BRUNSWICK CORP quarterly report, Q1 FY2019

Brunswick Corporation — Q1 2019 Form 10-Q

Reporting period: Three months ended March 30, 2019; unaudited. Comparisons are with the three months ended March 31, 2018, unless noted.

Metric	Q1 2019	Q1 2018
Net sales	$1,275.9 million	$1,211.4 million
Gross margin	$337.5 million; 26.5%	$310.0 million; 25.6%
Operating earnings (loss)	$(28.6) million; (2.2)% margin	$105.1 million; 8.7% margin
Net earnings (loss)	$(36.3) million	$72.9 million
Diluted EPS	$(0.42)	$0.82
Operating cash flow	$(79.4) million	$(67.1) million
Capital expenditures	$88.1 million	$37.1 million
Company-defined free cash flow	$(167.5) million	$(99.8) million

Sales rose 5.3%. Marine Engine sales increased 11.5% to $766.0 million; Boat sales declined 0.8% to $373.3 million; Fitness sales declined 7.9% to $225.2 million.
Marine Engine operating earnings increased to $112.9 million from $95.7 million. Boat operating earnings rose to $22.0 million from $14.4 million. Fitness recorded an operating loss of $139.1 million versus earnings of $11.0 million.
Q1 operating results included $141.5 million in restructuring, exit, integration and impairment charges, primarily a $137.2 million Fitness goodwill impairment ($103.0 million after tax). Excluding specified charges and other items, management reported adjusted operating earnings of $127.9 million, a 10.0% margin, and adjusted diluted EPS of $0.99, down from $1.01.

At March 30, 2019, cash and cash equivalents were $161.5 million; cash, cash equivalents and short-term marketable securities totaled $162.3 million. Total liquidity, including available credit, was $558.7 million.
Total debt was $1,286.5 million, compared with $1,220.8 million at December 31, 2018 and $434.0 million a year earlier. The debt-to-capitalization ratio was 45.7%, versus 43.5% and 22.7%, respectively.
The company issued $230 million of 6.375% senior notes due 2049, receiving $222 million net proceeds; $150 million was used to repay a term loan due 2021. No credit-facility borrowings were outstanding at quarter-end; $396.4 million was available. Brunswick reported compliance with debt covenants.
Operating cash use reflected seasonal working-capital needs, including higher receivables and inventory. Cash and cash equivalents declined from $294.4 million at year-end 2018.

Sales growth was led by the Power Products acquisition and demand for higher-horsepower outboards. Marine Engine sales growth included an 8-percentage-point contribution from Power Products. Fitness revenue fell amid lower sales to value-oriented clubs and weakness in some international markets. Boat comparisons were affected by the 2018 wind-down of Sea Ray Sport Yacht and Yacht operations.
Management projected 2019 net sales growth of 8%–10% for the combined marine segments, including approximately 4% from acquisitions, and a mid-single-digit decline in Fitness sales. It expected Marine Engine sales to grow at a low-double-digit rate and Boat sales at a low-single-digit rate.
For 2019, Brunswick projected free cash flow above $320 million, including approximately $20 million from Fitness; capital expenditures of $240–$260 million; and debt reduction of $150–$200 million, primarily toward year-end. It forecast an effective tax rate of about 23% and interest expense of $73–$75 million. Quarterly dividends were expected to remain $0.21 per share.
The company expected to announce a Fitness business sale as soon as practicable in Q2 2019, while retaining spin-off preparedness. It also planned to exit qualified defined benefit pension plans in 2019, with a residual pretax contribution of approximately $15–$25 million and related charges.

The Fitness separation may be delayed, not completed, or produce less value than expected; a sale or changing valuation assumptions could lead to additional impairment. A spin-off could also create tax exposure, including if tax-related assumptions or conditions are not met.
Management cited consumer discretionary demand, tariffs, foreign exchange, weather, dealer inventory and financing, supply-chain costs, competition, product quality and warranty claims, and acquisition/separation execution among material risks. Foreign exchange adversely affected Q1 operating earnings by an estimated $3 million.
The filing reported no material changes in previously disclosed legal, environmental or contractual contingencies. No material changes to market-risk exposure were reported.
Adoption of the lease accounting standard added operating lease assets of $101.2 million and liabilities of $85.3 million at January 1, 2019; the company said the adoption did not materially affect the income statement.

Progress, timing, structure, valuation and proceeds of the proposed Fitness sale or spin-off, and whether further impairment is required.
Underlying marine and Fitness demand, segment margins, and the extent to which marine growth depends on acquisitions and new-product mix.
Conversion of seasonal working-capital investment into cash, achievement of the above-$320 million free-cash-flow target, and planned capital spending.
Debt reduction, refinancing and interest costs, liquidity, and the planned pension-plan exit and associated charges.
Effects of tariffs, foreign exchange and other stated risks on margins and full-year targets.