Brunswick Corporation — Q1 2014 Form 10-Q
Business context and period. The unaudited quarter ended March 29, 2014 (13 weeks), compared with the quarter ended March 30, 2013. Brunswick manufactures and markets recreational products through Marine Engine, Boat, Fitness, and Bowling & Billiards. Management cautions that seasonality makes interim results not necessarily indicative of the full year.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $969.2 | $995.3 |
| Gross margin | $265.1; 27.4% | $261.9; 26.3% |
| Operating earnings / margin | $94.7; 9.8% | $89.9; 9.0% |
| Continuing-operations net earnings | $57.0 | $54.9 |
| Net earnings, including discontinued operations | $57.0 | $49.8 |
| Diluted EPS from continuing operations | $0.60 | $0.59 |
| Operating cash flow | $(108.2) | $(93.8) |
| Free cash flow (company-defined, non-GAAP) | $(130.0) | $(108.9) |
- Revenue fell 2.6%, while gross margin rose 110 basis points and operating earnings increased 5.3%. The improvement reflected stronger gross margins, cost reductions, and no Q1 restructuring charge, partly offset by lower sales and higher investment spending.
- Q1 2013 included a $5.5 million Marine Engine real-estate gain, a favorable Fitness insurance settlement, and $5.6 million in restructuring charges; there was no comparable real-estate gain or insurance settlement in 2014. Q1 2013 also included a $5.1 million after-tax discontinued-operations loss.
- Interest expense declined to $8.5 million from $14.4 million, primarily following debt reduction in 2013. The effective tax rate increased to 34.8% from 28.5%; the prior-year quarter included an $11.1 million unfavorable tax adjustment. Management’s adjusted diluted EPS measure was $0.60 versus $0.76, reflecting the prior-year special-item adjustments described in the filing.
Segments
| Segment | Sales, 2014 (change) | Operating earnings, 2014 (change) |
|---|---|---|
| Marine Engine | $505.1 (down 3.2%) | $61.7 (down 13.7%) |
| Boat | $282.8 (down 2.4%) | $8.4 (up from $2.4) |
| Fitness | $175.6 (up 5.7%) | $29.8 (up 21.6%) |
| Bowling & Billiards | $78.8 (down 7.5%) | $12.7 (down 14.8%) |
Harsh weather affected Marine Engine, Boat, and Bowling & Billiards activity. Fitness grew on U.S. customer demand. Marine Engine earnings were also affected by the absence of the prior-year real-estate gain and increased growth investment. Boat earnings benefited from reduced restructuring expense, lower warranty costs, and operating efficiencies.
Balance sheet, cash flow, and liquidity
- At March 29, 2014, cash and short-term investments were $226.8 million, versus $369.2 million at year-end 2013. Total debt was $459.2 million; company-defined net debt was $232.4 million, compared with $90.6 million at year-end. Net debt was below the $264.5 million reported a year earlier.
- Total liquidity, a company-defined measure including available borrowing capacity, was $510.0 million: $226.8 million of cash and marketable securities plus $283.2 million available under the asset-based facility. The company had no borrowings under that facility and reported compliance with its fixed-charge covenant.
- Operating cash use was principally seasonal working-capital investment: receivables and inventory rose, partly offset by higher accounts payable. Capital expenditures were $21.9 million. Cash dividends paid were $9.3 million; the company declared a $0.10 per-share dividend.
- Long-term debt, including current maturities, was $459.2 million. Management said the next significant long-term maturity was not until 2021 and that it might opportunistically reduce debt below $450 million.
Outlook, risks, and contingencies
- Management forecast 2014 revenue growth of 5%–6% versus 2013, with growth expected in Marine Engine, Boat, and Fitness. It expected higher pretax earnings from sales growth, improved gross margins, and lower net interest expense, but forecast EPS to decline versus 2013 because of a higher effective tax rate, estimated at 34%.
- Management expected 2014 working capital to use $40–$60 million of cash, capital expenditures of about 4% of projected sales, and free cash flow of $165–$190 million. It anticipated approximately $50 million of qualified pension-plan contributions in 2014.
- Additional 2014 restructuring charges of $2–$4 million were anticipated, primarily for Boat-segment actions. Management projected annual savings from various completed or ongoing restructuring and divestiture actions, with benefits expected to phase in during 2014–2015.
- Key risks include discretionary consumer demand, dealer and customer financing, marine-market conditions, weather, foreign-exchange movements, competition, product quality and warranty claims, supplier availability and costs, pension funding, regulatory and environmental compliance, and execution of restructuring and product initiatives. Management said there had been no material changes to the risk factors in its 2013 Form 10-K.
- Customer financing guarantees had maximum obligations of $41.9 million, and product repurchase arrangements had maximum obligations of $64.0 million; collateral and product resale value mitigate exposure. The company reported a $64.3 million maximum loss exposure related to its BAC joint venture, including off-balance-sheet recourse and repurchase obligations. Management did not believe material litigation losses beyond amounts recognized were reasonably possible, while noting outcomes remain uncertain.
- The filing notes that interim results are seasonal and that adverse weather affected demand. The company also uses foreign-exchange, interest-rate, and commodity derivatives for hedging, not speculation; management reported no significant market-risk changes since year-end.
Important facts for investors to verify
- Whether forecast 5%–6% revenue growth and $165–$190 million free cash flow are achieved, given Q1 seasonal cash use and marine demand conditions.
- Whether improved gross margins and expected restructuring savings offset lower sales, strategic investment spending, and pressure in Marine Engine and Bowling & Billiards.
- Whether the projected 34% tax rate and resulting EPS outlook are consistent with actual tax items and deferred-tax-asset realization.
- Liquidity, working-capital conversion, debt reduction, pension contributions, and compliance with borrowing-facility covenants.
- Actual costs and savings from restructuring, and developments in customer financing guarantees, repurchase exposure, warranty obligations, and legal matters.