Shares of Briggs & Stratton Corporation (BGG) gained around 2.6% and closed at $18.77 after the company reported its second-quarter fiscal 2015 (ended Dec 28, 2014) results. Briggs & Stratton’s adjusted earnings per share for the quarter grew a whopping 420% to 26 cents from 5 cents in the prior-year quarter driven by its cost reduction efforts as well as focus on new product innovation and increase if sale of higher margin products. Results also handily beat the Zacks Consensus Estimate of 14 cents per share.
On a reported basis, Briggs & Stratton posted earnings per share of 15 cents in the reported quarter, increasing significantly from the 1 cent per share in the prior-year quarter. Results in both quarters include restructuring charges. The reported quarter also had charges related to an acquisition.
Operational Update
Net sales in the reported quarter increased 6.6% year over year to $444 million led by a favorable mix of engines sold, higher sales of pressure washers, snow throwers and commercial lawn and garden equipment in North America. The Allmand acquisition, closed in Aug 2014, also aided sales growth. However, revenues fell short of the Zacks Consensus Estimate of $452 million.
Cost of sales went up 3.6% year over year to $349.6 million. Adjusted gross profit rose 19.5% to $94.7 million from $79.3 million in the prior-year quarter. Adjusted gross margin expanded 200 basis points (bps) year over year to 21%.
Engineering, selling, general and administrative expenses increased 3% year over year to $74 million. Adjusted operating profit increased an impressive 163% to $22.4 million in the reported quarter compared with $8.5 million in the year-ago quarter.
Segmental Performance
Engines Segment: Net sales in this segment rose 2% year over year to $272 million due to improved sales mix of large engines used in lawn and garden equipment for the North American and European markets and higher service parts sales. Adjusted operating income for the quarter increased 66.5% to $18.9 million from $11.3 million in the year-ago quarter.
Product Segment: The segment reported sales of $199 million, rising 16% from the year-ago quarter, driven by higher sales of pressure washers, commercial lawn and garden equipment, and snow throwers in North America as well as on benefits from the Allmand acquisition, partly offset by lower sales of riding mowers and snow throwers in Europe. The segment reported an adjusted income of $3.7 million, versus a loss of $4 million in the year-ago quarter.
Financials
As of Dec 28, 2014, the company had cash and cash equivalents of $51.7 million, down from $98 million as of Dec 29, 2013. Net debt as of Dec 28, 2014 was $260.3 million, higher than $126.8 million as of Dec 29, 2013.
The company recorded net cash usage in operating activities of $114 million in the first half of fiscal 2015, compared with usage of $45 million in the year-ago comparable period. The increase was primarily related to higher inventory levels to aid impending closure of McDonough plant and the introduction of a new engine line in fiscal 2015.
Repurchase Program
During the first half of fiscal 2015, Briggs & Stratton repurchased 1,428,588 shares for around $27.6 million. As of Dec 28, 2014, the company had authorization to repurchase up to approximately $60 million of common stock until Jun 30, 2016.
Restructuring Actions
During the second quarter of fiscal 2015, Briggs & Stratton implemented the restructuring actions to narrow its assortment of lower-priced Snapper consumer lawn and garden equipment and consolidate its Products segment manufacturing facilities in order to reduce costs. The company will also close its McDonough plant in the fourth quarter of fiscal 2015 and production will be shifted to the existing facilities in Wisconsin and New York. Briggs & Stratton recorded pre-tax restructuring costs of $7.4 million and pre-tax savings of $1.2 million in the second quarter of fiscal 2015.
Total restructuring charges related to these actions are reiterated to be around $30 million to $37 million for fiscal 2015. The company anticipates savings of about $15 million to $20 million, wherein roughly $5 million to $7 million is expected to be realized in fiscal 2015 and the rest in fiscal 2016.
Improved Outlook for Fiscal 2015
For fiscal 2015, Briggs & Stratton upwardly revised its net income guidance to the new range of $55–$63 million from $53–$63 million. The company also raised its earnings per share outlook to $1.20–$1.35 from $1.14–$1.35, without taking into account the effects of acquisitions, additional share repurchases and costs related to restructuring.
Net sales projections for fiscal 2015 are retained in the band of $1.94–$2.00 billion, which reflects an estimated 1-4% increase in the retail market for U.S. lawn and garden products in the next season. The company increased its operating margins expectation to a new range of 4.7%–5.2% from 4.5%–5% reflecting positive impact of the restructuring actions. The company confirmed the outlook for capital expenditures in the range of $60–$65 million.
Our Take
Briggs & Stratton will benefit from new product launches and expects modest industry growth in the near term. The company will introduce several new products, including the industry's only engine that does not require an oil change. Moreover, its continuous focus on margin growth, geographical expansion through strategic acquisitions and cost cutting will aid growth in the near term.
However, Briggs & Stratton expects that its OEM (Original Equipment Manufacturer) customers will start their seasonal production at a later period this year compared to last year as they have higher channel inventories of residential lawn and garden equipment. This will result in lower demand in the third quarter of fiscal 2015, which may hurt Briggs & Stratton’s revenue in the next quarter.
Currently, Briggs & Stratton has a Zacks Rank #2 (Buy).
Some better-ranked stocks in the industrial product sector include Kubota Corp. (KUBTY), Advanced Emissions Solutions, Inc. (ADES) and Adept Technology Inc. (ADEP). All these stocks carry a Zacks Rank #2 (Buy).
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