Brunswick Corporation — Q2 2013 Form 10-Q
Business context and reporting period. The filing covers the quarter ended June 29, 2013, and the six months then ended. Brunswick operates Marine Engine, Boat, Fitness, and Bowling & Billiards segments. Hatteras and Cabo boat businesses are reported as discontinued operations following the company’s decision to exit them.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $1,098.3 million | $1,053.9 million | $2,093.6 million | $2,013.5 million |
| Operating earnings | $136.7 million | $125.1 million | $226.6 million | $200.4 million |
| Operating margin | 12.4% | 11.9% | 10.8% | 10.0% |
| Continuing-operations net earnings | $79.3 million | $94.0 million | $134.2 million | $141.0 million |
| Net earnings, including discontinued operations | $80.4 million | $83.6 million | $130.2 million | $123.3 million |
| Diluted EPS, continuing operations | $0.85 | $1.02 | $1.43 | $1.53 |
| Diluted EPS, total | $0.86 | $0.90 | $1.39 | $1.34 |
- Q2 sales increased 4.2%; first-half sales increased 4.0%. Operating earnings rose 9.3% in Q2 and 13.1% in the first half.
- Higher operating earnings reflected sales growth, cost reductions and improved efficiencies. Q2 continuing-operations earnings fell mainly because the debt retirement generated a $32.3 million early-extinguishment loss; lower interest expense partly offset that charge.
- First-half continuing operating cash flow was $107.0 million, versus $65.9 million. Free cash flow, a company-defined non-GAAP measure, was $53.6 million versus $50.7 million. Capital expenditures were $61.3 million versus $36.3 million. Total operating cash flow, including discontinued operations, was $81.1 million.
- At June 29, cash and marketable securities totaled $330.2 million; total debt was $472.4 million and net debt was $142.2 million. Total liquidity, including available borrowing capacity, was $609.2 million. The company had no borrowings under its $300 million asset-based facility and $279.0 million of available capacity.
- In May, Brunswick issued $150 million of 4.625% senior notes due 2021 and used the proceeds, along with cash and proceeds from liquidating securities, to repurchase $249.8 million of 11.25% notes due 2016. The transaction reduced debt and interest costs but produced the early-extinguishment loss.
Material changes and segment trends
- Marine Engine: Q2 sales rose 6.9% and operating earnings rose 13.8%, supported by U.S. outboard engines and marine parts and service. First-half sales rose 6.7%; earnings benefited from improved efficiencies, the absence of prior-year production-transition problems and a $5.5 million real-estate sale gain.
- Boat: Q2 sales were nearly flat, while operating earnings fell 21.9%; first-half sales were flat and earnings fell 41.8%. Growth in outboard boats was offset by weak fiberglass sterndrive demand, restructuring costs and the absence of favorable prior-year legal and insurance settlements.
- Fitness: Q2 sales rose 5.2% and earnings 4.5%; first-half sales rose 5.5% and earnings 3.9%, with international and commercial sales supporting growth.
- Bowling & Billiards: Q2 sales fell 2.2% and earnings 33.3%; first-half sales fell 3.9% and earnings 1.8%. Lower bowling-product sales and a reduced retail-center count weighed on results.
- Q2 restructuring, exit and impairment charges were $4.0 million versus $0.8 million; first-half charges were $9.6 million versus $1.0 million. Brunswick agreed to divest its European retail bowling centers and consolidated yacht and motoryacht production at Palm Coast, suspending production at Sykes Creek at the end of June.
Outlook, risks and other matters
- Management targeted 4% sales growth for 2013 and expected higher full-year earnings per share, supported by sales growth, improved operating earnings and lower net interest expense. It expected gross margin to improve versus 2012, with the first-half improvement moderating, particularly in Q3; operating expenses as a percentage of sales were expected to be comparable to 2012.
- Management expected an adjusted 2013 effective tax rate of 11%–13%, excluding specified one-time charges and special tax items. A significant portion of valuation allowances might be reversed by year-end, but timing and amount were uncertain.
- Management expected $3–$5 million of additional restructuring charges in 2013. Announced actions were expected to yield annual savings of $1–$2 million from the bowling-center divestiture, $3–$5 million from yacht production consolidation, and $10–$12 million from the Bayliner cruiser and manufacturing changes, with full benefits expected in 2014. These actions may also reduce sales.
- The company expected 2013 working capital to use $25–$50 million of cash, capital expenditures of approximately 4% of projected sales, and free cash flow generally consistent with 2012. It expected qualified-pension contributions of $50–$60 million in 2013.
- Management cited below-expectation U.S. marine retail demand, weather, weak consumer confidence and spending, and continuing weakness in fiberglass sterndrive boats. Other key risks include seasonality, dealer financing and repurchase exposure, restructuring execution, warranty and product-liability claims, pension funding, foreign exchange, commodity costs, and environmental requirements. Management said liquidity was adequate and the next significant long-term debt maturity was not until 2021.
- The filing reports no material changes to previously disclosed risk factors or to legal and environmental commitments. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Investor verification points
- Track whether targeted 2013 sales growth, higher EPS, margin improvement and free-cash-flow expectations were achieved, considering marine seasonality and weak sterndrive demand.
- Verify the realized savings, sales effects and remaining costs from the boat and bowling restructuring and divestiture actions.
- Reconcile reported earnings with the $32.3 million debt-extinguishment loss, restructuring charges, real-estate gain and tax items; review the company’s adjusted EPS measure alongside GAAP results.
- Monitor cash conversion, working-capital use, capital spending, pension contributions and the remaining liquidity and debt position.
- Assess potential changes to tax valuation allowances and unrecognized tax benefits, and monitor dealer-default, repurchase, warranty and litigation exposures.