Briggs & Stratton reports 1.5% sales decrease for third quarter fiscal 2015

Highlights:

• Third quarter fiscal 2015 consolidated net sales were $619.0 million, a decrease of $9.4 million or 1.5% compared to the prior year
• Third quarter fiscal 2015 consolidated adjusted net income was $39.2 million, an improvement from the adjusted net income of $38.7 million in the third quarter of fiscal 2014
• Third quarter fiscal 2015 adjusted diluted earnings per share was $0.86, an improvement from the adjusted diluted earnings per share of $0.81 in the prior year
• Tax credits recognized in third quarter benefited earnings by $4.7 million
• Fiscal 2015 earnings guidance lifted to $1.27 to $1.43 per diluted share before restructuring and acquisition expenses from previous guidance of $1.20 to $1.35 per diluted share.

"While sales were relatively consistent with last year, we continued to make progress on introducing new products and improving our operations," comments Todd J. Teske, Chairman, President and Chief Executive Officer of Briggs & Stratton Corporation. "The restructuring of our Products business to focus on higher margin products and streamline our manufacturing operations has contributed to improved Products segment earnings of nearly $5 million in the quarter and $20 million for our fiscal year to date. We also launched several innovative products this spring including our new EXi engine that never requires oil changes and our new In-Start lithium-ion electric starting technology providing users with our easiest push button starting engine ever."

Consolidated Results:

Consolidated net sales for the third quarter of fiscal 2015 were $619.0 million, a decrease of $9.4 million or 1.5% from the third quarter of fiscal 2014. Engines shipped to third party OEM customers increased slightly in the quarter; however, shipments to our Products segment were down in the quarter due to higher shipments earlier in the year to enable production in advance of the McDonough plant closure. The strengthening of the US dollar, predominantly against the Australia dollar, Brazilian real and Euro, led to an unfavorable foreign exchange impact on sales of $6.7 million. In addition, net sales were unfavorably impacted by reduced generator sales and unfavorable mix of engines shipped. Net sales benefited by higher sales in international markets, particularly Australia and Europe, and the results of the Allmand acquisition, which closed in August of this fiscal year. The fiscal 2015 third quarter consolidated net income, which includes restructuring expenses and acquisition-related charges, was $33.9 million or $0.75 per diluted share. The third quarter of fiscal 2014 consolidated net income, which included restructuring charges, was $39.2 million or $0.82 per diluted share. The fiscal 2015 third quarter consolidated net income includes a tax benefit of $4.7 million related to incremental research and development tax credits, partially offset by an unfavorable foreign exchange impact of approximately $3.4 million.

Consolidated net sales for the first nine months of fiscal 2015 were $1.36 billion, a decrease of $6.4 million or 0.5% from the first nine months of fiscal 2014. The decrease is due to reduced shipment volumes of engines to OEM customers in North America due to slightly elevated channel inventories, lower generator sales from a lack of major power outages, and an unfavorable foreign exchange impact of approximately $14.0 million, predominantly due to the weakening of the Euro, Australian dollar, and Brazilian real. The decrease in net sales was partially offset by higher sales in Europe and Australia, higher sales of commercial lawn and garden equipment and pressure washers in North America, and the results of the Allmand acquisition. The fiscal 2015 nine months consolidated net income, which includes $24.9 million of restructuring expenses and acquisition-related charges, was $25.6 million or $0.56 per diluted share. The first nine months of fiscal 2014 consolidated net income, which included $5.1 million of restructuring charges, was $20.5 million or $0.43 per diluted share. The fiscal 2015 nine months consolidated net income includes an unfavorable foreign exchange impact of approximately $5.4 million, partially offset by a tax benefit of $5.0 million related to incremental research and development tax credits.

Engines Segment: 

Net sales were $432.2 million in the third quarter of fiscal 2015, a decrease of $20.1 million or 4.5% from the prior year. Total engine volumes shipped in the quarter decreased by 1.6% or approximately 50,000 engines. Engines shipped to third party OEM customers increased slightly in the quarter; however, shipments to our Products segment were down in the quarter due to higher shipments earlier in the year to enable production in advance of the McDonough plant closure. Net sales also decreased due to an unfavorable sales mix. Despite an unfavorable foreign exchange impact of $4.3 million, largely due to the weakening of the Euro, sales into the European market increased on improved placement of our engines and as channel inventories were low following an improved lawn and garden season last season.

Adjusted segment income in the third quarter of fiscal 2015 was $54.9 million, a decrease of $6.4 million from the prior year. The adjusted gross profit percentage was 22.9% in the third quarter of fiscal 2015, a decrease of 80 basis points from the prior year. Manufacturing throughput decreased by 6% during the quarter which reduced adjusted gross profit margins by approximately 140 basis points. The decrease was largely timing related as we accelerated production to earlier quarters in fiscal 2015 in order to accommodate the footprint restructuring of our Products segment and to build engine inventories in advance of beginning production of the EXi engine platform in the second fiscal quarter. In addition, unfavorable foreign exchange, primarily related to the Euro, reduced adjusted gross profit margins by 70 basis points. Partially offsetting the lower adjusted gross profit margins were the previously announced retirement plan changes, which improved fiscal 2015 adjusted gross profit margins by $3.2 million, or 70 basis points. Manufacturing efficiency improvements in fiscal 2015 also helped offset the decrease in adjusted gross profit margins.

Engineering, selling, general and administrative expenses decreased $2.2 million largely due to the retirement plan changes. Higher compensation expense in fiscal 2015 was offset by the benefit of the movement in foreign exchange rates.

Products Segment: 

Net sales were $211.1 million in the third quarter of fiscal 2015, which was an increase of $6.0 million or 2.9% from the prior year. This increase was due to higher sales in international markets, increased commercial lawn and garden equipment sales in the North American market and the results of the Allmand acquisition. Growing conditions in the Australia market improved in fiscal 2015, which led to increased net sales. Partially offsetting the increase was an unfavorable foreign exchange impact of $2.4 million, primarily related to the weakening of the Australian dollar and Brazilian real. In addition, generator sales decreased due to fewer major power outages.

Adjusted segment income in the third quarter of fiscal 2015 was $0.0 million, an improvement of $4.9 million from the prior year adjusted segment loss. The adjusted gross profit percentage of 12.8% increased by 190 basis points year over year.  Manufacturing throughput for the first three quarters of fiscal 2015 increased by over 20%. This favorable absorption of fixed costs led to an improvement of approximately 190 basis points in the third quarter. In addition, favorable sales mix improved adjusted gross margins due to a focus on selling higher margin lawn and garden equipment and the benefit of the Allmand acquisition. Partially offsetting the increase in adjusted gross profit margins was an unfavorable foreign exchange impact of approximately 80 basis points primarily due to the weakening of the Australian dollar and Brazilian real.

Adjusted engineering, selling, general and administrative expenses remained consistent year over year. Higher spend due to the Allmand acquisition and increased compensation expense was offset by $2.3 million in savings related to the restructuring actions announced in July 2014.

Allmand Bros., Inc. Acquisition:

On August 29, 2014, the Company completed the acquisition of Allmand Bros., Inc. for approximately $60 millionin cash, net of cash acquired.  Allmand is a leading designer and manufacturer of high quality towable light towers, industrial heaters, and solar LED arrow boards. Allmand, which is included within our Products segment, has historical annual net sales of approximately $80 million. 

Corporate Items:

The effective tax rates for the third quarter and first nine months of fiscal 2015 were 20.2% and 5.7%, compared to 26.1% and 26.6% for the same respective periods last year.  The tax rates for the third quarter and first nine months of fiscal 2015 were primarily driven by incremental federal research & development (R&D) tax credits related to prior years offset by reserves for unrecognized tax positions for a net tax benefit of $4.7 million and$5.0 million, respectively. In addition, the tax rate for the first nine months of fiscal 2015 was impacted by the reversal of previously recorded reserves as a result of the effective settlement of the Company's IRS audit. The tax rates for the third quarter and the first nine months of fiscal 2014 included a taxpayer election filed pursuant to the outcome of a U.S. court case that provided the company precedent to record a tax benefit of $2.9 million for the permanent exclusion of qualified export activity from prior years' taxable income.

Financial Position:

Net debt at March 29, 2015 was $235.4 million (total debt of $285.1 million less $49.7 million of cash), or $117.6 million higher than the $117.8 million (total debt of $225.0 million less $107.2 million of cash) at March 30, 2014. Cash flows used in operating activities for fiscal 2015 were $52.1 million compared to $14.0 million in fiscal 2014. The increase in operating cash flows used was primarily related to higher inventory levels to facilitate the upcoming closure of the McDonough plant and the introduction of a new engine line in fiscal 2015. In addition, the company paid cash of $59.9 million for the Allmand acquisition in the first nine months of fiscal 2015 compared to no acquisitions in the same respective period last year.

Restructuring:

During the third quarter of fiscal 2015, the company made progress on implementing the previously announced restructuring actions to narrow its assortment of lower-priced Snapper consumer lawn and garden equipment and consolidate its Products segment manufacturing facilities in order to reduce costs. The company initiated production of pressure washers at its Milwaukee plant during the third quarter and ceased production at the McDonough, GA, plant shortly after the end of the third quarter. Pre-tax restructuring costs for the third quarter and first nine months of fiscal 2015 were $8.0 million and $23.3 million, respectively, and pre-tax savings were $2.3 million and $5.1 million, respectively. Pre-tax restructuring cost estimates for fiscal 2015 remain unchanged at $30 million to $37 million. Total annual cost savings as a result of these actions are anticipated to be approximately $15 million to $20 million with approximately $5 million to $7 million expected to be realized in fiscal 2015 and the remainder realized in fiscal 2016. 

Share Repurchase Program:

On January 22, 2014, the Board of Directors of the company authorized up to $50 million in funds for use in the company's common share repurchase program. On August 13, 2014, the Board of Directors authorized up to an additional $50 million in funds for use in the common share repurchase program. 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 loan covenants. During the first nine months of fiscal 2015, the company repurchased approximately 2.0 million shares on the open market at an average price of $19.40 per share. As of March 29, 2015, the company has remaining authorization to repurchase up to approximately $48 million of common stock with an expiration date of June 30, 2016.

Outlook:

The company is increasing its estimated earnings for fiscal 2015 to take into consideration the operating results and additional share repurchases during the first three fiscal quarters as well as the tax benefit of $4.7 million recognized in the third quarter for research and development tax credits. It has also considered the continued strengthening of the U.S. dollar relative to many currencies it sells in outside of the United States. The company now projects fiscal 2015 full year net income to be in a range of $57 million to $64 million or $1.27 to $1.43 per diluted share prior to the impact of acquisition expenses, additional share repurchases, or costs related to our announced restructuring actions. It now projects consolidated net sales for fiscal 2015 to be in a range of $1.90 billion to $1.95 billion. The decrease in the sales guidance is primarily related to slowing growth rates in sales of product in international regions as well as the impact of the strengthening U.S. dollar. The company continues to estimate the retail market for U.S. lawn and garden products will increase an estimated 1 to 4% in the next season; however, it is possible that sales of lawn and garden products shift to later in the season due to retail sales patterns, retailer reorders, and OEM production schedules. Operating margins are expected to be in a range of 4.9% to 5.2%, an improvement over fiscal 2014 reflecting the strategic actions taken to focus on higher margin products and the positive impacts of the restructuring actions. Interest expense and other income are estimated to be approximately $19 million and $7 million, respectively. The effective tax rate excluding restructuring charges is projected to be in a range of 25% to 26% and capital expenditures are projected to be approximately $60 million to $65 million.