Brunswick Corporation — Q2 2015 Form 10-Q
Business context and reporting period. The unaudited quarter ended July 4, 2015; the six-month period covers the first half of fiscal 2015. Brunswick reports Marine Engine, Boat and Fitness as its continuing operating segments. Bowling operations are reported as discontinued operations.
Financial performance
| Metric | Three months ended July 4, 2015 | Six months ended July 4, 2015 |
|---|---|---|
| Net sales | $1,142.0 million; up 6% year over year (11% constant currency) | $2,127.7 million; up 8% (12% constant currency) |
| Gross margin | $324.4 million; 28.4% of sales, flat year over year | $583.2 million; 27.4%, down 40 basis points |
| Operating earnings / margin | $154.2 million / 13.5%, versus $138.3 million / 12.9% | $242.9 million / 11.4%, versus $220.2 million / 11.2% |
| Continuing-operations net earnings | $107.6 million, up from $87.1 million | $164.2 million, up from $136.2 million |
| Diluted EPS from continuing operations | $1.14, versus $0.92; adjusted EPS was $1.05 versus $0.94 | $1.73, versus $1.43; adjusted EPS was $1.64 versus $1.46 |
| Total net earnings / diluted EPS | $117.8 million / $1.25, including a $10.0 million after-tax bowling-products disposal gain | $174.8 million / $1.84, including the same $10.0 million gain |
In Q2, Marine Engine sales rose 6% and operating earnings 8%; Boat sales rose 8% while operating earnings rose 5%; Fitness sales rose 5% and operating earnings 22%. For the half year, sales increased in all three segments, but Boat operating earnings were nearly flat and Fitness operating earnings increased only slightly.
Cash flow, liquidity and capital
- First-half operating cash flow from continuing operations was $108.8 million, versus $63.6 million a year earlier. Company-defined free cash flow from continuing operations was $36.7 million, versus $16.7 million.
- Capital expenditures were $64.7 million. Working-capital movements reduced operating cash flow; pension contributions were $70.0 million.
- At July 4, cash and cash equivalents were $582.9 million and short-term marketable securities were $25.8 million. Total liquidity, including $294.1 million available under lending facilities, was $902.8 million.
- Total debt was $450.1 million; the debt-to-capitalization ratio was 26.3%. The company reported compliance with its credit-facility covenants.
- First-half financing cash outflows included $60.0 million of share repurchases and $23.1 million of dividends paid. The $200 million repurchase authorization had $120.0 million remaining at quarter-end.
Changes, outlook and material items
- Revenue gains reflected new products, market-share growth and favorable demand in several marine and fitness markets. Foreign exchange reduced reported growth: international sales fell 3% in Q2 and 2% for the half year on a reported basis, while both periods grew 9% at constant currency.
- Management maintained its 2015 outlook: sales growth of 6%–8%, higher earnings, improved operating margins and free cash flow of $180–$200 million. It expected a 34% effective tax rate, capital expenditures of about 4% of sales and $10–$30 million of working-capital cash use.
- Management cited planned spending for product launches, capacity expansion and production ramp-up, foreign-exchange headwinds, and higher research and development investment. It expected second-half margin improvement from less adverse currency comparisons and manufacturing efficiencies.
- The bowling-products business was sold on May 22, 2015, generating $42.8 million in net proceeds and a $10.0 million after-tax gain. Q2 discontinued-operations sales fell to $12.3 million from $66.7 million, in part reflecting the divestitures.
- A second-quarter foreign-entity restructuring and resolution of IRS audits contributed a $7.9 million net tax benefit for the quarter and a $9.2 million benefit for the first half. Adjusted EPS excludes special tax items and restructuring/impairment charges.
- The company expected approximately $70 million of pension lump-sum payments and a $30–$35 million settlement loss in Q4; estimates could change. It had already funded most of its planned 2015 qualified-plan contributions.
- Key risks identified include consumer demand and dealer financing, currency movements, dealer inventory and repurchase exposure, product liability and warranty claims, pension obligations, environmental regulation, execution of growth and capacity plans, and international-market uncertainty. Management reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales growth and margin improvement persist after accounting for currency, acquisitions, new-product costs and seasonal demand.
- Whether the $180–$200 million free-cash-flow target is achieved, given working-capital needs, capital spending and pension funding.
- The extent to which continuing-operations earnings growth depends on the discrete tax benefit; the company’s stated 2015 tax-rate outlook was 34%.
- The final cost and timing of the planned pension settlement and lump-sum payments.
- Potential cash exposure from customer-financing guarantees and product repurchase arrangements; reported maximum obligations were $34.2 million and $58.3 million, respectively, at quarter-end.