Brunswick Corporation’s consolidated net sales increased 4.4 percent in the third quarter. Net sales for the Marine Engine segment increased by 7 percent, the Fitness segment grew 2 percent and the Boat segment inched up 0.7 percent.
On a GAAP basis, operating earnings decreased by 9 percent. Adjusted operating earnings were down 5 percent versus the prior period. On a GAAP basis, diluted EPS of 88 cents decreased by 5 cents compared to the prior year. Diluted EPS, as adjusted, was 91 cents, consistent with prior period.
“Our performance in the third quarter reflected continued successful execution of our growth strategy, including our focus on product innovation,” said Brunswick Chairman and Chief Executive Officer Mark Schwabero. “Our third quarter revenues increased by 4.4 percent, reflecting strong growth in the outboard engine and aluminum outboard boat businesses, along with solid growth in our parts and accessories businesses. Overall demand in international marine markets remained strong, led by gains in Europe, Canada and Asia-Pacific, as well as improving conditions in other regions. Importantly, marine market data indicates a healthy global marketplace, which is consistent with our assumptions entering the year,” Schwabero continued.
“We faced certain headwinds in the quarter which led to a decline in boat earnings,” Schwabero continued. “As previously discussed on the second quarter call, we significantly lowered production in our large fiberglass sterndrive / inboard boat category as we meaningfully reduced pipelines from second quarter levels in response to weak retail demand over the last several quarters. In addition, during September, Hurricane Irma disrupted our Florida-based manufacturing operations.
“In our Fitness segment, results trailed our expectations, as we experienced a more challenging global market environment which affected both sales volumes and margins,” Schwabero continued. “Despite these challenges, we continue to believe that the long-term fitness market fundamentals are solid and, given our emphasis on product leadership, operational excellence and technology development, we remain confident that we will be successful in the evolving fitness marketplace.
“Overall, our adjusted operating earnings decreased by 5 percent compared to the prior year quarter. Benefits from an improved effective tax rate and fewer shares outstanding resulted in diluted earnings per common share, as adjusted, being consistent with the prior year,” Schwabero concluded.
Third Quarter Results
For the third quarter of 2017, Brunswick reported net sales of $1,141.5 million, up from $1,093 million a year earlier. For the quarter, Brunswick reported operating earnings of $111.7 million, which included $6.8 million of restructuring, exit and integration charges. In the third quarter of 2016, Brunswick had operating earnings of $122.5 million, which included $2.4 million of restructuring, exit and integration charges.
For the third quarter of 2017, Brunswick reported net earnings of $79 million, or 88 cents per diluted share, compared with net earnings of $85.3 million, or 93 cents per diluted share, for the third quarter of 2016. Diluted EPS for the third quarter of 2017 included 4 cents per diluted share of restructuring, exit and integration charges and 1 cents per diluted share benefit from special tax items. The diluted EPS for the third quarter of 2016 included 2 cents per diluted share of restructuring, exit and integration charges and 4 cents per diluted share benefit from special tax items.
Review of Cash Flow And Balance Sheet
Cash and marketable securities totaled $402.6 million at the end of the third quarter, down $66.8 million from year-end 2016 levels. The reduction includes net cash provided by operating activities during the first nine months of the year of $255.1 million, which declined by $38.1 million versus the prior year. The decrease was the result of higher seasonal working capital usage during the year-to-date period.
In addition, net cash used for investing and financing activities of $295.6 million during the year-to-date period reduced cash and marketable securities balances at period end. Investing and financing activities during the year-to-date period included $153.4 million of capital expenditures, $120 million of common stock repurchases and $44 million of dividend payments, partially offset by $35 million of proceeds from the sales of marketable securities.
Marine Engine Segment
The Marine Engine segment, which manufactures and distributes marine propulsion systems and related parts and accessories, reported net sales of $669.2 million in the third quarter of 2017, up 7 percent from $625.7 million in the third quarter of 2016.
International sales, which represented 30 percent of total segment sales in the quarter,
were up 14 percent compared to the prior year period. For the quarter, the Marine Engine segment reported operating earnings of $115.2 million. This compares with operating earnings of $109.5 million in the third quarter of 2016.
Sales increases in the quarter were led by the outboard engine business as well as solid growth from the parts and accessories businesses. The increase in operating earnings in the third quarter was primarily the result of higher net sales, improved cost efficiencies and favorable impacts from changes in foreign exchange rates, which were partially offset by the unfavorable impact from planned increases in growth investments in advance of new product introductions.
Boat Segment
The Boat segment, which manufactures and distributes recreational boats, reported net sales of $309.3 million for the third quarter of 2017, a slight increase from $307 million in the third quarter of 2016. International sales, which represented 22 percent of total segment sales in the quarter, increased by 8 percent compared to the prior year period. For the third quarter of 2017, the Boat segment reported operating earnings of $0.1 million. This compares with operating earnings of $6.8 million in the third quarter of 2016.
The Boat segment’s revenue reflected strong growth in the aluminum outboard boat business, particularly in pontoon boats. As previously mentioned, sales within the large fiberglass sterndrive / inboard boat category declined in the quarter, and disruptions in production resulting from Hurricane Irma affected sales of products manufactured at the company’s Florida-based operations, particularly the fiberglass outboard operations. The decrease in operating earnings resulted mostly from an unfavorable change in sales mix for the segment, resulting from the factors impacting sales comparisons, as well as manufacturing inefficiencies, including costs associated with the hurricane.
Fitness Segment
The Fitness segment designs, manufactures and sells strength and cardiovascular fitness equipment and active recreation products. Fitness segment sales in the third quarter of 2017 totaled $242.8 million, an increase of 2 percent from $237.6 million in the third quarter of 2016. International sales, which represented 47 percent of total segment sales in the quarter, decreased by 1 percent compared to the third quarter of 2016.
For the quarter, the Fitness segment reported operating earnings of $19.4 million, including restructuring, exit and integration charges of $6.8 million. This compares with operating earnings of $29.1 million in the third quarter of 2016, which included $2.4 million of restructuring, exit and integration charges.
The Fitness segment’s revenue increases resulted from the ICG acquisition completed in 2016. Sales comparisons also reflected flat overall global market demand, with growth in sales to value-oriented clubs being offset by softness in sales to traditional clubs and other vertical markets. The decline in operating earnings resulted from lower margins, reflecting higher restructuring, exit and integration charges, more challenging competitive dynamics in certain international markets and unfavorable changes in sales mix, which more than offset benefits from acquisitions and cost reduction efforts.
2017 Outlook
“Despite unanticipated headwinds, 2017 is expected to be another year of strong revenue and earnings performance, along with excellent cash flow generation,” said Schwabero. “Our Marine Engine segment continues to perform as anticipated, and we expect our collective marine businesses to continue to generate solid top-line growth over the remainder of the year. We also plan for our Fitness segment to report fourth quarter sales growth consistent with third quarter growth. As a result, our consolidated plan reflects revenue growth rates in 2017 of approximately 7 percent for the year, with a slightly lower growth rate in the fourth quarter.
“For the full year, we anticipate a modest decrease in operating margins. Gross margin percentage will be down for the year, but not to the same degree as our year-to-date comparisons. Operating expenses are estimated to increase for full-year 2017, including continued investments in advance of planned new product introductions, but on a percentage of sales basis, are expected to be at lower levels than those of 2016. Additionally, for 2017, our expectation remains that we will generate positive free cash flow in excess of $250 million,” Schwabero said.
“We are lowering our guidance for the year to $3.85 to $3.87,” Schwabero continued. “This adjustment reflects our third quarter results, and our view that certain market headwinds faced in the third quarter in our fitness and large fiberglass sterndrive/inboard boat businesses will continue to impact the fourth quarter,” Schwabero said.