Brunswick Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited interim results; the company cautions that seasonal results may not indicate full-year performance. Unless stated otherwise, amounts are in U.S. dollars.
Business context
Brunswick reports Marine Engine, Boat, and Fitness segments. After ending the Sea Ray sale process on June 25, 2018, it brought Sea Ray results back into continuing operations for all periods presented. The company plans to wind down Sea Ray Sport Yacht and Yacht production in Q3 2018 while continuing and reinventing Sport Boat and Sport Cruiser operations.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $1,400.9 million | $1,352.0 million | $2,612.3 million | $2,512.3 million |
| Gross margin | $349.7 million; 25.0% | $369.9 million; 27.4% | $659.7 million; 25.3% | $671.1 million; 26.7% |
| Operating earnings | $106.7 million; 7.6% margin | $171.1 million; 12.7% margin | $211.8 million; 8.1% margin | $262.5 million; 10.4% margin |
| Net earnings | $79.0 million | $119.4 million | $151.9 million | $184.3 million |
| Diluted EPS | $0.90 | $1.32 | $1.72 | $2.03 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $200.9 million | $171.8 million |
Q2 sales grew 3.6% year over year (3% on a constant-currency basis); first-half sales rose 4%. Marine Engine growth was led by outboard engines and parts and accessories. Boat sales declined, principally from Sport Yacht and Yacht. Fitness sales edged up, with commercial strength growth offset by weakness in cardio, including Cybex.
Q2 operating earnings fell 37.6%; first-half operating earnings fell 19.3%. First-half diluted EPS was down 15.3%. The filing also presents adjusted diluted EPS of $1.50 for Q2, up 9%, and $2.51 for the first half, up 10%; these are non-GAAP measures.
Cash flow, liquidity and debt
- First-half free cash flow, as defined by Brunswick, was $122.1 million versus $84.4 million. The definition adjusts operating and investing cash flows for specified items and is not a GAAP measure.
- First-half capital expenditures were $90.3 million; cash dividends paid were $33.1 million and share repurchases were $70.0 million.
- At June 30, cash and cash equivalents were $435.9 million; cash, cash equivalents and marketable securities totaled $436.7 million. Total liquidity, including available credit, was $732.7 million.
- Total debt was $433.7 million, compared with $437.4 million at year-end 2017. The debt-to-capitalization ratio was 22.4%. No borrowings were outstanding under the $300 million revolving facility; $296.0 million was available after letters of credit.
- The company arranged a $1.1 billion, 364-day bridge facility for the planned Power Products acquisition. After a July 13 amendment, $800 million remained; Brunswick planned to replace it with term loans and later refinance part with long-term debt.
Material changes and unusual items
- Q2 restructuring, exit, integration and impairment charges were $34.8 million versus $5.7 million a year earlier; first-half charges were $38.6 million versus $20.9 million. Sea Ray wind-down activity was the principal driver.
- Sport Yacht and Yacht operations recorded a Q2 operating loss of $60.8 million, including $15.5 million of estimated retail sales promotions. First-half operating loss was $69.7 million. The company recorded a $9.4 million impairment of long-lived assets in Q2.
- Additional Q2 items included $2.5 million of Fitness separation costs, $2.5 million of acquisition-related costs, and $1.6 million for an additional Fitness product field campaign.
- ASC 606 revenue recognition adoption reduced reported Q2 sales by $9.7 million and net earnings by $8.6 million versus the former accounting method; first-half sales were lower by $4.9 million and net earnings by $4.2 million. Prior-year periods were not restated.
- Effective June 28, Brunswick agreed to acquire Power Products’ Global Marine & Mobile business for $910 million cash, subject to closing conditions and regulatory review. The transaction was expected to close in mid-August. The target reported approximately $233 million of trailing-12-month sales through March 31, 2018.
- The Board authorized a Fitness business spin-off, anticipated to be tax-free to shareholders and expected in Q1 2019. The transaction remains subject to execution and other risks.
Outlook, management commentary and risks
Management continued to target 2018 net sales growth of approximately 8%–9% versus 2017, including announced acquisitions. It expected gross margin as a percentage of sales to decline for the year, though less than in the first half; operating margins were expected to decrease slightly, with high-single-digit operating leverage. Operating expenses were expected to rise in dollars but decline slightly as a percentage of sales. The projected effective tax rate was approximately 21%–22%.
Management expected full-year capital expenditures of approximately $220–$230 million and free cash flow of $200–$220 million, excluding specified Sea Ray wind-down and Fitness separation cash impacts. It projected $20–$40 million of working-capital cash use and $150–$160 million of qualified pension contributions. Share repurchases were to pause until financing for the acquisition and Fitness separation actions was completed; quarterly dividends were expected to remain at current levels.
Key risks include completing and integrating the Power Products acquisition, completing the Fitness separation, trade-policy changes and tariffs, consumer demand and dealer inventory, foreign exchange, cost inflation and freight, product quality and warranty exposure, pension funding, and the effects of Sea Ray wind-down activity. Brunswick said it had adequate liquidity for its needs. It reported no material changes to previously disclosed commitments, environmental requirements, or other risk factors beyond those described in this filing.
Important facts for investors to verify
- Whether the Power Products acquisition closed on the expected timetable, its final financing structure, integration costs, and realized benefits.
- Sea Ray wind-down costs, dealer inventory and promotions, and the performance of the retained Sport Boat and Sport Cruiser businesses.
- Progress, timing, costs and tax treatment of the planned Fitness spin-off.
- Whether sales, margin and cash-flow targets were achieved, particularly given the first-half margin decline, tariffs, and seasonal working-capital needs.
- How ASC 606 timing effects, restructuring charges, pension contributions and Tax Cuts and Jobs Act estimates affect comparability and reported earnings.