UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________ 
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 2, 2017
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
_____________________________________________________________
BSLOGOA04.JPG
BRIGGS & STRATTON CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin
 
39-0182330
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
12301 West Wirth Street, Wauwatosa, Wisconsin 53222
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: 414-259-5333
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock (par value $0.01 per share)
 
New York Stock Exchange
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   x      No    o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   o      No    x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x     No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   x     No   o
Indicate by check mark 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 or any amendment of this Form 10-K.   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨    (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   o  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No    x
The aggregate market value of Common Stock held by nonaffiliates of the registrant was approximately $920.5 million based on the last reported sale price of such securities as of December 30, 2016 , the last business day of the most recently completed second fiscal quarter.
Number of Shares of Common Stock Outstanding at August 17, 2017 : 42,755,848 .

DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy statement for the Annual Meeting to be held on October 25, 2017.






BRIGGS & STRATTON CORPORATION
FISCAL 2017 FORM 10-K
TABLE OF CONTENTS
PART I
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
 
Item 15.
 
Cautionary Statement on Forward-Looking Statements
This report contains certain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. The words "anticipate", “believe”, “estimate”, “expect”, “forecast”, “intend”, “plan”, “project”, and similar expressions are intended to identify forward-looking statements. The forward-looking statements are based on the Company’s current views and assumptions and involve risks and uncertainties that include, among other things, the ability to successfully forecast demand for its products; changes in interest rates and foreign exchange rates; the effects of weather on the purchasing patterns of consumers and original equipment manufacturers (OEMs); actions of engine manufacturers and OEMs with whom the Company competes; changes in laws and regulations; changes in customer and OEM demand; changes in prices of raw materials and parts that the Company purchases; changes in domestic and foreign economic conditions (including effects from the U.K.’s decision to exit the European Union); the ability to bring new productive capacity on line efficiently and with good quality; outcomes of legal proceedings and claims; the ability to realize anticipated savings from restructuring actions; and other factors disclosed from time to time in its SEC filings or otherwise, including the factors discussed in Item 1A, Risk Factors, of this Annual Report on Form 10-K and in the Company's periodic reports on Form 10-Q. The Company is not undertaking any obligation to update forward-looking statements or other statements it may make even though these statements may be affected by events or circumstances occurring after the forward-looking statements or other statements were made.






PART I
ITEM 1.
BUSINESS
Briggs & Stratton Corporation ("Briggs & Stratton" or the “Company”) is focused on providing power to get work done and make people's lives better. Briggs & Stratton is the world’s largest producer of gasoline engines for outdoor power equipment, and is a leading designer, manufacturer and marketer of power generation, pressure washer, lawn and garden, turf care and job site products through its Briggs & Stratton®, Simplicity®, Snapper®, Ferris®, Vanguard™, Allmand®, Billy Goat®, Murray®, Branco® and Victa® brands. Briggs & Stratton products are designed, manufactured, marketed and serviced in over 100 countries on six continents.
The Company conducts its operations in two reportable segments: Engines and Products. Further information about Briggs & Stratton’s business segments is contained in Note 9 of the Notes to Consolidated Financial Statements.
The Company’s internet address is www.basco.com. The Company makes available free of charge (other than an investor’s own internet access charges) through its internet website the Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the Securities and Exchange Commission. Charters of the Audit, Compensation, Finance, and Nominating and Governance Committees, Corporate Governance Guidelines, Stock Ownership Guidelines and code of business conduct and ethics contained in the Briggs & Stratton Integrity Manual are available on the Company’s website and are available in print to any shareholder upon request to the Corporate Secretary. The information contained on and linked from the Company's website is not incorporated by reference into this Annual Report on Form 10-K.
Engines Segment
General
Briggs & Stratton manufactures four-cycle aluminum alloy gasoline engines with gross horsepower ranging from 5.5hp up to 37hp and torques that range from 4.50 ft-lbs gross torque to 21.00 ft-lbs gross torque. The Company’s engines are used primarily by the lawn and garden equipment industry, which accounted for 89% of the Engines segment's fiscal 2017 engine sales to OEMs. Major lawn and garden equipment applications include walk-behind lawn mowers, riding lawn mowers, garden tillers and snow throwers. The remaining 11% of engine sales to OEMs in fiscal 2017 was for use on products for industrial, construction, agricultural and other consumer applications that include portable and standby generators, pumps and pressure washers. Many retailers specify the Company's engines on the power equipment they sell and the Briggs & Stratton logo is often featured prominently on a product because of the appeal and reputation of the brand. The Company mainly sells commercial engines under the Vanguard™ name.
In fiscal 2017 approximately 33% of the Engines segment net sales was derived from sales in international markets, primarily to customers in Europe. The Company serves its key international markets through its European regional office in Switzerland, its distribution center in the Netherlands and sales and service subsidiaries in Australia, Austria, Brazil, Canada, China, the Czech Republic, England, France, Germany, India, Italy, Japan, Malaysia, Mexico, New Zealand, Russia, South Africa, Spain, and Sweden. Briggs & Stratton is a leading supplier of gasoline engines in developed countries where there is an established lawn and garden equipment market. Briggs & Stratton also exports engines to developing nations where its engines are used in agricultural, marine, construction and other applications. More information about its foreign operations is in Note 9 of the Notes to Consolidated Financial Statements.
The Company's engines are sold primarily by its worldwide sales force through direct interaction with customers. The Company’s marketing staff and engineers provide support and technical assistance to its sales force.
The Engines segment also manufactures replacement engines and service parts and sells them to sales and service distributors. Beginning in fiscal 2014, the Company joined with one of its independent distributors to

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form Power Distributors, LLC (the venture) to distribute service parts in the United States. During fiscal years 2014 through 2016, the venture acquired other independent distributors. In fiscal 2016, the venture achieved a national distribution network. The Company's remaining domestic distributors are independently owned and operated. The Company owns its principal international distribution centers, but also uses independently owned and operated distributors.
These distributors supply service parts and replacement engines directly to independently owned, authorized service dealers throughout the world. These distributors and service dealers incorporate the Company’s commitment to reliability and service.
Customers
The Company's engine sales are primarily to OEMs. The Company's major external engine customers in fiscal years 2017, 2016 and 2015 were Husqvarna Outdoor Products Group (HOP), MTD Products Inc. (MTD), Deere & Company, and Power Distributors, LLC. Engines segment sales to the top three customers combined were 47%, 49% and 48% of Engines segment sales in fiscal 2017, 2016 and 2015, respectively. Under purchasing plans available to all of its gasoline engine customers, Briggs & Stratton typically enters into annual engine supply arrangements. In certain cases, the Company has entered into longer supply arrangements of two to three years.
The Company believes that in fiscal 2017 approximately 80% of all residential lawn and garden powered equipment sold in the United States was sold through mass merchandisers such as The Home Depot, Inc. (The Home Depot), Lowe’s Companies, Inc. (Lowe’s), Sears Holdings Corporation (Sears) and Wal-Mart Stores, Inc. (Wal-Mart). Given the buying power of the mass merchandisers, Briggs & Stratton, through its customers, has continued to experience pricing pressure; however, the development of new and innovative products may assist the Company and its customers in realizing higher margins. The Company believes commercial engines are mainly sold through independent dealer networks.
Competition
The Company’s major competitors in engine manufacturing are Honda Motor Co., Ltd. (Honda), Kawasaki Heavy Industries, Ltd. (Kawasaki) and Kohler Co. (Kohler). Several Japanese and Chinese small engine manufacturers, of which Honda and Kawasaki are the largest, compete directly with the Company in world markets in the sale of engines to other OEMs and indirectly through their sale of end products.
The Company believes it has a significant share of the worldwide market for engines that power outdoor equipment.
The Company believes the major areas of competition from all engine manufacturers include product quality, brand, price, delivery and service. Other factors affecting competition are short-term market share objectives, short-term profit objectives, exchange rate fluctuations, technology, new product innovation, product support, distribution strength, and advertising. The Company believes its technology, product value, distribution, marketing, and service reputation have given it strong brand name recognition and enhanced its competitive position.
Seasonality of Demand
Sales of engines to lawn and garden OEMs are highly seasonal because of consumer buying patterns. The majority of lawn and garden equipment is sold during the spring and summer months when most lawn care and gardening activities are performed. Sales of lawn and garden equipment are also influenced by consumer sentiment, employment levels, new and existing home sales and weather conditions. Engine sales in the Company’s third fiscal quarter have historically been the highest, while sales in the first fiscal quarter have historically been the lowest.
In order to efficiently use its capital investments and meet seasonal demand for engines, the Company pursues a relatively balanced production schedule throughout the year. The schedule is adjusted to reflect changes in estimated demand, customer inventory levels and other matters outside the control of the Company. Accordingly, inventory levels generally increase during the first and second fiscal quarters in anticipation of customer demand. Inventory levels begin to decrease as sales increase in the third fiscal quarter. This seasonal pattern results in high inventories and low cash flow for the Company in the first,

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second and the beginning of the third fiscal quarters. The pattern generally results in higher cash flow in the latter portion of the third fiscal quarter and in the fourth fiscal quarter as inventories are liquidated and receivables are collected.
Manufacturing
The Company manufactures engines and parts at the following locations: Auburn, Alabama; Statesboro, Georgia; Murray, Kentucky; Poplar Bluff, Missouri; Wauwatosa, Wisconsin; and Chongqing, China. Briggs & Stratton has a parts distribution center in Menomonee Falls, Wisconsin and Wijchen, Netherlands. The Engines segment also purchases certain products under contract manufacturing agreements.
The Company manufactures a majority of the structural components used in its engines, including aluminum die castings, carburetors and ignition systems. The Company purchases certain parts such as piston rings, spark plugs, valves, ductile and grey iron castings, plastic components, some stampings and screw machine parts and smaller quantities of other components. Raw material purchases consist primarily of aluminum and steel. The Company believes its sources of supply are adequate.
The Company has joint ventures with Daihatsu Motor Company for the manufacture of engines in Japan, and with Starting Industrial of Japan for the production of rewind starters and punch pressed components in the United States.
Subsequent to July 2, 2017, the Company announced its business optimization program. The program includes, among other things, moving production of larger commercial engines, which are currently sourced from overseas, to two of its existing U.S. plants.
Products Segment
General
The Products segment’s principal product lines include lawn and garden power equipment, turf care products, portable and standby generators, pressure washers, snow throwers, and job site products. Products sells its products through multiple channels of retail distribution, including consumer home centers, warehouse clubs, mass merchants, independent dealers and distributors, and on-line merchants. The Company sells its lawn and garden products, turf care products, snow throwers, and standby generators primarily through an independent dealer network and sells its pressure washers and portable generators primarily through the U.S. mass retail channel. To support its international business, Products has leveraged the existing Briggs & Stratton worldwide distribution network and regional sales offices. The Company sells its job site products primarily into the rental channel to the construction and infrastructure, mining and oil & gas industries.
Beginning in fiscal 2014, the Company joined with one of its independent distributors to form Power Distributors, LLC to distribute certain service parts in the United States. During fiscal years 2014 through 2016, the venture acquired other independent distributors. In fiscal 2016, the venture achieved a national distribution network. 
The Products segment product lines are marketed under its own brands such as Briggs & Stratton®, Simplicity®, Snapper®, Snapper Pro®, Ferris®, Allmand®, Billy Goat®, Murray®, Branco® and Victa®, as well as other brands such as Craftsman and Troy-Bilt.
Customers
Historically, Products’ major customers have included Lowe’s, Sears, PACE Inc., The Home Depot, Bunnings Warehouse, as well as numerous other distributors and dealers. Sales to the top three customers combined were 25%, 25% and 27% of Products segment net sales in fiscal 2017, 2016 and 2015, respectively. Commercial mowers are primarily sold through independent dealers.
Competition
The principal competitive factors in the outdoor power products industry include price, service, product performance, brand, innovation and delivery. Products has various competitors, depending on the type of equipment. Primary competitors include: Honda (portable generators, pressure washers and lawn and garden equipment), Generac Power Systems, Inc. (portable and standby generators and job site products), Alfred Karcher GmbH & Co. (pressure washers), Techtronic Industries (pressure washers and portable generators), Deere & Company (commercial and consumer lawn mowers), MTD (consumer lawn mowers), The Toro

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Company (commercial and consumer lawn mowers), Scag Power Equipment, a Division of Metalcraft of Mayville, Inc. (commercial lawn mowers), and HOP (commercial and consumer lawn mowers).
Seasonality of Demand
A significant portion of Products’ sales are subject to seasonal patterns. Due to seasonal and regional weather factors, sales of pressure washers and lawn and garden powered equipment are typically higher during the third and fourth fiscal quarters than at other times of the year. Sales of portable generators and snow throwers are typically higher during the first and second fiscal quarters and can spike during weather related power outage events.
Manufacturing
Products’ manufacturing facilities are located in Munnsville, New York; Wauwatosa, Wisconsin; Holdrege, Nebraska; Lee's Summit, Missouri; and Sydney, Australia. Products also purchases certain powered equipment under contract manufacturing agreements.
Products manufactures core components for its products, where such integration improves operating profitability by providing lower costs.
Products purchases engines from its parent, Briggs & Stratton, as well as from Honda, Kawasaki and Kohler. Products has not experienced any difficulty obtaining necessary engines or other purchased components.
Products assembles products for the international markets at its U.S. and Australian locations and through contract manufacturing agreements with other OEMs and suppliers.
Subsequent to July 2, 2017, the Company announced its business optimization program. The program includes, among other things, expanding capacity and moving commercial turf equipment operation into a larger, more efficient facility close to the current facility in Munnsville, New York.
Consolidated
General Information
The Company holds patents on features incorporated in its products; however, the success of the Company’s business is not considered to be primarily dependent upon patent protection. The Company owns several trademarks which it believes significantly affect a consumer’s choice of outdoor powered equipment and job site products, and therefore create value. Licenses, franchises and concessions are not a material factor in the Company’s business.
For the fiscal years ended July 2, 2017 , July 3, 2016  and June 28, 2015 , the Company spent approximately $23.0 million , $20.0 million and $19.9 million , respectively, on research activities relating to the development of new products or the improvement of existing products.
The average number of persons employed by the Company during fiscal 2017 and fiscal 2016 was 5,438 and 5,549, respectively. Employment in fiscal 2017 ranged from a high of 5,484 in November 2016 to a low of 5,300 in June 2017.
Export Sales
Export sales for fiscal 2017, 2016 and 2015 were $337.1 million (19% of net sales), $285.5 million (16% of net sales), and $334.0 million (18% of net sales), respectively. These sales were principally to customers in Europe, Asia, Australia, and Canada.
Refer to Note 9 of the Notes to Consolidated Financial Statements for financial information about geographic areas. Also, refer to Item 7A of this Form 10-K and Note 15 of the Notes to Consolidated Financial Statements for information about Briggs & Stratton’s foreign exchange risk management.



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ITEM 1A.
RISK FACTORS
In addition to the risks referred to elsewhere in this Annual Report on Form 10-K, the following risks, among others, may have affected, and in the future could materially affect, the Company and its subsidiaries’ business, financial condition or results of operations.
Demand for products fluctuates significantly due to seasonality. In addition, changes in the weather and consumer confidence impact demand.
Sales of our products are subject to seasonal and consumer buying patterns. Consumer demand in our markets can be reduced by unfavorable weather and weak consumer confidence. Although we manufacture throughout the year, our sales are concentrated in the second half of our fiscal year. This operating method requires us to anticipate demand of our customers many months in advance. If we overestimate or underestimate demand during a given year, we may not be able to adjust our production quickly enough to avoid excess or insufficient inventories, and that may in turn limit our ability to maximize our potential sales or maintain optimum working capital levels.
We have only a limited ability to pass through cost increases in our raw materials to our customers during the year.
We generally enter into annual purchasing plans with our largest customers, so our ability to raise our prices during a particular year to reflect increased raw materials costs is limited.
A significant portion of our net sales comes from major customers and the loss of any of these customers would negatively impact our financial results.
In fiscal 2017, our three largest customers accounted for 30% of our consolidated net sales. The loss of any of these customers or a significant portion of the business from one or more of our key customers would significantly impact our net sales and profitability.
A significant change or disruption in the U.S. retail market for lawn and garden products could have an adverse impact on our business.
The retail market in the U.S. for lawn and garden products is concentrated with a few large traditional retailers. A disruption or significant change at any of these large traditional retailers could have an adverse impact on our customers and on our business.
Changes in environmental, tax, health care or other laws and regulations could require extensive changes in our operations or to our products.
Our operations and products are subject to a variety of foreign, federal, state and local laws and regulations governing, among other things, emissions to air, discharges to water, noise, the generation, handling, storage, transportation, treatment and disposal of waste and other materials and health and safety matters as well as taxes, health care and data privacy. We do not expect these laws and regulations to have an adverse effect on us, but we cannot be certain that these or proposed changes in other applicable laws or regulations, or their enforcement, will not adversely affect our business or financial condition in the future.
Our international operations are subject to risks and uncertainties, which could adversely affect our business or financial results.
In fiscal 2017 , we derived approximately 30% of our consolidated net sales from international markets, primarily Europe. Our international operations are subject to various economic, political, and other risks and uncertainties that could adversely affect our business and operating results, including, but not limited to, regional or country specific economic downturns, fluctuations in currency exchange rates, labor practices, complications in complying with, or exposure to liability under, a variety of laws and regulations, including anti-corruption and export control laws and regulations, political instability and significant natural disasters and other events or factors impacting local infrastructure.
Actions of our competitors could reduce our sales or profits.
Our markets are highly competitive and we have a number of significant competitors in each market. Competitors may reduce their costs, lower their prices or introduce innovative products that could adversely


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affect our sales or profits. In addition, our competitors may focus on reducing our market share to improve their results.
Disruptions caused by labor disputes or organized labor activities or an inability to acquire and retain skill sets needed could harm our business and reputation.
Currently, approximately 12% of our workforce is represented by labor unions. In addition, we may from time to time experience union organizing activities in our non-union facilities. Disputes with the current labor union or new union organizing activities could lead to work slowdowns or stoppages and make it difficult or impossible for us to meet scheduled delivery times for product shipments to our customers, which could result in loss of business and damage to our reputation. Union activity could also result in higher labor costs, which could harm our financial condition, results of operations and competitive position. In addition, an inability to acquire and retain skill sets needed in the business could harm our financial condition, results of operations and competitive position.
Our level of debt and our ability to obtain debt financing could adversely affect our operating flexibility and put us at a competitive disadvantage.
Our level of debt and the limitations imposed on us by the indenture relating to the Senior Notes (as defined below) and our other credit agreements could have important consequences, including the following:
we will have to use a portion of our cash flow from operations for debt service rather than for our operations;
we may not be able to obtain additional debt financing for future working capital, capital expenditures or other corporate purposes or may have to pay more for such financing;
some or all of the debt under our current or future revolving credit facilities will be at a variable interest rate, making us more vulnerable to increases in interest rates;
we could be less able to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions;
we may be more vulnerable to general adverse economic and industry conditions; and
we may be disadvantaged compared to competitors with less leverage.
The terms of the indenture for the 6.875% Senior Notes due December 2020 (the "Senior Notes") do not fully prohibit us from incurring substantial additional debt in the future and our revolving credit facilities permit additional borrowings, subject to certain conditions. If incremental debt is added to our current debt levels, the related risks we now face could intensify.
We expect to obtain the money to pay our expenses and to pay the principal and interest on the outstanding Senior Notes, the credit facilities and other debt primarily from our operations or by refinancing part of our existing debt. Our ability to meet our expenses thus depends on our future performance, which will be affected by financial, business, economic and other factors. We will not be able to control many of these factors, such as economic conditions in the markets where we operate and pressure from competitors. We cannot be certain that the money we earn will be sufficient to allow us to pay principal and interest on our debt and meet our other obligations. If we do not have enough money, we may be required to refinance all or part of our existing debt, sell assets or borrow more money. We cannot guarantee that we will be able to do so on terms acceptable to us. In addition, the terms of existing or future debt agreements, including the revolving credit facilities and our indentures, may restrict us from adopting certain of these alternatives.
We are restricted by the terms of the outstanding Senior Notes and our other debt, which could adversely affect us.
The indenture relating to the Senior Notes and our multicurrency credit agreement include a number of financial and operating restrictions, which may prevent us from capitalizing on business opportunities and taking some corporate actions. These covenants could adversely affect us by limiting our ability to plan for or react to market conditions or to meet our capital needs. These covenants include, among other things, restrictions on our ability to:
incur more debt;
pay dividends, redeem stock or make other distributions;
make certain investments;
create liens;


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transfer or sell assets;
merge or consolidate; and
enter into transactions with our affiliates.
In addition, our multicurrency credit agreement contains financial covenants that, among other things, require us to maintain a minimum interest coverage ratio and impose a maximum average leverage ratio.
Our failure to comply with the restrictive covenants described above could result in an event of default, which, if not cured or waived, could result in us being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition could be adversely affected by increased costs and rates.
Worldwide economic conditions may adversely affect our industry, business and results of operations.
General worldwide economic conditions have experienced volatility in recent years due to the sequential effects of the subprime lending crisis, general credit market crisis, sovereign debt crisis, collateral effects on the finance and banking industries, changes in energy costs, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns. These conditions make it difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and they may cause U.S. and foreign OEMs and consumers to slow spending on our products. We cannot predict the timing or duration of any future economic slowdown or the timing or strength of a subsequent economic recovery, worldwide or in the specific end markets we serve. If the consumer and commercial lawn and garden markets significantly deteriorate due to these economic effects, our business, financial condition and results of operations will likely be adversely affected. Additionally, our stock price could decrease if investors have concerns that our business, financial condition and results of operations will be negatively impacted by a worldwide economic downturn.
In addition, on June 23, 2016, the United Kingdom (the "U.K.") held a referendum in which voters approved an exit from the European Union (the "E.U."), commonly referred to as "Brexit". As a result of the referendum, the British government has begin negotiating the terms of the U.K.'s withdrawal from the E.U. A withdrawal could, among other outcomes, disrupt the free movement of goods, services and people between the U.K. and the E.U., undermine bilateral cooperation in key policy areas and significantly disrupt trade between the U.K. and the E.U. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. Given the lack of comparable precedent, it is unclear what financial, trade and legal implications the withdrawal of the U.K. from the E.U. will have and how such withdrawal would affect us. The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. The strengthening of the U.S. dollar relative to other currencies may adversely affect our operating results. The announcement of Brexit and the withdrawal of the U.K. from the E.U. may also create global economic uncertainty, which may cause our customers to closely monitor their costs and reduce their spending budgets. Any of these effects of Brexit, among others, could adversely affect our business, financial condition, operating results and cash flows.
We have goodwill and intangible assets, which were written down in fiscal 2016 and in prior years. If we determine that goodwill and other intangible assets have become further impaired in the future, net income in such years would be adversely affected.
At July 2, 2017, goodwill and other intangible assets represented approximately 18.1% of our total assets. Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. We are required to evaluate whether our goodwill and indefinite-lived intangible assets have been impaired on an annual basis, or more frequently if indicators of impairment exist. In fiscal 2017 and fiscal 2015, there was no impairment of goodwill or other intangible assets. In fiscal 2016, we recorded pre-tax non-cash goodwill and tradename impairment charges of $10.3 million.The impairments were determined as part of the fair value assessments of goodwill and other intangible assets. Any additional write-down of our goodwill or intangible assets could adversely affect our results of operations.


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We are subject to litigation, including product liability, patent infringement, and warranty claims, that may adversely affect our business and results of operations.
We are a party to litigation that arises in the normal course of our business operations, including product warranty and liability (strict liability and negligence) claims, patent and trademark matters, contract disputes and environmental, asbestos, employment and other litigation matters. See Note 13, “Commitments and Contingencies,” to the Consolidated Financial Statements for a description of unresolved legal actions. We face an inherent business risk of exposure to product liability and warranty claims in the event that the use of our products is alleged to have resulted in injury or other damage or our products are alleged to be defective. In addition, we face an inherent risk that our competitors will allege that aspects of our product designs infringe their protected intellectual property. While we currently maintain general liability and product liability insurance coverage in amounts that we believe are adequate, we cannot be sure that we will be able to maintain this insurance on acceptable terms or that this insurance will provide sufficient coverage against potential liabilities that may arise. Any claims brought against us, with or without merit, may have an adverse effect on our business and results of operations as a result of potential adverse outcomes, the expenses associated with defending such claims, the diversion of our management’s resources and time and the potential adverse effect to our business reputation.
Our pension and postretirement benefit plan obligations are currently underfunded, and we may have to make significant cash payments to some or all of these plans, which would reduce the cash available for our businesses.
We have unfunded obligations under our domestic and foreign pension and postretirement benefit plans. As of July 2, 2017, our pension plans were underfunded by approximately $246 million . The funded status of our pension plans is dependent upon many factors, including returns on invested assets, the level of certain market interest rates, the mortality tables used, and the discount rate used to determine pension obligations. Unfavorable returns on the plan assets or unfavorable changes in applicable laws or regulations could materially change the timing and amount of required plan funding, which would reduce the cash available for our businesses. In addition, a decrease in the discount rate used to determine pension obligations could result in an increase in the valuation of pension obligations, which could affect the reported funding status of our pension plans and future contributions, as well as the periodic pension cost in subsequent fiscal years.
Our dependence on, and the price of, raw materials may adversely affect our profits.
The principal raw materials used to produce our products are aluminum, copper and steel. We source raw materials on a global or regional basis, and the prices of those raw materials are susceptible to significant price fluctuations due to supply/demand trends, transportation costs, government regulations and tariffs, changes in currency exchange rates, price controls, the economic climate and other unforeseen circumstances. If we are unable to pass on raw material price increases to our customers, our future profitability may be adversely affected.
We may be adversely affected by health and safety laws and regulations.
We are subject to various laws and regulations relating to the protection of human health and safety and have incurred and will continue to incur capital and other expenditures to comply with these regulations. Failure to comply with regulations could subject us to future liabilities, fines or penalties or the suspension of production, as well as damage our reputation.
The operations and success of our Company can be impacted by natural disasters, terrorism, acts of war, international conflict and political and governmental actions, which could harm our business.
Natural disasters, acts or threats of war or terrorism, international conflicts and the actions taken by the United States and other governments in response to such events could cause damage or disrupt our business operations, our suppliers or our customers, and could create political or economic instability, any of which could have an adverse effect on our business. Although it is not possible to predict such events or their consequences, these events could decrease demand for our products, could make it difficult or impossible for us to deliver products or could disrupt our supply chain. We may also be impacted by actions by foreign governments, including currency devaluation, tariffs and nationalization, where our facilities, customers and/or suppliers are located, which could disrupt manufacturing and commercial operations. In addition, our foreign operations make us subject to certain U.S. and foreign laws and regulations, including the Export Administration Regulations administered by the U.S. Department of Commerce, the trade sanctions laws and


8





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


9





confidential information, result in regulatory actions and legal proceedings, and have an adverse effect on our business and reputation.
We have implemented, and Wisconsin law contains, anti-takeover provisions that may adversely affect the rights of holders of our common stock.
Our articles of incorporation contain provisions that could have the effect of discouraging or making it more difficult for someone to acquire us through a tender offer, a proxy contest or otherwise, even though such an acquisition might be economically beneficial to our shareholders. These provisions include a board of directors divided into three classes of directors serving staggered terms of three years each and the removal of directors only for cause and only with the affirmative vote of a majority of the votes entitled to be cast in an election of directors.
We are subject to the Wisconsin Business Corporation Law, which contains several provisions that could have the effect of discouraging non-negotiated takeover proposals or impeding a business combination.
These provisions include:
requiring a supermajority vote of shareholders, in addition to any vote otherwise required, to approve business combinations not meeting adequacy of price standards;
prohibiting some business combinations between an interested shareholder and us for a period of three years, unless the combination was approved by our board of directors prior to the time the shareholder became a 10% or greater beneficial owner of our shares or under some other circumstances;
limiting actions that we can take while a takeover offer for us is being made or after a takeover offer has been publicly announced; and
limiting the voting power of shareholders who own more than 20% of our stock.

An inability to identify, complete and integrate acquisitions may adversely impact our sales, results of operations, cash flow and liquidity.
Our historical growth has included acquisitions, and our future growth strategy includes acquisition opportunities. For example, in fiscal 2015, the Company acquired Allmand, a leading designer and manufacturer of high quality towable light towers, industrial heaters and solar LED arrow boards, for approximately $59.9 million in cash. Also, in fiscal 2015, the Company acquired Billy Goat, a leading manufacturer of specialty turf equipment, which includes aerators, sod cutters, overseeders, power rakes, brush cutters, walk behind blowers, lawn vacuums, and debris loaders, for total cash consideration of $28.3 million. We may not be able to identify acquisition targets or successfully complete acquisitions in the future due to the absence of quality companies in our target markets, economic conditions, competition from other bidders, or price expectations from sellers. If we are unable to complete additional acquisitions, our growth may be limited.
Additionally, as we grow through acquisitions, we will continue to place significant demands on management, operational, and financial resources. Recent and future acquisitions will require integration of operations, sales and marketing, information technology, finance and administrative operations, which could decrease the time available to serve and attract customers. We cannot assure that we will be able to successfully integrate acquisitions, that these acquisitions will operate profitably, or that we will be able to achieve the desired financial or operational success. Our financial condition, cash flows, liquidity and results of operations could be adversely affected if we do not successfully integrate the newly acquired businesses, or if our other businesses suffer due to the increased focus on the newly acquired businesses. 
An inability to successfully manage the upgrade of our global enterprise resource planning ("ERP") system could adversely affect our operations and operating results.

We are in the process of upgrading our global ERP system. This upgrade will affect many of our existing operating and financial systems. This is a major undertaking both financially and from a management and personnel perspective. Should the upgrade not be implemented successfully and within budget, or if the system does not perform in a satisfactory manner, it could be disruptive and adversely affect our operations and results of operations, including our ability to report accurate and timely financial results.


10





Our common stock is subject to substantial price and volume fluctuations.
The market price of shares of our common stock may be volatile. Among the factors that could affect our common stock price are those previously discussed, as well as:
quarterly fluctuation in our operating income and earnings per share results;
decline in demand for our products;
significant strategic actions by our competitors, including new product introductions or technological advances;
fluctuations in interest rates or foreign currency exchange;
cost increases in energy, raw materials or labor;
changes in revenue or earnings estimates or publication of research reports by analysts; and
domestic and international economic and political factors unrelated to our performance.
In addition, the stock markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.


11





ITEM 2.
PROPERTIES
The Company maintains leased and owned manufacturing, office, warehouse, distribution and testing facilities throughout the world. The Company believes that its owned and leased facilities are adequate to perform its operations in a reasonable manner. As the Company’s business is seasonal, additional warehouse space may be leased when inventory levels are at their peak. Facilities in the United States occupy approximately 5.9 million square feet, of which 61% is owned. Facilities outside of the United States occupy approximately 0.9 million square feet, of which 28% is owned. Certain of the Company’s facilities are leased through operating lease agreements. See Note 10 to the Consolidated Financial Statements for information on the Company’s operating leases.

The following table provides information about each of the Company’s facilities (exceeding 25,000 square feet) as of July 2, 2017:
 
 
 
 
 
 
 
Location
 
Type of Property
 
Owned/Leased
 
Segment
U.S. Locations:
 
 
 
 
 
 
Auburn, Alabama
 
Manufacturing, office and warehouse
 
Owned and Leased
 
Engines
McDonough, Georgia (1)
 
Manufacturing, office and warehouse
 
Owned and Leased
 
Products
Statesboro, Georgia
 
Manufacturing, office and warehouse
 
Owned and Leased
 
Engines
Murray, Kentucky
 
Manufacturing, office and warehouse
 
Owned and Leased
 
Engines
Lee's Summit, Missouri
 
Manufacturing, office and warehouse
 
Leased
 
Products
Poplar Bluff, Missouri
 
Manufacturing, office and warehouse
 
Owned and Leased
 
Engines
Holdrege, Nebraska
 
Manufacturing, office and warehouse
 
Owned
 
Products
Munnsville, New York
 
Manufacturing and office
 
Owned
 
Products
Sherrill, New York
 
Warehouse
 
Leased
 
Products
Orangeburg, South Carolina
 
Distribution
 
Leased
 
Engines
Menomonee Falls, Wisconsin
 
Distribution and office
 
Leased
 
Engines, Products
Milwaukee, Wisconsin
 
Distribution
 
Leased
 
Engines, Products
Wauwatosa, Wisconsin
 
Manufacturing, office and warehouse
 
Owned
 
Engines, Products, Corporate
 
 
 
 
Non-U.S. Locations:
 
 
 
 
 
 
Melbourne, Australia
 
Office and warehouse
 
Leased
 
Engines, Products
Sydney, Australia
 
Manufacturing and office
 
Leased
 
Products
Curitiba, Brazil
 
Office and warehouse
 
Leased
 
Engines, Products
Mississauga, Canada
 
Office and warehouse
 
Leased
 
Products
Chongqing, China
 
Manufacturing, office and warehouse
 
Owned
 
Engines
Shanghai, China
 
Office and warehouse
 
Leased
 
Engines, Products
Queretaro, Mexico
 
Office and warehouse
 
Leased
 
Engines, Products
Wijchen, Netherlands
 
Distribution and office
 
Leased
 
Engines, Products
  
(1) During fiscal 2015, the Company closed its McDonough, Georgia manufacturing facility and consolidated production into its existing facilities. At July 2, 2017, the Company had $1.4 million classified as assets held for sale, which is included in Prepaid Expenses and Other Current Assets within the Consolidated Balance Sheets, related to the McDonough, Georgia manufacturing location.


12





ITEM 3.
LEGAL PROCEEDINGS
The Company is subject to various unresolved legal actions that arise in the normal course of its business. These actions typically relate to product liability (including asbestos-related liability), patent and trademark matters, and disputes with customers, suppliers, distributors and dealers, competitors and employees.
On May 12, 2010, Exmark Manufacturing Company, Inc. filed suit against Briggs & Stratton Power Products Group, LLC (“BSPPG”), a wholly owned subsidiary of the Company that was subsequently merged with and into the Company on January 1, 2017 (Case No. 8:10CV187, U.S. District Court for the District of Nebraska), alleging that certain Ferris® and Snapper Pro® mower decks infringed an Exmark mower deck patent. Exmark sought damages relating to sales since May 2004, attorneys’ fees, and enhanced damages. As a result of a reexamination proceeding in 2012, the United States Patent and Trademark Office (“USPTO”) initially rejected the asserted Exmark claims as invalid.  However, in 2014, that decision was reversed by the USPTO on appeal by Exmark. Following discovery, each of BSPPG and Exmark filed several motions for summary judgment in the Nebraska district court, which were decided on July 28, 2015. The court concluded that older mower deck designs infringed Exmark’s patent, leaving for trial the issues of whether current designs infringed, the amount of damages, and whether any infringement was willful.
The trial began on September 8, 2015, and on September 18, 2015, the jury returned its verdict, finding that BSPPG’s current mower deck designs do not infringe the Exmark patent. As to the older designs, the jury awarded Exmark $24.3 million in damages and found that the infringement was willful, allowing the judge to enhance the jury’s damages award post-trial by up to three times. Also on September 18, 2015, the U.S. Court of Appeals for the Federal Circuit issued its decision in an unrelated case, SCA Hygiene Products Aktiebolag SCA Personal Care, Inc. v. First Quality Baby Products, LLC, et al. (Case No. 2013-1564) (“SCA”), confirming the availability of laches as a defense to patent infringement claims. Laches is an equitable doctrine that may bar a patent owner from obtaining damages prior to commencing suit, in circumstances in which the owner knows or should have known its patent was being infringed for more than six years. Although the court in the Exmark case ruled before trial that BSPPG could not rely on the defense of laches, as a result of the subsequent SCA decision, the court held a bench trial on that defense on October 21 and 22, 2015. On May 2, 2016, the United States Supreme Court agreed to review the SCA decision.
The parties submitted post-trial motions and briefing related to: damages; willfulness; laches; attorney fees; enhanced damages; and prejudgment/post-judgment interest and costs.  All post-trial motions and briefing were completed on December 18, 2015.  On May 11, 2016, the court ruled on those post-trial motions and entered judgment against BSPPG and in favor of Exmark in the amount of $24.3 million in compensatory damages, an additional $24.3 million in enhanced damages, and $1.5 million in pre-judgment interest along with post-judgment interest and costs to be determined. The Company strongly disagrees with the jury verdict, certain rulings made before and during trial, and the May 11, 2016 post-trial rulings. BSPPG appealed to the U.S. Court of Appeals for the Federal Circuit on several bases, including the issues of obviousness and invalidity of Exmark’s patent, the damages calculation, willfulness and laches.
Following briefing of the appeal and prior to oral argument, the United States Supreme Court overturned the SCA decision, ruling that laches is not available in a patent infringement case for damages. That ruling eliminated laches as one basis for BSPPG’s appeal of the Exmark case. The U.S. Court of Appeals for the Federal Circuit held a hearing on the remainder of BSPPG’s appeal on April 5, 2017 and has not yet issued its decision.
In assessing whether the Company should accrue a liability in its financial statements as a result of the May 11, 2016 post-trial rulings and related matters, the Company considered various factors, including the legal and factual circumstances of the case, the trial record, the post-trial orders, the current status of the proceedings, applicable law, the views of legal counsel, and the likelihood of successful appeals. As a result of this review, the Company has concluded that a loss from this case is not probable and reasonably estimable at this time and, therefore, a liability has not been recorded with respect to this case as of July 2, 2017.
Although it is not possible to predict with certainty the outcome of these and other unresolved legal actions or the range of possible loss, the Company believes the unresolved legal actions will not have a material adverse effect on its results of operations, financial position or cash flows.

13





ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

14





Executive Officers of the Registrant
Name, Age, Position
  
Business Experience for At Least Past Five Years
TODD J. TESKE, 52
Chairman, President & Chief Executive Officer (1)(2)
  
Mr. Teske was elected to his current position effective October 2010. He previously was President & Chief Executive Officer from January 2010 to October 2010. He served as President and Chief Operating Officer from 2008 to 2010; as Executive Vice President & Chief Operating Officer from 2005 to 2008; and as Senior Vice President and President - Briggs & Stratton Power Products Group, LLC from 2003 to 2005. Mr. Teske also serves as a director of Badger Meter, Inc. and Lennox International, Inc.
 
 
KATHRYN M. BUONO, 55
Vice President, General Counsel & Corporate Secretary
 
Ms. Buono was elected to her position effective April 2015 (initially with the title Vice President, General Counsel & Secretary).  Prior to joining Briggs & Stratton, she held the position of Managing Partner of the Milwaukee, Wisconsin office of the Quarles & Brady LLP law firm from March 2014 through December 2014 and was a partner practicing in its Business Law Group from 1996 through 2014.
    
 
 
 
 
 
 
RANDALL R. CARPENTER, 60
Vice President Corporate Marketing
  
Mr. Carpenter was elected to his current position effective September 2016. Previously he served as Vice President - Marketing (an elected officer position) from 2009 through August 2016. He served as Vice President - Marketing (an appointed position) from 2007 to 2009. Prior to joining Briggs & Stratton, he held the position of Vice President Marketing and Product Development for Royal Appliance Manufacturing, a vacuum cleaner manufacturer.


  
  
  
  
  
 
 
DAVID G. DEBAETS, 54
Vice President Operations – Engines & Power
  
Mr. DeBaets was elected to his current position effective September 2015 (initially with the title Vice President – Global Engines Operations). He previously served as Vice President - North American Operations from 2007 through August 2015 and as Vice President and General Manager – Large Engine Division from 2000 to 2007.

  
  
 
 
ANDREA L. GOLVACH, 46
Vice President & Treasurer
 
Ms. Golvach was elected to her current position effective November 2011 after serving as Vice President of Treasury from May 2011 to November 2011. Prior to joining Briggs & Stratton, she held the position of Director of Finance & Cash Management at Harley-Davidson, Inc., a global motorcycle manufacturer, from 2007 to 2011.

 
 
 
 
 
 
 
 
 
HAROLD L. REDMAN, 52
Senior Vice President & President –
Turf & Consumer Products
  
Mr. Redman was elected to his current position effective September 2014. He previously served as Senior Vice President and President - Products Group from 2010 to 2014; as Senior Vice President and President - Home Power Products Group from 2009 to 2010; and as Vice President and President - Home Power Products Group from 2006 to 2009. Prior to joining Briggs & Stratton, he served as Senior Vice President - Sales & Marketing of Simplicity Manufacturing, Inc., the predecessor owner of the Company's Simplicity® business.


  
  
  
  
  
  
 
 

15





Name, Age, Position
  
Business Experience for At Least Past Five Years
WILLIAM H. REITMAN, 61
Senior Vice President & President – Support
  
Mr. Reitman was elected to his current position effective September 2016 (initially with the title Senior Vice President & President - Global Support). Previously he served as Senior Vice President & President - Global Service from 2015 to 2016; as Senior Vice President - Managing Director Europe & Global Service from 2013 to 2015; as Senior Vice President - Business Development & Customer Service from 2010 to 2013; as Senior Vice President - Sales & Customer Support from 2007 to 2010; as Senior Vice President - Sales & Marketing from 2006 to 2007; as Vice President - Sales & Marketing from 2004 to 2006; and as Vice President - Marketing from 1995 to 2004.

  
  
  
  
  
  
DAVID J. RODGERS, 46
Senior Vice President & President – Engines & Power
  
Mr. Rodgers was elected to his current position effective August 2015 (initially with the title Senior Vice President & President - Engines Group). He previously served as Senior Vice President & Chief Financial Officer from 2010 to 2015 and as Vice President - Finance during 2010. He served as Controller from 2006 to 2010 and was elected an executive officer in 2007. Prior to joining Briggs & Stratton, he was employed by Roundy’s Supermarkets, Inc., a Midwest grocer, as Vice President - Corporate Controller from 2005 to 2006 and Vice President - Retail Controller from 2003 to 2005.

  
  
  
  
  
 
  
 
 
MARK A. SCHWERTFEGER, 40
Senior Vice President & Chief Financial Officer
  
Mr. Schwertfeger was elected to his current position effective August 2015. He previously served as Vice President & Controller (an executive officer position) from 2014 to 2015; as Corporate Controller from 2010 to 2014; and as International Controller from 2008 to 2010. Prior to joining Briggs & Stratton, he held the position of Director with KPMG LLP., a public accounting firm.

  
  
 
 
 
 
 
 
(1) Officer is also a Director of Briggs & Stratton.
(2) Member of the Board of Directors Executive Committee.
Officers are elected annually and serve until they resign, die, are removed, or a different person is appointed to the office.

16





PART II
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Briggs & Stratton common stock is traded on the NYSE under the symbol “BGG”. Information required by this Item is incorporated by reference from the “Quarterly Financial Data, Dividend and Market Information” (unaudited), included in Item 8 of this report.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
The table below sets forth the information with respect to purchases made by or on behalf of the Company of its common stock during the quarterly period ended July 2, 2017 .
2017 Fiscal Month
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of a Publicly Announced Program (1)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under  the Program (1)
April 3, 2017 to April 30, 2017
 
56,355

 
$
21.37

 
56,355

 
$
31,071,935

May 1, 2017 to May 28, 2017
 

 

 

 
31,071,935

May 29, 2017 to July 2, 2017
 
23,260

 
23.74

 
23,260

 
30,519,743

Total Fourth Quarter
 
79,615

 
$
22.06

 
79,615

 
$
30,519,743

(1) On April 21, 2016, the Board of Directors authorized up to  $50 million  in funds for use in the common share repurchase program with an expiration date of June 29, 2018 . The common share repurchase program authorizes the purchase of shares of the Company's common stock on the open market or in private transactions from time to time, depending on market conditions and certain governing debt covenants.
Five-year Stock Performance Graph
The graph below shows the cumulative total stockholder return of an investment of $100 (and the reinvestment of any dividends thereafter) at the close of business on June 30, 2012 in each of Briggs & Stratton common stock, the Standard & Poor’s (S&P) Smallcap 600 Index and the S&P Machinery Index.
BGG-732016_CHARTX11693A02.JPG

17





ITEM 6.
SELECTED FINANCIAL DATA
Fiscal Year
 
2017

 
2016 (1)

 
2015 (2)

 
2014 (3)

 
2013 (4)

(dollars in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
SUMMARY OF OPERATIONS  
 
 
 
 
 
 
 
 
 
 
NET SALES
 
$
1,786,103

 
$
1,808,778

 
$
1,894,750

 
$
1,859,060

 
$
1,862,498

GROSS PROFIT
 
383,829

 
362,455

 
359,099

 
346,783

 
329,140

PROVISION (CREDIT) FOR INCOME TAXES
 
23,011

 
8,795

 
11,271

 
8,787

 
(18,484
)
NET INCOME (LOSS)
 
56,650

 
26,561

 
45,687

 
28,347

 
(33,657
)
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
 
 
 
 
 
 
 
 
 
 
Basic
 
1.31

 
0.61

 
1.00

 
0.59

 
(0.73
)
Diluted
 
1.31

 
0.60

 
1.00

 
0.59

 
(0.73
)
PER SHARE OF COMMON STOCK:
 
 
 
 
 
 
 
 
 
 
Cash Dividends
 
0.56

 
0.54

 
0.50

 
0.48

 
0.48

Shareholders’ Investment
 
$
13.26

 
$
11.47

 
$
12.94

 
$
14.50

 
$
14.16

WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (in 000’s)
 
42,178

 
43,019

 
44,392

 
46,366

 
47,172

DILUTED NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (in 000’s)
 
42,263

 
43,200

 
44,442

 
46,436

 
47,172

OTHER DATA  
 
 
 
 
 
 
 
 
 
 
SHAREHOLDERS’ INVESTMENT
 
$
559,334

 
$
493,626

 
$
574,250

 
$
672,434

 
$
667,938

LONG-TERM DEBT
 
221,793

 
221,339

 
222,685

 
222,159

 
221,595

TOTAL ASSETS (5)
 
1,450,979

 
1,456,667

 
1,456,424

 
1,446,865

 
1,444,146

PLANT AND EQUIPMENT
 
1,104,583

 
1,056,893

 
1,035,326

 
1,035,848

 
1,019,355

PLANT AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
 
364,880

 
326,273

 
314,838

 
297,007

 
287,195

PROVISION FOR DEPRECIATION
 
51,855

 
49,973

 
48,496

 
47,190

 
52,290

EXPENDITURES FOR PLANT AND EQUIPMENT
 
83,141

 
64,161

 
71,710

 
60,371

 
44,878

WORKING CAPITAL (5)
 
$
359,063

 
$
377,700

 
$
414,256

 
$
518,190

 
$
536,692

Current Ratio (5)
 
2.1 to 1

 
2.2 to 1

 
2.2 to 1

 
2.7 to 1

 
3.0 to 1

NUMBER OF EMPLOYEES AT YEAR-END
 
5,300

 
5,445

 
5,480

 
5,695

 
5,980

NUMBER OF SHAREHOLDERS AT YEAR-END
 
2,431

 
2,558

 
2,681

 
2,815

 
3,153

QUOTED MARKET PRICE:
 
 
 
 
 
 
 
 
 
 
High
 
$
25.92

 
$
24.48

 
$
21.09

 
$
23.02

 
$
25.52

Low
 
$
17.90

 
$
15.47

 
$
17.14

 
$
18.21

 
$
16.20

(1)
In fiscal 2016, the Company had restructuring charges of $6.7 million after-tax or $0.15 per diluted share, acquisition-related charges of $0.2 million after-tax or less than $0.01 per diluted share, litigation charges of $1.8 million after-tax or $0.04 per diluted share, goodwill and tradename impairment charges of $9.4 million after-tax or $0.22 per share, pension settlement charges of $13.2 million after-tax or $0.30 per diluted share, and a gain on sale of investment in marketable securities of $2.8 million after-tax or ($0.07) per diluted share.
(2)
In fiscal 2015, the Company had restructuring charges of $17.7 million after-tax or $0.40 per diluted share and acquisition-related charges of $1.4 million after-tax or $0.03 per diluted share.
(3)
In fiscal 2014, the Company had goodwill and tradename impairment charges of $5.5 million after-tax or $0.12 per diluted share and restructuring charges of $5.2 million after-tax or $0.11 per diluted share.
(4)
In fiscal 2013, the Company had goodwill and tradename impairment charges of $62.0 million after-tax or $1.30 per diluted share, restructuring charges of $15.5 million after-tax or $0.33 per diluted share, and a litigation settlement of $1.2 million after-tax or $0.03 per diluted share.
(5)
As discussed in Note 3 and Note 8 in the Notes to Consolidated Financial Statements, the Company adopted Accounting Standards Update No. 2015-17, and retrospectively reclassified current “Deferred Income Tax Assets" to "Long-term Deferred Income Tax Assets” in the Selected Financial Data table.

18





ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
FISCAL 2017 COMPARED TO FISCAL 2016
The following table is a reconciliation of financial results by segment, as reported, to adjusted financial results by segment, excluding restructuring charges, acquisition-related charges, litigation charges, pension settlement charges, goodwill and tradename impairments, and a gain on the sale of investment in marketable securities (in thousands, except per share data):
 
 
For the fiscal year ended June
 
 
2017 Reported
 
Adjustments (1)
 
2017 Adjusted (2)
 
2016 Reported
 
Adjustments (1)
 
2016 Adjusted (2)
Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
 
Engines
 
$
262,036

 
$

 
$
262,036

 
$
252,833

 
$
11,599

 
$
264,432

Products
 
121,141

 

 
121,141

 
110,944

 
7,943

 
118,887

Inter-Segment Eliminations
 
652

 

 
652

 
(1,322
)
 

 
(1,322
)
Total
 
$
383,829

 
$

 
$
383,829

 
$
362,455

 
$
19,542

 
$
381,997

 
 
 
 
 
 
 
 
 
 
 
 
 
Engineering, Selling, General and Administrative Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Engines
 
$
184,496

 
$

 
$
184,496

 
$
193,716

 
$
11,935

 
$
181,781

Products
 
113,042

 

 
113,042

 
111,766

 
26

 
111,740

Total
 
$
297,538

 
$

 
$
297,538

 
$
305,482

 
$
11,961

 
$
293,521

 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Income (Loss) (3):
 
 
 
 
 
 
 
 
 
 
 
 
Engines
 
$
84,165

 
$

 
$
84,165

 
$
60,645

 
$
24,424

 
$
85,069

Products
 
12,530

 

 
12,530

 
(9,775
)
 
19,451

 
9,676

Inter-Segment Eliminations
 
652

 

 
652

 
(1,322
)
 

 
(1,322
)
Total
 
$
97,347

 
$

 
$
97,347

 
$
49,548

 
$
43,875

 
$
93,423

 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation from Segment Income (Loss) to Income Before Income Taxes:
 
 
 
 
 
 
 
 
 
 
 
 
Equity in Earnings of Unconsolidated Affiliates (3)
 

 

 

 
3,187

 

 
3,187

Income from Operations
 
$
97,347

 
$

 
$
97,347

 
$
46,361

 
$
43,875

 
$
90,236

 
 
 
 
 
 
 
 
 
 
 
 
 
Income Before Income Taxes
 
79,661

 

 
79,661

 
35,356

 
40,532

 
75,888

Provision for Income Taxes
 
23,011

 

 
23,011

 
8,795

 
12,104

 
20,899

Net Income
 
$
56,650

 
$

 
$
56,650

 
$
26,561

 
$
28,428

 
$
54,989

 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings Per Share
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
1.31

 
$

 
$
1.31

 
$
0.61

 
$
0.64

 
$
1.25

Diluted
 
1.31

 

 
1.31

 
0.60

 
0.65

 
1.25

(1) For the fiscal year ended July 2, 2017, there were no adjustments. For the fiscal year ended July 3, 2016, includes pre-tax restructuring charges of $10,195 ($6,672 after tax), goodwill impairment charge of $7,651 which is not deductible for income tax purposes, pre-tax tradename impairment charge of $2,683 ($1,771 after tax), pre-tax acquisition-related charges of $276 ($180 after tax), pre-tax litigation charges of $2,825 ($1,836 after tax), pre-tax pension settlement charges of $20,245 ($13,160 after tax), and a pre-tax gain on the sale of an investment in marketable securities of $3,343 ($2,842 after tax).

19





(2) Adjusted financial results are non-GAAP financial measures. The Company believes this information is meaningful to investors as it isolates the impact that restructuring charges, acquisition-related charges, certain litigation charges, pension settlement charges, gains on sale of marketable securities, and goodwill and tradename impairment charges have on reported financial results and facilitates comparisons between peer companies. The Company may utilize non-GAAP financial measures as a guide in the forecasting, budgeting, and long-term planning process. While the Company believes that adjusted financial results are useful supplemental information, such adjusted financial results are not intended to replace its GAAP financial results and should be read in conjunction with those GAAP results.
(3) The Company defines segment income (loss) as income from operations plus equity in earnings of unconsolidated affiliates. For all periods presented, equity in earnings of unconsolidated affiliates is included in segment income (loss). Beginning with the third quarter of fiscal 2016, the Company is prospectively classifying its equity in earnings of unconsolidated affiliates as a separate line item within Income from Operations. For periods prior to the third quarter of fiscal 2016, equity in earnings from unconsolidated affiliates is classified in Other Income, Net.
Net Sales
Consolidated net sales for fiscal 2017 were $1.79 billion. Consolidated net sales decreased $23 million or 1.3% from fiscal 2016. Fiscal 2017 net sales of commercial products increased by approximately 7% to $434 million.
Engines segment net sales for fiscal 2017 were $1.1 billion, which was $44.0 million or 3.9% lower than the prior year. Net sales decreased primarily due to lower shipments of engines in North America due to channel partners taking a different approach to merchandising and inventory stocking this season compounded by regional pockets of suboptimal spring weather. Partially offsetting the decrease were higher sales of Vanguard commercial engines.
Products segment net sales for fiscal 2017 were $778 million, an increase of $6.2 million or 0.8% from the prior year. Net sales increased primarily due to higher sales of commercial lawn & garden and job site equipment and generators, which includes the higher shipments related to Hurricane Matthew. Pressure washer sales decreased due to lesser category merchandising support at retail and cool spring temperatures.
Gross Profit Percentage

The consolidated gross profit percentage was 21.5% in fiscal 2017, an increase of 150 basis points from fiscal 2016.

Included in consolidated gross profit for fiscal 2016 were pre-tax charges of $8.1 million related to restructuring actions, $0.3 million related to acquisition-related charges recorded in the Products segment, and $11.1 million of pension settlement expense recorded in the Engines segment.
The Engines segment gross profit percentage for fiscal 2017 was 23.8%, which was higher than the 22.1% in fiscal 2016. Adjusted gross profit percentage (which only included adjustments in the prior year) increased 70 basis points compared to the prior year despite lower production of 5% year over year due to manufacturing efficiency improvements and favorable sales mix including a higher proportion of commercial engine sales and margin lift on new products.
The Products segment gross profit percentage for fiscal 2017 was 15.6%, which was higher than the 14.4% in fiscal 2016. Adjusted gross profit percentage (which only included adjustments in the prior year) increased 20 basis points compared to the prior year due to favorable sales mix, which included higher sales of commercial products. The profitability improvement was achieved despite 8% lower production throughput.

Engineering, Selling, General and Administrative Expenses
Engineering, selling, general and administrative expenses were $297.5 million in fiscal 2017, a decrease of $7.9 million or 2.6% from fiscal 2016.
The Engines segment engineering, selling, general and administrative expenses were $184.5 million in fiscal 2017, or $9.2 million lower compared to fiscal 2016, primarily due to $9.1 million of pension settlement charges and $2.8 million of litigation charges in fiscal 2016. Adjusted engineering, selling, general and administrative expenses (which only included adjustments in the prior year) were $2.7 million higher than

20





fiscal 2016, primarily due to $4.0 million of higher spend related to our ERP system upgrade.
The Products segment engineering, selling, general and administrative expenses were $113.0 million in fiscal 2017, an increase of $1.3 million from fiscal 2016 primarily due to $1.3 million of higher spend related to our ERP system upgrade.
Interest Expense
Interest expense for fiscal 2017 was $20.3 million, which was $0.3 million higher than fiscal 2016, due to higher borrowings on the Revolver during fiscal 2017.
Provision for Income Taxes
The effective tax rate for fiscal 2017 was 28.9%, compared to 24.9% for the same period last year. The tax rates for fiscal 2017 and 2016 were lower than the statutory rates primarily due to the U.S. research and development tax credit and foreign earnings in jurisdictions with tax rates that vary from the U.S. statutory rate. The tax rate for fiscal 2017 was also impacted by the reversal of previously recorded reserves as the result of the effective settlement of the Company’s IRS audit for its fiscal year 2010 and 2013 consolidated income tax returns and the establishment of a valuation allowance against the deferred tax assets of the Company’s Brazilian subsidiary.
Other Information
Prior to January 1, 2017, Briggs & Stratton Power Products Group, LLC was a wholly owned subsidiary of Briggs & Stratton Corporation. On January 1, 2017, Briggs & Stratton Power Products Group, LLC was merged with and into Briggs & Stratton Corporation.
Business Optimization Program
In August 2017, the Company announced the launch of a business optimization program that is designed to drive efficiencies and expand capacity in commercial engines and cutting equipment. The program entails expanding production of Vanguard commercial engines into the company’s existing large engine plants located in Georgia and Alabama, and expanding Ferris commercial mower production capacity in a new, modern facility which is located close to the current manufacturing location in New York.

Production of Vanguard engines in the company’s U.S. plants is expected to be phased in beginning in late fiscal 2018 through the middle of fiscal 2019. Currently, the majority of Vanguard engines are sourced from overseas. Production of Ferris commercial mowers is expected to begin in the new facility in the latter half of fiscal 2018, and the exit from the existing plant and remote warehouse is planned for fiscal 2019. The business optimization program also includes the integration and go-live efforts of the Company’s ERP system upgrade and the resulting operational excellence efficiency improvements. The go-live for the ERP system upgrade is expected towards the end of fiscal 2018, subsequent to the peak seasonal shipment period.

We project that the business optimization program will generate $30 million to $35 million of annual pre-tax savings in addition to supporting profitable commercial growth. We estimate the savings will be achieved over a three year period beginning in fiscal 2019. Total pre-tax expenses related to the business optimization program are expected to be approximately $50 million to $55 million, of which $24 million to $28 million is expected be recognized in fiscal 2018.





21





FISCAL 2016 COMPARED TO FISCAL 2015
The following table is a reconciliation of financial results by segment, as reported, to adjusted financial results by segment, excluding restructuring charges, acquisition-related charges, litigation charges, pension settlement charges, goodwill and tradename impairments, and a gain on the sale of investment in marketable securities (in thousands, except per share data):
 
 
For the fiscal year ended June
 
 
2016 Reported
 
Adjustments (1)
 
2016 Adjusted (2)
 
2015 Reported
 
Adjustments (1)
 
2015 Adjusted (2)
Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
 
Engines
 
$
252,833

 
$
11,599

 
$
264,432

 
$
267,778

 
$

 
$
267,778

Products
 
110,944

 
7,943

 
118,887

 
89,268

 
25,710

 
114,978

Inter-Segment Eliminations
 
(1,322
)
 

 
(1,322
)
 
2,053

 

 
2,053

Total
 
$
362,455

 
$
19,542

 
$
381,997

 
$
359,099

 
$
25,710

 
$
384,809

 
 
 
 
 
 
 
 
 
 
 
 
 
Engineering, Selling, General and Administrative Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Engines
 
$
193,716

 
$
11,935

 
$
181,781

 
$
179,566

 
$

 
$
179,566

Products
 
111,766

 
26

 
111,740

 
110,350

 
693

 
109,657

Total
 
$
305,482

 
$
11,961

 
$
293,521

 
$
289,916

 
$
693

 
$
289,223

 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Income (Loss) (3):
 
 
 
 
 
 
 
 
 
 
 
 
Engines
 
$
60,645

 
$
24,424

 
$
85,069

 
$
93,880

 
$

 
$
93,880

Products
 
(9,775
)
 
19,451

 
9,676

 
(22,447
)
 
29,403

 
6,956

Inter-Segment Eliminations
 
(1,322
)
 

 
(1,322
)
 
2,053

 

 
2,053

Total
 
$
49,548

 
$
43,875

 
$
93,423

 
$
73,486

 
$
29,403

 
$
102,889

 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation from Segment Income (Loss) to Income Before Income Taxes:
 
 
 
 
 
 
 
 
 
 
 
 
Equity in Earnings of Unconsolidated Affiliates (3)
 
3,187

 

 
3,187

 
7,303

 

 
7,303

Income from Operations
 
$
43,361

 
$
43,875

 
$
90,236

 
$
66,183

 
$
29,403

 
$
95,586

 
 
 
 
 
 
 
 
 
 
 
 
 
Income Before Income Taxes
 
35,356

 
40,532

 
75,888

 
56,958

 
29,403

 
86,361

Provision for Income Taxes
 
8,795

 
12,104

 
20,899

 
11,271

 
10,280

 
21,551

Net Income
 
$
26,561

 
$
28,428

 
$
54,989

 
$
45,687

 
$
19,123

 
$
64,810

 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings Per Share
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.61

 
$
0.64

 
$
1.25

 
$
1.00

 
$
0.42

 
$
1.42

Diluted
 
0.60

 
0.65

 
1.25

 
1.00

 
0.42

 
1.42

(1) For the fiscal year ended July 3, 2016, includes pre-tax restructuring charges of $10,195 ($6,672 after tax), goodwill impairment charge of $7,651 which is not deductible for income tax purposes, pre-tax tradename impairment charge of $2,683 ($1,771 after tax), pre-tax acquisition-related charges of $276 ($180 after tax), pre-tax litigation charges of $2,825 ($1,836 after tax), pre-tax pension settlement charges of $20,245 ($13,160 after tax), and a pre-tax gain on the sale of an investment in marketable securities of $3,343 ($2,842 after tax). For the fiscal year ended June 28, 2015, includes pre-tax restructuring charges of $27,288 ($17,749 after tax) and pre-tax acquisition-related charges of $2,115 ($1,374 after tax).
(2) Adjusted financial results are non-GAAP financial measures. The Company believes this information is meaningful to investors as it isolates the impact that restructuring charges, acquisition-related charges, certain litigation charges, pension settlement charges, gains on sale of marketable securities, and goodwill and tradename impairment charges have on reported financial results and facilitates comparisons between peer companies. The Company may utilize non-GAAP financial measures as a guide in the forecasting, budgeting, and long-term planning process. While the Company believes that adjusted financial results are useful

22





supplemental information, such adjusted financial results are not intended to replace its GAAP financial results and should be read in conjunction with those GAAP results.
(3) The Company defines segment income (loss) as income from operations plus equity in earnings of unconsolidated affiliates. For all periods presented, equity in earnings of unconsolidated affiliates is included in segment income (loss). Beginning with the third quarter of fiscal 2016, the Company is prospectively classifying its equity in earnings of unconsolidated affiliates as a separate line item within Income from Operations. For periods prior to the third quarter of fiscal 2016, equity in earnings from unconsolidated affiliates is classified in Other Income, Net.
Net Sales
Consolidated net sales for fiscal 2016 were $1.81 billion. Consolidated net sales decreased $86 million or 4.5% from fiscal 2015. Consolidated net sales decreased $65 million or 3.4% before the impact of unfavorable currency rates. The decrease in net sales is due to a $25 million reduction in job site products sales and lower international sales caused by cool spring weather primarily in Europe as well as economic uncertainty.
Engines segment net sales for fiscal 2016 were $1.1 billion, which was $66.1 million or 5.5% lower than fiscal year 2015. Net sales decreased by $57.9 million or 4.8% before currency impacts, primarily due to lower shipments of engines into Europe and other international markets. Total engine unit shipments decreased by 7%, but reflected a favorable sales mix shift to large engines.
Products segment net sales for fiscal 2016 were $772.2 million, a decrease of $16.4 million or 2.1% from fiscal 2015. Net sales decreased by $3.2 million or 0.4% before currency impacts, primarily due to a $25 million reduction in job site products sales, lower international sales and lower sales of pressure washers due to the cool spring weather. Increased sales of high-end residential and commercial lawn and garden mowers and the Billy Goat acquisition helped partially offset the decrease.
Gross Profit Percentage

The consolidated gross profit percentage was 20.0% in fiscal 2016, an increase of 1.1% from fiscal 2015.

Included in consolidated gross profit for fiscal 2016 were pre-tax charges of $8.1 million related to restructuring actions, $0.3 million related to acquisition-related charges recorded in the Products segment, and $11.1 million of pension settlement expense recorded in the Engines segment. During fiscal 2015, the Products segment recorded pre-tax restructuring charges and acquisition-related charges within gross profit of $24.3 million and $1.4 million, respectively.
The Engines segment gross profit percentage for fiscal 2016 was 22.1%, which was consistent with the 22.2% in fiscal 2015. Adjusted gross profit percentage for fiscal 2016 was 23.1%, which was 90 basis points higher compared to fiscal 2015. The improvement in adjusted gross profit percentage was due to expanded margins on new products, manufacturing efficiency improvements and lower material costs.
The Products segment gross profit percentage for fiscal 2016 was 14.4%, which was higher than the 11.3% in fiscal 2015. The Products segment adjusted gross profit percentage for fiscal 2016 was 15.4%, which was 80 basis points higher compared to the adjusted gross profit percentage for fiscal 2015. The improvement in adjusted gross profit percentage was due to a favorable sales mix from our focus on selling higher margin lawn and garden equipment and the results of Billy Goat acquisition, higher margins from manufacturing efficiency improvements and lower material costs. The Products segment realized incremental restructuring savings of $6.2 million in fiscal 2016 as part of the efficiency improvements.

Engineering, Selling, General and Administrative Expenses
Engineering, selling, general and administrative expenses were $305.5 million in fiscal 2016, an increase of $15.6 million or 5.4% from fiscal 2015.
The Engines segment engineering, selling, general and administrative expenses were $193.7 million in fiscal 2016, or $14.2 million higher compared to fiscal 2015, primarily due to $9.1 million of pension settlement charges and $2.8 million of litigation charges in fiscal 2016. Adjusted engineering, selling, general and

23





administrative expenses were $181.8 million in fiscal 2016, or $2.2 million higher than fiscal 2015, largely due to spending on strategic initiatives including $2.8 million related to our ERP system upgrade.
The Products segment engineering, selling, general and administrative expenses were $111.8 million in fiscal 2016, an increase of $1.4 million from fiscal 2015 due to spending on strategic initiatives including $0.9 million related to our ERP system upgrade.
Restructuring Actions
During the fourth quarter of fiscal 2016, the Company completed the restructuring actions announced in fiscal 2015. Pre-tax restructuring costs for the twelve months ended July 3, 2016 were $10.2 million. Incremental cost savings as a result of these actions were $6.2 million in fiscal 2016.
Interest Expense
Interest expense for fiscal 2016 was $20.0 million, which was $0.5 million higher than fiscal 2015, due to higher borrowings on the Revolver during fiscal 2016.
Provision for Income Taxes
The effective tax rate for the year ended fiscal 2016 was 24.9% compared to 19.8% for the year ended fiscal 2015.  The tax rate for the year ended fiscal 2016 was lower than statutory rates primarily as a result of the reenactment of the federal research and development credit, which provided the Company one and a half years’ tax benefit in fiscal 2016.  Additionally, the tax rate for the year ended fiscal 2016 was driven by a non-deductible goodwill impairment and foreign earnings in jurisdictions with tax rates that vary from the U.S. statutory rate. The tax rate for the year ended fiscal 2015 was lower than statutory rates due to a net tax benefit of $5 million related to recognizing incremental federal research and development tax credits related to prior years. In addition, the year ended fiscal 2015 tax rate was impacted by the reversal of previously recorded reserves as a result of the favorable resolution of an IRS audit.
Liquidity and Capital Resources
FISCAL YEARS 2017, 2016 AND 2015
Cash flows provided by operating activities for fiscal 2017 were $90 million compared to $115 million in fiscal 2016. The decrease in cash provided by operating activities was primarily related to changes in working capital, including higher accounts receivable due to timing of sales and collections year over year.
Cash flows provided by operating activities for fiscal 2016 were $115 million compared to $151 million in fiscal 2015. The decrease in operating cash flows was primarily related to lower net income and changes in working capital from higher inventory levels due to lower sales volume.
Net cash used in investing activities was $79 million, $86 million, and $158 million in fiscal 2017, 2016 and 2015, respectively. These cash flows include capital expenditures of $83 million, $64 million, and $72 million in fiscal 2017, 2016 and 2015, respectively. The capital expenditures related primarily to investment in our ERP system upgrade, reinvestment in equipment, and new products and technology. In fiscal 2016, approximately $19 million of cash was used for an increased investment in an unconsolidated affiliate. In fiscal 2015, approximately $88 million of cash was used for the acquisitions of Allmand Bros., Inc. and Billy Goat Industries, Inc.
Net cash used in financing activities was $39 million, $55 million, and $67 million in fiscal 2017, 2016 and 2015, respectively. In fiscal 2017, the Company repurchased treasury stock at a total cost of $20 million compared to $37 million and $47 million of stock repurchases in fiscal 2016 and 2015, respectively. In fiscal 2017, 2016, and 2015, the Company received proceeds and tax benefits of $8 million, $12 million, and $5 million, respectively, from the exercise of stock options. The Company paid cash dividends on its common stock of $24 million, $24 million, and $23 million in fiscal 2017, 2016 and 2015, respectively.
Given the Company's international operations, a portion of the Company's cash and cash equivalents are held in non-U.S. subsidiaries where its undistributed earnings are considered to be permanently reinvested.

24





Generally, these would be subject to U.S. tax if repatriated. As of July 2, 2017 , approximately $56 million of the Company's $62 million of cash and cash equivalents was held in non-U.S. subsidiaries.
Future Liquidity and Capital Resources
On December 20, 2010 , the Company issued $225 million of 6.875% Senior Notes ("Senior Notes") due December 15, 2020 . During fiscal 2016, the Company repurchased  $1.9 million  of the Senior Notes after receiving unsolicited offers from bondholders.
On March 25, 2016 , the Company entered into a $500 million amended and restated multicurrency credit agreement (the “Revolver”) that matures on March 25, 2021 . The Revolver amended and restated the Company's $500 million  multicurrency credit agreement dated as of October 13, 2011 (as previously amended), which would have matured on October 21, 2018 . The initial maximum availability under the Revolver is  $500 million . Availability under the Revolver is reduced by outstanding letters of credit. The Company may from time to time increase the maximum availability under the revolving credit facility by up to  $250 million  if certain conditions are satisfied. There were no borrowings under the revolving credit facility as of July 2, 2017 and July 3, 2016.
The Senior Notes and the Revolver contain restrictive covenants. These covenants include restrictions on the ability of the Company and/or certain subsidiaries to pay dividends, repurchase equity interests of the Company and certain subsidiaries, incur indebtedness, create liens, consolidate and merge and dispose of assets, and enter into transactions with affiliates. The Revolver contains financial covenants that require the Company to maintain a minimum interest coverage ratio and impose on the Company a maximum average leverage ratio. As of July 2, 2017 , the Company was in compliance with these covenants.
On August 13, 2014, the Board of Directors of the Company authorized up to $50 million  in funds associated with the common share repurchase program with an expiration date of June 30, 2016 . On April 21, 2016, the Board of Directors authorized up to an additional  $50 million  in funds for use in the common share repurchase program with an expiration date of June 29, 2018 . As of July 2, 2017, the total remaining authorization was approximately $30.5 million . Share repurchases, among other things, allow the Company to offset any potentially dilutive impacts of share-based compensation. The common share repurchase program authorizes the purchase of shares of the Company's common stock on the open market or in private transactions from time to time, depending on market conditions and certain governing debt covenants. In fiscal 2017, the Company repurchased 995,655 shares on the open market at a total cost of $19.7 million , or $19.77 per share. There were 2,034,146 shares repurchased in fiscal 2016 at a total cost of $37.4 million , or $18.41 per share.
The Company expects capital expenditures to be approximately $80 to $90 million in fiscal 2018 . These anticipated expenditures reflect the Company's business optimization program as well as continuing to reinvest in efficient equipment and innovative new products.
During fiscal 2017, the Company made no cash contributions to the qualified pension plan. Based upon current regulations and actuarial studies the Company is required to make no minimum contributions to the qualified pension plan in fiscal 2018 but the Company may choose to make discretionary contributions. The Company may be required to make further required contributions in future years or the future expected funding requirements may change depending on a variety of factors including the actual return on plan assets, the funded status of the plan in future periods, and changes in actuarial assumptions or regulations.
Management believes that available cash, cash generated from operations, existing lines of credit and access to debt markets will be adequate to fund the Company’s capital requirements and operational needs for the foreseeable future.
Financial Strategy
Management believes that the value of the Company is enhanced if the capital invested in operations yields a cash return that is greater than the cost of capital. Management maintains a balanced approach to capital allocation. The balance is amongst the following areas: reinvesting capital into physical assets and products that maintain or grow the global cost leadership and market positions that the Company has achieved and drive the economic value of the Company, identifying strategic acquisitions or alliances that may enhance

25





revenues and provide a higher economic return, and returning capital to shareholders through dividends and/or share repurchases.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements or significant guarantees to third parties not fully recorded in its Consolidated Balance Sheets or fully disclosed in its Notes to Consolidated Financial Statements. The Company’s significant contractual obligations include debt agreements and certain employee benefit plans.
Contractual Obligations
A summary of the Company’s expected payments for significant contractual obligations as of July 2, 2017 is as follows (in thousands):
 
 
Total
 
Fiscal
2018
 
Fiscal
2019-2020
 
Fiscal
2021-2022
 
Thereafter
Long-Term Debt
 
$
223,149

 
$

 
$

 
$
223,149

 
$

Interest on Long-Term Debt
 
53,695

 
15,341

 
30,683

 
7,671

 

Operating Leases
 
83,266

 
13,910

 
17,097

 
9,243

 
43,016

Purchase Obligations
 
41,121

 
39,236

 
1,885

 

 

Other Liabilities (a)
 
81,000

 

 
38,000

 
37,000

 
6,000

 
 
$
482,231

 
$
68,487

 
$
87,665

 
$
277,063

 
$
49,016

(a) Includes an estimate of future expected funding requirements related to our pension plans. Funding requirements related to our pension plans are based upon current regulations and actuarial studies. The amounts included may change in the future depending on a variety of factors including the actual return on plan assets, the funded status of the plan in future periods, and changes in actuarial assumptions or regulations. Any further funding requirements for pension plans beyond fiscal 2023 cannot be estimated at this time. Because their future cash outflows are uncertain, liabilities for unrecognized tax benefits and other sundry items are excluded from the table above.
Critical Accounting Policies
The Company’s accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements. As discussed in Note 2, the preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
The Company believes the following critical accounting policies represent the more significant judgments and estimates used in preparing the consolidated financial statements.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over tangible and intangible assets acquired less liabilities assumed arising from business combinations. Goodwill is not amortized. The Company evaluates goodwill and other indefinite-lived intangible assets for impairment annually as of the end of the fourth fiscal quarter, and more frequently if events or circumstances indicate that the assets may be impaired.
For the goodwill evaluation for one reporting unit, the Company first determines based on a qualitative assessment whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. For other reporting units or if the Company's qualitative assessment conclusion is that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will test goodwill using a two-step process. The first step of the goodwill impairment test is to identify a potential impairment by comparing the carrying values of each of the Company's reporting units to their estimated fair values as of the test dates. The estimates of fair value of the reporting units are computed using either an income approach, a market approach, or a combination of both. The income approach utilizes a multi-year forecast of estimated cash flows and a terminal value at the end of the cash flow period. The forecast period

26





assumptions consist of internal projections that are based on the Company's budget and long-range strategic plan. The discount rate used at the test date is the weighted-average cost of capital which reflects the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn. Valuations using the market approach are derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services.
If the fair value of a reporting unit exceeds its book value, goodwill of the reporting unit is not deemed impaired and the second step of the impairment test is not performed. If the book value of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by allocating the estimated fair value of the reporting unit to the estimated fair value of its existing tangible assets and liabilities as well as existing identified intangible assets and previously unrecognized intangible assets in a manner similar to a purchase price allocation. The unallocated portion of the estimated fair value of the reporting unit is the implied fair value of goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
The Company performed the annual impairment test on all of its reporting units as of July 2, 2017 . Based on a qualitative assessment of its Engines reporting unit, the Company determined that it is more likely than not that the fair value of its reporting unit exceeds its carrying amount. As a result, the Company concluded that the Engines reporting unit is not impaired as of July 2, 2017.
The Company also performed a quantitative impairment test over its Products reportable segment, which consists of three reporting units, specifically Turf & Consumer, Standby Generators, and Job Site reporting units. The Standby Generators reporting unit does not have goodwill.
The impairment testing performed by the Company at July 2, 2017 indicated that the estimated fair value of the Turf & Consumer reporting unit exceeded its corresponding carrying amount, including recorded goodwill, and as such, no impairment existed. At July 2, 2017, the Turf & Consumer reporting unit had $11.6 million of goodwill.
The Company performed an annual goodwill impairment test on its Job Site reporting unit as of July 2, 2017. The first step of the goodwill impairment test noted that the carrying value of the Job Site reporting unit exceeded its fair value, and as a result, the second step of the goodwill impairment test was performed. The second step of the goodwill impairment test compared the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The test indicated that the carrying amount of the reporting unit’s goodwill did not exceed the implied fair value of that goodwill, and as such, no impairment existed.
At July 2, 2017, the Job Site reporting unit had $12.0 million of goodwill. The discount rate used for the reporting unit was 14.6%. The growth rate and gross profit margin used for the terminal value calculation for the reporting unit were 3.5% and 22.4%, respectively.
The assumptions included in the impairment test require judgment, and changes to these inputs could impact the results of the calculation. Other than management’s internal projections of future cash flows, the primary assumptions used in the impairment test were the weighted-average cost of capital and long-term growth rates.
Qualitative assessments of goodwill and quantitative assessments of goodwill and tradenames involve significant judgments by management. Although the Company’s cash flow forecasts are based on assumptions that are considered reasonable by management and consistent with the plans and estimates management is using to operate the underlying businesses, there is significant judgment in determining the expected future cash flows attributable to these businesses. Changes in such estimates or the application of alternative assumptions could produce significantly different results.

27





Tradenames are not amortized. If impairment occurs, the impaired amount of the tradename is written off immediately. For purposes of the tradename impairment analysis, the Company performs its assessment of fair value based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. The Company determines the fair value of each tradename by applying a royalty rate to a projection of net sales discounted using a risk adjusted cost of capital. The Company believes the relief-from-royalty method to be an acceptable methodology due to its common use by valuation specialists in determining the fair value of intangible assets. Sales growth rates are determined after considering current and future economic conditions, recent sales trends, discussions with customers, planned timing of new product launches and many other variables. Each royalty rate is based on profitability of the business to which it relates and observed market royalty rates.
As discussed in Note 7 to the consolidated financial statements, the Company performed the annual impairment test on its indefinite-lived intangible assets as of July 2, 2017 and determined that no indefinite-lived intangible asset impairment existed. The assumptions included in the impairment test require judgment, and changes to these inputs could impact the results of the calculation.
Definite-lived intangible assets consist primarily of customer relationships and patents. These definite-lived intangible assets are amortized over their estimated useful lives and are subject to impairment testing if events or changes in circumstances indicate that an asset may be impaired.
Pension and Other Postretirement Plans
The pension benefit obligation and related pension expense or income are impacted by certain actuarial assumptions, including the discount rate, mortality tables, and the expected rate of return on plan assets. These rates are evaluated on an annual basis considering such factors as market interest rates and historical asset performance. Actuarial valuations at July 2, 2017 used a discount rate of 4.00% and the determination of fiscal 2017 expense used an expected rate of return on plan assets of 7.25% . The discount rate was selected using a methodology that matches plan cash flows with a selection of Standard and Poor’s AA or higher rated bonds, resulting in a discount rate that better matches a bond yield curve with comparable cash flows. A 0.25% decrease in the discount rate would decrease annual pension service and interest costs by approximately $1.7 million. A 0.25% decrease in the expected return on plan assets would increase annual pension service and interest costs by approximately $2.2 million. In estimating the expected return on plan assets, the Company considers the historical returns on plan assets, adjusted for forward looking considerations, including inflation assumptions and active management of the plan’s invested assets, knowing that investment performance has been in the top decile compared to other plans. Changes in the discount rate, mortality tables, and return on assets can have a significant effect on the funded status of the pension plans, shareholders' investment and related expense. The Company cannot predict these changes in discount rates or investment returns and, therefore, cannot reasonably estimate whether the impact in subsequent years will be significant.
The funded status of the Company’s pension plan is the difference between the projected benefit obligation and the fair value of its plan assets. The projected benefit obligation is the actuarial present value of all benefits expected to be earned by the employees’ service adjusted for future potential wage increases. At July 2, 2017 and July 3, 2016 , the fair value of plan assets was less than the projected benefit obligation by approximately $246 million and $313 million , respectively.
Based upon current regulations and actuarial studies the Company is required to make no minimum contributions to the qualified pension plan in fiscal 2018 but the Company may choose to make discretionary contributions. The Company does anticipate making a voluntary contribution to the qualified pension plan of $20 million to $30 million in fiscal 2018. The Company may be required to make further required contributions in future years or the future expected funding requirements may change depending on a variety of factors including the actual return on plan assets, the funded status of the plan in future periods, and changes in actuarial assumptions or regulations.
In 2012, the Board of Directors of the Company authorized an amendment to the Company's defined benefit retirement plans for U.S., non-bargaining employees. The amendment froze accruals for all non-bargaining employees effective January 1, 2014.

28





The other postretirement benefits obligation and related expense or income are impacted by certain actuarial assumptions, including the health care trend rate. An increase of one percentage point in health care costs would increase the accumulated postretirement benefit obligation by $1.2 million and would increase the service and interest cost by $40 thousand . A corresponding decrease of one percentage point, would decrease the accumulated postretirement benefit by $1.2 million and decrease the service and interest cost by $40 thousand .
For pension and postretirement benefits, actuarial gains and losses are accounted for in accordance with U.S. GAAP. Refer to Note 16 of the Notes to the Consolidated Financial Statements for additional discussion.
Contingent Liabilities
The Company has contingent liabilities related to litigation and claims that arise in the normal course of business. The Company accrues for contingent liabilities when management determines it is probable that a liability has been incurred and the amount can be reasonably estimated. Liabilities are recorded based on management’s current judgments as to the probable and reasonably estimable outcome of the contingencies. To the extent that management’s future judgments related to the outcome of the contingencies differ from current expectations or as additional information becomes available, earnings could be impacted in the period such changes occur. See Note 13, “Commitments and Contingencies,” to the Consolidated Financial Statements for a description of these matters.
Other Reserves
Other significant accounting estimates inherent in the preparation of the Company's financial statements include estimates as to the realizability of accounts receivable and inventory assets, as well as estimates used in the determination of liabilities related to customer rebates, warranty, and group health insurance. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and, in some instances, actuarial techniques. The Company re-evaluates these significant factors as facts and circumstances change.
New Accounting Pronouncements
Refer to Note 3 of the Notes to the Consolidated Financial Statements.
Other Matters
Labor Agreements
The Company has collective bargaining agreements with its unions. These collective bargaining agreements cover approximately 12% of the total employees as of July 2, 2017. The Labor Agreement with United Steelworkers Local 2-232 expired on July 31, 2017. This agreement covers 510 hourly employees in the Wauwatosa, Milwaukee and Menomonee Falls, Wisconsin facilities. The Company and the union have met several times and are in the process of scheduling more bargaining dates. At the present time the Company does not anticipate a work stoppage. The Company has another collective bargaining agreement with its remaining union workforce which expires during calendar 2020.
Emissions
The United States Environmental Protection Agency (EPA) has adopted multiple stages of emission regulations for small air cooled engines. The Company currently has a full product offering that complies with the standards in those regulations.  
Canada's emission regulations incorporate the EPA emission standards. Canada is currently aligning its small off road engine emission regulations with the EPA's Phase 3 standards. The Company does not anticipate that compliance with these revisions will have a material adverse effect on its financial position or operations, as they will be substantially similar to the existing EPA standards.  
The California Air Resources Board (CARB) announced its 2030 Plan which contemplates changing the emission regulations for all mobile sources in phases over the next decade.  CARB published revisions to its

29





existing regulations for small off road engines that harmonize its standards with EPA's Phase 3 standards and eliminate exemptions from its evaporative emissions control requirements. The Company does not anticipate that compliance with these revisions will have a material adverse effect on its financial position or operations. 
The European Union has adopted multiple stages of emission standards for small air cooled engines and will be  implementing regulations in 2019 that align with the EPA's Phase 3 standards. The Company does not anticipate that compliance with these revisions will have a material adverse effect on its financial position or operations as they are substantially similar to the EPA's existing standards.
Australia announced that it will be adopting emission regulations for small air cooled engines that align with the EPA's Phase 2 and Phase 3 standards. The Company does not anticipate that compliance with these new regulations will have a material adverse effect on its financial position or operations as they are expected to be substantially similar to EPA standards.
China announced that it will be adopting emission regulations for small air cooled engines that align with the EPA's Phase 3 standards to be effective in 2019. The Company does not anticipate that compliance with these standards will have a material adverse effect on its financial position or operations as they are expected to be substantially similar to the EPA's Phase 3 standards.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk stemming from changes in foreign exchange rates, commodity prices and interest rates. The Company uses financial instruments to minimize earnings and cash flow volatility associated with changes in certain foreign exchange rates, commodity prices and interest rates. The Company does not hold or issue financial instruments for trading purposes. The Company is also exposed to equity market risk pertaining to the trading price of the common stock.
Foreign Currency
In the normal course of business, the Company actively manages the exposure of foreign currency exchange rate market risk by entering into financial instruments with highly rated counterparties. The Company’s earnings are affected by fluctuations in the value of the U.S. Dollar against various currencies. The Company receives Euros for certain products sold to European customers and receives Canadian dollars for certain products sold to Canadian customers. The Yen and Renminbi are used to purchase engines from the Company's joint venture in Japan and the Company's subsidiary in China, respectively. The Company's foreign subsidiaries’ earnings are also influenced by fluctuations of local currencies, including the Australian dollar and Brazilian Real, against the U.S. dollar as these subsidiaries purchase components and inventory from vendors and the parent in U.S. dollars. Forward foreign exchange contracts are used to partially hedge against the earnings effects of such fluctuations.
At July 2, 2017 , the Company had the following forward foreign exchange contracts outstanding with the notional value shown in local currency and the fair value and fair value (gains) losses shown in U.S. dollars (in thousands):
Hedge
Currency
 
Notional
Value
 
Fair Value
 
Conversion
Currency
 
(Gain) Loss
at Fair Value
Australian Dollar
 
39,196

 
$
30,081

 
U.S.
 
$
721

Brazilian Real
 
28,137

 
$
8,799

 
U.S.
 
$
341

Canadian Dollar
 
14,725

 
$
11,386

 
U.S.
 
$
342

Chinese Renminbi
 
74,950

 
$
10,894

 
U.S.
 
$
22

Euro
 
31,240

 
$
36,119

 
U.S.
 
$
1,318

Japanese Yen
 
570,000

 
$
5,085

 
U.S.
 
$
186

Amounts invested in the Company's non-U.S. subsidiaries and joint ventures are translated into U.S. dollars at the exchange rates in effect at fiscal year-end. The resulting cumulative translation adjustments are recorded in Shareholders’ Investment as Accumulated Other Comprehensive Income (Loss). The cumulative translation adjustments component of Shareholders’ Investment decreased by $0.9 million during fiscal 2017.

30





Using the year-end exchange rates, the total amount invested in non-U.S. subsidiaries on July 2, 2017 was approximately $244.8 million.
Commodity Prices
The Company is exposed to fluctuating market prices for commodities, including steel, natural gas, copper and aluminum. The Company has established programs to manage commodity price fluctuations through financial and physical contracts. The maturities of these contracts coincide with the expected usage of the commodities for periods up to the next thirty-six months.

At July 2, 2017 the Company had the following outstanding commodity derivative contracts with the fair value (gains) losses shown (in thousands):
Hedge
Commodity
 
Notional
Value
 
Fair Value
 
(Gain) Loss
at Fair Value
Natural Gas (Therms)
 
11,307

 
$
3,392

 
$
(8
)
Interest Rates
The Company is exposed to interest rate fluctuations on its borrowings, depending on general economic conditions. On July 2, 2017 , long-term loans consisted of the following (in thousands):
Description
 
Amount
 
Maturity
 
Interest Rate
6.875% Senior Notes
 
$
223,149

 
December 2020
 
6.875%
The Senior Notes carry a fixed rate of interest and are therefore not subject to market fluctuation.

The Company is also exposed to interest rate risk associated with programs under which the Company shares the expense of financing certain dealer and distributor inventories through third party financing sources. The Company enters into interest rate swaps to manage a portion of this interest rate risk. The swaps are designated as cash flow hedges and are used to effectively fix the interest payments to a third party financing source, exclusive of lender spreads, ranging from 0.98% to 1.81% for a notional principal amount of  $95 million with expiration dates ranging from May 2019 to July 2021.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
 
 
Consolidated Balance Sheets, July 2, 2017 and July 3, 2016
 
 
For the Fiscal Years Ended July 2, 2017, July 3, 2016, and June 28, 2015:
 
          Consolidated Statements of Operations
          Consolidated Statements of Comprehensive Income (Loss)
          Consolidated Statements of Shareholders' Investment
          Consolidated Statements of Cash Flows
          Notes to Consolidated Financial Statements
 
 
Reports of Independent Registered Public Accounting Firm
 
 
FINANCIAL STATEMENT SCHEDULES
 
 Schedule II – Valuation and Qualifying Accounts


31


Consolidated Balance Sheets
 
 
 
 
 


AS OF JULY 2, 2017 AND JULY 3, 2016
(in thousands)
 
ASSETS
 
2017
 
2016
CURRENT ASSETS:
 
 
 
 
Cash and Cash Equivalents
 
$
61,707

 
$
89,839

Receivables, Less Reserves of $2,645 and $2,806, Respectively
 
230,011

 
191,678

Inventories:
 
 
 
 
Finished Products
 
265,720

 
271,718

Work in Process
 
102,187

 
104,468

Raw Materials
 
6,972

 
9,879

Total Inventories
 
374,879

 
386,065

Prepaid Expenses and Other Current Assets
 
22,844

 
28,419

Total Current Assets
 
689,441

 
696,001

GOODWILL
 
161,649

 
161,568

INVESTMENTS
 
51,677

 
52,757

OTHER INTANGIBLE ASSETS, Net
 
100,595

 
104,164

LONG-TERM DEFERRED INCOME TAX ASSET
 
64,412

 
98,203

OTHER LONG-TERM ASSETS, Net
 
18,325

 
17,701

PLANT AND EQUIPMENT:
 
 
 
 
Land and Land Improvements
 
15,179

 
14,871

Buildings
 
135,226

 
128,218

Machinery and Equipment
 
867,445

 
862,312

Construction in Progress
 
86,733

 
51,492

 
 
1,104,583

 
1,056,893

Less - Accumulated Depreciation
 
739,703

 
730,620

Total Plant and Equipment, Net
 
364,880

 
326,273

 
 
$
1,450,979

 
$
1,456,667



















The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
32




 
 
 
 
 
 



AS OF JULY 2, 2017 AND JULY 3, 2016
(in thousands, except per share data)
 
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
 
2017
 
2016
CURRENT LIABILITIES:
 
 
 
 
Accounts Payable
 
$
193,677

 
$
181,152

Accrued Liabilities:
 
 
 
 
Wages and Salaries
 
43,061

 
45,149

Warranty
 
28,640

 
26,313

Accrued Postretirement Health Care Obligation
 
9,755

 
9,394

Other
 
55,245

 
56,293

Total Accrued Liabilities
 
136,701

 
137,149

Total Current Liabilities
 
330,378

 
318,301

ACCRUED PENSION COST
 
242,908

 
310,378

ACCRUED EMPLOYEE BENEFITS
 
21,897

 
23,483

ACCRUED POSTRETIREMENT HEALTH CARE OBLIGATION
 
35,132

 
38,441

ACCRUED WARRANTY
 
14,468

 
18,054

OTHER LONG-TERM LIABILITIES
 
25,069

 
33,045

LONG-TERM DEBT
 
221,793

 
221,339

COMMITMENTS AND CONTINGENCIES (Note 13)
 
 
 
 
SHAREHOLDERS’ INVESTMENT:
 
 
 
 
Common Stock -
    Authorized 120,000 Shares $.01 Par Value, Issued 57,854 Shares
 
579

 
579

Additional Paid-In Capital
 
73,562

 
72,020

Retained Earnings
 
1,107,033

 
1,074,437

Accumulated Other Comprehensive Loss
 
(300,026
)
 
(338,450
)
Treasury Stock at Cost, 15,074 and 14,675 Shares, Respectively
 
(321,814
)
 
(314,960
)
Total Shareholders’ Investment
 
559,334

 
493,626

 
 
$
1,450,979

 
$
1,456,667










The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
33




Consolidated Statements of Operations
 
 
 
 

FOR THE FISCAL YEARS ENDED JULY 2, 2017 , JULY 3, 2016 AND JUNE 28, 2015
(in thousands, except per share data)
 
 
 
2017
 
2016
 
2015
NET SALES
 
$
1,786,103

 
$
1,808,778

 
$
1,894,750

COST OF GOODS SOLD
 
1,402,274

 
1,438,166

 
1,511,363

RESTRUCTURING CHARGES
 

 
8,157

 
24,288

Gross Profit
 
383,829

 
362,455

 
359,099

ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
297,538

 
305,482

 
289,916

RESTRUCTURING CHARGES
 

 
2,038

 
3,000

GOODWILL IMPAIRMENT
 

 
7,651

 

TRADENAME IMPAIRMENT
 

 
2,683

 

EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES
 
11,056

 
1,760

 

Income from Operations
 
97,347

 
46,361

 
66,183

INTEREST EXPENSE
 
(20,293
)
 
(20,033
)
 
(19,532
)
OTHER INCOME, Net
 
2,607

 
9,028

 
10,307

Income Before Income Taxes
 
79,661

 
35,356

 
56,958

PROVISION FOR INCOME TAXES
 
23,011

 
8,795

 
11,271

NET INCOME
 
$
56,650

 
$
26,561

 
$
45,687

 
 
 
 
 
 
 
EARNINGS PER SHARE
 
 
 
 
 
 
Basic
 
$
1.31

 
$
0.61

 
$
1.00

Diluted
 
$
1.31

 
$
0.60

 
$
1.00

 
 
 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
Basic
 
42,178

 
43,019

 
44,392

Diluted
 
42,263

 
43,200

 
44,442

 


















The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
34




Consolidated Statements of Comprehensive Income (Loss)
 
 
 

FOR THE FISCAL YEARS ENDED JULY 2, 2017 , JULY 3, 2016 AND JUNE 28, 2015
(in thousands)
 
 
 
2017
 
2016
 
2015
Net Income
 
$
56,650

 
$
26,561

 
$
45,687

Other Comprehensive Income (Loss):
 
 
 
 
 
 
Cumulative Translation Adjustments
 
(881
)
 
(4,746
)
 
(32,170
)
Unrealized Gain (Loss) on Derivative Instruments, Net of Tax Provision (Benefit) of $886, ($1,659), and $1,435, respectively
 
1,476

 
(2,764
)
 
2,296

Unrecognized Pension & Postretirement Obligation, Net of Tax Provision (Benefit) of $22,697, ($31,098), and ($33,737), respectively
 
37,829

 
(51,830
)
 
(53,979
)
Other Comprehensive Income (Loss)
 
38,424

 
(59,340
)
 
(83,853
)
Total Comprehensive Income (Loss)
 
$
95,074

 
$
(32,779
)
 
$
(38,166
)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
35




Consolidated Statements of Shareholders’ Investment
 
 
 
 


FOR THE FISCAL YEARS ENDED JULY 2, 2017 , JULY 3, 2016 AND JUNE 28, 2015
(in thousands, except per share data)
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other Com-
prehensive
Income (Loss)
 
Treasury
Stock
 
Total Shareholders' Investment
BALANCES, JUNE 29, 2014
 
$
579

 
$
78,466

 
$
1,048,466

 
$
(195,257
)
 
$
(259,820
)
 
672,434

Net Income
 

 

 
45,687

 

 

 
45,687

Total Other Comprehensive Loss, Net of Tax
 

 

 

 
(83,853
)
 

 
(83,853
)
Cash Dividends Paid ($0.50 per share)
 

 

 
(22,660
)
 

 

 
(22,660
)
Stock Option Activity, Net of Tax
 

 
3,025

 

 

 
5,793

 
8,818

Restricted Stock
 

 
(3,482
)
 

 

 
1,868

 
(1,614
)
Amortization of Unearned Compensation
 

 
2,625

 

 

 

 
2,625

Deferred Stock
 

 
(3,287
)
 

 

 
2,368

 
(919
)
Deferred Stock - Directors
 

 
(75
)
 

 

 
852

 
777

Treasury Stock Purchases
 

 

 

 

 
(47,045
)
 
(47,045
)
BALANCES, JUNE 28, 2015
 
$
579

 
$
77,272

 
$
1,071,493

 
$
(279,110
)
 
$
(295,984
)
 
$
574,250

Net Income
 

 

 
26,561

 

 

 
26,561

Total Other Comprehensive Loss, Net of Tax
 

 

 

 
(59,340
)
 

 
(59,340
)
Cash Dividends Paid ($0.54 per share)
 

 

 
(23,617
)
 

 

 
(23,617
)
Stock Option Activity, Net of Tax
 

 
(1,955
)
 

 

 
15,111

 
13,156

Restricted Stock
 

 
(3,058
)
 

 

 
584

 
(2,474
)
Amortization of Unearned Compensation
 

 
3,255

 

 

 

 
3,255

Deferred Stock
 

 
(3,461
)
 

 

 
2,495

 
(966
)
Deferred Stock - Directors
 

 
(33
)
 

 

 
275

 
242

Treasury Stock Purchases
 

 

 

 

 
(37,441
)
 
(37,441
)
BALANCES, JULY 3, 2016
 
$
579

 
$
72,020

 
$
1,074,437

 
$
(338,450
)
 
$
(314,960
)
 
$
493,626

Net Income
 

 

 
56,650

 

 

 
56,650

Total Other Comprehensive Income, Net of Tax
 

 

 

 
38,424

 

 
38,424

Cash Dividends Paid ($0.56 per share)
 

 

 
(24,054
)
 

 

 
(24,054
)
Stock Option Activity, Net of Tax
 

 
(1,628
)
 

 

 
8,551

 
6,923

Restricted Stock
 

 
(3,439
)
 

 

 
2,506

 
(933
)
Amortization of Unearned Compensation
 

 
3,336

 

 

 

 
3,336

Deferred Stock
 

 
(655
)
 

 

 
1,675

 
1,020

Deferred Stock - Directors (1)
 

 
3,928

 

 

 
94

 
4,022

Treasury Stock Purchases
 

 

 

 

 
(19,680
)
 
(19,680
)
BALANCES, JULY 2, 2017
 
$
579

 
$
73,562

 
$
1,107,033

 
$
(300,026
)
 
$
(321,814
)
 
$
559,334

(1) See Note 14 for additional discussion.

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
36




Consolidated Statements of Cash Flows
 
 
 
 

FOR THE FISCAL YEARS ENDED JULY 2, 2017 , JULY 3, 2016 AND JUNE 28, 2015
(in thousands)
 
 
2017
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net Income
 
$
56,650

 
$
26,561

 
$
45,687

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
 
 
 
 
 
 
Depreciation and Amortization
 
56,183

 
54,400

 
52,260

Stock Compensation Expense
 
4,923

 
5,109

 
6,227

Goodwill and Tradename Impairment
 

 
10,334

 

Pension Settlement Expense
 

 
20,245

 

Equity in Earnings of Unconsolidated Affiliates
 
(11,056
)
 
(4,947
)
 
(7,303
)
Dividends Received from Unconsolidated Affiliates
 
9,067

 
6,119

 
4,628

Loss on Disposition of Plant and Equipment
 
857

 
751

 
265

Provision for Deferred Income Taxes
 
10,316

 
2,194

 
7,648

Non-Cash Restructuring Charges
 

 
3,903

 
11,257

Change in Operating Assets and Liabilities:
 
 
 
 
 
 
Accounts Receivable
 
(41,655
)
 
23,917

 
21,461

Inventories
 
11,204

 
(7,933
)
 
12,079

Other Current Assets
 
(1,759
)
 
1,231

 
5,444

Accounts Payable, Accrued Liabilities and Income Taxes
 
8,152

 
(14,016
)
 
291

Other, Net
 
(12,538
)
 
(12,941
)
 
(9,049
)
Net Cash Provided by Operating Activities
 
90,344

 
114,927

 
150,895

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
Capital Expenditures (1)
 
(83,141
)
 
(64,161
)
 
(71,710
)
Cash Paid for Acquisitions, Net of Cash Acquired
 

 
(3,074
)
 
(88,144
)
Cash Paid for Investment in Unconsolidated Affiliates
 

 
(19,100
)
 

Proceeds Received on Disposition of Plant and Equipment
 
1,027

 
1,359

 
2,117

Proceeds on Sale of Investment in Marketable Securities
 
3,343

 

 

Other, Net
 

 
(860
)
 
(250
)
Net Cash Used in Investing Activities
 
(78,771
)
 
(85,836
)
 
(157,987
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
Repayments on Long-Term Debt
 

 
(1,851
)
 

Debt Issuance Costs
 

 
(932
)
 

Cash Dividends Paid
 
(24,054
)
 
(23,617
)
 
(22,559
)
Stock Option Exercise Proceeds
 
7,770

 
12,389

 
5,126

Payment of Acquisition Contingent Liability
 
(1,625
)
 

 

Payments Related to Shares Withheld for Taxes for Stock Compensation
 
(1,750
)
 
(3,104
)
 
(2,799
)
Treasury Stock Purchases
 
(19,680
)
 
(37,441
)
 
(47,045
)
Net Cash Used in Financing Activities
 
(39,339
)
 
(54,556
)
 
(67,277
)
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
(366
)
 
(3,086
)
 
(1,909
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
 
(28,132
)
 
(28,551
)
 
(76,278
)
CASH AND CASH EQUIVALENTS:
 
 
 
 
 
 
Beginning of Year
 
89,839

 
118,390

 
194,668

End of Year
 
$
61,707

 
$
89,839

 
$
118,390

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
 
 
 
Interest Paid
 
$
19,422

 
$
18,804

 
$
18,535

Income Taxes Paid
 
$
4,683

 
$
5,980

 
$
4,122

(1) Non-cash investing activity: The change in the balance of unpaid purchases of property, plant, and equipment included in accounts payable is  $8.4 million  for fiscal year 2017, and is not material for fiscal year 2016 and 2015.

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
37




Notes to Consolidated Financial Statements
 
 
 
 



  FOR THE FISCAL YEARS ENDED JULY 2, 2017 , JULY 3, 2016 AND JUNE 28, 2015
(1) Nature of Operations:
Briggs & Stratton Corporation (the “Company”) is a U.S. based producer of gasoline engines and outdoor power equipment. The Company’s Engines segment sells engines worldwide, primarily to original equipment manufacturers of lawn & garden equipment and other gasoline engine powered equipment. The Company’s Products segment designs, manufacturers and markets a wide range of outdoor power equipment, job site products, and related accessories.
(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. The 2017 and 2015 fiscal years were each 52 weeks long, and the 2016 fiscal year was 53 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 the Company and its majority owned domestic and foreign subsidiaries after elimination of intercompany accounts and transactions. Investments in companies for which we have significant influence are accounted for by the equity method.
Accounting Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 may 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 an original maturity of three months or less to be cash equivalents.
Receivables: Receivables are recorded at their original carrying value less reserves for estimated uncollectible accounts. The Company estimates and records an allowance for doubtful accounts based on specific identification and historical experience. The Company writes off uncollectible accounts against the allowance for doubtful accounts after all collection efforts have been exhausted.
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 51% of total inventories at July 2, 2017 and 49% at July 3, 2016 . The cost for the remaining 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 $63.0 million and $61.5 million higher at the end of fiscal 2017 and 2016 , respectively. The LIFO inventory adjustment was determined on an overall basis, and accordingly, each class of inventory reflects an allocation based on the FIFO amounts.
Goodwill and Other Intangible Assets: Goodwill reflects the cost of acquisitions in excess of the fair values assigned to identifiable net assets acquired. Goodwill is assigned to reporting units based upon the expected benefit of the synergies of the acquisition.
Other Intangible Assets reflect identifiable intangible assets that arose from purchase acquisitions. Other Intangible Assets are primarily comprised of tradenames, patents and customer relationships. Goodwill and tradenames, which are considered to have indefinite lives, are not amortized; however, both must be tested for impairment at least annually. Amortization is recorded on a straight-line basis for other intangible assets with finite lives. Patents have been assigned an estimated useful life of 15 years. The customer relationships have been assigned an estimated useful life of 14 to 25 years.
The Company performed the required impairment tests in fiscal 2017 , 2016 and 2015 . There were no goodwill impairment charges or other intangible asset impairment charges recorded in fiscal 2017 or fiscal 2015. The Company recorded non-cash goodwill impairment charges and non-cash intangible asset impairment charges

38


 
 
 
 
 
 



in fiscal 2016. Refer to Note 7 for a discussion of the non-cash goodwill impairment charges and the non-cash intangible asset impairment charges recorded in fiscal 2016.
Investments: Investments represent the Company’s investments in unconsolidated affiliated companies.
Financial information of the unconsolidated affiliated companies are accounted for by the equity method, generally on a lag of one month or less. Combined results of operations of unconsolidated affiliated companies for the fiscal year (in thousands):
 
 
2017
 
2016
 
2015
Results of Operations:
 
 
 
 
 
 
Sales
 
$
321,938

 
$
287,728

 
$
219,904

Cost of Goods Sold
 
244,346

 
222,426

 
173,603

Gross Profit
 
$
77,592

 
$
65,302

 
$
46,301

Net Income
 
$
22,217

 
$
20,258

 
$
14,957

Combined balance sheets of unconsolidated affiliated companies as of fiscal year-end (in thousands):
 
 
2017
 
2016
Financial Position:
 
 
 
 
Assets:
 
 
 
 
Current Assets
 
$
157,117

 
$
139,673

Noncurrent Assets
 
54,748

 
59,837

 
 
211,865

 
199,510

Liabilities:
 
 
 
 
Current Liabilities
 
$
61,346

 
$
43,442

Noncurrent Liabilities
 
25,399

 
29,178

 
 
86,745

 
72,620

Equity
 
$
125,120

 
$
126,890

Net sales to equity method investees were approximately $113.6 million , $98.9 million and $60.1 million in 2017 , 2016 and 2015 , respectively. Purchases of finished products from equity method investees were approximately $94.9 million , $112.2 million and $104.7 million in 2017 , 2016 and 2015 , respectively.

Beginning in fiscal 2014, the Company joined with one of its independent distributors to form Power Distributors, LLC (the venture) to distribute service parts in the United States. During fiscal years 2014 through 2016, the venture acquired other independent distributors. During fiscal 2016, the Company contributed  $19.1 million in cash as well as non-cash assets in exchange for receiving an additional ownership interest in the venture. Also during fiscal 2016, the venture achieved a national distribution network. The Company uses the equity method to account for this investment, and the earnings of the unconsolidated affiliate are allocated between the Engines and Products segments. As of July 2, 2017 and July 3, 2016 , the Company's total investment in the venture was $27.4 million  and $29.5 million , respectively, and its ownership percentage was 38.0% . The Company's equity method investments also include entities that are suppliers for the Engines segment.

The Company concluded that its equity method investments are integral to its business. The equity method investments provide manufacturing and distribution functions, which are important parts of its operations. Beginning with the third quarter of fiscal 2016, the Company is prospectively classifying its equity in earnings of unconsolidated affiliates as a separate line item within Income from Operations. For periods prior to the third quarter of fiscal 2016, equity in earnings from unconsolidated affiliates is classified in Other Income, Net in the Consolidated Statements of Operations.

During fiscal 2016, the Company had an investment in marketable securities, which related to its ownership of common stock of a publicly-traded company. The Company classified its investment as available-for-sale

39


 
 
 
 
 
 



securities, and it was reported at fair value. Unrealized gains and losses, net of the related tax effects, were reported as a separate component of Accumulated Other Comprehensive Income (Loss). During the fourth quarter of fiscal 2016, the Company sold its investment in marketable securities and recognized a gain of $3.3 million , which is recorded in Other Income, Net in the Consolidated Statements of Operations. The Company received proceeds related to the sale in the first quarter of fiscal 2017.
Debt Issuance Costs: Direct and incremental costs incurred in obtaining loans or in connection with the issuance of long-term debt are capitalized and amortized to interest expense over the terms of the related credit agreements. The debt issuance costs are recorded as a direct deduction from the carrying value of the debt liability; however, the Company classifies debt issuance costs related to the revolving credit facility as an asset, regardless of whether it has any outstanding borrowings on the line of credit arrangements. Approximately $0.9 million , $0.9 million and $1.0 million of debt issuance costs and original issue discounts were amortized to interest expense during fiscal years 2017 , 2016 and 2015 , respectively.
Plant and Equipment and Depreciation: Plant and equipment are stated at historical cost. For financial reporting purposes, plant and equipment are depreciated primarily by the straight line method over the estimated useful lives of the assets which generally range from 3 to 10 years for software, from 20 to 40 years for land improvements, from 20 to 50 years for buildings, and 3 to 20 years for machinery and equipment. 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 cost of goods sold or engineering, selling, general and administrative expenses.
Depreciation expense was approximately $51.9 million , $50.0 million and $48.5 million during fiscal years 2017 , 2016 and 2015 , respectively.
Impairment of Property, Plant and Equipment: Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. Refer to Note 17 for impairments associated with restructuring actions.
Warranty: The Company recognizes the cost associated with its standard warranty on engines and products at the time of sale. The general warranty period begins at the time of sale and typically covers two years, but may vary due to product type and geographic location. The amount recognized is based on historical failure rates and current claim cost experience. The following is a reconciliation of the changes in accrued warranty costs for the reporting period (in thousands):
 
 
2017
 
2016
Balance, Beginning of Period
 
$
44,367

 
$
48,007

Payments
 
(27,336
)
 
(27,874
)
Provision for Current Year Warranties
 
25,513

 
24,262

Changes in Estimates
 
564

 
(28
)
Balance, End of Period
 
$
43,108

 
$
44,367

Revenue Recognition: Net sales include sales of engines, products, and related service parts and accessories, net of allowances for cash discounts, customer volume rebates and discounts, floor plan interest and advertising allowances. The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably assured. This is generally upon shipment. Prior to fiscal 2017, revenue for certain international shipments was recognized when the customer received the product.
Included in net sales are costs associated with programs under which the Company shares the expense of financing certain dealer and distributor inventories, referred to as floor plan expense. This represents interest for a pre-established length of time based on a variable rate (LIBOR) plus a fixed percentage from a contract with a third party financing source for dealer and distributor inventory purchases. Sharing the cost of these

40


 
 
 
 
 
 



financing arrangements is used by the Company as a marketing incentive for customers to purchase the Company's products to have floor stock for end users to purchase. The Company enters into interest rate swaps to hedge cash flows for a portion of its interest rate risk. The financing costs, net of the related gain or loss on interest rate swaps, are recorded at the time of sale as a reduction of net sales. Included in net sales in fiscal 2017 , 2016 and 2015 were financing costs, net of the related gain or loss on interest rate swaps, of $7.3 million , $6.6 million and $6.0 million , respectively.
The Company also offers a variety of customer rebates and sales incentives. The Company records estimates for rebates and incentives at the time of sale, as a reduction in net sales.
Income Taxes: The provision for income taxes includes federal, state and foreign income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The deferred income tax asset and liability represent temporary differences relating to assets and liabilities. A valuation allowance is recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
Retirement Plans: The Company has noncontributory, defined benefit retirement plans and postretirement benefit plans covering certain employees. Retirement benefits represent a form of deferred compensation, which are subject to change due to changes in assumptions. Management reviews underlying assumptions on an annual basis. Refer to Note 16.
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 and recorded in engineering, selling, general and administrative expenses within the Consolidated Statements of Operations. The amounts charged against income were $23.0 million , $20.0 million and $19.9 million in fiscal 2017 , 2016 and 2015 , respectively.
Advertising Costs: Advertising costs, included in engineering, selling, general and administrative expenses within the Consolidated Statements of Operations, are expensed as incurred. These expenses totaled $19.0 million in fiscal 2017 , $18.0 million in fiscal 2016 and $17.5 million in fiscal 2015 .
Shipping and Handling Fees: Revenue received from shipping and handling fees is reflected in net sales and related shipping costs are recorded in cost of goods sold. Shipping fee revenue for fiscal 2017 , 2016 and 2015 was $5.0 million , $5.2 million and $6.6 million , respectively.
Foreign Currency Translation: Foreign currency balance sheet accounts are translated into dollars at the rates of exchange in effect at fiscal year-end. Income and expenses incurred in a foreign currency 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. Foreign currency transaction gains and losses are included in the results of operations in the period incurred. The Company recorded pre-tax foreign currency transaction gains of $0.8 million , $2.6 million , and $3.7 million during fiscal 2017 , 2016 , and 2015 , respectively.
Earnings Per Share: The Company computes earnings per share using the two-class method, an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. The Company’s unvested grants of restricted stock, restricted stock units, and deferred stock awards contain non-forfeitable rights to dividends (whether paid or unpaid), which are required to be treated as participating securities and included in the computation of basic earnings per share.

41


 
 
 
 
 
 



Information on earnings per share is as follows (in thousands except per share data):
 
 
Fiscal Year Ended
 
 
July 2, 2017
 
July 3, 2016
 
June 28, 2015
Net Income
 
$
56,650

 
$
26,561

 
$
45,687

Less: Earnings Allocated to Participating Securities
 
(1,274
)
 
(497
)
 
(1,154
)
Net Income available to Common Shareholders
 
$
55,376

 
$
26,064

 
$
44,533

Average Shares of Common Stock Outstanding
 
42,178

 
43,019

 
44,392

Incremental Common Shares Applicable to Common Stock Options and Performance Shares Based on the Common Stock Average Market Price During the Period
 
85

 
181

 
50

Shares Used in Calculating Diluted Earnings Per Share
 
42,263

 
43,200

 
44,442

Adjustment for Participating Securities
 
792

 
722

 
953

Diluted Average Shares, Including Participating Securities
 
43,055

 
43,922

 
45,395

Basic Earnings Per Share
 
$
1.31

 
$
0.61

 
$
1.00

Diluted Earnings Per Share
 
$
1.31

 
$
0.60

 
$
1.00

The dilutive effect of the potential exercise of outstanding stock-based awards to acquire common shares is calculated using the treasury stock method. The following options to purchase shares of common stock were excluded from the calculation of diluted earnings per share as the exercise prices were greater than the average market price of the common shares, and their inclusion in the computation would be antidilutive:
 
 
Fiscal Year Ended
 
 
July 2, 2017
 
July 3, 2016
 
June 28, 2015
Options to Purchase Shares of Common Stock (in thousands)
 

 
408

 
784

Weighted Average Exercise Price of Options Excluded
 
$

 
$
20.82

 
$
20.37

Derivative Instruments & Hedging Activity: The Company enters into derivative contracts designated as cash flow hedges to manage certain interest rate, foreign currency and commodity exposures. Company policy allows derivatives to be used only for identifiable exposures and, therefore, the Company does not enter into derivative instruments for trading purposes where the sole objective is to generate profits.
The Company formally designates the financial instrument as a hedge of a specific underlying exposure and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally assesses, both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Derivative financial instruments are recorded on the Consolidated Balance Sheets as assets or liabilities, measured at fair value. The effective portion of gains or losses on derivatives designated as cash flow hedges are reported as a component of Accumulated Other Comprehensive Income (Loss) (AOCI) and reclassified into earnings in the same periods during which the hedged transaction affects earnings. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized in earnings.
The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is dedesignated because a forecasted transaction is not probable of occurring, or management determines to remove the designation of the cash flow hedge.
In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not

42


 
 
 
 
 
 



occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income related to the hedging relationship.

(3) New Accounting Pronouncements:

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated guidance requires a prospective adoption. The guidance is effective beginning fiscal year 2021. Early adoption is permitted. The Company is currently assessing the impact of this new accounting pronouncement on its results of operations and financial position.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU was issued as part of the FASB Simplification Initiative and involves several aspects of accounting for share-based payment transactions, including the income tax consequences and classification on the statement of cash flows. The guidance is effective beginning fiscal year 2018. Early adoption is permitted. The Company early adopted this ASU as of July 2, 2017. Prior to the adoption of the ASU, excess tax benefits or expense related to stock-based compensation transactions were recognized in “Additional paid-in capital” on the Condensed Consolidated Balance Sheets. Following the adoption of the ASU, all excess tax benefits or expense related to stock-based compensation transactions are recognized prospectively, including for the entire year of adoption, as income tax benefits or expense in the Condensed Consolidated Statements of Operations and are prospectively included in cash flows from operating activities on the Condensed Consolidated Statements of Cash Flows as a component of “Net Income.” In addition, the Company retrospectively adopted the presentation requirements for cash flows related to employee taxes paid for withheld shares as a financing activity on the Condensed Consolidated Statements of Cash Flows. The adoption of this ASU did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Certain qualitative and quantitative disclosures are required, as well as a modified retrospective recognition and measurement of impacted leases. The guidance is effective beginning fiscal year 2020, with early adoption permitted. The Company is currently assessing the impact of this new accounting pronouncement on its results of operations, financial position, and cash flows.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU No. 2016-01). ASU No. 2016-01 enhances the existing financial instruments reporting model by modifying fair value measurement tools, simplifying impairment assessments for certain equity instruments, and modifying overall presentation and disclosure requirements. The guidance is effective beginning fiscal year 2019, with early adoption permitted. The Company does not expect the impact of adoption to have a material impact on the Company’s results of operations, financial position, and cash flows.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). Prior guidance required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position; however, the new guidance requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective beginning fiscal year 2018. Early adoption is permitted. The Company early adopted this ASU as of July 2, 2017. As discussed in Note 8, the Company retrospectively reclassified current “Deferred Income Tax Assets" to "Long-term Deferred Income Tax Assets” on the accompanying Condensed

43


 
 
 
 
 
 



Consolidated Balance Sheet as of July 3, 2016. The adoption of this ASU did not have a material impact on the company’s Condensed Consolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Topic 606 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. This guidance is effective beginning fiscal year 2019 under either full or modified retrospective adoption. The Company has begun its assessment of Topic 606 and has developed a comprehensive project plan that includes representatives from across the Company’s business. The project plan includes analyzing the standard’s impact on the Company’s various revenue streams, comparing its historical accounting policies and practices to the requirements of the new standard, and identifying potential differences from applying the requirements of the new standard to its contracts. The Company is in the process of identifying and implementing appropriate changes to its business processes, systems and controls to support revenue recognition and disclosures under Topic 606. As of July 2, 2017, and subject to the potential effects of any new related ASUs issued by the FASB, as well as the Company’s ongoing evaluation of transactions and contracts, the Company does not anticipate that the adoption of this standard will have a material impact on the company’s consolidated financial statements. The Company anticipates adopting Topic 606 at the beginning of fiscal year 2019 using the modified retrospective approach.
(4) Accumulated Other Comprehensive Income (Loss):
The following tables set forth the changes in accumulated other comprehensive income (loss) (in thousands):
 
 
Fiscal Year Ended July 2, 2017
 
 
Cumulative Translation Adjustments
 
Derivative Financial Instruments
 
Pension and Postretirement Benefit Plans
 
Total
Beginning Balance
 
$
(23,863
)
 
$
(1,552
)
 
$
(313,035
)
 
$
(338,450
)
Other Comprehensive Income (Loss) Before Reclassification
 
(881
)
 
1,003

 
43,947

 
44,069

Income Tax Benefit (Expense)
 

 
(376
)
 
(16,480
)
 
(16,856
)
Net Other Comprehensive Income (Loss) Before Reclassifications
 
(881
)
 
627

 
27,467

 
27,213

Reclassifications:
 
 
 
 
 
 
 
 
Realized (Gains) Losses - Foreign Currency Contracts (1)
 

 
357

 

 
357

Realized (Gains) Losses - Commodity Contracts (1)
 

 
258

 

 
258

Realized (Gains) Losses - Interest Rate Swaps (1)
 

 
743

 

 
743

Amortization of Prior Service Costs (Credits) (2)
 

 

 
(2,474
)
 
(2,474
)
Amortization of Actuarial Losses (2)
 

 

 
19,053

 
19,053

Total Reclassifications Before Tax
 

 
1,358

 
16,579

 
17,937

Income Tax Expense (Benefit)
 

 
(509
)
 
(6,217
)
 
(6,726
)
Net Reclassifications
 

 
849

 
10,362

 
11,211

Other Comprehensive Income (Loss)
 
(881
)
 
1,476

 
37,829

 
38,424

Ending Balance
 
$
(24,744
)
 
$
(76
)
 
$
(275,206
)
 
$
(300,026
)
(1) Amounts reclassified to net income are included in net sales or cost of goods sold. See Note 15 for information related to derivative financial instruments.
(2) Amounts reclassified to net income are included in the computation of net periodic expense, which is presented in cost of goods sold or engineering, selling, general and administrative expenses. See Note 16 for information related to pension and postretirement benefit plans.


44


 
 
 
 
 
 



 
 
Fiscal Year Ended July 3, 2016
 
 
Cumulative Translation Adjustments
 
Derivative Financial Instruments
 
Pension and Postretirement Benefit Plans
 
Total
Beginning Balance
 
$
(19,117
)
 
$
1,212

 
$
(261,205
)
 
$
(279,110
)
Other Comprehensive Income (Loss) Before Reclassification
 
(4,746
)
 
1,147

 
(117,745
)
 
(121,344
)
Income Tax Benefit (Expense)
 

 
(430
)
 
44,154

 
43,724

Net Other Comprehensive Income (Loss) Before Reclassifications
 
(4,746
)
 
717

 
(73,591
)
 
(77,620
)
Reclassifications:
 
 
 
 
 
 
 
 
Realized (Gains) Losses - Foreign Currency Contracts (1)
 

 
(7,584
)
 

 
(7,584
)
Realized (Gains) Losses - Commodity Contracts (1)
 

 
901

 

 
901

Realized (Gains) Losses - Interest Rate Swaps (1)
 

 
1,113

 

 
1,113

Amortization of Prior Service Costs (Credits) (2)
 

 

 
(2,479
)
 
(2,479
)
Amortization of Actuarial Losses (2)
 

 

 
17,051

 
17,051

Plan Settlement (2)
 

 

 
20,245

 
20,245

Total Reclassifications Before Tax
 

 
(5,570
)
 
34,817

 
29,247

Income Tax Expense (Benefit)
 

 
2,089

 
(13,056
)
 
(10,967
)
Net Reclassifications
 

 
(3,481
)
 
21,761

 
18,280

Other Comprehensive Income (Loss)
 
(4,746
)
 
(2,764
)
 
(51,830
)
 
(59,340
)
Ending Balance
 
$
(23,863
)
 
$
(1,552
)
 
$
(313,035
)
 
$
(338,450
)
(1) Amounts reclassified to net income are included in net sales or cost of goods sold. See Note 15 for information related to derivative financial instruments.
(2) Amounts reclassified to net income are included in the computation of net periodic expense, which is presented in cost of goods sold or engineering, selling, general and administrative expenses. See Note 16 for information related to pension and postretirement benefit plans.


45


 
 
 
 
 
 



 
 
Fiscal Year Ended June 28, 2015
 
 
Cumulative Translation Adjustments
 
Derivative Financial Instruments
 
Pension and Postretirement Benefit Plans
 
Total
Beginning Balance
 
$
13,053

 
$
(1,084
)
 
$
(207,226
)
 
$
(195,257
)
Other Comprehensive Income (Loss) Before Reclassification
 
(32,170
)
 
13,280

 
(101,366
)
 
(120,256
)
Income Tax Benefit (Expense)
 

 
(4,980
)
 
38,012

 
33,032

Net Other Comprehensive Income (Loss) Before Reclassifications
 
(32,170
)
 
8,300

 
(63,354
)
 
(87,224
)
Reclassifications:
 
 
 
 
 
 
 
 
Realized (Gains) Losses - Foreign Currency Contracts (1)
 

 
(11,350
)
 

 
(11,350
)
Realized (Gains) Losses - Commodity Contracts (1)
 

 
521

 

 
521

Realized (Gains) Losses - Interest Rate Swaps (1)
 

 
1,222

 

 
1,222

Amortization of Prior Service Costs (Credits) (2)
 

 

 
(2,578
)
 
(2,578
)
Amortization of Actuarial Losses (2)
 

 

 
17,578

 
17,578

Total Reclassifications Before Tax
 

 
(9,607
)
 
15,000

 
5,393

Income Tax Expense (Benefit)
 

 
3,603

 
(5,625
)
 
(2,022
)
Net Reclassifications
 

 
(6,004
)
 
9,375

 
3,371

Other Comprehensive Income (Loss)
 
(32,170
)
 
2,296

 
(53,979
)
 
(83,853
)
Ending Balance
 
$
(19,117
)
 
$
1,212

 
$
(261,205
)
 
$
(279,110
)
(1) Amounts reclassified to net income are included in net sales or cost of goods sold. See Note 15 for information related to derivative financial instruments.
(2) Amounts reclassified to net income are included in the computation of net periodic expense, which is presented in cost of goods sold or engineering, selling, general and administrative expenses. See Note 16 for information related to pension and postretirement benefit plans.

(5) Acquisitions:
On August 29, 2014, the Company acquired all of the outstanding shares of Allmand Bros., Inc. ("Allmand") of Holdrege, Nebraska for total cash consideration of $59.9 million , net of cash acquired. Allmand is a leading designer and manufacturer of high quality towable light towers, industrial heaters, and solar LED arrow boards. Its products are used in a variety of industries, including construction, roadway, oil and gas, mining, and sporting and special events. Allmand's products are generally powered by diesel engines, and distributed through equipment rental companies, equipment dealers and distributors. During fiscal 2015, the Company recorded a purchase price allocation based on its estimates of fair value. The purchase price allocation resulted in the recognition of $15.6 million of goodwill, which was allocated to the Products segment, and $24.1 million of intangible assets, including $15.7 million of customer relationships, $8.1 million of tradenames, and $0.3 million of other intangible assets.
On May 20, 2015, the Company acquired all of the outstanding shares of Billy Goat Industries, Inc. ("Billy Goat") of Lee's Summit, Missouri for total cash consideration of $28.3 million , net of cash acquired. Billy Goat is a leading manufacturer of specialty turf equipment, which includes aerators, sod cutters, overseeders, power rakes, brush cutters, walk behind blowers, lawn vacuums, and debris loaders. During fiscal 2015, the Company recorded a purchase price allocation based on its estimates of fair value.The purchase price allocation resulted in the recognition of $9.2 million of goodwill, which was allocated to the Products segment, and $16.4 million of intangible assets, including $12.0 million of customer relationships, $4.0 million of tradenames, and $0.4 million of other intangible assets.

The results of operations of the acquisitions have been included in the Consolidated Condensed Statements of Operations since the date of acquisition. Pro forma financial information and allocation of the purchase

46


 
 
 
 
 
 



price are not presented as the effects of the acquisitions are not material to the Company's consolidated results of operations or financial position.
(6) Fair Value:
Assets and Liabilities Measured at Fair Value:
The following guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable.
Level 3: Significant inputs to the valuation model are unobservable.
The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of July 2, 2017 and July 3, 2016 (in thousands):
 
 
 
 
Fair Value Measurement Using
 
 
July 2, 2017
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Derivatives
 
$
2,081

 
$

 
$
2,081

 
$

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$
3,213

 
$

 
$
3,213

 
$

 
 
 
 
Fair Value Measurement Using
 
 
July 3, 2016
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Derivatives
 
$
1,422

 
$

 
$
1,422

 
$

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$
4,359

 
$

 
$
4,359

 
$


The fair value for Level 2 measurements are based upon the respective quoted market prices for comparable instruments in active markets, which include current market pricing for forward purchases of commodities, foreign currency forwards, and current interest rates.
The Company has currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States.
Fair Value of Financial Instruments:
The Company believes that the carrying values of cash and cash equivalents, trade receivables and accounts payable are reasonable estimates of their fair values at July 2, 2017 and July 3, 2016 due to the short-term nature of these instruments. The estimated fair value of the 6.875% Senior Notes due December 2020 is based on quoted market prices for similar instruments and is, therefore, classified as Level 2 within the valuation hierarchy.

47


 
 
 
 
 
 



The estimated fair market values of the Company’s indebtedness is (in thousands):
 
 
2017
 
2016
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
6.875% Senior Notes
 
$
223,149

 
$
245,888

 
$
223,149

 
$
240,164

Borrowings on Revolver
 
$

 
$

 
$

 
$

(7) Goodwill and Other Intangible Assets:
The changes in the carrying amount of goodwill by reportable segment for the fiscal years ended July 2, 2017 and July 3, 2016 are as follows (in thousands):
 
 
Engines
 
Products
 
Total
Goodwill Balance at June 28, 2015
 
$
138,281

 
$
27,241

 
$
165,522

Impairment Loss
 

 
(7,651
)
 
(7,651
)
Acquisition
 

 
4,104

 
4,104

Effect of Translation
 
(338
)
 
(69
)
 
(407
)
Goodwill Balance at July 3, 2016
 
$
137,943

 
$
23,625

 
$
161,568

Effect of Translation
 
131

 
(50
)
 
81

Goodwill Balance at July 2, 2017
 
$
138,074

 
$
23,575

 
$
161,649

At July 2, 2017 , July 3, 2016 and June 28, 2015 , accumulated goodwill impairment losses, as recorded in the Products segment, were $131.4 million , $131.4 million and $123.7 million respectively.
The Company evaluates goodwill for impairment at least annually as of the fiscal year-end and more frequently if events or circumstances indicate that the assets may be impaired. For the goodwill evaluation for one reporting unit, the Company first determines based on a qualitative assessment whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. For other reporting units or if the Company's qualitative assessment conclusion is that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will test goodwill using a two-step process. The first step of the goodwill impairment test is to identify a potential impairment by comparing the carrying values of each of the Company's reporting units to their estimated fair values as of the test dates. The estimates of fair value of the reporting units are computed using either an income approach, a market approach, or a combination of both. The income approach utilizes a multi-year forecast of estimated cash flows and a terminal value at the end of the cash flow period. The forecast period assumptions consist of internal projections that are based on the Company's budget and long-range strategic plan. The discount rate used at the test date is the weighted-average cost of capital which reflects the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn. Valuations using the market approach are derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services.
If the fair value of a reporting unit exceeds its book value, goodwill of the reporting unit is not deemed impaired and the second step of the impairment test is not performed. If the book value of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by allocating the estimated fair value of the reporting unit to the estimated fair value of its existing tangible assets and liabilities as well as existing identified intangible assets and previously unrecognized intangible assets in a manner similar to a purchase price allocation. The unallocated portion of the estimated fair value of the reporting unit is the implied fair value of goodwill. If the carrying amount of the reporting unit’s

48


 
 
 
 
 
 



goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
In fiscal 2016, the Company recorded a non-cash goodwill impairment charge of $ 7.7 million related to its Job Site reporting unit, which was determined by comparing the carrying value of the reporting unit’s goodwill with the implied fair value of goodwill for the reporting unit. The Company reached this conclusion because it determined that its forecasted cash flow estimates used in the goodwill assessment for its Job Site reporting unit were adversely impacted by elevated channel inventories. The inventory channel for job site products, particularly portable light towers and portable heaters, was elevated due to the rapid and significant change in market demand following the reduction in North American oil production and was compounded by the mild winter. The impairment charge was a non-cash expense that was recorded as a separate component of operating expenses. The goodwill impairment was not deductible for income tax purposes. The impairment charge did not adversely affect the Company’s debt position, cash flow, liquidity or compliance with financial covenants under its revolving credit facility. 
The Company’s other intangible assets as of July 2, 2017 and July 3, 2016 are as follows (in thousands) in the table below. After an intangible asset has been fully amortized, it is removed from the table in the subsequent year.
 
 
2017
 
2016
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Patents
 
$
7,300

 
$
(6,327
)
 
$
973

 
$
7,300

 
$
(5,840
)
 
$
1,460

Customer Relationships
 
60,182

 
(16,304
)
 
43,878

 
60,182

 
(13,507
)
 
46,675

Other Intangible Assets
 
839

 
(626
)
 
213

 
739

 
(337
)
 
402

Effect of Translation
 
(5,576
)
 
637

 
(4,939
)
 
(5,325
)
 
489

 
(4,836
)
Total Amortized Intangible Assets
 
62,745

 
(22,620
)
 
40,125

 
62,896

 
(19,195
)
 
43,701

Unamortized Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Tradenames
 
63,967

 

 
63,967

 
63,967

 

 
63,967

Effect of Translation
 
(3,497
)
 

 
(3,497
)
 
(3,504
)
 

 
(3,504
)
Total Unamortized Intangible Assets
 
60,470

 

 
60,470

 
60,463

 

 
60,463

Total Intangible Assets
 
$
123,215

 
$
(22,620
)
 
$
100,595

 
$
123,359

 
$
(19,195
)
 
$
104,164

The Company also performs an impairment test of its indefinite-lived intangible assets as of the fiscal year-end and more frequently if events or circumstances indicate that the assets may be impaired. For purposes of the indefinite-lived intangible asset impairment analysis, the Company performs its assessment of fair value based on an income approach using the relief-from-royalty method. The Company determines the fair value of each tradename by applying a royalty rate to a projection of net sales discounted using a risk adjusted cost of capital. Sales growth rates are determined after considering current and future economic conditions, recent sales trends, discussions with customers, planned timing of new product launches and many other variables. Each royalty rate is based on profitability of the business to which it relates and observed market royalty rates.
In fiscal 2016, the Company recorded a non-cash intangible asset impairment charge of $2.7 million . The impairment charge did not adversely affect the Company’s debt position, cash flow, liquidity or compliance with financial covenants under its revolving credit facility.
Amortization expense of other intangible assets amounted to approximately $3.5 million in 2017 , $3.4 million in 2016 , and $2.8 million in 2015 .

49


 
 
 
 
 
 



The estimated amortization expense of other intangible assets for the next five years is (in thousands):
 
 
2018
$
3,363

2019
3,241

2020
2,754

2021
2,754

2022
2,754

 
 
 
$
14,866

 
 
(8) Income Taxes:
Components of income before income taxes consists of the following (in thousands):
 
 
2017
 
2016
 
2015
U.S.
 
$
66,555

 
$
22,203

 
$
38,615

Foreign
 
13,106

 
13,153

 
18,343

Total
 
$
79,661

 
$
35,356

 
$
56,958

The provision for income taxes consists of the following (in thousands):
 
 
2017
 
2016
 
2015
Current
 
 
 
 
 
 
Federal
 
$
7,333

 
$
2,649

 
$
(659
)
State
 
933

 
670

 
859

Foreign
 
4,429

 
3,282

 
3,423

 
 
12,695

 
6,601

 
3,623

Deferred
 
 
 
 
 
 
Federal
 
$
8,156

 
$
2,702

 
$
6,928

State
 
583

 
193

 
495

Foreign
 
1,577

 
(701
)
 
225

 
 
10,316

 
2,194

 
7,648

Total
 
$
23,011

 
$
8,795

 
$
11,271


A reconciliation of the U.S. statutory tax rates to the effective tax rates on income follows:
 
 
2017
 
2016
 
2015
U.S. Statutory Rate
 
35.0
 %
 
35.0
 %
 
35.0
 %
State Taxes, Net of Federal Tax Benefit
 
1.5
 %
 
2.0
 %
 
2.0
 %
Impact of Foreign Operations and Tax Rates
 
(2.1
)%
 
(9.7
)%
 
(2.7
)%
Valuation Allowance
 
5.3
 %
 
3.3
 %
 
1.9
 %
Changes to Unrecognized Tax Benefits
 
(4.5
)%
 
2.8
 %
 
4.3
 %
U.S. Manufacturers Deduction
 
(2.4
)%
 
(3.7
)%
 
(2.5
)%
Research & Development Credit (1)
 
(3.1
)%
 
(10.6
)%
 
(18.1
)%
Goodwill Impairment
 
 %
 
7.6
 %
 
 %
Other, Net
 
(0.8
)%
 
(1.8
)%
 
(0.1
)%
Effective Tax Rate
 
28.9
 %
 
24.9
 %
 
19.8
 %
(1) "Research & Development Credit” in fiscal 2016 includes fiscal 2016 and fiscal 2015 federal research & development credit due to the reenactment of the credit during fiscal 2016.  In fiscal 2015, this item primarily relates to federal research & development tax credits associated with the completion of a research & development tax credit analysis of prior fiscal years.

50


 
 
 
 
 
 



The components of deferred income taxes were as follows (in thousands):
Long-Term Asset (Liability):
 
2017
 
2016
Difference Between Book and Tax Related to:
 
 
 
 
Pension Cost
 
$
64,216

 
$
90,016

Accumulated Depreciation
 
(48,679
)
 
(41,319
)
Intangibles
 
(54,360
)
 
(56,755
)
Accrued Employee Benefits
 
38,477

 
39,083

Postretirement Health Care Obligation
 
12,865

 
14,107

Inventory
 
15,969

 
13,360

Warranty
 
16,008

 
16,517

Payroll & Workers Compensation Accruals
 
7,087

 
7,620

Valuation Allowance
 
(23,461
)
 
(19,371
)
Net Operating Loss/State Credit Carryforwards
 
26,436

 
24,942

Other Accrued Liabilities
 
13,709

 
10,117

Miscellaneous
 
(3,904
)
 
(119
)
Deferred Income Tax Asset (Liability)
 
$
64,363

 
$
98,198

Total deferred tax assets were $171.3 million and $200.3 million as of July 2, 2017 and July 3, 2016 , respectively. Total deferred tax liabilities were $106.9 million and $102.1 million as of July 2, 2017 and July 3, 2016 , respectively. During fiscal 2017 , the total valuation allowance increased by $4.1 million . The Company early adopted ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (see Note 3) as of July 2, 2017. The Company retrospectively reclassified $44.7 million of current “Deferred Income Tax Assets" to "Long-term Deferred Income Tax Assets” on the accompanying Condensed Consolidated Balance Sheet as of July 3, 2016.
Deferred tax assets were generated during the current year as a result of foreign income tax loss carryforwards in the amount of $1.9 million . At July 2, 2017 , there are $7.5 million of foreign income tax loss carryforwards, consisting of $5.3 million that have no expiration date, and $2.2 million that will expire within the next 5 to 10 years. A deferred tax asset of $18.9 million exists at July 2, 2017 related to state income tax losses and state tax credit carryforwards. If not utilized against future taxable income, this amount will expire from 2018 through 2028 . Realization of the deferred tax assets are contingent upon generating sufficient taxable income prior to expiration of these carryforwards. At July 2, 2017 , a valuation allowance of $7.5 million is recorded for the foreign losses which the Company believes are unlikely to be realized in the future. In addition, a valuation allowance of $15.9 million is recorded related to state tax credits that are unlikely to be realized.
The Company does not record deferred income taxes applicable to undistributed earnings of foreign subsidiaries for which the Company intends to reinvest such earnings indefinitely outside of the U.S. The undistributed earnings that the Company intends to reinvest amounted to approximately $88.6 million at July 2, 2017 . If the Company were to distribute these earnings, foreign tax credits may become available under current law to reduce the resulting U.S. income tax. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.

51


 
 
 
 
 
 



The change to the gross unrecognized tax benefits of the Company during the fiscal years ended July 2, 2017 , July 3, 2016 , and June 28, 2015 is reconciled as follows:
Unrecognized Tax Benefits (in thousands):
 
2017
 
2016
 
2015
Beginning Balance
$
10,922

 
$
10,551

 
$
7,657

             Changes based on tax positions related to prior year
(861
)
 
(208
)
 
4,573

Additions based on tax positions related to current year
461

 
579

 
691

Settlements with taxing authorities
(4,437
)
 

 
(2,120
)
Lapse of statute of limitations
(99
)
 

 
(250
)
Ending Balance
$
5,986

 
$
10,922

 
$
10,551

As of July 2, 2017 , gross unrecognized tax benefits that, if recognized, would impact the effective tax rate were $4.7 million . There is a reasonable possibility that approximately $1.0 million of the liability for uncertain tax positions may be settled within the next twelve months due to the resolution of audits or expiration of statutes of limitations.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The total expense (income) recognized for fiscal years 2017 , 2016 and 2015 was $(0.2) million , $0.2 million , and $0.1 million , respectively.
As of July 2, 2017 and July 3, 2016 , the Company had $1.2 million and $1.4 million , respectively, accrued for the payment of interest and penalties.
At July 2, 2017 and July 3, 2016 , the liability for uncertain tax positions, inclusive of interest and penalties, was $7.2 million and $12.3 million , respectively, which is recorded as an other long-term liability within the Consolidated Balance Sheets.
Income tax returns are filed in the U.S., state, and foreign jurisdictions and related audits occur on a regular basis. In the U.S., the Company is no longer subject to U.S. federal income tax examinations before fiscal 2013. The Company is currently under audit by various state and foreign jurisdictions. The Company is no longer subject to tax examinations before fiscal 2007 in its major foreign jurisdictions.

52


 
 
 
 
 
 



(9) Segment and Geographic Information and Significant Customers:
The Company aggregates operating segments that have similar economic characteristics, products, production processes, types or classes of customers and distribution methods into reportable segments. The Company concluded that it operates two reportable segments: Engines and Products. The Company uses “segment income (loss)” as the primary measure to evaluate operating performance and allocate capital resources for the Engines and Products segments. The Company defines segment income (loss) as income from operations plus equity in earnings of unconsolidated affiliates. Summarized segment data is as follows (in thousands):
 
 
2017
 
2016
 
2015
NET SALES:
 
 
 
 
 
 
Engines
 
$
1,098,809

 
$
1,142,815

 
$
1,208,914

Products
 
778,378

 
772,154

 
788,564

Eliminations
 
(91,084
)
 
(106,191
)
 
(102,728
)
 
 
$
1,786,103

 
$
1,808,778

 
$
1,894,750

GROSS PROFIT:
 
 
 
 
 
 
Engines
 
$
262,036

 
$
252,833

 
$
267,778

Products
 
121,141

 
110,944

 
89,268

Eliminations
 
652

 
(1,322
)
 
2,053

 
 
$
383,829

 
$
362,455

 
$
359,099

SEGMENT INCOME (LOSS) (1)
 
 
 
 
 
 
Engines
 
$
84,165

 
$
60,645

 
$
93,880

Products
 
12,530

 
(9,775
)
 
(22,447
)
Eliminations
 
652

 
(1,322
)
 
2,053

 
 
$
97,347

 
$
49,548

 
$
73,486

Reconciliation from Segment Income (Loss) to Income Before Income Taxes:
 
 
 
 
 
 
Equity in Earnings of Unconsolidated Affiliates(1)
 

 
3,187

 
7,303

Income from Operations
 
$
97,347

 
$
46,361

 
$
66,183

INTEREST EXPENSE
 
(20,293
)
 
(20,033
)
 
(19,532
)
OTHER INCOME, Net
 
2,607

 
9,028

 
10,307

Income Before Income Taxes
 
79,661

 
35,356

 
56,958

PROVISION FOR INCOME TAXES
 
23,011

 
8,795

 
11,271

Net Income
 
$
56,650

 
$
26,561

 
$
45,687

 
 
 
 
 
 
 
ASSETS:
 
 
 
 
 
 
Engines
 
$
987,943

 
$
984,119

 
$
978,983

Products
 
551,207

 
546,104

 
565,048

Eliminations
 
(88,171
)
 
(73,556
)
 
(87,384
)
 
 
$
1,450,979

 
$
1,456,667

 
$
1,456,647

CAPITAL EXPENDITURES:
 
 
 
 
 
 
Engines
 
$
67,218

 
$
58,186

 
$
59,997

Products
 
15,923

 
5,975

 
11,713

 
 
$
83,141

 
$
64,161

 
$
71,710

DEPRECIATION & AMORTIZATION:
 
 
 
 
 
 
Engines
 
$
44,384

 
$
44,480

 
$
42,240

Products
 
11,799

 
9,920

 
10,020

 
 
$
56,183

 
$
54,400

 
$
52,260

(1) The Company concluded that its equity method investments are integral to its business. Beginning with the third quarter of fiscal 2016, the Company is prospectively classifying its equity in earnings of unconsolidated affiliates as a separate line item within Income

53


 
 
 
 
 
 



from Operations. For periods prior to the third quarter of fiscal 2016, equity in earnings from unconsolidated affiliates is classified in Other Income, Net. For all periods presented, equity in earnings from unconsolidated affiliates is included in segment income (loss).
Pre-tax restructuring charges, acquisition-related charges, and pension settlement charges impact on gross profit is as follows (in thousands):
 
 
2017
 
2016
 
2015
Engines
 
$

 
$
11,599

 
$

Products
 

 
7,943

 
25,710

Total
 
$

 
$
19,542

 
$
25,710

Pre-tax restructuring charges, acquisition-related charges, goodwill and tradename impairment, pension settlement charges, and litigation charges impact on segment income (loss) is as follows (in thousands):
 
 
2017
 
2016
 
2015
Engines
 
$

 
$
24,424

 
$

Products
 

 
19,451

 
29,403

Total
 
$

 
$
43,875

 
$
29,403

Information regarding the Company’s geographic sales based on product shipment destination (in thousands):
 
 
2017
 
2016
 
2015
United States
 
$
1,246,015

 
$
1,299,003

 
$
1,312,485

All Other Countries
 
540,088

 
509,775

 
582,265

Total
 
$
1,786,103

 
$
1,808,778

 
$
1,894,750

Information regarding the Company’s net plant and equipment based on geographic location (in thousands):
 
 
2017
 
2016
 
2015
United States
 
$
347,664

 
$
309,089

 
$
296,124

All Other Countries
 
17,216

 
17,184

 
18,714

Total
 
$
364,880

 
$
326,273

 
$
314,838

Sales to the following customers in the Company’s Engines segment amount to greater than or equal to 10% of consolidated net sales (in thousands):
 
 
2017
 
2016
 
2015
Customer:
 
Net Sales
 
%
 
Net Sales
 
%
 
Net Sales
 
%
HOP
 
$
207,882

 
12
%
 
$
229,899

 
13
%
 
$
266,038

 
14
%
MTD
 
205,339

 
11
%
 
235,220

 
13
%
 
228,430

 
12
%
 
 
$
413,221

 
23
%
 
$
465,119

 
26
%
 
$
494,468

 
26
%

54


 
 
 
 
 
 



(10) Leases:
The Company leases certain facilities, vehicles, and equipment under operating leases. Operating leases are not capitalized and lease payments are expensed over the life of the lease. Terms of the leases, including purchase options, renewals, and maintenance costs, vary by lease. Rental expense for fiscal 2017 , 2016 and 2015 was $19.3 million , $19.3 million and $19.5 million , respectively.
Future minimum lease commitments for all non-cancelable operating leases as of July 2, 2017 are as follows (in thousands):
Fiscal Year
 
Commitments
2018
 
$
13,910

2019
 
9,946

2020
 
7,151

2021
 
4,902

2022
 
4,341

Thereafter
 
43,016

Total future minimum lease commitments
 
$
83,266

(11) Indebtedness:
The following is a summary of the Company’s indebtedness (in thousands):
 
 
2017
 
2016
Multicurrency Credit Agreement
 
$

 
$

Total Short-Term Debt
 
$

 
$

 
 
 
 
 
6.875% Senior Notes
 
$
223,149

 
$
223,149

Unamortized Debt Issuance Costs associated with 6.875% Senior Notes
 
1,356

 
1,810

Total Long-Term Debt
 
$
221,793

 
$
221,339

6.875% Senior Notes
On December 20, 2010 , the Company issued $225 million of 6.875% Senior Notes ("Senior Notes") due December 15, 2020 . During fiscal 2016, the Company repurchased  $1.9 million  of the Senior Notes after receiving unsolicited offers from bondholders.
Multicurrency Credit Agreement
On March 25, 2016 , the Company entered into a $500 million amended and restated multicurrency credit agreement (the “Revolver”) that matures on March 25, 2021 . The Revolver amended and restated the Company's $500 million  multicurrency credit agreement dated as of October 13, 2011 (as previously amended), which would have matured on October 21, 2018 . The initial maximum availability under the Revolver is  $500 million . Availability under the Revolver is reduced by outstanding letters of credit. The Company may from time to time increase the maximum availability under the revolving credit facility by up to  $250 million  if certain conditions are satisfied. In connection with the amendment to the Revolver in fiscal 2016, the Company incurred approximately  $0.9 million  in new debt issuance costs, which are being amortized over the life of the Revolver using the straight-line method. The Company classifies debt issuance costs related to the Revolver as an asset, regardless of whether it has any outstanding borrowings on the line of credit arrangements. There were no borrowings under the revolving credit facility as of July 2, 2017 and July 3, 2016.
Borrowings under the Revolver by the Company bear interest at a rate per annum equal to, at its option, either:
(1) a 1, 2, 3 or 6 month LIBOR rate plus a margin varying from 1.25% to 2.25% , depending on the Company’s average net leverage ratio; or

55


 
 
 
 
 
 



(2) the higher of (a) the federal funds rate plus 0.50% ; (b) the bank's prime rate; or (c) the adjusted LIBO rate for a one-month interest period plus 1.00% plus a margin varying from 0.25% to 1.25% . In addition, the Company is subject to a 0.18% to 0.35% commitment fee and a 1.25% to 2.25% letter of credit fee, depending on the Company’s average net leverage ratio.
The Revolver contains covenants that the Company considers usual and customary for an agreement of this type, including a maximum average leverage ratio and minimum interest coverage ratio.
The Senior Notes and the Revolver contain restrictive covenants. These covenants include restrictions on the ability of the Company and/or certain subsidiaries to pay dividends, repurchase equity interests of the Company and certain subsidiaries, incur indebtedness, create liens, consolidate and merge and dispose of assets, and enter into transactions with affiliates. The Revolver contains financial covenants that require the Company to maintain a minimum interest coverage ratio and impose on the Company a maximum average leverage ratio.
(12) Other Income, Net:
The components of Other Income, Net are as follows (in thousands):
 
 
2017
 
2016
 
2015
Interest Income
 
$
1,203

 
$
695

 
$
1,317

Equity in Earnings of Unconsolidated Affiliates
 

 
3,187

 
7,303

Gain on Sale of Investment in Marketable Securities
 

 
3,343

 

Other Items
 
1,404

 
1,803

 
1,687

Total
 
$
2,607

 
$
9,028

 
$
10,307


The Company concluded that its equity method investments are integral to its business. Beginning with the third quarter of fiscal 2016, the Company is prospectively classifying its equity in earnings of unconsolidated affiliates as a separate line item within Income from Operations. For periods prior to the third quarter of fiscal 2016, equity in earnings from unconsolidated affiliates is classified in Other Income, Net.
(13) Commitments and Contingencies:
The Company is subject to various unresolved legal actions that arise in the normal course of its business. These actions typically relate to product liability (including asbestos-related liability), patent and trademark matters, and disputes with customers, suppliers, distributors and dealers, competitors and employees.
On May 14, 2010, the Company notified retirees and certain retirement eligible employees of various amendments to the Company-sponsored retiree medical plans intended to better align the plans offered to both hourly and salaried retirees. On August 16, 2010, a putative class of retirees who retired prior to August 1, 2006 and the United Steel Workers filed a complaint in the U.S. District Court for the Eastern District of Wisconsin (Merrill, Weber, Carpenter, et al.; United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO/CLC v. Briggs & Stratton Corporation; Group Insurance Plan of Briggs & Stratton Corporation; and Does 1 through 20, Docket No. 10-C-0700), contesting the Company's right to make these changes. In mid-December 2015, the parties agreed in principle to settle this case for an aggregate payment of $3.95 million covering both claimed benefits and plaintiffs’ attorneys fees, which resulted in a contribution of $1.975 million from the Company and $1.975 million from a third party insurance provider. The Company recorded a total charge of $1.975 million as Engineering, Selling, General and Administrative Expense on the Condensed Consolidated Statements of Operations in the second quarter of fiscal 2016 related to this matter. The parties filed a signed Stipulation of Settlement with the court on April 12, 2016 and the court held a hearing on the fairness, reasonableness and adequacy of the terms and conditions of the settlement and on the fee petition of the plaintiffs' counsel on August 11, 2016. The court approved the settlement following that hearing.
On May 12, 2010, Exmark Manufacturing Company, Inc. filed suit against Briggs & Stratton Power Products Group, LLC (“BSPPG”), a wholly owned subsidiary of the Company that was subsequently merged with and into the Company on January 1, 2017 (Case No. 8:10CV187, U.S. District Court for the District of Nebraska), alleging that certain Ferris® and Snapper Pro® mower decks infringed an Exmark mower deck patent.

56


 
 
 
 
 
 



Exmark sought damages relating to sales since May 2004, attorneys’ fees, and enhanced damages. As a result of a reexamination proceeding in 2012, the United States Patent and Trademark Office (“USPTO”) initially rejected the asserted Exmark claims as invalid.  However, in 2014, that decision was reversed by the USPTO on appeal by Exmark. Following discovery, each of BSPPG and Exmark filed several motions for summary judgment in the Nebraska district court, which were decided on July 28, 2015. The court concluded that older mower deck designs infringed Exmark’s patent, leaving for trial the issues of whether current designs infringed, the amount of damages, and whether any infringement was willful.
The trial began on September 8, 2015, and on September 18, 2015, the jury returned its verdict, finding that BSPPG’s current mower deck designs do not infringe the Exmark patent. As to the older designs, the jury awarded Exmark $24.3 million in damages and found that the infringement was willful, allowing the judge to enhance the jury’s damages award post-trial by up to three times. Also on September 18, 2015, the U.S. Court of Appeals for the Federal Circuit issued its decision in an unrelated case, SCA Hygiene Products Aktiebolag SCA Personal Care, Inc. v. First Quality Baby Products, LLC, et al. (Case No. 2013-1564) (“SCA”), confirming the availability of laches as a defense to patent infringement claims. Laches is an equitable doctrine that may bar a patent owner from obtaining damages prior to commencing suit, in circumstances in which the owner knows or should have known its patent was being infringed for more than six years. Although the court in the Exmark case ruled before trial that BSPPG could not rely on the defense of laches, as a result of the subsequent SCA decision, the court held a bench trial on that defense on October 21 and 22, 2015. On May 2, 2016, the United States Supreme Court agreed to review the SCA decision.
The parties submitted post-trial motions and briefing related to: damages; willfulness; laches; attorney fees; enhanced damages; and prejudgment/post-judgment interest and costs.  All post-trial motions and briefing were completed on December 18, 2015.  On May 11, 2016, the court ruled on those post-trial motions and entered judgment against BSPPG and in favor of Exmark in the amount of $24.3 million in compensatory damages, an additional $24.3 million in enhanced damages, and $1.5 million in pre-judgment interest along with post-judgment interest and costs to be determined. The Company strongly disagrees with the jury verdict, certain rulings made before and during trial, and the May 11, 2016 post-trial rulings. BSPPG appealed to the U.S. Court of Appeals for the Federal Circuit on several bases, including the issues of obviousness and invalidity of Exmark’s patent, the damages calculation, willfulness and laches.
Following briefing of the appeal and prior to oral argument, the United States Supreme Court overturned the SCA decision, ruling that laches is not available in a patent infringement case for damages. That ruling eliminated laches as one basis for BSPPG’s appeal of the Exmark case. The U.S. Court of Appeals for the Federal Circuit held a hearing on the remainder of BSPPG’s appeal on April 5, 2017 and has not yet issued its decision.
In assessing whether the Company should accrue a liability in its financial statements as a result of the May 11, 2016 post-trial rulings and related matters, the Company considered various factors, including the legal and factual circumstances of the case, the trial record, the post-trial orders, the current status of the proceedings, applicable law, the views of legal counsel, and the likelihood of successful appeals. As a result of this review, the Company has concluded that a loss from this case is not probable and reasonably estimable at this time and, therefore, a liability has not been recorded with respect to this case as of July 2, 2017.
Although it is not possible to predict with certainty the outcome of these and other unresolved legal actions or the range of possible loss, the Company believes the unresolved legal actions will not have a material adverse effect on its results of operations, financial position or cash flows.

(14) Stock Incentives:
Effective October 20, 2004, a total of 8,000,000 shares of common stock (as adjusted for the fiscal 2005 2 -for-1 stock split) were originally reserved for future issuance pursuant to the Company's Incentive Compensation Plan, and as a result of an amendment approved by shareholders on October 21, 2009 an additional 2,481,494 shares were reserved. On October 15, 2014, the Company's shareholders approved the 2014 Omnibus Incentive Plan, which constituted a complete amendment and restatement of the Company's Incentive Compensation Plan and under which 3,760,000 shares of common stock were reserved for future issuance (plus any shares remaining available for issuance under the Incentive Compensation Plan as of that date). Similar to the Incentive Compensation Plan, in accordance with the 2014 Omnibus Incentive Plan, the

57


 
 
 
 
 
 



Company can issue to eligible participants stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other stock-based and cash bonus awards subject to certain annual limitations. The plans also allow participants to defer the payment of awards and the Company to issue directors’ fees in stock. Stock-based compensation vests in accordance with the applicable plan and award agreements but can become immediately exercisable upon eligible recipients' departure from the Company or upon reaching retirement age, subject to approval of the Compensation Committee.
Stock-based compensation expense is calculated by estimating the fair value of incentive stock awards granted and amortizing the estimated value over the awards’ vesting periods. During fiscal 2017 , 2016 and 2015 , the Company recognized stock-based compensation expense of approximately $4.9 million , $5.1 million and $6.2 million , respectively.
Beginning for fiscal 2015 grants, the exercise price of each stock option is equal to the market value of the stock on the grant date. The exercise price of each stock option issued prior to fiscal 2015 exceeded the market value of the stock on the date of grant by 10% . The fair value of each option is estimated using the Black-Scholes option pricing model, and the assumptions are based on historical data and industry valuation practices and methodology. The assumptions used to determine fair value are as follows:
Options Granted During
 
2017
 
2016
 
2015
Grant Date Fair Value
 
$
3.84

 
$
3.72

 
$
3.81

(Since options are only granted once per year, the grant date fair value equals the weighted average grant date fair value.)
 
 
 
 
 
 
Assumptions:
 
 
 
 
 
 
Risk-free Interest Rate
 
1.2
%
 
1.7
%
 
1.6
%
Expected Volatility
 
29.3
%
 
25.1
%
 
27.9
%
Expected Dividend Yield
 
2.9
%
 
2.5
%
 
2.7
%
Expected Term (in Years)
 
5.5

 
5.5

 
5.5

Information on the options outstanding is as follows:
 
 
Options
 
Wtd. Avg. Exercise Price
 
 Wtd. Avg. Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in thousands)
Balance, June 29, 2014
 
2,417,366

 
$
22.71

 
 
 
 
Granted During the Year
 
557,170

 
18.83

 
 
 
 
Exercised During the Year
 
(260,726
)
 
19.66

 
 
 
 
Expired During the Year
 
(536,960
)
 
35.78

 
 
 
 
Balance, June 28, 2015
 
2,176,850

 
$
18.86

 
 
 
 
Granted During the Year
 
501,990

 
19.90

 
 
 
 
Exercised During the Year
 
(697,309
)
 
17.77

 
 
 
 
Expired During the Year
 
(136,988
)
 
19.88

 
 
 
 
Balance, July 3, 2016
 
1,844,543

 
$
19.48

 
 
 
 
Granted During the Year
 
496,880

 
19.15

 
 
 
 
Exercised During the Year
 
(414,176
)
 
18.76

 
 
 
 
Expired During the Year
 

 

 
 
 
 
Balance, July 2, 2017
 
1,927,247

 
$
19.55

 
6.80
 
$
8,764

Exercisable, July 2, 2017
 
371,207

 
$
20.71

 
1.11
 
$
1,259


The total intrinsic value of options exercised during fiscal year 2017 was $1.5 million . The exercise of options resulted in cash receipts of $7.8 million in fiscal 2017 . The total intrinsic value of options exercised during fiscal 2016 was $2.0 million . The exercise of options resulted in cash receipts of $12.4 million in fiscal 2016 . The total intrinsic value of options exercised during fiscal 2015 was $0.2 million . The exercise of options resulted in cash receipts of $5.1 million in fiscal 2015 .

58


 
 
 
 
 
 



Options Outstanding (as of July 2, 2017)
Fiscal
Year
 
Grant
Date
 
Date
Exercisable
 
Expiration
Date
 
Exercise
Price
 
Options
Outstanding
2013
 
8/14/2012
 
8/14/2015
 
8/31/2017
 
$
18.85

 
21,730

2014
 
8/20/2013
 
8/20/2016
 
8/31/2018
 
$
20.82

 
349,477

2015
 
10/21/2014
 
10/21/2017
 
10/21/2024
 
$
18.83

 
557,170

2016
 
8/18/2015
 
8/18/2018
 
8/18/2025
 
$
19.90

 
501,990

2017
 
8/22/2016
 
8/22/2019
 
8/22/2026
 
$
19.15

 
496,880


Below is a summary of the status of the Company’s nonvested shares as of July 2, 2017 , and changes during the year then ended:
 
 
Deferred Stock / RSU
 
Restricted Stock
 
Stock Options
 
Performance Shares
 
 
Shares
 
Wtd. Avg.
Grant Date
Fair Value
 
Shares
 
Wtd. Avg.
Grant Date
Fair Value
 
Shares
 
Wtd. Avg.
Grant Date
Fair Value
 
Shares
 
Wtd. Avg.
Grant Date
Fair Value
Nonvested shares/units,
July 3, 2016
 
134,215

 
$
19.56

 
650,445

 
$
18.76

 
1,467,020

 
$
4.16

 
342,713

 
$
19.29

Granted
 
60,438

 
19.50

 
160,130

 
19.18

 
496,880

 
3.84

 
5,601

 
21.70

Cancelled
 

 

 
(2,050
)
 
22.33

 

 

 
(14,249
)
 
19.19

Vested
 
(88,679
)
 
19.81

 
(108,890
)
 
14.77

 
(407,860
)
 
5.19

 
(113,684
)
 
19.05

Nonvested shares/units,
July 2, 2017
 
105,974

 
$
19.32

 
699,635

 
$
19.47

 
1,556,040

 
$
3.79

 
220,381

 
$
19.48

As of July 2, 2017 , there was $6.6 million of total unrecognized compensation cost related to nonvested stock-based compensation. That cost is expected to be recognized over a weighted average period of 1.4 years. The total fair value of shares vested during fiscal 2017 and 2016 was $7.4 million and $13.2 million , respectively.
During fiscal years 2017 , 2016 and 2015 , the Company issued 160,130 , 143,760 and 158,280 shares of restricted stock, respectively. For restricted stock issued prior to October 15, 2014, the restricted stock vests on the fifth anniversary date of the grant provided the recipient is still employed by the Company. For restricted stock issued after October 15, 2014, the restricted stock vests on the third anniversary date of the grant provided the recipient is still employed by the Company. The aggregate market value on the date of issue was approximately $3.1 million , $2.9 million and $3.3 million in fiscal 2017 , 2016 and 2015 , respectively, and has been recorded within the Shareholders’ Investment section of the Consolidated Balance Sheets, and is being amortized over the five-year vesting period (issuances prior to October 15, 2014) or the three-year vesting period (issuances after October 15, 2014).
The Company issued 45,307 , 39,049 and 36,975 deferred shares to its directors in lieu of directors' fees in fiscal 2017 , 2016 and 2015 , respectively, under this provision of the plans. Historically, the Company accounted for certain deferred shares issued to directors as liability classified awards, rather than equity classified awards. At January 1, 2017, the liability balance was  $4.8 million . During the third quarter of fiscal 2017, the Company determined that equity classification is appropriate and recorded correcting entries to adjust the deferred shares balance and reclassify it from Accrued Liabilities to Additional Paid-In Capital. The correcting entries did not have a material impact on the Consolidated Financial Statements.
The Company issued 15,131 , 20,177 and 25,181 shares of deferred shares / RSU to its officers and key employees in fiscal 2017 , 2016 and 2015 , respectively. The aggregate market value on the date of grant was approximately $0.3 million , $0.4 million and $0.5 million , respectively. For deferred stock issued prior to October 15, 2014, the deferred stock vests on the fifth anniversary date of the grant provided the recipient is still employed by the Company. For restricted stock units (RSU) issued after October 15, 2014, the restricted stock units vest on the third anniversary date of the grant provided the recipient is still employed by the Company.

59


 
 
 
 
 
 



The Company granted 120,451 and 125,853 performance share units in fiscal 2016 and 2015 , respectively. A maximum of two shares of Briggs & Stratton common stock per performance share unit may be awarded to recipients if certain performance targets are met at the end of the vesting period. The aggregate market value on the date of grant was approximately $2.4 million and $2.4 million in fiscal 2016 and 2015 , respectively. The performance share units vest based on Company-specific performance goals. The performance share units are valued at the Company's share price on the date of grant multiplied by the probability of achieving payout. Expense for each of the awards granted is recognized ratably over the three-year vesting period.
The following table summarizes the components of the Company’s stock-based compensation programs recorded as expense:
 
 
2017
 
2016
 
2015
Stock Options:
 
 
 
 
 
 
Pretax compensation expense
 
$
1,862

 
$
1,763

 
$
1,680

Tax benefit
 
(698
)
 
(661
)
 
(638
)
Stock option expense, net of tax
 
$
1,164

 
$
1,102

 
$
1,042

Restricted Stock:
 
 
 
 
 
 
Pretax compensation expense
 
$
3,291

 
$
2,750

 
$
2,416

Tax benefit
 
(1,234
)
 
(1,031
)
 
(918
)
Restricted stock expense, net of tax
 
$
2,057

 
$
1,719

 
$
1,498

Deferred Stock:
 
 
 
 
 
 
Pretax compensation expense
 
$
585

 
$
102

 
$
339

Tax benefit
 
(220
)
 
(38
)
 
(129
)
Deferred stock expense, net of tax
 
$
365

 
$
64

 
$
210

Performance Shares:
 
 
 
 
 
 
Pretax compensation expense
 
$
(815
)
 
$
494

 
$
1,792

Tax expense (benefit)
 
306

 
(185
)
 
(681
)
Performance Share expense, net of tax
 
$
(509
)
 
$
309

 
$
1,111

Total Stock-Based Compensation:
 
 
 
 
 
 
Pretax compensation expense
 
$
4,923

 
$
5,109

 
$
6,227

Tax benefit
 
(1,846
)
 
(1,915
)
 
(2,366
)
Total stock-based compensation, net of tax
 
$
3,077

 
$
3,194

 
$
3,861


(15) Derivative Instruments & Hedging Activities:
The Company enters into interest rate swaps to manage a portion of its interest rate risk from financing certain dealer and distributor inventories through third party financing sources. The swaps are designated as cash flow hedges and are used to effectively fix the interest payments to a third party financing source, exclusive of lender spreads, ranging from  0.98%  to  1.81% for a notional principal amount of  $95 million  with expiration dates ranging from  May 2019 to July 2021 .
The Company periodically enters into forward foreign currency contracts to hedge the risk from forecasted third party and intercompany sales or payments denominated in foreign currencies. Our primary foreign currency exchange rate exposures are with the Australian Dollar, the Brazilian Real, the Canadian Dollar, the Chinese Renminbi, the Euro, and the Japanese Yen against the U.S. Dollar. These contracts generally do not have a maturity of more than twenty-four months.
The Company uses raw materials that are subject to price volatility. The Company hedges a portion of its exposure to the variability of cash flows associated with commodities used in the manufacturing process by entering into forward purchase contracts or commodity swaps. Derivative contracts designated as cash flow hedges are used by the Company to reduce exposure to variability in cash flows associated with future purchases of natural gas. These contracts generally do not have a maturity of more than thirty-six months.

60


 
 
 
 
 
 



The Company has considered the counterparty credit risk related to all its interest rate, foreign currency, and commodity derivative contracts and does not deem any counterparty credit risk material at this time.
The notional amount of derivative contracts outstanding at the end of the period is indicative of the level of the Company’s derivative activity during the period. As of July 2, 2017 and July 3, 2016 , the Company had the following outstanding derivative contracts (in thousands):
Contract
 
Notional Amount
 
 
 
 
July 2, 2017
 
July 3, 2016
Interest Rate:
 
 
 
 
 
 
        LIBOR Interest Rate (U.S. Dollars)
 
Fixed
 
95,000

 
145,000
Foreign Currency:
 
 
 
 
 
 
Australian Dollar
 
Sell            
 
39,196

 
39,935

Brazilian Real
 
Buy
 
28,137

 
16,436

Canadian Dollar
 
Sell
14,725

 
8,675

Chinese Renminbi
 
Buy
 
74,950

 
171,475

Euro
 
Sell
 
31,240

 
41,730

Japanese Yen
 
Buy
 
570,000

 
587,000

Mexican Peso
 
Sell
 

 
3,500

Commodity:
 
 
 
 
 
 
Natural Gas (Therms)
 
Buy
 
11,307

 
11,771

The location and fair value of derivative instruments reported in the Consolidated Balance Sheets are as follows (in thousands):
Balance Sheet Location
 
Asset (Liability) Fair Value
   
 
July 2, 2017
 
July 3, 2016
Interest rate contracts:
 
 
 
 
Other Long-Term Assets, Net
 
$
1,852

 
$

Accrued Liabilities
 
(23
)
 

Other Long-Term Liabilities
 
(39
)
 
(1,367
)
Foreign currency contracts:
 
 
 
 
Other Current Assets
 
157

 
1,356

Other Long-Term Assets, Net
 
31

 
2

Accrued Liabilities
 
(3,050
)
 
(2,601
)
Other Long-Term Liabilities
 
(68
)
 
(185
)
Commodity contracts:
 
 
 
 
Other Current Assets
 
40

 

Other Long-Term Assets, Net
 
1

 
64

Accrued Liabilities
 
(22
)
 
(190
)
Other Long-Term Liabilities
 
(11
)
 
(16
)
 
 
$
(1,132
)
 
$
(2,937
)

61


 
 
 
 
 
 



The effect of derivatives designated as hedging instruments on the Consolidated Statements of Operations and Comprehensive Income (Loss) is as follows (in thousands):
 
 
Twelve months ended July 2, 2017
 
 
Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on  Derivatives, Net of Taxes (Effective Portion)
 
Classification of Gain (Loss)
 
Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Recognized in Earnings (Ineffective  Portion)
Interest rate contracts
 
$
1,973

 
Net Sales
 
$
(743
)
 
$

Foreign currency contracts – sell
 
(887
)
 
Net Sales
 
1,785

 

Foreign currency contracts – buy
 
297

 
Cost of Goods Sold
 
(2,142
)
 

Commodity contracts
 
93

 
Cost of Goods Sold
 
(258
)
 

 
 
$
1,476

 
 
 
$
(1,358
)
 
$

 
 
 
Twelve months ended July 3, 2016
 
 
Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on  Derivatives, Net of Taxes (Effective Portion)
 
Classification of Gain (Loss)
 
Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Recognized in Earnings (Ineffective  Portion)
Interest rate contracts
 
$
(213
)
 
Net Sales
 
$
(1,113
)
 
$

Foreign currency contracts – sell
 
(2,187
)
 
Net Sales
 
5,554

 

Foreign currency contracts – buy
 
(664
)
 
Cost of Goods Sold
 
2,030

 

Commodity contracts
 
300

 
Cost of Goods Sold
 
(901
)
 

 
 
$
(2,764
)
 
 
 
$
5,570

 
$

 
 
Twelve months ended June 28, 2015
 
 
Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on  Derivatives, Net of Taxes (Effective Portion)
 
Classification of Gain (Loss)
 
Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Recognized in Earnings (Ineffective  Portion)
Interest rate contracts
 
$
79

 
Net Sales
 
$
(1,222
)
 
$

Foreign currency contracts – sell
 
2,086

 
Net Sales
 
12,353

 

Foreign currency contracts – buy
 
228

 
Cost of Goods Sold
 
(1,003
)
 

Commodity contracts
 
(97
)
 
Cost of Goods Sold
 
(521
)
 

 
 
$
2,296

 
 
 
$
9,607

 
$

During the next twelve months, the amount of the July 2, 2017 Accumulated Other Comprehensive Income (Loss) balance that is expected to be reclassified into losses is $1.6 million .

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The Company enters into forward exchange contracts to hedge purchases and sales that are denominated in foreign currencies. The terms of these currency derivatives generally do not exceed twenty-four months, 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 exchange contracts to sell foreign currency, with the Euro as the most significant. These contracts are used to hedge foreign currency collections on sales of inventory. The Company also has forward contracts to purchase foreign currencies. The Company’s foreign currency forward contracts are carried at fair value based on current exchange rates.
 
The Company had the following forward currency contracts outstanding at the end of fiscal 2017 with the notional value shown in local currency and the contract value, fair value, and (gain) loss at fair value shown in U.S. dollars:
Hedge
 
In Thousands
 
 
 
 
 
 
Notional
Value
 
Contract
Value
 
Fair Value
 
(Gain) Loss
at Fair Value
 
Conversion
Currency
 
Latest
Expiration Date
Currency
 
Contract
 
Australian Dollar
 
Sell
 
39,196

 
29,360

 
30,081

 
721

 
U.S.
 
August 2018
Brazilian Real
 
Buy
 
28,137

 
9,140

 
8,799

 
341

 
U.S.
 
June 2018
Canadian Dollar
 
Sell
 
14,725

 
11,044

 
11,386

 
342

 
U.S.
 
May 2018
Chinese Renminbi
 
Buy
 
74,950

 
10,916

 
10,894

 
22

 
U.S.
 
September 2018
Euro
 
Sell
 
31,240

 
34,801

 
36,119

 
1,318

 
U.S.
 
August 2018
Japanese Yen
 
Buy
 
570,000

 
5,271

 
5,085

 
186

 
U.S.
 
May 2018
The Company had the following forward currency contracts outstanding at the end of fiscal 2016 with the notional value shown in local currency and the contract value, fair value, and (gain) loss at fair value shown in U.S. dollars:
Hedge
 
In Thousands
 
 
 
 
 
 
Notional
Value
 
Contract
Value
 
Fair Value
 
(Gain) Loss
at Fair Value
 
Conversion
Currency
 
Latest
Expiration Date
Currency
 
Contract
 
Australian Dollar
 
Sell
 
39,935

 
28,937

 
29,772

 
835

 
U.S.
 
August 2017
Brazilian Real
 
Buy
 
16,436

 
6,391

 
5,335

 
1,056

 
U.S.
 
March 2017
Canadian Dollar
 
Sell
 
8,675

 
6,660

 
6,720

 
60

 
U.S.
 
August 2017
Chinese Renminbi

 
Buy
 
171,475

 
25,874

 
25,402

 
472

 
U.S.
 
September 2017
Euro
 
Sell
 
41,730

 
47,145

 
46,906

 
(239
)
 
U.S.
 
November 2017
Japanese Yen
 
Buy
 
587,000

 
4,998

 
5,749

 
(751
)
 
U.S.
 
January 2017
Mexican Peso
 
Sell
 
3,500

 
195

 
190

 
(5
)
 
U.S.
 
August 2016
The Company continuously evaluates the effectiveness of its hedging program by evaluating its foreign exchange contracts compared to the anticipated underlying transactions. The Company did not have any ineffective currency hedges in fiscal 2017 , 2016 , or 2015 .

63


 
 
 
 
 
 



(16) Employee Benefit Costs:
Retirement Plan and Other Postretirement Benefits
The Company has noncontributory, defined benefit retirement plans and other postretirement benefit plans covering certain employees. In October 2012, the Board of Directors of the Company authorized an amendment to the Company's defined benefit retirement plans for U.S., non-bargaining employees. The amendment freezes accruals for all non-bargaining employees within the pension plan effective January 1, 2014. The Company uses a June 30 measurement date for all of its plans. The following provides a reconciliation of obligations, plan assets and funded status of the plans for the two years indicated (in thousands):
 
 
Pension Benefits
 
Other Postretirement
Benefits
Actuarial Assumptions:
 
2017
 
2016
 
2017
 
2016
Discounted Rate Used to Determine Present Value of Projected Benefit Obligation
 
4.00
%
 
3.75
%
 
3.85
%
 
3.60
%
Weighted Average Expected Long-Term Rate of Return on Plan Assets
 
7.10
%
 
7.25
%
 
n/a

 
n/a

Change in Benefit Obligations:
 
 
 
 
 
 
 
 
Projected Benefit Obligation at Beginning of Year
 
$
1,196,925

 
$
1,186,777

 
$
70,494

 
$
81,290

Service Cost
 
6,757

 
3,532

 
191

 
262

Interest Cost
 
43,357

 
52,110

 
2,382

 
3,170

Plan Settlements
 

 
(47,102
)
 

 

Plan Participant Contributions
 

 

 
1,918

 
1,572

Actuarial (Gain) Loss
 
(55,237
)
 
75,135

 
5,681

 
(1,909
)
Benefits Paid
 
(75,097
)
 
(73,527
)
 
(13,973
)
 
(13,891
)
Projected Benefit Obligation at End of Year
 
$
1,116,705

 
$
1,196,925

 
$
66,693

 
$
70,494

Change in Plan Assets:
 
 
 
 
 
 
 
 
Fair Value of Plan Assets at Beginning of Year
 
$
883,585

 
$
974,926

 
$

 
$

Actual Return on Plan Assets
 
58,837

 
26,059

 

 

Plan Participant Contributions
 

 

 
1,918

 
1,572

Employer Contributions
 
3,281

 
3,229

 
12,055

 
12,319

Benefits Paid
 
(75,097
)
 
(73,527
)
 
(13,973
)
 
(13,891
)
Plan Settlements
 

 
(47,102
)
 

 

Fair Value of Plan Assets at End of Year
 
$
870,606

 
$
883,585

 
$

 
$

Funded Status:
 
 
 
 
 
 
 
 
Plan Assets (Less Than) in Excess of Projected Benefit Obligation
 
$
(246,099
)
 
$
(313,340
)
 
$
(66,693
)
 
$
(70,494
)
Amounts Recognized on the Balance Sheets:
 
 
 
 
 
 
 
 
Accrued Pension Cost
 
$
(242,908
)
 
$
(310,378
)
 
$

 
$

Accrued Wages and Salaries
 
(3,191
)
 
(2,962
)
 

 

Accrued Postretirement Health Care Obligation
 

 

 
(35,132
)
 
(38,441
)
Accrued Liabilities
 

 

 
(9,755
)
 
(9,125
)
Accrued Employee Benefits
 

 

 
(21,806
)
 
(22,928
)
Net Amount Recognized at End of Year
 
$
(246,099
)
 
$
(313,340
)
 
$
(66,693
)
 
$
(70,494
)
Amounts Recognized in Accumulated Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
 
Net Actuarial Loss
 
$
(261,835
)
 
$
(303,714
)
 
$
(14,197
)
 
$
(12,301
)
Prior Service Credit (Cost)
 
(223
)
 
(334
)
 
1,306

 
2,873

Net Amount Recognized at End of Year
 
$
(262,058
)
 
$
(304,048
)
 
$
(12,891
)
 
$
(9,428
)
The accumulated benefit obligation for all defined benefit pension plans was $1,117 million and $1,196 million at July 2, 2017 and July 3, 2016 , respectively.

64


 
 
 
 
 
 



The Company recognizes the funded status of its pension plan in the Consolidated Balance Sheets. The funded status is the difference between the projected benefit obligation and the fair value of its plan assets. The projected benefit obligation is the actuarial present value of all benefits expected to be earned by the employees’ service adjusted for future potential wage increases. Pension plan liabilities are revalued annually, or when an event occurs that requires remeasurement, based on updated assumptions and information about the individuals covered by the plan.
The pension benefit obligation and related pension expense or income are impacted by certain actuarial assumptions, including the discount rate, mortality tables, and the expected rate of return on plan assets. The discount rate is selected using a methodology that matches plan cash flows with a selection of Standard and Poor’s AA or higher rated bonds, resulting in a discount rate that is consistent with a bond yield curve with comparable cash flows. In estimating the expected return on plan assets, the Company considers the historical returns on plan assets, adjusted for forward looking considerations, including inflation assumptions and active management of the plan’s invested assets. These rates are evaluated on an annual basis considering such factors as market interest rates and historical asset performance.
For pension and other postretirement plans, accumulated actuarial gains and losses in excess of a 10 percent corridor are amortized on a straight-line basis from the date recognized over the average remaining life expectancy of all participants. Any prior service costs are amortized on a straight-line basis over the average remaining service of impacted employees at the time the unrecognized prior service cost was established. Approximately half of the costs related to defined pension benefit and other postretirement plans are included in cost of sales; the remainder is included in selling, general and administrative expenses.
The following table summarizes the plans’ income and expense for the three years indicated (in thousands):
 
 
Pension Benefits
 
Other Postretirement Benefits
 
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Components of Net Periodic (Income) Expense:
 
 
 
 
 
 
 
 
 
 
 
 
Service Cost-Benefits Earned During the Year
 
$
6,757

 
$
3,532

 
$
3,432

 
$
191

 
$
262

 
$
295

Interest Cost on Projected Benefit Obligation
 
43,357

 
52,110

 
49,782

 
2,382

 
3,170

 
3,568

Expected Return on Plan Assets
 
(64,427
)
 
(71,202
)
 
(74,638
)
 

 

 

Amortization of:
 
 
 
 
 
 
 
 
 
 
 
 
Prior Service Cost (Credit)
 
180

 
180

 
180

 
(2,654
)
 
(2,659
)
 
(2,758
)
Actuarial Loss
 
16,957

 
13,007

 
13,262

 
2,796

 
3,234

 
4,316

Plan Settlements
 

 
20,245

 

 

 

 

Net Periodic Expense (Income)
 
$
2,824

 
$
17,872

 
$
(7,982
)
 
$
2,715

 
$
4,007

 
$
5,421

Significant assumptions used in determining net periodic expense for the fiscal years indicated are as follows:
 
 
Pension Benefits
 
Other Postretirement Benefits
 
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Discount Rate
 
3.75%
 
4.55%
 
4.40%
 
3.60%
 
4.20%
 
3.95%
Expected Return on Plan Assets
 
7.25%
 
7.50%
 
8.00%
 
n/a
 
n/a
 
n/a
Compensation Increase Rate
 
n/a
 
n/a
 
n/a
 
n/a
 
n/a
 
n/a
The amounts in Accumulated Other Comprehensive Income (Loss) that are expected to be recognized as components of net periodic (income) expense during the next fiscal year are as follows (in thousands):
 
 
Pension
Plans
 
Other
Postretirement
Plans
Prior Service Cost (Credit)
 
$
179

 
$
(1,434
)
Net Actuarial Loss
 
15,178

 
3,482

The “Other Postretirement Benefit” plans are unfunded.

65


 
 
 
 
 
 



On May 14, 2010, the Company notified retirees and certain retirement eligible employees of various amendments to the Company-sponsored retiree medical plans intended to better align the plans offered to both hourly and salaried retirees. On August 16, 2010, a putative class of retirees who retired prior to August 1, 2006 and the United Steel Workers filed a complaint in the U.S. District Court for the Eastern District of Wisconsin (Merrill, Weber, Carpenter, et al.; United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO/CLC v. Briggs & Stratton Corporation; Group Insurance Plan of Briggs & Stratton Corporation; and Does 1 through 20, Docket No. 10-C-0700), contesting the Company's right to make these changes. In mid-December 2015, the parties agreed in principle to settle this case for an aggregate payment of $3.95 million covering both claimed benefits and plaintiffs’ attorneys fees, which resulted in a contribution of $1.975 million from the Company and $1.975 million from a third party insurance provider. The Company recorded a total charge of $1.975 million as Engineering, Selling, General and Administrative Expense on the Condensed Consolidated Statements of Operations in the second quarter of fiscal 2016 related to this matter. The parties filed a signed Stipulation of Settlement with the court on April 12, 2016 and the court held a hearing on the fairness, reasonableness and adequacy of the terms and conditions of the settlement and on the fee petition of the plaintiffs' counsel on August 11, 2016. The court approved the settlement following that hearing.
For measurement purposes a 6.1% annual rate of increase in the per capita cost of covered health care claims was assumed for the Company for the fiscal year 2017 decreasing gradually to 4.5% for the fiscal year 2038 . The health care cost trend rate assumptions have a significant effect on the amounts reported. An increase of one percentage point would increase the accumulated postretirement benefit by $1.2 million and would increase the service and interest cost by $40 thousand for fiscal 2017 . A corresponding decrease of one percentage point would decrease the accumulated postretirement benefit by $1.2 million and decrease the service and interest cost by $40 thousand for the fiscal year 2017 .
In the third quarter of fiscal 2016, the Company initiated a limited offer for former employees with vested benefits to elect to receive a lump sum payout of their benefits. This program reduced the size of the pension plan while allowing former employees who accepted the offer to control the investment of their retirement funds. The Company completed this program during the fourth quarter of fiscal 2016. As a result of this program, the Company recognized pension settlement expense of $20.2 million ( $13.2 million after tax) during fiscal 2016.
Plan Assets
A Board of Directors appointed Investment Committee (“Committee”) manages the investment of the pension plan assets. The Committee has established and operates under an Investment Policy. It determines the asset allocation and target ranges based upon periodic asset/liability studies and capital market projections. The Committee retains external investment managers to invest the assets. The Investment Policy prohibits certain investment transactions, such as lettered stock, commodity contracts, margin transactions and short selling, unless the Committee gives prior approval.
The Company’s pension plan’s current target and asset allocations at July 2, 2017 and July 3, 2016 , by asset category are as follows:
 
 
 
 
Plan Assets at Year-end
     Asset Category
 
Target %
 
2017
 
2016
Domestic Equities
 
23%-30%
 
23%
 
23%
International Equities
 
15%-20%
 
16%
 
14%
Alternatives
 
0%-10%
 
8%
 
10%
Fixed Income
 
49%-53%
 
50%
 
50%
Cash Equivalents
 
0%-2%
 
3%
 
3%
 
 
 
 
100%
 
100%
The plan’s investment strategy is based on an expectation that, over time, equity securities will provide higher total returns than debt securities, but with greater risk. The plan primarily minimizes the risk of large losses through diversification of investments by asset class, by investing in different types of styles within the classes and by using a number of different managers. The Committee monitors the asset allocation and investment performance monthly, with a more comprehensive quarterly review with its consultant. Beginning in fiscal

66


 
 
 
 
 
 



2014, the Committee revised the target asset allocation to shift to more fixed income and less alternative investments as a percentage of total plan assets. This revision to the target asset allocation was made to better match future cash flows from plan assets with the future cash flows of the projected benefit obligation.
The plan’s expected return on assets is based on management’s and the Committee’s expectations of long-term average rates of return to be achieved by the plan’s investments. These expectations are based on the plan’s historical returns and expected returns for the asset classes in which the plan is invested.
The Company has adopted the fair value provisions for the plan assets of its pension plans. The Company categorizes plan assets within a three level fair value hierarchy, as described in Note 6.
Investments stated at fair value as determined by quoted market prices (Level 1) include:
Short-Term Investments:  Short-Term Investments include cash and money market mutual funds that invest in short-term securities and are valued based on cost, which approximates fair value.
Equity Securities:  U.S. Common Stocks and International Mutual Funds are valued at the last reported sales price on the last business day of the fiscal year.
Investments stated at estimated fair value using significant observable inputs (Level 2) include:
Fixed Income Securities:  Fixed Income Securities include investments in domestic bond collective trusts that are not traded publicly, but the underlying assets held in these funds are traded on active markets and the prices are readily observable. The investment in the trusts is valued at the last quoted price on the last business day of the fiscal year. Fixed Income Securities also include corporate and government bonds that are valued using a bid evaluation process with data provided by independent pricing sources.
Investments stated at estimated fair value using net asset value per share as the practical expedient include:
Other Investments:  Other Investments include investments in limited partnerships and are valued at estimated fair value, as determined with the assistance of each respective limited partnership, based on the net asset value of the investment as of the balance sheet date, which is subject to judgment.
The fair value of the major categories of the pension plans’ investments are presented below (in thousands):
 
 
 
 
July 2, 2017
     Category
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Short-Term Investments:
 
 
 
$
25,563

 
$
25,563

 
$

 
$

Fixed Income Securities:
 
 
 
433,372

 

 
433,372

 

Equity Securities:
 
 
 
 
 
 
 
 
 
 
U.S. common stocks
 
 
 
204,736

 
204,736

 

 

International mutual funds
 
 
 
141,565

 
141,565

 

 

Other Investments:
 
 
 
 
 
 
 
 
 
 
Venture capital funds
 
(A) (E)
 
31,060

 

 

 

Debt funds
 
(B) (E)
 
5,469

 

 

 

Real estate funds
 
(C) (E)
 
1,621

 

 

 

Private equity funds
 
(D) (E)
 
27,220

 

 

 

Fair Value of Plan Assets at End of Year
 
 
 
$
870,606

 
$
371,864

 
$
433,372

 
$


67


 
 
 
 
 
 



 
 
 
 
July 3, 2016
     Category
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Short-Term Investments:
 
 
 
$
26,558

 
$
26,558

 
$

 
$

Fixed Income Securities:
 
 
 
441,869

 

 
441,869

 

Equity Securities:
 
 
 
 
 
 
 
 
 
 
U.S. common stocks
 
 
 
205,343

 
205,343

 

 

International mutual funds
 
 
 
126,589

 
126,589

 

 

Other Investments:
 
 
 
 
 
 
 
 
 
 
Venture capital funds
 
(A) (E)
 
40,470

 

 

 

Debt funds
 
(B) (E)
 
7,227

 

 

 

Real estate funds
 
(C) (E)
 
2,608

 

 

 

Private equity funds
 
(D) (E)
 
32,921

 

 

 

Fair Value of Plan Assets at End of Year
 
 
 
$
883,585

 
$
358,490

 
$
441,869

 
$

 
(A)
This category invests in a combination of public and private securities of companies in financial distress, spin-offs, or new projects focused on technology and manufacturing.
(B)
This fund primarily invests in the debt of various entities including corporations and governments in emerging markets, mezzanine financing, or entities that are undergoing, are considered likely to undergo or have undergone a reorganization.
(C)
This category invests primarily in real estate related investments, including real estate properties, securities of real estate companies and other companies with significant real estate assets as well as real estate related debt and equity securities.
(D)
Primarily represents investments in all sizes of mostly privately held operating companies in the following core industry sectors: healthcare, energy, financial services, technology-media-telecommunications and industrial and consumer.
(E)
Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.

Contributions
During fiscal 2017, the Company made no cash contributions to the qualified pension plan. Based upon current regulations and actuarial studies the Company is required to make no minimum contributions to the qualified pension plan in fiscal 2018 but the Company may choose to make discretionary contributions. The Company does anticipate making a voluntary contribution to the qualified pension plan of $20 million to $30 million in fiscal 2018. The Company may be required to make further required contributions in future years or the future expected funding requirements may change depending on a variety of factors including the actual return on plan assets, the funded status of the plan in future periods, and changes in actuarial assumptions or regulations.
Estimated Future Benefit Payments
Projected benefit payments from the plans as of July 2, 2017 are estimated as follows (in thousands):
 
 
Pension Benefits
 
Other Postretirement Benefits
Year Ending
 
Qualified
 
Non-Qualified
 
Retiree
Medical
 
Retiree Life
2018
 
$
72,837

 
$
3,191

 
$
8,338

 
$
1,417

2019
 
72,795

 
3,356

 
6,832

 
1,428

2020
 
72,427

 
3,396

 
5,737

 
1,437

2021
 
72,024

 
3,451

 
4,737

 
1,443

2022
 
71,413

 
3,544

 
4,002

 
1,446

2023-2026
 
340,133

 
18,333

 
10,894

 
7,154


68


 
 
 
 
 
 



Defined Contribution Plans
Employees of the Company may participate in a defined contribution savings plan that allows participants to contribute a portion of their earnings in accordance with plan specifications. A maximum of 1.5% to 4.0% of each participant’s salary, depending upon the participant’s group, is matched by the Company. Additionally, all domestic non-bargaining employees receive a Company non-elective contribution of 3.0% of the employee’s pay.
The Company contributions totaled $14.5 million in 2017 , $14.5 million in 2016 and $14.2 million in 2015 .
Postemployment Benefits
The Company accrues the expected cost of postemployment benefits over the years that the employees render service. These benefits apply only to employees who become disabled while actively employed, or who terminate with at least thirty years of service and retire prior to age sixty-five. The items include disability payments, life insurance and medical benefits. These amounts were discounted using a 3.85% interest rate for fiscal 2017 and 3.60% interest rate for fiscal 2016 . Amounts are included in Accrued Employee Benefits in the Consolidated Balance Sheets.
(17) Restructuring Actions:
In fiscal 2015, the Company announced and began implementing restructuring actions to narrow its assortment of lower-priced Snapper consumer lawn and garden equipment and consolidate its Products segment manufacturing facilities in order to further reduce costs. The Company continues to focus on premium residential products through its Snapper and Simplicity brands and commercial products through its Snapper Pro and Ferris brands. The Company closed its McDonough, Georgia location in the fourth quarter of fiscal 2015 and consolidated production into existing facilities. Production of pressure washers, riding mowers, and snow throwers was moved to the Company's Wauwatosa, Wisconsin facility. At July 2, 2017 and July 3, 2016, the Company had $1.4 million and $2.5 million , respectively, classified as assets held for sale, which is included in Prepaid Expenses and Other Current Assets within the Consolidated Balance Sheets, related to the McDonough location. These changes affected approximately 475 employees during fiscal 2015. The Company's dealer product offerings under the Snapper Pro, Simplicity and Ferris brands as well as sales of Snapper and Murray branded lawn and garden products at Walmart were unaffected by these actions.

As of July 3, 2016, the restructuring actions announced in fiscal 2015 were completed as planned. As of July 3, 2016, the cumulative pre-tax restructuring costs associated with the 2015 restructuring actions were $36.1 million , which represented the total cost expected to be incurred under these restructuring actions.

During the first quarter of fiscal 2016, the Company implemented restructuring actions within the Engines segment. These actions, which were completed in the first quarter of fiscal 2016, included a headcount reduction at its plant in Chongqing, China to offset lower production of engines used on snow throwers as well as changes in salaried personnel in the United States. The Engines segment recorded pre-tax charges of  $1.4 million during the first quarter of fiscal 2016, which represented the cumulative pre-tax restructuring costs and the total costs expected to be incurred under these restructuring actions.

The Company reports restructuring charges associated with manufacturing and related initiatives as costs of goods sold within the Condensed Consolidated Statements of Operations. Restructuring charges reflected as costs of goods sold include, but are not limited to, termination and related costs associated with manufacturing employees, asset impairments and accelerated depreciation relating to manufacturing initiatives, and other costs directly related to the restructuring initiatives implemented. The Company reports all other non-manufacturing related restructuring charges as engineering, selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.

The Company recorded pre-tax charges of $10.2 million ( $6.7 million after tax or $0.15 per diluted share) during fiscal 2016 related to restructuring actions. The Engines segment recorded $1.4 million of pre-tax restructuring charges during fiscal 2016. The Products segment recorded $8.8 million of pre-tax restructuring charges during fiscal 2016 .


69


 
 
 
 
 
 



The following is a rollforward of the restructuring reserve (included in Accrued Liabilities within the Consolidated Condensed Balance Sheets) attributable to all Engines segment restructuring activities for fiscal 2016 and 2017 (in thousands):
Engines segment
 
Termination Benefits
 
Other Costs
 
Total
Reserve Balance at June 28, 2015
 
$

 
$

 
$

Provisions
 
1,354

 

 
1,354

Cash Expenditures
 
(877
)
 

 
(877
)
Other Adjustments
 
(182
)
 

 
(182
)
Reserve Balance at July 3, 2016
 
$
295

 
$

 
$
295

Cash Expenditures
 
(295
)
 

 
(295
)
Reserve Balance at July 2, 2017
 
$

 
$

 
$


The following is a rollforward of the restructuring reserve (included in Accrued Liabilities within the Consolidated Condensed Balance Sheets) attributable to all Products segment restructuring activities for fiscal 2016 and 2017 (in thousands):
Products segment
 
Termination Benefits
 
Other Costs
 
Total
Reserve Balance at June 28, 2015
 
$
2,107

 
$

 
$
2,107

Provisions
 
300

 
8,541

 
8,841

Cash Expenditures
 
(2,101
)
 
(4,820
)
 
(6,921
)
Other Adjustments (1)
 

 
(3,721
)
 
(3,721
)
Reserve Balance at July 3, 2016
 
$
306

 
$

 
$
306

Cash Expenditures
 
(306
)
 

 
(306
)
Reserve Balance at July 2, 2017
 
$

 
$

 
$

(1) Other adjustments in fiscal 2016 includes $3.7 million of asset impairments.
(18) Equity:
Share Repurchases
On August 13, 2014, the Board of Directors of the Company authorized up to $50 million  in funds associated with the common share repurchase program with an expiration date of June 30, 2016 . On April 21, 2016, the Board of Directors authorized up to an additional  $50 million  in funds for use in the common share repurchase program with an expiration date of June 29, 2018 . As of July 2, 2017 , the total remaining authorization was approximately $30.5 million . Share repurchases, among other things, allow the Company to offset any potentially dilutive impacts of share-based compensation. The common share repurchase program authorizes the purchase of shares of the Company's common stock on the open market or in private transactions from time to time, depending on market conditions and certain governing debt covenants. In fiscal 2017 , the Company repurchased 995,655 shares on the open market at a total cost of $19.7 million , or $19.77 per share. There were 2,034,146 shares repurchased in fiscal 2016 at a total cost of $37.4 million , or $18.41 per share.

70


Report of Independent Registered Public Accounting Firm
 
 
 
 




To the Board of Directors and Shareholders of Briggs & Stratton Corporation
Wauwatosa, Wisconsin

We have audited the accompanying consolidated balance sheets of Briggs & Stratton Corporation and subsidiaries (the "Company") as of July 2, 2017 and July 3, 2016, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ investment, and cash flows for each of the three years in the period ended July 2, 2017. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in all material respects, the financial position of Briggs & Stratton Corporation and subsidiaries as of July 2, 2017 and July 3, 2016, and the results of their operations and their cash flows for each of the three years in the period ended July 2, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of July 2, 2017, based on the criteria established in Internal Control - Integrated Framework (2013)  issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 29, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
August 29, 2017
























71


Report of Independent Registered Public Accounting Firm
 
 
 
 




To the Board of Directors and Shareholders of Briggs & Stratton Corporation
Wauwatosa, Wisconsin

We have audited the internal control over financial reporting of Briggs & Stratton Corporation and subsidiaries (the "Company") as of July 2, 2017 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 2, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule listed in the Index at Item 15(a)(2) as of and for the year ended July 2, 2017 of the Company and our report dated August 29, 2017 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
August 29, 2017


72


Quarterly Financial Data, Dividend and Market Information (Unaudited)
 
 
 





 
 
In Thousands
Quarter Ended
 
Net Sales
 
Gross Profit
 
Net Income (Loss)
Fiscal 2017
 
 
 
 
 
 
September
 
$
286,797

 
$
52,521

 
$
(14,148
)
December
 
428,236

 
95,406

 
15,251

March
 
596,965

 
134,771

 
35,819

June
 
474,105

 
101,130

 
19,727

Total (5)
 
$
1,786,103

 
$
383,829

 
$
56,650

Fiscal 2016
 
 
 
 
 
 
September (1)
 
$
289,458

 
$
49,712

 
$
(18,171
)
December (2)
 
413,379

 
91,696

 
12,560

March (3)
 
603,750

 
127,095

 
26,823

June (4)
 
502,191

 
93,952

 
5,349

Total (5)
 
$
1,808,778

 
$
362,455

 
$
26,561

 
 
Per Share of Common Stock
 
 
 
 
 
 
Market Price Range on 
New York Stock Exchange
Quarter Ended
 
Net Income
(Loss)
 
Dividends
Declared
 
High
 
Low
Fiscal 2017
 
 
 
 
 
 
 
 
September
 
$
(0.34
)
 
$
0.14

 
$
23.39

 
$
17.98

December
 
0.35

 
0.14

 
23.21

 
17.90

March
 
0.83

 
0.14

 
23.73

 
20.39

June
 
0.46

 
0.14

 
25.92

 
20.76

Total (5)
 
$
1.31

 
$
0.56

 
 
 
 
Fiscal 2016
 
 
 
 
 
 
 
 
September (1)
 
$
(0.42
)
 
$
0.135

 
$
20.59

 
$
17.72

December (2)
 
0.28

 
0.135

 
21.24

 
16.08

March (3)
 
0.62

 
0.135

 
24.48

 
15.47

June (4)
 
0.12

 
0.135

 
24.19

 
19.64

Total (5)
 
$
0.60

 
$
0.54

 
 
 
 
The number of shareholders of record of Briggs & Stratton Corporation Common Stock on July 2, 2017 was 2,431.
(1) The first quarter of fiscal 2016 included restructuring charges of $3.4 million ($2.2 million after tax or $0.05 per diluted share), litigation charges of $0.9 million ($0.6 million after tax or $0.01 per diluted share), and acquisition-related charges of $0.3 million ($0.2 million after tax or $0.01 per diluted share).
(2) The second quarter of fiscal 2016 included restructuring charges of $3.0 million ($2.0 million after tax or $0.05 per diluted share), litigation charges of $2.0 million ($1.3 million after tax or $0.03 per diluted share), and a tax benefit of $0.7 million or ($0.02) per diluted share) for the reinstatement of a deferred tax asset related to an investment in marketable securities.
(3) The third quarter of fiscal 2016 included restructuring charges of $0.7 million ($0.5 million after tax or $0.01 per diluted share) and a goodwill impairment charge of $7.7 million, which is not deductible for income tax purposes ($7.7 million after tax or $0.18 per diluted share).
(4) The fourth quarter of fiscal 2016 included restructuring charges of $3.1 million ($2.0 million after tax or $0.05 per diluted share), tradename impairment charges of $2.7 million ($1.8 million after tax or $0.04 per diluted share), pension settlement charges of $20.2 million ($13.2 million after tax or $0.31 per diluted share, and a gain on sale of investment in marketable securities of $3.3 million ($2.2 million after tax or ($0.05) per diluted share).
(5) Amounts may not total due to rounding.

73





ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control-Integrated Framework ( 2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management has concluded that, as of the end of the period covered by this report, the Company’s internal control over financial reporting was effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Deloitte & Touche LLP, an independent registered public accounting firm, has audited the Company’s consolidated financial statements and the effectiveness of internal control over financial reporting as of July 2, 2017 , as stated in their report which is included herein.
Changes in Internal Control Over Financial Reporting
There has not been any change in the Company’s internal control over financial reporting during the fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company anticipates implementing an upgrade to its global enterprise resource planning, or ERP, system at the end of fiscal 2018. This ERP system upgrade was designed to enhance the overall system of internal control over financial reporting through further automation and integration of business processes and was not implemented in response to any identified deficiency or material weakness in the Company’s internal control over financial reporting. This implementation is significant in scale and complexity and could significantly affect certain accounting functions.
ITEM 9B.
OTHER INFORMATION
None.

74





PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(a)
Executive Officers. Reference is made to “Executive Officers of Registrant” in Part I after Item 4.
(b)
Directors. The information required by this Item is in Briggs & Stratton’s definitive Proxy Statement, prepared for the 2017 Annual Meeting of Shareholders, in Section I. Shareholder Votes under the caption “Item 1: Election of Directors” and in Section II. Corporate Governance under the caption “General Information About Incumbent Directors”, and is incorporated herein by reference.
(c)
Section 16 Compliance. The information required by this Item is in Briggs & Stratton’s definitive Proxy Statement, prepared for the 2017 Annual Meeting of Shareholders, in Section IV. Other Matters under the caption “Section 16(a) Beneficial Ownership Reporting Compliance”, and is incorporated herein by reference.
(d)
Audit Committee Financial Expert. The information required by this Item is in Briggs & Stratton’s definitive Proxy Statement, prepared for the 2017 Annual Meeting of Shareholders, in Section II. Corporate Governance under the caption “Other Corporate Governance Matters – Board Committees – Audit Committee”, and is incorporated herein by reference.
(e)
Identification of Audit Committee. The information required by this Item is in Briggs & Stratton’s definitive Proxy Statement, prepared for the 2017 Annual Meeting of Shareholders, in Section II. Corporate Governance under the caption “Other Corporate Governance Matters – Board Committees – Audit Committee”, and is incorporated herein by reference.
(f)
Code of Ethics. Briggs & Stratton has adopted a written code of ethics, referred to as the Briggs & Stratton Integrity Manual, which is applicable to all directors, officers and employees and includes provisions related to accounting and financial matters applicable to the Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer and Controller. The Briggs & Stratton Integrity Manual is available on the Company’s corporate website at www.basco.com. If the Company makes any substantive amendment to, or grants any waiver of, the code of ethics for any director or officer, Briggs & Stratton will disclose the nature of such amendment or waiver on its corporate website or in a Current Report on Form 8-K.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is in Briggs & Stratton’s definitive Proxy Statement, prepared for the 2017 Annual Meeting of Shareholders, in Section III. Executive Compensation under the captions “Compensation Committee Report”, “Compensation Discussion and Analysis”, “Compensation Tables”, “Agreements with Executives” and “Change in Control Payments” and in Section II. Corporate Governance under the caption “Director Compensation”, and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is in Briggs & Stratton’s definitive Proxy Statement, prepared for the 2017 Annual Meeting of Shareholders, in Section IV. Other Matters under the captions “Security Ownership of Certain Beneficial Owners”, “Security Ownership of Directors and Executive Officers” and “Equity Compensation Plan Information”, and is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is in Briggs & Stratton’s definitive Proxy Statement, prepared for the 2017 Annual Meeting of Shareholders, in Section II. Corporate Governance under the captions “Other

75





Corporate Governance Matters - Director Independence”, “Other Corporate Governance Matters - Board Oversight of Risk” and “Other Corporate Governance Matters - Board Committees - Audit Committee”, and is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is in Briggs & Stratton’s definitive Proxy Statement, prepared for the 2017 Annual Meeting of Shareholders, in Section IV. Other Matters under the caption “Independent Auditors’ Fees” and in Section II. Corporate Governance under the caption “Other Corporate Governance Matters - Board Committees - Audit Committee”, and is incorporated herein by reference.

76





PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1.
Financial Statements
The following financial statements are included under the caption “Financial Statements and Supplementary Data" in Part II, Item 8 and are incorporated herein by reference:

Consolidated Balance Sheets, July 2, 2017 and July 3, 2016

For the Fiscal Years Ended July 2, 2017 July 3, 2016 and June 28, 2015 :
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders’ Investment
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firm
2.
Financial Statement Schedules
Schedule II – Valuation and Qualifying Accounts
All other financial statement schedules provided for in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions.
3.
Exhibits
Refer to the Exhibit Index 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.

BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
FOR FISCAL YEARS ENDED JULY 2, 2017 , JULY 3, 2016 AND JUNE 28, 2015
Reserve for
Doubtful Accounts
Receivable
 
Balance
Beginning
of Year
 
Additions
Charged
to Earnings
 
Charges to
Reserve, Net
 
Balance
End of
Year
2017
 
$2,806,000
 
$509,000
 
$(670,000)
 
$2,645,000
2016
 
3,463,000
 
1,293,000
 
(1,950,000)
 
2,806,000
2015
 
6,352,000
 
815,000
 
(3,704,000)
 
3,463,000
Deferred Tax
Assets Valuation
Allowance
 
Balance
Beginning
of Year
 
Allowance
Established for
Net Operating
and Other Loss
Carryforwards
 
Allowance
Reversed for
Loss Carryforwards
Utilized and
Other Adjustments
 
Balance
End of
Year
2017
 
$19,371,000
 
$4,450,000
 
$(360,000)
 
$23,461,000
2016
 
17,198,000
 
3,257,000
 
(1,084,000)
 
19,371,000
2015
 
15,241,000
 
2,361,000
 
(404,000)
 
17,198,000


77





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/ Mark A. Schwertfeger
 
 
 
 
Mark A. Schwertfeger
August 29, 2017
 
 
 
Senior Vice President and
 
 
 
 
Chief Financial Officer
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 dates indicated.*
 
 
 
 
 
 
/s/ Todd J. Teske
 
 
 
/s/ Patricia L. Kampling
Todd J. Teske
 
 
 
Patricia L. Kampling
Chairman, President and Chief Executive
 
 
 
Director
Officer and Director (Principal Executive Officer)
 
 
 
 
 
 
 
/s/ Mark A. Schwertfeger

 
 
 
/s/ Keith R. McLoughlin
Mark A. Schwertfeger
 
 
 
Keith R. McLoughlin
Senior Vice President and Chief Financial
 
 
 
Director
Officer (Principal Financial Officer and
 
 
 
 
Principal Accounting Officer)
 
 
 
 
 
 
 
/s/ Brian C. Walker
 
 
 
/s/ Frank M. Jaehnert
Brian C. Walker
 
 
 
Frank M. Jaehnert
Director
 
 
 
Director
 
 
 
/s/ Henrik C. Slipsager
 
 
 
/s/ Charles I. Story
Henrik C. Slipsager
 
 
 
Charles I. Story
Director
 
 
 
Director
 
 
 
/s/ James E. Humphrey
 
 
 
/s/ Jeffrey R. Hennion
James E. Humphrey
 
 
 
Jeffrey R. Hennion
Director
 
 
 
Director
 
 
 
 
 
 
 
*Each signature affixed as of
 
 
 
 
August 29, 2017


78





BRIGGS & STRATTON CORPORATION
(Commission File No. 1-1370)
EXHIBIT INDEX
2017 ANNUAL REPORT ON FORM 10-K
No.
 
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.)
 
 
3.1(a)
 
Amendment to Articles of Incorporation.
 
 
(Filed as Exhibit 3.1 to the Company’s Report on Form 10-Q for the quarter ended September 26, 2004 and incorporated by reference herein.)
 
 
3.2
 
Bylaws, as amended to April 21, 2016.
 
 
(Filed as Exhibit 3.2 to the Company’s Report on Form 10-K for the fiscal year ended July 3, 2016 and incorporated by reference herein.)
 
 
4.1
 
Indenture, dated December 20, 2010, between Briggs & Stratton Corporation and Wells Fargo Bank, National Association, as Trustee.
 
 
(Filed as Exhibit 4.1 to the Company’s Report on Form 8-K/A, dated December 15, 2010 and incorporated by reference herein.)
 
 
4.2
 
First Supplemental Indenture, dated December 20, 2010, among Briggs & Stratton Corporation, Briggs & Stratton Power Products Group, LLC and Wells Fargo Bank, National Association, as Trustee.
 
 
(Filed as Exhibit 4.2 to the Company’s Report on Form 8-K/A, dated December 15, 2010 and incorporated by reference herein.)
 
 
10.1*
 
Amended and Restated Supplemental Executive Retirement Plan.
 
 
(Filed as Exhibit 10.2 to the Company’s Report on Form 10-Q for the quarter ended April 1, 2012 and incorporated by reference herein.)
 
 
 
10.1(a)*
 
Amendment to the Amended and Restated Supplemental Executive Retirement Plan.
 
 
(Filed as Exhibit 10.2 to the Company's Current Report on Form 8-K dated December 14, 2012 and incorporated herein by reference.)
 
 
10.2*
 
Annual Incentive Plan
 
 
(Filed as Exhibit 10.2 to the Company’s Report on Form 10-Q for the quarter ended March 27, 2016 and incorporated by reference herein.)
 
 
10.3*
 
Form of Officer Change of Control Employment Agreement for officers appointed on or before June 28, 2009.
 
 
(Filed as Exhibit 10.2 to the Company’s Report on Form 8-K dated December 8, 2008 and incorporated herein by reference.)
 
 
 
10.3(a)*
 
Amended and Restated Form of Change of Control Employment Agreement for new officers appointed between June 29, 2009 and October 14, 2009.
 
 
(Filed as Exhibit 10.3 to the Company’s Report on Form 10-K for fiscal year ended June 28, 2009 and incorporated by reference herein.)
 
 
10.3(b)*
 
Amended and Restated Form of Change of Control Employment Agreement for new officers of the Company appointed after October 14, 2009.
 
 
(Filed as Exhibit 10.1 to the Company’s Report on Form 8-K dated October 14, 2009 and incorporated by reference herein.)
 
 
 
10.4*
 
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.)
 
 
 

79





No.
 
Document Description
10.4(a)*
 
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.)
 
 
10.4(b)*
 
Amendment to Trust Agreement with an independent trustee to provide payments under various compensation agreements with Company employees.
 
 
(Filed as Exhibit 10.4(b) to the Company’s Annual Report on Form 10-K for fiscal year ended July 3, 2011 and incorporated by reference herein.)
 
 
10.5*
 
Briggs & Stratton Corporation 2014 Omnibus Incentive Plan.
 
 
(Filed as Exhibit B to the Company’s 2014 Annual Meeting Proxy Statement and incorporated herein by reference.)
 
 
10.5(a)*
 
Amendment to Briggs & Stratton Corporation 2014 Omnibus Incentive Plan.
 
 
(Filed as Exhibit 10.5(a) to the Company’s Report on Form 10-K for fiscal year ended July 3, 2016 and incorporated by reference herein.)
 
 
 
10.5(a)(1)*
 
Amendment to Briggs & Stratton Corporation 2014 Omnibus Incentive Plan.
 
 
(Filed herewith)
 
 
 
10.5(a)(2)*
 
Form of Stock Option Agreement under the 2014 Omnibus Incentive Plan for awards granted prior to August 22, 2016.
 
 
(Filed as Exhibit 10.2 to the Company’s Report on Form 10-Q for the quarter ended September 28, 2014 and incorporated by reference herein.)
 
 
10.5(b)*
 
Form of Restricted Stock Award Agreement under the 2014 Omnibus Incentive Plan for awards granted prior to August 22, 2016.
 
 
(Filed as Exhibit 10.3 to the Company’s Report on Form 10-Q for the quarter ended September 28, 2014 and incorporated by reference herein.)
 
 
10.5(c)*
 
Form of Restricted Stock Unit Award Agreement under the 2014 Omnibus Incentive Plan for awards granted prior to August 22, 2016.
 
 
(Filed as Exhibit 10.4 to the Company’s Report on Form 10-Q for the quarter ended September 28, 2014 and incorporated by reference herein.)
 
 
10.5(d)*
 
Form of Performance Share Unit Award Agreement under the 2014 Omnibus Incentive Plan for awards granted prior to August 22, 2016.
 
 
(Filed as Exhibit 10.5 to the Company’s Report on Form 10-Q for the quarter ended September 28, 2014 and incorporated by reference herein.)
 
 
 
10.5(e)*
 
Briggs & Stratton Corporation Officer Long Term Incentive Award Program.
 
 
(Filed as Exhibit 10.5(e) to the Company’s Report on Form 10-K for fiscal year ended July 3, 2016 and incorporated by reference herein.)
 
 
 
10.5(f)*
 
Form of Stock Option Agreement under the 2014 Omnibus Incentive Plan for awards to be granted on or after August 22, 2016.
 
 
(Filed as Exhibit 10.5(f) to the Company’s Report on Form 10-K for fiscal year ended July 3, 2016 and incorporated by reference herein.)
 
 
 
10.5(g)*
 
Form of Restricted Stock Unit Award Agreement under the 2014 Omnibus Incentive Plan for awards to be granted on or after August 22, 2016.
 
 
(Filed as Exhibit 10.5(g) to the Company’s Report on Form 10-K for fiscal year ended July 3, 2016 and incorporated by reference herein.)
 
 
 
10.5(h)*
 
Form of Restricted Stock Award Agreement under the 2014 Omnibus Incentive Plan for awards to be granted on or after August 22, 2016.
 
 
(Filed as Exhibit 10.5(h) to the Company’s Report on Form 10-K for fiscal year ended July 3, 2016 and incorporated by reference herein.)
 
 
 

80





No.
 
Document Description
10.5(i)*
 
Form of Performance Unit Award Agreement under the 2014 Omnibus Incentive Plan for awards to be granted on or after August 22, 2016.
 
 
(Filed as Exhibit 10.5(i) to the Company’s Report on Form 10-K for fiscal year ended July 3, 2016 and incorporated by reference herein.)
 
 
 
10.5(j)*
 
Form of Performance Share Unit Award Agreement under the 2014 Omnibus Incentive Plan for awards to be granted on or after August 22, 2016.
 
 
(Filed as Exhibit 10.5(j) to the Company’s Report on Form 10-K for fiscal year ended July 3, 2016 and incorporated by reference herein.)
 
 
 
10.6*
 
Amended and Restated Briggs & Stratton Corporation Incentive Compensation Plan.
 
 
(Filed as Exhibit 10.5(c) to the Company’s Report on Form 10-K for fiscal year ended June 27, 2010 and incorporated by reference herein.)
 
 
10.6(a)*
 
Amended Form of Stock Option Agreement under the Incentive Compensation Plan.
 
 
(Filed as Exhibit 10.6 (d) to the Company’s Report on Form 10-K for year ended June 28, 2009 and incorporated herein by reference.)
 
 
10.6(b)*
 
Amended Form of Restricted Stock Award Agreement under the Premium Option and Stock Award Program.
 
 
(Filed as Exhibit 10.6 (b) to the Company’s Report on Form 10-K for fiscal year ended June 27, 2010 and incorporated by reference herein.)
 
 
10.6(c)*
 
Amended Form of Deferred Stock Award Agreement under the Premium Option and Stock Award Program.
 
 
(Filed as Exhibit 10.6 (c) to the Company’s Report on Form 10-K for fiscal year ended June 27, 2010 and incorporated by reference herein.)
 
 
 
10.6(d)*
 
Amended and Restated Briggs & Stratton Premium Option and Stock Award Program, effective beginning with plan year 2010 through 2014.
 
 
(Filed as Exhibit 10.6 to the Company’s Report on Form 10-K for fiscal year ended June 27, 2010 and incorporated by reference herein.)
 
 
 
10.7*
 
Form of Officer Employment Agreement.
 
 
(Filed as Exhibit 10.1 to the Company’s Report on Form 8-K dated December 8, 2008, and incorporated by reference herein.)
 
 
10.8*
 
Supplemental Employee Retirement Plan, as amended and restated effective as of January 1, 2017.
 
 
(Filed as Exhibit 10.1 to the Company’s Report on Form 10-Q for the quarter ended January 1, 2017 and incorporated by reference herein.)
 
 
10.9*
 
Amended and Restated Deferred Compensation Plan for Directors.
 
 
(Filed as Exhibit 10.9 to the Company’s Report on Form 10-K for fiscal year ended July 3, 2016 and incorporated by reference herein.)
 
 
 
10.10*
 
Summary of Director Compensation.
 
 
(Filed as Exhibit 10.10 to the Company’s Report on Form 10-K for fiscal year ended July 3, 2016 and incorporated by reference herein.)
 
 
10.11*
 
Executive Life Insurance Plan.
 
 
(Filed as Exhibit 10.17 to the Company’s Report on Form 10-K for fiscal year ended June 27, 1999 and incorporated by reference herein.)
 
 
10.11(a)*
 
Amendment to Executive Life Insurance Program.
 
 
(Filed as Exhibit 10.14 (a) to the Company’s Report on Form 10-K for fiscal year ended June 29, 2003 and incorporated by reference herein.)
 
 
10.11(b)*
 
Amendment to Executive Life Insurance Plan.
 
 
(Filed as Exhibit 10.14 (b) to the Company’s Report on Form 10-K for fiscal year ended June 27, 2004 and incorporated by reference herein.)
 
 

81





No.
 
Document Description
10.12*
 
Amended & Restated Key Employee Savings and Investment Plan.
 
 
(Filed as Exhibit 10.15 to the Company’s Report on Form 10-K for fiscal year ended June 30, 2013 and incorporated by reference herein.)
 
 
 
10.13*
 
Consultant Reimbursement Arrangement.
 
 
(Filed as Exhibit 10.19 to the Company’s Report on Form 10-K for fiscal year ended June 27, 1999 and incorporated by reference herein.)
 
 
10.14*
 
Briggs & Stratton Product Program for Directors.
 
 
(Filed as Exhibit 10.18 to the Company’s Report on Form 10-K for fiscal year ended June 30, 2002 and incorporated by reference herein.)
 
 
10.14(a)*
 
Amendment to the Briggs & Stratton Product Program for Directors.
 
 
(Filed as Exhibit 10.17 (a) to the Company’s Report on Form 10-K for fiscal year ended June 27, 2010 and incorporated by reference herein.)
 
 
10.15
 
Stipulation of Settlement, dated February 24, 2010.
 
 
(Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 24, 2010 and incorporated herein by reference.)
 
 
 
10.16*
 
Expatriate Agreement between Briggs & Stratton Corporation, Briggs & Stratton International, Inc. and William H. Reitman.
 
 
(Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 6, 2013 and incorporated herein by reference.)
 
 
 
10.16(a)*
 
Amendment to Expatriate Agreement between Briggs & Stratton Corporation, Briggs & Stratton International, Inc. and William H. Reitman, dated April 24, 2015.
 
 
(Filed as Exhibit 10.16(a) to the Company’s Report on Form 10-K for fiscal year ended June 28, 2015 and incorporated herein by reference)
 
 
 
10.16(b)*
 
Second Amendment to Expatriate Agreement between Briggs & Stratton International, Inc. and William H. Reitman, dated January 19, 2016.
 
 
(Filed as Exhibit 10.3 to the Company’s Report on Form 10-Q for the quarter ended March 27, 2016 and incorporated herein by reference.)
 
 
 
10.16(c)*
 
Third Amendment to Expatriate Agreement between Briggs & Stratton International, Inc. and William H. Reitman, dated August 11, 2016.
 
 
(Filed as Exhibit 10.16(c) to the Company’s Report on Form 10-K for fiscal year ended July 3, 2016 and incorporated by reference herein.)
 
 
 
10.17
 
Amended and Restated Multicurrency Credit Agreement, dated as of March 25, 2016, among Briggs & Stratton Corporation, Briggs & Stratton AG, the other subsidiary borrowers from time to time party thereto, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent, U.S. Bank National Association, as syndication agent and BMO Harris Bank, N.A., Bank of America, N.A., Wells Fargo Bank, National Association and PNC Bank, National Association, as documentation agents.

 
 
(Filed as Exhibit 10.1 to the Company’s Report on Form 10-Q for the quarter ended March 27, 2016 and incorporated herein by
 
 
 
12
 
Computation of Ratio of Earnings (Losses) to Fixed Charges.
 
 
(Filed herewith.)
 
 
21
 
Subsidiaries of the Registrant.
 
 
(Filed herewith.)
 
 
23.1
 
Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.
 
 
(Filed herewith.)
 
 
 
31.1
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
(Filed herewith.)

82





No.
 
Document Description
 
 
31.2
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
(Filed herewith.)
 
 
32.1
 
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
(Furnished herewith.)
 
 
32.2
 
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
(Furnished herewith.)
 
 
 
101
 
The following financial information from the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2017, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at July 2, 2017 and July 3, 2016; (ii) Consolidated Statements of Operations for the Fiscal Years Ended July 2, 2017, July 3, 2016, and June 28, 2015; (iii) the Consolidated Condensed Statements of Comprehensive Income (Loss) for the Fiscal Years Ended July 2, 2017, July 3, 2016, and June 28, 2015; (iv) Consolidated Statements of Shareholders’ Investment for the Fiscal Years Ended July 2, 2017, July 3, 2016, and June 28, 2015; (v) Consolidated Statements of Cash Flows for the Fiscal Years Ended July 2, 2017, July 3, 2016, and June 28, 2015; (vi) Notes to Consolidated Financial Statements; and (vii) Schedule II—Valuation and Qualifying Accounts.
 
 
 
*
 
Management contracts and executive compensation plans and arrangements required to be filed as exhibits pursuant to Item 15(a)(3) of Form 10-K.

83



Directors
 
 
 
 
 


JEFFREY R. HENNION   (2)(5)
 
Former Executive Vice President, Chief Marketing and e-Commerce Officer of GNC Holdings, Inc., a specialty retailer of health and wellness products worldwide
 
 
 
JAMES E. HUMPHREY   (2)(5)
 
Retired Chairman of Andersen Corporation, a window and door manufacturer
 
 
 
FRANK M. JAEHNERT   (1)(4)
 
Retired President and Chief Executive Officer of Brady Corporation, a provider of identification solutions
 
 
PATRICIA L. KAMPLING   (1)(3)(4)
 
Chairman, President and Chief Executive Officer of Alliant Energy Corporation, a regulated investor-owned public utility holding company
 
 
KEITH R. McLOUGHLIN   (3)(5)
 
Retired President and Chief Executive Officer of AB Electrolux, a manufacturer of major home appliances
 
 
HENRIK C. SLIPSAGER (1)(5)
 
Retired President and Chief Executive Officer of ABM Industries, Inc., a provider of integrated facility solutions
 
 
CHARLES I. STORY   (2)(3)(4)
 
President of ECS Group, Inc., an executive development company
 
 
TODD J. TESKE   (3)
 
Chairman, President and Chief Executive Officer of Briggs & Stratton Corporation
 
 
BRIAN C. WALKER   (2)(3)(4)
 
President and Chief Executive Officer, Herman Miller, Inc., a global provider of office furniture and services
Committees: (1) Audit, (2) Compensation, (3) Executive, (4) Finance, (5) Nominating and Governance.

Elected Officers


TODD J. TESKE
 
Chairman, President & Chief Executive Officer
 
 
HAROLD L. REDMAN
 
Senior Vice President & President – Turf & Consumer Products
 
 
WILLIAM H. REITMAN
 
Senior Vice President & President – Support
 
 
DAVID J. RODGERS
 
Senior Vice President & President – Engines & Power
 
 
 
MARK A. SCHWERTFEGER
 
Senior Vice President & Chief Financial Officer
 
 
KATHRYN M. BUONO
 
Vice President, General Counsel & Corporate Secretary
 
 
 
RANDALL R. CARPENTER
 
Vice President Corporate Marketing
 
 
DAVID G. DEBAETS
 
Vice President Operations – Engines & Power
 
 
ANDREA L. GOLVACH
 
Vice President & Treasurer
Note: For additional discussion related to elected officers and their titles, see Executive Officers of the Registrant section.




84



Appointed Vice Presidents & Subsidiary/Group Officers 1
 
 
 
 

Corporate
 
 
 
 
JOHN R. GUY III
 
Vice President Support Operations
 
 
 
RACHELE M. LEHR
 
Vice President Human Resources
 
 
TODD H. MACKAY
 
Vice President Chief Information Officer
 
 
 
BRIAN R. OLSSON
 
Vice President Program Management
 
 
 
THOMAS H. RUGG
 
Vice President Corporate Development
 
 
 
LAURA A. TIMM
 
Vice President Communications and Public Affairs
 
 
 
TIMOTHY G. WILD
 
Vice President Supply Chain
 
 
 
JEFFREY M. ZEILER
 
Vice President Product Innovation
 
 
Engines Group
 
 
 
 
 
RANDALL E. BALLARD
 
Vice President Sales – Consumer and Commercial Turf Engines & Power
 
 
JEFFREY W. COAD
 
Vice President Marketing & Product Management – Engines & Power
 
 
 
DAVID A. FRANK
 
Vice President Sales – Commercial Engines & Power
 
 
 
STEPHEN J. LAVENDER
 
Vice President Engineering – Engines & Power
 
 
 
RICHARD R. ZECKMEISTER
 
Vice President Marketing – Engines & Power
 
 
 
Products Group
 
 
 
 
THOMAS M. BURKARD
 
Vice President Product Management – Commercial Turf & Lawn Care
 
 
 
BENJAMIN D. DUKE
 
Vice President & President – Job Site / Standby
 
 
 
DONALD W. KLENK
 
Vice President Operations – Turf & Consumer Products
 
 
ROBERT D. PJEVACH
 
Vice President Product Management – Turf & Consumer Products
 
 
PHILIP H. WENZEL
 
Vice President Commercial Turf

1 Titles reflect current substantive roles and, in some cases, are indicative of upcoming title changes to be implemented by the Company.

85


SHAREHOLDER COMMUNICATIONS
Information is provided to shareholders on a regular basis to keep them informed of Briggs & Stratton’s activities and financial status. This information is available to any person interested in Briggs & Stratton. Address requests to Shareholder Relations at the Mailing Address listed for the Corporate Offices. A Shareholder Relations Hotline provides a no cost opportunity for shareholders to contact Briggs & Stratton other than for routine product inquiries. The Hotline number is 1-800-365-2759. For routine product inquiries, please contact Briggs & Stratton Customer Support at 1-800-743-4115.
Briggs & Stratton has an ongoing commitment to provide investors with real time access to financial disclosures, the latest corporate and financial news, and other shareholder information. Visit Briggs & Stratton’s home page on the internet at www.basco.com. Information includes: corporate press releases, web casts of conference calls, dividend information, stock prices, filings with the Securities and Exchange Commission, including Form 10-K Reports, Form 10-Q Reports, Proxy Statements and Section 16 filings, code of ethics for principal executive, financial and accounting officers, and additional financial information.
INVESTOR, BROKER, SECURITY ANALYST CONTACT
Stockbrokers, financial analysts and others desiring technical/financial information about Briggs & Stratton should contact Mark A. Schwertfeger, Senior Vice President and Chief Financial Officer, at 414-259-5333.
DIVIDEND REINVESTMENT PLAN
The Dividend Reinvestment Plan is a convenient way for shareholders of record to increase their investment in Briggs & Stratton. It enables shareholders to apply quarterly dividends and any cash deposits toward the purchase of additional shares of Briggs & Stratton stock. There is no brokerage fee or administrative charge for this service. For a brochure describing the plan, please call the Shareholder Relations Hotline.
PUBLIC INFORMATION
Persons desiring general information about Briggs & Stratton should contact Laura A. Timm, Vice President –Corporate Communications and Public Affairs, at 414-256-5123.
General Information

EXCHANGE LISTING
 
Briggs & Stratton Corporation common stock is listed on the New York Stock Exchange (symbol:BGG).
 
AUDITORS
 
Deloitte & Touche LLP
555 E. Wells St. Suite 1400
Milwaukee, Wisconsin 53202
 
 
 
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSER
 
Wells Fargo Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
 
CORPORATE OFFICES
 
12301 West Wirth Street
Wauwatosa, Wisconsin 53222
Telephone 414-259-5333
 
 
Inquiries concerning transfer requirements, lost certificates, dividend payments, changes of address and account status should be directed to Wells Fargo Shareowner Services at 1-800-468-9716.
 
MAILING ADDRESS
 
Briggs & Stratton Corporation
Post Office Box 702
Milwaukee, Wisconsin 53201








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