BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
There
are no remaining net assets available for sale as of December 31, 2007. The
following table reflects the financial position of the net assets of BNT
disaggregated and reported as discontinued operations as of December 31,
2006:
|
|
December
31,
|
|
(in
millions)
|
|
2006
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
51.5
|
|
Inventory
|
|
|
52.5
|
|
Other
current assets
|
|
|
1.5
|
|
Total
current assets
|
|
|
105.5
|
|
|
|
|
|
|
Goodwill
and intangible assets
|
|
|
19.8
|
|
Investments
|
|
|
6.1
|
|
Property,
plant and equipment
|
|
|
6.9
|
|
|
|
|
|
|
Total
assets
|
|
|
138.3
|
|
|
|
|
|
|
Accounts
payable
|
|
|
46.4
|
|
Accrued
expenses
|
|
|
48.6
|
|
Total
current liabilities
|
|
|
95.0
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
8.7
|
|
|
|
|
|
|
Total
liabilities
|
|
|
103.7
|
|
|
|
|
|
|
Net
assets
|
|
$
|
34.6
|
|
Note
3 – Restructuring Activities
In
November 2006, Brunswick announced initiatives to improve the Company’s cost
structure, better utilize overall capacity and improve general operating
efficiencies. These actions reflect the Company’s response to
difficult marine market conditions, as the Company continues to reduce
production volumes to achieve appropriate dealer pipeline inventories, and
include the consolidation of certain boat manufacturing facilities, sales
offices and distribution warehouses, as well as reductions in the Company’s
global workforce. In addition, these efforts include the streamlining
of certain sales and other operations throughout the Company.
The
Company announced further initiatives in 2007 to consolidate certain boat
manufacturing facilities in connection with the purchase of a manufacturing
facility in North Carolina, close a manufacturing facility in Mississippi and
shift boat production to Indiana and Minnesota, and eliminate assembly
operations for certain engines in Europe.
Restructuring
charges recorded during 2007 were included in the Consolidated Statements of
Income as follows:
(in
millions)
|
|
Boat
Segment
|
|
Marine
Engine
Segment
|
|
Fitness
Segment
|
|
Bowling
& Billiards Segment
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
0.7
|
|
$
|
1.6
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2.3
|
|
Asset write-downs
|
|
|
2.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.0
|
|
Facility closures and other
|
|
|
8.8
|
|
|
1.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10.3
|
|
Total
|
|
|
11.5
|
|
|
3.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
2.9
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
3.3
|
|
Asset write-downs
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.8
|
|
|
—
|
|
|
2.8
|
|
Other
|
|
|
1.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.5
|
|
Total
|
|
|
4.4
|
|
|
0.3
|
|
|
—
|
|
|
2.8
|
|
|
0.1
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
restructuring charges
|
|
$
|
15.9
|
|
$
|
3.4
|
|
$
|
—
|
|
$
|
2.8
|
|
$
|
0.1
|
|
$
|
22.2
|
|
Restructuring
charges recorded during 2006 were included in the Consolidated Statements of
Income as follows:
(in
millions)
|
|
Boat
Segment
|
|
Marine
Engine
Segment
|
|
Fitness
Segment
|
|
Bowling
& Billiards Segment
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
0.6
|
|
$
|
3.0
|
|
$
|
—
|
|
$
|
0.9
|
|
$
|
—
|
|
$
|
4.5
|
|
Asset
write-downs
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
Other
|
|
|
0.3
|
|
|
2.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.6
|
|
Total
|
|
|
1.4
|
|
|
5.3
|
|
|
—
|
|
|
0.9
|
|
|
—
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
1.5
|
|
|
3.2
|
|
|
—
|
|
|
0.5
|
|
|
0.7
|
|
|
5.9
|
|
Asset
write-downs
|
|
|
0.4
|
|
|
0.9
|
|
|
—
|
|
|
1.3
|
|
|
—
|
|
|
2.6
|
|
Other
|
|
|
0.9
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.0
|
|
Total
|
|
|
2.8
|
|
|
4.2
|
|
|
—
|
|
|
1.8
|
|
|
0.7
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
write-downs
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
restructuring charges
|
|
$
|
4.2
|
|
$
|
9.5
|
|
$
|
—
|
|
$
|
4.5
|
|
$
|
0.7
|
|
$
|
18.9
|
|
The
Company anticipates that it will incur total costs of approximately $48 million
under these initiatives, which will be completed in 2008. The remaining $7
million of restructuring costs under these initiatives are all expected to occur
in the Boat segment during 2008.
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Note
4 – 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 4.2 million
shares in 2007 compared with 2006, primarily due to the share repurchase program
(as discussed in
Note 19 –
Share Repurchase Program
). The decrease was partially offset by shares
issued upon the exercise of employee stock options. Average basic
shares decreased by 3.6 million in 2006 compared with 2005, primarily due to the
share repurchase program and partially offset by shares issued upon the exercise
of employee stock options.
Basic and
diluted earnings per share for the years ended December 31, 2007, 2006 and 2005
are calculated as follows:
(in
millions, except per share data)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$
|
79.6
|
|
$
|
263.2
|
|
$
|
371.1
|
|
Net
earnings (loss) from discontinued operations,
net
of tax
|
|
|
32.0
|
|
|
(129.3
|
)
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
111.6
|
|
$
|
133.9
|
|
$
|
385.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares – basic
|
|
|
89.8
|
|
|
94.0
|
|
|
97.6
|
|
Dilutive
effect of common stock equivalents
|
|
|
0.4
|
|
|
0.7
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares – diluted
|
|
|
90.2
|
|
|
94.7
|
|
|
98.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.88
|
|
$
|
2.80
|
|
$
|
3.80
|
|
Discontinued
operations
|
|
|
0.36
|
|
|
(1.38
|
)
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
1.24
|
|
$
|
1.42
|
|
$
|
3.95
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.88
|
|
$
|
2.78
|
|
$
|
3.76
|
|
Discontinued
operations
|
|
|
0.36
|
|
|
(1.37
|
)
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
1.24
|
|
$
|
1.41
|
|
$
|
3.90
|
|
As of
December 31, 2007, there were 4.2 million options outstanding, of which 2.4
million were exercisable. As of December 31, 2007, 2006 and 2005,
there were 2.9 million, 2.0 million and 0.8 million, respectively, of common
stock options outstanding excluded from the computation of diluted earnings per
share as the exercise price of the options was greater than the average market
price of the Company’s shares for the period then ended.
Note
5 – Segment Information
Brunswick
is a manufacturer and marketer of leading consumer brands, and operates in four
reportable segments: Boat, Marine Engine, Fitness and Bowling &
Billiards. The Company’s segments are defined by management reporting
structure and operating activities.
The Boat
segment designs, manufactures and markets fiberglass pleasure boats,
high-performance boats, offshore fishing boats and aluminum fishing, deck and
pontoon boats, which are sold primarily through dealers. The segment also owns
and operates marine parts and accessories distribution and manufacturing
businesses. The Boat segment’s products are manufactured primarily in the United
States. Sales to the segment’s largest boat dealer, MarineMax, which has
multiple locations, comprised approximately 21 percent of Boat segment sales in
2007, approximately 26 percent in 2006 and approximately 18 percent in
2005.
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
The
Marine Engine segment manufactures and markets a full range of sterndrive
engines, inboard engines, outboard engines, water jet propulsion systems, and
parts and accessories, which are principally sold directly to boat builders,
including Brunswick’s Boat segment, or through marine retail dealers worldwide.
Mercury Marine also manufactures and distributes boats in certain markets
outside the United States. The Company’s engine manufacturing plants are located
primarily in the United States, China and Japan, with sales primarily to United
States, European and Asian markets.
The
Fitness segment designs, manufactures and markets fitness equipment, including
treadmills, total body cross-trainers, stair climbers, stationary bikes and
strength-training equipment. These products are manufactured primarily in the
United States or sourced from international locations. Fitness equipment is sold
primarily in North America, Europe and Asia to health clubs, military,
government, corporate and university facilities, and to consumers through
specialty retail shops.
The
Bowling & Billiards segment designs, manufactures and markets bowling
capital equipment and associated parts and supplies, including lanes, automatic
pinsetters and scorers; bowling balls and other accessories; billiards, Air
Hockey and foosball tables and accessories; and operates bowling centers.
Products are manufactured or sourced from domestic and international locations.
Bowling products and commercial billiards, Air Hockey and foosball tables are
sold through a direct sales force or distributors in the United States and
through distributors in non-U.S. markets, primarily Europe and Asia. Consumer
billiards equipment is predominantly sold in the United States and distributed
primarily through dealers.
As
discussed in
Note 2 –
Discontinued Operations
,
during the second
quarter of 2006, Brunswick began reporting the majority of its BNT businesses as
discontinued operations. These businesses were previously reported in
the Marine Engine segment. Segment results have been restated for all
periods presented to reflect the change in Brunswick’s reported
segments. Additionally, the BNT businesses that are being retained
are now reported as part of the Boat, Marine Engine and Fitness segments,
consistent with the manner in which Brunswick’s management views these
businesses.
The
Company evaluates performance based on business segment operating earnings.
Operating earnings of segments do not include the expenses of corporate
administration, earnings from equity affiliates, other expenses and income of a
non-operating nature, interest expense and income or provisions for income
taxes.
Corporate/Other
results include items such as corporate staff and overhead costs as well as the
financial results of the Company’s joint venture, Brunswick Acceptance Company,
LLC (BAC), which is discussed in further detail in
Note 9 – Financial
Services
. Corporate/Other assets consist primarily of cash and
marketable securities, prepaid income taxes and investments in unconsolidated
affiliates. Marine eliminations are eliminations between the Marine
Engine and Boat segments for sales transactions consummated at established arm’s
length transfer prices.
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Information as to the
operations of Brunswick’s operating segments is set forth below:
Operating
Segments
|
|
Net
Sales
|
|
|
Operating
Earnings
|
|
Total
Assets
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$
|
2,690.9
|
|
$
|
2,864.4
|
|
$
|
2,783.4
|
|
|
$
|
(81.4
|
)
|
$
|
135.6
|
|
$
|
192.5
|
|
$
|
1,515.6
|
|
$
|
1,540.4
|
|
Marine
Engine
|
|
|
2,357.5
|
|
|
2,271.3
|
|
|
2,300.6
|
|
|
|
183.7
|
|
|
193.8
|
|
|
250.5
|
|
|
959.1
|
|
|
894.8
|
|
Marine
eliminations
|
|
|
(477.6
|
)
|
|
(521.8
|
)
|
|
(491.6
|
)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
Marine
|
|
|
4,570.8
|
|
|
4,613.9
|
|
|
4,592.4
|
|
|
|
102.3
|
|
|
329.4
|
|
|
443.0
|
|
|
2,474.7
|
|
|
2,435.2
|
|
Fitness
|
|
|
653.7
|
|
|
593.1
|
|
|
551.4
|
|
|
|
59.7
|
|
|
57.8
|
|
|
56.1
|
|
|
695.4
|
|
|
693.1
|
|
Bowling
& Billiards
|
|
|
446.9
|
|
|
458.3
|
|
|
464.5
|
|
|
|
16.5
|
|
|
22.1
|
|
|
37.2
|
|
|
409.2
|
|
|
392.2
|
|
Eliminations
|
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(1.4
|
)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate/Other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(71.3
|
)
|
|
(68.1
|
)
|
|
(67.6
|
)
|
|
786.3
|
|
|
791.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,671.2
|
|
$
|
5,665.0
|
|
$
|
5,606.9
|
|
|
$
|
107.2
|
|
$
|
341.2
|
|
$
|
468.7
|
|
$
|
4,365.6
|
|
$
|
4,312.0
|
|
|
|
Depreciation
|
|
Amortization
|
|
(
in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$
|
60.4
|
|
$
|
52.1
|
|
$
|
50.2
|
|
$
|
11.2
|
|
$
|
11.0
|
|
$
|
8.8
|
|
Marine
Engine
|
|
|
66.5
|
|
|
63.4
|
|
|
58.9
|
|
|
0.6
|
|
|
2.0
|
|
|
0.6
|
|
Fitness
|
|
|
10.0
|
|
|
10.8
|
|
|
11.9
|
|
|
0.3
|
|
|
0.3
|
|
|
0.2
|
|
Bowling
& Billiards
|
|
|
24.0
|
|
|
21.8
|
|
|
20.5
|
|
|
2.7
|
|
|
0.9
|
|
|
0.9
|
|
Corporate/Other
|
|
|
4.4
|
|
|
5.0
|
|
|
4.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
165.3
|
|
$
|
153.1
|
|
$
|
145.8
|
|
$
|
14.8
|
|
$
|
14.2
|
|
$
|
10.5
|
|
|
|
|
|
|
|
|
|
Research
& Development
|
|
|
|
Capital
Expenditures
|
|
Expense
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$
|
94.9
|
|
$
|
75.8
|
|
$
|
74.7
|
|
$
|
39.8
|
|
$
|
38.0
|
|
$
|
36.1
|
|
Marine
Engine
|
|
|
54.8
|
|
|
72.5
|
|
|
91.5
|
|
|
68.1
|
|
|
70.3
|
|
|
67.3
|
|
Fitness
|
|
|
11.8
|
|
|
11.0
|
|
|
11.2
|
|
|
21.6
|
|
|
18.4
|
|
|
14.2
|
|
Bowling
& Billiards
|
|
|
41.6
|
|
|
43.7
|
|
|
36.8
|
|
|
5.0
|
|
|
5.5
|
|
|
5.9
|
|
Corporate/Other
|
|
|
4.6
|
|
|
2.1
|
|
|
9.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
207.7
|
|
$
|
205.1
|
|
$
|
223.8
|
|
$
|
134.5
|
|
$
|
132.2
|
|
$
|
123.5
|
|
Geographic
Segments
|
|
Net
Sales
|
|
Long-Lived
Assets
|
|
(
in
millions
)
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
3,654.8
|
|
$
|
3,862.6
|
|
$
|
3,846.6
|
|
$
|
1,002.3
|
|
$
|
1,016.9
|
|
International
|
|
|
2,016.4
|
|
|
1,802.4
|
|
|
1,760.3
|
|
|
139.1
|
|
|
134.3
|
|
Corporate/Other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
185.3
|
|
|
201.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,671.2
|
|
$
|
5,665.0
|
|
$
|
5,606.9
|
|
$
|
1,326.7
|
|
$
|
1,352.9
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Note
6 – Acquisitions
All
acquisitions are accounted for under the purchase method and in accordance with
SFAS No. 141, “Business Combinations.”
In 2007,
consideration paid for acquisitions, net of cash acquired, and other
consideration provided was as follows:
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
|
Name/Description
|
|
Net
Cash
Consideration
(A)
|
|
Other
Consideration
|
|
Total
Consideration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/04/07
|
|
|
Marine
Innovations Warranty Corporation
|
|
$
|
1.5
|
|
$
|
–
|
|
$
|
1.5
|
|
8/24/07
|
|
|
Rayglass
Sales & Marketing Limited (51 percent)
|
|
|
4.6
|
|
|
–
|
|
|
4.6
|
|
Various
|
|
|
Miscellaneous
|
|
|
0.1
|
|
|
0.5
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6.2
|
|
$
|
0.5
|
|
$
|
6.7
|
|
(A)
|
Net
cash consideration is subject to subsequent changes resulting from final
purchase agreement adjustments.
|
The
Company made an additional payment of $1.5 million for the April 1, 2004,
acquisition of Marine Innovations Warranty Corporation (Marine Innovations), an
administrator of extended warranty contracts for the marine
industry. This was the final payment required under the purchase
agreement as Marine Innovations fulfilled earnings targets. The
post-acquisition results of Marine Innovations are included in the Boat
segment.
Brunswick
purchased a 49 percent equity interest in Rayglass Sales & Marketing Limited
(Rayglass), a manufacturer of boats and marine equipment located in New Zealand,
on July 15, 2003, for $5.5 million. On August 24, 2007, the Company exercised
its option to purchase the remaining 51 percent interest in the New Zealand
company for $4.6 million. The acquisition expands the global manufacturing
footprint of the marine operations and develops additional international sales
opportunities. The post-acquisition results of Rayglass are included in the
Marine Engine segment.
These
acquisitions were not and would not have been material to Brunswick’s net sales,
results of operations or total assets in the years ended December 31, 2007 and
2006. Accordingly, Brunswick’s consolidated results from operations do not
differ materially from historical performance as a result of these acquisitions,
and therefore, pro forma results are not presented.
In 2006,
consideration paid for acquisitions, net of cash acquired, was as
follows:
(in
millions)
|
|
|
|
|
|
|
Date
|
|
|
Name/Description
|
|
Net
Cash
Consideration
(A)
|
|
|
|
|
|
|
|
|
2/16/06
|
|
|
Cabo
Yachts, Inc.
|
|
$
|
60.6
|
|
3/24/06
|
|
|
Marine
Innovations Warranty Corporation
|
|
|
2.3
|
|
4/26/06
|
|
|
Diversified
Marine Products, L.P.
|
|
|
14.2
|
|
9/20/06
|
|
|
Protokon
LLC (13.3 percent)
|
|
|
5.6
|
|
10/19/06
|
|
|
Blue
Water Dealer Services, Inc.
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
86.2
|
|
|
|
|
|
|
|
|
|
(A)
|
Net
cash consideration is subject to subsequent changes resulting from final
purchase agreement adjustments.
|
Brunswick
acquired certain assets of Cabo Yachts, Inc. (Cabo) for $60.6
million. Cabo manufactures offshore sportfishing boats ranging from
31 to 52 feet. The purchase of Cabo complements Brunswick’s previous
acquisitions of Hatteras Yachts, Inc. and Albemarle Boats, Inc. (Albemarle),
discussed below, and allows the Company to offer a full range of sportfishing
convertibles and motoryachts from 24 to 100 feet. The post-acquisition results
of Cabo are included in the Boat segment.
The
Company made an additional payment of $2.3 million for the April 1, 2004,
acquisition of Marine Innovations. This payment was required under
the purchase agreement as Marine Innovations fulfilled earnings targets. The
post-acquisition results of Marine Innovations are included in the Boat
segment.
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
On April
26, 2006, Brunswick acquired the outstanding stock of Diversified Marine
Products, L.P. (Diversified) for $14.2 million. Diversified is a leading
wholesale distributor of marine parts and accessories headquartered in Los
Angeles, California. The acquisition of Diversified complements
Brunswick’s previous acquisitions of Benrock, Inc. (Benrock), Land ‘N’ Sea
Corporation and Kellogg Marine, Inc. (Kellogg) and allows Brunswick to provide
same- or next-day delivery of marine parts and accessories nationwide by
expanding its parts and accessories business to the West Coast of the United
States. The post-acquisition results of Diversified are included in
the Boat Segment.
On
September 20, 2006, the Company acquired an additional 13.3 percent of the
outstanding stock of Protokon LLC (Protokon), a Hungarian equipment
manufacturer, for $5.6 million. Brunswick previously purchased 80
percent of the outstanding stock of Protokon in 2003 and has the option to
acquire the remaining 6.7 percent interest in Protokon under certain
circumstances. The acquisition of Protokon has allowed
Brunswick to manufacture fitness equipment closer to the European marketplace,
thereby reducing freight costs and offering better service to fitness customers
in Europe. The post-acquisition results of Protokon are included in
the Fitness Segment.
On
October 19, 2006, Brunswick acquired the outstanding stock of Blue Water Dealer
Services, Inc. and its affiliates (Blue Water) for $3.5 million. Blue
Water, headquartered in Wilmington, North Carolina, is a provider of retail
financial services to marine dealers. The acquisition of Blue Water
allows Brunswick to offer a more complete line of financial services to its boat
and marine engine dealers and their customers. The post-acquisition
results of Blue Water are included in the Boat Segment.
These
acquisitions were not and would not have been material to Brunswick’s net sales,
results of operations or total assets in the years ended December 31, 2006 and
2005. Accordingly, Brunswick’s consolidated results from operations
do not differ materially from historical performance as a result of these
acquisitions, and therefore, pro forma results are not presented.
In 2005,
consideration paid for acquisitions, net of debt and cash acquired, was as
follows:
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
|
Name/Description
|
|
Net
Cash
Consideration
(A)
|
|
Other
Consideration
|
|
Total
Consideration
|
|
|
|
|
|
|
|
|
|
|
|
|
2/07/05
|
|
|
Benrock,
Inc.
|
|
$
|
4.2
|
|
$
|
–
|
|
$
|
4.2
|
|
2/28/05
|
|
|
Albemarle
Boats, Inc.
|
|
|
9.2
|
|
|
–
|
|
|
9.2
|
|
4/21/05
|
|
|
Sea
Pro, Sea Boss and Palmetto boats
|
|
|
1.0
|
|
|
–
|
|
|
1.0
|
|
5/27/05
|
|
|
Triton
Boat Company, L.P.
|
|
|
58.4
|
|
|
4.4
|
|
|
62.8
|
|
6/20/05
|
|
|
Supra-Industria
Textil, Lda. (51 percent)
|
|
|
7.8
|
|
|
0.9
|
|
|
8.7
|
|
6/27/05
|
|
|
Marine
Innovations Warranty Corporation
|
|
|
2.3
|
|
|
–
|
|
|
2.3
|
|
7/07/05
|
|
|
Kellogg
Marine, Inc.
|
|
|
41.7
|
|
|
–
|
|
|
41.7
|
|
9/16/05
|
|
|
Harris
Kayot Marine, LLC
|
|
|
4.8
|
|
|
–
|
|
|
4.8
|
|
Various
|
|
|
Miscellaneous
|
|
|
0.9
|
|
|
1.0
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
130.3
|
|
$
|
6.3
|
|
$
|
136.6
|
|
(A)
|
Net
cash consideration is subject to subsequent changes resulting from final
purchase agreement adjustments.
|
Brunswick
acquired the receivables, inventory, property and equipment of Benrock for $4.2
million. Benrock is a distributor of marine parts and expands
Brunswick’s geographic coverage of its parts and accessories businesses
distribution network serving the central and southern United States markets. The
post-acquisition results of Benrock are included in the Boat
segment.
Brunswick
acquired the outstanding stock of Albemarle for $9.2
million. Albemarle produces offshore sportfishing boats ranging in
length from 24 to 41 feet. The acquisition of Albemarle provides
Brunswick with the opportunity to offer a more complete range of offshore
sportfishing boats and complements the sportfishing convertibles offered by
Hatteras, whose products start at 50 feet. The post-acquisition
results of Albemarle are included in the Boat segment.
The
Company made a final payment of $1.0 million for the December 31, 2004,
acquisition of Sea Pro, Sea Boss and Palmetto boats (Sea Pro). This
payment was based on finalization of the closing balance sheet. The
post-acquisition results of Sea Pro are included in the Boat
segment.
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Brunswick
acquired the outstanding stock of Triton Boat Company, L.P. (Triton), a
manufacturer of fiberglass bass and freshwater boats, and aluminum fishing boats
ranging in length from 12 to 35 feet. The Company funded this acquisition
through cash consideration of $58.4 million and the assumption of $4.4 million
of debt. The acquisition of Triton adds freshwater bass boats to
Brunswick’s product lineup, as well as a broader range of saltwater and aluminum
fishing boats. The post-acquisition results of Triton are included in
the Boat segment.
The
Company exercised its contractual right to acquire its joint venture partner’s
51 percent interest in Supra-Industria Textil, Lda. (Valiant), a Portugal-based
manufacturer of the Valiant brand of rigid inflatable boats, for $7.8 million
and the assumption of debt. Brunswick is now the sole owner of
Valiant. The post-acquisition results of Valiant are included in the Marine
Engine segment.
The
Company made an additional payment of $2.3 million for the April 1, 2004,
acquisition of Marine Innovations. This payment was required under
the purchase agreement as Marine Innovations fulfilled earnings
targets. The post-acquisition results of Marine Innovations are
included in the Boat segment.
Brunswick
acquired the net assets of Kellogg for $41.7 million. Kellogg is a
leading distributor of marine parts and accessories headquartered in Old Lyme,
Connecticut. The acquisition of Kellogg complements Brunswick’s
previous acquisitions of Benrock and Land ‘N’ Sea and provides a distribution
hub in the northeastern United States. The post-acquisition results
of Kellogg are included in the Boat segment.
Brunswick
acquired the outstanding stock of Harris Kayot Marine, LLC (Harris Kayot), a
builder of pontoon boats, fiberglass runabouts and deck boats ranging in length
from 20 to 26 feet, for $4.8 million. This acquisition advances
Brunswick’s position in the pontoon market and complements the Company’s
existing boat portfolio with premium runabout and deck boat product
lines. The post-acquisition results of Harris Kayot are included in
the Boat segment.
These
acquisitions were not and would not have been material to Brunswick’s net sales,
results of operations or total assets in the years ended December 31,
2005. Accordingly, Brunswick’s consolidated results from operations
do not differ materially from historical performance as a result of these
acquisitions, and therefore, pro forma results are not presented.
Purchase
price allocations for acquisitions are subject to adjustment, pending final
third-party valuations, up to one year from the date of acquisition. Any
adjustments are not expected to be material to Brunswick’s Consolidated Balance
Sheets. See
Note 1 –
Significant Accounting Policies
and
Note 7 – Goodwill and Other
Intangible Assets
for further detail regarding the Company’s accounting
for goodwill and other intangible assets.
The
following table shows the gross amount of goodwill and intangible assets
recorded as of December 31 for the acquisitions completed in 2007, 2006 and
2005:
|
|
|
|
Weighted
Average
|
|
|
|
|
Useful
Life
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
8.1
|
|
$
|
32.9
|
|
$
|
41.7
|
|
|
|
|
|
Trademarks/trade
names
|
|
$
|
—
|
|
$
|
17.8
|
|
$
|
26.9
|
|
|
|
|
|
Amortizable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
—
|
|
$
|
9.1
|
|
$
|
19.9
|
|
|
N/A
|
|
|
10
years
|
Other
|
|
$
|
—
|
|
$
|
3.2
|
|
$
|
5.7
|
|
|
N/A
|
|
|
8
years
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Note
7 – Goodwill and Other Intangible Assets
During
2007, 2006 and 2005, the Company tested its goodwill balances for impairment and
no adjustments were recorded as a result of those reviews.
A summary
of changes in the Company’s goodwill during the period ended December 31, 2007,
by segment is as follows:
|
|
December
31,
|
|
|
|
|
|
December
31,
|
|
(in
millions)
|
|
2006
|
|
Acquisitions
|
|
Adjustments
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$
|
362.0
|
|
$
|
—
|
|
$
|
4.6
|
|
$
|
366.6
|
|
Marine
Engine
|
|
|
14.7
|
|
|
7.8
|
|
|
0.9
|
|
|
23.4
|
|
Fitness
|
|
|
272.3
|
|
|
—
|
|
|
1.7
|
|
|
274.0
|
|
Bowling
& Billiards
|
|
|
14.6
|
|
|
0.3
|
|
|
—
|
|
|
14.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
663.6
|
|
$
|
8.1
|
|
$
|
7.2
|
|
$
|
678.9
|
|
A summary
of changes in the Company’s goodwill during the period ended December 31, 2006,
by segment is as follows:
|
|
December
31,
|
|
|
|
|
|
December
31,
|
|
|
|
2005
|
|
Acquisitions
|
|
Adjustments
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Boat
|
|
$
|
317.0
|
|
$
|
28.8
|
|
$
|
16.2
|
|
$
|
362.0
|
|
Marine
Engine
|
|
|
19.9
|
|
|
—
|
|
|
(5.2
|
)
|
|
14.7
|
|
Fitness
|
|
|
265.9
|
|
|
3.9
|
|
|
2.5
|
|
|
272.3
|
|
Bowling
& Billiards
|
|
|
14.5
|
|
|
—
|
|
|
0.1
|
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
617.3
|
|
$
|
32.7
|
|
$
|
13.6
|
|
$
|
663.6
|
|
Adjustments
in 2007 and 2006 primarily relate to the effect of foreign currency translation
and changes in the fair value of net assets subject to purchase accounting
adjustments, primarily arising from the Company’s acquisitions as described in
Note 6 –
Acquisitions
.
During
2007 and 2006, the Company tested its indefinite-lived intangible asset
balances, excluding goodwill, for impairment and, other than the impairment
charges described below, no adjustments were recorded as a result of those
reviews.
Aggregate
amortization expense for intangibles was $14.8 million, $14.2 million and $10.5
million for the years ended December 31, 2007, 2006 and 2005,
respectively. Estimated amortization expense for intangible assets is
$13.1 million for the year ending December 31, 2008, and $8.9 million per year
from 2009 through 2012.
Other
intangibles consist of the following:
|
|
December
31, 2007
|
|
December
31, 2006
|
|
|
|
Gross
|
|
Accumulated
|
|
Gross
|
|
Accumulated
|
|
(in
millions)
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
271.4
|
|
$
|
(211.9
|
)
|
$
|
271.6
|
|
$
|
(202.9
|
)
|
Other
|
|
|
40.7
|
|
|
(20.0
|
)
|
|
38.7
|
|
|
(15.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
312.1
|
|
$
|
(231.9
|
)
|
$
|
310.3
|
|
$
|
(218.6
|
)
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks/trade
names
|
|
$
|
182.7
|
|
$
|
(17.3
|
)
|
$
|
248.2
|
|
$
|
(17.3
|
)
|
Amortized
intangible assets – Other includes patents, non-compete agreements and other
intangible assets. Gross amounts and related accumulated amortization
amounts include adjustments related 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 Company’s acquisitions as
described in
Note 6 –
Acquisitions.
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
As noted
in
Note 1 – Significant
Accounting Policies
, during the third quarter of 2007, Brunswick
estimated the fair value of certain outboard boat trade names with impairment
indicators by performing a discounted cash flow analysis based on a
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 $41.5 million, after-tax, impairment charge, or $66.4 million, pre-tax, to the
Boat segment, representing the excess of the carrying cost of the
indefinite-lived intangible assets over the calculated fair value. There were no
impairment adjustments made in 2006.
Note
8 – Investments
The
Company has certain unconsolidated international and domestic affiliates that
are accounted for using the equity method. Refer to
Note 9 – Financial Services
for more details on the Company’s Brunswick Acceptance Company, LLC joint
venture. The Company contributed $0.2 million and $4.0 million to
other existing joint ventures in 2007 and 2006, respectively.
Brunswick
received dividends from its unconsolidated affiliates of $11.6 million, $6.8
million and $12.3 million for the years ended December 31, 2007, 2006 and 2005,
respectively.
The
Company’s sales to and purchases from its investments, along with the
corresponding receivables and payables, were not material to the Company’s
overall results of operations for the years ended December 31, 2007, 2006 and
2005, respectively, and its financial position as of December 31, 2007 and
2006.
On
February 23, 2005, Brunswick sold its investment of 1,861,200 shares in
MarineMax, its largest boat dealer, for $56.8 million, net of $4.1 million of
selling costs, which included $1.1 million of accrued expenses. The sale was
made pursuant to a registered public offering by MarineMax. As a result of this
sale, the Company recorded an after-tax gain of $31.5 million after utilizing
previously unrecognized capital loss carryforwards.
Note
9 – Financial Services
A Company
subsidiary, Brunswick Financial Services Corporation (BFS), owns 49 percent of a
joint venture, Brunswick Acceptance Company, LLC (BAC). CDF Ventures, LLC
(CDFV), a subsidiary of GE Capital Corporation (GECC) owns the remaining 51
percent. Under the terms of the joint venture agreement, BAC provides
secured wholesale floor-plan financing to Brunswick’s boat and engine dealers.
BAC also purchases and services a portion of Mercury Marine’s domestic accounts
receivable relating to its boat builder and dealer customers.
BFS’s
contributed equity is adjusted monthly to maintain a 49 percent equity interest
in accordance with the capital provisions of the joint venture
agreement. BFS’s investment in BAC is accounted for by the Company
under the equity method and is recorded as a component of Investments in its
Consolidated Balance Sheets. The Company funds its investment in BAC through
cash contributions and reinvested earnings. In 2007, the Company
received a net distribution of $3.6 million compared with a net distribution of
$1.6 million in 2006 and a net contribution of $16.3 million in
2005. The Company records BFS’s share of income or loss in BAC based
on its ownership percentage in the joint venture in Equity earnings in its
Consolidated Statements of Income.
BAC is
funded in part through a loan from GE Commercial Distribution Finance
Corporation and a securitization facility arranged by GECC, and in part by a
cash equity investment from both partners. BFS’s total investment in BAC at
December 31, 2007 and 2006 was $47.0 million and $50.6 million,
respectively. BFS’s exposure to losses associated with BAC financing
arrangements is limited to its funded equity in BAC.
BFS
recorded income related to the operations of BAC of $12.7 million, $13.2 million
and $9.7 million for the years ended December 31, 2007, 2006 and 2005,
respectively. These amounts exclude the discount expense on the sale
of Mercury Marine’s accounts receivable to the joint venture noted
below.
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Accounts
receivable totaling $887.3 million, $832.0 million and $913.3 million were sold
to BAC in 2007, 2006 and 2005 respectively. Discounts of $8.0
million, $7.6 million and $7.0 million for the years ended December 31, 2007,
2006 and 2005, respectively, have been recorded as an expense in Other expense,
net, in the Consolidated Statements of Income. The outstanding
balance of receivables sold to BAC was $93.1 million as of December 31, 2007, up
from $80.0 million as of December 31, 2006. Pursuant to the joint
venture agreement, BAC reimbursed Mercury Marine $2.7 million, $2.2 million and
$2.6 million in 2007, 2006 and 2005, respectively, for the related credit,
collection and administrative costs incurred in connection with the servicing of
such receivables.
As of
December 31, 2007 and 2006, the Company had a retained interest in $46.4 million
and $31.5 million of the total outstanding accounts receivable sold to BAC,
respectively, as a result of recourse provisions. The Company’s
maximum exposure as of December 31, 2007 and 2006, related to these amounts was
$28.9 million and $16.9 million, respectively. In accordance
with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities,” (SFAS 140), the Company treats the
sale of receivables in which the Company retains an interest as a secured
obligation. Accordingly, the amount of receivables subject to
recourse was recorded in Accounts and notes receivable with an offsetting
amount recorded in Accrued expenses in the Consolidated Balance
Sheets. These balances are included in the amounts in
Note 11 – Commitments and
Contingencies
.
Additionally,
Brunswick's marine dealers can offer extended product warranties to their retail
customers through Brunswick Product Protection Corporation. In
October 2006, Brunswick acquired Blue Water Dealer Services, Inc. and its
affiliates, a provider of retail financial services to the marine industry, to
allow Brunswick to offer a more complete line of financial services to its boat
and marine engine dealers and their customers. See
Note 6 – Acquisitions
for
further details.
Note
10 – Income Taxes
The
sources of earnings before income taxes are as follows:
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
64.7
|
|
$
|
285.6
|
|
$
|
449.6
|
|
Foreign
|
|
|
28.0
|
|
|
24.1
|
|
|
36.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before income taxes
|
|
$
|
92.7
|
|
$
|
309.7
|
|
$
|
485.9
|
|
The
income tax provision consisted of the following:
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Current
tax expense (benefit):
|
|
|
|
|
|
|
|
U.S.
Federal
|
|
$
|
25.7
|
|
$
|
66.3
|
|
$
|
99.9
|
|
State
and local
|
|
|
(1.8
|
)
|
|
8.8
|
|
|
9.0
|
|
Foreign
|
|
|
33.6
|
|
|
1.4
|
|
|
14.3
|
|
Total
current
|
|
|
57.5
|
|
|
76.5
|
|
|
123.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
U.S.
Federal
|
|
|
(29.5
|
)
|
|
(28.6
|
)
|
|
(7.5
|
)
|
State
and local
|
|
|
(3.7
|
)
|
|
(4.3
|
)
|
|
0.1
|
|
Foreign
|
|
|
(11.2
|
)
|
|
2.9
|
|
|
(1.0
|
)
|
Total
deferred
|
|
|
(44.4
|
)
|
|
(30.0
|
)
|
|
(8.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
provision
|
|
$
|
13.1
|
|
$
|
46.5
|
|
$
|
114.8
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Temporary
differences and carryforwards giving rise to deferred tax assets and liabilities
at December 31, 2007 and 2006, were as follows:
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Current
deferred tax assets:
|
|
|
|
|
|
Product
warranties
|
|
$
|
53.0
|
|
$
|
65.7
|
|
Sales
incentives and discounts
|
|
|
43.8
|
|
|
44.4
|
|
Litigation
and environmental reserves
|
|
|
21.5
|
|
|
22.4
|
|
Insurance
reserves
|
|
|
20.2
|
|
|
19.4
|
|
Bad
debt and other receivable reserves
|
|
|
12.7
|
|
|
11.3
|
|
Stock
plans
|
|
|
12.6
|
|
|
10.4
|
|
Loss
carryforwards
|
|
|
16.3
|
|
|
1.9
|
|
Other
|
|
|
72.1
|
|
|
76.2
|
|
Valuation
allowance
|
|
|
(2.3
|
)
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
Total
current deferred tax assets
|
|
$
|
249.9
|
|
$
|
249.9
|
|
|
|
|
|
|
|
|
|
Non-current
deferred tax liabilities (assets):
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
139.1
|
|
$
|
160.4
|
|
Pension
|
|
|
42.8
|
|
|
46.0
|
|
Other
|
|
|
37.8
|
|
|
96.0
|
|
Non-current
deferred tax liabilities
|
|
|
219.7
|
|
|
302.4
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
(64.9
|
)
|
|
(84.6
|
)
|
Loss
carryforwards
|
|
|
(54.6
|
)
|
|
(45.2
|
)
|
Postretirement
and postemployment benefits
|
|
|
(45.9
|
)
|
|
(45.1
|
)
|
Deferred
compensation
|
|
|
(31.3
|
)
|
|
(32.9
|
)
|
Other
|
|
|
(24.9
|
)
|
|
(16.5
|
)
|
Valuation
allowance
|
|
|
14.2
|
|
|
8.2
|
|
Non-current
deferred tax assets
|
|
|
(207.4
|
)
|
|
(216.1
|
)
|
|
|
|
|
|
|
|
|
Total
non-current net deferred tax liabilities
|
|
$
|
12.3
|
|
$
|
86.3
|
|
At
December 31, 2007 Loss carryforwards totaling $70.9 million were available to
reduce future tax liabilities. This deferred tax asset was comprised
of $34.3 million of the tax benefit of state net operating loss (NOL)
carryforwards, $19.3 million of the tax benefit of foreign NOL carryforwards and
$17.3 million of the tax benefit of unused capital losses. NOL
carryforwards of $39.2 million expire at various intervals between the years
2008 and 2026, while the remainder have an unlimited life. At December 31, 2007,
the valuation allowance totaling $16.5 million was comprised of $6.1 million for
state NOL carryforwards, $7.1 million for foreign NOL carryforwards and $3.3
million for unused state capital losses.
The
Company does not believe other valuation allowances are necessary, because
deductible temporary differences will be utilized primarily by carryback to
prior years’ taxable income, or as charges against reversals of future taxable
temporary differences. Based upon prior earnings history, the Company expects
that future taxable income will be sufficient to utilize the remaining
deductible temporary differences.
The
Company has historically provided deferred taxes under APB No. 23, “Accounting
for Income Taxes – Special Areas,” (APB 23) for the presumed ultimate
repatriation to the United States of earnings from all non-U.S. subsidiaries and
unconsolidated affiliates. The indefinite reversal criterion of APB
23 allows the Company to overcome that presumption to the extent the earnings
are indefinitely reinvested outside the United States.
Through
July 2, 2005, Brunswick provided deferred taxes for the undistributed net
earnings for all of its foreign subsidiaries and unconsolidated affiliates, as
such earnings may have been repatriated to the United States in future
years. As of July 3, 2005, the Company determined that approximately
$37 million of certain foreign subsidiaries’ undistributed net earnings from
continuing operations would now be indefinitely reinvested in operations outside
the United States. These earnings will provide Brunswick with the
opportunity to continue to expand its global manufacturing footprint, fund
future growth in foreign locations and shift Brunswick’s acquisition focus to
Europe and Asia. The Company’s current intentions meet the indefinite
reversal criterion of APB 23. As a result of the APB 23 change in
assertion and related refinements in its tax calculations, the Company reduced
its deferred tax liabilities related to undistributed foreign
earnings.
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
As of
January 1, 2007, the Company determined that $25.8 million of current
undistributed net earnings, as well as the future net earnings, of certain
additional foreign subsidiaries will be permanently reinvested. As a
result of the additional APB 23 change in assertion, the Company reduced its
deferred tax liabilities related to undistributed foreign earnings by $2.0
million during the first quarter of 2007.
The
Company has undistributed earnings from continuing operations of foreign
subsidiaries of $89.2 million at December 31, 2007, for which deferred taxes
have not been provided. Such earnings are indefinitely reinvested in
the foreign subsidiaries. If such earnings were repatriated,
additional tax may result. The Company continues to provide deferred
taxes, as required, on the undistributed net earnings of foreign subsidiaries
and unconsolidated affiliates that are not indefinitely reinvested in operations
outside the United States.
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes,” (FIN 48) effective on January 1,
2007. As a result of the implementation of FIN 48, the Company
recognized an $8.7 million decrease in the net liability for unrecognized tax
benefits, which was accounted for as an increase to the January 1, 2007, balance
of retained earnings. As of January 1, 2007, the Company had $42.4 million of
gross unrecognized tax benefits, including interest. Of this amount,
$34.3 million represents the portion that, if recognized, would impact the
effective tax rate. The Company recognizes interest and penalties
related to unrecognized tax benefits in income tax expense. As of
January 1, 2007, the Company had $5.4 million accrued for the payment of
interest, and no amounts accrued for penalties.
The
following is a reconciliation of the total amounts of unrecognized tax benefits
excluding interest and penalties since the inception of FIN 48:
(in
millions)
|
|
2007
|
|
|
|
|
|
Balance
at January 1
|
|
$
|
37.0
|
|
Gross
increases – tax positions prior periods
|
|
|
4.5
|
|
Gross
decreases – tax positions prior periods
|
|
|
(0.7
|
)
|
Gross
increases – current period tax positions
|
|
|
2.6
|
|
Decreases
– settlements with taxing authorities
|
|
|
(0.3
|
)
|
Reductions
– lapse of statute of limitations
|
|
|
(4.4
|
)
|
Foreign
exchange
|
|
|
0.3
|
|
|
|
|
|
|
Balance
at December 31
|
|
$
|
39.0
|
|
As of
December 31, 2007, the Company had $44.4 million of gross unrecognized tax
benefits, including interest. Of this amount, $37.4 million
represents the portion that, if recognized, would impact the effective tax
rate. The Company recognizes interest and penalties related to
unrecognized tax benefits in income tax expense. As of December 31,
2007, the Company had $5.4 million accrued for the payment of interest, and no
amounts accrued for penalties.
The
Company believes that it is reasonably possible that the total amount of
unrecognized tax benefits as of December 31, 2007, will decrease by
approximately $1.2 million in 2008 as a result of expected settlements with
taxing authorities. Due to the various jurisdictions in which the
Company files tax returns and the uncertainty regarding the timing of the
settlement of tax audits, it is possible that there could be other significant
changes in the amount of unrecognized tax benefits in 2008, but the amount
cannot be estimated.
The Company is regularly
audited by federal, state and foreign tax authorities. In the fourth
quarter of 2006, the IRS completed its audit of the Company’s taxable years 2002
and 2003. As discussed in
Note 11
– Commitments and Contingencies
,
the Company and
the IRS reached settlements in 2005 for taxable years 1986 through 2001, and the
statute of limitations related to these taxable years expired on March 9,
2006.
The Company’s
taxable years 2004 through 2006 are currently open for IRS examination and the
IRS has begun its audit of 2004 and 2005
. Primarily as a
result of filing amended tax returns, which were generated by the closing of
federal income tax audits, the Company is still open to state and local tax
audits in major tax jurisdictions dating back to the 1999 taxable
year. With the exception of Germany, where the Company is currently
undergoing a tax audit for taxable years 1998 through 2001, the Company is no
longer subject to income tax examinations by any other major foreign tax
jurisdiction for years prior to 2001.
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
The
difference between the actual income tax provision and the tax provision
computed by applying the statutory Federal income tax rate to earnings before
taxes is attributable to the following:
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Income
tax provision at 35 percent
|
|
$
|
32.4
|
|
$
|
108.4
|
|
$
|
170.1
|
|
State
and local income taxes, net of Federal income tax effect
|
|
|
1.3
|
|
|
7.8
|
|
|
9.8
|
|
Deferred
tax reassessments
|
|
|
(12.7
|
)
|
|
—
|
|
|
—
|
|
Research
and development credit
|
|
|
(8.1
|
)
|
|
(8.5
|
)
|
|
(9.7
|
)
|
Change
in estimates related to prior years and prior
years’
amended tax return filings
|
|
|
3.8
|
|
|
(4.4
|
)
|
|
(15.0
|
)
|
Lower
taxes related to foreign income, net of credits
|
|
|
(2.9
|
)
|
|
(5.2
|
)
|
|
(5.7
|
)
|
Tax
rate changes
|
|
|
2.5
|
|
|
—
|
|
|
—
|
|
Domestic
production activities benefit
|
|
|
(2.4
|
)
|
|
(3.0
|
)
|
|
(3.7
|
)
|
Change
in APB No. 23 assertion
|
|
|
(2.0
|
)
|
|
—
|
|
|
(8.7
|
)
|
Tax
reserve reassessment
|
|
|
0.9
|
|
|
(40.2
|
)
|
|
(3.7
|
)
|
Extraterritorial
income benefit
|
|
|
—
|
|
|
(9.8
|
)
|
|
(12.2
|
)
|
Investment
sale capital loss utilization
|
|
|
—
|
|
|
—
|
|
|
(6.6
|
)
|
Other
|
|
|
0.3
|
|
|
1.4
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
income tax provision
|
|
$
|
13.1
|
|
$
|
46.5
|
|
$
|
114.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
14.1
|
%
|
|
15.0
|
%
|
|
23.6
|
%
|
In 2007,
the Company’s effective tax rate of 14.1 percent was lower than the statutory
rate primarily due to benefits from $12.7 million related to reassessments
of the deductibility of restructuring reserves and depreciation timing
differences; foreign earnings in tax jurisdictions with lower effective tax
rates; and a research and development tax credit. These benefits were partially
offset by $3.8 million of additional taxes related to changes in estimates
related to prior year’s filings.
In 2006,
the Company’s effective tax rate of 15.0 percent was lower than the statutory
rate primarily due to benefits from $40.2 million of tax reserve reassessments
of underlying exposures. Refer to
Note 11 – Commitments and
Contingencies
for further detail. In addition, the
extraterritorial income benefit, foreign earnings in tax jurisdictions with
lower effective tax rates and a research and development tax credit also
contributed to the reduced effective tax rate.
In 2005,
the Company’s effective tax rate of 23.6 percent was lower than the statutory
rate primarily as a result of $15.0 million attributed primarily to refinements
in the prior years’ extraterritorial income benefit included above in Change in
estimates related to the 2004 and prior years’ amended tax return filings; $12.2
million from the current year extraterritorial income benefit; $9.7 million from
a research and development credit; and $8.7 million from a change in the
assertion under APB No. 23 for certain foreign subsidiaries as discussed above.
Additionally, the Company’s 2005 tax rate benefited from a $6.6 million
utilization of previously unrecognized loss carryforwards incurred in connection
with the investment sale gain, as discussed in
Note 8 –
Investments
.
Income
tax provision (benefit) allocated to continuing operations and discontinued
operations for the years ended December 31 was as follows:
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
13.1
|
|
$
|
46.5
|
|
$
|
114.8
|
|
Discontinued
operations
|
|
|
(8.1
|
)
|
|
(9.6
|
)
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
tax provision
|
|
$
|
5.0
|
|
$
|
36.9
|
|
$
|
110.4
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Note
11 – Commitments and Contingencies
Financial
Commitments
The
Company has entered into guarantees of indebtedness of third parties, primarily
in connection with customer financing programs. Under these
arrangements, the Company has guaranteed customer obligations to the financial
institutions in the event of customer default, generally subject to a maximum
amount which is less than total obligations outstanding. The Company
has also guaranteed payments to third parties that have purchased customer
receivables from Brunswick and, in certain instances, has guaranteed secured
term financing of its customers. In most instances, upon repurchase
of the debt obligation, the Company receives rights to the collateral securing
the financing
.
The maximum
potential liability associated with these customer financing arrangements was
$106.2 million and $99.8 million as of December 31, 2007 and 2006,
respectively. Potential payments in connection with these customer
financing arrangements would likely extend over several years.
The
Company has also entered into arrangements with third-party lenders where it has
agreed, in the event of a default by the customer, to repurchase from the
third-party lender Brunswick products repossessed from the customer. These
arrangements are typically subject to a maximum repurchase
amount. The Company’s risk under these arrangements is mitigated by
the value of the products repurchased as part of the transaction.
The maximum amount of
collateral the Company could be required to purchase was $172.8 million and
$214.8 million as of December 31, 2007 and 2006, respectively.
In
accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others – An Interpretation of FASB Statements No. 5, 57, and 107
and Rescission of FASB Interpretation No. 34” (FIN 45), the Company has recorded
the fair market value of these guarantee and repurchase obligations as a
liability on the consolidated balance sheets based on historical experience and
current facts and circumstances. Historical cash requirements and
losses associated with these obligations have not been significant.
Financial
institutions have issued standby letters of credit and surety bonds
conditionally guaranteeing obligations on behalf of the Company totaling $70.1
million and $81.5 million as of December 31, 2007 and 2006, respectively,
including $70.1 million and $64.6 million for continuing operations,
respectively. These amounts are primarily comprised of standby letters of credit
and surety bonds issued in connection with the Company’s self-insured workers’
compensation program as required by its insurance companies and various state
agencies. The Company has recorded reserves to cover liabilities associated with
these programs. Under certain circumstances, such as an event of default under
the Company’s revolving credit facility, or, in the case of surety bonds, which
totaled $15.8 million and $17.7 million as of December 31, 2007 and 2006,
respectively, all related to continuing operations, a ratings downgrade below
investment grade, the Company could be required to post collateral to support
the outstanding letters of credit and surety bonds.
Product
Warranties
The
Company records a liability for product warranties at the time revenue is
recognized. The liability is estimated using historical warranty
experience, projected claim rates and expected costs per claim. The
Company adjusts its liability for specific warranty matters when they become
known and the exposure can be estimated. The Company’s warranty
reserves are affected by product failure rates and material usage and labor
costs incurred in correcting a product failure. If these estimated
costs differ from actual costs, a revision to the warranty reserve would be
required.
The
following activity related to product warranty liabilities from continuing
operations was recorded in Accrued expenses and Long-term liabilities — other at
December 31:
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
$
|
161.0
|
|
$
|
155.3
|
|
Payments
made
|
|
|
(119.5
|
)
|
|
(116.2
|
)
|
Provisions/additions
for contracts issued/sold
|
|
|
119.1
|
|
|
121.5
|
|
Aggregate
changes for preexisting warranties
|
|
|
3.3
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
Balance
at December 31
|
|
$
|
163.9
|
|
$
|
161.0
|
|
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Additionally,
marine engine customers may purchase a contract from the Company that extends
product protection beyond the standard product warranty period. For
certain extended warranty contracts in which the Company retains the warranty
obligation, a deferred liability is recorded based on the aggregate sales price
for contracts sold. The deferred liability is reduced and revenue is
recognized over the contract period as costs are expected to be
incurred. Deferred revenue associated with contracts sold by the
Company that extend product protection beyond the standard product warranty
period, not included in the table above, was $16.2 million and $21.2 million at
December 31, 2007 and 2006, respectively.
Legal
and Environmental
The
Company accrues for litigation exposure based upon its assessment, made in
consultation with counsel, of the likely range of exposure stemming from the
claim. In light of existing reserves, the Company’s litigation claims, when
finally resolved, will not, in the opinion of management, have a material
adverse effect on the Company’s consolidated financial statements. If current
estimates for the cost of resolving any claims are later determined to be
inadequate, results of operations could be adversely affected in the period in
which additional provisions are required.
Tax Case
.
In February 2003, the
United States Tax Court issued a ruling upholding the disallowance by the
Internal Revenue Service (IRS) of capital losses and other expenses for 1990 and
1991 related to two partnership investments entered into by the Company. In 2003
and 2004, the Company made payments to the IRS comprised of $33 million in taxes
due and $39 million of pre-tax interest (approximately $25 million after-tax) to
avoid future interest costs. Subsequently, the Company and the IRS
settled all issues involved in and related to this case. As a result,
the Company reversed $42.6 million of tax reserves in 2006, primarily related to
the reassessment of underlying exposures, received a refund of $12.9 million
from the IRS, and recorded an additional tax receivable of $4.1 million for
interest related to these tax years. Additionally, these tax years
will be subject to tax audits by various state jurisdictions to determine the
state tax effect of the IRS's audit adjustments.
Environmental Matters.
Brunswick 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
disposal 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 Brunswick as a waste generator under
Superfund legislation, which authorizes action regardless of fault, legality of
original disposition or ownership of a disposal site. Brunswick has established
reserves based on a range of cost estimates for all known claims.
The
environmental remediation and clean-up projects in which Brunswick is involved
have an aggregate estimated range of exposure of approximately $38.6 million to
$58.7 million as of December 31, 2007. At December 31, 2007 and 2006, Brunswick
had reserves for environmental liabilities of $48.0 million and $49.4 million,
respectively. There were environmental provisions of $0.7
million, $0.0 million
and $1.5 million for the years ended December 31, 2007, 2006 and 2005,
respectively.
Brunswick
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 or results of operations.
Asbestos Claims.
Brunswick’s subsidiary, Old Orchard Industrial Corp., is a defendant in
more than 8,000 lawsuits involving claims of asbestos exposure from products
manufactured by Vapor Corporation (Vapor), a former subsidiary that the Company
divested in 1990. Virtually all of the asbestos suits involve numerous other
defendants. The claims generally allege that the Company sold products that
contained components, such as gaskets, which included asbestos, and seek
monetary damages. Neither Brunswick nor Vapor is alleged to have manufactured
asbestos. Several thousand claims have been dismissed with no payment and no
claim has gone to jury verdict. In a few cases, claims have been filed against
other Brunswick entities, with a majority of these suits being either dismissed
or settled for nominal amounts. The Company does not believe that the resolution
of these lawsuits will have a material adverse effect on the Company’s
consolidated financial position or results of operations.
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Australia
Trade Practices
Investigation
.
In January 2005, Brunswick received a notice to furnish information and
documents to the Australian Competition and Consumer Commission (ACCC). A
subsequent notice was received in October of 2005. Following the
completion of its investigation in December 2006, the ACCC commenced proceedings
against a Brunswick subsidiary, Navman Australia Pty Limited, with respect to
its compliance with the Trade Practices Act of 1974 as it pertains to Navman
Australia’s sales practices from 2001 to 2005. The ACCC had alleged
that Navman Australia engaged in resale price maintenance in breach of the
Act. In December 2007, the Australian courts approved a settlement in
favor of ACCC for approximately $1.3 million.
Chinese Supplier Dispute.
Brunswick was involved in an arbitration proceeding in Hong Kong arising
out of a commercial dispute with a former contract manufacturer in China,
Shanghai Zhonglu Industrial Company Limited (Zhonglu). The Company filed the
arbitration seeking damages based on Zhonglu's breach of a supply and
distribution agreement pursuant to which Zhonglu agreed to manufacture bowling
equipment. Zhonglu had asserted counterclaims seeking damages for
alleged breach of contract among other claims in August 2007. The
arbitration tribunal issued a ruling in the Company’s favor for a net amount of
approximately $0.1 million.
Patent Infringement
Dispute
.
In
October 2006, Brunswick was sued by Electromotive, Inc. (Electromotive) in the
United States District Court for the Northern District of
Virginia. Electromotive claimed that a number of engines sold by
Brunswick’s Mercury Marine business had infringed on an expired patent held by
Electromotive related to a method for ignition timing. On July 27,
2007, a jury returned a verdict in favor of Electromotive in the amount of
approximately $3 million. In October 2007, the Company and
Electromotive subsequently reached an agreement to settle the case in lieu of
pursuing respective appeals at a level below the verdict.
Brazilian Customs
Dispute
.
In June
2007, the Brazilian Customs Office issued an assessment against a Company
subsidiary in the amount of approximately $14 million related to the importation
of Life Fitness products into Brazil. The assessment was based on a
determination by Brazilian customs officials that the proper import value of
Life Fitness equipment imported into Brazil should be the manufacturer’s
suggested retail price of those goods in the United States. The
assessment consists of duties, penalties and interest on the importation of Life
Fitness products into Brazil over the past five years. Brunswick
believes that this determination by the Brazilian Customs Office is without
merit and has appealed the assessment. The Company does not believe
that the resolution of this dispute will have a material adverse effect on
its consolidated financial condition or results of
operations.
Note
12 – Financial Instruments
The
Company operates domestically and internationally, with manufacturing and sales
facilities in various locations around the world. Due to the
Company’s global operations, the Company engages in activities involving both
financial and market risks. The Company utilizes its normal operating and
financing activities, along with derivative financial instruments to minimize
these risks.
Derivative Financial
Instruments.
The Company uses derivative financial instruments
to manage its risks associated with movements in foreign currency exchange
rates, interest rates and commodity prices. Derivative instruments are not used
for trading or speculative purposes. For certain derivative contracts, on the
date a derivative contract is entered into, the Company designates the
derivative as a hedge of a forecasted transaction (cash flow hedge). The Company
formally documents its hedge relationships, including identification of the
hedging instruments and the hedged items, as well as its risk management
objectives and strategies for undertaking the hedge transaction. This process
includes linking derivatives that are designated as hedges to specific
forecasted transactions. The Company also assesses, both at the
inception and at least quarterly thereafter, whether the derivatives used in
hedging transactions are highly effective in offsetting the changes in the
anticipated cash flows of the hedged item. There were no material adjustments as
a result of ineffectiveness to the results of operations for the years ended
December 31, 2007, 2006 and 2005. If the hedging relationship ceases
to be highly effective, or it becomes probable that a forecasted transaction is
no longer expected to occur, gains and losses on the derivative are recorded in
Other expense, net. The fair market value of derivative financial
instruments is determined through market-based valuations and may not be
representative of the actual gains or losses that will be recorded when these
instruments mature due to future fluctuations in the markets in which they are
traded. The effects of derivative and financial instruments are not
expected to be material to the Company’s financial position or results of
operations when considered together with the underlying exposure being
hedged.
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Fair Value Derivatives.
During 2007 and 2006, the Company entered into foreign currency forward
contracts to manage foreign currency exposure related to changes in the value of
assets or liabilities caused by changes in the exchange rates of foreign
currencies. The change in the fair value of the foreign currency derivative
contract and the corresponding change in the fair value of the asset or
liability of the Company are both recorded through earnings.
Cash Flow
Derivatives.
Certain derivative instruments qualify as cash
flow hedges under the requirements of SFAS Nos. 133,
Accounting
for Derivative Instruments and Hedging Activities
,
and 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities an
amendment of FASB Statement No. 133. The Company executes forward contracts and
options, based on forecasted transactions, to manage foreign exchange exposure
mainly related to inventory purchase and sales transactions. The Company also
enters into commodity swap agreements, based on anticipated purchases of certain
raw materials, and natural gas forward contracts, based on projected purchases,
to manage exposure related to risk from price changes. The Company has also
entered into forward starting interest rate swaps to hedge the interest rate
risk associated with the anticipated issuance of debt.
A cash
flow hedge requires that as changes in the fair value of derivatives occur, the
portion of the change deemed to be effective is recorded temporarily in
Accumulated other comprehensive income (loss), an equity account, and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings.
The
following activity related to cash flow hedges were recorded in Accumulated
other comprehensive income (loss) as of December 31:
|
|
Accumulated
Unrealized Derivative
|
|
|
|
Gains
(Losses)
|
|
|
|
2007
|
|
2006
|
|
|
|
Pre-tax
|
|
After-tax
|
|
Pre-tax
|
|
After-tax
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
7.6
|
|
$
|
5.3
|
|
$
|
11.2
|
|
$
|
7.9
|
|
Net
change associated with current period hedging activity
|
|
|
(34.6
|
)
|
|
(24.2
|
)
|
|
(12.6
|
)
|
|
(8.8
|
)
|
Net
amount recognized into earnings
|
|
|
22.5
|
|
|
15.7
|
|
|
9.0
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
(4.5
|
)
|
$
|
(3.2
|
)
|
$
|
7.6
|
|
$
|
5.3
|
|
The
Company estimates that $1.3 million of after-tax net realized losses from
derivatives that have been settled and deferred in Accumulated other
comprehensive income (loss) at December 31, 2007, will be realized in earnings
over the next twelve months. At December 31, 2007, the term of derivative
instruments hedging forecasted transactions ranges from one to eighteen
months.
Foreign
Currency.
The Company enters into forward exchange contracts
and options to manage foreign exchange exposure related to forecasted
transactions, and assets and liabilities that are subject to risk from foreign
currency rate changes. These include product costs; revenues and expenses;
associated receivables and payables; intercompany obligations and receivables;
and other related cash flows. Forward exchange contracts outstanding at December
31, 2007 and 2006, had notional contract values of $284.2 million and $377.2
million, respectively. The approximate fair value of forward exchange contracts
was a net liability of $5.0 million and $5.7 million at December 31, 2007 and
2006, respectively. Option contracts outstanding at December 31, 2007 and 2006,
had notional contract values of $343.8 million and $144.7 million, respectively.
The approximate fair value of options contracts outstanding was a net liability
of $1.2 million and a net asset of $0.5 million at December 31, 2007 and 2006,
respectively. The forward and options contracts outstanding at December 31,
2007, mature during 2008 and 2009 and primarily relate to the Euro, Canadian
dollar, British pound, Australian dollar, Japanese yen and New Zealand
dollar.
Interest Rate.
The
Company utilizes fixed-to-floating interest rate swaps to mitigate the interest
rate risk associated with its long-term debt. These swaps had a notional value
of $50.0 million as of December 31, 2007 and 2006, respectively, and an
associated fair market value of $1.4 million as of December 31, 2007, and a loss
of $0.2 million as of December 31, 2006. These instruments have been treated as
fair value hedges, with the offset to the aforementioned fair market value
(loss) recorded in long-term debt; see
Note 14 – Debt
in the Notes to
Consolidated Financial Statements for further details.
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
The
Company also utilizes forward starting floating-to-fixed interest rate swaps to
hedge the interest rate risks associated with interest payments on anticipated
issuances of long-term debt. As of December 31, 2007, Company had
forward starting swaps with a notional value of $150 million and a fair market
value of a loss of $3.9 million. These instruments are being
accounted for as cash flow hedges of long-term fixed rate debt expected to be
issued to refinance the $250 million of floating rate notes due July
2009. There were no forward starting swaps outstanding as of December
31, 2006.
As of
December 31, 2007 and 2006, the Company had $11.9 million and $12.6 million,
respectively, of deferred gains associated with forward starting interest
rate swaps included in Accumulated other comprehensive income
(loss). These amounts include gains deferred on $250 million of
forward starting interest rate swaps terminated in July 2006, which had been
designated as cash flow hedges of long term fixed rate debt expected to be
issued in 2006 to refinance notes maturing in December 2006. These
forward starting swaps resulted in a net realized gain of $14.2
million. In 2006, the Company refinanced its debt due in December
2006 with $250 million of floating rate notes due in July 2009, which were
callable beginning in July 2007, and recognized $1.6 million of the gain as the
ineffective portion of the hedge and deferred the remainder in Accumulated other
comprehensive income (loss) pending refinancing of the 2009 notes with
long-term, fixed rate debt. In 2007, the Company recognized an additional
$0.7 million of the gain as ineffective, as the long term fixed rate debt
issuance did not occur. The Company continues to believe that the
$250 million of floating rate notes due in July 2009 will be refinanced with
long term fixed rate debt.
Commodity
Price.
The Company uses commodity swap and futures contracts
to hedge anticipated purchases of certain raw materials. Commodity swap
contracts outstanding at December 31, 2007 and 2006 had notional values of $23.2
million and $18.6 million, respectively. At December 31, 2007 and 2006, the
estimated fair value of these swap contracts was a net asset of $0.5 million and
$4.0 million, respectively. The contracts outstanding at December 31, 2007,
mature throughout 2008 and 2009. The Company also uses futures contracts to
manage its exposure to fluctuating natural gas prices, which had a notional
contract value of $1.8 million and $1.7 million outstanding at December 31, 2007
and 2006, respectively. The estimated fair value of the futures contracts was a
net liability of $0.4 million at December 31, 2007 and 2006.
Concentration of Credit
Risk.
The Company enters into financial instruments with banks
and investment firms with which the Company has continuing business
relationships and regularly monitors the credit ratings of its counterparties.
The Company sells a broad range of active recreation products to a worldwide
customer base and extends credit to its customers based upon an ongoing credit
evaluation program. Concentrations of credit risk with respect to accounts
receivable are not material to the Company’s financial position, due to the
large number of customers comprising the Company’s customer base and their
dispersion across many different geographic areas, with the exception of one
boat builder customer. This customer had trade accounts receivable and long-term
notes receivable, in connection with a supply agreement, with net credit
exposure of $23.7 million and $29.4 million at December 31, 2007 and 2006,
respectively.
Fair Value of Other Financial
Instruments.
The carrying values of the Company’s short-term
financial instruments, including cash and cash equivalents, accounts and notes
receivable and short-term debt, approximate their fair values because of the
short maturity of these instruments. At December 31, 2007 and 2006, the fair
value of the Company’s long-term debt was approximately $717.8 million and
$729.0 million, respectively, as estimated using quoted market prices or
discounted cash flows based on market rates for similar types of
debt.
BRUNSWICK
CORPORATION
|
Notes
to Consolidated Financial
Statements
|
Note
13 – Accrued Expenses
Accrued
Expenses at December 31 were as follows:
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Sales
incentives and discounts
|
|
$
|
172.3
|
|
$
|
157.8
|
|
Product
warranties
|
|
|
161.8
|
|
|
158.9
|
|
Accrued
compensation and benefit plans
|
|
|
159.5
|
|
|
114.2
|
|
SFAS
140 obligations
|
|
|
92.1
|
|
|
31.6
|
|
Deferred
revenue
|
|
|
74.5
|
|
|
64.4
|
|
Insurance
reserves
|
|
|
50.2
|
|
|
48.6
|
|
Other
|
|
|
147.7
|
|
|
173.4
|
|
|
|
|
|
|
|
|
|
Total
accrued expenses
|
|
$
|
858.1
|
|
$
|
748.9
|
|
Included in Notes, 5.0% due 2011, is the estimated aggregate
market value related to the fixed-to-floating interest rate swaps discussed in
Note 12 - Financial Instruments
.