Brunswick Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; selected Q4 results are included below. Brunswick designs and sells marine engines and parts, boats, fitness equipment, and active recreation products.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $5,159.2 million | $4,835.9 million | +6.7% |
| Gross margin | $1,321.0 million; 25.6% | $1,262.1 million; 26.1% | Margin down 50 bps |
| Operating earnings | $367.0 million | $398.3 million | -7.9% |
| Operating margin | 7.1% | 8.2% | Down 110 bps |
| Continuing-operations net earnings | $263.1 million | $146.4 million | +79.7% |
| Diluted EPS from continuing operations | $2.98 | $1.62 | +84.0% |
| Operating cash flow, continuing operations | $337.0 million | $401.6 million | Down $64.6 million |
| Free cash flow (company-defined non-GAAP) | $208.8 million | $224.7 million | Down $15.9 million |
Net earnings included $2.2 million after tax from discontinued operations, related to adjustments to retained bowling-business liabilities. Reported results also reflect a lower effective tax rate: 18.3% in 2018 versus 47.9% in 2017, when tax reform produced significant charges. Adjusted diluted EPS, a non-GAAP measure, was $4.77, up 19% from $4.01.
Segments and fourth-quarter results
- Marine Engine: Sales of $2,993.6 million, up 13.7%; operating earnings of $454.4 million, up 10.5%. Growth reflected outboard propulsion demand, parts and accessories, and the Power Products acquisition.
- Boat: Sales of $1,471.3 million, down 1.3%; operating loss of $12.5 million versus earnings of $5.3 million. Sport Yacht and Yacht wind-down activity was a major drag; excluding those operations, sales rose across the main boat categories.
- Fitness: Sales of $1,038.3 million, up 0.4%; operating earnings of $22.4 million versus $64.1 million. Domestic cardio weakness and lower margins, including freight, mix, cost inflation and inefficiencies, weighed on results.
Q4 2018: Net sales were $1,248.9 million; continuing-operations net earnings were $41.2 million and diluted continuing-operations EPS was $0.47. Total net earnings were $43.4 million, including discontinued-operations earnings of $2.2 million. Q4 2017 reported a net loss of $116.9 million, including a $96.6 million pension settlement charge.
Liquidity, debt and capital allocation
- Year-end cash, cash equivalents and marketable securities were $295.2 million, down from $449.6 million. Total liquidity, including available borrowing capacity, was $691.3 million versus $745.3 million.
- Total debt rose to $1,220.8 million from $437.4 million; debt-to-capitalization increased to 43.5% from 22.8%. The increase primarily funded the $909.6 million Power Products acquisition. Brunswick reported compliance with its debt covenants.
- Capital expenditures were $193.4 million. The company paid $67.8 million in dividends and repurchased $75.0 million of shares. It contributed $163.8 million to qualified and nonqualified pension plans.
- Management cited adequate liquidity. It planned to reduce debt by $150–$200 million in 2019 and expected capital expenditures of approximately $240–$260 million.
Material developments, outlook and risks
- Brunswick acquired Power Products’ Global Marine & Mobile business for $909.6 million cash on August 9, 2018. The acquisition contributed $82.8 million in sales after closing; purchase-accounting amortization and transaction costs affected 2018 earnings.
- After ending the Sea Ray sale process, Brunswick retained and restructured the business, discontinuing Sport Yacht and Yacht models and winding down yacht production. These operations recorded a $107.8 million operating loss in 2018, including $49.4 million of restructuring, exit, integration and impairment charges.
- The company was pursuing a Fitness separation, by spin-off or sale; the process remained on plan, but completion, timing, value and tax treatment were uncertain. Fitness goodwill was $389.8 million, and its tested fair value exceeded carrying value by approximately 19% under management’s assumptions.
- 2019 outlook: Management projected strong revenue and earnings growth and free cash flow above $320 million, including approximately $20 million from Fitness. Combined marine sales were targeted to grow 9%–11%, including about 4% from acquisitions; Fitness sales were expected to decline by a mid-single-digit percentage. The projected effective tax rate was 23%–24%.
- Management expected marine margin improvement from new products, volume leverage and cost reductions, partly offset by tariffs and unfavorable foreign exchange. It also expected higher operating expenses for growth investment and the Fitness separation.
- Key risks include sensitivity of recreational demand to economic conditions, interest rates, weather and dealer inventory; tariffs, commodity costs, foreign exchange and supply constraints; acquisition integration; Fitness separation execution and potential impairment; dealer financing and repurchase/recourse exposure; cybersecurity and product-liability matters. Environmental remediation exposure was estimated at $17.0–$46.8 million, with $17.0 million accrued. The filing states management did not expect known litigation matters to have a material adverse effect.
- The two remaining U.S. qualified pension plans were being terminated, with settlement expected in 2019. The company estimated a residual pre-tax funding need of $15–$25 million and anticipated recognition of actuarial losses and tax effects.
Important facts for investors to verify
- Whether 2019 marine growth, Fitness performance and free-cash-flow targets are achieved, and how much reported growth reflects acquisitions versus organic demand.
- Debt reduction, interest expense, liquidity and compliance with the leverage and interest-coverage covenants after acquisition financing.
- Fitness separation structure, timing, costs, tax consequences and standalone valuation; monitor goodwill impairment assumptions.
- Progress and final costs of the Sea Ray yacht wind-down, including remaining restructuring, warranty and dealer-inventory effects.
- Exposure to tariffs, FX, supplier capacity, dealer credit and product claims, including open CPSC matters and environmental remediation.