pkg-10q_20190630.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 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 1-15399

 

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

36-4277050

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

1 North Field Court, Lake Forest, Illinois

 

60045

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant's telephone number, including area code

(847) 482-3000

 

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      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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

Accelerated filer

Emerging growth company

 

 

 

 

 

 

Non-accelerated filer

Smaller reporting 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  

 

As of July 26, 2019 the Registrant had outstanding 94,662,821 shares of common stock, par value $0.01 per share.

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

PKG

New York Stock Exchange

 

 

 

 


Table of Contents

 

 

 

PART I

 

 

 

 

 

Item 1.

 

Financial Statements

1

 

 

 

 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

 

Item 4.

 

Controls and Procedures

28

 

 

 

 

 

 

PART II

 

 

 

 

 

Item 1.

 

Legal Proceedings

29

 

 

 

 

Item 1A.

 

Risk Factors

29

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

29

 

 

 

 

Item 4.

 

Mine Safety Disclosures

29

 

 

 

 

Item 5.

 

Other Information

29

 

 

 

 

Item 6.

 

Exhibits

30

 

All reports we file with the Securities and Exchange Commission (SEC) are available free of charge via the Electronic Data Gathering Analysis and Retrieval (EDGAR) System on the SEC website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available through our website at www.packagingcorp.com as soon as reasonably practicable after filing such material with the SEC.

 

 

 

i


PART I

FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

Packaging Corporation of America

Consolidated Statements of Income and Comprehensive Income

(unaudited, dollars in millions, except per-share data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Statements of Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,759.9

 

 

$

1,767.5

 

 

$

3,493.6

 

 

$

3,458.1

 

Cost of sales

 

 

(1,332.0

)

 

 

(1,346.9

)

 

 

(2,644.3

)

 

 

(2,681.4

)

Gross profit

 

 

427.9

 

 

 

420.6

 

 

 

849.3

 

 

 

776.7

 

Selling, general and administrative expenses

 

 

(143.7

)

 

 

(137.7

)

 

 

(283.7

)

 

 

(272.6

)

Other expense, net

 

 

(3.8

)

 

 

(13.3

)

 

 

(9.8

)

 

 

(21.6

)

Income from operations

 

 

280.4

 

 

 

269.6

 

 

 

555.8

 

 

 

482.5

 

Non-operating pension expense

 

 

(2.0

)

 

 

(0.5

)

 

 

(4.1

)

 

 

(1.1

)

Interest expense, net

 

 

(22.4

)

 

 

(23.8

)

 

 

(46.4

)

 

 

(49.6

)

Income before taxes

 

 

256.0

 

 

 

245.3

 

 

 

505.3

 

 

 

431.8

 

Provision for income taxes

 

 

(62.4

)

 

 

(58.7

)

 

 

(124.9

)

 

 

(105.1

)

Net income

 

$

193.6

 

 

$

186.6

 

 

$

380.4

 

 

$

326.7

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.05

 

 

$

1.98

 

 

$

4.03

 

 

$

3.46

 

Diluted

 

$

2.04

 

 

$

1.97

 

 

$

4.02

 

 

$

3.46

 

Dividends declared per common share

 

$

0.79

 

 

$

0.79

 

 

$

1.58

 

 

$

1.42

 

Statements of Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

193.6

 

 

$

186.6

 

 

$

380.4

 

 

$

326.7

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(0.1

)

Reclassification adjustments to cash flow hedges included in net

   income, net of tax of $0.3 million, $0.3 million, $0.7 million, and

   $0.7 million

 

 

1.0

 

 

 

1.0

 

 

 

1.9

 

 

 

2.0

 

Amortization of pension and postretirement plans actuarial loss and

   prior service cost, net of tax of $0.8 million, $1.0 million,

   $1.6 million, and $1.9 million

 

 

2.3

 

 

 

3.0

 

 

 

4.7

 

 

 

6.0

 

Other comprehensive income

 

 

3.3

 

 

 

4.0

 

 

 

6.6

 

 

 

7.9

 

Comprehensive income

 

$

196.9

 

 

$

190.6

 

 

$

387.0

 

 

$

334.6

 

 

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

1


Packaging Corporation of America

Consolidated Balance Sheets

(unaudited, dollars and shares in millions, except per-share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

569.4

 

 

$

361.5

 

Accounts receivable, net of allowance for doubtful accounts and customer deductions

   of $12.8 million and $13.6 million as of June 30, 2019, and December 31, 2018, respectively

 

 

947.0

 

 

 

901.9

 

Inventories

 

 

815.7

 

 

 

795.6

 

Prepaid expenses and other current assets

 

 

59.2

 

 

 

39.4

 

Federal and state income taxes receivable

 

 

11.4

 

 

 

16.7

 

Total current assets

 

 

2,402.7

 

 

 

2,115.1

 

Property, plant, and equipment, net

 

 

3,107.2

 

 

 

3,108.6

 

Operating lease right-of-use assets

 

 

238.0

 

 

 

 

Goodwill

 

 

918.7

 

 

 

917.3

 

Other intangible assets, net

 

 

358.2

 

 

 

378.2

 

Other long-term assets

 

 

49.6

 

 

 

50.5

 

Total assets

 

$

7,074.4

 

 

$

6,569.7

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Finance lease obligations

 

$

1.5

 

 

$

1.4

 

Operating lease obligations

 

 

59.9

 

 

 

 

Accounts payable

 

 

382.8

 

 

 

382.2

 

Dividends payable

 

 

75.9

 

 

 

76.1

 

Accrued liabilities

 

 

197.9

 

 

 

222.4

 

Accrued interest

 

 

11.6

 

 

 

11.5

 

Total current liabilities

 

 

729.6

 

 

 

693.6

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term debt

 

 

2,485.4

 

 

 

2,483.7

 

Finance lease obligations

 

 

16.8

 

 

 

17.6

 

Operating lease obligations

 

 

183.4

 

 

 

 

Deferred income taxes

 

 

314.8

 

 

 

285.2

 

Compensation and benefits

 

 

364.9

 

 

 

357.5

 

Other long-term liabilities

 

 

58.3

 

 

 

59.7

 

Total long-term liabilities

 

 

3,423.6

 

 

 

3,203.7

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.01 per share, 300.0 million shares authorized, 94.7 and 94.5 million

   shares issued as of June 30, 2019, and December 31, 2018, respectively

 

 

0.9

 

 

 

0.9

 

Additional paid in capital

 

 

513.3

 

 

 

494.5

 

Retained earnings

 

 

2,539.2

 

 

 

2,315.8

 

Accumulated other comprehensive loss

 

 

(132.2

)

 

 

(138.8

)

Total stockholders' equity

 

 

2,921.2

 

 

 

2,672.4

 

Total liabilities and stockholders' equity

 

$

7,074.4

 

 

$

6,569.7

 

 

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

2


Packaging Corporation of America

Consolidated Statements of Cash Flows

(unaudited, dollars in millions)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

380.4

 

 

$

326.7

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion, and amortization of intangibles

 

 

190.7

 

 

 

212.2

 

Amortization of deferred financing costs

 

 

4.3

 

 

 

4.4

 

Share-based compensation expense

 

 

18.6

 

 

 

10.7

 

Deferred income tax provision

 

 

26.9

 

 

 

30.1

 

Loss on asset disposals

 

 

1.9

 

 

 

3.3

 

Pension and post-retirement benefits expense, net of contributions

 

 

11.3

 

 

 

9.0

 

Other, net

 

 

8.7

 

 

 

0.5

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Increase in assets —

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(44.9

)

 

 

(82.7

)

Inventories

 

 

(20.1

)

 

 

(5.7

)

Prepaid expenses and other current assets

 

 

(21.2

)

 

 

(19.2

)

Increase (decrease) in liabilities —

 

 

 

 

 

 

 

 

Accounts payable

 

 

(1.8

)

 

 

11.0

 

Accrued liabilities

 

 

(22.3

)

 

 

(19.7

)

Federal and state income taxes payable / receivable

 

 

5.9

 

 

 

52.9

 

Net cash provided by operating activities

 

 

538.4

 

 

 

533.5

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Additions to property, plant, and equipment

 

 

(170.9

)

 

 

(273.9

)

Additions to other long term assets

 

 

(1.8

)

 

 

(2.7

)

Proceeds from disposals

 

 

1.2

 

 

 

0.5

 

Other, net

 

 

(1.3

)

 

 

2.6

 

Net cash used for investing activities

 

 

(172.8

)

 

 

(273.5

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Repayments of debt and finance lease obligations

 

 

(0.7

)

 

 

(150.7

)

Common stock dividends paid

 

 

(149.3

)

 

 

(118.9

)

Shares withheld to cover employee restricted stock taxes

 

 

(7.7

)

 

 

(7.7

)

Net cash used for financing activities

 

 

(157.7

)

 

 

(277.3

)

Net increase (decrease) in cash and cash equivalents

 

 

207.9

 

 

 

(17.3

)

Cash and cash equivalents, beginning of period

 

 

361.5

 

 

 

216.9

 

Cash and cash equivalents, end of period

 

$

569.4

 

 

$

199.6

 

 

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

3


Packaging Corporation of America

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited, dollars in millions and shares in thousands)

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at April 1, 2019

 

 

94,494

 

 

$

0.9

 

 

$

501.4

 

 

$

2,427.8

 

 

$

(135.5

)

 

$

2,794.6

 

Common stock withheld and retired to

   cover taxes on vested stock awards

 

 

(83

)

 

 

 

 

 

(0.6

)

 

 

(7.1

)

 

 

 

 

 

(7.7

)

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

(74.9

)

 

 

 

 

 

(74.9

)

Share-based compensation

 

 

255

 

 

 

 

 

 

12.5

 

 

 

 

 

 

 

 

 

12.5

 

Other

 

 

 

 

 

 

 

 

 

 

 

(0.2

)

 

 

 

 

 

(0.2

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

193.6

 

 

 

3.3

 

 

 

196.9

 

Balance at June 30, 2019

 

 

94,666

 

 

$

0.9

 

 

$

513.3

 

 

$

2,539.2

 

 

$

(132.2

)

 

$

2,921.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at April 1, 2018

 

 

94,348

 

 

$

0.9

 

 

$

476.3

 

 

$

1,949.6

 

 

$

(153.0

)

 

$

2,273.8

 

Common stock withheld and retired to

   cover taxes on vested stock awards

 

 

(67

)

 

 

 

 

 

(0.4

)

 

 

(7.2

)

 

 

 

 

 

(7.6

)

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

(74.8

)

 

 

 

 

 

(74.8

)

Share-based compensation

 

 

219

 

 

 

 

 

 

6.0

 

 

 

 

 

 

 

 

 

6.0

 

Other

 

 

 

 

 

 

 

 

0.2

 

 

 

(0.2

)

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

186.6

 

 

 

4.0

 

 

 

190.6

 

Balance at June 30, 2018

 

 

94,500

 

 

$

0.9

 

 

$

482.1

 

 

$

2,054.0

 

 

$

(149.0

)

 

$

2,388.0

 

 

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at January 1, 2019

 

 

94,497

 

 

$

0.9

 

 

$

494.5

 

 

$

2,315.8

 

 

$

(138.8

)

 

$

2,672.4

 

Common stock withheld and retired to

   cover taxes on vested stock awards

 

 

(83

)

 

 

 

 

 

(0.6

)

 

 

(7.1

)

 

 

 

 

 

(7.7

)

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

(149.7

)

 

 

 

 

 

(149.7

)

Share-based compensation

 

 

252

 

 

 

 

 

 

19.4

 

 

 

 

 

 

 

 

 

19.4

 

Other

 

 

 

 

 

 

 

 

 

 

 

(0.2

)

 

 

 

 

 

(0.2

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

380.4

 

 

 

6.6

 

 

 

387.0

 

Balance at June 30, 2019

 

 

94,666

 

 

$

0.9

 

 

$

513.3

 

 

$

2,539.2

 

 

$

(132.2

)

 

$

2,921.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at January 1, 2018

 

 

94,350

 

 

$

0.9

 

 

$

471.2

 

 

$

1,867.4

 

 

$

(156.9

)

 

$

2,182.6

 

Common stock withheld and retired to

   cover taxes on vested stock awards

 

 

(67

)

 

 

 

 

 

(0.4

)

 

 

(7.3

)

 

 

 

 

 

(7.7

)

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

(134.2

)

 

 

 

 

 

(134.2

)

Adoption of ASC 606

 

 

 

 

 

 

 

 

 

 

 

1.6

 

 

 

 

 

 

1.6

 

Share-based compensation

 

 

217

 

 

 

 

 

 

11.1

 

 

 

 

 

 

 

 

 

11.1

 

Other

 

 

 

 

 

 

 

 

0.2

 

 

 

(0.2

)

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

326.7

 

 

 

7.9

 

 

 

334.6

 

Balance at June 30, 2018

 

 

94,500

 

 

$

0.9

 

 

$

482.1

 

 

$

2,054.0

 

 

$

(149.0

)

 

$

2,388.0

 

 

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

4


Condensed Notes to Unaudited Quarterly Consolidated Financial Statements

1.

Nature of Operations and Basis of Presentation

Packaging Corporation of America ("we," "us," "our," PCA," or the "Company") was incorporated on January 25, 1999. In April 1999, PCA acquired the containerboard and corrugated packaging products business of Pactiv Corporation (Pactiv), formerly known as Tenneco Packaging, Inc., a wholly owned subsidiary of Tenneco Inc. We are a large diverse manufacturer of both packaging and paper products. We are headquartered in Lake Forest, Illinois and we operate primarily in the United States.

We report our business in three reportable segments: Packaging, Paper, and Corporate and Other. Our Packaging segment produces a wide variety of containerboard and corrugated packaging products. The Paper segment manufactures and sells a range of communication-based papers. Corporate and Other includes support staff services and related assets and liabilities, transportation assets, and activity related to other ancillary support operations. For more information about our segments, see Note 19, Segment Information.

In these consolidated financial statements, certain amounts in prior periods' consolidated financial statements have been reclassified to conform with the current period presentation.

The consolidated financial statements of PCA as June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 are unaudited but include all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of such financial statements. The preparation of the consolidated financial statements involves the use of estimates and accruals. Actual results may vary from those estimates. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete audited financial statements. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018.

The consolidated financial statements include the accounts of PCA and its majority-owned subsidiaries after elimination of intercompany balances and transactions.

 

2.

New and Recently Adopted Accounting Standards

 

Recently Adopted Accounting Standards

Effective January 1, 2019, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02 (Topic 842): Leases, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The original guidance required application on a modified retrospective basis with the earliest period presented. In July 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which included an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition, which we elected. As a result of the adoption of ASC 842 on January 1, 2019, we recorded operating lease liabilities of $228 million, with corresponding right of use (“ROU”) assets of the same amount. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed us to carry forward the historical lease classification and not to reassess whether existing or expired contracts contain a lease. We also elected the short-term lease recognition exemption, which permits us to exclude short-term leases (i.e. leases with terms of 12 months or less) from the recognition requirements of this standard, and we elected to account for lease and non-lease components as a single lease component for all classes of underlying assets except for embedded leases. The adoption of ASC 842 had an immaterial impact on our consolidated net earnings, liquidity and debt covenants under our current agreements for the three- and six-month periods ended June 30, 2019. See Note 3, Leases, for more information.

Effective January 1, 2019, we adopted ASU 2018-02 (Topic 220): Income Statement—Reporting Comprehensive Income – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for optional reclassification from Accumulated Other Comprehensive Income (“AOCI”) to retained earnings for the stranded tax effects resulting from the Tax Cuts and Jobs Act in December 2017 (“Tax Act”). Stranded tax effects are the difference in deferred taxes between the amount initially recorded to other comprehensive income (“OCI”) at historical corporate income tax rates and the amount recorded using the newly-enacted corporate income tax rate. The cumulative tax rate adjustment to deferred taxes was required to be recorded through income tax expense from continuing operations in the period of enactment as opposed to OCI, resulting in the stranded tax effects in AOCI. The Company elected to not reclassify the stranded tax effects related to the Tax Act. As a result, the adoption did not have an impact on the Company's financial position, results of operations, or cash flow.  

New Accounting Standards Not Yet Adopted

 

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which includes amendments to align the accounting for costs incurred to implement a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The accounting for the service component of a hosting arrangement that is a service contract is not affected by the amendments in this update. The ASU is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance.

 

5


In August 2018, the FASB issued ASU 2018-14, CompensationRetirement BenefitsDefined Benefit PlansGeneral (Subtopic 715-20): Disclosure FrameworkChanges to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. The ASU is effective for annual periods beginning after December 31, 2020, with early adoption permitted. The amendments in ASU 2018-14 would need to be applied on a retrospective basis.  The Company is currently evaluating the impact this guidance will have on its related disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.  ASU 2018-13 removes or modifies certain disclosure requirements and adds additional requirements to improve the usefulness of the fair value measurement disclosure for financial statement users. The ASU is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Certain amendments of ASU 2018-13 are required to be applied prospectively for the first interim period of the initial year of adoption. All other amendments need to be applied retrospectively. The Company is currently evaluating the impact of the new guidance.

There were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.

 

3.

Leases

 

We group our leases into two primary lease types, real estate and equipment, and into various asset classes within each type. Real estate leases primarily include manufacturing locations, office space, warehouses, and design centers, while equipment leases primarily include manufacturing equipment.

 

Leases with an initial term of 12 months or less and certain month-to-month leases are not recorded on the balance sheet. The lease expense for these types of leases is recognized on a straight-line basis over the lease term.

 

To determine the lease term, we include the non-cancellable period of the lease together with the following: all periods covered by an option to extend the lease if we are reasonably certain to exercise that option; any periods covered by an option to terminate the lease if we are reasonably certain not to exercise that option; and any periods covered by an option to extend or not to terminate the lease that are controlled by the lessor. The exercising of lease renewal options is based on whether future economic benefit is expected to be derived from the renewal. Most of our real estate leases contain at least one renewal option. Renewal options generally range from 1 to 5 years. Although equipment leases may also contain renewal options, we typically do not expect to extend and/or exercise these renewal options unless a compelling business reason is provided to management.

 

Our leases may contain fixed and variable costs. Fixed costs determine the right-of-use asset. Variable costs are those costs which will vary month to month and are excluded from the calculation of the right-of-use asset. Variable lease costs are recorded to lease expense in the period in which they are incurred.

 

Our leases do not provide an implicit borrowing rate of return. Therefore, we use our incremental borrowing rate to calculate the present value of lease payments at inception of the lease or when a lease is modified.

 

6


Supplemental balance sheet information related to our leases was as follows (dollars in millions):

 

 

June 30, 2019

 

Operating leases:

 

 

 

Operating lease right-of-use assets

$

238.0

 

 

 

 

 

Current portion of operating lease obligations

$

59.9

 

Long-term portion of operating lease obligations

 

183.4

 

Total operating lease obligations

$

243.3

 

 

 

 

 

Finance leases:

 

 

 

Buildings

$

0.3

 

Machinery and equipment

 

28.5

 

Total

 

28.8

 

Less accumulated amortization

 

(17.4

)

Total

$

11.4

 

 

 

 

 

Current portion of finance lease obligations

$

1.5

 

Long-term portion of finance lease obligations