Brunswick Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparable period ended April 2, 2011. Brunswick manufactures and markets marine, fitness, bowling and billiards products. Management cautions that results are seasonal and the quarter is not necessarily indicative of the full year.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $974.2 million | $985.9 million |
| Gross margin | $236.0 million; 24.2% | $236.3 million; 24.0% |
| Operating earnings | $67.6 million; 6.9% margin | $67.0 million; 6.8% margin |
| Net earnings | $39.7 million | $27.5 million |
| Diluted EPS | $0.43 | $0.30 |
| Net cash used for operating activities | $69.7 million | $83.1 million |
| Free cash flow (company-defined, non-GAAP) | $(78.2) million | $(83.1) million |
Sales declined 1.2%, while operating earnings rose 0.9% and net earnings rose 44.4%. Higher earnings reflected lower restructuring costs, interest expense, variable compensation, depreciation and pension expense, as well as cost savings. The prior-year comparison included a $6.8 million gain on sale of an Australian distribution facility and a $4.3 million debt-extinguishment loss; neither had a comparable Q1 2012 item. Q1 2012 restructuring charges were $0.2 million versus $5.3 million.
Segments
- Marine Engine: Sales of $489.4 million, down 2.3%; operating earnings of $47.9 million, down 17.0%. Sterndrive market weakness and production ramp-up issues after plant consolidation weighed on results.
- Boat: Sales of $306.4 million, up 1.0%; operating earnings of $2.8 million versus a $4.8 million loss. Higher shipments and market-share gains helped, partly offset by smaller-boat mix and the Sealine divestiture.
- Fitness: Sales of $157.1 million, up 0.4%; operating earnings of $23.7 million, up 1.3%.
- Bowling & Billiards: Sales of $89.9 million, up 3.0%; operating earnings of $14.4 million, up 1.4%.
Cash, debt and liquidity
At March 31, 2012, cash and cash equivalents were $307.1 million; cash plus short- and long-term marketable securities totaled $426.9 million. Total debt was $696.0 million and company-defined net debt was $269.1 million, up from $185.0 million at December 31, 2011. Total liquidity, including $272.4 million available under the asset-based facility, was $699.3 million. There were no borrowings under that facility; the company reported compliance with its fixed-charge covenant.
Operating cash use primarily reflected seasonal working-capital needs, including higher receivables and inventory and payment of prior-year variable compensation. Capital expenditures were $17.5 million. Q1 debt interest expense was $18.1 million, down $5.2 million year over year, mainly due to lower average debt following 2011 retirements. Shareholders’ equity was $82.4 million.
Outlook, commentary and risks
- Management expected some Q1 headwinds to continue into Q2, but planned for significant sales and earnings growth in the second half of 2012. The 2012 outlook called for mid-single-digit consolidated revenue growth and a strong increase in operating earnings, with a stable-to-improving U.S. marine market and a declining European market.
- Management expected gross margins to benefit from cost reductions and operating efficiencies, and anticipated lower restructuring charges, interest expense, depreciation and pension expense versus 2011. Planned 2012 capital expenditures were approximately $120 million, compared with $90 million in 2011.
- The company anticipated $5 million to $10 million of additional 2012 restructuring charges, primarily in Marine Engine and Boat. It expected $75 million to $85 million of qualified pension contributions for 2012 and approximately $3 million of additional nonqualified-plan funding.
- Key risks include weak European demand and consumer credit, marine-market conditions, sterndrive production execution, dealer financing and potential repurchase obligations, input and compliance costs, pension funding, and the company’s ability to realize deferred tax assets. Management said the company remained in a cumulative three-year book-loss position, creating uncertainty around some deferred tax assets.
- Customer financing exposure included maximum obligations of $49.3 million for guarantees and $108.0 million for product repurchases; these are distinct disclosed categories and are partly mitigated by collateral or product value. The company reported $3.4 million and $1.9 million accrued for potential losses, respectively.
- After quarter-end, Brunswick repurchased $9.0 million of 2016 senior notes and $1.5 million of 2013 senior notes, and expected to record a $2.2 million extinguishment loss in Q2. More than 2,500 asbestos lawsuits had been reported at year-end 2011; the company said almost all had been dismissed or were expected to be dismissed following a February 2012 Supreme Court decision, and did not expect remaining cases to have a material adverse effect.
Important facts for investors to verify
- Whether sterndrive production ramp-up problems ease and planned second-half growth materializes.
- Whether seasonal working-capital use reverses and liquidity remains adequate as sales and production change.
- Actual restructuring costs, capital spending and pension contributions against management’s 2012 estimates.
- Debt-reduction progress, the 2013 note maturity and covenant availability under the asset-based facility.
- Developments in dealer credit quality, repurchase and guarantee exposure, deferred-tax-asset valuation and asbestos litigation.