Brunswick Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 27, 2014. Brunswick manufactures and markets marine engines, boats and fitness products. Figures below are in millions of dollars, except per-share data, percentages and where noted. Results generally reflect continuing operations unless stated otherwise.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $932.1 | $824.4 | $2,900.1 | $2,772.9 |
| Gross margin | $259.2; 27.8% | $227.6; 27.6% | $806.8; 27.8% | $754.5; 27.2% |
| Operating earnings | $93.7; 10.1% margin | $62.7; 7.6% margin | $313.9; 10.8% margin | $273.7; 9.9% margin |
| Continuing-operations net earnings | $61.0 | $57.2 | $197.2 | $178.1 |
| Diluted EPS, continuing operations | $0.64 | $0.61 | $2.07 | $1.90 |
| Net earnings, including discontinued operations | $104.4 | $57.8 | $250.0 | $188.0 |
- Q3 sales rose 13.1%, operating earnings rose 49.4%, and continuing-operations diluted EPS increased 4.9%. Q3 adjusted continuing-operations diluted EPS was $0.63, up 9% from $0.58.
- Nine-month sales rose 4.6%, operating earnings rose 14.7%, and continuing-operations diluted EPS increased 7.7%. Adjusted continuing-operations diluted EPS was $2.09, down 13% from $2.41, principally reflecting the higher effective tax rate in 2014.
- Continuing-operations effective tax rates were 31.4% for Q3 and 33.4% year to date, versus (4.8)% and 14.3%, respectively, in 2013. The 2013 comparisons included differing tax valuation allowance and special tax effects.
Cash flow, liquidity and debt
- Nine-month cash from continuing operating activities was $122.7, versus $140.5 in 2013. Capital expenditures were $79.6; company-defined free cash flow was $48.7, down from $68.6. Working-capital changes, pension contributions and seasonal receivables and inventory needs weighed on operating cash flow.
- Cash and cash equivalents were $596.0 at September 27, 2014; short-term investments were $0.8 and restricted cash was $18.6. Cash, cash equivalents and short-term investments totaled $596.8.
- Total debt was $456.6, compared with $459.8 at year-end 2013. Brunswick reported net cash (cash and short-term investments less debt) of $140.2, versus net debt of $90.6 at year-end 2013. Total liquidity, including $293.8 of available facility capacity, was $890.6.
- The amended $300 million secured revolving facility runs through 2019; there were no borrowings under it during the first nine months. The company reported compliance with its interest-coverage and leverage covenants. The next significant long-term debt maturity was stated to be in 2021.
Material changes and business developments
- Q3 sales increased across all continuing segments. Marine Engine growth reflected outboards and parts and accessories; Boat growth included new products, higher average selling prices and increased wholesale shipments; Fitness benefited from U.S. and international demand. International sales rose 10% in Q3 and 3% year to date.
- Marine Engine Q3 sales increased 10.9% and operating earnings rose to $93.3 from $75.2. Boat sales increased 22.4%; its operating loss narrowed to $7.0 from $16.9. Fitness sales increased 10.7%, while operating earnings were nearly flat at $25.8.
- Brunswick completed the sale of its retail bowling business and two California bowling centers on September 18, 2014, receiving net cash proceeds of $264.3 and recording a $52.6 after-tax gain. The sale contributed materially to reported net earnings and cash. Brunswick retained certain liabilities and guarantees, and planned to divest its bowling products business. Bowling results are reported as discontinued operations.
- The Q3 discontinued businesses recorded $68.8 of sales and a $9.2 after-tax operating loss, before the disposal gain. Hatteras and Cabo boat businesses had been sold in 2013. Billiards remains in the Fitness segment.
- Brunswick acquired Whale and Bell for a combined $41.8 net cash consideration in the first nine months; both are managed in Marine Engine’s service, parts and accessories businesses.
- Restructuring charges fell to $0.9 in Q3 and $4.0 year to date, versus $2.6 and $10.7 in 2013. The company reported expected annual savings from specified restructuring actions, with full benefits expected in 2014 or 2015 depending on the initiative.
Outlook, risks and contingencies
- Management expected full-year 2014 sales growth of 6%, growth in each segment, higher pretax earnings and improved gross margins. It expected full-year EPS to be lower than 2013 because of the higher effective tax rate, and projected a 2014 tax rate of approximately 34%.
- Management projected 2014 capital expenditures of approximately $140, working-capital cash use of $40–$60, and free cash flow of $110–$135. It expected cash taxes to be in the low-double-digit percentage range of pretax earnings and approximately $75 of 2014 qualified pension contributions.
- Demand remained uneven: management cited challenging European marine conditions, weakness in some international markets, declines in global fiberglass sterndrive products, and weaker demand in some markets, partly offset by outboard, parts and accessories, and fitness demand. Weather, discretionary consumer spending, dealer financing, competition, foreign exchange, commodity prices, warranty claims, pension funding and environmental regulation were among the stated risks.
- Customer-financing guarantees had maximum obligations of $37.0; product repurchase obligations had maximum exposure of $55.4. Accrued expected losses were $1.3 for each category. Management said historical cash losses had not been significant, but could rise if dealer defaults exceed expectations. No significant legal or environmental commitment changes were reported; management cautioned that case outcomes remain uncertain.
- A voluntary lump-sum pension offer was underway; the company expected a settlement loss but said the amount could not yet be estimated. A $200 million share-repurchase authorization and a $0.125-per-share quarterly dividend were announced after quarter-end.
Important facts for investors to verify
- How much of reported earnings and cash generation is attributable to the bowling-business disposal rather than ongoing operations, and what liabilities or lease guarantees remain?
- Whether the projected 6% annual sales growth and $110–$135 free-cash-flow range are achieved, given seasonal working-capital needs, pension funding and planned investment.
- Whether the higher tax rate and other special items continue to affect EPS, and how reported EPS compares with management’s adjusted measure.
- Whether marine-market weakness, especially in international and fiberglass sterndrive categories, affects segment margins, inventory and dealer health.
- Potential pension settlement costs, restructuring charges and customer-financing or product-repurchase losses; also monitor facility covenant compliance and the use of cash for the authorized repurchase program.