Briggs & Stratton Earnings 2019-03-31
BGG 10Q Quarterly Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
______________________________________________________________
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2019
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission file number 1-1370
________________________________________________
BRIGGS & STRATTON CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________________________
Wisconsin | 39-0182330 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
12301 West Wirth Street, Wauwatosa, Wisconsin 53222
(Address of Principal Executive Offices) (Zip Code)
(414) 259-5333
(Registrant’s telephone number, including area code)
___________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Emerging growth company | ¨ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock (par value $0.01 per share) | BGG | New York Stock Exchange |
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class | Outstanding at April 30, 2019 | |
COMMON STOCK, par value $0.01 per share | 42,057,970 Shares | |
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
INDEX
Page No. | ||
PART I – FINANCIAL INFORMATION | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II – OTHER INFORMATION | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 6. | ||
2
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
March 31, 2019 | July 1, 2018 | |||||||
CURRENT ASSETS: | ||||||||
Cash and Cash Equivalents | $ | 23,863 | $ | 44,923 | ||||
Accounts Receivable, Net | 253,536 | 182,801 | ||||||
Inventories - | ||||||||
Finished Products | 370,273 | 290,108 | ||||||
Work in Process | 141,807 | 111,409 | ||||||
Raw Materials | 13,130 | 10,314 | ||||||
Total Inventories | 525,210 | 411,831 | ||||||
Prepaid Expenses and Other Current Assets | 34,682 | 39,651 | ||||||
Total Current Assets | 837,291 | 679,206 | ||||||
OTHER ASSETS: | ||||||||
Goodwill | 169,693 | 163,200 | ||||||
Investments | 46,937 | 50,960 | ||||||
Other Intangible Assets, Net | 97,465 | 95,864 | ||||||
Long-Term Deferred Income Tax Asset | 31,031 | 12,149 | ||||||
Other Long-Term Assets, Net | 20,365 | 20,507 | ||||||
Total Other Assets | 365,491 | 342,680 | ||||||
PLANT AND EQUIPMENT: | ||||||||
Cost | 1,208,747 | 1,175,165 | ||||||
Less - Accumulated Depreciation | 795,467 | 753,085 | ||||||
Total Plant and Equipment, Net | 413,280 | 422,080 | ||||||
TOTAL ASSETS | $ | 1,616,062 | $ | 1,443,966 | ||||
3
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except per share data)
(Unaudited)
LIABILITIES & SHAREHOLDERS’ INVESTMENT
March 31, 2019 | July 1, 2018 | |||||||
CURRENT LIABILITIES: | ||||||||
Accounts Payable | $ | 272,125 | $ | 204,173 | ||||
Short-Term Debt | 211,545 | 48,036 | ||||||
Accrued Liabilities | 143,432 | 131,897 | ||||||
Total Current Liabilities | 627,102 | 384,106 | ||||||
OTHER LIABILITIES: | ||||||||
Accrued Pension Cost | 179,487 | 189,872 | ||||||
Accrued Employee Benefits | 20,122 | 20,196 | ||||||
Accrued Postretirement Health Care Obligation | 25,294 | 30,186 | ||||||
Accrued Warranty | 15,729 | 15,781 | ||||||
Other Long-Term Liabilities | 45,321 | 33,447 | ||||||
Long-Term Debt | 195,464 | 199,954 | ||||||
Total Other Liabilities | 481,417 | 489,436 | ||||||
SHAREHOLDERS’ INVESTMENT: | ||||||||
Common Stock - Authorized 120,000 shares, $.01 par value, issued 57,854 shares | 579 | 579 | ||||||
Additional Paid-In Capital | 77,523 | 76,408 | ||||||
Retained Earnings | 1,018,265 | 1,071,480 | ||||||
Accumulated Other Comprehensive Loss | (255,021 | ) | (252,272 | ) | ||||
Treasury Stock at cost, 15,784 and 14,942 shares, respectively | (333,803 | ) | (325,771 | ) | ||||
Total Shareholders’ Investment | 507,543 | 570,424 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ INVESTMENT | $ | 1,616,062 | $ | 1,443,966 | ||||
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, 2019 | April 1, 2018 | March 31, 2019 | April 1, 2018 | |||||||||||||
NET SALES | $ | 580,196 | $ | 604,069 | $ | 1,364,655 | $ | 1,379,599 | ||||||||
COST OF GOODS SOLD | 483,209 | 473,796 | 1,131,422 | 1,090,196 | ||||||||||||
Gross Profit | 96,987 | 130,273 | 233,233 | 289,403 | ||||||||||||
ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | 79,521 | 80,156 | 267,553 | 245,304 | ||||||||||||
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES | (205 | ) | 713 | 5,786 | 6,438 | |||||||||||
Income (Loss) from Operations | 17,261 | 50,830 | (28,534 | ) | 50,537 | |||||||||||
INTEREST EXPENSE | (9,088 | ) | (8,617 | ) | (21,731 | ) | (19,167 | ) | ||||||||
OTHER INCOME, Net | 953 | 1,350 | 391 | 3,297 | ||||||||||||
Income (Loss) Before Income Taxes | 9,126 | 43,563 | (49,874 | ) | 34,667 | |||||||||||
PROVISION (CREDIT) FOR INCOME TAXES | 1,121 | 11,675 | (14,331 | ) | 34,163 | |||||||||||
NET INCOME (LOSS) | $ | 8,005 | $ | 31,888 | $ | (35,543 | ) | $ | 504 | |||||||
EARNINGS (LOSS) PER SHARE | ||||||||||||||||
Basic | $ | 0.19 | $ | 0.74 | $ | (0.86 | ) | $ | 0.00 | |||||||
Diluted | 0.19 | 0.74 | (0.86 | ) | 0.00 | |||||||||||
WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||||||||||
Basic | 41,527 | 42,064 | 41,691 | 42,108 | ||||||||||||
Diluted | 41,527 | 42,307 | 41,691 | 42,362 | ||||||||||||
DIVIDENDS PER SHARE | $ | 0.14 | $ | 0.14 | $ | 0.42 | $ | 0.42 | ||||||||
The accompanying notes are an integral part of these statements.
4
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, 2019 | April 1, 2018 | March 31, 2019 | April 1, 2018 | |||||||||||||
Net Income (Loss) | $ | 8,005 | $ | 31,888 | $ | (35,543 | ) | $ | 504 | |||||||
Other Comprehensive Income (Loss): | ||||||||||||||||
Cumulative Translation Adjustments | 1,196 | 4,349 | (2,230 | ) | 7,596 | |||||||||||
Unrealized Gain (Loss) on Derivative Instruments, Net of Tax | (4,157 | ) | 2,034 | (8,635 | ) | 3,081 | ||||||||||
Unrecognized Pension & Postretirement Obligation, Net of Tax | 2,708 | 3,325 | 8,116 | 8,803 | ||||||||||||
Other Comprehensive Income (Loss) | (253 | ) | 9,708 | (2,749 | ) | 19,480 | ||||||||||
Total Comprehensive Income (Loss) | $ | 7,752 | $ | 41,596 | $ | (38,292 | ) | $ | 19,984 | |||||||
The accompanying notes are an integral part of these statements.
5
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(In thousands)
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 | Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholder Investment | ||||||||||||||||||
BALANCES, DECEMBER 30, 2018 | $ | 579 | $ | 77,310 | $ | 1,016,205 | $ | (254,768 | ) | $ | (333,907 | ) | 505,419 | |||||||||||
Net Income | — | — | 8,005 | — | — | 8,005 | ||||||||||||||||||
Total Other Comprehensive Loss, Net of Tax | — | — | — | (253 | ) | — | (253 | ) | ||||||||||||||||
Cash Dividends Declared ($0.14 per share) | — | — | (5,895 | ) | — | — | (5,895 | ) | ||||||||||||||||
Stock Option Activity, Net of Tax | — | — | — | — | — | — | ||||||||||||||||||
Restricted Stock | — | — | — | — | (241 | ) | (241 | ) | ||||||||||||||||
Amortization of Unearned Compensation | — | 490 | — | — | — | 490 | ||||||||||||||||||
Deferred Stock | — | — | — | — | — | — | ||||||||||||||||||
Deferred Stock - Directors | — | (277 | ) | (50 | ) | — | 853 | 526 | ||||||||||||||||
Treasury Stock Purchases | — | — | — | — | (508 | ) | (508 | ) | ||||||||||||||||
BALANCES, MARCH 31, 2019 | $ | 579 | $ | 77,523 | $ | 1,018,265 | $ | (255,021 | ) | $ | (333,803 | ) | $ | 507,543 | ||||||||||
FOR THE THREE MONTHS ENDED APRIL 1, 2018 | Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholder Investment | ||||||||||||||||||
BALANCES, DECEMBER 31, 2017 | $ | 579 | $ | 73,635 | $ | 1,063,501 | $ | (290,254 | ) | $ | (319,252 | ) | 528,209 | |||||||||||
Net Income | — | — | 31,888 | — | — | 31,888 | ||||||||||||||||||
Total Other Comprehensive Income Net of Tax | — | — | — | 9,708 | — | 9,708 | ||||||||||||||||||
Cash Dividends Declared ($0.14 per share) | — | — | (6,007 | ) | — | — | (6,007 | ) | ||||||||||||||||
Stock Option Activity, Net of Tax | — | (22 | ) | — | — | 855 | 833 | |||||||||||||||||
Restricted Stock | — | 7 | — | — | (179 | ) | (172 | ) | ||||||||||||||||
Amortization of Unearned Compensation | — | 461 | — | — | — | 461 | ||||||||||||||||||
Deferred Stock | — | 68 | — | — | 41 | 109 | ||||||||||||||||||
Deferred Stock - Directors | — | 852 | (18 | ) | — | — | 834 | |||||||||||||||||
Treasury Stock Purchases | — | — | — | — | (5,581 | ) | (5,581 | ) | ||||||||||||||||
BALANCES, APRIL 1, 2018 | $ | 579 | $ | 75,001 | $ | 1,089,364 | $ | (280,546 | ) | $ | (324,116 | ) | $ | 560,282 | ||||||||||
The accompanying notes are an integral part of these statements.
6
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(In thousands)
(Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 2019 | Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholder Investment | ||||||||||||||||||
BALANCES, JULY 1, 2018 | $ | 579 | $ | 76,408 | $ | 1,071,480 | $ | (252,272 | ) | $ | (325,771 | ) | 570,424 | |||||||||||
Net Loss | — | — | (35,543 | ) | — | — | (35,543 | ) | ||||||||||||||||
Total Other Comprehensive Loss, Net of Tax | — | — | — | (2,749 | ) | — | (2,749 | ) | ||||||||||||||||
Cash Dividends Declared ($0.42 per share) | — | — | (17,492 | ) | — | — | (17,492 | ) | ||||||||||||||||
Stock Option Activity, Net of Tax | — | (43 | ) | — | — | 1,862 | 1,819 | |||||||||||||||||
Restricted Stock | — | (72 | ) | — | — | 670 | 598 | |||||||||||||||||
Amortization of Unearned Compensation | — | 1,886 | — | — | — | 1,886 | ||||||||||||||||||
Deferred Stock | — | (879 | ) | — | — | 520 | (359 | ) | ||||||||||||||||
Deferred Stock - Directors | — | 223 | (180 | ) | — | 853 | 896 | |||||||||||||||||
Treasury Stock Purchases | — | — | — | — | (11,937 | ) | (11,937 | ) | ||||||||||||||||
BALANCES, MARCH 31, 2019 | $ | 579 | $ | 77,523 | $ | 1,018,265 | $ | (255,021 | ) | $ | (333,803 | ) | $ | 507,543 | ||||||||||
FOR THE NINE MONTHS ENDED APRIL 1, 2018 | Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholder Investment | ||||||||||||||||||
BALANCES, JULY 2, 2017 | $ | 579 | $ | 73,562 | $ | 1,107,033 | $ | (300,026 | ) | $ | (321,814 | ) | 559,334 | |||||||||||
Net Income | — | — | 504 | — | — | 504 | ||||||||||||||||||
Total Other Comprehensive Income, Net of Tax | — | — | — | 19,480 | — | 19,480 | ||||||||||||||||||
Cash Dividends Declared ($0.42 per share) | — | — | (18,016 | ) | — | — | (18,016 | ) | ||||||||||||||||
Stock Option Activity, Net of Tax | — | (1,671 | ) | — | — | 3,943 | 2,272 | |||||||||||||||||
Restricted Stock | — | 1,404 | — | — | 1,816 | 3,220 | ||||||||||||||||||
Amortization of Unearned Compensation | — | 1,851 | — | — | — | 1,851 | ||||||||||||||||||
Deferred Stock | — | (867 | ) | — | — | 649 | (218 | ) | ||||||||||||||||
Deferred Stock - Directors | — | 722 | (157 | ) | — | — | 565 | |||||||||||||||||
Treasury Stock Purchases | — | — | — | — | (8,710 | ) | (8,710 | ) | ||||||||||||||||
BALANCES, APRIL 1, 2018 | $ | 579 | $ | 75,001 | $ | 1,089,364 | $ | (280,546 | ) | $ | (324,116 | ) | $ | 560,282 | ||||||||||
The accompanying notes are an integral part of these statements.
7
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended | ||||||||
March 31, 2019 | April 1, 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net Income (Loss) | $ | (35,543 | ) | $ | 504 | |||
Adjustments to Reconcile Net Income (Loss) to Net Cash Used in Operating Activities: | ||||||||
Depreciation and Amortization | 47,385 | 43,756 | ||||||
Stock Compensation Expense | 5,496 | 5,312 | ||||||
Loss on Disposition of Plant and Equipment | 66 | 1,595 | ||||||
Provision (Credit) for Deferred Income Taxes | (19,247 | ) | 24,744 | |||||
Equity in Earnings of Unconsolidated Affiliates | (8,403 | ) | (9,068 | ) | ||||
Dividends Received from Unconsolidated Affiliates | 10,510 | 9,810 | ||||||
Cash Contributions to Qualified Pension Plans | — | (30,000 | ) | |||||
Change in Operating Assets and Liabilities: | ||||||||
Accounts Receivable | (70,876 | ) | (25,948 | ) | ||||
Inventories | (113,407 | ) | (62,780 | ) | ||||
Other Current Assets | (856 | ) | (3,430 | ) | ||||
Accounts Payable, Accrued Liabilities and Income Taxes | 77,905 | 11,287 | ||||||
Other, Net | 2,079 | 15,198 | ||||||
Net Cash Used in Operating Activities | (104,891 | ) | (19,020 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Capital Expenditures | (46,379 | ) | (77,483 | ) | ||||
Proceeds Received on Disposition of Plant and Equipment | 31 | 339 | ||||||
Cash Paid for Acquisition, Net of Cash Acquired | (8,865 | ) | (1,800 | ) | ||||
Net Cash Used in Investing Activities | (55,213 | ) | (78,944 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net Borrowings on Revolver | 163,509 | 131,556 | ||||||
Repayments on Long-Term Debt | (5,424 | ) | (19,781 | ) | ||||
Long Term Note Payable | — | 7,685 | ||||||
Debt Issuance Costs | — | (1,154 | ) | |||||
Treasury Stock Purchases | (11,937 | ) | (8,710 | ) | ||||
Stock Option Exercise Proceeds and Tax Benefits | 1,823 | 3,943 | ||||||
Cash Dividends Paid | (11,891 | ) | (12,007 | ) | ||||
Payments Related to Shares Withheld for Taxes for Stock Compensation | (257 | ) | (1,147 | ) | ||||
Net Cash Provided by Financing Activities | 135,823 | 100,385 | ||||||
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (239 | ) | 1,090 | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (24,520 | ) | 3,511 | |||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, Beginning (1) | 49,218 | 61,707 | ||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, Ending (2) | $ | 24,698 | $ | 65,218 | ||||
(2) Included within Ending Cash, Cash Equivalents, and Restricted Cash is approximately $0.8 million and $9.1 million of restricted cash as of March 31, 2019 and April 1, 2018, respectively.
The accompanying notes are an integral part of these statements.
8
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 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.
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.
9
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 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 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 pension costs in the amount of $0.5 million and $1.5 million have been included in Other Income in the Statement of Operations for the three and nine months ended March 31, 2019. Non-service cost components of net periodic pension costs in the amount of $0.3 million and $0.8 million have been included in Other Income in the Statement of Operations for the three and nine months ended April 1, 2018.
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):
March 31, 2019 | July 1, 2018 | |||||||
Cash and cash equivalents | $ | 23,863 | $ | 44,923 | ||||
Restricted cash | 835 | 4,295 | ||||||
Cash, cash equivalents, and restricted cash | $ | 24,698 | $ | 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's project plan involves identifying and implementing appropriate changes to its business processes, systems and controls as well
10
as compiling and evaluating lease arrangements to support lease accounting and disclosures under Topic 842. The Company made further progress during the quarter ended March 31, 2019 and is in the process of updating the Company's lease accounting system to prepare for adoption. 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 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.
3. Accumulated Other Comprehensive Income (Loss)
The following tables set forth the changes in accumulated other comprehensive income (loss) (in thousands):
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 Benefit (Expense) | — | 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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Three Months Ended April 1, 2018 | ||||||||||||||||
Cumulative Translation Adjustments | Derivative Financial Instruments | Pension and Postretirement Benefit Plans | Total | |||||||||||||
Beginning Balance | $ | (21,497 | ) | $ | 971 | $ | (269,728 | ) | $ | (290,254 | ) | |||||
Other Comprehensive Income (Loss) Before Reclassification | 4,349 | 606 | — | 4,955 | ||||||||||||
Income Tax Benefit (Expense) | — | (146 | ) | — | (146 | ) | ||||||||||
Net Other Comprehensive Income (Loss) Before Reclassifications | 4,349 | 460 | — | 4,809 | ||||||||||||
Reclassifications: | ||||||||||||||||
Realized (Gains) Losses - Foreign Currency Contracts (1) | — | 2,121 | — | 2,121 | ||||||||||||
Realized (Gains) Losses - Commodity Contracts (1) | — | 33 | — | 33 | ||||||||||||
Realized (Gains) Losses - Interest Rate Swaps (1) | — | (80 | ) | — | (80 | ) | ||||||||||
Amortization of Prior Service Costs (Credits) (2) | — | — | (314 | ) | (314 | ) | ||||||||||
Amortization of Actuarial Losses (2) | — | — | 4,696 | 4,696 | ||||||||||||
Total Reclassifications Before Tax | — | 2,074 | 4,382 | 6,456 | ||||||||||||
Income Tax Expense (Benefit) | — | (500 | ) | (1,057 | ) | (1,557 | ) | |||||||||
Net Reclassifications | — | 1,574 | 3,325 | 4,899 | ||||||||||||
Other Comprehensive Income (Loss) | 4,349 | 2,034 | 3,325 | 9,708 | ||||||||||||
Ending Balance | $ | (17,148 | ) | $ | 3,005 | $ | (266,403 | ) | $ | (280,546 | ) | |||||
(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.
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Nine Months Ended April 1, 2018 | ||||||||||||||||
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 | 7,596 | (149 | ) | — | 7,447 | |||||||||||
Income Tax Benefit (Expense) | — | 137 | — | 137 | ||||||||||||
Net Other Comprehensive Income (Loss) Before Reclassifications | 7,596 | (12 | ) | — | 7,584 | |||||||||||
Reclassifications: | ||||||||||||||||
Realized (Gains) Losses - Foreign Currency Contracts (1) | — | 4,537 | — | 4,537 | ||||||||||||
Realized (Gains) Losses - Commodity Contracts (1) | — | 65 | — | 65 | ||||||||||||
Realized (Gains) Losses - Interest Rate Swaps (1) | — | (97 | ) | — | (97 | ) | ||||||||||
Amortization of Prior Service Costs (Credits) (2) | — | — | (942 | ) | (942 | ) | ||||||||||
Amortization of Actuarial Losses (2) | — | — | 14,089 | 14,089 | ||||||||||||
Total Reclassifications Before Tax | — | 4,505 | 13,147 | 17,652 | ||||||||||||
Income Tax Expense (Benefit) | — | (1,412 | ) | (4,344 | ) | (5,756 | ) | |||||||||
Net Reclassifications | — | 3,093 | 8,803 | 11,896 | ||||||||||||
Other Comprehensive Income (Loss) | 7,596 | 3,081 | 8,803 | 19,480 | ||||||||||||
Ending Balance | $ | (17,148 | ) | $ | 3,005 | $ | (266,403 | ) | $ | (280,546 | ) | |||||
(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 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.
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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 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 31, 2019 were reductions 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 31, 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 is immaterial as of March 31, 2019 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 nine month period ended March 31, 2019, the Company recorded $4.1 million of bad debt expense related to a trade customer declaring bankruptcy. This charge occurred in the first quarter and there was no additional charge in the second or third quarter of fiscal 2019.
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 and nine months ended March 31, 2019, as follows (in thousands):
14
Three Month Period 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 Month Period 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 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 31, 2019 | April 1, 2018 | March 31, 2019 | April 1, 2018 | |||||||||||||
Net Income (Loss) | $ | 8,005 | $ | 31,888 | $ | (35,543 | ) | $ | 504 | |||||||
Less: Allocation to Participating Securities | (196 | ) | (626 | ) | (455 | ) | (301 | ) | ||||||||
Net Income (Loss) Available to Common Shareholders | $ | 7,809 | $ | 31,262 | $ | (35,998 | ) | $ | 203 | |||||||
Average Shares of Common Stock Outstanding | 41,527 | 42,064 | 41,691 | 42,108 | ||||||||||||
Shares Used in Calculating Diluted Earnings (Loss) Per Share | 41,527 | 42,307 | 41,691 | 42,362 | ||||||||||||
Basic Earnings (Loss) Per Share | $ | 0.19 | $ | 0.74 | $ | (0.86 | ) | $ | 0.00 | |||||||
Diluted Earnings (Loss) Per Share | $ | 0.19 | $ | 0.74 | $ | (0.86 | ) | $ | 0.00 | |||||||
The dilutive effect of the potential exercise of outstanding stock-based awards to acquire common shares is calculated using the treasury stock method. No options to purchase shares of common stock were excluded from the calculation of diluted earnings (loss) per share as the exercise prices were greater than the average market price of the common shares.
As a result of the Company incurring a net loss for the nine months ended March 31, 2019, potential incremental common shares of 529,644, 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 31, 2019, 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 31, 2019, the Company repurchased 725,321 shares on the open market at an average price of $16.46 per share, as compared to 382,806 shares purchased on the open market at an average price of $22.76 per share during the nine months ended April 1, 2018.
6. Investments
Investments represent the Company’s investments in unconsolidated affiliated companies.
Financial information of the unconsolidated affiliated companies is accounted for by the equity method, generally on a lag of one month or less. The following table sets forth the unaudited results of operations of unconsolidated affiliated companies for the three and nine months ended March 31, 2019 and April 1, 2018 (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, 2019 | April 1, 2018 | March 31, 2019 | April 1, 2018 | |||||||||||||
Results of Operations: | ||||||||||||||||
Sales | $ | 71,593 | $ | 78,271 | $ | 227,639 | $ | 234,664 | ||||||||
Cost of Goods Sold | 55,048 | 59,992 | 178,125 | 179,794 | ||||||||||||
Gross Profit | $ | 16,545 | $ | 18,279 | $ | 49,514 | $ | 54,870 | ||||||||
Net Income | $ | 3,884 | $ | 4,444 | $ | 11,799 | $ | 14,202 | ||||||||
The following table sets forth the unaudited balance sheets of unconsolidated affiliated companies as of March 31, 2019 and July 1, 2018 (in thousands):
March 31, 2019 | July 1, 2018 | |||||||
Financial Position: | ||||||||
Assets: | ||||||||
Current Assets | $ | 142,352 | $ | 150,382 | ||||
Noncurrent Assets | 40,210 | 45,186 | ||||||
182,562 | 195,568 | |||||||
Liabilities: | ||||||||
Current Liabilities | $ | 55,083 | $ | 54,007 | ||||
Noncurrent Liabilities | 15,969 | 20,027 | ||||||
71,052 | 74,034 | |||||||
Equity | $ | 111,510 | $ | 121,534 | ||||
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. Net sales to equity method investees were approximately $48.2 million and $65.1 million for the nine months ended March 31, 2019 and April 1, 2018, respectively. Purchases of finished products from equity method investees were approximately $94.1 million and $86.8 million for the nine months ended March 31, 2019 and April 1, 2018, respectively.
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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 31, 2019 | April 1, 2018 | March 31, 2019 | April 1, 2018 | |||||||||||||
Components of Net Periodic (Income) Expense: | ||||||||||||||||
Service Cost (Credit) | $ | 1,157 | $ | 601 | $ | 26 | $ | 34 | ||||||||
Interest Cost on Projected Benefit Obligation | 9,930 | 10,767 | 583 | 593 | ||||||||||||
Expected Return on Plan Assets | (13,582 | ) | (15,478 | ) | — | — | ||||||||||
Amortization of: | ||||||||||||||||
Prior Service Cost (Credit) | 45 | 45 | (182 | ) | (359 | ) | ||||||||||
Actuarial Loss | 2,910 | 3,833 | 790 | 863 | ||||||||||||
Net Periodic (Income) Expense | $ | 460 | $ | (232 | ) | $ | 1,217 | $ | 1,131 | |||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
March 31, 2019 | April 1, 2018 | March 31, 2019 | April 1, 2018 | |||||||||||||
Components of Net Periodic (Income) Expense: | ||||||||||||||||
Service Cost | $ | 3,427 | $ | 1,802 | $ | 79 | $ | 101 | ||||||||
Interest Cost on Projected Benefit Obligation | 29,790 | 32,301 | 1,749 | 1,779 | ||||||||||||
Expected Return on Plan Assets | (40,745 | ) | (46,434 | ) | — | — | ||||||||||
Amortization of: | ||||||||||||||||
Prior Service Cost (Credit) | 134 | 134 | (547 | ) | (1,076 | ) | ||||||||||
Actuarial Loss | 8,729 | 11,499 | 2,370 | 2,590 | ||||||||||||
Net Periodic (Income) Expense | $ | 1,335 | $ | (698 | ) | $ | 3,651 | $ | 3,394 | |||||||
The Company expects to make benefit payments of $3.4 million attributable to its non-qualified pension plans for the full year of fiscal 2019. During the first nine months of fiscal 2019, the Company made payments of approximately $2.8 million for its non-qualified pension plans. The Company anticipates making benefit payments of approximately $7.9 million for its other postretirement benefit plans for the full year of fiscal 2019. During the first nine months of fiscal 2019, the Company made payments of $6.8 million for its other postretirement benefit plans.
During the first nine 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. 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.
16
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 $2.3 million and $5.5 million for the three and nine months ended March 31, 2019, respectively. For the three and nine months ended April 1, 2018, stock based compensation expense was $1.4 million and $5.3 million, respectively.
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 $130.0 million with expiration dates ranging from May 2019 through June 2024.
In the second quarter of fiscal 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.
17
As of March 31, 2019 and July 1, 2018, the Company had the following outstanding derivative contracts (in thousands):
Contract | Notional Amount | |||||||
March 31, 2019 | July 1, 2018 | |||||||
Interest Rate: | ||||||||
LIBOR Interest Rate (U.S. Dollars) | Fixed | 250,000 | 110,000 | |||||
Foreign Currency: | ||||||||
Australian Dollar | Sell | 24,946 | 35,833 | |||||
Brazilian Real | Sell | 14,233 | 28,822 | |||||
Canadian Dollar | Sell | 17,240 | 14,430 | |||||
Chinese Renminbi | Buy | 98,160 | 62,209 | |||||
Euro | Sell | 7,060 | 32,592 | |||||
Japanese Yen | Buy | 450,000 | 587,500 | |||||
Commodity: | ||||||||
Natural Gas (Therms) | Buy | 7,648 | 10,553 | |||||
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 31, 2019 | July 1, 2018 | |||||||
Interest rate contracts | ||||||||
Other Current Assets | $ | 43 | $ | 161 | ||||
Other Long-Term Assets | 2,015 | 3,844 | ||||||
Accrued Liabilities | (6,815 | ) | — | |||||
Foreign currency contracts | ||||||||
Other Current Assets | 1,784 | 3,881 | ||||||
Other Long-Term Assets | 126 | 31 | ||||||
Accrued Liabilities | (87 | ) | (195 | ) | ||||
Other Long-Term Liabilities | — | — | ||||||
Commodity contracts | ||||||||
Other Current Assets | 27 | 16 | ||||||
Other Long-Term Assets | 5 | 5 | ||||||
Accrued Liabilities | (3 | ) | (7 | ) | ||||
Other Long-Term Liabilities | (6 | ) | (29 | ) | ||||
$ | (2,911 | ) | $ | 7,707 | ||||
18
The effect of derivative instruments on the Condensed Consolidated Statements of Operations and Comprehensive Loss is as follows (in thousands):
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 | ) | $ | — | |||||||