Brunswick Corp. is spinning off its fitness division and abandoning its longtime diversification strategy, and instead will look to marine parts and accessories as a way to weather economic downturns.
The company, which makes boat engines and a range of vessels including fiberglass boats, released details Nov. 13 on its plan to spin off the Rosemont, Ill.-based unit that makes Life Fitness treadmills, stair climbers and stationary bikes.
A new chief executive will head the pure-play marine company as well. Chairman and CEO Mark Schwabero will retire at the end of 2018, to be replaced by David Foulkes, 57, currently chief technology officer and president of marine customer solutions.
Brunswick is betting that the higher margins on its growing marine parts and accessories business will offset the departure of the more recession-proof exercise equipment division, which is to be called Life Fitness Holdings. In June, Brunswick said it would add to the parts division by buying the marine and mobile business of Menomonee Falls, Wis.-based Power Products for $910 million, the biggest deal in Brunswick's 173-year history. After Life Fitness is spun off, marine parts and accessories will make up more than a third of Brunswick's sales, spokesman Daniel Kubera says in an email.
"They're trying to control the whole ecosystem, from boats to engines to parts and accessories afterward to distribution," says Eric Wold, an analyst at B. Riley FBR.
Removing Life Fitness makes sense for Brunswick's operations and stock price, Wold says.
"I probably cannot name a single person who owns Brunswick stock for the fitness [segment]. They don't like conglomerates. . . . The valuation has definitely been held back by the fitness."
Mettawa, Ill.-based Brunswick said in a Nov. 13 filing with the Securities & Exchange Commission that "following the spinoff, Brunswick and Life Fitness each will have a more focused business." That's a change from the late '90s, when Brunswick went on an acquisition spree to broaden its offering of leisure products. Although the marine engine and boat-building units generally eclipsed the fitness unit — in 2017, they brought in a combined $3.73 billion in revenue compared to $1.03 billion from fitness — sales of luxuries like boats tend to plummet during economic downturns.
Brunswick employed 15,100 people at the end of 2017. According to SEC filings, Life Fitness would employ 2,900 and would have a facility in Franklin Park, Ill. Brunswick may retain up to a 19.9 percent stake in the spinoff.
Brunswick paid $310 million in 1997 for the fitness unit, which had $55 million in net earnings in 2017, or 38 percent of Brunswick's total; the spinoff is slated for April, if the company doesn't sell the unit outright first.
Brunswick started in 1845 in Cincinnati as a maker of carriages, cabinets and tables, including pool tables. It entered the bowling business during the Gilded Age and nearly a century later hyped the fad of cosmic bowling. The company didn't move into boating until 1960. Brunswick sold its bowling business in 2014, and billiards will become part of Life Fitness.
Brunswick sells Mercury engines, Bayliner sport cruisers, Boston Whaler fiberglass offshore boats and a mix of aluminum fishing, utility and pontoon boats. In the third quarter it began winding down production of Sea Ray yachts, though it's keeping the brand's sport boats and cruisers.
Though the marine business came to dominate Brunswick's balance sheet, it was subject to extreme swings, based on economic conditions and consumers' discretionary income. That prompted the diversification into other leisure products, including fitness equipment. It wasn't enough. During the Great Recession the company's stock crashed to $2 a share; it had been above $20 a year earlier.
The company now sees its parts and accessories business as the potential stabilizer. Kubera says in an email that the business has higher margins than most marine products and sells into the aftermarket, "making it less susceptible to economic slowdowns as marine [parts and accessories] is largely driven by boat and engine usage, not just the purchase of new boats or marine engines."
In other words, even if customers aren't buying new boats, they still need to maintain the boats they already own.
Brunswick's stock was trading at $53.16 on Nov. 16, off nearly 24 percent from the 52-week high on Sept. 19. The company is confronting other headwinds this year in the form of tariffs, which Schwabero said in a third-quarter earnings call would reduce 2018 earnings by $10 million to $15 million. Next year the impact is expected to be $30 million to $35 million.
In a note, R.W. Baird research analyst Craig Kennison writes, "We see risks in macro pressures and would not expect Brunswick to perform well in a recession. Recent equity market volatility has destroyed wealth among some affluent consumers, and rising rates may force consumers and dealers to rethink purchases."
Still, Kennison likes the opportunity for investors, and he likes the pure-play strategy. "We believe management is building a marine powerhouse."