S&P: Brunswick Corp. Rating Raised To 'BBB-' From 'BB+' On Improved Business Risk Assessment; Outlook Stable
"The upgrade reflects our belief that Brunswick has reduced risk in its business operations by demonstrating a sustained track record of lower manufacturing and administrative costs across all of its business units following multiple years of restructuring, efficient and sustained rationalization of Brunswick's marine dealer inventory levels, and our belief that the company's revenue mix has probably shifted enough toward less volatile product segments to meaningfully improve EBITDA volatility in a future downturn scenario compared to the last severe downturn," said S&P Global Ratings' credit analyst Emile Courtney. "Although we expect the company's EBITDA volatility to remain high over the cycle, revenue mix shifts in recent years toward less volatile marine parts and accessories, fitness equipment, and outboard boats and engines, as well as a reduction in manufacturing fixed costs, will enable the company to better cope with still significant anticipated revenue variability in its sterndrive/inboard boats and engines, which currently represents about 15% of sales." In addition, Brunswick has taken a balanced approach to boat production for several years, keeping global production at or below that of retail sales, to ensure dealer inventory levels remain lean. As a result, weeks on hand inventory in the dealer pipeline has remained relatively steady between 33 and 35 weeks since 2012. Brunswick's EBITDA margin has steadily increased to a forecasted 13% in 2016 from 5% in 2010. As a result of these improvements, we are raising our business risk assessment on the company.
The stable outlook reflects our expectation for continued modest growth in operating performance and modest acquisition spending through 2017. We anticipate minimal additional debt reduction over the intermediate term.
We could consider a lower rating if operating performance is significantly weaker than our expectation or if boat demand unexpectedly declines, and Brunswick's revenue and EBITDA suffer as a result in a manner that sustains adjusted debt to EBITDA above 2.0x.
We could raise the rating based on an improved business risk assessment, which would require a meaningful improvement in anticipated EBITDA volatility compared to currently anticipated levels. However, this is not a likely scenario given the very high revenue and EBITDA variability in the company's boat business.