Brunswick Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 26, 2020; year-to-date results cover nine months. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The company reports Propulsion, Parts and Accessories (P&A), and Boat segments. Its Fitness business was sold in June 2019 and is presented as discontinued operations.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,233.1 | $976.6 | $3,186.4 | $3,190.8 |
| Operating earnings | $192.6 | $119.7 | $402.8 | $396.5 |
| GAAP operating margin | 15.6% | 12.3% | 12.6% | 12.4% |
| Net earnings (loss) | $137.9 | $(239.3) | $277.6 | $(198.1) |
| Diluted EPS, continuing operations | $1.71 | $(2.74) | $3.49 | $(0.52) |
- Q3 sales rose 26.3%; nine-month sales were essentially flat, down 0.1%. Q3 gross margin was 30.6%, up 220 basis points; nine-month gross margin was 27.5%, down 20 basis points.
- Adjusted operating earnings were $202.9 million in Q3 and $433.3 million year to date; adjusted operating margins were 16.5% and 13.6%, respectively. Adjusted diluted EPS was $1.80 and $3.76. These are non-GAAP measures; adjustments include restructuring, purchase-accounting amortization, and other items.
- Nine-month cash from continuing operations was $637.4 million, versus $254.2 million. Free cash flow, as defined by the company, was $520.0 million versus $79.0 million. Lower inventory and lower capital spending contributed to cash generation.
- At September 26, cash and cash equivalents were $650.4 million; cash, equivalents and marketable securities totaled $651.2 million. Total liquidity, including available facility capacity, was $1,039.1 million.
- Total debt was $1,061.6 million; the debt-to-capitalization ratio was 42.1%. Cash less total debt implies approximate net debt of $410 million. No revolving-facility borrowings were outstanding; $387.9 million of capacity remained available. The company reported compliance with debt covenants.
- Capital expenditures were $120.6 million for the first nine months, compared with $178.4 million in 2019. Interest expense was $52.0 million, down from $59.4 million.
Changes versus comparable periods
- Q3 operating earnings rose 60.9%, with higher sales and improved margins across the marine businesses. Propulsion sales increased 32.7%, P&A sales 23.3%, and Boat sales 18.3%.
- For nine months, Boat sales declined 14.5% and segment operating earnings declined 41.9%, reflecting early-year manufacturing suspensions and ramp-up disruption. Propulsion and P&A sales increased 4.6% and 4.7%, respectively.
- Comparisons of 2019 earnings are materially affected by the $294.1 million pension settlement charge. 2019 also included Fitness discontinued-operation losses and disposal charges. Accordingly, year-over-year net income and EPS comparisons are not solely indicative of underlying operating trends.
- Brunswick changed its reportable segments in 2020 and recast prior-period segment data. Nine-month operating earnings were also negatively affected by approximately $13 million from foreign exchange, according to management.
Outlook, commentary and risks
- Management forecast 2020 adjusted diluted EPS of approximately $4.75 and free cash flow above $600 million, assuming no major additional pandemic-related business continuity issues. It expected Q4 sales growth in the low-to-mid-teens percentage range and adjusted operating leverage in the high-teens percentage range.
- Management expected U.S. marine-industry retail unit demand to rise by a high-single-digit percentage for 2020, with U.S. demand slightly stronger than international demand. It cited elevated retail demand, historically low dealer boat inventories, and production slots largely sold through the 2021 model year.
- Management expected year-end liquidity above $970 million, total 2020 debt retirement of approximately $160 million, and gross EBITDA leverage below 1.5 times. It also targeted approximately $100 million of 2020 share repurchases; $79.1 million had been repurchased through September 26. In October, the quarterly dividend was raised 12.5% to $0.27 per share.
- COVID-19 caused temporary manufacturing suspensions and dealer closures earlier in the year. By November 4, all global manufacturing and distribution facilities were operating, but labor availability, supply chains, consumer demand, and the pandemic’s duration remained uncertain.
- Other disclosed exposures include discretionary consumer spending and credit conditions, tariffs and foreign exchange, supplier and transportation disruption, production fixed-cost absorption, product quality and warranty claims, and tax audits. Management reported no material change in previously disclosed risk factors or off-balance-sheet arrangements.
- Unusual items include 2020 restructuring charges of $4.3 million year to date, primarily associated with cost actions, and a $6.5 million preliminary employee retention tax credit recognized year to date. The filing does not provide a clear quantified estimate for the potential financial impact of COVID-19.
Important facts for investors to verify
- Whether demand, dealer inventory replenishment, production capacity, and supply availability supported the company’s 2020 and 2021 growth assumptions.
- Whether adjusted EPS, free-cash-flow, debt-reduction, and liquidity targets were achieved; these are forward-looking, non-GAAP measures where applicable.
- The sustainability of Q3 margin gains and the degree to which nine-month cash generation depended on inventory reductions and other working-capital movements.
- The impact of COVID-19, foreign exchange, tariffs, and warranty or other contingent liabilities on future results and cash flows.
- The effects of the 2019 pension settlement, Fitness disposal, segment recast, and other adjustments when comparing reported results across periods.