UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________

Form 10-Q/A
Amendment No. 1

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2008
 
or
 
[   ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
  OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-1043
_______________

Brunswick Logo
Brunswick Corporation
(Exact name of registrant as specified in its charter)

Delaware
36-0848180
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
   
1 N. Field Court, 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 [   ]
   
  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
   
   Large accelerated filer   [X]        Accelerated filer      [   ] 
       
   Non-accelerated filer  [   ]    Smaller reporting company  [   ]
   
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
   
  Yes [   ]    No [X]
     
  The number of shares of Common Stock ($0.75 par value) of the registrant outstanding as of October 24, 2008, was 87,680,888.
 
 
 
 
 
 



 
 
 

 
 
 
BRUNSWICK CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q/A
September 27, 2008
 
 
TABLE OF CONTENTS



     
   
Page
 
 
 EXPLANATORY NOTE
 1
   
 PART I – FINANCIAL INFORMATION  
     
Item 1.
Consolidated Financial Statements, as restated        
 
     
 
Consolidated Statements of Operations for the three months and nine months ended September 27, 2008 (unaudited), and September 29, 2007 (unaudited)
2
     
 
Condensed Consolidated Balance Sheets as of September 27, 2008 (unaudited), December 31, 2007, and September 29, 2007 (unaudited)
3
     
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 27, 2008 (unaudited), and Revised September 29, 2007 (unaudited)
5
     
 
Notes to Consolidated Financial Statements (unaudited)
6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
48
     
Item 4.
Controls and Procedures
48
     
     
PART II – OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
50
     
Item 1A.
Risk Factors
50
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
55
     
Item 6.
Exhibits
55

 
 
 
 


EXPLANATORY NOTE

On December 17, 2008, management of Brunswick Corporation (Brunswick or the Company), with the concurrence of the Audit Committee of the Company’s Board of Directors, concluded that the consolidated financial statements as of and for the three and nine months ended September 27, 2008, presented in Brunswick’s previously issued Quarterly Report on Form 10-Q for the quarterly period ended September 27, 2008 (Third Quarter Form 10-Q), filed on November 3, 2008, incorrectly determined the valuation allowance against deferred tax assets. As a result, the Company determined that the Third Quarter Form 10-Q should not be relied upon and is being restated, as discussed below.

The Company is filing this Amendment No. 1 (the Amendment or Form 10-Q/A) to amend Items 1, 2, and 4 of Part I and Item 6 of Part II of the Company’s Third Quarter Form 10-Q to correct the deferred tax asset valuation error that was discovered by the Company while performing its valuation allowance assessment procedures in the fourth quarter of 2008.

A detailed description of the restatement is presented within Note 1 - Significant Accounting Policies, which shows the effect of the restatement on Deferred income taxes, Retained earnings, Income tax (benefit) provision and Net earnings (loss) from continuing operations. The effect of the restatement is specifically reflected within the consolidated financial statements and the following notes within the consolidated financial statements: Note 6 - Earnings per Common Share; Note 10 - Comprehensive Income (Loss); and Note 13 - Income Taxes. The correction of the error, which is a non-cash charge, has the effect of increasing net loss by $137.7 million for both the three and nine months ended September 27, 2008.

In addition, this Third Quarter Form 10-Q/A reflects the revision of management’s discussion and analysis of financial condition and results of operations in Item 2 of Part I; the revision of disclosures regarding controls and procedures in Item 4 of Part I; and new certifications filed as exhibits in Item 6 of Part II. This Third Quarter Form 10-Q/A has not been updated for events or information subsequent to the date of filing of the original Third Quarter Form 10-Q except in connection with the foregoing. Accordingly, this Third Quarter Form 10-Q/A should be read in conjunction with the Company’s other filings made with the Securities and Exchange Commission (SEC).
 
 

1
PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements, as restated

BRUNSWICK CORPORATION
Consolidated Statements of Operations
(unaudited)
 

   
Three Months Ended
   
Nine Months Ended
 
   
 Restated
           Restated        
(in millions,  except per share data)
 
Sept. 27,
2008
   
Sept. 29,
2007
   
Sept. 27,
2008
   
Sept. 29,
2007
 
                         
Net sales
  $ 1,038.8     $ 1,326.2     $ 3,871.0     $ 4,235.2  
Cost of sales
    862.3       1,063.5       3,121.5       3,339.0  
Selling, general and administrative expense
    177.4       206.9       586.1       623.2  
Research and development expense
    31.2       31.0       97.1       100.2  
Goodwill impairment charges
    374.0       -       377.2       -  
Trade name impairment charges
    121.1       66.4       133.9       66.4  
Restructuring, exit and other impairment charges
    39.1       4.7       128.4       13.4  
  Operating earnings (loss)
    (566.3 )     (46.3 )     (573.2 )     93.0  
Equity earnings (loss)
    (1.0 )     3.0       10.1       16.4  
Investment sale gains
    2.1       -       23.0       -  
Other income (expense), net
    (0.3 )     7.5       1.6       7.3  
  Earnings (loss) before interest and income taxes
    (565.5 )     (35.8 )     (538.5 )     116.7  
Interest expense
    (12.7 )     (12.8 )     (35.6 )     (39.7 )
Interest income
    2.5       1.9       5.4       5.6  
  Earnings (loss) before income taxes
    (575.7 )     (46.7 )     (568.7 )     82.6  
Income tax (benefit) provision
    153.4       (23.0 )     153.1       15.1  
  Net earnings (loss) from continuing operations
    (729.1 )     (23.7 )     (721.8 )     67.5  
                                 
Discontinued operations:
                               
  Earnings from discontinued operations, net of tax
    -       4.6       -       8.6  
  Gain on disposal of discontinued operations, net of tax
    -       21.0       -       28.7  
  Net earnings from discontinued operations
    -       25.6       -       37.3  
                                 
  Net earnings (loss)
  $ (729.1 )   $ 1.9     $ (721.8 )   $ 104.8  
                                 
Earnings per common share:
                               
  Basic
                               
    Net earnings (loss) from continuing operations
  $ (8.26 )   $ (0.27 )   $ (8.18 )   $ 0.75  
    Earnings from discontinued operations, net of tax
    -       0.05       -       0.09  
    Gain on disposal of discontinued operations, net of tax
    -       0.24       -       0.32  
                                 
    Net earnings (loss)
  $ (8.26 )   $ 0.02     $ (8.18 )   $ 1.16  
                                 
  Diluted
                               
    Net earnings (loss) from continuing operations
  $ (8.26 )   $ (0.27 )   $ (8.18 )   $ 0.75  
    Earnings from discontinued operations, net of tax
    -       0.05       -       0.09  
    Gain on disposal of discontinued operations, net of tax
    -       0.24       -       0.32  
                                 
    Net earnings (loss)
  $ (8.26 )   $ 0.02     $ (8.18 )   $ 1.16  
                                 
Weighted average shares used for computation of:
                               
  Basic earnings per share
    88.3       89.0       88.3       90.3  
  Diluted earnings per share
    88.3       89.0       88.3       90.7  
                                 
                                 
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
 

 
2
 


BRUNSWICK CORPORATION
Condensed Consolidated Balance Sheets

   
 Restated
             
   
September 27,
   
December 31,
   
September 29,
 
(in millions)
 
2008
   
2007
   
2007
 
   
(unaudited)
         
(unaudited)
 
Assets
                 
Current assets
                 
   Cash and cash equivalents, at cost, which approximates market
  $ 342.9     $ 331.4     $ 327.8  
   Accounts and notes receivable, less allowances of $37.9, $31.2 and $36.8
    518.3       572.4       510.9  
   Inventories
                       
      Finished goods
    475.9       446.7       510.7  
      Work-in-process
    291.1       323.4       348.0  
      Raw materials
    131.1       136.6       148.4  
         Net inventories
    898.1       906.7       1,007.1  
   Deferred income taxes
    39.2       249.9       250.3  
   Prepaid expenses and other
    75.2       53.9       75.6  
         Current assets
    1,873.7       2,114.3       2,171.7  
                         
Property
                       
   Land
    108.7       103.5       101.4  
   Buildings and improvements
    698.1       697.4       678.9  
   Equipment
    1,193.5       1,205.7       1,212.9  
      Total land, buildings and improvements and equipment
    2,000.3       2,006.6       1,993.2  
   Accumulated depreciation
    (1,170.9 )     (1,117.8 )     (1,097.2 )
      Net land, buildings and improvements and equipment
    829.4       888.8       896.0  
   Unamortized product tooling costs
    140.9       164.0       153.5  
         Net property
    970.3       1,052.8       1,049.5  
                         
Other assets
                       
   Goodwill
    294.8       678.9       679.2  
   Other intangibles, net
    89.9       245.6       249.7  
   Investments
    81.6       132.1       139.5  
   Deferred income taxes
    14.8       -       -  
   Other long-term assets
    140.8       141.9       181.9  
         Other assets
    621.9       1,198.5       1,250.3  
                         
Total assets
  $ 3,465.9     $ 4,365.6     $ 4,471.5  
                         
                         
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
 


 
3
 


BRUNSWICK CORPORATION
Condensed Consolidated Balance Sheets

   
 Restated
             
   
September 27,
   
December 31,
   
September 29,
 
(in millions, except share data)
 
2008
   
2007
   
2007
 
   
(unaudited)
         
(unaudited)
 
Liabilities and shareholders’ equity
                 
Current liabilities
                 
   Short-term debt, including current maturities of long-term debt
  $ 0.3     $ 0.8     $ 0.2  
   Accounts payable
    346.8       437.3       461.7  
   Accrued expenses
    791.7       858.1       857.8  
      Current liabilities
    1,138.8       1,296.2       1,319.7  
                         
Long-term liabilities
                       
   Debt
    726.4       727.4       726.1  
   Deferred income taxes
    -       12.3       19.6  
   Postretirement and postemployment benefits
    194.0       192.8       225.6  
   Other
    228.1       244.0       277.1  
      Long-term liabilities
    1,148.5       1,176.5       1,248.4  
                         
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
    413.3       409.0       386.2  
   Retained earnings
    1,166.6       1,888.4       1,934.2  
   Treasury stock, at cost:
                       
      14,861,000; 15,092,000 and 14,605,000 shares
    (424.2 )     (428.7 )     (418.6 )
   Accumulated other comprehensive loss, net of tax
    (54.0 )     (52.7 )     (75.3 )
      Shareholders’ equity
    1,178.6       1,892.9       1,903.4  
                         
Total liabilities and shareholders’ equity
  $ 3,465.9     $ 4,365.6     $ 4,471.5  
                         
                         
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
 



 
4
 


BRUNSWICK CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)

   
Nine Months Ended
 
(in millions)
 
Restated
Sept. 27,
2008
   
Revised
Sept. 29,
2007
 
             
Cash flows from operating activities
           
   Net earnings (loss)
   $ (721.8 )    $ 104.8  
   Less: net earnings from discontinued operations
    -       37.3  
   Net earnings (loss) from continuing operations
    (721.8 )     67.5  
   Depreciation and amortization
    133.1       130.2  
   Goodwill impairment charges
    377.2       -  
   Trade name impairment charges
    133.9       66.4  
   Other impairment charges
    50.0       0.4  
   Changes in non-cash current assets and current liabilities
    (95.1 )     (50.0 )
   Income taxes
    160.0       9.4  
   Other, net
    (17.1 )     16.0  
      Net cash provided by operating activities of continuing operations
    20.2       239.9  
      Net cash used for operating activities of discontinued operations
    -       (19.3 )
      Net cash provided by operating activities
    20.2       220.6  
                 
Cash flows from investing activities
               
   Capital expenditures
    (84.8 )     (156.3 )
   Acquisitions of businesses, net of cash acquired
    -       (6.2 )
   Investments
    21.1       9.1  
   Proceeds from investment sales
    45.5       -  
   Proceeds from the sale of property, plant and equipment
    9.6       5.3  
   Other, net
    0.2       12.1  
      Net cash used for investing activities of continuing operations
    (8.4 )     (136.0 )
      Net cash provided by investing activities of discontinued operations
    -       65.2  
      Net cash used for investing activities
    (8.4 )     (70.8 )
                 
Cash flows from financing activities
               
   Net proceeds from issuance of long-term debt
    250.4       -  
   Payments of long-term debt including current maturities
    (250.7 )     (0.7 )
   Stock repurchases
    -       (115.5 )
   Stock options exercised
    -       10.8  
      Net cash used for financing activities of continuing operations
    (0.3 )     (105.4 )
      Net cash used for financing activities of discontinued operations
    -          
      Net cash used for financing activities
    (0.3 )     (105.4 )
                 
Net increase in cash and cash equivalents
    11.5       44.4  
Cash and cash equivalents at beginning of period
    331.4       283.4  
                 
Cash and cash equivalents at end of period
   $ 342.9      $ 327.8  
                 
   
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
 



 
5
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)

Note 1 – Significant Accounting Policies

Interim Financial Statements. The unaudited interim consolidated financial statements of Brunswick Corporation (Brunswick or the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Therefore, certain information and disclosures normally included in financial statements and related 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 to 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 Brunswick’s 2007 Annual Report on Form 10-K (the 2007 Form 10-K), except as they relate to fair value measurements, as discussed in Note 4 – Fair Value Measurements. As indicated in Note 16 – Discontinued Operations, Brunswick’s results, as discussed in the Notes to Consolidated Financial Statements, reflect continuing operations only, unless otherwise noted. These interim results include, in the opinion of management, all normal and recurring adjustments necessary to present fairly the financial position of Brunswick as of September 27, 2008, December 31, 2007, and September 29, 2007, the results of operations for the three months and nine months ended September 27, 2008, and September 29, 2007, and the cash flows for the nine months ended September 27, 2008, and September 29, 2007. Due to the seasonality of Brunswick’s businesses, the goodwill and trade name impairments, and the restructuring activities underway, 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 (thirteen-week periods). The first three quarters of fiscal year 2008 ended on March 29, 2008, June 28, 2008, and September 27, 2008, and the first three quarters of fiscal year 2007 ended on March 31, 2007, June 30, 2007, and September 29, 2007.
 
6
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


Restatements. During the third quarter of 2008, in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (SFAS 109), the Company recorded a valuation allowance of $155.0 million to reduce certain net deferred tax assets to their anticipated realizable value.  While performing the Company’s valuation allowance assessment procedures in the fourth quarter of 2008, the Company realized it had incorrectly determined the valuation allowance against deferred tax assets when it prepared the Third Quarter Form 10-Q as of September 27, 2008.

As a result of this error, Deferred income taxes, Retained earnings, Income tax (benefit) provision and Net earnings (loss) from continuing operations were misstated in the Third Quarter Form 10-Q. The correction of the error, which is a non-cash charge, has the effect of increasing net loss by $137.7 million for both the three and nine months ended September 27, 2008. The table below shows the amount originally reported, the amount of the adjustment, and the restated amount.
 

 
 
(in millions)
 
As Reported
   
Adjustments
   
As Restated
 
                   
Consolidated Statements of Operations
                 
For the three months ended September 27, 2008
                 
                   
Income tax (benefit) provision
   $ 15.7      $ 137.7      $ 153.4  
Net earnings (loss) from continuing operations
    (591.4 )     (137.7 )     (729.1 )
Net earnings (loss)
    (591.4 )     (137.7 )     (729.1 )
Earnings per common share:
                       
   Basic
                       
      Net earnings (loss) from continuing operations
    (6.70 )     (1.56 )     (8.26 )
      Net earnings (loss)
    (6.70 )     (1.56 )     (8.26 )
   Diluted
                       
      Net earnings (loss) from continuing operations
    (6.70 )     (1.56 )     (8.26 )
      Net earnings (loss)
    (6.70 )     (1.56 )     (8.26 )
                         
For the nine months ended September 27, 2008
                       
                         
Income tax (benefit) provision
    15.4       137.7       153.1  
Net earnings (loss) from continuing operations
    (584.1 )     (137.7 )     (721.8 )
Net earnings (loss)
    (584.1 )     (137.7 )     (721.8 )
Earnings per common share:
                       
   Basic
                       
      Net earnings (loss) from continuing operations
    (6.62 )     (1.56 )     (8.18 )
      Net earnings (loss)
    (6.62 )     (1.56 )     (8.18 )
   Diluted
                       
      Net earnings (loss) from continuing operations
    (6.62 )     (1.56 )     (8.18 )
      Net earnings (loss)
    (6.62 )     (1.56 )     (8.18 )
                         
                         
Condensed Consolidated Balance Sheets
                       
As of September 27, 2008
                       
                         
Deferred income taxes, Current assets
    134.1       (94.9 )     39.2  
Current assets
    1,968.6       (94.9 )     1,873.7  
Deferred income taxes, Other assets
    57.6       (42.8 )     14.8  
Other assets
    664.7       (42.8 )     621.9  
Total assets
    3,603.6       (137.7 )     3,465.9  
Retained earnings
    1,304.3       (137.7 )     1,166.6  
Shareholder’s Equity
    1,316.3       (137.7 )     1,178.6  
Total liabilities and shareholder’s equity
    3,603.6       (137.7 )     3,465.9  
                         
                         
Condensed Consolidated Statements of Cash Flows
                       
For the nine months ended September 27, 2008
                       
                         
Net earnings (loss)
    (584.1 )     (137.7 )     (721.8 )
Net earnings (loss) from continuing operations
    (584.1 )     (137.7 )     (721.8 )
Income taxes
    22.3       137.7       160.0  
 
 

 
7
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)

 
 

Revisions. The Company expanded its presentation of the Condensed Consolidated Statements of Cash Flows to include net earnings (loss) and net earnings from discontinued operations. Accordingly, the Company revised the September 29, 2007, Condensed Consolidated Statement of Cash Flows. Net cash flows from operating, investing and financing activities have not changed.
 
Recent Accounting Pronouncements. In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” (SFAS 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Effective January 1, 2008, the Company adopted SFAS 157. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. The adoption of this statement did not have a material impact on the Company’s consolidated results of operations and financial condition. See Note 4 – Fair Value Measurements for additional disclosures.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115,” (SFAS 159). SFAS 159 permits entities to choose to measure certain financial assets and financial liabilities at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are to be reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has elected not to adopt the SFAS 159 fair value option.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (SFAS 141(R)). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, the goodwill acquired and any noncontrolling interest in the acquiree. This statement also establishes disclosure requirements to enable the evaluation of the nature and financial effect of the business combination. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the impact that the adoption of SFAS 141(R) may have on the consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51,” (SFAS 160). SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the impact that the adoption of SFAS 160 may have on the consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133,” (SFAS 161). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact that the adoption of SFAS 161 may have on the consolidated financial statements.


 
8
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)

Note 2 – Goodwill and Trade Name Impairments

Brunswick accounts for goodwill and identifiable intangible assets in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (SFAS 142). Under this standard, Brunswick assesses the impairment of goodwill and indefinite-lived intangible assets at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

During the third quarter of 2008, Brunswick encountered a significant adverse change in the business climate. A weak U.S. economy, soft housing markets and the emergence of a global credit crisis have accelerated the reduction in demand for certain Brunswick products. As a result of this reduced demand, along with lower-than-projected profits across certain Brunswick brands and lower purchase commitments received from its dealer network in the third quarter, management revised its future cash flow expectations in the third quarter of 2008, which lowered the fair value estimates of certain businesses.

As a result of the lower fair value estimates, Brunswick concluded that the carrying amounts of its Boat segment reporting unit and the Bowling Retail and Billiards reporting units within the Bowling & Billiards segment exceeded their respective fair values. As a result, the Company compared the implied fair value of the goodwill in each reporting unit with the carrying value and recorded a $374.0 million pretax impairment charge in the third quarter of 2008.

In conjunction with the goodwill impairment testing, the Company analyzed the valuation of its other indefinite-lived intangibles, consisting exclusively of acquired trade names. Brunswick estimated the fair value of trade names by performing a discounted cash flow analysis based on the relief-from-royalty approach. This approach treats the trade name as if it were licensed by the Company rather than owned, and calculates its value based on the discounted cash flow of the projected license payments. The analysis resulted in a pretax trade name impairment charge of $121.1 million in the third quarter of 2008, representing the excess of the carrying cost of the trade names over the calculated fair value. A similar analysis was performed during the third quarter of 2007 related to certain outboard boat trade names as a result of reduced revenue forecasts and adverse adjustments to projected royalty rates for those trade names. A $66.4 million pretax impairment charge was recorded during the third quarter of 2007 as a result of that analysis.

The following tables summarize the goodwill and trade name impairments:

   
Three Months Ended
 
   
September 27, 2008
   
September 29, 2007
 
(in millions)
 
Goodwill
   
Trade
Names
   
Goodwill
   
Trade
Names
 
                         
Boat
  $ 361.3     $ 115.7     $     $ 66.4  
Marine Engine
          4.5              
Bowling & Billiards
    12.7       0.9              
                                 
Total
  $ 374.0     $ 121.1     $     $ 66.4  
 

 
   
Nine Months Ended
 
   
September 27, 2008
   
September 29, 2007
 
(in millions)
 
Goodwill
   
Trade
Names
   
Goodwill
   
Trade
Names
 
 
                       
Boat
  $ 362.8     $ 120.9     $     $ 66.4  
Marine Engine
          4.5              
Bowling & Billiards
    14.4       8.5              
                                 
Total
  $ 377.2     $ 133.9     $     $ 66.4  
 
 

 
9
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)
 
A summary of changes in the Company’s goodwill during the nine months ended September 27, 2008, by segment is as follows:

   
December 31,
                     
September 27,
 
(in millions)
 
2007
   
Acquisitions
   
Adjustments
   
Impairments
   
2008
 
                               
Boat
  $ 366.6     $     $ (3.8 )   $ (362.8 )   $  
Marine Engine
    23.4             (2.7 )           20.7  
Fitness
    274.0             0.1             274.1  
Bowling & Billiards
    14.9             (0.5 )     (14.4 )      
                                         
Total
  $ 678.9     $     $ (6.9 )   $ (377.2 )   $ 294.8  

A summary of changes in the Company’s net trade names during the nine months ended September 27, 2008, by segment is as follows:

   
December 31,
                     
September 27,
 
(in millions)
 
2007
   
Acquisitions
   
Adjustments
   
Impairments
   
2008
 
                               
Boat
  $ 151.8     $     $ (0.6 )   $ (120.9 )   $ 30.3  
Marine Engine
    4.5             2.1       (4.5 )     2.1  
Fitness
    0.6                         0.6  
Bowling & Billiards
    8.5                   (8.5 )      
                                         
Total
  $ 165.4     $     $ 1.5     $ (133.9 )   $ 33.0  

Adjustments primarily relate to the effect of foreign currency translation and changes in the fair value of net assets subject to purchase accounting adjustments.
 

 
10
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)
 
Note 3 – Restructuring Activities

In November 2006, Brunswick announced restructuring initiatives to improve the Company’s cost structure, better utilize overall capacity and improve general operating efficiencies. These initiatives reflected the Company’s response to a difficult marine market. As the marine market continued to decline, Brunswick expanded its restructuring activities during 2007 and 2008 in order to improve performance and better position the Company for current market conditions and longer-term growth. These initiatives have resulted in the recognition of restructuring, exit and other impairment charges in the Statement of Operations during 2006, 2007 and 2008.

The actions taken under these initiatives are expected to benefit future operations by removing fixed costs of approximately $50 million from Cost of sales and approximately $250 million from Selling, general and administrative in the Consolidated Statements of Operations by the end of 2009 compared with 2007 spending levels. The majority of these costs are expected to be cash savings once all restructuring initiatives are complete. The Company has begun to see savings related to these initiatives in 2008 and expects all savings to be realized by the end of 2009.

The nature of the costs incurred under these initiatives include:

Restructuring Activities – These amounts primarily relate to:
·  
Employee termination and other benefits
·  
Costs to retain and relocate employees
·  
Consulting costs
·  
Consolidation of manufacturing footprint

Exit Activities – These amounts primarily relate to:
·  
Employee termination and other benefits
·  
Lease exit costs
·  
Inventory write-downs
·  
Facility shutdown costs

Definite-lived asset impairments – These amounts primary related to:
·  
Fixed assets
·  
Tooling
·  
Patents and proprietary technology
·  
Dealer networks

Definite-lived asset impairments are recognized when, as a result of the restructuring activities initiated, the carrying amount of the long-lived asset is not expected to be fully recoverable, in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (SFAS 144). The impairments recognized were equal to the difference between the carrying amount of the asset and the fair value of the asset, which was determined using observable inputs, when available, and, when observable inputs were not available, based on the Company’s own assumptions of the data that market participants would use in pricing the asset or liability, based on the best information available in the circumstances. Specifically, the Company used discounted cash flows to determine the fair value of the asset when observable inputs were unavailable.

The Company has disaggregated restructuring and exit activities based on the specific driver of the cost and reflected in the accounting period when the cost has been committed or incurred, in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The Company considers actions related to the sale of certain Baja boat business assets, the closure of its bowling pin manufacturing facility and the closure of the Valley-Dynamo coin-operated commercial billiards business to be exit activities. All other actions taken are considered to be restructuring activities.


 
11
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)

The specific actions undertaken and their related status are described below.

Actions initiated in 2006

In November 2006, Brunswick announced initiatives to improve the Company’s cost structure, better utilize overall capacity and improve general operating efficiencies. The restructuring initiatives included the consolidation of certain boat manufacturing facilities, sales offices and distribution warehouses and reductions in the Company’s global workforce. Through 2006, the Company incurred restructuring costs of $18.9 million related to these initiatives. At December 31, 2006, the Company estimated that it would incur additional expenses of approximately $9 million related to these initiatives during 2007; however, the Company actually incurred approximately $4 million of additional costs in 2007, which concluded the 2006 initiatives.

Actions initiated in 2007

In 2007, the Company initiated restructuring activities to consolidate certain boat manufacturing facilities in connection with the purchase of a manufacturing facility in Navassa, North Carolina, close a manufacturing facility in Aberdeen, Mississippi, and shift boat production to Fort Wayne, Indiana, enhance U.S. engine production efficiency and eliminate assembly operations for certain engines in Europe. Through 2007, the Company paid $18.1 million related to these initiatives. At December 31, 2007, the Company estimated that it would incur additional expenses of approximately $7 million related to these initiatives during 2008; however, the Company subsequently adjusted its plans and did not incur any significant additional costs for these initiatives during 2008. Substantially all of the 2007 initiatives were completed during 2007.

Actions initiated in 2008

During the first quarter of 2008, the Company continued its restructuring activities by closing its bowling pin manufacturing facility in Antigo, Wisconsin, and announcing that it would close its boat plant in Bucyrus, Ohio, in anticipation of the proposed sale of certain assets relating to its Baja boat business, cease boat manufacturing at one of its facilities in Merritt Island, Florida, and close its Swansboro, North Carolina, boat plant.

The Company announced additional actions in June 2008 as a result of the prolonged downturn in the U.S. marine market. The plan is designed to improve performance and better position the Company for current market conditions and longer-term growth. The plan will result in significant changes in the Company’s organizational structure, most notably by reducing the complexity of its operations, further shrinking its North American manufacturing footprint and enhancing its brand positioning. Specifically, the Company announced the closure of its production facility in Newberry, South Carolina, due to its decision to cease production of its Bluewater Marine brands, including Sea Pro, Sea Boss, Palmetto and Laguna; its intention to close four additional boat plants; and the write-down of certain assets of the Valley-Dynamo coin-operated commercial billiards business.

During the third quarter of 2008, the Company accelerated its previously announced efforts to resize the Company by the end of 2009 in light of extraordinary developments within global financial markets that are affecting the recreational marine industry. Specifically, the Company is closing its production facilities in Pipestone, Minnesota; Roseburg, Oregon; and Arlington, Washington. The Company is mothballing a fourth plant in Navassa, North Carolina. The Company expects to complete the Arlington, Roseburg and Navassa shutdowns by the end of 2008, and the Pipestone shutdown in the first quarter of 2009.

The third quarter results include severance and plant closure costs, asset write-downs and impairment charges related to accelerated restructuring efforts in September 2008 and certain costs related to other restructuring actions initiated in 2008.


 
12
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)

The following is a summary of the expense associated with the restructuring activities:

   
Three Months Ended
   
Nine Months Ended
 
 
(in millions)
 
Sept. 27,
2008
   
Sept. 29,
2007
   
Sept. 27,
2008
   
Sept. 29,
2007
 
                         
  Restructuring activities
                       
    Employee termination and other benefits
  $ 8.4     $     $ 20.6     $ 4.0  
    Current asset write-downs
    1.1             3.5        
    Transformation and other costs:
                               
      Consolidation of manufacturing footprint
    13.0       2.1       29.7       3.0  
      Retention and relocation costs
    0.3             5.4        
      Consulting costs
    1.7             3.7        
         Total transformation and other costs
    15.0       2.1       38.8       3.0  
  Exit activities
                               
    Employee termination and other benefits
    0.3       0.2       3.0       1.1  
    Current asset write-downs
    0.9             8.1       0.6  
    Transformation and other costs:
                               
      Consolidation of manufacturing footprint
    0.2       2.0       4.4       4.3  
      Retention and relocation costs
                       
      Consulting costs
                       
         Total transformation and other costs
    0.2       2.0       4.4       4.3  
     Definite-lived asset impairments
    13.2       0.4       50.0       0.4  
                                 
Total restructuring, exit and
    other impairment charges
  $ 39.1     $ 4.7     $ 128.4     $ 13.4  

The effect of the 2008 initiatives on each of the Company’s reportable segments for the three months ended September 27, 2008, is summarized below:

 
(in millions)
 
Boat
   
Marine Engine
   
Fitness
   
Bowling & Billiards
   
Corporate
   
Total
 
                                     
 Employee terminations and other benefits
  $ 1.7     $ 3.8     $ 0.8     $ 0.6     $ 1.8     $ 8.7  
 Current asset write-downs
     0.3        0.8        —        0.9        —        2.0  
 Transformation and other costs
    9.9        1.7        —        0.3        3.3        15.2  
 Definite-lived asset impairments
    3.9        6.6        —        —        2.7        13.2  
                                                 
 Total restructuring, exit and other
   impairment charges
  $ 15.8     $ 12.9     $ 0.8     $ 1.8     $ 7.8     $ 39.1  


 
13
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)

The effect of the 2008 initiatives on each of the Company’s reportable segments for the nine months ended September 27, 2008, is summarized below:

 
(in millions)
 
Boat
   
Marine Engine
   
Fitness
   
Bowling & Billiards
   
Corporate
   
Total
 
                                     
 Employee terminations and other benefits
  $ 5.4     $ 11.6     $ 0.8     $ 3.2     $ 2.6     $ 23.6  
Current asset write-downs
     5.9        0.8        1.3        3.6        —        11.6  
 Transformation and other costs
     25.9        6.1        —        1.4        9.8        43.2  
Definite-lived asset impairments
    23.9        12.9        —        9.7        3.5        50.0  
                                                 
Total restructuring, exit and other
   impairment charges
  $ 61.1     $ 31.4     $ 2.1     $ 17.9     $ 15.9     $ 128.4  

The following table summarizes the charges taken for restructuring, exit and other impairment charges related to actions initiated in 2008 and the related status as of September 27, 2008. The accrued amounts remaining as of September 27, 2008, represent cash expenditures needed to satisfy remaining obligations. The majority of accrued costs are expected to be paid by the end of 2009.

 
 
 
 
(in millions)
 
Costs
Recognized in 2008
   
Noncash
Charges
   
Cash
Payments
   
Accrued
Costs as of 
Sept. 27,
2008
 
                         
Employee termination and other benefits
  $ 23.6     $     $ 19.9     $ 3.7  
Current asset write-downs
    11.6       11.6              
Transformation and other costs:
                               
  Consolidation of manufacturing footprint
    34.1       6.3       27.8       6.3  
  Retention and relocation costs
    5.4             4.7       0.7  
  Consulting costs
    3.7             0.9       2.8  
     Total transformation and other costs
    43.2       6.3       33.4       9.8  
Definite-lived asset impairments
    50.0       50.0              
                                 
Total restructuring, exit and
    other impairment charges
  $  128.4     $ 67.9     $ 53.3     $ 13.5  

The Company anticipates that it will incur additional costs between $45 million and $50 million under these initiatives in the fourth quarter of 2008 and between $35 million and $45 million during 2009, when the 2008 initiatives are expected to be complete. The Company expects most of these charges will be incurred in the Boat and Marine Engine segments.

 
14
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)

Note 4 – Fair Value Measurements
 
Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard established a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.
 
·  
Level 1 - Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.
 
·  
Level 2 - Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for comparable instruments.
 
·  
Level 3 - Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions of the data that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.
 

The following table summarizes Brunswick’s financial assets and liabilities measured at fair value on a recurring basis in accordance with SFAS 157 as of September 27, 2008:

(in millions)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Cash Equivalents
  $ 237.1     $     $     $ 237.1  
Investments
    4.2                   4.2  
Derivatives
          7.4             7.4  
 Total Assets
   $ 241.3       $ 7.4       $        $ 248.7   
                                 
Liabilities:
                               
Derivatives
  $     $ 6.5     $     $ 6.5  
 
 
During the nine months ended September 27, 2008, the Company has undertaken various restructuring activities, as discussed in Note 3 – Restructuring Activities and has tested its goodwill and trade names, as discussed in Note 2 – Goodwill and Trade Name Impairments. The restructuring activities and testing of goodwill and trade names required the Company to perform fair value measurements, on a non-recurring basis, on certain asset groups to test for potential impairments. Other than the assets measured at fair value on a recurring basis, as shown in the table above, the asset balances shown in the Condensed Consolidated Balance Sheets include an insignificant amount of assets measured at fair value on a non-recurring basis.
 
15
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)

Note 5 – Share-Based Compensation

On January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment,” (SFAS 123(R)), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS 123R supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS 123(R) requires the Company to recognize all share-based payments to employees, including grants of stock options and the compensatory elements of employee stock purchase plans, in its income statement based upon the fair value of such share-based payments. Share-based employee compensation cost (benefit) is recognized as a component of Selling, general and administrative expense in the Consolidated Statements of Operations. Refer to Note 16 to the consolidated financial statements in the 2007 Form 10-K for further details regarding the Company’s adoption of SFAS 123(R).

 Under the 2003 Stock Incentive Plan (Plan), the Company may grant stock options, stock appreciation rights (SARs), nonvested stock and other types of share-based awards to executives and other management employees. Under the Plan, the Company may issue up to 8.1 million shares, consisting of treasury shares and authorized, but unissued shares of common stock. As of September 27, 2008, 1.0 million shares were available for grant under the Plan.

Stock Options and SARs

Prior to 2005, the Company primarily issued share-based compensation in the form of stock options, and had not issued any SARs. Since the beginning of 2005, the Company has issued stock-settled SARs and has not issued any stock options. Generally, stock options and SARs are exercisable over a period of 10 years, or as otherwise determined by the Human Resources and Compensation Committee of the Board of Directors, and subject to vesting periods of four years. The exercise price of stock options and SARs issued under the Plan cannot be less than the fair market value of the underlying shares at the date of grant.

During the three and nine months ended September 27, 2008, there were 0.0 million and 2.6 million SARs granted, respectively, which resulted in $2.4 million and $5.8 million of total expense, respectively, due to amortization of SARs granted. During the three and nine months ended September 29, 2007, there were 0.0 million and 0.9 million SARs granted, respectively, which resulted in $1.5 million and $3.9 million of total expense, respectively, due to amortization of SARs granted. These expenses resulted in a deferred tax asset for the tax benefit to be realized in future periods.

The weighted average fair values of individual SARs granted were $5.71 and $9.91 during 2008 and 2007, respectively. The fair value of each grant was estimated on the date of grant using the Black-Scholes-Merton pricing model utilizing the following weighted average assumptions used for 2008 and 2007:

   
2008
   
2007
 
             
Risk-free interest rate
    2.9 %     4.6 %
Dividend yield
    2.3 %     1.8 %
Volatility factor
    40.1 %     29.9 %
Weighted average expected life
 
5.4 - 6.2 years
 
5.1 - 6.2 years


 
 
16
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)
 
Nonvested stock awards

The Company issues nonvested stock awards (stock units) to key employees as determined by the Human Resources and Compensation Committee of the Board of Directors. In addition, employees entitled to receive cash payments under the Company’s Strategic Incentive Plan (a long-term incentive plan for senior employees), could have elected to receive a vested stock award instead with a 20 percent nonvested stock premium. Such awards vested at the time of deferral, with the exception of the premium. Effective January 1, 2008, the Strategic Incentive Plan was discontinued and, therefore, the right to receive a 20 percent nonvested stock premium no longer exists. Nonvested stock awards (including the premium) have vesting periods of three or four years and are eligible for dividends, which are reinvested and non-voting. All nonvested awards have restrictions on the sale or transfer of such awards during the nonvested period.

In 2008, performance share awards were issued to senior management. The number of performance share awards earned will be based on achieving key strategic and financial goals by 2010. A portion of the payout will be based on relative total shareholder return versus the S&P 500. Prior to any award being earned, the Company must meet a minimum stock price threshold.

The cost of nonvested stock awards is recognized on a straight-line basis over the requisite service period. During the three and nine months ended September 27, 2008, there were 0.1 million and 1.0 million stock awards granted under these plans, respectively, and, due to amortization of stock awards granted, $1.8 million and $4.6 million was charged to compensation expense under these plans, respectively. During the three and nine months ended September 29, 2007, there were 0.0 million and 0.1 million stock awards granted under these plans, respectively, and, due to amortization of stock awards granted, $0.9 million and $3.2 million was charged to compensation expense under these plans, respectively.

The weighted average price per nonvested stock award at grant date was $15.66 and $33.00 for the nonvested stock awards granted in 2008 and 2007, respectively. As of September 27, 2008, there was $14.4 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.7 years.

Generally, grants of nonvested stock options, SARs and stock units are forfeited if employment is terminated prior to vesting. However, with respect to stock options and SARs, all grants vest immediately: (i) in the event of a change in control; (ii) upon death or disability of the grantee; and (iii) beginning in 2007, upon the sale or divestiture of the business unit to which the grantee is assigned. Stock option and SARs grants made prior to 2006 also vest immediately if the sum of (A) the age of the grantee and (B) the grantee’s total number of years of service, equals 65 or more; grants made in 2006 and later vest immediately if (A) the grantee has attained the age of 62 and (B) the grantee’s age plus total years of service equals 70 or more. Nonvested stock awards granted prior to 2006 vest pro rata if the sum of (A) the age of the grantee and (B) the grantee’s total number of years of service equals 65 or more; grants made in 2006 and later vest pro rata if (A) the age of grantee and (B) the grantee’s total number of years of service equals 70 or more.

Director Awards

The Company issues stock awards to directors in accordance with the terms and conditions determined by the Nominating and Corporate Governance Committee of the Board of Directors. One-half of each director’s annual fees are paid in Brunswick common stock, the receipt of which may be deferred until a director retires from the Board of Directors. Each director may elect to have the remaining one-half paid either in cash, in Brunswick common stock distributed at the time of the award, or in deferred Brunswick common stock units with a 20 percent premium. Each non-employee director is also entitled to an annual grant of restricted stock units, which is deferred until the director retires from the Board.



 
17
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)

Note 6 – 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 stock awards. Weighted average basic shares decreased by 0.7 million shares and 2.0 million shares in the three and nine months ended September 27, 2008, respectively, versus the comparable periods in 2007, primarily due to the effect of the Company’s share repurchase program, as discussed in Note 15 – Share Repurchase Program.

Basic and diluted earnings per share for the three and nine months ended September 27, 2008, and for the comparable periods ended September 29, 2007, were calculated as follows:

   
Three Months Ended
   
Nine Months Ended
 
(in millions, except per share data)
 
Restated
Sept. 27,
2008
   
Sept. 29,
2007
   
Restated
Sept. 27,
2008
   
Sept. 29,
2007
 
   
 
         
 
       
Net earnings (loss) from continuing operations
  $ (729.1 )   $ (23.7 )   $ (721.8 )   $ 67.5  
Earnings from discontinued operations, net of tax
          4.6             8.6  
Gain on disposal of discontinued operations, net of tax
          21.0             28.7  
                                 
Net earnings (loss)
  $ (729.1 )   $ 1.9     $ (721.8 )   $ 104.8  
                                 
Average outstanding shares – basic
    88.3       89.0       88.3       90.3  
Dilutive effect of common stock equivalents
                      0.4  
                                 
Average outstanding shares – diluted
    88.3       89.0       88.3       90.7  
                                 
Basic earnings per share
                               
  Net earnings (loss) from continuing operations
  $ (8.26 )   $ (0.27 )   $ (8.18 )   $ 0.75  
  Earnings from discontinued operations, net of tax
          0.05             0.09  
  Gain on disposal of discontinued operations, net of tax
          0.24             0.32  
                                 
  Net earnings (loss)
  $ (8.26 )   $ 0.02     $ (8.18 )   $ 1.16  
                                 
Diluted earnings per share
                               
  Net earnings (loss) from continuing operations
  $ (8.26 )   $ (0.27 )   $ (8.18 )   $ 0.75  
  Earnings from discontinued operations, net of tax
          0.05             0.09  
  Gain on disposal of discontinued operations, net of tax
          0.24             0.32