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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 JUNE 30, 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 AUGUST 9, 2002, there were 90,107,329 shares of common stock ($0.75 par
value) outstanding.
1
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BRUNSWICK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED JUNE 30
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------ -------------------------
2002 2001 2002 2001
----------- ---------- ----------- -----------
NET SALES $ 1,017.2 $ 928.8 $ 1,883.9 $ 1,842.0
Cost of sales 777.4 700.8 1,452.7 1,388.2
Selling, general and administrative expense 161.9 146.6 323.0 293.4
----------- ---------- ----------- -----------
OPERATING EARNINGS 77.9 81.4 108.2 160.4
Interest expense (10.6) (14.1) (21.6) (27.7)
Other income (expense) 4.7 (1.4) 6.0 (3.1)
----------- ---------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 72.0 65.9 92.6 129.6
Income tax provision 25.8 24.4 33.2 48.6
----------- ---------- ----------- -----------
EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 46.2 41.5 59.4 81.0
Cumulative effect of change in accounting principle, net of tax -- -- (25.1) (2.9)
----------- ---------- ----------- -----------
NET EARNINGS $ 46.2 $ 41.5 $ 34.3 $ 78.1
=========== ========== =========== ===========
BASIC EARNINGS PER COMMON SHARE:
Earnings before cumulative effect of change in accounting principle $ 0.51 $ 0.47 $ 0.66 $ 0.92
Cumulative effect of change in accounting principle -- -- (0.28) (0.03)
----------- ---------- ----------- -----------
Net earnings $ 0.51 $ 0.47 $ 0.38 $ 0.89
=========== ========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE:
Earnings before cumulative effect of change in accounting principle $ 0.51 $ 0.47 $ 0.66 $ 0.92
Cumulative effect of change in accounting principle -- -- (0.28) (0.03)
----------- ---------- ----------- -----------
Net earnings $ 0.51 $ 0.47 $ 0.38 $ 0.89
=========== ========== =========== ===========
AVERAGE SHARES USED FOR COMPUTATION OF:
Basic earnings per share 90.2 87.8 89.5 87.7
Diluted earnings per share 91.4 88.3 90.6 88.0
CASH DIVIDENDS DECLARED PER COMMON SHARE $ -- $ 0.125 $ -- $ 0.25
The notes are an integral part of these consolidated statements.
2
BRUNSWICK CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002, DECEMBER 31, 2001, AND JUNE 30, 2001
(IN MILLIONS)
JUNE 30, December 31, June 30,
2002 2001 2001
---------- ---------- ----------
(UNAUDITED) (Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost,
which approximates market $ 334.5 $ 108.5 $ 155.8
Accounts and notes receivable,
less allowances of $27.5, $26.1 and $21.5 484.7 361.9 446.5
Inventories
Finished goods 273.4 317.2 303.4
Work-in-process 199.4 180.9 140.6
Raw materials 54.2 59.3 67.9
---------- ---------- ----------
Net inventories 527.0 557.4 511.9
---------- ---------- ----------
Prepaid income taxes 322.1 307.5 367.0
Prepaid expenses 26.7 38.9 39.0
Income tax refunds receivable -- 26.7 --
Net assets of discontinued operations offered for sale -- -- 66.9
---------- ---------- ----------
CURRENT ASSETS 1,695.0 1,400.9 1,587.1
---------- ---------- ----------
PROPERTY
Land 65.7 68.4 64.3
Buildings 440.3 426.3 410.3
Equipment 1,004.5 998.5 976.4
---------- ---------- ----------
Total land, buildings and equipment 1,510.5 1,493.2 1,451.0
Accumulated depreciation (836.5) (803.8) (778.1)
---------- ---------- ----------
Net land, buildings and equipment 674.0 689.4 672.9
Unamortized product tooling costs 110.4 116.2 113.7
---------- ---------- ----------
NET PROPERTY 784.4 805.6 786.6
---------- ---------- ----------
OTHER ASSETS
Goodwill 431.1 474.4 413.5
Other intangibles 124.2 128.9 114.7
Investments 99.8 80.4 71.1
Other long-term assets 269.8 267.3 164.4
---------- ---------- ----------
OTHER ASSETS 924.9 951.0 763.7
---------- ---------- ----------
TOTAL ASSETS $ 3,404.3 $ 3,157.5 $ 3,137.4
========== ========== ==========
The notes are an integral part of these consolidated statements.
3
BRUNSWICK CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002, DECEMBER 31, 2001, AND JUNE 30, 2001
(IN MILLIONS)
JUNE 30, December 31, June 30,
2002 2001 2001
---------- ---------- ----------
(UNAUDITED) (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt, including
current maturities of long-term debt $ 45.8 $ 40.0 $ 80.4
Accounts payable 264.0 214.5 198.5
Accrued expenses 684.5 648.2 610.7
Accrued income taxes 10.4 -- 28.1
---------- ---------- ----------
CURRENT LIABILITIES 1,004.7 902.7 917.7
---------- ---------- ----------
LONG-TERM DEBT
Notes, mortgages and debentures 600.9 600.2 594.9
---------- ---------- ----------
DEFERRED ITEMS
Income taxes 205.8 185.2 205.4
Postretirement and postemployment benefits 215.3 216.1 196.7
Compensation and other 165.5 142.4 81.4
---------- ---------- ----------
DEFERRED ITEMS 586.6 543.7 483.5
---------- ---------- ----------
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 309.2 316.2 315.8
Retained earnings 1,113.7 1,079.4 1,097.7
Treasury stock, at cost:
12,454,000, 14,739,000 and 14,889,000 shares (230.6) (289.8) (292.5)
Unamortized ESOP expense and other (28.4) (27.1) (31.6)
Accumulated other comprehensive loss (28.7) (44.7) (25.0)
---------- ---------- ----------
COMMON SHAREHOLDERS' EQUITY 1,212.1 1,110.9 1,141.3
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,404.3 $ 3,157.5 $ 3,137.4
========== ========== ==========
The notes are an integral part of these consolidated statements.
4
BRUNSWICK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
(IN MILLIONS)
(UNAUDITED)
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 34.3 $ 78.1
Depreciation and amortization 75.2 77.5
Change in accounting principle, net of tax 25.1 2.9
Changes in noncash current assets and current liabilities 11.9 (81.3)
Income taxes 55.5 79.0
Antitrust litigation settlement payments -- (6.7)
Other, net 36.6 (0.4)
-------- --------
NET CASH PROVIDED BY CONTINUING OPERATIONS 238.6 149.1
NET CASH PROVIDED BY DISCONTINUED OPERATIONS -- 4.4
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 238.6 153.5
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (41.0) (47.0)
Investments (6.7) --
Acquisitions of businesses, net of cash acquired (8.8) (20.1)
Proceeds on the sale of property, plant and equipment 4.2 25.3
Other, net (0.2) (1.2)
-------- --------
NET CASH USED FOR CONTINUING OPERATIONS (52.5) (43.0)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS -- 36.2
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES (52.5) (6.8)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net issuances (repayments) of commercial paper and other
short-term debt 18.5 (92.7)
Payments of long-term debt including current maturities (18.0) (9.0)
Cash dividends paid -- (21.9)
Stock options exercised 39.4 7.5
-------- --------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 39.9 (116.1)
-------- --------
Net increase in cash and cash equivalents 226.0 30.6
Cash and cash equivalents at January 1 108.5 125.2
-------- --------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 334.5 $ 155.8
======== ========
The notes are an integral part of these consolidated statements.
5
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, DECEMBER 31, 2001, AND JUNE 30, 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 June
30, 2002 and 2001. The interim results are not necessarily indicative of the
results that may be expected for the remainder of the year.
PROPERTY. Property, including major improvements and product tooling costs, is
recorded at cost. Product tooling costs principally comprise the cost to acquire
and construct various molds, dies and other tooling owned by the Company and
used in its manufacturing processes. Maintenance and repair costs are charged
against results of operations as incurred. Depreciation is charged against
results of operations over the estimated service lives of the related assets,
principally using the straight-line method. Buildings and improvements are
depreciated over a useful life of five to forty years. Equipment is depreciated
over a useful life of two to fifteen years. Product tooling costs are amortized
over the shorter of the useful life of the tooling or the useful life of the
applicable product, ranging from three to eight years.
OTHER LONG-TERM ASSETS. Other long-term assets include pension assets and
long-term notes receivable. Long-term notes receivable include cash advances
made to customers, principally boatbuilders and fitness equipment retailers, or
their owners, in connection with long-term supply arrangements. These
transactions have occurred in the normal course of business and are backed by
secured or unsecured notes receivable that are reduced as purchases of
qualifying products are made. Credits earned by these customers through
qualifying purchases are applied to the outstanding note balance in lieu of
payment. In the event sufficient orders are not received, the outstanding
balance remaining under the notes is subject to full collection. Amounts
outstanding related to these arrangements as of June 30, 2002, December 31,
2001, and June 30, 2001, totaled $50.0 million, $53.9 million and $56.9 million,
respectively. One boatbuilder customer and its owner comprised 69 percent, 69
percent and 68 percent of these amounts as of June 30, 2002, December 31, 2001,
and June 30, 2001, respectively. Certain agreements provide for the assignment
of lease and other long-term receivables originated by the Company to third
parties. The assignment is not treated as a sale of the associated receivables,
but as a secured obligation under SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
associated receivables and related obligations are included in Consolidated
Balance Sheets under other long-term assets and deferred items - compensation
and other, respectively.
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.
6
Pro Forma Information
(in millions, except per share data)
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
--------------------- ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Reported net earnings $ 46.2 $ 41.5 $ 34.3 $ 78.1
Goodwill and indefinite-lived intangible amortization -- 2.7 -- 5.4
--------- --------- --------- ---------
Adjusted net earnings $ 46.2 $ 44.2 $ 34.3 $ 83.5
========= ========= ========= =========
BASIC EARNINGS PER COMMON SHARE:
Reported net earnings $ 0.51 $ 0.47 $ 0.38 $ 0.89
Goodwill and indefinite-lived intangible amortization -- 0.03 -- 0.06
--------- --------- --------- ---------
Adjusted net earnings $ 0.51 $ 0.50 $ 0.38 $ 0.95
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE:
Reported net earnings $ 0.51 $ 0.47 $ 0.38 $ 0.89
Goodwill and indefinite-lived intangible amortization -- 0.03 -- 0.06
--------- --------- --------- ---------
Adjusted net earnings $ 0.51 $ 0.50 $ 0.38 $ 0.95
========= ========= ========= =========
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 to measure the amount of the impairment loss, if any. In
this second step, the implied fair value of the reporting unit's 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.
The Company completed both steps of the process described above in the second
quarter of 2002 and recorded a one-time, non-cash charge of $25.1 million
after-tax ($29.8 million pre-tax) to reduce the carrying amount of its goodwill
effective January 1, 2002. Consistent with SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements," the Company will amend its first
quarter Form 10-Q to reflect the adoption of SFAS No. 142 as of January 1, 2002.
Such charge is reflected as a cumulative effect of change in accounting
principle in the accompanying Consolidated Statements of Income. In calculating
the impairment charge, the fair value of the impaired reporting units underlying
the segments was estimated using a discounted cash flow methodology.
All of the $25.1 million after-tax goodwill impairment charge is associated with
the Recreation segment. Various bowling products businesses acquired in 1996
account for $11.7 million of the after-tax goodwill impairment ($13.3 million
pre-tax). The remaining $13.4 million after-tax change ($16.5 million pre-tax)
is associated with a fitness equipment retailer acquired beginning in 1999.
7
Other intangibles consist of the following (in millions):
JUNE 30
---------------------------------------------------------
2002* 2001
------------------------- --------------------------
GROSS ACCUMULATED Gross Accumulated
AMOUNT AMORTIZATION Amount Amortization
-------- ------------ -------- -------------
Amortized intangible assets:
Dealer network $ 196.4 $ (161.2) $ 185.9 $ (149.7)
Other 7.8 (1.1) 7.9 (1.9)
-------- -------- -------- --------
Total $ 204.2 $ (162.3) $ 193.8 $ (151.6)
======== ======== ======== ========
Indefinite-lived intangible assets:
Trademarks/tradenames $ 63.5 $ (17.4) $ 45.4 $ (16.2)
Pension intangible asset 36.2 -- 43.3 --
-------- -------- -------- --------
Total $ 99.7 $ (17.4) $ 88.7 $ (16.2)
======== ======== ======== ========
*Gross amounts and related accumulated amortization amounts include
adjustments related to changes in the fair value of net assets subject to
purchase accounting adjustments, primarily arising from the Teignbridge
acquisition completed in the first quarter of 2002 and the Sealine and
Hatteras acquisitions completed in the third and fourth quarters of 2001,
respectively. Refer to Note 6 and Matters Affecting Comparability in
Management's Discussion and Analysis on pages 11 and 13, respectively.
The costs of other intangible assets are amortized over their expected useful
lives using the straight-line method. Aggregate amortization expense for other
intangibles in the quarters ended June 30, 2002 and 2001, was $2.7 million and
$3.1 million, respectively. Aggregate amortization expense for the six-month
periods ended June 30, 2002 and 2001, was $6.0 million and $6.3 million,
respectively.
Estimated amortization expense for each of the next five years is as follows (in
millions):
For year ended December 31, 2003 $ 12.1
For year ended December 31, 2004 $ 11.9
For year ended December 31, 2005 $ 1.3
For year ended December 31, 2006 $ 1.3
For year ended December 31, 2007 $ 1.3
The reduction in estimated amortization expense in 2005 relates to the
completion of intangible amortization assigned to dealer network costs from the
1986 acquisition of the Boat Segment's Sea Ray operations.
8
A summary of changes in the Company's goodwill during the six-month period ended
June 30, 2002, by segment is as follows (in millions):
GOODWILL
-----------------------------------------------------
JANUARY 1, ADJUSTMENTS & JUNE 30,
2002 ACQUISITIONS* IMPAIRMENTS 2002
--------- ------------- ----------- --------
Marine Engine $ 9.0 $ 0.4 $ -- $ 9.4
Boat 173.5 (14.6) -- 158.9
Recreation 291.9 0.7 (29.8) 262.8
-------- ------- ------- --------
Total $ 474.4 $ (13.5) $ (29.8) $ 431.1
======== ======= ======= ========
*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 Teignbridge acquisition completed
in the first quarter of 2002 and the Sealine and Hatteras acquisitions
completed in the third and fourth quarters of 2001, respectively. Refer to
Note 6 and Matters Affecting Comparability in Management's Discussion and
Analysis on pages 11 and 13, respectively.
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
Nos. 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 pre-tax) as a cumulative effect of a change in accounting principle,
primarily resulting from recording interest rate swaps at their fair value.
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 was 1.2 million and 1.1 million for the quarter and six-month
periods ended June 30, 2002, respectively, whereas the average number of shares
of common stock equivalents was 0.5 million and 0.3 million for the quarter and
six-month periods ended June 30, 2001, respectively. The increase in the 2002
common stock equivalents is due primarily to an increase in the Company's stock
price.
NOTE 3 - DEBT
There were no outstanding commercial paper borrowings at June 30, 2002, or
December 31, 2001, compared with $60.0 million outstanding at June 30, 2001.
There were commercial paper issuances and repayments during the first quarter of
2002 with no such activity occurring in the second quarter of 2002. As a result,
the weighted-average interest rate for commercial paper borrowings was 4.87
percent for the quarter ended June 30, 2001, and 2.44 percent and 5.55 percent
for the six-month periods ended June 30, 2002 and 2001, respectively.
9
NOTE 4 - LEGAL AND ENVIRONMENTAL
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 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.
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 or a
replacement bicycle. 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). 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.
On May 30, 2002, Leiserv, Inc. (Leiserv), a Company subsidiary operated by the
Company's Bowling and Billiards Division, was sued in the Circuit Court of St.
Louis County, Missouri, for alleged violations of the federal Telephone Consumer
Protection Act. The lawsuit was brought as a putative class action on behalf of
all people and entities within two area codes in the St. Louis area who
allegedly received unsolicited faxes from Leiserv. Leiserv has removed the case
to the United States District Court for the Eastern District of Missouri.
Because this case remains in the early stages of litigation and raises legal
issues that have not yet been fully resolved by the courts, the Company is
unable to predict the potential outcome of this matter.
On April 22, 2002, a federal court in Seattle lifted a stay in a lawsuit filed
against Life Fitness by Precor Incorporated (Precor), a subsidiary of Illinois
Tool Works, Inc. The suit, which alleges that certain of Life Fitness'
cross-trainer exercise machines infringed Precor's Miller `829 patent, was
stayed by the court pending reexamination of the patent by the U.S. Patent and
Trademark Office (PTO). The PTO issued a modified Miller `829 patent on March 5,
2002, which led to the lifting of the stay. The Company does not believe that
its machines infringe the patent, as modified, but is unable to predict the
outcome of this matter.
10
On June 14, 2002, in a separate lawsuit between the Company and Precor, a
federal court in Seattle awarded Precor approximately $230,000 in attorneys'
fees. Precor had been awarded $5.3 million in attorneys' fees at trial, but the
award was remanded for reconsideration in light of an appellate court ruling in
the case. The Company believes that this matter, which was originally filed in
1994, has been finally concluded.
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 and six-month periods ended June
30, 2002 and 2001 (in millions):
QUARTER ENDED JUNE 30
------------------------------------------------------------
2002 2001
-------------------------- --------------------------
NET OPERATING Net Operating
SALES EARNINGS Sales Earnings
---------- -------- ---------- --------
Marine Engine $ 505.8 $ 77.8 $ 475.1 $ 79.1
Boat 373.3 11.0 326.2 9.8
Marine eliminations (61.2) -- (53.0) --
---------- -------- ---------- --------
Total Marine 817.9 88.8 748.3 88.9
Recreation 199.3 2.3 180.5 (4.3)
Corporate/Other -- (13.2) -- (3.2)
---------- -------- ---------- --------
Total $ 1,017.2 $ 77.9 $ 928.8 $ 81.4
========== ======== ========== ========
SIX MONTHS ENDED JUNE 30
------------------------------------------------------------
2002 2001
-------------------------- --------------------------
NET OPERATING Net Operating
SALES EARNINGS Sales Earnings
---------- -------- ---------- --------
Marine Engine $ 876.2 $ 102.5 $ 888.8 $ 128.4
Boat 727.2 14.3 706.5 33.6
Marine eliminations (114.0) -- (120.1) --
---------- -------- ---------- --------
Total Marine 1,489.4 116.8 1,475.2 162.0
Recreation 394.5 19.7 366.8 15.5
Corporate/Other -- (28.3) -- (17.1)
---------- -------- ---------- --------
Total $ 1,883.9 $ 108.2 $ 1,842.0 $ 160.4
========== ======== ========== ========
NOTE 6 - ACQUISITIONS
Cash paid for acquisitions in the first six months 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).
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
November 30, 2001, acquisition of Hatteras Yachts, Inc. (Hatteras).
Cash paid for acquisitions, net of cash acquired, totaled $20.1 million in the
first six months 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
post-acquisition results are included in the Boat segment. 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.
11
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.
Other 2001 acquisitions consist of Sealine International (Sealine), a leading
manufacturer of luxury sport cruisers and motoryachts, which closed on July 3,
2001, and Hatteras Yachts, Inc., a leading manufacturer of luxury sportfishing
convertibles and motoryachts, which was acquired on November 30, 2001. 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 and six-month periods ended June 30, 2002
and 2001, was as follows (in millions):
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
---------------------- ------------------------
2002 2001 2002 2001
------- ------- ------- -------
Net earnings $ 46.2 $ 41.5 $ 34.3 $ 78.1
Other comprehensive income:
Foreign currency cumulative translation
adjustment 6.7 (0.4) 9.7 (3.2)
Net change in unrealized gains on investments 1.0 1.7 5.7 4.0
Net change in accumulated unrealized
derivative gains (losses) (0.4) -- 0.6 1.6
------- ------- ------- -------
Total other comprehensive income 7.3 1.3 16.0 2.4
------- ------- ------- -------
Comprehensive income $ 53.5 $ 42.8 $ 50.3 $ 80.5
======= ======= ======= =======
The other comprehensive income associated with cumulative foreign currency
translation adjustments for the quarter and six-month periods ended June 30,
2002, resulted from the weakening of the U.S. dollar relative to other foreign
currencies.
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.
12
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
MATTERS AFFECTING COMPARABILITY
The Company's operating results for 2002 include the operating results of
Teignbridge Propellers, Ltd. (Teignbridge), a manufacturer of custom and
standard propellers and underwater stern gear for inboard-powered vessels,
Sealine International (Sealine), a leading manufacturer of luxury sport cruisers
and motoryachts, and Hatteras Yachts, Inc. (Hatteras), a leading manufacturer of
luxury sportfishing convertibles and motoryachts, from the acquisition dates of
February 10, 2002, July 3, 2001, and November 30, 2001, respectively.
The Company's operating results for 2001 include the operating results of Omni
Fitness Equipment Inc. (Omni Fitness), a domestic retailer of fitness equipment,
and Princecraft Boats Inc. (Princecraft), a manufacturer of deck and pontoon
boats, from the acquisition dates of February 28, 2001, and March 7, 2001,
respectively.
CONSOLIDATED
The following table sets forth certain amounts, ratios and relationships
calculated from the consolidated statements of income for the quarter and
six-month periods ended June 30, 2002 and 2001 (in millions, except per share
data):
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
----------------------------- --------------------------------
2002 2001 2002 2001
----------- --------- ----------- -----------
Net sales $ 1,017.2 $ 928.8 $ 1,883.9 $ 1,842.0
Operating earnings $ 77.9 $ 81.4 $ 108.2 $ 160.4
Earnings before cumulative effect of change in
accounting principle $ 46.2 $ 41.5 $ 59.4 $ 81.0
Cumulative effect of change in accounting
principle, net of tax -- -- (25.1) (2.9)
----------- --------- ----------- -----------
Net earnings $ 46.2 $ 41.5 $ 34.3 $ 78.1
=========== ========= =========== ===========
Diluted earnings per share before cumulative
effect of change in accounting principle $ 0.51 $ 0.47 $ 0.66 $ 0.92
Cumulative effect per share of change in
accounting principle -- -- (0.28) (0.03)
----------- --------- ----------- -----------
Diluted earnings per share $ 0.51 $ 0.47 $ 0.38 $ 0.89
=========== ========= =========== ===========
EXPRESSED AS A PERCENTAGE OF NET SALES:
Gross margin 23.6% 24.5% 22.9% 24.6%
Selling, general and administrative expense 15.9% 15.8% 17.1% 15.9%
Operating margin 7.7% 8.8% 5.7% 8.7%
The Company reported net sales of $1,017.2 million in the second quarter of
2002, up 10 percent from the second quarter of 2001. For the first half of the
year, sales increased 2 percent to $1,883.9 million. The sales increase for the
quarter was mainly attributable to higher sales in the Marine Engine and
Recreation segments as well as the benefit of the incremental sales associated
with the Boat segment's acquisitions of Sealine and Hatteras completed in the
second half of 2001. The increase in Marine Engine segment sales was mainly due
to higher sterndrive engine sales and the strong performance in international
markets. The main drivers of the increase in Recreation segment sales were
improved international sales, increased sales
13
of domestic consumer and commercial fitness equipment and increased sales in
billiards and bowling equipment. Excluding acquisitions, sales increased 4
percent for the quarter and declined 4 percent year-to-date. The primary driver
of the decrease in year-to-date sales, excluding acquisitions, was the Boat
segment where the Company continues to experience reduced demand for large
cruisers and yachts, partially driven by a reduction in inventories held by
dealers.
Gross margin percentages in the second quarter of 2002 decreased to 23.6 percent
from 24.5 percent in 2001, and the year-to-date comparisons reflected a decrease
of 170 basis points to 22.9 percent. The primary drivers for the decreases in
the quarter and year-to-date periods include lower margins in the Marine Engine
segment attributable to a shift in sales mix away from parts and accessories
sales, which are higher-margin products, towards low-emission two-stroke and
four-stroke outboard engines, which are lower-margin products. In addition,
higher variable compensation costs for hourly plant personnel and manufacturing
related salaried employees also drove gross margins for the Marine Engine
segment lower. Year-to-date gross margins were also affected by a shift in sales
mix in the Boat segment, most notably towards smaller boats, which carry lower
margins, as well as lower absorption of fixed costs due to production rate
reductions in the Marine Engine and Boat segments.
Operating earnings for the quarter ended June 30, 2002, totaled $77.9 million
compared with $81.4 million in 2001. For the six months ended June 30, 2002,
operating earnings decreased to $108.2 million from $160.4 million a year
earlier. Operating margins dropped 110 basis points and 300 basis points for the
quarter and six-month periods ending June 30, 2002, respectively. The decline in
2002 operating margins is primarily due to the aforementioned gross margin
decline; a sales mix shift towards the Boat and Recreation segments, which carry
lower operating margins; higher selling, general and administrative variable
compensation costs; and pre-tax gains recognized in 2001 on the sale of a
testing facility of $10.6 million and two boat plants of $0.3 million. These
factors more than offset the favorable impact of 2002 cost reduction programs,
restructuring and boat plant closure costs recorded in 2001, and the effect of
SFAS No. 142, which requires the cessation of recording amortization expense on
goodwill and indefinite-lived intangible assets.
Interest expense decreased $3.5 million, or 24.8 percent, for the quarter ended
June 30, 2002, compared with the second quarter of 2001. Year-to-date interest
expense decreased $6.1 million, or 22.0 percent, in 2002 compared with the same
period a year ago. The decrease in interest expense for both the quarter and
year-to-date periods is principally due to a decline in the average level of
outstanding debt, most notably as it relates to commercial paper.
Other income totaled $4.7 million in the second quarter of 2002 versus other
expense of $1.4 million in the second quarter of last year. Year-to-date other
income totaled $6.0 million in 2002 compared with other expense of $3.1 million
in 2001. Improved results from joint-venture investments and more favorable
currency adjustments from a weakening U.S. dollar affected the other income
(expense) quarter and year-to-date comparisons.
Net earnings from continuing operations totaled $46.2 million in the second
quarter of 2002 versus $41.5 million in the comparable quarter a year ago.
Earnings before the cumulative effect of change in accounting principle for the
six months ended June 30, 2002, were $59.4 million versus $81.0 million in the
prior year. Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." The non-cash cumulative effect of adopting this accounting standard
resulted in a charge of $25.1 million after-tax, or $0.28 per diluted share,
reducing net earnings to $34.3 million for the six months ended June 30, 2002.
Effective January 1, 2001, the Company adopted SFAS Nos. 133/138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities." The non-cash
cumulative effect of adopting these accounting standards was a charge of $2.9
million after-tax, or $0.03 per diluted share, reducing net earnings to $78.1
million for the six months ended June 30, 2001.
Average common shares outstanding used to calculate diluted earnings per share
for the quarter increased by 3.1 million shares to 91.4 million in 2002 from
88.3 million in 2001. In the six-month period, average
14
common shares increased by 2.6 million shares to 90.6 million in 2002 from 88.0
million in 2001. The increase in average diluted shares outstanding for both the
quarter and year-to-date periods reflects the effects of stock options
exercised 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.
STOCK OPTIONS. As allowed under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company continues to apply the provisions of Accounting
Principle Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees." Under APB No. 25, no compensation cost related to stock options
granted has been recognized in the Company's Consolidated Statements of Income
because the option terms are fixed and the exercise price equals the market
price of the underlying stock on the grant date.
In accordance with SFAS No. 123, the fair value of option grants is estimated on
the date of grant using the Black-Scholes option-pricing model for pro forma
footnote purposes using assumptions described further in Note 12 to the
consolidated financial statements in the 2001 Form 10-K. Had the fair value
method of accounting been applied to the Company's stock option plans, which
would include the amortization expense for option grants not fully vested as of
June 30, 2002 and 2001, the after-tax expense would be $1.3 million and $1.4
million for the quarters ended June 30, 2002 and 2001, respectively, and $2.7
million and $2.8 million for the six-month periods ended June 30, 2002 and 2001,
respectively. Under SFAS No. 123, a company adopting the fair value method of
accounting for its stock option plans must do so as of the beginning of the
fiscal year of adoption. If the Company were to adopt SFAS No. 123 in 2002, the
fair value method would only apply to options granted after December 31, 2001,
and the after-tax effect would be $0.3 million and $0.4 million for the quarter
and six-month periods ending June 30, 2002, respectively. The Company will
continue to evaluate its accounting for stock options as additional
authoritative guidance is issued.
EFFECTS OF MARINE MARKET CONDITIONS. The U.S. economic recession contributed to
the reduction in domestic demand for the Company's marine products for the six
months ended June 30, 2002, when compared with the six months ended June 30,
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 half of 2002
to address the adverse market conditions by stimulating retail demand,
decreasing production levels, and instituting working capital management
programs, which reduced inventories, excluding acquisitions, from levels at June
30, 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 the 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 become effective, 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.
15
MARINE ENGINE SEGMENT
The following table sets forth Marine Engine segment results for the quarter and
six-month periods ended June 30, 2002 and 2001 (in millions):
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 505.8 $ 475.1 $ 876.2 $ 888.8
Operating earnings $ 77.8 $ 79.1 $ 102.5 $ 128.4
Operating margin 15.4% 16.6% 11.7% 14.4%
Capital expenditures $ 7.4 $ 13.4 $ 10.9 $ 20.0
The Marine Engine segment reported a 6 percent increase in sales in the second
quarter of 2002 to $505.8 million from $475.1 million a year ago. Year-to-date
sales decreased $12.6 million, or 1 percent, to $876.2 million from $888.8
million in the same period a year ago. Sales increases in the quarter were a
result of higher sterndrive engine sales and an 8 percent increase in
international sales. The year-to-date decrease in sales is a result of decreased
shipments of both outboard and sterndrive engine shipments.
Operating earnings for the segment declined to $77.8 million in the second
quarter of 2002, compared with $79.1 million a year ago. Operating earnings for
the six months ended June 30, 2002, were $102.5 million compared to $128.4
million in 2001. Operating margins decreased in the current quarter to 15.4
percent versus 16.6 percent in the second quarter of last year, and year-to-date
operating margins dropped to 11.7 percent in 2002 from 14.4 percent in the prior
year. The decline in operating margins for both the quarter and year-to-date
periods reflects a mix shift away from parts and accessories sales, which are
higher-margin products, towards low-emission two-stroke and four-stroke outboard
engines, which are lower-margin products, and higher insurance, pension and
variable compensation costs. Operating margins were also adversely affected in
the quarter by higher costs for extended service agreements, and in the
year-to-date period by lower absorption of fixed costs due to reductions in
production rates.
BOAT SEGMENT
The following table sets forth Boat segment results for the quarter and
six-month periods ended June 30, 2002 and 2001 (in millions):
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 373.3 $ 326.2 $ 727.2 $ 706.5
Operating earnings $ 11.0 $ 9.8 $ 14.3 $ 33.6
Operating margin 2.9% 3.0% 2.0% 4.8%
Capital expenditures $ 10.3 $ 7.2 $ 19.5 $ 13.7
In the second quarter of 2002, the Boat segment reported net sales of $373.3
million, a 14 percent increase from the year-earlier quarter. In the
year-to-date period, sales increased 3 percent to $727.2 million versus the
comparable period of the prior year. Excluding the acquisitions completed in
2001, quarterly and year-to-date sales declined by 1.5 percent and 13 percent,
respectively. The drivers of the sales decline are continued weak demand,
particularly for large cruisers and yachts, partially driven by reduction in
inventories held by dealers.
Boat segment operating earnings totaled $11.0 million in the second quarter of
2002, increasing $1.2 million from the same period of 2001, and operating
margins decreased 10 basis points to 2.9 percent from 3.0 percent in the prior
year second quarter. In the year-to-date period, operating earnings totaled
$14.3 million, declining $19.3 million from the same period of 2001, and
operating margins declined 280 basis points to
16
2.0 percent from 4.8 percent in 2001. The decline in operating margins for the
year-to-date period reflects the lower absorption of fixed costs due to
reductions in production rates after excluding 2001 acquisitions, and a shift
in sales mix towards smaller boats, which carry lower margins. In addition,
cost increases associated with production inefficiencies at the Company's US
Marine division also impacted earnings in the second quarter of 2002.
RECREATION SEGMENT
The following table sets forth Recreation segment results for the quarter and
six-month periods ended June 30, 2002 and 2001 (in millions):
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
---------------------- ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 199.3 $ 180.5 $ 394.5 $ 366.8
Operating earnings (loss) $ 2.3 $ (4.3) $ 19.7 $ 15.5
Operating margin 1.2% (2.4)% 5.0% 4.2%
Capital expenditures $ 6.8 $ 7.2 $ 10.3 $ 12.4
Recreation segment sales of $199.3 million for the second quarter of 2002
increased 10 percent compared with the second quarter of 2001. Sales for the
first six months of 2002 increased 8 percent to $394.5 million from the prior
year. Increased international sales as well as higher commercial and consumer
fitness equipment sales domestically were the primary drivers behind the quarter
and year-to-date improvements in sales. Increased billiards and bowling
equipment sales also contributed to the increase in second quarter 2002 sales
compared with 2001. On a year-to-date basis, the 2002 sales also include the
full impact of the Omni Fitness acquisition, which closed late in the first
quarter of 2001.
In the second quarter of 2002, Recreation segment operating earnings increased
to $2.3 million from a loss of $4.3 million in 2001. Operating margins increased
360 basis points from a year ago to 1.2 percent in the current quarter. In the
year-to-date period, operating earnings increased to $19.7 million from $15.5
million versus the comparable period of the prior year. Operating margins for
the six-month period increased to 5.0 percent from 4.2 percent in 2001. The main
drivers for the operating earnings improvements in the quarter and year-to-date
periods are increased sales volumes of fitness, bowling and billiards equipment,
and continued cost cutting and supply chain initiatives in the bowling equipment
business.
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.
17
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth an analysis of cash flow for the six-month
periods ended June 30, 2002 and 2001 (in millions):
SIX MONTHS ENDED JUNE 30
-------------------------
2002 2001
-------- --------
EBITDA* $ 189.4 $ 234.8
Changes in working capital 11.9 (81.3)
Interest expense (21.6) (27.7)
Tax refunds, net 22.3 30.4
Other 36.6 (7.1)
-------- --------
Cash provided by operating activities of continuing operations 238.6 149.1
Cash used for investing activities of continuing operations** (43.7) (22.9)
-------- --------
Free cash flow *** $ 194.9 $ 126.2
======== ========
Cash flow from discontinued operations (pre-tax) $ -- $ 40.6
======== ========
* EBITDA is defined as net earnings adjusted for the effect of changes in
accounting principles and discontinued operations, and 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.
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
$238.6 million for the first six months of 2002 compared with $149.1 million in
2001.
The $89.5 million increase in net cash provided by operating activities of
continuing operations versus the prior year was generated principally from a
decrease in working capital. Cash provided by operating activities included
changes in working capital that provided cash of $11.9 million in 2002 versus a
use of cash of $81.3 million in 2001. The change in working capital is a result
of a decrease in inventories and an increase in accounts payable and accrued
expenses, which is partially offset by an increase in accounts and notes
receivable in the first six months of 2002 versus the comparable period of the
prior year.
Cash flow from operating activities in 2002 also included lower income tax
refunds versus the prior year. The net tax refunds for the six months ended June
30, 2002, resulted primarily from the divestiture of the beverage cooler
business completed in late 2001. The net tax refunds for the six months ended
June 30, 2001, were largely the result of the sale of the bicycle and camping
businesses completed in late 2000.
Other cash provided by operating activities was $36.6 million during the six
months ended June 30, 2002, versus cash used of $7.1 million in the first half
of 2001. Key drivers of favorable cash flows include an increase in deferred
items in 2002, including extended service agreements from the Marine Engine
segment. Antitrust litigation settlement payments made in 2001 also affected
the year-to-date comparisons.
During the first six months of 2002, the Company invested $41.0 million in
capital expenditures compared with $47.0 million in 2001. Cash paid for
acquisitions totaled $8.8 million in the first six months of 2002, compared with
$20.1 million in the first six months of 2001.
18
During the first six months of 2002, the company received $39.4 million from
stock options exercised compared with $7.5 million during the first six months
of 2001.
The Company announced in 2001 that it would begin paying dividends annually
rather than quarterly, beginning in 2002, to reduce administrative costs. Future
dividends, as declared at the discretion of the Board of Directors, will be paid
in December.
Cash and cash equivalents totaled $334.5 million at June 30, 2002, up $226.0
million from $108.5 million at the end of 2001. Total debt at June 30, 2002,
increased $6.5 million to $646.7 million versus $640.2 million at the end of
2001. Debt-to-capitalization ratios at these dates were 34.8 percent and 36.6
percent, respectively. The Company had no outstanding commercial paper
borrowings at June 30, 2002, with additional borrowing capacity of $360.0
million under the Company's $360 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.
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
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 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.
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 or a
replacement bicycle. 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). CCS had sued the Company alleging that a front-drive
cross trainer manufactured by Life Fitness infringed a patent held by CCS. As a
19
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.
On May 30, 2002, Leiserv, Inc. (Leiserv), a Company subsidiary operated by the
Company's Bowling and Billiards Division, was sued in the Circuit Court of St.
Louis County, Missouri, for alleged violations of the federal Telephone Consumer
Protection Act. The lawsuit was brought as a putative class action on behalf of
all people and entities within two area codes in the St. Louis area who
allegedly received unsolicited faxes from Leiserv. Leiserv has removed the case
to the United States District Court for the Eastern District of Missouri.
Because this case remains in the early stages of litigation and raises legal
issues that have not yet been fully resolved by the courts, the Company is
unable to predict the potential outcome of this matter.
On April 22, 2002, a federal court in Seattle lifted a stay in a lawsuit filed
against Life Fitness by Precor Incorporated (Precor), a subsidiary of Illinois
Tool Works, Inc. The suit, which alleges that certain of Life Fitness'
cross-trainer exercise machines infringed Precor's Miller `829 patent, was
stayed by the court pending reexamination of the patent by the U.S. Patent and
Trademark Office (PTO). The PTO issued a modified Miller `829 patent on March 5,
2002, which led to the lifting of the stay. The Company does not believe that
its machines infringe the patent, as modified, but is unable to predict the
outcome of this matter.
On June 14, 2002, in a separate lawsuit between the Company and Precor, a
federal court in Seattle awarded Precor approximately $230,000 in attorneys'
fees. Precor had been awarded $5.3 million in attorneys' fees at trial, but the
award was remanded for reconsideration in light of an appellate court ruling in
the case. The Company believes that this matter, which was originally filed in
1994, has been finally concluded.
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, bowling and billiards 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; and imports
from Asia and increased competition from Asian competitors. Additional factors
are included in the 2001 Form 10-K.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 4 to Consolidated Financial Statements in Part I of this Quarterly Report
on pages 10 and 11 is hereby incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K.
None
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRUNSWICK CORPORATION
(Registrant)
August 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.
22