1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 29, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission file number 1-1370 BRIGGS & STRATTON CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) A Wisconsin Corporation 39-0182330 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12301 West Wirth Street, Wauwatosa, Wisconsin 53222 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) 414/259-5333 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class February 10, 1997 - -------------------------------------------------------------------------------- COMMON STOCK, par value $0.01 per share 28,927,000 Shares -1- 2 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES INDEX Page No. PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Condensed Balance Sheets - December 29, 1996, June 30, 1996 and December 31, 1995 3 Consolidated Condensed Statements of Earnings - Three Months and Six Months Ended December 29, 1996 and December 31, 1995 5 Consolidated Condensed Statements of Cash Flow - Six Months Ended December 29, 1996 and December 31, 1995 6 Notes to Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 8 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 -2- 3 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands of dollars) ASSETS Dec. 29 June 30 Dec. 31 1996 1996 1995 ------- ------- ------- (Unaudited) (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 3,254 $150,639 $ 6,323 Receivables, net 234,525 119,346 270,142 Inventories - Finished products and parts 179,857 96,078 156,117 Work in process 45,426 36,932 44,087 Raw materials 5,141 4,393 4,560 -------- -------- -------- Total inventories 230,424 137,403 204,764 Future income tax benefits 32,870 29,589 31,744 Prepaid expenses 14,782 15,725 11,062 -------- -------- -------- Total current assets 515,855 452,702 524,035 -------- -------- -------- OTHER ASSETS: Prepaid pension cost 7,458 4,682 727 Deferred income tax asset 5,363 2,883 4,157 Purchased software 9,045 3,685 3,734 -------- -------- -------- Total other assets 21,866 11,250 8,618 -------- -------- -------- PLANT AND EQUIPMENT - Cost 788,453 776,638 759,178 Less - Accumulated depreciation 403,777 402,426 387,056 -------- -------- -------- Total plant and equipment, net 384,676 374,212 372,122 -------- -------- -------- $922,397 $838,164 $904,775 ======== ======== ======== The accompanying notes are an integral part of these statements. -3- 4 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION (Continued) CONSOLIDATED CONDENSED BALANCE SHEETS (Continued) (In thousands of dollars) LIABILITIES & SHAREHOLDERS' INVESTMENT Dec. 29 June 30 Dec. 31 1996 1996 1995 ----------- ------- ----------- (Unaudited) (Unaudited) CURRENT LIABILITIES: Accounts payable $ 62,091 $ 65,642 $ 62,251 Domestic notes payable 43,970 5,000 101,558 Foreign loans 16,440 14,922 20,066 Current maturities on long-term debt 15,000 15,000 - Accrued liabilities 99,146 82,932 94,602 Dividends payable 7,810 - 7,521 Federal and state income taxes 17,252 6,683 12,815 -------- -------- -------- Total current liabilities 261,709 190,179 298,813 -------- -------- -------- OTHER LIABILITIES: Deferred revenue on sale of plant and equipment 15,996 - - Accrued employee benefits 19,465 18,431 17,260 Accrued postretirement health care obligation 69,034 69,049 69,143 Long-Term debt 60,000 60,000 75,000 -------- -------- -------- Total other liabilities 164,495 147,480 161,403 -------- -------- -------- SHAREHOLDERS' INVESTMENT: Common stock- Authorized 60,000,000 shares, $.01 par value Issued and outstanding 28,927,000 shares 289 289 289 Additional paid-in capital 40,705 40,898 41,327 Retained earnings 455,477 459,666 403,209 Cumulative translation adjustments (278) (348) (266) -------- -------- -------- Total shareholders' investment 496,193 500,505 444,559 -------- -------- -------- $922,397 $838,164 $904,775 ======== ======== ======== The accompanying notes are an integral part of these statements. -4- 5 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (In thousands of dollars except amounts per share) (Unaudited) Three Months Ended Six Months Ended ------------------ ---------------- Dec. 29 Dec. 31 Dec. 29 Dec. 31 1996 1995 1996 1995 ------- ------- ------- ------- NET SALES $299,664 $329,357 $461,395 $518,834 COST OF GOODS SOLD 242,807 263,594 386,569 433,930 -------- -------- -------- -------- Gross profit on sales $ 56,857 $ 65,763 $ 74,826 $ 84,904 ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 28,071 24,801 54,132 49,284 -------- -------- -------- -------- Income from operations $ 28,786 $ 40,962 $ 20,694 $ 35,620 INTEREST EXPENSE (2,408) (2,919) (4,360) (4,976) OTHER INCOME, net 536 541 2,098 2,620 -------- -------- -------- -------- Income before provision for income taxes $ 26,914 $ 38,584 $ 18,432 $ 33,264 PROVISION FOR INCOME TAXES 10,220 14,660 7,000 12,640 -------- -------- -------- -------- Net income $ 16,694 $ 23,924 $ 11,432 $ 20,624 ======== ======== ======== ======== PER SHARE DATA* - Net income $ .58 $ .82 $ .40 $ .71 ====== ====== ====== ====== Cash dividends $ .27 $ .26 $ .54 $ .52 ====== ====== ====== ====== * Based on 28,927,000 shares outstanding. The accompanying notes are an integral part of these statements. -5- 6 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW Increase(Decrease) in Cash and Cash Equivalents (In thousands of dollars) (Unaudited) Six Months Ended -------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Dec. 29, 1996 Dec. 31, 1995 ------------- -------------- Net income $ 11,432 $ 20,624 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation 21,578 20,938 Loss on disposition of plant and equipment 1,537 680 (Increase)decrease in operating assets - Accounts receivable (115,179) (176,026) Inventories (93,021) (64,090) Other current assets (2,338) 1,400 Other assets (10,616) (3,066) Increase(decrease) in liabilities - Accounts payable and accrued liabilities 31,042 6,337 Other liabilities 1,019 (357) --------- --------- Net cash used in operating activities $(154,546) $(193,560) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to plant and equipment $ (33,687) $ (51,423) Proceeds received on sale of plant and equipment 112 928 Proceeds received on sale of Menomonee Falls, Wisconsin facility 15,996 - --------- --------- Net cash used in investing activities $ (17,579) $ (50,495) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from domestic and foreign loans $ 40,488 $ 95,221 Dividends (15,621) (15,042) Purchase of common stock for treasury (301) (547) Proceeds from exercise of stock options 108 176 --------- --------- Net cash provided from financing activities $ 24,674 $ 79,808 --------- --------- EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS $ 66 $ (78) --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS $(147,385) $(164,325) CASH AND CASH EQUIVALENTS, beginning 150,639 170,648 --------- --------- CASH AND CASH EQUIVALENTS, ending $ 3,254 $ 6,323 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 4,217 $ 4,596 ========= ========= Income taxes paid $ 2,075 $ 2,576 ========= ========= The accompanying notes are an integral part of these statements. -6- 7 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. However, in the opinion of the Company, adequate disclosures have been presented to make the information not misleading, and all adjustments necessary to present fair statements of the results of operations and financial position have been included. All of these adjustments are of a normal recurring nature. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. The new balance sheet caption entitled "Purchased Software" represents costs of software purchased for use in the Company's business. Amortization of Purchased 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 $3,562,000, $3,367,000, and $2,666,000 as of December 29, 1996, June 30, 1996 and December 31, 1995. Purchased Software on prior period balance sheets was reclassified from Prepaid Expense to the current caption. The sale of the Company's Menomonee Falls, Wisconsin facility for $16.3 million (less costs to sell) was completed at the beginning of the second fiscal quarter. 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. Given the provisions of the contract, the Company is required to account for this as a financing transaction. Under this method, the cash received is reflected as a deferred liability, 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 the deferred liability. 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. -7- 8 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following is Management's discussion and analysis of certain significant factors which have affected the Company's results of operations and financial condition during the periods included in the accompanying consolidated condensed financial statements. RESULTS OF OPERATIONS SALES Net sales for the second fiscal quarter of 1997 decreased 9% or $29,693,000 compared to the same period in the preceding year. The primary reason for this decline in sales dollars was a 15% decrease in engine shipments. The unit decrease is the result of lawn and garden equipment manufacturers building products later and as close as possible to the time they are needed by retailers. The Company's largest customers have increased their peak production capacity, which allows them to concentrate more of their production in winter and early spring. The result was less demand for engines in the second quarter. The decrease in unit volume was primarily in small engines which have lower selling prices. Accordingly, the Company experienced a favorable mix impact which partially offset the unit volume decline. Net sales for the six months ended December 1996 decreased 11% or $57,439,000 compared to the same period in the prior year. Unit engine sales were down 16%. The same reasons as described above apply to this six-month period. GROSS PROFIT Gross profit decreased 14% or $8,906,000 between comparable quarters, primarily because of the reduced volume described above. The gross profit rate declined from 20% last year to 19% in the current year. This decrease was principally due to a change of an accounting estimate totaling $3,477,000 for employees who had accepted an early retirement window in fiscal 1995 and subsequently canceled their acceptance in the second quarter of fiscal 1996. Gross profit for the six months ended December 1996 decreased 12% or $10,078,000, also due to the reduction in sales. The gross profit rate was 16% in each six-month period. If the credit for the retirement window is removed from the comparison, the gross profit rate would have shown a 1% improvement in the current year, primarily due to net lower costs in the current year related to the Company's new engine plants because of labor rate savings. -8- 9 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION (Continued) ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES This category of expenses increased 13% or $3,270,000 between the second fiscal quarter of 1997 and 1996. This was due to increases in salaries and planned increases in manpower and other costs relating to new venture activities. The 10% or $4,848,000 increase in this category for the six-month comparison was due to the same factors as described above, partially offset by a reduction in marketing costs due to timing during the year. INTEREST EXPENSE Interest expense decreased in both the three-month period and six-month period. This was due to lower borrowings offset, in part, by higher average interest rates. PROVISION FOR INCOME TAXES The effective income tax rate used in all periods was 38.0%, which reflects management's estimate of the rate for the entire year. OUTLOOK The changing seasonal pattern of sales described earlier should result in increased demand in the second half of the year. Based on customer expectations, orders actually placed, and favorable econometric forecasts, and assuming normal spring weather, management expects unit shipments for the full fiscal year to be somewhat higher than for the preceding year. The Company will offer a final early retirement window in late fiscal 1997, in accordance with the current union contract with its Milwaukee hourly employees. It is unknown how many employees will accept this offer. All elections under this window must be completed in June 1997. If all eligible employees elect to take this window, the charge to earnings could total a maximum of $53 million before taxes. -9- 10 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION (Continued) FINANCIAL CONDITION Cash used in operating activities was $154,546,000. This resulted from increased accounts receivable of $115,179,000 and increased inventories of $93,021,000 due to the normal seasonality of the business. This was offset by depreciation of $21,578,000 and an increase in accrued liabilities as a result of the timing of payments. Cash used in investing activities was $17,579,000 which was comprised of additions to plant and equipment, offset by proceeds received on the disposition of our Menomonee Falls facility as previously discussed. Additions to plant and equipment totaled $33,687,000 through December 1996. Management expects capital expenditures for reinvestment in equipment and new products to total approximately $65,000,000 in the current fiscal year--all to be financed from internal resources and the Company's lines of credit. During the six-month period the Company increased its short-term borrowings by $40,488,000 under its lines of credit, primarily to finance seasonal increases in working capital. The Company also paid $15,621,000 of dividends during the period. The Company will make the first of five annual installments on its long-term debt in June 1997. These payments will total $15,000,000 and are shown as Current Maturities on Long-Term Debt in the accompanying balance sheet. OTHER MATTERS The sale of the Company's Menomonee Falls, Wisconsin plant was completed at the beginning of the second quarter. The required accounting for this transaction is described in a footnote on page 7. The move from the manufacturing portion of this building to available space in the Company's Wauwatosa plant was completed by the end of the quarter. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation." This standard establishes financial accounting and reporting standards for stock-based employee compensation. The Company adopted the pro forma disclosure requirements of the statement which will be presented in the fiscal year-end 1997 annual report, and will continue to apply the accounting provisions of Accounting Principles Board Opinion No. 25, as allowed by the new standard. -10- 11 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION (Continued) EMISSION STANDARDS The U.S. Environmental Protection Agency (EPA) and several engine manufacturers, including Briggs & Stratton Corporation, 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 Two emission standards to be issued later in 1997 and to be phased in from 2001 to 2005. While it is impossible to precisely quantify the cost of compliance until the standards are actually issued, the Company believes compliance with the new standards will not have a material effect on its financial position or results of operations. CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS Certain statements in the Outlook, Financial Condition and Emission Standards sections of Management's Discussion and Analysis and the Notes to Consolidated Condensed Financial Statements may contain forward-looking information (as defined in the Private Securities Litigation Reform Act of 1995) that involves risk and uncertainty. The words "anticipate", "believe", "estimate", "expect", "objective", and "think" or similar expressions are intended to identify forward-looking statements. Company results may differ materially from those projected in the forward-looking statements. Any forward-looking statements are based on management's current views and assumptions and involve risks and uncertainties that could significantly affect final results. These uncertainties could include, among other things, the effects of weather; actions of competitors; changes in laws and regulations, including accounting standards; 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. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit Number Description ------ ----------- 11 Computation of Earnings Per Share of Common Stock (Filed herewith) 27 Financial Data Schedule (Filed herewith) (b) Reports on Form 8-K. There were no reports on Form 8-K for the second quarter ended December 29, 1996. -11- 12 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION (Continued) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BRIGGS & STRATTON CORPORATION (Registrant) Date: February 10, 1997 /s/ R. H. Eldridge ----------------------------------- R. H. Eldridge Executive Vice President & Chief Financial Officer, Secretary-Treasurer Date: February 10, 1997 /s/ J. E. Brenn ----------------------------------- J. E. Brenn Vice President and Controller -12-