Form 10-K
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 

(Mark One)

x   ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended JUNE 29, 2003

 

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
incorporation or organization)
  (I.R.S. Employer
Identification No.)

12301 WEST WIRTH STREET

WAUWATOSA, WISCONSIN

  53222
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: 414-259-5333

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class


 

Name of Each Exchange on Which Registered


Common Stock (par value $0.01 per share)

  New York Stock Exchange

Common Share Purchase Rights

  New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: NONE

 


 

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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  x  No  ¨

 

The aggregate market value of voting stock held by nonaffiliates of the registrant was approximately $857,207,926 based on the reported last sale price of such securities as of December 27, 2002.

 

Number of Shares of Common Stock Outstanding at August 21, 2003: 22,103,623.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Document


 

Part of Form 10-K Into Which Portions

of Document are Incorporated


Proxy Statement for Annual Meeting

on October 15, 2003

  Part III

 

The Exhibit Index is located on page 46.

 



Table of Contents

BRIGGS & STRATTON CORPORATION

FISCAL 2003 FORM 10-K

TABLE OF CONTENTS

 

          Page

PART I

         

Item 1.

  

Business

   1

Item 2.

  

Properties

   4

Item 3.

  

Legal Proceedings

   4

Item 4.

  

Submission of Matters to a Vote of Security Holders

   5
    

Executive Officers of the Registrant

   6

PART II

         

Item 5.

  

Market for the Registrant’s Common Equity and Related Stockholder Matters

   7

Item 6.

  

Selected Financial Data

   8

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   9

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   14

Item 8.

  

Financial Statements and Supplementary Data

   15

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   41

Item 9A.

  

Controls and Procedures

   41

PART III

         

Item 10.

  

Directors and Executive Officers of the Registrant

   41

Item 11.

  

Executive Compensation

   41

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   41

Item 13.

  

Certain Relationships and Related Transactions

   42

Item 14.

  

Principal Accountant Fees and Services

   42

PART IV

         

Item 15.

  

Exhibits, Financial Statement Schedules and Reports on Form 8-K

   42
    

Signatures

   45

 

Cautionary Statement on Forward-Looking Statements

 

Certain statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “plan,” “seek,” “think,” “will” and similar expressions are intended to identify forward-looking statements. The forward-looking statements are based on Briggs & Stratton’s current views and assumptions and involve risks and uncertainties that include, among other things: our ability to successfully forecast demand for our products and appropriately adjust our manufacturing and inventory levels; changes in our operating expenses; changes in interest rates; the effects of weather on the purchasing patterns of consumers and original equipment manufacturers (OEMs); actions of engine manufacturers and OEMs with whom we compete; the seasonal nature of our business; changes in laws and regulations, including environmental and accounting standards; work stoppages or other consequences of any deterioration in our employee relations; work stoppages by other unions that affect the ability of suppliers or customers to manufacture; acts of war or terrorism that may disrupt our business operations or those of our customers and suppliers; changes in customer and OEM demand; changes in prices of purchased raw materials and parts that we purchase; changes in domestic economic conditions, including housing starts and changes in consumer disposable income; changes in foreign economic conditions, including currency rate fluctuations; new facts that come to light in the future course of litigation proceedings which could affect our assessment of those matters; and other factors that may be disclosed from time to time in our SEC filings or otherwise. Some or all of the factors may be beyond our control. We caution you that any forward-looking statement reflects only our belief at the time the statement is made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made.


Table of Contents

PART I

 

ITEM 1. BUSINESS

 

Briggs & Stratton is the world’s largest producer of air cooled gasoline engines for outdoor power equipment. Briggs & Stratton designs, manufactures, markets and services these products for original equipment manufacturers (OEMs) worldwide. These engines are primarily aluminum alloy gasoline engines ranging from 3 to 31 horsepower.

 

Additionally, through its wholly owned subsidiary, Briggs & Stratton Power Products Group, LLC, Briggs & Stratton is a leading designer, manufacturer and marketer of portable generators, pressure washers and related accessories. Briggs & Stratton acquired Generac Portable Products, Inc. on May 15, 2001. Generac Portable Products, Inc. was merged with, and into Generac Portable Products, LLC on June 30, 2002, and changed its name to Briggs & Stratton Power Products Group, LLC (BSPPG) effective December 31, 2002.

 

Briggs & Stratton conducts its operations in two reportable segments: Engines and Power Products. Further information about Briggs & Stratton’s business segments is contained in Note 5 of the Notes to Consolidated Financial Statements.

 

The Company’s Internet address is www.briggsandstratton.com. The Company makes available free of charge (other than an investor’s own Internet access charges) through its Internet website the Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the Securities and Exchange Commission.

 

Engines

 

General

 

Briggs & Stratton’s engines are used primarily by the lawn and garden equipment industry, which accounted for 81% of fiscal 2003 engine sales to OEMs. Major lawn and garden equipment applications include walk-behind lawn mowers, riding lawn mowers and garden tillers. The remaining 19% of OEM sales in fiscal 2003 were for use on products for industrial, construction, agricultural and other consumer applications, that include generators, pumps and pressure washers. Many retailers specify Briggs & Stratton’s engines on the powered equipment they sell, and the Briggs & Stratton name is often featured prominently on a product despite the fact that the engine is only a component. Briggs & Stratton engines are marketed under various brand names including Classic, Sprint, Quattro, Quantum®, INTEK, I/C®, Industrial Plus and Vanguard.

 

In fiscal 2003, approximately 24% of Briggs & Stratton’s net sales were derived from sales in international markets, primarily to customers in Europe. Briggs & Stratton serves its key international markets through its European regional office in Switzerland, its distribution center in the Netherlands and sales and service subsidiaries in Australia, Austria, Canada, the Czech Republic, England, France, Germany, Mexico, New Zealand, the Philippines, Russia, South Africa, Sweden, and United Arab Emirates. Briggs & Stratton is a leading supplier of gasoline engines in developed countries where there is an established lawn and garden equipment market. Briggs & Stratton also exports engines to developing nations where its engines are used in agricultural, marine, construction and other applications. More detailed information about our foreign operations is in Note 5 of the Notes to Consolidated Financial Statements.

 

Briggs & Stratton engines are sold primarily by its worldwide sales force through direct calls on customers. Briggs & Stratton’s marketing staff and engineers in the United States provide support and technical assistance to its sales force.

 

Briggs & Stratton also manufactures replacement engines and service parts and sells them to sales and service distributors. Briggs & Stratton owns its principal international distributors. In the United States the distributors are independently owned and operated. These distributors supply service parts and replacement engines directly to approximately 35,000 independently owned, authorized service dealers throughout the world. These distributors and service dealers implement Briggs & Stratton’s commitment to reliability and service.

 

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Customers

 

Briggs & Stratton’s engine sales are made primarily to OEMs. Briggs & Stratton’s three largest engine customers in each of the last three fiscal years were AB Electrolux (principally its Electrolux Home Products Group), MTD Products Inc. and Murray Inc. (owned by Summersong Investments, Inc.). Sales to each of these customers were more than 10% of net sales in fiscal 2003, 2002, and 2001. Sales to all three combined were 41%, 47% and 46% of consolidated net sales in fiscal 2003, 2002 and 2001, respectively. Under purchasing plans available to all of its gasoline engine customers, Briggs & Stratton typically enters into annual engine supply arrangements with these large customers.

 

Briggs & Stratton believes that in fiscal 2003 more than 80% of all lawn and garden equipment sold in the United States was sold through mass merchandisers such as Sears, Roebuck and Co. (Sears), The Home Depot, Inc. (The Home Depot), Wal*Mart Stores, Inc. (Wal*Mart), and Lowe’s Home Centers, Inc. (Lowe’s). Given the buying power of the mass merchandisers, Briggs & Stratton, through its customers, has continued to experience pricing pressure. Briggs & Stratton expects that this pricing trend will continue in the foreseeable future. Briggs & Stratton believes that a similar trend has developed for its products in industrial and consumer applications outside of the lawn and garden market.

 

Competition

 

Briggs & Stratton’s major domestic competitors in engine manufacturing are Tecumseh Products Company (Tecumseh), Honda Motor Co., Ltd. (Honda), Kohler Co. and Kawasaki Heavy Industries, Ltd. (Kawasaki). Several Japanese small engine manufacturers, of which Honda and Kawasaki are the largest, compete directly with Briggs & Stratton in world markets in the sale of engines to other OEMs and indirectly through their sale of end products. Tecumseh Europa S.p.A., located in Italy, is a major competitor in Europe.

 

Briggs & Stratton believes it has a significant share of the worldwide market for engines that power outdoor equipment.

 

Briggs & Stratton believes the major areas of competition from all engine manufacturers include product quality, brand strength, price, timely delivery and service. Other factors affecting competition are short-term market share objectives, short-term profit objectives, exchange rate fluctuations, technology, product support and distribution strength. Briggs & Stratton believes its product value and service reputation have given it strong brand name recognition and enhance its competitive position.

 

Seasonality of Demand

 

Sales of engines to lawn and garden OEMs are highly seasonal because of consumer buying patterns. The majority of lawn and garden equipment is sold during the spring and summer months when most lawn care and gardening activities are performed. Sales of lawn and garden equipment are also influenced by weather conditions. Sales in Briggs & Stratton’s fiscal third quarter have historically been the highest, while sales in the first fiscal quarter have historically been the lowest.

 

In order to efficiently use its capital investments and meet seasonal demand for engines, Briggs & Stratton pursues a relatively balanced production schedule throughout the year. The schedule is adjusted to reflect changes in estimated demand, customer inventory levels and other matters outside the control of Briggs & Stratton. Accordingly, inventory levels generally increase during the first and second fiscal quarters in anticipation of customer demand. Inventory levels begin to decrease as sales increase in the third fiscal quarter. This seasonal pattern results in high inventories and low cash flow for Briggs & Stratton in the second and the beginning of the third fiscal quarters. The pattern results in higher cash flow in the latter portion of the third fiscal quarter and in the fourth fiscal quarter as inventories are liquidated and receivables are collected.

 

Manufacturing

 

Briggs & Stratton manufactures engines and parts at the following locations: Wauwatosa, Wisconsin; Murray, Kentucky; Poplar Bluff and Rolla, Missouri; Auburn, Alabama; and Statesboro, Georgia. Briggs & Stratton has a parts distribution center in Menomonee Falls, Wisconsin.

 

Briggs & Stratton manufactures a majority of the structural components used in its engines, including aluminum die castings, carburetors and ignition systems. Briggs & Stratton purchases certain parts such as piston rings, spark plugs, valves, ductile and grey iron castings, zinc die castings and plastic components, some stampings and screw machine parts and smaller quantities of other components. Raw material

 

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purchases consist primarily of aluminum and steel. Briggs & Stratton believes its sources of supply are adequate.

 

Briggs & Stratton has joint ventures with Daihatsu Motor Company for the manufacture of engines in Japan and with Starting Industrial of Japan for the production of rewind starters in the U.S. Briggs & Stratton is also the majority owner in a joint venture with China Machinery & Electronic Holding Corporation and China Yimin Machine Plant for the production of engines in China.

 

Briggs & Stratton has a strategic relationship with Mitsubishi Heavy Industries (MHI) for the global distribution of air cooled gasoline engines manufactured by MHI in Japan under Briggs & Stratton’s Vanguard brand.

 

Power Products

 

General

 

In May 2001, Briggs & Stratton acquired BSPPG. BSPPG’s two principal product lines are portable and home stand-by generators (“generators”) and pressure washers. BSPPG sells its products through multiple channels of retail distribution, including home centers, warehouse clubs, mass merchants and independent dealers.

 

BSPPG has assembled a comprehensive after-sales service network in North America for generators and pressure washers comprised of approximately 3,000 authorized independent dealers. BSPPG maintains its independent dealer network for the purpose of providing the after-sales service capability that supports its products.

 

To support its European power generator business, BSPPG has local sales offices in England, Germany and Spain.

 

Customers

 

BSPPG sells to consumer home centers and warehouse clubs, as well as mass merchants and independent dealers. Historically, BSPPG’s major customers have been Lowe’s, Costco Companies, Inc., The Home Depot and Sears. Other U.S. retail customers include Sam’s Club, Tractor Supply Company, Tru-Serv Incorporated, and Wal*Mart.

 

Competition

 

The U.S. engine powered equipment industry, in which Briggs & Stratton competes (the “power products industry”), is highly concentrated with approximately five competitors. The principal competitive factors in the power products industry include price, service, product performance, technical innovation and delivery. In the manufacture and sale of generators, BSPPG competes primarily with Coleman Powermate (part of The Coleman Company, Inc., an affiliate of Sunbeam Corporation) and Honda. In the manufacture and sale of pressure washers, BSPPG competes primarily with DeVilbiss Air Power Company (part of Pentair, Inc.) and to a lesser extent, with Coleman Powermate, Alfred Karcher GmbH & Co. and Campbell Hausfeld (part of Berkshire Hathaway, Inc.).

 

BSPPG believes it has a significant share of the North American market for generators and consumer pressure washers.

 

Seasonality of Demand

 

Sales of BSPPG’s products are subject to seasonal patterns. Due to seasonal and regional weather factors, sales of pressure washers and related working capital requirements are typically higher during the fiscal third and fourth quarters than at other times of the year. Sales of generators are typically higher during the summer and fall tropical storm seasons.

 

Manufacturing

 

BSPPG’s U.S. manufacturing facility is located in Jefferson, Wisconsin. BSPPG produces generators and pressure washers at this location.

 

BSPPG manufactures core components for generators, where such integration improves operating profitability by providing lower costs.

 

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BSPPG purchases engines from its parent, Briggs & Stratton, as well as from Generac Power Systems, Inc. and Honda. BSPPG has not experienced any difficulty obtaining necessary purchased components.

 

To service BSPPG’s European customer base more effectively, BSPPG designs and assembles its European products in a leased facility in Cheshire, England. This facility imports alternators, engines and other components and assembles generators to meet European product requirements.

 

Consolidated

 

General Information

 

Briggs & Stratton holds patents on features incorporated in its products; however, the success of Briggs & Stratton’s business is not considered to be primarily dependent upon patent protection. Trademarks, licenses, franchises and concessions are not a material factor in Briggs & Stratton’s business.

 

For the years ending June 29, 2003, June 30, 2002 and July 1, 2001, Briggs & Stratton spent approximately $26.4 million, $23.7 million and $21.5 million, respectively, on research activities relating to the development of new products or the improvement of existing products.

 

The average number of persons employed by Briggs & Stratton during the fiscal year was 7,147. Employment ranged from a low of 7,007 in July 2002 to a high of 7,249 in June 2003.

 

Export Sales

 

Export sales for fiscal 2003, 2002 and 2001 were $401.2 million (24% of net sales), $365.5 million (24% of net sales) and $325.6 million (25% of net sales), respectively. These sales were principally to customers in European countries. Refer to Note 5 of Notes to Consolidated Financial Statements for financial information about geographic areas. Also, refer to Item 7A of this Form 10-K and Note 12 of Notes to Consolidated Financial Statements for information about Briggs & Stratton’s foreign exchange risk management.

 

ITEM 2. PROPERTIES

 

The corporate offices and one of Briggs & Stratton’s engine manufacturing facilities are located in Wauwatosa, Wisconsin. Briggs & Stratton also has engine manufacturing facilities in Murray, Kentucky; Poplar Bluff and Rolla, Missouri; Auburn, Alabama and Statesboro, Georgia. These are owned facilities containing 3.6 million square feet of office and production area. Briggs & Stratton occupies warehouse space totalling approximately 380,000 square feet in Menomonee Falls, Wisconsin under a reservation of interest agreement. Briggs & Stratton also leases warehouse space in the localities of its engine manufacturing facilities, except Wisconsin, totalling 460,000 square feet.

 

BSPPG’s office and domestic manufacturing facility are located in Jefferson, Wisconsin and contain 250,000 square feet of office and production area. BSPPG leases warehouse space totaling 270,000 square feet in three communities in Wisconsin.

 

The engine business with the OEMs is seasonal, with demand for engines at its height in the winter and early spring. Engine manufacturing operations run at capacity levels during the peak season, with many operations running three shifts. Engine operations generally run fewer shifts in the summer, when demand is weakest and production levels are lower. During the winter, when finished goods inventories reach their highest levels, owned warehouse space may be insufficient and capacity may be expanded through rented space.

 

Briggs & Stratton leases approximately 310,000 square feet of space to house its foreign sales and service operations in Australia, Austria, Canada, China, the Czech Republic, England, France, Germany, Mexico, the Netherlands, New Zealand, the Philippines, Russia, South Africa, Spain, Sweden, Switzerland and United Arab Emirates.

 

Briggs & Stratton’s owned properties are well maintained. Briggs & Stratton believes that its owned and leased facilities are adequate to perform its operations in a reasonable manner.

 

ITEM 3. LEGAL PROCEEDINGS

 

Briggs & Stratton is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to product liability (including asbestos-related liability) and

 

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patent and trademark matters. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss, Briggs & Stratton believes these unresolved legal actions will not have a material effect on its financial position or results of operations.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the three months ended June 29, 2003.

 

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Executive Officers of the Registrant

 

Name, Age, Position


  

Business experience for Past Five Years


JOHN S. SHIELY, 51

Chairman, President and Chief Executive Officer (1)(2)(3)

   Mr. Shiely was elected to his current position effective January 2003, after serving as President and Chief Executive Officer since July 2001 and President and Chief Operating Officer since August 1994.

JAMES E. BRENN, 55

Senior Vice president and Chief Financial Officer

   Mr. Brenn was elected to his current position in October 1998, after serving as Vice President and Controller since November 1988. He also served as Treasurer from November 1999 until January 2000.

DAVID G. DEBAETS, 40

Vice President and

General Manager – Large Engine Division

   Mr. DeBaets was elected an executive officer effective September 2003. He has served as Vice President and General Manager – Large Engine Division since April 2000. He also served as Vice President and General Manager – Die Cast Components from May 1996 to April 2000.

MARK R. HAZELTINE, 60

Vice President and

Sales Manager – Consumer Products

   Mr. Hazeltine was elected to his current position in May 2002, after serving as Vice President and Sales Manager – Consumer Lawn & Garden since July 1999. He also served as Sales Manager from February 1995 to June 1999.

ROBERT F. HEATH, 55

Secretary

   Mr. Heath was elected to his current position in January 2002. He served as Assistant Secretary from January 2001 to December 2001. In addition, Mr. Heath is Vice President and General Counsel and has served in these positions since January 2001. He also served as General Counsel since December 1997.

PAUL M. NEYLON, 56

Senior Vice President – Engine Products Division

   Mr. Neylon was elected to his current position in October 2001, after serving as Senior Vice President – Production from August 2000 to October 2001 and as Vice President – Production from May 1999 to July 2000. He previously served as Vice President – Operations Support since January 1999 and prior to that held the position of Vice President and General Manager – Spectrum Division.

WILLIAM H. REITMAN, 47

Vice President – Marketing

   Mr. Reitman was elected an executive officer effective April 1998. He has served as Vice President – Marketing since November 1995.

STEPHEN H. RUGG, 56

Senior Vice President – Sales and Service

   Mr. Rugg was elected to his current position in May 1999, after serving as Vice President – Sales since November 1995.

THOMAS R. SAVAGE, 55

Senior Vice President – Administration

   Mr. Savage was elected to his current position effective July 1997, after serving as Vice President – Administration and General Counsel since November 1994. He also served as Secretary from November 1999 to June 2000.

 

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MICHAEL D. SCHOEN, 43

Vice President – International

   Mr. Schoen was elected to his current position effective July 2001. He was elected an executive officer in August 2000, after serving as Vice President – Operations Support since July 1999. He previously held the position of Vice President – International Operations since July 1996.

VINCENT R. SHIELY, 43

Vice President and

General Manager – Engine Products Division (3)

   Mr. Shiely was elected to the position of Vice President and General Manager – Engine Products effective in September 2002 after serving as Vice President and General Manager – Business Units since December 2001. He also served as Vice President and General Manager – Electrical Products Division since October 1998.

TODD J. TESKE, 38

Senior Vice President and

President – Briggs & Stratton

Power Products Group, LLC

   Mr. Teske was elected to his current position effective September 2003 after serving as Vice President and President – Briggs & Stratton Power Products Group, LLC since February 2003. He also served as Vice President – Corporate Development from March 2001 after serving as Controller since October 1998. He previously served as Assistant Controller.

CARITA R. TWINEM, 48

Treasurer

   Ms. Twinem was elected to her current position in February 2000, after serving as Tax Director since July 1994.

JOSEPH C. WRIGHT, 44

Vice President and

General Manager – Small Engine Division

   Mr. Wright was elected an executive officer effective September 2002. He has served as Vice President and General Manager – Small Engine Division since July 1997.

(1)   Officer is also a Director of Briggs & Stratton. (2) Member of Executive Committee.
(3)   John S. Shiely and Vincent R. Shiely are brothers.

 

Officers are elected annually and serve until they resign, die, are removed, or a different person is appointed to the office.

 

PART II

 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Briggs & Stratton common stock and its common share purchase rights are traded on the NYSE under the symbol “BGG”. Information required by this Item is incorporated by reference from the “Quarterly Financial Data, Dividend and Market Information” (unaudited) on page 40.

 

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ITEM 6. SELECTED FINANCIAL DATA

 

Fiscal Year


   2003

   2002

   2001

   2000

   1999

(dollars in thousands, except per share data)                         

SUMMARY OF OPERATIONS (1)

                                  

NET SALES

   $ 1,657,633    $ 1,529,300    $ 1,306,638    $ 1,591,442    $ 1,502,158

GROSS PROFIT ON SALES

     330,426      271,961      233,255      338,332      303,549

PROVISION FOR INCOME TAXES

     37,940      27,390      23,860      80,150      63,670

NET INCOME (2)

     80,638      53,120      48,013      136,473      106,101

PER SHARE OF COMMON STOCK:

                                  

Basic Earnings

     3.73      2.46      2.22      5.99      4.55

Diluted Earnings

     3.49      2.36      2.21      5.97      4.52

Cash Dividends

     1.28      1.26      1.24      1.20      1.16

Shareholders’ Investment

   $ 23.66    $ 20.78    $ 19.57    $ 18.83    $ 15.77

WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (in 000’s)

     21,639      21,615      21,598      22,788      23,344

DILUTED NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (in 000’s)

     24,480      24,452      21,966      22,842      23,459

OTHER DATA (1)

                                  

SHAREHOLDERS’ INVESTMENT

   $ 514,987    $ 449,646    $ 422,752    $ 409,465    $ 365,910

LONG-TERM DEBT

     503,397      499,022      508,134      98,512      113,307

TOTAL ASSETS

     1,475,193      1,356,601      1,306,243      940,950      886,232

PLANT AND EQUIPMENT

     876,664      879,635      890,191      838,655      859,848

PLANT AND EQUIPMENT, NET OF RESERVES

     370,784      395,215      416,361      395,580      404,454

PROVISION FOR DEPRECIATION

     58,325      61,091      56,117      51,097      49,346

EXPENDITURES FOR PLANT AND EQUIPMENT

     40,154      43,928      61,322      71,441      65,998

WORKING CAPITAL

   $ 505,752    $ 411,241    $ 381,443    $ 170,326    $ 171,646

Current Ratio

     2.7 to 1      2.6 to 1      2.6 to 1      1.5 to 1      1.6 to 1

NUMBER OF EMPLOYEES AT YEAR END

     7,249      6,971      6,974      7,233      7,994

NUMBER OF SHAREHOLDERS AT YEAR END

     4,503      4,686      4,129      4,385      4,628

QUOTED MARKET PRICE:

                                  

High

   $ 51.50    $ 48.39    $ 48.38    $ 63.63    $ 70.94

Low

   $ 30.75    $ 29.65    $ 30.38    $ 31.00    $ 33.69

(1)   The amounts include the acquisition of BSPPG since May 15, 2001. Refer to the Notes to Consolidated Financial Statements.
(2)   Fiscal year 2000 includes a $10.4 million gain on the disposition of foundry assets.

 

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

 

Results of Operations

 

FISCAL 2003 COMPARED TO FISCAL 2002

 

Net Sales

 

Fiscal 2003 consolidated net sales were approximately $1.7 billion, an increase of $128 million, or 8% compared to the previous year. Power Products sales increased $105 million, accounting for the majority of the increase. Generator sales increased $54 million to $152 million, up from $98 million in 2002. These increased sales were due to both an increase in weather events that created demand and increased cooperative promotional activities. Pressure washer sales increased $49 million to $164 million, up from $115 million in fiscal 2002. Pressure washer sales were driven by strong promotional campaigns that increased demand at key retailers. The remainder of the consolidated sales increase was attributable to the Engine segment. Improved engine unit volume resulted in a $28 million sales increase and greater volume in component parts and international service sales provided another $22 million sales increase. The remainder of the increase was primarily price improvement on international sales, as a result of a stronger Euro. Offsetting the Engine segment improvements were $46 million of increased sales to the Power Products segment that were eliminated in consolidation. Engine segment volume improvements were driven by market growth.

 

Gross Profit

 

Consolidated gross profit increased $58 million over the previous year. Volume increases generated $23 million of the improvement, with approximately $13 million from volume increases in the Engine segment and the remainder from the Power Products segment volume. The remaining $35 million of gross margin increases came from improvements in gross margin percentages in both business segments. Engines improved from 18% to 20% and Power Products improved from 10% to 12%. The gross margin percentage change in Engines resulted in approximately $28 million of improvement to gross margins between years. Pricing improvement, primarily due to the impact on European sales of a stronger Euro, contributed $12 million to the improvement and net reductions in manufacturing costs and an 11% increase in production volume each provided another $8 million of gross margin improvement. The Power Products gross margin percentage increase of 2% resulted in approximately $7 million of improved gross margin. A 59% production volume increase was the primary driver of the improvement.

 

Engineering, Selling, General and Administrative Costs

 

Engineering, selling, general and administrative costs increased $24 million or 16% compared to fiscal 2002. Increases in this category include salaries and fringe benefit cost increases of approximately $13 million, marketing cost increases of $6 million and international variable selling cost increases of $4 million. The increases in salaries and fringe benefits reflect increased incentive compensation awards in the current year, as well as increased employee benefit costs, essentially pension and health care. Increased marketing costs were driven by increased spending on Power Products market expansion and international marketing efforts.

 

Interest Expense

 

Interest Expense decreased $4 million in fiscal 2003 compared to fiscal 2002. The decrease is essentially the result of reduced working capital borrowings in the current year and the impact of a fixed to variable interest rate swap.

 

Other Income

 

Other income remained at $7 million in fiscal 2003, consistent with prior years. Refer to Note 8 of the Notes to Consolidated Financial Statements for detail as to the components of other income.

 

Provision for Income Taxes

 

The effective tax rate decreased from 34% in fiscal 2002 to 32% in fiscal 2003. This decrease is attributable to tax credits related to increased foreign sourced income.

 

FISCAL 2002 COMPARED TO FISCAL 2001

 

Net Sales

 

Fiscal 2002 net sales were approximately $1.5 billion, an increase of $223 million, or 17% compared to the previous year. Power Products included for a full fiscal year for the first time, added $188 million in sales this fiscal year. Our engine unit volume increase of 8%, offset by an unfavorable sales mix weighted towards lower priced engines, accounts for the majority of the remaining increase.

 

Gross Profit

 

The total Company gross profit rate of approximately 18% was comparable with fiscal 2001. The Engine segment gross profit rate remained approximately 18% in fiscal 2002. Reductions in manufacturing

 

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costs of $25 million (primarily, repairs and maintenance, processing supplies, utilities and warranty) were offset by $17 million of increased costs (primarily, fringe benefits which included rising health care costs). Power Products margins were approximately 10% for fiscal 2002, similar to their results for the 12 months ended June, 2001.

 

Engineering, Selling, General and Administrative Costs

 

Engineering, selling, general and administrative costs increased $16 million or 12% compared to fiscal 2001. The increase is entirely attributable to the inclusion of $18 million of Power Products engineering, selling, general, and administrative costs for a full year. The Engine segment engineering, selling, general and administrative cost category experienced increased salaries and fringe benefit expenses of approximately $8 million, but these increases were offset by a $6 million impact of lower bad debt write-off experience and a bad debt recovery, and $3 million of lower marketing expenses.

 

Interest Expense

 

Interest expense increased $14 million in fiscal 2002 compared to fiscal 2001, essentially the impact of increased borrowings associated with the Power Products acquisition.

 

Other Income

 

Other income was $7 million in fiscal 2002, consistent with fiscal 2001. Refer to Note 8 of the Notes to Consolidated Financial Statements for detail as to the components of other income.

 

Provision for Income Taxes

 

The effective tax rate increased to 34% in fiscal 2002 from 33%. Both effective rates reflect a refund on Foreign Sales Corporation tax benefits, however, the fiscal 2001 refund was larger.

 

Liquidity and Capital Resources

 

FISCAL YEARS 2003, 2002 AND 2001

 

Cash flows from operating activities were $167 million, $200 million and $68 million, in fiscal 2003, 2002 and 2001, respectively.

 

The fiscal 2003 cash flow from operating activities was $33 million lower than the prior year. Fiscal 2003 did not experience the significant reduction in inventory investment experienced in fiscal 2002 which caused cash flows to be $134 million less between years. Inventories were exceptionally high at the beginning of fiscal 2002. Inventory balances were lower at the end of fiscal 2002 due to planned lower production. There was not a significant inventory change between fiscal 2003 and 2002. Offsetting this reduction in cash flow were improved cash flows related to increased earnings ($28 million), a lower accounts receivable increase between years ($51 million) and higher current liabilities ($20 million). Accounts receivable levels increased in fiscal 2002 because of strong fourth quarter sales versus the prior year. Sales strength in the fourth quarter was similar between fiscal 2003 and 2002 resulting in an accounts receivable balance that did not change significantly. Current liabilities, primarily accruals for profit sharing were greater between years because better performance in fiscal 2003 resulted in larger awards than the prior year.

 

The fiscal 2002 cash flow from operating activities increased $132 million, which was driven primarily by a reduction in inventory and an increase in accounts payable and accrued liabilities. The decrease in inventory levels was achieved through increased sales volume, while holding production levels consistent between years.

 

Cash used in investing activities was $27 million, $38 million and $318 million in fiscal 2003, 2002 and 2001, respectively. These cash flows include capital expenditures of $40 million, $44 million and $61 million in fiscal 2003, 2002 and 2001, respectively. These capital expenditures relate primarily to reinvestment in equipment, capacity additions and new products.

 

In fiscal 2003, Briggs & Stratton restructured and increased its investment in its China joint venture from 52% to 90%. This increase in ownership interest gave Briggs & Stratton control over the joint venture and accordingly its operating results are now reflected in Briggs & Stratton’s consolidated financial statements. The actual cash outlay in fiscal 2003 for the restructuring was $343 thousand, however the consolidation resulted in an increase in cash of approximately $4 million.

 

The fiscal 2001 cash used in investing activities includes $267 million of cash paid for the BSPPG acquisition, net of cash acquired.

 

Briggs & Stratton used cash in financing activities totaling $37 million and $38 million in fiscal 2003 and 2002, respectively. Briggs & Stratton provided cash through financing activities in fiscal 2001 totaling $324 million. During fiscal 2003 the Company paid down $15 million of its short-term loans and notes payable. These loans were primarily used to fund the short-term working capital needs of Briggs & Stratton’s foreign operations. Given the level of cash flows the last two fiscal years and the available cash on hand, Briggs & Stratton made the decision to pay off these borrowings and fund these operations with

 

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available cash. During fiscal 2002 Briggs & Stratton repaid $10 million of its 7.25% Senior Notes due 2007. Financing activities in fiscal 2001 included $399 million of proceeds received from issuing the 5.00% Convertible Senior Notes due 2006 to replace an existing revolving line of credit and the 8.875% Senior Notes due 2011 to fund the acquisition of BSPPG. Briggs & Stratton also repurchased $6 million of its common shares in fiscal 2001. There were no shares repurchased in fiscal 2003 or 2002.

 

Future Liquidity and Capital Resources

 

Briggs & Stratton has a three-year $300 million revolving credit facility that expires in September 2004. This credit facility is used to fund seasonal working capital requirements and other financing needs. This facility and Briggs & Stratton’s other indebtedness contain certain restrictive covenants as are fully disclosed in Note 7 of the Notes to Consolidated Financial Statements. Briggs & Stratton expects to begin renegotiating its revolving credit agreement late in fiscal 2004. At this time we do not foresee any difficulties in securing a comparable agreement in the future.

 

Briggs & Stratton expects capital expenditures to be $60 million in fiscal 2004. These anticipated expenditures reflect our plans to continue to reinvest in equipment, new products, and capacity enhancements.

 

It is currently Briggs & Stratton’s plan to use its available cash in fiscal 2004 to reduce the Convertible Senior Notes due in 2006. Management believes that available cash, the credit facility, cash generated from future operations, existing lines of credit and access to debt markets will be adequate to fund Briggs & Stratton’s capital requirements for the foreseeable future.

 

Financial Strategy

 

Management believes that the value of Briggs & Stratton is enhanced if the capital invested in operations yields a cash return that is greater than the cost of capital. Consequently, management’s first priority is to reinvest capital into physical assets and products that maintain or grow the global cost leadership and market positions that Briggs & Stratton has achieved, and drive the economic value of the Company. Management’s next financial objective is to identify strategic acquisitions or alliances that enhance revenues and provide a superior economic return. Several successful joint ventures and the acquisition of BSPPG are examples of our successful execution of this strategy. Finally, management believes that when capital cannot be invested for returns greater than the cost of capital, we should return capital to the capital providers. This approach is apparent in the programs we executed to repurchase common stock from fiscal 1997 through 2001, and our plans to reduce outstanding debt in fiscal 2004 by calling our convertible securities.

 

Briggs & Stratton has remaining authorization to buy up to 1.8 million shares of its stock in the open market or private transactions under the June 2000 Board of Directors’ authorization to repurchase up to two million shares. Briggs & Stratton did not repurchase shares in fiscal 2003 and does not anticipate repurchases in fiscal 2004.

 

Off-Balance Sheet Arrangements and Contractual Obligations

 

Briggs & Stratton has no off-balance sheet arrangements or significant guarantees to third parties not fully recorded in our Balance Sheets or fully disclosed in our Notes to Consolidated Financial Statements. Briggs & Stratton’s significant contractual obligations include our debt agreements and certain employee benefit plans.

 

Briggs & Stratton is subject to certain financial and operating restrictions under its domestic debt agreements. As is fully disclosed in Note 7 of the Notes to Consolidated Financial Statements, these restrictions limit our ability to: pay dividends; incur further indebtedness; create liens; enter into sale and/or leaseback transactions; consolidate, sell or lease all or substantially all of our assets; and dispose of assets or the proceeds of our assets, in addition to certain financial covenants. We believe we will remain in compliance with these covenants in fiscal 2004. Briggs & Stratton has obligations concerning certain employee benefits including its pension plans, post retirement benefit obligations and deferred compensation arrangements. All of these obligations are recorded on our Balance Sheets and disclosed more fully in the Notes to Consolidated Financial Statements.

 

Other Matters

 

Early Retirement Incentive Program

 

In the second quarter of fiscal 2002, Briggs & Stratton offered and finalized an early retirement incentive program. The net reduction in the global salaried workforce was approximately 7%.

 

The impact for fiscal year 2002 was a reduction in net income on an after-tax basis of $2.5 million, after consideration of approximately $3 million in savings for lower salary related expenditures. The majority of the impact on net income was the result of recognizing the cost of the special termination benefits, which reduced net periodic pension income.

 

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Labor Agreement

 

In July 2001, Briggs & Stratton extended its collective bargaining agreement with one of its unions. This agreement expires in 2006, and contains provisions for future wage increases, medical cost sharing and increased pension benefits.

 

Emissions

 

The U.S. Environmental Protection Agency (EPA) has developed national emission standards under a two phase process for small air cooled engines. Briggs & Stratton currently has a complete product offering which complies with the EPA’s Phase I engine emission standards. The Phase II program imposes more stringent standards over the useful life of the engine and is being phased in through 2005 for Class II (225 or greater cubic centimeter) displacement engines and through 2008 for Class I (under 225 cubic centimeter) displacement engines. The majority of Briggs & Stratton’s engines are certified to be compliant with the EPA’s Phase II standards. Accordingly, Briggs & Stratton does not believe compliance with the new standards will have a material adverse effect on its financial position or results of operations.

 

The California Air Resources Board (CARB) staff have proposed Tier 3 regulations requiring additional reductions to engine exhaust emissions and also requiring new controls on evaporative emissions from small engines. The CARB staff proposal is phased in between 2006 and 2008 depending upon the size of the engine and type of control. While Briggs & Stratton believes the cost of the proposed regulation on a per engine basis is significant, Briggs & Stratton does not believe the CARB staff proposal will have a material effect on its financial condition or results of operations, given that California represents a relatively small percentage of Briggs & Stratton’s engine sales and that increased costs will be passed on to California consumers.

 

The European Commission adopted an engine emission Directive regulating exhaust emissions from engines manufactured by Briggs & Stratton. The European Directive parallels the regulation previously promulgated by the U.S. EPA, therefore Briggs & Stratton anticipates having a full product line offering which complies with Stage I and II of the Directive. Briggs & Stratton does not believe compliance with the new Directive will have a material adverse effect on its financial position or results of operations.

 

Critical Accounting Policies

 

Briggs & Stratton’s critical accounting policies are more fully described in Note 2 of the Notes to Consolidated Financial Statements. As discussed in Note 2, the preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

 

The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the recovery of accounts receivable and inventory reserves, as well as those used in the determination of liabilities related to customer rebates, pension obligations, postretirement benefits, warranty, product liability, and taxation.

 

The reserves for customer rebates, warranty, product liability, inventory reserves and doubtful accounts are fact specific and take into account such factors as specific customer situations, historical experience, and current and expected economic conditions. Changes in these reserves may be required if actual experience differs from the original estimates.

 

The Company’s estimate of income taxes payable, deferred income taxes, and the effective tax rate is based on a complex analysis of many factors including interpretations of Federal and state income tax laws, the difference between tax and financial reporting basis of assets and liabilities, estimates of amounts currently due or owed in various jurisdictions, and current accounting standards. We review and update our estimates on a quarterly basis as facts and circumstances change and actual results are known. In addition, Federal and state taxing authorities periodically review the Corporation’s estimates and interpretation of income tax laws. Adjustments to the effective income tax rate and recorded assets and liabilities may occur in future periods if actual results differ significantly from original estimates and interpretations.

 

The pension benefit obligation and related pension income are calculated in accordance with Statement of Financial Accounting Standard (SFAS) No. 87, “Employers Accounting for Pensions”, and are impacted by certain actuarial assumptions, including the discount rate and the expected rate of return on plan assets. These rates are evaluated on an annual basis considering such factors as market interest rates and historical asset performance. Actuarial valuations at June 29, 2003 used a discount rate of 6.0% and an expected rate of return on plan assets of

 

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8.75%. A 0.25% decrease in the discount rate would increase annual pension income by approximately $166 thousand. A 0.25% decrease in the expected return on plan assets would decrease our annual pension income by approximately $2.1 million.

 

The Other Postretirement Benefits Obligation and related expense charge are calculated in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” and are impacted by certain actuarial assumptions, including the health care trend rate. An increase of one percentage point, would increase the accumulated postretirement benefit obligation by $12.9 million and would increase the service and interest cost by $700 thousand. A corresponding decrease of one percentage point, would decrease the accumulated postretirement benefit by $12.2 million and decrease the service and interest cost by $700 thousand.

 

New Accounting Pronouncements

 

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also requires additional disclosure requirements about the guarantor’s obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of this interpretation are effective for financial statement periods ending after December 15, 2002. Briggs & Stratton adopted the disclosure requirements of this interpretation in the current year. The adoption did not have a material impact on its consolidated financial position, results of operations or cash flows.

 

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123, “Accounting for Stock-Based Compensation”. Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both the annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transitional requirements of SFAS No. 148 are effective for all financial statements for fiscal years ending after December 15, 2002. Briggs & Stratton adopted this statement in the current year. The adoption of this statement did not have a material impact on its consolidated financial position, results of operations or cash flows.

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Briggs & Stratton is exposed to market risk from changes in foreign exchange and interest rates. To reduce the risk from changes in foreign exchange rates, Briggs & Stratton uses financial instruments. Briggs & Stratton does not hold or issue financial instruments for trading purposes.

 

Foreign Currency

 

Briggs & Stratton’s earnings are affected by fluctuations in the value of the U.S. dollar against the Japanese Yen and Euro. The Yen is used to purchase engines from Briggs & Stratton’s joint venture. Briggs & Stratton purchases components in Euros from third parties and receives Euros for certain products sold to European customers. Forward foreign exchange contracts are used to partially hedge against the earnings effects of such fluctuations. At June 29, 2003, Briggs & Stratton had the following forward foreign exchange contracts outstanding with the Fair Value Gains (Losses) shown (in thousands):

 

Hedge

Currency


   Notional
Value


   Fair Market
Value


   Conversion
Currency


   (Gain)/Loss
at Fair Value


Japanese Yen

   410,000    $ 3,434    U.S.    $ 87

Euro

   46,000    $ 52,441    U.S.    $ 1,407

Australian Dollars

   1,450    $ 959    U.S.    $ 67

Canadian Dollars

   1,600    $ 1,184    U.S.    $ 38

 

All of the above contracts expire within twelve months.

 

Fluctuations in currency exchange rates may also impact the shareholders’ investment in Briggs & Stratton. Amounts invested in Briggs & Stratton’s non-U.S. subsidiaries are translated into U.S. dollars at the exchange rates in effect at fiscal year end. The resulting cumulative translation adjustments are recorded in shareholders’ investment as Accumulated Other Comprehensive Income. The cumulative translation adjustments component of shareholders’ investment increased $4.5 million during the year. Using the year-end exchange rates, the total amount invested in non-U.S. subsidiaries on June 29, 2003 was $46.5 million.

 

Interest Rates

 

Briggs & Stratton is exposed to interest rate fluctuations on its borrowings. Depending on general economic conditions, Briggs & Stratton has typically used variable rate debt for short-term borrowings and fixed rate debt for longer-term borrowings.

 

On June 29, 2003, Briggs & Stratton had the following short-term loans outstanding (in thousands):

 

Currency


   Amount

  

Weighted Average

Interest Rate


Euro

   432    7.19%

U.S. Dollars

   2,075    2.86%

Canadian Dollars

   500    3.78%

 

These loans carry variable interest rates. Assuming borrowings are outstanding for an entire year an increase (decrease) of one percentage point in the weighted average interest rate, would increase (decrease) interest expense by $32 thousand.

 

Long-term loans, net of unamortized discount consisted of the following (in thousands):

 

Description


   Amount

   Maturity

5.00%      Convertible Notes

   $ 140,000    2006

7.25%      Notes

   $ 89,217    2007

8.875%    Notes

   $ 270,587    2011

 

These loans carry fixed rates of interest.

 

In fiscal 2003, Briggs & Stratton began managing its long-term debt portfolio using interest rate swaps to achieve a desired mix of fixed and variable rates. At June 29, 2003, Briggs & Stratton had interest rate swaps relating to the $275 million 8.875% senior notes due in 2011. The swaps convert $50 million in notional amounts from fixed to a floating rate (LIBOR-set-in-arrears) and mature in 2011. The floating rate on interest rate swaps at June 29, 2003 was 5.3%. The fair market value of these derivatives was approximately $3.6 million. A one percentage point change in this floating interest rate would increase/decrease interest expense by $500 thousand.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Consolidated Statements of Earnings


 

FOR THE FISCAL YEARS ENDED JUNE 29, 2003, JUNE 30, 2002 AND JULY 1, 2001

 

(in thousands, except per share data)

 

     2003

    2002

    2001

 

NET SALES

   $ 1,657,633     $ 1,529,300     $ 1,306,638  

COST OF GOODS SOLD

     1,327,207       1,257,339       1,073,383  
    


 


 


Gross Profit on Sales

     330,426       271,961       233,255  

ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     178,022       153,675       137,684  
    


 


 


Income from Operations

     152,404       118,286       95,571  

INTEREST EXPENSE

     (40,389 )     (44,433 )     (30,665 )

OTHER INCOME, Net

     6,563       6,657       6,967  
    


 


 


Income Before Provision for Income Taxes

     118,578       80,510       71,873  

PROVISION FOR INCOME TAXES

     37,940       27,390       23,860  
    


 


 


NET INCOME

   $ 80,638     $ 53,120     $ 48,013  
    


 


 


Weighted Average Shares Outstanding

     21,639       21,615       21,598  

BASIC EARNINGS PER SHARE

   $ 3.73     $ 2.46     $ 2.22  
    


 


 


Diluted Average Shares Outstanding

     24,480       24,452       21,966  

DILUTED EARNINGS PER SHARE

   $ 3.49     $ 2.36     $ 2.21  
    


 


 


 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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Consolidated Balance Sheets


 

AS OF JUNE 29, 2003 AND JUNE 30, 2002

 

(in thousands)

 

     2003

   2002

ASSETS              

CURRENT ASSETS:

             

Cash and Cash Equivalents

   $ 324,815    $ 215,945

Receivables, Less Reserves of $ 1,780 and $1,703, Respectively

     201,948      194,873

Inventories:

             

Finished Products and Parts

     128,998      131,432

Work in Process

     76,929      61,748

Raw Materials

     3,211      3,059
    

  

Total Inventories

     209,138      196,239

Deferred Income Tax Asset

     48,674      50,708

Prepaid Expenses and Other Current Assets

     22,572      17,742
    

  

Total Current Assets

     807,147      675,507

GOODWILL

     159,756      161,030

INVESTMENTS

     44,175      46,889

PREPAID PENSION

     74,005      60,343

DEFERRED LOAN COSTS, Net

     8,314      10,506

OTHER LONG-TERM ASSETS, Net

     11,012      7,111

PLANT AND EQUIPMENT:

             

Land and Land Improvements

     15,938      16,356

Buildings

     156,823      153,043

Machinery and Equipment

     689,100      691,334

Construction in Progress

     14,803      18,902
    

  

       876,664      879,635

Less - Accumulated Depreciation

     505,880      484,420
    

  

Total Plant and Equipment, Net

     370,784      395,215
    

  

     $ 1,475,193    $ 1,356,601
    

  

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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AS OF JUNE 29, 2003 AND JUNE 30, 2002

 

(in thousands, except per share data)

 

     2003

    2002

 
LIABILITIES AND SHAREHOLDERS’ INVESTMENT                 

CURRENT LIABILITIES:

                

Accounts Payable

   $ 134,441     $ 102,673  

Domestic Notes Payable

     2,075       2,625  

Foreign Loans

     865       15,270  

Accrued Liabilities:

                

Wages and Salaries

     44,667       28,408  

Warranty

     47,590       46,346  

Accrued Postretirement Health Care Obligation

     17,000       8,000  

Other

     48,206       48,046  
    


 


Total Accrued Liabilities

     157,463       130,800  

Income Taxes Payable

     6,551       12,898  
    


 


Total Current Liabilities

     301,395       264,266  

DEFERRED REVENUE ON SALE OF PLANT AND EQUIPMENT

     15,163       15,364  

DEFERRED INCOME TAX LIABILITY

     57,917       36,730  

ACCRUED PENSION COST

     20,368       15,750  

ACCRUED EMPLOYEE BENEFITS

     13,901       13,070  

ACCRUED POSTRETIREMENT HEALTH CARE OBLIGATION

     48,065       62,753  

LONG-TERM DEBT

     503,397       499,022  

COMMITMENTS AND CONTINGENCIES

                

SHAREHOLDERS’ INVESTMENT:

                

Common Stock -

                

Authorized 60,000 Shares $ .01 Par Value, Issued 28,927 Shares

     289       289  

Additional Paid-In Capital

     35,074       35,459  

Retained Earnings

     822,060       769,131  

Accumulated Other Comprehensive Loss

     (734 )     (6,626 )

Unearned Compensation on Restricted Stock

     (287 )     (199 )

Treasury Stock at cost, 7,142 Shares in 2003 and 7,288 Shares in 2002

     (341,415 )     (348,408 )
    


 


Total Shareholders’ Investment

     514,987       449,646  
    


 


     $ 1,475,193     $ 1,356,601  
    


 


 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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Consolidated Statements of Shareholders’ Investment


 

FOR THE FISCAL YEARS ENDED JUNE 29, 2003, JUNE 30, 2002 AND JULY 1, 2001

 

(in thousands, except per share data)

 

     Common
Stock


   Additional
Paid-In
Capital


    Retained
Earnings


    Accumulated
Other Com-
prehensive Loss


    Unearned
Compensation
on Restricted
Stock


    Treasury
Stock


    Comprehensive
Income


 

BALANCES, JULY 2, 2000

   $ 289    $ 36,478     $ 721,980     $ (3,931 )   $ (226 )   $ (345,125 )        

Comprehensive Income:

                                                       

Net Income

     —        —         48,013       —         —         —       $ 48,013  

Foreign Currency Translation Adjustments

     —        —         —         (2,530 )     —         —         (2,530 )

Unrealized Loss on Marketable Securities, net of tax of $(607)

     —        —         —         (947 )     —         —         (947 )

Unrealized Gain on Derivatives

     —        —         —         1,226       —         —         1,226  
                                                   


Total Comprehensive Income

     —        —         —         —         —         —       $ 45,762  
                                                   


Cash Dividends Paid ($1.24 per share)

     —        —         (26,763 )     —         —         —            

Purchase of Common Stock for Treasury

     —        —         —         —         —         (6,118 )        

Exercise of Stock Options

     —        (368 )     —         —         —         643          

Restricted Stock Issued

     —        (58 )     —         —         (181 )     239          

Amortization of Unearned Compensation

     —        —         —         —         102       —            

Shares Issued to Directors

     —        (9 )     —         —         —         38          
    

  


 


 


 


 


       

BALANCES, JULY 1, 2001

   $ 289    $ 36,043     $ 743,230     $ (6,182 )   $ (305 )   $ (350,323 )        

Comprehensive Income:

                                                       

Net Income

     —        —         53,120       —         —         —       $ 53,120  

Foreign Currency Translation Adjustments

     —        —         —         4,017       —         —         4,017  

Unrealized Loss on Marketable Securities, net of tax of $(95)

     —        —         —         (148 )     —         —         (148 )

Unrealized Loss on Derivatives

     —        —         —         (4,313 )     —         —         (4,313 )
                                                   


Total Comprehensive Income

     —        —         —         —         —         —       $ 52,676  
                                                   


Cash Dividends Paid ($1.26 per share)

     —        —         (27,219 )     —         —         —            

Exercise of Stock Options

     —        (576 )     —         —         —         1,877          

Amortization of Unearned Compensation

     —        —         —         —         106       —            

Shares Issued to Directors

     —        (8 )     —         —         —         38          
    

  


 


 


 


 


       

BALANCES, JUNE 30, 2002

   $ 289    $ 35,459     $ 769,131     $ (6,626 )   $ (199 )   $ (348,408 )        

Comprehensive Income:

                                                       

Net Income

     —        —         80,638       —         —         —       $ 80,638  

Foreign Currency Translation Adjustments

     —        —         —         4,454       —         —         4,454  

Unrealized Gain on Marketable Securities, net of tax of $581

     —        —         —         901       —         —         901  

Unrealized Gain on Derivatives

     —        —         —         3,100       —         —         3,100  

Minimum Pension Liability Adjustment, net of tax of $(1,638)

     —        —         —         (2,563 )     —         —         (2,563 )
                                                   


Total Comprehensive Income

     —        —         —         —         —         —       $ 86,530  
                                                   


Cash Dividends Paid ($1.28 per share)

     —        —         (27,709 )     —         —         —            

Exercise of Stock Options

     —        (234 )     —         —         —         5,835          

Restricted Stock Issued

     —        (97 )     —         —         (238 )     335          

Amortization of Unearned Compensation

     —        —         —         —         150       —            

Issuance of Treasury Shares

     —        (44 )     —         —         —         760          

Shares Issued to Directors

     —        (10 )     —         —         —         63          
    

  


 


 


 


 


       

BALANCES, JUNE 29, 2003

   $ 289    $ 35,074     $ 822,060     $ (734 )   $ (287 )   $ (341,415 )        
    

  


 


 


 


 


       

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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Table of Contents

Consolidated Statements of Cash Flows


 

FOR THE FISCAL YEARS ENDED JUNE 29, 2003, JUNE 30, 2002 AND JULY 1, 2001

 

(in thousands)

 

     2003

    2002

    2001

 

CASH FLOWS FROM OPERATING ACTIVITIES:

                        

Net Income

   $ 80,638     $ 53,120     $ 48,013  

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

                        

Depreciation and Amortization

     63,526       65,968       59,711  

Equity in Earnings of Unconsolidated Affiliates

     (5,224 )     (6,181 )     (5,041 )

Loss on Disposition of Plant and Equipment

     3,850       3,192       1,493  

Provision for Deferred Income Taxes

     24,278       20,286       17,973  

Change in Operating Assets and Liabilities, Net of Effects of Acquisition:

                        

(Increase) Decrease in Receivables

     (5,958 )     (56,684 )     36,112  

(Increase) Decrease in Inventories

     (11,932 )     121,713       (8,782 )

(Increase) Decrease in Prepaid Expenses and Other Current Assets

     (4,663 )     (1,519 )     156  

Increase (Decrease) in Accounts Payable, Accrued Liabilities and Income Taxes

     44,321       24,979       (46,691 )

(Increase) in Prepaid Pension

     (13,566 )     (22,812 )     (28,378 )

Other, Net

     (7,875 )     (2,245 )     (6,598 )
    


 


 


Net Cash Provided by Operating Activities

     167,395       199,817       67,968  
    


 


 


CASH FLOWS FROM INVESTING ACTIVITIES:

                        

Additions to Plant and Equipment

     (40,154 )     (43,928 )     (61,322 )

Proceeds Received on Disposition of Plant and Equipment

     3,464       406       4,152  

Cash Paid for Acquisition, Net of Cash Acquired

     —         —         (267,174 )

Increase in Investment in China Joint Venture

     3,531       —         —    

Other, Net

     6,330       5,120       6,296  
    


 


 


Net Cash Used by Investing Activities

     (26,829 )     (38,402 )     (318,048 )
    


 


 


CASH FLOWS FROM FINANCING ACTIVITIES:

                        

Net Borrowings (Repayments) on Loans and Notes Payable

     (14,955 )     (1,696 )     (42,574 )

Borrowings (Repayments) on Long-Term Debt

     —         (10,393 )     399,415  

Cash Dividends Paid

     (27,709 )     (27,219 )     (26,763 )

Purchase of Common Stock for Treasury

     —         —         (6,118 )

Proceeds from Exercise of Stock Options

     5,490       1,078       275  
    


 


 


Net Cash (Used by) Provided by Financing Activities

     (37,174 )     (38,230 )     324,235  
    


 


 


EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

     5,478       4,017       (2,401 )
    


 


 


NET INCREASE IN CASH AND CASH EQUIVALENTS

     108,870       127,202       71,754  

CASH AND CASH EQUIVALENTS:

                        

Beginning of Year

     215,945       88,743       16,989  
    


 


 


End of Year

   $ 324,815     $ 215,945     $ 88,743  
    


 


 


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

                        

Interest Paid

   $ 38,905     $ 40,021     $ 26,339  
    


 


 


Income Taxes Paid

   $ 20,724     $ 3,222     $ 7,831  
    


 


 


 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

19


Table of Contents

Notes to Consolidated Financial Statements


 

FOR THE FISCAL YEARS ENDED JUNE 29, 2003, JUNE 30, 2002 AND JULY 1, 2001

 

(1) Nature of Operations:

 

Briggs & Stratton (“the Company”) is a U.S. based producer of air cooled gasoline engines. These engines are sold worldwide, primarily to original equipment manufacturers of lawn and garden equipment and other gasoline engine powered equipment. Additionally, through the Company’s wholly owned subsidiary, Briggs & Stratton Power Products Group, LLC (BSPPG), the company is a designer, manufacturer and marketer of portable and standby generators, pressure washers and related accessories. BSPPG’s products are sold throughout the United States, Canada and Europe.

 

(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 2003, 2002 and 2001 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 the Company and its majority owned domestic and foreign subsidiaries after elimination of intercompany accounts and transactions.

 

Accounting Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 may 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 an original 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 60% of total inventories at June 29, 2003 and 68% of total inventories at June 30, 2002. The cost for the remaining portion of the inventories was determined using the first-in, first-out (FIFO) method. During fiscal 2003 and 2002, a reduction in inventory quantities resulted in a liquidation of LIFO inventories carried at lower costs prevailing in prior years. The liquidation of these inventories has reduced cost of sales by $0.2 million in 2003 and $2.6 million in 2002. If the FIFO inventory valuation method had been used exclusively, inventories would have been $47.3 million and $44.8 million higher in 2003 and 2002, respectively. The LIFO inventory adjustment was determined on an overall basis, and accordingly, each class of inventory reflects an allocation based on the FIFO amounts.

 

Goodwill: This caption represents goodwill related to the acquisition of BSPPG in fiscal 2001 (See Note 3). Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. In accordance with SFAS 142, no goodwill amortization was recorded in fiscal year 2003 or 2002. Prior to the adoption of SFAS 142, $1.1 million of amortization was reported in fiscal year 2001. Had goodwill not been amortized in fiscal 2001, the Company’s fiscal 2001 net income would have increased $0.7 million or $0.03 per basic and diluted earnings per share. The Company performed the required impairment test of goodwill in fiscal 2003 and fiscal 2002 and found no impairment of the asset.

 

Investments: This caption represents the Company’s investments in its 50%-owned joint ventures, preferred stock in a privately held iron castings business and common stock in a publicly traded software company. The investments in the joint ventures and the privately held business are accounted for under the equity method. The common stock in the publicly traded company is being classified as available-for-sale and is reported at fair market value. Unrealized losses incurred on this stock are recorded as a component of Accumulated Other Comprehensive Loss in the Shareholders’ Investment section of the Consolidated Balance Sheets. In fiscal 2003, these losses were determined to be “other than temporary” and as a result, the Company reclassified the pretax unrealized loss of $1.8 million to earnings.

 

Deferred Loan Costs: Expenses associated with the issuance of debt instruments are capitalized and are being amortized over the terms of the respective financing arrangement using the straight-line

 

20


Table of Contents

Notes . . .


 

method over periods ranging from five to ten years. Accumulated amortization amounted to $5.1 million as of June 29, 2003 and $2.9 million as of June 30, 2002.

 

Other Long-Term Assets: This caption includes a long-term asset associated with interest rate swaps designated as effective fair value hedges. See discussion in Note 7. This caption also includes 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 $6.0 million as of June 29, 2003 and $8.4 million as of June 30, 2002.

 

Plant and Equipment and Depreciation: Plant and equipment are stated at cost and depreciation is computed using the straight-line method at rates based upon the estimated useful lives of the assets (20-30 years for land improvements, 20-50 years for buildings and 8-16 years for machinery and equipment).

 

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.

 

Impairment of Long-Lived Assets: Property, plant and equipment and other long-term assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. There were no adjustments to the carrying value of long-lived assets in fiscal 2003, 2002 or 2001.

 

Warranty: The Company recognizes the cost associated with its standard warranty on engines and power products at the time of sale. The amount recognized is based on historical failure rates and current claim cost experience. The following is a reconciliation of the changes in accrued warranty costs for fiscal year 2003 and 2002 (in thousands):

 

     2003

    2002

 

Balance, Beginning of Period

   $ 46,346     $ 47,480  

Payments

     (30,613 )     (26,968 )

Provision for Current Year Warranties

     27,605       20,621  

Provision for Prior Years Warranties

     4,252       5,213  
    


 


Balance, End of Period

   $ 47,590     $ 46,346  
    


 


 

Deferred Revenue on Sale of Plant and Equipment: In fiscal 1997, the Company sold its Menomonee Falls, Wisconsin facility for approximately $16.0 million. 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 SFAS No. 66, “Accounting for Sales of Real Estate,” the Company is required to account for this as a financing transaction as long as it 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 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-Briggs & Stratton 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 $5 million. The annual cost of operating the warehouse portion of the facility is not material.

 

Revenue Recognition: Revenue, net of estimated returns and allowances, is recognized upon shipment or when title passes, at which time the customer is obligated to pay and the Company has no further obligations.

 

Income Taxes: The Provision for Income Taxes includes Federal, state and foreign income taxes currently payable and those deferred because of temporary differences between the financial statement and tax basis of assets and liabilities. The Deferred Tax Asset represents temporary differences relating to current assets and current

 

21


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Notes . . .


 

liabilities and the Deferred Income Tax Liability represents temporary differences relating to noncurrent assets and liabilities.

 

Retirement Plans: The Company has noncontributory, defined benefit retirement plans and postretirement benefit plans covering certain employees. These plans are accounted for in accordance with SFAS 87 “Employers’ Accounting for Pensions” and SFAS 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. Retirement benefits represent a form of deferred compensation, which are subject to change due to changes in assumptions. Management reviews underlying assumptions on an annual basis. Refer to Note 13 of the Notes to Consolidated Financial Statements.

 

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 $26.4 million in fiscal 2003, $23.7 million in fiscal 2002 and $21.5 million in fiscal 2001.

 

Advertising Costs: Advertising costs, included in Engineering, Selling, General and Administrative Expenses on the accompanying Consolidated Statements of Earnings, are expensed as incurred. These expenses totaled $13.2 million in fiscal 2003, $8.3 million in fiscal 2002 and $7.8 million in fiscal 2001.

 

The Company adopted EITF No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of Vendor’s Products),” in the third quarter of fiscal 2002. Pursuant to EITF No. 01-09, the Company was required to reclassify co-op advertising expense previously reported as selling expense as a reduction in net sales. Co-op advertising expense reported as a reduction in net sales totaled $9.5 million in fiscal 2003, $7.2 million in fiscal 2002 and $2.3 million in fiscal 2001.

 

Shipping and Handling Fees and Costs: Revenue received from shipping and handling fees is reflected in net sales. Shipping fee revenue for fiscal 2003, 2002 and 2001 was $1.6 million, $1.6 million and $1.7 million, respectively. Shipping and handling costs are included in cost of goods sold.

 

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.

 

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Table of Contents

Notes …


 

Earnings Per Share: Basic earnings per share, for each period presented, is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share, for each period presented, is computed reflecting the potential dilution that would occur if options or other contracts to issue common stock were exercised or converted into common stock at the beginning of the period.

 

The shares outstanding used to compute diluted earnings per share for fiscal 2003, 2002 and 2001 excluded outstanding options to purchase 1,675,790, 1,886,640 and 1,724,564 shares of common stock, respectively, with weighted-average exercise prices of $53.40, $55.20 and $56.36, respectively. The options were excluded because their exercise prices were greater than the average market price of the common shares and their inclusion in the computation would have been antidilutive.

 

Information on earnings per share is as follows ( in thousands, except per share data):

 

     Fiscal Year Ended

     June 29, 2003

   June 30, 2002

   July 1, 2001

Net Income Used in Basic Earnings Per Share

   $ 80,638    $ 53,120    $ 48,013

Adjustment to Net Income to Add After-tax Interest Expense on Convertible Notes

     4,760      4,620      576
    

  

  

Adjusted Net Income Used in Diluted Earnings Per Share

   $ 85,398    $ 57,740    $ 48,589
    

  

  

Average Shares of Common Stock Outstanding

     21,639      21,615      21,598

Incremental Common Shares Applicable to Common Stock Options Based on the
Common Stock Average Market Price During the Period

     —        6      10

Incremental Common Shares Applicable to Restricted Common Stock Based on the Common Stock Average Market Price During the Period

     15      5      5

Incremental Common Shares Applicable to Convertible Notes Based on the Conversion Provisions of the Convertible Notes

     2,826      2,826      353
    

  

  

Diluted Average Common Shares Outstanding

     24,480      24,452      21,966
    

  

  

 

Comprehensive Income: Comprehensive income is a more inclusive financial reporting method that includes disclosure of financial information that historically has not been recognized in the calculation of net income. The Company has chosen to report Comprehensive Income and Accumulated Other Comprehensive Loss which encompasses net income, unrealized gain (loss) on marketable securities, cumulative translation adjustments, unrealized gain (loss) on derivatives and minimum pension liability adjustment in the Consolidated Statements of Shareholders’ Investment. Information on Accumulated Other Comprehensive Loss is as follows (in thousands):

 

     Unrealized
Gain (Loss)
on Marketable
Securities


    Cumulative
Translation
Adjustments


    Unrealized
Gain (Loss) on
Derivatives


    Minimum
Pension
Liability
Adjustment


    Accumulated
Other
Comprehensive
Loss


 

Balance at July 2, 2000

   $ 194     $ (4,125 )   $ —       $ —       $ (3,931 )

Fiscal Year Change

     (947 )     (2,530 )     1,226       —         (2,251 )
    


 


 


 


 


Balance at July 1, 2001

     (753 )     (6,655 )     1,226       —         (6,182 )

Fiscal Year Change

     (148 )     4,017       (4,313 )     —         (444 )
    


 


 


 


 


Balance at June 30, 2002

     (901 )     (2,638 )     (3,087 )     —         (6,626 )

Fiscal Year Change

     901       4,454       3,100       (2,563 )     5,892  
    


 


 


 


 


Balance at June 29, 2003

   $ —       $ 1,816     $ 13     $ (2,563 )   $ (734 )
    


 


 


 


 


 

Derivatives: Derivatives are recorded on the balance sheet as assets or liabilities, measured at fair value. Briggs & Stratton enters into derivative contracts designated as cash flow hedges to manage its foreign currency exposures. These instruments generally do not have a maturity of more than twelve months. Briggs & Stratton uses interest rate swaps designated as fair value hedges to manage its debt portfolio. These instruments generally have maturities and terms consistent with the underlying debt instrument.

 

Changes in the fair value of cash flow hedges are recorded on the income statement or as a

 

23


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Notes . . .


 

component of Accumulated Other Comprehensive Loss. The amounts included in Accumulated Other Comprehensive Loss will be reclassified into income when the forecasted transactions occur, generally within the next twelve months. These forecasted transactions represent the exporting of products for which Briggs & Stratton will receive foreign currency and the importing of products for which it will be required to pay in a foreign currency. Changes in the fair value of fair value hedges related to interest rate swaps are recorded as an increase/decrease to long-term debt. Changes in the fair value of all derivatives deemed to be ineffective are recorded as either income or expense in the accompanying Consolidated Statements of Earnings. There were no material ineffective hedges during fiscal 2003, 2002 or 2001.

 

Reclassification: Certain amounts in prior year financial statements have been reclassified to conform to current year presentation.

 

New Accounting Pronouncements: In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” which requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also requires additional disclosure requirements about the guarantor’s obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of this interpretation are effective for financial statement periods ending after December 15, 2002. Briggs & Stratton adopted the requirements of this interpretation in the current year. The adoption did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123, “Accounting for Stock-Based Compensation”. Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both the annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transitional requirements of SFAS No. 148 are effective for all financial statements for fiscal years ending after December 15, 2002. Briggs & Stratton adopted this statement in the current year. The adoption of this statement did not have a material impact on its consolidated financial position, results of operations or cash flows.

 

(3) Acquisition:

 

The Company acquired Generac Portable Products, Inc. on May 15, 2001. Generac Portable Products, Inc. was merged with, and into Generac Portable Products, LLC on June 30, 2002, and changed its name to Briggs & Stratton Power Products Group, LLC (BSPPG) effective December 31, 2002. BSPPG is a designer, manufacturer and marketer of portable and standby generators, pressure washers and related accessories. The aggregate purchase price of $288.1 million included $267.6 million of cash and $20.5 million of liabilities assumed. The cash paid included $0.5 million of cash acquired and $4.5 million of direct acquisition costs, and was funded through the issuance of 8.875% Senior Notes.

 

The provisions of the acquisition included a contingent purchase price based on the operating results of BSPPG. The Company will not pay any additional purchase price pursuant to these provisions.

 

The provisions of the acquisition also provide for a potential purchase price refund based on the final valuation of the acquired inventory. The amount of this purchase price refund, if any, will be recorded as a reduction in goodwill when it is received.

 

24


Table of Contents

Notes . . .


 

The acquisition has been accounted for using the purchase method of accounting. The purchase price was allocated on a preliminary basis to identifiable assets acquired and liabilities assumed based upon their estimated fair values, with the excess purchase price recorded as goodwill. This initial purchase price allocation resulted in approximately $167.7 million of goodwill which was amortized on a straight-line basis over twenty years until the Company adopted SFAS No. 142 on July 2, 2001. Under SFAS No. 142, goodwill is no longer amortized, but is subject to periodic impairment tests.

 

In 2003, the Company reduced goodwill by approximately $1.3 million, reflecting the tax benefit associated with the amortization of acquired goodwill for tax purposes.

 

In 2002, the Company reduced goodwill by approximately $5.7 million related to the finalization of the purchase price allocation. This decrease was primarily the result of recording $16.0 million of deferred taxes related to differences in BSPPG’s financial reporting versus tax reporting, offset by approximately $10.3 million of additional inventory and fixed asset reserves.

 

The following table sets forth the unaudited pro forma information for the Company as if the acquisition of BSPPG had occurred on July 2, 2000 (in millions, except per share data):

 

     2001

Net Sales

   $ 1,465.3

Net Income

   $ 26.6

Basic Earnings Per Share

   $ 1.23

Diluted Earnings Per Share

   $ 1.21

 

(4) Income Taxes:

 

The provision for income taxes consists of the following (in thousands):

 

     2003

   2002

   2001

Current

                    

Federal

   $ 11,404    $ 4,950    $ 4,042

State

     291      587      594

Foreign

     1,967      1,567      1,251
    

  

  

       13,662      7,104      5,887

Deferred

     24,278      20,286      17,973
    

  

  

     $ 37,940    $ 27,390    $ 23,860
    

  

  

 

A reconciliation of the U.S. statutory tax rates to the effective tax rates follows:

 

     2003

    2002

    2001

 

U.S. Statutory Rate

   35.0 %   35.0 %   35.0 %

State Taxes, Net of Federal Tax Benefit

   1.8 %   2.4 %   2.5 %

Foreign Tax Benefits

   (3.3 %)   (1.2 %)   (3.3 %)

Other

   (1.5 %)   (2.2 %)   (1.0 %)
    

 

 

Effective Tax Rate

   32.0 %   34.0 %   33.2 %
    

 

 

 

The Company received a refund of Foreign Sales Corporation tax benefits in fiscal 2002 and 2001. No refunds were received in fiscal 2003.

 

The components of deferred income taxes were as follows (in thousands):

 

     2003

    2002

 

Deferred Income Tax Asset:

                

Difference Between Book and Tax Methods Applied to

                

Inventory

   $ 13,145     $ 16,296  

Payroll Related Accruals

     2,483       4,880  

Warranty Reserves

     18,140       17,780  

Other Accrued Liabilities

     15,950       15,501  

Miscellaneous

     (1,044 )     (3,749 )
    


 


     $ 48,674     $ 50,708  
    


 


Deferred Income Tax Liability:

                

Difference Between Book and Tax Methods Applied to

                

Pension Cost

   $ (28,862 )   $ (22,532 )

Accumulated Depreciation

     (58,806 )     (56,025 )

Accrued Employee Benefits

     11,545       10,570  

Postretirement Health Care Obligation

     18,745       24,474  

Deferred Revenue on Sale of Plant & Equipment

     5,914       5,992  

Miscellaneous

     (6,453 )     791  
    


 


     $ (57,917 )   $ (36,730 )
    


 


 

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 $13.7 million at June 29, 2003. 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.

 

25


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Notes . . .


 

(5) Segment and Geographic Information and Significant Customers:

 

The Company has concluded that it operates two reportable business segments that are managed separately based on fundamental differences in their operations. Summarized segment data is as follows (in thousands):

 

     2003

    2002

    2001

 

NET SALES:

                        

Engines

   $ 1,432,964     $ 1,363,529     $ 1,286,323  

Power Products

     323,016       218,084       29,587  

Eliminations

     (98,347 )     (52,313 )     (9,272 )
    


 


 


     $ 1,657,633     $ 1,529,300     $ 1,306,638  
    


 


 


INCOME FROM OPERATIONS:

                        

Engines

   $ 135,284     $ 115,603     $ 95,621  

Power Products

     19,211       3,274       1,118  

Eliminations

     (2,091 )     (591 )     (1,168 )
    


 


 


     $ 152,404     $ 118,286     $ 95,571  
    


 


 


ASSETS:

                        

Engines

   $ 1,150,607     $ 1,087,943     $ 1,022,584  

Power Products

     339,970       279,083       286,960  

Eliminations

     (15,384 )     (10,425 )     (3,301 )
    


 


 


     $ 1,475,193     $ 1,356,601     $ 1,306,243  
    


 


 


CAPITAL EXPENDITURES:

                        

Engines

   $ 35,903     $ 42,086     $ 60,841  

Power Products

     4,251       1,842       481  
    


 


 


     $ 40,154     $ 43,928     $ 61,322  
    


 


 


DEPRECIATION & AMORTIZATION:

                        

Engines

   $ 60,875     $ 63,157     $ 58,362  

Power Products

     2,651       2,811       1,349  
    


 


 


     $ 63,526     $ 65,968     $ 59,711  
    


 


 


 

Information regarding the Company’s geographic sales by the location in which the sale originated is as follows (in thousands):

 

     2003

   2002

   2001

United States

   $ 1,546,520    $ 1,437,667    $ 1,226,483

All Other Countries

     111,113      91,633      80,155
    

  

  

Total

   $ 1,657,633    $ 1,529,300    $ 1,306,638
    

  

  

 

The Company has no material long lived assets in an individual foreign country.

 

In fiscal years 2003, 2002 and 2001, there were sales to three major engine customers that individually exceeded 10% of total Company net sales. The sales to these customers are summarized below (in thousands of dollars and percent of total Company net sales):

 

     2003

    2002

    2001

 

Customer


   Sales

     %

    Sales

     %

    Sales

   %

 

A

   $ 260,281      16 %   $ 255,119      17 %   $ 187,001    14 %

B

     253,066      15 %     299,785      19 %     267,516    20 %

C

     172,555      10 %     165,670      11 %     150,682    12 %
    

    

 

    

 

  

     $ 685,902      41 %   $ 720,574      47 %   $ 605,199    46 %
    

    

 

    

 

  

 

(6) Leases:

 

The Company leases certain facilities, vehicles, and equipment under non-cancelable operating leases which expire at various dates. Terms of the leases, including purchase options, renewals, and maintenance costs, vary by lease. Rental expense for fiscal 2003, 2002, and 2001 was $8.1 million, $8.7 million, and $8.1 million, respectively.

 

Future minimum lease commitments for all non-cancelable operating leases as of June 29, 2003 are as follows (in thousands):

 

Fiscal Year


    

2004

   $ 5,797

2005

     3,670

2006

     2,170

2007

     1,406

2008

     933

Thereafter

     454
    

     $ 14,430
    

 

(7) Indebtedness:

 

On November 15, 2001, the Company entered into a three-year $300 million revolving credit facility (the credit facility) that expires in September 2004. The Company also has access to domestic lines of credit (domestic lines) totaling $15.0 million that remain in effect until canceled by either party. The domestic lines provide amounts for short-term use at the then prevailing rate. There are no significant compensating balance requirements for any of these domestic lines. There were no borrowings using these domestic lines or the credit facility as of June 29, 2003 or June 30, 2002.

 

Borrowings under the credit facility by the Company bear interest at a rate per annum equal to, at its option, either:

 

(1) a 1, 2, 3 or 6 month LIBOR rate plus a margin varying from 0.50% to 1.75%, depending upon the rating of the Company’s long-term debt by Standard & Poor’s Rating group, a division of McGraw-Hill Companies (S&P) and Moody’s Investors Service, Inc. (Moody’s) or

 

26


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Notes . . .


 

(2) the higher of (a) the federal funds rate plus 0.50% or (b) the bank’s prime rate plus a margin of up to 0.25%, also depending on the Company’s long-term credit ratings.

 

In addition, the Company is subject to a 0.10% to 0.35% commitment fee and a 0.50% to 1.75% letter of credit fee, depending on the Company’s long-term credit ratings.

 

The following data relates to domestic notes payable (in thousands):

 

     2003

    2002

 

Balance at Fiscal Year End

   $ 2,075     $ 2,625  

Weighted Average Interest Rate at Fiscal Year End

     2.86 %     4.00 %

 

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 $29.5 million, expire at various times through April 2004 and are renewable. Borrowings of $0.9 million at June 29, 2003 using these lines of credit are included in foreign loans. None of these arrangements had material commitment fees or compensating balance requirements.

 

The following information relates to foreign loans (in thousands):

 

     2003

    2002

 

Balance at Fiscal Year End

   $ 865     $ 15,270  

Weighted Average Interest Rate at Fiscal Year End

     5.73 %     5.41 %

 

The Long-Term Debt caption consists of the following (in thousands):

 

     2003

   2002

5.00% Convertible Senior Notes Due 2006

   $ 140,000    $ 140,000

7.25% Senior Notes Due 2007, Net of Unamortized Discount of $783 in 2003 and $969 in 2002

     89,217      89,031

8.875% Senior Notes Due 2011, Net of Unamortized Discount of $4,413 in 2003 and $5,009 in 2002

     270,587      269,991

Fair Value of Interest Rate Swaps

     3,593      —  
    

  

Total Long-Term Debt

   $ 503,397    $ 499,022
    

  

 

In October 2002, the Company began managing its debt portfolio using interest rate swaps to achieve the desired mix of fixed and floating rates. At June 29, 2003, the Company had interest rate swaps relating to its 8.875% Senior Notes due 2011. These swaps convert $50 million of notional amounts from a fixed rate to a floating rate (LIBOR-set-in-arrears), and mature in 2011. The floating rate on the swaps as of June 29, 2003 was 5.3%. These swaps are deemed to be effective fair value hedges. Accordingly, the fair value at June 29, 2003 of $3.6 million is recorded as an increase to long-term debt with a corresponding increase to long-term assets.

 

In May 2001, the Company issued $275.0 million of 8.875% Senior Notes due March 15, 2011 and $140.0 million of 5.00% Convertible Senior Notes due May 15, 2006. The convertible senior notes are convertible at the option of the holders into the Company’s common stock at the conversion rate of 20.1846 shares per each $1,000 of convertible notes. Interest is paid semi-annually on both series of notes. No principal payments are due before the maturity dates.

 

The net proceeds from the sale of the 8.875% senior notes were used to fund the Company’s acquisition of BSPPG and the proceeds of the 5.00% convertible senior notes were used to replace an existing revolving line of credit used for working capital.

 

The 7.25% senior notes are due September 15, 2007. The net proceeds were used to repay borrowings incurred under the Company’s credit facility in connection with the repurchase of the Company’s stock under a tender offer. In accordance with the agreement, no principal payments are due before the maturity date, however the Company repurchased $10 million of the bonds in the fourth quarter of fiscal year 2002 after receiving unsolicited offers from bondholders.

 

The separate indentures providing for the 7.25% senior notes, the 8.875% senior notes, the 5.00% convertible senior notes and the Company’s credit facility (collectively, the Domestic Indebtedness) each include a number of financial and operating restrictions. These covenants include restrictions on the Company’s ability to: pay dividends; incur indebtedness; create liens; enter into sale and leaseback transactions; consolidate, merge, sell or lease all or substantially all of its assets; and dispose of assets or the proceeds of sales of its assets. The credit facility contains financial covenants that require

 

27


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Notes . . .


 

the Company to maintain a minimum interest coverage ratio and net worth (for fiscal 2004 the Company is required to maintain a minimum net worth of $416.9 million), impose a maximum leverage ratio and total funded debt to EBITDA ratio and impose capital expenditure limits. In addition, the credit facility contains provisions that only apply if the Company’s credit rating from S&P is BB or below or from Moody’s is Ba2 or below. The most significant of these provisions is a springing lien on the assets of the Company. Currently all of the Domestic Indebtedness is unsecured. In the event that the ratings of certain of our debt is reduced, our Domestic Indebtedness, excluding the convertible notes, will be entitled to participate in a pledge of substantially all of our assets. As of June 29, 2003, the Company was in compliance with these covenants and its ratings were BB+ and Ba1.

 

Additionally, under the terms of the indentures governing the Domestic Indebtedness, BSPPG became a joint and several guarantor of amounts outstanding under the Domestic Indebtedness. Refer to Note 15 of the Notes to Consolidated Financial Statements for subsidiary guarantor financial information.

 

(8) Other Income:

 

The components of other income (expense) are as follows (in thousands):

 

     2003

    2002

    2001

 

Interest Income

   $ 2,500     $ 2,189     $ 2,069  

Loss on the Disposition of Plant and Equipment

     (3,850 )     (3,192 )     (1,493 )

Income from Investments

     8,961       7,071       5,485  

Deferred Financing Costs

     (1,519 )     (1,420 )     (133 )

Amortization of Intangibles

     (56 )     (56 )     (1,052 )

Other Items

     527       2,065       2,091  
    


 


 


Total

   $ 6,563     $ 6,657     $ 6,967  
    


 


 


 

(9) Commitments and Contingencies:

 

Product and general liability claims arise against the Company from time to time in the ordinary course of business. The Company is generally self-insured for claims up to $2.0 million per claim. Accordingly, a reserve is maintained for the estimated costs of such claims. On June 29, 2003 and June 30, 2002 the reserve for product and general liability claims (which includes asbestos-related liabilities) was $4.7 million and $2.8 million, respectively. Because there is inherent uncertainty as to the eventual resolution of unsettled claims, no reasonable range of possible losses can be determined. Management does not anticipate that these claims, excluding the impact of insurance proceeds and reserves, will have a material adverse effect on the financial condition or results of operations of the Company.

 

In October 1998, the Company joined seventeen other companies in guaranteeing a $17.9 million letter of credit issued as a guarantee of certain City of Milwaukee Revenue Bonds used to develop a residential rental property. The Revenue Bonds were issued on behalf of a not-for-profit organization established to manage the project and rental property post construction. The revenues from the rental property are used to fund operating expenses and all debt service requirements. The Company’s share of the guarantee and the maximum exposure to the Company under the agreement is $1.8 million. The letter of credit and underlying guarantee expires August 15, 2008. Management believes the likelihood is remote that material payments will be required under this guarantee. Accordingly, no liability has been reflected in the accompanying Consolidated Balance Sheets related to this item.

 

The Company has no material commitments for materials or capital expenditures as of June 29, 2003.

 

(10) Stock Options:

 

The Company has a Stock Incentive Plan under which 5,361,935 shares of common stock have been reserved for issuance. In accordance with the plan, the Company can issue to eligible employees stock options, stock appreciation rights, restricted stock, deferred stock, stock purchase rights and cash bonus awards. The plan also allows the Company to issue to directors non-qualified stock options and directors’ fees in stock.

 

The Company has issued stock options to certain employees and directors in accordance with the plan, which are accounted for under Accounting Principles Board Opinion No. 25, and no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net

 

28


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Notes . . .


 

income and earnings per share would have been reduced to the following pro forma amounts:

 

     2003

    2002

    2001

 

Net Income (in thousands):

                        

As Reported

   $ 80,638     $ 53,120     $ 48,013  

Compensation Cost

     (3,056 )     (3,626 )     (3,199 )
    


 


 


Pro Forma

   $ 77,582     $ 49,494     $ 44,814  
    


 


 


Basic Earnings Per Share:

                        

As Reported

   $ 3.73     $ 2.46     $ 2.22  

Pro Forma

   $ 3.59     $ 2.29     $ 2.07  

Diluted Earnings Per Share:

                        

As Reported

   $ 3.49     $ 2.36     $ 2.21  

Pro Forma

   $ 3.36     $ 2.21     $ 2.07  

 

Information on the options outstanding is as follows:

 

     Shares

    Wtd. Avg.
Ex. Price


Balance, July 2, 2000

   1,327,028     $ 58.98

Granted During the Year

   621,000       46.22

Exercised During the Year

   (13,449 )     20.45

Expired During the Year

   (180,738 )     49.08
    

     

Balance, July 1, 2001

   1,753,841     $ 55.78

Granted During the Year

   371,490     $ 49.19

Exercised During the Year

   (39,597 )     27.64

Expired During the Year

   (199,094 )     54.59
    

     

Balance, June 30, 2002

   1,886,640     $ 55.20

Granted During the Year

   205,980     $ 46.69

Exercised During the Year

   (122,060 )     44.98

Expired During the Year

   (294,770 )     63.71
    

     

Balance, June 29, 2003

   1,675,790     $ 53.40
    

     

 

Grant Summary

Fiscal

Year


 

Grant

Date


 

Exercise

Price


 

Date

Exercisable


 

Options

Outstanding


 

Expiration

Date


1999

  8-5-98   $ 44.98   8-5-01   157,180   8-29-03

2000

  8-4-99     74.53   8-4-02   391,870   8-4-04

2001

  8-3-00     46.22   8-3-03   580,910   8-3-07

2002

  8-7-01     49.19   8-7-04   347,550   8-7-08

2003

  8-13-02     46.69   8-13-05   198,280   8-13-09

 

The fair value of each option is estimated using the Black-Scholes option pricing model. The grant-date fair market value of the options and assumptions used to determine such value are:

 

     2003

    2002

    2001

 

Options Granted During

                        

Grant Date Fair Value

   $ 10.61     $ 12.53     $ 11.47  

Assumptions:

                        

Risk-free Interest Rate

     4.3 %     5.1 %     6.0 %

Expected Volatility

     38.4 %     40.3 %     37.6 %

Expected Dividend Yield

     3.3 %     3.1 %     2.6 %

Expected Term (In Years)

     7.0       7.0       7.0  

 

Under the Stock Incentive Plan, the Company has issued restricted stock to certain employees. During fiscal years 2003 and 2001, the Company issued 7,000 and 5,000 shares, respectively. No restricted shares were issued during fiscal year 2002. The restricted stock issued vests on the fifth anniversary date of issue provided that the recipient is still employed by the Company. The aggregate market value of the restricted stock at the dates of issue of $0.2 million in both fiscal years 2003 and 2001 has been recorded as unearned compensation, a separate component of the Shareholders’ Investment section of the Consolidated Balance Sheets, and is being amortized over the five-year vesting period.

 

Under the Stock Incentive Plan the Company may also issue stock to its directors in lieu of directors fees upon election of the director. The Company has issued 1,317 shares, 800 shares and 800 shares in fiscal 2003, 2002 and 2001, respectively under this provision of the plan.

 

(11) 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 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.

 

29


Table of Contents

Notes . . .


 

(12) Foreign Exchange Risk Management:

 

The Company enters into forward exchange contracts to hedge purchases and sales that are denominated in foreign currencies. The terms of these currency derivatives do not exceed twelve months 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 Japanese yen. These contracts are used to hedge the commitments to purchase engines from the Company’s Japanese joint venture. The Company also has forward contracts to sell foreign currency. These contracts are used to hedge foreign currency collections on sales of inventory. The Company’s foreign currency forward contracts are carried at fair value based on current exchange rates.

 

The Company has the following forward currency contracts outstanding at the end of fiscal 2003:

 

Hedge


   In Millions

  

Conversion
Currency


  

Latest
Expiration Date


Currency


  

Contract


   Notional
Value


   Contract
Value


   Fair Market
Value


   (Gain)/Loss
at Fair Value


     

Japanese Yen

   Buy    410.0    3.5    3.4    0.1    U.S.    October 2003

Euro

   Sell    46.0    51.0    52.4    1.4    U.S.    February 2004

Australian Dollar

   Sell    1.5    0.9    1.0    0.1    U.S.    December 2003

Canadian Dollar

   Sell    1.6    1.1    1.2    0.1    U.S.    November 2003

 

The Company continuously evaluates the effectiveness of its hedging program by evaluating its foreign exchange contracts compared to the anticipated underlying transactions.

 

30


Table of Contents

Notes . . .


 

(13) Employee Benefit Costs:

 

Retirement Plan and Postretirement Benefits

 

The Company has noncontributory, defined benefit retirement plans and postretirement benefit plans covering certain employees. The following provides a reconciliation of obligations, plan assets and funded status of the plans for the two years indicated, (in thousands):

 

     Pension Benefits

       Other  Postretirement
 Benefits


 
     2003

    2002

       2003

    2002

 

Actuarial Assumptions:

                                   

Discounted Rate Used to Determine Present Value of Projected Benefit Obligation

     6.00 %     7.25 %        6.00 %     7.25 %

Expected Rate of Future Compensation Level Increases

     3.0-5.0 %     4.0-5.0 %        n/a       n/a  

Expected Long-Term Rate of Return on Plan Assets

     8.75 %     9.0 %        n/a       n/a  

Change in Benefit Obligations:

                                   

Actuarial Present Value of Benefit Obligations at Beginning of Year

   $ 747,621     $ 703,275        $ 123,465     $ 108,557  

Service Cost

     11,263       10,014          1,594       1,341  

Interest Cost

     52,276       51,203          8,258       8,028  

Plan Amendments

     1,234       —            —         —    

Plan Participant Contributions

     —         —            3,464       —    

Special Termination Benefits

     —         4,907          —         2,183  

Actuarial Loss

     127,441       30,692          74,534       12,337  

Benefits Paid

     (60,247 )     (52,470 )        (20,905 )     (8,981 )
    


 


    


 


Actuarial Present Value of Benefit Obligation at End of Year

   $ 879,588     $ 747,621        $ 190,410     $ 123,465  
    


 


    


 


Change in Plan Assets:

                                   

Plan Assets at Fair Value at Beginning of Year

   $ 856,503     $ 940,582        $ —       $ —    

Actual Return on Plan Assets

     54,350       (32,866 )        —         —    

Plan Participant Contributions

     —         —            3,464       —    

Employer Contributions

     1,312       1,257          17,441       8,981  

Benefits Paid

     (60,247 )     (52,470 )        (20,905 )     (8,981 )
    


 


    


 


Plan Assets at Fair Value at End of Year

   $ 851,918     $ 856,503        $ —       $ —    
    


 


    


 


Funded Status:

                                   

Plan Assets (Less Than) in Excess of Projected Benefit Obligation

   $ (27,670 )   $ 108,882        $ (190,410 )   $ (123,465 )

Remaining Unrecognized Net Obligation (Asset)

     82       90          228       275  

Unrecognized Net Loss (Gain)

     56,237       (95,637 )        112,284       40,177  

Minimum Pension Liability

     (4,522 )     —            —         —    

Unrecognized Prior Service Cost

     28,210       29,942          41       71  
    


 


    


 


Net Amount Recognized at End of Year

   $ 52,337     $ 43,277        $ (77,857 )   $ (82,942 )
    


 


    


 


Amounts Recognized on the Balance Sheets:

                                   

Prepaid Pension

   $ 74,005     $ 60,343        $ —       $ —    

Accrued Pension Cost

     (20,368 )     (15,750 )        —         —    

Accrued Wages and Salaries

     (1,300 )     (1,316 )        —         —    

Accrued Postretirement Health Care Obligation

     —         —            (48,065 )     (62,753 )

Accrued Liabilities

     —         —            (17,000 )     (8,000 )

Accrued Employee Benefits

     —         —            (12,792 )     (12,189 )
    


 


    


 


Net Amount Recognized at End of Year

   $ 52,337     $ 43,277        $ (77,857 )   $ (82,942 )
    


 


    


 


 

31


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Notes . . .


 

The following table summarizes the plans’ income and expense for the three years indicated (in thousands):

 

     Pension Benefits

    Other Postretirement Benefits

     2003

    2002

    2001

    2003

   2002

   2001

Components of Net Periodic Benefit Cost:

                                            

Service Cost-Benefits Earned During the Year

   $ 11,263     $ 10,014     $ 9,482     $ 1,594    $ 1,341    $ 1,215

Interest Cost on Projected Benefit Obligation

     52,276       51,203       48,079       8,258      8,028      7,091

Expected Return on Plan Assets

     (76,403 )     (77,192 )     (73,053 )     —        —        —  

Amortization of:

                                            

Transition Obligation (Asset)

     8       (4,517 )     (5,306 )     46      46      47

Prior Service Cost

     2,965       2,797       242       31      31      31

Actuarial (Gain) Loss

     (2,398 )     (8,328 )     (7,822 )     2,428      1,834      583
    


 


 


 

  

  

Net Periodic Benefit Expense (Income)

   $ (12,289 )   $ (26,023 )   $ (28,378 )   $ 12,357    $ 11,280    $ 8,967
    


 


 


 

  

  

 

In the second quarter of fiscal 2002, the Company offered and finalized an early retirement incentive program. As a result, the Company recorded $4.9 million of expense offsetting pension income of $26 million and $2.2 million was added to postretirement health care expense. The impact for the full fiscal year of 2002 reduced net income on an after-tax basis by $2.5 million, after consideration of salary and related expenditures savings.

 

In July 2001, the Company extended its collective bargaining agreement with one of its unions. As part of this contract extension, the Company agreed to pay certain amounts to employees who were hired prior to January 1, 1980 upon their retirement. The impact of this plan amendment is included in the above tables.

 

The Company’s supplemental pension plan has benefit obligations in excess of plan assets. The benefit obligation, accumulated benefit obligation and fair value of plan assets were $26.5 million, $21.7 million and $0.1 million respectively for fiscal year 2003 and $25.2 million, $17.9 million and $0.1 million respectively for fiscal year 2002. In fiscal 2003, the Company recorded an additional minimum pension liability for the supplemental pension plan as a result of the increase in its accumulated benefit obligation due to changes in the actuarial assumptions. This resulted in an increase in the accrued pension cost of $4.5 million, an increase in Accumulated Other Comprehensive Loss of $4.2 million and the recognition of an intangible asset of $0.3 million.

 

The postretirement benefit plans are essentially unfunded.

 

For measurement purposes a 9% annual rate of increase in the per capita cost of covered health care claims was assumed for the fiscal year 2004 decreasing gradually to 5% for the fiscal year 2008. The health care cost trend rate assumption has a significant effect on the amounts reported. An increase of one percentage point, would increase the accumulated postretirement benefit by $12.9 million and would increase the service and interest cost by $0.7 million for the year. A corresponding decrease of one percentage point, would decrease the accumulated postretirement benefit by $12.2 million and decrease the service and interest cost by $0.7 million for the fiscal year.

 

Defined Contribution Plans

 

The Company has a defined contribution retirement plan that includes most U.S. non-Wisconsin employees. Under the plan, the Company makes an annual contribution on behalf of covered employees equal to 2% of each participant’s gross income, as defined. For the fiscal years 2002 and 2001, the net expense related to these plans was $1.6 million and $0.2 million, respectively. Effective July 1, 2002, this plan was frozen and no future employer contributions will be made.

 

Employees of the Company may participate in a salary reduction deferred compensation retirement plan. A maximum of 1- 1/2% or 3% of each participant’s salary, depending upon the participant’s group, is matched by the Company. For certain employees, this Company matching contribution is discretionary. The Company contributions totaled $4.3 million in 2003, $4.1 million in 2002 and $4.7 million in 2001.

 

Postemployment Benefits

 

The Company accrues the expected cost of postemployment benefits over the years that the employees render service. These benefits are substantially smaller amounts because they apply

 

32


Table of Contents

Notes . . .


 

only to employees who permanently terminate employment prior to retirement. The items include disability payments, life insurance and medical benefits. These amounts are also discounted using an interest rate of 6.00% and 7.25% for fiscal year 2003 and 2002, respectively. Amounts are included in Accrued Employee Benefits in the Consolidated Balance Sheets.

 

(14) 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, Receivables, Accounts Payable, Domestic Notes Payable, Foreign Loans, Accrued Liabilities and Income Taxes Payable: The carrying amounts approximate fair market value because of the short maturity of these instruments.

 

Long-Term Debt: The fair market value of the Company’s long-term debt is estimated based on market quotations at year end.

 

The estimated fair market values of the Company’s Long-Term Debt is (in thousands):

 

     2003

    

Carrying

Amount


  

Fair

Value


Long-term Debt –

             

5.00% Convertible Notes Due 2006

   $ 140,000    $ 168,725

7.25% Notes Due 2007

   $ 89,217    $ 91,873

8.875% Notes Due 2011

   $ 270,587    $ 324,237
     2002

    

Carrying

Amount


  

Fair

Value


Long-term Debt –

             

5.00% Convertible Notes Due 2006

   $ 140,000    $ 150,865

7.25% Notes Due 2007

   $ 89,031    $ 88,712

8.875% Notes Due 2011

   $ 269,991    $ 288,562

 

(15) Separate Financial Information of Subsidiary Guarantors of Indebtedness

 

In June of 1997, Briggs & Stratton issued $100 million of 7.25% senior notes to finance the purchase of outstanding shares. In May 2001, the Company issued $275 million of 8.875% senior notes to fund the acquisition of BSPPG and $140 million of 5% convertible senior notes to replace an existing revolving line of credit. In addition, Briggs & Stratton has a $300 million revolving credit facility that expires in September 2004 used to finance seasonal working capital needs.

 

Under the terms of Briggs & Stratton’s 8.875% senior notes, 5.00% convertible senior notes, 7.25% senior notes and revolving credit agreement, (collectively, the “Domestic Indebtedness”), BSPPG became a joint and several guarantor of the Domestic Indebtedness (the “Guarantor”). Additionally, if at any time a domestic subsidiary of Briggs & Stratton constitutes a significant domestic subsidiary, then such domestic subsidiary will also become a guarantor of the Domestic Indebtedness. Currently all of the Domestic Indebtedness is unsecured. In the event that the ratings of certain of our debt are reduced, our Domestic Indebtedness, excluding the convertible notes, will be entitled to participate in a pledge of substantially all of our assets. The Guarantor, at that time, is obligated to pay the outstanding Domestic Indebtedness if Briggs & Stratton were to fail to make a payment of interest or principal on its due date. Briggs & Stratton had the following outstanding amounts related to the guaranteed debt (in thousands):

 

     June 29, 2003
Carrying
Amount


   Maximum
Guarantee


8.875% Senior Notes, due March 15, 2011

   $ 270,587    $ 275,000

5.00% Convertible Senior Notes, due May 15, 2006

   $ 140,000    $ 140,000

7.25% Senior Notes, due September 15, 2007

   $ 89,217    $ 90,000

Revolving Credit Facility, expiring September 2004

   $ —      $ 300,000

 

33


Table of Contents

Notes . . .


 

The following condensed supplemental consolidating financial information reflects the summarized financial information of Briggs & Stratton, its Guarantor, and Non-Guarantor Subsidiaries (in thousands):

 

BALANCE SHEET:

As of June 29, 2003


   Briggs & Stratton
Corporation


   Guarantor
Subsidiary


    Non-Guarantor
Subsidiaries


   Eliminations

    Consolidated

Current Assets

   $ 617,409    $ 159,067     $ 99,311    $ (68,640 )   $ 807,147

Investment in Subsidiary

     333,730      —         —        (333,730 )     —  

Noncurrent Assets

     483,227      180,903       3,916      —         668,046
    

  


 

  


 

     $ 1,434,366    $ 339,970     $ 103,227    $ (402,370 )   $ 1,475,193
    

  


 

  


 

Current Liabilities

   $ 256,358    $ 51,610     $ 53,846    $ (60,419 )   $ 301,395

Long-Term Debt

     503,397      —         —        —         503,397

Other Long-Term Obligations

     151,521      3,855       38      —         155,414

Shareholders’ Equity

     523,090      284,505       49,343      (341,951 )     514,987
    

  


 

  


 

     $ 1,434,366    $ 339,970     $ 103,227    $ (402,370 )   $ 1,475,193
    

  


 

  


 

As of June 30, 2002

                                    

Current Assets

   $ 532,790    $ 96,418     $ 70,387    $ (24,088 )   $ 675,507

Investment in Subsidiary

     312,679      —         —        (312,679 )     —  

Noncurrent Assets

     496,057      182,665       2,372      —         681,094
    

  


 

  


 

     $ 1,341,526    $ 279,083     $ 72,759    $ (336,767 )   $ 1,356,601
    

  


 

  


 

Current Liabilities

   $ 242,856    $ 10,017     $ 30,327    $ (18,934 )   $ 264,266

Long-Term Debt

     499,022      —         —        —         499,022

Other Long-Term Obligations

     144,517      (850 )     —        —         143,667

Shareholders’ Equity

     455,131      269,916       42,432      (317,833 )     449,646
    

  


 

  


 

     $ 1,341,526    $ 279,083     $ 72,759    $ (336,767 )   $ 1,356,601
    

  


 

  


 

 

34


Table of Contents

Notes . . .


 

STATEMENT OF EARNINGS:

For the Fiscal Year Ended June 29, 2003


   Briggs & Stratton
Corporation


    Guarantor
Subsidiary


    Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Net Sales

   $ 1,369,786     $ 318,707     $ 116,875     $ (147,735 )   $ 1,657,633  

Cost of Goods Sold

     1,103,714       280,477       88,278       (145,262 )     1,327,207  
    


 


 


 


 


Gross Profit

     266,072       38,230       28,597       (2,473 )     330,426  

Engineering, Selling, General and Administrative Expenses

     141,296       20,795       15,931       —         178,022  
    


 


 


 


 


Income from Operations

     124,776       17,435       12,666       (2,473 )     152,404  

Interest Expense

     (39,558 )     (10 )     (644 )     (177 )     (40,389 )

Other (Expense) Income, Net

     24,176       1,007       (8,775 )     (9,845 )     6,563  
    


 


 


 


 


Income Before Provision for Income Taxes

     109,394       18,432       3,247       (12,495 )     118,578  

Provision for Income Taxes

     28,756       6,328       2,856       —         37,940  
    


 


 


 


 


Net Income

   $ 80,638     $ 12,104     $ 391     $ (12,495 )   $ 80,638  
    


 


 


 


 


For the Fiscal Year Ended June 30, 2002

                                        

Net Sales

   $ 1,334,921     $ 215,904     $ 80,976     $ (102,501 )   $ 1,529,300  

Cost of Goods Sold

     1,102,548       195,533       62,416       (103,158 )     1,257,339  
    


 


 


 


 


Gross Profit

     232,373       20,371       18,560       657       271,961  

Engineering, Selling, General and Administrative Expenses

     123,114       18,420       12,141       —         153,675  
    


 


 


 


 


Income from Operations

     109,259       1,951       6,419       657       118,286  

Interest Expense

     (43,600 )     (50 )     (889 )     106       (44,433 )

Other Income, Net

     12,523       251       13,609       (19,726 )     6,657  
    


 


 


 


 


Income Before Provision for Income Taxes

     78,182       2,152       19,139       (18,963 )     80,510  

Provision for Income Taxes

     25,062       761       1,567       —         27,390  
    


 


 


 


 


Net Income

   $ 53,120     $ 1,391     $ 17,572     $ (18,963 )   $ 53,120  
    


 


 


 


 


For the Fiscal Year Ended July 1, 2001

                                        

Net Sales

   $ 1,247,927     $ 29,587     $ 80,701     $ (51,577 )   $ 1,306,638  

Cost of Goods Sold

     1,037,817       25,814       61,159       (51,407 )     1,073,383  
    


 


 


 


 


Gross Profit

     210,110       3,773       19,542       (170 )     233,255  

Engineering, Selling, General and Administrative Expenses

     124,146       2,656       10,882       —         137,684  
    


 


 


 


 


Income from Operations

     85,964       1,117       8,660       (170 )     95,571  

Interest Expense

     (28,024 )     (23 )     (2,642 )     24       (30,665 )

Other (Expense) Income, Net

     12,109       (1,073 )     8,841       (12,910 )     6,967  
    


 


 


 


 


Income Before Provision for Income Taxes

     70,049       21       14,859       (13,056 )     71,873  

Provision for Income Taxes

     22,036       7       1,817       —         23,860  
    


 


 


 


 


Net Income

   $ 48,013     $ 14     $ 13,042     $ (13,056 )   $ 48,013  
    


 


 


 


 


 

35


Table of Contents

Notes . . .


 

STATEMENT OF CASH FLOWS:

For the Fiscal Year Ended June 29, 2003


   Briggs & Stratton
Corporation


    Guarantor
Subsidiary


    Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

CASH FLOWS FROM OPERATING ACTIVITIES:

                                        

Net Income

   $ 80,638     $ 12,104     $ 391     $ (12,495 )   $ 80,638  

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

                                        

Depreciation and Amortization

     60,268       2,651       607       —         63,526  

Equity in (Earnings) Loss of Unconsolidated Affiliates

     (15,546 )     —         178       10,144       (5,224 )

Loss (Gain) on Disposition of Plant and Equipment

     4,900       (1,005 )     (45 )     —         3,850  

Provision for Deferred Income Taxes

     17,569       6,709       —         —         24,278  

Change in Operating Assets and Liabilities:

                                        

(Increase) Decrease in Receivables

     (1,122 )     (29,141 )     449       23,856       (5,958 )

Decrease (Increase) in Inventories

     9,542       (14,217 )     (9,608 )     2,351       (11,932 )

(Increase) in Prepaid Expenses and Other Current Assets

     (2,098 )     (807 )     (1,758 )     —         (4,663 )

Increase in Accounts Payable, Accrued Liabilities and Income Taxes

     21,130       12,331       34,716       (23,856 )     44,321  

(Increase) Decrease in Prepaid Pension

     (13,609 )     43       —         —         (13,566 )

Other, Net

     (5,700 )     42       (2,217 )     —         (7,875 )
    


 


 


 


 


Net Cash Provided by (Used by) Operating Activities

     155,972       (11,290 )     22,713       —         167,395  
    


 


 


 


 


CASH FLOWS FROM INVESTING ACTIVITIES:

                                        

Additions to Plant and Equipment

     (34,855 )     (4,251 )     (1,048 )     —         (40,154 )

Proceeds Received on Disposition of Plant and Equipment

     255       3,135       74       —         3,464  

Other, Net

     6,080       —         3,781       —         9,861  
    


 


 


 


 


Net Cash (Used by) Provided by Investing Activities

     (28,520 )     (1,116 )     2,807       —         (26,829 )
    


 


 


 


 


CASH FLOWS FROM FINANCING ACTIVITIES:

                                        

Net (Repayments) Borrowings on Loans and Notes Payable

     (12,741 )     12,191       (14,405 )     —         (14,955 )

Cash Dividends Paid

     (27,709 )     —         —         —         (27,709 )

Proceeds from Exercise of Stock Options

     5,490       —         —         —         5,490  
    


 


 


 


 


Net Cash (Used by) Provided by Financing Activities

     (34,960 )     12,191       (14,405 )     —         (37,174 )
    


 


 


 


 


EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

     —         835       4,643       —         5,478  
    


 


 


 


 


NET INCREASE IN CASH AND CASH EQUIVALENTS

     92,492       620       15,758       —         108,870  

Cash and Cash Equivalents, Beginning of Year

     211,611       955       3,379       —         215,945  
    


 


 


 


 


Cash and Cash Equivalents, End of Year

   $ 304,103     $ 1,575     $ 19,137     $ —       $ 324,815  
    


 


 


 


 


 

36


Table of Contents

Notes . . .


 

STATEMENT OF CASH FLOWS:

For the Fiscal Year Ended June 30, 2002


   Briggs & Stratton
Corporation


    Guarantor
Subsidiary


    Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

CASH FLOWS FROM OPERATING ACTIVITIES:

                                        

Net Income

   $ 53,120     $ 1,391     $ 17,572     $ (18,963 )   $ 53,120  

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

                                        

Depreciation and Amortization

     62,590       2,812       566       —         65,968  

Equity in (Earnings) Loss of Unconsolidated Affiliates

     (23,222 )     —         189       16,852       (6,181 )

Loss (Gain) on Disposition of Plant and Equipment

     3,593       (387 )     (14 )     —         3,192  

Provision for Deferred Income Taxes

     12,103       8,183