Brunswick Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 28, 2013; comparisons are to the periods ended September 29, 2012. Amounts are in millions of dollars except per-share data. Interim results are seasonal and may not indicate full-year performance.
Business context and performance
Brunswick manufactures and markets marine engines and boats, fitness equipment, and bowling and billiards products. The company completed the sale of its Hatteras and Cabo boat businesses in August 2013; their results are presented as discontinued operations.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $892.4 | $874.3 | $2,986.0 | $2,887.8 |
| Gross margin | $238.3; 26.7% | $233.0; 26.6% | $801.8; 26.9% | $755.1; 26.1% |
| Operating earnings | $63.6; 7.1% | $56.7; 6.5% | $290.2; 9.7% | $257.1; 8.9% |
| Continuing-operations net earnings | $57.4 | $22.5 | $191.6 | $163.5 |
| Net earnings, including discontinued operations | $57.8 | $2.0 | $188.0 | $125.3 |
| Diluted EPS from continuing operations | $0.61 | $0.24 | $2.05 | $1.77 |
- Cash flow: Nine-month cash from operating activities was $124.2, including $157.7 from continuing operations and $33.5 used by discontinued operations. Capital expenditures were $96.1. Company-defined free cash flow was $71.1, versus $90.9 a year earlier.
- Debt and liquidity at September 28: Total debt was $464.5, cash and marketable securities were $348.4, and net debt was $116.1. Total liquidity, including $279.0 of available asset-based borrowing capacity, was $627.4. There were no borrowings under the $300.0 revolving facility; the company reported covenant compliance and full access to availability.
- Balance sheet: Total assets were $2,416.9 and shareholders’ equity was $289.3. The company reported a debt-to-capitalization ratio of 61.6%.
- Segments, Q3: Marine Engine sales were $511.1 and operating earnings $75.2; Boat sales were $191.7 and operating loss $16.9; Fitness sales were $165.9 and operating earnings $25.3; Bowling & Billiards sales were $72.8 and operating earnings $1.0.
Material changes versus prior periods
- Q3 sales rose 2.1%; nine-month sales rose 3.4%. Growth came mainly from Marine Engine and Fitness, partly offset by lower Boat and Bowling & Billiards sales.
- Operating margin improved 60 basis points in Q3 and 80 basis points year to date. Management attributed the improvement to sales, cost reductions and operating efficiencies, and lower restructuring charges. Year-to-date results also included a $5.5 gain on Marine Engine real estate.
- Interest expense fell by $8.2 in Q3 and $17.2 year to date, reflecting lower average debt and interest rates. However, year-to-date earnings included a $32.7 loss on early debt extinguishment, compared with $11.9 in 2012.
- Q3 restructuring, exit and impairment charges were $3.1 versus $14.3; nine-month charges were $12.7 versus $15.3.
- Net cash and marketable securities declined from $428.7 at year-end 2012 to $348.4, while total debt declined from $571.8 to $464.5. Net debt decreased to $116.1 from $143.1.
Outlook, management commentary and notable items
- Management targeted 4% sales growth for 2013 and expected higher full-year EPS than in 2012, supported by sales growth, improved operating earnings, lower net interest and pension expense, and lower restructuring charges. It expected gross margin to improve, while operating expenses as a percentage of sales would be comparable with 2012.
- Management expected a 2013 effective tax rate of approximately 10% after specified one-time charges and special tax items. The company maintained $723.4 of deferred-tax-asset valuation allowances; management said a significant portion could potentially be reversed by year-end if sustained profitability is supported by forecasts. Any reversal would be a special, non-cash tax item.
- Management expected 2013 capital expenditures of approximately 4% of projected sales and solid free cash flow generally consistent with 2012. It forecast a $35–$45 use of cash from net working-capital activity for the year, with seasonal working-capital liquidation expected in the remainder of 2013. It could continue opportunistic debt retirement, with a stated goal of reducing debt below $450.
- Additional restructuring charges of $2–$4 were anticipated in 2013. Management estimated annual savings of $3–$5 from yacht and motoryacht production consolidation, $10–$12 from prior boat-product and plant actions, and $1–$2 from the European bowling-center divestiture, with full benefits expected in 2014. These actions may also reduce sales during transitions or from exiting businesses and models.
- The Hatteras/Cabo sale generated a $1.6 after-tax gain. Brunswick retained warranty liabilities for boats sold or completed before the sale.
- The Board declared a quarterly dividend of $0.10 per share, payable December 13, 2013. Management expected approximately $50 of qualified pension contributions for 2013.
Risks and contingencies
- Management cited continued weakness in fiberglass sterndrive boats and an uneven U.S. powerboat recovery. Results also depend on discretionary consumer demand, dealer financing and inventory levels, product mix, and success of new products and restructuring.
- Customer financing guarantees had maximum obligations of $40.8, while product-repurchase arrangements had maximum obligations of $64.0; collateral and repurchased-product value partly mitigate exposure. Historical losses were not significant, but could rise if dealer defaults exceed expectations.
- Product warranty liabilities were $122.3 at September 28. The filing notes that actual warranty costs may differ from estimates. Management did not believe a material litigation loss beyond amounts recognized was reasonably possible, but stated outcomes are inherently unpredictable.
- Other disclosed risks include environmental-compliance costs, pension funding, foreign exchange and commodity exposure, competition, supply availability, and the possibility of additional impairments. Management reported no material change in previously disclosed risk factors or market risk.
Investor verification points
- Check whether marine demand, especially fiberglass sterndrive retail demand, dealer inventories and wholesale shipments, developed as management anticipated.
- Assess whether segment-level growth and margin improvements persist, particularly in Marine Engine and Fitness, and whether Boat losses narrow.
- Verify delivery and timing of restructuring savings against remaining charges and any associated sales reductions.
- Monitor cash conversion, seasonal working capital, capital spending, free cash flow, and the company’s progress on debt reduction.
- Review the basis and timing for any deferred-tax-valuation-allowance release, given the $723.4 allowance balance and management’s profitability assumptions.
- Track dealer guarantees and repurchase exposure, warranty claims, and the retained Hatteras/Cabo warranty obligations.