Brunswick Corporation — Q2 2020 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter ended June 27, 2020, and the six months then ended. Brunswick reports Propulsion, Parts and Accessories (P&A), and Boat segments. The company recast prior-period segment data following a reporting change effective January 1, 2020. Its Fitness business, sold in June 2019, is presented as discontinued operations.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $987.8 million | $1,163.5 million | $1,953.3 million | $2,214.2 million |
| Operating earnings | $107.0 million | $162.7 million | $210.2 million | $276.8 million |
| Operating margin | 10.8% | 14.0% | 10.8% | 12.5% |
| Continuing-operations net earnings | $71.2 million | $112.1 million | $141.9 million | $188.3 million |
| Diluted continuing-operations EPS | $0.89 | $1.28 | $1.77 | $2.15 |
- Q2 gross margin was 25.9%, down 2.3 percentage points year over year; first-half gross margin was 25.6%, down 1.8 points. The filing cites production disruptions, foreign exchange and tariffs, partly offset by cost reductions.
- Q2 sales fell 15.1% (13.9% in constant currency); first-half sales fell 11.8% (10.7% in constant currency). Q2 adjusted operating earnings were $117.9 million and adjusted diluted EPS was $0.99; these are non-GAAP measures.
- Q2 segment sales and operating earnings: Propulsion $395.4 million and $47.7 million; P&A $386.5 million and $80.1 million; Boat $249.9 million and $2.0 million. Boat operating margin was 0.8%, versus 7.0% a year earlier.
- First-half operating cash flow from continuing operations was $215.7 million, versus $147.4 million. Capital expenditures were $90.7 million. Company-defined free cash flow was $124.2 million, versus $13.6 million.
- At quarter-end, cash and cash equivalents were $541.5 million; cash, equivalents and marketable securities totaled $542.3 million. Total liquidity, including available borrowing capacity, was $745.2 million. Total debt was $1,285.7 million; debt-to-capitalization was 48.5%.
Material changes and notable items
- The Boat segment had the steepest Q2 decline: sales fell 31.8%, largely from temporary factory suspensions and production ramp-up. Propulsion sales fell 14.3%; P&A sales fell 5.7%, with distribution strength offset by declines elsewhere.
- Q2 consolidated net earnings were $70.7 million, compared with $77.5 million in 2019. These include discontinued operations: a $0.5 million loss in Q2 2020 versus a $34.6 million loss in Q2 2019, which included the Fitness disposal loss.
- COVID-19 prompted suspension of production at most engine and boat facilities beginning March 23; partial operations resumed April 13. By August 4, all global manufacturing and distribution facilities were operating. Dealer inventory of boats was 34% below the prior-year Q2 level.
- The company recorded a preliminary $6.2 million employee-retention tax credit, including $4.3 million recognized in Q2. It deferred certain tax payments and expected to defer approximately $18–20 million of payroll taxes for payment in 2021 and 2022.
Outlook, risks and liquidity
- Management expected second-half 2020 revenue and operating earnings to exceed the comparable 2019 period, while emphasizing significant uncertainty from the pandemic, economic conditions, dealers, suppliers and OEM partners. It anticipated U.S. marine retail unit demand to increase by a low-single-digit percentage for 2020.
- For 2020, management projected capital expenditures of approximately $160–170 million, working-capital cash use of $0–10 million and free cash flow above $325 million. It planned $100 million of total debt retirement for the year and targeted gross debt-to-EBITDA leverage of approximately 1.5x by year-end. These are management expectations, not guarantees.
- The company had $185 million outstanding under its revolving credit facility and $202.9 million of available capacity at quarter-end. It reported compliance with debt covenants. On July 29, 2020, it repaid a further $100 million under the facility.
- Key risks include the duration and effects of COVID-19, discretionary consumer demand, dealer and OEM inventory changes, supply-chain and production constraints, tariffs and currency movements, access to financing, warranty and product-liability claims, and potential asset impairment. Management reported no material change to previously disclosed risk factors.
Investor verification priorities
- Confirm whether demand and dealer inventory recovery continued, and whether production ramp-up converted into shipments without excess channel inventory.
- Track segment margins, especially Boat, and assess whether cost savings offset lower volumes, tariffs and foreign-exchange effects.
- Reconcile the non-GAAP free-cash-flow and adjusted-earnings measures to GAAP results; test the assumptions behind the full-year cash-flow and debt-repayment outlook.
- Review debt maturities, covenant headroom, liquidity after the July repayment, and the company’s ability to meet its debt and investment plans.
- Monitor pandemic-related operational, supply-chain and demand risks, as well as retained Fitness-business liabilities and warranty obligations.