Brunswick Corp. reported a 12 percent gain in earnings in the first quarter on a 7 percent revenue lift. Sales grew 9 percent in the Marine Segment, 7 percent in the Boat segment and 4 percent in the Fitness segment.

First Quarter Highlights

• Consolidated net sales increased 7 percent versus first quarter 2017. Net sales increased 9 percent for the Marine Engine segment and 7 percent for the Boat segment.
• On a GAAP basis, operating earnings increased by 12 percent. Adjusted operating earnings were up 6 percent versus the prior period.
• On a GAAP basis, diluted EPS of $0.91 increased by 12 percent compared to the prior year. Diluted EPS, as adjusted, was $1.01, up 15 percent versus first quarter 2017.

“Our first quarter performance was an excellent start to what we believe will be another year of successful execution of our strategy and creation of shareholder value,” said Brunswick Chairman and Chief Executive Officer Mark Schwabero. “Our marine businesses continue to benefit from strong demand for outboard boats and engines, successful new products and our strategy to grow the parts and accessories businesses. As a result, our marine businesses had revenue growth of 8 percent in the quarter, with a very strong increase in operating earnings versus first quarter 2017.

“At this early point in the marine season, our current outlook on the global marine market remains in line with our initial expectations. While unfavorable weather conditions in certain markets, including the Northeast and Midwest regions of the U.S. as well as Europe, have contributed to a slightly slower start to boating activity and the marine retail selling season, we remain confident in our view of the industry for 2018,” Schwabero continued.

“We continue to focus on product leadership as evidenced by Mercury’s launch of the 175-225 horsepower V6 outboard engines, the first in a series of major outboard engine launches planned for 2018. These products, which will begin shipping in the second quarter, along with other award-winning, new products within our other marine categories, respond to customers’ desire to migrate to products with enhanced features, resulting in overall business results that exceed the market,” Schwabero continued.

“In our Fitness segment, we continue to execute against our digital strategy, as evidenced by our release at IHRSA of the Halo Fitness Cloud, a dynamic software platform for club operators that enhances the exerciser experience, while simplifying facility management. In the quarter, the business experienced improving demand in certain European and Asian markets, which drove top-line growth, with margins remaining under pressure.”

“Overall, our first quarter performance generated strong results, with the improvement in operating earnings, combined with a lower effective tax rate and fewer shares outstanding, producing a 15 percent increase in diluted earnings per common share, as adjusted, over prior year,” Schwabero concluded.

Discontinued Operations

On December 5, 2017, Brunswick announced its intention to sell its Sea Ray businesses. Starting with the fourth quarter of 2017, the historical and future results of these businesses are now reported as discontinued operations. Therefore, for all periods, all figures and outlook statements incorporate this change and reflect continuing operations only.

First Quarter Results

For the first quarter of 2018, Brunswick reported net sales of $1,155.4 million, up from $1,082.1 million a year earlier. For the quarter, Brunswick reported operating earnings of $115.4 million, which included $1.7 million of costs related to the planned Fitness business separation and $1.2 million of restructuring, exit, integration and impairment charges. In the first quarter of 2017, Brunswick had operating earnings of $103.4 million, which included $8.3 million of restructuring, exit, integration and impairment charges.

For the first quarter of 2018, Brunswick reported net earnings of $80.5 million, or $0.91 per diluted share, compared with net earnings of $74.2 million, or $0.81 per diluted share, for the first quarter of 2017. Diluted EPS for the first quarter of 2018 included an $0.08 per diluted share charge from special tax items, $0.01 per diluted share of costs related to the planned Fitness business separation and $0.01 per diluted share of restructuring, exit, integration and impairment charges. The diluted EPS for the first quarter of 2017 included $0.07 per diluted share of restructuring, exit, integration and impairment charges.

Review of Cash Flow and Balance Sheet

Cash and marketable securities totaled $294.2 million at the end of the first quarter, down $164.8 million from year-end 2017 levels. The reduction includes net cash used for operating activities during the first three months of the year of $43.1 million, which improved by $23.2 million versus the prior year. This usage of cash was primarily the result of seasonal changes in working capital.

In addition, net cash used for investing and financing activities of $99.4 million during the quarter reduced cash and marketable securities balances. Investing and financing activities during the year-to-date period included $34.5 million of capital expenditures, $35.0 million of common stock repurchases and $16.6 million of dividend payments.

Marine Engine Segment

The Marine Engine segment, which manufactures and distributes marine propulsion systems and related parts and accessories, reported net sales of $687.1 million in the first quarter of 2018, up 9 percent from $631.8 million in the first quarter of 2017. International sales, which represented 31 percent of total segment sales in the quarter, were up 10 percent compared to the prior year period. For the quarter, the Marine Engine segment reported operating earnings of $95.7 million. This compares with operating earnings of $87.7 million in the first quarter of 2017.

Sales increases in the quarter were driven by strong growth in propulsion, led by increases in outboard engines and solid growth in the parts and accessories businesses. The increase in operating earnings in the first quarter was primarily due to benefits from higher net sales and favorable movements in foreign exchange rates, which were partially offset by the unfavorable impact from planned spending increases stemming from new product introductions, capacity expansion and product development.

Boat Segment

The Boat segment, which manufactures and distributes recreational boats, reported net sales of $304.0 million for the first quarter of 2018, a solid increase from $284.9 million in the first quarter of 2017. International sales, which represented 28 percent of total segment sales in the quarter, increased by 14 percent compared to the prior year period. For the first quarter of 2018, the Boat segment reported operating earnings of $24.7 million. This compares with operating earnings of $16.2 million in the first quarter of 2017.

The Boat segment’s revenue reflected strong growth in the fiberglass freshwater boat businesses, comprised of the Bayliner brand, along with our European brands Quicksilver and Uttern, and solid growth in the aluminum freshwater boat businesses.

Revenue for the fiberglass saltwater boat business was comparable to a very strong first quarter of 2017. The increase in segment operating earnings was primarily the result of higher net sales and timing benefits resulting from the adoption and implementation of the new revenue recognition standard.

Fitness Segment

The Fitness segment, which manufactures and distributes strength and cardiovascular fitness equipment and active recreation products, reported net sales in the first quarter of 2018 of $244.4 million, an increase of 4 percent from $235.6 million in the first quarter of 2017. International sales, which represented 50 percent of total segment sales in the quarter, increased by 14 percent as compared to the first quarter of 2017. For the quarter, the Fitness segment reported operating earnings of $11.0 million, which included restructuring, exit, integration and impairment charges of $1.2 million. This compares with operating earnings of $18.3 million in the first quarter of 2017, which included $2.4 million of restructuring, exit, integration and impairment charges.

The Fitness segment’s revenue reflected growth in international markets and a decline in domestic sales, as increased sales to health clubs were partially offset by decreases in Cybex sales in advance of new products and sales to vertical markets. The decline in operating earnings resulted from higher freight costs, challenging pricing dynamics in certain international markets, unfavorable changes in product and customer mix and cost inflation, which more than offset benefits from sales increases.

2018 Outlook

“Our outlook for 2018 remains generally consistent with our recently provided three-year strategic plan and reflects another year of outstanding revenue and earnings growth, with excellent cash flow generation,” said Schwabero. “We expect our marine businesses’ top-line performance to benefit from the continuation of solid global market growth, along with the success of new products. In the Fitness segment, we expect to benefit from recently introduced new products, particularly in the second half of the year. We are raising the lower end of our revenue guidance for 2018 and now expect revenue growth of 6 percent to 7 percent, absent any significant changes in global macro-economic conditions.

“For the full-year, we anticipate improvement in both gross and operating margins in our marine businesses, as we plan to continue to benefit from new products, volume leverage, cost reductions related to efficiency programs and changes in foreign exchange rates, while continuing to invest in growth-related initiatives. In the Fitness business, we are projecting margins to decline, but year-over-year comparisons to stabilize as we move towards the end of the year as the margin pressures discussed earlier moderate, including assistance from the positive effects of recent new product launches and cost-management actions.

“Our plan assumes that inflation factors are mostly offset by price; however, the impact of trade policy changes could possibly create some additional pressure moving forward, which our businesses would address accordingly. Operating expenses are estimated to increase in 2018 as we continue to fund incremental investments to support growth; however, on a percentage of sales basis, we expect them to be consistent with 2017 levels.

“We are also narrowing the range for our full-year expectations of diluted EPS, as adjusted, to $4.50 to $4.65, which takes into account benefits from a lower federal tax rate, continued successful marine business performance, potential inflationary pressures and additional revenue and margin risk in the Fitness business for the remainder of the year,” Schwabero concluded.