Brunswick Corporation — Q1 2017 Form 10-Q
Reporting period: The 13-week quarter ended April 1, 2017; comparisons are with the quarter ended April 2, 2016. Brunswick manufactures and markets products through its Marine Engine, Boat and Fitness segments. The company notes that its businesses are seasonal, so interim results may not indicate full-year performance. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $1,160.3 | $1,070.3 |
| Gross margin / percentage | $300.1 / 25.9% | $282.1 / 26.4% |
| Operating earnings / margin | $89.0 / 7.7% | $96.0 / 9.0% |
| Net earnings from continuing operations | $64.9 | $63.2 |
| Diluted EPS from continuing operations | $0.71 | $0.68 |
| Cash dividends declared per share | $0.165 | $0.15 |
Sales increased 8.4% reported, or 8.5% on a constant-currency basis; excluding acquisitions, sales rose 6%. Operating earnings included $15.2 of restructuring, exit and integration charges, versus $3.8 a year earlier. Management reported adjusted diluted EPS, a non-GAAP measure excluding those charges and special tax items, of $0.84, up 18% from $0.71.
Segment sales and operating earnings were: Marine Engine $631.8 and $88.5 (prior-year $595.5 and $78.3); Boat $382.7 and $3.2 (prior-year $336.8 and $16.4); and Fitness $235.6 and $18.3 (prior-year $218.3 and $20.1). Marine Engine earnings benefited from sales, mix and efficiencies; Boat earnings were affected by Brazil exit costs and operating headwinds; Fitness earnings declined despite higher sales.
Cash flow, liquidity and debt
- Cash used in continuing operating activities was $86.3, versus $82.8 used a year earlier. Management attributed the outflow mainly to seasonal working-capital needs and pension contributions.
- Capital expenditures were $60.8, versus $46.2. Company-defined free cash flow from continuing operations, a non-GAAP measure, was negative $136.5, compared with negative $126.0.
- Cash and cash equivalents were $273.3; cash plus short-term marketable securities totaled $274.0 at April 1, down from $458.2 at December 31, 2016. Total liquidity, including available credit, was $569.7.
- Total debt was $441.8 and the debt-to-capitalization ratio was 23.1%. The $300 credit facility had $295.7 available, net of letters of credit; no borrowings were outstanding, and the company reported compliance with its covenants.
- The company repurchased $20 of shares in the quarter and reported $220 of remaining authorization. It planned approximately $100 of repurchases for 2017.
Material changes and management outlook
- Sales rose across the marine businesses and Fitness, with acquisitions contributing to growth. Marine Engine sales benefited from outboards and service, parts and accessories; sterndrive engines remained weak. Boat sales increased across its main categories. Fitness growth reflected acquisitions and international markets, while U.S. revenue excluding acquisitions was down.
- Gross margin fell 50 basis points, mainly from unfavorable sales mix within Fitness and Boat and between segments. Higher restructuring charges contributed to the 130-basis-point decline in operating margin.
- Management targeted 2017 sales growth of approximately 6%–8% versus 2016 and expected higher revenue and improved gross and operating margins, supported by volume and cost reductions. It also cited higher growth investment spending and an approximately $2 unfavorable foreign-exchange impact on Q1 operating earnings.
- Full-year restructuring, exit and integration charges were expected to be approximately $26–$28. Management planned capital expenditures of $185–$195, working-capital cash use of $30–$50, and approximately $75 of defined-benefit pension contributions; it expected 2017 free cash flow above $250.
- The company expected a 2017 effective tax rate of approximately 29%. Q1’s 25.3% rate included a $5.3 tax benefit from share-based compensation accounting changes.
Risks, contingencies and unusual items
Brunswick announced the closure of its Joinville, Brazil boat facility, citing continued market weakness and unfavorable currency effects. Q1 charges also included corporate officer transition costs and Fitness integration activity. Remaining restructuring accruals were $7.5, expected to be paid in 2017 and 2018. The company expected a pension settlement loss in the second half of 2017 related to termination of two pension plans.
The filing reported no material changes to previously disclosed legal, environmental or contractual commitments, risk factors, or market-risk exposures. Key disclosed risks include consumer discretionary demand, foreign exchange, acquisition integration, dealer financing and distribution, production capacity and fixed-cost absorption, pension funding, product quality, warranty and liability claims, and supply or technology disruptions. Product warranty liabilities were $113.2 at quarter-end. The company also noted that repatriation of certain foreign earnings could result in additional taxes.
The company is evaluating adoption of the new revenue-recognition standard, effective in 2018, and expects timing changes for certain Boat promotions and Fitness rebates, without an expected change in cumulative revenue per transaction. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the targeted sales growth, margin improvement and free-cash-flow outlook are achieved, given seasonal working-capital use and planned investment.
- Whether Boat segment profitability recovers as Brazil closure costs, warranty adjustments, mix and large-boat demand affect results.
- Whether Fitness U.S. trends and acquisition-related growth support the expected second-half improvement.
- The final costs and timing of the Brazil facility closure, other restructuring, and the expected pension settlement loss and contributions.
- How much Q1 earnings benefited from the share-based compensation tax benefit and whether the expected full-year tax rate is realized.
- Whether cash, available credit and debt remain adequate while funding capital expenditures, dividends, pension obligations and planned repurchases.