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 MARCH 31, 2001
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 MAY 7, 2001, THERE WERE 87,589,990 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 THREE MONTHS ENDED MARCH 31
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
2001 2000
--------------- ----------------
NET SALES $ 913.2 $ 955.4
Cost of sales 687.4 681.7
Selling, general and administrative expense 146.8 160.7
--------------- ----------------
OPERATING EARNINGS 79.0 113.0
Interest expense (13.6) (16.4)
Other income (expense) (1.7) 1.1
--------------- ----------------
EARNINGS BEFORE INCOME TAXES 63.7 97.7
Income tax provision 24.2 37.0
--------------- ----------------
EARNINGS FROM CONTINUING OPERATIONS 39.5 60.7
Cumulative effect of change in accounting principle, net of tax (2.9) --
Loss from discontinued operations, net of tax -- (2.0)
--------------- ----------------
NET EARNINGS $ 36.6 $ 58.7
=============== ================
BASIC EARNINGS PER COMMON SHARE:
Earnings from continuing operations $ 0.45 $ 0.66
Cumulative effect of change in accounting principle (0.03) --
Loss from discontinued operations -- (0.02)
--------------- ----------------
Net Earnings $ 0.42 $ 0.64
=============== ================
DILUTED EARNINGS PER COMMON SHARE:
Earnings from continuing operations $ 0.45 $ 0.66
Cumulative effect of change in accounting principle (0.03) --
Loss from discontinued operations -- (0.02)
--------------- ----------------
Net earnings $ 0.42 $ 0.64
=============== ================
AVERAGE SHARES USED FOR COMPUTATION OF:
Basic earnings per share 87.7 91.4
Diluted earnings per share 87.8 91.5
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.125 $ 0.125
The notes are an integral part of these consolidated statements.
2
BRUNSWICK CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2001, DECEMBER 31, 2000, AND MARCH 31, 2000
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
MARCH 31, December 31, March 31,
2001 2000 2000
---------------- ---------------- ----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost,
which approximates market $ 72.3 $ 125.2 $ 123.8
Accounts and notes receivable,
less allowances of $20.0, $21.2 and $19.7 450.7 419.9 419.6
Inventories
Finished goods 335.5 288.1 236.7
Work-in-process 147.3 153.6 149.7
Raw materials 86.2 69.0 69.6
---------------- ---------------- ----------------
Net inventories 569.0 510.7 456.0
---------------- ---------------- ----------------
Prepaid income taxes 363.5 367.8 259.6
Prepaid expenses 39.5 48.6 46.6
Income tax refunds receivable -- 57.4 --
Net assets of discontinued operations offered for sale 330.3 302.2 619.3
---------------- ---------------- ----------------
CURRENT ASSETS 1,825.3 1,831.8 1,924.9
---------------- ---------------- ----------------
PROPERTY
Land 65.6 64.6 70.1
Buildings 414.6 408.6 381.7
Equipment 973.8 967.7 936.6
---------------- ---------------- ----------------
Total land, buildings and equipment 1,454.0 1,440.9 1,388.4
Accumulated depreciation (772.1) (756.8) (729.3)
---------------- ---------------- ----------------
Net land, buildings and equipment 681.9 684.1 659.1
Unamortized product tooling costs 117.0 119.1 106.9
---------------- ---------------- ----------------
NET PROPERTY 798.9 803.2 766.0
---------------- ---------------- ----------------
OTHER ASSETS
Goodwill 411.9 391.8 401.1
Other intangibles 115.3 116.1 82.5
Investments 69.0 73.0 78.6
Other long-term assets 167.1 180.6 177.5
---------------- ---------------- ----------------
OTHER ASSETS 763.3 761.5 739.7
---------------- ---------------- ----------------
TOTAL ASSETS $ 3,387.5 $ 3,396.5 $ 3,430.6
================ ================ ================
The notes are an integral part of these consolidated statements.
3
BRUNSWICK CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2001, DECEMBER 31, 2000, AND MARCH 31, 2000
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
MARCH 31, December 31, March 31,
2001 2000 2000
---------------- ---------------- ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt, including
current maturities of long-term debt $ 144.8 $ 172.7 $ 298.2
Accounts payable 248.8 238.6 257.1
Accrued expenses 597.8 641.8 579.6
Accrued income taxes 29.1 -- 32.3
Reserve for discontinued operations 192.0 194.8 --
---------------- ---------------- ------------------
CURRENT LIABILITIES 1,212.5 1,247.9 1,167.2
---------------- ---------------- ------------------
LONG-TERM DEBT
Notes, mortgages and debentures 599.4 601.8 620.1
---------------- ---------------- ------------------
DEFERRED ITEMS
Income taxes 204.7 215.4 135.8
Postretirement and postemployment benefits 195.9 196.5 141.5
Compensation and other 75.0 67.8 72.5
---------------- ---------------- ------------------
DEFERRED ITEMS 475.6 479.7 349.8
---------------- ---------------- ------------------
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 314.9 314.5 314.5
Retained earnings 1,067.1 1,041.4 1,228.8
Treasury stock, at cost:
14,976,000; 15,194,000 and 13,596,000 shares (292.7) (296.4) (265.9)
Unamortized ESOP expense and other (39.9) (41.9) (47.2)
Accumulated other comprehensive income (loss) (26.3) (27.4) (13.6)
---------------- ---------------- ------------------
COMMON SHAREHOLDERS' EQUITY 1,100.0 1,067.1 1,293.5
---------------- ---------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,387.5 $ 3,396.5 $ 3,430.6
================ ================ ==================
The notes are an integral part of these consolidated statements.
4
BRUNSWICK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
(IN MILLIONS)
(UNAUDITED)
2001 2000
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 36.6 $ 58.7
Depreciation and amortization 37.1 35.2
Changes in noncash current assets and current liabilities (113.8) (125.7)
Income taxes 78.2 57.7
Antitrust litigation settlement payments -- (30.5)
Loss from discontinued operations -- 2.0
Other, net 11.7 (3.1)
-------------- -------------
NET CASH PROVIDED BY (USED FOR) CONTINUING OPERATIONS 49.8 (5.7)
NET CASH USED FOR DISCONTINUED OPERATIONS (28.1) (52.8)
-------------- -------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 21.7 (58.5)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (18.7) (21.5)
Investments -- (15.1)
Acquisitions of businesses (18.4) --
Other, net 5.6 0.6
-------------- -------------
NET CASH USED FOR CONTINUING OPERATIONS (31.5) (36.0)
NET CASH USED FOR DISCONTINUED OPERATIONS (2.8) (6.9)
-------------- -------------
NET CASH USED FOR INVESTING ACTIVITIES (34.3) (42.9)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net issuances (repayments) of commercial paper and other
short-term debt (27.5) 188.2
Payments of long-term debt including current maturities (2.8) --
Cash dividends paid (10.9) (11.4)
Stock repurchases -- (52.4)
Stock options exercised 0.9 --
-------------- -------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (40.3) 124.4
-------------- -------------
Net increase (decrease) in cash and cash equivalents (52.9) 23.0
Cash and cash equivalents at January 1 125.2 100.8
-------------- -------------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 72.3 $ 123.8
============== =============
SUPPLEMENTAL CASH-FLOW DISCLOSURES:
Interest paid $ 14.4 $ 17.1
Income taxes paid (refunds), net $ (55.8) $ (21.6)
Treasury stock issued for compensation plans and other $ 3.7 $ 0.1
The notes are an integral part of these consolidated statements.
5
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, DECEMBER 31, 2000, AND MARCH 31, 2000
(unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS. The unaudited financial data of Brunswick
Corporation (the Company) 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. 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
2000 Annual Report on Form 10-K (the 2000 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
March 31, 2001 and 2000. The interim results are not necessarily indicative of
the results that may be expected for the remainder of the year.
DERIVATIVES. Effective January 1, 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) Nos. 133/138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." Under SFAS 133/138,
all derivative instruments are recognized on the balance sheet at their fair
values.
The Company engages in business activities involving both financial and market
risks, including, but not limited to, changes in foreign currency exchange rates
and commodity prices. The Company uses derivative financial instruments to
manage its risks associated with movements in foreign currency exchange rates
and commodity prices. Derivative instruments are not used for trading or
speculative purposes. The Company's risk management objectives are described in
Notes 1 and 8 of the 2000 Form 10-K. The effects of derivative and financial
instruments are not expected to be material to the Company's results of
operations.
Cash Flow Hedges - Certain derivative instruments held at March 31, 2001,
qualify as cash flow hedges under the requirements of SFAS 133/138. The Company
executes forward contracts and options, based on forecasted transactions, to
manage foreign exchange exposure mainly related to inventory purchase
transactions. The Company also enters into commodity swap agreements, based on
anticipated purchases of certain raw materials, to manage exposure related to
risk from price changes.
As changes in the fair value of derivatives occur, the portion of the change
deemed to be effective is recorded temporarily in accumulated other
comprehensive income, an equity account, with any ineffective portion recorded
directly in other income (expense). The ineffective portion of derivative
transactions, including the premium or discount on option contracts, was not
material to the results of operations for the three months ended March 31, 2001.
6
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In the first quarter of 2001, the following activity related to cash flow hedges
was recorded in accumulated other comprehensive income (in millions):
INCREASE (DECREASE) IN
ACCUMULATED OTHER
COMPREHENSIVE INCOME
-------------------------------
PRETAX AFTER TAX
-------------- -------------
Net transition gain $ 1.6 $ 1.0
Net change associated with current period hedging activity 1.2 0.7
Net amount reclassified into earnings (0.1) (0.1)
-------------- -------------
Net accumulated unrealized derivative gains $ 2.7 $ 1.6
============== =============
The Company estimates that $1.5 million of after-tax net derivative gains
deferred in accumulated other comprehensive income will be realized in earnings
over the next 12 months. Included in this total is approximately $0.9 million
resulting from the original net transition gain that is expected to be
realized by the end of 2001. At March 31, 2001, the term of derivative
instruments hedging forecasted transactions ranges from one to twenty-one
months.
Also in the first quarter of 2001, the Company recorded a $2.9 million after-tax
loss ($4.7 million pretax) as a cumulative effect of a change in accounting
principle, primarily resulting from recording the interest rate swaps at fair
value.
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 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 average
number of shares of potential common stock was 0.1 million for the quarters
ended March 31, 2001 and 2000.
NOTE 3 - DEBT
Commercial paper outstanding decreased $28.9 million to $123.1 million at March
31, 2001, compared with $152.0 million at December 31, 2000. The
weighted-average interest rates for commercial paper borrowings were 6.37
percent and 6.12 percent for the quarters ended March 31, 2001 and 2000,
respectively.
NOTE 4 - LEGAL AND ENVIRONMENTAL
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 to the United States Court of Appeals for the
Federal Circuit. On May 23, 2000, a $13.0 million surety bond was issued to
secure damages while the Company pursues its appeal. Oral argument on the appeal
took place in April 2001, and the parties are awaiting a decision by the Federal
Circuit. While there can be no assurances, the Company believes it is likely to
prevail on the appeal and obtain either a new trial or judgment in its favor. No
reserve relating to the resolution of this case has been recorded.
7
NOTE 4 - LEGAL AND ENVIRONMENTAL (CONTINUED)
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, which involve both on- and
off-site waste disposal or other contamination, in many instances seek
compensation or remedial action 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. The Company is also
involved in a number of environmental remediation actions addressing
contamination resulting from historic activities on its present and former plant
properties.
The Company accrues for environmental remediation-related activities for which
commitments or clean-up plans have been developed and for which costs can be
reasonably estimated. All accrued amounts are generally determined in
coordination with third-party experts on an undiscounted basis and do not
consider recoveries from third parties until such recoveries are realized. In
light of existing reserves, the Company's environmental claims, when finally
resolved, will not, in the opinion of management, have a material adverse effect
on the Company's consolidated financial position. If current estimates are not
achieved, results of operations could be adversely affected in the period in
which additional provisions are required. Refer to Note 7 to the consolidated
financial statements in the 2000 Form 10-K for disclosure of the potential cash
requirements of environmental proceedings as of December 31, 2000.
NOTE 5 - SEGMENT DATA
The following table sets forth net sales and operating earnings of each of the
Company's reportable segments for the quarters ended March 31, 2001 and 2000 (in
millions):
Quarter ended March 31
------------------------------------------------------------------------------
2001 2000
------------------------------------ -----------------------------------
NET OPERATING Net Operating
SALES EARNINGS Sales Earnings
-------------- --------------- -------------- ---------------
Marine Engine $ 413.7 $ 49.3 $ 429.0 $ 60.9
Boat 380.3 23.8 418.5 37.9
Marine eliminations (67.1) -- (79.4) --
-------------- --------------- -------------- ---------------
Total Marine 726.9 73.1 768.1 98.8
Recreation 186.3 19.8 187.3 25.0
Corporate/Other -- (13.9) -- (10.8)
-------------- --------------- -------------- ---------------
Total $ 913.2 $ 79.0 $ 955.4 $ 113.0
============== =============== ============== ===============
NOTE 6 - DISCONTINUED OPERATIONS
During 2000, the Company announced its intention to divest the following
businesses that comprised its former outdoor recreation segment: fishing,
camping, bicycle, cooler, marine accessories and hunting sports accessories. The
consolidated financial statements for all periods have been restated to present
these 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.
8
NOTE 6 - DISCONTINUED OPERATIONS (CONTINUED)
Results from discontinued operations for the quarters ended March 31, 2001 and
2000, were as follows (in millions):
Quarter ended March 31
-------------------------------
2001 2000
------------- --------------
Net sales $ 114.9 $ 193.8
Pretax loss from discontinued operations $ -- $ (3.0)
The Company completed the sale of its bicycle and camping businesses in 2000.
The sale of these businesses principally accounted for the decrease in net sales
compared with the first quarter of the prior year. The losses associated with
these sales transactions were charged against the reserve for discontinued
operations in 2000.
The net assets of the remaining businesses have been segregated as net assets of
discontinued operations offered for sale. Net assets of discontinued operations
offered for sale at March 31, 2001, of $330.3 million, consisted of current
assets and liabilities, net property, plant and equipment and other assets
including goodwill. The reserve for discontinued operations at March 31, 2001,
was $192.0 million.
NOTE 7 - COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) includes cumulative foreign
currency translation adjustments, unrealized gains and losses on investments and
derivatives, and minimum pension liability adjustments, all net of tax.
Comprehensive income for the quarters ended March 31, 2001 and 2000, was as
follows (in millions):
Quarter ended March 31
----------------------------
2001 2000
------------ ------------
Net earnings $ 36.6 $ 58.7
Other comprehensive income (loss):
Foreign currency cumulative translation adjustment (2.8) (4.3)
Net change in unrealized gains (losses) on investments 2.3 (0.1)
Net change in accumulated unrealized derivative gains (losses) 1.6 --
------------ ------------
Total other comprehensive income (loss) $ 1.1 $ (4.4)
------------ ------------
Comprehensive income $ 37.7 $ 54.3
============ ============
NOTE 8 - ACQUISITIONS
Cash paid for acquisitions totaled $18.4 million in the first quarter of 2001,
comprised primarily of consideration paid for Princecraft Boats Inc.
(Princecraft), a manufacturer of deck and pontoon boats. On March 7, 2001, the
Company acquired Princecraft and its results are included in the Boat segment.
The acquisition of Princecraft has been accounted for as a purchase. Subject to
final purchase accounting adjustments, the Company acquired assets including
inventory, net property, plant and equipment and a trademark.
9
NOTE 8 - ACQUISITIONS (CONTINUED)
In addition, the Company also acquired the remaining interest in Omni Fitness
Equipment Inc. (Omni), a domestic retailer of fitness equipment, effective
February 28, 2001. Omni's results are included in the Recreation segment and the
acquisition has been accounted for as a purchase. The Company acquired the
remaining interest in exchange for a note with the previous owner. The Company
had previously accounted for its interest in Omni under the equity method of
accounting. Subject to final purchase accounting adjustments, the acquisition
resulted in an estimated unallocated excess purchase price over fair value of
net assets acquired of $24.0 million, which is being amortized on a
straight-line basis over ten years.
NOTE 9 - SUBSEQUENT EVENT
On April 10, 2001, the Company completed the sale of its hunting sports
accessories business. The loss associated with this transaction will be charged
against the reserve for discontinued operations.
10
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONSOLIDATED
The following table sets forth certain amounts, ratios and relationships
calculated from the consolidated statements of income for the quarters ended
March 31, 2001 and 2000 (dollars in millions, except per share data):
Quarter ended March 31
-----------------------------------
2001 2000
---------------- -----------------
Net sales $ 913.2 $ 955.4
Operating earnings $ 79.0 $ 113.0
Earnings from continuing operations $ 39.5 $ 60.7
Cumulative effect of change in accounting principle, net of tax (2.9) --
Loss from discontinued operations, net of tax -- (2.0)
---------------- -----------------
Net earnings $ 36.6 $ 58.7
================ =================
Diluted earnings per share from continuing operations $ 0.45 $ 0.66
Cumulative effect per share of change in accounting principle (0.03) --
Loss per share from discontinued operations -- (0.02)
---------------- -----------------
Diluted earnings per share $ 0.42 $ 0.64
================ =================
EXPRESSED AS A PERCENTAGE OF NET SALES:
Gross margin 24.7% 28.6%
Selling, general and administrative expense 16.1% 16.8%
Operating margin 8.7% 11.8%
For the quarter ended March 31, 2001, the Company reported net sales of $913.2
million, down 4.4 percent from the comparable quarter a year ago. This decline
was mainly attributable to lower sales in the Boat and Marine Engine segments,
caused by weakening market conditions that negatively affected domestic sales of
small boats and engines. Recreation segment sales benefited from continued
growth in the fitness equipment business, but the gains were more than offset by
lower sales in the bowling and billiards operations.
Gross margin percentages in the first three months of 2001 decreased to 24.7
percent from 28.6 percent. The 390-basis-point reduction reflects the impact of
lower production rates and plant closure costs and a stronger dollar against key
currencies and its effect on international margins, as well as a shift in sales
mix, primarily in the Marine Engine and Recreation segments.
Operating earnings for the quarter ended March 31, 2001, totaled $79.0 million
compared with $113.0 million in 2000. Operating margins fell 310 basis points to
8.7 percent in the current quarter versus 11.8 percent a year ago. The decline
in operating margins was primarily attributable to the aforementioned gross
margin decline.
Interest expense decreased $2.8 million, or 17.1 percent, in the first three
months of 2001 compared with the first three months of 2000, principally due to
the favorable impact of interest rate swaps and a decline in the average
outstanding debt balance.
Other expense totaled $1.7 million in the current quarter versus other income of
$1.1 million in the first quarter of last year. Losses from joint venture
investments and unfavorable currency adjustments adversely affected the other
income (expense) comparisons between the quarters.
11
The Company's effective tax rate was 38.0 percent in the first quarter of 2001,
compared with 37.9 percent in the first quarter of 2000.
Earnings from continuing operations totaled $39.5 million in the first three
months of 2001, versus $60.7 million in the comparable quarter a year ago.
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards Nos. 133/138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." The non-cash cumulative effect of adopting the new
accounting standards totaled $2.9 million after tax, or $0.03 per diluted share,
resulting in net earnings of $36.6 million for the three months ended March 31,
2001.
Average common shares outstanding used to calculate diluted earnings per share
for the quarter decreased to 87.8 million in 2001 from 91.5 million in 2000. The
decrease in average shares outstanding reflects the effects of stock repurchased
during the first half of 2000.
EFFECTS OF MARINE MARKET CONDITIONS. The Company is experiencing a reduction in
domestic demand for marine products, particularly boats and sterndrive engines,
which has resulted in higher-than-desirable field and Company inventories in
certain categories. In the first quarter, the Company took actions to reduce
production and costs, as well as stimulate retail demand. The Company plans to
implement further actions in the second quarter of 2001. The Company anticipates
the net effects of these actions, along with the reduction in demand, will have
an adverse impact on the Company's results for the remainder of 2001 when
compared with the results of the prior year.
MARINE ENGINE SEGMENT
The following table sets forth Marine Engine segment results for the quarters
ended March 31, 2001 and 2000 (dollars in millions):
Quarter ended March 31
---------------------------------
2001 2000
-------------- ---------------
Net sales $ 413.7 $ 429.0
Operating earnings $ 49.3 $ 60.9
Operating margin 11.9% 14.2%
Capital expenditures $ 6.6 $ 8.4
The Marine Engine segment reported a 3.6 percent drop in sales in the first
quarter of 2001 to $413.7 million from $429.0 million a year ago. Domestic sales
of sterndrive and outboard engines declined, reflecting weak market conditions,
particularly for small boats, and corresponding efforts by dealers and boat
builders to decrease inventories. These factors more than offset growth in
international engine sales that was partially driven by the success of
low-emission outboards. Domestic and international sales benefited from
increased outboard market share resulting from the bankruptcy of a major
competitor.
Operating earnings for the segment declined to $49.3 million in the first
quarter of 2001, compared with $60.9 million a year ago. Operating margins also
decreased to 11.9 percent in the current quarter, versus 14.2 percent in the
first quarter of last year. The decline in operating margins reflects reductions
in production rates and lower margins on international sales resulting from a
stronger dollar against key currencies. The decline also reflects an unfavorable
shift in sales mix including a decrease in higher-margin sterndrive engine sales
and increases in lower-margin international and low-emission outboard engine
sales.
12
BOAT SEGMENT
The following table sets forth Boat segment results for the quarters ended March
31, 2001 and 2000 (dollars in millions):
Quarter ended March 31
------------------------------------
2001 2000
---------------- ----------------
Net sales $ 380.3 $ 418.5
Operating earnings $ 23.8 $ 37.9
Operating margin 6.3% 9.1%
Capital expenditures $ 6.5 $ 8.5
In the first quarter of 2001, the Boat segment reported net sales of $380.3
million, a 9.1 percent decrease from the year-earlier quarter, resulting from
continued weak demand for small boats. Sales of larger boats and off-shore
fishing boats increased year-over-year, but weakened toward the end of the
quarter.
Boat segment operating earnings totaled $23.8 million in the first quarter of
2001, declining $14.1 million from the same period of 2000, and operating
margins decreased 280 basis points to 6.3 percent from 9.1 percent. The decline
in operating margins reflects costs associated with plant closures and
reductions in production rates.
RECREATION SEGMENT
The following table sets forth Recreation segment results for the quarters ended
March 31, 2001 and 2000 (dollars in millions):
Quarter ended March 31
------------------------------------
2001 2000
---------------- ----------------
Net sales $ 186.3 $ 187.3
Operating earnings $ 19.8 $ 25.0
Operating margin 10.6% 13.3%
Capital expenditures $ 5.2 $ 3.6
Recreation segment sales of $186.3 million in the first quarter of 2001 remained
essentially flat compared with the first quarter of 2000. Sales of fitness
equipment increased, reflecting gains in sales to international and consumer
fitness markets, while commercial sales to domestic health clubs were relatively
flat versus the prior year as health club chains slowed the pace of new club
openings and investments in equipment upgrades. Bowling equipment sales,
including capital equipment, balls, supplies and other accessories, declined due
to slower order activity and timing of product introductions. Results from
retail bowling centers were also down slightly reflecting a reduction in the
number of centers (five percent) and two fewer days in the quarter. Excluding
these factors, equivalent center sales rose slightly versus the first quarter
last year.
In the first quarter of 2001, Recreation segment operating earnings declined to
$19.8 million from $25.0 million in 2000. Operating margins decreased to 10.6
percent in the current quarter versus 13.3 percent a year ago. The margin
reduction reflects the decline in sales of bowling equipment, decreased
production levels and an unfavorable shift in sales mix.
13
DISCONTINUED OPERATIONS
During 2000, the Company announced its intention to divest the following
businesses that comprised its former outdoor recreation segment: fishing,
camping, bicycle, cooler, marine accessories and hunting sports accessories. The
consolidated financial statements for all periods have been restated to present
these businesses as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30.
The Company completed the sale of its bicycle and camping businesses in 2000 and
its hunting sports accessories business in April 2001. The losses associated
with these transactions were charged against the reserve for discontinued
operations. The Company anticipates disposing of the remaining businesses in
2001.
Cash generated from all of the 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 total
approximately $275 million. Excluding the impact of the seasonal build in
working capital during the first quarter for the cooler business, approximately
half of this benefit has been received through the first quarter of 2001. The
timing of the remaining cash benefit 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 its fishing, cooler and marine accessories
businesses within the time, price and manner estimated and its ability to
maintain key customers during the divestiture period.
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 provided by operating activities for the first three months of 2001 totaled
$21.7 million compared with cash used during the first three months of 2000 of
$58.5 million. Cash flow from operating activities was influenced in both
periods by seasonal increases in working capital resulting in a use of cash of
$113.8 million in 2001 and $125.7 million in 2000. At March 31, 2001,
inventories were $569.0 million versus $510.7 million at December 31, 2000, and
$456.0 million at March 31, 2000. Inventories increased $58.3 million from year
end; $21.6 million due to acquisitions and the remainder of the increase
primarily attributable to increases in small boat and engine inventories.
Accounts receivable totaled $450.7 million at March 31, 2001, versus $419.9
million at December 31, 2000, and $419.6 million at March 31, 2000. The $30.8
million increase in receivables since year end was principally due to the
seasonal build in Marine Engine segment receivables. Accrued expenses decreased
to $597.8 million at March 31, 2001, from $641.8 million at December 31, 2000,
with the decrease mainly attributable to compensation plan payments.
Cash flow from operating activities in 2001 also included more favorable income
tax related cash flows versus the prior year, as tax benefits associated with
the divestitures were realized. Activity in the first quarter of the prior year
included $30.5 million for antitrust litigation settlement payments that also
affected comparisons.
During the first three months of 2001, the Company invested $18.7 million in
capital expenditures compared with $21.5 million in 2000. Cash paid for
acquisitions totaled $18.4 million in the first quarter of 2001, comprised
primarily of consideration paid for Princecraft Boats Inc., a manufacturer of
deck and pontoon boats. In the first quarter of the prior year, the Company
invested $15.1 million principally in Internet-related businesses.
14
Cash and cash equivalents totaled $72.3 million at March 31, 2001, down from
$125.2 million at the end of 2000. Total debt at March 31, 2001, decreased to
$744.2 million versus $774.5 million at the end of 2000. Debt-to-capitalization
ratios at these dates were 40.4 percent and 42.1 percent, respectively. The
Company had $123.1 million in outstanding commercial paper at March 31, 2001,
with additional borrowing capacity of $276.9 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.
During the first three months of 2000, the Company repurchased 2.9 million
shares of its common stock for $51.9 million in open market transactions under a
$100 million repurchase program announced in February 2000. The Company also
repurchased additional shares for $0.5 million under a systematic repurchase
program in the first quarter of 2000. No stock repurchases occurred in the first
quarter of 2001.
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 and current divestiture
activities. Management believes that there are adequate sources of liquidity to
meet the Company's short-term and long-term needs.
LEGAL PROCEEDINGS AND CONTINGENCIES
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 to the United States Court of Appeals for the
Federal Circuit. On May 23, 2000, a $13.0 million surety bond was issued to
secure damages while the Company pursues its appeal. Oral argument on the appeal
took place in April 2001, and the parties are awaiting a decision by the Federal
Circuit. While there can be no assurances, the Company believes it is likely to
prevail on the appeal and obtain either a new trial or judgment in its favor. No
reserve relating to the resolution of 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, which involve both on- and
off-site waste disposal or other contamination, in many instances seek
compensation or remedial action 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. The Company is also
involved in a number of environmental remediation actions addressing
contamination resulting from historic activities on its present and former plant
properties.
The Company accrues for environmental remediation-related activities for which
commitments or clean-up plans have been developed and for which costs can be
reasonably estimated. All accrued amounts are generally determined in
coordination with third-party experts on an undiscounted basis and do not
consider recoveries from third parties until such recoveries are realized. In
light of existing reserves, the Company's environmental claims, when finally
resolved, will not, in the opinion of management, have a material adverse effect
on the Company's consolidated financial position. If current estimates are not
achieved, results of operations could be adversely affected in the period in
which additional provisions are required. Refer to Note 7 to the consolidated
financial statements in the 2000 Form 10-K for disclosure of the potential cash
requirements of environmental proceedings as of December 31, 2000.
15
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 fishing, cooler and marine
accessories businesses within the time, price and manner estimated; the ability
to maintain key customers during the divestiture period; the ability of the
buyers to obtain financing; weak market demand for the Company's products;
shifts in currency exchange rates; the effect of interest rates and fuel prices
on demand for marine products; competitive pricing pressures; inventory
adjustments by major dealers and retailers; the success of inventory reduction
efforts; adverse domestic or foreign economic conditions; adverse weather
conditions retarding sales of recreation products; the ability to complete
environmental remediation efforts at the cost estimated; the Company's ability
to develop product technologies that comply with regulatory requirements; 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 pages 7 and 8 is hereby incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the May 1, 2001, Annual Meeting of Shareholders of the Company, Messrs. Nolan
D. Archibald, Jeffrey L. Bleustein and Robert L. Ryan were elected directors of
the Company for terms expiring at the 2004 Annual Meeting. The numbers of shares
voted with respect to these directors were:
NOMINEE FOR WITHHELD
------- --- --------
Nolan D. Archibald 70,839,856 2,375,935
Jeffrey L. Bleustein 70,846,486 2,369,305
Robert L. Ryan 70,839,989 2,375,802
At the Annual Meeting, the 1991 Stock Plan was amended to increase the maximum
number of shares that may be awarded to an individual in a calendar year from
300,000 to 1,000,000. The amendment was approved by the Board of Directors on
February 6, 2001, and the number of shares voted with respect to this amendment
at the Annual Meeting were:
NUMBER OF SHARES
----------------
For 61,219,271
Against 11,256,706
Abstain 739,808
At the Annual Meeting, the Board of Directors' appointment of Arthur Andersen
LLP as auditors for the Company and its subsidiaries for the year 2001 was
ratified pursuant to the following vote:
NUMBER OF SHARES
----------------
For 71,815,046
Against 934,470
Abstain 466,270
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Separation Agreement dated March 12, 2001, by and between
the Company and Peter N. Larson.
10.2 Letter dated March 20, 2001 (the "Benefits Letter"),
describing benefits due to Peter N. Larson in accordance
with the Separation Agreement attached to this Form 10-Q
as Exhibit 10.1 (the "Separation Agreement"). Attachments
referenced in the Benefits Letter are not included with
this Exhibit 10.2, as the attachments merely itemize Mr.
Larson's account balances, accrued benefits and stock and
option holdings, all of which have been previously
described in the Company's Definitive Proxy Statement for
2000, the Benefits Letter, the Separation Agreement and
other previous filings. The Company will furnish a
complete copy of the attachments to the Benefits Letter
to the Commission on request.
(b) Reports on Form 8-K.
None
17
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)
May 14, 2001 By: /s/ PETER G. LEEMPUTTE
----------------------
Peter G. Leemputte
Vice President and Controller
*Mr. Leemputte is signing this report both as a duly authorized officer and as
the principal accounting officer.