Brunswick Corporation — Q2 2017 Form 10-Q
Business context and period: Unaudited results for the three and six months ended July 1, 2017, compared with the periods ended July 2, 2016. Brunswick reports Marine Engine, Boat and Fitness segments. Results are seasonal and interim performance may not indicate full-year results.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $1,352.0M | $1,242.2M | $2,512.3M | $2,312.5M |
| Operating earnings | $168.6M | $161.9M | $257.6M | $257.9M |
| Operating margin | 12.5% | 13.0% | 10.3% | 11.2% |
| Net earnings from continuing operations | $119.4M | $108.1M | $184.3M | $171.3M |
| Diluted continuing-operations EPS | $1.32 | $1.17 | $2.03 | $1.85 |
| Gross margin | 27.3% | 28.4% | 26.6% | 27.5% |
Q2 sales rose 8.8% (7% excluding acquisitions); first-half sales rose 8.6% (7% excluding acquisitions). Q2 adjusted diluted EPS, excluding restructuring, exit and integration charges and special tax items, was $1.35, up 13%; first-half adjusted EPS was $2.19, up 16%. These are non-GAAP measures.
Cash flow and liquidity: First-half operating cash flow from continuing operations was $171.8M versus $221.3M. Capital expenditures were $107.9M versus $90.0M; management-defined free cash flow from continuing operations was $76.2M versus $138.5M. The cash-flow decline reflected seasonal working-capital use, including higher receivables and inventory. At July 1, cash and marketable securities were $438.0M; total liquidity, including available credit, was $733.7M. Total debt was $444.0M and debt-to-capitalization was 22.3%. No credit-facility borrowings were outstanding; $295.7M was available, and the company reported covenant compliance.
Margins and segments: Marine Engine sales increased 6.5% in Q2 and operating earnings rose 6.6% to $148.2M. Boat sales increased 12.0%; operating earnings rose 8.8% to $24.7M in Q2, but first-half earnings fell 28.6% to $27.9M. Fitness sales increased 9.0%, while Q2 operating earnings declined 23.2% to $18.5M. Fitness margin pressure included unfavorable sales mix, capacity and product-transition costs, foreign exchange and a non-recurring liability adjustment.
Material changes and management outlook
- Higher sales and cost efficiencies supported Q2 operating earnings, but operating margin declined 50 basis points as gross margin fell 110 basis points. Management cited Fitness mix and unfavorable warranty adjustments in fiberglass sterndrive/inboard boats; higher legal costs, foreign exchange and restructuring charges also weighed on results.
- First-half operating earnings were nearly flat despite higher sales; restructuring, exit and integration charges rose to $20.9M from $6.4M. The company expects full-year charges of approximately $26M–$28M.
- Management targeted 2017 sales growth of approximately 7%–8% versus 2016, continued earnings growth and excellent cash generation. It expected slight full-year operating-margin improvement, a slight gross-margin decline with trends improving in the second half, and a GAAP effective tax rate of approximately 28%.
- Management planned 2017 capital expenditures of $185M–$195M, pension contributions of approximately $75M and free cash flow above $250M. It also planned approximately $100M of share repurchases; $180M remained authorized at July 1.
- The company expected a $45M–$55M pension settlement loss in the second half related to termination of two hourly pension plans. A $0.165-per-share dividend was declared after quarter-end. On July 19, Brunswick signed an agreement to acquire Dutch marine-parts distributor Lankhorst Taselaar; terms were not stated in the provided filing text.
Risks, contingencies and unusual items
- A jury returned a $2.7M verdict against Brunswick in Cobalt Boats’ Sea Ray swim-step patent case. The amount remains subject to adjustments and possible exceptional damages of up to three times the award plus attorney fees. Brunswick said it had filed post-trial motions and would appeal if necessary.
- The company announced closure of its Joinville, Brazil boat facility amid weak regional markets and unfavorable currency effects. The facility’s long-lived assets had previously been fully impaired.
- Key risks include consumer discretionary demand, currency movements, acquisitions and integration, dealer financing and distribution, product quality, warranty and liability claims, supply and manufacturing capacity, pension funding, competition, and technology or cybersecurity incidents. The filing reported no material changes to previously disclosed risk factors.
- Foreign exchange reduced operating-earnings comparisons by approximately $4M in Q2 and $5M in the first half. Management also cited market and execution uncertainties; forward-looking statements are not guarantees of results.
Important facts for investors to verify
- Whether sales growth and the projected second-half margin improvement materialize, particularly in Fitness and Boat.
- Cash conversion and working-capital trends, and whether management achieves its free-cash-flow, capital-spending and pension-funding plans.
- The final outcome and potential total cost of the Cobalt litigation, alongside warranty and other legal exposures.
- The timing, cost and operational effects of the Brazil facility closure, restructuring actions and planned pension settlements.
- The impact of acquisitions and the expected timing changes from adopting the new revenue-recognition standard in 2018.