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BGG > SEC Filings for BGG > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for BRIGGS & STRATTON CORP


8-May-2013

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 third quarter of fiscal 2013 were $637.3 million, a decrease of $82.8 million or 11.5% from the third quarter of fiscal 2012

Engines Segment fiscal 2013 third quarter net sales were $451.9 million, which was $46.1 million or 9.3% lower than the third quarter of fiscal 2012. This decrease in net sales was driven by reduced shipments of engines used primarily on walk and ride equipment in European and North American markets as OEM customers manage inventory levels due to a later start to warmer spring weather. Net sales were also lower due to unfavorable foreign exchange of $5.4 million primarily due to a decrease in the value of the Euro in fiscal 2013. These decreases in net sales were partially offset by the timing of generator engine replenishment sales in the U.S. following the recent hurricane season.

Products Segment fiscal 2013 third quarter net sales were $231.5 million, a decrease of $49.7 million or 17.7% from the third quarter of fiscal 2012. The decrease in net sales was primarily related to our decision to exit the sale of lawn and garden equipment through national mass retailers. In addition, sales of lawn and garden equipment and pressure washers decreased in North America from last year as a result of a later start to the spring selling season and decreased in international markets due to continued drought conditions in parts of Australasia. The net sales decrease was partially offset by net sales from the acquisition of Branco that were in line with expectations.

For the first nine months of fiscal 2013, consolidated net sales were $1.385 billion, a decrease of $180.0 million or 11.5% when compared to the same period a year ago.

Engines Segment net sales for the first nine months of fiscal 2013 were $890.6 million, which was $96.9 million or 9.8% lower than the same period a year ago. This decrease in net sales was primarily driven by reduced shipments of engines used on snow thrower equipment in the North American markets as well as lower sales to OEM customers for the European and Australasian markets. European markets were off considerably given macroeconomic issues and unfavorable weather conditions. Australasia markets were off due to a significant lack of rainfall in highly populated areas. In addition, sales were lower in fiscal 2013 due to an unfavorable mix of engines sold that reflected proportionately lower sales of large engines, and unfavorable foreign exchange of $9.7 million primarily related to the Euro.

Products Segment net sales for the first nine months of fiscal 2013 were $602.3 million, a decrease of $129.6 million or 17.7% from the same period a year ago. The decrease in net sales was primarily due to lower sales volumes of snow equipment due to significantly below average snowfall in North America and reduced sales of lawn and garden equipment resulting from prolonged drought conditions in the United States and Australasia. In addition, the decrease in net sales was impacted by our decision to exit the sale of lawn and garden equipment through national mass retailers. The decrease in net sales was partially offset by higher shipments of portable and standby generators in the North American market.

GROSS PROFIT PERCENTAGE

Included in consolidated gross profit were pre-tax charges of $6.6 million and $15.0 million during the third quarter and first nine months of fiscal 2013, respectively, 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 $5.4 million and $1.2 million, respectively, of pre-tax restructuring charges within gross profit during the third quarter of fiscal 2013, and $7.3 million and $7.6 million, respectively, for the first nine months of fiscal 2013. During the third quarter and first nine months of fiscal 2012, the Engines Segment recorded pre-tax restructuring charges of $9.9 million and the Products Segment recorded restructuring charges of $9.8 million.


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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           Nine Months Ended
                                        March 31,     April 1,      March 31,     April 1,
                                          2013          2012          2013          2012
Engines
Engines Net Sales                      $ 451,921     $ 498,009     $ 890,631     $ 987,486

Engines Gross Profit as Reported       $ 100,981     $ 100,320     $ 181,980     $ 186,555
Restructuring Charges                      5,409         9,943         7,346         9,943
Adjusted Engines Gross Profit (1)      $ 106,390     $ 110,263     $ 189,326     $ 196,498

Engines Gross Profit % as Reported          22.3 %        20.1 %        20.4 %        18.9 %
Adjusted Engines Gross Profit % (1)         23.5 %        22.1 %        21.3 %        19.9 %

Products
Products Net Sales                     $ 231,532     $ 281,271     $ 602,323     $ 731,969

Products Gross Profit as Reported      $  26,546     $  27,246     $  63,798     $  81,675
Restructuring Charges                      1,236         9,821         7,624         9,821
Adjusted Products Gross Profit (1)     $  27,782     $  37,067     $  71,422     $  91,496

Products Gross Profit % as Reported         11.5 %         9.7 %        10.6 %        11.2 %
Adjusted Products Gross Profit % (1)        12.0 %        13.2 %        11.9 %        12.5 %

Inter-Segment Eliminations                  (739 )        (454 )       1,793        (1,184 )
Adjusted Gross Profit (1)              $ 133,433     $ 146,876     $ 262,541     $ 286,810

(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 19.9% in the third quarter of fiscal 2013, up from 17.7% in the same period last year.

The Engines Segment gross profit percentage was 22.3% in the third quarter of fiscal 2013, higher than the 20.1% in the third quarter of fiscal 2012. Excluding restructuring charges of $5.4 million, adjusted gross profit percentage in the third quarter of fiscal 2013 was 23.5%, an increase of approximately 140 basis points compared to the third quarter of fiscal 2012. The adjusted gross profit percentage was favorably impacted by 3.6% due to lower manufacturing costs, partially offset by 1.2% due to unfavorable foreign exchange and by 1% due to unfavorable absorption of fixed manufacturing costs as a result of a 4% reduction in engines built. The lower manufacturing costs resulted from $3.4 million of cost savings as a result of restructuring actions initiated in fiscal 2012, lower material costs, and start-up costs incurred in fiscal 2012 associated with launching our phase III emissions compliant engines.

The Products Segment gross profit percentage was 11.5% for the third quarter of fiscal 2013, up from 9.7% in the third quarter of fiscal 2012. Excluding restructuring charges of $1.2 million, adjusted gross profit percentage for the third quarter of 2013 was 12.0%, which was approximately 120 basis points lower compared to the third quarter of


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fiscal 2012. The adjusted gross profit percentage decreased 3.4% due to unfavorable absorption associated with a 35% decrease in production in order to control inventory levels. This decrease was partially offset by a benefit of 1.7% due to cost savings of $4.0 million as a result of restructuring actions initiated in fiscal 2012.

The consolidated gross profit percentage for the first nine months of fiscal 2013 was 17.9%, up from 17.1% during the first nine months of fiscal 2012.

The Engines Segment gross profit percentage was 20.4% for the first nine months of fiscal 2013, higher than the 18.9% for the first nine months in fiscal 2012. Excluding restructuring charges of $7.3 million, adjusted Engines Segment gross profit percentage for the first nine months of 2013 was 21.3%, which was approximately 140 basis points higher compared to the first nine months of fiscal 2012. The adjusted gross profit percentage was favorably impacted by 3.4% due to lower manufacturing costs, partially offset by 1% due to unfavorable foreign exchange and by 1% due to unfavorable absorption of fixed manufacturing costs as a result of a 5% reduction in engines built. The lower manufacturing costs resulted from $8.1 million of cost savings as a result of restructuring actions initiated in fiscal 2012, lower material costs, and start-up costs incurred in fiscal 2012 associated with launching our phase III emissions compliant engines.

The Products Segment gross profit percentage was 10.6% for the first nine months of fiscal 2013, lower from 11.2% for the first nine months in fiscal 2012. Excluding restructuring charges of $7.6 million, adjusted gross profit percentage for the first nine months 2013 was 11.9%, which was approximately 60 basis points lower compared to the first nine months of fiscal 2012. The adjusted gross profit percentage decreased 2.6% due to unfavorable absorption associated with a 43% decrease in production volume in order to control inventory levels. This was partially offset by a 1.8% benefit due to cost savings of $11.1 million as a result of restructuring actions. We reduced production volumes in the first nine months of fiscal 2013 in order to manage inventory levels in response to a decline in near-term market demand. The McDonough, Georgia manufacturing facility was temporarily idled for four weeks in the second quarter of fiscal 2013 to reduce inventory levels in response to a decline in market demand for snow and lawn and garden products and to re-tool the plant for new products to be launched for the spring season.

ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Engineering, selling, general and administrative expenses were $70.7 million in the third quarter of fiscal 2013, a decrease of $3.0 million or 4.1% from the third quarter of fiscal 2012. The decrease in the current year was primarily attributable to lower compensation costs of $3.2 million as a result of the previously announced global salaried employee reduction and reduced selling expenses, which was partially offset by $0.6 million of increased pension expense compared to the same period last year.

Engineering, selling, general and administrative expenses were $205.6 million for the first nine months of fiscal 2013, a decrease of $9.1 million or 4.2% from the first nine months of fiscal 2012. The decrease in the current year was primarily attributable to lower compensation costs of $9.6 million as a result of the previously announced global salaried employee reduction and reduced selling expenses, which was partially offset by $2.7 million of increased pension expense compared to the same period last year.

INTEREST EXPENSE

Interest expense was lower compared to the prior year periods by $0.1 million for both the third quarter and first nine months of fiscal 2013.

PROVISION FOR INCOME TAXES

The effective tax rate for the third quarter and the first nine months of fiscal 2013 was 27.6% and 27.5% respectively, compared to 20.4% and 13.4% for the same respective periods last year. The tax rate for the third quarter of fiscal 2013 is lower than the 35% statutory U.S. rate due to the reenactment of the U.S. federal research and development and other credits in the amount of $1.0 million and foreign tax credits in the amount of $0.5 million, which were partially offset by additional taxes of $1.0 million due to non-deductible expenses related to the Ostrava, Czech Republic plant closing. The effective tax rate for the first nine months of fiscal 2013 was lower than the 35% statutory U.S. rate due to the aforementioned credits and non-deductible expenses and non-deductible acquisition costs increasing the tax expense by $0.5 million. The effective rate for the third quarter of fiscal 2012 was lower as a result of recording a net benefit of $3.3 million related to Ostrava plant restructuring charges


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incurred during that quarter. The effective tax rate for the first nine months of fiscal 2012 was impacted by the aforementioned restructuring charges and a net benefit of $5.0 million related to the settlement of U.S. audits and the expiration of a non-U.S. statute of limitation period during fiscal 2012.

RESTRUCTURING ACTIONS

In January 2012, the Company announced plans to reduce manufacturing capacity through closure of its Newbern, Tennessee and Ostrava, Czech Republic plants, as well as the reconfiguration of its plant in Poplar Bluff, Missouri. During fiscal 2012, the Company ceased manufacturing operations at its Newbern, Tennessee and Ostrava, Czech Republic plants, and carried out reconfiguration of the Poplar Bluff, Missouri plant.

In April 2012, the Company announced plans to further reduce manufacturing costs through consolidation of its Auburn, Alabama manufacturing facility as well as the reduction of approximately 10% of the Company's salaried headcount. In fiscal 2012 and fiscal 2013, the Company implemented salaried headcount reductions. Additionally, the Company announced that it will no longer pursue placement of lawn and garden products at national mass retailers beginning in fiscal 2013. The Engines Segment will continue to support lawn and garden equipment OEMs who provide lawn and garden equipment to these retailers. The Products Segment will continue to focus on innovative, higher margin products that are sold through our network of Simplicity, Snapper and Ferris dealers and regional retailers. The Company will also continue to sell pressure washers and portable and standby generators through the U.S. mass retail channel.

In October 2012, the Board of Directors of the Company authorized an amendment to the Company's defined benefit retirement plans for U.S., non-bargaining employees. The amendment freezes accruals for all non-bargaining employees effective January 1, 2014. The Company recorded a pre-tax curtailment charge of $1.9 million in the second quarter of fiscal 2013 related to the defined benefit plan change.

The Company's execution of its previously announced restructuring actions remains largely on schedule. In the third quarter of fiscal 2013, the Company entered into an agreement to sell the Ostrava, Czech Republic manufacturing facility. The transaction closed early in the fourth fiscal quarter. The Company continues to make progress towards finalizing its exit from the Newbern, Tennessee manufacturing facility and the move of horizontal engine manufacturing from its Auburn, Alabama plant to China.

Pre-tax restructuring costs for the third quarter and first nine months of fiscal 2013 were $6.6 million ($5.4 million after tax or $0.11 per diluted share) and $18.4 million ($13.0 million after tax or $0.27 per diluted share), respectively, of which $6.6 million and $15.0 million, respectively, were included in gross profit as previously mentioned.

The total estimated pre-tax expense related to restructuring actions in fiscal 2013 is expected to be $20 million to $22 million. In addition, the Company continues to anticipate pre-tax savings associated with restructuring actions of $32 million to $37 million in fiscal 2013 and $40 million to $45 million in fiscal 2014 as compared to 2012.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows used in operating activities for the first nine months of fiscal 2013 were $73.8 million compared to $166.7 million in the first nine months of fiscal 2012. The improvement in operating cash flows was primarily related to lower working capital needs in the most recent period associated with less of an increase of receivables and inventory compared to the same period last year.

Cash flows used in investing activities were $79.2 million and $34.3 million during the first nine months of fiscal 2013 and fiscal 2012, respectively. The $44.9 million increase in cash used in investing activities was primarily related to $59.6 million of cash payments made for the acquisition of Branco, partially offset by $5.5 million of lower additions to plant and equipment compared to the same period one year ago and $6.7 million of proceeds received on disposition of plant and equipment in fiscal 2013, primarily associated with the sale of the dormant manufacturing facility in Jefferson, Wisconsin and a land parcel adjacent to the Ostrava, Czech Republic plant.

Cash flows provided by financing activities were $19.5 million and $10.5 million during the first nine months of fiscal 2013 and fiscal 2012, respectively. The $9.0 million increase in cash provided by financing activities was primarily


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attributable to an increase of $19.4 million of stock option exercise proceeds in fiscal 2013, partially offset by $10.7 million of lower net borrowings on the revolver 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. Borrowings under the Revolver were $35.4 million and zero as of March 31, 2013 and July 1, 2012, respectively.

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 nine months ended March 31, 2013, the Company repurchased 1,216,325 shares on the open market at an average price of $18.96 per share.

The Company expects capital expenditures to be approximately $45 million to $50 million in fiscal 2013. These anticipated expenditures reflect our plans to continue to reinvest in efficient equipment and innovative new products.

During the first nine months of fiscal 2013, the Company made cash contributions of $29.4 million to the qualified pension plan. Based upon current regulations and actuarial studies, the Company estimates that it will make no further required minimum contributions to the qualified pension plan during the remainder of fiscal 2013. 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 use proceeds from 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 March 31, 2013, 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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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 2016-2017.

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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