Brunswick Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter ended September 28, 2019; comparisons are with the quarter ended September 29, 2018. The nine-month period is also summarized. Amounts are in millions of dollars unless otherwise stated.
Business context and reporting period
Brunswick completed the sale of its Fitness business on June 27, 2019, and now focuses on its marine portfolio. Fitness results are presented as discontinued operations for all periods shown, so continuing-operations comparisons exclude Fitness. Brunswick acquired Freedom Boat Club in May 2019; the 2018 acquisition of Power Products also affects comparisons.
Financial performance and liquidity
- Third-quarter sales: $976.6, down 6.5% from $1,044.1. Marine Engine sales fell 4.0% to $770.2; Boat sales fell 14.1% to $277.1. Management cited softer retail conditions, planned reductions in wholesale shipments and product-line comparisons.
- Nine-month sales: $3,190.8, up 1.0% from $3,159.8. Power Products contributed to growth; management said sales increased 2% excluding Sport Yacht and Yacht operations.
- Profit and margins: Third-quarter operating earnings were $119.7 versus $98.2, with operating margin of 12.3% versus 9.4%. Nine-month operating earnings were $396.5 versus $285.8, with margin of 12.4% versus 9.0%. Gross margin was 28.4% for the quarter and 27.7% year to date, compared with 26.7% and 25.4%, respectively.
- Reported net results: Continuing-operations net loss was $232.9 for the quarter and $44.6 for nine months, versus earnings of $75.2 and $207.1 in the comparable periods. The quarter included a $294.1 pretax pension settlement charge. Total net loss, including discontinued operations, was $239.3 for the quarter and $198.1 for nine months.
- Adjusted earnings: Management reported adjusted diluted continuing-operations EPS of $1.10 for the quarter, down from $1.14, and $3.49 for nine months, up from $3.36. These are non-GAAP measures.
- Cash flow: Nine-month cash from continuing operations was $254.2, up from $190.0. Free cash flow, as defined by the company, was $79.0 versus $105.6. Capital expenditures were $178.4. Fitness-sale proceeds contributed $481.9 to investing cash flows from discontinued operations.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $367.0; available credit capacity was $387.9, for total liquidity of $754.9. Total debt was $1,131.5, and the debt-to-capitalization ratio was 44.4%. No credit-facility borrowings were outstanding at quarter-end; the company reported compliance with debt covenants.
- Capital returns: Brunswick repurchased $231.1 of stock during the first nine months and paid $54.1 in dividends. The remaining repurchase authorization was approximately $404 million.
Material changes versus the prior comparable period
- Quarterly sales declined, particularly in the Boat segment, while nine-month sales edged higher. Power Products helped Marine Engine growth, while lower shipments and softer demand weighed on boat sales.
- Reported operating earnings and margins improved, including because 2018 comparisons reflected Sea Ray Sport Yacht and Yacht wind-down losses and higher restructuring and acquisition costs.
- The 2019 pension-plan settlement caused the large GAAP net loss despite stronger operating earnings. The company transferred $672.9 of pension obligations through lump-sum distributions and annuity purchases and recorded the $294.1 pretax settlement charge.
- Debt declined from $1,220.8 at December 31, 2018. Brunswick issued $230.0 of 2049 notes, used proceeds in part to repay a term loan, and retired $150.0 of 2021 notes.
- Fitness-sale accounting included a $45.0 after-tax loss on disposal and a $103.0 after-tax goodwill impairment in the nine-month discontinued-operations results.
Outlook, commentary and risks
- Management projected 2019 revenue and earnings growth, approximately $260 of free cash flow, and mid-single-digit growth in operating earnings. It expected Marine Engine sales to increase in the low single digits and Boat sales to decline in the mid-single digits.
- The outlook anticipated benefits from higher-horsepower products, new products, sales mix, cost controls and acquisitions, partly offset by wholesale shipment reductions, tariffs and currency headwinds. Management targeted approximately $50 of annualized savings from cost-reduction measures, with much of the benefit expected from 2020; approximately $13 of related restructuring charges were expected in 2019.
- Management projected 2019 capital expenditures of approximately $230, interest expense of approximately $72, an effective tax rate of approximately 22%, and a cash tax rate in the low-to-mid-single-digit range. It planned approximately $170 of additional share repurchases in the remainder of 2019 and announced a fourth-quarter dividend increase to $0.24 per share.
- Key stated risks include weaker consumer demand and credit availability, dealer inventory reductions, tariffs and other cost or supply disruptions, foreign-exchange movements, competitive pressures, execution and integration of acquisitions, product liability and warranty claims, and access to financing. The filing reported no material changes to previously disclosed risk factors.
- The Cobalt Boats patent judgment against Brunswick was reversed in full by the Court of Appeals; the parties agreed there would be no further appeals. The filing reported no other material changes to previously disclosed legal or environmental contingencies.
Important facts for investors to verify
- Whether marine retail demand, dealer inventories and planned wholesale reductions develop as management assumed.
- Whether the 2019 earnings, free-cash-flow and capital-spending outlook was achieved, and how the $50 million annualized cost savings progress.
- How much of adjusted earnings improvement reflects ongoing operations versus acquisition contributions and comparison-period restructuring or wind-down costs.
- Debt, liquidity, repurchases and dividend commitments after the Fitness divestiture and pension-plan settlement.
- Potential effects of tariffs, currency, consumer financing conditions, warranty obligations and other disclosed business risks.