RBC-2014.9.27-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 27, 2014
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-07283
 
 
REGAL BELOIT CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Wisconsin
 
39-0875718
(State of other jurisdiction of
incorporation)
 
(IRS Employer
Identification No.)
200 State Street, Beloit, Wisconsin 53511
(Address of principal executive office)
(608) 364-8800
Registrant’s telephone number, including area code
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a “smaller reporting company.” See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer
 
ý
 
Accelerated Filer
 
¨
Non-accelerated filer
o  (Do not check if a smaller reporting company)
 
Smaller Reporting Company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES  ¨    NO  ý
As of November 4, 2014 there were 44,688,756 shares of the registrant’s common stock, $.01 par value per share, outstanding.




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


2


CAUTIONARY STATEMENT

Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based on management’s expectations, beliefs, current assumptions, and projections.  When used in this Quarterly Report on Form 10-Q, words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project” or “plan” or the negative thereof or similar words are intended to identify forward-looking statements.  These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Those factors include, but are not limited to:

•
actions taken by our competitors and our ability to effectively compete in the increasingly competitive global electric motor, drives and controls, power generation and mechanical motion control industries;
•
our ability to develop new products based on technological innovation and marketplace acceptance of new and existing products;
•
fluctuations in commodity prices and raw material costs;
•
our dependence on significant customers;
•
issues and costs arising from the integration of acquired companies and businesses, including the timing and impact of purchase accounting adjustments;
•
challenges in our Venezuelan operations, including potential currency devaluations, non-payment of receivables, governmental restrictions such as price and margin controls, as well as other difficult operating conditions;
•
our dependence on key suppliers and the potential effects of supply disruptions;
•
infringement of our intellectual property by third parties, challenges to our intellectual property and claims of infringement by us of third party technologies;
•
product liability and other litigation, or the failure of our products to perform as anticipated, particularly in high volume applications;
•
increases in our overall debt levels as a result of acquisitions or otherwise and our ability to repay principal and interest on our outstanding debt;
•
economic changes in global markets where we do business, such as reduced demand for the products we sell, currency exchange rates, inflation rates, interest rates, recession, foreign government policies and other external factors that we cannot control;
•
unanticipated liabilities of acquired businesses;
•
effects on earnings of any significant impairment of goodwill or intangible assets;
•
cyclical downturns affecting the global market for capital goods;
•
difficulties associated with managing foreign operations; and
•
other risks and uncertainties including but not limited to those described in “Risk Factors” in this Quarterly Report on Form 10-Q and from time to time in our reports filed with U.S. Securities and Exchange Commission.


Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report, and we undertake no obligation to update these statements to reflect subsequent events or circumstances.  Additional information regarding these and other risks and factors is included in Part II-Item 1A-Risk Factors in this Quarterly Report on Form 10-Q and in Part I - Item 1A - Risk Factors in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2014.


3


PART I—FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in Millions, Except Per Share Data)
 
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Net Sales
$
829.8

 
$
768.2

 
$
2,481.4

 
$
2,368.4

Cost of Sales
626.0

 
571.7

 
1,872.2

 
1,763.2

Gross Profit
203.8

 
196.5

 
609.2

 
605.2

Operating Expenses
129.1

 
117.7

 
376.1

 
369.4

Goodwill Impairment
—

 
—

 
1.0

 
—

  Total Operating Expenses
129.1

 
117.7

 
377.1

 
369.4

Income From Operations
74.7

 
78.8

 
232.1

 
235.8

Interest Expense
9.8

 
10.6

 
30.5

 
31.9

Interest Income
2.0

 
1.3

 
5.4

 
3.1

Income Before Taxes
66.9

 
69.5

 
207.0

 
207.0

Provision For Income Taxes
18.1

 
15.0

 
55.1

 
48.2

Net Income
48.8

 
54.5

 
151.9

 
158.8

Less: Net Income Attributable to Noncontrolling Interests
1.3

 
1.9

 
4.4

 
5.6

Net Income Attributable to Regal Beloit Corporation
$
47.5

 
$
52.6

 
$
147.5

 
$
153.2

Earnings Per Share Attributable to Regal Beloit Corporation:
 
 
 
 
 
 
 
Basic
$
1.06

 
$
1.17

 
$
3.27

 
$
3.40

Assuming Dilution
$
1.05

 
$
1.16

 
$
3.25

 
$
3.38

Cash Dividends Declared Per Share
$
0.22

 
$
0.20

 
$
0.64

 
$
0.59

Weighted Average Number of Shares Outstanding:
 
 
 
 
 
 
 
Basic
44.9

 
45.1

 
45.1

 
45.0

Assuming Dilution
45.2

 
45.4

 
45.4

 
45.3


See accompanying Notes to Condensed Consolidated Financial Statements


4


REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Millions)
 
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Net Income
$
48.8

 
$
54.5

 
$
151.9

 
$
158.8

Other comprehensive income (loss) net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(17.2
)
 
6.4

 
(19.0
)
 
(22.4
)
Reclassification of foreign currency translation adjustments included in net income, net of immaterial tax effects for the three and nine months ended September 27, 2014
(1.0
)
 
—

 
(1.0
)
 
—

Hedging Activities:
 
 
 
 
 
 
 
Change in fair value of hedging activities, net of tax effects of $(2.2) million and $2.6 million for the three months ended September 27, 2014 and September 28, 2013, and $(3.5) million and $(3.0) million for the nine months ended September 27, 2014 and September 28, 2013, respectively
(3.7
)
 
4.4

 
(5.7
)
 
(4.8
)
Reclassification adjustment for losses included in net income, net of tax effects of $0.4 million and $2.5 million for the three months ended September 27, 2014 and September 28, 2013, and $3.6 million and $3.4 million for the nine months ended September 27, 2014 and September 28, 2013, respectively
0.8

 
4.0

 
5.9

 
5.5

Defined benefit pension plans:
 
 
 
 
 
 
 
Increase in prior service cost and unrecognized loss, net of immaterial tax effects for the nine months ended September 27, 2014
—

 
—

 
(0.5
)
 
—

Reclassification adjustments for pension benefits included in net income, net of tax effects of $0.3 and $0.4 million for the three months ended September 27, 2014 and September 28, 2013, and $0.7 million and $0.7 million for the nine months ended September 27, 2014 and September 28, 2013, respectively
0.5

 
0.5

 
1.2

 
1.1

Other comprehensive income (loss)
(20.6
)
 
15.3

 
(19.1
)
 
(20.6
)
Comprehensive income
28.2

 
69.8

 
132.8

 
138.2

Less: Comprehensive income attributable to noncontrolling interest
0.6

 
2.8

 
2.8

 
5.5

Comprehensive Income Attributable to Regal Beloit Corporation
$
27.6

 
$
67.0

 
$
130.0

 
$
132.7

See accompanying Notes to Condensed Consolidated Financial Statements


5


REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions, Except Per Share Data)
 
 
September 27,
2014
 
December 28,
2013
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
327.3

 
$
466.0

Trade Receivables, less allowances of $12.8 million in 2014 and $11.5 million in 2013
545.7

 
463.8

Inventories
681.7

 
618.7

Prepaid Expenses and Other Current Assets
116.5

 
130.6

Deferred Income Tax Benefits
47.5

 
46.8

Total Current Assets
1,718.7

 
1,725.9

Net Property, Plant and Equipment
572.0

 
573.4

Goodwill
1,126.3

 
1,081.9

Intangible Assets, net of Amortization
234.9

 
244.2

Other Noncurrent Assets
19.5

 
18.1

Total Assets
$
3,671.4

 
$
3,643.5

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts Payable
$
347.9

 
$
304.6

Dividends Payable
9.8

 
9.0

Hedging Obligations
7.8

 
11.3

Accrued Compensation and Employee Benefits
90.6

 
85.6

Other Accrued Expenses
128.2

 
132.0

Current Maturities of Debt
8.3

 
158.4

Total Current Liabilities
592.6

 
700.9

Long-Term Debt
668.6

 
609.0

Deferred Income Taxes
144.9

 
140.3

Hedging Obligations
14.0

 
16.8

Pension and Other Post Retirement Benefits
40.0

 
39.7

Other Noncurrent Liabilities
34.6

 
34.4

Commitments and Contingencies (see Note 12)

 

Equity:
 
 
 
Regal Beloit Corporation Shareholders' Equity:
 
 
 
Common Stock, $.01 par value, 100.0 million shares authorized, 44.7 million shares and 45.1 million shares issued and outstanding in 2014 and 2013, respectively
0.4

 
0.5

Additional Paid-In Capital
889.9

 
916.1

Retained Earnings
1,318.1

 
1,199.4

Accumulated Other Comprehensive Loss
(77.3
)
 
(59.8
)
Total Regal Beloit Corporation Shareholders' Equity
2,131.1

 
2,056.2

Noncontrolling Interests
45.6

 
46.2

Total Equity
2,176.7

 
2,102.4

Total Liabilities and Equity
$
3,671.4

 
$
3,643.5

See accompanying Notes to Condensed Consolidated Financial Statements.


6


REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(Dollars in Millions, Except Per Share Data)
 
 
Common
Stock
$.01 Par
Value
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Non-
controlling
Interests
 
Total
Equity
Balance as of December 29, 2012
$
0.4

 
$
903.3

 
$
1,115.0

 
$
(65.3
)
 
$
43.1

 
$
1,996.5

Net Income
—

 
—

 
153.2

 
—

 
5.6

 
158.8

Other Comprehensive Loss
—

 
—

 
—

 
(20.5
)
 
(0.1
)
 
(20.6
)
Dividends Declared ($0.59 per share)
—

 
—

 
(26.6
)
 
—

 
—

 
(26.6
)
Stock Options Exercised, including income tax benefit and share cancellations
0.1

 
1.4

 
—

 
—

 
—

 
1.5

Share-based Compensation
—

 
8.3

 
—

 
—

 
—

 
8.3

Purchase of Subsidiary Shares from Noncontrolling Interest
—

 
—

 
—

 
1.1

 
(2.8
)
 
$
(1.7
)
Balance as of September 28, 2013
$
0.5

 
$
913.0

 
$
1,241.6

 
$
(84.7
)
 
$
45.8

 
$
2,116.2

 
 
Common
Stock
$.01 Par
Value
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Non-
controlling
Interests
 
Total
Equity
Balance as of December 28, 2013
$
0.5

 
$
916.1

 
$
1,199.4

 
$
(59.8
)
 
$
46.2

 
$
2,102.4

Net Income
—

 
—

 
147.5

 
—

 
4.4

 
151.9

Other Comprehensive Loss
—

 
—

 
—

 
(17.5
)
 
(1.6
)
 
(19.1
)
Dividends Declared ($0.64 per share)
—

 
—

 
(28.8
)
 
—

 
—

 
(28.8
)
Stock Options Exercised, including income tax benefit and share cancellations
—

 
0.2

 
—

 
—

 
—

 
0.2

Stock Repurchase
(0.1
)
 
(34.9
)
 
—

 
—

 
—

 
(35.0
)
Sale of Joint Venture
—

 
—

 
—

 
—

 
(3.1
)
 
(3.1
)
Dividends Declared to Non-controlling Interests
—

 
—

 
—

 
—

 
(0.3
)
 
(0.3
)
Share-based Compensation
—

 
8.5

 
—

 
—

 
—

 
8.5

Balance as of September 27, 2014
$
0.4

 
$
889.9

 
$
1,318.1

 
$
(77.3
)
 
$
45.6

 
$
2,176.7

See accompanying Notes to Condensed Consolidated Financial Statements.

7


REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
  
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
151.9

 
$
158.8

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
103.6

 
95.1

Goodwill impairment
1.0

 
—

Excess tax benefits from share-based compensation
(1.2
)
 
(0.7
)
Loss on disposition of assets, net
0.4

 
0.1

Share-based compensation expense
8.5

 
8.3

Loss on sale of consolidated joint venture
1.9

 
—

Change in operating assets and liabilities, net of acquisitions
(39.0
)
 
(23.1
)
Net cash provided by operating activities
227.1

 
238.5

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Additions to property, plant and equipment
(60.5
)
 
(65.4
)
Purchases of investment securities
(38.0
)
 
(24.6
)
Proceeds from sale of investment securities
28.1

 
24.3

Business acquisitions, net of cash acquired
(128.2
)
 
(6.1
)
Additions of equipment on operating leases
(4.5
)
 
(3.6
)
Grants received for capital expenditures
—

 
1.6

Proceeds from sale of consolidated joint venture
0.7

 
—

Proceeds from sale of assets
0.1

 
1.7

Net cash used in investing activities
(202.3
)
 
(72.1
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings under revolving credit facility
128.0

 
20.0

Repayments under revolving credit facility
(68.0
)
 
(20.0
)
Proceeds from short-term borrowings
18.8

 
39.2

Repayments of short-term borrowings
(19.1
)
 
(38.2
)
Repayments of long-term debt
(150.1
)
 
(55.8
)
Dividends paid to shareholders
(28.0
)
 
(26.1
)
Payments of contingent consideration
(8.6
)
 
(0.3
)
Proceeds from the exercise of stock options
0.8

 
2.3

Excess tax benefits from share-based compensation
1.2

 
0.7

Repurchase of common stock
(35.0
)
 
—

Distributions to noncontrolling interests
(0.3
)
 
—

Purchase of subsidiary shares from noncontrolling interest
—

 
(1.7
)
Net cash used in financing activities
(160.3
)
 
(79.9
)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
(3.2
)
 
0.9

Net (decrease) increase in cash and cash equivalents
(138.7
)
 
87.4

Cash and cash equivalents at beginning of period
466.0

 
375.3

Cash and cash equivalents at end of period
$
327.3

 
$
462.7

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid for:
 
 
 
 Interest
$
37.3

 
$
37.3

 Income taxes
$
34.3

 
$
35.4

See accompanying Notes to Condensed Consolidated Financial Statements.

8


REGAL BELOIT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 27, 2014
(Unaudited)

1. BASIS OF PRESENTATION
The accompanying (a) condensed consolidated balance sheet of Regal Beloit Corporation (the “Company”) as of December 28, 2013, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of September 27, 2014 and for the three and nine months ended September 27, 2014 and September 28, 2013, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 2013 Annual Report on Form 10-K filed on February 26, 2014.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the three and nine months ended September 27, 2014 are not necessarily indicative of the results that may be expected for the entire fiscal year ending January 3, 2015.
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company uses estimates in accounting for, among other items, allowance for doubtful accounts; excess and obsolete inventory; share-based compensation; acquisitions; product warranty obligations; pension assets and liabilities; derivative fair values; goodwill and intangible impairment; health care; litigation claims and contingencies; and income taxes. The Company accounts for changes to estimates and assumptions when warranted by factually based experience.
The Company operates on a 52/53 week fiscal year ending on the Saturday closest to December 31.
Accounting for Highly Inflationary Economies
The Company has a subsidiary in Venezuela using accounting for highly inflationary economies. Currency restrictions enacted by the Venezuelan government have the potential to impact the ability of the Company's subsidiary to obtain U.S. dollars in exchange for Venezuelan bolivares fuertes ("Bolivars") at the official foreign exchange rate. In January 2014, the Venezuelan government announced the expansion of its auction-based foreign exchange system (SICAD1). In March 2014, the Venezuelan government introduced an additional auction-based foreign exchange system (SICAD2) which permits all companies incorporated or domiciled in Venezuela to bid for U.S. dollars. As of September 27, 2014, the SICAD1 and SICAD2 exchange rates were 12 and 50 Bolivars per U.S. dollar, respectively.
As of September 27, 2014, the Company continued to remeasure local currency transactions and balances into U.S. dollars at the official exchange rate of 6.3 based on charges incurred related to import tariffs. The Company believes that its imports will continue to qualify for the official rate and intends to pursue this rate for future exchanges. To date, the Company has not gained access to U.S. dollars in Venezuela through either SICAD1 or SICAD2 auctions. Whether it will be able to access either SICAD system in the foreseeable future and what volume of currency exchange will transact through these alternative mechanisms is unclear.
At September 27, 2014, the Company had approximately $10.0 million of net monetary assets denominated in Bolivars. In the event of a devaluation of the official exchange rate or if the Company were to determine that it is more appropriate to utilize one of the other legal auction-based exchange rates for financial reporting purposes, it would result in the Company recording a devaluation charge in its Consolidated Statement of Income. Going forward, any devaluation in Venezuela will result in a reduction in the U.S. dollar reported amount of currency denominated revenues, expenses and, consequently, income before taxes.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Revenue from Contracts with Customers (Accounting Standard Update ("ASU") 2014-09), a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP. 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. In doing

9


so, the Company will need to use more judgment and make more estimates than under today’s guidance. Such estimates include identifying performance obligations in the contracts, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company can either apply a full retrospective adoption or a modified retrospective adoption.
The Company is required to adopt the new requirements in the first quarter of 2017. The Company is currently evaluating the impact of the new requirements to its consolidated financial statements and does not currently believe the impact will be significant.
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends the definition of a discontinued operation and requires entities to provide additional disclosures about disposal transactions that do not meet the discontinued-operations criteria. Under the new guidance, a discontinued operation may include a component or group of components of an entity that has been disposed of by sale or other than sale in accordance with applicable guidance, or is classified as held for sale, and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The new guidance also requires entities to provide certain disclosures about disposals that do not meet the criteria to be reported as a discontinued operation but are considered individually significant components.
This ASU is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014, with early adoption permitted.
The Company has elected to early adopt ASU 2014-08, effective June 29, 2014. Consequently, individually significant operations that are sold or classified as held for sale may not qualify for presentation as discontinued operations in the condensed consolidated financial statements, but will be disclosed in the notes to the condensed consolidated financial statements. (See also Note 3 to the Condensed Consolidated Financial Statements.) This ASU did not have a significant impact on the Company's financial position or results of operations for any of the periods presented.
2. OTHER FINANCIAL INFORMATION
Inventories
Inventories are valued at last-in, first-out (LIFO) for approximately 52% and 49% of the Company’s inventory as of September 27, 2014 and December 28, 2013, respectively.

The approximate percentage distribution between major classes of inventories was as follows:

 
September 27,
2014
 
December 28,
2013
Raw Material and Work in Process
46
%
 
41
%
Finished Goods and Purchased Parts
54
%
 
59
%
Property, Plant and Equipment
Property, plant, and equipment by major classification was as follows (in millions):
 
 
Useful Life in Years
 
September 27,
2014
 
December 28,
2013
Land and Improvements
 
 
$
72.1

 
$
72.3

Buildings and Improvements
3 - 50
 
241.3

 
231.1

Machinery and Equipment
3 - 15
 
831.7

 
794.5

Property, Plant and Equipment
 
 
1,145.1

 
1,097.9

Less: Accumulated Depreciation
 
 
(573.1
)
 
(524.5
)
Net Property, Plant and Equipment
 
 
$
572.0

 
$
573.4



10


3.    ACQUISITIONS AND DIVESTITURES
Acquisitions
The results of operations for acquired businesses are included in the Condensed Consolidated Financial Statements from the dates of acquisition. Acquisition related expenses, which were recorded in operating expenses as incurred, were $0.2 million and $1.3 million for the three and nine months ended September 27, 2014, respectively, and immaterial and $3.2 million for the three and nine months ended September 28, 2013, respectively.
2014 Acquisitions
On June 30, 2014, the Company acquired all of the stock of Benshaw. Inc., ("Benshaw") for $51.0 million. Benshaw is a manufacturer of custom low and medium voltage variable frequency drives and soft starters. It is reported in the Electrical segment.
The acquisition of Benshaw was accounted for as a purchase in accordance with FASB Accounting Standards Codification ("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 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 attributable to the allocation of the purchase price is based upon a preliminary valuation of assets acquired and liabilities assumed. The Company expects the amount of goodwill will be deductible for United States tax purposes.
The preliminary purchase price allocation for Benshaw was as follows:
 
As of June 30, 2014
Current assets
$
0.5

Trade receivables
10.4

Inventories
22.4

Property, plant and equipment
4.5

Intangible assets, subject to amortization
14.6

Goodwill
9.9

Total assets acquired
62.3

Accounts payable
3.7

Current liabilities assumed
2.2

Long-term liabilities assumed
5.4

Net assets acquired
$
51.0


On February 7, 2014, the Company acquired Hy-Bon Engineering Company, Inc. ("Hy-Bon") for $78.0 million. Hy-Bon is a leader in vapor recovery solutions for oil and gas applications and is reported in the Electrical segment.
The acquisition of Hy-Bon was accounted for as a purchase in accordance with the 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, 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 attributable to the allocation of the purchase price is based upon a preliminary valuation of assets acquired and liabilities assumed. The Company does not expect the amount of goodwill will be deductible for tax purposes under current United States tax law.

11


The purchase price allocation for Hy-Bon was as follows:
 
As of February 7, 2014
Current assets
$
1.7

Trade receivables
11.5

Inventories
14.3

Property, plant and equipment
8.1

Intangible assets, subject to amortization
13.4

Goodwill
40.6

Other assets
0.1

Total assets acquired
89.7

Accounts payable
5.5

Current liabilities assumed
5.1

Long-term liabilities assumed
1.1

Net assets acquired
$
78.0

2013 Acquisitions
On February 8, 2013, the Company acquired the RAM motor business ("RAM") previously owned by Schneider Electric for $6.0 million. This business manufactures hermetic motors from 250 hp to 2,500 hp for commercial HVAC applications and is reported in the Electrical segment.

The acquisition of RAM was accounted for as a purchase in accordance with the FASB ASC Topic 805, Business Combinations. Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The allocation of the purchase price is based upon a valuation of assets acquired and liabilities assumed.

The purchase price allocation for RAM was as follows:
 
As of February 8, 2013
Current assets
$
1.2

Trade receivables
1.9

Inventories
7.7

Property, plant and equipment
2.1

Other assets
0.1

Total assets acquired
13.0

Accounts payable
1.1

Current liabilities assumed
5.4

Long-term liabilities assumed
0.5

Net assets acquired
$
6.0



On September 3, 2013, the Company purchased additional shares owned by the noncontrolling interest in its joint venture in a South African distribution business increasing its ownership from 60.0% to 80.0% for $1.7 million. The Company historically consolidated the results of the South African distribution business into the Company's condensed consolidated financial statements and presented the portion of its investment not owned by the Company as noncontrolling interest. The noncontrolling interest in the South African distribution business was reduced to 20.0% as of September 3, 2013.

On November 19, 2013, the Company acquired Cemp s.r.l. ("Cemp"), an Italy based electric motor company for $34.6 million. Cemp is a leading designer, manufacturer and marketer of flameproof electric motors, and is reported in the Electrical segment.


12


The acquisition of Cemp was accounted for as a purchase in accordance with the 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, 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 attributable to the allocation of the purchase price is based upon a valuation of assets acquired and liabilities assumed. The Company does not expect the amount of goodwill be deductible for tax purposes under current Italian tax law.

The purchase price allocation for Cemp was as follows:
 
As of November 19, 2013
Current assets
$
3.1

Trade receivables
6.6

Inventories
7.8

Property, plant and equipment
3.7

Intangible assets, subject to amortization
12.6

Goodwill
14.8

Total assets acquired
48.6

Accounts payable
5.5

Current liabilities assumed
3.0

Long-term liabilities assumed
5.5

Net assets acquired
$
34.6


Pro Forma Consolidated Results

The following supplemental pro forma information presents the financial results for the three and nine months ended September 27, 2014 and September 28, 2013, respectively, as if the acquisitions of Benshaw and Hy-Bon had occurred on December 29, 2013. Based upon the timing of the Company's fiscal 2014 acquisitions, financial results for the three months ended September 27, 2014 included the financial results of the acquisitions of Benshaw and Hy-Bon. Also presented are the financial results for the three and nine months ended September 28, 2013 as if the acquisitions of Benshaw, Hy-Bon, Cemp and RAM had occurred on December 30, 2012.


13


Such pro forma amounts do not include any estimated cost synergies or other effects of the integration of the acquisitions. Accordingly, the pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisitions been completed on the dates indicated. Pro forma amounts are also not indicative of any future consolidated operating results of the Company (see Note 5 of the Notes to the Condensed Consolidated Financial Statements for amortization expense related to intangible assets acquired).
 
 
Nine Months Ended
 
 
September 27,
2014
Pro forma net sales
 
$
2,515.5

Pro forma net income
 
145.3

 
 
 
Basic earnings per share as reported
 
$
3.27

Pro forma basic earnings per share
 
3.22

 
 
 
Diluted earnings per share as reported
 
$
3.25

Pro forma diluted earnings per share
 
3.20


 
Three Months Ended
 
Nine Months Ended
 
September 28,
2013
 
September 28,
2013
Pro forma net sales
$
801.5

 
$
2,247.9

Pro forma net income
53.2

 
156.2

 
 
 
 
Basic earnings per share as reported
$
1.17

 
$
3.40

Pro forma basic earnings per share
1.18

 
3.47

 
 
 
 
Diluted earnings per share as reported
$
1.16

 
$
3.38

Pro forma diluted earnings per share
1.17

 
3.45


2014 Divestitures

The Company sold its shares of a joint venture located in Shanghai, China ("Jinling") on September 11, 2014 which was previously accounted for as a consolidated joint venture and was reported in the Electrical segment. The disposal of Jinling was determined to not qualify for presentation as discontinued operations in the Company's Condensed Consolidated Financial Statements, in accordance with ASU 2014-08. A loss of approximately $1.9 million was recorded in Operating Expenses in the Condensed Consolidated Statements of Income for the three and nine months ended September 27, 2014.

4. ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustments, hedging activities and pension benefit adjustments are included in Equity in Accumulated Other Comprehensive Loss.

14


The changes in accumulated other comprehensive loss by component, net of tax, for the three and nine months ended September 27, 2014 and September 28, 2013 were as follows (in millions):
 
Three Months Ended
 
September 27, 2014
 
Hedging Activities
 
Pension Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
(6.4
)
 
$
(23.1
)
 
$
(27.9
)
 
$
(57.4
)
Other comprehensive income (loss) before reclassifications
(5.9
)
 
—

 
(16.5
)
 
(22.4
)
Tax (expense) benefit
2.2

 
—

 
—

 
2.2

Amounts reclassified from accumulated other comprehensive income (loss)
1.2

 
0.8

 
(1.0
)
 
1.0

Tax (expense) benefit
(0.4
)
 
(0.3
)
 
—

 
(0.7
)
Net current period other comprehensive income (loss)
(2.9
)
 
0.5

 
(17.5
)
 
(19.9
)
Ending balance
$
(9.3
)
 
$
(22.6
)
 
$
(45.4
)
 
$
(77.3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
September 28, 2013
 
Hedging Activities
 
Pension Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
(25.1
)
 
$
(41.3
)
 
$
(33.8
)
 
$
(100.2
)
Other comprehensive income (loss) before reclassifications
7.0

 
—

 
5.5

 
12.5

Tax (expense) benefit
(2.6
)
 
—

 
—

 
(2.6
)
Amounts reclassified from accumulated other comprehensive income (loss)
6.5

 
0.9

 
—

 
7.4

Tax (expense) benefit
(2.5
)
 
(0.4
)
 
—

 
(2.9
)
Purchase of subsidiary shares from noncontrolling interest
—

 
—

 
1.1

 
1.1

Net current period other comprehensive income (loss)
8.4

 
0.5

 
6.6

 
15.5

Ending balance
$
(16.7
)
 
$
(40.8
)
 
$
(27.2
)
 
$
(84.7
)
 
Nine Months Ended
 
September 27, 2014
 
Hedging Activities
 
Pension Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
(9.5
)
 
$
(23.3
)
 
$
(27.0
)
 
$
(59.8
)
Other comprehensive income (loss) before reclassifications
(9.2
)
 
(0.5
)
 
(17.4
)
 
(27.1
)
Tax (expense) benefit
3.5

 
—

 
—

 
3.5

Amounts reclassified from accumulated other comprehensive income (loss)
9.5

 
1.9

 
(1.0
)
 
10.4

Tax (expense) benefit
(3.6
)
 
(0.7
)
 
—

 
(4.3
)
Net current period other comprehensive income (loss)
0.2

 
0.7

 
(18.4
)
 
(17.5
)
Ending balance
$
(9.3
)
 
$
(22.6
)
 
$
(45.4
)
 
$
(77.3
)

15


 
Nine Months Ended
 
September 28, 2013
 
Hedging Activities
 
Pension Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
(17.4
)
 
$
(41.9
)
 
$
(6.0
)
 
$
(65.3
)
Other comprehensive income (loss) before reclassifications
(1.8
)
 
—

 
(22.3
)
 
(24.1
)
Tax (expense) benefit
(3.0
)
 
—

 
—

 
(3.0
)
Amounts reclassified from accumulated other comprehensive income (loss)
8.9

 
1.8

 
—

 
10.7

Tax (expense) benefit
(3.4
)
 
(0.7
)
 
—

 
(4.1
)
Purchase of subsidiary shares from noncontrolling interest
—

 
—

 
1.1

 
1.1

Net current period other comprehensive income (loss)
0.7

 
1.1

 
(21.2
)
 
(19.4
)
Ending balance
$
(16.7
)
 
$
(40.8
)
 
$
(27.2
)
 
$
(84.7
)
The Condensed Consolidated Statements of Income line items affected by the hedging activities reclassified from accumulated other comprehensive loss in the tables above are disclosed in Note 13 of Notes to Condensed Consolidated Financial Statements.
The reclassification amounts for pension benefit adjustments in the tables above are part of net periodic pension costs recorded in Operating Expenses (see Note 8 of Notes to Condensed Consolidated Financial Statements).
5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
As required, the Company performs an annual impairment test of goodwill as of the end of the October fiscal month or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting units below their carrying value.
The Company's reporting unit related to technology that had been deemed substantially impaired during the fourth quarter of 2013 was deemed fully impaired during the nine months ended September 27, 2014 as a result of the closing of the facility. This resulted in a $1.0 million impairment charge to goodwill.
The following information presents changes to goodwill during the nine months ended September 27, 2014 (in millions):
 
Total
 
Electrical
Segment
 
Mechanical
Segment
Balance as of December 28, 2013
1,081.9

 
1,055.0

 
26.9

Acquisitions and Valuation Adjustments
50.4

 
50.4

 
—

Less: Impairment Charges
(1.0
)
 
(1.0
)
 
—

Translation Adjustments
(5.0
)
 
(5.0
)
 
—

Balance as of September 27, 2014
$
1,126.3

 
$
1,099.4

 
$
26.9

 
 
 
 
 
 
Cumulative Goodwill Impairment Charges
$
77.3

 
$
65.2

 
$
12.1


16


Intangible Assets
Intangible assets consisted of the following (in millions):
 
 
 
 
 
September 27, 2014
 
December 28, 2013
 
 
Weighted Average Amortization Period (years)
 
Gross Value
 
Accumulated
Amortization
 
Gross Value
 
Accumulated
Amortization
Customer Relationships
 
11
 
$
271.0

 
$
118.3

 
$
253.8

 
$
101.4

Technology
 
9
 
137.4

 
70.5

 
133.0

 
57.9

Trademarks
 
12
 
34.1

 
19.8

 
32.6

 
18.0

Patent and Engineering Drawings
 
5
 
16.5

 
16.2

 
16.6

 
15.0

Non-compete Agreements
 
5
 
8.7

 
8.0

 
8.3

 
7.8

 
 
 
 
$
467.7

 
232.8

 
$
444.3

 
200.1

Net Values
 
 
 
 
 
$
234.9

 
 
 
$
244.2

The estimated expected future annual amortization for intangible assets is as follows (in millions):
 
Year
Estimated
Amortization
2014
$
45.3

2015
38.3

2016
33.3

2017
26.7

2018
24.6


Amortization expense recorded for the three and nine months ended September 27, 2014 was $11.8 million and $34.7 million, respectively. Amortization expense recorded for the three and nine months ended September 28, 2013 was $10.9 million and $33.0 million, respectively.


17


6. BUSINESS SEGMENTS
The Company has two reportable segments: Mechanical and Electrical. Segment detail was (in millions):
 
 
Electrical
 
Mechanical
 
Eliminations
 
Total
As of and for Three Months Ended September 27, 2014
 
 
 
 
 
 
 
External sales
$
760.6

 
$
69.2

 
$
—

 
$
829.8

Intersegment sales
0.8

 
1.2

 
(2.0
)
 
—

  Total sales
761.4

 
70.4

 
(2.0
)
 
829.8

Gross profit
185.5

 
18.3

 
—

 
203.8

Operating expenses
119.5

 
9.6

 
—

 
129.1

Income from operations
66.0

 
8.7

 
—

 
74.7

Depreciation and amortization
32.4

 
3.2

 
—

 
35.6

Capital expenditures
16.1

 
1.5

 
—

 
17.6

Identifiable assets
3,478.5

 
192.9

 
—

 
3,671.4

As of and for Three Months Ended September 28, 2013
 
 
 
 
 
 
 
External sales
$
707.5

 
$
60.7

 
$
—

 
$
768.2

Intersegment sales
1.2

 
1.2

 
(2.4
)
 
—

  Total sales
708.7

 
61.9

 
(2.4
)
 
768.2

Gross profit
180.1

 
16.4

 
—

 
196.5

Operating expenses
109.0

 
8.7

 
—

 
117.7

Income from operations
71.1

 
7.7

 
—

 
78.8

Depreciation and amortization
28.5

 
3.2

 
—

 
31.7

Capital expenditures
15.3

 
2.9

 
—

 
18.2

Identifiable assets
3,483.1

 
226.2

 
—

 
3,709.3



18


As of and for Nine Months Ended September 27, 2014
Electrical
 
Mechanical
 
Eliminations
 
Total
External sales
$
2,278.3

 
$
203.1

 
$
—

 
$
2,481.4

Intersegment sales
2.5

 
3.7

 
(6.2
)
 
—

  Total sales
2,280.8

 
206.8

 
(6.2
)
 
2,481.4

Gross profit
557.1

 
52.1

 
—

 
609.2

Operating expenses
347.8

 
28.3

 
—

 
376.1

Goodwill impairment
1.0

 
—

 
—

 
1.0

Income from operations
208.3

 
23.8

 
—

 
232.1

Depreciation and amortization
94.2

 
9.4

 
—

 
103.6

Capital expenditures
54.9

 
5.6

 
—

 
60.5

Identifiable assets
3,478.5

 
192.9

 
—

 
3,671.4

 
 
 
 
 
 
 
 
As of and for Nine Months Ended September 28, 2013
 
 
 
 
 
 
 
External Sales
$
2,171.8

 
$
196.6

 
$
—

 
$
2,368.4

Intersegment sales
3.2

 
4.0

 
(7.2
)
 
—

  Total sales
2,175.0

 
200.6

 
(7.2
)
 
2,368.4

Gross profit
552.9

 
52.3

 
—

 
605.2

Operating expenses
341.8

 
27.6

 
—

 
369.4

Income from operations
211.1

 
24.7

 
—

 
235.8

Depreciation and amortization
85.6

 
9.5

 
—

 
95.1

Capital expenditures
58.4

 
7.0

 
—

 
65.4

Identifiable assets
3,483.1

 
226.2

 
—

 
3,709.3


7. DEBT AND BANK CREDIT FACILITIES
The Company’s indebtedness as of September 27, 2014 and December 28, 2013 was as follows (in millions):
 
September 27,
2014
 
December 28,
2013
Senior notes
$
600.0

 
$
750.0

Revolving credit facility
60.0

 
—

Other
16.9

 
17.4

 
676.9

 
767.4

Less: Current maturities
(8.3
)
 
(158.4
)
Non-current portion
$
668.6

 
$
609.0


At September 27, 2014, the Company had $600.0 million of senior notes (the “Notes”) outstanding.
In August 2014, $150.0 million of the 2007 Notes matured. The Company repaid these Notes at maturity with a combination of existing cash and borrowings under its revolving credit facility.
Details on the Notes are as follows (in millions):
 
Principal
 
Interest Rate
 
Maturity
Floating Rate Series 2007A
100.0

 
Floating (1)
 
August 2017
Fixed Rate Series 2011A
100.0

 
4.1%
 
July 2018
Fixed Rate Series 2011A
230.0

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

 
4.9 to 5.1%
 
July 2023
 
$
600.0

 
 
 
 
 
(1)
Interest rates vary as LIBOR varies. At September 27, 2014, the interest rate was 0.9%.

The Company has a $500.0 million revolving credit facility (the “Facility”) that matures in June 2016. The Facility permits the Company to borrow at interest rates based upon a margin above LIBOR. The margin varies with the ratio of total funded debt to EBITDA, net of specified cash, as defined in the Facility. These interest rates also vary as LIBOR varies. The average interest rate on the Facility was 1.4% during the nine months ended September 27, 2014. The Company pays a commitment fee on the unused amount of the Facility, which also varies with the ratio of total funded debt to EBITDA. At September 27, 2014, the Company had $60.0 million outstanding on the Facility and had $23.8 million of standby letters of credit issued under the Facility with $416.2 million of available borrowing capacity.
At September 27, 2014, other notes payable of $16.9 million were outstanding with a weighted average interest rate of 2.5%. At December 28, 2013, other notes payable of approximately $17.4 million were outstanding with a weighted average interest rate of 2.7%.
Based on rates for instruments with comparable maturities and credit quality, which are classified as Level 2 inputs, the approximate fair value of the Company's Notes was $699.9 million and $779.6 million as of September 27, 2014 and December 28, 2013, respectively. The Company estimates that the fair value of other debt approximates book value.
The Notes and the Facility require the Company to meet specified financial ratios and to satisfy certain financial condition tests. The Company was in compliance with all financial covenants as of September 27, 2014. The Company believes that it will continue to be in compliance with these covenants for the foreseeable future.

19



8. PENSION PLANS
The Company’s net periodic defined benefit pension cost is comprised of the following components (in millions):
 
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Service cost
$
0.6

 
$
0.7

 
$
1.8

 
$
2.1

Interest cost
1.9

 
1.8

 
5.9

 
5.4

Expected return on plan assets
(2.2
)
 
(2.1
)
 
(6.7
)
 
(6.1
)
Amortization of prior service cost and net actuarial loss
0.6

 
1.1

 
1.7

 
3.2

Net periodic benefit expense
$
0.9

 
$
1.5

 
$
2.7

 
$
4.6


The estimated net actuarial loss and prior service cost for defined benefit pension plans that will be amortized from Accumulated Other Comprehensive Loss into net periodic benefit cost during the 2014 fiscal year is $2.0 million and $0.2 million, respectively.
For the three months ended September 27, 2014 and September 28, 2013, the Company contributed $0.9 million and $0.5 million, respectively, to defined benefit pension plans. For the nine months ended September 27, 2014 and September 28, 2013, the Company contributed $2.0 million and $4.4 million, respectively, to defined benefit pension plans. The Company expects to make total contributions of $2.9 million in 2014. The Company contributed a total of $5.5 million in 2013. The assumptions used in the valuation of the Company’s pension plans and in the target investment allocation have remained the same as those disclosed in the Company’s 2013 Annual Report on Form 10-K filed on February 26, 2014.

9. SHAREHOLDERS’ EQUITY
Repurchase of Common Stock
The Company acquired and retired 500,000 shares of its common stock in the quarter ended September 27, 2014, at an average cost of $69.94 per share for a total use of cash of $35.0 million. The repurchases were under the 3.0 million share repurchase program approved by the Company’s Board of Directors.

Share Based Compensation
The Company recognized approximately $2.2 million and $2.9 million in share-based compensation expense for the three months ended September 27, 2014 and September 28, 2013, respectively. Share-based compensation expense for the nine months ended September 27, 2014 and September 28, 2013 was $8.5 million and $8.3 million, respectively. The total excess income tax benefit recognized relating to share-based compensation for the nine months ended September 27, 2014 and September 28, 2013 was approximately $1.2 million and $0.7 million, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award. As of September 27, 2014, total unrecognized compensation cost related to share-based compensation awards was approximately $24.6 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 2.3 years.

Approximately 3.0 million shares were available for future grant under the 2013 Equity Incentive Plan at September 27, 2014.

The Company uses several forms of share-based incentive awards, including non-qualified stock options, incentive stock options, and stock appreciation rights (“SARs”). Historically, the majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter. For the nine months ended September 27, 2014, and September 28, 2013, respectively, 148,955 and 174,775 share-based incentive awards were granted. The per share weighted average fair value of share-based incentive awards granted during those respective periods was $28.01 and $23.01.

Options and Stock Appreciation Rights
Options and SARs generally vest over 5 years, are granted at prices equal to the fair market value of the stock on the grant dates, and expire 10 years from the grant date. Compensation expense recognized related to the options and SARs was $1.0 million and $1.1 million for the three months ended September 27, 2014 and September 28, 2013, respectively, and $3.6 million and $4.0 million for the nine months ended September 27, 2014 and September 28, 2013, respectively.

20


As of September 27, 2014, there was $12.7 million of unrecognized compensation cost related to non-vested options and SAR's that is expected to be recognized as a charge to earnings over a weighted average period of 3.1 years.
The assumptions used in the Company's Black-Scholes valuation related to grants for options and SARs were as follows:
 
September 27, 2014
 
September 28, 2013
Risk-free interest rate
2.0
%
 
1.1
%
Expected life (years)
7.0

 
7.0

Expected volatility
37.7
%
 
38.5
%
Expected dividend yield
1.2
%
 
1.2
%
The weighted average fair value of SARs granted during the nine months ended September 27, 2014 was $28.01. There were no options granted during the nine months ended September 27, 2014.
A summary of share-based awards (options and SARs) as of September 27, 2014 follows below. Forfeitures of share-based awards during the nine months ended September 27, 2014 were immaterial.
Number of Shares
Shares
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
(years)
 
Aggregate Intrinsic
Value (in
millions)
Outstanding
1,498,486

 
$59.27
 
6.1
 
$
13.2

Exercisable
878,054

 
$53.10
 
4.7
 
12.3


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. RSU awards are typically granted to eligible employees outside of the United States. 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.

21


Following is a summary of RSA award activity for the nine months ended September 27, 2014:
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (Years)
Unvested RSAs at December 28, 2013
40,717

 
$
66.50

 
0.8
Granted
12,144

 
75.76

 
 
Vested
28,047

 
67.83

 
 
Forfeited
—

 
—

 
 
Unvested RSAs September 27, 2014
24,814

 
$
69.53

 
0.6
RSAs vest on either the first (for RSAs granted in 2013 and later) or the third (for RSAs granted prior to 2013) anniversary of the grant date, provided the holder of the shares is continuously employed by or in the service of the Company until the vesting date. Compensation expense recognized related to the RSAs was $0.3 million and $0.5 million for the three months ended September 27, 2014 and September 28, 2013, respectively, and $1.2 million and $0.9 million for the nine months ended September 27, 2014 and September 28, 2013, respectively.
As of September 27, 2014, there was $0.7 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 0.6 years.
Following is a summary of RSU award activity for the nine months ended September 27, 2014:
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (Years)
Unvested RSUs at December 28, 2013
210,264

 
65.57

 
1.9
Granted
83,850

 
75.41

 
 
Vested
47,048

 
70.89

 
 
Forfeited
5,885

 
63.51

 
 
Unvested RSUs at September 27, 2014
241,181

 
68.00

 
2.0
RSU shares 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 $0.6 million and $1.0 million for the three months ended September 27, 2014 and September 28, 2013, respectively, and $3.0 million and $3.0 million for the nine months ended September 27, 2014 and September 28, 2013, respectively.
As of September 27, 2014, there was $10.4 million of unrecognized compensation cost related to non-vested RSUs that is expected to be recognized as a charge to earnings over a weighted average period of 2.0 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 vest and become payable upon the determination that the Company achieved certain established performance targets and can range from 0% to 200.0% of the targeted payout based on the actual results. PSUs have a performance period of 3 years. There are no voting rights with these instruments until vesting occurs and a share of stock is issued. PSU awards are valued using a Monte Carlo simulation method as of the grant date.

22


The assumptions used in the Company's Monte Carlo simulation related to grants for PSUs were as follows:
 
September 27,
2014
 
September 28,
2013
Risk-free interest rate
0.9
%
 
0.3
%
Expected life (years)
3.0

 
3.0

Expected volatility
32.0
%
 
35.0
%
Expected dividend yield
1.1
%
 
1.2
%
Following is a summary of PSU activity for the nine months ended September 27, 2014:
 
Shares
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Contractual Term (Years)
Unvested PSUs at December 28, 2013
35,730

 
$
56.71

 
2.4
Granted
25,310

 
83.74

 
 
Vested
—

 
—

 
 
Forfeited
1,645

 
56.71

 
 
Unvested PSUs at September 27, 2014
59,395

 
$
68.23

 
2.2
Compensation expense for awards granted is based on the targeted payout of 100%, net of estimated forfeitures. Compensation expense recognized related to PSUs was $0.3 million and $0.2 million for the three months ended September 27, 2014 and September 28, 2013, respectively, and $0.7 million and $0.3 million for the nine months ended September 27, 2014 and September 28, 2013, respectively. Total unrecognized compensation expense for all PSUs granted as of September 27, 2014 is estimated to be $3.0 million recognized as a charge to earnings over a weighted average period of 2.2 years.
10. INCOME TAXES
The effective tax rate for the three months ended September 27, 2014 was 27.1% versus 21.6% for the three months ended September 28, 2013. The effective tax rate for the nine months ended September 27, 2014 was 26.6% versus 23.3% for the nine months ended September 28, 2013.
The change in the third quarter 2014 compared to third quarter 2013 effective rate was primarily driven by the favorable adjustments related to the finalization of the 2012 U.S. Federal income tax return recorded in 2013 and the increase in the Mexican tax rate in 2014. The change in the effective tax rate for the nine months ended September 27, 2014 was driven by the same factors as in the third quarter 2014 as well as the U.S. Research and Development Credit not yet extended for 2014 and the retroactive Chinese Hi-Technology tax incentive recorded in 2013. The lower effective rate as compared to the 35.0% statutory Federal income tax rate is driven by lower foreign tax rates.
As of September 27, 2014 and December 28, 2013, the Company had approximately $3.4 million and $4.4 million, respectively, of unrecognized tax benefits, all of which would affect its effective tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
With few exceptions, the Company is no longer subject to U.S. Federal and state/local income tax examinations by tax authorities for years prior to 2010, and the Company is no longer subject to non-U.S. income tax examinations by tax authorities for years prior to 2008.

23


11. EARNINGS PER SHARE ("EPS")
The numerator for the calculation of basic and diluted earnings per share is Net Income Attributable to Regal Beloit Corporation. The denominator is computed as follows (in millions):
 
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Denominator for basic EPS (weighted average)
44.9

 
45.1

 
45.1

 
45.0

Effect of dilutive securities
0.3

 
0.3

 
0.3

 
0.3

Denominator for diluted EPS (weighted average)
45.2

 
45.4

 
45.4

 
45.3


The “Effect of dilutive securities” represents the dilution impact of equity awards. For the three months ended September 27, 2014 and September 28, 2013, respectively, there were 0.6 million and 0.7 million options where the exercise price was above the average market price which were excluded from the calculation of the effect of dilutive shares as the effect of such options was anti-dilutive. For the nine months ended September 27, 2014 and September 28, 2013, there were 0.3 million and 0.7 million shares, respectively, where the exercise price was above the average market price and which were excluded from the calculation of the effect of dilutive shares as the effect of such options was anti-dilutive.
12. CONTINGENCIES
One of the Company’s subsidiaries that it acquired in 2007 is subject to numerous claims filed in various jurisdictions relating to certain sub-fractional motors that were primarily manufactured through 2004 and that were included as components of residential and commercial ventilation units marketed by a third party. These claims generally allege that the ventilation units were the cause of fires. Based on the current facts, the Company does not believe these claims, individually or in the aggregate, will have a material effect on its interim condensed consolidated financial statements as a whole.
The Company is, from time to time, party to litigation that arises in the normal course of its business operations, including product warranty and liability claims, contract disputes and environmental, asbestos, 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. The Company accrues for exposures in amounts that it believes are adequate, and the Company does not believe that the outcome of any such lawsuit individually or collectively will have a material effect on the Company's financial position, its results of operations or its cash flows.
The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience.
The following is a reconciliation of the changes in accrued warranty costs for the three and nine months ended September 27, 2014 and September 28, 2013 (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Beginning balance
$
17.6

 
$
21.9

 
$
19.3

 
$
20.9

Payments
(4.1
)
 
(5.2
)
 
(14.9
)
 
(13.7
)
Provision
4.9

 
4.8

 
13.9

 
13.2

Acquisition
0.6

 
—

 
0.7

 
1.2

Translation adjustments
—

 
—

 
—

 
(0.1
)
Ending balance
$
19.0

 
$
21.5

 
$
19.0

 
$
21.5


13. DERIVATIVE INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are commodity price, currency exchange and interest rate risk. Forward contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing process. Forward contracts on certain currencies are entered into to manage forecasted cash flows in certain foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s floating rate borrowings.
The Company must recognize all derivative instruments as either assets or liabilities at fair value in the condensed consolidated balance sheets. The Company designates commodity forward contracts as cash flow hedges of forecasted purchases of commodities, currency forward contracts as cash flow hedges of forecasted foreign currency cash flows and interest rate swaps as cash flow hedges of forecasted LIBOR-based interest payments. There were no significant collateral deposits on derivative financial instruments as of September 27, 2014.

24


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 other comprehensive loss 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. All derivative instruments used by the Company impact operating cash flows.
At September 27, 2014, the Company had $0.6 million, net of tax, of derivative gains on closed hedge instruments in Accumulated Other Comprehensive Income (“AOCI”) that will be realized in earnings when the hedged items impact earnings. At December 28, 2013, the Company had $(0.7) million, net of tax, of derivative losses on closed hedge instruments in AOCI that was realized in earnings when the hedged items impacted earnings.
As of September 27, 2014, the Company had outstanding the following currency forward contracts (with maturities extending through March 2017) to hedge forecasted foreign currency cash flows (in millions):
 
Notional
Amount
Mexican Peso
$
238.0

Chinese Renminbi
166.9

Indian Rupee
33.7

Euro
26.1

Thai Baht
5.0

Australian Dollar
2.9


As of September 27, 2014, the Company had outstanding the following commodity forward contracts (with maturities extending through December 2015) to hedge forecasted purchases of commodities (notional amounts expressed in terms of the dollar value of the hedged item in millions):
 
Notional
Amount
Copper
$
111.2

Aluminum
5.1


As of September 27, 2014, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swap was $100.0 million (with maturity in August 2017).
Fair values of derivative instruments as of September 27, 2014 and December 28, 2013 were (in millions):

 
September 27, 2014
 
Prepaid
Expenses and Other Current Assets
 
Other
Noncurrent
Assets
 
Hedging
Obligations
(current)
 
Hedging
Obligations
Designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap contracts
$
—

 
$
—

 
$
—

 
$
12.6

Currency contracts
3.3

 
0.5

 
2.4

 
1.3

Commodity contracts
0.2

 
—

 
3.6

 
0.1

Not designated as hedging instruments:
 
 
 
 
 
 
 
Currency contracts
0.3

 
—

 
0.7

 
—

Commodity contracts
1.1

 
—

 
1.1

 
—

Total Derivatives
$
4.9

 
$
0.5

 
$
7.8

 
$
14.0

 

25


 
December 28, 2013
 
Prepaid
Expenses and Other Current Assets
 
Other
Noncurrent
Assets
 
Hedging
Obligations
(current)
 
Hedging
Obligations
Designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap contracts
$
—

 
$
—

 
$
5.7

 
$
16.1

Currency contracts
8.4

 
0.7

 
3.0

 
0.7

Commodity contracts
4.0

 
—

 
1.7

 
—

Not designated as hedging instruments:
 
 
 
 
 
 
 
Currency contracts
—

 
—

 
0.1

 
—

Commodity contracts
0.7

 
—

 
0.8

 
—

Total Derivatives
$
13.1

 
$
0.7

 
$
11.3

 
$
16.8



26


The effect of derivative instruments on the Condensed Consolidated Statements of Income and Comprehensive Income (pre-tax) for the three and nine months ended September 27, 2014 and September 28, 2013, respectively, was (in millions):

Derivatives Designated as Cash Flow Hedging Instruments
 
 
Three Months Ended
 
September 27, 2014
 
September 28, 2013
 
Commodity
Forwards
 
Currency
Forwards
 
Interest
Rate
Swaps
 
Total
 
Commodity
Forwards
 
Currency
Forwards
 
Interest
Rate
Swaps
 
Total
Gain (Loss) recognized in Other Comprehensive Income (Loss)
$
(3.2
)
 
$
(3.9
)
 
$
1.2

 
$
(5.9
)
 
$
10.3

 
$
(2.4
)
 
$
(0.9
)
 
$
7.0

Amounts reclassified from Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss recognized in Net Sales
—

 
—

 
—

 
—

 
—

 
(0.1
)
 
—

 
(0.1
)
Gain (Loss) recognized in Cost of Sales
(1.6
)
 
2.8

 
—

 
1.2