Brunswick Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a filing limited to the fourth quarter. Brunswick designs, manufactures and sells marine engines, boats, fitness equipment, and bowling and billiards products, and operates bowling centers. Unless noted, amounts are in U.S. dollars.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $3,717.6 million | $3,670.0 million |
| Gross margin | $944.0 million; 25.4% | $877.4 million; 23.9% |
| Operating earnings | $264.1 million; 7.1% margin | $213.7 million; 5.8% margin |
| Continuing-operations net earnings | $147.4 million | $90.6 million |
| Diluted EPS, continuing operations | $1.59 | $0.98 |
| Total net earnings, including discontinued operations | $50.0 million | $71.9 million |
| Operating cash flow, continuing operations | $183.6 million | $135.2 million |
| Free cash flow, continuing operations* | $90.2 million | $91.8 million |
| Capital expenditures | $115.2 million | $87.1 million |
| Total debt at year-end | $571.8 million | $692.8 million |
| Cash, cash equivalents and marketable securities | $428.7 million | $507.8 million |
| Net debt* | $143.1 million | $185.0 million |
| Total liquidity* | $701.5 million | $739.3 million |
*Company-defined non-GAAP measures. Free cash flow was approximately flat despite higher operating cash flow, primarily as capital expenditures increased. The company reported a debt-to-capitalization ratio of 88.0%, down from 95.7%; year-end shareholders’ equity was $77.7 million.
Material changes and segment results
- Sales rose 1.3% year over year; operating earnings increased 23.6%. Higher margins reflected cost reductions, efficiency gains and lower depreciation and pension expense. Debt retirements helped reduce interest expense by $13.7 million.
- Marine Engine: Sales increased 4.4% to $1,988.5 million; operating earnings rose to $243.8 million. Outboard engines and marine parts and service were stronger, while sterndrive demand and European sales remained weak.
- Boat: Sales declined 0.5% to $1,002.6 million; operating loss widened to $28.5 million. Aluminum, pontoon and outboard-powered boats gained, offset by weakness in larger fiberglass sterndrive boats and Europe.
- Fitness: Sales were essentially flat at $635.9 million; operating earnings increased to $103.1 million, with margin rising to 16.2%.
- Bowling & Billiards: Sales declined 0.9% to $322.3 million; operating earnings increased to $28.5 million, partly due to operating efficiencies.
- International sales were $1,397.2 million, or 38% of total sales, down from $1,483.6 million and 40% in 2011, with Europe particularly weak.
Outlook, management commentary and key risks
- Management forecast 2013 revenue growth of 3%–5%, with growth expected across all four segments, and higher earnings per share. It expected gross margins to remain strong while operating expenses rise with investment in growth initiatives.
- Management planned $100–$125 million of debt reduction in 2013, capital expenditures of approximately 3.5%–4.0% of projected sales, and a $25–$50 million use of cash for working capital. Planned pension contributions were approximately $50–$60 million to qualified plans and about $4 million for nonqualified plan benefits.
- The projected 2013 effective tax rate was 16%–18%, excluding specified one-time items. Management noted a possible substantial release of deferred-tax valuation allowances in 2013; any release would be a special tax item and was not assured.
- On December 31, 2012, the board authorized the exit of the Hatteras and Cabo boat businesses. Brunswick recorded a $52.7 million pretax, non-cash impairment ($53.2 million after tax) because expected sale proceeds were below carrying value. These businesses are presented as discontinued operations.
- Discontinued operations produced a $97.4 million net loss in 2012, versus an $18.7 million loss in 2011. Consequently, total net earnings fell despite stronger continuing-operations results. Fourth-quarter 2012 included a $75.3 million total net loss, including a $59.2 million discontinued-operations loss.
- Continuing-operations results included $25.8 million of restructuring, exit and impairment charges and a $16.3 million loss on early debt extinguishment. The company expected an additional $5–$6 million of restructuring charges in 2013.
- Principal risks include discretionary and cyclical demand, especially for marine products; European weakness; dealer access to floorplan financing and dealer defaults; inventory and fixed-cost exposure; supply shortages and cost inflation; foreign exchange; pension funding and discount-rate sensitivity; product liability and warranty claims; and execution of plant consolidations. The company reported periodic supply shortages in 2010–2012.
- The qualified pension plans were materially underfunded; the filing cites a year-end funded ratio of approximately 67% in its risk discussion and an underfunding of approximately $447 million on a projected-benefit-obligation basis. Required contributions could affect future cash flow.
- Environmental remediation exposure was estimated at $42–$68 million, with $43.6 million reserved at year-end. Management did not expect known litigation or environmental matters, net of reserves, to materially adversely affect the company, but estimates could change.
Important facts for investors to verify
- Whether the 2013 sales, earnings, margin and debt-reduction targets were achieved, and whether marine-market recovery supported the forecast.
- The sale or wind-down outcome for Hatteras and Cabo, including proceeds versus carrying value and any additional discontinued-operation losses.
- Cash conversion and working-capital trends, particularly the $73.1 million inventory increase, elevated capital spending and seasonal marine cash requirements.
- Pension funding needs, the assumptions underlying the funded-status estimate, and the effect of discount rates and asset returns on required contributions.
- Dealer-financing continuity: Brunswick Acceptance Company’s agreement ran through June 30, 2014, and renewal, purchase or termination options could affect dealer credit availability.
- Progress and costs of the Knoxville boat-plant consolidation and other restructuring, as well as supplier capacity to meet planned production growth.
- Deferred-tax valuation allowance judgments and any reversal; the filing reports a $717.5 million total valuation allowance at year-end.
- Contingent repurchase and recourse obligations, environmental exposures, and the sensitivity of results to currency and commodity movements.