Brunswick(BC) - 2023 Q4 - Annual Report

PART I Business Brunswick Corporation leads marine recreation, focusing on innovation, consumer experience, and ACES strategy across its Propulsion, Engine P&A, Navico Group, and Boat segments Company Overview and Segments Brunswick, a global marine recreation leader, realigned into Propulsion, Engine P&A, Navico Group, and Boat segments, emphasizing ACES strategy and consumer-centric innovation - The company's core strategy is centered on innovation and leadership in Autonomy, Connectivity, Electrification, and Shared Access (ACES) to enhance the consumer boating experience and drive growth[16] - Effective January 1, 2023, the company updated its reportable segments to Propulsion, Engine Parts and Accessories (Engine P&A), Navico Group, and Boat to align with its internal operating structure[17] 2023 Net Sales by Segment | Segment | 2023 Net Sales (in millions) | | :--- | :--- | | Propulsion | $2,763.8 | | Engine P&A | $1,199.8 | | Navico Group | $914.7 | | Boat | $1,989.4 | Financing, Distribution, and Technology Brunswick offers dealer and retail financing, leverages a global distribution network, and drives technology innovation through its ACES strategy, including electric outboards - The company provides wholesale inventory financing to dealers through its 49%-owned joint venture, Brunswick Acceptance Company, LLC (BAC), with Wells Fargo & Company owning the other 51%[28] - Brunswick utilizes a global network of over 19,000 active independent dealers, distributors, and retailers for the majority of its sales[32] - The company is heavily invested in its ACES (Autonomy, Connectivity, Electrification, and Shared Access) strategy, highlighted by the launch of Avator electric outboards and the acquisition of Fliteboard to enhance its electrification portfolio[34][35] International Operations and Raw Materials International sales were 30% of total net sales in 2023, with Europe as the largest market, while the company manages raw material and currency risks through global procurement and derivatives International Sales by Region (in millions) | Region | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Europe | $837.3 | $904.4 | $796.2 | | Canada | $373.0 | $458.2 | $411.7 | | Asia-Pacific | $410.0 | $466.0 | $439.0 | | Rest-of-World | $331.3 | $284.4 | $237.4 | | Total | $1,951.6 | $2,113.0 | $1,884.3 | | % of Net Sales | 30% | 31% | 32% | - The company purchases a wide variety of raw materials, including commodities like aluminum, copper, resins, and steel, and faces risks from price fluctuations and supply chain disruptions, mitigated by fixed-price contracts and derivatives[40] Intellectual Property and Market Conditions Brunswick maintains a strong intellectual property portfolio with over 1,100 U.S. patents, competing in fragmented markets based on product features, technology, and brand strength, with seasonal demand Intellectual Property Portfolio (as of Dec 31, 2023) | IP Type | Count | | :--- | :--- | | Active U.S. patents | > 1,100 | | Pending U.S. patent applications | > 450 | | Active foreign patents | > 650 | | U.S. registered trademarks | > 370 | | Foreign registered trademarks | > 1,800 | - The company faces strong competition across all product groups from diverse competitors, with no single entity competing across all of Brunswick's segments[44] Environmental and Human Capital Brunswick prioritizes environmental sustainability through lower-carbon products and operational efficiency, while fostering human capital development, DEI, and strong safety performance for its 17,300 employees - The company focuses on sustainability initiatives, including expanding the Avator™ electric outboard line, acquiring e-foil company Fliteboard, operationalizing solar installations, and reducing water consumption at manufacturing facilities[48][49][51][53] - As of December 31, 2023, Brunswick employed approximately 17,300 people, with 65% hourly and 35% salaried, including about 2,500 unionized U.S. employees[64] - The company emphasizes Diversity, Equity, and Inclusion (DEI), with women comprising one-third of Executive Officers and Directors, and Employee Resource Group (ERG) participation doubling to over 1,000 members in 2023[66][67] Safety Incident Rates (2021-2023) | Rate Type | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Recordable Incident Rate | 1.11 | 1.23 | 1.41 | | Lost Time Incident Rate | 0.33 | 0.36 | 0.42 | Risk Factors The company faces diverse risks including economic downturns, currency fluctuations, supply chain disruptions, cybersecurity threats, and potential goodwill impairment, particularly for the Navico Group - Economic conditions, such as rising interest rates and inflation, significantly affect consumer discretionary spending on recreational products, which could reduce sales and harm financial performance[80][81] - The company relies on third-party suppliers for raw materials and components, where shortages, price increases, or supplier failures could disrupt manufacturing and negatively affect financial results[95][96] - Cybersecurity incidents, such as the one experienced in June 2023, can disrupt operations, lead to lost revenue, and result in significant remediation costs and reputational damage[133][134] - There is a risk of goodwill impairment, particularly for the Navico Group reporting unit, whose fair value was approximately 10% in excess of its carrying value at year-end, where a decline in forecasts could trigger an impairment charge[147] - The company relies on a network of third-party dealers, and a deterioration in their financial health or ability to secure floor plan financing could adversely affect distribution and sales[119][121] Unresolved Staff Comments The company reports no unresolved staff comments - None[160] Cybersecurity Brunswick manages cybersecurity risk via a NIST-based program, experiencing a June 2023 incident that caused an estimated $80-85 million revenue loss and $35-40 million operating earnings impact - Cybersecurity risk is overseen by the Audit and Finance Committee of the Board, with regular updates from the Chief Information Officer (CIO) and Chief Information Security Officer (CISO), and the program is based on the NIST Cybersecurity Framework[162][163] - On June 13, 2023, an IT security incident impacted systems and facilities, pausing operations for nine days, with an estimated financial impact of $80 million to $85 million in revenue loss and $35 million to $40 million in operating earnings[167] - The company uses third-party service providers for risk assessments, penetration testing, and independent audits to evaluate and improve its cybersecurity program[164] Properties Brunswick operates a global network of owned and leased manufacturing, distribution, and office facilities across North America, Europe, and Asia-Pacific, deemed suitable for current needs - The company's principal properties include manufacturing, distribution, and office facilities across North America, Europe, and Asia-Pacific, with a mix of owned and leased locations[170][171] Legal Proceedings Information on legal proceedings is detailed in Note 11 – Commitments and Contingencies within the Consolidated Financial Statements - Refer to Note 11 – Commitments and Contingencies for information about legal proceedings[172] Mine Safety Disclosures This item is not applicable to the company - Not applicable[172] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Brunswick's common stock trades on NYSE, with $275.0 million in 2023 share repurchases and a $500.0 million authorization increase in January 2024, outperforming key indices - In 2023, the company repurchased $275.0 million of its common stock, and the Board of Directors approved a $500.0 million increase to the share repurchase authorization on January 30, 2024[186] Issuer Purchases of Equity Securities (Q4 2023) | Period | Total Shares Purchased | Weighted Average Price Paid per Share | | :--- | :--- | :--- | | Oct 1 - Oct 28 | 134,197 | $74.52 | | Oct 29 - Nov 25 | 394,467 | $70.88 | | Nov 26 - Dec 31 | 197,118 | $86.45 | | Total | 725,782 | $75.78 | Comparison of Cumulative Total Shareholder Return (2018-2023) | Index | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Brunswick | $100.00 | $131.24 | $169.24 | $224.46 | $165.54 | $225.78 | | S&P 400 GICS Consumer Discretionary | $100.00 | $81.92 | $103.17 | $171.32 | $135.32 | $169.26 | | S&P 400 Index | $100.00 | $89.02 | $112.50 | $156.48 | $136.29 | $160.05 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Brunswick's 2023 financial performance, noting a 6.0% net sales decrease to $6.4 billion and a 22.5% operating earnings decline to $734.9 million, driven by lower volumes and an IT incident Results of Operations In 2023, consolidated net sales decreased 6.0% to $6.4 billion, operating earnings fell 22.5% to $734.9 million, and diluted EPS from continuing operations dropped to $6.13 Consolidated Results of Operations (in millions, except per share data) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net sales | $6,401.4 | $6,812.2 | $5,846.2 | | Gross margin | $1,787.0 | $1,947.2 | $1,666.0 | | Operating earnings | $734.9 | $947.8 | $812.9 | | Net earnings from continuing operations | $432.6 | $681.3 | $595.4 | | Diluted EPS from continuing operations | $6.13 | $9.06 | $7.59 | Components of Net Sales Change (2023 vs. 2022) | Component | Percent Change | | :--- | :--- | | Volume | (13.2)% | | Product Mix and Price | 8.1% | | IT Security Incident | (1.2)% | | Acquisitions | 0.4% | | Currency | (0.1)% | | Total | (6.0)% | - Gross margin percentage decreased by 70 basis points in 2023 compared to 2022, driven by higher manufacturing costs (260 bps), depreciation (60 bps), and the IT security incident (30 bps), partially offset by favorable sales-related drivers (330 bps)[205] - The company recorded restructuring, exit, and impairment charges of $54.7 million in 2023, an increase from $25.1 million in 2022, expected to yield approximately $45 million in annualized cost savings[206] Segment Performance All segments saw sales declines in 2023, with Propulsion down 2.1% to $2.8 billion, Engine P&A down 8.4% to $1.2 billion, Navico Group down 14.5% to $914.7 million, and Boat down 6.1% to $2.0 billion 2023 vs. 2022 Segment Performance (in millions) | Segment | 2023 Net Sales | % Change | 2023 Operating Earnings | % Change | 2023 Adjusted Op. Margin | | :--- | :--- | :--- | :--- | :--- | :--- | | Propulsion | $2,763.8 | (2.1)% | $494.7 | (5.4)% | 18.2% | | Engine P&A | $1,199.8 | (8.4)% | $217.4 | (18.9)% | 18.5% | | Navico Group | $914.7 | (14.5)% | $5.2 | (92.4)% | 10.0% | | Boat | $1,989.4 | (6.1)% | $155.6 | (26.9)% | 8.8% | - Propulsion segment sales decreased 2.1% due to a 14.1% volume decline, largely offset by a 13.4% improvement in product mix and price[216] - Navico Group operating earnings fell 92.4% to $5.2 million, impacted by lower sales, restructuring charges, and elevated input costs[229] - Boat segment operating earnings decreased 26.9% to $155.6 million, driven by lower sales and restructuring charges, partially offset by cost reduction efforts[235] Cash Flow, Liquidity and Capital Resources Net cash from operating activities increased to $745.2 million in 2023, with free cash flow doubling to $473.4 million, ending the year with $1.21 billion in total liquidity and $2.43 billion in debt Cash Flow Summary (in millions) | Cash Flow Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $745.2 | $580.4 | $586.2 | | Capital expenditures | ($289.3) | ($388.3) | ($267.1) | | Total free cash flow | $473.4 | $191.5 | $320.8 | Total Liquidity (as of Dec 31, in millions) | Component | 2023 | 2022 | | :--- | :--- | | Cash, cash equivalents and marketable securities | $468.6 | $600.1 | | Amounts available under lending facilities | $741.9 | $747.2 | | Total liquidity | $1,210.5 | $1,347.3 | - The 2024 capital strategy includes share repurchases exceeding $200 million and capital expenditures of approximately $225 million, scaling back slightly from prior years[252] Critical Accounting Estimates Critical accounting estimates include revenue recognition, warranty reserves, and goodwill valuation, with a $13.0 million impairment on the Navico trade name and the Navico Group's goodwill fair value being sensitive to assumptions - Key critical accounting estimates involve significant judgment in areas such as revenue recognition, warranty reserves, goodwill and intangible asset valuation, and income taxes[258][260][262][263][273] - The company recorded a $13.0 million impairment charge on the Navico trade name in 2023 due to declines in forecasted revenues[270] - The fair value of the Navico Group reporting unit exceeded its carrying value by approximately 10%, making it sensitive to changes in assumptions, where a 100 basis point increase in the discount rate would cause the fair value to approximate the carrying value[147][435] Quantitative and Qualitative Disclosures About Market Risk Brunswick manages market risks from foreign currency, commodity prices, and interest rates using derivatives, with a 10% adverse currency change potentially reducing derivative fair value by $91.7 million - The company uses derivative financial instruments, including foreign currency forwards, options, and interest rate swaps, to manage market risks associated with currency, commodity prices, and interest rates[276][277] - A sensitivity analysis showed that a 10% adverse change in quoted foreign currency rates would lead to an estimated reduction in the fair market value of derivative financial instruments of $91.7 million as of year-end 2023, compared to $71.6 million in 2022[279] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2021-2023, including statements of operations, balance sheets, cash flows, and accompanying notes Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None[280] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes in Q4 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year 2023[280] - There were no changes in internal control over financial reporting during the fourth quarter of 2023 that materially affected, or are reasonably likely to materially affect, these controls[282] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the upcoming Proxy Statement for the May 1, 2024 Annual Meeting - Information required for this item is incorporated by reference from the company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled for May 1, 2024[284] Executive Compensation Information on director and executive compensation is incorporated by reference from the upcoming Proxy Statement for the May 1, 2024 Annual Meeting - Information required for this item is incorporated by reference from the company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled for May 1, 2024[285] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management, and equity compensation plans, is incorporated by reference from the upcoming Proxy Statement - Information required for this item is incorporated by reference from the company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled for May 1, 2024[286] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the upcoming Proxy Statement - Information required for this item is incorporated by reference from the company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled for May 1, 2024[287] Principal Accounting Fees and Services Information on principal accounting fees and services, and the Audit and Finance Committee's pre-approval policy, is incorporated by reference from the upcoming Proxy Statement - Information required for this item is incorporated by reference from the company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled for May 1, 2024[288] PART IV Exhibits and Financial Statement Schedules This section provides an index of all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K - This section provides an index of all financial statements, schedules, and exhibits filed with the 10-K report[290] Form 10-K Summary The company reports that no Form 10-K summary is provided - None[550]