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Table of Contents

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
________________________________________________
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12886287&doc=13
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


Table of Contents

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

Table of Contents

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

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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

Table of Contents

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

Table of Contents


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

Table of Contents


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

Table of Contents

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

(1) Included within Beginning Cash, Cash Equivalents, and Restricted Cash is approximately $4.3 million and $0 of restricted cash as of July 1, 2018 and July 2, 2017, respectively.
(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

Table of Contents


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

Table of Contents

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

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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.



11

Table of Contents


 
 
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.


12

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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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Table of Contents


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

Table of Contents


 
 
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.

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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.
    

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Table of Contents


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


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Table of Contents


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
)
 
$


 
 
Three Months Ended April 1, 2018
 
 
Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
(Loss) on Derivatives, Net of
Taxes (Effective
Portion)
 
Classification of
Gain (Loss)
 
Amount of Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)
 
Recognized in
Earnings
(Ineffective Portion)
Interest rate contracts
 
$
1,151

 
Net Sales
 
$
80

 
$

Foreign currency contracts - sell
 
289

 
Net Sales
 
(2,261
)
 

Foreign currency contracts - buy
 
566

 
Cost of Goods Sold
 
140

 

Commodity contracts
 
28

 
Cost of Goods Sold
 
(33
)
 

 
 
$
2,034

 
 
 
$
(2,074
)
 
$


 
 
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