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 | ||||||
|
|
||||||||