Form 10-K
Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

 

For the fiscal year ended JUNE 27, 2004

 

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 þ 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. þ

 

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

 

The aggregate market value of Common Stock held by nonaffiliates of the registrant was approximately $1,457,565,089 based on the reported last sale price of such securities as of December 26, 2003, the last business day of the most recently completed second fiscal quarter.

 

Number of Shares of Common Stock Outstanding at August 25, 2004: 25,612,270.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Document


  

Part of Form 10-K Into Which Portions

of Document are Incorporated


Proxy Statement for Annual Meeting
on October 20, 2004
   Part III

 

The Exhibit Index is located on page 50.

 



Table of Contents

BRIGGS & STRATTON CORPORATION

FISCAL 2004 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, Related Stockholder Matters and Issuer Purchases of Equity Securities    8
Item 6.    Selected Financial Data    9
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    10
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk    17
Item 8.    Financial Statements and Supplementary Data    18
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    46
Item 9A.    Controls and Procedures    46
Item 9B.    Other Information    46
PART III          
Item 10.    Directors and Executive Officers of the Registrant    46
Item 11.    Executive Compensation    47
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    47
Item 13.    Certain Relationships and Related Transactions    47
Item 14.    Principal Accountant Fees and Services    47
PART IV          
Item 15.    Exhibits and Financial Statement Schedules    47
     Signatures    49

 

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,” “forecast,” “intend,” “may,” “objective,” “plan,” “project,” “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, pension funding 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; our ability to successfully integrate the Simplicity Manufacturing, Inc. acquisition; 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 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. Charters of the Audit, Compensation, Nominating and Governance Committees; Corporate Governance Guidelines and code of business conduct and ethics contained in the Briggs & Stratton Business Integrity Manual are available on the Company’s website and are available in print to any shareholder upon request to the Corporate Secretary.

 

Engines

 

General

 

Briggs & Stratton’s engines are used primarily by the lawn and garden equipment industry, which accounted for 77% of fiscal 2004 engine sales to OEMs. Major lawn and garden equipment applications include walk-behind lawn mowers, riding lawn mowers and garden tillers. The remaining 23% of OEM sales in fiscal 2004 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 2004, approximately 17% 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, China, the Czech Republic, England, France, Germany, Mexico, New Zealand, the Philippines, Russia, South Africa, Spain, 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 39,000 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 9% of net sales in fiscal 2004, 2003 and 2002. Sales to all three combined were 42%, 41% and 47% of consolidated net sales in fiscal 2004, 2003 and 2002, 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 2004 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; Statesboro, Georgia; and Chongqing, China. 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 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

 

Briggs & Stratton Power Products Group, LLC’s (BSPPG) 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 4,300 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 international business, BSPPG has leveraged the existing Briggs & Stratton worldwide distribution network.

 

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, The Home Depot and Sears. Other U.S. retail customers include Tractor Supply Company, Tru-Serv Incorporated, and Wal*Mart.

 

Competition

 

The U.S. engine powered equipment industry (the “power products industry”), in which Briggs & Stratton competes is served by 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 and Honda. In the manufacture and sale of pressure washers, BSPPG competes primarily with DeVilbiss Air Power Company, 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.

 

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 international customer base more effectively, BSPPG designs and assembles its international products at its Jefferson, Wisconsin location and through a contract manufacturing arrangement in the Netherlands.

 

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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 27, 2004, June 29, 2003 and June 30, 2002, Briggs & Stratton spent approximately $25.9 million, $26.4 million and $23.7 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 7,438. Employment ranged from a low of 7,094 in September 2003 to a high of 7,732 in June 2004.

 

Export Sales

 

Export sales for fiscal 2004, 2003 and 2002 were $336.7 million (17% of net sales), $401.2 million (24% of net sales) and $365.5 million (24% 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 500,000 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 625,000 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 360,000 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 patent and trademark matters.

 

On June 3, 2004, eight individuals who claim to have purchased lawnmowers in Illinois and Minnesota filed a lawsuit (Ronnie Phillips et al. v. Sears Roebuck Corporation et al., No. 04-L-334 (20th Judicial Circuit, St. Clair County, IL)) against the Company and other defendants alleging that the horsepower labels on the products they purchased were inaccurate. The plaintiffs seek certification of a class of all persons in the United States who, beginning January 1, 1995 through the present, purchased a lawnmower containing a two stroke or four stroke gas combustible engine up to 20 horsepower that was manufactured by defendants.

 

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The complaint seeks an injunction, compensatory and punitive damages, and attorneys’ fees. No orders have been entered in the case, and there has been no discovery. The Company intends to vigorously defend this case.

 

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 27, 2004.

 

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Executive Officers of the Registrant

 

Name, Age, Position


  

Business Experience for Past Five Years


JOHN S. SHIELY, 52

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, 56

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, 41

Vice President and

General Manager – Large Engine Division

   Mr. DeBaets was elected to his current position 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.

RICKY T. DILLON, 33

Controller

   Mr. Dillon was elected an executive officer effective September 1, 2004. He has served as Controller since March 2002. He previously served for 9 years with Arthur Andersen LLP.

MARK R. HAZELTINE, 61

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, 56

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, 57

Senior Vice President – Engine Products Group

   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, 48

Vice President – Marketing

   Mr. Reitman was elected to his current position effective April 1998. He has served as Vice President – Marketing since November 1995.

STEPHEN H. RUGG, 57

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, 56

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, 44

Vice President – International Group

   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, 44

Vice President and

General Manager – Engine Products Group (3)

   Mr. Shiely was elected to his current position effective 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, 39

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.

CARITA R. TWINEM, 49

Treasurer

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

JOSEPH C. WRIGHT, 45

Vice President and

General Manager – Lawn and Garden Division

   Mr. Wright was elected to his current position in September 2004. He was elected an executive officer effective September 2002. He previously 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.

 

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PART II

 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

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 45.

 

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

Briggs & Stratton did not make any purchases of equity securities registered by the Company pursuant to Section 12 of the Exchange Act.

 

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ITEM 6. SELECTED FINANCIAL DATA

 

Fiscal Year


   2004

   2003

   2002

   2001

   2000

(dollars in thousands, except per share data)                         

SUMMARY OF OPERATIONS (1)

                                  

NET SALES

   $ 1,947,364    $ 1,657,633    $ 1,529,300    $ 1,306,638    $ 1,591,442

GROSS PROFIT ON SALES

     439,872      328,079      269,964      233,255      338,332

PROVISION FOR INCOME TAXES

     68,890      37,940      27,390      23,860      80,150

NET INCOME (2)

     136,114      80,638      53,120      48,013      136,473

PER SHARE OF COMMON STOCK:

                                  

Basic Earnings

     6.01      3.73      2.46      2.22      5.99

Diluted Earnings

     5.53      3.49      2.36      2.21      5.97

Cash Dividends

     1.32      1.28      1.26      1.24      1.20

Shareholders’ Investment

   $ 32.05    $ 23.66    $ 20.78    $ 19.57    $ 18.83

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

     22,643      21,639      21,615      21,598      22,788

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

     25,340      24,480      24,452      21,966      22,842

OTHER DATA (1)

                                  

SHAREHOLDERS’ INVESTMENT

   $ 817,595    $ 514,987    $ 449,646    $ 422,752    $ 409,465

LONG-TERM DEBT

     360,562      503,397      499,022      508,134      98,512

TOTAL ASSETS

     1,637,153      1,475,193      1,356,601      1,306,243      940,950

PLANT AND EQUIPMENT

     867,987      876,664      879,635      890,191      838,655

PLANT AND EQUIPMENT, NET OF RESERVES

     356,542      370,784      395,215      416,361      395,580

PROVISION FOR DEPRECIATION

     59,816      58,325      61,091      56,117      51,097

EXPENDITURES FOR PLANT AND EQUIPMENT

     52,962      40,154      43,928      61,322      71,441

WORKING CAPITAL

   $ 681,432    $ 505,752    $ 411,241    $ 381,443    $ 170,326

Current Ratio

     3.3 to 1      2.7 to 1      2.6 to 1      2.6 to 1      1.5 to 1

NUMBER OF EMPLOYEES AT YEAR-END

     7,732      7,249      6,971      6,974      7,233

NUMBER OF SHAREHOLDERS AT YEAR-END

     4,230      4,503      4,686      4,129      4,385

QUOTED MARKET PRICE:

                                  

High

   $ 88.44    $ 51.50    $ 48.39    $ 48.38    $ 63.63

Low

   $ 49.35    $ 30.75    $ 29.65    $ 30.38    $ 31.00

 

(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

 

Acquisition

 

On July 7, 2004 Briggs & Stratton Corporation and its subsidiary, Briggs & Stratton Power Products Group, LLC, acquired Simplicity Manufacturing, Inc. (“Simplicity”) for $227 million plus certain transaction related expenses. Simplicity designs, manufactures and markets a wide variety of premium yard and garden tractors, lawn tractors, riding mowers, snow throwers, attachments, and other lawn and garden products like rototillers and chipper shredders. See Note 15 of the Notes to Consolidated Financial Statements for additional information on this acquisition. The following Management Discussion and Analysis does not include a discussion of Simplicity’s operating results because this transaction occurred subsequent to our fiscal year-end.

 

Results of Operations

 

FISCAL 2004 COMPARED TO FISCAL 2003

 

Net Sales

 

Fiscal 2004 consolidated net sales were approximately $1.9 billion, an increase of $290 million, or 17% compared to the previous year. The improvement was driven primarily by increased sales volume in both Segments. Engine Segment net sales were $1.6 billion in fiscal 2004, an increase of $189 million or 13% compared to the prior year. Engine Segment increases were driven by an 11% increase in unit volume resulting in $163 million in net sales. $59 million or 4% of the increase in engine unit volume is attributable to sales to our Power Products Segment. Lawn and garden sales volume gains were driven by a strong selling season at retail. Inventory levels were low at the major original equipment manufacturers going into this fiscal year. As a result, the demand for engines was high all year long in anticipation of a strong season, which materialized. We believe the volume increase is reflective of market growth and market penetration in the U.S. While our European sales unit volume was down due to the drought conditions in Europe during much of fiscal 2004, the Euro exchange rate drove a $26 million increase in net sales. Power Products net sales were $489 million in fiscal 2004, an increase of $160 million, or 48%, over fiscal 2003. Generator volume benefited significantly by the wide spread power outages that occurred in the first quarter of fiscal 2004, as a result of the eastern electrical grid failure and the landfall of a major hurricane. There were no major power outages in fiscal 2003. These events, along with increased marketing efforts, increased consumer awareness which continued to drive the demand for generators higher in fiscal 2004. Pressure washer net sales gains were driven by continued advertising and promotions at major retailers, consistent with programs launched in the prior year and increased placement at a major retailer.

 

Gross Profit

 

Consolidated gross profit increased $112 million between years. Volume increases generated $76 million of the improvement; with approximately $60 million from increases in the Engine Segment and the remainder from the Power Products Segment. The remaining $36 million of gross margin increases came from gross margin percentage improvements in the Engine Segment. Engine Segment margins improved from 20% to 24%. Pricing improvement due to the impact of a stronger Euro on European sales contributed $26 million to the improvement. A 14% increase in production volume contributed $18 million in absorption benefits and our manufacturing cost reduction programs contributed an additional $14 million to the improvement. These positive margin enhancers were partially offset by a $22 million net increase in manufacturing costs, primarily overhead, raw materials and component costs. These cost increases reflect initiatives by many vendors to pass along higher costs due to price pressures on scrap aluminum and steel. We expect these cost increases to continue in fiscal 2005. We currently anticipate that our cost reduction programs and sales pricing initiatives should offset these higher costs. The Power Products Segment margin was at 12% in both fiscal 2004 and fiscal 2003. A 55% production volume improvement and manufacturing cost reduction efforts were offset by increased purchased component costs. The Power Products Segment purchases a major pressure washer component from a European supplier in Euros. In fiscal 2004 the Euro purchases reduced gross margins of the Power Products Segment by approximately $12 million. Under the Company’s foreign currency management program, this negative impact on margins was offset by the positive impact of the Euro discussed for the Engine Segment.

 

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Engineering, Selling, General and Administrative Costs

 

Engineering, selling, general and administrative costs increased $28 million or 15% compared to fiscal 2003. Increases in this category include salaries and fringe benefit cost increases of approximately $6 million, professional services of $6 million, marketing cost increases of $5 million and international variable selling cost increases of $6 million. In addition, $2 million of the increase is attributable to bad debt expense associated with a prior fiscal year customer bankruptcy. 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. The increase in professional services is attributable to several consulting projects related to our distributor channels, emissions regulations and Sarbanes-Oxley compliance efforts. Increased marketing costs were driven by increased spending on Power Products’ market expansion and international marketing efforts. Increases in international variable selling costs include $2 million attributable to translating Euro denominated expenditures by a stronger Euro.

 

Interest Expense

 

Interest expense decreased $3 million in fiscal 2004 compared to fiscal 2003. 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. On March 16, 2004, the Company called for the redemption of its $140 million 5% convertible senior notes due in 2006. Substantially all of the holders of the notes exercised their conversion rights prior to the redemption date of May 15, 2004. This resulted in the issuance of approximately three million treasury shares in May 2004 and the write-off of approximately $2 million in deferred financing costs. The redemption of these bonds eliminated all convertible debt and reduced our long-term debt to approximately $361 million. The redemption will also eliminate approximately $7 million in interest expense in fiscal 2005. In April 2004, all interest rate swaps were terminated resulting in a net gain of approximately $500 thousand.

 

Other Income

 

Other income remained at approximately $9 million in fiscal 2004, consistent with prior years. Refer to Note 8 of the Notes to Consolidated Financial Statements for detail of the components of other income.

 

Provision for Income Taxes

 

The effective tax rate increased from 32% in fiscal 2003 to 34% in fiscal 2004. The rate reflects less of a benefit from foreign and state tax credits. Earnings from some of our foreign subsidiaries was down due to market conditions, while the domestic income contribution increased. The impact of lower tax credits was offset by a reduction in the tax provision due to the closing of a tax audit year and recording additional tax benefits related to the filing of our fiscal 2003 income tax return.

 

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. Fiscal 2003 marked the return of significant demand-creating events such as hurricanes and ice storms after a two-year absence of significant activity. The generator market decreased significantly after the record demand created by the concern over year 2000 issues. We do not believe this market to be mature and have developed marketing campaigns to increase brand awareness and drive purchase decisions. We believe our efforts have generated demand resulting in increased household penetration. Our marketing efforts in fiscal 2003 included retailer specific flyers and promotions, national and regional advertising, and television and radio ads. We believe the return of weather events and our cooperative promotional activities together resulted in the sales increase in fiscal 2003. Pressure washer sales increased $49 million to $164 million, up from $115 million in fiscal 2002. Pressure washer sales also benefited from similar promotional campaigns, as described above. 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.

 

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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.

 

On an ongoing basis we challenge our operations group to lower our manufacturing costs in order to remain competitive in the marketplace. Historical areas of focus have been product engineering, labor productivity, controllable overhead spending, warranty and quality costs, as well as purchased component pricing. While none of these items account for an individually significant portion of our savings, the net impact across our six production facilities was a reduction in cost of $8 million.

 

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. As previously discussed, an increase in weather related events and promotional activities increased demand for generators and pressure washers in fiscal 2003. The increased demand allowed us to increase production volume between years.

 

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 fiscal 2003, 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 $9 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.

 

Liquidity and Capital Resources

 

FISCAL YEARS 2004, 2003 AND 2002

 

Cash flows from operating activities were $46 million, $167 million and $200 million, in fiscal 2004, 2003 and 2002, respectively.

 

The fiscal 2004 cash flow from operating activities were $122 million lower than the prior year. Fiscal 2004 experienced a significant increase in inventory levels, which reduced cash flows from operating activities by $129 million in fiscal 2004 and $117 million between years. Engine inventories increased $76 million between years. This increase is attributable to strong production levels through the end of the fiscal year driven by a strong selling season at retail. In addition we believe that the increased inventory is needed to meet our forecast for fiscal 2005. Our Power Products Segment also experienced an increase in inventory levels of $53 million between years. This increase in inventory reflects strong production levels throughout the year in order to replenish depleted inventories after the demand creating events for generators in the current year. The current

 

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inventory levels reflect our judgment of levels needed to maintain our position as the market leader in responsiveness to customer demand. Pressure washer inventory levels reflect increasing demand for the product due to significant market growth in the category. Inventory on hand will always reflect demand and our ability to respond to market changes at our production facilities in a timely manner.

 

Also contributing to the lower cash flows from operating activities were increased receivables growth between years of $23 million, which reflects our sales growth at both Segments and timing of payments, lower payable increases between years of $40 million and lower deferred tax provisions between years of $11 million. Offsetting these reductions in cash flows were increased earnings of $55 million, a reduction in prepaid expenses between years of $7 million and lower pension income of $7 million.

 

The fiscal 2003 cash flow from operating activities was $32 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. Inventory levels are a function of planned production levels based on anticipated demand, contrasted with actual sell through of product at retail. In fiscal 2001 the market was soft resulting in lower than anticipated sales for the year and increased inventory levels throughout the channel. As a result of the unusually high inventory levels at the end of fiscal 2001, we lowered our planned production in 2002. The 2002 lawn and garden selling season was strong, and we were successful in getting our inventory levels back to a level we considered normal. The fiscal 2003 selling season was also strong resulting in no significant change in our inventory levels.

 

Offsetting this reduction in cash flow were improved cash flows related to increased earnings of $28 million, a lower accounts receivable increase between years of $51 million and higher current liabilities of $19 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 bonus awards than the prior year.

 

Cash used in investing activities was $42 million, $27 million and $38 million in fiscal 2004, 2003 and 2002, respectively. Cash flows include capital expenditures of $53 million, $40 million and $44 million in fiscal 2004, 2003 and 2002, respectively. These capital expenditures relate primarily to reinvestment in equipment, capacity additions and new products.

 

In fiscal 2004, Briggs & Stratton received $6 million as a refund of a portion of the cash paid for the BSPPG acquisition in fiscal 2001. The amount was to adjust the original purchase price for the actual value received in acquired receivables and inventory.

 

In fiscal 2003, Briggs & Stratton 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. 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.

 

Briggs & Stratton provided cash from financing activities totaling $13 million in fiscal 2004. Briggs & Stratton used cash in financing activities totaling $37 million and $38 million in fiscal 2003 and 2002, respectively. During fiscal 2004 the company received $45 million from the exercise of stock options as opposed to $5 million and $1 million in fiscal 2003 and 2002, respectively. The stock option activity is a direct reflection of option strike prices, which encouraged the exercise of the options. 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 available cash. Briggs & Stratton did not use its revolver to finance working capital needs during fiscal 2004. In fiscal 2004 Briggs & Stratton also incurred $2 million to negotiate a new revolving credit agreement. During fiscal 2002 Briggs & Stratton repaid $10 million of its 7.25% Senior Notes due in 2007.

 

Future Liquidity and Capital Resources

 

As previously noted, Briggs & Stratton acquired Simplicity Manufacturing, Inc. in July of fiscal 2005, using its available cash. We don’t believe the acquisition of Simplicity will significantly alter our future liquidity and capital needs given its profitability and existing receivable financing arrangements.

 

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Briggs & Stratton has negotiated a new five-year $275 million revolving credit facility that expires in May 2009. This credit facility will be used to fund seasonal working capital requirements and other financing needs. This facility and Briggs & Stratton’s other indebtedness contain certain restrictive covenants described in Note 7 of the Notes to Consolidated Financial Statements. Because of our financial strength we were able to negotiate less restrictive covenants under the new revolving credit facility, specifically the covenants do not include the springing lien provisions of our previous credit facility.

 

Briggs & Stratton expects capital expenditures to be $87 million in fiscal 2005. These anticipated expenditures reflect our plans to continue to reinvest in equipment, new products, and capacity enhancements.

 

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.

 

Off-Balance Sheet Arrangements

 

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 financial and operating restrictions in addition to certain financial covenants under its domestic debt agreements. As is fully disclosed in Note 7 of the Notes to Consolidated Financial Statements, these restrictions could 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. We believe we will remain in compliance with these covenants in fiscal 2005. 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.

 

Contractual Obligations

 

A summary of the Company’s expected payments for significant contractual obligations as of June 27, 2004 is as follows (in thousands):

 

     2005

   2006-2007

   2008-2009

   Thereafter

   Total

Long-Term Debt

   $ —      $ 89,403    $ —      $ 271,159    $ 360,562

Interest on Long-Term Debt

     30,931      57,512      48,812      42,710      179,965

Operating Leases

     7,552      6,845      2,794      1,265      18,456
    

  

  

  

  

     $ 38,483    $ 153,760    $ 51,606    $ 315,134    $ 558,983
    

  

  

  

  

 

As of June 27, 2004, the Company had no material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment which generally have terms of less than 90 days. The Company also has long-term obligations related to its pension and postretirement plans which are discussed in detail in Note 13 to the financial statements. As of its most recent actuarial measurement date, no pension plan contributions are required in fiscal 2005, and postretirement medical claims are paid as they are submitted.

 

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%.

 

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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.

 

Labor Agreement

 

Briggs & Stratton has collective bargaining agreements with its unions. These agreements expire in 2006 for the Engines Segment and in 2007 for the Power Products Segment.

 

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.

 

EPA is also evaluating the development of Phase III standards to further reduce engine exhaust emissions and to control evaporative emissions from small off-road engines and equipment they are used in. A draft regulation is scheduled for publication by the end of calendar year 2004. We cannot predict the scope of any proposal or of the final regulations that EPA may ultimately adopt, and accordingly cannot estimate what, if any, impact such regulations could have on future financial performance.

 

The California Air Resources Board (CARB) staff issued a revised proposed Tier 3 regulation 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 may be significant, Briggs & Stratton does not believe the CARB staff proposal will have a material effect on its financial condition or results of operations. This assessment is based on a number of factors, including the “Bond Amendment” which precludes other states from opting into the California standard, revisions CARB made to its proposal from that published in September 2003 in response to recommendations from Briggs & Stratton and others in the regulated category, the fact that California represents a relatively small percentage of Briggs & Stratton’s engine sales and our ability and intention to pass increased costs associated with the CARB regulation 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 and Note 9 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, litigation and taxation.

 

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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, state and foreign 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, state and foreign 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 27, 2004 used a discount rate of 6.25% and an expected rate of return on plan assets of 8.75%. A 0.25% decrease in the discount rate would decrease annual pension income by approximately $1.3 million. A 0.25% decrease in the expected return on plan assets would decrease our annual pension income by approximately $2.0 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 in health care costs would increase the accumulated postretirement benefit obligation by $16.1 million and would increase the service and interest cost by $900 thousand. A corresponding decrease of one percentage point, would decrease the accumulated postretirement benefit by $15.0 million and decrease the service and interest cost by $900 thousand.

 

New Accounting Pronouncements

 

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities, and an Interpretation of ARB No. 51”. This statement addresses the consolidation by business enterprises of variable interest entities (“VIEs”), as defined by the statement. The Company has adopted the provisions of this statement, evaluated its interest in VIEs and determined it is not the primary beneficiary of any VIEs. The Company also does not believe its variable interest in any VIE is significant to its financial statements taken as a whole. As such, the adoption of this statement did not have an effect on the Company’s financial condition or results of operations.

 

In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. This statement revises employers’ disclosure about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions”, SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. It requires additional disclosures to those in the original SFAS No. 132. The adoption of this statement had no effect on the Company’s financial condition or results of operations.

 

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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 the 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 27, 2004, 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

   1,680,000    $ 15,698    U.S.    $ (171 )

Euro

   87,000    $ 105,747    U.S.    $ 2,839  

Australian Dollars

   375    $ 261    U.S.    $ 14  

 

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 $3.0 million during the year. Using the year-end exchange rates, the total amount invested in non-U.S. subsidiaries on June 27, 2004 was $59.4 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 27, 2004, Briggs & Stratton had the following short-term loans outstanding (in thousands):

 

Currency


   Amount

   Weighted Average
Interest Rate


 

Australian Dollars

   1,000    7.01 %

Euro

   993    8.00 %

U.S. Dollars

   1,220    2.98 %

 

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

7.25%      Notes

   $ 89,403    2007

8.875%    Notes

   $ 271,159    2011

 

These loans carry fixed rates of interest.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Consolidated Balance Sheets

 

AS OF JUNE 27, 2004 AND JUNE 29, 2003

(in thousands)

 

     2004

   2003

ASSETS              

CURRENT ASSETS:

             

Cash and Cash Equivalents

   $ 342,394    $ 324,815

Receivables, Less Reserves of $1,584 and $1,780, Respectively

     230,510      201,948

Inventories:

             

Finished Products and Parts

     206,638      128,998

Work in Process

     124,483      76,929

Raw Materials

     6,610      3,211
    

  

Total Inventories

     337,731      209,138

Deferred Income Tax Asset

     47,623      48,674

Prepaid Expenses and Other Current Assets

     23,735      22,572
    

  

Total Current Assets

     981,993      807,147

GOODWILL

     151,991      159,756

INVESTMENTS

     49,259      44,175

PREPAID PENSION

     81,730      74,005

DEFERRED LOAN COSTS, Net

     6,325      8,314

OTHER LONG-TERM ASSETS, Net

     9,313      11,012

PLANT AND EQUIPMENT:

             

Land and Land Improvements

     16,027      15,938

Buildings

     163,621      156,823

Machinery and Equipment

     674,047      689,100

Construction in Progress

     14,292      14,803
    

  

       867,987      876,664

Less - Accumulated Depreciation

     511,445      505,880
    

  

Total Plant and Equipment, Net

     356,542      370,784
    

  

     $ 1,637,153    $ 1,475,193
    

  

 

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

 

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AS OF JUNE 27, 2004 AND JUNE 29, 2003

(in thousands, except per share data)

 

     2004

    2003

 
LIABILITIES AND SHAREHOLDERS’ INVESTMENT                 

CURRENT LIABILITIES:

                

Accounts Payable

   $ 120,409     $ 134,441  

Domestic Notes Payable

     1,220       2,075  

Foreign Loans

     1,907       865  

Accrued Liabilities:

                

Wages and Salaries

     55,528       44,667  

Warranty

     43,148       47,590  

Accrued Postretirement Health Care Obligation

     22,000       17,000  

Other

     56,349       54,757  
    


 


Total Accrued Liabilities

     177,025       164,014  
    


 


Total Current Liabilities

     300,561       301,395  

DEFERRED REVENUE ON SALE OF PLANT AND EQUIPMENT

     14,929       15,163  

DEFERRED INCOME TAX LIABILITY

     70,454       57,917  

ACCRUED PENSION COST

     20,603       20,368  

ACCRUED EMPLOYEE BENEFITS

     14,201       13,901  

ACCRUED POSTRETIREMENT HEALTH CARE OBLIGATION

     38,248       48,065  

LONG-TERM DEBT

     360,562       503,397  

COMMITMENTS AND CONTINGENCIES

                

SHAREHOLDERS’ INVESTMENT:

                

Common Stock -

                

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

     289       289  

Additional Paid-in Capital

     48,657       35,074  

Retained Earnings

     927,766       822,060  

Accumulated Other Comprehensive Income (Loss)

     4,028       (734 )

Unearned Compensation on Restricted Stock

     (1,490 )     (287 )

Treasury Stock at cost, 3,382 Shares in 2004 and 7,142 Shares in 2003

     (161,655 )     (341,415 )
    


 


Total Shareholders’ Investment

     817,595       514,987  
    


 


     $ 1,637,153     $ 1,475,193  
    


 


 

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

 

19


Table of Contents

Consolidated Statements of Earnings

 

FOR THE FISCAL YEARS ENDED JUNE 27, 2004, JUNE 29, 2003 AND JUNE 30, 2002

(in thousands, except per share data)

 

     2004

    2003

    2002

 

NET SALES

   $ 1,947,364     $ 1,657,633     $ 1,529,300  

COST OF GOODS SOLD

     1,507,492       1,329,554       1,259,336  
    


 


 


Gross Profit on Sales

     439,872       328,079       269,964  

ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     205,663       178,157       153,712  
    


 


 


Income from Operations

     234,209       149,922       116,252  

INTEREST EXPENSE

     (37,665 )     (40,389 )     (44,433 )

OTHER INCOME, Net

     8,460       9,045       8,691  
    


 


 


Income Before Provision for Income Taxes

     205,004       118,578       80,510  

PROVISION FOR INCOME TAXES

     68,890       37,940       27,390  
    


 


 


NET INCOME

   $ 136,114     $ 80,638     $ 53,120  
    


 


 


Weighted Average Shares Outstanding

     22,643       21,639       21,615  

BASIC EARNINGS PER SHARE

   $ 6.01     $ 3.73     $ 2.46  
    


 


 


Diluted Average Shares Outstanding

     25,340       24,480       24,452  

DILUTED EARNINGS PER SHARE

   $ 5.53     $ 3.49     $ 2.36  
    


 


 


 

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

 

20


Table of Contents

Consolidated Statements of Shareholders’ Investment

 

FOR THE FISCAL YEARS ENDED JUNE 27, 2004, JUNE 29, 2003 AND JUNE 30, 2002

(in thousands, except per share data)

 

     Common
Stock


   Additional
Paid-In
Capital


    Retained
Earnings


    Accumulated
Other Comprehensive
Income (Loss)


    Unearned
Compensation
on Restricted
Stock


    Treasury
Stock


    Comprehensive
Income


 

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 )        

Comprehensive Income:

                                                       

Net Income

     —        —         136,114       —         —         —       $ 136,114  

Foreign Currency Translation Adjustments

     —        —         —         3,042       —         —         3,042  

Unrealized Gain on Derivatives

     —        —         —         487       —         —         487  

Minimum Pension Liability Adjustment, net of tax of $(788)

     —        —         —         1,233       —         —         1,233  
                                                   


Total Comprehensive Income

     —        —         —         —         —         —       $ 140,876  
                                                   


Cash Dividends Paid ($1.32 per share)

     —        —         (30,408 )     —         —         —            

Exercise of Stock Options

     —        7,667       —         —         —         41,194          

Restricted Stock Issued

     —        322       —         —         (1,494 )     1,171          

Amortization of Unearned Compensation

     —        —         —         —         291       —            

Issuance of Treasury Shares

     —        5,546       —         —         —         137,270          

Shares Issued to Directors

     —        48       —         —         —         125          
    

  


 


 


 


 


       

BALANCES, JUNE 27, 2004

   $ 289    $ 48,657     $ 927,766     $ 4,028     $ (1,490 )   $ (161,655 )        
    

  


 


 


 


 


       

 

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 27, 2004, JUNE 29, 2003 AND JUNE 30, 2002

(in thousands)

 

     2004

    2003

    2002

 

CASH FLOWS FROM OPERATING ACTIVITIES:

                        

Net Income

   $ 136,114     $ 80,638     $ 53,120  

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

                        

Depreciation and Amortization

     66,898       63,526       65,968  

Equity in Earnings of Unconsolidated Affiliates

     (7,876 )     (5,224 )     (6,181 )

Loss on Disposition of Plant and Equipment

     7,390       3,850       3,192  

Provision for Deferred Income Taxes

     12,800       24,278       20,286  

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

                        

Increase in Receivables

     (28,588 )     (5,958 )     (56,684 )

(Increase) Decrease in Inventories

     (128,594 )     (11,932 )     121,713  

Decrease (Increase) in Prepaid Expenses and Other Current Assets

     2,017       (4,663 )     (1,519 )

Increase in Accounts Payable, Accrued Liabilities and Income Taxes

     4,696       44,321       24,979  

Increase in Prepaid Pension

     (6,070 )     (13,566 )     (22,812 )

Other, Net

     (13,023 )     (7,875 )     (2,245 )
    


 


 


Net Cash Provided by Operating Activities

     45,764       167,395       199,817  
    


 


 


CASH FLOWS FROM INVESTING ACTIVITIES:

                        

Additions to Plant and Equipment

     (52,962 )     (40,154 )     (43,928 )

Proceeds Received on Disposition of Plant and Equipment

     720       3,464       406  

Refund of Cash Paid for Acquisition

     5,686       —         —    

Increase in Investment in China Joint Venture

     —         3,531       —    

Other, Net

     4,392       6,330       5,120  
    


 


 


Net Cash Used by Investing Activities

     (42,164 )     (26,829 )     (38,402 )
    


 


 


CASH FLOWS FROM FINANCING ACTIVITIES:

                        

Net Borrowings (Repayments) on Loans and Notes Payable

     187       (14,955 )     (1,696 )

Repayments on Long-Term Debt

     (22 )     —         (10,393 )

Issuance Cost of Debt

     (1,789 )     —         —    

Cash Dividends Paid

     (30,408 )     (27,709 )     (27,219 )

Proceeds from Exercise of Stock Options

     45,314       5,490       1,078  
    


 


 


Net Cash Provided by (Used by) Financing Activities

     13,282       (37,174 )     (38,230 )
    


 


 


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

     697       5,478       4,017  
    


 


 


NET INCREASE IN CASH AND CASH EQUIVALENTS

     17,579       108,870       127,202  

CASH AND CASH EQUIVALENTS:

                        

Beginning of Year

     324,815       215,945       88,743  
    


 


 


End of Year

   $ 342,394     $ 324,815     $ 215,945  
    


 


 


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

                        

Interest Paid

   $ 38,884     $ 39,448     $ 40,488  
    


 


 


Income Taxes Paid

   $ 53,253     $ 20,724     $ 3,222  
    


 


 


 

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

 

22


Table of Contents

Notes to Consolidated Financial Statements

 

FOR THE FISCAL YEARS ENDED JUNE 27, 2004, JUNE 29, 2003 AND JUNE 30, 2002

 

(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 2004, 2003 and 2002 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 56% of total inventories at June 27, 2004 and 60% of total inventories at June 29, 2003. 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 reduced cost of goods sold by $0.2 million in 2003 and $2.6 million in 2002. There was no such reduction of inventory in fiscal 2004. If the FIFO inventory valuation method had been used exclusively, inventories would have been $51.4 million and $47.3 million higher in 2004 and 2003, 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. The Company performed the required goodwill impairment test in fiscal 2004, 2003 and 2002, and found no impairment of the asset.

 

Investments: This caption represents the Company’s investment in its 50%-owned joint ventures and preferred stock in a privately held iron castings business. The investments in the joint ventures and the privately held business are accounted for under the equity method. In fiscal 2003, the Company determined losses on an investment in common stock of a publicly traded software company were “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 method over periods ranging from five to ten years. Accumulated amortization related to open issues amounted to $5.9 million as of June 27, 2004 and $5.1 million as of June 29, 2003. In fiscal 2004, the Company expensed $1.7 million in capitalized costs upon conversion of the 5.00% Convertible Senior Notes.

 

23


Table of Contents

Notes…

 

Other Long-Term Assets: This caption 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 $8.7 million as of June 27, 2004 and $6.0 million as of June 29, 2003. In fiscal 2003, this caption also included a long-term asset associated with interest rate swaps designated as effective fair value hedges. See discussion in Note 7.

 

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 income from operations.

 

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 2004, 2003 or 2002.

 

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 2004 and 2003 (in thousands):

 

     2004

    2003

 

Balance, Beginning of Period

   $ 47,590     $ 46,346  

Payments

     (30,761 )     (30,613 )

Provision for Current Year Warranties

     29,150       27,605  

(Credit) Provision for Prior Years Warranties

     (2,831 )     4,252  
    


 


Balance, End of Period

   $ 43,148     $ 47,590  
    


 


 

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: Net sales includes sales of engines, power products, and related component parts for servicing engines, net of allowances for cash discounts, customer volume rebates and discounts, and advertising allowances. In accordance with Staff Accounting Bulletin No. 101 as amended, the Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably assured. This is generally upon shipment, except for certain international shipments, where revenue is recognized when the customer receives the product.

 

24


Table of Contents

Notes…

 

The Company also offers a variety of customer rebates and sales incentives. The Company accrues for estimated rebates/incentives at the time of sale, as a reduction in net sales.

 

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 Income Tax Asset represents temporary differences relating to current assets and current 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. 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 $25.9 million in fiscal 2004, $26.4 million in fiscal 2003 and $23.7 million in fiscal 2002.

 

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 $15.0 million in fiscal 2004, $13.2 million in fiscal 2003 and $8.3 million in fiscal 2002.

 

The Company reports co-op advertising expense as a reduction in net sales. Co-op advertising expense reported as a reduction in net sales totaled $12.8 million in fiscal 2004, $9.5 million in fiscal 2003 and $7.2 million in fiscal 2002.

 

Shipping and Handling Fees and Costs: Revenue received from shipping and handling fees is reflected in net sales. Shipping fee revenue for fiscal 2004, 2003 and 2002 was $1.8 million, $1.6 million and $1.6 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.

 

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 2004, 2003 and 2002 excluded outstanding options to purchase 214,260, 1,675,790 and 1,886,640 shares of common stock, respectively, with weighted-average exercise prices of $74.53, $53.40 and $55.20, 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.

 

25


Table of Contents

Notes…

 

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

 

     Fiscal Year Ended

     June 27, 2004

   June 29, 2003

   June 30, 2002

Net Income Used in Basic Earnings Per Share

   $ 136,114    $ 80,638    $ 53,120

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

     4,053      4,760      4,620
    

  

  

Adjusted Net Income Used in Diluted Earnings Per Share

   $ 140,167    $ 85,398    $ 57,740
    

  

  

Average Shares of Common Stock Outstanding

     22,643      21,639      21,615

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

     180      —        6

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

     13      15      5

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

     2,504      2,826      2,826
    

  

  

Diluted Average Common Shares Outstanding

     25,340      24,480      24,452
    

  

  

 

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 Income (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 Income (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
Income (Loss)


 

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 )

Fiscal Year Change

     —         3,042       487       1,233       4,762  
    


 


 


 


 


Balance at June 27, 2004

   $ —       $ 4,858     $ 500     $ (1,330 )   $ 4,028  
    


 


 


 


 


 

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 has used 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 Consolidated Statement of Earnings or as a component of Accumulated Other Comprehensive Income (Loss). The amounts included in Accumulated Other Comprehensive Income (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. See discussion in Note 12.

 

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

 

26


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Notes…

 

New Accounting Pronouncements: In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities, and an interpretation of ARB No. 51”. This statement addresses the consolidation by business enterprises of variable interest entities (“VIEs”), as defined by the statement. The Company has adopted the provisions of this statement, evaluated its interest in VIEs and determined it is not the primary beneficiary of any VIEs. The Company also does not believe its variable interest in any VIE is significant to the financial statements taken as a whole. As such, the adoption of this statement did not have an effect on the Company’s financial condition or results of operations.

 

In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. This statement revises employers’ disclosure about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions”, SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. It requires additional disclosures to those in the original SFAS No. 132. This statement is effective for fiscal 2004. The adoption had no effect on the Company’s financial condition or results of operations.

 

(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 effective December 31, 2002. BSPPG is a designer, manufacturer and marketer of portable and standby generators, pressure washers and related accessories.

 

The provisions of the acquisition provided for a purchase price refund based on the final valuation of the acquired receivables and inventory. The Company received a purchase price refund of $5.7 million, which was recorded as a reduction in goodwill during fiscal 2004.

 

In 2004 and 2003, the Company reduced goodwill by approximately $2.1 and $1.3 million, respectively, reflecting the tax benefit associated with the amortization of acquired goodwill for tax purposes.

 

(4) Income Taxes:

 

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

 

     2004

   2003

   2002

Current

                    

Federal

   $ 46,506    $ 11,404    $ 4,950

State

     8,039      291      587

Foreign

     1,545      1,967      1,567
    

  

  

       56,090      13,662      7,104

Deferred

     12,800      24,278      20,286
    

  

  

     $ 68,890    $ 37,940    $ 27,390
    

  

  

 

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

 

     2004

    2003

    2002

 

U.S. Statutory Rate

   35.0 %   35.0 %   35.0 %

State Taxes, Net of Federal Tax Benefit

   3.0 %   1.8 %   2.4 %

Foreign Tax Benefits

   (0.9 %)   (3.3 %)   (1.2 %)

Resolution of Prior Period Tax Matters

   (2.2 %)   —       —    

Other

   (1.3 %)   (1.5 %)   (2.2 %)
    

 

 

Effective Tax Rate

   33.6 %   32.0 %   34.0 %
    

 

 

 

27


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Notes…

 

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

 

     2004

    2003

 

Deferred Income Tax Asset:

                

Difference Between Book and Tax Methods Applied to

                

Inventory

   $ 13,443     $ 13,145  

Payroll Related Accruals

     2,627       2,483  

Warranty Reserves

     16,768       18,140  

Other Accrued Liabilities

     16,395       15,950  

Miscellaneous

     (1,610 )     (1,044 )
    


 


     $ 47,623     $ 48,674  
    


 


Deferred Income Tax Liability:

                

Difference Between Book and Tax Methods Applied to

                

Pension Cost

   $ (31,875 )   $ (28,862 )

Accumulated Depreciation

     (59,271 )     (58,806 )

Accrued Employee Benefits

     12,333       11,545  

Postretirement Health Care Obligation

     14,917       18,745  

Deferred Revenue on Sale of Plant & Equipment

     5,822       5,914  

Miscellaneous

     (12,380 )     (6,453 )
    


 


     $ (70,454 )   $ (57,917 )
    


 


 

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 $10.5 million at June 27, 2004. 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.

 

(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):

 

     2004

    2003

    2002

 

NET SALES:

                        

Engines

   $ 1,617,409     $ 1,428,411     $ 1,366,977  

Power Products

     489,250       329,488       215,904  

Eliminations

     (159,295 )     (100,266 )     (53,581 )
    


 


 


     $ 1,947,364     $ 1,657,633     $ 1,529,300  
    


 


 


GROSS PROFIT ON SALES:

                        

Engines

   $ 387,582     $ 291,937     $ 250,150  

Power Products

     57,846       38,233       20,613  

Eliminations

     (5,556 )     (2,091 )     (799 )
    


 


 


     $ 439,872     $ 328,079     $ 269,964  
    


 


 


INCOME FROM OPERATIONS:

                        

Engines

   $ 209,337     $ 134,775     $ 114,859  

Power Products

     30,428       17,238       2,192  

Eliminations

     (5,556 )     (2,091 )     (799 )
    


 


 


     $ 234,209     $ 149,922     $ 116,252  
    


 


 


 

28


Table of Contents

Notes…

 

     2004

    2003

    2002

 

ASSETS:

                        

Engines

   $ 1,435,016     $ 1,150,607     $ 1,087,943  

Power Products

     402,618       339,970       279,083  

Eliminations

     (200,481 )     (15,384 )     (10,425 )
    


 


 


     $ 1,637,153     $ 1,475,193     $ 1,356,601  
    


 


 


CAPITAL EXPENDITURES:

                        

Engines

   $ 47,408     $ 35,903     $ 42,086  

Power Products

     5,554       4,251       1,842  
    


 


 


     $ 52,962     $ 40,154     $ 43,928  
    


 


 


DEPRECIATION & AMORTIZATION:

                        

Engines

   $ 63,744     $ 60,875     $ 63,157  

Power Products

     3,154       2,651       2,811  
    


 


 


     $ 66,898     $ 63,526     $ 65,968  
    


 


 


 

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

 

     2004

   2003

   2002

United States

   $ 1,795,128    $ 1,546,520    $ 1,437,667

All Other Countries

     152,236      111,113      91,633
    

  

  

Total

   $ 1,947,364    $ 1,657,633    $ 1,529,300
    

  

  

 

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

 

In fiscal years 2004, 2003 and 2002, there were sales to three major engine customers that exceeded 40% of our business and in certain years they 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):

 

    

2004

Net Sales


   %

   

2003

Net Sales


   %

   

2002

Net Sales


   %

 

Customer

                                       

A

   $ 318,705    16 %   $ 260,253    16 %   $ 255,155    17 %

B

     334,748    17 %     253,066    15 %     299,864    19 %

C

     169,002    9 %     168,928    10 %     165,097    11 %
    

  

 

  

 

  

     $ 822,455    42 %   $ 682,247    41 %   $ 720,116    47 %
    

  

 

  

 

  

 

(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 2004, 2003, and 2002 was $10.2 million, $8.1 million and $8.7 million, respectively.

 

Future minimum lease commitments for all non-cancelable operating leases as of June 27, 2004 are as follows (in thousands):

 

Fiscal Year


    

2005

   $ 7,552

2006

     4,570

2007

     2,275

2008

     1,718

2009

     1,076

Thereafter

     1,265
    

     $ 18,456
    

 

29


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Notes…

 

(7) Indebtedness:

 

On May 28, 2004, the Company replaced its unsecured three-year $300 million revolving credit facility that would have expired in September 2004 with an unsecured five-year $275 million revolving credit facility that expires in May 2009. There were no borrowings using these credit facilities as of June 27, 2004 or June 29, 2003.

 

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 2.00%, 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

 

(2) the higher of (a) the federal funds rate plus 0.50% or (b) the bank’s prime rate.

 

In addition, the Company is subject to a 0.10% to 0.375% commitment fee and a 0.50% to 2.00% letter of credit fee, depending on the Company’s long-term credit ratings.

 

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

 

     2004

    2003

 

Balance at Fiscal Year-End

   $ 1,220     $ 2,075  

Weighted Average Interest Rate at Fiscal Year-End

     2.98 %     2.86 %

 

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 $31.1 million, expire at various times through April 2005 and are renewable. Borrowings of $1.2 million at June 27, 2004 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):

 

     2004

    2003

 

Balance at Fiscal Year-End

   $ 1,907     $ 865  

Weighted Average Interest Rate at Fiscal Year-End

     7.64 %     5.73 %

 

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

 

     2004

   2003

5.00% Convertible Senior Notes Due 2006

   $ —      $ 140,000

7.25% Senior Notes Due 2007, Net of Unamortized Discount of $597 in 2004 and $783 in 2003

     89,403      89,217

8.875% Senior Notes Due 2011, Net of Unamortized Discount of $3,841 in 2004 and $4,413 in 2003

     271,159      270,587

Fair Value of Interest Rate Swaps

     —        3,593
    

  

Total Long-Term Debt

   $ 360,562    $ 503,397
    

  

 

In May 2004, the Company initiated and completed the redemption of its 5.00% Convertible Senior Notes due 2006 (“Notes”). With the exception of $22,000 principal amount of Notes which were redeemed for cash, all holders exercised their conversion rights prior to the redemption dates and were issued 2,825,363 shares of Briggs & Stratton Corporation common stock from shares held in treasury.

 

In April 2004, the Company terminated all outstanding interest rate swaps relating to its 8.875% Senior Notes due 2011. Prior to termination, the swaps converted $50 million of notional amounts from a fixed rate to a floating rate (LIBOR-set-in-arrears), and had a maturity of 2011. The swaps were terminated at a gain of $0.5 million.

 

In May 2001, the Company issued $275.0 million of 8.875% Senior Notes due March 15, 2011. No principal payments are due before the maturity date.

 

30


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Notes…

 

The 7.25% senior notes are due September 15, 2007. 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 provided for the 7.25% senior notes, the 8.875% 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 the Company to maintain a minimum interest coverage ratio and net worth (for the first quarter of fiscal 2005 the Company is required to maintain a minimum net worth of $575.0 million) and impose a maximum leverage ratio. As of June 27, 2004, the Company was in compliance with these covenants.

 

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 16 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):

 

     2004

    2003

    2002

 

Interest Income

   $ 2,970     $ 2,500     $ 2,189  

Equity in Earnings of Unconsolidated Affiliates

     7,876       5,224       6,181  

Deferred Financing Costs

     (3,778 )     (1,519 )     (1,420 )

Amortization of Intangibles

     (56 )     (56 )     (56 )

Gain on Investment in China

     386       2,972       —    

Other Items

     1,062       (76 )     1,797  
    


 


 


Total

   $ 8,460     $ 9,045     $ 8,691  
    


 


 


 

(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 27, 2004 and June 29, 2003 the reserve for product and general liability claims (which includes asbestos-related liabilities) was $6.3 million and $4.7 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 27, 2004.

 

(10) Stock Incentives:

 

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 eligible employees stock options,

 

31


Table of Contents

Notes…

 

stock appreciation rights, restricted stock, deferred stock, stock purchase rights and cash bonus awards. The plan also allows the Company to issue 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 this plan been determined consistent with SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share would have been reduced to the following pro forma amounts:

 

     2004

    2003

    2002

 

Net lncome (in thousands):

                        

As Reported

   $ 136,114     $ 80,638     $ 53,120  

Compensation Cost

     (3,528 )     (3,056 )     (3,626 )
    


 


 


Pro Forma

   $ 132,586     $ 77,582     $ 49,494  
    


 


 


Basic Earnings Per Share:

                        

As Reported

   $ 6.01     $ 3.73     $ 2.46  

Pro Forma

   $ 5.86     $ 3.59     $ 2.29  

Diluted Earnings Per Share:

                        

As Reported

   $ 5.53     $ 3.49     $ 2.36  

Pro Forma

   $ 5.40     $ 3.38     $ 2.21  

 

The exercise prices of each stock option issued is in excess of the market value of the stock on the date of grant. 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:

 

Options Granted During


   2004

    2003

    2002

 

Grant Date Fair Value

   $ 19.95     $ 10.61     $ 12.53  

Assumptions:

                        

Risk-free Interest Rate

     4.6 %     4.3 %     5.1 %

Expected Volatility

     33.1 %     38.4 %     40.3 %

Expected Dividend Yield

     2.3 %     3.3 %     3.1 %

Expected Term (In Years)

     10.0       7.0       7.0  

 

Information on the options outstanding is as follows:

 

     Shares

    Wtd. Avg.
Ex. Price


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

Granted During the Year

   438,050     $ 60.88

Exercised During the Year

   (861,695 )     52.59

Expired During the Year

   (3,000 )     74.53
    

     

Balance, June 27, 2004

   1,249,145     $ 56.53
    

     

 

32


Table of Contents

Notes…

 

Grant Summary


Fiscal Year


   Grant
Date


   Date
Exercisable


   Expiration
Date


   Exercise
Price


   Options
Outstanding


2000

   8-4-99    8-4-02    8-31-04    $ 74.53    214,260

2001

   8-3-00    8-3-03    8-3-07      46.22    221,805

2002

   8-7-01    8-7-04    8-7-08      49.19    224,820

2003

   8-13-02    8-13-05    8-13-09      46.69    174,910

2004

   8-15-03    8-15-06    8-15-13      60.88    413,350

 

Under the Stock Incentive Plan, the Company has issued restricted stock to certain employees. During fiscal years 2004 and 2003, the Company issued 24,500 and 7,000 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 on the date of issue of $1.5 million in fiscal 2004 and $0.2 million in fiscal 2003 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. The Company has issued 2,625 shares, 1,317 shares and 800 shares in fiscal 2004, 2003 and 2002, 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.

 

(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 2004:

 

Hedge


   In Millions

    Conversion
Currency


   Latest
Expiration Date


   Notional
Value


   Contract
Value


   Fair Market
Value


   (Gain)/Loss
at Fair Value


      

Currency


   Contract

                

Japanese Yen

   Buy    1,680.0    15.5    15.7    (0.2 )   U.S.    March 2005

Euro

   Sell    87.0    103.0    105.8    2.8     U.S.    April 2005

Australian Dollar

   Sell    0.4    0.2    0.3    0.1     U.S.    September 2004

 

33


Table of Contents

Notes…

 

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

 

Hedge


   In Millions

    Conversion
Currency


   Latest
Expiration Date


   Notional
Value


   Contract
Value


   Fair Market
Value


   (Gain)/Loss
at Fair Value


      

Currency


   Contract

                

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 reclassified approximately $1.1 million of unrealized loss into earnings during fiscal 2004 as forecasted transactions did not materialize in accordance with the hedging plan.

 

34


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 Company uses a June 30 measurement date for all of its plans. 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

 
     2004

    2003

    2004

    2003

 

Actuarial Assumptions:

                                

Discounted Rate Used to Determine Present Value of Projected Benefit Obligation

     6.25 %     6.00 %     6.25 %     6.00 %

Expected Rate of Future Compensation Level Increases

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

Expected Long-Term Rate of Return on Plan Assets

     8.75 %     8.75 %     n/a       n/a  

Change in Benefit Obligations:

                                

Actuarial Present Value of Benefit Obligations at Beginning of Year

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

Service Cost

     13,188       11,263       1,673       1,594  

Interest Cost

     51,089       52,276       10,766       8,258  

Plan Amendments

     1,048       1,234       —         —    

Plan Participant Contributions

     —         —         4,018       3,464  

Actuarial Loss

     21,171       127,441       65,629       74,534  

Benefits Paid

     (63,759 )     (60,247 )     (29,039 )     (20,905 )
    


 


 


 


Actuarial Present Value of Benefit Obligation at End of Year

   $ 902,325     $ 879,588     $ 243,457     $ 190,410  
    


 


 


 


Change in Plan Assets:

                                

Plan Assets at Fair Value at Beginning of Year

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

Actual Return on Plan Assets

     126,575       54,350       —         —    

Plan Participant Contributions

     135       —         4,018       3,464  

Employer Contributions

     1,411       1,312       25,021       17,441  

Benefits Paid

     (63,759 )     (60,247 )     (29,039 )     (20,905 )
    


 


 


 


Plan Assets at Fair Value at End of Year

   $ 916,280     $ 851,918     $ —       $ —    
    


 


 


 


Funded Status:

                                

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

   $ 13,955     $ (27,670 )   $ (243,457 )   $ (190,410 )

Remaining Unrecognized Net Obligation

     74       82       182       228  

Unrecognized Net Loss

     22,682       56,237       169,559       112,284  

Minimum Pension Liability

     (3,063 )     (4,522 )     —         —    

Unrecognized Prior Service Cost

     26,179       28,210       9       41  
    


 


 


 


Net Amount Recognized at End of Year

   $ 59,827     $ 52,337     $ (73,707 )   $ (77,857 )
    


 


 


 


Amounts Recognized on the Balance Sheets:

                                

Prepaid Pension

   $ 81,730     $ 74,005     $ —       $ —    

Accrued Pension Cost

     (20,603 )     (20,368 )     —         —    

Accrued Wages and Salaries

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

Accrued Postretirement Health Care Obligation

     —         —         (38,248 )     (48,065 )

Accrued Liabilities

     —         —         (22,000 )     (17,000 )

Accrued Employee Benefits

     —         —         (13,459 )     (12,792 )
    


 


 


 


Net Amount Recognized at End of Year

   $ 59,827     $ 52,337     $ (73,707 )   $ (77,857 )
    


 


 


 


 

35


Table of Contents

Notes…

 

The accumulated benefit obligation for all defined benefit pension plans was $855,859 and $831,919 at June 30, 2004 and 2003, respectively.

 

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

 

     Pension Benefits

    Other Postretirement Benefits

     2004

    2003

    2002

    2004

   2003

   2002

Components of Net Periodic (Income) Expense:

                                            

Service Cost-Benefits Earned During the Year

   $ 13,188     $ 11,263     $ 10,014     $ 1,673    $ 1,594    $ 1,341

Interest Cost on Projected Benefit Obligation

     51,089       52,276       51,203       10,766      8,258      8,028

Expected Return on Plan Assets

     (72,458 )     (76,403 )     (77,192 )     —        —        —  

Amortization of:

                                            

Transition Obligation (Asset)

     8       8       (4,517 )     46      46      46

Prior Service Cost

     3,080       2,965       2,797       31      31      31

Actuarial Loss (Gain)

     607       (2,398 )     (8,328 )     8,354      2,428      1,834
    


 


 


 

  

  

Net Periodic (Income) Expense

   $ (4,486 )   $ (12,289 )   $ (26,023 )   $ 20,870    $ 12,357    $ 11,280
    


 


 


 

  

  

 

Significant assumptions used in determining net periodic benefit cost for the fiscal years ended are as follows:

 

     Pension Benefits

    Other Postretirement Benefits

 
     2004

    2003

    2002

    2004

          2003      

    2002

 

Discount Rate

   6.0 %   7.25 %   7.5 %   6.0 %   7.25 %   7.5 %

Expected Return on Plan Assets

   8.75 %   9.0 %   9.0 %   n/a     n/a     n/a  

Compensation Increase Rate

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

 

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.

 

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 $28.4 million, $22.0 million and $0.1 million respectively for fiscal year 2004 and $26.5 million, $21.7 million and $0.1 million respectively for fiscal year 2003.

 

An additional pension obligation is required when the accumulated benefit obligation exceeds the sum of the fair value of plan assets and the accrued pension expense. At June 27, 2004, the Company’s additional pension obligation was $3.1 million, of which $1.3 million was included as a reduction in accumulated other comprehensive income, net of tax benefit of $0.9 million, and $0.9 million was included as an intangible asset as part of the other assets in the consolidated balance sheet. At June 29, 2003, the Company’s additional pension obligation was $4.5 million, of which $2.6 million was included as an increase in accumulated other comprehensive loss, net of tax benefit of $1.6 million, and $0.3 million was included as an intangible asset.

 

The postretirement benefit plans are essentially unfunded.

 

For measurement purposes a 10% 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 2010. 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 $16.1 million and would increase the service and interest cost by $0.9 million for the year. A corresponding decrease of one percentage point, would decrease the accumulated postretirement benefit by $15.0 million and decrease the service and interest cost by $0.9 million for the fiscal year.

 

36


Table of Contents

Notes…

 

Plan Assets

 

A Board of Directors appointed Investment Committee (“Committee”) manages the investment of the pension plan assets. The Committee has established and operates under an Investment Policy. It determines the asset allocation and target ranges based upon periodic asset/liability studies and capital market projections. The Committee retains external investment managers to invest the assets. The Investment Policy prohibits certain investment transactions, such as letter stock, commodity contracts, margin transactions and short selling, unless the Committee gives prior approval. Briggs & Stratton’s pension plans weighted-average asset allocations and target allocations at June 30, 2004, and 2003, by asset category are as follows:

 

Asset Category


   Target %

   Plan Assets at Year-end

 
      2004

    2003

 

Domestic bonds

   24%-34%    26 %   30 %

High yield

   3%-10%    7 %   7 %

Domestic equities

   36%-56%    48 %   45 %

International equities

   5%-15%    10 %   9 %

Alternatives

   2%-10%    5 %   5 %

Real estate

   4%-8%    4 %   4 %
         

 

          100 %   100 %
         

 

 

The plan’s investment strategy is based on an expectation that, over time, equity securities will provide higher total returns than debt securities. The plan primarily minimizes the risk of large losses through diversification of investments by asset class, by investing in different types of styles within the classes and by using a number of different managers. The Committee monitors the asset allocation and investment performance monthly, with a more comprehensive quarterly review with its consultant.

 

The plan’s expected return on assets is based on management’s and the Committee’s expectations of long-term average rates of return to be achieved by the plan’s investments. These expectations are based on the plan’s historical returns and expected returns for the asset classes in which the plan is invested.

 

Contributions

 

The Company does not expect to make any contributions to the pension plans in fiscal 2005.

 

Estimated Future Benefit Payments

 

Year Ending


   Pension Benefits

   Other Postretirement Benefits

   Qualified

   Non-Qualified

   Retiree Medical

   Retiree Life

   LTD

2005

   $ 60,004,000    $ 1,433,000    $ 25,390,000    $ 1,271,000    $ 208,000

2006

     58,148,000      1,451,000      27,507,000      1,291,000      149,000

2007

     58,634,000      1,461,000      28,889,000      1,311,000      98,000

2008

     58,550,000      1,461,000      29,121,000      1,330,000      100,000

2009

     58,576,000      1,461,000      28,817,000      1,348,000      102,000

2010-2014

     283,856,000      7,302,000      129,336,000      6,985,000      368,000

 

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 fiscal 2002, the net expense related to these plans was $1.6 million. 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 $4.6 million in 2004, $4.3 million in 2003 and $4.1 million in 2002.

 

37


Table of Contents

Notes…

 

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 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 6.25% and 6.00% for fiscal year 2004 and 2003, 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):

 

     2004

   2003

     Carrying
Amount


   Fair Value

   Carrying
Amount


   Fair Value

Long-term Debt -

                           

5.00% Convertible Notes Due 2006

   $ —      $ —      $ 140,000    $ 168,725

7.25% Notes Due 2007

   $ 89,403    $ 98,683    $ 89,217    $ 91,873

8.875% Notes Due 2011

   $ 271,159    $ 328,502    $ 270,587    $ 324,237

 

(15) Subsequent Event

 

On July 7, 2004 Briggs & Stratton Corporation and its subsidiary, Briggs & Stratton Power Products Group, LLC acquired Simplicity Manufacturing, Inc. for $227 million in cash plus certain transaction related expenses. Simplicity designs, manufactures and markets a wide variety of premium yard and garden tractors, lawn tractors, riding mowers, snow throwers, attachments, and other lawn and garden products like rototillers and chipper shredders. This acquisition will be accounted for using the purchase accounting provisions of SFAS No. 141 “Business Combinations”. While we have not completed our preliminary purchase price allocation, we have engaged a third party to assist in determining the fair value of the assets acquired. Simplicity has estimated net assets of approximately $75 million as of July 7, 2004.

 

(16) Separate Financial Information of Subsidiary Guarantors of Indebtedness

 

In June of 1997, Briggs & Stratton issued $100 million of 7.25% senior notes and in May 2001, the Company issued $275 million of 8.875% senior notes. In addition, Briggs & Stratton has a $275 million revolving credit facility that expires in May 2009 used to finance seasonal working capital needs.

 

Under the terms of Briggs & Stratton’s 8.875% 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”). The guarantee is a full and unconditional guarantee. 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. If Briggs & Stratton were to fail to make a payment of interest or principal on its

 

38


Table of Contents

Notes…

 

due date, the Guarantor is obligated to pay the outstanding Domestic Indebtedness. Briggs & Stratton had the following outstanding amounts related to the guaranteed debt (in thousands):

 

     June 27, 2004
Carrying
Amount


   Maximum
Guarantee


8.875% Senior Notes, due March 15, 2011

   $ 271,159    $ 275,000

7.25% Senior Notes, due September 15, 2007

   $ 89,403    $ 90,000

Revolving Credit Facility, expiring May 2009

   $ —      $ 275,000

 

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

 

BALANCE SHEET:

As of June 27, 2004


   Briggs & Stratton
Corporation


   Guarantor
Subsidiary


   Non-Gurantor
Subsidiaries


   Eliminations

    Consolidated

Current Assets

   $ 739,007    $ 243,300    $ 227,786    $ (228,100 )   $ 981,993

Investment in Subsidiary

     352,207      —        —        (352,207 )     —  

Noncurrent Assets

     471,395      175,439      8,326      —         655,160
    

  

  

  


 

     $ 1,562,609    $ 418,739    $ 236,112    $ (580,307 )   $ 1,637,153
    

  

  

  


 

Current Liabilities

   $ 226,627    $ 111,992    $ 180,791    $ (218,849 )   $ 300,561

Long-Term Debt

     360,562      —        —        —         360,562

Other Long-Term Obligations

     148,574      9,861      —        —         158,435

Shareholders’ Equity

     826,846      296,886      55,321      (361,458 )     817,595
    

  

  

  


 

     $ 1,562,609    $ 418,739    $ 236,112    $ (580,307 )   $ 1,637,153
    

  

  

  


 

As of June 29, 2003


                         

Current Assets

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

Investment in Subsidiary

     333,848      —        —        (333,848 )     —  

Noncurrent Assets

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

  

  

  


 

     $ 1,434,484    $ 339,970    $ 103,227    $ (402,488 )   $ 1,475,193
    

  

  

  


 

Current Liabilities

   $ 256,476    $ 51,610    $ 53,846    $ (60,537 )   $ 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
    

  

  

  


 

     $ 1,434,484    $ 339,970    $ 103,227    $ (402,488 )   $ 1,475,193
    

  

  

  


 

 

39


Table of Contents

Notes…

 

STATEMENT OF EARNINGS:

For the Fiscal Year Ended June 27, 2004


   Briggs &
Stratton
Corporation


    Guarantor
Subsidiary


    Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Net Sales

   $ 1,562,114     $ 460,122     $ 152,236     $ (227,108 )   $ 1,947,364  

Cost of Goods Sold

     1,205,950       405,720       120,253       (224,431 )     1,507,492  
    


 


 


 


 


Gross Profit

     356,164       54,402       31,983       (2,677 )     439,872  

Engineering, Selling, General and Administrative Expenses

     155,830       24,029       25,804       —         205,663  
    


 


 


 


 


Income from Operations

     200,334       30,373       6,179       (2,677 )     234,209  

Interest Expense

     (37,236 )     (2 )     (84 )     (343 )     (37,665 )

Other (Expense) Income, Net

     28,787       (55 )     983       (21,255 )     8,460  
    


 


 


 


 


Income Before Provision for Income Taxes

     191,885       30,316       7,078       (24,275 )     205,004  

Provision for Income Taxes

     64,473       11,574       1,545       (8,702 )     68,890  
    


 


 


 


 


Net Income

   $ 127,412     $ 18,742     $ 5,533     $ (15,573 )   $ 136,114  
    


 


 


 


 


For the Fiscal Year Ended June 29, 2003


                              

Net Sales

   $ 1,369,785     $ 319,000     $ 116,875     $ (148,027 )   $ 1,657,633  

Cost of Goods Sold

     1,107,515       279,436       88,158       (145,555 )     1,329,554  
    


 


 


 


 


Gross Profit

     262,270       39,564       28,717       (2,472 )     328,079  

Engineering, Selling, General and Administrative Expenses

     141,497       20,776       15,884       —         178,157  
    


 


 


 


 


Income from Operations

     120,773       18,788       12,833       (2,472 )     149,922  

Interest Expense

     (39,912 )     (10 )     (644 )     177       (40,389 )

Other (Expense) Income, Net

     28,177       (346 )     (8,941 )     (9,845 )     9,045  
    


 


 


 


 


Income Before Provision for Income Taxes

     109,038       18,432       3,248       (12,140 )     118,578  

Provision for Income Taxes

     34,892       6,328       2,856       (6,136 )     37,940  
    


 


 


 


 


Net Income

   $ 74,146     $ 12,104     $ 392     $ (6,004 )   $ 80,638  
    


 


 


 


 


For the Fiscal Year Ended June 30, 2002


                              

Net Sales

   $ 1,334,921     $ 216,243     $ 80,976     $ (102,840 )   $ 1,529,300  

Cost of Goods Sold

     1,104,862       195,630       62,340       (103,496 )     1,259,336  
    


 


 


 


 


Gross Profit

     230,059       20,613       18,636       656       269,964  

Engineering, Selling, General and Administrative Expenses

     123,165       18,421       12,126       —         153,712  
    


 


 


 


 


Income from Operations

     106,894       2,192       6,510       656       116,252  

Interest Expense

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

Other Income, Net

     14,800       8       13,521       (19,638 )     8,691  
    


 


 


 


 


Income Before Provision for Income Taxes

     78,094       2,150       19,142       (18,876 )     80,510  

Provision for Income Taxes

     26,552       761       1,567       (1,490 )     27,390  
    


 


 


 


 


Net Income

   $ 51,542     $ 1,389     $ 17,575     $ (17,386 )   $ 53,120  
    


 


 


 


 


 

40


Table of Contents

Notes…

 

STATEMENT OF CASH FLOWS:

For the Fiscal Year Ended June 27, 2004


   Briggs & Stratton
Corporation


    Guarantor
Subsidiary


    Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

CASH FLOWS FROM OPERATING ACTIVITIES:

                                        

Net Income

   $ 127,412     $ 18,742     $ 5,533     $ (15,573 )   $ 136,114  

Adjustments to Reconcile Net Income to Net Cash Provided by (Used by) Operating Activities:

                                        

Depreciation and Amortization

     62,995       3,154       749       —         66,898  

Equity in Earnings of Unconsolidated Affiliates

     (17,274 )     —         (500 )     9,898       (7,876 )

Loss on Disposition of Plant and Equipment

     6,252       163       975       —         7,390  

Provision for Deferred Income Taxes

     5,604       7,196       —         —         12,800  

Changes in Operating Assets and Liabilities:

                                        

Increase in Receivables

     (34,485 )     (10,492 )     (132,053 )     148,442       (28,588 )

Increase in Inventories

     (61,003 )     (63,860 )     (5,475 )     1,744       (128,594 )

(Increase) Decrease in Prepaid Expenses and Other Current Assets

     (76 )     645       1,448       —         2,017  

Increase in Accounts Payable, Accrued Liabilities and Income Taxes

     24,386       2,144       108,539       (130,373 )     4,696  

Increase in Prepaid Pension

     (6,022 )     (10 )     (38 )     —         (6,070 )

Other, Net

     (15,086 )     (160 )     2,223       —         (13,023 )
    


 


 


 


 


Net Cash Provided by (Used by) Operating Activities

     92,703       (42,478 )     (18,599 )     14,138       45,764  
    


 


 


 


 


CASH FLOWS FROM INVESTING ACTIVITIES:

                                        

Additions to Plant and Equipment

     (43,526 )     (5,518 )     (3,918 )     —         (52,962 )

Proceeds Received on Disposition of Plant and Equipment

     659       61       —         —         720  

Refund of Cash Paid for Acquisition

     5,686       —         —         —         5,686  

Other, Net

     4,617       —         (225 )     —         4,392  
    


 


 


 


 


Net Cash Used by Investing Activities

     (32,564 )     (5,457 )     (4,143 )     —         (42,164 )
    


 


 


 


 


CASH FLOWS FROM FINANCING ACTIVITIES:

                                        

Net (Repayments) Borrowings on Loans and Notes Payable

     (50,550 )     51,042       17,740       (18,067 )     165  

Issuance Cost of Debt

     (1,789 )     —         —         —         (1,789 )

Cash Dividends Paid

     (30,408 )     —         (3,929 )     3,929       (30,408 )

Proceeds from Exercise of Stock Options

     45,314       —         —         —         45,314  
    


 


 


 


 


Net Cash (Used by) Provided by Financing Activities

     (37,433 )     51,042       13,811       (14,138 )     13,282  
    


 


 


 


 


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

     —         (675 )     1,372       —         697  
    


 


 


 


 


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     22,706       2,432       (7,559 )     —         17,579  

Cash and Cash Equivalents, Beginning of Year

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


 


 


 


 


Cash and Cash Equivalents, End of Year

   $ 326,809     $ 4,007     $ 11,578     $ —       $ 342,394  
    


 


 


 


 


 

41


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

   $ 74,146     $ 12,104     $ 392     $ (6,004 )   $ 80,638  

Adjustments to Reconcile Net Income to Net Cash Provided by (Used by) Operating Activities:

                                        

Depreciation and Amortization

     60,268       2,651       607       —         63,526  

Equity in (Earnings) Loss of Unconsolidated Affiliates

     (9,054 )     —         177       3,653       (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