Briggs & Stratton reports first quarter 2016 results, reaffirms guidance

Briggs & Stratton Corporation has announced financial results for its first fiscal quarter 2016 ended September 27, 2015.

Highlights:

• First quarter fiscal 2016 consolidated net sales were $289 million, a decrease of $3 million or 1.1% compared to the prior year. Net sales increased $8 million or 2.6% before currency impacts
• First quarter fiscal 2016 consolidated adjusted net loss was $15.2 million compared to the adjusted net loss of $9.3 million in the first quarter of fiscal 2015
• First quarter fiscal 2016 adjusted diluted loss per share was $0.35, compared to the adjusted diluted loss per share of $0.21 last year

"Our first quarter results were better than we expected, driven by solid late season activity in the major lawn and garden markets, especially in the U.S.," says Todd J. Teske, Chairman, President and Chief Executive Officer. "We believe the late season activity has resulted in more normal channel inventories compared to the end of last season. Also, we are encouraged by the continued profitability improvement of our Products business through a focus on selling high-end residential and commercial products while improving the efficiency of our operation."

Teske continues, "While these factors are encouraging, we are cautious about the global economy and continued foreign currency headwinds as well as continued low oil prices which negatively impact a portion of our Job Site product sales."

Consolidated Results:

Consolidated net sales for the first quarter of fiscal 2016 were $289 million, a decrease of $3 million or 1.1% from the first quarter of fiscal 2015. Net sales decreased during the quarter primarily due to an unfavorable foreign currency impact, net of price increases, of $10.8 million, predominately related to the weakening of the Euro, Australian Dollar and Brazilian Real. Excluding currency impacts, net sales increased by $8 million. The increase was driven by the results of acquisitions completed during fiscal 2015, higher shipments of small engines used on walk mowers and increased sales of commercial lawn and garden equipment. The first quarter of fiscal 2016 adjusted consolidated net loss was $15.2 million or $0.35 per diluted share. The first quarter of fiscal 2015 adjusted consolidated net loss was $9.3 million or $0.21 per diluted share. Unfavorable foreign currencies in the first quarter of fiscal 2016 had an unfavorable impact on net income of approximately $1.2 million or $0.03 per diluted share. Lower production in the first quarter of fiscal 2016, as anticipated due to last year's pre-production of inventory to support the McDonough plant closure, also had an unfavorable impact on net loss compared to last year.

Engines Segment:

Net sales in the first quarter of fiscal 2016 decreased $3 million or 2.0% from the prior year. Unfavorable foreign currency, net of offsetting price increases, negatively impacted net sales by approximately $4.9 million, largely due to the weakening of the Euro. Total engine volumes shipped in the quarter increased by 6.3% or approximately 50,000 engines, mainly attributable to higher shipments of small engines used on walk mowers due to improved lawn and garden markets in North America and Europe this past season. This resulted in more normal channel inventories at the end of the season compared to higher inventory levels last year.

Adjusted segment loss in the first quarter of fiscal 2016 increased by $4.9 million from the prior year. The adjusted gross profit percentage was 16.2% in the first quarter of fiscal 2016, a decrease of 200 basis points from the prior year. Unfavorable foreign currency, net of offsetting price increases, negatively impacted gross profit percentage by 250 basis points, largely due to the weakening of the Euro. Manufacturing volume decreased by 7%, which reduced the adjusted gross profit percentage by 90 basis points. Engine production was elevated last year in the first quarter to support the pre-build of products related to the closure of the McDonough plant. Partially offsetting the lower gross profit percentage was the benefit of manufacturing efficiency improvements and slightly lower material costs.

Adjusted engineering, selling, general and administrative expenses for the first quarter of fiscal 2016 increased $0.5 million largely due to higher costs related to pension expense and higher compensation expense, partially offset by the benefit of the movement in foreign currency rates.

Products Segment:

Net sales in the first quarter of fiscal 2016 decreased $4 million or 2.2% from the prior year. Unfavorable foreign currency, net of offsetting price increases, negatively impacted net sales by approximately $5.9 million, primarily related to the Australian Dollar and Brazilian Real. Excluding currency impacts, net sales increased by $2.3 million due to the results from the prior year acquisitions of Allmand and Billy Goat as well as increased sales of high end residential and commercial lawn and garden equipment through our North America dealer channel. Partially offsetting this increase were lower sales of snow throwers into Europe following two seasons of below normal snowfall and decreased sales in Latin America due to unfavorable economic conditions in the region. Lower generator sales due to a prolonged absence of major storms and our planned actions to narrow the assortment of lower priced Snapper consumer lawn and garden equipment also offset the increase.

Adjusted segment income in the first quarter of fiscal 2016 improved by $1.5 million from the prior year. The adjusted gross profit percentage of 18.1% in the first quarter of fiscal 2016 increased 160 basis points year over year. Adjusted gross margins improved by 180 basis points due to increased manufacturing efficiencies, including $2.2 million of incremental savings realized from the previously announced restructuring actions. Favorable sales mix, which improved adjusted gross margins by approximately 70 basis points, was driven by our focus on selling higher margin lawn and garden equipment and the results from last year's acquisitions. Partially offsetting the higher gross profit margins was lower manufacturing volume, which reduced adjusted gross profit margins by 90 basis points. Manufacturing throughput decreased 13% during the first quarter of fiscal 2016 as production had been elevated in the first quarter of last year to pre-build products to support the closure of the McDonough plant.

Adjusted engineering, selling, general and administrative expenses in the first quarter of fiscal 2016 increased $0.8 million from the prior year largely due to the Allmand and Billy Goat acquisitions, partially offset by the benefit of the movement in foreign currency rates.

Corporate Items:

The effective tax rate for the first quarter of fiscal 2016 was 31.2%, compared to 40.9% for the same respective period last year. The tax rates for the first quarters of fiscal 2016 and 2015 were primarily driven by losses incurred at certain foreign subsidiaries for which the company does not receive tax benefits and foreign earnings in jurisdictions with tax rates that vary from the U.S. statutory rate. The tax rate for the first quarter of fiscal 2015 also included the reversal of previously recorded reserves as a result of the effective settlement of the company's IRS audit for its 2009-2010 consolidated income tax returns.

Financial Position:

Net debt at September 27, 2015 was $209.4 million (total debt of $263.4 million less $54.0 million of cash), or $46.3 million higher than the $163.1 million (total debt of $225.0 million less $61.9 million of cash) at September 28, 2014. The change in net debt is mainly attributable to the acquisition of Billy Goat for approximately $28.3 million in cash, net of cash acquired, during the fourth quarter of fiscal 2015. Cash flows used in operating activities for fiscal 2016 were $82.7 million compared to $48.9 million in fiscal 2015. The decrease in operating cash flows was primarily related to changes in working capital, primarily higher accounts receivable and lower accounts payable, partially offset by lower inventory levels. Inventory levels were elevated last year in the first quarter to support the McDonough plant closure.

Restructuring:

During the first quarter of fiscal 2016, the company made progress 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. Production of riding mowers, the last part of the manufacturing transition from the McDonough plant, began at the Wauwatosa, WI, plant during the first quarter. In addition to the Products segment restructuring, the company implemented restructuring actions within the Engines segment. These actions, which were completed in the first quarter of fiscal 2016, included a headcount reduction at the plant in Chongqing, China to offset lower production of engines used on snow throwers as well as changes in salaried personnel in the United States. Pre-tax restructuring costs for the first quarter of fiscal 2016 were $1.4 million and $2.0 million related to the Engines and Products segments, respectively. Pre-tax restructuring cost estimates for the Products segment remain unchanged for fiscal 2016 at $4 million to $8 million. There are no additional charges anticipated related to the Engine segment restructuring actions. Incremental pre-tax savings related to the Products restructuring actions during the first quarter of fiscal 2016 were $1.7 million. Incremental cost savings as a result of these actions are anticipated to be $5 million to $7 million in fiscal 2016.

Share Repurchase Program:

On August 13, 2014, the Board of Directors authorized up to $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 quarter of fiscal 2016, the company repurchased approximately 590,000 shares on the open market at an average price of $18.95 per share. As of September 27, 2015, the company has remaining authorization to repurchase up to approximately $29 million of common stock with an expiration date of June 30, 2016.

Outlook:

The company is reaffirming its guidance for fiscal 2016. It anticipates net sales for fiscal 2016 to be in a range of $1.90 billion to $1.96 billion. This sales range contemplates modest organic growth with its expectations of the U.S. and European markets to improve by 1 to 3% for the next season. Acquisitions completed in fiscal 2015 are expected to add up to 2% to net sales and reflects lower capital spending levels by oil and gas companies based on lower oil pricing compared with last year. Achievement of this growth will depend on the speed with which the company further diversifies its Allmand brand into construction and infrastructure sectors as well as internationally. Offsetting organic and acquisition growth are lower estimated sales of approximately 2% related to a reduction of the lower margin Snapper SKUs that were discontinued as part of the restructuring program and unfavorable net foreign currency impacts caused by a strong U.S. dollar.

Briggs & Stratton continues to estimate fiscal 2016 net income to be in a range of $54 million to $61 million or $1.20 to $1.36 per diluted share prior to the impact of any restructuring actions. Operating margins are estimated to be 4.8 to 5.2%. Compared to last year, operating margins are expected to be consistent as sales growth and manufacturing efficiency improvements are offset by a stronger dollar and increased pension expense caused by the adoption of new mortality tables to value our pension liability. Also, fiscal 2016 reflects an expected return to a more normalized tax rate in the range of 32 to 34% which represents a reduced benefit of approximately $0.14 per diluted share from fiscal 2015. Interest expense and other income is estimated to be $21 million and $8.5 million, respectively. Capital expenditures are estimated to be $65 million to $70 million.