brunswick10-q.htm
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 October
3, 2009
OR
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from
to
Commission
file number
1-1043
Brunswick
Corporation
(Exact
name of registrant as specified in its charter)
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|
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|
(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer Identification No.)
|
1
N. Field Court, Lake Forest, Illinois 60045-4811
(Address
of principal executive offices, including zip code)
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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x
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Accelerated filer
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¨
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Non-accelerated
filer
|
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¨ (Do
not check if a smaller reporting company)
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|
Smaller reporting company
|
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
The
number of shares of Common Stock ($0.75 par value) of the registrant outstanding
as of November 3, 2009, was 88,298,669.
BRUNSWICK
CORPORATION
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
October
3, 2009
TABLE
OF CONTENTS
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|
Page
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PART
I – FINANCIAL INFORMATION
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Item
1.
|
Consolidated
Financial Statements
|
|
|
|
|
|
Consolidated
Statements of Operations for the three months and nine months ended
October 3, 2009 (unaudited), and September 27, 2008
(unaudited)
|
1
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of October 3, 2009 (unaudited), December
31, 2008, and September 27, 2008 (unaudited)
|
2
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|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended October 3,
2009 (unaudited), and September 27, 2008 (unaudited)
|
4
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|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
5
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|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
31
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Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
50
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|
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|
Item
4.
|
Controls
and Procedures
|
50
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PART
II – OTHER INFORMATION
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|
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Item
1A.
|
Risk
Factors
|
51
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
51
|
|
|
|
Item
6.
|
Exhibits
|
51
|
PART
I – FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements
BRUNSWICK
CORPORATION
|
Consolidated
Statements of Operations
|
(unaudited)
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(in
millions, except per share data)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
665.8 |
|
|
$ |
1,038.8 |
|
|
$ |
2,118.8 |
|
|
$ |
3,871.0 |
|
Cost
of sales
|
|
|
590.2 |
|
|
|
862.3 |
|
|
|
1,878.0 |
|
|
|
3,121.5 |
|
Selling,
general and administrative expense
|
|
|
136.7 |
|
|
|
177.4 |
|
|
|
454.5 |
|
|
|
586.1 |
|
Research
and development expense
|
|
|
19.5 |
|
|
|
31.2 |
|
|
|
64.7 |
|
|
|
97.1 |
|
Goodwill
impairment charges
|
|
|
— |
|
|
|
374.0 |
|
|
|
— |
|
|
|
377.2 |
|
Trade
name impairment charges
|
|
|
— |
|
|
|
121.1 |
|
|
|
— |
|
|
|
133.9 |
|
Restructuring,
exit and impairment charges
|
|
|
28.8 |
|
|
|
39.1 |
|
|
|
103.9 |
|
|
|
128.4 |
|
Operating
loss
|
|
|
(109.4 |
) |
|
|
(566.3 |
) |
|
|
(382.3 |
) |
|
|
(573.2 |
) |
Equity
earnings (loss)
|
|
|
(3.8 |
) |
|
|
(1.0 |
) |
|
|
(11.1 |
) |
|
|
10.1 |
|
Investment
sale gain
|
|
|
— |
|
|
|
2.1 |
|
|
|
— |
|
|
|
23.0 |
|
Other
income (expense), net
|
|
|
0.3 |
|
|
|
(0.3 |
) |
|
|
(1.3 |
) |
|
|
1.6 |
|
Loss before interest and income
taxes
|
|
|
(112.9 |
) |
|
|
(565.5 |
) |
|
|
(394.7 |
) |
|
|
(538.5 |
) |
Interest
expense
|
|
|
(23.7 |
) |
|
|
(12.7 |
) |
|
|
(60.2 |
) |
|
|
(35.6 |
) |
Interest
income
|
|
|
0.7 |
|
|
|
2.5 |
|
|
|
2.2 |
|
|
|
5.4 |
|
Loss before income
taxes
|
|
|
(135.9 |
) |
|
|
(575.7 |
) |
|
|
(452.7 |
) |
|
|
(568.7 |
) |
Income
tax provision (benefit)
|
|
|
(21.6 |
) |
|
|
153.4 |
|
|
|
9.5 |
|
|
|
153.1 |
|
Net
loss
|
|
$ |
(114.3 |
) |
|
$ |
(729.1 |
) |
|
$ |
(462.2 |
) |
|
$ |
(721.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(1.29 |
) |
|
$ |
(8.26 |
) |
|
$ |
(5.23 |
) |
|
$ |
(8.18 |
) |
Diluted
|
|
$ |
(1.29 |
) |
|
$ |
(8.26 |
) |
|
$ |
(5.23 |
) |
|
$ |
(8.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used for computation of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss per common share
|
|
|
88.4 |
|
|
|
88.3 |
|
|
|
88.4 |
|
|
|
88.3 |
|
Diluted
loss per common share
|
|
|
88.4 |
|
|
|
88.3 |
|
|
|
88.4 |
|
|
|
88.3 |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
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|
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|
The
Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
|
|
BRUNSWICK
CORPORATION
|
Condensed
Consolidated Balance Sheets
|
|
|
October
3,
|
|
|
December
31,
|
|
|
September
27,
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, at cost, which
approximates
market
|
|
$ |
624.1 |
|
|
$ |
317.5 |
|
|
$ |
342.9 |
|
Accounts
and notes receivable, less
allowances
of $60.7, $41.7 and $37.9
|
|
|
368.2 |
|
|
|
444.8 |
|
|
|
518.3 |
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
|
238.8 |
|
|
|
457.7 |
|
|
|
475.9 |
|
Work-in-process
|
|
|
182.9 |
|
|
|
248.2 |
|
|
|
291.1 |
|
Raw
materials
|
|
|
81.5 |
|
|
|
105.8 |
|
|
|
131.1 |
|
Net
inventories
|
|
|
503.2 |
|
|
|
811.7 |
|
|
|
898.1 |
|
Deferred
income taxes
|
|
|
13.1 |
|
|
|
103.2 |
|
|
|
39.2 |
|
Prepaid
expenses and other
|
|
|
34.6 |
|
|
|
59.7 |
|
|
|
75.2 |
|
Current
assets
|
|
|
1,543.2 |
|
|
|
1,736.9 |
|
|
|
1,873.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
105.6 |
|
|
|
107.1 |
|
|
|
108.7 |
|
Buildings
and improvements
|
|
|
682.5 |
|
|
|
683.8 |
|
|
|
698.1 |
|
Equipment
|
|
|
1,104.9 |
|
|
|
1,156.6 |
|
|
|
1,193.5 |
|
Total
land, buildings and improvements and
equipment
|
|
|
1,893.0 |
|
|
|
1,947.5 |
|
|
|
2,000.3 |
|
Accumulated
depreciation
|
|
|
(1,193.7 |
) |
|
|
(1,155.4 |
) |
|
|
(1,170.9 |
) |
Net
land, buildings and improvements and
equipment
|
|
|
699.3 |
|
|
|
792.1 |
|
|
|
829.4 |
|
Unamortized
product tooling costs
|
|
|
99.1 |
|
|
|
125.5 |
|
|
|
140.9 |
|
Net
property
|
|
|
798.4 |
|
|
|
917.6 |
|
|
|
970.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
292.6 |
|
|
|
290.9 |
|
|
|
294.8 |
|
Other
intangibles, net
|
|
|
78.5 |
|
|
|
86.6 |
|
|
|
89.9 |
|
Investments
|
|
|
57.8 |
|
|
|
75.4 |
|
|
|
81.6 |
|
Deferred
income taxes
|
|
|
— |
|
|
|
— |
|
|
|
14.8 |
|
Other
long-term assets
|
|
|
109.9 |
|
|
|
116.5 |
|
|
|
140.8 |
|
Other
assets
|
|
|
538.8 |
|
|
|
569.4 |
|
|
|
621.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,880.4 |
|
|
$ |
3,223.9 |
|
|
$ |
3,465.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
|
|
BRUNSWICK
CORPORATION
|
Condensed
Consolidated Balance Sheets
|
|
|
October
3,
|
|
|
December
31,
|
|
|
September
27,
|
|
(in
millions, except share data)
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Short-term
debt, including current maturities
of
long-term debt
|
|
$ |
11.5 |
|
|
$ |
3.2 |
|
|
$ |
0.3 |
|
Accounts
payable
|
|
|
232.6 |
|
|
|
301.3 |
|
|
|
346.8 |
|
Accrued
expenses
|
|
|
628.4 |
|
|
|
696.7 |
|
|
|
791.7 |
|
Current
liabilities
|
|
|
872.5 |
|
|
|
1,001.2 |
|
|
|
1,138.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
904.8 |
|
|
|
728.5 |
|
|
|
726.4 |
|
Deferred
income taxes
|
|
|
54.4 |
|
|
|
25.0 |
|
|
|
— |
|
Postretirement
and postemployment benefits
|
|
|
517.6 |
|
|
|
528.3 |
|
|
|
194.0 |
|
Other
|
|
|
195.3 |
|
|
|
211.0 |
|
|
|
228.1 |
|
Long-term
liabilities
|
|
|
1,672.1 |
|
|
|
1,492.8 |
|
|
|
1,148.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
412.6 |
|
|
|
412.3 |
|
|
|
413.3 |
|
Retained
earnings
|
|
|
633.7 |
|
|
|
1,095.9 |
|
|
|
1,166.6 |
|
Treasury
stock, at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
14,275,000;
14,793,000 and 14,861,000 shares
|
|
|
(413.3 |
) |
|
|
(422.9 |
) |
|
|
(424.2 |
) |
Accumulated
other comprehensive loss, net of tax
|
|
|
(374.1 |
) |
|
|
(432.3 |
) |
|
|
(54.0 |
) |
Shareholders’
equity
|
|
|
335.8 |
|
|
|
729.9 |
|
|
|
1,178.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
2,880.4 |
|
|
$ |
3,223.9 |
|
|
$ |
3,465.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
|
|
BRUNSWICK
CORPORATION
|
Condensed
Consolidated Statements of Cash Flows
|
(unaudited)
|
|
|
Nine
Months Ended
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(462.2 |
) |
|
$ |
(721.8 |
) |
Depreciation
and amortization
|
|
|
119.8 |
|
|
|
133.1 |
|
Pension
expense, net of funding
|
|
|
58.7 |
|
|
|
4.8 |
|
Deferred
income taxes
|
|
|
9.9 |
|
|
|
0.1 |
|
Provision
for doubtful accounts
|
|
|
33.1 |
|
|
|
18.8 |
|
Goodwill
impairment charges
|
|
|
- |
|
|
|
377.2 |
|
Trade
name impairment charges
|
|
|
- |
|
|
|
133.9 |
|
Other
long-lived asset impairment charges
|
|
|
18.0 |
|
|
|
50.0 |
|
Changes
in certain current assets and current liabilities
|
|
|
314.3 |
|
|
|
(113.9 |
) |
Repurchase
of accounts receivable - Note 11
|
|
|
(84.2 |
) |
|
|
- |
|
Income
taxes
|
|
|
90.6 |
|
|
|
159.9 |
|
Other,
net
|
|
|
32.1 |
|
|
|
(21.9 |
) |
Net cash provided by operating
activities
|
|
|
130.1 |
|
|
|
20.2 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(20.2 |
) |
|
|
(84.8 |
) |
Investments
|
|
|
7.5 |
|
|
|
21.1 |
|
Proceeds
from investment sale
|
|
|
- |
|
|
|
45.5 |
|
Proceeds
from the sale of property, plant and equipment
|
|
|
11.7 |
|
|
|
9.6 |
|
Other,
net
|
|
|
1.9 |
|
|
|
0.2 |
|
Net cash provided by (used for)
investing activities
|
|
|
0.9 |
|
|
|
(8.4 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Net
issuances of short-term debt
|
|
|
8.3 |
|
|
|
- |
|
Initial
proceeds from asset-based lending facility - Note 14
|
|
|
81.1 |
|
|
|
- |
|
Net
payments of asset-based lending facility - Note 14
|
|
|
(81.1 |
) |
|
|
- |
|
Net
proceeds from issuance of long-term debt - Note 15
|
|
|
329.9 |
|
|
|
250.4 |
|
Payments
of long-term debt including current maturities - Note 15
|
|
|
(162.6 |
) |
|
|
(250.7 |
) |
Net cash provided by (used for)
financing activities
|
|
|
175.6 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
306.6 |
|
|
|
11.5 |
|
Cash
and cash equivalents at beginning of period
|
|
|
317.5 |
|
|
|
331.4 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
624.1 |
|
|
$ |
342.9 |
|
|
|
|
|
|
|
|
|
|
|
|
The
Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
|
|
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. Certain previously reported amounts have
been reclassified to conform to the current period presentation.
These
financial statements should be read in conjunction with, and have been prepared
in conformity with, the accounting principles reflected in the consolidated
financial statements and related notes included in Brunswick’s 2008 Annual
Report on Form 10-K (the 2008 Form 10-K). 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 October 3, 2009 and
September 27, 2008, the results of operations for the three months and nine
months ended October 3, 2009, and September 27, 2008, and the cash flows for the
nine months ended October 3, 2009, and September 27, 2008. 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 spanning thirteen weeks and ending on the
Saturday closest to the end of that thirteen-week period. The first
three quarters of fiscal year 2009 ended on April 4, 2009, July 4, 2009, and
October 3, 2009, and the first three quarters of fiscal year 2008 ended on March
29, 2008, June 28, 2008, and September 27, 2008.
Recent Accounting
Pronouncements. In December 2007, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No.
141(R), “Business Combinations” (SFAS 141(R)) (codified within the Accounting
Standards Codification (ASC) Topic 805). SFAS 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, the
goodwill acquired and any noncontrolling interest in the
acquiree. This statement also establishes disclosure requirements to
enable the evaluation of the nature and financial effect of the business
combination. SFAS 141(R) is effective for fiscal years beginning on or after
December 15, 2008. The adoption of this statement did not have a
material impact on the Company’s consolidated results of operations and
financial condition, but will affect future acquisitions.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (SFAS 160)
(codified within ASC Topic 810). 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 adoption of this statement did not have
a material impact on the Company’s consolidated results of operations and
financial condition.
In March
2008, the FASB issued SFAS No. 161, “Disclosures About Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133” (SFAS 161) (codified within ASC Topic 815). SFAS 161 is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance, and cash flows. SFAS 161 is effective for fiscal years beginning
after November 15, 2008. The adoption of this statement resulted
in the Company expanding its disclosures relative to its derivative instruments
and hedging activity, as reflected in Note 3 – Financial
Instruments.
In
December 2008, the FASB issued FASB Staff Position (FSP) FAS 132(R)-1,
“Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP FAS
132(R)-1) (codified within ASC Topic 715). FSP FAS 132(R)-1 amends SFAS
No. 132 (Revised 2003), “Employers’ Disclosures about Pensions and Other
Postretirement Benefits,” to provide guidance on an employer’s disclosures about
plan assets of a defined benefit pension or other postretirement plan. FSP FAS
132(R)-1 is effective for fiscal years ending after December 15, 2009. The
Company is currently evaluating the impact that the adoption of FSP FAS 132(R)-1
may have on the Company’s consolidated financial statements.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
In
June 2008, the FASB issued FSP Emerging Issues Task Force (EITF)
No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities,” (FSP EITF 03-6-1) (codified within
ASC Topic 260). FSP EITF 03-6-1 requires that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class method. FSP EITF
03-6-1 is effective for fiscal years beginning after December 15, 2008, and
interim periods within those years, and requires that all prior period earnings
per share data presented be adjusted retrospectively to conform to its
provisions. The adoption of this statement did not have a material impact on the
Company’s consolidated results of operations and financial
condition.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation
of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2) (codified
within ASC Topic 320). FSP FAS 115-2 and FAS 124-2 change the method for
determining whether an other-than-temporary impairment exists for debt
securities and the amount of the impairment to be recorded in earnings. FSP FAS
115-2 and FAS 124-2 are effective for interim and annual periods ending after
June 15, 2009. The adoption of these statements did not have a material impact
on the Company’s consolidated results of operations and financial
condition.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1) (codified
within ASC Topic 825). FSP FAS 107-1 and APB 28-1 require fair value disclosures
in both interim as well as annual financial statements in order to provide more
timely information about the effects of current market conditions on financial
instruments. FSP FAS 107-1 and APB 28-1 are effective for interim and annual
periods ending after June 15, 2009. The Company has included the required
disclosures beginning with its second quarter ending on July 4, 2009, as
reflected in Note 3 – Financial
Instruments.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS 165) (codified
within ASC Topic 855). SFAS 165 establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. Specifically,
SFAS 165 sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS 165 is effective prospectively for
interim and annual periods ending after June 15, 2009. The adoption of this
statement did not have a material impact on the Company’s consolidated results
of operations and financial condition as management followed a similar approach
prior to the adoption of this standard. See Note 17 – Subsequent Events
for further discussion.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets” (SFAS 166) (not yet codified under the ASC). SFAS 166 amends the
derecognition guidance in SFAS No. 140, “Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities” (SFAS No. 140). SFAS 166
is effective for fiscal years beginning after November 15, 2009. The Company is
currently evaluating the impact that the adoption of SFAS 166 may have on the
Company’s consolidated financial statements.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (SFAS 167) (not yet codified under the ASC). SFAS 167 amends the
consolidation guidance applicable to variable interest entities and affects the
overall consolidation analysis under FASB Interpretation No. 46(R). SFAS 167 is
effective for fiscal years beginning after November 15, 2009. The Company is
currently evaluating the impact that the adoption of SFAS 167 may have on the
Company’s consolidated financial statements.
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles – a replacement of
FASB Statement No. 162” (SFAS 168) (codified within ASC Topic 105). SFAS 168
stipulates the FASB Accounting Standards Codification is the source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. SFAS 168 is effective for interim and annual periods ending after
September 15, 2009. In conjunction with the issuance of SFAS 168, the
SEC issued interpretive guidance Final Rule 80 (FR-80) regarding FASB’s
Accounting Standards Codification. Under FR-80, the SEC clarified that the ASC
is not the authoritative source for SEC guidance and that the ASC does not
supersede any SEC rules or regulations. Further, any references within the SEC
rules and staff guidance to specific standards under U.S. GAAP should be
understood to mean the corresponding reference in the ASC. FR-80 is also
effective for interim and annual periods ending after September 15, 2009. The
adoption of these pronouncements did not have a material impact on the Company’s
consolidated results of operations and financial condition. The
Company began using the FASB Accounting Standards Codification as its source of
authoritative U.S. GAAP beginning with the third quarter ending on October 3,
2009.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
In August
2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, “Measuring
Liabilities at Fair Value” (ASU 2009-05) (codified within ASC Topic 820). ASU
2009-05 amends the fair value and measurement topic to provide guidance on the
fair value measurement of liabilities. ASU 2009-05 is effective for interim and
annual periods beginning after August 26, 2009. The Company is currently
evaluating the impact that the adoption of the amendments to the FASB Accounting
Standards Codification resulting from ASU 2009-05 may have on the Company’s
consolidated financial statements.
In
September 2009, the FASB issued ASU No. 2009-12, “Investments in Certain
Entities That Calculate Net Asset Value per Share (or its Equivalent)” (ASU
2009-12) (codified within ASC Topic 820). ASU 2009-12 amends the input
classification guidance under ASC Topic 820. ASU 2009-12 is effective for
interim and annual periods ending after December 15, 2009. The Company is
currently evaluating the impact that the adoption of the amendments to the FASB
Accounting Standards Codification resulting from ASU 2009-12 may have on the
Company’s consolidated financial statements.
In
October 2009, the FASB issued ASU No. 2009-13, “Multiple Deliverable Revenue
Arrangements - a consensus of the FASB Emerging Issues Task Force” (ASU 2009-13)
(codified within ASC Topic 605). ASU 2009-13 addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services (deliverables) separately rather than as a combined unit. ASU 2009-13
is effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010, with early
adoption permitted. The Company is currently evaluating the impact that the
adoption of the amendments to the FASB Accounting Standards Codification
resulting from ASU 2009-13 may have on the Company’s consolidated financial
statements.
Note
2 – Restructuring Activities
In
November 2006, Brunswick announced restructuring initiatives to improve the
Company’s cost structure, better utilize overall capacity and improve general
operating efficiencies. These initiatives reflected the Company’s response to a
difficult marine market. As the Company’s markets have continued to decline, the
Company expanded its restructuring activities across all business segments
during 2007, 2008 and 2009 in order to improve performance and better position
the Company for current market conditions and longer-term growth. These
initiatives have resulted in the recognition of restructuring, exit and other
impairment charges in the Statements of Operations during 2008 and 2009.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
The costs
incurred under these initiatives include:
Restructuring
Activities – These amounts primarily relate to:
·
|
Employee
termination and other benefits
|
·
|
Costs
to retain and relocate employees
|
·
|
Consolidation
of manufacturing footprint
|
Exit
Activities – These amounts primarily relate to:
·
|
Employee
termination and other benefits
|
·
|
Facility
shutdown costs
|
Asset
Disposition Actions – These amounts primarily relate to sales of assets and
definite-lived asset impairments on:
·
|
Patents
and proprietary technology
|
Impairments
of definite-lived assets are recognized when, as a result of the restructuring
activities initiated, the carrying amount of the long-lived asset is not
expected to be fully recoverable, in accordance with ASC 360, “Property, Plant,
and Equipment.” The impairments recognized were equal to the difference between
the carrying amount of the asset and the fair value of the asset, which was
determined using observable inputs when available, and when observable inputs
were not available, based on the Company’s assumptions of the data that market
participants would use in pricing the asset or liability, using the best
information available in the circumstances. Specifically, the Company used
discounted cash flows to determine the fair value of the asset when observable
inputs were unavailable.
The
Company has reported restructuring and exit activities based on the specific
driver of the cost and reflected the expense in the accounting period when the
cost has been committed or incurred, in accordance with ASC 420, “Exit or
Disposal Costs Obligations.” The Company considers actions related to the sale
of certain Baja boat business assets, the closure of its bowling pin
manufacturing facility, the sale of the Valley-Dynamo and Integrated Dealer
Systems businesses and the divestiture of MotoTron, a designer and supplier of
engine control and vehicle networking systems, to be exit activities. All other
actions taken are considered to be restructuring activities.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
The
following table is a summary of the expense associated with the restructuring,
exit and impairment activities for the three months and nine months ended
October 3, 2009, and September 27, 2008. The 2009 charge consists of expenses
related to actions initiated in both 2009 and 2008:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination and other benefits
|
|
$ |
9.8 |
|
|
$ |
8.4 |
|
|
$ |
39.4 |
|
|
$ |
20.6 |
|
Current
asset write-downs
|
|
|
0.3 |
|
|
|
1.1 |
|
|
|
3.7 |
|
|
|
3.5 |
|
Transformation
and other costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
of manufacturing footprint
|
|
|
16.7 |
|
|
|
13.0 |
|
|
|
39.9 |
|
|
|
29.7 |
|
Retention
and relocation costs
|
|
|
— |
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
5.4 |
|
Consulting
costs
|
|
|
— |
|
|
|
1.7 |
|
|
|
0.3 |
|
|
|
3.7 |
|
Exit
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination and other benefits
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.7 |
|
|
|
3.0 |
|
Current
asset write-downs
|
|
|
— |
|
|
|
0.9 |
|
|
|
1.1 |
|
|
|
8.1 |
|
Transformation
and other costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
of manufacturing footprint
|
|
|
(1.7 |
) |
|
|
0.2 |
|
|
|
1.3 |
|
|
|
4.4 |
|
Asset
disposition actions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived
asset impairments
|
|
|
3.4 |
|
|
|
13.2 |
|
|
|
17.4 |
|
|
|
50.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
restructuring, exit and impairment charges
|
|
$ |
28.8 |
|
|
$ |
39.1 |
|
|
$ |
103.9 |
|
|
$ |
128.4 |
|
The
Company anticipates that it will incur approximately $15 to $20 million of
additional costs, which are predominantly cash items, through the remainder of
2009 related to the 2009 and 2008 restructuring initiatives; however, more
significant or sustained reductions in demand for the Company’s products may
necessitate additional restructuring or exit charges in 2009. The Company
expects most of the $15 to $20 million in charges will be incurred in the Boat
and Marine Engine segments. Net cash payments related to 2009 and 2008
restructuring and exit activities were $78.4 million in the first nine months of
2009. There are no further anticipated charges related to the
restructuring activities initiated in 2007 and 2006.
Actions
Initiated in 2009
During
2009, the Company continued its restructuring activities by reducing the
Company’s global workforce, consolidating manufacturing operations and disposing
of non-strategic assets. During the third quarter of 2009, the Company announced
plans to consolidate engine production by transferring sterndrive engine
manufacturing operations from its Stillwater, Oklahoma plant to its Fond du Lac,
Wisconsin plant, which currently produces the Company’s outboard
engines. This plant consolidation effort is expected to occur through
2011. In connection with this action, the Company’s hourly union
workforce in Fond du Lac ratified a new collective bargaining agreement on
August 31, 2009, which resulted in net restructuring charges as a result of
changes to employees’ current and postretirement benefits. The
Company continued to consolidate the Boat segment’s manufacturing footprint in
2009. These actions taken together are expected to provide long-term
cost savings to the Company by reducing its fixed-cost structure.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
The
restructuring, exit and impairment charges recorded in 2009, related to actions
initiated in 2009 for each of the Company’s reportable segments, are summarized
below:
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Oct.
3,
2009
|
|
|
|
|
|
|
|
|
Marine
Engine
|
|
$ |
18.5 |
|
|
$ |
37.4 |
|
Boat
|
|
|
2.4 |
|
|
|
21.0 |
|
Fitness
|
|
|
0.4 |
|
|
|
1.6 |
|
Bowling
& Billiards
|
|
|
0.3 |
|
|
|
0.8 |
|
Corporate
|
|
|
2.1 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
23.7 |
|
|
$ |
65.3 |
|
The
following is a summary of the charges by category associated with the 2009
restructuring activities:
(in
millions)
|
|
Three
Months
Ended
Oct.
3,
2009
|
|
|
Nine
Months
Ended
Oct.
3,
2009
|
|
|
|
|
|
|
|
|
Restructuring
activities:
|
|
|
|
|
|
|
Employee
termination and other benefits
|
|
$ |
9.6 |
|
|
$ |
31.4 |
|
Current
asset write-downs
|
|
|
0.2 |
|
|
|
1.2 |
|
Transformation
and other costs:
|
|
|
|
|
|
|
|
|
Consolidation
of manufacturing footprint
|
|
|
14.1 |
|
|
|
23.2 |
|
Retention
and relocation costs
|
|
|
— |
|
|
|
0.1 |
|
Consulting
costs
|
|
|
— |
|
|
|
0.3 |
|
Exit
activities:
|
|
|
|
|
|
|
|
|
Transformation
and other costs:
|
|
|
|
|
|
|
|
|
Consolidation
of manufacturing footprint
|
|
|
(1.9 |
) |
|
|
(1.9 |
) |
Asset
disposition actions:
|
|
|
|
|
|
|
|
|
Definite-lived
asset impairments
|
|
|
1.7 |
|
|
|
11.0 |
|
|
|
|
|
|
|
|
|
|
Total
restructuring, exit and impairment charges
|
|
$ |
23.7 |
|
|
$ |
65.3 |
|
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
The
restructuring, exit and impairment charges related to actions initiated in 2009,
for each of the Company’s reportable segments for the nine months ended October
3, 2009, are summarized below:
(in
millions)
|
|
Marine
Engine
|
|
|
Boat
|
|
|
Fitness
|
|
|
Bowling
& Billiards
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
terminations
and
other benefits
|
|
$ |
16.6 |
|
|
$ |
9.7 |
|
|
$ |
1.6 |
|
|
$ |
0.8 |
|
|
$ |
2.7 |
|
|
$ |
31.4 |
|
Current
asset write-downs
|
|
|
0.4 |
|
|
|
0.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.2 |
|
Transformation
and
other costs
|
|
|
18.5 |
|
|
|
1.4 |
|
|
|
— |
|
|
|
— |
|
|
|
1.8 |
|
|
|
21.7 |
|
Asset
disposition actions
|
|
|
1.9 |
|
|
|
9.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
restructuring, exit and impairment charges
|
|
$ |
37.4 |
|
|
$ |
21.0 |
|
|
$ |
1.6 |
|
|
$ |
0.8 |
|
|
$ |
4.5 |
|
|
$ |
65.3 |
|
The
following table summarizes the 2009 charges taken for restructuring, exit and
other impairment charges related to actions initiated in 2009. The accrued
amounts remaining as of October 3, 2009 represent cash expenditures needed to
satisfy remaining obligations. The majority of the accrued cost is expected to
be paid by the end of 2009 and is included in Accrued expenses in the Condensed
Consolidated Balance Sheets.
(in
millions)
|
|
Costs
Recognized
in
2009
|
|
|
Non-cash
Charges
|
|
|
Net
Cash Payments
|
|
|
Accrued
Costs
as of
October
3,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination and other benefits
|
|
$ |
31.4 |
|
|
$ |
— |
|
|
$ |
(21.7 |
) |
|
$ |
9.7 |
|
Current
asset write-downs
|
|
|
1.2 |
|
|
|
(1.2 |
) |
|
|
— |
|
|
|
— |
|
Transformation
and other costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
of manufacturing footprint
|
|
|
21.3 |
|
|
|
(15.1 |
) |
|
|
(4.1 |
) |
|
|
2.1 |
|
Retention
and relocation costs
|
|
|
0.1 |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
— |
|
Consulting
costs
|
|
|
0.3 |
|
|
|
— |
|
|
|
(0.3 |
) |
|
|
— |
|
Asset
disposition actions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived
asset impairments
|
|
|
11.0 |
|
|
|
(11.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
restructuring, exit and impairment charges
|
|
$ |
65.3 |
|
|
$ |
(27.3 |
) |
|
$ |
(26.2 |
) |
|
$ |
11.8 |
|
The
Company anticipates that it will incur approximately $12 to $15 million of
additional charges related to announced restructuring activities that will be
initiated during 2009. The Company expects most of these charges will
be incurred in the Boat and Marine Engine segments. More significant
or sustained reductions in demand for the Company’s products may necessitate
additional restructuring, exit or impairment charges in 2009.
Actions
Initiated in 2008
During
the first quarter of 2008, the Company incurred charges related to its
restructuring and exit activities by closing its bowling pin manufacturing
facility in Antigo, Wisconsin; and announcing that it would close its boat plant
in Bucyrus, Ohio, in anticipation of the sale of certain assets relating to its
Baja boat business; cease boat manufacturing at one of its facilities in Merritt
Island, Florida; and close its Swansboro, North Carolina boat
plant.
The
Company announced additional actions in June 2008 as a result of the prolonged
downturn in the U.S. marine market. The plan was designed to improve performance
and better position the Company for market conditions and longer-term growth.
The plan was anticipated to result in significant changes in the Company’s
organizational structure, most notably by reducing the complexity of its
operations and further shrinking its North American manufacturing footprint.
Specifically, the Company announced: the closure of its production facility in
Newberry, South Carolina, due to its decision to cease production of its
Bluewater Marine brands, including Sea Pro, Sea Boss, Palmetto and Laguna; its
intention to close four additional boat plants; and the write-down of certain
assets of the Valley-Dynamo business.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
During
the third quarter of 2008, the Company accelerated its previously announced
efforts to resize the Company in light of extraordinary developments within
global financial markets that were affecting the recreational marine industry.
Specifically, the Company announced the closure of its boat production
facilities in Cumberland, Maryland; Pipestone, Minnesota; Roseburg, Oregon; and
Arlington, Washington. The Company also decided to mothball its boat plant in
Navassa, North Carolina. The Company completed the Arlington, Cumberland,
Roseburg and Navassa shutdowns in the fourth quarter of 2008, and
completed the Pipestone facility shutdown in the first quarter of
2009.
The
Company has incurred a total of $215.9 million in restructuring, exit and
impairment charges life-to-date related to the 2008 initiatives. The $215.9
million consists of $35.1 million in the Marine Engine segment, $127.2 million
in the Boat segment, $25.7 million in the Bowling and Billiards segment, $3.3
million in the Fitness segment and $24.6 million in Corporate.
The
restructuring, exit and impairment charges by reportable segment related to 2008
initiatives for the three and nine month periods in 2009 and 2008 are summarized
below.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
Engine
|
|
$ |
0.3 |
|
|
$ |
14.1 |
|
|
$ |
2.7 |
|
|
$ |
33.2 |
|
Boat
|
|
|
4.2 |
|
|
|
14.6 |
|
|
|
28.5 |
|
|
|
59.3 |
|
Fitness
|
|
|
— |
|
|
|
0.8 |
|
|
|
— |
|
|
|
2.1 |
|
Bowling
& Billiards
|
|
|
0.5 |
|
|
|
1.8 |
|
|
|
4.0 |
|
|
|
17.9 |
|
Corporate
|
|
|
0.1 |
|
|
|
7.8 |
|
|
|
3.4 |
|
|
|
15.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5.1 |
|
|
$ |
39.1 |
|
|
$ |
38.6 |
|
|
$ |
128.4 |
|
The
following is a summary of the total expense by category associated with the 2008
restructuring initiatives recognized during 2009:
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Oct.
3,
2009
|
|
|
|
|
|
|
|
|
Restructuring
activities:
|
|
|
|
|
|
|
Employee
termination and other benefits
|
|
$ |
0.2 |
|
|
$ |
8.0 |
|
Current
asset write-downs
|
|
|
0.1 |
|
|
|
2.5 |
|
Transformation
and other costs:
|
|
|
|
|
|
|
|
|
Consolidation
of manufacturing footprint
|
|
|
2.6 |
|
|
|
16.7 |
|
Exit
activities:
|
|
|
|
|
|
|
|
|
Employee
termination and other benefits
|
|
|
0.3 |
|
|
|
0.7 |
|
Current
asset write-downs
|
|
|
— |
|
|
|
1.1 |
|
Transformation
and other costs:
|
|
|
|
|
|
|
|
|
Consolidation
of manufacturing footprint
|
|
|
0.2 |
|
|
|
3.2 |
|
Asset
disposition actions:
|
|
|
|
|
|
|
|
|
Definite-lived
asset impairments
|
|
|
1.7 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
Total
restructuring, exit and impairment charges
|
|
$ |
5.1 |
|
|
$ |
38.6 |
|
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
The
restructuring, exit and impairment charges for actions initiated in 2008 for
each of the Company’s reportable segments for the nine months ended October 3,
2009 are summarized below:
(in
millions)
|
|
Marine
Engine
|
|
|
Boat
|
|
|
Bowling
&
Billiards
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
terminations
and
other benefits
|
|
$ |
0.9 |
|
|
$ |
6.3 |
|
|
$ |
1.1 |
|
|
$ |
0.4 |
|
|
$ |
8.7 |
|
Current
asset write-downs
|
|
|
0.7 |
|
|
|
1.8 |
|
|
|
1.1 |
|
|
|
— |
|
|
|
3.6 |
|
Transformation
and
other costs
|
|
|
1.1 |
|
|
|
16.9 |
|
|
|
1.8 |
|
|
|
0.1 |
|
|
|
19.9 |
|
Asset
disposition actions
|
|
|
— |
|
|
|
3.5 |
|
|
|
— |
|
|
|
2.9 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
restructuring, exit and impairment charges
|
|
$ |
2.7 |
|
|
$ |
28.5 |
|
|
$ |
4.0 |
|
|
$ |
3.4 |
|
|
$ |
38.6 |
|
The
following table summarizes the 2009 charges taken for restructuring, exit and
impairment related to actions initiated in 2008. The accrued amounts remaining
as of October 3, 2009, represent estimated cash expenditures needed to satisfy
remaining obligations. The Company expects the majority of the accrued costs to
be paid by the end of 2009 and the costs are included in Accrued expenses in the
Consolidated Balance Sheets.
(in
millions)
|
|
Accrued
Costs
as of
Jan.
1,
2009
|
|
|
Costs
Recognized in
2009
|
|
|
Non-cash
Charges
|
|
|
Net
Cash
Payments
|
|
|
Accrued
Costs
as of
Oct.
3,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination and other benefits
|
|
$ |
17.0 |
|
|
$ |
8.7 |
|
|
$ |
— |
|
|
$ |
(23.5 |
) |
|
$ |
2.2 |
|
Current
asset write-downs
|
|
|
— |
|
|
|
3.6 |
|
|
|
(3.6 |
) |
|
|
— |
|
|
|
— |
|
Transformation
and other costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
of manufacturing footprint
|
|
|
5.7 |
|
|
|
19.9 |
|
|
|
— |
|
|
|
(23.4 |
) |
|
|
2.2 |
|
Retention
and relocation costs
|
|
|
0.8 |
|
|
|
— |
|
|
|
— |
|
|
|
(0.8 |
) |
|
|
— |
|
Consulting
costs
|
|
|
4.5 |
|
|
|
— |
|
|
|
— |
|
|
|
(4.5 |
) |
|
|
— |
|
Asset
disposition actions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived
asset impairments
|
|
|
— |
|
|
|
6.4 |
|
|
|
(6.4 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
restructuring, exit and impairment charges
|
|
$ |
28.0 |
|
|
$ |
38.6 |
|
|
$ |
(10.0 |
) |
|
$ |
(52.2 |
) |
|
$ |
4.4 |
|
The
Company anticipates that it will incur approximately $3 to $5 million of
additional costs related to the 2008 initiatives during the remainder of 2009,
when the 2008 initiatives are expected to be complete. The Company expects most
of these charges will be incurred in the Boat segment.
Note
3 – Financial Instruments
The
Company operates globally, 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 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.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
This
process includes linking derivatives that are designated as hedges to specific
forecasted transactions. The Company also assesses, both at the inception and
monthly 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 to the results of operations as
a result of ineffectiveness for the three and nine months ended October 3, 2009,
and September 27, 2008. 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 Cost of
sales or Interest expense as appropriate. 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.
Fair Value Derivatives.
During 2009 and 2008, 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 (loss), each period
as incurred.
Cash Flow Derivatives.
Certain derivative instruments qualify as cash flow hedges under the
requirements of ASC 815,
“Derivatives and Hedging.” The Company executes both forward and option
contracts, 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
aluminum and natural gas, to manage exposure related to risk from price changes.
In prior periods, the Company 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 loss and reclassified into earnings in the same
period or periods during which the hedged transaction affects earnings. As of
October 3, 2009, the term of derivative instruments hedging forecasted
transactions ranged from one to 26 months.
Foreign Currency. The Company
enters into forward and option contracts 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 October 3, 2009, and December 31, 2008, had
notional contract values of $68.6 million and $106.3 million, respectively.
Option contracts outstanding at October 3, 2009, and December 31, 2008, had
notional contract values of $62.8 million and $137.9 million, respectively. The
forward and options contracts outstanding at October 3, 2009, mature during 2009
and 2010 and primarily relate to the Euro, Mexican peso, Canadian dollar,
British pound, Japanese yen and Australian dollar. As of October 3, 2009, the
Company estimates that during the next 12 months, it will reclassify
approximately $1 million in net losses (based on current rates) from Accumulated
other comprehensive loss to Cost of sales.
Interest Rate. The Company
has historically utilized fixed-to-floating interest rate swaps to mitigate the
interest rate risk associated with its long-term debt. There were no
fixed-to-floating interest rate swaps outstanding at October 3, 2009, and
December 31, 2008. These instruments were treated as fair value hedges, with the
offset to the fair market value recorded in long-term debt; see Note 14 to the
consolidated financial statements in the 2008 Form 10-K for further
details.
As of
October 3, 2009, and December 31, 2008, the Company had $5.0 million and $5.7
million, respectively, of net deferred gains associated with all forward
starting interest rate swaps included in Accumulated other comprehensive loss.
These amounts include gains deferred on $250.0 million of forward starting
interest rate swaps terminated in July 2006 and losses deferred on $150.0
million of notional value forward starting swaps, which were terminated in
August 2008. There were no forward starting interest rate swaps outstanding at
October 3, 2009. For the three months ended October 3, 2009, the Company
recognized $0.2 million of income related to the net amortization of all settled
forward starting interest rate swaps.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
Commodity Price. The Company
uses commodity swaps to hedge anticipated purchases of aluminum and natural gas.
Commodity swap contracts outstanding at October 3, 2009, and December 31, 2008,
had notional values of $20.8 million and $33.8 million, respectively. The
contracts outstanding mature from 2009 to 2011. The amount of gain or loss is
reclassified from Accumulated other comprehensive loss to Cost of sales in the
same period or periods during which the hedged transaction affects earnings. As
of October 3, 2009, the Company estimates that during the next 12 months, it
will reclassify approximately $2 million in net losses (based on current prices)
from Accumulated other comprehensive loss to Cost of sales.
As of
October 3, 2009, the fair values of the Company’s derivative instruments
were:
(in
millions)
|
|
|
|
|
|
|
|
Derivative
Assets
|
|
Derivative
Liabilities
|
|
Instrument
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
Prepaid
Expenses and Other
|
|
$ |
— |
|
Accrued
Expenses
|
|
$ |
— |
|
Foreign
exchange contracts
|
|
Prepaid
Expenses and Other
|
|
|
2.2 |
|
Accrued
Expenses
|
|
|
3.4 |
|
Commodity
contracts
|
|
Prepaid
Expenses and Other
|
|
|
2.4 |
|
Accrued
Expenses
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$ |
4.6 |
|
|
|
$ |
5.1 |
|
As of
December 31, 2008, the fair values of the Company’s derivative instruments
were:
(in
millions)
|
|
|
|
|
|
|
|
Derivative
Assets
|
|
Derivative
Liabilities
|
|
Instrument
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
Prepaid
Expenses and Other
|
|
$ |
— |
|
Accrued
Expenses
|
|
$ |
— |
|
Foreign
exchange contracts
|
|
Prepaid
Expenses and Other
|
|
|
14.3 |
|
Accrued
Expenses
|
|
|
3.9 |
|
Commodity
contracts
|
|
Prepaid
Expenses and Other
|
|
|
— |
|
Accrued
Expenses
|
|
|
15.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$ |
14.3 |
|
|
|
$ |
19.1 |
|
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
The
effect of derivative instruments on the Consolidated Statements of Operations
for the three months ended October 3, 2009, was:
(in
millions)
|
|
|
Fair
Value Hedging Instruments
|
|
Location
of Gain/(Loss)
Recognized
in Income on
Derivatives
|
|
Amount
of Gain/(Loss)
Recognized
in Income on
Derivatives
|
|
|
|
|
|
Foreign
exchange contracts
|
|
Cost
of Sales
|
|
$ (3.2)
|
Cash
Flow Hedge Instruments
|
|
Amount
of Gain/(Loss)
Recognized
on
Derivatives
in
Accumulated
other
comprehensive
loss
(Effective
Portion)
|
|
Location
of Gain/(Loss)
Reclassified
from
Accumulated
other
comprehensive
loss into
Income
(Effective
Portion)
|
|
Amount
of Gain/(Loss) Reclassified from
Accumulated
other
comprehensive
loss into
Income
(Effective
Portion)
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$ —
|
|
Interest
Expense
|
|
$ 0.2
|
Foreign
exchange contracts
|
|
(2.5)
|
|
Cost
of Sales
|
|
1.6
|
Commodity
contracts
|
|
1.8
|
|
Cost
of Sales
|
|
(3.5)
|
|
|
|
|
|
|
|
Total
|
|
$ (0.7)
|
|
|
|
$ (1.7)
|
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
The
effect of derivative instruments on the Consolidated Statement of Operations for
the nine months ended October 3, 2009, was:
(in
millions)
|
|
|
Fair
Value Hedging Instruments
|
|
Location
of Gain/(Loss) Recognized in Income on Derivatives
|
|
Amount
of Gain/(Loss) Recognized in Income on Derivatives
|
|
|
|
|
|
Foreign
exchange contracts
|
|
Cost
of Sales
|
|
$ (6.7)
|
Cash
Flow Hedge
Instruments
|
|
Amount
of Gain/(Loss) Recognized on Derivatives in Accumulated other
comprehensive loss
(Effective
Portion)
|
|
Location
of Gain/(Loss) Reclassified from Accumulated other comprehensive loss into
Income
(Effective
Portion)
|
|
Amount
of Gain/(Loss) Reclassified from Accumulated other comprehensive loss into
Income
(Effective
Portion)
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$ —
|
|
Interest
Expense
|
|
$ 0.7
|
Foreign
exchange contracts
|
|
(3.9)
|
|
Cost
of Sales
|
|
12.2
|
Commodity
contracts
|
|
2.3
|
|
Cost
of Sales
|
|
(12.2)
|
|
|
|
|
|
|
|
Total
|
|
$ (1.6)
|
|
|
|
$ 0.7
|
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 October 3, 2009, the fair value of the Company’s
long-term debt was approximately $825 million as estimated using quoted market
prices. The carrying value of long-term debt, including current
maturities, was $906.0 million as of October 3, 2009.
Note
4 – Fair Value Measurements
Fair
value is defined under ASC 820, “Fair Value Measurements and Disclosures,” as
the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value under ASC 820
must maximize the use of observable inputs and minimize the use of unobservable
inputs. The standard established a fair-value hierarchy based on three levels of
inputs, of which the first two are considered observable and the last
unobservable.
·
|
Level
1 - Quoted prices in active markets for identical assets or liabilities.
These are typically obtained from real-time quotes for transactions in
active exchange markets involving identical
assets.
|
·
|
Level
2 - Inputs, other than quoted prices included within Level 1, which are
observable for the asset or liability, either directly or indirectly.
These are typically obtained from readily-available pricing sources for
comparable instruments.
|
·
|
Level
3 - Unobservable inputs, where there is little or no market activity for
the asset or liability. These inputs reflect the reporting entity’s own
assumptions about the assumptions that market participants would use in
pricing the asset or liability, based on the best information available in
the circumstances.
|
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
The
following table summarizes Brunswick’s financial assets and liabilities measured
at fair value on a recurring basis in accordance with ASC 820 as of October 3,
2009:
(in
millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Equivalents
|
|
$ |
338.9 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
338.9 |
|
Investments
|
|
|
2.7 |
|
|
|
— |
|
|
|
— |
|
|
|
2.7 |
|
Derivatives
|
|
|
— |
|
|
|
4.6 |
|
|
|
— |
|
|
|
4.6 |
|
Total
Assets
|
|
$ |
341.6 |
|
|
$ |
4.6 |
|
|
$ |
— |
|
|
$ |
346.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$ |
— |
|
|
$ |
5.1 |
|
|
$ |
— |
|
|
$ |
5.1 |
|
Note
5 – Share-Based Compensation
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 13.1 million shares, consisting of treasury shares and
authorized, but unissued shares of common stock. As of October 3,
2009, 3.7 million shares were available for grant. 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.
SARs
During
the three and nine months ended October 3, 2009, there were 0.0 and 2.9 million
SARs granted, respectively. In the three and nine months ended
October 3, 2009, there was $2.3 million and $4.6 million of total expense,
respectively, after adjusting for forfeitures, due to amortization of SARs
granted. During the three and nine months ended September 27, 2008, there were
0.0 and 2.6 million SARs granted, respectively. In the three and nine
months ended September 27, 2008, there was $2.4 million and $5.8 million of
total expense, respectively, due to amortization of SARs granted.
The
weighted average fair values of individual SARs granted were $2.99 and $5.71
during 2009 and 2008, 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 for 2009 and
2008:
|
2009
|
|
2008
|
|
|
|
|
Risk-free
interest rate
|
2.3%
|
|
2.9%
|
Dividend
yield
|
1.9%
|
|
2.3%
|
Volatility
factor
|
72.3%
|
|
40.1%
|
Weighted
average expected life
|
5.7
– 6.3 years
|
|
5.4
– 6.2
years
|
Nonvested
stock awards
No stock
awards were granted during the first nine months of 2009. During the three and
nine months ended October 3, 2009, $0.3 million and $0.4 million, respectively,
were charged to compensation expense from the amortization of previous grants
including the result of reversing the amortization of certain awards in the
first quarter of 2009. During the three and nine months ended September 27,
2008, 0.1 million and 1.0 million stock awards were granted,
respectively. Compensation expense of $1.8 million and $4.6 million,
respectively, was recorded for the three and nine month periods ended September
27, 2008. The amortization of nonvested stock award cost is recognized on a
straight-line basis over the requisite service period.
As of
October 3, 2009, there was $0.6 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 0.4 years
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
Director
Awards
The
Company may issue 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. Prior to May 2009, each non-employee
director also received an annual grant of restricted stock units, which is
deferred until the director retires from the Board.
Note
6 – Earnings (loss) per Common Share
The
Company calculates earnings (loss) per common share in accordance with ASC 260,
"Earnings per Share." Basic earnings (loss) per common share is
calculated by dividing net earnings (loss) by the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per common
share is calculated similarly, except that the calculation includes the dilutive
effect of stock options and nonvested stock awards.
Basic and
diluted earnings (loss) per share for the three and nine months ended October 3,
2009, and for the comparable periods ended September 27, 2008, were calculated
as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(in
millions, except per share data)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(114.3 |
) |
|
$ |
(729.1 |
) |
|
$ |
(462.2 |
) |
|
$ |
(721.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares – basic
|
|
|
88.4 |
|
|
|
88.3 |
|
|
|
88.4 |
|
|
|
88.3 |
|
Dilutive
effect of common stock equivalents
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares – diluted
|
|
|
88.4 |
|
|
|
88.3 |
|
|
|
88.4 |
|
|
|
88.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss per share
|
|
$ |
(1.29 |
) |
|
$ |
(8.26 |
) |
|
$ |
(5.23 |
) |
|
$ |
(8.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
loss per share
|
|
$ |
(1.29 |
) |
|
$ |
(8.26 |
) |
|
$ |
(5.23 |
) |
|
$ |
(8.18 |
) |
As of
October 3, 2009, there were 8.6 million options and stock appreciation rights
(collectively “options”) outstanding, of which 3.3 million were exercisable.
This compares to 6.3 million options outstanding, of which 2.9 million were
exercisable as of September 27, 2008. During the three and nine months ended
October 3, 2009, there were 6.6 million and 5.3 million weighted average shares
of options outstanding, respectively, for which the exercise price, based on the
average price, was higher than the average market price of the Company’s shares
for the period then ended. These options were not included in the computation of
diluted earnings per share because the effect would have been anti-dilutive.
This compares to 6.5 million and 6.1 million anti-dilutive options that were
excluded from the corresponding periods ended September 27, 2008. During the
three and nine months ended October 3, 2009, and the three months and nine
months ended September 27, 2008, the Company incurred a net loss from continuing
operations. As common stock equivalents have an anti-dilutive effect on the
Company’s net loss, the equivalents were not included in the computation of
diluted earnings per share for the three and nine months ended October 3, 2009,
and for the three months and nine months ended September 27, 2008.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
Note
7 – Commitments and Contingencies
Financial
Commitments
The
Company has entered into guarantees of indebtedness of third parties, 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.
Potential payments in connection with these customer financing arrangements
would likely extend over several years. The potential cash payments associated
with these customer financing arrangements as of October 3, 2009, and September
27, 2008, were:
|
|
|
|
|
|
|
(in
millions)
|
|
October
3,
2009
|
|
|
September
27,
2008
|
|
|
October
3,
2009
|
|
|
September
27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
Engine
|
|
$ |
6.6 |
|
|
$ |
30.0 |
|
|
$ |
6.6 |
|
|
$ |
30.0 |
|
Boat
|
|
|
2.3 |
|
|
|
2.7 |
|
|
|
2.3 |
|
|
|
2.7 |
|
Fitness
|
|
|
25.5 |
|
|
|
24.3 |
|
|
|
32.5 |
|
|
|
36.3 |
|
Bowling
& Billiards
|
|
|
10.0 |
|
|
|
11.8 |
|
|
|
24.4 |
|
|
|
28.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
44.4 |
|
|
$ |
68.8 |
|
|
$ |
65.8 |
|
|
$ |
97.3 |
|
The
reduction in potential obligations in the Marine Engine segment is a result of
the Company’s discontinuance of its sale of receivables program in May of
2009. See Note
11 – Financial Services for further details.
In most instances, upon repurchase of
the debt obligation, the Company receives rights to the collateral securing the
financing. The Company’s
risk under these arrangements is mitigated by the value of the collateral that
secures the financing. The Company had $5.2 million accrued for potential losses
related to recourse exposure at October 3, 2009.
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 amount of
collateral the Company could be required to purchase as of October 3, 2009, and
September 27, 2008, was:
|
|
Single
Year Obligation
|
|
|
Maximum
Obligation
|
|
(in
millions)
|
|
October
3,
2009
|
|
|
September
27,
2008
|
|
|
October
3,
2009
|
|
|
September
27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
Engine
|
|
$ |
2.6 |
|
|
$ |
6.0 |
|
|
$ |
2.6 |
|
|
$ |
6.0 |
|
Boat
|
|
|
95.8 |
|
|
|
115.3 |
|
|
|
118.3 |
|
|
|
158.4 |
|
Bowling
& Billiards
|
|
|
0.7 |
|
|
|
2.3 |
|
|
|
0.7 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
99.1 |
|
|
$ |
123.6 |
|
|
$ |
121.6 |
|
|
$ |
166.7 |
|
The
Company had $12.0 million accrued for potential losses related to repurchase
exposure at October 3, 2009. The Company’s risk under these repurchase
arrangements is mitigated by the value of the products repurchased as part of
the transaction. The Company’s $12.0 million repurchase accrual represents the
expected net losses on obligations to repurchase products, after giving effect
to proceeds anticipated to be received from the resale of those products to
alternative dealers.
Based on
historical experience and current facts and circumstances, and in accordance
with ASC 460, “Guarantees,” the Company has recorded the fair value of its
estimated net liability associated with losses from these guarantee and
repurchase obligations on its Condensed Consolidated Balance Sheets. Historical
cash requirements and losses associated with these obligations have not been
significant, but could increase if dealer defaults increase as a result of the
difficult market conditions.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
Financial
institutions have issued standby letters of credit and surety bonds
conditionally guaranteeing obligations on behalf of the Company totaling $97.5
million as of October 3, 2009. A large portion of these standby letters of
credit and surety bonds is related to 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. In addition, the Company has provided a letter of credit to GE
Commercial Distribution Finance Corporation (GECDF) as a guarantee of the
Company’s obligations to GECDF and affiliates under various agreements. Under
certain circumstances, such as an event of default under the Company’s revolving
credit facility, or, in the case of surety bonds, a ratings downgrade below
investment grade, the Company could be required to post collateral to support
the outstanding letters of credit and surety bonds. As the Company’s current
long-term debt ratings are below investment grade, the Company has posted
letters of credit totaling $11.5 million as collateral against $12.9 million of
outstanding surety bonds as of October 3, 2009.
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 was recorded in
Accrued expenses during the nine months ended October 3, 2009, and September 27,
2008:
|
|
Nine
Months Ended
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
145.4 |
|
|
$ |
163.9 |
|
Payments
|
|
|
(73.1 |
) |
|
|
(91.0 |
) |
Provisions/additions
for contracts issued/sold
|
|
|
63.1 |
|
|
|
72.9 |
|
Aggregate
changes for preexisting warranties
|
|
|
0.6 |
|
|
|
– |
|
Balance
at end of period
|
|
$ |
136.0 |
|
|
$ |
145.8 |
|
Additionally,
customers may purchase a contract from the Company that extends product
protection beyond the standard product warranty period in the Company’s Marine
Engine, Boat and Fitness segments. 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 $39.7 million as of October 3,
2009, and $44.5 million as of September 27, 2008.
Legal
and Environmental
The
Company accrues for litigation exposure based upon its assessment, made in
consultation with counsel, of the likely range of exposure stemming from the
claim. In light of existing reserves, the Company’s litigation
claims, when finally resolved, will not, in the opinion of management, have a
material adverse effect on the Company’s consolidated financial
position. If current estimates for the cost of resolving any claims
are later determined to be inadequate, results of operations could be adversely
affected in the period in which additional provisions are required.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
Note
8 – Segment Data
Brunswick
is a manufacturer and marketer of leading consumer brands, and operates in four
reportable segments: Marine Engine, Boat, Fitness and Bowling &
Billiards. The Company’s segments are defined by management reporting
structure and operating activities.
During
the first quarter of 2009, the Company realigned the management of its marine
service, parts and accessories businesses. The Boat segment’s parts and
accessories businesses of Attwood, Land ‘N’ Sea, Benrock, Kellogg Marine and
Diversified Marine Products are now being managed by the Marine Engine segment’s
service and parts business leaders. As a result, the marine service, parts and
accessories operating results previously reported in the Boat segment are now
being reported in the Marine Engine segment. Segment results have been restated
for all periods presented to reflect the change in Brunswick’s reported
segments.
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. Marine
eliminations are eliminations between the Marine Engine and Boat segments for
sales transactions consummated at established arm’s length transfer
prices.
The
following table sets forth net sales and operating earnings (loss) of each of
the Company’s reportable segments for the three months ended October 3, 2009,
and September 27, 2008:
|
|
Net
Sales
|
|
|
Operating
Earnings (Loss)
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
(in
millions)
|
|
October
3,
2009
|
|
|
September
27,
2008
|
|
|
October
3,
2009
|
|
|
September
27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
Engine
|
|
$ |
363.5 |
|
|
$ |
515.2 |
|
|
$ |
(13.4 |
) |
|
$ |
(9.7 |
) |
Boat
|
|
|
118.2 |
|
|
|
314.2 |
|
|
|
(86.7 |
) |
|
|
(536.3 |
) |
Marine
eliminations
|
|
|
(20.1 |
) |
|
|
(63.4 |
) |
|
|
– |
|
|
|
– |
|
Total
Marine
|
|
|
461.6 |
|
|
|
766.0 |
|
|
|
(100.1 |
) |
|
|
(546.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fitness
|
|
|
126.8 |
|
|
|
161.6 |
|
|
|
12.5 |
|
|
|
10.3 |
|
Bowling
& Billiards
|
|
|
77.5 |
|
|
|
111.1 |
|
|
|
(3.8 |
) |
|
|
(10.4 |
) |
Eliminations
|
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
– |
|
|
|
– |
|
Corporate/Other
|
|
|
– |
|
|
|
– |
|
|
|
(18.0 |
) |
|
|
(20.2 |
) |
Total
|
|
$ |
665.8 |
|
|
$ |
1,038.8 |
|
|
$ |
(109.4 |
) |
|
$ |
(566.3 |
) |
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
The
following table sets forth net sales and operating earnings (loss) of each of
the Company’s reportable segments for the nine months ended October 3, 2009, and
September 27, 2008:
|
|
Net
Sales
|
|
|
Operating
Earnings (Loss)
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
(in
millions)
|
|
October
3,
2009
|
|
|
September
27,
2008
|
|
|
October
3,
2009
|
|
|
September
27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
Engine
|
|
$ |
1,122.6 |
|
|
$ |
1,867.4 |
|
|
$ |
(71.8 |
) |
|
$ |
82.8 |
|
Boat
|
|
|
462.3 |
|
|
|
1,471.5 |
|
|
|
(266.9 |
) |
|
|
(595.9 |
) |
Marine
eliminations
|
|
|
(71.2 |
) |
|
|
(270.6 |
) |
|
|
– |
|
|
|
– |
|
Total
Marine
|
|
|
1,513.7 |
|
|
|
3,068.3 |
|
|
|
(338.7 |
) |
|
|
(513.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fitness
|
|
|
350.4 |
|
|
|
467.7 |
|
|
|
13.0 |
|
|
|
26.6 |
|
Bowling
& Billiards
|
|
|
254.8 |
|
|
|
335.1 |
|
|
|
0.9 |
|
|
|
(29.3 |
) |
Eliminations
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
– |
|
|
|
– |
|
Corporate/Other
|
|
|
– |
|
|
|
– |
|
|
|
(57.5 |
) |
|
|
(57.4 |
) |
Total
|
|
$ |
2,118.8 |
|
|
$ |
3,871.0 |
|
|
$ |
(382.3 |
) |
|
$ |
(573.2 |
) |
The
following table sets forth total assets of each of the Company’s reportable
segments:
|
|
Total
Assets
|
|
(in
millions)
|
|
October
3,
2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
Marine
Engine
|
|
$ |
686.6 |
|
|
$ |
874.0 |
|
Boat
|
|
|
572.1 |
|
|
|
794.0 |
|
Total
Marine
|
|
|
1,258.7 |
|
|
|
1,668.0 |
|
|
|
|
|
|
|
|
|
|
Fitness
|
|
|
558.4 |
|
|
|
636.3 |
|
Bowling
& Billiards
|
|
|
296.1 |
|
|
|
340.8 |
|
Corporate/Other
|
|
|
767.2 |
|
|
|
578.8 |
|
Total
|
|
$ |
2,880.4 |
|
|
$ |
3,223.9 |
|
Note
9 – Investments
The
Company has certain unconsolidated international and domestic affiliates that
are accounted for using the equity method. See Note 11 – Financial Services
for more details on the Company’s joint venture, Brunswick Acceptance Company,
LLC (BAC). Refer to Note 8 to the consolidated financial statements in the 2008
Form 10-K for further detail relating to the Company’s investments.
In March
2008, Brunswick sold its interest in its bowling joint venture in Japan for
$40.4 million gross cash proceeds, $37.4 million net of cash paid for taxes and
other costs. For the nine months ended September 27, 2008, the sale resulted in
a $20.9 million pretax gain, $9.9 million after-tax, and was recorded in
Investment sale gain in the Consolidated Statements of Operations.
In
September 2008, Brunswick sold its investment in a foundry located in Mexico for
$5.1 million gross cash proceeds. The sale resulted in a $2.1 million pretax
gain and was recorded as Investment sale gains in the Consolidated Statements of
Operations.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
Note
10 – Comprehensive Income (Loss)
The
Company reports certain changes in equity during a period in accordance with ASC
220, “Comprehensive Income.” Accumulated other comprehensive loss
includes prior service costs and net actuarial gains and losses for defined
benefit plans; foreign currency cumulative translation adjustments; unrealized
derivative gains and losses; and investment gains and losses, all net of tax.
Changes in the components of other comprehensive income (loss) for the three
months and nine months ended October 3, 2009, and September 27, 2008, were as
follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(114.3 |
) |
|
$ |
(729.1 |
) |
|
$ |
(462.2 |
) |
|
$ |
(721.8 |
) |
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency cumulative translation
adjustment
|
|
|
11.5 |
|
|
|
(23.1 |
) |
|
|
14.1 |
|
|
|
(7.1 |
) |
Net
change in unrealized gains (losses) on
investments
|
|
|
0.1 |
|
|
|
(1.1 |
) |
|
|
2.6 |
|
|
|
(3.6 |
) |
Net
change in unamortized prior service cost
|
|
|
20.4 |
|
|
|
0.5 |
|
|
|
22.7 |
|
|
|
1.6 |
|
Net
change in unamortized actuarial loss
|
|
|
(11.1 |
) |
|
|
0.6 |
|
|
|
19.0 |
|
|
|
1.7 |
|
Net
change in accumulated unrealized
derivative
gains (losses)
|
|
|
1.7 |
|
|
|
2.8 |
|
|
|
(0.2 |
) |
|
|
6.1 |
|
Total
other comprehensive income (loss)
|
|
|
22.6 |
|
|
|
(20.3 |
) |
|
|
58.2 |
|
|
|
(1.3 |
) |
Comprehensive
loss
|
|
$ |
(91.7 |
) |
|
$ |
(749.4 |
) |
|
$ |
(404.0 |
) |
|
$ |
(723.1 |
) |
Note
11 – Financial Services
The
Company, through its Brunswick Financial Services Corporation (BFS) subsidiary,
owns a 49 percent interest in a joint venture, Brunswick Acceptance Company, LLC
(BAC). CDF Ventures, LLC (CDFV), a subsidiary of GE Capital Corporation (GECC),
owns the remaining 51 percent. BAC commenced operations in 2003 and provides
secured wholesale inventory floorplan financing to Brunswick’s boat and engine
dealers. BAC also purchased and serviced a portion of Mercury Marine’s domestic
accounts receivable relating to its boat builder and dealer customers, but
terminated this program on May 29, 2009, and the Company replaced this program
with a new facility discussed below and in Note 14 – Short-Term
Debt.
The term
of the joint venture extends through June 30, 2014. The joint venture
agreement contains provisions allowing for the renewal, purchase or termination
by either partner at the end of this term. Concurrent with finalizing the
amended and restated asset-based revolving credit facility (Revolving Credit
Facility) in the fourth quarter of 2008, the Company and CDFV amended the joint
venture agreement to conform to the minimum fixed-charges test contained in
the Revolving Credit Facility. Compliance with the fixed-charge test under
the joint venture agreement is only required when the Company’s available,
unused borrowing capacity under the Revolving Credit Facility is below $60
million. As available unused borrowing capacity under the Revolving Credit
Facility was above $60 million at the end of the third quarter of 2009, the
Company was not required to meet the minimum fixed-charge test.
BAC is funded in part
through a $1.0 billion secured borrowing facility from GE Commercial
Distribution Finance Corporation (GECDF), which is in place through the term of
the joint venture, and with equity contributions from both partners. BAC also
sells a portion of its receivables to a securitization facility, the GE Dealer
Floorplan Master Note Trust, which is arranged by GECC. The sales of these
receivables meet the requirements of a “true sale” under ASC 860, “Transfers and
Servicing”, and are therefore not retained on the financial statements of
BAC. The indebtedness of BAC is not guaranteed by the Company or any of its
subsidiaries. In addition, BAC is not responsible for any continuing servicing
costs or obligations with respect to the securitized receivables. BFS
and GECDF have an income sharing arrangement related to income generated from
the receivables sold by BAC to the securitization facility. The
Company records this income in Other income (expense), net, in the Consolidated
Statements of Operations.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
BFS’s
investment in BAC is accounted for by the Company under the equity method and is
recorded as a component of Investments in its Condensed Consolidated Balance
Sheets. The Company records BFS’s share of income or loss in BAC based on its
ownership percentage in the joint venture in Equity earnings (loss) in its
Consolidated Statements of Operations. BFS’s equity investment is
adjusted monthly to maintain a 49 percent interest in accordance with the
capital provisions of the joint venture agreement. The Company funds its
investment in BAC through cash contributions and reinvested earnings. BFS’s
total investment in BAC at October 3, 2009, and December 31, 2008, was $16.3
million and $26.7 million, respectively.
BFS
recorded income related to the operations of BAC of $0.7 million and $2.7
million for the three and nine months ended October 3, 2009, respectively.
During the three and nine months ended September 27, 2008, BFS recorded income
of $1.4 million and $7.1 million, respectively. These amounts include amounts
earned by BFS under the aforementioned income sharing agreement and the amounts
recorded under the equity method of accounting, but exclude the discount expense
paid by the Company on the sale of Mercury Marine’s accounts receivable to the
joint venture noted below.
There
were no accounts receivable sales to BAC during the three months ended October
3, 2009 due to the replacement of the program in May 2009. For the
nine months ended October 3, 2009, accounts receivable sales to BAC totaled
$186.4 million. For the comparable three and nine month periods in
2008, $164.2 million and $608.1 million of accounts receivable were sold to BAC.
Discounts of $0.0 and $1.3 million for the three and nine months ended October
3, 2009, respectively, have been recorded as an expense in Other income
(expense), net, in the Consolidated Statements of Operations. These amounts
compare with $1.3 million and $4.6 million for the same periods in the prior
year. Pursuant to the joint venture agreement, BAC reimbursed Mercury Marine
$0.9 million and $1.8 million for the nine months ended October 3, 2009, and
September 27, 2008, respectively, for the related credit, collection and
administrative costs incurred in connection with the servicing of such
receivables. On May 29, 2009, the Company entered into an asset-based lending
facility (Mercury Receivables ABL Facility) with GECDF to replace the Mercury
Marine accounts receivable sale program the Company had with BAC. See Note 14—Short-Term Debt for
more details on the Company’s Mercury Receivables ABL Facility. Concurrent with
entering into the Mercury Receivables ABL Facility, the Company repurchased
$84.2 million of accounts receivable from BAC on May 29, 2009. There was no
outstanding balance of receivables sold to BAC as of October 3, 2009. The
outstanding balance of receivables sold to BAC under the former Mercury Marine
accounts receivable sale program was $77.4 million as of December 31,
2008.
In
accordance with ASC 860, “Transfers and Servicing,” 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, and Accrued expenses in the Consolidated Balance
Sheets. As a result of the Mercury Receivables ABL Facility transaction noted
above, there is no outstanding retained interest recorded as of October 3, 2009.
At December 31, 2008, the Company had a retained interest of $41.0 million of
the total outstanding accounts receivable sold to BAC as a result of recourse
provisions. The Company’s maximum exposure as of December 31, 2008, related to
these amounts was $28.2 million. These balances are included in the
recourse obligations table in Note 7 – Commitments and
Contingencies.
Note
12 – Income Taxes
The
Company would ordinarily recognize a tax benefit on operating losses; however,
due to the Company’s recent cumulative losses for book purposes and the
uncertainty of the realization of certain deferred tax assets, the Company
continues to adjust its valuation allowances accordingly as the deferred tax
assets increase or decrease resulting in effectively no recorded federal tax
benefit. The Company is in a similar situation in certain state and
foreign taxing jurisdictions, but an income tax provision or benefit is still
required for those entities that are not in cumulative loss
positions. For the three and nine months ended October 3, 2009, the
resulting tax benefit recorded in jurisdictions that do not record full
valuation allowances was $0.2 million and $0.5 million,
respectively. The remaining tax benefit for the three months ended
October 3, 2009, and provision for the nine months ended October 3, 2009,
relates to items described below.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
During
the third quarter of 2009, the Company recognized a tax benefit of $21.6 million
on a loss before income taxes of $135.9 million for an effective tax rate of
15.9 percent. In periods in which there is a pretax operating loss and pretax
income in Other comprehensive income, the pretax income in Other comprehensive
income is considered a source of income and reduces a corresponding portion of
the valuation allowance. The reduction in the valuation allowance resulted in a
$9.4 million income tax benefit during the three months ended October 3,
2009. In addition, the Company filed its 2008 federal income tax
return in the third quarter of 2009, which generated a $10.3 million income tax
benefit for the quarter.
The
Company recognized an income tax provision of $9.5 million for the nine months
ended October 3, 2009 on losses before taxes of $452.7 million. The provision is
primarily due to uncertainty concerning the realization of certain state and
foreign net deferred tax assets, as prescribed by ASC 740, “Income Taxes.” A
valuation allowance of $36.6 million was recorded during the first quarter of
2009 to reduce certain state and foreign net deferred tax assets to their
anticipated realizable value. The remaining realizable value was determined by
evaluating the potential to recover the value of these assets through the
utilization of loss carrybacks. Partially offsetting this were the
items impacting the third quarter of 2009, noted above, that resulted in a tax
benefit for the nine month period ending October 3, 2009. The effective tax
rate, which is calculated as the income tax provision as a percent of pretax
losses, for the nine months ended October 3, 2009, was (2.0)
percent.
The
Company recognized an income tax provision for both the three months and nine
months ended September 27, 2008, despite losses before taxes for each of the
periods. The provision is primarily due to uncertainty concerning the
realization of certain net deferred tax assets, as prescribed by ASC
740. A valuation allowance of $292.7 million was recorded during the
third quarter of 2008 to reduce certain net deferred tax assets to their
anticipated realizable value. The remaining realizable value was
determined by evaluating the potential to recover the value of these assets
through the utilization of loss carrybacks and certain tax planning
strategies. The effective tax rate from continuing operations, which
is calculated as the income tax provision as a percent of pretax losses, for the
three months and nine months ended September 27, 2008 was (26.7) percent and
(26.9) percent, respectively.
As of
October 3, 2009, and December 31, 2008, the Company had approximately $42.6
million and $44.2 million of gross unrecognized tax benefits, including
interest. The Company believes it is reasonably possible that the total amount
of gross unrecognized tax benefits, as of October 3, 2009, could decrease by
approximately $12.3 million in the next 12 months due to 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 2009, but the amount cannot be
estimated.
The
Company recognizes interest and penalties related to unrecognized tax benefits
in income tax expense. As of October 3, 2009, and December 31, 2008, the Company
had approximately $6.3 million and $6.9 million accrued for the payment of
interest. There were no amounts accrued for penalties at October 3, 2009, or
December 31, 2008.
The Company is regularly
audited by federal, state and foreign tax authorities. The Company’s taxable
years 2004 through 2007 are currently open for IRS assessment. The IRS has
completed its field examination and has issued its Revenue Agents Report for
2004 and 2005 and all open issues have been resolved. The
statute of limitations for 2004 and 2005 expires in the fourth quarter of
2009. The IRS examination for 2006 and 2007 began in May
2009. 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 2002
taxable year. With the exception of Germany, where the Company is currently
undergoing a tax audit for taxable years 1998 through 2007, the Company is not
subject to income tax examinations by any other major foreign tax jurisdiction
for years prior to 2003. See Note 17 – Subsequent Events
for further discussion.
Note
13 – 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. The Company’s contributions to its defined contribution plans are
largely discretionary and are based on various percentages of compensation, and
in some instances are based on the amount of the employees’ contributions to the
plans. See Note 15 to the consolidated financial statements in the 2008 Form
10-K for further details regarding these plans.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
Pension
and other postretirement benefit costs included the following components for the
three months ended October 3, 2009, and September 27, 2008:
|
|
Pension
Benefits
|
|
|
Other
Postretirement
Benefits
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
(in
millions)
|
|
October
3,
2009
|
|
|
September
27,
2008
|
|
|
October
3,
2009
|
|
|
September
27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
2.3 |
|
|
$ |
3.8 |
|
|
$ |
(0.1 |
) |
|
$ |
0.7 |
|
Interest
cost
|
|
|
16.6 |
|
|
|
16.9 |
|
|
|
0.9 |
|
|
|
1.6 |
|
Expected
return on plan assets
|
|
|
(12.3 |
) |
|
|
(21.0 |
) |
|
|
– |
|
|
|
– |
|
Amortization
of prior service costs (credits)
|
|
|
0.9 |
|
|
|
1.6 |
|
|
|
(0.8 |
) |
|
|
(0.4 |
) |
Amortization
of net actuarial loss
|
|
|
13.0 |
|
|
|
0.9 |
|
|
|
– |
|
|
|
0.1 |
|
Curtailment
loss
|
|
|
6.6 |
|
|
|
– |
|
|
|
1.2 |
|
|
|
– |
|
Net
pension and other benefit costs
|
|
$ |
27.1 |
|
|
$ |
2.2 |
|
|
$ |
1.2 |
|
|
$ |
2.0 |
|
Pension
and other postretirement benefit costs included the following components for the
nine months ended October 3, 2009, and September 27, 2008:
|
|
Pension
Benefits
|
|
|
Other
Postretirement
Benefits
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
(in
millions)
|
|
October
3,
2009
|
|
|
September
27,
2008
|
|
|
October
3,
2009
|
|
|
September
27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
6.9 |
|
|
$ |
11.3 |
|
|
$ |
0.9 |
|
|
$ |
2.2 |
|
Interest
cost
|
|
|
49.8 |
|
|
|
50.7 |
|
|
|
3.9 |
|
|
|
4.9 |
|
Expected
return on plan assets
|
|
|
(36.6 |
) |
|
|
(63.0 |
) |
|
|
– |
|
|
|
– |
|
Amortization
of prior service costs (credits)
|
|
|
2.8 |
|
|
|
4.8 |
|
|
|
(1.4 |
) |
|
|
(1.3 |
) |
Amortization
of net actuarial loss
|
|
|
38.3 |
|
|
|
2.7 |
|
|
|
– |
|
|
|
0.1 |
|
Curtailment
loss
|
|
|
9.8 |
|
|
|
– |
|
|
|
1.2 |
|
|
|
– |
|
Net
pension and other benefit costs
|
|
$ |
71.0 |
|
|
$ |
6.5 |
|
|
$ |
4.6 |
|
|
$ |
5.9 |
|
Employer Contributions.
During the nine months ended October 3, 2009, and September 27, 2008, the
Company contributed $2.3 million and $1.7 million, respectively, to fund benefit
payments to its nonqualified pension plan. During the first nine months of 2009,
the Company contributed $10.0 million to its qualified pension plans. The
Company did not make any contributions to the qualified pension plans during the
nine months ended September 27, 2008. Company contributions are subject to
change based on market conditions and Company discretion.
Note
14 – Short-Term Debt
Short-term
debt at October 3, 2009, and December 31, 2008, consisted of the
following:
|
|
Oct.
3,
|
|
|
Dec.
31,
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Mercury
Receivables ABL Facility
|
|
$ |
– |
|
|
$ |
– |
|
Current
maturities of long-term debt
|
|
|
1.2 |
|
|
|
1.3 |
|
Other
short-term debt
|
|
|
10.3 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
Total
short-term debt
|
|
$ |
11.5 |
|
|
$ |
3.2 |
|
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
On May
29, 2009, the Company entered into the Mercury Receivables ABL Facility with GE
Commercial Distribution Finance Corporation (GECDF) to replace the Mercury
Marine accounts receivable sale program the Company had with Brunswick
Acceptance Company, LLC (BAC) as described in Note 11 – Financial
Services. The Mercury Receivables ABL Facility agreement
provides for a base level of borrowings of $100.0 million and is secured by the
domestic accounts receivable of Mercury Marine, a division of the Company, at a
borrowing rate, set at the beginning of each month, equal to the one-month LIBOR
rate plus 4.25%, provided, however, that the one-month LIBOR rate shall not be
less than 1.0%. Borrowings under the Mercury Receivables ABL Facility
can be adjusted to $120.0 million to accommodate seasonal increases in accounts
receivable from May to August. Borrowing availability under this
facility is subject to a borrowing base consisting of Mercury Marine domestic
accounts receivable, adjusted for eligibility requirements, with an 85% advance
rate. The Company may also borrow an additional $21.5 million in
excess of the borrowing base according to the over-advance feature through
November 2009, at which time the over-advance amount will decline ratably each
month through November 2010. Borrowings under the Mercury Receivables
ABL Facility are further limited to the lesser of the total amount available
under the Mercury Receivables ABL Facility or the Mercury Marine receivables,
excluding certain accounts, pledged as collateral against the Mercury
Receivables ABL Facility. The Mercury Receivables ABL Facility also
includes a financial covenant, which corresponds to the minimum fixed-charge
coverage covenant included in the Company’s revolving credit facility and the
BAC joint venture agreement described in Note 11 – Financial
Services. The Mercury Receivables ABL Facility’s term will
expire concurrently with the termination of BAC, by the Company with 90 days
notice or by GECDF upon the Company’s default under the Mercury Receivables ABL
Facility, including failure to comply with the facility’s financial covenant.
Initial borrowings under the Mercury Receivables ABL Facility were $81.1
million, but have since been repaid and the Company had no borrowings
outstanding at October 3, 2009.
Note
15 – Long-Term Debt
Long-term
debt at October 3, 2009, and December 31, 2008, consisted of the
following:
|
|
Oct.
3,
|
|
|
Dec.
31,
|
|
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Senior
notes, currently 11.25% due 2016, net of discount of
$10.2
and $0.0
|
|
$ |
339.8 |
|
|
$ |
– |
|
Senior
notes, currently 11.75% due 2013
|
|
|
237.9 |
|
|
|
250.0 |
|
Notes,
7.125% due 2027, net of discount of $0.9 and $0.9
|
|
|
199.1 |
|
|
|
199.1 |
|
Debentures,
7.375% due 2023, net of discount of $0.4 and $0.4
|
|
|
124.6 |
|
|
|
124.6 |
|
Notes,
1.82% to 4.0% payable through 2015
|
|
|
4.0 |
|
|
|
4.7 |
|
Notes,
5.0% due 2011, net of discount of $0.0 and $0.3
|
|
|
0.6 |
|
|
|
151.4 |
|
|
|
|
906.0 |
|
|
|
729.8 |
|
Current maturities
|
|
|
(1.2 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
904.8 |
|
|
$ |
728.5 |
|
|
|
|
|
|
|
|
|
|
On August
14, 2009, the Company completed the offering of a $350.0 million aggregate
principal amount of 11.25 percent senior secured notes due 2016 under a private
offering to qualified institutional buyers in accordance with Rule 144A, and to
persons outside the U.S. pursuant to Regulation S under the Securities Act of
1933, as amended. Interest will be paid semi-annually in arrears on
May 1 and November 1, commencing on November 1, 2009. A portion of
the proceeds from this offering were used to repurchase $149.4 million of the
Company’s outstanding $150.0 million principal amount 5 percent notes due 2011
and $12.1 million of its outstanding $250.0 million principal amount 11.75
percent Senior Notes due 2013. The remaining proceeds will be used
for general corporate purposes, which may include funding intermediate and
long-term financial obligations, including additional long-term debt retirements
or pension funding, reducing short-term borrowings, or supplementing its
liquidity. During the three and nine month periods ended October 3,
2009, approximately $0.1 million of extinguishment loss was recorded within
interest expense related to the repayments discussed above.
In
connection with the aforementioned offering of the 2016 secured notes, the
Company also amended its revolving credit facility to increase the amount of
permitted secured debt.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
Note
16 – Goodwill and Trade Name Impairments
Brunswick
accounts for goodwill and identifiable intangible assets in accordance with ASC
360 “Intangibles – Goodwill and Other.” Under this standard, Brunswick assesses
the impairment of goodwill and indefinite-lived intangible assets at least
annually and whenever events or changes in circumstances indicate that the
carrying value may not be recoverable.
During
the third quarter of 2008, Brunswick encountered a significant adverse change in
the business climate. A weak U.S. economy, soft housing markets and the
emergence of a global credit crisis have accelerated the reduction in demand for
certain Brunswick products. As a result of this reduced demand, along with
lower-than-projected profits across certain Brunswick brands and lower purchase
commitments received from its dealer network in the third quarter, management
revised its future cash flow expectations in the third quarter of 2008, which
lowered the fair value estimates of certain businesses.
As a
result of the lower fair value estimates, Brunswick concluded that the carrying
amounts of its Boat segment reporting unit and the Bowling Retail and Billiards
reporting units within the Bowling & Billiards segment exceeded their
respective fair values. As a result, the Company compared the implied fair value
of the goodwill in each reporting unit with the carrying value and recorded a
$374.0 million pretax impairment charge in the third quarter of 2008. The
Company has not recorded any goodwill impairment charges during the three months
and nine months ended October 3, 2009.
In
conjunction with the goodwill impairment testing, the Company analyzed the
valuation of its other indefinite-lived intangibles, consisting exclusively of
acquired trade names. Brunswick estimated the fair value of trade names by
performing a discounted cash flow analysis based on the relief-from-royalty
approach. This approach treats the trade name as if it were licensed by the
Company rather than owned, and calculates its value based on the discounted cash
flow of the projected license payments. The analysis resulted in a pretax trade
name impairment charge of $121.1 million in the third quarter of 2008,
representing the excess of the carrying cost of the trade names over the
calculated fair value. The Company has not recorded any trade name
impairment charges during the three months and nine months ended October 3,
2009.
The
following tables summarize the goodwill and trade name impairments:
|
|
September
27, 2008
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(in
millions)
|
|
Goodwill
|
|
|
Trade
Names
|
|
|
Goodwill
|
|
|
Trade
Names
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$ |
361.3 |
|
|
$ |
115.7 |
|
|
$ |
362.8 |
|
|
$ |
120.9 |
|
Marine
Engine
|
|
|
— |
|
|
|
4.5 |
|
|
|
— |
|
|
|
4.5 |
|
Bowling
& Billiards
|
|
|
12.7 |
|
|
|
0.9 |
|
|
|
14.4 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
374.0 |
|
|
$ |
121.1 |
|
|
$ |
377.2 |
|
|
$ |
133.9 |
|
Note
17 – Subsequent Events
Management
has evaluated and disclosed, as required, any subsequent events up to and
including November 5, 2009, the date of the filing of this report with the
Securities and Exchange Commission.
As a
result of a German tax audit for years 1998-2001, the Company's German
subsidiary received a proposed audit adjustment on October 27, 2009, related to
the shutdown of the subsidiary’s pinsetter manufacturing operation and sale of
the subsidiary's pinsetter assets to a related subsidiary. The Company is
evaluating this proposed tax audit adjustment and will prepare a response
contesting the proposed adjustment.
BRUNSWICK
CORPORATION
Notes
to Consolidated Financial Statements
(unaudited)
On
October 28, 2009, the Board of Directors of the Company declared a cash dividend
on its common stock of $0.05 cents per share. The dividend will be
payable on December 15, 2009, to shareholders of record on November 24,
2009.
During
October 2009, the Human Resources and Compensation Committee modified the May
2009 stock appreciation rights (SAR) award to reflect changes in the retirement
provisions. Specifically, award recipients will continue to vest in
accordance with the vesting schedule even upon termination if (A) the grantee
has attained age 62 or (B) the grantee’s age plus total years of service equals
70 or more. An additional component of the May 2009 SAR award
modification included a provision that would prorate the grant in the event of
termination prior to the first anniversary of the date of grant provided the
participant had met the appropriate retirement age definition of rule of 70 or
age 62.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Certain
statements in Management’s Discussion and Analysis are based on non-GAAP
financial measures. Specifically, the discussion of the Company’s cash flows
includes an analysis of free cash flows. GAAP refers to generally accepted
accounting principles in the United States. A “non-GAAP financial measure” is a
numerical measure of a registrant’s historical or future financial performance,
financial position or cash flows that excludes amounts, or is subject to
adjustments that have the effect of excluding amounts, that are included in the
most directly comparable measure calculated and presented in accordance with
GAAP in the Statement of operations, balance sheet or statement of cash flows of
the issuer; or includes amounts, or is subject to adjustments that have the
effect of including amounts, that are excluded from the most directly comparable
measure so calculated and presented. Operating and statistical measures are not
non-GAAP financial measures.
The
Company includes non-GAAP financial measures in Management’s Discussion and
Analysis, as Brunswick’s management believes that these measures and the
information they provide are useful to investors because they permit investors
to view Brunswick’s performance using the same tools that management uses and to
better evaluate the Company’s ongoing business performance.
Certain
other statements in Management’s Discussion and Analysis are forward-looking as
defined in the Private Securities Litigation Reform Act of 1995. These
statements are based on current expectations that are subject to risks and
uncertainties. Actual results may differ materially from expectations as of the
date of this filing because of factors identified in Item 1A – Risk
Factors.
During
the first quarter of 2009, the Company realigned the management of its marine
service, parts and accessories businesses. The Boat segment’s parts and
accessories businesses of Attwood, Land ‘N’ Sea, Benrock, Kellogg Marine and
Diversified Marine Products are now being managed as part of the Marine Engine
segment’s service and parts business. As a result, the marine service, parts and
accessories operating results previously reported in the Boat segment are now
being reported in the Marine Engine segment. Segment results have been restated
for all periods presented to reflect the change in Brunswick’s reported
segments.
Overview
and Outlook
General
Management
believes that the Company has adequate sources of liquidity to meet the
Company’s short-term and long-term needs. Management expects that the
Company’s interim cash requirements, which have declined due to lower spending,
will be met out of existing cash balances and cash flow. The Company
expects to end calendar year 2009 with solid levels of liquidity with the
possibility of modestly higher levels of net debt (defined as total debt, less
Cash and cash equivalents) than at the end of the third quarter.
Net sales
during the third quarter of 2009 decreased 36 percent to $665.8 million from
$1,038.8 million in the third quarter of 2008. During the nine months
ended October 3, 2009, net sales decreased 45 percent to $2,118.8 million from
$3,871.0 million during the nine months ended September 27, 2008. For
the three months and nine months ended October 3, 2009, the Company
reported lower global sales across all of its segments. Reduction in
marine industry demand and demand for other consumer discretionary products as a
result of a weak global economy, the credit market crisis, soft U.S. housing
markets, and decreased consumer confidence have all contributed to the decrease
in demand for the Company’s products and have lowered the Company’s net
sales. In addition, the Company has implemented an inventory
management and pipeline reduction strategy to produce fewer boat units than it
sells wholesale to dealers, and to sell to dealers wholesale at lower levels
than dealers are selling to customers at retail. While this strategy
is enabling the Company to reduce its overall boat and marine engine inventories
and has assisted our dealers in reducing the number of boats and engines in
stock to appropriate pipeline inventory levels, it has also resulted in greater
declines in wholesale sales compared with declines in retail
demand. The overall decline in net sales has led to lower fixed-cost
absorption, which has contributed to the decrease in Company earnings during the
quarter and year-to-date periods.
Retail
unit sales of powerboats in the United States have been declining since 2005,
with an increasing year-over-year rate of decline. This prolonged
downturn has negatively affected our dealers’ financial results, causing some
dealers to restructure their operations, close or file for
bankruptcy. This weak retail demand, and the resulting constraints on
dealers, have resulted in lower revenues in the Company’s Boat and Marine Engine
segments. In addition
to weak consumer demand, a constriction of the availability and increased cost
of floorplan financing has caused dealers to carry less inventory and has led to
a decrease in dealer wholesale orders. Several floorplan lenders have
exited the market, or taken steps to reduce their exposure, and other lenders
have imposed stricter lending criteria, which translate into higher costs for
dealers. Finally, the overall supply of boats available to the retail
market has been affected by units that are entering the system through
repossessions or liquidations, which has increased the need for discounts and
sales incentives to allow the Company to achieve its goal of reducing the number
of boats, particularly non-current product, in dealers’ stock. Lower
equipment orders from fitness and bowling product customers due to weak economic
conditions and customers’ reduced access to capital, along with lower consumer
spending on discretionary items such as fitness equipment and billiards tables,
have also led to lower Company sales.
Operating
losses in the third quarter of 2009 were $109.4 million with negative operating
margins of 16.4 percent. These results included $28.8 million of restructuring,
exit and impairment charges. In the three months ended September 27, 2008,
operating losses were $566.3 million, with negative operating margins of 54.5
percent, which included goodwill impairment charges of $374.0 million; trade
name impairment charges of $121.1 million; and restructuring, exit and
impairment charges of $39.1 million. Operating losses during the nine months
ended October 3, 2009 were $382.3 million, which included $103.9 million of
restructuring, exit and impairment charges, while operating losses during the
nine months ended September 27, 2008 were $573.2 million, which included
goodwill impairment charges of $377.2 million; trade name impairment charges of
$133.9 million; and restructuring, exit and impairment charges of $128.4
million.
The
smaller operating losses and negative operating margins during the third quarter
of 2009 compared with the third quarter of 2008 were primarily the result of the
absence of goodwill and trade name impairments, as well as successful
cost-reduction initiatives, as discussed in Note 2 – Restructuring
Activities in the Notes to Consolidated Financial Statements, and lower
restructuring, exit and impairment charges. The reductions were
partially offset by lower sales across all segments, reduced fixed-cost
absorption due to reduced production rates in the Company’s marine businesses in
an effort to achieve appropriate dealer pipeline inventory levels, higher
pension expense and increased dealer incentive programs as a percentage of
sales.
In March
2008, Brunswick sold its interest in its bowling joint venture in Japan for
$40.4 million gross cash proceeds, $37.4 million net of cash paid for taxes and
other costs. For the nine months ended September 27, 2008, the sale resulted in
a $20.9 million pretax gain, $9.9 million after-tax, and was recorded in
Investment sale gain in the Consolidated Statements of Operations.
In
September 2008, Brunswick sold its investment in a foundry located in Mexico for
$5.1 million gross cash proceeds. The sale resulted in a $2.1 million
pretax gain and was recorded as Investment sale gains in the Consolidated
Statements of Operations.
During
the third quarter of 2009, the Company recognized a tax benefit of $21.6 million
on a loss before income taxes of $135.9 million for an effective tax rate of
15.9 percent. In periods in which there is a pretax operating loss and pretax
income in Other comprehensive income, the pretax income in Other comprehensive
income is considered a source of income and reduces a corresponding portion of
the valuation allowance. The reduction in the valuation allowance resulted in a
$9.4 million income tax benefit during the three months ended October 3,
2009. In addition, the Company filed its 2008 federal income tax
return in the third quarter of 2009, which generated a $10.3 million income tax
benefit for the quarter.
The
Company recognized an income tax provision of $9.5 million for the nine months
ended October 3, 2009 on losses before taxes of $452.7 million. The provision is
primarily due to uncertainty concerning the realization of certain state and
foreign net deferred tax assets, as prescribed by ASC 740, “Income Taxes.” A
valuation allowance of $36.6 million was recorded during the first quarter of
2009 to reduce certain state and foreign net deferred tax assets to their
anticipated realizable value. The remaining realizable value was determined by
evaluating the potential to recover the value of these assets through the
utilization of loss carrybacks. Partially offsetting this were the
items impacting the third quarter of 2009, noted above, that resulted in a tax
benefit for the nine month period ending October 3, 2009. The effective tax
rate, which is calculated as the income tax provision as a percent of pretax
losses, for the nine months ended October 3, 2009, was (2.0)
percent.
The
Company recognized an income tax provision for both the three months and nine
months ended September 27, 2008, despite losses before taxes for each of the
periods. The provision is primarily due to uncertainty concerning the
realization of certain net deferred tax assets, as prescribed by ASC
740. A valuation allowance of $292.7 million was recorded
during
the third quarter of 2008 to reduce certain net deferred tax assets to their
anticipated realizable value. The remaining realizable value was
determined by evaluating the potential to recover the value of these assets
through the utilization of loss carrybacks and certain tax planning
strategies. The effective tax rate from continuing operations, which
is calculated as the income tax provision as a percent of pretax losses, for the
three months and nine months ended September 27, 2008 was (26.7) percent and
(26.9) percent, respectively.
Brunswick
has experienced continued losses through recent periods. While the
Company has a plan to restore itself to profitability, as discussed in Note 2 – Restructuring
Activities in the Notes to Consolidated Financial Statements, it has no
assurance that the plan will be achieved or that the Company will return to
profitability in the foreseeable future. As a result, the Company may
be required to take an impairment charge in the fourth quarter of 2009 as part
of its annual impairment testing for goodwill to the extent that the carrying
value of the reporting unit’s goodwill may not be recoverable. As of
October 3, 2009, the carrying value of goodwill at the Company’s Fitness and
Marine Engine segments was $272.4 million and $20.2 million,
respectively. While the Company does not believe it will incur an
impairment loss on its Marine Engine segment in the fourth quarter of 2009, a
reasonable possibility exists that an impairment loss might be required for the
Fitness segment. The Fitness segment’s fair value exceeded its
carrying value by approximately 10% during the testing performed in
2008. The outcome of the testing performed in the fourth quarter of
2009 will be largely dependent on the segment’s forecasted future cash flows and
the selection of an appropriate discount rate to apply to those future cash
flows. The Fitness segment’s fourth quarter has historically
represented approximately 50% of the segment’s operating earnings for the entire
year, and as a result, the operating earnings for the fourth quarter of 2009
will have a significant impact on the Company’s forecasted future cash flows
used in the 2009 annual goodwill impairment test.
Restructuring
Activities
In
November 2006, Brunswick announced restructuring initiatives to improve the
Company’s cost structure, better utilize overall capacity and improve general
operating efficiencies. These initiatives reflected the Company’s response to a
difficult marine market. As the marine market has continued to decline,
Brunswick expanded its restructuring activities across all business segments
during 2007, 2008 and 2009 in order to improve performance and better position
the Company for current market conditions and longer-term growth.
The
Company has classified its restructuring initiatives into three classifications:
exit activities; restructuring activities; and asset disposition actions. The
Company considers employee termination and other costs, lease exit costs,
inventory write-downs and facility shutdown costs related to the sale of certain
Baja boat business assets, the closure of its bowling pin manufacturing
facility, the sale of the Valley-Dynamo and Integrated Dealer Systems businesses
and the divestiture of MotoTron, a designer and supplier of engine control and
vehicle networking systems, to be exit activities. All other actions taken are
considered to be restructuring activities. Other employee termination costs,
costs to retain and relocate employees, consulting costs and costs to
consolidate the manufacturing footprint are considered restructuring activities.
Also, asset disposition actions primarily relate to sales of assets and
definite-lived impairments on fixed assets, tooling, patents and proprietary
technology, and dealer networks. See Note 2 – Restructuring Activities
in the Notes to Consolidated Financial Statements for further
details.
The
restructuring, exit and impairment charges taken during 2009 and 2008 for each
of the Company’s reportable segments are summarized below:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
Engine
|
|
$ |
18.8 |
|
|
$ |
14.1 |
|
|
$ |
40.1 |
|
|
$ |
33.2 |
|
Boat
|
|
|
6.6 |
|
|
|
14.6 |
|
|
|
49.5 |
|
|
|
59.3 |
|
Fitness
|
|
|
0.4 |
|
|
|
0.8 |
|
|
|
1.6 |
|
|
|
2.1 |
|
Bowling
& Billiards
|
|
|
0.8 |
|
|
|
1.8 |
|
|
|
4.8 |
|
|
|
17.9 |
|
Corporate
|
|
|
2.2 |
|
|
|
7.8 |
|
|
|
7.9 |
|
|
|
15.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
28.8 |
|
|
$ |
39.1 |
|
|
$ |
103.9 |
|
|
$ |
128.4 |
|
The
actions taken under these initiatives are expected to benefit future operations
by removing fixed costs in excess of $100 million from Cost of sales and in
excess of $320 million from Selling, general and administrative and Research and
development in the Consolidated Statements of Operations by the end of 2009
compared with 2007 spending levels. The majority of these cost reductions are
expected to be cash savings once all restructuring initiatives are complete. The
Company began to see savings related to these initiatives during 2008 and
expects further savings to be realized in 2009 and beyond.
The
Company anticipates that it will incur approximately $15 to $20 million of
additional costs, which are predominantly cash items, through the remainder of
2009 as related to the 2009 and 2008 restructuring initiatives; however, more
significant reductions in demand for the Company’s products may necessitate
additional restructuring or exit charges in 2009. The Company expects most of
the $15 to $20 million in charges will be incurred in the Boat and Marine Engine
segments.
Other
Operating
earnings and margins for 2009 are expected to continue to be adversely affected
by the reduction in production and wholesale shipments resulting from weak
demand and pipeline inventory reductions, as discussed above. These actions are
expected to have an unfavorable effect on margins due to reduced gross margins
on lower sales volumes and lower fixed-cost absorption on reduced production.
These reductions in sales demand and production volumes, and increased dealer
incentive program costs as a percentage of sales, are expected to lead to lower
earnings and margins in 2009 when compared with 2008 earnings and margins before
goodwill and trade name impairments. Additionally, in the fourth
quarter of 2008, the Company recorded an expense reduction of $81 million,
representing the reversal of variable compensation and benefit accruals that had
been recorded in each of the Company’s operating segments during the first three
quarters of 2008. As the Company is not presently anticipating the
benefit to be repeated in the fourth quarter of 2009, the absence of the
reversal of the variable compensation combined with the current year benefit
accrual will negatively impact 2009 earnings when compared to 2008
earnings.
The
Company expects $260 million of net cost reductions resulting from the full-year
effect of restructuring and cost reduction actions taken in 2008 and further
cost reduction activities implemented and planned in 2009 to partially offset
the factors described above. Also partially mitigating the impact of lower sales
and production is the effect of lower projected restructuring charges of
approximately $60 million in 2009 versus 2008. Further reductions in demand for
the Company’s products may necessitate additional restructuring, exit or
impairment charges in 2009. The Company continues to evaluate its
boat manufacturing footprint and brand portfolio in light of existing levels of
retail demand. The potential cash requirements and earnings impacts
associated with these actions have not been considered in the Company’s
forecasted restructuring, exit and impairment charges.
Matters
Affecting Comparability
The
following events have occurred during the three months and nine months ended
October 3, 2009 and September 27, 2008, which the Company believes affect the
comparability of the results of operations:
Restructuring, exit and impairment
charges. Brunswick announced initiatives to improve the Company’s cost
structure, better utilize overall capacity and improve general operating
efficiencies. During the third quarter of 2009, the Company recorded a charge of
$28.8 million related to restructuring activities as compared with $39.1 million
in the third quarter of 2008. Restructuring charges during the first nine months
of 2009 were $103.9 million, compared with $128.4 million during the first nine
months of 2008. See Note 2 –
Restructuring Activities in the Notes to Consolidated Financial
Statements for further details.
Goodwill impairment
charges. As a result of the continued reduction in demand for
certain Brunswick products, along with lower than projected profits across
certain Brunswick brands, management revised its future cash flow expectations
in the third quarter of 2008. The revised future cash flow expectations resulted
in the Company lowering its estimate of fair value of certain businesses and
required the Company to record a $374.0 million pretax goodwill impairment
charge during the third quarter of 2008, as prescribed by ASC 350, as compared
with no goodwill impairment charge during the third quarter of
2009.
During
the nine months ended September 27, 2008, the Company incurred $377.2 million of
goodwill impairment charges, which include the aforementioned $374.0 million,
along with impairments related to the analyses of its Baja boat business and its
Valley-Dynamo coin-operated commercial billiards business in the second quarter
of 2008. There were no comparable charges recognized during the nine months
ended October 3, 2009.
Trade name impairment
charges. In conjunction with the goodwill impairment testing,
the Company analyzed the valuation of its trade names in accordance with ASC
350. The analysis resulted in a pretax trade name impairment charge
of $121.1 million during the third quarter of 2008, representing the excess of
the carrying cost of the trade names over the calculated fair
value. There were no comparable charges recognized during the third
quarter of 2009.
During
the nine months ended September 27, 2008, the Company has recorded $133.9
million of trade name impairment charges, which include the aforementioned
$121.1 million and additional impairments related to its Bluewater Marine boat
business and its Valley-Dynamo coin-operated commercial billiards business
recorded in the second quarter of 2008, as compared with no trade name
impairments during the nine months ended October 3, 2009.
Investment sale gains. In March 2008, Brunswick
sold its interest in its bowling joint venture in Japan for $40.4 million gross
cash proceeds, $37.4 million net of cash paid for taxes and other costs. For the
nine months ended September 27, 2008, the sale resulted in a $20.9 million
pretax gain, $9.9 million after-tax, and was recorded in Investment sale gain in
the Consolidated Statements of Operations.
In
September 2008, Brunswick sold its investment in a foundry located in Mexico for
$5.1 million gross cash proceeds. The sale resulted in a $2.1 million pretax
gain and was recorded as Investment sale gains in the Consolidated Statements of
Operations.
There
were no comparable gains recognized during the three and nine month periods
ended October 3, 2009.
Tax Items. During the third
quarter of 2009, the Company recognized a tax benefit of $21.6 million on a loss
before income taxes of $135.9 million for an effective tax rate of 15.9 percent.
In periods in which there is a pretax operating loss and pretax income in Other
comprehensive income, the pretax income in Other comprehensive income is
considered a source of income and reduces a corresponding portion of the
valuation allowance. The reduction in the valuation allowance resulted in a $9.4
million income tax benefit during the three months ended October 3,
2009. In addition, the Company filed its 2008 federal income tax
return in the third quarter of 2009, which generated a $10.3 million income tax
benefit for the quarter.
The
Company recognized an income tax provision of $9.5 million for the nine months
ended October 3, 2009 on losses before taxes of $452.7 million. The provision is
primarily due to uncertainty concerning the realization of certain state and
foreign net deferred tax assets, as prescribed by ASC 740, “Income Taxes.” A
valuation allowance of $36.6 million was recorded during the first quarter of
2009 to reduce certain state and foreign net deferred tax assets to their
anticipated realizable value. The remaining realizable value was determined by
evaluating the potential to recover the value of these assets through the
utilization of loss carrybacks. Partially offsetting this were the
items impacting the third quarter of 2009, noted above, that resulted in a tax
benefit for the nine month period ending October 3, 2009. The effective tax
rate, which is calculated as the income tax provision as a percent of pretax
losses, for the nine months ended October 3, 2009, was (2.0)
percent.
The
Company recognized an income tax provision for both the three months and nine
months ended September 27, 2008, despite losses before taxes for each of the
periods. The provision is primarily due to uncertainty concerning the
realization of certain net deferred tax assets, as prescribed by ASC
740. A valuation allowance of $292.7 million was recorded during the
third quarter of 2008 to reduce certain net deferred tax assets to their
anticipated realizable value. The remaining realizable value was
determined by evaluating the potential to recover the value of these assets
through the utilization of loss carrybacks and certain tax planning
strategies. The effective tax rate from continuing operations, which
is calculated as the income tax provision as a percent of pretax losses, for the
three months and nine months ended September 27, 2008 was (26.7) percent and
(26.9) percent, respectively.
Results
of Operations
Consolidated
The
following table sets forth certain amounts, ratios and relationships calculated
from the Consolidated Statements of Operations for the three months
ended:
|
|
|
|
|
2009
vs. 2008
|
|
|
|
Three
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions, except per share data)
|
|
October
3,
2009
|
|
|
September
27,
2008
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
665.8 |
|
|
$ |
1,038.8 |
|
|
$ |
(373.0 |
) |
|
|
(35.9 |
)
% |
Gross
margin (A)
|
|
$ |
75.6 |
|
|
$ |
176.5 |
|
|
$ |
(100.9 |
) |
|
|
(57.2 |
)
% |
Goodwill
impairment charges
|
|
$ |
– |
|
|
$ |
374.0 |
|
|
$ |
(374.0 |
) |
|
NM
|
|
Trade
name impairment charges
|
|
$ |
– |
|
|
$ |
121.1 |
|
|
$ |
(121.1 |
) |
|
NM
|
|
Restructuring,
exit and impairment charges
|
|
$ |
28.8 |
|
|
$ |
39.1 |
|
|
$ |
(10.3 |
) |
|
|
(26.3 |
)
% |
Operating
loss
|
|
$ |
(109.4 |
) |
|
$ |
(566.3 |
) |
|
$ |
456.9 |
|
|
NM
|
|
Net
loss
|
|
$ |
(114.3 |
) |
|
$ |
(729.1 |
) |
|
$ |
614.8 |
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
loss per share
|
|
$ |
(1.29 |
) |
|
$ |
(8.26 |
) |
|
$ |
6.97 |
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expressed
as a percentage of Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
11.4 |
% |
|
|
17.0 |
% |
|
|
|
|
|
(560)
|
bpts |
Selling,
general and administrative expense
|
|
|
20.5 |
% |
|
|
17.1 |
% |
|
|
|
|
|
340
|
bpts |
Research
and development expense
|
|
|
2.9 |
% |
|
|
3.0 |
% |
|
|
|
|
|
(10)
|
bpts |
Goodwill
impairment charges
|
|
|
– |
|
|
|
36.0 |
% |
|
|
|
|
|
NM
|
|
Trade
name impairment charges
|
|
|
– |
|
|
|
11.7 |
% |
|
|
|
|
|
NM
|
|
Restructuring,
exit and impairment charges
|
|
|
4.3 |
% |
|
|
3.8 |
% |
|
|
|
|
|
50
|
bpts |
Operating
margin
|
|
|
(16.4 |
)% |
|
|
(54.5 |
)% |
|
|
|
|
|
NM
|
|
__________
bpts =
basis points
NM = not
meaningful
(A) Gross
margin is defined as Net sales less Cost of sales as presented in the
Consolidated Statements of Operations.
The
decrease in net sales was primarily due to reduced global demand levels across
all segments compared with the third quarter of 2008, most notably in the
recreational marine industry. Uncertainty in the global economy and increased
credit constraints that limit the Company’s customers’ and retail consumers’
purchasing power have curtailed both retail and wholesale activity. The
reduction in the Marine Engine segment’s net sales was less severe than the
percentage reduction in the Boat segment’s net sales in the third quarter of
2009 due to continued consumer purchases during the boating season from the
Marine Engine segment’s marine service, parts and accessories businesses.
International sales declines in the Marine Engine segment were also less severe
when compared with the Company’s Boat segment results in the third quarter of
2009. Net sales in the Fitness and Bowling & Billiards segments also
declined in the third quarter of 2009 as operators in these industries continue
to experience reduced access to capital, as well as remain cautious about making
capital purchases.
As a
result of the prolonged decline in marine retail demand and tighter credit
markets, a number of the Company’s dealers have filed for bankruptcy or
voluntarily ceased operations. During the three months ended October
3, 2009, the financial losses associated with repurchasing the Company’s product
from finance companies under contractual repurchase obligations, and reselling
the repurchased inventory to stronger dealers, have been approximately $1
million. If additional dealers file for bankruptcy or cease operations as
expected, additional losses associated with the repurchase of the Company’s
products will be incurred. As of October 3, 2009, the Company had
accruals totaling $12.0 million to cover losses associated with this
activity. In addition to these losses, Brunswick’s net sales and
earnings may be unfavorably affected as a result of lower market coverage and
the associated decline in sales.
The
decrease in gross margin percentage in the third quarter of 2009 compared with
the same period last year was primarily due to lower fixed-cost absorption and
inefficiencies due to reduced production rates as a result of the Company’s
effort to achieve appropriate levels of marine customer pipeline inventories in
light of lower retail demand, as well as higher pension expense and increased
dealer incentive programs as a percentage of sales. This decrease was partially
offset by successful cost-reduction efforts.
Selling,
general and administrative expense declined by $40.7 million to $136.7 million
in the third quarter of 2009 compared to the third quarter of
2008. The decrease was primarily a result of successful cost
reduction initiatives, partially offset by increased pension
expense.
The
Company recorded $10.3 million lower restructuring, exit and impairment charges
in the third quarter of 2009 when compared with the third quarter of 2008.
During the third quarter of 2009, the Company continued to reduce headcount
throughout the organization and pursue additional programs to realign the
Company’s cost structure and marine manufacturing footprint. During the third
quarter of 2009, the Company announced plans to consolidate engine production by
transferring sterndrive engine manufacturing operations from its Stillwater,
Oklahoma, plant to its Fond du Lac, Wisconsin plant, which currently produces
the Company’s outboard engines. This plant consolidation effort is
expected to occur through 2011. Additionally, the Company’s hourly
union workforce in Fond du Lac ratified a new collective bargaining agreement on
August 31, 2009, which resulted in net restructuring charges as a result of
changes to employees current and retirement benefits. The Company
continued to consolidate the Boat segment’s manufacturing footprint in
2009. During the third quarter of 2008, the Company announced the
closing of its boat production facilities in Pipestone, Minnesota; Roseburg,
Oregon; and Arlington, Washington. A fourth boat plant in Navassa, North
Carolina was mothballed. See
Note 2 – Restructuring Activities in the Notes to Consolidated Financial
Statements for further details.
The
smaller operating loss in the third quarter of 2009 compared with the third
quarter of 2008 was primarily due to the goodwill and trade name impairments
recorded in 2008, and the factors affecting gross margin and operating
expenses.
Equity
loss increased $2.8 million to a loss of $3.8 million in the third quarter of
2009 compared with a loss of $1.0 million in the third quarter of 2008. The
decrease in equity earnings was mainly the result of lower earnings from the
Company’s marine joint ventures.
During
the third quarter of 2008, Brunswick sold its investment in a foundry located in
Mexico for $5.1 million gross cash proceeds, which resulted in a $2.1 million
pretax gain, recorded in Investment sale gain. There was no
comparable transaction in the third quarter of 2009.
Interest
expense increased $11.0 million in the third quarter of 2009 compared with the
same period in 2008, primarily as a result of higher interest rates and
higher average debt levels resulting from debt refinancing activities in both
the third quarter of 2009 and the third quarter of 2008. See Note 15 – Long-Term Debt for
further discussion. Interest income decreased $1.8 million in the third quarter
of 2009 compared with the same period in 2008, primarily as a result of a
decline in interest rates on investments.
During
the third quarter of 2009, the Company recognized a tax benefit of $21.6 million
on a loss before income taxes of $135.9 million for an effective tax rate of
15.9 percent. In periods in which there is a pretax operating loss and pretax
income in Other comprehensive income, the pretax income in Other comprehensive
income is considered a source of income and reduces a corresponding portion of
the valuation allowance. The reduction in the valuation allowance resulted in a
$9.4 million income tax benefit during the three months ended October 3,
2009. In addition, the Company filed its 2008 federal income tax
return in the third quarter of 2009, which generated a $10.3 million income tax
benefit for the quarter. See Note 12 – Income Taxes for
further discussion.
During
the third quarter of 2008, the Company recognized a tax provision of $153.4
million on a loss before income taxes of $575.7 million for an effective tax
rate of (26.7) percent. The tax provision was mostly due to $294.8 million of
special tax provisions in the third quarter of 2008, primarily related to the
establishment of a deferred tax asset valuation allowance. See Note 12 – Income Taxes for
further discussion.
The
smaller net loss and diluted loss per share in the third quarter of 2009 when
compared with the third quarter of 2008 was primarily due to the same factors
discussed above in operating loss and income taxes. However, the lower net loss
was partially offset by increased equity losses from the Company’s joint
ventures and increased interest expense.
The
following table sets forth certain amounts, ratios and relationships calculated
from the Consolidated Statements of Operations for the nine months
ended:
|
|
|
|
|
2009
vs. 2008
|
|
|
|
Nine
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions, except per share data)
|
|
October
3,
2009
|
|
|
September
27,
2008
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,118.8 |
|
|
$ |
3,871.0 |
|
|
$ |
(1,752.2 |
) |
|
|
(45.3 |
)
% |
Gross
margin (A)
|
|
$ |
240.8 |
|
|
$ |
749.5 |
|
|
$ |
(508.7 |
) |
|
|
(67.9 |
)
% |
Goodwill
impairment charges
|
|
$ |
– |
|
|
$ |
377.2 |
|
|
$ |
(377.2 |
) |
|
NM
|
|
Trade
name impairment charges
|
|
$ |
– |
|
|
$ |
133.9 |
|
|
$ |
(133.9 |
) |
|
NM
|
|
Restructuring,
exit and impairment charges
|
|
$ |
103.9 |
|
|
$ |
128.4 |
|
|
$ |
(24.5 |
) |
|
|
(19.1 |
)
% |
Operating
loss
|
|
$ |
(382.3 |
) |
|
$ |
(573.2 |
) |
|
$ |
190.9 |
|
|
NM
|
|
Net
loss
|
|
$ |
(462.2 |
) |
|
$ |
(721.8 |
) |
|
$ |
259.6 |
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
loss per share
|
|
$ |
(5.23 |
) |
|
$ |
(8.18 |
) |
|
$ |
2.95 |
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expressed
as a percentage of Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
11.4 |
% |
|
|
19.4 |
% |
|
|
|
|
|
(800)
|
bpts |
Selling,
general and administrative expense
|
|
|
21.5 |
% |
|
|
15.1 |
% |
|
|
|
|
|
640
|
bpts |
Research
and development expense
|
|
|
3.1 |
% |
|
|
2.5 |
% |
|
|
|
|
|
60
|
bpts |
Goodwill
impairment charges
|
|
|
– |
|
|
|
9.8 |
% |
|
|
|
|
|
NM
|
|
Trade
name impairment charges
|
|
|
– |
|
|
|
3.5 |
% |
|
|
|
|
|
NM
|
|
Restructuring,
exit and impairment charges
|
|
|
4.9 |
% |
|
|
3.3 |
% |
|
|
|
|
|
160
|
bpts |
Operating
margin
|
|
|
(18.0 |
)% |
|
|
(14.8 |
)% |
|
|
|
|
|
(320)
|
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 Operations.
The
decreases in net sales, gross margin percentage and selling, general and
administrative expense were primarily due to the same factors as described in
the quarterly discussion.
The
Company recorded $24.5 million lower restructuring, exit and impairment charges
in the nine months ended October 3, 2009, when compared with the nine months
ended September 27, 2008. The charges during the first nine months of 2009 were
lower than those incurred during the first nine months of 2008, as the 2008
costs included significant charges related to definite-lived asset impairments
associated with the closing of its bowling pin manufacturing facility in Antigo,
Wisconsin; closing of its boat plant in Bucyrus, Ohio, in connection with the
divestiture of its Baja boat business; cessation of boat manufacturing at one of
its facilities in Merritt Island, Florida; mothballing its Swansboro, North
Carolina, boat plant; closing its production facility in Newberry, South
Carolina, due to the decision to cease production of its Bluewater Marine
brands, including Sea Pro, Sea Boss, Palmetto and Laguna; the write-down of
certain assets of the Valley-Dynamo coin-operated commercial billiards business;
the closing of its production facilities in Pipestone, Minnesota; Roseburg,
Oregon; and Arlington, Washington; and mothballing its Navassa, North Carolina,
boat plant. Restructuring, exit and impairment charges in the first nine months
of 2009 included definite-lived asset impairments and increased charges related
to headcount reductions, including the announced plans to consolidate engine
production by transferring sterndrive engine manufacturing operations from its
Stillwater, Oklahoma, plant to its Fond du Lac, Wisconsin plant, which currently
produces the Company’s outboard engines; the ratification of a new collective
bargaining agreement by the Company’s hourly union workforce; and the continued
consolidation of the Boat segment’s manufacturing footprint, when compared with
the nine months ended September 27, 2008. See Note 2 – Restructuring Activities
in the Notes to Consolidated Financial Statements for further
details.
The
smaller operating loss in the first nine months of 2009 compared with the
operating loss during the same period in the prior year was primarily due to the
same factors as described in the quarterly discussion.
Equity
earnings (loss) decreased $21.2 million to a loss of $11.1 million in the first
nine months of 2009 compared with earnings of $10.1 million in the first nine
months of 2008. The decrease in equity earnings was mainly the result of lower
earnings from the Company’s marine joint ventures.
During
the first nine months of 2008, Brunswick sold its interest in its bowling joint
venture in Japan for $40.4 million gross cash proceeds and in September 2008,
Brunswick sold its investment in a foundry located in Mexico for $5.1 million
gross cash proceeds. These sales resulted in $23.0 million of pretax
gains recorded in Investment sale gains. There were no comparable
transactions in 2009.
Interest
expense increased in the nine months ended October 3, 2009 compared with the
nine months ended September 27, 2008, primarily due to the same factors as
described in the quarterly discussion.
The
Company recognized an income tax provision of $9.5 million for the nine months
ended October 3, 2009 on losses before taxes of $452.7 million. The provision is
primarily due to uncertainty concerning the realization of certain state and
foreign net deferred tax assets, as prescribed by ASC 740, “Income Taxes.” A
valuation allowance of $36.6 million was recorded during the first quarter of
2009 to reduce certain state and foreign net deferred tax assets to their
anticipated realizable value. The remaining realizable value was determined by
evaluating the potential to recover the value of these assets through the
utilization of loss carrybacks. Partially offsetting this were the
items impacting the third quarter of 2009 that resulted in a tax benefit for the
nine month period ending October 3, 2009. The effective tax rate, which is
calculated as the income tax provision as a percent of pretax losses, for the
nine months ended October 3, 2009, was (2.0) percent. See Note 12 – Income Taxes for
further discussion.
The
Company recognized an income tax provision of $153.1 million for the nine months
ended September 27, 2008. The effective tax rate for the nine months ended
September 27, 2008 was (26.9) percent on operating losses, mostly due to $292.8
million of special tax provisions, primarily related to the establishment of a
deferred tax asset valuation allowance. See Note 12 – Income Taxes for
further discussion.
The lower
net loss and diluted loss per share in the first nine months of 2009 when
compared with the first nine months of 2008 was primarily due to the lower
goodwill and trade name impairment charges which occurred in
2008. Partially offsetting the lower net loss were the same factors
discussed above in operating loss, increased equity losses from the Company’s
joint ventures, increased interest expense and the absence of investment sale
gains.
Marine Engine
Segment
The
following table sets forth Marine Engine segment results for the three months
ended:
|
|
|
|
|
2009
vs. 2008
|
|
|
|
Three
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
363.5 |
|
|
$ |
515.2 |
|
|
$ |
(151.7 |
) |
|
|
(29.4 |
)% |
Trade
name impairment charges
|
|
$ |
– |
|
|
$ |
4.5 |
|
|
$ |
(4.5 |
) |
|
NM
|
|
Restructuring,
exit and impairment charges
|
|
$ |
18.8 |
|
|
$ |
14.1 |
|
|
$ |
4.7 |
|
|
|
33.3% |
|
Operating
loss
|
|
$ |
(13.4 |
) |
|
$ |
(9.7 |
) |
|
$ |
(3.7 |
) |
|
|
(38.1 |
)% |
Operating
margin
|
|
|
(3.7 |
)
% |
|
|
(1.9 |
) % |
|
|
|
|
|
(180)
|
bpts |
Capital
expenditures
|
|
$ |
3.6 |
|
|
$ |
6.9 |
|
|
$ |
(3.3 |
) |
|
|
(47.8 |
)% |
__________
NM = not
meaningful
Net sales
recorded by the Marine Engine segment decreased compared with the third quarter
of 2008, primarily due to the continued reduction in global marine retail demand
and the corresponding decline in wholesale shipments. Sales in the segment’s
domestic marine service, parts and accessories businesses, which represented 35
percent of the total segment sales for the quarter, were down only slightly for
the three months ended October 3, 2009, when compared with the three months
ended September 27, 2008, as consumers continued to make purchases during the
boating season.
The
restructuring, exit and impairment charges increased by $4.7 million during the
third quarter of 2009 when compared with the third quarter of 2008 due to
continued restructuring initiatives, including the announcement of the
consolidation of marine engine production in Fond du Lac, Wisconsin. See Note 2 – Restructuring
Activities in the Notes to Consolidated Financial Statements for further
details.
Marine
Engine segment operating loss increased in the third quarter of 2009 as a result
of lower sales volumes, reduced fixed-cost absorption on lower production, and
higher pension and bad debt expense. Lower fixed-cost absorption was
caused by the Company’s continued efforts to reduce inventory by reducing
production rates by approximately 35% compared with the same prior year
period. These additional costs were partially offset by the savings
from successful cost-reduction initiatives and favorable settlements reached
during the quarter.
Capital
expenditures in the third quarters of 2009 and 2008 were primarily related to
profit-maintaining investments and were lower during 2009 as a result of
discretionary capital spending constraints.
The
following table sets forth Marine Engine segment results for the nine months
ended:
|
|
|
|
|
2009
vs. 2008
|
|
|
|
Nine
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,122.6 |
|
|
$ |
1,867.4 |
|
|
$ |
(744.8 |
) |
|
|
(39.9 |
)% |
Trade
name impairment charges
|
|
$ |
– |
|
|
$ |
4.5 |
|
|
$ |
(4.5 |
) |
|
NM
|
|
Restructuring,
exit and impairment charges
|
|
$ |
40.1 |
|
|
$ |
33.2 |
|
|
$ |
6.9 |
|
|
|
20.8 |
% |
Operating
earnings (loss)
|
|
$ |
(71.8 |
) |
|
$ |
82.8 |
|
|
$ |
(154.6 |
) |
|
NM
|
|
Operating
margin
|
|
|
(6.4 |
)
% |
|
|
4.4 |
% |
|
|
|
|
|
NM
|
|
Capital
expenditures
|
|
$ |
8.3 |
|
|
$ |
20.7 |
|
|
$ |
(12.4 |
) |
|
|
(59.9 |
)% |
__________
NM = not
meaningful
The
factors that affected Marine Engine net sales, operating earnings (loss) and
capital expenditures for the year-to-date period were generally consistent with
those that affected the third quarter. Restructuring, exit and impairment
charges for the nine months ended October 3, 2009 were greater than the same
period in the prior year as a result of increased severance related
costs.
Boat
Segment
The
following table sets forth Boat segment results for the three months
ended:
|
|
|
|
|
2009
vs. 2008
|
|
|
|
Three
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
118.2 |
|
|
$ |
314.2 |
|
|
$ |
(196.0 |
) |
|
|
(62.4 |
)% |
Goodwill
impairment charges
|
|
$ |
– |
|
|
$ |
361.3 |
|
|
$ |
(361.3 |
) |
|
NM
|
|
Trade
name impairment charges
|
|
$ |
– |
|
|
$ |
115.7 |
|
|
$ |
(115.7 |
) |
|
NM
|
|
Restructuring,
exit and impairment charges
|
|
$ |
6.6 |
|
|
$ |
14.6 |
|
|
$ |
(8.0 |
) |
|
|
(54.8 |
)% |
Operating
loss
|
|
$ |
(86.7 |
) |
|
$ |
(536.3 |
) |
|
$ |
449.6 |
|
|
NM
|
|
Operating
margin
|
|
|
(73.4 |
)% |
|
NM
|
|
|
|
|
|
|
NM
|
|
Capital
expenditures
|
|
$ |
2.4 |
|
|
$ |
10.8 |
|
|
$ |
(8.4 |
) |
|
|
(77.8 |
)% |
__________
NM = not
meaningful
The
decrease in Boat segment net sales during the third quarter of 2009 was largely
the result of the continued reduction in marine retail demand in global markets
and lower shipments to dealers in an effort to achieve appropriate levels of
pipeline inventories, as well as higher dealer incentive programs and sales
discounts. Weak retail market conditions plus the Company’s objective
of protecting its dealer network resulted in units sold being reduced by
approximately 60% in the third quarter of 2009 compared with the same prior year
period.
The restructuring, exit and impairment charges recognized during the third
quarter of 2009 were primarily related to additional programs to realign the
Company’s marine manufacturing footprint, asset impairments and other
restructuring activities initiated in both 2008 and 2009. In the third quarter
of 2008, the Company recognized impairment charges on its goodwill and trade
names. There were no additional impairments to goodwill and trade
names during the third quarter of 2009. See Note 2 – Restructuring
Activities in the Notes to Consolidated Financial Statements for further
details.
The
reduced Boat segment operating loss in the third quarter of 2009 was primarily
the result of the absence of goodwill and trade name impairment charges, as well
as savings from successful cost-reduction initiatives. Factors
offsetting the decrease were lower sales volumes, and increased dealer incentive
programs as a percentage of sales to support retail demand. In addition, to
reduce the Company’s inventory, boat production rates were 70% below units
produced during the same period in the prior year, which was lower than the 60%
reduction in wholesale units sold to the Company’s dealer
network. This reduction in production during the third quarter of
2009 also resulted in lower fixed-cost absorption, which also unfavorably
impacted operating results during the quarter.
Capital
expenditures in the third quarters of 2009 and 2008 were largely related to
profit-maintaining investments. Capital spending was lower during 2009 as a
result of discretionary capital spending constraints.
The
following table sets forth Boat segment results for the nine months
ended:
|
|
|
|
|
2009
vs. 2008
|
|
|
|
Nine
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
462.3 |
|
|
$ |
1,471.5 |
|
|
$ |
(1,009.2 |
) |
|
|
(68.6 |
)% |
Goodwill
impairment charges
|
|
$ |
– |
|
|
$ |
362.8 |
|
|
$ |
(362.8 |
) |
|
NM
|
|
Trade
name impairment charges
|
|
$ |
– |
|
|
$ |
120.9 |
|
|
$ |
(120.9 |
) |
|
NM
|
|
Restructuring,
exit and impairment charges
|
|
$ |
49.5 |
|
|
$ |
59.3 |
|
|
$ |
(9.8 |
) |
|
|
(16.5 |
)% |
Operating
loss
|
|
$ |
(266.9 |
) |
|
$ |
(595.9 |
) |
|
$ |
329.0 |
|
|
NM
|
|
Operating
margin
|
|
|
(57.7 |
)% |
|
|
(40.5 |
)% |
|
|
|
|
|
NM
|
|
Capital
expenditures
|
|
$ |
8.4 |
|
|
$ |
33.1 |
|
|
$ |
(24.7 |
) |
|
|
(74.6 |
)% |
__________
NM = not
meaningful
The
factors affecting Boat segment net sales, restructuring, exit and impairment
charges, operating loss and capital expenditures for the year-to-date period
were generally consistent with the factors described in the quarterly period
above.
Fitness
Segment
The
following table sets forth Fitness segment results for the three months
ended:
|
|
|
|
|
2009
vs. 2008
|
|
|
|
Three
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
126.8 |
|
|
$ |
161.6 |
|
|
$ |
(34.8 |
) |
|
|
(21.5 |
)
% |
Restructuring,
exit and impairment charges
|
|
$ |
0.4 |
|
|
$ |
0.8 |
|
|
$ |
(0.4 |
) |
|
|
(50.0 |
)
% |
Operating
earnings
|
|
$ |
12.5 |
|
|
$ |
10.3 |
|
|
$ |
2.2 |
|
|
|
21.4 |
% |
Operating
margin
|
|
|
9.9 |
% |
|
|
6.4 |
% |
|
|
|
|
|
350
|
bpts |
Capital
expenditures
|
|
$ |
0.4 |
|
|
$ |
1.2 |
|
|
$ |
(0.8 |
) |
|
|
(66.7 |
)
% |
__________
bpts =
basis points
NM = not
meaningful
The
decrease in Fitness segment net sales was largely attributable to reduced volume
of worldwide commercial equipment sales, as gym and fitness club operators
delayed purchasing new equipment and deferred building new fitness centers as a
result of reduced credit availability to fitness center operators.
Despite
the impact of lower worldwide sales volumes of both commercial and consumer
equipment, savings from successful manufacturing and selling, general and
administrative cost-reduction initiatives, favorable customer and product mix,
as well as the absence of 2008 charges, resulted in increased operating earnings
for the three months ended October 3, 2009, when compared to the corresponding
period ended September 27, 2009.
Capital
expenditures in the third quarters of 2009 and 2008 were limited to
profit-maintaining investments and were lower during 2009 as a result of
discretionary capital spending constraints.
The
following table sets forth Fitness segment results for the nine months
ended:
|
|
|
|
|
2009
vs. 2008
|
|
|
|
Nine
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
350.4 |
|
|
$ |
467.7 |
|
|
$ |
(117.3 |
) |
|
|
(25.1 |
)
% |
Restructuring,
exit and impairment charges
|
|
$ |
1.6 |
|
|
$ |
2.1 |
|
|
$ |
(0.5 |
) |
|
|
(23.8 |
)
% |
Operating
earnings
|
|
$ |
13.0 |
|
|
$ |
26.6 |
|
|
$ |
(13.6 |
) |
|
|
(51.1 |
)
% |
Operating
margin
|
|
|
3.7 |
% |
|
|
5.7 |
% |
|
|
|
|
|
(200)
|
bpts |
Capital
expenditures
|
|
$ |
1.3 |
|
|
$ |
3.6 |
|
|
$ |
(2.3 |
) |
|
|
(63.9 |
)
% |
__________
bpts =
basis points
NM = not
meaningful
The
factors affecting Fitness segment net sales, restructuring, exit and impairment
charges, and capital expenditures for the year-to-date period were consistent
with the factors described in the quarterly period above.
The
Fitness segment operating earnings were negatively affected in the nine months
ended October 3, 2009 when compared with the nine months ended September 27,
2008 by lower worldwide sales volumes of both commercial equipment and consumer
equipment. The decrease in operating earnings was partially offset by
the savings from successful cost-reduction measures.
Bowling
& Billiards Segment
The
following table sets forth Bowling & Billiards segment results for the three
months ended:
|
|
|
|
|
2009
vs. 2008
|
|
|
|
Three
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
77.5 |
|
|
$ |
111.1 |
|
|
$ |
(33.6 |
) |
|
|
(30.2 |
)
% |
Goodwill
impairment charges
|
|
$ |
– |
|
|
$ |
12.7 |
|
|
$ |
(12.7 |
) |
|
NM
|
|
Trade
name impairment charges
|
|
$ |
– |
|
|
$ |
0.9 |
|
|
$ |
(0.9 |
) |
|
NM
|
|
Restructuring,
exit and impairment charges
|
|
$ |
0.8 |
|
|
$ |
1.8 |
|
|
$ |
(1.0 |
) |
|
|
(55.6 |
)
% |
Operating
loss
|
|
$ |
(3.8 |
) |
|
$ |
(10.4 |
) |
|
$ |
6.6 |
|
|
NM
|
|
Operating
margin
|
|
|
(4.9 |
)% |
|
|
(9.4 |
)% |
|
|
|
|
|
NM
|
|
Capital
expenditures
|
|
$ |
0.6 |
|
|
$ |
8.6 |
|
|
$ |
(8.0 |
) |
|
|
(93.0 |
)% |
__________
NM = not
meaningful
Bowling
& Billiards segment net sales were down from prior year primarily as a
result of lower sales from its Bowling Products business as new center
developments and upgrades to existing centers were delayed by proprietors due to
weak economic conditions and reduced access to capital. In addition, Bowling
retail sales were down primarily due to the loss of sales from divested centers
and lower sales from existing centers. Billiards sales also declined as
consumers continued to defer spending on discretionary items.
The
Bowling & Billiards segment incurred $1.0 million less restructuring, exit
and impairment charges during the third quarter of 2009 when compared with the
same period in the prior year.
The lower
operating loss during the third quarter of 2009 was the result of the absence of
$12.7 million and $0.9 million of goodwill and trade name impairment charges,
respectively, as well as savings from successful cost-reduction initiatives.
These factors were partially offset by the effect of lower sales and higher
pension expense during the third quarter of 2009 when compared with the same
prior year period.
Decreased
capital expenditures in 2009 were primarily driven by reduced spending for new
Brunswick Zone XL centers and constraints on capital spending for existing
centers.
The
following table sets forth Bowling & Billiards segment results for the nine
months ended:
|
|
|
|
|
2009
vs. 2008
|
|
|
|
Nine
Months Ended
|
|
|
Increase/(Decrease)
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
254.8 |
|
|
$ |
335.1 |
|
|
$ |
(80.3 |
) |
|
|
(24.0 |
)% |
Goodwill
impairment charges
|
|
$ |
– |
|
|
$ |
14.4 |
|
|
$ |
(14.4 |
) |
|
NM
|
|
Trade
name impairment charges
|
|
$ |
– |
|
|
$ |
8.5 |
|
|
$ |
(8.5 |
) |
|
NM
|
|
Restructuring,
exit and impairment charges
|
|
$ |
4.8 |
|
|
$ |
17.9 |
|
|
$ |
(13.1 |
) |
|
|
(73.2 |
)% |
Operating
earnings (loss)
|
|
$ |
0.9 |
|
|
$ |
(29.3 |
) |
|
$ |
30.2 |
|
|
NM
|
|
Operating
margin
|
|
|
0.4 |
% |
|
|
(8.7 |
)
% |
|
|
|
|
|
NM
|
|
Capital
expenditures
|
|
$ |
1.8 |
|
|
$ |
21.6 |
|
|
$ |
(19.8 |
) |
|
|
(91.7 |
)% |
__________
NM = not
meaningful
The
factors affecting Bowling & Billiards segment net sales, operating earnings
and capital expenditures for the year-to-date period were consistent with the
factors described in the quarterly period above. In addition to the factors
described above for restructuring, exit and impairment charges, during the nine
months ended September 27, 2008, the Bowling & Billiards Segment incurred
charges for asset write-downs related to the sale of its Valley-Dynamo
coin-operated commercial billiards operations, and charges related to the
closing of the segment’s bowling pin manufacturing facilities in Antigo,
Wisconsin.
Cash
Flow, Liquidity and Capital Resources
The
following table sets forth an analysis of free cash flow for the nine months
ended:
|
|
Nine
Months Ended
|
|
(in
millions)
|
|
Oct.
3,
2009
|
|
|
Sept.
27,
2008
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
130.1 |
|
|
$ |
20.2 |
|
Net
cash provided by (used for):
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(20.2 |
) |
|
|
(84.8 |
) |
Proceeds
from the sale of property, plant and equipment
|
|
|
11.7 |
|
|
|
9.6 |
|
Proceeds
from investment sale
|
|
|
– |
|
|
|
45.5 |
|
Other,
net
|
|
|
1.9 |
|
|
|
0.2 |
|
Free
cash flow *
|
|
$ |
123.5 |
|
|
$ |
(9.3 |
) |
*
|
The
Company defines “Free cash flow” as cash flow from operating and investing
activities (excluding cash used for investments) and excluding financing
activities. Free cash flow is not intended as an alternative measure of
cash flow from operations, as determined in accordance with generally
accepted accounting principles (GAAP) in the United States. The Company
uses this non-GAAP financial measure both in presenting its results to
shareholders and the investment community and in its internal evaluation
and management of its businesses. Management believes that this financial
measure and the information it provides are useful to investors because it
permits investors to view Brunswick’s performance using the same tool that
management uses to gauge progress in achieving its goals. Management
believes that Free cash flow is also useful to investors because it is an
indication of cash flow that may be available to fund further investments
in future growth initiatives.
|
Brunswick’s
major sources of funds for interim working capital requirements are cash
generated from operating activities, available cash balances and selected
borrowings. The Company evaluates potential acquisitions, divestitures and joint
ventures in the ordinary course of business.
In the
first nine months of 2009, net cash provided by operating activities totaled
$130.1 million, compared with net cash provided by operating activities of $20.2
million in the same period of 2008. Cash provided by operating activities during
2009 benefited from $314.3 million of changes in certain current assets and
current liabilities and a tax refund received in 2009 from the carryback of the
Company’s 2008 tax loss. These items were partially offset by the
Company’s net loss for the first nine months of 2009, which included non-cash
charges associated with pension expense, bad debt costs and a deferred tax asset
valuation allowance.
Changes
in certain current assets and current liabilities provided cash of $314.3
million for the nine months ended October 3, 2009, and were primarily the result
of reductions in the Company’s inventory and accounts receivable partially
offset by decreased accounts payable and lower accrued
expenses. These declines reflect the Company’s efforts to reduce
working capital in light of reduced business volumes. In 2008, the
changes in certain current assets and current liabilities used $113.9 million of
cash, driven by seasonal increases in inventory and accounts receivable as well
as lower accounts payable.
Also
included in cash flows from operating activities was the repurchase of $84.2
million of accounts receivable from Brunswick Acceptance Company, LLC on May 29,
2009, as part of its new asset-based lending facility (Mercury Receivables ABL
Facility). See Note
11—Financial Services and Note 14—Short-Term Debt for
more details on the Company’s sale of receivable program and Mercury Receivables
ABL Facility, respectively.
Cash
flows from investing activities included capital expenditures of $20.2 million
in the first nine months of 2009, which decreased from $84.8 million in the
first nine months of 2008. The majority of the capital expenditures in the first
nine months of 2009 were limited to profit-maintaining activities as a result of
discretionary capital spending constraints.
The
Company expects investments for capital expenditures in 2009 to be approximately
$30 to $35 million compared with $102.0 million in 2008 as discretionary capital
spending constraints will require the Company to focus primarily on investments
to maintain Company operations and position it to respond when marine markets
recover. The Company is projecting depreciation and amortization
expense for 2009 to be approximately $155 million compared with $177.2 million
for 2008.
Brunswick
did not complete any acquisitions during the first nine months of 2009 or 2008.
The Company’s investment in Brunswick Acceptance Company, LLC (BAC) decreased
$7.5 million and $21.1 million during the first nine months of 2009 and 2008,
respectively. The reduction in 2009 reflects a return of investment due to BAC’s
lower asset levels, whereas the decline in 2008 primarily reflects reduced
equity requirements resulting from an amendment of the joint venture’s capital
provisions.
In March
2008, the Company sold its investment in a bowling joint venture in Japan for
$40.4 million gross cash proceeds, $37.4 million net of cash paid for taxes and
other costs. See Note 9
–
Investments to
the Consolidated Financial Statements for details on the sale of this
investment, and Note 8 in the 2008 Form 10-K for further details on the
Company’s other investments.
In
September 2008, Brunswick sold its investment in a foundry located in Mexico for
$5.1 million gross cash proceeds. The sale resulted in a $2.1 million pretax
gain and was recorded as Investment sale gains in the Consolidated Statements of
Operations.
Cash
flows from financing activities provided $175.6 million during the first nine
months of 2009, primarily as a result of the new senior secured debt issuance,
as discussed in Note 15 –
Long-Term Debt, to the Consolidated Financial Statements. The proceeds
from the debt issuance were offset by the repurchase of long-term debt including
current maturities of $162.6 million. Cash flows from financing activities
compared with $0.3 million of cash used for financing activities during the same
period in 2008.
Cash and
cash equivalents totaled $624.1 million as of October 3, 2009, an increase of
$306.6 million from $317.5 million at December 31, 2008. Total debt as of
October 3, 2009, and December 31, 2008, was $916.3 million and $731.7 million,
respectively. Brunswick’s debt-to-capitalization ratio, calculated as the
Company’s total debt divided by the sum of the Company’s total debt and
shareholders’ equity, increased to 73.2 percent as of October 3, 2009, from 50.1
percent as of December 31, 2008.
On May
29, 2009, the Company entered into the Mercury Receivables ABL Facility with GE
Commercial Distribution Finance Corporation (GECDF) to replace the Mercury
Marine accounts receivable sale program the Company had with Brunswick
Acceptance Company, LLC (BAC) as described in Note 11—Financial
Services. The Mercury Receivables ABL Facility agreement
provides for a base level of borrowings of $100.0 million that are secured by
the domestic accounts receivable of Mercury Marine, a division of the Company,
at a borrowing rate, set at the beginning of each month, equal to the one-month
LIBOR rate plus 4.25%, provided, however, that the one-month LIBOR rate shall
not be less than 1.0%. Borrowings under the Mercury Receivables ABL
Facility can be adjusted to $120.0 million to accommodate seasonal increases in
accounts receivable from May to August. Borrowing availability under
this facility is subject to a borrowing base consisting of Mercury Marine
domestic accounts receivable, adjusted for eligibility requirements, with an 85%
advance rate. The Company may also borrow an additional $21.5 million
in excess of the borrowing base according to the over-advance feature through
November 2009, at which time the over-advance amount will decline ratably each
month through November 2010. Borrowings under the Mercury Receivables
ABL Facility are further limited to the lesser of the total amount available
under the Mercury Receivables ABL Facility or the Mercury Marine receivables,
excluding certain accounts, pledged as collateral against the Mercury
Receivables ABL Facility. The Mercury Receivables ABL Facility also
includes a financial covenant, which corresponds to the minimum fixed-charge
coverage covenant included in the Company’s revolving credit facility and the
BAC joint venture agreement described in Note 11 – Financial
Services. The Mercury Receivables ABL Facility’s term will
expire concurrently with the termination of BAC, by the Company with 90 days
notice or by GECDF upon the Company’s default under the Mercury Receivables ABL
Facility, including failure to comply with the facility’s financial covenant.
Initial borrowings under the Mercury Receivables ABL Facility were $81.1
million. During the third quarter of 2009, the Company reduced
borrowings under this facility by $73.9 million, and ended the period with no
borrowings under this facility. The amount of borrowing capacity
available under this facility at October 3, 2009 was $60.0 million.
The
Company has a $400.0 million secured, asset-based revolving credit facility
(Revolving Credit Facility) in place with a group of banks through May 2012, as
described in Note 14 to the consolidated financial statements in the 2008 Form
10-K. There were no loan borrowings under the Revolving Credit Facility in the
first nine months of 2009 or 2008. The Company has the ability to issue up to
$150.0 million in letters of credit under the Revolving Credit Facility. The
Company pays a facility fee of 75 to 100 basis points per annum, which is based
on the daily average utilization of the Revolving Credit Facility.
The
Company may borrow amounts under the Revolving Credit Facility equal to the
value of the borrowing base, which consists of certain accounts receivable,
inventory and machinery and equipment of the Company and certain of its domestic
subsidiaries. This borrowing base had a value of $199.5 million as of
October 3, 2009. The Company had no borrowings outstanding under the
facility as of the end of the third quarter, or at any time during
2009. Letters of credit outstanding under the facility were $84.0
million as of October 3, 2009, resulting in unused borrowing capacity of $115.5
million. However, the Company’s borrowing capacity is also affected
by the facility’s minimum fixed-charge ratio covenant. This covenant
requires that the Company meet a minimum fixed charge ratio test only if unused
borrowing capacity under the facility falls below $60 million. If
unused borrowing capacity under the facility exceeds $60 million, the Company
need not meet the minimum fixed charge ratio. Due to current
operating performance, the Company’s fixed charge ratio was below the minimum
requirement at the end of the third quarter of 2009. However, because
the Company’s unused borrowing capacity under the Revolving Credit Facility
exceeded $60 million at the end of the third quarter, the Company is in
compliance with the covenant. Taking into account the minimum
availability requirement, the Company’s unused borrowing capacity is effectively
reduced by $60 million to $55.5 million in order to maintain compliance with the
covenant.
The
Company expects unused borrowing capacity under the facility to continue to
exceed $60 million (and therefore to be in compliance with the minimum
fixed-charges covenant) in the future. Net borrowing capacity will
continue to be reduced by the $60 million minimum availability requirement as
the Company will likely not meet the minimum fixed charge ratio test for the
remainder of 2009 and into 2010. The Company’s effective unused
borrowing capacity is expected to be approximately $60 million at December 31,
2009.
Management
believes that the Company has adequate sources of liquidity to meet the
Company’s short-term and long-term needs. Management expects that the
Company’s near-term operating cash requirements, which have declined due to
lower spending, will be met out of existing cash balances and cash flow, and no
cash borrowings are expected under the facility. During the three
months ended October 3, 2009, the Company satisfied the requirement under the
facility that the Company’s $150 million, 5% notes due in May 2011 be retired by
the end of 2010. Additionally, the Company anticipates receiving
various state and local incentives (some of which will be in the form of debt,
some portion of which may be forgivable if the Company meets certain
requirements) in connection with its plant consolidation activities in Fond du
Lac, Wisconsin, as described in Note 2 – Restructuring
Activities. Receipt of these incentives is projected to begin
occurring in the fourth quarter of 2009.
Continued
weakness in the marine marketplace can jeopardize the financial stability of the
Company’s dealers. Specifically, dealer inventory levels may be higher than
desired, inventory may be aging beyond preferred levels and dealers may
experience reduced cash flow. These factors may impair a dealer’s ability to
meet payment obligations to Brunswick or to third-party financing sources and
obtain financing for new product. If a dealer is unable to meet its obligations
to third-party financing sources, Brunswick may be required to repurchase a
portion of its own products from these third-party financing sources. See Note 7 – Commitments and
Contingencies in the Notes to Consolidated Financial Statements for
further details.
The
Company contributed $2.3 million and $1.7 million to fund benefit payments in
its nonqualified pension plan in the first nine months of 2009 and 2008,
respectively. The Company contributed $10.0 million to its qualified pension
plans during the nine months ended October 3, 2009. The Company did
not make contributions to its qualified pension plans in the first nine months
of 2008. The Company does not expect to contribute additional funds to its
qualified plans in 2009 and did not make contributions to those plans in the
fourth quarter of 2008. Company contributions are subject to change
based on market conditions and Company discretion. See Note 13 – Pension and Other
Postretirement Benefits in the Notes to Consolidated
Financial Statements and Note 15 to the consolidated financial statements in the
2008 Form 10-K for more details.
Financial
Services
See Note 11 – Financial Services
in the Notes to Consolidated Financial Statements for a discussion on
BAC, the Company’s joint venture with CDF Ventures, LLC, a subsidiary of GE
Capital Corporation.
Off-Balance
Sheet Arrangements and Contractual Obligations
The
Company’s off-balance sheet arrangements and contractual obligations are
detailed in the 2008 Form 10-K. With the exception of the elimination of the
Company’s retained interest associated with its former sale of receivable
program described in Note
11—Financial Services, there have been no material changes outside the
ordinary course of business. The company periodically evaluates its
financing options, and as a result, issued notes due in 2016 and retired a
portion of the 2011 and 2013 notes as described in Note 15 - Long-Term Debt.
Environmental
Regulation
In its
Marine Engine segment, Brunswick plans to 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 the cost of compliance with federal, state and local environmental laws
will have a material adverse effect on Brunswick’s competitive
position.
Critical
Accounting Policies
As
discussed in the 2008 Form 10-K, the preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make certain estimates and assumptions that
affect the amount of reported assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and revenues and expenses during the periods
reported. Actual results may differ from those
estimates.
There
were no material changes in the Company’s critical accounting policies since the
filing of its 2008 Form 10-K.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141(R), “Business Combinations”
(SFAS 141(R)) (codified within the Accounting Standards Codification (ASC) Topic
805). SFAS 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, the goodwill acquired and any noncontrolling
interest in the acquiree. This statement also establishes disclosure
requirements to enable the evaluation of the nature and financial effect of the
business combination. SFAS 141(R) is effective for fiscal years beginning on or
after December 15, 2008. The adoption of this statement did not have
a material impact on the Company’s consolidated results of operations and
financial condition, but will impact future acquisitions.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (SFAS 160)
(codified within ASC Topic 810). 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 adoption of this statement did not have
a material impact on the Company’s consolidated results of operations and
financial condition.
In March
2008, the FASB issued SFAS No. 161, “Disclosures About Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133” (SFAS 161) (codified within ASC Topic 815). SFAS 161 is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance, and cash flows. SFAS 161 is effective for fiscal years beginning
after November 15, 2008. The adoption of this statement resulted
in the Company expanding its disclosures relative to its derivative instruments
and hedging activity, as reflected in Note 3 – Financial
Instruments.
In
December 2008, the FASB issued FASB Staff Position (FSP) FAS 132(R)-1,
“Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP FAS
132(R)-1) (codified within ASC Topic 715). FSP FAS 132(R)-1 amends SFAS
No. 132 (Revised 2003), “Employers’ Disclosures about Pensions and Other
Postretirement Benefits,” to provide guidance on an employer’s disclosures about
plan assets of a defined benefit pension or other postretirement plan. FSP FAS
132(R)-1 is effective for fiscal years ending after December 15, 2009. The
Company is currently evaluating the impact that the adoption of FSP FAS 132(R)-1
may have on the Company’s consolidated financial statements.
In
June 2008, the FASB issued FSP Emerging Issues Task Force (EITF)
No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities,” (FSP EITF 03-6-1) (codified within
ASC Topic 260). FSP EITF 03-6-1 requires that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class method. FSP EITF
03-6-1 is effective for fiscal years beginning after December 15, 2008, and
interim periods within those years, and requires that all prior period earnings
per share data presented be adjusted retrospectively to conform to its
provisions. The adoption of this statement did not have a material impact on the
Company’s consolidated results of operations and financial
condition.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation
of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2) (codified
within ASC Topic 320). FSP FAS 115-2 and FAS 124-2 change the method for
determining whether an other-than-temporary impairment exists for debt
securities and the amount of the impairment to be recorded in earnings. FSP FAS
115-2 and FAS 124-2 are effective for interim and annual periods ending after
June 15, 2009. The adoption of these statements did not have a material impact
on the Company’s consolidated results of operations and financial
condition.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1) (codified
within ASC Topic 825). FSP FAS 107-1 and APB 28-1 require fair value disclosures
in both interim as well as annual financial statements in order to provide more
timely information about the effects of current market conditions on financial
instruments. FSP FAS 107-1 and APB 28-1 are effective for interim and annual
periods ending after June 15, 2009. The Company has included the required
disclosures beginning with its second quarter ending on July 4,
2009.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS 165) (codified
within ASC Topic 855). SFAS 165 establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. Specifically,
SFAS 165 sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS 165 is effective prospectively for
interim and annual periods ending after June 15, 2009. The adoption of this
statement did not have a material impact on the Company’s consolidated results
of operations and financial condition as management followed a similar approach
prior to the adoption of this standard. See Note 17 – Subsequent Events
for further discussion.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets” (SFAS 166) (not yet codified under the ASC). SFAS 166 amends the
derecognition guidance in SFAS No. 140, “Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities” (SFAS No. 140). SFAS 166
is effective for fiscal years beginning after November 15, 2009. The Company is
currently evaluating the impact that the adoption of SFAS 166 may have on the
Company’s consolidated financial statements.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (SFAS 167) (not yet codified under the ASC). SFAS 167 amends the
consolidation guidance applicable to variable interest entities and affects the
overall consolidation analysis under FASB Interpretation No. 46(R). SFAS 167 is
effective for fiscal years beginning after November 15, 2009. The Company is
currently evaluating the impact that the adoption of SFAS 167 may have on the
Company’s consolidated financial statements.
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles – a replacement of
FASB Statement No. 162” (SFAS 168) (codified within ASC Topic 105). SFAS 168
stipulates the FASB Accounting Standards Codification is the source of
authoritative U.S. GAAP recognized
by the FASB to be applied by nongovernmental entities. SFAS 168 is effective for
interim and annual periods ending after September 15, 2009. In
conjunction with the issuance
of SFAS 168, the SEC issued interpretive guidance Final Rule 80 (FR-80)
regarding FASB’s Accounting Standards Codification. Under FR-80, the SEC
clarified that the ASC is not the authoritative source for SEC guidance and that
the ASC does not supersede any SEC rules or regulations. Further, any references
within the SEC rules and staff guidance to specific standards under U.S. GAAP
should be understood to mean the corresponding reference in the ASC. FR-80 is
also effective for interim and annual periods ending after September 15, 2009.
The adoption of these pronouncements did not have a material impact on the
Company’s consolidated results of operations and financial
condition. The Company began using the FASB Accounting Standards
Codification as its source of authoritative U.S. GAAP beginning with the third
quarter ending on October 3, 2009.
In August
2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, “Measuring
Liabilities at Fair Value” (ASU 2009-05) (codified within ASC Topic 820). ASU
2009-05 amends the fair value and measurement topic to provide guidance on the
fair value measurement of liabilities. ASU 2009-05 is effective for interim and
annual periods beginning after August 26, 2009. The Company is currently
evaluating the impact that the adoption of the amendments to the FASB Accounting
Standards Codification resulting from ASU 2009-05 may have on the Company’s
consolidated financial statements.
In
September 2009, the FASB issued ASU No. 2009-12, “Investments in Certain
Entities That Calculate Net Asset Value per Share (or its Equivalent)” (ASU
2009-12) (codified within ASC Topic 820). ASU 2009-12 amends the input
classification guidance under ASC Topic 820. ASU 2009-12 is effective for
interim and annual periods ending after December 15, 2009. The Company is
currently evaluating the impact that the adoption of the amendments to the FASB
Accounting Standards Codification resulting from ASU 2009-12 may have on the
Company’s consolidated financial statements.
In
October 2009, the FASB issued ASU No. 2009-13, “Multiple Deliverable Revenue
Arrangements - a consensus of the FASB Emerging Issues Task Force” (ASU 2009-13)
(codified within ASC Topic 605). ASU 2009-13 addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services (deliverables) separately rather than as a combined unit. ASU 2009-13
is effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010, with early
adoption permitted. The Company is currently evaluating the impact that the
adoption of the amendments to the FASB Accounting Standards Codification
resulting from ASU 2009-13 may have on the Company’s consolidated financial
statements.
Forward-Looking
Statements
Certain
statements in this Quarterly Report on Form 10-Q are forward-looking as defined
in the Private Securities Litigation Reform Act of 1995. These statements
involve certain risks and uncertainties that may cause actual results to differ
materially from expectations as of the date of this filing. These risks include,
but are not limited to: the effect of adverse general economic conditions,
particularly in the United States and Europe; the effect of tight consumer
credit markets on demand for marine products; our ability to maintain effective
distribution; inventory reductions by major dealers, retailers and independent
boat builders; the effect of an excess in the supply of repossessed boats on
industry pricing; our ability to meet repurchase and recourse obligations to
third parties arising out of dealer defaults; the ability of our dealers and
distributors to secure adequate access to capital; the possibility that those
lending institutions that provide financing to our dealers and distributors will
cease providing such financing; the adequacy and the cost of our restructuring
initiatives; the effect of having an impairment in the carrying value of
goodwill, trade names and other long-lived assets on our consolidated results of
operations and net worth; our ability to maintain a large fixed cost base; our
ability to establish a smaller manufacturing footprint; our ability to
successfully implement our restructuring initiatives; our reliance on third
party suppliers for the supply of raw material, parts and components necessary
to assemble our products; the effects of our pension funding requirements; the
higher costs of energy on our marine and bowling retail center businesses;
competitive pricing and other pressures; the success and the introduction of new
products; our ability to compete with other activities for consumers’ scarce
discretionary income and leisure time; our success in maintaining the continued
strength of our brands; our ability to maintain the services of key individuals
and relationships; our exposure to product liability, warranty liability,
personal injury and property damage claims; environmental and zoning
requirements; our ability to comply with environmental regulations for marine
engines; our compliance obligations and liabilities under environmental and
other laws and regulations; our ability to adequately protect our intellectual
property; the effect of our joint ventures on our business; changes in currency
exchange rates; the effect of international sources of revenue on our business;
and the effect of adverse weather conditions on our marine and retail bowling
center revenues. Additional factors are included in the Company's
Annual Report on Form 10-K for 2008 and elsewhere in this report.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Brunswick
is exposed to market risk from changes in foreign currency exchange rates,
interest rates and commodity prices. The Company enters into various
hedging transactions to mitigate these risks in accordance with guidelines
established by the Company’s management. The Company does not use
financial instruments for trading or speculative purposes. The
Company’s risk management objectives are described in Note 3 – Financial
Instruments in the Notes to Consolidated Financial Statements
and Notes 1 and 12 to the consolidated financial statements in the 2008 Form
10-K.
Item
4. Controls and Procedures
The Chief
Executive Officer and the Chief Financial Officer of the Company (its principal
executive officer and principal financial officer, respectively) have evaluated
the Company’s disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
quarterly report. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective. There were no changes in the
Company’s internal control over financial reporting during the fiscal quarter
covered by this report that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
PART
II – OTHER INFORMATION
Item
1A. Risk
Factors
Brunswick’s
operations and financial results are subject to various risks and uncertainties
that could adversely affect the Company’s business, financial condition, results
of operations, cash flows, and the trading price of Brunswick’s common
stock. Such risk factors are included in the Company's Annual Report
on Form 10-K for 2008 and in the Company’s Quarterly Report on Form 10-Q for the
second quarter of 2009.
Item
2. Unregistered Sales of
Equity Securities and Use of Proceeds
On May 4,
2005, Brunswick’s Board of Directors authorized a $200.0 million share
repurchase program to be funded with available cash. On April 27, 2006, the
Board of Directors increased the Company’s remaining share repurchase
authorization of $62.2 million to $500.0 million. As of October 3, 2009, the
Company’s remaining share repurchase authorization for the program was $240.4
million. The plan has been suspended as the Company intends to retain cash to
enhance its liquidity rather than to repurchase shares. There were no
share repurchases during the three months ended October 3,
2009.
Item
6. Exhibits
10.1
|
May
2009 Stock-Settled Stock Appreciation Rights Grant Terms and Conditions
Pursuant to the Brunswick Corporation 2003 Stock Incentive
Plan
|
31.1
|
Certification
of CEO Pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
Certification
of CFO Pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of
2002
|
32.1
|
Certification
of CEO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
Certification
of CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of
2002
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Brunswick
Corporation |
|
|
|
|
|
November
5, 2009
|
By:
|
/s/ ALAN
L. LOWE |
|
|
|
Alan
L. Lowe |
|
|
|
Vice
President and Controller |
|
|
|
|
|
*Mr. Lowe
is signing this report both as a duly authorized officer and as the principal
accounting officer.