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 Exchange Act). Yes o☐ No x☒
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
As of June 29, 2018,27, 2020, 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 $5,551,034,582.$4,898,235,570. 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 15, 201911, 2021 was 87,028,425.77,774,754.
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 8, 2019.5, 2021.
BRUNSWICK CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
December 31, 20182020
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Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K are forward-looking statements 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,” “should,” “expect,” “anticipate,” “project,” “position,” “intend,” “target,” “plan,” “seek,” “estimate,” “believe,” “predict,” “outlook,” 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.
PART I
Item 1. Business
References to "we," "us," "our," the "Company," "Brunswick," and "Brunswick Corporation" refer to Brunswick Corporation is aand its consolidated subsidiaries unless the context specifically states or implies otherwise.
We design, manufacture, and market recreational marine products, including leading marine propulsion products, parts and accessories, and boat brands, and operate service and shared access businesses, including the world's largest boat club. Incorporated in Delaware corporation incorporated on December 31, 1907. We are a leading global designer, manufacturer, and marketer of recreation1907, Brunswick has traded on the New York Stock Exchange for nearly 95 years.
Our propulsion products includinginclude marine engines boats, fitness equipment, and active recreation products. Our engine-related products include: outboard, sterndrive,related controls, rigging, and inboard engines; trolling motors; propellers; engine control systems; electrical componentspropellers. We manufacture and integrated systems; and marinedistribute a broad portfolio of parts and accessories.accessories, engine parts and consumables, electrical products, and boat parts and systems for original equipment manufacturers, aftermarket parts and accessory retailers and distributors, and for internal production. 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. Our fitness products include cardiovascularAdditionally, we offer related financing services, our shared access boat club, and strength training equipment for both the commercial and consumer markets. We also sell products for active aging and rehabilitation, a complete line of billiards tables, and other game room tables and accessories.
In 2018, we continued to successfully execute our growth strategy, acquiring new parts and accessories brands andcontinually focus on exploring, investing in, innovativeand developing opportunities to further engage consumers and improve boater experiences.
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. Our strategy is focused on:
•Introducing exceptional products productivity,across our strong array of brands;
•Promoting operational and efficiency initiatives. We expectquality excellence;
•Strengthening our relationships with our channel partners, suppliers, and employees;
•Accelerating customer-centric innovation and technology in products and services, including through our
ACES (Autonomy, Connectivity, Electrification & Shared Access) strategy; and
•Enhancing frictionless consumer experiences through digital engagement and advanced e-commerce
capabilities.
These strategies support our aim to continuecreate exceptional experiences for customers, expand participation in recreational boating, deliver industry transforming technology, and leverage our focus on growth in the combinedleading marine businesses to grow earnings and enhance shareholder value. Our integrated marine business in 2019. With respect to the Fitness segment, our focus remains firmly on completing the separation of this business from the portfolio instrategy is supported by a timely fashion, and in a manner that maximizes value to our shareholders. The spin-off process remains on plan, and we continue to evaluate other options, including a sale of the business. In 2019, our marine business will emphasize continued product leadership, targeted acquisitions, and other growth-related investments. In the longer term, our strategy remains consistent: to design, develop, and introduce high-quality products featuring innovative technology and styling; to distribute products through a model that benefits our partners - dealers and distributors; to provide world-class service to our customers; to develop and maintain low-cost manufacturing processes, and to continually improve productivity and efficiency; to manufacture and distribute products globally with local and regional styling; to continue implementing ourbalanced capital strategy whichthat includes allocating capital to organic growth initiatives and strategic acquisition opportunities while also managing debt levels and maturities, maintaining strong cash and liquidity positions, funding pension obligations, and continuing to return capital to shareholders through dividends and share repurchases;repurchases.
Effective January 1, 2020, we changed our management reporting and updated our reportable segments to attractPropulsion, Parts & Accessories (P&A), and retain skilled employees. These strategic objectives supportBoat to align with our plans to grow by expandingstrategy. The Propulsion segment manufactures and distributes marine engines and related controls, rigging, and propellers. The P&A segment includes engine parts and consumables, electrical products, boat parts and systems, and our existing businesses. Our primary objective is to enhance shareholder value by achieving returns on investments that exceed our cost of capital.distribution business. The Boat segment manufactures and distributes recreational boats and includes Business Acceleration, which operates Freedom Boat Club, dealer finance and ancillary services, and develops other emerging marine business models.
Refer to Note 76 – Segment Information and Note 3 – Discontinued Operations in the Notes to Consolidated Financial Statements for additional information regarding our segments and discontinued operations, including net sales, operating earnings, and total assets by segment.operations.
Marine EnginePropulsion Segment
The Marine EnginePropulsion segment, which had net sales of $2,993.6 million in 2018, consists of the Mercury Marine Group (Mercury Marine). Wewe believe our Marine Engine segment is a world leader in the manufacturing and sale of recreational marine engines, and marine parts and accessories.had 2020 net sales of $1,878.4 million.
Mercury MarineThe Propulsion segment manufactures and markets a full range of outboard, sterndrive, and inboard engineengines, as well as propulsion-related controls, rigging, and propulsion systemspropellers. The Propulsion segment primarily markets under among other brand names,the Mercury Marine, Mercury, Mercury MerCruiser, Mariner, Mercury Racing, and MotorGuideMercury Diesel brands. In addition, Mercury Marine manufactures and markets parts and accessories under the Ancor, Attwood, BEP, Besto, BLA, Blue Sea Systems, CZone, FulTyme RV, Garelick, Lenco Marine, Marinco, Mastervolt, Mercury, Mercury Precision Parts, MotorGuide, Park Power, Progressive Industries, ProMariner, Quicksilver, and Seachoice brand names, including marine electronics and control integration systems, steering systems, instruments, controls, propellers, trolling motors, fuel systems, electrical systems, service parts, and lubricants, as well as specialty vehicle, mobile, and transportation aftermarket products. 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 manufactures and markets advanced boat steering and engine control systems.
Mercury Marine's outboard, sterndrive, and inboard enginesThese products are principally sold directly to independent boat builders, local, state, and foreign governments, and to Brunswick's Boat segment. In addition, Mercury Marinethe Propulsion segment sells outboard engines through a global network of more than 6,000 marine dealers and distributors, specialty marine retailers, and marine service centers. White River Marine Group, LLC and its subsidiaries (including Tracker and Ranger Boats) is Mercury Marine’s most significant external customer.
Mercury Marine manufactures four-stroke outboard engine models ranging from 2.5 to 400 600 horsepower. These low-emission engines are in compliance 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,ProXS, SeaPro, and Mercury Marine'sRace variations that include naturally aspirated four-stroke outboards, ranging from 2.5 to 300 horsepower.and supercharged engines offered in a multitude of configurations designed for use in recreational, commercial, and racing applications. 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, mostMost of Mercury Marine's sterndrive and inboard engines are now available with catalyst exhaust treatment and monitoring systems, and all are compliant with applicable U.S. state and federal environmental regulations. Mercury MarineMarine's engines also makes engines that comply with applicable global emissions and noise regulations.
In terms of innovation and technology development, the Propulsion segment continues to excel. In 2020, Mercury Marine continues to develop innovative products, including its all-new V8 FourStroke outboard family of engines, winninglaunched the 2018 Most Innovative ProductBravo Four S forward-facing drive with Smart-Tow control system. Mercury Racing won an NMMA Innovation Award at the New Zealand2020 Miami International Boat Show and a 2018 Innovation Award from the National Marine Manufacturers Association for the 3.4L V6 FourStroke outboard engines. Mercury Marine was awarded an IBEX Innovation Award in 2018 for its tiller handle assembly450R engine, and successfully launched the new 360APX competition four-stroke V8 outboard engine, designed for portable outboard motors. 2018 also saw Mercurytunnel-boat racing competition on the Powerboat Formula 1 World Championship circuit. In December 2020, the Consumer Technology Association (CES) announced that Mercury's 1st Mate Marine openSafety and Security System had been named a state-of-the-art NVH (Noise, Vibration, Harshness) Technical Center at its global headquartersCES 2021 Innovation Awards Best of Innovation Honoree as part of an annual competition honoring outstanding design and engineering in Fond du Lac, Wisconsin.consumer technology products.
Mercury Marine produces its gasoline sterndriveoutboard and outboardsterndrive engines domestically in Fond du Lac, Wisconsin, with outboard engines also produced internationally in China and Japan.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.
ForThe Propulsion segment continues to be dedicated to its sustainability efforts and programs:
•In 2020, for the eighthtenth consecutive year, the Wisconsin Sustainable Business Council (Council) awarded Mercury Marine a “Green Masters”"Green Masters" designation under a program measuringthat measures 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 discussedis highlighted in its 20182019/2020 Sustainability Report, detailing specific goals Mercury Marine has met or exceeded related to energy, environment, products, and people, all of which goals people.
•Mercury Marine has met or exceeded. was named a winner of the 2020 Energy Efficiency Excellence Award by Wisconsin's Focus on Energy program. The award honors Wisconsin businesses, organizations, and communities that make outstanding efforts toward energy efficiency.
In addition to marine engines and propulsion systems, Mercury Marine won Sustainable Productmanufactures, markets, and supplies propulsion-related controls, rigging, and propellers. These products are designed for and sold to original equipment manufacturers (including Brunswick brands) and aftermarket retailers, distributors, and distribution businesses.
Intercompany sales to our Boat segment represented approximately 14 percent of the Year fromPropulsion segment's sales in 2020. Domestic demand for the Wisconsin Sustainable Business Council for its Active Trim technology and was presented a Wisconsin Business FriendPropulsion segment's products is typically seasonal, with sales generally highest in the second quarter of the Environment Award in 2018.calendar year.
Mercury Marine'sParts & Accessories Segment
The P&A segment consists of the Engine Parts and Accessories and the Advanced Systems Group operating segments, which are aggregated and presented as a single reportable segment. P&A manufactures and markets parts and accessories, including engine parts and consumables, electrical products, and boat parts and systems, and supplies parts and accessories through the distribution business. These products are designed for and sold mostly to aftermarket retailers, distributors, and distribution businesses, include:as well as original equipment manufacturers (including Brunswick brands) for both marine and non-marine markets. The P&A segment had 2020 net sales of $1,508.8 million.
Branded Engine Parts and Accessories include consumables, such as engine oils and lubricants, and are sold under the Mercury, Mercury Precision Parts, Quicksilver, and Seachoice brands. Engine Parts and Accessories distribution businesses include Land 'N' Sea, Kellogg Marine Supply, Lankhorst Taselaar, BLA, and Payne's Marine Group, and Del City. Parts and Accessories manufacturing businesses include Attwood, Garelick Mfg. Co.,Whale, Ancor, BEP, Blue Sea Systems, CZone, Lenco Marine, Marinco, Mastervolt, Park Power, Progressive Industries, and ProMariner.Group. These businesses are leading manufacturersdistributors of both third party and distributors ofCompany 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.
On August 9, 2018, Brunswick formed the Advanced Systems Group (ASG) effective January 1, 2020. ASG includes the collection of brands
acquired 100 percent of the Global Marine & Mobile business ofwith Power Products Holdings, LLC (Power Products), includingin 2018 and certain other parts and accessories brands. ASG conducts business under the globalAncor, Attwood, BEP, Blue Sea Systems, CZone, DelCity, Garelick, Lenco Marine, Marinco, Mastervolt, MotorGuide, NAUTIC-On, ParkPower, Progressive Industries, ProMariner, and Whale brand names. ASG products include marine electronics and control systems, instruments, trolling motors, fuel systems, and electrical systems, as well as specialty vehicle, mobile, industrial power, and transportation aftermarket products.
The P&A segment is similarly invested in developing innovative products. In 2020, Attwood launched several new products, including the all new Sahara Mk2 Automatic Bilge Pump Series, which won a 2020 IBEX Innovation Award in the Mechanical Systems Category. Progressive Industries developed a Portable Surge Protector Kit which protects recreational vehicles (RVs) from faulty pedestal wiring and dangerous power surges, and has been named the Aftermarket Product of the Year by the RV Industry Association (RVIA). The P&A businesses of Power Products, for $910 millionare also engaged in cash from San Francisco-based private equity firm Genstar Capital. The acquisition added a broad, complementary product portfolio of 11 new brands to Mercury Marine's partssustainability efforts, including focusing on electrification initiatives and accessories business.reducing packaging.
P&A's manufacturing and distribution facilities are primarily located in North America, Europe, Australia, and New Zealand. Intercompany sales to Brunswick'sour Boat segment represented approximately 112 percent of Mercury Marine'sthe segment's sales in 2018.2020. Domestic demand for the Marine EngineP&A segment's products is typically seasonal, with sales generally highest in the second calendar quarter of the calendar year.
Boat Segment
The Boat segment consists of the Brunswick Boat Group, (Boat Group), which manufactures and marketsdistributes recreational boats, and Business Acceleration, which provides innovative service models, shared access solutions, dealer services, and emerging technology to attract a wide range of customers to the following types of boats: fiberglass sport boats, cruisers, sport fishing and center-console, offshore fishing, aluminum and fiberglass fishing, pontoon, utility, deck, inflatable, and heavy-gauge aluminum.marine industry. We believe that the Boat Group,segment, which had net sales of $1,471.3$1,250.3 million during 2018,2020, is a world leader in the manufacturingmanufacture and sale of pleasure motorboats.
The Boat Groupsegment 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;profitability, including through its Business Acceleration initiatives; and speeds the introduction of new technologies into boat manufacturing and design processes, including through its Business Acceleration initiatives.processes.
The Boat Group includesdesigns, manufactures, and markets the following boat brands:brands and products: Sea Ray sport boats and cruisers; Bayliner sport cruisers runabouts, and Heyday wake boats;runabouts; 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; Heyday tow/wake boats; and Thunder Jet heavy-gauge aluminum boats. The Boat Groupsegment procures mostsubstantially all of its outboard engines, gasoline sterndrive engines, and gasoline inboard engines from Brunswick's Marine EnginePropulsion 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 Propulsion and P&A segments.
The Boat Group operatessegment's manufacturing facilities ininclude Florida, Indiana, Minnesota, Missouri, Tennessee, Washington, Canada, Mexico, New Zealand, and Portugal, and owns an inactive manufacturing facility in North Carolina.Portugal. The Boat Group also utilizesuses two contract manufacturing facilities in Poland.
The Boat Group continues to invest in new product development, innovation, and services, experiences, and products for the next generation of boaters. Sea Ray won a National Marine Manufacturers Association Innovation Award at the 2020 Miami International Boat Show for its groundbreaking SLX-R 400e outboard which debuted at CES earlier in the year. In addition, the Bayliner Trophy 22CC was named a finalist for the prestigious European Powerboat of the Year Award for 2021, and the Quicksilver 805 Pilothouse won the Best of Boats 2020 Award.
The Boat Group is also advancing its sustainability initiatives, with our Fort Wayne Operations achieving Zero Waste to Landfill Status in 2020, with more than 90% of the plant's waste materials being recycled, reused, or otherwise sustainably eliminated. Forbes named Brunswick on its annual list of America's Best-In-State Employers 2020 in Minnesota, where the Boat Group's New York Mills Operation is located, and the Minneapolis Star Tribune named the New York Mills Operation a Top 150 Workplace in 2020 for the second consecutive year. In 2020, we also announced the formation of Ripl, a consumer advisory board dedicated to shaping the future of recreational boating through perspectives of boating and other marine consumers.
The Boat Group sells its products through a global network of nearlymore than 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 2427 percent of Boat Group sales in 2018.2020. Domestic demand for pleasure boats is typically seasonal, with sales generally highest in the second calendar quarter of the calendar year.
Fitness SegmentBusiness Acceleration
Our FitnessThe Business Acceleration Group is dedicated to developing emerging and disruptive business models, focusing on services and subscriptions, engaging the next generation of boaters, and investing in early-stage innovative marine companies. Business Acceleration businesses accounted for 3 percent of Boat segment sales in 2020.
Business Acceleration businesses include Freedom Boat Club (FBC), which we believe is the world's leading boat club network. FBC is made up of more than 250 Company-owned and franchised boat club locations across the U.S., Canada, and Europe. 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 FBC locations. We believe this boat club membership model provides access to the Fitness division (Fitness), which designs, manufactures,boating lifestyle in a way that attracts new entrants, keeps disaffected boaters in the fold, and distributeshelps grow the broader boating community. FBC also provides a broad portfoliochannel for sales of reliable, high-quality cardiovascular fitness equipment (including treadmills, total body cross-trainers, stair climbers,our boats, marine engines, parts and stationary exercise bicycles)accessories, and strength-training equipment undervarious other services we offer. In 2020, Entrepreneur Magazine named FBC among the Life Fitness, Hammer Strength, Cybex, Indoor Cycling150 "Top Growth Franchises," an award for companies that have achieved the greatest positive franchisee unit growth in North America over a three-year period.
The Business Acceleration Group and SCIFIT brands. The Fitness segment also includes an active recreation business, including billiards tables, accessories, and game room furniture.
We believe that our Fitness segment, which had net sales of $1,038.3 million during 2018, is one of the world's largest manufacturers of commercial fitness equipment and a leading manufacturer of high-quality consumer fitness equipment. Fitness' commercial customers include health clubs, hospitality locations, multi-unit housing, corporations, schools and universities, military and governmental agencies, retirement and assisted living facilities, professional and collegiate sports teams, and community centers. Planet Fitness Inc. is the segment's most significant customer. Fitness makes commercial sales through its direct sales force, domestic dealers, and international distributors. Consumer products are available at specialty retailers, select mass merchants, sporting goods stores, through international distributors, and on the Life Fitness website. Further details about the Fitness business can be found in Amendment No. 1 to the Registration Statement on Form 10, File No. 001-38741, filed on February 8, 2019 by Life Fitness Holdings, Inc. However, we are not incorporating the Form 10 by reference into this Annual Report on Form 10-K.
The billiards business was established in 1845 and is Brunswick's heritage business. The billiards business designs and markets billiards tables, table tennis tables, and Air Hockey tables, as well as game room furniture and related accessories, under the Brunswick and Contender brands.
The Fitness segment's principal manufacturing facilities are located in Illinois, Kentucky, Minnesota, Oklahoma, Wisconsin, and Hungary, with principal third party contract manufacturing partners in China, Mexico, Taiwan, and Indonesia. Fitness distributes its products worldwide from regional warehouses and production facilities. Demand for Fitness products is seasonal, with sales generally highest in the fourth quarter of the year.
Discontinued Operations
In December 2017, the Board of Directors authorized the Company to exit its Sea Ray business, including the Meridian brand, as a result of, among other things, a material change in strategic direction and a review of the expected future cash flows, market conditions and business trends. The Company engaged in a thorough sales process and ultimately determined that the offers received did not reflect an appropriate value for the brand. As a result, in June 2018, the Board of Directors authorized the Company to end the sale process for its Sea Ray business. 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. The winding down of Sea Ray Sport Yacht and Yacht operations was largely completed in 2018. The assets and liabilities of the Sea Ray business, which were reported as held for sale in the 2017 Form 10-K, have been reclassified to assets and liabilities in the Consolidated Balance Sheets for all periods presented. Additionally, the results of these businesses are no longer presented as discontinued operations in the Consolidated Statements of Cash Flows, the Consolidated Statements of Operations and the Notes to Consolidated Financial Statements in any period presented.
In the fourth quarter of 2018, the Company made adjustments to certain liabilities that were retained as part of the sale of the retail bowling business in 2014 and the bowling products business in 2015. The Company does not have continuing involvement or cash flows associated with these businesses, which were previously reported as discontinued operations in the Consolidated
Statements of Operations for the years ended December 31, 2016, 2015 and 2014. As a result of these adjustments, the Company recognized $2.2 million of after-tax earnings as discontinued operations in the Consolidated Statements of Operations for the year ended December 31, 2018.
Refer to Note 3 – Discontinued Operations in the Notes to Consolidated Financial Statements for additional information regarding discontinued operations.
Boating Services Network, and Business Acceleration
Boating Services Network is our leadinga dealer finance and operationsancillary service business unit that includesprovides floor planning fromplan finance through Brunswick Acceptance CorporationCompany (USA) and Brunswick Commercial Finance (Canada), retail finance fromthrough Blue Water Finance and Mercury Repower Finance, retail extended product protection fromwarranties under the Passport and Passport Premier private label limited warranties for leading boat and engine manufacturers,brands through Brunswick Product Protection Corporation, retail insurance fromthrough Boater's Choice Insurance, and close to 50 name brand marine dealer service providers fromthrough Brunswick Dealer Advantage.
In 2018, Boating Services Network launched OnBoard Boating Cluband Rentals, a state-of-the-art, turnkey business platform empowering marine dealers and marinas to expand their operations and serve the emerging and rapidly growing boat club and rental consumer market segments. The suite of boats, tools, and services available through OnBoard enables club and rental operators to provide club members and rental customers an exceptional boating experience with a diverse fleet of newer boats, an easy-to-use online reservation system, incentives for members to become boat owners as they become captivated by the boating lifestyle, and many more benefits over time. We also launched NAUTIC-ON, a smart technology and service system that helps boaters stay connected with their boats remotely, monitoring engine status, battery and bilge pump, and providing other advanced features, in 2018.
We provide financial services through Brunswick Product Protection Corporation, which provides marine dealers the opportunity to offer extended product warranties to retail customers, and through Blue Water Dealer Services, Inc., which provides retail financial services to marine dealers. Each companyoffering allows us to offerdeliver 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.
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.
In February 2018, the parties entered into an amended and restated joint venture agreement (JV Agreement) to extend the term of their financial services 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 1716 – Debt in the Notes to Consolidated Financial Statements.The joint venture agreementJV Agreement contains provisions allowing for the renewal of the agreementJV Agreement or the purchase of the other party’sparty's interest in the joint venture at the end of its term. Alternatively, either partner may terminate the agreementJV Agreement at the end of its term.
Refer to Note 1110 – Financing Joint Venture in the Notes to Consolidated Financial Statements for more information about our financial services.services offered through BAC.
Distribution
We utilize independent distributors, dealers, and retailers (Dealers) for the majority of our boat sales and significant portions of oursome sales of marine engine, fitness, and billiards products.engines as well. We have over 16,000 active 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, BLA, and Del City,Lankhorst Taselaar, which comprise theour primary parts and accessoriesP&A distribution platforms for our Marine Engine segment in North America.platforms. We believe that these businesses, collectively, are the leading distributors of marine parts and accessories, throughout North America, with 21a network of distribution warehouses located throughout the United States and Canadamarkets they service, 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 in the Asia-Pacific region.
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 98 – Financing Receivables and Note 1413 – Commitments and Contingencies in the Notes to Consolidated Financial Statements for further discussion of these arrangements.
Technology and Innovation
UponWe believe Brunswick is uniquely positioned to define the completionfuture of the separation of our Fitness business, Brunswick will transition into a company concentrated on leading the global marine industry with a sharpened focusindustry. We are continuously and clear vision, consistently innovating the future of recreational boating.boating through growing service, connectivity, and alternative participation capabilities and businesses. To support thisour goal, we have established a strong foundation of cross functional and cross business investments and initiatives, and hired new leaders with strong technology experience. We continue to develop solutions to further improve customer interactionboater experiences both by advancing the efficiency and capabilities of our core product lines and through our ACES strategy. An example of this strategy is Mercury's Joystick Piloting System with advanced capabilities, including docking assistance. In addition, we continue to invest in electrification technology, personnel, and programs. The Fathom e-Power system, introduced in 2020 on the Sea Ray SLX-R 400e Outboard model, replaces a traditional gas-powered generator with a first-of-its-kind boat electrification feature. The Fathom system includes a high-capacity lithium-ion battery pack with an intuitive power management system to power the boat’s accessory systems for a longer, quieter, and more eco-friendly day on the water. We are driving the implementation of a full portfolio of 'digital first' initiatives that span our products, including NAUTIC-ONbusiness units and OnBoard Boatingproduct categories, and the consistent expansion of Freedom Boat Club and Rentals.demonstrates our commitment to shared access models. We also 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.
For its part, Fitness continues to develop digital solutions focused on providing innovative solutions to meet the needs of fitness facilities and exercisers. In addition, Fitness is collaborating with a number of technology companies to accelerate the development of its technology portfolio to satisfy growing demand for digital fitness and connectivity solutions. For further details about Fitness, see Amendment No. 1 to the Registration Statement on Form 10, File No. 001-38741, filed on February 8, 2019 by Life Fitness Holdings, Inc.
International Operations
Non-U.S. sales are set forth in Note 76 – 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:
| | | | | | | | | | | | | | | | | |
| (in millions) | 2020 | | 2019 | | 2018 |
| Europe | $ | 550.1 | | | $ | 516.7 | | | $ | 494.3 | |
| Canada | 246.3 | | | 279.9 | | | 287.3 | |
| Asia-Pacific | 383.9 | | | 274.9 | | | 262.0 | |
| Rest-of-World | 169.2 | | | 165.8 | | | 159.3 | |
| Total | $ | 1,349.5 | | | $ | 1,237.3 | | | $ | 1,202.9 | |
| Total International Sales as a Percentage of Net Sales | 31 | % | | 30 | % | | 29 | % |
|
| | | | | | | | | | | |
| (in millions) | 2018 | | 2017 | | 2016 |
| Europe | $ | 696.2 |
| | $ | 610.1 |
| | $ | 569.2 |
|
| Asia-Pacific | 437.0 |
| | 407.9 |
| | 363.1 |
|
| Canada | 317.3 |
| | 320.3 |
| | 284.6 |
|
| Rest-of-World | 256.8 |
| | 265.8 |
| | 240.1 |
|
| Total | $ | 1,707.3 |
| | $ | 1,604.1 |
| | $ | 1,457.0 |
|
| Total International Sales as a Percentage of Net Sales | 33 | % | | 33 | % | | 35 | % |
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 segmentPropulsion non-U.S. sales represented approximately 5047percent of our non-U.S. sales in 2018.2020. The segment's principal non-U.S. operations include the following:
•Distribution, sales, service, engineering, or representative offices in Australia, Belgium, Brazil, Canada, China, Dubai, Finland, France, Italy, Japan, New Zealand, the Netherlands, New Zealand, Norway, Russia, Singapore, Sweden, and Switzerland;
Component, parts and accessories manufacturing, and light•Light assembly facilities in Mexico, the Netherlands, New Zealand, and Northern Ireland;Mexico;
•An outboard engine assembly plant in Suzhou, China; and
•An outboard engine assembly plant operated by a joint venture in Japan.
Boat segmentP&A non-U.S. sales comprised approximately 2131 percent of our non-U.S. sales in 2018.2020. P&A's principal non-U.S. operations include manufacturing and distribution facilities in Europe, Australia, New Zealand, and Mexico.
Boat non-U.S. sales comprised approximately 22 percent of our non-U.S. sales in 2020. 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 3848 percent and 9192 percent of the units, respectively, were produced in the region.
Fitness segment non-U.S. sales comprised approximately 29percent of our non-U.S. sales in 2018. Fitness sells its products worldwide and has sales and distribution centers in Brazil, Germany, Hong Kong, Japan, the Netherlands, Spain, and the United Kingdom. The Fitness segment manufactures strength-training equipment and select lines of cardiovascular equipment in Hungary for its international markets, and has relationships with third-party contract manufacturing partners in Taiwan, China, Mexico, and Indonesia.
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.
As our manufacturing operations continued to raise production levels in 2018, our need for raw materials and supplies also increased. During 2018, we experienced some shortagesprices or delayed delivery of certain materials, parts, and supplies essential to our manufacturing operations, although such shortages did not materially impact operations. We have addressed and will continue to address this issue by identifying alternative suppliers, working to secure adequate inventories of critical supplies, and continually monitoring the capabilities of our supplier base. In 2019, we anticipate our suppliers will need to increase their manufacturing capacity and investments to meet the rising demand for their products and, in many cases, may need to hire additional workers in order to fulfill the orders placed by us and other customers.improved efficiencies.
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,Propulsion, 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 P&A, patent rights principally relate to features of trolling motors as well as parts and accessories for marine and recreational vehicles.
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 the Fitness segment, patent rights principally relateaddition to fitness equipment designs and components, including patents covering internal processes, programming functions, displays, design features and styling, as well as billiards table designs and components.
The"Brunswick," the following are our principal trademarks:trademarks and brands:
Propulsion: Axius, Mariner, MerCruiser, Mercury, Mercury Marine, Engine Segment:Mercury Propellers, Mercury Racing, OptiMax, SeaPro, SmartCraft, Sport-Jet, Valiant, Verado, VesselView, and Zeus.
P&A: 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, ParkNAUTIC-ON, ParkPower, Power Products, Progressive Industries, ProMariner,Quicksilver, Seachoice, SeaPro, SmartCraft, Sport-Jet, Swivl-Eze, Talamex, Valiant, Verado, Whale, and Zeus.Whale.
Boat Segment:Boat: Bayliner, Boston Whaler, Crestliner, Cypress Cay, Freedom Boat Club, Harris, Heyday, Legend, Lowe, Lund, Master Dealer, Meridian, Princecraft, Protector, Quicksilver, Rayglass, Sea Ray, Thunder Jet, and Uttern.
Fitness Segment: Air Hockey, Brunswick, Contender, Cybex, Flex Deck, Gold Crown, Hammer Strength, Indoor Cycling Group, Lifecycle, Life Fitness, and SCIFIT.
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:Propulsion: We believe the Marine EnginePropulsion segment is a world leader in the manufacture and sale of recreational and commercial marine engines and marine partsrelated controls, rigging, and accessories.propellers. 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.
P&A: We believe the P&A segment is a world leader in manufacturing, marketing, and distributing parts and accessories, including engine parts and consumables, electrical products, and boat parts and systems. The parts and accessories and distribution market is highly competitive and fragmented. Our competitive advantage in this market includes our product breadth, proprietary parts and technology, global distribution network, extensive portfolio of recognized brands, sales team, delivery timing, and service.
Boat Segment:Boat: 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 basisbases 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 the world, with more than 250 locations, either Company-owned or franchised. This operating model providers boaters a unique and lower cost means to participate in boating.
Fitness Segment:Human Capital Resources
Our business strategy relies on attracting, training, developing, and retaining a skilled workforce. We believeprovide opportunities for continuous learning and development, such as Brunswick University, a program that offers courses in leadership and innovation, effective communication, and strategic thinking. In addition, we arehave instituted rotational leadership programs to attract, develop, and retain management and financial talent. We recognize that we operate in competitive marketplaces when it comes to finding top talent, particularly in technical fields. We strive to offer our employees career-specific tools and resources and support development opportunities through apprenticeships and robust training opportunities.
Employee safety is a top priority. We foster an environment with a strong emphasis on understanding, proactively identifying, and addressing potential safety risks in our business and operations. With respect to the world's largest manufacturercurrent COVID-19 pandemic, we have updated and implemented our pandemic plans and operations to ensure the continuation of commercial fitness equipmentsafe and a leading manufacturerreliable service to customers and to maintain the safety of high-quality consumer fitness equipment and billiards tables. The fitness equipment industry is highly competitive among several major international companies that comprise the majority of the market,our employees, as well as many smaller manufacturers, whichto incorporate any new governmental guidance, rules, and regulations regarding workplace safety.
Our compensation philosophy is to encourage performance that creates sustainable, long-term shareholder value,
motivates achievement of financial and strategic goals, attracts, retains, and motivates talent, and reinforces our pay-for-performance culture. We continuously evolve our benefits programs, for example, by implementing paid parental leave and by instituting a highly fragmented, competitive landscape. Many oflong-standing, robust wellness program to encourage employees to build and maintain healthy lifestyles.
We are dedicated to enhancing diversity and inclusion in our fitness equipment offerings include industry-leading product features, andworkforce, because we place significant emphasis on introducing innovative fitness equipmentbelieve both are key to the market. Competitive focus is also placed on product quality, technology, service, pricing, state-of-the-art biomechanics, connectivity and customer solutions, and effective promotional activities. The billiards industry continues to experience competitive pressure from low-cost billiards manufacturers outside the United States.most
Research and Development
successful business outcomes. We strive to improveembrace a global, ethical, and respectful work culture. In 2020, we established an enterprise-wide Diversity, Equity and Inclusion (DEI) team, designed to influence our competitive positionactions and collectively drive progress to ensure DEI becomes more clearly visible and firmly embedded in allour workplace culture. Also in 2020, we were proud that Forbes named Brunswick to its lists of Best Employers for Veterans and Women and America's Best-in-State Employers for both Wisconsin and Minnesota.
As of December 31, 2020, we employed 14,382 people around the world. Less than 20% of our segments by continuously investing in researchU.S. employees belong to labor unions, and development to drive innovation in our products and manufacturing technologies. Our research and development investments support the introduction of new products and enhancements to existing products. Research and development expenses were 2.9 percent, 3.0 percent and 3.1 percent of net sales in 2018, 2017 and 2016, respectively. Research and development expenses by segment are discussed in Note 7 – Segment Information in the Notes to Consolidated Financial Statements.
Number of Employees
The number of employees worldwide is shown below by segment: |
| | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | Total | | Union (domestic) | | Total | | Union (domestic) |
| Marine Engine | 7,719 |
| | 2,402 |
| | 6,541 |
| | 2,078 |
|
| Boat | 4,996 |
| | — |
| | 5,365 |
| | — |
|
| Fitness | 2,956 |
| | 170 |
| | 2,854 |
| | 166 |
|
Corporate (A) | 367 |
| | — |
| | 356 |
| | — |
|
Total (B) | 16,038 |
| | 2,572 |
| | 15,116 |
| | 2,244 |
|
(A) Corporate numbers include certain information technology employees and shared service employees.
(B) All employee numbers exclude temporary employees.
Wewe believe that the relationships between our employees, applicable laborthe 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, agreed to a new collective bargaining agreement in February 2018 which will remainremains in place throughuntil 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 1413 – 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'sOur 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.
RISKS RELATED TO ECONOMIC AND MARKET CONDITIONS
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,or recession, consumers tend to have less discretionary income and to defer expenditures for discretionarysignificant spending on non-essential items, which may adversely affectsaffect our financial performance, especially inperformance. Although portions of the marine businesses. Although weindustry have expandedexperienced positive trends as a result of the portions ofunique consumer environment resulting from the COVID-19 pandemic, these trends may not continue, and the accompanying economic uncertainty caused by the pandemic may lead to unfavorable business outcomes. We continue to develop our portfolio with new and/or expanded technologies, business models, services, and solutions 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, but a portion of theour business remains cyclical and sensitive to personalconsumer spending levels.on new engines, boats, and associated parts and accessories.
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,recreational, 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,recreational, religious, cultural, or community activities. We cannot predict the timing or continued strength of global economies or the timing of economic recovery, either worldwide or in the specific markets in which we compete.
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, 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.
Adverse credit and capital market conditions could have a negative impact on our financial results.
Adverse global economic conditions, market volatility, and regulatory uncertainty could lead to volatility and disruptions in the capital and credit markets. 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 economic, credit, and capital market conditions could negatively affect our ability to access capital and credit markets or increase the cost to do so, which could adversely impact 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.
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.
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.
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.
RISKS RELATED TO OUR BUSINESS AND OPERATIONS
Actual or potential public health emergencies, epidemics, or pandemics, such as the current coronavirus (COVID-19) pandemic, could have a material adverse effect on our business, results of operations, or financial condition.
The impact of actual or potential public health emergencies, epidemics, or pandemics on the Company, our suppliers, dealers, and customers, and the general economy could be wide-ranging and significant, depending on the nature of the issue, governmental actions taken in response, and the public reaction. The impact of the current COVID-19 pandemic includes illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in economic activity, widespread unemployment, and supply chain interruptions, which collectively have caused significant disruptions to global economies and financial markets.
Despite the COVID-19 pandemic, demand in our products increased in the last two fiscal quarters of 2020 versus the same periods in 2019, but the pandemic could result in future significant volatility in demand, positively or negatively, for one or more of our products. Demand volatility may be caused by, among other things: the temporary inability of consumers to purchase our products due to illness, quarantine, or other travel restrictions; dealership closures due to illness or government restrictions; a reduction in boating activity as a result of governmental actions or self-quarantine measures; shifts in demand away from discretionary products; and reduced options for marketing and promotion of products or other restrictions in connection with COVID-19. If such events occurred over a prolonged period, they could increase our costs and difficulty of operating our business, including accurately planning and forecasting for our operations and inventory levels, which may adversely impact our results.
The COVID-19 pandemic has resulted in, and may continue to result in, disruption, uncertainty, and volatility in the global financial and credit markets. Such volatility could impact our access to capital resources and liquidity in the future, including making credit difficult to obtain or only available on less favorable terms. The COVID-19 pandemic may continue to have an impact on our operations, which could be material. For example, many of our facilities have experienced absenteeism caused by illness or quarantine measures. The continuing impact on our business operations could include, but are not limited to, significant numbers of employees contracting COVID-19; facility closures as a result of state and local "shelter-in-place" orders, safety precautions, employee illness, or self-quarantine measures; reductions in our operating effectiveness as our
employees work from home or as a result of new workplace safety measures; unavailability of key personnel necessary to conduct our business activities; project delays; and supply chain or distribution interruptions and constraints. Additionally, we rely on original equipment manufacturers, dealers, and distributors to market and sell most of our products, and effects on their businesses or financial condition as a result of the COVID-19 pandemic could result in various adverse operational impacts including, but not limited to, lower sales, delayed cash payments, interrupted customer warranty service, and increased credit risk.
Our efforts to manage, mitigate, and remedy these impacts may prove unsuccessful as the ultimate impact of the COVID-19 pandemic depends on factors beyond our knowledge or control, including the duration and severity of the pandemic, public safety actions taken by government authorities, long-term economic recovery, and resulting consumer response.
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 also continue to implement manufacturing efficiency enhancements that are important to our success. Conversely, we may make decisions to reduce our manufacturing footprint in accordance with our business strategy. We must carefully manage these capital improvement projects, expansions, efficiency enhancements, and any 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 negatively impact financial results.
Adverse weather conditions and climate change events 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.
Catastrophic events, including natural and environmental disasters, acts of terrorism, or civil unrest, could have a negative effect on our operations and financial results.
Hurricanes, floods, earthquakes, storms, and catastrophic natural or environmental disasters, as well as acts of terrorism or civil unrest, 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 supplier facilities, business operations, and/or operating systems could be interrupted. We could be uniquely affected by weather-related catastrophic events 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.
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, dependence on foreign personnel and unions, economic and social instability, and public health crises, including the outbreak of pandemic or contagious disease, such as
COVID-19. 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.
The decision of the United Kingdom (UK) to exit from the European Union (EU) (Brexit) could cause disruptions to, and create uncertainty surrounding, our business, which could affect our relationships with existing and potential customers. In addition, new rules in place in January 2021 in response to the December 2020 agreement reached between the EU and UK could lead to legal uncertainty and potentially divergent national laws and regulations, as the UK determines which EU laws to replace or replicate. We cannot predict what consequences Brexit may have on regulations applicable to our business or on our future operations.
In addition, political and economic uncertainty and shifts pose risks of volatility in other 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.
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 or our operating results could suffer.
Our ability to meet demand in a rapidly changing environment may adversely affect our results of operations.
Production and sales levels throughout 2020 fluctuated due in large part to the COVID-19 pandemic. Although we have remained focused on applying and enhancing our COVID-19 health and safety protocols while continuing to ramp-up global production, our businesses may experience difficulty in adapting to the rapidly changing production and sales volumes. We may not be able to recruit or maintain sufficient skilled labor or our suppliers may not be able to deliver sufficient quantities of parts and components for us to match production with rapid changes in forecasted demand. In addition, consumers may pursue other recreational activities if dealer pipeline inventories fall too low and it is not convenient to purchase our products, consumers may purchase from competitors, or our fixed costs may grow in response to increased demand. A failure to adjust dealer pipeline inventory levels to meet demand could adversely impact our results of operations.
Loss of key customers could harm our business.
In each segment, we have important relationships with key customers, including White River Marine Group, LLC and MarineMax, Inc. 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 financial results may be adversely affected by our third party suppliers' increased costs or inability to meet required production levels due to increased demand 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, including tariffs. 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 or improved operating efficiencies. 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:
•an outbreak of disease or facility closures due to the COVID-19 pandemic, or similar public health threat;
•a deterioration of our relationships with suppliers;
•events such as natural disasters, power outages, or labor strikes;
•financial pressures on our suppliers due to a weakening economy or unfavorable conditions in other end markets;
•supplier manufacturing constraints and investment requirements; or
•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 could potentially 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 in 2020. 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.
We have a fixed cost base that can affect our profitability if demand decreases.
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, 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.
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.
RISKS RELATED TO OUR STRATEGIC PLANS
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.markets. 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. OurHowever, our strategic plan and growth initiatives may require significant capital investment and management attention, however, 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.
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. During 2020, we added several new members to our senior leadership team, including our Chief Financial Officer, President of the Boat Group, President of the Advanced Systems Group, Vice President - Enterprise Technologies, and Chief Information Officer. 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, but we cannot ensure that all transitions will be implemented successfully.
Our ability to continue to execute our growth strategy could potentially be adversely affected by the effectiveness of organizational changes. Any disruption or uncertainty resulting from such changes 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. In 2020, nearly all facilities sought to increase production and to hire and retain sufficient skilled hourly labor to meet increased demand for our products. In the future, 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 availability and retention 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, training, and safety programs to attract and retain an experienced and skilled workforce.
An inability to successfully integrate newidentify and complete targeted acquisitions including the Global Marine Business of Power Products, could negatively impact financial results.
On August 9, 2018, Brunswick acquired
Our growth initiatives include making strategic acquisitions, which depend on the Global Marine & Mobile businessavailability of Power Products,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 includeswe 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, realize potential synergies and cost savings, and make accurate accounting estimates, as well as diversion of management attention. Uncertainties exist in assessing the global marine, specialty vehicle, mobile, industrial power,value, risks, profitability, and transportation aftermarket products businesses. Acquisitionsliabilities 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. Our failure to successfully do so could have a material adverse effect on our financial condition and results of operations.
The inability to successfully integrate acquisitions could negatively impact financial results.
Our strategic 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. TheOur recent acquisitions of Power Products acquisitionand Freedom Boat Club, and other acquisitions we may complete in the 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 and liabilities will be incurred;
•diversion of management attention; and
•difficulties retaining employees.
If we fail to timely and successfully integrate new businesses including Power Products, into existing operations, we may see higher production costs, lost sales, or otherwise diminished earnings and financial results.
The anticipated Fitness business separation could be disruptive to the business and our operations, and thereThere can be no assurance that itstrategic divestitures or restructurings will provide business benefits or that it willbenefits.
As part of our strategy, we continuously evaluate our portfolio of businesses to further maximize shareholder value. In recent years, we have divested our Fitness and Bowling businesses and restructured our Sea Ray business to remove Sport Yachts and Yachts from the portfolio. We have previously and may in the future make other changes to our portfolio, and the changes may be consummated within the anticipated time period or at all.
The Fitness business separation, whether ultimately a spin-off or a sale, like any business separation, involvesmaterial. Divestitures involve risks, including difficulties associated within 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, and adverse effects on relationships with business partners. In addition, we will incur significant expense in connection withour dealer or supplier partners or their businesses, the separation,erosion of employee morale or customer confidence, and completionthe retention of contingent liabilities related to the proposed transaction will require significant amounts of management time and effort, which may divert management’s attention from other aspects of our business operations.divested business. If we do not successfully manage thesethe risks associated with divestitures, our business, financial condition, and results of operations could be adversely affected.
The proposed separationaffected as the potential strategic benefits may not achieve the intended results,be realized or results may take longer to realize than expected. Unanticipated developments
RISKS RELATED TO OUR DEALERS, DISTRIBUTORS, AND FRANCHISEES
Our financial results could delay, prevent,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 otherwiseeffectiveness 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 could 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.
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 separation,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:
•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;
•the performance of their overall credit portfolios;
•their willingness to accept the risks associated with lending to marine dealers;
•the overall creditworthiness of those dealers; and
•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 disruptions in general market conditionsour direct financing to dealers, which could require additional capital to fund the associated receivables.
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 developments. The anticipated benefitsobligations 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.
Future declines in marine industry demand could cause an increase in 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 separationproduct declines. The finance companies could require changes in repurchase or recourse terms that would result in an increase in our contractual contingent obligations.
Inventory reductions by major dealers, retailers, and independent boat builders could adversely affect our financial results.
If demand begins to trail forecasted levels or if new product introductions are expected to replace existing products, the Company and our dealers, retailers, and other distributors could decide to reduce the number of units they hold. These actions could 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.
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.
RISKS RELATED TO CYBERSECURITY AND TECHNOLOGY
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. New system implementations across the enterprise also pose risks of outages or disruptions, which could affect our suppliers, commercial operations, and customers. We continue 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 many 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.
Most of our business systems 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 assumptions, some ofcauses such as technical failures, natural disasters, fraud, or internal or third-party security attacks, which may prove incorrect,could negatively impact our ability to manufacture and/or 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 cannot predictrely on third parties that are not directly under our control to do so as well. The General Data Protection Regulation (GDPR) in the prices at whichEuropean 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 these laws, GDPR, CCPA, and future laws 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.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
Our success depends upon the continued strength of our common stock, orbrands.
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 common stockdivestiture of the Fitness stand-alone entity,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.
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 after 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 proposed separation. 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 cannot assure thatmay be required to defend our products against patent or other intellectual property infringement claims or litigation. Besides defense expenses and costs, we willmay not prevail in such cases, forcing us to seek licenses or royalty arrangements from third parties, which we may not be able to complete the business separation within the announced timeline,obtain on reasonable terms, or at all. Delayssubjecting us to an order or failurerequirement to consummate the separationstop manufacturing, using, selling, or distributing products that included challenged intellectual property, which could negatively affectharm our business and financial results.
In addition
RISKS RELATED TO OUR REGULATORY, ACCOUNTING, LEGAL, AND TAX ENVIRONMENT
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, which may occur under a new U.S. presidential administration, could adversely affect our business and trigger retaliatory actions by affected countries. Although we were granted exclusion from Section 301 tariffs for Mercury Marine 40, 50, and 60 horsepower engines through the end of 2019, these risks,exclusions were not renewed for 2020 and the denial of exemption requests have and may continue to negatively affect our business. We continue to be subject to meaningful tariffs, and there is no assurance that we facewill be granted exclusions in the future. Like many other risks specific tomultinational corporations, we do a spin-offsignificant amount of the Fitness business as opposed to a sale, including the risk that a spin-off could result in significant tax liabilitywould be affected by changes to the Company or our shareholders, despite the steps we have taken to avoid this result. Completion of the spin-off is conditioned on our receipt of a written legal opinion to the effect that the distribution of Life Fitness common stock will qualify for non-recognition of gain and loss for U.S. Federal income tax purposes.
The legal opinion will not address any U.S. state or local or foreign tax consequences of the spin-off, and will rely on the continuing effectiveness and validity of the favorable private letter ruling (the “IRS Ruling”) from the U.S. Internal Revenue Service (the “IRS”) regarding such U.S. Federal income tax consequences of the spin-off. The Company has received the IRS Ruling, which relies on certain facts, assumptions, representations, and undertakings from Fitness business and from Brunswick. If any of these facts, assumptions, representations, or undertakings is incorrect or not otherwise satisfied, we may not be able to rely on the IRS Ruling. In addition, the IRS ruling is not a comprehensive ruling from the IRS regarding all aspectstrade policies of the U.S. Federal income tax consequences ofand foreign countries (including governmental action related to tariffs and international trade agreements). Such changes have the transactions. Accordingly, notwithstanding the legal opinion and the IRS Ruling, there can be no assurance that the IRS will not assert, or that a court would not sustain, a contrary position.
Further, the legal opinion will be based on certain representations aspotential to factual matters from the Company and the Fitness business. The opinion cannot be relied on if any of the assumptions, representations, or covenants is incorrect, incomplete, or inaccurate, or is violated in any material respect. If the distribution of Life Fitness common stock were determined not to qualify for non-recognition of gain and loss for U.S. Federal income tax purposes, U.S. holders could be subject to significant tax consequences.
The final determination to proceed with a spin-off or sale is a decision of our Board of Directors, and this determination could have an adverse impact on the Company's financial results. There are many factors that could impact the structure or timing of, the anticipated benefits from, or determination to ultimately proceed with, the separation, including global economic conditions, tax considerations, market conditions, and changes in the regulatory or legal environment, any of which could adversely impact the value of the separation transaction toU.S. economy, our shareholders. Additionally, the completion of the separation will be complex, costly,industry, our suppliers, and time-consuming,global demand for our products and, an inability to realize the full extent of the anticipated benefits, as well as delays encountered in the process,a result, could have ana material adverse effect upon the revenues, costs,on our business, financial condition, and operating results of the Company.operations.
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.
As
this determination, management made several significant assumptions that impact the estimated fair value of the Fitness reporting unit, including projected results, such as improvement of operating performance, particularly expanded gross margins, which are predicated upon the successful execution of cost reduction initiatives along with increased sales, in future years when compared with 2018 and the discount rate. While we believe current gross margin and sales projections are reasonable, the Fitness segment’s ability to expand gross margins or grow sales in line with projections could be negatively affected by its ability to execute the planned actions underlying the forecasted improvement in its performance as well as market conditions. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the impairment test will prove to be an accurate prediction of the future. To the extent future operating results differ from those in our current forecast, or if the assumptions underlying the discount rate change, it is possible that an impairment charge could be recorded.
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, 2018, goodwill was approximately 13 percent2020, the balance of total goodwill and indefinite lived intangible assets and included $391was $584 million, which represents approximately 15 percent of goodwill related to the Fitness segment, $32 million of goodwill related to the Marine Engine segment, and $2 million of goodwill related to the Boat segment.total assets. If the future operating performance of either the Company's reporting unitsCompany 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.
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 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 recently granted exclusion from Section 301 tariffs for Mercury Marine 40, 50, and 60 horsepower engines, these exclusions are only in effect through the end of 2019, 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.
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 will provide business benefits.
As part of our strategy, we continuously evaluate our portfolio of businesses. Recent results of this evaluation include the planned separation 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.
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, fitness equipment in Europe, and smaller outboard engines manufactured 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 and fitness equipment manufacturers, European-based large fiberglass boat manufacturers, and a European-based fitness equipment manufacturer, 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.
Fiscal concerns may negatively impact worldwide 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. Credit market conditions, while improved, are still less favorable overall than those in existence prior to the global recession in 2008. While credit availability is adequate to support demand and interest rates remain relatively low, they have recently increased, and there are fewer lenders, tighter underwriting and loan approval criteria, as well as greater down payment requirements. 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:
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;
the performance of their overall credit portfolios;
their willingness to accept the risks associated with lending to marine dealers;
the overall creditworthiness of those dealers; and
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, particularly in the marine businesses. 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. For example, in 2017, Bass Pro Shops acquired Cabela's, a meaningful channel for the Lowe boat brand, and Cabela's subsequent transition away from Lowe boats required Lowe enhance its sales and distribution network by identifying alternative dealers. However, 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 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 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.
Loss of key customers could harm our business.
In each segment, we have important relationships with key customers 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. For example, in 2018, we were involved in a competitive request for proposal and contract negotiations with Planet Fitness, a significant customer of our Fitness business. The resulting new contract with Planet Fitness is not exclusive to Fitness, and allows Planet Fitness to purchase from Fitness or two of our competitors. 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 October, 2018 we announced that our Chief Executive Officer, Mark Schwabero, would be retiring effective December 31, 2018, and his successor would be David Foulkes, our current CEO. In a separate action, we named a new President of the Fitness division. Our ability to continue to execute our growth strategy could potentially be adversely affected by uncertainty associated with these transitions or other, currently unanticipated, executive 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.
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 may have recourse obligations to the finance company on the dealer’s receivables. 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 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. As a result, 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;
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 2018. 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 marine parts and accessories businesses, as they increase the cost of boat ownership and possibly affect product use.
Our success depends upon the continued strength of our brands.
We believe that our brands, particularly including Mercury Marine, Sea Ray, Boston Whaler, Lund, and Life Fitness, significantly contribute to our success, and that maintaining and enhancing these brands is important to expanding our customer base. A failure to adequately promote and protect our brands could adversely affect our business and results of operations. Further, in connection with the divestiture of the bowling 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.
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.
Successfully managing our manufacturing footprint 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 Boston Whaler in Edgewater, Florida and Mercury Marine in Fond du Lac, Wisconsin. We may also make decisions to reduce our manufacturing footprint in accordance with our business strategy. We must carefully manage these capital improvement projects, expansions, 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.
Our business operations could be negatively impacted by an outage or breach of our information technology systems or a cybersecurity event.
We manage our global business operations through a variety of information technology (IT) 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 separation will require separation of business and IT systems, and new systems 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 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.
Our pension funding requirements and expenses are affected by certain factors outside our control.
Our funding obligations and pension expense for our two U.S. qualified pension plans are largely driven by the performance of assets set aside in trusts for these plans, the discount rate used to value the plans’ liabilities, actuarial data and experience, and legal and regulatory funding requirements. Changes in these factors could have an adverse impact on our results of operations, liquidity, or shareholders’ equity. The level of the Company's funding of our qualified pension plan liabilities was approximately 102 percent as of December 31, 2018. We continue to minimize our risks through pension de-risking actions, including investing in almost entirely fixed income investments and recently initiating the termination of both remaining U.S. qualified pension plans in 2018, which will be completed in 2019. However, our future pension expense and funding requirements could increase due to the effect of adverse changes in the discount rate and asset levels along with a decline in the estimated return on plan assets. Changes to legal regulations could require us to make increased contributions to the pension plans in 2019. In addition, the settlement will require us to recognize a substantial part of our unamortized actuarial losses as well as certain income tax consequences.
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 2018, we repurchased $75 million of shares, and we plan to revisit additional share repurchases in 2019 after the planned Fitness business separation is completed. 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 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 our stock price and performance versus earnings per share targets.
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 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 reviewing, 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. For example, in the last two years we have reported certain Cybex products designed prior to the Cybex acquisition as well as a Life Fitness PowerMill product to the Consumer Product Safety Commission ("CPSC") and those matters remain open. 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, data protection, 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.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. 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.
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.
We are subject to various data protection and privacy laws and regulations in the foreign countries where we operate because we collect, store, process, 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, although we have implemented plans to comply with the law, it 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 data. 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 and could increase negative publicity surrounding any incident that compromises personal data.
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
The US federal Tax Cuts and Jobs Act (TCJA), signed into law on December 22, 2017, has hadcontinues to have an overall positive impact on our financial statements, but certain expiring tax provisions (e.g., research and development and tangible property immediate expensing), administrative, and legislative changes that may result from the impact of the legislation could changerecent U.S. general elections as we analyze and apply additionalwell as new or amended government regulations or guidance issued by the government.could have a negative impact. In addition, other changes in international and domestic tax laws, including developments at the reaction by states to the corporate tax changes in the TCJA,Organization for Economic Co-operation and Development that may change global taxing norms, and changes in tax law enforcement, could negatively impact our tax provision, cash flow,flows, and/or tax related balance sheet amounts, including our deferred tax asset values. Changes in U.S. and international tax law will likelylaws may have broader implications, including impacts toon the economy, currency markets, inflation, environment,
consumer behavior, and/orand competitive dynamics, which are difficult to predict, and may positively or negatively impact the Company and our results.
RISKS RELATED TO OUR COMMON STOCK
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 2020, we repurchased $118 million of shares, and we plan to continue share repurchases in 2021 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.
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.
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, as well as economic and social instability. 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, such as the ongoing negotiations to determine the future terms of the U.K.’s relationship with the EU (Brexit), 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.
Adverse weather conditions and climate events can have a negative effect on marine revenues.
Changes in seasonal weather conditions can have a significant effect on our operating and financial results, especially in the marine businesses. 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. Additionally, climate changes, regardless of the cause, resulting in environmental changes including, but not limited to, severe weather, changing sea levels, poor water conditions, or reduced access to water, could disrupt or negatively affect our business.
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.
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 mostmany of our principal plants.
The principal facilities used in our operations are in the following locations:
Marine EnginePropulsion Segment
Leased facilities include: Fresno, California; Old Lyme, Connecticut; Largo, Miramar, Florida; Rio de Janeiro, Brazil; Toronto and Pompano Beach, Florida; Lowell, Michigan; St. Paul Park, Minnesota; Brisbane and Melbourne, Australia; Toronto,Milton, Ontario, Canada; Auckland, New Zealand; Bangor, Northern Ireland; AmsterdamDubai, UAE; Suzhou, China; Dandenong, Australia; 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,Petit-Rechain, Belgium; Victoria and Burnaby, British Columbia, Canada; Milton and Oakville, Ontario, Canada; Suzhou, China; and Juarez, Mexico.
P&A Segment
Leased facilities include: Fresno, California; Old Lyme, Connecticut; Lake Suzy and Pompano Beach, Florida; Suwanee, Georgia; Lowell, Michigan; St. Paul Park, Minnesota; Reno, Nevada; Bellingham, Washington; Menomonee Falls, Wisconsin; Langley and Victoria, British Columbia, Canada; Milton, Ontario, Canada; Amsterdam and Heerenveen, Netherlands; Auckland, New Zealand; Murrarie, Australia; Juarez, Mexico; and Bangor, Northern Ireland.
Owned facilities include: Stuart, Florida and Fond Du Lac, Wisconsin.
Boat Segment
Leased facilities include: Greeneville, TennesseeVenice, Florida; Knoxville, Tennessee; Amsterdam, Netherlands; and Auckland, New Zealand.
Owned facilities include: Edgewater, Palm Coast, and Merritt Island, (Sykes Creek), Florida; Fort Wayne, Indiana; New York Mills, Minnesota; Lebanon, Missouri; Vonore, Tennessee; Clarkston, Washington; Petit Rechain,Petit-Rechain, Belgium; Princeville, Quebec, Canada; Reynosa, Mexico; and Vila Nova de Cerveira, Portugal.
Fitness Segment
Leased facilities include: Rosemont, Illinois; a portion of the Franklin Park, Illinois facility; Tulsa, Oklahoma; Nuremberg, Germany.
Owned facilities include: a portion of the Franklin Park, Illinois facility; Falmouth, Kentucky; Owatonna and Ramsey, Minnesota; Bristol and Delavan, Wisconsin; and Kiskoros, Hungary.
Item 3. Legal Proceedings
Refer to Note 1413 – 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 of the Registrant
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 | | 59 |
| Ryan M. Gwillim | | Senior Vice President and Chief Financial Officer | | 2020 | | 41 |
| Aine L. Denari | | Vice President and President - Brunswick Boat Group | | 2020 | | 48 |
| Christopher F. Dekker | | Vice President, General Counsel and Secretary | | 2014 | | 52 |
| Brett A. Dibkey | | Vice President and President - Advanced Systems Group | | 2020 | | 48 |
| Christopher D. Drees | | Vice President and President - Mercury Marine | | 2019 | | 52 |
| Brenna D. Preisser | | President - Business Acceleration & Chief People & Strategy Officer | | 2016 | | 43 |
| Randall S. Altman | | Vice President and Controller | | 2019 | | 49 |
|
| | | | |
Officer | | Present Position | | Age |
| 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.
David M. Foulkes | | Chief Executive Officer | | 57 |
William L. Metzger | | Senior Vice President and Chief Financial Officer | | 57 |
Huw S. Bower | | Vice President and President - Brunswick Boat Group | | 44 |
Christopher F. Dekker | | Vice President, General Counsel and Secretary | | 50 |
John C. Pfeifer | | Senior Vice President and President - Mercury Marine | | 53 |
Brenna Preisser | | Vice President and Chief Human Resources Officer and President, Business Acceleration | | 41 |
Daniel J. Tanner | | Vice President and Controller | | 61 |
David M. Foulkes was named Chief Executive Officer of Brunswick in January 2019. He served as Chief Technology Officer and President, Brunswick Marine Consumer Solutions from May 2018 to 2019, as Vice President and Brunswick Chief Technology Officer from 2014 to 2018, as Vice President of Product Development and Engineering, Mercury Marine, from 2010 to 2018 and as President of Mercury Racing from 2012 to 2018. Previously, Mr. Foulkes was Vice President for Research & Developmentheld positions of increasing responsibility at Mercury Marine from the start of his employment in 2007.
William L. MetzgerRyan M. Gwillim was named Senior Vice President and Chief Financial Officer of Brunswick in March 2013.June 2020. Previously, he served as Vice President – Finance and Treasurer of Brunswick from 2001June 2019 to 2013June 2020, and in a number ofVice President – Investor Relations from 2017 to 2019. Mr. Gwillim served as Associate General Counsel - International from 2015 to 2017 and held positions of increasing responsibility within the Legal Department since his Brunswick employment with Brunswick began in 1987.2011.
Huw S. BowerAine L. Denari was named Vice President and President - Brunswick Boat Group in April 2016. Previously, heOctober 2020. Prior to joining Brunswick, Ms. Denari worked at ZF AG as Senior Vice President and General Manager, Global Electronics ADAS (Advanced Driver Assistance Systems) from December 2017 to October 2020, as Senior Vice President, Planning and Business Development from 2015 to 2017, and as Vice President, Business Development and Product Planning from 2014 to 2017. Ms. Denari previously served as President - Boston Whaler Group from 2013 to 2016, as President - Lowe Boats from 2010 to 2013,in a variety of executive positions within the automotive industry, and in leadership positions of increasing responsibility since he started with Brunswick in 2006.at major global consulting firms.
Christopher F. Dekker was named Vice President, General Counsel and Secretary of Brunswick in October 2014. Prior to his appointment, Mr. Dekker served as Brunswick's Associate General Counsel, with responsibilities for litigation, employment, and compliance matters, from 2010 to 2014.the start of his employment with Brunswick in 2010.
John C. PfeiferBrett A. Dibkey was named SeniorVice President and President – Advanced Systems Group in January 2020. Mr. Dibkey joined Brunswick following 12 years at Whirlpool Corporation, a multinational manufacturer and marketer of home appliances, where he served as Vice President and General Manager, Business Units, Brand Marketing, eCommerce, and IoT from January 2017 to December 2019, Vice President and General Manager, Integrated Business Units from 2012 to 2020, and General Manager, Dishwasher Category and New Business Development from 2007 to 2012. Prior to his career at Whirlpool, Mr. Dibkey worked in a variety of business development and strategic planning roles for Pfizer and Crowe Horwath, LLP.
Christopher D. Drees was named Vice President and President - Mercury Marine in OctoberApril 2019. He served as President of Marine Parts and Accessories from 2018 to 2019, and as Vice President - Mercury Global Operations from 2014 to 2018. Prior to 2014, Mr. Drees served in a variety of positions of increasing responsibility at Mercury Marine since his appointment, hehire in 1998.
Brenna D. Preisser was Vice President andnamed President - Mercury Marine from 2014 to 2018 and Vice President - Global Operations for Mercury Marine from 2012 to 2014. He had previously been President of Brunswick Marine in EMEA (Europe, Middle East and Africa) from 2008 to 2014 after joining Brunswick in 2006 as President of the Brunswick Asia Pacific Group.
Brenna Preisser was named Vice PresidentBusiness Acceleration and Chief Human ResourcesPeople and Strategy Officer and President, Business Acceleration in December 2018. Prior to this appointment,2020. Previously Ms. Preisser served as Vice President and Chief Human Resources Officer of Brunswickand President - Business Acceleration from 20162018 to 2018. Ms. Preisser previously served as Senior Director – Human Resources for Brunswick from 2015 to 20162020 and as Vice President –and Chief Human Resources for Life Fitness from 2013 to 2015.Officer of Brunswick since 2016. Ms. Preisser heldhas served in a numbervariety of positionsroles of increasing responsibility since she began her employmentstarted with Brunswick in 2004.
Randall S. Altman was named Vice President and Controller of Brunswick in February 2016.June 2019. Previously, he served as Assistant Vice President - Finance– Treasurer from 20152013 to 2016, as Group Financial Officer for Life Fitness from 2003 to 2015, and as Director – Financial Planning and Analysis for2019. Mr. Altman has held a series of roles of increasing responsibility within Brunswick from 2001 tosince he joined Brunswick in 2003.
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 15, 2019,11, 2021, there were 7,7897,186shareholders of record of the Company's common stock.
In the first, second, third and fourth quarters of 2018, Brunswick paid quarterly dividends on its common stock of $0.19, $0.19, $0.19 and $0.21 per share, respectively. In the first, second, third and fourth quarters of 2017, Brunswick paid quarterly dividends on its common stock of $0.165, $0.165, $0.165 and $0.19 per share, respectively. 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
| | | | | | | | | | | | | | | | | | | | |
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
| Brunswick | 100.00 | | 109.24 | | 111.99 | | 95.65 | | 125.52 | | 161.87 | |
| S&P 500 GICS Consumer Discretionary Index | 100.00 | | 105.96 | | 130.16 | | 131.41 | | 167.97 | | 223.34 | |
| S&P 500 Index | 100.00 | | 111.82 | | 136.06 | | 130.32 | | 171.01 | | 201.94 | |
|
| | | | | | | | | | | | |
| | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 |
| Brunswick | 100.00 |
| 112.32 |
| 111.82 |
| 122.15 |
| 125.22 |
| 106.95 |
|
| S&P 500 GICS Consumer Discretionary Index | 100.00 |
| 113.56 |
| 115.16 |
| 128.78 |
| 156.69 |
| 150.08 |
|
| S&P 500 Index | 100.00 |
| 109.61 |
| 120.70 |
| 127.90 |
| 157.11 |
| 158.62 |
|
The basis of comparison is a $100 investment at December 31, 20132015 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 20142016 and 2016.2019. In 2018,2020, the Company repurchased $75.0$118.3 million of stock under these authorizations and as of December 31, 2018,2020, the remaining authorization was $34.8$116.5 million.
The Company did not repurchase any shares
During the three months ended December 31, 2018.2020, 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 27 to October 24 | | — | | | NA | | — | | | |
| October 25 to November 21 | | 416,379 | | | 65.59 | | | 416,379 | | | |
| November 22 to December 31 | | 158,714 | | | 74.98 | | | 158,714 | | | |
| Total | | 575,093 | | | $ | 68.18 | | | 575,093 | | | $ | 116,517,858 | |
Item 6. Selected Financial Data
The selected historical financial data presented below as of and for the years ended December 31, 2018, 20172020, 2019 and 20162018 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, 20152017 and 20142016 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) | 2020 (A) | | 2019 (A) | | 2018 | | 2017 | | 2016 |
| Results of operations data | | | | | | | | | |
| Net sales | $ | 4,347.5 | | | $ | 4,108.4 | | | $ | 4,120.9 | | | $ | 3,802.2 | | | $ | 3,508.1 | |
| Restructuring, exit, integration, and impairment charges | 4.1 | | | 18.8 | | | 54.8 | | | 48.6 | | | 2.9 | |
| Operating earnings | 539.3 | | | 471.0 | | | 355.5 | | | 330.3 | | | 356.3 | |
| Pension settlement (benefit) charge | (1.1) | | | 292.8 | | | — | | | 96.6 | | | 55.1 | |
| Earnings before interest and income taxes | 538.8 | | | 183.4 | | | 358.9 | | | 236.7 | | | 292.7 | |
| Earnings before income taxes | 472.7 | | | 110.7 | | | 310.7 | | | 212.9 | | | 267.0 | |
| Net earnings from continuing operations | 374.7 | | | 30.4 | | | 253.4 | | | 101.3 | | | 188.4 | |
| | | | | | | | | |
| Net (loss) earnings from discontinued operations, net of tax | (2.0) | | | (161.4) | | | 11.9 | | | 45.1 | | | 87.6 | |
| Net earnings (loss) | $ | 372.7 | | | $ | (131.0) | | | $ | 265.3 | | | $ | 146.4 | | | $ | 276.0 | |
| | | | | | | | | |
| Basic earnings (loss) per common share | | | | | | | | | |
| Earnings from continuing operations | $ | 4.73 | | | $ | 0.36 | | | $ | 2.89 | | | $ | 1.13 | | | $ | 2.07 | |
| Net (loss) earnings from discontinued operations, net of tax | (0.03) | | | (1.90) | | | 0.14 | | | 0.51 | | | 0.96 | |
| Net earnings (loss) | $ | 4.70 | | | $ | (1.54) | | | $ | 3.03 | | | $ | 1.64 | | | $ | 3.03 | |
| | | | | | | | | |
| Average shares used for computation of basic earnings per share | 79.2 | | | 85.2 | | | 87.6 | | | 89.4 | | | 91.2 | |
| | | | | | | | | |
| Diluted earnings (loss) per common share | | | | | | | | | |
| Earnings from continuing operations | $ | 4.70 | | | $ | 0.36 | | | $ | 2.87 | | | $ | 1.12 | | | $ | 2.05 | |
| Net (loss) earnings from discontinued operations, net of tax | (0.02) | | | (1.89) | | | 0.14 | | | 0.50 | | | 0.95 | |
| Net earnings (loss) | $ | 4.68 | | | $ | (1.53) | | | $ | 3.01 | | | $ | 1.62 | | | $ | 3.00 | |
| | | | | | | | | |
| Average shares used for computation of diluted earnings per share | 79.7 | | | 85.6 | | | 88.2 | | | 90.1 | | | 92.0 | |
(A)Refer toNote 22 – Quarterly Data (unaudited), for further details on certain non-recurring items which impacted 2020 and 2019 results.
|
| | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | 2018 (A) (B) | | 2017 (A) | | 2016 | | 2015 | | 2014 (C) |
| Results of operations data | | | | | | | | | |
| Net sales | $ | 5,159.2 |
| | $ | 4,835.9 |
| | $ | 4,488.5 |
| | $ | 4,105.7 |
| | $ | 3,838.7 |
|
| Restructuring, exit, integration and impairment charges | 80.9 |
| | 81.3 |
| | 15.6 |
| | 12.4 |
| | 4.2 |
|
| Operating earnings | 367.0 |
| | 398.3 |
| | 479.5 |
| | 414.0 |
| | 356.4 |
|
| Pension settlement charge | — |
| | 96.6 |
| | 55.1 |
| | 82.3 |
| | 27.9 |
|
| Earnings before interest and income taxes | 370.4 |
| | 305.0 |
| | 415.4 |
| | 340.8 |
| | 316.6 |
|
| Earnings before income taxes | 322.2 |
| | 281.2 |
| | 389.7 |
| | 315.2 |
| | 287.9 |
|
| Net earnings from continuing operations | 263.1 |
| | 146.4 |
| | 274.4 |
| | 227.4 |
| | 194.9 |
|
| | | | | | | | | | |
| Net earnings from discontinued operations, net of tax | 2.2 |
| | — |
| | 1.6 |
| | 14.0 |
| | 50.8 |
|
| | | | | | | | | | |
Net earnings | $ | 265.3 |
| | $ | 146.4 |
| | $ | 276.0 |
| | $ | 241.4 |
| | $ | 245.7 |
|
| | | | | | | | | | |
| Basic earnings per common share | | | | | | | | | |
| Earnings from continuing operations | $ | 3.00 |
| | $ | 1.64 |
| | $ | 3.01 |
| | $ | 2.45 |
| | $ | 2.08 |
|
| Net earnings from discontinued operations, net of tax | 0.03 |
| | — |
| | 0.02 |
| | 0.15 |
| | 0.55 |
|
| Net earnings | $ | 3.03 |
| | $ | 1.64 |
| | $ | 3.03 |
| | $ | 2.60 |
| | $ | 2.63 |
|
| | | | | | | | | | |
| Average shares used for computation of basic earnings per share | 87.6 |
| | 89.4 |
| | 91.2 |
| | 93.0 |
| | 93.6 |
|
| | | | | | | | | | |
| Diluted earnings per common share | | | | | | | | | |
| Earnings from continuing operations | $ | 2.98 |
| | $ | 1.62 |
| | $ | 2.98 |
| | $ | 2.41 |
| | $ | 2.05 |
|
| Net earnings from discontinued operations, net of tax | 0.03 |
| | — |
| | 0.02 |
| | 0.15 |
| | 0.53 |
|
| Net earnings | $ | 3.01 |
| | $ | 1.62 |
| | $ | 3.00 |
| | $ | 2.56 |
| | $ | 2.58 |
|
| | | | | | | | | | |
| Average shares used for computation of diluted earnings per share | 88.2 |
| | 90.1 |
| | 92.0 |
| | 94.3 |
| | 95.1 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions, except per share and other data) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Balance sheet data | | | | | | | | | |
| Total assets | $ | 3,770.6 | | | $ | 3,564.4 | | | $ | 4,291.5 | | | $ | 3,371.1 | | | $ | 3,311.3 | |
| Debt | | | | | | | | | |
| Short-term | $ | 43.1 | | | $ | 41.3 | | | $ | 41.3 | | | $ | 5.6 | | | $ | 5.9 | |
| Long-term | 908.3 | | | 1,068.0 | | | 1,179.5 | | | 431.8 | | | 436.5 | |
| Total debt | 951.4 | | | 1,109.3 | | | 1,220.8 | | | 437.4 | | | 442.4 | |
| Common shareholders' equity | 1,510.0 | | | 1,300.9 | | | 1,582.6 | | | 1,482.9 | | | 1,440.1 | |
Total capitalization | $ | 2,461.4 | | | $ | 2,410.2 | | | $ | 2,803.4 | | | $ | 1,920.3 | | | $ | 1,882.5 | |
| | | | | | | | | |
| Cash flow data | | | | | | | | | |
| Net cash provided by operating activities of continuing operations | $ | 800.0 | | | $ | 475.3�� | | | $ | 274.5 | | | $ | 308.2 | | | $ | 309.6 | |
| Depreciation and amortization | 153.4 | | | 138.7 | | | 124.0 | | | 87.1 | | | 83.8 | |
| Capital expenditures | 182.4 | | | 232.6 | | | 180.2 | | | 178.0 | | | 157.9 | |
| | | | | | | | | |
| Investments | (4.0) | | | 2.4 | | | (8.8) | | | (3.2) | | | 5.1 | |
| | | | | | | | | |
| Cash dividends paid | 78.3 | | | 73.4 | | | 67.8 | | | 60.6 | | | 55.4 | |
| | | | | | | | | |
| Other data | | | | | | | | | |
| Dividends declared per share | $ | 0.990 | | | $ | 0.870 | | | $ | 0.780 | | | $ | 0.685 | | | $ | 0.615 | |
| Book value per share | 19.38 | | | 16.34 | | | 18.23 | | | 16.95 | | | 16.13 | |
| Return on beginning shareholders' equity | 28.6 | % | | (8.3) | % | | 17.9 | % | | 10.2 | % | | 21.5 | % |
| Effective tax rate from continuing operations | 20.7 | % | | 72.5 | % | | 18.4 | % | | 52.4 | % | | 29.4 | % |
| Debt-to-capitalization rate | 38.7 | % | | 46.0 | % | | 43.5 | % | | 22.8 | % | | 23.5 | % |
| Number of employees | 14,382 | | | 12,828 | | | 13,084 | | | 12,262 | | | 11,522 | |
| Number of shareholders of record | 7,232 | | | 7,484 | | | 7,823 | | | 8,247 | | | 8,683 | |
| Common stock price (NYSE) | | | | | | | | | |
| High | $ | 84.00 | | | $ | 62.23 | | | $ | 69.82 | | | $ | 63.82 | | | $ | 56.30 | |
| Low | 25.22 | | | 41.02 | | | 41.92 | | | 48.04 | | | 36.05 | |
| Close (last trading day) | 76.24 | | | 59.98 | | | 46.45 | | | 55.22 | | | 54.54 | |
| |
(A) | Refer toNote 23 – Quarterly Data (unaudited), for further details on certain unusual items which impacted 2018 and 2017 results.
|
| |
(B) | 2018 Earnings before income taxes includes transaction financing charges of $5.1 million. |
| |
(C) | 2014 Earnings before interest and income taxes includes a $20.2 million impairment charge related to an equity investment. |
|
| | | | | | | | | | | | | | | | | | | |
| (in millions, except per share and other data) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Balance sheet data | | | | | | | | | |
| Total assets of continuing operations | $ | 4,285.7 |
| | $ | 3,358.2 |
| | $ | 3,284.7 |
| | $ | 3,152.5 |
| | $ | 3,087.9 |
|
| Debt | | | | | | | | | |
| Short-term | $ | 41.3 |
| | $ | 5.6 |
| | $ | 5.9 |
| | $ | 6.0 |
| | $ | 5.5 |
|
| Long-term | 1,179.5 |
| | 431.8 |
| | 436.5 |
| | 442.5 |
| | 446.3 |
|
| Total debt | 1,220.8 |
| | 437.4 |
| | 442.4 |
| | 448.5 |
| | 451.8 |
|
| Common shareholders' equity | 1,582.6 |
| | 1,482.9 |
| | 1,440.1 |
| | 1,281.3 |
| | 1,171.5 |
|
Total capitalization | $ | 2,803.4 |
| | $ | 1,920.3 |
| | $ | 1,882.5 |
| | $ | 1,729.8 |
| | $ | 1,623.3 |
|
| | | | | | | | | | |
| Cash flow data | | | | | | | | | |
| Net cash provided by operating activities of continuing operations | $ | 337.0 |
| | $ | 401.6 |
| | $ | 439.1 |
| | $ | 345.3 |
| | $ | 255.3 |
|
| Depreciation and amortization | 149.6 |
| | 110.8 |
| | 103.9 |
| | 88.9 |
| | 81.2 |
|
| Capital expenditures | 193.4 |
| | 203.2 |
| | 193.9 |
| | 132.5 |
| | 124.8 |
|
| Investments | (10.8 | ) | | (3.2 | ) | | 5.1 |
| | 0.9 |
| | 0.2 |
|
| Cash dividends paid | 67.8 |
| | 60.6 |
| | 55.4 |
| | 48.3 |
| | 41.7 |
|
| | | | | | | | | | |
| Other data | | | | | | | | | |
| Dividends declared per share | $ | 0.78 |
| | $ | 0.685 |
| | $ | 0.615 |
| | $ | 0.525 |
| | $ | 0.45 |
|
| Book value per share | 18.23 |
| | 16.95 |
| | 15.77 |
| | 14.11 |
| | 12.64 |
|
| Return on beginning shareholders' equity | 17.9 | % | | 10.2 | % | | 21.5 | % | | 20.6 | % | | 23.7 | % |
| Effective tax rate from continuing operations | 18.3 | % | | 47.9 | % | | 29.6 | % | | 27.9 | % | | 32.3 | % |
| Debt-to-capitalization rate | 43.5 | % | | 22.8 | % | | 23.5 | % | | 25.9 | % | | 27.8 | % |
| Number of employees | 16,038 |
| | 15,116 |
| | 14,415 |
| | 12,745 |
| | 12,165 |
|
| Number of shareholders of record | 7,823 |
| | 8,247 |
| | 8,683 |
| | 9,009 |
| | 9,488 |
|
| Common stock price (NYSE) | | | | | | | | | |
| High | $ | 69.82 |
| | $ | 63.82 |
| | $ | 56.30 |
| | $ | 56.63 |
| | $ | 51.94 |
|
| Low | 41.92 |
| | 48.04 |
| | 36.05 |
| | 46.08 |
| | 38.95 |
|
| Close (last trading day) | 46.45 |
| | 55.22 |
| | 54.54 |
| | 50.51 |
| | 51.26 |
|
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 of Financial Condition and Results of Operations of Brunswick Corporation are forward-looking statements. 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. Actual results may differ materially from expectations and projections as of the date of this filing due to various risks and uncertainties. For additional information regarding forward-looking statements, refer to Forward-Looking Statements above.
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 excluding restructuring, exit, integration and impairment charges, Sport Yacht and Yacht operations, purchase accounting amortization, costs related to the planned Fitness business separation, acquisition-related costs and certain non-recurring charges in the Fitness segment; gross margin excluding Sport Yacht and Yacht operations, purchase accounting amortization and certain non-recurring charges in the Fitness segment; 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. For example, the discussion of our cash flows includes an analysis of free cash flows and total liquidity; the discussion of our net sales include a discussion of net sales on a constant currency basis; the discussion of our earnings includes a presentation of operating earnings and operating margin excluding restructuring, exit and impairment charges, purchase accounting amortization, acquisition-related costs and other applicable charges; and diluted earnings per common share, as adjusted. Non-GAAP financial measures do not include operating and statistical measures.
The Company includesWe include 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’sour performance using the same tools that management uses and to better evaluate the Company’sour ongoing business performance. In order to better align Brunswick'sour 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 measures exclude the impact of purchase accounting amortization related to the Power Products acquisition.and Freedom Boat Club acquisitions.
Certain statements in 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, costs related to the planned Fitness business separation, acquisition-related costs, and certain other unusual adjustments.
Overview and Outlook
Impact of COVID-19
In March 2020, the World Health Organization announced that infections of the novel coronavirus (COVID-19) had become a world-wide pandemic. National, state and local authorities have enforced social distancing and imposed quarantine and isolation measures on large portions of the population, including mandatory business closures. These measures have had and continue to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration.
On March 23, 2020, we temporarily suspended manufacturing operations at most engine and boat production facilities to ensure the health and safety of affected employees and to balance inventory levels with anticipated reductions in near-term demand. On April 13, 2020, we resumed partial operations and limited production activities in certain manufacturing facilities and, in the ensuing weeks, continued to open additional manufacturing facilities.
Our distribution business operated throughout the pandemic and the dealer network continued to sell products, enabling boaters to get out on the water. Approximately half of the dealer network was closed in some capacity in April, but the network was fully operational by mid-May. The pandemic also affected Freedom Boat Club, as many of its locations were closed in April due to local stay-at-home restrictions, particularly in Florida. However, once doors reopened, several locations had their busiest weekends in history with strong membership increases across the network.
Production ramp-up activities became a primary focus in the second half of the year, as we experienced an unprecedented surge in retail demand as a consequence of the need for social distancing friendly recreation. This surging retail demand environment resulted in our lowest pipeline inventory levels in over twenty years, at 19 weeks on hand as of the end of the year.
As of February 12, 2021, all global manufacturing and distribution facilities are online with a continued focus on rigorously applying, evolving and automating COVID-19 mitigation procedures, while continuing to ramp-up global production
to meet unprecedented market demand. We will continue to actively monitor the impact of COVID-19 and may take further actions that alter business operations as may be required by government authorities, or that are determined to be in the best interest of our employees, customers, dealers, suppliers and stakeholders. The full extent of the impact of COVID-19 on our business, operations and financial results will depend on evolving factors that we cannot accurately predict. Refer to Part I. Item 1A. Risk Factors for further information.
Change in Reportable Segments
Effective January 1, 2020, we changed our management reporting and updated our reportable segments to Propulsion, Parts and Accessories and Boat (inclusive of Business Acceleration) to align with our strategy. Refer to Note 6 – Segment Information in the Notes to Consolidated Financial Statements for further information.
CARES Act
On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The tax provisions include changes to the net operating loss rules, a temporary increase to the limitation on deductible business interest expense, and accelerated depreciation on qualified improvement property. In addition, the CARES Act has provisions designed to encourage eligible employers to keep employees on payroll, despite experiencing economic hardship related to COVID-19, with an employee retention tax credit (Employee Retention Credit). At this time, we do not expect the CARES Act to have a material impact on our results of operations.
Under the CARES Act, we deferred approximately $4 million of U.S. income tax payments from the first and second quarters to the third quarter of 2020 and approximately $2.7 million of non-U.S. tax payments from the first, second and third quarters of 2020 to the fourth quarter of 2020 and the first quarter of 2021. In addition, we deferred the payment of $22 million of payroll taxes normally due between March 27, 2020 and December 31, 2020. These payroll taxes are payable in two equal installments, due in the fourth quarters of 2021 and 2022, and will be paid no later than their prescribed due dates.
The Employee Retention Credit is a payroll tax credit against certain employment taxes equal to 50 percent of the qualified wages and healthcare costs an eligible employer incurs after March 12, 2020, and before January 1, 2021. We calculated an employee retention credit of $6.5 million across all segments which was recognized in full during 2020. These costs were recognized in Cost of sales and Selling, general and administrative expense.
Discontinued Operations
On June 27, 2019, we completed the sale of our Fitness business. This business, which was previously reported within our Fitness segment, is being reported as discontinued operations for all periods presented.
Our 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 itsof our Sea Ray business, including the Meridian brand, and as a result, we 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 2017Annual Report on Form 10-K.10-K for the fiscal year ended December 31, 2017. In June 2018, the Board of Directors authorized the Company to end of the sale process for itsour Sea Ray business and onceas a result, we again reportreported the results of the business within continuing operations beginning in the second quarter of 2018. As part of this action, we decided to restructure the businesses, including discontinuing Sea Ray Sport Yacht & Yachts models and winding down yacht production, while reinventing Sea Ray Sport Boat and Sport Cruiser operations. Refer to the Form 8-K datedfiled with the Securities and Exchange Commission (SEC) on July 19, 2018 and Note 3 – Discontinued Operations in the Notes to Consolidated Financial Statements for further information.
We largely completed the wind down of our Sea Ray Sport Yacht & Yachts operations during 2018. Non-GAAP figures exclude the results of Sport Yacht & Yachts operations in 2018, and certain amounts in 2019 related to changes in estimated liabilities.
Acquisition of Power Products
On August 9, 2018, the Companywe completed itsour 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. The net sales and operating earnings of Power Products included within Brunswick's financial statements since the date of acquisition were $82.8 million and $1.9 million, respectively, for the year ended December 31, 2018. Operating earnings included $21.2 million of purchase accounting amortization. For further discussion regarding the acquisition, refer to Note 5 –Acquisitions in the Notes to Consolidated Financial Statements for further details.Statements.
Discontinued Operations
In the fourth quarter of 2018, the Company made adjustments to certain liabilities that were retained as part of the sale of the retail bowling business in 2014 and the bowling products business in 2015. Refer to Note 3 – Discontinued Operations in the Notes to Consolidated Financial Statements for further information.
Overview
The Company's 2018Our 2020 results represent the ninthour eleventh consecutive year of growth, resulting from strong operating performance from ourin a healthy marine businesses. The Company lookedmarket. We sought to achieve the following financial objectives in 2018:2020:
•Deliver revenue growth.
•Increase earnings before income taxes, as well as deliver improvements in operating margin percentage, excluding non-recurring charges.
•Continue to generate strong free cash flow and execute our capital strategy.
Achievements against our financial objectives in 2020 were as follows:
Deliver revenue growth;growth:
Ended the year with a 6% increase in net sales when compared with 2019 due to the following:
•The Propulsion segment delivered top-line growth, increasing market share, leveraging what we believe is the strongest product lineup in the industry and accelerating penetration in saltwater, repower, and international commercial markets.
•The Parts & Accessories (P&A) segment delivered strong top-line growth as a result of increased boating participation, which drove strong aftermarket sales, together with high demand for our full range of OEM systems and services, as boat production increased during the second-half of the year across the industry.
•The Boat segment contributed to the revenue growth over the second half of 2020 as U.S. marine retail demand continued to surge through year-end. The surge in retail demand resulted in historically-low pipeline inventory levels, with 40% percent fewer boats in dealer inventory at the end of 2020 versus the end of 2019. Freedom Boat Club also exceeded expectations during 2020 by adding over 40 new locations and almost 10,000 new memberships.
•International net sales increased 9 percent and 10 percent in 2020 on a GAAP and constant currency basis, respectively, primarily driven by Asia-Pacific, Europe, and Rest-of-World regions, partially offset by declines in Canada.
Increase earnings before income taxes, as well as deliver improvements in bothoperating margin percentage, excluding non-recurring charges:
•Reported earnings before income taxes were $472.7 million in 2020 compared with earnings before income taxes of $110.7 million in 2019; adjusted earnings before income taxes were $511.2 million in 2020 versus $465.2 million in 2019.
•Gross margin percentage improved 60 basis points when compared with 2019 reflecting the impact of higher sales across all segments during the second half of the year, as well as favorable changes in sales mix, partially offset by the impact of production suspensions and stay-at-home restrictions earlier in the year.
•Operating margin improved by 90 basis points when compared with 2019 primarily due to the factors affecting gross margin and operatingpercentage discussed above. Operating margin, percentages; andas adjusted, was up 40 basis points compared with 2019.
Continue to generate strong free cash flow and execute against the Company's capital strategy.
Achievements against the Company's financial objectives in 2018 were as follows:
Deliver revenue growth:
Ended the year with a 7 percent increase in net sales when compared with 2017 on a GAAP basis as well as on a constant currency basis excluding the impact of acquisitions along with Sea Ray Sport Yacht and Yacht operations, due to the following:
The Company's combined Marine segments reported strong growth in the Marine Engine segment and solid growth in the Boat segment;
| |
▪ | Marine Engine segment sales benefited from significant growth in propulsion, primarily as a result of organic growth in the outboard engine business, as well as steady growth in the marine parts and accessories businesses; |
| |
▪ | Boat segment sales decreased slightly as a result of the winding down of Sport Yacht and Yacht operations during 2018. Excluding the impact of Sport Yacht and Yacht operations, sales increased across all three primary boat categories, with strong growth in the saltwater fishing category, primarily driven by Boston Whaler, and solid growth in the recreational fiberglass and aluminum fishing categories; |
The U.S. marine market, which comprised 71 percent of the Company's marine sales, performed in line with expectations in 2018, with industry unit volume growing 3 percent. Outboard boats and engines drove industry growth, with increases in aluminum fishing boats and pontoons outpacing overall industry performance;
Fitness segment net sales were flat in 2018 compared with 2017 as growth in international markets was offset by declines in domestic sales, particularly of Cybex branded cardio product; and
International sales for the Company increased 6 percent in 2018 when compared with 2017 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 Asia-Pacific, Europe and Canada, while Rest-of-World regions declined slightly.
Increase earnings before income taxes, as well as deliver improvements in both gross margin and operating margin percentages:
Reported earnings before income taxes of $322.2 million in 2018 compared with earnings before income taxes of $281.2 million in 2017; adjusted earnings before income taxes were $530.4 million in 2018 versus $504.5 million in 2017;
Gross margin declined 50 basis points when compared with 2017, resulting from the wind-down of Sport Yacht and Yacht operations as well as purchase accounting amortization associated with the Power Products acquisition. Additionally, several unfavorable factors in the Fitness segment contributed to gross margin declines. Partially offsetting these factors were volume benefits and a favorable impact from changes in sales mix, including benefits from new products in the marine businesses. Gross margin, as adjusted, also declined 50 basis points from the prior year; and
Operating margin declined by 110 basis points when compared with the prior year due to the factors affecting gross margin percentage discussed above, as well as costs associated with the planned Fitness business separation and acquisition-related costs. Operating margin, as adjusted, was flat versus 2017.
Continue to generate strong free cash flow and execute against the Company'sour capital strategy:
•Generated free cash flow of $208.8$629.3 million in 2018,2020 enabling the Companyus to continue executing itsexecute our capital strategy as follows:
Funded investments in growth:
Through the acquisition of Power Products for $909.6 million during 2018; and
Organically through capital expenditures, which included investments in new products as well as capacity expansions, primarily within the Marine Engine segment.
Contributed $163.8 million to the Company's qualified and nonqualified defined benefit pension plans; and
Enhanced shareholder returns in 2018 by repurchasing $75.0•Deployed $182 million of common stock undercapital in our businesses for product and capacity initiatives;
•Retired $155 million of long term debt;
•Completed approximately $118 million of share repurchases; and
•Increased our dividend for the Company’s share repurchase program and increased cash dividends paid to shareholders to $67.8 million.8th consecutive year.
•Maintained investment grade credit rating through the COVID-related recession
•Ended the year with $304.2$587.0 million of cash and marketable securities.securities
Net earnings from continuing operations increased to $263.1$374.7 million in 20182020 from $146.4$30.4 million in 2017.2019. The 20182019 results includeincluded an income tax provisionafter-tax, non-cash charge of $59.1$310.3 million which was based on a U.S. federal statutory rate of 21 percent and includedrelated to pension settlement costs as well as a net tax benefit of $4.1$17.2 million primarily related to 2017 U.S. tax reform updates. The 2017 results reflect an income tax provision of $134.8 million, which was based on a U.S. federal statutoryfavorable rate of 35 percent and included net charges of $69.7 million mostly relating to the impact of U.S. tax reform, including thechange impact on state deferred tax balances fromassets as well as a reassessment of the reduction in the statutory rate from 35 percent to 21 percent, along with an estimate of taxes payable on deemed unrepatriated foreign earnings.state valuation allowance.
Outlook for 20192021
While we remain very cognizant of macroeconomic headwinds and other related uncertainties, our continued strong performance in a robust marine retail environment has created improved visibility into our substantial growth opportunities for 2021. The Companyprogression of the pandemic remains very dynamic, and the resulting impact on our dealers, OEM partners, suppliers, and the macro-economy is projecting 2019difficult to fully predict. However, given our improved clarity on our ability to drive growth, we are providing the following guidance for 2021. We anticipate:
•U.S. marine industry retail unit demand up low-to-mid single digit percent for the year versus 2020;
•Net Sales between $4.75 and $5.0 billion;
•Adjusted operating margins to grow between 60 and 100 basis points, with operating expenses as a percent of sales to be another year of strong revenue and earnings growth with excellent free cash flow generationlower than in excess of $320 million, with approximately $20 million attributable to the Company's Fitness segment. The Company is targeting growth in the combined marine segments2020;
•Adjusted diluted EPS in the range of 9 percent$6.00 to 11 percent, including an approximate 4 percent benefit from completed acquisitions,$6.40; and mid single-digit percent declines
•Free cash flow generation to be in excess of $300 million.
For the Propulsion segment, we anticipate net sales growth for the year to be in the Fitness segment.high-single to low double-digit percent range, with operating margins up more than 20 basis points versus 2020. We expect earnings growth to include margin expansion associated with new product introductions, increased factory absorption from elevated production levels and currency tailwinds, partially offset by regional sales mix, increased tariffs due to volume increases, and some increase in spending on products, technology, and other strategic priorities.
For the Parts & Accessories segment, we anticipate organic net sales growth in the mid-single digit percent range for 2021. We expect margins to grow slightly in the year. This area will continue to be the primary focus of our M&A activity as we look for opportunities to further build out our technology and systems portfolio.
The marine segments are expected to benefit from a steady global marine market, ongoing benefits from customer migration to higher horsepower engines and boats with increased technology and content, and market share gains due in part to the continued strongBoat segment will be focused on improving operational performance, fulfilling demand and acceptancerefilling pipelines in a very robust retail environment, which should lead to top line growth of new outboard products. The Company anticipates the Marine Engine segment will increase net sales at a rate of low-to-mid-teensmore than 30 percent including the Power Products acquisition as well as continued growth in market share in outboard engines, especially in the greater than 150 horsepower categories. Boat segment net sales are expected to grow low-to-mid-single digit percent including benefits from growth in premium brands in the U.S. The Company expects Fitness segment net sales to decline, reflecting lower sales to value-oriented health clubs and stable market demand.
The Company is planning to deliver higher earnings before income taxes in 2019 resulting from increased revenue and improvements in both gross margin and operating margin levels. Margin gains reflect strong improvement in operating earnings and margins. With three-quarters of our entire calendar-year 2021 wholesale orders already received, and with several brands largely sold-out into 2022, we anticipate consistent production throughout the marine segments,
partially offset byyear, which should result in cost efficiencies. We anticipate exiting 2021 with operating margins in the Fitness segment. The Company projects operating expenses to increase in 2019 as it continues to fund incremental investments to support growth and incur costs in connection with the Fitness business separation.
Gross marginsapproaching our double-digit target for the Company's marine segments in 2019segment.
We are anticipated to benefit from new products, volume leverage and cost reduction activities; additionally, the Marine Engine segment will benefit from the Power Products acquisition. Partially offsetting these positive factors are the estimated impacts of tariffs and unfavorable movements in foreign exchange rates, which are expected to have an incremental negative impact on gross margins versus 2018. Operating expenses for both marine segments are estimated to decline slightly versus 2018 on a percentage of sales basis. Fitness segment gross margins in 2019 are anticipated to remain consistent with 2018 levels, including benefits from cost reduction initiatives. Operating margins are expected to decline due to planned investments in new products and modernizing information technology platforms which are intended to position the Fitness business to succeed as an independent entity.
The Company is planning for itsthe effective tax rate in 20192021 to be approximately 23 percent to 24 percent based on existing tax law.law, which does not reflect any potential changes in statutory tax rates.
These 2021 expectations assume no major additional pandemic-related business continuity issues. In addition, the level of recovery of the global economy, continued stable channel operations, the ability to moderate labor and input costs, and the absence of significant additional disruption to our global operations and supply chain, will be important factors in determining whether we ultimately perform in line with our targets.
Matters Affecting Comparability
Certain events occurred during 2020, 2019 and 2018 2017 and 2016 that the Company believeswe believe 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& Yachts operations on the Company'sour net sales:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | | | 2020 vs 2019 | | |
| (in millions) | 2020 | | 2019 | | | | GAAP | | Currency
Impact | | Acquisition Benefit | | Sport Yacht & Yachts
Impact | | | | | | | | |
| Propulsion | $ | 1,878.4 | | | $ | 1,692.9 | | | | | 11.0% | | (0.8)% | | —% | | —% | | | | | | | | |
| Parts & Accessories | 1,508.8 | | | 1,380.1 | | | | | 9.3% | | (0.1)% | | —% | | —% | | | | | | | | |
| Boat | 1,250.3 | | | 1,334.3 | | | | | (6.3)% | | 0.0% | | 0.7% | | 0.0% | | | | | | | | |
| Segment Eliminations | (290.0) | | | (298.9) | | | | | (3.0)% | | 0.1% | | —% | | —% | | | | | | | | |
| Total | $ | 4,347.5 | | | $ | 4,108.4 | | | | | 5.8% | | (0.3)% | | 0.2% | | 0.0% | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Net Sales | | 2018 vs. 2017 |
| (in millions) | 2018 | | 2017 | | GAAP | | Currency Impact | | Acquisition Impact | | Impact of Sport Yacht and Yacht |
| 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 Marine | 4,120.9 |
| | 3,802.2 |
| | 8.4% | | 0.3% | | 2.8% | | (3.1)% |
| | | | | | | | | | | | |
| Fitness | 1,038.3 |
| | 1,033.7 |
| | 0.4% | | 0.3% | | — | | — |
| Total | $ | 5,159.2 |
| | $ | 4,835.9 |
| | 6.7% | | 0.3% | | 2.2% | | (2.3)% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | | | 2019 vs 2018 | | |
| (in millions) | 2019 | | 2018 | | | | GAAP | | Currency
Impact | | Acquisition Benefit | | Sport Yacht & Yachts
Impact | | | | | | |
| Propulsion | $ | 1,692.9 | | | $ | 1,759.3 | | | | | (3.8)% | | (1.4)% | | —% | | —% | | | | | | |
| Parts & Accessories | 1,380.1 | | | 1,234.3 | | | | | 11.8% | | (1.3)% | | 12.4% | | —% | | | | | | |
| Boat | 1,334.3 | | | 1,471.3 | | | | | (9.3)% | | (0.6)% | | 1.1% | | (3.2)% | | | | | | |
| Segment Eliminations | (298.9) | | | (344.0) | | | | | (13.1)% | | (0.3)% | | 0.8% | | —% | | | | | | |
| Total | $ | 4,108.4 | | | $ | 4,120.9 | | | | | (0.3)% | | (1.2)% | | 4.1% | | (1.2)% | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Net Sales | | 2017 vs. 2016 |
| (in millions) | 2017 | | 2016 | | GAAP | | Currency Impact | | Acquisition Impact | | Impact of Sport Yacht and Yacht |
| Marine Engine | $ | 2,631.8 |
| | $ | 2,441.1 |
| | 7.8% | | 0.2% | | 1.0% | | — |
| Boat | 1,490.6 |
| | 1,369.9 |
| | 8.8% | | 0.2% | | 0.7% | | (5.0)% |
| Marine eliminations | (320.2 | ) | | (302.9 | ) | | | | | | | | |
| Total Marine | 3,802.2 |
| | 3,508.1 |
| | 8.4% | | 0.2% | | 1.0% | | (1.7)% |
| | | | | | | | | | | | |
| Fitness | 1,033.7 |
| | 980.4 |
| | 5.4% | | (0.0)% | | 3.1% | | — |
| Total | $ | 4,835.9 |
| | $ | 4,488.5 |
| | 7.7% | | 0.2% | | 1.4% | | (1.3)% |
Retention of the Sea Ray business and wind down of Sport Yacht and Yacht operations. As a result of the decision to retain and restructure the Sea Ray business and wind down Sport Yacht and Yacht operations as discussed in Note 3 – Discontinued Operations in the Notes to Consolidated Financial Statements, starting in the second quarter of 2018, the results of the Sea Ray business are reported in continuing operations. & Yachts Wind-down. The results of Sport Yacht and Yacht& Yachts operations are summarized in the table below.
| | | | | | | | | | | | | | | | | | | | | |
| (in millions) | 2019 | | 2018 | | | | | | | | | | |
Net sales (A) | $ | (0.7) | | | $ | 49.4 | | | | | | | | | | | |
| Gross margin | (6.4) | | | (39.7) | | | | | | | | | | | |
| Restructuring, exit and impairment charges | — | | | 49.4 | | | | | | | | | | | |
| Operating loss | (7.8) | | | (107.8) | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | Year Ended |
| (in millions) | 2018 | | 2017 | | 2016 |
Net sales (A) | $ | 49.4 |
| | $ | 151.6 |
| | $ | 194.4 |
|
Gross margin (A) | (39.7 | ) | | (12.4 | ) | | 12.6 |
|
| Restructuring, exit, integration and impairment charges | 49.4 |
| | 23.3 |
| | — |
|
Operating loss (A) | (107.8 | ) | | (55.2 | ) | | (9.5 | ) |
(A) During 2018, Sport Yacht and Yacht2019, results include $16.0included $(0.7) million of charges within Net sales related to estimated retail sales promotionsincentives to support the sale of sport yachts and yachtsSport Yacht & Yachts in the dealer pipeline. There were no comparableDuring 2018, results included $16.0 million of charges within Net sales to support the sale of Sport Yacht & Yachts in 2017 or 2016.the dealer pipeline at that time.
Acquisitions. The CompanyWe completed acquisitions during 2018, 20172019 and 20162018 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 changeschanges in the underlying business trends, excluding the impact of translation arising from foreign currency exchange rate fluctuations. Approximately 2124 percent of the Company'sour annual net sales are transacted in a currency other than the U.S. dollar. The Company'sOur most material exposures include sales in Euros, Canadian dollars, Chinese yuan, and Australian dollars, Brazilian reais and British pounds.dollars.
Additionally, operating earnings comparisons were negatively affected by foreign exchange rates by approximately $10 million in 2020 when compared with 2019, and were negatively affected by foreign exchange rates by approximately $2$15 million in 20182019 when compared with 2017, and were positively affected by foreign exchange rates by approximately $1 million in 2017 when compared with 2016.2018. 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 and pricing actions in certain international markets in response to the changes in the exchange rate between the local currency and the U.S. dollar.activities.
Restructuring, exit integration and impairment charges. The CompanyWe recorded restructuring, exit integration and impairment charges during 2018, 20172020, 2019 and 2016.2018. The following table summarizes these charges by cash charges and non-cash charges.
| | | | | | | | | | | | | | | | | |
| (in millions) | 2020 | | 2019 | | 2018 |
| Cash charges: | | | | | |
Boat (A) | $ | 0.8 | | | $ | 6.2 | | | $ | 27.5 | |
| Parts & Accessories | 0.8 | | | 4.6 | | | — | |
| Corporate | 2.0 | | | 4.5 | | | 0.7 | |
| Total cash charges | 3.6 | | | 15.3 | | | 28.2 | |
| Non-cash charges: | | | | | |
Boat (A) | 0.5 | | | 3.5 | | | 26.6 | |
| | | | | |
| | | | | |
| | | | | |
| Total restructuring, exit and impairment charges | $ | 4.1 | | | $ | 18.8 | | | $ | 54.8 | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| (in millions) | 2018 | | 2017 | | 2016 |
| Cash charges: | | | | | |
Boat (A) | $ | 27.5 |
| | $ | 5.4 |
| | $ | 0.6 |
|
Fitness (B) | 3.5 |
| | 13.7 |
| | 12.7 |
|
| Corporate | 1.5 |
| | 1.6 |
| | — |
|
| Total cash charges | 32.5 |
| | 20.7 |
| | 13.3 |
|
| Non-cash charges: | | | | | |
Boat (A) | 26.6 |
| | 43.2 |
| | — |
|
Fitness (B) | 21.8 |
| | 16.6 |
| | — |
|
| Corporate | — |
| | 0.8 |
| | 2.3 |
|
| Total non-cash charges | 48.4 |
| | 60.6 |
| | 2.3 |
|
| Total restructuring, exit, integration and impairment charges | $ | 80.9 |
| | $ | 81.3 |
| | $ | 15.6 |
|
_______________
(A) Restructuring, exit integration and impairment activities within the Boat segment during 2018 primarily related to the wind-down of Sport Yacht and Yacht& Yachts operations. As the wind-down was largely completed during 2018, the operating losses and cash flows in excess of restructuring activities will no longer be incurred.
(B)As a result of Restructuring, exit, integration and impairment activities, the Company anticipates future cost savings of approximately $5 million in the Fitness segment, with the full impact realized in 2019. Future cost savings will primarily be reflected within Selling, general and administrative expense.
See Note 4 – Restructuring, Exit Integration and Impairment Activities in the Notes to Consolidated Financial Statements for further details on charges and initiatives.
Purchase accounting amortization. As part of purchase accounting for the Freedom Boat Club and Power Products acquisition, the Companyacquisitions, we recognized definite-lived intangible assets as well as a fair value adjustment to inventory for Power Products, both of which will beare amortized over
their useful lives. During 2020, 2019 and 2018, the Companywe recorded $30.1 million, $29.5 million and $12.0 million and $9.2 millionrespectively, of purchase accounting amortization within Selling, general and administrative expense and Costexpense. During 2018, we also recorded $9.2 million of sales, respectively. There was no purchase accounting amortization for Power Products during 2017 or 2016.within Cost of sales.
Fitness business separation charges. On March 1, 2018, the Company's Board of Directors authorized proceeding with separating its Fitness business from the Company portfolio.Acquisition and IT related costs.. In connection with this action, the Company incurred $19.3Freedom Boat Club and Power Products acquisitions in 2019 and 2018, respectively, we recorded $1.7 million, $2.6 million and $13.8 million, of charges withinacquisition costs in Selling, general and administrative expense (SG&A), during 2018. There were no comparable charges2020, 2019 and 2018, respectively.
In addition, during 2020 and 2019, we recorded $3.7 million and $2.2 million, respectively, of IT transformation costs in 2017 or 2016.
Acquisition-related costs. In connection with the Power Products acquisition, the Company recorded $13.8 million of costsSG&A within Selling, general and administrative expense during 2018. As part of the financing of the acquisition, the Company recorded $5.1 million of Transaction financing charges in 2018 to secure the 364-Day Senior Unsecured Bridge Facility as described in Note 17 – Debt in the Notes to Consolidated Financial Statements. There were no comparable charges in 2017 or 2016.
Corporate/Other non-recurring charges inresulting from the Fitness segment. The Company's Fitness segment recorded $11.8 million and $13.5 million of non-recurring charges in 2018 and 2017, respectively. The charges in 2018 consisted of $3.6 million within Selling, general and administrative expense related to a contract dispute, $3.1 million within Cost of sales related to the settlement of supplier obligations, $2.8 million within Selling, general and administrative expense associated with the delayed submission of import duty filings in a foreign jurisdiction and $2.3 million within Cost of sales for a product field campaign. For 2017, non-recurring charges consisted of $8.4 million and $5.1 million within Cost of sales and Selling, general and administrative expense, respectively, related to field campaigns pertaining to certain Cybex products designed prior to the acquisition. Refer to Note 14 – Commitments and Contingencies for further details.separation.
Pension settlement charges. During 2019, we fully exited our remaining defined benefit pension plans and as a result, we recorded a pretax pension settlement benefit of $1.1 million and pretax pension settlement charge of $292.8 million, in 2020 and 2019, respectively. There were no pension settlement charges in 2018. In the fourth quarters of 2017 and 2016, the Company recognized $96.6 million and $55.1 million of charges, respectively, related to actions taken to settle a portion of its pension obligations. These actions included transferring certain plan obligations to a third party by purchasing annuities on behalf of plan participants and making lump-sum payments directly to certain plan participants, as applicable. These costs are reflected in Pension settlement charge on the Consolidated Statements of Operations. See Note 1817 – Postretirement Benefits in the Notes to Consolidated Financial Statements for further details.
AdoptionTax items. We recognized an income tax provision of new revenue standard. On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, (new revenue standard) using the modified retrospective method. As a result of applying the new revenue standard, the Company reported higher Net sales of $15.6$98.0 million and higher Operating earnings$80.3 million in 2020 and 2019, respectively. The income tax provision in 2019 included a net charge of $10.1$17.5 million duringrelated to the year ended December 31, 2018 when compared with previous GAAP. Refer to Note 1 – Significant Accounting Policies in the Notes to Consolidated Financial Statements for further information on thesettlement of our qualified defined benefit plans. The tax impact of this action consisted of a tax benefit of $73.9 million from the new revenue standardpension settlement charge, which was netted against a tax charge of $91.4 million resulting from the release of disproportionate tax effects in Accumulated other comprehensive income. Additionally, the income tax provision for 2019 included a net benefit of $17.2 million primarily related to favorable rate change impacts on the Company's consolidated financial statements. Refer to Note 2 – Revenue Recognition in the Notes to Consolidated Financial Statements for further discussionstate deferred tax assets as well as a reassessment of the Company's revenue recognition policies and a presentation of disaggregated revenue.
Tax items. As a result of U.S. tax reform, the Company's U.S. federal statutory rate decreased to 21 percent in 2018 versus 35 percent in 2017 and 2016. In addition, thestate valuation allowance. The 2018 income tax provision of $59.1$57.3 million included a net benefit of $4.1$4.8 million primarily related to 2017 U.S. tax reform updates. The 2017 results reflected an income tax provision of $134.8 million, which included net charges of $69.7 million mostly relating to the impact of U.S. tax reform, including the impact on deferred tax balances from the reduction in the statutory rate from 35 percent to 21 percent, along with an estimate of taxes payable on deemed unrepatriated foreign earnings. The 2016 results include an income tax provision of $115.3 million, which included a net tax charge of $1.1 million, primarily associated with the impact of changes in tax laws partially offset by the reassessment of tax reserves and favorable valuation allowance adjustments.
See Note 1312 – Income Taxes in the Notes to Consolidated Financial Statements for further details.
Results of Operations
Consolidated
The following table sets forth certain amounts, ratios and relationships calculated from the Consolidated Statements of Operations for 2018, 20172020, 2019 and 2016:2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 2020 vs. 2019 | | | | 2019 vs. 2018 |
| (in millions, except per share data) | 2020 | | 2019 | | 2018 | | $ | | % | | | | $ | | % | | |
| Net sales | $ | 4,347.5 | | $ | 4,108.4 | | $ | 4,120.9 | | $ | 239.1 | | 5.8% | | | | $ | (12.5) | | (0.3)% | | |
Gross margin (A) | 1,213.0 | | 1,121.0 | | 1,047.0 | | 92.0 | | 8.2% | | | | 74.0 | | 7.1% | | |
| Restructuring, exit, and impairment charges | 4.1 | | 18.8 | | 54.8 | | (14.7) | | (78.2)% | | | | (36.0) | | (65.7)% | | |
| Operating earnings | 539.3 | | 471.0 | | 355.5 | | 68.3 | | 14.5% | | | | 115.5 | | 32.5% | | |
| Pension settlement (benefit) charge | (1.1) | | 292.8 | | — | | (293.9) | | NM | | | | 292.8 | | NM | | |
| Transaction financing charges | — | | — | | (5.1) | | — | | NM | | | | 5.1 | | NM | | |
| Net earnings from continuing operations | 374.7 | | 30.4 | | 253.4 | | 344.3 | | NM | | | | (223.0) | | (88.0)% | | |
| | | | | | | | | | | | | | | | | |
Diluted earnings per share from continuing operations | $ | 4.70 | | $ | 0.36 | | $ | 2.87 | | $ | 4.34 | | NM | | | | $ | (2.51) | | (87.5)% | | |
| | | | | | | | | | | | | | | | | |
| Expressed as a percentage of Net sales: | | | | | | | | | | | | | | | | | |
| Gross margin | 27.9 | % | | 27.3 | % | | 25.4 | % | | | | 60 bpts | | | | | | 190 bpts | | |
| Selling, general and administrative expense | 12.5 | % | | 12.4 | % | | 12.5 | % | | | | 10 bpts | | | | | | (10) bpts | | |
| Research and development expense | 2.9 | % | | 3.0 | % | | 2.9 | % | | | | (10) bpts | | | | | | 10 bpts | | |
| Operating margin | 12.4 | % | | 11.5 | % | | 8.6 | % | | | | 90 bpts | | | | | | 290 bpts | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 2018 vs. 2017 | | 2017 vs. 2016 |
| (in millions, except per share data) | 2018 | | 2017 | | 2016 | | $ | | % | | $ | | % |
| Net sales | $ | 5,159.2 |
| | $ | 4,835.9 |
| | $ | 4,488.5 |
| | $ | 323.3 |
| | 6.7 | % | | $ | 347.4 |
| | 7.7 | % |
Gross margin (A) (B) | 1,321.0 |
| | 1,262.1 |
| | 1,232.4 |
| | 58.9 |
| | 4.7 | % | | 29.7 |
| | 2.4 | % |
| Restructuring, exit, integration and impairment charges | 80.9 |
| | 81.3 |
| | 15.6 |
| | (0.4 | ) | | (0.5 | )% | | 65.7 |
| | NM |
|
Operating earnings (B) | 367.0 |
| | 398.3 |
| | 479.5 |
| | (31.3 | ) | | (7.9 | )% | | (81.2 | ) | | (16.9 | )% |
| Pension settlement charge | — |
| | 96.6 |
| | 55.1 |
| | (96.6 | ) | | (100.0 | )% | | 41.5 |
| | 75.3 | % |
| Transaction financing charges | 5.1 |
| | — |
| | — |
| | 5.1 |
| | NM |
| | — |
| | NM |
|
Net earnings from continuing operations (B) | 263.1 |
| | 146.4 |
| | 274.4 |
| | 116.7 |
| | 79.7 | % | | (128.0 | ) | | (46.6 | )% |
| | | | | | | | | | | | | | |
Diluted earnings per share from continuing operations | $ | 2.98 |
| | $ | 1.62 |
| | $ | 2.98 |
| | $ | 1.36 |
| | 84.0 | % | | $ | (1.36 | ) | | (45.6 | )% |
| | | | | | | | | | | | | | |
| Expressed as a percentage of Net sales: | |
| | |
| | |
| | |
| | |
| | | | |
| Gross margin | 25.6 | % | | 26.1 | % | | 27.5 | % | | |
| | (50) bpts |
| | | | (140) bpts |
|
| Selling, general and administrative expense | 14.0 | % | | 13.2 | % | | 13.3 | % | | |
| | 80 bpts |
| | | | (10) bpts |
|
| Research and development expense | 2.9 | % | | 3.0 | % | | 3.1 | % | | |
| | (10) bpts |
| | | | (10) bpts |
|
| Operating margin | 7.1 | % | | 8.2 | % | | 10.7 | % | | |
| | (110) bpts |
| | | | (250) bpts |
|
NM = not meaningful
bpts = basis points
| |
(A) | Gross margin is defined as Net sales less Cost of sales as presented in the Consolidated Statements of Operations. |
| |
(B) | Refer toNote 23 – Quarterly Data (unaudited), for further details on certain unusual items which impacted 2018 and 2017 results.
|
2018(A)Gross margin is defined as Net sales less Cost of sales as presented in the Consolidated Statements of Operations.
The following is a summary of Adjusted operating earnings and Adjusted diluted earnings per common share from continuing operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Earnings | | Diluted Earnings (Loss) Per Share |
| (in millions, except per share data) | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| GAAP | $ | 539.3 | | | $ | 471.0 | | | $ | 355.5 | | | $ | 4.70 | | | $ | 0.36 | | | $ | 2.87 | |
| Restructuring, exit, and impairment charges | 4.1 | | | 18.8 | | | 54.8 | | | 0.04 | | | 0.21 | | | 0.47 | |
| Purchase accounting amortization | 30.1 | | | 29.5 | | | 21.2 | | | 0.29 | | | 0.22 | | | 0.19 | |
| Acquisition and IT related costs | 5.4 | | | 4.8 | | | 13.8 | | | 0.05 | | | 0.04 | | | 0.12 | |
| Special tax items | — | | | — | | | — | | | 0.00 | | | (0.20) | | | (0.06) | |
| Sport Yacht & Yachts | — | | | 7.8 | | | 58.4 | | | — | | | 0.07 | | | 0.51 | |
| Transaction financing charges | — | | | — | | | — | | | — | | | 0.01 | | | 0.05 | |
| Gain on sale of equity investment | — | | | — | | | — | | | — | | | — | | | (0.02) | |
| Pension settlement (benefit) charge | — | | | — | | | — | | | (0.01) | | | 3.62 | | | — | |
| As Adjusted | $ | 578.9 | | | $ | 531.9 | | | $ | 503.7 | | | $ | 5.07 | | | $ | 4.33 | | | $ | 4.13 | |
| | | | | | | | | | | |
| GAAP operating margin | 12.4 | % | | 11.5 | % | | 8.6 | % | | | | | | |
| Adjusted operating margin | 13.3 | % | | 12.9 | % | | 12.2 | % | | | | | | |
2020 vs. 20172019
Net sales increased 5.8 percent during 20182020 when compared with 2017 driven by strong growth in2019. Refer to the Marine Engine segment. Marine Engine segment sales benefited from significant growth in propulsion, primarily as a resultPropulsion, Parts & Accessories, and Boat segments discussions for further details on the drivers of organic growth in the outboard engine business driven by high demand for new outboard products, as well as the marine parts and accessories businesses, which included contributions from the Power Products acquisition.Boat segment sales decreased slightly as a result of the winding down of Sport Yacht and Yacht operations during 2018. Excluding the impact of Sport Yacht and Yacht operations, sales increased across all three primary boat categories, with strong growth in the saltwater fishing category, primarily driven by Boston Whaler, and solid growth in the recreational fiberglass and aluminum fishing categories.Fitness segment net sales were flatchanges.
Gross margin percentage increased 60 basis points in 20182020 when compared with 2017 as growth in international markets was offset by declines in domestic2019, reflecting impacts of higher sales particularly of Cybex branded cardio product. International net sales for the Company increased 6 percent in 2018 on a GAAP basis; on a constant currency basis and excluding the impact of acquisitions and Sport Yacht and Yacht operations, international sales increased 4 percent, driven by increases in Asia-Pacific, Europe and Canada, partially offset by declinesthe impacts of production suspensions and stay-at-home restrictions earlier in Rest-of-World.the year.
Gross margin percent decreased
SG&A increased during 2020 and includes purchase accounting amortization and acquisition and IT transformation-related costs, as applicable. Excluding those items, SG&A as a percentage of sales was relatively consistent in 2018 when2020 compared with 2017, reflecting the wind-down of the Sport Yacht and Yacht operations as well as purchase accounting amortization. Additionally, several unfavorable factors drove lower gross margins in the Fitness segment including inventory cost adjustments primarily related to product transitions, higher freight costs, an unfavorable impact from changes in sales mix and cost inflation and inefficiencies. Partially offsetting these factors were favorable items in the marine businesses including volume benefits and a favorable impact from changes in sales mix, including benefits from new products.
Selling, general and administrative expense and2019. Research and development expense increased during 2018 when compared with 2017. Selling, general and administrative expense in 2018 included purchase accounting amortization associated with the Power Products acquisition, costs associated with the planned Fitness business separation and acquisition-related costs. Both expenses reflected planned spending increases to support new product promotion and development, primarily in the Marine Engine segment.2020 versus 2019, but remained consistent as a percentage of Net Sales.
During 2018, the Company2020, we recorded restructuring, exit integration and impairment charges of $80.9$4.1 million compared with $81.3$18.8 million in 2017.2019. See Note 4 – Restructuring, Exit Integration and Impairment Activities in the Notes to Consolidated Financial Statements for further details.
The CompanyWe recognized equity earnings of $7.7$4.5 million and $6.1$7.3 million in 20182020 and 2017,2019, respectively, which were mainly related to our marine and technology-related joint ventures.
In 2019, we fully exited our remaining defined benefit pension plans and as a result, recorded a $1.1 million benefit in 2020, associated with a final settlement adjustment. In 2019, we recorded $292.8 million of charges related to these pension settlement actions. Refer to Note 17 – Postretirement Benefits in the Company'sNotes to Consolidated Financial Statements for further information.
We recognized $(6.1) million and $(2.1) million in 2020 and 2019, respectively, in Other expense, net. Other expense, net primarily includes other postretirement benefit costs and remeasurement gains and losses resulting from changes in foreign currency rates.
Net interest expense decreased in 2020 compared with 2019 due to a reduction in average daily debt outstanding. Refer to Note 16 – Debt in the Notes to Consolidated Financial Statements.
We recognized an income tax provision of $98.0 million and $80.3 million in 2020 and 2019, respectively. The income tax provision in 2019 included a net charge of $17.5 million related to the settlement of our qualified defined benefit plans. The impact of this action consisted of a tax benefit of $73.9 million from the pension settlement charge, which was netted against a tax charge of $91.4 million resulting from the release of disproportionate tax effects in Accumulated other comprehensive income. Additionally, the income tax provision for 2019 included a net benefit of $17.2 million, primarily related favorable rate change impacts on state deferred tax assets as well as a reassessment of the state valuation allowance.
The effective tax rate, which is calculated as the income tax provision as a percentage of earnings before income taxes, was 20.7 percent and 72.6 percent for 2020 and 2019, respectively.
See Note 12 – Income Taxes in the Notes to Consolidated Financial Statements for further details on the impacts of the Tax Cuts and Jobs Act as well as a reconciliation of our effective tax rate and statutory Federal income tax rate.
Due to the factors described in the preceding paragraphs, operating earnings, net earnings from continuing operations and diluted earnings per common share from continuing operations increased during 2020. Diluted earnings per common share from continuing operations benefited from common stock repurchases in both years.
2019 vs. 2018
Net sales decreased slightly during 2019 when compared with 2018. Refer to the Propulsion, Parts & Accessories, and Boat segments discussions for further details on the drivers of net sales changes.
Gross margin percentage increased, reflecting benefits from the absence of the Sport Yacht & Yachts operations in 2019, which had a negative gross margin impact in 2018, as well as improvements in the Propulsion and Parts & Accessories segment including benefits from the Power Products acquisition as well as favorable changes in sales mix. These positive factors exceeded the impact of lower sales, tariffs and unfavorable changes in foreign exchange rates. Additionally, the gross margin percentage reflected favorable comparisons versus the prior year due to unfavorable plant efficiencies associated with production ramp-up for new products and warehouse management integration in the first half of 2018.
Selling, general and administrative expense (SG&A) decreased and included purchase accounting amortization, acquisition-related costs, and the impacts of Sport Yacht & Yachts operations. Excluding these items, operating expenses were relatively flat on a percentage of net sales basis as lower variable compensation expense and benefits from cost reduction programs were offset by a full year of Power Products results and the acquisition of Freedom Boat Club. Research and development expense was relatively consistent in 2019 versus 2018, reflecting continued investment in new products across all segments.
During 2019, we recorded restructuring, exit and impairment charges of $18.8 million compared with $54.8 million in 2018. See Note 4 – Restructuring, Exit and Impairment Activities in the Notes to Consolidated Financial Statements for further details.
We recognized equity earnings of $7.3 million and $7.7 million in 2019 and 2018, respectively, which were mainly related to our marine joint ventures. Equity earnings in 2018 included a $2.3 million gain on the sale of an equity investment as discussed in Note 109 – Investments inthe Notes to Consolidated Financial Statements.
In 2017, the Company2019, we recorded $96.6$292.8 million respectively, of charges related to pension settlement actions as discussed in Note 1817 – Postretirement Benefits in the Notes to Consolidated Financial Statements. There were no pension settlement actions in 2018.
The CompanyWe recognized $4.3$(2.1) million and $2.8$(4.3) million in 20182019 and 2017,2018, respectively, in Other expense, net. Other expense, net primarily includes pension and other postretirement benefit costs, the amortization of deferred income related to a trademark licensing agreement with AMF Bowling Centers, Inc. as discussed in Note 1 – Significant Accounting Policies inthe Notes to Consolidated Financial Statements, as well as remeasurement gains and losses resulting from changes in foreign currency rates.
Net interest expense increased $19.3$29.6 million to $72.7 million in 20182019 compared with 20172018 primarily due to recent debt issuancesactivity as discussed in Note 1716 – Debt in the Notes to Consolidated Financial Statements.Interest expense also included the mark-to-market impact of the Company's fixed-to-floating rate interest rate swaps.
Transaction financing charges of $5.1 million in 2018 related to the 364-Day Senior Unsecured Bridge Facility which was secured in connection with the Power Products acquisition as discussedacquisition.
Income tax provision for 2019 was $80.3 million and included a net charge of $17.5 million related to the settlement of our qualified defined benefit plans. The tax impact of this action consisted of a tax benefit of $73.9 million from the pension settlement charge, which was netted against a tax charge of $91.4 million resulting from the release of disproportionate tax effects in Note 17 – Debt inAccumulated other comprehensive income. Additionally, the Notes to Consolidated Financial Statements.
As a result of U.S. tax reform, the Company's U.S. federal statutory rate decreased to 21 percent in 2018 versus 35 percent in 2017. In addition, the 2018 income tax provision of $59.1 millionfor 2019 included a net benefit of $4.1$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 which included a net benefit of $4.8 million primarily related to 2017 U.S. tax reform updates. The 2017 results reflected an income tax provision of $134.8 million, which included net charges of $69.7 million mostly relating to the impact of U.S. tax reform, including the impact on deferred tax balances from the reduction in the statutory rate from 35 percent to 21 percent, along with an estimate of taxes payable on deemed unrepatriated foreign earnings.updates. The effective tax rate for 2019 and 2018 and 2017 was 18.372.6 percent and 47.918.5 percent, respectively.
The Company'sOur effective tax rate also reflects the benefit of having earnings from foreign entities that are in jurisdictions that have lower statutory tax rates than the U.S. This includes entities in Hungary,with the most significant impact related to China and Poland, which have applicable statutory tax rates of 9 percent, 15 percent and 19 percent, respectively.
See Note 1312 – Income Taxes in the Notes to Consolidated Financial Statements for further details on the impacts of the TCJATax Cuts and Jobs Act as well as a reconciliation of the Company'sour effective tax rate and statutory Federal income tax rate.
OperatingDue to the factors described in the preceding paragraphs, operating earnings decreased,increased, while Netnet earnings from continuing operations and diluted earnings per common share from continuing operations decreased during 2019. Diluted earnings per common share from continuing operations increased in 2018 when compared with 2017, primarily due to the factors discussed in the preceding paragraphs. The increase in Diluted earnings per common share from continuing operations also included benefitsbenefited from common stock repurchases.
Diluted earnings per common share, as adjusted, increased by $0.76 per share, or 19 percent, to $4.77 per share for 2018 when compared with 2017, and excluded the following items in 2018: restructuring, exit, integration and impairment charges of $0.71 per share, losses related to Sport Yacht and Yacht operations of $0.51 per share, costs associated with the planned Fitness business separation of $0.19 per share, purchase accounting amortization of $0.18 per share, acquisition-related costs of $0.17 per share, other non-recurring charges in the Fitness segment of $0.10 per share, a net benefit from special tax items of $0.05 per share and a gain on the sale of an equity investment of $0.02 per share. In 2017, Diluted earnings per common share, as adjusted excluded $0.62 per share of restructuring, exit, integration and impairment charges, a net charge from special tax items of $0.76 per share, a pension settlement charge of $0.69 per share, losses related to Sport Yacht and Yacht operations of $0.22 per share and $0.10 per share of other non-recurring charges in the Fitness segment.
2017 vs. 2016
Net sales increased during 2017 when compared with 2016 due to increases across all segments. Marine Engine segment net sales increased due to strong growthrepurchases in both outboard engines as well as the marine parts and accessories businesses. Outboard engines benefited from a favorable market environment, particularly for higher horsepower engines, and continued benefits fromyears.
new product launches and market share gains. The marine parts and accessories businesses benefited from several factors, including the successful execution of the Company's international growth strategy, recent acquisitions and new product launches. Boat segment net sales reflected strong growth in the saltwater fishing and aluminum freshwater categories, partially offset by slight declines in the recreational fiberglass category as a result of sales weakness in Sport Yacht and Yacht operations. Fitness segment net sales increased modestly reflecting growth in international markets while domestic demand was flat. International net sales for the Company increased 10 percent in 2017 on a GAAP basis; on a constant currency basis and excluding acquisitions and Sport Yacht and Yacht operations, international net sales increased 7 percent, driven by strong increases in Asia-Pacific as well as solid increases in other international markets.
Gross margin percent decreased in 2017 when compared with 2016, primarily driven by declines in the Fitness segment as a result of several factors, including higher costs, particularly costs for product field campaigns for certain Cybex products designed prior to the acquisition as well as higher freight costs, particularly in the fourth quarter, challenging pricing dynamics in certain international markets and unfavorable changes in sales mix. Gross margin declines also reflected increased warranty costs and manufacturing inefficiencies for Sport Yacht and Yacht operations.
Selling, general and administrative expense and Research and development expense line items increased during 2017 when compared with 2016, but decreased as a percentage of net sales. Both line items reflected increased funding to support investments in new products and growth initiatives, partially offset by cost reduction efforts.
During 2017, the Company recorded restructuring, integration and impairment charges of $81.3 million compared with $15.6 million in 2016. See Note 4 – Restructuring, Exit, Integration and Impairment Activities in the Notes to Consolidated Financial Statements for further details.
The Company recognized equity earnings of $6.1 million and $4.3 million in 2017 and 2016, respectively, which were mainly related to the Company's marine joint ventures.
In 2017 and 2016, the Company recorded $96.6 million and $55.1 million, respectively, of charges related to pension settlement payments as discussed in Note 18 – Postretirement Benefits in the Notes to Consolidated Financial Statements.
The Company recognized $(2.8) million and $(13.3) million in 2017 and 2016, respectively, in Other expense, net. The reduction of expense in 2017 primarily related to decreased pension expense as discussed in Note 18 – Postretirement Benefits in the Notes to Consolidated Financial Statements.
Net interest expense decreased slightly in 2017 compared with 2016.
The Company recognized an income tax provision of $134.8 million in 2017, which included net charges of $69.7 million mostly relating to the impact of U.S. tax reform, including the impact on deferred tax balances from the reduction in the statutory rate from 35 percent to 21 percent, along with an estimate of taxes payable on deemed unrepatriated foreign earnings. The 2016 results include an income tax provision of $115.3 million, which included a net tax charge of $1.1 million, primarily associated with the impact of changes in tax laws partially offset by the reassessment of tax reserves and favorable valuation allowance adjustments. The effective tax rate for 2017 and 2016 was 47.9 percent and 29.6 percent, respectively. See Note 13 – Income Taxes in the Notes to Consolidated Financial Statements for further details.
Operating earnings, Net earnings from continuing operations and Diluted earnings per common share from continuing operations decreased in 2017 when compared with 2016, primarily due to the factors discussed in the preceding paragraphs. The decrease in Diluted earnings per common share from continuing operations was partially offset by benefits from common stock repurchases.
Diluted earnings per common share, as adjusted, increased by $0.43 per share, or 12 percent, to $4.01 per share for 2017 when compared with 2016, and excluded the following items in 2017: $0.62 per share of restructuring, exit, integration and impairment charges, a net charge from special tax items of $0.76 per share, a pension settlement charge of $0.69 per share, losses related to Sport Yacht and Yacht operations of $0.22 per share and $0.10 per share of other non-recurring charges in the Fitness segment. In 2016, Diluted earnings per common share, as adjusted excluded a pension settlement charge of $0.38 per share, Restructuring, integration and impairment charges of $0.11 per share, losses related to Sport Yacht and Yacht operations of $0.10 per share and special tax items were a net charge of $0.01 per share.
Segments
The Company operates inWe have three operating and reportable segments: Marine Engine, BoatPropulsion, Parts & Accessories, and Fitness.Boat. Refer to Note 76 – Segment Information in the Notes to Consolidated Financial Statements for details on the segment operations.
Marine EnginePropulsion Segment
The following table sets forth Marine Enginethe Propulsion segment results for the years ended December 31, 2018, 20172020, 2019 and 2016:2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2020 vs. 2019 | | | | 2019 vs. 2018 |
| (in millions) | 2020 | | 2019 | | 2018 | | $ | | % | | | | $ | | % |
| Net sales | $ | 1,878.4 | | | $ | 1,692.9 | | | $ | 1,759.3 | | | $ | 185.5 | | | 11.0 % | | | | $ | (66.4) | | | (3.8) % |
| | | | | | | | | | | | | | | |
| Operating earnings | $ | 285.5 | | | $ | 240.3 | | | $ | 243.8 | | | $ | 45.2 | | | 18.8 % | | | | $ | (3.5) | | | (1.4) % |
| Operating margin | 15.2 | % | | 14.2 | % | | 13.9 | % | | | | 100 | bpts | | | | | | 30 | bpts |
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 2018 vs. 2017 | | 2017 vs. 2016 |
| (in millions) | 2018 | | 2017 | | 2016 | | $ | | % | | $ | | % |
| Net sales | $ | 2,993.6 |
| | $ | 2,631.8 |
| | $ | 2,441.1 |
| | $ | 361.8 |
| | 13.7 | % | | $ | 190.7 |
| | 7.8 | % |
Operating earnings (A) | 454.4 |
| | 411.3 |
| | 378.4 |
| | 43.1 |
| | 10.5 | % | | 32.9 |
| | 8.7 | % |
Operating margin (A) | 15.2 | % | | 15.6 | % | | 15.5 | % | | |
| | (40) bpts |
| | | | 10 bpts |
|
bpts = basis points
(A) Includes $21.2 million
2020 vs. 2019
2018 vs. 2017
Marine EngineThe Propulsion segment net sales benefited from significant growth in both the propulsion and marine parts and accessories businesses. Propulsion benefited from organic growth as a result of robust demand for new, higher horsepower outboard products. The marine parts and accessories business benefited from contributions from Power Products as well as steady organic growth in both the products and distribution businesses.Acquisitions completed in 2018 and 2017 accounted for approximately 4 percentage points of the Marine Engine segment's overall revenue growth rate in 2018. International net sales were 30 percent of the segment's net sales in 2018, and increased 13 percent from the prior year on a GAAP basis. On a constant currency basis and excluding acquisitions, international net sales increased 6$185.5 million or 11.0 percent in 2018, which included gains in all international regions.
The Marine Engine segment reported increased operating earnings in 2018 when compared with2020 versus the prior year as a result of strong operating performance includingdemand, especially in the higher nethorsepower outboard engine categories and related controls, rigging and propeller business as original equipment manufacturer (OEM) customers continued to ramp-up production during the year, and increased capacity enabled elevated sales favorable impacts from changesto dealer and international channels as well as significant U.S. and international market share gains. These sales increases were partially offset by production disruptions at Mercury and its OEM engine customers in sales mix and contributions from the acquisition of Power Products. Partially offsetting these factors were the impacts of purchase accounting amortization and acquisition-related costs. Additionally, the first half of the year includeddue to the COVID-19 pandemic.
International sales were 36 percent of the Propulsion segment's net sales in 2020. International sales increased 24 percent on a GAAP basis and 26 percent on a constant currency basis from the prior year, primarily due to increases in Asia-Pacific, particularly in higher horsepower engines used for commercial purposes.
The Propulsion segment operating earnings for the year increased $45.2 million or 18.8% in 2020 versus the prior year as a result of increased sales volumes and favorable changes in sales mix, partially offset by unfavorable impactsabsorption resulting from product disruptions in the first half of plant efficiencies associated with production ramp-upthe year, higher variable compensation costs, and increased investment in new product development and technology.
2019 vs. 2018
The Propulsion segment net sales decreased $66.4 million or 3.8 percent in 2019 versus the prior year, resulting from lower sales of outboard engines 150 horsepower and below and sterndrive engines, partially offset by robust demand for new productshigher horsepower engines, particularly in 175 to 300 horsepower categories introduced in 2018 and 400 and 450 horsepower engines released in 2019.
International net sales were 32 percent of the integrationPropulsion segment's net sales in 2019. International sales increased 2 percent on a GAAP basis and 6 percent on a constant currency basis from the prior year, primarily driven by increases in Europe, Asia-Pacific and Rest-of-World regions, partially offset by declines in Canada.
The Propulsion segment operating earnings for the year decreased $3.5 million or 1.4 percent in 2019 versus the prior year as a result of new warehouse management systemsvolume declines, the impact of tariffs, as well as planned spending increasesunfavorable changes in foreign exchange rates, partially offset by favorable changes in sales mix described above and cost control measures.
Parts & Accessories Segment
The following table sets forth the Parts & Accessories (P&A) segment results for product promotionthe years ended December 31, 2020, 2019 and development.2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2020 vs. 2019 | | | | 2019 vs. 2018 |
| (in millions) | 2020 | | 2019 | | 2018 | | $ | | % | | | | $ | | % |
| Net sales | $ | 1,508.8 | | $ | 1,380.1 | | $ | 1,234.3 | | $ | 128.7 | | | 9.3 | % | | | | $ | 145.8 | | | 11.8 | % |
| | | | | | | | | | | | | | | |
| GAAP operating earnings | $ | 275.4 | | | $ | 237.5 | | | $ | 188.0 | | | $ | 37.9 | | | 16.0 | % | | | | $ | 49.5 | | | 26.3 | % |
| Restructuring, exit and impairment charges | 0.8 | | | 4.6 | | | — | | | (3.8) | | | (82.6) | % | | | | 4.6 | | | NM |
| Purchase accounting amortization | 28.7 | | | 28.7 | | | 21.2 | | | — | | | — | % | | | | 7.5 | | | 35.4 | % |
| Acquisition related costs | — | | | — | | | 13.8 | | | — | | | NM | | | | (13.8) | | | NM |
| Adjusted operating earnings | $ | 304.9 | | | $ | 270.8 | | | $ | 223.0 | | | $ | 34.1 | | | 12.6 | % | | | | $ | 47.8 | | | 21.4 | % |
| | | | | | | | | | | | | | | |
| GAAP operating margin | 18.3 | % | | 17.2 | % | | 15.2 | % | | | | 110 bpts | | | | | | 200 bpts |
| Adjusted operating margin | 20.2 | % | | 19.6 | % | | 18.1 | % | | | | 60 bpts | | | | | | 150 bpts |
2017
NM = not meaningful
bpts = basis points
2020 vs. 20162019
Marine EngineThe P&A segment net sales increased by $128.7 million or 9.3 percent in 20172020 versus 2016the prior year due to strong sales growth across all product categories. 2020 results were bolstered by healthy boat usage as a consequence of the need for social
distancing friendly recreation and by favorable weather conditions in both outboard engines and the marine parts and accessories businesses. Outboard engines benefited from a favorable market environment, particularly for higher horsepower engines, and continued benefits from market share gains, including benefits from newly launched products. The marine parts and accessories businesses benefitedU.S. throughout the year, especially compared with 2019. These sales increases were partially offset by stay-at-home restrictions resulting from the successful executionpandemic, which disrupted dealer, retail, and OEM operations in many locations in the first half of the Company's international growth strategy, acquisitionsyear.
International sales were 28 percent of the P&A segment's net sales in 2020. International sales increased 4 percent year over year on both a GAAP and new product launches. Partially offsetting these factorsa constant currency basis. The increase in net sales was a decreasedriven by Asia-Pacific and Europe, partially offset by Latin America.
The P&A segments operating earnings were $275.4 million in sterndrive engine net sales2020, an increase of 16.0 percent mainly due to the continuing shiftincrease in net sales as well as favorable product mix, partially offset by cost reduction actions.
2019 vs. 2018
The P&A segment net sales increased $145.8 million or 11.8 percent in 2019 versus the prior year, due to outboardsbenefits from the Power Products acquisition, which is contributinghad an accretive impact of 13 percent to unfavorable global retail demand trends. Acquisitions completed in 2017 and 2016 accounted for 1 percentage point of the Marine Engine segment's overall revenue growth rate in 2017.rate. International net sales were 3029 percent of the segment's net sales in 2017,2019. International sales increased 13 percent and increased 1018 percent fromversus the prior year on a GAAP basis. Onbasis as well as on a constant currency basis, internationalrespectively. The increase in net sales increased 9 percentwas driven by Europe, Asia-Pacific and Rest-of-World regions, partially offset by declines in 2017, which included gains in all international markets, with the strongest increases in Canada, EuropeLatin America and Asia-Pacific.Canada.
Marine EngineThe P&A segment operating earnings increasedwere $237.5 million in 20172019, an increase of 26.3 percent, mainly as a result of higher net sales andbenefits from the Power Products acquisition as well as favorable cost control measures. Partially offsetting these positive factors were the impact of tariffs, unfavorable changes in product mix, partially offset by planned increases in growth investments in advance of new product introductionsforeign exchange rates and the resolution of litigation in the fourth quarter of 2017.volume declines.
Boat Segment
The following table sets forth Boat segment results for the years ended December 31, 2018, 20172020, 2019 and 2016:2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2020 vs. 2019 | | | | 2019 vs. 2018 |
| (in millions) | 2020 | | 2019 | | 2018 | | $ | | % | | | | $ | | % |
| Net sales | $ | 1,250.3 | | $ | 1,334.3 | | $ | 1,471.3 | | $ | (84.0) | | | (6.3) | % | | | | $ | (137.0) | | | (9.3) | % |
| | | | | | | | | | | | | | | |
| GAAP operating earnings | $ | 70.2 | | | $ | 76.2 | | | $ | 9.1 | | | $ | (6.0) | | | (7.9) | % | | | | $ | 67.1 | | | NM |
| Restructuring, exit and impairment charges | 1.3 | | | 9.7 | | | 54.1 | | | (8.4) | | | (86.6) | % | | | | (44.4) | | | (82.1) | % |
| Acquisition related costs | 1.7 | | | 2.6 | | | — | | | (0.9) | | | (34.6) | % | | | | 2.6 | | | NM |
| Purchase accounting amortization | 1.4 | | | 0.8 | | | — | | | 0.6 | | | 75.0 | % | | | | 0.8 | | | NM |
| Sport Yacht & Yachts | — | | | 7.8 | | | 58.4 | | | (7.8) | | | NM | | | | (50.6) | | | (86.6) | % |
| Adjusted operating earnings | $ | 74.6 | | | $ | 97.1 | | | $ | 121.6 | | | $ | (22.5) | | | (23.2) | % | | | | $ | (24.5) | | | (20.1) | % |
| | | | | | | | | | | | | | | |
| GAAP operating margin | 5.6 | % | | 5.7 | % | | 0.6 | % | | | | (10) bpts | | | | | | 510 bpts |
| Adjusted operating margin | 6.0 | % | | 7.3 | % | | 8.3 | % | | | | (130) bpts | | | | | | (100) bpts |
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 2018 vs. 2017 | | 2017 vs. 2016 |
| (in millions) | 2018 | | 2017 | | 2016 | | $ | | % | | $ | | % |
| Boat segment: | | | | | | | | | | | | | |
| Net sales | $ | 1,471.3 |
| | $ | 1,490.6 |
| | $ | 1,369.9 |
| | $ | (19.3 | ) | | (1.3 | )% | | $ | 120.7 |
| | 8.8 | % |
Restructuring, exit, integration and impairment charges (A) | 54.1 |
| | 48.6 |
| | 0.6 |
| | 5.5 |
| | 11.3 | % | | 48.0 |
| | NM |
|
| Operating earnings (loss) | (12.5 | ) | | 5.3 |
| | 60.8 |
| | (17.8 | ) | | NM |
| | (55.5 | ) | | (91.3 | )% |
| Operating margin | (0.8 | )% | | 0.4 | % | | 4.4 | % | | |
| | (120) bpts |
| | | | (400) bpts |
|
| | | | | | | | | | | | | | |
| Sport Yacht and Yacht operations: | | | | | | | | | | | | | |
| Net sales | 49.4 |
| | 151.6 |
| | 194.4 |
| | (102.2 | ) | | (67.4 | )% | | (42.8 | ) | | (22.0 | )% |
Restructuring, exit, integration and impairment charges (A) | 49.4 |
| | 23.3 |
| | — |
| | 26.1 |
| | NM |
| | 23.3 |
| | NM |
|
| Operating loss | (107.8 | ) | | (55.2 | ) | | (9.5 | ) | | (52.6 | ) | | (95.3 | )% | | (45.7 | ) | | NM |
|
| Operating margin | NM |
| | (36.4 | )% | | (4.9 | )% | | | | NM |
| | | | NM |
|
NM = not meaningful
bpts = basis points
| |
(A) | Restructuring charges in 2018 and 2017 primarily relate to the wind-down of Sport Yacht and Yacht operations. See Note 4 – Restructuring, Exit, Integration and Impairment Activities in the Notes to Consolidated Financial Statements for further details.
|
20182020 vs. 20172019
The Boat segment net sales decreased slightly$84.0 million or 6.3 percent versus 2019 resulting from lower wholesale volume due to the temporary suspension of manufacturing in 2018most plants and the associated ramp-up of activities earlier in the year resulting from the pandemic. This decline was partially offset by increases in the second half of the year resulting from significantly higher wholesale volume to dealers to meet increased customer demand at the retail level and to begin refilling pipeline inventories. Freedom Boat Club, which represents approximately 2.5 percent of segment sales, also achieved higher net sales due to an increase in new memberships and new franchisee locations.
International sales were 23 percent of the Boat segment's net sales in 2020, and decreased 10 percent on both a GAAP basis and constant currency basis, reflecting declines in most regions, which was partially offset by increases in Europe.
The Boat segment operating earnings were $70.2 million in 2020, a decrease of 7.9 percent compared with 2019, due to lower net sales along with unfavorable impact of absorption resulting from production disruptions, which were partially offset by benefits from cost reduction measures.
2019 vs. 2018
The Boat segment net sales decreased $137.0 million versus 2018, reflecting planned pipeline reductions in the same prior year period, primarilyaluminum freshwater and saltwater fishing boat categories and the exit of Sport Yacht & Yachts operations. Excluding the impact of Sport Yacht & Yachts operations, recreational fiberglass net sales increased as a result of the winding down of Sport Yacht and Yacht operations during 2018. Sport Yacht and Yacht sales negatively affected sales comparisons by 7 percent. Net sales for the segment benefited from strong growthimprovement at Sea Ray, with a more favorable mix toward boats with expanded content driving sales. The planned reductions in wholesale unit shipments in the saltwater fishingaluminum freshwater boat category were in response to a challenging retail market environment in the first half of the year, due in part to the impact of new products and of hurricane activity on 2017 results. Net sales growth excluding Sport Yacht and Yacht operations was solid for the recreational fiberglass category, led by continued sales growth forunfavorable weather conditions.Premium boat brands, including Boston Whaler, Sea Ray Sport Boats and Cruisers. Aluminum freshwater reported solid growth as strong sales increasesLund, all performed strongly at retail in pontoon boats were partially offset by continued weakness at Lowe due to the transition of distribution away from Cabela's and lower sales into Canada due to the impact of retaliatory tariffs on wholesale shipments. Global wholesale boat shipments were down, but sales increases were aided by higher average selling prices as customers continued to migrate to boats with more content and higher horsepower engines, as well as growth in premium brands, which outpaced the performance of valuetheir key product lines. In addition, price increases were implemented in response to cost inflation, particularly in aluminum fishing boats and pontoons.categories. International net sales were 24 percent of the segment's net sales in 2018, a decrease of 62019 and decreased 7 percent from the prior year on a GAAP basis. On a constant currency basis and excluding Sport Yacht and Yacht operations, international net sales decreased 3 percent when compared with the same prior year period, mainly due to declines in Rest-of-World regions.
Boat segment operating earnings decreased in 2018 when compared with the prior year, including positive timing benefits from the adoption and implementation of the new revenue standard. The decrease was the result of losses from Sport Yacht and Yacht operations which included wind-down activities and higher restructuring, exit, integration and impairment charges. The other businesses posted an overall increase in earnings, benefitting from increased sales and a favorable impact from changes in product mix.
2017 vs. 2016
Boat segment net sales increased in 2017 versus 2016. The increase included the impact of Sport Yacht and Yacht operations, which negatively impacted sales comparisons by 5 percent. Excluding Sport Yacht and Yacht operations, Boat segment sales benefited from strong growth in all three primary boat categories and reflected growth in both domestic and international markets. Net sales benefited from increased global wholesale unit shipments as well as higher average selling prices, as customers continued to migrate to boats with more content and higher horsepower engines. An acquisition completed in 2016 accounted for 1 percentage point of the Boat segment's overall revenue growth rate in 2017. International net sales were 25 percent of the segment's net sales in 2017, an increase of 10 percent from the prior year on a GAAP basis. On a constant currency basis and excluding acquisitions and Sport Yacht and Yacht operations, international net sales increased 11 percent when compared with the same prior year period, mainly due to net sales increases in Canada and Europe.
Boat segment operating earnings decreased in 2017 when compared with 2016. The decrease was the result of losses from Sport Yacht and Yacht operations, reflecting higher restructuring, exit, integration and impairment charges and weaker operating performance. These factors more than offset earnings improvements from the rest of the businesses, which benefited from higher sales and margin gains, partially stemming from improved operating efficiencies.
Fitness Segment
The following table sets forth Fitness segment results for the years ended December 31, 2018, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 2018 vs. 2017 | | 2017 vs. 2016 |
| (in millions) | 2018 | | 2017 | | 2016 | | $ | | % | | $ | | % |
| Net sales | $ | 1,038.3 |
| | $ | 1,033.7 |
| | $ | 980.4 |
| | $ | 4.6 |
| | 0.4 | % | | $ | 53.3 |
| | 5.4 | % |
Restructuring, exit, integration and impairment charges (A) | 25.3 |
| | 30.3 |
| | 12.7 |
| | (5.0 | ) | | (16.5 | )% | | 17.6 |
| | NM |
|
Operating earnings (B) | 22.4 |
| | 64.1 |
| | 117.3 |
| | (41.7 | ) | | (65.1 | )% | | (53.2 | ) | | (45.4 | )% |
Operating margin (B) | 2.2 | % | | 6.2 | % | | 12.0 | % | | |
| | (400) bpts |
| | | | (580) bpts |
|
NM = not meaningful
bpts = basis points
| |
(A) | Includes $22.1 million and $13.9 million in 2018 and 2017, respectively, related to Cybex trade name impairments. See Note 4 – Restructuring, Exit, Integration and Impairment Activities in the Notes to Consolidated Financial Statements for further details.
|
(B) In 2018 and 2017, the Company's Fitness segment recorded $14.0 million and $13.5 million of non-recurring charges, respectively. The 2018 charges consisted of $3.6 million related to a contract dispute, $3.1 million related to the settlement of supplier obligations, $2.8 million associated with the delayed submission of foreign import duty filings, $2.3 million for a product field campaign and $2.2 million of charges related to the business separation. In 2017, the Fitness segment recorded a $13.5 million charge related to product field campaigns.
2018 vs. 2017
Fitness segment net sales were flat in 2018 compared with 2017 as growth in international markets was offset by declines in domestic sales, particularly of Cybex branded cardio product, and lower sales to value-oriented franchise clubs. This performance also included strong sales in the global commercial strength category due to increased demand resulting from a well-positioned product offering and evolving exerciser preferences. International net sales were 49 percent of the segment's net sales in 2018, and increased 6 percent from the prior year on a GAAP basis. On a constant currency basis, international net sales increaseddecreased 5 percent primarily driven by increases in Asia-Pacific and Europe, partially offset by slightdue to declines in Canada.Europe and Asia-Pacific.
FitnessThe Boat segment operating earnings decreasedwere $76.2 million in 20182019, an increase of $67.1 millioncompared with 2018, as a result of several factors affecting gross margins including inventory cost adjustments primarily related to product transitions, higher freight costs, an unfavorable impact from changes in sales mix and cost inflation and inefficiencies. These factors were partially offset by lower restructuring,reduced losses associated with the exit integration and impairment charges and higher sales, which included timing benefits from the adoption and implementation of the new revenue standard.
2017 vs. 2016
Fitness segment net sales increased in 2017 when compared with 2016 due primarily to growth in international markets including benefits from the ICG acquisition. Growth in sales to value-oriented franchise clubs continues to be offset by declines in sales to traditional clubs and certain vertical markets. Acquisitions completed in 2016 accounted for 3 percentage points of growth in 2017. International net sales were 46 percent of the segment's net sales in 2017 and increased 9 percent compared with
the prior year on both a GAAP basis and on a constant currency basis due to strength across most international markets, especially Asia-Pacific and Europe, partially offset by slight declines in Canada.
Fitness segmentSport Yacht & Yacht operations. Excluding this factor, operating earnings decreased in 2017 when compared withas a result of lower volume, higher retail discounts required to lower pipelines during the prior year resulting from lower margins, reflecting several factors, including higher restructuring, exit, integrationsecond-half of 2019 and impairment charges, costs associated with product field campaigns forplanned spending on profit improvement initiatives. Additionally, comparisons were negatively affected by less favorable plant efficiencies at certain Cybex products, higher costs including freight, particularlyboat facilities in the fourthfirst quarter the impact of planned costs associated with capacity expansions and2019 versus 2018, due in part to new products, more challenging competitive dynamics in certain international markets and unfavorable changes in sales mix, partially offset by higher sales andproduct integrations. These negative factors excluded benefits from cost reduction initiatives.control measures.
Corporate/Other
The following table sets forth Corporate/Other results for the years ended December 31, 2018, 20172020, 2019 and 2016:2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 2020 vs. 2019 | | 2019 vs. 2018 |
| (in millions) | 2020 | | 2019 | | 2018 | | $ | | % | | $ | | % |
| GAAP operating loss | $ | (91.8) | | | $ | (83.0) | | | $ | (85.4) | | | $ | (8.8) | | | 10.6 | % | | $ | 2.4 | | | (2.8) | % |
| Restructuring, exit, and impairment charges | 2.0 | | | 4.5 | | | 0.7 | | | (2.5) | | | (55.6) | % | | 3.8 | | | NM |
| IT transformation cost | 3.7 | | | 2.2 | | | — | | | 1.5 | | | 68.2 | % | | 2.2 | | | NM |
| Adjusted operating loss | $ | (86.1) | | | $ | (76.3) | | | $ | (84.7) | | | $ | (9.8) | | | 12.8 | % | | $ | 8.4 | | | (9.9) | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 2018 vs. 2017 | | 2017 vs. 2016 |
| (in millions) | 2018 | | 2017 | | 2016 | | $ | | % | | $ | | % |
Restructuring, exit, integration and impairment charges (A) | $ | 1.5 |
| | $ | 2.4 |
| | $ | 2.3 |
| | $ | (0.9 | ) | | (37.5 | )% | | $ | 0.1 |
| | 4.3 | % |
Operating loss (B) | (97.3 | ) | | (82.4 | ) | | (77.0 | ) | | (14.9 | ) | | (18.1 | )% | | (5.4 | ) | | (7.0 | )% |
| |
(A) | See Note 4 – Restructuring, Exit, Integration and Impairment Activities in the Notes to Consolidated Financial Statements for further details.
|
| |
(B) | Includes $17.1 million of costs related to the planned Fitness business separation. |
Corporate operating expenses increased by $8.8 million in 20182020 compared with 20172019 primarily due to costs related tohigher variable compensation expense.
Corporate operating expenses decreased by $2.4 million in 2019 compared with 2018 primarily as a result of several factors which included cost containment measures largely completed by the planned Fitness business separation. Comparisons also reflect lowerend of the third quarter of 2019, partially offset by higher restructuring, exit, integration and impairment charges. Corporate expenses increased in 2017 compared with 2016 primarily due to project and other growth initiative related spending, including investments in technology solutions and IT enhancements.charges.
Cash Flow, Liquidity and Capital Resources
The following table sets forth an analysis of free cash flow for the years ended December 31, 2018, 20172020, 2019 and 2016:2018:
| | | | | | | | | | | | | | | | | |
| (in millions) | 2020 | | 2019 | | 2018 |
| Net cash provided by operating activities of continuing operations | $ | 800.0 | | | $ | 475.3 | | | $ | 274.5 | |
| Net cash provided by (used for): | | | | | |
| Plus: Capital expenditures | (182.4) | | | (232.6) | | | (180.2) | |
| Plus: Proceeds from the sale of property, plant and equipment | 2.9 | | | 7.3 | | | 0.4 | |
| Plus: Effect of exchange rate changes on cash and cash equivalents | 8.8 | | | 0.4 | | | (5.0) | |
| Less: Cash impact of Sport Yacht & Yachts operations, net of tax | — | | | — | | | (53.7) | |
Total free cash flow from continuing operations (A) | $ | 629.3 | | | $ | 250.4 | | | $ | 143.4 | |
|
| | | | | | | | | | | |
| (in millions) | 2018 | | 2017 | | 2016 |
| Net cash provided by operating activities of continuing operations | $ | 337.0 |
| | $ | 401.6 |
| | $ | 439.1 |
|
| Net cash provided by (used for): | |
| | |
| | |
|
| Plus: Capital expenditures | (193.4 | ) | | (203.2 | ) | | (193.9 | ) |
| Plus: Proceeds from the sale of property, plant and equipment | 6.7 |
| | 8.5 |
| | 1.9 |
|
| Plus: Effect of exchange rate changes on cash and cash equivalents | (5.0 | ) | | 6.9 |
| | 0.1 |
|
| Less: Cash paid for Fitness business separation costs, net of tax | (9.8 | ) | | — |
| | — |
|
| Less: Cash impact of Sport Yacht and Yacht operations, net of tax | (53.7 | ) | | (10.9 | ) | | (20.6 | ) |
Total free cash flow from continuing operations (A) | $ | 208.8 |
| | $ | 224.7 |
| | $ | 267.8 |
|
(A) The Company defines “FreeWe define "Free cash flow”flow" as cash flow from operating and investing activities of continuing operations (excluding cash provided by or used for acquisitions, investments, purchases or sales/maturities of marketable securities and other investing activities, as well as cash paid for Fitness business separation costs, net of tax, and the cash impact of Sport Yacht and Yacht& Yachts operations, net of tax) and the effect of exchange rate changes on cash and cash equivalents. Free cash flow is not intended as an alternative measure of cash flow from operations, as determined in accordance with GAAP in the United States. The Company usesWe use this financial measure both in presenting its results to shareholders and the investment community and in itsour internal evaluation and management of itsour businesses. Management believesWe believe that this financial measure and the information it provides are useful to investors because it permits investors to view Brunswick’sour performance using the same tool that management useswe use to gauge progress in achieving itsour goals. Management believesWe believe that the non-GAAP financial measure “Free"Free cash flow”flow" is also useful to investors because it is an indication of cash flow that may be available to fund investments in future growth initiatives.
Brunswick’sOur major sources of funds for capital investments, acquisitions, share repurchase programs and dividend payments are cash generated from operating activities, available cash and marketable securities balances, proceeds from divestitures and potential borrowings. The Company evaluatesWe evaluate potential acquisitions, divestitures and joint ventures in the ordinary course of business.
20182020 Cash Flow
In 2018, netNet cash provided by operating activities of continuing operations in 2020 totaled $337.0 million. $800.0 million versus $475.3 million in 2019. The increase is primarily due to higher net earnings and favorable working capital usage, driven mainly by decreases in inventory levels and increases in accounts payable and accrued expenses.
The primary driverdrivers of theNet cash provided by operating activities wasof continuing operations in 2020 were net earnings, from continuing operations net of non-cash expense items. Additionally, the Company made discretionary pension contributions of $163.8 million to its qualifieditems, and nonqualified defined benefit plans. An increasea decrease in working capital had a negative effect on net cash provided by operating activities.capital. Working capital is defined as Accounts and notes receivable, Inventories and Prepaid expenses and other, net of Accounts payable and Accrued expenses as presented in the Consolidated Balance Sheets, excluding the impact of acquisitions. Net inventories increased by $84.2acquisitions and non-cash adjustments. Inventory decreased $109.3 million, primarily driven by increasesdue to the increase in net sales during 2020 and production disruptions in the Marine Engine segmentfirst half of the year. Accounts and notes receivable increased $19.9 million primarily due to the increase in net sales during the fourth quarter of 2020. Accrued expenses and Accounts payable increased $75.3 million and $64.5 million, respectively, primarily due to production associated withincreases, which were partially offset by timing of payments.
Net cash used for investing activities of continuing operations was $239.4 million, which included capital expenditures of $182.4 million. Our capital spending was focused on investments in new outboard products. We also purchased $55.9 million of marketable securities in 2020.
Net cash used for financing activities was $361.8 million, primarily related to payments of long-term debt including current maturities, common stock repurchases and cash dividends paid to common shareholders. Refer to Note 16 – Debt in the Notes to Consolidated Financial Statements for further details on our debt activity during the year ended December 31, 2020.
2019 Cash Flow
In 2019, Net cash provided by operating activities of continuing operations totaled $475.3 million versus $274.5 million in 2018. This comparison reflected lower pension contributions and higher net earnings, net of non-cash items (pension settlement charges, depreciation and amortization, impairments and income tax impacts not yet realized in cash) in 2019, which were partially offset by unfavorable working capital usage trends.
The primary drivers of Net cash provided by operating activities were net earnings from continuing operations net of non-cash expense items, partially offset by an increase in working capital. Inventory increased $50.5 million primarily related to
finished goods in the Propulsion and P&A segments, to support higher sales volumes after pipeline reduction efforts in 2019. Accrued expenses decreased $44.7 million, Accounts payable decreased $32.7 million and Accounts and notes receivable increased by $27.3decreased $41.4 million primarily as a result of strong year-over-yearlower sales increases in the fourth quarter in the Company's Marine Engine segment. Partially offsetting these items were increases in Accounts payable of $49.3 million, mostly related to higher expenditures in the Marine Engine segment to support higher production, and Accrued expenses of $13.7 primarily due to customer rebates attributable to increased sales volume.quarter.
Net cash used for investing activities of continuing operations during 20182019 totaled $1,107.3$287.0 million, which included capital expenditures of $232.6 million and cash paid for the acquisition of Power Products, netFreedom Boat Club of cash acquired, of $909.6$64.1 million. See Refer to Note 5 – Acquisitions in the Notes to Consolidated Financial Statements for further details on the Power ProductsFreedom Boat Club acquisition. In addition, capital expenditures totaled $193.4 million. The Company'sOur capital spending focused on investments in new productscapacity expansion initiatives as well as capacity expansion initiatives, mostly innew products. Net cash provided by investing activities of discontinued operations was $481.7 million and was primarily related to proceeds from the marine segments. sale of the Fitness business.
Net cash used for investingfinancing activities also included $10.8was $600.8 million of investments whichduring 2019 and primarily related to the Company's marine joint ventures.
Net cash provided by financing activities was $620.5 million during 2018. The cash inflow was mainly due to $793.5 million of net proceeds from debt activity in connection with the Power Products acquisition, partially offset by common stock repurchase activityrepurchases, net payments from issuances of long-term debt and cash dividends paid to common shareholders. Refer to Note 1716 – Debt in the Notes to Consolidated Financial Statements for further details on the Company'sour debt activity.
2017 Cash Flow
In 2017, net cash provided by operating activities of continuing operations totaled $401.6 million. The primary driver of the cash provided by operating activities was net earnings from continuing operations net of non-cash expense items. An increase in working capital had a negative effect on net cash provided by operating activities. Net inventories increased by $69.7 million to support higher sales volumes and Accounts receivable increased by $57.2 million as a result of strong year-over-year sales increases in the fourth quarter. Partially offsetting these items were increases in Accrued expenses of $47.1 million and Accounts payable of $31.0 due to higher expenditure levels and timing of payments.
Net cash used for investing activities of continuing operations during 2017 totaled $178.9 million, which included capital expenditures of $203.2 million. The Company's capital spending was focused on new product introductions, capacity expansion and other profit enhancing projects in all segments. Cash paid for the acquisition of Lankhorst Taselaar, net of cash acquired, was $15.5 million. Net cash used for investing activities also included $35.0 million of maturities of marketable securities and Proceeds from the sale of Property, plant and equipment of $8.5 million.
Cash flows used for financing activities of continuing operations were $203.7 million during 2017 and included common stock repurchases and cash dividends paid to common stock shareholders.
2016 Cash Flow
In 2016, net cash provided by operating activities of continuing operations totaled $439.1 million. The primary driver of the cash provided by operating activities was net earnings from continuing operations net of non-cash expense items. An increase in working capital had a negative effect on net cash provided by operating activities. Net inventories increased by $48.2 million due to increases in production to support higher sales volumes. Accrued expenses decreased $20.8 million which included the impact of the payments of deferred compensation in connection with executive management transitions. Partially offsetting these items was an increase in Accounts payable of $39.2 million, which was partially due to the timing of payments.
Net cash used for investing activities of continuing operations during 2016 totaled $486.0 million, which included capital expenditures of $193.9 million. The Company's capital spending was focused on new product introductions, capacity expansion projects in all segments and other high priority, profit-enhancing projects. Cash paid for acquisitions, net of cash acquired, totaled $276.1 million. Additionally, the Company had net purchases of marketable securities of $24.3 millionactivity during the year.year ended December 31, 2019.
Cash flows used for financing activities of continuing operations were $185.8 million during 2016 and included common stock repurchases and cash dividends paid to common stock shareholders.
Liquidity and Capital Resources
The Company views itsWe view our highly liquid assets as of December 31, 20182020 and 20172019 as:
| | | | | | | | | | | |
| (in millions) | 2020 | | 2019 |
| Cash and cash equivalents | $ | 519.6 | | | $ | 320.3 | |
| Short-term investments in marketable securities | 56.7 | | | 0.8 | |
| | | |
| Total cash, cash equivalents and marketable securities | $ | 576.3 | | | $ | 321.1 | |
|
| | | | | | | |
| (in millions) | 2018 | | 2017 |
| Cash and cash equivalents | $ | 294.4 |
| | $ | 448.8 |
|
| Short-term investments in marketable securities | 0.8 |
| | 0.8 |
|
| Total cash, cash equivalents and marketable securities | $ | 295.2 |
| | $ | 449.6 |
|
The following table sets forth an analysis of Total liquidity as of December 31, 20182020 and 2017:2019:
| | | | | | | | | | | |
| (in millions) | 2020 | | 2019 |
| Cash, cash equivalents and marketable securities | $ | 576.3 | | | $ | 321.1 | |
Amounts available under lending facilities(A) | 395.0 | | | 387.9 | |
Total liquidity (B) | $ | 971.3 | | | $ | 709.0 | |
|
| | | | | | | |
| (in millions) | 2018 | | 2017 |
| Cash, cash equivalents and marketable securities | $ | 295.2 |
| | $ | 449.6 |
|
Amounts available under lending facilities(A) | 396.1 |
| | 295.7 |
|
Total liquidity (B) | $ | 691.3 |
| | $ | 745.3 |
|
(A) See Note 1716 – Debt in the Notes to Consolidated Financial Statements for further details on the Company'sour lending facility.
(B) The Company definesWe define Total liquidity as Cash and cash equivalents and Short-term investments in marketable securities as presented in the Condensed Consolidated Balance Sheets, plus amounts available for borrowing under itsour lending facilities. Total liquidity is not intended as an alternative measure to Cash and cash equivalents and Short-term investments in marketable securities as determined in accordance with GAAP in the United States. The Company usesWe use this financial measure both in presenting itsour results to shareholders and the investment community and in itsour internal evaluation and management of itsour businesses. Management believes that this financial measure and the information it provides are useful to investors because it permits investors to view the Company’sour performance using the same metric that management uses to gauge progress in achieving its goals. Management believes that the non-GAAP financial measure “Total liquidity”"Total liquidity" is also useful to investors because it is an indication of the Company’sour available highly liquid assets and immediate sources of financing.
Cash, cash equivalents and marketable securities totaled $295.2$576.3 million as of December 31, 2018, a decrease2020, an increase of $154.4$255.2 million from $449.6$321.1 million as of December 31, 2017.2019. Total debt as of December 31, 20182020 and December 31, 20172019 was $1,220.8$951.4 million and $437.4$1,109.3 million, respectively. The Company'sOur debt-to-capitalization ratio increaseddecreased to 43.539 percent as of December 31, 2018,2020, from 22.846 percent as of December 31, 2017.2019.
The Company secured short-termDuring 2020 and long-term financing during 20182019, gross borrowings under our Amended and Restated Credit Agreement (Credit Facility) totaled $610.0 million and $655.0 million, respectively. As of December 31, 2020 and December 31, 2019, there were no borrowings outstanding and available borrowing capacity totaled $395.0 million, net of $5.0 million of letters of credit outstanding under the Credit Facility. As of December 31, 2020, we were in connectioncompliance with the Power Products acquisition. Additionally,financial covenants in the Company amended and restated its existingCredit Facility. The maximum amount utilized under the Credit Facility during the twelve months ended December 31, 2020, including letters of credit agreement, increasingoutstanding, was $397.1 million. In addition, during 2020, borrowings under our unsecured commercial paper program (CP Program) totaled $175.0 million, all of which were repaid. During the borrowing capacity by $100 million and extendingtwelve months ended December 31, 2020, the credit agreement through September 2023. Management believes thatmaximum amount outstanding under the Company has adequate sources of liquidity to meet the Company's short-term and long-term needs.CP Program was $100.0 million. Refer to Note 1716 – Debt in the Notes to Consolidated Financial Statements for further details on the Company's borrowing activity in 2018.details.
The Company has executed share repurchaseslevel of borrowing capacity under our Credit Facility and CP Program is limited by both a leverage and interest coverage test. These covenants also pertain to termination provisions included in our wholesale financing joint venture arrangements with Wells Fargo Distribution Finance. Based on our anticipated earnings generation throughout the year, we expect to maintain sufficient cushion against authorizations approved by the Boardexisting debt covenants.
We believe that we have adequate sources of liquidity to meet our short-term and 2016. In 2018, the Company repurchased $75.0 million of stock under these authorizationslong-term needs.
2021 Cash Flow Outlook and as of December 31, 2018, the remaining authorization was $34.8 million.
The Company contributed $160.0 million and $70.0 million to its qualified defined benefit pension plans in 2018 and 2017, respectively. The Company also contributed $3.8 million and $3.7 million to fund benefit payments from its nonqualified defined benefit pension plan in 2018 and 2017, respectively.
The aggregate funded status of the Company's qualified defined benefit pension plans, measured as a percentage of the projected benefit obligation, was approximately 103 percent at December 31, 2018 compared with approximately 80 percent at December 31, 2017. As of December 31, 2018, the Company's qualified defined benefit pension plans were over-funded on an aggregate projected benefit obligation basis by $18.4 million which represented a $156.0 million improvement from 2017. This improvement was mostly due to contributions of $160.0 million in 2018. As of December 31, 2018, the Company was left with a residual pre-tax funding requirement estimated to be between $15 million and $25 million to fully exit the plans. The Company plans to fully exit its defined benefit pension plans in 2019 and will incur charges in connection with this action, including the recognition of actuarial losses as well as certain income tax consequences.
See Note 18 – Postretirement Benefits in the Notes to Consolidated Financial Statements for more details.
Capital Plan
The Company is projecting an increase in net earnings in 2019 when compared with 2018. Net activity in working capital is projected to reflect a usage of cash in 2019 in the range of $10 million to $30 million. Additionally, the Company is planning for capital expenditures of approximately $240 million to $260 million, including investments in capacity and new products, as well as certain cash payments in 2019 that relate to 2018 activities. Including these and other factors, the Company plans to generateWe anticipate generating free cash flow in 2018 in excess of $320$300 million with approximately $20 million attributablein 2021, which likely reflects a return to more normal, historical free cash flow levels. 2020 saw a significant amount of cash generated from the Company's Fitness segment.
The Company plans on reducing debtliquidation of inventories, which will not repeat in 2021, and we estimate working capital to increase by at least$140 to $150 million for the year, primarily to $200rebuild inventories in our Propulsion and P&A segments.
We anticipate executing a balanced capital strategy in 2021, leveraging our strong cash position. We plan to retire approximately $100 million primarily inof our long-term debt obligations, with our interest expense estimated to be approximately $60 million for the year. During 2020, we paused certain capital expenditures during the pandemic to conserve cash until the second half of 2019, with estimated interest expensethe year. We anticipate returning to more normal levels of capital spending during 2021, between $200 and $220 million, including new product investments in the range of $65 million to $70 million. Upon completion of the Fitness business separation, the Company will re-assess its debt retirement objectives and share repurchase activities. The 2019 capital plan does not incorporate the utilization of any net proceeds the Company may receive in connection with the Fitness business separation.
Including the previously described planned debt actions in 2019, the Company plans to substantially reduce all of its near-term maturity debt (maturities 2023our businesses, cost reduction and prior) byautomation projects, and select additional capacity initiatives. Finally, we plan to continue our systematic approach to share repurchases, with our plan including between $80 million and $120 million of repurchases in 2021, spread relatively evenly across the end of 2021. The reduction will be funded primarily through free cash flow, potentially augmented by proceeds from the Fitness business separation.year.
Quarterly dividend payments in the 2019 plan are anticipated to be $0.21 per share, consistent with current levels. However, the Company may adjust these levels as it evaluates opportunities to grow dividends.
The Company plans to fully exit its qualified defined benefit pension plans in 2019, which will require a residual pre-tax contribution of approximately $15 million to $25 million.
The Company expects its cash tax rate to be in the high-single digit percentage range in 2019.
Financial Services
Refer to Note 1110 – Financing Joint Venture in the Notes to Consolidated Financial Statements for more information about the Company'sour financial services.
Off-Balance Sheet Arrangements
Guarantees. The Company hasWe have reserves to cover potential losses associated with guarantees and repurchase obligations based on historical experience and current facts and circumstances. Historical cash requirements and losses associated with these obligations have not been significant. See Note 1413 – Commitments and Contingencies in the Notes to Consolidated Financial Statements for a description of these arrangements.
Contractual Obligations
The following table sets forth a summary of the Company'sour contractual cash obligations as of December 31, 2018:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments due by period |
| (in millions) | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| Contractual Obligations | | | | | | | | | |
Debt (A) | $ | 951.4 | | | $ | 43.1 | | | $ | 222.7 | | | $ | 2.5 | | | $ | 683.1 | |
| Interest payments on long-term debt | 1,082.4 | | | 56.9 | | | 108.7 | | | 93.3 | | | 823.5 | |
Operating leases (B) | 99.8 | | | 24.4 | | | 41.0 | | | 24.5 | | | 9.9 | |
| | | | | | | | | |
Purchase obligations (C) | 58.0 | | | 57.6 | | | 0.4 | | | — | | | — | |
Deferred management compensation (D) | 30.7 | | | 9.6 | | | 8.0 | | | 6.0 | | | 7.1 | |
| | | | | | | | | |
Other long-term liabilities (E) | 190.3 | | | 13.8 | | | 90.7 | | | 70.2 | | | 15.6 | |
| Total contractual obligations | $ | 2,412.6 | | | $ | 205.4 | | | $ | 471.5 | | | $ | 196.5 | | | $ | 1,539.2 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
| (in millions) | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| Contractual Obligations | | | | | | | | | |
Debt (A) | $ | 1,240.5 |
| | $ | 41.3 |
| | $ | 383.4 |
| | $ | 340.5 |
| | $ | 475.3 |
|
| Interest payments on long-term debt | 163.5 |
| | 26.2 |
| | 52.3 |
| | 38.5 |
| | 46.5 |
|
Operating leases (B) | 153.4 |
| | 40.3 |
| | 58.8 |
| | 31.4 |
| | 22.9 |
|
Purchase obligations (C) | 211.6 |
| | 209.1 |
| | 2.4 |
| | 0.1 |
| | — |
|
Deferred management compensation (D) | 37.2 |
| | 9.7 |
| | 8.0 |
| | 6.0 |
| | 13.5 |
|
Other long-term liabilities (E) | 154.9 |
| | 15.7 |
| | 85.3 |
| | 32.7 |
| | 21.2 |
|
| Total contractual obligations | $ | 1,961.1 |
| | $ | 342.3 |
| | $ | 590.2 |
| | $ | 449.2 |
| | $ | 579.4 |
|
| |
(A) | See Note 17 – Debt in the Notes to Consolidated Financial Statements for additional information on the Company's debt. “Debt” refers to future cash principal payments. Debt also includes the Company's capital leases as discussed in Note 22 – Leases in the Notes to Consolidated Financial Statements.
|
| |
(B) | See Note 22 – Leases in the Notes to Consolidated Financial Statements for additional information.
|
| |
(C) | Purchase obligations represent agreements with suppliers and vendors as part of the normal course of business. |
| |
(D) | Amounts primarily represent long-term deferred compensation plans for Company management. |
| |
(E) | Other long-term liabilities primarily includes deferred revenue and future projected payments related to the Company's nonqualified pension plans. The Company is not required to make contributions to the qualified pension plan in 2019. |
Legal Proceedings
(A) See Note 1416 – Commitments and Contingencies Debtin the Notes to Consolidated Financial Statements for disclosureadditional information on our debt. “Debt” refers to future cash principal payments. Debt also includes our capital leases as discussed in Note 21 – Leases in the Notes to Consolidated Financial Statements.
(B) See Note 21 – Leases in the Notes to Consolidated Financial Statements for additional information.
(C) Purchase obligations represent agreements with suppliers and vendors as part of the normal course of business.
(D) Amounts primarily represent long-term deferred compensation plans.
(E) Other long-term liabilities primarily includes long-term warranty contracts, future projected payments related to certain legalour nonqualified pension plans and environmental proceedings.deferred revenue. We are not required to make contributions to the qualified pension plan in 2020.
Legal Proceedings
See Note 13 – Commitments and Contingencies in the Notes to Consolidated Financial Statements.
Environmental Regulation
In its Marine Enginethe Propulsion segment, Brunswick continueswe continue to develop engine technologies to reduce engine emissions to comply with current and future emissions requirements. In the P&A segment, we are working to develop electrification and other technologies to reduce our environmental footprint. The Boat segment continues to pursue fiberglass boat manufacturing technologies and techniques to reduce air emissions at its boat manufacturing facilities. The costs associated with these activities may have an adverse effect on segment operating margins and may affect short-term operating results. Environmental regulatory bodies in the United States and other countries may impose more stringent emissions standards and/or other environmental regulatory requirements than are currently in effect. Using itsBy following our environmental management system processes the Company compliesto drive sustainable, responsible practices, we comply with current regulations and expectsexpect to comply fully with any new regulations; compliance will most likely increase the cost of these products for the Companyus and the industry, but is not expected to have a material adverse effect on Brunswick'sour competitive position.
Critical Accounting Policies
The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates. If current estimates for the cost of resolving any specific matters are later determined to be inadequate, results of operations could be adversely affected in the period in which additional provisions are required. The Company hasWe have discussed the development and selection of the critical accounting policies with the Audit and Finance Committee of the Board of Directors and believesbelieve the following are the most critical accounting policies that could have an effect on Brunswick'sour reported results.
Revenue Recognition and Sales Incentives. Revenue is recognized as performance obligations under the terms of contracts with customers are satisfied; this occurs when control of promised goods (engines, engine parts and accessories, boats, and fitness equipment) is transferred to the customer. The Company recognizesWe recognize revenue related to the sale of extended warranty contracts that extend the coverage period beyond the standard warranty period over the life of the extended warranty period.
Revenue is measured as the amount of consideration expected to be entitled to in exchange for transferring goods or providing services. The Company hasWe have excluded sales, value add, and other taxes collected concurrent with revenue-producing activities from the determination of the transaction price for all contracts. The Company hasWe have elected to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment activity. For all contracts with customers, the Company haswe have not adjusted the promised amount of consideration for the effects of a significant financing component as the period between the transfer of the promised goods and the customer's payment is expected to be one year or less.
See Note 2 – Revenue Recognition in the Notes to Consolidated Financial Statements for more information.
Warranty Reserves. The Company recordsWe record an estimated liability for product warranties at the time revenue is recognized. The liability is estimated using historical warranty experience, projected claim rates and expected costs per claim. The Company adjusts itsWe adjust our liability for specific warranty matters when they become known and the exposure can be estimated. The Company'sOur warranty liabilities are affected by product failure rates as well as material usage and labor costs incurred in correcting a product failure. If actual costs differ from estimated costs, the Companywe must make a revision to the warranty liability.
Goodwill. Goodwill results from the excess of purchase price over the net assets of businesses acquired. All three of the Company's reporting units, which are also the Company's reportable segments, have a goodwill balance.
The Company reviewsWe review goodwill for impairment annually and whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying value. As part of the annual test, the Companywe may perform a qualitative, rather than quantitative, assessment to determine whether the fair values of itsour reporting units are “more"more likely than not”not" to be greater than their carrying values. In performing this qualitative analysis, the Company considerswe consider various factors, including the effect of market or industry changes and the reporting units' actual results compared towith projected results.
If the fair value of a reporting unit does not meet the "more likely than not" criteria discussed above, the impairment test for goodwill iswe perform a quantitative two-step process. The first step comparesassessment which begins by measuring the fair value of the reporting unit with its carrying value.unit. If the fair value exceeds the carrying value of the reporting unit exceeds its fair value, a goodwill impairment is not considered impaired. Ifrecorded equal to the carrying amount exceeds the fair value the second step is performed to measure the amount of the impairment loss, if any. In this second step, the impliedreporting unit less its fair value, goodwill is compared with the carrying amount of the goodwill. If the carrying amount of the goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amountvalue of the goodwill.
The Company calculatesWe calculate the fair value of itsour reporting units considering both the income approach and the guideline public company method. The income approach calculates the fair value of the reporting unit using a discounted cash flow approach utilizing a Gordon Growth model. Internally forecasted future cash flows, which the Company believeswe believe reasonably approximateapproximates market participant assumptions, are discounted using a weighted average cost of capital (Discount Rate) developed for each reporting unit. The Discount Rate is developed using market observable inputs, as well as considering whether or not there is a measure of risk related to the specific reporting unit’s forecasted performance. Fair value under the guideline public company method is determined for each unit by applying market multiples for comparable public companies to the unit’s current and forecasted financial results.
For 2018 and 2017,The key uncertainties in these calculations are the goodwill impairment test for the Fitness reporting unit was a two-step process. As of the Company’s annual goodwill impairment testing date on October 1, 2018, the estimated fair value of the Fitness reporting unit was approximately 19 percentassumptions used in excess of its carrying value, which included goodwill of $390.8 million. The fair value determination includes several inputs which require significant management assumptions. The most significant management assumptions that impact the estimated fair value ofdetermining the reporting unit areunit’s forecasted future performance, including revenue growth and operating margins, as well as the projected results andperceived risk associated with those forecasts in determining the Discount Rate, assumption. The projected results include improvements in operating performance versus 2018, particularly expanded gross margins which are predicated upon several factors, including the successful execution of cost reduction initiatives, along with increased sales. A 100 basis point increase in the Discount Rate assumption would lower the excess spread over fair value by approximately 8.0 percent. While the Company believes the current projections and the discount rate assumption are reasonable, the Fitness business' ability to expand gross margins or grow sales in line with projections could be negatively affected by its ability to execute the planned actions underlying the forecasted improvement in its performance as well asselecting representative market conditions. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the impairment test will prove to be an accurate prediction of the future. To the extent future operating results differ from those in our current forecast, or if the assumptions underlying the Discount Rate change, it is possible that an impairment charge could be recorded.multiples.
In addition, Brunswick is currently working to separate the Fitness business, which could involve either a spin-off or a sale transaction. It is possible that the public markets or potential buyers may value the standalone business differently upon a spin-off or in the event of a sale. It is not possible to predict what the valuation outcome will be and how the facts and circumstances at the time will influence the Brunswick Board of Directors’ final decision on the method of separation.
As of December 31, 2018, the goodwill balance for the Fitness reporting unit was $389.8 million, and represents the maximum potential goodwill impairment.
For 2018, 2017 and 2016, with the exception of the Fitness reporting unit in the two periods discussed above, the Company's reporting units met the "more likely than not" criteria; as a result, the Company was not required to perform the quantitative impairment test.
The CompanyWe did not record any goodwill impairments in 2020, 2019 or 2018 2017 or 2016.in continuing operations. Refer to Note 3 – Discontinued Operations for further information on the Fitness goodwill impairment recorded during 2019.
Other intangible assets. The Company'sOur primary intangible assets are customer relationships and trade names acquired in business combinations. Intangible assets are initially valued using a methodology commensurate with the intended use of the asset. The customer relationships including those acquired in the Power Products acquisition, which constitute the majority of the Company's customer relationships, wereare valued using the an income approach, specifically the multi-period excess earnings method (MPEEM). The fair value of trade names, including the Power Products trade names is measured using a relief-from-royalty (RFR) approach, which assumes the value of the trade name is the discounted amount of cash flows of the amount that would be paid to third parties had the Companywe not owned the trade name and instead licensed the trade name from another company. Higher royalty rates are assigned to premium brands within the marketplace based on name recognition and profitability, while other brands receive lower royalty rates. The basis for future sales projections for both the RFR and MPEEM are based on internal revenue forecasts by brand, which the Company believeswe believe represent reasonable market participant assumptions. The future cash flows are discounted using an applicable Discount Rate as well as any potential risk premium to reflect the inherent risk of holding a standalone intangible asset.
The key uncertainties in the RFR and MPEEM calculations, as applicable, are: the selection of an appropriate royalty rate, assumptions used in developing internal revenue growth and customer expense forecasts, assumed customer attrition rates, the selection of an appropriate royalty rate, as well as the perceived risk associated with those forecasts in determining the Discount Rate.discount rate and risk premium.
The costs of amortizable intangible assets are recognized over their expected useful lives, typically between three and sixteenfifteen years, using the straight-line method. Intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate long-lived assets described below. Intangible assets not subject to amortization are assessed for impairment at least annually and whenever events or changes in circumstances indicate that it is more likely than not that an asset may be impaired. The impairment test for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset.
For the years ended December 31, 2018 and 2017, the Company recorded $22.1 million and $13.9 million, respectively, of indefinite-lived intangible asset impairments related to the Cybex trade name. As a result of changes in operating strategy in 2018, the Cybex trade name was deemed to be a definite-lived intangible asset, with $2.6 million remaining within Other intangibles, net to be fully amortized by December 31, 2020. Refer to Note 4 – Restructuring, Exit, Integration and Impairment Activities for further details. The Company did not record impairments for indefinite-lived intangible assets in 2016.
Refer to Note 5 – Acquisitions and Note 1211 – Goodwill and Other Intangibles in the Notes to Consolidated Financial Statements for more information.
Long-Lived Assets. The CompanyWe continually evaluatesevaluate whether events and circumstances have occurred that indicate the remaining estimated useful lives of itsour definite-lived intangible assets--excluding goodwillassets and indefinite-lived trade names--and other long-lived assets may warrant revision or that the remaining balance of such assets may not be recoverable. Once an impairment indicator is identified, the Company testswe test for recoverability of the related asset group using an estimate of undiscounted cash flows over the remaining asset group's remaining life. If an asset group's carrying value is not recoverable, the Company recordswe record an impairment loss based on the excess of the carrying value of the asset group over the long-lived asset group's fair value. Fair value is determined using observable inputs, including the use of appraisals from independent third parties, when available, and, when observable inputs are not available, fair value is based on the Company's assumptionsour assumption of the data that market participants would use in pricing the asset, or liability, based on the best information available in the circumstances. Specifically, the Company useswe use discounted cash flows to determine the fair value of the asset when observable inputs are unavailable. The CompanyWe tested itsour long-lived asset balances for impairment as indicators arose during 2020, 2019 and 2018, 2017 or 2016, resulting in impairment charges of $13.1$0.9 million, $31.0$3.0 million and $2.4$12.7 million, respectively, which are recognized either in either Restructuring, integrationexit and impairment charges or Selling, general and administrative expense in the Consolidated Statements of Operations.
Income Taxes. Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. The Company evaluatesWe evaluate the realizability of net deferred tax assets and, as necessary, recordsrecord valuation allowances against them. The Company estimates itsWe estimate our tax obligations based on historical experience and current tax laws and litigation. The judgments made at any point in time may change based on the outcome of tax audits and settlements of tax litigation, as well as changes due to new tax laws and regulations and the Company'sour application of those laws and regulations. These factors may cause the Company'sour tax rate and deferred tax balances to increase or decrease. See Note 1312 – Income Taxes in Notes to Consolidated Financial Statements for further details.
Recent Accounting Pronouncements
See Note 1 – Significant Accounting Policies in the Notes to Consolidated Financial Statements for the recent accounting pronouncements that have been adopted during the year ended December 31, 2018,2020, or will be adopted in future periods.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign currency exchange rates, commodity prices and interest rates. The Company enters into various hedging transactions to mitigate certain of these risks in accordance with guidelines established by the Company's management. The Company does not use financial instruments for trading or speculative purposes.
The Company uses foreign currency forward and option contracts to manage foreign exchange rate exposure related to anticipated transactions, and assets and liabilities that are subject to risk from foreign currency rate changes. The Company's principal currency exposures mainly relate to the Euro, Japanese Yen, Canadian dollar, Australian dollar, Brazilian Real, and the British Pound.Brazilian Real. The Company hedges certain anticipated transactions with financial instruments whose maturity date, along with the realized gain or loss, occurs on or near the execution of the anticipated transaction. The Company manages foreign currency
exposure of certain assets or liabilities through the use of derivative financial instruments such that the gain or loss on the derivative financial instrument offsets the loss or gain recognized on the underlying asset or liability, respectively.
The Company uses fixed-to-floating interest rate swaps to convert a portion of the Company's long-term debt from fixed-to-floating rate debt. An interest rate swap is entered into with the expectation that the change in the fair value of the interest rate swap will offset the change in the fair value of the debt instrument attributable to changes in the benchmark interest rate.
Each period, the change in the fair value of the interest rate swap asset or liability is recorded as a change in the fair value of the corresponding debt instrument.
The following analyses provide quantitative information regarding the Company's exposure to foreign currency exchange rate risk and interest rate risk as it relates to its derivative financial instruments. The Company uses a model to evaluate the sensitivity of the fair value of financial instruments with exposure to market risk that assumes instantaneous, parallel shifts in exchange rates. For options and instruments with nonlinear returns, models appropriate to the instrument are utilized to determine the impact of market shifts. There are certain shortcomings inherent in the sensitivity analyses presented, primarily due to the assumption that exchange rates change in a parallel fashion.
The amounts shown below represent the estimated reduction in fair market value that the Company would incur on its derivative financial instruments from a 10 percent adverse change in quoted foreign currency rates are $41.1 million and interest rates.$34.5 million for the years 2020 and 2019, respectively.
|
| | | | | | | |
| (in millions) | 2018 | | 2017 |
| Risk Category | | | |
| Foreign exchange | $ | 46.9 |
| | $ | 47.8 |
|
| Interest rates | 1.5 |
| | 1.5 |
|
Item 8. Financial Statements and Supplementary Data
|
| |
See Index to Financial Statements and Financial Statement Schedule on page 5251. |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively), the Company has evaluated its disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a -15(e) and 15d -15(e)) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective.
Management's Report on Internal Control Over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company included a report of management's assessment of the effectiveness of its internal control over financial reporting as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2020. Management's report is included in the Company's 20182020 Financial Statements under the captions entitled “Report of Management on Internal Control Over Financial Reporting” and is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
The Company implemented internal controls to ensure adequate evaluation of contracts and proper assessment of the impact of the new accounting standard related to revenue recognition (ASC 606) on the financial statements to facilitate the adoption and implementation on January 1, 2018. There were no material changes to the Company's internal control over financial reporting due to the adoption of the new standard. On August 9, 2018, the Company completed the acquisition of Power Products. Our management is in the process of reviewing the operations of Power Products, and implementing our internal control structure over the operations of the recently acquired entity; however, we will elect to exclude Power Products when conducting our annual evaluation of the effectiveness of internal controls over financial reporting, as permitted by applicable regulations. Except for the
preceding changes, there have been no changes in the Company's internal control over financial reporting during the quarter ended December 31, 2018,2020, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information pursuant to this Item with respect to our Directors, the Company's Audit and Finance Committee, and the Company's code of ethics is incorporated by reference from the discussion under the headings Proposal No. 1: Election of Directors and Corporate Governance in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 8, 20195, 2021 (Proxy Statement). Information pursuant to this Item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the discussion under the heading Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy Statement.
The information required by Item 401 of Regulation S-K regarding executive officers is included under “Executive Officers of the Registrant” following Item 4 in Part I of this Annual Report.
Item 11. Executive Compensation
Information pursuant to this Item with respect to compensation paid to our Directors is incorporated by reference from the discussion under the heading Director Compensation in the Proxy Statement. Information pursuant to this Item with respect to executive compensation is incorporated by reference from the discussion under the heading Executive Compensation in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information pursuant to this Item with respect to the securities of the Company owned by the Directors and certain officers of the Company, by the Directors and officers of the Company as a group, and by the persons known to the Company to own beneficially more than 5 percent of the outstanding voting securities of the Company is incorporated by reference from the discussion under the heading Stock Held by Directors, Executive Officers, and Principal Shareholders in the Proxy Statement. Information pursuant to this Item with respect to securities authorized for issuance under the Company's equity compensation plans is hereby incorporated by reference from the discussion under the heading Equity Compensation Plan Information in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information pursuant to this Item with respect to certain relationships and related transactions is incorporated from the discussion under the headings Proposal No. 1: Election of Directors and Corporate Governance in the Proxy Statement.
Item 14. Principal Accounting Fees and Services
Information pursuant to this Item with respect to fees for professional services rendered by the Company's independent registered public accounting firm and the Audit and Finance Committee's policy on pre-approval of audit and permissible non-audit services of the Company's independent registered public accounting firm is incorporated by reference from the discussion in the Proxy Statement under the heading Proposal No. 3: Ratification of the Appointment of Independent Registered Public Accounting Firm.
PART IV
Item 15. Exhibits and Financial Statement Schedules
|
| |
The financial statements and schedule filed as part of this Annual Report on Form 10-K are listed in the accompanying Index to Financial Statements and Financial Statement Schedule on page 5251. The exhibits filed as a part of this Annual Report are listed in the Exhibit Index below.
|
|
| | | | |
| Exhibit No. | Description |
| 2.1 | Equity Purchase Agreement, and Plan of Merger, dated as of June 28, 2018, byMay 5, 2019, between Brunswick Corporation and among the Company, Whitecap Company Merger Sub, LLC, Power ProductsLumos International Holdings LLC, Power Products Industries, LLC, Genstar Capital Management LLC and the other parties thereto,B.V., filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2018May 8, 2019 and hereby incorporated by reference. |
| 3.1 | Restated Certificate of Incorporation of the Company, dated July 22, 1987, filed as Exhibit 19.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987, as filed with the Securities and Exchange Commission, and hereby incorporated by reference.
|
| 3.2 |
|
| 3.3 | Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock, filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for 1995 as filed with the Securities and Exchange Commission on March 23, 1995, and hereby incorporated by reference. |
| 3.4 | |
| 4.1 | |
| 4.2 | |
4.24.3 | |
4.34.4 | |
4.44.5 | |
| 4.6 | |
4.54.7 | |
4.64.8 | |
| 4.9 | Indenture, dated as of March 15, 1987, between the Company and Continental Illinois National Bank and Trust Company of Chicago, filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1987, and hereby incorporated by reference. |
4.74.10 | Officers' Certificate setting forth terms of the Company's $125,000,000 principal amount of 7 3/8% Debentures due September 1, 2023, filed as Exhibit 4.3 to the Company's Annual Report on Form 10-K for 1993 as filed with the Securities and Exchange Commission on March 29, 1994, and hereby incorporated by reference. |
4.84.11 | Form of the Company's $200,000,000 principal amount of 7 1/8% Notes due August 1, 2027, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 21, 1997, and hereby incorporated by reference. |
| | | | | |
4.94.12 | The Company's agreement to furnish additional debt instruments upon request by the Securities and Exchange Commission, filed as Exhibit 4.10 to the Company's Annual Report on Form 10-K for 1980, and hereby incorporated by reference. |
4.1010.1 | |
|
| |
4.11 | |
4.12 | First Supplemental Indenture, dated May 22, 2014, to the Indenture between the Company, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee dated May 13, 2013, filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 28, 2014, as filed with the Securities and Exchange Commission on July 31, 2014 and hereby incorporated by reference. |
10.1 | |
| 10.2 | Amended and Restated Credit Agreement, dated as of March 21, 2011, as amended and restated as of June 26, 2014, as further amended and restated as of June 30, 2016, as further amended as of July 13, 2018 and as further amended and restated as of September 26, 2018, among the Company, the subsidiary borrowers party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2018 and hereby incorporated by reference.
|
| 10.3 | Extension Amendment, dated as of November 12, 2019, amending the Amended and Restated Credit Agreement, dated as of March 21, 2011, as amended and restated as of June 26, 2014, as further amended and restated as of June 30, 2016, as further amended as of July 13, 2018 and as further amended and restated as of September 26, 2018, among the Company, the subsidiary borrowers party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 12, 2019 and hereby incorporated by reference. |
| 10.4 | First Amendment, dated September 26, 2018, to the Term Loan Credit Agreement, dated as of August 7, 2018, among the Company, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2018 and hereby incorporated by reference.
|
10.4*10.5 |
|
10.6*
| |
10.5*10.7* | |
10.6*
| |
10.7*10.8* | |
10.8*10.9* | |
10.9*10.10* | |
10.10* | 1997 Stock Plan for Non-Employee Directors, filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, as filed with the Securities and Exchange Commission on November 13, 1998, and hereby incorporated by reference. |
10.11* | |
10.12*10.11* | |
10.13* | |
10.14*10.12* | |
|
| |
10.15* | |
10.16*10.13* | |
10.17* | |
10.18* | |
10.19* |
|
10.20* |
|
10.21* | |
10.22* | |
10.23* | |
10.24* | |
10.25* | |
10.26* | |
10.27*10.14* | |
10.28* |
|
10.29* | |
|
| |
10.31* | |
10.32*10.16* | |
10.33* | |
21.110.17* | |
| 10.18* | |
| 10.19* | |
| 10.20* | |
| 10.21* | |
| 10.22* | |
| 10.23* | |
| 10.24* | |
| 10.25* | |
| 10.26* | |
| 12.1 | |
| 21.1 | |
| 23.1 | |
| 24.1 | |
| 31.1 | |
| 31.2 | |
| 32.1 | |
| 32.2 | |
| 101.INS | Inline XBRL Instance DocumentDocument. |
| 101.SCH | Inline XBRL Taxonomy Extension Schema DocumentDocument. |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase DocumentDocument. |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase DocumentDocument. |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase DocumentDocument. |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase DocumentDocument. |
| 104.1 | Cover Page Interactive Data File, formatted in Inline XBRL, is contained in Exhibit 101. |
* Management contract or compensatory plan or arrangement.
Index to Financial Statements and Financial Statement Schedule
Brunswick Corporation
| | | | | |
| Page |
| Page |
| Financial Statements: | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Financial Statement Schedule: | |
| |
| |
BRUNSWICK CORPORATION
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for the preparation, integrity, and objectivity of the financial statements and other financial information presented in this Annual Report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States and reflect the effects of certain estimates and judgments made by management.
The Company's management is also responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
Based on the Company's evaluation under the framework in Internal Control - Integrated Framework, management concluded that internal control over financial reporting was effective as of December 31, 2018. As permitted by SEC guidance, management excluded Power Products, which was acquired on August 9, 2018, from its evaluation. Power Products represented 23 percent of consolidated total assets and 2 percent of consolidated net sales as of and for the year ending December 31, 2018.2020.
The effectiveness of internal control over financial reporting as of December 31, 20182020 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its attestation report, which is included herein.
Brunswick Corporation
Mettawa, Illinois
February 19, 201916, 2021
BRUNSWICK CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors and Shareholders of Brunswick Corporation
Mettawa, Illinois
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Brunswick Corporation and subsidiaries (the “Company”) as of December 31, 2018,2020, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control -— Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018,2020, of the Company and our report dated February 19, 2019,16, 2021, expressed an unqualified opinion on those financial statements.
As described in the Report of Management on Internal Control Over Financial Reporting, management has excluded from its assessment the internal control over financial reporting at Power Products, which was acquired on August 9, 2018 and whose financial statements constitute 23 percent of consolidated total assets and 2 percent of consolidated net sales as of and for the year ended December 31, 2018. Accordingly, our audit did not include the internal control over financial reporting at Power Products.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 19, 201916, 2021
BRUNSWICK CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors and Shareholders of Brunswick Corporation
Mettawa, Illinois
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Brunswick Corporation and subsidiaries (the "Company") as of December 31, 20182020 and 2017,2019, the related consolidated statements of operations, comprehensive income, shareholders'shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2018,2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control -— Integrated Framework (2013)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 19, 2019,16, 2021, expressed an unqualified opinion on the Company'sCompany’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Power Products Trade Name Intangible Assets-Refer to Notes 1 and 11 to the financial statements
Critical Audit Matter Description
As of December 31, 2020, the carrying value of the Power Products trade name intangible assets was $111 million. Management assesses the recoverability of the Power Products trade name intangible assets at least annually by estimating the fair value of the trade names and comparing this fair value to the carrying value. The determination of the fair value requires management to make significant estimates and assumptions related to royalty rates, discount rates, and forecasts of future Power Products revenues.
How the Critical Audit Matter Was Addressed in the Audit
•We tested the effectiveness of controls over management’s intangible assets impairment evaluation, including those over the determination of the fair value of the Power Products trade name, such as controls related to selection of the royalty and discount rates.
•We evaluated management’s ability to accurately forecast future Power Products revenues by comparing actual Power Products revenues to management’s historical forecasts.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the royalty and discount rates by:
–Testing the source information underlying the determination of the royalty and discount rates and the mathematical accuracy of the calculation.
–Developing a range of independent estimates and comparing those to the royalty and discount rates selected by management.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 19, 201916, 2021
We have served as the Company'sCompany’s auditor since 2014.
BRUNSWICK CORPORATION Consolidated Statements of Operations
|
| | | | | | | | | | | |
| | For the Years Ended December 31 |
| (in millions, except per share data) | 2018 | | 2017 | | 2016 |
| Net sales | $ | 5,159.2 |
| | $ | 4,835.9 |
| | $ | 4,488.5 |
|
| Cost of sales | 3,838.2 |
| | 3,573.8 |
| | 3,256.1 |
|
| Selling, general and administrative expense | 724.3 |
| | 636.1 |
| | 598.1 |
|
| Research and development expense | 148.8 |
| | 146.4 |
| | 139.2 |
|
| Restructuring, exit, integration and impairment charges | 80.9 |
| | 81.3 |
| | 15.6 |
|
| Operating earnings | 367.0 |
| | 398.3 |
| | 479.5 |
|
| Equity earnings | 7.7 |
| | 6.1 |
| | 4.3 |
|
| Pension settlement charge | — |
| | (96.6 | ) | | (55.1 | ) |
| Other expense, net | (4.3 | ) | | (2.8 | ) | | (13.3 | ) |
| Earnings before interest and income taxes | 370.4 |
| | 305.0 |
| | 415.4 |
|
| Interest expense | (46.0 | ) | | (26.4 | ) | | (27.5 | ) |
| Interest income | 2.9 |
| | 2.6 |
| | 1.8 |
|
| Transaction financing charges | (5.1 | ) | | — |
| | — |
|
| Earnings before income taxes | 322.2 |
| | 281.2 |
| | 389.7 |
|
| Income tax provision | 59.1 |
| | 134.8 |
| | 115.3 |
|
| Net earnings from continuing operations | 263.1 |
|
| 146.4 |
| | 274.4 |
|
| | | | | | |
Net earnings from discontinued operations, net of tax
| 2.2 |
| | — |
| | 1.6 |
|
| | | | | | |
| Net earnings | $ | 265.3 |
| | $ | 146.4 |
| | $ | 276.0 |
|
| | | | | | |
| Earnings per common share: | |
| | |
| | |
|
| Basic | | | | | |
| Earnings from continuing operations | $ | 3.00 |
| | $ | 1.64 |
| | $ | 3.01 |
|
| Earnings from discontinued operations | 0.03 |
| | — |
| | 0.02 |
|
| Net earnings | $ | 3.03 |
| | $ | 1.64 |
| | $ | 3.03 |
|
| | | | | | |
| Diluted | | | | | |
| Earnings from continuing operations | $ | 2.98 |
| | $ | 1.62 |
| | $ | 2.98 |
|
| Earnings from discontinued operations | 0.03 |
| | — |
| | 0.02 |
|
| Net earnings | $ | 3.01 |
| | $ | 1.62 |
| | $ | 3.00 |
|
| | | | | | |
| Weighted average shares used for computation of: | |
| | |
| | |
| Basic earnings per common share | 87.6 |
| | 89.4 |
| | 91.2 |
|
| Diluted earnings per common share | 88.2 |
| | 90.1 |
| | 92.0 |
|
| | | | | | |
| Cash dividends declared per common share | $ | 0.78 |
| | $ | 0.685 |
| | $ | 0.615 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31 |
| (in millions, except per share data) | | | | 2020 | | 2019 | | 2018 |
| Net sales | | | | $ | 4,347.5 | | | $ | 4,108.4 | | | $ | 4,120.9 | |
| Cost of sales | | | | 3,134.5 | | | 2,987.4 | | | 3,073.9 | |
| Selling, general and administrative expense | | | | 543.7 | | | 509.6 | | | 515.2 | |
| Research and development expense | | | | 125.9 | | | 121.6 | | | 121.5 | |
| Restructuring, exit and impairment charges | | | | 4.1 | | | 18.8 | | | 54.8 | |
| Operating earnings | | | | 539.3 | | | 471.0 | | | 355.5 | |
| Equity earnings | | | | 4.5 | | | 7.3 | | | 7.7 | |
| Pension settlement benefit (charge) | | | | 1.1 | | | (292.8) | | | 0 | |
| Other expense, net | | | | (6.1) | | | (2.1) | | | (4.3) | |
| Earnings before interest and income taxes | | | | 538.8 | | | 183.4 | | | 358.9 | |
| Interest expense | | | | (67.3) | | | (76.0) | | | (46.0) | |
| Interest income | | | | 1.2 | | | 3.3 | | | 2.9 | |
| Transaction financing charges | | | | 0 | | | 0 | | | (5.1) | |
| Earnings before income taxes | | | | 472.7 | | | 110.7 | | | 310.7 | |
| Income tax provision | | | | 98.0 | | | 80.3 | | | 57.3 | |
| Net earnings from continuing operations | | | | 374.7 | | | 30.4 | | | 253.4 | |
| | | | | | | | |
| Discontinued operations: | | | | | | | | |
| (Loss) earnings from discontinued operations, net of tax | | | | (0.5) | | | (117.5) | | | 11.9 | |
| Loss on disposal of discontinued operations, net of tax | | | | (1.5) | | | (43.9) | | | 0 | |
| Net (loss) earnings from discontinued operations, net of tax | | | | (2.0) | | | (161.4) | | | 11.9 | |
| Net earnings (loss) | | | | $ | 372.7 | | | $ | (131.0) | | | $ | 265.3 | |
| | | | | | | | |
| Earnings (loss) per common share: | | | | | | | | |
| Basic | | | | | | | | |
| Earnings from continuing operations | | | | $ | 4.73 | | | $ | 0.36 | | | $ | 2.89 | |
| (Loss) earnings from discontinued operations | | | | (0.03) | | | (1.90) | | | 0.14 | |
| Net earnings (loss) | | | | $ | 4.70 | | | $ | (1.54) | | | $ | 3.03 | |
| | | | | | | | |
| Diluted | | | | | | | | |
| Earnings from continuing operations | | | | $ | 4.70 | | | $ | 0.36 | | | $ | 2.87 | |
| (Loss) earnings from discontinued operations | | | | (0.02) | | | (1.89) | | | 0.14 | |
| Net earnings (loss) | | | | $ | 4.68 | | | $ | (1.53) | | | $ | 3.01 | |
| | | | | | | | |
| Weighted average shares used for computation of: | | | | | | | | |
| Basic earnings (loss) per common share | | | | 79.2 | | | 85.2 | | | 87.6 | |
| Diluted earnings (loss) per common share | | | | 79.7 | | | 85.6 | | | 88.2 | |
| | | | | | | | |
| | | | | | | | |
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
BRUNSWICK CORPORATION
Consolidated Statements of Comprehensive Income BRUNSWICK CORPORATION Consolidated Statements of Comprehensive Income
|
| | | | | | | | | | | |
| | For the Years Ended December 31 |
| (in millions) | 2018 | | 2017 | | 2016 |
| Net earnings | $ | 265.3 |
| | $ | 146.4 |
| | $ | 276.0 |
|
| Other comprehensive income (loss), net of tax: | | | | | |
| Foreign currency translation: | | | | | |
Foreign currency translation adjustments (A) | (17.3 | ) | | 20.3 |
| | 4.5 |
|
| Net foreign currency translation | (17.3 | ) | | 20.3 |
| | 4.5 |
|
| Defined benefit plans: | | | | | |
Net actuarial losses (A) | (3.3 | ) | | (8.1 | ) | | (10.2 | ) |
Amortization of prior service credits (B) | (0.5 | ) | | (0.5 | ) | | (0.4 | ) |
Amortization of net actuarial losses (B) | 7.9 |
| | 69.3 |
| | 45.3 |
|
| Net defined benefit plans | 4.1 |
| | 60.7 |
| | 34.7 |
|
| Derivatives: | | | | | |
Net deferred gains (losses) on derivatives (A) | 7.3 |
| | (7.5 | ) | | 2.1 |
|
Net (gains) losses reclassified into earnings (B) | 2.6 |
| | 1.3 |
| | (1.8 | ) |
| Net deferred gains (losses) on derivatives | 9.9 |
| | (6.2 | ) | | 0.3 |
|
| Other comprehensive income (loss) | (3.3 | ) | | 74.8 |
| | 39.5 |
|
| Comprehensive income | $ | 262.0 |
| | $ | 221.2 |
| | $ | 315.5 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31 |
| (in millions) | | | | 2020 | | 2019 | | 2018 |
| Net earnings (loss) | | | | $ | 372.7 | | | $ | (131.0) | | | $ | 265.3 | |
| Other comprehensive income (loss), net of tax: | | | | | | | | |
| Foreign currency translation: | | | | | | | | |
Foreign currency translation adjustments (A) | | | | 22.5 | | | 25.1 | | | (17.3) | |
Less: foreign currency translation reclassified into Net earnings (loss) (B) | | | | 0 | | | (13.8) | | | 0 | |
| Net foreign currency translation | | | | 22.5 | | | 11.3 | | | (17.3) | |
| Defined benefit plans: | | | | | | | | |
Net actuarial losses (A) | | | | (2.4) | | | (11.3) | | | (3.3) | |
Amortization of prior service credits (B) | | | | (0.5) | | | 3.1 | | | (0.5) | |
Amortization of net actuarial losses (B) | | | | 0.8 | | | 310.2 | | | 7.9 | |
| Net defined benefit plans | | | | (2.1) | | | 302.0 | | | 4.1 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Derivatives: | | | | | | | | |
Net deferred (losses) gains on derivatives (A) | | | | (4.7) | | | 3.6 | | | 7.3 | |
Net (gains) losses reclassified into Net earnings (loss) (B) | | | | (5.0) | | | (7.2) | | | 2.6 | |
| Net activity for derivatives | | | | (9.7) | | | (3.6) | | | 9.9 | |
| Other comprehensive income (loss) | | | | 10.7 | | | 309.7 | | | (3.3) | |
| Comprehensive income | | | | $ | 383.4 | | | $ | 178.7 | | | $ | 262.0 | |
(A) The tax effects for the year ended December 31, 2020 were $(1.2) million for foreign currency translation, $0.3 million for net actuarial losses arising during the period and $1.8 million for derivatives. The tax effects for the year ended December 31, 2019 were $(0.7) million for foreign currency translation, $5.1 million for net actuarial losses arising during the period and $(1.4) million for derivatives. The tax effects for the year ended December 31, 2018 were $1.5 million for foreign currency translation, $1.2 million for net actuarial losses arising during the period and $(3.3) million for derivatives. The tax effects for the year ended December 31, 2017 were $(4.1) million for foreign currency translation, $5.4 million for net actuarial losses arising during the period and $3.4 million for derivatives. The tax effects for the year ended December 31, 2016 were $(7.9) million for foreign currency translation, $5.4 million for net actuarial losses arising during the period and $(0.8) million for derivatives.
(B) See Note 2019 –Comprehensive Income (Loss) for the tax effects for the years ended December 31, 2018,2020, December 31, 20172019 and December 31, 2016.2018.
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
BRUNSWICK CORPORATION
Consolidated Balance Sheets
| | | | | | | | | | | |
| As of December 31 |
| (in millions) | 2020 | | 2019 |
| Assets | | | |
| Current assets | | | |
| Cash and cash equivalents, at cost, which approximates fair value | $ | 519.6 | | | $ | 320.3 | |
| Restricted cash | 10.7 | | | 11.6 | |
| Short-term investments in marketable securities | 56.7 | | | 0.8 | |
| Total cash and short-term investments in marketable securities | 587.0 | | | 332.7 | |
| Accounts and notes receivable, less allowances of $10.7 and $8.5 | 337.6 | | | 331.8 | |
| Inventories | | | |
| Finished goods | 446.8 | | | 554.3 | |
| Work-in-process | 94.0 | | | 101.3 | |
| Raw materials | 171.0 | | | 168.9 | |
| Net inventories | 711.8 | | | 824.5 | |
| Prepaid expenses and other | 34.1 | | | 36.8 | |
| | | |
| Current assets | 1,670.5 | | | 1,525.8 | |
| | | |
| Property | | | |
| Land | 17.7 | | | 17.8 | |
| Buildings and improvements | 435.5 | | | 415.4 | |
| Equipment | 1,184.9 | | | 1,090.1 | |
| Total land, buildings and improvements and equipment | 1,638.1 | | | 1,523.3 | |
| Accumulated depreciation | (929.8) | | | (863.8) | |
| Net land, buildings and improvements and equipment | 708.3 | | | 659.5 | |
| Unamortized product tooling costs | 155.3 | | | 136.9 | |
| Net property | 863.6 | | | 796.4 | |
| | | |
| Other assets | | | |
| Goodwill | 417.7 | | | 415.0 | |
| Other intangibles, net | 552.3 | | | 583.5 | |
| Equity investments | 32.5 | | | 29.5 | |
| Deferred income tax asset | 136.6 | | | 118.7 | |
| Operating lease assets | 83.0 | | | 83.2 | |
| Other long-term assets | 14.4 | | | 12.3 | |
| | | |
| Other assets | 1,236.5 | | | 1,242.2 | |
| | | |
| Total assets | $ | 3,770.6 | | | $ | 3,564.4 | |
| | | |
BRUNSWICK CORPORATION Consolidated Balance Sheets
|
| | | | | | | |
| | As of December 31 |
| (in millions) | 2018 | | 2017 |
| Assets | | | |
| Current assets | | | |
| Cash and cash equivalents, at cost, which approximates fair value | $ | 294.4 |
| | $ | 448.8 |
|
| Restricted cash | 9.0 |
| | 9.4 |
|
| Short-term investments in marketable securities | 0.8 |
| | 0.8 |
|
| Total cash and short-term investments in marketable securities | 304.2 |
| | 459.0 |
|
| Accounts and notes receivable, less allowances of $11.3 and $9.2 | 550.7 |
| | 485.3 |
|
| Inventories | |
| | |
|
| Finished goods | 614.2 |
| | 521.3 |
|
| Work-in-process | 106.1 |
| | 119.3 |
|
| Raw materials | 223.4 |
| | 187.1 |
|
| Net inventories | 943.7 |
| | 827.7 |
|
| Prepaid expenses and other | 81.6 |
| | 74.7 |
|
| Current assets | 1,880.2 |
| | 1,846.7 |
|
| | | | |
| Property | |
| | |
|
| Land | 24.0 |
| | 25.1 |
|
| Buildings and improvements | 469.7 |
| | 412.8 |
|
| Equipment | 1,128.9 |
| | 1,027.7 |
|
| Total land, buildings and improvements and equipment | 1,622.6 |
| | 1,465.6 |
|
| Accumulated depreciation | (952.4 | ) | | (895.8 | ) |
| Net land, buildings and improvements and equipment | 670.2 |
| | 569.8 |
|
| Unamortized product tooling costs | 135.1 |
| | 136.2 |
|
| Net property | 805.3 |
| | 706.0 |
|
| | | | |
| Other assets | |
| | |
|
| Goodwill | 767.1 |
| | 425.3 |
|
| Other intangibles, net | 646.4 |
| | 149.1 |
|
| Equity investments | 34.6 |
| | 25.1 |
|
| Deferred income tax asset | 96.1 |
| | 165.6 |
|
| Other long-term assets | 56.0 |
| | 40.4 |
|
| Other assets | 1,600.2 |
| | 805.5 |
|
| | | | |
| Total assets | $ | 4,285.7 |
| | $ | 3,358.2 |
|
| | | | |
| |
BRUNSWICK CORPORATION Consolidated Balance Sheets
|
| | | | | | | |
| | As of December 31 |
| (in millions) | 2018 | | 2017 |
| Liabilities and shareholders’ equity | | | |
| Current liabilities | | | |
| Short-term debt and current maturities of long-term debt | $ | 41.3 |
| | $ | 5.6 |
|
| Accounts payable | 527.8 |
| | 420.5 |
|
| Accrued expenses | 687.4 |
| | 609.0 |
|
| Current liabilities | 1,256.5 |
| | 1,035.1 |
|
| | | | |
| Long-term liabilities | |
| | |
|
| Debt | 1,179.5 |
| | 431.8 |
|
| Postretirement benefits | 71.6 |
| | 220.8 |
|
| Other | 195.5 |
| | 187.6 |
|
| Long-term liabilities | 1,446.6 |
| | 840.2 |
|
| | | | |
| Shareholders’ equity | |
| | |
|
| Common stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares; outstanding: 86,757,000 and 87,537,000 shares | 76.9 |
| | 76.9 |
|
| Additional paid-in capital | 371.1 |
| | 374.4 |
|
| Retained earnings | 2,135.7 |
| | 1,966.8 |
|
| Treasury stock, at cost: 15,781,000 and 15,001,000 shares | (638.0 | ) | | (575.4 | ) |
| Accumulated other comprehensive loss, net of tax: | | | |
| Foreign currency translation | (48.9 | ) | | (31.6 | ) |
| Defined benefit plans: | | | |
| Prior service credits | (6.1 | ) | | (5.6 | ) |
| Net actuarial losses | (306.2 | ) | | (310.8 | ) |
| Unrealized losses on derivatives | (1.9 | ) | | (11.8 | ) |
| Accumulated other comprehensive loss, net of tax | (363.1 | ) | | (359.8 | ) |
| Shareholders’ equity | 1,582.6 |
| | 1,482.9 |
|
| | | | |
| Total liabilities and shareholders’ equity | $ | 4,285.7 |
| | $ | 3,358.2 |
|
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
BRUNSWICK CORPORATION Consolidated Statements of Cash Flows
|
| | | | | | | | | | | |
| | For the Years Ended December 31 |
| (in millions) | 2018 | | 2017 | | 2016 |
| Cash flows from operating activities | |
| | |
| | |
| Net earnings | $ | 265.3 |
| | $ | 146.4 |
| | $ | 276.0 |
|
| Less: net earnings from discontinued operations, net of tax | 2.2 |
| | — |
| | 1.6 |
|
| Net earnings from continuing operations | 263.1 |
| | 146.4 |
| | 274.4 |
|
| Depreciation and amortization | 149.6 |
| | 110.8 |
| | 103.9 |
|
| Stock compensation expense | 19.2 |
| | 18.3 |
| | 16.1 |
|
| Pension expense including settlement charges, net of (funding) | (156.1 | ) | | 32.2 |
| | (4.8 | ) |
| Asset impairment charges | 59.1 |
| | 54.7 |
| | 2.4 |
|
| Deferred income taxes | 25.1 |
| | 104.2 |
| | 62.5 |
|
| Changes in certain current assets and current liabilities | | | | | |
| Change in accounts and notes receivable | (27.3 | ) | | (57.2 | ) | | (1.1 | ) |
| Change in inventory | (84.2 | ) | | (69.7 | ) | | (48.2 | ) |
| Change in prepaid expenses and other, excluding income taxes | (8.6 | ) | | 4.4 |
| | 0.5 |
|
| Change in accounts payable | 49.3 |
| | 31.0 |
| | 39.2 |
|
| Change in accrued expenses | 13.7 |
| | 47.1 |
| | (20.8 | ) |
| Long-term extended warranty contracts and other deferred revenue | 15.1 |
| | 17.1 |
| | 10.3 |
|
| Fitness business separation costs | 19.3 |
| | — |
| | — |
|
| Cash paid for Fitness business separation costs | (12.7 | ) | | — |
| | — |
|
| Income taxes | 12.3 |
| | (43.1 | ) | | 20.2 |
|
| Other, net | 0.1 |
| | 5.4 |
| | (15.5 | ) |
| Net cash provided by operating activities of continuing operations | 337.0 |
| | 401.6 |
| | 439.1 |
|
| Net cash used for operating activities of discontinued operations | — |
| | (1.3 | ) | | (3.8 | ) |
| Net cash provided by operating activities | 337.0 |
| | 400.3 |
| | 435.3 |
|
| | | | | | |
| Cash flows from investing activities | |
| | |
| | |
| Capital expenditures | (193.4 | ) | | (203.2 | ) | | (193.9 | ) |
| Purchases of marketable securities | — |
| | — |
| | (35.0 | ) |
| Sales or maturities of marketable securities | — |
| | 35.0 |
| | 10.7 |
|
| Investments | (10.8 | ) | | (3.2 | ) | | 5.1 |
|
| Acquisition of businesses, net of cash acquired | (909.6 | ) | | (15.5 | ) | | (276.1 | ) |
| Proceeds from the sale of property, plant and equipment | 6.7 |
| | 8.5 |
| | 1.9 |
|
| Other, net | (0.2 | ) | | (0.5 | ) | | 1.3 |
|
| Net cash used for investing activities | (1,107.3 | ) | | (178.9 | ) | | (486.0 | ) |
| | | | | | |
| Cash flows from financing activities | |
| | |
| | |
| Net proceeds from issuances of short-term debt | 298.9 |
| | — |
| | — |
|
| Repayment of short-term debt | (300.0 | ) | | — |
| | — |
|
| Net proceeds from issuances of long-term debt | 794.6 |
| | — |
| | 1.0 |
|
| Payments of long-term debt including current maturities | (12.6 | ) | | (4.5 | ) | | (3.2 | ) |
| Common stock repurchases | (75.0 | ) | | (130.0 | ) | | (120.3 | ) |
| Cash dividends paid | (67.8 | ) | | (60.6 | ) | | (55.4 | ) |
| Proceeds from share-based compensation activity | 1.4 |
| | 6.2 |
| | 14.9 |
|
| Tax withholding associated with shares issued for share-based compensation | (12.5 | ) | | (14.8 | ) | | (20.9 | ) |
| Other, net | (6.5 | ) | | — |
| | (1.9 | ) |
| Net cash provided by (used for) financing activities | 620.5 |
| | (203.7 | ) | | (185.8 | ) |
| | | | | | |
| Effect of exchange rate changes | (5.0 | ) | | 6.9 |
| | 0.1 |
|
| Net increase (decrease) in Cash and cash equivalents and Restricted cash | (154.8 | ) | | 24.6 |
| | (236.4 | ) |
| Cash and cash equivalents and Restricted cash at beginning of period | 458.2 |
| | 433.6 |
| | 670.0 |
|
| | | | | | |
| Cash and cash equivalents and Restricted cash at end of period | 303.4 |
| | 458.2 |
| | 433.6 |
|
| Less: Restricted cash | 9.0 |
| | 9.4 |
| | 11.2 |
|
| Cash and cash equivalents at end of period | $ | 294.4 |
| | $ | 448.8 |
| | $ | 422.4 |
|
| | | | | | |
| Supplemental cash flow disclosures: | | | | | |
| Interest paid | $ | 46.8 |
| | $ | 33.0 |
| | $ | 30.1 |
|
| Income taxes paid, net | $ | 21.7 |
| | $ | 73.5 |
| | $ | 32.6 |
|
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
BRUNSWICK CORPORATION Consolidated Statements of Shareholders' Equity |
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Balance, December 31, 2015 | $ | 76.9 |
| | $ | 408.0 |
| | $ | 1,660.4 |
| | $ | (389.9 | ) | | $ | (474.1 | ) | | $ | 1,281.3 |
|
| Net earnings | — |
| | — |
| | 276.0 |
| | — |
| | — |
| | 276.0 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 39.5 |
| | 39.5 |
|
| Dividends ($0.615 per common share) | — |
| | — |
| | (55.4 | ) | | — |
| | — |
| | (55.4 | ) |
| Compensation plans and other | — |
| | (26.0 | ) | | — |
| | 45.0 |
| | — |
| | 19.0 |
|
| Common stock repurchases | — |
| | — |
| | — |
| | (120.3 | ) | | — |
| | (120.3 | ) |
| Balance, December 31, 2016 | 76.9 |
| | 382.0 |
| | 1,881.0 |
| | (465.2 | ) | | (434.6 | ) | | 1,440.1 |
|
| Net earnings | — |
| | — |
| | 146.4 |
| | — |
| | — |
| | 146.4 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 74.8 |
| | 74.8 |
|
| Dividends ($0.685 per common share) | — |
| | — |
| | (60.6 | ) | | — |
| | — |
| | (60.6 | ) |
| Compensation plans and other | — |
| | (7.6 | ) | | — |
| | 19.8 |
| | — |
| | 12.2 |
|
| Common stock repurchases | — |
| | — |
| | — |
| | (130.0 | ) | | — |
| | (130.0 | ) |
| Balance, December 31, 2017 | 76.9 |
| | 374.4 |
| | 1,966.8 |
| | (575.4 | ) | | (359.8 | ) | | 1,482.9 |
|
| ASU No. 2014-09 adoption | — |
| | — |
| | (28.6 | ) | | — |
| | — |
| | (28.6 | ) |
| Net earnings | — |
| | — |
| | 265.3 |
| | — |
| | — |
| | 265.3 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (3.3 | ) | | (3.3 | ) |
| Dividends ($0.78 per common share) | — |
| | — |
| | (67.8 | ) | | — |
| | — |
| | (67.8 | ) |
| Compensation plans and other | — |
| | (3.3 | ) | | — |
| | 12.4 |
| | — |
| | 9.1 |
|
| Common stock repurchases | — |
| | — |
| | — |
| | (75.0 | ) | | — |
| | (75.0 | ) |
| Balance, December 31, 2018 | $ | 76.9 |
| | $ | 371.1 |
| | $ | 2,135.7 |
| | $ | (638.0 | ) | | $ | (363.1 | ) | | $ | 1,582.6 |
|
| | | | | | | | | | | |
| | | |
| As of December 31 |
| (in millions) | 2020 | | 2019 |
| Liabilities and shareholders’ equity | | | |
| Current liabilities | | | |
| Short-term debt and current maturities of long-term debt | $ | 43.1 | | | $ | 41.3 | |
| Accounts payable | 457.6 | | | 393.5 | |
| Accrued expenses | 578.5 | | | 509.6 | |
| | | |
| Current liabilities | 1,079.2 | | | 944.4 | |
| | | |
| Long-term liabilities | | | |
| Debt | 908.3 | | | 1,068.0 | |
| Operating lease liabilities | 69.8 | | | 70.1 | |
| Postretirement benefits | 74.7 | | | 73.6 | |
| Other | 128.6 | | | 107.4 | |
| | | |
| Long-term liabilities | 1,181.4 | | | 1,319.1 | |
| | | |
| Shareholders’ equity | | | |
| Common stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares; outstanding: 77,875,000 and 79,569,000 shares | 76.9 | | | 76.9 | |
| Additional paid-in capital | 383.8 | | | 369.2 | |
| Retained earnings | 2,225.7 | | | 1,931.3 | |
| Treasury stock, at cost: 24,663,000 and 22,969,000 shares | (1,133.7) | | | (1,023.1) | |
| Accumulated other comprehensive loss, net of tax: | | | |
| Foreign currency translation | (15.1) | | | (37.6) | |
| Defined benefit plans: | | | |
| Prior service credits | (3.5) | | | (3.0) | |
| Net actuarial losses | (8.9) | | | (7.3) | |
| Unrealized losses on derivatives | (15.2) | | | (5.5) | |
| Accumulated other comprehensive loss, net of tax | (42.7) | | | (53.4) | |
| Shareholders’ equity | 1,510.0 | | | 1,300.9 | |
| | | |
| Total liabilities and shareholders’ equity | $ | 3,770.6 | | | $ | 3,564.4 | |
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
BRUNSWICK CORPORATION
Consolidated Statements of Cash Flow
| | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31 |
| (in millions) | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities | | | | | |
| Net earnings (loss) | $ | 372.7 | | | $ | (131.0) | | | $ | 265.3 | |
| Less: net (loss) earnings from discontinued operations, net of tax | (2.0) | | | (161.4) | | | 11.9 | |
| Net earnings from continuing operations | 374.7 | | | 30.4 | | | 253.4 | |
| Depreciation and amortization | 153.4 | | | 138.7 | | | 124.0 | |
| Stock compensation expense | 27.1 | | | 17.3 | | | 16.7 | |
| Pension expense including settlement charges, net of (funding) | (3.2) | | | 293.3 | | | (156.1) | |
| Asset impairment charges | 1.5 | | | 3.0 | | | 32.1 | |
| Deferred income taxes | (17.6) | | | (49.8) | | | 31.0 | |
| | | | | |
| | | | | |
| Changes in certain current assets and current liabilities | | | | | |
| Change in accounts and notes receivable | (19.9) | | | 41.4 | | | (30.2) | |
| Change in inventory | 109.3 | | | (50.5) | | | (82.4) | |
| Change in prepaid expenses and other, excluding income taxes | (2.6) | | | 5.7 | | | (8.9) | |
| Change in accounts payable | 64.5 | | | (32.7) | | | 61.4 | |
| Change in accrued expenses | 75.3 | | | (44.7) | | | 17.6 | |
| Long-term extended warranty contracts and other deferred revenue | 12.1 | | | 4.0 | | | 7.9 | |
| | | | | |
| | | | | |
| Income taxes | 6.1 | | | 114.4 | | | 4.9 | |
| Other, net | 19.3 | | | 4.8 | | | 3.1 | |
| Net cash provided by operating activities of continuing operations | 800.0 | | | 475.3 | | | 274.5 | |
| Net cash (used for) provided by operating activities of discontinued operations | (1.7) | | | (41.1) | | | 62.5 | |
| Net cash provided by operating activities | 798.3 | | | 434.2 | | | 337.0 | |
| | | | | |
| Cash flows from investing activities | | | | | |
| Capital expenditures | (182.4) | | | (232.6) | | | (180.2) | |
| Purchases of marketable securities | (55.9) | | | 0 | | | 0 | |
| | | | | |
| | | | | |
| Investments | (4.0) | | | 2.4 | | | (8.8) | |
| Acquisition of businesses, net of cash acquired | 0 | | | (64.1) | | | (909.6) | |
| Proceeds from the sale of property, plant and equipment | 2.9 | | | 7.3 | | | 0.4 | |
| Other, net | 0 | | | 0 | | | (0.2) | |
| Net cash used for investing activities of continuing operations | (239.4) | | | (287.0) | | | (1,098.4) | |
| Net cash (used for) provided by investing activities of discontinued operations | (7.5) | | | 481.7 | | | (8.9) | |
| Net cash (used for) provided by investing activities | (246.9) | | | 194.7 | | | (1,107.3) | |
| | | | | |
| Cash flows from financing activities | | | | | |
| Proceeds from issuances of short-term debt | 610.0 | | | 655.0 | | | 298.9 | |
| Payments of short-term debt | (610.0) | | | (655.0) | | | (300.0) | |
| Net proceeds from issuances of long-term debt | 0 | | | 223.6 | | | 794.6 | |
| Payments of long-term debt including current maturities | (159.1) | | | (341.0) | | | (12.6) | |
| | | | | |
| Common stock repurchases | (118.3) | | | (400.0) | | | (75.0) | |
| Cash dividends paid | (78.3) | | | (73.4) | | | (67.8) | |
| Proceeds from share-based compensation activity | 1.5 | | | 2.8 | | | 1.4 | |
| Tax withholding associated with shares issued for share-based compensation | (7.7) | | | (12.1) | | | (12.5) | |
| Other, net | 0.1 | | | (0.7) | | | (6.5) | |
| | | | | |
| | | | | |
| Net cash (used for) provided by financing activities | (361.8) | | | (600.8) | | | 620.5 | |
| | | | | |
| Effect of exchange rate changes | 8.8 | | | 0.4 | | | (5.0) | |
| Net increase (decrease) in Cash and cash equivalents and Restricted cash | 198.4 | | | 28.5 | | | (154.8) | |
| Cash and cash equivalents and Restricted cash at beginning of period | 331.9 | | | 303.4 | | | 458.2 | |
| | | | | |
| Cash and cash equivalents and Restricted cash at end of period | 530.3 | | | 331.9 | | | 303.4 | |
| Less: Restricted cash | 10.7 | | | 11.6 | | | 9.0 | |
| Cash and cash equivalents at end of period | $ | 519.6 | | | $ | 320.3 | | | $ | 294.4 | |
| | | | | |
| Supplemental cash flow disclosures: | | | | | |
| Interest paid | $ | 72.8 | | | $ | 79.5 | | | $ | 46.8 | |
| Income taxes paid, net | $ | 111.5 | | | $ | 18.2 | | | $ | 21.7 | |
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
BRUNSWICK CORPORATION
Consolidated Statements of Shareholders' Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Balance, December 31, 2017 | $ | 76.9 | | | $ | 374.4 | | | $ | 1,966.8 | | | $ | (575.4) | | | $ | (359.8) | | | $ | 1,482.9 | |
| ASU No. 2014-09 adoption | 0 | | | 0 | | | (28.6) | | | 0 | | | 0 | | | (28.6) | |
| Net earnings | 0 | | | 0 | | | 265.3 | | | 0 | | | 0 | | | 265.3 | |
| Other comprehensive loss | 0 | | | 0 | | | 0 | | | 0 | | | (3.3) | | | (3.3) | |
| Dividends ($0.78 per common share) | 0 | | | 0 | | | (67.8) | | | 0 | | | 0 | | | (67.8) | |
| Compensation plans and other | 0 | | | (3.3) | | | 0 | | | 12.4 | | | 0 | | | 9.1 | |
| Common stock repurchases | 0 | | | 0 | | | 0 | | | (75.0) | | | 0 | | | (75.0) | |
| Balance, December 31, 2018 | 76.9 | | | 371.1 | | | 2,135.7 | | | (638.0) | | | (363.1) | | | 1,582.6 | |
| Net loss | 0 | | | 0 | | | (131.0) | | | 0 | | | 0 | | | (131.0) | |
| Other comprehensive income | 0 | | | 0 | | | 0 | | | 0 | | | 309.7 | | | 309.7 | |
| Dividends ($0.87 per common share) | 0 | | | 0 | | | (73.4) | | | 0 | | | 0 | | | (73.4) | |
| Compensation plans and other | 0 | | | (1.9) | | | 0 | | | 14.9 | | | 0 | | | 13.0 | |
| Common stock repurchases | 0 | | | 0 | | | 0 | | | (400.0) | | | 0 | | | (400.0) | |
| Balance, December 31, 2019 | 76.9 | | | 369.2 | | | 1,931.3 | | | (1,023.1) | | | (53.4) | | | 1,300.9 | |
| Net earnings | 0 | | | 0 | | | 372.7 | | | 0 | | | 0 | | | 372.7 | |
| Other comprehensive income | 0 | | | 0 | | | 0 | | | 0 | | | 10.7 | | | 10.7 | |
| Dividends ($0.99 per common share) | 0 | | | 0 | | | (78.3) | | | 0 | | | 0 | | | (78.3) | |
| Compensation plans and other | 0 | | | 14.6 | | | 0 | | | 7.7 | | | 0 | | | 22.3 | |
| Common stock repurchases | 0 | | | 0 | | | 0 | | | (118.3) | | | 0 | | | (118.3) | |
| Balance, December 31, 2020 | $ | 76.9 | | | $ | 383.8 | | | $ | 2,225.7 | | | $ | (1,133.7) | | | $ | (42.7) | | | $ | 1,510.0 | |
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
Note 1 – Significant Accounting Policies
Basis of Presentation. Brunswick Corporation (Brunswick or the Company) has prepared its consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain previously reported amounts have been reclassifiedEffective January 1, 2020, the Company changed its management reporting and updated its reportable segments to conformPropulsion, Parts and Accessories (P&A) and Boat (inclusive of Business Acceleration) to align with current period presentation.its strategy. As a result of this change, the Company has recast all segment information for all prior periods presented. Refer to Note 6 – Segment Information for further information on the Company's reportable segments. Additionally, as stated in Note 3 – Discontinued Operations, Brunswick's results as discussed in the financial statements reflect continuing operations only, unless otherwise noted.
Principles of Consolidation. Brunswick's consolidated financial statements include the accounts of all majority owned and controlled domestic and foreign subsidiaries. Intercompany balances and transactions have been eliminated.
Use of Estimates. The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates. Actual results could differ materially from those estimates. These estimates affect:
•The reported amounts of revenues and expenses during the reporting periods;
•The reported amounts of assets and liabilities at the date of the financial statements; and
•The disclosure of contingent assets and liabilities at the date of the financial statements; andstatements.
•The reported amounts of revenues and expenses during the reporting periods.
Estimates in these consolidated financial statements include, but are not limited to:
•Allowances for doubtful accounts;
•Inventory valuation reserves;
•Variable consideration related to recorded revenue;
•Reserves related to repurchase and recourse obligations;
•Warranty related reserves;
•Losses on litigation and other contingencies;
•Environmental reserves;
•Insurance reserves;
•Valuation of goodwill and other intangible assets;
•Impairments of long-lived assets;
•Reserves related to restructuring, exit and integrationimpairment activities;
•Postretirement benefit liabilities;
•Valuation allowances on deferred tax assets; and
•Income tax reserves.
Cash and Cash Equivalents. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. These investments include, but are not limited to, investments in money market funds, bank deposits, federal government and agency debt securities and commercial paper.
Restricted Cash. Restricted Cash is primarily related to cash deposited in a trust that is pledged as collateral against certain workers' compensation-related obligations. Refer to Note 13 –Commitments and Contingencies for more information.
Investments in Marketable Securities. Securities. The Company classifies investments in debt securities that are not considered to be cash equivalents as Short-term investments in marketable securities as discussed in Note 109 – Investments. Short-term investments in marketable securities have a stated maturity of twelve months or less from the balance sheet date. These securities are considered as available-for-sale and are reported at fair value. Unrealized gains and losses on these debt securities are recorded net of tax as a component of Accumulated other comprehensive loss in Unrealized investment losses within Shareholders' equity. Declines in market value from the original cost deemed to be "other-than-temporary" are charged to Other expense, net in the Consolidated Statements of Operations in the period in which the loss occurs. The Company considers both the duration for which a decline in value has occurred and the extent of the decline in its determination of whether a decline in value has been “other"other than temporary.”" Realized gains and losses are calculated based on the specific identification method and are included in Other expense, net in the Consolidated Statements of Operations.
Restricted Cash. The Company considers the cash deposited in a trust that is pledged as collateral against certain workers' compensation-related obligations
BRUNSWICK CORPORATION
Notes to Note 14 –Commitments and Contingencies for more information.Consolidated Financial Statements
Accounts and Notes Receivable and Allowance for Doubtful Accounts. The Company carries its accounts and notes receivable at their face amounts less an allowance for doubtful accounts. On a regular basis, the Company records an allowance for uncollectible receivables based upon known bad debt risks and past loss history, customer payment practices and economic conditions. Actual collection experience may differ from the current estimate of net receivables. A change to the allowance for doubtful accounts
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
may be required if a future event or other change in circumstances results in a change in the estimate of the ultimate collectability of a specific account.
The Company treats the sale of receivables in which the Company retains an interest as a secured obligation. Accordingly, the short-term portion of the receivables sold that are subject to recourse is recorded in Accounts and notes receivable and Accrued expenses in the Consolidated Balance Sheets.
Inventories. Inventories are valued at the lower of cost or net realizable value, with net realizable value equal to the estimated selling price less the estimated costs to transact. Approximately 5750 percent and 45 percent of the Company's inventories were determined by the first-in, first-out method (FIFO) at both December 31, 20182020 and December 31, 2017.2019, respectively. Remaining inventories valued at the last-in, first-out method (LIFO) were $135.5$145.3 million and $124.9$139.9 million lower than the FIFO cost of inventories at December 31, 20182020 and 2017,2019, respectively. Inventory cost includes material, labor and manufacturing overhead. During 2020, a reduction in inventory quantities resulted in a liquidation of applicable LIFO inventory quantities carried at lower costs in prior years. This LIFO liquidation resulted in a decrease in cost of sales of approximately $7 million. There were no liquidations of LIFO inventory layers in 2018, 20172019 or 2016.2018.
Property. Property, including major improvements and product tooling costs, is recorded at cost. Product tooling costs principally comprise the cost to acquire and construct various long-lived molds, dies and other tooling the Company uses in its manufacturing processes. Design and prototype development costs associated with product tooling are expensed as incurred. Maintenance and repair costs are also expensed as incurred. Depreciation is recorded over the estimated service lives of the related assets, principally using the straight-line method. Buildings and improvements are depreciated over a useful life of five to forty years. Equipment is depreciated over a useful life of two to twenty years. Product tooling costs are amortized over the shorter of the useful life of the tooling or the anticipated life of the applicable product, for a period up to eight years. The Company capitalizes interest on qualifying assets during the construction period and capitalized $2.2$4.4 million and $4.6$5.0 million in the periods ending December 31, 20182020 and 2017,2019, respectively. The Company presents capital expenditures on a cash basis within the Consolidated Statements of Cash Flows. There were $65.5$31.7 million and $31.0$27.5 million of unpaid capital expenditures within Accounts payable as of December 31, 20182020 and 2017,2019, respectively. The Company includes gains and losses recognized on the sale and disposal of property in either Selling, general and administrative expenses or Restructuring, exit integration and impairment charges as appropriate. The amount of gains and losses for the years ended December 31 were as follows:
| | | | | | | | | | | | | | | | | |
| (in millions) | 2020 | | 2019 | | 2018 |
| Gains on the sale of property | $ | 0.7 | | | $ | 1.8 | | | $ | 0.3 | |
| Losses on the sale and disposal of property | (0.5) | | | (2.4) | | | (0.8) | |
| Net gains (losses) on sale and disposal of property | $ | 0.2 | | | $ | (0.6) | | | $ | (0.5) | |
|
| | | | | | | | | | | |
| (in millions) | 2018 | | 2017 | | 2016 |
| Gains on the sale of property | $ | 0.4 |
| | $ | 0.9 |
| | $ | 0.4 |
|
| Losses on the sale and disposal of property | (1.0 | ) | | (2.3 | ) | | (0.5 | ) |
| Net losses on sale and disposal of property | $ | (0.6 | ) | | $ | (1.4 | ) | | $ | (0.1 | ) |
As ofAt both December 31, 20182020 and 2017,2019, the Company had $8.9$3.0 million and $12.7 million, respectively, of net assets classified as held-for-sale within Net property in the Consolidated Balance Sheets.
Software Development Costs. Costs for Internal Use. The Company expenses all software development and implementation costs incurred until the Company has determined that the software will result in probable future economic benefit and management has committed to funding the project. Once this is determined, external direct costs of material and services, payroll-related costs of employees working on the project and related interest costs incurred during the application development stage are capitalized. These capitalized costs are amortized over three to seven years. All other related costs, including training costs and costs to re-engineer business processes, are expensed as incurred.
Goodwill. Goodwill results from the excess of purchase price over the net assets of businesses acquired. All three of the Company's reporting units, which are also the Company's reportable segments, have a goodwill balance.
The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying value. As part of the annual test, the Company may perform a qualitative, rather than quantitative, assessment to determine whether the fair values of its reporting units are “more"more likely than not”not" to be greater than their carrying values. In performing this qualitative analysis, the Company considers various factors, including the effect of market or industry changes and the reporting units' actual results compared to projected results.
If the fair value of a reporting unit does not meet the "more likely than not" criteria discussed above, the impairment test for goodwill isCompany performs a quantitative two-step process. The first step comparesassessment which begins by measuring the fair value of the reporting unit with its carrying value.unit. If the fair value exceeds the carrying value of the reporting unit exceeds its fair value, a goodwill impairment is not considered impaired. Ifrecorded equal to the carrying amount exceedsvalue of the reporting unit less its fair value, not to exceed the second step is performed to measure the amountcarrying value of the impairment loss, if any. In this second step, the implied fair value goodwillgoodwill.
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
is compared with the carrying amount of the goodwill. If the carrying amount of the goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill.
The Company calculates the fair value of its reporting units considering both the income approach and the guideline public company method. The income approach calculates the fair value of the reporting unit using a discounted cash flow approach utilizing a Gordon Growth model. Internally forecasted future cash flows, which the Company believes reasonably approximate market participant assumptions, are discounted using a weighted average cost of capital (Discount Rate) developed for each reporting unit. The Discount Rate is developed using market observable inputs, as well as considering whether or not there is a measure of risk related to the specific reporting unit’s forecasted performance. Fair value under the guideline public company method is determined for each unit by applying market multiples for comparable public companies to the unit’s current and forecasted financial results. The key uncertainties in these calculations are the assumptions used in determining the reporting unit’s forecasted future performance, including revenue growth and operating margins, as well as the perceived risk associated with those forecasts in determining the Discount Rate, along with selecting representative market multiples.
For 2018 and 2017, the Company performed a quantitative test for the Fitness reporting unit. For 2018, 2017 and 2016, with the exception of the Fitness reporting unit in 2018 and 2017, the Company's reporting units met the "more likely than not" criteria; as a result, the Company was not required to perform the quantitative test.
The Company did not record any goodwill impairments in 2020, 2019 or 2018 2017 or 2016.in continuing operations. Refer to Note 3 – Discontinued Operations for further information on the Fitness goodwill impairment recorded during 2019.
Other intangible assets. The Company's primary intangible assets are customer relationships and trade names acquired in business combinations. Intangible assets are initially valued using a methodology commensurate with the intended use of the asset. The customer relationships including those acquired in the Power Products acquisition, which constitute the majority of the Company's customer relationships, were valued using the an income approach, specifically the multi-period excess earnings method (MPEEM). The fair value of trade names, including the Power Products trade names is measured using a relief-from-royalty (RFR) approach, which assumes the value of the trade name is the discounted amount of cash flows of the amount that would be paid to third parties had the Company not owned the trade name and instead licensed the trade name from another company. Higher royalty rates are assigned to premium brands within the marketplace based on name recognition and profitability, while other brands receive lower royalty rates. The basis for future sales projections for both the RFR and MPEEM are based on internal revenue forecasts by brand, which the Company believes represent reasonable market participant assumptions. The future cash flows are discounted using an applicable Discount Ratediscount rate as well as any potential risk premium to reflect the inherent risk of holding a standalone intangible asset.
The key uncertainties in the RFR and MPEEM calculations, as applicable, are: the selection of an appropriate royalty rate, assumptions used in developing internal revenue growth and customer expense forecasts, assumed customer attrition rates, the selection of an appropriate royalty rate, as well as the perceived risk associated with those forecasts in determining the Discount Rate.discount rate and risk premium.
The costs of amortizable intangible assets are recognized over their expected useful lives, typically between three and sixteenfifteen years, using the straight-line method. Intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate long-lived assets described below. Intangible assets not subject to amortization are assessed for impairment at least annually and whenever events or changes in circumstances indicate that it is more likely than not that an asset may be impaired. As we determined the COVID-19 pandemic was a triggering event, we performed an interim impairment test of certain intangible assets as of March 28, 2020 in addition to our annual impairment test during the fourth quarter. The impairment test for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset.
For the years ended December 31, 2018 and 2017, the Company recorded $22.1 million and $13.9 million, respectively, of indefinite-lived intangible asset impairments related to the Cybex trade name. As of December 31, 2018, as a result of changes in operating strategy, the Cybex trade name is deemed to be a definite-lived intangible asset, with $2.6 million remaining within Other intangibles, net to be fully amortized by December 31, 2020. Refer to Note 4 – Restructuring, Exit, Integration and Impairment Activities for further details. The Company did not record any intangible asset impairments for indefinite-lived intangible assets in 2016.2020, 2019 or 2018.
Refer to Note 5 – Acquisitions and Note 1211 – Goodwill and Other Intangibles in the Notes to Consolidated Financial Statements for more information.
Equity Investments. For investments in which the Company owns or controls from 20 percent to 50 percent of the voting shares, the Company uses the equity method of accounting. The Company's share of net earnings or losses from equity method investments is included in the Consolidated Statements of Operations. The Company carries other investments, for which the
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
Company does not have the ability to exercise significant influence, at fair value, with changes in fair value recognized in net income. For equity investments that do not have a readily determinable fair value, the Company measures the investment at cost less impairment, plus or minus observable price changes. The Company periodically evaluates the carrying value of its investments. See Note 109 –Investments for further details about the Company's evaluation of the fair value of its investments.
Long-Lived Assets. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful lives of its definite-lived intangible assets and other long-lived assets may warrant revision or that the remaining balance of such assets may not be recoverable. Once an impairment indicator is identified, the Company tests for recoverability of the related asset group using an estimate of undiscounted cash flows over the asset group's remaining life. If an asset group's carrying value is not recoverable, the Company records an impairment loss based on the excess of the carrying value of the asset group over the long-lived asset group's fair value. Fair value is determined using observable inputs, including
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
the use of appraisals from independent third parties, when available, and, when observable inputs are not available, based on the Company's assumptions of the data that market participants would use in pricing the asset, based on the best information available in the circumstances. Specifically, the Company uses discounted cash flows to determine the fair value of the asset when observable inputs are unavailable. The Company tested its long-lived asset balances for impairment as indicators arose during 2018, 20172020, 2019 and 2016,2018, resulting in impairment charges of $13.1$0.9 million, $31.0$3.0 million and $2.4$12.7 million, respectively, which are recognized either in Restructuring, exit integration and impairment charges or Selling, general and administrative expense in the Consolidated Statements of Operations.
Other Long-Term Assets. Other long-term assets consists mainly of long-term receivables originated by the Companycapitalized financing costs and assigned to third parties, long-term pension assets and other long-term receivables and deposits. As of December 31, 2018 and 2017, amounts assigned to third parties totaled $41.1 million and $30.2 million, respectively. The assignment of these instruments does not meet sale criteria as a result of the Company's contingent obligation to repurchase the receivables in the event of customer non-payment and therefore is treated as a secured obligation. Accordingly, these amounts were recorded in the Consolidated Balance Sheets under Other long-term assets and Long-term liabilities – Other.
Revenue Recognition. Revenue is recognized as performance obligations under the terms of contracts with customers are satisfied; this occurs when control of promised goods (engines, engine parts and accessories, boats, and fitness equipment) is transferred to the customer. The Company recognizes revenue related to the sale of extended warranty contracts that extend the coverage period beyond the standard warranty period over the life of the extended warranty period.
Revenue is measured as the amount of consideration expected to be entitled to in exchange for transferring goods or providing services. The Company has excluded sales, value add, and other taxes collected concurrent with revenue-producing activities from the determination of the transaction price for all contracts. The Company has elected to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment activity. For all contracts with customers, the Company has not adjusted the promised amount of consideration for the effects of a significant financing component as the period between the transfer of the promised goods and the customer's payment is expected to be one year or less.
For product sales, the Company transfers control and recognizes revenue at the time the product ships from a manufacturing or distribution facility ("free on board shipping point"), or at the time the product arrives at the customer's facility ("free on board destination"). When the shipping terms are "free on board shipping point", the customer obtains control and is able to direct the use of, and obtain substantially all of the benefits from, the products at the time the products are shipped. For shipments provided under "free on board destination", control transfers to the customer upon delivery. Payment terms vary but are generally due within 30 days of transferring control. For the Company's Boat and Propulsion segments, most product sales to dealers are wholesale financed through the Company's joint venture, Brunswick Acceptance Company, LLC (BAC), or other lending institutions, and payment is typically due in the month of shipment. For further information on the BAC joint venture, refer to Note 10 – Financing Joint Venture. In addition, periodically the Company may require the customer to provide up-front cash deposits in advance of performance.
The Company also sells separately priced extended warranty contracts that extend the coverage period beyond the standard warranty period. When determining an appropriate allocation of the transaction price to the extended warranty performance obligation, the Company uses an observable price to determine the stand-alone selling price. Extended warranties typically range from an additional 1 year to 3 years. The Company receives payment at the inception of the contract and recognizes revenue over the extended warranty coverage period. This time-elapsed method is used to measure progress because the Company, on average, satisfies its performance obligation evenly over the warranty period.
See Note 2 – Revenue Recognition for more information.
Advertising Costs. The Company records advertising and promotion costs in Selling, general and administrative expense in the Consolidated Statements of Operations in the period when the advertising first takes place. Advertising and promotion costs were $35.2$29.7 million, $30.5$35.6 million and $27.1$31.7 million for the years ended December 31, 2020, 2019 and 2018, 2017 and 2016, respectively.
Foreign Currency. The functional currency for the majority of Brunswick's operations is the U.S. dollar. All assets and liabilities of operations with a functional currency other than the U.S. dollar are translated at period end current rates. The resulting translation adjustments are recorded in Accumulated other comprehensive loss, net of tax. Revenues and expenses of operations with a functional currency other than the U.S. dollar are translated at the average exchange rates for the period. Transaction gains and losses resulting from changes in foreign currency exchange rates are recorded in either Cost of sales or Other expense, net in the Consolidated Statements of Operations.
Trademark Licensing Agreement. On September 18, 2014, the Company completed the sale of its retail bowling business to AMF Bowling Centers, Inc. (AMF) and entered into a trademark licensing agreement, allowing AMF to use the Company's retail trademarks and trade names over a five year period from the date of sale. As a result, the Company recorded deferred income of $20.7 million related to this agreement, which will be recognized as Other expense, net in the Consolidated Statements of Operations over five years.
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
Share-Based Compensation. The Company records amounts for all share-based compensation, including grants of stock appreciation rights (SARs), non-vested stock awards and performance-based share awards over the vesting period in the Consolidated Statements of Operations based upon their fair values at the date of the grant. Share-based compensation costs are included in Selling, general and administrative
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
expense in the Consolidated Statements of Operations. See Note 1918 – Stock Plans and Management Compensation for a description of the Company's accounting for share-based compensation plans.
Research and Development. Research and development costs are expensed as incurred.
Derivatives. The Company uses derivative financial instruments to manage its risk associated with movements in foreign currency exchange rates, interest rates, and interest rates.commodity prices. These instruments are used in accordance with guidelines established by the Company's management and are not used for trading or speculative purposes. The Company records all derivatives on the Consolidated Balance Sheets at fair value. See Note 1514 – Financial Instruments for further discussion.
Recently Adopted Accounting Standards
Presentation of Benefit CostsCurrent Expected Credit Loss: In March 2017,June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07, Improving the Presentation2016-13, Measurement of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, Credit Losses on Financial Instruments, which amendedupdated the Accounting Standards Codification (ASC) related to the income statement presentation of the components of net periodic benefit cost foradd an entity’s sponsored defined benefit pension and other postretirement plans. The amendment requires entities to presentimpairment model that is based on expected losses rather than incurred losses. On January 1, 2020, the current-service-cost component with other current compensation costs in the income statement within income from operations and present the other components outside of income from operations. The Company adopted this amendment retrospectively during the first quarter of 2018. The Company reclassified $4.3 million and $5.5 million from Cost of sales and Selling, general and administrative expense, respectively, to Other expense, net for the year ended December 31, 2017. The Company reclassified $7.3 million and $8.1 million from Cost of sales and Selling, general and administrative expense, respectively, to Other expense, net for the year ended December 31, 2016. Additionally, Pension settlement charge is excluded as a component of operating earnings for all periods presented. The Company elected to apply the practical expedient that permits the use of previously disclosed service cost and other costs from the prior year postretirement benefits footnote in the comparative periods as appropriate estimates when retrospectively changing the presentation of these costs.
Revenue Recognition: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (new revenue standard), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. On January 1, 2018, the Company adopted the new revenue standard and all related amendments for all contracts using the modified retrospective method. The Company did not elect to separately evaluate contract modifications occurring before the adoption date. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the January 1, 2018 balance of retained earnings. Prior period information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The Company recognizes revenue in accordance with the terms of sale, primarily upon shipment to customers. Under the new revenue standard, estimated costs associated with retail sales promotions anticipated to be offered to customers within the Company's Boat segment are recognized at the time of sale, whereas under previous guidance, these promotions were recorded at the later of when the program was communicated to the customer or the time of sale. In addition, certain Fitness segment customer contracts offer incentives in the form of rebates settled with free product. These rebates are deemed to be separate performance obligations under the new revenue standard and the revenue associated withadoption did not have a material impact on the product rebates is deferred and recognized upon customer redemption. Under previous guidance, these product rebates were recorded in Cost of sales at the time of product sale. These impacts result in a change in the timing of when certain promotions and rebates are recorded, however, the total amount of cumulative revenue recognized over the life of the contract remains unchanged.consolidated financial statements.
The cumulative effect of the changes made to the Company's Consolidated Balance Sheets as of January 1, 2018 for the adoption of the new revenue standard was as follows:
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
|
| | | | | | | | | | | |
| (in millions) | Balance as of December 31, 2017 | | Adjustments Due to ASC 606 | | Balance as of January 1, 2018 |
| Assets | | | | | |
| Accounts and notes receivable | $ | 485.3 |
| | $ | 1.2 |
| | $ | 486.5 |
|
| Deferred income tax asset | 165.6 |
| | 9.3 |
| | 174.9 |
|
| | | | | | |
| Liabilities | | | | | |
| Accrued expenses | 609.0 |
| | 39.1 |
| | 648.1 |
|
| | | | | | |
| Shareholders' equity | | | | | |
| Retained earnings | $ | 1,966.8 |
| | $ | (28.6 | ) | | $ | 1,938.2 |
|
The impact to the Company's Consolidated Statements of Operations and Consolidated Balance Sheets as of and for the year ended December 31, 2018 as a result of applying the new revenue standard was as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| (in millions) | As Reported | | Effect of Change | | Balances without adoption of ASC 606 |
| Net sales | $ | 5,159.2 |
| | $ | (15.6 | ) | | $ | 5,143.6 |
|
| Cost of sales | 3,838.2 |
| | (5.5 | ) | | 3,832.7 |
|
| | | | | | |
| Earnings before income taxes | 322.2 |
| | (10.1 | ) | | 312.1 |
|
| Income tax provision | 59.1 |
| | (2.0 | ) | | 57.1 |
|
| Net earnings from continuing operations | $ | 263.1 |
| | $ | (8.1 | ) | | $ | 255.0 |
|
|
| | | | | | | | | | | |
| | As of December 31, 2018 |
| | As Reported | | Effect of Change | | Balances without adoption of ASC 606 |
| Assets | | | | | |
| Accounts and notes receivable | $ | 550.7 |
| | $ | (1.2 | ) | | $ | 549.5 |
|
| Deferred income tax asset | 96.1 |
| | (6.8 | ) | | 89.3 |
|
| | | | | | |
| Liabilities | | | | | |
| Accrued expenses | 687.4 |
| | (29.3 | ) | | 658.1 |
|
| | | | | | |
| Shareholders' equity | | | | | |
| Retained earnings | $ | 2,135.7 |
| | $ | 21.3 |
| | $ | 2,157.0 |
|
Recently Issued Accounting Standards
Defined Benefit Plan Disclosures: In August 2018, the FASB issued ASU 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendment is effective for interim and annual periods ending after December 15, 2020, with early adoption permitted.The Company is currently evaluating the impact of adoptingadopted this ASC amendment, but doesstandard and it did not expect it will have a material impact on itsthe consolidated financial statements.
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
Cloud Computing Arrangements: In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendment is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted.The Company is currently evaluating the impact of adopting this ASC amendment, but does not expect it will have a material impact on its consolidated financial statements.
Tax Effects in Other Comprehensive Income: In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which permits companies to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 on items within AOCI to retained earnings. The ASU also requires certain new disclosures. The amendment is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted.The Company is currently evaluating the impact of adopting this ASC amendment, but does not expect it will have a material impact on its consolidated financial statements.
Hedge Accounting: In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, to simplify the application of hedge accounting and to better align an entity's risk management activities with the financial reporting of hedging relationships. The amendment is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASC amendment, but does not expect it will have a material impact on its consolidated financial statements.
Recognition of Leases: In February 2016, the FASB issued ASU 2016-02, Leases, (new leasing standard), which amended the ASC to require lessees to recognize assets and liabilities on the balance sheet for all leases with terms greater than twelve months. Lessees will recognize expenses similar to current lease accounting. The amendment is to be applied using a modified retrospective method with certain practical expedients, and is effective for fiscal years and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The Company plans to elect the practical expedients upon transition that will retain the lease classification and initial direct costs for any leases that exist prior to adoption. The Company will also not reassess whether any contracts entered into prior to adoption are leases.
In July, 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, which amended the ASC to provide relief from implementing certain aspects of the new leasing standard. The amendment provides an additional (and optional) transition method to adopt the new leasing standard where an entity initially applies the new leasing standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to elect this option and as a result, will not restate its consolidated financial statements on the date of initial application. The Company anticipates the adoption of the standard will result in the recognition of approximately $100 million in right-of-use assets and associated lease obligations on the consolidated balance sheets and will not materially impact results on the consolidated statements of operations.
Note 2 – Revenue Recognition
The following tables presenttable presents the Company's revenue for the year ended December 31, 2018 into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.factors:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 | | |
| (in millions) | Propulsion | | Parts & Accessories | | Boat | | | | Total | | | | | | | | |
| Geographic Markets | | | | | | | | | | | | | | | | | |
| United States | $ | 1,207.8 | | | $ | 1,091.0 | | | $ | 957.5 | | | | | $ | 3,256.3 | | | | | | | | | |
| Europe | 255.2 | | | 180.5 | | | 128.5 | | | | | 564.2 | | | | | | | | | |
| Asia-Pacific | 240.4 | | | 117.9 | | | 27.7 | | | | | 386.0 | | | | | | | | | |
| Canada | 66.7 | | | 80.9 | | | 114.2 | | | | | 261.8 | | | | | | | | | |
| Rest-of-World | 108.3 | | | 38.5 | | | 22.4 | | | | | 169.2 | | | | | | | | | |
| Segment Eliminations | (263.1) | | | (26.9) | | | 0 | | | | | (290.0) | | | | | | | | | |
| Total | $ | 1,615.3 | | | $ | 1,481.9 | | | $ | 1,250.3 | | | | | $ | 4,347.5 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Major Product Lines | | | | | | | | | | | | | | | | | |
| Outboard Engines | $ | 1,471.8 | | | $ | 0 | | | $ | 0 | | | | | $ | 1,471.8 | | | | | | | | | |
| Controls, Rigging, and Propellers | 258.4 | | | 0 | | | 0 | | | | | 258.4 | | | | | | | | | |
| Sterndrive Engines | 148.2 | | | 0 | | | 0 | | | | | 148.2 | | | | | | | | | |
| Distribution Parts and Accessories | 0 | | | 664.2 | | | 0 | | | | | 664.2 | | | | | | | | | |
| Advanced Systems Group | 0 | | | 412.1 | | | 0 | | | | | 412.1 | | | | | | | | | |
| Engine Parts and Accessories | 0 | | | 432.5 | | | 0 | | | | | 432.5 | | | | | | | | | |
| Aluminum Freshwater Boats | 0 | | | 0 | | | 488.5 | | | | | 488.5 | | | | | | | | | |
| Recreational Fiberglass Boats | 0 | | | 0 | | | 427.1 | | | | | 427.1 | | | | | | | | | |
| Saltwater Fishing Boats | 0 | | | 0 | | | 298.7 | | | | | 298.7 | | | | | | | | | |
| Business Acceleration | 0 | | | 0 | | | 40.5 | | | | | 40.5 | | | | | | | | | |
| Boat Eliminations/Other | 0 | | | 0 | | | (4.5) | | | | | (4.5) | | | | | | | | | |
| Segment Eliminations | (263.1) | | | (26.9) | | | 0 | | | | | (290.0) | | | | | | | | | |
| Total | $ | 1,615.3 | | | $ | 1,481.9 | | | $ | 1,250.3 | | | | | $ | 4,347.5 | | | | | | | | | |
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2019 |
| (in millions) | | | | | | | | | | | Propulsion | | Parts & Accessories | | Boat | | Total |
| Geographic Markets | | | | | | | | | | | | | | | | | |
| United States | | | | | | | | | | | $ | 1,152.1 | | | $ | 978.5 | | | $ | 1,009.0 | | | $ | 3,139.6 | |
| Europe | | | | | | | | | | | 235.1 | | | 175.8 | | | 115.6 | | | 526.5 | |
| Asia-Pacific | | | | | | | | | | | 143.2 | | | 103.4 | | | 31.2 | | | 277.8 | |
| Canada | | | | | | | | | | | 62.7 | | | 80.1 | | | 154.8 | | | 297.6 | |
| Rest-of-World | | | | | | | | | | | 99.8 | | | 42.3 | | | 23.7 | | | 165.8 | |
| Segment Eliminations | | | | | | | | | | | (269.7) | | | (29.2) | | | 0 | | | (298.9) | |
| Total | | | | | | | | | | | $ | 1,423.2 | | | $ | 1,350.9 | | | $ | 1,334.3 | | | $ | 4,108.4 | |
| | | | | | | | | | | | | | | | | |
| Major Product Lines | | | | | | | | | | | | | | | | | |
| Outboard Engines | | | | | | | | | | | $ | 1,306.7 | | | $ | 0 | | | $ | 0 | | | $ | 1,306.7 | |
| Controls, Rigging, and Propellers | | | | | | | | | | | 213.6 | | | 0 | | | 0 | | | 213.6 | |
| Sterndrive Engines | | | | | | | | | | | 172.6 | | | 0 | | | 0 | | | 172.6 | |
| Distribution Parts and Accessories | | | | | | | | | | | 0 | | | 571.8 | | | 0 | | | 571.8 | |
| Advanced Systems Group | | | | | | | | | | | 0 | | | 413.0 | | | 0 | | | 413.0 | |
| Engine Parts and Accessories | | | | | | | | | | | 0 | | | 395.3 | | | 0 | | | 395.3 | |
| Aluminum Freshwater Boats | | | | | | | | | | | 0 | | | 0 | | | 556.6 | | | 556.6 | |
| Recreational Fiberglass Boats | | | | | | | | | | | 0 | | | 0 | | | 438.8 | | | 438.8 | |
| Saltwater Fishing Boats | | | | | | | | | | | 0 | | | 0 | | | 316.6 | | | 316.6 | |
| Business Acceleration | | | | | | | | | | | 0 | | | 0 | | | 24.1 | | | 24.1 | |
| Boat Eliminations/Other | | | | | | | | | | | 0 | | | 0 | | | (1.8) | | | (1.8) | |
| Segment Eliminations | | | | | | | | | | | (269.7) | | | (29.2) | | | 0 | | | (298.9) | |
| Total | | | | | | | | | | | $ | 1,423.2 | | | $ | 1,350.9 | | | $ | 1,334.3 | | | $ | 4,108.4 | |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | Marine Engine | | Boat | | Fitness | | Total |
| Geographic Markets | | | | | | | |
| United States | $ | 2,106.6 |
| | $ | 1,119.9 |
| | $ | 533.9 |
| | $ | 3,760.4 |
|
| Europe | 373.7 |
| | 132.9 |
| | 201.9 |
| | 708.5 |
|
| Asia-Pacific | 228.8 |
| | 35.7 |
| | 175.0 |
| | 439.5 |
|
| Canada | 150.5 |
| | 157.5 |
| | 30.0 |
| | 338.0 |
|
| Rest-of-World | 134.0 |
| | 25.3 |
| | 97.5 |
| | 256.8 |
|
| Marine eliminations | (344.0 | ) | | — |
| | — |
| | (344.0 | ) |
| Total | $ | 2,649.6 |
| | $ | 1,471.3 |
| | $ | 1,038.3 |
| | $ | 5,159.2 |
|
| | | | | | | | |
| Major Product Lines | | | | | | | |
| Propulsion | $ | 1,551.6 |
| | $ | — |
| | $ | — |
| | $ | 1,551.6 |
|
| Parts & Accessories | 1,442.0 |
| | — |
| | — |
| | 1,442.0 |
|
| Aluminum Freshwater Boats | — |
| | 619.0 |
| | — |
| | 619.0 |
|
| Recreational Fiberglass Boats | — |
| | 485.9 |
| | — |
| | 485.9 |
|
| Saltwater Fishing Boats | — |
| | 362.1 |
| | — |
| | 362.1 |
|
| Commercial Cardio Fitness Equipment | — |
| | — |
| | 579.4 |
| | 579.4 |
|
| Commercial Strength Fitness Equipment | — |
| | — |
| | 379.4 |
| | 379.4 |
|
| Consumer Fitness Equipment | — |
| | — |
| | 79.5 |
| | 79.5 |
|
| Other | — |
| | 4.3 |
| | — |
| | 4.3 |
|
| Marine eliminations | (344.0 | ) | | — |
| | — |
| | (344.0 | ) |
| Total | $ | 2,649.6 |
| | $ | 1,471.3 |
| | $ | 1,038.3 |
| | $ | 5,159.2 |
|
For product sales, the Company transfers control and recognizes revenue at the time the product ships from a manufacturing or distribution facility ("free on board shipping point"), or at the time the product arrives at the customer's facility ("free on board destination"). When the shipping terms are "free on board shipping point", the customer obtains control and is able to direct the use of, and obtain substantially all of the benefits from, the products at the time the products are shipped. For shipments provided under “free on board destination”, control transfers to the customer upon delivery. Payment terms vary but are generally due within 30 days of transferring control. For the Company's Boat and Marine Engine segments, most product sales are wholesale financed by customers through the Company's joint venture, Brunswick Acceptance Company, LLC (BAC), or other lending institutions, and payment is typically due in the month of shipment. For further information on the BAC joint venture, refer to Note 11 – Financing Joint Venture. In addition, periodically the Company may require the customer to provide up front cash deposits in advance of performance.
The Company also sells separately priced extended warranty contracts that extend the coverage period beyond the standard warranty period included with the product sale. When determining an appropriate allocation of the transaction price to the extended warranty performance obligation, the Company uses an observable price to determine the stand-alone selling price. Extended warranties typically range from an additional 1 year to 3 years. The Company receives payment at the inception of the contract and recognizes revenue over the extended warranty coverage period. This time-elapsed method is used to measure progress because the Company, on average, satisfies its performance obligation evenly over the warranty period.
For certain customers within the Fitness segment, the Company provides rebate incentives settled in free product. These rebates provide the customer with a material right which would not have been received without entering into the contract and, therefore, represent a separate performance obligation to which revenue is allocated based on the products' stand-alone selling price. This revenue is deferred and recognized at a point in time upon rebate redemption, with a commensurate charge to Cost of sales for related product costs. The Company also provides product installation services to certain customers for which the Company recognizes revenue at the time of installation, using an observable price to determine the stand-alone selling price.
As of January 1, 2018, $170.82020, $96.2 million of contract liabilities associated with extended warranties and customer deposits and product rebates were reported in Accrued expenses and Other Long-term liabilities with $76.8$34.8 million of this amount recognized as revenue during year ended December 31, 2018.2020. As of December 31, 2018,2020, total contract liabilities were $178.7$113.0 million. The total amount of the transaction price allocated to unsatisfied performance obligations as of December 31, 20182020 is $159.5$106.2 million for contracts greater than one year, which includes both extended warranties and product rebates.warranties. The Company expects to recognize
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
approximately $56.7$30.9 million of this amount in 20192021 and $102.8$75.3 million thereafter. Contract assets as of January 1, 20182020 and December 31, 20182020 were not material. In addition, costs to obtain and fulfill contracts during the period were not material.
The amount of consideration received can vary, primarily because of customer incentive or rebate arrangements. In addition, the Company provides customers the right to return eligible products under certain circumstances. The Company estimates variable consideration based on the expected value of total consideration to which customers are likely to be entitled based on historical experience and projected market expectations. Included in the estimate is an assessment as to whether any variable consideration is constrained. Revenue estimates are adjusted at the earlier of a change in the expected value of consideration or when the consideration becomes fixed. As a result, the Company recognized a decrease to revenue of $13.5 million related to sales recognized in 2017.
Note 3 – Discontinued Operations
In December 2017, the Board of Directors authorizedOn June 27, 2019, the Company completed the sale of its Fitness business to exit its Sea Ray business, including the Meridian brand, as a result of, among other things, a material change in strategic direction and a review of the expected future cash flows, market conditions and business trends. The Company engaged in a thorough sales process and ultimately determined that the offers received did not reflect an appropriate value for the brand.KPS Capital Partners, LP. As a result, in June 2018, the Board of Directors authorized the Company to end the sale process for its Sea Ray business. 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. The winding down of Sea Ray Sport Yacht and Yacht operations was largely completed in 2018. The assets and liabilities of the Sea Ray business, which werewas previously reported as held for sale in the 2017 Form 10-K, have been reclassified to assets and liabilities in the Consolidated Balance Sheets for all periods presented. Additionally, the results of these businesses are no longer presentedCompany's Fitness segment, is being reported as discontinued operations in the Consolidated Statements of Cash Flows, theOperations and Consolidated Statements of OperationsCash Flows for all periods presented.
The sale of the Fitness business resulted in net proceeds of $466.2 million and an after-tax loss of $45.4 million. During the third quarter of 2020, the Company made a payment of $3.3 million, including a $7.5 million final working capital settlement as well as $1.2 million of retained liabilities partially offset by a $5.4 million cash true-up. In connection with the sale of its Fitness business, the Company retained assets of $26.4 million primarily related to VAT receivables, and retained liabilities of $45.1 million primarily related to VAT payables, product warranty liabilities and certain employee benefits. As of December 31, 2020, retained assets and liabilities were $4.6 million and $12.7 million, respectively. As of December 31, 2019, retained assets and liabilities were $16.4 million and $30.5 million, respectively.
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
The following table discloses the results of operations of the business reported as discontinued operations for the years ended December 31, 2020, December 31, 2019 and December 31, 2018 respectively:
| | | | | | | | | | | | | | | | | | | |
| (in millions) | 2020 | | | | 2019 | | 2018 |
| Net sales | $ | 0 | | | | | $ | 448.3 | | | $ | 1,038.3 | |
| Cost of sales | 0 | | | | | 334.6 | | | 764.3 | |
Selling, general and administrative expense (A) (B) | 0.5 | | | | | 113.3 | | | 206.1 | |
| Research and development expense | 0 | | | | | 12.6 | | | 27.4 | |
Restructuring, exit and impairment charges(C) | 0 | | | | | 138.3 | | | 26.1 | |
| Other (income), net | 0 | | | | | (0.3) | | | (0.1) | |
(Loss) earnings from discontinued operations before income taxes (A) (B) (C) | (0.5) | | | | | (150.2) | | | 14.5 | |
| Income tax provision (benefit) | 0.0 | | | | | (32.7) | | | 2.6 | |
(Loss) earnings from discontinued operations, net of tax (A) (B) (C) | (0.5) | | | | | (117.5) | | | 11.9 | |
Loss on disposal of discontinued operations, net of tax (D) | (1.5) | | | | | (43.9) | | | 0 | |
| Net (loss) earnings from discontinued operations, net of tax | $ | (2.0) | | | | | $ | (161.4) | | | $ | 11.9 | |
| | | | | | | |
| | | | | | | |
(A) The Company recorded $16.5 million and $19.3 million for the year ended December 31, 2019 and December 31, 2018, respectively, of net costs incurred in any period presented.connection with the sale of its Fitness business
In(B) The Company recorded $(0.5) million for the fourth quarteryear ended December 31, 2020, primarily resulting from adjustments in certain liabilities as part of the sale of the Fitness business. During 2018, the Company maderecorded adjustments to certain liabilities that were retained as part of the sale of the retail bowling business in 2014 and the bowling products business in 2015. The Company does not have continuing involvement or cash flows associated with these businesses, which were previously reported as discontinued operations in the Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014.businesses. As a result, of these adjustments, the Company recognized $2.2 million of after-tax earnings asEarnings (loss) from discontinued operations, in the Consolidated Statementsnet of Operationstax, includes a gain of $3.0 million ($2.2 million after tax) for the year ended December 31, 2018.
(C) In the first quarter of 2019, the Company re-evaluated the fair value of the Fitness reporting unit and determined the fair value of the business was less than its carrying value. As a result, (Loss) earnings from discontinued operations, net of tax, includes a $137.2 million ($103.0 million after tax) goodwill impairment charge for the year ended December 31, 2019.
(D) The Loss on disposal of discontinued operations, net of tax for the year ended December 31, 2020 includes a pre-tax loss of $2.0 million and a net tax benefit of $0.5 million. The Loss on disposal of discontinued operations, net of tax for the year ended December 31, 2019 includes a pre-tax loss of $51.3 million and a net tax benefit of $7.4 million. There were no assets and liabilities held for sale related to discontinued operations as of December 31, 2020 or December 31, 2019.
Note 4 – Restructuring, Exit Integration and Impairment Activities
The Company has announced and implemented a number of initiatives designed to improve its cost structure better utilize overall capacity, improveand general operating efficiencies and integrate the operations of recently acquired businesses.better utilize overall capacity. These initiatives resulted in the recognition of restructuring, exit integration and impairment charges in the Consolidated Statements of Operations during 2018, 20172020, 2019 and 2016.2018.
The costs incurred under these initiatives include:
•Restructuring and Exit Activities – These amounts relate to:
•Employee termination and other benefits
•Inventory adjustments to lower of cost or net realizable value
•Costs to retain and relocate employees
•Consulting costs
•Consolidation of manufacturing footprint
•Facility shutdown costs
•Costs associated with the wind-down of Sport Yacht and Yacht operations& Yachts
•Asset Disposition and Impairment Actions – These amounts relate to impairments of assets and gains on the sale of assets previously impaired as part of a restructuring or exit activity. The impairments recognized were equal to the difference between the carrying amount of the asset and the estimated fair value of the asset, which was determined using observable inputs, including appraisals from independent third parties when available. When observable inputs were not available, estimated fair value was determined using the Company’s assumptions, including the data that market participants would use in pricing the asset, based
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
on the best information available in the circumstances. Specifically, the Company used discounted cash flows to determine the fair value of the asset when observable inputs were unavailable.
•Integration Activities – These amounts relate to professional fees for systems integration and deal costs, employee termination and benefits and other charges associated with integrating the operations of recently acquired businesses.
•Intangible Asset Impairments – These amounts relate to impairments of intangible assets recognized as a result of the Company's periodic impairment testing. In the fourth quarter of 2017, the Company recorded an impairment charge for the Cybex trade name as a result of declining sales and operating performance. In the third and fourth quarters of 2018, the Company recorded additional impairment charges for the Cybex trade name as a result of further declines in operating performance and projected declines in sales due to changes in operating strategy. The company used a relief-from-royalty analysis, using Level 3 inputs, to assess the fair value of the Cybex trade name. The impairment charges were recorded within the Fitness segment. Refer to Note 1 – Significant Accounting Policies for further details about the Company's impairment testing procedures.
The Company has reported restructuring, exit integration and impairment activities based on the specific driver of the cost and reflected the expense in the accounting period when the Company has committed to or incurred the cost, as appropriate. The following table is a summary of the net expense associated with the restructuring, exit integration and impairment activities.
| | | | | | | | | | | | | | | | | |
| (in millions) | 2020 | | 2019 | | 2018 |
| Restructuring and exit activities: | | | | | |
| Employee termination and other benefits | $ | 3.0 | | | $ | 11.7 | | | $ | 9.5 | |
| Current asset write-downs | 0 | | | 0.5 | | | 18.9 | |
| Professional fees | 0.1 | | | 3.1 | | | 8.0 | |
Other (A) | 0.5 | | | 0.5 | | | 10.7 | |
| Asset disposition and impairment actions: | | | | | |
| | | | | |
| Definite-lived and other asset impairments | 0.5 | | | 3.0 | | | 12.7 | |
| Valuation (reversal) allowance on disposal group | 0 | | | 0 | | | (5.0) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Total restructuring, exit and impairment charges | $ | 4.1 | | | $ | 18.8 | | | $ | 54.8 | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| (in millions) | 2018 | | 2017 | | 2016 |
| Restructuring and exit activities: | | | | | |
| Employee termination and other benefits | $ | 13.0 |
| | $ | 9.4 |
| | $ | 1.0 |
|
| Current asset write-downs | 18.2 |
| | 9.9 |
| | — |
|
| Professional fees | 8.0 |
| | 1.1 |
| | — |
|
Other (A) | 10.7 |
| | 1.5 |
| | — |
|
| Asset disposition and impairment actions: | | | | | |
| Trade name impairment | 22.1 |
| | 13.9 |
| | — |
|
| Definite-lived and other asset impairments | 13.1 |
| | 31.0 |
| | 2.3 |
|
| Valuation allowance (reversal) on disposal group | (5.0 | ) | | 5.0 |
| | — |
|
| Integration activities: | | | | | |
| Employee termination and other benefits | 0.0 |
| | 2.5 |
| | 4.0 |
|
| Professional fees | 0.7 |
| | 5.2 |
| | 5.9 |
|
| Other | 0.1 |
| | 1.8 |
| | 2.4 |
|
| Total restructuring, exit, integration and impairment charges | $ | 80.9 |
| | $ | 81.3 |
| | $ | 15.6 |
|
(A) The charges in 2018 primarily relate to warranty adjustments in connection with the wind-down of Sport Yacht and Yacht operations.& Yachts.
The following tables summarize the change in accrued restructuring, exit integration and impairment charges within Accrued expenses in the Consolidated Balance Sheets for the years ended December 31, 2018, 20172020, 2019 and 2016:2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dec 31, 2019 | | 2020 Activity | | Dec 31, 2020 |
| (in millions) | Accrued Charges | | Total Charges | | Non-Cash Charges | | Payments (A) | | Accrued Charges (B) |
| Parts & Accessories | $ | 1.2 | | | $ | 0.8 | | | $ | 0 | | | $ | (1.7) | | | $ | 0.3 | |
| Boat | 6.1 | | | 1.3 | | | (0.5) | | | (5.7) | | | 1.2 | |
| Corporate | 1.5 | | | 2.0 | | | 0 | | | (1.8) | | | 1.7 | |
| Total | $ | 8.8 | | | $ | 4.1 | | | $ | (0.5) | | | $ | (9.2) | | | $ | 3.2 | |
| | | | Dec 31, 2017 | | 2018 Activity | | Dec 31, 2018 | | Dec 31, 2018 | | 2019 Activity | | Dec 31, 2019 |
| (in millions) | Accrued Charges | | Total Charges | | Non-Cash Charges | | Payments (A) | | Accrued Charges (B) | (in millions) | Accrued Charges | | Total Charges | | Non-Cash Charges | | Payments (A) | | Accrued Charges |
| Fitness | $ | 5.0 |
| | $ | 25.3 |
| | $ | (21.8 | ) | | $ | (5.0 | ) | | $ | 3.5 |
| |
| Parts & Accessories | | Parts & Accessories | $ | 0 | | | $ | 4.6 | | | $ | 0 | | | $ | (3.4) | | | $ | 1.2 | |
| Boat | 3.7 |
| | 54.1 |
| | (26.6 | ) | | (15.8 | ) | | 15.4 |
| Boat | 15.4 | | | 9.7 | | | (3.5) | | | (15.5) | | | 6.1 | |
| Corporate | 0.5 |
| | 1.5 |
| | — |
| | (1.0 | ) | | 1.0 |
| Corporate | 0.7 | | | 4.5 | | | 0 | | | (3.7) | | | 1.5 | |
| Accrued balance | $ | 9.2 |
| | $ | 80.9 |
| | $ | (48.4 | ) | | $ | (21.8 | ) | | $ | 19.9 |
| |
| Total | | Total | $ | 16.1 | | | $ | 18.8 | | | $ | (3.5) | | | $ | (22.6) | | | $ | 8.8 | |
Index to Financial Statements | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dec 31, 2017 | | 2018 Activity | | Dec 31, 2018 |
| (in millions) | Accrued Charges | | Total Charges | | Non-Cash Charges | | Payments (A) | | Accrued Charges |
| | | | | | | | | |
| Boat | $ | 3.7 | | | $ | 54.1 | | | $ | (26.6) | | | $ | (15.8) | | | $ | 15.4 | |
| Corporate | 0 | | | 0.7 | | | 0 | | | 0 | | | 0.7 | |
| Total | $ | 3.7 | | | $ | 54.8 | | | $ | (26.6) | | | $ | (15.8) | | | $ | 16.1 | |
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | |
| | Dec 31, 2016 | | 2017 Activity | | Dec 31, 2017 |
| (in millions) | Accrued Charges | | Total Charges | | Non-Cash Charges | | Payments (A) | | Accrued Charges |
| Fitness | $ | 3.9 |
| | $ | 30.3 |
| | $ | (16.6 | ) | | $ | (12.6 | ) | | $ | 5.0 |
|
| Boat | 0.7 |
| | 48.6 |
| | (43.2 | ) | | (2.4 | ) | | 3.7 |
|
| Corporate | — |
| | 2.4 |
| | (0.8 | ) | | (1.1 | ) | | 0.5 |
|
| Accrued balance | $ | 4.6 |
| | $ | 81.3 |
| | $ | (60.6 | ) | | $ | (16.1 | ) | | $ | 9.2 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Dec 31, 2015 | | 2016 Activity | | Dec 31, 2016 |
| (in millions) | Accrued Charges | | Total Charges | | Non-Cash Charges | | Payments (A) | | Accrued Charges |
| Fitness | $ | — |
| | $ | 12.7 |
| | $ | — |
| | $ | (8.8 | ) | | $ | 3.9 |
|
| Boat | 1.0 |
| | 0.6 |
| | — |
| | (0.9 | ) | | 0.7 |
|
| Corporate | 0.5 |
| | 2.3 |
| | (2.3 | ) | | (0.5 | ) | | — |
|
| Accrued balance | $ | 1.5 |
| | $ | 15.6 |
| | $ | (2.3 | ) | | $ | (10.2 | ) | | $ | 4.6 |
|
(A) Cash payments may include payments related to prior period charges.
(B) The accrued charges as of December 31, 20182020 are expected to be paid during 2019.2021.
Reductions in demand for the Company’sCompany's products, further refinement of its product portfolio, further opportunities to reduce costs or the cost of integrating future acquisitions may result in additional restructuring, exit integration and impairment charges in future periods.
Actions Initiated in 2020
During 2020, the Company recorded restructuring charges within the Boat segment related to the consolidation of its Greenville manufacturing location in order to streamline the overall cost structure.
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
The following table is a summary of the expenses associated with the restructuring, exit and impairment activities for the year ended December 31, 2020, related to actions initiated in 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Parts & Accessories | | Boat | | Corporate | | Total |
| Restructuring and exit activities: | | | | | | | |
| Employee termination and other benefits | $ | 0.5 | | | $ | 0.4 | | | $ | 1.8 | | | $ | 2.7 | |
| | | | | | | |
| | | | | | | |
| Other | 0 | | | 0.5 | | | 0 | | | 0.5 | |
| Asset disposition and impairment actions: | | | | | | | |
| | | | | | | |
| Definite-lived and other asset impairments | 0 | | | 0.5 | | | 0 | | | 0.5 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total restructuring, exit and impairment charges | $ | 0.5 | | | $ | 1.4 | | | $ | 1.8 | | | $ | 3.7 | |
Actions Initiated in 2019
During 2019, the Company recorded restructuring charges within the Boat segment related to consolidating its commercial and government products operations in order to rationalize its product line to better align with customer demand.
In addition, the Company announced headcount reductions aimed at streamlining the cost structure of its enterprise-wide general and administrative functions, and recorded restructuring charges in 2019 as a result of these actions.
The following table is a summary of the expenses associated with the restructuring, exit and impairment activities for the year ended December 31, 2020 and December 31, 2019, related to actions initiated in 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| (in millions) | Parts & Accessories | | Boat | | Corporate | | Total | | Parts & Accessories | | Boat | | Corporate | | Total |
| Restructuring and exit activities: | | | | | | | | | | | | | | | |
| Employee termination and other benefits | $ | 0.3 | | | $ | (0.1) | | | $ | 0.1 | | | $ | 0.3 | | | $ | 4.6 | | | $ | 4.0 | | | $ | 3.1 | | | $ | 11.7 | |
| Current asset write-downs | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0.5 | | | 0 | | | 0.5 | |
| Professional fees | 0 | | | 0 | | | 0.1 | | | 0.1 | | | 0 | | | 1.7 | | | 1.4 | | | 3.1 | |
| Other | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0.5 | | | 0 | | | 0.5 | |
| Asset disposition and impairment actions: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Definite-lived and other asset impairments | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 3.0 | | | 0 | | | 3.0 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total restructuring, exit and impairment charges | $ | 0.3 | | | $ | (0.1) | | | $ | 0.2 | | | $ | 0.4 | | | $ | 4.6 | | | $ | 9.7 | | | $ | 4.5 | | | $ | 18.8 | |
Actions Initiated in 2018
In the second quarter of 2018, the Company ended the sale process of its Sea Ray business and asRay. As a result, the Company recorded an additional impairment of long-lived assets. During the second, third and fourth quarters of 2018, the Company also recorded additional charges in connection with the wind down of Sport Yacht and Yacht production,& Yachts, mainly relating to inventory write-downs, increased warranty liabilities and employee severance and retention bonuses. These costs were partially offset by the reversal of the valuation allowance in the second quarter of 2018 for estimated transaction costs which was recorded when the assets and liabilities of Sea Ray were initially classified as held for sale.
In 2018, the Company executed headcount reductions in the Fitness and Boat segmentssegment aimed at improving general operating efficiencies.
In 2018, the The Company also recorded charges within Corporate related to the transition of certain corporate officers.
BRUNSWICK CORPORATION
Notes to Consolidated Financial Statements
The following table is a summary of the expenses associated with the restructuring, exit integration and impairment activities for the year ended December 31, 2018, related to actions initiated in 2018:
| | | (in millions) | Fitness | | Boat | | Corporate | | Total | (in millions) | | Boat | | Corporate | | Total |
| Restructuring and exit activities: | | | | | | | | Restructuring and exit activities: | | | | | | |
| Employee termination and other benefits | $ | 2.7 |
| | $ | 4.7 |
| | $ | 1.5 |
| | $ | 8.9 |
| Employee termination and other benefits | | $ | 4.7 | | | $ | 0.7 | | | $ | 5.4 | |
| Current asset write-downs | — |
| | 18.9 |
| | — |
| | 18.9 |
| Current asset write-downs | | 18.9 | | | 0 | | | 18.9 | |
| Professional fees | — |
| | 3.9 |
| | — |
| | 3.9 |
| Professional fees | | 3.9 | | | 0 | | | 3.9 | |
| Other | — |
| | 10.7 |
| | — |
| | 10.7 |
| Other | | 10.7 | | | 0 | | | 10.7 | |
| Asset disposition and impairment actions: | | | | | | | | Asset disposition and impairment actions: | | |
| Trade name impairment | 22.1 |
| | — |
| | — |
| | 22.1 |
| |
| | Definite-lived and other asset impairments | 0.4 |
| | 12.7 |
| | — |
| | 13.1 |
| Definite-lived and other asset impairments | | 12.7 | | | 0 | | | 12.7 | |
| Total restructuring, exit, integration and impairment charges | $ | 25.2 |
| | $ | 50.9 |
| | $ | 1.5 |
| | $ | 77.6 |
| |
| | Total restructuring, exit and impairment charges | | Total restructuring, exit and impairment charges | | $ | 50.9 | | | $ | 0.7 | | | $ | 51.6 | |
