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 June 30, 2000
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 a 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 August 1, 2000, there were 87,291,711 shares of common stock
($0.75 par value) outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
BRUNSWICK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED JUNE 30
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
2000 1999 2000 1999
NET SALES $ 1,136.8 $ 1,043.7 $ 2,171.7 $ 1,988.8
Cost of sales 799.5 732.2 1,537.3 1,408.5
Selling, general and administrative expense 182.1 174.8 358.4 336.9
OPERATING EARNINGS 155.2 136.7 276.0 243.4
Interest expense (18.8) (15.1) (35.2) (30.6)
Other income (expense) (0.4) 2.1 0.7 1.4
EARNINGS BEFORE INCOME TAXES 136.0 123.7 241.5 214.2
Income tax provision (50.5) (45.9) (90.6) (80.3)
EARNINGS BEFORE INCOME TAXES 85.5 77.8 150.9 133.9
Earnings (loss) from discontinued operations, net of tax (65.0) 4.6 (71.7) 6.1
Loss from disposal of discontinued operations, net of tax (125.0) - (125.0) -
NET EARNINGS (LOSS) $ (104.5) $ 82.4 $ (45.8) $ 140.0
BASIC EARNINGS PER COMMON SHARE:
Earnings from continuing operations $ 0.97 $ 0.85 $ 1.68 $ 1.46
Earnings (loss) from discontinued operations (0.74) 0.05 (0.80) 0.07
Loss from disposal of discontinued operations (1.42) - (1.39) -
Net earnings (loss) $ (1.19) $ 0.90 $ (0.51) $ 1.52
DILUTED EARNINGS PER COMMON SHARE:
Earnings from continuing operations $ 0.97 $ 0.84 $ 1.68 $ 1.45
Earnings (loss) from discontinued operations (0.74) 0.05 (0.80) 0.07
Loss from disposal of discontinued operations (1.42) - (1.39) -
Net earnings (loss) $ (1.19) $ 0.89 $ (0.51) $ 1.51
AVERAGE SHARES USED FOR COMPUTATION OF:
BASIC EARNINGS PER SHARE 88.1 91.9 89.8 91.9
DILUTED EARNINGS PER SHARE 88.1 92.6 89.8 92.5
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.125 $ 0.125 $ 0.25 $ 0.25
The notes are an integral part of these consolidated statements.
2
BRUNSWICK CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000, DECEMBER 31, 1999, AND JUNE 30, 1999
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
June 30, December 31, June 30,
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost,
which approximates market $ 134.9 $ 100.8 $ 108.2
Accounts and notes receivable,
less allowances of $22.8, $18.9 and $19.6 510.4 391.7 463.5
Inventories
Finished goods 292.2 245.5 211.1
Work-in-process 153.2 145.0 141.3
Raw materials 97.3 84.5 77.7
Net inventories 542.7 475.0 430.1
Prepaid income taxes 364.8 257.2 228.0
Prepaid expenses 39.4 53.1 45.5
Income tax refund receivable - 25.1 -
Net assets of discontinued operations offered for sale 229.0 336.1 557.6
CURRENT ASSETS 1,821.2 1,639.0 1,832.9
PROPERTY
Land 72.6 73.2 70.0
Buildings 396.9 386.0 383.1
Equipment 994.7 977.2 921.9
Total land, buildings and equipment 1,464.2 1,436.4 1,375.0
Accumulated depreciation (762.0) (731.5) (710.8)
Net land, buildings and equipment 702.2 704.9 664.2
Unamortized product tooling costs 121.9 125.0 111.9
NET PROPERTY 824.1 829.9 776.1
OTHER ASSETS
Goodwill 489.9 497.8 500.1
Other intangibles 82.0 88.3 93.9
Investments 97.5 64.3 83.1
Other long-term assets 181.8 169.5 165.0
OTHER ASSETS 851.2 819.9 842.1
TOTAL ASSETS $ 3,496.5 $ 3,288.8 $ 3,451.1
The notes are an integral part of these consolidated statements.
3
BRUNSWICK CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000, DECEMBER 31, 1999, AND JUNE 30, 1999
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
JUNE 30, December 31, June 30,
2000 1999 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt, including
current maturities of long-term debt $ 274.5 $ 107.7 $ 188.1
Accounts payable 267.7 266.5 241.0
Accrued expenses 820.0 648.2 564.2
Accrued income taxes 19.2 - 28.2
CURRENT LIABILITIES 1,381.4 1,022.4 1,021.5
LONG-TERM DEBT
NOTES, MORTGAGES AND DEBENTURES 615.8 622.5 629.1
DEFERRED ITEMS
Income taxes 132.9 131.9 161.2
Postretirement and postemployment benefits 143.2 141.7 142.4
Compensation and other 79.5 70.1 65.8
DEFERRED ITEMS 355.6 343.7 369.4
COMMON 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 314.4 314.3 312.9
Retained earnings 1,113.3 1,181.5 1,306.5
Treasury stock, at cost:
15,261,000; 10,727,000 and 10,690,000 shares (297.3) (214.0) (209.8)
Unamortized ESOP expense and other (45.1) (49.3) (52.0)
Accumulated other comprehensive income (loss) (18.5) (9.2) (3.4)
COMMON SHAREHOLDERS' EQUITY 1,143.7 1,300.2 1,431.1
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,496.5 $ 3,288.8 $ 3,451.1
The notes are an integral part of these consolidated statements.
4
BRUNSWICK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
(IN MILLIONS)
(UNAUDITED)
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $(45.8) $140.0
Depreciation and amortization 79.5 76.7
Changes in noncash current assets
and current liabilities (143.2) (131.3)
Litigation settlement payments (47.6) -
Income taxes 51.3 4.9
Loss on discontinued operations 196.7 -
Other, net (6.3) (4.3)
NET CASH PROVIDED BY CONTINUING OPERATIONS 84.6 86.0
NET CASH USED FOR DISCONTINUED OPERATIONS (0.4) (18.2)
NET CASH PROVIDED BY OPERATING ACTIVITIES 84.2 67.8
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (65.0) (57.9)
Investments (41.2) -
Acquisitions of businessess - (2.3)
Other, net 4.4 3.1
NET CASH USED FOR CONTINUING OPERATIONS (101.8) (57.1)
NET CASH USED FOR DISCONTINUED OPERATIONS (1.6) (9.5)
NET CASH USED FOR INVESTING ACTIVITIES (103.4) (66.6)
CASH FLOWS FROM FINANCING ACTIVITIES
Net issuances/repayments of commercial paper
and other short-term debt 164.1 16.2
Payments of long-term debt including
current maturities (3.9) (4.6)
Cash dividends paid (22.4) (23.0)
Stock repurchases (85.4) (10.5)
Stock options exercised 0.9 2.8
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 53.3 (19.1)
Net increase (decrease) in cash and cash equivalents 34.1 (17.9)
Cash and cash equivalents at January 1 100.8 126.1
CASH AND CASH EQUIVALENTS AT JUNE 30 $134.9 $108.2
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 36.3 $ 31.7
Income taxes paid, net $ 39.3 $ 79.1
Treasury stock issued for compensation plans and other $ 1.1 $ 8.4
The notes are an integral part of these consolidated statements.
5
Brunswick Corporation
Notes to Consolidated Financial Statements
June 30, 2000, December 31, 1999, and June 30, 1999
(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 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. 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 1999 Annual Report on Form 10-K.
These interim results include, in the opinion of management, all
normal and recurring adjustments necessary to present fairly the
results of operations for the periods ended June 30, 2000 and
1999. The 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 basic
and diluted earnings per share. The difference in the average
shares of common stock outstanding used to compute basic and
diluted earnings per share is caused by potential common stock
relating to employee compensation plans. The average number of
shares of potential common stock was less than 0.1 million for the
quarter and six-month periods ended June 30, 2000. The average
number of shares of potential common stock was 0.7 million and 0.6
million for the quarter and six-month period ended June 30, 1999,
respectively.
Note 3 - Debt
Commercial paper outstanding increased to $262.9 million at June
30, 2000, compared with $95.0 million at December 31, 1999, to
fund seasonal working capital requirements, stock repurchases and
capital expenditures. The weighted-average interest rate for
commercial paper borrowings was 6.56 percent and 5.07 percent for
the quarters ended June 30, 2000 and 1999, respectively, and 6.34
percent and 5.14 percent for the six-month periods ended June 30,
2000 and 1999, respectively.
Note 4 - Legal and Environmental
On March 24, 2000, the United States Court of Appeals for the
Eighth Circuit issued an opinion reversing and vacating a verdict
entered against the Company in the case Concord Boat Corporation,
et al. v. Brunswick Corporation (Concord). In June 1998, a jury
had awarded the Concord plaintiffs treble damages totaling $133.2
million based on alleged antitrust violations involving the sale
of sterndrive and inboard marine engines. The Concord plaintiffs
were also awarded attorneys' fees and costs. The Company appealed
and the appellate court reversed and vacated the judgment,
including the award of fees and costs, remanding the case for
entry of judgment in the Company's favor. On June 13, 2000, the
appellate court denied the Concord plaintiffs' motion for a
rehearing. The Concord plaintiffs may seek review of the
appellate court's decision by the United States Supreme Court, but
review by the Court is discretionary.
6
Note 4 - Legal and Environmental (Continued)
The Company previously reached agreements to settle or dismiss six
additional suits, including five class-action lawsuits filed after
the 1998 Concord verdict, seeking to rely on the allegations and
findings in the Concord suit. Reserves related to these settlements
decreased from $58.4 million at December 31, 1999, to $10.8 million
at June 30, 2000, as a result of payments made under the terms of
the settlements. Refer to Note 6 to the consolidated financial
statements in the Company's 1999 Annual Report on Form 10-K for
a more detailed description of the Concord suit and settled actions.
On October 26, 1999, a federal court jury in Seattle, Washington,
awarded Precor, a subsidiary of Illinois Tool Works, Inc.,
approximately $5.2 million in a patent infringement trial against
the Company, as successor in interest to the predecessor entities
of its Life Fitness division, upon the basis that certain Life
Fitness treadmills willfully infringed a Precor design patent.
Precor was also awarded up to $5.3 million in attorneys' fees and
will be entitled to prejudgment interest on the damage award. The
Company has appealed the verdict and the award of attorneys' fees.
On May 23, 2000, a $13.0 million surety bond was issued to secure
damages while the Company pursues its appeal. While there can be
no assurances, the Company believes it is likely to prevail on the
Precor appeal and obtain either a new trial or judgment in its
favor. The Company is unable to predict the outcome of the Precor
case, and accordingly, no expense for this case has been recorded.
The Company is involved in certain legal and administrative
proceedings under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 and other federal and state
legislation governing the generation and disposition of certain
hazardous wastes. These proceedings, involving both on- and off-
site waste disposal or other contamination, in many instances seek
compensation from the Company as a waste generator under Superfund
legislation, which authorizes action regardless of fault, legality
of original disposition or ownership of a disposal site. Refer to
Note 6 to the consolidated financial statements in the Company's
1999 Annual Report on Form 10-K for disclosure of the potential
cash requirements of environmental proceedings.
The Company has been identified by the Wisconsin Department of
Natural Resources (WDNR) as being responsible for part of the
polychlorinated biphenyl (PCB) contamination in a creek alleged to
have come from a manufacturing facility that the Company closed in
1980. The Company has undertaken studies of the creek and has
removed PCB contaminated sediment from a portion of the creek.
The WDNR has notified the Company that it must complete a
feasibility study that addresses additional contamination in the
creek and undertake additional remediation efforts. The Company
is currently unable to fully estimate the cost of the remaining
work because of uncertainty as to the full extent of the PCB
contamination, the applicable cleanup criteria, the methodology to
be used to address the contamination and other factors. The
ultimate cost of the work could exceed the range of exposure
estimated at year end and any provisions required to increase
reserves could be significant to the Company's results of
operations in the period recognized, but management does not
believe that it will have a material adverse effect on the
Company's consolidated financial position or liquidity.
Note 5 - Segment Data
In conjunction with its June 27, 2000, announcement to divest its
bicycle, camping and fishing businesses, the Company's segments
have been realigned to be consistent with the remaining businesses
and current reporting structure. The Company's reportable
segments are: Marine Engine, Boat and Recreation. Prior-year
numbers have been restated to conform with the current
presentation.
The Marine Engine segment markets and manufactures outboard,
sterndrive and inboard engines, marine parts and accessories and
electric trolling motors. These products are principally sold
directly to boat builders or through dealers worldwide. The
segment also manufactures and distributes boats in certain
international markets. The Company's engine manufacturing plants
are located primarily in the United States, and sales are also
primarily in the United States.
7
Note 5 - Segment Data (Continued)
The Boat segment markets and manufacturers a complete line of
pleasure boats, including runabouts, cruisers, yachts, high-
performance boats and offshore fishing boats, which are marketed
through dealers. The segment's boat plants are located in the
United States, and sales are primarily in the United States.
The Recreation segment markets and manufactures fitness equipment,
including treadmills, cross-training equipment, stationary bikes
and weight-training equipment; bowling capital equipment,
including lanes, pinsetters, automatic scorers, bowling balls and
other accessories; coolers including, ice chests, beverage
coolers, and thermoelectric products; billiards tables and
accessories; and shooting sports accessories; and operates bowling
centers. These products are manufactured in plants in the United
States and sourced from or manufactured in foreign locations.
Fitness equipment is sold primarily in the United States and
Europe to health clubs, military, government, corporate and
university facilities, and consumers through specialty retail
shops. Bowling capital equipment is sold through a direct sales
force in the United States and foreign markets, primarily Europe
and Asia. Bowling balls, coolers, shooting sports accessories and
billiards equipment are predominately sold in the United States
and are distributed primarily through mass merchandisers, sporting
goods stores and specialty shops.
The following table sets forth net sales and operating earnings of
each of the Company's reportable segments for the quarter and six-
month periods ended June 30, 2000 and 1999 (in millions):
Quarter ended June 30
2000 1999
Net Operating Net Operating
Sales Earnings Sales Earnings
Marine Engine $ 543.7 $102.7 $ 488.2 $ 91.1
Boat 409.3 47.1 390.7 39.8
Marine eliminations (83.9) -- (76.6) --
Total Marine 869.1 149.8 802.3 130.9
Recreation 267.8 15.6 241.4 17.1
Corporate/Other (0.1) (10.2) -- (11.3)
Total continuing operations $1,136.8 $155.2 $1,043.7 $136.7
Six Months ended June 30
2000 1999
Net Operating Net Operating
Sales Earnings Sales Earnings
Marine Engine $ 992.4 $165.2 $ 891.0 $ 147.8
Boat 827.8 85.0 759.1 69.2
Marine eliminations (163.3) -- (146.3) --
Total Marine 1,656.9 250.2 1,503.8 217.0
Recreation 515.1 46.7 485.1 48.3
Corporate/Other (0.3) (20.9) (0.1) (21.9)
Total continuing operations $2,171.7 $276.0 $1,988.8 $ 243.4
8
Note 5 - Segment Data (Continued)
The following table sets forth the total assets of each of the
Company's reportable segments at June 30, 2000, and December 31,
1999 (in millions):
June 30, December 31,
2000 1999
Marine Engine $ 871.0 $ 768.3
Boat 633.7 594.1
Total Marine 1,504.7 1,362.4
Recreation 1,098.8 1,052.4
Corporate/Other 664.0 537.9
Total continuing oeprations 3,267.5 2,952.7
Discontinued operations 229.0 336.1
Total assets $3,496.5 $3,288.8
Note 6 - Discontinued Operations
On June 27, 2000, the Company announced its intention to divest
its bicycle, camping and fishing businesses. The consolidated
financial statements for all periods have been restated to present
the bicycle, camping and fishing businesses as discontinued
operations in accordance with Accounting Principles Board Opinion
No. 30. The Company intends to dispose of the assets of these
businesses through sales transactions.
Results from discontinued operations for the quarter and six-month
periods ended June 30, 2000 and 1999, were as follows (in millions):
Quarter ended Six Months ended
June 30 June 30
2000 1999 2000 1999
Net sales $ 138.7 $131.6 $ 252.9 $269.7
Pretax earnings (loss):
Earnings (loss) from $ (99.0) $ 7.5 $(109.8) $ 9.8
discontinued operations
Loss from disposal of
discontinued operations (189.0) -- (189.0) --
Pretax earnings (loss) $(288.0) $ 7.5 $(298.8) $ 9.8
The pretax loss from discontinued operations of $99.0 million in
the second quarter of 2000 includes the write-off of goodwill and
other long-term assets related to the camping business ($76.0
million pretax, $50.0 million after tax). The write-off was
necessary as the Company determined that additional actions would
not improve operating performance to levels sufficient to recover
its investment in these assets. Also included were asset write-
downs and restructuring costs, primarily severance in the fishing
and camping businesses necessitated by a change in business
conditions and the decision to source certain fishing reels that
were previously manufactured. The year-to-date results for the
discontinued operations include a $7.0 million strategic charge
that was recorded in the first quarter of 2000 for the bicycle
business, which is discussed further in Note 7 to the consolidated
financial statements.
The loss from disposal recorded in the second quarter totaled
$189.0 million pretax and $125.0 million after tax. This loss was
based on an estimate of cash proceeds, net of costs to sell, along
with an estimate of results of operations for these businesses
through the disposition date.
The net assets of these businesses have been segregated as net
assets of discontinued operations offered for sale. Net assets of
discontinued operations offered for sale at June 30, 2000, of
$229.0 million, consisted of current assets and liabilities and
net property, plant and equipment. The balance of the accrual
established in connection with the divestiture of the discontinued
operations at June 30, 2000, was $189.0 million.
9
Note 7 - Asset Write-Downs and Strategic Charges
During the fourth quarter of 1999, prior to the announcement of
its intention to divest the bicycle business, the Company
committed to and initiated plans to exit bicycle manufacturing
facilities, reduce warehouse capacity and administrative expenses
and rationalize product offerings. As a result of these actions,
the Company recorded a $178.0 million charge to operating earnings
relating to the bicycle business in the fourth quarter of 1999.
These charges included the write-off of goodwill of $133.6
million, inventory write-downs of $27.0 million and $10.5 million
of fixed asset write-downs, along with other incremental costs
associated with the actions of $6.9 million. An additional charge
of $7.0 million for severance, related to the termination of
approximately 1,250 employees, and other incremental costs was
recorded in the first quarter of 2000. Approximately 45 percent of
the planned severance actions have been completed, with the remainder
expected to occur before the end of the third quarter of 2000.
During the third quarter of 1998, the Company recorded a pretax
charge of $60.0 million 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.
The following table sets forth the activity in the accrued expense
balances relating to the above-mentioned strategic charges at June
30, 2000 (in millions):
December 31, 2000 2000 June 30,
1999 Charge Activity 2000
Severance $ -- $ 4.0 $ (1.9) $ 2.1
Lease termination 10.9 -- (1.8) 9.1
Other incremental costs 5.5 3.0 (2.2) 6.3
Total $16.4 $ 7.0 $ (5.9) $17.5
The balance of the severance-related accruals covers future
payments to be made for severance actions. Lease termination
costs are expected to be paid over the contractual terms of the
leases. Fixed assets to be disposed under the 1999 charge totaled
$16.5 million at December 31, 1999, and $13.0 million at June 30,
2000. Related reserves were $10.5 million at December 31, 1999,
and $7.7 million at June 30, 2000.
Note 8 - Comprehensive Income (Loss)
Accumulated other comprehensive income includes cumulative foreign
currency translation adjustments, unrealized gains and losses on
investments and minimum pension liability adjustments.
Comprehensive income (loss) for the quarter and six-month periods
ended June 30, 2000 and 1999, was as follows (in millions):
Quarter ended Six Months ended
June 30 June 30
2000 1999 2000 1999
Net earnings (loss) $(104.5) $82.4 $(45.8) $140.0
Other comprehensive income (loss) (4.9) 2.0 (9.3) 2.4
Comprehensive income (loss) $(109.4) $84.4 $(55.1) $142.4
Note 9 - Income Taxes
On October 27, 1999, the United States Tax Court issued a ruling
that upheld an Internal Revenue Service (IRS) determination that
resulted in the disallowance of capital losses and other expenses
from two partnership investments for 1990 and 1991. On July 17,
2000, the Company filed a Notice of Appeals for the District of
Columbia seeking a reversal of the United States Tax Court's
decision. 10
Note 9 - Income Taxes (Continued)
If the Company does not prevail in its appeal, the amount of taxes
due would total approximately $60 million, plus interest, net of
tax, of approximately $50 million. The Company is also in the
process of settling IRS audits on open tax years 1989 through 1991
and anticipates favorable adjustments that would decrease the
total tax owed to approximately $40 million, with the accompanying
interest, net of tax, of approximately $30 million. The interest
components and resulting total cash payment will continue to
increase until the tax liability is resolved. The cash payments
related to an unfavorable resolution in this matter are not likely
to occur until 2002. The Company does not anticipate any adverse
effects on its results of operations in the event of an
unfavorable resolution of this matter. This matter is more fully
described in Note 13 to the consolidated financial statements in
the Company's 1999 Annual Report on Form 10-K.
Note 10 - Subsequent Events
A $133.2 million surety bond was issued in 1998 to secure damages
awarded in the Concord suit, which was previously described in
Note 4 to the consolidated financial statements, while the Company
pursued its appeal of the suit. On July 10, 2000, the appellate
court ordered the release of the bond in the Concord suit,
relieving the Company from any and all obligation to maintain the
$133.2 million surety bond previously ordered by the trial court.
On July 14, 2000, the Company filed a $79.8 million surety bond to
secure payment of tax deficiencies plus accrued interest related
to the Company's appeal of a United States Tax Court determination.
This matter is more fully described in Note 9 to the consolidated
financial statements.
11
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Matters Affecting Comparability
On June 27, 2000, the Company announced its intention to divest
its bicycle, camping and fishing businesses. The consolidated
financial statements present the results from these businesses as
discontinued operations. In conjunction with this announcement,
the Company's segments have been realigned to be consistent with
the remaining businesses and current reporting structure. The
Company's reportable segments are: Marine Engine, Boat and
Recreation. Prior-year numbers have been restated to conform with
the discontinued operations and new segment presentation. Refer
to Note 5 to the consolidated financial statements for a
description of the businesses that comprise each of the reportable
segments.
Results of Operations
Consolidated
The following table sets forth certain amounts, along with ratios
and relationships calculated from the consolidated statements of
income, for the quarter and six-month periods ended June 30, 2000
and 1999 (dollars in millions, except share data):
Quarter ended Six Months ended
June 30 June 30
2000 1999 2000 1999
Net sales $1,136.8 $1,043.7 $2,171.7 $1,988.8
Percent increase 8.9% 6.7% 9.2% 11.1%
Operating earnings $ 155.2 $ 136.7 $ 276.0 $ 243.4
Earnings from continuing operations $ 85.5 $ 77.8 $ 150.9 $ 133.9
Earnings (loss) from discontinued
operations, net of tax (65.0) 4.6 (71.7) 6.1
Loss from disposal of discontinued
operations, net of tax (125.0) -- (125.0) --
Net earnings (loss) $ (104.5) $ 82.4 $ (45.8) $ 140.0
Diluted earnings per share from
continuing operations $ 0.97 $ 0.84 $ 1.68 $ 1.45
Diluted earnings (loss) per share
from discontinued operations (0.74) 0.05 (0.80) 0.07
Diluted loss per share from disposal
of discontinued operations (1.42) -- (1.39) --
Diluted earnings (loss) per share $ (1.19) $ 0.89 $ (0.51) $ 1.51
Expressed as a percentage of net sales:
Gross margin 29.7% 29.8% 29.2% 29.2%
Selling, general and administrative
expense 16.0% 16.7% 16.5% 16.9%
Operating margin 13.7% 13.1% 12.7% 12.2%
Sales increased by $93.1 million, or 8.9 percent, to $1,136.8 million
in the second quarter of 2000. In the year-to-date period, sales
increased by $182.9 million to $2,171.7 million from $1,988.8 million
in the comparable period of 1999. The increases in the periods
reflect sales gains resulting from strong demand for low-emission
outboard engines in both the domestic and international markets, as
well as for sterndrive engines; continued growth in sales of larger,
higher-margin cruisers and yachts; and from growth in fitness equipment
sales due to an ongoing strong health club market in the United States,
combined with the successful results from new product introductions in the
commercial and high-end consumer segments.
12
Gross margin percentages decreased 10 basis points in the second
quarter of 2000 to 29.7 percent from 29.8 percent in the comparable
quarter of 1999. The gross margin for the first half of 2000 was
29.2 percent, consistent with the first half of 1999. These gross
margin comparisons reflect unfavorable currency movements resulting
from a stronger dollar against key currencies, primarily the Euro,
which were offset by a more favorable product mix and improved pricing
in boats.
In the second quarter of 2000, selling, general and administrative
(SG&A) expenses as a percent of sales decreased 70 basis points to
16.0 percent from 16.7 percent in the second quarter of 1999. In
the year-to-date period, SG&A expenses as a percent of sales
declined 40 basis points to 16.5 percent compared with 16.9 percent
in the same period in 1999. These comparisons benefited from cost
containment efforts and from spending in 1999 on legal matters and
Year 2000 activities, which more than offset costs associated with
new product introductions and development in the fitness business.
Operating earnings totaled $155.2 million in the second quarter of
2000, increasing 13.5 percent over the comparable quarter of 1999.
Year-to-date operating earnings in 2000 were $276.0 million, which was
$32.6 million higher than in 1999. Operating margins increased 60
basis points in the second quarter to 13.7 percent from 13.1 percent
in the same quarter of 1999. Operating margins also increased in
the first half of the year, improving 50 basis points to 12.7 percent
from 12.2 percent in the first six months of 1999.
Interest expense for the second quarter of 2000 was $18.8 million,
$3.7 million higher than the comparable quarter of 1999. Year-to-date
interest expense in 2000 totaled $35.2 million, which was 15.0 percent
above the same period of 1999. The increase for both the quarter and
year-to-date periods was due to an increase in the weighted-average
interest rate on commercial paper as compared with 1999. In addition,
the average debt balance outstanding in 2000 was higher than the
comparable periods of 1999 as a result of increased commercial paper
borrowings incurred to fund seasonal working capital requirements,
stock repurchases and capital expenditures.
The effective tax rate was 37.1 percent and 37.5 percent for the
second quarter and six-month periods ended June 30, 2000 and 1999,
respectively.
Earnings from continuing operations for the quarter ended June 30,2000,
of $85.5 million were $7.7 million higher than the comparable quarter
of 1999. Year-to-date earnings from continuing operations of
$150.9 million in 2000 increased 12.7 percent from $133.9 million
in 1999. Net earnings, including the discontinued operations
discussed below, resulted in a $104.5 million loss for the quarter
compared with $82.4 million in earnings for the second quarter
of 1999. For the year-to-date period, net earnings, including the
discontinued operations, resulted in a $45.8 million loss versus
$140.0 million in earnings for the first half of 1999.
Average common shares outstanding used to calculate diluted earnings
per share decreased by 4.5 million shares to 88.1 million in the
second quarter of 2000 from 92.6 million in the same quarter of 1999,
and in the six-month period decreased by 2.7 million shares to
89.8 million in 2000 from 92.5 million in 1999. The decrease in both
periods primarily reflects stock repurchased during the first half of 2000.
Discontinued Operations
The pretax loss from discontinued operations of $99.0 million in
the second quarter of 2000 included the write-off of goodwill and
other long-term assets related to the camping business. The write-
off was necessary as the Company determined that additional actions
would not improve operating performance to levels sufficient to
recover its investment in these assets. Also included were asset
write-downs and restructuring costs, primarily severance in the fishing
and camping businesses necessitated by a change in business conditions
and the decision to source certain fishing reels that were previously
manufactured. The loss from disposal was based on an estimate of cash
proceeds, net of costs to sell, along with an estimate of results from
operations for these businesses through the disposition date.
13
The Company anticipates disposing of these businesses by June 2001.
Cash generated from these dispositions, including cash proceeds, costs
to sell, cash required to fund operations through disposition and
related tax benefits realized in connection with the divestitures, is
expected to approximate $175 million. The cash benefits are likely to
be realized in 2001 and 2002. The timing of these cash receipts is
tied to the completion of the related transactions and the impact on the
Company's tax payments. The amounts ultimately realized by the Company
could differ materially from the amounts assumed in arriving at the loss
from disposal of discontinued operations and could result in future
gains or losses from disposal of discontinued operations. Risks that could
influence the outcome include, but are not limited to, the Company's ability
to dispose of the bicycle, camping and fishing businesses within the time,
price and manner estimated and its ability to maintain key customers
during the divestiture period.
Marine Engine Segment
The following table sets forth Marine Engine segment results for the quarter
and six-month periods ended June 30, 2000 and 1999 (dollars in millions):
Quarter ended June 30 Six Months ended June 30
2000 1999 2000 1999
Net sales $543.7 $488.2 $992.4 $891.0
Operating earnings $102.7 $ 91.1 $165.2 $147.8
Operating margin 18.9% 18.7% 16.6% 16.6%
Capital expenditures $ 15.5 $ 11.7 $ 25.0 $ 22.4
In the second quarter, Marine Engine segment sales increased 11.4 percent
to $543.7 million from $488.2 million in the second quarter of 1999. In
the six-month period, sales also increased 11.4 percent to $992.4 million
from $891.0 million. The increase in both periods resulted from double-digit
growth in sales from the domestic outboard engine and international
operations, as well as a strong contribution from sterndrive engines.
These gains weredriven by good consumer demand for low-emission outboards,
in both domestic and international markets, and a favorable shift in product
mix to larger sterndrive engines.
Operating earnings were $102.7 million in the second quarter of 2000, up
$11.6 million from $91.1 million in the same period last year, and
operating margins increased to 18.9 percent in 2000 from 18.7 percent
in 1999. For the first six months of 2000, operating earnings increased
11.8 percent to $165.2 million from $147.8 million, while operating
margins remained flat at 16.6 percent. The aforementioned increases in
sales, along with increased production volumes and an improved mix of
larger sterndrive engines, favorably affected these comparisons. Also
benefiting these comparisons was non-recurring spending in 1999 on legal
matters. These factors helped to mitigate the adverse effect of a stronger
dollar against key currencies and the unfavorable margin differential between
low-emission and traditional outboard offerings due to higher initial
production costs.
Boat Segment
The following table sets forth Boat segment results for the quarter and
six-month periods ended June 30, 2000 and 1999 (dollars in millions):
Quarter ended June 30 Six Months ended June 30
2000 1999 2000 1999
Net sales $409.3 $390.7 $827.8 $759.1
Operating earnings $ 47.1 $ 39.8 $ 85.0 $ 69.2
Operating margin 11.5% 10.2% 10.3% 9.1%
Capital expenditures $ 12.6 $ 9.2 $ 21.1 $ 15.6
14
In the second quarter of 2000, the Boat segment reported a 4.8 percent
increase in sales to $409.3 million from $390.7 million in the comparable
period of 1999. In the year-to-date period, sales increased 9.1 percent
to $827.8 million from $759.1 million. These increases reflect continued
strong demand for larger boats.
Operating earnings for the segment were $47.1 million in the second quarter
of 2000, up 18.3 percent from the same period of 1999. Operating margins
in the quarter increased 130 basis points to 11.5 percent from 10.2 percent
in 1999. Operating earnings of $85.0 million for the year-to-date period
increased 22.8 percent compared with $69.2 million in 1999. Operating
margins for the first half of 2000 were 10.3 percent versus 9.1 percent in
1999. The strong growth in operating margins reflects improved pricing and
the benefits from continued growth in sales of larger, higher-margin boats.
Recreation Segment
The following table sets forth Recreation segment results for the quarter
and six-month periods ended June 30, 2000 and 1999 (dollars in millions):
Quarter ended June 30 Six Months ended June 30
2000 1999 2000 1999
Net sales $267.8 $241.4 $515.1 $485.1
Operating earnings $ 15.6 $ 17.1 $ 46.7 $ 48.3
Operating margin 5.8% 7.1% 9.1% 10.0%
Capital expenditures $ 10.7 $ 9.9 $ 18.1 $ 19.1
The Recreation segment recorded sales of $267.8 million in the second
quarter of 2000, an increase of 10.9 percent over 1999. Sales for the
first six months of 2000 increased $30.0 million to $515.1 million
from $485.1 million in 1999. This increase was a result of growth in
fitness equipment sales due to a continued strong health club market
in the United States and the success of new product launches in the
commercial and high-end consumer segments. Bowling equipment revenues
also increased as a result of improved capital equipment sales
primarily in the United States and Europe. Revenues from bowling center
operations declined as sales improvements from upgraded bowling centers
were more than offset by a 5 percent (six bowling center) reduction in
the number of bowling centers versus the prior year.
Operating earnings totaled $15.6 million in the second quarter of
2000 versus $17.1 million in 1999, an 8.8 percent decline, while
operating margins were 5.8 percent in 2000 compared with 7.1 percent
in 1999. Operating earnings for the first six months of 2000
decreased 3.3 percent to $46.7 million from $48.3 million in 1999,
and operating margins dropped to 9.1 percent from 10.0 percent. The
majority of the decline in segment operating margins was attributable
to lower operating margins in the cooler business resulting from higher
material and freight costs that exceeded productivity improvements.
Costs associated with new product introductions and development in the
fitness business also contributed to the decline.
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 $134.9 million at June 30, 2000, up from $100.8 million at
the end of 1999. Cash provided by operating activities for the
first half of 2000 totaled $84.2 million versus $67.8 million in 1999.
Cash flow from operating activities in 2000 also includes more
favorable income tax related cash flows versus the prior year.
Cash flow from operating activities for the first half of both 2000
and 1999 includes the effects of a seasonal build in operating working
capital that resulted in a use of $143.2 million in 2000 versus
$131.3 million in 1999. At June 30, 2000, inventories were $542.7 million
versus $475.0 million at December 31, 1999, and $430.1 million at
June 30, 1999. The year-over-year increase of $112.6 million was primarily
due to growth in boat and marine engine inventories, and reflected
increased investment to support sales growth, timing of
15
shipments to customers and increases in safety stock resulting from pending
labor negotiations. Accounts receivable totaled $510.4 million at
June 30, 2000, versus $391.7 million at December 31, 1999, and
$463.5 million at June 30, 1999. The $46.9 million growth in
receivables versus the prior year was primarily due to the growth
in sales. Accrued expenses increased to $820.0 million at June 30, 2000,
from $648.2 million at December 31, 1999. This increase reflects the
$189.0 million accrual established in connection with the divestiture of
the discontinued operations and increases in warranty and similar accruals
related to growth in the business, offset by the effects of $47.6 million
of payments related to the antitrust litigation settlements, which are
discussed in the Legal Proceedings and Contingencies section below.
During the first six months of 2000, the Company invested $65.0 million
in capital expenditures compared with $57.9 million in 1999. Investments
of $41.2 million in the first half of 2000 were primarily comprised of
amounts invested in Internet-related businesses and fitness equipment
distribution alliances. Total debt at June 30, 2000, increased to
$890.3 million versus $730.2 million at the end of 1999, due to
increased commercial paper borrowings to fund seasonal working capital
requirements, stock repurchases and capital expenditures.
Debt-to-capitalization ratios at these dates were 43.8 percent and
36.0 percent, respectively.
On February 8, 2000, the Company announced a program to repurchase
$100 million of its common stock from time to time in the open
market or through privately negotiated transactions. During the
first six months of 2000, the Company repurchased 4.6 million
shares of its common stock for $84.7 million in open market
transactions under this program. An additional $0.7 million of
shares were purchased in the first half of 2000 under a systematic
repurchase program authorized in October 1997. Future repurchases
of the Company's common stock will be considered; however, in the
short-term the Company intends to use excess cash to reduce debt.
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 $262.9 million in
outstanding commercial paper at June 30, 2000, with additional
borrowing capacity of $137.1 million under its $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.
Legal Proceedings and Contingencies
On March 24, 2000, the United States Court of Appeals for the
Eighth Circuit issued an opinion reversing and vacating a verdict
entered against the Company in the case Concord Boat Corporation,
et al. v. Brunswick Corporation (Concord). In June 1998, a jury
had awarded the Concord plaintiffs treble damages totaling
$133.2 million based on alleged antitrust violations involving the sale
of sterndrive and inboard marine engines. The Concord plaintiffs
were also awarded attorneys' fees and costs. The Company appealed
and the appellate court reversed and vacated the judgment,
including the award of fees and costs, remanding the case for
entry of judgment in the Company's favor. On June 13, 2000, the
appellate court denied the Concord plaintiffs' motion for a
rehearing. The Concord plaintiffs may seek review of the
appellate court's decision by the United States Supreme Court, but
review by the Court is discretionary.
The Company previously reached agreements to settle or dismiss six
additional suits, including five class-action lawsuits filed after
the 1998 Concord verdict, seeking to rely on the allegations and
findings in the Concord suit. The Company made payments totaling
$47.6 million relating to these settlements in the first half of
2000. The remaining payments, estimated at $10.8 million, are
expected to be paid through 2001.
On October 26, 1999, a federal court jury in Seattle, Washington,
awarded Precor, a subsidiary of Illinois Tool Works, Inc.,
approximately $5.2 million in a patent infringement trial against
the Company, as successor in interest to predecessor entities of
its Life Fitness division, upon the basis that certain Life
Fitness treadmills willfully infringed a Precor design patent.
Precor was also awarded up to $5.3 million in attorneys' fees and
will be entitled to prejudgment interest on the damage award.
The Company has appealed the verdict and the award
16
of attorneys' fees. While there can be no assurances,
the Company believes it is likely to prevail on the Precor appeal
and obtain either a new trial or judgment in its favor. The Company
is unable to predict the outcome of the Precor case, and accordingly,
no expense for this case has been recorded.
On October 27, 1999, the United States Tax Court issued a ruling
that upheld an Internal Revenue Service (IRS) determination that
resulted in the disallowance of capital losses and other expenses
from two partnership investments for 1990 and 1991. On July 17,
2000, the Company filed a Notice of Appeals for the District of
Columbia seeking a reversal of the United States Tax Court's
decision.
If the Company does not prevail in its appeal, the amount of taxes
due would total approximately $60 million, plus interest, net of
tax, of approximately $50 million. The Company is also in the
process of settling IRS audits on open tax years 1989 through 1991
and anticipates favorable adjustments that would decrease the
total tax owed to approximately $40 million, with the accompanying
interest, net of tax, of approximately $30 million. The interest
components and resulting total cash payment will continue to
increase until the tax liability is resolved. The cash payments
related to an unfavorable resolution in this matter are not likely
to occur until 2002. The Company does not anticipate any adverse
effects on its results of operations in the event of an
unfavorable resolution of this matter. This matter is more fully
described in Note 9 to the consolidated financial statements.
The Company is involved in certain legal and administrative
proceedings under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 and other federal and state
legislation governing the generation and disposition of certain
hazardous wastes. These proceedings, involving both on- and off-
site waste disposal or other contamination, in many instances seek
compensation from the Company as a waste generator under Superfund
legislation, which authorizes action regardless of fault, legality
of original disposition or ownership of a disposal site. Refer to
Note 6 to the consolidated financial statements in the Company's
1999 Annual Report on Form 10-K for disclosure of the potential
cash requirements of environmental proceedings.
The Company has been identified by the Wisconsin Department of
Natural Resources (WDNR) as being responsible for part of the
polychlorinated biphenyl (PCB) contamination in a creek alleged to
have come from a manufacturing facility that the Company closed in
1980. The Company has undertaken studies of the creek and has
removed PCB contaminated sediment from a portion of the creek.
The WDNR has notified the Company that it must complete a
feasibility study that addresses additional contamination in the
creek and undertake additional remediation efforts. The Company
is currently unable to fully estimate the cost of the remaining
work because of uncertainty as to the full extent of the PCB
contamination, the applicable cleanup criteria, the methodology to
be used to address the contamination and other factors. The
ultimate cost of the work could exceed the range of exposure
estimated at year end and any provisions required to increase
reserves could be significant to the Company's results of
operations in the period recognized, but management does not
believe that it will have a material adverse effect on the
Company's consolidated financial position or liquidity.
New Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133." SFAS 138 is
effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000 (quarter ended March 31, 2001, for the
Company). SFAS 138 amends several paragraphs of SFAS 133 that are
effective the same date as SFAS 138. The Company is assessing the
effect of SFAS 138, and management currently believes it will not
have a material effect on results of operations or financial
position.
17
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, the ability to dispose of the bicycle, camping and fishing
businesses within the time, price and manner estimated and the
ability to maintain key customers during the divestiture period;
shifts in market demand for the Company's products; competitive
pricing pressures; inventory adjustments by major retailers;
adverse domestic or foreign economic conditions; adverse weather
conditions retarding sales of outdoor recreation products; the
success of marketing and cost-management programs; the Company's
ability to develop and produce new products; new and competing
technologies; and imports from Asia and increased competition from
Asian competitors.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Note 4 to Consolidated Financial Statements in Part I of this
Quarterly Report on Form 10-Q on pages 6 and 7 is hereby
incorporated by reference.
Item 4. Submission of Matters to a Vote of Security Holders
Refer to Part II, Item 4 in the Company's first quarter 2000
Quarterly Report filed on Form 10-Q for results of matters
submitted to a vote of security holders at the Company's Annual
Meeting on April 26, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
1. Current Report on Form 8-K dated June 30, 2000,
reporting in Item 5 the election of George W. Buckley as
chairman of the board and chief executive officer, as
well as the Company's intention to divest its bicycle,
camping and fishing businesses.
18
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
(Registrant)
August 9, 2000 By: /s/ VICTORIA J. REICH
Victoria J. Reich
Senior Vice President and Chief
Financial Officer*
*Ms. Reich is signing this report both as a duly authorized
officer and as the principal accounting officer.
19