BRIGGS & STRATTON CORPORATION RESULTS OF OPERATIONS
The following table is a reconciliation of financial results by segment, as reported, to adjusted financial results by segment, excluding business optimization and engine manufacturing consolidation charges for the three months endedMarch 29, 2020 andMarch 31, 2019 (in thousands, except per share data): Three Months Ended Fiscal March 2020 Reported Adjustments(1) 2020 Adjusted(3) 2019 Reported Adjustments(2) 2019 Adjusted(3) Gross Profit: Engines$ 45,418 $ 6,184 $ 51,602 $ 72,529 $ 623$ 73,152 Products 17,789 2,189 19,978 24,348 3,267 27,615 Inter-Segment Eliminations 257 - 257 110 - 110 Total$ 63,464 $ 8,373 $ 71,837 $ 96,987 $ 3,890 $ 100,877 Engineering, Selling, General and Administrative Expenses: Engines$ 45,983 $ 907$ 45,076 $ 49,287 $ 3,835 $ 45,452 Products 28,914 305 28,609 30,234 1,428 28,806 Total$ 74,897 $ 1,212 $ 73,685 $ 79,521 $ 5,263 $ 74,258 Goodwill Impairment Engines$ 55,463 $ 55,463 $ - $ - $ - $ - Products 12,017 12,017 - - - - Total$ 67,480 $ 67,480 $ - $ - $ - $ - Equity in Earnings of Unconsolidated Affiliates Engines$ (3,133) $ 3,318 $ 185$ (408) $ 753 $ 345 Products 387 - 387 203 - 203 Total$ (2,746) $ 3,318 $ 572$ (205) $ 753 $ 548 Segment Income (Loss): Engines$ (59,161) $ 65,872 $ 6,711$ 22,833 $ 5,211 $ 28,044 Products (22,755) 14,511 (8,244) (5,682) 4,694 (988) Inter-Segment Eliminations 257 - 257 110 - 110 Total$ (81,659) $ 80,383 $ (1,276) $ 17,261 $ 9,905 $ 27,166 Interest Expense$ (9,521) $ -$ (9,521) $ (9,088) $ 15$ (9,073) Other Income (Expense)$ (1,773) $
20
- $ 953
Income Before Income Taxes (92,953) 80,403 (12,550) 9,126 9,920 19,046
Provision for Income Taxes 51,653 (53,360) (1,707) 1,121 3,288 4,409
Net Income (Loss) $ (144,606) $ 133,763 $ (10,843) $ 8,005 $ 6,632 $ 14,637
Earnings Per Share
Basic $ (3.47) $ 3.21 $ (0.26) $ 0.19 $ 0.15 $ 0.34
Diluted $ (3.47) $ 3.21 $ (0.26) $ 0.19 $ 0.15 $ 0.34
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(1) For the third quarter of fiscal 2020, engine manufacturing consolidation charges include$4.0 million ($1.0 million after tax) of cash charges and$2.2 million ($0.6 million after tax) of non-cash charges related to the closure of the engine plant inMurray, Kentucky . Business optimization expenses include$2.8 million ($0.7 million after tax) of cash charges and$0.9 million ($0.2 million after tax) to the warehouse optimization program and the plan to onshore Commercial engine production. Goodwill Impairment charges include$67.5 million ($67.5 million after tax) of non-cash impairment charges related to the impairment of Job Site and Engines goodwill. Gross profit includes$1.7 million ($0.4 million after tax) related to the settlement of a product liability matter. ESG&A includes$1.3 million ($0.3 million after tax) related to business realignment. Tax expense includes a$70.3 . million charge to record a valuation allowance against deferred tax assets and a$7.5 million benefit as a result of the Coronavirus Aid and Relief and Economic Security Act (CARES Act). (2) For the third quarter of fiscal 2019, business optimization expenses include$1.4 million ($0.9 million after tax) of non-cash charges related to accelerated depreciation, and$8.4 million ($5.6 million after tax) of cash charges related primarily to activities associated with the upgrade to the Company's ERP system, professional services, employee termination benefits, and plant rearrangement activities. The Company recognized$0.2 million ($0.1 million after tax) related to acquisition integration activities. (3) Adjusted financial results are non-GAAP financial measures. The Company believes this information is meaningful to investors as it isolates the impact that business optimization charges, engine manufacturing consolidation charges, and certain other items have on reported financial results and facilitates comparisons between peer companies. The Company may utilize non-GAAP financial measures as a guide in the forecasting, budgeting, and long-term planning process. While the Company believes that adjusted financial results are useful supplemental information, such adjusted financial results are not intended to replace its GAAP financial results and should be read in conjunction with those GAAP results. 40
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Consolidated net sales for the third quarter of fiscal year 2020 were
Engines segment net sales in the third quarter of fiscal year 2020 decreased$66.6 million , or 19.8%, from the prior year. Engine sales unit volumes decreased by 26%, or approximately 538,000 engines, in the third quarter of fiscal year 2020 compared to the same period last year principally on lower shipments of residential engines to OEM customers due to timing and a reduction related to the COVID-19 pandemic.
Products segment net sales in the third quarter of fiscal year 2020 decreased
GROSS PROFIT
The consolidated gross profit percentage was 13.4% in the third quarter of fiscal year 2020, a decrease from 16.7% in the same period last year. Adjusted gross profit percentage was 15.2% in the third quarter this year, a decrease from 17.4% in the same period last year. The Engines segment gross profit percentage was 16.8% in the third quarter of fiscal year 2020, a decrease of 480 basis points from 21.6% in the third quarter of fiscal year 2019. Adjusted gross profit margins also declined 270 basis points on lower production volumes and unfavorable foreign exchange, partially offset by business optimization program savings and manufacturing efficiency improvements of$6 million . The Products segment gross profit percentage was 7.8% for the third quarter of fiscal year 2020, down from 9.0% in the third quarter of fiscal year 2019. The adjusted gross profit percentage decreased 150 basis points principally related to the unfavorable sales mix including the impact of COVID-19, higher material cost and unfavorable foreign exchange. Partially offsetting the decrease were improved manufacturing efficiencies and business optimization program savings of nearly$5 million .
ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Engineering, selling, general and administrative expenses (ESG&A) were$74.9 million in the third quarter of fiscal year 2020, a decrease of$4.6 million , or 5.8%, from the third quarter of fiscal year 2019.
The Engines segment ESG&A expenses for the third quarter of fiscal year 2020
decreased
The Products segment ESG&A decreased by
GOODWILL IMPAIRMENT
Goodwill Impairment of$67.5 million for the third quarter of fiscal year 2020 included$12.0 million in the Products segment related to the Job Site reporting unit and$55.5 million in the Engines reporting unit. The impairment charge did not adversely affect the Company's debt position, cash flow, liquidity or compliance with financial covenants under its revolving credit facility.
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES
Equity in earnings of unconsolidated affiliates decreased by$2.5 million during the third quarter of fiscal year 2020 compared to the same period in the previous year. Adjusted equity in earnings of unconsolidated affiliates was flat to the prior year. COVID-19 41
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InMarch 2020 , theWorld Health Organization characterized the coronavirus outbreak ("COVID-19") a pandemic, and the President ofthe United States declared the COVID-19 outbreak a national emergency. The rapid spread of the virus and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy. To protect the health, safety and well-being of its employees, customers, channel partners and the public, the Company continues to implement preventative measures while also seeking to meet the needs of its global customers as an essential supplier to their businesses. These measures include more frequent and deeper cleaning of facilities; using appropriate social distancing, and other preventative practices; working remotely when possible; restricting business travel; cancelling certain events; and restricting visitor access to facilities. In response to the spread of COVID-19, uncertain economic conditions resulting in reduced demand and potential constraints on its supply chain, the Company reduced manufacturing activity at several of its manufacturing facilities and temporarily shut down others. As discussed further below, the Company also took other actions to manage expenditures in this fluid business environment. The Company will continue to monitor the situation and adjust manufacturing and other operations as the situation warrants.
For the third quarter of fiscal 2020, the Company estimates the COVID-19
pandemic negatively impacted sales by approximately
The Company is monitoring the progression of the pandemic and its potential
effect on its financial position, results of operations, and cash flows. While
the ultimate health and economic impact of the COVID-19 pandemic is highly
uncertain, the Company expects that its business operations and results of
operations, including the Company's net revenues, earnings and cash flows, will
be materially adversely impacted for at least the remainder of fiscal year 2020.
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The following table is a reconciliation of financial results by segment, as reported, to adjusted financial results by segment, excluding business optimization and engine manufacturing consolidation charges for the nine months endedMarch 29, 2020 andMarch 31, 2019 (in thousands, except per share data): Nine Months Ended Fiscal March 2020 Reported Adjustments(1) 2020 Adjusted(3) 2019 Reported Adjustments(2) 2019 Adjusted(3) Gross Profit: Engines$ 97,753 $ 18,359 $ 116,112 $ 144,272 $ 1,712 $ 145,984 Products 77,786 3,279 81,065 89,402 6,978 96,380 Inter-Segment Eliminations (804) - (804) (441) - (441) Total$ 174,735 $ 21,638 $ 196,373 $ 233,233 $ 8,690 $ 241,923 Engineering, Selling, General and Administrative Expenses: Engines$ 141,498 $ 2,648 $ 138,850 $ 163,997 $ 22,754 $ 141,243 Products 91,260 779 90,481 103,556 12,884 90,672 Total$ 232,758 $ 3,427 $ 229,331 $ 267,552 $ 35,638 $ 231,914 Goodwill Impairment Engines$ 55,463 $ 55,463 $ - $ - $ - $ - Products 12,017 12,017 - - - - Total$ 67,480 $ 67,480 $ - $ - $ - $ - Equity in Earnings of Unconsolidated Affiliates Engines$ (2,104) $ 3,839 $ 1,735$ 3,146 $ 2,617 $ 5,763 Products 1,567 - 1,567 2,640 - 2,640 Total$ (537) $ 3,839 $ 3,302$ 5,786 $ 2,617 $ 8,403 Segment Income (Loss): Engines$ (101,312) $ 80,309 $ (21,003) $ (16,579) $ 27,083 $ 10,504 Products (23,924) 16,075 (7,849) (11,513) 19,862 8,349 Inter-Segment Eliminations (804) - (804) (441) - (441) Total$ (126,040) $ 96,384 $ (29,656) $ (28,533) $ 46,945 $ 18,412 Interest Expense$ (25,390) $ -$ (25,390) $ (21,731) $ 263$ (21,468) Other Income (Expense)$ (2,904) $
20
- $ 391
Income (Loss) Before Income Taxes (154,334) 96,404 (57,930) (49,874) 47,208 (2,666)
Provision (Credit) for Income Taxes 39,253 (50,581) (11,328) (14,331) 9,602 (4,729)
Net Income (Loss) $ (193,587) $ 146,985 $ (46,602) $ (35,543) $ 37,606 $ 2,063
Earnings (Loss) Per Share
Basic $ (4.65) $ 3.53 $ (1.12) $ (0.86) $ 0.90 $ 0.04
Diluted (4.65) 3.53 $ (1.12) (0.86) 0.90 $ 0.04
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(1) For the nine months endedMarch 29, 2020 , engine manufacturing consolidation charges include$9.0 million ($5.2 million after tax) of cash charges and$9.1 million ($5.3 million after tax) of non-cash charges related to the closure of the engine plant inMurray, Kentucky . Business optimization expenses include$5.6 million ($3.2 million after tax) of cash charges and$2.2 million ($1.3 after tax) to the warehouse optimization program and the plan to onshore Commercial engine production. Goodwill Impairment charges include$67.5 million ($67.5 million after tax) of non-cash impairment charges related to the impairment of Job Site and Engines goodwill. Gross profit includes$1.7 million ($1.0 million after tax) related to the settlement of a product liability matter. ESG&A includes$1.3 million ($0.8 million after tax) related to business realignment. Tax expense includes a$70.3 million charge to record a valuation allowance against deferred tax assets and a$7.5 million benefit as a result of the Coronavirus Aid and Relief and Economic Security Act (CARES Act). (2) For the first nine months of fiscal 2019, business optimization expenses include$2.9 million ($2.3 million after tax) of non-cash charges related to accelerated depreciation, and$37.3 million ($29.0 million after tax) of cash charges related primarily to activities associated with the upgrade to the Company's ERP system, professional services, employee termination benefits, and plant rearrangement activities. The Company recognized bad debt expense of$4.1 million ($3.1 million after tax) after a major retailer announced that it had filed for bankruptcy protection. The Company recognized$2.0 million ($1.5 million after tax) for amounts accrued related to a litigation settlement and$0.5 million ($0.3 million after tax) related to acquisition integration activities. Interest expense includes$0.2 million ($0.2 million after tax) for premiums paid to repurchase senior notes. Tax expense includes a$1.1 million charge associated with the Tax Cuts and Jobs Act of 2017 to record the impact of the inclusion of foreign earnings. (3) Adjusted financial results are non-GAAP financial measures. The Company believes this information is meaningful to investors as it isolates the impact that business optimization charges, engine manufacturing consolidation charges, and certain other items have on reported financial results and facilitates comparisons between peer companies. The Company may utilize non-GAAP financial measures as a guide in the forecasting, budgeting, and long-term planning process. While the Company believes that adjusted financial results are useful supplemental information, such adjusted financial results are not intended to replace its GAAP financial results and should be read in conjunction with those GAAP results. 44
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Consolidated net sales for the first nine months of fiscal year 2020 were
Engines segment net sales for the first nine months of fiscal year 2020 decreased$105.2 million , or 14.5%, from the prior year. Engine sales unit volumes decreased by 19.1%, or approximately 902,000 engines, for the first nine months of fiscal year 2020 compared to the same period last year principally due to the timing of OEM mower builds, which began earlier in fiscal year 2019 to support brand transitions at retail, in addition to a reduction of shipments related to the COVID-19 pandemic.
Products segment net sales for the first nine months of fiscal year 2020
decreased
The consolidated gross profit percentage was 14.3% in the first nine months of fiscal year 2020, a decrease from 17.1% in the same period last year. Adjusted gross profit percentage was 16.0% in the first nine months of fiscal year 2020, a decrease from 17.7% in the same period last year. The Engines segment gross profit percentage was 15.7% in the first nine months of fiscal year 2020, a decrease of 410 basis points from 19.8% in the first nine months of fiscal year 2019. Adjusted gross profit margins decreased 140 basis points on the lower sales and production volumes and unfavorable foreign exchange partially offset by business optimization savings. The Products segment gross profit percentage was 11.7% for the first nine months of fiscal year 2020, down from 12.8% in the first nine months of fiscal year 2019. Adjusted gross profit percentage was 12.2% for the first nine months of fiscal year 2020, down from 13.8% in the first nine months of fiscal year 2019. The decrease in adjusted gross profit percentage was primarily due to lower sales and production volumes as well as unfavorable foreign exchange.
ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Engineering, selling, general and administrative expenses (ESG&A) were
The Engines segment ESG&A expenses for the first nine months of fiscal year 2020 decreased$22.5 million from the first nine months of fiscal year 2019. Adjusted ESG&A expenses decreased$2.4 million from last year primarily related to lower sales and timing. GAAP ESG&A expense included more business optimization charges in the first quarter of fiscal year 2019 compared to the current year. The Products segment ESG&A during the first nine months of fiscal year 2020 decreased by$12.3 million and adjusted ESG&A expenses decreased$0.2 million from the same period in the previous year. Fiscal year 2019 GAAP ESG&A expenses included$4.1 million of bad debt expense due to a major retailer announcing that it had filed for bankruptcy protection,$2.0 million for amounts accrued related to a litigation settlement, and higher business optimization charges.
GOODWILL IMPAIRMENT
Goodwill Impairment of$67.5 million for the first nine months of fiscal year 2020 included$12.0 million in the Products segment related to the Job Site reporting unit and$55.5 million in the Engines reporting unit. The impairment charge did not adversely affect the Company's debt position, cash flow, liquidity or compliance with financial covenants under its revolving credit facility. 45
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EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES
Equity in earnings of unconsolidated affiliates decreased by$6.3 million in the first nine months of fiscal year 2020 compared to the same period in the previous year. Adjusted equity in earnings of unconsolidated affiliates decreased by$5.1 million due to the ramp down of the Company's Japanese joint venture that formerly produced Vanguard engines and a decrease in the Company's service parts distributors' profitability. This was primarily due to higher shipping costs to refill channel inventory of service parts. 46
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INTEREST EXPENSE
Interest expense for the three and nine months endedMarch 29, 2020 was$0.4 million and$3.7 million higher than the same period last year due to higher borrowings on the ABL Facility.
PROVISION FOR INCOME TAXES
The effective tax rate for the third quarter of fiscal year 2020 was (55.6)% compared to 12.3% for the same period last year. The effective tax rate for the first nine months of fiscal year 2020 was (25.4)%, compared to 28.7% for the same period last year. During the third quarter of fiscal year 2020, the Company recorded a valuation allowance against itsU.S. and state deferred tax assets in the amount of approximately$70.3 million . The tax rates for fiscal year 2020 were more significantly impacted by losses for which the Company does not receive a tax benefit, including the aforementionedU.S. and state valuation allowance. The Company recorded an income tax expense of approximately$1.1 million related to the inclusion of foreign earnings as a result ofU.S. tax legislation during fiscal year 2019. Changes in corporate tax rates, the deferred tax assets and liabilities relating to the Company'sU.S. operations, the taxation of foreign earnings, and the deductibility of expenses contained in future tax legislation could have a material impact on the Company's future consolidated tax expense. BUSINESS OPTIMIZATION PROGRAM The Company completed the implementation of its previously announced business optimization program during the third quarter of fiscal year 2020. The program is designed to drive efficiencies and expand capacity in commercial engines and cutting equipment. The program entailed expanding production of Vanguard commercial engines into the Company's existing large engine plants, which are located inGeorgia andAlabama , expanding Ferris commercial mower production capacity into a new, modern facility which is located close to the former manufacturing facility inNew York , and the implementation of an ERP upgrade. The Company went live with the ERP upgrade at the beginning of the first quarter of fiscal year 2019. Production of Vanguard engines in the Company'sU.S. plants began in the fourth quarter of fiscal year 2018 and additional lines were phased in by the end of the fourth quarter of fiscal year 2019. Previously, the majority of Vanguard engines were sourced from overseas. Production of Ferris commercial mowers began in the new facility in the fourth quarter of fiscal year 2018 and all remaining production was transitioned in the third quarter of fiscal year 2019. During fiscal year 2020, the Company recorded business optimization charges of$7.8 million ($4.5 million after tax or$0.11 per diluted share). The business optimization program is expected to generate pre-tax savings of$35 million to$40 million of ongoing future annual pre-tax savings, in addition to supporting profitable commercial growth. The Company estimates$5 million of incremental savings to be realized in fiscal year 2020, and the future annual savings will be achieved by fiscal year 2022.
ENGINE MANUFACTURING CONSOLIDATION PROJECT
The Company made progress on the previously announced engine manufacturing consolidation project in the first nine months of fiscal year 2020. The Company fully transitioned engine assembly toPoplar Bluff by the end of the third quarter of fiscal year 2020. Project costs remain on track, and the Company remains on target to recognize approximately$10 million in pre-tax cost savings in fiscal year 2021 and upwards of$14 million in pre-tax cost savings by fiscal year 2022. STRATEGIC REPOSITIONING During the first half of fiscal 2020, the Company devoted significant time to more fully analyzing the dynamics of its markets with outside assistance. As a result of careful analysis of market dynamics and opportunities, the Company announced during the third quarter of fiscal year 2020 that it will be repositioning to focus its businesses in the design, production and sale ofBriggs & Stratton residential engines, where it maintains a recognized global leadership position; Vanguard commercial engines, which has experienced sustained high growth and market share gains;Briggs & Stratton standby power generation, in which it maintains the number two position inNorth America ; and Vanguard commercial battery systems, where it is a pioneer in commercializing electrification for a broad range 47
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of commercial applications. The repositioning includes planned divestitures of the majority of the businesses within the Products Segment. Priority is being placed on divesting the turf products business headquartered in theU.S. and the pressure washer and portable generator product lines. Due to the uncertainty related to COVID-19, the expected timing of the Company's process will be impacted. The turf products business includes premier lawn and garden and turf care equipment sold under the Ferris®, Billy Goat®, Simplicity®, Snapper®, and Snapper Pro® brands. Associated with the strategic repositioning plan are expected charges of$35 million to$45 million , of which, approximately$20 million to$25 million are cash charges. The charges are expected to be incurred during fiscal years 2020 and 2021. LIQUIDITY AND CAPITAL RESOURCES Cash flows used in operating activities for the first nine months of fiscal year 2020 were$169.6 million compared to$104.9 million in the first nine months of fiscal year 2019. The increase in cash used in operating activities related to changes in working capital, primarily due to reduction in accounts payable during the first nine months of fiscal year 2020. Cash flows used in investing activities were$40.4 million and$55.2 million during the first nine months of fiscal year 2020 and fiscal year 2019, respectively. The$14.8 million decrease in cash used in investing activities primarily related to lower cash paid for acquisitions and lower capital expenditures.
Cash flows provided by financing activities were
FUTURE LIQUIDITY AND CAPITAL RESOURCES
On
OnSeptember 27, 2019 the Company entered into a$625 million revolving credit agreement ("ABL Facility") that matures onSeptember 27, 2024 , subject to a springing maturity onSeptember 15, 2020 if any of the$195 million aggregate principal amount of the Company's Senior Notes remain outstanding and unreserved under the ABL Facility. The ABL Facility replaced the$500 million amended and restated multicurrency credit agreement ("Revolver") datedMarch 25, 2016 . The initial aggregate commitments under the ABL Facility were$625 million , subject to a borrowing base consisting of certain eligible cash, accounts receivable, inventory, equipment, trademarks and real estate. Availability under the ABL Facility is reduced by outstanding letters of credit. As ofMarch 29, 2020 , there were borrowings of$402.2 million and letters of credit of$45.3 million outstanding under the ABL Facility. As a result, availability under the ABL was$73.5 million atMarch 29, 2020 . There were outstanding borrowings of$160.5 million under the Revolver as ofJune 30, 2019 . In connection with the ABL Facility, the Company incurred$6.2 million of fees in fiscal year 2020. The Company classifies debt issuance costs related to the ABL Facility as an asset, regardless of whether it has any outstanding borrowings on the line of credit arrangements. The ABL Facility is secured by first priority liens on substantially all of the Company's assets. Borrowing under the ABL Facility by the Company bear interest at a rate per annum equal to 1, 2, 3 or 6 month LIBOR rate plus an applicable margin varying from 1.50% to 2.25% depending on the Consolidated Fixed Charge Coverage Ratio at the most recent determination date; see below regarding changes to the interest rate as a result of amendments to the ABL Facility in the third and fourth fiscal quarter of 2020. In addition, the Company is subject to a 0.25% commitment fee on the unused portion of the commitments and a 1.25% letter of credit fee. The Senior Notes and the ABL Facility contain covenants that are usual and customary for facilities and transactions of this type and that, among other things, restrict the ability of the Company and/or certain subsidiaries to pay dividends, repurchase equity interests of the Company and certain subsidiaries, make other restricted payments, incur or guarantee certain indebtedness, create liens, consolidate and merge and dispose of assets, and enter into transactions with the Company's affiliates. These covenants are subject to a number of other limitations and exceptions set forth in the agreements. The ABL Facility contains a springing financial covenant that would require the Company to maintain a Fixed Charge Coverage Ratio (as defined in the ABL Facility) of no less than 1.0 to 1.0 if 48
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aggregate availability under the ABL Facility (also referred to as excess
availability) decreases below the greater of
OnJanuary 29, 2020 , the Company entered into an amendment to the ABL Facility (the "January Amendment"). The January Amendment, among other things, added a new pricing level increasing the specified interest rate by 25 basis points to apply fromJanuary 29, 2020 until the Company delivers financial statements for the third fiscal quarter of 2020. The new pricing level will also be in effect thereafter when the Company's Fixed Charge Coverage Ratio is less than or equal to 0.75 to 1.00. Additionally, the January Amendment reduced the minimum aggregate availability required to trigger a liquidity event (as defined in the ABL Facility) betweenSeptember 27, 2019 and the end of the Company's third fiscal quarter of 2020 to the greater of$30 million and 7.5% of the line cap, which is equal to the lesser of aggregate commitments and the borrowing base. Should availability fall below 7.5%, the Company would be required to test the Fixed Charge Coverage Ratio, and would not have complied as ofMarch 29, 2020 because the Fixed Charge Coverage Ratio was (.23) to 1.00 at that date. Additionally, the January Amendment amended the financial covenant to reduce the minimum aggregate availability to avoid triggering the requirement to comply with the Fixed Charge Coverage Ratio fromSeptember 27, 2019 to the end of the Company's third fiscal quarter of 2020. As amended, the Company must maintain a Fixed Charge Coverage Ratio of no less than 1.0 to 1.0 when aggregate availability is less than the greater of$30 million and 7.5% of the line cap, which is equal to the lesser of aggregate commitments and the borrowing base. Thereafter, the aggregate availability threshold will revert back to the greater of$50 million and 12.5%. OnApril 27, 2020 , the Company entered into Amendment No. 4 to the ABL Facility. The Amendment No. 4 amends certain provisions of the ABL Facility to, among other things, (a) during the period commencing on the effective date of the Amendment No. 4 and ending onJuly 26, 2020 , (i) suspend the requirement that the Company maintain a consolidated fixed charge coverage ratio of no less than 1.0 to 1.0 whenever its borrowing availability under the revolving credit facility is less than$50 million and (ii) instead require the Company and its subsidiaries to maintain at least$12.5 million of borrowing availability under the revolving credit facility; (b) increase the amount that the Company and its subsidiaries may borrow outside of the ABL Facility to an amount equal to the greater of$300 million and 22.5% of the Company's consolidated total assets (this amount is in addition to amounts borrowed pursuant to specific exceptions under the ABL Facility); (c) reduce the maximum aggregate amount available for borrowing or letters of credit under the revolving credit facility that the Existing Credit Agreement contemplated by$25 million to$600 million ; (d) increase the applicable margins paid to lenders as part of the variable interest rates for both LIBOR and base rate borrowings by 100 basis points in each case; (e) incorporate a LIBOR floor equal to 1.0%; (f) add certain events of default, including with respect to raising capital; and (g) impose certain financial, operational and liquidity maintenance and reporting obligations on the Company. The Senior Notes contain an incurrence covenant that requires the Company to satisfy a minimum Fixed Charge Coverage Ratio of 2.0 to 1.0, as defined by the indenture, to utilize certain covenants for new debt, certain sale-leaseback transactions, distributions, investments and certain other restricted payments and mergers, consolidations and asset sales. As ofMarch 29, 2020 , the Company did not have a Fixed Charge Coverage Ratio of at least 2.00 to 1.00. As a result, the Company is currently subject to additional limitations related to the incurrence of new debt, certain sale-leaseback transactions, distributions, investments and certain other restricted payments and mergers, consolidations and asset sales. OnApril 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 ofJune 30, 2020 . As ofMarch 29, 2020 , the total remaining authorization was approximately$38.1 million . The common share repurchase program authorizes the purchase of shares of the Company's common stock on the open market or in private transactions from time to time, depending on market conditions and certain governing debt covenants. During the nine months endedMarch 29, 2020 , the Company repurchased no shares on the open market, as compared to 725,321 shares purchased on the open market at an average price of$16.46 per share during the nine months endedMarch 31, 2019 . The Company does not intend to repurchase shares through the conclusion of this authorization to support its efforts to deleverage. In each of the first two quarters of fiscal year 2020, the Company declared a$0.05 dividend per share. OnJanuary 30, 2020 , the Company announced the quarterly dividend is being suspended to help support efforts to strengthen the balance sheet. 49
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The Company expects capital expenditures to be approximately$55 million in fiscal year 2020. The Company has deferred all capital expenditures other than maintenance capital expenditures and certain committed capital expenditures. These anticipated expenditures predominantly reflect the Company's development of its Vanguard electrification capabilities. The Company faces liquidity challenges due to continuing operating losses and negative cash flows from operations that have accelerated, and may continue to accelerate, as a result of the rapid onset of COVID-19 and its effects on the Company's operations, vendors, and customers, as well as the global economy. OnApril 27, 2020 , the Company successfully amended its ABL Facility to obtain access to additional liquidity to help navigate near-term challenges presented by COVID-19 and to have additional time to work with its advisors to raise additional capital. The Company had$44.4 million of cash and cash equivalents as ofMarch 29, 2020 . The Company had$33.4 million of cash and cash equivalents as ofApril 26, 2020 . OnApril 27, 2020 , after the effectiveness of the Amendment No. 4, the Company and its subsidiaries had$366.8 million of borrowings and$52.8 million of letters of credit outstanding under the Credit Agreement against total borrowing capacity of$502.8 million .U.S. GAAP requires an evaluation of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date the financial statements are issued. Initially, this evaluation does not consider the potential mitigating effect of management's plans that have not been fully implemented. When substantial doubt exists, management evaluates the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. In complying with the requirements underU.S. GAAP to complete an evaluation without considering mitigating factors, the Company considered several conditions or events including 1) uncertainty around the global impact of COVID-19, 2) operating losses and negative cash flows from operations for fiscal year 2019 and projected fiscal year 2020, 3) pending maturity of$195 million of the Senior Notes inDecember 2020 , with a potential springing maturity on the ABL Facility, 4) potential for elevated borrowings on the ABL Facility at the end of the fiscal 2020 season, which, depending on results, may not allow the Company to support working capital build up early in fiscal year 2021 using available liquidity, and 5) financial results necessitated amendments to the ABL Facility during fiscal year 2020, which, among other things, added certain events of default. The above conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company is implementing a plan as discussed below, which includes strategic and cash-preservation initiatives, which is designed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date its financial statements are issued. The Company's primary sources of near- and medium-term liquidity are expected to be (1) the Company's ABL Facility, which had$115.8 million of available borrowing capacity as ofMarch 29, 2020 , (2) improved operating cash flows due to other strategic and cash preservation initiatives discussed below and (3) one or more capital raises, to the extent available on acceptable terms, if at all.
Strategic and Cash Preservation Initiatives
The Company has taken or intends to take the following actions and other actions to improve its liquidity position and to address uncertainty about its ability to operate as a going concern: 1.Entered into, effective as ofApril 27, 2020 , Amendment No. 4 to the ABL Facility to address near-term liquidity challenges brought on by business conditions, including COVID-19, 2.Implemented proactive spending reductions in the third and fourth quarters of fiscal 2020 to improve liquidity, including salary reductions, plant shutdowns, suspension of employee benefits, lower capital spending and reduced discretionary spending, 3.Eliminated the Company's quarterly dividend and suspended its share repurchases authorization, which authorization expires onJune 30, 2020 , 4.Took strategic actions to drive profitability improvements, including the recently completed business optimization program and the engine manufacturing consolidation project, 5.Pursuing cash proceeds through a potential sale-leaseback of Company-owned real estate, working capital reduction through inventory management, and potential divestitures of certain businesses and assets, and 6.Hired a skilled team of advisers to assist the Company in debt and capital matters, including raising additional capital to address the maturity of$195 million aggregate principal amount of the Senior Notes and any additional liquidity needs. 50
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The Company's plan is designed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date its financial statements are issued; however, the remediation plan is dependent on conditions and matters that may be outside of the Company's control or may not be available on terms acceptable to the Company, or at all, many of which have been made worse or more unpredictable by COVID-19. If the Company is unable to successfully execute all of these initiatives or if the plan does not fully mitigate the Company's liquidity challenges, the Company's operating plans and resulting cash flows along with its cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the next 12 months.
See also Risk Factors in Part II, Item 1A.
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OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes since the
CONTRACTUAL OBLIGATIONS
There have been no material changes since the August 27, 2019 filing of the
Company's Annual Report on Form 10-K, except that subsequent to the filing of
the Company's Annual Report on Form 10-K, on September 27, 2019 , the Company
entered into the $625 million ABL Facility which replaced the multicurrency
credit agreement dated March 25, 2016 . The ABL Facility matures on September 27,
2024 . A discussion of the ABL Facility is included in the Notes to Condensed
Consolidated Financial Statements of this Form 10-Q under the heading "Debt" and
is incorporated herein by reference.
CRITICAL ACCOUNTING POLICIES
There have been no material changes in the Company's critical accounting
policies since the August 27, 2019 filing of its Annual Report on Form 10-K. As
discussed in its annual report, the preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions about future events that
affect the amounts reported in the financial statements and accompanying notes.
Future events and their effects cannot be determined with absolute certainty.
Therefore, the determination of estimates requires the exercise of judgment.
Actual results inevitably will differ from those estimates, and such differences
may be material to the financial statements.
The most significant accounting estimates inherent in the preparation of the
Company's financial statements include a goodwill assessment, estimates as to
the realizability of accounts receivable and inventory assets, as well as
estimates used in the determination of liabilities related to customer rebates,
pension obligations, postretirement benefits, warranty, product liability, group
health insurance, litigation and taxation. Various assumptions and other factors
underlie the determination of these significant estimates. The process of
determining significant estimates is fact specific and takes into account
factors such as historical experience, current and expected economic conditions,
product mix, and, in some instances, actuarial techniques. The Company
re-evaluates these significant factors as facts and circumstances change.
NEW ACCOUNTING PRONOUNCEMENTSA discussion of new accounting pronouncements is included in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q under the heading "New Accounting Pronouncements" and is incorporated herein by reference.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
projected in the forward-looking statements. The words "anticipate", "believe",
"estimate", "expect", "forecast", "intend", "plan", "project", and similar
expressions are intended to identify forward-looking statements. The
forward-looking statements are based on the Company's current views and
assumptions and involve risks and uncertainties that include, among other
things, the ability to successfully forecast demand for its products; changes in
interest rates and foreign exchange rates; the effects of weather on the
purchasing patterns of consumers and original equipment manufacturers (OEMs);
actions of engine manufacturers and OEMs with whom the Company competes; changes
in laws and regulations, including U.S. tax reform, changes in tax rates, laws
and regulations as well as related guidance; imposition of new, or change in
existing, duties, tariffs and trade agreements; changes in customer and OEM
demand; changes in prices of raw materials and parts that the Company purchases;
changes in domestic and foreign economic conditions (including effects from the
U.K.'s decision to exit the European Union ); the ability to bring new productive
capacity on line efficiently and with good quality; outcomes of legal
proceedings and claims; the ability to realize anticipated savings from the
business optimization program and restructuring actions; the ability to maintain
or obtain adequate sources of liquidity and access to debt markets; and other
factors disclosed from time to time in the Company's SEC filings or otherwise,
including the factors discussed in Item 1A, Risk Factors, of the Company's
Annual Report on Form 10-K and in its periodic reports on Form 10-Q. In
addition, the effects of the COVID-19 pandemic, including actions taken by
individuals, businesses, government agencies and others in response to COVID-19,
may aggravate the impact on
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our business of the risk factors identified in our Annual Report on Form 10-K.The Company undertakes no obligation to update forward-looking statements or other statements it may make even though these statements may be affected by events or circumstances occurring after the forward-looking statements or other statements were made.
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