UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
Form
10-Q
|
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
|
|
For
the quarterly period ended June 30, 2007
|
|
or
|
|
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
|
|
Commission
file number 1-1043
|
_______________
Brunswick
Corporation
(Exact
name of registrant as specified in its charter)
|
Delaware
|
36-0848180
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
|
1
N. Field Court, Lake Forest, Illinois
|
60045-4811
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
(847)
735-4700
|
|
|
(Registrant’s
telephone number, including area
code)
|
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
[X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer
[X] Accelerated
filer [ ] Non-accelerated filer
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [X]
The
number of shares of Common Stock ($0.75 par value) of the registrant outstanding
as of July 27, 2007, was 88,525,547.
BRUNSWICK
CORPORATION
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
June
30, 2007
TABLE
OF CONTENTS
|
Page
|
||
|
PART
I – FINANCIAL INFORMATION
|
||
|
Item
1.
|
Consolidated
Financial Statements
|
|
|
Consolidated
Statements of Income for the three months and six
months
ended June 30, 2007, and July 1, 2006 (unaudited)
|
1
|
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2007
(unaudited),
December 31, 2006, and July 1, 2006 (unaudited)
|
2
|
|
|
Condensed
Consolidated Statements of Cash Flows for the six months
ended
June 30, 2007, and July 1, 2006 (unaudited)
|
4
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
5
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
|
19
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
33
|
|
Item
4.
|
Controls
and Procedures
|
33
|
|
PART
II – OTHER INFORMATION
|
||
|
Item
1.
|
Legal
Proceedings
|
34
|
|
Item
1A.
|
Risk
Factors
|
34
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
35
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
35
|
|
Item
6.
|
Exhibits
|
36
|
PART
I – FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements
|
BRUNSWICK
CORPORATION
|
|
Consolidated
Statements of Income
|
|
(in
millions, except per share data)
|
|
(unaudited)
|
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
|
June
30,
2007
|
July
1,
2006
|
June
30,
2007
|
July
1,
2006
|
|||||||||||||
|
Net
sales
|
$ |
1,522.9
|
$ |
1,543.1
|
$ |
2,909.0
|
$ |
2,956.4
|
||||||||
|
Cost
of sales
|
1,190.6
|
1,188.3
|
2,280.3
|
2,288.2
|
||||||||||||
|
Selling,
general and administrative expense
|
210.3
|
182.6
|
420.2
|
367.3
|
||||||||||||
|
Research
and development expense
|
35.7
|
34.0
|
69.2
|
64.5
|
||||||||||||
|
Operating
earnings
|
86.3
|
138.2
|
139.3
|
236.4
|
||||||||||||
|
Equity
earnings
|
7.1
|
6.6
|
13.4
|
11.8
|
||||||||||||
|
Other
income (expense), net
|
0.2
|
(2.6 | ) | (0.2 | ) | (2.7 | ) | |||||||||
|
Earnings
before interest and income taxes
|
93.6
|
142.2
|
152.5
|
245.5
|
||||||||||||
|
Interest
expense
|
(13.3 | ) | (14.2 | ) | (26.9 | ) | (27.8 | ) | ||||||||
|
Interest
income
|
1.9
|
2.5
|
3.7
|
5.4
|
||||||||||||
|
Earnings
before income taxes
|
82.2
|
130.5
|
129.3
|
223.1
|
||||||||||||
|
Income
tax provision
|
25.3
|
36.0
|
38.1
|
54.5
|
||||||||||||
|
Net
earnings from continuing operations
|
56.9
|
94.5
|
91.2
|
168.6
|
||||||||||||
|
Discontinued
operations:
|
||||||||||||||||
|
Earnings
(loss) from discontinued operations, net of tax
|
0.6
|
(11.3 | ) |
4.0
|
(18.0 | ) | ||||||||||
|
Gain
(loss) on disposal of discontinued operations, net of tax
|
(0.2 | ) |
–
|
7.7
|
–
|
|||||||||||
|
Net
earnings (loss) from discontinued operations
|
0.4
|
(11.3 | ) |
11.7
|
(18.0 | ) | ||||||||||
|
Net
earnings
|
$ |
57.3
|
$ |
83.2
|
$ |
102.9
|
$ |
150.6
|
||||||||
|
Earnings
per common share:
|
||||||||||||||||
|
Basic
|
||||||||||||||||
|
Net
earnings from continuing operations
|
$ |
0.63
|
$ |
1.00
|
$ |
1.00
|
$ |
1.77
|
||||||||
|
Earnings
(loss) from discontinued operations, net of tax
|
–
|
(0.12 | ) |
0.04
|
(0.19 | ) | ||||||||||
|
Gain
(loss) on disposal of discontinued operations, net of tax
|
–
|
–
|
0.09
|
–
|
||||||||||||
|
Net
earnings
|
$ |
0.63
|
$ |
0.88
|
$ |
1.13
|
$ |
1.58
|
||||||||
|
Diluted
|
||||||||||||||||
|
Net
earnings from continuing operations
|
$ |
0.63
|
$ |
0.99
|
$ |
1.00
|
$ |
1.76
|
||||||||
|
Earnings
(loss) from discontinued operations, net of tax
|
–
|
(0.12 | ) |
0.04
|
(0.19 | ) | ||||||||||
|
Gain
(loss) on disposal of discontinued operations, net of tax
|
–
|
–
|
0.09
|
–
|
||||||||||||
|
Net
earnings
|
$ |
0.63
|
$ |
0.87
|
$ |
1.13
|
$ |
1.57
|
||||||||
|
Weighted
average shares used for computation of:
|
||||||||||||||||
|
Basic
earnings per share
|
90.5
|
94.7
|
91.0
|
95.2
|
||||||||||||
|
Diluted
earnings per share
|
91.0
|
95.5
|
91.5
|
96.1
|
||||||||||||
|
The
Notes to Consolidated Financial Statements are an integral part of
these
consolidated statements.
|
||||||||||||||||
1
|
BRUNSWICK
CORPORATION
|
|
Condensed
Consolidated Balance Sheets
|
|
(in
millions)
|
|
June
30,
|
December
31,
|
July
1,
|
||||||||||
|
2007
|
2006
|
2006
|
||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||
|
Assets
|
||||||||||||
|
Current
assets
|
||||||||||||
|
Cash
and cash equivalents, at cost, which approximates
market
|
$ |
278.8
|
$ |
283.4
|
$ |
310.6
|
||||||
|
Accounts
and notes receivable, less allowances
of $28.5, $29.7 and $24.4
|
575.4
|
492.3
|
542.5
|
|||||||||
|
Inventories
|
||||||||||||
|
Finished
goods
|
462.2
|
410.4
|
393.4
|
|||||||||
|
Work-in-process
|
328.9
|
308.4
|
338.6
|
|||||||||
|
Raw
materials
|
141.5
|
143.1
|
141.9
|
|||||||||
|
Net
inventories
|
932.6
|
861.9
|
873.9
|
|||||||||
|
Deferred
income taxes
|
240.7
|
249.9
|
266.4
|
|||||||||
|
Prepaid
expenses and other
|
63.6
|
85.4
|
64.4
|
|||||||||
|
Current
assets held for sale
|
27.4
|
105.5
|
113.5
|
|||||||||
|
Current
assets
|
2,118.5
|
2,078.4
|
2,171.3
|
|||||||||
|
Property
|
||||||||||||
|
Land
|
93.7
|
91.7
|
84.6
|
|||||||||
|
Buildings
and improvements
|
644.9
|
631.6
|
606.5
|
|||||||||
|
Equipment
|
1,200.4
|
1,181.7
|
1,172.7
|
|||||||||
|
Total
land, buildings and improvements and equipment
|
1,939.0
|
1,905.0
|
1,863.8
|
|||||||||
|
Accumulated
depreciation
|
(1,071.7 | ) | (1,046.3 | ) | (1,022.2 | ) | ||||||
|
Net
land, buildings and improvements and equipment
|
867.3
|
858.7
|
841.6
|
|||||||||
|
Unamortized
product tooling costs
|
153.6
|
156.2
|
147.4
|
|||||||||
|
Net
property
|
1,020.9
|
1,014.9
|
989.0
|
|||||||||
|
Other
assets
|
||||||||||||
|
Goodwill
|
670.1
|
663.6
|
648.2
|
|||||||||
|
Other
intangibles
|
318.7
|
322.6
|
347.1
|
|||||||||
|
Investments
|
146.5
|
142.9
|
149.9
|
|||||||||
|
Other
long-term assets
|
184.8
|
195.1
|
235.6
|
|||||||||
|
Long-term
assets held for sale
|
24.6
|
32.8
|
92.3
|
|||||||||
|
Other
assets
|
1,344.7
|
1,357.0
|
1,473.1
|
|||||||||
|
Total
assets
|
$ |
4,484.1
|
$ |
4,450.3
|
$ |
4,633.4
|
||||||
|
The
Notes to Consolidated Financial Statements are an integral part of
these
consolidated statements.
|
||||||||||||
2
|
BRUNSWICK
CORPORATION
|
|
Condensed
Consolidated Balance Sheets
|
|
(in
millions, except share
data)
|
|
June
30,
|
December
31,
|
July
1,
|
||||||||||
|
2007
|
2006
|
2006
|
||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||
|
Liabilities
and shareholders’ equity
|
||||||||||||
|
Current
liabilities
|
||||||||||||
|
Short-term
debt, including current maturities of
long-term debt
|
$ |
0.4
|
$ |
0.7
|
$ |
1.0
|
||||||
|
Accounts
payable
|
414.6
|
448.6
|
406.5
|
|||||||||
|
Accrued
expenses
|
850.1
|
748.9
|
786.7
|
|||||||||
|
Current
liabilities held for sale
|
19.4
|
95.0
|
64.9
|
|||||||||
|
Current
liabilities
|
1,284.5
|
1,293.2
|
1,259.1
|
|||||||||
|
Long-term
liabilities
|
||||||||||||
|
Debt
|
724.8
|
725.7
|
722.6
|
|||||||||
|
Deferred
income taxes
|
43.9
|
86.3
|
142.0
|
|||||||||
|
Postretirement
and postemployment benefits
|
224.7
|
224.2
|
208.2
|
|||||||||
|
Other
|
275.5
|
240.4
|
251.2
|
|||||||||
|
Long-term
liabilities held for sale
|
10.7
|
8.7
|
6.8
|
|||||||||
|
Long-term
liabilities
|
1,279.6
|
1,285.3
|
1,330.8
|
|||||||||
|
Shareholders’
equity
|
||||||||||||
|
Common
stock; authorized: 200,000,000 shares,
$0.75
par value; issued: 102,538,000 shares
|
76.9
|
76.9
|
76.9
|
|||||||||
|
Additional
paid-in capital
|
384.3
|
378.7
|
369.7
|
|||||||||
|
Retained
earnings
|
1,932.3
|
1,820.7
|
1,892.4
|
|||||||||
|
Treasury
stock, at cost:
|
||||||||||||
|
13,631,000;
11,671,000 and 9,341,000 shares
|
(390.8 | ) | (315.5 | ) | (240.5 | ) | ||||||
|
Accumulated
other comprehensive loss, net of tax
|
(82.7 | ) | (89.0 | ) | (55.0 | ) | ||||||
|
Shareholders’
equity
|
1,920.0
|
1,871.8
|
2,043.5
|
|||||||||
|
Total
liabilities and shareholders’ equity
|
$ |
4,484.1
|
$ |
4,450.3
|
$ |
4,633.4
|
||||||
|
The
Notes to Consolidated Financial Statements are an integral part of
these
consolidated statements.
|
||||||||||||
3
|
BRUNSWICK
CORPORATION
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
(in
millions)
|
|
(unaudited)
|
|
Six
Months Ended
|
||||||||
|
June
30,
2007
|
July
1,
2006
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
earnings from continuing operations
|
$ |
91.2
|
$ |
168.6
|
||||
|
Depreciation
and amortization
|
84.8
|
81.7
|
||||||
|
Changes
in non-cash current assets and current liabilities
|
(97.3 | ) | (150.9 | ) | ||||
|
Income
taxes
|
49.2
|
32.4
|
||||||
|
Other,
net
|
6.6
|
(5.4 | ) | |||||
|
Net
cash provided by operating activities of continuing
operations
|
134.5
|
126.4
|
||||||
|
Net
cash used for operating activities of discontinued
operations
|
(26.8 | ) | (32.7 | ) | ||||
|
Net
cash provided by operating activities
|
107.7
|
93.7
|
||||||
|
Cash
flows from investing activities
|
||||||||
|
Capital
expenditures
|
(82.5 | ) | (97.3 | ) | ||||
|
Acquisitions
of businesses, net of cash acquired
|
(1.6 | ) | (74.0 | ) | ||||
|
Investments
|
4.5
|
2.7
|
||||||
|
Proceeds
from the sale of property, plant and equipment
|
1.6
|
5.4
|
||||||
|
Other,
net
|
12.4
|
–
|
||||||
|
Net
cash used for investing activities of continuing
operations
|
(65.6 | ) | (163.2 | ) | ||||
|
Net
cash provided by (used for) investing activities of discontinued
operations
|
30.2
|
(3.5 | ) | |||||
|
Net
cash used for investing activities
|
(35.4 | ) | (166.7 | ) | ||||
|
Cash
flows from financing activities
|
||||||||
|
Net
issuances (repayments) of commercial paper and other
short-term debt
|
–
|
0.4
|
||||||
|
Payments
of long-term debt including current maturities
|
(0.5 | ) | (0.6 | ) | ||||
|
Stock
repurchases
|
(87.2 | ) | (117.3 | ) | ||||
|
Stock
options exercised
|
10.8
|
13.4
|
||||||
|
Net
cash used for financing activities of continuing
operations
|
(76.9 | ) | (104.1 | ) | ||||
|
Net
cash used for financing activities of discontinued
operations
|
–
|
–
|
||||||
|
Net
cash used for financing activities
|
(76.9 | ) | (104.1 | ) | ||||
|
Net
decrease in cash and cash equivalents
|
(4.6 | ) | (177.1 | ) | ||||
|
Cash
and cash equivalents at beginning of period
|
283.4
|
487.7
|
||||||
|
Cash
and cash equivalents at end of period
|
$ |
278.8
|
$ |
310.6
|
||||
|
The
Notes to Consolidated Financial Statements are an integral part of
these
consolidated statements.
|
||||||||
4
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
1 – Significant Accounting Policies
Interim
Financial Statements. The unaudited interim consolidated
financial statements of Brunswick Corporation (“Brunswick” or “the Company”)
have been prepared pursuant to the rules and regulations of the Securities
and
Exchange Commission (SEC). Therefore, certain information and
disclosures normally included in financial statements and related notes prepared
in accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted.
These
financial statements should be read in conjunction with, and have been prepared
in conformity with, the accounting principles reflected in the consolidated
financial statements and related notes included in Brunswick’s 2006 Annual
Report on Form 10-K (the 2006 Form 10-K), except for the accounting for
unrecognized tax benefits, as discussed in Note 11 – Income
Taxes. As indicated in Note 2 – Discontinued
Operations, Brunswick’s results as discussed in the Notes to
Consolidated Financial Statements reflect continuing operations only, unless
otherwise noted. These interim results include, in the opinion of
management, all normal and recurring adjustments necessary to present fairly
the
financial position of Brunswick as of June 30, 2007, December 31, 2006, and
July
1, 2006, the results of operations for the three months and six months ended
June 30, 2007, and July 1, 2006, and the cash flows for the six months ended
June 30, 2007, and July 1, 2006. Due to the seasonality of
Brunswick’s businesses, the interim results are not necessarily indicative of
the results that may be expected for the remainder of the year.
The
Company maintains its financial records on the basis of a fiscal year ending
on
December 31, with the fiscal quarters ending on the Saturday closest to the
end
of the period (thirteen-week periods). The first two quarters of
fiscal year 2007 ended on March 31, 2007, and June 30, 2007, and the first
two
quarters of fiscal year 2006 ended on April 1, 2006, and July 1,
2006.
Recent
Accounting Pronouncements. In September 2006, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 157, “Fair Value Measurements,” (SFAS 157), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The adoption
of SFAS 157 is not expected to have a material impact on the Company’s financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115” (SFAS 159). SFAS 159 permits entities to choose to measure
certain financial assets and financial liabilities at fair value at specified
election dates. Unrealized gains and losses on items for which the fair value
option has been elected are to be reported in earnings. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. The Company does not believe
that the adoption of SFAS 159 will have a material impact on its financial
statements.
Note
2 – Discontinued Operations
On
April
27, 2006, Brunswick announced its intention to sell the majority of its
Brunswick New Technologies (BNT) business unit, consisting of the Company’s
marine electronics, portable navigation device (PND) and wireless fleet tracking
businesses. Therefore, the Company has reported these BNT businesses
as discontinued operations in accordance with the criteria of SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” related to the
classification of assets to be disposed of by sale.
In
March
2007, Brunswick completed the sale of BNT’s marine electronics and PND
businesses to Navico International Ltd. and MiTAC International Corporation,
respectively, for proceeds of $44.2 million, including the effect of a $12.2
million working capital adjustment, resulting in an after-tax gain of $7.7
million. Post-closing adjustments with respect to these sales are anticipated
to
be finalized in the third quarter of 2007.
In
July
2007, Brunswick completed the sale of BNT’s wireless fleet tracking business to
Navman Wireless Holdings L.P., as discussed in Note 15 – Subsequent
Events. This transaction essentially completes the sale of
the BNT businesses classified as discontinued operations.
5
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
The
following table discloses the results of operations for BNT, including the
gain
on the divestitures, reported as discontinued operations for the three months
and six months ended:
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
|
June
30,
2007
|
July
1,
2006
|
June
30,
2007
|
July
1,
2006
|
|||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Net
sales
|
$ |
16.5
|
$ |
69.9
|
$ |
97.5
|
$ |
117.4
|
||||||||
|
Pre-tax
earnings (loss)
|
$ | (2.6 | ) | $ | (23.5 | ) | $ |
2.1
|
$ | (34.5 | ) | |||||
The
following table reflects the financial position of the remaining net assets
of
BNT reported as discontinued operations:
|
June
30,
2007
|
December
31, 2006
|
July
1,
2006
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Accounts
receivable
|
$ |
23.0
|
$ |
51.5
|
$ |
44.5
|
||||||
|
Inventory,
net
|
4.1
|
52.5
|
67.6
|
|||||||||
|
Other
current assets
|
0.3
|
1.5
|
1.4
|
|||||||||
|
Total
current assets
|
27.4
|
105.5
|
113.5
|
|||||||||
|
Goodwill
and intangible assets
|
13.1
|
19.8
|
73.8
|
|||||||||
|
Investments
|
8.0
|
6.1
|
–
|
|||||||||
|
Property,
plant and equipment
|
3.5
|
6.9
|
18.5
|
|||||||||
|
Total
long-term assets
|
24.6
|
32.8
|
92.3
|
|||||||||
|
Total
assets
|
52.0
|
138.3
|
205.8
|
|||||||||
|
Accounts
payable
|
6.3
|
46.4
|
35.3
|
|||||||||
|
Accrued
expenses
|
13.1
|
48.6
|
29.6
|
|||||||||
|
Total
current liabilities
|
19.4
|
95.0
|
64.9
|
|||||||||
|
Long-term
liabilities
|
10.7
|
8.7
|
6.8
|
|||||||||
|
Total
liabilities
|
30.1
|
103.7
|
71.7
|
|||||||||
|
Net
assets
|
$ |
21.9
|
$ |
34.6
|
$ |
134.1
|
||||||
Note
3 – Share-Based Compensation
On
January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised
2004), “Share-Based Payment,” (SFAS 123R), which is a revision of SFAS No. 123,
“Accounting for Stock-Based Compensation.” SFAS 123R supersedes Accounting
Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS 123R
requires all share-based payments to employees, including grants of stock
options and the compensatory elements of employee stock purchase plans, to
be
recognized in the income statement based upon their fair values. Share-based
employee compensation cost (benefit) is recognized as a component of Selling,
general and administrative expense in the Consolidated Statements of
Income. Refer to Note 15 to the consolidated financial statements in
the 2006 Form 10-K for further details regarding the Company’s adoption of SFAS
123R.
Under
the 2003 Stock Incentive Plan (Plan), the Company may grant stock options,
stock
appreciation rights (SARs), nonvested stock and other types of awards to
executives and other management employees. Issuances under the Plan may be
from
either authorized, but unissued, shares or treasury shares. The
Company’s maximum issuance allowed by the Plan is 8.1 million
shares. As of June 30, 2007, 3.9 million shares were available for
grant.
6
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Stock
options were issued by the Company prior to 2005. Since 2005, the
Company has issued SARs. Grants are generally exercisable over a period of
10
years, or as determined by the Human Resources and Compensation Committee of
the
Board of Directors. Grants vest over three or four years, or immediately in
the
event of a change in control, upon death or disability of the grantee, or,
for
grants issued prior to 2006, if age and years of service equals 65 or more,
regardless of the grantee’s age. Vesting of 2006 and subsequent
grants will occur immediately in the event of a change in control, upon death
or
disability of the grantee, or upon termination of employment if the grantee
has
attained the age of 62 and age plus years of service equals 70 or
more. The exercise price per share cannot be less than the fair
market value at the date of grant. During the three months and six months ended
June 30, 2007, there were 0.0 million and 0.9 million SARs granted,
respectively, which resulted in $0.7 million and $2.4 million of total expense.
During the three months and six months ended July 1, 2006, there were 0.0
million and 0.9 million SARs granted, respectively, which resulted in $1.7
million and $3.1 million of total expense. These expenses resulted in a deferred
tax asset for a tax benefit to be realized in future periods.
The
weighted average fair value of individual SARs granted was $9.91 and $11.88
during 2007 and 2006, respectively. The fair value of each grant was
estimated on the date of grant using the Black-Scholes-Merton pricing model
with
the following weighted average assumptions used for 2007 and 2006:
|
2007
|
2006
|
||
|
Risk-free
interest rate
|
4.8
%
|
4.4
%
|
|
|
Dividend
yield
|
1.8
%
|
1.5
%
|
|
|
Volatility
factor
|
29.9
%
|
31.2
%
|
|
|
Weighted
average expected life
|
5.1
– 6.2 years
|
4.8
– 6.1 years
|
Nonvested
stock awards are issued to key employees as determined by the Human Resources
and Compensation Committee of the Board of Directors (nonvested stock shares
were issued for grants prior to April 30, 2003, and subsequently, nonvested
stock units were issued). Nonvested stock awards vest at the end of a three-
to
four-year period subject to continued employment, or immediately upon a change
in control of the Company, or upon death or disability of the recipient. For
grants issued before January 1, 2006, nonvested stock units are forfeited in
the
event employment terminates prior to vesting, except there is prorata vesting
if
the recipient’s age and years of service equals 65 or more upon termination of
employment. Prorata vesting on grants issued in 2006 and 2007 will
occur if the recipient’s age and years of service equals 70 or more upon
termination of employment. Selected grants that are made in lieu of Strategic
Incentive Plan cash payments vest one-third at the end of each of the first
three grant date anniversaries, except immediate vesting if the recipient's
age
and years of service equals 70 or more upon termination of
employment. Nonvested stock units are eligible for dividends, which
are reinvested and non-voting, and all awards have restrictions on the sale
or
transfer of such awards during the nonvested period. The cost of nonvested
stock
awards is recognized on a straight-line basis over the requisite service period.
During the three months ended June 30, 2007, and July 1, 2006, there were no
stock awards granted under these plans and $0.9 million and $1.8 million was
charged to compensation expense under these plans, respectively. During the
six
months ended June 30, 2007, and July 1, 2006, there were 0.1 million and 0.3
million stock awards granted under these plans, respectively, and $2.3 million
and $2.9 million was charged to compensation expense under these plans,
respectively. Stock awards are issued to directors in accordance with
terms and conditions determined by the Corporate Governance Committee of the
Board of Directors. Director stock awards are fully vested with
distribution deferred to the end of service as a director.
The
weighted average price per nonvested stock award at grant date was $33.00 and
$39.15 for the nonvested stock awards granted in 2007 and 2006,
respectively.
As
of
June 30, 2007, there was $10.3 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 1.8 years.
7
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
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 during both the three months and six months ended June 30, 2007, versus
the comparable periods in 2006, primarily due to the Company’s share repurchase
program (as discussed in Note 13 – Share Repurchase Program),
partially offset by shares issued upon the exercise of employee stock
options.
Basic
and
diluted earnings per share for the three months and six months ended June 30,
2007, and for the comparable periods ended July 1, 2006, were calculated as
follows:
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
|
June
30,
2007
|
July
1,
2006
|
June
30,
2007
|
July
1,
2006
|
|||||||||||||
|
(in
millions, except per share data)
|
||||||||||||||||
|
Net
earnings from continuing operations
|
$ |
56.9
|
$ |
94.5
|
$ |
91.2
|
$ |
168.6
|
||||||||
|
Earnings
(loss) from discontinued operations, net of tax
|
0.6
|
(11.3 | ) |
4.0
|
(18.0 | ) | ||||||||||
|
Gain
(loss) on disposal of discontinued operations, net of tax
|
(0.2 | ) |
–
|
7.7
|
–
|
|||||||||||
|
Net
earnings
|
$ |
57.3
|
$ |
83.2
|
$ |
102.9
|
$ |
150.6
|
||||||||
|
Average
outstanding shares – basic
|
90.5
|
94.7
|
91.0
|
95.2
|
||||||||||||
|
Dilutive
effect of common stock equivalents
|
0.5
|
0.8
|
0.5
|
0.9
|
||||||||||||
|
Average
outstanding shares – diluted
|
91.0
|
95.5
|
91.5
|
96.1
|
||||||||||||
|
Basic
earnings per share
|
||||||||||||||||
|
Net
earnings from continuing operations
|
$ |
0.63
|
$ |
1.00
|
$ |
1.00
|
$ |
1.77
|
||||||||
|
Earnings
(loss) from discontinued operations, net of tax
|
–
|
(0.12 | ) |
0.04
|
(0.19 | ) | ||||||||||
|
Gain
(loss) on disposal of discontinued operations, net of tax
|
–
|
–
|
0.09
|
–
|
||||||||||||
|
Net
earnings
|
$ |
0.63
|
$ |
0.88
|
$ |
1.13
|
$ |
1.58
|
||||||||
|
Diluted
earnings per share
|
||||||||||||||||
|
Net
earnings from continuing operations
|
$ |
0.63
|
$ |
0.99
|
$ |
1.00
|
$ |
1.76
|
||||||||
|
Earnings
(loss) from discontinued operations, net of tax
|
–
|
(0.12 | ) |
0.04
|
(0.19 | ) | ||||||||||
|
Gain
(loss) on disposal of discontinued operations, net of tax
|
–
|
–
|
0.09
|
–
|
||||||||||||
|
Net
earnings
|
$ |
0.63
|
$ |
0.87
|
$ |
1.13
|
$ |
1.57
|
||||||||
As
of
June 30, 2007, there were 4.4 million options outstanding, of which 2.5 million
were exercisable. There were 2.9 million and 2.7 million shares of
common stock outstanding for which the exercise price of the options was higher
than the average market price of the Company’s shares for the quarterly and
year-to-date periods ended June 30, 2007, respectively. These options were
not
included in the computation of diluted earnings per share because the effect
would have been anti-dilutive. This compares to 2.1 million and 2.0
million anti-dilutive options that were excluded from the corresponding periods
ended July 1, 2006.
8
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
5 – Commitments and Contingencies
Financial
Commitments
The
Company has entered into guarantees of indebtedness of third parties, which
are
primarily comprised of arrangements with financial institutions in connection
with customer financing programs. Under these arrangements, the Company has
guaranteed customer obligations to the financial institutions in the event
of
customer default, generally subject to a maximum amount, which is less than
total obligations outstanding. The Company has also guaranteed
payments to third parties that have purchased customer receivables from
Brunswick and, in certain instances, has guaranteed secured term financing
of
its customers. In most instances, upon repurchase of the debt
obligation, the Company receives rights to the collateral securing the
financing. The maximum potential liability associated with these customer
financing arrangements was $113.4 million as of June 30, 2007. Any
potential payments on these customer financing arrangements would extend over
several years.
The
Company has also entered into arrangements with third-party lenders where it
has
agreed, in the event of a default by the customer, to repurchase, from the
third-party lender, Brunswick products repossessed from the customer. These
arrangements are typically subject to a maximum repurchase amount. The Company’s
risk under these arrangements is mitigated by the value of the products
repurchased as part of the transaction. The maximum amount of collateral the
Company could be required to purchase was $173.9 million as of June 30,
2007.
Based
on
historical experience and current facts and circumstances, and in accordance
with FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of
Others – An Interpretation of FASB Statements No. 5, 57, and 107 and Rescission
of FASB Interpretation No. 34,” the Company has recorded the estimated net
liability associated with losses from these guarantee and repurchase obligations
on its Condensed Consolidated Balance Sheets. Historical cash
requirements and losses associated with these obligations have not been
significant.
Financial
institutions have issued standby letters of credit and surety bonds
conditionally guaranteeing obligations on behalf of the Company totaling $62.2
million as of June 30, 2007. This amount is primarily comprised of
standby letters of credit and surety bonds issued in connection with the
Company’s self-insured workers’ compensation program as required by its
insurance companies and various state agencies. The Company has recorded
reserves to cover liabilities associated with these programs. Under certain
circumstances, such as an event of default under the Company’s revolving credit
facility, or, in the case of surety bonds, a ratings downgrade below investment
grade, the Company could be required to post collateral to support the
outstanding letters of credit and surety bonds. Surety bonds totaled
$15.1 million as of June 30, 2007.
Product
Warranties
The
Company records a liability for product warranties at the time revenue is
recognized. The liability is estimated using historical warranty
experience, projected claim rates and expected costs per claim. The
Company adjusts its liability for specific warranty matters when they become
known and the exposure can be estimated. The Company’s warranty
reserves are affected by product failure rates as well as material usage and
labor costs incurred in correcting a product failure. If these
estimated costs differ from actual costs, a revision to the warranty reserve
would be required.
The
following activity related to product warranty liabilities from continuing
operations was recorded in Accrued expenses and Long-term liabilities – Other
during the six months ended June 30, 2007:
|
2007
|
||||
|
(in
millions)
|
||||
|
Balance
at beginning of period
|
$ |
161.0
|
||
|
Payments
made
|
(56.4 | ) | ||
|
Provisions/additions
for contracts issued/sold
|
55.5
|
|||
|
Aggregate
changes for preexisting warranties
|
(1.3 | ) | ||
|
Balance
at end of period
|
$ |
158.8
|
||
9
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Additionally,
marine engine customers may purchase a contract from the Company that extends
product protection beyond the standard product warranty period. For
certain extended warranty contracts in which the Company retains the warranty
obligation, a deferred liability is recorded based on the aggregate sales price
for contracts sold. The deferred liability is reduced and revenue is recognized
over the contract period as costs are expected to be
incurred. Deferred revenue associated with contracts sold by the
Company that extend product protection beyond the standard product warranty
period, not included in the table above, was $19.8 million as of June 30,
2007.
Legal
and Environmental
The
Company accrues for litigation exposure based upon its assessment, made in
consultation with counsel, of the likely range of exposure stemming from the
claim. In light of existing reserves, the Company’s litigation
claims, when finally resolved, will not, in the opinion of management, have
a
material adverse effect on the Company’s consolidated financial
position. If current estimates for the cost of resolving any claims
are later determined to be inadequate, results of operations could be adversely
affected in the period in which additional provisions are required.
Tax
Case. In February 2003, the United States Tax Court issued a
ruling upholding the disallowance by the Internal Revenue Service (IRS) of
capital losses and other expenses for 1990 and 1991 related to two partnership
investments entered into by the Company. In April 2003, the Company elected
to
pay the IRS $62 million (approximately $50 million after-tax), and in April
2004, the Company elected to pay the IRS an additional $10 million
(approximately $8 million after-tax), in connection with this matter pending
settlement negotiations. The payments were comprised of $33 million in taxes
due
and $39 million of pre-tax interest (approximately $25 million after-tax).
The
Company elected to make these payments to avoid future interest
costs.
On
March
9, 2005, the Company and the IRS reached a preliminary settlement of the issues
involved in and related to this case, in which the Company agreed to withdraw
its appeal of the tax ruling. All amounts due as a result of the settlement
were
covered by the payments previously made to the IRS. In addition, all tax
computations related to taxable years 1986 through 2001 were calculated and
agreed to with the IRS at the examination level. The statute of limitations
related to these taxable years expired on March 9, 2006. As a result
of these issues and other assessments, the Company reversed $18.2 million of
tax
reserves in the first half of 2006, consisting of $12.4 million in the first
quarter and $5.8 million in the second quarter, primarily related to the
reassessment of underlying exposures. During the second quarter of 2006,
Brunswick received a refund of $12.9 million from the IRS related to the final
settlement for 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.
Chinese
Supplier Dispute. Brunswick is involved in an arbitration
proceeding in Hong Kong arising out of a commercial dispute with a former
contract manufacturer in China, Shanghai Zhonglu Industrial Company Limited
(Zhonglu). The Company filed the arbitration seeking damages based on
Zhonglu's breach of a supply and distribution agreement pursuant to which
Zhonglu agreed to manufacture bowling equipment. Zhonglu has asserted
counterclaims seeking damages for alleged breach of contract among other
claims. The arbitration tribunal heard final arguments in August 2005
and the Company is awaiting a decision in the matter. The Company
does not believe that the resolution of this dispute will have a material
adverse effect on its consolidated financial condition or results of
operations.
Patent
Infringement Dispute. 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 an expired
patent held by Electromotive related to a method for engine timing and cylinder
firing. Trial in the case commenced on July 11, 2007, and, on July
27, 2007, a jury returned a verdict in favor of Electromotive in the amount
of
approximately $3 million, which was provided for in the second quarter of
2007.
10
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Brazilian
Customs Dispute. In June 2007, the Brazilian Customs Office
issued an assessment against a Company subsidiary in the amount of approximately
$12 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 of the value of the imported goods 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 10 to the consolidated financial statements in the 2006 Form 10-K for
disclosure of the potential cash requirements of environmental proceedings
and a
discussion of other legal matters as of December 31, 2006.
Note
6 – Segment Data
Brunswick
is a manufacturer and marketer of leading consumer brands, and operates in
four
reportable segments: Boat, Marine Engine, Fitness and Bowling &
Billiards. The Company’s segments are defined by management reporting
structure and operating activities.
The
Company evaluates performance based on business segment operating earnings.
Operating earnings of segments do not include the expenses of corporate
administration, earnings from equity affiliates, other expenses and income
of a
non-operating nature, interest expense and income or provisions for income
taxes. Marine eliminations are eliminations between the Marine Engine
and Boat segments for sales transactions consummated at established arm’s length
transfer prices.
The
following table sets forth net sales and operating earnings of each of the
Company’s reportable segments for the three months ended June 30, 2007, and July
1, 2006:
|
Net
Sales
|
Operating
Earnings
|
|||||||||||||||
|
Three
Months Ended
|
Three
Months Ended
|
|||||||||||||||
|
June
30,
2007
|
July
1,
2006
|
June
30,
2007
|
July
1,
2006
|
|||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Boat
|
$ |
732.8
|
$ |
769.7
|
$ |
19.3
|
$ |
53.1
|
||||||||
|
Marine
Engine
|
669.6
|
668.5
|
80.3
|
94.7
|
||||||||||||
|
Marine
eliminations
|
(126.7 | ) | (134.9 | ) |
–
|
–
|
||||||||||
|
Total
Marine
|
1,275.7
|
1,303.3
|
99.6
|
147.8
|
||||||||||||
|
Fitness
|
144.0
|
129.7
|
7.4
|
7.4
|
||||||||||||
|
Bowling
& Billiards
|
103.2
|
110.1
|
(2.7 | ) |
0.6
|
|||||||||||
|
Eliminations
|
–
|
–
|
–
|
–
|
||||||||||||
|
Corporate/Other
|
–
|
–
|
(18.0 | ) | (17.6 | ) | ||||||||||
|
Total
|
$ |
1,522.9
|
$ |
1,543.1
|
$ |
86.3
|
$ |
138.2
|
||||||||
11
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
The
following table sets forth net sales and operating earnings of each of the
Company’s reportable segments for the six months ended June 30, 2007, and July
1, 2006:
|
Net
Sales
|
Operating
Earnings
|
|||||||||||||||
|
Six
Months Ended
|
Six
Months Ended
|
|||||||||||||||
|
June
30,
2007
|
July
1,
2006
|
June
30,
2007
|
July
1,
2006
|
|||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Boat
|
$ |
1,431.8
|
$ |
1,520.7
|
$ |
38.8
|
$ |
101.5
|
||||||||
|
Marine
Engine
|
1,242.2
|
1,223.5
|
115.0
|
139.6
|
||||||||||||
|
Marine
eliminations
|
(262.9 | ) | (276.2 | ) |
–
|
–
|
||||||||||
|
Total
Marine
|
2,411.1
|
2,468.0
|
153.8
|
241.1
|
||||||||||||
|
Fitness
|
289.0
|
263.7
|
15.5
|
16.3
|
||||||||||||
|
Bowling
& Billiards
|
209.0
|
224.8
|
5.6
|
13.4
|
||||||||||||
|
Eliminations
|
(0.1 | ) | (0.1 | ) |
–
|
–
|
||||||||||
|
Corporate/Other
|
–
|
–
|
(35.6 | ) | (34.4 | ) | ||||||||||
|
Total
|
$ |
2,909.0
|
$ |
2,956.4
|
$ |
139.3
|
$ |
236.4
|
||||||||
Note
7 – Acquisitions
All
acquisitions are accounted for under the purchase method and in accordance
with
SFAS No. 141, “Business Combinations.” Brunswick continues to
evaluate potential acquisitions in the ordinary course of business.
During
the first six months of 2007, consideration paid for acquisitions, net of cash
acquired, was as follows:
|
Date
|
Name/Description
|
Net
Cash
Consideration(A)
|
Other
Consideration
|
Total
Consideration
|
||||||||||
|
(in
millions)
|
||||||||||||||
|
4/04/07
|
Marine
Innovations Warranty Corporation
|
$ |
1.5
|
$ |
–
|
$ |
1.5
|
|||||||
|
Various
|
Miscellaneous
|
0.1
|
0.5
|
0.6
|
||||||||||
| $ |
1.6
|
$ |
0.5
|
$ |
2.1
|
|||||||||
(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.
These
acquisitions were not and would not have been material to Brunswick’s net sales,
results of operations or total assets during the quarterly and year-to-date
periods ended June 30, 2007, and July 1, 2006, respectively. 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.
12
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
During
the first six months of 2006, consideration paid for acquisitions, net of cash
acquired, was as follows:
|
Date
|
Name/Description
|
Net
Cash
Consideration
(A)
|
||||
|
(in
millions)
|
||||||
|
2/16/06
|
Cabo
Yachts, Inc.
|
$ |
60.6
|
|||
|
3/24/06
|
Marine
Innovations Warranty Corporation
|
2.3
|
||||
|
4/26/06
|
Diversified
Marine Products, L.P.
|
11.1
|
||||
| $ |
74.0
|
|||||
(A) Net
cash consideration is subject to subsequent changes resulting from final
purchase agreement adjustments.
The
Company acquired certain assets of Cabo Yachts, Inc. (Cabo) for $60.6
million. Cabo manufactures offshore sportfishing boats ranging from
31 to 52 feet. The purchase of Cabo complements Brunswick’s previous
acquisitions of Hatteras Yachts, Inc. and Albemarle Boats, Inc. and allows
the
Company to offer a full range of sportfishing convertibles from 24 to 90 feet.
The post-acquisition results of Cabo are included in the Boat
segment.
The
Company made an additional payment of $2.3 million for the April 1, 2004,
acquisition of Marine Innovations. 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.
On
April
26, 2006, Brunswick acquired the outstanding stock of Diversified Marine
Products, L.P. (Diversified) for $11.1 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 Land ‘N’ Sea Corporation, Kellogg Marine,
Inc and Benrock, Inc., allowing Brunswick to provide same- or next-day delivery
of marine parts and accessories nationwide by expanding 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.
These
acquisitions were not material to Brunswick’s net sales, results of operations
or total assets during the quarterly and year-to-date periods ended July 1,
2006. Accordingly, Brunswick’s consolidated results from operations do not
differ materially from historical performance as a result of these acquisitions,
and therefore, pro forma results are not presented.
Refer
to
Note 6 to the consolidated financial statements in the 2006 Form 10-K for
further details relating to Brunswick’s acquisitions.
Note
8 – Investments
The
Company has certain unconsolidated international and domestic affiliates that
are accounted for using the equity method. See Note 10 –
Financial Services for more details on the Company’s joint venture,
Brunswick Acceptance Company, LLC (BAC). Refer to Note 7 to the
consolidated financial statements in the 2006 Form 10-K for further detail
relating to the Company’s investments.
13
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Note
9 – Comprehensive Income
The
Company reports certain changes in equity during a period in accordance with
SFAS No. 130, “Reporting Comprehensive Income.” Accumulated other
comprehensive income (loss) includes unamortized prior service costs,
unamortized net actuarial gains and losses, and minimum pension liability
adjustments for defined benefit plans; foreign currency cumulative translation
adjustments; and unrealized derivative and investment gains and losses, all
net
of tax. Effective December 31, 2006, the Company adopted the provisions of
SFAS
No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and
132(R),” (SFAS 158), eliminating the minimum pension liability concept under
which adjustments were recorded to other comprehensive income. The
Company’s adoption of SFAS 158 also required the inclusion of prior service
costs and net actuarial gains and losses in other comprehensive
income. Components of other comprehensive income for the three months
and six months ended June 30, 2007, and July 1, 2006, were as
follows:
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
|
June
30,
2007
|
July
1,
2006
|
June
30,
2007
|
July
1,
2006
|
|||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Net
earnings
|
$ |
57.3
|
$ |
83.2
|
$ |
102.9
|
$ |
150.6
|
||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||
|
Foreign
currency cumulative translation
adjustment
|
6.6
|
7.9
|
2.6
|
7.9
|
||||||||||||
|
Net
change in unrealized gains (losses) on
investments
|
0.1
|
(0.4 | ) |
0.1
|
1.2
|
|||||||||||
|
Net
change in unamortized prior service cost
|
0.6
|
–
|
1.1
|
–
|
||||||||||||
|
Net
change in unamortized actuarial loss
|
1.3
|
–
|
2.6
|
–
|
||||||||||||
|
Net
change in accumulated unrealized
derivative
gains (losses)
|
(0.5 | ) |
1.8
|
(0.1 | ) |
2.0
|
||||||||||
|
Total
other comprehensive income (loss)
|
8.1
|
9.3
|
6.3
|
11.1
|
||||||||||||
|
Comprehensive
income
|
$ |
65.4
|
$ |
92.5
|
$ |
109.2
|
$ |
161.7
|
||||||||
There
was
no change to other comprehensive income (loss) resulting from the minimum
pension liability adjustment in either 2006 period as, prior to the Company’s
adoption of SFAS 158, it was adjusted annually in the fourth
quarter.
Note
10 – Financial Services
The
Company’s subsidiary, Brunswick Financial Services Corporation (BFS), owns 49
percent of a joint venture, Brunswick Acceptance Company, LLC (BAC), and CDF
Ventures, LLC (CDFV), a subsidiary of General Electric 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
Condensed Consolidated Balance Sheets. The Company’s investment in BAC is funded
through cash contributions and reinvested earnings. The Company
records BFS’s share of income or loss in BAC based on its ownership percentage
in the joint venture in Equity earnings in its Consolidated Statements of
Income.
BAC
is
funded in part through a loan from GE Commercial Distribution Finance
Corporation and a securitization facility arranged by GECC, and in part by
a
cash equity investment from both partners. BFS’s total investment in BAC at June
30, 2007, and December 31, 2006, was $48.0 million and $50.6 million,
respectively. BFS’s exposure to losses associated with BAC financing
arrangements is limited to its funded equity in BAC.
14
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
BFS
recorded income related to the operations of BAC of $3.3 million and $6.7
million for the three months and six months ended June 30, 2007, respectively.
These amounts compare to $3.4 million and $7.4 million in the corresponding
periods ended July 1, 2006. These amounts exclude the discount
expense paid by the Company on the sale of Mercury Marine’s accounts receivable
to the joint venture noted below.
Since
2003, the Company has sold a significant portion of its domestic Mercury Marine
accounts receivable to BAC. Accounts receivable totaling $252.4
million and $460.6 million were sold to BAC during the three months and six
months ended June 30, 2007, respectively, compared with $273.3 million and
$473.0 million during the corresponding periods ended July 1,
2006. Discounts of $2.2 million and $4.1 million for the first three
months and six months of 2007, respectively, have been recorded as an expense
in
Other expense, net, in the Consolidated Statements of Income. These
amounts compare with $2.4 million and $4.2 million for the same periods in
the
prior year. The outstanding balance of receivables sold to BAC was
$126.6 million as of June 30, 2007, up from $80.0 million as of December 31,
2006. Pursuant to the joint venture agreement, BAC reimbursed Mercury
Marine $1.1 million and $1.0 million for the six months ended June 30, 2007,
and
July 1, 2006, respectively, for the related credit, collection and
administrative costs incurred in connection with the servicing of such
receivables.
As
of
June 30, 2007, and December 31, 2006, the Company had a retained interest in
$62.6 million and $31.5 million of the total outstanding accounts receivable
sold to BAC, respectively. The Company’s maximum exposure as of
June 30, 2007, and December 31, 2006, related to these amounts was $36.6 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 retained
interest was recorded in Accounts and notes receivable, and Accrued expenses
in
the Condensed Consolidated Balance Sheets. These balances are
included in the amounts in Note 5 – Commitments and
Contingencies.
Additionally,
Brunswick's marine dealers can offer extended product warranties to their retail
customers through Brunswick Product Protection Corporation (previously Marine
Innovations Warranty Corporation, which the Company acquired in
2004). In October 2006, Brunswick acquired Blue Water Dealer
Services, Inc. and its affiliates, a provider of retail financial services
to
the marine industry, to allow Brunswick to offer a more complete line of
financial services to its boat and marine engine dealers and their
customers. Refer to Note 6 to the consolidated financial statements
in the 2006 Form 10-K for further details.
Note
11 – Income Taxes
The
Company has historically provided deferred taxes under APB No. 23, “Accounting
for Income Taxes – Special Areas,” (APB 23) for the presumed ultimate
repatriation to the United States of earnings from all non-U.S. subsidiaries
and
unconsolidated affiliates. The indefinite reversal criterion of APB 23 allows
the Company to overcome that presumption to the extent the earnings are
indefinitely reinvested outside of the United States.
The
Company has continued to provide deferred taxes, as required, on the
undistributed net earnings of all non-U.S. subsidiaries and unconsolidated
affiliates for which the APB 23 assertion has not been elected, as those
earnings may be repatriated in future years. As of January 1, 2007,
the Company determined that approximately $25.8 million of current undistributed
net earnings, as well as the future net earnings, of certain additional foreign
subsidiaries will be permanently reinvested. These earnings will provide
Brunswick with the opportunity to continue to expand its global manufacturing
footprint, fund future growth in foreign locations and shift Brunswick’s
acquisition focus to Europe and Asia. The Company’s current
intentions with respect to these subsidiaries meet the indefinite reversal
criterion of APB 23. As a result of the additional APB 23 change in
assertion, the Company reduced its deferred tax liabilities related to
undistributed foreign earnings by $2.0 million during the first quarter of
2007.
The
Company’s effective tax rates from continuing operations for the three months
and six months ended June 30, 2007, were 30.8 percent and 29.5 percent,
respectively. The effective tax rates for both periods were lower
than the statutory rate mainly due to the favorable effect of the research
and
development tax credit. Additionally, the effective tax rate for the six months
ended June 30, 2007, was lower than the statutory rate due to $1.9 million
of
non-recurring tax benefits primarily related to the Company’s election to apply
the indefinite reversal criterion of APB 23 as discussed above.
15
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
For
the
quarterly and year-to-date periods ended July 1, 2006, the Company’s effective
tax rates from continuing operations were 27.6 percent and 24.4 percent,
respectively. The effective tax rates were lower than the statutory
rate primarily as a result of benefits from an $18.2 million tax reserve
reassessment of underlying exposures, of which $5.8 million was recognized
in
the second quarter. Refer to Note 5 – Commitments and
Contingencies for further details.
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes,” (FIN 48) 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. Of this amount, $34.3 million represents the portion that,
if recognized, would impact the effective tax rate. The Company
recognizes interest and penalties related to unrecognized tax benefits in income
tax expense. As of January 1, 2007, the Company had $5.4 million
accrued for the payment of interest, and no amounts accrued for
penalties. Due to the various jurisdictions in which the Company
files tax returns, it is reasonably possible that there will be a significant
change in the amount of unrecognized tax benefits in 2007, but the amount cannot
be estimated.
The
Company is regularly audited by federal, state and foreign tax
authorities. The IRS has completed their audits of the Company’s
United States income tax returns through the 2003 taxable year and is currently
auditing the Company’s United States income tax returns for taxable years 2004
and 2005. Primarily as a result of filing amended tax returns, which
were generated by the closing of federal income tax audits, the Company is
still
open to state and local audits dating back to the 1986 taxable
year. With the exception of Germany, where the Company is currently
undergoing a tax audit for taxable years 1998 through 2001, the Company is
no
longer subject to income tax examinations by any other major foreign tax
jurisdiction tax authorities for years prior to 2001.
Note
12 – Pension and Other Postretirement Benefits
The
Company has defined contribution plans, qualified and nonqualified pension
plans, and other postretirement benefit plans covering substantially all of
its
employees. On December 31, 2006, the Company adopted the provisions
of SFAS 158, which requires recognition of the overfunded or underfunded status
of pension and other postretirement plans in the statement of financial
position, as well as recognition of changes in that funded status through
comprehensive income in the year in which they occur. SFAS 158 was
adopted on a prospective basis as required. Prior years’ amounts have
not been restated. Effective for the year ended December 31,
2007, SFAS 158 also requires measurement of a plan’s assets and benefit
obligations as of the date of the employer’s fiscal year end. As the
Company already measured plan assets and benefit obligations as of December
31,
2006, the adoption of this element of SFAS 158 will have no impact on the
Company in 2007. See Note 14 to the consolidated financial statements
in the 2006 Form 10-K for further details regarding these plans.
Pension
and other postretirement benefit costs included the following components for
the
three months ended June 30, 2007, and July 1, 2006:
|
Pension
Benefits
|
Other
Postretirement
Benefits
|
|||||||||||||||
|
Three
Months Ended
|
Three
Months Ended
|
|||||||||||||||
|
June
30,
2007
|
July
1,
2006
|
June
30,
2007
|
July
1,
2006
|
|||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Service
cost
|
$ |
4.4
|
$ |
4.7
|
$ |
0.8
|
$ |
0.7
|
||||||||
|
Interest
cost
|
15.7
|
14.7
|
1.9
|
1.5
|
||||||||||||
|
Expected
return on plan assets
|
(20.5 | ) | (19.5 | ) |
–
|
–
|
||||||||||
|
Amortization
of prior service costs
|
1.6
|
1.7
|
(0.5 | ) | (0.5 | ) | ||||||||||
|
Amortization
of net actuarial loss
|
1.8
|
2.6
|
0.3
|
0.3
|
||||||||||||
|
Net
pension and other benefit costs
|
$ |
3.0
|
$ |
4.2
|
$ |
2.5
|
$ |
2.0
|
||||||||
16
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Pension
and other postretirement benefit costs included the following components for
the
six months ended June 30, 2007, and July 1, 2006:
|
Pension
Benefits
|
Other
Postretirement
Benefits
|
|||||||||||||||
|
Six
Months Ended
|
Six
Months Ended
|
|||||||||||||||
|
June
30,
2007
|
July
1,
2006
|
June
30,
2007
|
July
1,
2006
|
|||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Service
cost
|
$ |
8.7
|
$ |
9.3
|
$ |
1.5
|
$ |
1.4
|
||||||||
|
Interest
cost
|
31.4
|
29.4
|
3.3
|
3.0
|
||||||||||||
|
Expected
return on plan assets
|
(40.9 | ) | (39.2 | ) |
–
|
–
|
||||||||||
|
Amortization
of prior service costs
|
3.2
|
3.4
|
(0.9 | ) | (1.0 | ) | ||||||||||
|
Amortization
of net actuarial loss
|
3.6
|
5.2
|
0.5
|
0.6
|
||||||||||||
|
Net
pension and other benefit costs
|
$ |
6.0
|
$ |
8.1
|
$ |
4.4
|
$ |
4.0
|
||||||||
Employer
Contributions. During the six months ended June 30, 2007, the Company
contributed $1.3 million to fund benefit payments to its nonqualified
plan. The Company’s plans for additional contributions are subject to
equity market returns and discount rate movements, among other
items.
Note
13 – Share Repurchase Program
In
the
second quarter of 2005, Brunswick’s Board of Directors authorized a $200.0
million share repurchase program, to be funded with available
cash. On April 27, 2006, the Board of Directors increased the
Company’s remaining share repurchase authorization of $62.2 million to $500.0
million. The Company expects to repurchase shares on the open market or in
private transactions from time to time, depending on market
conditions. During the three months and six months ended June 30,
2007, the Company repurchased 1.6 million and 2.6 million shares under this
program for $53.8 million and $87.2 million, respectively. During the
three months and six months ended July 1, 2006, the Company repurchased 1.5
million and 3.1 million shares under this program for $55.5 million and $117.3
million, respectively. Through the first half of 2007, the Company
had repurchased approximately 10.2 million shares since the program’s
inception. As of June 30, 2007, the Company’s remaining share
repurchase authorization under the program was $279.1 million.
Note
14 – 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. In July
2007, an additional initiative was announced to further consolidate certain
boat
manufacturing facilities in connection with the purchase of a manufacturing
facility in North Carolina.
The
Company anticipates that it will incur total costs of approximately $39 million
under these initiatives, which will be completed by the first half of 2008.
The
Company incurred $18.9 million of restructuring charges prior to December 31,
2006, as discussed in Note 3 to the consolidated financial statements in the
2006 Form 10-K.
17
Brunswick
Corporation
Notes
to Consolidated Financial Statements
(unaudited)
Restructuring
charges recorded during the three and six months ended June 30, 2007, were
included in the Consolidated Statements of Income as follows:
|
Three
Months
Ended
|
Six
Months
Ended
|
|||||||
|
June
30,
2007
|
June
30,
2007
|
|||||||
|
(in
millions)
|
||||||||
|
Cost
of sales:
|
||||||||
|
Severance
|
$ |
0.0
|
$ |
0.3
|
||||
|
Other
|
0.3
|
0.6
|
||||||
|
Total
|
0.3
|
0.9
|
||||||
|
Selling,
general and administrative expense:
|
||||||||
|
Severance
|
0.5
|
3.0
|
||||||
|
Other
|
0.3
|
0.9
|
||||||
|
Total
|
0.8
|
3.9
|
||||||
|
Total
restructuring charges
|
$ |
1.1
|
$ |
4.8
|
||||
Restructuring
charges recorded by segment during the three months and six months ended June
30, 2007, were as follows:
|
Three
Months
Ended
|
Six
Months
Ended
|
|||||||
|
June
30,
2007
|
June
30,
2007
|
|||||||
|
(in
millions)
|
||||||||
|
Boat
|
$ |
1.0
|
$ |
4.1
|
||||
|
Marine
Engine
|
–
|
0.4
|
||||||
|
Corporate
|
0.1
|
0.3
|
||||||
|
Total
|
$ |
1.1
|
$ |
4.8
|
||||
The
Company expects to incur approximately $15 million of additional restructuring
costs under this initiative; $13.5 million in the Boat segment, $1 million
in
the Marine Engine segment and $0.5 million in the Bowling & Billiards
segment.
Note
15 – Subsequent Events
Disposal
of Business. Brunswick began pursuing the sale of BNT in April 2006. In
March 2007, Brunswick completed the sale of BNT’s marine electronics and
portable navigation device businesses. In July 2007, the Company completed
the
sale of BNT’s wireless fleet tracking business to Navman Wireless Holdings L.P.
for proceeds of $35.0 million, resulting in an after-tax gain ranging from
$23
million to $28 million, subject to the effect of a working capital adjustment.
This transaction essentially completes the sale of the BNT businesses classified
as discontinued operations.
Manufacturing
Facility Acquisition. On July 2, 2007, Brunswick announced that it will
expand its manufacturing capabilities with the purchase of a boat manufacturing
facility in Navassa, North Carolina. The purchase will offer
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. In a related action, Brunswick will
close its Salisbury, Maryland, plant and transfer cruiser production to the
new
North Carolina facility.
The
severance and other costs associated with the Salisbury plant closure, as well
as the start-up expenses and product development costs for new boat models
to be
manufactured in the facility in North Carolina, are expected to reduce operating
earnings by approximately $11 million over the 12 months following the
acquisition. Approximately half of these costs will be incurred during the
second half of 2007 with the remainder in the first half of 2008. These amounts
have been reflected in the restructuring activities discussed in
Note 14 – Restructuring Activities.
18
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Certain
statements in Management’s Discussion and Analysis are based on non-GAAP
financial measures with respect to the Company’s operating results and cash
flows. GAAP refers to generally accepted accounting principles in the
United States. At times, management’s discussion of operating results
excludes the effects of acquisitions, non-recurring tax benefits and related
effective tax rates, and management’s cash flow discussion includes an analysis
of free cash flow. Refer to the Matters Affecting
Comparability and Cash Flow, Liquidity and Capital Resources
sections for further details. Certain other statements in
Management’s Discussion and Analysis are forward-looking as defined in the
Private Securities Litigation Reform Act of 1995. These statements are based
on
current expectations that are subject to risks and uncertainties. Actual results
may differ materially from expectations as of the date of this filing because
of
factors discussed in Item 1A – Risk Factors of Brunswick’s 2006 Annual Report on
Form 10-K (the 2006 Form 10-K).
Overview
and Outlook
General
Sales
from continuing operations during the second quarter of 2007 decreased 1.3
percent to $1,522.9 million from $1,543.1 million in 2006. During the six months
ended June 30, 2007, sales decreased 1.6 percent to $2,909.0 million from
$2,956.4 million in 2006. For both the three months and six months ended June
30, 2007, higher sales were reported by the Marine Engine and Fitness segments,
which were more than offset by a reduction in the Boat and Bowling &
Billiards segments’ sales. The overall decrease in sales was
primarily due to lower sales volumes resulting from the continued reduction
in
United States marine industry demand levels. The decrease was partially offset
by strong performance outside of the United States, growth in the Fitness
segment and higher sales of marine parts and accessories. Excluding
incremental sales from acquisitions, Brunswick’s sales in the quarterly and
year-to-date periods ended June 30, 2007, declined 1.5 percent and 2.1 percent,
respectively, from the same periods in 2006. Quarterly and
year-to-date operating earnings from continuing operations of $86.3 million
and
$139.3 million, and operating margins of 5.7 percent and 4.8 percent,
respectively, decreased from the same periods in the prior year, primarily
as a
result of lower fixed-cost absorption due to reduced production rates in
Brunswick’s marine businesses in an effort to achieve appropriate levels of
dealer pipeline inventories, higher raw material and production costs and
unfavorable mix factors. These factors were partially offset by successful
cost-reduction initiatives, as discussed in Note 14 – Restructuring
Activities in the Notes to Consolidated Financial Statements and the
effect of higher pricing. In the three months and six months ended
July 1, 2006, the Company reported operating earnings from continuing operations
of $138.2 million and $236.4 million with related operating margins of 9.0
percent and 8.0 percent, respectively.
As
discussed in Note 2 – Discontinued Operations in the Notes to
Consolidated Financial Statements, on April 27, 2006, the Company announced
its
intention to sell the majority of the Brunswick New Technologies (BNT) business
unit, consisting of the Company’s marine electronics, portable navigation device
(PND) and wireless fleet tracking businesses. These BNT businesses had become
increasingly concentrated in markets outside of Brunswick’s core business
segments – marine, fitness, bowling and billiards – and continued growth would
have required significant investment to ensure successful new product
introductions. The Company believed that BNT’s long-term prospects
would be better under different ownership. During the second quarter
of 2006, Brunswick began reporting the results of these BNT businesses, which
were previously reported in the Marine Engine segment, as discontinued
operations for all periods presented. The Company’s results, as
discussed in Management’s Discussion and Analysis, reflect continuing operations
only, unless otherwise noted.
In
March
2007, Brunswick completed the sales of BNT’s marine electronics and PND
businesses to Navico International Ltd. and MiTAC International Corporation,
respectively, for total proceeds of $44.2 million, including the effect of
a
$12.2 million working capital adjustment. A $7.7 million after-tax
gain was recognized with the divestitures of these businesses. Post-closing
adjustments with respect to these sales are anticipated to be finalized in
the
third quarter of 2007.
In
July 2007, the Company completed the sale of BNT’s wireless fleet tracking
business to Navman Wireless Holdings L.P., as discussed in Note 15 –
Subsequent Events in the Notes to Consolidated Financial
Statements.
19
Looking
ahead to the remainder of 2007, Brunswick will continue its efforts to achieve
appropriate levels of dealer inventories by reducing production of boats and
marine engines as a result of reduced retail demand for marine products. The
Company anticipates that sales will benefit from favorable pricing and increased
promotional spending along with continued growth in markets outside of the
United States and Brunswick’s marine parts and accessories
businesses. Considering all of these factors, 2007 marine sales,
which include both the Boat and Marine Engine segments, are expected to decrease
in the low-single digits as compared with 2006. Sales for 2007 in the
Fitness segment are expected to increase in the mid- to high-single digit
percentages. Bowling & Billiards segment sales are expected to be relatively
flat as compared with 2006. Overall, reported sales for 2007 are
expected to be relatively flat as compared with 2006.
Operating
earnings and margins for 2007 will be adversely affected by the continued
production declines and the anticipation of increased promotional incentives,
as
discussed above. These actions will have an unfavorable effect on
Boat and Marine Engine segment margins due to lower fixed-cost absorption and
an
unfavorable product mix, as production cutbacks will be greater in certain
higher-margin boat and engine categories. Further possible reductions in demand
for Brunswick’s products could affect the Company’s long-term financial
projections utilized in its valuation of goodwill and other indefinite-lived
intangible assets. These factors, along with continued increases in raw
materials, production, and freight and distribution costs, are not expected
to
be offset by improvements in pricing, growth in operations outside of the United
States and benefits from restructuring and cost containment efforts underway
in
2007. The Company expects to incur restructuring costs from certain
manufacturing realignment and cost improvement initiatives currently underway
as
described in Note 14 – Restructuring Activities in the Notes to
Consolidated Financial Statements. Brunswick’s effective tax rate in 2007 is
expected to be approximately 31.0 percent, excluding the effect of any
non-recurring tax items.
Matters
Affecting Comparability
As
described above, certain statements in Management’s Discussion and Analysis are
based on non-GAAP financial measures. A “non-GAAP financial measure”
is a numerical measure of a registrant’s historical or future financial
performance, financial position or cash flows that excludes amounts, or is
subject to adjustments that have the effect of excluding amounts, that are
included in the most directly comparable measure calculated and presented in
accordance with GAAP in the statement of income, balance sheet or statement
of
cash flows of the issuer; or includes amounts, or is subject to adjustments
that
have the effect of including amounts, that are excluded from the most directly
comparable measure so calculated and presented. Operating and
statistical measures are not non-GAAP financial measures.
The
Company has used the non-GAAP financial measures that are included in
Management’s Discussion and Analysis for several years. Brunswick’s management
believes that these measures and the information they provide are useful to
investors because they permit investors to view Brunswick’s performance using
the same tools that Brunswick uses and to better evaluate its ongoing business
performance. Brunswick’s management believes that for the three months and six
months ended June 30, 2007, and July 1, 2006, the presentation of (i) diluted
earnings per share excluding non-recurring tax benefits; (ii) net sales and
operating earnings excluding acquisitions not reflected in the prior year’s
results; and (iii) the Company’s effective tax rate excluding the effect of
non-recurring tax benefits, provide a more meaningful comparison to prior
results.
Acquisitions. Brunswick’s
operating results for 2007 include the operating results from acquisitions
completed in 2006. Approximately 0.2 percent and 0.5 percent of
Brunswick’s sales during the first three months and six months of 2007,
respectively, can be attributed to incremental sales from the following
acquisitions:
|
Date
|
Description
|
Segment
|
||
|
2/16/06
|
Cabo
Yachts, Inc.
|
Boat
|
||
|
4/26/06
|
Diversified
Marine Products, L.P.
|
Boat
|
||
|
10/18/06
|
Blue
Water Dealer Services, Inc.
|
Boat
|
Refer
to Note
7 – Acquisitions in
the
Notes to Consolidated Financial Statements and Note 6 to the consolidated
financial statements in the 2006 Form 10-K for a detailed description of these
acquisitions.
20
Tax
Items. The comparison of net earnings per diluted share between
2007 and 2006 is affected by non-recurring tax items. During the
first six months of 2007, the Company reduced its tax provision by $1.9 million
($0.02 per diluted share), primarily as a result of its first quarter election
to apply the indefinite reversal criterion of APB No. 23, “Accounting for Income
Taxes – Special Areas” (APB 23), to the undistributed net earnings of certain
foreign subsidiaries. The Company determined that approximately $25.8
million of undistributed net earnings, as well as the future net earnings,
of
these foreign subsidiaries will be indefinitely reinvested in operations outside
of the United States. These earnings will provide Brunswick with the
opportunity to continue to expand its global manufacturing footprint, fund
future growth in foreign locations and shift Brunswick’s acquisition focus to
Europe and Asia. The Company’s current intentions with respect to
these subsidiaries satisfy the indefinite reversal criterion of APB
23. See Note
11 – Income Taxes in
the
Notes to Consolidated Financial Statements for further details.
During
the first six months of 2006, the Company reduced its tax provision primarily
due to tax benefits from an $18.2 million ($0.19 per diluted share) tax reserve
reassessment of underlying exposures, of which $5.8 million ($0.06 per diluted
share) was recognized in the second quarter, as detailed in Note 5 –
Commitments and Contingencies in the Notes to Consolidated Financial
Statements.
The
effect of these items on diluted earnings per share from continuing operations
was as follows:
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
|
June
30,
2007
|
July
1,
2006
|
June
30,
2007
|
July
1,
2006
|
|||||||||||||
|
(in
millions)
|
||||||||||||||||
|
Net
earnings from continuing operations
per
diluted share – as reported
|
$ |
0.63
|
$ |
0.99
|
$ |
1.00
|
$ |
1.76
|
||||||||
|
Tax
items
|
–
|
(0.06 | ) | (0.02 | ) | (0.19 | ) | |||||||||
|
Net
earnings from continuing operations
per
diluted share – as adjusted
|
$ |
0.63
|
$ |
0.93
|
$ |
0.98
|
$ |
1.57
|
||||||||
Management
believes that the presentation of net earnings from continuing operations per
diluted share, excluding these items, provides a more meaningful comparison
of
current-period and prior-period results because these items are unique to their
respective periods.
21
Results
of Operations
Consolidated
The
following table sets forth certain amounts, ratios and relationships calculated
from the Consolidated Statements of Income for the three months
ended:
|
2007
vs. 2006
|
||||||||||||||||
|
Three
Months Ended
|
Increase/(Decrease)
|
|||||||||||||||
|
June
30,
2007
|
July
1,
2006
|
$
|
%
|
|||||||||||||
|
(in
millions, except per share data)
|
||||||||||||||||
|
Net
sales
|
$ |
1,522.9
|
$ |
1,543.1
|
$ | (20.2) | (1.3)% | |||||||||
|
Gross
margin (A)
|
$ |
332.3
|
$ |
354.8
|
$ | (22.5) | (6.3)% | |||||||||
|
Operating
earnings
|
$ |
86.3
|
$ |
138.2
|
$ | (51.9) | (37.6)% | |||||||||
|
Net
earnings from continuing operations
|
$ |
56.9
|
$ |
94.5
|
$ | (37.6) | (39.8)% | |||||||||
|
Diluted
earnings per share from continuing
operations
|
$ |
0.63
|
$ |
0.99
|
$ | (0.36) | (36.4)% | |||||||||
|
Expressed
as a percentage of Net sales (B):
|
||||||||||||||||
|
Gross
margin
|
21.8% | 23.0% |
(120)
bpts
|
|||||||||||||
|
Selling,
general and administrative expense
|
13.8% | 11.8% |
200 bpts
|
|||||||||||||
|
Operating
margin
|
5.7% | 9.0% |
(330)
bpts
|
|||||||||||||
__________
bpts
=
basis points
|
(A)
|
Gross
margin is defined as Net sales less Cost of sales as presented in
the
Consolidated Statements of Income.
|
|
(B)
|
Percentages
are determined by using the following numerators expressed as a percentage
of Net sales: Gross margin as defined in (A), Selling, general and
administrative expense and Operating earnings as presented in the
Consolidated Statements of Income.
|
The
decrease in sales was primarily due to reduced demand levels across the marine
industry compared with the second quarter of 2006, most notably with respect
to
United States sales of fiberglass boats as well as engines, and lower Bowling
& Billiards segment sales. This decrease was partially offset by
strong growth outside of the United States and favorable pricing across several
of Brunswick’s marine brands; an increase in Fitness segment sales; and growth
in the Company’s marine parts and accessories businesses. In the second quarter
o