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BGG > SEC Filings for BGG > Form 10-K on 27-Aug-2013All Recent SEC Filings

Show all filings for BRIGGS & STRATTON CORP

Form 10-K for BRIGGS & STRATTON CORP


27-Aug-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations
The following table provides a summary of financial results, including information presented as a percentage of net sales (in thousands):

                                                           For the Fiscal Years Ended
                                    June 30, 2013                 July 1, 2012                 July 3, 2011
                                 Dollars       Percent        Dollars       Percent        Dollars       Percent
Net Sales                     $ 1,862,498       100.0  %   $ 2,066,533       100.0  %   $ 2,109,998       100.0  %
Cost of Goods Sold              1,514,597        81.3  %     1,685,048        81.5  %     1,711,682        81.1  %
Restructuring Charges              18,761         1.0  %        44,760         2.2  %             -           -  %
Gross Profit                      329,140        17.7  %       336,725        16.3  %       398,316        18.9  %
Engineering, Selling,
General and Administrative
Expenses                          276,188        14.8  %       290,381        14.1  %       297,113        14.1  %
Restructuring Charges               3,435         0.2  %         5,107         0.2  %         3,537         0.2  %
Goodwill and Tradename
Impairment                         90,080         4.8  %             -           -  %        49,450         2.3  %
Income (Loss) from
Operations                        (40,563 )      (2.2 )%        41,237         2.0  %        48,216         2.3  %
Interest Expense                  (18,519 )      (1.0 )%       (18,542 )      (0.9 )%       (23,318 )      (1.1 )%
Other Income, Net                   6,941         0.4  %         7,178         0.3  %         7,156         0.3  %
Income (Loss) Before Income
Taxes                             (52,141 )      (2.8 )%        29,873         1.4  %        32,054         1.5  %
Provision (Credit) for
Income Taxes                      (18,484 )      (1.0 )%           867           -  %         7,699         0.4  %
Net Income (Loss)             $   (33,657 )      (1.8 )%   $    29,006         1.4  %   $    24,355         1.2  %

FISCAL 2013 COMPARED TO FISCAL 2012
Net Sales
Consolidated net sales for fiscal 2013 were $1.9 billion, a decrease of $204.0 million or 9.9% when compared to the same period a year ago.
Engines segment net sales for fiscal 2013 were $1.2 billion, which was $120.3 million or 9.2% lower than the same period a year ago. This decrease in net sales was primarily driven by reduced shipments of engines used on walk, ride and snow equipment in the North American market as well as lower sales to OEM customers for the European and Australasian markets. Shipments to European markets decreased due to macroeconomic issues and unfavorable weather conditions. Shipments to Australasian markets decreased 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 $11.6 million primarily related to the Euro.
Products segment net sales for fiscal 2013 were $805.5 million, a decrease of $146.7 million or 15.4% from the same period a year ago. Approximately $90 million of the net sales decrease resulted from our decision to exit the sale of lawn and garden equipment through national mass retailers. The remaining decrease 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 drought conditions in the United States and Australasia. The decrease in net sales was partially offset by higher shipments of portable and standby generators in the North American market.


Gross Profit Percentage

The consolidated gross profit percentage was 17.7% in fiscal 2013, up from 16.3% in the same period last year.

Included in consolidated gross profit were pre-tax charges of $18.8 million during 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 $9.0 million and $9.8 million, respectively, of pre-tax restructuring charges within gross profit during fiscal 2013. During fiscal 2012, the Engines segment and Products segment recorded pre-tax restructuring charges within gross profit of $14.3 million and $30.5 million, respectively.

The following table is a reconciliation of gross profit by segment, as reported, to adjusted gross profit by segment, excluding restructuring charges.

                                                For the Fiscal Years Ended
                                         June 30,         July 1,         July 3,
                                           2013            2012            2011
Engines
Engines Net Sales                      $ 1,189,674     $ 1,309,942     $ 1,399,532

Engines Gross Profit as Reported       $   236,486     $   250,323     $   319,584
Restructuring Charges                        9,008          14,257               -
Adjusted Engines Gross Profit (1)      $   245,494     $   264,580     $   319,584

Engines Gross Profit % as Reported            19.9 %          19.1 %          22.8 %
Adjusted Engines Gross Profit % (1)           20.6 %          20.2 %          22.8 %

Products
Products Net Sales                     $   805,450     $   952,110     $   878,998

Products Gross Profit as Reported      $    87,392     $    86,193     $    77,406
Restructuring Charges                        9,753          30,503               -
Adjusted Products Gross Profit (1)     $    97,145     $   116,696     $    77,406

Products Gross Profit % as Reported           10.9 %           9.1 %           8.8 %
Adjusted Products Gross Profit % (1)          12.1 %          12.3 %           8.8 %

Inter-Segment Eliminations                   5,262             209           1,326
Adjusted Gross Profit (1)              $   347,901     $   381,485     $   398,316

(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 reporting periods and 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 Engines segment gross profit percentage for fiscal 2013 was 19.9%, which was slightly higher than the 19.1% in fiscal 2012. Adjusted gross profit percentage for 2013 was 20.6%, which was 0.4% higher compared to fiscal 2012. The adjusted gross profit percentage was favorably impacted by 1.5% due to lower manufacturing costs achieved through restructuring savings of $10.9 million and start-up costs incurred in fiscal 2012 associated with launching our phase III emissions compliant engines. Partially offsetting this


improvement was a 9% reduction in engines built in fiscal 2013, which reduced absorption of fixed manufacturing costs and lowered the adjusted gross profit percentage by 1.3%. Lower material costs were mostly offset by reduced pricing, unfavorable foreign exchange and an unfavorable mix of engines sold.

The Products segment gross profit percentage for fiscal 2013 was 10.9%, which was higher than the 9.1% in fiscal 2012. The Products segment adjusted gross profit percentage for fiscal 2013 was 12.1%, which was 0.2% lower compared to the adjusted gross profit percentage for fiscal 2012. The adjusted gross profit percentage decreased by 3.1% due to unfavorable absorption associated with a 15% decrease in production volume. The McDonough, Georgia manufacturing facility shutdown days increased by nearly six weeks in fiscal 2013 compared to last year. This enabled the Products segment to achieve a reduction in inventory levels despite the challenge of reduced sales volumes caused by lower market demand. The unfavorable volume impact on gross profit percentage was partially offset by a 2.3% benefit due to achieving restructuring cost savings of $13.6 million and other efficiency improvements. The addition of sales from the Branco acquisition and favorable foreign exchange, primarily due to the Australian dollar, also increased the gross margin percentage in fiscal 2013.

Engineering, Selling, General and Administrative Expenses Engineering, selling, general and administrative expenses were $276.2 million in fiscal 2013, a decrease of $14.2 million or 4.9% from fiscal 2012. The Engines segment engineering, selling, general and administrative expenses were $174.0 million in fiscal 2013, or $5.7 million lower compared to fiscal 2012. The decrease was primarily due to lower compensation costs of $8.4 million as a result of the previously announced reduction of 10% of the global salaried workforce and reduced selling costs in response to the softness in the global markets, partially offset by $2.8 million of increased pension expense compared to the same period last year. The fiscal 2013 engineering, selling, general and administrative expenses include a $1.9 million litigation settlement charge associated with a horsepower labeling case in Canada. The litigation charge is excluded from the Engine segment's adjusted income from operations. The Products segment engineering, selling, general and administrative expenses were $102.2 million in fiscal 2013, a decrease of $8.4 million from fiscal 2012. The decrease was attributable to lower compensation costs which include a $2.5 million benefit from the previously announced global salaried employee reduction as well as reduced selling expenses in response to the softness in the global markets. These reductions were partially offset by the addition of expenses related to the Branco acquisition.
Goodwill and Other Intangible Asset Impairment During the fourth quarter of fiscal 2013, the Company performed its annual impairment testing of goodwill and other intangible assets. Based on a combination of factors, predominantly driven by a slower than anticipated recovery of the North America lawn and garden market, the Company's forecasted cash flow estimates used in the assessment of goodwill and other intangible assets were adversely impacted. As a result, the Company concluded that the carrying value amounts of the Products reporting unit exceeded its fair value as of June 30, 2013. The non-cash goodwill impairment charge recorded in the fourth quarter of fiscal 2013 was $71.3 million. In addition, the Company concluded that the carrying value amounts of a tradename within the Products reporting unit exceeded its fair value as of June 30, 2013. The non-cash intangible asset impairment charge recorded in the fourth quarter of fiscal 2013 was $18.8 million. 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. No impairment charges were recorded within the Engines segment.
Restructuring Actions
In fiscal 2013, the Company made progress against its previously announced restructuring actions. The Company closed the sale of its Ostrava, Czech Republic manufacturing facility, has nearly completed all activities associated with exiting the Newbern, Tennessee manufacturing facility and continues to make progress towards moving horizontal engine manufacturing from its Auburn, Alabama plant to China. Also in fiscal 2013, the Company announced changes to its defined benefit pension plan that included freezing accruals for all non-bargaining employees within the pension plan effective January 1, 2014. This plan change


resulted in the Company recognizing a pre-tax curtailment charge of $1.9 million in fiscal 2013. Pre-tax restructuring costs for fiscal 2013 were $22.2 million. The following table is a reconciliation of income (loss) from operations by segment, as reported, to adjusted operating income (loss) by segment, excluding restructuring charges, goodwill and tradename impairment and litigation settlement.

                                                         For the Fiscal Years Ended
                                                   June 30,       July 1,        July 3,
                                                     2013           2012           2011
INCOME (LOSS) FROM OPERATIONS
   Engines
     Engines Income from Operations              $   59,093     $   66,559     $  120,402
        Restructuring Charges                        12,443         18,314            559
        Litigation Settlement                         1,877              -              -
     Adjusted Engines Income from Operations
(1)                                              $   73,413     $   84,873     $  120,961

   Products
     Products Income (Loss) from Operations      $ (104,918 )   $  (25,531 )   $  (73,512 )
        Restructuring Charges                         9,753         31,553          2,978
        Goodwill and Tradename Impairment            90,080              -         49,450
     Adjusted Products Income (Loss) from
Operations (1)                                   $   (5,085 )   $    6,022     $  (21,084 )

     Inter-Segment Eliminations                       5,262            209          1,326
   Adjusted Income (Loss) from Operations (1)    $   73,590     $   91,104     $  101,203

(1) Adjusted income (loss) from operations is a non-GAAP financial measure. The Company believes this information is meaningful to investors as it isolates the impact that restructuring charges, litigation settlements, and goodwill and tradename impairment have on income (loss) from operations and facilitates comparisons between reporting periods and peer companies. While the Company believes that adjusted income (loss) from operations is useful supplemental information, such adjusted results are not intended to replace our GAAP financial results and should be read in conjunction with those GAAP results.

Interest Expense
Interest expense for fiscal 2013 was $18.5 million, which was comparable to fiscal 2012.
Provision for Income Taxes
The effective tax rate for fiscal 2013 was 35.5% compared to 2.9% for the same period last year. The increase in the effective tax rate for fiscal 2013 compared to fiscal 2012 was primarily due to a net benefit of $5.6 million associated with restructuring charges incurred in connection with closing the Company's Ostrava manufacturing facility, a net benefit of $5.1 million due to the expiration of a non-U.S. statute of limitation period during fiscal 2012, and an additional tax expense of $5.6 million for a non-cash goodwill impairment charge in fiscal 2013.
FISCAL 2012 COMPARED TO FISCAL 2011

Net Sales
Consolidated net sales for fiscal 2012 were $2.1 billion, a decrease of $43.5 million, or 2.1% when compared to fiscal 2011.
Engines segment net sales for fiscal 2012 were $1.3 billion, which was lower by $89.6 million or 6.4% compared to fiscal 2011. This decrease in net sales was primarily driven by an 11% reduction in shipment


volumes of engines to OEMs for lawn and garden products in the North American and European markets due to drought conditions in North America and economic uncertainty in Europe leading to reduced consumer purchases of lawn and garden equipment and unfavorable foreign exchange of $8.7 million primarily related to the Euro. The decreases were partially offset by increased engine pricing, a favorable mix of product shipped that reflected proportionally larger volumes of units used on snow throwers and portable and standby generators.
Products segment net sales for fiscal 2012 were $952.1 million, an increase of $73.1 million or 8.3% from fiscal 2011. The increase in net sales was primarily due to increased shipments of portable and standby generators due to widespread power outages in the U.S. as a result of landed hurricane Irene and a subsequent snow storm on the United States East Coast earlier in the fiscal year, increased shipments of snow equipment after channel inventories were depleted from the prior selling season, improved pricing, a favorable mix of lawn and garden sales through the dealer channel and favorable foreign exchange of $2.3 million. These increases were partially offset by reduced shipment volumes of riding lawn and garden equipment domestically and reduced volume in the international markets. There were no landed hurricanes in fiscal 2011. Gross Profit
The consolidated gross profit percentage was 16.3% in fiscal 2012, down from 18.9% in fiscal 2011.
Included in consolidated gross profit were pre-tax charges of $44.8 million during fiscal 2012 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 $14.3 million and $30.5 million, respectively, for fiscal 2012. There were no pre-tax restructuring charges included in gross profit for fiscal 2011.
The Engines segment gross profit percentage for fiscal 2012 was 19.1%, lower from 22.8% in fiscal 2011. Excluding restructuring charges of $14.3 million, adjusted gross profit percentage in fiscal 2012 was 20.2%, a decrease of approximately 260 basis points compared to fiscal 2011. The adjusted gross profit percentage was unfavorably impacted by 0.8% due to reduced absorption on a 13% reduction in production volumes, 0.5% from unfavorable foreign exchange, and 3.0% from higher manufacturing spending associated with rising commodity costs and start-up costs of $8.6 million associated with launching our Phase III emissions compliant engines. These reductions were partially offset by a 1.7% benefit due to improved engine pricing and a favorable mix of products sold. The Products segment gross profit percentage for fiscal 2012 was 9.1%, up from 8.8% in fiscal 2011. Excluding restructuring charges of $30.5 million, adjusted gross profit percentage in fiscal 2012 was 12.3%, an increase of approximately 350 basis points compared to fiscal 2011. The adjusted gross profit percentage improved by 3.1% from increased pricing and a favorable mix of lawn and garden sales through the dealer channel, 1.5% due to production operational improvements of $13.9 million and 1.7% resulted from improved absorption on higher production volumes. This was offset by a decrease of 2.8% due to increased commodity costs.
Engineering, Selling, General and Administrative Expenses Engineering, selling, general and administrative expenses were $290.4 million in fiscal 2012, a decrease of $6.7 million or 2.2% from fiscal 2011. The Engines segment engineering, selling, general and administrative expenses were $179.7 million in fiscal 2012, a decrease of $18.9 million from fiscal 2011 primarily due to lower employee compensation expense and a planned reduction of spend in advertising costs and professional services in response to the softness in the global markets.
The Products segment engineering, selling, general and administrative expenses were $110.7 million in fiscal 2012, an increase of $12.2 million from fiscal 2011. The increase was attributable to greater selling expense to support investments in international growth, higher employee compensation expense, and $0.7 million higher bad debt expense recorded in fiscal 2012 primarily attributable to distributors in the European market.


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. 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 employees. During fiscal 2012, the Company completed manufacturing operations at its Newbern, Tennessee and Ostrava, Czech Republic plants, carried out the reconfiguration of the Poplar Bluff, Missouri plant and implemented the salaried employee reductions. Pre-tax costs of all restructuring actions totaled $49.9 million in fiscal 2012.
Additionally, in fiscal 2012 the Company announced that, beginning in fiscal 2013, it would no longer pursue placement of lawn and garden products at national mass retailers. The Engines segment continues to support lawn and garden equipment OEMs who provide lawn and garden equipment to these retailers. The Products segment continues to focus on innovative, higher margin products that are sold through the Company's network of Simplicity, Snapper and Ferris dealers and regional retailers. The Company also continues to sell pressure washers and portable and standby generators through the U.S. mass retail channel.
Interest Expense
For fiscal 2012, interest expense was $4.8 million lower compared to fiscal 2011 due to $3.9 million of pre-tax charges associated with the refinancing of Senior Notes in fiscal 2011, which did not recur in fiscal 2012, as well as lower average outstanding borrowings at slightly higher weighted average interest rates in fiscal 2012.
Provision for Income Taxes
The effective tax rate for fiscal 2012 was 2.9% compared to 24.0% reported for fiscal 2011. The decrease in the effective tax rate for fiscal 2012 compared to fiscal 2011 was primarily due to a net benefit of $5.6 million associated with restructuring charges incurred in connection with closing the Company's Ostrava plant facility and a net benefit of $5.1 million due to the expiration of a non-U.S. statute of limitation period during fiscal 2012 and the settlement of U.S. audits.
Liquidity and Capital Resources
FISCAL YEARS 2013, 2012 AND 2011
Net cash provided by operating activities was $161 million, $66 million and $157 million in fiscal 2013, 2012 and 2011, respectively.
Cash flows provided by operating activities for fiscal 2013 were $161 million compared to $66 million in fiscal 2012. The improvement in operating cash flows was primarily related to lower working capital needs in fiscal 2013 associated with lower levels of accounts receivable and inventory compared to the prior year.
Cash flows provided by operating activities for fiscal 2012 were $66 million compared to $157 million in fiscal 2011. The decrease in cash provided by operating activities was primarily related to a $32 million reduction in the decrease in accounts receivable compared to fiscal 2011, which was partly due to $19 million of delayed funding under the Company's dealer inventory financing facility with GE Capital Commercial Distribution Finance implemented in fiscal 2012, and cash contributions to the pension plan of $29 million in fiscal 2012. Net cash used in investing activities was $92 million, $51 million and $60 million in fiscal 2013, 2012 and 2011, respectively. These cash flows include capital expenditures of $45 million, $50 million and $60 million in fiscal 2013, 2012 and 2011, respectively. The capital expenditures related primarily to reinvestment in equipment, capacity additions and new products. Further, in fiscal 2013, approximately $60 million of cash was used for the acquisition of Branco.
Net cash used in financing activities was $36 million, $63 million and $4 million in fiscal 2013, 2012 and 2011, respectively. In fiscal 2013, the Company repurchased treasury stock at a total cost of $30 million compared to $39 million treasury stock repurchases in fiscal 2012. There were no treasury stock repurchases in fiscal year 2011. Also in fiscal 2013, the Company received proceeds of $20 million from the exercise of stock options and made repayments totaling $3 million on short-term loans. In fiscal 2012, as disclosed in Note 10 of the Notes to Consolidated Financial Statements, the Company incurred $2 million of debt issuance costs


associated with the refinancing of its revolving credit facility. In fiscal 2011, as disclosed in Note 10 of the Notes to Consolidated Financial Statements, the Company issued $225 million aggregate principal amount of 6.875% Senior Notes due December 15, 2020, the net proceeds of which were primarily used to redeem the $201 million outstanding principal amount of the 8.875% Senior Notes due March 15, 2011. The Company incurred $5 million of deferred financing costs in connection with the issuance of the 6.875% Senior Notes in fiscal 2011. The Company paid cash dividends on the common stock of $23 million in fiscal year 2013 and $22 million in each of fiscal years 2012 and 2011.
Given the Company's international operations, a portion of the Company's cash and cash equivalents are held in non-U.S. subsidiaries where its undistributed earnings are considered to be permanently reinvested. Generally, these would be subject to U.S. tax if repatriated. As of June 30, 2013, approximately $25 million of the Company's $188 million of cash and cash equivalents was held in non-U.S. subsidiaries.
Future Liquidity and Capital Resources
In December 2010, the Company issued $225 million aggregate principal amount of 6.875% Senior Notes due December 2020. Net proceeds were primarily used to redeem the remaining outstanding principal of the 8.875% Senior Notes due March 2011.
In October 2011, the Company entered into a $500 million multicurrency credit agreement (the "Revolver"). The Revolver replaced the Company's previous 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 June 30, 2013 and July 1, 2012. In August 2012, the Company announced that its Board of Directors declared an increase in the quarterly dividend from $0.11 per share to $0.12 per share on its common stock, payable on or after October 1, 2012 to shareholders of record at the close of business on August 20, 2012.
In August 2011, the Board of Directors of Briggs & Stratton authorized up to $50 million in funds for use in a common share repurchase program with an original expiration of June 30, 2013. In August 2012, the Board of Directors of Briggs & Stratton authorized 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 fiscal 2013 the Company repurchased 1,546,686 shares on the open market at an average price of $19.63 per share as compared to 2,409,972 shares purchased on the open market at an average price of $16.30 per share during fiscal 2012.
The Company expects capital expenditures to be approximately $50 to $55 million in fiscal 2014. These anticipated expenditures reflect the Company's plans to continue to reinvest in efficient equipment and innovative new products. On July 6, 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21 . . .

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