Form 10-Q Third Quarter
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
Form
10-Q
[X]
Quarterly
report pursuant to Section 13 or 15(d) of the
Securities
|
Exchange
Act of 1934
|
For
the quarterly period ended September 30, 2006
|
or
|
[ ]
Transition
Report Pursuant to Section 13 or 15(d) of the
Securities
|
Exchange
Act of 1934
|
|
Commission
file number 1-1043
|
_______________
Brunswick
Corporation
(Exact
name of registrant as specified in its charter)
Delaware
|
36-0848180
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
1
N. Field Court, Lake Forest, Illinois
|
60045-4811
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
(847)
735-4700
|
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
[X]
No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [X]
Accelerated filer [ ] Non-accelerated filer
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [X]
The
number of shares of Common Stock ($0.75 par value) of the registrant outstanding
as of October
26, 2006,
was
91,807,802.
BRUNSWICK
CORPORATION
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
September
30, 2006
TABLE
OF CONTENTS
|
|
Page
|
PART
I -
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Consolidated
Financial Statements
|
|
|
|
|
|
Consolidated
Statements of Income for the three months and nine
months
ended September 30, 2006, and October 1, 2005 (unaudited)
|
1
|
|
|
|
|
Consolidated
Balance Sheets as of September 30, 2006 (unaudited),
December
31, 2005, and October 1, 2005 (unaudited)
|
2
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months
ended
September 30, 2006, and October 1, 2005 (unaudited)
|
4
|
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
5
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
|
20
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
34
|
|
|
|
Item
4.
|
Controls
and Procedures
|
34
|
|
|
|
|
|
|
PART
II -
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
35
|
|
|
|
Item
1A.
|
Risk
Factors
|
35
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
35
|
|
|
|
Item
6.
|
Exhibits
|
36
|
PART
I - FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements
BRUNSWICK
CORPORATION
|
Consolidated
Statements of Income
|
(in
millions, except per share data)
|
(unaudited)
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
October
1,
|
|
September
30,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,337.8
|
|
$
|
1,351.1
|
|
$
|
4,294.2
|
|
$
|
4,225.2
|
|
Cost
of sales
|
|
|
1,048.9
|
|
|
1,045.6
|
|
|
3,337.1
|
|
|
3,211.9
|
|
Selling,
general and administrative expense
|
|
|
182.5
|
|
|
173.3
|
|
|
549.8
|
|
|
553.7
|
|
Research
and development expense
|
|
|
32.1
|
|
|
30.1
|
|
|
96.6
|
|
|
90.5
|
|
Operating
earnings
|
|
|
74.3
|
|
|
102.1
|
|
|
310.7
|
|
|
369.1
|
|
Equity
earnings
|
|
|
2.9
|
|
|
3.3
|
|
|
14.7
|
|
|
13.9
|
|
Investment
sale gain
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
38.7
|
|
Other
income (expense), net
|
|
|
0.5
|
|
|
(0.2
|
)
|
|
(2.2
|
)
|
|
(1.0
|
)
|
Earnings
before interest and income taxes
|
|
|
77.7
|
|
|
105.2
|
|
|
323.2
|
|
|
420.7
|
|
Interest
expense
|
|
|
(15.7
|
)
|
|
(13.5
|
)
|
|
(43.5
|
)
|
|
(39.6
|
)
|
Interest
income
|
|
|
5.0
|
|
|
3.9
|
|
|
10.4
|
|
|
10.1
|
|
Earnings
before income taxes
|
|
|
67.0
|
|
|
95.6
|
|
|
290.1
|
|
|
391.2
|
|
Income
tax provision
|
|
|
16.6
|
|
|
13.2
|
|
|
71.1
|
|
|
103.8
|
|
Net
earnings from continuing operations
|
|
|
50.4
|
|
|
82.4
|
|
|
219.0
|
|
|
287.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from discontinued operations,
net of tax
|
|
|
(13.9
|
)
|
|
6.0
|
|
|
(31.9
|
)
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
36.5
|
|
$
|
88.4
|
|
$
|
187.1
|
|
$
|
297.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
0.54
|
|
$
|
0.84
|
|
$
|
2.32
|
|
$
|
2.93
|
|
Earnings
(loss) from discontinued operations
|
|
|
(0.15
|
)
|
|
0.06
|
|
|
(0.34
|
)
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
0.39
|
|
$
|
0.90
|
|
$
|
1.98
|
|
$
|
3.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
0.54
|
|
$
|
0.83
|
|
$
|
2.30
|
|
$
|
2.90
|
|
Earnings
(loss) from discontinued operations
|
|
|
(0.15
|
)
|
|
0.06
|
|
|
(0.34
|
)
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
0.39
|
|
$
|
0.89
|
|
$
|
1.96
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used for computation
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
93.2
|
|
|
98.1
|
|
|
94.5
|
|
|
97.9
|
|
Diluted
earnings per share
|
|
|
93.7
|
|
|
99.3
|
|
|
95.3
|
|
|
99.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Notes to Consolidated Financial Statements are an integral part of
these
consolidated statements.
|
BRUNSWICK
CORPORATION
|
Consolidated
Balance Sheets
|
(in
millions)
|
|
|
September
30,
|
|
December
31,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents, at cost, which approximates
market
|
|
$
|
559.5
|
|
$
|
487.7
|
|
$
|
535.9
|
|
Accounts
and notes receivable, less allowances
of $26.0, $22.1 and $25.2
|
|
|
473.3
|
|
|
471.6
|
|
|
449.8
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
|
398.5
|
|
|
384.3
|
|
|
406.0
|
|
Work-in-process
|
|
|
330.6
|
|
|
298.5
|
|
|
314.4
|
|
Raw
materials
|
|
|
152.6
|
|
|
134.1
|
|
|
149.4
|
|
Net
inventories
|
|
|
881.7
|
|
|
816.9
|
|
|
869.8
|
|
Deferred
income taxes
|
|
|
282.8
|
|
|
274.8
|
|
|
293.7
|
|
Prepaid
expenses and other
|
|
|
65.0
|
|
|
70.3
|
|
|
48.8
|
|
Current
assets held for sale
|
|
|
111.3
|
|
|
113.7
|
|
|
100.5
|
|
Current
assets
|
|
|
2,373.6
|
|
|
2,235.0
|
|
|
2,298.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
87.8
|
|
|
76.7
|
|
|
74.9
|
|
Buildings
and improvements
|
|
|
618.9
|
|
|
603.2
|
|
|
581.8
|
|
Equipment
|
|
|
1,177.9
|
|
|
1,111.2
|
|
|
1,094.7
|
|
Total
land, buildings and improvements and equipment
|
|
|
1,884.6
|
|
|
1,791.1
|
|
|
1,751.4
|
|
Accumulated
depreciation
|
|
|
(1,045.4
|
)
|
|
(987.6
|
)
|
|
(973.6
|
)
|
Net
land, buildings and improvements and equipment
|
|
|
839.2
|
|
|
803.5
|
|
|
777.8
|
|
Unamortized
product tooling costs
|
|
|
154.0
|
|
|
149.8
|
|
|
141.2
|
|
Net
property
|
|
|
993.2
|
|
|
953.3
|
|
|
919.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
659.4
|
|
|
617.3
|
|
|
604.8
|
|
Other
intangibles
|
|
|
345.8
|
|
|
331.9
|
|
|
347.4
|
|
Investments
|
|
|
140.0
|
|
|
141.4
|
|
|
121.2
|
|
Other
long-term assets
|
|
|
228.5
|
|
|
249.6
|
|
|
236.3
|
|
Long-term
assets held for sale
|
|
|
94.2
|
|
|
93.0
|
|
|
91.3
|
|
Other
assets
|
|
|
1,467.9
|
|
|
1,433.2
|
|
|
1,401.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
4,834.7
|
|
$
|
4,621.5
|
|
$
|
4,618.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Notes to Consolidated Financial Statements are an integral part of
these
consolidated statements.
|
BRUNSWICK
CORPORATION
|
Consolidated
Balance Sheets
|
(in
millions, except share
data)
|
|
|
September
30,
|
|
December
31,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Short-term
debt, including current maturities of
long-term debt
|
|
$
|
249.7
|
|
$
|
1.1
|
|
$
|
5.8
|
|
Accounts
payable
|
|
|
403.3
|
|
|
431.7
|
|
|
406.8
|
|
Accrued
expenses
|
|
|
742.5
|
|
|
803.8
|
|
|
778.3
|
|
Current
liabilities held for sale
|
|
|
69.7
|
|
|
68.6
|
|
|
65.4
|
|
Current
liabilities
|
|
|
1,465.2
|
|
|
1,305.2
|
|
|
1,256.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
726.0
|
|
|
723.7
|
|
|
726.8
|
|
Deferred
income taxes
|
|
|
138.4
|
|
|
147.5
|
|
|
153.0
|
|
Postretirement
and postemployment benefits
|
|
|
212.4
|
|
|
215.6
|
|
|
233.8
|
|
Other
|
|
|
246.0
|
|
|
245.0
|
|
|
249.4
|
|
Long-term
liabilities held for sale
|
|
|
8.1
|
|
|
5.7
|
|
|
5.4
|
|
Long-term
liabilities
|
|
|
1,330.9
|
|
|
1,337.5
|
|
|
1,368.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
Common
stock; authorized: 200,000,000 shares,
$0.75
par value; issued: 102,538,000 shares
|
|
|
76.9
|
|
|
76.9
|
|
|
76.9
|
|
Additional
paid-in capital
|
|
|
373.0
|
|
|
368.3
|
|
|
369.8
|
|
Retained
earnings
|
|
|
1,928.9
|
|
|
1,741.8
|
|
|
1,710.8
|
|
Treasury
stock, at cost:
|
|
|
|
|
|
|
|
|
|
|
10,746,000;
6,881,000 and 5,485,000 shares
|
|
|
(284.5
|
)
|
|
(136.0
|
)
|
|
(78.7
|
)
|
Unearned
compensation and other
|
|
|
-
|
|
|
(6.1
|
)
|
|
(6.4
|
)
|
Accumulated
other comprehensive loss, net of tax
|
|
|
(55.7
|
)
|
|
(66.1
|
)
|
|
(78.6
|
)
|
Shareholders’
equity
|
|
|
2,038.6
|
|
|
1,978.8
|
|
|
1,993.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
4,834.7
|
|
$
|
4,621.5
|
|
$
|
4,618.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Notes to Consolidated Financial Statements are an integral part
of these
consolidated statements.
|
|
|
BRUNSWICK
CORPORATION
|
Condensed
Consolidated Statements of Cash Flows
|
(in
millions)
|
(unaudited)
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$
|
219.0
|
|
$
|
287.4
|
|
Depreciation
and amortization
|
|
|
123.1
|
|
|
114.3
|
|
Changes
in noncash current assets and current liabilities
|
|
|
(143.7
|
)
|
|
(132.4
|
)
|
Income
taxes
|
|
|
3.7
|
|
|
4.5
|
|
Other,
net
|
|
|
13.9
|
|
|
(34.2
|
)
|
Net
cash provided by operating activities of continuing
operations
|
|
|
216.0
|
|
|
239.6
|
|
Net
cash (used for) provided by operating activities of discontinued
operations
|
|
|
(38.2
|
)
|
|
13.1
|
|
Net
cash provided by operating activities
|
|
|
177.8
|
|
|
252.7
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(139.7
|
)
|
|
(150.4
|
)
|
Acquisitions
of businesses, net of cash acquired
|
|
|
(82.7
|
)
|
|
(127.5
|
)
|
Investments
|
|
|
14.5
|
|
|
4.7
|
|
Proceeds
from investment sale
|
|
|
-
|
|
|
57.9
|
|
Proceeds
from the sale of property, plant and equipment
|
|
|
6.8
|
|
|
13.4
|
|
Other,
net
|
|
|
(0.4
|
)
|
|
(1.2
|
)
|
Net
cash used for investing activities of continuing
operations
|
|
|
(201.5
|
)
|
|
(203.1
|
)
|
Net
cash used for investing activities of discontinued
operations
|
|
|
(4.8
|
)
|
|
(12.8
|
)
|
Net
cash used for investing activities
|
|
|
(206.3
|
)
|
|
(215.9
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Net
(repayments) issuances of commercial paper and other short-term
debt
|
|
|
(0.2
|
)
|
|
4.4
|
|
Net
proceeds from issuance of long-term debt
|
|
|
250.0
|
|
|
-
|
|
Payments
of long-term debt including current maturities
|
|
|
(0.8
|
)
|
|
(3.8
|
)
|
Stock
repurchases
|
|
|
(163.1
|
)
|
|
(15.7
|
)
|
Stock
options exercised
|
|
|
14.4
|
|
|
14.4
|
|
Net
cash provided by (used for) financing activities of continuing
operations
|
|
|
100.3
|
|
|
(0.7
|
)
|
Net
cash provided by (used for) financing activities of discontinued
operations
|
|
|
-
|
|
|
-
|
|
Net
cash provided by (used for) financing activities
|
|
|
100.3
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
71.8
|
|
|
36.1
|
|
Cash
and cash equivalents at beginning of period
|
|
|
487.7
|
|
|
499.8
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
559.5
|
|
$
|
535.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Notes to Consolidated Financial Statements are an integral part of
these
consolidated statements. |
|
|
|
|
|
|
|
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
1 - Significant Accounting Policies
Interim
Financial Statements. The
unaudited interim consolidated financial statements of Brunswick Corporation
(the Company) have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Accordingly, certain information
and
disclosures normally included in financial statements and notes prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted. Certain previously reported amounts have been
reclassified to conform to the current-period presentation.
These
financial statements should be read in conjunction with, and have been prepared
in conformity with, the accounting principles reflected in the consolidated
financial statements and related notes included in the Company’s 2005 Annual
Report on Form 10-K (the 2005 Form 10-K), except as noted in Note
2 - Discontinued Operations.
The
Company’s results as discussed in the financial statements reflect continuing
operations only, unless otherwise noted. These interim results include, in
the
opinion of management, all normal and recurring adjustments necessary to present
fairly the financial position of the Company as of September 30, 2006, December
31, 2005, and October 1, 2005, the results of operations for the three months
and nine months ended September 30, 2006, and October 1, 2005, and the cash
flows for the nine months ended September 30, 2006, and October 1, 2005. Due
to
the seasonality of the Company’s businesses, the interim results are not
necessarily indicative of the results that may be expected for the remainder
of
the year.
The
Company maintains its financial records on the basis of a fiscal year ending
on
December 31, with the fiscal quarters ending on the Saturday closest to the
end
of the period (13-week periods). The first three quarters of fiscal year 2006
ended on April 1, 2006, July 1, 2006, and September 30, 2006, and the first
three quarters of fiscal year 2005 ended on April 2, 2005, July 2, 2005, and
October 1, 2005.
New
Accounting Standards. In
June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109,” (FIN 48). FIN 48 prescribes recognition threshold and
measurement criteria for the financial statement recognition and measurement
of
tax positions taken or expected to be taken in a tax return, among other items.
In addition, FIN 48 provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition with
respect to the application of the new accounting standard. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact that FIN 48 will have on its financial
statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, “Fair Value Measurements,” (SFAS 157), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of SFAS 157 is not
expected to have a material impact on the Company’s financial
statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132(R),” (SFAS 158). SFAS 158 requires recognition of the
overfunded or underfunded status of a benefit postretirement plan in the
statement of financial position, as well as recognition of changes in that
funded status through comprehensive income in the year in which they occur.
SFAS
158 also requires a change in the measurement of a plan’s assets and benefit
obligations as of the end date of the employer’s fiscal year. SFAS 158 is
effective for fiscal years ending after December 15, 2006, except for the
measurement date provisions, which are effective for fiscal years ending after
December 15, 2008. The Company is currently evaluating the impact that SFAS
158
will have on its financial statements.
Note
2 - Discontinued Operations
On
April
27, 2006, the Company announced its intention to sell the majority of its
Brunswick New Technologies (BNT) business unit, which consists of the Company’s
marine electronics, land-based navigation systems and fleet tracking businesses.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
The
Company is actively marketing BNT and conducting other activities required
to
complete the sale within the next year. Accordingly, the Company has reported
these BNT businesses as discontinued operations in accordance with the criteria
of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” related to the classification of assets to be disposed of by sale.
These criteria include reclassifying the operations of BNT for all periods
presented. The Company currently anticipates the proceeds from the sale of
BNT
will exceed its net book value, which totaled $127.7 million as of September
30,
2006.
The
following table discloses the results of operations of the BNT businesses
reported as discontinued operations for the three months and nine months
ended:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
October
1,
|
|
September
30,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
75.6
|
|
$
|
85.3
|
|
$
|
193.0
|
|
$
|
215.1
|
|
Pre-tax
earnings (loss)
|
|
$
|
(13.2
|
)
|
$
|
3.8
|
|
$
|
(47.7
|
)
|
$
|
7.6
|
|
The
following table reflects the financial position of the BNT businesses reported
as discontinued operations:
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
(in
millions)
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
51.8
|
|
$
|
50.8
|
|
Inventory
|
|
|
57.5
|
|
|
57.7
|
|
Other
current assets
|
|
|
2.0
|
|
|
5.2
|
|
Total
current assets
|
|
|
111.3
|
|
|
113.7
|
|
|
|
|
|
|
|
|
|
Goodwill
and intangible assets
|
|
|
74.3
|
|
|
74.0
|
|
Investments
|
|
|
-
|
|
|
2.2
|
|
Property,
plant and equipment
|
|
|
19.9
|
|
|
16.8
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
205.5
|
|
|
206.7
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
35.7
|
|
|
40.5
|
|
Accrued
expenses
|
|
|
34.0
|
|
|
28.1
|
|
Total
current liabilities
|
|
|
69.7
|
|
|
68.6
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
8.1
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
77.8
|
|
|
74.3
|
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$
|
127.7
|
|
$
|
132.4
|
|
Note
3 - Share-Based Compensation
On
January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised
2004), “Share-Based Payment,” (SFAS 123R), which is a revision of SFAS No. 123,
“Accounting for Stock-Based Compensation,” (SFAS 123). SFAS 123R supersedes
Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued
to Employees,” (APB 25) and amends SFAS No. 95, “Statement of Cash Flows.” SFAS
123R requires all share-based payments to employees, including grants of
stock
options and the compensatory elements of employee stock purchase plans, to
be
recognized in the income statement based upon their fair values. Share-based
employee compensation cost (benefit) is recognized as a component of selling,
general and administrative expense in the Consolidated Statements of
Income.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
The
Company previously accounted for its share-based compensation using the
intrinsic value method as defined in APB 25. Prior to January 1, 2006, other
than for nonvested stock, no share-based employee compensation cost was
reflected in net earnings. SFAS 123R requires that the Company report the tax
benefit from the tax deduction related to share-based compensation that is
in
excess of recognized compensation costs (excess tax benefits) as a financing
cash flow rather than as an operating cash flow in the Condensed Consolidated
Statements of Cash Flows. Total stock option expense from continuing operations
was $1.4 million for the quarter ended September 30, 2006, and $4.5 million
for
the nine months ended September 30, 2006, and resulted in a deferred tax asset
for the tax benefit to be realized in future periods.
The
Company used the modified prospective transition method to adopt the provisions
of SFAS 123R. Under this method, employee compensation cost recognized in the
first nine months of 2006 includes: (i) compensation cost for all share-based
payments granted prior to, but not yet vested, as of January 1, 2006, based
on
grant date fair value estimated in accordance with the original provisions
of
SFAS 123 and (ii) compensation cost for all share-based payments granted on
or
subsequent to January 1, 2006, based on the grant date fair value estimated
in
accordance with the provisions of SFAS 123R. Therefore, prior period financial
statements have not been restated. In accordance with SFAS 123R, the fair value
of option grants is estimated on the date of grant using the
Black-Scholes-Merton option pricing model.
As
a
result of adopting SFAS 123R on January 1, 2006, the Company's net earnings
from
continuing operations for the three months and nine months ended September
30,
2006, were $0.9 million and $2.8 million lower, respectively, than if it had
continued to account for share-based compensation under APB 25. Basic and
diluted earnings per share from continuing operations for the three months
ended
September 30, 2006, were both $0.01 per share lower than if the Company had
not
adopted SFAS 123R. For the nine months ended September 30, 2006, basic and
diluted earnings per share were both $0.03 lower than if the Company had not
adopted SFAS 123R.
The
following table illustrates the effect on net earnings and earnings per share
for the three months and nine months ended October 1, 2005, if the fair
value-based method provided by SFAS 123 had been applied for all outstanding
and
unvested awards for periods before the Company adopted SFAS 123R:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
October
1,
|
|
October
1,
|
|
|
|
2005
|
|
2005
|
|
(in
millions, except per share data)
|
|
|
|
|
|
Net
earnings from continuing operations, as reported
|
|
$
|
82.4
|
|
$
|
287.4
|
|
Add:
Share-based employee compensation
included in reported earnings, net of tax
|
|
|
0.9
|
|
|
2.9
|
|
Less:
Total share-based employee compensation
expense under fair value-based method for
all awards, net of tax
|
|
|
1.8
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations, pro forma
|
|
$
|
81.5
|
|
$
|
281.3
|
|
|
|
|
|
|
|
|
|
Basic
earnings from continuing operations per common share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.84
|
|
$
|
2.93
|
|
Pro
forma
|
|
$
|
0.83
|
|
$
|
2.87
|
|
|
|
|
|
|
|
|
|
Diluted
earnings from continuing operations per common share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.83
|
|
$
|
2.90
|
|
Pro
forma
|
|
$
|
0.82
|
|
$
|
2.84
|
|
Under
the
2003 Stock Incentive Plan, the Company may grant stock options, stock
appreciation rights, nonvested stock and other types of awards to executives
and
other management employees. Issuances under the plan may be from either
authorized, but unissued, shares or treasury shares. On July 27, 2006, the
Company registered an additional 4.0 million shares that may be issued under
the
plan, increasing the maximum issuance allowed by the plan to 8.1 million
shares.
As of September 30, 2006, shares available for grant totaled 4.6 million.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Stock
options issued are generally exercisable over a period of 10 years, or as
determined by the Human Resources and Compensation Committee of the Board of
Directors. Options vest over three or four years, or immediately in the event
of
a change in control, upon death or disability of the optionee, or, for grants
issued prior to 2006, if the optionee’s age and years of service equal 65 or
more. Vesting
of 2006 option grants will occur immediately in the event of a change in
control, upon death or disability of the optionee, or upon termination of
employment if the optionee has attained the age of 62 and his or her age and
years of service equal 70 or more (or for grants prior to 2006, if the
optionee’s age and years of service equal 65 or more, regardless of the
optionee’s age). The
option price per share cannot be less than the fair market value at the date
of
grant. The Company has additional stock and stock option plans to provide for
compensation of non-employee directors. Stock option activity for all plans
for
the nine months ended September 30, 2006, was as follows:
|
Stock
Options
Outstanding
(in
thousands)
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
|
|
|
|
|
|
|
Outstanding
on January 1
|
3,844
|
|
$
29.91
|
|
|
|
|
Granted
|
904
|
|
$
39.08
|
|
|
|
|
Exercised
|
(492)
|
|
$
21.51
|
|
|
|
$
8,004
|
Forfeited
|
(149)
|
|
$
38.73
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
on September 30
|
4,107
|
|
$
32.62
|
|
6.5
years
|
|
$
16,700
|
|
|
|
|
|
|
|
|
Exercisable
on September 30
|
2,392
|
|
$
26.70
|
|
5.0
years
|
|
$
16,093
|
The
following table summarizes information about stock options outstanding as of
September 30, 2006:
Range
of
Exercise
Price
|
|
Number
Outstanding
(in
thousands)
|
|
Weighted
Average
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
(in
thousands)
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
$17.38
to $20.00
|
|
670
|
|
3.9
years
|
|
$
19.64
|
|
668
|
|
$
19.64
|
$20.01
to $30.00
|
|
1,179
|
|
5.1
years
|
|
$
23.59
|
|
1,100
|
|
$
23.58
|
$30.01
to $40.00
|
|
1,382
|
|
7.9
years
|
|
$
38.13
|
|
378
|
|
$
35.77
|
$40.01
to $49.27
|
|
876
|
|
8.3
years
|
|
$
45.97
|
|
246
|
|
$
45.89
|
The
weighted average fair value of individual options granted during 2006 was
$11.88. The fair value of each option grant was estimated on the date of grant
using the Black-Scholes-Merton option pricing model with the following weighted
average assumptions used for 2006 and 2005:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
4.4
|
%
|
|
3.7
|
%
|
Dividend
yield
|
|
|
1.5
|
%
|
|
1.4
|
%
|
Volatility
factor
|
|
|
31.2
|
%
|
|
34.1
|
%
|
Weighted
average expected life
|
|
|
4.8 - 6.1 years
|
|
5.0
years
|
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Nonvested
stock awards (nonvested stock shares were issued for grants prior to April
30,
2003, and subsequently nonvested stock units were issued) are issued to
directors and key employees as determined by the Human Resources and
Compensation Committee of the Board of Directors. Nonvested stock awards vest
at
the end of a three- to five-year period subject to continued employment, or
immediately upon a change in control of the Company, or upon death or disability
of the recipient. For grants issued before January 1, 2006, nonvested stock
units are forfeited in the event employment terminates prior to vesting, except
there is pro rata vesting if age and years of service equals 65 or more upon
termination of employment. Pro rata vesting on grants issued in 2006 will occur
if the recipient has attained the age of 62 and his or her age and years of
service equals 70 or more upon termination of employment. Although participants’
nonvested stock award dividends are automatically reinvested, nonvested stock
units are non-voting, and all awards have restrictions on the sale or transfer
of such awards during the nonvested period. The cost of nonvested stock awards
is recognized on a straight-line basis over the requisite service period. During
the three months and nine months ended September 30, 2006, $1.4 million and
$4.2
million was charged to compensation expense under these plans, respectively.
The
weighted average price per nonvested stock award at grant date was $39.15 for
the nonvested stock awards granted in 2006. Nonvested stock award activity
for
all plans for the nine months ended September 30, 2006, was as
follows:
|
Nonvested
Stock
Outstanding
|
|
(in
thousands)
|
|
|
Outstanding
at January 1
|
519
|
|
Granted
|
314
|
|
Released
|
(224)
|
|
Forfeited
|
(61)
|
|
|
|
|
Outstanding
at September 30
|
548
|
|
As
of
September 30, 2006, there was $12.0 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the Plan. That cost is expected to be recognized over a weighted-average period
of 1.7 years.
Note
4 - Earnings per Common Share
The
Company calculates earnings per share in accordance with SFAS No. 128, "Earnings
per Share." Basic earnings per share is calculated by dividing net earnings
by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is calculated similarly, except that the calculation
includes the dilutive effect of stock options and nonvested stock awards.
Weighted average basic shares decreased by 4.9 million shares and 3.4 million
shares in the three-month and nine-month periods ended September 30, 2006,
respectively, versus the comparable periods in 2005, primarily due to the share
repurchase program (as discussed in Note
14 - Share Repurchase Program)
and a
lower average share price, partially offset by shares issued upon the exercise
of employee stock options. The decrease in common stock equivalents for the
three months and nine months ended September 30, 2006, compared with the
comparable periods in 2005, was primarily due to the reduction in outstanding
dilutive options.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Basic
and
diluted earnings per share for the three months and nine months ended September
30, 2006, and for the comparable periods ended October 1, 2005, were calculated
as follows:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
October
1,
|
|
September
30,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(in
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$
|
50.4
|
|
$
|
82.4
|
|
$
|
219.0
|
|
$
|
287.4
|
|
Net
earnings (loss) from discontinued operations, net
of tax
|
|
|
(13.9 |
) |
|
6.0
|
|
|
(31.9
|
)
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
36.5
|
|
$
|
88.4
|
|
$
|
187.1
|
|
$
|
297.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares - basic
|
|
|
93.2 |
|
|
98.1
|
|
|
94.5
|
|
|
97.9
|
|
Dilutive
effect of common stock equivalents
|
|
|
0.5 |
|
|
1.2
|
|
|
0.8
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares - diluted
|
|
|
93.7 |
|
|
99.3
|
|
|
95.3
|
|
|
99.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
0.54
|
|
$
|
0.84
|
|
$
|
2.32
|
|
$
|
2.93
|
|
Earnings
(loss) from discontinued operations
|
|
|
(0.15 |
) |
|
0.06
|
|
|
(0.34
|
)
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
0.39
|
|
$
|
0.90
|
|
$
|
1.98
|
|
$
|
3.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
0.54
|
|
$
|
0.83
|
|
$
|
2.30
|
|
$
|
2.90
|
|
Earnings
(loss) from discontinued operations
|
|
|
(0.15 |
) |
|
0.06
|
|
|
(0.34
|
)
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
0.39
|
|
$
|
0.89
|
|
$
|
1.96
|
|
$
|
3.00
|
|
As
of
September 30, 2006, there were 4.1 million options outstanding, of which 2.4
million are exercisable. There were 2.3 million and 2.0 million options
outstanding for the three- and nine-month periods ended September 30, 2006,
respectively, for which the exercise price of the options was greater than
the
average market price of the Company’s shares for the period then ended. These
options were not included in the computation of diluted earnings per share
because the effect would have been anti-dilutive. This compares to 0.9 million
and 0.8 million anti-dilutive options outstanding in the corresponding periods
ended October 1, 2005.
Note
5 - Commitments and Contingencies
Financial
Commitments. The
Company has entered into guarantees of indebtedness of third parties, which
are
primarily comprised of arrangements with financial institutions in connection
with customer financing programs. Under these arrangements, the Company has
guaranteed customer obligations to the financial institutions in the event
of
customer default, generally subject to a maximum amount, which is less than
total obligations outstanding. The Company has also guaranteed payments to
third
parties that have purchased customer receivables from the Company, and, in
certain instances, has guaranteed secured term financing of its customers.
In
most instances, upon repurchase of the debt obligation, the Company receives
rights to the collateral securing the financing. The
maximum potential liability associated with these customer financing
arrangements was approximately $113.5
million as of September 30, 2006.
Any
potential payments by the Company related to these customer financing
arrangements would extend over several years in accordance with the Company’s
agreements.
The
Company has also entered into arrangements with third-party lenders where
it has
agreed, in the event of a default by the customer, to repurchase from the
third-party lender Company products repossessed from the customer. These
arrangements are typically subject to a maximum repurchase amount. The Company’s
risk under these arrangements is mitigated by the value of the products
repurchased as part of the transaction. The maximum amount of payments the
Company could be required to make under these arrangements totaled approximately
$210.5 million as of September 30, 2006.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Based
on
historical experience and current facts and circumstances, and in accordance
with FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of
Others - An Interpretation of FASB Statements No. 5, 57, and 107 and Rescission
of FASB Interpretation No. 34” (FIN 45), the Company has recorded the fair
market value of these guarantee and repurchase obligations as a liability on
the
consolidated balance sheets. Historical cash requirements and losses associated
with these obligations have not been significant.
Financial
institutions have issued standby letters of credit and surety bonds
conditionally guaranteeing obligations on behalf of the Company totaling $87.0
million, including $70.7 million for continuing operations, as of September
30,
2006. This amount is primarily comprised of standby letters of credit and surety
bonds issued in connection with the Company’s self-insured workers’ compensation
program as required by its insurance companies and various state agencies.
The
Company has recorded reserves to cover liabilities associated with these
programs. Under certain circumstances, such as an event of default under the
Company’s revolving credit facility, or, in the case of surety bonds, which
totaled $19.4 million, all related to continuing operations, as of September
30,
2006, a ratings downgrade below investment grade, the Company could be required
to post collateral to support the outstanding letters of credit and surety
bonds.
Product
Warranties. The
Company records a 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 its
liability for specific warranty matters when they become known and the exposure
can be estimated. The Company’s warranty reserves are affected by product
failure rates and material usage and labor costs incurred in correcting a
product failure. If these estimated costs differ from actual costs, a revision
to the warranty reserve would be required.
The
following activity related to product warranty liabilities from continuing
operations was recorded in Accrued expenses and Long-term liabilities -
Other for the nine months ended September 30, 2006:
|
|
2006
|
|
(in
millions)
|
|
|
|
Balance
at January 1
|
|
$
|
155.3
|
|
Payments
made
|
|
|
(86.9
|
)
|
Provisions/additions
for contracts issued/sold
|
|
|
87.9
|
|
Aggregate
changes for preexisting warranties
|
|
|
0.7
|
|
|
|
|
|
|
Balance
at September 30
|
|
$
|
157.0
|
|
Additionally,
marine engine customers may purchase a contract from the Company that extends
product protection beyond the standard product warranty period. For certain
extended warranty contracts in which the Company retains the warranty
obligation, a deferred liability is recorded based on the aggregate sales price
for contracts sold. The deferred liability is reduced and revenue is recognized
over the contract period as costs are expected to be incurred. Deferred revenue
associated with contracts sold by the Company that extend product protection
beyond the standard product warranty period, not included in the table above,
was $22.3 million as of September 30, 2006.
Legal
and Environmental.
The
Company accrues for litigation exposure based upon its assessment, made in
consultation with counsel, of the likely range of exposure stemming from
the
claim. In light of existing reserves, the Company’s litigation claims, when
finally resolved, will not, in the opinion of management, have a material
adverse effect on the Company’s consolidated financial position. If current
estimates for the cost of resolving any claims are later determined to be
inadequate, results of operations could be adversely affected in the period
in
which additional provisions are required.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Tax
Case. In
February 2003, the United States Tax Court issued a ruling upholding the
disallowance by the Internal Revenue Service (IRS) of capital losses and other
expenses for 1990 and 1991 related to two partnership investments entered into
by the Company. In April 2003, the Company elected to pay the IRS $62 million
(approximately $50 million after-tax), and in April 2004, the Company elected
to
pay the IRS an additional $10 million (approximately $8 million after-tax),
in
connection with this matter pending settlement negotiations. The payments were
comprised of $33 million in taxes due and $39 million of pre-tax interest
(approximately $25 million after-tax). The Company elected to make these
payments to avoid future interest costs.
On
March
9, 2005, the Company and the IRS reached a preliminary settlement of the issues
involved in and related to this case, in which the Company agreed to withdraw
its appeal of the tax ruling. All amounts due as a result of the settlement
were
covered by the payments previously made to the IRS. In addition, all tax
computations related to taxable years 1986
through 2001 were calculated and agreed to with the IRS at the examination
level. The statute of limitations related to these taxable years expired on
March 9, 2006. As a result of these issues and other assessments, the Company
reversed approximately $19.3 million of tax reserves in the first nine months
of
2006, consisting of $12.4 million in the first quarter, $5.8 million in the
second quarter and $1.1 million in the third quarter, primarily related to
the
reassessment of underlying exposures and tax contingencies for temporary items
related to these years. During the second quarter of 2006, the Company received
a refund of $12.9 million from the IRS related to the final settlement for
these
tax years. In the third quarter of 2006, the Company recorded an additional
tax
receivable of $4.1 million for interest related to these tax years.
Additionally, these tax years will be subject to tax audits by various state
jurisdictions to determine the state tax impact of the IRS' audit
adjustments.
Chinese
Supplier Dispute. The
Company is involved in an arbitration proceeding in Hong Kong arising out of
a
commercial dispute with a former contract manufacturer in China, Shanghai
Zhonglu Industrial Company Limited (Zhonglu). The Company filed the arbitration
seeking damages based on Zhonglu's breach of a supply and distribution agreement
pursuant to which Zhonglu agreed to manufacture bowling equipment for the
Company. Zhonglu has asserted counterclaims seeking damages for alleged breach
of contract and the resolution of other claims. The arbitration tribunal heard
final arguments in August 2005 and the Company is awaiting a decision in the
matter. The Company does not believe that this dispute will have a material
adverse effect on the Company's consolidated financial condition or results
of
operations.
Refer
to
Note 9 to the consolidated financial statements of the 2005 Form 10-K for
disclosure of the potential cash requirements of environmental proceedings
and a
discussion of other legal matters as of December 31, 2005.
Note
6 - Segment Data
The
Company is a manufacturer and marketer of leading consumer brands. The Company
operates in four reportable segments: Boat, Marine Engine, Fitness and Bowling
& Billiards. The Company’s management evaluates individual segment
performance based on operating earnings. Marine eliminations are for sales
transactions consummated at arm’s length between the Marine Engine and Boat
segments. As discussed in Note
2 - Discontinued Operations, during
the second quarter of 2006, the Company began reporting the majority of its
BNT
businesses as discontinued operations. These businesses were previously reported
in the Marine Engine segment. Segment results have been restated for all
periods
presented to reflect the change in the Company’s reported segments.
Additionally, the BNT businesses that are being retained are now reported
as
part of the Boat, Marine Engine and Fitness segments, consistent with the
manner
in which the Company’s management now views these businesses.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
The
following table sets forth net sales and operating earnings of each of the
Company’s reportable segments for the three months ended September 30, 2006, and
October 1, 2005:
|
|
Net
Sales
|
|
Operating
Earnings
|
|
|
|
September
30,
|
|
October
1,
|
|
September
30,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$
|
679.2
|
|
$
|
685.5
|
|
$
|
24.8
|
|
$
|
37.9
|
|
Marine
Engine
|
|
|
536.5
|
|
|
555.0
|
|
|
50.4
|
|
|
61.2
|
|
Marine
eliminations
|
|
|
(127.8
|
)
|
|
(128.7
|
)
|
|
-
|
|
|
-
|
|
Total
Marine
|
|
|
1,087.9
|
|
|
1,111.8
|
|
|
75.2
|
|
|
99.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fitness
|
|
|
136.6
|
|
|
127.4
|
|
|
12.6
|
|
|
14.2
|
|
Bowling
& Billiards
|
|
|
113.4
|
|
|
111.9
|
|
|
3.1
|
|
|
5.7
|
|
Eliminations
|
|
|
(0.1
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Corporate/Other
|
|
|
-
|
|
|
-
|
|
|
(16.6
|
)
|
|
(16.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,337.8
|
|
$
|
1,351.1
|
|
$
|
74.3
|
|
$
|
102.1
|
|
The
following table sets forth net sales and operating earnings of each of the
Company’s reportable segments for the nine months ended September 30, 2006, and
October 1, 2005:
|
|
Net
Sales
|
|
Operating
Earnings
|
|
|
|
September
30,
|
|
October
1,
|
|
September
30,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$
|
2,199.9
|
|
$
|
2,111.7
|
|
$
|
126.3
|
|
$
|
161.9
|
|
Marine
Engine
|
|
|
1,760.0
|
|
|
1,780.8
|
|
|
190.0
|
|
|
216.7
|
|
Marine
eliminations
|
|
|
(404.0
|
)
|
|
(379.6
|
)
|
|
-
|
|
|
-
|
|
Total
Marine
|
|
|
3,555.9
|
|
|
3,512.9
|
|
|
316.3
|
|
|
378.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fitness
|
|
|
400.3
|
|
|
375.3
|
|
|
28.9
|
|
|
25.7
|
|
Bowling
& Billiards
|
|
|
338.2
|
|
|
338.3
|
|
|
16.5
|
|
|
22.0
|
|
Eliminations
|
|
|
(0.2
|
)
|
|
(1.3
|
)
|
|
-
|
|
|
-
|
|
Corporate/Other
|
|
|
-
|
|
|
-
|
|
|
(51.0
|
)
|
|
(57.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,294.2
|
|
$
|
4,225.2
|
|
$
|
310.7
|
|
$
|
369.1
|
|
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
7 - Acquisitions
All
acquisitions are accounted for under the purchase method and in accordance
with
SFAS No. 141, “Business Combinations.”
In
the
first nine months of 2006, consideration paid for acquisitions, net of cash
acquired, was as follows:
(in
millions)
|
|
|
|
|
Date
|
|
Description
|
|
Net
Cash
Consideration
(A)
|
|
|
|
|
|
2/16/06
|
|
Cabo
Yachts, Inc.
|
|
$ 60.6
|
3/24/06
|
|
Marine
Innovations Warranty Corporation
|
|
2.3
|
4/26/06
|
|
Diversified
Marine Products, L.P.
|
|
14.2
|
9/20/06
|
|
Protokon
LLC (13.3 percent)
|
|
5.6
|
|
|
|
|
|
|
|
|
|
$ 82.7
|
(A)
Net
cash consideration is subject to subsequent changes resulting from final
purchase agreement adjustments.
The
Company acquired certain assets of Cabo Yachts, Inc. (Cabo) for $60.6 million.
Cabo manufactures offshore sportfishing boats ranging from 31 to 52 feet. The
purchase of Cabo complements the Company’s previous acquisitions of Hatteras
Yachts, Inc. and Albemarle Boats, Inc. (Albemarle), discussed below, and allows
the Company to offer a full range of sportfishing convertibles from 24 to 90
feet. The post-acquisition results of Cabo are included in the Boat
segment.
The
Company made an additional payment of $2.3 million for the April 1, 2004,
acquisition of Marine Innovations Warranty Corporation (Marine Innovations).
This payment was required under the purchase agreement as Marine Innovations
fulfilled earnings targets. The post-acquisition results of Marine Innovations
are included in the Boat segment.
On
April
26, 2006, the Company acquired the outstanding stock of Diversified Marine
Products, L.P. (Diversified) for $14.2 million. Diversified is a leading
wholesale distributor of marine parts and accessories headquartered in Los
Angeles, California. The acquisition of Diversified complements the Company’s
previous acquisitions of Benrock, Inc. (Benrock), Land ‘N’ Sea Corporation and
Kellogg Marine, Inc. (Kellogg) and allows the Company to provide same- and
next-day delivery of marine parts and accessories nationwide by expanding the
Company’s parts and accessories business to the West Coast of the United States.
The post-acquisition results of Diversified are included in the Boat
Segment.
On
September 20, 2006, the Company acquired an additional 13.3 percent of the
outstanding stock of Protokon LLC (Protokon), a Hungarian equipment
manufacturer, for $5.6 million. The Company previously purchased 80 percent
of
the outstanding stock of Protokon in 2003. The Company has the option to acquire
the remaining 6.7 percent interest in Protokon under certain circumstances.
The
acquisition of Protokon has allowed the Company to manufacture fitness equipment
closer to the European marketplace, thereby reducing freight costs and offering
better service to fitness customers in Europe. The post-acquisition results
of
Protokon are included in the Fitness Segment.
These
acquisitions were not and would not have been material to the Company’s net
sales, results of operations or total assets in the quarterly and year-to-date
periods ended September 30, 2006, and October 1, 2005. Accordingly, the
Company’s consolidated results from operations do not differ materially from
historical performance as a result of these acquisitions, and therefore,
pro
forma results are not presented.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
In
the
first nine months of 2005, consideration paid for acquisitions, net of cash
acquired, was as follows:
(in
millions)
|
|
|
|
|
|
|
|
|
Date
|
|
Description
|
|
Net
Cash
Consideration
(A)
|
|
Other
Consideration
|
|
Total
Consideration
|
|
|
|
|
|
|
|
|
|
2/7/05
|
|
Benrock,
Inc.
|
|
$ 4.2
|
|
$
-
|
|
$
4.2
|
2/28/05
|
|
Albemarle
Boats, Inc.
|
|
9.2
|
|
-
|
|
9.2
|
4/21/05
|
|
Sea
Pro, Sea Boss and Palmetto boats
|
|
1.0
|
|
-
|
|
1.0
|
5/27/05
|
|
Triton
Boat Company
|
|
58.4
|
|
4.4
|
|
62.8
|
6/20/05
|
|
Supra-Industria
Textil, Lda. (51 percent)
|
|
7.8
|
|
0.9
|
|
8.7
|
6/27/05
|
|
Marine
Innovations Warranty Corporation
|
|
2.3
|
|
-
|
|
2.3
|
7/7/05
|
|
Kellogg
Marine, Inc.
|
|
39.7
|
|
-
|
|
39.7
|
9/16/05
|
|
Harris
Kayot Marine, LLC
|
|
4.8
|
|
-
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 127.4
|
|
$
5.3
|
|
$ 132.7
|
(A)
Net
cash consideration is subject to subsequent changes resulting from final
purchase agreement adjustments.
The
Company acquired the receivables, inventory, property and equipment of Benrock,
Inc. for $4.2 million. Benrock is a distributor of marine parts and expands
the
Company’s geographic coverage of its parts and accessories businesses
distribution network. The post-acquisition results of Benrock are included
in
the Boat segment.
The
Company acquired the outstanding stock of Albemarle Boats, Inc. for $9.2
million. Albemarle produces offshore sportfishing boats ranging in length from
24 to 41 feet. The acquisition of Albemarle provides the Company with the
opportunity to offer a more complete range of offshore sportfishing boats and
complements the sportfishing convertibles offered by Hatteras, where products
start at 50 feet. The post-acquisition results of Albemarle are included in
the
Boat segment.
The
Company made a final payment of $1.0 million for the December 31, 2004
acquisition of Sea Pro, Sea Boss and Palmetto boats. This payment was based
on
finalization of the closing balance sheet.
The
Company acquired the outstanding stock of Triton Boat Company, L.P. (Triton),
a
manufacturer of fiberglass bass and saltwater boats, and aluminum fishing boats
ranging in length from 12 to 35 feet. The Company funded this acquisition
through cash consideration of $58.4 million and the assumption of $4.4 million
of debt. The acquisition of Triton adds bass boats to the Company’s product
lineup, as well as a broader range of saltwater and aluminum fishing boats.
The
post-acquisition results of Triton are included in the Boat
segment.
The
Company exercised its contractual right to acquire its joint venture partner’s
51.0 percent interest in Supra-Industria Textil, Lda. (Valiant), a Portuguese
manufacturer of the Valiant brand of rigid inflatable boats, for $7.8 million,
and the assumption of $0.9 million of debt. The Company is now the sole owner
of
Valiant. The post-acquisition results of Valiant are included in the Marine
Engine segment.
The
Company made an additional payment of $2.3 million for the April 1, 2004
acquisition of Marine Innovations Warranty Corporation. This payment was
required under the purchase agreement as Marine Innovations fulfilled earnings
targets.
The
Company acquired the net assets of Kellogg Marine, Inc. for $39.7 million.
Kellogg is a leading distributor of marine parts and accessories headquartered
in Old Lyme, Connecticut. The acquisition of Kellogg complements the Company’s
previous acquisitions of Benrock and Land ‘N’ Sea and provides a distribution
hub in the northeastern United States. The post-acquisition results of Kellogg
are included in the Boat segment.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
The
Company acquired the outstanding stock of Harris Kayot Marine, LLC
(HarrisKayot), a builder of pontoon boats, fiberglass runabouts and deckboats
ranging in length from 20 to 26 feet, for $4.8 million. This acquisition will
advance the Company’s position in the pontoon market and complement the
Company’s existing boat portfolio with premium runabout and deckboat product
lines. The post-acquisition results of HarrisKayot are included in the Boat
segment.
These
acquisitions were not material to the Company’s net sales, results of operations
or total assets in the quarterly and year-to-date periods ended October 1,
2005.
Accordingly, the Company’s consolidated results from operations do not differ
materially from historical performance as a result of these
acquisitions.
Refer
to
Note 5 to the consolidated financial statements in the 2005 Form 10-K for
further detail relating to the Company’s acquisitions.
Note
8 - Investments
The
Company has certain unconsolidated foreign and domestic affiliates that are
accounted for using the equity method. See Note
10 - Financial Services
for more
details on the Company’s joint venture, Brunswick Acceptance Company (BAC), LLC.
Refer to Note 6 to the consolidated financial statements in the 2005 Form 10-K
for further detail relating to the Company’s investments.
On
February 23, 2005, the Company sold its investment of 1,861,200 shares in
MarineMax, Inc. (MarineMax), its largest boat dealer, for $56.8 million, net
of
$4.1 million of selling costs, which included $1.1 million of accrued expenses.
The sale was made pursuant to a registered public offering by MarineMax. As
a
result of this sale, the Company recorded an after-tax gain of $31.5 million
after utilizing previously unrecognized capital loss carryforwards.
Note
9 - Comprehensive Income
The
Company reports changes in equity during a period in accordance with SFAS
No.
130, “Reporting Comprehensive Income.” Accumulated other comprehensive income
(loss) includes minimum pension liability adjustments, cumulative foreign
currency translation adjustments, and unrealized gains and losses on derivatives
and investments, all net of tax. Components of other comprehensive income
were
as follows:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
October
1,
|
|
September
30,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
36.5
|
|
$
|
88.4
|
|
$
|
187.1
|
|
$
|
297.1
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency cumulative translation adjustment
|
|
|
4.7
|
|
|
(1.1
|
)
|
|
12.6
|
|
|
(15.1
|
)
|
Net
change in unrealized gains (losses) on investments
|
|
|
(0.7
|
)
|
|
(0.4
|
)
|
|
0.5
|
|
|
(23.2
|
)
|
Net
change in accumulated unrealized derivative
gains (losses)
|
|
|
(4.7
|
)
|
|
2.1
|
|
|
(2.7
|
)
|
|
14.0
|
|
Total
other comprehensive income (loss)
|
|
|
(0.7
|
)
|
|
0.6
|
|
|
10.4
|
|
|
(24.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
35.8
|
|
$
|
89.0
|
|
$
|
197.5
|
|
$
|
272.8
|
|
The
net
change in unrealized gains (losses) on investments in the nine months ended
October 1, 2005, was primarily due to the sale of the Company’s investment in
MarineMax, Inc. Refer to Note
8 - Investments
for
details on the sale. There was no impact due to the minimum pension liability
adjustment in either period as it is adjusted annually in the fourth quarter.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
10 - Financial Services
The
Company’s subsidiary, Brunswick
Financial Services Corporation (BFS), has a joint venture, BAC,
with GE
Commercial Finance (GECF). Under the terms of the joint venture agreement,
BAC
provides secured wholesale floor-plan financing to the Company’s boat and engine
dealers. BAC also purchases and services a portion of Mercury Marine’s domestic
accounts receivable relating to its boat builder and dealer customers.
BFS’s
contributed equity is adjusted monthly to maintain a 49 percent equity interest
in accordance with the capital provisions of the joint venture agreement. BFS’s
investment in BAC is recorded under the equity method of accounting as a
component of Investments in the Company’s Consolidated Balance Sheets. The
Company records BFS’s share of income or loss in BAC based on its ownership
percentage in the joint venture in Equity earnings in its Consolidated
Statements of Income.
BAC
is
funded in part through a loan from GECF and a securitization facility arranged
by General Electric Capital Corporation, a GECF affiliate, and in part by a
cash
equity investment from both GECF (51 percent) and BFS (49 percent). BFS’s total
investment in BAC as of September 30, 2006, was $41.2 million compared with
$52.2 million as of December 31, 2005. BFS’s exposure to losses associated with
BAC financing arrangements is limited to its funded equity in BAC.
BFS
recorded income related to the operations of BAC of $2.6 million and $10.0
million for the three-month and nine-month periods ended September 30, 2006,
respectively. These amounts compare to $1.6 million and $6.8 million in the
corresponding periods ended October 1, 2005. These amounts exclude the discount
expense on the sale of Mercury Marine’s accounts receivable to the joint venture
noted below.
The
Company’s sales of receivables to BAC for the three-month and nine-month periods
ended September 30, 2006, and for the comparable periods ended October 1,
2005,
were as follows:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
October
1,
|
|
September
30,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Receivables
sold
|
|
$
|
197.4
|
|
$
|
221.6
|
|
$
|
670.4
|
|
$
|
710.6
|
|
Discounts
|
|
|
2.0
|
|
|
1.6
|
|
|
6.1
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
received
|
|
$
|
195.4
|
|
$
|
220.0
|
|
$
|
664.3
|
|
$
|
705.3
|
|
Discounts
were recorded as an expense in Other income (expense), net in the Consolidated
Statements of Income. The outstanding balance of receivables sold to BAC
was
$103.4 million as of September 30, 2006, compared with $96.5 million as of
December 31, 2005. Pursuant to the joint venture agreement, BAC reimbursed
Mercury Marine $1.5 million and $1.6 million in the first nine months of
2006
and 2005, respectively, for the related credit, collection and administrative
costs incurred in connection with the servicing of such receivables.
As
of
September 30, 2006, and December 31, 2005, the Company had a retained interest
in certain receivables sold to BAC totaling $44.2 million and $44.5 million,
respectively, as a result of recourse provisions on these receivables. The
Company’s maximum exposure related to these recourse obligations in the event of
default as of September 30, 2006, and December 31, 2005, was $23.8 million
and
$28.5 million, respectively. In accordance with SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”
the Company treats the sale of receivables in which the Company retains an
interest as a secured obligation. Accordingly, the amount of the Company’s
retained interest was recorded in Accounts and notes receivable, and Accrued
expenses in the Consolidated Balance Sheets. These contingent obligations
were
included in the amounts disclosed in Note
5 - Commitments and Contingencies.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
11 - Income Taxes
The
Company’s effective tax rates from continuing operations for the three-month and
nine-month periods ended September 30, 2006, were 24.8 percent and 24.5 percent,
respectively. The effective tax rates were lower than the statutory rate
primarily due to $19.3 million in tax reserve reassessments of underlying
exposures and tax contingencies, of which $1.1 million was recognized in the
third quarter, in addition to the initial recognition of a $4.1 million
receivable for interest
related to prior year tax audits, as
discussed in Note
5 - Commitments and Contingencies.
Increased
foreign earnings in tax jurisdictions with lower effective tax rates also
contributed to the reduced effective tax rate.
For
the
three-month and nine-month periods ended October 1, 2005, the Company’s
effective tax rates were 13.9 percent and 26.5 percent, respectively. The
decrease in the effective tax rate for the three months ended October 1, 2005,
was primarily due to $13.9 million of non-recurring tax benefits arising from
a
change in assertion on indefinitely reinvested earnings in selected
international operations, as well as refined tax planning strategies for
research and foreign export tax benefits and increased foreign earnings in
tax
jurisdictions with lower effective tax rates. In addition to the factors
discussed in the quarterly period, the nine-month effective tax rate was lower
than the statutory rate primarily due to the utilization of previously
unrecognized capital loss carryforwards incurred in connection with the gain
on
the sale of the MarineMax stock, as discussed in Note
8 - Investments.
Note
12 - Debt Offering
On
July
24, 2006, the Company completed the offering of a $250 million aggregate
principal amount of Floating Rate Notes due in 2009 under the Company’s
universal shelf registration. The proceeds from this offering are to be used
to
repay the Company’s outstanding $250 million principal amount of 6.75% Notes due
December 2006. Interest on the Floating Rate Notes will be paid quarterly
commencing on October 24, 2006, and will accrue at the rate of three-month
LIBOR
plus 65 basis points, set at the beginning of each quarterly period. After
this
issuance of debt, the Company has $200 million available under its universal
shelf registration statement filed in 2001 with the SEC for the issuance
of
equity and/or debt securities.
Note
13 - Pension and Other Postretirement Benefits
The
Company has defined contribution plans, qualified and nonqualified pension
plans, and other postretirement benefit plans covering substantially all
of its
employees. See Note 13 to the consolidated financial statements in the 2005
Form
10-K for details on these plans.
Pension
and other postretirement benefit costs included the following components
for the
three months ended September 30, 2006, and October 1, 2005:
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
|
|
|
September
30,
|
|
October
1,
|
|
September
30,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
4.6
|
|
$
|
4.6
|
|
$
|
0.8
|
|
$
|
0.7
|
|
Interest
cost
|
|
|
14.7
|
|
|
14.6
|
|
|
1.4
|
|
|
1.4
|
|
Expected
return on plan assets
|
|
|
(19.5
|
)
|
|
(18.2
|
)
|
|
-
|
|
|
-
|
|
Amortization
of prior service costs
|
|
|
1.7
|
|
|
1.8
|
|
|
(0.6
|
)
|
|
(0.5
|
)
|
Amortization
of net actuarial loss
|
|
|
2.6
|
|
|
3.5
|
|
|
0.3
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
pension and other benefit costs
|
|
$
|
4.1
|
|
$
|
6.3
|
|
$
|
1.9
|
|
$
|
1.8
|
|
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Pension
and other postretirement benefit costs included the following components for
the
nine months ended September 30, 2006, and October 1, 2005:
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
|
|
|
September
30,
|
|
October
1,
|
|
September
30,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
13.9
|
|
$
|
14.0
|
|
$
|
2.2
|
|
$
|
2.0
|
|
Interest
cost
|
|
|
44.1
|
|
|
43.8
|
|
|
4.4
|
|
|
4.3
|
|
Expected
return on plan assets
|
|
|
(58.7
|
)
|
|
(54.5
|
)
|
|
-
|
|
|
-
|
|
Amortization
of prior service costs
|
|
|
5.1
|
|
|
5.5
|
|
|
(1.6
|
)
|
|
(1.5
|
)
|
Amortization
of net actuarial loss
|
|
|
7.8
|
|
|
10.1
|
|
|
0.9
|
|
|
0.6
|
|
Curtailment
loss
|
|
|
-
|
|
|
0.8
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
pension and other benefit costs
|
|
$
|
12.2
|
|
$
|
19.7
|
|
$
|
5.9
|
|
$
|
5.4
|
|
Employer
Contributions. As
of
September 30, 2006, the Company has contributed $16.6 million year-to-date,
which included $1.6
million to fund benefit payments in its nonqualified plan.
The
Company’s plans for additional contributions are subject to equity market
returns and discount rate movements, among other items.
Note
14 - Share Repurchase Program
In
the
second quarter of 2005, the Company’s Board of Directors authorized a $200.0
million share repurchase program, to be funded with available cash. On April
27,
2006, the Board of Directors increased the Company’s remaining share repurchase
authorization of $62.2 million to $500.0 million. As of September 30, 2006,
the
Company’s remaining share repurchase authorization for the program was $398.7
million. The Company expects to repurchase shares on the open market or in
private transactions from time to time, depending on market conditions. During
the three-month and nine-month periods ended September 30, 2006, the Company
repurchased approximately 1.5 million and 4.6 million shares under this program
for $45.8 million and $163.1 million, respectively. During the three-month
and
nine-month periods ended October 1, 2005, the Company repurchased approximately
0.4 million shares for $15.7 million. As of September 30, 2006, the Company
has
repurchased approximately 6.6 million shares since the program’s inception.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Certain
statements in Management’s Discussion and Analysis are based on non-GAAP
financial measures with respect to the Company’s operating results and cash
flows. At times, management’s discussion of operating results excludes the
effects of acquisitions, an investment sale gain, non-recurring tax benefits
and
related effective tax rates, and management’s cash flow discussion includes an
analysis of free cash flow. Refer to the Matters
Affecting Comparability
and
Cash
Flow, Liquidity and Capital Resources
sections
for further details.
Results
of Operations
Overview
and Outlook
Sales
during the nine-month period ended September 30, 2006, increased 1.6 percent
to
$4.3 billion, with gains reported by the Boat and Fitness segments. The increase
in sales was primarily due to acquisitions and higher sales prices, partially
offset by lower sales volumes resulting from lower demand levels across the
marine industry. Sales decreased 1.0 percent in the three-month period ended
September 30, 2006, to $1.3 billion as a result of sales volume declines in
the
Boat and Marine Engine segments due to lower marine demand levels, despite
gains
reported by the Fitness and Bowling & Billiards segments. The decrease in
quarter-to-date sales was partially offset by the effect of acquisitions and
higher sales prices. Excluding acquisitions, the Company’s sales in the quarter
and year-to-date periods declined 3.2 percent and 2.9 percent, respectively,
from the same periods in the prior year. Quarterly and year-to-date operating
earnings from continuing operations of $74.3 million and $310.7 million, and
operating margins of 5.6 percent and 7.2 percent, respectively, decreased from
the same periods in the prior year, primarily as a result of higher raw material
and production costs, unfavorable mix factors, and lower fixed-cost absorption
due to lower production rates in the Company’s marine businesses to achieve
appropriate levels of dealer pipeline inventories, partially offset by
successful cost-reduction initiatives and the effects of higher pricing and
acquisitions. In the three-month and nine-month periods ended October 1, 2005,
the Company reported operating earnings from continuing operations of $102.1
million and $369.1 million, with operating margins of 7.6 percent and 8.7
percent, respectively.
As
discussed in Note
2 - Discontinued Operations
in the
Notes to Consolidated Financial Statements, on April 27, 2006, the Company
announced its intention to sell the majority of the Brunswick New Technologies
(BNT) business unit, which consists of the Company’s marine electronics,
land-based navigation systems and fleet tracking businesses. These BNT
businesses have become increasingly concentrated in markets outside of the
Company’s core business segments - marine, fitness, bowling and billiards - and
continued growth requires significant investment to ensure successful new
product introductions. The Company believes the future prospects for BNT could
best be achieved under different ownership. Based on discussions with potential
buyers, as well as current projections of the performance of these BNT
businesses, the Company anticipates that proceeds from the divestiture of BNT
will exceed its net book value. There is a risk that if discussions with
potential buyers fail to maintain current expectations or operating projections
are not realized, the divestiture proceeds could fall below the net book
value.
During
the second quarter of 2006, the Company began reporting the results of these
BNT
businesses, which were previously reported in the Marine Engine segment, as
discontinued operations for all periods presented. The Company’s results as
discussed in Management’s Discussion and Analysis reflect continuing operations
only, unless otherwise noted.
Looking
ahead to the rest of 2006, excluding the results of BNT, the Company expects
domestic retail demand for marine products to continue to be lower than
anticipated based on recent market trends. As a result of this reduction in
retail demand, the Company is continuing its efforts to achieve appropriate
levels of dealer inventories by reducing production of boats and marine engines
during the remainder of the year. The Company anticipates that sales will
benefit from the introduction of new products and the full-year benefit of
businesses acquired in 2006 and 2005, along with favorable pricing. Considering
all of these factors, 2006 marine sales are expected to be up slightly, but,
excluding acquisitions, to decrease in the low-single digits as compared with
2005. Fitness segment sales for 2006 are expected to increase in the mid-single
digits. Bowling & Billiards segment sales for 2006 are expected to be
relatively flat as compared with 2005. Overall, reported consolidated sales
for
2006 are expected to increase in the low-single digits from 2005.
Operating
earnings for the remainder of 2006 will be adversely affected by the anticipated
production declines, as discussed above. These actions will have an unfavorable
effect on margins due to lower fixed-cost absorption and an unfavorable
product
mix, as production cutbacks will be more pronounced in certain higher-margin
fiberglass boat categories and sterndrive engines. These factors, along
with
continued increases in raw materials, energy, and freight and distribution
costs, are not expected to be offset by improvements in pricing and cost
containment efforts during the remainder of 2006. As a result, operating
earnings for 2006 are expected to be at a level below that in
2005.
Matters
Affecting Comparability
As
described above, certain statements in Management’s Discussion and Analysis are
based on non-GAAP financial measures. 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 statement of income, balance sheet or statement 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. Operating and statistical measures are
not
non-GAAP financial measures. GAAP refers to generally accepted accounting
principles in the United States.
The
Company has used the non-GAAP financial measures that are included in the
Management’s Discussion and Analysis for several years. The Company’s management
believes that these measures and the information they provide are useful to
investors because they permit investors to view the Company’s performance using
the same tools that the Company uses and to better evaluate its ongoing business
performance. The Company’s management believes that for the three months and
nine months ended September 30, 2006, and October 1, 2005, the presentation
of
(i) diluted earnings per share excluding non-recurring tax benefits in both
2006
and 2005 and an investment sale gain in the first quarter of 2005; (ii) net
sales excluding acquisitions not reflected in the prior year’s results; and
(iii) the Company’s effective tax rate excluding the effect of non-recurring tax
benefits and the investment sale, provide a more meaningful comparison to prior
results.
Acquisitions.
The
Company’s operating results for 2006 include the operating results for
acquisitions completed in 2006 and 2005. Approximately 2 percent and 4 percent
of the Company’s sales during the three-month and nine-month periods ended
September 30, 2006, respectively, can be attributed to incremental sales from
the following acquisitions:
Date
|
|
Description
|
|
Segment
|
|
|
|
|
|
2/28/05
|
|
Albemarle
Boats, Inc. (Albemarle)
|
|
Boat
|
5/27/05
|
|
Triton
Boat Company, L.P. (Triton)
|
|
Boat
|
6/20/05
|
|
Supra-Industria
Textil, Lda. (Valiant) - 51 percent
|
|
Marine
Engine
|
7/07/05
|
|
Kellogg
Marine, Inc. (Kellogg)
|
|
Boat
|
9/16/05
|
|
Harris
Kayot Marine, LLC (Harris Kayot)
|
|
Boat
|
2/16/06
|
|
Cabo
Yachts, Inc. (Cabo)
|
|
Boat
|
4/26/06
|
|
Diversified
Marine Products, L.P. (Diversified)
|
|
Boat
|
Albemarle
provides the Company with the opportunity to offer a more complete range
of
offshore sportfishing boats. Triton adds bass boats to the Company’s product
lineup, as well as a broader range of saltwater and aluminum fishing boats.
The
Valiant brand of rigid inflatable boats enhances the Company’s offerings in
Europe. Kellogg complements the Company’s previous acquisitions of Benrock, Inc.
and Land ‘N’ Sea Corporation and provides an essential distribution hub in the
northeastern United States. Harris Kayot advances the Company’s position in the
pontoon market and complements the Company’s existing boat portfolio with
premium runabout and deckboat product lines. Cabo complements the Company’s
previous acquisitions of Hatteras Yachts, Inc. and Albemarle and allows
the
Company to offer a full range of sportfishing convertibles from 24 to 90
feet.
Diversified complements the Company’s previous acquisitions of Benrock, Land ‘N’
Sea Corporation and Kellogg, allowing the Company to provide same- and
next-day
delivery of marine parts and accessories nationwide by expanding the Company’s
parts and accessories business to the West Coast of the United States.
Refer
to
Note
7 - Acquisitions
in the
Notes to Consolidated Financial Statements for a more detailed description
of
these acquisitions.
Investment
Sale Gain and Tax Items.
The
comparison of net earnings per diluted share between 2006 and 2005 is affected
by the gain on the sale of an investment and tax items, which are described
below. The effect of these items on diluted earnings per share is as
follows:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
October
1,
|
|
September
30,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
per
diluted share - as reported
|
|
$
|
0.54
|
|
$
|
0.83
|
|
$
|
2.30
|
|
$
|
2.90
|
|
Investment
sale gain
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.32
|
)
|
Tax
items
|
|
|
(0.06
|
)
|
|
(0.14
|
)
|
|
(0.25
|
)
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
per
diluted share - as adjusted
|
|
$
|
0.48
|
|
$
|
0.69
|
|
$
|
2.05
|
|
$
|
2.44
|
|
Management
believes that the presentation of earnings per diluted share, excluding these
items, provides a more meaningful comparison of current-period and prior-period
results because these items are unique to their respective periods:
|
•
|
Investment
Sale Gain:
On
February 23, 2005, the Company sold its investment of 1,861,200 shares
in
MarineMax, Inc. (MarineMax), its largest boat dealer, for $56.8 million,
net of $4.1 million of selling costs, which included $1.1 million
of
accrued expenses. The sale was made pursuant to a registered public
offering by MarineMax. As a result of this sale, the Company recorded
an
after-tax gain of $31.5 million ($0.32 per diluted share) after utilizing
previously unrecognized capital loss carryforwards.
|
|
•
|
Tax
Items:
During 2006, the Company reduced its tax provision primarily due
to
benefits from $19.3 million of tax reserve reassessments of underlying
exposures, of
which $1.1 million was recognized in the third quarter,
and the initial recognition of a $4.1 million interest receivable
in the
third quarter of 2006 related to prior taxable years. Refer to
Note
5 - Commitments and Contingencies
in
the Notes to Consolidated Financial Statements for further detail.
In the
third quarter of 2005, the Company recognized $13.9 million of
non-recurring tax benefits arising from a change in assertions on
indefinitely reinvested earnings in selected international operations,
refined tax planning strategies for research and foreign export tax
benefits and increased foreign earnings in tax jurisdictions with
lower
effective tax rates. Refer to Note
11 - Income Taxes
in
the Notes to Consolidated Financial Statements for further detail.
|
Consolidated
The
following table sets forth certain amounts, ratios and relationships calculated
from the Consolidated Statements of Income for the three months
ended:
|
|
|
|
Increase/(Decrease)
|
|
|
|
Three
Months Ended
|
|
vs.
2005
|
|
|
|
September
30,
|
|
October
1,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,337.8
|
|
$
|
1,351.1
|
|
$
|
(13.3
|
)
|
|
(1.0)
|
%
|
Gross
margin (A)
|
|
$
|
288.9
|
|
$
|
305.5
|
|
$
|
(16.6
|
)
|
|
(5.4)
|
%
|
Operating
earnings
|
|
$
|
74.3
|
|
$
|
102.1
|
|
$
|
(27.8
|
)
|
|
(27.2)
|
%
|
Net
earnings
|
|
$
|
50.4
|
|
$
|
82.4
|
|
$
|
(32.0
|
)
|
|
(38.8)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.54
|
|
$
|
0.83
|
|
$
|
(0.29
|
)
|
|
(34.9)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expressed
as a percentage of net sales (B):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
21.6
|
%
|
|
22.6
|
%
|
|
|
|
|
(100)
bpts
|
Selling,
general and administrative expense
|
|
|
13.6
|
%
|
|
12.8
|
%
|
|
|
|
|
800
bpts
|
Operating
margin
|
|
|
5.6
|
%
|
|
7.6
|
%
|
|
|
|
|
(200)
bpts
|
__________
bpts
=
basis points
|
(A)
|
Gross
margin is defined as Net sales less Cost of sales as presented
in the
Consolidated Statements of
Income.
|
|
(B)
|
Percentages
are determined by using the following numerators expressed as a percentage
of Net sales: Gross margin as defined in (A), Selling, general and
administrative expense and Operating earnings as presented in the
Consolidated Statements of Income.
|
The
decrease in sales was primarily due to lower demand across the marine industry,
most notably in domestic markets, compared with stronger demand in the third
quarter of 2005. This decrease was partially offset by the effect of increased
sales from acquisitions completed in 2006 and 2005 in the Boat segment, which
accounted for approximately $30 million of third quarter sales. Higher Fitness
and Bowling & Billiards segment sales also contributed to the increase in
sales. Organic sales, defined as sales from the Company’s businesses that have
operating results in comparable periods presented, decreased 3.2 percent.
The
decrease in gross margin percentage in the third quarter of 2006 compared with
the same period last year was primarily due to higher raw material and component
costs; lower fixed-cost absorption and inefficiencies due to reduced production
rates as a result of the Company’s effort to achieve appropriate levels of
marine customer pipeline inventories in light of lower retail demand; a shift
in
product mix as sales volumes decreased in some of the higher-margin fiberglass
boat lines; and higher sales from acquired businesses, which have lower margins
than the Company’s core brands. These decreases were partially offset by
favorable pricing and lower variable compensation expense.
Operating
expenses increased by $11.2 million in the third quarter of 2006 compared with
the same period in 2005. The increase was primarily due to increased
research and development expenses; the unfavorable effect of inflation on wages
and benefits; the impact of acquisitions; and the absence of a reduction in
Marine Engine segment bad debt reserves that occurred in the third quarter
of
2005 resulting from improved credit experience in international
markets.
The
increase in operating expenses was partially offset by reduced variable
compensation expense; the absence of legal expenses incurred in 2005 related
to
a dispute with a supplier in China as discussed in Note
5 - Commitments and Contingencies
in the
Notes to Consolidated Financial Statements; and other cost-reduction
initiatives. Excluding the effect of acquisitions, operating expenses increased
3.6 percent from 2005.
The
decrease in operating earnings was mainly due to the decrease in sales volumes
and the unfavorable factors affecting gross margin and operating expenses
discussed above. These decreases were partially offset by contributions from
acquisitions.
Interest
expense increased $2.2 million in the third quarter of 2006 compared with the
same period in 2005, primarily due to additional interest incurred on the $250
million Floating Rate Notes issued in July 2006, as described in Note
12 - Debt Offering
in the
Notes to Consolidated Financial Statements, partially offset by the net
favorable effects of interest rate swaps in the period. See Note 10 to the
consolidated financial statements in the 2005 Form 10-K for details related
to
financial instruments. Interest income increased $1.1 million in the third
quarter of 2006 compared with the same period in 2005 due to a higher average
invested cash balance as a result of proceeds from the Floating Rate Notes
issuance.
The
Company’s effective tax rate in the third quarter of 2006 increased to 24.8
percent from 13.9 percent in the same period last year, primarily due to lower
non-recurring tax benefits in the third quarter of 2006 compared with the same
period in the prior year. During the three-month period ended September 30,
2006, the Company recognized non-recurring tax benefits of $5.2 million,
consisting of a $1.1 million tax reserve reassessment of underlying exposures
and tax contingencies for temporary items and the recognition of an additional
tax receivable of $4.1 million for interest related to prior taxable years,
as
discussed in Note
5 - Commitments and Contingencies
in the
Notes to Consolidated Financial Statements. Excluding these tax benefits, the
Company’s effective tax rate for the third quarter of 2006 was 32.6 percent.
During the three-month period ended October 1, 2005, the Company recognized
$13.9 million of non-recurring tax benefits and reduced its projected full
year
effective tax rate due to refined tax planning strategies and increased foreign
earnings in tax jurisdictions with lower effective tax rates, as discussed
in
Note
11 - Income Taxes
in the
Notes to Consolidated Financial Statements. Excluding these non-recurring tax
benefits, the Company’s effective tax rate for the third quarter of 2005 was
28.4 percent. The 2005 effective tax rate was lower than that in 2006 due to
the
research and development tax credit, which Congress has not yet extended for
2006 and is therefore not reflected in the 2006 effective tax rate. Management
believes that presentation of the effective tax rate, excluding these
non-recurring tax benefits in the third quarter of 2006 and 2005, provides
a
more meaningful comparison because these tax benefits are unique to their
respective periods.
Net
earnings and diluted earnings per share decreased primarily due to the same
factors discussed above. Excluding the $5.2 million and $13.9 million of
non-recurring tax benefits in the third quarter of 2006 and 2005, respectively,
diluted earnings per share would have been $0.48 and $0.69 for the third quarter
of 2006 and 2005, respectively. Management believes that presentation of diluted
earnings per share, excluding non-recurring tax benefits, provides a more
meaningful comparison to the prior period because these items are unique to
their respective periods.
Weighted
average common shares outstanding used to calculate diluted earnings per share
decreased to 93.7 million in the third quarter of 2006 from 99.3 million in
the
third quarter of 2005. The decrease in average shares outstanding was primarily
due to the repurchase of approximately 6.2 million shares since the third
quarter of 2005, as discussed in Note
14 - Share Repurchase Program in
the
Notes to Consolidated Financial Statements.
Sales
from discontinued operations decreased to $75.6 million in the third quarter
of
2006 from $85.3 million in the third quarter of 2005, as
BNT took
necessary discounting and promotional actions to meet competitive pricing
pressures, especially in the European consumer navigation markets. Pre-tax
losses from discontinued operations in the third quarter of 2006 were $13.2
million, compared with pre-tax earnings of $3.8 million in the third quarter
of
2005. In addition to the lower sales volumes, the reduction in pre-tax earnings
from discontinued operations was due to efforts to reduce inventory for BNT
as
well as for its dealers and maintain competitive pricing in anticipation
of new
product launches later in the year.
The
following table sets forth certain amounts, ratios and relationships calculated
from the Consolidated Statements of Income for the nine months
ended:
|
|
|
|
Increase/(Decrease)
|
|
|
|
Nine
Months Ended
|
|
vs.
2005
|
|
|
|
September
30, |
|
October
1,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
4,294.2
|
|
$
|
4,225.2
|
|
$
|
69.0
|
|
|
1.6
|
%
|
Gross
margin (A)
|
|
$
|
957.1
|
|
$
|
1,013.3
|
|
$
|
(56.2
|
)
|
|
(5.5)
|
%
|
Operating
earnings
|
|
$
|
310.7
|
|
$
|
369.1
|
|
$
|
(58.4
|
)
|
|
(15.8)
|
%
|
Net
earnings
|
|
$
|
219.0
|
|
$
|
287.4
|
|
$
|
(68.4
|
)
|
|
(23.8)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
2.30
|
|
$
|
2.90
|
|
$
|
(0.60
|
)
|
|
(20.7)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expressed
as a percentage of net sales (B):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
22.3
|
%
|
|
24.0
|
%
|
|
|
|
|
(170)
bpts
|
Selling,
general and administrative expense
|
|
|
12.8
|
%
|
|
13.1
|
%
|
|
|
|
|
(30)
bpts
|
Operating
margin
|
|
|
7.2
|
%
|
|
8.7
|
%
|
|
|
|
|
(150)
bpts
|
__________
bpts
=
basis points
|
(A)
|
Gross
margin is defined as Net sales less Cost of sales as presented in
the
Consolidated Statements of Income.
|
|
(B)
|
Percentages
are determined by using the following numerators expressed as a percentage
of Net sales: Gross margin as defined in (A), Selling, general and
administrative expense and Operating earnings as presented in the
Consolidated Statements of Income.
|
The
increase in sales was primarily due to acquisitions completed in 2006 and 2005
in the Boat and Marine Engine segments, which accounted for approximately $190
million of sales during the first nine months of 2006, and higher Fitness
segment sales resulting from increased sales volumes and improved product mix.
Excluding the impact of acquisitions, sales decreased 2.9 percent due to lower
demand across the marine industry, compared with very robust demand in the
first
nine months of 2005, especially with respect to sales of domestic outboard
engines and fiberglass boats.
The
decrease in gross margin percentage for the first nine months of 2006 compared
with the same period in 2005 was primarily due to the same factors as described
in the quarterly discussion. In addition, this decrease was also attributable
to
the transition to low-emission outboard engines, which carry lower margins
than
the carbureted two-stroke outboards they replaced, as well as increased
promotional incentives.
The
increase in operating expenses in the first nine months of 2006 compared with
the same period in the prior year was primarily due to the same factors as
described in the quarterly discussion, as well as a reduction in gains
associated with the sale of bowling centers. This increase was partially offset
by reduced variable compensation expense; a favorable settlement with an
insurance carrier on environmental coverage; the absence of legal expenses
incurred in 2005 related to a dispute with a supplier in China as discussed
in
Note
5 - Commitments and Contingencies
in the
Notes to Consolidated Financial Statements; lower costs incurred in 2006
compared with 2005 for the transition of bowling ball production from Michigan
to Reynosa, Mexico; and other cost-reduction initiatives. Excluding the effect
of acquisitions, operating expenses decreased 3.2 percent.
The
decrease in operating earnings was mainly due to the decrease in sales volumes
and the unfavorable factors affecting gross margin and operating expenses
discussed above. These decreases were partially offset by contributions from
acquisitions and other cost-reduction initiatives.
In
the
first quarter of 2005, the Company sold 1,861,200 shares of common stock of
MarineMax, its largest boat dealer. Proceeds from this stock sale totaled $56.8
million, net of $4.1 million of selling expenses, which included $1.1 million
of
accrued expenses. This sale generated a pre-tax gain of $38.7 million for the
Company.
Interest
expense increased $3.9 million in the first nine months of 2006 compared with
the same period in 2005, primarily due to additional interest incurred on the
$250 million Floating Rate Notes issued in July 2006, as described in
Note 12 - Deb Offering in the Notes to Consolidated Financial
Statements and interim commercial paper borrowings, along with the unfavorable
effects of interest rate swaps in the period. Interest income
increased $0.3 million in the first nine months of 2006 compared with the same
period in 2005 due to the same factors that affected quarterly interest income,
as well as increasing rates of return on invested cash balances, partially
offset by lower invested cash balances during the first half of
2006.
The
Company’s effective tax rate in the first nine months of 2006 decreased to 24.5
percent from 26.6 percent in the same period last year, primarily due to higher
non-recurring tax benefits in the first nine months of 2006 compared with the
same period in the prior year. During the nine-month period ended September
30,
2006, the Company recognized non-recurring tax benefits of $23.4 million,
consisting of $19.3 million of tax reserve reassessments of underlying exposures
and tax contingencies for temporary items and recording an additional tax
receivable of $4.1 million for interest related to prior taxable years as the
claim was filed in the current quarter, as discussed in Note
5 - Commitments and Contingencies
in the
Notes to Consolidated Financial Statements. Excluding tax benefits, the
Company’s effective tax rate for the first nine months of 2006 was 32.6 percent.
In the first nine months of 2005, the Company recognized $13.9 million of
non-recurring tax benefits and reduced its projected full year effective tax
rate due to refined tax planning strategies and increased foreign earnings
in
tax jurisdictions with lower effective tax rates, as discussed in Note
11 - Income Taxes
in the
Notes to Consolidated Financial Statements. In addition, the Company utilized
previously unrecognized capital loss carryforwards on the gain on the sale
of
MarineMax stock as discussed above. Excluding non-recurring tax benefits, the
Company’s effective tax rate for the first nine months of 2005 was 31.3 percent,
which was lower than that in 2006 due to the research and development tax
credit, which Congress has not yet extended for 2006 and is therefore not
reflected in the 2006 effective tax rate. Management believes that presentation
of the effective tax rate, excluding these non-recurring tax benefits in the
third quarter of 2006 and 2005 and the investment sale gain in 2005, provides
a
more meaningful comparison because these tax benefits are unique to their
respective periods.
Net
earnings and diluted earnings per share decreased primarily due to the same
factors discussed above. Excluding the $23.4 million and $13.9 million of
non-recurring tax benefits in the first nine months of 2006 and 2005 discussed
above, respectively, and the gain on the sale of the Company’s investment in
MarineMax reported in the first nine months of 2005, diluted earnings per share
would have been $2.05 and $2.44 per diluted share for the first nine months
of
2006 and 2005, respectively. Management believes that presentation of diluted
earnings per share, excluding non-recurring tax benefits and the investment
sale
gain, provides a more meaningful comparison to the prior period because these
items are unique to their respective periods.
Weighted
average common shares outstanding used to calculate diluted earnings per
share
decreased to 95.3 million in the first nine months of 2006 from 99.2 million
in
the same period in 2005. The decrease in average shares outstanding was
primarily due to the repurchase of approximately 6.2 million shares since
the
third quarter of 2005, as discussed in Note
14 - Share Repurchase Program in
the
Notes to Consolidated Financial Statements.
Sales
from discontinued operations decreased to $193.0 million in the first nine
months of 2006 from $215.1 million in the same period in the prior year,
as BNT
took necessary discounting and promotional actions to meet competitive pricing
pressures, especially in the European consumer navigation markets. Pre-tax
losses from discontinued operations in the first nine of months of 2006 were
$47.7 million, compared with pre-tax earnings of $7.6 million in the same
period
in 2005. In addition to the factors affecting sales, the reduction in pre-tax
earnings from discontinued operations was also due to efforts to reduce
inventory for BNT as well as for its dealers and maintain competitive pricing
in
anticipation of new product launches later in the year, as well as certain
investment write-offs that were recorded during the
period.
Boat
Segment
The
following table sets forth Boat segment results for the three months
ended:
|
|
|
|
Increase/(Decrease)
|
|
|
|
Three
Months Ended
|
|
vs.
2005
|
|
|
|
September
30,
|
|
October
1,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
679.2
|
|
$
|
685.5
|
|
$
|
(6.3
|
)
|
|
(0.9)
|
%
|
Operating
earnings
|
|
$
|
24.8
|
|
$
|
37.9
|
|
$
|
(13.1
|
)
|
|
(34.6)
|
%
|
Operating
margin
|
|
|
3.7
|
%
|
|
5.5
|
%
|
|
|
|
|
(180)
bpts
|
Capital
expenditures
|
|
$
|
15.8
|
|
$
|
26.6
|
|
$
|
(10.8
|
)
|
|
(40.6)
|
%
|
__________
bpts
=
basis points
The
decrease in Boat segment sales was largely attributable to reduced marine demand
in domestic markets, as well as lower shipments to dealers in an effort to
achieve appropriate levels of pipeline inventories, when compared with the
same
period of 2005. Higher promotional incentives, particularly for some
higher-margin fiberglass boat lines, also contributed to the reduced sales.
The
sales decrease was partially offset by favorable pricing, improved sales in
Europe and the impact of acquisitions completed in 2006 and 2005. Excluding
incremental sales from acquired businesses, organic boat sales declined by
approximately 5 percent primarily due to lower sales volumes as described above.
Boat
segment operating earnings decreased from 2005 primarily due to lower fixed-cost
absorption as a result of reduced production levels across the segment’s
brands, an unfavorable shift in product mix as sales volumes decreased in some
of the higher-margin fiberglass boat lines, increased promotional incentives,
higher raw material costs and increased research and development expenditures.
These factors were partially offset by favorable pricing. Excluding the impact
of acquisitions, operating expenses decreased compared with the prior year
period, largely due to successful cost control efforts and lower variable
compensation expense.
Capital
expenditures in the third quarter of 2006 and 2005 were largely attributable
to
tooling costs for the production of new models. The decrease in capital
expenditures from the prior year was primarily due to the acquisition of a
boat
plant in North Carolina in 2005.
The
following table sets forth Boat segment results for the nine months
ended:
|
|
|
|
Increase/(Decrease)
|
|
|
|
Nine
Months Ended
|
|
vs.
2005
|
|
|
|
September
30,
|
|
October
1,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
2,199.9
|
|
$
|
2,111.7
|
|
$
|
88.2
|
|
|
4.2
|
%
|
Operating
earnings
|
|
$
|
126.3
|
|
|
161.9
|
|
$
|
(35.6
|
)
|
|
(22.0)
|
%
|
Operating
margin
|
|
|
5.7
|
%
|
|
7.7
|
%
|
|
|
|
|
(200)
bpts
|
Capital
expenditures
|
|
$
|
52.2
|
|
$
|
53.3
|
|
$
|
(1.1
|
)
|
|
(2.1)
|
%
|
__________
bpts
=
basis points
The
increase in Boat segment sales was largely attributable to acquisitions
completed in 2006 and 2005. Excluding incremental sales from acquired
businesses, organic boat sales declined by approximately 4 percent primarily
due
to the same factors as described above.
The
factors affecting Boat segment operating earnings for the year-to-date period
were consistent with the factors impacting the third quarter earnings noted
above.
The
slight decrease in capital expenditures was primarily due to the acquisition
of
a boat plant in North Carolina in 2005, largely offset by higher tooling costs
for the production of new models and the acquisition of a marina in
2006.
Marine
Engine Segment
The
following table sets forth Marine Engine segment results for the three months
ended:
|
|
|
|
Increase/(Decrease)
|
|
|
|
Three
Months Ended
|
|
vs.
2005
|
|
|
|
September
30,
|
|
October
1,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
536.5
|
|
$
|
555.0
|
|
$
|
(18.5
|
)
|
|
(3.3)
|
%
|
Operating
earnings
|
|
$
|
50.4
|
|
$
|
61.2
|
|
$
|
(10.8
|
)
|
|
(17.6)
|
%
|
Operating
margin
|
|
|
9.4
|
%
|
|
11.0
|
%
|
|
|
|
|
(160)
bpts
|
Capital
expenditures
|
|
$
|
11.7
|
|
$
|
28.3
|
|
$
|
(16.6
|
)
|
|
(58.7)
|
%
|
__________
bpts
=
basis points
Sales
recorded by the Marine Engine segment, which comprises the Company’s Mercury
Marine operations, decreased primarily due to a decline in domestic outboard
engine sales volume compared with a stronger marine environment in the third
quarter of 2005, as well as efforts to achieve appropriate levels for pipeline
inventories. These factors were partially offset by higher engine pricing,
improved sales in European markets, an acquisition completed in 2005 and
a
greater mix of low-emission outboard engines, which have higher prices.
The
decrease in operating earnings for the Marine Engine segment was largely
attributable to the lower sales volumes discussed above, as well as higher
raw
material costs, lower fixed-cost absorption due to lower production levels
to
maintain balanced dealer pipeline inventories, and the absence of a reduction
in
bad debt reserves that occurred in the third quarter of 2005 resulting from
improved credit experience in international markets. The positive effects
of
lower variable compensation expense were partially offset by higher research
and
development expenses.
The
decrease in capital expenditures was primarily due to investments in 2005
for
the development of the new line of 75-, 90- and 115-horsepower naturally
aspirated four-stroke outboard engines.
The
following table sets forth Marine Engine segment results for the nine months
ended:
|
|
|
|
Increase/(Decrease)
|
|
|
|
Nine
Months Ended
|
|
vs.
2005
|
|
|
|
September
30,
|
|
October
1,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,760.0
|
|
$
|
1,780.8
|
|
$
|
(20.8
|
)
|
|
(1.2)
|
%
|
Operating
earnings
|
|
$
|
190.0
|
|
$
|
216.7
|
|
$
|
(26.7
|
)
|
|
(12.3)
|
%
|
Operating
margin
|
|
|
10.8
|
%
|
|
12.2
|
%
|
|
|
|
|
(140)
bpts
|
Capital
expenditures
|
|
$
|
49.7
|
|
$
|
59.1
|
|
$
|
(9.4
|
)
|
|
(15.9)
|
%
|
__________
bpts
=
basis points
Marine
Engine segment sales and operating earnings decreased primarily due to the
same
factors as described above in the quarterly period. Additionally, the decrease
in operating earnings was partially offset by a gain on the sale of property
in
the first quarter of 2006 and a favorable settlement with an insurance carrier
on environmental coverage in the second quarter of 2006.
The
decrease in capital expenditures was primarily due to investments in 2005 for
the development of the new line of 75-, 90- and 115-horsepower naturally
aspirated, four-stroke outboard engines and for the four-cylinder supercharged
Verado engines, partially offset by expenditures in 2006 for the completion
of a
second four-stroke outboard production line and plant expansions for die cast
operations, as well as investments in information technology.
Fitness
Segment
The
following table sets forth Fitness segment results for the three months
ended:
|
|
|
|
Increase/(Decrease)
|
|
|
|
Three
Months Ended
|
|
vs.
2005
|
|
|
|
September
30,
|
|
October
1,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
136.6
|
|
$
|
127.4
|
|
$
|
9.2
|
|
|
7.2
|
%
|
Operating
earnings
|
|
$
|
12.6
|
|
$
|
14.2
|
|
$
|
(1.6
|
)
|
|
(11.3)
|
%
|
Operating
margin
|
|
|
9.2
|
%
|
|
11.1
|
%
|
|
|
|
|
(190)
bpts
|
Capital
expenditures
|
|
$
|
2.6
|
|
$
|
2.7
|
|
$
|
(0.1
|
)
|
|
(3.7)
|
%
|
__________
bpts
=
basis points
The
increase in Fitness segment sales was largely attributable to higher
international commercial sales volumes, as health clubs continued to expand.
Increased sales volumes of domestic and international strength equipment also
contributed to improved sales.
Operating
earnings decreased from the same period in 2005, primarily due to increased
sales in Europe, where margins are lower than domestic markets, and a shift
in
mix toward lower-margin strength equipment away from higher-margin
cardiovascular product lines. Additionally, the decrease was attributable to
increased research and development investments for future new product
introductions and the unfavorable effect of inflation on wages and benefits.
These factors were partially offset by lower variable compensation expense
and
cost-reduction initiatives.
Capital
expenditures in the third quarter of 2006 and 2005 were primarily related to
tooling for new products and software development.
The
following table sets forth Fitness segment results for the nine months
ended:
|
|
|
|
Increase/(Decrease)
|
|
|
|
Nine
Months Ended
|
|
vs.
2005
|
|
|
|
September
30,
|
|
October
1,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
400.3
|
|
$
|
375.3
|
|
$
|
25.0
|
|
|
6.7
|
%
|
Operating
earnings
|
|
$
|
28.9
|
|
$
|
25.7
|
|
$
|
3.2
|
|
|
12.4
|
%
|
Operating
margin
|
|
|
7.2
|
%
|
|
6.8
|
%
|
|
|
|
|
40
bpts
|
Capital
expenditures
|
|
$
|
7.6
|
|
$
|
8.2
|
|
$
|
(0.6
|
)
|
|
(7.3)
|
%
|
__________
bpts
=
basis points
The
increase in Fitness segment sales was largely attributable to an improved
product mix and increased sales volumes of cardiovascular and strength equipment
in all markets, partially offset by competitive pricing pressures in
international markets.
Fitness
segment operating earnings increased primarily due to the higher sales volumes
as discussed above, as well as lower variable compensation expense and
cost-reduction initiatives. These factors were partially offset by higher
freight and distribution costs and increased investments in research and
development costs for future new product introductions.
Capital
expenditures in 2006 and 2005 were primarily related to tooling for new products
and software development. Additionally, capital expenditures in 2006 included
investments in a new engineering design facility to drive future product
improvements. 2005 capital expenditures were also related to equipment
associated with the expansion at the Company’s Hungarian manufacturing
facility.
Bowling
& Billiards Segment
The
following table sets forth Bowling & Billiards segment results for the three
months ended:
|
|
|
|
Increase/(Decrease)
|
|
|
|
Three
Months Ended
|
|
vs.
2005
|
|
|
|
September
30,
|
|
October
1,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
113.4
|
|
$
|
111.9
|
|
$
|
1.5
|
|
|
1.3
|
%
|
Operating
earnings
|
|
$
|
3.1
|
|
$
|
5.7
|
|
$
|
(2.6
|
)
|
|
(45.6)
|
%
|
Operating
margin
|
|
|
2.7
|
%
|
|
5.1
|
%
|
|
|
|
|
(240)
bpts
|
Capital
expenditures
|
|
$
|
11.9
|
|
$
|
10.1
|
|
$
|
1.8
|
|
|
17.8
|
%
|
__________
bpts
=
basis points
Bowling
& Billiards segment sales increased over prior year levels as a result of
increased bowling center revenues, partially offset by lower sales volumes
of
Valley-Dynamo coin-operated billiards tables. Increased sales at bowling retail
centers was primarily due to improved traffic at existing retail centers, driven
partly by the addition of two new Brunswick Zone XL centers, partially offset
by
operating three fewer bowling centers in the third quarter of 2006 versus the
comparable 2005 period. Bowling equipment sales, which increased slightly from
the third quarter in 2005, are subject to fluctuations during the year as they
are tied to new center openings and center modernization projects by independent
proprietors.
The
decrease in current quarter operating earnings was largely attributable to
start-up costs associated with the transition of the segment’s bowling ball and
Valley-Dynamo manufacturing operations to Reynosa, Mexico. The transition of
bowling ball production is expected to be completed by the first quarter of
2007, while the Valley-Dynamo transition commenced in the third quarter of
2006.
These items were partially offset by the absence of legal expenses incurred
in
2005 related to a dispute with a supplier in China as discussed in Note
5 - Commitments and Contingencies
in the
Notes to Consolidated Financial Statements.
Capital
expenditures in the third quarter of 2006 and 2005 were primarily related to
capital spending for new Brunswick Zone XL and existing bowling centers as
well
as investments in the new manufacturing facility in Reynosa, Mexico.
The
following table sets forth Bowling & Billiards segment results for the nine
months ended:
|
|
|
|
Increase/(Decrease)
|
|
|
|
Nine
Months Ended
|
|
vs.
2005
|
|
|
|
September
30,
|
|
October 1,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
338.2
|
|
$
|
338.3
|
|
$
|
(0.1
|
)
|
|
(0.0)
|
%
|
Operating
earnings
|
|
$
|
16.5
|
|
$
|
22.0
|
|
$
|
(5.5
|
)
|
|
(25.0)
|
%
|
Operating
margin
|
|
|
4.9
|
%
|
|
6.5
|
%
|
|
|
|
|
(160)
bpts
|
Capital
expenditures
|
|
$
|
28.6
|
|
$
|
24.0
|
|
$
|
4.6
|
|
|
19.2
|
%
|
__________
bpts
=
basis points
The
factors affecting Bowling and Billiards segment sales and operating earnings
for
the year-to-date period were comparable to those factors impacting the third
quarter sales noted above. Additionally, the decrease in operating earnings
was
attributable to a reduction in gains associated with the sale of bowling
centers.
Increased
capital expenditures in the first nine months of 2006 were driven by higher
investments in the new manufacturing facility in Reynosa as well as higher
capital spending for new Brunswick Zone XL bowling centers year-over-year.
Cash
Flow, Liquidity and Capital Resources
The
following table sets forth an analysis of free cash flow for the nine months
ended:
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
(in
millions)
|
|
|
|
|
|
Net
cash provided by operating activities of continuing
operations
|
|
$
|
216.0
|
|
$
|
239.6
|
|
Net
cash provided by (used for):
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(139.7
|
)
|
|
(150.4
|
)
|
Proceeds
from investment sale
|
|
|
-
|
|
|
57.9
|
|
Proceeds
from the sale of property, plant and equipment
|
|
|
6.8
|
|
|
13.4
|
|
Other,
net
|
|
|
(0.4
|
)
|
|
(1.2
|
)
|
Free
cash flow from continuing operations *
|
|
$
|
82.7
|
|
$
|
159.3
|
|
*
The Company defines Free cash flow from continuing operations
as cash flow from operating and investing activities of continuing operations
(excluding cash used for acquisitions and investments), and excluding financing
activities. Free cash flow from continuing operations is not intended as an
alternative measure of cash flow from operations, as determined in accordance
with generally accepted accounting principles (GAAP) in the United States.
The
Company uses this financial measure, both in presenting its results to
shareholders and the investment community, and in its internal evaluation and
management of its businesses. Management believes that this financial measure
and the information it provides are useful to investors because it permits
investors to view the Company’s performance using the same tool that management
uses to gauge progress in achieving its goals. Management believes that the
non-GAAP financial measure “Free cash flow from continuing operations” is also
useful to investors because it is an indication of cash flow that may be
available to fund further investments in future growth initiatives.
The
Company’s major sources of funds for investments, acquisitions, share
repurchases and dividend payments are cash generated from operating activities,
available cash balances and selected borrowings. The Company evaluates potential
acquisitions, divestitures and joint ventures in the ordinary course of
business.
In
the
first nine months of 2006, net cash provided by operating activities of
continuing operations totaled $216.0 million compared with $239.6 million
in the
same period of 2005.
The
decrease in net cash provided by operating activities in the first nine months
of 2006 was primarily due to lower net income, compared with the same period
in
2005. Operating cash used for seasonal working capital growth was slightly
higher in 2006 than in 2005. Reduced growth in inventories was offset by
higher
accounts receivable and lower accounts payable, as well as lower accruals
for
variable compensation.
Cash
flows from investing activities included capital expenditures of $139.7 million
and $150.4 million in the first nine months of 2006 and 2005, respectively.
Significant capital expenditures in the first nine months of 2006 were
attributable to tooling expenditures for new models and product innovations
in
the Boat Group, the completion of a second four-stroke outboard production
line
in the Marine Engine segment; the acquisition of a marina in St. Petersburg,
Florida; capital spending for new Brunswick Zone XL and existing bowling
centers; investments in the new bowling ball manufacturing facility in Reynosa,
Mexico; and completion of the Life Fitness engineering design facility.
Cash
paid
for acquisitions, net of cash and debt acquired, totaled $82.7 million and
$127.5 million in the first nine months of 2006 and 2005, respectively. See
Note
7 - Acquisitions
in the
Notes to Consolidated Financial Statements and Note 5 in the 2005 Form 10-K
for
further details on the Company’s acquisitions. The Company’s cash investment in
Brunswick Acceptance Company, LLC (BAC) decreased $15.7 million during the
first
nine months of 2006, compared with a decrease of $8.5 million in the first
nine
months of 2005, to maintain the Company’s required 49% equity investment.
During
the first quarter of 2005, the Company sold its investment in MarineMax
(1,861,200 shares) for $56.8 million, net of $4.1 million of selling costs,
which included $1.1 million of accrued expenses. See Note 6 to the consolidated
financial statements in the 2005 Form 10-K for further details on this
sale.
Cash
provided by financing activities was $100.3 million in the first nine months
of
2006, compared with $0.7 million of cash used in the prior year period. This
increase was the result of issuing the $250 million of senior unsubordinated
notes described below, offset by the Company’s share repurchase program. Under
the Company’s share repurchase plan, the Company repurchased approximately 4.6
million common shares for $163.1 million during the first nine months of 2006,
compared with repurchases of 0.4 million common shares for $15.7 million in
the
first nine months of 2005. The Company received $14.4 million from stock options
exercised in the first nine months of 2006 and 2005.
Cash
and
cash equivalents totaled $559.5 million at September 30, 2006, an increase
of
$71.8 million from $487.7 million at December 31, 2005. Total debt at September
30, 2006 increased $250.9 million to $975.7 million, versus $724.8 million
at
December 31, 2005, and debt-to-capitalization ratios were 32.4 percent and
26.8
percent, respectively.
The
Company has a $650 million long-term revolving credit agreement with a group
of
banks, as described in Note 12 to the consolidated financial statements in
the
2005 Form 10-K, that serves as support for commercial paper borrowings. In
April
2006, the Company amended the agreement, resulting in improved pricing and
a
one-year extension. The agreement has a term of five years, through May 5,
2011,
with provisions to extend the term for an additional one year on each
anniversary of the agreement, with consent of the lenders. There were no
borrowings under the revolving credit agreement during the first nine months
of
2006 or 2005. The Company has the ability to issue up to $150 million in letters
of credit under the revolving credit facility. The Company had borrowing
capacity of $582.9 million under the terms of the revolving credit agreement
as
of September 30, 2006.
In
July
2006, Brunswick issued senior unsubordinated notes in the aggregate principal
amount of $250 million, receiving proceeds of $249 million, net of discount
and
before an estimated $0.4 million of expenses. The notes mature on July 24,
2009,
and interest on the notes is required to be paid quarterly at an annual rate
tied to three-month LIBOR, beginning October 24, 2006. After July 24, 2007,
the
Company has the option to redeem some or all of the notes at par, plus accrued
interest, prior to maturity. The net proceeds of the notes are expected to
be
used to retire the Company’s $250 million principal amount of 6.75% notes due
December 15, 2006. After this issuance, the Company has $200 million available
under a universal shelf registration statement filed in 2001 with the SEC
for
the issuance of equity and/or debt securities.
The
Company has continued to proactively fund its defined benefit plans in advance
of Employee Retirement Income Security Act (ERISA) requirements. The Company
funded $15.0 million of discretionary contributions into its defined benefit
plans during the second quarter of 2006. The Company will evaluate making
additional contributions to its defined benefit plans in 2006 based on market
conditions and Company discretion, among other items. The Company also
contributed $1.6
million to fund benefit payments in its nonqualified plan in
the
first nine months of 2006. The Company expects to contribute an additional
$0.6
million to the nonqualified plan in the fourth quarter of 2006. In the first
nine months of 2005, the Company contributed $25.0 million into its defined
benefit plan and $1.8 million to fund benefit payments in its nonqualified
plan.
See Note
13 - Pension and Other Postretirement Benefits
in the
Notes to
Consolidated Financial Statements and Note 13 to the consolidated financial
statements in the 2005 Form 10-K for more details.
The
Company’s financial flexibility and access to capital markets is supported by
its balance sheet position, investment-grade credit ratings and ability to
generate significant cash from operating activities. Management believes
that
there are adequate sources of liquidity to meet the Company’s short-term and
long-term needs.
Financial
Services
See
Note
10 - Financial Services in
the
Notes to Consolidated Financial Statements for a discussion on the Company’s
joint venture, BAC, with GE Commercial Finance.
New
Accounting Standards
In
June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109,” (FIN 48). FIN 48 prescribes recognition threshold and
measurement criteria for the financial statement recognition and measurement
of
tax positions taken or expected to be taken in a tax return, among other items.
In addition, FIN 48 provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition with
respect to the application of the new accounting standard. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact that FIN 48 will have on its financial
statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, “Fair Value Measurements,” (SFAS 157), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of SFAS 157 is not
expected to have a material impact on the Company’s financial
statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132(R),” (SFAS 158). SFAS 158 requires recognition of the
overfunded or underfunded status of a benefit postretirement plan in the
statement of financial position, as well as recognition of changes in that
funded status through comprehensive income in the year in which they occur.
SFAS
158 also requires a change in the measurement of a plan’s assets and benefit
obligations as of the end date of the employer’s fiscal year. SFAS 158 is
effective for fiscal years ending after December 15, 2006, except for the
measurement date provisions, which are effective for fiscal years ending
after
December 15, 2008. The Company is currently evaluating the impact that SFAS
158
will have on its financial statements.
Legal
Refer
to
Note
5 - Commitments and Contingencies
in the
Notes to Consolidated Financial Statements for disclosure of the potential
cash
requirements related to the Company’s legal and environmental
proceedings.
Environmental
Regulation
In
its
Marine Engine segment, the Company will continue to develop engine technologies
to reduce engine emissions to comply with current and future emissions
requirements. The costs associated with these activities and the introduction
of
low-emission engines will continue to have an adverse effect on Marine Engine
segment operating margins and may affect short-term operating results. The
State
of California has adopted regulations requiring catalytic converters on
sterndrive and inboard engines by January 1, 2008. The Company expects to
comply
fully with these regulations, but compliance will increase the cost of these
products. Other environmental regulatory bodies in the United States and
other
countries also may impose higher emissions standards than are currently in
effect for the Company’s engines, which would require the Company to modify
these engines, increasing their cost.
The
Boat
segment continues to pursue fiberglass boat manufacturing technologies and
techniques to reduce air emissions at its boat manufacturing facilities.
The
Company does not believe that compliance with Federal, state and local
environmental laws will have a material adverse effect on the Company’s
competitive position.
Off-Balance
Sheet Arrangements and Contractual Obligations
The
Company’s off-balance sheet arrangements and contractual obligations are
detailed in the 2005 Form 10-K. There have been no material changes outside
the
ordinary course of business with the exception of the issuance of the $250
million of Floating Rate Notes due in July 2009, as described above in Cash
Flow, Liquidity and Capital Resources.
Critical
Accounting Policies
There
were no material changes in the Company’s critical accounting policies since the
filing of its 2005 Form 10-K. As discussed in the 2005 Form 10-K, the
preparation of the consolidated financial statements in conformity 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.
Forward-Looking
Statements
Certain
statements in this Form 10-Q are forward-looking as defined in the Private
Securities Litigation Reform Act of 1995. These statements involve certain
risks
and uncertainties that may cause actual results to differ materially from
expectations as of the date of this filing. These risks include, but are not
limited to: the effect of a weak economy and stock market on consumer confidence
and thus the demand for marine, fitness, billiards and bowling equipment and
products; competitive pricing pressures; the success of new product
introductions; the ability to maintain market share in high-margin products;
competition from new technologies; competition in the consumer electronics
markets; imports from Asia and increased competition from Asian competitors;
the
ability to obtain component parts from suppliers; the ability to maintain
effective distribution; the financial strength of dealers, distributors and
independent boat builders; the ability to transition and ramp up certain
manufacturing operations within time and budgets allowed; the ability to
maintain product quality and service standards expected by customers; the
ability to successfully manage pipeline inventories; the success of global
sourcing and supply chain initiatives; the ability to successfully integrate
acquisitions; the ability to successfully complete announced divestitures;
the
success of marketing and cost management programs; the ability to develop
product technologies that comply with regulatory requirements; the ability
to
complete environmental remediation efforts and resolve claims and litigation
at
the cost estimated; the impact of weather conditions on demand for marine
products and retail bowling center revenues; shifts in currency exchange rates;
adverse foreign economic conditions; and the impact of interest rates and fuel
prices on demand for marine products. Additional factors are included in the
2005 Form 10-K.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
The
Company is exposed to market risk from changes in foreign currency exchange
rates, interest rates and commodity prices. The Company enters into various
hedging transactions to mitigate 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’s risk management
objectives are described in Notes 1 and 10 of the 2005 Form 10-K.
Item
4. Controls and Procedures
The
Chief
Executive Officer and the Chief Financial Officer of the Company (its principal
executive officer and principal financial officer, respectively) have evaluated
the Company’s disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
quarterly report. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective. There were no changes in the Company’s internal
control over financial reporting during the third quarter of 2006 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART
II - OTHER INFORMATION
The
Company was not required to report the information pursuant to Items 1 through
6
of Part II of Form 10-Q for the three months ended September 30, 2006, except
as
follows:
Item
1. Legal Proceedings
The
Company accrues for litigation exposure based upon its assessment, made in
consultation with counsel, of the likely range of exposure stemming from the
claim. In light of existing reserves, the Company’s litigation claims, when
finally resolved, will not, in the opinion of management, have a material
adverse effect on the Company’s consolidated financial statements. If current
estimates for the cost of resolving any claims are later determined to be
inadequate, results of operations could be adversely affected in the period
in
which additional provisions are required.
Chinese
Supplier Dispute. The
Company is involved in an arbitration proceeding in Hong Kong arising out of
a
commercial dispute with a former contract manufacturer in China, Shanghai
Zhonglu Industrial Company Limited (Zhonglu). The Company filed the arbitration
seeking damages based on Zhonglu's breach of a supply and distribution agreement
pursuant to which Zhonglu agreed to manufacture bowling equipment for the
Company. Zhonglu has asserted counterclaims seeking damages for alleged breach
of contract and the resolution of other claims. The arbitration tribunal heard
final arguments in August 2005 and the Company is awaiting a decision in the
matter. The Company does not believe that this dispute will have a material
adverse effect on the Company's consolidated financial condition or results
of
operations.
Refer
to
Note 9 to the consolidated financial statements of the 2005 Form 10-K for
disclosure of the potential cash requirements of environmental proceedings
and a
discussion of other legal matters as of December 31, 2005.
Item
1A. Risk Factors
Other
than potential risks associated with the successful completion of the announced
divestiture as described in Management’s Discussion and Analysis, there have
been no material changes from the Company’s risk factors as disclosed in the
2005 Form 10-K.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
(c)
Purchases of Company Securities
|
|
Issuer
Purchases of Equity Securities
|
Period
|
|
Total
Number
of
Shares (or
Units)
Purchased
|
|
Average
Price
Paid
per Share
(or
Unit)
|
|
Total
Number of
Shares
(or Units)
Purchased
as Part of
Publicly
Announced
Plans
or Programs
|
|
Maximum
Number (or
Approximate
Dollar Value)
that
May Yet Be Purchased
Under
the Plans or
Programs
(A)
(amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
7/2/06
- 7/29/06
|
|
500,000
|
|
$
32.51
|
|
500,000
|
|
$
428,248
|
7/30/06
- 8/26/06
|
|
500,000
|
|
$
29.64
|
|
500,000
|
|
$
413,428
|
8/27/06
- 9/30/06
|
|
500,000
|
|
$
29.51
|
|
500,000
|
|
$
398,674
|
|
|
|
|
|
|
|
|
|
Total
Stock Repurchases
|
|
1,500,000
|
|
$
30.55
|
|
1,500,000
|
|
$
398,674
|
|
|
|
|
|
|
|
|
|
(A)
|
On
May 4, 2005, the Company’s Board of Directors authorized a $200 million
share repurchase program, to be funded with available cash. On
April 27,
2006, the Board of Directors increased the Company’s remaining share
repurchase authorization of $62.2 million to $500.0 million. The
Company
expects to repurchase shares on the open market or in private transactions
from time to time, depending on market conditions. The Company
repurchased
1.5 million shares under this program during the third quarter
of 2006 for
$45.8 million. Refer to Note 14 - Share Repurchase
Program in the Notes to Consolidated Financial Statements for
further details.
|
Item
6. Exhibits
31.1
|
Certification
of CEO Pursuant to 15 U.S.C. Section 7241, as adopted pursuant
to Section
302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
Certification
of CFO Pursuant to 15 U.S.C. Section 7241, as adopted pursuant
to Section
302 of the Sarbanes-Oxley Act of
2002
|
32.1
|
Certification
of CEO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section
906 of the Sarbanes-Oxley Act of 2002
|
32.2
|
Certification
of CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section
906 of the Sarbanes-Oxley Act of
2002
|
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
BRUNSWICK
CORPORATION |
|
|
|
Date: October
30, 2006 |
By: |
/s/ ALAN
L. LOWE |
|
Alan
L. Lowe
|
|
Vice
President and
Controller |
*Mr.
Lowe
is signing this report both as a duly authorized officer and as the principal
accounting officer.