BRUNSWICK
CORPORATION
|
Condensed
Consolidated Statements of Cash Flows
|
(unaudited)
|
|
|
Six
Months Ended
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
Revised
June
30,
2007
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
7.3 |
|
|
$ |
102.9 |
|
Net
earnings from discontinued operations
|
|
|
– |
|
|
|
11.7 |
|
Net
earnings from continuing operations
|
|
|
7.3 |
|
|
|
91.2 |
|
Depreciation
and amortization
|
|
|
90.5 |
|
|
|
84.8 |
|
Changes
in non-cash current assets and current liabilities
|
|
|
(91.5 |
) |
|
|
(97.3 |
) |
Impairment
charges
|
|
|
52.8 |
|
|
|
– |
|
Income
taxes
|
|
|
1.2 |
|
|
|
49.2 |
|
Other,
net
|
|
|
2.3 |
|
|
|
6.6 |
|
Net cash provided by operating
activities of continuing operations
|
|
|
62.6 |
|
|
|
134.5 |
|
Net cash used for operating
activities of discontinued operations
|
|
|
– |
|
|
|
(26.8 |
) |
Net cash provided by operating
activities
|
|
|
62.6 |
|
|
|
107.7 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(58.0 |
) |
|
|
(82.5 |
) |
Acquisitions
of businesses, net of cash acquired
|
|
|
– |
|
|
|
(1.6 |
) |
Investments
|
|
|
13.0 |
|
|
|
4.5 |
|
Proceeds
from investment sale
|
|
|
40.4 |
|
|
|
– |
|
Proceeds
from the sale of property, plant and equipment
|
|
|
3.4 |
|
|
|
1.6 |
|
Other,
net
|
|
|
0.2 |
|
|
|
12.4 |
|
Net cash used for investing
activities of continuing operations
|
|
|
(1.0 |
) |
|
|
(65.6 |
) |
Net cash provided by investing
activities of discontinued operations
|
|
|
– |
|
|
|
30.2 |
|
Net cash used for investing
activities
|
|
|
(1.0 |
) |
|
|
(35.4 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Net
issuances of commercial paper and other short-term debt
|
|
|
0.3 |
|
|
|
– |
|
Payments
of long-term debt including current maturities
|
|
|
(0.5 |
) |
|
|
(0.5 |
) |
Stock
repurchases
|
|
|
– |
|
|
|
(87.2 |
) |
Stock
options exercised
|
|
|
– |
|
|
|
10.8 |
|
Net
cash used for financing activities of continuing
operations
|
|
|
(0.2 |
) |
|
|
(76.9 |
) |
Net cash used for financing
activities of discontinued operations
|
|
|
– |
|
|
|
– |
|
Net cash used for financing
activities
|
|
|
(0.2 |
) |
|
|
(76.9 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
61.4 |
|
|
|
(4.6 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
331.4 |
|
|
|
283.4 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
392.8 |
|
|
$ |
278.8 |
|
|
|
|
|
|
|
|
|
|
|
|
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 (Brunswick or the Company) have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Therefore,
certain information and disclosures normally included in financial statements
and related 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 Brunswick’s 2007 Annual
Report on Form 10-K (the 2007 Form 10-K), except as it relates to fair value
measurements, as discussed in Note 4 – Fair Value
Measurements. As indicated in Note 2 – Discontinued
Operations, Brunswick’s results as discussed in the Notes to Consolidated
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
Brunswick as of June 28, 2008, December 31, 2007, and June 30, 2007, the results
of operations for the three months and six months ended June 28, 2008, and June
30, 2007, and the cash flows for the six months ended June 28, 2008, and June
30, 2007. Due to the seasonality of Brunswick’s businesses and the restructuring
activities underway, 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 (thirteen-week periods). The first two quarters of fiscal year
2008 ended on March 29, 2008, and June 28, 2008, and the first two quarters of
fiscal year 2007 ended on March 31, 2007, and June 30, 2007.
Revisions. The Company
expanded its presentation of the Consolidated Statements of Cash Flows to
include net earnings and net earnings from discontinued operations. Accordingly,
the Company revised the June 30, 2007, Consolidated Statement of Cash Flows. Net
cash flows from operating, investing and financing activities have not
changed.
Recent Accounting
Pronouncements. In September 2006, the
Financial Accounting Standards Board (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. Effective January 1, 2008, the Company adopted SFAS
157. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2,
“Effective Date of FASB Statement No. 157,” which provides a one year
deferral of the effective date of SFAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Therefore, the Company has
adopted the provisions of SFAS 157 with respect to its financial assets and
liabilities only. The adoption of this statement did not have a material impact
on the Company’s consolidated results of operations and financial condition. See
Note 4 – Fair Value
Measurements for additional disclosures.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115” (SFAS 159). SFAS 159 permits entities to choose to measure
certain financial assets and financial liabilities at fair value at specified
election dates. Unrealized gains and losses on items for which the fair value
option has been elected are to be reported in earnings. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. The Company has elected not
to adopt the fair value option established by SFAS 159.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS
141(R)). SFAS 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, the goodwill acquired and any noncontrolling
interest in the acquiree. This statement also establishes disclosure
requirements to enable the evaluation of the nature and financial effect of the
business combination. SFAS 141(R) is effective for fiscal years beginning on or
after December 15, 2008. The Company is currently evaluating the impact that the
adoption of SFAS 141(R) may have on the financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (SFAS 160). SFAS
160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company is currently evaluating the
impact that the adoption of SFAS 160 may have on the financial
statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures About Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133” (SFAS 161). SFAS 161 is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity’s financial position, financial performance, and cash flows. SFAS 161
is effective for fiscal years beginning after November 15, 2008. The
Company is currently evaluating the impact that the adoption of SFAS 161
may have on the financial statements.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
2 – Discontinued Operations
In April
2006, the Company announced its intention to sell the majority of its Brunswick
New Technologies (BNT) business unit, which consisted of the Company’s marine
electronics, portable navigation device (PND) and wireless fleet tracking
businesses. Accordingly, the Company 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.
In March
2007, Brunswick completed the sales of BNT’s marine electronics and PND
businesses to Navico International Ltd. and MiTAC International Corporation,
respectively. During the first six months of 2007, the Company recognized
proceeds of $44.2 million, resulting in an after-tax gain of $7.7 million before
all post-closing adjustments.
Each of
these sales was subject to post-closing adjustments, which were completed during
2007. Ultimately, the Company recorded net proceeds of $40.6 million and an
after-tax gain of $4.0 million for the year ended December 31,
2007.
There
were no sales or earnings from discontinued operations during the first six
months of 2008. The following table discloses the results of operations of the
BNT businesses reported as discontinued operations for the three months and six
months ended June 30, 2007:
(in
millions)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
16.5 |
|
|
$ |
97.5 |
|
Pre-tax
earnings (loss)
|
|
$ |
(2.6 |
) |
|
$ |
2.1 |
|
There
were no remaining BNT net assets available for sale as of June 28, 2008, or
December 31, 2007. The following table reflects the financial position of the
BNT businesses reported as discontinued operations as of June 30,
2007:
(in
millions)
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ |
23.0 |
|
Inventory,
net
|
|
|
4.1 |
|
Other
current assets
|
|
|
0.3 |
|
Total
current assets
|
|
|
27.4 |
|
|
|
|
|
|
Goodwill
and intangible assets
|
|
|
13.1 |
|
Investments
|
|
|
8.0 |
|
Property,
plant and equipment
|
|
|
3.5 |
|
Total
assets
|
|
|
52.0 |
|
|
|
|
|
|
Accounts
payable
|
|
|
6.3 |
|
Accrued
expenses
|
|
|
13.1 |
|
Total
current liabilities
|
|
|
19.4 |
|
|
|
|
|
|
Long-term
liabilities
|
|
|
10.7 |
|
Total
liabilities
|
|
|
30.1 |
|
|
|
|
|
|
Net
assets
|
|
$ |
21.9 |
|
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
3 – Restructuring Activities
Restructuring
and exit charges
In
November 2006, Brunswick announced initiatives to improve the Company’s cost
structure, better utilize overall capacity and improve general operating
efficiencies. The restructuring initiatives included the consolidation of
certain boat manufacturing facilities, sales offices and distribution warehouses
and reductions in the Company’s global workforce.
The
Company announced further initiatives during 2007 to consolidate certain boat
manufacturing facilities in connection with the purchase of a manufacturing
facility in North Carolina, close a manufacturing facility in Mississippi and
shift boat production to Indiana and Minnesota, enhance U.S. engine production
efficiency and eliminate assembly operations for certain engines in
Europe.
During
the first quarter of 2008, the Company closed its bowling pin manufacturing
facility in Antigo, Wisconsin, and announced that it would close its boat plant
in Bucyrus, Ohio, in anticipation of the proposed sale of certain assets
relating to its Baja boat business, cease boat manufacturing at one of its
facilities in Merritt Island, Florida, and mothball its Swansboro, North
Carolina, boat plant.
The
Company announced a plan in June 2008 to expand on its previous restructuring
initiatives as a result of the prolonged downturn in the U.S. marine market. The
plan is designed to improve performance and better position the Company for
current market conditions and longer term growth. The plan will result in
significant changes in the Company’s organizational structure, most notably by
reducing the complexity of its operations, shrinking its North American
manufacturing footprint and enhancing its brand positioning. Specifically, the
Company has announced the closing of its production facility in Newberry, South
Carolina, due to its decision to cease production of its Bluewater Marine
brands, including Sea Pro, Sea Boss, Palmetto and Laguna; its intention to close
four additional boat plants; and the write-down of certain assets of the
Valley-Dynamo coin-operated commercial billiards business while it explores a
potential sale of that business. The second quarter results include severance
and plant closure costs, asset write-downs and impairment charges related to the
plan announced in June 2008 and certain costs related to restructuring actions
previously initiated.
The
nature of the costs incurred under actions related to the announced plan are
anticipated to be:
Restructuring
Activities – These amounts primarily relate to:
·
|
Employee
termination and other benefits
|
·
|
Costs
to retain and relocate employees
|
·
|
Consolidation
of manufacturing footprint
|
Exit
Activities – These amounts primarily relate to:
·
|
Employee
termination and other benefits
|
·
|
Facility
shutdown costs
|
Specifically,
the Company considers actions related to the sale of certain Baja boat business
assets, the closure of its bowling pin manufacturing facility and the potential
sale of the Valley-Dynamo coin-operated commercial billiards business to be exit
activities. The Company considers all other actions taken to be restructuring
activities.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
The
following is a summary of the expense associated with the restructuring
activities:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination and other benefits
|
|
$ |
9.4 |
|
|
$ |
0.1 |
|
|
$ |
11.4 |
|
|
$ |
4.0 |
|
Current
asset write-downs
|
|
|
2.0 |
|
|
|
— |
|
|
|
2.0 |
|
|
|
— |
|
Transformation
and other costs
|
|
|
19.0 |
|
|
|
— |
|
|
|
24.6 |
|
|
|
0.9 |
|
Exit
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination and other benefits
|
|
|
1.1 |
|
|
|
0.4 |
|
|
|
3.3 |
|
|
|
0.9 |
|
Current
asset write-downs
|
|
|
4.1 |
|
|
|
0.6 |
|
|
|
7.2 |
|
|
|
0.6 |
|
Transformation
and other costs
|
|
|
3.1 |
|
|
|
— |
|
|
|
4.0 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
restructuring and exit charges
|
|
$ |
38.7 |
|
|
$ |
1.1 |
|
|
$ |
52.5 |
|
|
$ |
8.7 |
|
The
effect of these actions on each the Company’s reportable segments for the three
months ended June 28, 2008, is summarized below:
(in
millions)
|
|
Boat
|
|
|
Marine
Engine
|
|
|
Fitness
|
|
|
Bowling
& Billiards
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
terminations and
other benefits
|
|
$ |
3.1 |
|
|
$ |
6.3 |
|
|
$ |
— |
|
|
$ |
1.0 |
|
|
$ |
0.1 |
|
|
$ |
10.5 |
|
Current
asset write-downs
|
|
|
2.5 |
|
|
|
— |
|
|
|
1.3 |
|
|
|
2.3 |
|
|
|
— |
|
|
|
6.1 |
|
Transformation
and other costs
|
|
|
11.6 |
|
|
|
4.4 |
|
|
|
— |
|
|
|
0.2 |
|
|
|
5.9 |
|
|
|
22.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
restructuring and exit charges
|
|
$ |
17.2 |
|
|
$ |
10.7 |
|
|
$ |
1.3 |
|
|
$ |
3.5 |
|
|
$ |
6.0 |
|
|
$ |
38.7 |
|
The
effect of these actions on each the Company’s reportable segments for the six
months ended June 28, 2008, is summarized below:
(in
millions)
|
|
Boat
|
|
Marine
Engine
|
|
Fitness
|
|
Bowling
& Billiards
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
terminations and
other benefits
|
|
$ |
3.7 |
|
$ |
7.8 |
|
$ |
— |
|
$ |
2.6 |
|
$ |
0.6 |
|
|
$ |
14.7 |
|
Current
asset write-downs
|
|
|
5.2 |
|
|
— |
|
|
1.3 |
|
|
2.7 |
|
|
— |
|
|
|
9.2 |
|
Transformation
and other costs
|
|
|
16.4 |
|
|
4.4 |
|
|
— |
|
|
1.1 |
|
|
6.7 |
|
|
|
28.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
restructuring and exit charges
|
|
$ |
25.3 |
|
$ |
12.2 |
|
$ |
1.3 |
|
$ |
6.4 |
|
$ |
7.3 |
|
|
$ |
52.5 |
|
The
Company anticipates that it will incur additional costs of $65 million to $75
million under these initiatives in 2008. The Company expects most of these
charges will be incurred in the Boat and Marine Engine
segments.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Impairment
charges
The
Company recognized a $44.4 million impairment charge in the second quarter of
2008, which is comprised of the following components:
(in
millions)
|
|
Goodwill
|
|
|
Other
Intangibles
|
|
|
Property
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$ |
— |
|
|
$ |
13.4 |
|
|
$ |
7.6 |
|
|
$ |
21.0 |
|
Marine
Engine
|
|
|
— |
|
|
|
4.9 |
|
|
|
1.4 |
|
|
|
6.3 |
|
Bowling
& Billiards
|
|
|
1.7 |
|
|
|
11.6 |
|
|
|
3.0 |
|
|
|
16.3 |
|
Corporate
|
|
|
— |
|
|
|
— |
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
charge
|
|
$ |
1.7 |
|
|
$ |
29.9 |
|
|
$ |
12.8 |
|
|
$ |
44.4 |
|
The
Company recognized a $52.8 million impairment charge in the first six months of
2008, which is comprised of the following components:
(in
millions)
|
|
Goodwill
|
|
|
Other
Intangibles
|
|
|
Property
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$ |
1.5 |
|
|
$ |
13.4 |
|
|
$ |
11.8 |
|
|
$ |
26.7 |
|
Marine
Engine
|
|
|
— |
|
|
|
4.9 |
|
|
|
1.4 |
|
|
|
6.3 |
|
Bowling
& Billiards
|
|
|
1.7 |
|
|
|
11.6 |
|
|
|
5.7 |
|
|
|
19.0 |
|
Corporate
|
|
|
— |
|
|
|
— |
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
charge
|
|
$ |
3.2 |
|
|
$ |
29.9 |
|
|
$ |
19.7 |
|
|
$ |
52.8 |
|
The
Company had no comparable charges in either period of 2007.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
4 – Fair Value Measurements
Fair
value is defined under SFAS 157 as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation techniques used
to measure fair value under SFAS 157 must maximize the use of observable inputs
and minimize the use of unobservable inputs. The standard established a fair
value hierarchy based on three levels of inputs, of which the first two are
considered observable and the last unobservable.
·
|
Level
1 - Quoted prices in active markets for identical assets or liabilities.
These are typically obtained from real-time quotes for transactions in
active exchange markets involving identical
assets
|
·
|
Level
2 - Inputs, other than quoted prices included within Level 1, which are
observable for the asset or liability, either directly or indirectly.
These are typically obtained from readily-available pricing sources for
comparable instruments.
|
·
|
Level
3 - Unobservable inputs, where there is little or no market activity for
the asset or liability. These inputs reflect the reporting entity’s own
assumptions about the assumptions that market participants would use in
pricing the asset or liability, based on the best information available in
the circumstances.
|
The
following table summarizes Brunswick’s financial assets and liabilities measured
at fair value on a recurring basis in accordance with SFAS 157 as of June
28, 2008:
(in
millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Equivalents
|
|
$ |
228.9 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
228.9 |
|
Investments
|
|
|
4.4 |
|
|
|
— |
|
|
|
— |
|
|
|
4.4 |
|
Derivatives
|
|
|
— |
|
|
|
5.4 |
|
|
|
— |
|
|
|
5.4 |
|
Total
Assets
|
|
$ |
233.3 |
|
|
$ |
5.4 |
|
|
$ |
— |
|
|
$ |
238.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$ |
— |
|
|
$ |
10.8 |
|
|
$ |
— |
|
|
$ |
10.8 |
|
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
5 – Share-Based Compensation
On
January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised
2004), “Share-Based Payment,” (SFAS 123(R)), which is a revision of SFAS No.
123, “Accounting for Stock-Based Compensation.” SFAS 123R supersedes Accounting
Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS 123(R)
requires the Company to recognize all share-based payments to employees,
including grants of stock options and the compensatory elements of employee
stock purchase plans, in its income statement based upon the fair value of such
share-based payments. Share-based employee compensation cost (benefit) is
recognized as a component of Selling, general and administrative expense in the
Consolidated Statements of Income. Refer to Note 16 to the consolidated
financial statements in the 2007 Form 10-K for further details regarding the
Company’s adoption of SFAS 123(R).
Under
the 2003 Stock Incentive Plan (Plan), the Company may grant stock options, stock
appreciation rights (SARs), nonvested stock and other types of share-based
awards to executives and other management employees. Under the Plan, the Company
may issue up to 8.1 million shares, consisting of treasury shares and
authorized, but unissued shares of common stock. As of June 28, 2008, 0.5
million shares were available for grant under the Plan.
Stock
Options and SARs
Prior to
2005, the Company primarily issued share-based compensation in the form of stock
options, and had not issued any SARs. Since the beginning of 2005, the Company
has issued stock-settled SARs and has not issued any stock options. Generally,
stock options and SARs are exercisable over a period of 10 years, or as
otherwise determined by the Human Resources and Compensation Committee of the
Board of Directors, and subject to vesting periods of four years. The exercise
price of stock options and SARs issued under the Plan cannot be less than the
fair market value of the underlying shares at the date of grant.
During
the three and six months ended June 28, 2008, there were 0.0 million and 2.6
million SARs granted, respectively, which resulted in $2.4 million and $3.4
million of total expense, respectively, due to amortization of SARs granted.
During the three and six months ended June 30, 2007, there were 0.0 million and
0.9 million SARs granted, respectively, which resulted in $0.7 million and $2.4
million of total expense, respectively, due to amortization of SARs granted.
These expenses resulted in a deferred tax asset for the tax benefit to be
realized in future periods.
The
weighted average fair values of individual SARs granted were $5.71 and $9.91
during 2008 and 2007, respectively. The fair value of each grant was estimated
on the date of grant using the Black-Scholes-Merton pricing model utilizing the
following weighted average assumptions used for 2008 and 2007:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
2.9 |
% |
|
|
4.6 |
% |
Dividend
yield
|
|
|
2.3 |
% |
|
|
1.8 |
% |
Volatility
factor
|
|
|
40.1 |
% |
|
|
29.9 |
% |
Weighted
average expected life
|
5.4
- 6.2 years |
|
5.1 - 6.2 years
|
Nonvested
stock awards
The
Company issues nonvested stock awards (stock units) to key employees as
determined by the Human Resources and Compensation Committee of the Board of
Directors. In addition, employees entitled to receive cash payments under the
Company’s Strategic Incentive Plan (a long-term incentive plan for senior
employees), could have elected to receive a vested stock award instead with a 20
percent nonvested stock premium. Such awards vested at the time of deferral,
with the exception of the premium. Effective January 1, 2008, the Strategic
Incentive Plan was discontinued and, therefore, the right to receive a 20
percent nonvested stock premium no longer exists. Nonvested stock awards
(including the premium) have vesting periods of three or four years and are
eligible for dividends, which are reinvested and non-voting. All nonvested
awards have restrictions on the sale or transfer of such awards during the
nonvested period.
In 2008,
performance share awards were issued to senior management. The number of
performance share awards earned will be based on achieving key strategic and
financial goals by 2010. A portion of the payout will be based on relative total
shareholder return versus the S&P 500. Prior to any award being earned, the
Company must meet a minimum stock price threshold.
The cost
of nonvested stock awards is recognized on a straight-line basis over the
requisite service period. During the three and six months ended June 28, 2008,
there were 0.0 million and 0.9 million stock awards granted under these plans,
respectively, and, due to amortization of stock awards granted, $2.1 million and
$2.8 million was charged to compensation expense under these plans,
respectively. During the three and six months ended June 30, 2007, there were
0.0 million and 0.1 million stock awards granted under these plans,
respectively, and, due to amortization of stock awards granted, $0.9 million and
$2.3 million was charged to compensation expense under these plans,
respectively.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
|
The
weighted average price per nonvested stock award at grant date was $15.84 and
$33.00 for the nonvested stock awards granted in 2008 and 2007, respectively. As
of June 28, 2008, there was $17.2 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 2.0 years.
Generally,
grants of nonvested stock options, SARs and stock units are forfeited if
employment is terminated prior to vesting. However, with respect to stock
options and SARs, all grants vest immediately: (i) in the event of a change in
control; (ii) upon death or disability of the grantee; and (iii) beginning in
2007, upon the sale or divestiture of the business unit to which the grantee is
assigned. Stock option and SARs grants made prior to 2006 also vest immediately
if the sum of (A) the age of the grantee and (B) the grantee’s total number of
years of service, equals 65 or more; grants made in 2006 and later vest
immediately if (A) the grantee has attained the age of 62 and (B) the grantee’s
age plus total years of service equals 70 or more. Nonvested stock awards
granted prior to 2006 vest pro rata if the sum of (A) the age of the grantee and
(B) the grantee’s total number of years of service equals 65 or more; grants
made in 2006 and later vest pro rata if (A) the age of grantee and (B) the
grantee’s total number of years of service equals 70 or more.
Director
Awards
The
Company issues stock awards to directors in accordance with the terms and
conditions determined by the Nominating and Corporate Governance Committee of
the Board of Directors. One-half of each director’s annual fee is paid in
Brunswick common stock, the receipt of which may be deferred until a director
retires from the Board of Directors. Each director may elect to have the
remaining one-half paid either in cash, in Brunswick common stock distributed at
the time of the award, or in deferred Brunswick common stock units with a 20
percent premium. Each non-employee director is also entitled to an annual grant
of restricted stock units, which is deferred until the director retires from the
Board.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
6 – 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 2.2 million shares and 2.7 million
shares in the three and six months ended June 28, 2008, respectively, versus the
comparable periods in 2007, primarily due to the effect of the Company’s share
repurchase program, as discussed in Note 14 – Share Repurchase
Program.
Basic and
diluted earnings per share for the three and six months ended June 28, 2008, and
for the comparable periods ended June 30, 2007, were calculated as
follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(in
millions, except per share data)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from continuing operations
|
|
$ |
(6.0 |
) |
|
$ |
56.9 |
|
|
$ |
7.3 |
|
|
$ |
91.2 |
|
Earnings
from discontinued operations, net of tax
|
|
|
– |
|
|
|
0.6 |
|
|
|
– |
|
|
|
4.0 |
|
Gain
(loss) on disposal of discontinued operations, net of tax
|
|
|
– |
|
|
|
(0.2 |
) |
|
|
– |
|
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$ |
(6.0 |
) |
|
$ |
57.3 |
|
|
$ |
7.3 |
|
|
$ |
102.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares – basic
|
|
|
88.3 |
|
|
|
90.5 |
|
|
|
88.3 |
|
|
|
91.0 |
|
Dilutive
effect of common stock equivalents
|
|
|
– |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares – diluted
|
|
|
88.3 |
|
|
|
91.0 |
|
|
|
88.4 |
|
|
|
91.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from continuing operations
|
|
$ |
(0.07 |
) |
|
$ |
0.63 |
|
|
$ |
0.08 |
|
|
$ |
1.00 |
|
Earnings
from discontinued operations, net of tax
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
0.04 |
|
Gain
(loss) on disposal of discontinued operations, net of tax
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$ |
(0.07 |
) |
|
$ |
0.63 |
|
|
$ |
0.08 |
|
|
$ |
1.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$ |
(0.07 |
) |
|
$ |
0.63 |
|
|
$ |
0.08 |
|
|
$ |
1.00 |
|
Earnings
from discontinued operations, net of tax
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
0.04 |
|
Gain
(loss) on disposal of discontinued operations, net of tax
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$ |
(0.07 |
) |
|
$ |
0.63 |
|
|
$ |
0.08 |
|
|
$ |
1.13 |
|
As of
June 28, 2008, there were 6.7 million options outstanding, of which 3.1 million
were exercisable. This compares to 4.4 million options outstanding, of which 2.5
million were exercisable as of June 30, 2007. During the three and six months
ended June 28, 2008, there were 6.7 million and 5.9 million weighted average
shares of options outstanding, respectively, for which the exercise price, based
on the average price, was higher 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 2.9 million and 2.7 million anti-dilutive
options that were excluded from the corresponding periods ended June 30, 2007.
During the three months ended June 28, 2008, the Company incurred a net loss
from continuing operations. As common stock equivalents have an anti-dilutive
effect on the net loss, the equivalents were not included in the computation of
diluted earnings per share for the three months ended June 28,
2008.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
7 – Commitments and Contingencies
Financial
Commitments
The
Company has entered into guarantees of indebtedness of third parties, which
primarily relate to 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 collection of
customer receivables sold to third parties by Brunswick. In most instances, upon
repurchase of the debt obligation, the Company receives rights to the collateral
securing the financing. The maximum potential cash obligation associated with
these customer financing arrangements was $101.7 million, as of June 28, 2008,
of which $37.0 million is related to the Fitness segment, $31.7 million is
related to the Marine Engine segment, $30.1 million is related to the Bowling
& Billiards segment and $2.9 million is related to the Boat segment.
Potential payments on these customer financing arrangements would extend over
several years with the maximum single year obligation related to these
arrangements of $72.6 million, of which $25.6 million is related to the Fitness
segment, $31.7 million is related to the Marine Engine segment, $12.4 million is
related to the Bowling & Billiards segment and $2.9 million is related to
the Boat segment.
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, select Brunswick products repossessed from the customer.
These arrangements are typically subject to repurchase criteria and 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 collateral the Company could be required to purchase was $186.5
million as of June 28, 2008, with $151.5 million relating to the Company’s U.S.
boat business. The maximum single year repurchase obligation is $138.4 million,
with $112.3 million relating to the Company’s U.S. boat business.
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,” the Company has recorded the estimated net
liability associated with losses from these guarantee and repurchase obligations
on its Condensed Consolidated Balance Sheets. Historical cash requirements and
losses associated with these obligations have not been significant, but could
increase if dealer defaults increase as a result of the difficult market
conditions in the United States.
Financial
institutions have issued standby letters of credit and surety bonds
conditionally guaranteeing obligations on behalf of the Company totaling $75.7
million as of June 28, 2008. 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, a ratings downgrade below investment grade, the Company
could be required to post collateral to support the outstanding letters of
credit and surety bonds. As a result of the recent downgrade of the Company’s
long-term debt by one of the rating agencies, the Company may be required to
post letters of credit as collateral against a portion of surety bonds totaling
$8.3 million.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
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 as well as 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
during the six months ended June 28, 2008:
(in
millions)
|
|
2008
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
163.9 |
|
Payments
made
|
|
|
(57.5 |
) |
Provisions/additions
for contracts issued/sold
|
|
|
56.0 |
|
Aggregate
changes for preexisting warranties
|
|
|
— |
|
|
|
|
|
|
Balance
at end of period
|
|
$ |
162.4 |
|
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 $20.2 million as of June 28, 2008.
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.
Refer to
Note 11 to the consolidated financial statements in the 2007 Form 10-K for
discussion of other legal and environmental matters as of December 31,
2007.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note 8 – Segment
Data
Brunswick
is a manufacturer and marketer of leading consumer brands, and operates in four
reportable segments: Boat, Marine Engine, Fitness and Bowling & Billiards.
The Company’s segments are defined by management reporting structure and
operating activities.
The
Company evaluates performance based on business segment operating earnings.
Operating earnings of segments do not include the expenses of corporate
administration, earnings from equity affiliates, other expenses and income of a
non-operating nature, interest expense and income or provisions for income
taxes.
Corporate/Other
results include items such as corporate staff and overhead costs as well as the
financial results of the Company’s joint venture, Brunswick Acceptance Company,
LLC (BAC), which is discussed in further detail in Note 11 – Financial Services.
Corporate/Other assets consist primarily of cash and marketable securities,
prepaid income taxes and investments in unconsolidated affiliates. Marine
eliminations are eliminations between the Marine Engine and Boat segments for
sales transactions consummated at established arm’s length transfer
prices.
The
following table sets forth net sales and operating earnings (loss) of each of
the Company’s reportable segments for the three months ended June 28, 2008, and
June 30, 2007:
|
|
Net
Sales
|
|
|
Operating
Earnings (Loss)
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$ |
687.9 |
|
|
$ |
732.8 |
|
|
$ |
(37.7 |
) |
|
$ |
19.3 |
|
Marine
Engine
|
|
|
643.5 |
|
|
|
669.6 |
|
|
|
54.4 |
|
|
|
80.3 |
|
Marine
eliminations
|
|
|
(113.1 |
) |
|
|
(126.7 |
) |
|
|
– |
|
|
|
– |
|
Total
Marine
|
|
|
1,218.3 |
|
|
|
1,275.7 |
|
|
|
16.7 |
|
|
|
99.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fitness
|
|
|
156.9 |
|
|
|
144.0 |
|
|
|
8.2 |
|
|
|
7.4 |
|
Bowling
& Billiards
|
|
|
110.4 |
|
|
|
103.2 |
|
|
|
(19.8 |
) |
|
|
(2.7 |
) |
Eliminations
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Corporate/Other
|
|
|
(0.2 |
) |
|
|
– |
|
|
|
(22.3 |
) |
|
|
(18.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,485.4 |
|
|
$ |
1,522.9 |
|
|
$ |
(17.2 |
) |
|
$ |
86.3 |
|
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
The
following table sets forth net sales and operating earnings (loss) of each of
the Company’s reportable segments for the six months ended June 28, 2008, and
June 30, 2007:
|
|
Net
Sales
|
|
|
Operating
Earnings (Loss)
|
|
|
|
Six
Months Ended
|
|
|
Six
Months Ended
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$ |
1,325.7 |
|
|
$ |
1,431.8 |
|
|
$ |
(52.4 |
) |
|
$ |
38.8 |
|
Marine
Engine
|
|
|
1,209.5 |
|
|
|
1,242.2 |
|
|
|
85.3 |
|
|
|
115.0 |
|
Marine
eliminations
|
|
|
(232.9 |
) |
|
|
(262.9 |
) |
|
|
– |
|
|
|
– |
|
Total
Marine
|
|
|
2,302.3 |
|
|
|
2,411.1 |
|
|
|
32.9 |
|
|
|
153.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fitness
|
|
|
306.1 |
|
|
|
289.0 |
|
|
|
16.3 |
|
|
|
15.5 |
|
Bowling
& Billiards
|
|
|
224.0 |
|
|
|
209.0 |
|
|
|
(18.9 |
) |
|
|
5.6 |
|
Eliminations
|
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
– |
|
|
|
– |
|
Corporate/Other
|
|
|
– |
|
|
|
– |
|
|
|
(37.2 |
) |
|
|
(35.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,832.2 |
|
|
$ |
2,909.0 |
|
|
$ |
(6.9 |
) |
|
$ |
139.3 |
|
Note
9 – Investments
The
Company has certain unconsolidated international and domestic affiliates that
are accounted for using the equity method. See Note 11 – Financial Services
for more details on the Company’s joint venture, Brunswick Acceptance Company,
LLC (BAC). Refer to Note 8 to the consolidated financial statements in the 2007
Form 10-K for further detail relating to the Company’s investments.
In March
2008, Brunswick sold its interest in its bowling joint venture in Japan for
$40.4 million gross cash proceeds, $37.4 million net of cash paid for taxes and
other costs, after post-closing adjustments. For the six months ended June 28,
2008, the sale resulted in a $20.9 million pretax gain, $9.9 million after-tax,
and was recorded as an Investment sale gain in the Consolidated Statements of
Income. As a result of post-closing adjustments made during the second quarter,
an additional $1.2 million pretax gain, $0.8 million after-tax, was recorded as
an Investment sale gain in the Consolidated Statements of Income.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
10 – Comprehensive Income
The
Company reports certain changes in equity during a period in accordance with
SFAS No. 130, “Reporting Comprehensive Income.” Accumulated other comprehensive
loss includes prior service costs and net actuarial gains and losses for defined
benefit plans; foreign currency cumulative translation adjustments; and
unrealized derivative and investment gains and losses, all net of tax. Effective
December 31, 2006, the Company adopted the provisions of 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),
eliminating the minimum pension liability concept under which adjustments were
recorded to other comprehensive income. The Company’s adoption of SFAS 158 also
required the inclusion of prior service costs and net actuarial gains and losses
in other comprehensive income (loss). Components of other comprehensive income
(loss) for the three months and six months ended June 28, 2008, and June 30,
2007, were as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$ |
(6.0 |
) |
|
$ |
57.3 |
|
|
$ |
7.3 |
|
|
$ |
102.9 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency cumulative translation adjustment
|
|
|
4.8 |
|
|
|
6.6 |
|
|
|
16.1 |
|
|
|
2.6 |
|
Net
change in unrealized gains (losses) on investments
|
|
|
(1.1 |
) |
|
|
0.1 |
|
|
|
(2.5 |
) |
|
|
0.1 |
|
Net
change in unamortized prior service cost
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
1.1 |
|
|
|
1.1 |
|
Net
change in unamortized actuarial loss
|
|
|
0.4 |
|
|
|
1.3 |
|
|
|
1.1 |
|
|
|
2.6 |
|
Net
change in accumulated unrealized derivative
gains (losses)
|
|
|
4.9 |
|
|
|
(0.5 |
) |
|
|
3.3 |
|
|
|
(0.1 |
) |
Total
other comprehensive income (loss)
|
|
|
9.6 |
|
|
|
8.1 |
|
|
|
19.1 |
|
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
3.6 |
|
|
$ |
65.4 |
|
|
$ |
26.4 |
|
|
$ |
109.2 |
|
Note
11 – Financial Services
The
Company, through its Brunswick Financial Services Corporation (BFS) subsidiary,
owns a 49 percent interest in a joint venture, Brunswick Acceptance Company, LLC
(BAC). CDF Ventures, LLC (CDFV), a subsidiary of GE Capital Corporation (GECC),
owns the remaining 51 percent. BAC commenced operations in 2003 and provides
secured wholesale inventory floor-plan financing to Brunswick’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.
During
the second quarter of 2008, the parties agreed to extend the term of the venture
through June 30, 2014. The joint venture
agreement contains provisions allowing for renewal, purchase, or termination by
either of the partners at the end of this term or subsequent extensions.
The agreement also contains provisions allowing CDFV to terminate the
joint venture if the Company is unable to maintain compliance with certain
financial metrics. The Company was in compliance with these metrics at the end
of the second quarter.
BAC is
funded in part through a $1.0 billion secured borrowing facility from GE
Commercial Distribution Finance Corporation (GECDF), which is in place through
the term of the joint venture, and with equity contributions from both partners.
BAC also sells a portion of its receivables to a securitization facility, the GE
Dealer Floorplan Master Note Trust, which is arranged by GECC. The sales of
these receivables meet the requirements of a “true sale” under SFAS No.
140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities – a replacement of FASB Statement No. 125,” (SFAS
140), and are
therefore not retained on the financial statements of BAC. The indebtedness of
BAC is not guaranteed by the Company or any of its subsidiaries. In addition,
BAC is not responsible for any continuing servicing costs or obligations with
respect to the securitized receivables.
BFS’s
investment in BAC is accounted for by the Company under the equity method and is
recorded as a component of Investments in its Condensed 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. BFS and GECDF also have an
income sharing arrangement related to income generated from the receivables sold
by BAC to the securitization facility.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
|
BFS’s
equity investment is adjusted monthly to maintain a 49 percent interest in
accordance with the capital provisions of the joint venture agreement. The
Company funds its investment in BAC through cash contributions and reinvested
earnings. BFS’s total investment in BAC at June 28, 2008, and December 31, 2007,
was $34.0 million and $47.0 million, respectively.
BFS
recorded income related to the operations of BAC of $2.9 million and $5.7
million for the three months and six months ended June 28, 2008, respectively.
These amounts compare to $3.3 million and $6.7 million in the corresponding
periods ended June 30, 2007, respectively. These amounts include amounts earned
by BFS under the aforementioned income sharing agreement, but exclude the
discount expense paid by the Company on the sale of Mercury Marine’s accounts
receivable to the joint venture noted below.
Accounts
receivable totaling $234.8 million and $443.9 million were sold to BAC during
the three months and six months ended June 28, 2008, respectively, compared with
$252.4 million and $460.6 million during the corresponding periods ended June
30, 2007. Discounts of $1.5 million and $3.3 million for the three months and
six months ended June 28, 2008, respectively, have been recorded as an
expense in Other expense, net, in the Consolidated Statements of Income. These
amounts compare with $2.2 million and $4.1 million for the same periods in the
prior year. The outstanding balance of receivables sold to BAC was $107.8
million as of June 28, 2008, up from $93.1 million as of December 31, 2007.
Pursuant to the joint venture agreement, BAC reimbursed Mercury Marine $1.2
million and $1.1 million for the six months ended June 28, 2008, and June 30,
2007, respectively, for the related credit, collection and administrative costs
incurred in connection with the servicing of such receivables.
As of
June 28, 2008, and December 31, 2007, the Company had a retained interest in
$41.3 million and $46.4 million of the total outstanding accounts receivable
sold to BAC, respectively. The Company’s maximum exposure as of June 28, 2008,
and December 31, 2007, related to these amounts was $25.1 million and $28.9
million, respectively. In accordance with SFAS 140, 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 Condensed
Consolidated Balance Sheets. These balances are included in the amounts in Note 7 – Commitments and
Contingencies.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
12 – Income Taxes
The
Company recognized an income tax benefit for both the three months and six
months ended June 28, 2008. The effective tax rate from continuing operations,
which is based on an income tax benefit, for the three months and six months
ended June 28, 2008, was 68.2 percent and 5.0 percent, respectively. The
effective tax rate benefit for the three months ended June 28, 2008, was higher
than the statutory rate primarily due to the $2.5 million of tax benefits
related to an interest refund received from the IRS. Additionally, for the six
months ended June 28, 2008, the effective tax rate was lower than the statutory
rate primarily due to the interest refund received from the IRS, but was
partially offset by a higher tax rate on the sale of the Company’s interest in
its bowling joint venture in Japan.
The
Company’s effective tax rate from continuing operations for the three months and
six months ended June 30, 2007, was 30.8 percent and 29.5 percent, respectively.
The effective tax rates for both periods were lower than the statutory rate
mainly due to the favorable effect of the research and development tax credit.
Additionally, the effective tax rate for the six months ended June 30, 2007, was
lower than the statutory rate primarily due to $1.9 million of special benefits,
primarily related to the Company’s election to apply the indefinite reversal
criterion of Accounting Principles Board No. 23, “Accounting for Income Taxes –
Special Areas,” (APB 23) as discussed in the following paragraphs.
The
Company has historically provided deferred taxes under APB 23 for the presumed
ultimate repatriation to the United States of earnings from all non-U.S.
subsidiaries and unconsolidated affiliates. The indefinite reversal criterion of
APB 23 allows the Company to overcome that presumption to the extent the
earnings are indefinitely reinvested outside the United States.
As of
January 1, 2007, the Company determined that approximately $25.8 million of
certain additional foreign subsidiaries’ current undistributed net earnings, as
well as the future net earnings, will be permanently reinvested. As a result of
the additional APB 23 change in assertion, the Company reduced its deferred tax
liabilities related to undistributed foreign earnings by $2.0 million during the
first quarter of 2007.
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes,” (FIN 48) on January 1, 2007. As a result of the
implementation of FIN 48, the Company recognized an $8.7 million decrease in the
net liability for unrecognized tax benefits, which was accounted for as an
increase to the January 1, 2007, balance of retained earnings.
As of
June 30, 2008, and December 31, 2007, the Company had approximately $36 million
and $39 million of gross unrecognized tax benefits, excluding interest. The
Company believes it is reasonably possible that the total amount of gross
unrecognized tax benefits, as of June 30, 2008, could decrease by approximately
$1 million in the next 12 months due to settlements with taxing
authorities.
The
Company recognizes interest and penalties related to unrecognized tax benefits
in income tax expense. As of June 30, 2008, and December 31, 2007, the Company
had approximately $6.0 million and $5.4 million accrued for the payment of
interest. There were no amounts accrued for penalties at either June 30, 2008,
or December 31, 2007.
The
Company is regularly audited by federal, state and foreign tax authorities. The
IRS has completed its audits of the Company’s United States income tax returns
through the 2003 taxable year and is currently auditing the Company’s United
States income tax returns for taxable years 2004 and 2005. Primarily as a result
of filing amended tax returns, which were generated by the closing of federal
income tax audits, the Company is still open to state and local audits dating
back to the 1986 taxable year. With the exception of Germany, where the Company
is currently undergoing a tax audit for taxable years 1998 through 2001, the
Company is no longer subject to income tax examinations by any other major
foreign tax jurisdiction tax authorities for years prior to 2001.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
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. On December 31, 2006, the Company adopted the provisions of SFAS 158,
which requires recognition of the overfunded or underfunded status of pension
and other postretirement plans 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 was adopted on a prospective basis, as
required. Prior years’ amounts have not been restated. Effective for the year
ended December 31, 2007, SFAS 158 also required measurement of a plan’s assets
and benefit obligations as of the date of the employer’s fiscal year end. As the
Company already measured plan assets and benefit obligations as of December 31,
2006, the adoption of this element of SFAS 158 had no impact on the Company in
2007. See Note 15 to the consolidated financial statements in the 2007 Form 10-K
for further details regarding these plans.
Pension
and other postretirement benefit costs included the following components for the
three months ended June 28, 2008, and June 30, 2007:
|
|
Pension
Benefits
|
|
|
Other
Postretirement
Benefits
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
3.7 |
|
|
$ |
4.4 |
|
|
$ |
0.8 |
|
|
$ |
0.8 |
|
Interest
cost
|
|
|
16.9 |
|
|
|
15.7 |
|
|
|
1.7 |
|
|
|
1.9 |
|
Expected
return on plan assets
|
|
|
(21.0 |
) |
|
|
(20.5 |
) |
|
|
– |
|
|
|
– |
|
Amortization
of prior service costs
|
|
|
1.6 |
|
|
|
1.6 |
|
|
|
(0.5 |
) |
|
|
(0.5 |
) |
Amortization
of net actuarial loss
|
|
|
0.9 |
|
|
|
1.8 |
|
|
|
– |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
pension and other benefit costs
|
|
$ |
2.1 |
|
|
$ |
3.0 |
|
|
$ |
2.0 |
|
|
$ |
2.5 |
|
Pension
and other postretirement benefit costs included the following components for the
six months ended June 28, 2008, and June 30, 2007:
|
|
Pension
Benefits
|
|
|
Other
Postretirement
Benefits
|
|
|
|
Six
Months Ended
|
|
|
Six
Months Ended
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
7.5 |
|
|
$ |
8.7 |
|
|
$ |
1.5 |
|
|
$ |
1.5 |
|
Interest
cost
|
|
|
33.8 |
|
|
|
31.4 |
|
|
|
3.3 |
|
|
|
3.3 |
|
Expected
return on plan assets
|
|
|
(42.0 |
) |
|
|
(40.9 |
) |
|
|
– |
|
|
|
– |
|
Amortization
of prior service costs
|
|
|
3.2 |
|
|
|
3.2 |
|
|
|
(0.9 |
) |
|
|
(0.9 |
) |
Amortization
of net actuarial loss
|
|
|
1.8 |
|
|
|
3.6 |
|
|
|
– |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
pension and other benefit costs
|
|
$ |
4.3 |
|
|
$ |
6.0 |
|
|
$ |
3.9 |
|
|
$ |
4.4 |
|
Employer Contributions.
During the six months ended June 28, 2008, the Company contributed $1.1
million to fund benefit payments to its nonqualified plan. The Company’s plans
for additional contributions are subject to equity market returns and discount
rate movements, among other items.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
14 – Share Repurchase Program
In the
second quarter of 2005, Brunswick’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. The Company expects to
repurchase shares on the open market or in private transactions from time to
time, depending on market conditions and the Company’s financial objectives. The
Company has not repurchased any shares during 2008. During the three months and
six months ended June 30, 2007, the Company repurchased 1.6 million and 2.6
million shares under this program for $53.8 million and $87.2 million,
respectively. Through the second quarter of 2008, the Company had repurchased
approximately 11.7 million shares for $397.4 million since the program’s
inception. As of June 28, 2008, the Company’s remaining share repurchase
authorization for the program was $240.4 million; however, the Company
intends to retain cash to enhance its liquidity rather than repurchasing
shares.
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. Specifically, the discussion of the Company’s cash flows
includes an analysis of free cash flows. GAAP refers to generally accepted
accounting principles in the United States. 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.
The
Company includes non-GAAP financial measures in Management’s Discussion and
Analysis. Brunswick’s management believes that these measures and the
information they provide are useful to investors because they permit investors
to view Brunswick’s performance using the same tools that Brunswick uses and to
better evaluate its ongoing business performance.
Certain
other statements in Management’s Discussion and Analysis are forward-looking as
defined in the Private Securities Litigation Reform Act of 1995. These
statements are based on current expectations that are subject to risks and
uncertainties. Actual results may differ materially from expectations as of the
date of this filing because of factors discussed in Item 1A – Risk Factors of
Brunswick’s 2007 Annual Report on Form 10-K (the 2007 Form 10-K).
Overview
and Outlook
General
Net sales
from continuing operations during the second quarter of 2008 decreased 2.5
percent to $1,485.4 million from $1,522.9 million in 2007. During the six months
ended June 28, 2008, net sales decreased 2.6 percent to $2,832.2 million from
$2,909.0 million during the six months ended June 30, 2007. For the three months
and six months ended June 28, 2008, the Company reported higher sales in the
Fitness and Bowling & Billiards segments, as well as higher sales outside
the United States for all segments, which were more than offset by a reduction
in the Boat and Marine Engine segments’ sales in the United States. The overall
decrease in sales in the United States was primarily due to the continued
reduction in marine industry demand as a result of a weak U.S. economy, soft
housing markets in key U.S. boating states, and higher food and fuel prices that
ultimately reduce the funds available for discretionary purchases. Retail unit
sales of powerboats in the United States have been declining since 2005, with
the rate of decline accelerating in 2008. Industry retail unit sales were down
significantly during the first half of 2008 compared with the already low retail
unit sales during the first half of 2007.
Quarterly
and year-to-date operating losses from continuing operations of $17.2 million
and $6.9 million, and negative operating margins of 1.2 percent and 0.2 percent,
respectively, decreased from the same periods in the prior year, primarily as a
result of lower sales from marine operations, reduced fixed-cost absorption due
to reduced production rates in the Company’s marine businesses in an effort to
achieve appropriate levels of dealer pipeline inventories and higher
restructuring, exit and impairment charges. These factors were partially offset
by successful cost-reduction initiatives, as discussed in Note 3 – Restructuring
Activities in the Notes to Consolidated Financial Statements. In the
three months and six months ended June 30, 2007, the Company reported operating
earnings from continuing operations of $86.3 million and $139.3 million with
related operating margins of 5.7 percent and 4.8 percent,
respectively.
During
the first quarter of 2008, the Company signed a letter of intent to sell certain
assets of its Baja boat business (Baja) to Fountain Powerboat Industries, Inc.
(Fountain). The transaction was aimed at further refining the Company’s product
portfolio and focusing its resources on brands and marine segments that are
considered to be core to the Company’s future success. The Company ramped down
production at its Bucyrus, Ohio, plant through the end of May, when the sale was
completed. The Company estimates that asset write-downs, along with severance
and other costs associated with the Baja plant closure, will total approximately
$15 million in 2008. In addition to the $8.9 million charge taken during the
first quarter of 2008, Brunswick incurred an additional $4.5 million during the
second quarter of 2008 related to the sale of Baja assets to Fountain. The
majority of the $13.4 million charge consists of asset write-downs related to
selected assets sold to Fountain and the residual assets expected to be sold to
third parties.
In March
2008, Brunswick sold its interest in its bowling joint venture in Japan for
$40.4 million gross cash proceeds, $37.4 million net of cash paid for taxes and
other costs, after post-closing adjustments. For the six months ended June
28, 2008, the sale resulted in a $20.9 million pretax gain, $9.9 million
after-tax, and was recorded as an Investment sale gain in the Consolidated
Statements of Income. As a result of post-closing adjustments made during the
second quarter, an additional $1.2 million pretax gain, $0.8 million after-tax,
was recorded as an Investment sale gain in the Consolidated Statements of
Income.
During
the second quarter of 2008, the Company ceased production of boats for its
Bluewater Marine group, including Sea Pro, Sea Boss, Palmetto and Laguna brands,
which were manufactured at its Newberry, South Carolina, facility. As a result,
the Company incurred a $20.8 million charge during the second quarter of 2008.
The majority of the $20.8 million charge consists of asset write-downs related
to selected assets being disposed. The Company estimates that total asset
write-downs, along with severance and other costs associated with the closure of
the Newberry, South Carolina, facility, could total between $25 million and $30
million.
During
the second quarter of 2008, the Company determined that it would evaluate a
potential sale of its Valley-Dynamo coin-operated commercial billiards business.
The Company plans to concentrate its efforts on more profitable lines of
business such as its Brunswick branded billiards tables, furniture, and
accessories and its consumer Dynamo, Tornado and Valley pool tables, Air Hockey
and foosball tables. During the second quarter of 2008, Brunswick incurred a
$17.8 million charge for asset write-downs related to the potential sale of its
Valley coin-operated commercial billiards operations. The Company estimates that
total asset write-downs, along with severance and other costs associated with
this transaction, could total between $20 million and $25 million.
The
Company intends to continue its efforts to achieve appropriate levels of marine
dealer inventories by reducing production of boats and marine engines in line
with reduced domestic retail demand for marine products. The Company anticipates
that marine sales will benefit from the introduction of new products and the
continued growth in markets outside the United States. Sales in 2008 for both
the Fitness and Bowling & Billiards segments are expected to increase as a
result of new product launches at Life Fitness and the continued opening of new
Brunswick Zone XL retail bowling centers.
The
Company expects operating earnings and margins for 2008 to decrease as a result
of restructuring, exit and impairment charges; reduced marine sales; weak demand
for certain consumer products; and production declines. As a result of these
factors, the Company may be required to conduct an impairment review of affected
business assets. An adverse outcome from such a review could directly affect
operating earnings and margins. These factors, along with planned restructuring
activities, continued increases in raw material, production, and freight and
distribution costs are not expected to be fully offset by growth in Fitness and
Bowling & Billiards operations, growth in operations outside the United
States and the benefits from restructuring and cost containment efforts
undertaken during 2007 and 2008.
Brunswick’s
stock has been trading below its book value per share in recent months. While
the Company has a plan to restore its business operations to levels that would
support its book value per share, as discussed in Note 3 – Restructuring
Activities in the Notes to Consolidated Financial Statements, it has no
assurance that the plan will be achieved or that the market price of its common
stock will increase to such levels in the foreseeable future. As a result, the
Company may be required to take an impairment charge to the extent that the
carrying value of its goodwill exceeds the implied fair value of reporting unit
goodwill.
Brunswick’s
effective tax rate in 2008 is expected to be 33 percent, which reflects the
absence of the research and development tax credit as Congress has not yet
extended that benefit, and excludes the effect of taxes on restructuring, exit
and impairment charges and the additional tax provisions realized in conjunction
with the sale of its joint venture in Japan, as previously
described.
In June
2008, the Company renewed its Marine Engine segment's union contract with the
International Association of Machinists for the Fond du Lac, Wisconsin facility
for an additional four years.
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, consisting of
the Company’s marine electronics, portable navigation device (PND) and wireless
fleet tracking businesses. During the second quarter of 2006, Brunswick 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. The Company
completed the divestiture of the BNT discontinued operations in
2007.
Matters
Affecting Comparability
The
following events have occurred during the three months and six months ended June
28, 2008, and June 30, 2007, which the Company believes affect the comparability
of the results of operations:
Restructuring, exit and impairment
charges. In November 2006, Brunswick announced initiatives to improve the
Company’s cost structure, better utilize overall capacity and improve general
operating efficiencies. During the second quarter of 2008, the Company recorded
a charge of $83.1 million related to restructuring activities as compared with
$1.1 million in the second quarter of 2007. During the first six months of 2008,
the Company recorded a charge of $105.3 million related to restructuring
activities as compared with $8.7 million during the first six months of 2007.
See Note 3 – Restructuring
Activities in the Notes to Consolidated Financial Statements for further
details.
Investment sale gain. In
March 2008, Brunswick sold its interest in its bowling joint venture in Japan
for $40.4 million gross cash proceeds, $37.4 million net of cash paid for taxes
and other costs, after post-closing adjustments. For the six months ended June
28, 2008, the sale resulted in a $20.9 million pretax gain, $9.9 million
after-tax, and was recorded as an Investment sale gain in the Consolidated
Statements of Income. As a result of post-closing adjustments made during the
second quarter, an additional $1.2 million pretax gain, $0.8 million after-tax,
was recorded as an Investment sale gain in the Consolidated Statements of
Income.
Tax Items. The comparison of
net earnings per diluted share between 2008 and 2007 is affected by special tax
items. During the three months and six months ended June 28, 2008, the Company
recognized $2.5 million and $2.0 million of tax benefits, respectively,
primarily from an interest refund received from the Internal Revenue Service
(IRS). During the three months and six months ended June 30, 2007, the Company
reduced its tax provision by $2.3 million and $1.9 million, respectively,
primarily as a result of its election to apply the indefinite reversal criterion
of APB 23 to the undistributed net earnings of certain foreign subsidiaries, as
discussed in Note 12 – Income
Taxes in the Notes to Consolidated Financial Statements. The Company
determined that approximately $25.8 million of undistributed net earnings, as
well as the future net earnings, of these foreign subsidiaries will be
indefinitely reinvested in operations outside of the United States.
Results
of Operations
Consolidated
The
following table sets forth certain amounts, ratios and relationships calculated
from the Consolidated Statements of Income for the three months
ended:
|
|
|
|
|
2008
vs. 2007
|
|
|
|
Three
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions, except per share data)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,485.4 |
|
|
$ |
1,522.9 |
|
|
$ |
(37.5 |
) |
|
|
(2.5 |
)% |
Gross
margin (A)
|
|
$ |
303.4 |
|
|
$ |
332.6 |
|
|
$ |
(29.2 |
) |
|
|
(8.8 |
)% |
Restructuring,
exit and impairment charges
|
|
$ |
83.1 |
|
|
$ |
1.1 |
|
|
$ |
82.0 |
|
|
NM
|
|
Operating
earnings (loss)
|
|
$ |
(17.2 |
) |
|
$ |
86.3 |
|
|
$ |
(103.5 |
) |
|
NM
|
|
Net
earnings (loss) from continuing operations
|
|
$ |
(6.0 |
) |
|
$ |
56.9 |
|
|
$ |
(62.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share from continuing
operations
|
|
$ |
(0.07 |
) |
|
$ |
0.63 |
|
|
$ |
(0.70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expressed
as a percentage of Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
20.4 |
% |
|
|
21.8 |
% |
|
|
|
|
|
(140
|
)bpts |
Selling,
general and administrative expense
|
|
|
13.8 |
% |
|
|
13.7 |
% |
|
|
|
|
|
10
|
bpts |
Research
and development expense
|
|
|
2.2 |
% |
|
|
2.3 |
% |
|
|
|
|
|
(10
|
)bpts |
Restructuring,
exit and impairment charges
|
|
|
5.6 |
% |
|
|
0.1 |
% |
|
|
|
|
|
550
|
bpts |
Operating
margin
|
|
|
(1.2 |
)% |
|
|
5.7 |
% |
|
|
|
|
|
(690
|
)bpts |
__________
bpts
= basis points
NM
= not meaningful
(A)
|
Gross margin is defined as Net sales less Cost of sales as presented in
the Consolidated Statements of
Income. |
The
decrease in net sales was primarily due to reduced U.S. marine industry demand
compared with the second quarter of 2007. This decrease was partially offset by
strong sales of commercial fitness equipment and bowling products, additional
contributions from recently opened Brunswick Zone XL centers, growth in non-U.S.
markets, and the favorable translation effects resulting from the weakening U.S.
dollar.
The
decrease in gross margin percentage in the second quarter of 2008 compared with
the same period last year was primarily due to 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 and higher raw material and component costs. This
decrease was partially offset by successful cost-reduction efforts.
Selling,
general and administrative expense decreased by $4.0 million to $205.5 million
in the second quarter of 2008. The decrease was primarily driven by successful
cost reduction initiatives, but was partially offset by increased variable
compensation expense and the effect of unfavorable foreign currency
translation.
During
the second quarter of 2008, the Company announced additional restructuring
activities including the closing of its production facility in Newberry, South
Carolina, as a result of the decision to cease production of its Bluewater
Marine brands, including Sea Pro, Sea Boss, Palmetto and Laguna, the write-down
of certain assets of the Valley-Dynamo coin-operated commercial billiards
business and the reduction of its employee workforce across the Company. These
restructuring activities led to the increase in restructuring, exit and
impairment charges. See Note 3
– Restructuring Activities in the Notes to Consolidated Financial
Statements for further details.
The
decrease in operating earnings was mainly due to reduced sales volumes and the
unfavorable factors affecting gross margin and restructuring, exit and
impairment activities discussed above.
Interest
expense decreased $1.9 million in the second quarter of 2008 compared with the
same period in 2007, primarily as a result of lower short-term borrowings and
lower interest rates on outstanding debt in 2008. Interest income decreased $0.4
million in the second quarter of 2008 compared with the same period in 2007,
primarily as a result of a decline in interest rates on
investments.
The
Company’s effective tax rate in the second quarter of 2008 changed to a 68.2
percent tax benefit, from a 30.8 percent tax provision in the comparable period
of 2007. The tax rate change was mostly due to $2.5 million of tax benefits
primarily related to an interest refund received from the IRS.
Net
earnings from continuing operations and diluted earnings per share from
continuing operations decreased primarily due to the same factors discussed
above with respect to operating earnings.
Weighted
average common shares outstanding used to calculate diluted earnings per share
decreased to 88.3 million in the second quarter of 2008 from 91.0 million in the
second quarter of 2007. The decrease in average shares outstanding was primarily
due to the repurchase of 1.5 million shares since the second quarter of 2007 and
the effect of a lower stock price in determining common share equivalents for
options and SARs. See Note 14 –
Share Repurchase Program in the Notes to Consolidated Financial
Statements for additional information related to share repurchases.
The
following table sets forth certain amounts, ratios and relationships calculated
from the Consolidated Statements of Income for the six months
ended:
|
|
|
|
|
2008
vs. 2007
|
|
|
|
Six
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions, except per share data)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
$
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,832.2 |
|
|
$ |
2,909.0 |
|
|
$ |
(76.8 |
) |
|
|
(2.6 |
)% |
Gross
margin (A)
|
|
$ |
573.0 |
|
|
$ |
633.5 |
|
|
$ |
(60.5 |
) |
|
|
(9.6 |
)% |
Restructuring,
exit and impairment charges
|
|
$ |
105.3 |
|
|
$ |
8.7 |
|
|
$ |
96.6 |
|
|
NM
|
|
Operating
earnings (loss)
|
|
$ |
(6.9 |
) |
|
$ |
139.3 |
|
|
$ |
(146.2 |
) |
|
NM
|
|
Net
earnings from continuing operations
|
|
$ |
7.3 |
|
|
$ |
91.2 |
|
|
$ |
(83.9 |
) |
|
|
(92.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share from continuing operations
|
|
$ |
0.08 |
|
|
$ |
1.00 |
|
|
$ |
(0.92 |
) |
|
|
(92.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expressed
as a percentage of Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
20.2 |
% |
|
|
21.8 |
% |
|
|
|
|
|
(160
|
)bpts |
Selling,
general and administrative expense
|
|
|
14.4 |
% |
|
|
14.3 |
% |
|
|
|
|
|
10
|
bpts |
Research
and development expense
|
|
|
2.3 |
% |
|
|
2.4 |
% |
|
|
|
|
|
(10
|
)bpts |
Restructuring,
exit and impairment charges
|
|
|
3.7 |
% |
|
|
0.3 |
% |
|
|
|
|
|
340
|
bpts |
Operating
margin
|
|
|
(0.2 |
)% |
|
|
4.8 |
% |
|
|
|
|
|
(500
|
)bpts |
__________
bpts =
basis points
NM = not
meaningful
(A)
|
Gross margin is defined as Net sales less Cost of sales as presented in
the Consolidated Statements of
Income. |
The
decrease in net sales was primarily due to reduced U.S. marine industry demand
compared with the first half of 2007. This decrease was partially offset by
strong sales of commercial fitness equipment and bowling products, additional
contributions from recently opened Brunswick Zone XL centers; growth in non-U.S.
markets; and the favorable translation effects resulting from the weakening U.S.
dollar.
The
decrease in gross margin percentage in the first six months of 2008 compared
with the same period in the prior year was primarily due to the same factors as
described in the quarterly discussion.
Selling,
general and administrative expense decreased by $7.6 million to $408.7 million
in the first half of 2008. The decrease was primarily driven by successful cost
reduction initiatives, but was partially offset by increased variable
compensation expense and the effect of unfavorable foreign currency
translation.
During
the first six months of 2008, the Company announced additional restructuring
activities including the closing of its bowling pin manufacturing facility in
Antigo, Wisconsin; closing of its boat plant in Bucyrus, Ohio, in connection
with the divestiture of its Baja boat business; ceasing of boat manufacturing at
one of its facilities in Merritt Island, Florida; mothballing its Swansboro,
North Carolina, boat plant; closing its production facility in Newberry, South
Carolina, due to the decision to cease production of its Bluewater Marine
brands, including Sea Pro, Sea Boss, Palmetto and Laguna; the write-down of
certain assets of the Valley-Dynamo coin-operated commercial billiards business;
and the reduction of its employee workforce across the Company. These
restructuring activities led to the increase in restructuring, exit and
impairment charges. See Note 3
– Restructuring Activities in the Notes to Consolidated Financial
Statements for further details.
The
decrease in operating earnings in the first six months of 2008 compared with the
same period in the prior year was primarily due to the same factors as described
in the quarterly discussion.
Interest
expense decreased in the first half of 2008 compared with the same period in
2007, primarily due to the same factors as described in the quarterly
discussion.
The
Company’s effective tax rate in the first six months of 2008 changed to a 5.0
percent tax benefit, from a 29.5 percent tax provision in the comparable period
of 2007 mostly due to a benefit from an interest refund received from the IRS,
but was partially offset by a higher tax rate on the sale of the Company’s
interest in its bowling joint venture in Japan and the absence of the research
and development credit in 2008. During the six months ended June 30, 2007, the
Company recognized special tax benefits of $1.9 million, primarily as a result
of its APB 23 assertion to indefinitely reinvest the undistributed net earnings
of certain foreign subsidiaries.
Net
earnings from continuing operations and diluted earnings per share from
continuing operations decreased primarily due to the same factors discussed
above in operating earnings.
Weighted
average common shares outstanding used to calculate diluted earnings per share
decreased to 88.4 million in the first six months of 2008 from 91.5 million in
the first six months of 2007. The decrease in average shares outstanding was
primarily due to the repurchase of 1.5 million shares since the second quarter
of 2007 and the effect of a lower stock price in determining common share
equivalents for options and SARs. See Note 14 – Share Repurchase Program
in the Notes to Consolidated Financial Statements for additional
information related to share repurchases.
Boat
Segment
The
following table sets forth Boat segment results for the three months
ended:
|
|
|
|
|
2008
vs. 2007
|
|
|
|
Three
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
$ |
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
687.9 |
|
|
$ |
732.8 |
|
|
$ |
(44.9 |
) |
|
|
(6.1 |
)% |
Restructuring,
exit and impairment charges
|
|
$ |
38.2 |
|
|
$ |
1.0 |
|
|
$ |
37.2 |
|
|
NM
|
|
Operating
earnings (loss)
|
|
$ |
(37.7 |
) |
|
$ |
19.3 |
|
|
$ |
(57.0 |
) |
|
NM
|
|
Operating
margin
|
|
|
(5.5 |
)% |
|
|
2.6 |
% |
|
|
|
|
|
(810
|
)bpts |
Capital
expenditures
|
|
$ |
13.6 |
|
|
$ |
16.9 |
|
|
$ |
(3.3 |
) |
|
|
(19.5 |
)% |
__________
bpts =
basis points
NM = not
meaningful
The
decrease in Boat segment net sales was largely attributable to the effect of
reduced marine retail demand in U.S. markets and lower shipments to dealers in
an effort to achieve appropriate levels of pipeline inventories. This decrease
was partially offset by continued growth outside the United States.
Boat
segment operating earnings decreased from 2007 primarily due to a decrease in
sales volume and increased restructuring, exit and impairment charges related to
the closure of its Newberry, South Carolina, facility that manufactured
Bluewater Marine brands; the divestiture of the Baja business; the closing of
one of its Merritt Island, Florida, boat manufacturing facilities; the decision
to mothball its Swansboro, North Carolina, boat plant; and employee headcount
reductions. Additionally, higher raw material costs, lower fixed-cost absorption
and increased inventory repurchase obligation accruals contributed to the
decline in operating earnings. This decrease was partially offset by the savings
from successful cost-reduction initiatives and the absence of unfavorable
inventory adjustments that were made in 2007.
Capital
expenditures in the second quarter of 2008 and 2007 were largely attributable to
tooling costs for the production of new models, but were lower during 2008 as a
result of discretionary capital spending constraints.
The
following table sets forth Boat segment results for the six months
ended:
|
|
|
|
|
2008
vs. 2007
|
|
|
|
Six
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
$
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,325.7 |
|
|
$ |
1,431.8 |
|
|
$ |
(106.1 |
) |
|
|
(7.4 |
)% |
Restructuring,
exit and impairment charges
|
|
$ |
52.0 |
|
|
$ |
5.8 |
|
|
$ |
46.2 |
|
|
NM
|
|
Operating
earnings (loss)
|
|
$ |
(52.4 |
) |
|
$ |
38.8 |
|
|
$ |
(91.2 |
) |
|
NM
|
|
Operating
margin
|
|
|
(4.0 |
)% |
|
|
2.7 |
% |
|
|
|
|
|
(670
|
)bpts |
Capital
expenditures
|
|
$ |
23.5 |
|
|
$ |
31.4 |
|
|
$ |
(7.9 |
) |
|
|
(25.2 |
)% |
__________
bpts =
basis points
NM = not
meaningful
The
factors affecting Boat segment net sales, operating earnings and capital
expenditures for the year-to-date period were consistent with the factors
described in the quarterly period above.
Marine
Engine Segment
The
following table sets forth Marine Engine segment results for the three months
ended:
|
|
|
|
|
2008
vs. 2007
|
|
|
|
Three
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
$ |
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
643.5 |
|
|
$ |
669.6 |
|
|
$ |
(26.1 |
) |
|
|
(3.9 |
)% |
Restructuring,
exit and impairment charges
|
|
$ |
17.0 |
|
|
$ |
- |
|
|
$ |
17.0 |
|
|
NM
|
|
Operating
earnings
|
|
$ |
54.4 |
|
|
$ |
80.3 |
|
|
$ |
(25.9 |
) |
|
|
(32.3 |
)% |
Operating
margin
|
|
|
8.5 |
% |
|
|
12.0 |
% |
|
|
|
|
|
(350
|
)bpts |
Capital
expenditures
|
|
$ |
5.2 |
|
|
$ |
11.3 |
|
|
$ |
(6.1 |
) |
|
|
(54.0 |
)% |
__________
bpts =
basis points
NM = not
meaningful
Net sales
recorded by the Marine Engine segment decreased compared with the second quarter
of 2007 primarily due to the Company’s reduction in wholesale shipments in
response to reduced marine retail demand in the United States. The decrease was
partially offset by an increase in sales outside the United States, which was
partially attributable to the favorable effect of foreign currency translation,
and higher engine pricing during the second quarter of 2008 compared with the
second quarter of 2007.
Marine
Engine segment operating earnings decreased in the second quarter of 2008 as a
result of restructuring, exit and impairment charges incurred associated with
the Company’s initiatives to reduce costs across all business units; lower sales
volumes; increases in raw material costs and other inflationary pressures; an
increased concentration of sales in lower-margin products; higher promotional
incentives; and increased freight costs in excess of billings. This decrease was
partially offset by the savings from successful cost-reduction initiatives,
increases in engine prices, the favorable effect of foreign currency translation
and lower variable compensation expense.
Capital
expenditures in the second quarter of 2008 and 2007 were primarily related to
the continued investments in new products, but were lower during 2008 as a
result of discretionary capital spending constraints.
The
following table sets forth Marine Engine segment results for the six months
ended:
|
|
|
|
|
2008
vs. 2007
|
|
|
|
Six
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
$
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,209.5 |
|
|
$ |
1,242.2 |
|
|
$ |
(32.7 |
) |
|
|
(2.6 |
)% |
Restructuring,
exit and impairment charges
|
|
$ |
18.5 |
|
|
$ |
2.8 |
|
|
$ |
15.7 |
|
|
NM
|
|
Operating
earnings
|
|
$ |
85.3 |
|
|
$ |
115.0 |
|
|
$ |
(29.7 |
) |
|
|
(25.8 |
)% |
Operating
margin
|
|
|
7.1 |
% |
|
|
9.3 |
% |
|
|
|
|
|
(220
|
)bpts |
Capital
expenditures
|
|
$ |
12.7 |
|
|
$ |
25.3 |
|
|
$ |
(12.6 |
) |
|
|
(49.8 |
)% |
__________
bpts =
basis points
NM = not
meaningful
The
factors that affected Marine Engine net sales, operating earnings and capital
expenditures for the year-to-date period were generally consistent with those
that affected the second quarter.
Fitness
Segment
The
following table sets forth Fitness segment results for the three months
ended:
|
|
|
|
|
2008
vs. 2007
|
|
|
|
Three
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
$ |
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
156.9 |
|
|
$ |
144.0 |
|
|
$ |
12.9 |
|
|
|
9.0 |
% |
Restructuring,
exit and impairment charges
|
|
$ |
1.3 |
|
|
$ |
– |
|
|
$ |
1.3 |
|
|
NM
|
|
Operating
earnings
|
|
$ |
8.2 |
|
|
$ |
7.4 |
|
|
$ |
0.8 |
|
|
|
10.8 |
% |
Operating
margin
|
|
|
5.2 |
% |
|
|
5.1 |
% |
|
|
|
|
|
10
|
bpts |
Capital
expenditures
|
|
$ |
0.9 |
|
|
$ |
3.0 |
|
|
$ |
(2.1 |
) |
|
|
(70.0 |
)% |
__________
bpts =
basis points
NM = not
meaningful
The
increase in Fitness segment net sales was largely attributable to volume growth
in worldwide commercial equipment sales. Additionally, favorable foreign
currency translation resulting from the weaker dollar led to higher sales. These
increases were partially offset by a decline in consumer equipment sales, as
individuals continue to defer purchasing discretionary items.
The
Fitness segment operating earnings benefited from sales volume growth in
commercial products and favorable foreign currency translation. Operating
earnings were adversely affected by increases in raw material and fuel costs;
higher warranty expense; and the implementation of various restructuring
activities within the segment.
Capital
expenditures in the second quarter of 2008 and 2007 were primarily related to
tooling for new products, but were lower during 2008 as a result of the near
completion of the Elevation series cardiovascular equipment.
The
following table sets forth Fitness segment results for the six months
ended:
|
|
|
|
|
2008
vs. 2007
|
|
|
|
Six
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
$
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
306.1 |
|
|
$ |
289.0 |
|
|
$ |
17.1 |
|
|
|
5.9 |
% |
Restructuring,
exit and impairment charges
|
|
$ |
1.3 |
|
|
$ |
– |
|
|
$ |
1.3 |
|
|
NM
|
|
Operating
earnings
|
|
$ |
16.3 |
|
|
$ |
15.5 |
|
|
$ |
0.8 |
|
|
|
5.2 |
% |
Operating
margin
|
|
|
5.3 |
% |
|
|
5.4 |
% |
|
|
|
|
|
(10
|
)bpts |
Capital
expenditures
|
|
$ |
2.4 |
|
|
$ |
4.5 |
|
|
$ |
(2.1 |
) |
|
|
(46.7 |
)% |
__________
bpts
= basis points
NM
= not meaningful
The
factors affecting Fitness segment net sales, operating earnings and capital
expenditures for the year-to-date period were consistent with the factors
described in the quarterly period above.
Bowling
& Billiards Segment
The
following table sets forth Bowling & Billiards segment results for the three
months ended:
|
|
|
|
|
2008
vs. 2007
|
|
|
|
Three
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
$
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
110.4 |
|
|
$ |
103.2 |
|
|
$ |
7.2 |
|
|
|
7.0 |
% |
Restructuring,
exit and impairment charges
|
|
$ |
19.8 |
|
|
$ |
– |
|
|
$ |
19.8 |
|
|
NM
|
|
Operating
earnings (loss)
|
|
$ |
(19.8 |
) |
|
$ |
(2.7 |
) |
|
$ |
(17.1 |
) |
|
NM
|
|
Operating
margin
|
|
|
(17.9 |
)% |
|
|
(2.6 |
)% |
|
|
|
|
|
NM
|
|
Capital
expenditures
|
|
$ |
7.5 |
|
|
$ |
10.1 |
|
|
$ |
(2.6 |
) |
|
|
(25.7 |
)% |
__________
NM = not
meaningful
Bowling
& Billiards segment net sales were up from prior year levels primarily as a
result of sales associated with Brunswick Zone XL centers opened during 2007 and
2008 and stronger capital equipment sales. Partially offsetting this increase
was a decline in sales volume of consumer and commercial billiards
tables.
The
decrease in current quarter operating earnings was attributable to
restructuring, exit and impairment charges related to certain asset write-downs
of the Valley-Dynamo coin-operated commercial billiards business, increased bad
debt expense and lower sales of consumer and commercial billiards tables. This
decrease was partially offset by increased earnings from recently opened
Brunswick Zone XL centers, improved efficiency at the Reynosa, Mexico, bowling
ball manufacturing facility and increased sales of capital
equipment.
Decreased
capital expenditures in the second quarter of 2008 were driven by reduced
spending for Brunswick Zone XL centers, as the Company had more centers under
construction during the second quarter of 2007.
The
following table sets forth Bowling & Billiards segment results for the six
months ended:
|
|
|
|
|
2008
vs. 2007
|
|
|
|
Six
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
$
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
224.0 |
|
|
$ |
209.0 |
|
|
$ |
15.0 |
|
|
|
7.2 |
% |
Restructuring,
exit and impairment charges
|
|
$ |
25.4 |
|
|
$ |
– |
|
|
$ |
25.4 |
|
|
NM
|
|
Operating
earnings (loss)
|
|
$ |
(18.9 |
) |
|
$ |
5.6 |
|
|
$ |
(24.5 |
) |
|
NM
|
|
Operating
margin
|
|
|
(8.4 |
)% |
|
|
2.7 |
% |
|
|
|
|
|
NM
|
|
Capital
expenditures
|
|
$ |
15.0 |
|
|
$ |
19.5 |
|
|
$ |
(4.5 |
) |
|
|
(23.1 |
)% |
__________
NM = not
meaningful
The
factors affecting Bowling & Billiards segment net sales for the year-to-date
period were consistent with the factors impacting the second quarter net sales
noted above.
Bowling
& Billiards segment operating earnings were subject to the same factors as
described in the quarterly period. Additionally, the Bowling & Billiards
segment operating earnings decreased as a result of exit and restructuring
charges related to the shutdown of the segment’s bowling pin manufacturing
facility in Antigo, Wisconsin, during the first quarter of 2008.
The
factors affecting Bowling & Billiards segment capital expenditures for the
year-to-date period were consistent with the factors described in the quarterly
period above.
Cash
Flow, Liquidity and Capital Resources
The
Company expanded its presentation of the Consolidated Statement of Cash Flows to
include net earnings and net earnings from discontinued operations. Accordingly,
the Company revised the June 30, 2007, Consolidated Statement of Cash Flow. Net
cash flows from operating, investing and financing activities have not
changed.
The
following table sets forth an analysis of free cash flow for the six months
ended:
|
|
Six
Months Ended
|
|
(in
millions)
|
|
June
28,
2008
|
|
|
June
30,
2007
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities of continuing
operations
|
|
$ |
62.6 |
|
|
$ |
134.5 |
|
Net
cash provided by (used for):
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(58.0 |
) |
|
|
(82.5 |
) |
Proceeds
from the sale of property, plant and equipment
|
|
|
3.4 |
|
|
|
1.6 |
|
Proceeds
from investment sale
|
|
|
40.4 |
|
|
|
– |
|
Other,
net
|
|
|
0.2 |
|
|
|
12.4 |
|
|
|
|
|
|
|
|
|
|
Free
cash flow from continuing operations *
|
|
$ |
48.6 |
|
|
$ |
66.0 |
|
__________
*
|
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 of continuing operations. 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
non-GAAP 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 Brunswick’s performance using the same tool that
management uses to gauge progress in achieving its goals. Management
believes that 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.
|
Brunswick’s
major sources of funds for investments, acquisitions, dividend payments and
share repurchases 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 six months of 2008, net cash provided by operating activities of
continuing operations totaled $62.6 million, compared with $134.5 million in the
same period of 2007. The decrease in net cash provided by operating activities
in the first six months of 2008 was primarily due to an $83.9 million decrease
in net earnings from continuing operations, which included $52.8 million of
impairment charges, and a larger net income tax refund received during the first
six months of 2007 compared to the first six months of 2008.
The
increase in working capital, defined as non-cash current assets less current
liabilities, was reduced slightly to $91.5 million for the first six months of
2008 compared with $97.3 million for the first six months of 2007. Changes in
working capital were negatively affected in 2008 as a result of the timing of
the Company’s contributions to employees’ profit-sharing accounts. Effective as
of January 1, 2007, the Company changed its plan from funding on a continual
basis throughout the year to making one annual contribution in the first quarter
of the following year. This caused an incremental cash outflow of approximately
$35 million in the first quarter of 2008, resulting in unfavorable working
capital performance year-over-year. Offsetting this unfavorable variance was a
lower rate of growth in inventories and receivables in the Company’s marine
operations.
Cash
flows from investing activities included capital expenditures of $58.0 million
in the first six months of 2008, which decreased from $82.5 million in the first
six months of 2007. Significant capital expenditures in the six months of 2008
included tooling expenditures for new models and product innovations in the Boat
segment and capital spending for new Brunswick Zone XL centers and the purchase
of a bowling center.
Brunswick
did not complete any acquisitions during the first six months of 2008 or 2007.
The Company’s cash investment in Brunswick Acceptance Company, LLC (BAC)
decreased $13.0 million and $4.7 million during the first six months of 2008 and
2007, respectively, in accordance with the equity provisions of the joint
venture.
In March
2008, the Company sold its investment in a bowling joint venture in Japan for
$40.4 million gross cash proceeds, $37.4 million net of cash paid for taxes and
other costs, after post-closing adjustments. The Company intends to use the cash
proceeds for general corporate purposes. See Note 9 –
Investments, to
the Consolidated Financial Statements for details on the sale of this
investment, and Note 8 in the 2007 Form 10-K for further details on the
Company’s other investments.
Cash
flows from financing activities of continuing operations resulted in cash used
of $0.2 million during first six months of 2008, compared with $76.9 million use
of cash in the same period in 2007. This change was largely attributable to the
Company’s share repurchase program, under which the Company repurchased no
shares during the first six months of 2008, compared with repurchases of 2.6
million shares for $87.2 million in the first six months of 2007. See Note 14 – Share Repurchase Program
in the Notes to Consolidated Financial Statements for further details.
The Company received no proceeds from stock options exercised in the first six
months of 2008, compared with $10.8 million received from stock options
exercised during the same period in 2007.
Cash and
cash equivalents totaled $392.8 million as of June 28, 2008, an increase of
$61.4 million from $331.4 million at December 31, 2007. Total debt as of June
28, 2008, and December 31, 2007, was $727.7 million and 728.2 million,
respectively. Brunswick’s debt-to-capitalization ratio, calculated as the
Company’s total debt divided by the sum of the Company’s total debt and
shareholders’ equity, decreased slightly to 27.4 percent as of June 28, 2008,
from 27.8 percent as of December 31, 2007.
Available
cash balances, along with free cash flow, are expected to be adequate to fund
the Company’s liquidity requirements. In the event that short-term borrowings
are required, the Company’s maintains a $650 million long-term revolving credit
facility with a group of banks, as described in Note 14 to the consolidated
financial statements in the 2007 Form-10K. This facility serves as the Company’s
primary source of financing to fund interim cash requirements and has served as
support for commercial paper borrowings. The $650 million facility is in place
through 2012, with $55 million of the bank commitments expiring in 2011. There
are currently $58.4 million of letters of credit issued against the $150 million
allowed under the facility. The undrawn portion of the facility was $591.6
million as of June 28, 2008. The Company’s ability to borrow against the
facility is subject to covenants, including a leverage test, which allows for
debt of up to three times EBITDA (Earnings before Interest, Taxes, Depreciation
and Amortization, as defined in the revolving credit agreement, adjusted for
non-cash charges). The Company was in compliance with its loan covenants as of
June 28, 2008. The timing of cash restructuring costs, along with the impact of
production cuts in the second half of 2008, is having an adverse effect on
EBITDA. As a result, the Company is in the process of amending this facility to
ensure that it is able to meet the requirements of the leverage test in the
future, and maintain access to this facility. The amendment is expected to be
completed in the third quarter; however, there can be no assurances that this
amendment will be effected.
The
Company’s long-term credit ratings were recently lowered, with Standard and
Poor’s Rating Services assigning a non-investment grade rating of BB+ and
Moody’s Investors Service assigning an investment grade rating of Baa3. The
Company’s short-term ratings have also been lowered, which substantially
restricts the Company’s access to commercial paper as a short-term borrowing
source. Available cash balances, along with free cash flow, are expected to be
adequate to fund the Company’s interim cash requirements. Management believes
that, in spite of these recent credit rating downgrades, the Company continues
to have access to adequate sources of liquidity and financing to meet the
Company’s short-term and long-term needs.
The
Company did not make contributions to its qualified pension plans in the first
six months of 2008 or 2007, as the funded status of those plans exceeded
Employee Retirement Income Security Act (ERISA) requirements. The Company will
evaluate additional contributions to its defined benefit plans in 2008 based on
market conditions and Company discretion, among other items. The Company
contributed $1.1 million and $1.3 million to fund benefit payments in its
nonqualified plans in the first six months of 2008 and 2007, respectively, and
expects to contribute an additional $2.1 million to the nonqualified plans in
2008, compared with $1.3 million that was funded subsequent to the first six
months of 2007. See Note 13 –
Pension and Other Postretirement Benefits in the Notes to Consolidated
Financial Statements and Note 15 to the consolidated financial statements in the
2007 Form 10-K for more details.
Financial
Services
See Note 11 – Financial Services
in the Notes to Consolidated Financial Statements for a discussion on
BAC, the Company’s joint venture with CDF Ventures, LLC, a subsidiary of GE
Capital Corporation.
Off-Balance
Sheet Arrangements and Contractual Obligations
The
Company’s off-balance sheet arrangements and contractual obligations are
detailed in the 2007 Form 10-K. There have been no material changes outside the
ordinary course of business.
Legal
Refer to
Note 7 – 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, Brunswick will continue to develop engine technologies to
reduce engine emissions to comply with current and future emissions
requirements. The costs associated with these activities may have an adverse
effect on Marine Engine segment operating margins and may affect short-term
operating results. The State of California adopted regulations that required
catalytic converters on sterndrive and inboard engines that became effective on
January 1, 2008. In addition, other environmental regulatory bodies in the
United States and other countries may impose higher emissions standards than are
currently in effect for those regions. The Company expects to comply fully with
these regulations, but compliance will increase the cost of these products for
the Company and the industry. 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 its competitive position.
Critical
Accounting Policies
As
discussed in the 2007 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.
There
were no material changes in the Company’s critical accounting policies since the
filing of its 2007 Form 10-K, except for the Company’s adoption of SFAS 157 as
discussed in “Recent Accounting Pronouncements” below.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (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. Effective January 1, 2008, the Company adopted SFAS
157. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2,
“Effective Date of FASB Statement No. 157”, which provides a one year
deferral of the effective date of SFAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Therefore, the Company has
adopted the provisions of SFAS 157 with respect to its financial assets and
liabilities only. The adoption of this statement did not have a material impact
on the Company’s consolidated results of operations and financial
condition.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115” (SFAS 159). SFAS 159 permits entities to choose to measure
certain financial assets and financial liabilities at fair value at specified
election dates. Unrealized gains and losses on items for which the fair value
option has been elected are to be reported in earnings. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. The Company has elected not
to adopt the fair value option established by SFAS 159.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS
141(R)). SFAS 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, the goodwill acquired and any noncontrolling
interest in the acquiree. This statement also establishes disclosure
requirements to enable the evaluation of the nature and financial effect of the
business combination. SFAS 141(R) is effective for fiscal years beginning on or
after December 15, 2008. The Company is currently evaluating the impact that the
adoption of SFAS 141(R) may have on the financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (SFAS 160). SFAS
160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company is currently evaluating the
impact that the adoption of SFAS 160 may have on the financial
statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures About Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133” (SFAS 161). SFAS 161 is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity’s financial position, financial performance, and cash flows. SFAS 161
is effective for fiscal years beginning after November 15, 2008. The
Company is currently evaluating the impact that the adoption of SFAS 161
may have on the financial statements.
Forward-Looking
Statements
Certain
statements in this Quarterly Report on Form 10-Q (Quarterly Report) 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: (i) the
amount of disposable income available to consumers for discretionary purchases,
and (ii) the level of consumer confidence on the demand for marine, fitness,
billiards and bowling equipment and products; the ability to successfully
complete restructuring efforts in the timeframe and cost anticipated; the
ability to amend or maintain credit facilities on terms favorable to the
company; the ability of the company's operations to generate expected financial
results and levels of cash flow; the ability to transition and ramp up certain
manufacturing operations within the time and budgets allowed; the success of
marketing and cost management programs; the effect of interest rates and fuel
prices on demand for marine products; the ability to successfully manage
pipeline inventories; the financial strength of dealers, distributors and
independent boat builders, their ability to obtain financing for the purchase of
company product, and their ability to meet their payment obligations to the
company and their third-party financing sources as those obligations become due;
the ability to meet repurchase and recourse obligations to third parties arising
out of dealer defaults; the ability to comply with all financial covenants and
other obligations set forth in the Brunswick Acceptance Company joint venture
documents; the ability to maintain mutually beneficial relationships with
dealers, distributors and independent boat builders; the ability to maintain
effective distribution and to develop alternative distribution channels without
disrupting incumbent distribution partners; the success of global sourcing and
supply chain initiatives; the effect of higher product prices due to technology
changes and added product features and components on consumer demand; the effect
of competition from other leisure pursuits on the level of participation in
boating, fitness, bowling and billiards activities; the ability to maintain
market share, particularly in high-margin products; the success of new product
introductions; the ability to maintain product quality and service standards
expected by customers; competitive pricing pressures; the ability to develop
cost-effective product technologies that comply with regulatory requirements;
the ability to successfully develop and distribute products differentiated for
the global marketplace; shifts in currency exchange rates; adverse foreign
economic conditions; the ability to repay or refinance existing indebtedness
when it becomes due; the effect of the downturn in the U.S. economy on the
company's suppliers and the company's ability to obtain components and raw
materials; increased competition from Asian competitors; competition from new
technologies; the ability to complete environmental remediation efforts and
resolve claims and litigation at the cost estimated; and the effect of weather
conditions on demand for marine products and retail bowling center revenues.
Additional factors are included in the company's Annual Report on Form 10-K for
2007 and elsewhere in this report.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Brunswick
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 11 to the consolidated financial statements in the 2007
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 first six months of 2008 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 and six months ended June 28, 2008,
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 Brunswick’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.
Refer to
Note 11 to the consolidated financial statements in the 2007 Form 10-K for
discussion of other legal and environmental matters as of December 31,
2007.
Item
1A. Risk Factors
There
have been no material changes from the Company’s risk factors as disclosed in
the 2007 Form 10-K.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
On May 4,
2005, Brunswick’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 June 28, 2008 the
Company’s remaining share repurchase authorization for the program was $240.4
million. The Company expects to repurchase shares on the open market or in
private transactions from time to time, depending on market conditions and the
Company’s financial objectives. There were no share repurchases during the three
months ended June 28, 2008.
Item
4. Submission of Matters to a Vote of Security Holders
At the
May 7, 2008, Annual Meeting of Shareholders of the Company, Cambria W. Dunaway,
Dustan E. McCoy and Ralph C. Stayer were elected as directors of the Company for
terms expiring at the 2011 Annual Meeting. The numbers of shares voted with
respect to these directors were:
Nominee
|
|
For
|
|
Withheld
|
|
Cambria
W. Dunaway
|
|
|
75,587,577
|
|
|
1,660,977
|
|
Dustan
E. McCoy
|
|
|
74,512,200
|
|
|
2,736,354
|
|
Ralph
C. Stayer
|
|
|
75,578,026
|
|
|
1,670,528
|
|
The
following directors’ terms of office continued after the meeting: Nolan D.
Archibald, Jeffrey L. Bleustein, Michael J. Callahan, Manuel A. Fernandez,
Graham H. Phillips, J. Steven Whisler and Lawrence A. Zimmerman.
At the
Annual Meeting, the Audit Committee’s selection of Ernst & Young, LLP as
independent auditors for the Company and its subsidiaries for the year 2008 was
ratified pursuant to the following vote:
|
|
Number
of Shares
|
|
For
|
|
76,411,639
|
|
|
Against
|
|
207,807
|
|
|
Abstain
|
|
629,106
|
|
|
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
July 29,
2008
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.