Brunswick Corporation — Q2 2016 Form 10-Q
Business context and reporting period. The unaudited quarter and six-month period ended July 2, 2016 cover Brunswick’s Marine Engine, Boat and Fitness businesses. Results are seasonal and interim performance may not indicate full-year results.
Financial performance
| Metric | Q2 2016 | Six months 2016 |
|---|---|---|
| Net sales | $1,242.2 million, up 8.8% | $2,312.5 million, up 8.7% |
| Gross margin | $353.3 million; 28.4% | $635.4 million; 27.5% |
| Operating earnings / margin | $161.9 million / 13.0% | $257.9 million / 11.2% |
| Continuing-operations net earnings | $108.1 million | $171.3 million |
| Diluted continuing-operations EPS | $1.17 | $1.85 |
| Operating cash flow, continuing operations | Not separately provided for the quarter | $213.1 million |
| Capital expenditures | Not separately provided for the quarter | $90.0 million |
| Free cash flow, continuing operations (company-defined non-GAAP) | Not separately provided for the quarter | $130.3 million |
Q2 net earnings were $108.1 million versus $117.8 million a year earlier; the prior-year quarter included a $10.0 million after-tax gain on the sale of the bowling products business. Continuing-operations diluted EPS rose from $1.14 to $1.17. Adjusted continuing-operations diluted EPS, excluding restructuring and integration charges, was $1.19 versus $1.05. For the first half, adjusted EPS was $1.89 versus $1.64.
Balance sheet and liquidity
- At July 2, cash, cash equivalents and short-term investments were $493.3 million, down from $668.8 million at year-end 2015. Total liquidity, including $296.2 million available under the credit facility, was $789.5 million.
- Total debt was $452.6 million; debt-to-capitalization was 24.6%. The next significant long-term debt maturity was not until 2021.
- The amended $300 million revolving credit facility runs through June 2021. Brunswick reported compliance with its financial covenants.
- Q2 and first-half dividends declared were $0.15 and $0.30 per share, respectively.
Material changes and operating drivers
- Second-quarter sales increased 9% on a constant-currency basis and 5% excluding acquisitions. First-half sales rose 10% on a constant-currency basis and 5% excluding acquisitions.
- Marine Engine Q2 sales increased 4% and operating earnings increased 5%; outboard engines and service, parts and accessories grew, while sterndrive engines declined.
- Boat Q2 sales increased 5% and operating earnings increased 9%; fiberglass outboard and aluminum boats were strong, partly offset by declines in sterndrive and inboard boats.
- Fitness Q2 sales increased 32%, with acquisitions contributing 21 percentage points. Operating earnings increased 4% in the quarter but declined 10% for the first half; integration costs, growth investment and mix weighed on margins.
- Operating margin fell 50 basis points in Q2 and 20 basis points for the first half. Q2 gross margin was flat; cost savings and lower commodity costs were offset by foreign exchange and spending on growth initiatives.
- First-half cash from continuing operations increased from $108.8 million to $213.1 million year over year. Investing used $293.6 million, including $90.0 million of capital expenditures and $215.9 million for acquisitions. Financing used $86.4 million, including $60.0 million of repurchases and $27.2 million of dividends.
Outlook, commentary and risks
- Management targeted 2016 net sales growth of 10%–11% versus 2015, assuming no change in its global macroeconomic outlook; acquisitions were expected to contribute about 5 percentage points.
- Management expected higher 2016 pretax earnings, slight gross- and operating-margin improvement, and free cash flow above $200 million. It projected a 31% effective tax rate and $8–$10 million of full-year restructuring and integration charges.
- Management estimated foreign exchange would reduce operating-earnings comparisons by $12–$17 million for 2016, with much of the impact in the first half. It also expected $40–$60 million of working-capital cash use, pension contributions of approximately $70–$75 million and capital expenditures of 4%–4.5% of sales.
- Cybex was acquired in January 2016; Thunder Jet was acquired July 1 for $20.9 million, with preliminary goodwill of $12.2 million. On July 27, Brunswick signed an agreement to acquire Indoor Cycling Group. Acquisition purchase accounting remains subject to finalization where noted.
- Key disclosed risks include discretionary consumer demand, currency movements, acquisition integration, dealer and customer financing, inventory management, suppliers and commodity costs, pension funding, product liability and warranty exposure, environmental regulation, weather, and execution of growth initiatives. Management reported no material changes to previously disclosed risk factors.
- Customer financing guarantees and product warranties create contingent exposures; management said historical losses on guarantees and repurchases had not been significant. It did not expect existing litigation matters to materially affect consolidated results, while noting that outcomes are inherently unpredictable.
Important facts for investors to verify
- Whether the 10%–11% sales-growth and greater-than-$200-million free-cash-flow targets were achieved, and the assumptions underlying those targets.
- How much reported growth and earnings came from acquisitions versus organic demand, particularly in Fitness.
- Whether marine demand weakness in sterndrive and certain international markets, foreign-exchange headwinds, or boat shipment trends persisted.
- Acquisition integration costs, purchase-price allocations, and the financial impact of Thunder Jet and the proposed Indoor Cycling Group transaction.
- Cash conversion, seasonal working-capital needs, pension funding, capital spending and share repurchases relative to liquidity and debt.
- Management’s non-GAAP definitions for adjusted EPS, free cash flow and total liquidity when comparing these measures with other companies.