UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
Form
10-K
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[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2007
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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
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_______________
Brunswick
Corporation
(Exact
name of registrant as specified in its charter)
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Delaware
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36-0848180
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1
N. Field Court, Lake Forest, Illinois
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60045-4811
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(Address
of principal executive offices)
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(Zip
Code)
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(847)
735-4700
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(Registrant’s
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
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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
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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 [X] No
[ ]
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 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. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer [X] Accelerated filer [ ] Non-accelerated
filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
As of
June 30, 2007, the aggregate market value of the voting stock of the registrant
held by non-affiliates was $2,891,550,032. 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 15, 2008 was 87,567,242.
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 7,
2008.
BRUNSWICK
CORPORATION
INDEX
TO ANNUAL REPORT ON FORM 10-K
December
31, 2007
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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11
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Item
2.
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Properties
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11
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Item
3.
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Legal
Proceedings
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12
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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14
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PART
II
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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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15
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Item
6.
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Selected
Financial Data
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17
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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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19
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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40
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Item
8.
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Financial
Statements and Supplementary Data
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41
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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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41
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Item
9A.
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Controls
and Procedures
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41
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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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42
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Item
11.
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Executive
Compensation
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42
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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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42
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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42
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Item
14.
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Principal
Accounting Fees and Services
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42
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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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42
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PART
I
Item
1. Business
Brunswick
Corporation (Brunswick or the Company) is a leading global manufacturer and
marketer of recreation products including boats, marine engines, fitness
equipment and bowling and billiards equipment. Brunswick’s boat
offerings include fiberglass pleasure boats; luxury sportfishing convertibles
and motoryachts; high-performance boats; offshore fishing boats; aluminum
fishing, deck and pontoon boats; rigid inflatable boats; and marine parts and
accessories. The Company’s engine products include outboard,
sterndrive and inboard engines; trolling motors; propellers; marine dealer
management systems; and engine control systems. Brunswick’s fitness
products include both cardiovascular and strength training
equipment. Brunswick’s bowling offerings include products such as
capital equipment, aftermarket and consumer products; and billiards offerings
include billiards tables and accessories, Air Hockey tables and
foosball tables. The Company also owns and operates Brunswick bowling centers in
the United States and other countries, and retail billiards stores in the United
States.
Brunswick’s
strategy is to introduce the highest quality product 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, to continually improve productivity and efficiency; to
manufacture and distribute products globally with local and regional styling;
and to attract and retain the best and the brightest people. In addition, the
Company pursues growth from expansion of existing businesses and acquisitions.
The Company’s objective is to enhance shareholder value by achieving returns on
investments that exceed its cost of capital.
Refer to
Note 5 – Segment Information
and Note 2 –
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 2007, 2006 and 2005.
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, high-performance boats, offshore fishing boats, aluminum fishing,
pontoon and deck boats; manufactures and distributes marine parts and
accessories; and offers marine dealer management systems. The Company believes
that its Boat Group, which had net sales of $2,690.9 million during 2007, 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, expands the Company’s involvement in 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: Albemarle, Cabo and Hatteras
luxury sportfishing convertibles and motoryachts; Sea Ray and Sealine yachts,
sport yachts, cruisers and runabouts; Bayliner and Maxum cruisers and runabouts;
Meridian motoryachts; Boston Whaler, Sea Pro, Sea Boss, Palmetto, Triton and
Trophy fiberglass fishing boats; Baja high-performance boats; Crestliner,
Harris, Lowe, Lund, Princecraft and Triton aluminum fishing, pontoon and deck
boats; and Kayot deck and runabout boats. The Boat Group also
includes Integrated Dealer Systems, a leading developer of management systems
for dealers of marine products and recreational vehicles; a commercial and
governmental sales unit that sells products to the United States Government,
state, local and foreign governments, and commercial customers; and several
brands comprising its boat parts and accessories business, including Attwood and
Land ‘N’ Sea. 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 Cummins MerCruiser Diesel Marine LLC (CMD), a joint venture of
Brunswick’s Mercury Marine division with Cummins Marine, a division of Cummins
Inc.
The Boat
Group has manufacturing facilities in California, Florida, Indiana, Maryland,
Michigan, Minnesota, Missouri, North Carolina, Ohio, Oregon, South Carolina,
Tennessee, Washington, Canada, China, Mexico and the United Kingdom. The Boat
Group also utilizes contract manufacturing facilities in Poland. In
July 2007, Brunswick announced that it would expand its manufacturing
capabilities with the purchase of a boat manufacturing facility in Navassa,
North Carolina. The purchase offers Brunswick additional capacity to
build larger boats as well as the ability to manufacture several brands of
cruisers, resulting in increased production flexibility, productivity and
efficiency. Due to this acquisition, the Boat Group was also able to
close down the Salisbury, Maryland, plant and transfer cruiser production to the
new North Carolina facility. In September 2007, the Boat Group
announced the closure of its aluminum boat manufacturing facility in Aberdeen,
Mississippi, and shifted production to other aluminum boat manufacturing
facilities as part of an ongoing strategy to integrate past acquisitions and
achieve improved operating efficiencies. Brunswick also expects to
mothball the facility in Swansboro, North Carolina, in the summer of
2008.
The Boat
Group’s products are sold to end users through a global network of approximately
2,300 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 21 percent of Boat Group
sales in 2007. Domestic retail demand for pleasure boats is seasonal, with sales
generally highest in the second calendar quarter of the year.
Marine
Engine Segment
The
Marine Engine segment, which had net sales of $2,357.5 million in 2007, consists
of the Mercury Marine Group. 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, outboard engines and water jet propulsion systems under the
Mercury, Mercury MerCruiser, Mariner, Mercury Racing, Mercury SportJet and
Mercury Jet Drive brand names. In addition, Mercury Marine
manufactures and markets engine parts and Marine accessories under the
Quicksilver, Mercury Precision Parts, Mercury Propellers 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 and inboard engines,
outboard engines and water jet propulsion systems are sold either to independent
boat builders; local, state or foreign governments; or to the Boat
Group. In addition, Mercury Marine’s outboard engines and parts and
accessories are sold to end-users through a global network of approximately
7,000 marine dealers and distributors, specialty marine retailers and marine
service centers. Mercury Marine, through CMD, supplies integrated diesel
propulsion systems to the worldwide recreational and commercial marine markets,
including the Boat Group. Mercury Marine’s operations also include
MotoTron, a designer and supplier of sophisticated engine control and vehicle
networking systems.
Mercury
Marine manufactures two-stroke OptiMax outboard engines ranging from 75 to 350
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 in compliance with U.S.
Environmental Protection Agency (EPA) requirements, which required a 75 percent
reduction in outboard engine emissions over a nine-year period, ending with the
2006 model year. Mercury Marine’s four-stroke outboard engines
include Verado, a series of supercharged outboards ranging from 135 to 350
horsepower, and Mercury’s naturally aspirated four-stroke outboards, which are
based on Verado technology, ranging from 75 to 115 horsepower. In
addition, Brunswick’s sterndrive and inboard engines are now available with
catalytic converters that comply with environmental regulations that the
State of California adopted effective on January 1, 2008, and the Company
expects that the EPA will enforce in the remaining states by 2010.
To
promote advanced propulsion systems with improved handling, performance and
efficiency, Mercury Marine, both directly and through its joint venture, CMD,
has introduced and is continuing to develop engines and propulsion systems
under the brand names of Zeus, Axius and MerCruiser 360.
Mercury
Marine’s sterndrive and outboard engines are produced primarily in Oklahoma and
Wisconsin, respectively. 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. Some engine components are sourced from Asian
suppliers. Mercury Marine also manufactures engine component parts at
plants in Florida and Mexico. Diesel marine propulsion systems are manufactured
in South Carolina by CMD. Further, Mercury Marine operates a
remanufacturing business for engines and service parts in
Wisconsin.
In
addition to its marine engine operations, Mercury Marine serves markets outside
the United States with a wide range of aluminum, fiberglass and inflatable boats
produced either by, or for, Mercury in Australia, China, New Zealand, Poland,
Portugal, Russia and Sweden. These boats, which are marketed under the brand
names Arvor, Bermuda, Guernsey, Legend, Lodestar, Mercury, Örnvik, Passport,
Protector, Quicksilver, Savage, 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 has equity ownership
interests in companies that manufacture boats under the brand names Aquador,
Bella and Flipper in Finland, and Askeladden in Norway. From July
2003 until August 2007, the Company had a 49 percent equity interest in Rayglass
Sales & Marketing Limited (Rayglass). In August 2007, the Company
exercised its option to purchase the remaining 51 percent interest in Rayglass
for $4.6 million, expanding the global manufacturing footprint of the Company’s
marine operations and developing additional international sales
opportunities. Mercury Marine also manufactures propellers and
underwater sterngear for inboard-powered vessels, under the Teignbridge brand,
in the United Kingdom.
Domestic
retail demand for the Marine Engine segment’s products 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, 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, Hammer Strength and ParaBody brands.
The
Company believes that its Fitness segment, which had net sales of $653.7 million
during 2007, 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 to private health clubs and 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’ website.
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. Domestic
retail demand for Life Fitness’ products is seasonal, with sales generally
highest in the first and fourth calendar quarters of the year.
During
2007, Life Fitness launched its Elevation series of commercial cardiovascular
training equipment in the United States. These new Elevation series
treadmills and elliptical cross-trainers deliver state of the art styling and
feature seamless iPod integration through their consoles. In
addition, Life Fitness introduced a number of other new fitness products during
the year, including consumer elliptical cross-trainers, treadmills and home gym
products, as well as additional commercial selectorized and core
strength-training equipment.
Bowling
& Billiards Segment
The
Bowling & Billiards segment is comprised of the Brunswick Bowling &
Billiards division (BB&B), which had net sales of $446.9 million during
2007. BB&B believes it is the leading full-line designer, manufacturer and
marketer of bowling products, including bowling balls and bowling pins,
aftermarket products and parts, and capital equipment, which includes bowling
lanes, automatic pinsetters, ball returns, furniture units, and scoring and
center management systems. Through licensing arrangements, BB&B also offers
an array of bowling consumer products, including bowling shoes, bags and
accessories. BB&B also designs and markets a full line of
high-quality consumer and commercial billiards tables, Air Hockey table games,
foosball tables and related accessories.
BB&B
operates 108 bowling centers in the United States, Canada and Europe. Since
1960, BB&B has been a partner in a joint venture in which BB&B operates
14 additional centers in Japan, however, BB&B expects to exit this joint
venture in the first quarter of 2008. BB&B bowling centers offer bowling
and, depending on size and location, the following activities and facilities:
billiards, video, redemption and other games of skill, laser tag, pro shops,
meeting and party rooms, restaurants and cocktail lounges. Substantially all of
the North American and European centers offer Cosmic Bowling, an enhanced form
of bowling with integrated sound systems and glow-in-the-dark effects. To date,
46 of BB&B’s centers have been converted into Brunswick Zones, which are
modernized bowling centers that offer an array of family-oriented entertainment
activities. The entertainment offerings available at Brunswick Zones are
designed to appeal to a broad audience, including families and other
recreational bowlers, as well as traditional league bowlers. BB&B has
further enhanced the Brunswick Zone concept with expanded Brunswick Zone family
entertainment centers, branded Brunswick Zone XL, which are approximately 50
percent larger than typical Brunswick Zones and feature multiple-venue
entertainment offerings such as laser tag games, expanded game rooms and are
ideal for customer events such as child and adult birthday parties, team
building events and corporate parties. BB&B operates eight
Brunswick Zone XL centers, located in the Chicago, Denver, Minneapolis,
Philadelphia, Phoenix and St. Louis markets. BB&B intends to
accelerate the pace of Brunswick Zone XL openings.
BB&B’s
billiards business was established in 1845 and is Brunswick’s oldest enterprise.
BB&B designs and markets billiards tables, balls and cues, as well as
billiards furniture and related accessories, under the Brunswick and Contender
brands. These products are sold worldwide in both commercial and
consumer billiards markets. BB&B also operates Valley-Dynamo, a leading
manufacturer of commercial and consumer billiards and coin-operated pool tables,
Air Hockey table games and foosball tables. The Company believes it has the
largest dollar sales volume of billiards tables in the world. In
2003, BB&B opened Brunswick Home & Billiard, its first retail store, in
a northern suburb of Chicago, followed in 2005 with three new stores in the
Boston and Denver markets. These stores feature billiards tables and
other products for the home.
BB&B’s
primary manufacturing and distribution facilities are located in Mexico,
Michigan, Texas and Hungary. In 2006, Brunswick moved its bowling
ball manufacturing operations from Muskegon, Michigan, to Reynosa, Mexico, and
in early 2007 Brunswick transitioned its Valley-Dynamo manufacturing operations
from Richland Hills, Texas, to a facility in Reynosa,
Mexico. Additionally, in January 2008, Brunswick closed its bowling
pin production plant in Antigo, Wisconsin, and going forward will source bowling
pins from a third party.
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
products are distributed worldwide from regional warehouses, sales offices and
factory stocks of merchandise. Domestic retail demand for BB&B’s products is
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 was established in 2002
and consisted of: (i) marine electronics sold under the Northstar,
Navman and MX Marine brands; (ii) portable navigation devices (PND) for
automotive markets, which are based on global positioning systems technology;
and (iii) a wireless fleet tracking business. In accordance with the
criteria of Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” 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 has now completed the divestiture of the BNT discontinued operations.
With the net asset impairment taken prior to the disposition of the BNT
businesses in the fourth quarter of 2006 of $85.6 million, after-tax, and the
subsequent 2007 gains of $29.8 million, after-tax, on the BNT business sales,
the net impact to the Company of these dispositions was a net loss of $55.8
million, after-tax.
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. Under the terms of the joint venture agreement, BAC
provides secured wholesale floor-plan financing to the Company’s boat and engine
dealers. BAC also purchases and services a portion of Mercury Marine’s domestic
accounts receivable relating to its boat builder and dealer
customers. Additionally, Brunswick’s marine dealers can offer
extended product warranties to retail customers through Brunswick Product
Protection Corporation. In October 2006, the Company acquired Blue
Water Dealer Services, Inc. and its affiliates, a provider of retail financial
services to marine dealers, to allow Brunswick to offer a more complete line of
financial services to its boat and marine engine dealers and their
customers.
Refer to
Note 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 marine engine, fitness and bowling and
billiards products sales. Brunswick has approximately 7,000 Dealers serving its
business segments worldwide. Brunswick’s marine Dealers typically carry boats,
engines and related parts and accessories.
Brunswick’s
Dealers are independent companies or proprietors that range in size from small,
family-owned businesses to large, publicly traded corporations 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.
Brunswick
owns Land ‘N’ Sea Corporation, Benrock Inc., Kellogg Marine Inc. and Diversified
Marine Products L.P., the primary parts and accessories distribution platforms
for the Boat Group. These companies are the leading distributors of marine parts
and accessories throughout the North American marine industry with 15
distribution warehouses throughout the United States and Canada offering
same-day or next-day service to a broad array of marine service
facilities.
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 and provide
stable channels for Brunswick’s products. In addition to the financial services
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 of 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 seeks opportunities to sustain and improve
its various distribution channels. 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 $2,016.4
million (36 percent of net sales) and $1,802.4 million (32 percent of net sales)
in 2007 and 2006, 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. Future strengthening or weakening of the U.S.
dollar can affect 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)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$ |
1,038.9 |
|
$ |
925.1 |
|
$ |
926.4 |
|
|
Canada
|
|
|
344.6 |
|
|
328.6 |
|
|
311.7 |
|
|
Pacific
Rim
|
|
|
338.2 |
|
|
303.2 |
|
|
315.6 |
|
|
Latin
America
|
|
|
196.6 |
|
|
158.3 |
|
|
133.7 |
|
|
Africa
& Middle East
|
|
|
98.1 |
|
|
87.2 |
|
|
72.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,016.4 |
|
$ |
1,802.4 |
|
$ |
1,760.3 |
|
Marine
Engine segment sales represented approximately 46 percent of Brunswick’s
non-U.S. sales in 2007. The segment’s primary operations include the
following:
|
|
•
|
A
propeller and underwater sterngear manufacturing plant in the United
Kingdom;
|
|
|
•
|
Sales
offices and distribution centers in Australia, Belgium, Brazil, Canada,
China, Japan, Malaysia, Mexico, New Zealand, Singapore and the United Arab
Emirates;
|
|
|
•
|
Sales
offices in Denmark, Finland, France, Germany, Italy, the Netherlands,
Norway, Sweden, Switzerland and the United
Kingdom;
|
|
|
•
|
Boat
manufacturing plants in Australia, China, New Zealand, Portugal and
Sweden;
|
|
|
•
|
An
outboard engine assembly plant in Suzhou, China;
and
|
|
|
•
|
A
marina and boat club in Suzhou, China, on Lake
Taihu.
|
Boat
segment sales comprised approximately 34 percent of Brunswick’s non-U.S. sales
in 2007. The Boat Group’s products are manufactured or assembled in the United
States, Canada, China, Mexico, Poland and the United Kingdom, and are sold
worldwide through dealers. The Boat Group has sales offices in France
and the Netherlands.
Fitness
segment sales comprised approximately 15 percent of Brunswick’s
non-U.S. sales in 2007. 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 and Italy.
The Fitness segment also manufactures strength-training equipment and select
lines of cardiovascular equipment in Hungary for the European
market.
Bowling
& Billiards segment sales comprised approximately 5 percent of Brunswick’s
non-U.S. sales in 2007. 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 in 2007. In addition, BB&B’s
Valley-Dynamo segment commenced operating at a manufacturing facility in
Reynosa, Mexico in early 2007. BB&B operates bowling centers in
Austria, Canada and Germany, and, although slated for disposal in early 2008,
currently holds a 50 percent interest in an entity that sells bowling equipment
and operates bowling centers in Japan.
Raw
Materials
Brunswick
purchases raw materials from various sources. The Company is not currently
experiencing any critical raw material shortages, nor does it anticipate any
shortages. General Motors Corporation is the sole supplier of engine blocks used
in the manufacture of Brunswick’s gasoline sterndrive and inboard engines.
Brunswick experienced increases in the cost of oil, aluminum, steel and resins
used in its manufacturing processes during 2007. The Company
continues to expand its global procurement operations to leverage its purchasing
power across its divisions and improve supply chain and cost
efficiencies.
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
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 boat seats, interiors and other boat features and
components.
In the
Marine Engine segment, patent rights principally relate to features of outboard
engines and inboard-outboard 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
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:
Boat
Segment: Albemarle, Attwood, Baja, Bayliner, Boston Whaler,
Cabo, Crestliner, Diversified Marine, Harris, Hatteras, IDS, Kayot, Kellogg
Marine, Laguna, Land ‘N’ Sea, Lowe, Lund, Master Dealer, Maxum, Meridian,
Palmetto, Princecraft, Sea Boss, Sea Pro, Sea Ray, Seachoice,
Sealine, Swivl-Eze, Total Command, Triton and Trophy.
Marine Engine
Segment: Axius, Mariner, MercNet, MerCruiser, MerCruiser
360 Control, Mercury, MercuryCare, Mercury Marine, Mercury Parts Express,
Mercury Precision Parts, Mercury Propellers, Mercury Racing, MotorGuide,
MotoTron, OptiMax, Pinpoint, Quicksilver, Rayglass, SeaPro, SmartCraft,
SportJet, Teignbridge Propellers, Valiant, Verado and Zeus.
Fitness
Segment: Elevation, Flex Deck, Hammer Strength, Lifecycle,
Life Fitness and ParaBody.
Bowling & Billiards
Segment: Air Hockey, Anvilane, Brunswick, Brunswick Billiards,
Brunswick Home and Billiard, Brunswick Pavilion, Brunswick Zone, Brunswick Zone
XL, Centennial, Contender, Cosmic Bowling, DBA Products, Dynamo, Gold Crown,
Inferno, Lane Shield, Lightworx, Pro Lane, Throbot, Tornado, U.S. Play by
Brunswick, Valley, Vector, Virtual Bowling by Brunswick, Viz-A-Ball and
Zone.
Brunswick’s
trademark rights have indefinite lives, and many are well known to the public
and considered 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; innovative technological advancements;
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
manufacturer 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 seek to attract customers’ leisure time but do not compete in
Brunswick’s product groups.
The
following summarizes Brunswick’s competitive position in each
segment:
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 from 10 to 100 feet, along with a parts and
accessories business. In all of its boat operations, Brunswick competes on the
basis of product features, technology, quality, dealer service, performance,
value, durability and styling, along with effective promotion, distribution and
pricing.
Marine Engine
Segment: The Company believes it has the largest dollar sales
volume of recreational marine engines in the world. The marine engine market is
highly competitive among several major international companies that comprise the
majority of the market, and several smaller companies. Competitive advantage in
this segment is a function of product features, technological leadership,
quality, service, performance and durability, along with effective promotion,
distribution and pricing.
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 create a highly
fragmented competitive landscape. Many of Brunswick’s fitness equipment products
feature industry-leading product innovations, and the Company places significant
emphasis on new product introductions. Competitive focus is also placed on
product quality, marketing activities, pricing and service.
Bowling & Billiards
Segment: The Company believes it is the world’s leading
designer, manufacturer and marketer of bowling products and billiards
tables. There are
several large manufacturers of bowling products and competitive emphasis is
placed on product innovation, quality, service, marketing activities and
pricing. The billiards industry is experiencing increased competitive
pressure from low-cost billiards operations outside the United States. The
billiards industry is experiencing increased competitive pressure from low-cost
billiards operations outside the United States. In 2007, Brunswick also operated
122 retail bowling centers worldwide, including those operated by its joint
venture in Japan. The bowling retail market is highly fragmented, but Brunswick
is one of the larger competitors in the North America bowling retail market,
with an emphasis on larger, upscale, full service family entertainment
centers. The bowling retail business emphasizes enhancing 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 for continuing
operations are shown below:
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$ |
39.8 |
|
$ |
38.0 |
|
$ |
36.1 |
|
|
Marine
Engine
|
|
|
68.1 |
|
|
70.3 |
|
|
67.3 |
|
|
Fitness
|
|
|
21.6 |
|
|
18.4 |
|
|
14.2 |
|
|
Bowling
& Billiards
|
|
|
5.0 |
|
|
5.5 |
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
134.5 |
|
$ |
132.2 |
|
$ |
123.5 |
|
Number
of Employees
The
approximate number of employees worldwide as of December 31, 2007, is shown
below by segment:
|
|
Total
|
|
Union
|
|
| |
|
|
|
|
|
|
|
Boat
|
|
12,650 |
|
|
57 |
|
|
Marine
Engine
|
|
6,300 |
|
|
2,591 |
|
|
Fitness
|
|
2,000 |
|
|
135 |
|
|
Bowling
& Billiards
|
|
5,850 |
|
|
87 |
|
|
Corporate
|
|
250 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total
|
|
27,050 |
|
|
2,870 |
|
The
Marine Engine Segment's Fond du Lac, Wisconsin, facility has a union contract
with the International Association of Machinists Winnebago Lodge 1947 that
expires in June 2008. The Company believes that the relationships between
employees, unions and the Company are good.
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
website.
Item
1A. Risk Factors
General economic conditions,
particularly in the United States and Europe, affect Brunswick’s
results.
Brunswick’s
revenues are affected by economic conditions and consumer confidence worldwide,
but especially in the United States and Europe. In times of economic
uncertainty, consumers tend to defer expenditures for discretionary items, which
affects demand for Brunswick’s products, especially in its marine and billiards
businesses. Brunswick’s marine businesses are cyclical in nature, and
their success is dependent upon favorable economic conditions, the overall level
of consumer confidence and discretionary income levels. Any
substantial deterioration in general economic conditions that diminishes
consumer confidence or discretionary income can reduce Brunswick’s sales and
adversely affect its financial results including the potential for future
impairments. The impact of weakening consumer credit
markets; corporate restructurings; layoffs; declines in the value of
investments and residential real estate, especially in large boating markets
such as Florida and California; higher fuel prices and increases in federal and
state taxation all can negatively affect Brunswick’s results.
Brunswick’s
profitability may suffer as a result of competitive pricing
pressures.
The
introduction of lower-priced alternative products by other companies can hurt
Brunswick’s competitive position in all of its businesses. The
Company is constantly subject to competitive pressures, particularly in the
outboard engine market, in which Asian manufacturers often have pursued a
strategy of aggressive pricing. Such pricing pressure can limit the
Company’s ability to increase prices for its products in response to raw
material and other cost increases.
Brunswick’s growth depends on the
successful introduction of new product offerings.
Brunswick’s
ability to grow may be adversely affected by difficulties or delays in product
development, such as an inability to develop viable new products, gain market
acceptance of new products or obtain adequate intellectual property protection
for new products. To meet ever-changing consumer demands, the timing
of market entry and pricing of new products are critical.
Establishing
low-cost manufacturing facilities is critical to its operating and financial
results.
Brunswick
has historically derived a significant portion of its earnings from sales of
higher-margin products, especially in its outboard engine business. The Marine
Engine segment has now completed a transition to manufacturing primarily
low-emission four-stroke outboard engines, which have lower margins than the
two-stroke products they are replacing. The Company has addressed
this margin pressure in part by relocating some outboard engine manufacturing to
lower-cost areas such as China, consolidating
boat manufacturing facilities to improve efficiency, shifting its bowling
pin production to a contract manufacturer and relocating its bowling ball and
Valley-Dynamo billiards table manufacturing to Mexico, where it already
manufactures boats. Brunswick’s inability to achieve lower-cost
manufacturing, as well as increased competition in the product lines affected,
could adversely affect its future operating and financial results.
Brunswick’s
financial results may be adversely affected if the Company is unable to maintain
effective distribution.
Because
Brunswick sells the majority of its products through third parties such as
dealers and distributors, the financial health of its distribution network is
critical to Brunswick’s success. Brunswick’s results can be negatively affected
if dealers and distributors experience higher operating costs, which can result
from rising interest rates, higher rents, labor costs and taxes, and compliance
with regulations. In addition, a substantial portion of Brunswick’s
marine engine sales are made to boat manufacturers not affiliated with
Brunswick. Accordingly, the results of the Marine Engine segment can be
influenced by the financial health of these independent boat builders, which
depends on their access to capital, ability to develop new products and ability
to compete effectively in the marketplace. Brunswick’s independent
boat builder customers also can react negatively to competition from
Brunswick's own boat brands, which can lead them to seek marine
engines and marine engine supplies from competing marine engine
manufacturers.
Inventory
adjustments by major dealers, retailers and independent boat builders adversely
affect Brunswick’s operating margins.
If
Brunswick’s dealers and retailers, as well as independent boat builders who
purchase Brunswick’s marine engine products, adjust their inventories downward
in response to weakness in retail demand, wholesale demand for Brunswick’s
products diminishes. In turn, the Company must reduce production, which results
in lower rates of absorption of fixed costs in its manufacturing facilities and
thus lower margins. Inventory reduction by dealers and customers can hurt
Brunswick’s short-term sales and results of operations and limit its ability to
meet increased demand when economic conditions improve.
Adverse weather conditions can have a
negative effect on marine and retail bowling center
revenues.
Weather
conditions can have a significant effect on Brunswick’s operating and financial
results, especially in the marine and bowling retail
businesses. Sales of Brunswick’s marine products are generally
stronger just before and during spring and summer, and favorable weather during
these months generally has a positive effect on consumer demand. Conversely,
unseasonably cool weather, excessive rainfall or drought conditions during these
periods can reduce demand. Hurricanes and other storms can result in the
disruption of the Company’s distribution channel, as occurred in 2004 and 2005
on the U.S. Atlantic and Gulf coasts. Since many of Brunswick’s boat
products are used on lakes and reservoirs, the viability of these for boating is
important to the Boat segment. In addition, severely inclement
weather on weekends and holidays, particularly during the winter months, can
adversely affect patronage of Brunswick’s bowling centers and, therefore,
revenues in the bowling retail business.
Licensing requirements and limited
access to water can inhibit Brunswick’s ability to grow its marine
businesses.
Environmental
restrictions, permitting and zoning requirements and the increasing cost of and
competition for waterfront property can limit access to water for boating, as
well as marina and storage space. Brunswick’s Boat and Marine Engine
segments can be adversely affected in areas that do not have sufficient marina
and storage capacity to satisfy demand. Certain jurisdictions both in
and outside the United States require a license to operate a recreational boat,
which can deter potential customers.
Brunswick’s marine engines may be subject to
more stringent environmental regulations.
The State
of California has adopted regulations requiring catalytic converters on
sterndrive and inboard engines by January 1, 2008, which the Company expects
will be expanded to all states by 2010. Compliance with these
regulations will increase the cost of these products. Other
environmental regulatory bodies in the United States or other countries also may
impose higher emissions standards in the future for engines. These
standards could require catalytic converters, increasing the cost of Brunswick's
engines, which could in turn reduce consumer demand for Brunswick’s marine
products. As a result, any increase in the cost of marine engines or unforeseen
delays in compliance with environmental regulations affecting these products
could have an adverse effect on Brunswick’s results of operations.
Higher
energy costs can adversely affect Brunswick’s results, especially in the marine
and bowling center businesses.
Higher
energy 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 Brunswick’s marine products. Also,
higher fuel costs may have an adverse affect on demand for marine retail
products as fuel costs are a significant component of retail marine ownership.
Finally, because heating, air conditioning and electricity comprise a
significant part of the cost of operating a bowling center, any increase in the
price of energy could adversely affect the operating margins of Brunswick
bowling centers.
Tighter credit markets can reduce
demand, especially for marine products.
Customers
often finance purchases of Brunswick’s marine products, particularly
boats. Rising interest rates can have an adverse effect on dealers’
and consumers’ ability to finance boat purchases, which can adversely affect the
Company’s ability to sell boats and engines and the profitability of its
financing activities, including Brunswick Acceptance Company.
Changes in currency exchange rates
can adversely affect Brunswick’s growth rate.
Because
the Company derives approximately 36 percent of its revenues from outside the
United States, its ability to realize projected growth rates can be adversely
affected when the U.S. dollar strengthens against other
currencies. Brunswick manufactures its products primarily in the
United States, and the costs of its products are generally denominated in U.S.
dollars, although the manufacture and sourcing of products and materials outside
the United States is increasing. A strong U.S. dollar can make
Brunswick’s products less price-competitive relative to local products outside
the United States.
Brunswick’s business is vulnerable to
adverse international conditions.
As
Brunswick continues to focus on international growth, including in developing
countries, and on lower-cost manufacturing outside the United States, it may
become increasingly vulnerable to the effects of political instability, adverse
economic conditions and the possibility of terrorism, insurrection and military
conflict around the world.
Brunswick competes with a variety of
other activities for consumers’ scarce leisure time.
The vast
majority of Brunswick’s products are used for recreational purposes, and demand
for its products can be adversely affected by competition from other activities
that occupy consumers’ leisure time, including other forms of recreation as well
as religious, cultural and community activities. A decrease in
leisure time can reduce consumers’ willingness to purchase and enjoy Brunswick’s
products.
The Company’s
ability to integrate acquisitions successfully may affect its financial
results.
Since
2001, Brunswick has acquired a number of new businesses and entered into joint
ventures, and it intends to continue to pursue other strategic investments to
complement its existing product portfolio. The Company’s success in achieving
the requisite investment return and effectively integrating the financial,
operational and distribution practices and systems of these businesses can
affect Brunswick’s financial performance. There can be no assurance
that any future acquisitions or joint ventures will be beneficial to
Brunswick.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
Brunswick’s
headquarters are located in Lake Forest, Illinois. The Company also maintains
administrative offices in Chicago, Illinois. Brunswick has numerous
manufacturing plants, distribution warehouses, 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:
Boat
Segment: Adelanto, Los Angeles and Sacramento, California; Old
Lyme, Connecticut; Edgewater, Merritt Island, Palm Coast, Pompano Beach and St.
Petersburg, Florida; Fort Wayne, Indiana; Lowell, Michigan; Mills and Pipestone,
Minnesota; Lebanon, Missouri; Little Falls, New York: Edenton, New Bern,
Raleigh, Navassa and Swansboro, North Carolina; Bucyrus, Ohio; Roseburg, Oregon;
Newberry, South Carolina; Ashland City, Knoxville and Vonore, Tennessee;
Lancaster, Texas; Arlington, Washington; Pickering, Ontario, Canada;
Princeville, Quebec, Canada; Toronto, Ontario, Canada; Zhuhai, People’s Republic
of China; Reynosa, Mexico; and Kidderminster, United Kingdom. Brunswick owns all
of these facilities with the exception of the Pompano Beach, Florida; Lowell,
Michigan; Raleigh, North Carolina; Lancaster, Texas; and Pickering, Ontario,
Canada, facilities, which are leased.
Marine Engine
Segment: Miramar, Panama City and St. Cloud, Florida;
Stillwater and Tulsa, Oklahoma; Brookfield, Fond du Lac and Oshkosh, Wisconsin;
Melbourne and Sydney, Australia; Petit Rechain, Belgium; Suzhou, People’s
Republic of China; Juarez, Mexico; Auckland and Christchurch, New Zealand; Vila
Nova de Cerveira, Portugal; Singapore; Skelleftea, Sweden; and Newton Abbot,
United Kingdom. The Sydney, Australia; Auckland and Christchurch, New
Zealand; and Skelleftea, Sweden facilities are leased. The remaining facilities
are owned by Brunswick.
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; Richland
Hills, Texas; Bristol, Wisconsin; Szekesfehervar, Hungary; and Reynosa, Mexico;
108 bowling recreation centers in the United States, Canada and Europe, and
retail billiards stores in the suburbs of Chicago, Denver and Boston.
Approximately 50 percent of BB&B’s bowling centers, as well as the Richland
Hills and Reynosa manufacturing facilities and the retail billiards stores and
warehouses, 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 statements. If current
estimates for the cost of resolving any claims are later determined to be
inadequate, results of operations could be adversely affected in the period in
which additional provisions are required.
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 $33 million in taxes due and $39 million of pre-tax 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. 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.
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 $38.6 million to
$58.7 million as of December 31, 2007. At December 31, 2007 and 2006, Brunswick
had reserves for environmental liabilities of $48.0 million and $49.4 million,
respectively. There were environmental provisions of $0.7 million, $0.0 million
and $1.5 million for the years ended December 31, 2007, 2006 and 2005,
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 the Company 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.
Australia
Trade Practices Investigation
In
January 2005, Brunswick received a notice to furnish information and documents
to the Australian Competition and Consumer Commission (ACCC). A subsequent
notice was received in October of 2005. Following the completion of
its investigation in December 2006, the ACCC commenced proceedings against a
Brunswick subsidiary, Navman Australia Pty Limited, with respect to its
compliance with the Trade Practices Act of 1974 as it pertains to Navman
Australia’s sales practices from 2001 to 2005. The ACCC had alleged
that Navman Australia engaged in resale price maintenance in breach of the
Act. In December 2007, the Australian courts approved a settlement in
favor of ACCC for approximately $1.3 million.
Chinese
Supplier Dispute
Brunswick
was involved in an arbitration proceeding in Hong Kong arising out of a
commercial dispute with a former contract manufacturer in China, Shanghai
Zhonglu Industrial Company Limited (Zhonglu). The Company filed the arbitration
seeking damages based on Zhonglu's breach of a supply and distribution agreement
pursuant to which Zhonglu agreed to manufacture bowling
equipment. Zhonglu had asserted counterclaims seeking damages for
alleged breach of contract among other claims in August 2007. The
arbitration tribunal issued a ruling in the Company’s favor for a net amount of
approximately $0.1 million.
Patent
Infringement Dispute
In
October 2006, Brunswick was sued by Electromotive, Inc. (Electromotive) in the
United States District Court for the Northern District of
Virginia. Electromotive claimed that a number of engines sold by
Brunswick’s Mercury Marine business had infringed on an expired patent held by
Electromotive related to a method for ignition timing. On July
27, 2007, a jury returned a verdict in favor of Electromotive in the amount of
approximately $3 million. In October 2007, the Company and
Electromotive subsequently reached an agreement to settle the case in lieu of
pursuing respective appeals at a level below the verdict.
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. The
assessment consists of duties, penalties and interest on the importation of Life
Fitness products into Brazil over the past five years. Brunswick
believes that this determination by the Brazilian Customs Office is without
merit and has appealed the assessment. The Company does not believe
that the resolution of this dispute will have a material adverse effect on its
consolidated financial condition or results of operations.
Refer to
Note 11 – Commitments and
Contingencies in the Notes to Consolidated Financial Statements for
disclosure of the potential cash requirements of environmental proceedings and
other legal proceedings.
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 fiscal year 2007.
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
|
|
58
|
|
Patrick
C. Mackey(A)
|
|
Executive
Vice President, Chief Operating Officer – Marine
and
President – Mercury Marine Group
|
|
61
|
|
Peter
G. Leemputte
|
|
Senior
Vice President and Chief Financial Officer
|
|
50
|
|
Lloyd
C. Chatfield II
|
|
Vice
President, General Counsel and Secretary
|
|
39
|
|
Warren
N. Hardie
|
|
Vice
President and President – Brunswick Bowling &
Billiards
|
|
57
|
|
B.
Russell Lockridge
|
|
Vice
President and Chief Human Resources Officer
|
|
58
|
|
Alan
L. Lowe
|
|
Vice
President and Controller
|
|
56
|
|
George
T. Neill
|
|
Vice
President and Chief Marketing Officer
|
|
41
|
|
John
E. Stransky
|
|
Vice
President and President – Life Fitness Division
|
|
56
|
|
(A)
|
Mr.
Mackey will retire effective March 1,
2008.
|
There are
no familial relationships among these officers. The term of office of all
elected officers expires May 7, 2008. 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.
Patrick C. Mackey was named
Executive Vice President and Chief Operating Officer – Marine in January 2007
and was President of Brunswick’s Mercury Marine Group since
2000. From 2000 to January 2007, he was Vice President of the
Company. He will retire from the Company effective March 1,
2008.
Peter G. Leemputte has been
Senior Vice President and Chief Financial Officer of Brunswick since August
2003. He was Vice President and Controller of Brunswick from 2001 to
2003.
Lloyd C. Chatfield II was
named Vice President, General Counsel and Secretary of Brunswick in July
2007. He has been with Brunswick Corporation since 2000 serving in
various capacities, most recently as Deputy General Counsel and Managing
Director of Mergers and Acquisitions.
Warren N. Hardie was named
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. Prior to joining
Brunswick, he held a number of senior financial positions with FMC Technologies,
Inc., including, most recently, Director – Financial Control.
George T. Neill has been Vice
President and Chief Marketing Officer of Brunswick since November 2007. Prior to
joining Brunswick, he was the Corporate Vice President of Global Marketing for
Motorola, Inc. from July 2005 to September 2007. Before he joined Motorola,
Inc., he was the Senior Director of Worldwide Marketing Communications with
Apple Computer from April 2001 to February 2005.
John E. Stransky was named
Vice President and President – Life Fitness Division in February
2006. He was President – Brunswick Bowling & Billiards from
February 2005 to February 2006 and President of the Billiards division from 1998
to 2005.
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 20 – Quarterly Data in
the Notes to Consolidated Financial Statements. As of February 15, 2008, there
were 12,999 shareholders of record of the Company’s common stock.
In
October 2007, Brunswick announced its annual dividend on its common stock of
$0.60 per share, payable in December 2007. 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. Brunswick’s dividend policy may be affected by, among
other things, the Company’s views on potential future capital requirements,
including those relating to investments and acquisitions.
The
Company continues to repurchase shares of its common stock under a program
initiated in 2005. Under this program, approximately 11.7 million shares have
been repurchased for $397.4 million with a remaining authorization of $240.4
million as of December 31, 2007. The Company expects to repurchase shares on the
open market or in private transactions from time to time, depending on market
conditions. Brunswick repurchased approximately 4.1 million shares under this
program during 2007 for $125.8 million as discussed in Note 19 – Share Repurchase
Program in the Notes to Consolidated Financial Statements. Set
forth below is the information regarding the Company’s share repurchases during
the fourth quarter of the year ended December 31, 2007:
|
|
|
Issuer
Purchases of Equity Securities
|
|
Period
|
|
Total
Number
of
Shares
(or
Units)
Purchased
|
|
Average
Price
Paid
per
Share
(or
Unit)
|
|
Total
Number of
Shares
(or Units)
Purchased
as Part of Publicly Announced
Plans
or Programs
|
|
Maximum
Number (or Approximate Dollar
Value)
of Shares (or
Units)
that May Yet Be Purchased Under the
Plans
or Programs
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
10/01/07
– 10/28/07
|
|
—
|
|
$ —
|
|
—
|
|
$ 250,733
|
|
10/29/07
– 11/25/07
|
|
305,300
|
|
$ 21.42
|
|
305,300
|
|
$ 244,194
|
|
11/26/07
– 12/31/07
|
|
194,700
|
|
$ 19.43
|
|
194,700
|
|
$ 240,411
|
|
|
|
|
|
|
|
|
|
|
|
Total
Share Repurchases
|
|
500,000
|
|
$ 20.64
|
|
500,000
|
|
$ 240,411
|
|
|
|
|
|
|
|
|
|
|
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
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
Brunswick
|
100.00 |
|
163.37 |
|
257.82 |
|
214.59 |
|
171.14 |
|
93.72 |
|
S&P
500 Index
|
100.00 |
|
126.38 |
|
137.75 |
|
141.88 |
|
161.21 |
|
166.89 |
|
S&P
500 GICS Consumer Discretionary Index
|
100.00 |
|
136.08 |
|
152.61 |
|
141.38 |
|
165.75 |
|
142.01 |
The basis
of comparison is a $100 investment at December 31, 2002, 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
is included in this index and believes the other companies included in this
index provide a representative sample of enterprises that are in primary lines
of business that are similar to Brunswick.
Item
6. Selected Financial Data
The
selected historical financial data presented below as of and for the years ended
December 31, 2007, 2006 and 2005, 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, 2004, 2003 and 2002, have been
derived from the consolidated financial statements of the Company that are not
included herein. The financial data presented below have been restated to
present discontinued operations in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets.”
|
(in
millions, except per share data)
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of operations data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
5,671.2 |
|
$ |
5,665.0 |
|
$ |
5,606.9 |
|
$ |
5,058.1 |
|
$ |
4,063.6 |
|
$ |
3,711.9 |
|
|
Operating
earnings
|
|
|
107.2 |
|
|
341.2 |
|
|
468.7 |
|
|
394.8 |
|
|
223.5 |
|
|
197.4 |
|
|
Earnings
before interest and taxes
|
|
|
136.3 |
|
|
354.2 |
|
|
524.1 |
|
|
408.4 |
|
|
233.6 |
|
|
200.7 |
|
|
Earnings
before income taxes
|
|
|
92.7 |
|
|
309.7 |
|
|
485.9 |
|
|
373.3 |
|
|
204.0 |
|
|
162.4 |
|
|
Earnings
from continuing operations
|
|
|
79.6 |
|
|
263.2 |
|
|
371.1 |
|
|
263.8 |
|
|
137.0 |
|
|
104.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from discontinued
operations,
net of tax (A)
|
|
|
32.0 |
|
|
(129.3 |
) |
|
14.3 |
|
|
6.0 |
|
|
(1.8 |
) |
|
(0.6 |
) |
|
Cumulative
effect of changes in accounting
principle,
net of tax (B)
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(25.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
111.6 |
|
$ |
133.9 |
|
$ |
385.4 |
|
$ |
269.8 |
|
$ |
135.2 |
|
$ |
78.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations before
accounting
change
|
|
$ |
0.88 |
|
$ |
2.80 |
|
$ |
3.80 |
|
$ |
2.76 |
|
$ |
1.50 |
|
$ |
1.16 |
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from discontinued
operations,
net of tax
|
|
|
0.36 |
|
|
(1.38 |
) |
|
0.15 |
|
|
0.06 |
|
|
(0.02 |
) |
|
(0.01 |
) |
|
Cumulative
effect of changes in accounting
principle,
net of tax (B)
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
1.24 |
|
$ |
1.42 |
|
$ |
3.95 |
|
$ |
2.82 |
|
$ |
1.48 |
|
$ |
0.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares used for computation of
basic
earnings per share
|
|
|
89.8 |
|
|
94.0 |
|
|
97.6 |
|
|
95.6 |
|
|
91.2 |
|
|
90.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations before
accounting
change
|
|
$ |
0.88 |
|
$ |
2.78 |
|
$ |
3.76 |
|
$ |
2.71 |
|
$ |
1.49 |
|
$ |
1.15 |
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from discontinued
operations,
net of tax
|
|
|
0.36 |
|
|
(1.37 |
) |
|
0.14 |
|
|
0.06 |
|
|
(0.02 |
) |
|
(0.01 |
) |
|
Cumulative
effect of changes in accounting
principle,
net of tax (B)
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
1.24 |
|
$ |
1.41 |
|
$ |
3.90 |
|
$ |
2.77 |
|
$ |
1.47 |
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares used for computation of
diluted
earnings per share
|
|
|
90.2 |
|
|
94.7 |
|
|
98.8 |
|
|
97.3 |
|
|
91.9 |
|
|
90.7 |
|
|
(A)
|
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 includes an $85.6 million
impairment charge ($73.9 million pre-tax) 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 2 –
Discontinued Operations in the Notes to Consolidated Financial
Statements for further details.
|
|
(B)
|
In
2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets", which resulted in a $25.1 million ($0.28 per share) charge as the
cumulative effect of the change in accounting
principle.
|
|
(in
millions, except per share and other data)
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
2002
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
of continuing operations
|
|
$ |
4,365.6 |
|
$
|
4,312.0 |
|
$ |
4,414.8 |
|
$ |
4,198.9 |
|
$ |
3,523.4 |
|
|
$ |
3,306.4 |
|
|
Debt
Short-term
|
|
$ |
0.8 |
|
$ |
0.7 |
|
$ |
1.1 |
|
$ |
10.7 |
|
$ |
23.8 |
|
|
$ |
28.9 |
|
|
Long-term
|
|
|
727.4 |
|
|
725.7 |
|
|
723.7 |
|
|
728.4 |
|
|
583.8 |
|
|
|
589.5 |
|
|
Total
debt
|
|
|
728.2 |
|
|
726.4 |
|
|
724.8 |
|
|
739.1 |
|
|
607.6 |
|
|
|
618.4 |
|
|
Common
shareholders’ equity (C)
|
|
|
1,892.9 |
|
|
1,871.8 |
|
|
1,978.8 |
|
|
1,712.3 |
|
|
1,323.0 |
|
|
|
1,101.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capitalization (C)
|
|
$ |
2,621.1 |
|
$ |
2,598.2 |
|
$ |
2,703.6 |
|
$ |
2,451.4 |
|
$ |
1,930.6 |
|
|
$ |
1,720.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow data
Net
cash provided by operating activities of
continuing
operations
|
|
$ |
344.1 |
|
$ |
351.0 |
|
$ |
421.6 |
|
$ |
424.4 |
|
$ |
405.7 |
|
|
$ |
413.4 |
|
|
Depreciation
and amortization
|
|
|
180.1 |
|
|
167.3 |
|
|
156.3 |
|
|
153.6 |
|
|
149.4 |
|
|
|
148.4 |
|
|
Capital
expenditures
|
|
|
207.7 |
|
|
205.1 |
|
|
223.8 |
|
|
163.8 |
|
|
157.7 |
|
|
|
112.6 |
|
|
Acquisitions
of businesses
|
|
|
6.2 |
|
|
86.2 |
|
|
130.3 |
|
|
248.2 |
|
|
140.0 |
|
|
|
16.4 |
|
|
Investments
|
|
|
(4.1 |
) |
|
(6.1 |
) |
|
18.1 |
|
|
16.2 |
|
|
39.3 |
|
|
|
8.9 |
|
|
Stock
repurchases
|
|
|
125.8 |
|
|
195.6 |
|
|
76.0 |
|
|
— |
|
|
— |
|
|
|
— |
|
|
Cash
dividends paid
|
|
|
52.6 |
|
|
55.0 |
|
|
57.3 |
|
|
58.1 |
|
|
45.9 |
|
|
|
45.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
data
Dividends
declared per share
|
|
$ |
0.60 |
|
$ |
0.60 |
|
$ |
0.60 |
|
$ |
0.60 |
|
$ |
0.50 |
|
|
$ |
0.50 |
|
|
Book
value per share (C)
|
|
|
20.99 |
|
|
19.76 |
|
|
20.03 |
|
|
17.60 |
|
|
14.40 |
|
|
|
12.15 |
|
|
Return
on beginning shareholders’ equity
|
|
|
6.0 |
% |
|
6.8 |
% |
|
22.5 |
% |
|
20.4 |
% |
|
12.3 |
% |
|
|
7.0 |
% |
|
Effective
tax rate
|
|
|
14.1 |
% |
|
15.0 |
% |
|
23.6 |
% |
|
29.3 |
% |
|
32.8 |
% |
|
|
36.0 |
% |
|
Debt-to-capitalization
rate (C)
|
|
|
27.8 |
% |
|
28.0 |
% |
|
26.8 |
% |
|
30.2 |
% |
|
31.5 |
% |
|
|
35.9 |
% |
|
Number
of employees
|
|
|
27,050 |
|
|
28,000 |
|
|
26,500 |
|
|
24,745 |
|
|
22,525 |
|
|
|
20,815 |
|
|
Number
of shareholders of record
|
|
|
13,052 |
|
|
13,695 |
|
|
14,143 |
|
|
14,952 |
|
|
15,373 |
|
|
|
16,605 |
|
|
Common
stock price (NYSE)
High
|
|
$ |
34.80 |
|
$ |
42.30 |
|
$ |
49.50 |
|
$ |
49.85 |
|
$ |
32.08 |
|
|
$ |
30.01 |
|
|
Low
|
|
|
17.05 |
|
|
27.56 |
|
|
35.09 |
|
|
31.25 |
|
|
16.35 |
|
|
|
18.30 |
|
|
Close
(last trading day)
|
|
|
17.05 |
|
|
31.90 |
|
|
40.66 |
|
|
49.50 |
|
|
31.83 |
|
|
|
19.86 |
|
|
(C)
|
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),” which resulted in a $60.7 million decrease to Common
shareholders’ equity. The Company adopted the provisions of FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN
48) 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, balance of retained
earnings.
|
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. GAAP refers to generally accepted
accounting principles in the United States. 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 2007,
Brunswick made significant progress toward achieving its strategic objective to
solidify its leadership position in the marine, fitness and bowling &
billiards industries by:
|
|
•
|
Introducing
high-quality and reliable products with innovative and new technologies in
all of Brunswick’s market segments;
|
|
|
•
|
Distributing
products through a model that benefits the Company’s dealers and
distributors by providing additional products and services that will make
them more successful, improve the customer experience and, in turn, make
Brunswick more successful;
|
|
|
•
|
Focusing
on cost reduction initiatives through global sourcing and realignment of
Brunswick’s manufacturing operations and organizational structure;
and
|
|
|
•
|
Continuing
to expand and enhance Brunswick’s global manufacturing footprint to
achieve best-cost positions.
|
Accomplishments
in support of the Company’s strategic objectives in 2007 include:
New
products:
|
–
|
A
suite of products collectively referred to as "MerCruiser 360" and branded
Zeus, Axius and Total Command, which focus on maneuverability and handling
of recreational marine vessels across a broad range of pod,
sterndrive and inboard vessel applications to address the challenge of
handling and close quarters maneuverability of marine
vessels;
|
|
–
|
The
transition of sterndrive and inboard engines that now incorporate
catalytic converters, which reduce their environmental impact and bring
the engines into compliance with the regulations adopted by the State of
California;
|
|
–
|
New
boat models across all boat brands, many of which utilize Brunswick’s High
Performance Product Development (HPPD) process to integrate the design,
engineering and manufacturing processes from start to
finish;
|
|
–
|
New
cardiovascular and strength training fitness product offerings,
including Life Fitness' all-new Elevation series of treadmills
and upgraded cardiovascular equipment that deliver seamless iPod
integration; and
|
|
–
|
Continued
expansion of the larger Brunswick Zone XL family bowling entertainment
centers.
|
|
|
Manufacturing
realignment:
|
|
–
|
Adjustments
to the manufacturing footprint to streamline operations, including the
purchase of a manufacturing facility in Navassa, North Carolina, to expand
its capacity to build larger boats and to allow for the closure of the
Salisbury, Maryland, facility;
|
|
–
|
Announcement
of the closure of the aluminum manufacturing facility in Aberdeen,
Mississippi, and shifting of production to other existing aluminum
facilities;
|
|
–
|
Completion
of the transition of bowling ball manufacturing operations from Muskegon,
Michigan, to Reynosa, Mexico;
and
|
|
–
|
Completion
of the relocation of Brunswick’s Valley-Dynamo manufacturing operations
from Richland Hills, Texas, to Reynosa, Mexico, where production commenced
in 2007.
|
|
–
|
The
Company exercised its option to purchase the remaining 51 percent interest
of Rayglass Sales & Marketing Limited (Rayglass), a New Zealand
company, which expands the global manufacturing footprint of the Company’s
marine operations and develops additional international sales
opportunities.
|
|
|
International
Operations:
|
|
–
|
Increased
investments in operations in Europe, the Pacific Rim and Latin America
supporting international sales, which now represent approximately 36
percent of net sales from continuing
operations.
|
|
|
Returning
Value to Shareholders:
|
|
–
|
Continued
purchases under a $500 million share repurchase program, buying back
approximately 4.1 million shares of Brunswick common stock for
approximately $126 million during 2007;
and
|
|
–
|
Payment
of an annual dividend of $0.60 per
share.
|
Despite
its success in executing these objectives, Brunswick saw a decline in its
financial performance due to difficult marine market conditions. Net sales from
continuing operations in 2007 increased slightly to $5,671.2 million from
$5,665.0. Net sales in 2007 were comparable with 2006 net sales as the strong
performance outside the United States, growth in the Fitness segment and higher
sales of marine parts and accessories were mostly offset by the continued
reduction in United States marine industry demand. Organic sales, defined as
sales from the Company’s businesses that have operating results in comparable
periods, declined 0.3 percent from 2006.
Operating
earnings from continuing operations for 2007 of $107.2 million, and operating
margins of 1.9 percent, decreased from 2006 operating earnings from continuing
operations of $341.2 and operating margins of 6.0 percent, primarily as a result
of lower sales from the Boat segment, reduced fixed-cost absorption as a result
of reduced production rates in the Company’s marine businesses in an effort to
achieve appropriate levels of dealer pipeline inventories, higher raw material
and production costs, increased promotional incentives at the Boat segment, and
unfavorable mix factors. Also contributing to the decline in both operating
earnings and margins was a $66.4 million pre-tax indefinite-lived intangible
asset impairment charge recorded during the third quarter of 2007, as discussed
in Note 7 – Goodwill and Other
Intangible Assets in the Notes to Consolidated Financial Statements.
These factors were partially offset by successful cost-reduction initiatives, as
discussed in Note 3 –
Restructuring Activities in the Notes to Consolidated Financial
Statements and the favorable effect of foreign currency
translation. The Company also incurred additional costs for
investments in research and development, marketing for new product launches and
international operations to support future growth. See the Results of Operations section
below for further discussion.
Discontinued
Operations
As
discussed in Note 2 –
Discontinued Operations in the Notes to Consolidated Financial
Statements, on April 27, 2006, the Company announced its intention to sell the
majority of the Brunswick New Technologies (BNT) business unit, consisting of
the Company’s marine electronics, portable navigation device (PND) and wireless
fleet tracking businesses. During the second quarter of 2006, Brunswick began
reporting the results of these BNT businesses, which were previously reported in
the Marine Engine segment, as discontinued operations for all periods
presented. The Company’s results, as discussed in Management’s
Discussion and Analysis, reflect continuing operations only, unless otherwise
noted.
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 has now completed the divestiture of the BNT discontinued operations.
With the net asset impairment taken prior to the disposition of the BNT
businesses in the fourth quarter of 2006 of $85.6 million, after-tax, and the
subsequent 2007 gains of $29.8 million, after-tax, on the BNT business sales,
the net impact to the Company of these dispositions was a net loss of $55.8
million, after-tax.
Outlook
for 2008
Looking
ahead to 2008, the Company expects domestic marine retail demand to be down as
compared to 2007. As a result of this reduction in retail demand,
Brunswick will continue its efforts to achieve appropriate levels of dealer
inventories by reducing production of boats and marine engines. However, the
Company anticipates that sales will benefit from the introduction of new
products and the continued growth of sales outside the United
States. Sales for 2008 in both the Fitness and Bowling &
Billiards segments are expected to increase as a result of new product launches
at the Fitness segment and the continued roll-out of the Brunswick Zone XL model
at Bowling & Billiards. These factors provide some insight to expected 2008
sales, which will largely depend on the United States marine industry retail
demand, which is difficult to predict.
Operating
earnings and margins for 2008 will be adversely affected by the reduction in
marine retail demand and the corresponding continued production declines, as
discussed above. These actions will have an unfavorable effect on margins due to
lower fixed-cost absorption. Additionally, with the restructuring of specific
business operations and the potential for further reduction in marine retail
demand in 2008, an impairment review of affected business assets may be
required. An adverse outcome from a future review could directly affect
operating earnings and margins. These factors, along with continued increases in
raw materials, production, and freight and distribution costs, are not expected
to be fully offset by growth in international operations and cost containment
efforts during 2008. Excluding the effect of any tax-related items
that may occur, Brunswick’s effective tax rate in 2008 is expected to increase
into the mid-30 percent range as Congress has not yet extended the research
and development tax credit into 2008.
Matters
Affecting Comparability
As
described above, certain statements in Management’s Discussion and Analysis are
based on non-GAAP financial measures. A “non-GAAP financial measure”
is a numerical measure of a registrant’s historical or future financial
performance, financial position or cash flows that excludes amounts, or is
subject to adjustments that have the effect of excluding amounts, that are
included in the most directly comparable measure calculated and presented in
accordance with GAAP in the statement of income, balance sheet or statement of
cash flows of the issuer; or includes amounts, or is subject to adjustments that
have the effect of including amounts, that are excluded from the most directly
comparable measure so calculated and presented. Operating and
statistical measures are not non-GAAP financial measures.
The
Company has used the non-GAAP financial measures that are included in
Management’s Discussion and Analysis for several years. Brunswick’s management
believes that these measures and the information they provide are useful to
investors because they permit investors to view Brunswick’s performance using
the same tools that Brunswick uses and to better evaluate its ongoing business
performance.
Acquisitions. Approximately
0.4 percent of Brunswick’s sales during 2007 can be attributed to incremental
sales from the following acquisitions:
|
Date
|
|
Description
|
|
Segment
|
|
|
|
|
|
|
|
2/16/06
|
|
Cabo
Yachts, Inc. (Cabo)
|
|
Boat
|
|
4/26/06
|
|
Diversified
Marine Products, L.P. (Diversified)
|
|
Boat
|
|
8/24/07
|
|
Rayglass
Sales & Marketing Limited (Rayglass) – 51 percent
|
|
Marine
Engine
|
Cabo
complements the Company’s previous acquisitions of Hatteras Yachts, Inc. and
Albemarle Boats, Inc., allowing Brunswick to offer a full range of sportfishing
convertibles and motoryachts from 24 to 100 feet. Diversified complements
Brunswick’s previous acquisitions of Benrock, Inc., Land ‘N’ Sea Corporation and
Kellogg Marine Inc., allowing Brunswick to provide same- or next-day delivery of
marine parts and accessories nationwide by expanding the Company’s parts and
accessories business to the West Coast of the United States. Rayglass expands
the global manufacturing footprint of the marine operations and develops
additional international sales opportunities.
Approximately
3.7 percent of Brunswick’s sales during 2006 can be attributed to incremental
sales from the following acquisitions:
|
Date
|
|
Description
|
|
Segment
|
|
|
|
|
|
|
|
2/28/05
|
|
Albemarle
Boats, Inc. (Albemarle)
|
|
Boat
|
|
5/27/05
|
|
Triton
Boat Company, L.P. (Triton)
|
|
Boat
|
|
6/20/05
|
|
Supra-Industria
Textil, Lda. (Valiant) – 51 percent
|
|
Marine
Engine
|
|
7/07/05
|
|
Kellogg
Marine, Inc. (Kellogg)
|
|
Boat
|
|
9/16/05
|
|
Harris
Kayot Marine, LLC (Harris Kayot)
|
|
Boat
|
|
2/16/06
|
|
Cabo
Yachts, Inc.
|
|
Boat
|
|
4/26/06
|
|
Diversified
Marine Products, L.P.
|
|
Boat
|
Albemarle
provides the Company with the opportunity to offer a more complete range of
offshore sportfishing boats, building on offerings of the Hatteras brand. Triton
adds bass boats to Brunswick’s product lineup, as well as a broader range of
saltwater and aluminum fishing boats. The Valiant brand of rigid inflatable
boats enhances Brunswick’s product offerings in Europe. Kellogg complements
Brunswick’s previous acquisitions of Benrock, Inc. and Land ‘N’ Sea Corporation
and provides an essential distribution hub in the northeastern United States.
Harris Kayot advances Brunswick’s position in the pontoon market and complements
the Company’s existing boat portfolio with premium runabout and deck boat
product lines.
Refer to
Note 6 – Acquisitions in
the Notes to Consolidated Financial Statements for a detailed description of
these acquisitions.
Impairment Charges. The
Company experienced a decline in marine industry demand during 2007. As a result
of this decline, Brunswick lowered its estimates of the fair value of certain
trade names and incurred impairment charges on these indefinite-lived intangible
assets. See Note 7 – Goodwill
and Other Intangible Assets in the Notes to Consolidated Financial
Statements for further discussion.
Tax Items. The Company
reduced its tax provision for the year ended December 31, 2007, by $9.8 million,
or $0.11 per diluted share. This was due to favorable deferred tax and tax
reserve reassessments of $14.1 million, or $0.16 per diluted share, $2.0 million
of benefits recognized in the first quarter related to the Company’s election to
apply the indefinite reversal criterion of Accounting Principles Board No. 23,
“Accounting for Income Taxes – Special Areas” (APB 23), or $0.02 per diluted
share, and $1.4 million of benefits related to amended return filings, or $0.02
per diluted share. These benefits were partially offset by expense related to
changes in estimates in prior years’ tax return filings of $5.2 million, or
$0.06 per diluted share, and the impact of foreign jurisdiction tax rate
reductions on the underlying net deferred tax assets of $2.5 million, or $0.03
per diluted share. See Note 10 – Income
Taxes in the Notes to Consolidated Financial Statements for further
details.
During
2006, the Company reduced its tax provision primarily due to $47.0 million of
tax benefits ($0.50 per diluted share), consisting of $40.2 million of tax
reserve reassessments of underlying exposures. Refer to Note 11 –
Commitments and Contingencies in the Notes to Consolidated Financial
Statements for further detail.
In
2005, Brunswick reduced its tax provision by $30.8 million ($0.31 per diluted
share), primarily as a result of refinements in the calculation of prior years’
extraterritorial income tax benefit, tax reserve reassessments of underlying
exposures and the Company’s election to apply the indefinite reversal criterion
of APB 23 to the undistributed net earnings of certain foreign
subsidiaries. The Company determined that approximately $37 million
of undistributed net earnings from continuing operations, as well as the future
net earnings, of these foreign subsidiaries will be indefinitely reinvested in
operations outside the United States. These earnings provided
Brunswick with the opportunity to continue to expand its global manufacturing
footprint, fund future growth in foreign locations and shift Brunswick’s
acquisition focus to Europe and Asia. The Company’s current
intentions satisfy the indefinite reversal criterion of APB 23. In
addition, Brunswick’s 2005 tax rate benefited from the utilization of previously
unrecognized capital loss carryforwards applied in connection with the
MarineMax, Inc. (Marine Max), investment sale gain discussed
below. See Note 10 – Income
Taxes in the Notes to Consolidated Financial Statements for further
details.
Investment Sale
Gain. On February 23, 2005, the Company sold its investment of
1,861,200 shares in MarineMax, its largest boat dealer, for $56.8 million, net
of $4.1 million of selling costs, which included $1.1 million of accrued
expenses. The sale was made pursuant to a registered public offering by
MarineMax. As a result of this sale, the Company recorded an after-tax gain of
$31.5 million ($0.32 per diluted share) after utilizing previously unrecognized
capital loss carryforwards.
Results
of Operations
Consolidated
The
following table sets forth certain amounts, ratios and relationships calculated
from the Consolidated Statements of Income for the years ended December 31,
2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
2007
vs. 2006
|
|
|
2006
vs. 2005
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
|
|
(in
millions, except per share data)
|
|
2007
|
|
2006
|
|
2005
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
5,671.2 |
|
$ |
5,665.0 |
|
$ |
5,606.9 |
|
$ |
6.2 |
|
|
0.1 |
% |
|
$ |
58.1 |
|
|
1.0 |
% |
|
Gross
margin (A)
(B)
|
|
$ |
1,143.1 |
|
$ |
1,225.7 |
|
$ |
1,321.6 |
|
$ |
(82.6 |
) |
|
(6.7 |
)% |
|
$ |
(95.9 |
) |
|
(7.3 |
)% |
|
Impairment
charges
|
|
$ |
66.4 |
|
$ |
— |
|
$ |
— |
|
$ |
66.4 |
|
NM
|
|
|
$ |
— |
|
|
— |
% |
|
Operating
earnings (B)
|
|
$ |
107.2 |
|
$ |
341.2 |
|
$ |
468.7 |
|
$ |
(234.0 |
) |
|
(68.6 |
)% |
|
$ |
(127.5 |
) |
|
(27.2 |
)% |
|
Net
earnings
|
|
$ |
79.6 |
|
$ |
263.2 |
|
$ |
371.1 |
|
$ |
(183.6 |
) |
|
(69.8 |
)% |
|
$ |
(107.9 |
) |
|
(29.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
0.88 |
|
$ |
2.78 |
|
$ |
3.76 |
|
$ |
(1.90 |
) |
|
(68.3 |
)% |
|
$ |
(0.98 |
) |
|
(26.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expressed
as a percentage of Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin (B)
|
|
|
20.2 |
% |
|
21.6 |
% |
|
23.6 |
% |
|
|
|
(140
|
)bpts |
|
|
|
|
(200
|
)bpts |
|
Selling,
general and administrative expense
(B)
|
|
|
14.7 |
% |
|
13.3 |
% |
|
13.0 |
% |
|
|
|
140
|
bpts |
|
|
|
|
30
|
bpts |
|
Impairment
charges
|
|
|
1.2 |
% |
|
— |
% |
|
— |
% |
|
|
|
120
|
bpts |
|
|
|
|
—
|
bpts |
|
Research
& development expense
|
|
|
2.4 |
% |
|
2.3 |
% |
|
2.2 |
% |
|
|
|
10
|
bpts |
|
|
|
|
10
|
bpts |
|
Operating
margin (B)
|
|
|
1.9 |
% |
|
6.0 |
% |
|
8.4 |
% |
|
|
|
(410
|
)bpts |
|
|
|
|
(240
|
)bpts |
__________
bpts =
basis points
NM = not
meaningful
|
(A)
|
Gross
margin is defined as Net sales less Cost of sales as presented in the
Consolidated Statements of Income.
|
|
(B)
|
Operating
earnings for the year ended December 31, 2007, included a $22.2 million
pre-tax restructuring charge, of which $14.7 million was recorded as Cost
of sales and reflected in Gross margin. Operating earnings for the year
ended December 31, 2006, included a $17.1 million pre-tax restructuring
charge, of which $7.6 million was recorded as Cost of sales and reflected
in Gross margin. Total pre-tax restructuring charges were $18.9 million,
with the remaining $1.8 million balance recorded against equity earnings.
See Note
3 – Restructuring Activities in the Notes to Consolidated Financial
Statements for further details regarding these
charges.
|
2007
vs. 2006
The
increase in net sales was primarily due to the strong performance of boat and
engine sales outside the United States, higher Fitness segment sales resulting
from increased sales volumes, higher sales of marine parts and accessories, and
sales gains at bowling retail centers. These factors slightly outpaced the
impact of continued reduction in United States marine industry demand. Organic
sales decreased 0.3 percent in 2007 compared with 2006, primarily due to lower
United States retail demand for marine products.
Sales
outside the United States increased $214.0 million to $2,016.4 million in 2007,
with the largest contributions coming from the European region, which increased
$113.9 million to $1,038.9 million, the Latin American region, which increased
$38.3 million to $196.6 million, and the Asia Pacific region, which increased
$35.0 million to $338.2 million. This growth was largely attributable
to higher sales of engines, fitness equipment and boats.
Brunswick’s
gross margin percentage decreased 140 basis points in 2007 to 20.2 percent from
21.6 percent in 2006. This decrease was the result of lower
fixed-cost absorption and inefficiencies due to reduced production rates as a
result of the Company’s effort to achieve appropriate levels of marine customer
pipeline inventories in light of lower retail demand; higher raw material and
component costs; increased promotional incentives, restructuring expenses and
unfavorable warranty experiences in the Boat segment; and a mix shift toward
lower horsepower four-stroke engines manufactured by a joint venture that
carry lower margins. These unfavorable factors were partially offset by
successful cost-reduction efforts, the benefit of a weaker dollar and increased
world-wide sales volume in the Fitness segment.
Operating expenses increased $151.4 million to $1,035.9 million in 2007, due to
the $66.4 million impairment charge taken on indefinite-lived intangible assets,
as discussed in Note 7 –
Goodwill and Other Intangible Assets in the Notes to Consolidated
Financial Statements, higher variable compensation expense, inflation and the
effects of a weaker dollar, the absence of the gains on sales of property
sold in 2006 and the absence of a favorable settlement with an insurance carrier
on environmental coverage received in 2006.
Operating
earnings decreased to $107.2 million in 2007 from $341.2 million in
2006. The decrease in operating earnings was mainly due to the
decline in Boat segment sales volumes and the unfavorable factors affecting
gross margin and operating expenses discussed above.
Equity
earnings increased $6.4 million to $21.3 million in 2007. The increase in equity
earnings was mainly the result of additional earnings from the Company’s CMD
joint venture.
In August
2007, the Company settled a legal claim against a third-party service provider.
The settlement resulted in $7.1 million of income, net of legal fees, and was
reflected in Other income (expense), net for the period.
Interest
expense decreased $8.2 million to $52.3 million in 2007 compared with 2006,
primarily as a result of lower debt levels in 2007. In July 2006, the Company
issued $250 million of notes due in 2009 to fund the maturity of $250 million of
notes due in December 2006, as described in Note 14 – Debt in the Notes to
Consolidated Financial Statements. Interest income decreased $7.3 million to
$8.7 million in 2007 compared with 2006 primarily as a result of income earned
in 2006 on the proceeds from the aforementioned notes issued in July
2006.
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.
During
the year ended December 31, 2006, the Company recognized tax benefits of
$47.0 million, consisting primarily of $40.2 million of tax reserve
reassessments of underlying exposures, as discussed in Note 11 – Commitments and
Contingencies in the Notes to Consolidated Financial
Statements.
Net
earnings and diluted earnings per share decreased primarily due to the same
factors discussed above in operating earnings.
Weighted
average common shares outstanding used to calculate diluted earnings per share
decreased to 90.2 million in 2007 from 94.7 million in 2006. The
decrease in average shares outstanding was primarily due to the repurchase of
4.1 million shares during 2007, as discussed in Note 19 – Share Repurchase Program
in the Notes to Consolidated Financial Statements.
Sales
from discontinued operations were $99.7 million during 2007, compared with
$306.3 million during 2006. Sales declined significantly as a result of the
sales of BNT’s marine electronics and PND businesses, which were disposed of
during the first quarter of 2007 and the BNT wireless fleet tracking business,
which was sold in July 2007. The July sale completed the disposal of the BNT
businesses. The discontinued operations generated after-tax earnings from the
BNT business operations, excluding the gains on the sales of the businesses, of
$2.2 million in 2007, compared with after-tax operating losses, which include
impairment charges of $85.6 million after-tax, of $43.7 million during 2006. The
2007 earnings from these operations were almost exclusively related to
post-closing income tax adjustments as a result of the finalization of BNT sales
agreements. The comparable 2006 loss was the result of costs associated with
reducing inventories and maintaining competitive pricing in the
marketplace.
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 has now completed the divestiture of the BNT discontinued operations.
With the net asset impairment taken prior to the disposition of the BNT
businesses in the fourth quarter of 2006 of $85.6 million, after-tax, and the
subsequent 2007 gains of $29.8 million, after-tax, on the BNT business sales,
the net impact to the Company of these dispositions was a net loss of $55.8
million, after-tax.
2006
vs. 2005
The
increase in sales was primarily due to $210.2 million from acquisitions
completed in 2006 and 2005 in the Boat and Marine Engine segments, higher
Fitness segment sales resulting from increased sales volumes and improved
product mix, and sales gains at bowling retail centers. Organic sales
decreased 2.7 percent in 2006, primarily due to lower retail demand for marine
products compared with 2005, especially with respect to sales of domestic
outboard engines and fiberglass boats. These decreases were partially
offset by growth in non-U.S. sales in the Boat, Marine Engine and Fitness
segments, as well as favorable pricing.
Non-U.S.
sales increased $42.1 million to $1,802.4 million in 2006, with the largest
contributions coming from the Latin American region, which increased $24.6
million to $158.3 million, and the Africa and Middle East region, which
increased $14.3 million to $87.2 million. This growth was largely
attributable to higher sales of fitness equipment, boats and outboard
engines.
Brunswick’s
gross margin percentage decreased 200 basis points in 2006 to 21.6 percent from
23.6 percent in 2005. This decrease was the result of higher raw
material and component costs; lower fixed-cost absorption and inefficiencies due
to reduced production rates as a result of the Company’s effort to achieve
appropriate levels of marine customer pipeline inventories in light of lower
retail demand; and the full-year effect of the transition to low-emission
outboard engines, which carry lower margins than the carbureted two-stroke
outboards they replaced. Gross margin also decreased due to a shift
in product mix, as sales volumes decreased in some of the higher-margin
fiberglass boat lines, and higher sales from acquired businesses, which have
lower margins than Brunswick’s core brands. Also contributing to the
decrease in gross margin percentage was a restructuring charge of $7.6 million
recorded during the fourth quarter of 2006 for severance costs, asset
write-downs and other costs associated with workforce reductions, plant
shutdowns and distribution realignment actions. Total pre-tax
restructuring charges recognized during the fourth quarter under this initiative
were $18.9 million, of which $9.5 million was recorded in operating
expenses. The remaining balance of $1.8 million was related to asset
write-downs associated with a joint venture and recorded against equity
earnings. These unfavorable factors were partially offset by
favorable pricing and lower variable compensation expense.
Operating
expenses increased $31.6 million to $884.5 million in 2006, primarily due to the
effect of acquisitions; the $9.5 million restructuring charge recorded in the
fourth quarter of 2006 as discussed above; the unfavorable effect of inflation
on wages and benefits; the absence of a reduction in Marine Engine segment bad
debt reserves that occurred in the third quarter of 2005 resulting from improved
credit experience in international markets; a reduction in gains associated with
the sale of bowling centers; and increased investments in research and
development expenses, particularly in the Marine Engine and Fitness
segments. These increases were partially offset by reduced variable
compensation expense; a favorable settlement with an insurance carrier on
environmental coverage; the absence of legal expenses incurred in 2005 related
to a dispute with a supplier in China as discussed in Note 11 – Commitments and
Contingencies in the Notes to Consolidated Financial Statements; lower
costs associated with the transition of bowling ball production from Michigan to
Reynosa, Mexico; and other cost-reduction initiatives.
Operating
earnings decreased to $341.2 million in 2006 from $468.7 million in
2005. The decrease in operating earnings was mainly due to the
decline in sales volumes and the factors affecting gross margin and operating
expenses discussed above. The decrease was partially offset by
contributions from acquisitions, the benefit of a weaker dollar and
cost-reduction initiatives.
In the
first quarter of 2005, Brunswick sold 1,861,200 shares of common stock of
MarineMax, its largest boat dealer. Proceeds from this stock sale
totaled $56.8 million, net of $4.1 million of selling expenses, which included
$1.1 million of accrued expenses. Brunswick recorded a pre-tax gain
of $38.7 million on the sale. Refer to Note 8 – Investments in the
Notes to Consolidated Financial Statements for details on the sale of this
investment.
Interest
expense increased $7.3 million in 2006 compared with 2005, primarily due to
additional interest incurred on the $250 million floating rate notes issued in
July 2006, as described in Note
14 – Debt in the Notes to Consolidated Financial Statements, coupled with
the unfavorable effects of higher short-term interest rates compared with the
prior year. Interest income increased $1.0 million in 2006 from 2005
due to a higher average invested cash balance as a result of proceeds from the
floating rate notes issuance during the second half of 2006, as well as
increasing rates of return on invested cash balances.
Brunswick’s
effective tax rate in 2006 decreased to 15.0 percent from 23.6 percent in 2005,
mostly due to higher tax benefits in 2006 compared with the prior
year. During the year ended December 31, 2006, the Company recognized
tax benefits of $47.0 million, consisting primarily of $40.2 million of tax
reserve reassessments of underlying exposures as discussed in Note 11 – Commitments and
Contingencies in the Notes to Consolidated Financial
Statements.
In 2005,
the Company recognized $30.8 million of tax benefits, primarily due to
refinements in the calculation of prior years’ extraterritorial income tax
benefit, the reassessment of tax reserves for underlying exposures and the
Company’s APB 23 assertion to indefinitely reinvest the undistributed net
earnings of certain foreign subsidiaries, as discussed above. In
addition, Brunswick utilized previously unrecognized capital loss carryforwards
on the gain on the sale of MarineMax stock as discussed above. The
2005 tax rate was further affected by foreign earnings in lower effective tax
rate jurisdictions. Refer to Note 10 – Income Taxes in the
Notes to Consolidated Financial Statements for further details with respect to
these tax benefits. Both the 2006 and 2005 effective tax rates were
lower than the statutory rate as a result of the research and development tax
credit and the extraterritorial income tax benefit.
Net
earnings and diluted earnings per share decreased primarily due to the same
factors discussed above in operating earnings.
Weighted
average common shares outstanding used to calculate diluted earnings per share
decreased to 94.7 million in 2006 from 98.8 million in 2005. The
decrease in average shares outstanding was primarily due to the repurchase of
approximately 5.6 million shares during 2006, as well as the full-year benefit
of 2005 share repurchases, as discussed in Note 19 – Share Repurchase Program
in the Notes to Consolidated Financial Statements.
Sales
from discontinued operations decreased to $306.3 million in 2006 from $325.0
million in 2005, as BNT took necessary discounting and promotional actions to
meet competitive pricing pressures, especially in the European consumer portable
navigation device market. Pre-tax operating losses from discontinued operations
in 2006, before impairment, were $65.0 million, compared with pre-tax operating
earnings of $9.9 million in 2005. In addition to the factors affecting sales,
the reduction in pre-tax operating earnings from discontinued operations was
also due to efforts to reduce inventory for BNT as well as for its dealers and
to maintain competitive pricing in anticipation of new product launches in late
2006, in addition to certain investment write-offs that were recorded during the
year. Additionally, based on Brunswick’s December 2006 announcement
that the proceeds from the sale of BNT were expected to be less than its book
value at that time, BNT recognized a non-cash impairment charge of $73.9
million, $85.6 million after-tax, in the fourth quarter of 2006. The
after-tax impairment amount reflects the reversal of previously recorded
tax-benefited operating losses.
Segments
The
Company operates in four reportable segments: Boat, Marine Engine, 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.
Boat
Segment
The
following table sets forth Boat segment results for the years ended December 31,
2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
2007
vs. 2006
|
|
|
2006
vs. 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
% |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,690.9 |
|
|
$ |
2,864.4 |
|
|
$ |
2,783.4 |
|
|
$ |
(173.5 |
) |
|
(6.1 |
)% |
|
$ |
81.0 |
|
|
2.9 |
% |
|
Impairment
charges(A)
|
|
$ |
66.4 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
66.4 |
|
NM
|
|
|
$ |
— |
|
|
— |
% |
|
Operating earnings (A)
|
|
$ |
(81.4 |
) |
|
$ |
135.6 |
|
|
$ |
192.5 |
|
|
$ |
(217.0 |
) |
NM
|
|
|
$ |
(56.9 |
) |
|
(29.6 |
)% |
|
Operating
margin
|
|
|
(3.0 |
)% |
|
|
4.7 |
% |
|
|
6.9 |
% |
|
|
|
|
(770
|
)bpts |
|
|
|
|
(220
|
)bpts |
|
Capital
expenditures
|
|
$ |
94.9 |
|
|
$ |
75.8 |
|
|
$ |
74.7 |
|
|
$ |
19.1 |
|
|
25.2 |
% |
|
$ |
1.1 |
|
|
1.5 |
% |
__________
bpts=basis
points
NM = not
meaningful
|
(A)
|
Consolidated
operating earnings for the years ended December 31, 2007 and 2006,
included restructuring charges, as discussed in the Consolidated Results
of Operations above, of which $15.9 million and $4.2 million were recorded
in the Boat segment for the years ended December 31, 2007 and 2006,
respectively.
|
2007
vs. 2006
The
decrease in Boat segment net sales was largely attributable to the impact of
reduced marine retail demand in United States markets and lower shipments to
dealers in an effort to achieve appropriate levels of pipeline inventories.
Increased promotional incentives also contributed to lower net sales. Sales were
positively affected by growth outside the United States and gains in the Boat
segment’s parts and accessories business. Additionally, sales were favorably
affected by acquisitions completed in 2007 and 2006. Excluding incremental sales
of $14.5 million from acquired businesses, organic Boat segment sales declined
by 6.6 percent.
Boat
segment operating earnings decreased from 2006, primarily due to a decrease in
sales volume and the $66.4 million pre-tax impairment charges taken on certain
indefinite-lived intangible assets, as discussed in Note 7 – Goodwill and Other
Intangible Assets in the Notes to Consolidated Financial Statements.
Additionally, increased promotional incentives, higher raw material costs,
higher restructuring costs, increased variable compensation expense
and additional warranty costs contributed to the decline in operating
earnings.
Capital
expenditures increased in 2007 as a result of the acquisition of a boat
manufacturing facility in Navassa, North Carolina, which offers the Company the
ability to manufacture cruisers and other large boats as well as increased
manufacturing flexibility, productivity and efficiency. Other than the
acquisition of the manufacturing facility in 2007 and a marina in 2006, the 2007
and 2006 capital expenditures were largely attributable to tooling costs for the
production of new models across all boat brands.
2006
vs. 2005
The
increase in Boat segment sales was mainly attributable to $201.1 million from
acquisitions completed in 2006 and 2005. Organic Boat segment sales
declined by 4.3 percent from the prior year primarily due to reduced marine
retail demand in domestic markets, as well as lower shipments to dealers in an
effort to achieve appropriate levels of pipeline
inventories. Increased promotional incentives, particularly for some
higher-margin fiberglass boat lines, also contributed to lower
sales. The sales decrease was partially offset by favorable pricing
and improved sales in non-U.S. markets, most notably Canada and Latin
America.
Boat
segment operating earnings decreased from 2005 as the favorable effect of
slightly higher sales, together with successful cost control efforts and lower
variable compensation expense, was more than offset by $24.1 million
of operating expenses from acquisitions, lower fixed-cost absorption as a result
of reduced production levels across the segment’s brands, an unfavorable shift
in product mix as sales volumes decreased in some of the higher-margin
fiberglass boat lines, higher raw material and production costs and increased
freight expenses. In addition, a $4.2 million restructuring charge was recorded
against Boat segment operating earnings during the fourth quarter of 2006,
related to the consolidation of certain US Marine and Lund boat manufacturing
facilities, sales offices and distribution centers to streamline
operations.
Capital
expenditures in 2006 and 2005 were primarily related to tooling costs for the
production of new models. Additionally, capital expenditures in 2006
included the acquisition of an interest in a marina. Capital
expenditures in 2005 were also related to the acquisition of a boat plant in
North Carolina in 2005 to expand capacity for the production of Hatteras
sportfishing convertibles and motoryachts, as well as the expansion of a boat
manufacturing plant in Reynosa, Mexico.
Marine
Engine Segment
The
following table sets forth Marine Engine segment results for the years ended
December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
2007
vs. 2006
|
|
|
2006
vs. 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
$ |
|
|
% |
|
|
$
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,357.5 |
|
|
$ |
2,271.3 |
|
|
$ |
2,300.6 |
|
|
$ |
86.2 |
|
|
3.8 |
% |
|
$ |
(29.3 |
) |
|
(1.3 |
)% |
|
Operating
earnings (A)
|
|
$ |
183.7 |
|
|
$ |
193.8 |
|
|
$ |
250.5 |
|
|
$ |
(10.1 |
) |
|
(5.2 |
)% |
|
$ |
(56.7 |
) |
|
(22.6 |
)% |
|
Operating
margin (A)
|
|
|
7.8 |
% |
|
|
8.5 |
% |
|
|
10.9 |
% |
|
|
|
|
(70
|
)bpts |
|
|
|
|
(240
|
)bpts |
|
Capital
expenditures
|
|
$ |
54.8 |
|
|
$ |
72.5 |
|
|
$ |
91.5 |
|
|
$ |
(17.7 |
) |
|
(24.4 |
)% |
|
$ |
(19.0 |
) |
|
(20.8 |
)% |
__________
bpts=basis
points
|
(A)
|
Consolidated
operating earnings for the years ended December 31, 2007 and 2006,
included restructuring charges, as discussed in the Consolidated Results
of Operations above, of which $3.4 million and $9.5 million were recorded
in the Marine Engine segment for the years ended December 31, 2007 and
2006, respectively.
|
2007
vs. 2006
Net sales
recorded by the Marine Engine segment increased compared with 2006. The increase
was the result of sales growth outside the United States across all major
regions, volume increases in the low horsepower four-stroke engines manufactured
by a joint venture, the favorable effect of foreign currency translation and
higher engine pricing. This increase was partially offset by a slight decline in
sales within the United States.
Marine
Engine segment operating earnings decreased in 2007 as a result of increases in
raw materials costs and other inflationary effects, concentration of sales in
lower margin products, higher variable compensation expense, costs related
to inventory adjustments, an adverse settlement related to a patent
infringement lawsuit and the absence of a favorable settlement with an insurance
carrier on environmental coverage received in 2006. This decrease was partially
offset by the impact of increased net sales outside the United States, the
favorable effect of foreign currency translation, increased manufacturing
efficiencies in outboard engine manufacturing, favorable warranty experience in
2007 and reduced promotional incentives.
The
decrease in capital expenditures was primarily attributable to investments in
2006 associated with the completion of a second four-stroke outboard production
line, plant expansions for die cast operations and investments in information
technology.
2006
vs. 2005
Sales
recorded by the Marine Engine segment decreased slightly from 2005, mainly due
to a decline in domestic outboard engine sales volume compared with a stronger
marine environment in the prior year, as well as efforts to reduce pipeline
inventories held by customers. These factors were partially offset by
higher engine pricing; international sales growth, especially in European and
Latin American markets; an acquisition completed in 2005; a greater mix of
low-emission outboard engines, which have higher prices; and the favorable
effect of foreign currency translation.
The
decrease in operating earnings for the Marine Engine segment was largely
attributable to the lower sales volumes discussed above, as well as higher raw
material costs; lower fixed-cost absorption due to reduced production levels to
maintain appropriate dealer and customer pipeline inventories; the full-year
effect of the mix shift to low-emission outboard engines; the absence of a
reduction in bad debt reserves that occurred in the third quarter of 2005
resulting from improved credit experience in international markets; and costs to
ramp up Asian manufacturing facilities. The positive effects of lower
variable compensation expense, successful cost-reduction initiatives, a gain on
the sale of property in the first quarter of 2006 and a favorable settlement
with an insurance carrier on environmental coverage in the second quarter were
partially offset by higher research and development expenses. In
addition, a $9.5 million restructuring charge was recorded against Marine Engine
segment operating earnings during the fourth quarter of 2006, primarily related
to severance costs, asset write-downs and other expenses associated with actions
to improve the Company’s cost structure and streamline sales
operations.
The
decrease in capital expenditures was largely due to investments in 2005 for the
development of the new line of 75, 90 and 115 horsepower naturally aspirated
four-stroke outboard engines, as well as the completion of tooling for the
four-cylinder supercharged Verado engines. The decrease was partially
offset by expenditures in 2006 for the completion of a second four-stroke
outboard production line and plant expansions for die cast operations, as well
as investments in information technology.
Fitness
Segment
The
following table sets forth Fitness segment results for the years ended December
31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
2007
vs. 2006
|
|
|
2006
vs. 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
% |
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
653.7 |
|
|
$ |
593.1 |
|
|
$ |
551.4 |
|
|
$ |
60.6 |
|
|
10.2 |
% |
|
$ |
41.7 |
|
|
|
7.6 |
% |
|
Operating
earnings
|
|
$ |
59.7 |
|
|
$ |
57.8 |
|
|
$ |
56.1 |
|
|
$ |
1.9 |
|
|
3.3 |
% |
|
$ |
1.7 |
|
|
|
3.0 |
% |
|
Operating
margin
|
|
|
9.1 |
% |
|
|
9.7 |
% |
|
|
10.2 |
% |
|
|
|
|
|
(60
|
)bpts |
|
|
|
|
|
(50
|
)bpts |
|
Capital
expenditures
|
|
$ |
11.8 |
|
|
$ |
11.0 |
|
|
$ |
11.2 |
|
|
$ |
0.8 |
|
|
7.3 |
% |
|
$ |
(0.2 |
) |
|
|
(1.8 |
)
% |
__________
bpts=basis
points
2007
vs. 2006
The
increase in Fitness segment net sales was largely attributable to commercial
equipment sales growth in the United States and Europe, as health clubs
continued to expand, as well as consumer equipment sales growth in Europe.
Additionally, favorable foreign currency translation led to higher sales in 2007
as compared with 2006. The sales growth in 2007 was partially offset by
competitive pricing pressures in markets outside the United States.
The
Fitness segment benefited from sales volume growth in commercial products,
higher contributions from the resale of certified pre-owned fitness equipment in
Europe and a decline in United States freight and installation costs. These
benefits to operating earnings were partially offset by a mix shift in sales
toward lower margin products in the United States and Europe, the unfavorable
effect of inflation on wages and benefits, higher research and development and
marketing costs related to the launch of new cardiovascular products and higher
product warranty costs.
2007
capital expenditures were related to continued investments in a new line of
cardiovascular products while capital expenditures in 2006 were primarily
related to investment in an engineering research and development
facility.
2006
vs. 2005
The
increase in Fitness segment sales was largely attributable to higher domestic
sales and increased international commercial sales volumes, particularly in the
Pacific Rim, as health clubs continued to expand. Sales momentum for consumer
fitness products grew in all markets with the successful introduction of new
cardiovascular and strength equipment. Sales growth in domestic
markets was partially offset by competitive pricing pressures in international
markets.
Fitness
segment operating earnings benefited from the higher sales volumes discussed
above, as well as from lower variable compensation expense and cost-reduction
initiatives. These factors were partially offset by a shift in mix
toward strength equipment, which has lower margins than cardiovascular product
lines, as well as higher raw materials, freight and distribution costs,
increased research and development investments for new product introductions and
the unfavorable effect of inflation on wages and benefits.
Capital
expenditures in 2006 and 2005 were primarily related to tooling for new products
and software development. Additionally, capital expenditures in 2006
included investments in a new engineering research and development facility to
drive future product improvements. Capital expenditures in 2005
included equipment expenditures associated with expansion at the Company’s
Hungarian manufacturing facility.
Bowling
& Billiards Segment
The
following table sets forth Bowling & Billiards segment results for the years
ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
2007
vs. 2006
|
|
|
2006
vs. 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
|
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
|
% |
|
|
$ |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
446.9 |
|
|
$ |
458.3 |
|
|
$ |
464.5 |
|
|
$ |
(11.4 |
) |
|
|
(2.5 |
)
% |
|
$ |
(6.2 |
) |
(1.3 |
)% |
|
Operating
earnings (A)
|
|
$ |
16.5 |
|
|
$ |
22.1 |
|
|
$ |
37.2 |
|
|
$ |
(5.6 |
) |
|
|
(25.3 |
)
% |
|
$ |
(15.1 |
) |
(40.6 |
)% |
|
Operating
margin (A)
|
|
|
3.7 |
% |
|
|
4.8 |
% |
|
|
8.0 |
% |
|
|
|
|
|
(110
|
)bpts |
|
|
|
|
(320
|
)bpts |
|
Capital
expenditures
|
|
$ |
41.6 |
|
|
$ |
43.7 |
|
|
$ |
36.8 |
|
|
$ |
(2.1 |
) |
|
|
(4.8 |
)
% |
|
$ |
6.9 |
|
18.8 |
% |
__________
bpts=basis
points
|
(A)
|
Consolidated
operating earnings for the years ended December 31, 2007 and 2006,
included restructuring charges, as discussed in the Consolidated Results
of Operations above, of which $2.8 million and $2.7 million were recorded
in the Bowling & Billiards segment for the years ended December 31,
2007 and 2006, respectively.
|
2007
vs. 2006
Bowling
& Billiards segment net sales in 2007 decreased from prior year levels,
primarily due to declines in sales of bowling products as a result of difficult
market conditions; operational inefficiencies at the Reynosa, Mexico bowling
ball facility; the absence of sales related to instant redemption games, where
Brunswick’s supplier modified its distribution channel and began selling
directly to retail entertainment centers; the loss of sales from divested
bowling centers and a decline in Valley-Dynamo coin-operated billiards table
sales. This decrease has been partially offset by increased sales at three new
Brunswick Zone XL centers and higher revenues at existing bowling
centers.
The
decrease in 2007 operating earnings was attributable to lower
sales, additional costs associated with operational inefficiencies of the
Reynosa bowling ball plant, write-downs taken on certain bowling center fixed
assets where the carrying value was not expected to be fully recoverable, the
absence of earnings from the instant redemption games discussed above, the lack
of gains from sales of bowling centers in 2006 and higher costs associated with
the start-up of three new Brunswick Zone XL centers noted above. This decrease
was partially offset by the absence of 2006 losses from bowling centers
disposed of during 2007 and improved warranty experience related to bowling
products.
Decreased
capital expenditures in 2007 were driven by reduced spending for the new bowling
ball manufacturing facility in Reynosa, Mexico, partially offset by capital
expenditures associated with three new Brunswick Zone XL centers opened in 2007
compared with one in 2006.
2006
vs. 2005
Bowling
& Billiards segment sales decreased from prior year levels as the benefits
of increased bowling center revenues and higher sales volumes of home billiards
tables were offset by lower sales of bowling equipment and Valley-Dynamo
coin-operated billiards tables. Sales growth at bowling retail
centers was primarily due to improved traffic at existing retail centers, as
well as the addition of two new Brunswick Zone XL centers, partially offset by
operating five fewer bowling centers in 2006 versus the prior
year. Bowling equipment sales decreased from 2005, when there were
several large one-time shipments to international customers. In
addition, bowling equipment sales were adversely affected by start-up production
inefficiencies related to the transition of bowling ball manufacturing from
Muskegon, Michigan to Reynosa, Mexico.
The
decrease in operating earnings was largely attributable to a reduction in gains
associated with the sale of bowling centers in 2006, compared with 2005, and
start-up costs associated with the transition of the segment’s bowling ball and
Valley-Dynamo manufacturing operations to Reynosa, Mexico. Bowling
ball production at the Reynosa facility commenced in 2006, while Valley-Dynamo
operations in Reynosa commenced in early 2007. Additionally, a $2.7
million restructuring charge was recorded against Bowling & Billiards
segment operating earnings during the fourth quarter of 2006, primarily related
to severance costs and other expenses associated with actions to streamline
operations. These items were partially offset by reduced variable
compensation expenses and the absence of legal fees incurred in 2005 related to
a dispute with a supplier in China as discussed in Note 11 – Commitments and
Contingencies in the Notes to Consolidated Financial
Statements.
Increased
capital expenditures in 2006 were driven by higher investments in the new
manufacturing facilities in Reynosa as well as higher capital spending for new
Brunswick Zone XL bowling centers.
Cash
Flow, Liquidity and Capital Resources
For the
year ended December 31, 2007, the Company changed its presentation of the
consolidated statements of cash flows to include net earnings and net earnings
(loss) from discontinued operations. Accordingly, the Company revised the 2006
and 2005 consolidated statements of cash flows. Net cash flows from operating,
investing and financing activities have not changed.
The
following table sets forth an analysis of free cash flow for the years ended
December 31, 2007, 2006 and 2005:
|
(in millions)
|
|
2007
|
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Net
cash provided by operating activities of continuing
operations
|
|
$ |
344.1 |
|
$ |
351.0 |
|
$ |
421.6 |
|
|
Net
cash provided by (used for):
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(207.7 |
) |
|
(205.1 |
) |
|
(223.8 |
) |
|
Proceeds
from investment sale
|
|
|
— |
|
|
— |
|
|
57.9 |
|
|
Proceeds
from the sale of property, plant and equipment
|
|
|
10.1 |
|
|
7.2 |
|
|
13.4 |
|
|
Other,
net
|
|
|
25.6 |
|
|
(0.4 |
) |
|
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Free
cash flow from continuing operations *
|
|
$ |
172.1 |
|
$ |
152.7 |
|
$ |
267.9 |
|
__________
|
*
|
The
Company defines Free cash flow from continuing operations as cash flow
from operating and investing activities of continuing operations
(excluding acquisitions and investments) and excluding financing
activities. Free cash flow from continuing operations is not
intended as an alternative measure of cash flow from operations, as
determined in accordance with generally accepted accounting principles
(GAAP) in the United States. The Company uses this financial
measure, both in presenting its results to shareholders and the investment
community and in its internal evaluation and management of its businesses.
Management believes that this financial measure and the information it
provides are useful to investors because it permits investors to view the
Company’s performance using the same tool that management uses to gauge
progress in achieving its goals. Management believes that the non-GAAP
financial measure “Free cash flow from continuing operations” is also
useful to investors because it is an indication of cash flow that may be
available to fund further investments in future growth
initiatives.
|
Brunswick’s
major sources of funds for investments, acquisitions 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.
2007
vs. 2006
In 2007,
net cash provided by operating activities of continuing operations totaled
$344.1 million, compared with $351.0 million in 2006. This decrease
was caused by a $142.1 million decline in net earnings from continuing
operations, adjusted for the non-cash pre-tax impairment charge of $66.4 million
($41.5 million after-tax). The decrease in net earnings from
continuing operations was primarily offset by more favorable changes in working
capital between periods as the Company experienced a $3.5 million decrease in
working capital, defined as non-cash current assets less current liabilities, in
2007 versus a $92.8 million increase in 2006. The favorable change in
working capital was driven by a decrease in cash variable compensation payouts
during 2007, as well as increased accrued promotional incentives in the Boat and
Engine segments, compared with prior year. These factors were
partially offset by operating cash used to fund inventory increases in 2007,
compared with 2006. Although production rates were lowered to help
achieve reduced levels of marine pipeline inventories, increases in inventory
balances exceeded those in the prior year as a result of the reduction in retail
demand for both boats and engines, higher engine inventories to support growth
in markets outside the United States, acquisitions completed during 2006 and the
ramp up of production at the Company’s Hatteras facility in Swansboro, North
Carolina, which opened in late 2005, as well as the Navassa facility acquired in
July 2007. Additionally, accounts receivable balances increased due to growth in
marine sales outside the United States, which carry longer terms.
Cash
flows from investing activities included capital expenditures of $207.7 million
in 2007, which increased from $205.1 million in 2006. Significant capital
expenditures in 2007 included the purchase of a new boat manufacturing facility
in Navassa, North Carolina, tooling expenditures for new models and product
innovations in the Boat and Fitness segments and higher capital spending for new
Brunswick Zone XL centers and existing bowling centers.
The
Company expects investments for capital expenditures in 2008 to be below 2007
levels. Approximately 60 percent of the capital spending is
anticipated to be for investments in new and upgraded products and the
construction of new Brunswick Zone XL centers, with the remainder targeted
towards cost reductions, plant capacity expansions and investments in
information technology.
Cash paid
for acquisitions, net of cash acquired, totaled $6.2 million and $86.2 million
in 2007 and 2006, respectively. See Note 6 – Acquisitions in the
Notes to Consolidated Financial Statements for further details on Brunswick’s
acquisitions. Brunswick received $4.1 million from its joint
ventures, net of investments, in 2007 compared with $6.1 million, net of
investments, in 2006. Additionally, cash flows from investing
activities in 2007 benefited from the Company’s receipt of proceeds on notes
associated with divestitures that occurred in previous years.
Cash
flows from financing activities of continuing operations resulted in a use of
cash of $167.8 million in 2007 compared with $235.7 million in
2006. This change was primarily due to the Company’s share repurchase
program, under which the Company repurchased 4.1 million shares for $125.8
million in 2007, compared with repurchases of approximately 5.6 million shares
for $195.6 million in 2006. See Note 19 – Share Repurchase Program
in the Notes to Consolidated Financial Statements for further details.
The Company received $10.8 million from stock options exercised in 2007,
compared with $15.9 million during the same period in 2006. An annual
dividend of $0.60 per share was declared and paid in both 2007 and 2006,
resulting in dividend payments of $52.6 million and $55.0 million,
respectively.
Cash and
cash equivalents totaled $331.4 million as of December 31, 2007, an increase of
$48.0 million from $283.4 million at December 31, 2006. Total debt as of
December 31, 2007, and December 31, 2006, was $728.2 million and $726.4 million,
respectively. Brunswick’s debt-to-capitalization ratio decreased
slightly to 27.8 percent as of December 31, 2007, from 28.0 percent as of
December 31, 2006.
The
Company has a $650.0 million long-term revolving credit facility (Facility) with
a group of banks, as described in Note 14 - Debt in the Notes of
Consolidated Financial Statements, that serves as support for commercial paper
borrowings. The Facility has a term of five years, with provisions to extend the
term for an additional one year on each anniversary of the Facility, with
consent of the lenders. In May 2007, the Company amended the Facility
agreement, resulting in a one-year extension of the term through May 5,
2012. Of the $650.0 million Facility, there are $55.0 million of
commitments which expire on May 5, 2011; however, the Company has the right to
replace these commitments with new lenders at any time. There were no borrowings
under the Facility during 2007 or 2006, and the Facility continues to serve as
support for any outstanding commercial paper borrowings. The Company
has the ability to issue up to $150.0 million in letters of credit under the
Facility. At December 31, 2007, the Company had $53.8 million in outstanding
letters of credit under the Facility compared with $63.2 million at December 31,
2006. The Company had borrowing capacity of $596.2 million under the
terms of this agreement as of December 31, 2007, net of outstanding letters of
credit. Under the terms of the Facility, Brunswick is subject to a
leverage test, as well as restrictions on secured debt. The Company
was in compliance with these covenants at December 31, 2007. The
borrowing rate, as calculated in accordance with the Facility, was 5.1 percent
as of December 31, 2007. In addition, the Company has $200.0 million
available under its universal shelf registration statement filed in 2001 with
the SEC for the issuance of equity and/or debt securities.
The
aggregate funded status of the Company’s qualified pension plans, measured as a
percentage of the projected benefit obligation, improved to 99.9 percent in 2007
from 96.7 percent in 2006 primarily as a result of positive asset returns in
2007, and the favorable impacts of an increase in the discount rate and
demographic gains on the determination of the projected benefit obligation in
2007, partially offset by the impact of updating expected mortality assumptions.
As of December 31, 2007, the Company’s qualified pension plans were underfunded
on an aggregate projected benefit obligation basis by a net balance of $0.1
million. See Note 15
– Postretirement Benefits in the Notes to Consolidated
Financial Statements for more details.
The
Company contributed $2.6 million and $2.4 million to fund benefit payments in
its nonqualified plan in 2007 and 2006, respectively. The Company was not
required to make contributions to its qualified pension plans in
2007. During 2006, the Company funded $15.0 million of discretionary
contributions into its qualified pension plans.
Brunswick’s
financial flexibility and access to capital markets are supported by its balance
sheet position, investment-grade credit ratings and ability to generate
significant cash from operating activities. Management believes that
there are adequate sources of liquidity to meet the Company’s short-term and
long-term needs.
2006
vs. 2005
In 2006,
net cash provided by operating activities of continuing operations totaled
$351.0 million, compared with $421.6 million in 2005. This decrease was
primarily caused by a $107.9 million decline in net earnings from continuing
operations, including a $31.5 million after-tax gain from the sale of the
Company’s investment in MarineMax recognized in 2005. The proceeds
recognized on this sale are presented in investing activities. See
Note 8 – Investments in
the Notes to Consolidated Financial Statements for details on the sale of this
investment.
Brunswick
also used operating cash flow to increase working capital by $92.8 million in
2006 versus a $53.6 million increase in 2005. The cash used to fund
working capital in 2006 was primarily due to lower variable compensation
accruals year over year and an increase in inventory, as domestic retail demand
for marine products slowed in 2006. Inventory balances also increased
as a result of acquisitions completed during the year; higher raw material and
work-in-process balances associated with increased order rates at the Company’s
Hatteras facility in Swansboro, North Carolina, which opened in 2005; and sales
growth and new product introductions in the Fitness segment.
Cash
flows from investing activities of continuing operations included capital
expenditures of $205.1 million in 2006, which decreased from $223.8 million in
2005. Significant capital expenditures in 2006 were attributable to
tooling expenditures for new models and product innovations in the Boat segment,
the completion of a second four-stroke outboard production line in the Marine
Engine segment; the acquisition of an interest in a marina in St. Petersburg,
Florida; capital spending for new Brunswick Zone XL and existing bowling
centers; investments in the new bowling ball manufacturing facility in Reynosa,
Mexico; and completion of the Life Fitness engineering design
facility.
Cash paid
for acquisitions, net of debt and cash acquired, totaled $86.2 million and
$130.3 million in 2006 and 2005, respectively. See Note 6 – Acquisitions in the
Notes to Consolidated Financial Statements for further details on Brunswick’s
acquisitions. Additionally, Brunswick received $6.1 million from its
joint ventures, net of investments, in 2006 compared with net investments of
$18.1 million in 2005. These joint ventures are discussed further in
Note 8 – Investments in
the Notes to Consolidated Financial Statements.
In 2005,
Brunswick sold 1,861,200 shares of common stock of MarineMax, its largest boat
dealer. Pre-tax proceeds from this stock sale totaled $56.8 million, net of $4.1
million of selling expenses, which included $1.1 million of accrued
expenses. This sale generated $51.5 million of after-tax cash flow
for the Company, which was used for general corporate purposes. See Note 8 – Investments in the
Notes to Consolidated Financial Statements for details on the sale of this
investment.
Cash
flows from financing activities of continuing operations used cash of $235.7
million in 2006, compared with $122.2 million in 2005. This change
was primarily due to the Company’s stock repurchase plan, which resulted in
expenditures of $195.6 million to buy back approximately 5.6 million shares of
Brunswick’s common stock in 2006, compared to the 2005 buyback of $76.0 million
for approximately 1.9 million shares. The Company received $15.9
million from stock options exercised in 2006, compared with $17.1 million during
2005. An annual dividend of $0.60 per share was declared and paid in
both 2006 and 2005, resulting in dividend payments of $55.0 million and $57.3
million, respectively.
Cash and
cash equivalents totaled $283.4 million as of December 31, 2006, a decrease of
$204.3 million from the $487.7 balance in 2005. Total debt as of December 31,
2006, increased $1.6 million to $726.4 million versus $724.8 million at December
31, 2005. Brunswick’s debt-to-capitalization ratio increased to 28.0
percent as of December 31, 2006, compared with 26.8 percent as of December 31,
2005. The increase was largely attributable to the Company’s adoption 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),” which resulted in a $60.7 million decrease to common shareholders’
equity, as described in Note 15
– Postretirement Benefits in the Notes to Consolidated Financial
Statements.
Brunswick
has a $650.0 million revolving credit facility, as described in Note 14 – Debt in the Notes to
Consolidated Financial Statements, that serves as support for commercial paper
borrowings. There were no borrowings under the Facility during
2006. The Company has the ability to issue up to $150.0 million in
letters of credit under the Facility. At December 31, 2006, the
Company had $63.2 million in outstanding letters of credit under the Facility,
including $46.4 million for continuing operations. Net of these
issued letters of credit, the Company had borrowing capacity of $586.8 million
under the terms of the Facility at December 31, 2006. Under the terms
of the Facility, Brunswick is subject to a leverage test, as well as
restrictions on secured debt. The Company was in compliance with
these covenants at December 31, 2006. The borrowing rate, as
calculated in accordance with the Facility, was 5.62 percent as of December 31,
2006. Brunswick also has $200.0 million available under a universal shelf
registration statement filed in 2001 with the SEC for the issuance of equity
and/or debt securities.
In July
2006, Brunswick issued senior unsubordinated floating rate notes in the
aggregate principal amount of $250 million, receiving proceeds of approximately
$249 million, net of discount and before an estimated $0.4 million of
expenses. The notes mature on July 24, 2009, and interest on the
notes is required to be paid quarterly at a rate tied to three-month LIBOR plus
65 basis points. After July 24, 2007, the Company has the option to
redeem some or all of the notes at par, plus accrued interest, prior to
maturity. The net proceeds of the notes were used to retire the
Company’s $250 million principal amount of 6.75% notes, which was due December
15, 2006.
For 2006,
Brunswick contributed $17.4 million into its defined benefit plans, compared
with $27.4 million of contributions in 2005. These amounts include
contributions to fund payments made under the nonqualified plans of $2.4 million
in 2006 and 2005. See Note 15 – Postretirement
Benefits in the Notes to Consolidated Financial Statements for more
details.
The
funded status of the Company’s qualified pension plans, measured as a percentage
of the projected benefit obligation, improved to 96.7 percent in 2006 from 91.8
percent in 2005 as a result of positive equity market returns and discretionary
pension contributions made in 2006. As of December 31, 2006, on a projected
benefit obligation basis, the Company’s qualified pension plans were underfunded
by a net balance of $34.0 million.
Financial
Services
A Company
subsidiary, Brunswick Financial Services Corporation (BFS), owns 49 percent of a
joint venture, Brunswick Acceptance Company, LLC (BAC). CDF Ventures, LLC
(CDFV), a subsidiary of GE Capital Corporation (GECC) owns the remaining 51
percent. Under the terms of the joint venture agreement, BAC provides
secured wholesale floor-plan financing to Brunswick’s boat and engine dealers.
BAC also purchases and services a portion of Mercury Marine’s domestic accounts
receivable relating to its boat builder and dealer customers.
BFS’s
contributed equity is adjusted monthly to maintain a 49 percent equity interest
in accordance with the capital provisions of the joint venture
agreement. BFS’s investment in BAC is accounted for by the Company
under the equity method and is recorded as a component of Investments in its
Consolidated Balance Sheets. The Company’s investment in BAC is determined by
cash contributions and reinvested earnings. In 2007, the Company
received a net distribution of $3.6 million compared with a net distribution of
$1.6 million in 2006 and a net contribution of $16.3 million in
2005. The Company records BFS’s share of income or loss in BAC based
on its ownership percentage in the joint venture in Equity earnings in its
Consolidated Statements of Income.
BAC is
funded in part through a loan from GE Commercial Distribution Finance
Corporation and a securitization facility arranged by GECC, and in part by a
cash equity investment from both partners. BFS’s total investment in BAC at
December 31, 2007 and 2006 was $47.0 million and $50.6 million,
respectively. BFS’s exposure to losses associated with BAC is limited
to its funded equity in BAC.
BFS
recorded income related to the operations of BAC of $12.7 million, $13.2 million
and $9.7 million for the years ended December 31, 2007, 2006 and 2005,
respectively. These amounts exclude the discount expense on the sale
of Mercury Marine’s accounts receivable to the joint venture noted
below.
Accounts
receivable totaling $887.3 million, $832.0 million and $913.3 million were sold
to BAC in 2007, 2006 and 2005 respectively. Discounts of $8.0
million, $7.6 million and $7.0 million for the years ended December 31, 2007,
2006 and 2005, respectively, have been recorded as an expense in Other expense,
net, in the Consolidated Statements of Income. The outstanding
balance of receivables sold to BAC was $93.1 million as of December 31, 2007, up
from $80.0 million as of December 31, 2006. Pursuant to the joint
venture agreement, BAC reimbursed Mercury Marine $2.7 million, $2.2 million and
$2.6 million in 2007, 2006 and 2005, respectively, for the related credit,
collection and administrative costs incurred in connection with the servicing of
such receivables.
As of
December 31, 2007 and 2006, the Company had a retained interest in $46.4 million
and $31.5 million of the total outstanding accounts receivable sold to BAC,
respectively. The Company’s maximum exposure as of December 31,
2007 and 2006, related to these amounts was $28.9 million and $16.9 million,
respectively. In accordance with SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”
the Company treats the sale of receivables in which the Company retains an
interest as a secured obligation. Accordingly, the amount of the
Company’s maximum exposure was recorded in Accounts and notes receivable, and
Accrued expenses in the Consolidated Balance Sheets. These balances
are included in the amounts in Note 11 – Commitments and
Contingencies.
Off-Balance
Sheet Arrangements
Guarantees. Based
on historical experience and current facts and circumstances, and in accordance
with Financial Accounting Standards Board (FASB) Interpretation No. 45 (FIN 45),
“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others — An Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34,” the
Company has reserves to cover potential losses associated with guarantees and
repurchase obligations. Historical cash requirements and losses associated with
these obligations have not been significant. See Note 11 – Commitments and
Contingencies in the Notes to Consolidated Financial Statements for a
description of these arrangements.
Contractual
Obligations
The
following table sets forth a summary of the Company’s contractual cash
obligations for continuing operations as of December 31, 2007:
|
|
|
Payments
due by period
|
|
|
|
|
|
|
Less
than
|
|
|
|
|
|
More
than
|
|
|
(in
millions)
|
|
Total
|
|
1
year
|
|
1-3
years
|
|
3-5
years
|
|
5
years
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (1)
|
|
$ |
728.2 |
|
$ |
0.8 |
|
$ |
251.5 |
|
$ |
151.8 |
|
$ |
324.1 |
|
|
Interest
payments on long-term debt
|
|
|
469.0 |
|
|
42.5 |
|
|
67.4 |
|
|
50.0 |
|
|
309.1 |
|
|
Operating
leases (2)
|
|
|
201.6 |
|
|
49.2 |
|
|
76.7 |
|
|
40.2 |
|
|
35.5 |
|
|
Purchase
obligations (3)
|
|
|
248.3 |
|
|
242.5 |
|
|
4.0 |
|
|
1.8 |
|
|
— |
|
|
Deferred
management compensation (4)
|
|
|
58.0 |
|
|
9.2 |
|
|
15.3 |
|
|
7.3 |
|
|
26.2 |
|
|
Other
tax liabilities (5)
|
|
|
2.9 |
|
|
1.2 |
|
|
1.7 |
|
|
— |
|
|
— |
|
|
Other
long-term liabilities (6)
|
|
|
210.3 |
|
|
23.9 |
|
|
78.3 |
|
|
21.9 |
|
|
86.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
|
$ |
1,918.3 |
|
$ |
369.3 |
|
$ |
494.9 |
|
$ |
273.0 |
|
$ |
781.1 |
|
__________
|
|
(1)
|
See
Note
14 – Debt in the Notes to Consolidated Financial Statements for
additional information on the Company’s
debt.
|
|
|
(2)
|
See
Note
18 – Leases in the Notes to Consolidated Financial Statements for
additional information on the Company’s operating
leases.
|
|
|
(3)
|
Purchase
obligations represent agreements with suppliers and vendors at the end of
2007 for raw materials and other supplies as part of the normal course of
business.
|
|
|
(4)
|
Amounts
primarily represent long-term deferred compensation plans for Company
management. Payments are assumed to be equal to the remaining liability
and to be primarily paid out more than five years from December 31,
2007.
|
|
|
(5)
|
Represents
the liability reported in accordance with the Company’s adoption of the
provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes.” As of December 31, 2007, the Company’s liability for
uncertain income tax positions was $44.4 million including interest. Due
to the high degree of uncertainty regarding the timing of potential future
cash outflows associated with these liabilities, other than the items
included in the table above, the Company was unable to make a reasonably
reliable estimate of the amount and period in which these remaining
liabilities might be paid.
|
|
|
(6)
|
Other
long-term liabilities include amounts reflected on the balance sheet,
which primarily includes certain agreements that provide for the
assignment of lease and other long-term receivables originated by the
Company to third parties and are treated as a secured obligation under
SFAS No. 140, postretirement benefit obligations, and obligations under
deferred revenue arrangements.
|
Legal
Proceedings
See Note 11 – Commitments and
Contingencies in the Notes to Consolidated Financial Statements for
disclosure of the potential cash requirements related to legal and environmental
proceedings.
Environmental
Regulation
In its
Marine Engine segment, Brunswick will continue to develop engine technologies to
reduce engine emissions to comply with current and future emissions
requirements. The costs associated with these activities may have an adverse
effect on Marine Engine segment operating margins and may affect short-term
operating results. The State of California adopted regulations that required
catalytic converters on sterndrive and inboard engines that became effective on
January 1, 2008. Other environmental regulatory bodies in the United States and
other countries may also impose higher emissions standards than are currently in
effect for those regions. The Company expects to comply fully with
these regulations, but compliance will increase the cost of these products for
the Company and the industry. The Boat segment continues to pursue
fiberglass boat manufacturing technologies and techniques to reduce air
emissions at its boat manufacturing facilities. The Company does not believe
that compliance with federal, state and local environmental laws will have a
material adverse effect on Brunswick’s competitive
position.
Critical
Accounting Policies
The
preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States requires
management to make certain estimates and assumptions that affect the amount of
reported assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and revenues
and expenses during the periods reported. Actual results may differ from those
estimates. If current estimates for the cost of resolving any specific matters
are later determined to be inadequate, results of operations could be adversely
affected in the period in which additional provisions are required. The Company
records a reserve when it is probable that a loss has been incurred and the loss
can be reasonably estimated. The Company establishes its reserve based on its
best estimate within a range of losses. If the Company is unable to identify the
best estimate, the Company records the minimum amount in the
range. The Company discussed the development and selection of the
critical accounting policies with the Audit Committee of the Board of Directors
and believes the following are the most critical accounting policies that could
have an effect on Brunswick’s reported results.
Revenue Recognition and Sales
Incentives. The Company’s revenue is derived primarily from
the sale of boats, marine engines, fitness equipment, bowling products and
billiards tables. Revenue is recognized in accordance with the terms of the
sale, primarily upon shipment to customers, once the sales price is fixed or
determinable and collectibility is reasonably assured. Brunswick offers
discounts and sales incentives that include retail promotional activities and
rebates. The estimated liability for sales incentives is recorded at the later
of the time of program communication to the customer or at the time of sale in
accordance with Emerging Issues Task Force (EITF) No. 01-9, “Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of a
Vendor’s Products).” The liability is estimated based on the costs for the
incentive program, the planned duration of the program and historical
experience. If actual costs are different from estimated costs, the recorded
value of the liability and revenue is adjusted.
Allowances for Doubtful
Accounts. The Company records an allowance for uncollectible
trade receivables based upon currently known bad debt risks and provides
reserves based on loss history, customer payment practices and economic
conditions. Actual collection experience may differ from the current estimate of
reserves. The Company also provides a reserve based on historical, current and
estimated future purchasing levels in connection with its long-term notes
receivables for Brunswick’s supply agreements. These assumptions are
re-evaluated considering the customer’s financial position and product purchase
volumes. Changes to the allowance for doubtful accounts may be required if a
future event or other circumstance result in a change in the estimate of the
ultimate collectibility of a specific account or note.
Reserve for Excess and Obsolete
Inventories. The Company records a reserve for excess and
obsolete inventories in order to ensure inventories are carried at the lower of
cost or fair market value. Fair market value can be affected by assumptions
about market demand and conditions, historical usage rates, model changes and
new product introductions. If model changes or new product introductions create
more or less than favorable market conditions, the reserve for excess and
obsolete inventories may need to be adjusted.
Warranty
Reserves. The Company records a liability for standard product
warranties at the time revenue is recognized. The liability is recorded using
historical warranty experience to estimate projected claim rates and expected
costs per claim. If necessary, the Company adjusts its liability for specific
warranty matters when they become known and are reasonably estimable. The
Company’s warranty reserves are affected by product failure rates and material
usage and labor costs incurred in correcting a product failure. If these
estimated costs differ from actual product failure rates and actual material
usage and labor costs, a revision to the warranty reserve would be
required.
Goodwill and Indefinite-lived
Intangible Assets. In assessing the value of goodwill and
indefinite-lived intangible assets, management relies on a number of factors to
value anticipated future cash flows including operating results, business plans
and present value techniques. Rates used to value and discount cash flows are
dependent upon royalty rate assumptions, interest rates and the cost of capital
at a point in time. There are inherent uncertainties related to these factors
and management’s judgment in applying them to the analysis of intangible asset
impairment. It is possible that operating results or assumptions underlying the
impairment analysis will change in such a manner that impairment in value may
occur in the future.
Litigation. In the
normal course of business, the Company is subject to claims and litigation,
including obligations assumed or retained as part of acquisitions and
divestitures. 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.
Environmental. The
Company accrues for environmental remediation-related activities for which
commitments or clean-up plans have been developed and for which costs can be
reasonably estimated. 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.
Self-Insurance
Reserves. The Company records a liability for self-insurance
obligations, which include employee-related health care benefits and claims for
workers’ compensation, product liability, general liability and auto liability.
The liability is estimated based on claims incurred as of the date of the
financial statements. In estimating the obligations associated with
self-insurance reserves, the Company primarily uses loss development factors
based on historical claim experience, which incorporate anticipated exposure for
losses incurred, but not yet reported. These loss development factors are used
to estimate ultimate losses on incurred claims. Actual costs associated with a
specific claim can vary from an earlier estimate. If the facts were to change,
the liability recorded for expected costs associated with a specific claim may
need to be revised.
Postretirement Benefit
Reserves. Postretirement costs and obligations are actuarially
determined and are affected by assumptions, including the discount rate, the
estimated future return on plan assets, the annual rate of increase in
compensation for plan employees, the increase in costs of health care benefits
and other factors. The Company evaluates assumptions used on a periodic basis
and makes adjustments to these liabilities as necessary. Postretirement benefit
reserves are determined in accordance with SFAS No. 87, “Employers’ Accounting
for Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement
Benefits Other Than Pensions.” 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).”
Income
Taxes. Deferred taxes are recognized for the future tax
effects of temporary differences between financial and income tax reporting
using tax rates in effect for the years in which the differences are expected to
reverse. The Company historically provided deferred taxes on the undistributed
net earnings of foreign subsidiaries and unconsolidated affiliates. As of July
3, 2005, the Company determined that certain foreign subsidiaries’ undistributed
net earnings were to be indefinitely reinvested in operations outside the United
States, and accordingly, U.S. income taxes are no longer provided for the
earnings of those foreign subsidiaries. The Company estimates its tax
obligations based on historical experience and current tax laws and litigation.
The judgments made at any point in time may change based on the outcome of tax
audits and settlements of tax litigation, as well as changes due to new tax laws
and regulations and the Company’s application of those laws and regulations.
These factors may cause the Company’s tax rate and deferred tax balances to
increase or decrease.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (SFAS
157), which defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
adoption of SFAS 157 is not expected to have a material impact on the Company’s
financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115,” (SFAS 159). SFAS 159 permits entities to choose to measure
certain financial assets and financial liabilities at fair value at specified
election dates. Unrealized gains and losses on items for which the fair value
option has been elected are to be reported in earnings. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. The Company does not believe
that the adoption of SFAS 159 will have a material impact on its financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (SFAS
141(R)). SFAS 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, the goodwill acquired and any noncontrolling
interest in the acquiree. This statement also establishes disclosure
requirements to enable the evaluation of the nature and financial effect of the
business combination. SFAS 141(R) is effective for fiscal years beginning after
December 15, 2008. The Company is currently evaluating the impact that the
adoption of SFAS 141(R) will have on the financial
statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51,” (SFAS 160).
SFAS 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company is currently evaluating the
impact that the adoption of SFAS 160 will have on the financial
statements.
Forward-Looking
Statements
Certain
statements in this Annual Report on Form 10-K (Annual Report) are
forward-looking as defined in the Private Securities Litigation Reform Act of
1995. Forward-looking statements in this Annual Report may include words such as
“expect,” “anticipate,” “believe,” “may,” “should,” “could” or “estimate.” These
statements involve certain risks and uncertainties that may cause actual results
to differ materially from expectations as of the date of this
filing. These risks include, but are not limited to, those set forth
under Item 1A of this report.
Caution
should be taken not to place undue reliance on the Company’s forward-looking
statements, which represent the Company’s views only as of the date this report
is filed. The Company undertakes no obligation to update publicly or
revise any forward-looking statement, whether as a result of new information,
future events or otherwise.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
The
Company is exposed to market risk from changes in foreign currency exchange
rates, interest rates and commodity prices. The Company enters into various
hedging transactions to mitigate these risks in accordance with guidelines
established by the Company’s management. The Company does not use financial
instruments for trading or speculative purposes.
The
Company uses foreign currency forward and option contracts to manage foreign
exchange exposure related to anticipated transactions, and assets and
liabilities that are subject to risk from foreign currency rate changes. The
Company’s principal currency exposures relate to the Euro, Japanese yen,
Canadian dollar, Australian dollar, British pound and New Zealand dollar.
Hedging of anticipated transactions is accomplished with financial instruments
whose maturity date, along with the realized gain or loss, occurs on or near the
execution of the anticipated transaction. The Company manages foreign currency
exposure of assets or liabilities through the use of derivative financial
instruments such that the gain or loss on the derivative financial instrument
offsets the loss or gain recognized on the asset or liability,
respectively.
The
Company uses interest rate swap agreements to mitigate the effect that changes
in interest rates have on the fair market value of the Company’s debt and to
lower the Company’s borrowing costs on current or anticipated issuances of debt.
The Company’s net exposure to interest rate risk is primarily attributable to
its outstanding debt. Interest rate risk management is accomplished through the
use of fixed-to-floating interest rate swaps, forward starting floating-to-fixed
interest rate swaps and floating rate instruments that are benchmarked to U.S.
and European short-term money market interest rates.
Raw
materials used by the Company are exposed to the effect of changing commodity
prices. Accordingly, the Company uses commodity swap agreements, futures
contracts and supplier agreements to manage fluctuations in prices of
anticipated purchases of certain raw materials, including aluminum and natural
gas.
The
following analyses provide quantitative information regarding the Company’s
exposure to foreign currency exchange rate risk, interest rate risk and
commodity price risk. The Company uses a model to evaluate the
sensitivity of the fair value of financial instruments with exposure to market
risk that assumes instantaneous, parallel shifts in exchange rates, interest
rate yield curves and commodity prices. For options and instruments
with nonlinear returns, models appropriate to the instrument are utilized to
determine the impact of market shifts. There are certain shortcomings
inherent in the sensitivity analyses presented, primarily due to the assumption
that exchange rates change in a parallel fashion and that interest rates change
instantaneously.
The
amounts shown below represent the estimated reduction in fair market value that
the Company would incur on its derivative financial instruments from a 10
percent adverse change in quoted foreign currency rates, interest rates, and
commodity prices.
|
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
Risk
Category
|
|
|
|
|
|
|
|
Foreign
exchange
|
|
$ |
37.7 |
|
|
$ |
34.3 |
|
|
Interest
rates
|
|
$ |
5.3 |
|
|
$ |
1.0 |
|
|
Commodity
prices
|
|
$ |
2.0 |
|
|
$ |
2.2 |
|
Item
8. Financial Statements and Supplementary Data
See Index
to Financial Statements and Financial Statement Schedule on page
43.
Item 9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item
9A. Controls and Procedures
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
Under the
supervision and with the participation of the Company’s management, including
the Chief Executive Officer and the Chief Financial Officer of the Company (its
principal executive officer and principal financial officer, respectively), the
Company has evaluated its disclosure controls and procedures (as defined in
Securities Exchange Act Rules 12a -15(e) and 15d -15(e)) as of the end of the
period covered by this annual report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Company’s disclosure controls and procedures are effective in ensuring that all
material information required to be filed has been made known in a timely
manner.
Management’s
Report on Internal Control Over Financial Reporting
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, the Company included a report
of management’s assessment of the design and effectiveness of its internal
controls as part of this Annual Report for the fiscal year ended December 31,
2007. Management’s report is included in the Company’s 2007 Financial
Statements under the captions entitled “Report of Management on Internal Control
Over Financial Reporting” and is incorporated herein by reference.
The Audit
Committee of the Board of Directors, comprised entirely of independent
directors, meets regularly with the independent public accountants, management
and internal auditors to review accounting, reporting, internal control and
other financial matters. The Committee regularly meets with both the internal
and external auditors without members of management present.
Changes
in Internal Control Over Financial Reporting
There has
been no change in the Company’s internal control over financial reporting during
the fourth quarter ended December 31, 2007, that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance
Information
pursuant to this Item with respect to the Directors of the Company is
incorporated by reference from the discussion under the headings Proposal No. 1:
Election of Directors and Corporate Governance in the Company’s proxy statement
for the 2008 Annual Meeting of Stockholders (Proxy
Statement). Information pursuant to this Item with respect to the
Company’s Audit Committee and the Company’s code of ethics is incorporated by
reference from the discussion under the heading Corporate Governance in the
Proxy Statement. Information pursuant to this Item with respect to
compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated by reference from the discussion under the heading Section 16(a)
Beneficial Ownership Reporting Requirements in the Proxy Statement.
The
information required by Item 401 of Regulation S-K regarding executive officers
is included under “Executive Officers of the Registrant” following Item 4 in
Part I of this Annual Report.
Item
11. Executive Compensation
Information
pursuant to this Item with respect to compensation paid to Directors of the
Company is incorporated by reference from the discussion under the heading
Director Compensation in the Proxy Statement. Information pursuant to
this Item with respect to executive compensation is incorporated by reference
from the discussion under the heading Executive Compensation in the Proxy
Statement.
Item
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Information
pursuant to this Item with respect to the securities of the Company owned by the
Directors and certain officers of the Company, by the Directors and officers of
the Company as a group and by the persons known to the Company to own
beneficially more than 5 percent of the outstanding voting securities of the
Company is incorporated by reference from the discussion under the heading Stock
Held By Directors, Executive Officers And Principal Shareholders in the Proxy
Statement. Information pursuant to this Item with respect to securities
authorized for issuance under the Company’s equity compensation plans is hereby
incorporated by reference from the discussion under the heading Equity
Compensation Plan Information in the Proxy Statement.
Item
13. Certain Relationships and Related Transactions, and Director
Independence
Information
pursuant to this Item with respect to certain relationships and related
transactions is incorporated from the discussion under the heading Corporate
Governance in the Proxy Statement.
Item
14. Principal Accounting Fees and Services
Information
pursuant to this Item with respect to fees for professional services rendered by
the Company’s independent registered public accounting firm and the Audit
Committee’s policy on pre-approval of audit and permissible non-audit services
of the Company’s independent registered public accounting firm is incorporated
by reference from the discussion under the headings Proposal No. 2: Ratification
of Independent Registered Public Accounting Firm–Fees Incurred for Services of
Ernst & Young and Proposal No. 2: Ratification of Independent Registered
Public Accounting Firm–Approval of Services Provided by Independent Registered
Public Accounting Firm in the Proxy Statement.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
The
financial statements and schedule filed as part of this Annual Report are listed
in the accompanying Index to Financial Statements and Financial Statement
Schedule on page 43. The exhibits filed as a part of this Annual
Report are listed in the accompanying Exhibit Index on page 91.
Index
to Financial Statements and Financial Statement Schedule
Brunswick
Corporation
|
|
Page
|
|
Financial
Statements:
|
|
|
Report
of Management on Internal Control over Financial Reporting
|
44
|
|
Report
of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting
|
45
|
|
Report
of Independent Registered Public Accounting Firm
|
46
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2007, 2006 and
2005
|
47
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
48
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
2005
|
50
|
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 2007,
2006 and 2005
|
51
|
|
Notes
to Consolidated Financial Statements
|
52
|
|
|
|
|
Financial
Statement Schedule:
|
|
|
Schedule
II - Valuation and Qualifying Accounts
|
90
|
BRUNSWICK
CORPORATION
REPORT
OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
Company’s management is responsible for the preparation, integrity and
objectivity of the financial statements and other financial information
presented in this report. The financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
and reflect the effects of certain estimates and judgments made by
management.
The
Company’s management is also responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in Securities
Exchange Act Rule 13a-15(f). Under the supervision and with the
participation of the Company’s management, including the Company’s Chief
Executive Officer and the Chief Financial Officer, the Company conducted an
evaluation of the effectiveness of its internal control over financial reporting
based on the framework in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on
the Company’s evaluation under the framework in Internal Control – Integrated
Framework, management concluded that internal control over financial reporting
was effective as of December 31, 2007. The effectiveness of internal
control over financial reporting as of December 31, 2007, has been audited by
Ernst & Young LLP, an independent registered public accounting firm, as
stated in their report, which is included herein.
Brunswick
Corporation
Lake
Forest, Illinois
February
22, 2008
| |
|
|
|
/s/ DUSTAN E. McCOY
|
|
/s/
PETER G. LEEMPUTTE
|
|
Dustan
E. McCoy
|
|
Peter
G. Leemputte
|
|
Chairman
and Chief Executive Officer
|
|
Senior
Vice President and Chief Financial
Officer
|
BRUNSWICK
CORPORATION
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
Board of
Directors and Shareholders
Brunswick
Corporation
We have
audited Brunswick Corporation’s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Brunswick Corporation’s management is
responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Report of Management on Internal Control
over Financial Reporting. Our responsibility is to express an opinion
on the effectiveness of the company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing a risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Brunswick Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Brunswick
Corporation as of December 31, 2007 and 2006, and the related consolidated
statements of income, shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2007, of Brunswick Corporation and our
report dated February 22, 2008, expressed an unqualified opinion
thereon.
/s/ ERNST & YOUNG
LLP
Chicago,
Illinois
February
22, 2008
BRUNSWICK
CORPORATION
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Shareholders
Brunswick
Corporation
We have
audited the accompanying consolidated balance sheets of Brunswick Corporation as
of December 31, 2007 and 2006, and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2007. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Brunswick Corporation
at December 31, 2007 and 2006, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2007, in accordance with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, on January 1,
2007, Brunswick Corporation changed its method of accounting for uncertain tax
positions to conform with Financial Accounting Standards Board Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes.” On January 1,
2006, Brunswick Corporation changed its method of accounting for share-based
awards to conform with Statement of Financial Accounting Standards (SFAS) No.
123(R), “Share-Based Payment.” Additionally, on December 31, 2006,
Brunswick Corporation changed its method of accounting for defined benefit
pension and other postretirement benefit plans to conform with 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).”
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Brunswick Corporation's internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 22, 2008,
expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG
LLP
Chicago,
Illinois
February
22, 2008
|
BRUNSWICK
CORPORATION
|
|
Consolidated
Statements of Income
|
|
|
|
For
the Years Ended December 31
|
|
|
(in
millions, except per share data)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
5,671.2 |
|
$ |
5,665.0 |
|
$ |
5,606.9 |
|
|
Cost
of sales
|
|
|
4,528.1 |
|
|
4,439.3 |
|
|
4,285.3 |
|
|
Selling,
general and administrative expense
|
|
|
835.0 |
|
|
752.3 |
|
|
729.4 |
|
|
Research
and development expense
|
|
|
134.5 |
|
|
132.2 |
|
|
123.5 |
|
|
Impairment
charges
|
|
|
66.4 |
|
|
– |
|
|
– |
|
|
Operating
earnings
|
|
|
107.2 |
|
|
341.2 |
|
|
468.7 |
|
|
Equity
earnings
|
|
|
21.3 |
|
|
14.9 |
|
|
18.1 |
|
|
Investment
sale gain
|
|
|
– |
|
|
– |
|
|
38.7 |
|
|
Other
income (expense), net
|
|
|
7.8 |
|
|
(1.9 |
) |
|
(1.4 |
) |
|
Earnings before interest and
income taxes
|
|
|
136.3 |
|
|
354.2 |
|
|
524.1 |
|
|
Interest
expense
|
|
|
(52.3 |
) |
|
(60.5 |
) |
|
(53.2 |
) |
|
Interest
income
|
|
|
8.7 |
|
|
16.0 |
|
|
15.0 |
|
|
Earnings before income
taxes
|
|
|
92.7 |
|
|
309.7 |
|
|
485.9 |
|
|
Income
tax provision
|
|
|
13.1 |
|
|
46.5 |
|
|
114.8 |
|
|
Net
earnings from continuing operations
|
|
|
79.6 |
|
|
263.2 |
|
|
371.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from discontinued operations, net of tax
|
|
|
2.2 |
|
|
(43.7 |
) |
|
14.3 |
|
|
Gain
on disposal of discontinued operations, net of tax
|
|
|
29.8 |
|
|
– |
|
|
– |
|
|
Impairment
charges on assets held for sale, net of tax
|
|
|
– |
|
|
(85.6 |
) |
|
– |
|
|
Net earnings (loss) from
discontinued
operations
|
|
|
32.0 |
|
|
(129.3 |
) |
|
14.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
111.6 |
|
$ |
133.9 |
|
$ |
385.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$ |
0.88 |
|
$ |
2.80 |
|
$ |
3.80 |
|
|
Earnings
(loss) from discontinued operations
|
|
|
0.36 |
|
|
(1.38 |
) |
|
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
1.24 |
|
$ |
1.42 |
|
$ |
3.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$ |
0.88 |
|
$ |
2.78 |
|
$ |
3.76 |
|
|
Earnings
(loss) from discontinued operations
|
|
|
0.36 |
|
|
(1.37 |
) |
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
1.24 |
|
$ |
1.41 |
|
$ |
3.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used for computation of:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
89.8 |
|
|
94.0 |
|
|
97.6 |
|
|
Diluted
earnings per share
|
|
|
90.2 |
|
|
94.7 |
|
|
98.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per common share
|
|
$ |
0.60 |
|
$ |
0.60 |
|
$ |
0.60 |
|
| |
|
| |
|
|
The
Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
|
|
|
BRUNSWICK
CORPORATION
|
|
Consolidated
Balance Sheets
|
|
|
|
As
of December 31
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
and cash equivalents, at cost, which approximates market
|
|
$ |
331.4 |
|
$ |
283.4 |
|
|
Accounts
and notes receivable, less allowances of $31.2 and $29.7
|
|
|
572.4 |
|
|
492.3 |
|
|
Inventories
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
|
446.7 |
|
|
410.4 |
|
|
Work-in-process
|
|
|
323.4 |
|
|
308.4 |
|
|
Raw
materials
|
|
|
136.6 |
|
|
143.1 |
|
|
Net
inventories
|
|
|
906.7 |
|
|
861.9 |
|
|
Deferred
income taxes
|
|
|
249.9 |
|
|
249.9 |
|
|
Prepaid
expenses and other
|
|
|
53.9 |
|
|
85.4 |
|
|
Current
assets held for sale
|
|
|
– |
|
|
105.5 |
|
|
Current
assets
|
|
|
2,114.3 |
|
|
2,078.4 |
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
|
|
|
|
|
|
|
Land
|
|
|
103.5 |
|
|
91.7 |
|
|
Buildings
and improvements
|
|
|
697.4 |
|
|
631.6 |
|
|
Equipment
|
|
|
1,205.7 |
|
|
1,181.7 |
|
|
Total
land, buildings and improvements and equipment
|
|
|
2,006.6 |
|
|
1,905.0 |
|
|
Accumulated
depreciation
|
|
|
(1,117.8 |
) |
|
(1,046.3 |
) |
|
Net
land, buildings and improvements and equipment
|
|
|
888.8 |
|
|
858.7 |
|
|
Unamortized
product tooling costs
|
|
|
164.0 |
|
|
156.2 |
|
|
Net
property
|
|
|
1,052.8 |
|
|
1,014.9 |
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
678.9 |
|
|
663.6 |
|
|
Other
intangibles
|
|
|
245.6 |
|
|
322.6 |
|
|
Investments
|
|
|
132.1 |
|
|
142.9 |
|
|
Other
long-term assets
|
|
|
141.9 |
|
|
195.1 |
|
|
Long-term
assets held for sale
|
|
|
– |
|
|
32.8 |
|
|
Other
assets
|
|
|
1,198.5 |
|
|
1,357.0 |
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
4,365.6 |
|
$ |
4,450.3 |
|
|
|
|
|
|
|
|
|
|
| |
|
|
The
Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
|
|
|
BRUNSWICK
CORPORATION
|
|
Consolidated
Balance Sheets
|
|
|
|
As
of December 31
|
|
(in
millions, except share data)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$ |
0.8 |
|
$ |
0.7 |
|
|
Accounts
payable
|
|
|
437.3 |
|
|
448.6 |
|
|
Accrued
expenses
|
|
|
858.1 |
|
|
748.9 |
|
|
Current
liabilities held for sale
|
|
|
– |
|
|
95.0 |
|
|
Current
liabilities
|
|
|
1,296.2 |
|
|
1,293.2 |
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
Debt
|
|
|
727.4 |
|
|
725.7 |
|
|
Deferred
income taxes
|
|
|
12.3 |
|
|
86.3 |
|
|
Postretirement
benefits
|
|
|
192.8 |
|
|
224.2 |
|
|
Other
|
|
|
244.0 |
|
|
240.4 |
|
|
Long-term
liabilities held for sale
|
|
|
– |
|
|
8.7 |
|
|
Long-term
liabilities
|
|
|
1,176.5 |
|
|
1,285.3 |
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
Common
stock; authorized: 200,000,000 shares,
$0.75
par value; issued: 102,538,000 shares
|
|
|
76.9 |
|
|
76.9 |
|
|
Additional
paid-in capital
|
|
|
409.0 |
|
|
378.7 |
|
|
Retained
earnings
|
|
|
1,888.4 |
|
|
1,820.7 |
|
|
Treasury
stock, at cost: 15,092,000 and 11,671,000 shares
|
|
|
(428.7 |
) |
|
(315.5 |
) |
|
Accumulated
other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
50.8 |
|
|
38.8 |
|
|
Defined
benefit plans:
|
|
|
|
|
|
|
|
|
Prior
service costs
|
|
|
(9.2 |
) |
|
(11.2 |
) |
|
Net
actuarial losses
|
|
|
(92.6 |
) |
|
(121.7 |
) |
|
Unrealized
investment gains (losses)
|
|
|
1.5 |
|
|
(0.2 |
) |
|
Unrealized
gains (losses) on derivatives
|
|
|
(3.2 |
) |
|
5.3 |
|
|
Total
accumulated other comprehensive loss
|
|
|
(52.7 |
) |
|
(89.0 |
) |
|
Shareholders’
equity
|
|
|
1,892.9 |
|
|
1,871.8 |
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
4,365.6 |
|
$ |
4,450.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
|
|
| |
|
|
BRUNSWICK
CORPORATION
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
For
the Years Ended December 31
|
|
|
(in
millions)
|
|
2007
|
|
Revised
2006
|
|
Revised
2005
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
111.6 |
|
$ |
133.9 |
|
$ |
385.4 |
|
|
Less:
net earnings (loss) from discontinued operations
|
|
|
32.0 |
|
|
(129.3 |
) |
|
14.3 |
|
|
Net
earnings from continuing operations
|
|
|
79.6 |
|
|
263.2 |
|
|
371.1 |
|
|
Depreciation
and amortization
|
|
|
180.1 |
|
|
167.3 |
|
|
156.3 |
|
|
Changes
in noncash current assets and current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Change
in accounts and notes receivable
|
|
|
(45.9 |
) |
|
(4.3 |
) |
|
(9.5 |
) |
|
Change
in inventory
|
|
|
(42.9 |
) |
|
(28.7 |
) |
|
(22.8 |
) |
|
Change
in prepaid expenses and other
|
|
|
3.3 |
|
|
0.8 |
|
|
0.9 |
|
|
Change
in accounts payable
|
|
|
(13.5 |
) |
|
9.5 |
|
|
29.7 |
|
|
Change
in accrued expenses
|
|
|
102.5 |
|
|
(70.1 |
) |
|
(51.9 |
) |
|
Income
taxes
|
|
|
6.4 |
|
|
(25.5 |
) |
|
(3.1 |
) |
|
Impairment
charges
|
|
|
66.4 |
|
|
– |
|
|
– |
|
|
Other,
net
|
|
|
8.1 |
|
|
38.8 |
|
|
(49.1 |
) |
|
Net
cash provided by operating activities of
continuing operations
|
|
|
344.1 |
|
|
351.0 |
|
|
421.6 |
|
|
Net cash used for operating
activities of discontinued operations
|
|
|
(29.8 |
) |
|
(35.7 |
) |
|
11.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
314.3 |
|
|
315.3 |
|
|
432.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(207.7 |
) |
|
(205.1 |
) |
|
(223.8 |
) |
|
Acquisitions
of businesses, net of cash acquired
|
|
|
(6.2 |
) |
|
(86.2 |
) |
|
(130.3 |
) |
|
Investments
|
|
|
4.1 |
|
|
6.1 |
|
|
(18.1 |
) |
|
Proceeds
from investment sale
|
|
|
– |
|
|
– |
|
|
57.9 |
|
|
Proceeds
from the sale of property, plant and equipment
|
|
|
10.1 |
|
|
7.2 |
|
|
13.4 |
|
|
Other,
net
|
|
|
25.6 |
|
|
(0.4 |
) |
|
(1.2 |
) |
|
Net cash used for investing
activities of
continuing operations
|
|
|
(174.1 |
) |
|
(278.4 |
) |
|
(302.1 |
) |
|
Net cash provided by (used for)
investing activities of
discontinued operations
|
|
|
75.6 |
|
|
(5.5 |
) |
|
(20.7 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing
activities
|
|
|
(98.5 |
) |
|
(283.9 |
) |
|
(322.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Net
repayments of commercial paper and other short-term debt
|
|
|
– |
|
|
(0.2 |
) |
|
(0.6 |
) |
|
Net
proceeds from issuance of long-term debt
|
|
|
0.7 |
|
|
250.3 |
|
|
1.3 |
|
|
Payments
of long-term debt including current maturities
|
|
|
(0.9 |
) |
|
(251.1 |
) |
|
(6.7 |
) |
|
Cash
dividends paid
|
|
|
(52.6 |
) |
|
(55.0 |
) |
|
(57.3 |
) |
|
Stock
repurchases
|
|
|
(125.8 |
) |
|
(195.6 |
) |
|
(76.0 |
) |
|
Stock
options exercised
|
|
|
10.8 |
|
|
15.9 |
|
|
17.1 |
|
|
Net cash used for financing
activities of continuing operations
|
|
|
(167.8 |
) |
|
(235.7 |
) |
|
(122.2 |
) |
|
Net cash used for financing
activities of discontinued operations
|
|
|
– |
|
|
– |
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing
activities
|
|
|
(167.8 |
) |
|
(235.7 |
) |
|
(122.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
48.0 |
|
|
(204.3 |
) |
|
(12.1 |
) |
|
Cash
and cash equivalents at January 1
|
|
|
283.4 |
|
|
487.7 |
|
|
499.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at December 31
|
|
$ |
331.4 |
|
$ |
283.4 |
|
$ |
487.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
54.8 |
|
$ |
61.2 |
|
$ |
54.6 |
|
|
Income
taxes paid, net
|
|
$ |
6.7 |
|
$ |
72.0 |
|
$ |
113.4 |
|
| |
|
|
The
Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
|
|
|
BRUNSWICK
CORPORATION
|
|
Consolidated
Statements of Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Unearned
|
|
Other
|
|
|
|
|
|
|
Common
|
|
Paid-in
|
|
Retained
|
|
Treasury
|
|
Compensation
|
|
Comprehensive
|
|
|
|
|
(in
millions, except per share data)
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
Stock
|
|
and Other
|
|
Income (Loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
$ |
76.9 |
|
$ |
358.8 |
|
$ |
1,413.7 |
|
$ |
(76.5 |
) |
$ |
(6.3 |
) |
$ |
(54.3 |
) |
$ |
1,712.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
— |
|
|
— |
|
|
385.4 |
|
|
— |
|
|
— |
|
|
— |
|
|
385.4 |
|
|
Translation
adjustments, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(18.1 |
) |
|
(18.1 |
) |
|
Realized
gain from investment sale, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(24.2 |
) |
|
(24.2 |
) |
|
Unrealized
investment gains, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
0.9 |
|
|
0.9 |
|
|
Unrealized
gains on derivatives, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
19.9 |
|
|
19.9 |
|
|
Minimum
pension liability adjustment, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
9.7 |
|
|
9.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
|
— |
|
|
— |
|
|
385.4 |
|
|
— |
|
|
— |
|
|
(11.8 |
) |
|
373.6 |
|
|
Dividends
($0.60 per common share)
|
|
|
— |
|
|
— |
|
|
(57.3 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(57.3 |
) |
|
Stock
repurchases
|
|
|
— |
|
|
— |
|
|
— |
|
|
(76.0 |
) |
|
— |
|
|
— |
|
|
(76.0 |
) |
|
Tax
benefit relating to stock options
|
|
|
— |
|
|
5.6 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
5.6 |
|
|
Compensation
plans and other
|
|
|
— |
|
|
3.9 |
|
|
— |
|
|
16.5 |
|
|
0.2 |
|
|
— |
|
|
20.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
76.9 |
|
|
368.3 |
|
|
1,741.8 |
|
|
(136.0 |
) |
|
(6.1 |
) |
|
(66.1 |
) |
|
1,978.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
— |
|
|
— |
|
|
133.9 |
|
|
— |
|
|
— |
|
|
— |
|
|
133.9 |
|
|
Translation
adjustments, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
24.7 |
|
|
24.7 |
|
|
Unrealized
investment losses, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.1 |
) |
|
(0.1 |
) |
|
Unrealized
losses on derivatives, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(2.6 |
) |
|
(2.6 |
) |
|
Minimum
pension liability adjustment, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
15.8 |
|
|
15.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
— |
|
|
— |
|
|
133.9 |
|
|
— |
|
|
— |
|
|
37.8 |
|
|
171.7 |
|
|
Adoption
of FASB Statement No. 158, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(60.7 |
) |
|
(60.7 |
) |
|
Dividends
($0.60 per common share)
|
|
|
— |
|
|
— |
|
|
(55.0 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(55.0 |
) |
|
Stock
repurchases
|
|
|
— |
|
|
— |
|
|
— |
|
|
(195.6 |
) |
|
— |
|
|
— |
|
|
(195.6 |
) |
|
Tax
benefit relating to stock options
|
|
|
— |
|
|
2.9 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2.9 |
|
|
Adoption
of FASB Statement No. 123(R)
|
|
|
— |
|
|
(6.1 |
) |
|
— |
|
|
— |
|
|
6.1 |
|
|
— |
|
|
— |
|
|
Compensation
plans and other
|
|
|
— |
|
|
13.6 |
|
|
— |
|
|
16.1 |
|
|
— |
|
|
— |
|
|
29.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
76.9 |
|
|
378.7 |
|
|
1,820.7 |
|
|
(315.5 |
) |
|
— |
|
|
(89.0 |
) |
|
1,871.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
— |
|
|
— |
|
|
111.6 |
|
|
— |
|
|
— |
|
|
— |
|
|
111.6 |
|
|
Translation
adjustments, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
12.0 |
|
|
12.0 |
|
|
Unrealized
investment gains, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1.7 |
|
|
1.7 |
|
|
Unrealized
losses on derivatives, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(8.5 |
) |
|
(8.5 |
) |
|
Defined
benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service costs, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2.0 |
|
|
2.0 |
|
|
Net
actuarial gains, net of tax
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
29.1 |
|
|
29.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
— |
|
|
— |
|
|
111.6 |
|
|
— |
|
|
— |
|
|
36.3 |
|
|
147.9 |
|
|
Adoption
of FASB Interpretation No. 48
|
|
|
— |
|
|
— |
|
|
8.7 |
|
|
— |
|
|
— |
|
|
— |
|
|
8.7 |
|
|
Dividends
($0.60 per common share)
|
|
|
— |
|
|
— |
|
|
(52.6 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(52.6 |
) |
|
Stock
repurchases
|
|
|
— |
|
|
— |
|
|
— |
|
|
(125.8 |
) |
|
— |
|
|
— |
|
|
(125.8 |
) |
|
Tax
benefit relating to stock options
|
|
|
— |
|
|
1.2 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1.2 |
|
|
Compensation
plans and other
|
|
|
— |
|
|
29.1 |
|
|
— |
|
|
12.6 |
|
|
— |
|
|
— |
|
|
41.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
$ |
76.9 |
|
$ |
409.0 |
|
$ |
1,888.4 |
|
$ |
(428.7 |
) |
$ |
— |
|
$ |
(52.7 |
) |
$ |
1,892.9 |
|
|
The
Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
|
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Note
1 – Significant Accounting Policies
Basis of
Presentation. The consolidated financial statements of
Brunswick Corporation (Brunswick or the Company) have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission
(SEC). Certain previously reported amounts have been reclassified to
conform to the current-period presentation. As indicated in Note 2 – Discontinued
Operations, Brunswick’s results as discussed in the financial statements
reflect continuing operations only, unless otherwise noted.
Revisions. For the year ended
December 31, 2007, the Company changed its presentation of the consolidated
statements of cash flows to include net earnings and net earnings (loss) from
discontinued operations. Accordingly, the Company revised the 2006 and 2005
consolidated statements of cash flows. Net cash flows from operating, investing
and financing activities have not changed.
Principles of
Consolidation. The consolidated financial statements of
Brunswick include the accounts of all consolidated domestic and foreign
subsidiaries, after eliminating transactions between the Company and such
subsidiaries.
Use of
Estimates. The preparation of the consolidated financial
statements in accordance with accounting principles generally accepted in the
United States (GAAP) requires management to make certain estimates. Actual
results could differ materially from those estimates. These estimates
affect:
|
–
|
The
reported amounts of assets and
liabilities;
|
|
–
|
The
disclosure of contingent assets and liabilities at the date of the
financial statements; and
|
|
–
|
The
reported amounts of revenues and expenses during the reporting
periods.
|
Estimates
in these consolidated financial statements include, but are not limited
to:
|
–
|
Allowances
for doubtful accounts;
|
|
–
|
Inventory
valuation reserves;
|
|
–
|
Reserves
for dealer allowances;
|
|
–
|
Warranty
related reserves;
|
|
–
|
Losses
on litigation and other
contingencies;
|
|
–
|
Environmental
reserves;
|
|
–
|
Reserves
related to restructuring activities;
and
|
|
–
|
Postretirement
benefit liabilities.
|
The
Company records a reserve when it is probable that a loss has been incurred and
the loss can be reasonably estimated. The Company establishes its reserve based
on its best estimate within a range of losses. If the Company is unable to
identify the best estimate, the Company records the minimum amount in the
range.
Cash and Cash
Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to
be cash equivalents.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Accounts Receivable and Allowance
for Doubtful Accounts. The Company carries its accounts
receivable at their face amounts less an allowance for doubtful accounts. On a
regular basis, the Company records an allowance for uncollectible receivables
based upon known bad debt risks and past loss history, customer payment
practices and economic conditions. Actual collection experience may differ from
the current estimate of net receivables. A change to the allowance for doubtful
accounts may be required if a future event or other change in circumstances
result in a change in the estimate of the ultimate collectibility of a specific
account.
Accounts
receivable also include domestic accounts receivable sold with full and partial
recourse by Brunswick’s Marine Engine segment to Brunswick Acceptance Company
LLC, as discussed in Note 9 –
Financial Services. As of December 31, 2007 and 2006, the Company had a
retained interest in $46.4 million and $31.5 million of the total outstanding
accounts receivable sold to BAC, respectively, as a result of recourse
provisons. The Company’s maximum exposure as of December 31,
2007 and 2006, related to these amounts was $28.9 million and $16.9 million,
respectively. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 140, “Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities,” the Company treats the sale of
receivables in which the Company retains an interest as a secured
obligation. Accordingly, the amount of receivables subject to
recourse was recorded in Accounts and notes receivable with an offsetting
amount recorded in Accrued expenses in the Consolidated Balance
Sheets. These balances are included in the amounts in Note 11 – Commitments and
Contingencies.
Inventories. Inventories
are valued at the lower of cost or market, with market based on replacement cost
or net realizable value. Approximately 63 percent and 62 percent of Brunswick’s
inventories were determined by the first-in, first-out method (FIFO) at December
31, 2007 and 2006, respectively. Inventories valued at the last-in, first-out
method (LIFO), which results in a better matching of costs and revenue, were
$116.2 million and $107.6 million lower than the FIFO cost of inventories at
December 31, 2007 and 2006, respectively. Inventory cost includes material,
labor and manufacturing overhead.
Property. Property,
including major improvements and product tooling costs, is recorded at cost.
Product tooling costs principally comprise the cost to acquire and construct
various long-lived molds, dies and other tooling owned by the Company and used
in its manufacturing processes. Design and prototype development costs
associated with product tooling are expensed as incurred. Maintenance and repair
costs are also expensed as incurred. Depreciation is recorded over the estimated
service lives of the related assets, principally using the straight-line method.
Buildings and improvements are depreciated over a useful life of five to forty
years. Equipment is depreciated over a useful life of two to twenty years.
Product tooling costs are amortized over the shorter of the useful life of the
tooling or the useful life of the applicable product, for a period not to exceed
eight years. Gains and losses recognized on the sale of property are included in
Selling, general and administrative (SG&A) expenses. The amount of gains and
losses included in SG&A for the years ended December 31 was as
follows:
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Gains
on the sale of property
|
|
$ |
4.2 |
|
$ |
3.3 |
|
$ |
7.1 |
|
|
Losses
on the sale of property
|
|
|
(2.5 |
) |
|
(2.2 |
) |
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gains on sale of property
|
|
$ |
1.7 |
|
$ |
1.1 |
|
$ |
4.9 |
|
Software Development
Costs. The Company expenses all software development and
implementation costs incurred until the Company has determined that the software
will result in probable future economic benefit and management has committed to
funding the project. Once this is determined, external direct costs of material
and services, payroll-related costs of employees working on the project and
related interest costs incurred during the application development stage are
capitalized. These capitalized costs are amortized over three to seven years.
Training costs and costs to re-engineer business processes are expensed as
incurred.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Goodwill and Other
Intangibles. Goodwill and other intangible assets primarily
result from business acquisitions. The excess of cost over net assets of
businesses acquired is recorded as goodwill. Under SFAS No. 142, “Goodwill and
Other Intangible Assets,” (SFAS 142), while amortization of goodwill and
indefinite-lived intangible assets is no longer permitted, these accounts must
be reviewed annually for impairment. The impairment test for goodwill is a
two-step process. The first step is to identify when goodwill impairment has
occurred by comparing the fair value of a reporting unit with its carrying
amount, including goodwill. The Company considers the Boat segment, Marine
Engine segment, Fitness segment, bowling products business, bowling retail
business and billards business to be reporting units for goodwill testing. If
the fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is not considered impaired. If the carrying amount of the
reporting unit exceeds its fair value, the second step of the goodwill test is
performed to measure the amount of the impairment loss, if any. In this second
step, the implied fair value of the reporting unit’s goodwill is compared with
the carrying amount of the goodwill. If the carrying amount of the reporting
unit’s goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount equal to that excess, not to exceed the carrying
amount of the goodwill.
The
Company’s primary intangible assets are customer relationships and trademarks
acquired in business combinations. The costs of amortizable
intangible assets are amortized over their expected useful lives, typically
between 3 and 15 years, to their estimated residual values using the
straight-line method. Intangible assets that are subject to
amortization are evaluated for impairment using a process similar to that used
to evaluate long-lived assets described below. Intangible assets not
subject to amortization are assessed for impairment at least annually and as
triggering events may occur. The impairment test for indefinite-lived
intangible assets consists of a comparison of the fair value of the intangible
asset with its carrying amount. An impairment loss is recognized for the amount
by which the carrying value exceeds the fair value of the asset. The
fair value of trademarks is measured using a relief-from-royalty approach, which
assumes the value of the trademark is the discounted cash flows of the amount
that would be paid had the Company not owned the trademark and instead licensed
the trademark from another company.
The
Company tests indefinite-lived intangible assets (which consist of acquired
trade names) and goodwill for impairment in the fourth quarter of each year
unless triggering events suggest that the assets may be impaired. During the
third quarter of 2007, the Company experienced continued declines in marine
industry demand and revised its strategic plan accordingly. This decline has led
to reduced revenue forecasts and adverse adjustments to projected royalty rates
for certain trade names which, in turn, indicated that certain outboard boat
trade names were subject to impairment. The Company performed an impairment
analysis in the third quarter, resulting in a $66.4 million pre-tax impairment
charge or $41.5 million, after-tax, in the Boat Segment. Refer to Note 7 – Goodwill and Other
Intangible Assets for further details.
Effective
December 31, 2006, the Company adopted the provisions of SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R),” (SFAS 158),
eliminating the minimum liability concept under which any adjustments to
recognize the Company’s additional minimum liability were offset with the
recognition of an intangible asset. Refer to Note 15 – Postretirement
Benefits for further details regarding the Company’s adoption of SFAS
158.
Investments. For
investments in which Brunswick owns or controls from 20 percent to 50 percent of
the voting shares, which includes all of Brunswick’s unconsolidated joint
venture investments, the equity method of accounting is used. The Company’s
share of net earnings or losses from equity method investments is included in
the Consolidated Statements of Income. The Company accounts for its long-term
investments that represent less than 20 percent ownership using SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities,” (SFAS 115).
The Company has investments in certain equity securities that have readily
determinable market values and are being accounted for as available-for-sale
equity investments in accordance with SFAS 115. Therefore, these investments are
recorded at fair market value with changes reflected in Accumulated other
comprehensive income (loss), a component of Shareholders’ equity, on an
after-tax basis.
Other
investments for which the Company does not have the ability to exercise
significant influence and for which there is not a readily determinable market
value are accounted for under the cost method of accounting. The Company
periodically evaluates the carrying value of its investments, and at December
31, 2007 and 2006, such investments were recorded at the lower of cost or fair
value.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Long-Lived
Assets. In accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” the Company continually evaluates
whether events and 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 that the remaining
balance of such assets may not be recoverable. The Company uses an estimate of
the related undiscounted cash flows over the remaining life of the asset in
measuring whether the asset is recoverable. The Company tested its long-lived
asset balances for impairment as triggering events occurred during 2007 and
2006, resulting in impairment charges of $4.8 million and $1.8 million,
respectively.
Other Long-Term
Assets. Other long-term assets include pension assets, which
are discussed in Note 15 –
Postretirement Benefits, and long-term notes receivable. Long-term notes
receivable include cash advances made to customers, principally boat builders
and fitness equipment customers, or their owners, in connection with long-term
supply arrangements. These transactions have occurred in the normal course of
business and are backed by secured or unsecured notes receivable. Credits earned
by these customers through qualifying purchases are applied to the outstanding
note balance in lieu of payment. The reduction in the note receivable balance is
recorded as a reduction in the Company’s sales revenue as a sales discount. In
the event sufficient product purchases are not made, the outstanding balance
remaining under the notes is subject to full collection. Amounts outstanding
related to these arrangements as of December 31, 2007 and 2006, totaled $25.2
million and $32.8 million, respectively. One boat builder customer and its owner
comprised approximately 50 percent and 53 percent of both of these amounts as of
December 31, 2007 and 2006, respectively.
Other
long-term notes receivable also include leases and other long-term receivables
originated by the Company and assigned to third parties. As of December 31, 2007
and 2006, these amounts totaled $57.6 million and $108.5 million,
respectively. Under SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,” the
assignment is treated as a secured obligation as a result of the Company’s
commitment to repurchase the obligation in the event of customer
non-payment. Accordingly, these amounts were recorded in the
Consolidated Balance Sheets under Other long-term assets and Long-term
liabilities — Other.
Revenue
Recognition. Brunswick’s revenue is derived primarily from the
sale of boats, marine engines, marine parts and accessories, fitness equipment,
bowling products and billiards tables. Revenue is recognized in accordance with
the terms of the sale, primarily upon shipment to customers, once the sales
price is fixed or determinable and collectibility is reasonably assured.
Brunswick offers discounts and sales incentives that include retail promotional
activities, rebates and manufacturer coupons. The estimated liability for sales
incentives is recorded at the later of when the program has been communicated to
the customer or at the time of sale in accordance with Emerging Issues Task
Force (EITF) No. 01-9, “Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of a Vendor’s Products).” Revenues from freight
are included as a part of Net sales in the Consolidated Statements of Income,
whereas shipping, freight and handling costs are included in Cost of
sales.
Advertising
Costs. Advertising and promotion costs, included in SG&A
expenses, are expensed when the advertising first takes place. Advertising and
promotion costs were $71.8 million, $67.7 million and $65.8 million for the
years ended December 31, 2007, 2006 and 2005, respectively.
Foreign
Currency. The functional currency for the majority of
Brunswick’s operations is the U.S. dollar. All assets and liabilities of
operations with a functional currency other than the U.S. dollar are translated
at current rates. The resulting translation adjustments are charged to
Accumulated other comprehensive income (loss) in the Consolidated Statements of
Shareholders’ Equity, net of tax. Revenues and expenses of operations with a
functional currency other than the U.S. dollar are translated at the average
exchange rates for the period.
Comprehensive
Income. Accumulated other comprehensive income (loss) includes
prior service costs and net actuarial gains and losses for defined benefit
plans, currency translation adjustments and unrealized derivative and investment
gains and losses, all net of tax. The net effect of these items
reduced Shareholders’ equity on a cumulative basis by $52.7 million and $89.0
million as of December 31, 2007 and 2006, respectively. The change
from 2006 to 2007 was primarily due to a net decrease in actuarial losses and
recognition of prior service costs related to the Company’s pension and
postretirement benefit plans totaling $31.1 million and favorable foreign
currency translation adjustments of $12.0 million. These items were partially
offset by an increase in unrealized losses on derivatives of $8.5 million. The
tax effect included in Accumulated other comprehensive income (loss) was $42.5
million and $59.5 million for the years ended December 31, 2007 and 2006,
respectively.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
The $60.7
million decrease to Accumulated other comprehensive income (loss) resulting from
the Company’s adoption of SFAS 158 at December 31, 2006, included the
elimination of the Company’s $72.2 million minimum pension liability, offset by
the recognition of prior service costs and net actuarial losses of $11.2 million
and $121.7 million, net of tax, respectively. Refer to Note 15 – Postretirement
Benefits for further details regarding the Company’s adoption of SFAS
158.
Stock-Based
Compensation. On January 1, 2006, the Company adopted the
provisions of SFAS No. 123 (revised 2004), “Share-Based Payment,” (SFAS 123R),
which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.”
SFAS 123R supersedes Accounting Principles Board (APB) Opinion No. 25,
“Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement
of Cash Flows.” SFAS 123R requires all share-based payments to employees,
including grants of stock options and the compensatory elements of employee
stock purchase plans, to be recognized in the income statement based upon their
fair values. Share-based employee compensation cost (benefit) is recognized as a
component of selling, general and administrative expense in the Consolidated
Statements of Income. See Note 16 – Stock Plans and Management
Compensation for a description of the Company’s accounting for
stock-based compensation plans.
Derivatives. The
Company uses derivative financial instruments to manage its risk associated with
movements in foreign currency exchange rates, interest rates and commodity
prices. These instruments are used in accordance with guidelines established by
the Company’s management and are not used for trading or speculative purposes.
All derivatives are recorded on the consolidated balance sheet at fair
value. See Note 12 –
Financial Instruments for further discussion.
Recent Accounting
Pronouncements. In September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements,” (SFAS 157), which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The adoption of SFAS 157 is not expected to
have a material impact on the Company’s financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115” (SFAS 159). SFAS 159 permits entities to choose to measure
certain financial assets and financial liabilities at fair value at specified
election dates. Unrealized gains and losses on items for which the fair value
option has been elected are to be reported in earnings. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. The Company does not believe
that the adoption of SFAS 159 will have a material impact on its financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS
141(R)). SFAS 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, the goodwill acquired and any noncontrolling
interest in the acquiree. This statement also establishes disclosure
requirements to enable the evaluation of the nature and financial effect of the
business combination. SFAS 141(R) is effective for fiscal years beginning after
December 15, 2008. The Company is currently evaluating the impact that the
adoption of SFAS 141(R) will have on the financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51” (SFAS 160). SFAS
160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company is currently evaluating the
impact that the adoption of SFAS 160 will have on the financial
statements.
In June
2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes ", which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS No.
109, "Accounting for Income Taxes." FIN 48 also provides guidance on the
derecognition of uncertain positions, financial statement classification,
accounting for interest and penalties, accounting for interim periods and adds
new disclosure requirements. FIN 48 is effective as of the beginning of an
entity's first fiscal year that begins after December 15, 2006. The Company
adopted this Interpretation on January 1, 2007 and the effects of the adoption
are discussed in Note 10 –
Income Taxes.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Note
2 – 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 device (PND) and wireless fleet tracking
businesses. Accordingly, the Company has reported these BNT
businesses as discontinued operations in accordance with the criteria of SFAS
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
related to the classification of assets to be disposed of by sale. These
criteria include reclassifying the operations of BNT for all periods presented.
In 2007, the Company completed the disposition of the businesses comprising
BNT.
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 has now completed the divestiture of the BNT
discontinued operations. With the net asset impairment taken prior to the
dispositon of the BNT business in the fourth quarter of 2006 of $85.6 million,
after-tax, and the subsequent 2007 gains of $29.8 million, after-tax, on the BNT
business sales, the net impact to the Company of these dispositions was a net
loss of $55.8 million, after-tax.
The
following table discloses the results of operations for BNT, including the gain
on the divestitures, reported as discontinued operations for years ended
December 31, 2007, 2006 and 2005, respectively:
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
99.7 |
|
$ |
306.3 |
|
$ |
325.0 |
|
|
Earnings
(loss) before income taxes (A)
|
|
|
(2.4 |
) |
|
(138.9 |
) |
|
9.9 |
|
|
Income
tax (benefit) provision
|
|
|
(4.6 |
) |
|
(9.6 |
) |
|
(4.4 |
) |
|
Earnings
(loss) from operations
|
|
|
2.2 |
|
|
(129.3 |
) |
|
14.3 |
|
|
Gain
on divestitures, net of tax(B)
|
|
|
29.8 |
|
|
— |
|
|
— |
|
|
Net
earnings (loss)
|
|
$ |
32.0 |
|
$ |
(129.3 |
) |
$ |
14.3 |
|
|
(A)
|
Earnings
(loss) before income taxes in 2006 include a pre-tax impairment charge of
$73.9 million with an after-tax effect of $85.6
million.
|
|
(B)
|
The
Gain on divestitures in 2007 includes pre-tax net gains of $26.3 million
and net tax benefits of $3.5
million.
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
There
are no remaining net assets available for sale as of December 31, 2007. The
following table reflects the financial position of the net assets of BNT
disaggregated and reported as discontinued operations as of December 31,
2006:
|
|
|
December
31,
|
|
|
(in
millions)
|
|
2006
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ |
51.5 |
|
|
Inventory
|
|
|
52.5 |
|
|
Other
current assets
|
|
|
1.5 |
|
|
Total
current assets
|
|
|
105.5 |
|
|
|
|
|
|
|
|
Goodwill
and intangible assets
|
|
|
19.8 |
|
|
Investments
|
|
|
6.1 |
|
|
Property,
plant and equipment
|
|
|
6.9 |
|
|
|
|
|
|
|
|
Total
assets
|
|
|
138.3 |
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
46.4 |
|
|
Accrued
expenses
|
|
|
48.6 |
|
|
Total
current liabilities
|
|
|
95.0 |
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
8.7 |
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
103.7 |
|
|
|
|
|
|
|
|
Net
assets
|
|
$ |
34.6 |
|
Note
3 – Restructuring Activities
In
November 2006, Brunswick announced initiatives to improve the Company’s cost
structure, better utilize overall capacity and improve general operating
efficiencies. These actions reflect the Company’s response to
difficult marine market conditions, as the Company continues to reduce
production volumes to achieve appropriate dealer pipeline inventories, and
include the consolidation of certain boat manufacturing facilities, sales
offices and distribution warehouses, as well as reductions in the Company’s
global workforce. In addition, these efforts include the streamlining
of certain sales and other operations throughout the Company.
The
Company announced further initiatives in 2007 to consolidate certain boat
manufacturing facilities in connection with the purchase of a manufacturing
facility in North Carolina, close a manufacturing facility in Mississippi and
shift boat production to Indiana and Minnesota, and eliminate assembly
operations for certain engines in Europe.
Restructuring
charges recorded during 2007 were included in the Consolidated Statements of
Income as follows:
|
(in
millions)
|
|
Boat
Segment
|
|
Marine
Engine
Segment
|
|
Fitness
Segment
|
|
Bowling
& Billiards Segment
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$ |
0.7 |
|
$ |
1.6 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
2.3 |
|
|
Asset write-downs
|
|
|
2.0 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2.0 |
|
|
Facility closures and other
|
|
|
8.8 |
|
|
1.5 |
|
|
— |
|
|
— |
|
|
— |
|
|
10.3 |
|
|
Total
|
|
|
11.5 |
|
|
3.1 |
|
|
— |
|
|
— |
|
|
— |
|
|
14.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
2.9 |
|
|
0.3 |
|
|
— |
|
|
— |
|
|
0.1 |
|
|
3.3 |
|
|
Asset write-downs
|
|
|
— |
|
|
— |
|
|
— |
|
|
2.8 |
|
|
— |
|
|
2.8 |
|
|
Other
|
|
|
1.5 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1.5 |
|
|
Total
|
|
|
4.4 |
|
|
0.3 |
|
|
— |
|
|
2.8 |
|
|
0.1 |
|
|
7.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
restructuring charges
|
|
$ |
15.9 |
|
$ |
3.4 |
|
$ |
— |
|
$ |
2.8 |
|
$ |
0.1 |
|
$ |
22.2 |
|
Restructuring
charges recorded during 2006 were included in the Consolidated Statements of
Income as follows:
|
(in
millions)
|
|
Boat
Segment
|
|
Marine
Engine
Segment
|
|
Fitness
Segment
|
|
Bowling
& Billiards Segment
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$ |
0.6 |
|
$ |
3.0 |
|
$ |
— |
|
$ |
0.9 |
|
$ |
— |
|
$ |
4.5 |
|
|
Asset
write-downs
|
|
|
0.5 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
0.5 |
|
|
Other
|
|
|
0.3 |
|
|
2.3 |
|
|
— |
|
|
— |
|
|
— |
|
|
2.6 |
|
|
Total
|
|
|
1.4 |
|
|
5.3 |
|
|
— |
|
|
0.9 |
|
|
— |
|
|
7.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
1.5 |
|
|
3.2 |
|
|
— |
|
|
0.5 |
|
|
0.7 |
|
|
5.9 |
|
|
Asset
write-downs
|
|
|
0.4 |
|
|
0.9 |
|
|
— |
|
|
1.3 |
|
|
— |
|
|
2.6 |
|
|
Other
|
|
|
0.9 |
|
|
0.1 |
|
|
— |
|
|
— |
|
|
— |
|
|
1.0 |
|
|
Total
|
|
|
2.8 |
|
|
4.2 |
|
|
— |
|
|
1.8 |
|
|
0.7 |
|
|
9.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
write-downs
|
|
|
— |
|
|
— |
|
|
— |
|
|
1.8 |
|
|
— |
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
restructuring charges
|
|
$ |
4.2 |
|
$ |
9.5 |
|
$ |
— |
|
$ |
4.5 |
|
$ |
0.7 |
|
$ |
18.9 |
|
The
Company anticipates that it will incur total costs of approximately $48 million
under these initiatives, which will be completed in 2008. The remaining $7
million of restructuring costs under these initiatives are all expected to occur
in the Boat segment during 2008.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Note
4 – Earnings per Common Share
The
Company calculates earnings per share in accordance with SFAS No. 128, "Earnings
per Share." Basic earnings per share is calculated by dividing net
earnings by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is calculated similarly, except
that the calculation includes the dilutive effect of stock options and nonvested
stock awards. Weighted average basic shares decreased by 4.2 million
shares in 2007 compared with 2006, primarily due to the share repurchase program
(as discussed in Note 19 –
Share Repurchase Program). The decrease was partially offset by shares
issued upon the exercise of employee stock options. Average basic
shares decreased by 3.6 million in 2006 compared with 2005, primarily due to the
share repurchase program and partially offset by shares issued upon the exercise
of employee stock options.
Basic and
diluted earnings per share for the years ended December 31, 2007, 2006 and 2005
are calculated as follows:
|
(in
millions, except per share data)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$ |
79.6 |
|
$ |
263.2 |
|
$ |
371.1 |
|
|
Net
earnings (loss) from discontinued operations, net
of tax
|
|
|
32.0 |
|
|
(129.3 |
) |
|
14.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
111.6 |
|
$ |
133.9 |
|
$ |
385.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares – basic
|
|
|
89.8 |
|
|
94.0 |
|
|
97.6 |
|
|
Dilutive
effect of common stock equivalents
|
|
|
0.4 |
|
|
0.7 |
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares – diluted
|
|
|
90.2 |
|
|
94.7 |
|
|
98.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.88 |
|
$ |
2.80 |
|
$ |
3.80 |
|
|
Discontinued
operations
|
|
|
0.36 |
|
|
(1.38 |
) |
|
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
1.24 |
|
$ |
1.42 |
|
$ |
3.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.88 |
|
$ |
2.78 |
|
$ |
3.76 |
|
|
Discontinued
operations
|
|
|
0.36 |
|
|
(1.37 |
) |
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
1.24 |
|
$ |
1.41 |
|
$ |
3.90 |
|
As of
December 31, 2007, there were 4.2 million options outstanding, of which 2.4
million were exercisable. As of December 31, 2007, 2006 and 2005,
there were 2.9 million, 2.0 million and 0.8 million, respectively, of common
stock options outstanding excluded from the computation of diluted earnings per
share as the exercise price of the options was greater than the average market
price of the Company’s shares for the period then ended.
Note
5 – Segment Information
Brunswick
is a manufacturer and marketer of leading consumer brands, and operates in four
reportable segments: Boat, Marine Engine, Fitness and Bowling &
Billiards. The Company’s segments are defined by management reporting
structure and operating activities.
The Boat
segment designs, manufactures and markets fiberglass pleasure boats,
high-performance boats, offshore fishing boats and aluminum fishing, deck and
pontoon boats, which are sold primarily through dealers. The segment also owns
and operates marine parts and accessories distribution and manufacturing
businesses. The Boat segment’s products are manufactured primarily in the United
States. Sales to the segment’s largest boat dealer, MarineMax, which has
multiple locations, comprised approximately 21 percent of Boat segment sales in
2007, approximately 26 percent in 2006 and approximately 18 percent in
2005.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
The
Marine Engine segment manufactures and markets a full range of sterndrive
engines, inboard engines, outboard engines, water jet propulsion systems, and
parts and accessories, which are principally sold directly to boat builders,
including Brunswick’s Boat segment, or through marine retail dealers worldwide.
Mercury Marine also manufactures and distributes boats in certain markets
outside the United States. The Company’s engine manufacturing plants are located
primarily in the United States, China and Japan, with sales primarily to United
States, European and Asian markets.
The
Fitness segment designs, manufactures and markets fitness equipment, including
treadmills, total body cross-trainers, stair climbers, stationary bikes and
strength-training equipment. These products are manufactured primarily in the
United States or sourced from international locations. Fitness equipment is sold
primarily in North America, Europe and Asia to health clubs, military,
government, corporate and university facilities, and to consumers through
specialty retail shops.
The
Bowling & Billiards segment designs, manufactures and markets bowling
capital equipment and associated parts and supplies, including lanes, automatic
pinsetters and scorers; bowling balls and other accessories; billiards, Air
Hockey and foosball tables and accessories; and operates bowling centers.
Products are manufactured or sourced from domestic and international locations.
Bowling products and commercial billiards, Air Hockey and foosball tables are
sold through a direct sales force or distributors in the United States and
through distributors in non-U.S. markets, primarily Europe and Asia. Consumer
billiards equipment is predominantly sold in the United States and distributed
primarily through dealers.
As
discussed in Note 2 –
Discontinued Operations, during the second
quarter of 2006, Brunswick began reporting the majority of its BNT businesses as
discontinued operations. These businesses were previously reported in
the Marine Engine segment. Segment results have been restated for all
periods presented to reflect the change in Brunswick’s reported
segments. Additionally, the BNT businesses that are being retained
are now reported as part of the Boat, Marine Engine and Fitness segments,
consistent with the manner in which Brunswick’s management views these
businesses.
The
Company evaluates performance based on business segment operating earnings.
Operating earnings of segments do not include the expenses of corporate
administration, earnings from equity affiliates, other expenses and income of a
non-operating nature, interest expense and income or provisions for income
taxes.
Corporate/Other
results include items such as corporate staff and overhead costs as well as the
financial results of the Company’s joint venture, Brunswick Acceptance Company,
LLC (BAC), which is discussed in further detail in Note 9 – Financial
Services. Corporate/Other assets consist primarily of cash and
marketable securities, prepaid income taxes and investments in unconsolidated
affiliates. Marine eliminations are eliminations between the Marine
Engine and Boat segments for sales transactions consummated at established arm’s
length transfer prices.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Information as to the
operations of Brunswick’s operating segments is set forth below:
Operating
Segments
|
|
|
Net
Sales
|
|
|
Operating
Earnings
|
|
Total
Assets
|
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$ |
2,690.9 |
|
$ |
2,864.4 |
|
$ |
2,783.4 |
|
|
$ |
(81.4 |
) |
$ |
135.6 |
|
$ |
192.5 |
|
$ |
1,515.6 |
|
$ |
1,540.4 |
|
|
Marine
Engine
|
|
|
2,357.5 |
|
|
2,271.3 |
|
|
2,300.6 |
|
|
|
183.7 |
|
|
193.8 |
|
|
250.5 |
|
|
959.1 |
|
|
894.8 |
|
|
Marine
eliminations
|
|
|
(477.6 |
) |
|
(521.8 |
) |
|
(491.6 |
) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Total
Marine
|
|
|
4,570.8 |
|
|
4,613.9 |
|
|
4,592.4 |
|
|
|
102.3 |
|
|
329.4 |
|
|
443.0 |
|
|
2,474.7 |
|
|
2,435.2 |
|
|
Fitness
|
|
|
653.7 |
|
|
593.1 |
|
|
551.4 |
|
|
|
59.7 |
|
|
57.8 |
|
|
56.1 |
|
|
695.4 |
|
|
693.1 |
|
|
Bowling
& Billiards
|
|
|
446.9 |
|
|
458.3 |
|
|
464.5 |
|
|
|
16.5 |
|
|
22.1 |
|
|
37.2 |
|
|
409.2 |
|
|
392.2 |
|
|
Eliminations
|
|
|
(0.2 |
) |
|
(0.3 |
) |
|
(1.4 |
) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Corporate/Other
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
(71.3 |
) |
|
(68.1 |
) |
|
(67.6 |
) |
|
786.3 |
|
|
791.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,671.2 |
|
$ |
5,665.0 |
|
$ |
5,606.9 |
|
|
$ |
107.2 |
|
$ |
341.2 |
|
$ |
468.7 |
|
$ |
4,365.6 |
|
$ |
4,312.0 |
|
|
|
|
Depreciation
|
|
Amortization
|
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$ |
60.4 |
|
$ |
52.1 |
|
$ |
50.2 |
|
$ |
11.2 |
|
$ |
11.0 |
|
$ |
8.8 |
|
|
Marine
Engine
|
|
|
66.5 |
|
|
63.4 |
|
|
58.9 |
|
|
0.6 |
|
|
2.0 |
|
|
0.6 |
|
|
Fitness
|
|
|
10.0 |
|
|
10.8 |
|
|
11.9 |
|
|
0.3 |
|
|
0.3 |
|
|
0.2 |
|
|
Bowling
& Billiards
|
|
|
24.0 |
|
|
21.8 |
|
|
20.5 |
|
|
2.7 |
|
|
0.9 |
|
|
0.9 |
|
|
Corporate/Other
|
|
|
4.4 |
|
|
5.0 |
|
|
4.3 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
165.3 |
|
$ |
153.1 |
|
$ |
145.8 |
|
$ |
14.8 |
|
$ |
14.2 |
|
$ |
10.5 |
|
|
|
|
|
|
|
|
|
|
Research
& Development
|
|
|
|
|
Capital
Expenditures
|
|
Expense
|
|
| (in
millions) |
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$ |
94.9 |
|
$ |
75.8 |
|
$ |
74.7 |
|
$ |
39.8 |
|
$ |
38.0 |
|
$ |
36.1 |
|
|
Marine
Engine
|
|
|
54.8 |
|
|
72.5 |
|
|
91.5 |
|
|
68.1 |
|
|
70.3 |
|
|
67.3 |
|
|
Fitness
|
|
|
11.8 |
|
|
11.0 |
|
|
11.2 |
|
|
21.6 |
|
|
18.4 |
|
|
14.2 |
|
|
Bowling
& Billiards
|
|
|
41.6 |
|
|
43.7 |
|
|
36.8 |
|
|
5.0 |
|
|
5.5 |
|
|
5.9 |
|
|
Corporate/Other
|
|
|
4.6 |
|
|
2.1 |
|
|
9.6 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
207.7 |
|
$ |
205.1 |
|
$ |
223.8 |
|
$ |
134.5 |
|
$ |
132.2 |
|
$ |
123.5 |
|
Geographic
Segments
|
|
|
Net
Sales
|
|
Long-Lived
Assets
|
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
3,654.8 |
|
$ |
3,862.6 |
|
$ |
3,846.6 |
|
$ |
1,002.3 |
|
$ |
1,016.9 |
|
|
International
|
|
|
2,016.4 |
|
|
1,802.4 |
|
|
1,760.3 |
|
|
139.1 |
|
|
134.3 |
|
|
Corporate/Other
|
|
|
— |
|
|
— |
|
|
— |
|
|
185.3 |
|
|
201.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,671.2 |
|
$ |
5,665.0 |
|
$ |
5,606.9 |
|
$ |
1,326.7 |
|
$ |
1,352.9 |
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Note
6 – Acquisitions
All
acquisitions are accounted for under the purchase method and in accordance with
SFAS No. 141, “Business Combinations.”
In 2007,
consideration paid for acquisitions, net of cash acquired, and other
consideration provided was as follows:
| (in
millions) |
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
|
Name/Description
|
|
Net
Cash
Consideration(A)
|
|
Other
Consideration
|
|
Total
Consideration
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/04/07
|
|
|
Marine
Innovations Warranty Corporation
|
|
$ |
1.5 |
|
$ |
– |
|
$ |
1.5 |
|
|
8/24/07
|
|
|
Rayglass
Sales & Marketing Limited (51 percent)
|
|
|
4.6 |
|
|
– |
|
|
4.6 |
|
|
Various
|
|
|
Miscellaneous
|
|
|
0.1 |
|
|
0.5 |
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6.2 |
|
$ |
0.5 |
|
$ |
6.7 |
|
|
(A)
|
Net
cash consideration is subject to subsequent changes resulting from final
purchase agreement adjustments.
|
The
Company made an additional payment of $1.5 million for the April 1, 2004,
acquisition of Marine Innovations Warranty Corporation (Marine Innovations), an
administrator of extended warranty contracts for the marine
industry. This was the final payment required under the purchase
agreement as Marine Innovations fulfilled earnings targets. The
post-acquisition results of Marine Innovations are included in the Boat
segment.
Brunswick
purchased a 49 percent equity interest in Rayglass Sales & Marketing Limited
(Rayglass), a manufacturer of boats and marine equipment located in New Zealand,
on July 15, 2003, for $5.5 million. On August 24, 2007, the Company exercised
its option to purchase the remaining 51 percent interest in the New Zealand
company for $4.6 million. The acquisition expands the global manufacturing
footprint of the marine operations and develops additional international sales
opportunities. The post-acquisition results of Rayglass are included in the
Marine Engine segment.
These
acquisitions were not and would not have been material to Brunswick’s net sales,
results of operations or total assets in the years ended December 31, 2007 and
2006. Accordingly, Brunswick’s consolidated results from operations do not
differ materially from historical performance as a result of these acquisitions,
and therefore, pro forma results are not presented.
In 2006,
consideration paid for acquisitions, net of cash acquired, was as
follows:
| (in
millions) |
|
|
|
|
|
|
|
Date
|
|
|
Name/Description
|
|
Net
Cash
Consideration(A)
|
|
| |
|
|
|
|
|
|
|
2/16/06
|
|
|
Cabo
Yachts, Inc.
|
|
$ |
60.6 |
|
|
3/24/06
|
|
|
Marine
Innovations Warranty Corporation
|
|
|
2.3 |
|
|
4/26/06
|
|
|
Diversified
Marine Products, L.P.
|
|
|
14.2 |
|
|
9/20/06
|
|
|
Protokon
LLC (13.3 percent)
|
|
|
5.6 |
|
|
10/19/06
|
|
|
Blue
Water Dealer Services, Inc.
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
86.2 |
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Net
cash consideration is subject to subsequent changes resulting from final
purchase agreement adjustments.
|
Brunswick
acquired certain assets of Cabo Yachts, Inc. (Cabo) for $60.6
million. Cabo manufactures offshore sportfishing boats ranging from
31 to 52 feet. The purchase of Cabo complements Brunswick’s previous
acquisitions of Hatteras Yachts, Inc. and Albemarle Boats, Inc. (Albemarle),
discussed below, and allows the Company to offer a full range of sportfishing
convertibles and motoryachts from 24 to 100 feet. The post-acquisition results
of Cabo are included in the Boat segment.
The
Company made an additional payment of $2.3 million for the April 1, 2004,
acquisition of Marine Innovations. This payment was required under
the purchase agreement as Marine Innovations fulfilled earnings targets. The
post-acquisition results of Marine Innovations are included in the Boat
segment.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
On April
26, 2006, Brunswick acquired the outstanding stock of Diversified Marine
Products, L.P. (Diversified) for $14.2 million. Diversified is a leading
wholesale distributor of marine parts and accessories headquartered in Los
Angeles, California. The acquisition of Diversified complements
Brunswick’s previous acquisitions of Benrock, Inc. (Benrock), Land ‘N’ Sea
Corporation and Kellogg Marine, Inc. (Kellogg) and allows Brunswick to provide
same- or next-day delivery of marine parts and accessories nationwide by
expanding its parts and accessories business to the West Coast of the United
States. The post-acquisition results of Diversified are included in
the Boat Segment.
On
September 20, 2006, the Company acquired an additional 13.3 percent of the
outstanding stock of Protokon LLC (Protokon), a Hungarian equipment
manufacturer, for $5.6 million. Brunswick previously purchased 80
percent of the outstanding stock of Protokon in 2003 and has the option to
acquire the remaining 6.7 percent interest in Protokon under certain
circumstances. The acquisition of Protokon has allowed
Brunswick to manufacture fitness equipment closer to the European marketplace,
thereby reducing freight costs and offering better service to fitness customers
in Europe. The post-acquisition results of Protokon are included in
the Fitness Segment.
On
October 19, 2006, Brunswick acquired the outstanding stock of Blue Water Dealer
Services, Inc. and its affiliates (Blue Water) for $3.5 million. Blue
Water, headquartered in Wilmington, North Carolina, is a provider of retail
financial services to marine dealers. The acquisition of Blue Water
allows Brunswick to offer a more complete line of financial services to its boat
and marine engine dealers and their customers. The post-acquisition
results of Blue Water are included in the Boat Segment.
These
acquisitions were not and would not have been material to Brunswick’s net sales,
results of operations or total assets in the years ended December 31, 2006 and
2005. Accordingly, Brunswick’s consolidated results from operations
do not differ materially from historical performance as a result of these
acquisitions, and therefore, pro forma results are not presented.
In 2005,
consideration paid for acquisitions, net of debt and cash acquired, was as
follows:
| (in
millions) |
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
|
Name/Description
|
|
Net
Cash
Consideration(A)
|
|
Other
Consideration
|
|
Total
Consideration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/07/05
|
|
|
Benrock,
Inc.
|
|
$ |
4.2 |
|
$ |
– |
|
$ |
4.2 |
|
|
2/28/05
|
|
|
Albemarle
Boats, Inc.
|
|
|
9.2 |
|
|
– |
|
|
9.2 |
|
|
4/21/05
|
|
|
Sea
Pro, Sea Boss and Palmetto boats
|
|
|
1.0 |
|
|
– |
|
|
1.0 |
|
|
5/27/05
|
|
|
Triton
Boat Company, L.P.
|
|
|
58.4 |
|
|
4.4 |
|
|
62.8 |
|
|
6/20/05
|
|
|
Supra-Industria
Textil, Lda. (51 percent)
|
|
|
7.8 |
|
|
0.9 |
|
|
8.7 |
|
|
6/27/05
|
|
|
Marine
Innovations Warranty Corporation
|
|
|
2.3 |
|
|
– |
|
|
2.3 |
|
|
7/07/05
|
|
|
Kellogg
Marine, Inc.
|
|
|
41.7 |
|
|
– |
|
|
41.7 |
|
|
9/16/05
|
|
|
Harris
Kayot Marine, LLC
|
|
|
4.8 |
|
|
– |
|
|
4.8 |
|
|
Various
|
|
|
Miscellaneous
|
|
|
0.9 |
|
|
1.0 |
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
130.3 |
|
$ |
6.3 |
|
$ |
136.6 |
|
|
(A)
|
Net
cash consideration is subject to subsequent changes resulting from final
purchase agreement adjustments.
|
Brunswick
acquired the receivables, inventory, property and equipment of Benrock for $4.2
million. Benrock is a distributor of marine parts and expands
Brunswick’s geographic coverage of its parts and accessories businesses
distribution network serving the central and southern United States markets. The
post-acquisition results of Benrock are included in the Boat
segment.
Brunswick
acquired the outstanding stock of Albemarle for $9.2
million. Albemarle produces offshore sportfishing boats ranging in
length from 24 to 41 feet. The acquisition of Albemarle provides
Brunswick with the opportunity to offer a more complete range of offshore
sportfishing boats and complements the sportfishing convertibles offered by
Hatteras, whose products start at 50 feet. The post-acquisition
results of Albemarle are included in the Boat segment.
The
Company made a final payment of $1.0 million for the December 31, 2004,
acquisition of Sea Pro, Sea Boss and Palmetto boats (Sea Pro). This
payment was based on finalization of the closing balance sheet. The
post-acquisition results of Sea Pro are included in the Boat
segment.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Brunswick
acquired the outstanding stock of Triton Boat Company, L.P. (Triton), a
manufacturer of fiberglass bass and freshwater boats, and aluminum fishing boats
ranging in length from 12 to 35 feet. The Company funded this acquisition
through cash consideration of $58.4 million and the assumption of $4.4 million
of debt. The acquisition of Triton adds freshwater bass boats to
Brunswick’s product lineup, as well as a broader range of saltwater and aluminum
fishing boats. The post-acquisition results of Triton are included in
the Boat segment.
The
Company exercised its contractual right to acquire its joint venture partner’s
51 percent interest in Supra-Industria Textil, Lda. (Valiant), a Portugal-based
manufacturer of the Valiant brand of rigid inflatable boats, for $7.8 million
and the assumption of debt. Brunswick is now the sole owner of
Valiant. The post-acquisition results of Valiant are included in the Marine
Engine segment.
The
Company made an additional payment of $2.3 million for the April 1, 2004,
acquisition of Marine Innovations. This payment was required under
the purchase agreement as Marine Innovations fulfilled earnings
targets. The post-acquisition results of Marine Innovations are
included in the Boat segment.
Brunswick
acquired the net assets of Kellogg for $41.7 million. Kellogg is a
leading distributor of marine parts and accessories headquartered in Old Lyme,
Connecticut. The acquisition of Kellogg complements Brunswick’s
previous acquisitions of Benrock and Land ‘N’ Sea and provides a distribution
hub in the northeastern United States. The post-acquisition results
of Kellogg are included in the Boat segment.
Brunswick
acquired the outstanding stock of Harris Kayot Marine, LLC (Harris Kayot), a
builder of pontoon boats, fiberglass runabouts and deck boats ranging in length
from 20 to 26 feet, for $4.8 million. This acquisition advances
Brunswick’s position in the pontoon market and complements the Company’s
existing boat portfolio with premium runabout and deck boat product
lines. The post-acquisition results of Harris Kayot are included in
the Boat segment.
These
acquisitions were not and would not have been material to Brunswick’s net sales,
results of operations or total assets in the years ended December 31,
2005. Accordingly, Brunswick’s consolidated results from operations
do not differ materially from historical performance as a result of these
acquisitions, and therefore, pro forma results are not presented.
Purchase
price allocations for acquisitions are subject to adjustment, pending final
third-party valuations, up to one year from the date of acquisition. Any
adjustments are not expected to be material to Brunswick’s Consolidated Balance
Sheets. See Note 1 –
Significant Accounting Policies and Note 7 – Goodwill and Other
Intangible Assets for further detail regarding the Company’s accounting
for goodwill and other intangible assets.
The
following table shows the gross amount of goodwill and intangible assets
recorded as of December 31 for the acquisitions completed in 2007, 2006 and
2005:
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
Useful
Life
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
8.1 |
|
$ |
32.9 |
|
$ |
41.7 |
|
|
|
|
|
|
Trademarks/trade
names
|
|
$ |
— |
|
$ |
17.8 |
|
$ |
26.9 |
|
|
|
|
|
|
Amortizable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$ |
— |
|
$ |
9.1 |
|
$ |
19.9 |
|
|
N/A
|
|
|
10
years
|
|
Other
|
|
$ |
— |
|
$ |
3.2 |
|
$ |
5.7 |
|
|
N/A
|
|
|
8
years
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Note
7 – Goodwill and Other Intangible Assets
During
2007, 2006 and 2005, the Company tested its goodwill balances for impairment and
no adjustments were recorded as a result of those reviews.
A summary
of changes in the Company’s goodwill during the period ended December 31, 2007,
by segment is as follows:
|
|
|
December
31,
|
|
|
|
|
|
December
31,
|
|
|
(in
millions)
|
|
2006
|
|
Acquisitions
|
|
Adjustments
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$ |
362.0 |
|
$ |
— |
|
$ |
4.6 |
|
$ |
366.6 |
|
|
Marine
Engine
|
|
|
14.7 |
|
|
7.8 |
|
|
0.9 |
|
|
23.4 |
|
|
Fitness
|
|
|
272.3 |
|
|
— |
|
|
1.7 |
|
|
274.0 |
|
|
Bowling
& Billiards
|
|
|
14.6 |
|
|
0.3 |
|
|
— |
|
|
14.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
663.6 |
|
$ |
8.1 |
|
$ |
7.2 |
|
$ |
678.9 |
|
A summary
of changes in the Company’s goodwill during the period ended December 31, 2006,
by segment is as follows:
|
|
|
December
31,
|
|
|
|
|
|
December
31,
|
|
|
|
|
2005
|
|
Acquisitions
|
|
Adjustments
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$ |
317.0 |
|
$ |
28.8 |
|
$ |
16.2 |
|
$ |
362.0 |
|
|
Marine
Engine
|
|
|
19.9 |
|
|
— |
|
|
(5.2 |
) |
|
14.7 |
|
|
Fitness
|
|
|
265.9 |
|
|
3.9 |
|
|
2.5 |
|
|
272.3 |
|
|
Bowling
& Billiards
|
|
|
14.5 |
|
|
— |
|
|
0.1 |
|
|
14.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
617.3 |
|
$ |
32.7 |
|
$ |
13.6 |
|
$ |
663.6 |
|
Adjustments
in 2007 and 2006 primarily relate to the effect of foreign currency translation
and changes in the fair value of net assets subject to purchase accounting
adjustments, primarily arising from the Company’s acquisitions as described in
Note 6 –
Acquisitions.
During
2007 and 2006, the Company tested its indefinite-lived intangible asset
balances, excluding goodwill, for impairment and, other than the impairment
charges described below, no adjustments were recorded as a result of those
reviews.
Aggregate
amortization expense for intangibles was $14.8 million, $14.2 million and $10.5
million for the years ended December 31, 2007, 2006 and 2005,
respectively. Estimated amortization expense for intangible assets is
$13.1 million for the year ending December 31, 2008, and $8.9 million per year
from 2009 through 2012.
Other
intangibles consist of the following:
|
|
|
December
31, 2007
|
|
December
31, 2006
|
|
|
|
|
Gross
|
|
Accumulated
|
|
Gross
|
|
Accumulated
|
|
|
(in
millions)
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$ |
271.4 |
|
$ |
(211.9 |
) |
$ |
271.6 |
|
$ |
(202.9 |
) |
|
Other
|
|
|
40.7 |
|
|
(20.0 |
) |
|
38.7 |
|
|
(15.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
312.1 |
|
$ |
(231.9 |
) |
$ |
310.3 |
|
$ |
(218.6 |
) |
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks/trade
names
|
|
$ |
182.7 |
|
$ |
(17.3 |
) |
$ |
248.2 |
|
$ |
(17.3 |
) |
Amortized
intangible assets – Other includes patents, non-compete agreements and other
intangible assets. Gross amounts and related accumulated amortization
amounts include adjustments related to the impact of foreign currency
translation and changes in the fair value of net assets subject to purchase
accounting adjustments, primarily arising from the Company’s acquisitions as
described in Note 6 –
Acquisitions.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
As noted
in Note 1 – Significant
Accounting Policies, during the third quarter of 2007, Brunswick
estimated the fair value of certain outboard boat trade names with impairment
indicators by performing a discounted cash flow analysis based on a
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 $41.5 million, after-tax, impairment charge, or $66.4 million, pre-tax, to the
Boat segment, representing the excess of the carrying cost of the
indefinite-lived intangible assets over the calculated fair value. There were no
impairment adjustments made in 2006.
Note
8 – Investments
The
Company has certain unconsolidated international and domestic affiliates that
are accounted for using the equity method. Refer to Note 9 – Financial Services
for more details on the Company’s Brunswick Acceptance Company, LLC joint
venture. The Company contributed $0.2 million and $4.0 million to
other existing joint ventures in 2007 and 2006, respectively.
Brunswick
received dividends from its unconsolidated affiliates of $11.6 million, $6.8
million and $12.3 million for the years ended December 31, 2007, 2006 and 2005,
respectively.
The
Company’s sales to and purchases from its investments, along with the
corresponding receivables and payables, were not material to the Company’s
overall results of operations for the years ended December 31, 2007, 2006 and
2005, respectively, and its financial position as of December 31, 2007 and
2006.
On
February 23, 2005, Brunswick sold its investment of 1,861,200 shares in
MarineMax, its largest boat dealer, for $56.8 million, net of $4.1 million of
selling costs, which included $1.1 million of accrued expenses. The sale was
made pursuant to a registered public offering by MarineMax. As a result of this
sale, the Company recorded an after-tax gain of $31.5 million after utilizing
previously unrecognized capital loss carryforwards.
Note
9 – Financial Services
A Company
subsidiary, Brunswick Financial Services Corporation (BFS), owns 49 percent of a
joint venture, Brunswick Acceptance Company, LLC (BAC). CDF Ventures, LLC
(CDFV), a subsidiary of GE Capital Corporation (GECC) owns the remaining 51
percent. Under the terms of the joint venture agreement, BAC provides
secured wholesale floor-plan financing to Brunswick’s boat and engine dealers.
BAC also purchases and services a portion of Mercury Marine’s domestic accounts
receivable relating to its boat builder and dealer customers.
BFS’s
contributed equity is adjusted monthly to maintain a 49 percent equity interest
in accordance with the capital provisions of the joint venture
agreement. BFS’s investment in BAC is accounted for by the Company
under the equity method and is recorded as a component of Investments in its
Consolidated Balance Sheets. The Company funds its investment in BAC through
cash contributions and reinvested earnings. In 2007, the Company
received a net distribution of $3.6 million compared with a net distribution of
$1.6 million in 2006 and a net contribution of $16.3 million in
2005. The Company records BFS’s share of income or loss in BAC based
on its ownership percentage in the joint venture in Equity earnings in its
Consolidated Statements of Income.
BAC is
funded in part through a loan from GE Commercial Distribution Finance
Corporation and a securitization facility arranged by GECC, and in part by a
cash equity investment from both partners. BFS’s total investment in BAC at
December 31, 2007 and 2006 was $47.0 million and $50.6 million,
respectively. BFS’s exposure to losses associated with BAC financing
arrangements is limited to its funded equity in BAC.
BFS
recorded income related to the operations of BAC of $12.7 million, $13.2 million
and $9.7 million for the years ended December 31, 2007, 2006 and 2005,
respectively. These amounts exclude the discount expense on the sale
of Mercury Marine’s accounts receivable to the joint venture noted
below.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Accounts
receivable totaling $887.3 million, $832.0 million and $913.3 million were sold
to BAC in 2007, 2006 and 2005 respectively. Discounts of $8.0
million, $7.6 million and $7.0 million for the years ended December 31, 2007,
2006 and 2005, respectively, have been recorded as an expense in Other expense,
net, in the Consolidated Statements of Income. The outstanding
balance of receivables sold to BAC was $93.1 million as of December 31, 2007, up
from $80.0 million as of December 31, 2006. Pursuant to the joint
venture agreement, BAC reimbursed Mercury Marine $2.7 million, $2.2 million and
$2.6 million in 2007, 2006 and 2005, respectively, for the related credit,
collection and administrative costs incurred in connection with the servicing of
such receivables.
As of
December 31, 2007 and 2006, the Company had a retained interest in $46.4 million
and $31.5 million of the total outstanding accounts receivable sold to BAC,
respectively, as a result of recourse provisions. The Company’s
maximum exposure as of December 31, 2007 and 2006, related to these amounts was
$28.9 million and $16.9 million, respectively. In accordance
with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities,” (SFAS 140), the Company treats the
sale of receivables in which the Company retains an interest as a secured
obligation. Accordingly, the amount of receivables subject to
recourse was recorded in Accounts and notes receivable with an offsetting
amount recorded in Accrued expenses in the Consolidated Balance
Sheets. These balances are included in the amounts in Note 11 – Commitments and
Contingencies.
Additionally,
Brunswick's marine dealers can offer extended product warranties to their retail
customers through Brunswick Product Protection Corporation. In
October 2006, Brunswick acquired Blue Water Dealer Services, Inc. and its
affiliates, a provider of retail financial services to the marine industry, to
allow Brunswick to offer a more complete line of financial services to its boat
and marine engine dealers and their customers. See Note 6 – Acquisitions for
further details.
Note
10 – Income Taxes
The
sources of earnings before income taxes are as follows:
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
64.7 |
|
$ |
285.6 |
|
$ |
449.6 |
|
|
Foreign
|
|
|
28.0 |
|
|
24.1 |
|
|
36.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before income taxes
|
|
$ |
92.7 |
|
$ |
309.7 |
|
$ |
485.9 |
|
The
income tax provision consisted of the following:
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Current
tax expense (benefit):
|
|
|
|
|
|
|
|
|
U.S.
Federal
|
|
$ |
25.7 |
|
$ |
66.3 |
|
$ |
99.9 |
|
|
State
and local
|
|
|
(1.8 |
) |
|
8.8 |
|
|
9.0 |
|
|
Foreign
|
|
|
33.6 |
|
|
1.4 |
|
|
14.3 |
|
|
Total
current
|
|
|
57.5 |
|
|
76.5 |
|
|
123.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Federal
|
|
|
(29.5 |
) |
|
(28.6 |
) |
|
(7.5 |
) |
|
State
and local
|
|
|
(3.7 |
) |
|
(4.3 |
) |
|
0.1 |
|
|
Foreign
|
|
|
(11.2 |
) |
|
2.9 |
|
|
(1.0 |
) |
|
Total
deferred
|
|
|
(44.4 |
) |
|
(30.0 |
) |
|
(8.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
provision
|
|
$ |
13.1 |
|
$ |
46.5 |
|
$ |
114.8 |
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Temporary
differences and carryforwards giving rise to deferred tax assets and liabilities
at December 31, 2007 and 2006, were as follows:
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Current
deferred tax assets:
|
|
|
|
|
|
|
Product
warranties
|
|
$ |
53.0 |
|
$ |
65.7 |
|
|
Sales
incentives and discounts
|
|
|
43.8 |
|
|
44.4 |
|
|
Litigation
and environmental reserves
|
|
|
21.5 |
|
|
22.4 |
|
|
Insurance
reserves
|
|
|
20.2 |
|
|
19.4 |
|
|
Bad
debt and other receivable reserves
|
|
|
12.7 |
|
|
11.3 |
|
|
Stock
plans
|
|
|
12.6 |
|
|
10.4 |
|
|
Loss
carryforwards
|
|
|
16.3 |
|
|
1.9 |
|
|
Other
|
|
|
72.1 |
|
|
76.2 |
|
|
Valuation
allowance
|
|
|
(2.3 |
) |
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
Total
current deferred tax assets
|
|
$ |
249.9 |
|
$ |
249.9 |
|
|
|
|
|
|
|
|
|
|
|
Non-current
deferred tax liabilities (assets):
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
139.1 |
|
$ |
160.4 |
|
|
Pension
|
|
|
42.8 |
|
|
46.0 |
|
|
Other
|
|
|
37.8 |
|
|
96.0 |
|
|
Non-current
deferred tax liabilities
|
|
|
219.7 |
|
|
302.4 |
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
(64.9 |
) |
|
(84.6 |
) |
|
Loss
carryforwards
|
|
|
(54.6 |
) |
|
(45.2 |
) |
|
Postretirement
and postemployment benefits
|
|
|
(45.9 |
) |
|
(45.1 |
) |
|
Deferred
compensation
|
|
|
(31.3 |
) |
|
(32.9 |
) |
|
Other
|
|
|
(24.9 |
) |
|
(16.5 |
) |
|
Valuation
allowance
|
|
|
14.2 |
|
|
8.2 |
|
|
Non-current
deferred tax assets
|
|
|
(207.4 |
) |
|
(216.1 |
) |
|
|
|
|
|
|
|
|
|
|
Total
non-current net deferred tax liabilities
|
|
$ |
12.3 |
|
$ |
86.3 |
|
At
December 31, 2007 Loss carryforwards totaling $70.9 million were available to
reduce future tax liabilities. This deferred tax asset was comprised
of $34.3 million of the tax benefit of state net operating loss (NOL)
carryforwards, $19.3 million of the tax benefit of foreign NOL carryforwards and
$17.3 million of the tax benefit of unused capital losses. NOL
carryforwards of $39.2 million expire at various intervals between the years
2008 and 2026, while the remainder have an unlimited life. At December 31, 2007,
the valuation allowance totaling $16.5 million was comprised of $6.1 million for
state NOL carryforwards, $7.1 million for foreign NOL carryforwards and $3.3
million for unused state capital losses.
The
Company does not believe other valuation allowances are necessary, because
deductible temporary differences will be utilized primarily by carryback to
prior years’ taxable income, or as charges against reversals of future taxable
temporary differences. Based upon prior earnings history, the Company expects
that future taxable income will be sufficient to utilize the remaining
deductible temporary differences.
The
Company has historically provided deferred taxes under APB No. 23, “Accounting
for Income Taxes – Special Areas,” (APB 23) for the presumed ultimate
repatriation to the United States of earnings from all non-U.S. subsidiaries and
unconsolidated affiliates. The indefinite reversal criterion of APB
23 allows the Company to overcome that presumption to the extent the earnings
are indefinitely reinvested outside the United States.
Through
July 2, 2005, Brunswick provided deferred taxes for the undistributed net
earnings for all of its foreign subsidiaries and unconsolidated affiliates, as
such earnings may have been repatriated to the United States in future
years. As of July 3, 2005, the Company determined that approximately
$37 million of certain foreign subsidiaries’ undistributed net earnings from
continuing operations would now be indefinitely reinvested in operations outside
the United States. These earnings will provide Brunswick with the
opportunity to continue to expand its global manufacturing footprint, fund
future growth in foreign locations and shift Brunswick’s acquisition focus to
Europe and Asia. The Company’s current intentions meet the indefinite
reversal criterion of APB 23. As a result of the APB 23 change in
assertion and related refinements in its tax calculations, the Company reduced
its deferred tax liabilities related to undistributed foreign
earnings.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
As of
January 1, 2007, the Company determined that $25.8 million of current
undistributed net earnings, as well as the future net earnings, of certain
additional foreign subsidiaries will be permanently reinvested. As a
result of the additional APB 23 change in assertion, the Company reduced its
deferred tax liabilities related to undistributed foreign earnings by $2.0
million during the first quarter of 2007.
The
Company has undistributed earnings from continuing operations of foreign
subsidiaries of $89.2 million at December 31, 2007, for which deferred taxes
have not been provided. Such earnings are indefinitely reinvested in
the foreign subsidiaries. If such earnings were repatriated,
additional tax may result. The Company continues to provide deferred
taxes, as required, on the undistributed net earnings of foreign subsidiaries
and unconsolidated affiliates that are not indefinitely reinvested in operations
outside the United States.
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes,” (FIN 48) 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, balance
of retained earnings. As of January 1, 2007, the Company had $42.4 million of
gross unrecognized tax benefits, including interest. Of this amount,
$34.3 million represents the portion that, if recognized, would impact the
effective tax rate. The Company recognizes interest and penalties
related to unrecognized tax benefits in income tax expense. As of
January 1, 2007, the Company had $5.4 million accrued for the payment of
interest, and no amounts accrued for penalties.
The
following is a reconciliation of the total amounts of unrecognized tax benefits
excluding interest and penalties since the inception of FIN 48:
|
(in
millions)
|
|
2007
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
$ |
37.0 |
|
|
Gross
increases – tax positions prior periods
|
|
|
4.5 |
|
|
Gross
decreases – tax positions prior periods
|
|
|
(0.7 |
) |
|
Gross
increases – current period tax positions
|
|
|
2.6 |
|
|
Decreases
– settlements with taxing authorities
|
|
|
(0.3 |
) |
|
Reductions
– lapse of statute of limitations
|
|
|
(4.4 |
) |
|
Foreign
exchange
|
|
|
0.3 |
|
|
|
|
|
|
|
|
Balance
at December 31
|
|
$ |
39.0 |
|
As of
December 31, 2007, the Company had $44.4 million of gross unrecognized tax
benefits, including interest. Of this amount, $37.4 million
represents the portion that, if recognized, would impact the effective tax
rate. The Company recognizes interest and penalties related to
unrecognized tax benefits in income tax expense. As of December 31,
2007, the Company had $5.4 million accrued for the payment of interest, and no
amounts accrued for penalties.
The
Company believes that it is reasonably possible that the total amount of
unrecognized tax benefits as of December 31, 2007, will decrease by
approximately $1.2 million in 2008 as a result of expected settlements with
taxing authorities. Due to the various jurisdictions in which the
Company files tax returns and the uncertainty regarding the timing of the
settlement of tax audits, it is possible that there could be other significant
changes in the amount of unrecognized tax benefits in 2008, but the amount
cannot be estimated.
The Company is regularly
audited by federal, state and foreign tax authorities. In the fourth
quarter of 2006, the IRS completed its audit of the Company’s taxable years 2002
and 2003. As discussed in Note 11
– Commitments and Contingencies, the Company and
the IRS reached settlements in 2005 for taxable years 1986 through 2001, and the
statute of limitations related to these taxable years expired on March 9,
2006. The Company’s
taxable years 2004 through 2006 are currently open for IRS examination and the
IRS has begun its audit of 2004 and 2005. Primarily as a
result of filing amended tax returns, which were generated by the closing of
federal income tax audits, the Company is still open to state and local tax
audits in major tax jurisdictions dating back to the 1999 taxable
year. With the exception of Germany, where the Company is currently
undergoing a tax audit for taxable years 1998 through 2001, the Company is no
longer subject to income tax examinations by any other major foreign tax
jurisdiction for years prior to 2001.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
The
difference between the actual income tax provision and the tax provision
computed by applying the statutory Federal income tax rate to earnings before
taxes is attributable to the following:
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision at 35 percent
|
|
$ |
32.4 |
|
$ |
108.4 |
|
$ |
170.1 |
|
|
State
and local income taxes, net of Federal income tax effect
|
|
|
1.3 |
|
|
7.8 |
|
|
9.8 |
|
|
Deferred
tax reassessments
|
|
|
(12.7 |
) |
|
— |
|
|
— |
|
|
Research
and development credit
|
|
|
(8.1 |
) |
|
(8.5 |
) |
|
(9.7 |
) |
|
Change
in estimates related to prior years and prior
years’
amended tax return filings
|
|
|
3.8 |
|
|
(4.4 |
) |
|
(15.0 |
) |
|
Lower
taxes related to foreign income, net of credits
|
|
|
(2.9 |
) |
|
(5.2 |
) |
|
(5.7 |
) |
|
Tax
rate changes
|
|
|
2.5 |
|
|
— |
|
|
— |
|
|
Domestic
production activities benefit
|
|
|
(2.4 |
) |
|
(3.0 |
) |
|
(3.7 |
) |
|
Change
in APB No. 23 assertion
|
|
|
(2.0 |
) |
|
— |
|
|
(8.7 |
) |
|
Tax
reserve reassessment
|
|
|
0.9 |
|
|
(40.2 |
) |
|
(3.7 |
) |
|
Extraterritorial
income benefit
|
|
|
— |
|
|
(9.8 |
) |
|
(12.2 |
) |
|
Investment
sale capital loss utilization
|
|
|
— |
|
|
— |
|
|
(6.6 |
) |
|
Other
|
|
|
0.3 |
|
|
1.4 |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
income tax provision
|
|
$ |
13.1 |
|
$ |
46.5 |
|
$ |
114.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
14.1 |
% |
|
15.0 |
% |
|
23.6 |
% |
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.
In 2006,
the Company’s effective tax rate of 15.0 percent was lower than the statutory
rate primarily due to benefits from $40.2 million of tax reserve reassessments
of underlying exposures. Refer to Note 11 – Commitments and
Contingencies for further detail. In addition, the
extraterritorial income benefit, foreign earnings in tax jurisdictions with
lower effective tax rates and a research and development tax credit also
contributed to the reduced effective tax rate.
In 2005,
the Company’s effective tax rate of 23.6 percent was lower than the statutory
rate primarily as a result of $15.0 million attributed primarily to refinements
in the prior years’ extraterritorial income benefit included above in Change in
estimates related to the 2004 and prior years’ amended tax return filings; $12.2
million from the current year extraterritorial income benefit; $9.7 million from
a research and development credit; and $8.7 million from a change in the
assertion under APB No. 23 for certain foreign subsidiaries as discussed above.
Additionally, the Company’s 2005 tax rate benefited from a $6.6 million
utilization of previously unrecognized loss carryforwards incurred in connection
with the investment sale gain, as discussed in Note 8 –
Investments.
Income
tax provision (benefit) allocated to continuing operations and discontinued
operations for the years ended December 31 was as follows:
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
13.1 |
|
$ |
46.5 |
|
$ |
114.8 |
|
|
Discontinued
operations
|
|
|
(8.1 |
) |
|
(9.6 |
) |
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
tax provision
|
|
$ |
5.0 |
|
$ |
36.9 |
|
$ |
110.4 |
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Note
11 – Commitments and Contingencies
Financial
Commitments
The
Company has entered into guarantees of indebtedness of third parties, primarily
in connection with customer financing programs. Under these
arrangements, the Company has guaranteed customer obligations to the financial
institutions in the event of customer default, generally subject to a maximum
amount which is less than total obligations outstanding. The Company
has also guaranteed payments to third parties that have purchased customer
receivables from Brunswick and, in certain instances, has guaranteed secured
term financing of its customers. In most instances, upon repurchase
of the debt obligation, the Company receives rights to the collateral securing
the financing. The maximum
potential liability associated with these customer financing arrangements was
$106.2 million and $99.8 million as of December 31, 2007 and 2006,
respectively. Potential payments in connection with these customer
financing arrangements would likely extend over several years.
The
Company has also entered into arrangements with third-party lenders where it has
agreed, in the event of a default by the customer, to repurchase from the
third-party lender Brunswick products repossessed from the customer. These
arrangements are typically subject to a maximum repurchase
amount. The Company’s risk under these arrangements is mitigated by
the value of the products repurchased as part of the transaction. The maximum amount of
collateral the Company could be required to purchase was $172.8 million and
$214.8 million as of December 31, 2007 and 2006, respectively.
In
accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others – An Interpretation of FASB Statements No. 5, 57, and 107
and Rescission of FASB Interpretation No. 34” (FIN 45), the Company has recorded
the fair market value of these guarantee and repurchase obligations as a
liability on the consolidated balance sheets based on historical experience and
current facts and circumstances. Historical cash requirements and
losses associated with these obligations have not been significant.
Financial
institutions have issued standby letters of credit and surety bonds
conditionally guaranteeing obligations on behalf of the Company totaling $70.1
million and $81.5 million as of December 31, 2007 and 2006, respectively,
including $70.1 million and $64.6 million for continuing operations,
respectively. These amounts are primarily comprised of standby letters of credit
and surety bonds issued in connection with the Company’s self-insured workers’
compensation program as required by its insurance companies and various state
agencies. The Company has recorded reserves to cover liabilities associated with
these programs. Under certain circumstances, such as an event of default under
the Company’s revolving credit facility, or, in the case of surety bonds, which
totaled $15.8 million and $17.7 million as of December 31, 2007 and 2006,
respectively, all related to continuing operations, a ratings downgrade below
investment grade, the Company could be required to post collateral to support
the outstanding letters of credit and surety bonds.
Product
Warranties
The
Company records a liability for product warranties at the time revenue is
recognized. The liability is estimated using historical warranty
experience, projected claim rates and expected costs per claim. The
Company adjusts its liability for specific warranty matters when they become
known and the exposure can be estimated. The Company’s warranty
reserves are affected by product failure rates and material usage and labor
costs incurred in correcting a product failure. If these estimated
costs differ from actual costs, a revision to the warranty reserve would be
required.
The
following activity related to product warranty liabilities from continuing
operations was recorded in Accrued expenses and Long-term liabilities — other at
December 31:
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
$ |
161.0 |
|
$ |
155.3 |
|
|
Payments
made
|
|
|
(119.5 |
) |
|
(116.2 |
) |
|
Provisions/additions
for contracts issued/sold
|
|
|
119.1 |
|
|
121.5 |
|
|
Aggregate
changes for preexisting warranties
|
|
|
3.3 |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31
|
|
$ |
163.9 |
|
$ |
161.0 |
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Additionally,
marine engine customers may purchase a contract from the Company that extends
product protection beyond the standard product warranty period. For
certain extended warranty contracts in which the Company retains the warranty
obligation, a deferred liability is recorded based on the aggregate sales price
for contracts sold. The deferred liability is reduced and revenue is
recognized over the contract period as costs are expected to be
incurred. Deferred revenue associated with contracts sold by the
Company that extend product protection beyond the standard product warranty
period, not included in the table above, was $16.2 million and $21.2 million at
December 31, 2007 and 2006, respectively.
Legal
and Environmental
The
Company accrues for litigation exposure based upon its assessment, made in
consultation with counsel, of the likely range of exposure stemming from the
claim. In light of existing reserves, the Company’s litigation claims, when
finally resolved, will not, in the opinion of management, have a material
adverse effect on the Company’s consolidated financial statements. If current
estimates for the cost of resolving any claims are later determined to be
inadequate, results of operations could be adversely affected in the period in
which additional provisions are required.
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 $33 million in taxes
due and $39 million of pre-tax 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. 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.
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 $38.6 million to
$58.7 million as of December 31, 2007. At December 31, 2007 and 2006, Brunswick
had reserves for environmental liabilities of $48.0 million and $49.4 million,
respectively. There were environmental provisions of $0.7 million, $0.0 million
and $1.5 million for the years ended December 31, 2007, 2006 and 2005,
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 the Company 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.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Australia Trade Practices
Investigation.
In January 2005, Brunswick received a notice to furnish information and
documents to the Australian Competition and Consumer Commission (ACCC). A
subsequent notice was received in October of 2005. Following the
completion of its investigation in December 2006, the ACCC commenced proceedings
against a Brunswick subsidiary, Navman Australia Pty Limited, with respect to
its compliance with the Trade Practices Act of 1974 as it pertains to Navman
Australia’s sales practices from 2001 to 2005. The ACCC had alleged
that Navman Australia engaged in resale price maintenance in breach of the
Act. In December 2007, the Australian courts approved a settlement in
favor of ACCC for approximately $1.3 million.
Chinese Supplier Dispute.
Brunswick was involved in an arbitration proceeding in Hong Kong arising
out of a commercial dispute with a former contract manufacturer in China,
Shanghai Zhonglu Industrial Company Limited (Zhonglu). The Company filed the
arbitration seeking damages based on Zhonglu's breach of a supply and
distribution agreement pursuant to which Zhonglu agreed to manufacture bowling
equipment. Zhonglu had asserted counterclaims seeking damages for
alleged breach of contract among other claims in August 2007. The
arbitration tribunal issued a ruling in the Company’s favor for a net amount of
approximately $0.1 million.
Patent Infringement
Dispute. In
October 2006, Brunswick was sued by Electromotive, Inc. (Electromotive) in the
United States District Court for the Northern District of
Virginia. Electromotive claimed that a number of engines sold by
Brunswick’s Mercury Marine business had infringed on an expired patent held by
Electromotive related to a method for ignition timing. On July 27,
2007, a jury returned a verdict in favor of Electromotive in the amount of
approximately $3 million. In October 2007, the Company and
Electromotive subsequently reached an agreement to settle the case in lieu of
pursuing respective appeals at a level below the verdict.
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. The
assessment consists of duties, penalties and interest on the importation of Life
Fitness products into Brazil over the past five years. Brunswick
believes that this determination by the Brazilian Customs Office is without
merit and has appealed the assessment. The Company does not believe
that the resolution of this dispute will have a material adverse effect on
its consolidated financial condition or results of
operations.
Note
12 – Financial Instruments
The
Company operates domestically and internationally, with manufacturing and sales
facilities in various locations around the world. Due to the
Company’s global operations, the Company engages in activities involving both
financial and market risks. The Company utilizes its normal operating and
financing activities, along with derivative financial instruments to minimize
these risks.
Derivative Financial
Instruments. The Company uses derivative financial instruments
to manage its risks associated with movements in foreign currency exchange
rates, interest rates and commodity prices. Derivative instruments are not used
for trading or speculative purposes. For certain derivative contracts, on the
date a derivative contract is entered into, the Company designates the
derivative as a hedge of a forecasted transaction (cash flow hedge). The Company
formally documents its hedge relationships, including identification of the
hedging instruments and the hedged items, as well as its risk management
objectives and strategies for undertaking the hedge transaction. This process
includes linking derivatives that are designated as hedges to specific
forecasted transactions. The Company also assesses, both at the
inception and at least quarterly thereafter, whether the derivatives used in
hedging transactions are highly effective in offsetting the changes in the
anticipated cash flows of the hedged item. There were no material adjustments as
a result of ineffectiveness to the results of operations for the years ended
December 31, 2007, 2006 and 2005. If the hedging relationship ceases
to be highly effective, or it becomes probable that a forecasted transaction is
no longer expected to occur, gains and losses on the derivative are recorded in
Other expense, net. The fair market value of derivative financial
instruments is determined through market-based valuations and may not be
representative of the actual gains or losses that will be recorded when these
instruments mature due to future fluctuations in the markets in which they are
traded. The effects of derivative and financial instruments are not
expected to be material to the Company’s financial position or results of
operations when considered together with the underlying exposure being
hedged.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Fair Value Derivatives.
During 2007 and 2006, the Company entered into foreign currency forward
contracts to manage foreign currency exposure related to changes in the value of
assets or liabilities caused by changes in the exchange rates of foreign
currencies. The change in the fair value of the foreign currency derivative
contract and the corresponding change in the fair value of the asset or
liability of the Company are both recorded through earnings.
Cash Flow
Derivatives. Certain derivative instruments qualify as cash
flow hedges under the requirements of SFAS Nos. 133, Accounting
for Derivative Instruments and Hedging Activities, and 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities an
amendment of FASB Statement No. 133. The Company executes forward contracts and
options, based on forecasted transactions, to manage foreign exchange exposure
mainly related to inventory purchase and sales transactions. The Company also
enters into commodity swap agreements, based on anticipated purchases of certain
raw materials, and natural gas forward contracts, based on projected purchases,
to manage exposure related to risk from price changes. The Company has also
entered into forward starting interest rate swaps to hedge the interest rate
risk associated with the anticipated issuance of debt.
A cash
flow hedge requires that as changes in the fair value of derivatives occur, the
portion of the change deemed to be effective is recorded temporarily in
Accumulated other comprehensive income (loss), an equity account, and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings.
The
following activity related to cash flow hedges were recorded in Accumulated
other comprehensive income (loss) as of December 31:
|
|
|
Accumulated
Unrealized Derivative
|
|
|
|
|
Gains
(Losses)
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
Pre-tax
|
|
After-tax
|
|
Pre-tax
|
|
After-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
7.6 |
|
$ |
5.3 |
|
$ |
11.2 |
|
$ |
7.9 |
|
|
Net
change associated with current period hedging activity
|
|
|
(34.6 |
) |
|
(24.2 |
) |
|
(12.6 |
) |
|
(8.8 |
) |
|
Net
amount recognized into earnings
|
|
|
22.5 |
|
|
15.7 |
|
|
9.0 |
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$ |
(4.5 |
) |
$ |
(3.2 |
) |
$ |
7.6 |
|
$ |
5.3 |
|
The
Company estimates that $1.3 million of after-tax net realized losses from
derivatives that have been settled and deferred in Accumulated other
comprehensive income (loss) at December 31, 2007, will be realized in earnings
over the next twelve months. At December 31, 2007, the term of derivative
instruments hedging forecasted transactions ranges from one to eighteen
months.
Foreign
Currency. The Company enters into forward exchange contracts
and options to manage foreign exchange exposure related to forecasted
transactions, and assets and liabilities that are subject to risk from foreign
currency rate changes. These include product costs; revenues and expenses;
associated receivables and payables; intercompany obligations and receivables;
and other related cash flows. Forward exchange contracts outstanding at December
31, 2007 and 2006, had notional contract values of $284.2 million and $377.2
million, respectively. The approximate fair value of forward exchange contracts
was a net liability of $5.0 million and $5.7 million at December 31, 2007 and
2006, respectively. Option contracts outstanding at December 31, 2007 and 2006,
had notional contract values of $343.8 million and $144.7 million, respectively.
The approximate fair value of options contracts outstanding was a net liability
of $1.2 million and a net asset of $0.5 million at December 31, 2007 and 2006,
respectively. The forward and options contracts outstanding at December 31,
2007, mature during 2008 and 2009 and primarily relate to the Euro, Canadian
dollar, British pound, Australian dollar, Japanese yen and New Zealand
dollar.
Interest Rate. The
Company utilizes fixed-to-floating interest rate swaps to mitigate the interest
rate risk associated with its long-term debt. These swaps had a notional value
of $50.0 million as of December 31, 2007 and 2006, respectively, and an
associated fair market value of $1.4 million as of December 31, 2007, and a loss
of $0.2 million as of December 31, 2006. These instruments have been treated as
fair value hedges, with the offset to the aforementioned fair market value
(loss) recorded in long-term debt; see Note 14 – Debt in the Notes to
Consolidated Financial Statements for further details.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
The
Company also utilizes forward starting floating-to-fixed interest rate swaps to
hedge the interest rate risks associated with interest payments on anticipated
issuances of long-term debt. As of December 31, 2007, Company had
forward starting swaps with a notional value of $150 million and a fair market
value of a loss of $3.9 million. These instruments are being
accounted for as cash flow hedges of long-term fixed rate debt expected to be
issued to refinance the $250 million of floating rate notes due July
2009. There were no forward starting swaps outstanding as of December
31, 2006.
As of
December 31, 2007 and 2006, the Company had $11.9 million and $12.6 million,
respectively, of deferred gains associated with forward starting interest
rate swaps included in Accumulated other comprehensive income
(loss). These amounts include gains deferred on $250 million of
forward starting interest rate swaps terminated in July 2006, which had been
designated as cash flow hedges of long term fixed rate debt expected to be
issued in 2006 to refinance notes maturing in December 2006. These
forward starting swaps resulted in a net realized gain of $14.2
million. In 2006, the Company refinanced its debt due in December
2006 with $250 million of floating rate notes due in July 2009, which were
callable beginning in July 2007, and recognized $1.6 million of the gain as the
ineffective portion of the hedge and deferred the remainder in Accumulated other
comprehensive income (loss) pending refinancing of the 2009 notes with
long-term, fixed rate debt. In 2007, the Company recognized an additional
$0.7 million of the gain as ineffective, as the long term fixed rate debt
issuance did not occur. The Company continues to believe that the
$250 million of floating rate notes due in July 2009 will be refinanced with
long term fixed rate debt.
Commodity
Price. The Company uses commodity swap and futures contracts
to hedge anticipated purchases of certain raw materials. Commodity swap
contracts outstanding at December 31, 2007 and 2006 had notional values of $23.2
million and $18.6 million, respectively. At December 31, 2007 and 2006, the
estimated fair value of these swap contracts was a net asset of $0.5 million and
$4.0 million, respectively. The contracts outstanding at December 31, 2007,
mature throughout 2008 and 2009. The Company also uses futures contracts to
manage its exposure to fluctuating natural gas prices, which had a notional
contract value of $1.8 million and $1.7 million outstanding at December 31, 2007
and 2006, respectively. The estimated fair value of the futures contracts was a
net liability of $0.4 million at December 31, 2007 and 2006.
Concentration of Credit
Risk. The Company enters into financial instruments with banks
and investment firms with which the Company has continuing business
relationships and regularly monitors the credit ratings of its counterparties.
The Company sells a broad range of active recreation products to a worldwide
customer base and extends credit to its customers based upon an ongoing credit
evaluation program. Concentrations of credit risk with respect to accounts
receivable are not material to the Company’s financial position, due to the
large number of customers comprising the Company’s customer base and their
dispersion across many different geographic areas, with the exception of one
boat builder customer. This customer had trade accounts receivable and long-term
notes receivable, in connection with a supply agreement, with net credit
exposure of $23.7 million and $29.4 million at December 31, 2007 and 2006,
respectively.
Fair Value of Other Financial
Instruments. The carrying values of the Company’s short-term
financial instruments, including cash and cash equivalents, accounts and notes
receivable and short-term debt, approximate their fair values because of the
short maturity of these instruments. At December 31, 2007 and 2006, the fair
value of the Company’s long-term debt was approximately $717.8 million and
$729.0 million, respectively, as estimated using quoted market prices or
discounted cash flows based on market rates for similar types of
debt.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Note
13 – Accrued Expenses
Accrued
Expenses at December 31 were as follows:
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Sales
incentives and discounts
|
|
$ |
172.3 |
|
$ |
157.8 |
|
|
Product
warranties
|
|
|
161.8 |
|
|
158.9 |
|
|
Accrued
compensation and benefit plans
|
|
|
159.5 |
|
|
114.2 |
|
|
SFAS
140 obligations
|
|
|
92.1 |
|
|
31.6 |
|
|
Deferred
revenue
|
|
|
74.5 |
|
|
64.4 |
|
|
Insurance
reserves
|
|
|
50.2 |
|
|
48.6 |
|
|
Other
|
|
|
147.7 |
|
|
173.4 |
|
|
|
|
|
|
|
|
|
|
|
Total
accrued expenses
|
|
$ |
858.1 |
|
$ |
748.9 |
|
Note
14 – Debt
Long-Term
Debt at December 31 consisted of the following:
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Floating
rate notes, due 2009
|
|
$ |
250.0 |
|
$ |
250.0 |
|
|
Notes,
7.125% due 2027, net of discount of $0.9 and $1.0
|
|
|
199.1 |
|
|
199.0 |
|
|
Notes,
5.0% due 2011, net of discount of $0.4 and $0.5
|
|
|
151.0 |
|
|
149.3 |
|
|
Debentures,
7.375% due 2023, net of discount of $0.5 and $0.5
|
|
|
124.5 |
|
|
124.5 |
|
|
Notes,
1.82% to 4.0% payable through 2015
|
|
|
3.6 |
|
|
3.6 |
|
|
|
|
|
728.2 |
|
|
726.4 |
|
|
Current
maturities
|
|
|
(0.8 |
) |
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
727.4 |
|
$ |
725.7 |
|
|
Scheduled
maturities
2009
|
|
$ |
251.0 |
|
|
|
|
|
2010
|
|
|
0.5 |
|
|
|
|
|
2011
|
|
|
151.4 |
|
|
|
|
|
2012
|
|
|
0.4 |
|
|
|
|
|
Thereafter
|
|
|
324.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
$ |
727.4 |
|
|
|
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
In the
second quarter of 2005, the Company and certain of its domestic and foreign
subsidiaries entered into a new $650 million revolving credit facility
(Facility) that serves as support for commercial paper
borrowings. The Facility’s initial term was five years, with
provisions to extend the term for an additional one year on each anniversary of
the Facility, with consent of the lenders. In May 2007, the Company
amended the Facility agreement, resulting in a one-year extension of the term
through May 5, 2012. There are $55.0 million of the $650.0 million
Facility commitments expiring on May 5, 2011; however, the Company has the right
to replace these commitments at any time. Under the terms of the Facility, the
Company has multiple borrowing options, including borrowing at the greater of
the prime rate as announced by JPMorgan Chase Bank, N.A., or the Federal Funds
effective rate plus 50 basis points, or a rate tied to LIBOR. The
Company pays a facility fee of 8 basis points per annum, which is subject to
adjustment based on credit ratings. Under the terms of the Facility,
the Company is subject to a leverage test, as well as restrictions on secured
debt. The Company was in compliance with these covenants at December
31, 2007. There were no borrowings under the Facility during 2007,
and the Facility continues to serve as support for any outstanding commercial
paper borrowings. The Company has the ability to issue up to $150.0 million in
letters of credit under the Facility. The Company had borrowing
capacity of $596.2 million under the terms of this agreement at December 31,
2007, net of outstanding letters of credit.
On July
24, 2006, the Company completed the offering of a $250.0 million aggregate
principal amount of senior unsubordinated floating rate notes due in 2009 under
the Company’s universal shelf registration. The proceeds from this
offering were used to repay the Company’s $250.0, 6.75% notes that were due in
December 2006. The floating rate notes mature on July 24, 2009, and
interest is due quarterly and accrues at the rate of three-month LIBOR plus 65
basis points, set at the beginning of each quarterly period. The
Company has the option to redeem some or all of the floating rate notes at par,
plus accrued interest, prior to maturity. After this issuance, the
Company had $200.0 million available under its universal shelf registration
statement filed in 2001 with the SEC for the issuance of equity and/or debt
securities.
Included in Notes, 5.0% due 2011, is the estimated aggregate
market value related to the fixed-to-floating interest rate swaps discussed in
Note 12 - Financial Instruments.
Note
15 – Postretirement Benefits
Overview. The
Company has defined contribution plans, qualified and nonqualified pension
plans, and other postretirement benefit plans covering substantially all of its
employees. The Company’s contributions to its defined contribution plans are
based on various percentages of compensation, and in some instances are based on
the amount of the employees’ contributions to the plans. The expense related to
these plans was $42.0 million, $47.6 million and $46.5 million in 2007, 2006 and
2005, respectively. Company contributions to multiemployer plans were $0.5
million, $0.4 million and $0.5 million in 2007, 2006 and 2005,
respectively.
The
Company’s domestic pension and retiree health care and life insurance benefit
plans, which are discussed below, provide benefits based on years of service,
and for some plans, the average compensation prior to retirement. The Company
uses a December 31 measurement date for these plans. The Company’s salaried
pension plan was closed to new participants effective April 1, 1999. This plan
was replaced with a defined contribution plan for certain employees not meeting
age and service requirements and for new hires. The Company’s foreign benefit
plans are not significant individually or in the aggregate.
In
December 2003, the Medicare Prescription Drug, Improvement and Modernization Act
of 2003 (the Act) was signed into law. The Act introduces a
prescription drug benefit under Medicare as well as a subsidy to sponsors of
retiree health care benefit plans that provides a benefit that is at least
actuarially equivalent to Medicare Part D. The Company’s
postretirement benefit obligation and net periodic benefit cost do not reflect
the effects of the Act, as the Company does not anticipate qualifying for the
subsidy based on its current plan designs.
FAS 158
Adoption. On December 31, 2006, the Company adopted the
provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106
and 132(R),” (SFAS 158). SFAS 158 requires recognition of the
overfunded or underfunded status of pension and other postretirement plans in
the statement of financial position, as well as recognition of changes in that
funded status through comprehensive income in the year in which they
occur. SFAS 158 was adopted on a prospective basis as
required. Prior years’ amounts have not been
restated. Effective for the year ended December 31, 2007, SFAS
158 also requires measurement of a plan’s assets and benefit obligations as of
the date of the employer’s fiscal year end. As the Company already
measures plan assets and benefit obligations as of December 31, 2006, the
adoption of this element of SFAS 158 did not have any impact on the Company in
2007.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
The
prior accounting for defined pension and other postretirement plans allowed for
delayed recognition of changes in plan assets and benefit obligations and
recognition of a liability that may have been significantly less than the
underfunded status of the plans or an asset for plans that may have been
underfunded. The following table illustrates the incremental effect
of applying SFAS 158 for pension, postretirement and postemployment benefits on
individual line items in the Company’s Consolidated Balance Sheet as of December
31, 2006:
|
(in
millions)
|
|
Before
Application of SFAS 158
|
|
SFAS
158 Adjustments
Increase
(Decrease)
|
|
After
Application of SFAS 158
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
|
Other
intangibles, net
|
|
$ |
353.8 |
|
$ |
(31.2 |
) |
$ |
322.6 |
|
|
Other
long-term assets
|
|
$ |
216.4 |
|
$ |
(21.3 |
) |
|
195.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
4,502.8 |
|
$ |
(52.5 |
) |
$ |
4,450.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
$ |
124.9 |
|
$ |
(38.6 |
) |
$ |
86.3 |
|
|
Postretirement
and postemployment benefits
|
|
$ |
177.4 |
|
$ |
46.8 |
|
$ |
224.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income
(loss),
net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
$ |
— |
|
$ |
(11.2 |
) |
$ |
(11.2 |
) |
|
Net
actuarial loss
|
|
$ |
— |
|
$ |
(121.7 |
) |
$ |
(121.7 |
) |
|
Minimum
pension liability
|
|
$ |
(72.2 |
) |
$ |
72.2 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
$ |
1,932.5 |
|
$ |
(60.7 |
) |
$ |
1,871.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
4,502.8 |
|
$ |
(52.5 |
) |
$ |
4,450.3 |
|
Costs. Pension and
other postretirement benefit costs included the following components for 2007,
2006 and 2005:
|
|
|
|
|
|
|
|
|
Other
Postretirement
|
|
|
|
|
Pension
Benefits
|
|
Benefits
|
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
17.3 |
|
$ |
18.5 |
|
$ |
18.6 |
|
$ |
3.0 |
|
$ |
2.9 |
|
$ |
2.7 |
|
|
Interest
cost
|
|
|
62.8 |
|
|
58.9 |
|
|
58.3 |
|
|
6.6 |
|
|
6.0 |
|
|
5.7 |
|
|
Expected
return on plan assets
|
|
|
(81.9 |
) |
|
(78.3 |
) |
|
(72.6 |
) |
|
— |
|
|
— |
|
|
— |
|
|
Amortization
of prior service costs
|
|
|
6.5 |
|
|
6.8 |
|
|
7.3 |
|
|
(1.8 |
) |
|
(2.1 |
) |
|
(2.1 |
) |
|
Amortization
of net actuarial loss
|
|
|
7.3 |
|
|
10.4 |
|
|
13.5 |
|
|
1.0 |
|
|
1.2 |
|
|
0.8 |
|
|
Special
termination benefit
|
|
|
— |
|
|
0.1 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Curtailment
loss
|
|
|
— |
|
|
— |
|
|
0.8 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
pension and other benefit costs
|
|
$ |
12.0 |
|
$ |
16.4 |
|
$ |
25.9 |
|
$ |
8.8 |
|
$ |
8.0 |
|
$ |
7.1 |
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Benefit Obligations and Funded
Status. A reconciliation of the changes in the plans’ benefit
obligations and fair value of assets over the two-year period ending December
31, 2007, and a statement of the funded status at December 31 for these years
for the Company’s pension and other postretirement benefit plans
follow:
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
Pension
Benefits
|
|
Benefits
|
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at previous December 31
|
|
$ |
1,077.2 |
|
$ |
1,051.0 |
|
$ |
113.9 |
|
$ |
105.4 |
|
|
Service
cost
|
|
|
17.3 |
|
|
18.5 |
|
|
3.0 |
|
|
2.9 |
|
|
Interest
cost
|
|
|
62.8 |
|
|
58.9 |
|
|
6.6 |
|
|
6.0 |
|
|
Participant
contributions
|
|
|
— |
|
|
— |
|
|
1.0 |
|
|
1.2 |
|
|
Plan
amendments
|
|
|
0.2 |
|
|
2.9 |
|
|
— |
|
|
2.2 |
|
|
Special
termination benefits
|
|
|
— |
|
|
0.1 |
|
|
— |
|
|
— |
|
|
Acquisition
|
|
|
— |
|
|
— |
|
|
— |
|
|
0.3 |
|
|
Actuarial
(gains) losses(A)
|
|
|
(30.3 |
) |
|
(2.6 |
) |
|
(9.3 |
) |
|
3.1 |
|
|
Benefit
payments
|
|
|
(55.9 |
) |
|
(51.6 |
) |
|
(8.2 |
) |
|
(7.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at December 31
|
|
$ |
1,071.3 |
|
$ |
1,077.2 |
|
$ |
107.0 |
|
$ |
113.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of fair value of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at previous December 31
|
|
$ |
991.0 |
|
$ |
931.8 |
|
$ |
— |
|
$ |
— |
|
|
Actual
return on plan assets
|
|
|
79.0 |
|
|
93.4 |
|
|
— |
|
|
— |
|
|
Employer
contributions
|
|
|
2.6 |
|
|
17.4 |
|
|
7.2 |
|
|
6.0 |
|
|
Participant
contributions
|
|
|
— |
|
|
— |
|
|
1.0 |
|
|
1.2 |
|
|
Benefit
payments
|
|
|
(55.9 |
) |
|
(51.6 |
) |
|
(8.2 |
) |
|
(7.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at December 31
|
|
$ |
1,016.7 |
|
$ |
991.0 |
|
$ |
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status at December 31
|
|
$ |
(54.6 |
) |
$ |
(86.2 |
) |
$ |
(107.0 |
) |
$ |
(113.9 |
) |
|
(A)
|
The actuarial gains
for pension and other postretirement benefits arising during 2007 are
primarily a result of the increase in the discount rate and demographic
gains, partially offset by the impact of updating expected mortality
assumptions using the RP-2000 Generational Mortality
tables. |
The
amounts included in the Company’s balance sheets as of December 31, 2007 and
2006, were as follows:
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
Pension
Benefits
|
|
Benefits
|
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
long-term assets
|
|
$ |
29.3 |
|
$ |
19.7 |
|
$ |
— |
|
$ |
— |
|
|
Accrued
expenses
|
|
|
(3.1 |
) |
|
(2.6 |
) |
|
(8.8 |
) |
|
(8.0 |
) |
|
Postretirement
benefits
|
|
|
(80.8 |
) |
|
(103.3 |
) |
|
(98.2 |
) |
|
(105.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amount recognized
|
|
$ |
(54.6 |
) |
$ |
(86.2 |
) |
$ |
(107.0 |
) |
$ |
(113.9 |
) |
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
The
following pre-tax activity related to pensions and other postretirement benefits
was recorded in Accumulated other comprehensive income (loss) as of December
31:
|
|
|
|
|
Other
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
Pension
Benefits
|
|
Benefits
|
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost (credit)
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
35.2 |
|
$ |
— |
|
$ |
(6.1 |
) |
$ |
— |
|
|
Prior
service cost arising during the period
|
|
|
0.2 |
|
|
— |
|
|
— |
|
|
— |
|
|
Amount
recognized as component of net benefit costs
|
|
|
(6.5 |
) |
|
— |
|
|
1.8 |
|
|
— |
|
|
Effect
of SFAS No. 158 adoption
|
|
|
— |
|
|
35.2 |
|
|
— |
|
|
(6.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$ |
28.9 |
|
$ |
35.2 |
|
$ |
(4.3 |
) |
$ |
(6.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
172.8 |
|
$ |
— |
|
$ |
22.0 |
|
$ |
— |
|
|
Actuarial
gain arising during the period
|
|
|
(27.4 |
) |
|
— |
|
|
(
9.3 |
) |
|
— |
|
|
Amount
recognized as component of net benefit costs
|
|
|
(7.3 |
) |
|
— |
|
|
(
1.0 |
) |
|
— |
|
|
Effect
of SFAS No. 158 adoption
|
|
|
— |
|
|
172.8 |
|
|
— |
|
|
22.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ending
balance |
|
$ |
138.1 |
|
$ |
172.8 |
|
$ |
11.7 |
|
$ |
22.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
167.0 |
|
$ |
208.0 |
|
$ |
7.4 |
|
$ |
15.9 |
|
The
estimated pre-tax prior service cost and net actuarial loss in Accumulated other
comprehensive income (loss) at December 31, 2007, expected to be recognized as
components of net periodic benefit cost in 2008 for the Company’s pension plans
are $6.5 million and $3.6 million, respectively. The estimated
pre-tax prior service credit and net actuarial loss in Accumulated other
comprehensive income (loss) at December 31, 2007, expected to be recognized as
components of net periodic benefit cost in 2008 for the Company’s other
postretirement benefit plans are $1.7 million and $0.1 million,
respectively.
The
minimum liability concept, including recognition of an intangible asset, has
been eliminated under SFAS 158 effective December 31, 2006. Prior to
the adoption of SFAS 158, a minimum liability adjustment was recognized in
Accumulated other comprehensive income (loss) to the extent there was an
unfunded accumulated benefit obligation that had not been recognized in the
balance sheet. Minimum pension liabilities of $71.4 million after-tax
($116.9 million pre-tax) were recognized in Accumulated other comprehensive
income (loss) as of December 31, 2006, prior to the adoption of SFAS 158,
representing a $15.8 million after-tax ($25.8 million pre-tax) adjustment for
the change in the additional minimum liability for the year ended December 31,
2006. Minimum pension liabilities of $87.2 million after-tax ($142.7
million pre-tax) are included in Accumulated other comprehensive income (loss)
in the Consolidated Balance Sheets as of December 31, 2005. The adjustment for
the change in the additional minimum liability decreased Accumulated other
comprehensive income (loss) by $10.0 million after-tax ($16.4 million pre-tax)
for the year ended December 31, 2005.
The
accumulated benefit obligation for the Company’s pension plans was $1,040.3
million and $1,037.8 million at December 31, 2007 and 2006,
respectively. The projected benefit obligation, accumulated benefit
obligation and fair value of plan assets for pension plans with a projected
benefit obligation in excess of plan assets, and pension plans with an
accumulated benefit obligation in excess of plan assets, at December 31 were as
follows:
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation
|
|
$ |
687.6 |
|
$ |
989.6 |
|
|
Accumulated
benefit obligation
|
|
$ |
656.6 |
|
$ |
950.2 |
|
|
Fair
value of plan assets
|
|
$ |
603.7 |
|
$ |
883.7 |
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
The
funded status of these pension plans as a percentage of the projected benefit
obligation was 88 percent in 2007 compared to 89 percent in 2006. In
the aggregate, the Company’s qualified pension plans had assets greater than
their accumulated benefit obligations at December 31, 2007 and
2006. The projected benefit obligation for the Company’s unfunded,
nonqualified pension plan was $54.5 million and $52.2 million at December 31,
2007 and 2006, respectively. The accumulated benefit obligation for
the unfunded, nonqualified plan was $52.2 million and $48.4 million at December
31, 2007 and 2006, respectively.
The Company's nonqualified pension plan and other postretirement
benefit plans are not funded.
Prior
service costs are amortized on a straight-line basis over the average remaining
service period of active participants. Actuarial gains and losses in excess of
10 percent of the greater of the benefit obligation or the market value of
assets are amortized over the remaining service period of active plan
participants.
Participants
eligible for other postretirement benefits have flat dollar post-age 65
benefits. The assumed health care cost trend rate for other
postretirement benefits for pre-age 65 benefits as of December 31 was as
follows:
|
|
|
Pre-age
65 Benefits
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Health
care cost trend rate for next year
|
|
|
8.5 |
% |
|
|
9.0 |
% |
|
Rate
to which the cost trend rate is assumed to decline
(the
ultimate trend rate)
|
|
|
5.0 |
% |
|
|
5.0 |
% |
|
Year
rate reaches the ultimate trend rate
|
|
2015
|
|
|
2011
|
|
The
health care cost trend rate assumption has an effect on the amounts reported. A
one percent change in the assumed health care trend rate at December 31, 2007,
would have the following effects:
|
|
|
One
Percent
|
|
One
Percent
|
|
|
(in
millions)
|
|
Increase
|
|
Decrease
|
|
|
|
|
|
|
|
|
|
Effect
on total service and interest cost
|
|
$ |
0.6 |
|
$ |
(0.5 |
) |
|
Effect
on accumulated postretirement benefit obligation
|
|
$ |
5.7 |
|
$ |
(5.1 |
) |
The
Company monitors the cost of health care and life insurance benefit plans and
reserves the right to make additional changes or terminate these benefits in the
future.
Weighted
average assumptions used to determine pension and other postretirement benefit
obligations at December 31 were as follows:
|
|
|
|
|
Other
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
Pension
Benefits
|
|
Benefits
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.50 |
% |
|
6.00 |
% |
|
6.35 |
% |
|
6.00 |
% |
|
Rate
of compensation increase(A)
|
|
|
3.25 |
% |
|
3.75 |
% |
|
— |
|
|
— |
|
| (A) |
Assumption used
in determining pension benefit obligation
only. |
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Weighted
average assumptions used to determine net pension and other postretirement
benefit costs for the years ended December 31 were as follows:
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.00 |
% |
|
5.75 |
% |
|
5.90 |
% |
|
Long-term
rate of return on plan assets(A)
|
|
|
8.50 |
% |
|
8.50 |
% |
|
8.50 |
% |
|
Rate
of compensation increase(A)
|
|
|
3.75 |
% |
|
3.75 |
% |
|
3.75 |
% |
| (A) |
Assumption used in determining pension benefit cost
only.
|
The
Company utilized a yield curve analysis to determine the discount rates for
pension and other postretirement benefit obligations in 2007. The yield curve
consist of spot interest rates at half yearly increments for each of the next 30
years and was developed based on pricing and yield information for high quality
corporate bonds rated Aa by Moody’s, excluding callable bonds, bonds of less
that a minimum size and other filtering criteria. The yield curve analysis
matched the cash flows of the Company’s benefit obligations.
The
Company utilized a long-term corporate bond model to determine the discount rate
used to calculate plan liabilities at December 31, 2006, 2005 and
2004. The corporate bond model calculated the yield of a portfolio of
bonds whose cash flows approximated the plans’ expected benefit
payments. The yield of this portfolio was compared to the Moody’s Aa
Corporate Bond Yield Index at a comparable measurement date to determine the
yield differential, which was 22 basis points, 27 basis points and 16 basis
points in 2006, 2005 and 2004, respectively. This differential was
added to the year-end Moody’s index to determine the discount rate. These rates
were used to determine the benefit costs for the subsequent year.
The
Company evaluates its assumption regarding the estimated long-term rate of
return on plan assets based on historical experience and future expectations of
investment returns. The Company’s long-term rate of return on assets assumption
of 8.5 percent in 2007, 2006 and 2005, reflects recent market trends and is
consistent with historical weighted average total returns achieved by the plans’
assets.
Plan Assets. The
Company’s asset allocation for its qualified pension plans at December 31 by
asset category was as follows:
|
|
|
|
|
|
|
|
|
|
Percentage
of Plan
Assets
|
|
Target
Allocation
Ranges
|
|
| |
|
2007
|
|
|
2006
|
|
High
|
|
Low
|
|
|
Asset
Category
Equity
securities
|
|
|
66 |
% |
|
|
68 |
% |
75
|
% |
55
|
% |
|
Debt
securities
|
|
|
14 |
|
|
|
15 |
|
22 |
|
12
|
|
|
Real
estate
|
|
|
14 |
|
|
|
13 |
|
18 |
|
10
|
|
|
Other
|
|
|
6 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
Equity
securities do not include any shares of the Company’s common stock at December
31, 2007 and 2006.
Assets of the Company’s Master Pension Trust (Trust) are invested
solely in the interest of the plan participants for the purpose of providing
benefits to participants and their beneficiaries. Investment decisions within
the Trust are made after giving appropriate consideration to the prevailing
facts and circumstances that a prudent person acting in a like capacity would
use in a similar situation, and follow the guidelines and objectives established
within the investment policy statement for the Trust. The Trust strategically
diversifies its investments among various asset classes in order to reduce risks
and enhance returns. Long-term strategic weightings for the total Trust of 66
percent for equity securities, 20 percent for interest-sensitive investments
(debt securities and other) and 14 percent for real estate are within the
Company’s target allocation ranges. All investments are continually
monitored and reviewed, with evaluation considerations focusing on strategic
target allocations, investment vehicles and performance of the individual
investment managers, as well as overall Trust performance. Actual asset
allocations within the Trust are described below.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Expected Cash
Flows. The expected cash flows for the Company’s pension and
other postretirement benefit plans follow:
|
(in
millions)
|
|
Pension
Benefits
|
|
Other
Post-retirement
Benefits
|
|
|
|
|
|
|
|
|
|
Company
contributions expected to be made in 2008 (A)
|
|
$ |
3.2 |
|
$ |
8.8 |
|
|
Expected
benefit payments (which reflect future service):
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
61.6 |
|
$ |
8.8 |
|
|
2009
|
|
$ |
65.6 |
|
$ |
8.8 |
|
|
2010
|
|
$ |
68.9 |
|
$ |
8.9 |
|
|
2011
|
|
$ |
72.4 |
|
$ |
9.2 |
|
|
2012
|
|
$ |
76.2 |
|
$ |
9.4 |
|
|
2013-2017
|
|
$ |
426.0 |
|
$ |
52.4 |
|
|
(A)
|
The
Company currently anticipates funding approximately $3.2 million to cover
benefit payments in the unfunded, nonqualified pension plan in
2008. The Company is evaluating the impact of the Pension
Protection Act of 2006 on 2008 contributions to the qualified pension
plans. Company contributions are subject to change based on
market conditions or Company
discretion.
|
Brunswick
also provides postemployment benefits to qualified former or inactive
employees. The incremental effect of adopting SFAS 158 for these
postemployment benefit plans resulted in a $6.6 million after-tax ($10.8 million
pre-tax) increase in Accumulated other comprehensive income (loss), net of tax,
at December 31, 2006. The pre-tax prior service credit in Accumulated
other comprehensive income (loss) recognized in income in 2007 was $1.3
million. The estimated pre-tax prior service credit in Accumulated
other comprehensive income (loss) at December 31, 2007, expected to be
recognized in income in 2008, is $1.3 million.
Note
16 – Stock Plans and Management Compensation
On
January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised
2004), “Share-Based Payment,” (SFAS 123R), which is a revision of SFAS No. 123,
“Accounting for Stock-Based Compensation.” SFAS 123R supersedes Accounting
Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS 123R
requires the Company to recognize all share-based payments to employees,
including grants of stock options and the compensatory elements of employee
stock purchase plans, in its income statement based upon the fair value of such
share-based payments. Share-based employee compensation cost (benefit) is
recognized as a component of Selling, general and administrative expense in the
Consolidated Statements of Income.
The
Company previously accounted for its share-based compensation using the
intrinsic value method as defined in APB 25. Prior to January 1, 2006, other
than for nonvested stock, no share-based employee compensation cost was
reflected in net earnings. SFAS 123R requires that the Company report the tax
benefit related to share-based compensation that is in excess of recognized
compensation costs (excess tax benefits) as a financing cash flow rather than as
an operating cash flow in the Consolidated Statements of Cash
Flows. Total stock option expense from continuing operations was $5.2
million and 5.8 million for the years ended December 31, 2007 and 2006,
respectively and resulted in a deferred tax asset for the tax benefit to be
realized in future periods.
The
Company used the modified prospective transition method to adopt the provisions
of SFAS 123R. Under this method, employee compensation cost recognized in 2006
includes: (i) compensation cost for all share-based payments granted prior to,
but not yet vested, as of January 1, 2006, based on grant date fair value
estimated in accordance with the original provisions of SFAS 123 and (ii)
compensation cost for all share-based payments granted on or subsequent to
January 1, 2006, based on the grant date fair value estimated in accordance with
the provisions of SFAS 123R. Therefore, prior period financial statements have
not been restated. In accordance with SFAS 123R, the fair value of option grants
is estimated as of the date of grant using the Black-Scholes-Merton option
pricing model.
As a
result of adopting SFAS 123R on January 1, 2006, the Company's net earnings from
continuing operations for the year ended December 31, 2006, were $3.5 million
lower ($0.04 per diluted share) than if it had continued to account for
share-based compensation under APB 25.
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
The
following table illustrates the effect on net earnings and earnings per share
for the year ended December 31, 2005, if the fair value-based method provided by
SFAS 123 had been applied for all outstanding and unvested awards for periods
before the Company adopted SFAS 123R:
|
|
|
|
|
|
(in
millions, except per share data)
|
|
2005
|
|
|
|
|
|
|
|
Net
earnings from continuing operations, as reported
|
|
$ |
371.1 |
|
|
Add: Share-based
employee compensation
included
in reported earnings, net of tax
|
|
|
1.8 |
|
|
Less:
Total share-based employee compensation
expense
under fair value-based method for
all
awards, net of tax
|
|
|
8.7 |
|
|
Net
earnings from continuing operations, pro forma
|
|
$ |
364.2 |
|
|
|
|
|
|
|
|
Basic
earnings from continuing operations per common share:
|
|
|
|
|
|
As
reported
|
|
$ |
3.80 |
|
|
Pro
forma
|
|
$ |
3.73 |
|
|
|
|
|
|
|
|
Diluted
earnings from continuing operations per common share:
|
|
|
|
|
|
As
reported
|
|
$ |
3.76 |
|
|
Pro
forma
|
|
$ |
3.69 |
|
Under the
2003 Stock Incentive Plan (Plan), the Company may grant stock options, stock
appreciation rights (SARs), nonvested stock and other types of share-based
awards to executives and other management employees. Under the Plan, the Company
may issue up to 8.1 million shares, consisting of treasury shares and
authorized, but unissued shares of common stock. As of December 31,
2007, 4.0 million shares were available for grant.
Stock
Options and SARS
Prior to
2005, the Company primarily issued share-based compensation in the form of stock
options, and had not issued any SARs. Since the beginning of 2005, the Company
has issued stock-settled SARs and has not issued any stock options. Generally,
stock options and SARs are exercisable over a period of 10 years, or as
otherwise determined by the Human Resources and Compensation Committee of the
Board of Directors, and subject to vesting periods of four years. The exercise
price of stock options and SARs issued under the Plan cannot be less than the
fair market value of the underlying shares at the date of
grant. Stock option activity for all plans for the three years ended
December 31, 2007, 2006 and 2005, was as follows:
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(Options
in thousands)
|
|
Stock
Options
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value
|
|
Stock
Options
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Stock
Options
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
on January 1
|
|
|
4,001 |
|
|
$
32.62
|
|
|
|
|
|
|
3,844 |
|
|
$
29.91
|
|
|
3,702 |
|
|
$
24.59
|
|
|
Granted
|
|
|
900 |
|
|
$
32.89
|
|
|
|
|
|
|
906 |
|
|
$
39.06
|
|
|
934 |
|
|
$
45.90
|
|
|
Exercised
|
|
|
(410 |
) |
|
$
23.94
|
|
|
|
$ |
3,556 |
|
|
(548 |
) |
|
$
21.95
|
|
|
(740 |
) |
|
$
23.17
|
|
|
Forfeited
|
|
|
(272 |
) |
|
$
37.39
|
|
|
|
|
|
|
|
(201 |
) |
|
$
38.90
|
|
|
(52 |
) |
|
$
34.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
on December 31
|
|
|
4,219 |
|
|
$
33.22
|
|
5.7
years
|
|
$ |
— |
|
|
4,001 |
|
|
$
32.62
|
|
|
3,844 |
|
|
$
29.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
on December 31
|
|
|
2,428 |
|
|
$
30.02
|
|
4.0
years
|
|
$ |
— |
|
|
2,338 |
|
|
$
26.73
|
|
|
2,312 |
|
|
$
23.45
|
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
The
following table summarizes information about stock options outstanding as of
December 31, 2007:
|
Range
of Exercise
Price
|
|
Number
Outstanding
(in
thousands)
|
|
Weighted
Average
Remaining
Years
of
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
(in
thousands)
|
|
Weighted
Average
Remaining
Years
of
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$17.38
to $20.00
|
|
|
479
|
|
2.7
years
|
|
$
19.59
|
|
|
479
|
|
2.7
years
|
|
$
19.59
|
|
|
$20.01
to $30.00
|
|
|
1,003
|
|
3.5
years
|
|
$
23.49
|
|
|
990
|
|
3.4
years
|
|
$
23.48
|
|
|
$30.01
to $40.00
|
|
|
1,928
|
|
7.8
years
|
|
$
36.30
|
|
|
509
|
|
5.6
years
|
|
$
38.47
|
|
|
$40.01
to $49.27
|
|
|
809
|
|
5.0
years
|
|
$
46.00
|
|
|
450
|
|
4.8
years
|
|
$
45.93
|
|
The
weighted average fair values of individual SARs granted were $9.85 and $12.02
during 2007 and 2006, respectively. The fair value of each grant was
estimated on the date of grant using the Black-Scholes-Merton pricing model
utilizing the following weighted average assumptions used for 2007, 2006 and
2005:
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
4.6 |
% |
|
4.4 |
% |
|
3.7 |
% |
|
Dividend
yield
|
|
|
1.8 |
% |
|
1.5
|
% |
|
1.4 |
% |
|
Volatility
factor
|
|
|
29.9 |
% |
|
31.2 |
% |
|
34.1 |
% |
|
Weighted
average expected life
|
|
5.1
– 6.2 years
|
|
4.8
- 6.1 years
|
|
5.0
years
|
|
Nonvested
stock awards
The
Company issues nonvested stock awards (stock units) to key employees as
determined by the Human Resources and Compensation Committee of the Board of
Directors. In addition, employees entitled to receive cash payments under the
Company’s Strategic Incentive Plan (a long-term incentive plan for senior
employees) may elect to receive a vested stock award instead, with a 20 percent
nonvested stock premium. Nonvested stock awards (including the
premium) have vesting periods of three or four years and are eligible for
dividends, which are reinvested and non-voting. All nonvested awards have
restrictions on the sale or transfer of such awards during the nonvested
period.
Generally,
grants of nonvested stock options, SARs and stock units are forfeited if
employment is terminated prior to vesting. However, with respect to
stock options and SARs, all grants vest immediately: (i) in the event of a
change in control; (ii) upon death or disability of the grantee; and (iii)
beginning in 2007, upon the sale or divestiture of the business unit to which
the grantee is assigned. Stock option and SAR grants made prior to
2006 also vest immediately if the sum of (A) the age of the grantee and (B) the
grantee’s total number of years of service, equals 65 or more; grants made in
2006 and later vest immediately if (A) the grantee has attained the age of 62
and (B) the grantee’s age plus total years of service equals 70 or
more. Nonvested stock awards granted prior to 2006 vest pro rata if
the sum of (A) the age of the grantee and (B) the grantee’s total number of
years of service equals 65 or more; grants made in 2006 and later vest pro rata
if the sum of (A) the age of the grantee and (B) the grantee’s total number of
years of service equals 70 or more.
The cost
of nonvested stock awards is recognized on a straight-line basis over the
requisite service period. During December 31, 2007, 2006 and 2005, there was
$4.1 million, $7.0 million and $3.4 million charged to compensation expense
under the Plan, respectively.
The
weighted average price per nonvested stock award at grant date was $33.00,
$39.15 and $45.90 for the nonvested stock awards granted in 2007, 2006 and 2005,
respectively. Nonvested stock award activity for all plans for the
three years ended December 31 was as follows:
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1
|
|
|
550
|
|
|
|
519
|
|
|
|
824
|
|
|
Granted
|
|
|
127
|
|
|
|
325
|
|
|
|
103
|
|
|
Released
|
|
|
(195)
|
|
|
|
(227)
|
|
|
|
(101)
|
|
|
Forfeited
|
|
|
(47)
|
|
|
|
(67)
|
|
|
|
(307)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31
|
|
|
435
|
|
|
|
550
|
|
|
|
519
|
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
As of
December 31, 2007, there was $6.2 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the Plan. That cost is expected to be recognized over a weighted
average period of 1.4 years.
Director
Awards
The
Company issues stock awards to directors in accordance with the terms and
conditions determined by the Nominating and Corporate Governance Committee of
the Board of Directors. One-half of each director’s annual fee is paid in
Brunswick common stock, the receipt of which may be deferred until a director
retires from the Board of Directors. Each director may elect to have
the remaining one-half paid either in cash, in Brunswick common stock
distributed at the time of the award, or in deferred Brunswick common stock
units with a 20 percent premium. Each non-employee director is also
entitled to an annual grant of restricted stock units, which is deferred until
the director retires from the Board.
Note
17 – Treasury and Preferred Stock
Treasury
stock activity for the three years ended December 31, 2007, 2006 and 2005, was
as follows:
|
(Shares
in thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
|
11,671 |
|
|
6,881 |
|
|
5,709 |
|
|
Common
stock repurchase program
|
|
|
4,100 |
|
|
5,638 |
|
|
1,943 |
|
|
Compensation
plans and other
|
|
|
(679 |
) |
|
(848 |
) |
|
(771 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31
|
|
|
15,092 |
|
|
11,671 |
|
|
6,881 |
|
At
December 31, 2007, 2006 and 2005, the Company had no preferred stock outstanding
(12.5 million shares authorized, $0.75 par value at December 31, 2007, 2006 and
2005).
Note
18 – Leases
The
Company has various lease agreements for offices, branches, factories,
distribution and service facilities, certain Company-operated bowling centers
and certain personal property. The longest of these obligations extends through
2099. Most leases contain renewal options, some contain purchase options or
escalation clauses, and many provide for contingent rentals based on percentages
of gross revenue.
No leases
contain restrictions on the Company’s activities concerning dividends,
additional debt or further leasing. Rent expense consisted of the
following:
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Basic
expense
|
|
$ |
51.4 |
|
$ |
48.8 |
|
$ |
43.1 |
|
|
Contingent
expense
|
|
|
2.7 |
|
|
2.6 |
|
|
2.3 |
|
|
Sublease
income
|
|
|
(0.7 |
) |
|
(0.9 |
) |
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent
expense, net
|
|
$ |
53.4 |
|
$ |
50.5 |
|
$ |
44.5 |
|
Future
minimum rental payments at December 31, 2007, under agreements classified as
operating leases with non-cancelable terms in excess of one year, were as
follows:
|
(in
millions)
|
|
|
|
|
2008
|
|
$ |
49.2 |
|
|
2009
|
|
|
42.5 |
|
|
2010
|
|
|
34.1 |
|
|
2011
|
|
|
25.0 |
|
|
2012
|
|
|
15.2 |
|
|
Thereafter
|
|
|
35.5 |
|
|
|
|
|
|
|
|
Total
(not reduced by minimum sublease rentals of $1.6)
|
|
$ |
201.5 |
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Note
19 – Share Repurchase Program
In the
second quarter of 2005, Brunswick’s Board of Directors authorized a $200.0
million share repurchase program, to be funded with available
cash. On April 27, 2006, the Board of Directors increased the
Company’s remaining share repurchase authorization of $62.2 million to $500.0
million. As of December 31, 2007, the Company’s remaining share repurchase
authorization for the program was $240.4 million. The Company expects to
repurchase shares on the open market or in private transactions from time to
time, depending on market conditions. During 2007, 2006 and 2005, the
Company repurchased approximately 4.1 million, 5.6 million and 2.0 million
shares under this program for $125.8 million, $195.6 million and $76.0 million,
respectively. As of December 31, 2007, the Company has repurchased
approximately 11.7 million shares since the program’s inception.
Note
20 – Quarterly Data (unaudited)
Brunswick
maintains its financial records on the basis of a fiscal year ending on December
31, with the fiscal quarters ending on the Saturday closest to the end of the
period (13-week periods). The first three quarters of fiscal year 2007 ended on
March 31, 2007, June 30, 2007, and September 29, 2007 and the first three
quarters of 2006 ended on April 1, 2006, July 1, 2006, and September 30,
2006.
|
|
|
Quarter
Ended
|
|
Year
|
|
|
(in
millions, except per share data)
|
|
March
31,
2007
|
|
June
30,
2007
|
|
Sept.
29,
2007
|
|
Dec.
31,
2007
|
|
Ended
Dec.
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,386.1 |
|
$ |
1,522.9 |
|
$ |
1,326.2 |
|
$ |
1,436.0 |
|
$ |
5,671.2 |
|
|
Gross
margin (A)
|
|
$ |
296.4 |
|
$ |
332.3 |
|
$ |
258.4 |
|
$ |
256.0 |
|
$ |
1,143.1 |
|
|
Net
earnings (loss) from continuing operations
|
|
$ |
34.3 |
|
$ |
56.9 |
|
$ |
(23.7 |
) |
$ |
12.1 |
|
$ |
79.6 |
|
|
Net
earnings
|
|
$ |
45.6 |
|
$ |
57.3 |
|
$ |
1.9 |
|
$ |
6.8 |
|
$ |
111.6 |
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from continuing operations
|
|
$ |
0.38 |
|
$ |
0.63 |
|
$ |
(0.27 |
) |
$ |
0.14 |
|
$ |
0.88 |
|
|
Net
earnings (loss) from discontinued operations
|
|
|
0.12 |
|
|
— |
|
|
0.29 |
|
|
(0.06 |
) |
|
0.36 |
|
|
Net
earnings
|
|
$ |
0.50 |
|
$ |
0.63 |
|
$ |
0.02 |
|
$ |
0.08 |
|
$ |
1.24 |
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from continued operations
|
|
$ |
0.38 |
|
$ |
0.63 |
|
$ |
(0.27 |
) |
$ |
0.14 |
|
$ |
0.88 |
|
|
Net
earnings (loss) from discontinued operations
|
|
|
0.12 |
|
|
— |
|
|
0.29 |
|
|
(0.06 |
) |
|
0.36 |
|
|
Net
earnings
|
|
$ |
0.50 |
|
$ |
0.63 |
|
$ |
0.02 |
|
$ |
0.08 |
|
$ |
1.24 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared
|
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
0.60 |
|
$ |
0.60 |
|
|
Common stock price (NYSE
symbol: BC):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
34.62 |
|
$ |
34.80 |
|
$ |
33.12 |
|
$ |
24.21 |
|
$ |
34.80 |
|
|
Low
|
|
$ |
30.02 |
|
$ |
30.38 |
|
$ |
21.49 |
|
$ |
17.05 |
|
$ |
17.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
Year
Ended
Dec.
31,
2006
|
|
|
(in
millions, except per share data)
|
|
April
1,
2006
|
|
July
1,
2006
|
|
Sept.
30,
2006
|
|
Dec.
31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,413.3 |
|
$ |
1,543.1 |
|
$ |
1,337.8 |
|
$ |
1,370.8 |
|
$ |
5,665.0 |
|
|
Gross
margin (A)
|
|
$ |
313.4 |
|
$ |
354.8 |
|
$ |
288.9 |
|
$ |
268.6 |
|
$ |
1,225.7 |
|
|
Net
earnings from continuing operations
|
|
$ |
74.2 |
|
$ |
94.4 |
|
$ |
50.4 |
|
$ |
44.2 |
|
$ |
263.2 |
|
|
Net
earnings (loss)
|
|
$ |
67.4 |
|
$ |
83.2 |
|
$ |
36.5 |
|
$ |
(53.2 |
) |
$ |
133.9 |
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$ |
0.78 |
|
$ |
1.00 |
|
$ |
0.54 |
|
$ |
0.48 |
|
$ |
2.80 |
|
|
Net
loss from discontinued operations
|
|
|
(0.07 |
)
|
|
(0.12 |
)
|
|
(0.15 |
)
|
|
(1.05 |
)
|
|
(1.38 |
) |
|
Net
earnings (loss)
|
|
$ |
0.71 |
|
$ |
0.88 |
|
$ |
0.39 |
|
$ |
(0.57 |
) |
$ |
1.42 |
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from continued operations
|
|
$ |
0.77 |
|
$ |
0.99 |
|
$ |
0.54 |
|
$ |
0.47 |
|
$ |
2.78 |
|
|
Net
loss from discontinued operations
|
|
|
(0.07 |
)
|
|
(0.12 |
)
|
|
(0.15 |
)
|
|
(1.04 |
)
|
|
(1.37 |
) |
|
Net
earnings (loss)
|
|
$ |
0.70 |
|
$ |
0.87 |
) |
$ |
0.39 |
|
$ |
(0.57 |
) |
$ |
1.41 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared
|
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
0.60 |
|
$ |
0.60 |
|
|
Common stock price (NYSE
symbol: BC):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
42.30 |
|
$ |
40.50 |
|
$ |
33.31 |
|
$ |
33.24 |
|
$ |
42.30 |
|
|
Low
|
|
$ |
36.04 |
|
$ |
32.35 |
|
$ |
27.56 |
|
$ |
30.71 |
|
$ |
27.56 |
|
|
(A)
|
Gross margin is
defined as Net sales less Cost of sales as presented in the
Consolidated Statements of
Income.
|
BRUNSWICK
CORPORATION
SCHEDULE
II — VALUATION AND QUALIFYING ACCOUNTS
(in
millions)
|
Allowances
for
Losses
on Receivables
|
|
Balance
at
Beginning
of
Year
|
|
Charges
to
Profit
and Loss
|
|
Write-offs
|
|
Recoveries
|
|
Other
|
|
Balance
at
End
of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
29.7 |
|
$ |
10.7 |
|
$ |
(10.4 |
) |
$ |
0.3 |
|
$ |
0.9 |
|
$ |
31.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
22.1 |
|
$ |
9.2 |
|
$ |
(5.7 |
) |
$ |
(1.5 |
) |
$ |
5.6 |
|
$ |
29.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$ |
28.7 |
|
$ |
(0.7 |
) |
$ |
(6.0 |
) |
$ |
0.1 |
|
$ |
0.2 |
|
$ |
22.1 |
|
|
Deferred
Tax Asset
Valuation Allowance
(A)
|
|
Balance
at
Beginning
of
Year
|
|
Charges
to
Profit
and Loss
|
|
Write-offs
|
|
Recoveries
|
|
Other
|
|
Balance
at
End
of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
10.0 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
6.5 |
|
$ |
16.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
12.4 |
|
$ |
(0.1 |
) |
$ |
— |
|
$ |
— |
|
$ |
(2.3 |
) |
$ |
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$ |
20.0 |
|
$ |
(7.6 |
) |
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
12.4 |
|
|
(A)
|
State
and foreign net operating loss carryforwards, and state capital losses
that are not expected to be
utilized.
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SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
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BRUNSWICK
CORPORATION |
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Date:
February 22, 2008
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By:
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/s/ ALAN
L. LOWE |
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Alan
L. Lowe |
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Vice
President and Controller |
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
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Date:
February 22, 2008
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By:
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/s/ DUSTAN
E. McCOY |
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Dustan
E. McCoy |
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Chairman
and Chief Executivr Officer |
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(Principal
Executive Officer) |
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Date:
February 22, 2008
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By:
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/s/ PETER
G. LEEMPUTTE |
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Peter
G. Leemputte |
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Senior
Vice President and Chief Financial Officer |
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(Principal
Financial Officer) |
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Date:
February 22, 2008
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By:
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/s/ ALAN
L. LOWE |
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Alan
L. Lowe |
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Vice
President and Controller |
|
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(Principal
Accounting
Officer) |
This
report has been signed by the following directors, constituting a majority of
the Board of Directors, by Peter G. Leemputte, Attorney-in-Fact.
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Nolan
D. Archibald
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Jeffrey
L. Bleustein
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Michael
J. Callahan
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Cambria
W. Dunaway
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Manuel
A. Fernandez
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Graham
H. Phillips
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Ralph
C. Stayer
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J.
Steven Whisler
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Lawrence
A. Zimmerman
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Date:
February 22, 2008
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By:
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/s/ PETER
G. LEEMPUTTE |
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Peter
G. Leemputte |
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Attorney-in-Fact |
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EXHIBIT
INDEX
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Exhibit
No.
|
|
Description
|
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3.1
|
|
Restated
Certificate of Incorporation of the Company filed as Exhibit 19.2 to the
Company’s
Quarterly
Report on Form 10-Q for the quarter ended June 30, 1987, and hereby
incorporated
by
reference.
|
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3.2
|
|
Certificate
of Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock
filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for 1995,
and hereby incorporated
by reference.
|
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3.3
|
|
By-Laws
of the Company filed as Exhibit 3.3 to the Company’s Annual Report on Form
10-K for
2002, and hereby incorporated by reference.
|
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4.1
|
|
Indenture
dated as of March 15, 1987, between the Company and Continental Illinois
National
Bank
and Trust Company of Chicago filed as Exhibit 4.1 to the Company’s
Quarterly Report
on
Form 10-Q for the quarter ended March 31, 1987, and hereby incorporated by
reference.
|
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4.2
|
|
Officers’
Certificate setting forth terms of the Company’s $125,000,000 principal
amount of 7 3/8% Debentures due September 1, 2023, filed as Exhibit 4.3 to
the Company’s Annual Report
on
Form 10-K for 1993, and hereby incorporated by
reference.
|
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4.3
|
|
Form
of the Company’s $200,000,000 principal amount of 7 1/8% Notes due August
1, 2027, filed as
Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 4,
1997, and hereby incorporated
by reference.
|
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4.4
|
|
The
Company’s agreement to furnish additional debt instruments upon request by
the Securities and
Exchange Commission filed as Exhibit 4.10 to the Company’s Annual Report
on Form 10-K for
1980, and hereby incorporated by
reference.
|
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4.5
|
|
Form
of the Company’s $150,000,000 principal amount of 5% Notes due 2011, filed
as Exhibit 4.1 to
the Company’s Current Report on Form 8-K dated May 26, 2004, and hereby
incorporated by reference.
|
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4.6
|
|
Credit
Agreement dated as of November 15, 2002, setting forth the terms of the
Company’s
$350,000,000
Revolving Credit and Competitive Bid Loan Facility with JPMorgan Chase
Bank,
administrative
agent, and other lenders identified in the Credit Agreement, filed as
Exhibit 4.8 to the
Company’s Annual Report on Form 10-K for 2002, and hereby incorporated by
reference.
|
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4.7
|
|
Credit
Agreement dated as of April 29, 2005, setting forth the terms of the
Company’s $650,000,000 Revolving Credit and Competitive Bid Loan Facility
with JPMorgan Chase Bank, administrative agent, and other lenders
identified in the Credit Agreement, filed as Exhibit 10.4 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, and
hereby incorporated by reference.
|
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4.8
|
|
Form
of the Company’s $250,000,000 principal amount of floating rate Notes due
July 24, 2009, filed as Exhibit 4.1 to the Company’s Current Report on
Form 8-K dated July 24, 2006, and hereby incorporated by
reference.
|
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10.1*
|
|
Terms
and Conditions of Employment between the Company and D. E. McCoy, filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September
18, 2006, and hereby incorporated by
reference.
|
EXHIBIT INDEX (Cont'd)
|
Exhibit
No.
|
|
Description
|
| |
10.2* |
|
Form
of Terms and Conditions of Employment between the Company and each of L.C.
Chatfield II, W. N. Hardie, P. G. Leemputte, B. R. Lockridge, A. L. Lowe,
P. C. Mackey, G.T. Neill, K. Roll-Wallace and J. E. Stransky, filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 18,
2007, and hereby incorporated by reference. |
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10.3* |
|
1994
Stock Option Plan for Non-Employee Directors filed as Exhibit A to the
Company’s
definitive
Proxy Statement dated March 25, 1994, for the Annual Meeting of
Stockholders on
April
27, 1994, and hereby incorporated by
reference.
|
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10.4* |
|
Supplemental
Pension Plan filed as Exhibit 10.7 to the Company’s Quarterly Report on
Form
10-Q
for the quarter ended September 30, 1998, and hereby incorporated by
reference.
|
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10.5* |
|
Form
of Indemnification Agreement by and between the Company and each of N. D.
Archibald,
J.
L. Bleustein, M. J. Callahan, C. W. Dunaway, M. A. Fernandez, G.H.
Phillips, R. C. Stayer, J.S. Whisler and L. A.
Zimmerman.
|
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10.6* |
|
1991
Stock Plan filed as Exhibit 10 to the Company’s Quarterly Report on Form
10-Q for the
quarter
ended June 30, 1999, and hereby incorporated by
reference.
|
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10.7* |
|
Brunswick
Performance Plan for 2007 filed as Exhibit 10.8 to the Company’s Annual
Report on Form 10-K for 2006, and hereby incorporated by
reference. |
| |
10.8*
|
|
Brunswick
Performance Plan for 2008.
|
| |
10.9* |
|
Brunswick
Strategic Incentive Plan for 2006 – 2007 filed as Exhibit 10.10 to the
Company’s Annual Report on Form 10-K for 2006, and hereby incorporated by
reference. |
| |
10.10* |
|
Brunswick
Strategic Incentive Plan for 2007 – 2008 filed as Exhibit 10.11 to the
Company’s Annual Report on Form 10-K for 2006, and hereby incorporated by
reference. |
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10.11
|
|
1997
Stock Plan for Non-Employee Directors filed as Exhibit 10.3 to the
Company’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998, and hereby
incorporated by reference.
|
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10.12*
|
|
Elective
Deferred Compensation Plan filed as Exhibit 4.6 to the Company’s
Registration Statement on
Form S-8 (333-112880) filed February 17, 2004, and hereby incorporated by
reference.
|
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10.13*
|
|
Automatic
Deferred Compensation Plan filed as Exhibit 10.24 to the Company’s Annual
Report on Form 10-K for 2003 and hereby incorporated by
reference.
|
| |
10.14*
|
|
Brunswick
2003 Stock Incentive Plan filed as Exhibit 4.5 to the Company’s
Registration Statement on Form S-8 (333-112880) filed February 17, 2004,
and hereby incorporated by reference.
|
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10.15*
|
|
S-8
(333-112880) filed February 17, 2004, and hereby incorporated by
reference.
|
| |
12.1
|
|
Statement
regarding computation of ratios.
|
| |
21.1
|
|
Subsidiaries
of the Company.
|
| |
23.1
|
|
Consent
of Independent Registered Public Accounting Firm.
|
| |
24.1
|
|
Power
of Attorney.
|
| |
31.1
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
| |
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
| |
32.1
|
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
| |
32.2
|
|
Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
_______
|
*
|
Management
contract or compensatory plan or
arrangement.
|
