Brunswick
Corporation
Notes
to Consolidated Financial Statements
June
30, 2005, December 31, 2004, and June 30, 2004
(unaudited)
Note
1 - Summary of Significant Accounting Policies
Interim
Financial Statements. The
unaudited interim consolidated financial statements of Brunswick Corporation
(the Company) have 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 accounting principles generally accepted in the United States
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 2004 Annual
Report on Form 10-K (the 2004 Form 10-K). These interim results include,
in the
opinion of management, all normal and recurring adjustments necessary to
present
fairly the financial position of the Company as of June 30, 2005, December
31,
2004 and June 30, 2004, the results of operations for the three and six months
ended June 30, 2005 and 2004, and cash flows for the six months ended June
30,
2005 and 2004. Due to the seasonality of the Company’s businesses, the interim
results are not necessarily indicative of the results that may be expected
for
the remainder of the year.
The
Company maintains its financial records on the basis of a fiscal year ending
on
December 31, with the fiscal quarters ending on the Saturday closest to the
end
of the period (13-week periods). For ease of reference, all references to
period
end dates have been presented as though the period ended on the last day
of the
calendar month. The first two quarters of fiscal year 2005 ended on April
2,
2005 and July 2, 2005 and the first two quarters of fiscal year 2004 ended
on
April 3, 2004 and July 3, 2004.
New
Accounting Standards. In
March
2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
(FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations.” FIN 47,
which clarifies the accounting for conditional asset retirement obligations
as
used in Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting
for Asset Retirement Obligations.” A conditional asset retirement obligation is
an unconditional legal obligation to perform an asset retirement activity
in
which the timing and (or) method of settlement are conditional on a future
event
that may or may not be within the control of the entity. Therefore, an entity
is
required to recognize a liability for the fair value of a conditional asset
retirement obligation under SFAS No. 143 if the fair value of the liability
can
be reasonably estimated. The provisions of FIN 47 are effective for reporting
periods ending after December 15, 2005. The Company is currently evaluating
the
impact of adopting FIN 47, but does not anticipate it will have a material
impact on the financial statements.
Stock-based
Compensation. The
Company complies with the disclosure provisions of SFAS No. 148, “Accounting for
Stock-Based Compensation - Transition and Disclosure.” As it relates to stock
options, the Company continues to apply the provisions of Accounting Principles
Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees.” Under
APB No. 25, the Company recognizes no compensation cost related to stock
options
granted in its Consolidated Statements of Income because the option terms
are
fixed and the exercise price equals the market price of the underlying stock
on
the grant date. The cost of nonvested stock awards is recognized on a
straight-line basis over the requisite service period. In accordance with
SFAS
No. 123, “Accounting for Stock-Based Compensation,” the fair value of option
grants is estimated on the date of grant using the Black-Scholes option pricing
model for pro forma footnote purposes. Refer to Notes 1 and 14 to the
consolidated financial statements in the 2004 Form 10-K for further detail
relating to the Company’s stock-based compensation.
The
following table illustrates the effect on net income and earnings per share
if
the Company had applied the fair value recognition provisions of SFAS No.
123 to
all of its outstanding stock plans as of June 30:
| |
|
Three
Months ended
June
30
|
|
Six
Months ended
June
30
|
|
|
(in
millions, except per share data)
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
Net
Earnings:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
114.1
|
|
$
|
90.1
|
|
$
|
208.7
|
|
$
|
138.1
|
|
|
Add:
Stock-based employee compensation included in reported earnings,
net of
tax
|
|
|
1.2
|
|
|
1.5
|
|
|
2.2
|
|
|
2.8
|
|
|
Less:
Total stock-based employee compensation expense
determined
under fair value-based method for all
awards,
net of tax
|
|
|
2.3
|
|
|
2.9
|
|
|
7.3
|
|
|
5.7
|
|
|
Pro
forma
|
|
$
|
113.0
|
|
$
|
88.7
|
|
$
|
203.6
|
|
$
|
135.2
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
1.16
|
|
$
|
0.94
|
|
$
|
2.13
|
|
$
|
1.46
|
|
|
Pro
forma
|
|
|
1.15
|
|
|
0.93
|
|
|
2.08
|
|
|
1.43
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
1.15
|
|
$
|
0.93
|
|
$
|
2.11
|
|
$
|
1.43
|
|
|
Pro
forma
|
|
|
1.14
|
|
|
0.91
|
|
|
2.05
|
|
|
1.40
|
|
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment,” (SFAS No. 123R). SFAS No. 123R eliminates the intrinsic value method
under APB No. 25, “Accounting for Stock Issued to Employees,” and requires the
Company to use a fair-value based method of accounting for share-based payments.
Under APB No. 25, no compensation cost related to stock options is recognized
in
the Consolidated Statements of Income. SFAS No. 123R requires that compensation
cost for employee services received in exchange for an award of equity
instruments be recognized in the Consolidated Statements of Income based
on the
grant date fair value of that award. That cost measured at the grant date
will
be amortized in the Consolidated Statements of Income over the period during
which an employee is required to provide service in exchange for that award
(requisite service period). Although the pronouncement is
effective
as of July 1, 2005, the FASB has delayed the required adoption date until
January 1, 2006. The Company has the choice to use the modified prospective
or
modified retrospective methods upon adoption.
On
March
29, 2005, the SEC staff issued Staff Accounting Bulletin (SAB) No. 107,
“Share-Based Payment” to express the views of the staff regarding the
interaction between SFAS No. 123R and certain SEC rules and regulations and
to
provide the staff’s views regarding the valuation of share-based payment
arrangements for public companies. The Company is currently in the process
of
evaluating SFAS No. 123R, and will take into consideration the additional
guidance provided by SAB No. 107 in connection with the implementation of
SFAS
No. 123R.
Note
2 - Earnings Per Common Share
The
Company calculates earnings per share in accordance with SFAS No. 128, "Earnings
Per Share." Basic earnings per share is calculated by dividing net earnings
by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is calculated similarly, except that the calculation
includes the dilutive effect of stock options and nonvested restricted shares.
Basic
and
diluted earnings per share are calculated as follows:
| |
|
Three
Months ended
June
30
|
|
Six
Months ended
June
30
|
|
|
(in
millions, except per share data)
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
114.1
|
|
$
|
90.1
|
|
$
|
208.7
|
|
$
|
138.1
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares - basic
|
|
|
98.0
|
|
|
95.4
|
|
|
97.8
|
|
|
94.5
|
|
|
Common
stock equivalents
|
|
|
1.2
|
|
|
1.8
|
|
|
1.3
|
|
|
1.9
|
|
|
Average
outstanding shares - diluted
|
|
|
99.2
|
|
|
97.2
|
|
|
99.1
|
|
|
96.4
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
1.16
|
|
$
|
0.94
|
|
$
|
2.13
|
|
$
|
1.46
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
1.15
|
|
$
|
0.93
|
|
$
|
2.11
|
|
$
|
1.43
|
|
Basic
shares increased by 2.6 million and 3.3 million in the three-month and
year-to-date 2005 periods, respectively, primarily due to shares issued upon
the
exercise of employee stock options.
There
were 0.7 million options outstanding as of June 30, 2005, where the exercise
price was greater than the average market price of the Company’s shares for the
quarterly period then ended. These options were not included in the computation
of diluted earnings per share because the effect would have been anti-dilutive.
As of June 30, 2004, there were no options outstanding where the exercise
price
was greater than the average market price of the Company’s shares. As of June
30, 2005, there were 4.2 million options outstanding, of which 2.6 million
are
exercisable.
Note
3 - Commitments and Contingencies
Financial
Commitments. The
Company has entered into arrangements with financial institutions in connection
with customer financing programs. Under these arrangements, the Company has
guaranteed customer obligations to the financial institutions in the event
of
customer default, generally subject to a maximum amount, which is less than
the
total obligations outstanding. The Company has also guaranteed payments to
third
parties that have purchased customer receivables from the Company, and, in
certain instances, has guaranteed secured term financing of its customers.
In
most instances, upon repurchase of the debt obligation, the Company receives
rights to the collateral securing the financing. The
maximum potential liability associated with these customer financing
arrangements was approximately $108
million as of June 30, 2005.
The
Company has also entered into arrangements with third-party lenders where
it has
agreed, in the event of a default by the customer, to repurchase from the
third-party lender Company products repossessed from the customer. These
arrangements are typically subject to a maximum repurchase amount. The Company’s
risk under these arrangements is mitigated by the value of the products
repurchased as part of the transaction. The maximum amount of collateral
the
Company could be required to purchase as
of
June 30, 2005, totaled approximately $176 million.
Based
on
historical experience, current facts and circumstances the Company has reserves
to cover potential losses associated with these guarantee and repurchase
obligations. Historical cash requirements and losses associated with these
obligations have not been significant.
Financial
institutions have issued standby letters of credit of approximately $58 million
and surety bonds of approximately $15 million conditionally guaranteeing
obligations on behalf of the Company as of June 30, 2005. These amounts are
primarily comprised of standby letters of credit and outstanding surety bonds
issued in connection with the Company’s self-insured workers’ compensation
program as required by its insurance companies and various state agencies.
The
Company has recorded reserves to cover liabilities associated with these
programs as appropriate. Under certain circumstances, such as an event of
default under the Company’s revolving credit facility or a ratings downgrade
below investment grade could require the Company to post collateral to support
the outstanding letters of credit and surety bonds.
Product
Warranties. The
Company records a liability for product warranties at the time revenue is
recognized. The liability is estimated using historical warranty experience,
projected claim rates and expected costs per claim. The Company adjusts its
liability for specific warranty matters when they become known and the exposure
can be estimated. The Company’s warranty reserves are affected by product
failure rates and material usage and labor costs incurred in correcting a
product failure. If these estimated costs differ from actual costs, a revision
to the warranty reserve would be required.
Additionally,
marine engine customers may purchase a contract from the Company that extends
product protection beyond the standard product warranty period. For certain
extended warranty contracts in which the Company retains the warranty
obligation, a deferred liability is recorded based on the aggregate sales
price
for contracts sold. The deferred liability is reduced and revenue is recognized
ratably over the contract period.
The
Company recorded the following activity related to product warranty liabilities
in Accrued expenses and Long-term liabilities-Other as of June 30:
|
(in
millions)
|
|
|
|
|
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
Balance
at January 1
|
|
$
|
190.5
|
|
$
|
177.9
|
|
|
Provisions
for contracts issued
|
|
|
57.5
|
|
|
65.3
|
|
|
Payments
made
|
|
|
(55.2
|
)
|
|
(47.8
|
)
|
|
Aggregate
changes for pre-existing warranties
|
|
|
0.2
|
|
|
(0.8
|
)
|
|
Balance
at June 30
|
|
$
|
193.0
|
|
$
|
194.6
|
|
Legal
and Environmental.
The
Company accrues for litigation and environmental exposure based upon its
assessment, made in consultation with counsel, of the likely range of exposure
stemming from the claim. In light of existing reserves, the Company’s litigation
claims and environmental exposures, when finally resolved, will not, in the
opinion of management, have a material adverse effect on the Company’s
consolidated financial statements. If current estimates for the cost of
resolving any claims are later determined to be inadequate, results of
operations could be adversely affected in the period in which additional
provisions are required.
In
February 2003, the United States Tax Court issued a ruling upholding the
disallowance by the Internal Revenue Service (IRS) of capital losses and
other
expenses for 1990 and 1991 related to two partnership investments entered
into
by the Company. In April 2003, the Company elected to pay the IRS $62 million
(approximately $50 million after-tax), and in April 2004, the Company elected
to
pay the IRS an additional $10 million (approximately $8 million after-tax),
in
connection with this matter pending settlement negotiations. The payments
were
comprised of $33 million in taxes due and $39 million of pre-tax interest
(approximately $25 million after-tax). The Company elected to make these
payments to avoid future interest costs.
On
March
9, 2005, the Company and the IRS reached a settlement of the issues involved
in,
and related to, this tax court case. The Company agreed to withdraw its appeal
of the tax ruling. All amounts due as a result of the settlement are covered
by
the payments previously made to the IRS. In addition, all tax computations
related to taxable years 1986 through 2001 have been calculated and agreed
to
with the Internal Revenue Service at the examination level. The Company is
awaiting final determination of tax and interest for these taxable years
and
believes that no additional amounts related to this tax case will be
due.
The
Company's Bowling & Billiards segment is involved in an arbitration
proceeding in Hong Kong arising out of a commercial dispute with a former
supplier, Shanghai Zhonglu Industrial Company Limited (Zhonglu), a Chinese
contract manufacturer. The Company filed the arbitration seeking damages
based
on Zhonglu's breach of a supply and distribution agreement pursuant to which
Zhonglu agreed to manufacture bowling equipment for the Company. Zhonglu
has
asserted counterclaims seeking damages for alleged breach of contract and
other
claims. Final arguments in the matter are scheduled for August 2005. The
Company
does not believe that this dispute will have a material adverse effect on
the
Company's financial condition or results of operations.
Refer
to
Note 9 to the consolidated financial statements of the 2004 Form 10-K for
disclosure of the potential cash requirements of environmental proceedings
and a
discussion of other legal matters as of December 31, 2004.
Note
4 - Segment Data
The
following table sets forth net sales and operating earnings of each of the
Company’s reportable segments for the three months ended June 30:
| |
|
Net
Sales
|
|
Operating
Earnings
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
| |
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
Marine
Engine
|
|
$
|
755.5
|
|
$
|
665.2
|
|
$
|
107.0
|
|
$
|
95.6
|
|
|
Boat
|
|
|
742.2
|
|
|
629.9
|
|
|
74.8
|
|
|
57.0
|
|
|
Marine
eliminations
|
|
|
(133.4
|
)
|
|
(99.9
|
)
|
|
--
|
|
|
--
|
|
|
Total
Marine
|
|
|
1,364.3
|
|
|
1,195.2
|
|
|
181.8
|
|
|
152.6
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fitness
|
|
|
120.4
|
|
|
122.3
|
|
|
5.1
|
|
|
2.9
|
|
|
Bowling
& Billiards
|
|
|
114.9
|
|
|
105.8
|
|
|
5.2
|
|
|
4.2
|
|
|
Eliminations
|
|
|
(1.0
|
)
|
|
(0.6
|
)
|
|
--
|
|
|
--
|
|
|
Corporate/Other
|
|
|
--
|
|
|
--
|
|
|
(20.4
|
)
|
|
(20.2
|
)
|
|
Total
|
|
$
|
1,598.6
|
|
$
|
1,422.7
|
|
$
|
171.7
|
|
$
|
139.5
|
|
The
following table sets forth net sales and operating earnings of each of the
Company’s reportable segments for the six months ended June 30:
| |
|
Net
Sales
|
|
Operating
Earnings
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
| |
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
Marine
Engine
|
|
$
|
1,361.1
|
|
$
|
1,193.1
|
|
$
|
159.0
|
|
$
|
138.2
|
|
|
Boat
|
|
|
1,419.7
|
|
|
1,141.9
|
|
|
124.3
|
|
|
89.0
|
|
|
Marine
eliminations
|
|
|
(252.9
|
)
|
|
(180.1
|
)
|
|
--
|
|
|
--
|
|
|
Total
Marine
|
|
|
2,527.9
|
|
|
2,154.9
|
|
|
283.3
|
|
|
227.2
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fitness
|
|
|
247.9
|
|
|
252.9
|
|
|
11.5
|
|
|
12.1
|
|
|
Bowling
& Billiards
|
|
|
226.4
|
|
|
216.0
|
|
|
16.3
|
|
|
17.7
|
|
|
Eliminations
|
|
|
(2.5
|
)
|
|
(1.5
|
)
|
|
--
|
|
|
--
|
|
|
Corporate/Other
|
|
|
--
|
|
|
--
|
|
|
(40.3
|
)
|
|
(39.0
|
)
|
|
Total
|
|
$
|
2,999.7
|
|
$
|
2,622.3
|
|
$
|
270.8
|
|
$
|
218.0
|
|
Note
5 - Acquisitions
In
the
first six months of 2005, consideration paid for acquisitions was as
follows:
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Description
|
|
Net
Cash
Consideration
|
|
Other
Consideration
|
|
Total
Consideration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/7/05
|
|
|
Benrock,
Inc.
|
|
$
|
4.2
|
|
$
|
--
|
|
$
|
4.2
|
|
|
2/28/05
|
|
|
Albermarle
Boats, Inc.
|
|
|
9.2
|
|
|
--
|
|
|
9.2
|
|
|
4/21/05
|
|
|
Sea
Pro, Sea Boss and Palmetto Boats
|
|
|
1.0
|
|
|
--
|
|
|
1.0
|
|
|
4/29/05
|
|
|
MX
Marine, Inc.
|
|
|
2.4
|
|
|
--
|
|
|
2.4
|
|
|
5/27/05
|
|
|
Triton
Boat Company
|
|
|
61.8
|
|
|
4.4
|
|
|
66.2
|
|
|
6/20/05
|
|
|
Supra-Industria
Textil, Lda. (51 percent)
|
|
|
8.3
|
|
|
--
|
|
|
8.3
|
|
|
6/27/05
|
|
|
Marine
Innovations Warranty Corporation
|
|
|
2.3
|
|
|
--
|
|
|
2.3
|
|
|
|
|
|
Other
|
|
|
0.4
|
|
|
--
|
|
|
0.4
|
|
| |
|
|
|
|
$ |
89.6 |
|
$ |
4.4 |
|
$
|
94.0 |
|
The
Company acquired the receivables, inventory, property and equipment of Benrock,
Inc. (Benrock) for $4.2 million. Benrock is a distributor of marine parts
and expands the Company's geographic coverage of its parts and accessories
businesses distribution network. The post-acquisition results of Benrock
are
included in the Boat segment.
The
Company acquired the outstanding stock of Albemarle Boats, Inc. (Albemarle)
for
$9.2 million. Albemarle produces offshore sportfishing boats ranging in length
from 24 to 41 feet. The acquisition of Albemarle provides the Company with
the
opportunity to offer a more complete range of offshore sportfishing boats
and
complements the sportfishing convertibles offered by Hatteras, where products
start at 50 feet. The post-acquisition results of Albemarle are included
in the
Boat segment.
The
Company made a final payment of $1.0 million for the December 31, 2004
acquisition of Sea Pro, Sea Boss and Palmetto boats. This payment was based
on
finalization of purchase accounting adjustments.
The
Company acquired certain assets of MX Marine, Inc. (MX Marine) for $2.4 million.
MX Marine manufactures global-positioning systems, navigations systems and
other
marine electronics for the commercial market. The acquisition of MX Marine
provides a new channel for the Company’s offerings of global-positioning
systems, navigations systems and other marine electronics. The post-acquisition
results of MX Marine are included in the Marine Engine segment.
The
Company acquired the outstanding stock of Triton Boat Company (Triton), a
manufacturer of fiberglass bass and saltwater boats, and aluminum fishing
boats
ranging in length from 12 to 35 feet. The Company funded this acquisition
through cash consideration of $61.8 million and the assumption of debt. The
acquisition of Triton adds bass boats to the Company's product lineup,
as
well as a broader range of saltwater and aluminum fishing boats. The
post-acquisition results of Triton are included in the Boat
segment.
The
Company exercised its contractual right to acquire its joint venture partner’s
51.0 percent interest in Supra-Industria Textil, Lda. (Valiant), a
Portuguese manufacturer of the Valiant brand of rigid inflatable boats, for
$8.3
million. The Company is now the sole owner of Valiant. The post-acquisition
results of Valiant are included in the Marine Engine segment.
The
Company made an additional payment of $2.3 million for the April 1, 2004
acquisition of Marine Innovations Warranty Corporation (Marine Innovations).
This payment was required under the purchase agreement as Marine Innovations
fulfilled earnings targets.
These
acquisitions were not material to the Company’s results of operations or total
assets in the quarterly and year-to-date periods. Accordingly, the Company’s
consolidated results from operations would not differ materially from historical
performance; however, they did contribute to approximately 20 percent and
30
percent of the increase in net sales in the 2005 quarterly and year-to-date
periods, respectively, compared with the 2004 quarterly and year-to-date
periods.
In
the
first six months of 2004, consideration paid for acquisitions was as
follows:
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Description
|
|
Net
Cash
Consideration
|
|
Other
Consideration
|
|
Total
Consideration
|
|
| |
|
|
|
|
|
|
|
|
|
|
3/19/04
|
|
|
Vulcan-Bowling
Pin Company and
Vulcan-Brunswick
Bowling Pin Company
|
|
$
|
1.1
|
|
$
|
--
|
|
$
|
1.1
|
|
|
4/01/04
|
|
|
Lowe,
Lund, Crestliner
|
|
|
191.0
|
|
|
--
|
|
|
191.0
|
|
|
4/01/04
|
|
|
Marine
Innovations Warranty Corporation
|
|
|
5.4
|
|
|
--
|
|
|
5.4
|
|
|
4/30/04
|
|
|
Mainstar
Computer Systems Ltd.
|
|
|
0.1
|
|
|
--
|
|
|
0.1
|
|
|
6/01/04
|
|
|
Navman
NZ Limited (30 percent)
|
|
|
16.4
|
|
|
16.6
|
|
|
33.0
|
|
| |
|
|
|
|
$
|
214.0
|
|
$
|
16.6
|
|
$
|
230.6
|
|
The
Company acquired its joint venture partner’s share of a bowling pin operation
for $1.1 million allowing the Company to increase its ability to manufacture,
distribute, and market its own bowling pins. The post-acquisition results
of
these businesses are included in the Bowling & Billiards
segment.
The
Company acquired the outstanding stock of four aluminum boat companies for
$191.0 million. These companies include: Minnesota-based Crestliner, Inc.
and
Lund Boat Company; Lowe Boats, Inc., based in Missouri; and Lund Boats Canada,
Inc., which manufactures and sells the Lund brand in Canada. They produce
numerous models of aluminum fishing, pontoon, deck and utility boats ranging
from 10 to 25 feet. These boat companies provide the Company with the
opportunity to offer products in all major aluminum boat segments. The purchase
agreement provides for additional consideration of up to $30 million to be
paid
in 2007 based on the achievement of a minimum 10 percent after-tax cash flow
return on total investment over that time period. The post-acquisition results
of the aluminum boat companies are included in the Boat segment.
The
Company acquired the net assets, including working capital and other
intangibles, of Marine Innovations, a provider of extended warranty protection
for the marine industry, for $5.4 million. This acquisition expands the
financial services offered by the Company to its dealers. The purchase agreement
provides for additional consideration of up to $6.0 million based on financial
performance during the years 2004, 2005 and 2006. The post-acquisition results
of Marine Innovations are included in the Boat segment.
The
Company acquired the remaining 30 percent of outstanding stock of Navman
NZ
Limited (Navman), a New Zealand-based manufacturer of marine electronics
and
global positioning system-based products, including in-vehicle navigation
systems. The Company purchased 70 percent of the outstanding stock
of
Navman in 2003. Consideration for the remaining outstanding stock of Navman
was
funded through cash and 410,287 shares of the Company’s common stock. The
acquisition of Navman complements the Company’s expansion into marine-based
electronics and allows for additional growth in markets outside of the Company's
core marine operations. The results of operations of Navman, which was
consolidated in the financial statements in 2003, are included in the Marine
Engine segment.
These
acquisitions were not material to the Company’s net sales, results of operations
or total assets in the quarterly and year-to-date periods. Accordingly, the
Company’s consolidated results from operations would not differ materially from
historical performance.
Refer
to
Note 5 to the consolidated financial statements in the 2004 Form 10-K for
further detail relating to the Company’s acquisitions.
Note
6 - Investments
As
of
June 30, 2005 and 2004, the Company’s investment in Brunswick Acceptance
Company, LLC (BAC), totaled $39.7 million and $26.5 million, respectively,
compared with $35.9 million and $22.0 million at December 31, 2004 and 2003,
respectively. The 2005 increase in the net investment reflects $1.9 million
in
earnings and $1.9 million of cash invested to maintain the Company’s required 49
percent equity investment. See Note
8, Financial Services,
for
more details on this joint venture. Refer to Note 6 to the consolidated
financial statements in the 2004 Form 10-K for further detail relating to
the
Company’s investments.
On
February 23, 2005, the Company sold its investment of 1,861,200 shares in
MarineMax, Inc. (MarineMax), its largest boat dealer, for $56.8 million,
net of
$4.1 million of selling costs. The sale was made pursuant to a registered
public
offering by MarineMax. As a result of this sale, the Company recorded an
after-tax gain of $31.5 million after utilizing previously unrecognized capital
loss carryforwards. The Company intends to use these proceeds for general
corporate purposes, including possible acquisitions.
As
of
December 31, 2004, the Company’s investment in MarineMax was recorded in the
Consolidated Balance Sheets in Other assets-Investments at its fair market
value
of $55.4 million with the unrealized after-tax gain of $22.8 million ($37.3
million pre-tax) included as a part of Shareholders’ equity in Accumulated other
comprehensive income (loss).
Note
7 - Comprehensive Income
Accumulated
other comprehensive income (loss) includes minimum pension liability
adjustments, cumulative foreign currency translation adjustments, and unrealized
gains and losses on derivatives and investments, all net of tax. Comprehensive
income was as follows:
| |
|
Three
Months ended
June
30
|
|
Six
Months ended
June
30
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
114.1
|
|
$
|
90.1
|
|
$
|
208.7
|
|
$
|
138.1
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency cumulative translation
adjustment
|
|
|
(9.8
|
)
|
|
(0.5
|
)
|
|
(14.0
|
)
|
|
(0.2
|
)
|
|
Net
change in unrealized gains and losses
on
investments
|
|
|
--
|
|
|
(1.8
|
)
|
|
(22.9
|
)
|
|
7.4
|
|
|
Net
change in accumulated unrealized
derivative
gains and losses
|
|
|
5.4
|
|
|
0.5
|
|
|
12.0
|
|
|
4.2
|
|
|
Total
other comprehensive income (loss)
|
|
|
(4.4
|
)
|
|
(1.8
|
)
|
|
(24.9
|
)
|
|
11.4
|
|
|
Comprehensive
income
|
|
$
|
109.7
|
|
$
|
88.3
|
|
$
|
183.8
|
|
$
|
149.5
|
|
The
net
change in unrealized gains (losses) on investments in the six months ended
2005
was primarily due to sale of the Company’s investment in MarineMax. Refer to
Note
6, Investments,
for
details on the sale.
There
was
no impact due to the minimum pension liability adjustment in either period
as it
is adjusted annually in the fourth quarter.
Note
8 - Financial Services
In
2002,
the Company established a joint venture, BAC, with Transamerica Commercial
Finance Corporation (TCFC). In January of 2004, GE Commercial Finance (GECF)
acquired the commercial finance business of Transamerica, including TCFC.
Under
the
terms of the joint venture agreement, BAC provides secured wholesale floor-plan
financing to the Company’s boat and engine dealers. BAC also purchases and
services a portion of Mercury Marine’s domestic accounts receivable relating to
its boat builder and dealer customers.
Brunswick
Financial Services Corporation (BFS), a subsidiary of the Company, contributed
equity in BAC is adjusted monthly to maintain a 49 percent equity interest
in
accordance with the capital provisions of the joint venture agreement. BFS’s
investment in BAC is unconsolidated and accounted for by the Company under
the
equity method and is recorded as a component of Investments in its Consolidated
Balance Sheets. The Company records BFS’s share of income or loss in BAC based
on its ownership percentage in the joint venture in Other income in its
Consolidated Statements of Income.
BAC
is
funded in part through a loan from GECF and a securitization facility arranged
by General Electric Capital Corporation, a GECF affiliate, and in part by
a cash
equity investment from both GECF (51 percent) and BFS (49 percent). BFS’s total
investment in BAC at June 30, 2005 was $39.7 million. BFS’s exposure to losses
associated with BAC financing arrangements is limited to its funded equity
in
BAC. The net finance receivables of BAC as of June 30, 2005 and 2004 were
$201.4
million and $326.5 million, respectively.
The
Company’s sales of receivables to BAC were as follows:
| |
|
Three
Months ended
June
30
|
|
Six
Months ended
June
30
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
Receivables
sold
|
|
$
|
286.8
|
|
$
|
295.0
|
|
$
|
489.0
|
|
$
|
505.7
|
|
|
Discounts
|
|
|
2.1
|
|
|
1.7
|
|
|
3.7
|
|
|
3.1
|
|
|
Cash
received
|
|
$
|
284.7
|
|
$
|
293.3
|
|
$
|
485.3
|
|
$
|
502.6
|
|
Discounts
were recorded as an expense in Other income in the Consolidated Statements
of
Income. The outstanding balance for receivables sold to BAC was $130.1 million
as of June 30, 2005, up from $103.7 million at December 31, 2004. BAC will
continue to purchase and service a significant portion of Mercury Marine’s
domestic accounts receivable on an ongoing basis. Pursuant to the joint venture
agreement, BAC reimbursed Mercury Marine $1.1 million and $1.2 million for
the
six months ended 2005 and 2004, respectively, for the related credit,
collection, and administrative costs incurred in connection with the servicing
of such receivables.
The
Company has a retained interest in certain receivables sold to BAC. This
retained interest results from recourse provided to BAC in the event of customer
non-payment. In accordance with SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,” the Company
treats the sale of these receivables as a secured obligation. As of June
30,
2005, there were $48.8 million of such receivables which had been retained
on
the company’s consolidated balance sheet in Accounts and notes receivable, with
a corresponding liability included in Accrued expenses. The Company’s maximum
exposure to these receivables is $29.6 million, which is included in the
amounts
disclosed in Note
3, Commitments and Contingencies.
BFS
recorded income related to the operations of BAC of $2.7 million and $0.4
million for the quarters ended June 30, 2005 and 2004, respectively, and
$5.2
million and $1.6 million for the six months ended June 30, 2005 and 2004,
respectively.
Note
9 - Income Taxes
The
Company’s effective tax rate for the year-to-date period of 2005 was 30.3
percent, compared with 33.0 percent for the same period of 2004. The lower
effective tax rate was primarily due to the utilization of previously
unrecognized capital loss carryforwards incurred in connection with the gain
on
sale of the MarineMax stock as discussed in Note
6, Investments.
Note
10 - Pension and Other Postretirement Benefits
The
Company has defined contribution plans, qualified and nonqualified pension
plans, and other postretirement benefit plans covering substantially all
of its
employees. See Note 13 to the consolidated financial statements in the 2004
Form
10-K for details on these plans.
Pension
and other postretirement benefit (income) costs included the following
components for the three months ended June 30:
| |
|
|
|
|
|
Other
|
|
| |
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
4.7
|
|
$
|
4.7
|
|
$
|
0.6
|
|
$
|
0.8
|
|
|
Interest
cost
|
|
|
14.6
|
|
|
14.0
|
|
|
1.5
|
|
|
1.6
|
|
|
Expected
return on plan assets
|
|
|
(18.1
|
)
|
|
(16.4
|
)
|
|
--
|
|
|
--
|
|
|
Amortization
of prior service costs
|
|
|
1.8
|
|
|
1.5
|
|
|
(0.5
|
)
|
|
(0.5
|
)
|
|
Amortization
of net actuarial loss
|
|
|
3.3
|
|
|
3.5
|
|
|
0.2
|
|
|
0.4
|
|
|
Curtailment
loss
|
|
|
0.8
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Net
pension and other benefit cost
|
|
$
|
7.1
|
|
$
|
7.3
|
|
$
|
1.8
|
|
$
|
2.3
|
|
Pension
and other postretirement benefit (income) costs included the following
components for the six months ended June 30:
| |
|
|
|
|
|
Other
|
|
| |
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
9.4
|
|
$
|
8.7
|
|
$
|
1.3
|
|
$
|
1.2
|
|
|
Interest
cost
|
|
|
29.2
|
|
|
28.4
|
|
|
2.9
|
|
|
2.9
|
|
|
Expected
return on plan assets
|
|
|
(36.3
|
)
|
|
(33.0
|
)
|
|
--
|
|
|
--
|
|
|
Amortization
of prior service costs
|
|
|
3.7
|
|
|
3.0
|
|
|
(1.0
|
)
|
|
(1.1
|
)
|
|
Amortization
of net actuarial loss
|
|
|
6.6
|
|
|
6.7
|
|
|
0.4
|
|
|
0.4
|
|
|
Curtailment
loss
|
|
|
0.8
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Net
pension and other benefit cost
|
|
$
|
13.4
|
|
$
|
13.8
|
|
$
|
3.6
|
|
$
|
3.4
|
|
Employer
Contributions. The
Company previously disclosed in the 2004 Form 10-K that it expected to
contribute $27.2 million to the Company’s pension plans in 2005. As of June 30,
2005, the Company has contributed $11.2 million and expects to contribute
an
additional $16.0 million during the remainder of the year. The Company’s plans
for additional contributions are subject to, among other items, equity market
returns and discount rate movements.
Note
11 - Revolving Credit Facility
In
the
second quarter of 2005, the Company and certain of its domestic and foreign
subsidiaries entered into a new $650.0 million revolving credit facility
(the “Facility”). The Facility has a term of five years, with the option to
extend the term for an additional one year on each anniversary of the Facility.
Under the terms of the Facility, the Company has multiple borrowing options,
including borrowing at the greater of the prime rate as announced by JPMorgan
Chase Bank, N.A. or the Federal Funds effective rate plus 0.5 percent, or
a rate
tied to LIBOR. The Company pays a facility fee of 10.0 basis points per annum,
which is subject to adjustment based on credit ratings. Under the terms of
the
Facility, the Company is subject to a leverage test, as well as restrictions
on
secured debt. The Company was in compliance with these covenants at June
30,
2005. There were no borrowings under the Facility during the second quarter
of
2005, and the Facility continues to serve as support for commercial paper
borrowings when commercial paper is outstanding. The Company has the ability
to
issue up to $150.0 million in letters of credit under the Facility. The Company
had borrowing capacity of $593.0 million under the terms of this agreement
at
June 30, 2005, net of outstanding letters of credit. The Company also has
$450.0
million available under a universal shelf registration statement filed in
2001
with the Securities and Exchange Commission for the issuance of equity and/or
debt securities.
Note
12 - Share Repurchase Program
In
the
second quarter of 2005, the Company’s Board of Directors authorized a $200
million share repurchase program, which will be funded with available cash.
The
Company expects to repurchase shares on the open market or in private
transactions from time to time, depending on market conditions. The Company
did
not repurchase any shares under this program during the second quarter of
2005.
Note
13 - Subsequent Event
On
July
7, 2005, the Company acquired the net assets of Kellogg Marine, Inc. (Kellogg)
for approximately $40 million in cash. Kellogg is a leading distributor of
marine parts and accessories headquartered in Old Lyme, Connecticut. The
acquisition of Kellogg complements the Company’s previous acquisitions of
Benrock and Land ‘N’ Sea and provides an essential distribution hub in the
northeastern United States.
Item
2. - Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Results
of Operations
Overview
and Outlook
Sales
increased 12.4 percent and 14.4 percent in the second quarter and six-month
period ended June 30, 2005 to $1.6 billion and $3.0 billion, respectively,
with
gains reported primarily by the Marine Engine and Boat segments. Acquisitions
also played a role, accounting for approximately 20 percent and 30 percent
of
the sales gain in the three-month and six-month period ended June 30, 2005,
respectively. Higher sales volumes, product prices and cost reduction
initiatives contributed to an increase in operating earnings to $171.7 million
and $270.8 million and operating margins of 10.7 percent and 9.0 percent,
in the
three-month and six-month periods, respectively.
Looking
ahead to the second half of 2005, the Company estimates that
industry
growth, coupled with market share gains, success of new products, improved
pricing and the full-year impact of acquisitions completed in 2005 and 2004,
will result in an approximately 14 to 15 percent overall sales gain for the
year. Operating earnings are expected to improve in 2005, benefiting from
higher
volumes, improved pricing, market success of new product introductions as
well
as the Company’s ongoing focus on effective cost management. These gains will be
partially offset by higher research and development expenses for new products,
the margin impact of the industry’s transition to low-emission outboard engines,
start-up costs related to the opening of the Company’s new manufacturing engine
facility in China and additional investments to further the Company’s global
manufacturing footprint in Japan, Mexico and Hungary, expenses to enhance
infrastructure in the European, Asia-Pacific and Latin American regions,
and
costs to upgrade our information technology systems.
Matters
Affecting Comparability
Acquisitions.
The
Company’s operating results for 2005 include the operating results for
acquisitions completed in 2005 and 2004. Approximately 20 percent and 30
percent
of the increase in three-month and year-to-date 2005 sales, respectively,
when
compared with the same periods of 2004, can be attributed to the following
acquisitions:
|
Date
|
|
Description
|
|
Segment
|
| |
|
|
|
|
|
4/01/04
|
|
Lowe,
Lund, Crestliner
|
|
Boat
|
|
12/31/04
|
|
Sea
Pro, Sea Boss and Palmetto
|
|
Boat
|
|
2/28/05
|
|
Albemarle
Boats, Inc. (Albemarle)
|
|
Boat
|
|
5/27/05
|
|
Triton
Boat Company (Triton)
|
|
Boat
|
The
Lowe,
Lund, and Crestliner boat brands provide the Company with the opportunity
to
offer products in all major aluminum boat segments and to leverage engine
synergies with the Company’s Mercury Marine division. The Sea Pro, Sea Boss
and Palmetto boat brands provide the Company with the opportunity to offer
a
distinctive array of offshore saltwater fishing boats. Albemarle provides
the
Company with the opportunity to offer a more complete range of offshore
sportfishing boats. Triton adds bass boats to the Company's lineup,
as well
as a broader range of saltwater and aluminum fishing boats.
Consolidated
The
following table sets forth certain amounts, ratios and relationships calculated
from the Consolidated Statements of Income for the three months ended June
30:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Increase/(Decrease)
|
|
| |
|
|
|
vs.
2004
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,598.6
|
|
$
|
1,422.7
|
|
$
|
175.9
|
|
|
12.4
|
%
|
|
Gross
margin (A)
|
|
$
|
412.6
|
|
$
|
367.8
|
|
$
|
44.8
|
|
|
12.2
|
%
|
|
Operating
earnings
|
|
$
|
171.7
|
|
$
|
139.5
|
|
$
|
32.2
|
|
|
23.1
|
%
|
|
Net
earnings
|
|
$
|
114.1
|
|
$
|
90.1
|
|
$
|
24.0
|
|
|
26.6
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
1.15
|
|
$
|
0.93
|
|
$
|
0.22
|
|
|
23.7
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expressed
as a percentage of net sales: (B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
25.8
|
%
|
|
25.9
|
%
|
|
|
|
|
(10)
bpts
|
|
|
Selling,
general and administrative expense
|
|
|
12.8
|
%
|
|
14.0
|
%
|
|
|
|
|
(120)
bpts
|
|
|
Operating
margin
|
|
|
10.7
|
%
|
|
9.8
|
%
|
|
|
|
|
90
bpts
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bpts=basis
points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
Gross margin is defined as Net sales less Cost of sales as presented in the
Consolidated Statements of Income.
(B)
Percentages are determined by using the following numerators expressed as
a
percentage of net sales: Gross margin as defined in (A), Selling, general
and
administrative expense and Operating earnings as presented in the Consolidated
Statements of Income.
The
increase in sales was primarily due to the Marine Engine and Boat segments.
Approximately 80 percent of the increase in sales was from organic growth,
defined as sales from the Company’s businesses that have operating results in
comparable periods presented. Sales from businesses acquired in 2004 and
2005
accounted for the remaining 20 percent of the increase in sales in the second
quarter of 2005. The Marine Engine segment sales increased due to higher
revenues from outboard engines and sterndrive engines as a result
of growth
in international and domestic markets, higher sales of marine electronics
and
navigation products, and favorable pricing. Organic Boat segment sales increased
due to higher wholesale shipments of fiberglass boats and favorable pricing,
partially offset by lower sales of aluminum boats as a result of unfavorable
weather conditions at the start of the selling season in key markets. The
Fitness segment sales decreased as a result of the divestiture of the Omni
Fitness (Omni) retail stores in 2004, which was partially offset by higher
domestic sales to commercial customers. The Bowling & Billiards segment
sales increased due to higher sales of bowling equipment, increased bowling
center revenues partly as a result of four new bowling centers in 2004 and
2005,
and higher sales of billiard products, partially offset by the disposition
of
six bowling centers.
The
slight decrease in gross margin percentage in the second quarter of 2005
compared with the same period last year was primarily due to a higher mix
of
shipments towards lower margin low-emission outboard engines, production
start-up expenses associated with a new outboard engine manufacturing facility
in China and additional investments to expand the Company’s global
manufacturing footprint, cost inefficiencies related to a reduction in
production volume for the aluminum boat operations, and costs associated
with the transfer of bowling ball production from the Muskegon, Michigan,
facility to Mexico. These decreases were partially offset by favorable net
pricing and higher wholesale shipments of higher margin larger
boats.
The
increase in operating earnings was primarily due to the increase in sales
volumes, the factors affecting gross margin percentage discussed above, the
elimination of operating expenses associated with Omni, and lower variable
compensation costs. Partially offsetting the increase in operating earnings
were
higher marketing and promotional activities in the Boat and Marine Engine
segments, higher research and development expenses for new products in the
Marine Engine and Boat segments, and expenses to enhance infrastructure in
the
European region.
Interest
expense increased $2.7 million in the second quarter of 2005 compared with
the
same period in 2004, primarily due to the issuance of debt in 2004 and the
effects of higher short-term interest rates. See Note 12 in the 2004
Form
10-K for details on the issuance of the debt.
Other
income increased to $9.2 million in the second quarter of 2005 compared with
$5.4 million in the same period last year, primarily due to improved results
from Brunswick Financial Services, as described in Note
8,
Financial
Services,
to the
Consolidated Financial Statements, and the Cummins MerCruiser Diesel Marine
LLC
joint venture.
Weighted
average common shares outstanding used to calculate diluted earnings per
share
increased to 99.2 million in the second quarter of 2005 from 97.2 million
in the
second quarter of 2004. The increase in average shares outstanding was primarily
due to the exercise of stock options during 2004.
The
following table sets forth certain amounts, ratios and relationships calculated
from the Consolidated Statements of Income for the six months ended June
30:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Increase/(Decrease)
|
|
| |
|
|
|
vs.
2004
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
2,999.7
|
|
$
|
2,622.3
|
|
$
|
377.4
|
|
|
14.4
|
%
|
|
Gross
margin (A)
|
|
$
|
754.5
|
|
$
|
665.1
|
|
$
|
89.4
|
|
|
13.4
|
%
|
|
Operating
earnings
|
|
$
|
270.8
|
|
$
|
218.0
|
|
$
|
52.8
|
|
|
24.2
|
%
|
|
Net
earnings
|
|
$
|
208.7
|
|
$
|
138.1
|
|
$
|
70.6
|
|
|
51.1
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
2.11
|
|
$
|
1.43
|
|
$
|
0.68
|
|
|
47.6
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expressed
as a percentage of net sales: (B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
25.2
|
%
|
|
25.4
|
%
|
|
|
|
|
(20)
bpts
|
|
|
Selling,
general and administrative expense
|
|
|
13.8
|
%
|
|
14.7
|
%
|
|
|
|
|
(80)
bpts
|
|
|
Operating
margin
|
|
|
9.0
|
%
|
|
8.3
|
%
|
|
|
|
|
70
bpts
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bpts=basis
points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
Gross
margin is defined as Net sales less Cost of sales as presented in the
Consolidated Statements of Income.
(B)
Percentages are determined by using the following numerators expressed as
a
percentage of net sales: Gross margin as defined in (A), Selling, general
and
administrative expense and Operating earnings as presented in the Consolidated
Statements of Income.
The
increase in sales was primarily due to the Marine Engine and Boat segments.
Approximately 70 percent of the increase in sales was from organic growth,
defined as sales from the Company’s businesses that have operating results in
comparable periods presented. Sales from businesses acquired in 2004 and
2005
accounted for the remaining 30 percent of the increase in sales in the first
six
months of 2005. The factors that drove the sales increase are primarily the
same
as described in the quarterly period above.
The
slight decrease in gross margin percentage in the first six months of 2005
compared with the same period last year was primarily due to the same factors
as
described in the quarterly discussion. Additionally, gross margin percentage
was
unfavorable due to competitive pricing pressures internationally and increased
freight and installation costs in the Fitness segment.
The
increase in operating earnings was primarily due to the increase in sales
volumes, the factors affecting gross margin percentage, and the additional
factors affecting operating earnings as described in the quarterly period.
Interest
expense increased $5.6 million in the first six months of 2005 compared with
the
same period in 2004, primarily due to the issuance of debt in 2004 and the
effects of higher short-term interest rates. See Note 12 in the 2004
Form
10-K for details on the issuance of the debt.
Other
income increased to $16.0 million in the first six months of 2005 compared
with
$8.6 million in the same period last year, primarily due to improved results
from Brunswick Financial Services, as described in Note
8,
Financial
Services,
to the
Consolidated Financial Statements, and the Cummins MerCruiser Diesel Marine
LLC
joint venture.
The
Company’s effective tax rate for the six months ending June 30, 2005 was 30.3
percent compared with 33.0 percent in the same period last year. The lower
effective tax rate was primarily due to the utilization of previously
unrecognized capital loss carryforwards on the gain on sale of the MarineMax,
Inc., (MarineMax) stock as discussed in Note
6, Investments, to
the
Consolidated Financial Statements. Excluding the tax effect on this gain,
the
Company’s effective tax rate for the six months ending June 30, 2005 was 32.0
percent. Management believes that presentation of the effective tax rate,
excluding this transaction, provides a more meaningful comparison to the
prior-period because there was no comparable transaction in 2004.
Net
earnings and diluted earnings per share increased primarily due to the same
factors discussed above in operating earnings and as a result of the gain
on
sale of the Company’s investment in MarineMax. See Note
6, Investments,
to the
Consolidated Financial Statements for details on this gain. Excluding this
gain,
net earnings and diluted earnings per share would have been $177.2 million
and
$1.79 per diluted share. Management believes that presentation of net earnings
and diluted earnings per share excluding this gain provides a more meaningful
comparison to the prior-period because there was no comparable investment
sale
gain in the first six months of 2004.
Weighted
average common shares outstanding used to calculate diluted earnings per
share
increased to 99.1 million in the first six months of 2005 from 96.4 million
in
the same period of 2004. The increase in average shares outstanding was
primarily due to the exercise of stock options during the 2004.
Marine
Engine Segment
The
following table sets forth Marine Engine segment results for the three months
ended June 30:
| |
|
|
|
Increase/(Decrease)
vs.
2004
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
755.5
|
|
$
|
665.2
|
|
$
|
90.3
|
|
|
13.6
|
%
|
|
Operating
earnings
|
|
$
|
107.0
|
|
$
|
95.6
|
|
$
|
11.4
|
|
|
11.9
|
%
|
|
Operating
margin
|
|
|
14.2
|
%
|
|
14.4
|
%
|
|
|
|
|
(20)
bpts
|
|
|
Capital
expenditures
|
|
$
|
21.2
|
|
$
|
15.9
|
|
$
|
5.3
|
|
|
33.3
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bpts=basis
points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
Engine segment sales, which include the Company’s Mercury Marine and Brunswick
New Technologies (BNT) operations, increased primarily due to higher revenues
from outboard engines and sterndrive engines as a result of growth in
international and domestic markets, higher sales of marine electronics and
navigation products, favorable pricing, and growth in marine parts and services
businesses.
Operating
earnings benefited from the increase in sales volume, favorable pricing,
reduced
warranty costs as a result of quality improvements, and lower variable
compensation costs. These factors were partially offset by higher marketing
and
promotional activities for the Verado engines and new products at BNT, a
higher
mix of shipments towards lower margin low-emission outboard engines, higher
research and development expenses for products at BNT, and production start-up
expenses associated with a new outboard engine manufacturing facility in
China.
The
increase in capital expenditures was primarily due to investments for the
135,
150 and 175 horsepower Verado engines and for naturally aspirated,
four-stroke engines ranging from 75- to 115-horespower.
The
following table sets forth Marine Engine segment results for the six months
ended June 30:
| |
|
|
|
Increase
vs. 2004
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,361.1
|
|
$
|
1,193.1
|
|
$
|
168.0
|
|
|
14.1
|
%
|
|
Operating
earnings
|
|
$
|
159.0
|
|
$
|
138.2
|
|
$
|
20.8
|
|
|
15.1
|
%
|
|
Operating
margin
|
|
|
11.7
|
%
|
|
11.6
|
%
|
|
|
|
|
10
bpts
|
|
|
Capital
expenditures
|
|
$
|
35.4
|
|
$
|
28.9
|
|
$
|
6.5
|
|
|
22.5
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bpts=basis
points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
Engine segment sales and operating earnings increased primarily due to the
same
factors as described above in the quarterly period.
The
increase in capital expenditures was primarily due the same factors as described
in the quarterly period.
Boat
Segment
The
following table sets forth Boat segment results for the three months ended
June
30:
| |
|
|
|
Increase
vs. 2004
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
742.2
|
|
$
|
629.9
|
|
$
|
112.3
|
|
|
17.8
|
%
|
|
Operating
earnings
|
|
$
|
74.8
|
|
$
|
57.0
|
|
$
|
17.8
|
|
|
31.2
|
%
|
|
Operating
margin
|
|
|
10.1
|
%
|
|
9.0
|
%
|
|
|
|
|
110
bpts
|
|
|
Capital
expenditures
|
|
$
|
14.3
|
|
$
|
13.0
|
|
$
|
1.3
|
|
|
10.0
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bpts=basis
points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately
70 percent of the increase in Boat segment sales was due to organic growth.
This
increase was the result of higher wholesale shipments of fiberglass
boats
to dealers domestically and internationally, driven by the
success of
new models and favorable pricing. This increase was partially offset by
a
decrease in sales of aluminum boats, partly as a result of unfavorable
weather
conditions in the Midwest and Northeast markets at the start of the selling
season. Adverse weather, particularly in the Midwest, affected aluminum
boats to
a greater extent than fiberglass boats because the majority of the Company’s
aluminum boats are sold in the Midwest region, whereas fiberglass
boat
sales are more geographically diverse. Acquisitions completed since the
second
quarter of 2004 accounted for the remainder of the increase in segment
sales.
The
increase in operating earnings was due to the higher sales volumes, improved
net
pricing and a favorable mix of higher margin larger boats partially offset
by
lower earnings of approximately $7 million from our aluminum boats brands
acquired in 2004 as a result of unfavorable weather conditions and a reduction
in production volume. Additionally, operating earnings were
unfavorably affected by higher research and development expenses and higher
marketing and promotional expenses for new models.
The
increase in capital expenditures was primarily for tooling required for the
production of new models and investments in closed molding manufacturing
equipment.
The
following table sets forth Boat segment results for the six months ended
June
30:
| |
|
|
|
Increase
vs. 2004
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,419.7
|
|
$
|
1,141.9
|
|
$
|
277.8
|
|
|
24.3
|
%
|
|
Operating
earnings
|
|
$
|
124.3
|
|
$
|
89.0
|
|
$
|
35.3
|
|
|
39.7
|
%
|
|
Operating
margin
|
|
|
8.8
|
%
|
|
7.8
|
%
|
|
|
|
|
100
bpts
|
|
|
Capital
expenditures
|
|
$
|
26.7
|
|
$
|
23.5
|
|
$
|
3.2
|
|
|
13.6
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bpts=basis
points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately
60 percent of the increase in Boat segment sales was due to organic growth.
Organic growth in sales and operating earnings was primarily due to the same
factors as described above for the quarterly period.
The
increase in capital expenditures was primarily for the same factors as described
in the quarterly period.
Fitness
Segment
The
following table sets forth Fitness segment results for the three months ended
June 30:
| |
|
|
|
Increase/(Decrease)
|
|
| |
|
|
|
vs.
2004
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
120.4
|
|
$
|
122.3
|
|
$
|
(1.9
|
)
|
|
(1.6
|
)%
|
|
Operating
earnings
|
|
$
|
5.1
|
|
$
|
2.9
|
|
$
|
2.2
|
|
|
75.9
|
%
|
|
Operating
margin
|
|
|
4.2
|
%
|
|
2.4
|
%
|
|
|
|
|
180
bpts
|
|
|
Capital
expenditures
|
|
$
|
2.0
|
|
$
|
1.0
|
|
$
|
1.0
|
|
|
100.0
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bpts=basis
points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
decrease in sales was primarily attributable to the divestiture of the Omni
Fitness (Omni) retail stores in 2004. Excluding the sales associated with
the
divestiture of Omni from the second quarter of 2004, net sales in the second
quarter of 2005 increased by $2.5 million to $120.4 million from $117.9 million
in the second quarter of 2004. Management believes that presentation of net
sales excluding the net sales from Omni provides a more meaningful comparison
to
the prior-period because there were no comparable net sales from Omni in
the
second quarter of 2005. This increase in sales was primarily due to increased
sales of strength and cardiovascular equipment in the domestic market, partially
offset by a decrease in sales in the European market.
The
increase in operating earnings was primarily due to the increase in sales
volume, lower manufacturing costs, and the absence of Omni operating expenses
in
the second quarter of 2005 partially offset by competitive pricing pressures
in
the European market, and higher freight and installation costs.
Capital
expenditures in the second quarter of 2005 and 2004 were primarily related
to
facility expansion and tooling for new products.
The
following table sets forth Fitness segment results for the six months ended
June
30:
| |
|
|
|
Increase/(Decrease)
vs.
2004
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
247.9
|
|
$
|
252.9
|
|
$
|
(5.0
|
)
|
|
(2.0
|
)%
|
|
Operating
earnings
|
|
$
|
11.5
|
|
$
|
12.1
|
|
$
|
(0.6
|
)
|
|
(5.0
|
)%
|
|
Operating
margin
|
|
|
4.6
|
%
|
|
4.8
|
%
|
|
|
|
|
(20)
bpts
|
|
|
Capital
expenditures
|
|
$
|
5.6
|
|
$
|
3.6
|
|
$
|
2.0
|
|
|
55.6
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bpts=basis
points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
decrease in sales was primarily attributable to the divestiture of the Omni
Fitness (Omni) retail stores in 2004. Excluding the sales associated with
the
divestiture of Omni from the first six months of 2004, net sales in the first
six months of 2005 increased by $8.6 million to $247.9 million from $239.3
million in the same period of 2004. Management believes that presentation
of net
sales excluding the net sales from Omni provides a more meaningful comparison
to
the prior-period because there were no comparable net sales from Omni in
the
first six months of 2005. This increase in sales was primarily due to increased
sales of strength and cardiovascular equipment in international and domestic
markets.
Operating
earnings decreased as a result of competitive pricing pressures internationally,
higher freight and installation costs, higher mix of shipments toward
lower-margin strength equipment in the domestic market, and higher material
costs. These factors were partially offset by the increase in sales volume,
lower manufacturing costs and the absence of Omni operating expenses in the
six
months of 2005.
Capital
expenditures were primarily for the same factors as described in the quarterly
period.
Bowling
& Billiards Segment
The
following table sets forth Bowling & Billiards segment results for the three
months ended June 30:
| |
|
|
|
Increase
vs. 2004
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
114.9
|
|
$
|
105.8
|
|
$
|
9.1
|
|
|
8.6
|
%
|
|
Operating
earnings
|
|
$
|
5.2
|
|
$
|
4.2
|
|
$
|
1.0
|
|
|
23.8
|
%
|
|
Operating
margin
|
|
|
4.5
|
%
|
|
4.0
|
%
|
|
|
|
|
50
bpts
|
|
|
Capital
expenditures
|
|
$
|
12.3
|
|
$
|
9.4
|
|
$
|
2.9
|
|
|
30.9
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bpts=basis
points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bowling
& Billiards segment sales increased due to a higher sales volume of bowling
equipment, higher bowling center revenues partly from four new bowling centers
in 2004 and 2005, and higher sales of billiards products. These increases
were
partially offset by the disposition of six bowling centers.
The
increase in operating earnings was primarily due to the increased
sales volume. While a gain on the sale of one bowling center
was
included in the second quarter of 2005 results, this was more than
offset
by expenses related to the dispute with a Chinese supplier as discussed in
Note
3, Commitments and Contingencies,
to the
Consolidated Financial Statements, as well as costs and other expenses
associated with the transfer of bowling ball production from the segment’s
Muskegon, Michigan, facility to Mexico.
Capital
expenditures in the second quarter of 2004 and 2005 were primarily related
to
four new bowling centers.
The
following table sets forth Bowling & Billiards segment results for the six
months ended June 30:
| |
|
|
|
Increase/(Decrease)
|
|
| |
|
|
|
vs.
2004
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
226.4
|
|
$
|
216.0
|
|
$
|
10.4
|
|
|
4.8
|
%
|
|
Operating
earnings
|
|
$
|
16.3
|
|
$
|
17.7
|
|
$
|
(1.4
|
)
|
|
(7.9
|
)%
|
|
Operating
margin
|
|
|
7.2
|
%
|
|
8.2
|
%
|
|
|
|
|
(100)
bpts
|
|
|
Capital
expenditures
|
|
$
|
13.9
|
|
$
|
15.5
|
|
$
|
(1.6
|
)
|
|
(10.3
|
)%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bpts=basis
points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bowling
& Billiards segment sales increased primarily due to the same factors as
discussed in the quarterly period.
The
decrease in operating earnings was primarily due to expenses related to the
dispute with a Chinese supplier as discussed in Note
3, Commitments and Contingencies,
to the
Consolidated Financial Statements, and costs and other expenses associated
with
the transfer of bowling ball production from the segment’s Muskegon, Michigan
facility to Mexico and an unfavorable mix of lower-margin billiard products.
These decreases were partially offset by an increase in sales volume and
a gain
on the sale of two bowling centers.
Capital
expenditures were primarily for the same factors as described in the quarterly
period.
Cash
Flow, Liquidity and Capital Resources
The
following table sets forth an analysis of cash flow for the six months ended
June 30:
| |
|
|
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$
|
111.4
|
|
$
|
170.0
|
|
|
Net
cash provided by (used for):
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(84.5
|
)
|
|
(72.7
|
)
|
|
Proceeds
from investment sale
|
|
|
57.9
|
|
|
--
|
|
|
Other,
net
|
|
|
11.8
|
|
|
3.9
|
|
|
Free
cash flow *
|
|
$
|
96.6
|
|
$
|
101.2
|
|
*
The Company defines Free cash flow as cash flow from operating and investing
activities (excluding cash used for acquisitions and investments), and excluding
financing activities. Free cash flow is not intended as an alternative measure
of cash flow from operations, as determined in accordance with generally
accepted accounting principles (GAAP) in the United States. The Company uses
this financial measure, both in presenting its results to shareholders and
the
investment community, and in its internal evaluation and management of its
businesses. Management believes that this financial measure, and the information
it provides, is useful to investors because it permits investors to view
the
Company’s performance using the same tool that management uses to gauge progress
in achieving its goals. Management believes that the non-GAAP financial measure
“Free cash flow” is also useful to investors because it is an indication of cash
flow that may be available to fund further investments in future growth
initiatives.
The
Company’s major sources of funds for investments, acquisitions, dividend
payments and share repurchases are cash generated from operating activities,
available cash balances and selected borrowings. The Company evaluates potential
acquisitions, divestitures and joint ventures in the ordinary course of
business.
In
the
first six months of 2005, net cash provided by operating activities totaled
$111.4 million compared with $170.0 million in the same period of 2004.
The
decrease in net cash provided by operating activities in the first six months
of
2005 was primarily due to a $64.8 million increase in cash used to fund working
capital (defined as non-cash current assets less current liabilities) and
tax
payments partially offset by an increase in net earnings. The greater use
of
funds for working capital in the first six months of 2005 was primarily
attributable to higher variable compensation payments, partially offset by
reduced growth in accounts receivable as a result of improved collections.
Cash
flows from investing activities included capital expenditures of $84.5 million
and $72.7 million in the first six months of 2005 and 2004, respectively.
Capital expenditures in the first six months of 2005 were attributable to
investments in: the 135, 150 and 175 horsepower and naturally aspirated,
four-stroke engines; tooling and equipment expenditures for new models
and
product innovations in the Boat segment; and for the construction of new
bowling
centers. Cash paid for acquisitions, net of cash and debt acquired, totaled
$89.6 million and $214.0 million in the first six months of 2005 and 2004,
respectively. See Note
5, Acquisitions,
to the
Consolidated Financial Statements, and Note 5 in the 2004 Form 10-K for further
details on the Company’s acquisitions. The Company invested $1.9 million and
$2.3 million in Brunswick Acceptance Company, LLC (BAC), during the first
six
months of 2005 and 2004, respectively.
On
February 23, 2005, the Company sold its investment in MarineMax, Inc. (1,861,200
shares), its largest boat dealer, for $56.8 million, net of $4.1 million
of
selling costs, which included $1.1 million of accrued expenses. Cash of $5.3
million for taxes related to this sale were paid in April of 2005. The Company
intends to use the after-tax cash flow proceeds of $51.5 million for general
corporate purposes, including possible acquisitions. See
Note
6, Investments,
to the
Consolidated Financial Statements for details on the sale of this investment,
and Note 6 in the 2004 Form 10-K for further details on the Company’s other
investments.
Cash
provided by financing activities was $8.6 million in the first six months
of
2005, compared with cash provided of $207.4 million in the prior year period.
This decrease was primarily due to the issuance of new debt issued in the
second
quarter of 2004. The Company received $9.4 million from stock options exercised
in the first six months of 2005, compared with $69.4 million during the same
period of 2004. On May 4, 2005, the Company’s Board of Directors authorized a
$200 million share repurchase program, which will be funded with available
cash.
The Company expects to repurchase shares on the open market or in private
transactions from time to time, depending on market conditions. There were
no
repurchases in the second quarter of 2005.
Cash
and
cash equivalents totaled $508.6 million at June 30, 2005, up $8.8 million
from
$499.8 million at December 31, 2004. Total debt at June 30, 2005 decreased
$6.6
million to $732.5 million, versus $739.1 million at December 31, 2004, and
debt-to-capitalization ratios were 27.7 percent and 30.2 percent, respectively.
The decrease in debt was primarily due to payments of $1.9 million for its
long-term debt obligations and the effect of higher short-term interest
rates in the first six months of 2005.
On
May 5,
2005, the Company completed a new $650.0 million revolving credit facility
(the
“Facility”),
which
replaced the existing $350.0 million facility, as described in Note
11,
Revolving
Credit Facility,
to
the
Consolidated Financial Statements, that serves as support for commercial
paper
borrowings.
This
new five-year facility contains improved pricing and has similar terms to
the
existing facility. The increased capacity reflects the growth in the Company’s
business and our desire to maintain liquidity sources at conservative
levels.
There
were no borrowings under the revolving credit agreement during the first
six
months of 2005. The Company has the ability to issue up to $150.0 million
in
letters of credit under the revolving credit facility, with $57.0 million
in
outstanding letters of credit at June 30, 2005. Net of these outstanding
letters
of credit, the Company had borrowing capacity of $593.0 million under the
terms
of the revolving credit agreement at June 30, 2005. Under the terms of the
Facility, the Company is subject to a leverage test, as well as restrictions
on
secured debt. The Company was in compliance with these covenants at June
30,
2005. The Company also has $450.0 million available under a universal shelf
registration statement filed in 2001 with the Securities and Exchange Commission
for the issuance of equity and/or debt securities.
In
2005,
the Company intends to continue to proactively fund its defined benefit plans
in
advance of Employee Retirement Income Security Act (ERISA) requirements.
For
2005, the Company anticipates contributing $27.2 million into its defined
benefit plans, compared with $42.6 million of contributions in 2004. These
amounts include contributions to fund payments made under the non-qualified
plans of $2.2 million in 2005 and $2.6 million in 2004. Contributions under
the
non-qualified plans for the first six months totaled $1.2 million in 2005
and
$1.4 million in 2004. The Company funded $10.0 million into its qualified
defined pension plans in both the first six months of 2005 and 2004.
In
July of 2005, the Company contributed $15.0 million of the $16.0 million
expected to be contributed to the qualified pension plans during the second
half
of 2005. See Note
10, Pension and Other Postretirement Benefits, to
the
Consolidated Financial Statements, and Note 13 in the 2004 Form 10-K, for
more
details.
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. Management believes
that
there are adequate sources of liquidity to meet the Company’s short-term and
long-term needs.
Financial
Services
See
Note
8, Financial Services,
to the
Consolidated Financial Statements, for a discussion on the Company’s joint
venture, BAC, with GE Commercial Finance.
New
Accounting Standards
In
March
2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
(FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations.” FIN 47,
which clarifies the accounting for conditional asset retirement obligations
as
used in Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting
for Asset Retirement Obligations.” A conditional asset retirement obligation is
an unconditional legal obligation to perform an asset retirement activity
in
which the timing and (or) method of settlement are conditional on a future
event
that may or may not be within the control of the entity. Therefore, an entity
is
required to recognize a liability for the fair value of a conditional asset
retirement obligation under SFAS No. 143 if the fair value of the liability
can
be reasonably estimated. The provisions of FIN 47 are effective for reporting
periods ending after December 15, 2005. The Company is currently evaluating
the
impact of adopting FIN 47, but does not anticipate it will have a material
impact on the financial statements.
Legal
Refer
to
Note 3, Commitments and Contingencies, to
the
Consolidated Financial Statements, for a discussion of the Company’s legal
proceedings.
Environmental
Regulation
In
its
Marine Engine segment, the Company will continue to develop engine technologies
to reduce engine emissions to comply with present and future emissions
requirements. The costs associated with these activities and the introduction
of
low-emission engines will have an adverse effect on Marine Engine segment
operating margins and may affect short-term operating results. The Boat segment
continues to pursue fiberglass boat manufacturing technologies and techniques
to
reduce air emissions at its boat manufacturing facilities. The Company does
not
believe that compliance with federal, state, and local environmental laws
will
have a material adverse effect on the Company’s competitive
position.
Off-Balance
Sheet Arrangements and Contractual Obligations
The
Company’s off-balance sheet arrangements and contractual obligations are
detailed in the 2004 Form 10-K. There have been no material changes in this
information.
Critical
Accounting Policies
There
have been no material changes in the Company’s critical accounting policies
since the filing of its 2004 Form 10-K. As discussed in the 2004 Form 10-K,
the
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make certain estimates and assumptions that affect the amount
of
reported assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and revenues
and expenses during the periods reported. Actual results may differ from
those
estimates.
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 effect of a weak economy and stock market on consumer confidence
and thus the demand for marine, fitness, billiards and bowling equipment
and
products; competitive pricing pressures; the success of new product
introductions; the ability to maintain market share in high-margin products;
competition from new technologies; imports from Asia and increased competition
from Asian competitors; the ability to obtain component parts from suppliers;
the ability to maintain effective distribution; the financial strength of
dealers, distributors and independent boat builders; the ability to transition
and ramp up certain manufacturing operations within time and budgets allowed;
the ability to maintain product quality and service standards expected by
our
customers; the ability to successfully manage pipeline inventories; the success
of global sourcing and supply chain initiatives; the ability to successfully
integrate acquisitions; the success of marketing and cost management programs;
the ability to develop product technologies that comply with regulatory
requirements; the ability to complete environmental remediation efforts and
resolve claims and litigation at the cost estimated; the impact of weather
conditions on demand for marine products and retail bowling center revenues;
shifts in currency exchange rates; adverse foreign economic conditions; and
the
impact of interest rates and fuel prices on demand for marine products.
Additional factors are included in the 2004 Form 10-K.
Item
3. - Quantitative and Qualitative Disclosures About Market
Risk
The
Company is exposed to market risk from changes in foreign currency exchange
rates, interest rates and commodity prices. The Company enters into various
hedging transactions to mitigate these risks in accordance with guidelines
established by the Company’s management. The Company does not use financial
instruments for trading or speculative purposes. The Company’s risk management
objectives are described in Notes 1 and 10 of the 2004 Form 10-K.
Item
4. - Controls and Procedures
The
Chief
Executive Officer and the Chief Financial Officer of the Company (its principal
executive officer and principal financial officer, respectively) have evaluated
the Company’s disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
quarterly report. Based upon that evaluation, the Chief Executive Officer
and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective. There were no changes in the Company’s internal
control over financial reporting during the second quarter of 2005 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
The
Company accrues for litigation exposure based upon its assessment, made in
consultation with counsel, of the likely range of exposure stemming from
the
claim. In light of existing reserves, the Company’s litigation claims, when
finally resolved, will not, in the opinion of management, have a material
adverse effect on the Company’s consolidated financial statements. If current
estimates for the cost of resolving any claims are later determined to be
inadequate, results of operations could be adversely affected in the period
in
which additional provisions are required.
In
February 2003, the United States Tax Court issued a ruling upholding the
disallowance by the Internal Revenue Service (IRS) of capital losses and
other
expenses for 1990 and 1991 related to two partnership investments entered
into
by the Company. In April 2003, the Company elected to pay the IRS $62 million
(approximately $50 million after-tax), and in April 2004, the Company elected
to
pay the IRS an additional $10 million (approximately $8 million after-tax),
in
connection with this matter pending settlement negotiations. The payments
were
comprised of $33 million in taxes due and $39 million of pre-tax interest
(approximately $25 million after-tax). The Company elected to make these
payments to avoid future interest costs.
On
March
9, 2005 the Company and the IRS reached a settlement of the issues involved
in,
and related to, this tax court case. The Company agreed to withdraw its appeal
of the tax ruling. All amounts due as a result of the settlement are covered
by
the payments previously made to the IRS. In addition, all tax computations
related to taxable years 1986 through 2001 have been calculated and agreed
to
with the Internal Revenue Service at the examination level. The Company is
awaiting final determination of tax and interest for these taxable years
and
believes that no additional amounts related to this tax case will be
due.
The
Company's Bowling & Billiards segment is involved in an arbitration
proceeding in Hong Kong arising out of a commercial dispute with a former
supplier, Shanghai Zhonglu Industrial Company Limited (Zhonglu), a Chinese
contract manufacturer. The Company filed the arbitration seeking damages
based
on Zhonglu's breach of a supply and distribution agreement pursuant to which
Zhonglu agreed to manufacture bowling equipment for the Company. Zhonglu
has
asserted counterclaims seeking damages for alleged breach of contract and
other
claims. Final arguments in the matter are scheduled for August 2005. The
Company
does not believe that this dispute will have a material adverse effect on
the
Company's financial condition or results of operations.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
(c)
Purchases
of Company Securities
| |
|
Issuer
Purchases of Equity Securities
|
| |
|
Total
Number
of Shares (or
Units)
Purchased
(A)
|
|
Average
Price
Paid
per
share
(or
unit)
|
|
Total
Number of
Shares
(or Units)
Purchased
as Part
of
Publicly
Announced
Plans
or
Programs
(B)
|
|
Maximum
Number (or
Approximate
Dollar
Value)
that May Yet
Be
Purchased Under
the
Plans or Programs
(amounts
in thousands)
|
|
Period
|
|
|
|
|
|
|
|
|
|
4/1/05
- 4/30/05
|
|
--
|
|
$ --
|
|
--
|
|
$
--
|
|
5/1/05
- 5/31/05
|
|
--
|
|
--
|
|
--
|
|
200,000
|
|
6/1/05
- 6/30/05
|
|
--
|
|
--
|
|
--
|
|
200,000
|
| |
|
|
|
|
|
|
|
|
(A)
These shares represent shares owned by employees and delivered to the Company
by
those employees in payment for the exercise price of stock options.
(B)
Other than those purchases identified in footnote A, the Company has not,
and no
other party has on behalf of the Company or any affiliated purchaser, purchased
any shares or other units of any class of the Company’s registered equity
securities. On May 4, 2005, the Company adopted a plan pursuant to which
the
Company may make such purchases, as described in Item 2, Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Item
6. Exhibits
| (a) |
Exhibits |
| |
|
| 31.1 |
Certification
of CEO Pursuant to 15 U.S.C. Section 7241, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
|
| 31.2 |
Certification
of CFO Pursuant to 15 U.S. C. Section 7241, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
|
| 32.1 |
Certification
of CEO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
|
| 32.2 |
Certification
of CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
|
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
| |
|
|
| |
BRUNSWICK
CORPORATION
(Registrant)
|
|
|
|
| August
3, 2005 |
By: |
/s/ ALAN
L. LOWE |
| |
Alan
L. Lowe
|
| |
Vice
President and Controller
|
*Mr.
Lowe
is signing this report both as a duly authorized officer and as the principal
accounting officer.
