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 engine 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 notes 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 Company's results of operations and financial position have been included. All of these adjustments are of a normal recurring nature, except as otherwise noted.
The consolidated financial statements have been prepared assuming the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. See note 16 for additional information.
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 August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting and Hedging Activities. ASU No. 2017-12 better aligns a Company's risk management activities and financial reporting for hedging relationships, in addition to simplifying certain aspects of ASC Topic 815. The guidance was effective beginning fiscal year 2020, with early adoption permitted. The Company adopted this ASU prospectively effective July 1, 2019 and this standard did not have a material impact on the Company's Condensed Consolidated Financial Statements.
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 adopted this ASU prospectively effective July 1, 2019.
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 Company adopted the guidance beginning fiscal year 2020. The Company's project plan involved identifying and implementing appropriate changes to its business processes, systems and controls as well as compiling and evaluating lease arrangements to support lease accounting and disclosures under Topic 842. Upon adoption, the Company recorded $93.0 million of right of use assets and lease obligation liabilities on the consolidated balance sheet. The Company elected the practical expedient package which allows the Company to maintain historical lease classification and not reassess initial direct costs. There was no impact on existing financial debt covenants. See note 15 for additional information on lease accounting.
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 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 was 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 June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which requires the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The objective of ASU No. 2016-01 is to provide financial statement users with additional information about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. ASU No. 2016-13 was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of this ASU.
3. Accumulated Other Comprehensive Income (Loss)
The following tables set forth the changes in accumulated other comprehensive income (loss) (in thousands):
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 29, 2020
|
|
|
|
|
|
|
|
|
|
|
Cumulative Translation Adjustments
|
|
Derivative Financial Instruments
|
|
Pension and Postretirement Benefit Plans
|
|
|
|
Total
|
Beginning Balance
|
|
$
|
(34,024)
|
|
|
$
|
(8,454)
|
|
|
$
|
(246,505)
|
|
|
|
|
$
|
(288,983)
|
|
Other Comprehensive Income (Loss) Before Reclassification
|
|
(12,332)
|
|
|
(10,600)
|
|
|
(12)
|
|
|
|
|
(22,944)
|
|
Income Tax Expense (Benefit)
|
|
—
|
|
|
2,544
|
|
|
3
|
|
|
|
|
2,547
|
|
Net Other Comprehensive Income (Loss) Before Reclassifications
|
|
(12,332)
|
|
|
(8,056)
|
|
|
(9)
|
|
|
|
|
(20,397)
|
|
Reclassifications:
|
|
|
|
|
|
|
|
|
|
|
Realized (Gains) Losses - Foreign Currency Contracts (1)
|
|
—
|
|
|
(446)
|
|
|
—
|
|
|
|
|
(446)
|
|
Realized (Gains) Losses - Commodity Contracts (1)
|
|
—
|
|
|
175
|
|
|
—
|
|
|
|
|
175
|
|
Realized (Gains) Losses - Interest Rate Swaps (1)
|
|
—
|
|
|
104
|
|
|
—
|
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of Prior Service Costs (Credits) (2)
|
|
—
|
|
|
—
|
|
|
19
|
|
|
|
|
19
|
|
Amortization of Actuarial Losses (2)
|
|
—
|
|
|
—
|
|
|
4,739
|
|
|
|
|
4,739
|
|
Total Reclassifications Before Tax
|
|
—
|
|
|
(167)
|
|
|
4,758
|
|
|
|
|
4,591
|
|
Income Tax Expense (Benefit)
|
|
—
|
|
|
40
|
|
|
(1,142)
|
|
|
|
|
(1,102)
|
|
Net Reclassifications
|
|
—
|
|
|
(127)
|
|
|
3,616
|
|
|
|
|
3,489
|
|
Other Comprehensive Income (Loss)
|
|
(12,332)
|
|
|
(8,183)
|
|
|
3,607
|
|
|
|
|
(16,908)
|
|
Ending Balance
|
|
$
|
(46,356)
|
|
|
$
|
(16,637)
|
|
|
$
|
(242,898)
|
|
|
|
|
$
|
(305,891)
|
|
(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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Cumulative Translation Adjustments
|
|
Derivative Financial Instruments
|
|
Pension and Postretirement Benefit Plans
|
|
|
|
Total
|
Beginning Balance
|
|
$
|
(32,354)
|
|
|
$
|
2,008
|
|
|
$
|
(224,422)
|
|
|
|
|
$
|
(254,768)
|
|
Other Comprehensive Income (Loss) Before Reclassification
|
|
1,196
|
|
|
(7,393)
|
|
|
—
|
|
|
|
|
(6,197)
|
|
Income Tax Expense (Benefit)
|
|
—
|
|
|
1,848
|
|
|
—
|
|
|
|
|
1,848
|
|
Net Other Comprehensive Income (Loss) Before Reclassifications
|
|
1,196
|
|
|
(5,545)
|
|
|
—
|
|
|
|
|
(4,349)
|
|
Reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
Realized (Gains) Losses - Foreign Currency Contracts (1)
|
|
—
|
|
|
2,190
|
|
|
—
|
|
|
|
|
2,190
|
|
Realized (Gains) Losses - Commodity Contracts (1)
|
|
—
|
|
|
(20)
|
|
|
—
|
|
|
|
|
(20)
|
|
Realized (Gains) Losses - Interest Rate Swaps (1)
|
|
—
|
|
|
(320)
|
|
|
—
|
|
|
|
|
(320)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of Prior Service Costs (Credits) (2)
|
|
—
|
|
|
—
|
|
|
(137)
|
|
|
|
|
(137)
|
|
Amortization of Actuarial Losses (2)
|
|
—
|
|
|
—
|
|
|
3,700
|
|
|
|
|
3,700
|
|
Total Reclassifications Before Tax
|
|
—
|
|
|
1,850
|
|
|
3,563
|
|
|
|
|
5,413
|
|
Income Tax Expense (Benefit)
|
|
—
|
|
|
(462)
|
|
|
(855)
|
|
|
|
|
(1,317)
|
|
Net Reclassifications
|
|
—
|
|
|
1,388
|
|
|
2,708
|
|
|
|
|
4,096
|
|
Other Comprehensive Income (Loss)
|
|
1,196
|
|
|
(4,157)
|
|
|
2,708
|
|
|
|
|
(253)
|
|
Ending Balance
|
|
$
|
(31,158)
|
|
|
$
|
(2,149)
|
|
|
$
|
(221,714)
|
|
|
|
|
$
|
(255,021)
|
|
(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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 29, 2020
|
|
|
|
|
|
|
|
|
|
|
Cumulative Translation Adjustments
|
|
Derivative Financial Instruments
|
|
Pension and Postretirement Benefit Plans
|
|
|
|
Total
|
Beginning Balance
|
|
$
|
(31,767)
|
|
|
$
|
(7,066)
|
|
|
$
|
(253,717)
|
|
|
|
|
$
|
(292,550)
|
|
Other Comprehensive Income (Loss) Before Reclassification
|
|
(14,589)
|
|
|
(12,399)
|
|
|
(39)
|
|
|
|
|
(27,027)
|
|
Income Tax Expense (Benefit)
|
|
|
|
|
2,903
|
|
|
9
|
|
|
|
|
2,912
|
|
Net Other Comprehensive Income (Loss) Before Reclassifications
|
|
(14,589)
|
|
|
(9,496)
|
|
|
(30)
|
|
|
|
|
(24,115)
|
|
Reclassifications:
|
|
|
|
|
|
|
|
|
|
|
Realized (Gains) Losses - Foreign Currency Contracts (1)
|
|
—
|
|
|
(899)
|
|
|
|
|
|
|
(899)
|
|
Realized (Gains) Losses - Commodity Contracts (1)
|
|
—
|
|
|
320
|
|
|
|
|
|
|
320
|
|
Realized (Gains) Losses - Interest Rate Swaps (1)
|
|
—
|
|
|
384
|
|
|
|
|
|
|
384
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of Prior Service Costs (Credits) (2)
|
|
—
|
|
|
|
|
58
|
|
|
|
|
58
|
|
Amortization of Actuarial Losses (2)
|
|
—
|
|
|
|
|
14,216
|
|
|
|
|
14,216
|
|
Total Reclassifications Before Tax
|
|
—
|
|
|
(195)
|
|
|
14,274
|
|
|
|
|
14,079
|
|
Income Tax Expense (Benefit)
|
|
—
|
|
|
120
|
|
|
(3,425)
|
|
|
|
|
(3,305)
|
|
Net Reclassifications
|
|
—
|
|
|
(75)
|
|
|
10,849
|
|
|
|
|
10,774
|
|
Other Comprehensive Income (Loss)
|
|
(14,589)
|
|
|
(9,571)
|
|
|
10,819
|
|
|
|
|
(13,341)
|
|
Ending Balance
|
|
$
|
(46,356)
|
|
|
$
|
(16,637)
|
|
|
$
|
(242,898)
|
|
|
|
|
$
|
(305,891)
|
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(2,230)
|
|
|
(10,201)
|
|
|
—
|
|
|
|
|
(12,431)
|
|
Income Tax Benefit (Expense)
|
|
—
|
|
|
2,550
|
|
|
—
|
|
|
|
|
2,550
|
|
Net Other Comprehensive Income (Loss) Before Reclassifications
|
|
(2,230)
|
|
|
(7,651)
|
|
|
—
|
|
|
|
|
(9,881)
|
|
Reclassifications:
|
|
|
|
|
|
|
|
|
|
|
Realized (Gains) Losses - Foreign Currency Contracts (1)
|
|
—
|
|
|
(353)
|
|
|
—
|
|
|
|
|
(353)
|
|
Realized (Gains) Losses - Commodity Contracts (1)
|
|
—
|
|
|
(160)
|
|
|
—
|
|
|
|
|
(160)
|
|
Realized (Gains) Losses - Interest Rate Swaps (1)
|
|
—
|
|
|
(798)
|
|
|
—
|
|
|
|
|
(798)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of Prior Service Costs (Credits) (2)
|
|
—
|
|
|
—
|
|
|
(413)
|
|
|
|
|
(413)
|
|
Amortization of Actuarial Losses (2)
|
|
—
|
|
|
—
|
|
|
11,099
|
|
|
|
|
11,099
|
|
Total Reclassifications Before Tax
|
|
—
|
|
|
(1,311)
|
|
|
10,686
|
|
|
|
|
9,375
|
|
Income Tax Expense (Benefit)
|
|
—
|
|
|
327
|
|
|
(2,570)
|
|
|
|
|
(2,243)
|
|
Net Reclassifications
|
|
—
|
|
|
(984)
|
|
|
8,116
|
|
|
|
|
7,132
|
|
Other Comprehensive Income (Loss)
|
|
(2,230)
|
|
|
(8,635)
|
|
|
8,116
|
|
|
|
|
(2,749)
|
|
Ending Balance
|
|
$
|
(31,158)
|
|
|
$
|
(2,149)
|
|
|
$
|
(221,714)
|
|
|
|
|
$
|
(255,021)
|
|
(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, Revenue from Contracts with Customers, 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 such 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 mass retail channel, and the rental channel. These channels primarily serve 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 typically customized for each customer; therefore, there is an alternative use for such 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 and nine months ended March 29, 2020 were reductions for tiered volume discounts of $4.7 million and $8.4 million, respectively. Included in net sales for the three and nine months ended March 31, 2019 were reductions for tiered volume discounts of $7.1 million and $9.5 million, respectively. 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 and nine months ended March 29, 2020 was a decrease for rebates of $2.7 million and $4.8 million, respectively. Included in net sales for the three and nine months ended March 31, 2019 was a decrease for rebates of $2.6 million and $4.5 million, respectively.
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 and nine months ended March 29, 2020 were financing costs, net of the related gain or loss on interest rate swaps, of $4.4 million and $9.8 million, respectively. Included in net sales for the three and nine months ended March 29, 2019 were financing costs, net of the related gain or loss on interest rate swaps, of $7.9 million and $9.5 million, respectively.
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 was immaterial as of March 29, 2020 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 the 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 nine month period ended March 31, 2019, the Company recorded $4.1 million of bad debt expense related to a trade customer declaring bankruptcy. No material bad debt expense was recorded during the three month period ended March 31, 2019. No material bad debt expense was recorded during the three and nine month periods ended March 29, 2020.
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 periods indicated, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 29, 2020
|
|
|
|
|
|
|
|
|
Engines
|
|
Products
|
|
Eliminations
|
|
Total
|
Commercial
|
|
$
|
58,455
|
|
|
$
|
84,367
|
|
|
$
|
(14,998)
|
|
|
$
|
127,824
|
|
Residential
|
|
211,164
|
|
|
145,001
|
|
|
(10,454)
|
|
|
345,711
|
|
Total
|
|
$
|
269,619
|
|
|
$
|
229,368
|
|
|
$
|
(25,452)
|
|
|
$
|
473,535
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
Engines
|
|
Products
|
|
Eliminations
|
|
Total
|
Commercial
|
|
$
|
56,898
|
|
|
$
|
110,533
|
|
|
$
|
(6,464)
|
|
|
$
|
160,967
|
|
Residential
|
|
279,345
|
|
|
160,676
|
|
|
(20,792)
|
|
|
419,229
|
|
Total
|
|
$
|
336,243
|
|
|
$
|
271,209
|
|
|
$
|
(27,256)
|
|
|
$
|
580,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 29, 2020
|
|
|
|
|
|
|
|
|
Engines
|
|
Products
|
|
Eliminations
|
|
Total
|
Commercial
|
|
$
|
147,734
|
|
|
$
|
260,275
|
|
|
$
|
(29,666)
|
|
|
$
|
378,343
|
|
Residential
|
|
474,429
|
|
|
406,718
|
|
|
(34,295)
|
|
|
846,852
|
|
Total
|
|
$
|
622,163
|
|
|
$
|
666,993
|
|
|
$
|
(63,961)
|
|
|
$
|
1,225,195
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
Engines
|
|
Products
|
|
Eliminations
|
|
Total
|
Commercial
|
|
$
|
151,103
|
|
|
$
|
281,882
|
|
|
$
|
(15,390)
|
|
|
$
|
417,595
|
|
Residential
|
|
576,248
|
|
|
416,997
|
|
|
(46,185)
|
|
|
947,060
|
|
Total
|
|
$
|
727,351
|
|
|
$
|
698,879
|
|
|
$
|
(61,575)
|
|
|
$
|
1,364,655
|
|
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 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
|
|
|
|
Nine Months Ended
|
|
|
|
|
March 29,
2020
|
|
March 31,
2019
|
|
March 29,
2020
|
|
March 31,
2019
|
Net Income (Loss)
|
|
$
|
(144,606)
|
|
|
$
|
8,005
|
|
|
$
|
(193,587)
|
|
|
$
|
(35,543)
|
|
Less: Allocation to Participating Securities
|
|
—
|
|
|
(196)
|
|
|
(127)
|
|
|
(455)
|
|
Net Income (Loss)
Available to Common Shareholders
|
|
$
|
(144,606)
|
|
|
$
|
7,809
|
|
|
$
|
(193,714)
|
|
|
$
|
(35,998)
|
|
Average Shares of Common Stock Outstanding
|
|
41,726
|
|
|
41,527
|
|
|
41,685
|
|
|
41,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Used in Calculating Diluted Earnings (Loss) Per Share
|
|
41,726
|
|
|
41,527
|
|
|
41,685
|
|
|
41,691
|
|
Basic Earnings (Loss) Per Share
|
|
$
|
(3.47)
|
|
|
$
|
0.19
|
|
|
$
|
(4.65)
|
|
|
$
|
(0.86)
|
|
Diluted Earnings (Loss) Per Share
|
|
$
|
(3.47)
|
|
|
$
|
0.19
|
|
|
$
|
(4.65)
|
|
|
$
|
(0.86)
|
|
The dilutive effect of the potential exercise of outstanding stock-based awards to acquire common shares is calculated using the treasury stock method.
As a result of the Company incurring a net loss for the three and nine months ended March 29, 2020, potential incremental common shares of 518,531 and 562,556, respectively, were excluded from the calculation of diluted earnings (loss) per share because the effect would have been anti-dilutive.
On April 25, 2018, the Board of Directors authorized up to $50 million in funds for use in the common share repurchase program with an expiration date of June 30, 2020. As of March 29, 2020, the total remaining authorization was approximately $38.1 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 nine months ended March 29, 2020, the Company repurchased no shares on the open market, as compared to 725,321 shares purchased on the open market at an average price of $16.46 per share during the nine months ended March 31, 2019. The Company does not intend to repurchase shares through the conclusion of this authorization to support its efforts to deleverage.
6. Investments
Investments represent the Company’s investments in unconsolidated affiliated companies. The decrease in the investment balance from $49.6 million at June 30, 2019 to $30.5 million at March 29, 2020 is primarily due to the ramp down of the Company's Japanese joint venture that formerly produced Vanguard engines.
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.
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
|
|
|
|
|
March 29,
2020
|
|
March 31,
2019
|
|
March 29,
2020
|
|
March 31,
2019
|
Components of Net Periodic (Income) Expense:
|
|
|
|
|
|
|
|
|
Service Cost (Credit)
|
|
$
|
1,213
|
|
|
$
|
1,157
|
|
|
$
|
21
|
|
|
$
|
26
|
|
Interest Cost on Projected Benefit Obligation
|
|
8,660
|
|
|
9,930
|
|
|
451
|
|
|
583
|
|
Expected Return on Plan Assets
|
|
(12,820)
|
|
|
(13,582)
|
|
|
—
|
|
|
—
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Service Cost (Credit)
|
|
19
|
|
|
45
|
|
|
—
|
|
|
(182)
|
|
Actuarial Loss
|
|
3,987
|
|
|
2,910
|
|
|
752
|
|
|
790
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Expense
|
|
$
|
1,059
|
|
|
$
|
460
|
|
|
$
|
1,224
|
|
|
$
|
1,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Other Postretirement Benefits
|
|
|
|
|
Nine Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
March 29,
2020
|
|
March 31,
2019
|
|
March 29,
2020
|
|
March 31,
2019
|
Components of Net Periodic (Income) Expense:
|
|
|
|
|
|
|
|
|
Service Cost (Credit)
|
|
$
|
3,660
|
|
|
$
|
3,427
|
|
|
$
|
62
|
|
|
$
|
79
|
|
Interest Cost on Projected Benefit Obligation
|
|
25,979
|
|
|
29,790
|
|
|
1,354
|
|
|
1,749
|
|
Expected Return on Plan Assets
|
|
(38,461)
|
|
|
(40,745)
|
|
|
—
|
|
|
—
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Service Cost (Credit)
|
|
58
|
|
|
134
|
|
|
—
|
|
|
(547)
|
|
Actuarial Loss
|
|
11,961
|
|
|
8,729
|
|
|
2,255
|
|
|
2,370
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Expense
|
|
$
|
3,197
|
|
|
$
|
1,335
|
|
|
$
|
3,671
|
|
|
$
|
3,651
|
|
The Company expects to make benefit payments of $3.5 million attributable to its non-qualified pension plans for the full year of fiscal 2020. During the first nine months of fiscal year 2020, the Company made payments of approximately $2.9 million for its non-qualified pension plans. The Company anticipates making benefit payments of approximately $6.3 million for its other postretirement benefit plans for the full year of fiscal 2020. During the first nine months of fiscal year 2020, the Company made payments of $5.5 million for its other postretirement benefit plans.
During the first nine months of fiscal year 2020, 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 year 2020. 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 period. Stock based compensation expense was $1.8 million and $4.5 million for the three and nine month periods ended March 29, 2020. For the three and nine months ended March 31, 2019, stock based compensation expense was $2.3 million and $5.5 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 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 2.83% for a notional principal amount of $110.0 million with expiration dates ranging from July 2021 through June 2024.
In the second quarter of fiscal year 2019, the Company entered into interest rate swaps to manage a portion of its interest rate risk from anticipated floating rate, LIBOR based indebtedness, exclusive of lender spreads, ranging from 2.47% to 3.13%. The swaps are designated as cash flow hedges, in an aggregate amount of $120 million, with forward starting dates between June and December 2019 and termination dates between June 2023 and December 2029.
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. The Company's 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 of its interest rate, foreign currency, and commodity derivative contracts and does not deem any counterparty credit risk material at this time.
As of March 29, 2020 and June 30, 2019, the Company had the following outstanding derivative contracts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
Notional Amount
|
|
|
|
|
|
|
March 29,
2020
|
|
June 30,
2019
|
Interest Rate:
|
|
|
|
|
|
|
LIBOR Interest Rate (U.S. Dollars)
|
|
Fixed
|
|
230,000
|
|
|
230,000
|
|
Foreign Currency:
|
|
|
|
|
|
|
Australian Dollar
|
|
Sell
|
|
6,871
|
|
|
17,611
|
|
Brazilian Real
|
|
Sell
|
|
—
|
|
|
13,436
|
|
Canadian Dollar
|
|
Sell
|
|
15,675
|
|
|
14,610
|
|
Chinese Renminbi
|
|
Buy
|
|
81,650
|
|
|
70,555
|
|
Euro
|
|
Sell
|
|
6,540
|
|
|
2,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas (Therms)
|
|
Buy
|
|
3,462
|
|
|
7,627
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
March 29,
2020
|
|
June 30,
2019
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
Other Long-Term Assets
|
|
—
|
|
|
876
|
|
|
|
|
|
|
Other Long-Term Liabilities
|
|
(24,007)
|
|
|
(11,634)
|
|
Foreign currency contracts
|
|
|
|
|
Other Current Assets
|
|
1,268
|
|
|
672
|
|
Other Long-Term Assets
|
|
2
|
|
|
16
|
|
Accrued Liabilities
|
|
(99)
|
|
|
(179)
|
|
Other Long-Term Liabilities
|
|
(12)
|
|
|
(11)
|
|
Commodity contracts
|
|
|
|
|
Other Current Assets
|
|
5
|
|
|
—
|
|
|
|
|
|
|
Accrued Liabilities
|
|
(131)
|
|
|
(176)
|
|
Other Long-Term Liabilities
|
|
(1)
|
|
|
(15)
|
|
|
|
$
|
(22,975)
|
|
|
$
|
(10,451)
|
|
The effect of derivative instruments on the Condensed Consolidated Statements of Operations and Comprehensive Loss is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 29, 2020
|
|
|
|
|
|
|
|
|
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
|
|
$
|
(1,857)
|
|
|
Net Sales
|
|
$
|
(104)
|
|
|
$
|
—
|
|
Foreign currency contracts - sell
|
|
(443)
|
|
|
Net Sales
|
|
488
|
|
|
—
|
|
Foreign currency contracts - buy
|
|
(48)
|
|
|
Cost of Goods Sold
|
|
(42)
|
|
|
—
|
|
Commodity contracts
|
|
50
|
|
|
Cost of Goods Sold
|
|
(175)
|
|
|
—
|
|
Interest rate contracts
|
|
(5,885)
|
|
|
Interest Expense
|
|
—
|
|
|
—
|
|
|
|
$
|
(8,183)
|
|
|
|
|
$
|
167
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
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
|
|
$
|
(1,125)
|
|
|
Net Sales
|
|
$
|
320
|
|
|
$
|
—
|
|
Foreign currency contracts - sell
|
|
(409)
|
|
|
Net Sales
|
|
(2,674)
|
|
|
—
|
|
Foreign currency contracts - buy
|
|
2,036
|
|
|
Cost of Goods Sold
|
|
484
|
|
|
—
|
|
Commodity contracts
|
|
47
|
|
|
Cost of Goods Sold
|
|
20
|
|
|
—
|
|
Interest rate contracts
|
|
(4,706)
|
|
|
Interest Expense
|
|
—
|
|
|
—
|
|
|
|
$
|
(4,157)
|
|
|
|
|
$
|
(1,850)
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 29, 2020
|
|
|
|
|
|
|
|
|
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
|
|
$
|
(2,165)
|
|
|
Net Sales
|
|
$
|
(384)
|
|
|
$
|
—
|
|
Foreign currency contracts - sell
|
|
(671)
|
|
|
Net Sales
|
|
1,055
|
|
|
—
|
|
Foreign currency contracts - buy
|
|
(74)
|
|
|
Cost of Goods Sold
|
|
(156)
|
|
|
—
|
|
Commodity contracts
|
|
48
|
|
|
Cost of Goods Sold
|
|
(320)
|
|
|
—
|
|
Interest rate contracts
|
|
$
|
(6,709)
|
|
|
Interest Expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
(9,571)
|
|
|
|
|
$
|
195
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
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
|
|
$
|
(1,944)
|
|
|
Net Sales
|
|
$
|
798
|
|
|
$
|
—
|
|
Foreign currency contracts - sell
|
|
(1,384)
|
|
|
Net Sales
|
|
(37)
|
|
|
—
|
|
Foreign currency contracts - buy
|
|
(632)
|
|
|
Cost of Goods Sold
|
|
390
|
|
|
—
|
|
Commodity contracts
|
|
29
|
|
|
Cost of Goods Sold
|
|
160
|
|
|
—
|
|
Interest rate contracts
|
|
(4,706)
|
|
|
Interest Expense
|
|
—
|
|
|
—
|
|
|
|
$
|
(8,637)
|
|
|
|
|
$
|
1,311
|
|
|
$
|
—
|
|
During the next twelve months, the estimated net amount of gain on cash flow hedges as of March 29, 2020 expected to be reclassified out of AOCI into earnings is $0.6 million.
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 March 29, 2020 and June 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
March 29,
2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
1,275
|
|
|
$
|
—
|
|
|
$
|
1,275
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
24,250
|
|
|
$
|
—
|
|
|
$
|
24,250
|
|
|
$
|
—
|
|
|
|
June 30,
2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
1,564
|
|
|
$
|
—
|
|
|
$
|
1,564
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
12,014
|
|
|
$
|
—
|
|
|
$
|
12,014
|
|
|
$
|
—
|
|
The fair values 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 16) at March 29, 2020 and June 30, 2019 was $150.8 million and $203.6 million, respectively, compared to the carrying value of $195.5 million and $195.5 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. Subsequent to March 29, 2020, the estimated fair value of the Senior Notes was $97.6 million as of May 4, 2020. The carrying value of the ABL Facility (as defined in Note 16) 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 March 29, 2020 and June 30, 2019 due to the short-term nature of these instruments.
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 retail 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
March 29,
2020
|
|
March 31,
2019
|
Beginning Balance
|
|
$
|
47,602
|
|
|
$
|
45,327
|
|
Payments
|
|
(20,416)
|
|
|
(18,169)
|
|
Provision for Current Year Warranties
|
|
16,238
|
|
|
17,964
|
|
Changes in Estimates
|
|
(185)
|
|
|
232
|
|
Ending Balance
|
|
$
|
43,239
|
|
|
$
|
45,354
|
|
12. Income Taxes
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. The CARES Act includes various income tax provisions such as the use of net operating losses arising in prior taxable years, for which the Company has recorded a benefit in its income tax provision for the third quarter of fiscal year 2020 of approximately $7.5 million. Also during the third quarter of fiscal year 2020, the Company recorded a full valuation allowance against its U.S. and state deferred tax assets in the amount of approximately $70.3 million.
When calculating the income tax provision for the third quarter of fiscal year 2020, the Company used 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. For the third quarter of fiscal year 2019, the Company used an actual effective tax rate calculation. The effective tax rate for the third quarter of fiscal year 2020 was (55.6)% compared to 12.3% for the same period last year. The effective tax rate for the first nine months of fiscal year 2020 was (25.4)%, compared to 28.7% for the same period last year. The tax rates for fiscal year 2020 were more significantly impacted by losses for which the Company does not receive a tax benefit, including the aforementioned U.S. and state valuation allowance. The Company recorded an income tax expense of approximately $1.1 million related to the inclusion of foreign earnings as a result of U.S. tax legislation during fiscal year 2019.
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 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 disagreed 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. In subsequent rulings, the district court reaffirmed the validity of Exmark’s patent and its original ruling on willfulness. A new trial on the issue of damages commenced on December 10, 2018, resulting in a damages assessment by the jury of $14.4 million.
On December 20, 2018, the district court entered judgment against the Company and in favor of Exmark in the amount of $14.4 million in compensatory damages, an additional $14.4 million in enhanced damages, as well as pre-judgment interest, post-judgment interest and costs to be determined. On April 15, 2019, the district court entered an order denying the Company’s post-trial motions related to modification of the jury’s damages award, as
well as seeking a new trial in light of certain evidentiary rulings. The district court awarded $6.0 million in pre-judgment interest, as well as post-judgment interest after December 19, 2018 and costs to be determined.
The Company strongly disagrees with the verdict and certain rulings made before, during and after the new trial and intends to vigorously pursue its rights on appeal. The Company filed its notice of appeal on May 14, 2019, and has appealed errors made by the district court in construing certain claims of Exmark’s patent, granting summary judgment motions filed by Exmark, and altering the prejudgment interest rate following the second trial. Oral argument on the appeal was held on May 5, 2020 and the parties await the decision of the Court of Appeals.
In assessing whether the Company should accrue a liability in its financial statements as a result of this lawsuit, the Company considered various factors, including the legal and factual circumstances of the case, the trial records and post-trial rulings of the district court, the decision of the appellate court, the current status of the proceedings, applicable law and the views of legal counsel. 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 March 29, 2020.
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.
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
|
|
|
|
Nine Months Ended
|
|
|
|
|
March 29,
2020
|
|
March 31,
2019
|
|
March 29,
2020
|
|
March 31,
2019
|
NET SALES:
|
|
|
|
|
|
|
|
|
Engines
|
|
$
|
269,619
|
|
|
$
|
336,243
|
|
|
$
|
622,163
|
|
|
$
|
727,351
|
|
Products
|
|
229,368
|
|
|
271,209
|
|
|
666,993
|
|
|
698,879
|
|
Inter-Segment Eliminations
|
|
(25,452)
|
|
|
(27,256)
|
|
|
(63,961)
|
|
|
(61,575)
|
|
Total*
|
|
$
|
473,535
|
|
|
$
|
580,196
|
|
|
$
|
1,225,195
|
|
|
$
|
1,364,655
|
|
* International sales included in net sales based on product shipment destination
|
|
$
|
138,771
|
|
|
$
|
142,817
|
|
|
$
|
385,406
|
|
|
$
|
379,468
|
|
GROSS PROFIT:
|
|
|
|
|
|
|
|
|
Engines
|
|
$
|
45,418
|
|
|
$
|
72,529
|
|
|
$
|
97,753
|
|
|
$
|
144,272
|
|
Products
|
|
17,789
|
|
|
24,348
|
|
|
77,786
|
|
|
89,402
|
|
Inter-Segment Eliminations
|
|
257
|
|
|
110
|
|
|
(804)
|
|
|
(441)
|
|
Total
|
|
$
|
63,464
|
|
|
$
|
96,987
|
|
|
$
|
174,735
|
|
|
$
|
233,233
|
|
SEGMENT INCOME (LOSS):
|
|
|
|
|
|
|
|
|
Engines
|
|
$
|
(59,161)
|
|
|
$
|
22,833
|
|
|
$
|
(101,312)
|
|
|
$
|
(16,579)
|
|
Products
|
|
(22,755)
|
|
|
(5,682)
|
|
|
(23,924)
|
|
|
(11,514)
|
|
Inter-Segment Eliminations
|
|
257
|
|
|
110
|
|
|
(804)
|
|
|
(441)
|
|
Total
|
|
$
|
(81,659)
|
|
|
$
|
17,261
|
|
|
$
|
(126,040)
|
|
|
$
|
(28,534)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following supplemental data is presented for informational purposes.
Pre-tax business optimization, litigation settlement and engine manufacturing consolidation project charges included in gross profit were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
March 29,
2020
|
|
March 31,
2019
|
|
March 29,
2020
|
|
March 31,
2019
|
Engines
|
|
$
|
6,184
|
|
|
$
|
623
|
|
|
$
|
18,359
|
|
|
$
|
1,712
|
|
Products
|
|
2,189
|
|
|
3,267
|
|
|
3,279
|
|
|
6,978
|
|
Total
|
|
$
|
8,373
|
|
|
$
|
3,890
|
|
|
$
|
21,638
|
|
|
$
|
8,690
|
|
Pre-tax business optimization charges, engine manufacturing consolidation project charges, bad debt expense related to a major retailer bankruptcy, business realignment charges, litigation settlement charge, goodwill impairment charges and acquisition integration activities included in segment income (loss) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
March 29,
2020
|
|
March 31,
2019
|
|
March 29,
2020
|
|
March 31,
2019
|
Engines
|
|
$
|
65,872
|
|
|
$
|
5,211
|
|
|
$
|
80,309
|
|
|
$
|
27,083
|
|
Products
|
|
14,511
|
|
|
4,694
|
|
|
16,075
|
|
|
19,862
|
|
Total
|
|
$
|
80,383
|
|
|
$
|
9,905
|
|
|
$
|
96,384
|
|
|
$
|
46,945
|
|
15. Leases
The Company leases certain manufacturing facilities, warehouses/distribution centers, office space, land, vehicles, and equipment. At lease inception, the Company determines the lease term by assuming the exercise of those renewal options that are reasonably assured. The Company had operating lease costs of approximately $6 million and $17 million for the three and nine months ended March 29, 2020.
Leases which include renewal options that can extend the lease term are reflected in the lease term when they are reasonably certain to be exercised. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Lease agreements containing lease and non-lease components are accounted for separately.
At December 29, 2019, the Company had $1 million of leases classified as financing leases and approximately $102 million of non-cancelable operating lease commitments, excluding variable consideration. The undiscounted annual future minimum lease payments are summarized by year in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Commitments
|
2020
|
|
$
|
13,289
|
|
2021
|
|
11,830
|
|
2022
|
|
11,578
|
|
2023
|
|
11,595
|
|
2024
|
|
11,526
|
|
Thereafter
|
|
76,211
|
|
Total Lease Payments
|
|
136,029
|
|
Less: Interest
|
|
34,252
|
|
Total Lease Liabilities
|
|
$
|
101,777
|
|
The Company's future minimum lease commitments, as of June 30, 2019, under Accounting Standard Codification Topic 840, the predecessor to Topic 842, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
2020
|
|
$
|
20,453
|
|
2021
|
|
18,179
|
|
2022
|
|
14,784
|
|
2023
|
|
10,345
|
|
2024
|
|
9,515
|
|
Thereafter
|
|
73,639
|
|
Total Lease Payments
|
|
$
|
146,915
|
|
Supplemental balance sheet information related to leases as of March 29, 2020, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 29, 2020
|
Operating Leases:
|
|
|
Right of Use Assets
|
|
$
|
103,924
|
|
|
|
|
Short-Term Lease Obligations
|
|
11,710
|
|
Long-Term Lease Obligations
|
|
90,067
|
|
Total Operating Lease Obligations
|
|
101,777
|
|
At March 29, 2020, the weighted average remaining lease term and weighted average discount rate for operating leases was 11.1 years and 5.15%, respectively.
During the three and nine months ended March 29, 2020 the cash paid for amounts included in the measurement of the liabilities and the operating cash flows was $6 million and $17 million, respectively. The Company incurred $24.7 million of new lease liabilities for leases entered into during the nine months ended March 29, 2020. Adoption of the new lease standard was a non-cash transaction.
As the Company's lease agreements normally do not provide an implicit interest rate, the Company applies its incremental borrowing rate based on the information available at commencement date in determining the present value of future lease payments. Relevant information used in determining the Company's incremental borrowing rate includes the duration of the lease, currency of the lease, and the Company's credit risk relative to risk-free market rates.
16. Debt
The following is a summary of the Company’s indebtedness (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29,
2020
|
|
June 30,
2019
|
Multicurrency Credit Agreement
|
|
$
|
—
|
|
|
$
|
160,540
|
|
ABL Facility
|
|
402,224
|
|
|
—
|
|
6.875% Senior Notes
|
|
195,464
|
|
|
—
|
|
Unamortized Debt Issuance Costs associated with 6.875% Senior Notes
|
|
215
|
|
|
—
|
|
Total Short-Term Debt
|
|
$
|
597,473
|
|
|
$
|
160,540
|
|
|
|
|
|
|
Note Payable (NMTC transaction)
|
|
$
|
7,685
|
|
|
$
|
7,685
|
|
Unamortized Debt Issuance Costs associated with Note Payable
|
|
710
|
|
|
820
|
|
|
|
$
|
6,975
|
|
|
$
|
6,865
|
|
|
|
|
|
|
6.875% Senior Notes
|
|
$
|
—
|
|
|
$
|
195,464
|
|
Unamortized Debt Issuance Costs associated with 6.875% Senior Notes
|
|
—
|
|
|
495
|
|
|
|
$
|
—
|
|
|
$
|
194,969
|
|
Total Long-Term Debt
|
|
$
|
6,975
|
|
|
$
|
201,834
|
|
On December 20, 2010, the Company issued $225 million of 6.875% Senior Notes ("Senior Notes") due December 15, 2020. During the three and nine months ended March 29, 2020 the Company made no repurchases of the Senior Notes. During the three and nine months ended March 31, 2019 the Company repurchased $0.5 million and $5.4 million of the Senior Notes.
On September 27, 2019 the Company entered into a $625 million revolving credit agreement ("ABL Facility") that matures on September 27, 2024, subject to a springing maturity on September 15, 2020 if any of the $195 million aggregate principal amount of the Company’s Senior Notes remain outstanding and unreserved under the ABL Facility. The ABL Facility replaced the $500 million amended and restated multicurrency credit agreement ("Revolver") dated March 25, 2016. The initial aggregate commitments under the ABL Facility were $625 million, subject to a borrowing base consisting of certain eligible cash, accounts receivable, inventory, equipment, trademarks and real estate. Availability under the ABL Facility is reduced by outstanding letters of credit. As of March 29, 2020, there were borrowings of $402.2 million and letters of credit of $45.3 million outstanding under the ABL Facility. As a result, availability under the ABL was $73.5 million at March 29, 2020. There were outstanding borrowings of $160.5 million under the Revolver as of June 30, 2019. In connection with the ABL Facility, the Company incurred $6.2 million of fees in fiscal year 2020. The Company classifies debt issuance costs related to the ABL Facility as an asset, regardless of whether it has any outstanding borrowings on the line of credit arrangements. The ABL Facility is secured by first priority liens on substantially all of the Company's assets.
Borrowing under the ABL Facility by the Company bear interest at a rate per annum equal to 1, 2, 3 or 6 month LIBOR rate plus an applicable margin varying from 1.50% to 2.25% depending on the Consolidated Fixed Charge Coverage Ratio at the most recent determination date; see below regarding changes to the interest rate as a result of amendments to the ABL Facility in the third and fourth fiscal quarter of 2020. In addition, the Company is subject to a 0.25% commitment fee on the unused portion of the commitments and a 1.25% letter of credit fee.
The Senior Notes and the ABL Facility contain covenants that are usual and customary for facilities and transactions of this type and that, among other things, restrict the ability of the Company and/or certain subsidiaries to pay dividends, repurchase equity interests of the Company and certain subsidiaries, make other restricted payments, incur or guarantee certain indebtedness, create liens, consolidate and merge and dispose of assets, and enter into transactions with the Company's affiliates. These covenants are subject to a number of other limitations and exceptions set forth in the agreements. The ABL Facility contains a springing financial covenant that would require the Company to maintain a Fixed Charge Coverage Ratio (as defined in the ABL Facility) of no less than 1.0 to 1.0 if aggregate availability under the ABL Facility (also referred to as excess availability) decreases below the greater of $50 million and 12.5% of the borrowing base. If Excess Availability were to fall below this level, the Company would be required to test the Fixed Charge Coverage Ratio.
On January 29, 2020, the Company entered into an amendment to the ABL Facility (the “January Amendment”). The January Amendment, among other things, added a new pricing level increasing the specified interest rate by 25 basis points to apply from January 29, 2020 until the Company delivers financial statements for the third fiscal quarter of 2020. The new pricing level will also be in effect thereafter when the Company’s Fixed Charge Coverage Ratio is less than or equal to 0.75 to 1.00. Additionally, the January Amendment reduced the minimum aggregate availability required to trigger a liquidity event (as defined in the ABL Facility) between September 27, 2019 and the end of the Company’s third fiscal quarter of 2020 to the greater of $30 million and 7.5% of the line cap, which is equal to the lesser of aggregate commitments and the borrowing base. Should availability fall below 7.5%, the Company would be required to test the Fixed Charge Coverage Ratio, and would not have complied as of March 29, 2020 because the Fixed Charge Coverage Ratio was (.23) to 1.00 at that date.
Additionally, the January Amendment amended the financial covenant to reduce the minimum aggregate availability to avoid triggering the requirement to comply with the Fixed Charge Coverage Ratio from September 27, 2019 to the end of the Company’s third fiscal quarter of 2020. As amended, the Company must maintain a Fixed Charge Coverage Ratio of no less than 1.0 to 1.0 when aggregate availability is less than the greater of $30 million and 7.5% of the line cap, which is equal to the lesser of aggregate commitments and the borrowing base. Thereafter, the aggregate availability threshold will revert back to the greater of $50 million and 12.5%.
On April 27, 2020, the Company entered into Amendment No. 4 to the ABL Facility. The Amendment No. 4 amends certain provisions of the ABL Facility to, among other things, (a) during the period commencing on the effective date of the Amendment No. 4 and ending on July 26, 2020, (i) suspend the requirement that the Company maintain a consolidated fixed charge coverage ratio of no less than 1.0 to 1.0 whenever its borrowing availability under the revolving credit facility is less than $50 million and (ii) instead require the Company and its subsidiaries to maintain at least $12.5 million of borrowing availability under the revolving credit facility; (b) increase the amount that the Company and its subsidiaries may borrow outside of the ABL Facility to an amount equal to the greater of $300 million and 22.5% of the Company’s consolidated total assets (this amount is in addition to amounts borrowed pursuant to specific exceptions under the ABL Facility); (c) reduce the maximum aggregate amount available for borrowing or letters of credit under the revolving credit facility that the Existing Credit Agreement contemplated by $25 million to $600 million; (d) increase the applicable margins paid to lenders as part of the variable interest rates for both LIBOR and base rate borrowings by 100 basis points in each case; (e) incorporate a LIBOR floor equal to 1.0%; (f) add certain events of default, including with respect to raising capital; and (g) impose certain financial, operational and liquidity maintenance and reporting obligations on the Company. The Company classifies its outstanding borrowings under the ABL facility as a short term liability due to the requirement to directly apply cash deposits to repay outstanding loans.
The Senior Notes contain an incurrence covenant that requires the Company to satisfy a minimum Fixed Charge Coverage Ratio of 2.0 to 1.0, as defined by the indenture, to utilize certain covenants for new debt, certain sale-leaseback transactions, distributions, investments and certain other restricted payments and mergers, consolidations and asset sales. As of March 29, 2020, the Company did not have a Fixed Charge Coverage Ratio of at least 2.00 to 1.00. As a result, the Company is currently subject to additional limitations related to the incurrence of new debt, certain sale-leaseback transactions, distributions, investments and certain other restricted payments and mergers, consolidations and asset sales.
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 use on the project. Restricted cash of $0.7 million held by the Company at March 29, 2020 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.
The Company faces liquidity challenges due to continuing operating losses and negative cash flows from operations that have accelerated, and may continue to accelerate, as a result of the rapid onset of COVID-19 and its effects on the Company’s operations, vendors, and customers, as well as the global economy. On April 27, 2020, the Company successfully amended its ABL Facility to obtain access to additional liquidity to help navigate near-term challenges presented by COVID-19 and to have additional time to work with its advisors to raise additional capital. The Company had $44.4 million of cash and cash equivalents as of March 29, 2020. The Company had $33.4 million of cash and cash equivalents as of April 26, 2020. On April 27, 2020, after the effectiveness of the Amendment No. 4, the Company and its subsidiaries had $366.8 million of borrowings and $52.8 million of letters of credit outstanding under the Credit Agreement against total borrowing capacity of $502.8 million.
U.S. GAAP requires an evaluation of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued. Initially, this evaluation does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management evaluates the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
In complying with the requirements under U.S. GAAP to complete an evaluation without considering mitigating factors, the Company considered several conditions or events including 1) uncertainty around the global impact of COVID-19, 2) operating losses and negative cash flows from operations for fiscal year 2019 and projected fiscal year 2020, 3) pending maturity of $195 million of the Senior Notes in December 2020, with a potential springing maturity on the ABL Facility, 4) potential for elevated borrowings on the ABL Facility at the end of the fiscal 2020 season, which, depending on results, may not allow the Company to support working capital build up early in fiscal year 2021 using available liquidity, and 5) financial results necessitated amendments to the ABL Facility during fiscal year 2020, which, among other things, added certain events of default. The above conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Company is implementing a plan as discussed below, which includes strategic and cash-preservation initiatives, which is designed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date its financial statements are issued. The Company’s primary sources of near- and medium-term liquidity are expected to be (1) the Company’s ABL Facility, which had $115.8 million of available borrowing capacity as of March 29, 2020, (2) improved operating cash flows due to other strategic and cash preservation initiatives discussed below and (3) one or more capital raises, to the extent available on acceptable terms, if at all.
Strategic and Cash Preservation Initiatives
The Company has taken or intends to take the following actions and other actions to improve its liquidity position and to address uncertainty about its ability to operate as a going concern:
1.Entered into, effective as of April 27, 2020, Amendment No. 4 to the ABL Facility to address near-term liquidity challenges brought on by business conditions, including COVID-19,
2.Implemented proactive spending reductions in the third and fourth quarters of fiscal 2020 to improve liquidity, including salary reductions, plant shutdowns, suspension of employee benefits, lower capital spending and reduced discretionary spending,
3.Eliminated the Company’s quarterly dividend and suspended its share repurchases authorization, which authorization expires on June 30, 2020,
4.Took strategic actions to drive profitability improvements, including the recently completed business optimization program and the engine manufacturing consolidation project,
5.Pursuing cash proceeds through a potential sale-leaseback of Company-owned real estate, working capital reduction through inventory management, and potential divestitures of certain businesses and assets, and
6.Hired a skilled team of advisers to assist the Company in debt and capital matters, including raising additional capital to address the maturity of $195 million aggregate principal amount of the Senior Notes and any additional liquidity needs.
The Company’s plan is designed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date its financial statements are issued; however, the remediation plan is dependent on conditions and matters that may be outside of the Company’s control or may not be available on terms acceptable to the Company, or at all, many of which have been made worse or more unpredictable by COVID-19. If the Company is unable to successfully execute all of these initiatives or if the plan does not fully mitigate the Company’s liquidity challenges, the Company’s operating plans and resulting cash flows along with its cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the next 12 months.
17. Goodwill Impairment
Goodwill represents the excess of purchase price over tangible and intangible assets acquired less liabilities assumed arising from business combinations. Goodwill is assigned to reporting units. The Engines reporting segment is a reporting unit. The Products reporting segment has three reporting units, which are Turf & Consumer, Standby, and Job Site.
The changes in the carrying amount of goodwill by reporting segment for the period ended March 29, 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engines
|
Products
|
Total
|
Goodwill Balance June 30, 2019
|
|
137,095
|
|
32,587
|
|
169,682
|
|
Impairment Loss
|
|
(55,463)
|
|
(12,017)
|
|
(67,480)
|
|
Effect of Translation
|
|
(950)
|
|
(892)
|
|
(1,842)
|
|
Goodwill Balance at March 29, 2020
|
|
80,682
|
|
19,678
|
|
100,360
|
|
At March 29, 2020 and June 30, 2019, accumulated goodwill impairment losses, as recorded in the Products segment, were $143.4 million and $131.4 million, respectively, and in the Engines Segment were $55.5 million and $0.0 million, respectively.
Goodwill and other indefinite-lived intangibles assets are not amortized. The Company evaluates goodwill and other indefinite-lived intangible assets for impairment annually as of the end of the fourth fiscal quarter, or more frequently if events or circumstances indicate that the assets may be impaired.
The Company will test goodwill using the simplified one-step process. The Company identifies a potential impairment by comparing the carrying values of each of the Company’s reporting units to their estimated fair values as of the test dates. The estimates of fair value of the reporting units are computed using a combination of an income approach and a market approach. The income approach utilizes a multi-year forecast of estimated cash flows and a terminal value at the end of the cash flow period. The forecast period assumptions consist of internal projections that are based on the Company's budget and long-range strategic plan. The discount rate used at the test date is the weighted-average cost of capital which reflects the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn. Valuations using the market approach are derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services.
Some of the significant assumptions inherent in estimating the fair values include the estimated future annual net cash flows for each reporting unit (including net sales, operating income margin, and working capital) and a discount rate that appropriately reflects the risks inherent in each future cash flow stream. The Company selected assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated growth rates, management’s plans, and guideline companies. The assumptions included in the impairment test require judgment, and changes to these inputs could impact the results of the calculation.
If the fair value of a reporting unit exceeds its book value, goodwill of the reporting unit is not deemed impaired. If the book value of a reporting unit exceeds its fair value, an impairment is recorded.
The Company determined that a triggering event existed during the third quarter of fiscal year 2020 due to the continued downward trend of the stock price during the third quarter and additionally due to the impact COVID-19 may have on forecasted cash flow estimates used in the goodwill assessment and other intangible asset assessment. The Company performed an interim goodwill impairment test on its Engines, Turf & Consumer, and Job Site reporting units as of March 29, 2020.
The Job Site reporting unit fair value did not exceed the carrying value and a $12.0 million impairment was recorded. The discount rate the Company used to determine the fair value was 15%. The Turf & Consumer reporting unit fair value exceeded the carrying value by more than 10% but less than 20%. The discount rate the Company used to determine the fair value was 16%. The Engines reporting unit fair value did not exceed the carrying value and a $55.5 million impairment was recorded. The discount rate the Company used to determine the
fair value was 18%. The Company recorded the non-cash goodwill impairment charge in the third quarter of fiscal year 2020 for Engines and Job Site, as determined by comparing the carrying value of the reporting unit’s goodwill with the implied fair value of goodwill for the reporting unit. The impairment charge is a non-cash expense that was recorded as a separate component of operating expenses. The goodwill impairment was not deductible for income tax purposes. The impairment charge did not adversely affect the Company’s debt position, cash flow, liquidity or compliance with financial covenants under its revolving credit facility. The Company will continue to perform triggering event assessments throughout the year and perform the annual goodwill impairment test in the fourth quarter of fiscal 2020. Assumptions used in future impairment test models for each reporting unit could change based on factors such as market conditions and reporting unit performance.
The Company also performs an impairment test of its indefinite-lived intangible assets as of the fiscal year-end and more frequently if events or circumstances indicate that the assets may be impaired. For purposes of the indefinite-lived intangible asset impairment analysis, the Company performs its assessment of fair value based on an income approach using the relief-from-royalty method. The Company determines the fair value of each tradename by applying a royalty rate to a projection of net sales discounted using a risk adjusted cost of capital. Sales growth rates are determined after considering current and future economic conditions, recent sales trends, discussions with customers, planned timing of new product launches and many other variables. Each royalty rate is based on profitability of the business to which it relates and observed market royalty rates.
The Company also performed the impairment test on its indefinite-lived intangible assets. Based on the results of the impairment test, no indefinite-lived intangible asset impairment charges were recorded
18. COVID-19
In March 2020, the World Health Organization characterized the coronavirus outbreak ("COVID-19") a pandemic,
and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid
spread of the virus and the continuously evolving responses to combat it have had an increasingly
negative impact on the global economy.
To protect the health, safety and well-being of its employees, customers, channel partners and the public, the Company continues to implement preventative measures while also seeking to meet the needs of its global customers as an essential supplier to their businesses. These measures include more frequent and deeper cleaning of facilities; using appropriate social distancing, and other preventative practices; working remotely when possible; restricting business travel; cancelling certain events; and restricting visitor access to facilities.
In response to the spread of COVID-19, uncertain economic conditions resulting in reduced demand and potential constraints on its supply chain, the Company reduced manufacturing activity at several of its manufacturing facilities and temporarily shut down others. As discussed in Note 16, the Company also took other actions to manage expenditures in this fluid business environment. The Company will continue to monitor the situation and adjust manufacturing and other operations as the situation warrants.
For the third quarter of fiscal 2020, the Company estimates the COVID-19 pandemic negatively impacted sales by approximately $40 million and income from operations by approximately $11 million.
The Company is monitoring the progression of the pandemic and its potential effect on its financial position, results of operations, and cash flows. While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, the Company expects that its business operations and results of operations, including the Company's net revenues, earnings and cash flows, will be materially adversely impacted for at least the remainder of fiscal year 2020.