UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
Form
10-Q
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[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the quarterly period ended September 27, 2008
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or
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[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d)
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OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission
file number 1-1043
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_______________
Brunswick
Corporation
(Exact
name of registrant as specified in its charter)
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Delaware
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36-0848180
|
|
(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer
Identification
No.)
|
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1
N. Field Court, Lake Forest, Illinois
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60045-4811
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(Address
of principal
executive
offices)
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(Zip
Code)
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(847)
735-4700
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(Registrant’s
telephone number, including area
code)
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|
| 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, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): | |||||
| Large accelerated filer | [X] | Accelerated filer | [ ] | ||
| Non-accelerated filer | [ ] | Smaller reporting company | [ ] | ||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | |||||
| Yes [ ] | No [X] | ||||
| The number of shares of Common Stock ($0.75 par value) of the registrant outstanding as of October 24, 2008, was 87,680,888. | |||||
BRUNSWICK
CORPORATION
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
September
27, 2008
TABLE
OF CONTENTS
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Page
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PART
I – FINANCIAL INFORMATION
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Item
1.
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Consolidated
Financial Statements
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|
|
Consolidated
Statements of Operations for the three months and nine months ended
September 27, 2008 (unaudited), and September 29, 2007
(unaudited)
|
1
|
|
|
Condensed
Consolidated Balance Sheets as of September 27, 2008 (unaudited), December
31, 2007, and September 29, 2007 (unaudited)
|
2
|
|
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Condensed
Consolidated Statements of Cash Flows for the nine months ended September
27, 2008 (unaudited), and Revised September 29, 2007
(unaudited)
|
4
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
5
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|
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
27
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
|
46
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Item
4.
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Controls
and Procedures
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46
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PART
II – OTHER INFORMATION
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||
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Item
1.
|
Legal
Proceedings
|
47
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|
Item
1A.
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Risk
Factors
|
47
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|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
52
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|
Item
6.
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Exhibits
|
52
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PART
I – FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements
|
BRUNSWICK
CORPORATION
|
|
Consolidated
Statements of Operations
|
|
(unaudited)
|
|
Three
Months Ended
|
Nine
Months Ended
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|||||||||||||||
|
(in
millions, except per share data)
|
Sept.
27,
2008
|
Sept.
29,
2007
|
Sept.
27,
2008
|
Sept.
29,
2007
|
||||||||||||
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Net
sales
|
$ | 1,038.8 | $ | 1,326.2 | $ | 3,871.0 | $ | 4,235.2 | ||||||||
|
Cost
of sales
|
862.3 | 1,063.5 | 3,121.5 | 3,339.0 | ||||||||||||
|
Selling,
general and administrative expense
|
177.4 | 206.9 | 586.1 | 623.2 | ||||||||||||
|
Research
and development expense
|
31.2 | 31.0 | 97.1 | 100.2 | ||||||||||||
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Goodwill
impairment charges
|
374.0 | - | 377.2 | - | ||||||||||||
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Trade
name impairment charges
|
121.1 | 66.4 | 133.9 | 66.4 | ||||||||||||
|
Restructuring,
exit and other impairment charges
|
39.1 | 4.7 | 128.4 | 13.4 | ||||||||||||
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Operating
earnings (loss)
|
(566.3 | ) | (46.3 | ) | (573.2 | ) | 93.0 | |||||||||
|
Equity
earnings (loss)
|
(1.0 | ) | 3.0 | 10.1 | 16.4 | |||||||||||
|
Investment
sale gains
|
2.1 | - | 23.0 | - | ||||||||||||
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Other
income (expense), net
|
(0.3 | ) | 7.5 | 1.6 | 7.3 | |||||||||||
|
Earnings
(loss) before interest and income taxes
|
(565.5 | ) | (35.8 | ) | (538.5 | ) | 116.7 | |||||||||
|
Interest
expense
|
(12.7 | ) | (12.8 | ) | (35.6 | ) | (39.7 | ) | ||||||||
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Interest
income
|
2.5 | 1.9 | 5.4 | 5.6 | ||||||||||||
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Earnings
(loss) before income taxes
|
(575.7 | ) | (46.7 | ) | (568.7 | ) | 82.6 | |||||||||
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Income
tax (benefit) provision
|
15.7 | (23.0 | ) | 15.4 | 15.1 | |||||||||||
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Net
earnings (loss) from continuing operations
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(591.4 | ) | (23.7 | ) | (584.1 | ) | 67.5 | |||||||||
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Discontinued
operations:
|
||||||||||||||||
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Earnings
from discontinued operations, net of tax
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- | 4.6 | - | 8.6 | ||||||||||||
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Gain
on disposal of discontinued operations, net of tax
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- | 21.0 | - | 28.7 | ||||||||||||
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Net
earnings from discontinued operations
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- | 25.6 | - | 37.3 | ||||||||||||
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Net
earnings (loss)
|
$ | (591.4 | ) | $ | 1.9 | $ | (584.1 | ) | $ | 104.8 | ||||||
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Earnings
per common share:
|
||||||||||||||||
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Basic
|
||||||||||||||||
|
Net
earnings (loss) from continuing operations
|
$ | (6.70 | ) | $ | (0.27 | ) | $ | (6.62 | ) | $ | 0.75 | |||||
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Earnings
from discontinued operations, net of tax
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- | 0.05 | - | 0.09 | ||||||||||||
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Gain
on disposal of discontinued operations, net of tax
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- | 0.24 | - | 0.32 | ||||||||||||
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Net
earnings (loss)
|
$ | (6.70 | ) | $ | 0.02 | $ | (6.62 | ) | $ | 1.16 | ||||||
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Diluted
|
||||||||||||||||
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Net
earnings (loss) from continuing operations
|
$ | (6.70 | ) | $ | (0.27 | ) | $ | (6.62 | ) | $ | 0.75 | |||||
|
Earnings
from discontinued operations, net of tax
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- | 0.05 | - | 0.09 | ||||||||||||
|
Gain
on disposal of discontinued operations, net of tax
|
- | 0.24 | - | 0.32 | ||||||||||||
|
Net
earnings (loss)
|
$ | (6.70 | ) | $ | 0.02 | $ | (6.62 | ) | $ | 1.16 | ||||||
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Weighted
average shares used for computation of:
|
||||||||||||||||
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Basic
earnings per share
|
88.3 | 89.0 | 88.3 | 90.3 | ||||||||||||
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Diluted
earnings per share
|
88.3 | 89.0 | 88.3 | 90.7 | ||||||||||||
|
The
Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
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||||||||||||||||
1
|
BRUNSWICK
CORPORATION
|
|
Condensed
Consolidated Balance Sheets
|
|
September
27,
|
December
31,
|
September
29,
|
||||||||||
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(in
millions)
|
2008
|
2007
|
2007
|
|||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||
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Assets
|
||||||||||||
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Current
assets
|
||||||||||||
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Cash
and cash equivalents, at cost, which approximates
market
|
$ | 342.9 | $ | 331.4 | $ | 327.8 | ||||||
|
Accounts
and notes receivable, less allowances
of $37.9, $31.2 and $36.8
|
518.3 | 572.4 | 510.9 | |||||||||
|
Inventories
|
||||||||||||
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Finished
goods
|
475.9 | 446.7 | 510.7 | |||||||||
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Work-in-process
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291.1 | 323.4 | 348.0 | |||||||||
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Raw
materials
|
131.1 | 136.6 | 148.4 | |||||||||
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Net
inventories
|
898.1 | 906.7 | 1,007.1 | |||||||||
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Deferred
income taxes
|
134.1 | 249.9 | 250.3 | |||||||||
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Prepaid
expenses and other
|
75.2 | 53.9 | 75.6 | |||||||||
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Current
assets
|
1,968.6 | 2,114.3 | 2,171.7 | |||||||||
|
Property
|
||||||||||||
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Land
|
108.7 | 103.5 | 101.4 | |||||||||
|
Buildings
and improvements
|
698.1 | 697.4 | 678.9 | |||||||||
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Equipment
|
1,193.5 | 1,205.7 | 1,212.9 | |||||||||
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Total
land, buildings and improvements and equipment
|
2,000.3 | 2,006.6 | 1,993.2 | |||||||||
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Accumulated
depreciation
|
(1,170.9 | ) | (1,117.8 | ) | (1,097.2 | ) | ||||||
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Net
land, buildings and improvements and equipment
|
829.4 | 888.8 | 896.0 | |||||||||
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Unamortized
product tooling costs
|
140.9 | 164.0 | 153.5 | |||||||||
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Net
property
|
970.3 | 1,052.8 | 1,049.5 | |||||||||
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Other
assets
|
||||||||||||
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Goodwill
|
294.8 | 678.9 | 679.2 | |||||||||
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Other
intangibles, net
|
89.9 | 245.6 | 249.7 | |||||||||
|
Investments
|
81.6 | 132.1 | 139.5 | |||||||||
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Deferred
income taxes
|
57.6 | - | - | |||||||||
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Other
long-term assets
|
140.8 | 141.9 | 181.9 | |||||||||
|
Other
assets
|
664.7 | 1,198.5 | 1,250.3 | |||||||||
|
Total
assets
|
$ | 3,603.6 | $ | 4,365.6 | $ | 4,471.5 | ||||||
|
The
Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
|
||||||||||||
2
|
BRUNSWICK
CORPORATION
|
|
Condensed
Consolidated Balance Sheets
|
|
September
27,
|
December
31,
|
September
29,
|
||||||||||
|
(in millions, except share
data)
|
2008
|
2007
|
2007
|
|||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||
|
Liabilities
and shareholders’ equity
|
||||||||||||
|
Current
liabilities
|
||||||||||||
|
Short-term
debt, including current maturities of
long-term debt
|
$ | 0.3 | $ | 0.8 | $ | 0.2 | ||||||
|
Accounts
payable
|
346.8 | 437.3 | 461.7 | |||||||||
|
Accrued
expenses
|
791.7 | 858.1 | 857.8 | |||||||||
|
Current
liabilities
|
1,138.8 | 1,296.2 | 1,319.7 | |||||||||
|
Long-term
liabilities
|
||||||||||||
|
Debt
|
726.4 | 727.4 | 726.1 | |||||||||
|
Deferred
income taxes
|
- | 12.3 | 19.6 | |||||||||
|
Postretirement
and postemployment benefits
|
194.0 | 192.8 | 225.6 | |||||||||
|
Other
|
228.1 | 244.0 | 277.1 | |||||||||
|
Long-term
liabilities
|
1,148.5 | 1,176.5 | 1,248.4 | |||||||||
|
Shareholders’
equity
|
||||||||||||
|
Common
stock; authorized: 200,000,000 shares, $0.75
par value; issued: 102,538,000 shares
|
76.9 | 76.9 | 76.9 | |||||||||
|
Additional
paid-in capital
|
413.3 | 409.0 | 386.2 | |||||||||
|
Retained
earnings
|
1,304.3 | 1,888.4 | 1,934.2 | |||||||||
|
Treasury
stock, at cost:
|
||||||||||||
|
14,861,000;
15,092,000 and 14,605,000 shares
|
(424.2 | ) | (428.7 | ) | (418.6 | ) | ||||||
|
Accumulated
other comprehensive loss, net of tax
|
(54.0 | ) | (52.7 | ) | (75.3 | ) | ||||||
|
Shareholders’
equity
|
1,316.3 | 1,892.9 | 1,903.4 | |||||||||
|
Total
liabilities and shareholders’ equity
|
$ | 3,603.6 | $ | 4,365.6 | $ | 4,471.5 | ||||||
|
The
Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
|
||||||||||||
3
|
BRUNSWICK
CORPORATION
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
(unaudited)
|
|
Nine
Months Ended
|
||||||||
|
(in
millions)
|
Sept.
27,
2008
|
Revised
Sept.
29,
2007
|
||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
earnings (loss)
|
$ | (584.1 | ) | $ | 104.8 | |||
|
Less:
net earnings from discontinued operations
|
- | 37.3 | ||||||
|
Net
earnings (loss) from continuing operations
|
(584.1 | ) | 67.5 | |||||
|
Depreciation
and amortization
|
133.1 | 130.2 | ||||||
|
Goodwill
impairment charges
|
377.2 | - | ||||||
|
Trade
name impairment charges
|
133.9 | 66.4 | ||||||
|
Other
impairment charges
|
50.0 | 0.4 | ||||||
|
Changes
in non-cash current assets and current liabilities
|
(95.1 | ) | (50.0 | ) | ||||
|
Income
taxes
|
22.3 | 9.4 | ||||||
|
Other,
net
|
(17.1 | ) | 16.0 | |||||
|
Net cash provided by operating
activities of continuing operations
|
20.2 | 239.9 | ||||||
|
Net cash used for operating
activities of discontinued operations
|
- | (19.3 | ) | |||||
|
Net cash provided by operating
activities
|
20.2 | 220.6 | ||||||
|
Cash
flows from investing activities
|
||||||||
|
Capital
expenditures
|
(84.8 | ) | (156.3 | ) | ||||
|
Acquisitions
of businesses, net of cash acquired
|
- | (6.2 | ) | |||||
|
Investments
|
21.1 | 9.1 | ||||||
|
Proceeds
from investment sales
|
45.5 | - | ||||||
|
Proceeds
from the sale of property, plant and equipment
|
9.6 | 5.3 | ||||||
|
Other,
net
|
0.2 | 12.1 | ||||||
|
Net cash used for investing
activities of continuing operations
|
(8.4 | ) | (136.0 | ) | ||||
|
Net cash provided by investing
activities of discontinued operations
|
- | 65.2 | ||||||
|
Net cash used for investing
activities
|
(8.4 | ) | (70.8 | ) | ||||
|
Cash
flows from financing activities
|
||||||||
|
Net
proceeds from issuance of long-term debt
|
250.4 | - | ||||||
|
Payments
of long-term debt including current maturities
|
(250.7 | ) | (0.7 | ) | ||||
|
Stock
repurchases
|
- | (115.5 | ) | |||||
|
Stock
options exercised
|
- | 10.8 | ||||||
|
Net
cash used for financing activities of continuing
operations
|
(0.3 | ) | (105.4 | ) | ||||
|
Net cash used for financing
activities of discontinued operations
|
- | |||||||
|
Net cash used for financing
activities
|
(0.3 | ) | (105.4 | ) | ||||
|
Net
increase in cash and cash equivalents
|
11.5 | 44.4 | ||||||
|
Cash
and cash equivalents at beginning of period
|
331.4 | 283.4 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 342.9 | $ | 327.8 | ||||
|
The
Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
|
||||||||
4
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
1 – Significant Accounting Policies
Interim Financial Statements.
The unaudited interim consolidated financial statements of Brunswick
Corporation (Brunswick or the Company) have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Therefore,
certain information and disclosures normally included in financial statements
and related notes prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted. Certain previously
reported amounts have been reclassified to conform to the current period
presentation.
These
financial statements should be read in conjunction with, and have been prepared
in conformity with, the accounting principles reflected in the consolidated
financial statements and related notes included in Brunswick’s 2007 Annual
Report on Form 10-K (the 2007 Form 10-K), except as they relate to fair value
measurements, as discussed in Note 4 – Fair Value
Measurements. As indicated in Note 16 – Discontinued
Operations, Brunswick’s results, as discussed in the Notes to
Consolidated Financial Statements, reflect continuing operations only, unless
otherwise noted. These interim results include, in the opinion of management,
all normal and recurring adjustments necessary to present fairly the financial
position of Brunswick as of September 27, 2008, December 31, 2007, and September
29, 2007, the results of operations for the three months and nine months ended
September 27, 2008, and September 29, 2007, and the cash flows for the nine
months ended September 27, 2008, and September 29, 2007. Due to the seasonality
of Brunswick’s businesses, the goodwill and trade name impairments, and the
restructuring activities underway, the interim results are not necessarily
indicative of the results that may be expected for the remainder of the
year.
The
Company maintains its financial records on the basis of a fiscal year ending on
December 31, with the fiscal quarters ending on the Saturday closest to the end
of the period (thirteen-week periods). The first three quarters of fiscal year
2008 ended on March 29, 2008, June 28, 2008, and September 27, 2008, and the
first three quarters of fiscal year 2007 ended on March 31, 2007, June 30, 2007,
and September 29, 2007.
Revisions. The Company
expanded its presentation of the Condensed Consolidated Statements of Cash Flows
to include net earnings (loss) and net earnings from discontinued operations.
Accordingly, the Company revised the September 29, 2007, Condensed Consolidated
Statement of Cash Flows. Net cash flows from operating, investing and financing
activities have not changed.
Recent Accounting
Pronouncements. In September 2006, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” (SFAS 157),
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. Effective January 1, 2008, the Company adopted SFAS
157. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2,
“Effective Date of FASB Statement No. 157,” which provides a one year
deferral of the effective date of SFAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Therefore, the Company has
adopted the provisions of SFAS 157 with respect to its financial assets and
liabilities only. The adoption of this statement did not have a material impact
on the Company’s consolidated results of operations and financial condition. See
Note 4 – Fair Value
Measurements for additional disclosures.
5
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115,” (SFAS 159). SFAS 159 permits entities to choose to measure
certain financial assets and financial liabilities at fair value at specified
election dates. Unrealized gains and losses on items for which the fair value
option has been elected are to be reported in earnings. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. The Company has elected not
to adopt the SFAS 159 fair value option.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (SFAS
141(R)). SFAS 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, the goodwill acquired and any noncontrolling
interest in the acquiree. This statement also establishes disclosure
requirements to enable the evaluation of the nature and financial effect of the
business combination. SFAS 141(R) is effective for fiscal years beginning on or
after December 15, 2008. The Company is currently evaluating the impact that the
adoption of SFAS 141(R) may have on the consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51,” (SFAS 160).
SFAS 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company is currently evaluating the
impact that the adoption of SFAS 160 may have on the consolidated financial
statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures About Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133,” (SFAS 161). SFAS 161 is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity’s financial position, financial performance, and cash flows. SFAS 161
is effective for fiscal years beginning after November 15, 2008. The
Company is currently evaluating the impact that the adoption of SFAS 161
may have on the consolidated financial statements.
6
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
2 – Goodwill and Trade Name Impairments
Brunswick
accounts for goodwill and identifiable intangible assets in accordance with
Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets,” (SFAS 142). Under this standard, Brunswick assesses the
impairment of goodwill and indefinite-lived intangible assets at least annually
and whenever events or changes in circumstances indicate that the carrying value
may not be recoverable.
During
the third quarter of 2008, Brunswick encountered a significant adverse change in
the business climate. A weak U.S. economy, soft housing markets and the
emergence of a global credit crisis have accelerated the reduction in demand for
certain Brunswick products. As a result of this reduced demand, along with
lower-than-projected profits across certain Brunswick brands and lower purchase
commitments received from its dealer network in the third quarter, management
revised its future cash flow expectations in the third quarter of 2008, which
lowered the fair value estimates of certain businesses.
As a
result of the lower fair value estimates, Brunswick concluded that the carrying
amounts of its Boat segment reporting unit and the Bowling Retail and Billiards
reporting units within the Bowling & Billiards segment exceeded their
respective fair values. As a result, the Company compared the implied fair value
of the goodwill in each reporting unit with the carrying value and recorded a
$374.0 million pretax impairment charge in the third quarter of
2008.
In
conjunction with the goodwill impairment testing, the Company analyzed the
valuation of its other indefinite-lived intangibles, consisting exclusively of
acquired trade names. Brunswick estimated the fair value of trade names by
performing a discounted cash flow analysis based on the relief-from-royalty
approach. This approach treats the trade name as if it were licensed by the
Company rather than owned, and calculates its value based on the discounted cash
flow of the projected license payments. The analysis resulted in a pretax trade
name impairment charge of $121.1 million in the third quarter of 2008,
representing the excess of the carrying cost of the trade names over the
calculated fair value. A similar analysis was performed during the third quarter
of 2007 related to certain outboard boat trade names as a result of reduced
revenue forecasts and adverse adjustments to projected royalty rates for those
trade names. A $66.4 million pretax impairment charge was recorded during the
third quarter of 2007 as a result of that analysis.
The
following tables summarize the goodwill and trade name impairments:
|
Three
Months Ended
|
||||||||||||||||
|
September
27, 2008
|
September
29, 2007
|
|||||||||||||||
|
(in
millions)
|
Goodwill
|
Trade
Names
|
Goodwill
|
Trade
Names
|
||||||||||||
|
Boat
|
$ | 361.3 | $ | 115.7 | $ | – | $ | 66.4 | ||||||||
|
Marine
Engine
|
– | 4.5 | – | – | ||||||||||||
|
Bowling
& Billiards
|
12.7 | 0.9 | – | – | ||||||||||||
|
Total
|
$ | 374.0 | $ | 121.1 | $ | – | $ | 66.4 | ||||||||
|
Nine
Months Ended
|
||||||||||||||||
|
September
27, 2008
|
September
29, 2007
|
|||||||||||||||
|
(in
millions)
|
Goodwill
|
Trade
Names
|
Goodwill
|
Trade
Names
|
||||||||||||
|
|
||||||||||||||||
|
Boat
|
$ | 362.8 | $ | 120.9 | $ | – | $ | 66.4 | ||||||||
|
Marine
Engine
|
– | 4.5 | – | – | ||||||||||||
|
Bowling
& Billiards
|
14.4 | 8.5 | – | – | ||||||||||||
|
Total
|
$ | 377.2 | $ | 133.9 | $ | – | $ | 66.4 | ||||||||
7
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
A summary
of changes in the Company’s goodwill during the nine months ended September 27,
2008, by segment is as follows:
|
December
31,
|
September
27,
|
|||||||||||||||||||
|
(in
millions)
|
2007
|
Acquisitions
|
Adjustments
|
Impairments
|
2008
|
|||||||||||||||
|
Boat
|
$ | 366.6 | $ | — | $ | (3.8 | ) | $ | (362.8 | ) | $ | — | ||||||||
|
Marine
Engine
|
23.4 | — | (2.7 | ) | — | 20.7 | ||||||||||||||
|
Fitness
|
274.0 | — | 0.1 | — | 274.1 | |||||||||||||||
|
Bowling
& Billiards
|
14.9 | — | (0.5 | ) | (14.4 | ) | — | |||||||||||||
|
Total
|
$ | 678.9 | $ | — | $ | (6.9 | ) | $ | (377.2 | ) | $ | 294.8 | ||||||||
A summary
of changes in the Company’s net trade names during the nine months ended
September 27, 2008, by segment is as follows:
|
December
31,
|
September
27,
|
|||||||||||||||||||
|
(in
millions)
|
2007
|
Acquisitions
|
Adjustments
|
Impairments
|
2008
|
|||||||||||||||
|
Boat
|
$ | 151.8 | $ | — | $ | (0.6 | ) | $ | (120.9 | ) | $ | 30.3 | ||||||||
|
Marine
Engine
|
4.5 | — | 2.1 | (4.5 | ) | 2.1 | ||||||||||||||
|
Fitness
|
0.6 | — | — | — | 0.6 | |||||||||||||||
|
Bowling
& Billiards
|
8.5 | — | — | (8.5 | ) | — | ||||||||||||||
|
Total
|
$ | 165.4 | $ | — | $ | 1.5 | $ | (133.9 | ) | $ | 33.0 | |||||||||
Adjustments
primarily relate to the effect of foreign currency translation and changes in
the fair value of net assets subject to purchase accounting
adjustments.
8
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
3 – Restructuring Activities
In
November 2006, Brunswick announced restructuring initiatives to improve the
Company’s cost structure, better utilize overall capacity and improve general
operating efficiencies. These initiatives reflected the Company’s response to a
difficult marine market. As the marine market continued to decline, Brunswick
expanded its restructuring activities during 2007 and 2008 in order to improve
performance and better position the Company for current market conditions and
longer-term growth. These initiatives have resulted in the recognition of
restructuring, exit and other impairment charges in the Statement of Operations
during 2006, 2007 and 2008.
The
actions taken under these initiatives are expected to benefit future operations
by removing fixed costs of approximately $50 million from Cost of sales and
approximately $250 million from Selling, general and administrative in the
Consolidated Statements of Operations by the end of 2009 compared with 2007
spending levels. The majority of these costs are expected to be cash savings
once all restructuring initiatives are complete. The Company has begun to see
savings related to these initiatives in 2008 and expects all savings to be
realized by the end of 2009.
The
nature of the costs incurred under these initiatives include:
Restructuring
Activities – These amounts primarily relate to:
|
·
|
Employee
termination and other benefits
|
|
·
|
Costs
to retain and relocate employees
|
|
·
|
Consulting
costs
|
|
·
|
Consolidation
of manufacturing footprint
|
Exit
Activities – These amounts primarily relate to:
|
·
|
Employee
termination and other benefits
|
|
·
|
Lease
exit costs
|
|
·
|
Inventory
write-downs
|
|
·
|
Facility
shutdown costs
|
Definite-lived
asset impairments – These amounts primary related to:
|
·
|
Fixed
assets
|
|
·
|
Tooling
|
|
·
|
Patents
and proprietary technology
|
|
·
|
Dealer
networks
|
Definite-lived
asset impairments are recognized when, as a result of the restructuring
activities initiated, the carrying amount of the long-lived asset is not
expected to be fully recoverable, in accordance with SFAS 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” (SFAS 144). The impairments
recognized were equal to the difference between the carrying amount of the asset
and the fair value of the asset, which was determined using observable inputs,
when available, and, when observable inputs were not available, based on the
Company’s own assumptions of the data that market participants would use in
pricing the asset or liability, based on the best information available in the
circumstances. Specifically, the Company used discounted cash flows to determine
the fair value of the asset when observable inputs were
unavailable.
The
Company has disaggregated restructuring and exit activities based on the
specific driver of the cost and reflected in the accounting period when the cost
has been committed or incurred, in accordance with SFAS 146, “Accounting for
Costs Associated with Exit or Disposal Activities.” The Company considers
actions related to the sale of certain Baja boat business assets, the closure of
its bowling pin manufacturing facility and the closure of the Valley-Dynamo
coin-operated commercial billiards business to be exit activities. All other
actions taken are considered to be restructuring activities.
9
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
The
specific actions undertaken and their related status are described
below.
Actions
initiated in 2006
In
November 2006, Brunswick announced initiatives to improve the Company’s cost
structure, better utilize overall capacity and improve general operating
efficiencies. The restructuring initiatives included the consolidation of
certain boat manufacturing facilities, sales offices and distribution warehouses
and reductions in the Company’s global workforce. Through 2006, the Company
incurred restructuring costs of $18.9 million related to these initiatives. At
December 31, 2006, the Company estimated that it would incur additional expenses
of approximately $9 million related to these initiatives during 2007; however,
the Company actually incurred approximately $4 million of additional costs in
2007, which concluded the 2006 initiatives.
Actions
initiated in 2007
In 2007,
the Company initiated restructuring activities to consolidate certain boat
manufacturing facilities in connection with the purchase of a manufacturing
facility in Navassa, North Carolina, close a manufacturing facility in Aberdeen,
Mississippi, and shift boat production to Fort Wayne, Indiana, enhance U.S.
engine production efficiency and eliminate assembly operations for certain
engines in Europe. Through 2007, the Company paid $18.1 million related to these
initiatives. At December 31, 2007, the Company estimated that it would incur
additional expenses of approximately $7 million related to these initiatives
during 2008; however, the Company subsequently adjusted its plans and did not
incur any significant additional costs for these initiatives during 2008.
Substantially all of the 2007 initiatives were completed during
2007.
Actions
initiated in 2008
During
the first quarter of 2008, the Company continued its restructuring activities by
closing its bowling pin manufacturing facility in Antigo, Wisconsin, and
announcing that it would close its boat plant in Bucyrus, Ohio, in anticipation
of the proposed sale of certain assets relating to its Baja boat business, cease
boat manufacturing at one of its facilities in Merritt Island, Florida, and
close its Swansboro, North Carolina, boat plant.
The
Company announced additional actions in June 2008 as a result of the prolonged
downturn in the U.S. marine market. The plan is designed to improve performance
and better position the Company for current market conditions and longer-term
growth. The plan will result in significant changes in the Company’s
organizational structure, most notably by reducing the complexity of its
operations, further shrinking its North American manufacturing footprint and
enhancing its brand positioning. Specifically, the Company announced the closure
of its production facility in Newberry, South Carolina, due to its decision to
cease production of its Bluewater Marine brands, including Sea Pro, Sea Boss,
Palmetto and Laguna; its intention to close four additional boat plants; and the
write-down of certain assets of the Valley-Dynamo coin-operated commercial
billiards business.
During
the third quarter of 2008, the Company accelerated its previously announced
efforts to resize the Company by the end of 2009 in light of extraordinary
developments within global financial markets that are affecting the recreational
marine industry. Specifically, the Company is closing its production facilities
in Pipestone, Minnesota; Roseburg, Oregon; and Arlington, Washington. The
Company is mothballing a fourth plant in Navassa, North Carolina. The Company
expects to complete the Arlington, Roseburg and Navassa shutdowns by the end of
2008, and the Pipestone shutdown in the first quarter of 2009.
The third
quarter results include severance and plant closure costs, asset write-downs and
impairment charges related to accelerated restructuring efforts in September
2008 and certain costs related to other restructuring actions initiated in
2008.
10
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
The
following is a summary of the expense associated with the restructuring
activities:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
(in
millions)
|
Sept.
27,
2008
|
Sept.
29,
2007
|
Sept.
27,
2008
|
Sept.
29,
2007
|
||||||||||||
|
Restructuring
activities
|
||||||||||||||||
|
Employee
termination and other benefits
|
$ | 8.4 | $ | — | $ | 20.6 | $ | 4.0 | ||||||||
|
Current
asset write-downs
|
1.1 | — | 3.5 | — | ||||||||||||
|
Transformation
and other costs:
|
||||||||||||||||
|
Consolidation
of manufacturing footprint
|
13.0 | 2.1 | 29.7 | 3.0 | ||||||||||||
|
Retention
and relocation costs
|
0.3 | — | 5.4 | — | ||||||||||||
|
Consulting
costs
|
1.7 | — | 3.7 | — | ||||||||||||
|
Total
transformation and other costs
|
15.0 | 2.1 | 38.8 | 3.0 | ||||||||||||
|
Exit
activities
|
||||||||||||||||
|
Employee
termination and other benefits
|
0.3 | 0.2 | 3.0 | 1.1 | ||||||||||||
|
Current
asset write-downs
|
0.9 | — | 8.1 | 0.6 | ||||||||||||
|
Transformation
and other costs:
|
||||||||||||||||
|
Consolidation
of manufacturing footprint
|
0.2 | 2.0 | 4.4 | 4.3 | ||||||||||||
|
Retention
and relocation costs
|
— | — | — | — | ||||||||||||
|
Consulting
costs
|
— | — | — | — | ||||||||||||
|
Total
transformation and other costs
|
0.2 | 2.0 | 4.4 | 4.3 | ||||||||||||
|
Definite-lived
asset impairments
|
13.2 | 0.4 | 50.0 | 0.4 | ||||||||||||
|
Total
restructuring, exit and
other
impairment charges
|
$ | 39.1 | $ | 4.7 | $ | 128.4 | $ | 13.4 | ||||||||
The
effect of the 2008 initiatives on each of the Company’s reportable segments for
the three months ended September 27, 2008, is summarized below:
|
(in
millions)
|
Boat
|
Marine
Engine
|
Fitness
|
Bowling
& Billiards
|
Corporate
|
Total
|
||||||||||||||||||
|
Employee
terminations and
other benefits
|
$ | 1.7 | $ | 3.8 | $ | 0.8 | $ | 0.6 | $ | 1.8 | $ | 8.7 | ||||||||||||
|
Current
asset write-downs
|
0.3 | 0.8 | — | 0.9 | — | 2.0 | ||||||||||||||||||
|
Transformation and
other costs
|
9.9 | 1.7 | — | 0.3 | 3.3 | 15.2 | ||||||||||||||||||
|
Definite-lived asset
impairments
|
3.9 | 6.6 | — | — | 2.7 | 13.2 | ||||||||||||||||||
|
Total restructuring, exit and other
impairment charges
|
$ | 15.8 | $ | 12.9 | $ | 0.8 | $ | 1.8 | $ | 7.8 | $ | 39.1 | ||||||||||||
11
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
The
effect of the 2008 initiatives on each of the Company’s reportable segments for
the nine months ended September 27, 2008, is summarized below:
|
(in
millions)
|
Boat
|
Marine
Engine
|
Fitness
|
Bowling
& Billiards
|
Corporate
|
Total
|
||||||||||||||||||
|
Employee
terminations and
other benefits
|
$ | 5.4 | $ | 11.6 | $ | 0.8 | $ | 3.2 | $ | 2.6 | $ | 23.6 | ||||||||||||
|
Current
asset write-downs
|
5.9 | 0.8 | 1.3 | 3.6 | — | 11.6 | ||||||||||||||||||
|
Transformation and
other costs
|
25.9 | 6.1 | — | 1.4 | 9.8 | 43.2 | ||||||||||||||||||
|
Definite-lived asset
impairments
|
23.9 | 12.9 | — | 9.7 | 3.5 | 50.0 | ||||||||||||||||||
|
Total
restructuring, exit and other
impairment
charges
|
$ | 61.1 | $ | 31.4 | $ | 2.1 | $ | 17.9 | $ | 15.9 | $ | 128.4 | ||||||||||||
The
following table summarizes the charges taken for restructuring, exit and other
impairment charges related to actions initiated in 2008 and the related status
as of September 27, 2008. The accrued amounts remaining as of September 27,
2008, represent cash expenditures needed to satisfy remaining obligations. The
majority of accrued costs are expected to be paid by the end of
2009.
|
(in
millions)
|
Costs
Recognized
in 2008
|
Noncash
Charges
|
Cash
Payments
|
Accrued
Costs
as of
Sept.
27,
2008
|
||||||||||||
|
Employee
termination and other benefits
|
$ | 23.6 | $ | — | $ | 19.9 | $ | 3.7 | ||||||||
|
Current
asset write-downs
|
11.6 | 11.6 | — | — | ||||||||||||
|
Transformation
and other costs:
|
||||||||||||||||
|
Consolidation
of manufacturing footprint
|
34.1 | 6.3 | 27.8 | 6.3 | ||||||||||||
|
Retention
and relocation costs
|
5.4 | — | 4.7 | 0.7 | ||||||||||||
|
Consulting
costs
|
3.7 | — | 0.9 | 2.8 | ||||||||||||
|
Total
transformation and other costs
|
43.2 | 6.3 | 33.4 | 9.8 | ||||||||||||
|
Definite-lived
asset impairments
|
50.0 | 50.0 | — | — | ||||||||||||
|
Total
restructuring, exit and
other
impairment charges
|
$ | 128.4 | $ | 67.9 | $ | 53.3 | $ | 13.5 | ||||||||
The
Company anticipates that it will incur additional costs between $45 million and
$50 million under these initiatives in the fourth quarter of 2008 and between
$35 million and $45 million during 2009, when the 2008 initiatives are expected
to be complete. The Company expects most of these charges will be incurred in
the Boat and Marine Engine segments.
12
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
4 – Fair Value Measurements
Fair
value is defined under SFAS 157 as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation techniques used
to measure fair value under SFAS 157 must maximize the use of observable inputs
and minimize the use of unobservable inputs. The standard established a fair
value hierarchy based on three levels of inputs, of which the first two are
considered observable and the last unobservable.
|
·
|
Level
1 - Quoted prices in active markets for identical assets or liabilities.
These are typically obtained from real-time quotes for transactions in
active exchange markets involving identical
assets.
|
|
·
|
Level
2 - Inputs, other than quoted prices included within Level 1, which are
observable for the asset or liability, either directly or indirectly.
These are typically obtained from readily-available pricing sources for
comparable instruments.
|
|
·
|
Level
3 - Unobservable inputs, where there is little or no market activity for
the asset or liability. These inputs reflect the reporting entity’s own
assumptions of the data that market participants would use in pricing the
asset or liability, based on the best information available in the
circumstances.
|
The
following table summarizes Brunswick’s financial assets and liabilities measured
at fair value on a recurring basis in accordance with SFAS 157 as of
September 27, 2008:
|
(in
millions)
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash
Equivalents
|
$ | 237.1 | $ | — | $ | — | $ | 237.1 | ||||||||
|
Investments
|
4.2 | — | — | 4.2 | ||||||||||||
|
Derivatives
|
— | 7.4 | — | 7.4 | ||||||||||||
|
Total
Assets
|
$ | 241.3 | $ | 7.4 | $ | — | $ | 248.7 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivatives
|
$ | — | $ | 6.5 | $ | — | $ | 6.5 | ||||||||
During
the nine months ended September 27, 2008, the Company has undertaken various
restructuring activities, as discussed in Note 3 – Restructuring
Activities and has tested its goodwill and trade names, as discussed in
Note 2 – Goodwill and Trade
Name Impairments. The restructuring activities and testing of goodwill
and trade names required the Company to perform fair value measurements, on a
non-recurring basis, on certain asset groups to test for potential impairments.
Other than the assets measured at fair value on a recurring basis, as shown in
the table above, the asset balances shown in the Condensed Consolidated Balance
Sheets include an insignificant amount of assets measured at fair value on a
non-recurring basis.
13
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
5 – Share-Based Compensation
On
January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised
2004), “Share-Based Payment,” (SFAS 123(R)), which is a revision of SFAS No.
123, “Accounting for Stock-Based Compensation.” SFAS 123R supersedes Accounting
Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS 123(R)
requires the Company to recognize all share-based payments to employees,
including grants of stock options and the compensatory elements of employee
stock purchase plans, in its income statement based upon the fair value of such
share-based payments. Share-based employee compensation cost (benefit) is
recognized as a component of Selling, general and administrative expense in the
Consolidated Statements of Operations. Refer to Note 16 to the consolidated
financial statements in the 2007 Form 10-K for further details regarding the
Company’s adoption of SFAS 123(R).
Under
the 2003 Stock Incentive Plan (Plan), the Company may grant stock options, stock
appreciation rights (SARs), nonvested stock and other types of share-based
awards to executives and other management employees. Under the Plan, the Company
may issue up to 8.1 million shares, consisting of treasury shares and
authorized, but unissued shares of common stock. As of September 27, 2008, 1.0
million shares were available for grant under the Plan.
Stock
Options and SARs
Prior to
2005, the Company primarily issued share-based compensation in the form of stock
options, and had not issued any SARs. Since the beginning of 2005, the Company
has issued stock-settled SARs and has not issued any stock options. Generally,
stock options and SARs are exercisable over a period of 10 years, or as
otherwise determined by the Human Resources and Compensation Committee of the
Board of Directors, and subject to vesting periods of four years. The exercise
price of stock options and SARs issued under the Plan cannot be less than the
fair market value of the underlying shares at the date of grant.
During
the three and nine months ended September 27, 2008, there were 0.0 million and
2.6 million SARs granted, respectively, which resulted in $2.4 million and $5.8
million of total expense, respectively, due to amortization of SARs granted.
During the three and nine months ended September 29, 2007, there were 0.0
million and 0.9 million SARs granted, respectively, which resulted in $1.5
million and $3.9 million of total expense, respectively, due to amortization of
SARs granted. These expenses resulted in a deferred tax asset for the tax
benefit to be realized in future periods.
The
weighted average fair values of individual SARs granted were $5.71 and $9.91
during 2008 and 2007, respectively. The fair value of each grant was estimated
on the date of grant using the Black-Scholes-Merton pricing model utilizing the
following weighted average assumptions used for 2008 and 2007:
|
2008
|
2007
|
|||||||
|
Risk-free
interest rate
|
2.9 | % | 4.6 | % | ||||
|
Dividend
yield
|
2.3 | % | 1.8 | % | ||||
|
Volatility
factor
|
40.1 | % | 29.9 | % | ||||
|
Weighted
average expected life
|
5.4
- 6.2 years
|
5.1
- 6.2 years
|
||||||
14
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Nonvested
stock awards
The
Company issues nonvested stock awards (stock units) to key employees as
determined by the Human Resources and Compensation Committee of the Board of
Directors. In addition, employees entitled to receive cash payments under the
Company’s Strategic Incentive Plan (a long-term incentive plan for senior
employees), could have elected to receive a vested stock award instead with a 20
percent nonvested stock premium. Such awards vested at the time of deferral,
with the exception of the premium. Effective January 1, 2008, the Strategic
Incentive Plan was discontinued and, therefore, the right to receive a 20
percent nonvested stock premium no longer exists. Nonvested stock awards
(including the premium) have vesting periods of three or four years and are
eligible for dividends, which are reinvested and non-voting. All nonvested
awards have restrictions on the sale or transfer of such awards during the
nonvested period.
In 2008,
performance share awards were issued to senior management. The number of
performance share awards earned will be based on achieving key strategic and
financial goals by 2010. A portion of the payout will be based on relative total
shareholder return versus the S&P 500. Prior to any award being earned, the
Company must meet a minimum stock price threshold.
The cost
of nonvested stock awards is recognized on a straight-line basis over the
requisite service period. During the three and nine months ended September 27,
2008, there were 0.1 million and 1.0 million stock awards granted under these
plans, respectively, and, due to amortization of stock awards granted, $1.8
million and $4.6 million was charged to compensation expense under these plans,
respectively. During the three and nine months ended September 29, 2007, there
were 0.0 million and 0.1 million stock awards granted under these plans,
respectively, and, due to amortization of stock awards granted, $0.9 million and
$3.2 million was charged to compensation expense under these plans,
respectively.
The
weighted average price per nonvested stock award at grant date was $15.66 and
$33.00 for the nonvested stock awards granted in 2008 and 2007, respectively. As
of September 27, 2008, there was $14.4 million of total
unrecognized compensation cost related to nonvested share-based compensation
arrangements granted under the Plan. That cost is expected to be recognized over
a weighted average period of 1.7 years.
Generally,
grants of nonvested stock options, SARs and stock units are forfeited if
employment is terminated prior to vesting. However, with respect to stock
options and SARs, all grants vest immediately: (i) in the event of a change in
control; (ii) upon death or disability of the grantee; and (iii) beginning in
2007, upon the sale or divestiture of the business unit to which the grantee is
assigned. Stock option and SARs grants made prior to 2006 also vest immediately
if the sum of (A) the age of the grantee and (B) the grantee’s total number of
years of service, equals 65 or more; grants made in 2006 and later vest
immediately if (A) the grantee has attained the age of 62 and (B) the grantee’s
age plus total years of service equals 70 or more. Nonvested stock awards
granted prior to 2006 vest pro rata if the sum of (A) the age of the grantee and
(B) the grantee’s total number of years of service equals 65 or more; grants
made in 2006 and later vest pro rata if (A) the age of grantee and (B) the
grantee’s total number of years of service equals 70 or more.
Director
Awards
The
Company issues stock awards to directors in accordance with the terms and
conditions determined by the Nominating and Corporate Governance Committee of
the Board of Directors. One-half of each director’s annual fees are paid in
Brunswick common stock, the receipt of which may be deferred until a director
retires from the Board of Directors. Each director may elect to have the
remaining one-half paid either in cash, in Brunswick common stock distributed at
the time of the award, or in deferred Brunswick common stock units with a 20
percent premium. Each non-employee director is also entitled to an annual grant
of restricted stock units, which is deferred until the director retires from the
Board.
15
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
6 – Earnings per Common Share
The
Company calculates earnings per share in accordance with SFAS No. 128, “Earnings
per Share.” Basic earnings per share is calculated by dividing net earnings by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is calculated similarly, except that the calculation
includes the dilutive effect of stock options and nonvested stock awards.
Weighted average basic shares decreased by 0.7 million shares and 2.0 million
shares in the three and nine months ended September 27, 2008, respectively,
versus the comparable periods in 2007, primarily due to the effect of the
Company’s share repurchase program, as discussed in Note 15 – Share Repurchase
Program.
Basic and
diluted earnings per share for the three and nine months ended September 27,
2008, and for the comparable periods ended September 29, 2007, were calculated
as follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
(in
millions, except per share data)
|
Sept.
27,
2008
|
Sept.
29,
2007
|
Sept.
27,
2008
|
Sept.
29,
2007
|
||||||||||||
|
Net
earnings (loss) from continuing operations
|
$ | (591.4 | ) | $ | (23.7 | ) | $ | (584.1 | ) | $ | 67.5 | |||||
|
Earnings
from discontinued operations, net of tax
|
– | 4.6 | – | 8.6 | ||||||||||||
|
Gain
on disposal of discontinued operations, net of tax
|
– | 21.0 | – | 28.7 | ||||||||||||
|
Net
earnings (loss)
|
$ | (591.4 | ) | $ | 1.9 | $ | (584.1 | ) | $ | 104.8 | ||||||
|
Average
outstanding shares – basic
|
88.3 | 89.0 | 88.3 | 90.3 | ||||||||||||
|
Dilutive
effect of common stock equivalents
|
– | – | – | 0.4 | ||||||||||||
|
Average
outstanding shares – diluted
|
88.3 | 89.0 | 88.3 | 90.7 | ||||||||||||
|
Basic
earnings per share
|
||||||||||||||||
|
Net
earnings (loss) from continuing operations
|
$ | (6.70 | ) | $ | (0.27 | ) | $ | (6.62 | ) | $ | 0.75 | |||||
|
Earnings
from discontinued operations, net of tax
|
– | 0.05 | – | 0.09 | ||||||||||||
|
Gain
on disposal of discontinued operations, net of tax
|
– | 0.24 | – | 0.32 | ||||||||||||
|
Net
earnings (loss)
|
$ | (6.70 | ) | $ | 0.02 | $ | (6.62 | ) | $ | 1.16 | ||||||
|
Diluted
earnings per share
|
||||||||||||||||
|
Net
earnings (loss) from continuing operations
|
$ | (6.70 | ) | $ | (0.27 | ) | $ | (6.62 | ) | $ | 0.75 | |||||
|
Earnings
from discontinued operations, net of tax
|
– | 0.05 | – | 0.09 | ||||||||||||
|
Gain
on disposal of discontinued operations, net of tax
|
– | 0.24 | – | 0.32 | ||||||||||||
|
Net
earnings (loss)
|
$ | (6.70 | ) | $ | 0.02 | $ | (6.62 | ) | $ | 1.16 | ||||||
As of
September 27, 2008, there were 6.3 million options outstanding, of which 2.9
million were exercisable. This compares to 4.3 million options outstanding, of
which 2.5 million were exercisable as of September 29, 2007. During the three
and nine months ended September 27, 2008, there were 6.5 million and 6.1 million
weighted average shares of options outstanding, respectively, for which the
exercise price, based on the average price, was higher than the average market
price of the Company’s shares for the period then ended. These options were not
included in the computation of diluted earnings per share because the effect
would have been anti-dilutive. This compares to 2.9 million and 2.8 million
anti-dilutive options that were excluded from the corresponding periods ended
September 29, 2007. During the three months and nine months ended September 27,
2008, and the three months ended September 29, 2007, the Company incurred a net
loss from continuing operations. As common stock equivalents have an
anti-dilutive effect on the net loss, the equivalents were not included in the
computation of diluted earnings per share for the three and nine months ended
September 27, 2008, and the three months ended September 29, 2007.
16
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
7 – Commitments and Contingencies
Financial
Commitments
The
Company has entered into guarantees of indebtedness of third parties, which
primarily relate to arrangements with financial institutions in connection with
customer financing programs. Under these arrangements, the Company has
guaranteed customer obligations to the financial institutions in the event of
customer default, generally subject to a maximum amount, which is less than
total obligations outstanding. The Company has also guaranteed collection of
customer receivables sold to third parties by Brunswick. In most instances, upon
repurchase of the debt obligation, the Company receives rights to the collateral
securing the financing. The maximum potential cash obligation associated with
these customer financing arrangements was $97.2 million, as of September 27,
2008, of which $35.4 million is related to the Fitness segment, $30.2 million is
related to the Marine Engine segment, $28.4 million is related to the Bowling
& Billiards segment and $3.2 million is related to the Boat segment.
Potential payments on these customer financing arrangements extend over several
years with the maximum single year obligation related to these arrangements of
$69.4 million, of which $24.3 million is related to the Fitness segment, $30.2
million is related to the Marine Engine segment, $11.7 million is related to the
Bowling & Billiards segment and $3.2 million is related to the Boat
segment.
The
Company has also entered into arrangements with third-party lenders where it has
agreed, in the event of a default by the customer, to repurchase, from the
third-party lender, select Brunswick products repossessed from the customer.
These arrangements are typically subject to repurchase criteria and a maximum
repurchase amount. The Company’s risk under these arrangements is mitigated by
the value of the products repurchased as part of the transaction. The maximum
amount of collateral the Company could be required to purchase was $166.6
million as of September 27, 2008, with $136.9 million relating to the Company’s
U.S. boat business. The maximum single year repurchase obligation is $123.6
million, with $100.0 million relating to the Company’s U.S. boat
business.
Based on
historical experience and current facts and circumstances, and in accordance
with FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others – An Interpretation of FASB Statements No. 5, 57, and 107 and Rescission
of FASB Interpretation No. 34,” the Company has recorded the estimated net
liability associated with losses from these guarantee and repurchase obligations
on its Condensed Consolidated Balance Sheets. Historical cash requirements and
losses associated with these obligations have not been significant, but could
increase if dealer defaults increase as a result of the difficult market
conditions in the United States.
Financial
institutions have issued standby letters of credit and surety bonds
conditionally guaranteeing obligations on behalf of the Company totaling $106.6
million as of September 27, 2008. This amount is primarily comprised of standby
letters of credit and surety bonds issued in connection with the Company’s
self-insured workers’ compensation program as required by its insurance
companies and various state agencies. The Company has recorded reserves to cover
liabilities associated with these programs. Under certain circumstances, such as
an event of default under the Company’s revolving credit facility, or, in the
case of surety bonds, a ratings downgrade below investment grade, the Company
could be required to post collateral to support the outstanding letters of
credit and surety bonds. As a result of the recent downgrade of the Company’s
long-term debt by rating agencies, the Company may be required to post letters
of credit totaling $9.5 million as collateral against a portion of surety
bonds.
17
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Product
Warranties
The
Company records a liability for product warranties at the time revenue is
recognized. The liability is estimated using historical warranty experience,
projected claim rates and expected costs per claim. The Company adjusts its
liability for specific warranty matters when they become known and the exposure
can be estimated. The Company’s warranty reserves are affected by product
failure rates as well as material usage and labor costs incurred in correcting a
product failure. If these estimated costs differ from actual costs, a revision
to the warranty reserve would be required.
The
following activity related to product warranty liabilities from continuing
operations was recorded in Accrued expenses and Long-term liabilities – Other
during the nine months ended September 27, 2008:
|
(in
millions)
|
2008
|
|||
|
Balance
at beginning of period
|
$ | 163.9 | ||
|
Payments
made
|
(91.0 | ) | ||
|
Provisions/additions
for contracts issued/sold
|
72.9 | |||
|
Aggregate
changes for preexisting warranties
|
— | |||
|
Balance
at end of period
|
$ | 145.8 | ||
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 $23.9 million as of September 27, 2008.
Legal
and Environmental
The
Company accrues for litigation exposure based upon its assessment, made in
consultation with counsel, of the likely range of exposure stemming from the
claim. In light of existing reserves, the Company’s litigation claims, when
finally resolved, will not, in the opinion of management, have a material
adverse effect on the Company’s consolidated financial position. If current
estimates for the cost of resolving any claims are later determined to be
inadequate, results of operations could be adversely affected in the period in
which additional provisions are required.
Refer to
Note 11 to the consolidated financial statements in the 2007 Form 10-K for
discussion of legal and environmental matters as of December 31,
2007.
18
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note 8 – Segment
Data
Brunswick
is a manufacturer and marketer of leading consumer brands, and operates in four
reportable segments: Boat, Marine Engine, Fitness and Bowling & Billiards.
The Company’s segments are defined by management reporting structure and
operating activities.
The
Company evaluates performance based on business segment operating earnings.
Operating earnings of segments do not include the expenses of corporate
administration, earnings from equity affiliates, other expenses and income of a
non-operating nature, interest expense and income or provisions for income
taxes.
Corporate/Other
results include items such as corporate staff and overhead costs as well as the
financial results of the Company’s joint venture, Brunswick Acceptance Company,
LLC (BAC), which is discussed in further detail in Note 11 – Financial Services.
Corporate/Other assets consist primarily of cash and marketable securities,
prepaid income taxes and investments in unconsolidated affiliates. Marine
eliminations are eliminations between the Marine Engine and Boat segments for
sales transactions consummated at established arm’s length transfer
prices.
The
following table sets forth net sales and operating earnings (loss) of each of
the Company’s reportable segments for the three months ended September 27, 2008,
and September 29, 2007:
|
Net
Sales
|
Operating
Earnings (Loss)
|
|||||||||||||||
|
Three
Months Ended
|
Three
Months Ended
|
|||||||||||||||
|
(in
millions)
|
September
27,
2008
|
September
29,
2007
|
September
27,
2008
|
September
29,
2007
|
||||||||||||
|
Boat
|
$ | 392.5 | $ | 613.9 | $ | (537.4 | ) | $ | (90.3 | ) | ||||||
|
Marine
Engine
|
448.9 | 566.7 | (8.6 | ) | 47.5 | |||||||||||
|
Marine
eliminations
|
(75.4 | ) | (119.1 | ) | – | – | ||||||||||
|
Total
Marine
|
766.0 | 1,061.5 | (546.0 | ) | (42.8 | ) | ||||||||||
|
Fitness
|
161.6 | 150.2 | 10.3 | 11.8 | ||||||||||||
|
Bowling
& Billiards
|
111.1 | 114.6 | (10.4 | ) | (0.2 | ) | ||||||||||
|
Eliminations
|
0.1 | (0.1 | ) | – | – | |||||||||||
|
Corporate/Other
|
– | – | (20.2 | ) | (15.1 | ) | ||||||||||
|
Total
|
$ | 1,038.8 | $ | 1,326.2 | $ | (566.3 | ) | $ | (46.3 | ) | ||||||
19
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
The
following table sets forth net sales and operating earnings (loss) of each of
the Company’s reportable segments for the nine months ended September 27, 2008,
and September 29, 2007:
|
Net
Sales
|
Operating
Earnings (Loss)
|
|||||||||||||||
|
Nine
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
(in
millions)
|
September
27,
2008
|
September
29,
2007
|
September
27,
2008
|
September
29,
2007
|
||||||||||||
|
Boat
|
$ | 1,718.2 | $ | 2,045.7 | $ | (589.8 | ) | $ | (51.5 | ) | ||||||
|
Marine
Engine
|
1,658.4 | 1,808.9 | 76.7 | 162.5 | ||||||||||||
|
Marine
eliminations
|
(308.3 | ) | (382.0 | ) | – | – | ||||||||||
|
Total
Marine
|
3,068.3 | 3,472.6 | (513.1 | ) | 111.0 | |||||||||||
|
Fitness
|
467.7 | 439.2 | 26.6 | 27.3 | ||||||||||||
|
Bowling
& Billiards
|
335.1 | 323.6 | (29.3 | ) | 5.4 | |||||||||||
|
Eliminations
|
(0.1 | ) | (0.2 | ) | – | – | ||||||||||
|
Corporate/Other
|
– | – | (57.4 | ) | (50.7 | ) | ||||||||||
|
Total
|
$ | 3,871.0 | $ | 4,235.2 | $ | (573.2 | ) | $ | 93.0 | |||||||
The
following table sets forth total assets of each of the Company’s reportable
segments:
|
Total
Assets
|
||||||||
|
(in
millions)
|
September
27,
2008
|
December
31, 2007
|
||||||
|
Boat
|
$ | 978.7 | $ | 1,515.6 | ||||
|
Marine
Engine
|
869.6 | 959.1 | ||||||
|
Total
Marine
|
1,848.3 | 2,474.7 | ||||||
|
Fitness
|
669.4 | 695.4 | ||||||
|
Bowling
& Billiards
|
369.6 | 409.2 | ||||||
|
Corporate/Other
|
716.3 | 786.3 | ||||||
|
|
|
|||||||
|
Total
|
$ | 3,603.6 | $ | 4,365.6 | ||||
Note
9 – Investments
The
Company has certain unconsolidated international and domestic affiliates that
are accounted for using the equity method. See Note 11 – Financial Services
for more details on the Company’s joint venture, Brunswick Acceptance Company,
LLC (BAC). Refer to Note 8 to the consolidated financial statements in the 2007
Form 10-K for further detail relating to the Company’s investments.
In March
2008, Brunswick sold its interest in its bowling joint venture in Japan for
$40.4 million gross cash proceeds after post-closing adjustments, $37.4 million
net of cash paid for taxes and other costs. For the nine months ended September
27, 2008, the sale resulted in a $20.9 million pretax gain, $9.9 million
after-tax, and was recorded as Investment sale gains in the Consolidated
Statements of Operations.
In
September 2008, Brunswick sold its investment in a foundry located in Mexico for
$5.1 million gross cash proceeds. The sale resulted in a $2.1 million pretax
gain and was recorded as Investment sale gains in the Consolidated Statements of
Operations.
20
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
10 – Comprehensive Income (Loss)
The
Company reports certain changes in equity during a period in accordance with
SFAS No. 130, “Reporting Comprehensive Income.” Accumulated other comprehensive
loss includes prior service costs and net actuarial gains and losses for defined
benefit plans; foreign currency cumulative translation adjustments; and
unrealized derivative and investment gains and losses, all net of tax. Effective
December 31, 2006, the Company adopted the provisions of SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R),” (SFAS 158),
eliminating the minimum pension liability concept under which adjustments were
recorded to other comprehensive income. The Company’s adoption of SFAS 158 also
required the inclusion of prior service costs and net actuarial gains and losses
in other comprehensive income (loss). Components of other comprehensive income
(loss) for the three months and nine months ended September 27, 2008, and
September 29, 2007, were as follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
(in
millions)
|
Sept.
27,
2008
|
Sept.
29,
2007
|
Sept.
27,
2008
|
Sept.
29,
2007
|
||||||||||||
|
Net
earnings (loss)
|
$ | (591.4 | ) | $ | 1.9 | $ | (584.1 | ) | $ | 104.8 | ||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||
|
Foreign
currency cumulative translation adjustment
|
(23.1 | ) | 10.6 | (7.1 | ) | 13.2 | ||||||||||
|
Net
change in unrealized gains (losses) on investments
|
(1.1 | ) | 0.2 | (3.6 | ) | 0.3 | ||||||||||
|
Net
change in unamortized prior service costs
|
0.5 | 0.5 | 1.6 | 1.6 | ||||||||||||
|
Net
change in unamortized actuarial losses
|
0.6 | 1.2 | 1.7 | 3.8 | ||||||||||||
|
Net
change in accumulated unrealized derivative
gains (losses)
|
2.8 | (5.1 | ) | 6.1 | (5.2 | ) | ||||||||||
|
Total
other comprehensive income (loss)
|
(20.3 | ) | 7.4 | (1.3 | ) | 13.7 | ||||||||||
|
Comprehensive
income (loss)
|
$ | (611.7 | ) | $ | 9.3 | $ | (585.4 | ) | $ | 118.5 | ||||||
Note
11 – Financial Services
The
Company, through its Brunswick Financial Services Corporation (BFS) subsidiary,
owns a 49 percent interest in a joint venture, Brunswick Acceptance Company, LLC
(BAC). CDF Ventures, LLC (CDFV), a subsidiary of GE Capital Corporation (GECC),
owns the remaining 51 percent. BAC commenced operations in 2003 and provides
secured wholesale inventory floor-plan financing to Brunswick’s boat and engine
dealers. BAC also purchases and services a portion of Mercury Marine’s domestic
accounts receivable relating to its boat builder and dealer
customers.
During
the second quarter of 2008, the parties agreed to extend the term of the venture
through June 30, 2014. The joint venture
agreement contains provisions allowing for renewal, purchase, or termination by
either of the partners at the end of this term or subsequent extensions.
The agreement also contains provisions allowing CDFV to terminate the
joint venture if the Company is unable to maintain compliance with certain
financial metrics. The Company was in compliance with these metrics at the end
of the third quarter.
BAC is
funded in part through a $1.0 billion secured borrowing facility from GE
Commercial Distribution Finance Corporation (GECDF), which is in place through
the term of the joint venture, and with equity contributions from both partners.
BAC also sells a portion of its receivables to a securitization facility, the GE
Dealer Floorplan Master Note Trust, which is arranged by GECC. The sales of
these receivables meet the requirements of a “true sale” under SFAS No.
140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities – a replacement of FASB Statement No. 125,” (SFAS
140), and are
therefore not retained on the financial statements of BAC. The indebtedness of
BAC is not guaranteed by the Company or any of its subsidiaries. In addition,
BAC is not responsible for any continuing servicing costs or obligations with
respect to the securitized receivables.
21
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
BFS’s
investment in BAC is accounted for by the Company under the equity method and is
recorded as a component of Investments in its Condensed Consolidated Balance
Sheets. The Company records BFS’s share of income or loss in BAC based on its
ownership percentage in the joint venture in Equity earnings in its Consolidated
Statements of Operations. BFS and GECDF also have an
income sharing arrangement related to income generated from the receivables sold
by BAC to the securitization facility.
BFS’s
equity investment is adjusted monthly to maintain a 49 percent interest in
accordance with the capital provisions of the joint venture agreement. The
Company funds its investment in BAC through cash contributions and reinvested
earnings. BFS’s total investment in BAC at September 27, 2008, and December 31,
2007, was $26.2 million and $47.0 million, respectively.
BFS
recorded income related to the operations of BAC of $1.4 million and $7.1
million for the three months and nine months ended September 27, 2008,
respectively. These amounts compare with $3.4 million and $10.1 million in the
corresponding periods ended September 29, 2007, respectively. These amounts
include amounts earned by BFS under the aforementioned income sharing agreement,
but exclude the discount expense paid by the Company on the sale of Mercury
Marine’s accounts receivable to the joint venture noted below.
Accounts
receivable totaling $164.2 million and $608.1 million were sold to BAC during
the three months and nine months ended September 27, 2008, respectively,
compared with $228.2 million and $688.8 million during the corresponding periods
ended September 29, 2007. Discounts of $1.3 million and $4.6 million for the
three months and nine months ended September 27, 2008, respectively, have been
recorded as an expense in Other expense, net, in the Consolidated Statements of
Operations. These amounts compare with $2.2 million and $6.3 million for the
same periods in the prior year. The outstanding balance of receivables sold to
BAC was $100.2 million as of September 27, 2008, up from $93.1 million as of
December 31, 2007. Pursuant to the joint venture agreement, BAC reimbursed
Mercury Marine $1.8 million and $1.7 million for the nine months ended September
27, 2008, and September 29, 2007, respectively, for the related credit,
collection and administrative costs incurred in connection with the servicing of
such receivables.
As of
September 27, 2008, and December 31, 2007, the Company had a retained interest
in $37.6 million and $46.4 million of the total outstanding accounts receivable
sold to BAC, respectively. The Company’s maximum exposure as of September 27,
2008, and December 31, 2007, related to these amounts was $23.7 million and
$28.9 million, respectively. In accordance with SFAS 140, the Company treats the
sale of receivables in which the Company retains an interest as a secured
obligation. Accordingly, the amount of the Company’s retained interest was
recorded in Accounts and notes receivable, and Accrued expenses in the Condensed
Consolidated Balance Sheets. These balances are included in the amounts in Note 7 – Commitments and
Contingencies.
Note
12 – Debt
On August
15, 2008, the Company completed the offering of a $250 million aggregate
principal amount of 9.75% Senior Notes due in 2013 under the Company’s universal
shelf registration. The proceeds from this offering were used to repay the
Company’s outstanding $250 million principal amount of Floating Rate Notes due
July 2009. Interest on the Senior Notes will be paid semi-annually commencing on
February 15, 2009. The interest rate payable on the Senior Notes will be subject
to adjustment from time to time if the rating assigned to the Senior Notes is
changed under circumstances described in the prospectus supplement. Total
interest rate adjustments are capped at 2.00%. Subsequent to September 27, 2008,
the Company’s debt ratings were lowered by the rating agencies, which increased
the interest rate on the Senior Notes by 100 basis points to
10.75%.
Also
during the third quarter, Brunswick amended its long-term revolving credit
facility (Facility). The amendment provides for the following changes to the
Facility: (1) a reduction in the lending commitment from $650 million
to $500 million; (2) an increase in the interest rate, facility fee rate and
letter of credit fee rate; (3) an amendment of the leverage ratio covenant,
permitting the add-back of certain cash restructuring charges in the
calculation of consolidated EBITDA and permitting a higher ratio than what is
currently in place for the first and second fiscal quarters of 2009; and (4)
adding two new financial covenants, one establishing minimum consolidated cash
requirements at quarter end and the other establishing minimum consolidated
EBITDA requirements.
22
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
13 – Income Taxes
The
Company recognized an income tax provision for both the three months and nine
months ended September 27, 2008, despite losses before taxes for each of the
periods. The provision is primarily due to uncertainty concerning the
realization of certain net deferred tax assets, as prescribed by SFAS No. 109,
“Accounting for Income Taxes.” A valuation allowance of $155.0 million was
recorded during the third quarter of 2008 to reduce certain net deferred tax
assets to their anticipated realizable value. The remaining realizable value was
determined by evaluating the potential to recover the value of these assets
through the utilization of loss carrybacks and certain tax planning strategies.
The effective tax rate from continuing operations, which is calculated as the
income tax provision as a percent of pretax losses, for the three months and
nine months ended September 27, 2008, was (2.7) percent for both
periods.
The
Company’s effective tax rate from continuing operations for the three months
ended September 29, 2007, was 49.4 percent. The effective tax rate, applied to
the Company’s reported loss from continuing operations, created a more favorable
tax benefit than the application of the statutory rate due to additional tax
benefits related to favorable tax reassessments of $8.9 million and research and
development tax credits. These benefits were partially offset by $3.5 million of
expense related to changes in estimates of prior years’ tax return filings and
$1.7 million expense related to the impact of a foreign jurisdiction tax rate
reduction on the underlying net deferred tax asset.
The
effective tax rate for the nine months ended September 29, 2007, was 18.3
percent. The effective tax rate was lower than the statutory rate due to tax
reassessments of $9.1 million, $2.0 million of benefits recognized in the first
quarter related to the Company’s election to apply the indefinite reversal
criterion of APB 23 discussed above and research and development tax credits,
partially offset by expense related to changes in estimates of prior years’ tax
return filings of $4.0 million and the impact of a foreign jurisdiction tax rate
reduction on the underlying net deferred tax asset of $1.7 million.
The
Company has historically provided deferred taxes under APB 23 for the presumed
ultimate repatriation to the United States of earnings from all non-U.S.
subsidiaries and unconsolidated affiliates. The indefinite reversal criterion of
APB 23 allows the Company to overcome that presumption to the extent the
earnings are indefinitely reinvested outside the United States.
As of
January 1, 2007, the Company determined that approximately $25.8 million of
certain additional foreign subsidiaries’ current undistributed net earnings, as
well as the future net earnings, will be permanently reinvested. As a result of
the additional APB 23 change in assertion, the Company reduced its deferred tax
liabilities related to undistributed foreign earnings by $2.0 million during the
first quarter of 2007.
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes,” (FIN 48) on January 1, 2007. As a result of the
implementation of FIN 48, the Company recognized an $8.7 million decrease in the
net liability for unrecognized tax benefits, which was accounted for as an
increase to the January 1, 2007, balance of retained earnings.
As of
September 27, 2008, and December 31, 2007, the Company had approximately $35
million and $39 million of gross unrecognized tax benefits, excluding interest.
The Company believes it is reasonably possible that the total amount of gross
unrecognized tax benefits, as of September 27, 2008, could decrease by
approximately $12 million in the next 12 months due to settlements with taxing
authorities.
The
Company recognizes interest and penalties related to unrecognized tax benefits
in income tax expense. As of September 27, 2008, and December 31, 2007, the
Company had approximately $6.3 million and $5.4 million accrued for the payment
of interest. There were no amounts accrued for penalties at September 27, 2008,
or December 31, 2007.
23
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
The
Company is regularly audited by federal, state and foreign tax authorities. The
IRS has completed its audits of the Company’s United States income tax returns
through the 2003 taxable year and is currently auditing the Company’s United
States income tax returns for taxable years 2004 and 2005. Primarily as a result
of filing amended tax returns, which were generated by the closing of federal
income tax audits, the Company is still open to state and local audits dating
back to the 1986 taxable year. With the exception of Germany, where the Company
is currently undergoing a tax audit for taxable years 1998 through 2001, the
Company is no longer subject to income tax examinations by any other major
foreign tax jurisdiction tax authorities for years prior to 2001.
Note
14 – Pension and Other Postretirement Benefits
The
Company has defined contribution plans, qualified and nonqualified pension
plans, and other postretirement benefit plans covering substantially all of its
employees. On December 31, 2006, the Company adopted the provisions of SFAS 158,
which requires recognition of the overfunded or underfunded status of pension
and other postretirement plans in the statement of financial position, as well
as recognition of changes in that funded status through comprehensive income in
the year in which they occur. SFAS 158 was adopted on a prospective basis, as
required. Prior years’ amounts have not been restated. Effective for the year
ended December 31, 2007, SFAS 158 also required measurement of a plan’s assets
and benefit obligations as of the date of the employer’s fiscal year end. As the
Company already measured plan assets and benefit obligations as of December 31,
2006, the adoption of this element of SFAS 158 had no impact on the Company in
2007. See Note 15 to the consolidated financial statements in the 2007 Form 10-K
for further details regarding these plans.
Pension
and other postretirement benefit costs included the following components for the
three months ended September 27, 2008, and September 29, 2007:
|
Pension
Benefits
|
Other
Postretirement
Benefits
|
|||||||||||||||
|
Three
Months Ended
|
Three
Months Ended
|
|||||||||||||||
|
(in
millions)
|
September
27,
2008
|
September
29,
2007
|
September
27,
2008
|
September
29,
2007
|
||||||||||||
|
|
||||||||||||||||
|
Service
cost
|
$ | 3.8 | $ | 4.3 | $ | 0.7 | $ | 0.8 | ||||||||
|
Interest
cost
|
16.9 | 15.7 | 1.6 | 1.6 | ||||||||||||
|
Expected
return on plan assets
|
(21.0 | ) | (20.5 | ) | – | – | ||||||||||
|
Amortization
of prior service costs
|
1.6 | 1.7 | (0.4 | ) | (0.4 | ) | ||||||||||
|
Amortization
of net actuarial losses
|
0.9 | 1.8 | 0.1 | 0.2 | ||||||||||||
|
Net
pension and other benefit costs
|
$ | 2.2 | $ | 3.0 | $ | 2.0 | $ | 2.2 | ||||||||
Pension
and other postretirement benefit costs included the following components for the
nine months ended September 27, 2008, and September 29, 2007:
|
Pension
Benefits
|
Other
Postretirement
Benefits
|
|||||||||||||||
|
Nine
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
(in
millions)
|
September
27,
2008
|
September
29,
2007
|
September
27,
2008
|
September
29,
2007
|
||||||||||||
|
Service
cost
|
$ | 11.3 | $ | 13.0 | $ | 2.2 | $ | 2.3 | ||||||||
|
Interest
cost
|
50.7 | 47.1 | 4.9 | 4.9 | ||||||||||||
|
Expected
return on plan assets
|
(63.0 | ) | (61.4 | ) | – | – | ||||||||||
|
Amortization
of prior service costs
|
4.8 | 4.9 | (1.3 | ) | (1.3 | ) | ||||||||||
|
Amortization
of net actuarial losses
|
2.7 | 5.4 | 0.1 | 0.7 | ||||||||||||
|
Net
pension and other benefit costs
|
$ | 6.5 | $ | 9.0 | $ | 5.9 | $ | 6.6 | ||||||||
Employer Contributions.
During the nine months ended September 27, 2008, the Company contributed
$1.7 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.
24
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
15 – 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 has not
repurchased any shares during 2008. During the three months and nine months
ended September 29, 2007, the Company repurchased 1.0 million and 3.6 million
shares under this program for $28.3 million and $115.5 million, respectively.
Through the third quarter of 2008, the Company had repurchased approximately
11.7 million shares for $397.4 million since the program’s inception with a
remaining authorization of $240.4 million. The plan has been suspended as the
Company intends to retain cash to enhance its liquidity rather than to
repurchase shares.
Note
16 – Discontinued Operations
In April
2006, the Company announced its intention to sell the majority of its Brunswick
New Technologies (BNT) business unit, which consisted of the Company’s marine
electronics, portable navigation device (PND) and wireless fleet tracking
businesses. Accordingly, the Company reported these BNT businesses as
discontinued operations in accordance with the criteria of SFAS No.
144.
In March
2007, Brunswick completed the sales of BNT’s marine electronics and PND
businesses to Navico International Ltd. and MiTAC International Corporation,
respectively. During the first nine months of 2007, the Company recognized
proceeds on these sales of $40.6 million, resulting in an after-tax gain of $4.0
million, after all post-closing adjustments.
In July
2007, the Company completed the sale of BNT’s wireless fleet tracking business
to Navman Wireless Holdings L.P. for net proceeds of $29.0 million, resulting in
an after-tax gain of $24.7 million. This transaction completed the sale of the
BNT businesses classified as discontinued operations.
This sale
was subject to post-closing adjustments, which were completed during 2007.
Ultimately, the Company recorded net proceeds of $28.8 million and an after-tax
gain of $25.8 million for the year ended December 31, 2007.
The sale
of BNT’s wireless fleet tracking completed the divestiture of the BNT
discontinued operations. With the net asset impairment taken prior to the
disposition of the BNT businesses in the fourth quarter of 2006 of $85.6
million, after-tax, and the subsequent 2007 gains of $29.8 million, after-tax,
on the BNT business sales, the net impact to the Company of these dispositions
was a net loss of $55.8 million, after-tax.
There
were no sales or earnings from discontinued operations during the first nine
months of 2008. The following table discloses the results of operations of the
BNT businesses reported as discontinued operations for the three months and nine
months ended September 29, 2007:
|
(in
millions)
|
Three
Months Ended
|
Nine
Months Ended
|
||||||
|
Net
sales
|
$ | 2.2 | $ | 99.7 | ||||
|
Pre-tax
earnings (loss)
|
$ | 21.9 | $ | 24.0 | ||||
There
were no remaining BNT net assets available for sale as of September 27, 2008,
December 31, 2007, or September 29, 2007.
25
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
17 – Subsequent Events
On
October 6, 2008, Brunswick sold the stock of MotoTron Corporation, a wholly
owned subsidiary reported in the Marine Engine segment, and all related
intellectual property to Woodward Governor Company. MotoTron Corporation
specializes in software tools and processes used to rapidly develop control
systems for marine, power generation, industrial and other engine equipment
applications. The sale resulted in gross cash proceeds of $17.0 million and is
expected to result in a pretax gain of approximately $13 million.
26
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Certain
statements in Management’s Discussion and Analysis are based on non-GAAP
financial measures. Specifically, the discussion of the Company’s cash flows
includes an analysis of free cash flows and the general discussion includes an
analysis of operating earnings and operating margins without the impact of the
goodwill and trade name impairment charges. GAAP refers to generally accepted
accounting principles in the United States. A “non-GAAP financial measure” is a
numerical measure of a registrant’s historical or future financial performance,
financial position or cash flows that excludes amounts, or is subject to
adjustments that have the effect of excluding amounts, that are included in the
most directly comparable measure calculated and presented in accordance with
GAAP in the statement of Operations, balance sheet or statement of cash flows of
the issuer; or includes amounts, or is subject to adjustments that have the
effect of including amounts, that are excluded from the most directly comparable
measure so calculated and presented. Operating and statistical measures are not
non-GAAP financial measures.
The
Company includes non-GAAP financial measures in Management’s Discussion and
Analysis, as Brunswick’s management believes that these measures and the
information they provide are useful to investors because they permit investors
to view Brunswick’s performance using the same tools that Brunswick uses and to
better evaluate its ongoing business performance.
Certain
other statements in Management’s Discussion and Analysis are forward-looking as
defined in the Private Securities Litigation Reform Act of 1995. These
statements are based on current expectations that are subject to risks and
uncertainties. Actual results may differ materially from expectations as of the
date of this filing because of factors discussed in Part II - Other Information,
Item 1A – Risk Factors in this filing.
Overview
and Outlook
General
Net sales
from continuing operations during the third quarter of 2008 decreased 21.7
percent to $1,038.8 million from $1,326.2 million in 2007. During the nine
months ended September 27, 2008, net sales decreased 8.6 percent to $3,871.0
million from $4,235.2 million during the nine months ended September 29, 2007.
For the three months ended September 27, 2008, the Company reported higher
world-wide net sales in the Fitness segment, as well as higher sales outside the
United States for the Bowling & Billiards segment, which were more than
offset by a reduction in the Boat and Marine Engine segments’ global sales. The
overall decrease in sales was primarily due to the continued reduction in marine
industry demand as a result of a weak U.S. economy, soft housing markets, the
recent contraction of liquidity in global credit markets, and higher food and
fuel prices that ultimately reduce the funds available for discretionary
purchases. For the nine months ended September 27, 2008, the Company reported
higher sales in the Fitness and Bowling & Billiards segments, as well as
higher sales outside the United States for all segments, which were more than
offset by a reduction in the Boat and Marine Engine segments’ sales in the
United States. The factors affecting year-to-date net sales were consistent with
the factors that affected the third quarter net sales, although the effects of
the global credit crisis had a more pervasive effect on the third quarter
results.
Retail
unit sales of powerboats in the United States have been declining since 2005,
with the rate of decline accelerating in 2008. Industry retail unit sales were
down significantly during the first nine months of 2008 compared with the
already low retail unit sales during the first nine months of 2007.
Quarterly
and year-to-date operating losses from continuing operations were $566.3 million
and $573.2 million, with negative operating margins of 54.5 percent and 14.8
percent, respectively. These results included goodwill and trade name impairment
charges of $495.1 million in the third quarter of 2008 and $511.1 million during
the first nine months of 2008. In the three months and nine months ended
September 29, 2007, quarterly operating losses and year-to-date operating
earnings from continuing operations were $46.3 million and $93.0 million, with
operating margins of (3.5) percent and 2.2 percent, respectively, which included
trade name impairment charges of $66.4 million during the three and nine months
ended September 29, 2007. The operating losses during 2008 were primarily as a
result of higher goodwill and trade name impairment charges, lower sales from
marine operations, reduced fixed-cost absorption due to reduced production rates
in the Company’s marine businesses in an effort to achieve appropriate levels of
dealer pipeline inventories and higher restructuring, exit and other impairment
charges. These factors were partially offset by successful cost-reduction
initiatives, as discussed in Note 3 – Restructuring
Activities in the Notes to Consolidated Financial
Statements.
27
In March
2008, Brunswick sold its interest in its bowling joint venture in Japan for
$40.4 million gross cash proceeds after post-closing adjustments, $37.4 million
net of cash paid for taxes and other costs, For the nine months ended September
27, 2008, the sale resulted in a $20.9 million pretax gain, $9.9 million
after-tax, and was recorded as Investment sale gains in the Consolidated
Statements of Operations.
Restructuring
Activities
In
November 2006, Brunswick announced restructuring initiatives to improve the
Company’s cost structure, better utilize overall capacity and improve general
operating efficiencies. These initiatives reflected the Company’s response to a
difficult marine market. As the marine market has continued to decline,
Brunswick expanded its restructuring activities during 2006, 2007 and 2008 in
order to improve performance and better position the Company for current market
conditions and longer term growth.
The
Company has disaggregated its restructuring initiatives into three
classifications: exit activities; restructuring activities; and definite-lived
asset impairments. The Company considers employee termination costs, lease exit
costs, inventory write-downs and facility shutdown costs related to the sale of
certain Baja boat business assets, the closure of its bowling pin manufacturing
facility and the closure of the Valley-Dynamo coin-operated commercial billiards
business to be exit activities. Other employee termination costs, costs to
retain and relocate employees, consulting costs and costs to consolidate the
manufacturing footprint are considered restructuring activities. Also,
definite-lived impairments are costs related to the write-downs of fixed assets,
tooling, patents and proprietary technology, and dealer networks.
Total
restructuring, exit and other impairment charges in the third quarter were $39.1
million for the three months ended September 27, 2008. The $39.1 million
consists of $15.8 million in the Boat segment, $12.9 million in the Marine
Engine segment, $0.8 million in the Fitness segment, $1.8 million in the Bowling
& Billiards segment and $7.8 million at Corporate. Total restructuring, exit
and other impairment charges during the first nine months of 2008 were $128.4
million. The $128.4 million consists of $61.1 million in the Boat segment, $31.4
million in the Marine Engine segment, $2.1 million in the Fitness segment, $17.9
million in the Bowling & Billiards segment and $15.9 million at Corporate.
See Note 3 – Restructuring
Activities in the Notes to Consolidated Financial Statements for further
details.
The
actions taken under these initiatives are expected to benefit future operations
by removing fixed costs of approximately $50 million from Cost of sales and
approximately $250 million from Selling, general and administrative in the
Consolidated Statements of Operations by the end of 2009 compared with 2007
spending levels. The majority of these costs are expected to be cash savings
once all restructuring initiatives are complete. The Company has begun to see
savings related to these initiatives in 2008 and expects all savings to be
realized by the end of 2009.
Goodwill
and Trade Name Impairments
Brunswick
accounts for goodwill and identifiable intangible assets in accordance with
Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets,” (SFAS 142). Under this standard, Brunswick assesses the
impairment of goodwill and indefinite-lived intangible assets at least annually
and whenever events or changes in circumstances indicate that the carrying value
may not be recoverable.
During
the third quarter of 2008, Brunswick encountered a significant adverse change in
the business climate. A weak U.S. economy, soft housing markets and the recent
contraction of liquidity in global credit markets have contributed to the
continued reduction in demand for certain Brunswick products and specifically
the reduced wholesale production rates for those affected products. As a result
of this reduced demand, along with lower-than-projected profits across certain
Brunswick brands and lower commitments received from its dealer network in the
third quarter, management revised its future cash flow expectations in the third
quarter of 2008, which lowered the fair value estimates of certain
businesses.
28
As a
result of the lower fair value estimates, Brunswick concluded that the carrying
amounts of its Boat segment and Bowling Retail and Billiards reporting units
within the Bowling & Billiards segment exceeded their respective fair
values. The Company compared the implied fair value of the goodwill in each
reporting unit with the carrying value and concluded that a $374.0 million
pretax impairment charge needed to be recognized in the third quarter of 2008.
Of this amount, $361.3 million relates to the Boat segment reporting unit and
$1.7 million relates to the Bowling Retail reporting unit and $11.0 million
relates to the Billiards reporting unit within the Bowling & Billiards
segment. As a result of these impairments, all goodwill has been written down to
zero at these respective reporting units.
In
conjunction with the goodwill impairment testing, the Company analyzed the
valuation of its other indefinite-lived intangibles, consisting exclusively of
acquired trade names. Brunswick estimated the fair value of trade names by
performing a discounted cash flow analysis based on the relief-from-royalty
approach. This approach treats the trade name as if it were licensed by the
Company rather than owned, and calculates its value based on the discounted cash
flow of the projected license payments. The analysis resulted in a pretax trade
name impairment charge of $121.1 million, representing the excess of the
carrying cost of the trade names over the calculated fair value. Of this amount,
$115.7 million relates to the Boat segment reporting unit, $4.5 million relates
to the Marine Engine segment reporting unit and $0.9 million relates to the
Billiards reporting unit within the Bowling & Billiards
segment.
Other
The
Company intends to continue its efforts to reduce its cost structure, including
furloughing a significant portion of its salaried workforce in the United States
for eight days during the fourth quarter of 2008. In addition, the Company plans
to continue working toward achieving appropriate levels of marine dealer
inventories by reducing production of boats and marine engines in excess of the
reduced domestic retail demand for marine products and will be furloughing
several of its fiberglass boat manufacturing facilities during the fourth
quarter in order to accomplish lower production. The Company anticipates that
marine sales will benefit from the introduction of new products; however, this
benefit will be unable to offset the overall decline in sales as a result of
lower marine retail demand, which stems from the weakening global economy. The
recent openings of new Brunswick Zone XL retail bowling centers are expected to
benefit Bowling & Billiards net sales; the weakening global economy is
expected to partially offset the anticipated increase in net sales at the
Bowling & Billiards segment. Sales in 2008 for the Fitness segment are
expected to increase as a result of recently introduced products at Life
Fitness.
The
Company expects operating earnings and margins for 2008 to decrease as a result
of goodwill impairment charges, trade name impairment charges and restructuring,
exit and other impairment charges; reduced marine sales; weak demand for certain
consumer products; and production declines in its marine businesses. These
factors, along with continued increases in raw material, production, and freight
and distribution costs are not expected to be fully offset by growth in Fitness
and Bowling & Billiards operations and the benefits from restructuring and
cost containment efforts undertaken during 2006, 2007 and 2008.
Brunswick’s
effective tax rate is expected to be 36 percent in 2008, which excludes the
valuation allowance established against the Company’s deferred tax assets, the
effect of taxes on goodwill and trade name impairment charges, restructuring,
exit and other impairment charges, the additional tax provisions realized in
conjunction with the sale of its joint venture in Japan and the effect of the
research and development tax credit, which was recently extended.
As
discussed in Note
16 – Discontinued Operations in the Notes to Consolidated Financial
Statements, on April 27, 2006, the Company announced its intention to sell the
majority of the Brunswick New Technologies (BNT) business unit, consisting of
the Company’s marine electronics, portable navigation device (PND) and wireless
fleet tracking businesses. During the second quarter of 2006, Brunswick began
reporting the results of these BNT businesses, which were previously reported in
the Marine Engine segment, as discontinued operations for all periods presented.
The Company’s results, as discussed in Management’s Discussion and Analysis,
reflect continuing operations only, unless otherwise noted. The Company
completed the divestiture of the BNT discontinued operations in
2007.
29
Matters
Affecting Comparability
The
following events have occurred during the three months and nine months ended
September 27, 2008, and September 29, 2007, which the Company believes affect
the comparability of the results of operations:
Goodwill impairment charges.
As a result of the continued reduction in demand for certain Brunswick
products, along with lower-than-projected profits across certain Brunswick
brands, management revised its future cash flow expectations in the third
quarter of 2008. The revised future cash flow expectations resulted in the
Company lowering its estimate of fair value of certain businesses and required
the Company to take a $374.0 million pretax goodwill impairment charge during
the third quarter of 2008, as prescribed by SFAS 142, as compared with no
goodwill impairment during the third quarter of 2007.
During
the nine months ended September 27, 2008, the Company incurred $377.2 million of
goodwill impairment charges, which include the aforementioned $374.0 million,
along with impairments related to the analyses of its Baja boat business and its
Valley-Dynamo coin-operated commercial billiards business in the second quarter
of 2008. There were no comparable charges recognized during the nine months
ended September 29, 2007.
Trade name impairment
charges. In conjunction with the goodwill impairment testing, the Company
analyzed the valuation of its trade names in accordance with SFAS 142. The
analysis resulted in a pretax trade name impairment charge of $121.1 million
during the third quarter of 2008, representing the excess of the carrying cost
of the trade names over the calculated fair value. This compares with a $66.4
million pretax trade name impairment charge taken in the third quarter of 2007
as a result of a valuation analysis performed on certain outboard boat company
trade names.
During
the nine months ended September 27, 2008, the Company has taken $133.9 million
of trade name impairment charges, which includes the aforementioned $121.1
million and additional impairments related to the previous analyses of its
Bluewater Marine boat business and its Valley-Dynamo coin-operated commercial
billiards business in the second quarter of 2008. This charge compares with the
$66.4 million trade name impairment charge taken during the nine months ended
September 29, 2007, related to the impairment of certain outboard boat trade
names.
Restructuring, exit and other
impairment charges. Brunswick announced initiatives to improve the
Company’s cost structure, better utilize overall capacity and improve general
operating efficiencies. During the third quarter of 2008, the Company recorded a
charge of $39.1 million related to restructuring activities as compared with
$4.7 million in the third quarter of 2007. During the first nine months of 2008,
the Company recorded a charge of $128.4 million related to restructuring
activities as compared with $13.4 million during the first nine months of 2007.
See Note 3 – Restructuring
Activities in the Notes to Consolidated Financial Statements for further
details.
Investment sale gains. In
March 2008, Brunswick sold its interest in its bowling joint venture in Japan
for $40.4 million gross cash proceeds after post-closing adjustments, $37.4
million net of cash paid for taxes and other costs. For the nine months ended
September 27, 2008, the sale resulted in a $20.9 million pretax gain, $9.9
million after-tax, and was recorded as Investment sale gains in the Consolidated
Statements of Operations.
In
September 2008, Brunswick sold its investment in a foundry located in Mexico for
$5.1 million gross cash proceeds. The sale resulted in a $2.1 million pretax
gain and was recorded as Investment sale gains in the Consolidated Statements of
Operations.
Tax Items. The comparison of
net earnings per diluted share between 2008 and 2007 is affected by special tax
items. During the three months and nine months ended September 27, 2008, the
Company recognized special tax provisions of $15.7 million and $15.4 million,
respectively, on operating losses. Typically, the Company would recognize a tax
benefit on operating losses; however, due to the uncertainty of the realization
of certain net deferred tax assets, $157.1 million and $155.1 million of special
tax charges were recognized, respectively, primarily as a result of the
establishment of a deferred tax asset valuation allowance of $155.0 million.
During the three months and nine months ended September 29, 2007, the Company
reduced its tax provision by $3.7 million and $5.6 million, respectively,
primarily as a result of favorable tax reassessments and its election to apply
the indefinite reversal criterion of APB 23 to the undistributed net earnings of
certain foreign subsidiaries, as discussed in Note 13 – Income Taxes in the
Notes to Consolidated Financial Statements. These benefits were partially offset
by expense related to changes in estimates of prior years’ tax return filings
and the impact of a foreign jurisdiction tax rate reduction on the underlying
net deferred tax asset.
30
Results
of Operations
Consolidated
The
following table sets forth certain amounts, ratios and relationships calculated
from the Consolidated Statements of Operations for the three months
ended:
|
2008
vs. 2007
|
||||||||||||||||
|
Three
Months Ended
|
Increase/(Decrease)
|
|||||||||||||||
|
(in
millions, except per share data)
|
September
27,
2008
|
September
29,
2007
|
$ | % | ||||||||||||
|
Net
sales
|
$ | 1,038.8 | $ | 1,326.2 | $ | (287.4 | ) | (21.7 | )% | |||||||
|
Gross
margin (A)
|
$ | 176.5 | $ | 262.7 | $ | (86.2 | ) | (32.8 | )% | |||||||
|
Goodwill
impairment charges
|
$ | 374.0 | $ | - | $ | 374.0 |
NM
|
|||||||||
|
Trade
name impairment charges
|
$ | 121.1 | $ | 66.4 | $ | 54.7 | 82.4 | % | ||||||||
|
Restructuring,
exit and other impairment charges
|
$ | 39.1 | $ | 4.7 | $ | 34.4 |
NM
|
|||||||||
|
Operating
earnings (loss)
|
$ | (566.3 | ) | $ | (46.3 | ) | $ | (520.0 | ) |
NM
|
||||||
|
Net
earnings (loss) from continuing operations
|
$ | (591.4 | ) | $ | (23.7 | ) | $ | (567.7 | ) |
NM
|
||||||
|
Diluted
earnings (loss) per share from continuing
operations
|
$ | (6.70 | ) | $ | (0.27 | ) | $ | (6.43 | ) |
NM
|
||||||
|
Expressed
as a percentage of Net sales:
|
||||||||||||||||
|
Gross
margin
|
17.0 | % | 19.8 | % |
(280)bpts
|
|||||||||||
|
Selling,
general and administrative expense
|
17.1 | % | 15.6 | % |
150
bpts
|
|||||||||||
|
Research
and development expense
|
3.0 | % | 2.3 | % |
70
bpts
|
|||||||||||
|
Goodwill
impairment charges
|
36.0 | % | - | % |
NM
|
|||||||||||
|
Trade
name impairment charges
|
11.7 | % | 5.0 | % |
670
bpts
|
|||||||||||
|
Restructuring,
exit and other impairment charges
|
3.7 | % | 0.4 | % |
330
bpts
|
|||||||||||
|
Operating
margin
|
(54.5 | )% | (3.5 | )% |
NM
|
|||||||||||
__________
bpts =
basis points
NM = not
meaningful
(A) Gross
margin is defined as Net sales less Cost of sales as presented in the
Consolidated Statements of Operations.
The
decrease in net sales was primarily due to reduced marine industry demand
compared with the third quarter of 2007 as a result of uncertainty in the global
economy and the related recent contraction of liquidity in global credit
markets. Although weakness in marine retail demand was previously isolated to
the United States, the recent uncertainty in the global economy has had an
adverse effect on world-wide retail demand. Although net sales in the third
quarter of 2008 are down 22 percent from the third quarter of 2007, the Company
has seen strong sales of commercial fitness equipment and bowling products and
has experienced increases in revenue from recently opened Brunswick Zone XL
centers.
The
decrease in gross margin percentage in the third quarter of 2008 compared with
the same period last year was primarily due to lower fixed-cost absorption and
inefficiencies due to reduced production rates, as a result of the Company’s
efforts to achieve appropriate levels of marine customer pipeline inventories in
light of lower retail demand, and higher raw material and component costs. This
decrease was partially offset by successful cost-reduction efforts.
31
Selling,
general and administrative expense decreased by $29.5 million to $177.4 million
in the third quarter of 2008. The decrease was primarily driven by successful
cost reduction initiatives, but was partially offset by increased variable
compensation expense and the effect of unfavorable foreign currency
translation.
During
the third quarter of 2008, the Company reviewed its goodwill and trade names and
determined that $495.1 million of impairment charges were necessary. These
charges compare with the $66.4 million impairment charge taken on select trade
names during the third quarter of 2007. See Note 2 – Goodwill and Trade Name
Impairments in the Notes to Consolidated Financial Statements for further
details.
Also
during the third quarter of 2008, the Company accelerated its previously
announced restructuring activities. These restructuring activities led to the
increase in restructuring, exit and other impairment charges. Specifically, the
Company has announced the closing of its production facilities in Pipestone,
Minnesota; Roseburg, Oregon; and Arlington, Washington. A fourth plant, in
Navassa, North Carolina, will be mothballed. The Arlington, Roseburg and Navassa
shutdowns are expected to be completed by the end of 2008, with the Pipestone
shutdown expected to be completed in the first quarter of 2009. See Note 3 – Restructuring Activities
in the Notes to Consolidated Financial Statements for further
details.
The
decrease in operating earnings was mainly due to reduced sales volumes, goodwill
and trade name impairments taken during the third quarter of 2008 and the
unfavorable factors affecting gross margin and restructuring activities
discussed above.
During
the third quarter of 2008, Brunswick sold its investment in a foundry located in
Mexico for
$5.1 million gross cash proceeds, which resulted in a $2.1 million pretax
gain.
Interest
expense decreased $0.1 million in the third quarter of 2008 compared with the
same period in 2007. Interest income increased $0.6 million in the third quarter
of 2008 compared with the same period in 2007, primarily as a result of higher
average cash balances during the third quarter of 2008.
The
Company’s effective tax rate in the third quarter of 2008 was a 2.7 percent tax
provision on operating losses, compared with a 49.4 percent tax benefit in the
comparable period of 2007. The tax rate change was mostly due to $157.1 million
of special tax provisions in the third quarter of 2008, primarily related to the
establishment of a deferred tax asset valuation allowance.
Net
earnings from continuing operations and diluted earnings per share from
continuing operations decreased primarily due to the same factors discussed
above with respect to operating earnings.
Weighted
average common shares outstanding used to calculate diluted earnings per share
decreased to 88.3 million in the third quarter of 2008 from 89.0 million in the
third quarter of 2007. The decrease in average shares outstanding was primarily
due to the repurchase of 0.5 million shares since the third quarter of 2007 and
the effect of a lower stock price in determining common share equivalents for
options and SARs. See Note 15 –
Share Repurchase Program in the Notes to Consolidated Financial
Statements for additional information related to share repurchases.
32
The
following table sets forth certain amounts, ratios and relationships calculated
from the Consolidated Statements of Operations for the nine months
ended:
|
2008
vs. 2007
|
||||||||||||||||
|
Nine
Months Ended
|
Increase/(Decrease)
|
|||||||||||||||
|
(in
millions, except per share data)
|
September
27,
2008
|
September
29,
2007
|
$ | % | ||||||||||||
|
Net
sales
|
$ | 3,871.0 | $ | 4,235.2 | $ | (364.2 | ) | (8.6 | )% | |||||||
|
Gross
margin (A)
|
$ | 749.5 | $ | 896.2 | $ | (146.7 | ) | (16.4 | )% | |||||||
|
Goodwill
impairment charges
|
$ | 377.2 | $ | - | $ | 377.2 |
NM
|
|||||||||
|
Trade
name impairment charges
|
$ | 133.9 | $ | 66.4 | $ | 67.5 |
NM
|
|||||||||
|
Restructuring,
exit and other impairment charges
|
$ | 128.4 | $ | 13.4 | $ | 115.0 |
NM
|
|||||||||
|
Operating
earnings (loss)
|
$ | (573.2 | ) | $ | 93.0 | $ | (666.2 | ) |
NM
|
|||||||
|
Net
earnings (loss) from continuing operations
|
$ | (584.1 | ) | $ | 67.5 | $ | (651.6 | ) |
NM
|
|||||||
|
Diluted
earnings (loss) per share from continuing operations
|
$ | (6.62 | ) | $ | 0.75 | $ | (7.37 | ) |
NM
|
|||||||
|
Expressed
as a percentage of Net sales:
|
||||||||||||||||
|
Gross
margin
|
19.4 | % | 21.2 | % |
(180)bpts
|
|||||||||||
|
Selling,
general and administrative expense
|
15.1 | % | 14.7 | % |
40
bpts
|
|||||||||||
|
Research
and development expense
|
2.5 | % | 2.4 | % |
10
bpts
|
|||||||||||
|
Goodwill
impairment charges
|
9.8 | % | - | % |
980
bpts
|
|||||||||||
|
Trade
name impairment charges
|
3.5 | % | 1.6 | % |
190
bpts
|
|||||||||||
|
Restructuring,
exit and other impairment charges
|
3.3 | % | 0.3 | % |
300
bpts
|
|||||||||||
|
Operating
margin
|
(14.8 | )% | 2.2 | % |
NM
|
|||||||||||
__________
bpts =
basis points
NM = not
meaningful
(A) Gross
margin is defined as Net sales less Cost of sales as presented in the
Consolidated Statements of Operations.
The
decrease in net sales was primarily due to reduced U.S. marine industry demand
compared with the first nine months of 2007. This decrease was partially offset
by strong sales of commercial fitness equipment and bowling products, additional
contributions from recently opened Brunswick Zone XL centers; growth in non-U.S.
markets; and favorable translation effects.
The
decrease in gross margin percentage in the first nine months of 2008 compared
with the same period in the prior year was primarily due to the same factors as
described in the quarterly discussion.
Selling,
general and administrative expense decreased by $37.1 million to $586.1 million
in the first nine months of 2008. The decrease was primarily driven by
successful cost reduction initiatives, but was partially offset by the effect of
unfavorable foreign currency translation and increased variable compensation
expense.
During
the first nine months of 2008, the Company incurred $511.1 million of impairment
charges related to its goodwill and trade names. These charges compare with the
$66.4 million impairment charge taken on select trade names during the
comparable 2007 period. See
Note 2 – Goodwill and Trade Name Impairments in the Notes to Consolidated
Financial Statements for further details.
During
the first nine months of 2008, the Company announced additional restructuring
activities including the closing of its bowling pin manufacturing facility in
Antigo, Wisconsin; closing of its boat plant in Bucyrus, Ohio, in connection
with the divestiture of its Baja boat business; ceasing of boat manufacturing at
one of its facilities in Merritt Island, Florida; mothballing its Swansboro,
North Carolina, boat plant; closing its production facility in Newberry, South
Carolina; the write-down of certain assets of the Valley-Dynamo coin-operated
commercial billiards business; the closing of its production facilities in
Pipestone, Minnesota; Roseburg, Oregon; and Arlington, Washington; mothballing
is Navassa, North Carolina, boat plant; and the reduction of its employee
workforce across the Company. See Note 3 – Restructuring Activities
in the Notes to Consolidated Financial Statements for further
details.
33
The
decrease in operating earnings in the first nine months of 2008 compared with
the same period in the prior year was primarily due to the same factors as
described in the quarterly discussion.
During
the first nine months of 2008, Brunswick sold its interest in its bowling joint
venture in Japan for $40.4 million gross cash proceeds and in September 2008,
Brunswick sold its investment in a foundry located in Mexico for $5.1 million gross
cash proceeds. These sales resulted in $23.0 million of pretax
gains.
Interest
expense decreased by $4.1 million in the first nine months of 2008 compared with
the same period in 2007, primarily due to the same factors as described in the
quarterly discussion. Interest income decreased $0.2 million in the first nine
months of 2008 compared with the same period in 2007, primarily as a result of a
decline in interest rates on investments.
The
Company’s effective tax rate in the first nine months of 2008 was a 2.7 percent
tax provision on operating losses compared with an 18.3 percent tax provision in
the comparable period of 2007 mostly due to $155.1 million of special tax
provisions, primarily related to the establishment of a deferred tax asset
valuation allowance. During the nine months ended September 29, 2007, the
Company reduced its tax provision by $5.6 million, primarily as a result of
favorable tax reassessments and its election to apply the indefinite reversal
criterion of APB 23 to the undistributed net earnings of certain foreign
subsidiaries, as discussed in Note 13 – Income Taxes in the
Notes to Consolidated Financial Statements. These benefits were partially offset
by expense related to changes in estimates of prior years’ tax return filings
and the impact of a foreign jurisdiction tax rate reduction on the underlying
net deferred tax asset
Net
earnings from continuing operations and diluted earnings per share from
continuing operations decreased primarily due to the same factors discussed
above in operating earnings.
Weighted
average common shares outstanding used to calculate diluted earnings per share
decreased to 88.3 million in the first nine months of 2008 from 90.7 million in
the first nine months of 2007. The decrease in average shares outstanding was
primarily due to the share repurchase program and the effect of a lower stock
price in determining common share equivalents for options and SARs. See Note 15 – Share Repurchase Program
in the Notes to Consolidated Financial Statements for additional
information related to share repurchases.
34
Boat
Segment
The
following table sets forth Boat segment results for the three months
ended:
|
2008
vs. 2007
|
||||||||||||||||
|
Three
Months Ended
|
Increase/(Decrease)
|
|||||||||||||||
|
(in
millions)
|
September
27,
2008
|
September
29,
2007
|
$ |
%
|
||||||||||||
|
Net
sales
|
$ | 392.5 | $ | 613.9 | $ | (221.4 | ) | (36.1 | )% | |||||||
|
Goodwill
impairment charges
|
$ | 361.3 | $ | - | $ | 361.3 |
NM
|
|||||||||
|
Trade
name impairment charges
|
$ | 115.7 | $ | 66.4 | $ | 49.3 | 74.2 | % | ||||||||
|
Restructuring,
exit and other impairment charges
|
$ | 15.8 | $ | 4.1 | $ | 11.7 |
NM
|
|||||||||
|
Operating
earnings (loss)
|
$ | (537.4 | ) | $ | (90.3 | ) | $ | (447.1 | ) |
NM
|
||||||
|
Operating
margin
|
NM
|
|
(14.7 | )% |
NM
|
|||||||||||
|
Capital
expenditures
|
$ | 11.2 | $ | 44.9 | $ | (33.7 | ) | (75.1 | )% | |||||||
__________
NM = not
meaningful
The
decrease in Boat segment net sales was largely attributable to the effect of
reduced marine retail demand in U.S. markets and lower shipments to dealers in
an effort to achieve appropriate levels of pipeline inventories. In addition to
the weak retail demand in the United States, the recent contraction of liquidity
in global credit markets has led to lower net sales outside the United States
during the third quarter. Also during the third quarter of 2008, the Company
temporarily furloughed nearly all of its fiberglass boat manufacturing
facilities for approximately one month.
As a
result of its SFAS 142 review of goodwill and trade names, Brunswick incurred
goodwill and trade name charges within the Boat segment during the third quarter
of 2008. See Note 2 – Goodwill
and Trade Name Impairments in the Notes to Consolidated Financial
Statements for further details.
The
restructuring, exit and other impairment charges recognized during the third
quarter of 2008 are related to various restructuring activities initiated in
2008. See Note 3 –
Restructuring Activities in the Notes to Consolidated Financial
Statements for further details.
Boat
segment operating earnings decreased from 2007 primarily due to goodwill and
trade name impairment charges, a decrease in sales volume and increased
restructuring, exit and other impairment charges. Additionally, higher raw
material costs, lower fixed-cost absorption and increased inventory repurchase
obligation accruals resulting primarily from the bankruptcy of one of its larger
dealers contributed to the decline in operating earnings. This decrease was
partially offset by the savings from successful cost-reduction
initiatives.
Capital
expenditures in the third quarter of 2008 were largely attributable to tooling
costs for the production of new models, while capital expenditures in the third
quarter of 2007 were largely attributable to the acquisition of a boat
manufacturing facility in Navassa, North Carolina, and tooling costs for the
production of new models. Capital expenditures were lower during the third
quarter of 2008 as a result of discretionary capital spending
constraints.
35
The
following table sets forth Boat segment results for the nine months
ended:
|
2008
vs. 2007
|
||||||||||||||||
|
Nine
Months Ended
|
Increase/(Decrease)
|
|||||||||||||||
|
(in
millions)
|
September
27,
2008
|
September
29,
2007
|
$ | % | ||||||||||||
|
Net
sales
|
$ | 1,718.2 | $ | 2,045.7 | $ | (327.5 | ) | (16.0 | )% | |||||||
|
Goodwill
impairment charges
|
$ | 362.8 | $ | - | $ | 362.8 |
NM
|
|||||||||
|
Trade
name impairment charges
|
$ | 120.9 | $ | 66.4 | $ | 54.5 | 82.1 | % | ||||||||
|
Restructuring,
exit and other impairment charges
|
$ | 61.1 | $ | 9.9 | $ | 51.2 |
NM
|
|||||||||
|
Operating
earnings (loss)
|
$ | (589.8 | ) | $ | (51.5 | ) | $ | (538.3 | ) |
NM
|
||||||
|
Operating
margin
|
(34.3 | )% | (2.5 | )% |
NM
|
|||||||||||
|
Capital
expenditures
|
$ | 34.7 | $ | 76.3 | $ | (41.6 | ) | (54.5 | )% | |||||||
__________
NM = not
meaningful
The
factors affecting Boat segment net sales for the year-to-date period were
consistent with the factors described in the quarterly period above, except
year-to-date international sales are higher in 2008 than in 2007 as the recent
emergence of the global credit crisis did not impact sales outside the United
States until the third quarter.
Goodwill
and trade name impairment charges for the year-to-date period were primarily due
to the SFAS 142 analysis performed during the third quarter of 2008. The
remaining charges were the result of exiting certain businesses.
During
the nine months ended September 27, 2008, Brunswick has continued its
restructuring initiatives as described in Note 3 – Restructuring
Activities in the Notes to Consolidated Financial Statements. Certain
significant actions taken at the Boat segment include the sale of certain assets
of its Baja boat business and the cessation of production of Bluewater Marine
group boats, as described below.
During
the second quarter of 2008, the Company sold certain assets of its Baja boat
business (Baja) to Fountain Powerboat Industries, Inc. (Fountain). The
transaction was aimed at further refining the Company’s product portfolio and
focusing its resources on brands and marine segments that are considered to be
core to the Company’s future success. The Company ramped down production at its
Bucyrus, Ohio, plant through the end of May. The Company estimates that asset
write-downs, along with severance and other costs associated with the Baja plant
closure, will total approximately $15 million in 2008. In addition to the $13.4
million charge taken during the first six months of 2008, Brunswick incurred an
additional $0.6 million during the third quarter of 2008 related to the sale of
Baja assets to Fountain. The majority of the $14.0 million charge consists of
asset write-downs related to selected assets sold to Fountain and the residual
assets expected to be sold to third parties.
During
the second quarter of 2008, the Company ceased production of boats for its
Bluewater Marine group, including the Sea Pro, Sea Boss, Palmetto and Laguna
brands, which were manufactured at its Newberry, South Carolina, facility. As a
result, the Company incurred a $20.8 million charge during the second quarter of
2008. In addition to the $20.8 million charge taken during the second quarter of
2008, Brunswick incurred an additional $1.8 million during the third quarter of
2008 related to the closure of the manufacturing facility. The majority of the
$22.6 million charge consists of asset write-downs related to the disposition of
selected assets. The Company estimates that total asset write-downs, along with
severance and other costs associated with the closure of the Newberry, South
Carolina, facility, will total approximately $25 million in 2008.
The
factors affecting Boat segment operating earnings and capital expenditures for
the year-to-date period were consistent with the factors described in the
quarterly period above.
36
Marine
Engine Segment
The
following table sets forth Marine Engine segment results for the three months
ended:
|
2008
vs. 2007
|
||||||||||||||||
|
Three
Months Ended
|
Increase/(Decrease)
|
|||||||||||||||
|
(in
millions)
|
September
27,
2008
|
September
29,
2007
|
$
|
%
|
||||||||||||
|
Net
sales
|
$ | 448.9 | $ | 566.7 | $ | (117.8 | ) | (20.8 | )% | |||||||
|
Trade
name impairment charges
|
$ | 4.5 | $ | - | $ | 4.5 |
NM
|
|||||||||
|
Restructuring,
exit and other impairment charges
|
$ | 12.9 | $ | 0.6 | $ | 12.3 |
NM
|
|||||||||
|
Operating
earnings (loss)
|
$ | (8.6 | ) | $ | 47.5 | $ | (56.1 | ) |
NM
|
|||||||
|
Operating
margin
|
(1.9 | )% | 8.4 | % |
NM
|
|||||||||||
|
Capital
expenditures
|
$ | 6.6 | $ | 13.8 | $ | (7.2 | ) | (52.2 | )% | |||||||
__________
NM = not
meaningful
Net sales
recorded by the Marine Engine segment decreased compared with the third quarter
of 2007 primarily due to the Company’s reduction in wholesale shipments in
response to reduced marine retail demand in the United States. In addition to
the weak retail demand in the United States, the recent contraction of liquidity
in global credit markets has led to lower net sales outside the United States
during the third quarter.
As a
result of its SFAS 142 review of goodwill and trade names, Brunswick incurred
trade name charges within the Engine segment during the third quarter of 2008.
See Note 2 – Goodwill and Trade
Name Impairments in the Notes to Consolidated Financial Statements for
further details.
The
restructuring, exit and other impairment charges recognized during the third
quarter of 2008 are related to various restructuring activities initiated in
2008. See Note 3 –
Restructuring Activities in the Notes to Consolidated Financial
Statements for further details.
Marine
Engine segment operating earnings decreased in the third quarter of 2008 as a
result of lower sales volumes; restructuring, exit and other impairment charges
associated with the Company’s initiatives to reduce costs across all business
units and increases in raw material costs and other inflationary pressures. This
decrease was partially offset by the savings from successful cost-reduction
initiatives and increases in engine prices.
Capital
expenditures in the third quarter of 2008 and 2007 were primarily related to the
continued investments in new products, but were lower during 2008 as a result of
discretionary capital spending constraints.
37
The
following table sets forth Marine Engine segment results for the nine months
ended:
|
2008
vs. 2007
|
||||||||||||||||
|
Nine
Months Ended
|
Increase/(Decrease)
|
|||||||||||||||
|
(in
millions)
|
September
27,
2008
|
September
29,
2007
|
$
|
%
|
||||||||||||
|
Net
sales
|
$ | 1,658.4 | $ | 1,808.9 | $ | (150.5 | ) | (8.3 | )% | |||||||
|
Trade
name impairment charges
|
$ | 4.5 | $ | - | $ | 4.5 |
NM
|
|||||||||
|
Restructuring,
exit and other impairment charges
|
$ | 31.4 | $ | 3.4 | $ | 28.0 |
NM
|
|||||||||
|
Operating
earnings
|
$ | 76.7 | $ | 162.5 | $ | (85.8 | ) | (52.8 | )% | |||||||
|
Operating
margin
|
4.6 | % | 9.0 | % |
(440)
bpts
|
|||||||||||
|
Capital
expenditures
|
$ | 19.3 | $ | 39.1 | $ | (19.8 | ) | (50.6 | )% | |||||||
__________
bpts =
basis points
NM = not
meaningful
The
factors affecting Marine Engine segment net sales for the year-to-date period
were consistent with the factors described in the quarterly period above, except
year-to-date international sales were higher in 2008 than in 2007, which was
partially attributable to the favorable effect of foreign currency translation,
as the recent emergence of the global credit crisis did not impact sales outside
the United States until the third quarter.
Trade
name impairment charges for the year-to-date period were the result of the SFAS
142 analysis performed during the third quarter of 2008.
The
restructuring, exit and other impairment charges recognized during the first
nine months of 2008 are related to various restructuring activities initiated in
2008. See Note 3 –
Restructuring Activities in the Notes to Consolidated Financial
Statements for further details.
Marine
Engine segment operating earnings decreased during the first nine months of 2008
as a result of lower sales volumes; restructuring, exit and other impairment
charges associated with the Company’s initiatives to reduce costs across all
business units; increases in raw material costs and other inflationary
pressures; an increased concentration of sales in lower-margin products; and
increased freight costs in excess of billings. This decrease was partially
offset by the savings from successful cost-reduction initiatives; increases in
engine prices; the favorable effect of foreign currency translation; and lower
variable compensation expense.
The
factors affecting Marine Engine capital expenditures for the year-to-date period
were consistent with the factors described in the quarterly period
above.
38
Fitness
Segment
The
following table sets forth Fitness segment results for the three months
ended:
|
2008
vs. 2007
|
||||||||||||||||
|
Three
Months Ended
|
Increase/(Decrease)
|
|||||||||||||||
|
(in
millions)
|
September
27,
2008
|
September
29,
2007
|
$
|
%
|
||||||||||||
|
Net
sales
|
$ | 161.6 | $ | 150.2 | $ | 11.4 | 7.6 | % | ||||||||
|
Restructuring,
exit and other impairment charges
|
$ | 0.8 | $ | – | $ | 0.8 |
NM
|
|||||||||
|
Operating
earnings
|
$ | 10.3 | $ | 11.8 | $ | (1.5 | ) | (12.7 | )% | |||||||
|
Operating
margin
|
6.4 | % | 7.9 | % |
(150)bpts
|
|||||||||||
|
Capital
expenditures
|
$ | 1.2 | $ | 3.5 | $ | (2.3 | ) | (65.7 | )% | |||||||
__________
bpts =
basis points
NM = not
meaningful
The
increase in Fitness segment net sales was largely attributable to volume growth
in worldwide commercial equipment sales. Additionally, favorable foreign
currency translation resulting from the weaker dollar led to higher sales. These
increases were partially offset by a decline in consumer equipment sales in the
United States, as individuals continue to defer purchasing discretionary
items.
The
restructuring, exit and other impairment charges recognized during the third
quarter of 2008 are related to various restructuring activities initiated in
2008. See Note 3 –
Restructuring Activities in the Notes to Consolidated Financial
Statements for further details.
The
Fitness segment operating earnings were adversely affected by lower sales of
consumer equipment; increases in raw material and fuel costs; and the
implementation of various restructuring activities within the segment. Operating
earnings, however, benefited from sales volume growth in worldwide commercial
equipment.
Capital
expenditures in the third quarter of 2008 and 2007 were primarily related to
tooling for new products, but were lower during 2008 as a result of the
substantial completion of the Elevation series cardiovascular
equipment.
The
following table sets forth Fitness segment results for the nine months
ended:
|
2008
vs. 2007
|
||||||||||||||||
|
Nine
Months Ended
|
Increase/(Decrease)
|
|||||||||||||||
|
(in
millions)
|
September
27,
2008
|
September
29,
2007
|
$
|
%
|
||||||||||||
|
Net
sales
|
$ | 467.7 | $ | 439.2 | $ | 28.5 | 6.5 | % | ||||||||
|
Restructuring,
exit and other impairment charges
|
$ | 2.1 | $ | – | $ | 2.1 |
NM
|
|||||||||
|
Operating
earnings
|
$ | 26.6 | $ | 27.3 | $ | (0.7 | ) | (2.6 | )% | |||||||
|
Operating
margin
|
5.7 | % | 6.2 | % |
(50)bpts
|
|||||||||||
|
Capital
expenditures
|
$ | 3.6 | $ | 8.0 | $ | (4.4 | ) | (55.0 | )% | |||||||
__________
bpts =
basis points
NM = not
meaningful
The
factors affecting Fitness segment net sales, restructuring, exit and other
impairment charges, operating earnings and capital expenditures for the
year-to-date period were consistent with the factors described in the quarterly
period above.
39
Bowling
& Billiards Segment
The
following table sets forth Bowling & Billiards segment results for the three
months ended:
|
2008
vs. 2007
|
||||||||||||||||
|
Three
Months Ended
|
Increase/(Decrease)
|
|||||||||||||||
|
(in
millions)
|
September
27,
2008
|
September
29,
2007
|
$
|
%
|
||||||||||||
|
Net
sales
|
$ | 111.1 | $ | 114.6 | $ | (3.5 | ) | (3.1 | )% | |||||||
|
Goodwill
impairment charges
|
$ | 12.7 | $ | – | $ | 12.7 |
NM
|
|||||||||
|
Trade
name impairment charges
|
$ | 0.9 | $ | – | $ | 0.9 |
NM
|
|||||||||
|
Restructuring,
exit and other impairment charges
|
$ | 1.8 | $ | – | $ | 1.8 |
NM
|
|||||||||
|
Operating
earnings (loss)
|
$ | (10.4 | ) | $ | (0.2 | ) | $ | (10.2 | ) |
NM
|
||||||
|
Operating
margin
|
(9.4 | )% | (0.2 | )% |
(920)bpts
|
|||||||||||
|
Capital
expenditures
|
$ | 8.6 | $ | 11.2 | $ | (2.6 | ) | (23.2 | )% | |||||||
__________
bpts =
basis points
NM = not
meaningful
Bowling
& Billiards segment net sales were down from prior year levels primarily as
a result of a decline in sales volume of consumer and commercial billiards
tables and lower bowling retail sales, in part due to fewer centers in operation
during the third quarter of 2008 as compared with the third quarter of 2007. The
decline in net sales was partially offset by higher sales associated with new
Brunswick Zone XL centers opened during 2007 and 2008 and stronger capital
equipment sales.
As a
result of its SFAS 142 review of goodwill and trade names, Brunswick incurred
goodwill and trade name charges within the Bowling & Billiards segment
during the third quarter of 2008. See Note 2 – Goodwill and Trade Name
Impairments in the Notes to Consolidated Financial Statements for further
details.
The
restructuring, exit and other impairment charges recognized during the third
quarter of 2008 are related to various restructuring activities initiated in
2008. See Note 3 –
Restructuring Activities in the Notes to Consolidated Financial
Statements for further details.
The
decrease in current quarter operating earnings was attributable to goodwill and
trade name impairment charges and other restructuring, exit and other impairment
charges and the impact of lower sales of consumer and commercial billiards
tables. This decrease was partially offset by the impact of increased capital
equipment sales, improved efficiency at the Reynosa, Mexico, bowling ball
manufacturing facility and increased earnings from recently opened Brunswick
Zone XL centers.
Decreased
capital expenditures in the third quarter of 2008 were driven by reduced
spending for Brunswick Zone XL centers, as the Company had more centers under
construction during the third quarter of 2007 compared with the third quarter of
2008.
40
The
following table sets forth Bowling & Billiards segment results for the nine
months ended:
|
2008
vs. 2007
|
||||||||||||||||
|
Nine
Months Ended
|
Increase/(Decrease)
|
|||||||||||||||
|
(in
millions)
|
September
27,
2008
|
September
29,
2007
|
$ |
%
|
||||||||||||
|
Net
sales
|
$ | 335.1 | $ | 323.6 | $ | 11.5 | 3.6 | % | ||||||||
|
Goodwill
impairment charges
|
$ | 14.4 | $ | – | $ | 14.4 |
NM
|
|||||||||
|
Trade
name impairment charges
|
$ | 8.5 | $ | – | $ | 8.5 |
NM
|
|||||||||
|
Restructuring,
exit and other impairment charges
|
$ | 17.9 | $ | – | $ | 17.9 |
NM
|
|||||||||
|
Operating
earnings (loss)
|
$ | (29.3 | ) | $ | 5.4 | $ | (34.7 | ) |
NM
|
|||||||
|
Operating
margin
|
(8.7 | ) % | 1.7 | % |
NM
|
|||||||||||
|
Capital
expenditures
|
$ | 21.6 | $ | 30.7 | $ | (9.1 | ) | (29.6 | )% | |||||||
__________
NM = not
meaningful
Bowling
& Billiards segment net sales were up from prior year levels primarily as a
result of sales associated with Brunswick Zone XL centers opened during 2007 and
2008 and stronger capital equipment sales. Partially offsetting this increase
was a decline in sales volume of consumer and commercial billiards
tables.
Goodwill
and trade name impairment charges for the year-to-date period were primarily due
to the SFAS 142 analysis performed during the third quarter of 2008. The
remaining charges were the result of exiting its Valley-Dynamo coin-operated
commercial billiards business.
During
the nine months ended September 27, 2008, Brunswick has continued its
restructuring initiatives as described in Note 3 – Restructuring
Activities in the Notes to Consolidated Financial Statements. One
significant action taken at the Bowling & Billiards segment is the analysis
of its Valley-Dynamo coin-operated commercial billiards business and the related
determination to close that business as described below.
During
the third quarter of 2008, the Company finalized its evaluation of the potential
sale of its Valley-Dynamo coin-operated commercial billiards business and
determined that, as a sale was unlikely, it would close the business altogether.
The Company plans to concentrate its efforts on more profitable lines of
business such as its Brunswick branded billiards tables, furniture, and
accessories and its consumer Dynamo, Tornado and Valley pool tables, Air Hockey
and foosball tables. In addition to the $17.8 million charge for Valley-Dynamo
coin-operated commercial billiards business asset write-downs taken during the
second quarter of 2008, Bowling & Billiards incurred an additional $0.4
million of other expenses related to the Valley-Dynamo coin-operated commercial
billiards business closure during the third quarter of 2008. The Company
estimates that total asset write-downs, along with severance and other costs
associated with this closure, could total between $20 million and $25
million.
The
factors affecting Bowling & Billiards segment operating earnings and capital
expenditures for the year-to-date period were consistent with the factors
described in the quarterly period above.
41
Cash
Flow, Liquidity and Capital Resources
The
Company expanded its presentation of the Condensed Consolidated Statement of
Cash Flows to include net earnings and net earnings from discontinued
operations. Accordingly, the Company revised the September 29, 2007, Condensed
Consolidated Statement of Cash Flow. Net cash flows from operating, investing
and financing activities have not changed.
The
following table sets forth an analysis of free cash flow for the nine months
ended:
|
Nine
Months Ended
|
||||||||
|
(in
millions)
|
September
27,
2008
|
September
29,
2007
|
||||||
|
Net
cash provided by operating activities of continuing
operations
|
$ | 20.2 | $ | 239.9 | ||||
|
Net
cash provided by (used for):
|
||||||||
|
Capital
expenditures
|
(84.8 | ) | (156.3 | ) | ||||
|
Proceeds
from investment sales
|
45.5 | – | ||||||
|
Proceeds
from the sale of property, plant and equipment
|
9.6 | 5.3 | ||||||
|
Other,
net
|
0.2 | 12.1 | ||||||
|
Free
cash flow from continuing operations *
|
$ | (9.3 | ) | $ | 101.0 | |||
__________
|
*
|
The
Company defines “Free cash flow from continuing operations” as cash flow
from operating and investing activities of continuing operations
(excluding cash used for acquisitions and investments) and excluding
financing activities of continuing operations. Free cash flow from
continuing operations is not intended as an alternative measure of cash
flow from operations, as determined in accordance with generally accepted
accounting principles (GAAP) in the United States. The Company uses this
non-GAAP financial measure both in presenting its results to shareholders
and the investment community and in its internal evaluation and management
of its businesses. Management believes that this financial measure and the
information it provides are useful to investors because it permits
investors to view Brunswick’s performance using the same tool that
management uses to gauge progress in achieving its goals. Management
believes that Free cash flow from continuing operations is also useful to
investors because it is an indication of cash flow that may be available
to fund further investments in future growth
initiatives.
|
Brunswick’s
major sources of funds for interim working capital requirements, 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 nine months of 2008, net cash provided by operating activities of
continuing operations totaled $20.2 million, compared with $239.9 million in the
same period of 2007.
Changes
in working capital, defined as non-cash current assets less current liabilities,
increased by $95.1 million in the first nine months of 2008, as a reduction in
sales, production and capital spending resulted in a decrease in accounts
payable and accrued expenses. Inventories decreased slightly as a result of
production declines, which are expected to favorably affect inventory levels in
future periods. In the first nine months of 2007, working capital increased by
$50 million, as increases in inventory, resulting from the slowdown in marine
shipments, was partially offset by an increase in accrued expenses.
Cash
flows from investing activities included capital expenditures of $84.8 million
in the first nine months of 2008, which decreased from $156.3 million in the
first nine months of 2007. Significant capital expenditures in the nine months
of 2008 included tooling expenditures for new models and product innovations in
the Boat segment and capital spending for new Brunswick Zone XL centers and the
purchase of a bowling center. Significant capital expenditures in the first nine
months of 2007 included the purchase of a new boat manufacturing facility in
Navassa, North Carolina, tooling expenditures for new models and product
innovations in the Boat and Fitness segments, higher capital spending for new
Brunswick Zone XL and existing bowling centers, as well as costs to expand die
cast operations in the Marine Engine segment.
Brunswick
did not complete any acquisitions during the first nine months of 2008 or 2007.
The Company’s cash investment in Brunswick Acceptance Company, LLC (BAC)
resulted in $21.1 million and $15.9 million of cash inflows during the first
nine months of 2008 and 2007, respectively, in accordance with the equity
provisions of the joint venture.
42
In March
2008, the Company sold its investment in a bowling joint venture in Japan for
$40.4 million gross cash proceeds after post-closing adjustments, $37.4 million
net of cash paid for taxes and other costs. The Company intends to use the cash
proceeds for general corporate purposes. See Note 9 –
Investments, to
the Consolidated Financial Statements for details on the sale of this
investment, and Note 8 in the 2007 Form 10-K for further details on the
Company’s other investments.
In
September 2008, Brunswick sold its investment in a foundry located in Mexico for
$5.1 million gross cash proceeds. The sale resulted in a $2.1 million pretax
gain and was recorded as Investment sale gains in the Consolidated Statements of
Operations.
Cash
flows from financing activities of continuing operations resulted in cash used
of $0.3 million during first nine months of 2008, compared with $105.4 million
use of cash in the same period in 2007. This change was largely attributable to
the Company’s share repurchase program, under which the Company repurchased no
shares during the first nine months of 2008, compared with repurchases of 3.6
million shares for $115.5 million in the first nine months of 2007. See Note 15 – Share Repurchase Program
in the Notes to Consolidated Financial Statements for further details.
The Company received no proceeds from stock options exercised in the first nine
months of 2008, compared with $10.8 million received from stock options
exercised during the same period in 2007.
Cash and
cash equivalents totaled $342.9 million as of September 27, 2008, an increase of
$11.5 million from $331.4 million at December 31, 2007. Total debt as of
September 27, 2008, and December 31, 2007, was $726.7 million and $728.2
million, respectively. Brunswick’s debt-to-capitalization ratio, calculated as
the Company’s total debt divided by the sum of the Company’s total debt and
shareholders’ equity, increased to 35.6 percent as of September 27, 2008, from
27.8 percent as of December 31, 2007. The increase in debt-capitalization ratio
was primarily due to lower earnings resulting primarily from the impairment
charges recorded under SFAS 142, as described in Note 2 – Goodwill and Trade Name
Impairments in the Notes to Consolidated Financial
Statements.
From
time-to-time, the Company has utilized short-term borrowings to fund interim
working capital requirements, particularly during the first half of the calendar
year. In the event that short-term borrowings are required, the Company
maintains a $500 million long-term revolving credit facility with a group of
banks. This facility serves as the Company’s primary source of financing to fund
interim cash requirements and has served as support for commercial paper
borrowings. The $500 million facility is in place through 2012, with $42 million
of the bank commitments expiring in 2011. There are currently $88.5 million of
letters of credit issued against the $150 million allowed under the facility.
The undrawn portion of the facility was $411.5 million as of September 27, 2008.
The Company’s ability to borrow against the facility is subject to covenants,
including a leverage test, which allows for debt of up to 3 times EBITDA
(Earnings before Interest, Taxes, Depreciation and Amortization, as defined in
the revolving credit agreement, adjusted for non-cash charges). This ratio
increases to 3.25 times EBITDA in the first and second quarters of 2009.
Additional covenants include the maintenance of minimum cash and cash
equivalents balances of $250 million (reduced to $200 million after the fourth
quarter of 2009) and minimum trailing 12-month EBITDA of $200 million. All
financial covenant measurements are performed as of quarter-end. The Company was
in compliance with its loan covenants as of September 27, 2008. Recent trends in
global marine demand, along with the expected impact on the Company’s future
sales and profitability, have increased the risk that the Company will not be in
compliance with these covenants, possibly at the end of the fourth quarter of
2008.
Additionally,
further and continued weakness in the marine marketplace can jeopardize the
financial stability of the Company’s dealers. Specifically, dealer inventory
levels may be higher than desired, inventory may be aging beyond preferred
levels and dealers may experience reduced cash flow. These factors may impair a
dealer’s ability to meet payment obligations to Brunswick or its third-party
financing sources. If a dealer is unable to meet its obligations to third-party
financing sources, Brunswick may be required to repurchase a portion of its own
products from these third-party financing sources, as discussed in Note 7 – Commitments and
Contingencies in the Notes to Consolidated Financial
Statements.
43
The
Company’s long-term credit ratings were lowered subsequent to the end of the
third quarter, with Standard and Poor’s Rating Services assigning a
non-investment grade rating of BB- and Moody’s Investors Service assigning a
non-investment grade rating of Ba3. At current ratings levels, the Company no
longer has access to commercial paper markets as a short-term borrowing source.
While there can be no assurances in light of the current economic environment,
management believes that available cash balances, along with free cash flow, are
expected to be adequate to fund the Company’s near-term operating cash
requirements. Management believes that, in spite of recent credit rating
downgrades, the Company will continue to have access to adequate sources of
liquidity and financing to meet the Company’s short-term and long-term needs.
The Company is currently having discussions with its lenders and plans on
further amending the revolving credit facility to provide for access to this
facility in the future, particularly during the first half of 2009 when seasonal
working capital requirements may necessitate incremental borrowings under this
facility. This amendment is expected to be completed in the fourth quarter;
however, there can be no assurances that this amendment will be effected. The
Company expects that this facility will need to be changed to a secured facility
as a result of the Company's lower credit ratings and current global credit
environment, and will likely require an amendement to the Company's joint
venture agreement with CDF Ventures, LLC, a subsidiary of GE Capital
Corporation.
The
Company did not make contributions to its qualified pension plans in the first
nine months of 2008 or 2007, as the funded status of those plans exceeded
Employee Retirement Income Security Act (ERISA) requirements. The Company will
evaluate additional contributions to its defined benefit plans in 2008 based on
market conditions and Company discretion, among other items. The Company
contributed $1.7 million to fund benefit payments in its nonqualified plans in
the first nine months of both 2008 and 2007, and expects to contribute an
additional $0.9 million to the nonqualified plans in 2008, compared with $0.9
million that was funded in the fourth quarter of 2007. The declines in capital
markets during 2008 have adversely affected the value of investments used to
fund the Company's qualified defined benefit pension plans. If these declines
continue through the remainder of the year, the Company would expect that
expense and funding requirements related to these plans will increase in
2009. See Note 14 –
Pension and Other Postretirement Benefits in the Notes to Consolidated
Financial Statements and Note 15 to the consolidated financial statements in the
2007 Form 10-K for more details.
Financial
Services
See Note 11 – Financial Services
in the Notes to Consolidated Financial Statements for a discussion on
BAC, the Company’s joint venture with CDF Ventures, LLC, a subsidiary of GE
Capital Corporation.
Off-Balance
Sheet Arrangements and Contractual Obligations
The
Company’s off-balance sheet arrangements and contractual obligations are
detailed in the 2007 Form 10-K. There have been no material changes outside the
ordinary course of business.
Legal
Refer to
Note 7 – Commitments and
Contingencies in the Notes to Consolidated Financial Statements for
disclosure of the potential cash requirements related to the Company’s legal and
environmental proceedings.
Environmental
Regulation
In its
Marine Engine segment, Brunswick will continue to develop engine technologies to
reduce engine emissions to comply with current and future emissions
requirements. The costs associated with these activities may have an adverse
effect on Marine Engine segment operating margins and may affect short-term
operating results. The State of California adopted regulations that required
catalytic converters on sterndrive and inboard engines that became effective on
January 1, 2008. In addition, other environmental regulatory bodies in the
United States and other countries may impose higher emissions standards than are
currently in effect for those regions. The Company expects to comply fully with
these regulations, but compliance will increase the cost of these products for
the Company and the industry. The Boat segment continues to pursue fiberglass
boat manufacturing technologies and techniques to reduce air emissions at its
boat manufacturing facilities. The Company does not believe that compliance with
federal, state and local environmental laws will have a material adverse effect
on its competitive position.
44
Critical
Accounting Policies
As
discussed in the 2007 Form 10-K, the preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make certain estimates and assumptions that
affect the amount of reported assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and revenues and expenses during the periods reported. Actual results
may differ from those estimates.
There
were no material changes in the Company’s critical accounting policies since the
filing of its 2007 Form 10-K.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,”
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. Effective January 1, 2008, the Company adopted SFAS 157. In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective
Date of FASB Statement No. 157”, which provides a one year deferral of the
effective date of SFAS 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. Therefore, the Company has adopted
the provisions of SFAS 157 with respect to its financial assets and liabilities
only. The adoption of this statement did not have a material impact on the
Company’s consolidated results of operations and financial
condition.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115.” SFAS 159 permits entities to choose to measure certain
financial assets and financial liabilities at fair value at specified election
dates. Unrealized gains and losses on items for which the fair value option has
been elected are to be reported in earnings. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. The Company has elected not to adopt
the SFAS 159 fair value option.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS
141(R) establishes principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, the goodwill acquired and any noncontrolling interest in
the acquiree. This statement also establishes disclosure requirements to enable
the evaluation of the nature and financial effect of the business combination.
SFAS 141(R) is effective for fiscal years beginning on or after December 15,
2008. The Company is currently evaluating the impact that the adoption of SFAS
141(R) may have on the financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS 160 amends
ARB 51 to establish accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company is currently evaluating the
impact that the adoption of SFAS 160 may have on the financial
statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures About Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133.” SFAS 161 is intended to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity’s financial
position, financial performance, and cash flows. SFAS 161 is effective for
fiscal years beginning after November 15, 2008. The Company is currently
evaluating the impact that the adoption of SFAS 161 may have on the
financial statements.
45
Forward-Looking
Statements
Certain
statements in this Quarterly Report on Form 10-Q (Quarterly Report) are
forward-looking as defined in the Private Securities Litigation Reform Act of
1995. These statements involve certain risks and uncertainties that may cause
actual results to differ materially from expectations as of the date of this
filing. These risks include, but are not limited to: the effect of (i) the
amount of disposable income available to consumers for discretionary purchases,
and (ii) the level of consumer confidence on the demand for marine, fitness,
billiards and bowling equipment, products and services; the ability to
successfully complete restructuring efforts within the timeframe and cost
anticipated; the ability to successfully complete the disposition of non-core
assets; the ability to amend or maintain credit facilities on terms favorable to
the Company; the effect of higher product prices due to technology changes and
added product features and components on consumer demand; the effect of
competition from other leisure pursuits on the level of participation in
boating, fitness, bowling and billiards activities; the effect of interest rates
and fuel prices on demand for marine products; the ability to successfully
manage pipeline inventories; the financial strength of dealers, distributors and
independent boat builders; the ability to maintain mutually beneficial
relationships with dealers, distributors and independent boat builders; the
ability to maintain effective distribution and to develop alternative
distribution channels without disrupting incumbent distribution partners; the
ability to maintain market share, particularly in high-margin products; the
success of new product introductions; the ability to maintain product quality
and service standards expected by customers; competitive pricing pressures; the
ability to develop cost-effective product technologies that comply with
regulatory requirements; the ability to transition and ramp up certain
manufacturing operations within time and budgets allowed; the ability to
successfully develop and distribute products differentiated for the global
marketplace; shifts in currency exchange rates; adverse foreign economic
conditions; the success of global sourcing and supply chain initiatives; the
ability to obtain components and raw materials from suppliers; increased
competition from Asian competitors; competition from new technologies; the
ability to complete environmental remediation efforts and resolve claims and
litigation at the cost estimated; and the effect of weather conditions on demand
for marine products and retail bowling center revenues. Additional factors are
included in the company's Annual Report on Form 10-K for 2007 and elsewhere in
this report.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Brunswick
is exposed to market risk from changes in foreign currency exchange rates,
interest rates and commodity prices. The Company enters into various hedging
transactions to mitigate these risks in accordance with guidelines established
by the Company’s management. The Company does not use financial instruments for
trading or speculative purposes. The Company’s risk management objectives are
described in Notes 1 and 11 to the consolidated financial statements in the 2007
Form 10-K.
Item
4. Controls and Procedures
The Chief
Executive Officer and the Chief Financial Officer of the Company (its principal
executive officer and principal financial officer, respectively) have evaluated
the Company’s disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
quarterly report. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective. There were no changes in the Company’s internal
control over financial reporting during the first nine months of 2008 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
46
PART
II – OTHER INFORMATION
The
Company was not required to report the information pursuant to Items 1 through 6
of Part II of Form 10-Q for the three months and nine months ended September 27,
2008, except as follows:
Item
1. Legal Proceedings
The
Company accrues for litigation exposure based upon its assessment, made in
consultation with counsel, of the likely range of exposure stemming from the
claim. In light of existing reserves, the Company’s litigation claims, when
finally resolved, will not, in the opinion of management, have a material
adverse effect on Brunswick’s consolidated financial statements. If current
estimates for the cost of resolving any claims are later determined to be
inadequate, results of operations could be adversely affected in the period in
which additional provisions are required.
Refer to
Note 11 to the consolidated financial statements in the 2007 Form 10-K for
discussion of other legal and environmental matters as of December 31,
2007.
Item
1A. Risk Factors
General
economic conditions, particularly in the United States and Europe, affect the
Company’s results.
Demand
for Brunswick’s products is affected by economic conditions and consumer
confidence worldwide, but especially in the United States and Europe. In times
of economic uncertainty, consumers tend to defer expenditures for discretionary
items, which affects the Company’s financial performance, especially in its
marine and billiards businesses. The Company’s marine businesses are cyclical in
nature, and their success is dependent upon favorable economic conditions, the
overall level of consumer confidence and discretionary income
levels.
For
example, retail unit sales of powerboats in the United States have been
declining since 2005, with the rate of decline accelerating in 2008 due to the
continued reduction in marine industry demand as a result of a weak United
States economy, soft housing markets in key United States boating states, and
higher prices for food and fuel, among other products, that ultimately reduce
the funds available for discretionary purchases. On an industry level, retail
unit sales were down significantly during the nine months ended September 27,
2008, compared with the already low retail unit sales during the nine months
ended September 29, 2007.
Any
continued deterioration in general economic conditions that further diminishes
consumer confidence or discretionary income can reduce Brunswick’s sales further
and adversely affect the Company’s financial results, including the potential
for future impairments. The impact of weakening consumer credit markets;
continued reduction in marine industry demand; corporate restructurings;
layoffs; declines in the value of investments and residential real estate,
especially in large boating markets such as Florida and California; higher fuel
prices and increases in federal and state taxation all can negatively affect our
results.
The
Company’s restructuring initiatives, implemented as a result of the prolonged
downturn in the U.S. marine market, could result in additional costs or be
unsuccessful.
The
Company announced a plan in June 2008 to expand on its previous restructuring
initiatives as a result of the prolonged downturn in the U.S. marine market.
These initiatives have resulted in severance and plant closure costs, asset
write-downs and impairment charges related to the restructuring plan and certain
costs related to restructuring actions previously initiated during the second
quarter of 2008. During the third quarter of 2008, the Company accelerated its
restructuring initiatives in light of continued deterioration in general
economic conditions. The Company will incur additional restructuring, exit and
impairment charges in the last quarter of 2008 and in 2009 as a result of the
plan announced in June 2008. The Company cannot assure that the restructuring
plan will be successful, or that further restructuring efforts will not be
required resulting in additional costs, write-downs or charges. If additional
actions are required, Brunswick’s earnings could decrease.
47
Establishing
a smaller manufacturing footprint is critical to the Company’s operating and
financial results.
A
significant component in the Company’s cost-reduction efforts is establishing a
smaller manufacturing footprint by consolidating boat production into fewer
plants. Moving production to a new plant involves risks, including the inability
to start up production within the cost and time estimated, supply product to
dealers when expected, and attract a sufficient number of skilled workers to
handle the additional production. The inability to successfully implement the
manufacturing footprint initiatives could adversely affect Brunswick’s operating
and financial results.
A
variety of trends could negatively affect the Company’s liquidity position,
which in turn could have a material adverse effect on Brunswick’s
business.
The
ability to meet the Company’s capital requirements will depend on the continued
successful execution of the restructuring initiatives and reduction in
manufacturing footprint to return Brunswick’s marine operations to profitability
and positive cash flow. Brunswick is subject to numerous risks and uncertainties
that could negatively affect its cash flow and liquidity position in the future.
These include, among other things, the ability to amend or maintain credit
facilities on terms favorable to the Company, the continued reduction in marine
industry demand or the ability of the Company’s customers to pay amounts owed to
Brunswick on a timely basis as a result of a weak global economy, soft housing
markets in key United States boating states, and higher prices for food and
fuel, among other products, that ultimately reduce the funds available for
discretionary purchases. The continuation of, or adverse change with respect to,
one or more of these trends could weaken the Company’s liquidity position and
materially adversely affect net revenues available for the Company’s anticipated
cash needs.
The
Company’s credit ratings are an assessment by rating agencies of the Company’s
ability to pay our debts when due. Subsequent to September 27, 2008, Brunswick’s
long-term credit ratings were lowered by Standard and Poor’s Rating Services to
a non-investment grade rating of BB- and by Moody’s Investors Service to a
non-investment grade rating of Ba3. At current ratings levels, the Company no
longer has access to commercial paper markets as a short-term borrowing source.
Further downgrades of the Company’s current credit ratings, or failure to
restore the Company’s credit ratings to higher levels, as well as the current
weakness of the credit markets and the general economic downturn, could have a
significant negative effect on the Company’s ability to borrow funds to meet the
Company’s anticipated cash needs or limit Brunswick’s ability to make important
capital expenditures.
Brunswick
relies on third party suppliers for the supply of the raw materials, parts and
components necessary to assemble Brunswick’s products. Brunswick’s financial
results may be adversely affected by an increase in cost, disruption of supply
or shortage of or defect in raw materials, parts or product
components.
Outside
suppliers and contract manufacturers provide raw materials used in Brunswick’s
manufacturing processes including oil, aluminum, steel and resins, as well as
product parts and components, such as boat windshields. The prices for these raw
materials, parts and components fluctuate depending on market conditions.
Substantial increases in the prices for the Company’s raw materials, parts and
components could increase the Company’s operating costs, and could reduce
Brunswick’s profitability if the Company cannot recoup the increased costs
through increased product prices. In addition, some components the Company uses
in our manufacturing processes are available from a sole or limited number of
suppliers. Financial difficulties or solvency problems at these or
other suppliers could materially adversely affect their ability to supply
Brunswick with the parts and components the Company needs, which could disrupt
Brunswick’s operations. It may be difficult to find a replacement supplier for a
limited or sole source raw material, part or component without significant delay
or on commercially reasonable terms. In addition, an uncorrected defect or
supplier’s variation in a raw material, part or component, either unknown to the
Company or incompatible with Brunswick’s manufacturing process, could harm
Brunswick’s ability to manufacture products. An increase in the cost, defect or
a sustained interruption in the supply or shortage of some of these raw
materials, parts or products that may be caused by financial pressures on
suppliers due to the weakening economy, a deterioration of Brunswick’s
relationships with suppliers or by events such as natural disasters, power
outages or labor strikes could disrupt Brunswick’s operations and negatively
impact Brunswick’s net revenues and profits.
48
Brunswick’s
pension funding requirements and expenses are affected by certain factors
outside the Company’s control, including the performance of plan assets, the
discount rate used to value liabilities, actuarial data and experience, and
legal and regulatory changes.
Brunswick’s
funding obligations for its four qualified pension plans depend upon the future
performance of assets set aside in trusts for these plans, the discount rate
used to value the plans’ liabilities, actuarial data and experience and legal
and regulatory changes. In addition, the majority of the Company’s pension plan
assets are invested in equity securities. If the market values of these
securities decline, Brunswick’s pension expenses could increase significantly,
in addition, Brunswick could be legally required to make increased contributions
to the pension plans, and these contributions could be material.
Higher
energy costs can adversely affect Brunswick’s results, especially in the marine
and retail bowling center businesses.
Higher
energy costs result in increases in operating expenses at Brunswick’s
manufacturing facilities and in the cost of shipping products to customers. In
addition, increases in energy costs can adversely affect the pricing and
availability of petroleum-based raw materials such as resins and foam that are
used in many of Brunswick’s marine products. Also, higher fuel prices may have
an adverse effect on both demand for marine retail products as they increase the
cost of boat ownership and on retail bowling sales as customers may choose to
reduce fuel purchases for leisure or discretionary trips. Finally, because
heating, air conditioning and electricity comprise a significant part of the
cost of operating a bowling center, any increase in the price of energy could
adversely affect the operating margins of Brunswick’s bowling
centers.
Tighter
credit markets can reduce demand, especially for marine products.
Customers
often finance purchases of our marine products, particularly boats. Rising
interest rates can have an adverse effect on dealers’ and consumers’ ability to
finance boat purchases, which can adversely affect Brunswick’s ability to sell
boats and engines and the profitability of Brunswick’s financing activities,
including Brunswick Acceptance Company, our joint venture with GE Capital
Corporation that provides secured wholesale inventory floor-plan financing to
our boat and engine dealers. Further, tighter credit markets may restrict funds
available for retail financing for marine products or require higher credit
scores from boat buyers.
The
Company’s profitability may suffer as a result of competitive pricing
pressures.
The
introduction of lower-priced alternative products by other companies can hurt
the Company’s competitive position in all of its businesses. The Company is
constantly subject to competitive pressures, particularly in the outboard engine
market, in which Asian manufacturers often have pursued a strategy of aggressive
pricing. Such pricing pressure can limit the Company’s ability to increase
prices for our products in response to raw material and other cost
increases.
The
Company’s growth depends on the successful introduction of new product
offerings.
Brunswick’s
ability to grow may be adversely affected by difficulties or delays in product
development, such as an inability to develop viable new products, gain market
acceptance of new products, generate sufficient capital to fund new product
development or obtain adequate intellectual property protection for new
products. To meet ever-changing consumer demands, the timing of market entry and
pricing of new products are critical.
49
The
Company’s financial results may be adversely affected if the Company is unable
to maintain effective distribution.
Because
Brunswick sells the majority of its products through third parties such as
dealers and distributors, the financial health of the Company’s marine
distribution network is critical to our success. Weak demand for marine products
may adversely affect the financial performance of the Company’s dealers.
Specifically, dealer inventory levels may be higher than desired, inventory may
be aging beyond preferred levels and dealers may experience reduced cash flow.
These factors may impair a dealer’s ability to purchase Brunswick products and
meet payment obligations to Brunswick or the dealer’s other third-party
financing sources. If dealer inventory levels are higher than desired, dealers
may postpone additional product purchases from Brunswick until the current
inventory is sold, which may negatively affect the Company’s revenues. If a
dealer is unable to meet its obligations to third-party financing sources,
Brunswick may be required to repurchase a portion of Brunswick products from
these third-party financing sources. In addition, Brunswick may not be able to
obtain alternate distribution in the relevant market.
A
substantial portion of Brunswick’s marine engine sales are made to boat
manufacturers not affiliated with the Company. Accordingly, the results of
Brunswick’s marine engine segment can be influenced by the financial health of
these independent boat builders, which depends on their access to capital,
ability to develop new products and ability to compete effectively in the
marketplace. Brunswick’s independent boat builder customers also can react
negatively to competition from Brunswick’s own boat brands, which can lead them
to purchase marine engines and marine engine supplies from competing marine
engine manufacturers.
Inventory
adjustments by major dealers, retailers and independent boat builders adversely
affect the Company’s financial results.
If the
Company’s boat and engine dealers and distributors, as well as independent boat
builders who purchase Brunswick marine engine products, adjust their inventories
downward in response to weakness in retail demand, wholesale demand for
Brunswick products diminishes. In turn, Brunswick must reduce production, which
results in lower rates of absorption of fixed costs in the Company’s
manufacturing facilities and thus lower margins. Inventory reduction by dealers
and customers can hurt the Company’s short-term sales and results of operations
and limit the Company’s ability to meet increased demand when economic
conditions improve.
Licensing
requirements and limited access to water can inhibit the Company’s ability to
grow our marine businesses.
Environmental
restrictions, permitting and zoning requirements and the increasing cost of, and
competition for, waterfront property can limit access to water for boating, as
well as marina and storage space. Brunswick’s boat and marine engine segments
can be adversely affected in areas that do not have sufficient marina and
storage capacity to satisfy demand. Certain jurisdictions both inside and
outside the United States require a license to operate a recreational boat,
which can deter potential customers.
Compliance
with environmental regulations for marine engines will increase costs and may
reduce demand for Brunswick products.
The State
of California adopted regulations requiring catalytic converters on sterndrive
and inboard engines, which the Company expects will be expanded to all states by
2010. Other environmental regulatory bodies may impose higher emissions
standards in the future for engines. Compliance with these standards could
increase the cost of Brunswick engines, which could in turn reduce consumer
demand for Brunswick’s marine products. As a result, any increase in the cost of
marine engines or unforeseen delays in compliance with environmental regulations
affecting these products could have an adverse effect on the Company’s results
of operations.
Changes
in currency exchange rates can adversely affect the Company’s growth
rate.
Because
the Company derives a portion of its revenues from outside the United
States (36% in 2007), the Company’s ability to realize projected growth rates
can be adversely affected when the U.S. dollar strengthens against other
currencies. Brunswick manufactures its products primarily in the United States,
and the costs of its products are generally denominated in U.S. dollars,
although the manufacture and sourcing of products and materials outside the
United States is increasing. A strong U.S. dollar can make Brunswick products
less price-competitive relative to local products outside the United
States.
50
The
Company competes with a variety of other activities for consumers’ scarce
leisure time.
The vast
majority of Brunswick’s products are used for recreational purposes, and demand
for the Company’s products can be adversely affected by competition from other
activities that occupy consumers’ leisure time, including other forms of
recreation as well as religious, cultural and community activities. A decrease
in leisure time can reduce consumers’ willingness to purchase and enjoy
Brunswick’s products.
Adverse
weather conditions can have a negative effect on marine and retail bowling
center revenues.
Weather
conditions can have a significant effect on the Company’s operating and
financial results, especially in the marine and bowling retail businesses. Sales
of Brunswick’s marine products are generally stronger just before and during
spring and summer, and favorable weather during these months generally has a
positive effect on consumer demand. Conversely, unseasonably cool weather,
excessive rainfall or drought conditions during these periods can reduce demand.
Hurricanes and other storms can result in the disruption of our distribution
channel, as occurred in 2004, 2005 and 2008 on the Atlantic and Gulf coasts of
the United States. Since many of Brunswick’s boat products are used on lakes and
reservoirs, the viability of these for boating is important to Brunswick’s boat
segment. In addition, severely inclement weather on weekends and holidays,
particularly during the winter months, can adversely affect patronage of
Brunswick’s bowling centers and, therefore, revenues in the bowling retail
business.
51
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 September 27, 2008, the
Company’s remaining share repurchase authorization for the program was $240.4
million. The plan has been suspended as the Company intends to retain cash
to enhance its liquidity rather than to repurchase shares. There were no
share repurchases during the three and nine months ended September 27,
2008.
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
|
52
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 CORPORATOIN | |||
|
November
3, 2008
|
By:
|
/s/ ALAN L. LOWE | |
| Alan L. Lowe | |||
| Vice President and Corporate Controller | |||
*Mr. Lowe
is signing this report both as a duly authorized officer and as the principal
accounting officer.