Brunswick Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended April 4, 2015; comparative quarter ended March 29, 2014. Brunswick manufactures and markets marine engines and parts, boats, and fitness equipment. Bowling operations are reported as discontinued operations; billiards remains in Fitness. Amounts below are in millions except per-share data and percentages.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $985.7 | $894.9 | +10.1% reported; +13.8% constant currency |
| Gross margin | $258.8; 26.3% | $243.3; 27.2% | Margin down 90 basis points |
| Operating earnings | $88.7; 9.0% margin | $81.9; 9.2% margin | +8.3%; margin down 20 basis points |
| Continuing-operations earnings | $56.6 | $49.1 | +15.3% |
| Net earnings, including discontinued operations | $57.0 | $57.0 | Unchanged |
| Diluted EPS from continuing operations | $0.59 | $0.52 | +$0.07 |
| Diluted EPS, including discontinued operations | $0.60 | $0.60 | Unchanged |
| Operating cash flow, continuing operations | $(125.9) | $(124.1) | Greater cash use |
| Free cash flow, continuing operations | $(168.2) | $(145.4) | Greater cash use |
Sales rose across all segments, with new product launches supporting growth. Marine Engine sales were $562.2 million (+11.3%; +16.0% constant currency) and operating earnings were $74.2 million (+20.3%). Boat sales were $318.0 million (+12.4%; +15.1% constant currency), but operating earnings fell to $7.7 million (−8.3%). Fitness sales were $185.6 million (+3.1%; +6.3% constant currency), while operating earnings declined to $25.8 million (−13.1%).
Gross margin and segment profitability were pressured by foreign-exchange effects, planned costs for new products, capacity expansion and production ramp-up, and the absence of favorable warranty adjustments recorded in Q1 2014. Fitness and Boat earnings declined despite higher sales. Interest expense fell $0.9 million, primarily reflecting interest-rate swaps. The continuing-operations effective tax rate was 33.3%, versus 34.6%.
Balance sheet, cash flow and liquidity
- At April 4, 2015, cash and cash equivalents were $368.2 million; short-term marketable securities were $57.8 million. Combined cash and securities were $426.0 million, down from $635.9 million at year-end 2014.
- Total liquidity, including $294.1 million available under the credit facility, was $720.1 million, compared with $930.0 million at December 31, 2014.
- Total debt was $457.6 million, versus $455.7 million at year-end 2014; debt-to-capitalization was 27.7%, compared with 28.0%. The next significant long-term debt maturity is in 2021. No facility borrowings were outstanding; the company reported compliance with facility covenants.
- Q1 operating cash use reflected seasonal working-capital needs and pension contributions. The company contributed $60.0 million to qualified pension plans during the quarter. Capital expenditures were $33.8 million, up from $21.0 million.
- Cash used in financing activities included $20.0 million of share repurchases and $11.6 million of dividends paid. The quarterly dividend declared was $0.125 per share, versus $0.10 in Q1 2014.
Material changes and unusual items
- Continuing-operations sales increased, but total net earnings were flat because discontinued-operations earnings fell to $0.4 million from $7.9 million. Discontinued-operations sales were $25.2 million versus $74.3 million, reflecting the 2014 sale of retail bowling; Brunswick continued to plan to divest its bowling products business.
- Q1 2015 comprehensive income was $45.7 million, down from $58.5 million, including a $17.1 million foreign-currency translation loss.
- The company’s 2015 pension plan contributions were expected to total approximately $70–$75 million, most funded in Q1. A planned lump-sum offer was expected to involve about $70 million in payments and a $30–$35 million settlement loss, subject to change.
- Brunswick repurchased $40.0 million of shares under its $200 million authorization through April 4, 2015, including $20.0 million in Q1. It expected to complete the remaining program by the end of 2016.
- After quarter-end, Brunswick acquired BLA, an Australian marine-products provider, on April 27, 2015. The board declared a $0.125-per-share dividend on May 6, payable June 15.
Outlook, commentary and risks
Management expected 2015 to bring strong earnings growth, weighted more heavily to the second half, and targeted net-sales growth of 6%–8% versus 2014. It projected higher pretax earnings from revenue growth and slight gross-margin improvement, while expecting first-half operating margins to be flat to slightly lower year over year and second-half margins to improve. The 2015 effective tax-rate estimate was 34%, excluding a possible extension of the U.S. research and development tax credit.
Management projected 2015 free cash flow of $170–$190 million, working-capital cash use of $20–$40 million, and capital expenditures of approximately 4% of net sales. These are forward-looking estimates, not reported results. The company noted risks including foreign-exchange movements, weaker international demand, weather-sensitive marine demand, dealer and customer financing and credit risk, warranty and product-liability exposure, pension funding, capacity expansion and production execution, and environmental regulation. Management said there were no material changes to previously disclosed risk factors or off-balance-sheet arrangements. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the projected 6%–8% sales growth and $170–$190 million free-cash-flow range were achieved, given Q1 cash use and seasonal working-capital demands.
- Whether Boat and Fitness segment margins recovered from Q1 declines and whether production ramp-up, capacity expansion and foreign-exchange pressures eased.
- The actual cost and timing of the planned pension lump-sum settlement, including the estimated $30–$35 million loss and remaining contributions.
- Completion and financial effects of the bowling-products divestiture, and the integration and contribution of the BLA acquisition.
- Actual share repurchases, liquidity and covenant compliance, and any changes in customer financing guarantees, product-repurchase exposure or warranty liabilities.