Brunswick Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 29, 2012; comparative periods ended October 1, 2011. Interim financial statements are unaudited. Brunswick manufactures and markets marine engines and boats, fitness equipment, and bowling and billiards products.
Financial performance
| Metric | Third quarter 2012 | Third quarter 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $884.8 million | $876.7 million | $2,926.0 million | $2,958.9 million |
| Gross margin | $231.8 million; 26.2% | $202.8 million; 23.1% | $745.1 million; 25.5% | $713.9 million; 24.1% |
| Operating earnings | $37.5 million; 4.2% margin | $35.6 million; 4.1% margin | $219.9 million; 7.5% margin | $210.5 million; 7.1% margin |
| Net earnings | $2.0 million | $4.7 million | $125.3 million | $101.5 million |
| Diluted EPS | $0.02 | $0.05 | $1.36 | $1.10 |
Third-quarter operating earnings included $28.2 million of restructuring, exit and impairment charges, versus $13.2 million a year earlier. Excluding those charges, management reported a 7.4% operating margin and 34.6% growth in operating earnings. For the first nine months, charges were $29.4 million versus $18.2 million; adjusted operating earnings increased 9.0%. Management’s adjusted diluted EPS was $0.43 for the quarter and $1.81 year to date.
For the quarter, Marine Engine sales rose 10.5% to $503.5 million and operating earnings grew to $74.5 million. Boat sales fell 6.9% to $205.8 million and the segment recorded a $43.5 million operating loss, including $27.7 million of charges. Fitness sales declined 3.4% to $151.9 million, while operating earnings were $23.1 million. Bowling & Billiards sales declined 6.3% to $74.5 million, with operating earnings of $3.2 million.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $106.7 million, compared with $81.2 million. Capital expenditures were $68.6 million; company-defined free cash flow was $59.7 million, versus $59.0 million.
- Cash and marketable securities totaled $455.4 million at September 29, 2012, down from $507.8 million at year-end 2011. Total debt was $597.7 million, down from $692.8 million; net debt was $142.3 million, down from $185.0 million.
- Total liquidity, including undrawn asset-based borrowing capacity, was $731.2 million. The company had $275.8 million available under its $300 million facility, no facility borrowings, and reported compliance with its fixed-charge covenant.
- Brunswick repurchased $99.2 million of debt in the first nine months, including all of its 11.25% notes due 2013. The next significant long-term maturity was stated to be in 2016. Interest expense fell $11.0 million year over year for the nine-month period.
- Management expected 2012 capital expenditures of approximately $115 million and additional qualified pension contributions of approximately $35 million during the remainder of the year.
Changes, outlook and notable items
- Quarterly sales increased 0.9%, but nine-month sales declined 1.1%. Marine Engine growth was offset by declines in Boat, Fitness and Bowling & Billiards. European sales fell 18.6% in the quarter and 23.4% year to date, amid weak economic conditions; the Sealine divestiture also reduced comparable sales.
- Management attributed improved gross margins to operating efficiencies and cost reductions, partly offset by higher spending on growth initiatives. Year-to-date results also reflected first-quarter sterndrive production ramp-up inefficiencies.
- Brunswick recorded significant Boat-related impairments and restructuring, including impairments tied to Hatteras and Cabo, closure of its Knoxville facility, manufacturing consolidation, and the exit from Bayliner cruisers in the U.S. and Europe. It expected another $5 million to $10 million of restructuring charges in 2012.
- Management targeted modest consolidated revenue growth and a strong increase in operating earnings for full-year 2012, and planned fourth-quarter sales and earnings growth versus 2011. It expected domestic marine improvement, especially in aluminum boats and outboard engines, to be offset by weak European demand and continued challenges in fiberglass sterndrive boats.
- Third-quarter net earnings were affected by a $10.5 million tax provision, producing an 84.0% effective tax rate, and a $7.5 million loss on early debt extinguishment. The company noted uncertainty about realizing some deferred tax assets in jurisdictions with cumulative losses. A $0.05-per-share dividend was declared after quarter-end, payable December 14, 2012.
- Disclosed maximum obligations included $40.1 million under customer financing guarantees and $102.5 million under product repurchase arrangements; the company said collateral and resale values mitigate exposure. Management did not expect existing litigation reserves to result in a material adverse effect. Principal risks include discretionary consumer demand, Europe and other international markets, dealer financing and defaults, warranty and product claims, restructuring execution, pension funding, currencies, commodities and environmental compliance.
Important facts for investors to verify
- Whether Boat-market weakness and the new product and facility actions lead to additional impairments or restructuring costs beyond the stated 2012 estimate.
- Whether management’s full-year growth targets were achieved, particularly given Europe’s weakness and the planned fourth-quarter improvement.
- How operating cash flow, working-capital needs, capital spending and pension contributions affect cash and net debt.
- Whether available borrowing capacity and covenant compliance remain intact, and the progress of debt reduction ahead of the 2016 maturity.
- Whether tax valuation allowances, customer financing guarantees, repurchase obligations and warranty liabilities require material changes.