UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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, 2002, there were 90,039,755 shares of common stock ($0.75 par value)
outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BRUNSWICK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
2002 2001
----------- -----------
NET SALES $ 866.7 $ 913.2
Cost of sales 675.3 687.4
Selling, general and administrative expense 161.1 146.8
----------- -----------
OPERATING EARNINGS 30.3 79.0
Interest expense (11.0) (13.6)
Other income(expense) 1.3 (1.7)
----------- -----------
EARNINGS BEFORE INCOME TAXES 20.6 63.7
Income tax provision 7.4 24.2
----------- -----------
EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 13.2 39.5
Cumulative effect of change in accounting principle, net of tax - (2.9)
----------- -----------
NET EARNINGS $ 13.2 $ 36.6
=========== ===========
BASIC EARNINGS PER COMMON SHARE:
Earnings before cumulative effect of change in accounting principle $ 0.15 $ 0.45
Cumulative effect of change in accounting principle - (0.03)
----------- -----------
Net earnings $ 0.15 $ 0.42
=========== ===========
DILUTED EARNINGS PER COMMON SHARE:
Earnings before cumulative effect of change in accounting principle $ 0.15 $ 0.45
Cumulative effect of change in accounting principle - (0.03)
----------- -----------
Net earnings $ 0.15 $ 0.42
=========== ===========
AVERAGE SHARES USED FOR COMPUTATION OF:
Basic earnings per share 88.7 87.7
Diluted earnings per share 89.7 87.8
CASH DIVIDENDS DECLARED PER COMMON SHARE $ - $ 0.125
<FN>
The notes are an integral part of these consolidated statements.
</FN>
2
BRUNSWICK CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2002, DECEMBER 31, 2001, AND MARCH 31, 2001
(IN MILLIONS)
MARCH 31, December 31, March 31,
2002 2001 2001
--------------- --------------- ---------------
(UNAUDITED) (unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost,
which approximates market $ 143.6 $ 108.5 $ 72.3
Accounts and notes receivable,
less allowances of $26.8, $26.1 and $20.0 432.1 361.9 450.7
Inventories
Finished goods 294.9 317.2 335.5
Work-in-process 185.2 180.9 147.3
Raw materials 59.1 59.3 86.2
--------------- --------------- ---------------
Net inventories 539.2 557.4 569.0
--------------- --------------- ---------------
Prepaid income taxes 318.2 307.5 363.5
Prepaid expenses 31.6 38.9 39.5
Income tax refunds receivable 3.3 26.7 -
Net assets of discontinued operations offered for sale - - 138.3
--------------- --------------- ---------------
CURRENT ASSETS 1,468.0 1,400.9 1,633.3
--------------- --------------- ---------------
PROPERTY
Land 65.3 68.4 65.6
Buildings 429.3 426.3 414.6
Equipment 998.6 998.5 973.8
--------------- --------------- ---------------
Total land, buildings and equipment 1,493.2 1,493.2 1,454.0
Accumulated depreciation (818.1) (803.8) (772.1)
--------------- --------------- ---------------
Net land, buildings and equipment 675.1 689.4 681.9
Unamortized product tooling costs 112.4 116.2 117.0
--------------- --------------- ---------------
NET PROPERTY 787.5 805.6 798.9
--------------- --------------- ---------------
OTHER ASSETS
Goodwill 473.9 474.4 411.9
Other intangibles 124.8 128.9 115.3
Investments 86.8 80.4 69.0
Other long-term assets 269.8 267.3 167.1
--------------- --------------- ---------------
OTHER ASSETS 955.3 951.0 763.3
--------------- --------------- ---------------
TOTAL ASSETS $ 3,210.8 $ 3,157.5 $ 3,195.5
=============== =============== ===============
<FN>
The notes are an integral part of these consolidated statements.
</FN>
3
BRUNSWICK CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2002, DECEMBER 31, 2001, AND MARCH 31, 2001
(IN MILLIONS)
MARCH 31, December 31, March 31,
2002 2001 2001
--------------- --------------- ---------------
(UNAUDITED) (unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt, including
current maturities of long-term debt $ 40.8 $ 40.0 $ 144.8
Accounts payable 214.5 214.5 248.8
Accrued expenses 631.3 648.2 597.8
Accrued income taxes - - 29.1
--------------- --------------- ---------------
CURRENT LIABILITIES 886.6 902.7 1,020.5
--------------- --------------- ---------------
LONG-TERM DEBT
Notes, mortgages and debentures 599.1 600.2 599.4
--------------- --------------- ---------------
DEFERRED ITEMS
Income taxes 201.3 185.2 204.7
Postretirement and postemployment benefits 213.1 216.1 195.9
Compensation and other 146.6 142.4 75.0
--------------- --------------- ---------------
DEFERRED ITEMS 561.0 543.7 475.6
--------------- --------------- ---------------
COMMON SHAREHOLDERS' EQUITY
Common stock; authorized: 200,000,000 shares,
$0.75 par value; issued: 102,538,000 shares 76.9 76.9 76.9
Additional paid-in capital 309.1 316.2 314.9
Retained earnings 1,092.6 1,079.4 1,067.1
Treasury stock, at cost:
13,156,000, 14,739,000 and 14,976,000 shares (246.8) (289.8) (292.7)
Unamortized ESOP expense and other (31.7) (27.1) (39.9)
Accumulated other comprehensive income (loss) (36.0) (44.7) (26.3)
--------------- --------------- ---------------
COMMON SHAREHOLDERS' EQUITY 1,164.1 1,110.9 1,100.0
--------------- --------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,210.8 $ 3,157.5 $ 3,195.5
=============== =============== ===============
<FN>
The notes are an integral part of these consolidated statements.
</FN>
4
BRUNSWICK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
(IN MILLIONS)
(UNAUDITED)
2002 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 13.2 $ 36.6
Depreciation and amortization 37.5 37.1
Changes in noncash current assets and current liabilities (50.0) (113.8)
Income taxes 31.3 78.2
Other, net 1.0 11.7
-------------- --------------
NET CASH PROVIDED BY CONTINUING OPERATIONS 33.0 49.8
NET CASH USED FOR DISCONTINUED OPERATIONS - (28.1)
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 33.0 21.7
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (16.3) (18.7)
Acquisitions of businesses, net of cash acquired (8.8) (18.4)
Other, net 2.4 5.6
-------------- --------------
NET CASH USED FOR CONTINUING OPERATIONS (22.7) (31.5)
NET CASH USED FOR DISCONTINUED OPERATIONS - (2.8)
-------------- --------------
NET CASH USED FOR INVESTING ACTIVITIES (22.7) (34.3)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments of commercial paper and other
short-term debt - (27.5)
Payments of long-term debt including current maturities - (2.8)
Cash dividends paid - (10.9)
Stock options exercised 25.1 0.9
Other, net (0.3) -
-------------- --------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 24.8 (40.3)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 35.1 (52.9)
Cash and cash equivalents at January 1 108.5 125.2
-------------- --------------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 143.6 $ 72.3
============== ==============
<FN>
The notes are an integral part of these consolidated statements.
</FN>
5
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002, DECEMBER 31, 2001, AND MARCH 31, 2001
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS. The unaudited financial data of Brunswick
Corporation ("the Company") has been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
information and disclosures normally included in financial statements and notes
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. Certain previously reported amounts have been reclassified
to conform with the current-period presentation.
These financial statements should be read in conjunction with, and have been
prepared in conformity with, the accounting principles reflected in the
consolidated financial statements and related notes included in the Company's
2001 Annual Report on Form 10-K (the 2001 Form 10-K). These interim results
include, in the opinion of management, all normal and recurring adjustments
necessary to present fairly the results of operations for the periods ended
March 31, 2002 and 2001. The interim results are not necessarily indicative of
the results that may be expected for the remainder of the year.
GOODWILL AND OTHER INTANGIBLE ASSETS. During 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets," which requires that, effective
January 1, 2002, goodwill and certain other intangible assets deemed to have an
indefinite useful life are no longer amortized. SFAS No.142 does not require
retroactive restatement for all periods presented; however, the comparative pro
forma information below for 2001 assumes that SFAS No. 142 was in effect
beginning January 1, 2001.
Pro Forma Information
(in millions, except per share data)
QUARTER ENDED MARCH 31
-----------------------------
2002 2001
------------ ------------
Reported net earnings $ 13.2 $ 36.6
Goodwill and indefinite-lived intangible amortization -- 2.7
------------ ------------
Adjusted net earnings $ 13.2 $ 39.3
============ ============
BASIC EARNINGS PER COMMON SHARE:
Reported net earnings $ 0.15 $ 0.42
Goodwill and indefinite-lived intangible amortization -- 0.03
------------ ------------
Adjusted net earnings $ 0.15 $ 0.45
============ ============
DILUTED EARNINGS PER COMMON SHARE:
Reported net earnings $ 0.15 $ 0.42
Goodwill and indefinite-lived intangible amortization -- 0.03
------------ ------------
Adjusted net earnings $ 0.15 $ 0.45
============ ============
Under SFAS No. 142, while amortization of goodwill and certain other intangible
assets is no longer permitted, these accounts must be reviewed annually for
impairment. The impairment test for goodwill is a two-step process. The first
step is to identify when goodwill impairment has occurred by comparing the fair
value of a reporting unit with its carrying amount, including goodwill. If the
fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is not considered impaired. If the carrying amount of the
reporting unit exceeds its fair value, the second step of the goodwill test
should be performed
6
to measure the amount of the impairment loss, if any. In this second step the
implied fair value of reporting unit goodwill is compared with the carrying
amount of the goodwill. If the carrying amount of the reporting unit's goodwill
exceeds the implied fair value of that goodwill, an impairment loss should be
recognized in an amount equal to that excess, not to exceed the carrying amount
of the goodwill.
In accordance with the transition provisions of SFAS No.142, the Company is
nearing completion of the first step of the transitional goodwill impairment
test for all the reporting units of the Company. The results of that test have
indicated that goodwill of certain bowling products businesses acquired in 1996
and 1998, and a fitness equipment retailer acquired beginning in 1999, all of
which are reported in the Recreation segment, may be impaired, and an impairment
loss may have to be recognized. While the analysis has not been completed, the
Company expects to record a non-cash charge of $25 million to $30 million, after
tax. The measurement of this loss is expected to be completed by the end of the
second quarter of 2002. Any resulting impairment loss will be recognized as the
cumulative effect of a change in accounting principle as required by SFAS No.
142.
Other intangibles consist of the following (in millions):
QUARTER ENDED MARCH 31
----------------------------------------------------------------------
2002 2001
--------------------------------- --------------------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------- ----------------- ----------- -----------------
Amortized intangible assets:
Dealer network $ 205.7 $ (158.6) $ 185.7 $ (147.2)
Other 7.3 (2.1) 6.6 (1.8)
----------- ----------------- ----------- -----------------
Total $ 213.0 $ (160.7) $ 192.3 $ (149.0)
=========== ================= =========== =================
Indefinite-lived intangible assets:
Trademarks/tradenames $ 53.7 $ (17.4) $ 44.4 $ (15.7)
Pension intangible asset 36.2 -- 43.3 --
----------- ----------------- ----------- -----------------
Total $ 89.9 $ (17.4) $ 87.7 $ (15.7)
=========== ================= =========== =================
Aggregate amortization expense for the quarter ended March 31, 2002 and March
31, 2001 was $3.3 million and $3.2 million, respectively.
Estimated amortization expense for each of the next five years is as follows (in
millions):
For year ended December 31, 2003 $ 10.1
For year ended December 31, 2004 $ 9.8
For year ended December 31, 2005 $ 6.8
For year ended December 31, 2006 $ 6.8
For year ended December 31, 2007 $ 4.0
7
A summary of changes in the Company's goodwill during the quarter by segment is
as follows (in millions):
GOODWILL
--------------------------------------------------------------------
JANUARY 1, ADJUSTMENTS & MARCH 31,
2002 ACQUISITIONS (A) 2002
-------------------- ------------------ --------------------
Marine Engine $ 9.0 $ 0.2 $ 9.2
Boat 173.5 (0.7) 172.8
Recreation 291.9 -- 291.9
-------------------- ------------------ --------------------
Total $ 474.4 $ (0.5) $ 473.9
==================== ================== ====================
<FN>
(A) Adjustments primarily relate to the impact of foreign currency
translation and changes in the fair value of net assets subject to
purchase accounting adjustments, primarily arising from the Sealine and
Hatteras acquisitions completed in the third and fourth quarters of
2001, respectively.
</FN>
DERIVATIVES. The Company engages in business activities involving both financial
and market risks, including, but not limited to, changes in foreign currency
exchange rates and commodity prices. The Company uses derivative financial
instruments to manage its risks associated with movements in foreign currency
exchange rates and commodity prices. Derivative instruments are not used for
trading or speculative purposes. The Company's risk management objectives are
described in Notes 1 and 8 of the 2001 Form 10-K. The effects of derivative and
financial instruments are not expected to be material to the Company's results
of operations
Effective January 1, 2001, the Company adopted SFAS Nos. 133/138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities." Under SFAS
133/138, all derivative instruments are recognized on the balance sheet at their
fair values. As a result of the adoption of this standard, in the first quarter
of 2001, the Company recorded a $2.9 million after-tax loss ($4.7 million
pretax) as a cumulative effect of a change in accounting principle, primarily
resulting from the recording of interest rate swaps.
NOTE 2 - EARNINGS PER COMMON SHARE
There is no difference in the net earnings used to compute basic and diluted
earnings per share. The difference in the average number of shares of common
stock outstanding used to compute basic and diluted earnings per share is
primarily the amount of common stock equivalents relating to unexercised
outstanding employee stock options. The average number of shares of common stock
equivalents increased to 1.0 million from 0.1 million for the quarters ended
March 31, 2002 and 2001, respectively, due to an increase in the Company's stock
price.
NOTE 3 - DEBT
There was no outstanding commercial paper at March 31, 2002, or December 31,
2001, compared with $123.1 million at March 31, 2001. The weighted-average
interest rates for commercial paper borrowings were 2.44 percent and 6.37
percent for the quarters ended March 31, 2002 and 2001, respectively.
NOTE 4 - LEGAL AND ENVIRONMENTAL
See Note 9 for legal matters arising after March 31, 2002.
The Company is involved in certain legal and administrative proceedings under
the Comprehensive Environmental Response, Compensation and Liability Act of 1980
and other federal and state legislation governing the generation and disposition
of certain hazardous wastes. These proceedings, which involve both on- and
off-site waste disposal or other contamination, in many instances seek
compensation or remedial action from the Company as a waste generator under
Superfund legislation, which authorizes
8
action regardless of fault, legality of original disposition or ownership of a
disposal site. The Company is also involved in a number of environmental
remediation actions addressing contamination resulting from historic activities
on its present and former plant properties.
The Company accrues for environmental remediation-related activities for which
commitments or clean-up plans have been developed and for which costs can be
reasonably estimated. All accrued amounts are generally determined in
coordination with third-party experts on an undiscounted basis and do not
consider recoveries from third parties until such recoveries are realized. In
light of existing reserves, the Company's environmental claims, when finally
resolved, will not, in the opinion of management, have a material adverse effect
on the Company's consolidated financial position. If current estimates are not
achieved, results of operations could be adversely affected in the period in
which additional provisions are required. Refer to Note 7 to the consolidated
financial statements in the 2001 Form 10-K for disclosure of the potential cash
requirements of environmental proceedings as of December 31, 2001.
NOTE 5 - SEGMENT DATA
The following table sets forth net sales and operating earnings of each of the
Company's reportable segments for the quarters ended March 31, 2002 and 2001 (in
millions):
QUARTER ENDED MARCH 31
------------------------------------------------------------------------------
2002 2001
------------------------------------ -----------------------------------
NET OPERATING NET OPERATING
SALES EARNINGS SALES EARNINGS
-------------- --------------- -------------- ---------------
Marine Engine $ 370.4 $ 24.7 $ 413.7 $ 49.3
Boat 353.9 3.3 380.3 23.8
Marine eliminations (52.8) -- (67.1) --
-------------- --------------- -------------- ---------------
Total Marine 671.5 28.0 726.9 73.1
Recreation 195.2 17.4 186.3 19.8
Corporate/Other -- (15.1) -- (13.9)
-------------- --------------- -------------- ---------------
Total $ 866.7 $ 30.3 $ 913.2 $ 79.0
============== =============== ============== ===============
NOTE 6 - ACQUISITIONS
Cash paid for acquisitions in the first quarter of 2002, net of cash acquired,
totaled $8.8 million from two transactions. First, on February 10, 2002, the
Company acquired Teignbridge Propellers, Ltd. Teignbridge, headquartered in
Newton Abott, United Kingdom, is a manufacturer of custom and standard
propellers and underwater stern gear for inboard-powered vessels. Second, the
Company paid additional consideration relating to the 2001 acquisition of
Hatteras Yachts, Inc.
Cash paid for acquisitions, net of cash acquired, totaled $18.4 million for the
first quarter of 2001, comprised primarily of consideration paid for Princecraft
Boats Inc. (Princecraft), a manufacturer of fishing, deck and pontoon boats.
The Company acquired Princecraft on March 7, 2001, and its results are included
in the Boat segment post-acquisition. The acquisition of Princecraft has been
accounted for as a purchase. The Company acquired assets including inventory,
net property, plant and equipment and a trademark. In addition, the Company
also acquired the remaining interest in Omni Fitness Equipment, Inc. (Omni
Fitness), a domestic retailer of fitness equipment, effective February 28, 2001.
Omni Fitness' results are included in the Recreation segment, and the
acquisition has been accounted for as a purchase. The Company acquired the
remaining interest in satisfaction of a note with the previous owner. The
Company had previously accounted for its interest in Omni Fitness under the
equity method of accounting. The Company also acquired some other small
businesses included in the Recreation segment.
9
Other 2001 acquisitions include Sealine International (Sealine), a leading
manufacturer of luxury sport cruisers and motoryachts, which closed on July 3,
2001, and Hatteras Yachts, Inc. (Hatteras), a leading manufacturer of luxury
sportfishing convertibles and motoryachts, which was acquired on November 30,
2001. The fair value of the net assets acquired is subject to final purchase
accounting adjustments. Refer to Note 6 to the consolidated financial statements
in the 2001 Form 10-K for further disclosure of the Company's acquisitions.
NOTE 7 - COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) includes cumulative foreign
currency translation adjustments, unrealized gains and losses on investments and
derivatives, and minimum pension liability adjustments, all net of tax.
Comprehensive income for the quarters ended March 31, 2002 and 2001, was as
follows (in millions):
QUARTER ENDED MARCH 31
--------------------------------
2002 2001
-------------- --------------
Net earnings $ 13.2 $ 36.6
Other comprehensive income (loss):
Foreign currency cumulative translation adjustment 3.0 (2.8)
Net change in unrealized gains on investments 4.7 2.3
Net change in accumulated unrealized derivative gains 1.0 1.6
-------------- --------------
Total other comprehensive income 8.7 1.1
-------------- --------------
Comprehensive income $ 21.9 $ 37.7
============== ==============
NOTE 8 - DISCONTINUED OPERATIONS
The Company substantially completed the sale of its outdoor recreation segment
in 2001. Refer to Note 11 to the consolidated financial statements in the 2001
Form 10-K for information related to discontinued operations.
NOTE 9 - SUBSEQUENT EVENTS
On April 18, 2002, the Company, in cooperation with the United States Consumer
Products Safety Commission, announced a recall of approximately 103,000 bicycles
that were sold by the Company's former bicycle division. The bicycles had been
equipped with suspension forks that were purchased from a Taiwanese company.
Some of the forks were found to have been defectively manufactured and were
involved in approximately 35 reported accidents. The recall is an expansion of a
prior recall involving the suspension forks and allows consumers who purchased
bicycles with an affected fork to return the fork in exchange for $65. The
Company does not believe that the resolution of this matter will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
On May 3, 2002, the United States Court of Appeals for the Federal Circuit
reversed a summary judgment that had been granted in the Company's favor against
CCS Fitness, Inc. CCS had sued the Company alleging that a front-drive cross
trainer manufactured by Life Fitness infringed a patent held by CCS. As a result
of the appellate court's ruling, the case will be remanded to the trial court,
where the Company believes it has strong defenses on the merits of the case. The
Company does not believe that the resolution of this matter will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
10
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONSOLIDATED
The following table sets forth certain amounts, ratios and relationships
calculated from the consolidated statements of income for the quarters ended
March 31, 2002 and 2001 (in millions, except per share data):
QUARTER ENDED MARCH 31
----------------------------------
2002 2001
---------------- ----------------
Net sales $ 866.7 $ 913.2
Operating earnings $ 30.3 $ 79.0
Earnings from continuing operations $ 13.2 $ 39.5
Cumulative effect of change in accounting principle, net of tax (A) -- (2.9)
---------------- ----------------
Net earnings $ 13.2 $ 36.6
================ ================
Diluted earnings per share from continuing operations $ 0.15 $ 0.45
Cumulative effect per share of change in accounting principle (A) -- (0.03)
---------------- ----------------
Diluted earnings per share $ 0.15 $ 0.42
================ ================
Expressed as a percentage of net sales:
Gross margin 22.1% 24.7%
Selling, general and administrative expense 18.6% 16.1%
Operating margin 3.5% 8.7%
<FN>
(A) The Company adopted SFAS Nos. 133/138, effective January 1, 2001.
</FN>
For the first quarter of 2002, the Company reported net sales of $866.7 million,
down 5 percent from the first quarter of 2001. Excluding acquisitions completed
during 2001, sales would have decreased 14 percent. This decline was mainly
attributable to lower sales in the Boat and Marine Engine segments primarily
caused by weak domestic market conditions. Excluding acquisitions, Recreation
segment sales were down slightly due to lower shipments of bowling equipment.
Gross margin percentages in the first three months of 2002 decreased to 22.1
percent from 24.7 percent. The 260 basis point reduction reflects the impact of
lower sales volume, lower production rates, as well as a shift in sales mix,
most notably in the Boat segment towards smaller boats, which carry lower
margins.
Operating earnings for the quarter ended March 31, 2002, totaled $30.3 million
compared with $79.0 million in 2001. Operating margins fell 520 basis points to
3.5 percent in the current quarter versus 8.7 percent a year ago. The decline in
operating margins was primarily attributable to the aforementioned gross margin
decline and increases in selling, general and administrative costs almost
entirely associated with acquisitions completed after the first quarter of 2001.
Interest expense decreased $2.6 million, or 19.1 percent, in the first three
months of 2002 compared with the first three months of 2001, principally due to
a decline in the average level of outstanding debt.
Other income totaled $1.3 million in the current quarter versus other expense of
$1.7 million in the first quarter of last year. Improved results from
joint-venture investments and more favorable currency adjustments affected the
other income (expense) comparison between the quarters.
Earnings from continuing operations totaled $13.2 million in the first three
months of 2002, versus $39.5 million in the comparable quarter a year ago.
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards Nos. 133/138 "Accounting for Certain Derivative Instruments and
Certain
11
Hedging Activities." The non-cash cumulative effect of adopting the new
accounting standards resulted in a charge of $2.9 million after tax, or $0.03
per diluted share, reducing net earnings to $36.6 million for the three months
ended March 31, 2001.
Average common shares outstanding used to calculate diluted earnings per share
for the quarter increased to 89.7 million in 2002 from 87.8 million in 2001. The
increase in average diluted shares outstanding reflects the effects of stock
options exercised since March 31, 2001, as well as an increase in common stock
equivalents related to unexercised employee stock options, driven by an increase
in the Company's stock price.
EFFECTS OF MARINE MARKET CONDITIONS. The U.S. economic recession contributed to
the reduction in the Company's domestic demand for its marine products in the
first quarter of 2002 when compared with the first quarter of 2001. As such, the
results of the Company's Boat and Marine Engine segments were adversely
affected. The Company took actions in 2001 and the first quarter of 2002 to
address the adverse market conditions by stimulating retail demand, decreasing
production levels, and instituting working capital management programs, which
reduced inventories from levels at March 31, 2001, and December 31, 2001. The
Company will continue to take additional actions in 2002, as necessary, to keep
inventories at desirable levels.
EFFECTS OF THREATENED EUROPEAN COMMUNITIES TARIFF INCREASES. On April 19, 2002,
the Commission of the European Communities announced its intention to increase
tariffs on certain U.S. exports to the countries comprising European Communities
(EC), including many categories of recreational boats. The proposed EC tariff
increase was announced in response to increases by the United States on certain
steel tariffs. If the EC tariffs are put into effect, a substantial portion of
the Company's boats imported into the EC would be subject to an additional duty
of 30 percent. The proposed tariffs are scheduled to become effective on March
20, 2005, or five days following a ruling from the World Trade Organization
(WTO) that the U.S. steel tariffs are incompatible with WTO standards, whichever
is sooner. A ruling from the WTO is expected during 2003, but the Company is
unable to predict what that ruling will be. Although it is not possible to
determine the likely effects of the EC proposal, the Company is carefully
monitoring developments concerning this matter and will continue to evaluate
potential strategies for mitigating any adverse effects of the proposed tariffs.
Boat sales into the EC during 2001 totaled approximately $40 million.
MARINE ENGINE SEGMENT
The following table sets forth Marine Engine segment results for the quarters
ended March 31, 2002 and 2001 (in millions):
QUARTER ENDED MARCH 31
----------------------------------
2002 2001
--------------- ---------------
Net sales $ 370.4 $ 413.7
Operating earnings $ 24.7 $ 49.3
Operating margin 6.7% 11.9%
Capital expenditures $ 3.5 $ 6.6
The Marine Engine segment reported a 10 percent drop in sales in the first
quarter of 2002 to $370.4 million from $413.7 million a year ago. Domestic sales
were down 11 percent largely driven by lower sterndrive shipments, as weak
markets led dealers and boat builders to decrease pipeline inventories.
International sales declined 3 percent compared to the first quarter of 2001 due
to weak market conditions in Europe for outboard engines.
Operating earnings for the segment declined to $24.7 million in the first
quarter of 2002, compared with $49.3 million a year ago. Operating margins also
decreased to 6.7 percent in the current quarter, versus 11.9
12
percent in the first quarter of last year. The decline in operating margins
reflects lower sales volumes and lower absorption of fixed costs associated with
reductions in production levels.
BOAT SEGMENT
The following table sets forth Boat segment results for the quarters ended March
31, 2002 and 2001 (in millions):
QUARTER ENDED MARCH 31
------------------------------------
2002 2001
---------------- ----------------
Net sales $ 353.9 $ 380.3
Operating earnings $ 3.3 $ 23.8
Operating margin 0.9% 6.3%
Capital expenditures $ 9.2 $ 6.5
In the first quarter of 2002, the Boat segment reported net sales of $353.9
million, a 7 percent decrease from the year-earlier quarter. Excluding
acquisitions completed in 2001, sales were down 25 percent due to continued weak
demand. In particular, shipments of sport yachts and yachts, which were strong
in the first quarter of 2001, saw the biggest decline.
Boat segment operating earnings totaled $3.3 million in the first quarter of
2002, declining $20.5 million from the same period of 2001, and operating
margins decreased 540 basis points to 0.9 percent from 6.3 percent. The decline
in operating margins reflects the overall decline in volume, a shift in sales
mix towards smaller boats, which carry lower margins, as well as lower
absorption of fixed costs due to reductions in production rates, partially
offset by profit contributed from acquisitions.
RECREATION SEGMENT
The following table sets forth Recreation segment results for the quarters ended
March 31, 2002 and 2001 (in millions):
QUARTER ENDED MARCH 31
------------------------------------
2002 2001
---------------- ----------------
Net sales $ 195.2 $ 186.3
Operating earnings $ 17.4 $ 19.8
Operating margin 8.9% 10.6%
Capital expenditures $ 3.5 $ 5.2
Recreation segment sales of $195.2 million in the first quarter of 2002
increased 5 percent compared with the first quarter of 2001. This increase in
sales is entirely due to the completion of the Omni Fitness acquisition, which
closed late in the first quarter of 2001. Excluding the Omni acquisition, first
quarter 2002 sales of fitness equipment were flat versus the prior year, as
higher international shipments were offset by reduced commercial sales to
domestic health clubs. Bowling equipment sales, including capital equipment,
balls, supplies and other accessories, were down when comparing the first
quarter of 2002 with the first quarter of 2001 as customers postponed new
construction and renovation projects due to the weak economic conditions.
In the first quarter of 2002, Recreation segment operating earnings declined to
$17.4 million from $19.8 million in 2001. Lower sales of bowling equipment was
the key driver. Operating margins decreased to 8.9 percent in the current
quarter versus 10.6 percent a year ago.
13
DISCONTINUED OPERATIONS
The Company substantially completed the sale of its outdoor recreation segment
in 2001. Refer to Note 11 to the consolidated financial statements in the 2001
Form 10-K for additional information related to discontinued operations.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth an analysis of cash flow for the three-month
periods ended March 31, 2002 and 2001 (in millions):
THREE MONTHS ENDED MARCH 31
----------------------------------
2002 2001
--------------- ---------------
EBITDA* $ 69.1 $ 114.3
Changes in working capital (50.0) (113.8)
Interest expense (11.0) (13.5)
Tax refunds, net 23.9 55.8
Other 1.0 7.0
--------------- ---------------
Cash provided by operating activities of continuing operations 33.0 49.8
Cash used for investing activities of continuing operations** (13.9) (13.1)
--------------- ---------------
Free cash flow *** $ 19.1 $ 36.7
=============== ===============
Cash flow used for discontinued operations (pretax) $ -- $ (30.9)
=============== ===============
<FN>
*EBITDA is defined as net earnings adjusted for the effect of the change in
an accounting principle, unusual charges and discontinued operations,
before interest, taxes, depreciation and amortization. EBITDA is presented
to assist in the analysis of cash from operations. However, it is not
intended as an alternative measure of operating results or cash flow from
operations, as determined in accordance with generally accepted accounting
principles.
**Comprised principally of capital expenditures and excludes acquisition and
disposition activities.
***Free cash flow is defined as cash flow from operating and investing
activities of continuing operations, excluding acquisition, disposition
and financing activities.
</FN>
The Company's major sources of funds for investments and dividend payments are
cash generated from operating activities, available cash balances and selected
borrowings.
Net cash provided by operating activities of continuing operations totaled $33.0
million for the first three months of 2002, compared with $49.8 million in 2001.
Cash provided from operating activities included changes in working capital that
resulted in a use of cash of $50.0 million in 2002 and $113.8 million in 2001.
Inventory, excluding acquired inventory balances, decreased $20.0 million during
the first three months of 2002 compared with an increase of $36.7 million in the
same period in 2001. Lower production rates in the Marine Engine and Boat
segments were the primary drivers. Accounts and notes receivable increased $70.2
million in the first three months of 2002 versus an increase of $30.8 million in
the first three months of 2001. The $70.2 million increase in receivables since
year end 2001 was principally due to the seasonal build in Marine Engine segment
receivables and the exit from a third party floor plan arrangement with a
financial services provider in Europe. Accrued expenses decreased $16.9 million
during the first three months of 2002 versus a drop of $44.0 million in the
first three months of 2001, with lower incentive payments this year as the
principle driver.
Cash flow from operating activities in 2002 also included less favorable income
tax related cash flows versus the prior year. The tax refunds in the first
quarter of 2001 are largely the result of dispositions
14
completed in late 2000 for the camping and bicycle businesses. The refund in
the first quarter of 2002 resulted from the divestiture of the beverage cooler
business completed in late 2001.
During the first three months of 2002, the Company invested $16.3 million in
capital expenditures compared with $18.7 million in 2001. Cash paid for
acquisitions totaled $8.8 million in the first quarter of 2002, compared with
$18.4 million paid in the first quarter of 2001.
Cash and cash equivalents totaled $143.6 million at March 31, 2002, up from
$108.5 million at the end of 2001. Total debt at March 31, 2002, stood at $639.9
million versus $640.2 million at the end of 2001. Debt-to-capitalization ratios
at these dates were 35.5 percent and 36.6 percent, respectively. The Company had
no outstanding commercial paper at March 31, 2002, with additional borrowing
capacity of $400.0 million under the Company's $400.0 million long-term credit
agreement with a group of banks.
The Company has $600.0 million available for the issuance of equity and/or debt
securities under a shelf registration filed in 2001 with the Securities and
Exchange Commission.
During the first three months of 2002, the company received $25.1 million from
stock options exercised compared to $0.9 million during the first three months
of 2001.
The Company announced in 2001 that it would begin paying dividends annually
rather than quarterly, beginning in 2002, in order to reduce administrative
costs. Future dividends, as declared at the discretion of the Board of
Directors, will be paid in December.
The Company's financial flexibility and access to capital markets are supported
by its balance sheet position, investment-grade credit ratings and ability to
generate significant cash from operating activities. Management believes that
there are adequate sources of liquidity to meet the Company's short-term and
long-term needs.
LEGAL PROCEEDINGS AND CONTINGENCIES
On April 18, 2002, the Company, in cooperation with the United States Consumer
Products Safety Commission, announced a recall of approximately 103,000 bicycles
that were sold by the Company's former bicycle division. The bicycles had been
equipped with suspension forks that were purchased from a Taiwanese company.
Some of the forks were found to have been defectively manufactured, and were
involved in approximately 35 reported accidents. The recall is an expansion of a
prior recall involving the suspension forks and allows consumers who purchased
bicycles with an affected fork to return the fork in exchange for $65. The
Company does not believe that the resolution of this matter will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
On May 3, 2002, the United States Court of Appeals for the Federal Circuit
reversed a summary judgment that had been granted in the Company's favor against
CCS Fitness, Inc. CCS had sued the Company alleging that a front-drive cross
trainer manufactured by Life Fitness infringed a patent held by CCS. As a result
of the appellate court's ruling, the case will be remanded to the trial court,
where the Company believes it has strong defenses on the merits of the case. The
Company does not believe that the resolution of this matter will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
The Company is involved in certain legal and administrative proceedings under
the Comprehensive Environmental Response, Compensation and Liability Act of 1980
and other federal and state legislation governing the generation and disposition
of certain hazardous wastes. These proceedings, which involve both on- and
off-site waste disposal or other contamination, in many instances seek
compensation or remedial action from the Company as a waste generator under
Superfund legislation, which authorizes action regardless of fault, legality of
original disposition or ownership of a disposal site. The Company is
15
also involved in a number of environmental remediation actions addressing
contamination resulting from historic activities on its present and former plant
properties.
The Company accrues for environmental remediation-related activities for which
commitments or clean-up plans have been developed and for which costs can be
reasonably estimated. All accrued amounts are generally determined in
coordination with third-party experts on an undiscounted basis and do not
consider recoveries from third parties until such recoveries are realized. In
light of existing reserves, the Company's environmental claims, when finally
resolved, will not, in the opinion of management, have a material adverse effect
on the Company's consolidated financial position. If current estimates are not
achieved, results of operations could be adversely affected in the period in
which additional provisions are required. Refer to Note 7 to the consolidated
financial statements in the 2001 Form 10-K for disclosure of the potential cash
requirements of environmental proceedings as of December 31, 2001.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q are forward looking as defined in the
Private Securities Litigation Reform Act of 1995. These statements involve
certain risks and uncertainties that may cause actual results to differ
materially from expectations as of the date of this filing. These risks include,
but are not limited to, the effect of a weak U.S. economy on consumer confidence
and thus the demand for marine, fitness and bowling equipment and products; the
impact of interest rates, fuel prices and weather conditions on demand for
marine products; competitive pricing pressures; inventory adjustments by major
dealers and retailers; the financial strength of dealers and independent boat
builders; the success of inventory reduction efforts; adverse foreign economic
conditions; shifts in currency exchange rates; adverse weather conditions
retarding sales of recreation products; the ability to complete environmental
remediation and compliance efforts at the cost estimated; the success of
marketing and cost-management programs; the Company's ability to develop and
produce new products; new and competing technologies; imports from Asia and
increased competition from Asian competitors; and possible increases in tariffs
on the Company's boat sales into Europe. Additional factors are included in the
2001 Form 10-K.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 4 to Consolidated Financial Statements in Part I of this Quarterly Report
on pages 8 and 9 is hereby incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the May 1, 2002, Annual Meeting of Shareholders of the Company, Ms. Dorrit
J. Bern, Mr. Peter Harf, Mr. Jay W. Lorsch, Ms. Bettye Martin Musham and Mr.
Ralph Stayer were elected directors of the Company for terms expiring at the
2005 Annual Meeting. The numbers of shares voted with respect to these directors
were:
NOMINEE FOR WITHHELD
------- --- --------
Dorrit J. Bern 76,662,317 2,069,243
Peter Harf 76,672,319 2,059,241
Jay W. Lorsch 77,151,097 1,580,463
Bettye Martin Musham 77,185,128 1,546,432
Ralph Stayer 77,280,779 1,450,781
At the Annual Meeting, the Board of Directors' appointment of Ernst & Young LLP
as auditors for the Company and its subsidiaries for the year 2002 was ratified
pursuant to the following vote:
NUMBER OF SHARES
----------------
For 74,366,133
Against 3,802,817
Abstain 561,709
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
In a Current Report filed on Form 8-K dated March 15, 2002, the
Company reported information pursuant to "Item 4. Changes in
Registrant's Certifying Accountant" in connection with the decision to
terminate the engagement with Arthur Andersen LLP as its independent
auditor on March 13, 2002. As recommended by the Audit and Finance
Committee and approved by the Board of Directors, the Company engaged
Ernst & Young LLP as its independent auditors, effective March 14,
2002. This decision was ratified at the annual shareholders' meeting
held on May 1, 2002.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRUNSWICK CORPORATION
(Registrant)
May 14, 2002 By: /s/ PETER G. LEEMPUTTE
----------------------
Peter G. Leemputte
Vice President and Controller
*Mr. Leemputte is signing this report both as a duly authorized officer and as
the principal accounting officer.
18