Blount Announces Second Quarter 2013 Results

- Second quarter 2013 sales declined eight percent from 2012

- Operating income declined by $4.6 million

- Company to consolidate two Portland, Oregon manufacturing facilities

- Company to amend 2012 Form 10-K

PORTLAND, Ore., Aug. 7, 2013 /PRNewswire/ -- Blount International, Inc. today announced results for the second quarter ended June 30, 2013. 

Results for the Quarter Ended June 30, 2013

Sales in the second quarter were $220.4 million, an eight percent decrease versus the second quarter of 2012. Operating income for the second quarter of 2013 was $19.3 million compared to $23.8 million in the prior year, which included $1.7 million of facility closure and restructuring charges. Second quarter net income was $9.3 million, or $0.19 per diluted share, compared to $13.1 million, or $0.26 per diluted share, in the second quarter of 2012.

"In the second quarter, we continued to be challenged by difficult economic conditions, as all of our major markets were soft compared to last year," stated Josh Collins, Blount's Chairman and CEO. "However, during the quarter, we improved free cash flow and reduced net debt and working capital by actively managing our balance sheet and expenses."

Mr. Collins continued, "In an effort to further improve operational efficiencies, we are consolidating the saw chain plant purchased with the 2008 acquisition of Carlton Company into our larger Portland-based saw chain manufacturing facility. We expect to complete this consolidation by the middle of the fourth quarter."    

          

Segment Results

Blount operates primarily in two business segments – the Forestry, Lawn, and Garden ("FLAG") segment and the Farm, Ranch, and Agriculture ("FRAG") segment. The Company reports separate results for the FLAG and FRAG segments. Blount's Concrete Cutting and Finishing ("CCF") business is included in "Corporate and Other."

Forestry, Lawn, and Garden

The FLAG segment reported second quarter 2013 sales of $150.8 million, a nine percent decrease from the second quarter of 2012. Unit volume decreases drove the largest decline in sales, with average pricing and foreign exchange fluctuations extending the impact. Sales volumes declined in all major geographies, primarily as a result of a delayed start of spring in North America as well as continued economic uncertainty in Europe. Additionally, sales were down on softer demand and excess distribution channel inventory in Asia for the quarter, although Asia is flat on a year to date basis versus the prior year. Average pricing was lower in the quarter as a result of promotions in select markets and channel mix. The change in segment sales for the comparable second quarter periods is illustrated below.

Change in FLAG Segment Sales
(In millions; amounts may not sum due to rounding)				Sales	Change
	Second quarter 2012			$166.3
		Increase / (Decrease)
		Foreign Exchange		(1.3)	(0.8)%
				164.9	(0.8)%
		Unit Volume		(13.4)	(8.1)%
		Selling Price / Mix		(0.8)	(0.5)%
	Second quarter 2013			$150.8	(9.3)%

Segment backlog was $156.3 million at June 30, 2013, a decrease of nine percent from $170.8 million at June 30, 2012. The reduction in backlog relates primarily to a reduction in backorders as FLAG distribution operations have improved on-time delivery performance.

Segment contribution to operating income and Earnings Before Interest, Taxes, Depreciation, Amortization and certain charges ("Adjusted EBITDA") were $20.7 million and $27.4 million , respectively, (after $6.7 million of allocated shared services expenses) for the second quarter of 2013. Segment contribution to operating income and Adjusted EBITDA declined by $8.6 million and $8.7 million, respectively, for the second quarter of 2013 versus 2012. The change in FLAG contribution to operating income for the comparable second quarter periods is presented below.

Change in FLAG Segment Contribution to Operating Income and Adjusted EBITDA
(In millions; amounts may not sum due to rounding)
			Contribution to Operating Income	Percent of Segment Sales	Depreciation, Amortization, and Other		Adjusted EBITDA	Percent of Segment Sales
Second Quarter 2012			$29.3	17.6%	$6.8		$36.1	21.7%
	Increase / (Decrease)
	Steel Costs		1.5
	Foreign Exchange		(0.2)
			30.5	18.5%
	Unit Volume		(4.4)
	Selling Price / Mix		(0.8)
	Costs / Mix		(5.2)
			20.2	13.4%
	Acquisition accounting(1)		0.5
Second Quarter 2013			$20.7	13.7%	$6.7		$27.4	18.2%
(1) Represents change in acquisition accounting impact for all FLAG business units

The effects of unfavorable volume, average pricing, product mix, and the overall cost profile were partially offset by lower steel costs. Segment costs were driven higher mostly due to unabsorbed manufacturing and supply chain fixed costs related to lower production and shipping volumes. A reduction in SG&A expense, mainly in the areas of training, travel, and advertising, partially offset the margin decline from mix and reduced efficiency.

Farm, Ranch, and Agriculture

The FRAG segment reported second quarter 2013 sales of $62.7 million, a decrease of $3.6 million from the second quarter of 2012 on reduced sales volumes of agriculture attachments and tractor parts driven by the late spring and late start to the growing season, partially offset by improved average pricing. The change in segment sales for the comparable second quarter periods is illustrated below.

Change in FRAG Segment Sales
(In millions; amounts may not sum due to rounding)				Sales	Change
	Second Quarter 2012			$66.3
		Increase / (Decrease)
		Foreign Exchange		(0.0)	(0.1)%
				66.3	(0.1)%
		Unit Volume		(4.1)	(6.1)%
		Selling Price / Mix		0.5	0.7 %
	Second Quarter 2013			$62.7	(5.5)%

Segment backlog was $16.3 million at June 30, 2013, compared to $19.9 million at June 30, 2012. Backlog has decreased primarily due to improved throughput of SpeeCo products in the Company's Kansas City, Missouri distribution and assembly center.

The FRAG segment had $6.4 million of Adjusted EBITDA in the second quarter of 2013. FRAG segment contribution to operating income was $2.0 million after $1.2 million of depreciation expense, $3.2 million of non-cash amortization of acquired intangible assets from purchase accounting, and$2.1 million of allocated shared services expenses. The change in the second quarter 2013 contribution to operating income compared to the second quarter of 2012 is presented below.

Change in FRAG Segment Contribution to Operating Income and Adjusted EBITDA
(In millions; amounts may not sum due to rounding)
			Contribution to Operating Income	Percent of Segment Sales	Depreciation, Amortization, and Other		Adjusted EBITDA	Percent of Segment Sales
Second Quarter 2012			$(0.9)	(1.4)%	$4.3		$3.4	5.1%
	Increase / (Decrease)
	Steel Costs		0.3
	Foreign Exchange		0.0
			(0.6)	(1.0)%
	Unit Volume		(1.4)
	Selling Price / Mix		0.5
	Costs / Mix		3.6
			1.9	3.1%
	Acquisition accounting(1)		0.1
Second Quarter 2013			$2.0	3.2%	$4.4		$6.4	10.3%
(1) Represents change in acquisition accounting impact for all FRAG business units

Segment costs improved significantly over the prior year quarter. Expedited shipping costs in the prior year of $2.2 million along with $2.6 million of prior year expense related to product quality issues were not repeated in the second quarter of 2013. The improvement in segment costs was partially offset by increased manufacturing costs at Woods due to reduced plant efficiency and absorption of fixed costs on lower production levels compared to 2012. Additionally, average selling prices increased, mostly in the Woods and TISCO businesses, as a result of normal annual price increases.

Corporate and Other

Corporate and Other generated net expense of $3.4 million in the second quarter of 2013 compared to net expense of $4.5 million in the second quarter of 2012. The improvement in Corporate and Other results was mostly due to the absence of $1.7 million of facility closure and restructuring costs incurred in the second quarter of 2012, partially offset by increased SG&A spending in the CCF business. The Company's CCF business, included in Corporate and Other, recognized increased sales in the second quarter of eight percent from last year's second quarter. The increase in CCF sales was driven by the result of increased sales of PowerGrit® ductile iron saw chain and related chain saws, which are gaining increased acceptance in the marketplace as a time efficient alternative to traditional methods of cutting ductile iron pipe.

Restructuring
The Company announced yesterday that it is consolidating its saw chain manufacturing facilities in Portland, Oregon into one location to further improve operating efficiencies. As part of the consolidation, saw chain manufacturing will be discontinued at the former Carlton Company facility acquired in 2008. The Carlton^® brand continues to be a strong forestry brand for the Company and will continue to be sold worldwide. Manufacturing for Carlton products will be consolidated into an existing Portland FLAG facility as well as FLAG production facilities in China, Brazil, and Canada. The Company expects to achieve more timely delivery by manufacturing closer to its customers, an overall net reduction in global FLAG manufacturing headcount of approximately 200 positions, and annual cost savings of between $6 million and $8 million. The Company expects to incur expenses of $9 million to $10 million over the course of the third and fourth quarters of 2013 to consolidate the manufacturing operations, of which approximately $4 million to $5 million are cash transition costs including severance and moving expenses and approximately $5 million represents non-cash charges for accelerated depreciation on equipment to be idled and a write-down of land and building carrying value. Operating cost savings of between $0 and $2 million are expected in 2013, dependent on the timing of completion of the manufacturing consolidation.

Material Weaknesses

The Company will be amending its Annual Report on Form 10-K for 2012 as well as its Quarterly Report on Form 10-Q for the first quarter of 2013 to reflect a conclusion by the Company's management that internal control over financial reporting ("ICFR") and disclosure controls and procedures ("DCP") were not effective as of December 31, 2012, and that DCP was not effective as of March 31, 2013. The Company's management did not make any conclusion with regard to the effectiveness of ICFR as of March 31, 2013, as that assessment is only performed as of year end, in keeping with the rules of the Securities and Exchange Commission ("SEC"). Management of the Company as well as our independent registered public accounting firm, PricewaterhouseCoopers LLP ("PwC"), re-evaluated our ICFR after a routine inspection by the Public Company Accounting Oversight Board ("PCAOB") of PwC, which included a review by the PCAOB of PwC's independent audit of our 2012 financial statements. After re-evaluating our ICFR related to the information systems at our Woods/TISCO subsidiary and ICFR related to our accounting for indefinite-lived intangible assets in 2012, the Company's management concluded that material weaknesses existed in those areas and that therefore ICFR and DCP were not effective as of December 31, 2012. Similarly, management has concluded that because those same material weaknesses had not yet been remediated byMarch 31, 2013, our DCP continued to be ineffective as of that date. Our Annual Report on Form 10-K for 2012 and our Quarterly Report on Form 10-Q for the first quarter 2013 will be amended to reflect those conclusions.

The Company is in the process of remediating the identified deficiencies in ICFR and expects to have that work completed by the end of 2013, although there can be no assurance we will accomplish that goal.

In light of the material weaknesses identified when our ICFR were re-evaluated, the Company and PwC are in the process of also re-evaluating the Company's 2012 accounting for goodwill and other indefinite-lived intangible assets recorded in connection with the business acquisitions made in 2010 and 2011. We will not file our Quarterly Report on Form 10-Q for the second quarter 2013 with the SEC until that re-evaluation is completed and therefore anticipate that our filing of that Form 10-Q will be delayed beyond the required filing deadline of August 9, 2013.  Following that re-evaluation, it is possible that we may conclude that a restatement of our financial statements for the year ended December 31, 2012 is necessary to reflect an impairment of goodwill. Any potential restatement is expected to be limited to a non-cash charge to operating income in the fourth quarter of 2012, with no associated impact on fourth quarter 2012 Sales, Cash or Adjusted EBITDA. Further, no impact is expected on previously reported First Quarter 2013 Sales, Cash, Operating Income, Net Income or Adjusted EBITDA amounts or guidance for the rest of 2013 on those items as a result of any potential restatement of our 2012 financial statements.

Net Income 

Second quarter 2013 net income declined due to lower overall operating income compared to 2012. Additionally, the impact of higher average borrowing rates increased net interest expense by approximately $0.3 million, and the Company's income tax expense rate was lower than the prior year quarter. Finally, other expense increased by approximately $1.1 million reflecting unfavorable effects of foreign currency exchange rate movements on non-operating assets. The change in net income for the second quarter of 2013 compared to the second quarter of 2012 is summarized in the table below.

Change in Consolidated Net Income
(In millions, except per share data;     amounts may not sum due to rounding)			Pre-tax Income	Income Tax Effect	Net Income	Diluted Earnings per Share
	Second Quarter 2012 Results		$19.7	$6.6	$13.1	$0.26
		Change due to:
		Decreased operating income excluding      acquisition accounting	(5.2)	(1.7)	(3.5)	(0.07)
		Acquisition accounting	0.6	0.2	0.4	0.01
		Increased net interest expense	(0.3)	(0.1)	(0.2)	–
		Change in other expense	(1.1)	(0.4)	(0.7)	(0.01)
		Change in income tax rate	n/a	(0.2)	0.2	–
	Second Quarter 2013 Results		$13.7	$4.4	$9.3	$0.19

Cash Flow and Debt

As of June 30, 2013, the Company had net debt of $460.5 million, a decrease of $6.0 million from December 31, 2012 and a decrease of $13.1 million compared to June 30, 2012. Free cash flow of $15.9 million was generated in the second quarter of 2013 compared to $5.7 million in the prior year second quarter. Most of the increased free cash generation was driven by a reduction in capital spending. Net working capital decreased by approximately $2.6 million compared to a $0.4 million growth in the second quarter of 2012. Working capital benefited from accounts receivable collection in the second quarter of 2013 compared to 2012 along with controlled inventory growth in the second quarter of 2013 versus a significant increase in the second quarter of 2012. Capital spending in the second quarter of 2013 was smaller than the second quarter of 2012 by $8.0 million as capacity additions were lower in China this year. The major capital expenditures associated with the China saw chain facility expansion were incurred in 2012. The Company defines free cash flow as cash flows from operating activities less net capital spending.

The ratio of net debt to last-twelve-months ("LTM") Adjusted EBITDA was 3.5x as of June 30, 2013, a small increase from 3.4x at December 31, 2012, and flat compared to March 31, 2013. The increase in leverage from the end of 2012 is primarily the result of lower Adjusted EBITDA for the LTM period ended June 30, 2013.

2013 Financial Outlook 

The Company has updated its fiscal year 2013 outlook. Sales are expected to range between $915 million and $945 million, and operating income to range between $66.0 million and $76.0 million. Our expectation for sales assumes FLAG segment sales are down between 1% and 5%, and that FRAG segment sales grow between 5% and 8% – both compared to 2012 levels. In 2013, operating income is expected to experience headwind from foreign currency exchange rates of between $2 million and $3 million, and steel costs are expected to have up to an overall $3 million favorable impact for the year compared to 2012. The 2013 operating income outlook includes non-cash charges of between $16.5 million and $18.5 million related to acquisition accounting. Free cash flow in 2013 is expected to range between $40 million and $50 million, after approximately $35 million to $40 million of capital expenditures. Net interest expense is expected to be between $18 million and $19 million in 2013, and the effective income tax rate for continuing operations is expected to be between 35 percent and 38 percent in 2013.

A comparison of key operating indicators for 2011 pro forma results, 2012 actual results, and the 2013 outlook mid-point is provided in the table below.    

(In millions)		2011 Pro-Forma	2012 Actual	2013 Outlook Mid-Point
	Sales	$975.5	$927.7	$930.0
	Operating Income	110.0	79.3	71.0
	Adjusted EBITDA	168.7	136.4	135.0
	Free Cash Flow	47.9	(0.5)	45.0
	Net Capital Expenditures	41.6	51.7	37.5
	Net Debt at Period End	468.2	466.5	429.0
	Net Debt/Adjusted EBITDA	2.8x	3.4x	3.2x

Adjusted EBITDA and Free Cash Flow are non-GAAP measures and are reconciled to Operating Income and Cash Flow from Operations in the attached financial data table.

Blount is a global manufacturer and marketer of replacement parts, equipment, and accessories for consumers and professionals operating primarily in two market segments: Forestry, Lawn, and Garden ("FLAG"); and Farm, Ranch, and Agriculture ("FRAG"). Blount also sells products in the construction markets and is the market leader in manufacturing saw chain and guide bars for chain saws.  Blount has a global manufacturing and distribution footprint and sells its products in more than 115 countries around the world.  Blount markets its products primarily under the OREGON^®, Carlton^®, Woods^®, TISCO, SpeeCo^®, and ICS^® brands. For more information about Blount, please visit our website at http://www.blount.com.

Blount Discloses Material Weakness in Accounting

August 7 -- Blount International Inc., which reported weak second-quarter earnings and layoffs Wednesday, has also reported a "material weakness" in its accounting practices.

In a press release accompanying its earnings statement, the company said it will amend its 2012 annual report and its first-quarter earnings report.

The Portland-based company also expects it will not file a formal report for its second quarter on time.

It expects to complete a review of its accounting procedures by the end of 2013.

The accounting problems relate to how Blount valued acquisitions in 2010 and 2011. The company said restated earnings may result in a charge against income reported in the fourth quarter of 2012. It's unclear whether earnings reported in other quarters will be restated.

The accounting problems are not expected to result in changes to previously reported sales.

Matthew Kish       www.bizjournals.com/Portland

Blount Will Cut 200 Jobs, Close Portland-Area Factory After 2nd Quarter Sales Slide

August 7 -- Saw-chain maker Blount International Inc. will lay off 200 and shutter a Portland-area factory after the company's second-quarter profits fell by nearly one-third.

The Milwaukie manufacturer announced plans to consolidate two local factories into one on Wednesday, as part of its quarterly financial results. The company also disclosed an systems control problem that will force it to amend past financial statements.

The news hit hard on Wall Street, where shares of the company's stock fell 8.8 percent to $11.66 before the market closed.

Blount reported net income of $9.3 million during the three months ending June 30, down 29 percent from the same time last year. Sales declined 8 percent during that period, to $220.4 million

Second-quarter earnings per share were 19 cents, compared to 26 cents a year ago.

In its earnings release, the company said the late-arriving spring hurt domestic sales, and economic uncertainty dampened eurozone sales. Demand also fell in Asia. Chairman and chief executive Josh Collins said in the statement that all of the company's major markets were weaker this year than last. "In the second quarter, we continued to be challenged by difficult economic conditions," he said.

Blount makes equipment geared for the gardening, forestry and agricultural industries under several brands, including Oregon, SpeeCo and Carlton. It employs 4,500 worldwide.

Blount acquired the Carlton Co. in 2008, and continued to operate out of Carlton's Milwaukie plant. But it will consolidate those operations later this year into a larger nearby factory. The plans had been in the works for years, company spokesman David Dugan said.

The company expects the move to save between $6 million and $8 million annually.

Blount also plans to amend its 2012 annual report and first quarter 2013 report after a routine review uncovered a "material weakness" tied to computer systems controls. The company also found a possible accounting issue that could result in a non-cash charge to its fourth-quarter 2012 operating income.

Blount said it won't file its second-quarter report with the U.S. Securities and Exchange Commission until the review is finished, meaning it could potentially miss its Friday filing deadline.

Molly Young         www.oregonlive.com 

Briggs and Stratton Provides Market Update and Revises Fiscal 2013 Guidance

MILWAUKEE, July 26, 2013 -- Briggs and Stratton Corporation today announced that it expects to report net sales and earnings below the guidance provided for fiscal 2013.

•          Consolidated net sales for the fourth quarter and fiscal year 2013 are expected to be approximately    $475 million and $1.86 billion, respectively
•  ·      Production levels lowered in response to OEM production schedules to control inventories
•  ·      U.S. sales in line with industry estimates for engines and products; Europe market softness continues
•          Engine market share in line with original guidance

·         Excluding charges related to restructuring actions, legal settlements, and other non-cash charges, revised fourth fiscal quarter and fiscal 2013 adjusted diluted earnings per share is estimated to be approximately $0.17 to $0.21 per share and $0.88 to $0.92 per share, respectively

·         Outlook for an improved fiscal 2014 on a strengthening U.S. lawn and garden market, lower channel inventories, and continued expansion and growth in certain international markets; European outlook remains cautious

"An extremely slow start to the spring lawn and garden season and a cautious approach to managing inventories after last year's drought has impacted the U.S. and European markets through the end of June," commented Todd J. Teske, Chairman, President and CEO of Briggs and Stratton Corporation.  "In response to the lower retail sales, almost all channel participants including mass retailers, dealers, and equipment OEMs have been cautiously managing inventories and therefore have been slow to re-order for the current season.  Equipment OEMs have reduced production levels compared to last year and thus we reduced our engine production in the quarter negatively impacting absorption of plant operating costs in the near term," continued Teske.  "On a positive note, we have seen the retail market strengthening in May and June and continuing into July as we compare to last year's drought-impacted summer season and we believe inventory levels at our dealers are in great shape heading into our next fiscal year."

Engines Segment:

•          Fourth fiscal quarter 2013 Engines segment net sales are expected to be approximately $300 million
•         Total engines shipped in the quarter were approximately 1.9 million units compared to approximately   2.1 million units in the prior year
•       Production totaled approximately 1.6 million units in the quarter compared to approximately 2.0 million in the prior year
•           Ending engine unit inventories were approximately 1.4 million compared to approximately 1.3 million units last year

Through the end of June 2013, the Company estimates that the retail market for walk and riding mowing equipment has decreased by approximately 3-5% compared to the last season.   The lower retail sales due to a late spring in the U.S. and Europe have not yet recovered in the current season.  Estimates of U.S. industry shipments to retailers of walk mowers are consistent with last year through June while shipments of riding mowers has increased by approximately 3%.   The Company expects that by the end of the current season, retail sales of mowing equipment will be flat to slightly up for the season.   Certain equipment OEMs have reduced inventories compared to the prior year in response to lower than anticipated retail sales.

Products Segment:

•         Fourth fiscal quarter 2013 Products segment net sales are expected to be approximately $203 million
•          Manufacturing throughput reduced 15% in the quarter compared to the prior year in order to control inventories
•          Domestic product inventories decreased by approximately $50 million compared to the prior year 
•         Dealer inventories are below average of last several years
• 
  

The  majority of the decrease in net sales compared to the prior year is due to our previously announced decision to exit the sale of lawn and garden equipment to U.S. mass market retailers.  This was partially offset by higher sales of lawn and garden equipment to our dealers in the U.S. and increased sales in Brazil due to our acquisition of Branco in December of 2012.  Production levels in the products plants were also reduced to lower inventories resulting in lower absorption of fixed manufacturing costs in the near term. 

Financial Position:

Net debt at June 30, 2013 is anticipated to be approximately $37 million.   Expected cash flows from operations for fiscal 2013 is approximately $160 million.   

Generac to Acquire Tower Light Business Based in Italy

Acquisition of leading light tower manufacturer positions Generac as a global leader in mobile power equipment and accelerates international expansion efforts

WAUKESHA, Wis. — July 25 -- Generac Holdings Inc., a leading designer and manufacturer of generators and other engine powered products, announced today the signing of a purchase agreement to acquire the equity of Tower Light Srl and its wholly-owned subsidiaries from European private equity fund Ambienta I, advised by Ambienta SGR, and a group of minority-share investors.

Founded in 1996 and headquartered outside Milan, Italy, Tower Light is a leading developer and supplier of mobile light towers throughout Europe, the Middle East and Africa. Tower Light has experienced growth and built a leading market position in the equipment rental markets by leveraging their broad product offering and strong global distribution network in over 50 countries. With approximately 100 employees, Tower Light’s net sales for year ended December 31, 2012 were approximately €37 million.

“Tower Light is a great strategic fit for Generac’s business, providing an expanded product offering of light tower generators to support additional geographic markets beyond those we serve today,” said Aaron Jagdfeld, President and Chief Executive Officer of Generac. “Acquiring Tower Light positions us as a global leader in light towers, allowing us to participate in the growing rental market for these products outside the U.S.”

“This is a very exciting development for Tower Light which opens up many new opportunities and allows us to continue to innovate and further develop the Tower Light product range. We are pleased to join the Generac family, and we look forward to our continued success as we work together to execute on potential synergies and drive global growth for mobile power products,” said Andrea Fontanella, Founder and Managing Director of Tower Light Srl.

Following the close of the transaction, Tower Light’s management team will continue to lead the company and the Tower Light brand name will join Generac’s brands, including Magnum and Ottomotores, in serving global power generation and associated markets. It is expected that the transaction will close in the third quarter of 2013, pending standard closing conditions. The purchase price of the acquisition was not announced.

About Generac

Since 1959, Generac has been a leading designer and manufacturer of a wide range of generators and other engine powered products. As a leader in power equipment serving residential, light commercial, industrial and construction markets, Generac's power products are available internationally through a broad network of independent dealers, retailers, wholesalers and equipment rental companies.

About Tower Light Srl

Tower Light Srl, founded in 1996 and based at Villanova d’Ardenghi (PV), is the European leader in the production of lighting towers for construction and other applications. Through continuous product development and a broad distribution network, Tower Light Srl has become a leading supplier to construction and equipment rental companies, providing mobile power equipment that meets the specific needs of geographic markets across the world.

Presentation to House Energy and Commerce Committee by Todd Teske, Briggs CEO

A PRESENTATION BY MR. TODD J. TESKE, PRESIDENT, CHAIRMAN and CEO, BRIGGS and STRATTON CORP. TO THE HOUSE ENERGY AND COMMERCE SUBCOMMITTEE ON ENERGY AND POWER

July 19, 2013

One Page Summary: 

Five reasons why EPA should revisit its conditional certification of E-15:

1. Research has shown, and EPA has agreed, that use of E15 in small non-road engines can have harmful and costly consequences on small engines and outdoor power equipment.

2. Research on warning label effectiveness suggests that an E-15 warning label will do very little to mitigate misfueling.

3. Behavioral studies of customers at the gas pump conclude that consumers overwhelmingly favor the lowest priced option, regardless of the consequences.

4. Misfueling due to lack of education to consumers regarding the proper use of E-15 will be significant.

5. The use of Biofuels or “drop-in fuels” has been tested and could prevent misfueling.

If public policy requires that the federal government drive the market for alternative fuels, Briggs and Stratton urges that the policy be amended to more fully support the development and use of biofuels, from any feedstock, which are intended for use as “drop-in fuels” which provide a safe fuel for both legacy and newly manufactured small engines and outdoor power equipment.

At a minimum we recommend that the reform legislation rescind the partial waiver for E15, and establish gasoline blended with up to 10% ethanol as the general purpose domestic fuel. The legislation should also require that all considerations to increase domestic biofuel levels in the future be subject to a formal EPA rulemaking whereby the market’s ability to safely distribute, retail and consume such fuel is provided for.

July 19, 2013

Written Testimony of Mr. Todd J. Teske, President, Chairman and CEO, Briggs and Stratton Corporation

Chairman Whitfield, Ranking Member Rush, Congressman Barrow and distinguished Members of the Committee, thank you for soliciting Briggs and Stratton’s perspective on the issues raised by the EPA’s implementation of the Renewable Fuels Standard. I have been extremely impressed by the Committee’s workmanlike approach to educate itself, and the public, on the challenge which the RFS presents to manufacturers, consumers and the environment. The Outdoor Power Equipment Institute, on which I currently serve as Chairman, has submitted formal comments in response to the Committee’s white papers. My statement, which is submitted strictly in my capacity as Chairman and CEO of Briggs and Stratton, will attempt to define that challenge as it pertains to small engine manufacturers and offer suggestions on how to protect consumers from significant economic and environmental damage.

Briggs and Stratton Corporation, which is headquartered in Milwaukee, Wisconsin, is the world’s largest producer of gasoline engines for outdoor power equipment. We are a leading designer, manufacturer and marketer of pressure washers, generators, lawn and garden, turf care and other power equipment through its Briggs and Stratton, Simplicity®, Snapper®, Ferris®, Murray®, Branco® and Victa® brands. Briggs and Stratton products are designed, manufactured, marketed and serviced in over 100 countries by 6,200 employees. Approximately 5,300 of those employees work here in the United States. As a U.S. based manufacturer, our company is proud to be celebrating its 105th anniversary this year and continues to manufacture over 85% of its products here in America.

Briggs and Stratton’s long standing commitment to the environment remains a key focus for our business. We continue to manufacture our products with recycled materials that are highly efficient and with reduced emissions. Since 1995, we have reduced our emissions by 75% and, after completing the phase in of our new product offering, will achieve an additional 35% reduction in those emissions by January, 2014. In 2007, we signed a pledge with the Department of Energy to reduce our energy consumption by 25% over 10 years. Just 6 years later, we have already cut our consumption by 20%. These are just a few of the many examples that demonstrate our commitment to the environment.

Below are five factors justifying rescission of EPA’s conditional certification of E-15 :

1. Research has shown, and EPA has agreed, that use of E15 in small non-road engines can have harmful and costly consequences on small engines and outdoor power equipment. 

Briggs and Stratton has conducted extensive testing on levels of ethanol above 10%. Increasing levels of ethanol in gasoline result in increased levels of alcohol. Alcohol has inherent properties that cause issues with our engines and they become more acute with increasing alcohol content.

Increasing the alcohol in fuel changes the air-fuel ratio (enleanment) in our carbureted engines. E-15 fuel, by definition would have an alcohol content ranging from 0 to 15%. Our engines would have great difficulty in meeting both emissions and performance expectations with this type of alcohol range. Enleanment will also result in higher operating temperatures that will lower engine life due to issues such as valve sealing, piston scoring, and head gasket leakage, just to name a few. Ethanol is also hydroscopic (absorbs water). Increased levels of water will cause the engine to run poorly, and will also cause corrosion by means of acidic attack, galvanic activity, and chemical interaction. Ethanol will also cause other problems such as reduced fuel storage life, starting issues and reduced fuel economy.

The Department of Energy (DOE) also conducted testing. After testing E-15 on a representative sample of small non-road engines, including Briggs and Stratton powered generators and power washers, the DOE found that small engines experienced a variety of difficulties with intermediate blends of ethanol. Most engines performed worse in several metrics when running on higher ethanol blends – engines often had higher operating temperatures, higher exhaust temperatures, and NOx emission rates. Higher operating temperatures, lead to increased wear and tear and more frequent maintenance. Moreover, 7 out of the 11 engines behaved “poorly” or “erratically”, according to DOE’s report, with incidents of unstable speeds, stalling, and clutch engagement at idle. As a result of this testing, small engines were specifically excluded by EPA from the E-15 Waiver.

2. Research on warning label effectiveness suggests that an E-15 warning label will do very little to mitigate misfueling.

In response to our concerns and the concerns of other interested parties, EPA has issued a mandatory warning label for pumps that distribute E-15. Given the body of research on the effectiveness of warning labels, we believe that this warning will not prevent consumers from misfueling their engines with the E-15 blend, and, with no one else liable, will leave the equipment owner liable for the damage to their products. Warning labels have been the subject of many research studies, with results often showing little change in consumer behavior. To address this concern, there are standards and testing protocol that have been completed. The Association for Consumer Research further reports that warning labels are considerably less likely to be successful when applied to products that consumers use frequently and feel comfortable with, e.g. gas pumps. If consumers visit their local gas station and do not realize that the ethanol blend has been increased, this research would indicate that they are unlikely to heed the warning label on the pump. There has been no testing done by EPA to validate the effectiveness of the warning label, which is not consistent with recognized safety standards such as ANSI.

When the U.S. transitioned from leaded gasoline to unleaded gasoline in the 70s and 80’s, new cars running on unleaded gasoline were designed with different fuel tanks to be incompatible with older leaded gasoline in an effort to prevent misfueling. There is no such “transition” plan or tangible differentiation in place for E-15 and it is solely up to the consumer to know what fuel is appropriate for their automobile, lawn mower, generator, pressure washer, etc.

3. Behavioral studies of customers at the gas pump conclude that consumers overwhelmingly favor the lowest priced option, regardless of the consequences.

Historical evidence suggests that when faced with a range of prices at the pump, consumers are far more likely to choose the lowest-priced option despite potential damages to their engines. As previously mentioned, when the United States transitioned from leaded gasoline to unleaded gasoline in the 70’s and 80’s, new cars running on unleaded gasoline were designed with different fuel tanks, to be incompatible with older leaded gasoline pumps. Additionally, car buyers were educated at the point of purchase about the new fuel. Even with those prevention and education measures, the EPA reported that in 1983 – ten years after the introduction of unleaded gasoline – misfueling rates remained as high as 15.5%. The New York Times reported that “customers would go out of their way to pump leaded gas if it was just a few cents cheaper. What they gain at the pump they lose at the repair shop in higher maintenance costs.” If high rates of misfueling still occurred when physical obstacles were in place, we believe that a simple warning label next to the pump will not yield better results. Similarly, the National Bureau of Economic Research reports very strong price elasticity of demand in its own study on the use of premium vs. regular gasoline during times of high gasoline prices. When gasoline prices increased, consumers switched to less expensive, regular gasoline even though premium gasoline was recommended for their vehicles. NBER concludes that households are nearly 20 times more sensitive to the income effect for gasoline than to equivalent effects from other sources.

4. Misfueling due to lack of education to consumers regarding the proper use of E-15 will be significant.

EPA has instructed stakeholders to “develop a broad public education and outreach campaign that provides both consumers and retailers with the information they need to avoid misfueling.” Briggs and Stratton is already taking steps to educate its customers about proper fueling for its products and has introduced additives and E-0 gasoline products to assist consumers with selecting the proper fuel. Briggs and Stratton does not feel it, nor the outdoor power equipment industry, should be held solely responsible for educating tens of millions of Americans of the dangers of misfueling, especially when many already own products which are incompatible with E-15. In a recent study, AAA found that 95% of Americans had not heard of the new E-15 waiver. In a separate study by the National Association of Convenience Stores, it was clear that consumers were confused by E-15; many believed that E-15 had higher fuel economy than E-10. And the study also found that of participants who said they would consider fueling their cars with E-15, 60% of them owned cars for which E-15 is incompatible and prohibited. Despite our best efforts at education and prevention, we believe the risk of misfueling will be substantial, and damage to our products will be irreversible. We risk losing decades of trust and our brand reputation as a manufacturer of quality, reliable products while owners will not get the value they expected when

they purchased the product.

5. The use of Biofuels or “drop-in fuels” has been tested and could prevent misfueling.

Small engines and outdoor power equipment are not designed, warranted, or EPA-approved to operate on gasoline containing more than 10% ethanol. Briggs and Stratton fully supports the development and use of biofuels, from any feedstock, which are “drop-in fuels”. Drop in fuels, by definition, meet existing gasoline specifications and are ready to “drop-in” to infrastructure, minimizing compatibility issues. These fuels are capable of satisfying the additional growth in

biofuel use, while also providing a safe and highly performing general fuel for both legacy and newly manufactured small engines and outdoor power equipment. We have conducted extensive testing with a drop-in isobutanol blended gasoline which demonstrated evidence that such fuels can provide the performance and operational criteria necessary, without demonstrating any negative effects. Drop in fuels had not yet materialized when the RFS was developed in previous market conditions and the EPA was compelled to grant the partial waiver to meet the statutory targets using ethanol. E-15 will not provide compliance with current RFS targets and will require EPA to continue to revise fuel standards creating uncertainty in the marketplace and for manufacturers and increasing misfueling risks to consumers. Misfueling will result in economic harm to all parties and void product warranties. Ever changing targets will result in less efficient

investment of manufacturing resources and more costly products.

Briggs and Stratton Corporation’s Request To The Committee

For the past three years we have worked closely with our Congressman, Jim Sensenbrenner, in an effort to rescind the certification of E-15 until such time as the National Academy of Science can convene a peer review panel to evaluate EPA’s action and recommend alternative approaches which protect consumers and the environment. Briggs and Stratton urges this Committee to work in a bi-partisan, bi-cameral manner to pass reform legislation through revisions to the RFS which will align domestic goals for biofuel use with the market’s ability to produce, distribute and consume such fuels. At a minimum we recommend that the reform legislation rescind the partial waiver for E-15, and establish gasoline blended with up to 10% ethanol as the general purpose domestic fuel. The legislation should also require that all considerations to increase domestic biofuel levels in the future be subject to a formal EPA rulemaking whereby the market’s ability to safely distribute, retail and consume such fuel is provided for.

Generac Is the One to Watch Out For

July 15 -- Power outages are getting more common in US and Canada.

The energy crisis has taken over the whole world and its adverse effects are encompassing the residential and commercial sectors alike. According to the estimates of U.S. Department of Energy, power cuts cost businesses an average $80 billion loss per year. This has opened the gates for standby energy source providers in the market to take advantage of this opportunity. The use of standby power generators are growing more popular each day. Companies providing such machinery are expected to experience exponential growth on the basis of growing demand. The companies are expanding their operations outside the U.S. so that they can cater a larger market. One company working on this principle is Generac Holdings.  Let’s see if investors can trust the company’s growth expectations or not.

Generac’s business outlook

Generac is a manufacturer and marketer of generators and other engine-powered machinery for residential, commercial and industrial markets. The company has a huge market share in the residential sector holding a 70% share of the domestic home standby market in the US. It has a huge distribution network of over 4800 dealers which acts as a competitive advantage and a barrier to entry for the new players in the market. The company’s sales rocketed up to the $1 billion mark for the first time in 2012, which was a 48% growth in sales from 2011. Along with this, the company’s 3 year average income growth stands at a huge 29.4% compared to the industry average of just 3.5%. The cash flows of the company increased from $105 in 2010 to $213 million in 2012.

Though it is performing better than the industry, the company has a lower return on equity and return on assets compared to rival Cummins.  But it may not be too worrisome for Generac, as Cummins has gone down with its revenues last year and its performance might deteriorate more in coming future due to the strict regulations recently introduced by the government on diesel engines. Briggs and Stratton on the other hand is a large cap stable company with little or no growth expected in near future. Thus it is unable to excite you with its margins or returns.

The company’s main focus these days is the optional standby power supply for markets, restaurants, healthcare institutions and telecom companies. This is because of the huge losses these places incur when power is cut and there is no secondary power source.  Hospitals cannot risk the life of patients by not keeping power generators. They are bound to keep power generators for emergency purposes. Moreover, the company is also considering working on a line of generators that use natural gas as the power source. This decision might be fruitful as natural gas prices have declined and demand for such products would be high.

Competitive situation

As mentioned above some of its peers are Briggs and Stratton and Cummins. Cummins gives Generac a tough time in the residential market whereas Briggs is present as a dominant force in the commercial sector. Moreover Cummins is not just confined to power generation; it has a number of other operations. Currently its diesel engine business is in a funk as the government has conducted some serious changes in the regulations for diesel engine vehicles. Cummins is currently working on Natural gas engines to take advantage from the low natural gas prices in the country.

Briggs on the other hand also has two segments i.e. engines and products. Most of its sales and profits are attributed to the engines segment whereas its product line of generators and power washers have reported losses since the past 3 years. Both these other companies have their primary focus on engines, but Generac is focused on the production of power generators only. This gives the company an advantage over its peers to increase its market share of the power generators market. Furthermore, both Cummins and Briggs provide a decent yield to their investors which Generac does not, but Generac does give out hefty special dividends to its investors. In June 2012 the company paid a $6 per share dividend which is huge compared to what you have to pay for the company’s stock.

Recent acquisition

In the last quarter of 2012 the company made a strong move to enter international markets by acquiring Ottomotores. Through this acquisition, the company would take over the operations of Ottomotores Mexico and Ottomotores Brazil in Curitiba. This would enable Generac to combine both companies which are involved in the manufacturing and selling of diesel generators from 15 kW to 2.5 MW. Ottomotores is a leading company in Latin American standby power industry. This would help the company to strengthen its grasp on the Latin American market where its competitor Briggs & Stratton is already present.

Conclusion

Power generators are an essential component for both residential and commercial users alike. With the energy shortage in different countries increasing, the market for these power generators is growing. Growing companies like Generac can make full use of this opportunity due to its exceptional presence in the market over more than 50 years and its strong profitability and cash flows indicating that the company can take a few leaps of faith. Furthermore, its acquisition of Ottomotores will help it to focus on its sales outside the US market and take advantage of synergies.

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