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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-1370
BRIGGS & STRATTON CORPORATION
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(Exact name of registrant as specified in its charter)
A Wisconsin Corporation 39-0182330
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12301 WEST WIRTH STREET
WAUWATOSA, WISCONSIN 53222
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 414-259-5333
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock (par value $0.01 per share) New York Stock Exchange
Common Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was approximately $877,470,000 based on the reported last sale price
of such securities as of August 20, 1998.
Number of Shares of Common Stock Outstanding at August 20, 1998: 23,623,591.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Part of Form 10-K Into Which Portions
Document of Document are Incorporated
-------- ----------------------------
Proxy Statement for Annual Meeting
on October 21, 1998 Part III
The Exhibit Index is located on page 30.
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BRIGGS & STRATTON CORPORATION
1998 FORM 10-K - TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 1
Item 2. Properties 3
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
Executive Officers of the Registrant 4
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 5
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 11
Item 8. Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 28
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners and Management 28
Item 13. Certain Relationships and Related Transactions 28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 28
Signatures 29
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Certain statements in Item 1. Business and Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations may contain
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from those projected in the forward-looking
statements. The words "anticipate", "believe", "estimate", "expect",
"objective", and "think" or 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 effects of weather on the purchasing patterns
of the Company's customers and end use purchasers of the Company's engines; the
seasonal nature of the Company's business; actions of competitors; changes in
laws and regulations, including accounting standards; employee relations;
customer demand; prices of purchased raw materials and parts; domestic economic
conditions, including housing starts and changes in consumer disposable income;
foreign economic conditions, including currency rate fluctuations; the ability
of the Company's customers and suppliers to meet year 2000 compliance; and
unanticipated internal year 2000 issues. Some or all of the factors may be
beyond the Company's control.
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PART I
ITEM 1. BUSINESS
GENERAL
Briggs & Stratton Corporation is the world's largest producer of air cooled
gasoline engines for outdoor power equipment. The Company designs, manufactures,
markets and services these products for original equipment manufacturers (OEMs)
worldwide. These engines are aluminum alloy gasoline engines ranging from 3
through 22 horsepower.
The Company's engines are used primarily by the lawn and garden equipment
industry, which accounted for 79% of fiscal 1998 OEM engine sales. The major
lawn and garden equipment applications include walk-behind lawn mowers, riding
lawn mowers and garden tillers. The remaining 21% of OEM sales in fiscal 1998
were for use on many products for industrial, construction, agricultural and
consumer applications, including generators, pumps and pressure washers. Many
retailers specify the Company's engines on the powered equipment they sell, and
the Briggs & Stratton name is often featured prominently on a product despite
the fact that its engine is just a component. Briggs & Stratton engines are
marketed under various brand names including Classic(TM), Sprint(TM), Quattro
(TM), Quantum(R), INTEK(TM), I/C(R), Diamond I/C(R), Industrial Plus(TM) and
Vanguard(TM).
In fiscal 1998, approximately 22% of the Company's net sales were derived from
sales in international markets, primarily to customers in Europe. Briggs &
Stratton serves its key international markets through its European regional
office in Switzerland, its distribution center in the Netherlands and sales and
service subsidiaries in Australia, Austria, Canada, Czech Republic, France,
Germany, New Zealand, Sweden, the United Kingdom and Mexico. The Company is a
leading supplier of gasoline engines in developed countries where there is an
established lawn and garden equipment market. The Company also exports to
developing nations where its engines are used in agricultural, marine,
construction and other applications.
Briggs & Stratton engines are sold primarily by its worldwide sales force
through direct calls on customers. The Company's marketing staff and engineers
provide support and technical assistance to its sales force.
Briggs & Stratton also manufactures replacement engines and service parts and
sells them to sales and service distributors. The Company owns its principal
international distributors. In the United States the distributors are
independently owned and operated. These distributors supply service parts and
replacement engines directly to approximately 30,000 independently owned
authorized service dealers throughout the world. These distributors and service
dealers implement Briggs & Stratton's commitment to reliability and service.
CUSTOMERS
The Company's sales are primarily made directly to original equipment
manufacturers. The Company's three largest customers accounted for 46%, 46% and
48% of net sales in fiscal 1998, 1997 and 1996, respectively. Sales to the
Company's largest engine customer, MTD Products Inc., were 18%, 21% and 21% of
net sales in fiscal 1998, 1997 and 1996, respectively. Sales to its second
largest customer, AB Electrolux (including its Frigidaire Home Products group),
were 15%, 14% and 14% of net sales in fiscal 1998, 1997 and 1996, respectively,
and sales to its third largest customer, Tomkins PLC (including its Murray
subsidiary products), were 13%, 11% and 13% of net sales in fiscal 1998, 1997
and 1996, respectively. Under purchasing plans available to all of its gasoline
engine customers, the Company typically enters into annual engine supply
arrangements with these large customers. The Company has no reason to anticipate
a change in this practice or in its historical business relationships with these
equipment manufacturers.
Over the past several years, sales in the United States of lawn and garden
equipment by mass merchandisers have increased significantly, while sales by
independent distributors and dealers have declined. The Company believes that in
1998 more than 75% of all lawn and garden equipment sold in the United States
was sold through mass merchandisers such as Sears, Wal-Mart, Kmart, Home Depot
and Lowe's. Given the buying power of the mass merchandisers, the Company,
through its
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customers, has experienced pricing pressure. The Company expects that this trend
will continue in the foreseeable future. The Company believes that a similar
trend has developed for commercial products for industrial and consumer
applications.
COMPETITION
The small gasoline engine industry is highly competitive. The Company's major
domestic competitors in engine manufacturing are Tecumseh Products Company,
Honda Motor Co., Ltd., Kohler Co. and Kawasaki Heavy Industries, Ltd. Also, two
domestic lawn mower manufacturers, Toro Co. under its Lawn-Boy brand, and Honda,
manufacture their own engines. Eight Japanese small engine manufacturers, of
which Honda and Kawasaki are the largest, compete directly with the Company in
world markets in the sale of engines and indirectly through their sale of end
products that compete with the end products produced by the Company's customers.
Tecumseh Europa S.p.A., located in Italy, is a major competitor in Europe.
The Company believes the major areas of competition from all engine
manufacturers include product quality, brand strength, price, timely delivery
and service. Other factors affecting competition are short-term market share
objectives, short-term profit objectives, exchange rate fluctuations, technology
and product support and distribution strength. Briggs & Stratton believes its
product quality and service reputation have given it strong brand name
recognition and enhance its competitive position.
SEASONALITY OF DEMAND
Sales of engines to lawn and garden equipment manufacturers are highly seasonal
because of the buying patterns of retail customers. The majority of lawn and
garden equipment is sold during the spring and summer months when most lawn care
and gardening activities are performed. Sales of lawn and garden equipment are
also influenced by weather conditions. Sales in the Company's fiscal third
quarter have historically been the highest, while sales in the first fiscal
quarter have historically been the lowest.
The sale of lawn and garden equipment has shifted from smaller dealers to larger
mass merchandisers, who do not wish to carry large inventories of lawn and
garden equipment. In order to efficiently use its capital investments and meet
seasonal demand for engines, the Company pursues a balanced production schedule
throughout the year, subject to ongoing adjustment to reflect changes in
estimated demand, customer inventory levels and other matters outside the
control of the Company. Accordingly, inventory levels are generally higher
during the first and second fiscal quarters in anticipation of increased
customer demand in the third fiscal quarter, at which time inventory levels
begin to decrease as sales increase.
In recent years, lawn and garden equipment manufacturers have tended to place
orders with engine manufacturers and to take deliveries later in the selling
season, specifically later in the Company's third fiscal quarter and in the
Company's fourth fiscal quarter. This seasonal pattern results in high
inventories and receivables and low cash for the Company in the second and the
beginning of the third fiscal quarters, with a rapid shift to lower inventories
and receivables and ultimately higher cash in the latter portion of the third
fiscal quarter and in the fourth fiscal quarter.
MANUFACTURING
Briggs & Stratton manufactures engines and parts at the following locations in
the United States: Wauwatosa, Wisconsin; Murray, Kentucky; Poplar Bluff and
Rolla, Missouri; Auburn, Alabama; and Statesboro, Georgia. The Company has a
parts distribution center in Menomonee Falls, Wisconsin. Parts and components
are manufactured at foundries located in West Allis, Wisconsin and Ravenna,
Michigan. The Company believes that it has adequate capacity to meet its
currently anticipated production needs.
Briggs & Stratton manufactures a majority of the structural components used in
its engines, including ductile iron castings, aluminum die castings and a high
percentage of other major components, such as carburetors and ignition systems.
The Company purchases certain finished
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standard commercial parts such as piston rings, spark plugs, valves, grey iron
castings, zinc die castings and plastic components, some stampings and screw
machine parts and smaller quantities of other components. Raw material purchases
are principally for aluminum, iron 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, with Puling Machinery Works and Yimin Machinery Plant for
the production of engines in China, and with Starting Industrial of Japan for
the production of rewind starters in the U.S. The Company also has two new joint
ventures in India. Kirloskar Briggs & Stratton, a joint venture with Kirloskar
Oil Engines Ltd., will be responsible for sales and distribution of Briggs &
Stratton engines and parts in India and will assemble and distribute generators
and pumps powered by Briggs & Stratton engines. Hero Briggs & Stratton is a
joint venture with Hero Motors, part of the Hero Group, for the manufacture of
engines and transmissions to be used in two wheel transportation vehicles.
The Company has a strategic relationship with Mitsubishi Heavy Industries (MHI)
for the international distribution of engines for outdoor power equipment
manufactured by MHI in Japan.
OTHER GENERAL INFORMATION
The Company holds certain 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. Licenses, franchises and concessions are not a
material factor in the Company's business.
For the years ending June 28, 1998, June 29, 1997 and June 30, 1996, the Company
spent approximately $19,950,000, $19,525,000 and $15,019,000, respectively, on
Company sponsored 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 the fiscal year was
7,350. Employment ranged from a low of 7,205 in July 1997 to a high of 7,486 in
October 1997.
EXPORT SALES
Export sales for fiscal 1998 were $288,510,000 (22% of total sales), for fiscal
1997 were $304,230,000 (23% of total sales) and for fiscal 1996 were
$323,747,000 (25% of total sales). These sales were principally to customers in
European countries.
ITEM 2. PROPERTIES
The corporate offices and two of the Company's manufacturing facilities are
located in suburbs of Milwaukee, Wisconsin. The Company also has manufacturing
facilities in Murray, Kentucky; Poplar Bluff and Rolla, Missouri; Auburn,
Alabama; Statesboro, Georgia; and Ravenna, Michigan. These are owned facilities
containing over 3.9 million square feet of office and production area. The
Company occupies warehouse space totalling 400,000 square feet in a suburb of
Milwaukee, Wisconsin under a reservation of interest agreement.
The engine business is seasonal, with demand for engines at its height in the
winter and early spring. Engine manufacturing operations run at capacity levels
during the peak season, with many operations running three shifts. Engine
operations generally run one shift in the summer, when demand is weakest and
production is considerably under capacity. During the winter, when finished
goods inventories reach their highest levels, owned warehouse space may be
insufficient and capacity may be expanded through rented space. Excess warehouse
space exists in the spring and summer seasons. The Company's owned properties
are well maintained.
The Company leases 174,000 square feet of space to house its European warehouse
in the Netherlands and its foreign sales and service operations in Australia,
Austria, Canada, the Czech Republic, France, Germany, Mexico, New Zealand,
Sweden, Switzerland and the United Kingdom.
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ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings that are required to be reported under
this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the three months ended June 28,
1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name, Age, Position Business Experience for Past Five Years
- ------------------- ---------------------------------------
FREDERICK P. STRATTON, JR., 59 Mr. Stratton was elected to the position of Chief Executive Officer in May
Chairman and Chief Executive Officer 1977 and Chairman in November 1986. He also served in the position of President
(1) (2) (3) from January 1992 to August 1994.
JOHN S. SHIELY, 46 Mr. Shiely was elected to his current position in August 1994, after serving
President and Chief Operating Officer as Executive Vice President - Administration since November 1991.
(1) (2)
ROBERT H. ELDRIDGE, 59 Mr. Eldridge was elected to his current position effective April 1995. He has
Executive Vice President and served as Secretary-Treasurer since January 1984.
Chief Financial Officer,
Secretary-Treasurer (1)
MICHAEL D. HAMILTON, 56 Mr. Hamilton was elected to his present position effective June 1989.
Executive Vice President -
Sales and Service
JAMES A. WIER, 55 Mr. Wier was elected to his current position in April 1989.
Executive Vice President - Operations
JAMES E. BRENN, 50 Mr. Brenn was elected to his current position in November 1988.
Vice President and Controller
RICHARD J. FOTSCH, 43 Mr. Fotsch was elected to his current position effective July 1997, after serving
Senior Vice President - in the executive officer position of Vice President; General Manager - Small
Engine Group Engine Division since May 1993.
HUGO A. KELTZ, 50 Mr. Keltz was elected to his present position in May 1992.
Vice President - International
CURTIS E. LARSON, JR., 50 Mr. Larson was elected to this executive officer position in October 1995 after
Vice President - Distribution serving as Vice President - Industrial Engine Division since January 1993.
Sales and Service
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PAUL M. NEYLON, 51 Mr. Neylon was elected to his current position in May 1993.
Vice President; General Manager -
Spectrum Division
WILLIAM H. REITMAN, 42 Mr. Reitman was elected an executive officer effective April 20, 1998. He has
Vice President - Marketing served as Vice President - Marketing since November 1995, after serving as
Marketing Director - New Ventures since March 1993.
STEPHEN H. RUGG, 51 Mr. Rugg was elected to his current position in November 1995, after serving as
Vice President - Sales Vice President - Sales and Marketing since November 1988.
THOMAS R. SAVAGE, 50 Mr. Savage was elected to his current position effective July 1997, after
Senior Vice President - Administration serving as Vice President - Administration and General Counsel since November
1994. He joined the Company in April 1992 as General Counsel.
GREGORY D. SOCKS, 49 Mr. Socks was elected to his current position effective July 1997, after serving
Vice President; General Manager - in the executive officer position of Vice President; General Manager - Large
Castings Division Engine Division since May 1993.
GERALD E. ZITZER, 51 Mr. Zitzer was elected to his current position in November 1988.
Vice President - Human Resources
(1) Officer is also a Director of the Company.
(2) Member of Executive Committee.
(3) Member of Planning Committee.
Officers are elected annually and serve until they resign, die, are removed, or
a different person is appointed to the office.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information required by this Item is incorporated by reference to "Quarterly
Financial Data, Dividend and Market Information" on page 27.
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ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year 1998 1997 1996 1995 1994
(dollars in thousands, except per share data)
SUMMARY OF OPERATIONS
NET SALES 1,327,610 1,316,413 1,287,029 1,339,677 1,285,517
GROSS PROFIT ON SALES 254,674 221,216 261,748 271,618 266,540
PROVISION FOR INCOME TAXES 42,500 37,740 56,640 65,570 67,240
NET INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 70,645 61,565 92,412 104,805 102,481
NET INCOME 70,645 61,565 92,412 104,805 69,923
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (000) 24,666 28,551 28,927 28,927 28,927
DILUTED NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (000) 24,775 28,678 29,059 29,072 29,120
PER SHARE OF COMMON STOCK:
Basic Earnings
before cumulative effect of accounting changes 2.86 2.16 3.19 3.62 3.54
Basic Earnings 2.86 2.16 3.19 3.62 2.42
Diluted Earnings 2.85 2.15 3.18 3.61 2.40
Cash Dividends 1.12 1.09 1.05 .98 .90
Shareholders' Investment 13.28 13.82 17.30 15.19 13.96
OTHER DATA
SHAREHOLDERS' INVESTMENT 316,488 351,097 500,505 439,478 403,792
LONG-TERM DEBT 128,102 142,897 60,000 75,000 75,000
TOTAL ASSETS 793,409 842,189 838,164 798,493 777,355
PLANT AND EQUIPMENT 812,428 796,714 776,638 726,331 669,593
PLANT AND EQUIPMENT, NET OF RESERVES 391,927 396,266 374,212 343,297 285,890
PROVISION FOR DEPRECIATION 47,511 43,345 43,032 44,445 42,950
EXPENDITURES FOR PLANT AND EQUIPMENT 45,893 71,262 77,746 131,034 40,804
WORKING CAPITAL 159,101 204,422 266,208 256,075 276,040
Current Ratio 1.7 to 1 2.0 to 1 2.4 to 1 2.3 to 1 2.3 to 1
NUMBER OF EMPLOYEES AT YEAR END 7,265 7,661 7,199 6,958 8,628
NUMBER OF SHAREHOLDERS AT YEAR END 4,911 5,336 5,879 6,792 6,228
QUOTED MARKET PRICE:
High 53-3/8 53-5/8 46-7/8 39-1/4 45-1/8
Low 36-7/8 36-1/2 32-3/4 30-1/2 32-1/2
NOTES:
(1) The number of shares of common stock and per share data have been adjusted
for a 2-for-1 stock split in fiscal 1995.
(2) The cumulative effects of accounting changes in 1994 were for postretirement
health care, postemployment benefits and deferred income taxes.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Sales
Net sales for fiscal 1998 totaled $1,328 million, up 1% or $11 million from the
preceding year. This increase resulted primarily from a $34 million increase in
sales dollars due to a 3% increase in engine unit shipments and a $6 million
increase in service parts sales due to increased demand. These increases were
partially offset by a $19 million decrease in sales dollars due to a mix change
to lower horsepower, lower priced engines and a $10 million decrease in revenue
from European customers with whom the Company shares currency risk.
Gross Profit
The gross profit margin for the 1998 fiscal year increased to 19% from 17% in
the 1997 fiscal year. The primary reason for this favorable change was the lack
of the $37 million charge related to the early retirement window (described
later). There was also a $2 million increase due to improvements in
manufacturing productivity. These were offset by the $10 million in lost gross
profit due to the reduced revenue from European customers described above.
Engineering, Selling, General and Administrative Expenses
Engineering, selling, general and administrative expenses increased $12 million
or 11% between years. This increase was caused primarily by the costs associated
with the new company-wide information system which totaled $7 million (discussed
later) and increased costs of new venture activities which totaled $7 million,
of which $4 million related to the Company's POWERCOM software business. The
Company signed a letter of intent for the sale of its POWERCOM software business
shortly after the end of the fiscal year. This sale is not expected to result in
any material gains or losses.
Interest Expense
Interest expense for the 1998 fiscal year was $9 million higher than in 1997.
This resulted from using increased domestic short-term borrowings to finance
seasonal increases in accounts receivable and inventories during the year and an
increase in long-term debt over the preceding year. Seasonal borrowings were
paid off by the end of the fiscal year.
Provision for Income Taxes
The effective tax rate decreased to 37.6% in 1998 from 38.0% in the previous
year. This was due primarily to reductions in the foreign tax provision and in
other tax related items that were individually insignificant.
FISCAL 1997 COMPARED TO FISCAL 1996
Sales
Net sales for fiscal 1997 increased 2% or $29.4 million compared to the prior
year. The primary reason for this was a 1% increase in engine unit shipments.
The remaining 1% increase in net sales was a result of modest price increases
and a mix improvement.
Gross Profit
Gross profit for fiscal 1997 decreased 15% or $40.5 million compared to the same
period in the prior year. The primary reason for this decrease was a charge of
$37.1 million related to an early retirement window accepted by certain
Milwaukee hourly employees in accordance with the current union contract.
The gross profit rate was 17% in fiscal 1997 compared to 20% in fiscal 1996. In
addition to the early retirement window, the gross profit rate was also
negatively impacted by increases in warranty expenses totaling $9.3 million due
to claims experience, increases in the unit price of aluminum totaling $3.7
million, and the absence in fiscal 1997 of the $3.5 million credit for employees
who had accepted early retirement in fiscal 1995 and canceled their acceptance
in fiscal 1996. Savings from lower labor costs at the Company's new engine
plants partially offset the preceding factors impacting the gross profit rate.
Engineering, Selling, General and Administrative Expenses
Engineering, selling, general and administrative expenses for fiscal 1997
increased 8% or $9.2 million compared to fiscal 1996. This increase was
primarily due to increased employee compensation of $4.0 million, planned
increases in manpower and other costs of $2.7 million relating to new venture
activities, and increased professional services of $1.5 million primarily
resulting from the start of the implementation of a new enterprise-wide
information system.
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Provision for Income Taxes
The effective income tax rate used in both periods was 38.0%.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEARS 1998, 1997 AND 1996
Cash flows from operating activities was $136 million, $143 million and $94
million, in fiscal 1998, 1997 and 1996, respectively. The primary source of
funds was from net income excluding depreciation. The significant change between
fiscal 1997 and fiscal 1996 amounts was due to changes in working capital as
explained below.
The fiscal 1998 cash flow from operating activities reflects a $7 million
increase in accounts receivable and an $18 million decrease in inventories
resulting from increased sales late in the last fiscal quarter.
The fiscal 1997 cash flow from operating activities reflects an increase in
accounts receivable of $11 million and lower inventories of $11 million
resulting from increased sales at the end of the fiscal year when compared to
the previous year. Also, increased accounts payable of $17 million caused by the
timing of payments, increased accrued liabilities of $5 million resulting
primarily from increased profit sharing provisions, and increased federal and
state income taxes payable of $4 million caused by the timing of payments, all
contributed to the cash flows of the Company.
The fiscal 1996 cash flow from operating activities reflects an increase in
receivables of $25 million resulting from higher sales at the end of the fiscal
year and a decrease in accrued liabilities of $26 million primarily due to
decreased profit sharing provisions.
Net cash used in investing activities amounted to $45 million, $51 million and
$77 million in fiscal 1998, 1997 and 1996, respectively. Cash flows used in
investing activities included additions to plant and equipment of $46 million,
$71 million and $78 million in fiscal 1998, 1997 and 1996, respectively. The
fiscal 1998 capital expenditures principally related to investment in equipment.
The fiscal 1997 capital expenditures related primarily to reinvestment in
equipment and new products, while the fiscal 1996 expenditures principally
related to the construction of three new engine manufacturing plants and a
foundry and plant expansions at existing facilities. The 1997 cash flows from
investing activities also included $16 million related to the sale of the
Menomonee Falls, Wisconsin facility. The sale of this facility is described
under "Other Matters."
Net cash used in financing activities amounted to $119 million, $129 million and
$38 million in fiscal 1998, 1997 and 1996, respectively. These financing
activities included the repurchase of the Company's common stock, totaling $86
million in 1998 and $179 million in 1997. In each of fiscal 1998 and 1997, $15
million was paid on the 9.21% Senior Notes due 2001. Cash dividends totaled $28
million, $31 million and $30 million in fiscal 1998, 1997 and 1996,
respectively. The cash dividends in 1998 were less than those paid in the
preceding two years because the common stock repurchase program resulted in less
stock outstanding in that year. In fiscal 1997, the Company issued ten-year
notes which resulted in $98 million of net proceeds from the offering. The $9
million in proceeds from the exercise of stock options in 1998 was substantially
higher than in prior years due to increased option activity.
Future Liquidity and Capital Resources
The Company has in place a $250 million revolving credit facility to be used to
fund seasonal working capital requirements and other financing needs. This
credit facility expires in April 2002 and contains certain restrictive
covenants. Because the Company has been using some available cash in its ongoing
stock repurchase program, the Company will be placing more reliance on
borrowings to fund working capital needs than it did prior to fiscal 1997.
Accordingly, the Company experienced higher interest expense in fiscal 1998, and
anticipates interest expense to remain at such higher levels in the future.
In May 1997, the Company filed a shelf registration for $175 million of debt
securities to be issued periodically. Of this, $75 million has not yet been
issued on the registration statement. The Company may decide to offer all or
part of the remaining securities depending on many factors, including general
economic conditions, cash required for operations and the timing of the
remaining open market repurchases of its common stock.
Management expects capital expenditures to total $72 million in fiscal 1999,
consisting of projects which include reinvestment in equipment and new products.
Management believes that available cash, the credit facility, cash generated
from operations, existing lines of credit and access to public debt markets will
be adequate to fund the Company's capital requirements for the foreseeable
future.
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FINANCIAL STRATEGY
Management of the Company subscribes to the premise that the value of the
Company is enhanced if the capital invested in the Company's operations yields a
cash return that is greater than the Company's cost of capital. Given this
belief, the Company implemented this financial strategy by means of a "dutch
auction" tender offer (described below) and a public debt offering in fiscal
1997. The Company also continued the repurchase of its outstanding common stock
in the open market in the 1998 fiscal year. The Company believes this will
provide a capital structure that makes greater use of financial leverage without
imposing excessive risk on either the Company's shareholders or creditors. The
Company also believes that the substitution of lower (after-tax) cost debt for
equity in its permanent capital structure will reduce its overall cost of
capital and that its profitability and strong cash flows will accommodate the
increased use of debt without impairing its ability to finance growth or
increase cash dividends per share on its common stock.
In fiscal 1997, the Company's Board of Directors authorized the purchase of up
to $300 million of shares of its common stock by means of a tender offer and
open market or private transactions. As of June 28, 1998, purchases totaled $264
million. Future purchases will depend on many factors, including the market
price of the shares, the Company's business and financial position, and general
economic and market conditions. The Company intends to fund any future purchases
of its common stock through a combination of available cash, cash generated from
operations and additional borrowings.
Also as a part of its financial strategy, subject to the discretion of its Board
of Directors and the requirements of applicable law, the Company currently
intends to increase future cash dividends per share at a rate approximating the
inflation rate.
OTHER MATTERS
Year 2000 Issues
The Company is implementing a new company-wide information system. This new
system is expected to address the great majority of information technology year
2000 computer issues. The new system will replace the Company's mainframe
computer, which is being retired in early calendar 1999. The new system has been
installed and implementation has been completed in approximately one-half of the
Company's U.S. operations. Other internal year 2000 issues not directly related
to the previously described project are being addressed and tested in parallel
with the main project. These are expected to be completed by the middle of the
1999 calendar year.
Project expenditures to date total $26 million. The Company expects to incur an
additional $8 million of incremental costs, running through the 2002 fiscal
year, because of related projects.
The Company has developed an overall comprehensive Year 2000 Program to address
year 2000 issues. This program is based on the Automotive Industry Action
Group's model system consisting of five steps: Awareness; Inventory and
Assessment; Remediation; Testing; and Readiness Certification. Oversight of the
program is the responsibility of a group of senior executives with progress
reported to the Company's Board of Directors.
A risk assessment and exposure analysis has been made, and each area has been
ranked as high, medium or low. The Company's high risk areas have been
identified as information technology systems and infrastructures, customers,
suppliers, and financial institutions. The software for a new company-wide
information system, which is broad based, has already been installed and is
effectively in use for over 50% of company operations. And since remaining
operations are substantially similar, management does not anticipate the need to
develop an extensive contingency plan for information technology systems.
The non-information technology systems are midway through the assessment phase
and remediation is scheduled for completion by mid-calendar year 1999 without
material incremental costs anticipated. Based on the assessment of its
non-information technology systems to date, the Company currently does not
anticipate the need to develop an extensive contingency plan for non-information
systems, so it is not expecting to incur material incremental costs to do this.
The Company's largest customers have certified that they will be year 2000
compliant before the end of calendar year 1999, as to their relationships with
the Company. The identification of critical vendors has been completed and a
survey is scheduled for completion by the first quarter of calendar year 1999.
Alternative suppliers will be identified for those not expected to be compliant
by the end of 1999, as to their relationships with the Company. The Company's
financial institutions are currently being surveyed and it is anticipated that
they are year 2000 compliant, or will be before the end of calendar year 1999.
9
12
Selected areas, both internal and external, will be tested to assure the
integrity of the Company's remediation programs. The testing will be completed
by mid-calendar year 1999.
It is anticipated that any requisite changes necessary to become year 2000
compliant will be completed prior to mid-calendar year 1999 and contingency
plans will be developed, as necessary, to address unforeseen circumstances prior
to the end of calendar year 1999.
The Company believes its Year 2000 Program is adequate to detect in advance year
2000 compliance issues, and that it has the necessary resources to remedy them.
However, the year 2000 problem has many aspects and potential consequences, some
of which are not reasonably foreseeable, and there can be no assurance that
unforeseen consequences will not arise.
Emissions
The U.S. Environmental Protection Agency (EPA) is developing national emission
standards under a two phase process for small air cooled engines. The Company
currently has a complete product offering which complies with EPA's Phase I
engine emission standards. The EPA issued a Notice of Proposed Rulemaking for
Phase II emission standards in January of 1998 incorporating the agreement in
principle reached between EPA and several engine manufacturers, including the
Company. This proposed Phase II program will impose more stringent standards
over the useful life of the engine and will be phased in from 2001 to 2005. EPA
expects to finalize the Phase II regulation by the end of 1998. While it is
impossible to precisely quantify the cost of compliance until the standards are
issued, the Company believes compliance with the new standards will not have a
material adverse effect on its financial position or results of operations.
The California Air Resources Board (CARB) staff completed a review of the
existing Tier II standards and proposed that alternative standards and
implementation dates be adopted by CARB. Alternative Tier II standards were
adopted by CARB at its March 26, 1998 meeting and are not harmonized with EPA's
proposed Phase II, but rather require the accelerated introduction of overhead
valve engine technology into California. In addition, individual companies which
sell more than a threshold number of Class I engines into California must submit
a supplemental compliance plan to CARB to achieve additional reductions in
extreme non-attainment areas. While CARB's aggressive program may result in a
reduced product offering by the Company in California, it is not anticipated
that the California program will have a material effect on the financial
condition or results of operations of the Company.
Sale of the Menomonee Falls, Wisconsin Facility
The sale of the Company's Menomonee Falls, Wisconsin facility for approximately
$16.0 million was completed during fiscal 1997. The provisions of the contract
state that the Company will continue to own and occupy the warehouse portion of
the facility for a period of up to ten years (the "Reservation Period"). The
contract also contains a buyout clause, at the buyer's option and under certain
circumstances, of the remaining Reservation Period. Under the provisions of
Statement of Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate," the Company is required to account for this as a financing
transaction as the Company continues to have substantial involvement with the
facility during the Reservation Period or until the buyout option is exercised.
Under this method, the cash received is reflected as a deferred revenue, and the
assets and the accumulated depreciation remain on the Company's books.
Depreciation expense continues to be recorded each period, and imputed interest
expense is also recorded and added to deferred revenue. Offsetting this is the
fair value lease income on the non-Company occupied portion of the building. A
pretax gain, which will be recognized at the earlier of the exercise of the
buyout option or the expiration of the Reservation Period, is estimated to be
$10 million to $12 million. The annual cost of operating the warehouse portion
of the facility is not material.
New Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board adopted Financial
Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging
Activities". This new standard will be effective for the Company in fiscal 2000,
and requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Any fair value changes will be recorded in
net income or comprehensive income. The Company does not expect that the
adoption of this standard will have a material effect on the results of
operations.
10
13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign exchange and
interest rates. To reduce the risk from changes in foreign exchange rates, the
Company selectively uses financial instruments. The Company does not hold or
issue financial instruments for trading purposes.
FOREIGN CURRENCY
The Company's earnings are affected by fluctuations in the value of the U.S.
dollar against foreign currencies primarily as a result of purchasing engines
from its Japanese joint venture. The Company's foreign subsidiaries' earnings
are also influenced by fluctuations of the local currency against the U.S.
dollar as these subsidiaries purchase inventory from the parent in U.S. dollars.
Forward foreign exchange contracts are used to partially hedge against the
earnings effects of such fluctuations. At June 28, 1998, the Company had the
following forward foreign exchange contracts outstanding at the Fair Value Gains
and (Losses) shown (in thousands):
Notional U.S. Fair Value
Currency Value Dollars Gains and (Losses)
- -------- -------- ------- ------------------
Japanese Yen 3,600,000 28,000 ($2,200)
Australian Dollars 400 300 60
All of the above contracts expire in less than one year.
Although the Company sells its domestically produced engines to foreign
customers in U.S. dollars, the Company has shared some of the currency risk with
customers for certain sales transactions. Accordingly, the Company is exposed to
fluctuations in foreign exchange rates, primarily related to the U.S.
dollar/European Currency Unit rate. Historically, the Company has managed these
risks through limitations on the amount of sharing provided to customers. These
programs are generally for one year.
Fluctuations in currency exchange rates may also impact the stockholders' equity
of the Company. Amounts invested in the Company's non-U.S. subsidiaries are
translated into U.S. dollars at the exchange rates in effect at year end. The
resulting translation adjustments are recorded in stockholders' equity as
cumulative translation adjustments. The dollar was stronger relative to many of
the foreign currencies at June 28, 1998 compared to June 29, 1997. Consequently,
the cumulative translation adjustments component of stockholders' equity
decreased $1.1 million during the year. Using the year-end exchange rates, the
total amount invested in subsidiaries at June 28, 1998 was approximately $9.9
million.
INTEREST RATES
The Company is exposed to interest rate fluctuations on its borrowings. The
Company manages its interest rate exposure through a combination of fixed and
variable rate debt. Depending on general economic conditions, the Company has
typically used variable rate debt for short-term borrowings and fixed rate debt
for longer-term borrowings.
At June 28, 1998, the Company had the following short-term loans outstanding
(amount in thousands):
Average Annual
Currency Amount Interest Rate
- -------- ------ ---------------
German Mark 19,561 4.52%
British Pounds 140 8.10%
Dutch Guilder 1,715 5.10%
Irish Punt 227 6.90%
Canadian Dollars 2,797 6.50%
Swedish Krona 1,000 8.05%
French Franc 665 5.19%
U.S. Dollars 4,700 5.94%
All of the above loans carry variable interest rates.
Long-term loans consisted of the following (amounts in thousands):
Description Amount Maturity
- ----------- ------ --------
9.21% Senior Notes $45,000 $15,000 in fiscal 1999, 2000
and 2001
7.25% Notes 98,102 2007
Each of the above loans carries a fixed rate of interest.
11
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 28, 1998 AND JUNE 29, 1997
(in thousands)
ASSETS 1998 1997
---- ----
CURRENT ASSETS:
Cash and Cash Equivalents $ 84,527 $112,859
Receivables, Less Reserves of
$1,537 and $1,522, Respectively 136,629 129,877
Inventories -
Finished Products and Parts 58,975 83,361
Work in Process 45,217 37,922
Raw Materials 3,684 4,674
-------- --------
Total Inventories 107,876 125,957
Future Income Tax Benefits 31,287 31,602
Prepaid Expenses 21,727 18,121
-------- --------
Total Current Assets 382,046 418,416
DEFERRED INCOME TAX ASSETS 9,555 16,975
CAPITALIZED SOFTWARE 9,881 10,532
PLANT AND EQUIPMENT:
Land and Land Improvements 15,781 15,548
Buildings 148,868 146,769
Machinery and Equipment 630,043 584,834
Construction in Progress 17,736 49,563
-------- --------
812,428 796,714
Less - Accumulated Depreciation 420,501 400,448
-------- --------
Total Plant and Equipment, Net 391,927 396,266
-------- --------
$793,409 $842,189
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
12
15
AS OF JUNE 28, 1998 AND JUNE 29, 1997
(in thousands)
LIABILITIES AND SHAREHOLDERS' INVESTMENT 1998 1997
---- ----
CURRENT LIABILITIES:
Accounts Payable $ 76,915 $ 82,166
Domestic Notes Payable 4,700 5,000
Foreign Loans 14,336 13,359
Current Maturities on Long-Term Debt 15,000 15,000
Accrued Liabilities -
Wages and Salaries 29,502 25,767
Warranty 29,565 27,017
Other 42,398 34,769
--------- ---------
Total Accrued Liabilities 101,465 87,553
Federal and State Income Taxes 10,529 10,916
--------- ---------
Total Current Liabilities 222,945 213,994
DEFERRED REVENUE ON SALE OF
PLANT AND EQUIPMENT 15,893 15,966
ACCRUED PENSION COST 26,477 31,891
ACCRUED EMPLOYEE BENEFITS 12,571 12,324
ACCRUED POSTRETIREMENT
HEALTH CARE OBLIGATION 70,933 74,020
LONG-TERM DEBT 128,102 142,897
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' INVESTMENT:
Common Stock -
Authorized 60,000 shares $.01 Par Value,
Issued 28,927 in 1998 and 1997 289 289
Additional Paid-In Capital 37,776 40,533
Retained Earnings 533,805 490,682
Cumulative Translation Adjustments (2,110) (1,033)
Treasury Stock at cost,
5,103 shares in 1998 and 3,513 in 1997 (253,272) (179,374)
--------- ---------
Total Shareholders' Investment 316,488 351,097
--------- ---------
$ 793,409 $ 842,189
========= =========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
13
16
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED JUNE 28, 1998, JUNE 29, 1997 AND JUNE 30, 1996
(in thousands, except per share data)
1998 1997 1996
---- ---- ----
NET SALES $ 1,327,610 $ 1,316,413 $ 1,287,029
COST OF GOODS SOLD 1,072,936 1,095,197 1,025,281
----------- ----------- -----------
Gross Profit on Sales 254,674 221,216 261,748
ENGINEERING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 129,986 117,497 108,339
----------- ----------- -----------
Income from Operations 124,688 103,719 153,409
INTEREST EXPENSE (19,352) (9,880) (10,069)
OTHER INCOME, Net 7,809 5,466 5,712
----------- ----------- -----------
Income Before Provision for Income Taxes 113,145 99,305 149,052
PROVISION FOR INCOME TAXES 42,500 37,740 56,640
----------- ----------- -----------
NET INCOME $ 70,645 $ 61,565 $ 92,412
=========== =========== ===========
Average Shares Outstanding 24,666 28,551 28,927
BASIC EARNINGS PER SHARE $ 2.86 $ 2.16 $ 3.19
=========== =========== ===========
Diluted Average Shares Outstanding 24,775 28,678 29,059
DILUTED EARNINGS PER SHARE $ 2.85 $ 2.15 $ 3.18
=========== =========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
14
17
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED JUNE 28, 1998, JUNE 29, 1997 AND JUNE 30, 1996
(in thousands)
Additional Cumulative
Common Paid-In Retained Translation Treasury
Stock Capital Earnings Adjustments Stock
----- ------- -------- ----------- -----
BALANCES, JULY 2, 1995 $ 289 $ 41,698 $ 397,627 $ (136) $ --
Net Income -- -- 92,412 -- --
Cash Dividends Paid ($1.05 per share) -- -- (30,373) -- --
Purchase of Common Stock
for Treasury -- -- -- -- (1,185)
Exercise of Stock Options -- (800) -- -- 1,185
Currency Translation Adjustments -- -- -- (212) --
--------- --------- --------- --------- ---------
BALANCES, JUNE 30, 1996 289 40,898 459,666 (348) --
Net Income -- -- 61,565 -- --
Cash Dividends Paid ($1.09 per share) -- -- (30,549) -- --
Purchase of Common Stock
for Treasury -- -- -- -- (179,924)
Exercise of Stock Options -- (365) -- -- 550
Currency Translation Adjustments -- -- -- (685) --
--------- --------- --------- --------- ---------
BALANCES, JUNE 29, 1997 289 40,533 490,682 (1,033) (179,374)
Net Income -- -- 70,645 -- --
Cash Dividends Paid ($1.12 per share) -- -- (27,522) -- --
Purchase of Common Stock
for Treasury -- -- -- -- (85,943)
Exercise of Stock Options -- (2,757) -- -- 12,045
Currency Translation Adjustments -- -- -- (1,077) --
--------- --------- --------- --------- ---------
BALANCES, JUNE 28, 1998 $ 289 $ 37,776 $ 533,805 $ (2,110) $(253,272)
========= ========= ========= ========= =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
15
18
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED JUNE 28, 1998, JUNE 29, 1997 AND JUNE 30, 1996
(in thousands)
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 70,645 $ 61,565 $ 92,412
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities -
Depreciation 47,511 43,345 43,032
Amortization of Discount on 7.25% Notes Due 2007 205 17 --
Loss on Disposition of Plant and Equipment 1,973 1,608 2,692
Provision for Deferred Income Taxes 7,735 (16,105) 770
Change in Operating Assets and Liabilities -
(Increase) in Receivables (6,752) (10,531) (25,230)
Decrease in Inventories 18,081 11,446 3,271
(Increase) in Other Current Assets (3,606) (2,396) (2,895)
Increase (Decrease) in Accounts Payable,
Accrued Liabilities and Income Taxes 8,274 25,378 (15,595)
Other, Net (7,676) 28,590 (3,961)
--------- --------- ---------
Net Cash Provided by Operating Activities 136,390 142,917 94,496
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Plant and Equipment (45,893) (71,262) (77,746)
Proceeds Received on Sale of Plant and Equipment 620 4,133 1,069
Proceeds Received on Sale of Menomonee Falls,
Wisconsin Facility -- 15,966 --
--------- --------- ---------
Net Cash Used in Investing Activities (45,273) (51,163) (76,677)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings (Repayments) on Loans and Notes Payable 677 (1,563) (6,481)
Net Borrowings on 7.25% Notes Due 2007 -- 97,880 --
Repayment on 9.21% Senior Notes Due 2001 (15,000) (15,000) --
Cash Dividends Paid (27,522) (30,549) (30,373)
Purchase of Common Stock for Treasury (85,943) (179,924) (1,185)
Proceeds from Exercise of Stock Options 9,288 185 385
--------- --------- ---------
Net Cash Used in Financing Activities (118,500) (128,971) (37,654)
--------- --------- ---------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE
CHANGES ON CASH AND CASH EQUIVALENTS (949) (563) (174)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (28,332) (37,780) (20,009)
CASH AND CASH EQUIVALENTS:
Beginning of Year 112,859 150,639 170,648
--------- --------- ---------
End of Year $ 84,527 $ 112,859 $ 150,639
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest Paid $ 17,989 $ 9,298 $ 10,137
========= ========= =========
Income Taxes Paid $ 33,352 $ 49,707 $ 48,865
========= ========= =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
16
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 28, 1998, JUNE 29, 1997 AND JUNE 30, 1996
(1) NATURE OF OPERATIONS:
Briggs & Stratton Corporation (the Company) is a U.S. based producer of air
cooled gasoline engines. These engines are sold primarily to original equipment
manufacturers of lawn and garden equipment and other gasoline engine powered
equipment worldwide.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Fiscal Year: The Company's fiscal year consists of 52 or 53 weeks, ending on the
Sunday nearest the last day of June in each year. Therefore, the 1998, 1997 and
1996 fiscal years were 52 weeks long. All references to years relate to fiscal
years rather than calendar years.
Principles of Consolidation: The consolidated financial statements include the
accounts of Briggs & Stratton Corporation and its wholly owned domestic and
foreign subsidiaries after elimination of intercompany accounts and
transactions.
Accounting Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents: This caption includes cash, commercial paper and
certificates of deposit. The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
Inventories: Inventories are stated at cost, which does not exceed market. The
last-in, first-out (LIFO) method was used for determining the cost of
approximately 88% of total inventories at June 28, 1998, and 93% at June 29,
1997 and June 30, 1996. The cost for the remaining portion of the inventories
was determined using the first-in, first-out (FIFO) method. If the FIFO
inventory valuation method had been used exclusively, inventories would have
been $48,100,000, $48,894,000 and $48,125,000 higher in the respective years.
The LIFO inventory adjustment was determined on an overall basis, and
accordingly, each class of inventory reflects an allocation based on the FIFO
amounts.
Plant and Equipment and Depreciation:
Plant and equipment is stated at cost, and depreciation is computed using the
straight-line method at rates based upon the estimated useful lives of the
assets.
Expenditures for repairs and maintenance are charged to expense as incurred.
Expenditures for major renewals and betterments, which significantly extend the
useful lives of existing plant and equipment, are capitalized and depreciated.
Upon retirement or disposition of plant and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in other income.
Income Taxes: The Provision for Income Taxes includes Federal, state and foreign
income taxes currently payable and those deferred or prepaid because of
temporary differences between the financial statement and tax basis of assets
and liabilities. The Future Income Tax Benefits represent temporary differences
relating to current assets and current liabilities and the Deferred Income Tax
Assets represent temporary differences relating to noncurrent assets and
liabilities.
Research and Development Costs: Expenditures relating to the development of new
products and processes, including significant improvements and refinements to
existing products, are expensed as incurred. The amounts charged against income
were $19,950,000 in 1998, $19,525,000 in 1997 and $15,019,000 in 1996.
Accrued Employee Benefits: The Company's life insurance program includes payment
of a death benefit to beneficiaries of retired employees. The Company accrues
for the estimated cost of these benefits over the estimated working life of the
employee. Past service costs for all retired employees have been fully provided
for. The Company also accrues for the estimated cost of supplemental retirement
and death benefit agreements with executive officers.
17
20
NOTES . . .
Advertising Costs: Advertising costs, included in Engineering, Selling, General
and Administrative Expenses on the accompanying Consolidated Statement of
Earnings, are expensed as incurred. These expenses totaled $7,325,000 in 1998,
$7,989,000 in 1997 and $7,066,000 in 1996.
Foreign Currency Translation: Foreign currency balance sheet accounts are
translated into United States dollars at the rates of exchange in effect at
fiscal year end. Income and expenses are translated at the average rates of
exchange in effect during the year. The related translation adjustments are made
directly to a separate component of Shareholders' Investment.
Start-Up Costs: It is the Company's policy to expense all start-up costs for
new manufacturing plants. Under this policy, the Company expensed $11,660,000
in fiscal 1996.
Capitalized Software: This caption represents costs of software used in the
Company's business. Amortization of Capitalized Software is computed on an
item-by-item basis over a period of three to ten years, depending on the
estimated useful life of the software. Accumulated amortization amounted to
$7,137,000 as of June 28, 1998, and $4,442,000 as of June 29, 1997.
Deferred Revenue on Sale of Plant & Equipment: The sale of the Company's
Menomonee Falls, Wisconsin facility for approximately $16.0 million was
completed at the beginning of the fiscal quarter ended December 29, 1996. The
provisions of the contract state that the Company will continue to own and
occupy the warehouse portion of the facility for a period of up to ten years
(the "Reservation Period"). The contract also contains a buyout clause, at the
buyer's option and under certain circumstances, of the remaining Reservation
Period. Under the provisions of Statement of Financial Accounting Standards
(FAS) No. 66, "Accounting for Sales of Real Estate," the Company is required to
account for this as a financing transaction as the Company continues to have
substantial involvement with the facility during the Reservation Period or until
the buyout option is exercised. Under this method, the cash received is
reflected as a deferred revenue, and the assets and the accumulated depreciation
remain on the Company's books. Depreciation expense continues to be recorded
each period, and imputed interest expense is also recorded and added to deferred
revenue. Offsetting this is the imputed fair value lease income on the
non-Company occupied portion of the building. A pretax gain, which will be
recognized at the earlier of the exercise of the buyout option or the expiration
of the Reservation Period, is estimated to be $10 million to $12 million. The
annual cost of operating the warehouse portion of the facility is not material.
Derivatives: The Company uses derivative financial instruments to manage its
foreign currency and interest rate exposures. Gains and losses relating to
hedges of probable transactions with noncontrolled subsidiaries and third
parties are deferred and recognized as adjustments of carrying amounts when the
transaction occurs. Gains and losses on hedges of transactions that are not
probable of occurring and hedges of transactions with controlled subsidiaries
are recognized in the Company's results of operations.
Earnings Per Share: The Company adopted Financial Accounting Standard No. 128
during the second quarter of the current fiscal year. The Company's earnings
per share were computed by dividing net income by the weighted average number
of shares of common stock outstanding during the period. Diluted earnings per
share, for each period presented, were computed on the assumption that stock
options were exercised at the beginning of the periods reported. The difference
between weighted average shares outstanding and diluted average shares
outstanding reflects the dilutive effects of stock options.
Earnings per share of common stock are computed based on the weighted average
number of shares outstanding during each period. The shares repurchased on May
20, 1997 pursuant to the dutch auction tender offer, which totaled 3,506,190
shares at $51.00 per share, and the Company's ongoing share repurchase program
affect the year-to-date comparisons.
18
21
NOTES . . .
(3) INCOME TAXES:
The provision for income taxes consists of the following (in thousands of
dollars):
1998 1997 1996
---- ---- ----
Current
Federal $ 29,295 $ 45,474 $ 46,448
State 4,442 6,723 7,768
Foreign 1,028 1,648 1,654
-------- -------- --------
34,765 53,845 55,870
Deferred 7,735 (16,105) 770
-------- -------- --------
Total $ 42,500 $ 37,740 $ 56,640
======== ======== ========
A reconciliation of the U.S. statutory tax rates to the effective tax rates
follows:
1998 1997 1996
---- ---- ----
U.S. statutory rate 35.0% 35.0% 35.0%
State taxes, net of
Federal tax benefit 3.1% 3.1% 3.4%
Foreign Sales Corporation
tax benefit (.8%) (.9%) (.7%)
Other .3% .8% .3%
----- ------ -----
Effective tax rate 37.6% 38.0% 38.0%
===== ====== =====
The components of deferred tax assets and liabilities at the end of the fiscal
year were (in thousands of dollars):
1998 1997
---- ----
Future Income Tax Benefits:
Inventory $ 2,212 $ 2,916
Payroll related accruals 3,602 4,244
Warranty reserves 11,531 10,537
Other accrued liabilities 11,542 8,926
Miscellaneous 2,400 4,979
-------- --------
$ 31,287 $ 31,602
======== ========
1998 1997
---- ----
Deferred Income Taxes:
Difference between book and
tax methods applied to
maintenance and supply
inventories $ 11,198 $ 12,464
Pension cost 7,137 9,688
Accumulated depreciation (53,109) (50,207)
Accrued employee benefits 8,529 7,904
Postretirement
health care obligation 27,664 28,868
Deferred revenue on sale
of plant & equipment 6,198 6,226
Miscellaneous 1,938 2,032
-------- --------
$ 9,555 $ 16,975
======== ========
The Company has not recorded deferred income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in foreign
operations. These undistributed earnings amounted to approximately $7,300,000 at
June 28, 1998. If these earnings were remitted to the U.S., they would be
subject to U.S. income tax. However, this tax would be substantially less than
the U.S. statutory income tax because of available foreign tax credits.
(4) EXPORT SALES AND SIGNIFICANT CUSTOMERS:
Export sales for fiscal 1998 were $288,510,000 (22% of total sales), for fiscal
1997 were $304,230,000 (23%) and for fiscal 1996 were $323,747,000 (25%). These
sales were principally to customers in European countries.
In the fiscal years 1998, 1997 and 1996, there were sales to three major engine
customers that exceeded 10% of total Company net sales. The sales to these
customers are summarized below (in thousands of dollars and percent of total
Company sales):
1998 1997 1996
---- ---- ----
Customer Sales % Sales % Sales %
- -------- ----- - ----- - ----- -
A $235,468 18% $282,428 21% $267,257 21%
B 203,931 15% 180,770 14% 177,314 14%
C 165,937 13% 142,840 11% 163,065 13%
------- -- ------- -- ------- --
$605,336 46% $606,038 46% $607,636 48%
======= == ======= == ======= ==
19
22
NOTES . . .
(5) INDEBTEDNESS:
The Company has access to a $250,000,000 revolving credit facility (the Credit
Facility) which expires in April 2002. The Company also has access to additional
domestic lines of credit totaling $18,000,000 which remain in effect until
canceled by either party. They provide amounts for short-term use at the then
prevailing rate. There are no significant compensating balance requirements for
any of these lines, and there were no borrowings at June 28, 1998 using these
lines or the Credit Facility.
Borrowings under the Credit Facility by the Company bear interest at a rate per
annum equal to, at its option, either:
(1) the higher of (a) the bank's reference rate or (b) 0.5% per annum above the
Federal Funds rate; or
(2) LIBOR plus a margin that may be adjusted up or down based on the Company's
debt ratings.
The Credit Facility contains certain restrictive covenants that require the
Company to maintain certain financial conditions including a maximum limit on
the ratio of debt to capital and a minimum fixed charge coverage ratio. The
Credit Facility imposes limitations on liens, certain indebtedness, the sales of
assets and certain investments.
The following data relates to domestic notes payable (in thousands of dollars):
1998 1997
---- ----
Balance at
Fiscal Year End $ 4,700 $ 5,000
Weighted Average
Interest Rate at
Fiscal Year End 5.94% 5.98%
The lines of credit available to the Company in foreign countries are in
connection with short-term borrowings and bank overdrafts used in the normal
course of business. These amounts total $15,894,000, expire at various times
through December, 1998 and are renewable. None of these arrangements had
material commitment fees or compensating balance requirements.
The following information relates to foreign loans (in thousands of dollars):
1998 1997
---- ----
Balance at
Fiscal Year End $14,336 $13,359
Weighted Average
Interest Rate at
Fiscal Year End 4.97% 4.49%
The Long-Term Debt caption consists of the following (in thousands of dollars):
1998 1997
---- ----
9.21% Senior Notes Due 2001
at Face Amount $ 45,000 $ 60,000
7.25% Notes Due 2007, Net of
Unamortized Discount of
$1,898 in 1998 and
$2,103 in 1997 98,102 97,897
-------- --------
$143,102 $157,897
Less Current Maturities 15,000 15,000
-------- --------
Total Long-Term Debt $128,102 $142,897
======== ========
The 9.21% Senior Notes are due June 15, 2001. Payments on these notes are due in
five equal annual installments beginning in 1997. The notes include covenants
that limit total borrowings, require maintenance of a minimum net worth and set
certain restrictions on the sale or collateralizing of the Company's assets.
The 7.25% notes are due September 15, 2007. No principal payments are due before
that date. These notes have covenants that limit secured funded debt and certain
sale-leaseback transactions.
(6) OTHER INCOME:
The components of other income (expense) are (in thousands of dollars):
1998 1997 1996
---- ---- ----
Interest income $ 2,720 $ 3,981 $ 4,477
Loss on the
disposition of
plant and equipment (1,973) (1,608) (2,692)
Income from joint
ventures 5,232 3,026 2,957
Other items 1,830 67 970
-------- -------- -------
Total $ 7,809 $ 5,466 $ 5,712
======== ======== =======
20
23
NOTES . . .
(7) COMMITMENTS AND CONTINGENCIES:
The Company is a 50% guarantor on bank loans of two unconsolidated joint
ventures. One is in Japan for the manufacture of engines and the second in the
United States for the manufacture of parts. These bank loans totaled
approximately $6,000,000 at the end of 1998.
Product and general liability claims arise against the Company from time to time
in the ordinary course of business. The Company is self-insured for future
claims up to $1 million per claim. Accordingly, a reserve is maintained for the
estimated costs of such claims. At June 28, 1998 and June 29, 1997, the reserve
for product and general liability claims was $5.8 million and $4.6 million,
respectively, based on available information. There is inherent uncertainty as
to the eventual resolution of unsettled claims. Management, however, believes
that any losses in excess of established reserves will not have a material
effect on the Company's financial condition or results of operations.
The Company has no material commitments for materials or capital expenditures at
June 28, 1998.
(8) STOCK OPTIONS:
The Company has a Stock Incentive Plan under which 3,361,935 shares of common
stock have been reserved for issuance. The Company accounts for the plan under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized. Had compensation cost for these plans been determined
consistent with FAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
1998 1997 1996
---- ---- ----
Net Income (in thousands):
As Reported $70,645 $61,565 $92,412
Pro Forma $69,574 $60,777 $91,690
Basic Earnings Per Share:
As Reported $2.86 $2.16 $3.19
Pro Forma $2.82 $2.13 $3.17
Diluted Earnings Per Share:
As Reported $2.85 $2.15 $3.18
Pro Forma $2.81 $2.12 $3.16
Because the FAS No. 123 method of accounting has not been applied to options
granted prior to July 2, 1995, the resulting pro forma compensation cost may not
be representative of that to be expected in future years.
Information on the options outstanding is as follows:
1996
-------------------------
Wtd. Avg.
Shares Ex. Price
------ ---------
Balance, beginning of year 1,169,620 $ 38.41
Granted during the year 600,000 49.08
Exercised during the year (65,089) 17.07
---------
Balance, end of year 1,704,531 $ 42.98
=========
1997
-------------------------
Wtd. Avg.
Shares Ex. Price
------ ---------
Balance, beginning of year 1,704,531 $ 42.98
Granted during the year 106,550 53.30
Exercised during the year (24,369) 17.26
---------
Balance, end of year 1,786,712 $ 43.95
=========
1998
-------------------------
Wtd. Avg.
Shares Ex. Price
------ ---------
Balance, beginning of year 1,786,712 $ 43.95
Granted during the year 241,980 65.69
Exercised during the year (236,873) 35.65
---------
Balance, end of year 1,791,819 $ 47.98
=========
Grant Summary
- ---------------------------------------------------------------------------
Fiscal Grant Exercise Date Options Expiration
Year Date Price (a) Exercisable Outstanding Date
- ---- ---- --------- ----------- ----------- ----------
1990 2-20-90 $ 13.014 50%, 1-1-94; 1,076 2-19-00
50%, 1-1-95
1991 2-19-91 14.524 50%, 1-1-95; 45,010 2-18-01
50%, 1-1-96
1992 5-18-92 21.525 50%, 1-1-96; 111,722 5-17-02
50%, 1-1-97
1994 8-16-93 48.369 8-16-96 177,828 8-16-98
1995 8-12-94 45.854 8-12-97 507,653 8-12-99
1996 8-7-95 49.080 8-7-98 600,000 8-7-00
1997 8-6-96 53.300 8-6-99 106,550 8-6-01
1998 8-5-97 65.690 8-5-00 241,980 8-4-02
There were no options granted in fiscal 1993.
(a) Exercise prices of earlier grants have been adjusted as appropriate
To reflect a two-for-one stock split in October 1994 and the
spin-off of the Company's lock business in February 1995.
21
24
NOTES . . .
The fair value of each option is estimated using the Black-Scholes option
pricing model. The grant-date fair market value of the options and assumptions
used to determine such value are as follows:
Options granted during 1998 1997 1996
---- ---- ----
Grant date fair value $5.98 $5.42 $5.39
Assumptions:
Risk-free interest rates 6.1% 6.3% 6.4%
Expected volatility 20.4% 20.6% 24.6%
Expected dividend yield 2.6% 2.5% 2.7%
Expected term (in years) 5.0 5.0 5.0
(9) SHAREHOLDER RIGHTS PLAN:
On August 6, 1996, the Board of Directors declared a dividend distribution of
one common stock purchase right (a "right") for each share of the Company's
common stock outstanding on August 19, 1996. Each right would entitle
shareowners to buy one-half of one share of the Company's common stock at an
exercise price of $160.00 per full common share, subject to adjustment. The
rights are not currently exercisable, but would become exercisable if certain
events occurred relating to a person or group acquiring or attempting to acquire
15 percent or more of the outstanding shares of common stock. The rights expire
on August 19, 2006, unless redeemed or exchanged by the Company earlier. Rights
granted under a previous plan expired July 1, 1996.
(10) FOREIGN EXCHANGE RISK MANAGEMENT:
The Company enters into forward exchange contracts to hedge purchase commitments
denominated in foreign currencies. The term of these currency derivatives never
exceeds one year and the purpose is to protect the Company from the risk that
the eventual dollars being transferred will be adversely affected by changes in
exchange rates.
The Company has forward foreign currency exchange contracts to purchase 3.6
billion Japanese yen for $28 million through January, 1999. These contracts are
used to hedge the commitments to purchase engines from the Company's Japanese
joint venture and accordingly any gain or loss has been deferred at the end
of the 1998 fiscal year. The amount deferred was a loss of approximately $2.2
million.
The Company's foreign subsidiaries have the following forward currency contracts
outstanding at the end of fiscal 1998:
In Millions
----------------------
Local U.S. Latest
Currency Currency Dollars Expiration Date
- -------- -------- ------- ---------------
Australian Dollars .4 .3 July, 1998
There are no significant gains or losses included in the above amounts.
22
25
NOTES . . .
(11) EMPLOYEE BENEFIT COSTS:
Retirement Plan
The Company has noncontributory, defined benefit retirement plans covering most
Wisconsin employees. The following tables summarize the plans' income and
expense, actuarial assumptions, and funded status for the three years indicated
(dollars in thousands):
Qualified Plans Supplemental Plans
-------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Income and Expense:
- -------------------
Service Cost-Benefits Earned
During the Year $ 9,030 $ 11,309 $ 13,143 $ 461 $ 378 $ 456
Interest Cost on Projected
Benefit Obligation 43,518 40,990 41,722 1,013 860 926
Actual Return on Plan Assets (118,434) (114,303) (104,872) (11) (11) (9)
Net Amortization, Deferral
and Windows 59,121 58,525 51,830 374 395 462
--------- --------- --------- -------- -------- --------
Net Periodic Pension
Expense (Income) $ (6,765) $ (3,479) $ 1,823 $ 1,837 $ 1,622 $ 1,835
========= ========= ========= ======== ======== ========
Actuarial Assumptions:
- ---------------------
Discount Rate Used to Determine
Present Value of Projected
Benefit Obligation: 7.0% 7.75% 7.75% 7.0% 7.75% 7.75%
Expected Rate of Future
Compensation Level Increases 5.0% 5.5% 5.5% 5.0% 5.5% 5.5%
Expected Long-Term Rate of
Return on Plan Assets 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
Funded Status:
- -------------
Actuarial Present Value of
Benefit Obligations:
Vested $ 539,480 $ 482,712 $ 413,035 $ 12,863 $ 8,869 $ 8,286
Non-Vested 29,638 32,735 34,268 -- -- 21
--------- --------- --------- -------- -------- --------
Accumulated Benefit
Obligation 569,118 515,447 447,303 12,863 8,869 8,307
Effect of Projected Future
Wage and Salary Increases 64,472 82,941 120,083 2,630 3,228 4,766
--------- --------- --------- -------- -------- --------
Projected Benefit Obligation 633,590 598,388 567,386 15,493 12,097 13,073
Plan Assets at Fair Market Value 845,828 767,108 681,819 127 127 126
--------- --------- --------- -------- -------- --------
Plan Assets in Excess of (Less Than)
Projected Benefit Obligation 212,238 168,720 114,433 (15,366) (11,970) (12,947)
Remaining Unrecognized Net
Obligation (Asset) Arising
from the Initial Application of
SFAS No. 87 (20,739) (26,006) (31,321) -- 132 179
Unrecognized Net Loss (Gain) (207,403) (164,779) (75,983) 4,778 2,531 4,494
Unrecognized Prior Service Cost (1,394) (2,002) (2,447) 881 953 1,029
--------- --------- --------- -------- -------- --------
Prepaid (Accrued) Pension Cost $ (17,298) $ (24,067) $ 4,682 $ (9,707) $ (8,354) $ (7,245)
Less Current Portion -- -- -- 528 530 511
--------- --------- --------- -------- -------- --------
$ (17,298) $ (24,067) $ 4,682 $ (9,179) $ (7,824) $ (6,734)
========= ========= ========= ======== ======== ========
23
26
NOTES . . .
The Company offered early retirement windows to certain of its Milwaukee union
members during the 1995 fiscal year. As a result, $13,806,000 was added to
pension expense and $5,253,000 was added to postretirement health care expense
in the fourth quarter of the 1995 fiscal year. When the retirements were
scheduled to occur in the first fiscal quarter of 1996, a number of these union
members canceled their acceptance, and thus credits totaling $3,477,000 were
recorded as a change in the original accounting estimate. A second retirement
window was offered in fiscal 1997. The cost of this window was additional
pension expense of $33,457,000 and additional postretirement health care expense
of $3,644,000 in the fourth quarter of the 1997 fiscal year.
During fiscal 1996, the defined benefit pension plan which covered employees at
two of the Company's plants was terminated and replaced by a defined
contribution retirement plan that includes most U.S. non-Wisconsin employees.
The impact of the termination was not material. Under the new plan, the Company
will make a contribution on behalf of covered employees equal to 2% of each
participant's gross income, as defined. For fiscal years 1998, 1997 and 1996,
the cost to the Company was $1,641,000, $1,352,000 and $757,000, respectively.
Most U.S. employees of the Company may participate in a salary reduction
deferred compensation retirement plan. The Company makes matching contributions
of $.50 for every $1.00 deferred by a participant to a maximum of 1-1/2% or 3%
of each participant's salary, depending upon the participant's group. Company
contributions totaled $3,918,000 in 1998, $3,944,000 in 1997 and $2,825,000 in
1996.
Postretirement Benefits
The Company records the expected health care and life insurance benefits for
employees during the years that the employees render service.
For measurement purposes, a 9% annual rate of increase in the per capita cost of
covered health care claims was assumed for the years 1998 through 2000,
decreasing gradually to 6% for the year 2007. The health care cost trend rate
assumption has a significant effect on the amounts reported. The rates, if
changed by one percentage point, would change the accumulated postretirement
benefit by $5,704,000 and would change the service and interest cost by $701,000
for the year.
The discount rate used in determining the accumulated postretirement benefit
obligations was 7.0% compounded annually. Both the health care and life
insurance plans are unfunded.
The components of the accumulated postretirement benefit obligations were (in
thousands of dollars):
Health Care
-----------
1998 1997
---- ----
Retirees $49,307 $51,553
Fully eligible plan participants 2,897 467
Other active participants 30,131 26,961
------- -------
82,335 78,981
Unrecognized loss (6,602) (161)
------- -------
75,733 78,820
Less current portion 4,800 4,800
------- -------
$70,933 $74,020
======= =======
Life Insurance
--------------
1998 1997
---- ----
Retirees $11,354 $ 9,048
Fully eligible plan participants 1,315 1,720
Other active participants 1,576 1,453
------- --------
14,245 12,221
Unrecognized net obligation (460) (507)
Unrecognized prior service cost (756) (827)
Unrecognized loss (1,985) (35)
------- --------
11,044 10,852
-- --
Less current portion ------- --------
$11,044 $ 10,852
======= ========
The current portion of the health care component above represents the benefits
expected to be paid within the next twelve months and is included in the caption
Accrued Liabilities in the accompanying balance sheet. The net health care
balance has its own caption in this balance sheet. The life insurance component
is included in the caption Accrued Employee Benefits.
24
27
NOTES . . .
The net periodic postretirement costs recorded were (in thousands of dollars):
Health Care
-----------------
1998 1997 1996
---- ---- ----
Service cost-benefits
attributed to service
during the year $1,145 $1,272 $ 1,596
Interest cost on accumulated
benefit obligation 5,856 5,226 5,480
Other -- -- (91)
------ ------ -------
$7,001 $6,498 $ 6,985
====== ====== =======
Life Insurance
---------------------
1998 1997 1996
---- ---- ----
Service cost-benefits
attributed to service
during the year $ 61 $ 87 $ 90
Interest cost on accumulated
benefit obligation 917 964 947
Other 118 118 118
------ ------ ------
$1,096 $1,169 $1,155
====== ====== ======
Postemployment Benefits
The Company also accrues the expected cost of postemployment benefits over the
years that the employees render service. These benefits are substantially
smaller amounts because they apply only to employees who permanently terminate
employment prior to retirement. The items included in this amount are disability
payments, life insurance and medical benefits, and these amounts are also
discounted using a 7.0% interest rate.
The balance in this reserve at the end of fiscal 1998 was $1,527,000 and at the
end of fiscal 1997 was $1,468,000. Both were included in the caption Accrued
Employee Benefits in the accompanying balance sheets.
(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents, Domestic Notes Payable and Foreign Loans: The
carrying amount approximates fair value because of the short maturity of those
instruments.
Long-Term Debt: The fair value of the Company's long-term debt is estimated
based on quotations made on similar issues.
The estimated fair values of the Company's financial instruments are as follows
(in thousands of dollars):
1998
-------------
Carrying Fair
Amount Value
-------- -----
Cash and cash equivalents $ 84,527 $ 84,527
Domestic notes payable $ 4,700 $ 4,700
Foreign loans $ 14,336 $ 14,336
Long-term debt -
9.21% Senior Notes due 2001,
including current maturities $ 45,000 $ 47,012
7.25% Notes due 2007 $ 98,102 $105,071
1997
-------------
Carrying Fair
Amount Value
-------- ------
Cash and cash equivalents $112,859 $112,859
Domestic notes payable $ 5,000 $ 5,000
Foreign loans $ 13,359 $ 13,359
Long-term debt -
9.21% Senior Notes due 2001,
including current maturities $ 60,000 $ 62,885
7.25% Notes due 2007 $ 97,897 $100,531
25
28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Briggs & Stratton Corporation:
We have audited the accompanying consolidated balance sheets of Briggs &
Stratton Corporation (a Wisconsin Corporation) and subsidiaries as of June 28,
1998 and June 29, 1997, and the related consolidated statements of income,
shareholders' investment and cash flows for each of the three years in the
period ended June 28, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Briggs & Stratton Corporation
and subsidiaries as of June 28, 1998 and June 29, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 28, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Milwaukee, Wisconsin,
July 30, 1998.
26
29
QUARTERLY FINANCIAL DATA, DIVIDEND AND MARKET INFORMATION (UNAUDITED)
In Thousands Per Share of Common Stock
------------------------------------ -------------------------------------------
Market Price Range
on New York
Net Net Stock Exchange
Quarter Net Gross Income Income Dividends -------------------
Ended Sales Profit (Loss) (Loss) Declared High Low
- ------- ----- ------ ------ ------ --------- ---- ---
FISCAL 1998
- -----------
SEPTEMBER $ 170,557 $ 26,411 $ (2,632) $ (.10) $ .28 51-3/8 47-1/8
DECEMBER 308,481 50,897 10,294 .41 .28 53-3/8 47-1/4
MARCH 469,055 94,773 35,778 1.46 .28 49 43-1/8
JUNE 379,517 82,593 27,205 1.13 .28 46-1/4 36-7/8
----------- ----------- ----------- ------ -----
TOTAL $ 1,327,610 $ 254,674 $ 70,645 $ 2.86* $1.12
=========== =========== =========== ====== =====
Fiscal 1997
- -----------
September $ 161,731 $ 17,969 $ (5,262) $ (.18) $ .27 45-7/8 36-1/2
December 299,664 56,857 16,694 .58 .27 44-5/8 39-1/4
March 475,955 107,119 46,514 1.60 .27 46-3/8 43
June 379,063 39,271 3,619 .13 .28 53-5/8 42-5/8
----------- ----------- ----------- ------ -----
Total $ 1,316,413 $ 221,216 $ 61,565 $ 2.16* $1.09
=========== =========== =========== ====== =====
The number of record holders of Briggs & Stratton Corporation Common Stock on
August 20, 1998 was 4,892.
Net Income (Loss) per share of Common Stock represents Basic Earnings per Share.
* See Footnote No. 2 "Summary of Accounting Policies - Earnings per Share" to
the Consolidated Financial Statements.
27
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has not changed independent accountants in the last two years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in the Corporation's definitive Proxy Statement, prepared for
the 1998 Annual Meeting of Shareholders, concerning directors of the Corporation
under the caption "Election of Directors", is incorporated herein by reference.
The information concerning "Executive Officers of the Registrant" as a separate
item, appears in Part I of this Form 10-K. There is no information required by
Item 405 of Regulation S-K to be reported.
ITEM 11. EXECUTIVE COMPENSATION
The information in the Corporation's definitive Proxy Statement, prepared for
the 1998 Annual Meeting of Shareholders, concerning this item, in paragraphs two
and three under the caption "Election of Directors", in the final two paragraphs
of the "Nominating, Compensation and Governance Committee Report on Executive
Compensation" and the "Executive Compensation" section, is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the Corporation's definitive Proxy Statement, prepared for
the 1998 Annual Meeting of Shareholders, concerning this item, under captions
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management", is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has no relationships or related transactions to report pursuant to
Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements are included under the caption
"Financial Statements and Supplementary Data" in Part II, Item 8 hereof
and are incorporated herein by reference:
Consolidated Balance Sheets, June 28, 1998 and June 29, 1997
For the Years Ended June 28, 1998, June 29, 1997 and June 30, 1996:
Consolidated Statements of Earnings and Shareholders' Investment
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
2. Financial Statement Schedules
All financial statement schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions.
3. Exhibits
See Exhibit Index following the Signature Page, which is incorporated
herein by reference. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report is
identified in the Exhibit Index by an asterisk following the Exhibit
Number.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
28
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BRIGGS & STRATTON CORPORATION
By /s/ R. H. Eldridge
----------------------------------------
R. H. Eldridge
September 3, 1998 Executive Vice President and
Chief Financial Officer, Secretary-Treasurer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Frederick P. Stratton, Jr. and Robert H. Eldridge, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their substitutes, may lawfully
do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.*
/s/ F. P. Stratton, Jr. /s/ Peter A. Georgescu
- ----------------------------------- -----------------------------------
F. P. Stratton, Jr. Peter A. Georgescu
Chairman and Chief Executive Officer Director
and Director (Principal Executive
Officer)
/s/ Robert H. Eldridge /s/ Robert J. O'Toole
- ----------------------------------- -----------------------------------
Robert H. Eldridge Robert J. O'Toole
Executive Vice President and Director
Chief Financial Officer,
Secretary-Treasurer
and Director (Principal Financial
Officer)
/s/ James E. Brenn /s/ C. B. Rogers, Jr.
- ----------------------------------- -----------------------------------
James E. Brenn C. B. Rogers, Jr.
Vice President and Controller Director
(Principal Accounting Officer)
/s/ Michael E. Batten /s/ John S. Shiely
- ----------------------------------- -----------------------------------
Michael E. Batten John S. Shiely
Director President and Chief Operating
Officer and Director
/s/ E. Margie Filter /s/ Charles I. Story
- ----------------------------------- -----------------------------------
E. Margie Filter Charles I. Story
Director Director
*Each signature affixed as of September 3, 1998.
29
32
BRIGGS & STRATTON CORPORATION
(Commission File No. 1-1370)
EXHIBIT INDEX
1998 ANNUAL REPORT ON FORM 10-K
Exhibit
Number Document Description
------ --------------------
3.1 Articles of Incorporation.
(Filed as Exhibit 3.2 to the Company's Report on Form 10-Q
for the quarter ended October 2, 1994, and incorporated by
reference herein.)
3.2 Bylaws.
(Filed as Exhibit 3.2 to the Company's Registration Statement
on Form 8-B dated October 12, 1992 and incorporated by
reference herein.)
4.0 Rights Agreement dated as of August 7, 1996, between Briggs &
Stratton Corporation and Firstar Trust Company which includes
the form of Right Certificate as Exhibit A and the Summary of
Rights to Purchase Common Shares as Exhibit B.
(Filed as Exhibit 4.1 to the Company's Registration Statement
on Form 8-A, dated as of August 7, 1996 and incorporated by
reference herein.)
4.1 Indenture dated as of June 4, 1997 between Briggs & Stratton
Corporation and Bank One, N.A., as Trustee.
(Filed as Exhibit 4.1 to the Company's Report on Form 8-K
dated May 30, 1997 and incorporated by reference herein.)
4.2 Form of 7-1/4% Note due September 15, 2007 of Briggs &
Stratton Corporation issued pursuant to the Indenture dated as
of June 4, 1997 between Briggs & Stratton Corporation and Bank
One, N.A., as Trustee.
(Filed as Exhibit 4.2 to the Company's Report on Form 8-K
dated May 30, 1997 and incorporated by reference herein.)
4.3 Resolutions of the Board of Directors of Briggs & Stratton
Corporation authorizing the public offering of debt
securities of Briggs & Stratton Corporation in an aggregate
principal amount of up to $175,000,000.
(Filed as Exhibit 4.3 to the Company's Report on Form 8-K
dated May 30, 1997 and incorporated by reference herein.)
4.4 Actions of the Authorized Officers of Briggs & Stratton
Corporation authorizing the issuance of $100,000,000 aggregate
principal amount of 7-1/4% Notes due September 15, 2007.
(Filed as Exhibit 4.4 to the Company's Report on Form 8-K
dated May 30, 1997 and incorporated by reference herein.)
4.5 Officers' Certificate and Company Order of Briggs & Stratton
Corporation executed in conjunction with the issuance of
$100,000,000 aggregate principal amount of 7-1/4% Notes due
September 15, 2007.
(Filed as Exhibit 4.5 to the Company's Report on Form 8-K
dated May 30, 1997 and incorporated by reference herein.)
10.0* Forms of Officer Employment Agreements.
(Filed as Exhibit 10.0 to the Company's Report on Form 10-Q
for the quarter ended March 29, 1998 and incorporated by
reference herein.)
10.1* Survivor Annuity Plan.
(Filed as Exhibit 10.1 to the Company's Annual Report on Form
10-K for fiscal year ended June 30, 1986 and incorporated by
reference herein.)
10.2* Supplemental Retirement Program.
(Filed as Exhibit 10.3 to the Company's Annual Report on Form
10-K for fiscal year ended June 30, 1990 and incorporated by
reference herein.)
30
33
Exhibit
Number Document Description
------ --------------------
10.3(a)* Economic Value Added Incentive Compensation Plan, as amended
and restated effective April 18, 1995.
(Filed as Exhibit 10.3 (b) to the Company's Annual Report on
Form 10-K for fiscal year ended July 2, 1995 and incorporated
by reference herein.)
10.3(b)* Amendment to Economic Value Added Incentive Compensation Plan.
(Filed as Exhibit 10.3 (c) to the Company's Report on Form
10-Q for the quarter ended December 31, 1995 and incorporated
by reference herein.)
10.3(c)* Second Amendment to Economic Value Added Incentive
Compensation Plan.
(Filed as Exhibit 10.3 (c) to the Company's Annual Report on
Form 10-K for fiscal year ended June 29, 1997 and
incorporated by reference herein.)
10.4* Form of Change of Control Employment Agreements.
(Filed as Exhibit 10.4 to the Company's Annual Report on Form
10-K for fiscal year ended June 27, 1993 and incorporated by
reference herein.)
10.5(a)* Trust Agreement with an independent trustee to provide
payments under various compensation agreements with company
employees upon the occurrence of a change in control.
(Filed as Exhibit 10.5 (a) to the Company's Annual Report on
Form 10-K for fiscal year ended July 2, 1995 and incorporated
by reference herein.)
10.5(b)* Amendment to Trust Agreement with an independent trustee to
provide payments under various compensation agreements with
company employees.
(Filed as Exhibit 10.5 (b) to the Company's Annual Report on
Form 10-K for fiscal year ended July 2, 1995 and incorporated
by reference herein.)
10.6* Stock Incentive Plan.
(Filed as Exhibit A to the Company's 1993 Annual Meeting
Proxy Statement, which was filed as Exhibit 100A to the
Company's Annual Report on Form 10-K for fiscal year ended
June 27, 1993 and incorporated by reference herein.)
10.7(a)* Leveraged Stock Option Program.
(Filed as Exhibit 10.7 to the Company's Annual Report on Form
10-K for fiscal year ended June 27, 1993 and incorporated by
reference herein.)
10.7(b)* Amendment to Leveraged Stock Option Program.
(Filed as Exhibit 10.7 (b) to the Company's Annual Report on
Form 10-K for fiscal year ended July 2, 1995 and incorporated
by reference herein.)
10.8* Amended and Restated Deferred Compensation Agreement for
Fiscal 1995.
(Filed as Exhibit 10.9 to the Company's Annual Report on Form
10-K for fiscal year ended July 2, 1995 and incorporated by
reference herein.)
10.9* Deferred Compensation Agreement for Fiscal 1997.
(Filed as Exhibit 10.10 to the Company's Annual Report on
Form 10-K for fiscal year ended June 30, 1996 and
incorporated by reference herein.)
10.10* Deferred Compensation Agreement for Fiscal 1998.
(Filed as Exhibit 10.11 to the Company's Annual Report on
Form 10-K for fiscal year ended June 29, 1997 and
incorporated by reference herein.)
10.11* Deferred Compensation Agreement for Fiscal 1999.
(Filed herewith.)
10.12* Officer Employment Agreement.
(Filed as Exhibit 10.11 to the Company's Report on Form 10-Q
for the quarter ended December 31, 1995 and incorporated by
reference herein.)
10.13* Deferred Compensation Plan for Directors.
(Filed as Exhibit 10.12 to the Company's Report on Form 10-Q
for the quarter ended December 31, 1995 and incorporated by
reference herein.)
31
34
Exhibit
Number Document Description
------ --------------------
10.14* Director's Leveraged Stock Option Plan.
(Filed as Exhibit 10.14 to the Company's Annual Report on
Form 10-K for fiscal year ended June 29, 1997 and
incorporated by reference herein.)
11 Computation of Earnings Per Share of Common Stock.
(Filed herewith.)
12 Computation of Ratio of Earnings to Fixed Charges.
(Filed herewith.)
21 Subsidiaries of the Registrant.
(Filed herewith.)
23 Consent of Independent Public Accountants.
(Filed herewith.)
24 Power of Attorney.
(Included in the Signatures Page of this report.)
27(a) Financial Data Schedule, 6/28/98.
(Filed herewith.)
27(b) Restated Financial Data Schedule, 6/29/97.
(Filed herewith.)
27(c) Restated Financial Data Schedule, 6/30/96.
(Filed herewith.)
* Management contracts and executive compensation plans and arrangements
required to be filed as exhibits pursuant to Item 14 (c) of Form 10-K.
32