Brunswick Corporation — Q1 2016 Form 10-Q
Reporting period: 13 weeks ended April 2, 2016. The unaudited results are seasonal and may not indicate full-year performance. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and results
Brunswick manufactures and markets marine engines, boats and fitness equipment. It reported three segments: Marine Engine, Boat and Fitness. The company acquired commercial fitness-equipment maker Cybex on January 20, 2016, and includes it in Fitness.
- Sales: $1,070.3, up 8.6% from $985.7; management cited 10% growth at constant currency and 6% at constant currency excluding acquisitions.
- Profit: Operating earnings were $96.0, up 8.2%, with a 9.0% operating margin, unchanged year over year. Continuing-operations net earnings were $63.2, up 11.7%; diluted continuing-operations EPS was $0.68 versus $0.59. Total net earnings were $64.8, or $0.70 diluted EPS, including $1.6 from discontinued operations.
- Margins and costs: Gross margin was $282.1, or 26.4% of sales, versus $258.8, or 26.3%. SG&A was 13.8% of sales versus 14.2%; R&D was 3.2% versus 3.1%. Q1 included $3.8 of Fitness integration charges.
- Segment sales and operating earnings: Marine Engine sales were $595.5 and earnings $78.3; Boat sales were $336.8 and earnings $16.4; Fitness sales were $218.3 and earnings $20.1. Year-over-year, Boat earnings improved from $7.7, Marine Engine earnings from $74.2, while Fitness earnings declined from $25.8, including Cybex integration and purchase-accounting effects.
- Cash flow: Continuing-operations operating cash flow was negative $90.2 versus negative $125.9. Capital expenditures were $46.2 versus $33.8. Company-defined free cash flow from continuing operations was negative $133.4 versus negative $168.2; this non-GAAP measure excludes acquisitions and certain other items.
- Liquidity and debt: Cash and short-term investments were $283.0 at quarter-end, down from $668.8 at December 31, 2015. Total liquidity, including $296.2 available under lending facilities, was $579.2 versus $965.0 at year-end. Total debt was $450.9; debt-to-capitalization was 25.7%. The company reported compliance with its credit-facility covenants.
- Capital returns: Q1 share repurchases were approximately $40.0; dividends paid were $13.6. The declared dividend was $0.15 per share, unchanged from the Q1 amount declared per share in the prior-year quarter.
Material changes and management commentary
- Marine Engine sales rose 5.9%, supported by service, parts and accessories, acquisitions and outboard engines; sterndrive demand weakened. Segment margin eased to 13.1% from 13.2%.
- Boat sales rose 5.9%, with a favorable shift toward larger boats, while global wholesale unit shipments declined. Margin increased to 4.9% from 2.4%.
- Fitness sales rose 17.6%, primarily from Cybex and prior acquisitions; excluding acquisitions and currency effects, sales increased slightly. Segment margin fell to 9.2% from 13.9%.
- Foreign exchange reduced Q1 operating earnings by approximately $5, or 6%, according to management. Results also reflected favorable volume, product mix, sourcing savings and lower commodity costs, partly offset by currency headwinds, growth spending and acquisition-related costs.
- Cybex cost $195.0 net of cash acquired; its preliminary purchase accounting included $81.9 of goodwill and $83.5 of trade names, customer relationships, patents and technology. The filing says the acquisition was not material to consolidated results for the periods presented.
Guidance, risks and contingencies
- Management maintained its 2016 outlook for sales growth of 9%–11% versus 2015, with acquisitions estimated to contribute 5 percentage points. It expected higher pretax earnings and modest gross- and operating-margin improvement, while projecting operating expenses to rise in dollars but decline slightly as a percentage of sales.
- Management expected foreign exchange to reduce 2016 operating earnings by $5–$10, with much of the impact in the first half. It forecast a 31%–31.5% effective tax rate and $7–$10 of full-year restructuring and integration charges.
- Management targeted 2016 free cash flow above $200, capital expenditures of 4%–4.5% of sales, working-capital cash use of $60–$80, and qualified pension contributions of approximately $35–$40.
- Key risks include seasonal and discretionary marine demand, weak international marine markets, currency volatility, dealer inventory and financing, customer defaults and potential product repurchases, acquisition integration, pension funding, input costs, competition, product liability and warranty claims, and environmental regulation. The filing reported no material changes to the risk factors in the 2015 Form 10-K.
- Customer-financing guarantees had maximum potential cash obligations of $36.4; product-repurchase arrangements had single-year and maximum potential payments of $60.4. Management noted collateral mitigates exposure and historical losses have not been significant, but losses could rise if dealer defaults exceed expectations. Management did not expect existing litigation matters to have a material adverse effect.
- After quarter-end, the board declared the $0.15 dividend payable June 15, 2016. On May 4, 2016, it also amended the bylaws to permit qualifying shareholder proxy access.
Important facts for investors to verify
- Whether 2016 sales, earnings, margin and free-cash-flow targets were achieved, and how much growth came from acquisitions rather than underlying demand.
- Whether Fitness earnings recover as Cybex integration and purchase-accounting effects progress, and whether Marine Engine and Boat trends remain favorable.
- Cash conversion through the marine selling season, working-capital requirements, capital spending and pension contributions; Q1 operating cash flow was negative despite higher earnings.
- Liquidity and covenant headroom after the acquisition, repurchases and dividend payments; confirm the terms and availability of the revolving facility.
- Dealer credit, guarantee and repurchase exposures, including actual defaults and losses relative to recorded accruals.
- Whether the preliminary Cybex purchase-price allocation changes, particularly goodwill and intangible-asset values, and the associated amortization and integration costs.