Business context and reporting period
Brunswick Corporation’s unaudited Form 10-Q covers the third quarter ended October 1, 2016, and the first nine months of fiscal 2016. The company reports Marine Engine, Boat and Fitness segments. Results reflect continuing operations unless noted; interim performance may be affected by seasonality.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $1,093.0 million | $991.9 million | $3,405.5 million | $3,119.6 million |
| Operating earnings | $122.5 million | $115.8 million | $380.4 million | $358.7 million |
| Operating margin | 11.2% | 11.7% | 11.2% | 11.5% |
| Continuing-operations net earnings | $85.3 million | $72.2 million | $256.6 million | $236.4 million |
| Diluted continuing-operations EPS | $0.93 | $0.77 | $2.78 | $2.50 |
| Gross margin | 28.3% | 28.4% | 27.8% | 27.7% |
Q3 net earnings, including discontinued operations, were $85.4 million versus $75.9 million; nine-month net earnings were $258.3 million versus $250.7 million. Prior-year discontinued-operations results included disposal gains of $2.8 million for the quarter and $12.8 million for the nine-month period.
For the first nine months, operating cash flow from continuing operations was $282.1 million, compared with $240.7 million. Company-defined free cash flow from continuing operations was $157.5 million, up from $131.0 million. Capital expenditures were $131.9 million, versus $98.5 million.
At October 1, 2016, cash, cash equivalents and short-term investments totaled $438.0 million; total liquidity, including available credit, was $733.7 million. Total debt was $452.2 million, and debt-to-capitalization was 24.0%. The company reported $4.2 million of current debt maturities and $448.0 million of long-term debt.
Changes versus comparable periods
- Q3 sales rose 10% year over year; nine-month sales rose 9% on a GAAP basis. On a constant-currency basis excluding acquisitions, sales increased 6% in both periods.
- Q3 operating earnings increased 5.8%, while operating margin declined 50 basis points. Nine-month operating earnings rose 6.0%, while operating margin declined 30 basis points.
- Marine Engine and Boat sales grew in both periods. Fitness sales growth included substantial acquisition contributions; Fitness operating earnings fell 4.3% for the first nine months, partly reflecting integration costs and growth investments.
- Q3 diluted EPS from continuing operations rose 20.8%; nine-month diluted EPS rose 11.2%. Lower share counts from repurchases also supported per-share growth.
- Cash and short-term investments declined $230.8 million from December 31, 2015, reflecting acquisitions, capital spending, repurchases, dividends and operating needs. The company acquired Cybex, Thunder Jet and ICG during 2016, with $269.5 million of net cash used for acquisitions in the first nine months.
Outlook, commentary and risks
- Management continued to target approximately 10% net sales growth for 2016 versus 2015, absent significant changes in global macroeconomic assumptions, and expected another year of earnings growth and strong free cash flow generation.
- Management projected 2016 free cash flow above $215 million, capital expenditures of approximately 4%–4.5% of sales, and an effective tax rate of approximately 30%. Acquisitions were expected to contribute about five percentage points to 2016 sales growth.
- Management expected approximately $12 million of full-year restructuring and integration charges. It projected approximately $14 million of adverse 2016 operating-earnings impact from foreign exchange.
- The company planned fourth-quarter group annuity purchases for certain pension participants and estimated a related settlement loss of $60 million–$65 million; the final amount could change. Management said most planned 2016 qualified-plan contributions had been funded and did not expect additional contributions to those plans in 2016.
- Drivers included marine service, parts and accessories, outboard engines, boat demand and international Fitness growth. Offsets and uncertainties included sterndrive engine weakness, uneven international marine markets, currency headwinds, acquisition integration, consumer demand, dealer financing and inventory management, pension obligations, product liability and warranty exposure, and environmental regulation.
- The June 2016 amended credit facility provides $300 million of borrowing capacity through June 2021. Brunswick reported compliance with its financial covenants and said its next significant long-term debt maturity is not until 2021. No material changes to previously disclosed risk factors were reported.
- The board declared a subsequent quarterly dividend of $0.165 per share, payable December 15, 2016. The company had approximately $270 million remaining under its share-repurchase authorization as of October 1.
Important facts for investors to verify
- Whether management’s full-year sales-growth and free-cash-flow targets were achieved, considering seasonality and working-capital needs.
- The final pension-annuity settlement loss and its effect on reported fourth-quarter earnings and cash requirements.
- Fitness acquisition integration, restructuring costs and the expected contribution from Cybex, ICG and Thunder Jet.
- Underlying segment margins and demand trends, especially sterndrive engines, boat wholesale shipments and Fitness sales channels.
- Cash deployment, acquisition spending, capital expenditures, repurchases, dividends and available liquidity.
- Exposure to currency movements, dealer/customer defaults, warranties and other contingencies; management stated that recognized litigation reserves were not expected to result in a material adverse effect.