Brunswick Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended April 1, 2017. Results are unaudited. Brunswick operates Marine Engine, Boat and Fitness businesses. Sea Ray and Meridian are reported as discontinued operations following the decision to exit those businesses.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $1,155.4 million | $1,082.1 million |
| Gross margin | $307.8 million; 26.6% | $294.3 million; 27.2% |
| Operating earnings | $115.4 million; 10.0% margin | $103.4 million; 9.6% margin |
| Continuing-operations net earnings | $80.5 million | $74.2 million |
| Net earnings, including discontinued operations | $72.9 million | $64.9 million |
| Diluted EPS from continuing operations | $0.91 | $0.81 |
| Diluted net EPS | $0.82 | $0.71 |
| Cash from continuing operating activities | $(43.1) million | $(66.3) million |
- Sales grew 6.8% reported and 4.7% on a constant-currency basis. Marine Engine sales rose 8.8%, Boat rose 6.7%, and Fitness rose 3.7%.
- Marine Engine operating earnings increased to $95.7 million, with margin flat at 13.9%. Boat earnings rose to $24.7 million and margin improved to 8.1% from 5.7%. Fitness earnings fell to $11.0 million; margin contracted to 4.5% from 7.8%.
- Gross margin declined 60 basis points, mainly reflecting Fitness freight costs, pricing, product/customer mix and inflation. Operating margin improved 40 basis points, helped by higher sales and lower restructuring charges.
- Continuing-operations diluted EPS as adjusted was $1.01, up $0.13, or 15%, year over year; adjustments included special tax, Fitness separation and restructuring charges.
Cash, liquidity and debt
- Cash and short-term investments were $284.8 million at March 31, down from $449.6 million at year-end 2017. Total liquidity, including $295.7 million available under the credit facility, was $580.5 million.
- Cash and restricted cash decreased $164.8 million during the quarter. Continuing free cash flow, as defined by the company, was negative $73.2 million. Management attributed operating cash use primarily to seasonal working-capital needs, including higher receivables and inventory.
- Total debt was $434.0 million; debt-to-capitalization was 22.7%. No credit-facility borrowings were outstanding, and the company reported compliance with its covenants. The next significant long-term debt maturity is in 2021.
- Capital expenditures were $34.5 million; share repurchases were $35.0 million and cash dividends paid were $16.6 million. The declared quarterly dividend was $0.19 per share.
Material changes and unusual items
- The Board authorized a proposed tax-free Fitness spin-off, targeted for completion in Q1 2019. Q1 included $1.7 million of related separation costs. Completion, timing and anticipated benefits are uncertain.
- Sea Ray and Meridian reported discontinued-operation sales of $72.6 million, down from $97.8 million, and an after-tax loss of $7.6 million versus $9.3 million. Brunswick was targeting completion of the sale process in the first half of 2018.
- Restructuring, exit, integration and impairment charges were $1.2 million versus $8.3 million. The company recorded a $5.4 million net tax charge in the quarter, primarily from updates related to 2017 tax reform; the effective tax rate was 27.0% versus 24.6%.
- Adoption of the new revenue standard affected timing of promotions and rebates and reduced opening retained earnings by $28.6 million. The company said adoption increased Q1 net sales by $1.8 million and operating earnings by $2.7 million.
- A $23.0 million indemnification receivable and offsetting accrued settlement loss were recorded for an unfavorable settlement of a legal matter involving previously sold Hatteras Yachts; the filing reports no income-statement impact. The company reported no material changes to other previously disclosed legal or environmental contingencies.
Outlook, commentary and risks
- Management targeted 2018 sales growth of approximately 6%–7% versus 2017, assuming no significant change in global macroeconomic conditions, and expected another year of earnings growth and strong cash generation.
- Marine margins were expected to improve through new products, volume leverage and efficiency savings. Fitness margins were projected to decline, with pressures expected to moderate toward year-end. Management cited trade-policy changes as a possible additional cost pressure.
- 2018 plans included capital expenditures of $215–$225 million, free cash flow above $275 million, and restructuring charges of approximately $5–$10 million. Management expected a 22%–23% effective tax rate and a cash tax rate in the high single digits. It expected approximately $70 million of qualified pension contributions.
- The company planned approximately $100 million in 2018 share repurchases, subject to cash availability and other investment opportunities. Management said liquidity was adequate for short- and long-term needs.
- Key disclosed risks include consumer and economic weakness, currency movements, pricing and competition, dealer/customer financing and distribution, supply and production challenges, pension funding, product liability and warranty claims, and execution or disruption risks related to the Fitness spin-off.
Important facts for investors to verify
- Whether the Fitness spin-off and Sea Ray disposition proceeded on the announced timelines and what costs, proceeds or operational effects resulted.
- Whether marine demand, Fitness margins and the stated 2018 sales, free-cash-flow and capital-spending targets were achieved.
- How seasonal working capital, pension contributions, share repurchases and dividends affected cash and liquidity over the rest of 2018.
- Final tax-reform accounting and cash-tax outcomes, including any effects of repatriation and tax-authority developments.
- The scope and financial consequences, if any, of the Hatteras settlement and other contingencies; the filing gives no further clear estimate of potential exposure beyond the recorded offsetting amounts.