First Quarter 2007 Form 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
Form
10-Q
[X]
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
|
For
the quarterly period ended March 31, 2007
|
or
|
[ ]
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
|
|
Commission
file number 1-1043
|
_______________
Brunswick
Corporation
(Exact
name of registrant as specified in its charter)
Delaware
|
36-0848180
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
1
N. Field Court, Lake Forest, Illinois
|
60045-4811
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
(847)
735-4700
|
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
[X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
[X]
Accelerated
filer [ ] Non-accelerated filer
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [X]
The
number of shares of Common Stock ($0.75 par value) of the registrant outstanding
as of May
1, 2007,
was
90,362,558.
BRUNSWICK
CORPORATION
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
March
31, 2007
TABLE
OF CONTENTS
|
|
Page
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Consolidated
Financial Statements
|
|
|
|
|
|
Consolidated
Statements of Income for the three months ended March
31,
2007, and April 1, 2006 (unaudited)
|
1
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2007
(unaudited),
December 31, 2006, and April 1, 2006 (unaudited)
|
2
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the three
months
ended March 31, 2007, and April 1, 2006 (unaudited)
|
4
|
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
5
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
|
17
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
27
|
|
|
|
Item
4.
|
Controls
and Procedures
|
27
|
|
|
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
28
|
|
|
|
Item
1A.
|
Risk
Factors
|
28
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
29
|
|
|
|
Item
6.
|
Exhibits
|
29
|
PART
I - FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements
BRUNSWICK
CORPORATION
|
Consolidated
Statements of Income
|
(in
millions, except per share data)
|
(unaudited)
|
|
|
Three
Months Ended
|
|
|
|
March
31, 2007
|
|
April
1, 2006
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,386.1
|
|
$
|
1,413.3
|
|
Cost
of sales
|
|
|
1,089.7
|
|
|
1,099.9
|
|
Selling,
general and administrative expense
|
|
|
209.9
|
|
|
184.7
|
|
Research
and development expense
|
|
|
33.5
|
|
|
30.5
|
|
Operating
earnings
|
|
|
53.0
|
|
|
98.2
|
|
Equity
earnings
|
|
|
6.3
|
|
|
5.2
|
|
Other
expense, net
|
|
|
(0.4
|
)
|
|
(0.1
|
)
|
Earnings
before interest and income taxes
|
|
|
58.9
|
|
|
103.3
|
|
Interest
expense
|
|
|
(13.6
|
)
|
|
(13.6
|
)
|
Interest
income
|
|
|
1.8
|
|
|
2.9
|
|
Earnings
before income taxes
|
|
|
47.1
|
|
|
92.6
|
|
Income
tax provision
|
|
|
12.8
|
|
|
18.5
|
|
Net
earnings from continuing operations
|
|
|
34.3
|
|
|
74.1
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
Earnings
(loss) from discontinued operations, net of tax
|
|
|
3.4
|
|
|
(6.7
|
)
|
Gain
on disposal of discontinued operations, net of tax
|
|
|
7.9
|
|
|
-
|
|
Net
earnings (loss) from discontinued operations
|
|
|
11.3
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
45.6
|
|
$
|
67.4
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$
|
0.38
|
|
$
|
0.78
|
|
Earnings
(loss) from discontinued operations, net of tax
|
|
|
0.03
|
|
|
(0.07
|
)
|
Gain
on disposal of discontinued operations, net of tax
|
|
|
0.09
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
0.50
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$
|
0.38
|
|
$
|
0.77
|
|
Earnings
(loss) from discontinued operations, net of tax
|
|
|
0.03
|
|
|
(0.07
|
)
|
Gain
on disposal of discontinued operations, net of tax
|
|
|
0.09
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
0.50
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used for computation of:
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
91.4
|
|
|
95.6
|
|
Diluted
earnings per share
|
|
|
92.0
|
|
|
96.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Notes to Consolidated Financial Statements are an integral part of
these
consolidated statements.
|
BRUNSWICK
CORPORATION
|
Condensed
Consolidated Balance Sheets
|
(in
millions)
|
|
|
March
31,
|
|
December
31,
|
|
April
1,
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents, at cost, which
approximates
market
|
|
$
|
204.0
|
|
$
|
283.4
|
|
$
|
216.5
|
|
Accounts
and notes receivable, less
allowances
of $27.5, $29.7 and $23.3
|
|
|
565.5
|
|
|
492.3
|
|
|
540.5
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
|
461.2
|
|
|
410.4
|
|
|
418.3
|
|
Work-in-process
|
|
|
338.8
|
|
|
308.4
|
|
|
335.8
|
|
Raw
materials
|
|
|
145.2
|
|
|
143.1
|
|
|
143.5
|
|
Net
inventories
|
|
|
945.2
|
|
|
861.9
|
|
|
897.6
|
|
Deferred
income taxes
|
|
|
223.0
|
|
|
249.9
|
|
|
273.6
|
|
Prepaid
expenses and other
|
|
|
80.0
|
|
|
85.4
|
|
|
60.8
|
|
Current
assets held for sale
|
|
|
30.3
|
|
|
105.5
|
|
|
99.4
|
|
Current
assets
|
|
|
2,048.0
|
|
|
2,078.4
|
|
|
2,088.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
93.3
|
|
|
91.7
|
|
|
86.2
|
|
Buildings
and improvements
|
|
|
638.3
|
|
|
631.6
|
|
|
600.8
|
|
Equipment
|
|
|
1,193.1
|
|
|
1,181.7
|
|
|
1,142.8
|
|
Total
land, buildings and improvements and
equipment
|
|
|
1,924.7
|
|
|
1,905.0
|
|
|
1,829.8
|
|
Accumulated
depreciation
|
|
|
(1,065.1
|
)
|
|
(1,046.3
|
)
|
|
(1,003.3
|
)
|
Net
land, buildings and improvements and
equipment
|
|
|
859.6
|
|
|
858.7
|
|
|
826.5
|
|
Unamortized
product tooling costs
|
|
|
157.3
|
|
|
156.2
|
|
|
155.5
|
|
Net
property
|
|
|
1,016.9
|
|
|
1,014.9
|
|
|
982.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
664.8
|
|
|
663.6
|
|
|
646.8
|
|
Other
intangibles
|
|
|
319.2
|
|
|
322.6
|
|
|
344.7
|
|
Investments
|
|
|
152.8
|
|
|
142.9
|
|
|
153.7
|
|
Other
long-term assets
|
|
|
190.3
|
|
|
195.1
|
|
|
245.8
|
|
Long-term
assets held for sale
|
|
|
22.6
|
|
|
32.8
|
|
|
93.3
|
|
Other
assets
|
|
|
1,349.7
|
|
|
1,357.0
|
|
|
1,484.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
4,414.6
|
|
$
|
4,450.3
|
|
$ |
4,554.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Notes to Consolidated Financial Statements are an integral part of
these
consolidated statements.
|
BRUNSWICK
CORPORATION
|
Condensed
Consolidated Balance Sheets
|
(in
millions, except share
data)
|
|
|
March
31,
|
|
December
31,
|
|
April
1,
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Short-term
debt, including current maturities
of
long-term debt
|
|
$
|
0.6
|
|
$
|
0.7
|
|
$
|
0.9
|
|
Accounts
payable
|
|
|
435.4
|
|
|
448.6
|
|
|
418.6
|
|
Accrued
expenses
|
|
|
788.1
|
|
|
748.9
|
|
|
757.9
|
|
Current
liabilities held for sale
|
|
|
23.3
|
|
|
95.0
|
|
|
42.4
|
|
Current
liabilities
|
|
|
1,247.4
|
|
|
1,293.2
|
|
|
1,219.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
725.8
|
|
|
725.7
|
|
|
723.5
|
|
Deferred
income taxes
|
|
|
36.0
|
|
|
86.3
|
|
|
136.0
|
|
Postretirement
and postemployment benefits
|
|
|
224.2
|
|
|
224.2
|
|
|
219.1
|
|
Other
|
|
|
273.8
|
|
|
240.4
|
|
|
255.6
|
|
Long-term
liabilities held for sale
|
|
|
9.5
|
|
|
8.7
|
|
|
5.8
|
|
Long-term
liabilities
|
|
|
1,269.3
|
|
|
1,285.3
|
|
|
1,340.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
Common
stock; authorized: 200,000,000 shares,
$0.75
par value; issued: 102,538,000 shares
|
|
|
76.9
|
|
|
76.9
|
|
|
76.9
|
|
Additional
paid-in capital
|
|
|
378.0
|
|
|
378.7
|
|
|
366.4
|
|
Retained
earnings
|
|
|
1,875.0
|
|
|
1,820.7
|
|
|
1,809.2
|
|
Treasury
stock, at cost:
|
|
|
|
|
|
|
|
|
|
|
12,257,000;
11,671,000 and 8,294,000 shares
|
|
|
(341.2
|
)
|
|
(315.5
|
)
|
|
(193.3
|
)
|
Accumulated
other comprehensive loss, net of tax
|
|
|
(90.8
|
)
|
|
(89.0
|
)
|
|
(64.3
|
)
|
Shareholders’
equity
|
|
|
1,897.9
|
|
|
1,871.8
|
|
|
1,994.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
4,414.6
|
|
$
|
4,450.3
|
|
$ |
4,554.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Notes to Consolidated Financial Statements are an integral part
of these
consolidated statements.
|
BRUNSWICK
CORPORATION
|
Condensed
Consolidated Statements of Cash Flows
|
(in
millions)
|
(unaudited)
|
|
|
Three
Months Ended
|
|
|
|
March
31, 2007
|
|
April
1, 2006
|
|
Cash
flows from operating activities
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$
|
34.3
|
|
$
|
74.1
|
|
Depreciation
and amortization
|
|
|
41.0
|
|
|
40.7
|
|
Changes
in non-cash current assets and current liabilities
|
|
|
(132.2
|
)
|
|
(220.9
|
)
|
Income
taxes
|
|
|
33.1
|
|
|
17.2
|
|
Other,
net
|
|
|
11.1
|
|
|
14.2
|
|
Net
cash used for operating activities of continuing
operations
|
|
|
(12.7
|
)
|
|
(74.7
|
)
|
Net
cash used for operating activities of discontinued
operations
|
|
|
(22.6
|
)
|
|
(16.9
|
)
|
Net
cash used for operating activities
|
|
|
(35.3
|
)
|
|
(91.6
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(39.8
|
)
|
|
(54.4
|
)
|
Acquisitions
of businesses, net of cash acquired
|
|
|
(0.1
|
)
|
|
(62.9
|
)
|
Investments
|
|
|
(5.5
|
)
|
|
(7.1
|
)
|
Proceeds
from the sale of property, plant and equipment
|
|
|
0.3
|
|
|
5.1
|
|
Other,
net
|
|
|
(0.3
|
)
|
|
-
|
|
Net
cash used for investing activities of continuing
operations
|
|
|
(45.4
|
)
|
|
(119.3
|
)
|
Net
cash provided by (used for) investing activities of
discontinued
operations
|
|
|
30.4
|
|
|
(1.9
|
)
|
Net
cash used for investing activities
|
|
|
(15.0
|
)
|
|
(121.2
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Payments
of long-term debt including current maturities
|
|
|
(0.2
|
)
|
|
(0.3
|
)
|
Stock
repurchases
|
|
|
(33.4
|
)
|
|
(61.8
|
)
|
Stock
options exercised
|
|
|
4.5
|
|
|
3.7
|
|
Net
cash used for financing activities of continuing
operations
|
|
|
(29.1
|
)
|
|
(58.4
|
)
|
Net
cash used for financing activities of discontinued
operations
|
|
|
-
|
|
|
-
|
|
Net
cash used for financing activities
|
|
|
(29.1
|
)
|
|
(58.4
|
)
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
(79.4
|
)
|
|
(271.2
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
283.4
|
|
|
487.7
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
204.0
|
|
$
|
216.5
|
|
|
|
|
|
|
|
|
|
|
The
Notes to Consolidated Financial Statements are an integral part of
these
consolidated statements.
|
Brunswick
Corporation
Notes
to Consolidated Financial Statements (continued)
(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 of America 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 2006 Annual
Report on Form 10-K (the 2006 Form 10-K). As indicated in Note
2 - Discontinued Operations,
Brunswick’s results as discussed in the notes to the financial statements
reflect continuing operations only, unless otherwise noted. These interim
results include, in the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position of Brunswick
as
of March 31, 2007, December 31, 2006, and April 1, 2006, the results of
operations for the
three
months ended March 31, 2007, and April 1, 2006,
and the
cash flows for the three months ended March 31, 2007, and April 1, 2006. Due
to
the seasonality of Brunswick’s businesses, the interim results are not
necessarily indicative of the results that may be expected for the remainder
of
the year.
The
Company maintains its financial records on the basis of a fiscal year ending
on
December 31, with the fiscal quarters ending on the Saturday closest to the
end
of the period (13-week periods). The first quarter of fiscal year 2007 ended
on
March 31, 2007, and the first quarter of fiscal year 2006 ended on April 1,
2006.
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. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The adoption
of SFAS 157 is not expected to have a material impact on the Company’s financial
statements.
In
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 does not believe
that the adoption of SFAS 159 will have a material impact on its financial
statements.
Note
2 - Discontinued Operations
On
April
27, 2006, Brunswick announced its intention to sell the majority of its
Brunswick New Technologies (BNT) business unit, consisting of the Company’s
marine electronics, portable navigation device (PND) and wireless fleet tracking
businesses. Therefore, the Company has reported these BNT businesses as
discontinued operations in accordance with the criteria of SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” related to the
classification of assets to be disposed of by sale. These criteria include
reclassifying the operations of BNT for all periods presented.
In
March
2007, Brunswick completed the sales of BNT’s marine electronics and PND
businesses to Navico International Ltd. and MiTAC International Corporation,
respectively, for proceeds of $44.7 million, including the impact of a working
capital adjustment, resulting in an after-tax gain of $7.9 million. Finalization
of post-closing adjustments with respect to these sales will occur in the second
quarter of 2007. The Company is continuing to pursue the sale of the wireless
fleet tracking business and currently anticipates that the proceeds will exceed
its net book value.
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
The
following table discloses the results of operations for BNT, including the
gain
on the divestitures, reported as discontinued operations for the three months
ended:
|
|
Three
Months Ended
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
(in
millions)
|
|
|
|
|
|
Net
sales
|
|
$
|
81.0
|
|
$
|
47.5
|
|
Pre-tax
earnings (loss)
|
|
$
|
4.7
|
|
$
|
(11.0
|
)
|
The
following table reflects the financial position of the remaining net assets
of
BNT reported as discontinued operations:
|
|
March
31,
2007
|
|
December
31,
2006
|
|
(in
millions)
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
26.8
|
|
$
|
51.5
|
|
Inventory,
net
|
|
|
3.2
|
|
|
52.5
|
|
Other
current assets
|
|
|
0.3
|
|
|
1.5
|
|
Total
current assets
|
|
|
30.3
|
|
|
105.5
|
|
|
|
|
|
|
|
|
|
Goodwill
and intangible assets
|
|
|
12.9
|
|
|
19.8
|
|
Investments
|
|
|
6.4
|
|
|
6.1
|
|
Property,
plant and equipment
|
|
|
3.3
|
|
|
6.9
|
|
Total
long-term assets
|
|
|
22.6
|
|
|
32.8
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
52.9
|
|
|
138.3
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
6.5
|
|
|
46.4
|
|
Accrued
expenses
|
|
|
16.8
|
|
|
48.6
|
|
Total
current liabilities
|
|
|
23.3
|
|
|
95.0
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
9.5
|
|
|
8.7
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
32.8
|
|
|
103.7
|
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$
|
20.1
|
|
$
|
34.6
|
|
Note
3 - Share-Based Compensation
On
January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised
2004), “Share-Based Payment,” (SFAS 123R), which is a revision of SFAS No. 123,
“Accounting for Stock-Based Compensation.” SFAS 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 123R
requires all share-based payments to employees, including grants of stock
options and the compensatory elements of employee stock purchase plans, to
be
recognized in the income statement based upon their fair values. Share-based
employee compensation cost (benefit) is recognized as a component of Selling,
general and administrative expense in the Consolidated Statements of Income.
Refer to Note 15 to the consolidated financial statements in the 2006 Form
10-K
for further details regarding the Company’s adoption of SFAS 123R.
Under
the
2003 Stock Incentive Plan (Plan), the Company may grant stock options, stock
appreciation rights (SARs), nonvested stock and other types of awards to
executives and other management employees. Issuances under the Plan may be
from
either authorized, but unissued, shares or treasury shares. The Company’s
maximum issuance allowed by the Plan is 8.1 million shares. As of March 31,
2007, approximately 3.8 million shares were available for grant.
Brunswick
Corporation
Notes
to Consolidated Financial Statements (continued)
(unaudited)
Stock
options were issued by the Company prior to 2005. Since 2005, the Company has
issued SARs. Grants are generally exercisable over a period of 10 years, or
as
determined by the Human Resources and Compensation Committee of the Board of
Directors. Grants vest over three or four years, or immediately in the event
of
a change in control, upon death or disability of the grantee, or, for grants
issued prior to 2006, if age and years of service equal 65 or more, regardless
of the grantee’s age. Vesting of 2006 and subsequent grants will occur
immediately in the event of a change in control, upon death or disability of
the
grantee, or upon termination of employment if the grantee has attained the
age
of 62 and age plus years of service equals 70 or more. The exercise price per
share cannot be less than the fair market value at the date of grant. During
the
three months ended March 31, 2007, and April 1, 2006, there were 0.9 million
SARs granted. Total expense from continuing operations for these periods was
$1.7 million and $1.6 million, respectively, and resulted in a deferred tax
asset for the tax benefit to be realized in future periods.
The
weighted average fair value of individual SARs granted was $9.91 and $11.88
during 2007 and 2006, respectively. The fair value of each grant was estimated
on the date of grant using the Black-Scholes-Merton pricing model with the
following weighted average assumptions used for 2007 and 2006:
|
2007
|
|
2006
|
|
|
|
|
Risk-free
interest rate
|
4.8
%
|
|
4.4%
|
Dividend
yield
|
1.8
%
|
|
1.5
%
|
Volatility
factor
|
29.9%
|
|
31.2%
|
Weighted
average expected life
|
5.1
- 6.2 years
|
|
4.8
- 6.1 years
|
Nonvested
stock awards (nonvested stock shares were issued for grants prior to April
30,
2003, and subsequently, nonvested stock units were issued) are issued to key
employees as determined by the Human Resources and Compensation Committee of
the
Board of Directors. Nonvested stock awards vest at the end of a three- to
four-year period subject to continued employment, or immediately upon a change
in control of the Company, or upon death or disability of the recipient. For
grants issued before January 1, 2006, nonvested stock units are forfeited in
the
event employment terminates prior to vesting, except there is prorata vesting
if
age and years of service equals 65 or more upon termination of employment.
Prorata vesting on grants issued in 2006 and 2007 will occur if the recipient’s
age and years of service equals 70 or more upon termination of employment.
Selected grants that are made in lieu of Strategic Incentive Plan cash payments
vest one-third at the end of each the first three grant date anniversaries.
Nonvested stock units are eligible for dividends, which are reinvested, and
non-voting, and all awards have restrictions on the sale or transfer of such
awards during the nonvested period. The cost of nonvested stock awards is
recognized on a straight-line basis over the requisite service period. During
the three months ended March 31, 2007, and April 1, 2006, there were 0.1 million
and 0.3 million stock awards granted under these plans, respectively, and $1.4
million and $1.1 million was charged to compensation expense under these plans,
respectively. Stock awards are issued to directors in accordance with terms
and
conditions determined by the Corporate Governance Committee of the Board of
Directors. Director stock awards are fully vested with distribution deferred
to
the end of service as a director.
The
weighted average price per nonvested stock award at grant date was $33.00 and
$39.15 for the nonvested stock awards granted in 2007 and 2006, respectively.
As
of
March 31, 2007, there was $11.7 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.
Note
4 - Earnings per Common Share
The
Company calculates earnings per share in accordance with SFAS No. 128, "Earnings
per Share." Basic earnings per share is calculated by dividing net earnings
by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is calculated similarly, except that the calculation
includes the dilutive effect of stock options and nonvested stock awards.
Weighted average basic shares decreased by 4.2 million shares in the three
months ended March 31, 2007, versus the comparable period in 2006, primarily
due
to the share repurchase program (as discussed in Note
13 - Share Repurchase Program)
and a
lower average share price, partially offset by shares issued upon the exercise
of employee stock options.
Brunswick
Corporation
Notes
to Consolidated Financial Statements (continued)
(unaudited)
Basic
and
diluted earnings per share for the three months ended March 31, 2007, and April
1, 2006, were calculated as follows:
|
|
Three
Months Ended
|
|
|
|
March
31, 2007
|
|
April
1,
2006
|
|
(in
millions, except per share data)
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$
|
34.3
|
|
$
|
74.1
|
|
Earnings
(loss) from discontinued operations, net of tax
|
|
|
3.4
|
|
|
(6.7
|
)
|
Gain
on disposal of discontinued operations, net of tax
|
|
|
7.9
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
45.6
|
|
$
|
67.4
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares - basic
|
|
|
91.4
|
|
|
95.6
|
|
Dilutive
effect of common stock equivalents
|
|
|
0.6
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares - diluted
|
|
|
92.0
|
|
|
96.6
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$
|
0.38
|
|
$
|
0.78
|
|
Earnings
(loss) from discontinued operations, net of tax
|
|
|
0.03
|
|
|
(0.07
|
)
|
Gain
on disposal of discontinued operations, net of tax
|
|
|
0.09
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
0.50
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$
|
0.38
|
|
$
|
0.77
|
|
Earnings
(loss) from discontinued operations, net of tax
|
|
|
0.03
|
|
|
(0.07
|
)
|
Gain
on disposal of discontinued operations, net of tax
|
|
|
0.09
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
0.50
|
|
$
|
0.70
|
|
As
of
March 31, 2007, there were 4.6 million options outstanding, of which 2.6 million
were exercisable. As of March 31, 2007, and April 1, 2006, there were 2.5
million and 0.9 million shares, respectively, of common stock outstanding for
which the exercise price of the options was greater than the average market
price of the Company’s shares for the period then ended. These options were not
included in the computation of diluted earnings per share because the effect
would have been anti-dilutive.
Note
5 - Commitments and Contingencies
Financial
Commitments
The
Company has entered into guarantees of indebtedness of third parties, which
are
primarily comprised of arrangements with financial institutions in connection
with customer financing programs. Under these arrangements, the Company has
guaranteed customer obligations to the financial institutions in the event
of
customer default, generally subject to a maximum amount, which is less than
total obligations outstanding. The Company has also guaranteed payments to
third
parties that have purchased customer receivables from Brunswick and, in certain
instances, has guaranteed secured term financing of its customers. In most
instances, upon repurchase of the debt obligation, the Company receives rights
to the collateral securing the financing. The
maximum potential liability associated with these customer financing
arrangements was $115.3
million as of March 31, 2007.
Any
potential payments on these customer financing arrangements would extend over
several years.
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 Brunswick products repossessed from the customer. These
arrangements are typically subject to a maximum repurchase amount. The Company’s
risk under these arrangements is mitigated by the value of the products
repurchased as part of the transaction. The maximum amount of collateral the
Company could be required to purchase was $205.5 million as of March 31,
2007.
Brunswick
Corporation
Notes
to Consolidated Financial Statements (continued)
(unaudited)
Based
on
historical experience and current facts and circumstances, and in accordance
with FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of
Others - An Interpretation of FASB Statements No. 5, 57, and 107 and Rescission
of FASB Interpretation No. 34,” the Company has recorded the estimated liability
associated with these guarantee and repurchase obligations as a liability on
its
Condensed Consolidated Balance Sheets. Historical cash requirements and losses
associated with these obligations have not been significant.
Financial
institutions have issued standby letters of credit and surety bonds
conditionally guaranteeing obligations on behalf of the Company totaling $78.0
million as of March 31, 2007, including $61.1 million for continuing operations.
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. Surety
bonds totaled $15.1 million as of March 31, 2007, including $15.0 million
related to continuing operations.
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 three months ended March 31, 2007:
|
|
2007
|
|
(in
millions)
|
|
|
|
Balance
at beginning of period
|
|
$
|
161.0
|
|
Payments
made
|
|
|
(25.6
|
)
|
Provisions/additions
for contracts issued/sold
|
|
|
28.2
|
|
Aggregate
changes for preexisting warranties
|
|
|
0.6
|
|
|
|
|
|
|
Balance
at end of period
|
|
$
|
164.2
|
|
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 $19.8 million as of March 31, 2007.
Legal
and Environmental
The
Company accrues for litigation exposure based upon its assessment, made in
consultation with counsel, of the likely range of exposure stemming from the
claim. In light of existing reserves, the Company’s litigation claims, when
finally resolved, will not, in the opinion of management, have a material
adverse effect on the Company’s consolidated financial position. If current
estimates for the cost of resolving any claims are later determined to be
inadequate, results of operations could be adversely affected in the period
in
which additional provisions are required.
Brunswick
Corporation
Notes
to Consolidated Financial Statements (continued)
(unaudited)
Tax
Case. In
February 2003, the United States Tax Court issued a ruling upholding the
disallowance by the Internal Revenue Service (IRS) of capital losses and other
expenses for 1990 and 1991 related to two partnership investments entered into
by the Company. In April 2003, the Company elected to pay the IRS $62 million
(approximately $50 million after-tax), and in April 2004, the Company elected
to
pay the IRS an additional $10 million (approximately $8 million after-tax),
in
connection with this matter pending settlement negotiations. The payments were
comprised of $33 million in taxes due and $39 million of pre-tax interest
(approximately $25 million after-tax). The Company elected to make these
payments to avoid future interest costs.
On
March
9, 2005, the Company and the IRS reached a preliminary settlement of the issues
involved in and related to this case, in which the Company agreed to withdraw
its appeal of the tax ruling. All amounts due as a result of the settlement
were
covered by the payments previously made to the IRS. In addition, all tax
computations related to taxable years 1986
through 2001 were calculated and agreed to with the IRS at the examination
level. The statute of limitations related to these taxable years expired on
March 9, 2006. As a result of these issues and other assessments, the Company
reversed $12.4 million of tax reserves in the first quarter of 2006, primarily
related to the reassessment of underlying exposures. Additionally, these tax
years will be subject to tax audits by various state jurisdictions to determine
the state tax effect of the IRS's audit adjustments.
Chinese
Supplier Dispute. Brunswick
is involved in an arbitration proceeding in Hong Kong arising out of a
commercial dispute with a former contract manufacturer in China, Shanghai
Zhonglu Industrial Company Limited (Zhonglu). The Company filed the arbitration
seeking damages based on Zhonglu's breach of a supply and distribution agreement
pursuant to which Zhonglu agreed to manufacture bowling equipment. Zhonglu
has
asserted counterclaims seeking damages for alleged breach of contract among
other claims. The arbitration tribunal heard final arguments in August 2005
and
the Company is awaiting a decision in the matter. The Company does not believe
that the resolution of this dispute will have a material adverse effect on
its consolidated financial condition or results of operations.
Patent
Infringement Dispute.
Brunswick is involved in a patent infringement action pending in the United
States District Court for the Northern District of Virginia. The plaintiff,
Electromotive, Inc., has alleged that Brunswick's Mercury Marine Group has
infringed an Electromotive patent and is seeking treble damages based on its
claim that the infringement was willful. The patent in issue expired in 2006
and
allegedly describes a methodology for engine timing and the firing of cylinders.
The plaintiff further alleges that the technology in question has been broadly
incorporated into Mercury Marine outboard and sterndrive engines. Trial is
set
to commence on July 11, 2007. The Company does not believe that the resolution
of this dispute will have a material adverse effect on its consolidated
financial condition or results of operations.
Refer
to
Note 10 to the consolidated financial statements in the 2006 Form 10-K for
disclosure of the potential cash requirements of environmental proceedings
and a
discussion of other legal matters as of December 31, 2006.
Note
6 - 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. As discussed in Note
2 - Discontinued Operations, during
the second quarter of 2006, Brunswick began reporting the majority of its
BNT
businesses as discontinued operations. These businesses were previously reported
in the Marine Engine segment. Segment results have been restated for all
periods
presented to reflect the change in Brunswick’s reported segments. Additionally,
the BNT businesses that are being retained are now reported as part of the
Boat,
Marine Engine and Fitness segments, consistent with the manner in which
Brunswick’s management now views these businesses.
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. Marine eliminations are eliminations between the Marine Engine and
Boat
segments for sales transactions consummated at established arm’s length transfer
prices.
Brunswick
Corporation
Notes
to Consolidated Financial Statements (continued)
(unaudited)
The
following table sets forth net sales and operating earnings of each of the
Company’s reportable segments for the three months ended March 31, 2007, and
April 1, 2006:
|
|
Net
Sales
|
|
Operating
Earnings
|
|
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
March
31,
2007
|
|
April
1,
2006
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$
|
699.0
|
|
$
|
751.0
|
|
$
|
19.5
|
|
$
|
48.4
|
|
Marine
Engine
|
|
|
572.6
|
|
|
555.0
|
|
|
34.7
|
|
|
44.9
|
|
Marine
eliminations
|
|
|
(136.2
|
)
|
|
(141.3
|
)
|
|
-
|
|
|
-
|
|
Total
Marine
|
|
|
1,135.4
|
|
|
1,164.7
|
|
|
54.2
|
|
|
93.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fitness
|
|
|
145.0
|
|
|
134.0
|
|
|
8.1
|
|
|
8.9
|
|
Bowling
& Billiards
|
|
|
105.8
|
|
|
114.7
|
|
|
8.3
|
|
|
12.8
|
|
Eliminations
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
-
|
|
|
-
|
|
Corporate/Other
|
|
|
-
|
|
|
-
|
|
|
(17.6
|
)
|
|
(16.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,386.1
|
|
$
|
1,413.3
|
|
$
|
53.0
|
|
$
|
98.2
|
|
Note
7 - Acquisitions
All
acquisitions are accounted for under the purchase method and in accordance
with
SFAS No. 141, “Business Combinations.”
Brunswick
continues to evaluate potential acquisitions in the ordinary course of business.
The Company did not complete any acquisitions during the first quarter of
2007.
During
the first quarter of 2006, consideration paid for acquisitions, net of cash
acquired, was as follows:
Date
|
|
Name/Description
|
|
Net
Cash
Consideration(A)
|
|
(in
millions)
|
|
|
|
|
|
2/16/06
|
|
|
Cabo
Yachts, Inc.
|
|
$
|
60.6
|
|
3/24/06
|
|
|
Marine
Innovations Warranty Corporation
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62.9
|
|
(A)
Net
cash consideration is subject to subsequent changes resulting from final
purchase agreement adjustments.
The
Company acquired certain assets of Cabo Yachts, Inc. (Cabo) for $60.6 million.
Cabo manufactures offshore sportfishing boats ranging from 31 to 52 feet. The
purchase of Cabo complements Brunswick’s previous acquisitions of Hatteras
Yachts, Inc. and Albemarle Boats, Inc. and allows the Company to offer a full
range of sportfishing convertibles from 24 to 90 feet. The post-acquisition
results of Cabo are included in the Boat segment.
The
Company made an additional payment of $2.3 million for the April 1, 2004,
acquisition of Marine Innovations Warranty Corporation (Marine Innovations).
This payment was required under the purchase agreement as Marine Innovations
fulfilled earnings targets. The Company made a final payment of $1.5 million
under this arrangement in April 2007. The post-acquisition results of Marine
Innovations are included in the Boat segment.
These
acquisitions were not and would not have been material to Brunswick’s net sales,
results of operations or total assets in the quarterly period ended April 1,
2006. Accordingly, Brunswick’s consolidated results from operations do not
differ materially from historical performance as a result of these acquisitions,
and therefore, pro forma results are not presented.
Brunswick
Corporation
Notes
to Consolidated Financial Statements (continued)
(unaudited)
Refer
to
Note 6 to the consolidated financial statements in the 2006 Form 10-K for
further details relating to Brunswick's acquisitions.
Note
8 - Investments
The
Company has certain unconsolidated international and domestic affiliates
that are accounted for using the equity method. See Note
10 - Financial Services
for more
details on the Company’s joint venture, Brunswick Acceptance Company, LLC (BAC).
Refer to Note 7 to the consolidated financial statements in the 2006 Form 10-K
for further detail relating to the Company’s investments.
Note
9 - Comprehensive Income
The
Company reports certain changes in equity during a period in accordance with
SFAS No. 130, “Reporting Comprehensive Income.” Accumulated other comprehensive
income (loss) includes unamortized prior service costs, unamortized net
actuarial gains and losses, and minimum pension liability adjustments 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. Components of other comprehensive income were
as
follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
(in
millions)
|
|
|
|
|
|
Net
earnings
|
|
$
|
45.6
|
|
$
|
67.4
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
Foreign
currency cumulative translation
adjustment
|
|
|
(4.0
|
)
|
|
-
|
|
Net
change in unrealized gains (losses) on
investments
|
|
|
-
|
|
|
1.6
|
|
Net
change in unamortized prior service cost
|
|
|
0.5
|
|
|
-
|
|
Net
change in unamortized actuarial loss
|
|
|
1.3
|
|
|
-
|
|
Net
change in accumulated unrealized
derivative
gains (losses)
|
|
|
0.4
|
|
|
0.2
|
|
Total
other comprehensive income (loss)
|
|
|
(1.8
|
)
|
|
1.8
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
43.8
|
|
$
|
69.2
|
|
There
was
no change to other comprehensive income (loss) resulting from the minimum
pension liability adjustment during the first quarter of 2006 as, prior to
the
Company’s adoption of SFAS 158, it was adjusted annually in the fourth quarter.
Note
10 - Financial Services
The
Company’s subsidiary, Brunswick Financial Services Corporation (BFS), owns 49
percent of a joint venture, Brunswick Acceptance Company, LLC (BAC), with CDF
Ventures, LLC (CDFV), a subsidiary of General Electric Capital Corporation
(GECC). Under the terms of the joint venture agreement, BAC provides secured
wholesale 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.
Brunswick
Corporation
Notes
to Consolidated Financial Statements (continued)
(unaudited)
BFS’s
contributed equity is adjusted monthly to maintain a 49 percent equity interest
in accordance with the capital provisions of the joint venture agreement. BFS’s
investment in BAC is 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’s investment in BAC is funded through cash contributions and
reinvested earnings. The Company records BFS’s share of income or loss in BAC
based on its ownership percentage in the joint venture in Equity earnings in
its
Consolidated Statements of Income.
BAC
is
funded in part through a loan from GE Commercial Distribution Finance
Corporation and a securitization facility arranged by GECC, and in part by
a
cash equity investment from both partners. BFS’s total investment in BAC at
March 31, 2007, and December 31, 2006, was $57.5 million and $50.6 million,
respectively. BFS’s exposure to losses associated with BAC financing
arrangements is limited to its funded equity in BAC.
BFS
recorded income related to the operations of BAC of $3.4 million and $4.0
million for the three months ended March 31, 2007, and April 1, 2006,
respectively. These amounts exclude the discount expense paid by the Company
on
the sale of Mercury Marine’s accounts receivable to the joint venture noted
below.
Since
2003, the Company has sold a significant portion of its domestic Mercury Marine
accounts receivable to BAC. Accounts receivable totaling $208.2 million and
$199.7 million were sold to BAC in the first quarter of 2007 and 2006,
respectively. Discounts of $1.9 million and $1.7 million for the first quarter
of 2007 and 2006, respectively, have been recorded as an expense in Other
expense, net, in the Consolidated Statements of Income. The outstanding balance
of receivables sold to BAC was $105.8 million as of March 31, 2007, up from
$80.0 million as of December 31, 2006. Pursuant to the joint venture agreement,
BAC reimbursed Mercury Marine $0.5 million for the three months ended March
31,
2007, and April 1, 2006, for the related credit, collection and administrative
costs incurred in connection with the servicing of such receivables.
As
of
March 31, 2007, and December 31, 2006, the Company had a retained interest
in
$43.2 million and $31.5 million of the total outstanding accounts receivable
sold to BAC, respectively. The Company’s maximum exposure as of March 31, 2007,
and December 31, 2006, related to these amounts was $22.7 million and $16.9
million, respectively. In accordance with SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”
the Company treats the sale of receivables in which the Company retains an
interest as a secured obligation. Accordingly, the amount of the Company’s
maximum exposure 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
5 - Commitments and Contingencies.
Additionally,
Brunswick's marine dealers can offer extended product warranties to their retail
customers through Brunswick Product Protection Corporation (previously Marine
Innovations Warranty Corporation, which the Company acquired in 2004). In
October 2006, Brunswick acquired Blue Water Dealer Services, Inc. and its
affiliates, a provider of retail financial services to the marine industry,
to
allow Brunswick to offer a more complete line of financial services to its
boat
and marine engine dealers and their customers. Refer to Note 6 to the
consolidated financial statements in the 2006 Form 10-K for further
details.
Note
11 - Income Taxes
The
Company has historically provided deferred taxes under APB No. 23, “Accounting
for Income Taxes - Special Areas,” (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.
Brunswick
Corporation
Notes
to Consolidated Financial Statements (continued)
(unaudited)
The
Company has continued to provide deferred taxes, as required, on the
undistributed net earnings of all non-U.S. subsidiaries and unconsolidated
affiliates for which the APB 23 assertion had not been elected, as those
earnings may be repatriated in future years. As of January 1, 2007, the Company
determined that approximately $25.8 million of current undistributed net
earnings, as well as the future net earnings, of certain additional foreign
subsidiaries will be permanently reinvested. These earnings will provide
Brunswick with the opportunity to continue to expand its global manufacturing
footprint, fund future growth in foreign locations and shift Brunswick’s
acquisition focus to Europe and Asia. The Company’s current intentions meet the
indefinite reversal criterion of APB 23. 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’s effective tax rate from continuing operations for the three months
ended March 31, 2007, was 27.3 percent. The effective tax rate was lower than
the statutory rate due principally to $2.3 million of non-recurring tax
benefits, primarily related to the Company’s election to apply the indefinite
reversal criterion of APB 23 as discussed above. Additionally,
the 2007 effective tax rate was further favorably affected by the research
and
development tax credit.
The
Company’s effective tax rate from continuing operations for the three months
ended April 1, 2006, was 20.0 percent. The effective tax rate was lower than
the
statutory rate primarily as a result of benefits from a $12.4 million tax
reserve reassessment of underlying exposures. Refer to Note
5 - Commitments and Contingencies
for
further details.
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
January 1, 2007, the Company had $42.4 million of gross unrecognized tax
benefits. Of this amount, $34.3 million represents the portion that, if
recognized, would impact the effective tax rate. The Company recognizes interest
and penalties related to unrecognized tax benefits in income tax expense. As
of
January 1, 2007, the Company had $5.4 million accrued for the payment of
interest, and no amounts accrued for penalties. Due to the various jurisdictions
in which the Company files tax returns, it is reasonably possible that there
will be a significant change in the amount of unrecognized tax benefits in
2007,
but the amount cannot be estimated.
The
Company is regularly audited by federal, state and foreign tax authorities.
The
IRS has completed their audits of the Company’s U.S. income tax returns through
the 2003 taxable year and is currently auditing the Company’s U.S. 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.
Note
12 - 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 requires 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 will have no impact on the
Company in 2007. See Note 14 to the consolidated financial statements in the
2006 Form 10-K for further details regarding these plans.
Brunswick
Corporation
Notes
to Consolidated Financial Statements (continued)
(unaudited)
Pension
and other postretirement benefit costs included the following components for
the
three months ended March 31, 2007, and April 1, 2006:
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
|
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
March
31,
2007
|
|
April
1,
2006
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
4.3
|
|
$
|
4.6
|
|
$
|
0.7
|
|
$
|
0.7
|
|
Interest
cost
|
|
|
15.7
|
|
|
14.7
|
|
|
1.4
|
|
|
1.5
|
|
Expected
return on plan assets
|
|
|
(20.4
|
)
|
|
(19.7
|
)
|
|
-
|
|
|
-
|
|
Amortization
of prior service costs
|
|
|
1.6
|
|
|
1.7
|
|
|
(0.4
|
)
|
|
(0.5
|
)
|
Amortization
of net actuarial loss
|
|
|
1.8
|
|
|
2.6
|
|
|
0.2
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
pension and other benefit costs
|
|
$
|
3.0
|
|
$
|
3.9
|
|
$
|
1.9
|
|
$
|
2.0
|
|
Employer
Contributions. During
the three months ended March 31, 2007, the Company contributed $0.7 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.
Note
13 - 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. During the three months ended March 31,
2007, the Company repurchased 1.0 million shares under this program for $33.4
million. During the three months ended April 1, 2006, the Company repurchased
approximately 1.6 million shares for $61.8 million. Through the first quarter
of
2007, the Company had repurchased approximately 8.6 million shares since the
program’s inception. As of March 31, 2007, the Company’s remaining share
repurchase authorization under the program was $332.8 million.
Note
14 - Restructuring Activities
In
November 2006, Brunswick announced an initiative to improve the Company’s cost
structure, better utilize overall capacity and improve general operating
efficiencies. These actions reflect the Company’s response to difficult marine
market conditions, as the Company continues to reduce production volumes to
achieve appropriate dealer pipeline inventories, and include the consolidation
of certain boat manufacturing facilities, sales offices and distribution
warehouses as well as reductions in the Company’s global workforce. In addition,
these efforts include the streamlining of certain sales and other operations
throughout the Company.
The
Company anticipates that it will incur total costs of approximately $28 million
under this initiative, which will be completed in early- to mid-2007. The
Company incurred $18.9 million of restructuring charges prior to December 31,
2006, as discussed in Note 3 to the consolidated financial statements in the
2006 Form 10-K. During the first quarter of 2007, the Company recorded an
additional $3.7 million of pre-tax restructuring charges for severance and
other
costs associated with workforce reductions, plant closures and distribution
realignment actions.
Brunswick
Corporation
Notes
to Consolidated Financial Statements (continued)
(unaudited)
Restructuring
charges recorded during the three months ended March 31, 2007, were included
in
the Consolidated Statements of Income as follows:
|
|
Three
Months
Ended
March
31, 2007
|
|
(in
millions)
|
|
|
|
Cost
of sales:
|
|
|
|
Severance
|
|
$
|
0.3
|
|
Other
|
|
|
0.3
|
|
Total
|
|
|
0.6
|
|
|
|
|
|
|
Selling,
general and administrative expense:
|
|
|
|
|
Severance
|
|
|
2.5
|
|
Other
|
|
|
0.6
|
|
Total
|
|
|
3.1
|
|
|
|
|
|
|
Total
restructuring charges
|
|
$
|
3.7
|
|
Restructuring
charges recorded by segment during the three months ended March 31, 2007, were
as follows:
|
|
Three
Months
Ended
March
31, 2007
|
|
(in
millions)
|
|
|
|
Boat
|
|
$
|
3.2
|
|
Marine
Engine
|
|
|
0.3
|
|
Corporate
|
|
|
0.2
|
|
|
|
|
|
|
Total
|
|
$
|
3.7
|
|
The
Company expects to incur approximately $5 million of additional restructuring
costs under this initiative in 2007; $3 million in the Boat segment, $1 million
in the Marine Engine segment and $1 million in the Bowling & Billiards
segment.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Certain
statements in Management’s Discussion and Analysis are based on non-GAAP
financial measures with respect to the Company’s operating results and cash
flows. GAAP refers to generally accepted accounting principles in the United
States. At times, management’s discussion of operating results excludes the
effects of acquisitions, restructuring charges, non-recurring tax benefits
and
related effective tax rates, and management’s cash flow discussion includes an
analysis of free cash flow. Refer to the Matters
Affecting Comparability
and
Cash
Flow, Liquidity and Capital Resources
sections
for further details. 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 2006 Annual Report on Form 10-K (the 2006 Form
10-K).
Overview
and Outlook
General
Sales
from continuing operations during the first quarter of 2007 decreased 1.9
percent to $1,386.1 million, with gains reported by the Marine Engine and
Fitness segments, which were more than offset by a reduction in the Boat and
Bowling & Billiards segments. The decrease in sales was primarily due to
lower sales volumes resulting from the continued reduction in domestic marine
industry demand levels, partially offset by the effect of marine acquisitions
during 2006, growth in the Fitness segment, strong international performance,
higher sales of marine parts and accessories and favorable pricing. Excluding
incremental sales of $12.3 million from acquisitions, Brunswick’s sales in the
quarter declined 2.8 percent from the same period in 2006. Operating earnings
from continuing operations of $53.0 million and related operating margins of
3.8
percent decreased from the same period in the prior year, primarily as a result
of lower fixed-cost absorption due to reduced production rates in Brunswick’s
marine businesses in an effort to achieve appropriate levels of dealer pipeline
inventories, higher raw material and production costs and unfavorable mix
factors. These factors were partially offset by successful cost-reduction
initiatives and the effects of higher pricing and acquisitions. In the quarter
ended April 1, 2006, the Company reported operating earnings from continuing
operations of $98.2 million with related operating margins of 6.9
percent.
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. These BNT
businesses had become increasingly concentrated in markets outside of
Brunswick’s core business segments - marine, fitness, bowling and billiards -
and continued growth would have required significant investment to ensure
successful new product introductions. The Company believed that BNT’s long-term
prospects would be better under different ownership. 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.
In
March
2007, Brunswick completed the sales of BNT’s marine electronics and PND
businesses to Navico International Ltd. and MiTAC International Corporation,
respectively, for total proceeds of $44.7 million, including the effect of
a
working capital adjustment. A $7.9 million after-tax gain was recognized with
the divestiture of these two businesses. The
Company is continuing to pursue the sale of the wireless fleet tracking
business, and, based on discussions with potential buyers as well as current
projections, the Company currently anticipates that the proceeds will exceed
its
net book value.
As
a
result of reduced retail demand for marine products in 2007, Brunswick will
continue its efforts to achieve appropriate levels of dealer inventories by
reducing production of boats and marine engines. The Company anticipates that
sales will benefit from the introduction of new products and the full-year
benefit of businesses acquired in 2006, along with favorable pricing as well
as
continued growth in international markets and Brunswick’s marine parts and
accessories businesses. Considering all of these factors, 2007 marine sales,
which includes both the Boat and Marine Engine segments, are expected to be
down
slightly as compared with 2006. Sales for 2007 in both the Fitness and Bowling
& Billiards segments are expected to increase in the low- to mid-single
digit percentages. Overall, reported sales for 2007 are expected to be
relatively flat, plus or minus a couple of percentage points.
Operating
earnings and margins for 2007 will be adversely affected by the continued
production declines, as discussed above. These actions will have an unfavorable
effect on Boat and Marine Engine segment margins due to lower fixed-cost
absorption and an unfavorable product mix, as production cutbacks will be
greater in certain higher-margin boat categories. These factors, along with
continued increases in raw materials, production, freight and distribution
costs
and restored variable compensation expenses, are not expected to be offset
by
improvements in pricing, growth in international marine operations and benefits
from restructuring and cost containment efforts currently underway in 2007.
The
Company may incur additional restructuring costs from certain manufacturing
realignment and cost improvement initiatives currently under consideration.
Brunswick’s effective tax rate in 2007 is expected to be approximately 32
percent, excluding the effect of any non-recurring tax
items.
Matters
Affecting Comparability
As
described above, certain statements in Management’s Discussion and Analysis are
based on non-GAAP financial measures. A “non-GAAP financial measure” is a
numerical measure of a registrant’s historical or future financial performance,
financial position or cash flows that excludes amounts, or is subject to
adjustments that have the effect of excluding amounts, that are included in
the
most directly comparable measure calculated and presented in accordance with
GAAP in the statement of income, balance sheet or statement of cash flows of
the
issuer; or includes amounts, or is subject to adjustments that have the effect
of including amounts, that are excluded from the most directly comparable
measure so calculated and presented. Operating and statistical measures are
not
non-GAAP financial measures.
The
Company has used the non-GAAP financial measures that are included in
Management’s Discussion and Analysis for several years. 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. Brunswick’s management believes that for the three months ended
March 31, 2007, and April 1, 2006, the presentation of (i) diluted earnings
per
share excluding non-recurring tax benefits; (ii) net sales and operating
earnings excluding acquisitions not reflected in the prior year’s results; and
(iii) the Company’s effective tax rate excluding the effect of non-recurring tax
benefits, provide a more meaningful comparison to prior results.
Acquisitions.
Brunswick’s operating results for the three months ended March 31, 2007, include
the operating results from acquisitions completed in 2006. Approximately 1
percent of Brunswick’s sales during the first quarter of 2007 can be attributed
to incremental sales from the following acquisitions:
Date
|
|
Description
|
|
Segment
|
|
|
|
|
|
2/16/06
|
|
Cabo
Yachts, Inc. (Cabo)
|
|
Boat
|
4/26/06
|
|
Diversified
Marine Products, L.P. (Diversified)
|
|
Boat
|
10/18/06
|
|
Blue
Water Dealer Services, Inc. (Blue Water)
|
|
Boat
|
Cabo
complements the Company’s previous acquisitions of Hatteras Yachts, Inc. and
Albemarle, allowing Brunswick to offer a full range of sportfishing convertibles
from 24 to 90 feet. Diversified complements Brunswick’s previous acquisitions of
Land ‘N’ Sea Corporation, Kellogg Marine, Inc. and Benrock, Inc., allowing
Brunswick to provide same- or next-day delivery of marine parts and accessories
nationwide by expanding the Company’s parts and accessories business to the West
Coast of the United States. The acquisition of Blue Water, a provider of retail
financial services to the marine industry, allows Brunswick to offer a more
complete line of financial services to its boat and marine engine dealers and
their customers.
Refer
to
Note
7 - Acquisitions
in the
Notes to Consolidated Financial Statements for a more detailed description
of
these acquisitions.
Tax
Items.
The
comparison of net earnings per diluted share between 2007 and 2006 is affected
by non-recurring tax items. During the first quarter of 2007, the Company
reduced its tax provision by $2.3 million ($0.03 per diluted share), primarily
as a result of its election to apply the indefinite reversal criterion of APB
No. 23, “Accounting for Income Taxes - Special Areas” (APB 23), to the
undistributed net earnings of certain foreign subsidiaries. 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. These
earnings will provide Brunswick with the opportunity to continue to expand
its
global manufacturing footprint, fund future growth in foreign locations and
shift Brunswick’s acquisition focus to Europe and Asia. The Company’s current
intentions satisfy the indefinite reversal criterion of APB 23. See Note
11 - Income Taxes
in the
Notes to Consolidated Financial Statements for further details.
During
the first quarter of 2006, the Company reduced its tax provision primarily
due
to tax benefits from a $12.4 million ($0.13 per diluted share) tax reserve
reassessment of underlying exposures, as detailed in Note
5 - Commitments and Contingencies
in the
Notes to Consolidated Financial Statements.
The
effect of these items on diluted earnings per share from continuing
operations was as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
(in
millions)
|
|
|
|
|
|
Net
earnings from continuing operations
per
diluted share - as reported
|
|
$
|
0.38
|
|
$
|
0.77
|
|
Tax
items
|
|
|
(0.03
|
)
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
per
diluted share - as adjusted
|
|
$
|
0.35
|
|
$
|
0.64
|
|
Management
believes that the presentation of net earnings from continuing operations per
diluted share, excluding these items, provides a more meaningful comparison
of
current-period and prior-period results because these items are unique to their
respective periods.
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:
|
|
|
|
2007
vs. 2006
|
|
|
|
Three
Months Ended
|
|
Increase/(Decrease)
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,386.1
|
|
$
|
1,413.3
|
|
$
|
(27.2
|
)
|
|
(1.9)
|
%
|
Gross
margin (A)
|
|
$
|
296.4
|
|
$
|
313.4
|
|
$
|
(17.0
|
)
|
|
(5.4)
|
%
|
Operating
earnings
|
|
$
|
53.0
|
|
$
|
98.2
|
|
$
|
(45.2
|
)
|
|
(46.0)
|
%
|
Net
earnings from continuing operations
|
|
$
|
34.3
|
|
$
|
74.1
|
|
$
|
(39.8
|
)
|
|
(53.7)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share from continuing
operations
|
|
$
|
0.38
|
|
$
|
0.77
|
|
$
|
(0.39
|
)
|
|
(50.6)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expressed
as a percentage of net sales (B):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
21.4
|
%
|
|
22.2
|
%
|
|
|
|
|
(80)
bpts
|
|
Selling,
general and administrative expense
|
|
|
15.1
|
%
|
|
13.1
|
%
|
|
|
|
|
200
bpts
|
|
Operating
margin
|
|
|
3.8
|
%
|
|
6.9
|
%
|
|
|
|
|
(310)
bpts
|
|
__________
bpts
=
basis points
(A) Gross
margin is defined as Net sales less Cost of sales as presented in the
Consolidated Statements of Income.
(B)
Percentages are determined by using the following numerators expressed as a
percentage of Net sales: Gross margin as defined in (A), Selling, general and
administrative expense and Operating earnings as presented in the
Consolidated Statements of Income.
The
decrease in sales was primarily due to reduced demand levels across the marine
industry compared with the first quarter of 2006, most notably with respect
to
domestic sales of fiberglass and aluminum boats as well as engines, and lower
Bowling & Billiards segment sales. This decrease was partially offset by
increased Marine Engine segment sales resulting from strong international growth
and favorable pricing, as well as an increase in Fitness segment sales, the
effect of acquisitions completed in 2006 in the Boat segment and growth in
the
Company’s marine parts and accessories businesses. Excluding incremental sales
of $12.3 million from acquisitions, sales decreased 2.8 percent in the first
quarter of 2007 from the same period in 2006. Non-U.S. sales in the first
quarter of 2007 increased 6.1 percent from the same period in the prior year
as
a result of international growth in the Boat, Marine Engine and Fitness
segments.
The
decrease in gross margin percentage in the first quarter of 2007 compared with
the same period last year was primarily due to higher raw material and component
costs, lower fixed-cost absorption and inefficiencies due to reduced production
rates as a result of the Company’s effort to achieve appropriate levels of
marine customer pipeline inventories in light of lower retail demand, and
increased promotional incentives in the Boat segment. These decreases were
partially offset by favorable pricing, the benefit of a weaker dollar and
successful cost-reduction efforts.
Operating
expenses increased by $28.2 million in the first quarter of 2007 compared with
the same period in 2006. The increase was primarily due to higher
investments in research and development; increased variable compensation
expense; the absence of gains associated with the sale of a facility in the
Marine Engine segment and a bowling center; the
effect of acquisitions; and the effects of inflation and a weaker dollar.
Also contributing to the increase in operating expenses were restructuring
charges for severance and other costs associated with previously announced
workforce reductions and plant closures. See Note
14 - Restructuring Activities
in the
Notes to Consolidated Financial Statements for further details regarding these
charges. The increase in operating expenses was partially offset by the
favorable effect of cost containment efforts arising from the Company’s
restructuring activities.
The
decrease in operating earnings was mainly due to reduced sales volumes and
the
unfavorable factors affecting gross margin and operating expenses discussed
above. These decreases were partially offset by contributions from acquisitions.
Interest
expense in the first quarter of both 2007 and 2006 was $13.6 million, as
increased interest resulting from higher interim commercial paper borrowings
during 2007 was offset by the favorable effect of lower interest rates on the
Company’s floating-rate debt, compared with higher rates on fixed-rate debt in
2006. See Note 13 to the consolidated financial statements in the 2006 Form
10-K
for details related to financial instruments. Interest income decreased $1.1
million in the first quarter of 2007 compared with the same period in 2006
due
to a lower average invested cash balance.
The
Company’s effective tax rate in the first quarter of 2007 increased to 27.3
percent from 20.0 percent in the first quarter of 2006, mostly due to lower
non-recurring tax benefits in 2007 compared with the prior year. During the
three months ended March 31, 2007, the Company recognized non-recurring tax
benefits of $2.3 million, primarily as a result of its APB 23 assertion to
indefinitely reinvest the undistributed net earnings of certain foreign
subsidiaries, as discussed in Note
11 - Income Taxes
in the
Notes to Consolidated Financial Statements. Excluding these tax benefits, the
Company’s effective tax rate for the first quarter of 2007 was 32.2 percent.
During the three months ended April 1, 2006, the Company’s tax provision
benefited from a $12.4 million tax reserve reassessment of underlying exposures,
as discussed in Note
5 - Commitments and Contingencies in
the
Notes to Consolidated Financial Statements. Excluding the $12.4 million tax
reserve reassessment, the Company’s effective tax rate for the first quarter of
2006 was 33.4 percent. Management believes that presentation of the effective
tax rate, excluding these non-recurring tax benefits in the first quarter of
2007 and 2006, provides a more meaningful comparison because these tax benefits
are unique to their respective periods.
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. Excluding the $2.3 million and $12.4 million of
non-recurring tax benefits in the first quarter of 2007 and 2006, respectively,
diluted earnings per share from continuing operations would have been $0.35
and
$0.64 for the first quarter of each respective year. Management believes that
presentation of diluted earnings per share from continuing operations, excluding
the non-recurring tax benefits, provides a more meaningful comparison to the
prior period because these items are unique to their respective
periods.
Weighted
average common shares outstanding used to calculate diluted earnings per share
decreased to 92.0 million in the first quarter of 2007 from 96.6 million in
the
first quarter of 2006. The decrease in average shares outstanding was primarily
due to the repurchase of 5.0 million shares since the first quarter of 2006,
as
discussed in Note
13 - Share Repurchase Program in
the
Notes to Consolidated Financial Statements.
During
the first quarter of 2007, the Company completed the sales of BNT’s marine
electronics and PND businesses for total proceeds of $44.7 million, including
the effect of a working capital adjustment, resulting in an after-tax gain
of
$7.9 million. Additionally, BNT’s operations generated after-tax earnings of
$3.4 million, driven primarily by higher earnings in BNT’s wireless
fleet tracking business and tax-related benefits, compared with an after-tax
loss of $6.7 million in the first quarter of 2006.
Boat
Segment
The
following table sets forth Boat segment results for the three months
ended:
|
|
|
|
2007
vs. 2006
|
|
|
|
Three
Months Ended
|
|
Increase/(Decrease)
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
699.0
|
|
$
|
751.0
|
|
$
|
(52.0
|
)
|
|
(6.9)
|
%
|
Operating
earnings
|
|
$
|
19.5
|
|
$
|
48.4
|
|
$
|
(28.9
|
)
|
|
(59.7)
|
%
|
Operating
margin
|
|
|
2.8
|
%
|
|
6.4
|
%
|
|
|
|
|
(360)
bpts
|
|
Capital
expenditures
|
|
$
|
14.5
|
|
$
|
24.6
|
|
$
|
(10.1
|
)
|
|
(41.1)
|
%
|
__________
bpts
=
basis points
The
decrease in Boat segment sales was largely attributable to reduced marine retail
demand in domestic markets, resulting in lower shipments to dealers in an effort
to achieve appropriate levels of pipeline inventories. Increased promotional
incentives also contributed to lower sales. Sales were favorably affected by
growth outside the U.S., higher pricing, gains in the Boat segment’s parts and
accessories business and acquisitions completed in 2006. Excluding incremental
sales of $12.3 million from acquired businesses, organic Boat segment sales
declined by 8.6 percent.
Boat
segment operating earnings decreased from 2006, primarily due to reduced
production levels across the segment’s brands, which lead to lower fixed-cost
absorption; higher raw material and production costs; and increased promotional
incentives. Also contributing to the decrease in operating earnings were
restructuring charges for severance and other costs associated with previously
announced workforce reductions and plant closures. See Note
14 - Restructuring Activities
in the
Notes to Consolidated Financial Statements for further details regarding these
charges. The decrease in operating earnings was partially offset by the benefits
of favorable pricing and successful cost control efforts.
Capital
expenditures in the first quarter of 2007 and 2006 were largely attributable
to
tooling costs for the production of new models. The decrease in capital
expenditures was mainly due to the acquisition of a marina in 2006.
Marine
Engine Segment
The
following table sets forth Marine Engine segment results for the three months
ended:
|
|
|
|
2007
vs. 2006
|
|
|
|
Three
Months Ended
|
|
Increase/(Decrease)
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
572.6
|
|
$
|
555.0
|
|
$
|
17.6
|
|
|
3.2
|
%
|
Operating
earnings
|
|
$
|
34.7
|
|
$
|
44.9
|
|
$
|
(10.2
|
)
|
|
(22.7)
|
%
|
Operating
margin
|
|
|
6.1
|
%
|
|
8.1
|
%
|
|
|
|
|
(200)
bpts
|
|
Capital
expenditures
|
|
$
|
14.0
|
|
$
|
20.2
|
|
$
|
(6.2
|
)
|
|
(30.7)
|
%
|
__________
bpts
=
basis points
Sales
recorded by the Marine Engine segment increased 3.2 percent from the first
quarter of 2006, primarily due to international sales growth across all major
regions; higher engine pricing; gains in the Marine Engine segment’s parts and
accessories business; and the favorable effect of foreign currency translation.
Domestic engine sales volumes decreased as a result of lower marine retail
demand levels and related efforts to reduce pipeline inventories held by
customers.
Marine
Engine segment operating earnings decreased in the first quarter of 2007, as
the
gains in sales and successful cost containment efforts were more than offset
by
the effects of inflation and higher raw material costs; lower fixed-cost
absorption due to reduced production levels in an effort to achieve appropriate
pipeline inventories; the absence of a gain on the sale of property in the
first
quarter of 2006; and increased variable compensation expense.
The
decrease in capital expenditures was primarily attributable to increased
investments in 2006 associated with the completion of a second four-stroke
outboard production line and plant expansions for die cast operations.
Fitness
Segment
The
following table sets forth Fitness segment results for the three months
ended:
|
|
|
|
2007
vs. 2006
|
|
|
|
Three
Months Ended
|
|
Increase/(Decrease)
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
145.0
|
|
$
|
134.0
|
|
$
|
11.0
|
|
|
8.2
|
%
|
Operating
earnings
|
|
$
|
8.1
|
|
$
|
8.9
|
|
$
|
(0.8
|
)
|
|
(9.0)
|
%
|
Operating
margin
|
|
|
5.6
|
%
|
|
6.6
|
%
|
|
|
|
|
(100)
bpts
|
|
Capital
expenditures
|
|
$
|
1.5
|
|
$
|
3.7
|
|
$
|
(2.2
|
)
|
|
(59.5)
|
%
|
__________
bpts
=
basis points
The
increase in Fitness segment sales was largely attributable to commercial sales
growth in international markets, particularly in Europe and Latin America,
as
health clubs continued to expand. Domestic sales for commercial and
consumer products continued to grow.
While
the
Fitness segment benefited from sales growth in all markets, operating earnings
decreased, primarily due to increased research and development spending for
new product introductions.
Capital
expenditures in the first quarter of 2007 and 2006 were primarily related to
tooling for new products and software development. Additionally, capital
expenditures in 2006 included spending for a new engineering design
facility to drive future product improvements.
Bowling
& Billiards Segment
The
following table sets forth Bowling & Billiards segment results for the three
months ended:
|
|
|
|
2007
vs. 2006
|
|
|
|
Three
Months Ended
|
|
Increase/(Decrease)
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
$
|
|
%
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
105.8
|
|
$
|
114.7
|
|
$
|
(8.9
|
)
|
|
(7.8)
|
%
|
Operating
earnings
|
|
$
|
8.3
|
|
$
|
12.8
|
|
$
|
(4.5
|
)
|
|
(35.2)
|
%
|
Operating
margin
|
|
|
7.8
|
%
|
|
11.2
|
%
|
|
|
|
|
(340)
bpts
|
|
Capital
expenditures
|
|
$
|
9.4
|
|
$
|
5.7
|
|
$
|
3.7
|
|
|
64.9
|
%
|
__________
bpts
=
basis points
Bowling
& Billiards segment sales decreased from prior year levels, primarily due to
declines in sales of bowling products and coin-operated billiards tables, which
were adversely affected by the start-up of production related to
the transition of manufacturing to Reynosa, Mexico. Bowling products sales
also
decreased due to the timing of capital equipment sales, which are subject to
fluctuations during the year as they are tied to new center openings and center
modernization projects by independent proprietors. Sales at bowling retail
centers declined slightly as a result of operating five fewer bowling centers
in
the first quarter of 2007 versus the comparable 2006 period. This decrease
was
largely offset by gains from improved traffic at existing retail centers, as
well as the addition of a new Brunswick Zone XL center in the second quarter
of
2006.
The
decrease in current quarter operating earnings was largely attributable to
the
absence of a gain associated with the sale of a bowling center that occurred
in
the first quarter of 2006, as well as start-up costs associated with the
transition of the segment’s bowling ball and commercial billiards table
manufacturing operations to Reynosa, Mexico. The transition of bowling ball
and
commercial billiards table production is expected to be completed during 2007.
Increased variable compensation expenses also reduced operating
earnings.
Increased
capital expenditures in the first quarter of 2007 were driven by higher capital
spending for new Brunswick Zone XL bowling centers, partially offset by reduced
spending for the new bowling ball manufacturing facility in Reynosa,
Mexico.
Cash
Flow, Liquidity and Capital Resources
The
following table sets forth an analysis of free cash flow for the three months
ended:
|
|
Three
Months Ended
|
|
|
|
March
31,
2007
|
|
April
1,
2006
|
|
(in
millions)
|
|
|
|
|
|
Net
cash used for operating activities of continuing
operations
|
|
$
|
(12.7
|
)
|
$
|
(74.7
|
)
|
Net
cash provided by (used for):
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(39.8
|
)
|
|
(54.4
|
)
|
Proceeds
from the sale of property, plant and equipment
|
|
|
0.3
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
Free
cash flow from continuing operations *
|
|
$
|
(52.2
|
)
|
$
|
(124.0
|
)
|
__________
|
*
|
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. Free cash flow from continuing operations is
not
intended as an alternative measure of cash flow from operations,
as
determined in accordance with generally accepted accounting principles
(GAAP) in the United States. The Company uses this financial measure
both
in presenting its results to shareholders and the investment community
and
in its internal evaluation and management of its businesses. Management
believes that this financial measure and the information it provides
are
useful to investors because it permits investors to view the Company’s
performance using the same tool that management uses to gauge progress
in
achieving its goals. Management believes that the non-GAAP financial
measure “Free cash flow from continuing operations” is also useful to
investors because it is an indication of cash flow that may be available
to fund further investments in future growth
initiatives.
|
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 quarter of 2007, net cash used by operating activities of continuing
operations totaled $12.7 million, compared with $74.7 million in the same period
of 2006. Despite a $39.8 million decrease in net earnings from continuing
operations, net cash used for operating activities in the first quarter of
2007
decreased from the comparable prior year period, primarily due to a $132.2
million increase in working capital, defined as non-cash current assets less
current liabilities, compared with a $220.9 million increase in the first
quarter of 2006. The favorable change in working capital spending was driven
by
a decrease in cash variable compensation payouts during the first quarter of
2007. These factors were partially offset by an increase in operating cash
used
to fund seasonal inventory build in the first quarter of 2007, compared with
the
same period in 2006. Although production rates were reduced to achieve
appropriate levels of marine pipeline inventories, increases in inventory
balances exceeded the prior year increase in inventory as a result of
acquisitions completed during 2006, higher engine inventories to support growth
in international markets and the ramp up of production at the Company’s new
Hatteras facility in Swansboro, North Carolina, which opened in late 2005.
Additionally, accounts receivable balances increased due to growth in
international marine sales and the impact of incremental sales from 2006
acquisitions.
Cash
flows from investing activities included capital expenditures of $39.8 million
in the first quarter of 2007, which decreased from $54.4 million in the first
quarter of 2006, primarily as a result of the absence of 2006 expenditures
for
the acquisition of an interest in a marina in St. Petersburg, Florida, the
completion of a second four-stroke outboard production line in the Marine Engine
segment and investments in the Life Fitness engineering design facility, which
was completed in the second quarter of 2006. Significant capital expenditures
in
the first quarter of 2007 included tooling expenditures for new models and
product innovations in the Boat Group, capital spending for new Brunswick Zone
XL and existing bowling centers, and costs to expand die cast operations in
the
Marine Engine segment.
Brunswick
did not complete any acquisitions during the first quarter of 2007. During
the
first quarter of 2006, cash paid for acquisitions, net of cash acquired, totaled
$62.9 million. See Note
7 - Acquisitions in
the
Notes to Consolidated Financial Statements and Note 6 to the consolidated
financial statements in the 2006 Form 10-K for further details on the Company’s
acquisitions. The Company’s cash investment in Brunswick Acceptance Company, LLC
(BAC) increased $5.5 million and $6.1 million during the first quarter of 2007
and 2006, respectively, to maintain the Company’s required 49 percent equity
investment.
Cash
flows from financing activities of continuing operations resulted in a use
of
cash of $29.1 million in the first quarter of 2007, which decreased from a
$58.4
million use of cash in the same period in 2006. This change was largely
attributable to the Company’s share repurchase program, under which the Company
repurchased 1.0 million shares for $33.4 million during the first quarter of
2007, compared with repurchases of approximately 1.6 million shares for $61.8
million in the first quarter of 2006. See Note
13 - Share Repurchase Program in
the
Notes to Consolidated Financial Statements for further details. The Company
received $4.5 million from stock options exercised in the first quarter of
2007,
compared with $3.7 million during the same period in 2006.
Cash
and
cash equivalents totaled $204.0 million as of March 31, 2007, a decrease of
$79.4 million from $283.4 million at December 31, 2006. Total debt as of both
March 31, 2007, and December 31, 2006, was $726.4 million. Brunswick’s
debt-to-capitalization ratio decreased slightly to 27.7 percent as of March
31,
2007, from 28.0 percent as of December 31, 2006.
The
Company has a $650.0 million long-term revolving credit facility (Facility)
with
a group of banks, as described in Note 13 to the consolidated financial
statements in the 2006 Form 10-K, that serves as support for commercial paper
borrowings. The Facility has a term of five years, with provisions to extend
the
term for an additional one year on each anniversary of the Facility, with
consent of the lenders. In May 2007, the Company amended the Facility agreement,
resulting in a one-year extension of the term through May 5, 2012. Of the $650.0
million Facility, there are $55.0 million of commitments which expire on May
5,
2011; however, the Company has the right to replace these commitments at any
time. There were no borrowings under the Facility during the first three months
of 2007 or 2006, and the Facility continues to serve as support for any
outstanding commercial paper borrowings. The Company has the ability to issue
up
to $150.0 million in letters of credit under the Facility. The Company had
borrowing capacity of $587.6 million under the terms of this agreement as of
March 31, 2007, net of outstanding letters of credit. In addition, the Company
has $200.0 million available under its universal shelf registration statement
filed in 2001 with the SEC for the issuance of equity and/or debt
securities.
The
Company did not make contributions to its qualified pension plans in the first
quarter of 2007 or 2006, 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 2007 based on market
conditions and Company discretion, among other items. The Company contributed
$0.7
million and $0.6 million to fund benefit payments in its nonqualified plan
in
the
first quarter of 2007 and 2006, respectively, and expects to contribute an
additional $1.9 million to the nonqualified plan in 2007, compared with $1.8
million that was funded subsequent to the first quarter of 2006. See
Note
12 - Pension and Other Postretirement Benefits
in the
Notes to
Consolidated Financial Statements and Note 14 to the consolidated financial
statements in the 2006 Form 10-K for more details.
Brunswick’s
financial flexibility and access to capital markets are supported by its balance
sheet position, investment-grade credit ratings and ability to generate
significant cash from operating activities. Management believes that there
are
adequate sources of liquidity to meet the Company’s short-term and long-term
needs.
Financial
Services
See
Note
10 - Financial Services in
the
Notes to Consolidated Financial Statements for a discussion on BAC, the
Company’s joint venture with CDF Ventures, LLC, a subsidiary of General Electric
Capital Corporation.
Off-Balance
Sheet Arrangements and Contractual Obligations
The
Company’s off-balance sheet arrangements and contractual obligations are
detailed in the 2006 Form 10-K. There have been no material changes outside
the
ordinary course of business.
Legal
Refer
to
Note
5 - Commitments and Contingencies
in the
Notes to Consolidated Financial Statements for disclosure of the potential
cash
requirements related to the Company’s legal and environmental
proceedings.
Environmental
Regulation
In
its
Marine Engine segment, 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 has adopted regulations requiring
catalytic converters on sterndrive and inboard engines by January 1, 2008.
Other
environmental regulatory bodies in the United States and other countries also
may impose more stringent emissions standards than are currently in effect.
The
Company expects to comply fully with these regulations, but compliance will
increase the cost of these products. 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 Brunswick’s competitive position.
Critical
Accounting Policies
There
were no material changes in the Company’s critical accounting policies since the
filing of its 2006 Form 10-K, other than the Company's adoption of FIN 48 as
discussed in “Recent Accounting Pronouncements” below. As discussed in the
2006 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.
Recent
Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109,” (FIN 48). FIN 48 prescribes criteria for the financial
statement recognition and measurement of tax positions taken or expected to
be
taken in a tax return, among other items. In addition, FIN 48 provides guidance
on derecognition and classification of tax liabilities, interest and penalties,
accounting in interim periods, disclosure, and transition with respect to the
application of the new accounting standard. The Company adopted the provisions
of FIN 48 on January 1, 2007. See Note
11 - Income Taxes
in the
Notes to Consolidated Financial Statements for further details regarding the
Company’s adoption of FIN 48.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, “Fair Value Measurements,” (SFAS 157), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of SFAS 157 is not
expected to have a material impact on the Company’s financial
statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132(R),” (SFAS 158). SFAS 158 requires recognition of the
overfunded or underfunded status of 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.
The
Company adopted the provisions of SFAS 158 on December 31, 2006. See
Note
12 - Pension and Other Postretirement Benefits
in the
Notes to Consolidated Financial Statements and Note 14 to the consolidated
financial statements in the 2006 Form 10-K for further discussion regarding
the
Company’s adoption of SFAS 158 in its 2006 fiscal year. SFAS 158 also requires
measurement of a plan’s assets and benefit obligations as of date of the
employer’s fiscal year end, effective for fiscal years ending after December 15,
2008. As the Company already measured plan assets and benefits obligations
as of
December 31, 2006, the adoption of this element of SFAS 158 will have no further
impact on the Company’s financial statements.
In
February 2007, 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 No. 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 does not believe that
the
adoption of SFAS 159 will have a material impact on its 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. Forward-looking statements in this Quarterly Report may include words
such
as “expect,” “anticipate,” “believe,” “may,” “should,” “could” or “estimate.”
These statements involve certain risks and uncertainties that may cause actual
results to differ materially from expectations as of the date of this filing.
These risks include, but are not limited to: the effect of a weak economy and
stock market on consumer confidence and thus the demand for marine, fitness,
billiards and bowling equipment and products; competitive pricing pressures;
the
success of new product introductions; the ability to maintain market share
in
high-margin products; competition from new technologies; imports from Asia
and
increased competition from Asian competitors; the ability to obtain component
parts from suppliers; the ability to maintain effective distribution; the
financial strength of dealers, distributors and independent boat builders;
the
ability to transition and ramp up certain manufacturing operations within time
and budgets allowed; the ability to maintain product quality and service
standards expected by customers; the ability to successfully manage pipeline
inventories; the success of global sourcing and supply chain initiatives; the
ability to successfully integrate acquisitions; the ability to successfully
complete announced divestitures; the success of marketing and cost management
programs; the ability to develop product technologies that comply with
regulatory requirements; the ability to complete environmental remediation
efforts and resolve claims and litigation at the cost estimated; the impact
of
weather conditions on demand for marine products and retail bowling center
revenues; shifts in currency exchange rates; adverse foreign economic
conditions; and the impact of interest rates and fuel prices on demand for
marine products. Additional factors are included in the 2006 Form
10-K.
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
2006
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 quarter of 2007 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART
II - OTHER INFORMATION
The
Company was not required to report the information pursuant to Items 1 through
6
of Part II of Form 10-Q for the three months ended March 31, 2007, 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.
Chinese
Supplier Dispute. Brunswick
is involved in an arbitration proceeding in Hong Kong arising out of a
commercial dispute with a former contract manufacturer in China, Shanghai
Zhonglu Industrial Company Limited (Zhonglu). The Company filed the arbitration
seeking damages based on Zhonglu's breach of a supply and distribution agreement
pursuant to which Zhonglu agreed to manufacture bowling equipment. Zhonglu
has
asserted counterclaims seeking damages for alleged breach of contract among
other claims. The arbitration tribunal heard final arguments in August 2005
and
the Company is awaiting a decision in the matter. The Company does not believe
that the resolution of this dispute will have a material adverse effect on
its
consolidated financial condition or results of operations.
Patent
Infringement Dispute.
Brunswick is involved in a patent infringement action pending in the United
States District Court for the Northern District of Virginia. The plaintiff,
Electromotive, Inc., has alleged that Brunswick's Mercury Marine Group has
infringed an Electromotive patent and is seeking treble damages based on its
claim that the infringement was willful. The patent in issue expired in 2006
and
allegedly describes a methodology for engine timing and the firing of cylinders.
The plaintiff further alleges that the technology in question has been broadly
incorporated into Mercury Marine outboard and sterndrive engines. Trial is
set
to commence on July 11, 2007. The Company does not believe that the resolution
of this dispute will have a material adverse effect on its consolidated
financial condition or results of operations.
Refer
to
Note 10 to the consolidated financial statements in the 2006 Form 10-K for
disclosure of the potential cash requirements of environmental proceedings
and a
discussion of other legal matters as of December 31, 2006.
Item
1A. Risk Factors
There
have been no material changes from the Company’s risk factors as disclosed in
the 2006 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 March 31, 2007, the
Company’s remaining share repurchase authorization for the program was $332.8
million. The Company expects to repurchase shares on the open market or in
private transactions from time to time, depending on market conditions.
Brunswick repurchased 1.0 million shares under this program during the first
quarter of 2007 for $33.4 million, as discussed in Note
13 - Share Repurchase Program
in the
Notes to Consolidated Financial Statements. Set forth below is the information
regarding the Company’s share repurchases during the three months ended March
31, 2007:
|
|
Issuer
Purchases of Equity Securities
|
|
Period
|
|
Total
Number
of
Shares
(or
Units)
Purchased
|
|
Average
Price
Paid
per
Share
(or
Unit)
|
|
Total
Number of
Shares
(or Units)
Purchased
as Part of
Publicly
Announced
Plans
or Programs
|
|
Maximum
Number (or
Approximate
Dollar Value) of Shares (or
Units)
that May Yet Be
Purchased
Under the
Plans
or Programs
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
1/01/07
- 1/27/07
|
|
|
|
|
|
$
-
|
|
|
|
|
|
$
366,232
|
|
1/28/07
- 2/24/07
|
|
|
575,000
|
|
|
$
33.75
|
|
|
575,000
|
|
|
$
346,824
|
|
2/25/07
- 3/31/07
|
|
|
425,000
|
|
|
$
32.92
|
|
|
425,000
|
|
|
$
332,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Share Repurchases
|
|
|
1,000,000
|
|
|
$
33.40
|
|
|
1,000,000
|
|
|
$
332,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
May
3,
2007 |
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.