News Column

BRIGGS & STRATTON CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 26, 2014

Results of Operations FISCAL 2014 COMPARED TO FISCAL 2013 The following table is a reconciliation of financial results by segment, as reported, to adjusted financial results by segment, excluding restructuring actions, goodwill and tradename impairments, and a litigation settlement (in thousands, except per share data):



For the fiscal year ended June

2014 Reported Adjustments(1) 2014 Adjusted(2) 2013 Reported Adjustments(1) 2013 Adjusted(2) NET SALES: Engines $ 1,219,627 $ - $ 1,219,627$ 1,189,674 $ - $ 1,189,674 Products 736,312 - 736,312 805,450 - 805,450 Inter-Segment Eliminations (96,879 ) - (96,879 ) (132,626 ) - (132,626 ) Total $ 1,859,060 $ - $ 1,859,060$ 1,862,498 $ - $ 1,862,498 GROSS PROFIT: Engines $ 257,441 $ 3,099 $ 260,540 $ 236,486 $ 9,008 $ 245,494 Products 87,682 2,742 90,424 87,392 9,753 97,145 Inter-Segment Eliminations 1,660 - 1,660 5,262 - 5,262 Total $ 346,783 $ 5,841 $ 352,624 $ 329,140 $ 18,761 $ 347,901 INCOME (LOSS) FROM OPERATIONS: Engines $ 72,213 $ 3,524 $ 75,737 $ 59,093 $ 14,320 $ 73,413 Products (27,615 ) 11,475 (16,140 ) (104,918 ) 99,833 (5,085 ) Inter-Segment Eliminations 1,660 - 1,660 5,262 - 5,262 Total $ 46,258$ 14,999 $ 61,257 $ (40,563 )$ 114,153 $ 73,590 INTEREST EXPENSE (18,466 ) - (18,466 ) (18,519 ) - (18,519 ) OTHER INCOME, Net 9,342 - 9,342 6,941 - 6,941 Income (Loss) Before Income Taxes 37,134 14,999 52,133 (52,141 ) 114,153



62,012

PROVISION (CREDIT) FOR INCOME TAXES 8,787 4,307 13,094 (18,484 ) - (18,484 ) Net Income (Loss) $ 28,347$ 10,692 $ 39,039 $ (33,657 )$ 114,153 $ 80,496 EARNINGS (LOSS) PER SHARE Basic $ 0.59 $ 0.23 $ 0.82 $ (0.73 ) $ 1.66 $ 0.93 Diluted 0.59 0.23 0.82 (0.73 ) 1.66 0.93 (1) For the fiscal year ended June 29, 2014, includes restructuring charges of $6,539 net of $1,376 of taxes, and goodwill and tradename impairment charges of $8,460 net of $2,931 of taxes. For the fiscal year ended June 30, 2013, includes restructuring charges of $22,196 net of $6,669 of taxes, goodwill and tradename impairment charges of $90,080, of which $13,807 related to non-deductible goodwill for tax purposes with the remaining impairment generating a $28,116 tax benefit, and a litigation settlement of $1,877 net of $657 of taxes. (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, goodwill and tradename impairments, and litigation settlements 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 our GAAP financial results and should be read in conjunction with those GAAP results. 18 --------------------------------------------------------------------------------

Net Sales Consolidated net sales for fiscal 2014 were $1.9 billion, a decrease of $3.4 million or 0.2% from fiscal 2013, due to lower sales of generators and the engines that power them. The impact of fewer weather related events creating demand for generators and the related engines was an estimated sales decrease of $100 million for fiscal 2014. This decrease was offset by higher sales of engines used on U.S. lawn and garden equipment, increased sales of pressure washers and sales from Branco, which was acquired mid-year in fiscal 2013. Engines segment net sales for fiscal 2014 were $1.2 billion, which was $30.0 million or 2.5% higher than the prior year. This increase in net sales was primarily driven by higher sales of engines used on U.S. lawn and garden equipment and related service parts and sales from Branco, which was acquired mid-year in fiscal 2013. The increase in net sales was partially offset by lower sales of engines used on generators due to the lack of storm activity during fiscal 2014. Products segment net sales for fiscal 2014 were $736.3 million, a decrease of $69.1 million or 8.6% from the prior year. The decrease in net sales was primarily due to lower sales of standby and portable generators due to the lack of storm activity during fiscal 2014, lower replenishment of snow throwers in Europe following last year's dry winter, and unfavorable foreign exchange predominantly due to the Australian Dollar and Brazilian Real. The decrease in net sales was partially offset by higher sales of pressure washers and sales from Branco, which was acquired mid-year in fiscal 2013.



Gross Profit Percentage

The consolidated gross profit percentage was 18.7% in fiscal 2014, an increase of 1% from fiscal 2013.

Included in consolidated gross profit were pre-tax charges of $5.8 million during fiscal 2014 related to previously announced restructuring actions. The Engines segment and Products segment recorded $3.1 million and $2.7 million, respectively, of pre-tax restructuring charges within gross profit during fiscal 2014. During fiscal 2013, the Engines segment and Products segment recorded pre-tax restructuring charges within gross profit of $9.0 million and $9.8 million, respectively. The Engines segment gross profit percentage for fiscal 2014 was 21.1%, which was higher than the 19.9% in fiscal 2013. Adjusted gross profit percentage for 2014 was 21.4%, which was 0.8% higher compared to fiscal 2013. The adjusted gross profit percentage increased due to a favorable sales mix, including the impact of new product introductions, and by 0.6% due to a 1% increase in manufacturing throughput with fixed cost absorption benefiting from a 14% increase in the production of large engines. Lower material costs were mostly offset by reduced pricing. The Products segment gross profit percentage for fiscal 2014 was 11.9%, which was higher than the 10.9% in fiscal 2013. The Products segment adjusted gross profit percentage for fiscal 2014 was 12.3%, which was 0.2% higher compared to the adjusted gross profit percentage for fiscal 2013. The increase in adjusted gross profit percentage was primarily due to a 0.8% benefit from improved manufacturing efficiencies and incremental footprint restructuring savings of $1.6 million. The adjusted gross profit percentage also benefited from additional margin from a favorable mix of products sold. Partially offsetting the increase in adjusted gross profit percentage was an unfavorable foreign exchange impact of 0.6%. Engineering, Selling, General and Administrative Expenses Engineering, selling, general and administrative expenses were $291.4 million in fiscal 2014, an increase of $15.2 million or 5.5% from fiscal 2013. The Engines segment engineering, selling, general and administrative expenses were $184.8 million in fiscal 2014, or $10.8 million higher compared to fiscal 2013. The increase was primarily due to increased international sales and marketing expenses, research and development costs, corporate development and legal expenses, additional expenses from Branco, and higher compensation costs, partially offset by lower retirement plan expenses. 19 -------------------------------------------------------------------------------- The Products segment engineering, selling, general and administrative expenses were $106.6 million in fiscal 2014, an increase of $4.4 million from fiscal 2013. The increase was primarily attributable to additional expenses from Branco and higher advertising costs related to new product launches, partially offset by favorable foreign exchange. Other Intangible Asset Impairment During the fourth quarter of fiscal 2014, the Company performed its annual impairment testing of other intangible assets. Based on a combination of factors, predominantly driven by a slower than anticipated recovery of the North America lawn and garden market and the operating results of the Products segment during the previous year leading up to the impairment which lacked the benefit of certain weather related events that would have been favorable to the business, the Company's forecasted cash flow estimates used in the assessment of goodwill and other intangible assets were adversely impacted. The Company concluded that the carrying value of a tradename within the Products reporting unit exceeded its fair value as of June 29, 2014. The non-cash intangible asset impairment charge recorded in the fourth quarter of fiscal 2014 was $5.5 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. No impairment charges were recorded within the Engines segment. Restructuring Actions The restructuring actions that were in progress at the beginning of fiscal 2014 have concluded as planned. These restructuring actions resulted in pre-tax restructuring costs for the fourth quarter and twelve months ended June 29, 2014 of $1.4 million and $6.5 million, respectively. Incremental pre-tax restructuring savings for fiscal 2014 were $2.5 million. Subsequent to fiscal 2014, the Company announced further 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 continue to focus on premium residential products through its Snapper and Simplicity brands and commercial products through its Snapper Pro and Ferris brands. The Company will close its McDonough, Georgia location and consolidate production into existing facilities in Wisconsin and New York. The Company anticipates total restructuring charges related to these actions to be approximately $30 to $37 million, including non-cash write-downs of approximately $15 to $20 million, to be recorded during fiscal 2015. Total cash costs related to these actions are anticipated to be approximately $15 to $17 million, with the majority of the cash costs being incurred in fiscal 2015. Pending Acquisition On August 14, 2014, the Company announced that it signed a definitive agreement to acquire Allmand Bros., Inc. for approximately $62 million in cash, subject to customary due diligence and working capital adjustments. Founded in 1938 and based in Holdrege, Nebraska, Allmand is a leading designer and manufacturer of high quality towable light towers, industrial heaters and solar LED arrow boards. This transaction is expected to close in the first quarter of fiscal 2015. Interest Expense Interest expense for fiscal 2014 was $18.5 million, which was comparable to fiscal 2013. Provision for Income Taxes The effective tax rate for fiscal 2014 was 23.7% compared to 35.6% for the same period last year. The tax rate for fiscal 2014 was mainly impacted by a taxpayer election which provided the Company a previously unavailable tax benefit of $2.9 million as well as a U.S. manufacturers deduction of $1.8 million. The tax rate for fiscal 2013 was primarily driven by tax benefits related to foreign operations of $2.4 million and state credits of $2.0 million with an offsetting $5.6 million non-deductible goodwill impairment charge. 20 -------------------------------------------------------------------------------- FISCAL 2013 COMPARED TO FISCAL 2012 The following table is a reconciliation of financial results by segment, as reported, to adjusted financial results by segment, excluding restructuring actions, goodwill and tradename impairments, and a litigation settlement (in thousands, except per share data):



For the fiscal year ended June

2013 Reported Adjustments(1) 2013 Adjusted(2) 2012 Reported Adjustments(1) 2012 Adjusted(2) NET SALES: Engines $ 1,189,674 $ - $ 1,189,674$ 1,309,942 $ - $ 1,309,942 Products 805,450 - 805,450 952,110 - 952,110 Inter-Segment Eliminations (132,626 ) - (132,626 ) (195,519 ) - (195,519 ) Total $ 1,862,498 $ - $ 1,862,498$ 2,066,533 $ - $ 2,066,533 GROSS PROFIT: Engines $ 236,486 $ 9,008 $ 245,494 $ 250,323$ 14,257 $ 264,580 Products 87,392 9,753 97,145 86,193 30,503 116,696 Inter-Segment Eliminations 5,262 - 5,262 209 - 209 Total $ 329,140 $ 18,761 $ 347,901 $ 336,725$ 44,760 $ 381,485 INCOME (LOSS) FROM OPERATIONS: Engines $ 59,093 $ 14,320 $ 73,413 $ 66,559$ 18,314 $ 84,873 Products (104,918 ) 99,833 (5,085 ) (25,531 ) 31,553 6,022 Inter-Segment Eliminations 5,262 - 5,262 209 - 209 Total $ (40,563 )$ 114,153 $ 73,590 $ 41,237$ 49,867 $ 91,104 INTEREST EXPENSE (18,519 ) - (18,519 ) (18,542 ) - (18,542 ) OTHER INCOME, Net 6,941 - 6,941 7,178 - 7,178 Income (Loss) Before Income Taxes (52,141 ) 114,153 62,012 29,873 49,867



79,740

PROVISION (CREDIT) FOR INCOME TAXES (18,484 ) 35,442 16,958 867 21,062 21,929 Net Income (Loss) $ (33,657 ) $ 78,711 $ 45,054 $ 29,006$ 28,805 $ 57,811 EARNINGS (LOSS) PER SHARE Basic $ (0.73 ) $ 1.66 $ 0.93 $ 0.58 $ 0.60 $ 1.17 Diluted (0.73 ) 1.66 0.93 0.57 0.58 1.15 (1) For the fiscal year ended June 30, 2013, includes restructuring charges of $22,196 net of $6,669 of taxes, goodwill and tradename impairment charges of $90,080, of which $13,807 related to non-deductible goodwill for tax purposes with the remaining impairment generating a $28,116 tax benefit, and a litigation settlement of $1,877 net of $657 of taxes. For the fiscal year ended July 1, 2012, includes restructuring charges of $49,867 net of $21,062 of taxes. (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, goodwill and tradename impairments, and litigation settlements 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 our GAAP financial results and should be read in conjunction with those GAAP results. Net Sales Consolidated net sales for fiscal 2013 were $1.9 billion, a decrease of $204.0 million or 9.9% when compared to fiscal 2012. Engines segment net sales for fiscal 2013 were $1.2 billion, which was $120.3 million or 9.2% lower than the prior year. This decrease in net sales was primarily driven by reduced shipments of engines used on walk, ride and snow equipment in the North American market as well as lower sales to OEM customers for the 21

-------------------------------------------------------------------------------- European and Australasian markets. Shipments to European markets decreased due to macroeconomic issues and unfavorable weather conditions. Shipments to Australasian markets decreased due to a significant lack of rainfall in highly populated areas. In addition, sales were lower in fiscal 2013 as compared to fiscal 2012 due to an unfavorable mix of engines sold that reflected proportionately lower sales of large engines and unfavorable foreign exchange of $11.6 million primarily related to the Euro. Products segment net sales for fiscal 2013 were $805.5 million, a decrease of $146.7 million or 15.4% from the prior year. Approximately $90 million of the net sales decrease resulted from our decision to exit the sale of lawn and garden equipment through national mass retailers. The remaining decrease was primarily due to lower sales volumes of snow equipment due to significantly below average snowfall in North America and reduced sales of lawn and garden equipment resulting from drought conditions in the United States and Australasia. The decrease in net sales was partially offset by higher shipments of portable and standby generators in the North American market.



Gross Profit Percentage

The consolidated gross profit percentage was 17.7% in fiscal 2013, up from 16.3% in fiscal 2012.

Included in consolidated gross profit were pre-tax charges of $18.8 million during fiscal 2013 related to previously announced restructuring actions to close the Ostrava, Czech Republic and Newbern, Tennesee manufacturing facilities and the Auburn, Alabama plant consolidation. The Engines segment and Products segment recorded $9.0 million and $9.8 million, respectively, of pre-tax restructuring charges within gross profit during fiscal 2013. During fiscal 2012, the Engines segment and Products segment recorded pre-tax restructuring charges within gross profit of $14.3 million and $30.5 million, respectively. The Engines segment gross profit percentage for fiscal 2013 was 19.9%, which was slightly higher than the 19.1% in fiscal 2012. Adjusted gross profit percentage for 2013 was 20.6%, which was 0.4% higher compared to fiscal 2012. The adjusted gross profit percentage was favorably impacted by 1.5% due to lower manufacturing costs achieved through restructuring savings of $10.9 million and start-up costs incurred in fiscal 2012 associated with launching our phase III emissions compliant engines. Partially offsetting this improvement was a 9% reduction in engines built in fiscal 2013, which reduced absorption of fixed manufacturing costs and lowered the adjusted gross profit percentage by 1.3%. Lower material costs were mostly offset by reduced pricing, unfavorable foreign exchange and an unfavorable mix of engines sold. The Products segment gross profit percentage for fiscal 2013 was 10.9%, which was higher than the 9.1% in fiscal 2012. The Products segment adjusted gross profit percentage for fiscal 2013 was 12.1%, which was 0.2% lower compared to the adjusted gross profit percentage for fiscal 2012. The adjusted gross profit percentage decreased by 3.1% due to unfavorable absorption associated with a 15% decrease in production volume. The McDonough, Georgia manufacturing facility shutdown days increased by nearly six weeks in fiscal 2013 compared to the prior year. This enabled the Products segment to achieve a reduction in inventory levels despite the challenge of reduced sales volumes caused by lower market demand. The unfavorable volume impact on gross profit percentage was partially offset by a 2.3% benefit due to achieving restructuring cost savings of $13.6 million and other efficiency improvements. The addition of sales from the Branco acquisition and favorable foreign exchange, primarily due to the Australian dollar, also increased the gross margin percentage in fiscal 2013. Engineering, Selling, General and Administrative Expenses Engineering, selling, general and administrative expenses were $276.2 million in fiscal 2013, a decrease of $14.2 million or 4.9% from fiscal 2012. The Engines segment engineering, selling, general and administrative expenses were $174.0 million in fiscal 2013, or $5.7 million lower compared to fiscal 2012. The decrease was primarily due to lower compensation costs of $8.4 million as a result of the previously announced reduction of 10% of the global salaried workforce and reduced selling costs in response to the softness in the global markets, partially offset by $2.8 million of increased pension expense compared to the same period last year. The fiscal 2013 engineering, selling, general and administrative expenses include a $1.9 million litigation settlement charge associated with a 22 -------------------------------------------------------------------------------- horsepower labeling case in Canada. The litigation charge is excluded from the Engine segment's adjusted income from operations. The Products segment engineering, selling, general and administrative expenses were $102.2 million in fiscal 2013, a decrease of $8.4 million from fiscal 2012. The decrease was attributable to lower compensation costs which include a $2.5 million benefit from the global salaried employee reduction as well as reduced selling expenses in response to the softness in the global markets. These reductions were partially offset by the addition of expenses related to the Branco acquisition. Goodwill and Other Intangible Asset Impairment During the fourth quarter of fiscal 2013, the Company performed its annual impairment testing of goodwill and other intangible assets. Based on a combination of factors, predominantly driven by a slower than anticipated recovery of the North America lawn and garden market, the Company's forecasted cash flow estimates used in the assessment of goodwill and other intangible assets were adversely impacted. As a result, the Company concluded that the carrying value amounts of the Products reporting unit exceeded its fair value as of June 30, 2013. The non-cash goodwill impairment charge recorded in the fourth quarter of fiscal 2013 was $71.3 million. In addition, the Company concluded that the carrying value amounts of a tradename within the Products reporting unit exceeded its fair value as of June 30, 2013. The non-cash intangible asset impairment charge recorded in the fourth quarter of fiscal 2013 was $18.8 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. No impairment charges were recorded within the Engines segment. Restructuring Actions In fiscal 2013, the Company made progress against its previously announced restructuring actions, including the sale of its Ostrava, Czech Republic manufacturing facility. Also in fiscal 2013, the Company announced changes to its defined benefit pension plan that included freezing accruals for all non-bargaining employees within the pension plan effective January 1, 2014. This plan change resulted in the Company recognizing a pre-tax curtailment charge of $1.9 million in fiscal 2013. Pre-tax restructuring costs for fiscal 2013 were $22.2 million. Interest Expense Interest expense for fiscal 2013 was $18.5 million, which was comparable to fiscal 2012. Provision for Income Taxes The effective tax rate for fiscal 2013 was 35.5% compared to 2.9% for fiscal 2012. The increase in the effective tax rate for fiscal 2013 compared to fiscal 2012 was primarily due to a net benefit of $5.6 million associated with restructuring charges incurred in connection with closing the Company's Ostrava manufacturing facility, a net benefit of $5.1 million due to the expiration of a non-U.S. statute of limitation period during fiscal 2012, and an additional tax expense of $5.6 million for a non-cash goodwill impairment charge in fiscal 2013. Liquidity and Capital Resources FISCAL YEARS 2014, 2013 AND 2012 Net cash provided by operating activities was $127 million, $161 million and $66 million in fiscal 2014, 2013 and 2012, respectively. Cash flows provided by operating activities for fiscal 2014 were $127 million compared to $161 million in fiscal 2013. The decrease in operating cash flows was primarily related to changes in working capital as higher fourth quarter sales in fiscal 2014 led to a larger accounts receivable balance year over year. The change was partially offset by no contributions to the pension plan in fiscal 2014 compared to $29.4 million in contributions in fiscal 2013. 23 -------------------------------------------------------------------------------- Cash flows provided by operating activities for fiscal 2013 were $161 million compared to $66 million in fiscal 2012. The improvement in operating cash flows was primarily related to lower working capital needs in fiscal 2013 associated with lower levels of accounts receivable and inventory compared to fiscal 2012. Net cash used in investing activities was $60 million, $92 million and $51 million in fiscal 2014, 2013 and 2012, respectively. These cash flows include capital expenditures of $60 million, $45 million and $50 million in fiscal 2014, 2013 and 2012, respectively. The capital expenditures related primarily to reinvestment in equipment, capacity additions and new products. Further, in fiscal 2013, approximately $60 million of cash was used for the acquisition of Branco and approximately $12.5 million was received from dispositions of plant and equipment. Net cash used in financing activities was $62 million, $36 million and $63 million in fiscal 2014, 2013 and 2012, respectively. In fiscal 2014, the Company repurchased treasury stock at a total cost of $43 million compared to $30 million and $39 million stock repurchases in fiscal 2013 and 2012, respectively. In fiscal 2014, the Company received proceeds of $5 million from the exercise of stock options and made repayments totaling $0.3 million on short-term loans. Also in fiscal 2014, as disclosed in Note 11 of the Notes to Consolidated Financial Statements, the Company incurred $0.9 million of debt issuance costs associated with the refinancing of its revolving credit facility. In fiscal 2013, the Company received proceeds of $20 million from the exercise of stock options and made repayments totaling $3 million on short-term loans. In fiscal 2012, as disclosed in Note 11 of the Notes to Consolidated Financial Statements, the Company incurred $2 million of debt issuance costs associated with the refinancing of its revolving credit facility. The Company paid cash dividends on its common stock of $23 million, $23 million, and $22 million in fiscal 2014, 2013 and 2012, 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. Generally, these would be subject to U.S. tax if repatriated. As of June 29, 2014, approximately $53 million of the Company's $195 million of cash and cash equivalents was held in non-U.S. subsidiaries. Future Liquidity and Capital Resources In December 2010, the Company issued $225 million aggregate principal amount of 6.875% Senior Notes due December 2020 (the "Senior Notes"). Net proceeds were primarily used to redeem the remaining outstanding principal of the 8.875% Senior Notes due March 2011. On October 13, 2011, the Company entered into a $500 million multicurrency credit agreement (the "Revolver"). The Revolver had a term of five years and all outstanding borrowings on the Revolver were due and payable on October 13, 2016. On October 21, 2013, the Company entered into an amendment to the Revolver, which, among other things, extended the maturity of the Revolver from October 13, 2016 to 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 Revolver by up to $250 million if certain conditions are satisfied. There were no borrowings under the Revolver as of June 29, 2014 and June 30, 2013. In August 2012, the Company announced that its Board of Directors declared an increase in the quarterly dividend from $0.11 per share to $0.12 per share on the Company's common stock, payable on or after October 1, 2012 to shareholders of record at the close of business on August 20, 2012. In August 2014, the Company announced that its Board of Directors declared an increase in the quarterly dividend from $0.12 per share to $0.125 per share on the Company's common stock, payable on or after October 1, 2014 to shareholders of record at the close of business on September 17, 2014. In August 2011, the Board of Directors authorized up to $50 million in funds for use in a common share repurchase program with an original expiration of June 30, 2013. In August 2012, the Board of Directors of Briggs & Stratton authorized an additional $50 million in funds associated with the common share repurchase program and an extension of the expiration date to June 30, 2014. On January 22, 2014, the Board of Directors authorized up to an additional $50 million in funds for use in the Company's common share repurchase program with an extension of the expiration date to June 30, 2016. On August 13, 2014, the Board of Directors authorized up to an additional $50 million in funds for use in the Company's common share repurchase program with an expiration date of June 30, 2016. The common share repurchase program 24 -------------------------------------------------------------------------------- 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 restrictive covenants. During fiscal 2014 the Company repurchased 2,100,499 shares on the open market at an average price of $20.49 per share as compared to 1,546,686 shares purchased on the open market at an average price of $19.63 per share during fiscal 2013. The Company expects capital expenditures to be approximately $60 to $65 million in fiscal 2015. These anticipated expenditures reflect the Company's plans to continue to reinvest in efficient equipment and innovative new products. On July 6, 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21 Act) was signed into law. The MAP-21 Act included certain pension-related provisions which included changes to the methodology used to determine discount rates for ERISA funding purposes for qualified defined benefit pension plans. Based on historical interest rates, the MAP-21 Act allows plan sponsors to utilize a higher discount rate to value pension liabilities, which results in lower required pension plan contributions under ERISA. During fiscal 2014, 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 2015. The Company may be required to make further contributions in future years depending on the actual return on plan assets and the funded status of the plan in future periods. 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. The Revolver and the Senior Notes contain restrictive covenants. These covenants include restrictions on the Company's ability to: pay dividends; repurchase shares; incur indebtedness; create liens; enter into sale and leaseback transactions; consolidate or merge with other entities; sell or lease all or substantially all of its assets; and dispose of assets or the proceeds of sales of its assets. The Revolver contains financial covenants that require the Company to maintain a minimum interest coverage ratio and impose a maximum average leverage ratio. As of June 29, 2014, the Company was in compliance with these covenants. 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. Consequently, management's first priority is to reinvest 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. Management's next financial objective is to identify strategic acquisitions or alliances that may enhance revenues and provide a higher economic return. Finally, management believes that when capital cannot be invested for returns greater than the cost of capital, the Company should return capital to the capital providers 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 our Consolidated Balance Sheets or fully disclosed in our Notes to Consolidated Financial Statements. The Company's significant contractual obligations include our debt agreements and certain employee benefit plans. 25 --------------------------------------------------------------------------------



Contractual Obligations A summary of the Company's expected payments for significant contractual obligations as of June 29, 2014 is as follows (in thousands):

Fiscal Fiscal



Fiscal

Total 2015 2016-2017 2018-2019 Thereafter Long-Term Debt $ 225,000 $ - $ - $ - $ 225,000 Interest on Long-Term Debt 100,548 15,469 30,938 30,938 23,203 Operating Leases 68,955 13,934 14,634 9,635 30,752 Purchase Obligations 52,353 51,932 421 - - Other Liabilities (a) 57,022 - 21,504 35,518 - $ 503,878$ 81,335$ 67,497$ 76,091$ 278,955 (a) Includes an estimate of future expected funding requirements related to our pension plans. Any further funding requirements for pension plans beyond fiscal 2019 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 critical accounting policies are more fully described in Note 2 and Note 17 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. There have been no material changes made to the Company's critical accounting policies and estimates during the periods presented in 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, or more frequently if events or circumstances indicate that the assets may be impaired, by applying a fair value based test and, if impairment occurs, the amount of impaired goodwill is written off immediately. Goodwill impairment is determined 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 Company has determined that its reporting units are the same as its reportable segments, Engines and Products. The estimates of fair value of the reporting units are computed using an income approach. 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. 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 26 -------------------------------------------------------------------------------- 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. As discussed in Note 7 to the Consolidated Financial Statements, the Company performed the annual impairment test on its Engine and Products reporting units as of June 29, 2014. The impairment testing performed by the Company at June 29, 2014 indicated that the estimated fair value of the Engines reporting unit substantially exceeded its corresponding carrying amount, including recorded goodwill, and as such, no further impairment existed. The amount of goodwill recorded in the Products segment is not significant. 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. The methods of assessing fair value for goodwill and tradename impairment purposes require significant judgments to be made 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. The growth rates and gross profit margins used for the terminal value calculations and the discount rates of the respective reporting units as of June 29, 2014 were as follows: Terminal Terminal Gross Discount Growth Rate Profit Margin Rate Engines 3.0% 27.5% 11.4% Products 3.0% 18.6% 11.8% Changes in such estimates or the application of alternative assumptions could produce significantly different results. 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 June 29, 2014. The impairment testing performed by the Company at June 29, 2014 indicated that the estimated fair value of a tradename in the Products reporting unit did not exceed its corresponding carrying amount. Therefore, the Company recognized a $5.5 million non-cash impairment charge in the fourth quarter of fiscal 2014. In fiscal 2013, the Company recognized a $18.8 million non-cash impairment charge related to a tradename in the Products reporting unit. In fiscal 2012, no intangible assets were impaired. 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. 27 --------------------------------------------------------------------------------

Income Taxes The Company's estimate of income taxes payable, deferred income taxes, tax contingencies and the effective tax rate is based on a complex analysis of many factors including interpretations of federal, state and foreign income tax laws, the difference between tax and financial reporting bases of assets and liabilities, estimates of amounts currently due or owed in various jurisdictions, and current accounting standards. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. We review and update our estimates on a quarterly basis as facts and circumstances change and actual results are known. In addition, federal, state and foreign taxing authorities periodically review the Company's estimates and interpretation of income tax laws. Adjustments to the effective income tax rate and recorded tax related assets and liabilities may occur in future periods if actual results differ significantly from original estimates and interpretations. 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 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, which is essential in the current volatile market. Actuarial valuations at June 29, 2014 used a discount rate of 4.40% and the determination of fiscal 2014 expense used an expected rate of return on plan assets of 8.25%. Our 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 $1.1 million. A 0.25% decrease in the expected return on plan assets would increase our 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 our investment performance has been in the top decile compared to other plans. Changes in the discount rate and return on assets can have a significant effect on the funded status of our pension plans, shareholders' investment and related expense. We 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 June 29, 2014 and June 30, 2013, the fair value of plan assets was less than the projected benefit obligation by approximately $130 million and $153 million, respectively. On July 6, 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21 Act) was signed into law. The MAP-21 Act included certain pension-related provisions which included changes to the methodology used to determine discount rates for ERISA funding purposes for qualified defined benefit pension plans. Based on historical interest rates, the MAP-21 Act allows plan sponsors to utilize a higher discount rate to value pension liabilities, which results in lower required pension plan contributions under ERISA. During fiscal 2014, 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 2015. The Company may be required to make further contributions in future years depending on the actual return on plan assets and the funded status of the plan in future periods. 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 froze accruals for all non-bargaining employees effective January 1, 2014. The Company recorded a pre-tax curtailment charge of $1.9 million in fiscal 2013 related to the defined benefit plan change. 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 $1.9 million and would increase the service and interest cost by $0.1 million. A corresponding decrease of one percentage point, would decrease 28 -------------------------------------------------------------------------------- the accumulated postretirement benefit by $2.1 million and decrease the service and interest cost by $0.1 million. For pension and postretirement benefits, actuarial gains and losses are accounted for in accordance with U.S. GAAP. Refer to Note 17 of the Notes to the Consolidated Financial Statements for additional discussion. Other Reserves The reserves for customer rebates, warranty, product liability, inventory and doubtful accounts are fact specific and take into account such factors as specific customer situations, historical experience, and current and expected economic conditions. New Accounting Pronouncements In May 2014, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ("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. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, under either full or modified retrospective adoption. Early application is not permitted. Management is currently assessing the potential impact of this new accounting pronouncement on the Company's results of operations, financial position, and cash flow. In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which requires an entity to present significant reclassifications out of accumulated other comprehensive income by the respective line items of net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2012 with earlier adoption permitted. The amendments in the ASU are applied prospectively. The Company adopted ASU No. 2013-02 at the beginning of fiscal 2014, and the required disclosures are presented in Note 4 to the Consolidated Financial Statements. The adoption of this ASU did not have any impact on the Company's results of operations, financial position or cash flow, as the ASU solely relates to disclosures. In July 2012, the FASB issued ASU No. 2012-02, "Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment," which permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired before performing quantitative impairment testing. The amendments did not change the measurement of impairment losses. This update is effective for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company adopted ASU No. 2012-02 at the beginning of fiscal 2014. The adoption of this ASU did not have any impact on the Company's results of operations, financial position or cash flow. Other Matters Labor Agreements The Company has collective bargaining agreements with its unions. These collective bargaining agreements cover approximately 11% of the total employees as of June 29, 2014. These agreements expire at various times beginning in calendar 2016. Emissions The United States Environmental Protection Agency (EPA), the California Air Resources Board (CARB), Canada and the European Union (EU) have adopted multiple stages of emission standards for small air cooled engines. The Company currently has product offerings that comply with those standards. 29



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In addition, China has adopted emission standards which parallel those adopted by EPA and were phased in from 2011 to 2013. The Company has specific products that meet these standards and are certified for sale in China. Australia has announced that it will be adopting emission standards. These standards are generally expected to be based on the EPA standards, but a timetable for their adoption has not yet been published. The Company does not anticipate that compliance with either of these emission standards will have a material adverse effect on its financial position or operations as they are expected to be substantially similar to the existing standards adopted by EPA, CARB, Canada and the EU.


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