Brunswick Corp. reported sales in its Fitness Segment fell 7.9 in the first quarter due to reduced sales to value-oriented health clubs, along with softness in certain international markets. The segment posted a steep operating loss due to charges related to its pending spinoff.
The Fitness segment, which manufactures and distributes cardiovascular and strength fitness equipment and active recreation products, reported net sales in the first quarter of 2019 of $225.2 million, a decrease from $244.4 million in the first quarter of 2018.
International sales, which represented 49 percent of total segment sales in the quarter, decreased 10 percent when compared to the first quarter of 2018.
For the quarter, the Fitness segment reported operating losses of $139.1 million, which included $138.3 million of restructuring, exit, integration, and impairment charges, mostly related to an impairment of goodwill resulting from a re-evaluation of the fair value of the Fitness reporting unit, which was informed by significant progress made on the sale process, and $1.7 million of separation costs. This compares with operating earnings of $11.0 million in the first quarter of 2018, which included $1.2 million of restructuring, exit, integration, and impairment charges. As anticipated, the Fitness segment’s revenue comparisons reflected lower sales to value-oriented health clubs, along with softness in certain international markets. The decline in operating earnings resulted from the goodwill impairment, costs related to investments in product and systems ahead of the separation, other cost inflation and inefficiencies, and lower sales.
Brands in the segment include Life Fitness, Hammer Strength, Cybex, Indoor Cycling Group and SCIFIT. The company also operates a Marine Engine Segment and Boat Segment.
Companywide, Brunswick reported consolidated net sales of $1,275.9 million in the quarter, up from $1,211.4 million a year earlier, with $15.1 million of sales related to Sport Yacht and Yacht operations in the first quarter of 2018. These operations were wound down in the third quarter of 2018. Diluted EPS for the quarter was a loss of 42 cents a share on a GAAP basis versus 99 cents on an as adjusted basis.
“As anticipated, our marine business delivered strong results in the first quarter,” said Brunswick Chief Executive Officer David Foulkes. “These results reflect the continued successful execution of our marine strategy, focusing on product and technology leadership, growth initiatives, and operational excellence.
“Our Marine Engine segment continued to post strong top-line growth, led by benefits from the Power Products acquisition and healthy demand for recently introduced higher horsepower outboard products. These sales gains, along with impressive operating leverage and margin accretion, led to robust earnings growth in this segment. The boat business reported modest sales growth led by gains in premium offerings, including Sea Ray Sport Boats and Cruisers, while earnings declined slightly. Finally, our Fitness business made significant progress toward separation and reported top-line and margin results mostly consistent with our expectations for the quarter.
“After a slower than expected start to the marine selling season, due in part to more challenging weather conditions in much of the U.S., we believe that global unit market demand for the year will reflect modest growth. As a result, we will continue to execute against our plans and our overall marine strategy and believe that 2019 will be another year of solid earnings growth further enhancing shareholder value,” Foulkes continued.
2019 Outlook
With the pending separation of the Fitness business, Brunswick said it is again providing additional results, commentary, and guidance for the company exclusive of the Fitness segment results. This presentation provides increased visibility into the performance and expectations of the marine operations and will minimize adjustments to guidance when the separation is complete. Therefore, when used, the term “marine business” means the consolidated Brunswick enterprise, excluding the impact or results of the Fitness segment as though it were reported as a discontinued operation.
“Our outlook for 2019 remains consistent with our existing three-year strategic plan, with top-line growth and strong operating leverage generating solid returns for our shareholders,” said Foulkes. “Our full-year guidance for the combined marine business remains relatively unchanged. Absent significant changes in the macro-economic climate and the marine
market, we anticipate overall revenue growth rates in the range of 8 to 10 percent which, while slightly lower than the previous estimate, still represents strong top-line growth for the year. Operating expenses are estimated to be lower than 2018 on a percentage of sales basis as we continue to fund investments in growth while driving improved cost efficiencies. We believe that these factors, together with ongoing benefits from new products and acquisitions, will enable strong leverage and margin growth, and allow us to achieve our initial operating earnings growth guidance for the marine business of high-teens percent for the year.
“Our expectations for the Fitness business remain unchanged. For the year, we anticipate net sales to decline mid-single digit percent from 2018 levels, reflecting lower sales to value-oriented health clubs and stable market demand. We expect gross margin levels to remain consistent with 2018 levels, with operating margins declining due to increased spending in advance of the separation. Finally, we expect the profitability of the business in the second quarter to look similar to the first quarter results, with a significant majority of the 2019 earnings anticipated in the back half of the year.
“Given the factors discussed above, our guidance for 2019 as adjusted diluted EPS, excluding the Fitness business, remains in the range of $4.50 to $4.70. Inclusive of the estimated full-year results of the Fitness business, our guidance for 2019 as adjusted diluted EPS remains in the range of $4.80 to $5.05,” Foulkes concluded.
