Brunswick Corporation — Q1 2013 Form 10-Q
Business context and reporting period. The filing covers the 13 weeks ended March 30, 2013, compared with the 13 weeks ended March 31, 2012. Brunswick manufactures and markets marine engines and boats, fitness equipment, and bowling and billiards products. Results are seasonal and are not necessarily indicative of the full year. Hatteras and Cabo results are presented as discontinued operations following the decision to exit those businesses.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $995.3 million | $959.6 million |
| Gross margin | $261.9 million; 26.3% | $238.2 million; 24.8% |
| Operating earnings | $89.9 million; 9.0% margin | $75.3 million; 7.8% margin |
| Continuing-operations net earnings | $54.9 million | $47.0 million |
| Net earnings, including discontinued operations | $49.8 million | $39.7 million |
| Diluted EPS from continuing operations | $0.59 | $0.51 |
| Diluted net EPS | $0.53 | $0.43 |
- Revenue grew 3.7%. Operating earnings increased 19.4%; management cited higher volume, cost reductions, improved efficiencies, the absence of prior-year sterndrive transition inefficiencies, and a $5.5 million real-estate gain.
- Continuing-operations cash from operations was negative $93.8 million, versus negative $61.7 million. Total operating cash use, including discontinued operations, was $108.2 million. Management attributed the outflow mainly to seasonal working-capital needs.
- Capital expenditures were $21.2 million, compared with $16.7 million. Company-defined free cash flow was negative $108.9 million, versus negative $69.4 million.
- At March 30, cash and marketable securities totaled $305.2 million; total debt was $569.7 million and net debt was $264.5 million. Total liquidity, including $270.8 million of available asset-based borrowing capacity, was $576.0 million. The company had no borrowings under its $300 million asset-based facility and reported covenant compliance.
- Shareholders’ equity was $130.6 million. Debt-to-capitalization was 81.4%, down from 88.0% at year-end 2012.
Material changes and segment performance
- Marine Engine sales rose 6.6% to $521.8 million and operating earnings rose to $71.5 million from $47.9 million. Growth in U.S. outboards and parts and accessories was partly offset by weaker global sterndrive demand.
- Boat sales declined 0.7% to $289.7 million; operating earnings fell to $2.4 million from $10.5 million. Weakness in large fiberglass sterndrive boats and European markets, plus higher restructuring charges, weighed on results.
- Fitness sales rose 5.8% to $166.2 million; operating earnings increased 3.4% to $24.5 million. Bowling & Billiards sales fell 5.2% to $85.2 million, while operating earnings increased 3.5% to $14.9 million.
- Restructuring, exit and impairment charges were $5.6 million, versus $0.2 million. The company began consolidating yacht and motoryacht production at Palm Coast, Florida, with production at Sykes Creek, Florida, scheduled to be suspended at the end of June 2013. It expects an additional $5 million to $7 million of restructuring charges in 2013.
- Interest expense fell to $14.4 million from $18.1 million, primarily reflecting lower average debt. The company repurchased $1.0 million of 2027 notes and recorded a $0.1 million extinguishment loss.
Outlook, commentary and risks
- Management maintained its 2013 sales-growth target of 3% to 5% and expects higher full-year EPS. It expects modest full-year gross-margin improvement, with the strong Q1 increase moderating, and operating expenses as a percentage of sales comparable to 2012.
- The company expects a 2013 effective tax rate of 13% to 15%, excluding specified one-time charges and special tax items. Q1’s 28.5% rate included an $11.1 million net charge, primarily from valuation-allowance adjustments. Management said a significant portion of valuation allowances could potentially be reversed by year-end if results improve and relevant conditions are met.
- Management planned $100 million to $125 million of 2013 debt reductions, including retirement of the 11.25% senior notes due 2016, funded with cash and proceeds from a new debt offering. It expected working capital to use $25 million to $50 million for the year, capital expenditures of approximately 4% of projected sales, and solid full-year free cash flow.
- Marine demand remained uneven: management cited weak large-fiberglass-boat and sterndrive markets, soft European demand and consumer confidence, and uncertainty about the effects of weather and higher taxes on U.S. retail demand. The filing highlights exposure to consumer credit and discretionary spending, dealer financing and repurchase obligations, weather, competition, product liability and warranty claims, pension funding, regulation, foreign exchange, and execution of restructuring and growth initiatives.
- Customer financing guarantees had maximum obligations of $39.2 million, while product-repurchase arrangements had maximum obligations of $75.4 million; these exposures are partly mitigated by collateral or recovered products. Accrued expected losses were $1.8 million and $1.9 million, respectively. Management did not expect existing litigation matters to have a material adverse effect, but noted estimates could prove inadequate.
- The Hatteras and Cabo discontinued businesses generated $10.7 million in sales and a $5.1 million after-tax loss in Q1 2013, versus $14.6 million in sales and a $7.3 million loss in Q1 2012.
Investor facts to verify
- Whether marine retail demand, especially in large fiberglass boats and sterndrives, improves and whether weather or consumer confidence continues to affect sales.
- Whether seasonal working-capital investment reverses as expected and supports management’s full-year free-cash-flow outlook.
- Execution, costs and savings from planned plant consolidations and restructuring, including the Sykes Creek production suspension.
- Progress on the planned debt reduction and 2016-note retirement, including financing terms and effects on liquidity.
- Whether tax valuation allowances can be reduced, and how pension contributions and customer-financing or repurchase exposures evolve.