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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019
or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________
Commission file number 1-1043
Brunswick Corporation
(Exact name of registrant as specified in its charter)
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Delaware | | 36-0848180 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
26125 N. Riverwoods Blvd., Suite 500, Mettawa, IL 60045-3420
(Address of principal executive offices, including zip code)
(847) 735-4700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
Common stock, par value $0.75 per share | | BC | | New York Stock Exchange |
| | Chicago Stock Exchange |
6.500% Senior Notes due 2048 | | BC-A | | New York Stock Exchange |
6.625% Senior Notes due 2049 | | BC-B | | New York Stock Exchange |
6.375% Senior Notes due 2049 | | BC-C | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): |
| | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock of the registrant held by non-affiliates was $3,906,175,936. Such number excludes stock beneficially owned by executive officers and directors. This does not constitute an admission that they are affiliates.
The number of shares of Common Stock ($0.75 par value) of the registrant outstanding as of February 12, 2020 was 79,470,343.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report on Form 10-K incorporates by reference certain information that will be set forth in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 6, 2020.
BRUNSWICK CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
December 31, 2019
TABLE OF CONTENTS
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PART I | Page |
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PART II | | |
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PART III | | |
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PART IV | | |
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PART I
Item 1. Business
Brunswick Corporation is a Delaware corporation incorporated on December 31, 1907. We are a leading global designer, manufacturer, and marketer of recreational marine products including marine engines, boats, and parts and accessories for those products. Our engine-related products include: outboard, sterndrive, and inboard engines; trolling motors; propellers; engine control systems; electrical components and integrated systems; and marine parts and accessories. The boats we make include fiberglass sport boats, cruisers, sport fishing and center-console, offshore fishing, aluminum and fiberglass fishing, pontoon, utility, deck, inflatable, tow/wake, and heavy-gauge aluminum boats. We manufacture and supply parts and accessories for original equipment manufacturers, aftermarket parts and accessory retailers and distributors, and for internal production. Additionally, we explore, invest in, and develop growth opportunities in key strategically, synergistically, and technologically adjacent markets.
In 2019, we sold our Fitness business, including the active aging, rehabilitation and billiards lines, transitioning to a company focused on the recreational marine industry. We have leading positions in several important marine business lines, including propulsion, parts & accessories, boats, and shared access models. As the global leader in recreational marine, it is our intention to define the future of recreational boating through innovation and inspiration on the water. We will do this through an integrated strategy focused on:
•Introducing exceptional products across our strong array of brands;
•Promoting operational and quality excellence;
•Strengthening our relationships with our channel partners, suppliers, and employees;
•Developing customer-centric innovation in both products and services; and
•Establishing frictionless experience across consumer touchpoints.
Our integrated marine business strategy is supported by a balanced capital strategy that includes allocating capital to organic growth initiatives and strategic acquisition opportunities while also managing debt levels and maturities, maintaining strong cash and liquidity positions, and continuing to return capital to shareholders through dividends and share repurchases. These strategies support our aim to create exceptional experiences for our customers, expand participation in recreational boating, deliver industry transforming technology, and leverage our leading marine businesses to grow earnings and enhance shareholder value.
Consistent with our integrated marine business strategy, the Company is focused on four business pillars - Propulsion, Parts and Accessories (P&A), Boats and Business Acceleration. Effective January 1, 2020, we changed our management reporting and updated our reportable segments to Propulsion, P&A and Boat to align with our strategy. The Propulsion segment will contain both outboard and sterndrive engines, along with controls and riggings, which are closely associated with our propulsion businesses. The P&A segment will contain all other P&A categories, including engine parts and consumables, electrical products, boat parts and systems, and our distribution business. The Boat segment will continue to include Business Acceleration. For this Annual Report on Form 10-K, we are reporting our results according to our historical segments, Marine Engine and Boat.
Refer to Note 6 – Segment Information and Note 3 – Discontinued Operations in the Notes to Consolidated Financial Statements for additional information regarding our segments and discontinued operations.
Marine Engine Segment
The Marine Engine segment, which had net sales of $3,073.5 million in 2019, consists of the Mercury Marine Group (Mercury Marine). We believe our Marine Engine segment is a world leader in the manufacturing and sale of recreational marine engines and marine parts and accessories.
Mercury Marine manufactures and markets a full range of outboard, sterndrive, and inboard engine and propulsion systems under, among other brand names, Mercury, Mercury MerCruiser, Mercury Racing, and MotorGuide brands. Mercury Marine supplies integrated propulsion systems to the worldwide recreational and commercial marine markets. To promote advanced propulsion systems with improved handling, performance, and efficiency, Mercury Marine also designs, manufactures, and markets advanced boat steering and engine control systems.
Mercury Marine's outboard, sterndrive, and inboard engines are sold to independent boat builders, local, state, and foreign governments, and to Brunswick's Boat segment. In addition, Mercury Marine sells outboard engines through a global network of more than 6,000 marine dealers and distributors, specialty marine retailers, and marine service centers.
Mercury Marine manufactures four-stroke outboard engine models ranging from 2.5 to 450 horsepower. These low-emission engines comply with applicable U.S. Environmental Protection Agency (EPA) requirements. Mercury Marine's four-stroke outboard engines include Verado, a collection of outboards ranging from 250 to 400 horsepower, and Mercury Marine's naturally aspirated four-stroke outboards, ranging from 2.5 to 300 horsepower. Mercury Marine and Mercury Racing manufacture inboard and sterndrive engine models ranging from 115 to 1,750 horsepower. Mercury Marine also manufactures two-stroke, non-DFI engines for certain markets outside the United States. In addition, most of Mercury Marine's sterndrive and inboard engines are available with catalyst exhaust treatment and monitoring systems, and all are compliant with applicable U.S. state and federal environmental regulations. Mercury Marine also makes engines that comply with global emissions and noise regulations.
Mercury Marine continues to develop innovative products and technologies. In 2019, Mercury Marine jointly received the Most Innovative Marine Company Award from Soundings Trade Only media group for its introduction of groundbreaking new products and technologies, as well as its commitment to sustainability and diversity training. Mercury Marine also earned an International Forum Design (iF) award in 2019 in the Product Category for design excellence demonstrated by its V6 outboard line. Additionally in 2019, Wisconsin Manufacturers and Commerce awarded Mercury Marine the 2018 Manufacturer of the Year Award and the North American Die Casting Association awarded Mercury Marine the 2018 Casting of the Year Award for its 4.6-liter V8 outboard engine blocks.
Mercury Marine produces gasoline outboard and sterndrive engines domestically in Fond du Lac, Wisconsin. Mercury Marine manufactures 40, 50 and 60 horsepower four-stroke outboard engines in a facility in China, and produces smaller outboard engines in Japan pursuant to a joint venture with its partner, Tohatsu Corporation. Mercury Marine sources engine components from a global supply base and manufactures additional engine component parts at its Fond du Lac facility and plants in Florida and Mexico. Mercury Marine also operates a remanufacturing business for engines and service parts in Wisconsin.
For the ninth consecutive year, the Wisconsin Sustainable Business Council (Council) awarded Mercury Marine a “Green Masters” designation, a program measuring a broad range of sustainability issues including energy and water conservation, waste management, community outreach, and education. The designation highlights Mercury Marine's commitment to sustainability as discussed in its 2019 Sustainability Report, detailing specific goals related to energy, environment, products, and people, all of which goals Mercury Marine has met or exceeded. In addition, the Council awarded Mercury Marine the 2019 Sustainable Process Award for its responsible stewardship of aluminum. Also in 2019, Mercury Marine declared its Fond du Lac distribution operation as a "Zero Waste to Landfill Facility."
In addition to marine engines and propulsion systems, Mercury Marine manufactures, markets, and supplies parts and accessories for both marine and non-marine markets. These products are designed for and sold to original equipment manufacturers (including Brunswick brands) and aftermarket retailers, distributors, and distribution businesses. Branded propulsion-related parts and accessories include consumables, such as engine oils and lubricants, and propulsion-related parts and accessories such as propellers, controls, and riggings. Branded propulsion-related parts and accessories are sold under the Mercury, Mercury Precision Parts, Quicksilver, and Seachoice brand names.
The Company announced the formation of the Advanced Systems Group on December 10, 2019, which is effective starting on January 1, 2020. The Advanced Systems Group comprises the collection of brands acquired with Power Products in 2018 and certain other parts and accessories brands. The Advanced Systems Group will conduct business under the Ancor, Attwood, BEP, Blue Sea Systems, CZone, DelCity, Garelick, Lenco Marine, Marinco, Mastervolt, MotorGuide, ParkPower, Progressive Industries, ProMariner, and Whale brand names, including marine electronics and control systems, instruments, trolling motors, fuel systems, electrical systems, as well as specialty vehicle, mobile, and transportation aftermarket products.
Mercury Marine's distribution businesses include: Land 'N' Sea, Kellogg Marine Supply, Lankhorst Taselaar, BLA, and Payne's Marine Group. These businesses are leading distributors of marine parts and accessories throughout North America, Europe, and Asia-Pacific, offering same-day or next-day delivery service to a broad array of marine service facilities.
Intercompany sales to Brunswick's Boat segment represented approximately 10 percent of Mercury Marine's sales in 2019. Domestic demand for the Marine Engine segment's products is seasonal, with sales generally highest in the second calendar quarter of the year.
Boat Segment
The Boat segment consists of the Brunswick Boat Group (Boat Group), which manufactures and markets the following types of boats: fiberglass sport boats, cruisers, sport fishing and center-console, offshore fishing, aluminum and fiberglass fishing, pontoon, utility, deck, inflatable, tow/wake, and heavy-gauge aluminum. The Boat segment also includes the Company's Business Acceleration group. We believe that the Boat segment, which had net sales of $1,333.8 million during 2019, is a world leader in the manufacturing and sale of pleasure motorboats.
The Boat Group manages Brunswick's boat brands; evaluates and optimizes the Boat segment's boat portfolio; promotes recreational boating services and activities to enhance the consumer experience and dealer profitability, including through its Business Acceleration initiatives; and speeds the introduction of new technologies into boat manufacturing and design processes.
The Boat Group includes the following boat brands: Sea Ray sport boats and cruisers; Bayliner sport cruisers, runabouts, and Heyday wake boats; Boston Whaler fiberglass offshore boats; Lund fiberglass fishing boats; Crestliner, Cypress Cay, Harris, Lowe, Lund, and Princecraft aluminum fishing, utility, pontoon boats, and deck boats; and Thunder Jet heavy-gauge aluminum boats. The Boat Group procures substantially all of its outboard engines, gasoline sterndrive engines, and gasoline inboard engines from Brunswick's Marine Engine segment.
The Boat Group also includes Brunswick boat brands based in Europe and Asia-Pacific, which include Quicksilver, Uttern, and Rayglass (including Protector and Legend), that are typically equipped with Mercury Marine engines and often include other parts and accessories supplied by Mercury Marine.
The Boat Group operates manufacturing facilities in Florida, Indiana, Minnesota, Missouri, Washington, Canada, Mexico, New Zealand, and Portugal. The Boat Group also uses two contract manufacturing facilities in Poland.
The Boat Group sells its products through a global network of nearly 1,300 dealers and distributors, with some dealers operating in more than one location and some dealers carrying more than one of our boat brands. Sales to the Boat Group's largest dealer, MarineMax, Inc., which has multiple locations and carries a number of the Boat Group's product lines, represented approximately 25 percent of Boat Group sales in 2019. Domestic demand for pleasure boats is seasonal, with sales generally highest in the second calendar quarter of the year.
Business Acceleration
Through innovative service models, shared access solutions and emerging technology, Business Acceleration, which is reported in our Boat segment, provides exceptional experiences which attract a wide range of consumers to the marine industry and shape the future of boating through several businesses.
Boating Services Network is our dealer finance and ancillary service business unit that provides floor plan finance through Brunswick Acceptance Company (USA) and Brunswick Commercial Finance (Canada), retail finance through Blue Water Finance and Mercury Repower Finance, retail extended warranties under the Passport and Passport Premier brands through Brunswick Product Protection Corporation, retail insurance through Boater's Choice Insurance, and close to 50 name brand marine dealer service providers through Brunswick Dealer Advantage. Each offering allows us to deliver a more complete line of financial services and product offerings to our boat and marine engine dealers and their customers. See the “Financing Joint Venture” section below for details about our related financing joint venture that operates closely with the Boating Services Network.
On May 21, 2019, Brunswick acquired Freedom Boat Club, the leading boat club network in North America. Freedom Boat Club is made up of over 210 company-owned and franchised boat club locations, primarily in North America, with three franchised locations in France. These locations sell memberships comprised of an initiation fee and ongoing monthly payment in exchange for which members gain shared access to their local club’s diverse fleet of boats and reciprocal privileges at other Freedom Boat Club locations around the world. We believe this boat club membership model provides access to the boating lifestyle in a way that attracts new entrants, keeps disaffected boaters in the fold, and helps grow the broader boating community. We anticipate a portion of boat club members will ultimately transition to boat ownership. The Freedom Boat Club business also provides a channel for sales of our boats, marine engines, parts & accessories, and various other of our services both at company-owned and franchised locations.
NAUTIC-ON, a smart technology and service system that helps boaters stay connected with their boats remotely by monitoring engine, battery and bilge pump status, and providing other advanced features, was launched in 2018 and now comes factory installed on certain Sea Ray and Boston Whaler models.
Financing Joint Venture
Through our Brunswick Financial Services Corporation subsidiary, we own a 49 percent interest in a joint venture, Brunswick Acceptance Company, LLC (BAC). Under the terms of the joint venture agreement (JV Agreement), BAC provides secured wholesale inventory floorplan financing to our boat and engine dealers. A subsidiary of Wells Fargo & Company owns the remaining 51 percent.
The JV Agreement runs through December 31, 2022. The JV Agreement contains a financial covenant that conforms to the maximum leverage ratio test in the Credit Facility described in Note 16 – Debt in the Notes to Consolidated Financial Statements. The JV Agreement contains provisions allowing for the renewal of the JV Agreement or the purchase of the other party’s interest in the joint venture at the end of its term. Alternatively, either partner may terminate the JV Agreement at the end of its term.
Refer to Note 10 – Financing Joint Venture in the Notes to Consolidated Financial Statements for more information about our financial services.
Distribution
We utilize independent distributors, dealers, and retailers (Dealers) for the majority of our boat sales and significant portions of our sales of marine engines. We have over 16,000 Dealers serving our business segments worldwide. Our marine Dealers typically carry one or more of the following product categories: boats, engines, and related parts and accessories.
We own Land 'N' Sea, Kellogg Marine Supply, Payne's Marine Group, and Del City, which comprise the primary parts and accessories distribution platforms for our Marine Engine segment in North America. We believe that these businesses, collectively, are the leading distributors of marine parts and accessories throughout North America, with a network of distribution warehouses located throughout the United States and Canada offering same-day or next-day delivery service to a broad array of marine service facilities and Dealers. We also believe we are a leading parts and accessories distributor outside of North America.
Our Dealers are independent companies or proprietors that range in size from small, family-owned businesses to a large, publicly-traded corporation with substantial revenues and multiple locations. Some Dealers sell our products exclusively, while a majority also carry competitor and complementary products. We partner with our boat dealer network to improve quality, service, distribution, and delivery of parts and accessories to enhance the boating customer's experience.
Demand for a significant portion of our products is seasonal, and a number of our Dealers are relatively small and/or highly-leveraged. As a result, many Dealers secure floor plan financing from BAC or other third party finance companies, enabling them to stock product in advance of the peak selling season and provide stable channels for our products. In addition to the financing BAC offers, we may also provide our Dealers with incentive programs, loan guarantees, inventory repurchase commitments, and financing receivable arrangements, under which we are obligated to repurchase inventory or receivables from a finance company in the event of a Dealer's default. We believe that these arrangements are in our best interest; however, these arrangements expose us to credit and business risk. Our business units, along with BAC, maintain active credit operations to manage this financial exposure, and we continually seek opportunities to sustain and improve the financial health of our various distribution channel partners. Refer to Note 8 – Financing Receivables and Note 13 – Commitments and Contingencies in the Notes to Consolidated Financial Statements for further discussion of these arrangements.
Technology and Innovation
With the 2019 sale of our Fitness business, Brunswick transitioned into a company concentrated on leading the global marine industry with a sharpened focus and clear vision, consistently innovating the future of recreational boating. To support this goal, we have established a strong foundation of cross functional and cross business investments and initiatives to further improve customer interaction with our products and grow boating participation, including Freedom Boat Club, NAUTIC-ON, and VesselView Mobile. We continue to partner with TechNexus Holdings, LLC to identify and incubate innovative start-up ventures with strategic marine applications to help drive long-term growth.
International Operations
Non-U.S. sales are set forth in Note 6 – Segment Information and Note 2 – Revenue Recognition in the Notes to Consolidated Financial Statements and are also included in the table below, which details our non-U.S. sales by region:
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(in millions) | 2019 | | 2018 | | 2017 |
Europe | $ | 516.7 |
| | $ | 494.3 |
| | $ | 420.7 |
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Canada | 279.9 |
| | 287.3 |
| | 288.1 |
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Asia-Pacific | 274.9 |
| | 262.0 |
| | 251.9 |
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Rest-of-World | 165.8 |
| | 159.3 |
| | 165.3 |
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Total | $ | 1,237.3 |
| | $ | 1,202.9 |
| | $ | 1,126.0 |
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Total International Sales as a Percentage of Net Sales | 30 | % | | 29 | % | | 29 | % |
We transact a portion of our sales in non-U.S. markets in local currencies, while a meaningful portion of our product costs are denominated in U.S. dollars as a result of our U.S. manufacturing operations. As a result, the strengthening or weakening of the U.S. dollar affects the financial results of our non-U.S. operations.
Marine Engine segment non-U.S. sales represented approximately 74 percent of our non-U.S. sales in 2019. The segment's principal non-U.S. operations include the following:
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• | Distribution, sales, service, engineering, or representative offices in Australia, Belgium, Brazil, Canada, China, Dubai, Finland, France, Italy, Japan, the Netherlands, New Zealand, Norway, Russia, Singapore, Sweden, and Switzerland; |
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• | Component, parts and accessories manufacturing, and light assembly facilities in Mexico, the Netherlands, New Zealand, and Northern Ireland; |
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• | An outboard engine assembly plant in Suzhou, China; and |
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• | An outboard engine assembly plant operated by a joint venture in Japan. |
Boat segment non-U.S. sales comprised approximately 26 percent of our non-U.S. sales in 2019. The Boat Group manufactures or assembles a portion of its products in Canada, Mexico, New Zealand, and Portugal, as well as in boat plants owned and operated by third parties in Poland that perform contract manufacturing for us, which are sold mostly in international markets through Dealers. The Boat Group has sales or import offices in Belgium, Canada, France, Italy, the Netherlands, New Zealand, Norway, Poland, and Sweden. Of our boat sales in Canada and Europe, approximately 33 percent and 91 percent of the units, respectively, were produced in the region.
Raw Materials and Supplies
We purchase a wide variety of raw materials from our supplier base, including commodities such as aluminum, resins, oil, and steel, as well as product parts and components, such as engine blocks and boat windshields. The prices for these raw materials, parts, and components fluctuate depending on market conditions. Significant increases in the cost of such materials would raise our production costs, which could reduce profitability if we did not recoup the increased costs through higher product prices.
Our global procurement operations continue to better leverage purchasing power across our divisions and to improve supply chain and cost efficiencies. We mitigate commodity price risk on certain raw material purchases by entering into fixed priced contracts or derivatives to mitigate exposure related to changes in commodity prices.
Intellectual Property
We have, and continue to obtain, patent rights covering certain features of our products and processes. By law, our patent rights, which consist of patents and patent licenses, have limited lives and expire periodically. We believe that our patent rights are important to our competitive position in all of our business segments. Our trademark rights have indefinite lives, and many are well known to the public and are considered to be valuable assets. Most of our intellectual property is owned by U.S. entities.
In the Marine Engine segment, patent rights principally relate to features of outboard engines and inboard-outboard drives, hybrid drives, and pod drives, including: die-cast powerheads; cooling and exhaust systems; drivetrain, clutch, and gearshift mechanisms; boat/engine mountings; shock-absorbing tilt mechanisms; ignition systems; propellers; marine vessel control systems; fuel and oil injection systems; supercharged engines; outboard mid-section structures; segmented cowls; hydraulic trim, tilt and steering; screw compressor charge air cooling systems; a range of proprietary metal alloys; and airflow silencers.
In the Boat segment, patent rights principally relate to processes for manufacturing fiberglass hulls, decks, and components for boat products, as well as patent rights related to boat design, features and components.
In addition to "Brunswick," the following are our principal trademarks and brands:
Marine Engine Segment: Ancor, Attwood, Axius, BEP, Blue Sea Systems, CZone, Del City, FulTyme RV, Garelick, Kellogg Marine Supply, Land 'N' Sea, Lenco Marine, Marinco, Mariner, Mastervolt, MerCruiser, Mercury, Mercury Marine, Mercury Precision Parts, Mercury Propellers, Mercury Racing, MotorGuide, OptiMax, ParkPower, Power Products, Progressive Industries, ProMariner, Quicksilver, Seachoice, SeaPro, SmartCraft, Sport-Jet, Swivl-Eze, Talamex, Valiant, Verado, VesselView, Whale, and Zeus.
Boat Segment: Bayliner, Boston Whaler, Crestliner, Cypress Cay, Freedom Boat Club, Harris, Heyday, Legend, Lowe, Lund, Master Dealer, NAUTIC-ON, Princecraft, Protector, Quicksilver, Rayglass, Sea Ray, Thunder Jet, and Uttern.
Competitive Conditions and Position
We believe that we have a reputation for quality in each of our highly competitive lines of business. We compete in various markets by: utilizing efficient production techniques; developing and strengthening our leading brands; developing and promoting innovative technological advancements; undertaking effective marketing, advertising, and sales efforts; providing high-quality, innovative products at competitive prices; and offering extensive aftermarket products.
Strong competition exists in each of our product groups, but no single enterprise competes with us in all product groups. In each product area, competitors range in size from large, highly-diversified companies to small, single-product businesses. We also indirectly compete with businesses that offer alternative leisure products or activities.
The following summarizes our competitive position in each segment:
Marine Engine Segment: We believe the Marine Engine segment is a world leader in the manufacture and sale of recreational and commercial marine engines and marine parts and accessories. The marine engine market is highly competitive among several major international companies that comprise the majority of the market, including Japanese-based outboard engine manufacturers, as well as several smaller companies including Chinese manufacturers. Competitive advantage in this segment is a function of product features, technological leadership, quality, service, pricing, performance, manufacturing capabilities, depth of product portfolio, intuitive product controls, and durability, along with effective promotion and distribution. The parts & accessories and distribution market is highly competitive and fragmented. Our competitive advantage in this market includes our product breadth, proprietary parts and technology, nationwide distribution center network, sales team, delivery timing and service.
Boat Segment: We believe that the Boat segment is a world leader in the manufacture and sale of pleasure motorboats. There are several major manufacturers of pleasure and offshore fishing boats, along with hundreds of smaller manufacturers. However, few major manufacturers compete in the breadth of categories or geographies in which our Boat segment competes. Consequently, this business is highly competitive by category but also highly fragmented. In all of our boat operations, we compete on the basis of product features, technology, quality, brand strength, dealer service, pricing, performance, value, durability and styling, along with effective promotion and distribution. In addition, we believe Freedom Boat Club is the largest operator of boat club locations in North America with more than 210 locations, either company-owned or franchised. This operating model providers boaters a unique and lower cost means to participate in boating.
Number of Employees
The number of employees worldwide is shown below by segment: |
| | | | | | | | | | | |
| December 31, 2019 | | December 31, 2018 |
| Total | | Union (domestic) | | Total | | Union (domestic) |
Marine Engine | 7,483 |
| | 2,053 |
| | 7,719 |
| | 2,402 |
|
Boat (A) | 5,016 |
| | — |
| | 4,996 |
| | — |
|
Corporate (B) | 329 |
| | — |
| | 369 |
| | — |
|
Total(C) | 12,828 |
| | 2,053 |
| | 13,084 |
| | 2,402 |
|
(A) Includes Freedom Boat Club employees at company-owned locations for 2019.
(B) Corporate numbers include (i) enterprise information technology employees, which numbered 151 as of December 31, 2019 and 186 as of December 31, 2018, and (ii) shared service employees.
(C) All employee numbers exclude third-party contractor employees supplying temporary labor
We believe that the relationships between our employees, labor unions, and the Company remain stable. The collective bargaining agreement between Mercury Marine and its largest union, the International Association of Machinists and Aerospace Workers (IAM) Lodge 1947, remains in place until August 26, 2023.
Discontinued Operations
Refer to Note 3 – Discontinued Operations in the Notes to Consolidated Financial Statements for additional information regarding discontinued operations.
Environmental Requirements
Refer to Note 13 – Commitments and Contingencies in the Notes to Consolidated Financial Statements for a description of certain environmental proceedings.
Available Information
Brunswick maintains an Internet website at http://www.brunswick.com that includes links to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports, and Proxy Statements (SEC Filings). The SEC Filings are available without charge as soon as reasonably practicable following the time that they are filed with, or furnished to, the SEC. Shareholders and other interested parties may request email notification of the posting of these documents through the Investors section of our website. Brunswick’s SEC Filings are also available on the SEC’s website at http://www.sec.gov.
Item 1A. Risk Factors
The Company's operations and financial results are subject to certain risks and uncertainties, including those described below, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock.
Worldwide economic conditions significantly affect our industries and businesses, and economic decline can materially impact our financial results.
In times of economic uncertainty and contraction, consumers tend to have less discretionary income and to defer expenditures for discretionary items, which adversely affects our financial performance. Although we have expanded the portions of our portfolio that are dependent or substantially weighted toward the usage and maintenance of boats and engines versus the sale of new product and therefore less susceptible to economic cycles, a portion of the business remains cyclical and sensitive to personal spending levels.
Deterioration in general economic conditions that in turn diminishes consumer confidence or discretionary income may reduce our sales, or we may decide to lower pricing for our products, thus adversely affecting our financial results, including increasing the potential for future impairment charges. Further, most of our products are used for recreation, and consumers’ limited discretionary income in times of economic hardship may be diverted to other activities that occupy their time, such as other forms of recreation, religious, cultural, or community activities. We cannot predict the timing or continued strength of global economies, either worldwide or in the specific markets in which we compete.
Failure to successfully implement our strategic plan and growth initiatives could have a material adverse effect on our business and financial condition.
Our ability to continue generating strong cash flow and profits depends partly on the sustained successful execution of our strategic plan and growth initiatives, including optimizing our business and product portfolio, making acquisitions, improving operating efficiency, and expanding into new adjacent markets and customers. To address risks associated with our plan and growth initiatives, we have established processes to regularly review, manage, and modify our plans, and we believe we have appropriate oversight to monitor initiatives and their impact. However, our strategic plan and growth initiatives may require significant capital investment and management attention, which could result in the diversion of these resources from the core business and other business issues and opportunities. Additionally, any new initiative is subject to certain risks, including customer acceptance, competition, the ability to manufacture products on schedule and to specification, the ability to create the necessary supply chain, and/or the ability to attract and retain qualified management and other personnel. There is no assurance that we will be able to develop and successfully implement our strategic plan and growth initiatives in a manner that fully achieves our strategic objectives.
Successfully managing our manufacturing activity is critical to our operating and financial results.
Over the past several years, we have made strategic capital investments in capacity expansion activities to successfully capture growth opportunities and enhance product offerings, including expansions at Mercury Marine in Fond du Lac, Wisconsin and Boston Whaler in Edgewater, Florida. We may also make decisions to reduce our manufacturing footprint in accordance with our business strategy. We have also implemented, or are in the process of implementing, several manufacturing efficiency enhancements that are important to our success. We must carefully manage these capital improvement projects, expansions, efficiency enhancements, and any manufacturing consolidation efforts to ensure they meet cost targets, comply with applicable environmental, safety, and other regulations, and uphold high-quality workmanship.
Moving production to a different plant, expanding capacity at an existing facility, or ceasing production at a facility involves risks, including difficulties initiating production within the cost and timeframe estimated, supplying product to customers when expected, integrating new products, and attracting sufficient skilled workers to handle additional production demands. If we fail to meet these objectives, it could adversely affect our ability to meet customer demand for products and increase the cost of production versus projections, both of which could result in a significant adverse impact on operating and financial results. Additionally, plant consolidation or expansion can result in manufacturing inefficiencies, additional expenses, including higher wages or severance costs, and cost inefficiencies, which could exceed projections and negatively impact financial results.
Changes to U.S. trade policy, tariffs, and import/export regulations may have a material adverse effect on our business, financial condition, and results of operations.
Changes in laws and policies governing foreign trade could continue to adversely affect our business. As a result of recent policy changes, there may be greater restrictions and economic disincentives on international trade. The new tariffs and other changes in U.S. trade policy could trigger retaliatory actions by affected countries, and certain foreign governments have instituted
or are considering imposing trade sanctions on certain U.S. goods, such as aluminum and steel. Although we were granted exclusion from Section 301 tariffs for Mercury Marine 40, 50, and 60 horsepower engines in 2018 effective through the end of 2019, these exclusions were not renewed for 2020 and the denial of exemption requests will negatively affect our business. We continue to be subject to meaningful other tariffs, and there is no assurance that we will be granted similar exclusions for these or other products in the future, or that we will not be subject to additional tariffs. Like many other multinational corporations, we do a significant amount of business that would be affected by changes to the trade policies of the U.S. and foreign countries (including governmental action related to tariffs and international trade agreements). Such changes have the potential to adversely impact the U.S. economy, our industry, and global demand for our products and, as a result, could have a material adverse effect on our business, financial condition and results of operations.
Changes in currency exchange rates can adversely affect our results.
Some of our sales are denominated in a currency other than the U.S. dollar. Consequently, a strong U.S. dollar may adversely affect reported revenues and our profitability. We have hedging programs in place to reduce our risk to currency fluctuations; however, we cannot hedge against all currency risks, especially over the long term. We maintain a portion of our cost structure in currencies other than the U.S. dollar, which partially mitigates the impact of a strengthening U.S. dollar. This includes manufacturing operations for boats in Europe and Canada, and smaller outboard engines manufactured in China and purchased from our joint venture in Japan. We also continue to evaluate the supply chain and cost structure for opportunities to further mitigate foreign currency risks.
We sell products manufactured in the U.S. into certain international markets in U.S. dollars, including to Canada, Europe, and Latin America. Demand for our products in these markets may be diminished by a strengthening U.S. dollar, or we may need to lower prices to remain competitive. Some of our competitors with cost positions based outside the U.S., including Asian-based outboard engine manufacturers and European-based large fiberglass boat manufacturers, may have an improved cost position due to a strengthening U.S. dollar, which could result in pricing pressures on our products. Although these factors have existed for several years, we do not believe they have had a material adverse effect on our competitive position.
Our success depends upon the continued strength of our brands.
We believe that our brands, particularly including Mercury Marine, Sea Ray, Boston Whaler, and Lund significantly contribute to our success, and that maintaining and enhancing these brands is important to expanding our customer base. A failure to adequately promote, protect, and strengthen our brands could adversely affect our business and results of operations. Further, in connection with the divestiture of the bowling and billiards businesses, we licensed certain trademarks and servicemarks, including use of the name “Brunswick,” to the acquiring companies. Our reputation may be adversely affected by the purchasers' inappropriate use of the marks or of the name Brunswick, including potential negative publicity, loss of confidence, or other damage to our image due to this licensed use.
Fiscal concerns and policy changes may negatively impact worldwide economic and credit conditions and adversely affect our industries, businesses, and financial condition.
Fiscal policy could have a material adverse impact on worldwide economic conditions, the financial markets, and availability of credit and, consequently, may negatively affect our industries, businesses, and overall financial condition. Customers often finance purchases of our products, particularly boats, and as interest rates rise, the cost of financing the purchase also increases. While credit availability is adequate to support demand and interest rates remain relatively low, there are fewer lenders, tighter underwriting and loan approval criteria, as well as greater down payment requirements than before the global recession. If credit conditions worsen, and adversely affect the ability of customers to finance potential purchases at acceptable terms and interest rates, it could result in a decrease in sales or delay improvement in sales.
Dealer or distributor inability to secure adequate access to capital could adversely affect our sales.
Our dealers require adequate liquidity to finance their operations, including purchasing our products. Dealers are subject to numerous risks and uncertainties that could unfavorably affect their liquidity positions, including, among other things, continued access to adequate financing sources on a timely basis on reasonable terms. These financing sources are vital to our ability to sell products through our distribution network, particularly to boat and engine dealers. Entities affiliated with Wells Fargo & Company, including BAC, the Company’s 49 percent owned joint venture, finance a significant portion of our boat and engine sales to dealers through floorplan financing to marine dealers.
Many factors continue to influence the availability and terms of financing that our dealer floorplan financing providers offer, including:
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• | their ability to access certain capital markets, such as the securitization and the commercial paper markets, and to fund their operations in a cost effective manner; |
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• | the performance of their overall credit portfolios; |
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• | their willingness to accept the risks associated with lending to marine dealers; |
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• | the overall creditworthiness of those dealers; and |
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• | the overall aging and level of pipeline inventories. |
Our sales could be adversely affected if financing terms change unfavorably or if BAC were to be terminated. This could require dealers to find alternative sources of financing, including our direct financing to dealers, which could require additional capital to fund the associated receivables.
Our financial results could be adversely affected if we are unable to maintain effective distribution.
We rely on third-party dealers and distributors to sell most of our products. Maintaining a reliable network of dealers is essential to our success. We face competition from other manufacturers in attracting and retaining distributors and independent boat dealers. A significant deterioration in the number or effectiveness of our dealers and distributors could have a material adverse effect on our financial results.
Although at present we believe dealer health to be generally favorable, weakening demand for marine products could hurt our dealers’ financial performance. In particular, reduced cash flow from decreases in sales and tightening credit markets may impair dealers' ability to fund operations. Inability to fund operations can force dealers to cease business, and we may be unable to obtain alternate distribution in the vacated market. An inability to obtain alternate distribution could unfavorably affect our net sales through reduced market presence. If economic conditions deteriorate, we anticipate that dealer failures or voluntary market exits would increase, especially if overall retail demand materially declines.
Adverse economic, credit, and capital market conditions could have a negative impact on our financial results.
We may rely on short-term capital markets to meet our working capital requirements, fund capital expenditures, pay dividends, or fund employee benefit programs and we maintain short-term borrowing facilities that can be used to meet these capital requirements. In addition, over the long term, we may determine that it is necessary to access the capital markets to refinance existing long-term indebtedness or to raise capital for other initiatives.
Adverse global economic conditions, market volatility, and regulatory uncertainty could lead to volatility and disruptions in the capital and credit markets. This could adversely affect our ability to access capital and credit markets or increase the cost to do so, which could have a negative impact on our business, financial results and competitive position.
In addition, our variable rate indebtedness and financing programs, including wholesale financing arrangements through BAC, may use LIBOR as a benchmark for establishing the rate. As announced in July 2017, LIBOR is expected to be phased out by the end of 2021. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely impact the availability and cost of borrowings.
Adverse weather conditions, climate events, or regulatory policies can have a negative effect on revenues.
Changes in seasonal weather conditions can have a significant effect on our operating and financial results. Sales of our marine products are typically stronger just before and during spring and summer, and favorable weather during these months generally has had a positive effect on consumer demand. Conversely, unseasonably cool weather, excessive rainfall, or drought conditions during these periods can reduce or change the timing of demand. Climate change could have an impact on longer-term natural weather trends, resulting in environmental changes including, but not limited to, increases in severe weather, changing sea levels, changes in sea, land and air temperatures, poor water conditions, or reduced access to water, could disrupt or negatively affect our business. Many of our customers use our products for fishing and related recreational activities. Regulatory or commercial policies and practices impacting access to water, including availability of slip locations and/or the ability to transfer boats among different waterways, access to fisheries, or the ability to fish in some areas could negatively affect demand for our products.
Catastrophic events, including natural and environmental disasters, could have a negative effect on our operations and financial results.
Hurricanes, floods, earthquakes, storms, and catastrophic natural or environmental disasters could disrupt our distribution channel, operations, or supply chain and decrease consumer demand. If a catastrophic event takes place in one of our major sales
markets, our sales could be diminished. Additionally, if such an event occurs near our business locations, manufacturing facilities or key suppliers' facilities, business operations and/or operating systems could be interrupted. We could be uniquely affected by a catastrophic event due to the location of certain of our boat facilities in coastal Florida and the size of the manufacturing operation in Fond du Lac, Wisconsin.
Loss of key customers could harm our business.
In each segment, we have important relationships with key customers, such as White River Marine Group, LLC and MarineMax, Inc., and, from time to time, contracts with these customers come up for renewal. We cannot be certain we will renew such contracts, or renew them on favorable terms. If we lose a key customer, or a significant portion of its business, we could be adversely affected. In addition, certain customers could try to negotiate more favorable pricing of our products, which could depress earnings. In an effort to mitigate the risk associated with reliance on key customer accounts, we continually monitor such relationships and maintain a complete and competitive product lineup.
Our business and operations are dependent on the expertise of our key contributors, our successful implementation of succession plans, and our ability to attract and retain management employees and skilled labor.
The talents and efforts of our employees, particularly key managers, are vital to our success. Our management team has significant industry experience and would be difficult to replace. We may be unable to retain them or to attract other highly qualified employees. Failure to hire, develop, and retain highly qualified and diverse employee talent and to develop and implement an adequate succession plan for the management team could disrupt our operations and adversely affect our business and our future success. Although we cannot ensure that all transitions will be implemented successfully, we perform an annual review of management succession plans with the Board of Directors, including reviewing executive officer and other important positions to substantially mitigate the risk associated with key contributor transitions.
In 2019, we reorganized several of our operations and streamlined functions as part of the transformation to a marine-focused enterprise. Our ability to continue to execute our growth strategy could potentially be adversely affected by the effectiveness of these organizational changes or other, currently unanticipated executive or management changes that may be disruptive to, or cause uncertainty in, our business and future strategic direction. Any such disruption or uncertainty could have a material adverse impact on our business, results of operations, and financial condition.
Much of our future success depends on, among other factors, our ability to attract and retain skilled labor. If we are not successful in these efforts, we may be unable to meet our operating goals and plans, which may impact our financial results. We continually invest in automation and improve our efficiency, but with unemployment rates at low levels in many of the geographic areas in which we manufacture or distribute goods, availability of skilled hourly workers remains critical to our operations. In order to manage this risk, we regularly monitor and make improvements to wages and benefit programs, as well as develop and improve recruiting and training programs to attract and retain an experienced and skilled workforce.
A significant portion of our revenue is derived from international sources, which creates additional uncertainty.
We intend to continue to expand our international operations and customer base as part of our growth strategy. Sales outside the United States, especially in emerging markets, are subject to various risks, including government embargoes or foreign trade restrictions, foreign currency effects, tariffs, customs duties, inflation, difficulties in enforcing agreements and collecting receivables through foreign legal systems, compliance with international laws, treaties, and regulations, and unexpected changes in regulatory environments, disruptions in distribution, and dependence on foreign personnel and unions, economic and social instability, and public health crises, including the outbreak of pandemic or contagious disease, such as the novel coronavirus. In addition, there may be tax inefficiencies in repatriating cash from non-U.S. subsidiaries, or tax laws that affect this process may change.
Instability, including, but not limited to, political events, civil unrest, and an increase in criminal activity, in locations where we maintain a significant presence could adversely impact our manufacturing and business operations. Decreased stability poses a risk of business interruption and delays in shipments of materials, components, and finished goods, as well as a risk of decreased local retail demand for our products.
In addition, global political and economic uncertainty and shifts pose risks of volatility in global markets, which could affect our operations and financial results. Changes in U.S. policy regarding foreign trade or manufacturing may create negative sentiment about the U.S. among non-U.S. customers, employees, or prospective employees, which could adversely affect our business, sales, hiring, and employee retention. If we continue to expand our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other risks, which could materially impact international operations or the business as a whole.
Additionally, on January 31, 2020, the United Kingdom (“UK”) officially withdrew from the EU (“Brexit”), subject to a transition period until December 31, 2020, which could be extended up to two years under certain conditions (the “Brexit Transition Period”). There is uncertainty as to the scope, nature and terms of the relationship between the UK and the EU after the Brexit Transition Period. This uncertainty could adversely impact customer and investor confidence, result in additional market volatility, legal uncertainty and divergent national laws and regulations.
An impairment in the carrying value of goodwill, trade names, and other long-lived assets could negatively affect our consolidated results of operations and net worth.
Goodwill and indefinite-lived intangible assets, such as our trade names, are recorded at fair value at the time of acquisition and are not amortized, but are reviewed for impairment at least annually or more frequently if impairment indicators arise. In evaluating the potential for impairment of goodwill and trade names, we make assumptions regarding future operating performance, business trends, and market and economic conditions. Such analyses further require us to make certain assumptions about sales, operating margins, growth rates, and discount rates. Uncertainties are inherent in evaluating and applying these factors to the assessment of goodwill and trade name recoverability. We could be required to evaluate the recoverability of goodwill or trade names prior to the annual assessment if we experience business disruptions, unexpected significant declines in operating results, a divestiture of a significant component of our business, or declines in market capitalization.
We also continually evaluate whether events or circumstances have occurred that indicate the remaining estimated useful lives of our definite-lived intangible assets and other long-lived assets may warrant revision or whether the remaining balance of such assets may not be recoverable. We use an estimate of the related undiscounted cash flow over the remaining life of the asset in measuring whether the asset is recoverable.
As of December 31, 2019, the balance of total goodwill and indefinite lived intangible assets was $580 million, which represents approximately 16 percent of total assets. If the future operating performance of either the Company or individual operating segments is not sufficient, we could be required to record non-cash impairment charges. Impairment charges could substantially affect our reported earnings in the periods such charges are recorded. In addition, impairment charges could indicate a reduction in business value which could limit our ability to obtain adequate financing in the future.
Our business operations could be negatively impacted by an outage or breach of our information technology systems, operational technology systems, or a cybersecurity event.
We manage our global business operations through a variety of information technology (IT) and operational technology systems which we continually enhance to increase efficiency and security. We depend on these systems for commercial transactions, customer interactions, manufacturing, branding, employee tracking, and other applications. Some of the systems are based on legacy technology and operate with a minimal level of available support, and recent acquisitions using other systems have added to the complexity of our IT infrastructure. In addition, the Fitness business sale has required the separation of previously unified business and IT systems, and new systems, which process is ongoing. New system implementations across the enterprise also pose risks of outages or disruptions, which could affect our suppliers, commercial operations, and customers. We are working to upgrade, streamline, and integrate these systems and have invested in strategies to prevent a failure or breach but, like those of other companies, our systems are susceptible to outages due to natural disasters, power loss, computer viruses, security breaches, hardware or software vulnerabilities, disruptions, and similar events. If a legacy system or another of the Company's key systems were to fail or if our IT systems were unable to communicate effectively, this could result in missed or delayed sales or lost opportunities for cost reduction or efficient cash management.
We exchange information with hundreds of trading partners across all aspects of our commercial operations through our IT systems. A breakdown, outage, malicious intrusion, breach, random attack, or other disruption of communications could result in erroneous or fraudulent transactions, disclosure of confidential information, loss of reputation and confidence, and may also result in legal claims or proceedings, penalties and remediation costs. We have numerous e-commerce and e-marketing portals and our systems may contain personal information of customers or employees; therefore, we must continue to be diligent in protecting against malicious cyber attacks. We have been the target of attempted cyber attacks and other security threats and we may be subject to breaches of our IT systems. We have programs in place that are intended to detect, contain, and respond to data security incidents and that provide employee awareness training regarding phishing, malware and other cyber risks. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect, we may be unable to anticipate these techniques or implement adequate preventive measures. If our security measures are breached or fail, unauthorized persons may be able to obtain access to or acquire personal or other confidential data. Depending on the nature of the information compromised, we may also have obligations to notify consumers and/or employees about the incident, and we may need to provide some form of remedy, such as a subscription to a credit monitoring service, for the individuals affected by the incident. This could negatively affect our relationships with customers or trading partners, lead to potential claims against the Company, and damage our image and reputation.
We rely on third parties for computing, storage, processing, and similar services. Any disruption of or interference with our use of these third-party services could have an adverse effect on our business, financial condition, and operating results.
Certain of our business system reside on third-party outsourced cloud infrastructure providers. We are therefore vulnerable to service interruptions experienced by these providers and could experience interruptions, delays, or outages in service availability in the future due to a variety of factors, including infrastructure changes, human, hardware or software errors, hosting disruptions, and capacity constraints. While we have mitigation and service redundancy plans in place, outages and/or capacity constraints could still arise from a number of causes such as technical failures, natural disasters, fraud, or internal or third-party security attacks which could negatively impact our ability to manufacture and operate our business.
We collect, store, process, share, and use personal information, and rely on third parties that are not directly under our control to do so as well, which subjects us to legal obligations, laws and regulations related to security and privacy, and any actual or perceived failure to meet those obligations could harm our business.
We are subject to various data protection and privacy laws and regulations in the countries where we operate because we collect, store, process, share, and use personal information, and we rely on third parties that are not directly under our control to do so as well. The General Data Protection Regulation (GDPR) in the European Union (EU) went into effect in May 2018 and the California Consumer Privacy Act (CCPA) became effective January 1, 2020. Although we have implemented plans to comply with the laws, GDPR, CCPA, and future law and regulations could impose an even greater compliance burden and risk with respect to privacy and data security than prior laws. The EU (through the GDPR) and a growing number of legislative and regulatory bodies elsewhere in the world have adopted consumer notification requirements in the event of unauthorized access to or acquisition of certain types of personal information. These breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another. Complying with these obligations could cause us to incur substantial costs, require significant management time and attention, and increase negative publicity surrounding any incident that compromises personal information.
Inventory reductions by major dealers, retailers, and independent boat builders could adversely affect our financial results.
The Company and our dealers, retailers, and other distributors could decide to reduce the number of units they hold, particularly if demand trails forecasted levels or if new product introductions are expected to replace existing products. Such efforts tend to result in wholesale sales reductions in excess of retail sales reductions and would likely result in lower production levels of certain of our products, potentially causing lower rates of absorption of fixed costs in our manufacturing facilities and lower margins. While we have processes in place to help manage dealer inventories at appropriate levels, potential inventory reductions remain a risk to our future sales and results of operations.
We may be required to repurchase inventory or accounts of certain dealers.
We have agreements with certain third-party finance companies to provide financing to our customers, enabling them to purchase our products. In connection with these agreements, we may either have obligations to repurchase our products from the finance company or have recourse obligations. These obligations may be triggered if our dealers default on their payment or other obligations to the finance companies.
Our maximum contingent obligation to repurchase inventory and our maximum contingent recourse obligations on customer receivables are less than the total balances of dealer financings outstanding under these programs, because our obligations under certain of these arrangements are subject to caps, or are limited based on the age of product. Our risk related to these arrangements is partially mitigated by the proceeds we receive on the resale of repurchased product to other dealers, or by recoveries on receivables purchased under the recourse obligations.
Our inventory repurchase obligations relate primarily to the inventory floorplan credit facilities of our boat and engine dealers. Our actual historical repurchase experience related to these arrangements has been substantially less than our maximum contractual obligations. If dealers default on their obligations, file for bankruptcy, or cease operations, however, we could incur losses associated with the repurchase of our products. In addition, our net sales and earnings may be unfavorably affected due to reduced market coverage and an associated decline in sales.
Declines in marine industry demand could cause an increase in future repurchase activity, or could require us to incur losses in excess of established reserves. In addition, our cash flow and loss experience could be adversely affected if repurchased inventory is not successfully distributed to other dealers in a timely manner, or if the recovery rate on the resale of the product declines. The finance companies could require changes in repurchase or recourse terms that would result in an increase in our contractual contingent obligations.
Our financial results may be adversely affected by our third party suppliers' increased costs or inability to meet required production levels due to tariff impacts or defects or disruption of supply of raw materials, parts, and product components.
We rely on third parties to supply raw materials used in the manufacturing process, including oil, aluminum, copper, steel, and resins, as well as product parts and components. The prices for these raw materials, parts, and components fluctuate depending on market conditions and, in some instances, commodity prices or trade policies. Substantial increases in the prices of raw materials, parts, and components would increase our operating costs, and could reduce our profitability if we are unable to recoup the increased costs through higher product prices. Similarly, if a critical supplier were to close its operations, cease manufacturing, or otherwise fail to deliver an essential component necessary to our manufacturing operations, that could detrimentally affect our ability to manufacture and sell our products, resulting in an interruption in business operations and/or a loss of sales.
In addition, some components used in our manufacturing processes, including certain engine components, furniture, upholstery, and boat windshields, are available from a sole supplier or a limited number of suppliers. Operational and financial difficulties that these or other suppliers may face in the future could adversely affect their ability to supply us with the parts and components we need, which could significantly disrupt our operations. It may be difficult to find a replacement supplier for a limited or sole source raw material, part, or component without significant delay or on commercially reasonable terms. In addition, an uncorrected defect or supplier's variation in a raw material, part, or component, either unknown to us or incompatible with our manufacturing process, could jeopardize our ability to manufacture products.
Some additional supply risks that could disrupt our operations, impair our ability to deliver products to customers, and negatively affect our financial results include:
| |
• | financial pressures on our suppliers due to a weakening economy or unfavorable conditions in other end markets; |
| |
• | a deterioration of our relationships with suppliers; |
| |
• | events such as natural disasters, power outages or labor strikes; |
| |
• | an outbreak of disease or similar public health threat, such as the existing threat of coronavirus, particularly as it may impact our operations and supply chain in China; |
| |
• | supplier manufacturing constraints and investment requirements; or |
| |
• | labor disruption at major global ports and shipping hubs. |
These risks are exacerbated in the case of single-source suppliers, and the exclusive supplier of a key component potentially could exert significant bargaining power over price, quality, warranty claims, or other terms.
We continue to increase production; consequently, our need for raw materials and supplies continues to increase. Our suppliers must be prepared to ramp up operations and, in many cases, hire additional workers and/or expand capacity in order to fulfill our orders and those of other customers. Cost increases, defects, or sustained interruptions in the supply of raw materials, parts, or components due to delayed start-up periods our suppliers experience as they increase production efforts create risks to our operations and financial results. The Company experienced periodic supply shortages and increases in costs to certain materials, such as aluminum, in 2019. We continue to address these issues by identifying alternative suppliers for key materials and components, working to secure adequate inventories of critical supplies, and continually monitoring the capabilities of our supplier base. In the future, however, we may experience shortages, delayed delivery, and/or increased prices for key materials, parts, and supplies that are essential to our manufacturing operations.
Higher energy and fuel costs can affect our results.
Higher energy and fuel costs increase operating expenses at our manufacturing facilities and the cost of shipping products to customers. In addition, increases in energy costs can adversely affect the pricing and availability of petroleum-based raw materials such as resins and foam that are used in many of our marine products. Higher fuel prices may also have an adverse effect on demand for our parts and accessories businesses, as they increase the cost of boat ownership and possibly affect product use.
Either inadequate intellectual property protection that could allow others to use our technologies and impair our ability to compete, or failure to successfully defend against patent infringement claims could have a material adverse effect on our financial condition and results of operations.
We regard much of the technology underlying our products as proprietary. We rely on a combination of patents, trademark, copyright, and trade secret laws; employee and third-party non-disclosure agreements; and other contracts to establish and protect our technology and other intellectual property rights. However, we remain subject to risks, including:
| |
• | the steps we take to protect our proprietary technology may be inadequate to prevent misappropriation of our technology; |
| |
• | third parties may independently develop similar technology; |
| |
• | agreements containing protections may be breached or terminated; |
| |
• | we may not have adequate remedies for breaches; |
| |
• | existing patent, trademark, copyright, and trade secret laws may afford limited protection; |
| |
• | a third party could copy or otherwise obtain and use our products or technology without authorization; or |
| |
• | we may be required to litigate to enforce our intellectual property rights, and we may not be successful. |
Policing unauthorized use of our intellectual property is difficult, particularly outside the U.S., and litigating intellectual property claims may result in substantial cost and divert management’s attention.
In addition, we may be required to defend our products against patent or other intellectual property infringement claims or litigation. In addition to defense expenses and costs, we may not prevail in such cases, forcing us to seek licenses or royalty arrangements from third parties, which we may not be able to obtain on reasonable terms, or subjecting us to an order or requirement to stop manufacturing, using, selling, or distributing products that included challenged intellectual property, which could harm our business and financial results.
We have a fixed cost base that can affect our profitability in a declining sales environment.
The fixed cost levels of operating production facilities can put pressure on profit margins when sales and production decline. We have maintained discipline over our fixed cost base during the economic recovery, and improvements in gross margin can help mitigate the risks related to a fixed cost base. However, our profitability is dependent, in part, on our ability to absorb fixed costs over an increasing number of products sold and shipped. Decreased demand or the need to reduce inventories can lower our production levels and impact our ability to absorb fixed costs, consequently materially impacting our results.
An inability to identify and complete targeted acquisitions could negatively impact financial results.
Our growth initiatives include making strategic acquisitions, which depend on the availability of suitable targets at acceptable terms and our ability to complete the transactions. In managing our acquisition strategy, we conduct rigorous due diligence, involve various functions, and continually review target acquisitions, all of which we believe mitigates some of our acquisition risks. However, we cannot assure that suitable acquisitions will be identified or consummated or that, if consummated, they will be successful. Acquisitions include a number of risks, including our ability to project and evaluate market demand, potential synergies, and cost savings, and our ability to make accurate accounting estimates, as well as diversion of management attention. Uncertainties exist in assessing the value, risks, profitability, and liabilities associated with certain businesses or assets, negotiating acceptable terms, obtaining financing on acceptable terms, and receiving any necessary regulatory approvals. As we continue to grow, in part, through acquisitions, our success depends on our ability to anticipate and effectively manage these risks. Any failure to do so could have a material adverse effect on our financial condition and results of operations.
There can be no assurance that strategic divestitures or restructurings will provide business benefits.
As part of our strategy, we continuously evaluate our portfolio of businesses. Recent results of this evaluation include the sale of the Fitness business, the discontinuation of Sea Ray Sport Yacht and Yacht models, and winding down yacht production. We have previously and may in the future make other changes to our portfolio as well, which may be material. Divestitures involve risks, including difficulties in the separation of operations, services, products and personnel, disruption in our operations or businesses, finding a suitable purchaser, the diversion of management's attention from our other businesses, the potential loss of key employees, adverse effects on relationships with our dealer or supplier partners or their businesses, the erosion of employee morale or customer confidence, and the retention of contingent liabilities related to the divested business. If we do not successfully manage the risks associated with divestitures, our business, financial condition, and results of operations could be adversely affected as the potential strategic benefits may not be realized or may take longer to realize than expected.
The completed Fitness business separation could be disruptive to the business and our operations, and there can be no assurance that it will provide all of the anticipated business benefits.
On June 27, 2019, the Company completed the sale (Sale) of the Fitness business to KPS Capital Partners, LP (KPS), which Sale included a transition services arrangement. Like any business separation, the Sale involves risks, including difficulties associated with the separation of operations, services, and personnel, disruption in our operations or businesses, the potential loss of key employees, and adverse effects on relationships with business partners. In addition, we have incurred, and continue to incur, expenses in connection with the separation, and the completion of the transition services arrangement requires time and effort by the Company’s management team, which may divert management’s attention from other aspects of our business operations. Also, in connection with the Sale, we agreed to indemnify KPS for certain specified matters, including product liability and regulatory matters. If we do not successfully manage these risks, our business, financial condition, and results of operations could be adversely
affected. Furthermore, the Sale may not achieve the intended results, or results may take longer to realize than expected. The anticipated benefits of the Sale are based on a number of factors that we cannot predict.
The inability to successfully integrate acquisitions, including the Global Marine & Mobile Business of Power Products, could negatively impact financial results.
On August 9, 2018, Brunswick acquired the Global Marine & Mobile business of Power Products, which includes the global marine, specialty vehicle, mobile, industrial power, and transportation aftermarket products businesses. Additionally, on May 21, 2019, Brunswick acquired 100 percent of Freedom Boat Club, a leading boat club operator based in Florida. Acquisitions pose risks, such as our ability to project and evaluate market demand; maximize potential synergies and cost savings; make accurate accounting estimates; and achieve anticipated business objectives. The Power Products and Freedom Boat Club acquisitions and other, future acquisitions, present these and other integration risks, including:
| |
• | disruptions in core, adjacent, or acquired businesses that could make it more difficult to maintain business and operational relationships, including customer and supplier relationships; |
| |
• | the possibility that the expected synergies and value creation will not be realized or will not be realized within the expected time period; |
| |
• | the risk that unexpected costs will be incurred; |
| |
• | diversion of management attention; and |
| |
• | difficulties retaining employees. |
If we fail to timely and successfully integrate new businesses, including Power Products and Freedom Boat Club, into existing operations, we may see higher costs, lost sales, or otherwise diminished earnings and financial results.
The franchise business model of Freedom Boat Club presents risks.
Our franchisees are an integral part of our Freedom Boat Club business and its growth strategies. We may be unable to successfully implement the growth strategies if our franchisees do not participate in the implementation of those strategies or if we are unable to attract a sufficient number of qualified franchisees.
While our franchisees are required to comply with our franchise and related agreements, our franchisees are independent and manage their boat clubs as independent businesses, responsible for all day-to-day operations of their boat clubs. If these franchisees fail to maintain or act in accordance with applicable brand standards; experience service, safety or other operational problems, including any data breach involving club member information; or project a brand image inconsistent with ours, our image and reputation could suffer, which in turn could hurt our business and operating results.
The timing and amount of our share repurchases are subject to a number of uncertainties.
The Board of Directors has authorized the Company’s discretionary repurchase of outstanding common stock, to be systematically completed in the open market or through privately negotiated transactions. In 2019, we repurchased $400 million of shares, and we plan to continue share repurchases in 2020 and beyond. The amount and timing of share repurchases are based on a variety of factors. Important considerations that could cause us to limit, suspend, or delay future stock repurchases include:
| |
• | unfavorable market and economic conditions; |
| |
• | the trading price of our common stock; |
| |
• | the nature and magnitude of other investment opportunities available to us from time to time; and |
| |
• | the availability of cash. |
Delaying, limiting, or suspending our stock repurchase program may negatively affect performance versus earnings per share targets, and ultimately our stock price.
Our profitability may suffer as a result of competitive pricing and other pressures.
The introduction of lower-priced alternative products or services by other companies can hurt our competitive position in all of our businesses. We are constantly subject to competitive pressures in which predominantly international manufacturers may pursue a strategy of aggressive pricing, particularly during periods when their local currency weakens versus the U.S. dollar. Such pricing pressure may limit our ability to increase prices for our products in response to raw material and other cost increases and negatively affect our profit margins.
In addition, our independent boat builder customers may react negatively to potential competition for their products from Brunswick’s own boat brands, which can lead them to purchase marine engines, boat systems, and marine engine supplies from competing marine engine manufacturers and may negatively affect demand for our products.
Our ability to remain competitive depends on successfully introducing new products and services that meet customer expectations.
We believe that our customers look for and expect quality, innovation, and advanced features when evaluating and making purchasing decisions about products and services in the marketplace. Our ability to remain competitive and meet our growth objectives may be adversely affected by difficulties or delays in product development, such as an inability to develop viable new products or customer solutions, gain market acceptance of new products, generate sufficient capital to fund new product development, or obtain adequate intellectual property protection for new products. To meet ever-changing consumer demands, both timing of market entry and pricing of new products are critical. As a result, we may not be able to introduce new products that are necessary to remain competitive in all markets that we serve. Furthermore, we must continue to meet or exceed customers' expectations regarding product quality and after-sales service.
We manufacture and sell products that create exposure to potential claims and litigation.
Our manufacturing operations and the products we produce could result in product quality, warranty, personal injury, property damage, and other issues, thereby increasing the risk of litigation and potential liability, as well as regulatory fines. To manage this risk, we have established a global, enterprise-wide program charged with the responsibility for addressing, reviewing, and reporting on product integrity issues. Historically, the resolution of such claims has not had a materially adverse effect on our business, and we maintain what we believe to be adequate insurance coverage to mitigate a portion of these risks. However, we may experience material losses in the future, incur significant costs to defend claims or issue product recalls, experience claims in excess of our insurance coverage or that are not covered by insurance, or be subjected to fines or penalties. Our reputation may be adversely affected by such claims, whether or not successful, including potential negative publicity about our products. We record accruals for known potential liabilities, but there is the possibility that actual losses may exceed these accruals and therefore negatively impact earnings.
Compliance with environmental, health, safety, zoning, and other laws and regulations may increase costs and reduce demand for our products.
We are subject to federal, state, local, and foreign laws and regulations, including product safety, environmental, health and safety, privacy, and other regulations. While we believe that we maintain the requisite licenses and permits and that we are in material compliance with applicable laws and regulations, a failure to satisfy these and other regulatory requirements could result in fines or penalties, and compliance could increase the cost of operations. The adoption of additional laws, rules, and regulations, including stricter emissions standards, could increase our manufacturing costs, require additional product development investment, increase consumer pricing, and reduce consumer demand for our products or boat club operations.
Environmental restrictions, boat plant emission restrictions, and permitting and zoning requirements can limit production capacity, access to water for boating and marinas, and storage space. While future licensing requirements, including any licenses imposed on recreational boating, are not expected to be unduly restrictive, they may deter potential customers, thereby reducing our sales. Furthermore, regulations allowing the sale of fuel containing higher levels of ethanol for automobiles, which is not appropriate or intended for use in marine engines, may nonetheless result in increased warranty, service costs, customer dissatisfaction with products, and other claims against the Company if boaters mistakenly use this fuel in marine engines, causing damage to and the degradation of components in their marine engines.
Our manufacturing processes involve the use, handling, storage and contracting for recycling or disposal of hazardous or toxic substances or wastes. Accordingly, we are subject to regulations regarding these substances, and the misuse or mishandling of such substances could expose us to liabilities, including claims for property, personal injury, or natural resources damages, or fines. We are also subject to laws requiring the cleanup of contaminated property, including cleanup efforts currently underway. If a release of hazardous substances occurs at or from one of our current or former properties or another location where we have disposed of hazardous materials, we may be held liable for the contamination, regardless of knowledge or whether we were at fault, and the amount of such liability could be material.
Additionally, we are subject to laws governing our relationships with employees, including, but not limited to, employment obligations as a federal contractor and employee wage, hour, and benefits issues, such as pension funding and health care benefits. Compliance with these rules and regulations, and compliance with any changes to current regulations, could increase the cost of our operations.
Changes in income tax laws or enforcement could have a material adverse impact on our financial results.
Although domestic tax reform legislation in the form of the Tax Cuts and Jobs Act (TCJA), signed into law on December 22, 2017, has had an overall positive impact on our financial statements, the impact of the legislation could change as we analyze and apply additional regulations or guidance issued by the government. In addition, other changes in international and domestic tax laws, including the reaction by states to the corporate tax changes in the TCJA, and changes in tax law enforcement, could negatively impact our tax provision, cash flow, and/or tax related balance sheet amounts, including our deferred tax asset values. Changes in U.S. tax law will likely have broader implications, including impacts to the economy, currency markets, inflation environment, consumer behavior, and/or competitive dynamics, which are difficult to predict, and may positively or negatively impact the Company and our results.
Certain activist shareholder actions could cause us to incur expense and hinder execution of our strategy.
We actively engage in discussions with our shareholders regarding further strengthening our Company and creating long-term shareholder value. This ongoing dialogue can include certain divisive activist tactics, which can take many forms. Some shareholder activism, including potential proxy contests, could result in substantial costs, such as legal fees and expenses, and divert management’s and our Board’s attention and resources from our businesses and strategic plans. Additionally, public shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with dealers, distributors, or customers, make it more difficult to attract and retain qualified personnel, and cause our stock price to fluctuate based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business. These risks could adversely affect our business and operating results.
Some of our operations are conducted by joint ventures that are not operated solely for our benefit.
We share ownership and management responsibilities with jointly owned companies such as BAC and Tohatsu Marine Corporation. These joint ventures may not have the same goals, strategies, priorities, or resources as the Company because they are intended to be operated for the benefit of all co-owners, rather than for our exclusive benefit. If such a conflict occurred, it could negatively impact our sales or financial results.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our headquarters are in Mettawa, Illinois. We have numerous manufacturing plants, distribution warehouses, sales offices, and product test sites around the world. Research and development facilities are primarily located at manufacturing sites.
We believe our facilities are suitable and adequate for our current needs and are well maintained and in good operating condition. Most plants and warehouses are of modern, single-story construction, providing efficient manufacturing and distribution operations. We believe our manufacturing facilities have the capacity, or we are investing to increase capacity, to meet current and anticipated demand. We own most of our principal plants.
The principal facilities used in our operations are in the following locations:
Marine Engine Segment
Leased facilities include: Fresno, California; Old Lyme, Connecticut; Lake Suzy, Largo, Miramar, Pompano Beach, and Stuart, Florida; Lowell, Michigan; St. Paul Park, Minnesota; Reno, NV; Bellingham and Kent, WA; Menomonee Falls, WI; Brisbane and Melbourne, Australia; Palcoa, Brazil; Toronto, Ontario, Canada; Juarez, Mexico; Auckland, New Zealand; Bangor, Northern Ireland; Amsterdam and Heerenveen, Netherlands; and Singapore.
Owned facilities include: Panama City and St. Cloud, Florida; Atlanta, Georgia; Brookfield, Fond du Lac, and Oshkosh, Wisconsin; Petit Rechain, Belgium; Victoria and Burnaby, British Columbia, Canada; Milton and Oakville, Ontario, Canada; Suzhou, China; and Juarez, Mexico.
Boat Segment
Leased facilities include: Greeneville and Knoxville, Tennessee; and Auckland, New Zealand.
Owned facilities include: Edgewater and Merritt Island, Florida; Fort Wayne, Indiana; New York Mills, Minnesota; Lebanon, Missouri; Vonore, Tennessee; Clarkston, Washington; Petit Rechain, Belgium; Princeville, Quebec, Canada; Reynosa, Mexico; and Vila Nova de Cerveira, Portugal.
Item 3. Legal Proceedings
Refer to Note 13 – Commitments and Contingencies in the Notes to Consolidated Financial Statements for information about the Company's legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
Information About Our Executive Officers
Brunswick's Executive Officers are listed in the following table:
|
| | | | | | |
Officer Name | | Present Position | | First Became an Executive Officer | | Age |
David M. Foulkes | | Chief Executive Officer | | 2018 | | 58 |
William L. Metzger | | Senior Vice President and Chief Financial Officer | | 2013 | | 58 |
Huw S. Bower | | Vice President and President - Brunswick Boat Group | | 2016 | | 45 |
Christopher F. Dekker | | Vice President, General Counsel and Secretary | | 2014 | | 51 |
Christopher D. Drees | | Vice President and President - Mercury Marine | | 2019 | | 51 |
Brenna D. Preisser | | Vice President and Chief Human Resources Officer and President - Business Acceleration | | 2016 | | 42 |
Randall S. Altman | | Vice President and Controller | | 2019 | | 48 |
The executive officers named above have been appointed to serve until their successors are chosen and qualified or until the executive officer's earlier resignation or removal. Each of our executive officers has held the position set forth in the table above or has served Brunswick in various executive or administrative capacities at Brunswick for at least five years.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Brunswick's common stock is traded on the New York and Chicago Stock Exchanges under the symbol "BC". As of February 12, 2020, there were 7,444 shareholders of record of the Company's common stock.
Brunswick expects to continue to pay quarterly dividends at the discretion of the Board of Directors, subject to continued capital availability and a determination that cash dividends continue to be in the best interest of the Company's shareholders. Brunswick's dividend and share repurchase policies may be affected by, among other things, the Company's views on future liquidity, potential future capital requirements and restrictions contained in certain credit agreements.
Performance Graph
Comparison of Five-Year Cumulative Total Shareholder Return among Brunswick, S&P 500 Index and S&P 500 Global Industry Classification Standard (GICS) Consumer Discretionary Index
|
| | | | | | | | | | | | |
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 |
Brunswick | 100.00 |
| 99.55 |
| 108.76 |
| 111.49 |
| 95.22 |
| 124.96 |
|
S&P 500 GICS Consumer Discretionary Index | 100.00 |
| 101.41 |
| 113.40 |
| 137.98 |
| 132.16 |
| 173.42 |
|
S&P 500 Index | 100.00 |
| 110.12 |
| 116.69 |
| 143.34 |
| 144.71 |
| 184.06 |
|
The basis of comparison is a $100 investment at December 31, 2014 in each of: (i) Brunswick, (ii) the S&P 500 GICS Consumer Discretionary Index and (iii) the S&P 500 Index. All dividends are assumed to be reinvested. The S&P 500 GICS Consumer Discretionary Index encompasses industries including automotive, household durable goods, textiles and apparel and leisure equipment. Brunswick believes the companies included in this index provide the most representative sample of enterprises that are in primary lines of business that are similar to Brunswick's.
Issuer Purchases of Equity Securities
The Company has executed share repurchases against authorizations approved by the Board of Directors in 2014, 2016 and 2019. In 2019, the Company repurchased $400.0 million of stock under these authorizations and as of December 31, 2019, the remaining authorization was $234.8 million.
During the three months ended December 31, 2019, the Company repurchased the following shares of its common stock:
|
| | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Weighted Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Amount of Dollars that May Yet Be Used to Purchase Shares Under the Program |
September 29 to October 26 | | 939,938 |
| | $ | 53.60 |
| | 939,938 |
| | |
October 27 to November 23 | | 1,071,300 |
| | 59.38 |
| | 1,071,300 |
| | |
November 24 to December 31 | | 926,156 |
| | 59.37 |
| | 926,156 |
| | |
Total | | 2,937,394 |
| | $ | 57.53 |
| | 2,937,394 |
| | $ | 234,788,743 |
|
Item 6. Selected Financial Data
The selected historical financial data presented below as of and for the years ended December 31, 2019, 2018 and 2017 has been derived from, and should be read in conjunction with, the historical consolidated financial statements of the Company, including the notes thereto, and Item 7 of this report, including the Matters Affecting Comparability section. The selected historical financial data presented below as of and for the years ended December 31, 2016 and 2015 has been derived from the consolidated financial statements of the Company for those years and are not included in this Annual Report Form 10-K.
|
| | | | | | | | | | | | | | | | | | | |
(in millions, except per share data) | 2019 (A) | | 2018 (A) | | 2017 | | 2016 | | 2015 |
Results of operations data | | | | | | | | | |
Net sales | $ | 4,108.4 |
| | $ | 4,120.9 |
| | $ | 3,802.2 |
| | $ | 3,508.1 |
| | $ | 3,311.1 |
|
Restructuring, exit, integration, and impairment charges | 18.8 |
| | 54.8 |
| | 48.6 |
| | 2.9 |
| | 12.4 |
|
Operating earnings | 471.0 |
| | 355.5 |
| | 330.3 |
| | 356.3 |
| | 306.0 |
|
Pension settlement charge | 292.8 |
| | — |
| | 96.6 |
| | 55.1 |
| | 82.3 |
|
Earnings before interest and income taxes | 183.4 |
| | 358.9 |
| | 236.7 |
| | 292.7 |
| | 219.0 |
|
Earnings before income taxes | 110.7 |
| | 310.7 |
| | 212.9 |
| | 267.0 |
| | 193.4 |
|
Net earnings from continuing operations | 30.4 |
| | 253.4 |
| | 101.3 |
| | 188.4 |
| | 143.5 |
|
| | | | | | | | | |
Net (loss) earnings from discontinued operations, net of tax | (161.4 | ) | | 11.9 |
| | 45.1 |
| | 87.6 |
| | 97.9 |
|
Net (loss) earnings | $ | (131.0 | ) | | $ | 265.3 |
| | $ | 146.4 |
| | $ | 276.0 |
| | $ | 241.4 |
|
| | | | | | | | | |
Basic earnings (loss) per common share | | | | | | | | | |
Earnings from continuing operations | $ | 0.36 |
| | $ | 2.89 |
| | $ | 1.13 |
| | $ | 2.07 |
| | $ | 1.54 |
|
Net (loss) earnings from discontinued operations, net of tax | (1.90 | ) | | 0.14 |
| | 0.51 |
| | 0.96 |
| | 1.06 |
|
Net (loss) earnings | $ | (1.54 | ) | | $ | 3.03 |
| | $ | 1.64 |
| | $ | 3.03 |
| | $ | 2.60 |
|
| | | | | | | | | |
Average shares used for computation of basic earnings per share | 85.2 |
| | 87.6 |
| | 89.4 |
| | 91.2 |
| | 93.0 |
|
| | | | | | | | | |
Diluted earnings (loss) per common share | | | | | | | | | |
Earnings from continuing operations | $ | 0.36 |
| | $ | 2.87 |
| | $ | 1.12 |
| | $ | 2.05 |
| | $ | 1.52 |
|
Net (loss) earnings from discontinued operations, net of tax | (1.89 | ) | | 0.14 |
| | 0.50 |
| | 0.95 |
| | 1.04 |
|
Net (loss) earnings | $ | (1.53 | ) | | $ | 3.01 |
| | $ | 1.62 |
| | $ | 3.00 |
| | $ | 2.56 |
|
| | | | | | | | | |
Average shares used for computation of diluted earnings per share | 85.6 |
| | 88.2 |
| | 90.1 |
| | 92.0 |
| | 94.3 |
|
| |
(A) | Refer to Note 22 – Quarterly Data (unaudited), for further details on certain non-recurring items which impacted 2019 and 2018 results. |
|
| | | | | | | | | | | | | | | | | | | |
(in millions, except per share and other data) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Balance sheet data | | | | | | | | | |
Total assets | $ | 3,564.4 |
| | $ | 4,291.5 |
| | $ | 3,371.1 |
| | $ | 3,311.3 |
| | $ | 3,153.0 |
|
Debt | | | | | | | | | |
Short-term | $ | 41.3 |
| | $ | 41.3 |
| | $ | 5.6 |
| | $ | 5.9 |
| | $ | 6.0 |
|
Long-term | 1,068.0 |
| | 1,179.5 |
| | 431.8 |
| | 436.5 |
| | 442.5 |
|
Total debt | 1,109.3 |
| | 1,220.8 |
| | 437.4 |
| | 442.4 |
| | 448.5 |
|
Common shareholders' equity | 1,300.9 |
| | 1,582.6 |
| | 1,482.9 |
| | 1,440.1 |
| | 1,281.3 |
|
Total capitalization | $ | 2,410.2 |
| | $ | 2,803.4 |
| | $ | 1,920.3 |
| | $ | 1,882.5 |
| | $ | 1,729.8 |
|
| | | | | | | | | |
Cash flow data | | | | | | | | | |
Net cash provided by operating activities of continuing operations | $ | 475.3 |
| | $ | 274.5 |
| | $ | 308.2 |
| | $ | 309.6 |
| | $ | 331.3 |
|
Depreciation and amortization | 138.7 |
| | 124.0 |
| | 87.1 |
| | 83.8 |
| | 94.6 |
|
Capital expenditures | 232.6 |
| | 180.2 |
| | 178.0 |
| | 157.9 |
| | 177.0 |
|
Investments | 2.4 |
| | (8.8 | ) | | (3.2 | ) | | 5.1 |
| | 5.1 |
|
Cash dividends paid | 73.4 |
| | 67.8 |
| | 60.6 |
| | 55.4 |
| | 5.4 |
|
| | | | | | | | | |
Other data | | | | | | | | | |
Dividends declared per share | $ | 0.87 |
| | $ | 0.78 |
| | $ | 0.685 |
| | $ | 0.615 |
| | $ | 0.525 |
|
Book value per share | 16.34 |
| | 18.23 |
| | 16.95 |
| | 16.13 |
| | 14.11 |
|
Return on beginning shareholders' equity | (8.3 | )% | | 17.9 | % | | 10.2 | % | | 21.5 | % | | 20.6 | % |
Effective tax rate from continuing operations | 72.5 | % | | 18.4 | % | | 52.4 | % | | 29.4 | % | | 25.8 | % |
Debt-to-capitalization rate | 46.0 | % | | 43.5 | % | | 22.8 | % | | 23.5 | % | | 25.9 | % |
Number of employees | 12,828 |
| | 13,084 |
| | 12,262 |
| | 11,522 |
| | 10,398 |
|
Number of shareholders of record | 7,484 |
| | 7,823 |
| | 8,247 |
| | 8,683 |
| | 9,009 |
|
Common stock price (NYSE) | | | | | | | | | |
High | $ | 62.23 |
| | $ | 69.82 |
| | $ | 63.82 |
| | $ | 56.30 |
| | $ | 56.63 |
|
Low | 41.02 |
| | 41.92 |
| | 48.04 |
| | 36.05 |
| | 46.08 |
|
Close (last trading day) | 59.98 |
| | 46.45 |
| | 55.22 |
| | 54.54 |
| | 50.51 |
|
The Notes to Consolidated Financial Statements should be read in conjunction with the above summary.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in Management’s Discussion and Analysis are based on non-GAAP financial measures. GAAP refers to generally accepted accounting principles in the United States. For example, the discussion of the Company’s cash flows includes an analysis of free cash flows and total liquidity; the discussion of the Company's net sales includes a discussion of net sales on a constant currency basis and excluding acquisitions and Sport Yacht and Yacht operations; the discussion of the Company's earnings includes a presentation of operating earnings and operating margin, as adjusted, excluding restructuring, exit, impairment and other charges, Sport Yacht and Yacht operations, purchase accounting amortization and acquisition-related costs; gross margin, as adjusted, excluding Sport Yacht and Yacht operations and purchase accounting amortization; and diluted earnings per common share, as adjusted. A “non-GAAP financial measure” is a numerical measure of a registrant’s historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the consolidated statements of operations, balance sheets or statements of cash flows of the issuer; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. Non-GAAP financial measures do not include operating and statistical measures.
The Company includes non-GAAP financial measures in Management’s Discussion and Analysis and elsewhere in this Annual Report on Form 10-K, as Brunswick’s management believes that these measures and the information they provide are useful to investors because they permit investors to view Brunswick’s performance using the same tools that management uses and to better evaluate the Company’s ongoing business performance. In order to better align Brunswick's reported results with the internal metrics used by the Company's management to evaluate business performance as well as to provide better comparisons to prior periods and peer data, non-GAAP financial measures exclude the impact of purchase accounting amortization related to the Power Products and Freedom Boat Club acquisitions.
Certain statements in this Management's Discussion and Analysis are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations, estimates, and projections about Brunswick’s business and by their nature address matters that are, to different degrees, uncertain. Words such as “may,” “could,” “expect,” “anticipate,” “intend,” “target,” “plan,” “seek,” “estimate,” “believe,” “predict,” “project,” “outlook,” “goal,” and similar expressions are intended to identify forward-looking statements. Forward looking statements are not guarantees of future performance and involve certain risks and uncertainties that may cause actual results to differ materially from expectations as of the date of this Annual Report on Form 10-K. These risks include, but are not limited to, those set forth under Item 1A of this Annual Report on Form 10-K. Forward-looking statements speak only as of the date on which they are made and Brunswick does not undertake any obligation to update them to reflect events or circumstances after the date of this Annual Report.
Brunswick does not provide forward-looking guidance for certain financial measures on a GAAP basis because it is unable to predict certain items contained in the GAAP measures without unreasonable efforts. These items may include pension settlement charges, restructuring, exit, integration and impairment costs, special tax items, acquisition-related costs, and certain other unusual adjustments.
Overview and Outlook
Discontinued Operations
On June 27, 2019, the Company completed the sale of its Fitness business. This business, which was previously reported as the Company's Fitness segment, is being reported as discontinued operations for all periods presented.
The Company's results for all periods presented, as discussed in Management's Discussion and Analysis, are presented on a continuing operations basis, unless otherwise noted. Refer to Note 3 – Discontinued Operations in the Notes to Consolidated Financial Statements for further information.
Presentation of Sea Ray Results
In December 2017, the Board of Directors authorized the Company to exit its Sea Ray business, including the Meridian brand, and as a result, reclassified the assets and liabilities as held for sale on the Consolidated Balance Sheets and presented the results of the business as discontinued operations on the Consolidated Statements of Operations in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017. In June 2018, the Board of Directors authorized the Company to end the sale process for its Sea Ray business and once again report the results of the business within continuing operations beginning in the second quarter of 2018. As part of this action, the Company decided to restructure the businesses, including discontinuing Sea Ray Sport
Yacht and Yacht models and winding down yacht production, while reinventing Sea Ray Sport Boat and Sport Cruiser operations. Refer to the Form 8-K filed with the Securities and Exchange Commission (SEC) on July 19, 2018 for further information.
The Company largely completed the wind down of its Sea Ray Sport Yacht and Yacht operations during 2018. Non-GAAP figures exclude the results of Sport Yacht and Yacht operations in 2018 and 2017, and certain amounts in 2019 related to changes in estimated liabilities.
Acquisition of Power Products
On August 9, 2018, the Company completed its acquisition of the Global Marine Business of Power Products Holdings, LLC (Power Products) for $909.6 million in cash, on a cash-free, debt-free basis. For further discussion regarding the acquisition, refer to Note 5 – Acquisitions in the Notes to Consolidated Financial Statements.
Overview
The Company's 2019 results represent the tenth consecutive year of growth, resulting from strong operating performance. The Company looked to achieve the following financial objectives in 2019:
| |
• | Increase earnings before income taxes, as well as deliver improvements in both gross margin and operating margin percentages, excluding non-recurring charges. |
| |
• | Continue to generate strong free cash flow and execute against the Company's capital strategy. |
Achievements against the Company's financial objectives in 2019 were as follows:
Deliver revenue growth:
Ended the year with a slight decrease in net sales when compared with 2018 due to the following:
| |
• | The decrease in GAAP net sales included a benefit of 4.1 percent relating to recent acquisitions, negative impacts from foreign exchange rate of 1 percent, and negative impact from the exit of Sport Yacht and Yacht operations of 1 percent. |
| |
• | The U.S. engine and boat operations experienced total industry powerboat retail unit declines of 5 percent in 2019 versus an expectation at the beginning of the year of a low-to-middle single digit percent increase, reflecting a challenging retail environment during the first half of the year with volumes stabilizing in the second half. Outboard engine retail units were up slightly year-over-year. |
| |
• | The Marine Engine segment reported sales increases as the addition of Power Products and continued gains in higher horsepower outboard engine categories were partially offset by reductions in outboard engines 150 horsepower and below, as well as lower sales of sterndrive engines. |
| |
• | Boat segment net sales decreased as a result of planned reductions in wholesale unit shipments of value pontoons and aluminum fish products. Saltwater fishing sales were affected by challenging comparisons between years at Boston Whaler due to leaning pipelines in advance of upcoming major product launches. Sales declines were partially offset by gains in other premium offerings, including Sea Ray Sport Boats and Cruisers. |
| |
• | International sales for the Company increased 3 percent in 2019 when compared with 2018 on a GAAP basis and increased 4 percent on a constant currency basis, excluding the impact of acquisitions and Sport Yacht and Yacht operations; the increase was driven by Europe, Asia-Pacific and Rest-of-World regions, partially offset by weakness in Canada. |
Increase earnings before income taxes, as well as deliver improvements in both gross margin and operating margin percentages, excluding non-recurring charges:
| |
• | Reported earnings before income taxes of $110.7 million in 2019 compared with earnings before income taxes of $310.7 million in 2018; adjusted earnings before income taxes were $465.2 million in 2019 versus $461.7 million in 2018 |
| |
• | Gross margin improved 190 basis points when compared with 2018 and reflected the absence of Sport Yacht and Yacht operations and purchase accounting amortization associated with the Power Products acquisition, both of which negatively impacted 2018. Gross margin, as adjusted, improved 50 basis points as benefits from the Power Products acquisition and favorable changes in sales mix in the Marine Engine segment outweighed the impact of lower sales, tariffs and unfavorable changes in foreign exchange rates |
| |
• | Operating margin improved by 290 basis points when compared with the prior year due to the factors affecting gross margin percentage discussed above, as well as reduced restructuring, exit, impairment and other charges and acquisition-related costs. Operating margin, as adjusted, was up 50 basis points compared with 2018 |
| |
• | Earnings before income taxes included a pre-tax, non-cash charge of $292.8 million relating to the exit of its remaining defined benefit pension plans during the year |
Continue to generate strong free cash flow and execute against the Company's capital strategy:
| |
• | Generated free cash flow of $250.4 million in 2019, and had cash flow from discontinued operations of $440.6 million including proceeds from the sale of Fitness, enabling the Company to continue executing its capital strategy as follows: |
| |
• | Funded investments in growth: |
| |
• | Organically through capital expenditures and research and development, which included investments in new products as well as capacity expansions, primarily within the Marine Engine segment |
| |
• | Through the acquisition of Freedom Boat Club for $64.1 million |
| |
• | Retired $300.0 million of near-term debt including the retirement of the Company’s 4.625 percent senior notes due 2021 and refinancing of acquisition-related debt |
| |
• | Completed the exit from the Company's qualified defined benefit pension plans |
| |
• | Enhanced shareholder returns in 2019 by repurchasing $400.0 million of common stock under the Company’s share repurchase program and increased cash dividends paid to shareholders to $73.4 million |
| |
• | Ended the year with $332.7 million of cash and marketable securities |
Net earnings from continuing operations decreased to $30.4 million in 2019 from $253.4 million in 2018, and included an after-tax, non-cash charge of $310.3 million related to pension settlement costs as well as a net tax benefit of $17.2 million primarily related to favorable rate change impacts on state deferred tax assets as well as a reassessment of the state valuation allowance. The 2018 results reflect an income tax provision of $57.3 million and included a net benefit of $4.8 million primarily related to 2017 U.S. tax reform updates.
Outlook for 2020
Reportable Segment Changes
The Company has refocused its strategy on four business pillars - Propulsion, Parts and Accessories (P&A), Boats and Business Acceleration. Effective January 1, 2020, the Company changed its management reporting and updated its reportable segments to Propulsion, P&A and Boat (inclusive of Business Acceleration) to align with its strategy. Outlook statements included in this discussion will reflect these new segments.
For further information, refer to the Company's Current Report on Form 8-K filed with the SEC on January 30, 2020 and Note 23 – Subsequent Events in the Notes to Consolidated Financial Statements.
Outlook
The Company is projecting 2020 to be another year of strong growth and operating performance, with free cash flow generation in excess of $325 million. The Company is targeting growth in the range of 6 percent to 8 percent.
The Company projects U.S. marine industry powerboat retail unit demand for 2020 to be flat to slightly up versus 2019. Our efforts to manage pipeline inventory levels in the back half of 2019 put us in a favorable position entering 2020, as wholesale boat sales are expected to more closely match retail sales for the year resulting in top-line growth versus 2019. We anticipate continued growth and share gains in higher horsepower engine categories bolstered by our completed capacity expansion efforts. Boat segment sales in 2020 will also benefit from significant new product introductions as well as the Company's continued focus on product with more technology features and content. The Propulsion and Boat segments will experience more challenging wholesale revenue comparisons early in the year, with more favorable comparisons in the second-half, as a result of the timing of wholesale activity in 2019, including the impact of second-half reductions in wholesale shipments and pipeline inventories. The P&A segment should benefit from more normal seasonal conditions for boating activity.
The Company is planning to deliver higher earnings before income taxes in 2020 resulting from planned sales increases and continued margin growth resulting from improved operating efficiency. However, as a result of the expiration and non-renewal of the tariff exemption related to 40 to 60 horsepower engines assembled in China, the Company now anticipates the full impact of tariffs on its 2020 pre-tax earnings to be between $30 to $35 million, or an incremental $10 to $15 million over 2019. In addition, the Company expects foreign currency exchange rates to negatively impact 2020 earnings growth by one percent to two percent.
The Company is planning for its effective tax rate in 2020 to be approximately 21 percent to 22 percent based on existing tax law.
Matters Affecting Comparability
Certain events occurred during 2019, 2018 and 2017 that the Company believes affect the comparability of the results of operations. The tables below summarize the impact of changes in currency exchange rates, the impact of recent acquisitions and the impact of Sport Yacht and Yacht operations on the Company's net sales:
|
| | | | | | | | | | | | | | | |
| Net Sales | | 2019 vs. 2018 |
(in millions) | 2019 | | 2018 | | GAAP | | Currency Impact | | Acquisition Impact | | Sport Yacht and Yacht Impact |
Marine Engine | $ | 3,073.5 |
| | $ | 2,993.6 |
| | 2.7% | | (1.3)% | | 4.2% | | — |
Boat | 1,333.8 |
| | 1,471.3 |
| | (9.3)% | | (0.6)% | | 1.1% | | (3.2)% |
Marine eliminations | (298.9 | ) | | (344.0 | ) | | | | | | | | |
Total | $ | 4,108.4 |
| | $ | 4,120.9 |
| | (0.3)% | | (1.2)% | | 4.1% | | (1.2)% |
|
| | | | | | | | | | | | | | | |
| Net Sales | | 2018 vs. 2017 |
(in millions) | 2018 | | 2017 | | GAAP | | Currency Impact | | Acquisition Impact | | Sport Yacht and Yacht Impact |
Marine Engine | $ | 2,993.6 |
| | $ | 2,631.8 |
| | 13.7% | | 0.1% | | 4.0% | | — |
Boat | 1,471.3 |
| | 1,490.6 |
| | (1.3)% | | 0.5% | | — | | (7.5)% |
Marine eliminations | (344.0 | ) | | (320.2 | ) | | | | | | | | |
Total | $ | 4,120.9 |
| | $ | 3,802.2 |
| | 8.4% | | 0.3% | | 2.8% | | (3.1)% |
Sport Yacht and Yacht Wind-down. The results of Sport Yacht and Yacht operations are summarized in the table below.
|
| | | | | | | | | | | |
(in millions) | 2019 | | 2018 | | 2017 |
Net sales (A) | $ | (0.7 | ) | | $ | 49.4 |
| | $ | 151.6 |
|
Gross margin | (6.4 | ) | | (39.7 | ) | | (12.4 | ) |
Restructuring, exit and impairment charges | — |
| | 49.4 |
| | 23.3 |
|
Operating loss | (7.8 | ) | | (107.8 | ) | | (55.2 | ) |
(A) During 2019, results included $(0.7) million of charges within Net sales related to estimated retail sales incentives to support the sale of sport yachts and yachts currently in the dealer pipeline. During 2018, results included $16.0 million of charges within Net sales to support the sale of sport yachts and yachts in the dealer pipeline at that time. There were no comparable charges in 2017.
Acquisitions. The Company completed acquisitions during 2019, 2018 and 2017 that affect the comparability of net sales. The impacts on consolidated and segment sales comparisons are reflected above. Refer to Note 5 – Acquisitions in the Notes to Consolidated Financial Statements for further information.
Changes in foreign currency rates. Percentage changes in net sales expressed in constant currency reflect the impact that changes in currency exchange rates had on comparisons of net sales. To determine this information, net sales transacted in currencies other than U.S. dollars have been translated to U.S. dollars using the average exchange rates that were in effect during the comparative period. The percentage change in net sales expressed on a constant currency basis better reflects the changes in the underlying business trends, excluding the impact of translation arising from foreign currency exchange rate fluctuations. Approximately 22 percent of the Company's annual net sales are transacted in a currency other than the U.S. dollar. The Company's most material exposures include sales in Euros, Canadian dollars, Australian dollars and Brazilian reais.
Additionally, operating earnings comparisons were negatively affected by foreign exchange rates by approximately $15 million in 2019 when compared with 2018, and were positively affected by foreign exchange rates by approximately $1 million in 2018 when compared with 2017. These estimates include the impact of translation on all sales and costs transacted in a currency other than the U.S. dollar and the impact of hedging activities.