Brunswick Corporation — Q3 2017 Form 10-Q
Business context and period. The unaudited quarter ended September 30, 2017; comparisons are with the quarter ended October 1, 2016. Brunswick operates Marine Engine, Boat and Fitness businesses. Results are seasonal, so interim performance may not indicate full-year results.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,141.5 million | $1,093.0 million | $3,653.8 million | $3,405.5 million |
| Operating earnings | $111.7 million | $122.5 million | $369.3 million | $380.4 million |
| Operating margin | 9.8% | 11.2% | 10.1% | 11.2% |
| Net earnings from continuing operations | $79.0 million | $85.3 million | $263.3 million | $256.6 million |
| Diluted continuing-operations EPS | $0.88 | $0.93 | $2.91 | $2.78 |
| Gross margin | 27.4% | 28.3% | 26.9% | 27.8% |
- Q3 sales rose 4.4% (3.9% on a constant-currency basis); nine-month sales rose 7.3% (7.4% constant currency). Acquisitions contributed to growth.
- Marine Engine Q3 sales increased 7.0% and operating earnings increased 5.2%. Boat sales increased 0.7%, but operating earnings fell to $0.1 million from $6.8 million. Fitness sales increased 2.2%, while operating earnings declined 33.3% to $19.4 million.
- Operating earnings declined in both comparison periods despite higher sales. Q3 net earnings and EPS fell; nine-month net earnings and EPS increased, with EPS also benefiting from fewer shares outstanding.
- Nine-month operating cash flow from continuing operations was $255.1 million, down from $293.2 million. Company-defined free cash flow from continuing operations was $118.7 million versus $168.6 million.
- At September 30, cash and cash equivalents were $391.1 million; cash, cash equivalents and marketable securities totaled $391.9 million. Total liquidity, including $295.7 million available under the credit facility, was $687.6 million.
- Total debt, including current maturities, was $441.8 million; debt-to-capitalization was 22.0%. No credit-facility borrowings were outstanding, and the company reported compliance with its covenants.
- Nine-month capital expenditures were $153.4 million. The company repurchased $120 million of shares and paid $44.0 million in dividends during the period.
Changes, outlook and notable items
- Management attributed weaker margins to unfavorable sales mix in Boat and Fitness, Boat manufacturing inefficiencies and Hurricane Irma disruption, Fitness competitive pressures, higher restructuring charges, and growth investments. Nine-month Boat results were also affected by warranty adjustments, litigation costs and costs related to the Brazil facility closure.
- Marine Engine growth was led by outboard engines and marine parts and accessories; sterndrive demand declined. Boat’s aluminum outboard business grew, while large sterndrive/inboard demand weakened. Fitness benefited from acquisitions, but underlying global demand was flat in Q3, with softness in traditional clubs and other markets.
- Management continued to target approximately 7% full-year 2017 sales growth versus 2016, with a slightly lower growth rate in Q4. It expected full-year gross margin to decline, operating margin to decrease modestly, and operating expenses to be higher in dollars but slightly lower as a percentage of sales. The company projected full-year free cash flow above $250 million.
- Management expected 2017 restructuring, exit and integration charges of approximately $33–34 million and a GAAP effective tax rate of approximately 27.5% (28.0–28.5% adjusted, excluding specified items). Planned 2017 capital spending was $185–195 million.
- October pension-plan settlements used plan assets to purchase annuities and make lump-sum payments. The company expected a fourth-quarter settlement loss of approximately $90–105 million.
- In the Cobalt Boats patent case, an amended judgment entered October 31, 2017 awarded $5.4 million in damages, including enhanced damages, plus $2.5 million in attorneys’ fees and applicable interest. Brunswick said it believed it had meritorious defenses and planned to appeal.
- Other notable items included $27.7 million of restructuring, exit and integration charges in the first nine months; the exit of Fitness’s InMovement product line amid declining demand; and the announced closure of the Joinville, Brazil boat facility amid market weakness and unfavorable currency impacts. A September acquisition of Lankhorst Taselaar for $15.5 million expanded marine parts and accessories distribution.
- Key risks cited include consumer demand and economic conditions, currency movements, competition and pricing, weather and catastrophic events, product quality and warranty claims, litigation, pension funding, acquisition integration, manufacturing capacity, and access to financing. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales growth and the expected full-year growth target are being achieved excluding acquisitions and currency effects.
- Whether Boat and Fitness margins recover from Q3 pressures, including hurricane-related disruption, mix, manufacturing inefficiencies and competitive conditions.
- Actual operating cash flow, working-capital needs, capital spending and free cash flow versus management’s full-year outlook.
- The amount and timing of pension settlement charges, and the effect of pension actions on reported earnings and future obligations.
- The outcome and financial impact of the Cobalt patent appeal, including attorneys’ fees and interest.
- Execution and costs of restructuring and the Brazil facility closure, and the eventual purchase-accounting amounts for Lankhorst Taselaar.