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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________ 
FORM 10-Q
______________________________________________________________ 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 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=13181445&doc=11
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)
___________________________________________________________ 
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 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:
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:
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 October 25, 2019
COMMON STOCK, par value $0.01 per share
 
42,483,625 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
 
 
 
 
 
 
 
 
September 29,
2019
 
June 30,
2019
CURRENT ASSETS:
 
 
 
 
Cash and Cash Equivalents
 
$
48,740

 
$
29,569

Accounts Receivable, Net
 
198,021

 
198,498

Inventories -
 
 
 
 
Finished Products
 
427,876

 
344,277

Work in Process
 
169,648

 
145,182

Raw Materials
 
14,877

 
12,547

Total Inventories
 
612,401

 
502,006

Prepaid Expenses and Other Current Assets
 
38,887

 
32,404

Total Current Assets
 
898,049

 
762,477

OTHER ASSETS:
 
 
 
 
Goodwill
 
169,131

 
169,682

Investments
 
47,333

 
49,641

Other Intangible Assets, Net
 
95,396

 
96,738

Long-Term Deferred Income Tax Asset
 
52,159

 
43,172

Other Long-Term Assets, Net
 
21,743

 
18,676

Right of Use Asset
 
91,285

 

Total Other Assets
 
477,047

 
377,909

PLANT AND EQUIPMENT:
 
 
 
 
Cost
 
1,228,401

 
1,220,339

Less - Accumulated Depreciation
 
826,239

 
809,294

Total Plant and Equipment, Net
 
402,162

 
411,045

TOTAL ASSETS
 
$
1,777,258

 
$
1,551,431



3

Table of Contents


BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except per share data)
(Unaudited)
 

LIABILITIES & SHAREHOLDERS’ INVESTMENT
 
 
 
 
 
 
 
 
September 29,
2019
 
June 30,
2019
CURRENT LIABILITIES:
 
 
 
 
Accounts Payable
 
$
247,338

 
$
287,620

Short-Term Debt
 

 
160,540

Accrued Liabilities
 
134,982

 
129,585

Short-Term Lease Obligations
 
11,968

 

Total Current Liabilities
 
394,288

 
577,745

OTHER LIABILITIES:
 
 
 
 
Accrued Pension Cost
 
217,154

 
221,033

Accrued Employee Benefits
 
21,329

 
21,311

Accrued Postretirement Health Care Obligation
 
24,691

 
25,929

Accrued Warranty
 
19,298

 
19,572

Other Long-Term Liabilities
 
47,493

 
44,152

Long-Term Lease Obligations
 
79,317

 

Long-Term Debt
 
565,863

 
194,969

Total Other Liabilities
 
975,145

 
526,966

SHAREHOLDERS’ INVESTMENT:
 
 
 
 
Common Stock - Authorized 120,000 shares, $.01 par value, issued 57,854 shares
 
579

 
579

Additional Paid-In Capital
 
69,873

 
78,902

Retained Earnings
 
958,222

 
993,873

Accumulated Other Comprehensive Loss
 
(297,363
)
 
(292,550
)
Treasury Stock at cost, 15,784 and 14,942 shares, respectively
 
(323,486
)
 
(334,084
)
Total Shareholders’ Investment
 
407,825

 
446,720

TOTAL LIABILITIES AND SHAREHOLDERS’ INVESTMENT
 
$
1,777,258

 
$
1,551,431



The accompanying notes are an integral part of these statements.
4

Table of Contents

BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended
 
 
September 29,
2019
 
September 30,
2018
NET SALES
 
$
313,719

 
$
278,997

COST OF GOODS SOLD
 
270,472

 
235,243

Gross Profit
 
43,247

 
43,754

ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
78,737

 
100,858

EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES
 
1,263

 
2,973

Loss from Operations
 
(34,227
)
 
(54,131
)
INTEREST EXPENSE
 
(6,905
)
 
(5,161
)
OTHER INCOME (EXPENSE), Net
 
(743
)
 
343

Loss Before Income Taxes
 
(41,875
)
 
(58,949
)
CREDIT FOR INCOME TAXES
 
(8,238
)
 
(17,963
)
NET LOSS
 
$
(33,637
)
 
$
(40,986
)
 
 
 
 
 
EARNINGS (LOSS) PER SHARE
 
 
 
 
Basic
 
$
(0.81
)
 
$
(0.98
)
Diluted
 
(0.81
)
 
(0.98
)
 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
Basic
 
41,603

 
41,858

Diluted
 
41,603

 
41,858

 
 
 
 
 
DIVIDENDS PER SHARE
 
$
0.05

 
$
0.14





The accompanying notes are an integral part of these statements.
5

Table of Contents

BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)


 
 
 
Three Months Ended
 
 
September 29,
2019
 
September 30,
2018
Net Loss
 
$
(33,637
)
 
$
(40,986
)
Other Comprehensive Income (Loss):
 
 
 
 
Cumulative Translation Adjustments
 
(5,588
)
 
(3,690
)
Unrealized Loss on Derivative Instruments, Net of Tax
 
(2,838
)
 
(698
)
Unrecognized Pension & Postretirement Obligation, Net of Tax
 
3,613

 
2,726

Other Comprehensive Loss
 
(4,813
)
 
(1,662
)
Total Comprehensive Loss
 
$
(38,450
)
 
$
(42,648
)



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 THREE MONTHS ENDED SEPTMEMBER 29, 2019
 
Common Stock
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Treasury Stock
 
Total Shareholder Investment
BALANCES, JUNE 30, 2019
 
$
579

 
$
78,902

 
$
993,873

 
$
(292,550
)
 
$
(334,084
)
 
446,720

Net Loss
 

 

 
(33,637
)
 

 

 
(33,637
)
Total Other Comprehensive Loss, Net of Tax
 

 

 

 
(4,813
)
 

 
(4,813
)
Cash Dividends Declared ($0.05 per share)
 

 

 
(2,086
)
 

 

 
(2,086
)
Stock Option Activity, Net of Tax
 

 
412

 

 

 

 
412

Restricted Stock
 

 
(10,064
)
 

 

 
9,708

 
(356
)
Amortization of Unearned Compensation
 

 
650

 

 

 

 
650

Deferred Stock
 

 
(597
)
 

 

 
542

 
(55
)
Deferred Stock - Directors
 

 
570

 
72

 

 
348

 
990

Treasury Stock Purchases
 

 

 

 

 

 

BALANCES, SEPTEMBER 29, 2019
 
$
579

 
$
69,873

 
$
958,222

 
$
(297,363
)
 
$
(323,486
)
 
$
407,825


FOR THE THREE MONTHS ENDED SEPTMEMBER 30, 2018
 
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
 

 

 
(40,986
)
 

 

 
(40,986
)
Total Other Comprehensive Loss, Net of Tax
 

 

 

 
(1,662
)
 

 
(1,662
)
Cash Dividends Declared ($0.14 per share)
 

 

 
(5,868
)
 

 

 
(5,868
)
Stock Option Activity, Net of Tax
 

 
555

 

 

 
1,823

 
2,378

Restricted Stock
 

 
(2,713
)
 

 

 
936

 
(1,777
)
Amortization of Unearned Compensation
 

 
905

 

 

 

 
905

Deferred Stock
 

 
(707
)
 

 

 
475

 
(232
)
Deferred Stock - Directors
 

 
989

 
249

 

 

 
1,238

Treasury Stock Purchases
 

 

 

 

 
(5,082
)
 
(5,082
)
BALANCES, SEPTEMBER 30, 2018
 
$
579

 
$
75,437

 
$
1,024,875

 
$
(253,934
)
 
$
(327,619
)
 
$
519,338



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)

 
 
Three Months Ended
 
 
September 29,
2019
 
September 30,
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net Loss
 
$
(33,637
)
 
$
(40,986
)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
 
 
 
 
Depreciation and Amortization
 
19,657

 
16,003

Stock Compensation Expense
 
2,319

 
2,632

Loss on Disposition of Plant and Equipment
 
1,421

 

Credit for Deferred Income Taxes
 
(9,148
)
 
(20,482
)
Equity in Earnings of Unconsolidated Affiliates
 
(1,745
)
 
(3,910
)
Dividends Received from Unconsolidated Affiliates
 
3,453

 
3,101

Change in Operating Assets and Liabilities:
 
 
 
 
Accounts Receivable
 
36

 
(1,465
)
Inventories
 
(112,759
)
 
(127,597
)
Other Current Assets
 
(6,974
)
 
8,014

Accounts Payable, Accrued Liabilities and Income Taxes
 
(25,052
)
 
27,374

Other, Net
 
735

 
629

Net Cash Used in Operating Activities
 
(161,694
)
 
(136,687
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Capital Expenditures
 
(18,825
)
 
(21,246
)
Cash Paid for Acquisition, Net of Cash Acquired
 

 
(8,865
)
Net Cash Used in Investing Activities
 
(18,825
)
 
(30,111
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Net Borrowings on Credit Facilities
 
210,250

 
153,371

Debt Issuance Costs
 
(4,350
)
 

Treasury Stock Purchases
 

 
(5,082
)
Stock Option Exercise Proceeds and Tax Benefits
 

 
1,823

Cash Dividends Paid
 
(5,888
)
 

Payments Related to Shares Withheld for Taxes for Stock Compensation
 
(55
)
 
(232
)
Net Cash Provided by Financing Activities
 
199,957

 
149,880

EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
(300
)
 
(940
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
19,138

 
(17,858
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, Beginning (1)
 
30,342

 
49,218

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, Ending (2)
 
$
49,480

 
$
31,360

(1) Included within Beginning Cash, Cash Equivalents, and Restricted Cash is approximately $0.8 million and $4.3 of restricted cash as of June 30, 2019 and July 1, 2018, respectively.
(2) Included within Ending Cash, Cash Equivalents, and Restricted Cash is approximately $0.7 million and $2.3 million of restricted cash as of September 29, 2019 and September 30, 2018, respectively.

The accompanying notes are an integral part of these statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and General Information
 
Briggs & Stratton Corporation (the “Company”) is focused on providing power to get work done and make people's lives better. The Company is a U.S. based producer of gasoline engines and outdoor power equipment. The Company’s Engines segment sells engines worldwide, primarily to original equipment manufacturers ("OEMs") of lawn and garden equipment and other gasoline engine powered equipment. The Company also sells related service parts and accessories for its engines. The Company’s Products segment designs, manufactures and markets a wide range of outdoor power equipment, job site products, and related accessories.

The majority of lawn and garden equipment is sold during the spring and summer months when most lawn care and gardening activities are performed. Engine sales in the Company’s third fiscal quarter have historically been the highest, while engine sales in the first fiscal quarter have historically been the lowest. Sales of pressure washers and lawn and garden powered equipment are typically higher during the third and fourth fiscal quarters than at other times of the year. Sales of portable generators and snowthrowers are typically higher during the first and second fiscal quarters.

Inventory levels generally increase during the first and second fiscal quarters in anticipation of customer demand. Inventory levels begin to decrease as sales increase in the third fiscal quarter. This seasonal pattern results in high inventories and low cash flow for the Company in the first, second and the beginning of the third fiscal quarters. The pattern generally results in higher cash flow in the latter portion of the third fiscal quarter and in the fourth fiscal quarter as inventories are liquidated and receivables are collected.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and therefore do not include all information and 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.

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. The Company has assessed this ASU and has determined that the Company will not make the permitted reclassification.

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 adopted this ASU prospectively effective July 1, 2019 and this standard did not have a material impact on the Company's Condensed Consolidated Financial Statements.



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Table of Contents

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated guidance requires a prospective adoption. The guidance is effective beginning fiscal year 2021. Early adoption is permitted. The Company adopted this ASU prospectively effective July 1, 2019 and this standard will not have a material impact on the Company's Condensed Consolidated Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Certain qualitative and quantitative disclosures are required, as well as a modified retrospective recognition and measurement of impacted leases. The Company adopted the guidance beginning fiscal year 2020. The Company's project plan involved identifying and implementing appropriate changes to its business processes, systems and controls as well as compiling and evaluating lease arrangements to support lease accounting and disclosures under Topic 842. Upon adoption, the Company recorded $93 million of right of use assets and lease obligation liabilities on the consolidated balance sheet. The Company elected the practical expedient package which allows the Company to maintain historical lease classification and not reassess initial direct costs. The standard did not have a significant impact on the Company's condensed consolidated financial statements. There was no impact on existing debt covenants. See footnote 15 for additional information on leases accounting.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU No. 2016-01 enhances the existing financial instruments reporting model by modifying fair value measurement tools, simplifying impairment assessments for certain equity instruments, and modifying overall presentation and disclosure requirements. The guidance 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 June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which requires the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The objective of ASU No. 2016-01 is to provide financial statement users with additional information about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of this ASU.


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Table of Contents


3. Accumulated Other Comprehensive Income (Loss)
The following tables set forth the changes in accumulated other comprehensive income (loss) (in thousands):
 
 
Three Months Ended September 29, 2019
 
 
Cumulative Translation Adjustments
 
Derivative Financial Instruments
 
Pension and Postretirement Benefit Plans
 
Total
Beginning Balance
 
$
(31,767
)
 
$
(7,066
)
 
$
(253,717
)
 
$
(292,550
)
Other Comprehensive Income (Loss) Before Reclassification
 
(5,588
)
 
(2,785
)
 
10

 
(8,363
)
Income Tax Benefit (Expense)
 

 
511

 
(2
)
 
509

Net Other Comprehensive Income (Loss) Before Reclassifications
 
(5,588
)
 
(2,274
)
 
8

 
(7,854
)
Reclassifications:
 
 
 
 
 
 
 


Realized (Gains) Losses - Foreign Currency Contracts (1)
 

 
(413
)
 

 
(413
)
Realized (Gains) Losses - Commodity Contracts (1)
 

 
(81
)
 

 
(81
)
Realized (Gains) Losses - Interest Rate Swaps (1)
 

 
(248
)
 

 
(248
)
Amortization of Prior Service Costs (Credits) (2)
 

 

 
19

 
19

Amortization of Actuarial Losses (2)
 

 

 
4,725

 
4,725

Total Reclassifications Before Tax
 

 
(742
)
 
4,744

 
4,002

Income Tax Expense (Benefit)
 

 
178

 
(1,139
)
 
(961
)
Net Reclassifications
 

 
(564
)
 
3,605

 
3,041

Other Comprehensive Income (Loss)
 
(5,588
)
 
(2,838
)
 
3,613

 
(4,813
)
Ending Balance
 
$
(37,355
)
 
$
(9,904
)
 
$
(250,104
)
 
$
(297,363
)
(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 September 30, 2018
 
 
Cumulative Translation Adjustments
 
Derivative Financial Instruments
 
Pension and Postretirement Benefit Plans
 
Total
Beginning Balance
 
$
(28,928
)
 
$
6,486

 
$
(229,830
)
 
$
(252,272
)
Other Comprehensive Income (Loss) Before Reclassification
 
(3,690
)
 
252

 


 
(3,438
)
Income Tax Benefit (Expense)
 

 
(61
)
 

 
(61
)
Net Other Comprehensive Income (Loss) Before Reclassifications
 
(3,690
)
 
191

 

 
(3,499
)
Reclassifications:
 
 
 
 
 
 
 


Realized (Gains) Losses - Foreign Currency Contracts (1)
 

 
(951
)
 

 
(951
)
Realized (Gains) Losses - Commodity Contracts (1)
 

 
(4
)
 

 
(4
)
Realized (Gains) Losses - Interest Rate Swaps (1)
 

 
(216
)
 

 
(216
)
Amortization of Prior Service Costs (Credits) (2)
 

 

 
(137
)
 
(137
)
Amortization of Actuarial Losses (2)
 

 

 
3,728

 
3,728

Total Reclassifications Before Tax
 

 
(1,171
)
 
3,591

 
2,420

Income Tax Expense (Benefit)
 

 
282

 
(865
)
 
(583
)
Net Reclassifications
 

 
(889
)
 
2,726

 
1,837

Other Comprehensive Income (Loss)
 
(3,690
)
 
(698
)
 
2,726

 
(1,662
)
Ending Balance
 
$
(32,618
)
 
$
5,788

 
$
(227,104
)
 
$
(253,934
)
(1) Amounts reclassified to net income (loss) are included in net sales or cost of goods sold. See Note 9 for information related to derivative financial instruments.
(2) Amounts reclassified to net income (loss) are included in the computation of net periodic expense, which is presented in cost of goods sold or engineering, selling, general and administrative expenses. See Note 7 for information related to pension and postretirement benefit plans.


4. Revenue
    
The Company has adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach. Revenue is measured based on consideration expected to be received from a customer, and excludes any cash discounts, volume rebates and discounts, floor plan interest, advertising allowances, and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control of a product to a customer, which is generally upon shipment.
Nature of Revenue
The Company’s revenues primarily consist of sales of engines and products to its customers. The Company considers the purchase orders, which may also be governed by purchasing agreements, to be the contracts with customers. For each contract, the Company considers delivery of the engines and products to be the identified performance obligations. The following is a description of principal activities, separated by reportable segments, from which the Company generates its revenue. For more detailed information about reportable segments, see Note 14.
The Engines segment principally generates revenue by providing gasoline engines and power solutions to OEMs which serve commercial and residential markets primarily for lawn and garden equipment applications. The Company typically enters into annual purchasing plans with its engine customers. In certain cases, the Company has entered into longer supply arrangements of two to three years; however, these longer term supply agreements do not generally create unfulfilled performance obligations. The sale of products to OEMs represents a single performance obligation. Revenue is recognized at a point in time when the product is shipped as substantially all engines are not customized for each customer and there is an alternative use for such inventory. The amount of revenue recognized is adjusted for variable consideration such as tiered volume discounts and rebates. Revenue recognized is also adjusted based on an estimate of future returns.

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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 months ended September 29, 2019 and September 30, 2018 were reductions for tiered volume discounts of $2.2 million and $1.2 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 months ended September 29, 2019 and September 30, 2018 were reductions for rebates of $2.5 million and $0.8 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 months ended September 29, 2019 and September 30, 2018 were financing costs, net of the related gain or loss on interest rate swaps, of $1.3 million and $0.7 million, respectively.
The Company estimates the expected number of returns based on historical return rates and reduces revenue by the amount of expected returns.
The Company requires prepayment on sales in limited circumstances, but the contract liability related to prepayments was immaterial as of September 29, 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 the three month period ended September 30, 2018, the Company recorded $4.1 million of bad debt expense related to a trade customer declaring bankruptcy. No material bad debt expense was recorded during the three month period ended September 29, 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 months ended September 29, 2019 and September 30, 2018, as follows (in thousands):


13

Table of Contents


 
 
Three Months Ended September 29, 2019
 
 
Engines
 
Products
 
Eliminations
 
Total
Commercial
 
$
39,653

 
$
73,421

 
$
(5,064
)
 
$
108,010

Residential
 
93,701

 
122,220

 
(10,212
)
 
205,709

Total
 
$
133,354

 
$
195,641

 
$
(15,276
)
 
$
313,719

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
 
Engines
 
Products
 
Eliminations
 
Total
Commercial
 
$
36,017

 
$
71,583

 
$
(1,466
)
 
$
106,134

Residential
 
83,073

 
101,459

 
(11,669
)
 
172,863

Total
 
$
119,090

 
$
173,042

 
$
(13,135
)
 
$
278,997



5. Earnings (Loss) Per Share
    
The Company computes earnings (loss) per share using the two-class method, an earnings allocation formula that determines earnings 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
 
 
September 29,
2019
 
September 30,
2018
Net Income (Loss)
 
$
(33,637
)
 
$
(40,986
)
Less: Allocation to Participating Securities
 
(63
)
 
(154
)
Net Income (Loss)
 Available to Common Shareholders
 
$
(33,700
)
 
$
(41,140
)
Average Shares of Common Stock Outstanding
 
41,603

 
41,858

Shares Used in Calculating Diluted Earnings (Loss) Per Share
 
41,603

 
41,858

Basic Earnings (Loss) Per Share
 
$
(0.81
)
 
$
(0.98
)
Diluted Earnings (Loss) Per Share
 
$
(0.81
)
 
$
(0.98
)


The dilutive effect of the potential exercise of outstanding stock-based awards to acquire common shares is calculated using the treasury stock method.

As a result of the Company incurring a net loss for the three months ended September 29, 2019, potential incremental common shares of 489,185, 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 September 29, 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 three months ended September 29, 2019, the Company repurchased no shares on the open market, as compared to 282,126 shares purchased on the open market at an average price of $18.02 per share during the three months ended September 30, 2018. The Company does not intend to repurchase shares through the conclusion of this authorization to support its efforts to deleverage.

14

Table of Contents


6. Investments

Investments represent the Company’s investments in unconsolidated affiliated companies.

The Company concluded that its equity method investments are integral to its business. The equity method investments provide manufacturing and distribution functions, which are important parts of its operations. The Company classifies its equity in earnings of unconsolidated affiliates as a separate line item within Income from Operations.
7. Pension and Postretirement Benefits

The Company has noncontributory defined benefit retirement plans and postretirement plans covering certain employees. The following tables summarize the plans’ income and expense for the periods indicated (in thousands):
 
 
Pension Benefits
 
Other Postretirement Benefits
 
 
Three Months Ended
 
Three Months Ended
 
 
September 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
Components of Net Periodic (Income) Expense:
 
 
 
 
 
 
 
 
Service Cost (Credit)
 
$
1,254

 
$
1,132

 
$
31

 
$
34

Interest Cost on Projected Benefit Obligation
 
8,664

 
9,937

 
449

 
580

Expected Return on Plan Assets
 
(12,823
)
 
(13,589
)
 

 

Amortization of:
 
 
 
 
 
 
 
 
Prior Service Cost (Credit)
 
19

 
45

 

 
(182
)
Actuarial Loss
 
3,976

 
2,926

 
749

 
802

Net Periodic Expense
 
$
1,090

 
$
451

 
$
1,229

 
$
1,234




The Company expects to make benefit payments of $3.5 million attributable to its non-qualified pension plans for the full year of fiscal 2020. During the first three months of fiscal 2020, the Company made payments of approximately $0.9 million for its non-qualified pension plans. The Company anticipates making benefit payments of approximately $6.7 million for its other postretirement benefit plans for the full year of fiscal 2020. During the first three months of fiscal 2020, the Company made payments of $1.7 million for its other postretirement benefit plans.
 
During the first three months of fiscal 2020, the Company made no cash contributions to the qualified pension plan. Based upon current regulations and actuarial studies the Company is required to make no minimum contributions to the qualified pension plan in fiscal 2020. The Company may be required to make further required contributions in future years or the future expected funding requirements may change depending on a variety of factors including the actual return on plan assets, the funded status of the plan in future periods, and changes in actuarial assumptions or regulations.
8. Stock Incentives
 
Stock based compensation expense is calculated by estimating the fair value of incentive stock awards granted and amortizing the estimated value over the awards' vesting period. Stock based compensation expense was $2.3 million for the three months ended September 29, 2019. For the three months ended September 30, 2018, stock based compensation expense was $2.6 million.

9. Derivative Instruments & Hedging Activities

The Company enters into derivative contracts designated as cash flow hedges to manage certain interest rate, foreign currency and commodity exposures. Company policy allows derivatives to be used only for identifiable exposures and, therefore, the Company does not enter into derivative instruments for trading purposes where the sole objective is to generate profits.

The Company formally designates the financial instrument as a hedge of a specific underlying exposure and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally

15

Table of Contents


assesses, both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Derivative financial instruments are recorded within the Condensed Consolidated Balance Sheets as assets or liabilities, measured at fair value. The effective portion of gains or losses on derivatives designated as cash flow hedges are reported as a component of Accumulated Other Comprehensive Income (Loss) (AOCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of a financial instrument's change in fair value is immediately recognized in earnings.

The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is dedesignated because a forecasted transaction is not probable of occurring, or management determines to remove the designation of the cash flow hedge.

In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income related to the hedging relationship.
    
The Company enters into interest rate swaps to manage a portion of its interest rate risk from financing certain dealer and distributor inventories through a third party financing source. The swaps are designated as cash flow hedges and are used to effectively fix the interest payments to third party financing sources, exclusive of lender spreads, ranging from 0.98% to 2.83% for a notional principal amount of $110.0 million with expiration dates ranging from July 2021 through June 2024.

In the second quarter of fiscal 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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As of September 29, 2019 and June 30, 2019, the Company had the following outstanding derivative contracts (in thousands):
Contract
 
Notional Amount
 
 
 
 
September 29,
2019
 
June 30,
2019
Interest Rate:
 
 
 
 
 
 
LIBOR Interest Rate (U.S. Dollars)
 
Fixed
 
230,000

 
230,000

Foreign Currency:
 
 
 
 
 
 
Australian Dollar
 
Sell
 
10,624

 
17,611

Brazilian Real
 
Sell
 
17,403

 
13,436

Canadian Dollar
 
Sell
 
5,795

 
14,610

Chinese Renminbi
 
Buy
 
57,200

 
70,555

Euro
 
Sell
 
2,550

 
2,750

Commodity:
 
 
 
 
 
 
Natural Gas (Therms)
 
Buy
 
5,719

 
7,627


The location and fair value of derivative instruments reported in the Condensed Consolidated Balance Sheets are as follows (in thousands):
Balance Sheet Location
 
Asset (Liability) Fair Value
 
 
September 29,
2019
 
June 30,
2019
Interest rate contracts
 
 
 
 
Other Long-Term Assets
 
529

 
876

Other Long-Term Liabilities
 
(15,361
)
 
(11,634
)
Foreign currency contracts
 
 
 
 
Other Current Assets
 
888

 
672

Other Long-Term Assets
 

 
16

Accrued Liabilities
 
(243
)
 
(179
)
Other Long-Term Liabilities
 
(26
)
 
(11
)
Commodity contracts
 
 
 
 
Other Long-Term Assets
 
3

 

Accrued Liabilities
 
(161
)
 
(176
)
Other Long-Term Liabilities
 
(1
)
 
(15
)
 
 
$
(14,372
)
 
$
(10,451
)

The effect of derivative instruments on the Condensed Consolidated Statements of Operations and Comprehensive Loss is as follows (in thousands):
 
 
Three Months Ended September 29, 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
 
$
(511
)
 
Net Sales
 
$
248

 
$

Foreign currency contracts - sell
 
429

 
Net Sales
 
478

 

Foreign currency contracts - buy
 
(176
)
 
Cost of Goods Sold
 
(65
)
 

Commodity contracts
 
25

 
Cost of Goods Sold
 
81

 

Interest rate contracts
 
(2,552
)
 
Interest Expense
 

 

 
 
$
(2,785
)
 
 
 
$
742

 
$



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Three Months Ended September 30, 2018
 
 
Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
(Loss) on Derivatives, Net of
Taxes (Effective
Portion)
 
Classification of
Gain (Loss)
 
Amount of Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)
 
Recognized in
Earnings
(Ineffective Portion)
Interest rate contracts
 
$
106

 
Net Sales
 
$
216

 
$

Foreign currency contracts - sell
 
(331
)
 
Net Sales
 
1,116

 

Foreign currency contracts - buy
 
(457
)
 
Cost of Goods Sold
 
(165
)
 

Commodity contracts
 
(16
)
 
Cost of Goods Sold
 
4

 

 
 
$
(698
)
 
 
 
$
1,171

 
$





During the next twelve months, the estimated net amount of gain on cash flow hedges as of September 29, 2019 expected to be reclassified out of AOCI into earnings is $0.9 million.
10. Fair Value Measurements

The following guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:

Level 1: Quoted prices for identical instruments in active markets.

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable.

Level 3: Significant inputs to the valuation model are unobservable.
The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 29, 2019 and June 30, 2019 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
 
September 29,
2019
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Derivatives
 
$
1,420

 
$

 
$
1,420

 
$

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$
15,792

 
$

 
$
15,792

 
$

 
 
June 30,
2019
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Derivatives
 
$
1,564

 
$

 
$
1,564

 
$

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$
12,014

 
$

 
$
12,014

 
$



The fair values for Level 2 measurements are based upon the respective quoted market prices for comparable instruments in active markets, which include current market pricing for forward purchases of commodities, foreign currency forwards, and current interest rates.

The Company has currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States.


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Table of Contents


The estimated fair value of the Company's Senior Notes (as defined in Note 16) at September 29, 2019 and June 30, 2019 was $198.3 million and $203.6 million, respectively, compared to the carrying value of $195.5 million and $195.5 million. The estimated fair value of the Senior Notes is based on quoted market prices for similar instruments and is, therefore, classified as Level 2 within the valuation hierarchy. The carrying value of the ABL Facility (as defined in Note 16) approximates fair value since the underlying rate of interest is variable based upon LIBOR rates.  

The Company believes that the carrying values of cash and cash equivalents, trade receivables, and accounts payable are reasonable estimates of their fair values at September 29, 2019 and June 30, 2019 due to the short-term nature of these instruments.
11. Warranty

The Company recognizes the cost associated with its standard warranty on Engines and Products at the time of sale. The general warranty period begins at the time of retail sale and typically covers two years, but may vary due, in general, to product type and geographic location. The amount recognized is based on historical failure rates and current claim cost experience. The following is a reconciliation of the changes in accrued warranty costs for the reporting period (in thousands):
 
 
Three Months Ended
 
 
September 29,
2019
 
September 30,
2018
Beginning Balance
 
$
47,621

 
$
45,327

Payments
 
(8,091
)
 
(6,479
)
Provision for Current Year Warranties
 
3,814

 
2,678

Changes in Estimates
 
(11
)
 
33

Ending Balance
 
$
43,333

 
$
41,559


12.