form10_q.htm


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

Form 10-Q

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2008
or
[   ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number 1-1043
_______________

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

Delaware
36-0848180
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
1 N. Field Court, Lake Forest, Illinois
60045-4811
(Address of principal
executive offices)
(Zip Code)
 
(847) 735-4700
(Registrant’s telephone number, including area code)


 
 
  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
   
  Yes [X]  No [   ]
   
  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
   
   Large accelerated filer   [X]        Accelerated filer      [   ] 
       
   Non-accelerated filer  [   ]    Smaller reporting company  [   ]
   
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
   
  Yes [   ]    No [X]
     
  The number of shares of Common Stock ($0.75 par value) of the registrant outstanding as of July 25, 2008, was 87,603,646.
 
 
 
 
 
 
 



 
 
 

 
 
 
BRUNSWICK CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 28, 2008
 
 
TABLE OF CONTENTS



     
Page
 
PART I – FINANCIAL INFORMATION
     
         
Item 1.
Consolidated Financial Statements
     
         
 
Consolidated Statements of Income for the three months and six months ended June 28, 2008 (unaudited), and June 30, 2007 (unaudited)
    1  
           
 
Condensed Consolidated Balance Sheets as of June 28, 2008 (unaudited), December 31, 2007, and June 30, 2007 (unaudited)
    2  
           
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 28, 2008 (unaudited), and Revised June 30, 2007 (unaudited)
    4  
           
 
Notes to Consolidated Financial Statements (unaudited)
    5  
           
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    24  
           
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    38  
           
Item 4.
Controls and Procedures
    38  
           
           
PART II – OTHER INFORMATION
       
           
Item 1.
Legal Proceedings
    39  
           
Item 1A.
Risk Factors
    39  
           
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    40  
           
Item 4.
Submission of Matters to a Vote of Security Holders
    40  
           
Item 6.
Exhibits
    40  


 
 
 

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

BRUNSWICK CORPORATION
Consolidated Statements of Income
(unaudited)

(in millions, except per share data)  
Three Months Ended
   
Six Months Ended
 
   
June 28,
2008
   
June 30,
2007
   
June 28,
2008
   
June 30,
2007
 
                         
Net sales
  $ 1,485.4     $ 1,522.9     $ 2,832.2     $ 2,909.0  
Cost of sales
    1,182.0       1,190.3       2,259.2       2,275.5  
Selling, general and administrative expense
    205.5       209.5       408.7       416.3  
Research and development expense
    32.0       35.7       65.9       69.2  
Restructuring, exit and impairment charges
    83.1       1.1       105.3       8.7  
  Operating earnings (loss)
    (17.2 )     86.3       (6.9 )     139.3  
Equity earnings
    6.3       7.1       11.1       13.4  
Investment sale gain
    1.2             20.9        
Other income (expense), net
    0.8       0.2       1.9       (0.2 )
  Earnings (loss) before interest and income taxes
    (8.9 )     93.6       27.0       152.5  
Interest expense
    (11.4 )     (13.3 )     (22.9 )     (26.9 )
Interest income
    1.5       1.9       2.9       3.7  
  Earnings (loss) before income taxes
    (18.8 )     82.2       7.0       129.3  
Income tax (benefit) provision
    (12.8 )     25.3       (0.3 )     38.1  
  Net earnings (loss) from continuing operations
    (6.0 )     56.9       7.3       91.2  
                                 
Discontinued operations:
                               
  Earnings from discontinued operations, net of tax
          0.6             4.0  
  Gain (loss) on disposal of discontinued operations, net of tax
          (0.2 )           7.7  
  Net earnings from discontinued operations
          0.4             11.7  
                                 
  Net earnings (loss)
  $ (6.0 )   $ 57.3     $ 7.3     $ 102.9  
                                 
Earnings per common share:
                               
  Basic
                               
    Net earnings (loss) from continuing operations
  $ (0.07 )   $ 0.63     $ 0.08     $ 1.00  
    Earnings from discontinued operations, net of tax
                      0.04  
    Gain (loss) on disposal of discontinued operations, net of tax
                      0.09  
                                 
    Net earnings (loss)
  $ (0.07 )   $ 0.63     $ 0.08     $ 1.13  
                                 
  Diluted
                               
    Net earnings (loss) from continuing operations
  $ (0.07 )   $ 0.63     $ 0.08     $ 1.00  
    Earnings from discontinued operations, net of tax
                      0.04  
    Gain (loss) on disposal of discontinued operations, net of tax
                      0.09  
                                 
    Net earnings (loss)
  $ (0.07 )   $ 0.63     $ 0.08     $ 1.13  
                                 
Weighted average shares used for computation of:
                               
  Basic earnings per share
    88.3       90.5       88.3       91.0  
  Diluted earnings per share
    88.3       91.0       88.4       91.5  
                                 
                                 
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
 


 
1
 


BRUNSWICK CORPORATION
Condensed Consolidated Balance Sheets

   
June 28,
   
December 31,
   
June 30,
 
(in millions)
 
2008
   
2007
   
2007
 
   
(unaudited)
         
(unaudited)
 
Assets
                 
Current assets
                 
   Cash and cash equivalents, at cost, which approximates market
  $ 392.8     $ 331.4     $ 278.8  
   Accounts and notes receivable, less allowances of $38.1, $31.2 and $28.5
    604.8       572.4       575.4  
   Inventories
                       
      Finished goods
    471.0       446.7       462.2  
      Work-in-process
    311.6       323.4       328.9  
      Raw materials
    139.7       136.6       141.5  
         Net inventories
    922.3       906.7       932.6  
   Deferred income taxes
    242.6       249.9       240.7  
   Prepaid expenses and other
    44.8       53.9       63.6  
   Current assets held for sale
                27.4  
         Current assets
    2,207.3       2,114.3       2,118.5  
                         
Property
                       
   Land
    108.0       103.5       93.7  
   Buildings and improvements
    703.1       697.4       644.9  
   Equipment
    1,210.3       1,205.7       1,200.4  
      Total land, buildings and improvements and equipment
    2,021.4       2,006.6       1,939.0  
   Accumulated depreciation
    (1,161.9 )     (1,117.8 )     (1,071.7 )
      Net land, buildings and improvements and equipment
    859.5       888.8       867.3  
   Unamortized product tooling costs
    142.4       164.0       153.6  
         Net property
    1,001.9       1,052.8       1,020.9  
                         
Other assets
                       
   Goodwill
    677.3       678.9       670.1  
   Other intangibles, net
    213.1       245.6       318.7  
   Investments
    103.1       132.1       146.5  
   Other long-term assets
    142.4       141.9       184.8  
   Long-term assets held for sale
                24.6  
         Other assets
    1,135.9       1,198.5       1,344.7  
                         
Total assets
  $ 4,345.1     $ 4,365.6     $ 4,484.1  
                         
                         
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
 

 
2
 
 

 
BRUNSWICK CORPORATION
Condensed Consolidated Balance Sheets

   
June 28,
   
December 31,
   
June 30,
 
(in millions, except share data)
 
2008
   
2007
   
2007
 
   
(unaudited)
         
(unaudited)
 
Liabilities and shareholders’ equity
                 
Current liabilities
                 
   Short-term debt, including current maturities of long-term debt
  $ 0.8     $ 0.8     $ 0.4  
   Accounts payable
    421.6       437.3       414.6  
   Accrued expenses
    836.8       858.1       850.1  
   Current liabilities held for sale
                19.4  
      Current liabilities
    1,259.2       1,296.2       1,284.5  
                         
Long-term liabilities
                       
   Debt
    726.9       727.4       724.8  
   Deferred income taxes
    3.2       12.3       43.9  
   Postretirement and postemployment benefits
    194.5       192.8       224.7  
   Other
    236.1       244.0       275.5  
   Long-term liabilities held for sale
                10.7  
      Long-term liabilities
    1,160.7       1,176.5       1,279.6  
                         
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
    412.1       409.0       384.3  
   Retained earnings
    1,895.7       1,888.4       1,932.3  
   Treasury stock, at cost:
                       
      14,937,000; 15,092,000 and 13,631,000 shares
    (425.9 )     (428.7 )     (390.8 )
   Accumulated other comprehensive loss, net of tax
    (33.6 )     (52.7 )     (82.7 )
      Shareholders’ equity
    1,925.2       1,892.9       1,920.0  
                         
Total liabilities and shareholders’ equity
  $ 4,345.1     $ 4,365.6     $ 4,484.1  
                         
                         
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
 

 
3
 

 
BRUNSWICK CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)

   
Six Months Ended
 
(in millions)
 
June 28,
2008
   
Revised
June 30,
2007
 
             
Cash flows from operating activities
           
   Net earnings
  $ 7.3     $ 102.9  
   Net earnings from discontinued operations
          11.7  
   Net earnings from continuing operations
    7.3       91.2  
   Depreciation and amortization
    90.5       84.8  
   Changes in non-cash current assets and current liabilities
    (91.5 )     (97.3 )
   Impairment charges
    52.8        
   Income taxes
    1.2       49.2  
   Other, net
    2.3       6.6  
      Net cash provided by operating activities of continuing operations
    62.6       134.5  
      Net cash used for operating activities of discontinued operations
          (26.8 )
      Net cash provided by operating activities
    62.6       107.7  
                 
Cash flows from investing activities
               
   Capital expenditures
    (58.0 )     (82.5 )
   Acquisitions of businesses, net of cash acquired
          (1.6 )
   Investments
    13.0       4.5  
   Proceeds from investment sale
    40.4        
   Proceeds from the sale of property, plant and equipment
    3.4       1.6  
   Other, net
    0.2       12.4  
      Net cash used for investing activities of continuing operations
    (1.0 )     (65.6 )
      Net cash provided by investing activities of discontinued operations
          30.2  
      Net cash used for investing activities
    (1.0 )     (35.4 )
                 
Cash flows from financing activities
               
   Net issuances of commercial paper and other short-term debt
    0.3        
   Payments of long-term debt including current maturities
    (0.5 )     (0.5 )
   Stock repurchases
          (87.2 )
   Stock options exercised
          10.8  
      Net cash used for financing activities of continuing operations
    (0.2 )     (76.9 )
      Net cash used for financing activities of discontinued operations
           
      Net cash used for financing activities
    (0.2 )     (76.9 )
                 
Net increase (decrease) in cash and cash equivalents
    61.4       (4.6 )
Cash and cash equivalents at beginning of period
    331.4       283.4  
                 
Cash and cash equivalents at end of period
  $ 392.8     $ 278.8  
                 
   
The Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
 



 
4
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)
 
 

Note 1 – Significant Accounting Policies

Interim Financial Statements. The unaudited interim consolidated financial statements of Brunswick Corporation (Brunswick or the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Therefore, certain information and disclosures normally included in financial statements and related notes prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Certain previously reported amounts have been reclassified to conform to the current period presentation.

These financial statements should be read in conjunction with, and have been prepared in conformity with, the accounting principles reflected in the consolidated financial statements and related notes included in Brunswick’s 2007 Annual Report on Form 10-K (the 2007 Form 10-K), except as it relates to fair value measurements, as discussed in Note 4 – Fair Value Measurements. As indicated in Note 2 – Discontinued Operations, Brunswick’s results as discussed in the Notes to Consolidated Financial Statements reflect continuing operations only, unless otherwise noted. These interim results include, in the opinion of management, all normal and recurring adjustments necessary to present fairly the financial position of Brunswick as of June 28, 2008, December 31, 2007, and June 30, 2007, the results of operations for the three months and six months ended June 28, 2008, and June 30, 2007, and the cash flows for the six months ended June 28, 2008, and June 30, 2007. Due to the seasonality of Brunswick’s businesses and the restructuring activities underway, the interim results are not necessarily indicative of the results that may be expected for the remainder of the year.

The Company maintains its financial records on the basis of a fiscal year ending on December 31, with the fiscal quarters ending on the Saturday closest to the end of the period (thirteen-week periods). The first two quarters of fiscal year 2008 ended on March 29, 2008, and June 28, 2008, and the first two quarters of fiscal year 2007 ended on March 31, 2007, and June 30, 2007.

Revisions. The Company expanded its presentation of the Consolidated Statements of Cash Flows to include net earnings and net earnings from discontinued operations. Accordingly, the Company revised the June 30, 2007, Consolidated Statement of Cash Flows. Net cash flows from operating, investing and financing activities have not changed.
 
Recent Accounting Pronouncements. In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” (SFAS 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Effective January 1, 2008, the Company adopted SFAS 157. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. The adoption of this statement did not have a material impact on the Company’s consolidated results of operations and financial condition. See Note 4 – Fair Value Measurements for additional disclosures.


 
5
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)
 
 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 permits entities to choose to measure certain financial assets and financial liabilities at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are to be reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has elected not to adopt the fair value option established by SFAS 159.

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

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

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


 
6
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


Note 2 – Discontinued Operations

In April 2006, the Company announced its intention to sell the majority of its Brunswick New Technologies (BNT) business unit, which consisted of the Company’s marine electronics, portable navigation device (PND) and wireless fleet tracking businesses. Accordingly, the Company reported these BNT businesses as discontinued operations in accordance with the criteria of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” related to the classification of assets to be disposed of by sale. These criteria include reclassifying the operations of BNT for all periods presented.

In March 2007, Brunswick completed the sales of BNT’s marine electronics and PND businesses to Navico International Ltd. and MiTAC International Corporation, respectively. During the first six months of 2007, the Company recognized proceeds of $44.2 million, resulting in an after-tax gain of $7.7 million before all post-closing adjustments.

Each of these sales was subject to post-closing adjustments, which were completed during 2007. Ultimately, the Company recorded net proceeds of $40.6 million and an after-tax gain of $4.0 million for the year ended December 31, 2007.

There were no sales or earnings from discontinued operations during the first six months of 2008. The following table discloses the results of operations of the BNT businesses reported as discontinued operations for the three months and six months ended June 30, 2007:
 

(in millions)
 
Three Months Ended
   
Six Months Ended
 
             
Net sales
  $ 16.5     $ 97.5  
Pre-tax earnings (loss)
  $ (2.6 )   $ 2.1  
 

 
There were no remaining BNT net assets available for sale as of June 28, 2008, or December 31, 2007. The following table reflects the financial position of the BNT businesses reported as discontinued operations as of June 30, 2007:

 
(in millions)
     
       
Accounts receivable
  $ 23.0  
Inventory, net
    4.1  
Other current assets
    0.3  
     Total current assets
    27.4  
         
Goodwill and intangible assets
    13.1  
Investments
    8.0  
Property, plant and equipment
    3.5  
     Total assets
    52.0  
         
Accounts payable
    6.3  
Accrued expenses
    13.1  
     Total current liabilities
    19.4  
         
Long-term liabilities
    10.7  
     Total liabilities
    30.1  
         
Net assets
  $ 21.9  



 
7
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


Note 3 – Restructuring Activities

Restructuring and exit charges

In November 2006, Brunswick announced initiatives to improve the Company’s cost structure, better utilize overall capacity and improve general operating efficiencies. The restructuring initiatives included the consolidation of certain boat manufacturing facilities, sales offices and distribution warehouses and reductions in the Company’s global workforce.

The Company announced further initiatives during 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, enhance U.S. engine production efficiency and eliminate assembly operations for certain engines in Europe.

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

The Company announced a plan in June 2008 to expand on its previous restructuring initiatives as a result of the prolonged downturn in the U.S. marine market. The plan is designed to improve performance and better position the Company for current market conditions and longer term growth. The plan will result in significant changes in the Company’s organizational structure, most notably by reducing the complexity of its operations, shrinking its North American manufacturing footprint and enhancing its brand positioning. Specifically, the Company has announced the closing of its production facility in Newberry, South Carolina, due to its decision to cease production of its Bluewater Marine brands, including Sea Pro, Sea Boss, Palmetto and Laguna; its intention to close four additional boat plants; and the write-down of certain assets of the Valley-Dynamo coin-operated commercial billiards business while it explores a potential sale of that business. The second quarter results include severance and plant closure costs, asset write-downs and impairment charges related to the plan announced in June 2008 and certain costs related to restructuring actions previously initiated.

The nature of the costs incurred under actions related to the announced plan are anticipated to be:

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

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

Specifically, the Company considers actions related to the sale of certain Baja boat business assets, the closure of its bowling pin manufacturing facility and the potential sale of the Valley-Dynamo coin-operated commercial billiards business to be exit activities. The Company considers all other actions taken to be restructuring activities.

 
8
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


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

   
Three Months Ended
   
Six Months Ended
 
 
(in millions)
 
June 28,
2008
   
June 30,
2007
   
June 28,
2008
   
June 30,
2007
 
                         
     Restructuring activities
                       
        Employee termination and other benefits
   $ 9.4      $ 0.1      $ 11.4      $ 4.0  
        Current asset write-downs
    2.0             2.0        
        Transformation and other costs
    19.0             24.6       0.9  
     Exit activities
                               
        Employee termination and other benefits
    1.1       0.4       3.3       0.9  
        Current asset write-downs
    4.1       0.6       7.2       0.6  
        Transformation and other costs
    3.1             4.0       2.3  
                                 
Total restructuring and exit charges
  $ 38.7     $ 1.1     $ 52.5     $ 8.7  
 

 
The effect of these actions on each the Company’s reportable segments for the three months ended June 28, 2008, is summarized below:

 
(in millions)
 
Boat
   
Marine
Engine
   
Fitness
   
Bowling & Billiards
   
Corporate
   
Total
 
                                     
 Employee terminations and other benefits
  $ 3.1     $ 6.3     $     $ 1.0     $ 0.1     $ 10.5  
 Current asset write-downs
    2.5             1.3       2.3             6.1  
 Transformation and other costs
     11.6        4.4        —        0.2        5.9        22.1  
                                                 
Total restructuring and exit charges
  $ 17.2     $ 10.7     $ 1.3     $ 3.5     $ 6.0     $ 38.7  
 

 
The effect of these actions on each the Company’s reportable segments for the six months ended June 28, 2008, is summarized below:

 
(in millions)
 
Boat
 
Marine
Engine
 
Fitness
 
Bowling & Billiards
 
Corporate
   
Total
 
                             
 Employee terminations and other benefits
  $ 3.7   $ 7.8   $   $ 2.6   $ 0.6     $ 14.7  
 Current asset write-downs
    5.2         1.3     2.7           9.2  
 Transformation and other costs
     16.4      4.4      —      1.1      6.7        28.6  
                                         
Total restructuring and exit charges
  $ 25.3   $ 12.2   $ 1.3   $ 6.4   $ 7.3     $ 52.5  
 
 
The Company anticipates that it will incur additional costs of $65 million to $75 million under these initiatives in 2008. The Company expects most of these charges will be incurred in the Boat and Marine Engine segments.

 
9
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


Impairment charges

The Company recognized a $44.4 million impairment charge in the second quarter of 2008, which is comprised of the following components:

 
(in millions)
 
Goodwill
   
Other Intangibles
   
Property
   
Total
 
                         
Boat
  $     $ 13.4     $ 7.6     $ 21.0  
Marine Engine
          4.9       1.4       6.3  
Bowling & Billiards
    1.7       11.6       3.0       16.3  
Corporate
                0.8       0.8  
                                 
Impairment charge
  $ 1.7     $ 29.9     $ 12.8     $ 44.4  

The Company recognized a $52.8 million impairment charge in the first six months of 2008, which is comprised of the following components:

 
(in millions)
 
Goodwill
   
Other Intangibles
   
Property
   
Total
 
                         
Boat
  $ 1.5     $ 13.4     $ 11.8     $ 26.7  
Marine Engine
          4.9       1.4       6.3  
Bowling & Billiards
    1.7       11.6       5.7       19.0  
Corporate
                0.8       0.8  
                                 
Impairment charge
  $ 3.2     $ 29.9     $ 19.7     $ 52.8  

The Company had no comparable charges in either period of 2007.


 
10
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


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

The following table summarizes Brunswick’s financial assets and liabilities measured at fair value on a recurring basis in accordance with SFAS 157 as of June 28, 2008:

(in millions)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Cash Equivalents
  $ 228.9     $     $     $ 228.9  
Investments
    4.4                   4.4  
Derivatives
          5.4             5.4  
Total Assets
  $ 233.3     $ 5.4     $     $ 238.7  
                                 
Liabilities:
                               
Derivatives
  $     $ 10.8     $     $ 10.8  
 


 
11
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)

Note 5 – Share-Based Compensation

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

 Under the 2003 Stock Incentive Plan (Plan), the Company may grant stock options, stock appreciation rights (SARs), nonvested stock and other types of share-based awards to executives and other management employees. Under the Plan, the Company may issue up to 8.1 million shares, consisting of treasury shares and authorized, but unissued shares of common stock. As of June 28, 2008, 0.5 million shares were available for grant under the Plan.

Stock Options and SARs

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

During the three and six months ended June 28, 2008, there were 0.0 million and 2.6 million SARs granted, respectively, which resulted in $2.4 million and $3.4 million of total expense, respectively, due to amortization of SARs granted. During the three and six months ended June 30, 2007, there were 0.0 million and 0.9 million SARs granted, respectively, which resulted in $0.7 million and $2.4 million of total expense, respectively, due to amortization of SARs granted. These expenses resulted in a deferred tax asset for the tax benefit to be realized in future periods.

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

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

Nonvested stock awards

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

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

The cost of nonvested stock awards is recognized on a straight-line basis over the requisite service period. During the three and six months ended June 28, 2008, there were 0.0 million and 0.9 million stock awards granted under these plans, respectively, and, due to amortization of stock awards granted, $2.1 million and $2.8 million was charged to compensation expense under these plans, respectively. During the three and six months ended June 30, 2007, there were 0.0 million and 0.1 million stock awards granted under these plans, respectively, and, due to amortization of stock awards granted, $0.9 million and $2.3 million was charged to compensation expense under these plans, respectively.

12
 
 
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)
 
The weighted average price per nonvested stock award at grant date was $15.84 and $33.00 for the nonvested stock awards granted in 2008 and 2007, respectively. As of June 28, 2008, there was $17.2 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 2.0 years.

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

Director Awards

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


 
13
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


Note 6 – Earnings per Common Share

The Company calculates earnings per share in accordance with SFAS No. 128, “Earnings per Share.” Basic earnings per share is calculated by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated similarly, except that the calculation includes the dilutive effect of stock options and nonvested stock awards. Weighted average basic shares decreased by 2.2 million shares and 2.7 million shares in the three and six months ended June 28, 2008, respectively, versus the comparable periods in 2007, primarily due to the effect of the Company’s share repurchase program, as discussed in Note 14 – Share Repurchase Program.

Basic and diluted earnings per share for the three and six months ended June 28, 2008, and for the comparable periods ended June 30, 2007, were calculated as follows:
 

   
Three Months Ended
   
Six Months Ended
 
(in millions, except per share data)
 
June 28,
2008
   
June 30,
2007
   
June 28,
2008
   
June 30,
2007
 
                         
Net earnings (loss) from continuing operations
  $ (6.0 )   $ 56.9     $ 7.3     $ 91.2  
Earnings from discontinued operations, net of tax
          0.6             4.0  
Gain (loss) on disposal of discontinued operations, net of tax
          (0.2 )           7.7  
                                 
Net earnings (loss)
  $ (6.0 )   $ 57.3     $ 7.3     $ 102.9  
                                 
Average outstanding shares – basic
    88.3       90.5       88.3       91.0  
Dilutive effect of common stock equivalents
          0.5       0.1       0.5  
                                 
Average outstanding shares – diluted
    88.3       91.0       88.4       91.5  
                                 
Basic earnings per share
                               
  Net earnings (loss) from continuing operations
  $ (0.07 )   $ 0.63     $ 0.08     $ 1.00  
  Earnings from discontinued operations, net of tax
                      0.04  
  Gain (loss) on disposal of discontinued operations, net of tax
                      0.09  
                                 
  Net earnings (loss)
  $ (0.07 )   $ 0.63     $ 0.08     $ 1.13  
                                 
Diluted earnings per share
                               
  Net earnings from continuing operations
  $ (0.07 )   $ 0.63     $ 0.08     $ 1.00  
  Earnings from discontinued operations, net of tax
                      0.04  
  Gain (loss) on disposal of discontinued operations, net of tax
                      0.09  
                                 
  Net earnings (loss)
  $ (0.07 )   $ 0.63     $ 0.08     $ 1.13  
 

As of June 28, 2008, there were 6.7 million options outstanding, of which 3.1 million were exercisable. This compares to 4.4 million options outstanding, of which 2.5 million were exercisable as of June 30, 2007. During the three and six months ended June 28, 2008, there were 6.7 million and 5.9 million weighted average shares of options outstanding, respectively, for which the exercise price, based on the average price, was higher than the average market price of the Company’s shares for the period then ended. These options were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive. This compares to 2.9 million and 2.7 million anti-dilutive options that were excluded from the corresponding periods ended June 30, 2007. During the three months ended June 28, 2008, the Company incurred a net loss from continuing operations. As common stock equivalents have an anti-dilutive effect on the net loss, the equivalents were not included in the computation of diluted earnings per share for the three months ended June 28, 2008.


 
14
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


Note 7 – Commitments and Contingencies

Financial Commitments

The Company has entered into guarantees of indebtedness of third parties, which primarily relate to arrangements with financial institutions 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 collection of customer receivables sold to third parties by Brunswick. In most instances, upon repurchase of the debt obligation, the Company receives rights to the collateral securing the financing. The maximum potential cash obligation associated with these customer financing arrangements was $101.7 million, as of June 28, 2008, of which $37.0 million is related to the Fitness segment, $31.7 million is related to the Marine Engine segment, $30.1 million is related to the Bowling & Billiards segment and $2.9 million is related to the Boat segment. Potential payments on these customer financing arrangements would extend over several years with the maximum single year obligation related to these arrangements of $72.6 million, of which $25.6 million is related to the Fitness segment, $31.7 million is related to the Marine Engine segment, $12.4 million is related to the Bowling & Billiards segment and $2.9 million is related to the Boat segment.

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, select Brunswick products repossessed from the customer. These arrangements are typically subject to repurchase criteria and 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 $186.5 million as of June 28, 2008, with $151.5 million relating to the Company’s U.S. boat business. The maximum single year repurchase obligation is $138.4 million, with $112.3 million relating to the Company’s U.S. boat business.

Based on historical experience and current facts and circumstances, and 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,” the Company has recorded the estimated net liability associated with losses from these guarantee and repurchase obligations on its Condensed Consolidated Balance Sheets. Historical cash requirements and losses associated with these obligations have not been significant, but could increase if dealer defaults increase as a result of the difficult market conditions in the United States.

Financial institutions have issued standby letters of credit and surety bonds conditionally guaranteeing obligations on behalf of the Company totaling $75.7 million as of June 28, 2008. This amount is 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, a ratings downgrade below investment grade, the Company could be required to post collateral to support the outstanding letters of credit and surety bonds. As a result of the recent downgrade of the Company’s long-term debt by one of the rating agencies, the Company may be required to post letters of credit as collateral against a portion of surety bonds totaling $8.3 million.


 
15
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


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 as well as 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 during the six months ended June 28, 2008:

(in millions)
 
2008
 
       
Balance at beginning of period
  $ 163.9  
Payments made
    (57.5 )
Provisions/additions for contracts issued/sold
    56.0  
Aggregate changes for preexisting warranties
     
         
Balance at end of period
  $ 162.4  

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 $20.2 million as of June 28, 2008.

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 position. 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.

Refer to Note 11 to the consolidated financial statements in the 2007 Form 10-K for discussion of other legal and environmental matters as of December 31, 2007.


 
16
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


 Note 8 – Segment Data

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 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 11 – 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.

The following table sets forth net sales and operating earnings (loss) of each of the Company’s reportable segments for the three months ended June 28, 2008, and June 30, 2007:
 

   
Net Sales
   
Operating Earnings (Loss)
 
   
Three Months Ended
   
Three Months Ended
 
(in millions)
 
June 28,
 2008
   
June 30,
 2007
   
June 28,
 2008
   
June 30,
 2007
 
                         
Boat
  $ 687.9     $ 732.8     $ (37.7 )   $ 19.3  
Marine Engine
    643.5       669.6       54.4       80.3  
Marine eliminations
    (113.1 )     (126.7 )            
  Total Marine
    1,218.3       1,275.7       16.7       99.6  
                                 
Fitness
    156.9       144.0       8.2       7.4  
Bowling & Billiards
    110.4       103.2       (19.8 )     (2.7 )
Eliminations
                       
Corporate/Other
    (0.2 )           (22.3 )     (18.0 )
                                 
  Total
  $ 1,485.4     $ 1,522.9     $ (17.2 )   $ 86.3  



 
17
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


The following table sets forth net sales and operating earnings (loss) of each of the Company’s reportable segments for the six months ended June 28, 2008, and June 30, 2007:
 

   
Net Sales
   
Operating Earnings (Loss)
 
   
Six Months Ended
   
Six Months Ended
 
(in millions)
 
June 28,
 2008
   
June 30,
 2007
   
June 28,
 2008
   
June 30,
 2007
 
                         
Boat
  $ 1,325.7     $ 1,431.8     $ (52.4 )   $ 38.8  
Marine Engine
    1,209.5       1,242.2       85.3       115.0  
Marine eliminations
    (232.9 )     (262.9 )            
  Total Marine
    2,302.3       2,411.1       32.9       153.8  
                                 
Fitness
    306.1       289.0       16.3       15.5  
Bowling & Billiards
    224.0       209.0       (18.9 )     5.6  
Eliminations
    (0.2 )     (0.1 )            
Corporate/Other
                (37.2 )     (35.6 )
                                 
  Total
  $ 2,832.2     $ 2,909.0     $ (6.9 )   $ 139.3  


Note 9 – Investments

The Company has certain unconsolidated international and domestic affiliates that are accounted for using the equity method. See Note 11 – Financial Services for more details on the Company’s joint venture, Brunswick Acceptance Company, LLC (BAC). Refer to Note 8 to the consolidated financial statements in the 2007 Form 10-K for further detail relating to the Company’s investments.

In March 2008, Brunswick sold its interest in its bowling joint venture in Japan for $40.4 million gross cash proceeds, $37.4 million net of cash paid for taxes and other costs, after post-closing adjustments. For the six months ended June 28, 2008, the sale resulted in a $20.9 million pretax gain, $9.9 million after-tax, and was recorded as an Investment sale gain in the Consolidated Statements of Income. As a result of post-closing adjustments made during the second quarter, an additional $1.2 million pretax gain, $0.8 million after-tax, was recorded as an Investment sale gain in the Consolidated Statements of Income.


 
18
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


Note 10 – Comprehensive Income

The Company reports certain changes in equity during a period in accordance with SFAS No. 130, “Reporting Comprehensive Income.” Accumulated other comprehensive loss includes prior service costs and net actuarial gains and losses for defined benefit plans; foreign currency cumulative translation adjustments; and unrealized derivative and investment gains and losses, all net of tax. Effective December 31, 2006, the Company adopted the provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R),” (SFAS 158), eliminating the minimum pension liability concept under which adjustments were recorded to other comprehensive income. The Company’s adoption of SFAS 158 also required the inclusion of prior service costs and net actuarial gains and losses in other comprehensive income (loss). Components of other comprehensive income (loss) for the three months and six months ended June 28, 2008, and June 30, 2007, were as follows:
 

   
Three Months Ended
   
Six Months Ended
 
 
(in millions)
 
June 28,
2008
   
June 30,
2007
   
June 28,
2008
   
June 30,
2007
 
                         
Net earnings (loss)
  $ (6.0 )   $ 57.3     $ 7.3     $ 102.9  
Other comprehensive income (loss):
                               
  Foreign currency cumulative translation adjustment
    4.8       6.6       16.1       2.6  
  Net change in unrealized gains (losses) on investments
    (1.1 )     0.1       (2.5 )     0.1  
  Net change in unamortized prior service cost
    0.6       0.6       1.1       1.1  
  Net change in unamortized actuarial loss
    0.4       1.3       1.1       2.6  
  Net change in accumulated unrealized derivative gains (losses)
    4.9       (0.5 )     3.3       (0.1 )
    Total other comprehensive income (loss)
    9.6       8.1       19.1       6.3  
                                 
Comprehensive income
  $ 3.6     $ 65.4     $ 26.4     $ 109.2  
 

 
Note 11 – Financial Services

The Company, through its Brunswick Financial Services Corporation (BFS) subsidiary, owns a 49 percent interest in a joint venture, Brunswick Acceptance Company, LLC (BAC). CDF Ventures, LLC (CDFV), a subsidiary of GE Capital Corporation (GECC), owns the remaining 51 percent. BAC commenced operations in 2003 and provides secured wholesale inventory 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.

During the second quarter of 2008, the parties agreed to extend the term of the venture through June 30, 2014. The joint venture agreement contains provisions allowing for renewal, purchase, or termination by either of the partners at the end of this term or subsequent extensions. The agreement also contains provisions allowing CDFV to terminate the joint venture if the Company is unable to maintain compliance with certain financial metrics. The Company was in compliance with these metrics at the end of the second quarter.

BAC is funded in part through a $1.0 billion secured borrowing facility from GE Commercial Distribution Finance Corporation (GECDF), which is in place through the term of the joint venture, and with equity contributions from both partners. BAC also sells a portion of its receivables to a securitization facility, the GE Dealer Floorplan Master Note Trust, which is arranged by GECC. The sales of these receivables meet the requirements of a “true sale” under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of FASB Statement No. 125,” (SFAS 140), and are therefore not retained on the financial statements of BAC. The indebtedness of BAC is not guaranteed by the Company or any of its subsidiaries. In addition, BAC is not responsible for any continuing servicing costs or obligations with respect to the securitized receivables.

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 Condensed Consolidated Balance Sheets. 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. BFS and GECDF also have an income sharing arrangement related to income generated from the receivables sold by BAC to the securitization facility.

19
 

 
 
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)
 
 
BFS’s equity investment is adjusted monthly to maintain a 49 percent interest in accordance with the capital provisions of the joint venture agreement. The Company funds its investment in BAC through cash contributions and reinvested earnings. BFS’s total investment in BAC at June 28, 2008, and December 31, 2007, was $34.0 million and $47.0 million, respectively.

BFS recorded income related to the operations of BAC of $2.9 million and $5.7 million for the three months and six months ended June 28, 2008, respectively. These amounts compare to $3.3 million and $6.7 million in the corresponding periods ended June 30, 2007, respectively. These amounts include amounts earned by BFS under the aforementioned income sharing agreement, but exclude the discount expense paid by the Company on the sale of Mercury Marine’s accounts receivable to the joint venture noted below.

Accounts receivable totaling $234.8 million and $443.9 million were sold to BAC during the three months and six months ended June 28, 2008, respectively, compared with $252.4 million and $460.6 million during the corresponding periods ended June 30, 2007. Discounts of $1.5 million and $3.3 million for the three months and six months ended June 28, 2008, respectively, have been recorded as an expense in Other expense, net, in the Consolidated Statements of Income. These amounts compare with $2.2 million and $4.1 million for the same periods in the prior year. The outstanding balance of receivables sold to BAC was $107.8 million as of June 28, 2008, up from $93.1 million as of December 31, 2007. Pursuant to the joint venture agreement, BAC reimbursed Mercury Marine $1.2 million and $1.1 million for the six months ended June 28, 2008, and June 30, 2007, respectively, for the related credit, collection and administrative costs incurred in connection with the servicing of such receivables.

As of June 28, 2008, and December 31, 2007, the Company had a retained interest in $41.3 million and $46.4 million of the total outstanding accounts receivable sold to BAC, respectively. The Company’s maximum exposure as of June 28, 2008, and December 31, 2007, related to these amounts was $25.1 million and $28.9 million, respectively. In accordance with SFAS 140, the Company treats the sale of receivables in which the Company retains an interest as a secured obligation. Accordingly, the amount of the Company’s retained interest was recorded in Accounts and notes receivable, and Accrued expenses in the Condensed Consolidated Balance Sheets. These balances are included in the amounts in Note 7 – Commitments and Contingencies.


 
20
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


Note 12 – Income Taxes

The Company recognized an income tax benefit for both the three months and six months ended June 28, 2008. The effective tax rate from continuing operations, which is based on an income tax benefit, for the three months and six months ended June 28, 2008, was 68.2 percent and 5.0 percent, respectively. The effective tax rate benefit for the three months ended June 28, 2008, was higher than the statutory rate primarily due to the $2.5 million of tax benefits related to an interest refund received from the IRS. Additionally, for the six months ended June 28, 2008, the effective tax rate was lower than the statutory rate primarily due to the interest refund received from the IRS, but was partially offset by a higher tax rate on the sale of the Company’s interest in its bowling joint venture in Japan.

The Company’s effective tax rate from continuing operations for the three months and six months ended June 30, 2007, was 30.8 percent and 29.5 percent, respectively. The effective tax rates for both periods were lower than the statutory rate mainly due to the favorable effect of the research and development tax credit. Additionally, the effective tax rate for the six months ended June 30, 2007, was lower than the statutory rate primarily due to $1.9 million of special benefits, primarily related to the Company’s election to apply the indefinite reversal criterion of Accounting Principles Board No. 23, “Accounting for Income Taxes – Special Areas,” (APB 23) as discussed in the following paragraphs.

The Company has historically provided deferred taxes under 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.

As of January 1, 2007, the Company determined that approximately $25.8 million of certain additional foreign subsidiaries’ current undistributed net earnings, as well as the future net earnings, 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 adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN 48) 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 June 30, 2008, and December 31, 2007, the Company had approximately $36 million and $39 million of gross unrecognized tax benefits, excluding interest. The Company believes it is reasonably possible that the total amount of gross unrecognized tax benefits, as of June 30, 2008, could decrease by approximately $1 million in the next 12 months due to settlements with taxing authorities.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2008, and December 31, 2007, the Company had approximately $6.0 million and $5.4 million accrued for the payment of interest. There were no amounts accrued for penalties at either June 30, 2008, or December 31, 2007.

The Company is regularly audited by federal, state and foreign tax authorities. The IRS has completed its audits of the Company’s United States income tax returns through the 2003 taxable year and is currently auditing the Company’s United States income tax returns for taxable years 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 audits dating back to the 1986 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 tax authorities for years prior to 2001.


 
21
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


Note 13 – Pension and Other Postretirement Benefits

The Company has defined contribution plans, qualified and nonqualified pension plans, and other postretirement benefit plans covering substantially all of its employees. On December 31, 2006, the Company adopted the provisions of SFAS 158, which requires recognition of the overfunded or underfunded status of pension and other postretirement plans in the statement of financial position, as well as recognition of changes in that funded status through comprehensive income in the year in which they occur. SFAS 158 was adopted on a prospective basis, as required. Prior years’ amounts have not been restated. Effective for the year ended December 31, 2007, SFAS 158 also required measurement of a plan’s assets and benefit obligations as of the date of the employer’s fiscal year end. As the Company already measured plan assets and benefit obligations as of December 31, 2006, the adoption of this element of SFAS 158 had no impact on the Company in 2007. See Note 15 to the consolidated financial statements in the 2007 Form 10-K for further details regarding these plans.

Pension and other postretirement benefit costs included the following components for the three months ended June 28, 2008, and June 30, 2007:
 
   
Pension Benefits
   
Other
Postretirement Benefits
 
   
Three Months Ended
   
Three Months Ended
 
(in millions)
 
June 28,
 2008
   
June 30,
 2007
   
June 28,
 2008
   
June 30,
 2007
 
                         
Service cost
  $ 3.7     $ 4.4     $ 0.8     $ 0.8  
Interest cost
    16.9       15.7       1.7       1.9  
Expected return on plan assets
    (21.0 )     (20.5 )            
Amortization of prior service costs
    1.6       1.6       (0.5 )     (0.5 )
Amortization of net actuarial loss
    0.9       1.8             0.3  
                                 
  Net pension and other benefit costs
  $ 2.1     $ 3.0     $ 2.0     $ 2.5  

Pension and other postretirement benefit costs included the following components for the six months ended June 28, 2008, and June 30, 2007:
 
   
Pension Benefits
   
Other
Postretirement Benefits
 
   
Six Months Ended
   
Six Months Ended
 
(in millions)
 
June 28,
 2008
   
June 30,
 2007
   
June 28,
 2008
   
June 30,
 2007
 
                         
Service cost
  $ 7.5     $ 8.7     $ 1.5     $ 1.5  
Interest cost
    33.8       31.4       3.3       3.3  
Expected return on plan assets
    (42.0 )     (40.9 )            
Amortization of prior service costs
    3.2       3.2       (0.9 )     (0.9 )
Amortization of net actuarial loss
    1.8       3.6             0.5  
                                 
  Net pension and other benefit costs
  $ 4.3     $ 6.0     $ 3.9     $ 4.4  

Employer Contributions. During the six months ended June 28, 2008, the Company contributed $1.1 million to fund benefit payments to its nonqualified plan. The Company’s plans for additional contributions are subject to equity market returns and discount rate movements, among other items.


 
22
 
Brunswick Corporation
Notes to Consolidated Financial Statements
 (unaudited)


Note 14 – Share Repurchase Program

In the second quarter of 2005, Brunswick’s Board of Directors authorized a $200.0 million share repurchase program, to be funded with available cash. On April 27, 2006, the Board of Directors increased the Company’s remaining share repurchase authorization of $62.2 million to $500.0 million. The Company expects to repurchase shares on the open market or in private transactions from time to time, depending on market conditions and the Company’s financial objectives. The Company has not repurchased any shares during 2008. During the three months and six months ended June 30, 2007, the Company repurchased 1.6 million and 2.6 million shares under this program for $53.8 million and $87.2 million, respectively. Through the second quarter of 2008, the Company had repurchased approximately 11.7 million shares for $397.4 million since the program’s inception. As of June 28, 2008, the Company’s remaining share repurchase authorization for the program was $240.4 million; however, the Company intends to retain cash to enhance its liquidity rather than repurchasing shares.


 
23
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in Management’s Discussion and Analysis are based on non-GAAP financial measures. Specifically, the discussion of the Company’s cash flows includes an analysis of free cash flows. GAAP refers to generally accepted accounting principles in the United States. A “non-GAAP financial measure” is a numerical measure of a registrant’s historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows of the issuer; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. Operating and statistical measures are not non-GAAP financial measures.

The Company includes non-GAAP financial measures in Management’s Discussion and Analysis. Brunswick’s management believes that these measures and the information they provide are useful to investors because they permit investors to view Brunswick’s performance using the same tools that Brunswick uses and to better evaluate its ongoing business performance.

Certain other statements in Management’s Discussion and Analysis are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations that are subject to risks and uncertainties. Actual results may differ materially from expectations as of the date of this filing because of factors discussed in Item 1A – Risk Factors of Brunswick’s 2007 Annual Report on Form 10-K (the 2007 Form 10-K).

Overview and Outlook

General

Net sales from continuing operations during the second quarter of 2008 decreased 2.5 percent to $1,485.4 million from $1,522.9 million in 2007. During the six months ended June 28, 2008, net sales decreased 2.6 percent to $2,832.2 million from $2,909.0 million during the six months ended June 30, 2007. For the three months and six months ended June 28, 2008, the Company reported higher sales in the Fitness and Bowling & Billiards segments, as well as higher sales outside the United States for all segments, which were more than offset by a reduction in the Boat and Marine Engine segments’ sales in the United States. The overall decrease in sales in the United States was primarily due to the continued reduction in marine industry demand as a result of a weak U.S. economy, soft housing markets in key U.S. boating states, and higher food and fuel prices that ultimately reduce the funds available for discretionary purchases. Retail unit sales of powerboats in the United States have been declining since 2005, with the rate of decline accelerating in 2008. Industry retail unit sales were down significantly during the first half of 2008 compared with the already low retail unit sales during the first half of 2007.

Quarterly and year-to-date operating losses from continuing operations of $17.2 million and $6.9 million, and negative operating margins of 1.2 percent and 0.2 percent, respectively, decreased from the same periods in the prior year, primarily as a result of lower sales from marine operations, reduced fixed-cost absorption due to reduced production rates in the Company’s marine businesses in an effort to achieve appropriate levels of dealer pipeline inventories and higher restructuring, exit and impairment charges. These factors were partially offset by successful cost-reduction initiatives, as discussed in Note 3 – Restructuring Activities in the Notes to Consolidated Financial Statements. In the three months and six months ended June 30, 2007, the Company reported operating earnings from continuing operations of $86.3 million and $139.3 million with related operating margins of 5.7 percent and 4.8 percent, respectively.

During the first quarter of 2008, the Company signed a letter of intent to sell certain assets of its Baja boat business (Baja) to Fountain Powerboat Industries, Inc. (Fountain). The transaction was aimed at further refining the Company’s product portfolio and focusing its resources on brands and marine segments that are considered to be core to the Company’s future success. The Company ramped down production at its Bucyrus, Ohio, plant through the end of May, when the sale was completed. The Company estimates that asset write-downs, along with severance and other costs associated with the Baja plant closure, will total approximately $15 million in 2008. In addition to the $8.9 million charge taken during the first quarter of 2008, Brunswick incurred an additional $4.5 million during the second quarter of 2008 related to the sale of Baja assets to Fountain. The majority of the $13.4 million charge consists of asset write-downs related to selected assets sold to Fountain and the residual assets expected to be sold to third parties.

In March 2008, Brunswick sold its interest in its bowling joint venture in Japan for $40.4 million gross cash proceeds, $37.4 million net of cash paid for taxes and other costs, after post-closing adjustments.  For the six months ended June 28, 2008, the sale resulted in a $20.9 million pretax gain, $9.9 million after-tax, and was recorded as an Investment sale gain in the Consolidated Statements of Income. As a result of post-closing adjustments made during the second quarter, an additional $1.2 million pretax gain, $0.8 million after-tax, was recorded as an Investment sale gain in the Consolidated Statements of Income.

During the second quarter of 2008, the Company ceased production of boats for its Bluewater Marine group, including Sea Pro, Sea Boss, Palmetto and Laguna brands, which were manufactured at its Newberry, South Carolina, facility. As a result, the Company incurred a $20.8 million charge during the second quarter of 2008. The majority of the $20.8 million charge consists of asset write-downs related to selected assets being disposed. The Company estimates that total asset write-downs, along with severance and other costs associated with the closure of the Newberry, South Carolina, facility, could total between $25 million and $30 million.

24
 
During the second quarter of 2008, the Company determined that it would evaluate a potential sale of its Valley-Dynamo coin-operated commercial billiards business. The Company plans to concentrate its efforts on more profitable lines of business such as its Brunswick branded billiards tables, furniture, and accessories and it