Brunswick Corporation — Form 10-Q Summary
Reporting period: Quarter ended October 1, 2011; results are compared with the quarter ended October 2, 2010. Year-to-date figures cover the first nine months. The company operates in Marine Engine, Boat, Fitness, and Bowling & Billiards. Management cautions that seasonal interim results are not necessarily indicative of the full year.
Financial performance and liquidity
| Metric | Third quarter 2011 | Third quarter 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $876.7 million | $815.4 million | $2,958.9 million | $2,674.5 million |
| Operating earnings | $35.6 million | $25.2 million | $210.5 million | $91.0 million |
| Operating margin | 4.1% | 3.1% | 7.1% | 3.4% |
| Net earnings (loss) | $4.7 million | $(7.2) million | $101.5 million | $(6.5) million |
| Diluted EPS | $0.05 | $(0.08) | $1.10 | $(0.07) |
| Gross margin | 23.1% | 22.5% | 24.1% | 22.6% |
- Quarterly sales rose 7.5%; nine-month sales rose 10.6%. Operating earnings improved 41.3% for the quarter and increased substantially year to date.
- For the first nine months, operating cash flow was $81.2 million versus $192.6 million; capital expenditures were $57.9 million versus $31.1 million. Company-defined free cash flow was $59.0 million versus $175.7 million. The prior-year operating cash flow included substantial tax refunds, including a $109.5 million federal refund.
- At October 1, cash, cash equivalents and marketable securities totaled $546.7 million; another $20.0 million was restricted cash. Total debt was $703.3 million and company-defined net debt was $156.6 million. Total liquidity, including $242.9 million of available asset-based borrowing capacity, was $789.6 million.
- Long-term debt was $701.2 million. The company repurchased $128.7 million of notes in the first nine months and recorded $16.9 million of early-extinguishment losses. It had no borrowings under its $300 million asset-based facility and reported covenant compliance.
Material changes and business drivers
- Marine Engine and Fitness drove quarterly sales growth; Bowling & Billiards also grew. Boat sales were flat for the quarter, while year-to-date Boat sales increased 9.4%.
- Year-to-date segment results improved across the businesses: Marine Engine operating earnings were $191.6 million (up from $164.7 million); Boat reported a $12.3 million operating loss (versus a $76.6 million loss); Fitness earnings were $65.1 million (up from $35.2 million); and Bowling & Billiards earnings were $16.5 million (up from $12.3 million).
- Management attributed improvement to higher sales, cost reductions, better fixed-cost absorption and lower restructuring costs; year-to-date results also benefited from a $6.8 million Australian distribution-facility gain and lower pension expense. Higher materials costs and variable compensation were offsets.
- Restructuring, exit and impairment charges were $13.2 million in the quarter and $18.2 million year to date, compared with $12.2 million and $43.8 million, respectively, in 2010. The third-quarter charges included a $9.4 million loss on the Sealine boat-brand divestiture.
Outlook, risks and unusual items
- Management expected an additional $2 million to $7 million of restructuring charges in 2011, primarily in Marine Engine and Boat. It anticipated further debt reduction at its discretion and expected to end 2011 with lower net debt than at year-end 2010.
- Management said existing cash and marketable securities, free cash flow and available financing were adequate for near- and long-term needs. It expected additional qualified-pension contributions of $35 million to $45 million during the remainder of 2011, plus $0.8 million for its nonqualified plan.
- On October 26, the board declared a $0.05-per-share dividend, payable December 15, 2011. After quarter-end, the company repurchased $14.1 million of notes and expected to record a $2.9 million extinguishment loss in the fourth quarter.
- Key risks include discretionary consumer demand and credit availability, dealer and customer defaults, inventory and repurchase exposure, pension funding, raw-material and freight costs, foreign-exchange movements, regulatory costs, restructuring execution, warranty claims and possible asset impairments. The filing reported no material change to previously disclosed risk factors.
- Maximum potential obligations under customer financing guarantees were $55.8 million; maximum product-repurchase obligations were $107.2 million. Recorded accruals were $5.1 million and $1.6 million, respectively; actual exposure may rise if defaults exceed expectations. The company also reported $505.6 million of postretirement-benefit liabilities.
- Litigation and environmental matters were not expected by management, based on existing reserves, to have a material adverse effect; estimates could prove inadequate. The company noted that emissions compliance may increase product costs and affect Marine Engine margins.
Important facts for investors to verify
- Whether sales growth, especially Marine Engine and Fitness demand, is sustainable and how seasonal patterns affect fourth-quarter results.
- Whether Boat operations can reach profitability, and how product mix, warranty costs and the Sealine divestiture affect performance.
- Whether operating cash flow recovers after working-capital needs, and whether planned debt reduction and pension contributions remain consistent with liquidity.
- The composition and potential cash impact of customer financing guarantees, repurchase commitments, warranty reserves and pension obligations.
- How much of reported improvement reflects recurring operations versus restructuring charges, asset-sale gains, debt-retirement losses and tax valuation allowances.