Brunswick Corporation — Q1 2011 Form 10-Q
Business context and period. Brunswick manufactures and markets marine engines, boats, fitness equipment, and bowling and billiards products. This unaudited report covers the 13 weeks ended April 2, 2011, compared with the 13 weeks ended April 3, 2010. Management cautions that seasonality makes interim results not necessarily indicative of the remainder of the year.
Financial results
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $985.9 million | $844.4 million |
| Gross margin | $236.3 million; 24.0% | $178.6 million; 21.2% |
| Operating earnings and margin | $67.0 million; 6.8% | $10.1 million; 1.2% |
| Net earnings (loss) | $27.5 million | $(13.0) million |
| Diluted earnings (loss) per share | $0.30 | $(0.15) |
| Net cash from operating activities | $(83.1) million | $28.1 million |
| Capital expenditures | $13.2 million | $8.6 million |
Sales rose 16.8%. Higher wholesale shipments in Marine Engine and Boat, and stronger Fitness sales, drove growth; Bowling & Billiards sales declined. Operating improvement reflected higher volume, fixed-cost absorption and cost reductions, as well as a $6.8 million gain on sale of an Australian distribution facility. Restructuring charges were $5.3 million versus $7.4 million.
Segments
- Marine Engine: Sales $520.5 million, up 16.8%; operating earnings $51.6 million versus $26.5 million. Results included the $6.8 million facility-sale gain.
- Boat: Sales $283.6 million, up 16.4%; operating loss narrowed to $3.8 million from $26.7 million. Management cited volume, cost savings and lower restructuring charges, partly offset by a mix shift toward smaller boats.
- Fitness: Sales $156.4 million, up 31.4%; operating earnings $23.4 million versus $9.5 million. A large commercial order contributed to growth.
- Bowling & Billiards: Sales $87.3 million, down 5.0%; operating earnings $13.2 million versus $14.9 million, reflecting cautious customer spending.
Liquidity, debt and cash flow
Cash, cash equivalents and marketable securities totaled $548.7 million at quarter-end, down from $657.1 million at December 31, 2010. Total debt was $811.7 million; net debt, the company’s non-GAAP measure, was $263.0 million, up from $173.5 million at year-end. Total liquidity, including available asset-based borrowing capacity, was $755.7 million. The company had $207.0 million of available capacity under its new facility and no borrowings under it. The facility has a $300 million commitment and runs through March 2016.
Operating cash use of $83.1 million was primarily driven by seasonal working-capital needs, including higher receivables and inventory and payment of accrued variable compensation. The prior-year operating cash inflow included $107.5 million of income-tax refunds. The company repurchased $18.7 million of its 11.75% notes due 2013, reducing their balance to $98.5 million, and recorded a $4.3 million early-extinguishment loss. Long-term debt carrying value, including current maturities, was $811.6 million; its estimated fair value was approximately $872.0 million.
Outlook, risks and unusual items
- Management expects positive net earnings in 2011, compared with a net loss in 2010, and expects to end 2011 with lower net debt than at year-end 2010. It expects marine wholesale boat shipments to approximate marine retail demand for 2011.
- Management expects higher 2011 capital expenditures for new products and marine consolidation. It anticipates approximately $10 million of additional restructuring charges in 2011, primarily in Marine Engine and Boat.
- The company expects approximately $60 million of qualified pension-plan contributions in 2011 and an additional $3.2 million to its nonqualified plan during the rest of the year. Contributions may change with market conditions, regulation and company discretion.
- Tax expense was $13.2 million, a 32.4% effective rate; deferred-tax-asset valuation allowances remain subject to uncertainty. The company said it may settle tax matters that could reduce gross unrecognized tax benefits by about $13.9 million over the next 12 months.
- Risks include discretionary consumer demand, dealer access to financing, inventory and potential repurchases of dealer products, raw-material and energy costs, pension funding, foreign exchange, product liability and warranties, environmental compliance, and execution of restructuring. Management reported no material change in previously disclosed risk factors and said litigation claims are not expected to have a material adverse effect, subject to estimation uncertainty.
- Customer-financing guarantees had maximum potential obligations of $63.0 million; product repurchase arrangements had maximum potential obligations of $111.8 million. Management noted that collateral or resale value mitigates exposure. The company also had $89.8 million of standby letters of credit and surety bonds outstanding.
Important facts for investors to verify
- Whether sales growth and operating improvement persist beyond the seasonal first quarter, particularly as the large Fitness order and Australian facility-sale gain are not necessarily recurring.
- Whether working capital converts to cash as marine-season shipments and customer collections progress; operating cash flow was negative despite quarterly earnings.
- Whether the company meets its 2011 earnings, lower-net-debt, capital-spending and pension-contribution expectations, and whether the new asset-based facility’s borrowing availability remains adequate under its borrowing-base and covenant terms.
- Progress and actual costs of restructuring, dealer financing and repurchase exposures, warranty obligations, and tax and pension liabilities.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.