NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1
. Description of Business and General Information
Briggs & Stratton Corporation (the “Company”) is focused on providing power to get work done and make people's lives better. The Company is a U.S. based producer of gasoline engines and outdoor power equipment. The Company’s Engines Segment sells engines worldwide, primarily to original equipment manufacturers ("OEMs") of lawn and garden equipment and other gasoline engine powered equipment. The Company also sells related service parts and accessories for its engines. The Company’s Products Segment designs, manufactures and markets a wide range of outdoor power equipment, job site products, and related accessories.
The majority of lawn and garden equipment is sold during the spring and summer months when most lawn care and gardening activities are performed. Engine sales in the Company’s third fiscal quarter have historically been the highest, while sales in the first fiscal quarter have historically been the lowest. Sales of pressure washers and lawn and garden powered equipment are typically higher during the third and fourth fiscal quarters than at other times of the year. Sales of portable generators and snowthrowers are typically higher during the first and second fiscal quarters.
Inventory levels generally increase during the first and second fiscal quarters in anticipation of customer demand. Inventory levels begin to decrease as sales increase in the third fiscal quarter. This seasonal pattern results in high inventories and low cash flow for the Company in the first, second and the beginning of the third fiscal quarters. The pattern generally results in higher cash flow in the latter portion of the third fiscal quarter and in the fourth fiscal quarter as inventories are liquidated and receivables are collected.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and therefore do not include all information and footnotes necessary for a fair statement of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but also does not include all disclosures required by accounting principles generally accepted in the United States. However, in the opinion of the Company, adequate disclosures have been presented to prevent the information from being misleading, and all adjustments necessary to fairly present the results of operations and financial position have been included. All of these adjustments are of a normal recurring nature, except as otherwise noted.
Interim results are not necessarily indicative of results for a full year. The information included in these condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto that were included in the Company's latest Annual Report on Form 10-K.
2
. New Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02, Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU No. 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The guidance is effective beginning fiscal year 2020, with early adoption permitted. The Company is currently assessing the impact of this new accounting pronouncement on its financial position.
In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires an employer to disaggregate the service cost component from the other components of net periodic pension costs within the statement of income. The guidance is applied on a retrospective basis, and became effective for the Company in fiscal 2019. Accordingly, the Company adopted this ASU effective July 2, 2018. Non-service cost components of net periodic pensions costs in the amount of
$0.5 million
and
$0.2 million
have been included in Other Income in the Statement of Operations for the three months ended
September 30, 2018
and
October 1, 2017
, respectively.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated guidance requires a prospective adoption. The guidance is effective beginning fiscal year 2021. Early adoption is permitted. The Company is currently assessing the impact of this new accounting pronouncement on its results of operations and financial position.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective, on a retrospective basis, beginning fiscal year 2019. Accordingly, the Company has adopted this ASU effective July 2, 2018. The following table provides a reconciliation of the amount of cash and cash equivalents reported on the Condensed Consolidated Balance Sheets to the total of cash and cash equivalents and restricted cash shown on the Condensed Consolidated Statements of Cash Flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
July 1,
2018
|
|
Cash and cash equivalents
|
|
$
|
29,012
|
|
|
$
|
44,923
|
|
|
Restricted cash
|
|
2,348
|
|
|
4,295
|
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
31,360
|
|
|
$
|
49,218
|
|
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Certain qualitative and quantitative disclosures are required, as well as a modified retrospective recognition and measurement of impacted leases. The guidance is effective beginning fiscal year 2020, with early adoption permitted. The Company is currently assessing the impact of this new accounting pronouncement on its results of operations, financial position, and cash flows.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU No. 2016-01). ASU No. 2016-01 enhances the existing financial instruments reporting model by modifying fair value measurement tools, simplifying impairment assessments for certain equity instruments, and modifying overall presentation and disclosure requirements. The guidance is effective beginning fiscal year 2019, with early adoption permitted. The Company adopted this standard effective July 1, 2018 and it did not have a material impact on the Company’s results of operations, financial position, and cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Topic 606 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. This guidance is effective beginning fiscal year 2019 under either full or modified retrospective adoption. The Company has adopted this ASU effective July 2, 2018 using the modified retrospective approach and this standard did not have a material impact on the Company's Condensed Consolidated Financial Statements. Additional disclosures related to adoption of this ASU have been included at Note
4
.
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
3
. Accumulated Other Comprehensive Income (Loss)
The following tables set forth the changes in accumulated other comprehensive income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
Cumulative Translation Adjustments
|
|
Derivative Financial Instruments
|
|
Pension and Postretirement Benefit Plans
|
|
Total
|
|
Beginning Balance
|
|
$
|
(28,928
|
)
|
|
$
|
6,486
|
|
|
$
|
(229,830
|
)
|
|
$
|
(252,272
|
)
|
|
Other Comprehensive Income (Loss) Before Reclassification
|
|
(3,690
|
)
|
|
252
|
|
|
—
|
|
|
(3,438
|
)
|
|
Income Tax Benefit (Expense)
|
|
—
|
|
|
(61
|
)
|
|
—
|
|
|
(61
|
)
|
|
Net Other Comprehensive Income (Loss) Before Reclassifications
|
|
(3,690
|
)
|
|
191
|
|
|
—
|
|
|
(3,499
|
)
|
|
Reclassifications:
|
|
|
|
|
|
|
|
|
|
|
Realized (Gains) Losses - Foreign Currency Contracts (1)
|
|
—
|
|
|
(951
|
)
|
|
—
|
|
|
(951
|
)
|
|
Realized (Gains) Losses - Commodity Contracts (1)
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
|
Realized (Gains) Losses - Interest Rate Swaps (1)
|
|
—
|
|
|
(216
|
)
|
|
—
|
|
|
(216
|
)
|
|
Amortization of Prior Service Costs (Credits) (2)
|
|
—
|
|
|
—
|
|
|
(137
|
)
|
|
(137
|
)
|
|
Amortization of Actuarial Losses (2)
|
|
—
|
|
|
—
|
|
|
3,728
|
|
|
3,728
|
|
|
Total Reclassifications Before Tax
|
|
—
|
|
|
(1,171
|
)
|
|
3,591
|
|
|
2,420
|
|
|
Income Tax Expense (Benefit)
|
|
—
|
|
|
282
|
|
|
(865
|
)
|
|
(583
|
)
|
|
Net Reclassifications
|
|
—
|
|
|
(889
|
)
|
|
2,726
|
|
|
1,837
|
|
|
Other Comprehensive Income (Loss)
|
|
(3,690
|
)
|
|
(698
|
)
|
|
2,726
|
|
|
(1,662
|
)
|
|
Ending Balance
|
|
$
|
(32,618
|
)
|
|
$
|
5,788
|
|
|
$
|
(227,104
|
)
|
|
$
|
(253,934
|
)
|
(1) Amounts reclassified to net income (loss) are included in net sales or cost of goods sold. See Note
9
for information related to derivative financial instruments.
(2) Amounts reclassified to net income (loss) are included in the computation of net periodic expense, which is presented in cost of goods sold or engineering, selling, general and administrative expenses. See Note
7
for information related to pension and postretirement benefit plans.
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 1, 2017
|
|
|
|
Cumulative Translation Adjustments
|
|
Derivative Financial Instruments
|
|
Pension and Postretirement Benefit Plans
|
|
Total
|
|
Beginning Balance
|
|
$
|
(24,744
|
)
|
|
$
|
(76
|
)
|
|
$
|
(275,206
|
)
|
|
$
|
(300,026
|
)
|
|
Other Comprehensive Income (Loss) Before Reclassification
|
|
3,928
|
|
|
(3,206
|
)
|
|
—
|
|
|
722
|
|
|
Income Tax Benefit (Expense)
|
|
—
|
|
|
1,202
|
|
|
—
|
|
|
1,202
|
|
|
Net Other Comprehensive Income (Loss) Before Reclassifications
|
|
3,928
|
|
|
(2,004
|
)
|
|
—
|
|
|
1,924
|
|
|
Reclassifications:
|
|
|
|
|
|
|
|
|
|
|
Realized (Gains) Losses - Foreign Currency Contracts (1)
|
|
—
|
|
|
2,349
|
|
|
—
|
|
|
2,349
|
|
|
Realized (Gains) Losses - Commodity Contracts (1)
|
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
|
Realized (Gains) Losses - Interest Rate Swaps (1)
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
Amortization of Prior Service Costs (Credits) (2)
|
|
—
|
|
|
—
|
|
|
(314
|
)
|
|
(314
|
)
|
|
Amortization of Actuarial Losses (2)
|
|
—
|
|
|
—
|
|
|
4,665
|
|
|
4,665
|
|
|
Total Reclassifications Before Tax
|
|
—
|
|
|
2,356
|
|
|
4,351
|
|
|
6,707
|
|
|
Income Tax Expense (Benefit)
|
|
—
|
|
|
(884
|
)
|
|
(1,631
|
)
|
|
(2,515
|
)
|
|
Net Reclassifications
|
|
—
|
|
|
1,472
|
|
|
2,720
|
|
|
4,192
|
|
|
Other Comprehensive Income (Loss)
|
|
3,928
|
|
|
(532
|
)
|
|
2,720
|
|
|
6,116
|
|
|
Ending Balance
|
|
$
|
(20,816
|
)
|
|
$
|
(608
|
)
|
|
$
|
(272,486
|
)
|
|
$
|
(293,910
|
)
|
(1) Amounts reclassified to net income (loss) are included in net sales or cost of goods sold. See Note
9
for information related to derivative financial instruments.
(2) Amounts reclassified to net income (loss) are included in the computation of net periodic expense, which is presented in cost of goods sold or engineering, selling, general and administrative expenses. See Note
7
for information related to pension and postretirement benefit plans.
4
. Revenue
The Company has adopted ASC 606 using the modified retrospective approach. Revenue is measured based on consideration expected to be received from a customer, and excludes any cash discounts, volume rebates and discounts, floor plan interest, advertising allowances, and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control of a product to a customer, which is generally upon shipment.
Nature of Revenue
The Company’s revenues primarily consist of sales of engines and products to its customers. The Company considers the purchase orders, which may also be governed by purchasing agreements, to be the contracts with customers. For each contract, the Company considers delivery of the engines and products to be the identified performance obligations. The following is a description of principal activities, separated by reportable segments, from which the Company generates its revenue. For more detailed information about reportable segments, see Note
14
.
The Engines segment principally generates revenue by providing gasoline engines and power solutions to OEMs which serve commercial and residential markets primarily for lawn and garden equipment applications. The Company typically enters into annual purchasing plans with its engine customers. In certain cases, the Company has entered into longer supply arrangements of two to three years; however, these longer term supply agreements do not generally create unfulfilled performance obligations. The sale of products to OEMs represents a single performance obligation. Revenue is recognized at a point in time when the product is shipped as substantially all engines are not customized for each customer and there is an alternative use for all inventory. The amount of revenue recognized is adjusted for variable consideration such as tiered volume discounts and rebates. Revenue recognized is also adjusted based on an estimate of future returns.
The Products segment generates revenue through the sale of end user products through retail distribution, independent dealer networks, the US mass retail channel, and the rental channel. These channels primarily serve
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
commercial and residential end users. The sale of products to the various distribution networks represents a single performance obligation. Revenue is recognized at a point in time when the product is shipped as the products are not customized for each customer; therefore, there is an alternative use for all inventory. The amount of revenue recognized is adjusted for variable consideration such as tiered volume discounts, rebates, and floor plan interest. Revenue recognized is also adjusted based on an estimate of future returns.
Both the Engines and Products segments account for variable consideration and estimated returns according to the same accounting policies. The Company offers a variable discount if certain customers reach established volume goals in the form of tiered volume discounts. The Company applies the expected value approach to estimate the value of the discount which is then applied as a reduction to the transaction price. Included in net sales for the three months ended
September 30, 2018
were reductions for tiered volume discounts of
$1.2 million
. The Company offers rebates in the form of promotional allowances to incentivize certain customers to make purchases. The expected value approach is used to estimate the rebate value relative to these allowances which is then applied as a reduction of the transaction price. Included in net sales for the three months ended
September 30, 2018
were reductions for rebates of
$0.8 million
.
Included in net sales are costs associated with programs under which the Company shares the expense of financing certain dealer and distributor inventories, referred to as floor plan expense. This represents interest for a pre-established length of time based on a variable rate (LIBOR) plus a fixed percentage from a contract with a third party financing source for dealer and distributor inventory purchases. Sharing the cost of these financing arrangements is used by the Company as a marketing incentive for customers to purchase the Company's products to have floor stock for end users to purchase. The Company enters into interest rate swaps to hedge cash flows for a portion of its interest rate risk. The financing costs, net of the related gain or loss on interest rate swaps, are recorded at the time of sale as a reduction of net sales. Included in net sales for the three months ended
September 30, 2018
were financing costs, net of the related gain or loss on interest rate swaps, of
$0.7 million
.
The Company estimates the expected number of returns based on historical return rates and reduces revenue by the amount of expected returns.
The Company requires prepayment on sales in limited circumstances, but the contract liability related to prepayments is immaterial at as of September 30, 2018 and represents less than 1% of total sales.
The Company offers a standard warranty that is not sold separately on substantially all products that the Company sells which is accounted for as an assurance warranty. Accordingly, no component of transaction price is allocated to the standard warranty. The Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience.
During the three month period ended September 30, 2018, the Company recorded
$4.1 million
of bad debt expense related to a trade customer declaring bankruptcy.
Disaggregation of Revenue
In the following table, revenue is disaggregated by primary product application. The table also includes a reconciliation of the disaggregated revenue with the reportable segments for the three months ended
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engines
|
|
Products
|
|
Eliminations
|
|
Total
|
|
Commercial
|
|
$
|
36,017
|
|
|
$
|
71,583
|
|
|
$
|
(1,466
|
)
|
|
$
|
106,134
|
|
|
Residential
|
|
83,073
|
|
|
101,459
|
|
|
(11,669
|
)
|
|
172,863
|
|
|
Total
|
|
$
|
119,090
|
|
|
$
|
173,042
|
|
|
$
|
(13,135
|
)
|
|
$
|
278,997
|
|
5
. Earnings (Loss) Per Share
The Company computes earnings (loss) per share using the two-class method, an earnings allocation formula that determines earnings (loss) per share for each class of common stock and participating security according to
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
dividends declared and participation rights in undistributed earnings. The Company’s unvested grants of restricted stock, restricted stock units, and deferred stock awards contain non-forfeitable rights to dividends (whether paid or unpaid), which are required to be treated as participating securities and included in the computation of basic earnings (loss) per share.
Information on earnings (loss) per share is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
2018
|
|
October 1,
2017
|
|
Net Loss
|
|
$
|
(40,986
|
)
|
|
$
|
(15,038
|
)
|
|
Less: Allocation to Participating Securities
|
|
(154
|
)
|
|
(151
|
)
|
|
Net Loss Available to Common Shareholders
|
|
$
|
(41,140
|
)
|
|
$
|
(15,189
|
)
|
|
Average Shares of Common Stock Outstanding
|
|
41,858
|
|
|
42,105
|
|
|
Shares Used in Calculating Diluted Earnings (Loss) Per Share
|
|
41,858
|
|
|
42,105
|
|
|
Basic Earnings (Loss) Per Share
|
|
$
|
(0.98
|
)
|
|
$
|
(0.36
|
)
|
|
Diluted Earnings (Loss) Per Share
|
|
$
|
(0.98
|
)
|
|
$
|
(0.36
|
)
|
The dilutive effect of the potential exercise of outstanding stock-based awards to acquire common shares is calculated using the treasury stock method. The following options to purchase shares of common stock were excluded from the calculation of diluted earnings per share as the exercise prices were greater than the average market price of the common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
2018
|
|
October 1,
2017
|
|
Options to Purchase Shares of Common Stock (in thousands)
|
|
2,286
|
|
|
—
|
|
|
Weighted Average Exercise Price of Options Excluded
|
|
$
|
19.76
|
|
|
$
|
—
|
|
On April 25, 2018, the Board of Directors authorized
$50 million
in funds for use in the common share repurchase program expiring June 30, 2020. As of
September 30, 2018
, the total remaining authorization was approximately
$44.9 million
.
The common share repurchase program authorizes the purchase of shares of the Company's common stock on the open market or in private transactions from time to time, depending on market conditions and certain governing debt covenants. During the
three
months ended
September 30, 2018
, the Company repurchased
282,126
shares on the open market at an average price of
$18.02
per share, as compared to
99,281
shares purchased on the open market at an average price of
$21.20
per share during the
three
months ended
October 1, 2017
.
6
. Investments
Investments represent the Company’s investments in unconsolidated affiliated companies.
The Company concluded that its equity method investments are integral to its business. The equity method investments provide manufacturing and distribution functions, which are important parts of its operations. The Company classifies its equity in earnings of unconsolidated affiliates as a separate line item within Income from Operations.
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
7
. Pension and Postretirement Benefits
The Company has noncontributory defined benefit retirement plans and postretirement plans covering certain employees. The following tables summarize the plans’ income and expense for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
September 30,
2018
|
|
October 1,
2017
|
|
September 30,
2018
|
|
October 1,
2017
|
|
Components of Net Periodic (Income) Expense:
|
|
|
|
|
|
|
|
|
|
Service Cost
|
|
$
|
1,132
|
|
|
$
|
1,501
|
|
|
$
|
34
|
|
|
$
|
43
|
|
|
Interest Cost on Projected Benefit Obligation
|
|
9,937
|
|
|
10,774
|
|
|
580
|
|
|
595
|
|
|
Expected Return on Plan Assets
|
|
(13,589
|
)
|
|
(15,474
|
)
|
|
—
|
|
|
—
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
Prior Service Cost (Credit)
|
|
45
|
|
|
45
|
|
|
(182
|
)
|
|
(359
|
)
|
|
Actuarial Loss
|
|
2,926
|
|
|
3,795
|
|
|
802
|
|
|
870
|
|
|
Net Periodic (Income) Expense
|
|
$
|
451
|
|
|
$
|
641
|
|
|
$
|
1,234
|
|
|
$
|
1,149
|
|
The Company expects to make benefit payments of
$3.5 million
attributable to its non-qualified pension plans for the full year of fiscal
2019
. During the first
three
months of fiscal
2019
, the Company made payments of approximately
$0.9 million
for its non-qualified pension plans. The Company anticipates making benefit payments of approximately
$8.4 million
for its other postretirement benefit plans for the full year of fiscal
2019
. During the first
three
months of fiscal
2019
, the Company made payments of
$2.1 million
for its other postretirement benefit plans.
During the first
three
months of fiscal
2019
, the Company made
no
cash contributions to the qualified pension plan. Based upon current regulations and actuarial studies the Company is required to make
no
minimum contributions to the qualified pension plan in fiscal
2019
. During fiscal 2018, the Company made
$30 million
in voluntary cash contributions to the qualified pension plan. The Company may be required to make further required contributions in future years or the future expected funding requirements may change depending on a variety of factors including the actual return on plan assets, the funded status of the plan in future periods, and changes in actuarial assumptions or regulations.
8
. Stock Incentives
Stock based compensation expense is calculated by estimating the fair value of incentive stock awards granted and amortizing the estimated value over the awards' vesting periods. Stock based compensation expense was
$2.6 million
for the
three
months ended
September 30, 2018
. For the
three
months ended
October 1, 2017
, stock based compensation expense was
$2.3 million
.
9
. Derivative Instruments & Hedging Activities
The Company enters into derivative contracts designated as cash flow hedges to manage certain interest rate, foreign currency and commodity exposures. Company policy allows derivatives to be used only for identifiable exposures and, therefore, the Company does not enter into derivative instruments for trading purposes where the sole objective is to generate profits.
The Company formally designates the financial instrument as a hedge of a specific underlying exposure and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally assesses, both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Derivative financial instruments are recorded within the Condensed Consolidated Balance Sheets as assets or liabilities, measured at fair value. The effective portion of gains or losses on derivatives designated as cash flow hedges are reported as a component of
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
Accumulated Other Comprehensive Income (Loss) (AOCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of a financial instrument's change in fair value is immediately recognized in earnings.
The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is dedesignated because a forecasted transaction is not probable of occurring, or management determines to remove the designation of the cash flow hedge.
In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income related to the hedging relationship.
The Company enters into interest rate swaps to manage a portion of its interest rate risk from financing certain dealer and distributor inventories through a third party financing source. The swaps are designated as cash flow hedges and are used to effectively fix the interest payments to third party financing sources, exclusive of lender spreads, ranging from
0.98%
to
2.00%
for a notional principal amount of
$110.0 million
with expiration dates ranging from
May 2019
through
December 2021
.
The Company periodically enters into foreign currency contracts to hedge the risk from forecasted third party and intercompany sales or payments denominated in foreign currencies. Our primary foreign currency exposures are the Australian Dollar, the Brazilian Real, the Canadian Dollar, the Chinese Renminbi, the Euro, and the Japanese Yen against the U.S. Dollar. These contracts generally do not have a maturity of more than twenty-four months.
The Company uses raw materials that are subject to price volatility. The Company hedges a portion of its exposure to the variability of cash flows associated with commodities used in the manufacturing process by entering into forward purchase contracts or commodity swaps. Derivative contracts designated as cash flow hedges are used by the Company to reduce exposure to variability in cash flows associated with future purchases of natural gas. These contracts generally do not have a maturity of more than thirty-six months.
The Company has considered the counterparty credit risk related to all its interest rate, foreign currency, and commodity derivative contracts and does not deem any counterparty credit risk material at this time.
As of
September 30, 2018
and
July 1, 2018
, the Company had the following outstanding derivative contracts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
Notional Amount
|
|
|
|
|
|
September 30,
2018
|
|
July 1,
2018
|
|
Interest Rate:
|
|
|
|
|
|
|
|
LIBOR Interest Rate (U.S. Dollars)
|
|
Fixed
|
|
110,000
|
|
|
110,000
|
|
|
Foreign Currency:
|
|
|
|
|
|
|
|
Australian Dollar
|
|
Sell
|
|
39,330
|
|
|
35,833
|
|
|
Brazilian Real
|
|
Sell
|
|
16,708
|
|
|
28,822
|
|
|
Canadian Dollar
|
|
Sell
|
|
20,675
|
|
|
14,430
|
|
|
Chinese Renminbi
|
|
Buy
|
|
102,195
|
|
|
62,209
|
|
|
Euro
|
|
Sell
|
|
17,105
|
|
|
32,592
|
|
|
Japanese Yen
|
|
Buy
|
|
1,712,500
|
|
|
587,500
|
|
|
Commodity:
|
|
|
|
|
|
|
|
Natural Gas (Therms)
|
|
Buy
|
|
10,505
|
|
|
10,553
|
|
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
The location and fair value of derivative instruments reported in the Condensed Consolidated Balance Sheets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
Asset (Liability) Fair Value
|
|
|
|
September 30,
2018
|
|
July 1,
2018
|
|
Interest rate contracts
|
|
|
|
|
|
Other Current Assets
|
|
$
|
135
|
|
|
$
|
161
|
|
|
Other Long-Term Assets
|
|
4,009
|
|
|
3,844
|
|
|
Foreign currency contracts
|
|
|
|
|
|
Other Current Assets
|
|
3,188
|
|
|
3,881
|
|
|
Other Long-Term Assets
|
|
—
|
|
|
31
|
|
|
Accrued Liabilities
|
|
(579
|
)
|
|
(195
|
)
|
|
Other Long-Term Liabilities
|
|
(9
|
)
|
|
—
|
|
|
Commodity contracts
|
|
|
|
|
|
Other Current Assets
|
|
21
|
|
|
16
|
|
|
Other Long-Term Assets
|
|
2
|
|
|
5
|
|
|
Accrued Liabilities
|
|
(22
|
)
|
|
(7
|
)
|
|
Other Long-Term Liabilities
|
|
(38
|
)
|
|
(29
|
)
|
|
|
|
$
|
6,707
|
|
|
$
|
7,707
|
|
The effect of derivative instruments on the Condensed Consolidated Statements of Operations and Comprehensive Loss is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
(Loss) on Derivatives, Net of
Taxes (Effective
Portion)
|
|
Classification of
Gain (Loss)
|
|
Amount of Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)
|
|
Recognized in
Earnings
(Ineffective Portion)
|
|
Interest rate contracts
|
|
$
|
106
|
|
|
Net Sales
|
|
$
|
216
|
|
|
$
|
—
|
|
|
Foreign currency contracts - sell
|
|
(331
|
)
|
|
Net Sales
|
|
1,116
|
|
|
—
|
|
|
Foreign currency contracts - buy
|
|
(457
|
)
|
|
Cost of Goods Sold
|
|
(165
|
)
|
|
—
|
|
|
Commodity contracts
|
|
(16
|
)
|
|
Cost of Goods Sold
|
|
4
|
|
|
—
|
|
|
|
|
$
|
(698
|
)
|
|
|
|
$
|
1,171
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 1, 2017
|
|
|
|
Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
(Loss) on Derivatives, Net of
Taxes (Effective
Portion)
|
|
Classification of
Gain (Loss)
|
|
Amount of Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)
|
|
Recognized in
Earnings
(Ineffective Portion)
|
|
Interest rate contracts
|
|
$
|
61
|
|
|
Net Sales
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
Foreign currency contracts - sell
|
|
(476
|
)
|
|
Net Sales
|
|
(1,720
|
)
|
|
—
|
|
|
Foreign currency contracts - buy
|
|
(129
|
)
|
|
Cost of Goods Sold
|
|
(629
|
)
|
|
—
|
|
|
Commodity contracts
|
|
12
|
|
|
Cost of Goods Sold
|
|
(5
|
)
|
|
—
|
|
|
|
|
$
|
(532
|
)
|
|
|
|
$
|
(2,356
|
)
|
|
$
|
—
|
|
During the next twelve months, the estimated net amount of losses on cash flow hedges as of
September 30, 2018
expected to be reclassified out of AOCI into earnings is
$2.9 million
.
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
10
. Fair Value Measurements
The following guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable.
Level 3: Significant inputs to the valuation model are unobservable.
The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of
September 30, 2018
and
July 1, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
September 30,
2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
7,355
|
|
|
$
|
—
|
|
|
$
|
7,355
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
648
|
|
|
$
|
—
|
|
|
$
|
648
|
|
|
$
|
—
|
|
|
|
|
July 1,
2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
7,938
|
|
|
$
|
—
|
|
|
$
|
7,938
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
231
|
|
|
$
|
—
|
|
|
$
|
231
|
|
|
$
|
—
|
|
The fair value for Level 2 measurements are based upon the respective quoted market prices for comparable instruments in active markets, which include current market pricing for forward purchases of commodities, foreign currency forwards, and current interest rates.
The Company has currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States.
The estimated fair value of the Company's Senior Notes (as defined in Note
15
) at
September 30, 2018
and
July 1, 2018
was
$212.8 million
and
$214.0 million
, respectively, compared to the carrying value of
$200.9 million
. The estimated fair value of the Senior Notes is based on quoted market prices for similar instruments and is, therefore, classified as Level 2 within the valuation hierarchy. The carrying value of the Revolver (as defined in Note
15
) approximates fair value since the underlying rate of interest is variable based upon LIBOR rates.
The Company believes that the carrying values of cash and cash equivalents, trade receivables, and accounts payable are reasonable estimates of their fair values at
September 30, 2018
and
July 1, 2018
due to the short-term nature of these instruments.
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
11
. Warranty
The Company recognizes the cost associated with its standard warranty on Engines and Products at the time of sale. The general warranty period begins at the time of sale and typically covers two years, but may vary due, in general, to product type and geographic location. The amount recognized is based on historical failure rates and current claim cost experience. The following is a reconciliation of the changes in accrued warranty costs for the reporting period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
2018
|
|
October 1,
2017
|
|
Beginning Balance
|
|
$
|
45,327
|
|
|
$
|
43,108
|
|
|
Payments
|
|
(6,479
|
)
|
|
(7,715
|
)
|
|
Provision for Current Year Warranties
|
|
2,678
|
|
|
4,895
|
|
|
Changes in Estimates
|
|
33
|
|
|
(675
|
)
|
|
Ending Balance
|
|
$
|
41,559
|
|
|
$
|
39,613
|
|
12
. Income Taxes
On December 22, 2017 the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will impact the Company’s financial statements, including but not limited to a permanent decrease in the corporate federal statutory income tax rate and a one-time charge from the inclusion of foreign earnings that the Company can elect to pay over eight years.
The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with the Company’s analysis of the impact of the Tax Act, a tax expense of approximately
$21.1 million
was recorded in fiscal 2018. This amount consists of an expense resulting from the re-measurement of deferred tax assets and liabilities for the corporate tax rate reduction of approximately
$13.8 million
and an expense related to the inclusion of foreign earnings of approximately
$7.3 million
. The Company has not completed its accounting for the income tax effects of certain elements of the Tax Act; however, reasonable estimates were made in order to record provisional adjustments for areas where analysis is not yet complete. For instance, the tax expense of approximately
$13.8 million
related to the re-measurement of the Company’s deferred tax assets and liabilities from the enacted corporate tax rate reduction may be affected by other analyses related to the Tax Act, including but not limited to the transition tax, expenditures that qualify for immediate expensing and the state tax effect of adjustments made to federal temporary differences. Additionally, in calculating the approximate tax expense of
$7.3 million
related to the inclusion of foreign earnings, the Company is required to determine various components including the amount of accumulated and current earnings and profits of its foreign subsidiaries, the amount of foreign income taxes paid on these earnings, and the cash and equivalents held by its foreign subsidiaries at various prescribed measurement dates. The Company has made a reasonable estimate of this expense and will continue to gather additional information to more precisely compute the expense.
The Company is also in the process of evaluating its permanent reinvestment assertions since the Tax Act may provide opportunity to repatriate overseas cash to the U.S. at a lower tax cost. There is a dividends received deduction available for certain foreign distributions under the Tax Act, but certain foreign earnings remain subject to withholding taxes upon repatriation. As of September 30, 2018, the Company has analyzed its global working capital and cash requirements and the potential tax liabilities attributable to repatriation in regards to its permanent reinvestment assertion. During fiscal 2018, the Company removed its permanent reinvestment assertion on approximately
$33 million
of its foreign earnings and made distributions from its foreign earnings related to the
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
assertion removal in the second quarter of approximately
$18 million
. The Company expects to repatriate approximately an additional
$15 million
of foreign earnings in fiscal 2019. The Company continues to evaluate its cash needs and strategic opportunities to repatriate cash. The Company was able to make a reasonable estimate of the tax effects of the planned repatriation, and the provisional estimate has been recorded in the financials including withholding taxes and currency gain and loss. The Company will continue to gather additional information to more precisely compute the tax impact. For the remainder of its foreign earnings, the Company has yet to determine whether it intends to change its prior assertion and repatriate earnings. Accordingly, deferred taxes attributable to its investments in its foreign subsidiaries have not yet been recorded. The tax effects of any change in the Company’s prior assertion will be recorded in the period that analysis is completed and a reasonable estimate is able to be calculated, and any unrecognized deferred tax liability for temporary differences related to its foreign investments will be disclosed if practicable.
When calculating the income tax provision, the Company uses an estimate of the annual effective tax rate based upon information known at each interim period. The actual effective tax rate is adjusted each quarter based upon changes to the forecast as compared to the beginning of the fiscal year and each following interim period.
The effective tax rate for the
first
quarter of fiscal 2019 was
30.5%
, compared to
28.6%
for the same period last year. As a result of the Tax Act, the Company is subject to a U.S. federal statutory corporate income tax rate of
28%
for the fiscal year ending July 1, 2018 and a U.S. federal statutory corporate income tax rate of
21%
for the fiscal year ending June 30, 2019 and future fiscal years. The tax rates for the first quarters of fiscal 2019 and 2018 were primarily driven by the federal research and development credit.
13
. Commitments and Contingencies
The Company is subject to various unresolved legal actions that arise in the normal course of its business. These actions typically relate to product liability (including asbestos-related liability), patent and trademark matters, and disputes with customers, suppliers, distributors and dealers, competitors and employees.
On May 12, 2010, Exmark Manufacturing Company, Inc. filed suit against Briggs & Stratton Power Products Group, LLC (“BSPPG”), a wholly owned subsidiary of the Company that was subsequently merged with and into the Company on January 1, 2017 (Case No. 8:10CV187, U.S. District Court for the District of Nebraska), alleging that certain Ferris® and Snapper Pro® mower decks infringed an Exmark mower deck patent. Exmark sought damages relating to sales since May 2004, attorneys’ fees, and enhanced damages. As a result of a reexamination proceeding in 2012, the United States Patent and Trademark Office (“USPTO”) initially rejected the asserted Exmark claims as invalid. However, in 2014, that decision was reversed by the USPTO on appeal by Exmark. Following discovery, each of BSPPG and Exmark filed several motions for summary judgment in the Nebraska district court, which were decided on July 28, 2015. The court concluded that older mower deck designs infringed Exmark’s patent, leaving for trial the issues of whether current designs infringed, the amount of damages, and whether any infringement was willful.
The trial began on September 8, 2015, and on September 18, 2015, the jury returned its verdict, finding that BSPPG’s current mower deck designs do not infringe the Exmark patent. As to the older designs, the jury awarded Exmark
$24.3 million
in damages and found that the infringement was willful, allowing the judge to enhance the jury’s damages award post-trial by up to three times. Also on September 18, 2015, the U.S. Court of Appeals for the Federal Circuit issued its decision in an unrelated case, SCA Hygiene Products Aktiebolag SCA Personal Care, Inc. v. First Quality Baby Products, LLC, et al. (Case No. 2013-1564) (“SCA”), confirming the availability of laches as a defense to patent infringement claims. Laches is an equitable doctrine that may bar a patent owner from obtaining damages prior to commencing suit, in circumstances in which the owner knows or should have known its patent was being infringed for more than six years. Although the court in the Exmark case ruled before trial that BSPPG could not rely on the defense of laches, as a result of the subsequent SCA decision, the court held a bench trial on that defense on October 21 and 22, 2015. On May 2, 2016, the United States Supreme Court agreed to review the SCA decision.
The parties submitted post-trial motions and briefing related to: damages; willfulness; laches; attorney fees; enhanced damages; and prejudgment/post-judgment interest and costs. All post-trial motions and briefing were completed on December 18, 2015. On May 11, 2016, the court ruled on those post-trial motions and entered judgment against BSPPG and in favor of Exmark in the amount of
$24.3 million
in compensatory damages, an
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
additional
$24.3 million
in enhanced damages, and
$1.5 million
in pre-judgment interest along with post-judgment interest and costs to be determined. The Company strongly disagrees with the jury verdict, certain rulings made before and during trial, and the May 11, 2016 post-trial rulings. BSPPG appealed to the U.S. Court of Appeals for the Federal Circuit on several bases, including the issues of obviousness and invalidity of Exmark’s patent, the damages calculation, willfulness and laches.
Following briefing of the appeal and prior to oral argument, the United States Supreme Court overturned the SCA decision, ruling that laches is not available in a patent infringement case for damages. That ruling eliminated laches as one basis for BSPPG’s appeal of the Exmark case. The appellate court held a hearing on the remainder of BSPPG’s appeal on April 5, 2017 and issued its decision on January 12, 2018. The appellate court found that the district court erred in granting summary judgment concerning the patent’s validity and remanded that issue to the district court for reconsideration. The appellate court also vacated the jury’s damages award and the district court’s award of enhanced damages, remanding the case to the district court for a new trial on damages and reconsideration on willfulness. The appellate court affirmed the district court rulings in all other respects. The new trial has been scheduled to begin on December 10, 2018. Each of the Company and Exmark filed several pre-trial motions in the Nebraska district court. On October 12, 2018, as part of the pretrial ruling, the court reaffirmed the validity of Exmark’s patent. The court has yet to issue its opinion on willfulness. The issues of damages and potentially willfulness will be addressed at the new trial.
In assessing whether the Company should accrue a liability in its financial statements as a result of the May 11, 2016 post-trial rulings and related matters, the Company considered various factors, including the legal and factual circumstances of the case, the trial record, the post-trial orders, the current status of the proceedings, applicable law, the views of legal counsel, the decision of the appellate court and the Nebraska district court’s October 12, 2018 ruling. As a result of this review, the Company has concluded that a loss from this case is not probable and reasonably estimable at this time and, therefore, a liability has not been recorded with respect to this case as of September 30, 2018.
Although it is not possible to predict with certainty the outcome of this and other unresolved legal actions or the range of possible loss, the Company believes the unresolved legal actions will not have a material adverse effect on its results of operations, financial position or cash flows.
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
14
. Segment Information
The Company aggregates operating segments that have similar economic characteristics, products, production processes, types or classes of customers and distribution methods into reportable segments. The Company concluded that it operates two reportable segments: Engines and Products. The Company uses “segment income (loss)” as the primary measure to evaluate operating performance and allocate capital resources for the Engines and Products Segments. For all periods presented, segment income (loss) is equal to income (loss) from operations. Summarized segment data is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
2018
|
|
October 1,
2017
|
|
NET SALES:
|
|
|
|
|
|
Engines
|
|
$
|
119,090
|
|
|
$
|
162,746
|
|
|
Products
|
|
173,042
|
|
|
186,597
|
|
|
Inter-Segment Eliminations
|
|
(13,135
|
)
|
|
(20,249
|
)
|
|
Total*
|
|
$
|
278,997
|
|
|
$
|
329,094
|
|
|
* International sales included in net sales based on product shipment destination
|
|
$
|
88,526
|
|
|
$
|
114,637
|
|
|
GROSS PROFIT:
|
|
|
|
|
|
Engines
|
|
$
|
16,042
|
|
|
$
|
31,219
|
|
|
Products
|
|
27,556
|
|
|
35,707
|
|
|
Inter-Segment Eliminations
|
|
156
|
|
|
(661
|
)
|
|
Total
|
|
$
|
43,754
|
|
|
$
|
66,265
|
|
|
SEGMENT INCOME (LOSS):
|
|
|
|
|
|
Engines
|
|
$
|
(44,408
|
)
|
|
$
|
(19,590
|
)
|
|
Products
|
|
(9,880
|
)
|
|
3,658
|
|
|
Inter-Segment Eliminations
|
|
156
|
|
|
(661
|
)
|
|
Total
|
|
$
|
(54,132
|
)
|
|
$
|
(16,593
|
)
|
|
|
|
|
|
|
Pre-tax business optimization charges, bad debt expense related to a major retailer bankruptcy, litigation settlement charge, and acquisition integration activities included in gross profit were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
2018
|
|
October 1,
2017
|
|
Engines
|
|
$
|
423
|
|
|
$
|
425
|
|
|
Products
|
|
2,880
|
|
|
768
|
|
|
Total
|
|
$
|
3,303
|
|
|
$
|
1,193
|
|
Pre-tax business optimization charges, bad debt expense related to a major retailer bankruptcy, litigation settlement charge, and acquisition integration activities included in segment income (loss) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
2018
|
|
October 1,
2017
|
|
Engines
|
|
$
|
14,488
|
|
|
$
|
2,331
|
|
|
Products
|
|
11,641
|
|
|
2,906
|
|
|
Total
|
|
$
|
26,129
|
|
|
$
|
5,237
|
|
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
15
. Debt
The following is a summary of the Company’s indebtedness (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
July 1,
2018
|
|
Multicurrency Credit Agreement
|
|
$
|
201,406
|
|
|
$
|
48,036
|
|
|
Total Short-Term Debt
|
|
$
|
201,406
|
|
|
$
|
48,036
|
|
|
|
|
|
|
|
|
Note Payable (NMTC transaction)
|
|
$
|
7,685
|
|
|
$
|
7,685
|
|
|
Unamortized Debt Issuance Costs associated with Note Payable
|
|
968
|
|
|
1,009
|
|
|
|
|
$
|
6,717
|
|
|
$
|
6,676
|
|
|
|
|
|
|
|
|
6.875% Senior Notes
|
|
$
|
200,888
|
|
|
$
|
200,888
|
|
|
Unamortized Debt Issuance Costs associated with 6.875% Senior Notes
|
|
750
|
|
|
934
|
|
|
|
|
$
|
200,138
|
|
|
$
|
199,954
|
|
|
Total Long-Term Debt
|
|
$
|
206,855
|
|
|
$
|
206,630
|
|
On December 20, 2010, the Company issued
$225 million
of
6.875%
Senior Notes ("Senior Notes") due
December 15, 2020
. The Company has repurchased
$24 million
of Senior Notes after receiving unsolicited offers from bondholders since issuance of the Senior Notes. There were
no
repurchases during the
three
month periods ended
September 30, 2018
or October 1, 2017.
On March 25, 2016, the Company entered into a
$500 million
amended and restated multicurrency credit agreement (the “Revolver”) that matures on
March 25, 2021
. The Revolver amended and restated the Company’s $500 million multicurrency credit agreement dated as of
October 13, 2011
(as previously amended), which would have matured on
October 21, 2018
. The initial maximum availability under the Revolver is
$500 million
. Availability under the Revolver is reduced by outstanding letters of credit. The Company may from time to time increase the maximum availability under the revolving credit facility by up to
$250 million
if certain conditions are satisfied. As of
September 30, 2018
and
July 1, 2018
,
$201.4 million
and
$48.0 million
was outstanding under the Revolver, respectively. The Company classifies debt issuance costs related to the Revolver as an asset, regardless of whether it has any outstanding borrowings on the line of credit arrangements.
The Senior Notes and the Revolver contain restrictive covenants. These covenants include restrictions on the ability of the Company and/or certain subsidiaries to pay dividends, repurchase equity interests of the Company and certain subsidiaries, incur indebtedness, create liens, consolidate and merge and dispose of assets, and enter into transactions with the Company's affiliates. The Revolver contains financial covenants that require the Company to maintain a minimum interest coverage ratio and impose on the Company a maximum average leverage ratio.
On August 16, 2017, the Company entered into a financing transaction with SunTrust Community Capital, LLC (“SunTrust”) related to the Company's business optimization program under the New Markets Tax Credit (“NMTC”) program. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) and is intended to induce capital investment in qualified low-income communities. The Act permits taxpayers to claim credits against their Federal income taxes for qualified investments in the equity of community development entities (“CDEs”). CDEs are privately managed investment institutions that are certified to make qualified low-income community investments (“QLICIs”).
In connection with the financing, one of the Company’s subsidiaries loaned approximately
$16 million
to an investment fund, and simultaneously, SunTrust contributed approximately
$8 million
to the investment fund. SunTrust is entitled to substantially all of the benefits derived from the NMTCs. SunTrust’s contribution, net of syndication fees, is included in Other Long-Term Liabilities on the consolidated balance sheets. The Company incurred approximately
$1.2 million
in new debt issuance costs, which are being amortized over the life of the note payable. The investment fund contributed the proceeds to certain CDEs, which, in turn, loaned the funds to the Company, as partial financing for the business optimization program. The proceeds of the loans from the CDEs (including loans representing the capital contribution made by SunTrust, net of syndication fees) are restricted for
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
use on the project. Restricted cash of $
2.3 million
held by the Company at
September 30, 2018
is included in Prepaid Expenses and Other Current Assets in the accompanying consolidated balance sheet.
This financing also includes a put/call provision that can be exercised beginning in August 2024 whereby the Company may be obligated or entitled to repurchase SunTrust’s interest in the investment fund for a de minimis amount.
The Company has determined that the financing arrangement is a variable interest entity (“VIE”)
and has consolidated the VIE in accordance with the accounting standard for consolidation.
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
16
. Acquisitions
On July 31, 2018 the Company completed a cash acquisition of certain assets of Hurricane Inc., a designer and manufacturer of commercial stand-on leaf and debris blowers. The purchase price is comprised of
$8.7 million
of cash consideration and
$2.0 million
of contingent cash consideration. The Company has accounted for the acquisition in accordance with ASC 805 and it has been included in the Products segment. At September 30, 2018, the preliminary purchase price allocation resulted in the recognition of
$6.2 million
of goodwill, and
$4.6 million
of intangible assets.