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Fitch Affirms Brunswick's IDR at 'BBB'; Outlook Stable
September 8, 2017 / 3:54 PM / in a month

Fitch Affirms Brunswick's IDR at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, September 08 (Fitch) Fitch Ratings has affirmed Brunswick Corporation's (BC) Issuer Default Rating (IDR) at 'BBB'. Fitch has also affirmed BC's senior unsecured revolver and senior unsecured notes at 'BBB'. The Rating Outlook is Stable. KEY RATING DRIVERS Downturn Cushion: BC took steps since the last recession to reduce operating leverage and improve its financial health. The business mix is less exposed to materially cyclical operations, the operating footprint was reduced, the maturity schedule and interest costs are more favorable, and its liquidity profile is strong. Fitch believes BC is in a much stronger position today to withstand a significant downturn in consumer discretionary spending, and BC's management is executing on its commitment to de-risk the business. The current maturity schedule also gives BC more flexibility to withstand a downturn, which is in contrast to the prior recession when approximately $400 million in debt was coming due between 2009-2011. Strong Credit Profile: Debt reduction, EBITDA growth, and interest savings have strengthened BC's credit profile since exiting the last recession. As of July 1, 2017, leverage was at a 10-year low of 0.7x and interest coverage was nearly 20x. Fitch-defined free cash flow (FCF) generation has also improved since briefly turning negative in 2011, totalling $114 million for the TTM ending July 1, 2017. Fitch forecasts BC to generate FCF of $200 million - $300 million annually through 2020, primarily through EBITDA growth in the Marine Engine and Fitness segments. Improving Business Mix: BC's greater strategic emphasis on its less cyclical Marine Engine, specifically marine parts and accessories (P&A), and Fitness segments is a key credit positive due to the relatively less volatile and/or discretionary product demand profiles relative to boats. BC generates the majority of its division operating profit before depreciation and amortization (Fitch estimated) from its Marine Engine (64% in FY2016) and Fitness (22%) segments, which should be more stable in a recession. The company does not break out profitability within the Marine Engine segment between engines and P&A. Cyclical Element Remains: The company remains committed to the Boat business, albeit on a smaller scale, in part as it creates a level of demand for its engines and BC has a strong portfolio of brands (including Boston Whaler and Sea Ray). Additionally, select Marine Engine segment sales are still tied to the recreational boating industry through new engine sales and BC's Boat segment remains a meaningful customer of BC's engines (estimated at more than 10% of Marine Engine segment sales). Positive on Fitness Segment: Fitch has a favorable view of BC's Fitness segment, given its performance through the last recession and BC's strong market position and brands. Additionally, the global commercial fitness equipment market is not as fragmented as the highly competitive health club operator market. BC's focus on various end users within the fitness segment (commercial, consumer, rehabilitation, recreation, and group exercise) gives BC some degree of diversification and exposure to many types of varying and evolving trends and consumer preferences. DERIVATION SUMMARY Brunswick's 'BBB' IDR reflects its strong competitive positions in its Marine Engine and Fitness segments, low leverage and improving business mix towards less cyclical marine parts and accessories and fitness businesses. Fitch believes BC is in a stronger position today to weather a downturn relative to the last recession. However, cyclical boat and engine sales still comprise approximately 53% of the company's total sales in 2016. Harley-Davidson (HOG, A/Stable) is BC's closest Fitch-rated peer based on business model and product offering; however, HOG's end demand generally exhibits less cyclicality. When viewed relative to HOG, Fitch feels there is a multi-notch differential based on its higher exposure to discretionary spending, bigger ticket price, weaker profitability, and HOG's higher brand equity. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Revenues grow in high single digits in 2017 and mid-single digits thereafter, driven primarily through organic growth in the Marine Engine and Fitness segments, as well as through bolt-on acquisitions; --EBITDA margins expand modestly from current levels thanks to growth in the higher margin Marine Engine and Fitness businesses; --Capex remains around 4% of revenues to support growth in the Marine Engine and Fitness segments; --Modest dividend increases of 5% per year and share repurchases of $120 million per year; --$100 million in annual bolt-on acquisitions; --Pension contributions steady at $70 million per year. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action Upward rating momentum is unlikely given the inherent boating industry cyclicality. However, Fitch would consider upgrading BC's ratings and/or Outlook if the agency takes a more favorable view towards BC's through-the-cycle cash flow volatility. This could occur if BC exceeds Fitch's performance expectations during a downturn (e.g. less than 50% EBITDA decline in a severe downturn) and/or through further revenue diversification away from the Boat segment into less cyclical businesses, such as Fitness and P&A. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --A severe downturn in global boating demand; --Leverage sustaining above 1.5x through the cycle. The ratings have some tolerance for leverage of up to 2.0x, assuming Fitch expects leverage to return to 1.5x or below within one-to-two years; --A shift towards a more aggressive financial policy or shift in business strategy, such that the Boat segment becomes a more meaningful portion of total company sales; --A need for BC to provide material support to Brunswick Acceptance Company, LLC (BAC), BC's financial services joint venture. LIQUIDITY BC has ample liquidity on hand between $437 million in cash and nearly full availability under its $300 million revolving facility. The company does not disclose its overseas cash balance. Fitch expects BC to generate roughly $200 million - $300 million in annual FCF through 2020, supporting its liquidity profile. Capex, acquisitions, and shareholder returns are the company's most likely capital use avenues for its cash flow from operations. BC has minimal debt maturities through 2020. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Brunswick Corp. --IDR at 'BBB', Stable Outlook; --Senior unsecured credit facility at 'BBB'; --4.625% senior unsecured notes due 2021 at 'BBB'; --7.375% senior unsecured notes due 2023 at 'BBB'; --7.125% senior unsecured notes due 2027 at 'BBB'. Contact: Primary Analyst Colin A. Mansfield, CFA Director +1-212-908-0899 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Stephen Boyd, CFA Senior Director +1-212-908-9153 Committee Chairperson Alex Bumazhny, CFA Senior Director +1-212-908-9179 Date of Relevant Rating Committee: Sept. 7, 2017 Summary of Financial Statement Adjustments --Fitch adds back stock-based compensation in calculating EBITDA. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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