form10_k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
Form
10-K
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2009
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or
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[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
file number 1-1043
|
_______________
Brunswick
Corporation
(Exact
name of registrant as specified in its charter)
Delaware
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36-0848180
|
(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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|
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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)
|
|
(847)
735-4700
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(Registrant’s
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
Title of each
class
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|
Name
of each exchange on which registered
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Common
Stock ($0.75 par value)
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|
New
York and Chicago
|
|
|
Stock
Exchanges
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Securities
registered pursuant to Section 12(g) of the Act: None
______________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
[ ] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in the definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [ ] Accelerated filer [X] Non-accelerated
filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
As of
June 30, 2009, the aggregate market value of the voting stock of the registrant
held by non-affiliates was $377,727,905. Such number excludes stock beneficially
owned by officers and directors. This does not constitute an admission that they
are affiliates.
The
number of shares of Common Stock ($0.75 par value) of the registrant outstanding
as of February
19, 2010 was 88,444,430.
DOCUMENTS
INCORPORATED BY REFERENCE
Part
III of this Report on Form 10-K incorporates by reference certain information
that will be set forth in the Company’s definitive Proxy Statement for the
Annual Meeting of Shareholders scheduled to be held on May 5, 2010.
BRUNSWICK
CORPORATION
INDEX
TO ANNUAL REPORT ON FORM 10-K
December
31, 2009
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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9
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Item
1B.
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Unresolved
Staff Comments
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16
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Item
2.
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Properties
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16
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Item
3.
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Legal
Proceedings
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17
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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18
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PART
II
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|
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder
Matters
and Issuer Purchases of Equity Securities
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20
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Item
6.
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Selected
Financial Data
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22
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations
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24
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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50
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Item
8.
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Financial
Statements and Supplementary Data
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50
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting
and
Financial Disclosure
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50
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Item
9A.
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Controls
and Procedures
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51
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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52
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Item
11.
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Executive
Compensation
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52
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Item
12.
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Security
Ownership of Certain Beneficial Owners and
Management
and Related Stockholder Matters
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52
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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52
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Item
14.
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Principal
Accounting Fees and Services
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52
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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52
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PART
I
Item
1. Business
Brunswick
Corporation (Brunswick or the Company) is a Delaware corporation, incorporated
on December 31, 1907. Brunswick is a leading global manufacturer and marketer of
recreation products including marine engines, boats, fitness equipment and
bowling and billiards equipment. Brunswick’s engine products include outboard,
sterndrive and inboard engines; trolling motors; propellers; engine control
systems; and marine parts and accessories. The Company’s boat offerings include
fiberglass pleasure boats; luxury sportfishing convertibles and motoryachts;
offshore fishing boats; aluminum fishing boats; and pontoon and deck boats.
Brunswick’s fitness products include both cardiovascular and strength training
equipment. Brunswick’s bowling offerings include products such as capital
equipment, after-market and consumer products; and billiards offerings such as
billiards and gaming tables and accessories. The Company also owns and operates
Brunswick bowling family entertainment centers in the United States and other
countries.
In 2009,
Brunswick’s primary focus was on liquidity. In 2010, Brunswick intends to focus
on generating positive cash flow, performing better than the market in each of
its business segments, and, as its revenue grows, taking advantage of its
considerable leverage. In the longer term, Brunswick’s strategy is to introduce
the highest quality products with the most innovative technology and styling at
a rate faster than its competitors; to distribute products through a model that
benefits its partners – dealers and distributors – and provides world-class
service to its customers; to develop and maintain low-cost manufacturing
processes and to continually improve productivity and efficiency; to manufacture
and distribute products globally with local and regional styling; and to attract
and retain skilled and knowledgeable people. These factors promote the Company’s
ability to grow from expansion of its existing businesses. The Company’s
objective is to enhance shareholder value by achieving returns on investments
that exceed its cost of capital.
During
the first quarter of 2009, the Company realigned the management of its marine
service, parts and accessories businesses. The Boat segment’s parts and
accessories businesses of Attwood, Land ‘N’ Sea, Benrock, Kellogg Marine and
Diversified Marine Products are now being managed by the Marine Engine segment’s
service and parts business leaders. As a result, the marine service, parts and
accessories operating results previously reported in the Boat segment are now
being reported in the Marine Engine segment. Segment results have been restated
for all periods presented to reflect the change in Brunswick’s reported
segments. Refer to Note 5 –
Segment Information and
Note 20 – Discontinued Operations in the Notes to Consolidated Financial
Statements for additional information regarding the Company’s segments and
discontinued operations, including net sales, operating earnings and total
assets by segment for 2009, 2008 and 2007.
Marine
Engine Segment
The
Marine Engine segment, which had net sales of $1,425.0 million in 2009, consists
of the Mercury Marine Group (Mercury Marine). The Company believes its Marine
Engine segment has the largest dollar sales volume of recreational marine
engines in the world.
Mercury
Marine manufactures and markets a full range of sterndrive propulsion systems,
inboard engines and outboard engines under the Mercury, Mercury MerCruiser,
Mariner, Mercury Racing, Mercury SportJet and Mercury Jet Drive, MotorGuide,
Axius, Zeus and MerCruiser 360 brand names. In addition, Mercury Marine
manufactures and markets marine parts and accessories under the Quicksilver,
Mercury Precision Parts, Mercury Propellers, Attwood, Land ‘N’ Sea, Benrock,
Kellogg Marine, Diversified Marine Products, Sea Choice and MotorGuide brand
names, including marine electronics and control integration systems, steering
systems, instruments, controls, propellers, trolling motors, service aids and
marine lubricants. Mercury Marine’s sterndrive engines, inboard engines and
outboard engines are sold to independent boat builders, local, state and foreign
governments, and to the Company’s Boat segment. In addition, Mercury Marine’s
outboard engines are sold to end-users through a global network of more than
4,000 marine dealers and distributors worldwide, specialty marine retailers and
marine service centers. Mercury Marine, through Cummins MerCruiser Diesel Marine
LLC (CMD), a joint venture between Brunswick’s Mercury Marine division and
Cummins Marine, a division of Cummins Inc., supplies integrated diesel
propulsion systems to the worldwide recreational and commercial marine markets,
including the Company’s Boat segment.
Mercury
Marine manufactures two-stroke OptiMax outboard engines ranging from 75 to 300
horsepower, all of which feature Mercury’s direct fuel injection (DFI)
technology, and four-stroke outboard engine models ranging from 2.5 to 350
horsepower. All of these low-emission engines are believed to be in compliance
with U.S. Environmental Protection Agency (EPA) requirements for 2010. Mercury
Marine’s four-stroke outboard engines include Verado, a collection of
supercharged outboards ranging from 135 to 350 horsepower, and Mercury Marine’s
naturally aspirated four-stroke outboards, ranging from 2.5 to 115 horsepower.
In addition, most of Mercury’s sterndrive and inboard engines are now available
with catalytic converters, and are compliant with environmental regulations
adopted by the State of California, effective January 1, 2008, and by the EPA,
effective January 1, 2010.
To
promote advanced propulsion systems with improved and easier handling,
performance and efficiency, Mercury Marine, both directly and through its joint
venture, CMD, manufactures and markets advanced boat and engine steering and
control systems under the brand names of Zeus, Axius and MerCruiser
360.
Mercury
Marine’s sterndrive and outboard engines are produced domestically in Oklahoma
and Wisconsin, respectively. During the third quarter of 2009, the Company
announced plans to consolidate engine production by transferring sterndrive
engine manufacturing operations from its Stillwater, Oklahoma plant to its Fond
du Lac, Wisconsin plant. This plant consolidation effort is expected to occur
throughout 2010 and 2011. Mercury Marine manufactures 40, 50 and 60 horsepower
four-stroke outboard engines in a facility in China, and, in a joint venture
with its partner, Tohatsu Corporation, produces smaller outboard engines in
Japan. Mercury Marine sources some engine components from Asian suppliers and
manufactures engine component parts at plants in Florida and Mexico. CMD
manufactures diesel marine propulsion systems in South Carolina. Mercury Marine
also operates a remanufacturing business for engines and service parts in
Wisconsin.
In
addition to its marine engine operations, Mercury Marine serves markets outside
of the United States with a wide range of aluminum, fiberglass and inflatable
boats produced either by, or for, Mercury Marine in China, New Zealand, Poland,
Portugal, and Vietnam. These boats, which are marketed under the brand names
Arvor, Guernsey, Legend, Mercury, Protector, Quicksilver, Uttern and
Valiant, are typically equipped with engines manufactured by Mercury Marine and
often include other parts and accessories supplied by Mercury Marine. Mercury
Marine also has an equity ownership interest in a company that manufactures
boats under the brand names Aquador, Bella and Flipper in Finland.
Mercury
Marine’s parts and accessories businesses include: Attwood, Land ‘N’ Sea,
Benrock, Kellogg Marine and Diversified Marine Products. These businesses are
the leading distributors of marine parts and accessories throughout North
America, offering same-day or next-day service to a broad array of marine
service facilities.
Inter-company
sales to the Company’s Boat segment represented approximately 7 percent of Mercury
Marine sales in 2009. Domestic demand for the Marine Engine segment’s products
is seasonal, with sales generally highest in the second calendar quarter of the
year.
Boat
Segment
The Boat
segment consists of the Brunswick Boat Group (Boat Group), which manufactures
and markets fiberglass pleasure boats, luxury sportfishing convertibles and
motoryachts, offshore and aluminum fishing boats, and pontoon and deck boats.
The Company believes that its Boat Group, which had net sales of $615.7 million
during 2009, has the largest dollar sales and unit volume of pleasure boats in
the world.
The Boat
Group manages most of Brunswick’s boat brands; evaluates and enhances the
Company’s boat portfolio; promotes recreational boating services and activities
to enhance the consumer experience and dealer profitability; and speeds the
introduction of new technologies into boat manufacturing processes.
The Boat
Group is comprised of the following boat brands: Cabo sportfishing express boats
and convertibles; Hatteras luxury sportfishing convertibles and motoryachts; Sea
Ray yachts, sport yachts, sport cruisers and runabouts; Bayliner sport cruisers
and runabouts; Meridian motoryachts; Sealine yachts and sport cruisers; Boston
Whaler, Lund, Triton and Trophy fiberglass fishing boats; and Crestliner,
Cypress Cay, Harris, Lowe, Lund, Princecraft and Triton aluminum fishing,
utility, pontoon and deck boats. The Boat Group also includes a commercial and
governmental sales unit that sells products to commercial customers, as well as
the United States government and state, local and foreign governments. The Boat
Group procures most of its outboard engines, gasoline sterndrive engines and
gasoline inboard engines from Brunswick’s Marine Engine segment. The Boat Group
also purchases a portion of its diesel engines from CMD.
The Boat
Group has active manufacturing facilities in California, Florida, Indiana,
Minnesota, Missouri, North Carolina, Tennessee, Canada, China, Mexico, Portugal
and the United Kingdom, as well as additional inactive manufacturing facilities
in Florida, Maryland, Minnesota, North Carolina, Ohio, Oregon, Tennessee and
Washington. The Boat Group also utilizes contract manufacturing facilities in
Poland and has an agreement with a local boat builder to manufacture boats in
Argentina. During 2009 the Boat Group continued its 2008 restructuring
activities by reducing its workforce, consolidating manufacturing operations and
disposing of non-strategic assets. In the first quarter of 2009, the
Company announced and completed the shutdown of its Riverview plant in
Knoxville, Tennessee, and completed the closure of its Pipestone, Minnesota
facility. Further, in the fourth quarter of 2009, the
Company reached a decision to sell its properties in Cape Canaveral, Florida and
Navassa, North Carolina. The Navassa, North Carolina property was mothballed
during 2008. Brunswick also sold all of the capital stock of the Albemarle Boats
business on December 31, 2008. In 2008, Brunswick announced the closure of
certain boat manufacturing plants in Merritt Island, Florida; Cumberland,
Maryland; Bucyrus, Ohio; Swansboro, North Carolina; Roseburg, Oregon; and
Arlington, Washington.
The Boat
Group’s products are sold to end-users through a global network of approximately
1,750 dealers and distributors, each of which carries one or more of Brunswick’s
boat brands. Sales to the Boat Group’s largest dealer, MarineMax Inc., which has
multiple locations and carries a number of the Boat Group’s product lines,
represented approximately 16 percent of Boat Group
sales in 2009. Domestic demand for pleasure boats is seasonal, with sales
generally highest in the second calendar quarter of the
year.
Fitness
Segment
Brunswick’s
Fitness segment is comprised of its Life Fitness division (Life Fitness), which
designs, manufactures and markets a full line of reliable, high-quality
cardiovascular fitness equipment (including treadmills, total body
cross-trainers, stair climbers and stationary exercise bicycles) and
strength-training equipment under the Life Fitness and Hammer Strength
brands.
The
Company believes that its Fitness segment, which had net sales of $496.8 million
during 2009, is the world’s largest manufacturer of commercial fitness equipment
and a leading manufacturer of high-end consumer fitness equipment. Life Fitness’
commercial sales are primarily made to health clubs, fitness facilities operated
by professional sports teams, the military, governmental agencies, corporations,
hotels, schools and universities. Commercial sales are made to customers either
directly, through domestic dealers, or through international distributors.
Consumer products are sold through specialty retailers and on Life Fitness’ Web
site.
The
Fitness segment’s principal manufacturing facilities are located in Illinois,
Kentucky, Minnesota and Hungary. Life Fitness distributes its products worldwide
from regional warehouses and production facilities. Demand for Life Fitness
products is seasonal, with sales generally highest in the first and fourth
calendar quarters of the year.
Bowling
& Billiards Segment
The
Bowling & Billiards segment is comprised of the Brunswick Bowling &
Billiards division (BB&B), which had net sales of $337.0 million during
2009. The Company believes BB&B is the leading full-line designer,
manufacturer and marketer of bowling products. BB&B also designs and markets
a full line of high-quality consumer billiard tables, Air Hockey table games,
foosball tables and related accessories. In addition, BB&B operates 100
bowling centers in the United States, Canada and Europe.
BB&B’s
bowling products business designs, manufactures and markets a wide variety of
bowling products, including capital equipment, which includes automatic
pinsetters, bowling balls and after-market products. Through licensing and
manufacturing arrangements, BB&B also offers bowling pins and a wide array
of bowling consumer products, including bowling shoes, bags and
accessories.
BB&B
retail bowling centers offer bowling and, depending on size and location, may
also offer the following activities and facilities: billiards, video games,
redemption and other games of skill, laser tag, pro shops, meeting and party
rooms, snack bars, restaurants and cocktail lounges. Of the 100 bowling centers,
44 have been converted into Brunswick Zones, which are modernized bowling
centers that offer an array of family-oriented entertainment activities.
BB&B has further enhanced the Brunswick Zone concept with expanded Brunswick
Zone family entertainment centers, branded Brunswick Zone XL, which are larger
than typical Brunswick Zones and feature multiple-venue entertainment offerings.
BB&B operates 11 Brunswick Zone XL centers. In 2008, BB&B exited a joint
venture that operated 14 additional centers in Japan, and in which BB&B had
been a partner since 1960.
BB&B’s
billiards business was established in 1845 and is Brunswick’s oldest enterprise.
BB&B designs and/or markets billiard tables, Air Hockey table games,
foosball tables, balls and cues, as well as game room furniture and related
accessories, under the Brunswick and Contender brands. The Company believes it
has the largest dollar sales volume of slate U.S. style pocket billiards tables
in the world. These products are sold worldwide in both commercial and consumer
billiards markets. BB&B also operated Valley-Dynamo, a leading manufacturer
of commercial and consumer billiards tables, Air Hockey table games and foosball
tables. The Valley-Dynamo business was sold in the second quarter of 2009,
although the Company retained the intellectual property rights to the Air Hockey
trademark.
BB&B’s
primary manufacturing and distribution facilities are located in Hungary,
Mexico, Michigan and Wisconsin.
Brunswick’s
bowling and billiards products are sold through a variety of channels, including
distributors, dealers, mass merchandisers, bowling centers and retailers, and
directly to consumers on the Internet and through other outlets. BB&B’s
sales are seasonal with sales generally highest in the first and fourth calendar
quarters of the year.
Discontinued
Operations
On April
27, 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 devices (PND) and wireless fleet
tracking business. As a result, Brunswick reclassified the operations of BNT to
discontinued operations and shifted reporting for the retained businesses from
the Marine Engine segment to the Boat, Marine Engine and Fitness
segments.
In March
2007, Brunswick completed the sales of BNT’s marine electronics and PND
businesses to Navico International Ltd. and MiTAC International Corporation,
respectively, for net proceeds of $40.6 million. A $4.0 million after-tax gain
was recognized with the divestiture of these businesses in 2007.
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 $28.8 million, resulting in
an after-tax gain of $25.8 million.
The
Company completed the divestiture of the BNT discontinued operations during
2007. The Company recognized a net asset impairment of $85.6 million, after-tax,
in the fourth quarter of 2006, prior to the disposition of the BNT businesses,
and recorded 2007 gains of $29.8 million, after-tax, on the BNT business sales.
As a result, the financial impact to the Company of the BNT dispositions was a
net loss of $55.8 million, after-tax.
Financial
Services
A Company
subsidiary, Brunswick Financial Services Corporation (BFS), has a 49 percent
ownership interest in a joint venture, Brunswick Acceptance Company, LLC (BAC).
CDF Ventures, LLC (CDFV), a subsidiary of GE Capital Corporation, owns the
remaining 51 percent of the joint venture. Under the terms of the joint venture
agreement, BAC provides secured wholesale floorplan financing to the Company’s
engine and boat dealers. BAC also purchased and serviced a portion of Mercury
Marine’s domestic accounts receivable relating to its boat builder and dealer
customers, but this program was terminated in May 2009. The Company
replaced this program with the Mercury Receivables ABL Facility, which is
discussed in Note 14 – Debt
in the Notes to Consolidated Financial Statements.
The term
of the BAC joint venture extends through June 30, 2014. The joint venture
agreement contains provisions allowing for the renewal or purchase at the end of
this term. Alternatively, either partner may terminate the agreement at the end
of its term.
Refer to
Note 9 – Financial
Services in the Notes to Consolidated Financial Statements for more
information about the Company’s financial services.
Distribution
Brunswick
depends on distributors, dealers and retailers (Dealers) for the majority of its
boat sales and significant portions of its sales of marine engine, fitness and
bowling and billiards products. Brunswick has over 15,000 Dealers serving its
business segments worldwide. Brunswick’s marine Dealers typically carry boats,
engines and related parts and accessories.
Brunswick
owns Attwood, Land ‘N’ Sea, Benrock, Kellogg Marine and Diversified Marine
Products, which are the primary parts and accessories distribution platforms for
the Company’s Marine Engine segment. These businesses are the leading
distributors of marine parts and accessories throughout North America, with 14
distribution warehouses located throughout the United States and Canada offering
same-day or next-day service to a broad array of marine service
facilities.
Brunswick’s
Dealers are independent companies or proprietors that range in size from small,
family-owned businesses to a large, publicly-traded corporation with substantial
revenues and multiple locations. Some Dealers sell Brunswick’s products
exclusively, while others also carry competitors’ products. Brunswick works with
its boat dealer network to improve quality, distribution and delivery of parts
and accessories to enhance the boating customer’s experience.
Demand
for a significant portion of Brunswick’s products is seasonal, and a number of
Brunswick’s Dealers are relatively small or highly-leveraged. As a result, many
Dealers require financial assistance to support their businesses, allowing them
to provide stable channels for Brunswick’s products. In addition to the
financing offered by BAC, the Company provides its Dealers with assistance,
including incentive programs, loans, loan guarantees and inventory repurchase
commitments, under which the Company is obligated to repurchase
inventory from a finance company in the event of a Dealer's
default. The Company believes that these arrangements are in its best
interest; however, the financial support that the Company provides to its
Dealers does expose the Company to credit and business risk. Brunswick’s
business units, along with BAC, maintain active credit operations to manage this
financial exposure, and the Company continually seeks opportunities to sustain
and improve the financial health of its various distribution channel partners.
Refer to Note 11 – Commitments
and Contingencies in the Notes to Consolidated Financial Statements for
further discussion of these arrangements.
International
Operations
Brunswick’s
sales from continuing operations to customers in markets other than the United
States were $1,168.7 million (42 percent of net sales), $2,058.5 million (44
percent of net sales) and $2,016.4 million (36 percent of net sales) in 2009,
2008 and 2007, respectively. The Company transacts most of its sales in non-U.S.
markets in local currencies, and the cost of its products is generally
denominated in U.S. dollars. Strengthening or weakening of the U.S. dollar
affects the financial results of Brunswick’s non-U.S. operations.
Non-U.S.
sales from continuing operations are set forth in Note 5 – Segment Information
in the Notes to Consolidated Financial Statements and are also included
in the table below, which details Brunswick’s non-U.S. sales by
region:
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$ |
518.1 |
|
|
$ |
1,024.1 |
|
|
$ |
1,038.9 |
|
Pacific
Rim
|
|
|
235.8 |
|
|
|
318.1 |
|
|
|
338.2 |
|
Canada
|
|
|
178.1 |
|
|
|
346.7 |
|
|
|
344.6 |
|
Latin
America
|
|
|
157.9 |
|
|
|
247.8 |
|
|
|
196.6 |
|
Africa
& Middle East
|
|
|
78.8 |
|
|
|
121.8 |
|
|
|
98.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,168.7 |
|
|
$ |
2,058.5 |
|
|
$ |
2,016.4 |
|
Marine
Engine segment sales represented approximately 50 percent of Brunswick’s
non-U.S. sales in 2009. The segment’s primary non-U.S. operations include the
following:
|
•
|
Sales
offices and distribution centers in Australia, Belgium, Brazil, Canada,
China, Japan, Malaysia, Mexico, New Zealand and
Singapore;
|
|
•
|
Sales
offices in Finland, France, Germany, Italy, the Netherlands, Norway,
Sweden and Switzerland;
|
|
•
|
Boat
manufacturing plants in China, New Zealand, Poland and Portugal;
and
|
|
•
|
An
outboard engine assembly plant in Suzhou,
China.
|
Boat
segment sales comprised approximately 23 percent of Brunswick’s non-U.S. sales
in 2009. The Boat Group’s products are manufactured or assembled in the United
States, Canada, China, Mexico, Poland, Portugal and the United Kingdom, and are
sold worldwide through dealers. The Boat Group has sales offices in France,
Mexico and the Netherlands.
Fitness
segment sales comprised approximately 21 percent of Brunswick’s
non-U.S. sales in 2009. Life Fitness sells its products worldwide and has sales
and distribution centers in Brazil, Germany, Hong Kong, Japan, the Netherlands,
Spain and the United Kingdom, as well as sales offices in Hong Kong. The Fitness
segment also manufactures strength-training equipment and select lines of
cardiovascular equipment in Hungary for its international markets.
Bowling
& Billiard segment sales comprised approximately 6 percent of Brunswick’s
non-U.S. sales in 2009. BB&B sells its products worldwide, has sales offices
in Germany, Hong Kong and Tokyo, and operates a plant that manufactures
automatic pinsetters in Hungary. BB&B commenced bowling ball manufacturing
in Reynosa, Mexico in 2006, and completed the transition of manufacturing
operations from Muskegon, Michigan to Reynosa in 2007. BB&B operates retail
bowling centers in Austria, Canada and Germany.
Raw
Materials and Supplies
Brunswick
purchases a wide variety of raw materials from its supplier base, including oil,
aluminum, steel and resins, as well as product parts and components, such as
engine blocks and boat windshields. The prices for these raw materials, parts
and components fluctuate depending on market conditions. Significant increases
in the cost of such materials would increase the Company’s production and
operating costs. This could reduce the Company’s profitability if the Company
cannot recoup the increased costs through increased product
prices.
As a
result of recent worldwide economic conditions and the reduced demand for raw
materials, parts, supplies and goods, a number of Brunswick’s suppliers made the
decision to slow or temporarily cease production in 2008 and 2009. Additionally,
many of the Company’s suppliers have elected to reduce the size of their
workforces. As Brunswick’s manufacturing operations continue to increase
production in 2010, the Company’s need for raw materials and supplies will
likewise increase. Brunswick’s suppliers must be prepared to resume operations
and, in many cases, must recall or hire additional workers in order to fulfill
the orders placed by Brunswick and other customers. During this transition
period, the Company has experienced some delayed delivery of and shortages of
certain materials, parts and supplies that are essential to its manufacturing
operations. The Company will continue to address this issue by identifying
alternative suppliers, working to secure adequate inventories of critical
supplies and continually monitoring its supplier base.
Additionally,
some components used in Brunswick’s manufacturing processes, including engine
blocks and boat windshields, are available from a sole supplier or a limited
number of suppliers. Financial difficulties or solvency problems that these or
other suppliers currently face or may face in the future could adversely affect
their ability to supply Brunswick with the parts and components it needs, which
could significantly disrupt Brunswick’s operations.
The
Company also continues to expand its global procurement operations to leverage
its purchasing power across its divisions and to improve supply chain and cost
efficiencies. The Company attempts to manage its commodity price risk by using
derivatives to hedge a portion of its raw material purchases.
Intellectual
Property
Brunswick
has, and continues to obtain, patent rights covering certain features of its
products and processes. By law, Brunswick’s patent rights, which consist of
patents and patent licenses, have limited lives and expire periodically. The
Company believes that its patent rights are important to its competitive
position in all of its business segments.
In the
Marine Engine segment, patent rights principally relate to features of outboard
engines and inboard-outboard drives and pod drives, including: die-cast
powerheads; cooling and exhaust systems; drivetrain, clutch and gearshift
mechanisms; boat/engine mountings; shock-absorbing tilt mechanisms; ignition
systems; propellers; marine vessel control systems; fuel and oil injection
systems; supercharged engines; outboard mid-section structures; segmented cowls;
hydraulic trim, tilt and steering; screw compressor charge air cooling systems;
and airflow silencers.
In the
Boat segment, patent rights principally relate to processes for manufacturing
fiberglass hulls, decks and components for boat products, as well as patent
rights related to interiors and other boat features and components.
In the
Fitness segment, patent rights principally relate to fitness equipment designs
and components, including patents covering internal processes, programming
functions, displays, design features and styling.
In the
Bowling & Billiards segment, patent rights principally relate to
computerized bowling scorers and bowling center management systems, bowling
center furniture, bowling lanes, lane conditioning machines and related
equipment, bowling balls, and billiards table designs and
components.
The
following are Brunswick’s primary trademarks for its continuing
operations:
Marine Engine
Segment: Attwood, Axius, Diversified Marine, Kellogg Marine,
Land ‘N’ Sea, Mariner, MercNet, MerCruiser, Mercury, Mercury Marine, Mercury
Parts Express, Mercury Precision Parts, Mercury Propellers, Mercury Racing,
MotorGuide, OptiMax, Quicksilver, Rayglass, Seachoice, SeaPro, SmartCraft,
SportJet, Swivl-Eze, Valiant, Verado and Zeus.
Boat
Segment: Bayliner, Boston Whaler, Cabo, Crestliner, Harris,
Hatteras, Lowe, Lund, Master Dealer, Meridian, Princecraft, Sea Ray, Sealine,
Total Command, Triton and Trophy.
Fitness
Segment: Flex Deck, Hammer Strength, Lifecycle, Life Fitness
and ParaBody.
Bowling & Billiards
Segment: Air Hockey, Ballworx, Brunswick, Brunswick Billiards,
Brunswick Home and Billiard, Brunswick Pavilion, Brunswick Zone, Brunswick Zone
XL, Centennial, Contender, Cosmic Bowling, Frameworx, Gold Crown, Inferno, Lane
Shield, Lightworx, Pro Lane, U.S. Play by Brunswick, Vector, Viz-A-Ball and
Zone.
Brunswick’s
trademark rights have indefinite lives, and many are well known to the public
and are considered to be valuable assets.
Competitive
Conditions and Position
The
Company believes that it has a reputation for quality in its highly competitive
lines of business. Brunswick competes in its various markets by: utilizing
efficient production techniques; developing and promoting innovative
technological advancements; undertaking effective marketing, advertising and
sales efforts; providing high-quality products at competitive prices; and
offering extensive after-market services.
Strong
competition exists in each of Brunswick’s product groups, but no single
enterprise competes with Brunswick in all product groups. In each product area,
competitors range in size from large, highly-diversified companies to small,
single-product businesses. Brunswick also competes with businesses that offer
alternative leisure products or activities but do not compete directly with
Brunswick’s products.
The
following summarizes Brunswick’s competitive position in each
segment:
Marine Engine
Segment: The Company believes it has the largest dollar sales
volume of recreational marine engines in the world, along with a leading parts
and accessories business. The marine engine market is highly competitive among
several major international companies that comprise the majority of the market,
as well as several smaller companies. Competitive advantage in this segment is a
function of product features, technological leadership, quality, service,
pricing, performance and durability, along with effective promotion and
distribution.
Boat Segment: The
Company believes it has the largest dollar sales and unit volume of pleasure
boats in the world. There are several major manufacturers of pleasure and
offshore fishing boats, along with hundreds of smaller manufacturers.
Consequently, this business is both highly competitive and highly fragmented.
The Company believes it has the broadest range of boat product offerings in the
world, with boats ranging in size from 10 to 105 feet. In all of its boat
operations, Brunswick competes on the basis of product features, technology,
quality, dealer service, pricing, performance, value, durability and styling,
along with effective promotion and distribution.
Fitness
Segment: The Company believes it is the world’s largest
manufacturer of commercial fitness equipment and a leading manufacturer of
high-quality consumer fitness equipment. There are a few large manufacturers of
fitness equipment and hundreds of small manufacturers, which creates a highly
fragmented, competitive landscape. Many of Brunswick’s fitness equipment
offerings feature industry-leading product innovations, and the Company places
significant emphasis on introducing new fitness equipment to the market.
Competitive focus is also placed on product quality, service, pricing,
state-of-the-art biomechanics, and effective promotional
activities.
Bowling & Billiards
Segment: The Company believes it is the world’s leading
designer, manufacturer and marketer of bowling products and slate U.S. style
pocket billiards tables. There are other large manufacturers of bowling products
and competitive emphasis is placed on product innovation, quality, service,
marketing activities and pricing. The billiards industry continues to experience
competitive pressure from low-cost billiards manufacturers outside the United
States. The bowling retail market, in which the Company’s bowling centers
compete, is highly fragmented. Brunswick is one of the two largest competitors
in the North American bowling retail market, with an emphasis on larger,
upscale, full-service family entertainment centers. The bowling retail business
emphasizes the bowling and entertainment experience, maintaining quality
facilities and providing excellent customer service.
Research
and Development
The
Company strives to improve its competitive position in all of its segments by
continuously investing in research and development to drive innovation in its
products and manufacturing technologies. Brunswick’s research and development
investments support the introduction of new products and enhancements to
existing products. Research and development expenses as a percentage of net
sales was 3.2 percent, 2.6 percent and 2.4 percent in 2009, 2008 and 2007,
respectively. In light of the prolonged downturn in recreational marine industry
demand, the Company has undertaken significant efforts to reduce its fixed and
variable expenses to adjust its cost structure to current market conditions. In
implementing these cost reductions, the Company reduced selective research and
development expenses for 2008 and 2009. The Company believes that the
implementation of these actions would not materially limit its ability to
successfully execute its long-term strategies, particularly as market conditions
improve. Research and development expenses for continuing operations are shown
below:
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Marine
Engine
|
|
$ |
50.1 |
|
|
$ |
61.3 |
|
|
$ |
70.0 |
|
Boat
|
|
|
19.6 |
|
|
|
38.6 |
|
|
|
37.9 |
|
Fitness
|
|
|
14.9 |
|
|
|
17.4 |
|
|
|
21.6 |
|
Bowling
& Billiards
|
|
|
3.9 |
|
|
|
4.9 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
88.5 |
|
|
$ |
122.2 |
|
|
$ |
134.5 |
|
Number
of Employees
The
number of employees worldwide is shown below by segment:
|
|
December
31,
2009
|
|
|
December
31,
2008
|
|
|
|
Total
|
|
|
Union
|
|
|
Total
|
|
|
Union
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
Engine
|
|
|
3,683 |
|
|
|
1,835 |
|
|
|
5,436 |
|
|
|
1,166 |
|
Boat
|
|
|
4,744 |
|
|
|
— |
|
|
|
6,774 |
|
|
|
17 |
|
Fitness
|
|
|
1,668 |
|
|
|
135 |
|
|
|
1,940 |
|
|
|
147 |
|
Bowling
& Billiards
|
|
|
4,756 |
|
|
|
99 |
|
|
|
5,410 |
|
|
|
328 |
|
Corporate
|
|
|
152 |
|
|
|
— |
|
|
|
200 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,003 |
|
|
|
2,069 |
|
|
|
19,760 |
|
|
|
1,658 |
|
Mercury
Marine renegotiated its collective bargaining agreement for its Fond du Lac
facility with the International Association of Machinists Winnebago Lodge 1947.
The new agreement was ratified in August 2009. Additionally, the Marine Engine
segment’s Attwood facility in Lowell, Michigan has a collective bargaining
agreement with the International Brotherhood of Boilermakers, Iron Shipbuilders,
Blacksmiths, Forgers and Helpers AFL-CIO, Local M-7, which was ratified in
November 2009. In January 2009, BB&B renewed its collective bargaining
agreement with the International Association of Machinists, Local 2597, and the
Federal Labor Union, Local 23409 AFL-CIO, both of which represent employees at
the Muskegon, Michigan distribution facility. Life Fitness renewed
its collective bargaining agreement with the Chemical and Production
Workers Union, Local 30 AFL-CIO, at its Franklin Park, Illinois facility in
February 2010. The Company believes that the relationships between its
employees, the labor unions and the Company remain
stable.
Environmental
Requirements
See Item
3 of this report for a description of certain environmental
proceedings.
Available
Information
Brunswick
maintains an Internet Web site at http://www.brunswick.com that includes links
to Brunswick’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and any amendments to those reports (SEC Reports).
The SEC Reports are available without charge as soon as reasonably practicable
following the time that they are filed with, or furnished to, the SEC.
Shareholders and other interested parties may request email notification of the
posting of these documents through the Investors section of Brunswick’s Web
site.
Item
1A. Risk Factors
The Company’s operations and financial
results are subject to various risks and uncertainties, including those
described below, that could adversely affect the Company’s business, financial
condition, results of operations, cash flows and the trading price of the
Company’s common stock.
Worldwide
economic conditions, particularly in the United States and Europe, have
adversely affected the Company’s industry, business and results of operations
and may continue to do so.
In 2008
and 2009, general worldwide economic conditions, particularly in the United
States and Europe, experienced a downturn due to the effects of the subprime
lending crisis, general credit market crisis, collateral effects on the finance
and banking industries, increased energy costs, concerns about inflation, slower
economic activity, decreased consumer confidence, reduced corporate profits and
capital spending, adverse business conditions and liquidity
concerns. In times of economic uncertainty and contraction, consumers
tend to have less discretionary income and to defer expenditures for
discretionary items, which adversely affects the Company’s financial
performance, especially in its marine businesses. A significant
majority of the Company’s businesses are cyclical in nature and are highly
sensitive to personal discretionary spending levels, and their success is
dependent upon favorable economic conditions, the overall level of consumer
confidence and personal income levels. The impact of weakening consumer and
corporate credit markets; continued reduction in marine industry demand;
corporate restructurings; declines in the value of investments and residential
real estate, especially in large boating markets such as Florida and California;
and higher fuel prices, have negatively affected the Company’s financial results
and may continue to do so.
Demand
for the Company’s marine products has been significantly reduced by weak
economic conditions, a lack of consumer confidence, unemployment and increased
market volatility worldwide, especially in the United States and
Europe. The Company estimates that retail unit sales of powerboats in
the United States were down significantly during 2009, compared with the already
low retail unit sales during 2007 and 2008. Bankruptcies, reorganizations
outside of the bankruptcy process, restructurings, debt renegotiations and
closures have become significantly more numerous for the industry’s
manufacturers, distributors and suppliers around the globe. Any continued
deterioration in general economic conditions that further diminishes consumer
confidence or discretionary income may further reduce the Company’s sales and
adversely affect its financial results, including increasing the potential for
future impairment charges. The Company cannot predict the timing or
duration of the current economic slowdown or the timing or strength of a
subsequent economic recovery, either worldwide or in the specific markets where
it competes.
The
economic factors discussed above have also reduced the ability of fitness
centers and bowling retail centers to invest in new equipment, which has
adversely affected sales in the Company’s Fitness and Bowling & Billiards
segments.
Tight
consumer credit markets have reduced demand, especially for marine products, and
may continue to do so.
Customers
often finance purchases of the Company’s marine products, particularly
boats. Rising interest rates can have an adverse effect on consumers’
ability and willingness to finance boat purchases, which can adversely affect
the Company’s ability to sell boats and engines to dealers and
distributors. Further, the current tight credit markets in the United
States have resulted in a tightening of funds available for retail financing for
marine products and in some cases have resulted in lenders imposing stricter
eligibility requirements, such as higher credit scores for potential boat
buyers, loans with a higher interest rate than in prior periods, a decline in
loan advance rates, particularly on aged product, and larger down
payments. If the tightening of credit in the financial markets
continues to adversely affect the ability of customers to finance potential
purchases at acceptable terms and interest rates, it could result in a further
decrease in sales of the Company’s products or delay any improvement in its
sales.
The
Company’s financial results may be adversely affected if it is unable to
maintain effective distribution.
The
Company relies on third-party dealers and distributors to sell the majority of
its products, particularly in the marine business. The ability to
maintain a reliable network of dealers is essential to the Company’s
success. The Company faces competition from other boat manufacturers
in attracting and retaining distributors and independent boat dealers. A
significant deterioration in the number or effectiveness of the Company’s
dealers and distributors could have a material adverse effect on the
Company’s financial results.
Weak
demand for marine products has adversely affected and could continue to
adversely affect the financial performance of the Company’s
dealers. In particular, reduced cash flow from decreased sales and
tighter credit markets may impair a dealer’s ability to fund
operations. A continued inability to fund operations can force
dealers to cease business, and the Company may not be able to obtain alternate
distribution in the vacated market. An inability to obtain alternate
distribution could unfavorably affect the Company’s net sales through lower
market exposure. The Company anticipates that dealer failures or voluntary
market exits will continue into future periods.
Inventory
reductions by major dealers, retailers and independent boat builders can
adversely affect the Company’s financial results.
In 2008
and the first half of 2009, dealer inventory levels were higher than desired and
dealer inventory was aged beyond the Company’s preferred
level. Consequently, in 2009, the Company implemented an aggressive
pipeline strategy to reduce the number of units held by its dealers, which
reduced field inventory by 13,700 units versus 2008 levels. Such
efforts, combined with retail discounting, resulted in diminished wholesale
levels of the Company’s products in 2009. To achieve these reductions, the
Company: reduced boat production for 2009 by approximately 65 percent as
compared to the prior year (which has resulted in lower rates of absorption of
fixed costs in the Company’s manufacturing facilities and thus lower margins);
provided substantial support to dealers through retail discount programs aimed
at reducing aged inventory; and, for most of the Company’s brands, delayed the
start of the 2010 model year to September 1, 2009 in order to clear aged
inventory to make room for new models. Continued inventory reduction
efforts by dealers and independent boatbuilder customers could impair the
Company’s future sales and results of operations.
Excess
supply of repossessed and aged boats can adversely affect industry
pricing.
Boats
entering the market through non-traditional avenues, such as dealer and
independent boat builder failures and rising levels of consumer-related
repossessions, have resulted in an excess supply of repossessed boats that has
had an adverse effect on industry pricing. Failed or struggling dealers and boat
builders may be required to sell their inventory at significantly reduced prices
or liquidation prices in order to pay their financial obligations. These supply
conditions, combined with the Company’s inventory pipeline reduction strategy,
have resulted in higher discounts and sales incentives used to facilitate retail
boat sales, which can lead to lower sales or result in pressure on wholesale
prices.
The
Company may be required to repurchase inventory or accounts of certain
dealers.
The
Company has agreements with certain third-party finance companies to provide
financing to the Company’s customers to enable the purchase of its
products. In connection with these agreements, the Company may have
obligations to either repurchase the Company’s products from the finance
company, or may have recourse obligations to the finance company on the dealers
receivables. These obligations are triggered if the Company’s dealers
default on their debt obligations to the finance companies.
The
Company’s maximum contingent obligation to repurchase inventory and its maximum
contingent recourse obligations on customer receivables are less than the total
balances of dealer financings outstanding under these programs, as the Company’s
obligations under certain of these arrangements are subject to caps, or limit
the Company’s obligations based on the age of product. The Company’s
risk related to these arrangements is mitigated by the proceeds it receives on
the resale of repurchased product to other dealers, or by recoveries on
receivables purchased under the recourse obligations.
The
Company’s inventory repurchase obligations relate primarily to the inventory
floorplan credit facilities of the Company’s boat and engine dealers. The
Company’s actual historical repurchase experience related to these arrangements
has been substantially less than the Company’s maximum contractual obligations.
If additional dealers file for bankruptcy or cease operations, additional losses
associated with the repurchase of the Company’s products will be
incurred. The Company’s net sales and earnings may be unfavorably
affected as a result of reduced market coverage and the associated decline in
sales.
Continued
weakness in the marine industry could cause an increase in future repurchase
activity, or could require the Company to incur losses in excess of established
reserves. In addition, the Company’s cash flow and loss experience
could be adversely affected if inventory is not successfully distributed to
other dealers in a timely manner, or if the recovery rate on the resale of the
product declines. In addition, the finance companies could require
changes in repurchase or recourse terms that would result in an increase in the
Company’s contractual contingent obligations.
The
inability of the Company’s dealers and distributors to secure adequate access to
capital could adversely affect the Company’s sales.
The
Company’s dealers require adequate liquidity to finance their operations,
including purchases of the Company’s products. Dealers are subject to
numerous risks and uncertainties that could unfavorably affect their liquidity
positions, including, among other things, continued access to adequate financing
sources on a timely basis on reasonable terms. These sources of
financing are vital to the Company’s ability to sell products through the
Company’s distribution network, particularly to its boat and engine
dealers. During the recent credit crisis, several third-party
floorplan lenders ceased their lending operations, or materially reduced their
exposure. A significant portion of the Company’s domestic and
international boat and engine sales to dealers are financed through entities
affiliated with GE Capital Corporation (GECC), including BAC (the
Company’s 49 percent owned joint venture,
with the other 51 percent being owned by CDFV, a subsidiary of
GECC), which provides floorplan financing to domestic marine
dealers. During 2009, GECC implemented several changes to its lending
terms that significantly increased the cost of financing, imposed stricter
lending criteria and required more rigorous terms, such as the timing of
curtailment payments due on product based on aging. These
changes have translated to higher costs for dealers to carry inventory, which in
part has led the Company and its dealers to reassess and ultimately reduce
wholesale orders and dealer inventories.
BAC
commenced operations in 2003, and in the second quarter of 2008, the term of the
joint venture was extended through June 2014. The joint venture is
funded with the capital contributions from the joint venture partners, along
with a $1.0 billion secured credit line provided by GE Commercial Distribution
Finance Corporation (GECDF), which is in place through the term of the joint
venture, and through receivable sales to a securitization facility arranged by
GECDF. The Company does not guarantee the debt of
BAC. GECDF may, however, terminate the joint venture if the Company
is unable to maintain compliance with the minimum fixed-charge coverage ratio
covenant included in the joint venture agreement, which is the same as the
covenant included in the Company’s revolving credit facility.
The
availability and terms of financing offered by the Company’s dealer floorplan
financing providers (including BAC and others) will continue to be influenced by
their ability to access certain markets, including the securitization and the
commercial paper markets, and to fund their operations in a cost effective
manner; the performance of their overall credit portfolios; their willingness to
accept the risks associated with lending to marine dealers; and the overall
creditworthiness of those dealers. The Company’s sales could be
adversely affected if BAC were to be terminated, if further declines in
floorplan financing availability occur, or if financing terms become more
adverse. This could require the Company to find alternative sources
of financing, including the Company providing this financing directly to
dealers, which could require additional capital to fund the associated
receivables.
An
impairment in the carrying value of goodwill, trade names and other long-lived
assets could negatively affect the Company’s consolidated results of operations
and net worth.
Goodwill
and indefinite-lived intangible assets, such as the Company’s trade names, are
recorded at fair value at the time of acquisition and are not amortized, but are
reviewed for impairment at least annually or more frequently if impairment
indicators arise. In evaluating the potential for impairment of
goodwill and trade names, the Company makes assumptions regarding future
operating performance, business trends and market and economic
conditions. Such analyses further require the Company to make certain
assumptions about sales, operating margins, growth rates and discount
rates. There are inherent uncertainties related to these factors and
in applying these factors to the assessment of goodwill and trade name
recoverability. Goodwill reviews are prepared using estimates of the
fair value of reporting units based on market multiples of EBITDA (earnings
before interest, taxes, depreciation and amortization) or on the estimated
present value of future discounted cash flows. The Company could be
required to evaluate the recoverability of goodwill or trade names prior to the
annual assessment if it experiences disruptions to the business, unexpected
significant declines in operating results, divestiture of a significant
component of the Company’s business or market capitalization
declines.
The
Company also continually evaluates whether events or circumstances have occurred
that indicate the remaining estimated useful lives of its definite-lived
intangible assets, excluding goodwill, and other long-lived assets may warrant
revision or whether the remaining balance of such assets may not be
recoverable. The Company uses an estimate of the related undiscounted
cash flow over the remaining life of the asset in measuring whether the asset is
recoverable.
If the
future operating performance of the Company’s reporting units is not consistent
with the Company’s assumptions, the Company could be required to record
additional non-cash impairment charges. Impairment charges could
substantially affect the Company’s reported earnings in the periods of such
charges. In addition, impairment charges could indicate a reduction
in business value which could limit the Company’s ability to obtain adequate
financing in the future. As of December 31, 2009, the Company had
$272.2 million of goodwill related to the Life Fitness segment and $20.3 million
of goodwill related to the Marine Engine segment. As of December 31,
2009, the Company’s total goodwill represented approximately 11 percent of total
assets.
The
Company’s business requires it to maintain a large fixed cost base that can
affect its profitability.
The high
levels of fixed costs of operating marine production plants can put pressure on
profit margins. The Company’s profitability is dependent, in part, on its
ability to spread fixed costs over an increasing number of products sold and
shipped, and if the Company continues to reduce its rate of production, as it
did in 2008 and 2009, gross margins will be negatively impacted. Decreased
demand or the need to reduce inventories can lower the Company’s ability to
absorb fixed costs and materially impact its results of operations.
Successfully
establishing a smaller manufacturing footprint is critical to the Company’s
operating and financial results.
A
significant component of the Company’s cost-reduction efforts has been focused
on reducing its manufacturing footprint by consolidating boat and engine
production into fewer plants. Since January 1, 2007, the Company has
closed 14 of its boat manufacturing facilities. Additionally, during
the third quarter of 2009, the Company announced plans to consolidate engine
production by transferring sterndrive engine manufacturing operations from its
Stillwater, Oklahoma plant to its Fond du Lac, Wisconsin plant. This plant
consolidation effort is underway and is expected to occur throughout 2010 and
2011.
Moving
production to a different plant involves risks, including the inability to start
up production within the cost and timeframe estimated, to supply product to
dealers when expected and to attract a sufficient number of skilled workers to
handle the additional production demands. The inability to
successfully implement the Company’s manufacturing footprint initiatives could
adversely affect its operating and financial results. Additionally, expenses
associated with plant consolidation, including severance costs, pension funding
requirements and loss of trained employees with knowledge of the Company’s
business and operations could exceed projections and negatively impact financial
results.
The
Company’s inability to successfully implement its restructuring initiatives and
other uncertainties could negatively affect the Company’s liquidity position,
which in turn could have a material adverse effect on the Company’s
business.
The
Company’s ability to successfully generate cash flow will depend on its
continued successful execution of the Company’s restructuring initiatives and
its plans to consolidate manufacturing operations, in order to return the
Company’s marine operations to profitability. The Company is subject
to numerous other risks and uncertainties that could negatively affect its cash
flow in the future. These include, among other things, the continued
reduction in marine industry demand as a result of a weak global economy
resulting in, among other things: (i) the failure of the Company’s customers to
pay amounts owed or to pay amounts owed to it on a timely basis, or (ii) an
increase in the Company’s obligations to repurchase its products or make
recourse payments on customers’ debt obligations. The continuation
of, or adverse change with respect to, one or more of these trends would weaken
the Company’s competitive position and materially adversely affect the Company’s
ability to satisfy its anticipated cash requirements.
The
Company relies on third-party suppliers for the supply of the raw materials,
parts and components necessary to assemble its products. The
Company’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 the Company with raw materials used
in its manufacturing processes including oil, aluminum, steel and resins, as
well as product parts and components, such as engine blocks and boat
windshields. The prices for these raw materials, parts and components
fluctuate depending on market conditions. Substantial increases in
the prices of the Company’s raw materials, parts and components would increase
the Company’s operating costs, and could reduce its profitability if the Company
cannot recoup the increased costs through increased product
prices. In addition, some components used in the Company’s
manufacturing processes, including engine blocks and boat windshields, are
available from a sole supplier or a limited number of
suppliers. Financial difficulties or solvency problems that these or
other suppliers currently face or may face in the future could adversely affect
their ability to supply the Company with the parts and components it needs,
which could significantly disrupt the Company’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 the Company’s manufacturing process, could harm the Company’s
ability to manufacture products. An increase in the cost of, a
shortage of, or defects or a sustained interruption in the supply of some
of these raw materials, parts or products that may be caused by delayed start-up
periods experienced by the Company’s suppliers as they ramp up production
efforts, financial pressures on the Company’s suppliers due to the weakening
economy, a deterioration of the Company’s relationships with suppliers or by
events such as natural disasters, power outages or labor strikes, could disrupt
the Company’s operations, impair the Company’s ability to deliver products to
the Company’s customers and negatively affect the Company’s financial results.
In addition to the risks described above regarding interruption of supplies,
which are exacerbated in the case of single-source suppliers, the exclusive
supplier of a key component potentially could exert significant bargaining power
over price, quality, warranty claims, or other terms relating to a
component.
Additionally,
as a result of recent worldwide economic conditions and the reduced demand for
raw materials, parts, supplies and goods, many of the Company’s suppliers made
the decision to slow or temporarily cease production in 2008 and 2009.
Additionally, many of the Company’s suppliers have elected to reduce the size of
their workforces. As the Company’s manufacturing operations continue to ramp up
production in 2010, the Company’s need for raw materials and supplies will
likewise increase. The Company’s suppliers must be prepared to resume operations
and, in many cases, must recall or hire additional workers in order to fulfill
the orders placed by the Company and other customers. In 2009, the
Company
began experiencing some supply shortages and continues working to address this
issue by indentifying alternative suppliers, working to secure adequate
inventories of critical supplies and continually monitoring its supplier base.
During this transition period, however, the Company may continue to experience
shortages of and delayed delivery of key materials, parts and supplies that are
essential to its manufacturing operations.
The Company’s
pension funding requirements and expenses are affected by certain factors
outside of its control, including the performance of plan assets, the discount
rate used to value liabilities, actuarial data and experience and legal and
regulatory changes.
The
Company’s funding obligations and pension expense for its four qualified pension
plans are driven by the 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 funding requirements. Changes
in these factors can affect the accounting expense and cash funding requirements
associated with these plans, which could have an adverse impact on the Company’s
results of operations, liquidity or shareholders’ equity. In
addition, a significant percentage of the Company’s pension plan assets are
invested in equity securities. Due to significant declines in
worldwide financial market conditions, the funded status of the Company’s
pension plans was adversely affected and the level of the Company’s funding of
its pension liabilities has declined to approximately 60% (including the impact
of non-qualified pension liabilities) as of December 31, 2009. The Company’s
future pension expenses and funding requirements could further increase
significantly due to the effect of the discount rate, changes in asset levels
and a decline in the estimated return on plan assets. In addition, the Company
could be legally required to make increased contributions to the pension plans,
and these contributions could be material and negatively affect the Company’s
cash flow.
Higher
energy costs can adversely affect the Company’s results, especially in the
marine and retail bowling center businesses.
Higher
energy and fuel costs result in increases in operating expenses at the Company’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 the Company’s marine
products. Also, higher fuel prices may have an adverse effect on
demand for marine retail products as they increase the cost of boat
ownership. Finally, because heating and air conditioning 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 the Company’s
bowling centers.
The
Company’s profitability may suffer as a result of competitive pricing and other
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 predominantly Asian manufacturers often have
pursued a strategy of aggressive pricing. Such pricing pressure has
limited the Company’s ability to increase prices for its products in response to
raw material and other cost increases and has negatively affected the Company’s
profit margins and may continue to do so. The Company has also
experienced pricing pressure from dealers with large unsold inventories and
increasing levels of repossessed boats, and faces a meaningful volume of
significantly discounted product coming into the market from failed or
struggling manufacturers or dealers.
In
addition, the Company’s independent boat builder customers may react negatively
to potential competition for their products from Brunswick’s own boat brands,
which can lead them to purchase marine engines and marine engine supplies from
competing marine engine manufacturers and may negatively affect demand for the
Company’s products.
The
Company’s ability to remain competitive depends on the successful introduction
of new product offerings.
The
Company believes that its customers rigorously evaluate their suppliers on the
basis of product quality, development capability and new product innovation. The
Company’s ability to remain competitive 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. Additionally, in 2008 and 2009, the Company
decreased the amount spent on research and development and capital expenditures
which, as a result, affects the number of new products it may be able to
develop. To meet ever-changing consumer demands, the timing of market entry and
pricing of new products are critical. As a result, the Company may
not be able to introduce new products necessary to remain competitive in all
markets that it serves.
The
Company competes with a variety of other activities for consumers’ scarce
discretionary income and leisure time.
The vast
majority of the Company’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 discretionary income as a result of the current economic environment has
reduced consumers’ willingness to purchase and enjoy the Company’s
products.
The
Company’s success depends upon the continued strength of its
brands.
The
Company believes that its brands, including Brunswick, Mercury, Sea Ray, Boston
Whaler, Hatteras and Life Fitness, are significant contributors to the success
of the Company’s business and that maintaining and enhancing the brands are
important to expanding the Company’s customer base. Failure to
protect the Company’s brands from infringers may adversely affect the Company’s
business and results of operations.
The
Company’s operations are dependent upon the services of key individuals, the
loss of which could materially harm us.
The
Company’s operations depend, in part, on the efforts of the Company’s executive
officers and other key employees. In addition, the Company’s future
success will depend on, among other factors, its ability to attract and retain
other qualified personnel. The loss of the services of any of the Company’s key
employees or the failure to attract or retain employees could have a material
adverse effect on the Company. The Company’s restructuring
activities, which have resulted in substantial employee terminations, may make
it more difficult for the Company to attract or retain employees and it may be
adversely affected for some time by the loss of trained employees with knowledge
of the Company’s business and industries. If the Company is unable to
attract and retain qualified individuals, or the Company’s costs to do so
increase significantly, the Company’s operations could be materially adversely
affected.
The
Company manufactures and sells products that create exposure to potential
product liability, warranty liability, personal injury and property damage
claims and litigation.
The
Company’s products may expose it to potential liabilities for product liability,
warranty liability, personal injury or property damage claims relating to the
use of those products. The Company’s manufacturing consolidation efforts could
result in a disruption to its production processes and its increased
production rates could result in product quality issues, thereby increasing the
risk of litigation and potential liability. Historically, the resolution of such
claims has not materially adversely affected the Company’s business, and the
Company maintains insurance which it believes to be
adequate. However, the Company may experience material losses in the
future, incur significant costs to defend claims or experience claims in excess
of its insurance coverage or claims that will not be covered by
insurance. Furthermore, the Company’s reputation may be adversely
affected by such claims, whether or not successful, including potential negative
publicity about its products.
Environmental
and zoning requirements can inhibit the Company’s ability to grow its marine
businesses.
Environmental
restrictions, boat plant emission restrictions and permitting and zoning
requirements can limit access to water for boating, as well as marina and
storage space. In addition, certain jurisdictions both inside and
outside the United States require or are considering requiring a license to
operate a recreational boat. While such licensing requirements are
not expected to be unduly restrictive, they may deter potential customers,
thereby reducing the Company’s sales.
Compliance
with environmental regulations affecting marine engines will increase costs and
may reduce demand for the Company’s products.
The U.S.
Environmental Protection Agency recently adopted emission regulations requiring
certain gasoline sterndrive and inboard engines to be equipped with a catalyst,
with an effective date of January 1, 2010. It is possible that
environmental regulatory bodies may impose higher emissions standards in the
future for marine engines. Compliance with these standards would
increase the cost to manufacture and the price to the customer of the Company’s
engines, which could in turn reduce consumer demand for the Company’s marine
products. Any increase in the cost of marine engines, an increase in the retail
price to consumers or unforeseen delays in compliance with environmental
regulations affecting these products could have an adverse effect on the
Company’s results of operations.
The
Company’s businesses may be adversely affected by compliance obligations and
liabilities under environmental and other laws and
regulations.
The
Company is subject to federal, state, local and foreign environmental, health
and safety laws and other regulations, including exposure restrictions in
connection with manufacturing processes. While the Company believes
that it maintains all requisite licenses and permits and that it is in material
compliance with all applicable laws and regulations, a failure to satisfy these
and other regulatory requirements could cause the Company to incur fines or
penalties or could increase its cost of operations. The adoption of
additional laws, rules and regulations could also increase the Company’s capital
or operations costs.
The
Company’s manufacturing processes involve the use, handling, storage and
contracting for recycling or disposal of hazardous or toxic substances or
wastes. Accordingly, the Company is subject to regulations regarding
these substances, and the misuse or mishandling of such substances could expose
it to liabilities, including claims for property or natural resources
damages, personal injury, or fines. The Company is also subject
to laws requiring the cleanup of contaminated property. If a release
of hazardous substances occurs at or from any of the Company’s current or former
properties or another location where it has disposed of hazardous materials, the
Company may be held liable for the contamination, regardless of knowledge or
whether it was at fault in connection with the release, and the amount of such
liability could be material.
If
the Company’s intellectual property protection is inadequate, others may be able
to use its technologies and thereby reduce the Company’s ability to compete,
which could have a material adverse effect on the Company, its financial
condition and results of operations.
The
Company regards much of the technology underlying its products as
proprietary. The steps the Company takes to protect its proprietary
technology may be inadequate to prevent misappropriation of the Company’s
technology, or third parties may independently develop similar
technology. The Company relies on a combination of patents,
trademark, copyright and trade secret laws, employee and third party
non-disclosure agreements and other contracts to establish and protect its
technology and other intellectual property rights. The agreements may
be breached or terminated, and the Company may not have adequate remedies for
any breach, and existing patent, trademark, copyright and trade secret laws
afford it limited protection. Policing unauthorized use of the
Company’s intellectual property is difficult. A third party could
copy or otherwise obtain and use the Company’s products or technology without
authorization. Litigation may be necessary for the Company to defend against
claims of infringement or to protect its intellectual property rights and could
result in substantial cost. Further, the Company might not prevail in
such litigation, which could harm its business.
Some
of the Company’s operations are conducted by joint ventures that it cannot
operate solely for its benefit.
Some of
the Company’s operations are carried on through jointly owned companies such as
BAC or Cummins MerCruiser Diesel Marine LLC (CMD), Mercury Marine’s joint
venture with Cummins Marine, a division of Cummins Inc. With respect
to these joint ventures, the Company shares ownership and management of these
companies with one or more parties who may not have the same goals, strategies,
priorities or resources as the Company. These joint ventures are
intended to be operated for the equal benefit of all co-owners, rather than for
the Company’s exclusive benefit.
Changes
in currency exchange rates can adversely affect the Company’s
results.
Because
the Company derives a portion of its revenues from outside the United States
(42% in 2009), the Company’s financial performance can be adversely affected
when the U.S. dollar strengthens against other currencies. The
Company manufactures its products primarily in the United States and the costs
of the Company’s products are generally denominated in U.S. dollars, although
the increasing manufacture and sourcing of products and materials outside the
United States continues to be a strategic focus. The Company sells
most of these products in currencies other than the U.S. dollar. Consequently, a
strong U.S. dollar can make the Company’s products less price-competitive
relative to local products outside the United States.
Although
the Company enters into currency exchange contracts to reduce its risk related
to currency exchange fluctuations, it is impossible to hedge against all
currency risk, especially over the long term, and changes in the relative values
of currencies occur from time to time and may, in some instances, affect the
Company’s results of operations. The Company is also exposed to the
risk that its counterparties to hedging contracts could default on their
obligations, which may have an adverse effect on the Company.
A
growing portion of the Company’s revenue may be derived from international
sources, which exposes it to additional
uncertainty.
Approximately
42% of the Company’s 2009 sales were derived from sources outside of the United
States, and the Company intends to continue to expand its international
operations and customer base. Sales outside of the United States,
especially in emerging markets, are subject to various risks including
governmental embargoes or foreign trade restrictions, tariffs, fuel duties,
inflation and political difficulties in enforcing agreements and collecting
receivables through foreign legal systems, compliance with international laws,
treaties and regulations and unexpected changes in regulatory environments,
disruptions in distribution, dependence on foreign personnel and unions, as well
as economic and social instability. In addition, there may be tax
inefficiencies in repatriating cash flow from non-U.S.
subsidiaries. If the Company continues to expand its business
globally, its success will depend, in part, on the Company’s ability to
anticipate and effectively manage these and other risks. These and
other factors may have a material impact on the Company’s international
operations or its business as a whole.
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 retail bowling center
businesses. Sales of the Company’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 the Company’s distribution
channel. In addition, severely inclement weather on weekends and holidays,
particularly during the winter months, can adversely affect patronage of the
Company’s bowling centers and, therefore, revenues in the retail bowling center
business. Additionally, in the event that climate change occurs, which
could result in environmental changes including, but not limited to, severe
weather, rising sea levels or reduced access to water, the Company's business
could be disrupted and negatively impacted.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
Brunswick’s
headquarters are located in Lake Forest, Illinois. Brunswick has numerous
manufacturing plants, distribution warehouses, bowling family entertainment
centers, retail stores, sales offices and product test sites around the world.
Research and development facilities are decentralized within Brunswick’s
operating segments and most are located at manufacturing sites.
The
Company believes its facilities are suitable and adequate for its current needs
and are well maintained and in good operating condition. Most plants and
warehouses are of modern, single-story construction, providing efficient
manufacturing and distribution operations. The Company believes its
manufacturing facilities have the capacity to meet current and anticipated
demand. Brunswick owns its Lake Forest, Illinois headquarters and most of its
principal plants.
The
primary facilities used in Brunswick’s continuing operations are in the
following locations:
Marine Engine
Segment: Fresno and Los Angeles, California; Old Lyme,
Connecticut; Miramar, Panama City, Pompano Beach and St. Cloud, Florida;
Atlanta, Georgia; Lowell, Michigan; Stillwater, Oklahoma; Brookfield and Fond du
Lac, Wisconsin; Petit Rechain, Belgium; Toronto, Ontario, Canada; Suzhou,
People’s Republic of China; Juarez, Mexico; Auckland, New Zealand; Vila Nova de
Cerveira, Portugal; and Singapore. The Fresno and Los Angeles, California; Old
Lyme, Connecticut; Miramar and Pompano Beach, Florida; Lowell, Michigan;
Toronto, Ontario, Canada; and Auckland, New Zealand facilities are leased. The
remaining facilities are owned by Brunswick.
Boat
Segment: Adelanto, California; Edgewater, Merritt Island and
Palm Coast, Florida; Fort Wayne, Indiana; Little Falls and New York Mills,
Minnesota; Lebanon, Missouri; New Bern, North Carolina; Vila Nova de Cerveira,
Portugal; Ashland City, Knoxville and Vonore, Tennessee; Princeville, Quebec,
Canada; Zhuhai, People’s Republic of China; Reynosa, Mexico; and Kidderminster,
United Kingdom. Brunswick owns all of these facilities with the exception of the
Adelanto, California facility, which is leased.
Fitness
Segment: Franklin Park and Schiller Park, Illinois; Falmouth,
Kentucky; Ramsey, Minnesota; and Kiskoros and Szekesfehervar, Hungary. The
Schiller Park office and a portion of the Franklin Park facility are leased. The
remaining facilities are owned by Brunswick or, in the case of the Kiskoros,
Hungary facility, by a company in which Brunswick is the majority
owner.
Bowling & Billiards
Segment: Lake Forest, Illinois; Muskegon, Michigan; Bristol,
Wisconsin; Szekesfehervar, Hungary; and Reynosa, Mexico; 100 bowling recreation
centers in the United States, Canada and Europe; and one retail billiards store
in a Boston suburb. Approximately 35 percent of BB&B’s bowling centers, as
well as the Reynosa manufacturing facility and the retail billiards store, are
leased. The remaining facilities are owned by Brunswick.
Item
3. Legal Proceedings
The
Company accrues for litigation exposure based upon its assessment, made in
consultation with counsel, of the likely range of exposure stemming from the
claim. In light of existing reserves, the Company’s litigation claims, when
finally resolved, will not, in the opinion of management, have a material
adverse effect on the Company’s consolidated financial position or results of
operations. 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.
Tax
Case
In
February 2003, the United States Tax Court issued a ruling upholding the
disallowance by the Internal Revenue Service (IRS) of capital losses and other
expenses for 1990 and 1991 related to two partnership investments entered into
by the Company. In 2003 and 2004, the Company made payments to the IRS comprised
of approximately $33 million in taxes due and approximately $39 million of
pretax interest (approximately $25 million after-tax) to avoid future interest
costs. Subsequently, the Company and the IRS settled all issues involved in and
related to this case. As a result, the Company reversed $42.6 million of tax
reserves in 2006, primarily related to the reassessment of underlying exposures,
received a refund of $12.9 million from the IRS, and recorded an additional tax
receivable of $4.1 million for interest related to these tax years. In 2008, the
Company protested that the IRS’s calculation of the $4.1 million interest
receivable due to the Company was understated. As a result, the IRS paid the
Company approximately $10 million for interest related to these tax years in
2008. Additionally, these tax years will be subject to tax audits by various
state jurisdictions to determine the state tax effect of the IRS's audit
adjustments.
German
Tax Audit
As the
result of a German tax audit for years 1998 through 2001, the Company’s German
subsidiary received a proposed audit adjustment in the fourth quarter of 2009,
which is being contested by the Company, related to the shutdown of the
subsidiary’s pinsetter manufacturing operation and sale of the subsidiary’s
pinsetter assets to a related subsidiary.
Environmental
Matters
Brunswick
is involved in certain legal and administrative proceedings under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980 and
other federal and state legislation governing the generation and disposal of
certain hazardous wastes. These proceedings, which involve both on- and off-site
waste disposal or other contamination, in many instances seek compensation or
remedial action from Brunswick as a waste generator under Superfund legislation,
which authorizes action regardless of fault, legality of original disposition or
ownership of a disposal site. Brunswick has established reserves based on a
range of cost estimates for all known claims.
The
environmental remediation and clean-up projects in which Brunswick is involved
have an aggregate estimated range of exposure of approximately $46.2 million to
$80.4 million as of December 31, 2009. At December 31, 2009 and 2008, Brunswick
had reserves for environmental liabilities of $48.0 million and $46.9 million,
respectively. The Company recorded environmental provisions of $2.4 million,
$0.0 and $0.7 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
Brunswick
accrues for environmental remediation related activities for which commitments
or clean-up plans have been developed and for which costs can be reasonably
estimated. All accrued amounts are generally determined in coordination with
third-party experts on an undiscounted basis and do not consider recoveries from
third parties until such recoveries are realized. In light of existing reserves,
the Company’s environmental claims, when finally resolved, will not, in the
opinion of management, have a material adverse effect on the Company’s
consolidated financial position or results of operations.
Asbestos
Claims
Brunswick’s
subsidiary, Old Orchard Industrial Corp., is a defendant in more than 8,000
lawsuits involving claims of asbestos exposure from products manufactured by
Vapor Corporation (Vapor), a former subsidiary that the Company divested in
1990. Virtually all of the asbestos suits involve numerous other defendants. The
claims generally allege that Vapor sold products that contained components, such
as gaskets, which included asbestos, and seek monetary damages. Neither
Brunswick nor Vapor is alleged to have manufactured asbestos. Several thousand
claims have been dismissed with no payment and no claim has gone to jury
verdict. In a few cases, claims have been filed against other Brunswick
entities, with a majority of these suits being either dismissed or settled for
nominal amounts. The Company does not believe that the resolution of these
lawsuits will have a material adverse effect on the Company’s consolidated
financial position or results of operations.
Brazilian
Customs Dispute
In June
2007, the Brazilian Customs Office issued an assessment against a Company
subsidiary in the amount of approximately $14 million related to the importation
of Life Fitness products into Brazil. The assessment was based on a
determination by Brazilian customs officials that the proper import value of
Life Fitness equipment imported into Brazil should be the manufacturer’s
suggested retail price of those goods in the United States. This assessment was
dismissed during 2008. The Brazilian Customs Office has appealed the ruling as a
matter of course.
Item
4. Submission of Matters to a Vote of Security Holders
No
matters were submitted to a vote of security holders during the fourth quarter
of 2009.
Executive
Officers of the Registrant
Brunswick’s
Executive Officers are listed in the following table:
Officer
|
|
Present
Position
|
|
Age
|
|
|
|
|
|
Dustan
E. McCoy
|
|
Chairman
and Chief Executive Officer
|
|
60
|
Peter
B. Hamilton
|
|
Senior
Vice President and Chief Financial Officer
|
|
63
|
Kristin
M. Coleman
|
|
Vice
President, General Counsel and Secretary
|
|
41
|
Andrew
E. Graves
|
|
Vice
President and President – Brunswick Boat Group
|
|
50
|
Kevin
S. Grodzki
|
|
Vice
President and President – Mercury Marine Sales, Marketing and Commercial
Operations
|
|
54
|
Warren
N. Hardie
|
|
Vice
President and President – Brunswick Bowling &
Billiards
|
|
59
|
B.
Russell Lockridge
|
|
Vice
President and Chief Human Resources Officer
|
|
60
|
Alan
L. Lowe
|
|
Vice
President and Controller
|
|
58
|
John
C. Pfeifer
|
|
Vice
President, President – Brunswick Marine in EMEA and President – Brunswick
Global Structure
|
|
44
|
Mark
D. Schwabero
|
|
Vice
President and President – Mercury Marine
|
|
57
|
John
E. Stransky
|
|
Vice
President and President – Life Fitness
|
|
58
|
Stephen
M. Wolpert
|
|
Vice
President and Vice President – Global Boat Operations
|
|
55
|
There are
no familial relationships among these officers. The term of office of all
elected officers expires May 5, 2010. The Executive Officers are appointed from
time to time at the discretion of the Chief Executive Officer.
Dustan E. McCoy was named
Chairman and Chief Executive Officer of Brunswick in December 2005. He was Vice
President of Brunswick and President – Brunswick Boat Group from 2000 to 2005.
From 1999 to 2000, he was Vice President, General Counsel and Secretary of
Brunswick.
Peter B. Hamilton was named
Senior Vice President and Chief Financial Officer of Brunswick in September
2008. He served as Vice Chairman of the Board of Brunswick from 2000 until his
retirement in 2007; Executive Vice President and Chief Financial Officer of
Brunswick from 1998 to 2000; and Senior Vice President and Chief Financial
Officer of Brunswick from 1995 to 1998.
Kristin M. Coleman was named
Vice President, General Counsel and Secretary of Brunswick in May 2009. Prior to
her appointment, she was Vice President and Associate General Counsel for Mead
Johnson Nutrition Company. She had previously been with Brunswick Corporation
from 2003 to 2008, serving in a number of positions of increasing
responsibility.
Andrew E. Graves was named
Vice President and President – Brunswick Boat Group in October
2009. Previously, he was Vice President and President – US Marine and
Outboard Boats from 2008 to 2009; and President – Brunswick Boat Group
Freshwater Group from 2005 to 2008. From 2003 to 2005, Mr. Graves was
President of Dresser Flow Solutions, a global energy infrastructure
company.
Kevin S. Grodzki was named
Vice President and President – Mercury Marine Sales, Marketing and Commercial
Operations in November of 2008. He has been with Mercury since 2005. Prior to
that assignment, he was President of Brunswick’s Life Fitness
Division.
Warren N. Hardie was named
Vice President and President – Brunswick Bowling & Billiards in February
2006. Previously, he was President – Bowling Retail from 1998 to February
2006.
B. Russell Lockridge has been
Vice President and Chief Human Resources Officer of Brunswick since
1999.
Alan L. Lowe has been Vice
President and Controller of Brunswick since September 2003.
John C. Pfeifer was named
Vice President and President – Brunswick Marine in EMEA, as well as President –
Brunswick Global Structure, in February 2008. Mr. Pfeifer joined
Brunswick in 2006, serving most recently as President – Brunswick Asia-Pacific
Group. Prior to joining Brunswick, Mr. Pfeifer held executive
positions with ITT Corporation, a high-technology engineering and manufacturing
company, from 2000 to 2006.
Mark D. Schwabero was named
Vice President and President – Mercury Marine in December 2008. Previously, he
was President – Mercury Outboards from 2004 to 2008.
John E. Stransky was named
Vice President and President – Life Fitness in February 2006. Previously, he was
President – Brunswick Bowling & Billiards from February 2005 to February
2006 and President of the Billiards division from 1998 to 2005.
Stephen M. Wolpert was named
Vice President and Vice President – Global Boat Operations in November of 2009.
Mr. Wolpert most recently was Vice President of Manufacturing and, prior to that
appointment, served as President – US Marine Division. He joined the
Brunswick Boat Group as its Vice President – Manufacturing in 2001, and
continued serving in positions of increasing responsibility.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Brunswick’s
common stock is traded on the New York and Chicago Stock Exchanges. Quarterly
information with respect to the high and low prices for the common stock and the
dividends declared on the common stock is set forth in Note 22 – Quarterly Data
(unaudited) in the Notes to Consolidated Financial Statements. As of February
19, 2010, there were 12,517 shareholders of record of the Company’s common
stock.
In
October 2009 and October 2008, Brunswick announced its annual dividend on its
common stock of $0.05 per share, payable in December 2009 and December 2008,
respectively. Brunswick intends to continue to pay annual dividends at the
discretion of the Board of Directors, subject to continued capital availability
and a determination that cash dividends continue to be in the best interest of
the Company’s stockholders.
In the
second quarter of 2005, Brunswick’s Board of Directors authorized and announced
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 did not
repurchase any shares during 2009 or 2008. During 2007, the Company repurchased
approximately 4.1 million shares under this program for $125.8 million. As of
December 31, 2009, 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.
Brunswick’s
dividend and share repurchase policies may be affected by, among other things,
the Company’s views on future liquidity, potential future capital requirements
and restrictions contained in certain credit agreements.
Performance
Graph
Comparison
of Five-Year Cumulative Total Return among Brunswick, S&P 500 Index and
S&P 500 Global Industry Classification Standard (GICS) Consumer
Discretionary Index
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
Brunswick
|
100.00
|
83.23
|
66.38
|
36.35
|
9.02
|
27.39
|
S&P
500 Index
|
100.00
|
103.00
|
117.03
|
121.16
|
74.53
|
92.01
|
S&P
500 GICS Consumer Discretionary Index
|
100.00
|
92.64
|
108.61
|
93.05
|
60.74
|
83.07
|
The basis
of comparison is a $100 investment at December 31, 2004, in each of (i)
Brunswick, (ii) the S&P 500 Index, and (iii) the S&P 500 GICS Consumer
Discretionary Index. All dividends are assumed to be reinvested. The S&P 500
GICS Consumer Discretionary Index encompasses industries including automotive,
household durable goods, textiles and apparel, and leisure equipment. Brunswick
believes the companies included in this index provide a representative sample of
enterprises that are in primary lines of business that are similar to
Brunswick’s.
Item
6. Selected Financial Data
The
selected historical financial data presented below as of and for the years ended
December 31, 2009, 2008 and 2007 have been derived from, and should be read in
conjunction with, the historical consolidated financial statements of the
Company, including the notes thereto, and Item 7 of this report, including the
Matters Affecting
Comparability section. The selected historical financial data presented
below as of and for the years ended December 31, 2006 and 2005 have been derived
from the consolidated financial statements of the Company for the years that are
not included herein. The financial data presented below have been restated to
present discontinued operations separately from continuing
operations.
(in
millions, except per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of operations data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,776.1 |
|
|
$ |
4,708.7 |
|
|
$ |
5,671.2 |
|
|
$ |
5,665.0 |
|
|
$ |
5,606.9 |
|
Operating
earnings (loss) (A)
|
|
|
(570.5 |
) |
|
|
(611.6 |
) |
|
|
107.2 |
|
|
|
341.2 |
|
|
|
468.7 |
|
Earnings
(loss) before interest, loss on early
extinguishment of debt and income taxes (A)
|
|
|
(588.7 |
) |
|
|
(584.7 |
) |
|
|
136.3 |
|
|
|
354.2 |
|
|
|
524.1 |
|
Earnings
(loss) before income taxes (A)
|
|
|
(684.7 |
) |
|
|
(632.2 |
) |
|
|
92.7 |
|
|
|
309.7 |
|
|
|
485.9 |
|
Net
earnings (loss) from continuing operations (A)
|
|
|
(586.2 |
) |
|
|
(788.1 |
) |
|
|
79.6 |
|
|
|
263.2 |
|
|
|
371.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from discontinued
operations,
net of tax (B)
|
|
|
— |
|
|
|
— |
|
|
|
32.0 |
|
|
|
(129.3 |
) |
|
|
14.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) (A)
|
|
$ |
(586.2 |
) |
|
$ |
(788.1 |
) |
|
$ |
111.6 |
|
|
$ |
133.9 |
|
|
$ |
385.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations (A)
|
|
$ |
(6.63 |
) |
|
$ |
(8.93 |
) |
|
$ |
0.88 |
|
|
$ |
2.80 |
|
|
$ |
3.80 |
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from discontinued
operations,
net of tax
|
|
|
— |
|
|
|
— |
|
|
|
0.36 |
|
|
|
(1.38 |
) |
|
|
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) (A)
|
|
$ |
(6.63 |
) |
|
$ |
(8.93 |
) |
|
$ |
1.24 |
|
|
$ |
1.42 |
|
|
$ |
3.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares used for computation of
basic
earnings (loss) per share
|
|
|
88.4 |
|
|
|
88.3 |
|
|
|
89.8 |
|
|
|
94.0 |
|
|
|
97.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations (A)
|
|
$ |
(6.63 |
) |
|
$ |
(8.93 |
) |
|
$ |
0.88 |
|
|
$ |
2.78 |
|
|
$ |
3.76 |
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from discontinued
operations,
net of tax
|
|
|
— |
|
|
|
— |
|
|
|
0.36 |
|
|
|
(1.37 |
) |
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) (A)
|
|
$ |
(6.63 |
) |
|
$ |
(8.93 |
) |
|
$ |
1.24 |
|
|
$ |
1.41 |
|
|
$ |
3.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares used for computation of
diluted
earnings per share
|
|
|
88.4 |
|
|
|
88.3 |
|
|
|
90.2 |
|
|
|
94.7 |
|
|
|
98.8 |
|
(A)
|
2009
results include $172.5 million of pretax restructuring, exit and
impairment charges. 2008 results include $688.4 million of pretax goodwill
impairment charges, trade name impairment charges and restructuring, exit
and impairment charges. 2007 results include $88.6 million of pretax trade
name impairment charges and restructuring, exit and impairment charges.
2006 results include $17.1 million of pretax restructuring, exit and
impairment charges.
|
(B)
|
Earnings
(loss) from discontinued operations in 2007 include net gains of $29.8
million related to the sales of the discontinued businesses. Earnings
(loss) from discontinued operations in 2006 include an $85.6 million
impairment charge ($73.9 million pretax) related to the Company’s
announcement in December 2006 that proceeds from the sale of BNT were
expected to be less than its book value. See Note
20 – Discontinued Operations in the Notes to Consolidated Financial
Statements for further details.
|
(in
millions, except per share and other data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets of continuing operations
|
|
$ |
2,709.4 |
|
|
$ |
3,223.9 |
|
|
$ |
4,365.6 |
|
|
$ |
4,312.0 |
|
|
$ |
4,414.8 |
|
Debt
Short-term
|
|
$ |
11.5 |
|
|
$ |
3.2 |
|
|
$ |
0.8 |
|
|
$ |
0.7 |
|
|
$ |
1.1 |
|
Long-term
|
|
|
839.4 |
|
|
|
728.5 |
|
|
|
727.4 |
|
|
|
725.7 |
|
|
|
723.7 |
|
Total
debt
|
|
|
850.9 |
|
|
|
731.7 |
|
|
|
728.2 |
|
|
|
726.4 |
|
|
|
724.8 |
|
Common
shareholders’ equity (A)
(B)
|
|
|
210.3 |
|
|
|
729.9 |
|
|
|
1,892.9 |
|
|
|
1,871.8 |
|
|
|
1,978.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capitalization (A)
(B)
|
|
$ |
1,061.2 |
|
|
$ |
1,461.6 |
|
|
$ |
2,621.1 |
|
|
$ |
2,598.2 |
|
|
$ |
2,703.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow data
Net
cash provided by (used for)
operating
activities of continuing operations
|
|
$ |
125.5 |
|
|
$ |
(12.1 |
) |
|
$ |
344.1 |
|
|
$ |
351.0 |
|
|
$ |
421.6 |
|
Depreciation
and amortization
|
|
|
157.3 |
|
|
|
177.2 |
|
|
|
180.1 |
|
|
|
167.3 |
|
|
|
156.3 |
|
Capital
expenditures
|
|
|
33.3 |
|
|
|
102.0 |
|
|
|
207.7 |
|
|
|
205.1 |
|
|
|
223.8 |
|
Acquisitions
of businesses
|
|
|
— |
|
|
|
— |
|
|
|
6.2 |
|
|
|
86.2 |
|
|
|
130.3 |
|
Investments
|
|
|
(6.2 |
) |
|
|
(20.0 |
) |
|
|
(4.1 |
) |
|
|
(6.1 |
) |
|
|
18.1 |
|
Stock
repurchases
|
|
|
— |
|
|
|
— |
|
|
|
125.8 |
|
|
|
195.6 |
|
|
|
76.0 |
|
Cash
dividends paid
|
|
|
4.4 |
|
|
|
4.4 |
|
|
|
52.6 |
|
|
|
55.0 |
|
|
|
57.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
data
Dividends
declared per share
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.60 |
|
|
$ |
0.60 |
|
|
$ |
0.60 |
|
Book
value per share (A)
(B)
|
|
|
2.38 |
|
|
|
8.27 |
|
|
|
20.99 |
|
|
|
19.76 |
|
|
|
20.03 |
|
Return
on beginning shareholders’ equity
|
|
|
(80.3)% |
|
|
|
(41.6)% |
|
|
|
6.0% |
|
|
|
6.8% |
|
|
|
22.5% |
|
Effective
tax rate
|
|
|
14.4% |
|
|
|
(24.7)% |
|
|
|
14.1% |
|
|
|
15.0% |
|
|
|
23.6% |
|
Debt-to-capitalization
rate (A)
(B)
|
|
|
80.2% |
|
|
|
50.1% |
|
|
|
27.8% |
|
|
|
28.0% |
|
|
|
26.8% |
|
Number
of employees
|
|
|
15,003 |
|
|
|
19,760 |
|
|
|
27,050 |
|
|
|
28,000 |
|
|
|
26,500 |
|
Number
of shareholders of record
|
|
|
12,602 |
|
|
|
12,842 |
|
|
|
13,052 |
|
|
|
13,695 |
|
|
|
14,143 |
|
Common
stock price (NYSE)
High
|
|
$ |
13.11 |
|
|
$ |
19.28 |
|
|
$ |
34.80 |
|
|
$ |
42.30 |
|
|
$ |
49.50 |
|
Low
|
|
|
2.18 |
|
|
|
2.01 |
|
|
|
17.05 |
|
|
|
27.56 |
|
|
|
35.09 |
|
Close
(last trading day)
|
|
|
12.71 |
|
|
|
4.21 |
|
|
|
17.05 |
|
|
|
31.90 |
|
|
|
40.66 |
|
(A)
|
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),” codified under
ASC 715 “Compensation – Retirement Benefits,” which resulted in a $60.7
million decrease to Shareholders’ equity. The Company adopted the
provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes,” (FIN 48), codified under ASC 740 “Income Taxes,” effective
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, opening retained
earnings.
|
(B)
|
2009
results include $172.5 million of pretax restructuring, exit and
impairment charges. 2008 results include $688.4 million of pretax goodwill
impairment charges, trade name impairment charges and restructuring, exit
and impairment charges. 2007 results include $88.6 million of pretax trade
name impairment charges and restructuring, exit and impairment charges.
2006 results include $17.1 million of pretax restructuring, exit and
impairment charges.
|
The Notes
to Consolidated Financial Statements should be read in conjunction with the
above summary.
Item
7. 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, net debt and total liquidity. 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 management uses and to
better evaluate the Company’s ongoing business performance.
Certain
other statements in Management’s Discussion and Analysis are forward-looking as
defined in the Private Securities Litigation Reform Act of 1995. These
statements are based on current expectations that are subject to risks and
uncertainties. Actual results may differ materially from expectations as of the
date of this filing because of factors discussed in Item 1A of this Annual
Report on Form 10-K.
Overview
and Outlook
General
In 2009,
Brunswick continued its restructuring activities in order to operate effectively
in a difficult economy and marine industry, while positioning itself to take
advantage of market opportunities as they evolve, and maintaining its strategic
objective to solidify its leadership position in the marine, fitness and bowling
and billiards industries, by:
|
•
|
Maintaining
strong liquidity during difficult economic
times;
|
|
•
|
Focusing
on cost reduction initiatives across the organization through the resizing
and realignment of Brunswick’s manufacturing operations and organizational
structure;
|
|
•
|
Continuing
to shrink and consolidate its manufacturing footprint to a level that
allows each facility to produce at higher volumes and lower costs;
and
|
|
•
|
Lowering
its marine production levels to achieve reductions in pipeline inventories
held by its dealers in order to maintain the health of the Company’s many
dealers in a difficult retail
environment.
|
Actions
in support of the Company’s strategic objectives in 2009 include:
–
|
Increased
its overall liquidity and reduced its net debt position, when compared
with the end of 2008, through cost reduction efforts, combined with
inventory management strategies;
|
–
|
Reduced
its near-term debt obligations through a $350.0 million debt offering due
in 2016. The Company used a portion of the proceeds to repay
99.6 percent of the Company’s notes due in 2011 and to reduce the amount
of its 2013 notes outstanding to $153.4 million, representing the only
significant long-term debt maturity from 2010 to 2015;
and
|
–
|
Ended
the year with $526.6 million of cash, compared with $317.5 million at the
end of 2008, despite a significant reduction in sales and a difficult
economy.
|
Cost
Reduction Initiatives and Manufacturing
Realignment:
|
–
|
Achieved
the Company’s goal of reducing its fixed-cost structure compared with 2007
by approximately $420 million through continued reduction of the Company’s
global workforce, consolidation of manufacturing operations and
disposition of non-strategic
assets;
|
–
|
Reduced
total Company workforce by 24 percent in 2009 and 45 percent since
2007;
|
–
|
Removed approximately 13,700 boats, or 47 percent, from dealer
pipeline inventories; and |
–
|
Further
adjusted the boat manufacturing footprint to streamline operations by
having several plants manufacture multiple brands, rather than having
dedicated facilities for single brands;
and
|
–
|
Reduced
the number of boat models being manufactured in order to better utilize
the new footprint and to reduce complexity and costs.
|
–
|
Announced
plans to consolidate engine production by transferring sterndrive engine
manufacturing operations from its Stillwater, Oklahoma plant to its Fond
du Lac, Wisconsin plant, which currently produces the Company’s outboard
engines;
|
–
|
Maintained
the Company’s dealer network by replacing those dealers who were
underperforming and/or exiting the market with healthier dealers in the
same territories, thereby ensuring adequate brand representation. The
Company experienced a net loss of boat brand representation at
dealers of approximately 1
percent.
|
Brunswick
incurred financial losses in 2009 due to continued weakness in marine markets,
contracting global credit markets and the effects of its restructuring and
dealer health actions. Net sales from continuing operations in 2009 decreased to
$2,776.1 million from $4,708.7 million in 2008. The overall decrease in sales
was primarily due to the continued reduction in marine industry demand as a
result of a weak global economy, soft housing markets and the contraction of
liquidity in global credit markets. The reduction in marine industry demand is
evidenced by the declining number of retail unit sales of powerboats in the
United States since 2005, with the rate of decline accelerating throughout 2009.
Industry retail unit sales were down significantly during 2009 compared with the
already low retail unit sales during 2008. In 2009, the Company reported lower
sales across all segments and global regions.
Operating
losses from continuing operations for 2009 were $570.5 million, with negative
operating margins of 20.6 percent. Operating losses from continuing operations
for 2008 were $611.6 million, with negative operating margins of 13.0 percent.
The 2009 results included $172.5 million of restructuring, exit and impairment
charges, while the 2008 results included goodwill and trade name impairment
charges of $511.1 million and $177.3 million of restructuring, exit and
impairment charges. The lower operating losses during 2009 primarily resulted
from the absence of goodwill and trade name impairment charges and the benefit
of cost-reduction initiatives, as discussed in Note 2 – Restructuring
Activities in the Notes to Consolidated Financial Statements. These
factors were partially offset by lower sales across all segments, higher pension
expense, the absence of variable compensation and defined contribution accruals
in 2008, higher dealer incentive programs and sales discounts and reduced
fixed-cost absorption due to reduced production rates in the Company’s marine
businesses.
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. As the marine market entered a sustained decline in
2007, Brunswick expanded its restructuring activities during 2007, 2008 and 2009
in order to improve performance and better position the Company to address
current market conditions and enable long-term profitable growth. These
initiatives have resulted in the recognition of restructuring, exit and
impairment charges in the Statement of Operations during 2009, 2008 and
2007.
Total
restructuring, exit and impairment charges in 2009 were $172.5 million which
consists of $48.3 million in the Marine Engine segment, $107.8 million in the
Boat segment, $2.1 million in the Fitness segment, $5.3 million in the Bowling
& Billiards segment and $9.0 million at Corporate. See Note 2 – Restructuring
Activities in the Notes to Consolidated Financial Statements for further
details.
The
actions taken under these initiatives will benefit future operations as the
Company has removed fixed costs of approximately $100 million from Cost of sales
and approximately $320 million from Selling, general and administrative
expense in the Consolidated Statements of Operations when compared with
2007 spending levels. The majority of these costs are cash savings. The Company
anticipates it will incur approximately $30 million of additional charges in
2010 related to known restructuring activities that will be initiated in 2010 or
have been initiated in 2009.
Goodwill
and Trade Name Impairments
Brunswick
accounts for goodwill and identifiable intangible assets in accordance with
Accounting Standards Codification (ASC) 350 “Intangibles – Goodwill and Other”
(ASC 350). Under this standard, Brunswick assesses the impairment of goodwill
and indefinite-lived intangible assets at least annually in the fourth quarter
and whenever events or changes in circumstances indicate that the carrying value
may not be recoverable.
The
Company did not record any goodwill or indefinite-lived intangible asset
impairments during 2009 after completing its annual impairment test. While the
Company has a plan to restore itself to profitability, as discussed in Note 2 – Restructuring
Activities in the Notes to Consolidated Financial Statements, it has no
assurance that the plan will be achieved or that the Company will return to
profitability in the foreseeable future. As a result, the Company may be
required to take an impairment charge in a future period if it experiences any
significant adverse changes in its businesses or as part of its annual
impairment testing for goodwill to the extent that the carrying value of the
reporting unit’s goodwill may not be recoverable. As of December 31, 2009, the
carrying value of goodwill at the Company’s Fitness and Marine Engine segments
was $272.2 million and $20.3 million, respectively. While the Company does not
believe it will incur an impairment loss on its Marine Engine segment, a
reasonable possibility exists that an impairment loss might be required for the
Fitness segment in future periods. The Fitness segment’s fair value exceeded its
carrying value by approximately 10 percent during the testing performed in 2009.
The outcome of the testing performed is largely dependent on the segment’s
forecasted future cash flows and the selection of an appropriate discount rate
to apply to those future cash flows. The Fitness segment’s fourth quarter has
historically represented approximately 50 percent of the segment’s operating
earnings for the entire year, and as a result, the operating earnings in future
fourth quarters will have a significant impact on the Company’s forecasted
future cash flows used in the annual goodwill impairment test.
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
contraction of liquidity in global credit markets contributed to the continued
reduction in demand for certain Brunswick products and, consequently, 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.
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 related to the Boat segment reporting unit, $1.7
million related to the bowling retail reporting unit within the Bowling &
Billiards segment and $11.0 million related to the billiards reporting unit
within the Bowling & Billiards segment. The Company also recognized goodwill
impairment charges of $1.5 million in the Boat segment reporting unit and $1.7
million related to the billiards reporting unit within the Bowling &
Billiards segment earlier in 2008 as a result of deciding to exit certain
businesses. As a result of the $377.2 million of impairments, all goodwill at
these respective reporting units has been written down to zero.
In
conjunction with the goodwill impairment testing, the Company analyzed the
valuation of its other indefinite-lived intangibles, consisting 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. Of this amount, $115.7 million related to the Boat segment reporting
unit, $4.5 million related to the Marine Engine segment reporting unit and $0.9
million related to the billiards reporting unit within the Bowling &
Billiards segment. The Company also recognized trade name impairment charges of
$5.2 million in the Boat segment reporting unit and $7.6 million related to the
billiards reporting unit within the Bowling & Billiards segment earlier in
2008 as a result of deciding to exit certain businesses.
Discontinued
Operations
As
discussed in Note 20 –
Discontinued Operations in the Notes to Consolidated Financial
Statements, in April 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.
Outlook
for 2010
Looking
ahead to 2010, the Company expects 2010 revenues to be higher when compared with
2009, primarily in the Marine Engine and Boat segments. The
expectation of higher revenues is a result of the Company’s expected marine
wholesale shipments in 2010 more closely matching marine retail demand, whereas
2009 wholesale shipments were significantly lower than retail sales. In
addition, the Company expects to offer reduced discounts to incent marine
retail demand for prior model year boats. The Company also expects the Fitness
and Bowling & Billiards segments to experience a modest growth in
revenues.
Due to
higher sales and production volumes in the Company’s marine segments, 2010 gross
margins are expected to be improved and operating losses are expected to be
significantly reduced. Actions in 2009 to lower dealer pipeline inventories are
expected to have a favorable effect on margins due to reduced discounts on
higher sales volumes and higher fixed-cost absorption on increased production.
Contributing to the decline in expected operating losses for the Company are
lower restructuring, exit and impairment charges, and decreased pension and bad
debt expenses. An increase in interest expense in 2010 is expected to
partially offset the improvement in operating losses. Excluding the effect of
any special tax items that may occur or any changes to legislation, the
Company’s tax provision or benefit in 2010 will primarily be related to its
state and foreign earnings or losses as the Company will continue to provide
deferred tax asset valuation allowances on its anticipated domestic federal tax
losses in 2010.
Matters
Affecting Comparability
The
following events have occurred during 2009, 2008 and 2007, which the Company
believes affect the comparability of the results of operations:
Goodwill impairment charges.
In 2008, the Company incurred $377.2 million of goodwill impairment
charges. This was a result of the continued reduction in demand for certain
products, along with lower-than-projected profits across certain brands, which
led management to revise 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 ASC 350. Additionally, impairments were
recorded in the second quarter of 2008 related to the analyses of its Baja boat
business and its Valley-Dynamo coin-operated commercial billiards business.
There were no comparable charges recognized in 2009 or 2007. See Note 3 – Goodwill and Trade Name
Impairments in the Notes to Consolidated Financial Statements for further
details.
Trade name impairment
charges. In 2008, the Company recorded $133.9 million of trade name
impairment charges. In conjunction with the goodwill impairment testing, the
Company analyzed the valuation of its trade names in accordance with ASC 350.
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. Additionally, impairments
were recorded in the second quarter of 2008 related to analyses of its Bluewater
Marine boat business (Bluewater Marine group), which previously manufactured the
Sea Pro, Sea Boss, Palmetto and Laguna brands of fishing boats, and its
Valley-Dynamo coin-operated commercial billiards business. 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. There were no comparable charges in 2009. See Note 3 – Goodwill and Trade Name
Impairments in the Notes to Consolidated Financial Statements for further
details.
Restructuring, exit and impairment
charges. The Company implemented initiatives to improve its cost
structure, better utilize overall capacity and improve general operating
efficiencies. During 2009, the Company recorded a charge of $172.5 million
related to these restructuring activities as compared with $177.3 million during
2008 and $22.2 million during 2007. See Note 2 – Restructuring Activities
in the Notes to Consolidated Financial Statements for further
details.
Investment sale gains. In
March 2008, the Company sold its interest in its bowling joint venture in Japan
for $40.4 million gross cash proceeds, $37.4 million net of cash paid for taxes
and other costs. The sale resulted in a $20.9 million pretax gain, $9.9 million
after-tax, and was recorded in Investment sale gains in the Consolidated
Statements of Operations.
In
September 2008, the Company 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 in Investment sale gains in the Consolidated Statements of
Operations.
Tax Items. During 2009, the
Company recognized a tax benefit of $98.5 million on operating losses from
continuing operations of $684.7 million for an effective tax rate of 14.4
percent. In November 2009, new legislation was signed into law which included
provisions allowing the Company to carryback its 2009 domestic tax losses up to
five years. As a result, the Company reduced its need for tax valuation
allowances by $109.5 million during 2009 related to anticipated tax refunds,
which are expected to be received during the first half of 2010. Additionally,
when maintaining a deferred tax asset valuation allowance in periods in which
there is a pretax operating loss and pretax income in Other comprehensive
income, the pretax income in Other comprehensive income is considered a source
of income and reduces a corresponding portion of the valuation allowance. The
reduction in the valuation allowance, as a result of Other comprehensive income,
was a $29.9 million income tax benefit during 2009. The Company also filed its
2008 federal income tax return in the third quarter of 2009, which generated an
additional $10.3 million income tax benefit in 2009. Partially offsetting these
tax benefits was the recording of a $36.6 million tax valuation allowance in the
first quarter of 2009 to reduce certain state and foreign 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.
During
2008, the Company recognized a tax provision of $155.9 million on operating
losses from continuing operations of $632.2 million for an effective tax rate of
(24.7) percent. 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, a provision of $338.3 million was recognized to
increase the deferred tax asset valuation allowance. See Note 10 – Income Taxes in the
Notes to Consolidated Financial Statements for further
details.
During
2007, the Company recognized special tax benefits of $9.8 million, primarily as
a result of favorable tax reassessments and its election to apply the indefinite
reversal criterion ASC 740 “Income Taxes” to the undistributed net earnings of
certain foreign subsidiaries, which are intended to be permanently reinvested,
as discussed in Note 10 –
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.
Results
of Operations
Consolidated
The
following table sets forth certain amounts, ratios and relationships calculated
from the Consolidated Statements of Operations for the years ended December 31,
2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2009
vs. 2008
|
|
|
2008
vs. 2007
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
(in millions, except
per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
$ |
|
|
|
% |
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,776.1 |
|
|
$ |
4,708.7 |
|
|
$ |
5,671.2 |
|
|
$ |
(1,932.6 |
) |
|
|
(41.0)% |
|
|
$ |
(962.5 |
) |
|
|
(17.0)% |
Gross
margin (A)
|
|
|
315.6 |
|
|
|
867.4 |
|
|
|
1,157.8 |
|
|
|
(551.8 |
) |
|
|
(63.6)% |
|
|
|
(290.4 |
) |
|
|
(25.1)% |
Goodwill
impairment charges
|
|
|
— |
|
|
|
377.2 |
|
|
|
— |
|
|
|
(377.2 |
) |
|
NM
|
|
|
|
377.2 |
|
|
NM
|
Trade
name impairment charges
|
|
|
— |
|
|
|
133.9 |
|
|
|
66.4 |
|
|
|
(133.9 |
) |
|
NM
|
|
|
|
67.5 |
|
|
NM
|
Restructuring,
exit and impairment charges
|
|
|
172.5 |
|
|
|
177.3 |
|
|
|
22.2 |
|
|
|
(4.8 |
) |
|
|
(2.7)% |
|
|
|
155.1 |
|
|
NM
|
Operating
earnings (loss)
|
|
|
(570.5 |
) |
|
|
(611.6 |
) |
|
|
107.2 |
|
|
|
41.1 |
|
|
|
6.7% |
|
|
|
(718.8 |
) |
|
NM
|
Net
earnings (loss) from continuing
operations
|
|
|
(586.2 |
) |
|
|
(788.1 |
) |
|
|
79.6 |
|
|
|
201.9 |
|
|
|
25.6% |
|
|
|
(867.7 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
$ |
(6.63 |
) |
|
$ |
(8.93 |
) |
|
$ |
0.88 |
|
|
$ |
2.30 |
|
|
NM
|
|
|
$ |
(9.81 |
) |
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expressed
as a percentage of Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
11.4% |
|
|
|
18.4% |
|
|
|
20.4% |
|
|
|
|
|
|
(700)
bpts
|
|
|
|
|
|
|
(200)
bpts
|
Selling,
general and administrative expense
|
|
|
22.5% |
|
|
|
14.2% |
|
|
|
14.5% |
|
|
|
|
|
|
830
bpts
|
|
|
|
|
|
|
(30)
bpts
|
Research
& development expense
|
|
|
3.2% |
|
|
|
2.6% |
|
|
|
2.4% |
|
|
|
|
|
|
60 bpts
|
|
|
|
|
|
|
20 bpts
|
Goodwill
impairment charges
|
|
|
—% |
|
|
|
8.0% |
|
|
|
—% |
|
|
|
|
|
|
(800)
bpts
|
|
|
|
|
|
|
800 bpts
|
Trade
name impairment charges
|
|
|
—% |
|
|
|
2.8% |
|
|
|
1.2% |
|
|
|
|
|
|
(280)
bpts
|
|
|
|
|
|
|
160 bpts
|
Restructuring,
exit and impairment charges
|
|
|
6.2% |
|
|
|
3.8% |
|
|
|
0.4% |
|
|
|
|
|
|
240
bpts
|
|
|
|
|
|
|
340 bpts
|
Operating
margin
|
|
|
(20.6)% |
|
|
|
(13.0)% |
|
|
|
1.9% |
|
|
|
|
|
|
(760)
bpts
|
|
|
|
|
|
|
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.
2009
vs. 2008
The
decrease in net sales was primarily due to reduced global demand for the
Company’s products and services across all segments compared with 2008, most
notably in the marine industry. The continued uncertainty in the
global economy and increased credit constraints have limited the Company’s
retail and other customers’ purchasing power and have curtailed both retail and
wholesale activity. As a result of the prolonged decline in marine retail demand
and tighter credit markets, a number of the Company’s dealers have filed for
bankruptcy or voluntarily ceased operations. As a result, the Company has
repurchased Company product from finance companies under contractual repurchase
obligations and resold the repurchased inventory to stronger dealers. If
additional dealers file for bankruptcy or cease operations, the Company’s net
sales and earnings may be unfavorably affected as a result of lower market
coverage and the associated decline in sales. The decline in the
Marine Engine segment’s net sales was less severe than the percentage reduction
in the Boat segment’s net sales for the year due to continued customer purchases
in 2009 from the Marine Engine segment’s marine service, parts and accessories
businesses. Net sales in the Fitness and Bowling & Billiards
segments also declined during the year as operators in these industries continue
to experience reduced access to capital and remained cautious about making
capital purchases.
Sales
outside the United States in 2009 decreased to $1,168.7 million from $2,058.5
million in 2008, with the largest reduction in international sales coming from
Europe, which decreased $506.0 million to $518.1 million. The
decrease in international sales impacted all segments at rates relatively
consistent with the domestic reductions.
The
Company’s gross margin percentage decreased 700 basis points in 2009 to 11.4
percent from 18.4 percent in 2008. The decrease 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, as well as higher pension
expense, variable compensation expense and increased dealer incentive programs
as a percentage of sales. The decrease in gross margin percentage was partially
offset by successful cost reduction efforts.
Selling,
general and administrative expense decreased by $43.3 million to $625.1 million
in 2009. The decrease was primarily driven by successful cost reduction
initiatives, which were partially offset by higher variable compensation,
pension and bad debt expense.
During
2009, the Company did not incur impairment charges related to its goodwill and
trade names. In 2008, the Company incurred $511.1 million of impairment charges
related to its goodwill and trade names. See Note 3 – Goodwill and Trade Name
Impairments in the Notes to Consolidated Financial Statements for further
details.
During
2009, the Company continued its restructuring activities, which included
reducing the Company’s global workforce, consolidating manufacturing operations
and disposing of non-strategic assets. During the third quarter of
2009, the Company announced plans to consolidate engine production by
transferring sterndrive engine manufacturing operations from its Stillwater,
Oklahoma plant to its Fond du Lac, Wisconsin plant, which currently produces the
Company’s outboard engines. This plant consolidation effort is
expected to continue through 2011. In connection with this
action, the Company’s hourly union workforce in Fond du Lac ratified a new
collective bargaining agreement in August 2009, which resulted in net
restructuring charges as a result of changes to employees’ current and
postretirement benefits. The Company continued to consolidate the
Boat segment’s manufacturing footprint in 2009 and began marketing for sale
certain previously closed boat production facilities in the fourth quarter of
2009, including the previously mothballed plant in Navassa, North Carolina.
See Note 2 – Restructuring
Activities in the Notes to Consolidated Financial Statements for further
details.
The
decrease in operating loss was mainly due to the absence of goodwill and trade
name impairment charges in 2009 and successful cost reduction efforts, partially
offset by reduced sales volumes, along with lower fixed-cost absorption and the
absence of variable compensation and defined contribution accruals in
2008.
Equity
earnings (loss) decreased $22.2 million to a loss of $15.7 million in 2009. The
decrease in equity earnings was mainly the result of lower earnings from the
Company’s marine joint ventures.
In 2009,
the Company did not sell any investments. During 2008, Brunswick sold
its interest in its bowling joint venture in Japan for $40.4 million gross cash
proceeds and 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 increased $31.9 million to $86.1 million in 2009 compared with 2008,
primarily as a result of higher interest rates combined with higher average
outstanding debt levels. In August 2009, the Company issued $350 million of
notes due in 2016 to fund the retirement of $150 million of notes due in
2011 and a portion of notes due in 2013, as described in Note 14 – Debt in the Notes to
Consolidated Financial Statements. In connection with the repurchase
of the 2013 notes, the Company recognized a loss on early extinguishment of debt
of $13.1 million, while there was no comparable charge in 2008. Interest income
decreased $3.5 million to $3.2 million in 2009 compared with 2008, primarily as
a result of lower rates earned on invested balances during 2009.
During
2009, the Company recognized a tax benefit of $98.5 million on operating losses
from continuing operations of $684.7 million for an effective tax rate of 14.4
percent. In November 2009, new legislation was signed into law which included
provisions allowing the Company to carryback its 2009 domestic tax losses up to
five years. As a result, the Company reduced its need for tax valuation
allowances by $109.5 million during 2009 related to anticipated tax refunds,
which are expected to be received during the first half of 2010. Additionally,
when maintaining a deferred tax asset valuation allowance in periods in which
there is a pretax operating loss and pretax income in Other comprehensive
income, the pretax income in Other comprehensive income is considered a source
of income and reduces a corresponding portion of the valuation allowance. The
reduction in the valuation allowance, as a result of Other comprehensive income,
was a $29.9 million income tax benefit during 2009. The Company also filed its
2008 federal income tax return in the third quarter of 2009, which generated a
$10.3 million income tax benefit in 2009. Partially offsetting these tax
benefits was the recording of a $36.6 million tax valuation allowance in the
first quarter of 2009 to reduce certain state and foreign 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.
During
2008, the Company recognized a tax provision of $155.9 million on operating
losses from continuing operations of $632.2 million for an effective tax rate of
(24.7) percent. 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, a provision of $338.3 million was recognized to
increase the deferred tax asset valuation allowance. See Note 10 – Income Taxes in the
Notes to Consolidated Financial Statements for further details.
Net loss
from continuing operations and Diluted loss per share were lower in 2009 when
compared with 2008, primarily due to the same factors discussed above in
operating loss and interest expense.
Weighted
average common shares outstanding used to calculate Diluted earnings (loss) per
share increased to 88.4 million in 2009 from 88.3 million in 2008. No shares
were repurchased during 2009 or 2008.
2008
vs. 2007
The
decrease in net sales was primarily due to reduced marine industry demand
compared with 2007 as a result of uncertainty in the global economy and the
related contraction of liquidity in global credit markets.
Although
net sales in 2008 were down 17 percent from 2007, the Company saw strong sales
of commercial fitness equipment and bowling products and experienced increases
in revenue from Brunswick Zone XL centers.
Sales
outside the United States increased $42.1 million to $2,058.5 million in 2008,
with the largest increase coming from the Latin America region, which increased
$51.2 million to $247.8 million, and the Africa & Middle East region, which
increased $23.7 million to $121.8 million. The total growth outside the United
States was largely attributable to higher sales from the Boat, Bowling &
Billiards and Fitness segments.
Brunswick’s
gross margin percentage decreased 200 basis points in 2008 to 18.4 percent from
20.4 percent in 2007. The decrease 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 price increases at
certain businesses, successful cost-reduction efforts and lower variable
compensation expense.
Operating
expenses decreased by $171.4 million to $790.6 million in 2008. The decrease was
primarily driven by successful cost reduction initiatives and lower variable
compensation expense, but was partially offset by the effect of unfavorable
foreign currency translation.
During
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 certain trade names during the comparable 2007
period. See Note 3 – Goodwill
and Trade Name Impairments in the Notes to Consolidated Financial
Statements for further details.
During
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; closing of its Swansboro, North Carolina boat plant; closing
of its production facility in Newberry, South Carolina; the cessation of boat
manufacturing at one of its facilities in Merritt Island, Florida; 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 its Navassa,
North Carolina boat plant; and the reduction of its employee workforce across
the Company. See Note 2 –
Restructuring Activities in the Notes to Consolidated Financial
Statements for further details.
The
decrease in operating earnings when compared with 2007 was mainly due to reduced
sales volumes, along with lower fixed-cost absorption, goodwill and trade name
impairments taken during 2008 and the restructuring activities discussed
above.
Equity
earnings decreased $14.8 million to $6.5 million in 2008. The decrease in equity
earnings was mainly the result of lower earnings from the Company’s marine joint
ventures and the absence of earnings from its bowling joint venture in Japan,
which was sold in the first quarter of 2008.
During
2008, Brunswick sold its interest in its bowling joint venture in Japan for
$40.4 million gross cash proceeds and 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.
The
decrease in Other income (expense), net was due to the absence of a legal claim
settlement against a third-party service provider in 2007. The 2007 settlement
resulted in $7.1 million of income, net of legal fees, and was reflected in
Other income (expense), net.
Interest
expense increased $1.9 million to $54.2 million in 2008 compared with 2007,
primarily as a result of higher interest rates on outstanding debt. In July
2008, the Company issued $250 million of notes due in 2013 to fund the maturity
of $250 million of notes due in July 2009, as described in Note 14 – Debt in the Notes to
Consolidated Financial Statements. Interest income decreased $2.0 million to
$6.7 million in 2008, compared with 2007, primarily as a result of lower
invested balances during 2008.
During
2008, the Company recognized a tax provision of $155.9 million on operating
losses from continuing operations of $632.2 million for an effective tax rate of
(24.7) percent. 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, a provision of $338.3 million was recognized to
increase the deferred tax asset valuation allowance. See Note 10 – Income Taxes in the
Notes to Consolidated Financial Statements for further details.
In 2007,
the Company’s effective tax rate of 14.1 percent was lower than the statutory
rate primarily due to benefits from $12.7 million related to reassessments of
the deductibility of restructuring reserves and depreciation timing differences;
foreign earnings in tax jurisdictions with lower effective tax rates; and a
research and development tax credit. These benefits were partially offset by
$3.8 million of additional taxes related to changes in estimates related to
prior year’s filings, as discussed in Note 10 – Income Taxes in the
Notes to Consolidated Financial Statements.
Net
earnings and diluted earnings per share decreased primarily due to the same
factors discussed above affecting operating earnings.
Weighted
average common shares outstanding used to calculate diluted earnings per share
decreased to 88.3 million in 2008 from 90.2 million in 2007. Although no shares
were repurchased during 2008, the average outstanding shares in 2007 did not
fully reflect the effect of the 4.1 million shares repurchased in 2007, as
discussed in Note 19 – Share
Repurchase Program in the Notes to Consolidated Financial
Statements.
There was
no activity related to discontinued operations in 2008 as the disposition was
completed during 2007.
Segments
The
Company operates in four reportable segments: Marine Engine, Boat, Fitness and
Bowling & Billiards. Refer to Note 5 – Segment Information
in the Notes to Consolidated Financial Statements for details on the operations
of these segments.
Marine
Engine Segment
The
following table sets forth Marine Engine segment results for the years ended
December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2009
vs. 2008
|
|
|
2008
vs. 2007
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
$ |
|
|
|
% |
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,425.0 |
|
|
$ |
2,207.6 |
|
|
$ |
2,639.5 |
|
|
$ |
(782.6 |
) |
|
|
(35.5)% |
|
|
$ |
(431.9 |
) |
|
|
(16.4)% |
Trade
name impairment charges
|
|
$ |
— |
|
|
$ |
4.5 |
|
|
$ |
— |
|
|
$ |
(4.5 |
) |
|
|
|
|
$ |
4.5 |
|
|
|
Restructuring,
exit and impairment charges
|
|
$ |
48.3 |
|
|
$ |
32.4 |
|
|
$ |
4.8 |
|
|
$ |
15.9 |
|
|
|
49.1% |
|
|
$ |
27.6 |
|
|
NM
|
Operating
earnings (loss)
|
|
$ |
(131.2 |
) |
|
$ |
69.9 |
|
|
$ |
195.8 |
|
|
$ |
(201.1 |
) |
|
NM
|
|
|
$ |
(125.9 |
) |
|
|
(64.3)% |
Operating
margin
|
|
|
(9.2) |
% |
|
|
3.2 |
% |
|
|
7.4 |
% |
|
|
|
|
|
NM
|
|
|
|
|
|
|
(420)
bpts
|
Capital
expenditures
|
|
$ |
12.3 |
|
|
$ |
23.5 |
|
|
$ |
58.0 |
|
|
$ |
(11.2 |
) |
|
|
(47.7)% |
|
|
$ |
(34.5 |
) |
|
|
(59.5)% |
__________
bpts =
basis points
NM = not
meaningful
2009
vs. 2008
Net sales
recorded by the Marine Engine segment decreased compared with 2008, primarily
due to the continued reduction in global marine retail demand and the
corresponding decline in wholesale shipments. Despite the poor economic climate,
sales in the segment’s domestic marine service, parts and accessories
businesses, which represented 31 percent of the total segment sales for 2009,
only experienced a single digit percentage decline in sales when compared with
2008.
As a
result of its impairment analysis of goodwill and trade names, Brunswick
incurred trade name charges within the Marine Engine segment during 2008. There
were no comparable charges in 2009. See Note 3 – Goodwill and Trade Name
Impairments in the Notes to Consolidated Financial Statements for further
details.
During
2009, the Marine Engine segment recognized restructuring, exit and impairment
charges primarily related to severance charges and other restructuring
activities initiated in 2009 and 2008. These charges increased by
$15.9 million compared to 2008, primarily due to additional restructuring
initiatives, including the announcement of the consolidation of marine
sterndrive engine production in Fond du Lac, Wisconsin. The restructuring, exit
and impairment charges recognized during 2008 were primarily related to
severance charges and other restructuring activities initiated in 2008 and
included $19.3 million of gains recognized on the sales of non-strategic assets.
See Note 2 – Restructuring
Activities in the Notes to Consolidated Financial Statements for further
details.
Marine
Engine segment operating earnings (loss) decreased in 2009 as a result of lower
sales volumes, reduced fixed-cost absorption on lower production, higher
restructuring, exit and impairment charges associated with the Company’s
initiatives to reduce costs across all business units and higher pension and bad
debt expense. Lower fixed-cost absorption was caused by the Company’s continued
efforts to reduce inventory by reducing production rates by approximately 43
percent compared with 2008. These additional costs were partially offset by the
savings from successful cost-reduction initiatives and favorable settlements
reached during the year.
Capital
expenditures in 2009 and 2008 were primarily related to profit-maintaining
investments and were lower during 2009 as a result of discretionary capital
spending constraints.
2008
vs. 2007
Net sales
recorded by the Marine Engine segment decreased compared with 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 contraction of liquidity in
global credit markets in the second half of 2008 also led to lower net sales
outside the United States in 2008.
As a
result of its impairment analysis of goodwill and trade names, Brunswick
incurred trade name charges within the Marine Engine segment during 2008. See
Note 3 – Goodwill and Trade
Name Impairments in the Notes to Consolidated Financial Statements for
further details.
The
restructuring, exit and impairment charges recognized during 2008 were primarily
related to severance charges and other restructuring activities initiated in
2008 and include $19.3 million of gains recognized on the sales of non-strategic
assets. See Note 2 –
Restructuring Activities in the Notes to Consolidated Financial
Statements for further details.
Marine
Engine segment operating earnings decreased in 2008 when compared with 2007 as a
result of lower sales volumes; restructuring, exit and impairment charges
associated with the Company’s initiatives to reduce costs across all business
units; and trade name impairment charges. Additionally, lower fixed-cost
absorption and an increased concentration of sales in lower-margin products
contributed to the decline in operating earnings. This decrease was partially
offset by the savings from successful cost-reduction initiatives and lower
variable compensation expense.
Capital
expenditures in 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.
Boat
Segment
The
following table sets forth Boat segment results for the years ended December 31,
2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2009
vs. 2008
|
|
|
2008
vs. 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
$ |
|
|
|
% |
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
615.7 |
|
|
$ |
1,719.5 |
|
|
$ |
2,367.5 |
|
|
$ |
(1,103.8 |
) |
|
|
(64.2)% |
|
|
$ |
(648.0 |
) |
|
|
(27.4)% |
|
Goodwill
impairment charges
|
|
$ |
— |
|
|
$ |
362.8 |
|
|
$ |
— |
|
|
$ |
(362.8 |
) |
|
NM
|
|
|
$ |
362.8 |
|
|
NM
|
|
Trade
name impairment charges
|
|
$ |
— |
|
|
$ |
120.9 |
|
|
$ |
66.4 |
|
|
$ |
(120.9 |
) |
|
NM
|
|
|
$ |
54.5 |
|
|
|
82.1% |
|
Restructuring,
exit and
impairment charges
|
|
$ |
107.8 |
|
|
$ |
98.7 |
|
|
$ |
14.5 |
|
|
$ |
9.1 |
|
|
|
9.2% |
|
|
$ |
84.2 |
|
|
NM
|
|
Operating
loss
|
|
$ |
(398.5 |
) |
|
$ |
(655.3 |
) |
|
$ |
(93.5 |
) |
|
$ |
256.8 |
|
|
|
39.2% |
|
|
$ |
(561.8 |
) |
|
NM
|
|
Operating
margin
|
|
|
(64.7) |
% |
|
|
(38.1) |
% |
|
|
(3.9) |
% |
|
|
|
|
|
NM
|
|
|
|
|
|
|
NM
|
|
Capital
expenditures
|
|
$ |
15.5 |
|
|
$ |
40.8 |
|
|
$ |
91.7 |
|
|
$ |
(25.3 |
) |
|
|
(62.0)% |
|
|
$ |
(50.9 |
) |
|
|
(55.5)% |
|
__________
bpts =
basis points
NM = not
meaningful
2009
vs. 2008
The
decrease in Boat segment net sales was largely the result of the continued
reduction in marine retail demand in global markets and lower shipments to
dealers in an effort to achieve appropriate levels of pipeline inventories, as
well as higher dealer incentive programs and sales discounts. Weak retail market
conditions, paired with the Company’s objective of protecting its dealer network
by selling fewer units at wholesale than are being sold by the dealers at
retail, resulted in approximately 50 percent fewer unit sales when compared to
2008.
No
goodwill and trade name impairment charges were recognized in
2009. This compares to the goodwill and trade name impairment charges
in 2008, which were primarily the result of its impairment analysis performed
during the third quarter of 2008. See Note 3 – Goodwill and Trade Name
Impairments in the Notes to Consolidated Financial Statements for further
details.
The
restructuring, exit and impairment charges recognized during 2009 were primarily
related to asset impairments, additional programs to realign the Company’s boat
manufacturing footprint and other restructuring activities initiated in both
2008 and 2009. Asset impairments recorded in 2009 primarily relate to writing
down the carrying value of several previously closed boat production facilities
to their fair value as these properties were marketed for sale, the largest of
which relates to the previously mothballed plants in Navassa and Swansboro,
North Carolina, and the Riverview plant in Knoxville, Tennessee. The Company
also recorded impairments during 2009 on tooling, its Cape Canaveral, Florida
property and on a marina in St. Petersburg, Florida, to record these assets at
their fair value. Refer to Note
2 – Restructuring Activities in the Notes to Consolidated Financial
Statements for further discussion.
The Boat
segment’s operating loss decreased from 2008, primarily due to the absence of
goodwill and trade name impairment charges that were taken in 2008, as well as
savings from successful cost-reduction initiatives. This decrease was
partially offset by a decrease in sales volume, lower fixed-cost absorption,
higher dealer incentive programs and sales discounts, the absence of variable
compensation and defined contribution accruals in 2008, and increased
restructuring, exit and impairment charges.
Capital
expenditures in 2009 were largely attributable to tooling costs for the
production of new models and profit maintaining capital. Capital spending was
lower during 2009 as a result of discretionary capital spending constraints and
a smaller manufacturing footprint.
2008
vs. 2007
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, the contraction of liquidity in global credit markets
led to lower net sales in 2008.
The
goodwill and trade name impairment charges in 2008 were primarily the result of
the Company’s impairment analysis performed during the third quarter of 2008,
which determined that the carrying value of goodwill and trade names exceeded
the calculated fair value. The remaining charges in 2008 were the result of the
Company’s decision to exit certain businesses. See Note 3 – Goodwill and Trade Name
Impairments in the Notes to Consolidated Financial Statements for further
details on the 2008 charges, as well as the $66.4 million pretax impairment
charge taken on certain indefinite-lived intangible assets in 2007.
During
2008, the Boat segment continued its restructuring initiatives as described in
Note 2 – Restructuring
Activities in the Notes to Consolidated Financial Statements. Certain
significant actions taken at the Boat segment included the sale of certain
assets of its Baja boat business (Baja), the cessation of production of
Bluewater Marine group boat brands and the closure of several of its US Marine
production facilities, as described below.
During
the second quarter of 2008, the Company sold certain assets of 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 were considered to be core to the Company’s future
success. The total costs of the Baja transaction were approximately $15 million,
all of which were incurred during 2008. The majority of the $15 million charge
consisted of asset write-downs related to selected assets sold to Fountain and
the residual assets 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. The
total costs of the Bluewater cessation were approximately $24 million, all of
which were incurred during 2008. The $24 million charge primarily consisted of
asset write-downs related to the disposition of selected assets.
During
the second half of 2008, the Company closed several of its US Marine production
facilities, which produced Bayliner, Maxum and Trophy boats and Meridian yachts,
in an effort to continue to consolidate its manufacturing footprint. The Company
incurred approximately $26 million in costs related to these closures in 2008.
The majority of the costs represented asset write-downs related to the
disposition of selected assets and severance charges.
Boat
segment operating earnings in 2008 decreased from 2007, primarily due to
goodwill and trade name impairment charges, a decrease in sales volume and
increased restructuring, exit and impairment charges. Additionally, lower
fixed-cost absorption and increased inventory repurchase obligation accruals
contributed to the decline in operating earnings. This decrease was partially
offset by savings from successful cost-reduction initiatives and lower variable
compensation expense.
Capital
expenditures in 2008 were largely attributable to tooling costs for the
production of new models. Capital spending was lower during 2008 as a result of
discretionary capital spending constraints and the acquisition of a boat
manufacturing facility in 2007.
Fitness
Segment
The
following table sets forth Fitness segment results for the years ended December
31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2009
vs. 2008
|
|
|
2008
vs. 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
$ |
|
|
|
% |
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
496.8 |
|
|
$ |
639.5 |
|
|
$ |
653.7 |
|
|
$ |
(142.7 |
) |
|
|
(22.3)% |
|
|
$ |
(14.2 |
) |
|
|
(2.2)% |
|
Restructuring,
exit and impairment charges
|
|
$ |
2.1 |
|
|
$ |
3.3 |
|
|
$ |
— |
|
|
$ |
(1.2 |
) |
|
|
(36.4)% |
|
|
$ |
3.3 |
|
|
NM
|
|
Operating
earnings
|
|
$ |
33.5 |
|
|
$ |
52.2 |
|
|
$ |
59.7 |
|
|
$ |
(18.7 |
) |
|
|
(35.8)% |
|
|
$ |
(7.5 |
) |
|
|
(12.6)% |
|
Operating
margin
|
|
|
6.7 |
% |
|
|
8.2 |
% |
|
|
9.1 |
% |
|
|
|
|
|
(150)
bpts
|
|
|
|
|
|
|
(90)
bpts
|
|
Capital
expenditures
|
|
$ |
2.2 |
|
|
$ |
4.5 |
|
|
$ |
11.8 |
|
|
$ |
(2.3 |
) |
|
|
(51.1)% |
|
|
$ |
(7.3 |
) |
|
|
(61.9)% |
|
__________
bpts =
basis points
NM = not
meaningful
2009
vs. 2008
The
decrease in Fitness segment net sales was largely attributable to reduced volume
of worldwide commercial equipment sales, as gym and fitness club operators
delayed purchasing new equipment and deferred building new fitness centers as a
result of general economic weakness and reduced credit availability. Commercial
and consumer equipment sales in the United States and Canada declined
approximately 23 percent compared to 2008, while other international sales
decreased approximately 20 percent.
The
restructuring, exit and impairment charges recognized during 2009 are primarily
employee severance and other benefits charges. Restructuring, exit and
impairment charges recorded during 2008 included asset write-downs and employee
severance and other benefits charges. See Note 2 – Restructuring
Activities in the Notes to Consolidated Financial Statements for further
details.
The
Fitness segment operating earnings were negatively affected in 2009 by lower
worldwide sales volumes of both commercial equipment and consumer equipment as
well as the absence of variable compensation and defined contribution accruals
in 2008. Operating earnings were favorably impacted by the savings from
successful cost-reduction measures and reduced restructuring, exit and
impairment charges.
2009
capital expenditures were primarily related to profit-maintaining investments
and were lower compared to 2008 as a result of discretionary capital spending
constraints.
2008
vs. 2007
The
decrease in Fitness segment net sales was largely attributable to volume
declines in consumer equipment sales in the United States, as individuals
continued to defer purchasing discretionary items. Competitive pricing pressures
in global markets also contributed to the sales decline in 2008. These decreases
were partially offset by sales of the recently introduced Elevation line of new
cardiovascular products.
The
restructuring, exit and impairment charges recognized during 2008 were related
to write-downs of non-strategic assets and severance charges. See Note 2 – 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 in the United States, competitive pricing pressures,
increases in raw material and fuel costs and the implementation of various
restructuring activities. Operating earnings benefited from successful
cost-reduction initiatives and lower variable compensation expense.
2008
capital expenditures were primarily related to tooling for new products, but
were lower during 2008 as a result of the substantial completion of the
Elevation series of cardiovascular equipment in early 2008.
Bowling
& Billiards Segment
The
following table sets forth Bowling & Billiards segment results for the years
ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2009
vs. 2008
|
|
|
2008
vs. 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
$ |
|
|
|
% |
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
337.0 |
|
|
$ |
448.3 |
|
|
$ |
446.9 |
|
|
$ |
(111.3 |
) |
|
|
(24.8)% |
|
|
$ |
1.4 |
|
|
|
0.3% |
|
Goodwill
impairment charges
|
|
$ |
— |
|
|
$ |
14.4 |
|
|
$ |
— |
|
|
$ |
(14.4 |
) |
|
NM
|
|
|
$ |
14.4 |
|
|
NM
|
|
Trade
name impairment charges
|
|
$ |
— |
|
|
$ |
8.5 |
|
|
$ |
— |
|
|
$ |
(8.5 |
) |
|
NM
|
|
|
$ |
8.5 |
|
|
NM
|
|
Restructuring,
exit and impairment charges
|
|
$ |
5.3 |
|
|
$ |
21.7 |
|
|
$ |
2.8 |
|
|
$ |
(16.4 |
) |
|
|
(75.6)% |
|
|
$ |
18.9 |
|
|
NM
|
|
Operating
earnings (loss)
|
|
$ |
3.1 |
|
|
$ |
(12.7 |
) |
|
$ |
16.5 |
|
|
$ |
15.8 |
|
|
NM
|
|
|
$ |
(29.2 |
) |
|
NM
|
|
Operating
margin
|
|
|
0.9 |
% |
|
|
(2.8 |
)% |
|
|
3.7 |
% |
|
|
|
|
|
370
bpts
|
|
|
|
|
|
|
(650)
bpts
|
|
Capital
expenditures
|
|
$ |
3.3 |
|
|
$ |
26.9 |
|
|
$ |
41.6 |
|
|
$ |
(23.6 |
) |
|
|
(87.7)% |
|
|
$ |
(14.7 |
) |
|
|
(35.3)% |
|
__________
bpts =
basis points
NM = not
meaningful
2009
vs. 2008
Bowling
& Billiards segment net sales were down from prior year levels, primarily as
a result of lower sales from its Bowling Products business as new center
developments and upgrades to existing centers were delayed by proprietors due to
weak economic conditions and reduced access to capital. Bowling
retail sales were also reduced during the year due to the loss of sales from
divested centers and lower sales from existing centers. Equivalent
bowling center sales decreased in mid-single digit percentages. Net
sales were also reduced due to the sale of the Valley-Dynamo business in early
2009.
The
goodwill and trade name impairment charges in 2008 were primarily the result of
the Company’s impairment analysis performed during the third quarter of 2008.
The remaining charges related to the Valley-Dynamo business. There were no
comparable charges in 2009. See Note 3 – Goodwill and Trade Name
Impairments in the Notes to Consolidated Financial Statements for further
details.
During
2009, Brunswick continued its restructuring initiatives as described in Note 2 – Restructuring
Activities in the Notes to Consolidated Financial Statements. The Company
completed the sale of its Valley-Dynamo coin-operated commercial billiards
business in 2009. The Company incurred approximately $4 million and $19 million
of costs related to the sale of the Valley-Dynamo business in 2009 and 2008,
respectively. The majority of these charges related to asset write-downs. The
Company also incurred costs in 2008 related to the closing of its bowling pin
manufacturing facility in Antigo, Wisconsin.
The
increase in 2009 operating earnings (loss) was the result of the absence of
$14.4 million and $8.5 million of goodwill and trade name impairment charges,
respectively, reduced restructuring, exit and impairment charges, as well as
savings from successful cost-reduction initiatives. These factors were partially
offset by the effect of lower sales, higher pension expense and the absence of
variable compensation and defined contribution accruals in 2008.
Decreased
capital expenditures in 2009 were driven primarily by reduced spending for new
Brunswick Zone XL centers and constraints on capital spending for existing
centers.
2008
vs. 2007
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. Mostly offsetting this increase was a
decline in equivalent bowling retail entertainment center sales as well as
volume declines in consumer and commercial billiards tables.
The
goodwill and trade name impairment charges in 2008 were primarily the result of
the Company’s impairment analysis performed during the third quarter of 2008.
The remaining charges related to the Valley-Dynamo business. See Note 3 – Goodwill and Trade Name
Impairments in the Notes to Consolidated Financial Statements for further
details.
During
2008, Brunswick continued its restructuring initiatives as described in Note 2 – Restructuring
Activities in the Notes to Consolidated Financial Statements. The Company
evaluated several strategic options, including the potential sale of its
Valley-Dynamo coin-operated commercial billiards business. The Company incurred
approximately $19 million of costs in 2008 related to the potential sale, which
primarily related to asset write-downs. The Company also incurred costs in 2008
related to the closing of its bowling pin manufacturing facility in Antigo,
Wisconsin.
The
decrease in 2008 operating earnings when compared with 2007 was attributable to
goodwill and trade name impairment charges, restructuring, exit and impairment
charges as well as the impact of lower sales of consumer and commercial
billiards tables and lower non-Brunswick Zone XL bowling retail entertainment
sales. Partially offsetting this decrease was the impact of increased capital
equipment sales, improved efficiency at the Reynosa, Mexico bowling ball
manufacturing facility, savings from successful cost-reduction initiatives and
the full year impact of recently opened Brunswick Zone XL centers.
Decreased
capital expenditures in 2008 were driven primarily by reduced spending for
Brunswick Zone XL centers, as the Company had more centers under construction
during 2007 compared with 2008.
Corporate
The
following table sets forth charges for restructuring activities undertaken at
Corporate for the years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2009
vs. 2008
|
|
|
2008
vs. 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
$ |
|
|
|
% |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring,
exit and impairment charges
|
|
$ |
9.0 |
|
|
$ |
21.2 |
|
|
$ |
0.1 |
|
|
$ |
(12.2 |
) |
|
|
(57.5 |
)% |
|
$ |
21.1 |
|
|
NM
|
|
__________
NM = not
meaningful
The
restructuring, exit and impairment charges recognized during 2009 and 2008 were
related to write-downs and disposals of non-strategic assets and severance
charges. See Note 2 –
Restructuring Activities in the Notes to Consolidated Financial
Statements for further details.
Cash
Flow, Liquidity and Capital Resources
The
following table sets forth an analysis of free cash flow for the years ended
December 31, 2009, 2008 and 2007:
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used for) operating activities of continuing
operations
|
|
$ |
125.5 |
|
|
$ |
(12.1 |
) |
|
$ |
344.1 |
|
Net
cash provided by (used for):
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(33.3 |
) |
|
|
(102.0 |
) |
|
|
(207.7 |
) |
Proceeds
from investment sales
|
|
|
— |
|
|
|
45.5 |
|
|
|
— |
|
Proceeds
from the sale of property, plant and equipment
|
|
|
13.0 |
|
|
|
28.3 |
|
|
|
10.1 |
|
Other,
net
|
|
|
1.8 |
|
|
|
17.2 |
|
|
|
25.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free
cash flow from continuing operations (A)
|
|
$ |
107.0 |
|
|
$ |
(23.1 |
) |
|
$ |
172.1 |
|
(A)
|
The
Company defines Free cash flow from continuing operations as cash flow
from operating and investing activities of continuing operations
(excluding cash used for acquisitions and investments) and excluding
financing activities. Free cash flow from continuing operations is not
intended as an alternative measure of cash flow from operations, as
determined in accordance with generally accepted accounting principles
(GAAP) in the United States. The Company uses this financial measure, both
in presenting its results to shareholders and the investment community and
in its internal evaluation and management of its businesses. Management
believes that this financial measure and the information it provides are
useful to investors because it permits investors to view the Company’s
performance using the same tool that management uses to gauge progress in
achieving its goals. Management believes that the non-GAAP financial
measure “Free cash flow from continuing operations” is also useful to
investors because it is an indication of cash flow that may be available
to fund investments in future growth
initiatives.
|
Brunswick’s
major sources of funds for investments, acquisitions and dividend payments are
cash generated from operating activities, available cash balances and selected
borrowings. The Company evaluates potential acquisitions, divestitures and joint
ventures in the ordinary course of business.
2009
Cash Flow
In 2009,
net cash provided by operating activities of continuing operations totaled
$125.5 million. The most significant source of cash provided by
operating activities was from a reduction in working capital of $400.8
million. Working capital is defined as non-cash current assets less
non-debt current liabilities. Inventory balances changed favorably by
$325.1 million, primarily due to decreased production and procurement across the
Company, especially in the Marine Engine and Boat segments, which produced less
inventory than was sold at wholesale. Additionally, favorable changes
in accounts receivable of $159.9 million resulted from lower sales and continued
collection activities of outstanding receivables. Accrued expenses
and accounts payable were an unfavorable change to working capital of $56.8
million and $39.9 million, respectively, primarily as a result of the reduced
level of the Company’s business activities in 2009 compared with
2008. The Company also received net tax refunds of $90.6 million
during the year, primarily related to its 2008 taxable
losses. Partially offsetting these factors were the Company’s net
loss from operations adjusted for non-cash charges and the Company’s repurchase
of $84.2 million of accounts receivable from Brunswick Acceptance Company, LLC
in May 2009, as part of its new asset-based lending facility (Mercury Receivable
ABL Facility). See Note 9 – Financial Services
and Note 14 – Debt in
the Notes to Consolidated Financial Statements for more details on the Company’s
sale of accounts receivable program and Mercury Receivables ABL Facility,
respectively.
In 2009,
net cash used for investing activities totaled $12.3 million, which included
capital expenditures of $33.3 million. The Company has significantly
reduced its capital spending since 2007 by focusing on non-discretionary,
profit-maintaining investments and investments required for the introduction of
new products. Cash provided from investments primarily represented a return on
the Company’s investment in its Brunswick Acceptance Company, LLC joint
venture. The Company also received $13.0 million of proceeds during
the year from the sale of property, plant and equipment in the normal course of
business.
Cash
flows from financing activities provided net cash of $95.9 million in
2009. The cash inflow was primarily the result of issuing $350.0
million of notes due in 2016 to pay down substantially all of the Company’s
notes due in 2011 and a portion of notes due in 2013. The Company
received net proceeds of $353.7 million during 2009, primarily from the issuance
of the 2016 notes and another $20.0 million from the Fond du Lac County Economic
Development Council in the form of partially forgivable debt associated with the
Company’s efforts to consolidate its Marine Engine segment’s engine production
facilities in its Fond du Lac, Wisconsin plant. As discussed above, the Company
made payments on it long-term debt in 2009 of $247.9 million, primarily related
to the retirement of 2011 and 2013 notes, and also paid a premium of $13.2
million to repurchase a portion of the Company’s outstanding 2013 notes. See
Note 14 – Debt in the
Notes to Consolidated Financial Statements for further
discussion.
2008
Cash Flow
In 2008,
net cash used for operating activities of continuing operations totaled $12.1
million. The primary driver of the cash used for operating activities
was from an increase in working capital of $132.3 million. The 2008
increase in working capital was primarily the result of reductions in the
Company’s accounts payable and accrued expenses relating to the reduced level of
production activity, largely in the Marine Engine and Boat segments, and lower
accrued discounts. These declines were partially offset by lower inventories and
lower trade receivables, which were driven by reduced demand for the Company’s
marine products. Partially offsetting the changes in working
capital were the Company’s operating results, which provided cash during
2008 after adjusting the net loss on continuing operations for non-cash charges
such as goodwill, trade name and other long-lived asset impairments, charges
associated with recording additional tax valuation allowances and adding back
depreciation and amortization.
Cash
provided by investing activities totaled $9.0 million in 2008. The
Company received $45.5 million in proceeds from the sale of its interest in its
bowling joint venture in Japan and its investment in a foundry located in
Mexico; $20.0 million primarily from reduced equity requirements associated with
the Company’s investment in its Brunswick Acceptance Company, LLC joint venture;
$17.2 million of proceeds primarily from the sale of MotoTron and Albemarle; and
$28.3 million from the sale of property, plant and equipment in the normal
course of business. Offsetting these proceeds was $102.0 million in
capital expenditures. The Company significantly reduced its capital
spending from 2007 levels by limiting its discretionary purchases and focusing
on profit-maintaining investments and investments required for the introduction
of new products.
The
Company used $10.8 million of net cash in its financing activities during 2008,
reflecting net issuances of short-term debt of $7.4 million and a $4.4 million
dividend payment. The Company also issued $250 million of notes due
in 2013 to retire the $250 million of notes due in 2009.
2007
Cash Flow
In 2007,
net cash provided by operating activities of continuing operations totaled
$344.1 million. The primary driver was cash provided by the Company’s
operating results adjusted for non-cash charges. Changes in working
capital amounted to a use of cash of $7.2 million during the
year. Cash used in investing activities during 2007 was $207.7
million and was primarily related to capital expenditures.
The
Company used $167.8 million of net cash for financing activities during
2007. The primary uses of cash included the Company repurchasing 4.1
million shares for $125.8 million under its share repurchase program, and the
payment of a $52.6 million dividend in 2007. Partially offsetting
this was the receipt of $10.8 million from stock options exercised during the
year.
Liquidity
and Capital Resources
The
following table sets forth an analysis of net debt for the years ended December
31, 2009 and 2008:
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Short-term
debt, including current maturities of long-term debt
|
|
$ |
11.5 |
|
|
$ |
3.2 |
|
Long-term
debt
|
|
|
839.4 |
|
|
|
728.5 |
|
Total
debt
|
|
|
850.9 |
|
|
|
731.7 |
|
Less:
Cash and cash equivalents
|
|
|
526.6 |
|
|
|
317.5 |
|
|
|
|
|
|
|
|
|
|
Net
debt (A)
|
|
$ |
324.3 |
|
|
$ |
414.2 |
|
(A)
|
The
Company defines Net debt as Short-term and long-term Debt, less Cash
and cash equivalents, as presented in the Consolidated Balance Sheets. Net
debt is not intended as an alternative measure to debt, as determined in
accordance with GAAP in the United States. The Company uses this financial
measure, both in presenting its results to shareholders and the investment
community and in its internal evaluation and management of its businesses.
Management believes that this financial measure and the information it
provides are useful to investors because it permits investors to view the
Company’s performance using the same tool that management uses to gauge
progress in achieving its goals. Management believes that the non-GAAP
financial measure “Net debt” is also useful to investors because it is an
indication of the Company’s ability to repay its outstanding debt using
its current Cash and cash equivalents.
|
The
following table sets forth an analysis of total liquidity for the years ended
December 31, 2009 and 2008:
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
526.6 |
|
|
$ |
317.5 |
|
Amounts
available under its asset-based lending facilities (B)
|
|
|
88.5 |
|
|
|
201.1 |
|
|
|
|
|
|
|
|
|
|
Total
liquidity (A)
|
|
$ |
615.1 |
|
|
$ |
518.6 |
|
(A)
|
The
Company defines Total liquidity as Cash and cash equivalents as presented
in the Consolidated Balance Sheets, plus amounts available under its
asset-based lending facilities. Total liquidity is not intended as an
alternative measure to Cash and cash equivalents, as determined in
accordance with GAAP in the United States. The Company uses this financial
measure, both in presenting its results to shareholders and the investment
community and in its internal evaluation and management of its businesses.
Management believes that this financial measure and the information it
provides are useful to investors because it permits investors to view the
Company’s performance using the same tool that management uses to gauge
progress in achieving its goals. Management believes that the non-GAAP
financial measure “Total liquidity” is also useful to investors because it
is an indication of the Company’s available highly liquid assets and
immediate sources of financing.
|
(B)
|
Represents
the sum of (1) $106.2 million of unused brrowing capacity underthe
Company's Revolving Credit Facility discussed below, reduced by the $60.0
million minimum availability requirement and (2) the available borrowing
capacity of $42.2 million under the Company's Mercury Receivables ABL
Facility as discussed below.
|
Cash and
cash equivalents totaled $526.6 million as of December 31, 2009, an increase of
$209.1 million from $317.5 million as of December 31, 2008. Total debt as of
December 31, 2009 and December 31, 2008, was $850.9 million and $731.7 million,
respectively. As a result, the Company’s Net debt was reduced $89.9 million in
2009 to $324.3 million from $414.2 million in 2008. Brunswick’s
debt-to-capitalization ratio increased to 80.2 percent as of December 31, 2009,
from 50.1 percent as of December 31, 2008, as a result of the current year
losses from continuing operations on Shareholders’ equity and increased debt
levels.
In May
2009, the Company entered into the Mercury Receivables ABL Facility with GE
Commercial Distribution Finance Corporation (GECDF) to replace the Mercury
Marine accounts receivable sale program the Company had with Brunswick
Acceptance Company, LLC (BAC) as described in Note 9 – Financial Services.
The Mercury Receivables ABL Facility agreement provides for a base level of
borrowings of $100.0 million that are secured by the domestic accounts
receivable of Mercury Marine, a division of the Company, at a borrowing rate,
set at the beginning of each month, equal to the one-month LIBOR rate plus 4.25
percent, provided, however, that the one-month LIBOR rate shall not be less than
1.0 percent. Borrowings under the Mercury Receivables ABL Facility can be
adjusted to $120.0 million to accommodate seasonal increases in accounts
receivable from May to August. Borrowing availability under this facility is
subject to a borrowing base consisting of Mercury Marine domestic accounts
receivable, adjusted for eligibility requirements, with an 85 percent advance
rate. The Company was also able to borrow an additional $21.5 million in excess
of the borrowing base according to the over-advance feature through November
2009, which is now declining ratably each month through November 2010.
Borrowings under the Mercury Receivables ABL Facility are further limited to the
lesser of the total amount available under the Mercury Receivables ABL Facility
or the Mercury Marine receivables, excluding certain amounts, pledged as
collateral against the Mercury Receivables ABL Facility. The Mercury Receivables
ABL Facility also includes a financial covenant, which corresponds to the
minimum fixed-charge coverage ratio covenant included in the Company’s revolving
credit facility and the BAC joint venture agreement described in Note 9 – Financial Services.
The Mercury Receivables ABL Facility’s term will expire concurrently with the
termination of BAC, by the Company with 90 days notice or by GECDF upon the
Company’s default under the Mercury Receivables ABL Facility, including failure
to comply with the facility’s financial covenant. Initial borrowings under the
Mercury Receivables ABL Facility were $81.1 million. The Company has since
reduced the borrowings outstanding and ended 2009 with no borrowings under this
facility. The amount of borrowing capacity available under this facility at
December 31, 2009 was $42.2 million.
The
Company has a $400.0 million secured, asset-based revolving credit facility
(Revolving Credit Facility) in place with a group of banks through May 2012, as
described in Note 14 –
Debt in the Notes to Consolidated Financial Statements. There were no
loan borrowings under the Revolving Credit Facility in 2009 or 2008. The Company
has the ability to issue up to $150.0 million in letters of credit under the
Revolving Credit Facility. The Company pays a facility fee of 75 to 100 basis
points per annum, which is based on the daily average utilization of the
Revolving Credit Facility.
The
Company may borrow amounts under the Revolving Credit Facility equal to the
value of the borrowing base, which consists of certain accounts receivable,
inventory and machinery and equipment of certain of its domestic subsidiaries.
The borrowing base had a value of $191.3 million, excluding cash, as of
December 31, 2009. The Company had no borrowings outstanding under this facility
at December 31, 2009. Letters of credit outstanding under the facility totaled
$85.0 million as of December 31, 2009, resulting in unused borrowing capacity of
$106.3 million. However, the Company’s borrowing capacity is also affected by
the facility’s minimum fixed-charge coverage ratio covenant. This covenant
requires that the Company meet a
minimum fixed-charge coverage ratio test only if unused borrowing capacity under
the facility falls below $60.0 million. If unused borrowing capacity under the
facility exceeds $60.0 million, the Company need not meet the minimum
fixed-charge coverage ratio covenant. Due to current operating performance, the
Company’s fixed-charge coverage ratio was below the minimum requirement at the
end of 2009. However, because the Company’s unused borrowing capacity under the
Revolving Credit Facility exceeded $60.0 million at the end of the year, the
Company is in compliance with the covenant. Taking into account the minimum
availability requirement, the Company’s unused borrowing capacity is effectively
reduced by $60.0 million to $46.3 million in order to maintain compliance with
the covenant. The Company expects unused borrowing capacity under the
facility to continue to exceed $60.0 million (and therefore to be in compliance
with the minimum fixed-charge coverage ratio covenant) during 2010.
Management
believes that the Company has adequate sources of liquidity to meet the
Company’s short-term and long-term needs. Through actions taken in
2009, the Company has reduced its near-term debt obligations, including the
repayment of 99.6 percent of its notes due in 2011 and the reduction of the
amounts outstanding on its 2013 notes to $153.4 million, representing the only
significant long-term debt maturity from 2010 to 2015. Management expects that
the Company’s near-term operating cash requirements, which have declined due to
lower spending, will be met out of existing cash balances and free cash flow.
Specifically, the Company is anticipating significantly reduced losses from
continuing operations and restructuring activities in 2010 from increasing sales
as the year progresses and plans on maintaining flat year-over-year working
capital levels by increasing inventory turns, in line with historical levels,
and reducing days sales outstanding in its accounts receivable. The Company also
expects to receive a tax refund of $109.5 million in the first half of 2010
related to its 2009 federal domestic tax losses. The Company also plans to
increase capital expenditures in 2010 to approximately $60 million to develop
new products in anticipation of the slowly improving economy and to fund
projects to reduce operating costs. In 2010, the Company anticipates
receiving approximately $35 million of additional funding, primarily from
government programs, in connection with its plant consolidation activities in
Fond du Lac, Wisconsin. Based on the factors described above, the
Company believes it will end 2010 with net debt levels comparable to the end of
2009.
Continued
weakness in the marine marketplace may jeopardize the financial stability of the
Company’s dealers. Specifically, dealer inventory levels may increase to levels
higher than desired, inventory may be aged beyond preferred levels and dealers
may experience reduced cash flow. These factors may impair a dealer’s ability to
meet payment obligations to the Company or to third-party financing sources and
to obtain financing to purchase new product. 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. See Note 11 –
Commitments and Contingencies in the Notes to Consolidated Financial
Statements for further details.
The
aggregate funded status of the Company’s qualified pension plans, measured as a
percentage of the projected benefit obligation, was 62.0 percent in 2009
compared to 63.2 percent in 2008. As of December 31, 2009, the Company’s
qualified pension plans were underfunded on an aggregate projected benefit
obligation basis by $418.7 million. See Note 15 – Postretirement Benefits
in the Notes to Consolidated Financial Statements for more
details.
The
Company contributed $10.0 million to its qualified pension plans in 2009. No
contributions were required to be made to the Company’s qualified pension plans
in 2008. The Company also contributed $11.6 million and $2.6 million to fund
benefit payments in its nonqualified pension plan in 2009 and 2008,
respectively. The 2009 contribution included an $8.5 million lump sum
distribution to a former executive for benefits earned in the nonqualified
pension plan. The Company anticipates contributing approximately $22 million to
fund the qualified pension plans and approximately $3 million to cover benefit
payments in the unfunded, nonqualified pension plans in 2010. Company
contributions are subject to change based on market conditions, pension funding
regulations and Company discretion.
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 purchased and serviced a portion of Mercury Marine’s domestic
accounts receivable relating to its boat builder and dealer customers. In 2009,
this program was terminated and replaced with a new facility discussed below and
in Note 14 –
Debt.
The term
of the joint venture extends through June 30, 2014. The joint venture agreement
contains provisions allowing for the renewal or purchase at the end of this
term. Alternatively, either partner may terminate the agreement at the end of
its term. Concurrent with finalizing the amended and restated asset-based
revolving credit facility (Revolving Credit Facility) in the fourth quarter of
2008, the Company and CDFV amended the joint venture agreement to conform the
financial covenant contained in that agreement to the minimum fixed-charge
coverage ratio covenant contained in the Revolving Credit Facility. Compliance
with the fixed-charge coverage ratio covenant under the joint venture agreement
is only required when the Company’s available, unused borrowing capacity under
the Revolving Credit Facility is below $60.0 million. As available unused
borrowing capacity under the Revolving Credit Facility was above $60.0 million
at the end of 2009, the Company was not required to meet the minimum
fixed-charge coverage ratio covenant.
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 ASC 860
“Transfers and Servicing,” 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 secu