Brunswick Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter ended October 3, 2015; comparisons are with the quarter ended September 27, 2014. The nine-month period is also summarized. Financial statements are unaudited. Brunswick reports Marine Engine, Boat and Fitness as continuing segments; its retail bowling and bowling products businesses are reported as discontinued operations. Management cautions that seasonal interim results may not indicate full-year performance.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $991.9 million | $932.1 million | $3,119.6 million | $2,900.1 million |
| Operating earnings | $115.8 million | $93.7 million | $358.7 million | $313.9 million |
| Operating margin | 11.7% | 10.1% | 11.5% | 10.8% |
| Continuing-operations net earnings | $72.2 million | $61.0 million | $236.4 million | $197.2 million |
| Diluted continuing-operations EPS | $0.77 | $0.64 | $2.50 | $2.07 |
| Consolidated net earnings, including discontinued operations | $75.9 million | $104.4 million | $250.7 million | $250.0 million |
- Sales rose 6.4% in Q3 and 7.6% over nine months on a reported basis; at prior-year exchange rates, growth was 10.8% and 11.7%, respectively. Foreign-currency translation weighed on reported international sales.
- Q3 gross margin was 28.4%, up 0.6 percentage points year over year; nine-month gross margin was 27.7%, down 0.1 points. Management cited favorable mix, sourcing savings and cost reductions in Q3; nine-month results also reflected currency effects, new-product ramp-up costs and the absence of favorable prior-year warranty adjustments.
- Q3 diluted adjusted continuing-operations EPS was $0.77 versus $0.63; nine-month adjusted EPS was $2.41 versus $2.09. These are non-GAAP measures; the filing defines the adjustments as restructuring charges and special tax items.
- Reported consolidated net earnings obscure the improvement in continuing operations: prior-year discontinued-operations earnings included a $52.6 million after-tax disposal gain, compared with $2.8 million in Q3 2015. Nine-month disposal gains were $52.6 million in 2014 and $12.8 million in 2015.
Segments and material changes
- Marine Engine: Q3 sales increased 3.8% reported (7.9% constant currency) to $588.2 million; operating earnings rose to $102.5 million from $93.3 million. Growth in parts and accessories and outboard engines was partly offset by weaker sterndrive engines.
- Boat: Q3 sales increased 15.6% reported (18.6% constant currency) to $271.3 million. The segment returned to operating earnings of $6.4 million from a $7.0 million loss, supported by higher shipments, favorable mix and cost savings.
- Fitness: Q3 sales increased 4.5% reported (8.8% constant currency) to $197.5 million; operating earnings rose to $27.6 million from $25.8 million. The SCIFIT acquisition contributed to sales growth.
- Brunswick acquired BLA, an Australian marine-products distributor, and SCIFIT, a fitness-equipment provider, in 2015. It completed the sale of its bowling products business in May 2015. These transactions were not material to consolidated results, according to the filing.
Cash flow, liquidity and capital
- For the first nine months, cash from continuing operating activities was $240.7 million, compared with $127.4 million. Capital expenditures were $98.5 million versus $79.6 million. Management-defined free cash flow from continuing operations was $131.0 million versus $48.7 million; this non-GAAP measure includes the effect of exchange-rate changes and excludes specified investing items.
- Cash and short-term marketable securities totaled $654.4 million at October 3, 2015, versus $635.9 million at year-end 2014. Total liquidity, including $296.2 million available under lending facilities, was $950.6 million.
- Total debt was $453.1 million; the debt-to-capitalization ratio was 26.0%. The company reported compliance with its credit-facility covenants. The next significant long-term debt maturity was not expected until 2021.
- Financing cash outflows included $100.0 million of share repurchases and $34.6 million of dividends paid. Under a $200 million repurchase authorization, $120.0 million had been repurchased through October 3, 2015, leaving approximately $80.0 million authorized.
- Inventory increased $45.0 million during the nine months, principally to support higher volumes and new products. Pension-plan contributions were $70.0 million; management said it did not expect further qualified-plan contributions in 2015.
Outlook, commentary and risks
- Management targeted 7% net-sales growth for 2015 versus 2014 and expected another year of strong earnings growth. It expected free cash flow above $200 million, modest working-capital cash use of $10 million to $30 million, capital expenditures of approximately 4% of 2015 sales, and a 32% effective tax rate, excluding any extension of the U.S. R&D tax credit.
- Management cited new products, market-share gains, acquisitions and solid U.S. and European markets as growth drivers, partly offset by unfavorable foreign exchange and weakness in certain international marine markets. It expected higher operating expenses in dollars to support strategic investment, but lower operating expenses as a share of sales.
- The company expected a fourth-quarter pension settlement loss of $30 million to $35 million related to anticipated lump-sum payouts of approximately $70 million; both estimates could change, and additional settlement actions could increase the loss.
- Key disclosed risks include discretionary consumer demand and credit availability, dealer financing and repurchase exposure, currency movements, international-market weakness, production-capacity execution, supply and commodity costs, weather, product liability and warranties, pension funding, and environmental requirements. Management said there were no material changes to previously disclosed risk factors or legal and environmental commitments.
- Customer-financing guarantees had maximum potential cash obligations of $35.2 million; product repurchase arrangements had maximum potential payments of $56.3 million. The company stated that collateral mitigates exposure and historical losses had not been significant, but dealer defaults above expectations could increase losses. Retained bowling-business liabilities and lease guarantees also remain.
- On October 20, 2015, the board declared a quarterly dividend of $0.15 per share, payable December 15, 2015. The filing reported $0.125 per share declared for each of the first three quarters.
Important facts for investors to verify
- Whether targeted 2015 sales growth of 7% and free cash flow above $200 million were achieved, and how foreign exchange and seasonal working capital affected results.
- How much of earnings growth was recurring operating improvement versus tax items, acquisition effects and discontinued-operation disposal gains.
- The final pension settlement amount and any resulting charge, as well as the status of pension funding obligations.
- Execution and returns from capacity expansion, new-product investment, acquisitions and remaining authorized share repurchases.
- Developments in dealer credit quality, repurchase obligations, retained bowling liabilities and the company’s international marine markets.