SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) Quarterly Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
Commission file number 1-1043
BRUNSWICK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-0848180
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 N. Field Ct., Lake Forest, Illinois 60045-4811
(Address of principal executive offices) (Zip Code)
(847) 735-4700
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
At May 10, 1999, there were 91,930,393 shares of the Company's
Common Stock ($.75 par value) outstanding.
Part I- Financial Information
Item I-Financial Statements
<TABLE>
Brunswick Corporation
Consolidated Statements of Income
for the three months ended March 31
(in millions, except per share data)
(unaudited)
1999 1998
<S> <C> <C>
Net sales 1,083.0 904.2
Cost of sales 792.4 647.9
Selling, general and administrative expense 181.0 148.2
Operating earnings 109.6 108.1
Interest expense (15.5) (14.9)
Other income (expense) (1.2) 1.8
Earnings before income taxes 92.9 95.0
Income tax provision 35.3 36.1
Net earnings 57.6 58.9
Earnings per common share:
Basic 0.63 0.59
Diluted 0.62 0.59
Average shares used for computation of:
Basic earnings per share 92.0 99.5
Diluted earnings per share 92.6 100.5
Cash dividends declared per common share 0.125 0.125
The notes are an integral part of these
consolidated statements.
</TABLE>
<TABLE>
Brunswick Corporation
Consolidated Balance Sheets
As of March 31, 1999, December 31, 1998 and March 31, 1998
(in millions, except share data)
(unaudited)
March 31, December 31, March 31,
1999 1998 1998
Assets
Current assets
Cash and cash equivalents, at cost,
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which approximates market 81.2 126.1 82.7
Accounts and notes receivable,
less allowances of $21.3, $22.5 and $21.7 589.4 420.8 570.1
Inventories
Finished goods 410.5 383.6 365.1
Work-in-process 138.0 141.3 145.9
Raw materials 121.3 120.6 138.9
Net inventories 669.8 645.5 649.9
Prepaid income taxes 212.1 208.7 211.1
Prepaid expenses 51.9 53.3 44.6
Current assets 1,604.4 1,454.4 1,558.4
Property
Land 70.7 72.0 76.3
Buildings 405.4 412.0 434.9
Equipment 960.2 950.9 851.8
Total land, buildings and equipment 1,436.3 1,434.9 1,363.0
Accumulated depreciation (714.7) (699.0) (669.1)
Net land, buildings and equipment 721.6 735.9 693.9
Unamortized product tooling costs 118.8 109.2 108.8
Net property 840.4 845.1 802.7
Other assets
Goodwill 713.2 718.9 731.5
Other intangibles 98.1 101.6 115.3
Investments 80.3 71.2 78.5
Other long-term assets 165.0 160.3 166.2
Other assets 1,056.6 1,052.0 1,091.5
Total Assets 3,501.4 3,351.5 3,452.6
Liabilities and Shareholders' Equity
Current liabilities
Short-term debt, including
current maturities of long-term debt 274.7 170.1 296.2
Accounts payable 273.3 286.1 256.3
Accrued expenses 543.6 574.6 531.6
Income taxes payable 42.4 5.6 35.3
Current liabilities 1,134.0 1,036.4 1,119.4
Long-term debt
Notes, mortgages and debentures 635.6 635.4 645.5
Deferred items
Income taxes 161.8 165.1 137.7
Postretirement and postemployment benefits 141.4 141.1 138.2
Compensation and other 68.7 62.2 55.5
Deferred items 371.9 368.4 331.4
Common shareholders' equity
Common stock; authorized: 200,000,000 shares,
$.75 par value; issued: 102,538,000 shares 76.9 76.9 76.9
Additional paid-in capital 312.6 311.5 310.3
Retained earnings 1,235.6 1,189.5 1,098.7
Treasury stock, at cost:
10,556,000; 10,669,000 and 3,039,000 shares (205.7) (204.7) (62.9)
Unamortized ESOP expense and other (54.1) (56.1) (62.2)
Accumulated other comprehensive income (5.4) (5.8) (4.5)
Common shareholders' equity 1,359.9 1,311.3 1,356.3
Total liabilities and shareholders' equity 3,501.4 3,351.5 3,452.6
The notes are an integral part of these consolidated statements.
</TABLE>
<TABLE>
Brunswick Corporation
Consolidated Statements of Cash Flows
for the three months ended March 31
(dollars in millions)
(unaudited)
1999 1998
Cash flows from operating activities
<S> <C> <C>
Net earnings 57.6 58.9
Depreciation and amortization 41.5 39.5
Changes in noncash current assets and current
liabilities (234.4) (255.1)
Income taxes 29.1 58.9
Other, net 5.5 (9.1)
Net cash used for operating activities (100.7) (106.9)
Cash flows from investing activities
Acquisitions of businesses 0.0 (29.0)
Capital expenditures (31.1) (36.8)
Other, net (3.3) 2.3
Net cash used for financing activities (34.4) (63.5)
Cash flows from financing activities
Net proceeds from issuances of short-term
commercial paper and other short-term debt 104.8 186.2
Cash dividends paid (11.5) (12.4)
Stock repurchases (3.7) (11.5)
Stock options exercised 0.6 4.4
Other, net 0.0 0.8
Net cash provided by financing activities 90.2 167.5
Net decrease in cash and cash equivalents (44.9) (2.9)
Cash and cash equivalents at January 1 126.1 85.6
Cash and cash equivalents at March 31 81.2 82.7
Supplemental cash flow disclosures:
Interest paid 17.7 18.9
Income taxes paid (refunds received), net 6.2 (22.8)
Treasury stock issued for compensation plans and other 4.9 9.5
The notes are an integral part of these consolidated statements.
</TABLE>
Brunswick Corporation
Notes to Consolidated Financial Statements
March 31, 1999, December 31, 1998 and March 31, 1998
(unaudited)
Note 1 - Accounting Policies
This unaudited financial data has been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and disclosures normally included
in financial statements and footnotes prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. Brunswick Corporation (the Company) believes that the
disclosures in these statements are adequate to make the
information presented not misleading. Certain previously reported
amounts have been reclassified to conform with the current period
presentation.
These financial statements should be read in conjunction with, and
have been prepared in conformity with, the accounting principles
reflected in the consolidated financial statements and related
notes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998. These interim results include, in
the opinion of the Company, all normal and recurring adjustments
necessary to present fairly the results of operations for the
quarters ended March 31, 1999 and 1998. The 1999 interim results
are not necessarily indicative of the results that may be expected
for the remainder of the year.
Note 2 - Earnings Per Common Share
There is no difference in the net earnings used to compute the
Company's basic and diluted earnings per share. The difference in
the weighted-average number of shares of common stock outstanding
used to compute basic and diluted earnings per share is the amount
of potential common stock relating to employee stock options. The
weighted-average number of shares of potential common stock was
0.6 million and 1.0 million for the quarters ended March 31, 1999
and 1998, respectively.
Note 3 - Debt
During the first quarter of 1999, commercial paper outstanding
increased to $249.5 million at March 31, 1999, versus $156.3
million at December 31, 1998, to fund working capital requirements
and capital expenditures.
Note 4 - Litigation
On June 19, 1998, a jury awarded $44.4 million in damages in a
suit brought in December 1995 by Independent Boat Builders, Inc.,
a buying group of boat manufacturers and 22 of its members. The
lawsuit, Concord Boat Corporation, et al. v. Brunswick Corporation
(Concord), was filed in the United States District Court for the
Eastern District of Arkansas, and alleged that the Company
unlawfully monopolized, unreasonably restrained trade in, and made
acquisitions that substantially lessened competition in the market
for sterndrive and inboard marine engines in the United States and
Canada. Under the antitrust laws, the damage award has been
trebled, and plaintiffs will be entitled to their attorneys' fees
and interest. Under current law, any and all amounts paid by the
Company will be deductible for tax purposes.
The trial court judge denied the Company's post-trial motions
seeking to set aside the verdict and for a new trial. The judge
also denied all forms of equitable relief sought by the plaintiffs
in connection with the jury verdict, including their requests for
divestiture of the Company's principal boat manufacturing
operations and orders precluding the Company from implementing
various marketing and pricing programs and from acquiring other
marine-related companies or assets. The judge granted the
Company's motion for judgment as a matter of law on its
counterclaim which asserted a per se violation of the antitrust
laws by a group of six of the plaintiffs and awarded nominal
damages. Plaintiffs dismissed, voluntarily, two related claims
which had alleged that the Company attempted to monopolize the
outboard engine and sterndrive boat markets.
On November 4, 1998, the Company filed an appeal contending the
Concord verdict was erroneous as a matter of law, both as to
liability and damages. Plaintiffs filed a cross appeal on the
denial of equitable relief and on the judgment against certain of
them on the counterclaim. The Company is not presently able to
reasonably estimate the ultimate outcome of this case, and
accordingly, no expense for this judgment has been recorded. If
the adverse judgment is sustained after all appeals, satisfaction
of the judgment is likely to have a material adverse effect on the
Company's results of operations for a particular year, but is not
expected to have a material adverse effect on the Company's
financial condition.
On October 23, 1998, a suit was filed in the United States
District Court for the District of Minnesota by two independent
boat builders alleging antitrust violations by the Company in the
sterndrive and inboard engine business, seeking to rely on both
the liability and damage findings of the Concord litigation. In
this suit, KK Motors et al. v. Brunswick Corporation (KK Motors),
the named plaintiffs also seek to represent a class of all
allegedly similarly situated boat builders whose claims have not
been resolved in Concord or in other judicial proceedings. Sales
of sterndrive and inboard marine engines to the Concord plaintiffs
are estimated to have represented less than one-fifth of the total
sold to independent boat builders during the six-and-one-half year
time period for which damages were awarded in that suit. The
complaint in the KK Motors case seeks damages for a time period
covering slightly less than four years.
On December 23, 1998, Volvo Penta of the Americas, Inc.,
Brunswick's principal competitor in the sale of sterndrive marine
engines, filed suit in the United States District Court for the
Eastern District of Virginia. That suit, Volvo Penta of the
Americas v. Brunswick Corporation (Volvo), also invokes the
antitrust allegations of the Concord action and seeks injunctive
relief and damages in an unspecified amount for an unspecified
time period.
On February 10, 1999, a former dealer of Brunswick boats filed
suit in the United States District Court for the District of
Minnesota, also seeking to rely on the liability findings of the
Concord action. This suit, Amo Marine Products, Inc. v. Brunswick
Corporation (Amo) seeks class status purporting to represent all
marine dealers who purchased directly from Brunswick sterndrive or
inboard engines or boats equipped with sterndrive or inboard
engines during the period January 1, 1986 to June 30, 1998. Sales
by Brunswick of boats equipped with sterndrive or inboard engines
to dealers accounted for less than half of such engines produced
during the time period covered by the complaint; sales of such
engines directly to dealers were de minimis. The complaint seeks
damages in an unspecified amount and requests injunctive relief.
On March 31, 1999, another suit, Jack's Marina, Inc. v. Brunswick
(Jack's Marina), was filed in the same court seeking to represent
the same putative class as Amo.
On February 16, 1999, a suit was filed in the Circuit Court of
Washington County, Tennessee, by an individual claiming that the
same conduct challenged in the Concord action violated various
antitrust and consumer protection laws of 16 states and the
District of Coulmbia. In that suit, Couch v. Brunswick (Couch),
plaintiff seeks to represent all indirect purchasers in those
states of boats equipped with Brunswick sterndrive or inboard
engines. The plaintiff claims damages in an unspecified amount
during the period from 1986 to the filing of the complaint and
also requests injunctive relief.
It is possible that additional suits will be filed, in either
federal or state court, asserting allegations similar to those in
the existing complaints and purporting to represent similar or
overlapping classes of claimants.
The Company has answered or will answer each of these new
complaints denying liability and asserting various defenses. In
addition, the Company has filed or will file motions to stay all
proceedings in each of these matters pending the resolution of the
appeal in the Concord action because it believes that an appellate
decision in that matter is likely to have an impact on each of
these recently filed actions. In the KK Motors and Amo cases, the
court has granted a stay of all proceedings on the merits of
plaintiffs' claims, but has allowed the cases to proceed on class
certification and certain procedural matters. In the Volvo case
the court has denied the stay.
Because litigation is subject to many uncertainties, the Company
is unable to predict the outcome of any of the above referenced
actions. While there can be no assurance, the Company believes
the adverse judgment in the Concord case is likely to be reversed
on appeal and that any such reversal will have an impact on all
related actions. If the Concord judgment is sustained after all
appeals, however, and if the KK Motors and/or Amo and Jack's
Marina cases successfully proceed as class actions on behalf of
all described potential claimants substantially as alleged, and if
plaintiffs are successful, the damages ultimately payable by the
Company would have a material adverse effect on the Company's
financial condition and results of operations. The Company is
unable at this time to assess the magnitude of damages that either
Volvo or the Couch plaintiffs might assert. Because of a variety
of factors affecting both the likelihood and size of any damage
award to these or any other potential claimants, the Company is
unable to estimate the range, amount or timing of its overall
possible exposure.
Note 5 - Segment Data
The following table sets forth net sales and operating earnings of
each of the Company's operating segments for the quarters ended
March 31, 1999 and 1998 (in millions):
Quarter Ended March 31,
1999 1998
Net Operating Net Operating
Sales Earnings Sales Earnings
Outdoor Recreation $213.1 $13.6 $157.7 $18.4
Indoor Recreation 184.8 23.6 163.6 16.2
Boat (1) 368.4 29.4 313.7 32.3
Marine Engine 386.7 53.5 331.7 49.3
Corporate/Other (70.0) (10.5) (62.5) (8.1)
Consolidated $1,083.0 $109.6 $904.2 $108.1
(1) Boat segment operating earnings for the quarter ended March
31, 1998, include $7.5 million of income recorded in connection
with a settlement with certain boat dealers.
Note 6 - Strategic Charge
During the third quarter of 1998, the Company recorded a pretax
charge of $60.0 million ($41.4 million after tax) in the Indoor
and Outdoor Recreation segments to cover costs associated with
strategic initiatives designed to streamline operations and
enhance operating efficiencies in response to the effect of the
economic situation in Asia and other emerging markets on its
businesses. These strategic actions included exiting and
disposing of 15 retail bowling centers in Asia, Brazil and Europe;
rationalizing manufacturing of bowling equipment, including
closing a pinsetter manufacturing plant in China, accelerating the
shutdown of a pinsetter manufacturing plant in Germany and exiting
the manufacture of electronic scorers and components; closing
bowling sales offices and administrative offices in four
countries; and rationalizing the manufacture and distribution of
outdoor recreation products including the consolidation of certain
North American manufacturing operations and closing seven domestic
distribution warehouses. These actions were substantially
completed during 1998.
The components of the 1998 strategic charge include lease
termination costs, severance costs, other incremental costs and
asset disposition costs. Lease termination costs of $11.3 million
consist primarily of costs to exit leased international bowling facilities
as well as distribution and warehouse facilities of the Outdoor Recreation
segment. Severance costs of $10.6 million relate to the
termination of approximately 750 employees in the Company's
bowling businesses and 330 employees in the Company's Outdoor
Recreation segment. During 1999, the Company substantially
completed the severance actions. Other incremental costs of
$9.3 million include contract termination costs related to the
manufacture and sale of bowling equipment; cleanup, holding and
shutdown costs related to the closing of domestic distribution
warehouses and manufacturing facilities; and legal costs.
Asset disposition costs of $28.8 million primarily relate to the
write-down of facilities and equipment at international bowling
centers in the Indoor Recreation segment and manufacturing facilities
in the Outdoor Recreation segment. As of March 31, 1999 and
September 30, 1998, these assets had a gross carrying value of
approximately $14.9 million and $35.2 million, respectively, and an
estimated sales value, net of related costs to sell, of $0.3 million and
$6.4 million, respectively. The Company is pursuing plans to complete
the sale of these assets in 1999.
During the third quarter of 1997, the Company announced strategic
initiatives to streamline its operations and improve global
manufacturing costs. The initiatives included terminating
development efforts on a line of personal watercraft; closing boat
plant manufacturing facilities in Ireland and Oklahoma;
centralizing European marketing and customer service in the Marine
Engine segment; rationalizing manufacturing of bowling equipment
including the shutdown of a pinsetter manufacturing plant in
Germany and outsourcing the manufacture of certain components in
the Company's bowling division; consolidating fishing reel
manufacturing; and other actions directed at manufacturing
rationalization, product profitability improvements and general
and administrative expense efficiencies. These actions were
substantially completed during 1998.
In the third quarter of 1997, the Company recorded a pretax charge
of $98.5 million ($63.0 million after tax) to cover exit costs
related to these actions. The charge consisted of $3.4 million
recorded in the Outdoor Recreation segment, $20.4 million recorded
in the Indoor Recreation segment, $14.1 million recorded in the
Boat segment, and $60.6 million recorded in the Marine Engine
segment.
These actions included termination of approximately 900 hourly and
salaried employees and severance and related benefits totaling
$32.6 million. During 1998, the Company substantially completed
the severance actions of both hourly and salaried employees.
Asset disposition costs of $26.4 million consist of the write-down
of facilities and equipment related to the development of a line
of personal watercraft, boat manufacturing facilities in Ireland
and Oklahoma and an international pinsetter plant. As of March
31, 1999, and September 30, 1997, these assets had a gross
carrying value of approximately $10.6 million and $30.1 million,
respectively, with an estimated sales value approximating the
related cost to sell at March 31, 1999, and an estimated sales
value less cost to sell of $3.7 million as of September 30, 1997.
The Company is pursuing plans to complete the sale of these assets
in 1999. Product and inventory write-downs related to exit
activities were $15.6 million. Other incremental costs related to
exit activities were $23.9 million.
The Company's accrued expense balances relating to 1998 and 1997
strategic charges as of March 31, 1999 and December 31, 1998,
were as follows (in millions):
December 31, 1999 March 31,
1998 Spending 1999
Severance $16.1 $4.3 $11.8
Lease Termination 10.6 0.5 10.1
Other Incremental costs 10.8 1.6 9.2
Total $37.5 $6.4 $31.1
The balance of the severance-related accruals covers future
payments to be made for severance actions.
Note 7 - Comprehensive Income
Accumulated other comprehensive income includes cumulative
translation, unrealized gains and losses on investments and
minimum pension liability adjustments. Comprehensive income for
the quarters ended March 31, 1999 and 1998, was as follows (in
millions):
Quarter Ended
March 31
1999 1998
Net earnings $57.6 $58.9
Other comprehensive income (loss) 0.4 (4.3)
Comprehensive income $58.0 $54.6
Item 2. - Management's Discussion and Analysis
Overview
The Company's financial results in the first quarter of 1999
continue to reflect the favorable effect of its growth strategy,
which includes acquiring active recreation businesses, expanding
existing brands through effective marketing programs and product
innovations, and managing costs to improve operating margins.
Results of Operations
Consolidated
The following table sets forth certain ratios and relationships
calculated from the consolidated statements of income for the
quarters ended March 31:
1999 1998
Percentage increase (decrease) versus the prior year in:
Net sales 19.8% 7.4%
Operating earnings 1.4% 15.7%
Net earnings (2.2)% 11.8%
Diluted earnings per share 5.1% 11.3%
Expressed as a percentage of net sales:
Gross margin 26.8% 28.3%
Selling, general and administrative expense 16.7% 16.3%
Operating margin 10.1% 12.0%
Sales increased by $178.8 million to $1,083.0 million in the first
quarter of 1999 from $904.2 million in 1998. This increase
primarily reflects gains in sales of marine engines due to strong
demand for sterndrive engines and new low-emission outboard
engines, continued improvements in the mix of boat sales driven by
larger, higher-margin boats, and an increase in sales of bicycles
due to expanded distribution.
Gross margin decreased to 26.8 percent in 1999 from 28.3 percent
in 1998 as the Company took actions in the first quarter of 1999
in the camping business that resulted in a $5.0 million inventory
write-down. Also contributing to the margin decline was a shift
in sales mix as a result of strong sales gains in lower-margin
product offerings including bikes and low-emission outboard
engines. These factors more than offset gross margin gains in the
bowling business resulting from the strategic actions taken in
1998.
Selling, general and administrative expenses (SG&A expenses) as a
percent of sales increased to 16.7 percent in the first quarter of
1999 from 16.3 percent in the first quarter of 1998. SG&A
expenses in 1998 include $7.5 million of income recorded in 1998
in connection with the settlement reached with certain of the
Company's boat dealers, MarineMax, Inc. Excluding this
settlement, SG&A expenses as a percent of sales declined to 16.7
percent in 1999 from 17.2 percent in 1998 reflecting the Company's
continuing focus on cost management, while increasing expenditures
for product and market development.
Operating earnings totaled $109.6 million in 1999 and $108.1
million in 1998. Operating margins in the first quarter of 1999
were 10.1 percent compared with 12.0 percent (11.1 percent
excluding the aforementioned MarineMax settlement) in 1998.
Other income and expense amounted to a loss of $1.2 million in
1999 compared with income of $1.8 million in 1998 reflecting a
reduction in the contribution from joint ventures along with the
effect of changes in foreign currency related adjustments. The
Company's effective tax rate was 38.0 percent in the first quarter
of 1999 and 1998.
Net earnings were $57.6 million in 1999 versus $58.9 million in
1998, and diluted earnings per share increased to $0.62 in the
first quarter of 1999 from $0.59 in 1998. Excluding the
previously mentioned 1998 settlement ($4.6 million after tax), net
earnings increased 6.1 percent and diluted earnings per share
increased 14.8 percent. Average common shares outstanding used to
calculate diluted earnings per share decreased to 92.6 million in
1999 from 100.5 million in 1998 primarily reflecting stock
repurchased during 1998.
Outdoor Recreation Segment
The following table sets forth Outdoor Recreation segment results
for the quarters ended March 31 (dollars in millions):
1999 1998
Net sales $213.1 $157.7
Operating earnings $ 13.6 $ 18.4
Operating margin 6.4% 11.7%
Capital expenditures $ 8.4 $ 6.7
In 1999, Outdoor Recreation segment sales increased 35.1 percent
to $213.1 million. The sales gain reflects increased bicycle sales
due to expanded distribution and improvements in sales of ice
chests, beverage coolers and fishing equipment due to new product
introductions. These gains were partially offset by lower camping
equipment sales.
Operating earnings in 1999 decreased to $13.6 million or 26.1
percent from 1998 and operating margins for the segment were 6.4
percent during the first quarter of 1999, compared with 11.7
percent in 1998. These declines were primarily attributable to
actions taken in the first quarter of 1999 to better position this
segment to improve its performance over the long term. The
Company implemented promotional programs designed to lower
inventories of slower moving camping products and reduced the
number of products offered to concentrate efforts on fewer, but
higher-margin products. This resulted in a $5.0 million inventory
write-down in the first quarter of 1999. These actions, along
with continued emphasis on effective cost management, investments
in new product launches and aggressive marketing activities are
expected to result in earnings growth for the Outdoor Recreation
segment in the later part of the year.
Indoor Recreation Segment
The following table sets forth Indoor Recreation segment results
for the quarters ended March 31 (dollars in millions):
1999 1998
Net sales $184.8 $163.6
Operating earnings $ 23.6 $ 16.2
Operating margin 12.8% 9.9%
Capital expenditures $ 5.7 $ 10.0
The Indoor Recreation segment recorded sales of $184.8 million,
which represents an increase of 13.0 percent from 1998. This
increase was a result of growth in fitness equipment sales due to
a continuing strong health club market in the United States,
Europe and the United Kingdom and increased bowling center
revenues and bowling equipment sales.
Operating earnings of $23.6 million in 1999 represented a 45.7
percent increase from 1998. Operating margins were 12.8 percent
in 1999 compared with 9.9 percent in 1998. These improvements
reflect increased sales and the strategic actions taken in late
1998 to address the effect of the Asian economic situation on
bowling equipment sales.
Boat Segment
The following table sets forth Boat segment results for the
quarters ended March 31 (dollars in millions):
1999 1998
Net sales $368.4 $313.7
Operating earnings $ 29.4 $ 32.3
Operating margin 8.0% 10.3%
Capital expenditures $ 6.4 $ 8.7
The Boat segment reported a 17.4 percent increase in sales to
$368.4 million in 1999 as a result of continued strong demand for
larger boats.
Operating earnings for the segment were $29.4 million in the first
quarter of 1999, compared with $32.3 million in the same period of
1998. Operating margins were 8.0 percent in the first quarter of
1999 versus 10.3 percent in the same period of 1998. In the first
quarter of 1998, the Company recorded income of $7.5 million in
connection with the aforementioned settlement reached with certain
of the Company's boat dealers. Excluding this settlement,
operating earnings totaled $24.8 million and operating margins
were 7.9 percent in the first quarter of 1998. The change in
operating margins, excluding the settlement, reflects the benefits
from a reduction in retail price incentives and the continued
growth in sales of larger, higher-margin boats. Benefits from
these factors were offset by increased investments in advertising
and marketing, along with costs associated with rationalizing
certain product lines and manufacturing operations.
Marine Engine Segment
The following table sets forth Marine Engine segment results for
the quarters ended March 31 (dollars in millions):
1999 1998
Net sales $386.7 $331.7
Operating earnings $ 53.5 $ 49.3
Operating margin 13.8% 14.9%
Capital expenditures $ 10.4 $ 11.0
The Marine Engine segment posted a sales gain in 1999 of 16.6
percent to $386.7 million resulting from strong demand for
sterndrive engines and new low-emission outboard engines, along
with increased distribution of engine parts and accessories.
Operating earnings were $53.5 million in the first quarter of
1999, compared with $49.3 million in the same period last year,
and operating margins were 13.8 percent in 1999 and 14.9 percent
in 1998. The operating margin decline reflects higher sales of
low-emission outboard engines that have lower margins than
traditional outboards due to higher initial production costs. In
addition, increased investments in product development, service
initiatives and brand-building marketing activities affected
margins in the first quarter of 1999.
Cash Flow, Liquidity and Capital Resources
Cash generated from operating activities, available cash balances
and selected borrowings are the Company's major sources of funds
for investments and dividend payments. Cash and cash equivalents
totaled $81.2 million at March 31, 1999, down from $126.1 million
at the end of 1998.
Cash used for operating activities for the first quarter reflects
a seasonal build in working capital and totaled $100.7 million in
1999, versus $106.9 million in 1998. The primary components of
cash used for operating activities include the Company's net
earnings adjusted for noncash expenses; the timing of cash flows
relating to operating expenses, sales and income taxes; and the
management of inventory levels. The improvement in cash used for
operating activities between periods reflects the benefits of
improved working capital management partially offset by the
effects of the timing of tax payments between the two years.
During the first quarter of 1999, the Company invested $31.1
million in capital expenditures, compared with $36.8 million in
1998. Total debt at March 31, 1999, increased to $910.3 million
versus $805.5 million at the end of 1998 due to increased
commercial paper borrowings to fund working capital requirements
and capital expenditures. Debt-to-capitalization ratios at these
dates were 40.1 percent and 38.1 percent, respectively.
During the first quarter of 1999, the Company repurchased 180,000
shares of its common stock for $3.7 million in open market
transactions under the systematic repurchase program announced in
1997.
The Company's financial flexibility and access to capital markets
is supported by its balance sheet position, investment-grade
credit ratings and ability to generate significant cash from
operating activities. The Company has a $400 million long-term
credit agreement with a group of banks. The Company has $150
million available under a universal shelf registration filed in
1996 with the Securities and Exchange Commission for the issuance
of equity and/or debt securities. Management believes that these
factors provide adequate sources of liquidity to meet its long-
term and short-term needs.
Refer to Note 4 to consolidated financial statements and the Legal
Proceedings section below for disclosure of the potential cash
requirements of legal proceedings and to Note 6 to the 1998
consolidated financial statements in the Company's Annual Report
on Form 10-K for environmental proceedings. Additionally, the
Company is in the process of litigating certain findings from
Federal tax audits for the years 1990 and 1991 as described in
Note 13 to the 1998 consolidated financial statements in the
Company's Annual Report on Form 10-K. Should the IRS prevail in
these proceedings, the Company may be required to pay up to $60
million for taxes due, plus accrued interest.
Legal Proceedings
Six lawsuits, more fully described in Note 4 to the consolidated
financial statements, are currently pending wherein it is claimed
the Company violated various provisions of federal and state
antitrust and state consumer protection laws in connection with
its sales of MerCruiser sterndrive and inboard engines and its
acquisitions of the Sea Ray and US Marine boat companies. In June
1998, an adverse verdict was reached in the first of these suits
that was brought by a buying group of boat-builder customers whose
purchases represent less than one-fifth of all direct sales of
sterndrive and inboard engines to boat builders during the damage
period relevant to that action. That verdict and resulting damage
judgment of $133.2 million, after trebling, has been appealed and
the Company believes the adverse judgment is likely to be
reversed. Following the verdict, five additional suits have been
filed seeking to rely on the allegations and findings of that
verdict. The first purports to represent a class of all other
boat-builder customers and seeks damages on the same model as the
initial suit and the second was brought by the Company's principal
competitor in the sterndrive engine business and claims damages in
an unspecified amount. Two suits seek to represent a class of all
dealers that purchased sterndrive or inboard
engines or boats equipped with such engines directly from the
Company and the remaining suit seeks to represent indirect
purchasers from 17 jurisdictions of boats equipped with such
engines. Because of a variety of factors affecting both the
likelihood and size of any damage award to these or any other
potential claimants, the Company is unable to estimate the range,
amount or timing of its overall possible exposure, and
accordingly, no expense for either the judgment or related
lawsuits has been recorded. If the adverse judgment is sustained
after all appeals, and if the class actions proceed and are
successful, the damages ultimately payable by the Company would
have a material adverse affect on the Company's financial
condition and results of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133).
SFAS 133 is effective for all fiscal quarters of all fiscal years
beginning June 15, 1999 (March 31, 2000, for the Company). The
Company is assessing the effect of SFAS 133 and currently believes
it will not have a material effect on its earnings or financial
position.
Year 2000
In January 1998, the Company initiated a formal program to address
the Year 2000 issue. The Year 2000 issue involves the inability
of date-sensitive computer applications to process dates beyond
the year 2000. The Company has established a Year 2000 Project
Office to lead initiatives that address areas with the potential
of having a major adverse effect on the business. The Company's
program encompasses the use of both internal
and external resources to identify, remediate and test systems for
Year 2000 readiness. External resources include nationally
recognized consulting firms and other contractual resources to
supplement available internal resources.
The Company uses software and related technologies throughout its
businesses and in certain of its products that will be affected by
the Year 2000 issue. A comprehensive inventory and assessment of
business systems and processes that may be affected by Year 2000
issues have been substantially completed. Key areas requiring
priority focus are the Company's information (IT) systems
including financial, invoicing, order entry, purchasing, payroll,
inventory management and production management systems along with
IT systems infrastructure, as well as the Company's manufacturing
and other non-IT systems.
The Company is in the process of implementing its plan to address
its IT and non-IT systems that includes a combination of
replacement and remediation activities. The implementation of
this plan is expected to be substantially complete in July 1999.
The Company's IT replacement projects, which are being done in
connection with company-wide IT system upgrade projects, are
approximately 85 to 90 percent complete and include financial and
order-processing systems in certain businesses. The remaining IT
systems are being addressed through remediation efforts, which
have been substantially completed. The Company's testing
activities include system testing, unit testing and Year 2000
multiple-date testing. Testing efforts are ongoing, with an
expected finish date for substantially all IT systems in July
1999. Replacement and remediation of non-IT systems is also
ongoing, with a targeted finish date of July 1999 for
substantially all such systems.
An inventory and assessment of the technology incorporated into
the Company's products is substantially complete. Key areas of
focus include bowling products consisting of electronic scorers
and bowling center management systems. The Company is currently
taking steps to address these products on a case-by-case basis
including notifying known users and making Year 2000 solutions
available, where appropriate. These steps are expected to be
completed by July 1999.
The Company is assessing the Year 2000 readiness of its critical
customers and suppliers and has sent letters inquiring as to their
Year 2000 readiness. Of approximately 1,300 suppliers considered
critical, approximately 5 percent are high risk based on their
responses and approximately 24 percent have not yet responded to
inquiries. The Company will supplement this written
correspondence with additional procedures, which may include
interviews and on-site visits to evaluate risks associated with
third parties, and will consider the results from these procedures
in establishing its contingency plans.
The Company believes that its efforts to address the Year 2000
issue will be successful in avoiding any material adverse effect
on the Company's results of operations or financial condition;
however, given the complexity and number of potential risks, there
can be no guarantee that the Company's efforts will be successful.
The risks to a successful Year 2000 plan include, but are not
limited to, the readiness of customers and suppliers, including
suppliers of sole and internationally sourced products; the
availability of technical resources; and the effectiveness of
systems replacement and remediation programs and product fixes.
If the Company's efforts to achieve Year 2000 readiness are
unsuccessful, the impact could have a material adverse effect on
the Company's results of operation and financial condition. The
potential adverse effects include a limited ability to manufacture
and distribute products and process daily business transactions.
The Company has developed contingency plans designed to mitigate
the potential disruptions that may result from the Year 2000
issue. These plans may include shifting from replacement to
remediation activities for IT systems, securing alternative
sources for key suppliers of materials and services, replacing
electronic applications with manual processes, developing
emergency backup and recovery procedures, investing in safety
stocks of key raw materials and finished goods and other measures
considered appropriate by management. These contingency plans and
the related cost estimates will be continually refined as
additional information becomes available.
The costs of remediating existing software and other Year 2000-
related expenses have been determined and are expected to total
approximately $15 million to $18 million. The Company has
expensed approximately $12.4 million of costs since the Year 2000
assessment process began in 1997. The majority of this amount was
expensed in 1998. Costs associated with the replacement of non-
Year 2000 compliant systems are included in capital expenditures
as part of the company-wide systems upgrade project. Total
spending on the systems upgrade project through March 1999 is
$74.6 million, of which $66.0 million has been capitalized.
Spending on replacement projects necessary for Year 2000 readiness
is substantially complete.
The foregoing discussion regarding the Year 2000 project timing,
effectiveness, implementation and costs is based on management's
current evaluation using available information. Factors that
might cause material changes include, but are not limited to, the
availability of resources, the readiness of third parties and the
Company's ability to respond to unforeseen Year 2000 compliance
issues.
Forward Looking Statements
Certain statements in this Form 10-Q are forward looking as
defined in the Private Securities Litigation Reform Act of 1995.
These statements involve certain risks and uncertainties that may
cause actual results to differ materially from expectations as of
the date of this filing. These risks include, but are not limited
to, the effect of economic conditions in Asia and South America;
inventory adjustments by major retailers; competitive pricing
pressures; the success of marketing and cost-management programs;
adverse weather conditions retarding sales of outdoor recreation
products; Year 2000 issues including the effectiveness of the
Company's remediation and replacement initiatives, the readiness
of third parties including customers and suppliers and the
Company's ability to complete the information systems initiatives
within the time and cost estimated; the outcome of pending
litigation; and shifts in market demand for the Company's
products.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Note 4 to the Financial Statements in Part I of this Quarterly
Report on pages 6 to 8 is hereby incorporated by reference.
Item 4. Submission of Matters to a Vote of Security Holders
At the April 21, 1999, Annual Meeting of Shareholders of
Brunswick, Messrs. Peter Harf, Peter N. Larson and Jay W. Lorsch
and Ms. Bettye Martin Musham were elected directors of Brunswick
for terms expiring at the 2002 Annual Meeting. The numbers of
shares voted with respect to these directors were:
Nominees For Withheld
Peter Harf 80,519,414 1,175,987
Peter N. Larson 80,331,067 1,364,334
Jay W. Lorsch 80,455,803 1,239,598
Bettye Martin Musham 80,480,390 1,215,011
There were no broker non-votes with respect to the directors.
At the 1999 Annual Meeting, the amendment to the 1991 Stock Plan
increasing the number of shares authorized for issuance under the
1991 Stock Plan was approved pursuant to the following vote:
Number of
Shares
For 63,637,986
Against 9,237,643
Abstain 597,315
Broker Non-votes 8,222,456
The 1991 Stock Plan is described on pages 22 to 25 of Brunswick's
definitive proxy statement dated March 22, 1999, and is Exhibit A
to the proxy statement, which description and exhibit are hereby
incorporated by reference.
At the 1999 Annual Meeting, the Board of Directors' appointment of
Arthur Andersen LLP as auditors for Brunswick and its subsidiaries
for the year 1999 was ratified pursuant to the following vote:
Number of
Shares
For 80,855,008
Against 455,004
Abstain 385,388
Broker Non-votes 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
On January 8, 1999, Brunswick filed a Current Report on
Form 8-K that reports under Item 5 that a suit was filed
claiming Brunswick violated various provisions of the
antitrust laws in connection with its sales of MerCruiser
sterndrive and inboard engines.
On January 12, 1999, Brunswick filed an amended Current
Report on Form 8-K/A that reports under Item 5
developments in the Concord Boat Corporation, et al. v.
Brunswick Corporation lawsuit.
On March 2, 1999, Brunswick filed a Current Report on
Form 8-K that reports under Item 5 that two additional
lawsuits were brought against Brunswick claiming
Brunswick violated various provisions of federal or state
antitrust laws and consumer protection laws in connection
with its sale of MerCruiser sterndrive and inboard
engines and that summarizes the status of the other
antitrust suits pending against Brunswick.
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
May 14, 1999 By: /s/ Victoria J. Reich
Victoria J. Reich
Vice President and Controller*
*Ms. Reich is signing this report both as a duly authorized
officer and as the principal accounting officer.
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