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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________ 
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2019
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
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13083397&doc=17
BRIGGS & STRATTON CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin
 
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
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock (par value $0.01 per share)
BGG
New York Stock Exchange
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o  No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨  
Smaller reporting company
¨
 
 
Emerging growth company
¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No   x
The aggregate market value of Common Stock held by nonaffiliates of the registrant was approximately $561.6 million based on the last reported sale price of such securities as of December 30, 2018, the last business day of the most recently completed second fiscal quarter.
Number of Shares of Common Stock Outstanding at August 16, 2019: 42,055,973.

DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy statement for the Annual Meeting to be held on October 31, 2019.






BRIGGS & STRATTON CORPORATION
FISCAL 2019 FORM 10-K
TABLE OF CONTENTS
PART I
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
 
Item 15.
Item 16.
 
Cautionary Statement on Forward-Looking Statements
This report contains certain 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”, “plan”, “project”, and similar expressions are intended to identify forward-looking statements. The forward-looking statements are based on the Company’s current views and assumptions and involve risks and uncertainties that include, among other things, the ability to successfully forecast demand for its products; changes in interest rates and foreign exchange rates; the effects of weather on the purchasing patterns of consumers and original equipment manufacturers (OEMs); actions of engine manufacturers and OEMs with whom the Company competes; changes in laws and regulations; changes in customer and OEM demand; changes in prices of raw materials and parts that the Company purchases; changes in domestic and foreign economic conditions (including effects from the U.K.’s decision to exit the European Union); the ability to bring new productive capacity on line efficiently and with good quality; outcomes of legal proceedings and claims; the ability to realize anticipated savings from restructuring actions; and other factors disclosed from time to time in its SEC filings or otherwise, including the factors discussed in Item 1A, Risk Factors, of this Annual Report on Form 10-K and in the Company's periodic reports on Form 10-Q. The Company is not undertaking any obligation to update forward-looking statements or other statements it may make even though these statements may be affected by events or circumstances occurring after the forward-looking statements or other statements were made.






PART I
ITEM 1.
BUSINESS
Briggs & Stratton Corporation ("Briggs & Stratton" or the “Company”) is focused on providing power to get work done and make people's lives better. Briggs & Stratton is the world’s largest producer of gasoline engines for outdoor power equipment, and is a leading designer, manufacturer and marketer of power generation, pressure washer, lawn and garden, turf care and job site products through its Briggs & Stratton®, Simplicity®, Snapper®, Ferris®, Vanguard®, Allmand®, Billy Goat®, Hurricane®, Murray®, Branco® and Victa® brands. Briggs & Stratton products are designed, manufactured, marketed and serviced in over 100 countries on six continents.
The Company conducts its operations in two reportable segments: Engines and Products. Further information about Briggs & Stratton’s business segments is contained in Note 9 of the Notes to Consolidated Financial Statements.
The Company’s internet address is www.basco.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, Finance, and Nominating and Governance Committees, Corporate Governance Guidelines, Stock Ownership Guidelines and code of business conduct and ethics contained in the Briggs & Stratton Integrity Manual are available on the Company’s website and are available in print to any shareholder upon request to the Corporate Secretary. The information contained on and linked from the Company's website is not incorporated by reference into this Annual Report on Form 10-K.
Engines Segment
General
Briggs & Stratton manufactures four-cycle aluminum alloy gasoline engines with gross horsepower ranging from 2.5hp up to 40hp and torque ranging from 4.50 ft-lbs gross torque to 21.00 ft-lbs gross torque. The Company’s engines are used primarily by the lawn and garden equipment industry, which accounted for 89% of the Engines segment's fiscal 2019 engine sales to OEMs. Major lawn and garden equipment applications include walk-behind lawn mowers, riding lawn mowers, garden tillers and snow throwers. The remaining 11% of engine sales to OEMs in fiscal 2019 was for use on products for industrial, construction, agricultural and other commercial and consumer applications that include portable and standby generators, pumps and pressure washers. Many retailers specify the Company's engines on the power equipment they sell and the Briggs & Stratton logo is often featured prominently on a product because of the appeal and reputation of the brand. The Company mainly sells commercial engines under the Vanguard® name.
In fiscal 2019, approximately 30% of the Engines segment net sales was derived from sales in international markets, primarily to customers in Europe. The Company 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, Brazil, Canada, China, the Czech Republic, England, France, Germany, India, Italy, Japan, Malaysia, Mexico, New Zealand, Russia, South Africa, Spain, and Sweden. 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 information about its foreign operations is in Note 9 of the Notes to Consolidated Financial Statements.
The Company's engines are sold primarily by its worldwide sales force through direct interaction with customers. The Company’s marketing staff and engineers provide support and technical assistance to its sales force.
The Engines segment also manufactures replacement engines and service parts and sells them to sales and service distributors. The Company owns 38% of Power Distributors LLC, a joint venture with a national

1





distribution network of service parts in the United States. The Company's remaining domestic distributors are independently owned and operated.
The Company owns its principal international distribution centers, but also uses independently owned and operated distributors. These distributors supply service parts and replacement engines directly to independently owned, authorized service dealers throughout the world. These distributors and service dealers incorporate the Company’s commitment to reliability and service.
Customers
The Company's engine sales are primarily to OEMs. The Company's major external engine customers in fiscal years 2019, 2018 and 2017 were MTD Products Inc. (MTD), Husqvarna Outdoor Products Group (HOP), Deere & Company, and Power Distributors, LLC. Engines segment sales to the top three customers combined were 44%, 42% and 47% of Engines segment sales in fiscal 2019, 2018 and 2017, respectively. Under purchasing plans available to all of its gasoline engine customers, Briggs & Stratton typically enters into annual engine supply arrangements. In certain cases, the Company has entered into longer supply arrangements of two to three years.
The Company believes that in fiscal 2019 approximately 71% of all residential lawn and garden powered equipment sold in the United States was sold through mass merchandisers such as The Home Depot, Inc. (The Home Depot), Lowe’s Companies, Inc. (Lowe’s), Sears Holdings Corporation (Sears) and Wal-Mart Stores, Inc. (Wal-Mart). Given the buying power of the mass merchandisers, Briggs & Stratton, through its customers, has continued to experience pricing pressure; however, the development of new and innovative products may assist the Company and its customers in realizing higher margins. The Company believes commercial engines are mainly sold through independent dealer networks.
Competition
The Company’s major competitors in engine manufacturing are Honda Motor Co., Ltd. (Honda), Kawasaki Heavy Industries, Ltd. (Kawasaki) and Kohler Co. (Kohler). Several Japanese and Chinese small engine manufacturers, of which Honda and Kawasaki are the largest, compete directly with the Company in world markets in the sale of engines to other OEMs and indirectly through their sale of end products.
The Company believes it has a significant share of the worldwide market for engines that power residential outdoor equipment.
The Company believes the major areas of competition from all engine manufacturers include product quality, brand, price, delivery and service. Other factors affecting competition are short-term market share objectives, short-term profit objectives, exchange rate fluctuations, technology, new product innovation, product support, distribution strength, and advertising. The Company believes its technology, product value, distribution, marketing, and service reputation have given it strong brand name recognition and enhanced 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 consumer sentiment, employment levels, new and existing home sales and weather conditions. Engine sales in the Company’s third fiscal 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, the Company 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 the Company. 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 the Company in the first, second and the beginning of the third fiscal quarters. The pattern generally results in higher cash flow in the

2





latter portion of the third fiscal quarter and in the fourth fiscal quarter as inventories are liquidated and receivables are collected.
Manufacturing
The Company manufactures engines and parts at the following locations: Auburn, Alabama; Statesboro, Georgia; Murray, Kentucky; Poplar Bluff, Missouri; Wauwatosa, Wisconsin; and Chongqing, China. Briggs & Stratton has a parts distribution center in Menomonee Falls, Wisconsin and Wijchen, Netherlands. The Engines segment also purchases certain products under contract manufacturing agreements.
The Company manufactures a majority of the structural components used in its engines, including aluminum die castings, carburetors and ignition systems. The Company purchases certain parts such as piston rings, spark plugs, valves, ductile and grey iron castings, plastic components, some stampings and screw machine parts and smaller quantities of other components. Raw material purchases consist primarily of aluminum and steel. The Company believes its sources of supply are adequate.
The Company 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 and punch pressed components in the United States. During fiscal 2018, the Company announced its business optimization program. The program included, among other things, moving production of larger commercial engines, which were sourced from the joint venture with Daihatsu Motor Company, to two of its existing U.S. plants. Production of Vanguard engines in the Company’s U.S. plants began in the fourth quarter of fiscal 2018 and additional lines were phased in by the end of the fiscal 2019.
On August 15, 2019, the Company announced a plan to consolidate the Company’s production of small vertical shaft engines into its Poplar Bluff, Missouri facility. This decision was made after a comprehensive evaluation of the Company’s manufacturing operations. The Company’s Murray, Kentucky facility currently manufactures small vertical shaft engines and will be closed as a result of this consolidation.
 
Products Segment
General
The Products segment’s principal product lines include lawn and garden power equipment, turf care products, portable and standby generators, pressure washers, snow throwers, and job site products. The Products segment sells its products primarily through multiple channels of retail distribution, including consumer home centers, warehouse clubs, mass merchants, independent dealers and distributors, and on-line merchants. The Company sells its lawn and garden products, turf care products, snow throwers, and standby generators primarily through an independent dealer network and sells its pressure washers and portable generators primarily through the U.S. mass retail channel. To support its international business, the Products segment has leveraged the existing Briggs & Stratton worldwide distribution network and regional sales offices. The Company sells its job site products primarily into the rental channel to the construction and infrastructure, mining and oil & gas industries.
Beginning in fiscal 2014, the Company joined with one of its independent distributors to form Power Distributors, LLC to distribute certain service parts in the United States. During fiscal years 2014 through 2016, the venture acquired other independent distributors. In fiscal 2016, the venture achieved a national distribution network. 
The Products segment product lines are marketed under its own brands such as Briggs & Stratton®, Simplicity®, Snapper®, Snapper Pro®, Ferris®, Allmand®, Billy Goat®, Hurricane®, Murray®, Branco® and Victa®, as well as other brands such as Craftsman and Troy-Bilt.
Customers
Historically, the Products’ segment major customers have included Lowe’s, Sears, PACE Inc., The Home Depot, Bunnings Warehouse, as well as numerous other distributors and dealers. Sales to the top three customers combined were 29%, 24% and 25% of Products segment net sales in fiscal 2019, 2018 and 2017, respectively. Commercial mowers are primarily sold through independent dealers.

3





Competition
The principal competitive factors in the outdoor power products industry include price, service, product performance, brand, innovation and delivery. The Products segment has various competitors, depending on the type of equipment. Primary competitors include: Honda (portable generators, pressure washers and lawn and garden equipment), Generac Power Systems, Inc. (portable and standby generators and job site products), Alfred Karcher GmbH & Co. (pressure washers), Techtronic Industries (pressure washers and portable generators), Deere & Company (commercial and consumer lawn mowers), MTD (consumer lawn mowers), The Toro Company (commercial and consumer lawn mowers), Scag Power Equipment, a Division of Metalcraft of Mayville, Inc. (commercial lawn mowers), and HOP (commercial and consumer lawn mowers).
Seasonality of Demand
A significant portion of Products’ sales are subject to seasonal patterns. Due to seasonal and regional weather factors, sales of pressure washers and lawn and garden powered equipment are typically higher during the third and fourth fiscal quarters than at other times of the year. Sales of portable generators and snow throwers are typically higher during the first and second fiscal quarters and can spike during weather related power outage events.
Manufacturing
The Products segment's manufacturing facilities are located in Sherrill, New York; Munnsville, New York; Wauwatosa, Wisconsin; Holdrege, Nebraska; Lee's Summit, Missouri; and Kemps Creek, Australia. The Products segment also purchases certain powered equipment under contract manufacturing agreements.
The Products segment manufactures core components for its products, where such integration improves operating profitability by providing lower costs.
The Products segment purchases engines from the Engines segment, as well as from Honda, Kawasaki and Kohler. The Products segment has not typically experienced any difficulty obtaining necessary engines or other purchased components.
The Products segment assembles products for the international markets at its U.S. and Australian locations and through contract manufacturing agreements with other OEMs and suppliers.
During fiscal 2018, the Company announced its business optimization program. The program included, among other things, expanding capacity and moving the commercial turf equipment operation into a larger, more efficient facility in Sherrill, New York close to the facility in Munnsville, New York. Production of Ferris commercial mowers began in the new facility in the fourth quarter of fiscal 2018 and all remaining production was transitioned in the third quarter of fiscal 2019.
Consolidated
General Information
The Company holds patents on features incorporated in its products; however, the success of the Company’s business is not considered to be primarily dependent upon patent protection. The Company owns several trademarks which it believes significantly affect a consumer’s choice of outdoor powered equipment and job site products, and therefore create value. Licenses, franchises and concessions are not a material factor in the Company’s business.
For the fiscal years ended June 30, 2019, July 1, 2018 and July 2, 2017, the Company spent approximately $22.8 million, $23.6 million and $23.0 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 the Company during fiscal 2019 and fiscal 2018 was 5,251 and 5,258, respectively. Employment in fiscal 2019 ranged from a high of 5,341 in December 2019 to a low of 5,152 in August 2018.

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Export Sales
Export sales for fiscal 2019, 2018 and 2017 were $316.1 million (17% of net sales), $324.4 million (17% of net sales), and $337.1 million (19% of net sales), respectively. These sales were principally to customers in Europe, Asia, Australia, and Canada.
Refer to Note 9 of the Notes to Consolidated Financial Statements for financial information about geographic areas. Also, refer to Item 7A of this Form 10-K and Note 15 of the Notes to Consolidated Financial Statements for information about Briggs & Stratton’s foreign exchange risk management.
ITEM 1A.
RISK FACTORS
In addition to the risks referred to elsewhere in this Annual Report on Form 10-K, the following risks, among others, may have affected, and in the future could materially affect, the Company and its subsidiaries’ business, financial condition or results of operations.
Demand for products fluctuates significantly due to seasonality. In addition, changes in the weather and consumer confidence impact demand.
Sales of our products are subject to seasonal and consumer buying patterns. Consumer demand in our markets can be reduced by unfavorable weather and weak consumer confidence. Although we manufacture throughout the year, our sales are concentrated in the second half of our fiscal year. This operating method requires us to anticipate demand of our customers many months in advance. If we overestimate or underestimate demand during a given year, we may not be able to adjust our production quickly enough to avoid excess or insufficient inventories, and that may in turn limit our ability to maximize our potential sales or maintain optimum working capital levels.
We have only a limited ability to pass through cost increases in our raw materials to our customers during the year.
We generally enter into annual purchasing plans with our largest customers, so our ability to raise our prices during a particular year to reflect increased raw materials costs is limited.
A significant portion of our net sales comes from major customers and the loss of any of these customers would negatively impact our financial results.
In fiscal 2019, our three largest customers accounted for 27% of our consolidated net sales. The loss of any of these customers or a significant portion of the business from one or more of our key customers would significantly impact our net sales and profitability.
A significant change or disruption in the U.S. retail market for lawn and garden products could have an adverse impact on our business.
The retail market in the U.S. for lawn and garden products is concentrated with a few large traditional retailers. A disruption or significant change at any of these large traditional retailers could have an adverse impact on our customers and on our business.
Changes in environmental, tax, health care or other laws and regulations could require extensive changes in our operations or to our products.
Our operations and products are subject to a variety of foreign, federal, state and local laws and regulations governing, among other things, emissions to air, discharges to water, noise, the generation, handling, storage, transportation, treatment and disposal of waste and other materials and health and safety matters as well as taxes, health care and data privacy. We do not expect these laws and regulations to have an adverse effect on us, but we cannot be certain that these or proposed changes in other applicable laws or regulations, or their enforcement, will not adversely affect our business or financial condition in the future.

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Our international operations are subject to risks and uncertainties, which could adversely affect our business or financial results.
In fiscal 2019, we derived approximately 26% of our consolidated net sales from international markets, primarily Europe. Our international operations are subject to various economic, political, and other risks and uncertainties that could adversely affect our business and operating results, including, but not limited to, regional or country specific economic downturns, fluctuations in currency exchange rates, trade protection measures, tariffs, and other border taxes, labor practices, complications in complying with, or exposure to liability under, a variety of laws and regulations, including anti-corruption and export control laws and regulations, political instability and significant natural disasters and other events or factors impacting local infrastructure.
Actions of our competitors could reduce our sales or profits.
Our markets are highly competitive and we have a number of significant competitors in each market. Competitors may reduce their costs, lower their prices or introduce innovative products that could adversely affect our sales or profits. In addition, our competitors may focus on reducing our market share to improve their results.
We are restricted by the terms of the outstanding Senior Notes and our other debt, which could adversely affect us.
The indenture relating to the Senior Notes and our multicurrency credit agreement include a number of financial and operating restrictions, which may prevent us from capitalizing on business opportunities and taking some corporate actions. These covenants could adversely affect us by limiting our ability to plan for or react to market conditions or to meet our capital needs. These covenants include, among other things, restrictions on our ability to:
incur more debt;
pay dividends, redeem stock or make other distributions;
make certain investments;
create liens;
transfer or sell assets;
merge or consolidate; and
enter into transactions with our affiliates.
In addition, our multicurrency credit agreement contains financial covenants that, among other things, require us to maintain a minimum interest coverage ratio and impose a maximum average leverage ratio.
Our failure to comply with the restrictive covenants described above could result in an event of default, which, if not cured or waived, could result in us being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition could be adversely affected by increased costs and rates.
On August 13, 2019, we entered into a consent memorandum pursuant to our revolving multicurrency credit agreement. Pursuant to the consent memorandum, the average leverage ratio covenant will not be tested for the computation period ended June 30, 2019 and no failure (or anticipated failure) by us to comply with associated restrictions for the specified computation period will constitute (or be deemed to have constituted) a default or an event of default under the credit agreement.  Additionally, no default shall be deemed to exist under the credit agreement for any anticipated failure by us to comply with such restrictions for the computation period ending on or about September 30, 2019. The Company was in compliance with all other financial covenants of the credit agreement as of June 30, 2019, and the failure or anticipated failure to comply with the average leverage ratio under the Credit Agreement is not considered to be a cross default for purposes of the Company’s Senior Notes.


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Although we are in the process of refinancing our revolving credit agreement which, among other things, reduces the risk of potential violations of the covenant in the future, we cannot be sure we will not breach this or any other covenant in the future and we cannot guarantee that we will be able to refinance the revolving credit agreement with terms acceptable to us. In addition, if we borrow additional funds under the credit agreement, we may be required to increase the borrowing limit under the credit agreement or seek additional sources of borrowing. Given current credit and debt markets, there is no assurance that if we were to seek additional credit or debt, it would be available when needed or if it is available, the cost or terms and conditions would be acceptable.
Our level of debt and our ability to obtain debt financing could adversely affect our operating flexibility and put us at a competitive disadvantage.
Our level of debt and the limitations imposed on us by the indenture relating to the Senior Notes (as defined below) and our other credit agreements could have important consequences, including the following:
we will have to use a portion of our cash flow from operations for debt service rather than for our operations;
we may not be able to obtain additional debt financing for future working capital, capital expenditures or other corporate purposes or may have to pay more for such financing;
some or all of the debt under our current or future revolving credit facilities will be at a variable interest rate, making us more vulnerable to increases in interest rates;
we could be less able to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions;
we may be more vulnerable to general adverse economic and industry conditions; and
we may be disadvantaged compared to competitors with less leverage.
The terms of the indenture for the 6.875% Senior Notes due December 2020 (the "Senior Notes") do not fully prohibit us from incurring substantial additional debt in the future and our revolving credit facilities permit additional borrowings, subject to certain conditions. If incremental debt is added to our current debt levels, the related risks we now face could intensify.
We expect to obtain the money to pay our expenses and to pay the principal and interest on the outstanding Senior Notes, the credit facilities and other debt primarily from our operations or by refinancing some or all of our existing debt. Our ability to meet our expenses thus depends on our future performance, which will be affected by financial, business, economic and other factors. We will not be able to control many of these factors, such as economic conditions in the markets where we operate and pressure from competitors. We cannot be certain that the money we earn will be sufficient to allow us to pay principal and interest on our debt and meet our other obligations. If we do not have enough money, we may be required to refinance all or part of our existing debt, sell assets or borrow more money. We cannot guarantee that we will be able to do so on terms acceptable to us. In addition, the terms of existing or future debt agreements, including the revolving credit facilities and our indentures, may restrict us from adopting certain of these alternatives.
Disruptions caused by labor disputes or organized labor activities or an inability to acquire and retain skill sets needed could harm our business and reputation.
The Company has collective bargaining agreements with its unions. These collective bargaining agreements cover approximately 10% of the total employees as of June 30, 2019. The Labor Agreement with United Steelworkers Local 2-232 expired on July 31, 2017. The Company and the union have met and the Company implemented its final offer to the Union on June 14, 2018, but remains hopeful that the parties will continue to work together to reach a new agreement. This agreement covers 557 hourly employees in the Wauwatosa, Germantown and Menomonee Falls, Wisconsin facilities. The Company has another collective bargaining agreement with its remaining union workforce in Georgia, which expires during calendar 2020, however, it is anticipated that location will be closing in December 2019. At the present time the Company does not anticipate a work stoppage.
Worldwide economic conditions may adversely affect our industry, business and results of operations.
General worldwide economic conditions have experienced volatility in recent years due to the sequential effects of the subprime lending crisis, general credit market crisis, sovereign debt crisis, collateral effects on


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the finance and banking industries, changes in energy costs, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns. These conditions make it difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and they may cause U.S. and foreign OEMs and consumers to slow spending on our products. We cannot predict the timing or duration of any future economic slowdown or the timing or strength of a subsequent economic recovery, worldwide or in the specific end markets we serve. If the consumer and commercial lawn and garden markets significantly deteriorate due to these economic effects, our business, financial condition and results of operations will likely be adversely affected. Additionally, our stock price could decrease if investors have concerns that our business, financial condition and results of operations will be negatively impacted by a worldwide economic downturn.
In addition, in June 2016, the United Kingdom (the "U.K.") held a referendum in which voters approved an exit from the European Union (the "E.U."), commonly referred to as "Brexit". Negotiations between the U.K. and E.U are underway to determine the terms of Brexit. Given the lack of comparable precedent and the status of the negotiations, it is unclear what financial, trade and legal implications Brexit will have and how such withdrawal would affect us. Brexit could disrupt the free movement of goods, services and people between the U.K. and the E.U., undermine bilateral cooperation in key policy areas and significantly disrupt trade between the U.K. and the E.U. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. Moreover, Brexit could lead to changes in the regulatory environment for engines, and new or heightened regulatory and approval requirements may increase our expenses or limit or delay our ability to sell our engines or other products in those markets. The withdrawal of the U.K. from the E.U. may also create global economic uncertainty, which may cause our customers to closely monitor their costs and reduce their spending budgets. Any of these effects of Brexit, among others, could adversely affect our business, financial condition, operating results and cash flows.
We have goodwill and intangible assets, which were written down in fiscal 2016 and in prior years. If we determine that goodwill and other intangible assets have become further impaired in the future, net income in such years would be adversely affected.
At June 30, 2019, goodwill and other intangible assets represented approximately 17.2% of our total assets. Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. We are required to evaluate whether our goodwill and indefinite-lived intangible assets have been impaired on an annual basis, or more frequently if indicators of impairment exist. In fiscal 2019, 2018 and fiscal 2017, there was no impairment of goodwill or other intangible assets. Estimating the fair value of individual reporting units and indefinite-lived intangible assets requires us to make assumptions and estimates regarding our future plans, as well as industry and economic conditions. These assumptions and estimates include projected net sales, operating income margin, working capital, market-based discount rates, and other market factors.
At June 30, 2019, the Job Site reporting unit had $12.0 million of goodwill, the Turf & Consumer reporting unit had $20.1 million of goodwill, and the Engines reporting unit had $137.1 million of goodwill. The Jobsite reporting unit fair value exceeded the carrying value by less than 10% as of the latest 2019 impairment testing date. The discount rate the Company used to determine the fair value was 14.3%. The Turf & Consumer reporting unit fair value exceeded the carrying value by more than 10% but less than 20% as of the latest 2019 impairment testing date. The discount rate the Company used to determine the fair value was 14.2%.The Engines reporting unit fair value exceeded the carrying value by more than 20% as of the latest 2019 impairment testing date. The discount rate the Company used to determine the fair value was 14.9%. If current expectations of future growth rates are not met or market factors outside of our control, such as discount rates, change significantly, then one or more reporting units or intangible assets might become impaired in the future. Any additional write-down of our goodwill or intangible assets could adversely affect our results of operations.



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We are subject to litigation, including product liability, patent infringement, and warranty claims, that may adversely affect our business and results of operations.
We are a party to litigation that arises in the normal course of our business operations, including product warranty and liability (strict liability and negligence) claims, patent and trademark matters, contract disputes and environmental, asbestos, employment and other litigation matters. See Note 13, “Commitments and Contingencies,” to the Consolidated Financial Statements for a description of unresolved legal actions. We face an inherent business risk of exposure to product liability and warranty claims in the event that the use of our products is alleged to have resulted in injury or other damage or our products are alleged to be defective. In addition, we face an inherent risk that our competitors will allege that aspects of our product designs infringe their protected intellectual property. While we currently maintain general liability and product liability insurance coverage in amounts that we believe are adequate, we cannot be sure that we will be able to maintain this insurance on acceptable terms or that this insurance will provide sufficient coverage against potential liabilities that may arise. Any claims brought against us, with or without merit, may have an adverse effect on our business and results of operations as a result of potential adverse outcomes, the expenses associated with defending such claims, the diversion of our management’s resources and time and the potential adverse effect to our business reputation.
Our pension and postretirement benefit plan obligations are currently underfunded, and we may have to make significant cash payments to some or all of these plans, which would reduce the cash available for our businesses.
We have unfunded obligations under our domestic and foreign pension and postretirement benefit plans. As of June 30, 2019, our pension plans were underfunded by approximately $225 million. The funded status of our pension plans is dependent upon many factors, including returns on invested assets, the level of certain market interest rates, the mortality tables used, and the discount rate used to determine pension obligations. Unfavorable returns on the plan assets or unfavorable changes in applicable laws or regulations could materially change the timing and amount of required plan funding, which would reduce the cash available for our businesses. In addition, a decrease in the discount rate used to determine pension obligations could result in an increase in the valuation of pension obligations, which could affect the reported funding status of our pension plans and future contributions, as well as the periodic pension cost in subsequent fiscal years.
Our dependence on, and the price of, raw materials may adversely affect our profits.
The principal raw materials used to produce our products are aluminum and steel. We source raw materials on a global or regional basis, and the prices of those raw materials are susceptible to significant price fluctuations due to supply/demand trends, transportation costs, government regulations and tariffs, changes in currency exchange rates, price controls, the economic climate and other unforeseen circumstances. If we are unable to pass on raw material price increases to our customers, our future profitability may be adversely affected.
We may be adversely affected by health and safety laws and regulations.
We are subject to various laws and regulations relating to the protection of human health and safety and have incurred and will continue to incur capital and other expenditures to comply with these regulations. Failure to comply with regulations could subject us to future liabilities, fines or penalties or the suspension of production, as well as damage our reputation.
The operations and success of our Company can be impacted by natural disasters, terrorism, acts of war, international conflict and political and governmental actions, which could harm our business.
Natural disasters, acts or threats of war or terrorism, international conflicts and the actions taken by the United States and other governments in response to such events could cause damage or disrupt our business operations, our suppliers or our customers, and could create political or economic instability, any of which could have an adverse effect on our business. Although it is not possible to predict such events or their consequences, these events could decrease demand for our products, could make it difficult or impossible for us to deliver products or could disrupt our supply chain. We may also be impacted by actions by foreign governments, including currency devaluation, tariffs and nationalization, where our facilities, customers and/or suppliers are located. Furthermore, as a result of changes to U.S. administrative policy, there may be changes to existing trade agreements, like the North American Free Trade Agreement, greater restrictions on free trade generally, or the enactment of or increases in tariffs, which could have an adverse impact on our


9





operating results and financial position. Such changes to foreign or U.S. policies could also disrupt manufacturing and commercial operations. In addition, our foreign operations make us subject to certain U.S. and foreign laws and regulations, including the Export Administration Regulations administered by the U.S. Department of Commerce, the trade sanctions laws and regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control, the Foreign Corrupt Practices Act, and the U.K. Bribery Act. A violation of these laws and regulations could adversely affect our business, financial condition, and results of operations and reputation.
We are subject to tax laws and regulations in many jurisdictions, and the inability to successfully defend claims from taxing authorities could adversely affect our operating results and financial position.
We conduct business in many countries, which requires us to interpret the tax laws and rulings in each of those taxing jurisdictions. Due to the subjectivity of tax laws between those jurisdictions as well as the subjectivity of factual interpretations, our estimates of tax liabilities may differ from actual payments or assessments. Claims from taxing authorities related to these differences could have an adverse impact on our operating results and financial position.
If we fail to remain current with changes in gasoline engine technology or if the technology becomes less important to customers in our markets due to the impact of alternative fuels or power sources, our results may be negatively affected. In addition, if we are unable to continue to enhance existing products, as well as develop and market new products, that respond to customer needs and preferences and achieve market acceptance, our results may be negatively impacted.
Our ability to remain current with changes in gasoline engine technology may significantly affect our business. Any advances in gasoline engine technology, including the impact of alternative fuels or power sources, may inhibit our ability to compete with other manufacturers. Our competitors may also be more effective and efficient at integrating new technologies.
Through our Products segment, we compete with certain customers of our Engines segment, thereby creating inherent channel conflict that may impact the actions of engine manufacturers and OEMs with whom we compete.
Through our Products segment, we compete with certain customers of our Engines segment. Any further forward integration of our products may strain relationships with OEMs that are significant customers of our Engines segment and have an adverse impact on operating results.
The financial stability of our suppliers and the ability of our suppliers to produce quality materials could adversely affect our ability to obtain timely and cost-effective raw materials.
The loss of certain of our suppliers or interruption of production at certain suppliers from adverse financial conditions, work stoppages, equipment failures or other unfavorable events could adversely affect our ability to obtain raw materials and other inputs used in the manufacturing process. Our cost of purchasing raw materials and other inputs used in the manufacturing process could be higher and could temporarily affect our ability to produce sufficient quantities of our products, which could harm our financial condition, results of operations and competitive position.
An inability to successfully manage information systems, or to adequately maintain these systems and their security, as well as to protect data and other confidential information, could adversely affect our business and reputation.
In the ordinary course of business, we collect and store sensitive data and information, including our proprietary and regulated business information and that of our customers, suppliers and business partners, as well as personally identifiable information about our employees. We depend on our information systems to successfully manage our business. We have taken steps to maintain adequate data security by implementing security technologies, internal controls, and network and data center resiliency and recovery processes. However, any inability to successfully manage these systems, including matters related to system and data security, privacy, reliability, compliance, performance and access, as well as any inability of these systems to fulfill their intended purpose within our business, could have an adverse effect on our business.


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Despite our efforts, our information systems, like those of other companies, are susceptible to damage or interruption due to natural disasters, power loss, telecommunications failures, viruses, breaches of security, system upgrades or new system implementations. Furthermore, our security measures may not detect or prevent all security threats, whether from intentional or inadvertent breaches by our employees or attacks designed to gain unauthorized access to our systems, networks and data, such as denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions. Any operational failure or breach of security from increasingly sophisticated cyber threats could lead to the loss or disclosure of both our and our customers’ financial, product and other confidential information, result in regulatory actions and legal proceedings, or have an adverse effect on our business and reputation.
The Company experienced a malware attack on its computer systems at its Milwaukee, Wisconsin and Munnsville, New York locations that potentially compromised information from approximately July 25, 2017 to July 28, 2017.  Immediate steps were taken to both contain and thoroughly investigate the attack.  The investigation revealed no evidence of actual misuse of any information.  The Company provided notice of the attack to the media, various state and federal agencies and potentially affected individuals in accordance with applicable legal requirements and also offered credit monitoring and identity theft services free of charge to such individuals.  In addition, the Company implemented process and technology improvements to enhance its protections.  However, attackers may outpace currently available malware preventative technologies and as a result, there can be no assurance that the Company will not experience another malware attack in the future. 
We have implemented, and Wisconsin law contains, anti-takeover provisions that may adversely affect the rights of holders of our common stock.
Our articles of incorporation contain provisions that could have the effect of discouraging or making it more difficult for someone to acquire us through a tender offer, a proxy contest or otherwise, even though such an acquisition might be economically beneficial to our shareholders. These provisions include a board of directors divided into three classes of directors serving staggered terms of three years each and the removal of directors only for cause and only with the affirmative vote of a majority of the votes entitled to be cast in an election of directors.
We are subject to the Wisconsin Business Corporation Law, which contains several provisions that could have the effect of discouraging non-negotiated takeover proposals or impeding a business combination.
These provisions include:
requiring a supermajority vote of shareholders, in addition to any vote otherwise required, to approve business combinations not meeting adequacy of price standards;
prohibiting some business combinations between an interested shareholder and us for a period of three years, unless the combination was approved by our board of directors prior to the time the shareholder became a 10% or greater beneficial owner of our shares or under some other circumstances;
limiting actions that we can take while a takeover offer for us is being made or after a takeover offer has been publicly announced; and
limiting the voting power of shareholders who own more than 20% of our stock.

An inability to identify, complete and integrate acquisitions may adversely impact our sales, results of operations, cash flow and liquidity.
Our historical growth has included acquisitions, and our future growth strategy includes acquisition opportunities. For example, in fiscal 2015, the Company acquired Allmand, a leading designer and manufacturer of high quality towable light towers, industrial heaters and solar LED arrow boards, for approximately $59.9 million in cash. Also, in fiscal 2015, the Company acquired Billy Goat, a leading manufacturer of specialty turf equipment, which includes aerators, sod cutters, overseeders, power rakes, brush cutters, walk behind blowers, lawn vacuums, and debris loaders, for total cash consideration of $28.3 million. We may not be able to identify acquisition targets or successfully complete acquisitions in the future due to the absence of quality companies in our target markets, economic conditions, competition from other bidders, or price expectations from sellers. If we are unable to complete additional acquisitions, our growth may be limited.


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Additionally, as we grow through acquisitions, we will continue to place significant demands on management, operational, and financial resources. Recent and future acquisitions will require integration of operations, sales and marketing, information technology, finance and administrative operations, which could decrease the time available to serve and attract customers. We cannot assure that we will be able to successfully integrate acquisitions, that these acquisitions will operate profitably, or that we will be able to achieve the desired financial or operational success. Our financial condition, cash flows, liquidity and results of operations could be adversely affected if we do not successfully integrate the newly acquired businesses, or if our other businesses suffer due to the increased focus on the newly acquired businesses. 
An inability to successfully manage our global enterprise resource planning ("ERP") system could adversely affect our operations and operating results.

We went live with an upgrade to our global ERP system on July 9, 2018. This upgrade affected many of our existing operating and financial systems. This is a major undertaking both financially and from a management and personnel perspective. Should the organization not achieve the expected operational efficiencies and value realization associated with the ERP implementation it could adversely affect our operations and results of operations.
Our common stock is subject to substantial price and volume fluctuations.
The market price of shares of our common stock may be volatile. Among the factors that could affect our common stock price are those previously discussed, as well as:
quarterly fluctuation in our operating income and earnings per share results;
decline in demand for our products;
significant strategic actions by our competitors, including new product introductions or technological advances;
fluctuations in interest rates or foreign currency exchange;
cost increases in energy, raw materials or labor;
changes in revenue or earnings estimates or publication of research reports by analysts; and
domestic and international economic and political factors unrelated to our performance.
In addition, the stock markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.


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ITEM 2.
PROPERTIES
The Company maintains leased and owned manufacturing, office, warehouse, distribution and testing facilities throughout the world. The Company believes that its owned and leased facilities are adequate to perform its operations in a reasonable manner. As the Company’s business is seasonal, additional warehouse space may be leased when inventory levels are at their peak. Facilities in the United States occupy approximately 5.6 million square feet, of which 55% is owned. Facilities outside of the United States occupy approximately 1.0 million square feet, of which 27% is owned. Certain of the Company’s facilities are leased through operating lease agreements. See Note 10 to the Consolidated Financial Statements for information on the Company’s operating leases.

The following table provides information about each of the Company’s facilities (exceeding 25,000 square feet) as of June 30, 2019:
 
 
 
 
 
 
 
Location
 
Type of Property
 
Owned/Leased
 
Segment
U.S. Locations:
 
 
 
 
 
 
Auburn, Alabama
 
Manufacturing, office and warehouse
 
Owned and Leased
 
Engines
McDonough, Georgia
 
Warehouse
 
Leased
 
Products
Statesboro, Georgia
 
Manufacturing, office and warehouse
 
Owned and Leased
 
Engines
Murray, Kentucky
 
Manufacturing, office and warehouse
 
Owned and Leased
 
Engines
Lee's Summit, Missouri
 
Manufacturing, office and warehouse
 
Leased
 
Products
Poplar Bluff, Missouri
 
Manufacturing, office and warehouse
 
Owned and Leased
 
Engines
Holdrege, Nebraska
 
Manufacturing, office and warehouse
 
Owned
 
Products
Munnsville, New York
 
Manufacturing and office
 
Owned
 
Products
Sherrill, New York
 
Manufacturing, office and warehouse
 
Leased
 
Products
Orangeburg, South Carolina
 
Distribution
 
Leased
 
Engines
Menomonee Falls, Wisconsin
 
Distribution and office
 
Leased
 
Engines, Products
Milwaukee, Wisconsin
 
Distribution
 
Leased
 
Engines, Products
Wauwatosa, Wisconsin
 
Manufacturing, office and warehouse
 
Owned
 
Engines, Products, Corporate
Germantown, Wisconsin
 
Distribution
 
Leased
 
Engines, Products
 
 
 
 
Non-U.S. Locations:
 
 
 
 
 
 
Melbourne, Australia
 
Office and warehouse
 
Leased
 
Engines, Products
Sydney, Australia
 
Manufacturing, office and warehouse
 
Leased
 
Products
Curitiba, Brazil
 
Office and warehouse
 
Leased
 
Engines, Products
Chongqing, China
 
Manufacturing, office and warehouse
 
Owned
 
Engines
Shanghai, China
 
Office and warehouse
 
Leased
 
Engines, Products
Queretaro, Mexico
 
Office and warehouse
 
Leased
 
Engines, Products
Wijchen, Netherlands
 
Distribution and office
 
Leased
 
Engines, Products
  
On August 15, 2019, the Company announced a plan to consolidate the Company’s production of small vertical shaft engines into its Poplar Bluff, Missouri facility. This decision was made after a comprehensive evaluation of the Company’s manufacturing operations. The Company’s Murray, Kentucky facility currently manufactures small vertical shaft engines and will be closed as a result of this consolidation.

ITEM 3.
LEGAL PROCEEDINGS
The Company is subject to various unresolved legal actions that arise in the normal course of its business. These actions typically relate to product liability (including asbestos-related liability), patent and trademark matters, and


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disputes with customers, suppliers, distributors and dealers, competitors and employees.
On May 12, 2010, Exmark Manufacturing Company, Inc. filed suit against Briggs & Stratton Power Products Group, LLC (“BSPPG”), a wholly owned subsidiary of the Company that was subsequently merged with and into the Company on January 1, 2017 (Case No. 8:10CV187, U.S. District Court for the District of Nebraska), alleging that certain Ferris® and Snapper Pro® mower decks infringed an Exmark mower deck patent. Exmark sought damages relating to sales since May 2004, attorneys’ fees, and enhanced damages. As a result of a reexamination proceeding in 2012, the United States Patent and Trademark Office (“USPTO”) initially rejected the asserted Exmark claims as invalid.  However, in 2014, that decision was reversed by the USPTO on appeal by Exmark. Following discovery, each of BSPPG and Exmark filed several motions for summary judgment in the Nebraska district court, which were decided on July 28, 2015. The court concluded that older mower deck designs infringed Exmark’s patent, leaving for trial the issues of whether current designs infringed, the amount of damages, and whether any infringement was willful.
The trial began on September 8, 2015, and on September 18, 2015, the jury returned its verdict, finding that BSPPG’s current mower deck designs do not infringe the Exmark patent. As to the older designs, the jury awarded Exmark $24.3 million in damages and found that the infringement was willful, allowing the judge to enhance the jury’s damages award post-trial by up to three times. Also on September 18, 2015, the U.S. Court of Appeals for the Federal Circuit issued its decision in an unrelated case, SCA Hygiene Products Aktiebolag SCA Personal Care, Inc. v. First Quality Baby Products, LLC, et al. (Case No. 2013-1564) (“SCA”), confirming the availability of laches as a defense to patent infringement claims. Laches is an equitable doctrine that may bar a patent owner from obtaining damages prior to commencing suit, in circumstances in which the owner knows or should have known its patent was being infringed for more than six years. Although the court in the Exmark case ruled before trial that BSPPG could not rely on the defense of laches, as a result of the subsequent SCA decision, the court held a bench trial on that defense on October 21 and 22, 2015. On May 2, 2016, the United States Supreme Court agreed to review the SCA decision.

The parties submitted post-trial motions and briefing related to: damages; willfulness; laches; attorney fees; enhanced damages; and prejudgment/post-judgment interest and costs.  All post-trial motions and briefing were completed on December 18, 2015. On May 11, 2016, the court ruled on those post-trial motions and entered judgment against BSPPG and in favor of Exmark in the amount of $24.3 million in compensatory damages, an additional $24.3 million in enhanced damages, and $1.5 million in pre-judgment interest along with post-judgment interest and costs to be determined. The Company strongly disagreed with the jury verdict, certain rulings made before and during trial, and the May 11, 2016 post-trial rulings. BSPPG appealed to the U.S. Court of Appeals for the Federal Circuit on several bases, including the issues of obviousness and invalidity of Exmark’s patent, the damages calculation, willfulness and laches.

Following briefing of the appeal and prior to oral argument, the United States Supreme Court overturned the SCA decision, ruling that laches is not available in a patent infringement case for damages. That ruling eliminated laches as one basis for BSPPG’s appeal of the Exmark case. The appellate court held a hearing on the remainder of BSPPG’s appeal on April 5, 2017 and issued its decision on January 12, 2018. The appellate court found that the district court erred in granting summary judgment concerning the patent’s validity and remanded that issue to the district court for reconsideration. The appellate court also vacated the jury’s damages award and the district court’s award of enhanced damages, remanding the case to the district court for a new trial on damages and reconsideration on willfulness. The appellate court affirmed the district court rulings in all other respects. In subsequent rulings, the district court reaffirmed the validity of Exmark’s patent and its original ruling on willfulness. A new trial on the issue of damages commenced on December 10, 2018, resulting in a damages assessment by the jury of $14.4 million.
On December 20, 2018, the district court entered judgment against the Company and in favor of Exmark in the amount of $14.4 million in compensatory damages, an additional $14.4 million in enhanced damages, as well as pre-judgment interest, post-judgment interest and costs to be determined. On April 15, 2019, the district court entered an order denying the Company’s post-trial motions related to modification of the jury’s damages award, as well as seeking a new trial in light of certain evidentiary rulings. The district court awarded $6.0 million in pre-judgment interest, as well as post-judgment interest after December 19, 2018 and costs to be determined.


14





The Company strongly disagrees with the verdict and certain rulings made before, during and after the new trial and intends to vigorously pursue its rights on appeal. The Company filed its notice of appeal on May 14, 2019, and has appealed errors made by the district court in construing certain claims of Exmark’s patent, granting summary judgment motions filed by Exmark, and altering the prejudgment interest rate following the second trial. The parties are in the process of briefing the issues raised on appeal.

In assessing whether the Company should accrue a liability in its financial statements as a result of this lawsuit, the Company considered various factors, including the legal and factual circumstances of the case, the trial records and post-trial rulings of the district court, the decision of the appellate court, the current status of the proceedings, applicable law and the views of legal counsel. As a result of this review, the Company has concluded that a loss from this case is not probable and reasonably estimable at this time and, therefore, a liability has not been recorded with respect to this case as of June 30, 2019.

Although it is not possible to predict with certainty the outcome of this and other unresolved legal actions or the range of possible loss, the Company believes the unresolved legal actions will not have a material adverse effect on its results of operations, financial position or cash flows.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

15





Executive Officers of the Registrant
Name, Age, Position
  
Business Experience for At Least Past Five Years
TODD J. TESKE, 54
Chairman, President & Chief Executive Officer (1)(2)
  
Mr. Teske was elected to his current position effective October 2010. He previously was President & Chief Executive Officer from January 2010 to October 2010. He served as President and Chief Operating Officer from 2008 to 2010; as Executive Vice President & Chief Operating Officer from 2005 to 2008; and as Senior Vice President and President - Briggs & Stratton Power Products Group, LLC from 2003 to 2005. Mr. Teske also serves as a director of Badger Meter, Inc. and Lennox International, Inc.

 
 
KATHRYN M. BUONO, 57
Vice President, General Counsel & Corporate Secretary (3)
 
Ms. Buono was elected to her position effective April 2015 (initially with the title Vice President, General Counsel & Secretary).  Prior to joining Briggs & Stratton, she held the position of Managing Partner of the Milwaukee, Wisconsin office of the Quarles & Brady LLP law firm from March 2014 through December 2014 and was a partner practicing in its Business Law Group from 1996 through 2014.

 
 
 
 
 
 
RANDALL R. CARPENTER, 62
Vice President Corporate Marketing
  
Mr. Carpenter was elected to his current position effective September 2016. Previously he served as Vice President - Marketing (an elected officer position) from 2009 through August 2016. He served as Vice President - Marketing (an appointed position) from 2007 to 2009. Prior to joining Briggs & Stratton, he held the position of Vice President Marketing and Product Development for Royal Appliance Manufacturing, a vacuum cleaner manufacturer.
  
  
  
  
  
 
 
ANDREA L. GOLVACH, 48
Vice President & Treasurer
 
Ms. Golvach was elected to her current position effective November 2011 after serving as Vice President of Treasury from May 2011 to November 2011. Prior to joining Briggs & Stratton, she held the position of Director of Finance & Cash Management at Harley-Davidson, Inc., a global motorcycle manufacturer, from 2007 to 2011.
 
 
 
 
 
 
 
 
 
RACHELE M. LEHR, 42
Vice President Human Resources

 
Ms. Lehr was elected to her current position effective September 2018. She previously served as Vice President Human Resources (an appointed position) from July 2015 through August 2018. Prior to then, she served as Human Resources Senior Director from March 2015 through June 2015, as Human Resources Director from June 2013 through February 2015, and as Controller from April 2010 through May 2013.
 
 
 
 
 
 
 
 
 
HAROLD L. REDMAN, 54
Senior Vice President & President –
Turf & Consumer Products
  
Mr. Redman was elected to his current position effective September 2014. He previously served as Senior Vice President and President - Products Group from 2010 to 2014; as Senior Vice President and President - Home Power Products Group from 2009 to 2010; and as Vice President and President - Home Power Products Group from 2006 to 2009. Prior to joining Briggs & Stratton, he served as Senior Vice President - Sales & Marketing of Simplicity Manufacturing, Inc., the predecessor owner of the Company's Simplicity® business.

  
  
  
  
  
  
 
 

16





Name, Age, Position
  
Business Experience for At Least Past Five Years
WILLIAM H. REITMAN, 63
Senior Vice President & President – Support
  
Mr. Reitman was elected to his current position effective September 2016 (initially with the title Senior Vice President & President - Global Support). Previously he served as Senior Vice President & President - Global Service from 2015 to 2016; as Senior Vice President - Managing Director Europe & Global Service from 2013 to 2015; as Senior Vice President - Business Development & Customer Service from 2010 to 2013; as Senior Vice President - Sales & Customer Support from 2007 to 2010; as Senior Vice President - Sales & Marketing from 2006 to 2007; as Vice President - Sales & Marketing from 2004 to 2006; and as Vice President - Marketing from 1995 to 2004.

  
  
  
  
  
  
DAVID J. RODGERS, 48
Senior Vice President & President – Engines & Power
  
Mr. Rodgers was elected to his current position effective August 2015 (initially with the title Senior Vice President & President - Engines Group). He previously served as Senior Vice President & Chief Financial Officer from 2010 to 2015 and as Vice President - Finance during 2010. He served as Controller from 2006 to 2010 and was elected an executive officer in 2007. Prior to joining Briggs & Stratton, he was employed by Roundy’s Supermarkets, Inc., a Midwest grocer, as Vice President - Corporate Controller from 2005 to 2006 and Vice President - Retail Controller from 2003 to 2005.

  
  
  
  
  
 
  
 
 
MARK A. SCHWERTFEGER, 42
Senior Vice President & Chief Financial Officer (4)
  
Mr. Schwertfeger was elected to his current position effective August 2015. He previously served as Vice President & Controller (an executive officer position) from 2014 to 2015; as Corporate Controller from 2010 to 2014; and as International Controller from 2008 to 2010. Prior to joining Briggs & Stratton, he held the position of Director with KPMG LLP., a public accounting firm.
  
  
 
 
 
JEFFREY M. ZEILER, 50
Vice President Product Innovation


 
Mr. Zeiler was elected to his current position effective September 2018. He previously served as Vice President Product Innovation (an appointed position) from January 2013 through August 2018. Prior to joining Briggs & Stratton, he held the position of Senior Vice President of Business Development at Milwaukee Electric Tool Corp., a manufacturer of heavy-duty power tools, accessories and hand tools for professional users.
(1) Officer is also the Company's principal executive officer and a Director of Briggs & Stratton.
(2) Member of the Board of Directors Executive Committee.
(3) Officer also serves as the Company's principal compliance officer.
(4) Officer also serves as the Company's principal financial officer.
Officers are elected annually and serve until they resign, die, are removed, or a different person is appointed to the office.

17





PART II
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Briggs & Stratton common stock is 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), included in Item 8 of this report.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
The table below sets forth the information with respect to purchases made by or on behalf of the Company of its common stock during the quarterly period ended June 30, 2019.
2019 Fiscal Month
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of a Publicly Announced Program (1)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under  the Program (1)
April 1, 2019 to April 28, 2019
 

 
$

 

 
$
38,062,939

April 29, 2019 to May 26, 2019
 

 

 

 
38,062,939

May 27, 2019 to June 30, 2019
 

 

 

 
38,062,939

Total Fourth Quarter
 

 
$

 

 
$
38,062,939

(1) On April 21, 2016, the Board of Directors authorized up to $50 million in funds for use in the common share repurchase program with an expiration date of June 29, 2018. The common share repurchase program authorizes the purchase of shares of the Company's common stock on the open market or in private transactions from time to time, depending on market conditions and certain governing debt covenants. On April 25, 2018 the Board of Directors authorized an additional $50 million under the share repurchase program with an expiration date of June 30, 2020.
Five-year Stock Performance Graph
The graph below shows the cumulative total stockholder return of an investment of $100 (and the reinvestment of any dividends thereafter) at the close of business on June 30, 2014 in each of Briggs & Stratton common stock, the Standard & Poor’s (S&P) Smallcap 600 Index and the S&P Machinery Index.
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13083397&doc=16

18





ITEM 6.
SELECTED FINANCIAL DATA
Fiscal Year
 
2019(1)
 
2018(2)
 
2017
 
2016(3)
 
2015(4)
(dollars in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
SUMMARY OF OPERATIONS 
 
 
 
 
 
 
 
 
 
 
NET SALES
 
$
1,836,605

 
$
1,881,294

 
$
1,786,103

 
$
1,808,778

 
$
1,894,750

GROSS PROFIT
 
301,051

 
398,082

 
383,829

 
362,455

 
359,099

PROVISION (BENEFIT) FOR INCOME TAXES
 
(14,015
)
 
22,421

 
23,011

 
8,795

 
11,271

NET INCOME (LOSS)
 
(54,083
)
 
(11,320
)
 
56,650

 
26,561

 
45,687

EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
 
 
 
 
 
 
 
 
 
 
Basic
 
(1.31
)
 
(0.28
)
 
1.31

 
0.61

 
1.00

Diluted
 
(1.31
)
 
(0.28
)
 
1.31

 
0.60

 
1.00

PER SHARE OF COMMON STOCK:
 
 
 
 
 
 
 
 
 
 
Cash Dividends
 
0.42

 
0.56

 
0.56

 
0.54

 
0.50

Shareholders’ Investment
 
$
10.73

 
$
13.56

 
$
13.26

 
$
11.47

 
$
12.94

WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (in 000’s)
 
41,647

 
42,068

 
42,178

 
43,019

 
44,392

DILUTED NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (in 000’s)
 
41,647

 
42,068

 
42,263

 
43,200

 
44,442

OTHER DATA 
 
 
 
 
 
 
 
 
 
 
SHAREHOLDERS’ INVESTMENT
 
$
446,720

 
$
570,424

 
$
559,334

 
$
493,626

 
$
574,250

LONG-TERM DEBT
 
194,969

 
199,954

 
221,793

 
221,339

 
222,685

TOTAL ASSETS (5)
 
1,551,431

 
1,443,966

 
1,450,979

 
1,456,667

 
1,456,424

PLANT AND EQUIPMENT
 
1,220,339

 
1,175,165

 
1,104,583

 
1,056,893

 
1,035,326

PLANT AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
 
411,045

 
422,080

 
364,880

 
326,273

 
314,838

PROVISION FOR DEPRECIATION
 
59,820

 
53,783

 
51,855

 
49,973

 
48,496

EXPENDITURES FOR PLANT AND EQUIPMENT
 
52,454

 
103,203

 
83,141

 
64,161

 
71,710

WORKING CAPITAL (5)
 
$
184,732

 
$
295,100

 
$
359,063

 
$
377,700

 
$
414,256

Current Ratio (5)
 
1.3 to 1

 
1.8 to 1

 
2.1 to 1

 
2.2 to 1

 
2.2 to 1

NUMBER OF EMPLOYEES AT YEAR-END
 
5,200

 
5,185

 
5,300

 
5,445

 
5,480

NUMBER OF SHAREHOLDERS AT YEAR-END
 
2,190

 
2,306

 
2,431

 
2,558

 
2,681

QUOTED MARKET PRICE:
 
 
 
 
 
 
 
 
 
 
High
 
$
21.40

 
$
27.34

 
$
25.92

 
$
24.48

 
$
21.09

Low
 
$
9.35

 
$
17.11

 
$
17.90

 
$
15.47

 
$
17.14

(1)
In fical 2019, business optimization expenses include $2.5 million after tax or $0.04 per diluted share of non-cash charges related to accelerated depreciation, and $32.1 million after tax or $0.77 per diluted share of cash charges related primarily to activities associated with the upgrade to the Company's ERP system, professional services, employee termination benefits, and plant rearrangement activities. The Company recognized bad debt expense of $3.1 million after tax or $0.08 per diluted share after a major retailer announced that it had filed for bankruptcy protection. The Company recognized $1.5 million after tax or $0.04 per diluted share for amounts accrued related to a litigation settlement and $0.4 million after tax or $0.01 per diluted share related to acquisition integration activities. Interest expense includes $0.2 million after tax or $0.01 per diluted share for premiums paid to repurchase senior notes. Other income includes a $0.3 million after tax or $0.01 per diluted share pension settlement charge. Tax expense includes a $1.0 million charge or $0.03 per diluted share associated with the Tax Cuts and Jobs Act of 2017 to record the impact of the inclusion of foreign earnings.
(2)
In fiscal 2018, the Company had business optimization expenses of $3.4 million after-tax or $0.08 per diluted share of non-cash charges related primarily to plant & equipment impairment and accelerated depreciation, and $11.4 million after-tax or $0.26 per diluted share of cash charges related primarily to employee termination benefits, lease terminations, professional services and plant rearrangement activities, non-cash charges of $29.6 after-tax or $0.70 per diluted share related to the pension settlement. The Company recognized in interest expense $1.6 million after-tax or $0.04 per diluted share for

19





premiums paid to repurchase senior notes after receiving unsolicited offers from bondholders. Tax expense also includes a $21.1 million or $0.49 per diluted share charge associated with the Tax Cuts and Jobs Act of 2017
(3)
In fiscal 2016, the Company had restructuring charges of $6.7 million after-tax or $0.15 per diluted share, acquisition-related charges of $0.2 million after-tax or less than $0.01 per diluted share, litigation charges of $1.8 million after-tax or $0.04 per diluted share, goodwill and tradename impairment charges of $9.4 million after-tax or $0.22 per share, pension settlement charges of $13.2 million after-tax or $0.30 per diluted share, and a gain on sale of investment in marketable securities of $2.8 million after-tax or ($0.07) per diluted share.
(4)
In fiscal 2015, the Company had restructuring charges of $17.7 million after-tax or $0.40 per diluted share and acquisition-related charges of $1.4 million after-tax or $0.03 per diluted share.
(5)
The Company adopted Accounting Standards Update No. 2015-17, and retrospectively reclassified current “Deferred Income Tax Assets" to "Long-term Deferred Income Tax Assets” in the Selected Financial Data table.


20





ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
FISCAL 2019 COMPARED TO FISCAL 2018
The following table is a reconciliation of financial results by segment, as reported, to adjusted financial results by segment, excluding business optimization charges, pension settlement charges, product liability litigation charges, major retailer bankruptcy bad debt expense, charges as a result of the implementation of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), and senior note repurchase premiums (in thousands, except per share data):
 
 
For the fiscal year ended June
 
 
2019 Reported
 
Adjustments(1)
 
2019 Adjusted(3)
 
2018 Reported
 
Adjustments(2)
 
2018 Adjusted(3)
Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
 
Engines
 
$
193,069

 
$
2,662

 
$
195,731

 
$
252,645

 
$
2,854

 
$
255,499

Products
 
108,984

 
9,207

 
118,191

 
144,933

 
3,775

 
148,708

Inter-Segment Eliminations
 
(1,002
)
 

 
(1,002
)
 
504

 

 
504

Total
 
$
301,051

 
$
11,869

 
$
312,920

 
$
398,082

 
$
6,628

 
$
404,710

 
 
 
 
 
 
 
 
 
 
 
 
 
Engineering, Selling, General and Administrative Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Engines
 
$
213,589

 
$
23,374

 
$
190,215

 
$
248,286

 
$
48,096

 
$
200,190

Products
 
135,687

 
13,441

 
122,246

 
126,944

 
4,339

 
122,605

Total
 
$
349,276

 
$
36,815

 
$
312,461

 
$
375,230

 
$
52,435

 
$
322,796

 
 
 
 
 
 
 
 
 
 
 
 
 
Equity in Earnings of Unconsolidated Affiliates
 
 
 
 
 
 
 
 
 
 
 
 
Engines
 
$
5,001

 
$
3,113

 
$
8,114

 
$
5,234

 
$
2,964

 
$
8,198

Products
 
4,028

 

 
4,028

 
4,023

 

 
4,023

Total
 
$
9,029

 
$
3,113

 
$
12,142

 
$
9,257

 
$
2,964

 
$
12,221

 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Income (Loss) (4):
 
 
 
 
 
 
 
 
 
 
 
 
Engines
 
$
(15,519
)
 
$
29,149

 
$
13,630

 
$
9,593

 
$
53,913

 
$
63,506

Products
 
(22,675
)
 
22,648

 
(27
)
 
22,012

 
8,113

 
30,125

Inter-Segment Eliminations
 
(1,002
)
 

 
(1,002
)
 
504

 

 
504

Total
 
$
(39,196
)
 
$
51,797

 
$
12,601

 
$
32,109

 
$
62,026

 
$
94,135

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense
 
$
(29,242
)
 
$
263

 
$
(28,979
)
 
$
(25,320
)
 
$
2,228

 
$
(23,092
)
Other Income
 
$
340

 
$
521

 
$
861

 
$
4,312

 
$

 
$
4,312

 
 
 
 
 
 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
 
(68,098
)
 
52,581

 
(15,517
)
 
11,101

 
64,254

 
75,355

Provision (Credit) for Income Taxes
 
(14,015
)
 
11,362

 
(2,653
)
 
22,421

 
(2,836
)
 
19,585

Net Income (Loss)
 
$
(54,083
)
 
$
41,219

 
$
(12,864
)
 
$
(11,320
)
 
$
67,090

 
$
55,770

 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (Loss) Per Share
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(1.31
)
 
$
0.99

 
$
(0.32
)
 
$
(0.28
)
 
$
1.57

 
$
1.29

Diluted
 
(1.31
)
 
0.99

 
(0.32
)
 
(0.28
)
 
1.57

 
1.29


21





(1) For the twelve months of fiscal 2019, business optimization expenses include $3.2 million ($2.5 million after tax) of non-cash charges related to accelerated depreciation, and $41.9 million ($32.1 million after tax) of cash charges related primarily to activities associated with the upgrade to the Company's ERP system, professional services, employee termination benefits, and plant rearrangement activities. The Company recognized bad debt expense of $4.1 million ($3.1 million after tax) after a major retailer announced that it had filed for bankruptcy protection. The Company recognized $2.0 million ($1.5 million after tax) for amounts accrued related to a litigation settlement and $0.6 million ($0.4 million after tax) related to acquisition integration activities. Interest expense includes $0.2 million ($0.2 million after tax) for premiums paid to repurchase senior notes. Other income includes a $0.5 million ($0.3 million after tax) pension settlement charge. Tax expense includes a $1.0 million charge associated with the Tax Cuts and Jobs Act of 2017 to record the impact of the inclusion of foreign earnings.
(2) For the twelve months of fiscal 2018, business optimization expenses include $4.8 million ($3.4 million after tax) of non-cash charges related primarily to plant & equipment impairment and accelerated depreciation, and $16.1 million ($11.4 million after tax) of cash charges related primarily to employee termination benefits, lease terminations, professional services and plant rearrangement activities. ESG&A includes $41.2 million ($29.6 million after tax) of non-cash charges related to the pension settlement. Tax expense also includes a $21.1 million charge associated with the Tax Cuts and Jobs Act of 2017 comprised of $13.8 million to revalue deferred tax assets and liabilities and $7.3 million to record the impact of the inclusion of foreign earnings. The company recognized in interest expense $2.2 million ($1.6 million after tax) for premiums paid to repurchase senior notes after receiving unsolicited offers from bondholders.
(3) Adjusted financial results are non-GAAP financial measures. The Company believes this information is meaningful to investors as it isolates the impact that restructuring charges, acquisition-related charges, certain litigation charges, pension settlement charges, gains on sale of marketable securities, and goodwill and tradename impairment charges have on reported financial results and facilitates comparisons between peer companies. The Company may utilize non-GAAP financial measures as a guide in the forecasting, budgeting, and long-term planning process. While the Company believes that adjusted financial results are useful supplemental information, such adjusted financial results are not intended to replace its GAAP financial results and should be read in conjunction with those GAAP results.
(4) The Company defines segment income (loss) as income from operations plus equity in earnings of unconsolidated affiliates. For all periods presented, equity in earnings of unconsolidated affiliates is included in segment income (loss).
Net Sales

Fiscal 2019 net sales were $1.84 billion, down $44.7 million or 2.4% from $1.88 billion for fiscal 2018 primarily due to unusually dry weather conditions in Australia and Europe, lower storm generator sales and lower service parts sales, and near-term disruption caused by channel partner transitions, including the bankruptcy of a major North American retailer. Sales of commercial engines and products increased approximately 13% for the fiscal year.
Engines segment net sales for fiscal 2019 were $988.7 million, which was $77.6 million or 7.3% lower than the prior year. Sales in fiscal 2019 were lower than in the prior year primarily due to lower shipments of consumer engines in Europe and Australia due to unfavorable weather conditions. Service parts sales declined year over year, both in North America and Europe, largely due to throughput inefficiencies. Partially offsetting the decrease were higher sales of Vanguard commercial engines.
Products segment net sales for fiscal 2019 were $932.1 million, an increase of $28.1 million or 3.1% from the prior year. Net sales increased primarily due to higher sales of commercial lawn and garden and job site equipment, as well as increased sales of pressure washers. Partially offsetting the increase was a decrease in shipments related to less hurricane activity in fiscal 2019 compared to fiscal 2018.
Gross Profit Percentage

The consolidated gross profit percentage was 16.4% in fiscal 2019, a decrease of 480 basis points from fiscal 2018.

Included in consolidated gross profit for fiscal 2019 were pre-tax charges of $9.9 million related to the business optimization program and $2.0 million related to a product liability ligation settlement. Of these charges, $9.2 million was recorded in the Products segment, and $2.7 million was recorded in the Engines segment.
The Engines segment gross profit percentage for fiscal 2019 was 19.5%, which was lower than the 23.7% in

22





fiscal 2018. Adjusted gross profit percentage decreased 420 basis points compared to last year due to inefficiencies, a reduction in manufacturing volume, and unfavorable sales mix. Inefficiencies from start-up activities related to the Company’s ERP upgrade and the on-shoring of Vanguard engines which led to elevated supply chain and labor costs to ensure timely delivery of Vanguard engines and to improve the throughput of service parts.
The Products segment gross profit percentage for fiscal 2019 was 14.6%, which was lower than the 16.0% in fiscal 2018. Adjusted gross profit percentage decreased 380 basis points year over year due to unfavorable sales mix, manufacturing inefficiencies and increased material and tariff costs net of price increases. Sales mix was predominantly driven by lower sales of storm generators and shifts within the pressure washer and lawn tractor categories towards more entry level models. Improvements to inefficiencies from start-up activities related to the business optimization program were hampered by labor availability challenges.
Engineering, Selling, General and Administrative Expenses
Engineering, selling, general and administrative expenses were $349.3 million in fiscal 2019, a decrease of $25.9 million or 6.9% from fiscal 2018.

Included in engineering, selling, general and administrative expenses for fiscal 2019 were pre-tax charges of $36.8 million related to the business optimization program, bad debt expense due to a major retailer bankruptcy, and pension settlement charges. Of these charges, $13.4 million was recorded in the Products segment, and $23.4 million was recorded in the Engines segment.

Included in engineering, selling, general and administrative expenses for fiscal 2018 were pre-tax charges of $52.4 million related to the business optimization program and pension settlement charges. Of these charges, $4.3 million was recorded in the Products segment for the business optimization program, and $48.1 million was recorded in the Engines segment for the business optimization program and pension settlement.

The Engines segment engineering, selling, general and administrative expenses were $213.6 million in fiscal 2019, or $34.7 million lower compared to fiscal 2018, primarily due to a $41.2 million pension settlement charge in the prior year. Adjusted engineering, selling, general and administrative expenses were $10.0 million lower than fiscal 2018, primarily due to reduced employee compensation costs.
The Products segment engineering, selling, general and administrative expenses were $135.7 million in fiscal 2019, an increase of $8.7 million from fiscal 2018. Adjusted engineering, selling, general and administrative expenses were $0.4 million lower than fiscal 2018.
Interest Expense
Interest expense for fiscal 2018 was $29.2 million, which was $3.9 million higher than fiscal 2018 due to increased average net borrowings and higher interest rates.
Provision for Income Taxes
On December 22, 2017, the U.S. government enacted significant tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). As a result of the Tax Act, the Company was subject to a U.S. federal statutory corporate income tax rate of 28% for the fiscal year ending July 1, 2018 and is subject to a U.S. federal statutory corporate income tax rate of 21% in the fiscal year ending June 30, 2019 and future fiscal years. Overall, the Company anticipates the decrease in the U.S. federal statutory rate resulting from the enactment of the Tax Act will have favorable impact on its future consolidated tax expense and operating cash flows.
Within the calculation of the Company’s tax rate, various assumptions and estimates have been used that may change as a result of future guidance, interpretation, and legislation from the Internal Revenue Service, the SEC, the Financial Accounting Standards Board (“FASB”) and/or various other taxing jurisdictions. For example, the Company anticipates that U.S. state jurisdictions will continue to determine and announce their conformity to the Tax Act which could have an impact on the Company’s tax rate. The Tax Act contains many significant changes to U.S. tax laws, the consequences of which have not yet been fully determined.

23





As of June 30, 2019, the Company has analyzed its global working capital and cash requirements and the potential tax liabilities attributable to repatriation in regards to its permanent reinvestment assertion. During fiscal 2018, the Company removed its permanent reinvestment assertion on approximately $33 million of its foreign earnings and made distributions from its foreign earnings related to the assertion removal of approximately $18 million. The Company repatriated the additional $15 million of foreign earnings in the second quarter of fiscal 2019. During the second quarter of fiscal 2019, the Company has also removed its permanent reinvestment assertion on an additional approximately $21.6 million of its accumulated offshore earnings. This resulted in an estimated tax expense of $1.0 million. The Company has recorded the tax effects of the distributions and planned repatriations in its financial statements, including withholding taxes and currency gain and loss. For the remainder of its foreign earnings, the Company has not changed its prior assertion. Accordingly, deferred taxes attributable to its investments in its foreign subsidiaries have not yet been recorded.
The Tax Act also established new tax laws that came into effect for the Company in fiscal year 2019, including the creation of a new provision designed to tax global intangible low-taxed income (GILTI), which allows for the possibility of using foreign tax credits (FTCs), a deduction of up to 50 percent to offset the income tax liability, and a deduction for foreign derived intangible income (FDII) subject to certain limitations, along with the base erosion anti-abuse tax (BEAT) and the limitation on deductibility of interest expense in the US. For fiscal year 2019, the Company is estimating no current income tax impact from the new GILTI, FDII, or BEAT provisions. The Company incurred approximately $40 million in nondeductible interest expense during fiscal year 2019, resulting in a deferred tax asset of approximately $9.8 million with an unlimited carryforward period. Realization of the deferred tax asset is contingent upon generating sufficient taxable income.
Business Optimization Program
The Company made significant progress on implementing its previously announced business optimization program in fiscal 2019. The program is designed to drive efficiencies and expand capacity in commercial engines and cutting equipment. The program entails expanding production of Vanguard commercial engines into the Company’s existing large engine plants, which are located in Georgia and Alabama, expanding Ferris commercial mower production capacity into a new, modern facility which is located close to the current manufacturing facility in New York, and the implementation of an ERP upgrade. The Company went live with the ERP upgrade at the beginning of the first quarter of fiscal 2019.
Production of Vanguard engines in the Company’s U.S. plants began in the fourth quarter of fiscal 2018 and additional lines were phased in by the end of the fourth quarter of fiscal 2019. Previously, the majority of Vanguard engines were sourced from overseas. Production of Ferris commercial mowers began in the new facility in the fourth quarter of fiscal 2018 and all remaining production was transitioned in the third quarter of fiscal 2019. 
During fiscal 2019, the Company recorded business optimization charges of $45.0 million ($34.5 million after tax or $0.81 per diluted share). Remaining program costs to be incurred in fiscal 2020 are expected to be $5 million. The business optimization program is expected to generate pre-tax savings of $35 million to $40 million of ongoing future annual pre-tax savings, in addition to supporting profitable commercial growth. The Company estimates the future annual savings will be achieved by fiscal 2022.






24





FISCAL 2018 COMPARED TO FISCAL 2017
The following table is a reconciliation of financial results by segment, as reported, to adjusted financial results by segment, excluding business optimization charges, pension settlement charges, charges as a result of the implementation of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), and senior note repurchase premiums (in thousands, except per share data):
 
 
For the fiscal year ended June
 
 
2018 Reported
 
Adjustments(1)
 
2018 Adjusted(2)
 
2017 Reported
 
Adjustments(1)
 
2017 Adjusted(2)
Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
 
Engines
 
$
252,645

 
$
2,854

 
$
255,499

 
$
262,036

 
$

 
$
262,036

Products
 
144,933

 
3,775

 
148,708

 
121,141

 

 
121,141

Inter-Segment Eliminations
 
504

 

 
504

 
652

 

 
652

Total
 
$
398,082

 
$
6,628

 
$
404,710

 
$
383,829

 
$

 
$
383,829

 
 
 
 
 
 
 
 
 
 
 
 
 
Engineering, Selling, General and Administrative Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Engines
 
$
248,286

 
$
48,096

 
$
200,190

 
$
187,020

 
$

 
$
187,020

Products
 
126,944

 
4,339

 
122,605

 
113,042

 

 
113,042

Total
 
$
375,230

 
$
52,435

 
$
322,796

 
$
300,062

 
$

 
$
300,062

 
 
 
 
 
 
 
 
 
 
 
 
 
Equity in Earnings of Unconsolidated Affiliates
 
 
 
 
 
 
 
 
 
 
 
 
Engines
 
$
5,234

 
$
2,964

 
$
8,198

 
$
6,625

 
$

 
$
6,625

Products
 
4,023

 

 
4,023

 
4,431

 

 
4,431

Total
 
$
9,257

 
$
2,964

 
$
12,221

 
$
11,056

 
$

 
$
11,056

 
 

 

 

 

 

 

Segment Income (3):
 
 
 
 
 
 
 
 
 
 
 
 
Engines
 
$
9,593

 
$
53,913

 
$
63,506

 
$
81,641

 
$

 
$
81,641

Products
 
22,012

 
8,113

 
30,125

 
12,530

 

 
12,530

Inter-Segment Eliminations
 
504

 

 
504

 
652

 

 
652

Total
 
$
32,109

 
$
62,026

 
$
94,135

 
$
94,823

 
$

 
$
94,823

 
 
 
 
 
 


 
 
 
 
 


Interest Expense
 
$
(25,320
)
 
$
2,228

 
$
(23,092
)
 
$
(20,293
)
 
$

 
$
(20,293
)
 
 


 


 


 


 


 


Income Before Income Taxes
 
11,101

 
64,254

 
75,355

 
79,661

 

 
79,661

Provision (Credit) for Income Taxes
 
22,421

 
(2,836
)
 
19,585

 
23,011

 

 
23,011

Net Income (Loss)
 
$
(11,320
)
 
$
67,090

 
$
55,770

 
$
56,650

 
$

 
$
56,650

 
 
 
 
 
 


 
 
 
 
 


Earnings (Loss) Per Share
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.28
)
 
$
1.57

 
$
1.29

 
$
1.31

 
$

 
$
1.31

Diluted
 
(0.28
)
 
1.57

 
1.29

 
1.31

 

 
1.31


25





(1) For the twelve months of fiscal 2018, business optimization expenses include $4.8 million ($3.4 million after tax) of non-cash charges related primarily to plant & equipment impairment and accelerated depreciation, and $16.1 million ($11.4 million after tax) of cash charges related primarily to employee termination benefits, lease terminations, professional services and plant rearrangement activities. ESG&A includes $41.2 million ($29.6 million after tax) of non-cash charges related to the pension settlement. Tax expense also includes a $21.1 million charge associated with the Tax Cuts and Jobs Act of 2017 comprised of $13.8 million to revalue deferred tax assets and liabilities and $7.3 million to record the impact of the inclusion of foreign earnings. The company recognized in interest expense $2.2 million ($1.6 million after tax) for premiums paid to repurchase senior notes after receiving unsolicited offers from bondholders. For the twelve months of fiscal 2017, there were no adjustments.
(2) Adjusted financial results are non-GAAP financial measures. The Company believes this information is meaningful to investors as it isolates the impact that restructuring charges, acquisition-related charges, certain litigation charges, pension settlement charges, gains on sale of marketable securities, and goodwill and tradename impairment charges have on reported financial results and facilitates comparisons between peer companies. The Company may utilize non-GAAP financial measures as a guide in the forecasting, budgeting, and long-term planning process. While the Company believes that adjusted financial results are useful supplemental information, such adjusted financial results are not intended to replace its GAAP financial results and should be read in conjunction with those GAAP results.
(3) The Company defines segment income (loss) as income from operations plus equity in earnings of unconsolidated affiliates. For all periods presented, equity in earnings of unconsolidated affiliates is included in segment income (loss).
Net Sales
Consolidated net sales for fiscal 2018 were $1.88 billion. Consolidated net sales increased $95.2 million or 5.3% from fiscal 2017. Fiscal 2018 net sales of commercial products increased by approximately 16% to $505 million.
Engines segment net sales for fiscal 2018 were $1.06 billion, which was $32.5 million or 3.0% lower than the prior year. Sales were lower in North America due to certain channel partners taking a cautious approach to ordering inventory due to a delayed start of spring weather and a desire to further reduce channel inventory in advance of anticipated brand transitions next season. Sales into Europe were lower due to customers taking a cautious approach to ordering due to a delayed start of spring weather and the desire of certain channel partners to reduce their inventory levels in advance of new emissions requirements on engines that begin in calendar 2019. Partially offsetting the decrease were higher sales of Vanguard commercial engines.
Products segment net sales for fiscal 2018 were $904.0 million, an increase of $125.6 million or 16.1% from the prior year. Net sales increased primarily due to higher sales of commercial lawn and garden and job site equipment and generators, which included approximately $55 million in shipments related to hurricane activity in fiscal 2018.
Gross Profit Percentage

The consolidated gross profit percentage was 21.2% in fiscal 2018, a decrease of 30 basis points from fiscal 2017.

Included in consolidated gross profit for fiscal 2018 were pre-tax charges of $6.6 million related to the business optimization program. Of these charges, $3.8 million was recorded in the Products segment, and $2.8 million was recorded in the Engines segment.
The Engines segment gross profit percentage for fiscal 2018 was 23.7%, which was lower than the 23.8% in fiscal 2017. Adjusted gross profit percentage (which only included adjustments in the current year) increased 20 basis points compared to last year due to manufacturing efficiency improvements. The improvement in gross margins was offset by 8% lower production volumes. Higher pricing offset material and freight cost increases.
The Products segment gross profit percentage for fiscal 2018 was 16.0%, which was higher than the 15.6% in fiscal 2017. Adjusted gross profit percentage (which only included adjustments in the current year) increased 80 basis points year over year due to the contribution margin from hurricane-related sales, favorable sales mix from proportionately higher sales of commercial products and higher pricing. The margin improvement was partially offset by a reduction in manufacturing throughput of approximately 3.5% and higher freight costs.

26





Engineering, Selling, General and Administrative Expenses
Engineering, selling, general and administrative expenses were $375.2 million in fiscal 2018, an increase of $75.2 million or 25.1% from fiscal 2017.

Included in engineering, selling, general and administrative expenses for fiscal 2018 were pre-tax charges of $52.4 million related to the business optimization program and pension settlement charges. Of these charges, $4.3 million was recorded in the Products segment for the business optimization program, and $48.1 million was recorded in the Engines segment for the business optimization program and pension settlement.

The Engines segment engineering, selling, general and administrative expenses were $248.3 million in fiscal 2018, or $61.3 million higher compared to fiscal 2017, primarily due to a $41.2 million pension settlement charge and $6.9 million of business optimization program charges in fiscal 2018. Adjusted engineering, selling, general and administrative expenses (which only included adjustments in the current year) were $14.6 million higher than fiscal 2017, primarily due to $2.9 million of higher spending related to the ERP upgrade, higher marketing costs, and funding growth initiatives.
The Products segment engineering, selling, general and administrative expenses were $126.9 million in fiscal 2018, an increase of $13.9 million from fiscal 2017. Adjusted engineering, selling, general and administrative expenses (which only included adjustments in the current year) were $9.6 million higher than fiscal 2017, primarily due to increased sales commissions, increased spend related to the ERP upgrade, higher marketing costs, and funding growth initiatives.
Interest Expense
Interest expense for fiscal 2018 was $25.3 million, which was $5.0 million higher than fiscal 2017 due to premiums paid to repurchase senior notes after receiving unsolicited offers. Adjusted interest expense (which only included adjustments in the current year) was $2.8 million higher than fiscal 2017 primarily due to increased average net borrowings and higher interest rates.
Provision for Income Taxes
On December 22, 2017, the U.S. government enacted significant tax legislation commonly referred to as the Tax Act. As a result of the Tax Act, the Company was subject to a U.S. federal statutory corporate income tax rate of 28% for the fiscal year ending July 1, 2018 and a U.S. federal statutory corporate income tax rate of 21% in future fiscal years. Overall, the Company anticipates the decrease in the U.S. federal statutory rate resulting from the enactment of the Tax Act will have favorable impact on its future consolidated tax expense and operating cash flows.
Within the calculation of the Company’s tax rate, various assumptions and estimates have been used that may change as a result of future guidance, interpretation, and legislation from the Internal Revenue Service, the SEC, the Financial Accounting Standards Board (“FASB”) and/or various other taxing jurisdictions. For example, the Company anticipates that U.S. state jurisdictions will continue to determine and announce their conformity to the Tax Act which could have an impact on the Company’s tax rate. The Tax Act contains many significant changes to U.S. tax laws, the consequences of which have not yet been fully determined.
The Company was also in the process of evaluating its permanent reinvestment assertions since the Tax Act may provide opportunity to repatriate overseas cash to the U.S. at a lower tax cost. There is a dividends received deduction available for certain foreign distributions under the Tax Act, but certain foreign earnings remain subject to withholding taxes upon repatriation. As of July 1, 2018, the Company had analyzed its global working capital and cash requirements and the potential tax liabilities attributable to repatriation of its foreign earnings. In the second quarter of fiscal 2018, the Company removed its permanent reinvestment assertion on approximately $25 million of its foreign earnings. During the third quarter of fiscal 2018, the Company made distributions from its foreign earnings related to the assertion removal in the second quarter of approximately $18 million. The Company recorded the estimated tax impact in its financial statements and continues to evaluate its cash needs and strategic opportunities to repatriate cash.
Business Optimization Program

27





For fiscal 2018, the Company recorded business optimization charges of $20.9 million ($14.8 million after tax or $0.34 per diluted share).
Liquidity and Capital Resources
FISCAL YEARS 2019, 2018 AND 2017
Cash flows provided by (used in) operating activities for fiscal 2019 were ($35) million compared to $93 million in fiscal 2018. The decrease in cash provided by operating activities was primarily related to elevated inventory balances and the increased net loss as compared to prior year. Partially offsetting the decrease is elevated accounts payable balances and lower pension plan contributions.
Cash flows provided by operating activities for fiscal 2018 were $93 million compared to $90 million in fiscal 2017. The increase in cash provided by operating activities was primarily related to changes in working capital, including more rapid collections of accounts receivable partially offset by higher inventory levels due to timing of shipments. The improvement in operating cash flows was partially offset by a $30 million voluntary contribution made to the pension plan in the third quarter of fiscal 2018.
Net cash used in investing activities was $61 million, $104 million, and $79 million in fiscal 2019, 2018 and 2017, respectively. These cash flows include capital expenditures of $53 million, $103 million, and $83 million in fiscal 2019, 2018 and 2017, respectively. The capital expenditures in fiscal 2018 related primarily to investment in the business optimization program, and the decrease in fiscal 2019 represents a return to normalized levels.
Net cash provided by (used in) financing activities was $78 million, $0.4 million, and ($39) million, in fiscal 2019, 2018 and 2017, respectively. In fiscal 2019, the Company repurchased treasury stock at a total cost of $12 million compared to $10 million and $20 million of stock repurchases in fiscal 2018 and 2017, respectively. The Company paid cash dividends on its common stock of $18 million in fiscal 2019, and $24 million in each of fiscal 2018 and 2017. In fiscal 2019, cash used for financing activities was offset by cash provided by net revolver borrowings of $160 million, compared to $48 million in 2018 and $0 million in 2017.
As of June 30, 2019, approximately $27 million of the Company's $30 million of cash and cash equivalents was held in non-U.S. subsidiaries.
Future Liquidity and Capital Resources
On December 20, 2010, the Company issued $225 million of 6.875% Senior Notes ("Senior Notes") due December 15, 2020. During fiscal 2019 and 2018, the Company repurchased $5 million and $22 million, respectively, of the Senior Notes after receiving unsolicited offers from bondholders. There were no repurchases in fiscal 2017.
On March 25, 2016, the Company entered into a $500 million amended and restated multicurrency credit agreement (the “Revolver”) that matures on March 25, 2021. The Revolver amended and restated the Company's $500 million multicurrency credit agreement dated as of October 13, 2011 (as previously amended), which would have matured on October 21, 2018. The initial maximum availability under the Revolver is $500 million. Availability under the Revolver is reduced by outstanding letters of credit. The Company may from time to time increase the maximum availability under the revolving credit facility by up to $250 million if certain conditions are satisfied. There were $160 million of borrowings under the Revolver as of June, 30 2019 and $48 million of borrowings as of July 1, 2018.
The Senior Notes and the Revolver contain restrictive covenants. These covenants include restrictions on the ability of the Company and/or certain subsidiaries to pay dividends, repurchase equity interests of the Company and certain subsidiaries, incur indebtedness, create liens, consolidate, merge and dispose of assets, and enter into transactions with affiliates. The Revolver contains financial covenants that require the Company to maintain a minimum interest coverage ratio of 3.0 to 1.0 and impose on the Company a maximum average leverage ratio of 3.5 to 1.0. The Senior Notes contain a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 2.0 to 1.0, as defined by the indenture. As of June 30, 2019, the Company's interest coverage ratio, average leverage ratio, and fixed charge coverage ratio were 3.57, 4.10, and 2.19, respectively.

28





On August 13, 2019, the Company entered into a consent memorandum pursuant to its revolving multicurrency credit agreement. Pursuant to the consent memorandum, the average leverage ratio covenant will not be tested for the computation period ended June 30, 2019 (the “Specified Computation Period”) and no failure (or anticipated failure) by the Company to comply with associated restrictions for the specified computation period will constitute (or be deemed to have constituted) a default or an event of default under the credit agreement.  Additionally, no default shall be deemed to exist under the Credit Agreement for any anticipated failure by the Company to comply with such restrictions for the computation period ending on or about September 30, 2019. The Company was in compliance with all other financial covenants of the credit agreement as of June 30, 2019, and the failure or anticipated failure to comply with the average leverage ratio under the Credit Agreement is not considered to be a cross default for purposes of the Company’s Senior Notes.
The Company is in the process of refinancing its revolving credit agreement. The new revolving credit facility, which would be secured by certain of the Company's working capital and other assets, is planned to have a larger borrowing capacity that would allow the Company to retire the outstanding Senior Notes.
Although the Company is in the process of refinancing the revolving credit agreement which, among other things, reduces the risk of potential violations of the covenant in the future, the Company cannot guarantee that it will be able to refinance the revolving credit agreement with acceptable terms.
On April 21, 2016, the Board of Directors authorized $50 million in funds for use in the common share repurchase program which expired on June 29, 2018. On April 25, 2018, the Board of Directors authorized an additional $50 million in funds for use in the common share repurchase program expiring June 30, 2020. As of June 30, 2019, the total remaining authorization was $38 million. Share repurchases, among other things, allow the Company to offset any potentially dilutive impacts of share-based compensation. The common share repurchase program authorizes the purchase of shares of the Company's common stock on the open market or in private transactions from time to time, depending on market conditions and certain governing debt covenants. In fiscal 2019, the Company repurchased 725,321 shares on the open market at a total cost of $11.9 million, or $16.46 per share. There were 467,183 shares repurchased in fiscal 2018 at a total cost of $10.3 million, or $22.07 per share.
On August 15, 2019, the first quarter fiscal 2020 dividend of $0.05 per share was announced, which is reduced compared to $0.14 per share paid in the past several quarters.
The Company expects capital expenditures to be approximately $55 million in fiscal 2020. These anticipated expenditures reflect the continued reinvestment in efficient equipment and innovative new products.
During fiscal 2018, the Company made $30 million in voluntary cash contributions to the qualified pension plan. The Company made no contributions in fiscal 2019 to the qualified pension plan. Based upon current regulations and actuarial studies the Company is required to make no minimum contributions to the qualified pension plan in fiscal 2020, but the Company may choose to make discretionary contributions. The Company may be required to make further required contributions in future years or the future expected funding requirements may change depending on a variety of factors including the actual return on plan assets, the funded status of the plan in future periods, and changes in actuarial assumptions or regulations.
Management believes that available cash, cash generated from operations, existing lines of credit and access to debt markets will be adequate to fund the Company’s capital requirements and operational needs for the foreseeable future.
Financial Strategy
Management believes that the value of the Company is enhanced if the capital invested in operations yields a cash return that is greater than the cost of capital. Management maintains a balanced approach to capital allocation. The balance is amongst the following areas: reinvesting capital into physical assets and products that maintain or grow the global cost leadership and market positions that the Company has achieved and drive the economic value of the Company, identifying strategic acquisitions or alliances that may enhance revenues and provide a higher economic return, and returning capital to shareholders through dividends and/or share repurchases.

29





Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements or significant guarantees to third parties not fully recorded in its Consolidated Balance Sheets or fully disclosed in its Notes to Consolidated Financial Statements. The Company’s significant contractual obligations include debt agreements and certain employee benefit plans.
Contractual Obligations
A summary of the Company’s expected payments for significant contractual obligations as of June 30, 2019 is as follows (in thousands):
 
 
Total
 
Fiscal
2020
 
Fiscal
2021-2022
 
Fiscal
2023-2024
 
Thereafter
Long-Term Debt
 
$
195,464

 
$

 
$
195,464

 
$

 
$

Interest on Long-Term Debt
 
20,157

 
13,438

 
6,719

 

 

Revolving Credit Facility
 
160,540

 

 
160,540

 

 

Operating Leases
 
146,915

 
20,453

 
32,963

 
19,860