension cost for fiscal years
2017
,
2016
and
2015
, respectively.
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Discount Rate
|
|
4.3%
|
|
4.6%
|
|
4.2%
|
Expected Long-Term Rate of Return on Assets
|
|
7.0%
|
|
7.2%
|
|
7.5%
|
The Company made contributions to its defined benefit plan of
$8.6 million
and
$9.2 million
for the fiscal years ended
December 30, 2017
and
December 31, 2016
, respectively.
The Company estimates that in
2018
it will make contributions in the amount of
$8.3 million
to fund its defined benefit pension plans.
The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in millions):
|
|
|
|
|
|
Year
|
|
Expected Payments
|
2018
|
|
$
|
14.1
|
|
2019
|
|
13.9
|
|
2020
|
|
14.6
|
|
2021
|
|
15.6
|
|
2022
|
|
15.2
|
|
2023-2027
|
|
84.6
|
|
Post Retirement Health Care Plan
In connection with the PTS acquisition, the Company established an unfunded post retirement health care plan for certain domestic retirees and their dependents.
The following table presents a reconciliation of the benefit obligation of the post retirement health care plan (in millions):
|
|
|
|
|
|
|
|
|
|
Change in Accumulated Post Retirement Benefit Obligation
|
|
2017
|
|
2016
|
Obligation at Beginning of Period
|
|
$
|
13.8
|
|
|
$
|
16.8
|
|
Service Cost
|
|
0.1
|
|
|
0.1
|
|
Interest Cost
|
|
0.4
|
|
|
0.5
|
|
Actuarial Gain
|
|
(1.3
|
)
|
|
(2.4
|
)
|
Participant Contributions
|
|
0.5
|
|
|
0.2
|
|
Less: Benefits Paid
|
|
1.4
|
|
|
1.4
|
|
Obligation at End of Period
|
|
$
|
12.1
|
|
|
$
|
13.8
|
|
The Company recognized the funded status of its post retirement health care plan on the balance sheet as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Accrued Compensation and Employee Benefits
|
|
$
|
0.9
|
|
|
$
|
1.1
|
|
Pension and Other Post Retirement Benefits
|
|
11.2
|
|
|
12.7
|
|
Total
|
|
$
|
12.1
|
|
|
$
|
13.8
|
|
Amounts Recognized in Accumulated Other Comprehensive Loss
|
|
|
|
|
Net Actuarial (Gain) Loss
|
|
$
|
(0.9
|
)
|
|
$
|
0.4
|
|
Net periodic benefit costs for the post retirement health care plan were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Service Cost
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Interest Cost
|
|
0.4
|
|
|
0.5
|
|
Amortization of Net Actuarial Loss
|
|
—
|
|
|
0.2
|
|
Net Periodic Benefit Cost
|
|
$
|
0.5
|
|
|
$
|
0.8
|
|
There was no amortization of prior service cost recognized in OCI, net of tax, for fiscal 2017. There will be
no
amortization of net actuarial loss for the post retirement health care plan from OCI into net periodic benefit cost during the 2018 fiscal year.
The following assumptions were used to determine the projected benefit obligation at December 30, 2017 and December 31, 2016, respectively.
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Discount Rate
|
|
3.5%
|
|
3.9%
|
The health care cost trend rate for 2018 is
8.0%
for pre-65 participants and
5.4%
for post-65 participants, decreasing to
4.5%
in 2026. The health care cost trend rate for 2017 is
7.0%
for pre-65 participants and
5.4%
for post-65 participants, decreasing to
4.5%
in 2025. A one percentage point change in the health care cost trend rate assumption would have a
$0.3 million
impact on the benefit obligation and an immaterial impact on post retirement benefits expense.
The Company contributed
$0.9 million
and
$1.2 million
to the post retirement health care plan in 2017 and 2016, respectively. The Company estimates that in 2018 it will make contributions of
$0.9 million
to the post retirement health care plan.
The following post retirement benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in millions):
|
|
|
|
|
|
Year
|
|
Expected Payments
|
2018
|
|
$
|
0.9
|
|
2019
|
|
1.0
|
|
2020
|
|
1.1
|
|
2021
|
|
1.1
|
|
2022
|
|
1.1
|
|
2023-2027
|
|
4.6
|
|
(9) Shareholders' Equity
Common Stock
The Company acquired and retired
576,804
shares of its common stock in fiscal 2017, at an average cost of
$78.12
per share for a total cost of
$45.1 million
. The Company acquired and retired
180,000
shares of its common stock in fiscal 2015 at an average cost of
$66.56
per share for a total cost of
$12.0 million
. The repurchases were under the
3.0 million
share repurchase program approved by the Company's Board of Directors.
There are approximately
1.7 million
shares of common stock available for repurchase under this program.
Share Based Compensation
The Company recognized approximately
$13.6 million
,
$13.3 million
and
$13.9 million
in share-based compensation expense in
2017
,
2016
and
2015
, respectively. The total income tax benefit recognized in the Consolidated Statements of Income for share-based compensation expense was
$5.2 million
,
$5.1 million
, and
$5.3 million
in
2017
,
2016
and
2015
, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award. The total fair value of shares and options vested was
$11.9 million
,
$11.3 million
, and
$10.9 million
in
2017
,
2016
and
2015
, respectively. As of
December 30, 2017
, total unrecognized compensation cost related to share-based compensation awards was approximately
$24.8 million
, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately
2.0
years.
During 2013, the Company's shareholders approved the 2013 Equity Incentive Plan ("2013 Plan"). The 2013 Plan authorizes the issuance of
3.5 million
shares of common stock for equity-based awards, and terminates any further grants under prior equity plans. Approximately
1.0 million
shares were available for future grant or payment under the 2013 Plan at
December 30, 2017
.
Options and Stock Appreciation Rights
The Company uses stock settled stock appreciation rights (“SARs”) as a form of share-based incentive awards. SARs are the right to receive stock in an amount equal to the appreciation in value of a share of stock over the base price per share that generally vest over 5 years and expire 10 years from the grant date. All grants are made at prices equal to the fair market value of the stock on the grant date. For years ended
December 30, 2017
,
December 31, 2016
, and January 2, 2016, expired and canceled shares were immaterial.
The table below presents share-based compensation activity for the three fiscal years ended
2017
,
2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Total Intrinsic Value of Share-Based Incentive Awards Exercised
|
|
$
|
4.3
|
|
|
$
|
2.5
|
|
|
$
|
4.3
|
|
Cash Received from Stock Option Exercises
|
|
0.4
|
|
|
0.5
|
|
|
4.1
|
|
Total Fair Value of Share-Based Incentive Awards Vested
|
|
4.3
|
|
|
4.9
|
|
|
4.9
|
|
The weighted average assumptions used in the Company's Black-Scholes valuation related to grants for SARs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Per Share Weighted Average Fair Value of Grants
|
$
|
23.31
|
|
|
$
|
15.22
|
|
|
$
|
27.15
|
|
Risk-Free Interest Rate
|
2.1
|
%
|
|
1.4
|
%
|
|
1.9
|
%
|
Expected Life (Years)
|
7.0
|
|
|
7.0
|
|
|
7.0
|
|
Expected Volatility
|
28.6
|
%
|
|
29.6
|
%
|
|
35.6
|
%
|
Expected Dividend Yield
|
1.3
|
%
|
|
1.7
|
%
|
|
1.2
|
%
|
The average risk-free interest rate is based on US Treasury security rates in effect as of the grant date. The expected dividend yield is based on the projected annual dividend as a percentage of the estimated market value of the Company's common stock as of the grant date. The Company estimated the expected volatility using a weighted average of daily historical volatility of the Company's stock price over the expected term of the award. The Company estimated the expected term using historical data.
Following is a summary of share-based incentive plan activity (options and SARs) for fiscal
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares Under Options and SARs
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (years)
|
|
Aggregate Intrinsic Value (in millions)
|
Exercisable at December 31, 2016
|
1,610,499
|
|
|
$
|
63.16
|
|
|
|
|
|
Granted
|
195,207
|
|
|
80.72
|
|
|
|
|
|
Exercised
|
(184,191
|
)
|
|
52.89
|
|
|
|
|
|
Forfeited
|
(10,239
|
)
|
|
65.13
|
|
|
|
|
|
Expired
|
(9,485
|
)
|
|
64.21
|
|
|
|
|
|
Outstanding at December 30, 2017
|
1,601,791
|
|
|
$
|
66.46
|
|
|
5.7
|
|
$
|
17.2
|
|
Exercisable at December 30, 2017
|
940,751
|
|
|
$
|
64.47
|
|
|
3.9
|
|
$
|
11.5
|
|
Compensation expense recognized related to options and SARs was
$4.1
million for fiscal 2017.
As of
December 30, 2017
, there was
$10.1 million
of unrecognized compensation cost related to non-vested options and SARs that is expected to be recognized as a charge to earnings over a weighted average period of
3.3
years.
The amount of options and 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, or death, disability or normal retirement of the grantee.
Following is a summary of RSA activity for fiscal
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Fair Value at Grant Date
|
|
Weighted Average Remaining Contractual Term (years)
|
Unvested RSAs at December 31, 2016
|
|
19,593
|
|
|
$
|
57.43
|
|
|
0.4
|
Granted
|
|
13,941
|
|
|
80.70
|
|
|
|
Vested
|
|
(19,593
|
)
|
|
57.43
|
|
|
|
Unvested RSAs December 30, 2017
|
|
13,941
|
|
|
$
|
80.70
|
|
|
0.4
|
The weighted average grant date fair value of awards granted was
$80.70
,
$57.43
and
$78.15
in
2017
,
2016
and
2015
, respectively.
RSAs vest on the
one
year 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
$1.1 million
for fiscal
2017
.
As of
December 30, 2017
, there was
$0.4 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
0.4
years.
Following is a summary of RSU activity for fiscal
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Fair Value at Grant Date
|
|
Weighted Average Remaining Contractual Term (years)
|
Unvested RSUs at December 31, 2016
|
|
277,863
|
|
|
$
|
69.23
|
|
|
1.7
|
Granted
|
|
76,030
|
|
|
80.48
|
|
|
|
Vested
|
|
(85,790
|
)
|
|
74.50
|
|
|
|
Forfeited
|
|
(7,570
|
)
|
|
68.02
|
|
|
|
Unvested RSUs at December 30, 2017
|
|
260,533
|
|
|
$
|
70.81
|
|
|
1.7
|
The weighted average grant date fair value of awards granted was
$80.48
,
$57.50
and
$77.38
in
2017
,
2016
and
2015
, respectively.
RSUs vest on the third anniversary of the grant date, provided the holder of the shares is continuously employed by the Company until the vesting date. Compensation expense recognized related to the RSUs was
$6.2 million
for fiscal
2017
.
As of
December 30, 2017
, there was
$8.8 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
1.7
years.
Performance Share Units
Performance share unit ("PSU") awards consist of shares or the rights to shares of the Company's stock which are awarded to employees of the Company. These shares are payable upon the determination that the Company achieved certain established performance targets and can range from
0%
to
200%
of the targeted payout based on the actual results. PSUs have a performance period of
3 years
. and vest
three
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 grant agreements, acceleration of vesting may occur under a change in control, death or disability. There are no voting rights with these instruments until vesting occurs and a share of stock is issued. Some of the PSU awards are valued using a Monte Carlo simulation method as of the grant date while others are valued using the closing market price as of the grant date depending on the performance criteria for the award.
The assumptions used in the Company's Monte Carlo simulation related to grants for performance share units were as follows:
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
Risk-free interest rate
|
1.6
|
%
|
|
0.9
|
%
|
Expected life (years)
|
3.0
|
|
|
3.0
|
|
Expected volatility
|
24.0
|
%
|
|
23.0
|
%
|
Expected dividend yield
|
1.3
|
%
|
|
1.7
|
%
|
Following is a summary of PSU activity for fiscal
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Fair Value at Grant Date
|
|
Weighted Average Remaining Contractual Term (years)
|
Unvested PSUs at December 31, 2016
|
|
133,340
|
|
|
$
|
65.28
|
|
|
2.0
|
Granted
|
|
48,666
|
|
|
90.82
|
|
|
|
Vested
|
|
(110
|
)
|
|
83.74
|
|
|
|
Forfeited
|
|
(26,780
|
)
|
|
81.76
|
|
|
|
Unvested PSUs December 30, 2017
|
|
155,116
|
|
|
$
|
70.43
|
|
|
2.0
|
The weighted average grant date fair value of awards granted was
$90.82
,
$51.84
and
$89.98
in
2017
,
2016
and
2015
, respectively.
Compensation expense for awards granted are recognized based on the Monte Carlo simulation value or the expected payout ratio depending upon the performance criterion for the award, net of estimated forfeitures. Compensation expense recognized related to PSUs was
$2.2 million
for fiscal
2017
. Total unrecognized compensation expense for all PSUs granted as of
December 30, 2017
was
$5.5 million
and it is expected to be recognized as a charge to earnings over a weighted average period of
2.0
years.
(10) Income Taxes
Income before taxes consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
United States
|
|
$
|
147.4
|
|
|
$
|
143.4
|
|
|
$
|
25.8
|
|
Foreign
|
|
129.8
|
|
|
123.0
|
|
|
171.1
|
|
Total
|
|
$
|
277.2
|
|
|
$
|
266.4
|
|
|
$
|
196.9
|
|
The provision for income taxes is summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
36.9
|
|
|
$
|
23.1
|
|
|
$
|
13.5
|
|
State
|
|
(0.3
|
)
|
|
3.5
|
|
|
0.2
|
|
Foreign
|
|
32.2
|
|
|
30.4
|
|
|
45.1
|
|
|
|
$
|
68.8
|
|
|
$
|
57.0
|
|
|
$
|
58.8
|
|
Deferred
|
|
|
|
|
|
|
Federal
|
|
$
|
(7.2
|
)
|
|
$
|
5.6
|
|
|
$
|
(2.0
|
)
|
State
|
|
2.2
|
|
|
1.8
|
|
|
(0.9
|
)
|
Foreign
|
|
(4.7
|
)
|
|
(7.3
|
)
|
|
(7.5
|
)
|
|
|
(9.7
|
)
|
|
0.1
|
|
|
(10.4
|
)
|
Total
|
|
$
|
59.1
|
|
|
$
|
57.1
|
|
|
$
|
48.4
|
|
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law revising the US corporate income tax. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the elimination of certain deductions and imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries. The primary impacts of the Act reflected in the consolidated financial statements relate to the remeasurement of deferred tax assets and liabilities resulting from the change in the corporate tax rate; a one-time mandatory transition tax on undistributed earnings of foreign affiliates; and deferred taxes in connection with a change in the Company’s intent to permanently reinvest the historical undistributed earnings of its foreign affiliates. The SEC provided guidance that allows the Company to record provisional amounts if the accounting assessment is incomplete for impacts of the Act, with the requirement that the accounting be finalized in a period not to exceed one year from the date of enactment. As of December 30, 2017, the Company has not completed the accounting for the tax effects of the Act. Therefore, the Company has recorded provisional amounts for
certain effects of the Act. These estimates may be impacted by the need for further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations and state conformity to federal changes. The Act also creates a new requirement that certain income earned by controlled foreign corporations must be included currently in gross income of the controlled foreign corporations’ US shareholder. Due to the complexity of the new Global Intangible Low Taxed Income tax rules, the Company is currently evaluating this provision of the Act and its application under the applicable accounting guidance. Therefore, the Company has not recognized any provisional amounts for this provision of the Act in its consolidated financial statements.
The Company recorded a net
$1.0 million
reduction in tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional benefit recognized related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse was
$51.0 million
. The provisional expense recognized related to the one-time tax on the mandatory deemed repatriation of foreign earnings was
$40.0 million
of which the Company will elect to pay the one-time tax over a period of eight years. The Company also recognized a provisional expense of
$10.0 million
for local withholding taxes on foreign earnings not deemed permanently reinvested. Additional analysis of historical foreign earnings is necessary to finalize the tax impact of the Act and any subsequent adjustment to these amounts will be recorded as current tax expense in the quarter of 2018 in which the analysis is complete.
On February 13, 2018 the Internal Revenue Service issued Revenue Proclamation 2018-17 modifying existing procedures for changing the annual accounting period of certain foreign corporations whose US shareholders are subject to the new mandatory deemed repatriation of deferred foreign earnings. The Company is currently analyzing the impact of Revenue Proclamation 2018-17 and anticipates the impact to tax expense to be between
$4.0 million
to
$5.0 million
. As the Revenue Proclamation was issued after the Company’s fiscal year end, the current consolidated financial statements do not reflect this impact.
A reconciliation of the statutory federal income tax rate and the effective tax rate reflected in the consolidated statements of income follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Federal Statutory Rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State Income Taxes, Net of Federal Benefit
|
|
0.3
|
%
|
|
1.5
|
%
|
|
(0.2
|
)%
|
Domestic Production Activities Deduction
|
|
(1.0
|
)%
|
|
(1.1
|
)%
|
|
(1.0
|
)%
|
Foreign Rate Differential - China
|
|
(2.1
|
)%
|
|
(2.0
|
)%
|
|
(3.3
|
)%
|
Foreign Rate Differential - All Other
|
|
(4.3
|
)%
|
|
(6.0
|
)%
|
|
(7.2
|
)%
|
Research and Development Credit
|
|
(3.0
|
)%
|
|
(2.3
|
)%
|
|
(4.1
|
)%
|
Goodwill Impairment
|
|
—
|
%
|
|
—
|
%
|
|
4.0
|
%
|
Valuation Allowance
|
|
(0.6
|
)%
|
|
—
|
%
|
|
—
|
%
|
Tax Cuts and Jobs Act of 2017
|
|
(0.4
|
)%
|
|
—
|
%
|
|
—
|
%
|
Adjustments to Tax Accruals and Reserves
|
|
(1.9
|
)%
|
|
0.7
|
%
|
|
2.1
|
%
|
Write Down of Venezuelan Assets
|
|
—
|
%
|
|
—
|
%
|
|
2.3
|
%
|
Other
|
|
(0.7
|
)%
|
|
(4.4
|
)%
|
|
(3.0
|
)%
|
Effective Tax Rate
|
|
21.3
|
%
|
|
21.4
|
%
|
|
24.6
|
%
|
Deferred taxes arise primarily from differences in amounts reported for tax and financial statement purposes. The Company's net deferred tax liability was
$(106.8) million
as of December 30, 2017, classified on the consolidated Balance Sheet as a net non-current deferred tax asset of
$28.5 million
and a net non-current deferred income tax liability of
$(135.3) million
. As of December 31, 2016, the Company's net deferred tax liability was
$(75.3) million
classified on the consolidated Balance Sheet as a net non-current deferred income tax benefit of
$22.4 million
and a net non-current deferred income tax liability of
$(97.7) million
. The Company remeasured its US deferred assets and liabilities at the applicable tax rate of 21% in accordance with the Act. The remeasurement resulted in a decrease of
$51.0 million
to the net deferred tax liability.
The components of this net deferred tax liability are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
Accrued Employee Benefits
|
|
$
|
53.4
|
|
|
$
|
75.1
|
|
Bad Debt Allowances
|
|
2.3
|
|
|
2.7
|
|
Warranty Accruals
|
|
3.1
|
|
|
5.5
|
|
Inventory
|
|
12.9
|
|
|
21.3
|
|
Accrued Liabilities
|
|
(5.3
|
)
|
|
9.2
|
|
Derivative Instruments
|
|
(4.3
|
)
|
|
25.9
|
|
Tax Loss Carryforward
|
|
12.9
|
|
|
12.4
|
|
Valuation Allowance
|
|
(5.9
|
)
|
|
(6.8
|
)
|
Other
|
|
1.2
|
|
|
5.0
|
|
Deferred Tax Assets
|
|
70.3
|
|
|
150.3
|
|
Property Related
|
|
(26.2
|
)
|
|
(31.4
|
)
|
Intangible Items
|
|
(150.9
|
)
|
|
(194.2
|
)
|
Deferred Tax Liabilities
|
|
(177.1
|
)
|
|
(225.6
|
)
|
Net Deferred Tax Liability
|
|
$
|
(106.8
|
)
|
|
$
|
(75.3
|
)
|
Following is a reconciliation of the beginning and ending amount of unrecognized tax benefits (in millions):
|
|
|
|
|
|
|
|
|
|
Unrecognized Tax Benefits, January 3, 2015
|
|
$
|
5.8
|
|
Gross Increases from Prior Period Tax Positions
|
|
—
|
|
Gross Increases from Current Period Tax Positions
|
|
4.0
|
|
Settlements with Taxing Authorities
|
|
(1.3
|
)
|
Lapse of Statute of Limitations
|
|
(0.2
|
)
|
Unrecognized Tax Benefits, January 2, 2016
|
|
$
|
8.3
|
|
Gross Increases from Prior Period Tax Positions
|
|
—
|
|
Gross Increases from Current Period Tax Positions
|
|
2.0
|
|
Settlements with Taxing Authorities
|
|
—
|
|
Lapse of Statute of Limitations
|
|
(0.3
|
)
|
Unrecognized Tax Benefits, December 31, 2016
|
|
$
|
10.0
|
|
Gross Increases from Prior Period Tax Positions
|
|
—
|
|
Gross Increases from Current Period Tax Positions
|
|
2.7
|
|
Settlements with Taxing Authorities
|
|
(5.3
|
)
|
Lapse of Statute of Limitations
|
|
(0.7
|
)
|
Unrecognized Tax Benefits, December 30, 2017
|
|
$
|
6.7
|
|
Unrecognized tax benefits as of
December 30, 2017
amount to
$6.7 million
, 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. During fiscal
2017
,
2016
and
2015
, the Company recognized approximately
$(0.2) million
,
$0.2 million
and
$0.6 million
in net interest (income) expense, respectively. The Company had approximately
$1.7 million
,
$1.9 million
and
$1.7 million
of accrued interest as of
December 30, 2017
,
December 31, 2016
and
January 2, 2016
, respectively.
Due to statute expirations, approximately
$0.4 million
of the unrecognized tax benefits, including accrued interest, could reasonably change in the coming year.
With few exceptions, the Company is no longer subject to US federal and state/local income tax examinations by tax authorities for years prior to 2012, and the Company is no longer subject to non-US income tax examinations by tax authorities for years prior to 2010.
At
December 30, 2017
, the Company had approximately
$12.9 million
of tax effected net operating losses in various jurisdictions with a portion expiring over a period of up to
15
years and the remaining without expiration. At
December 31, 2016
, the Company had approximately
$12.4 million
of tax effected net operating losses in various jurisdictions with a portion expiring over a period up to
15
years and the remaining without expiration.
Valuation allowances totaling
$5.9 million
and
$6.8 million
as of
December 30, 2017
and
December 31, 2016
, respectively, have been established for deferred income tax assets primarily related to certain subsidiary loss carryforwards that may not be realized. Realization of the net deferred income tax assets is dependent on generating sufficient taxable income prior to their expiration. Although realization is not assured, management believes it is more-likely-than-not that the net deferred income tax assets will be realized. The amount of the net deferred income tax assets considered realizable, however, could change in the near term if future taxable income during the carryforward period fluctuates.
The Company has been granted tax holidays for some of its Chinese subsidiaries. These tax holidays expire in 2020 and are renewable subject to certain conditions with which the Company expects to comply. In 2017, these holidays decreased the Provision for Income Taxes by
$4.2 million
.
The Act included a mandatory one-time tax on all accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no US tax liability had been accrued have now been subject to US tax. The Company recognized a provisional one-time tax of
$40.0 million
and a provisional expense of
$10.0 million
for local withholding taxes on foreign earnings not deemed permanently reinvested. As a result, earnings in foreign jurisdictions are available for distribution without incremental US tax cost.
(11) 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 the outcome of any such lawsuit individually or collectively will have a material effect on the Company's financial position, results of operations or cash flows.
The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience. The following is a reconciliation of the changes in accrued warranty costs for
2017
and
2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
Beginning Balance
|
|
$
|
20.3
|
|
|
$
|
19.1
|
|
Less: Payments
|
|
23.5
|
|
|
20.6
|
|
Provisions
|
|
19.0
|
|
|
21.9
|
|
Translation Adjustments
|
|
0.2
|
|
|
(0.1
|
)
|
Ending Balance
|
|
$
|
16.0
|
|
|
$
|
20.3
|
|
These liabilities are included in Other Accrued Expenses and Other Noncurrent Liabilities on the Consolidated Balance Sheet.
(12) Leases and Rental Commitments
Rental expenses charged to operations amounted to
$35.1 million
in
2017
,
$31.9 million
in
2016
and
$45.1 million
in
2015
. The Company has future minimum rental commitments under operating leases as shown in the following table (in millions):
|
|
|
|
|
|
|
|
|
Year
|
|
Expected Payments
|
2018
|
|
$
|
23.6
|
|
2019
|
|
13.0
|
|
2020
|
|
9.6
|
|
2021
|
|
6.9
|
|
2022
|
|
4.8
|
|
Thereafter
|
|
12.9
|
|
(13) 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 were previously 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 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
December 30, 2017
or
December 31, 2016
.
Cash flow hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or changes in market value of derivatives not designated as hedges are recognized in current earnings.
At
December 30, 2017
and
December 31, 2016
, the Company had
$(2.0) million
and
$(7.5) 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.
As of
December 30, 2017
, the Company had the following commodity forward contracts outstanding (with maturities extending through
June 2019
) to hedge forecasted purchases of commodities (notional amounts expressed in terms of the dollar value of the hedged item (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
|
|
Copper
|
|
$
|
80.8
|
|
|
$
|
50.7
|
|
Aluminum
|
|
7.7
|
|
|
4.9
|
|
As of
December 30, 2017
, the Company had the following currency forward contracts outstanding (with maturities extending through October
2019
) to hedge forecasted foreign currency cash flows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
|
|
Mexican Peso
|
|
$
|
137.1
|
|
|
$
|
230.1
|
|
Chinese Renminbi
|
|
214.9
|
|
|
275.5
|
|
Indian Rupee
|
|
35.8
|
|
|
43.6
|
|
Euro
|
|
26.4
|
|
|
69.0
|
|
Canadian Dollar
|
|
47.7
|
|
|
41.8
|
|
Australian Dollar
|
|
14.9
|
|
|
12.1
|
|
Thai Baht
|
|
7.5
|
|
|
4.9
|
|
Japanese Yen
|
|
—
|
|
|
2.8
|
|
British Pound
|
|
2.7
|
|
|
4.3
|
|
As of
December 31, 2016
, the total notional amount of the Company's receive-variable/pay-fixed interest rate swap was
$100.0 million
. The interest rate swap agreement matured in August 2017.
Fair values of derivative instruments as of December 30, 2017 and December 31, 2016 were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
|
Prepaid Expenses and Other Current Assets
|
|
Other Noncurrent Assets
|
|
Current Hedging Obligations
|
|
Noncurrent Hedging Obligations
|
Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
Currency Contracts
|
|
$
|
11.5
|
|
|
$
|
2.5
|
|
|
$
|
7.9
|
|
|
$
|
0.9
|
|
Commodity Contracts
|
|
10.8
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
Currency Contracts
|
|
4.1
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
Commodity Contracts
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Derivatives
|
|
$
|
26.6
|
|
|
$
|
3.2
|
|
|
$
|
8.1
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Prepaid Expenses and Other Current Assets
|
|
Other Noncurrent Assets
|
|
Current Hedging Obligations
|
|
Noncurrent Hedging Obligations
|
Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
Interest Rate Swap Contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.3
|
|
|
$
|
—
|
|
Currency Contracts
|
|
1.3
|
|
|
0.4
|
|
|
39.7
|
|
|
17.6
|
|
Commodity Contracts
|
|
4.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
Currency Contracts
|
|
1.5
|
|
|
—
|
|
|
6.0
|
|
|
—
|
|
Commodity Contracts
|
|
2.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Derivatives
|
|
$
|
10.1
|
|
|
$
|
0.4
|
|
|
$
|
49.0
|
|
|
$
|
17.6
|
|
Derivatives Designated as Cash Flow Hedging Instruments
The effect of derivative instruments designated as cash flow hedges on the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income for fiscal 2017, 2016 and 2015 were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
|
|
|
|
|
|
Interest
|
|
|
|
|
Commodity
|
|
Currency
|
|
Rate
|
|
|
|
|
Forwards
|
|
Forwards
|
|
Swaps
|
|
Total
|
Gain Recognized in Other Comprehensive Income
|
|
$
|
21.7
|
|
|
$
|
46.3
|
|
|
$
|
0.5
|
|
|
$
|
68.5
|
|
Amounts Reclassified from Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
Gain Recognized in Net Sales
|
|
—
|
|
|
0.9
|
|
|
—
|
|
|
0.9
|
|
Gain (Loss) Recognized in Cost of Sales
|
|
12.2
|
|
|
(22.1
|
)
|
|
—
|
|
|
(9.9
|
)
|
Loss Recognized in Interest Expense
|
|
—
|
|
|
—
|
|
|
(2.8
|
)
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016
|
|
|
|
|
|
|
Interest
|
|
|
|
|
Commodity
|
|
Currency
|
|
Rate
|
|
|
|
|
Forwards
|
|
Forwards
|
|
Swaps
|
|
Total
|
Gain (Loss) Recognized in Other Comprehensive Loss
|
|
$
|
6.4
|
|
|
$
|
(46.1
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(40.0
|
)
|
Amounts Reclassified from Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
Gain Recognized in Net Sales
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
Loss Recognized in Cost of Sales
|
|
(13.6
|
)
|
|
(32.1
|
)
|
|
—
|
|
|
(45.7
|
)
|
Loss Recognized in Interest Expense
|
|
—
|
|
|
—
|
|
|
(4.8
|
)
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015
|
|
|
|
|
|
|
Interest
|
|
|
|
|
Commodity
|
|
Currency
|
|
Rate
|
|
|
|
|
Forwards
|
|
Forwards
|
|
Swaps
|
|
Total
|
Loss Recognized in Other Comprehensive Loss
|
|
$
|
(22.3
|
)
|
|
$
|
(46.5
|
)
|
|
$
|
(1.1
|
)
|
|
$
|
(69.9
|
)
|
Amounts Reclassified from Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
Gain Recognized in Net Sales
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
Loss Recognized in Cost of Sales
|
|
(19.8
|
)
|
|
(18.5
|
)
|
|
—
|
|
|
(38.3
|
)
|
Loss Recognized in Interest Expense
|
|
—
|
|
|
—
|
|
|
(5.2
|
)
|
|
(5.2
|
)
|
The ineffective portion of hedging instruments recognized was immaterial for all periods presented.
Derivatives Not Designated as Cash Flow Hedging Instruments
The effect of derivative instruments not designated as cash flow hedges on the Consolidated Statements of Income for fiscal 2017, 2016 and 2015 were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
|
|
|
|
Commodity Forwards
|
|
Currency Forwards
|
|
Total
|
Loss Recognized in Cost of Sales
|
|
$
|
(1.1
|
)
|
|
$
|
—
|
|
|
$
|
(1.1
|
)
|
Gain Recognized in Operating Expenses
|
|
$
|
—
|
|
|
$
|
14.3
|
|
|
$
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016
|
|
|
|
|
Commodity Forwards
|
|
Currency Forwards
|
|
Total
|
Gain Recognized in Cost of Sales
|
|
$
|
2.6
|
|
|
$
|
—
|
|
|
$
|
2.6
|
|
Loss Recognized in Operating Expenses
|
|
$
|
—
|
|
|
$
|
(5.2
|
)
|
|
$
|
(5.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015
|
|
|
|
|
Commodity Forwards
|
|
Currency Forwards
|
|
Total
|
Loss Recognized in Cost of Sales
|
|
$
|
—
|
|
|
$
|
(8.8
|
)
|
|
$
|
(8.8
|
)
|
The net AOCI balance related to hedging activities of a
$8.6 million
gain at
December 30, 2017
includes
$11.0 million
of net deferred gains expected to be reclassified to the Consolidated Statement of Comprehensive Income in the next twelve months. There were no gains or losses reclassified from AOCI to earnings based on the probability that the forecasted transaction would not occur.
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 Consolidated Balance Sheets on a gross basis for the periods ended
December 30, 2017
and
December 31, 2016
.
The following table presents the derivative assets and derivative liabilities presented on a net basis under enforceable master netting agreements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
|
Gross Amounts as Presented in the 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
|
|
$
|
15.6
|
|
|
$
|
(5.9
|
)
|
|
$
|
9.7
|
|
Derivative Commodity Contracts
|
|
11.0
|
|
|
—
|
|
|
11.0
|
|
Other Noncurrent Assets:
|
|
|
|
|
|
|
Derivative Currency Contracts
|
|
2.5
|
|
|
(0.7
|
)
|
|
1.8
|
|
Derivative Commodity Contracts
|
|
0.7
|
|
|
—
|
|
|
0.7
|
|
Current Hedging Obligations:
|
|
|
|
|
|
|
Derivative Currency Contracts
|
|
8.1
|
|
|
(5.9
|
)
|
|
2.2
|
|
Noncurrent Hedging Obligations:
|
|
|
|
|
|
|
Derivative Currency Contracts
|
|
0.9
|
|
|
(0.7
|
)
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Gross Amounts as Presented in the 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
|
|
$
|
2.8
|
|
|
$
|
(1.7
|
)
|
|
$
|
1.1
|
|
Derivative Commodity Contracts
|
|
7.3
|
|
|
—
|
|
|
7.3
|
|
Other Noncurrent Assets:
|
|
|
|
|
|
|
Derivative Currency Contracts
|
|
0.4
|
|
|
(0.2
|
)
|
|
0.2
|
|
Current Hedging Obligations:
|
|
|
|
|
|
|
Derivative Currency Contracts
|
|
45.7
|
|
|
(1.7
|
)
|
|
44.0
|
|
Noncurrent Hedging Obligations:
|
|
|
|
|
|
|
Derivative Currency Contracts
|
|
17.6
|
|
|
(0.2
|
)
|
|
17.4
|
|
(14) 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 following table sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of
December 30, 2017
and
December 31, 2016
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
|
|
|
|
Classification
|
Assets:
|
|
|
|
|
|
Prepaid Expenses and Other Current Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
$
|
15.6
|
|
|
$
|
2.8
|
|
|
Level 2
|
Derivative Commodity Contracts
|
11.0
|
|
|
7.3
|
|
|
Level 2
|
Other Noncurrent Assets:
|
|
|
|
|
|
Assets Held in Rabbi Trust
|
5.7
|
|
|
5.4
|
|
|
Level 1
|
Derivative Currency Contracts
|
2.5
|
|
|
0.4
|
|
|
Level 2
|
Derivative Commodity Contracts
|
0.7
|
|
|
—
|
|
|
Level 2
|
Liabilities:
|
|
|
|
|
|
Current Hedging Obligations:
|
|
|
|
|
|
Interest Rate Swap
|
—
|
|
|
3.3
|
|
|
Level 2
|
Derivative Currency Contracts
|
8.1
|
|
|
45.7
|
|
|
Level 2
|
Noncurrent Hedging Obligations:
|
|
|
|
|
|
Derivative Currency Contracts
|
0.9
|
|
|
17.6
|
|
|
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 using the LIBOR forward yield curve for an instrument 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.
The Company did not change its valuation techniques during fiscal
2017
.
(15) Restructuring Activities
The Company incurred restructuring and restructuring related costs on projects beginning in 2014. Restructuring costs include employee termination and plant relocation costs. Restructuring-related costs include 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.
The following is a reconciliation of provisions and payments for the restructuring projects for
2017
and
2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
Beginning Balance
|
|
$
|
0.6
|
|
|
$
|
1.3
|
|
Provision
|
|
14.1
|
|
|
6.8
|
|
Less: Payments
|
|
13.5
|
|
|
7.5
|
|
Ending Balance
|
|
$
|
1.2
|
|
|
$
|
0.6
|
|
The following is a reconciliation of expenses by type for the restructuring projects in fiscal
2017
and fiscal
2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Restructuring Costs:
|
Cost of Sales
|
Operating Expenses
|
Total
|
|
Cost of Sales
|
Operating Expenses
|
Total
|
Employee Termination Expenses
|
$
|
2.6
|
|
$
|
1.7
|
|
$
|
4.3
|
|
|
$
|
0.5
|
|
$
|
0.3
|
|
$
|
0.8
|
|
Facility Related Costs
|
4.3
|
|
0.9
|
|
5.2
|
|
|
2.9
|
|
0.3
|
|
3.2
|
|
Other Expenses
|
3.9
|
|
—
|
|
3.9
|
|
|
0.8
|
|
0.9
|
|
1.7
|
|
Total Restructuring Costs
|
$
|
10.8
|
|
$
|
2.6
|
|
$
|
13.4
|
|
|
$
|
4.2
|
|
$
|
1.5
|
|
$
|
5.7
|
|
Restructuring Related Costs:
|
|
|
|
|
|
|
|
Other Employment Benefit Expenses
|
$
|
0.7
|
|
$
|
—
|
|
$
|
0.7
|
|
|
$
|
0.5
|
|
$
|
0.6
|
|
$
|
1.1
|
|
Total Restructuring Related Costs
|
$
|
0.7
|
|
$
|
—
|
|
$
|
0.7
|
|
|
$
|
0.5
|
|
$
|
0.6
|
|
$
|
1.1
|
|
Total Restructuring and Restructuring Related Costs
|
$
|
11.5
|
|
$
|
2.6
|
|
$
|
14.1
|
|
|
$
|
4.7
|
|
$
|
2.1
|
|
$
|
6.8
|
|
The following table shows the allocation of Restructuring Expenses by segment for fiscal
2017
and fiscal
2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Commercial and Industrial Systems
|
|
Climate Solutions
|
|
Power Transmission Solutions
|
Restructuring Expenses - 2017
|
$
|
14.1
|
|
|
$
|
10.9
|
|
|
$
|
2.5
|
|
|
$
|
0.7
|
|
Restructuring Expenses - 2016
|
$
|
6.8
|
|
|
$
|
2.5
|
|
|
$
|
2.6
|
|
|
$
|
1.7
|
|
The Company's current restructuring activities are expected to continue into 2018. The Company expects to record aggregate future charges of approximately
$5.3 million
related to announced projects as of year-end fiscal 2017, which includes
$0.5 million
of employee termination expenses and
$4.8 million
of facility related and other costs.