FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (X) Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1997 Commission file number 1-1043 BRUNSWICK CORPORATION (Exact name of registrant as specified in its charter) Delaware 36-0848180 (State or other Jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1 N. Field Ct., Lake Forest, Illinois 60045-4811 (Address of principal executive offices) (Zip Code) (847) 735-4700 Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At July 24, 1997, there were 99,310,510 shares of the Company's Common Stock ($.75 par value) outstanding. Part I- Financial Information Item I-Financial Statements Brunswick Corporation Consolidated Statements of Income for the periods ended June 30 (dollars in millions, except per share data) Quarter Six months ended June 30 ended June 30 1997 1996 1997 1996 (unaudited) Net sales 1,008.2 858.3 1,849.8 1,597.2 Cost of sales 706.0 601.9 1,307.0 1,125.9 Selling, general and administrative 164.2 143.1 311.4 281.4 Operating earnings 138.0 113.3 231.4 189.9 Interest expense (10.3) (7.9) (21.4) (16.0) Other income and expense 4.1 5.7 6.9 12.0 Earnings before income taxes 131.8 111.1 216.9 185.9 Income tax provision 48.9 41.3 81.3 69.7 Earnings from continuing operations 82.9 69.8 135.6 116.2 Earnings from discontinued operations 0.0 1.0 0.0 0.0 Net earnings 82.9 70.8 135.6 116.2 Earnings per common share Continuing operations 0.83 0.71 1.36 1.18 Earnings from discontinued operations 0.00 0.01 0.00 0.00 Net earnings per common share 0.83 0.72 1.36 1.18 Cash dividends declared per common share 0.125 0.125 0.25 0.25 Average shares used for computation of earnings per share 100.2 98.7 99.9 98.6 The notes are an integral part of these consolidated statements.
Brunswick Corporation Consolidated Balance Sheets As of June 30, 1997 and December 31, 1996 (in millions, except share data) June 30, December 31, 1997 1996 (unaudited) Assets Current assets Cash and cash equivalents, at cost, which approximates market 110.8 238.5 Marketable securities 0.0 3.6 Accounts and notes receivable, less allowances of $18.5 and $17.2 509.4 326.9 Inventories Finished goods 292.8 225.3 Work-in-process 149.7 137.2 Raw materials 92.9 82.4 Net inventories 535.4 444.9 Prepaid income taxes 192.2 184.4 Prepaid expenses 32.7 33.6 Income tax refund receivable 0.0 9.9 Current assets 1,380.5 1,241.8 Property Land 69.5 65.0 Buildings 411.3 404.6 Equipment 797.6 752.7 Total land, buildings and equipment 1,278.4 1,222.3 Accumulated depreciation (636.7) (620.5) Net land, buildings and equipment 641.7 601.8 Unamortized product tooling costs 97.0 83.6 Net property 738.7 685.4 Other assets Unrestricted cash held for acquisition of Igloo Holdings, Inc. 0.0 143.0 Goodwill 437.5 352.4 Other intangibles 126.0 137.9 Investments 89.1 87.5 Other long-term assets 158.7 154.4 Other assets 811.3 875.2 Total assets 2,930.5 2,802.4 Liabilities and Shareholders' Equity Current liabilities Short-term debt, including current maturities of long-term debt Accounts payable 67.7 112.6 Accrued expenses 244.4 202.4 Income taxes payable 504.5 516.1 Current liabilities 21.3 0.0 837.9 831.1 Long-term debt Notes, mortgages and debentures 458.6 455.4 Deferred items Income taxes Postretirement and postemployment benefits 137.4 155.6 Compensation and other 134.6 131.7 Deferred items 36.5 30.9 308.5 318.2 Common shareholders' equity Common stock; authorized: 200,000,000 shares, $.75 par value; issued: 102,537,692 shares Additional paid-in capital 76.9 76.9 Retained earnings 305.2 302.0 Treasury stock, at cost: 3,220,570 shares and 4,071,644 shares 1,062.1 951.3 Cumulative translation adjustments (59.1) (75.4) Unamortized ESOP expense and other 6.8 11.2 Common shareholders' equity (66.4) (68.3) 1,325.5 1,197.7 Total liabilities and shareholders' equity 2,930.5 2,802.4 The notes are an integral part of these consolidated statements.
Brunswick Corporation Consolidated Statements Of Cash Flows for the six months ended June 30 (dollars in millions) 1997 1996 (unaudited) Cash flows from operating activities Net earnings 135.6 116.2 Depreciation and amortization 72.0 59.2 Changes in noncash current assets and current liabilities of continuing operations (204.6) (163.8) Income taxes 26.8 40.9 Other, net 17.9 (0.5) Net cash provided by operating activities 47.7 52.0 Cash flows from investing activities Acquisitions of businesses (176.0) (156.8) Unrestricted cash held for acquisition of Igloo Holdings, Inc. 143.0 0.0 Capital expenditures (80.6) (64.9) Payments advanced for long-term supply arrangements (4.6) (47.0) Proceeds from businesses disposed 0.0 29.4 Investments in marketable securities 3.6 9.2 Other, net 5.8 (1.4) Net cash used for investing activities (108.8) (231.5) Cash flows from financing activities Proceeds from issuances of short-term commercial paper 54.3 0.0 Proceeds from issuances of long-term debt 7.0 0.0 Payments of long-term debt including current maturties (103.1) (2.8) Cash dividends paid (24.8) (24.6) Net cash used for financing activities (66.6) (27.4) Net decrease in cash and cash equivalents (127.7) (206.9) Cash and cash equivalents at January 1 238.5 344.3 Cash and cash equivalents at June 30 110.8 137.4 Supplemental cash flow disclosures: Interest paid 29.2 27.0 Income taxes paid, net 54.6 28.8 The notes are an integral part of these consolidated statements.
Brunswick Corporation Notes to Consolidated Financial Statements June 30, 1997, December 31, 1996 and June 30, 1996 (unaudited) Note 1 - Accounting Policies This financial data has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and disclosures, normally included in financial statements and footnotes prepared in accordance with generally accepted accounting principles, have been condensed or omitted. Brunswick Corporation (the "Company") believes that the disclosures in these statements are adequate to make the information presented not misleading. The results of operations and net assets of the Company's divested freshwater fishing boat operations that comprised substantially all of the assets of the Fishing Boats Division have been reported as discontinued operations. Previously reported amounts have been restated to conform with this presentation. Additionally, certain amounts on the December 31, 1996, balance sheet have been reclassified to conform with 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 the Company's Annual Report on Form 10-K for the year ended December 31, 1996. These interim results include, in the opinion of the Company, all normal and recurring adjustments necessary to present fairly the results of operations for the quarter and six-month periods ended June 30, 1997 and 1996. The 1997 interim results are not necessarily indicative of the results which may be expected for the remainder of the year. Note 2 - Acquisitions On January 3, 1997, the Company acquired the stock of Igloo Holdings, Inc., a manufacturer and marketer of coolers and ice chests, for approximately $143.0 million in cash. On March 7, 1997, the Company acquired the assets of the Hoppe's line of hunting accessories from Penguin Industries, Inc. On April 28, 1997, the Company purchased for approximately $22.0 million the inventory and trademarks of the Mongoose bicycle and parts business of Bell Sports Corp. and a three-year option to acquire up to 600,000 shares of Bell common stock for $7.50 per share. These operations have been included as part of the Brunswick Outdoor Recreation Group of the Recreation segment. These acquisitions were accounted for as purchases and have been recorded using preliminary valuations of the opening balance sheets. Goodwill arising from these acquisitions will be amortized using the straight-line method over 40 years. The operating results of each acquisition are included in the Company's results of operations since the date of acquisition. In January 1997, the Company received an $8.2 million payment from Roadmaster Industries, Inc. in settlement of the final purchase price adjustment on the bicycle business purchased in September 1996, which reduces the final cash consideration paid for the business to $190.2 million. On July 9, 1997, the Company purchased substantially all of the facilities, equipment, inventory and other assets of Life Fitness, a designer, manufacturer and marketer of computerized cardiovascular and strength training fitness equipment, from a private equity fund. The purchase price was approximately $310.0 million, of which $10.0 million has been deferred pursuant to an incentive compensation plan in connection with the waiver of employee options granted by Life Fitness. Note 3 - Debt On April 1, 1997, the Company retired $100.0 million of 8.125 percent notes that matured. During the second quarter of 1997, the Company negotiated a new long-term credit agreement with a group of banks for $400.0 million with a termination date of May 22, 2002. Under terms of the agreement, the Company has multiple borrowing options including borrowing at the greater of the prime rate as announced by The Chase Manhattan Bank, or federal funds effective rate plus 0.5 percent, or a rate tied to the Eurodollar rate. The Company must pay a facility fee of 0.08 percent per annum on the unused portion of the agreement. Under the terms of the agreement, the Company is subject to a leverage test, as well as a restriction on secured debt. The Company was in compliance with these covenants at June 30, 1997. On July 9, 1997, the Company issued $296.0 million of commercial paper to fund the acquisition of the Life Fitness business. Note 4 - Litigation There have been no significant changes in the status of the items set forth in Note 4: "Commitments and Contingencies" in the 1996 Annual Report to Shareholders except as noted in Note 18: "Subsequent Event" in the 1996 Annual Report on Form 10-K. Note 5 - Segment Data The following table sets forth net sales and operating earnings of each of the Company's industry segments for the quarter and six-month periods ended June 30, 1997 and 1996 (in millions): Quarter ended June 30 1997 1996 Net Operating Net Operating Sales Earnings Sales Earnings Marine $ 659.1 $ 105.8 $ 638.9 $ 99.0 Recreation 349.1 41.7 219.4 23.8 Corporate - (9.5) - (9.5) Consolidated $1,008.2 $ 138.0 $ 858.3 $ 113.3 Six months ended June 30 1997 1996 Net Operating Net Operating Sales Earnings Sales Earnings Marine $1,227.7 $ 172.8 $1,185.4 $ 163.3 Recreation 622.1 78.5 411.8 45.5 Corporate - (19.9) - (18.9) Consolidated $1,849.8 $ 231.4 $1,597.2 $ 189.9 Item 2. - Management's Discussion and Analysis Overview The Company's financial results for the first six months of 1997 continue to reflect the favorable impact of strategic initiatives, which include increasing the contribution of active recreation businesses through acquisitions, expanding existing brands through effective marketing programs and product innovations, and managing costs to improve operating margins. There were several acquisitions that affected the comparison of the Company's results from the quarter and six months ending June 30, 1997 with the prior year. These acquisitions consist of American Camper acquired on March 8, 1996; Boston Whaler, a designer and manufacturer of offshore fishing boats, acquired on May 31, 1996; Roadmaster Bicycles acquired on September 6, 1996; Igloo Holdings, Inc., the leading manufacturer and marketer of coolers and thermoelectric products, acquired on January 3, 1997; Hoppe's hunting accessories acquired on March 7, 1997; and Mongoose bicycles acquired on April 28, 1997. The Company further advanced its strategy to increase the scope of its active recreation businesses by acquiring substantially all of the facilities, equipment, inventory and other assets of Life Fitness, the leading designer, manufacturer and marketer of computerized cardiovascular and strength training fitness equipment for the commercial market, from a private equity fund on July 9, 1997. The Company continues to evaluate the profit margins of existing businesses and product lines, making investments where necessary to improve quality, efficiency and cost; actively managing its supply chain; and adjusting cost structures, if appropriate. These activities may result in restructuring charges in future periods. Other Matters - Results for the second quarter and first six months of 1996 have been restated to account for the Company's divested freshwater fishing boat units as discontinued operations. In February 1997, the Financial Accounting Standards Board issued Statement No. 128 (SFAS No. 128), "Earnings per Share." SFAS No. 128 replaces the presentation of primary earnings per share with basic earnings per share, which excludes the dilutive effect of common stock equivalents. The Company's basic earnings per share are not expected to be materially different from primary earnings per share. On March 18, 1997, the Company received notification from the Federal Trade Commission that the investigation, referenced in Note 4: "Commitments and Contingencies" of the Company's 1996 Annual Report to Shareholders and Note 18: "Subsequent Event" in the 1996 Annual Report on Form 10-K, had been concluded with no action warranted by the Commission. Results of Operations Consolidated The following table sets forth certain ratios and relationships calculated from the consolidated statements of income for the quarter and six-month periods ended June 30: Quarter Six months ended June 30 ended June 30 1997 1996 1997 1996 Percentage increase in (1) Net sales 17.5% 6.9% 15.8% 3.2% Operating earnings 21.8% 18.4% 21.9% 12.2% Earnings from continuing operations 18.8% 15.6% 16.7% 15.5% Earnings per share from continuing operations 16.9% 12.7% 15.3% 12.4% Expressed as a percentage of net sales Gross margin 30.0% 29.9% 29.3% 29.5% Selling, general and administrative expense 16.3% 16.7% 16.8% 17.6% Operating margin 13.7% 13.2% 12.5% 11.9% (1) compared with the prior year; excludes the effects of restructuring charges of $40.0 million ($24.4 million after tax) recorded in 1995 and reflects results from continuing operations. Sales increased by $149.9 million to $1,008.2 million in the second quarter of 1997 compared with $858.3 million in 1996. The Marine segment recorded a sales increase of $20.2 million, and the Recreation segment added $129.7 million in the second quarter. Sales for the six-month period of 1997 were $1,849.8 million, an increase of $252.6 million versus 1996 sales. The Marine segment contributed $42.3 million to this increase, and the Recreation segment recorded a sales increase of $210.3 million. These increases primarily reflect the effect of revenues from the companies acquired in 1996 and 1997, growth in sales of large boats and continued strong demand for bowling capital equipment in East Asian markets. The Company's gross margin percentage for the second quarter of 1997 improved slightly to 30.0 percent reflecting productivity enhancements and product innovations. Selling, general and administrative expenses as a percent of sales decreased to 16.3 percent in the second quarter of 1997 from 16.7 percent in the second quarter of 1996 as a result of ongoing cost management and the integration of acquired businesses. This relationship, coupled with improved gross margins in the quarterly period, resulted in operating margin improvement in the second quarter of 1997 of 0.5 points to 13.7 percent, and in the first six months of 1997 an increase of 0.6 points to 12.5 percent, as compared with the 1996 periods. Interest expense increased $2.4 million and $5.4 million, or 30.4 percent and 33.8 percent, in the second quarter and first six months of 1997 compared with 1996 due to increased debt levels related to the funding of acquisitions. Other income and expense decreased $1.6 million to $4.1 million in the second quarter of 1997 and $5.1 million to $6.9 million in the first six months of 1997 compared with 1996 due to lower joint venture earnings and interest income. The Company's effective tax rate of 37.1 percent in the second quarter of 1997 was comparable to the 37.2 percent rate in the 1996 and remained unchanged at 37.5 percent in the first six months of 1997 versus 1996. Earnings per share from continuing operations increased 16.9 percent to $0.83 in the second quarter of 1997 from $0.71 in 1996. Earnings per share from continuing operations for the first six months of 1997 were $1.36, a 15.3 percent increase from $1.18 in 1996. Per share amounts reflect higher levels of shares outstanding in 1997 versus 1996. Marine Segment The following table sets forth Marine segment results for the quarter and six-month periods ended June 30: Quarter Six-months (Dollars in millions) ended June 30 ended June 30 1997 1996 1997 1996 Net sales $659.1 $638.9 $1,227.7 $1,185.4 Percentage increase(decrease)(1) 3.2% (1.0)% 3.6% 2.7% Operating earnings $105.8 $ 99.0 $ 172.8 $ 163.3 Percentage increase (1) 6.9% 12.6% 5.8% 9.8% Operating margin 16.1% 15.5% 14.1% 13.8% Capital expenditures $ 29.0 $ 25.8 $ 48.3 $ 43.1 (1) compared with the prior year The Marine segment achieved sales gains versus the prior year of 3.2 percent and 3.6 percent for the 1997 second quarter and six-month periods, respectively, as a result of successful marketing programs and an improved product mix. Operating earnings for the segment increased 6.9 percent to $105.8 million in the second quarter of 1997, compared with $99.0 million in the same period last year. Operating margins increased for the quarter to 16.1 percent in 1997 from 15.5 percent in 1996 and to 14.1 percent from 13.8 percent in the six-month period of 1997 compared with 1996. These gains reflect the benefits of cost management actions, which more than offset costs associated with new product introductions and increased marketing expenses. Recreation Segment The following table sets forth Recreation segment results for the quarter and six-month periods ended June 30: Quarter ended Six-months (Dollars in millions) ended June 30 ended June 30 1997 1996 1997 1996 Net sales $349.1 $219.4 $622.1 $411.8 Percentage increase (1) 59.1% 13.2% 51.1% 4.9% Operating earnings $ 41.7 $ 23.8 $ 78.5 $ 45.5 Percentage increase (1) 75.2% 32.2% 72.5% 8.3% Operating margin 11.9% 10.8% 12.6% 11.0% Capital expenditures $ 13.8 $ 11.4 $ 26.3 $ 19.0 (1) compared with the prior year; excludes the effects of a $25.8 million restructuring charge recorded in 1995. In the second quarter of 1997, Recreation segment sales increased 59.1 percent to $349.1 million while operating earnings increased 75.2 percent to $41.7 million. Sales increased 51.1 percent to $622.1 million, and operating earnings increased 72.5 percent to $78.5 million in the first six months of 1997 compared with 1996. These gains reflect the contribution of the aforementioned businesses acquired in 1996 and 1997, increased shipments of bowling capital equipment into rapidly growing East Asian markets and higher fishing tackle sales. Operating margins for the segment were 11.9 percent during the second quarter of 1997, an increase of 1.1 points from 10.8 percent in 1996, and 12.6 percent during the first six months of 1997, an increase of 1.6 points from 11.0 percent in 1996. These operating margin improvements reflect the benefits of higher bowling capital equipment sales along with ongoing cost management and acquisition integration actions. Cash Flow, Liquidity and Capital Resources Cash generated from operating activities, available cash balances and selected borrowings are the Company's major sources of funds for investments and dividend payments. Cash and cash equivalents totaled $110.8 million at June 30, 1997, down $127.7 million from the end of 1996. Cash provided by operating activities totaled $47.7 million in 1997, compared with $52.0 million in 1996. The primary components of cash provided by operating activities include the Company's net earnings adjusted for noncash expenses; the timing of cash flows relating to operating expenses, sales and income taxes; and the management of inventory levels. The change in cash provided by operating activities between 1996 and 1997 is due to stronger operating results offset by the requirements for seasonal noncash working capital by newly acquired businesses. During the first six months of 1997, the Company invested $80.6 million in capital expenditures, compared with $64.9 million in 1996. The $15.7 million increase reflects the Company's continued emphasis on investing to achieve improved production efficiencies and product quality, growth from new products and expansion of existing product lines. Management anticipates that 1997 capital expenditures could approach $200.0 million, principally for new product introductions and productivity improvements. Investments in acquisitions of businesses totaled $176.0 million in the first six months of 1997. The $143.0 million of cash paid to acquire Igloo Holdings, Inc. was classified as unrestricted cash held for acquisition of Igloo Holdings, Inc. and excluded from cash and cash equivalents on the December 31, 1996 balance sheet. Total debt at June 30, 1997 was $526.3 million versus $568.0 million at the end of 1996, with debt-to-capitalization ratios at those dates of 28.4 percent and 32.2 percent, respectively. On April 1, 1997, the Company used cash to retire $100.0 million of 8.125 percent notes maturing on that date. On July 9, 1997, the Company used proceeds from commercial paper borrowings along with cash from operations to pay for the acquisition of Life Fitness. The Company is in the process of evaluating refinancing a portion of its commercial paper borrowings with longer-term debt instruments. The Company has substantial financial flexibility and access to the capital markets stemming from its strong balance sheet, investment-grade credit ratings and ability to generate significant cash from operating activities. The Company has $400.0 million available under a long-term credit agreement with a group of banks and $350.0 million under a universal shelf registration filed in 1996 with the Securities and Exchange Commission for the issuance of equity and/or debt securities. The Company uses its cash balances and other sources of liquidity to invest in its current businesses to promote innovation and new product lines, and to acquire complementary businesses. These investments, along with other actions taken to improve the profit margins of current businesses, are designed to continue improvement in the Company's financial performance and enhance shareholder value. Forward Looking Statements Certain statements in this 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, adverse weather conditions retarding sales; inventory adjustments by major retailers; competitive pricing pressures; success of planned acquisitions, marketing and cost-management programs and shifts in market demand. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 12. Statement regarding computation of ratio of earnings to fixed charges (b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the three months ended June 30, 1997. 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 July 30, 1997 By: /s/ Victoria J. Reich Victoria J. Reich Vice President and Controller* *Ms. Reich is signing this report both as a duly authorized officer and as the principal accounting officer. Exhibit Index No. Title 12. Statement regarding computation of ratio of earnings to fixed charges 27. Financial Data Schedule Exhibit 12 Brunswick Corporation Computation of Ratio of Earnings to Fixed Charges (dollars in millions) Six Months Ended Year Ended June 30 December 31, 1997 1996 1996 Earnings as Adjusted Earnings from continuing operations (a) 135.6 116.2 185.8 Income tax provision 81.3 69.7 104.5 Interest expense 21.4 16.0 33.4 Interest portion of rent expense 4.9 4.9 9.8 Equity in earnings of less-than 50% owned affiliates 0.0 0.0 0.0 Dividends received from less-than 50% owned affiliates 0.0 0.0 0.0 243.2 206.8 333.5 Fixed Charges Interest expense 21.4 16.0 33.4 Interest portion of rent expense 4.9 4.9 9.8 Capitalized interest 0.0 0.0 0.0 26.3 20.9 43.2 Ratio of earnings to fixed charges (b) 9.2x 9.9x 7.7x (a) Previously reported amounts have been restated to reflect the results of operations and net assets of the divested freshwater fishing boat unit as discontinued operations. (b)For computation of the ratio of earnings to fixed charges, "earnings" have been calculated by adding fixed charges (excluding capitalized interest) to earnings from continuing operations before income taxes and then deducting the undistributed earnings of affiliates. Fixed charges consist of interest expense, estimated interest portion of rental expense and capitalized interest.