Brunswick Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing; fourth-quarter figures are identified separately where available. Unless stated otherwise, amounts are in U.S. dollars and millions.
Business context
Brunswick designs, manufactures and markets marine engines and parts, boats, fitness equipment, and bowling and billiards products; it also operates bowling centers. Its four reporting segments are Marine Engine, Boat, Fitness, and Bowling & Billiards. Hatteras and Cabo results are reported as discontinued operations following their sale in August 2013.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $3,887.5 | $3,717.6 |
| Operating earnings | $304.2 | $264.1 |
| Operating margin | 7.8% | 7.1% |
| Net earnings from continuing operations | $775.2 | $147.4 |
| Net earnings | $769.2 | $50.0 |
| Diluted EPS from continuing operations | $8.26 | $1.59 |
| Operating cash flow from continuing operations | $204.8 | $183.6 |
| Free cash flow from continuing operations (company-defined) | $75.9 | $90.2 |
| Capital expenditures | $148.1 | $115.2 |
Revenue increased 4.6%; gross margin rose to 26.1% from 25.4%. GAAP earnings were heavily affected by a $545.6 million income tax benefit, including a $599.5 million fourth-quarter release of deferred-tax valuation allowances. Accordingly, reported net income and EPS are not a straightforward measure of underlying operating growth. Management’s adjusted diluted EPS from continuing operations was $2.73, up from $2.09.
- Segment sales and operating results: Marine Engine sales were $2,088.1 and operating earnings $284.2; Boat sales were $1,032.0 and operating loss $21.8; Fitness sales were $693.5 and operating earnings $106.1; Bowling & Billiards sales were $310.3 and operating earnings $24.5.
- Debt and liquidity: Total debt was $459.8 versus $571.8; cash and marketable securities were $369.2 versus $428.7. Company-defined net debt fell to $90.6 from $143.1. Total liquidity, including available asset-based facility capacity, was $647.1 versus $701.5. No borrowings were outstanding under the $300 million asset-based facility; $277.9 million was available.
- Capital and pensions: Shareholders’ equity rose to $1,038.4, substantially reflecting the deferred-tax allowance release and pension remeasurement. Qualified pension plans were approximately 79% funded, with a reported underfunding of $255.4 on a projected-benefit-obligation basis.
- Fourth quarter: Net sales were $901.5; net earnings were $581.2, including $583.6 from continuing operations. The quarter included the principal valuation-allowance reversal.
Material changes versus the prior year
- Marine Engine sales increased 5.0%, led by outboard engines and marine parts and accessories; sterndrive engine demand remained weak.
- Boat sales increased 2.9%, with growth in aluminum and outboard-powered boats partly offset by lower fiberglass sterndrive shipments. The segment remained loss-making.
- Fitness sales rose 9.1%, while operating earnings increased 2.9%; the margin declined to 15.3% from 16.2% amid investment spending and lower gross margin.
- Bowling & Billiards sales fell 3.7% and operating earnings fell 14.0%, reflecting lower product sales, fewer centers and restructuring costs.
- Interest expense declined to $43.9 from $68.1 as debt and average borrowing costs fell. The company repurchased $258.0 of debt and recorded $32.8 of early-extinguishment losses.
- Capital spending increased, particularly for Marine Engine capacity and boat-facility projects. Free cash flow declined despite higher operating cash flow.
Outlook, commentary and risks
Management projected 2014 revenue growth of 5%–7%, with growth in all four segments, higher pretax earnings, and free cash flow of $150–$175. It expected capital expenditures of about 4% of projected sales and working-capital cash use of $40–$60. Management also expected the effective tax rate to rise to approximately 34% and stated that 2014 EPS would decrease versus 2013, whose GAAP result benefited from the one-time tax valuation release.
The company expected approximately $2–$4 of additional 2014 restructuring charges. Actions underway included boat-production consolidation and outsourced woodworking; management forecast annual savings of $1–$2 from the woodworking action and $3–$5 from yacht and motoryacht consolidation. Divesting European bowling centers was expected to improve segment profitability by $1–$2, while reducing sales.
Key risks include cyclical discretionary demand and continuing weakness in fiberglass sterndrive boats; consumer and dealer access to credit and dealer-default exposure; supply constraints and input-cost increases; execution of restructuring and capacity expansion; pension funding and assumptions; foreign-exchange exposure; product liability and warranty claims; environmental and regulatory requirements; and potential impairment of assets. Environmental remediation exposure was estimated at $40–$67, with $42.3 reserved. The filing states that known legal matters are not expected to have a material adverse effect, while acknowledging uncertain outcomes. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions.
Important facts for investors to verify
- Whether the deferred-tax assets underlying the $599.5 valuation-allowance reversal are realized as projected; the 2013 GAAP earnings surge is largely tax-related.
- Whether the 2014 revenue, free-cash-flow and segment-growth targets are achieved, and how much cash is absorbed by working capital and capital spending.
- Whether boat-segment losses and weak fiberglass sterndrive demand improve, and whether restructuring savings materialize without further impairment charges.
- Future pension contributions and funded status, including sensitivity to discount rates and plan-asset returns.
- Potential losses from dealer financing guarantees and product repurchase obligations; disclosed maximum repurchase obligations were $65.0, before expected resale recoveries.