Brunswick Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter ended June 29, 2019; financial amounts are in millions of dollars except per-share data. Results are unaudited. The Fitness business was sold on June 27, 2019 and is presented as discontinued operations in all periods.
Business context and financial performance
After the Fitness divestiture, Brunswick says it will focus solely on its global marine portfolio. The continuing business reports Marine Engine and Boat segments.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $1,163.5 | $1,148.7 | $2,214.2 | $2,115.7 |
| Operating earnings | $162.7 | $93.1 | $276.8 | $187.6 |
| Operating margin | 14.0% | 8.1% | 12.5% | 8.9% |
| Continuing-operations net earnings | $112.1 | $68.1 | $188.3 | $131.9 |
| Diluted EPS from continuing operations | $1.28 | $0.77 | $2.15 | $1.49 |
| Total net earnings, including discontinued operations | $77.5 | $79.0 | $41.2 | $151.9 |
Q2 sales increased 1.3% year over year; first-half sales increased 4.7%. Q2 gross margin was 28.2%, up from 24.5%; first-half gross margin was 27.4%, up from 24.8%. Improved margins reflected the absence of prior-year Sea Ray Sport Yacht and Yacht losses, Marine Engine improvement, acquisition contributions and favorable mix, partly offset by tariffs and foreign exchange.
- Marine Engine: Q2 sales rose 4.5% to $871.5 and operating earnings rose 10.4% to $164.6. Power Products acquisition benefits and higher-horsepower outboard demand helped; lower-horsepower and sterndrive sales were weaker.
- Boat: Q2 sales fell 7.2% to $366.6, principally reflecting the Sport Yacht and Yacht wind-down. Excluding those operations, sales were slightly lower; weaker value aluminum and pontoon sales offset gains in premium products. Operating earnings were $20.8 versus a $32.2 loss in the prior-year quarter, which included substantial wind-down and impairment charges.
Q2 adjusted operating earnings were $180.1, or 15.5% of sales, versus $157.2 and 13.9% a year earlier, excluding specified restructuring, wind-down, purchase-accounting amortization and acquisition-related items. Adjusted diluted EPS was $1.45 versus $1.33. These are non-GAAP measures; reported GAAP operating earnings and EPS are shown above.
Cash flow, balance sheet and liquidity
- First-half operating cash flow from continuing operations was $147.4, versus $167.0 in 2018. Working-capital use was a significant offset, including higher receivables and inventories.
- Capital expenditures were $135.2, versus $81.7. Company-defined free cash flow from continuing operations was $13.6, versus $95.7.
- Cash and cash equivalents were $656.1 at June 29, 2019; cash, cash equivalents and marketable securities totaled $656.9. Total liquidity, including available borrowing capacity, was $1,053.3.
- Total debt was $1,280.4; the debt-to-capitalization ratio was 45.4%. The $400 million credit facility had no outstanding borrowings and $396.4 of available capacity, net of letters of credit. The company reported compliance with debt covenants.
- First-half financing included $223.1 net proceeds from long-term debt issuance, $69.8 of share repurchases and $36.4 of dividends. The March issuance of $230 million of 6.375% senior notes generated $222 million net proceeds; $150 million was used to repay a 2021 term loan.
Material changes, outlook and notable items
- The Fitness sale generated net proceeds of $473.7 and an after-tax disposal loss of $41.5. First-half discontinued-operations results also included a $137.2 pre-tax goodwill impairment ($103.0 after tax). These items substantially reduced reported total net earnings relative to continuing-operations earnings.
- Brunswick acquired Freedom Boat Club in May for $64.4 net cash consideration. The company also continued integrating the 2018 Power Products acquisition.
- Management projected 2019 revenue and earnings growth and free cash flow above $260. It expected slight improvement in sales growth, including an approximately 4% contribution from Power Products; Marine Engine sales growth in the low-to-mid single digits; and Boat sales to decline in the mid-single digits. Operating earnings were expected to increase by a low-to-mid single-digit percentage. Management targeted a 2019 effective tax rate of about 22%.
- Management cited weaker retail demand and planned wholesale shipment reductions to manage dealer inventories, particularly for value boats, as well as tariffs and currency as headwinds. It expected margin support from new products, manufacturing efficiencies, cost initiatives and acquisitions.
- Cost actions announced in June and July were expected to reduce annual operating costs by approximately $50 beginning in 2020; approximately $13 of 2019 restructuring charges were expected, mostly in the second half. Planned 2019 capital expenditures were $240–$260; management projected $20–$40 of working-capital cash use.
- After the quarter, Brunswick called $150 of 4.625% notes due 2021 for retirement on August 2. It planned at least $150–$200 of 2019 debt reduction. The board increased 2019 share-repurchase authorization to $600; $565 remained as of July 16, and the company planned to repurchase another $330 in the second half.
- On July 18, pension settlement payments totaling $595.8 were made to terminate two defined-benefit plans. The company expected approximately $280–$300 of pre-tax and after-tax charges in Q3, including actuarial losses and tax effects, plus $5–$10 of additional payments.
- The Federal Circuit reversed the prior $5.4 patent judgment against Brunswick in the Cobalt Boats case; the parties agreed there would be no further appeals. Management reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- How 2019 sales and earnings progress against guidance, particularly Boat demand, dealer inventory adjustments and Marine Engine trends.
- Whether free cash flow exceeds the $260 target given first-half free cash flow of $13.6, planned capital spending and working-capital needs.
- The actual Q3 pension settlement charge and its effect on reported earnings, taxes, cash and capital allocation.
- Execution and timing of the $50 annual cost reductions, restructuring charges, planned debt reduction and remaining share repurchases.
- The comparability of GAAP results with adjusted measures, including the effects of the Fitness disposal, Power Products acquisition, Sea Ray wind-down and purchase-accounting amortization.