Brunswick Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended July 1, 2023. Comparisons are with the periods ended July 2, 2022. The filing is unaudited. Brunswick reports Propulsion, Engine Parts and Accessories (Engine P&A), Navico Group and Boat segments; prior periods were recast to reflect the segment structure adopted in 2023.
Key financial results
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $1,702.3 million | $1,835.6 million | $3,445.9 million | $3,531.3 million |
| Gross margin | $472.3 million; 27.7% | $536.4 million; 29.2% | $977.9 million; 28.4% | $1,020.0 million; 28.9% |
| Operating earnings | $194.4 million | $279.0 million | $430.5 million | $518.5 million |
| Net earnings | $134.7 million | $197.3 million | $247.0 million | $371.5 million |
| Diluted EPS from continuing operations | $1.91 | $2.61 | $3.47 | $4.86 |
| Operating cash flow from continuing operations | — | $254.4 million | $149.4 million | |
| Free cash flow (non-GAAP) | — | $88.9 million | $(55.3) million |
Q2 net sales declined 7.3%, operating earnings 30.3%, and diluted EPS from continuing operations 26.8% year over year. First-half sales declined 2.4%, operating earnings 17.0%, and diluted EPS 28.6%. GAAP operating margin was 11.4% in Q2 versus 15.2% a year earlier, and 12.5% for the first half versus 14.7%.
Management reported adjusted Q2 operating earnings of $234.9 million and adjusted diluted EPS of $2.35, compared with $300.2 million and $2.82, respectively, in Q2 2022. First-half adjusted operating earnings were $497.3 million and adjusted diluted EPS was $4.91, versus $567.7 million and $5.35. These non-GAAP figures exclude specified items, including restructuring, purchase-accounting amortization, IT incident costs and, for first-half EPS, special tax items.
Segments and drivers of change
- Propulsion: Q2 sales of $703.3 million, down 4.2%; operating earnings of $111.1 million, down 21.8%. Management cited the IT incident’s production disruption, lower planned shipments of lower-horsepower engines and sterndrives, and higher input costs; high-horsepower outboard demand and pricing/mix were positive.
- Engine P&A: Q2 sales of $328.9 million, down 13.3%; operating earnings of $66.4 million, down 22.6%. Lower distribution and international sales and incident-related disruption contributed to declines.
- Navico Group: Q2 sales of $227.8 million, down 20.4%; operating earnings of $4.2 million, down 81.3%. Lower marine and RV OEM orders versus a strong prior-year quarter, slow RV production recovery and restructuring weighed on results.
- Boat: Q2 sales of $560.8 million, down 1.3%; operating earnings of $53.2 million, down 9.7%. For the first half, sales increased 7.0% and operating earnings increased 6.5%, with acquisitions and favorable price/mix contributing.
Consolidated sales changes reflected lower volume and the IT incident, partly offset by product mix and pricing. Gross margin was pressured by material and labor inflation, incident effects, depreciation, capitalized-variance timing and foreign exchange. Higher SG&A as a share of sales also reduced operating leverage.
Cash, debt and liquidity
- At July 1, 2023, cash and cash equivalents were $477.5 million; cash, equivalents and short-term marketable securities totaled $478.3 million, down from $600.1 million at December 31, 2022.
- Total debt was $2,510.3 million, approximately unchanged from $2,509.0 million at year-end 2022. The debt-to-capitalization ratio was 54%, versus 55% at year-end. The company reported compliance with debt covenants.
- Total liquidity, including $741.9 million of available credit-facility capacity net of letters of credit, was $1,220.2 million. There were no credit-facility borrowings at quarter-end.
- First-half capital expenditures were $173.4 million; cash dividends were $56.8 million and share repurchases were $132.2 million. Operating cash flow improved year over year primarily because working-capital use decreased. Cash declined by $120.0 million during the first half, including investing and financing activity.
Outlook, commentary and risks
- IT security incident: The June incident disrupted some systems and facilities; normal global operations resumed over nine days. Management estimates lost revenue of approximately $80–$85 million and lost operating earnings of $35–$40 million in the quarter and first half, and recorded $8.1 million of non-recurring costs. Brunswick intends to seek insurance recovery for a portion of lost earnings and costs; recovery is not assured.
- Restructuring: The company estimates approximately $25 million of 2023 charges for cost actions and expects annualized savings of approximately $30–$35 million.
- Capital plans: Management maintained expected 2023 capital expenditures of approximately $350 million, interest expense of approximately $100 million and working-capital usage of approximately $100 million. It increased expected 2023 share repurchases to more than $250 million and estimated average diluted shares of 70.5 million. The filing does not provide clear full-year revenue or earnings guidance.
- Tax item: First-half effective tax rate was 35.3%, including a $52.9 million discrete tax expense related to an intercompany transfer of intellectual-property rights; Q2 effective tax rate was 21.2%.
- Risks and contingencies: Results remain exposed to discretionary consumer demand, dealer and OEM inventory/order trends, inflation and supply-chain costs, foreign exchange, weather, competition, cybersecurity disruption, warranty/product claims and execution of restructuring and growth plans. Brunswick notes seasonality means interim results may not indicate full-year performance. No material change to previously disclosed risk factors or contractual obligations was reported.
Important facts for investors to verify
- Whether production, sales and operating earnings recover from the incident’s estimated disruption, and what insurance proceeds, if any, are ultimately recognized.
- Whether the planned restructuring savings materialize and whether total restructuring costs remain near management’s estimate.
- Whether inventory, dealer/OEM demand and working-capital usage develop as expected, particularly amid weaker Navico and Engine P&A sales.
- How cash generation, debt, interest expense and liquidity evolve alongside planned capital spending, dividends and share repurchases.
- How the $52.9 million tax charge and other adjusted-result exclusions affect comparisons of reported and non-GAAP performance.