SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 September 30, 1999
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 November 12, 1999, there were 91,826,519 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 September 30
(in millions, except per share data)
(unaudited)
Quarter Nine Months
ended September 30 ended September 30
1999 1998 1999 1998
Net sales 1,004.6 956.5 3,262.8 2,973.7
Cost of sales 733.8 698.8 2,362.0 2,142.0
Selling, general and administrative expense 183.8 174.1 560.0 496.1
Litigation charge 48.0 0.0 48.0 0.0
Strategic charge 0.0 60.0 0.0 60.0
Operating earnings 39.0 23.6 292.8 275.6
Interest expense (15.5) (15.1) (46.1) (46.0)
Other income (expense) 1.4 (0.4) 2.2 6.1
Earnings before income taxes 24.9 8.1 248.9 235.7
Income tax provision 7.1 4.0 91.1 89.3
Net earnings 17.8 4.1 157.8 146.4
Earnings per common share:
Basic 0.19 0.04 1.72 1.47
Diluted 0.19 0.04 1.70 1.46
Average shares used for computation of:
Basic earnings per share 91.9 99.0 91.9 99.3
Diluted earnings per share 93.1 99.1 92.7 100.0
Cash dividends declared per common share 0.125 0.125 0.375 0.375
The notes are an integral part of these consolidated statements.
Brunswick Corporation
Consolidated Balance Sheets
As of September 30, 1999, December 31, 1998, and September 30, 1998
(in millions, except share data)
(unaudited)
September 30, December 31, September 30,
1999 1998 1998
Assets
Current assets
Cash and cash equivalents, at cost,
which approximates market 122.9 126.1 91.1
Accounts and notes receivable,
less allowances of $25.5, $22.5 and $21.9 518.1 420.8 502.9
Inventories
Finished goods 379.0 383.6 367.9
Work-in-process 143.1 141.3 150.9
Raw materials 129.4 120.6 133.4
Net inventories 651.5 645.5 652.2
Prepaid income taxes 228.4 208.7 218.7
Prepaid expenses 65.0 53.3 61.1
Income tax refund receivable 0.8 0.0 0.0
Current assets 1,586.7 1,454.4 1,526.0
Property
Land 69.7 72.0 71.2
Buildings 399.6 412.0 433.0
Equipment 999.3 950.9 887.0
Total land, buildings and equipment 1,468.6 1,434.9 1,391.2
Accumulated depreciation (745.0) (699.0) (698.9)
Net land, buildings and equipment 723.6 735.9 692.3
Unamortized product tooling costs 118.4 109.2 103.7
Net property 842.0 845.1 796.0
Other assets
Goodwill 708.0 718.9 724.2
Other intangibles 91.5 101.6 104.4
Investments 86.5 71.2 86.7
Other long-term assets 173.8 160.3 163.1
Other assets 1,059.8 1,052.0 1,078.4
Total Assets 3,488.5 3,351.5 3,400.4
Liabilities and Shareholders' Equity
Current liabilities
Short-term debt, including
current maturities of long-term debt 166.5 170.1 160.2
Accounts payable 259.3 286.1 233.2
Accrued expenses 622.6 574.6 594.4
Income taxes payable 0.0 5.6 20.8
Current liabilities 1,048.4 1,036.4 1,008.6
Long-term debt
Notes, mortgages and debentures 626.7 635.4 641.8
Deferred items
Income taxes 167.9 165.1 143.0
Postretirement and postemployment benefits 143.0 141.1 140.9
Compensation and other 68.4 62.2 63.5
Deferred items 379.3 368.4 347.4
Common shareholders' equity
Common stock; authorized: 200,000,000 shares,
$.75 par value; issued: 102,538,000 shares 76.9 76.9 76.9
Additional paid-in capital 314.0 311.5 311.4
Retained earnings 1,312.8 1,189.5 1,161.4
Treasury stock, at cost:
10,664,000; 10,669,000 and 3,712,000 shares (211.7) (204.7) (81.1)
Unamortized ESOP expense and other (50.2) (56.1) (59.9)
Accumulated other comprehensive income (7.7) (5.8) (6.1)
Common shareholders' equity 1,434.1 1,311.3 1,402.6
Total liabilities and shareholders' equity 3,488.5 3,351.5 3,400.4
The notes are an integral part of these consolidated statements.
Brunswick Corporation
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998
(dollars in millions)
(unaudited)
Nine Months ended September 30
1999 1998
Cash flows from operating activities
Net earnings 157.8 146.4
Depreciation and amortization 124.6 119.5
Changes in noncash current assets and current
liabilities (136.9) (190.5)
Income taxes (14.0) 43.1
Strategic charge 0.0 60.0
Litigation charge 48.0 0.0
Other, net 2.8 (0.5)
Net cash provided by operating activities 182.3 178.0
Cash flows from investing activities
Acquisitions of businesses (11.4) (32.8)
Capital expenditures (110.0) (117.5)
Investments (15.1) (21.6)
Other, net 4.8 15.0
Net cash used for financing activities (131.7) (156.9)
Cash flows from financing activities
Net proceeds from issuances/(retirements) of short-term
commercial paper and other short-term debt (5.1) 50.8
Payments of long-term debt including current maturities (7.1) (3.6)
Cash dividends paid (34.5) (37.2)
Stock repurchases (15.4) (32.2)
Stock options exercised 8.3 6.6
Net cash used for financing activities (53.8) (15.6)
Net (decrease) increase in cash and cash equivalents (3.2) 5.5
Cash and cash equivalents at January 1 126.1 85.6
Cash and cash equivalents at September 30 122.9 91.1
Supplemental cash flow disclosures:
Interest paid 42.0 40.9
Income taxes paid, net 105.0 46.2
Treasury stock issued for compensation plans and other 16.8 13.0
The notes are an integral part of these consolidated statements.
Brunswick Corporation
Notes to Consolidated Financial Statements
September 30, 1999, December 31, 1998, and September 30, 1998
(unaudited)
Note 1 - Accounting Policies
This unaudited 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 notes 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. Certain
previously reported amounts 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, 1998. 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 periods ended
September 30, 1999 and 1998. The 1999 interim results
are not necessarily indicative of the results that may
be expected for the remainder of the year.
Note 2 - Earnings Per Common Share
There is no difference in the net earnings used to
compute the Company's basic and diluted earnings per
share. The difference in the average number of shares
of common stock outstanding used to compute basic and
diluted earnings per share is the amount of potential
common stock relating to employee stock options. The
number of shares of potential common stock was 1.2
million and 0.1 million for the quarters ended
September 30, 1999 and 1998, respectively, and 0.8
million and 0.7 million for the nine-month periods
ended September 30, 1999 and 1998, respectively.
Note 3 - Segment Data
The following table sets forth net sales and operating
earnings of each of the Company's operating segments
for the quarter and nine-month periods ended September
30, 1999 and 1998 (in millions):
Quarter ended Septemer 30
1999 1998
Net Operating Net Operating
Sales Earnings Sales Earnings
Outdoor Recreation $ 143.2 $ (5.4) $ 154.2 $ (8.5)
Indoor Recreation 174.1 10.4 164.0 (42.1)
Boat 360.5 28.1 332.0 23.0
Marine Engine 394.8 18.8 366.8 61.1
Corporate/Other (68.0) (12.9) (60.5) (9.9)
Consolidated $1,004.6 $ 39.0 $ 956.5 $ 23.6
Nine Months ended September 30
1999 1998
Net Operating Net Operating
Sales Earnings Sales Earnings
Outdoor Recreation $ 585.9 $ 29.2 $ 543.3 $ 37.2
Indoor Recreation 521.4 41.4 487.1 (24.3)
Boat 1,119.6 97.3 1,006.3 98.5
Marine Engine 1,250.6 159.8 1,139.5 189.7
Corporate/Other (214.7) (34.9) (202.5) (25.5)
Consolidated $ 3,262.8 $ 292.8 $2,973.7 $ 275.6
Operating earnings for the quarter and nine months
ended September 30, 1999, include a litigation charge
of $48.0 million in the Marine Engine segment.
Operating earnings for the quarter and nine months
ended September 30, 1998, include a strategic charge
of $60.0 million, which consisted of $9.2 million in
the Outdoor Recreation segment and $50.8 million in
the Indoor Recreation segment, to cover costs
associated with strategic initiatives designed to
streamline operations and enhance operating
efficiencies in response to the Asian economic
situation. Boat segment operating earnings for the
nine-month period ended September 30, 1998, include
$15.0 million of income recorded in connection with a
settlement with a boat dealer.
Note 4 - Litigation
On June 19, 1998, a jury awarded $133.2 million, after
trebling, in damages in a suit brought in December
1995 by Independent Boat Builders, Inc., a buying
group of boat manufacturers and 22 of its members.
The lawsuit, Concord Boat Corporation, et al. v.
Brunswick Corporation (Concord), was filed in the
United States District Court for the Eastern District
of Arkansas, and alleged that the Company unlawfully
monopolized, unreasonably restrained trade in, and
made acquisitions that substantially lessened
competition in the market for sterndrive and inboard
marine engines in the United States and Canada. Under
the antitrust laws, the damage award was trebled, and
plaintiffs will be entitled to their attorneys' fees
and interest. Under current law, any and all amounts
paid by the Company will be deductible for tax
purposes.
On November 4, 1998, the Company filed an appeal
contending the Concord verdict was erroneous as a
matter of law, both as to liability and damages, and
Plaintiffs filed a cross appeal. Briefing and oral
argument on all issues on appeal are complete and the
Company anticipates a decision in the fourth quarter
of 1999 or the first quarter of 2000. The Company is
not presently able to reasonably estimate the ultimate
outcome of this case and, accordingly, no expense for
this judgment has been recorded.
On October 23, 1998, a suit was filed in the United
States District Court for the District of Minnesota by
two independent boat builders alleging antitrust
violations by the Company in the sterndrive and
inboard engine business seeking to rely on both the
liability and damage findings of the Concord
litigation. In this suit, KK Motors et al. v.
Brunswick Corporation (KK Motors), the named
plaintiffs also seek to represent a class of all
allegedly similarly situated boat builders whose
claims have not been resolved in Concord or in other
judicial proceedings. Sales of sterndrive and inboard
marine engines to the Concord plaintiffs are estimated
to have represented less than one-fifth of the total
sold to independent boat builders during the six-and-
one-half year time period for which damages were
awarded in that suit. The complaint in the KK Motors case
seeks damages for a time period covering slightly less than
four years. In the KK Motors case, the court granted a stay
of all proceedings on the merits of plaintiffs' claims
pending the outcome of the Concord appeal, but has
allowed the case to proceed on class certification and
certain procedural matters.
On December 23, 1998, Volvo Penta of the Americas,
Inc., the Company's principal competitor in the sale
of sterndrive marine engines, filed suit in the United
States District Court for the Eastern District of
Virginia. That suit, Volvo Penta of the Americas v.
Brunswick Corporation (Volvo), also invoked the
antitrust allegations of the Concord action and sought
injunctive relief and damages in an unspecified amount
for an unspecified time period.
On February 10, 1999, a former dealer of the Company's
boats filed suit in the United States District Court
for the District of Minnesota, also seeking to rely on
the liability findings of the Concord action. This
suit, Amo Marine Products, Inc. v. Brunswick
Corporation (Amo) sought class status purporting to
represent a class of all marine dealers who purchased
directly from the Company sterndrive or inboard
engines or boats equipped with sterndrive or inboard
engines during the period January 1, 1986, to June 30,
1998. Sales by the Company of boats equipped with
sterndrive or inboard engines to dealers accounted for
less than half of such engines produced during the
time period covered by the complaint; sales of such
engines directly to dealers were de minimis. The
complaint sought damages in an unspecified amount and
requested injunctive relief. On March 31, 1999,
another suit, Jack's Marina, Inc. v. Brunswick (Jack's
Marina), was filed in the same court seeking to
represent the same putative class as Amo.
On September 16, 1999, another suit, Howard S.
Cothran, d/b/a Sonny's Marine v. Brunswick Corporation
(Cothran), was filed in the United States District
Court for the Southern District of Illinois seeking to
represent the same putative class as Amo.
Amo, Jack's Marina and Cothran are collectively
referred to as the "Direct Dealer" cases.
On February 16, 1999, a suit was filed in the Circuit
Court of Washington County, Tennessee, by an
individual claiming that the same conduct challenged
in the Concord action violated various antitrust and
consumer protection laws of 16 states and the District
of Columbia. In that suit, Couch v. Brunswick
(Couch), plaintiff sought to represent a class of all
indirect purchasers of boats equipped with the
Company's sterndrive or inboard engines in 17
jurisdictions. The plaintiff claimed damages in an
unspecified amount during the period from 1986 to the
filing of the complaint and also requested injunctive
relief.
The Company has reached agreements to settle the
Volvo, Direct Dealer, and Couch lawsuits. As a result,
the Company recorded a charge to operating earnings of
$48.0 million in the third quarter of 1999. In
addition, as part of the settlement with Volvo, the
Company has entered into a long-term supply agreement
to purchase diesel sterndrive and inboard engines from
Volvo for use in certain models of boats manufactured
by the Company. The Direct Dealer and Couch class
action settlements are subject to approval by the
courts.
It is possible that additional suits will be filed, in
either federal or state court, asserting allegations
similar to those in the existing complaints and
purporting to represent similar or overlapping classes
of claimants.
The Company is unable to predict the outcome of the
appeal of the Concord verdict or the outcome of the KK
Motors action and, accordingly, no expense for these cases
has been recorded. While there can be no assurance, the Company
believes it is likely to prevail on the Concord appeal
and obtain either a new trial or judgment in its
favor. If the Company is successful, it could impact
all related actions. If the Concord judgment is
sustained after all appeals, however, and if the KK
Motors case proceeds as a class action on behalf of
all described potential claimants substantially as
alleged, and if plaintiffs are successful, the damages
ultimately payable by the Company would have a
material adverse effect on the Company's results of
operations for a particular accounting period, and
could have a material adverse effect on the Company's
consolidated financial condition.
Note 5 - Debt
Short-term debt, including current maturities of long-
term debt, decreased to $166.5 million at September
30, 1999, versus $170.1 million at December 31, 1998.
Note 6 - Strategic Charges
During the third quarter of 1998, the Company recorded
a pretax charge of $60.0 million in the Indoor and
Outdoor Recreation segments to cover costs associated
with strategic initiatives designed to streamline
operations and enhance operating efficiencies in
response to the effect of the economic situation in
Asia and other emerging markets on its businesses.
These actions were substantially completed during 1998
with asset dispositions and payments continuing into
1999. Lease termination costs are expected to be paid
over the contractual terms of the leases.
During the third quarter of 1997, the Company recorded
a pretax charge of $98.5 million to cover costs
associated with strategic initiatives designed to
streamline its operations and improve global
manufacturing costs. These actions were substantially
completed during 1998 with asset dispositions and
payments continuing into 1999.
The Company's accrued expense balances relating to
strategic charges as of September 30, 1999, and
December 31, 1998, were as follows (in millions):
December 31, 1999 September 30,
1998 Activity 1999
Severance $ 16.1 $ 14.8 $ 1.3
Lease termination 10.6 1.8 8.8
Other incremental costs 10.8 8.6 2.2
Total $ 37.5 $ 25.2 $ 12.3
In connection with these charges, the Company is
disposing of certain assets. Assets to be disposed as
a result of the 1998 charge had a gross carrying value
of $35.2 million as of September 30, 1998, with
related reserves of $28.8 million. These assets had a
gross carrying value of $9.4 million as of September
30, 1999, with related reserves approximating an equal
amount. Assets to be disposed as a result of the 1997
charge had a gross carrying value of $30.1 million as of
September 30, 1997, with related reserves of $26.4
million. These assets had a gross carrying value of
$3.3 million as of September 30, 1999, with related
reserves approximating an equal amount. The Company
continues to pursue plans to complete the remaining sales
of these assets.
Note 7 - Comprehensive Income
Accumulated other comprehensive income includes
cumulative translation, unrealized gains and losses on
investments and minimum pension liability adjustments.
Comprehensive income for the quarters and nine-month
periods ended September 30, 1999 and 1998, was as
follows (in millions):
Quarter ended Nine Months ended
September 30 September 30
1999 1998 1999 1998
Net earnings $ 17.8 $ 4.1 $ 157.8 $ 146.4
Other comprehensive loss (4.3) (2.1) (1.9) (5.9)
Comprehensive income $ 13.5 $ 2.0 $ 155.9 $ 140.5
Note 8 - Subsequent Events
On October 26, 1999, a jury awarded Precor, a
subsidiary of Premark, Inc., approximately $5.2 million
in a patent infringement trial against Life Fitness, on
the basis that certain Life Fitness treadmills willfully
infringed a Precor design patent. The jury award may
be subject to enhancement by the judge because of the
jury's finding of willfulness. In addition, Precor has
filed a motion seeking its attorneys' fees. The
Company has filed a motion for judgment as a matter of
law seeking to reverse the jury verdict and, if
unsuccessful, intends to appeal the decision.
Life Fitness no longer manufactures the treadmill
models at issue and the decision will not have a
material adverse effect on Life Fitness' business.
Life Fitness is a part of the Indoor Recreation
segment.
On October 27, 1999, the United States Tax Court issued
a ruling that upheld an Internal Revenue Service
determination that resulted in an increase in the short-
term capital gains and income distributions from two
partnership investments for 1990 and 1991. This
decision increases the Company's tax liability relating
to those years by approximately $60.0 million, plus
accrued interest, but will not have an unfavorable
effect on the Company's results of operations. The
Company is evaluating whether to appeal this decision.
This matter is more fully described in Note 13 to the
consolidated financial statements in the Company's 1998
Annual Report on Form 10-K.
Item 2. - Management's Discussion and Analysis
Results of Operations
Consolidated
The following table sets forth certain amounts, ratios
and relationships calculated from the consolidated
statements of income for the quarter and nine-month
periods ended September 30, 1999 and 1998 (dollars in
millions, except per share data):
Quarter ended Nine Months ended
September 30 September 30
1999 1998 1999 1998
Net sales $1,004.6 $ 956.5 $3,262.8 $2,973.7
Percent increase 5.0% 9.1% 9.7% 9.1%
Operating earnings $ 39.0 $ 23.6 $ 292.8 $ 275.6
Net earnings $ 17.8 $ 4.1 $ 157.8 $ 146.4
Diluted earnings per share $ 0.19 $ 0.04 $ 1.70 $ 1.46
Expressed as a percentage of net sales:
Gross margin 27.0% 26.9% 27.6% 28.0%
Selling, general and administrative
expense 18.3% 18.2% 17.2% 16.7%
Operating margin 3.9% 2.5% 9.0% 9.3%
The amounts in the above table include a $48.0 million
pretax ($30.7 million after tax) litigation charge
recorded in the third quarter of 1999, a $60.0 million
pretax ($41.4 million after tax) strategic charge
recorded in the third quarter of 1998 and $15.0 million
of pretax income ($9.6 million after tax) recorded in
connection with a settlement with a boat dealer in the
first half of 1998. On a pro forma basis, excluding
these items, amounts are as follows (dollars in
millions, except per share data):
Quarter ended Nine Months ended
September 30 September 30
1999 1998 1999 1998
Operating earnings $ 87.0 $ 83.6 $ 340.8 $ 320.6
Percent increase 4.1% 4.6% 6.3% 3.0%
Operating margin 8.7% 8.7% 10.4% 10.8%
Net earnings $ 48.5 $ 45.5 $ 188.5 $ 178.2
Diluted earnings per share $ 0.52 $ 0.46 $ 2.03 $ 1.78
In the third quarter of 1999, sales increased $48.1
million or 5.0 percent to $1,004.6 million from $956.5
million in 1998. The gain in third quarter sales
reflects strong performances in the Marine Engine and
Boat segments along with the fitness equipment and ice
chest and beverage cooler businesses. In the year-to-
date period, sales increased by $289.1 million to
$3,262.8 million from $2,973.7 million in 1998 due to
the aforementioned factors driving improvements in
third quarter sales and sales gains resulting from the
expanded distribution of bicycles.
Gross margins improved to 27.0 percent in the third
quarter of 1999 versus 26.9 percent in 1998 while the
year-to-date comparisons resulted in a decline to 27.6
percent in 1999 versus 28.0 percent in 1998. The gain
in gross margin for the quarter reflects improvements
in boat margins primarily resulting from the continued
growth in sales of larger, higher-margin boats,
productivity gains and a decline in retail incentives.
These factors offset the effects of continued softness
in pricing in the bicycle business and inventory reduction
efforts in the camping business. In addition to these factors,
year-to-date gross margin also reflects an unfavorable shift
in sales mix to lower-margin product offerings
including bikes and low-emission engines that was
partially offset by margin gains in the bowling
business attributable to strategic actions taken in
late 1998.
Selling, general and administrative expenses (SG&A
expenses) increased 5.6 percent to $183.8 million in
the third quarter of 1999 versus $174.1 million in
1998. In the year-to-date period, SG&A expenses
increased 12.9 percent to $560.0 million in 1999 from
$496.1 million in 1998. SG&A expenses in 1998 include
income of $15.0 million recorded in the year-to-date
period relating to a settlement reached with a boat
dealer. Excluding this settlement, SG&A expenses as a
percent of sales in the year-to-date period remained
flat at 17.2 percent.
Operating earnings totaled $39.0 million in the third
quarter of 1999 versus $23.6 million in 1998. In 1999,
year-to-date operating earnings totaled $292.8 million
compared with $275.6 million in the same period last
year. Operating earnings for the third quarter and nine-
month periods in 1999 include the aforementioned $48.0
million ($30.7 million after tax) litigation charge.
Operating earnings for the third quarter and nine-month
periods in 1998 include the aforementioned $60.0
million ($41.4 million after tax) strategic charge, and
the nine-month period also includes $15.0 million of
income ($9.6 million after tax) for a boat dealer
settlement. Excluding these charges, third quarter
1999 operating earnings increased 4.1 percent and
operating margins were flat with the prior year at 8.7
percent. Excluding the above mentioned charges and the
boat dealer settlement, year-to-date operating earnings
increased 6.3 percent and operating margins declined to
10.4 percent in 1999 from 10.8 percent in 1998.
Other income and expense amounted to income of $1.4
million in the third quarter of 1999 versus an expense
of $0.4 million in 1998. In the year-to-date period,
other income and expense totaled $2.2 million and $6.1
million of income in 1999 and 1998, respectively. The
improvement in other income and expense in the third
quarter was due to improved performance of joint
ventures. The decline in the year-to-date comparison
relates to unfavorable effects of foreign currency-
related adjustments along with reductions in interest
income that more than offset the favorable joint
venture performance in the third quarter.
Net earnings were $17.8 million in the third quarter of
1999 versus $4.1 million in 1998, and diluted earnings
per share for those periods were $0.19 and $0.04, respectively.
For the year-to-date periods, net earnings totaled $157.8
million in 1999 and $146.4 million in 1998 while
diluted earnings per share totaled $1.70 and $1.46,
respectively. Excluding the aforementioned litigation
charge, net earnings in 1999 for the quarter and year-to-
date periods were $48.5 million and $188.5 million,
respectively. Excluding the aforementioned 1998
strategic charge and the boat dealer settlement, 1998
quarter and year-to-date net earnings were $45.5
million and $178.2 million, respectively. Excluding the
charges and settlement, net earnings increased 6.6
percent for the quarter and increased 5.8 percent for
the nine-month period while diluted earnings per share
increased 13.0 percent and 14.0 percent for the quarter
and year-to-date, respectively.
Average common shares outstanding used to calculate
diluted earnings per share for the quarter decreased to
93.1 million in 1999 from 99.1 million in 1998, and in
the nine-month period decreased to 92.7 million in 1999
from 100.0 million in 1998. These decreases reflect
primarily the 7.0 million shares of stock repurchased
during the fourth quarter of 1998 along with shares
repurchased under a systematic share repurchase program
initiated in 1997.
Outdoor Recreation Segment
The following table sets forth Outdoor Recreation
segment results for the quarter and nine-month
periods ended September 30, 1999 and 1998 (dollars in
millions):
Quarter ended Nine Months ended
September 30 September 30
1999 1998 1999 1998
Net sales $ 143.2 $ 154.2 $ 585.9 $ 543.3
Operating earnings $ (5.4) $ (8.5) $ 29.2 $ 37.2
Operating margin (3.8)% (5.5)% 5.0% 6.8%
Capital expenditures $ 5.7 $ 6.4 $ 22.1 $ 17.6
The above table includes a $9.2 million strategic
charge recorded in the third quarter of 1998. On a
pro forma basis, excluding this charge, the Outdoor
Recreation segment results are as follows (dollars in
millions):
Quarter ended Nine Months ended
September 30 September 30
1999 1998 1999 1998
Net sales $ 143.2 $ 154.2 $ 585.9 $ 543.3
Operating earnings $ (5.4) $ 0.7 $ 29.2 $ 46.4
Operating margin (3.8)% 0.5% 5.0% 8.5%
Capital expenditures $ 5.7 $ 6.4 $ 22.1 $ 17.6
In the third quarter of 1999, Outdoor Recreation
segment sales decreased 7.1 percent to $143.2 million,
while sales for the first nine months of 1999 increased
7.8 percent to $585.9 million. The third quarter
results reflect a reduction in bicycle sales caused by
continued pricing pressure, which more than offset the
benefits from increased market share and distribution
of Mongoose-branded products. These benefits are
evident in the year-to-date sales growth of the
segment. Camping equipment sales declined in both
periods reflecting actions taken in the first quarter
of 1999 to reduce the number of products offered,
concentrating efforts on higher-margin, differentiated
products. Sales of beverage coolers and ice chests
improved as new products and an extended selling season
have increased demand. Fishing equipment sales are up
slightly year-to-date with a decline in the third
quarter as the business transitions into a
substantially revised new product lineup for the next
tackle year.
The Outdoor Recreation segment incurred an operating
loss of $5.4 million in the third quarter and operating
earnings of $29.2 million in the year-to-date period of
1999 compared with an operating loss of $8.5 million in
the third quarter and operating earnings of $37.2
million in the year-to-date period in 1998.
Operating results for the third quarter and nine-month
periods in 1998 include a strategic charge of $9.2
million.
Excluding the strategic charge in 1998, the segment
reported operating earnings of $0.7 million for the third
quarter and $46.4 million for the year-to-date period.
Operating margins in the third quarter of 1999
decreased to a negative 3.8 percent from 0.5 percent
in 1998, excluding the 1998 charge. Year-to-date
operating margins in 1999 decreased to 5.0 percent
from 8.5 percent in 1998, excluding the 1998 charge.
The decline in operating margins in both periods is
primarily attributable to the aforementioned pricing
pressures in the bicycle business and inventory
liquidation efforts in the camping business resulting
from the previously mentioned actions taken in the
first quarter of 1999. Additionally, labor shortages
and start-up costs associated with new manufacturing
equipment in the coolers business and increased
spending in the fishing business to support marketing
and information technology investments also adversely
affected year-to-date comparisons.
Management believes that the pricing pressure
currently being experienced in the bicycles business
will continue, affecting the long-term profitability
of that business. Consequently, management is
evaluating strategic alternatives for this business,
which may result in a charge in future periods.
Indoor Recreation Segment
The following table sets forth Indoor Recreation
segment results for the quarter and nine-month periods
ended September 30, 1999 and 1998 (dollars in
millions):
Quarter ended Nine Months ended
September 30 September 30
1999 1998 1999 1998
Net sales $ 174.1 $ 164.0 $ 521.4 $ 487.1
Operating earnings $ 10.4 $ (42.1) $ 41.4 $ (24.3)
Operating margin 6.0% (25.7)% 7.9% (5.0)%
Capital expenditures $ 10.6 $ 13.6 $ 23.4 $ 32.2
The above table includes a $50.8 million strategic
charge recorded in the third quarter of 1998. On a
pro forma basis, excluding this charge, the Indoor
Recreation segment results are as follows (dollars in
millions):
Quarter ended Nine Months ended
September 30 September 30
1999 1998 1999 1998
Net sales $ 174.1 $ 164.0 $ 521.4 $ 487.1
Operating earnings $ 10.4 $ 8.7 $ 41.4 $ 26.5
Operating margin 6.0% 5.3% 7.9% 5.4%
Capital expenditures $ 10.6 $ 13.6 $ 23.4 $ 32.2
The Indoor Recreation segment recorded sales of $174.1
million in the third quarter of 1999, which represents
a 6.2 percent increase from $164.0 million in the same
period last year. Sales for the first nine months of
1999 increased 7.0 percent to $521.4 million from
$487.1 million in 1998. Growth in sales of fitness
equipment due to a continued strong health club market
in the United States, Europe and the United Kingdom
and increased North American bowling center revenues
benefited comparisons for both periods. Sales of
bowling equipment and supplies are down slightly in
both periods as softness in sales into Asia has been
partially offset by increased sales to bowling center
customers in the United States to modernize their facilities.
Operating earnings in the third quarter of 1999
increased to $10.4 million compared with an operating
loss of $42.1 million in 1998. Operating earnings for
the first nine months of 1999 increased to $41.4
million compared with an operating loss of $24.3
million in 1998. Operating results in 1998 for the
third quarter and nine-month periods include a
strategic charge of $50.8 million.
Operating earnings were $8.7 million in the third
quarter and $26.5 million in the year-to-date period
of 1998, excluding the strategic charge. Excluding
the charge in 1998, operating margins increased to 6.0
percent in the third quarter of 1999 from 5.3 percent
in 1998 and increased to 7.9 percent in the first nine
months of 1999 from 5.4 percent in 1998. These
improvements reflect the benefits from strategic
actions taken in 1998 to address the effect of the
Asian economic situation on bowling equipment sales,
which offset increased investment in the fitness
equipment business for new product development and
marketing activities.
Boat Segment
The following table sets forth Boat segment results
for the quarter and nine-month periods ended
September 30, 1999 and 1998 (dollars in millions):
Quarter ended Nine Months ended
September 30 September 30
1999 1998 1999 1998
Net sales $ 360.5 $ 332.0 $1,119.6 $1,006.3
Operating earnings $ 28.1 $ 23.0 $ 97.3 $ 98.5
Operating margin 7.8% 6.9% 8.7% 9.8%
Capital expenditures $ 11.2 $ 11.2 $ 26.8 $ 30.5
The above table includes $15.0 million of income
recorded in the first half of 1998 in connection with
a boat dealer settlement. On a pro forma basis,
excluding this settlement, the Boat segment results
are as follows (dollars in millions):
Quarter ended Nine Months ended
September 30 September 30
1999 1998 1999 1998
Net sales $ 360.5 $ 332.0 $1,119.6 $1,006.3
Operating earnings $ 28.1 $ 23.0 $ 97.3 $ 83.5
Operating margin 7.8% 6.9% 8.7% 8.3%
Capital expenditures $ 11.2 $ 11.2 $ 26.8 $ 30.5
The Boat segment reported sales of $360.5 million in
the third quarter of 1999, an 8.6 percent increase
from $332.0 million in 1998. Sales for the nine-month
period of 1999 increased 11.3 percent to $1,119.6
million from $1,006.3 million in 1998. These
improvements are the result of continued strong demand
for larger boats.
Operating earnings for the segment were $28.1 million
in the third quarter of 1999 compared with $23.0
million in the same period of 1998, and operating
margins increased to 7.8 percent from 6.9 percent.
Boat operating earnings for the first nine months of
1999 were $97.3 million compared with $98.5 million in
1998. Operating results for the 1998 nine-month period
include income of $15.0 million relating to a boat dealer
settlement. Excluding this settlement, operating earnings
totaled $83.5 million and operating margins were 8.3 percent
in the nine-month period of 1998. The improvement in quarterly
and year-to-date comparisons, without the 1998 settlement,
reflect the aforementioned strong performance in sales of
larger,higher-margin boats, along with productivity gains
resulting from the rationalization of product lines
and manufacturing operations and a reduction in retail
price incentives.
Marine Engine Segment
The following table sets forth Marine Engine segment
results for the quarter and nine-month periods ended
September 30, 1999 and 1998 (dollars in millions):
Quarter ended Nine Months ended
September 30 September 30
1999 1998 1999 1998
Net sales $ 394.8 $ 366.8 $1,250.6 $1,139.5
Operating earnings $ 18.8 $ 61.1 $ 159.8 $ 189.7
Operating margin 4.8% 16.7% 12.8% 16.6%
Capital expenditures $ 15.0 $ 13.8 $ 36.8 $ 36.5
The above table includes a $48.0 million litigation
charge recorded in the third quarter of 1999. On a
pro forma basis, excluding this charge, the Marine
Engine segment results are as follows (dollars in
millions):
Quarter ended Nine Months ended
September 30 September 30
1999 1998 1999 1998
Net sales $ 394.8 $ 366.8 $1,250.6 $1,139.5
Operating earnings $ 66.8 $ 61.1 $ 207.8 $ 189.7
Operating margin 16.9% 16.7% 16.6% 16.6%
Capital expenditures $ 15.0 $ 13.8 $ 36.8 $ 36.5
Marine Engine segment sales increased 7.6 percent to
$394.8 million in the third quarter of 1999 and 9.7
percent to $1,250.6 million in the first nine months
of 1999. Quarter and year-to-date improvements reflect
strong domestic demand for outboards, particularly
those complying with new low-emission standards.
Additionally, sales of sterndrives improved driven by
increased demand, and parts and accessories sales
benefited from increased distribution and new
products.
Operating earnings for the segment decreased to $18.8
million in the third quarter of 1999 compared with
$61.1 million in 1998. For the first nine months of 1999,
operating earnings decreased to $159.8 million from $189.7
million. Operating results for the third quarter and nine-month
periods in 1999 include a litigation charge of $48.0
million, as previously described.
Operating earnings for the third quarter, excluding
the litigation charge, increased 9.3 percent to $66.8
million in 1999 from $61.1 million in 1998. Operating
earnings for the year-to-date period excluding the litigation
charge increased to $207.8 million in 1999, or 9.5
percent, from $189.7 million in 1998. Operating
margins, excluding the litigation charge, improved to
16.9 percent in 1999 from 16.7 percent in 1998 in the
quarter, and were flat in the year-to-date period.
Operating margin comparisons between periods reflect
productivity gains in the engine businesses along with
growth in sales of high-margin parts and accessories.
These benefits were partially offset by the
unfavorable margin differential between low-emission
outboards and traditional offerings, increased
spending on marketing and product development
investments, and softness in global outboard and
sterndrive pricing.
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
$122.9 million at September 30, 1999, down from $126.1
million at the end of 1998.
Cash provided by operating activities for the first
nine months of 1999 and 1998 totaled $182.3 million
and $178.0 million, respectively. 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 increase in cash
provided by operating activities between periods
reflects the benefits of improved working capital
management partially offset by the unfavorable effect
of the timing of tax payments between the two years.
During the first nine months of 1999, the Company
invested $110.0 million in capital expenditures,
compared with $117.5 million in 1998. Total debt at
September 30, 1999 decreased to $793.2 million versus
$805.5 million at December 31, 1998. Debt-to-
capitalization ratios at these dates were 35.6 percent
and 38.1 percent, respectively.
During the first nine months of 1999, the Company
repurchased 630,000 shares of its common stock for
$15.4 million in open market transactions under the
systematic repurchase program initiated in 1997.
The Company's financial flexibility and access to
capital markets is supported by its balance sheet
position, investment-grade credit ratings and ability
to generate significant cash from operating
activities. The Company had $120 million in
outstanding commercial paper at September 30, 1999,
with additional borrowing capacity of $280 million
under the Company's $400 million long-term credit
agreement with a group of banks. The Company has $150
million available under a universal shelf registration
filed in 1996 with the Securities and Exchange
Commission for the issuance of equity and/or debt
securities. Management believes that these factors
provide adequate sources of liquidity to meet its
long-term and short-term needs.
Refer to Note 4 to consolidated financial statements
and the Legal Proceedings section below for disclosure
of the potential cash requirements of legal proceedings
and to Note 6 to the 1998 consolidated financial statements
in the Company's Annual Report on Form 10-K for environmental
proceedings.
On October 27, 1999, the United States Tax Court
issued a ruling that upheld an Internal Revenue
Service determination that resulted in an increase in
the short-term capital gains and income distributions
from two partnership investments for 1990 and 1991.
This decision increases the Company's tax liability
relating to those years by approximately $60.0
million, plus accrued interest, but will not have an
unfavorable effect on the Company's results of
operations. The Company is evaluating whether to
appeal this decision. This matter is more fully
described in Note 13 to the consolidated financial
statements in the Company's 1998 Annual Report on Form 10-K.
Legal Proceedings
In June 1998, an adverse verdict was reached in a
lawsuit brought by a buying group of boat-builder
customers who purchased sterndrive and inboard marine
engines and whose purchases represented less than one-
fifth of all direct sales of sterndrive and inboard
engines to boat builders during the damage period
relevant to that action. That verdict and resulting
damage judgment of $133.2 million, after trebling, has
been appealed and the Company anticipates a decision
in the fourth quarter of 1999 or the first quarter of
2000. While there can be no assurance, the Company
believes it is likely to prevail on appeal and obtain
either a new trial or judgment in its favor.
Following the verdict, six additional suits were
filed, including five class action lawsuits, seeking
to rely on the allegations and findings of that
verdict. The Company has reached agreements to settle
or dismiss five of these lawsuits, four of which are
class action lawsuits. As a result, the Company
recorded a charge to operating earnings of $48.0
million ($30.7 million after tax, or $0.33 per diluted
share) in the third quarter of 1999. Payments related
to the settled lawsuits are expected to occur through
2001. In addition, as part of the settlement with a
competing seller of sterndrive marine engines, the
Company has entered into a long-term supply agreement
to purchase diesel sterndrive and inboard engines from
the competitor for use in certain models of boats
manufactured by the Company. The class action
settlements are subject to approval by the courts.
It is possible that additional suits will be filed, in
either federal or state court, asserting allegations
similar to those in the existing complaints and
purporting to represent similar or overlapping classes
of claimants.
If the adverse judgment is sustained after all appeals
and if the class action proceeds and is successful,
the damages ultimately payable by the Company would
have a material adverse effect on the Company's
results of operations for a particular accounting
period, and could have a material adverse effect on
the Company's consolidated financial condition.
The Company is unable to reasonably estimate the
ultimate outcome of these cases and, accordingly,
no expense for the unsettled cases has been recorded.
New Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133" (SFAS 137). SFAS 137 is
effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (March 31, 2001, for the
Company). The Company is assessing the effect of SFAS
137 and currently believes it will not have a material
effect on its results of operations or financial
position.
Year 2000
The Company uses software and related technologies
throughout its businesses and in certain of its
products that will be affected by the Year 2000 issue.
In January 1998, the Company initiated a formal
program to address the Year 2000 issue. The Year 2000
issue involves the inability of date-sensitive
computer applications to process dates beyond the year
2000. The Company's Year 2000 Project Office leads
initiatives that address areas with the potential of
having a major adverse effect on the business. The
Company's program has encompassed the use of both
internal and external resources to identify, remediate
and test systems for Year 2000 readiness. External
resources have included nationally recognized
consulting firms and other contractual resources to
supplement available internal resources.
The Company has completed its plan to address its
critical IT and non-IT systems that included a
combination of replacement projects, which were done
in connection with company-wide IT system upgrade
projects, and remediation activities. While
implementation of this plan is complete, Year 2000
multiple date testing for the last few systems is
ongoing,with an expected finish date for all critical
IT systems in the fourth quarter. Replacement and
remediation of critical non-IT systems is complete.
The Company has developed contingency plans to
mitigate potential Year 2000 related disruptions
caused by critical suppliers that have not
satisfactorily confirmed their Year 2000 readiness.
These plans include, among other actions, identifying
alternative sources of supply and building additional
inventory. The Company has assessed the Year 2000
readiness of its critical customers and suppliers and
has sent letters inquiring as to their Year 2000
readiness. Of approximately 1,300 suppliers
considered critical, approximately 5 percent were high
risk based on their responses. The Company has
supplemented, and will continue to supplement, this
written correspondence with additional procedures,
such as follow-up telephone interviews, to evaluate
risks associated with third parties.
The Company believes that its efforts to address the
Year 2000 issue will be successful in avoiding any
material adverse effect on the Company's results of
operations or financial condition; however, given the
complexity and number of potential risks, there can be
no guarantee that the Company's efforts will be
successful. The risks to a successful Year 2000 plan
include, but are not limited to, the readiness of
customers and suppliers, including suppliers of sole
and internationally sourced products; the availability
of technical resources; and the effectiveness of
systems replacement and remediation programs and
product fixes.
If the Company's efforts to achieve Year 2000
readiness are unsuccessful, the impact could have a
material adverse effect on the Company's results of
operations and financial condition. The potential
adverse effects include a limited ability to
manufacture and distribute products and process daily business
transactions.
The Company has developed comprehensive contingency
plans designed to mitigate the potential disruptions
that may result from the Year 2000 issue. These plans
may include securing alternative sources for key suppliers
of materials and services, replacing electronic applications
with manual processes, developing emergency backup and recovery
procedures, investing in safety stocks of key raw
materials and finished goods, having staff available at
certain critical locations during and after the Year 2000
rollover and other measures considered appropriate by
management. These contingency plans and the related cost
estimates will be continually refined as additional information
becomes available.
The costs of remediating existing software and other
Year 2000-related expenses are expected to total
approximately $18 million. The Company has expensed
approximately $17 million of costs since the Year 2000
assessment process began in 1997. The majority of
this amount was expensed in 1998. Costs associated
with the replacement of non-Year 2000 compliant
systems are included in capital expenditures as part
of the company-wide systems upgrade projects. Spending
on replacement projects necessary for Year 2000
readiness is substantially complete.
The foregoing discussion regarding the Year 2000
project timing, effectiveness, implementation and
costs is based on management's current evaluation
using available information. Factors that might cause
material changes include, but are not limited to, the
availability of resources, the readiness of third
parties and the Company's ability to respond to
unforeseen Year 2000 compliance issues.
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 domestic or foreign
economic conditions; Year 2000 issues including the
effectiveness of the Company's remediation and
replacement initiatives, the readiness of third
parties including customers and suppliers and the
Company's ability to complete the information systems
initiatives within the time and cost estimated; the
Company's ability to develop and manufacture new
products; new and competing technology; inventory
adjustments by major retailers; competitive pricing
pressures; the outcome of pending or potential
litigation; and adverse weather conditions retarding
sales of outdoor recreation products.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Note 4 to Consolidated Financial Statements in Part I of this
Quarterly Report on pages 7 and 8 is hereby
incorporated by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K
during the three months ended
September 30, 1999.
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 15, 1999 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.