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BGG > SEC Filings for BGG > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for BRIGGS & STRATTON CORP


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the Company's financial condition and results of operations for the periods included in the accompanying consolidated condensed financial statements:

RESULTS OF OPERATIONS

NET SALES

Consolidated net sales for the first quarter of fiscal 2013 were $309.0 million, a decrease of $88.3 million or 22.2% from the first quarter of fiscal 2012.

Engines Segment fiscal 2013 first quarter net sales were $164.5 million, which was $38.9 million or 19.1% lower than the first quarter of fiscal 2012. This decrease in net sales was primarily driven by a 16% reduction in unit shipment volumes mainly to lawn and garden OEMs in the North American and Asian markets resulting from drought conditions in North America and economic uncertainty in the global markets, an unfavorable mix of engines sold that reflected proportionately lower sales of large engines and unfavorable foreign exchange of $1.9 million, partially offset by improved engine pricing.

Products Segment fiscal 2013 first quarter net sales were $173.3 million, a decrease of $62.0 million or 26.3% from the first quarter of fiscal 2012. The decrease in net sales was primarily due to lower sales volumes of portable generators due to fewer storm related sales compared to the same period a year ago, reduced pre-season sales of snow equipment due to adequate inventory levels resulting from the unusually mild winter last year and reduced sales of lawn and garden equipment due to drought conditions in North America. This decrease was partially offset by higher shipments internationally as well as higher shipments of home standby generators and improved pricing.

GROSS PROFIT PERCENTAGE

Included in consolidated gross profit were pre-tax charges of $5.1 million ($3.3 million after tax or $0.07 per diluted share) during the first quarter of fiscal 2013 related to previously announced restructuring actions to close the Ostrava, Czech Republic and Newbern, Tennesee manufacturing facilities and the Auburn, Alabama plant consolidation. The Engines Segment and Products Segment recorded $1.1 million and $4.0 million, respectively, of pre-tax restructuring charges within gross profit during the three months ended September 30, 2012.


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                 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES


The following table is a reconciliation of gross profit by segment, as reported,
to adjusted gross profit by segment, excluding restructuring charges.
                                             Three Months Ended
                                        September 30,      October 2,
                                             2012             2011
Engines
Engines Net Sales                      $      164,515     $  203,378

Gross Profit                           $       24,712     $   36,882
Restructuring Charges                           1,091              -
Adjusted Engines Gross Profit (1)      $       25,803     $   36,882

Engines Gross Profit % as Reported               15.0 %         18.1 %
Adjusted Engines Gross Profit % (1)              15.7 %         18.1 %

Products
Products Net Sales                     $      173,297     $  235,282

Gross Profit                           $       18,716     $   27,611
Restructuring Charges                           4,035              -
Adjusted Products Gross Profit (1)     $       22,751     $   27,611

Products Gross Profit % as Reported              10.8 %         11.7 %
Adjusted Products Gross Profit % (1)             13.1 %         11.7 %

Inter-Segment Eliminations                        442          1,561
Adjusted Gross Profit (1)              $       48,996     $   66,054

(1) Adjusted gross profit is a non-GAAP financial measure. The Company believes this information is meaningful to investors as it isolates the impact that restructuring charges have on gross profit and facilitates comparisons between peer companies. While the Company believes that adjusted gross profit is useful supplemental information, such adjusted results are not intended to replace our Generally Accepted Accounting Principles' ("GAAP") financial results and should be read in conjunction with those GAAP results.

The consolidated gross profit percentage was 14.2% in the first quarter of fiscal 2013, down from 16.6% in the same period last year.

The Engines Segment gross profit percentage was 15.0% in the first quarter of fiscal 2013, lower from 18.1% in the first quarter of fiscal 2012. Excluding restructuring charges of $1.1 million, adjusted Engines Segment gross profit percentage in the first quarter of fiscal 2013 was 15.7%, a decrease of 240 basis points compared to Engines Segment gross profit percentage in the first quarter of fiscal 2012. The adjusted gross profit percentage was unfavorably impacted by 2.8% due to a mix of products sold that reflect proportionately lower sales of large engines, 2.1% due to reduced absorption on 16% lower production volumes and unfavorable absorption rates driven by proportionately lower production of large engines and 0.6% due to unfavorable foreign exchange. These reductions in gross profit percentage were partially offset by a 1.4% benefit due to increased pricing and 1.7% from cost savings as a result of restructuring actions initiated in fiscal 2012.


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BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES

The Products Segment gross profit percentage was 10.8% for the first quarter of fiscal 2013, lower from 11.7% in the first quarter of fiscal 2012. Excluding restructuring charges of $4.0 million, adjusted Products Segment gross profit percentage in the first quarter of fiscal 2013 was 13.1%, an increase of 140 basis points compared to Products Segment gross profit percentage in the first quarter of fiscal 2012. The adjusted gross profit percentage was improved by 2.5% due to increased pricing and a favorable mix of lawn and garden sales through the dealer channel, 0.3% from favorable foreign exchange and 2.4% from cost savings as a result of restructuring actions initiated in fiscal 2012. This was partially offset by 0.3% from higher manufacturing costs and 3.5% unfavorable absorption on 44% lower production throughput as we continue to manage inventories.

ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Engineering, selling, general and administrative expenses were $65.7 million in the first quarter of fiscal 2013, a decrease of $2.0 million or 2.9% from the first quarter of fiscal 2012. The decrease in the current year was primarily attributable to lower compensation costs of $2.9 million as a result of the previously announced global salaried employee reduction and a planned reduction of spend in advertising costs and professional services in response to the softness in the global markets, which was partially offset by $1.4 million of increased pension expense compared to the same period last year.

INTEREST EXPENSE

Interest expense for the first quarter of fiscal 2013 was $4.5 million, or $0.1 million higher compared to the same period a year ago.

PROVISION FOR INCOME TAXES

The effective tax rate for the first quarter of fiscal 2013 was 33.6% or $8.4 million of tax benefit compared to negative 25.3% or $1.1 million of tax expense for the first quarter of fiscal 2012. The first quarter of fiscal 2012 reflected a tax expense in spite of a loss before taxes as the Company was unable to record a benefit for losses at certain of our foreign subsidiaries. During the first quarter of fiscal 2013, these foreign subsidiaries improved their profitability, resulting in the most recent quarter effective tax rate to be in line with the effective rate expected for the full fiscal year.

RESTRUCTURING ACTIONS

The Company's execution of its previously announced restructuring actions remains on schedule. In the first fiscal quarter of 2013, the Company completed the sale of its dormant manufacturing facility in Jefferson, Wisconsin and a land parcel adjacent to its Ostrava, Czech Republic plant. In addition, the Company has made progress towards finalizing its exit from the Newbern, Tennessee and Ostrava, Czech Republic manufacturing facilities. The Company anticipates completion of its Auburn, Alabama plant consolidation by the end of fiscal 2013. As noted previously, pre-tax restructuring costs for the first quarter of fiscal 2013 were $5.1 million. The total estimated pre-tax expense related to restructuring actions in fiscal 2013 is expected to be $12 million to $22 million. In addition, the Company continues to anticipate pre-tax savings associated with restructuring actions of $30 million to $35 million in fiscal 2013 and $40 million to $45 million in fiscal 2014.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows used in operating activities for the fiscal 2013 first quarter were $41.4 million compared to $56.3 million in the fiscal 2012 first quarter. The change in cash flows used in operating activities was primarily related to lower working capital needs in the most recent period and incremental contributions to the pension plan of $5.5 million in fiscal 2013.

Cash flows used in investing activities were $2.3 million and $10.2 million during the first quarter of fiscal 2013 and fiscal 2012, respectively. The $7.9 million decrease in cash used in investing activities was primarily the result of $5.6 million of proceeds received on disposition of plant and equipment, primarily associated with the sale of the dormant manufacturing facility in Jefferson, Wisconsin and a land parcel adjacent to the Ostrava, Czech Republic plant. The remaining $2.3 million decrease was attributable to lower capital expenditures in the first quarter of fiscal 2013 compared to the same period a year ago.


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BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES

Cash flows used in financing activities were $11.4 million and $3.1 million during the first quarter of fiscal 2013 and fiscal 2012, respectively. The $8.2 million increase in cash used in financing activities was primarily attributable to $9.8 million of higher treasury share repurchases in the first quarter of fiscal 2013 compared to the same period a year ago.

FUTURE LIQUIDITY AND CAPITAL RESOURCES

On December 15, 2010, the Company issued $225 million of 6.875% Senior Notes ("Senior Notes") due December 15, 2020.

On October 13, 2011, the Company entered into a $500 million multicurrency credit agreement (the "Revolver"). The Revolver replaced the amended and restated multicurrency credit agreement dated as of July 12, 2007. The Revolver has a term of five years and all outstanding borrowings on the Revolver are due and payable on October 13, 2016. The initial maximum availability under the revolving credit facility is $500 million. Availability under the revolving credit facility is reduced by outstanding letters of credit. The Company may from time to time increase the maximum availability under the revolving credit facility by up to $250 million if certain conditions are satisfied. There were no borrowings under the Revolver as of September 30, 2012.

On August 10, 2011, the Board of Directors of the Company authorized up to $50 million in funds for use in a common share repurchase program with an expiration of June 30, 2013. On August 8, 2012 the Board of Directors of the Company authorized up to an additional $50 million in funds associated with the common share repurchase program and an extension of the expiration date to June 30, 2014. 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 loan covenants. During the first quarter of fiscal 2013, the Company repurchased 726,745 shares on the open market at an average price $17.73 per share as compared to repurchasing 219,200 shares on the open market at an average price of $14.23 per share during the first quarter of fiscal 2012. Subsequent to the end of the first quarter of fiscal 2013, the Company repurchased an additional 189,174 shares at an average price of $19.00 per share.

The Company expects capital expenditures to be approximately $50 million to $60 million in fiscal 2013. These anticipated expenditures reflect our plans to continue to reinvest in efficient equipment and innovative new products.

The Company is required to make contributions to the qualified pension plan of approximately $30 million during fiscal 2013. During the first three months of fiscal 2013, the Company made cash contributions of $5.5 million to the qualified pension plan. The Company may be required to make further contributions in future years depending upon the actual return on plan assets and the funded status of the plan in future periods.

Management believes that available cash, cash generated from operations, existing lines of credit and access to debt markets will be adequate to fund the Company's capital requirements and operational needs for the foreseeable future.

The Revolver and the Senior Notes contain restrictive covenants. These covenants include restrictions on the Company's ability to: pay dividends; repurchase shares; incur indebtedness; create liens; enter into sale and leaseback transactions; consolidate or merge with other entities; sell or lease all or substantially all of its assets; and dispose of assets or the proceeds of sales of its assets. The Revolver contains financial covenants that require the Company to maintain a minimum interest coverage ratio and impose a maximum leverage ratio. As of September 30, 2012, the Company was in compliance with these covenants, and expects to be in compliance with all covenants during the remainder of fiscal 2013.


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BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES

OFF-BALANCE SHEET ARRANGEMENTS

There have been no material changes since the August 28, 2012 filing of the Company's Annual Report on Form 10-K.

CONTRACTUAL OBLIGATIONS

There have been no material changes since the August 28, 2012 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, the Company learned of the final interest rates published by the Internal Revenue Service used to calculate minimum pension contributions under the Map-21 Act. In addition, the changes announced to freeze the defined benefit pension plans for non-bargaining employees also impacts the future minimum plan funding requirements. Based upon the current regulations and actuarial studies the Company estimates that it will make required minimum contributions to the qualified pension plan of approximately $30 million in fiscal 2013, $10 million in fiscal years 2014-2015, and $55 million in fiscal years 2015-2016.

CRITICAL ACCOUNTING POLICIES

There have been no material changes in the Company's critical accounting policies since the August 28, 2012 filing of its Annual Report on Form 10-K. As discussed in our 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 our 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 PRONOUNCEMENTS

A discussion of new accounting pronouncements is included in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q under the heading New Accounting Pronouncements and 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 our 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 we compete; changes in laws and regulations; changes in customer and OEM demand; changes in prices of raw materials and parts that we purchase; changes in domestic and foreign economic conditions; the ability to bring new productive capacity on line efficiently and with good quality; outcomes of legal proceedings and claims; and other factors disclosed from time to time in our 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.


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BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES

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