1
BRIGGS & STRATTON CORPORATION
1997 ANNUAL REPORT ON FORM 10-K
EXHIBIT NO. 13
EXCERPTS FROM ANNUAL REPORT TO SHAREHOLDERS FOR YEAR ENDED JUNE 29, 1997
2
CONSOLIDATED BALANCE SHEETS
================================================================================
- --------------------------------------------------------------------------------
AS OF JUNE 29, 1997 AND JUNE 30, 1996
- --------------------------------------------------------------------------------
(in thousands)
ASSETS 1997 1996
---- ----
CURRENT ASSETS:
Cash and Cash Equivalents ...................... $112,859 $150,639
Receivables, Less Reserves of $1,522 and
$1,544, Respectively ......................... 129,877 119,346
Inventories -
Finished Products and Parts .................. 83,361 96,078
Work in Process .............................. 37,922 36,932
Raw Materials ................................ 4,674 4,393
-------- --------
Total Inventories ........................... 125,957 137,403
Future Income Tax Benefits ..................... 31,602 29,589
Prepaid Expenses ............................... 18,121 15,725
-------- --------
Total Current Assets ........................ 418,416 452,702
PREPAID PENSION COST ............................. -- 4,682
DEFERRED INCOME TAX ASSETS ....................... 16,975 2,883
CAPITALIZED SOFTWARE ............................. 10,532 3,685
PLANT AND EQUIPMENT:
Land and Land Improvements ..................... 15,548 15,603
Buildings ...................................... 146,769 147,670
Machinery and Equipment ........................ 584,834 594,608
Construction in Progress ....................... 49,563 18,757
-------- --------
796,714 776,638
Less - Accumulated Depreciation ................ 400,448 402,426
-------- --------
Total Plant and Equipment, Net .............. 396,266 374,212
-------- --------
$842,189 $838,164
======== ========
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.
12
3
================================================================================
- --------------------------------------------------------------------------------
AS OF JUNE 29, 1997 AND JUNE 30, 1996
- --------------------------------------------------------------------------------
(in thousands)
LIABILITIES AND SHAREHOLDERS' INVESTMENT 1997 1996
---- ----
CURRENT LIABILITIES:
Accounts Payable ................................. $ 82,166 $ 65,642
Domestic Notes Payable ........................... 5,000 5,000
Foreign Loans .................................... 13,359 14,922
Current Maturities on Long-Term Debt ............. 15,000 15,000
Accrued Liabilities -
Wages and Salaries ............................. 25,767 25,488
Warranty ....................................... 27,017 26,257
Other .......................................... 34,769 31,187
-------- --------
Total Accrued Liabilities .................... 87,553 82,932
Federal and State Income Taxes ................... 10,916 6,683
-------- --------
Total Current Liabilities .................... 213,994 190,179
DEFERRED REVENUE ON SALE OF PLANT AND EQUIPMENT .... 15,966 --
ACCRUED PENSION COST ............................... 31,891 6,734
ACCRUED EMPLOYEE BENEFITS .......................... 12,324 11,697
ACCRUED POSTRETIREMENT HEALTH CARE OBLIGATION ...... 74,020 69,049
LONG-TERM DEBT ..................................... 142,897 60,000
COMMITMENTS AND CONTINGENCIES.......................
SHAREHOLDERS' INVESTMENT:
Common Stock -
Authorized 60,000 shares $.01 Par Value,
Issued 28,927 in 1997 and 1996 ................ 289 289
Additional Paid-In Capital ....................... 40,533 40,898
Retained Earnings ................................ 490,682 459,666
Cumulative Translation Adjustments ............... (1,033) (348)
Treasury Stock at cost,
3,513 shares in 1997 and none in 1996 .......... (179,374) --
-------- --------
Total Shareholders' Investment ............... 351,097 500,505
-------- --------
$842,189 $838,164
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
13
4
CONSOLIDATED STATEMENTS OF EARNINGS
================================================================================
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED JUNE 29, 1997, JUNE 30, 1996 AND JULY 2, 1995
- --------------------------------------------------------------------------------
(in thousands, except per share data)
1997 1996 1995
----------- ----------- -----------
NET SALES .................................................... $ 1,316,413 $ 1,287,029 $ 1,339,677
COST OF GOODS SOLD ........................................... 1,095,197 1,025,281 1,068,059
----------- ----------- -----------
Gross Profit on Sales ................................... 221,216 261,748 271,618
ENGINEERING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ..................................... 117,497 108,339 101,852
----------- ----------- -----------
Income from Operations .................................. 103,719 153,409 169,766
INTEREST EXPENSE ............................................. (9,880) (10,069) (8,580)
OTHER INCOME, Net ............................................ 5,466 5,712 9,189
----------- ----------- -----------
Income Before Provision for Income Taxes ................ 99,305 149,052 170,375
PROVISION FOR INCOME TAXES ................................... 37,740 56,640 65,570
----------- ----------- -----------
NET INCOME ................................................... $ 61,565 $ 92,412 $ 104,805
=========== =========== ===========
NET INCOME PER SHARE ......................................... $ 2.16 $ 3.19 $ 3.62
=========== =========== ===========
Weighted Average Number of Shares Outstanding ............... 28,551 28,927 28,927
=========== =========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
14
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
================================================================================
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED JUNE 29, 1997, JUNE 30, 1996 AND JULY 2, 1995
- --------------------------------------------------------------------------------
(in thousands)
Additional Cumulative
Common Paid-In Retained Translation Treasury
Stock Capital Earnings Adjustments Stock
----- ------- -------- ----------- -----
BALANCES, JULY 3, 1994 .................. $ 145 $ 42,358 $ 362,136 $ (847) $ -
Net Income ............................ - - 104,805 - -
Cash Dividends Paid ($.98 per share)... - - (28,348) - -
Distribution of Shares of STRATTEC
SECURITY CORPORATION ................ - - (40,966) 1,226 -
Two-for-One Stock Split ............... 144 (144) - - -
Purchase of Common Stock
for Treasury ....................... - - - - (915)
Exercise of Stock Options ............. - (516) - - 915
Currency Translation Adjustments ...... - - - (515) -
--------- --------- --------- --------- ---------
BALANCES, JULY 2, 1995 .................. 289 41,698 397,627 (136) -
Net Income ............................ - - 92,412 - -
Cash Dividends Paid ($1.05 per share).. - - (30,373) - -
Purchase of Common Stock
for Treasury ....................... - - - - (1,185)
Exercise of Stock Options ............. - (800) - - 1,185
Currency Translation Adjustments ...... - - - (212) -
--------- --------- --------- --------- ---------
BALANCES, JUNE 30, 1996 ................. 289 40,898 459,666 (348) -
Net Income ............................ - - 61,565 - -
Cash Dividends Paid ($1.09 per share).. - - (30,549) - -
Purchase of Common Stock
for Treasury ........................ - - - - (179,924)
Exercise of Stock Options ............. - (365) - - 550
Currency Translation Adjustments ...... - - - (685) -
--------- --------- --------- --------- ---------
BALANCES, JUNE 29, 1997 ................. $ 289 $ 40,533 $ 490,682 $ (1,033) $(179,374)
========= ========= ========= ========= =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
15
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CONSOLIDATED STATEMENTS OF CASH FLOW
================================================================================
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED JUNE 29, 1997, JUNE 30, 1996 AND JULY 2, 1995
- --------------------------------------------------------------------------------
(in thousands)
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ..................................................... $ 61,565 $ 92,412 $ 104,805
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities -
Depreciation ................................................. 43,345 43,032 44,445
Amortization of Discount on 7.25% Notes Due 2007 ............. 17 - -
Loss on Disposition of Plant and Equipment ................... 1,608 2,692 1,452
Change in Operating Assets and Liabilities -
(Increase) Decrease in Receivables ......................... (10,531) (25,230) 11,125
(Increase) Decrease in Inventories ......................... 11,446 3,271 (62,753)
(Increase) in Other Current Assets ......................... (4,409) (1,107) (4,720)
Increase (Decrease) in Accounts Payable,
Accrued Liabilities and Income Taxes ..................... 25,378 (15,595) (8,220)
Other, Net ................................................. 14,498 (4,979) 9,633
--------- -------- --------
Net Cash Provided by Operating Activities ................ 142,917 94,496 95,767
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Plant and Equipment ............................... (71,262) (77,746) (131,034)
Proceeds Received on Sale of Plant and Equipment ............... 4,133 1,069 2,055
Proceeds Received on Sale of Menomonee Falls,
Wisconsin Facility ........................................... 15,966 - -
Decrease in Cash Due to Spin-Off of Lock Business .............. - - (174)
--------- -------- --------
Net Cash Used in Investing Activities ..................... (51,163) (76,677) (129,153)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings (Repayments) on Loans and Notes Payable.......... (1,563) (6,481) 12,080
Net Borrowings on 7.25% Notes Due 2007 ......................... 97,880 - -
Repayment on 9.21% Senior Notes Due 2001 ....................... (15,000) - -
Cash Dividends Paid ............................................ (30,549) (30,373) (28,348)
Purchase of Common Stock for Treasury .......................... (179,924) (1,185) (915)
Proceeds from Exercise of Stock Options ........................ 185 385 399
--------- -------- --------
Net Cash Used in Financing Activities ....................... (128,971) (37,654) (16,784)
--------- -------- --------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE
CHANGES ON CASH AND CASH EQUIVALENTS ........................... (563) (174) (283)
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................................... (37,780) (20,009) (50,453)
CASH AND CASH EQUIVALENTS:
Beginning of Year .............................................. 150,639 170,648 221,101
--------- -------- --------
End of Year .................................................... $ 112,859 $150,639 $170,648
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest Paid .................................................. $ 9,298 $ 10,137 $ 8,501
========= ======== ========
Income Taxes Paid .............................................. $ 49,707 $ 48,865 $ 88,935
========= ======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 29, 1997, JUNE 30, 1996 AND JULY 2, 1995
(1) NATURE OF OPERATIONS:
Briggs & Stratton Corporation (the Company) is a U.S. based producer of air
cooled gasoline engines. These engines are sold primarily to original equipment
manufacturers of lawn and garden equipment and other gasoline engine powered
equipment worldwide.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Fiscal Year: The Company's fiscal year consists of 52 or 53 weeks, ending on
the Sunday nearest the last day of June in each year. Therefore, the 1997, 1996
and 1995 fiscal years were 52 weeks long. All references to years relate to
fiscal years rather than calendar years.
Principles of Consolidation: The consolidated financial statements include the
accounts of Briggs & Stratton Corporation and its wholly owned domestic and
foreign subsidiaries after elimination of intercompany accounts and
transactions.
Accounting Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents: This caption includes cash, commercial paper and
certificates of deposit. The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
Inventories: Inventories are stated at cost, which does not exceed market. The
last-in, first-out (LIFO) method was used for determining the cost of
approximately 93% of total inventories at June 29, 1997, June 30, 1996 and July
2, 1995. The cost for the remaining portion of the inventories was determined
using the first-in, first-out (FIFO) method. If the FIFO inventory valuation
method had been used exclusively, inventories would have been $48,894,000,
$48,125,000 and $43,582,000 higher in the respective years. The LIFO inventory
adjustment was determined on an overall basis, and accordingly, each class of
inventory reflects an allocation based on the FIFO amounts.
Plant and Equipment and Depreciation: Plant and equipment is stated at cost,
and depreciation is computed using the straight-line method at rates based
upon the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense as incurred.
Expenditures for major renewals and betterments, which significantly extend the
useful lives of existing plant and equipment, are capitalized and depreciated.
Upon retirement or disposition of plant and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in other income.
Income Taxes: The Provision for Income Taxes includes Federal, state and
foreign income taxes currently payable and those deferred or prepaid because of
temporary differences between financial statement and tax basis of assets and
liabilities. The Future Income Tax Benefits represent temporary differences
relating to current assets and current liabilities and the Deferred Income Tax
Assets represent temporary differences relating to noncurrent assets and
liabilities.
Research and Development Costs: Expenditures relating to the development of new
products and processes, including significant improvements and refinements to
existing products, are expensed as incurred. The amounts charged against income
were $19,525,000 in 1997, $15,019,000 in 1996 and $13,112,000 in 1995.
Accrued Employee Benefits: The Company's life insurance program includes
payment of a death benefit to beneficiaries of retired employees. The Company
accrues for the estimated cost of these benefits over the estimated working
life of the employee. Past service costs for all retired employees have been
fully provided for. The Company also accrues for the estimated cost of
supplemental retirement and death benefit agreements with executive officers.
17
8
NOTES . . .
Advertising Costs: Advertising costs, included in Engineering, Selling, General
and Administrative Expenses on the accompanying Consolidated Statement of
Earnings, are expensed as incurred. These expenses totaled $7,989,000 in 1997,
$7,066,000 in 1996 and $6,357,000 in 1995.
Foreign Currency Translation: Foreign currency balance sheet accounts are
translated into United States dollars at the rates of exchange in effect at
fiscal year end. Income and expenses are translated at the average rates of
exchange in effect during the year. The related translation adjustments are
made directly to a separate component of Shareholders' Investment.
Start-Up Costs: It is the Company's policy to expense all start-up costs for
new manufacturing plants. Under this policy, the Company expensed $11,660,000
in fiscal 1996 and $5,300,000 in fiscal 1995.
Capitalized Software: This new balance sheet caption represents costs of
software used in the Company's business. Amortization of Capitalized Software
is computed on an item-by-item basis over a period of three to ten years,
depending on the estimated useful life of the software. Accumulated
amortization amounted to $4,442,000 and $3,367,000 as of June 29, 1997 and June
30, 1996, respectively. Capitalized Software on prior period balance sheets
was reclassified from Prepaid Expense to the current caption.
Deferred Revenue on Sale of Plant & Equipment: The sale of the Company's
Menomonee Falls, Wisconsin facility for approximately $16.0 million was
completed at the beginning of the fiscal quarter ended December 29, 1996. The
provisions of the contract state that the Company will continue to own and
occupy the warehouse portion of the facility for a period of up to ten years
(the "Reservation Period"). The contract also contains a buyout clause, at the
buyer's option and under certain circumstances, of the remaining Reservation
Period. Under the provisions of Statement of Financial Accounting Standards
(FAS) No. 66, "Accounting for Sales of Real Estate," the Company is required to
account for this as a financing transaction as the Company continues to have
substantial involvement with the facility during the Reservation Period or
until the buyout option is exercised. Under this method, the cash received is
reflected as a deferred revenue, and the assets and the accumulated
depreciation remain on the Company's books. Depreciation expense continues to
be recorded each period, and imputed interest expense is also recorded and
added to deferred revenue. Offsetting this is the imputed fair value lease
income on the non-Company occupied portion of the building. A pretax gain,
which will be recognized at the earlier of the exercise of the buyout option or
the expiration of the Reservation Period, is estimated to be $10 million to $12
million. The annual cost of operating the warehouse portion of the facility is
not material.
Derivatives: The Company uses derivative financial instruments to manage its
foreign currency and interest rate exposures. Gains and losses relating to
hedges of probable transactions with noncontrolled subsidiaries and third
parties are deferred and recognized as adjustments of carrying amounts when the
transaction occurs. Gains and losses on hedges of transactions that are not
probable of occurring and hedges of transactions with controlled subsidiaries
are recognized in the Company's results of operations.
Earnings Per Share: In February 1997, the Financial Accounting Standards Board
issued FAS No. 128, "Earnings per Share." This statement establishes a new
standard for computing and presenting earnings per share in financial
statements. The Company will adopt the new standard in its fiscal 1998 second
quarter financial statements. The impact of adoption of this standard will not
be material to the Company's results of operations.
18
9
NOTES . . .
Earnings per share of common stock are computed based on the weighted average
number of shares outstanding during each period. The shares repurchased on May
20, 1997 pursuant to the dutch auction tender, which totaled 3,506,190 shares
at $51.00 per share, and the Company's ongoing share repurchase program, affect
the year-to-date comparisons. Weighted average common shares outstanding for
the quarter and year ended June 29, 1997 were 27,424,105 and 28,551,277,
respectively, compared to 28,927,000 for each of the same periods in fiscal
1996.
(3) INCOME TAXES:
The provision for income taxes consists of the following (in thousands of
dollars):
Current 1997 1996 1995
---- ---- ----
Federal................................... $ 45,474 $ 46,448 $ 67,255
State..................................... 6,723 7,768 10,644
Foreign................................... 1,648 1,654 873
--------- --------- ---------
53,845 55,870 78,772
Deferred.................................... (16,105) 770 (13,202)
--------- --------- ---------
Total....................................... $37,740 $56,640 $65,570
========= ========= =========
A reconciliation of the U.S. statutory tax rates to the effective tax rates
follows:
1997 1996 1995
---- ---- ----
U.S. statutory rate......................... 35.0% 35.0% 35.0%
State taxes, net of
Federal tax benefit....................... 3.1% 3.4% 3.5%
Foreign Sales Corporation
tax benefit............................... (.9%) (.7%) (.6%)
Other....................................... .8% .3% .6%
---- ---- ----
Effective tax rate.......................... 38.0% 38.0% 38.5%
==== ==== ====
The components of deferred tax assets and liabilities at the end of the fiscal
year were (in thousands of dollars):
1997 1996
---- ----
Future Income Tax Benefits:
Inventory................................ $ 2,916 $ 2,518
Payroll related accruals................. 4,244 4,658
Warranty reserves........................ 10,537 10,240
Other accrued liabilities................ 8,926 8,453
Miscellaneous............................ 4,979 3,720
-------- ---------
$ 31,602 $ 29,589
======== =========
1997 1996
---- ----
Deferred Income Taxes:
Difference between book and
tax methods applied to
maintenance and supply
inventories............................ $ 12,464 $ 9,982
Pension cost............................ 9,688 (1,679)
Accumulated depreciation................ (50,207) (41,768)
Accrued employee benefits............... 7,904 7,232
Postretirement
health care obligation................. 28,868 26,929
Deferred revenue on sale
of plant & equipment................... 6,226 -
Miscellaneous........................... 2,032 2,187
---------- ---------
$ 16,975 $ 2,883
========== =========
The Company has not recorded deferred income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in foreign
operations. These undistributed earnings amounted to approximately $5,500,000
at June 29, 1997. If these earnings were remitted to the U.S., they would be
subject to U.S. income tax. However, this tax would be substantially less than
the U.S. statutory income tax because of available foreign tax credits.
(4) INDUSTRY SEGMENTS:
Certain information concerning the Company's industry segments is presented
below (in thousands of dollars):
SALES- 1995
Engines & parts.......................... $ 1,276,264
Locks.................................... 63,413
-------------
$1,339,677
=============
INCOME FROM OPERATIONS -
Engines & parts.......................... $162,903
Locks.................................... 6,863
-------------
$169,766
=============
DEPRECIATION EXPENSE -
Engines & parts.......................... $ 42,746
Locks.................................... 1,699
-------------
$ 44,445
=============
EXPENDITURES FOR PLANT
AND EQUIPMENT -
Engines & parts.......................... $ 124,604
Locks.................................... 6,430
-------------
$ 131,034
=============
19
10
NOTES . . .
On February 27, 1995, the Company spun off its lock business to its
shareholders in a tax-free distribution. This spin-off was accomplished by
distributing shares in a newly created corporation on the basis of one share in
the new corporation for each five shares of Briggs & Stratton Corporation stock
held on February 16, 1995. The newly created corporation, STRATTEC SECURITY
CORPORATION, is publicly traded. This distribution resulted in a charge of
$40,966,000 against the retained earnings account and represented the total of
the net assets transferred to STRATTEC. The financial statements of Briggs &
Stratton Corporation have not been restated to deal with this distribution as a
discontinued operation because the amounts were not material. Because of the
spin-off, no industry segment data is being presented for fiscal 1997 or 1996.
Export sales for fiscal 1997 were $304,230,000 (23% of total sales), for fiscal
1996 were $323,747,000 (25%) and for fiscal 1995 were $312,234,000 (23%). These
sales were principally to customers in European countries.
In the fiscal years 1997, 1996 and 1995, there were sales to three major engine
customers that exceeded 10% of total Company net sales. The sales to these
customers are summarized below (in thousands of dollars and percent of total
Company sales):
1997 1996 1995
---- ---- ----
Customer Sales % Sales % Sales %
A $282,428 21% $267,257 21% $237,241 18%
B 180,770 14% 177,314 14% 155,072 12%
C 142,840 11% 163,065 13% 189,916 14%
-------- --- -------- --- -------- ---
$606,038 46% $607,636 48% $582,229 44%
======== === ======== === ======== ===
(5) INDEBTEDNESS:
The Company has access to a $250,000,000 revolving credit facility (the Credit
Facility) which expires in April 2002. The Company also has access to
additional domestic lines of credit totaling $13,000,000 which remain in effect
until canceled by either party. They provide amounts for short-term use at the
then prevailing rate. There are no significant compensating balance
requirements for any of these lines, and there were no borrowings at June 29,
1997 using these lines or the Credit Facility.
Borrowings under the Credit Facility by the Company bear interest at a rate per
annum equal to, at its option, either:
(1) the higher of (a) the bank's reference rate or (b) 0.5% per annum above the
Federal Funds rate; or
(2) LIBOR plus a margin that may be adjusted up or down based on the Company's
debt ratings.
The Credit Facility contains certain restrictive covenants that require the
Company to maintain certain financial conditions including a maximum limit on
the ratio of debt to capital and a minimum fixed charge coverage ratio. The
Credit Facility imposes limitations on liens, certain indebtedness, the sales
of assets and certain investments.
The following data relates to domestic notes payable:
1997 1996
---- ----
Balance at
Fiscal Year End...... $ 5,000,000 $ 5,000,000
Weighted Average
Interest Rate at
Fiscal Year End...... 5.98% 6.10%
The lines of credit available to the Company in foreign countries are in
connection with short-term borrowings and bank overdrafts used in the normal
course of business. These amounts total $17,200,000, expire at various times
through June, 1998 and are renewable. None of these arrangements had material
commitment fees or compensating balance requirements.
The following information relates to foreign loans:
1997 1996
---- ----
Balance at
Fiscal Year End....... $ 13,359,000 $ 14,922,000
Weighted Average
Interest Rate at
Fiscal Year End....... 4.49% 4.60%
20
11
NOTES . . .
The Long-Term Debt caption consists of the following (in thousands of dollars):
1997 1996
---- ----
9.21% Senior Notes Due 2001
at Face Amount........................... $ 60,000 $ 75,000
7.25% Notes Due 2007, Net of
Unamortized Discount of
$2,103 in 1997........................... 97,897 -
-------- --------
$157,897 $ 75,000
Less Current Maturities................... $ 15,000 $ 15,000
-------- --------
Total Long-Term Debt.................... $142,897 $ 60,000
======== ========
The 9.21% Senior Notes are due June 15, 2001. Payments on these notes are due
in five equal annual installments beginning in 1997. The notes include
covenants that limit total borrowings, require maintenance of a minimum net
worth and set certain restrictions on the sale or collateralizing of the
Company's assets.
The 7.25% notes are due September 15, 2007. No principal payments are due
before that date. These notes have covenants that limit secured funded debt and
certain sale-leaseback transactions.
(6) OTHER INCOME:
The components of other income (expense) are
(in thousands of dollars):
1997 1996 1995
---- ---- ----
Interest income....................... $ 3,981 $ 4,477 $ 6,840
Loss on the
disposition of
plant and equipment................. (1,608) (2,692) (1,452)
Income from joint
ventures............................ 3,026 2,957 2,842
Other items........................... 67 970 959
-------- --------- ---------
Total................................. $5,466 $5,712 $9,189
======== ========= =========
(7) COMMITMENTS AND CONTINGENCIES:
The Company is a 50% guarantor on bank loans of two unconsolidated joint
ventures. One is in Japan for the manufacture of engines and the second in the
United States for the manufacture of parts. These bank loans totaled
approximately $8,000,000 at the end of 1997.
Product and general liability claims arise against the Company from time to
time in the ordinary course of business. The Company is self-insured for future
claims up to $1 million per claim. Accordingly, a reserve is maintained for the
estimated costs of such claims. At June 29, 1997 and June 30, 1996, the reserve
for product and general liability claims was $4.6 million and $6.5 million,
respectively, based on available information. There is inherent uncertainty as
to the eventual resolution of unsettled claims. Management, however, believes
that any losses in excess of established reserves will not have a material
effect on the Company's financial position or results of operations.
The Company has no material commitments for materials or capital expenditures
at June 29, 1997.
(8) STOCK OPTIONS:
The Company has a Stock Incentive Plan under which 3,361,935 shares of common
stock have been reserved for issuance. The Company accounts for the plan under
Accounting Principles Board No. 25, under which no compensation cost has been
recognized. Had compensation cost for these plans been determined consistent
with FAS No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share would have been reduced to the following pro
forma amounts:
1997 1996
---- ----
Net Income (in thousands):
As Reported............... $61,565 $92,412
Pro Forma................. $60,777 $91,690
Earnings Per Share:
As Reported............... $2.16 $3.19
Pro Forma................. $2.13 $3.17
Because the FAS No. 123 method of accounting has not been applied to options
granted prior to July 2, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
21
12
NOTES . . .
Information on the options outstanding is as follows:
1997
----------------------
Wtd. Avg.
Shares Ex. Price
------ ---------
Balance, beginning of year................................ 1,704,531 $ 42.98
Granted during the year................................... 106,550 53.30
Exercised during the year................................. (24,369) 17.26
---------
Balance, end of year...................................... 1,786,712 $ 43.95
=========
1996
----------------------
Wtd. Avg.
Shares Ex. Price
------ ---------
Balance, beginning of year................................ 1,169,620 $ 38.41
Granted during the year................................... 600,000 49.08
Exercised during the year................................. (65,089) 17.07
---------
Balance, end of year...................................... 1,704,531 $ 42.98
=========
1995
----------------------
Wtd. Avg.
Shares Ex. Price
------ ---------
Balance, beginning of year................................ 606,864 $ 32.76
Granted during the year................................... 552,000 45.85
Increase due to spin-off.................................. 83,843 38.08
Exercised during the year................................. (43,827) 15.91
Terminated during the year................................ (29,260) 49.77
---------
Balance, end of year...................................... 1,169,620 $ 38.41
=========
Grant Summary
---------------------------------------------------------------------------------------------
Fiscal Grant Exercise Date Options Expiration
Year Date Price (a) Exercisable Outstanding Date
----------------------------------------------------------------------------------------------
1990 2-20-90 $13.014 50%, 1-1-94; 3,782 2-19-00
50%, 1-1-95
1991 2-19-91 14.524 50%, 1-1-95; 79,405 2-18-01
50%, 1-1-96
1992 5-18-92 21.525 50%, 1-1-96; 171,385 5-17-02
50%, 1-1-97
1994 8-16-93 48.369 8-16-96 258,085 8-16-98
1995 8-12-94 45.854 8-12-97 567,505 8-12-99
1996 8-07-95 49.080 8-07-98 600,000 8-07-00
1997 8-06-96 53.300 8-06-99 106,550 8-06-01
There were no options granted in fiscal 1993.
(a) Exercise prices have been adjusted as appropriate to reflect a two-for-one
stock split and the spin-off of the Company's lock business.
The grant-date fair market value of the options granted in fiscal 1997 and 1996
was $5.42 and $5.39, respectively. The fair value of each option is estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions used for the 1997 and 1996 option grants, respectively:
risk free interest rates of 6.25% and 6.36%; expected volatility of 20.6% and
24.6%; expected dividend yields of 2.5% and 2.7%; and expected lives of the
options of 5 years.
(9) SHAREHOLDER RIGHTS PLAN:
On August 6, 1996, the Board of Directors declared a dividend distribution of
one common stock purchase right (a "right") for each share of the Company's
common stock outstanding on August 19, 1996. Each right would entitle
shareowners to buy one-half of one share of the Company's common stock at an
exercise price of $160.00 per full common share, subject to adjustment. The
rights are not currently exercisable, but would become exercisable if certain
events occurred relating to a person or group acquiring or attempting to
acquire 15 percent or more of the outstanding shares of common stock. The
rights expire on August 19, 2006, unless redeemed or exchanged by the Company
earlier. Rights granted under a previous plan expired July 1, 1996.
(10) FOREIGN EXCHANGE RISK MANAGEMENT:
The Company enters into forward exchange contracts to hedge purchase
commitments denominated in foreign currencies. The term of these currency
derivatives never exceeds one year and the purpose is to protect the Company
from the risk that the eventual dollars being transferred will be adversely
affected by changes in exchange rates.
The Company has forward foreign currency exchange contracts to purchase 5.5
billion Japanese yen for $46 million through June, 1998. These contracts are
used to hedge the commitments to purchase engines from the Company's Japanese
joint venture and accordingly any gain or loss has been deferred at the end of
the 1997 fiscal year. The amount deferred was a gain of approximately $2.5
million.
The Company's foreign subsidiaries have the following forward currency
contracts outstanding at the end of fiscal 1997:
In Millions
-----------
Local U.S. Latest
Currency Currency Dollars Expiration Date
- -------- -------- ------- ---------------
German Deutschemarks................................... .6 .2 July, 1997
Canadian Dollars....................................... .7 .5 July, 1997
Australian Dollars..................................... 1.3 1.0 September, 1997
There are no significant gains or losses included in the above amounts.
22
13
NOTES . . .
(11) EMPLOYEE BENEFIT COSTS:
Retirement Plan
The Company has noncontributory, defined benefit retirement plans covering most
Wisconsin employees. The following tables summarize the plans' income and
expense, actuarial assumptions, and funded status for the three years indicated
(dollars in thousands):
Qualified Plans Supplemental Plans
------------------------------- ---------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
Income and Expense:
- -------------------
Service Cost-Benefits Earned
During the Year....................................... $ 11,309 $ 13,143 $ 15,098 $ 378 $ 456 $ 453
Interest Cost on Projected
Benefit Obligation.................................... 40,990 41,722 39,877 860 926 904
Actual Return on Plan Assets........................... (114,303) (104,872) (89,941) (11) (9) (3)
Net Amortization, Deferral
and Windows........................................... 58,525 51,830 37,078 395 462 333
--------- --------- -------- --------- -------- --------
Net Periodic Pension
Expense (Income)....................................... $ (3,479) $ 1,823 $ 2,112 $ 1,622 $ 1,835 $ 1,687
========= ========= ======== ======== ======== ========
Actuarial Assumptions:
- ----------------------
Discount Rate Used to Determine
Present Value of Projected
Benefit Obligation.................................... 7.75% 7.75% 7.75% 7.75% 7.75% 7.75%
Expected Rate of Future
Compensation Level Increases.......................... 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
Expected Long-Term Rate of
Return on Plan Assets................................. 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
Funded Status:
- --------------
Actuarial Present Value of
Benefit Obligations:
Vested............................................... $ 482,712 $ 413,035 $389,117 $ 8,869 $ 8,286 $ 7,991
Non-Vested........................................... 32,735 34,268 36,144 - 21 6
--------- --------- -------- --------- -------- --------
Accumulated Benefit
Obligation........................................... 515,447 447,303 425,261 8,869 8,307 7,997
Effect of Projected Future
Wage and Salary Increases............................. 82,941 120,083 124,651 3,228 4,766 4,679
--------- --------- -------- --------- -------- --------
Projected Benefit Obligation......................... 598,388 567,386 549,912 12,097 13,073 12,676
Plan Assets at Fair Market Value....................... 767,108 681,819 609,385 127 126 100
--------- --------- -------- --------- -------- --------
Plan Assets in Excess of (Less Than)
Projected Benefit Obligation.......................... 168,720 114,433 59,473 (11,970) (12,947) (12,576)
Remaining Unrecognized Net
Obligation (Asset) Arising
from the Initial Application of
SFAS No. 87........................................... (26,006) (31,321) (36,902) 132 179 258
Unrecognized Net Loss (Gain)........................... (164,779) (75,983) (21,992) 2,531 4,494 5,277
Unrecognized Prior Service Cost........................ (2,002) (2,447) (2,185) 953 1,029 1,102
--------- --------- -------- --------- -------- --------
Prepaid (Accrued) Pension Cost......................... $ (24,067) $ 4,682 $ (1,606) $ (8,354) $ (7,245) $ (5,939)
Less Current Portion................................... - - - 530 511 511
--------- --------- -------- --------- -------- --------
$ (24,067) $ 4,682 $ (1,606) $ (7,824) $ (6,734) $ (5,428)
========= ========= ======== ======== ======== ========
23
14
Notes . . .
The Company offered early retirement windows to certain of its Milwaukee union
members during the 1995 fiscal year. As a result, $13,806,000 was added to
pension expense and $5,253,000 was added to postretirement health care expense
in the fourth quarter of the 1995 fiscal year. When the retirements were
scheduled to occur in the first fiscal quarter of 1996, a number of these union
members canceled their acceptance, and thus credits totaling $3,477,000 were
recorded as a change in the original accounting estimate. A second retirement
window was offered in fiscal 1997. The cost of this window was additional
pension expense of $33,457,000 and additional postretirement health care
expense of $3,644,000 in the fourth quarter of the 1997 fiscal year.
During fiscal 1996, the defined benefit pension plan which covered employees at
two of the Company's plants was terminated and replaced by a defined
contribution retirement plan that includes most U.S. non-Wisconsin employees.
The impact of the termination was not material. Under the new plan, the Company
will make a contribution on behalf of covered employees equal to 2% of each
participant's gross income, as defined. For fiscal 1997 and 1996, the cost to
the Company was $1,352,000 and $757,000, respectively.
Most U.S. employees of the Company may participate in a salary reduction
deferred compensation retirement plan. The Company makes matching contributions
of $.50 for every $1.00 deferred by a participant to a maximum of 1-1/2% or 3%
of each participant's salary, depending upon the participant's group. Company
contributions totaled $3,944,000 in 1997, $2,825,000 in 1996 and $1,756,000 in
1995.
Postretirement Benefits
The Company records the expected health care and life insurance benefits for
employees during the years that the employees render service.
For measurement purposes, a 10.5% annual rate of increase in the per capita
cost of covered health care claims was assumed for the years 1995 through 1997,
decreasing gradually to 6% for the year 2007. The health care cost trend rate
assumption has a significant effect on the amounts reported. The rates, if
changed by one percentage point, would change the accumulated postretirement
benefit by $5,472,000 and would change the service and interest cost by
$641,000 for the year.
The discount rate used in determining the accumulated postretirement benefit
obligations was 7.75% compounded annually. Both the health care and life
insurance plans are unfunded.
The components of the accumulated postretirement benefit obligations were (in
thousands of dollars):
<Caption
Health Care
-----------
1997 1996
---- ----
Retirees.............................. $51,553 $33,044
Fully eligible plan participants...... 467 4,077
Other active participants............. 26,961 32,628
------- -------
$78,981 $69,749
Unrecognized gain (loss).............. (161) 4,000
------- -------
$78,820 $73,749
Less current portion.................. 4,800 4,700
------- -------
$74,020 $69,049
======= =======
Life Insurance
--------------
1997 1996
---- ----
Retirees.............................. $ 9,048 $ 8,840
Fully eligible plan participants...... 1,720 2,226
Other active participants............. 1,453 1,736
------- -------
$12,221 $12,802
Unrecognized net obligation........... (507) (553)
Unrecognized prior service cost....... (827) (898)
Unrecognized loss..................... (35) (908)
------- -------
$10,852 $10,443
Less current portion.................. - -
------- -------
$10,852 $10,443
======= =======
The current portion of the health care component above represents the benefits
expected to be paid within the next twelve months and is included in the
caption Accrued Liabilities in the accompanying balance sheet. The net health
care balance has its own caption in this balance sheet. The life insurance
component is included in the caption Accrued Employee Benefits.
24
15
NOTES . . .
The net periodic postretirement costs recorded were (in thousands of dollars):
Health Care
-----------
1997 1996 1995
---- ---- ----
Service cost-benefits
attributed to service
during the year............... $1,272 $1,596 $1,680
Interest cost on accumulated
benefit obligation............ 5,226 5,480 5,150
Other.......................... - (91) -
------ ------ ------
$6,498 $6,985 $6,830
====== ====== ======
Life Insurance
--------------
1997 1996 1995
---- ---- ----
Service cost-benefits
attributed to service
during the year............... $ 87 $ 90 $ 73
Interest cost on accumulated
benefit obligation............ 964 947 801
Other.......................... 118 118 47
------ ------ ------
$1,169 $1,155 $ 921
====== ====== ======
Postemployment Benefits
The Company also accrues the expected cost of postemployment benefits over the
years that the employees render service. These benefits are substantially
smaller amounts because they apply only to employees who permanently terminate
employment prior to retirement. The items included in this amount are
disability payments, life insurance and medical benefits, and these amounts are
also discounted using a 7.75% interest rate.
The balance in this reserve at the end of fiscal 1997 was $1,468,000 and at the
end of fiscal 1996 was $1,245,000. Both were included in the caption Accrued
Employee Benefits in the accompanying balance sheets.
(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents, Domestic Notes Payable and Foreign Loans: The
carrying amount approximates fair value because of the short maturity of those
instruments.
Long-Term Debt: The fair value of the Company's long-term debt is estimated
based on quotations made on similar issues.
The estimated fair values of the Company's financial instruments are as follows
(in thousands of dollars):
1997
--------------------------
Carrying Fair
Amount Value
-------- -----
Cash and cash equivalents........ $ 112,859 $ 112,859
Domestic notes payable........... $ 5,000 $ 5,000
Foreign loans.................... $ 13,359 $ 13,359
Long-term debt -
9.21% Senior Notes due 2001,
including current maturities... $ 60,000 $ 62,885
7.25% Notes due 2007............ $ 97,897 $ 100,531
1996
--------------------------
Carrying Fair
Amount Value
-------- -----
Cash and cash equivalents........ $ 150,639 $ 150,639
Domestic notes payable........... $ 5,000 $ 5,000
Foreign loans.................... $ 14,922 $ 14,922
Long-term debt -
9.21% Senior Notes due 2001,
including current maturities... $ 75,000 $ 77,365
25
16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Briggs & Stratton Corporation:
We have audited the accompanying consolidated balance sheets of Briggs &
Stratton Corporation (a Wisconsin Corporation) and subsidiaries as of June 29,
1997 and June 30, 1996, and the related consolidated statements of income,
shareholders' investment and cash flows for each of the three years in the
period ended June 29, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Briggs & Stratton Corporation
and subsidiaries as of June 29, 1997 and June 30, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 29, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
July 31, 1997.
27
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
Sales
Net sales for fiscal 1997 increased 2% or $29.4 million compared to the prior
year. The primary reason for this was a 1% increase in engine unit shipments.
The remaining 1% increase in net sales was a result of modest price increases
and a mix improvement.
Gross Profit
Gross profit for fiscal 1997 decreased 15% or $40.5 million compared to the
same period in the prior year. The primary reason for this decrease was a
charge of $37.1 million related to an early retirement window accepted by
certain Milwaukee hourly employees in accordance with the current union
contract.
The gross profit rate was 17% in fiscal 1997 compared to 20% in fiscal 1996.
In addition to the early retirement window, the gross profit rate was also
negatively impacted by increases in warranty expenses totaling $9.3 million
due to claims experience, increases in the unit price of aluminum totaling
$3.7 million, and the absence in fiscal 1997 of the $3.5 million credit for
employees who had accepted early retirement in fiscal 1995 and canceled their
acceptance in fiscal 1996. Savings from lower labor costs at the Company's
new engine plants partially offset the preceding factors impacting the gross
profit rate.
Engineering, Selling, General and Administrative Expenses
Engineering, selling, general and administrative expenses for fiscal 1997
increased 8% or $9.2 million compared to fiscal 1996. This increase was
primarily due to increased employee compensation of $4.0 million, planned
increases in manpower and other costs of $2.7 million relating to new venture
activities, and increased professional services of $1.5 million primarily
resulting from the start of the implementation of a new enterprise-wide
information system.
Provision for Income Taxes
The effective income tax rate used in both periods was 38.0%.
FISCAL 1996 COMPARED TO FISCAL 1995
Sales
Sales for fiscal 1996 totaled $1,287 million, down 4% or $52.6 million from
the preceding year. The reason for this decrease was the absence of sales from
the automotive lock business, which was spun off after eight months in the
preceding fiscal year. These sales amounted to $63.4 million in fiscal 1995.
Excluding the lock business sales, engine business sales increased $10.8 million
between years. This change was caused by an approximate 1.8% improvement in
selling prices to the original equipment manufacturing customers, offset by
a 1% decrease in engine unit sales that was almost entirely in the service
sales area.
Gross Profit
The gross profit percentage remained consistent between years. This was the
result of several factors: increased startup costs of $6.4 million and
inefficiencies related to the new plants, and less absorption of fixed costs due
to fewer engines produced were offset by lower profit sharing provisions of
$18.0 million and the impact of a decrease in the unit price of aluminum
totaling $3.4 million. In addition, the 1995 gross profit included a $19.1
million charge for the retirement window, of which $3.5 million was reversed in
1996 due to a change of an accounting estimate for employees who had accepted
an early retirement window in fiscal 1995 and subsequently canceled their
acceptance in the second quarter of fiscal 1996.
Engineering, Selling, General and Administrative Expenses
Engineering, selling, general and administrative expenses increased $6.5 million
or 6% between years. This was due to increases in salaries amounting to $3.4
million, planned increases in manpower costs relating to new venture activities
of $6.4 million, increased professional services of $2.1 million and higher
advertising expenses of $.7 million. Offsetting these, in part, was a reduction
28
18
MANAGEMENT'S DISCUSSION . . .
in profit sharing accruals amounting to $4.6 million and the lack of engineering
and selling expenses of $5.7 million from the spun off lock business.
Interest Expense
Interest expense for the 1996 fiscal year was 17% higher than in 1995. This
was the result of using domestic short-term borrowing to finance increases
in accounts receivable and inventories in mid-year. Seasonal borrowings were
paid off by the end of the fiscal year. The preceding year had minimal seasonal
short-term borrowings.
Other Income
Other income decreased $3.5 million between years, primarily because of a
reduction in interest income due to lower available investable funds. Funds
were used for seasonal working capital and the construction of the new
manufacturing plants. There also was an increase in the loss on disposition of
plant and equipment between years.
Provision for Income Taxes
The effective income tax rate decreased to 38.0% in 1996 from 38.5% in the
previous year due to lower state income taxes, increased Foreign Sales
Corporation tax benefits, and reductions in other tax related items.
FINANCIAL STRATEGY
Management of the Company subscribes to the premise that the value of the
Company is enhanced if the capital invested in the Company's operations yields
a cash return that is greater than the Company's cost of capital. Given this
belief, the Company continued to implement its financial strategy by means of a
"dutch auction" tender offer and a public debt offering in fiscal 1997 which it
believes will provide a capital structure that makes greater use of financial
leverage without imposing excessive risk on either the Company's shareholders
or creditors. The Company believes that the substitution of lower (after-tax)
cost debt for equity in its permanent capital structure will reduce its overall
cost of capital. The Company believes that its profitability and strong
cash flows will accommodate the increased use of debt without impairing its
ability to finance growth or increase cash dividends per share on its common
stock.
In connection with its financial strategy, the Company repurchased 3,506,190
shares of its common stock at a price of $51.00 per share or approximately
$179 million in the aggregate, entered into a new credit facility allowing
borrowings of up to $250 million and completed a $100 million ten-year note
offering. The Company funded the tender offer with $169 million of available
cash and $10 million of short-term borrowings under the new credit facility.
A portion of the net proceeds of the ten-year debt offering was used to repay
short-term borrowings. The new credit facility also provides a source of
financing for the seasonal working capital needs of the Company.
The Company's Board of Directors authorized the purchase of up to $300 million
of shares of common stock by means of the tender offer and open market or
private transactions. The Company has from time to time purchased additional
shares of common stock pursuant to an open market repurchase program. As of
August 22, 1997, the Company has repurchased 457,900 shares at a total cost of
$22.7 million pursuant to its open market repurchase program. Any future
purchases by the Company will depend on many factors, including the market
price of the shares, the Company's business and financial position and general
economic and market conditions. The Company intends to fund future repurchases
of its common stock through a combination of available cash and additional
borrowings.
Also as a part of its financial strategy, subject to the discretion of the
Company's Board of Directors and the requirements of applicable law, the
Company currently intends to increase future cash dividends per share at a
rate no more than the inflation rate.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEARS 1997, 1996 AND 1995
Cash flow from operating activities was $142.9 million, $94.5 million and $95.8
million, in fiscal 1997, 1996 and 1995, respectively. The primary source of
funds was from net income excluding depreciation. The significant change between
fiscal 1997 and fiscal 1996 amounts was due to changes in working capital as
explained below.
The fiscal 1997 cash flow from operating activities reflects an increase in
accounts receivable of $10.5 million and lower inventories of $11.4 million
resulting from increased sales at the end of the fiscal year. Also, increased
accounts payable of
29
19
MANAGEMENT'S DISCUSSION . . .
$16.6 million caused by the timing of payments, increased accrued liabilities
of $4.6 million resulting primarily from increased profit sharing provisions,
and increased federal and state income taxes payable of $4.2 million caused
by the timing of payments contributed to the cash flows of the Company.
The fiscal 1996 cash flow from operating activities reflects an increase in
receivables of $25.2 million resulting from increased sales at the end of the
fiscal year and also reflects a decrease in accrued liabilities of $25.9 million
primarily due to decreased profit sharing provisions.
The fiscal 1995 cash flow from operating activities reflects a decrease in
accounts receivable of $11.1 million due to lower sales late in the fourth
quarter of fiscal 1995 and an increase in inventories of $62.8 million. This
increase in inventories was primarily due to two factors. The Company maintained
a stable rate of production while experiencing a reduction in orders from
equipment manufacturers due to less favorable spring weather. In addition, the
Company planned an increase in inventories to provide a cushion for the
transfer of engine assembly to the three new plants under construction.
Cash used in investing activities amounted to $51.2 million, $76.7 million
and $129.2 million in fiscal 1997, 1996 and 1995, respectively. The 1997 cash
flows from investing activities included additions to plant and equipment of
$71.3 million, $77.7 million and $131.0 million in fiscal 1997, 1996 and 1995,
respectively. The fiscal 1997 capital expenditures related primarily to
reinvestment in equipment and new products, while the fiscal 1996 and fiscal
1995 expenditures principally related to the construction of three new engine
manufacturing plants and a foundry and plant expansions at existing facilities.
The 1997 cash flows from investing activities also included $16.0 million
related to the sale of the Menomonee Falls, Wisconsin facility. The sale of
this facility is described under "Other Matters."
Cash flows used in financing activities amounted to $129.0 million, $37.6
million and $16.8 million in fiscal 1997, fiscal 1996 and fiscal 1995,
respectively. The fiscal 1997 cash used in financing activities includes the
repurchase of the Company's common stock totaling $179 million pursuant to the
dutch auction tender offer and open market repurchase program previously
discussed. Also in fiscal 1997, the Company issued ten-year notes which resulted
in $97.9 million of net proceeds from the offering. The Company also paid $15
million as its first installment on its 9.21% Senior Notes in fiscal 1997.
Cash dividends totaled $30.5 million, $30.4 million and $28.3 million, in
fiscal 1997, 1996 and 1995, respectively. Fiscal 1997 and 1996 cash used in
financing activities also reflects the repayment of foreign loans of $1.6
million and $6.5 million, respectively. Fiscal 1995 reflects increased borrowing
by the Company's foreign subsidiaries of $12.1 million to fund working capital
requirements.
Future Liquidity and Capital Resources
In connection with the debt offering and tender offer, the Company entered
into a new credit facility allowing borrowings of up to $250 million to
primarily fund seasonal working capital requirements and other financing needs
of the Company. The term of the new credit facility is five years and such
facility contains certain restrictive covenants. Because the Company used $169
million of available cash to fund a portion of the tender offer, the Company
anticipates placing more reliance on borrowings to fund working capital
requirements than it has in recent years. The Company will incur additional
interest expense in the future as a result of the issuance of ten-year notes
and increased reliance on the new revolving credit facility.
In May 1997, the Company filed a shelf registration for $175 million of debt
securities to be issued periodically. Of this, $75 million has not yet been
issued on the registration statement. The Company may decide to offer all or
part of the remaining securities depending on many factors, including general
economic conditions, cash required for operations and the timing of the
remaining open market repurchases of its common stock.
Management expects capital expenditures to total $56 million in fiscal 1998
for reinvestment in equipment and new products. As previously mentioned, the
Company is also implementing a new enterprise-wide information system, the
expenditures for which are expected to total $25 million over the next five
years.
Management believes that available cash, the new credit facility, cash
generated from operations, existing lines of credit and access to public debt
markets will be adequate to fund the Company's capital requirements for
the foreseeable future.
30
20
MANAGEMENT'S DISCUSSION . . .
OTHER MATTERS
Sale of the Menomonee Falls, Wisconsin Facility
The sale of the Company's Menomonee Falls, Wisconsin facility for approximately
$16.0 million was completed during fiscal 1997. The provisions of the contract
state that the Company will continue to own and occupy the warehouse portion
of the facility for a period of up to ten years (the "Reservation Period").
The contract also contains a buyout clause, at the buyer's option and under
certain circumstances, of the remaining Reservation Period. Under the provisions
of Statement of Financial Accounting Standards No. 66, "Accounting for Sales
of Real Estate," the Company is required to account for this as a financing
transaction as the Company continues to have substantial involvement with the
facility during the Reservation Period or until the buyout option is exercised.
Under this method, the cash received is reflected as a deferred revenue, and
the assets and the accumulated depreciation remain on the Company's books.
Depreciation expense continues to be recorded each period, and imputed interest
expense is also recorded and added to deferred revenue. Offsetting this is
the fair value lease income on the non-Company occupied portion of the building.
A pretax gain, which will be recognized at the earlier of the exercise of the
buyout option or the expiration of the Reservation Period, is estimated to
be $10 million to $12 million. The annual cost of operating the warehouse
portion of the facility is not material.
Emissions
The U.S. Environment Protection Agency (EPA) is developing national emission
standards under a two phase process for equipment powered by small air cooled
engines. In 1995, the EPA promulgated its Phase I emission standards, which
will be reflected in the Company's 1998 model year engines. The EPA and several
engine manufacturers, including the Company, recently announced an agreement
in principle to further cut pollution emitted by gasoline engines. These
reductions are expected to be incorporated into the EPA's Phase II emission
standards to be issued in 1998 and to be phased in from 2001 to 2005. While it
is impossible to precisely quantify the cost of compliance until the standards
are issued, the Company believes compliance with the new standards will not
have a material adverse effect on its financial position or results of
operations.
The California Air Resources Board (CARB) has also adopted emission standards
to be effective in two tiers. Tier I was effective as of August 1995.
Tier II of the CARB engine emission standards will not be effective until 1999
or later. CARB has directed its staff to review its Tier II standards in light
of technological and economic issues raised by the industry. The Company
expects this review to be completed in late 1997 or early 1998. In the event
the Company is unable to comply with the Tier II standards and they remain
unchanged, the Company believes that any resulting downturn in sales will not
have a material adverse effect on the Company's financial position or
results of operations.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share." This statement
establishes a new standard for computing and presenting earnings per share
in financial statements. The Company will adopt the new standard in its 1998
second quarter financial statements. The impact of adoption of this standard
will not be material to the Company's results of operations.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Certain statements in Management's Discussion and Analysis, in the Letter to
Shareholders on pages 2 through 5 and in About Briggs & Stratton on pages 6
through 11 may contain forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
in the forward-looking statements. The words "anticipate", "believe",
"estimate", "expect", "objective", and "think" or 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 effects of weather on the
purchasing patterns of the Company's customers and end use purchasers of the
Company's engines; the seasonal nature of the Company's business; actions of
competitors; changes in laws and regulations, including accounting standards;
employee relations; customer demand; prices of purchased raw materials and
parts; domestic economic conditions, including housing starts and changes in
consumer disposable income; and foreign economic conditions, including currency
rate fluctuations. Some or all of the factors are beyond the Company's control.
31
21
QUARTERLY FINANCIAL DATA, DIVIDEND AND MARKET INFORMATION (UNAUDITED)
In Thousands Per Share of Common Stock
------------------------------------- -----------------------------------------------
Market Price Range
on New York
Net Net Stock Exchange
Quarter Net Gross Income Income Dividends --------------
Ended Sales Profit (Loss) (Loss) Declared High Low
----- ----- ------ ------ ------ -------- ---- ---
Fiscal 1997
- -----------
SEPTEMBER $ 161,731 $ 17,969 $ (5,262) $ (.18) $ .27 45-7/8 36-1/2
DECEMBER 299,664 56,857 16,694 .58 .27 44-5/8 39-1/4
MARCH 475,955 107,119 46,514 1.60 .27 46-3/8 43
JUNE 379,063 39,271 3,619 .13 .28 53-5/8 42-5/8
---------- -------- -------- ------- -------
TOTAL $1,316,413 $221,216 $ 61,565 $ 2.16* $ 1.09
========== ======== ======== ======= =======
Fiscal 1996
- -----------
September $ 189,477 $ 19,141 $ (3,300) $ (.11) $ .26 41 32-3/4
December 329,357 65,763 23,924 .82 .26 44-1/8 39
March 460,201 104,082 45,226 1.57 .26 44-3/4 39-3/4
June 307,994 72,762 26,562 .91 .27 46-7/8 40-1/2
---------- -------- -------- ------- -------
Total $1,287,029 $261,748 $ 92,412 $ 3.19 $ 1.05
========== ======== ======== ======= =======
The number of record holders of Briggs & Stratton Corporation Common Stock on
August 20, 1997 was 5,272.
* See Footnote No. 2 "Summary of Accounting Policies - Earnings per Share" to
the Consolidated Financial Statements.
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22
FIVE YEAR COMPARISONS
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
SUMMARY OF OPERATIONS
NET SALES............................... 1,316,413 1,287,029 1,339,677 1,285,517 1,139,462
GROSS PROFIT ON SALES................... 221,216 261,748 271,618 266,540 212,601
PROVISION FOR INCOME TAXES.............. 37,740 56,640 65,570 67,240 44,060
NET INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGES........... 61,565 92,412 104,805 102,481 70,345
NET INCOME.............................. 61,565 92,412 104,805 69,923 70,345
WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING (000)...... 28,551 28,927 28,927 28,927 28,927
PER SHARE OF COMMON STOCK:
Net Income before cumulative effect
of accounting changes ................. 2.16 3.19 3.62 3.54 2.43
Net Income.............................. 2.16 3.19 3.62 2.42 2.43
Cash Dividends.......................... 1.09 1.05 .98 .90 .85
Shareholders' Investment................ 13.82 17.30 15.19 13.96 12.45
OTHER DATA
SHAREHOLDERS' INVESTMENT................ 351,097 500,505 439,478 403,792 359,958
LONG-TERM DEBT.......................... 142,897 60,000 75,000 75,000 75,000
TOTAL ASSETS............................ 842,189 838,164 798,493 777,355 656,107
PLANT AND EQUIPMENT..................... 796,714 776,638 726,331 669,593 658,120
PLANT AND EQUIPMENT NET OF RESERVES..... 396,266 374,212 343,297 285,890 295,542
PROVISION FOR DEPRECIATION.............. 43,345 43,032 44,445 42,950 47,222
EXPENDITURES FOR PLANT AND EQUIPMENT.... 71,262 77,746 131,034 40,804 38,110
WORKING CAPITAL......................... 204,422 266,208 256,075 276,040 195,019
Current Ratio ......................... 2.0 to 1 2.4 to 1 2.3 to 1 2.3 to 1 2.2 to 1
NUMBER OF EMPLOYEES AT YEAR END......... 7,661 7,199 6,958 8,628 7,950
NUMBER OF SHAREHOLDERS AT YEAR END...... 5,336 5,879 6,792 6,228 6,651
QUOTED MARKET PRICE:
High................................... 53-5/8 46-7/8 39-1/4 45-1/8 34-1/4
Low.................................... 36-1/2 32-3/4 30-1/2 32-1/2 21
NOTES:
(1) The number of shares of common stock and per share data have been
adjusted for a 2-for-1 stock split in fiscal 1995.
(2) The cumulative effects of accounting changes in 1994 were for
postretirement health care, postemployment benefits and deferred
income taxes.