Brunswick Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Brunswick designs, manufactures and markets marine engines and parts, boats, fitness equipment and active-recreation products. Results below are primarily for continuing operations; Sea Ray and Meridian were classified as discontinued operations.
Financial performance and position
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $4,510.0 million | $4,153.9 million | +8.6% (+8.4% constant currency) |
| Gross margin | $1,234.7 million; 27.4% | $1,180.3 million; 28.4% | Margin down 100 bps |
| Operating earnings | $354.9 million | $406.9 million | Down 12.8% |
| Operating margin | 7.9% | 9.8% | Down 190 bps |
| Continuing-operations net earnings | $187.3 million | $272.6 million | Down 31.3% |
| Diluted EPS, continuing operations | $2.08 | $2.96 | Down 29.7% |
| Operating cash flow, continuing operations | $417.2 million | $423.5 million | Down $6.3 million |
| Free cash flow, continuing operations (non-GAAP) | $243.1 million | $253.0 million | Down $9.9 million |
Reported net earnings were $146.4 million versus $276.0 million, including a $40.9 million after-tax loss from discontinued operations in 2017. Cash and marketable securities were $449.6 million at year-end; total liquidity, including undrawn lending capacity, was $745.3 million. Total debt was $437.4 million, and debt-to-capitalization was 22.8%, down from 23.4%. Capital expenditures were $189.3 million. Dividends paid were $60.6 million and share repurchases totaled $130.0 million.
Segment sales and operating earnings were: Marine Engine $2,631.8 million and $407.0 million; Boat $1,103.0 million and $71.1 million; Fitness $1,033.7 million and $64.1 million. Boat sales and earnings advanced strongly; Marine Engine earnings increased; Fitness earnings fell sharply despite higher sales. International sales were $1,537.1 million, or 34% of total sales.
Material changes and unusual items
- Growth was led by outboard engines, marine parts and accessories, and aluminum and fiberglass outboard boats. Sterndrive engine sales continued to decline amid the market shift toward outboards.
- Fitness segment operating earnings fell 45.4%; reported margin declined from 12.0% to 6.2%. The company cited higher restructuring and integration costs, freight, challenging pricing and mix, capacity and product investments, and $13.5 million of Cybex product field-campaign costs.
- FY2017 included $96.6 million of pension-settlement charges, compared with $55.1 million in 2016, and $36.6 million of restructuring, exit, integration and impairment charges, versus $15.2 million. Management’s adjusted figures, which exclude specified items, were earnings before tax of $490.0 million versus $459.3 million and diluted continuing-operations EPS of $3.89 versus $3.46; these are non-GAAP measures.
- The 45.4% effective tax rate reflected tax reform and other items. The filing reports a provisional $71.8 million discrete tax expense from the Tax Cuts and Jobs Act, including deferred-tax remeasurement and deemed repatriation tax; the accounting remained subject to refinement.
- On December 5, 2017, Brunswick authorized an exit and sale process for Sea Ray and Meridian, citing a strategic shift toward outboard boat categories. It recorded a $36.0 million pretax impairment charge ($23.8 million after tax); completion of the sale process was targeted for the first half of 2018.
- The company acquired Dutch/German marine-parts distributor Lankhorst Taselaar for $15.5 million net cash consideration. It also launched Nautic-ON in 2018, a connected-boat monitoring service.
Outlook, risks and contingencies
For 2018, management targeted sales growth of 5%–7%, higher earnings before tax, improved gross and operating margins, and free cash flow above $275 million. Planned capital expenditures were $215–$225 million; working capital was expected to use $20–$40 million of cash; and pension contributions were expected to be approximately $70–$75 million. Management projected an effective tax rate of 23%–24% and a high-single-digit cash tax rate. It planned approximately $100 million of share repurchases, subject to cash availability and investment opportunities.
- Key business risks include discretionary and seasonal demand, economic and weather conditions, dealer health and access to floorplan financing, inventory reductions, competition and pricing pressure, foreign exchange, and supply shortages, costs or constraints on production capacity. Brunswick reported periodic supply shortages in 2017, without material operational impact.
- Dealer and customer financing arrangements expose the company to contingent credit and repurchase obligations. Maximum potential customer-financing guarantees were $49.2 million; potential repurchase payments were $53.6 million. Management said historical losses had not been significant and were partly mitigated by collateral or resale value.
- Environmental remediation exposure was estimated at $21.0–$39.2 million; accrued environmental liabilities were $21.0 million. The company said existing litigation and environmental reserves were not expected to have a material adverse effect.
- A Cobalt Boats patent case resulted in a $5.4 million damages award plus $2.5 million attorneys’ fees and interest; Brunswick appealed. The matter relates to Sea Ray discontinued operations. For the Cybex arm-curl investigation, the CPSC proposed a $6.3 million civil penalty, accrued and offset by a seller indemnification receivable. Brunswick also sought seller recovery for the separate $13.5 million Cybex field-campaign costs and had not recorded a corresponding receivable.
- Qualified pension plans were approximately 80% funded on the company’s stated aggregate basis at year-end; future funding needs remain sensitive to asset returns, discount rates and regulation. Tax-reform accounting, GDPR implementation, cybersecurity, product liability and potential asset impairment are additional risks.
Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal control were effective.
Important facts for investors to verify
- Whether the Sea Ray divestiture closed on schedule and what proceeds, final impairment or retained liabilities resulted.
- Whether 2018 sales, margin and free-cash-flow targets were met, including the planned capacity spending and working-capital use.
- Whether Fitness profitability recovered and whether further Cybex field-campaign, warranty or indemnification costs arose.
- How the final TCJA accounting, cash-tax rate and any foreign cash repatriations compared with the provisional estimates.
- Actual losses under dealer-financing guarantees and repurchase commitments, and developments in the Cobalt appeal and environmental matters.