Brunswick Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparisons are with the three months ended March 30, 2019. The company reorganized its reporting segments effective January 1, 2020, and recast prior-period segment information. The Fitness business, sold in June 2019, is reported as discontinued operations.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $965.5 million | $1,050.7 million |
| Gross margin | $243.8 million; 25.3% | $279.5 million; 26.6% |
| Operating earnings / margin | $103.2 million; 10.7% | $114.1 million; 10.9% |
| Adjusted operating earnings / margin | $112.5 million; 11.7% | $124.5 million; 11.8% |
| Continuing-operations net earnings | $70.7 million | $76.2 million |
| Diluted continuing-operations EPS | $0.88 | $0.87 |
| Net earnings (loss), including discontinued operations | $69.0 million | $(36.3) million |
| Cash from continuing operating activities | $(83.9) million | $(73.2) million |
| Free cash flow from continuing operations | $(143.8) million | $(159.1) million |
Sales declined 8.1%; gross margin fell 130 basis points. Adjusted results exclude purchase accounting amortization, restructuring and impairment charges, and acquisition- and IT-transformation-related costs. The GAAP net-earnings comparison is notably affected by the 2019 discontinued-operations loss of $112.5 million, which included a $137.2 million goodwill impairment charge; Q1 2020 discontinued-operations loss was $1.7 million.
Segments: Propulsion sales were $448.6 million (down 0.8%) and operating earnings were $61.3 million (up 2.3%). Parts & Accessories sales were $301.6 million (down 3.8%) and operating earnings were $46.2 million (down 3.3%). Boat sales were $291.5 million (down 21.9%) and operating earnings were $5.1 million (down 81.1%).
Liquidity, debt and capital
- Cash and cash equivalents were $502.9 million at March 28, 2020; cash, equivalents and short-term investments totaled $503.7 million.
- Total liquidity, including available borrowing capacity, was $506.6 million, down from $709.0 million at December 31, 2019. Only $2.9 million remained available under the $400 million revolving credit facility, net of letters of credit.
- Total debt was $1,494.7 million, versus $1,109.3 million at year-end 2019; debt-to-capitalization was 53.4%, versus 46.0%. The company drew $385 million on its revolver in March as a precautionary COVID-19 liquidity measure. It reported compliance with debt covenants.
- Q1 capital expenditures were $55.9 million. The company repurchased $34.1 million of shares and paid $19.2 million in dividends; it suspended repurchases in March.
Material changes, outlook and risks
- Management attributed the sales and margin pressure primarily to COVID-19-related production suspensions, stay-at-home measures, disrupted dealer activity and unfavorable foreign exchange, with tariffs also weighing on gross margin. Production at most facilities was suspended March 23; partial restarts began April 13, and significant U.S. and European facilities were back online by May 7, with safety protocols. The extent and duration of the pandemic’s effects remained uncertain.
- Management expected the global market to decline significantly in Q2 2020, with declines moderating in the second half. Its full-year U.S. marine retail unit-demand outlook was down in the high-teens to low-twenties percent range from 2019. It expected to operate profitably in the quarter and generate positive free cash flow, while emphasizing cost controls and safe production restarts.
- For 2020, the company projected free cash flow above $125 million, capital expenditures of approximately $150–$160 million, and a $40–$60 million working-capital cash use. It planned to reduce debt by $40 million, estimated net interest expense at $70 million, and expected an effective tax rate of 21%–22%.
- COVID-19 risks include weaker discretionary demand, facility or supplier disruptions, dealer financial stress, reduced access to financing and difficulty forecasting operations. The company performed an interim impairment test of certain intangible assets after identifying COVID-19 as a triggering event; it recorded no impairment charge and said it would continue monitoring conditions.
- Other relevant items: CARES Act tax provisions were not expected to have a material results impact; the company deferred certain tax and payroll-tax payments. It retained $30.4 million of liabilities and $11.1 million of assets following the Fitness sale. Product warranty liabilities were $116.0 million at quarter-end.
Important facts for investors to verify
- Whether production restarts, dealer operations and consumer demand recovered as assumed in management’s outlook, particularly the Q2 decline and second-half moderation.
- Whether the company achieved its 2020 free-cash-flow, capital-spending and debt-reduction targets while managing the elevated debt and very limited revolver availability at quarter-end.
- Whether segment sales and margins—especially Boat—stabilized, and how much performance reflects volume, mix, discounts, foreign exchange and cost controls.
- Whether continued COVID-19 effects, dealer or supplier stress, or market deterioration required further impairment testing or affected covenant headroom and liquidity.
- How the discontinued Fitness business’s retained liabilities, warranty obligations and tax contingencies develop; the filing states that the timing and amount of potential changes in unrecognized tax benefits are uncertain.