MILWAUKEE — Briggs & Stratton Corp. (NYSE: BGG) announces financial results for its fiscal fourth quarter and year ended June 30, 2019.
For the fiscal 2019 fourth quarter:
- Fiscal fourth quarter net sales were $472 million, a decrease of $30 million or 5.9% from $502 million for the prior year. Fiscal 2018's fourth quarter included approximately $20 million of accelerated sales in anticipation of the go-live of the Company's upgraded ERP system at the beginning of fiscal 2019. Adjusting for this, net sales this year decreased approximately 2%. Shipments for the fiscal 2019 fourth quarter fell short of expectations primarily due to difficult market conditions caused by an unusually wet spring in North America compounded by near-term market disruptions caused by channel partner transitions.
- Quarterly GAAP gross profit margin of 14.4% and adjusted gross profit margin of 15.0% decreased from gross profit margin of 21.7% and adjusted gross profit margin of 22.1% last year due to sales mix, lower production volumes and operational inefficiencies. Challenges in labor availability restricted the Company's ability to more quickly remediate start-up inefficiencies related to the business optimization initiatives.
- Fourth quarter GAAP net loss of $18.5 million, or $0.45 per share, included business optimization charges, acquisition integration charges and a pension settlement charge. Excluding these items, adjusted net loss was $14.9 million, or $0.36 per share, as compared to adjusted net income of $0.47 per diluted share for the fourth quarter of fiscal 2018. The fourth quarter of fiscal 2019 also included a non-cash tax related charge of $5.1 million, or $0.12 per share.
For the fiscal 2019 full year:
- Fiscal 2019 net sales were $1.84 billion, down $44.7 million or 2.4% from $1.88 billion for fiscal 2018 primarily due to unusually dry weather conditions in Australia and Europe, lower storm generator sales and lower service parts sales, and near-term disruption caused by channel partner transitions, including the bankruptcy of a major North American retailer. Sales of commercial engines and products increased approximately 13% for the fiscal year.
- Full-year GAAP gross profit margin of 16.4% was down from 21.2% for fiscal 2018. Adjusted gross profit margin of 17.0% was down from 21.5% last year due to sales mix, lower production volumes and startup inefficiencies from the Company's business optimization initiatives.
- Full-year GAAP net loss of $54.1 million, or $1.31 per share, included business optimization charges, bad debt expense for a major retailer that filed for bankruptcy protection, a litigation settlement charge, a pension settlement charge, senior note repurchase premiums, a tax charge associated with tax reform and integration charges. Excluding these items, adjusted net loss was $12.9 million, or $0.32 per share.
"We are clearly disappointed with the fiscal 2019 results. The fourth quarter capped a difficult year of unprecedented market challenges and higher than expected operational inefficiencies encountered during the ramp-up of our business optimization initiatives," stated Todd J. Teske, Chairman, President and Chief Executive Officer. "The North America lawn and garden market slowed considerably as the quarter progressed from unusually wet, cool spring weather compounded by near-term market disruptions with channel partners. Europe set record high temperatures in June and July to impede channel inventory reductions. While we achieved operational improvements on many of the business optimization program start-up issues, continued inefficiencies offset the benefit of those improvements, including near-term labor availability challenges."
Teske continued, "Regardless of the cause of the various headwinds, it is our responsibility to address the issues and restore the company to growth and profitability. As we enter fiscal 2020, we are intensely focused on five key areas to drive improvements in performance:
- First, we are working aggressively to complete the business optimization program and eliminate the operational inefficiencies to begin realizing the $35 million to $40 million in pre-tax cost savings from the program.
- Second, as we also announced today, we will be consolidating engine production within our plant in Poplar Bluff, Missouri, to streamline operations and adjust production capacity to meet current and anticipated future needs. This initiative will reduce pre-tax expenses by up to $14 million when fully implemented.
- Third, we will be devoting increased time and focus to more fully analyzing the dynamics of our market with outside help to position our business for more sustained growth and higher returns. Gaining an outside perspective will help our thinking, planning and actions to further adapt to the continually changing environment so that we are properly positioned as the market continues to change.
- Fourth, we intend to strengthen our balance sheet, with the near-term objectives of improving working capital and lowering debt. With the winding down of investments in our business optimization initiatives, projected lower capital expenditures and the action announced today to reduce the cash dividend, we will be directing more funds to reduce debt and invest in attractive commercial products and enabling technologies.
- Fifth, we are making solid progress on a debt refinancing which we expect to close before the end of our first fiscal quarter. We believe the refinancing will provide good flexibility as we strengthen the balance sheet and execute our strategy."
Teske concluded, "There is no question that fiscal 2019 was enormously difficult from both a market perspective and our execution on operational excellence. Still, the several foundational changes we implemented advanced our commercial growth and diversification strategy and position us well for the long term. We remain confident in our strategy and view fiscal 2020 as an opportunity to get back on track."
Fiscal 2020 Outlook:
- Net sales are expected to be within a range of $1.91 billion to $1.97 billion for fiscal 2020, which contemplates midpoint growth of approximately 5.5% over fiscal 2019's performance. This outlook compares with the Company's previous preliminary expectation of approximately $2.01 billion in sales for fiscal 2020. The revision to the outlook principally relates to the lower base sales for fiscal 2019, a reduction in the Company's estimate of the North American market due to near-term disruption caused by channel partner transitions and the prolonged impact of weather on Europe, which has experienced hot and dry conditions in the early months of summer. The estimated sales growth breaks down as follows:
- 2.5-3.5% of total sales growth is expected to be driven by commercial sales.
- 2-4% of total sales growth is expected to be driven by residential sales, which contemplates some market rebound for more normal weather conditions in North America and Europe as well as a reduction in inventory liquidation from channel partner transitions. The growth also contemplates more normal shipments of service parts due to improved throughput.
- The fiscal 2020 outlook does not include storm sales, which contributed approximately $25 million of net sales in fiscal 2019.
- Price increases are expected to help offset incremental tariff costs.
- Adjusted net income is expected within a range of $9 million to $17 million, or $0.20 to $0.40 per diluted share, prior to the impact of costs related to the Company's business optimization program and the engine manufacturing consolidation project. The revision from the prior, preliminary estimate of approximately $1.30 per share, relates to the lower sales outlook, in addition to the impact on margin from expected lower production to reduce inventories and expected continuation of some operational inefficiencies into the first half of the fiscal year.
- Operating margins before business optimization costs and engine manufacturing consolidation costs are expected to be approximately 2.5% to 3.0%. Compared to fiscal 2019, operating margins are expected to improve due to a favorable sales mix from growth of commercial products and a rebound of service parts sales, improved plant utilization on higher production levels, efficiency improvements and business optimization program savings. Higher tariffs are expected to be offset by pricing, efficiency improvements and product cost improvements. Operating margins are lower than historical norms, however, in part, due to anticipated operational inefficiencies in the first half of the fiscal year and throttled back plant utilization to reduce inventories.
- Interest expense is expected to be approximately $34 million, which contemplated elevated debt levels. Other income (loss) is expected to be a loss of approximately $2.5 million, which includes approximately $3 million of incremental pension expense. Equity in earnings of unconsolidated affiliates is expected to be $10 million.
- The tax rate before business optimization costs and engine manufacturing consolidation costs is expected to be approximately 25%.
- The Company expects capital expenditures to be approximately $55 million, which includes anticipated expenditures related to the engine manufacturing consolidation project in fiscal 2020. The Company expects to achieve positive cash flow from operations net of capital spending.
- Pre-tax charges associated with the business optimization program are expected to be approximately $5 million as this program concludes. Pre-tax charges associated with the engine manufacturing consolidation program are expected to be $30 million to $35 million, split evenly between cash and non-cash charges, of which $15 million to $20 million are expected to be recognized in fiscal 2020. Cost savings associated with the engine manufacturing consolidation program are expected to begin in fiscal 2021 and ramp to the full run rate of $12 million to $14 million in fiscal 2022.