Brunswick Corporation is a Delaware corporation, incorporated on December 31, 1907. Brunswick is a leading global manufacturer and marketer of recreation products including marine engines, boats, fitness equipment and bowling and billiards equipment. Brunswick’s engine products include outboard, sterndrive and inboard engines; trolling motors; propellers; engine control systems; and marine parts and accessories. The Company’s boat offerings include fiberglass pleasure boats; luxury sportfishing convertibles and motoryachts; offshore fishing boats; aluminum fishing boats; and pontoon and deck boats. Brunswick’s fitness products include both cardiovascular and strength training equipment. Brunswick’s bowling offerings include products such as capital equipment, after-market and consumer products; and billiards offerings such as billiards and gaming tables and accessories. The Company also owns and operates Brunswick bowling family entertainment centers in the United States and other countries.
In 2009, Brunswick’s primary focus was on liquidity. In 2010, Brunswick intends to focus on generating positive cash flow, performing better than the market in each of its business segments, and, as its revenue grows, taking advantage of its considerable leverage. In the longer term, Brunswick’s strategy is to introduce the highest quality products with the most innovative technology and styling at a rate faster than its competitors; to distribute products through a model that benefits its partners – dealers and distributors – and provides world-class service to its customers; to develop and maintain low-cost manufacturing processes and to continually improve productivity and efficiency; to manufacture and distribute products globally with local and regional styling; and to attract and retain skilled and knowledgeable people. These factors promote the Company’s ability to grow from expansion of its existing businesses. The Company’s objective is to enhance shareholder value by achieving returns on investments that exceed its cost of capital.
During the first quarter of 2009, the Company realigned the management of its marine service, parts and accessories businesses. The Boat segment’s parts and accessories businesses of Attwood, Land ‘N’ Sea, Benrock, Kellogg Marine and Diversified Marine Products are now being managed by the Marine Engine segment’s service and parts business leaders. As a result, the marine service, parts and accessories operating results previously reported in the Boat segment are now being reported in the Marine Engine segment. Segment results have been restated for all periods presented to reflect the change in Brunswick’s reported segments. Refer to Note 5 – Segment Information and Note 20 – Discontinued Operations in the Notes to Consolidated Financial Statements for additional information regarding the Company’s segments and discontinued operations, including net sales, operating earnings and total assets by segment for 2009, 2008 and 2007.
Marine Engine Segment
The Marine Engine segment, which had net sales of $1,425.0 million in 2009, consists of the Mercury Marine Group (Mercury Marine). The Company believes its Marine Engine segment has the largest dollar sales volume of recreational marine engines in the world.
Mercury Marine manufactures and markets a full range of sterndrive propulsion systems, inboard engines and outboard engines under the Mercury, Mercury MerCruiser, Mariner, Mercury Racing, Mercury SportJet and Mercury Jet Drive, MotorGuide, Axius, Zeus and MerCruiser 360 brand names. In addition, Mercury Marine manufactures and markets marine parts and accessories under the Quicksilver, Mercury Precision Parts, Mercury Propellers, Attwood, Land ‘N’ Sea, Benrock, Kellogg Marine, Diversified Marine Products, Sea Choice and MotorGuide brand names, including marine electronics and control integration systems, steering systems, instruments, controls, propellers, trolling motors, service aids and marine lubricants. Mercury Marine’s sterndrive engines, inboard engines and outboard engines are sold to independent boat builders, local, state and foreign governments, and to the Company’s Boat segment. In addition, Mercury Marine’s outboard engines are sold to end-users through a global network of more than 4,000 marine dealers and distributors worldwide, specialty marine retailers and marine service centers. Mercury Marine, through Cummins MerCruiser Diesel Marine LLC (CMD), a joint venture between Brunswick’s Mercury Marine division and Cummins Marine, a division of Cummins Inc., supplies integrated diesel propulsion systems to the worldwide recreational and commercial marine markets, including the Company’s Boat segment.
Mercury Marine manufactures two-stroke OptiMax outboard engines ranging from 75 to 300 horsepower, all of which feature Mercury’s direct fuel injection (DFI) technology, and four-stroke outboard engine models ranging from 2.5 to 350 horsepower. All of these low-emission engines are believed to be in compliance with U.S. Environmental Protection Agency (EPA) requirements for 2010. Mercury Marine’s four-stroke outboard engines include Verado, a collection of supercharged outboards ranging from 135 to 350 horsepower, and Mercury Marine’s naturally aspirated four-stroke outboards, ranging from 2.5 to 115 horsepower. In addition, most of Mercury’s sterndrive and inboard engines are now available with catalytic converters, and are compliant with environmental regulations adopted by the State of California, effective January 1, 2008, and by the EPA, effective January 1, 2010.
To promote advanced propulsion systems with improved and easier handling, performance and efficiency, Mercury Marine, both directly and through its joint venture, CMD, manufactures and markets advanced boat and engine steering and control systems under the brand names of Zeus, Axius and MerCruiser 360.
Mercury Marine’s sterndrive and outboard engines are produced domestically in Oklahoma and Wisconsin, respectively. During the third quarter of 2009, the Company announced plans to consolidate engine production by transferring sterndrive engine manufacturing operations from its Stillwater, Oklahoma plant to its Fond du Lac, Wisconsin plant. This plant consolidation effort is expected to occur throughout 2010 and 2011. Mercury Marine manufactures 40, 50 and 60 horsepower four-stroke outboard engines in a facility in China, and, in a joint venture with its partner, Tohatsu Corporation, produces smaller outboard engines in Japan. Mercury Marine sources some engine components from Asian suppliers and manufactures engine component parts at plants in Florida and Mexico. CMD manufactures diesel marine propulsion systems in South Carolina. Mercury Marine also operates a remanufacturing business for engines and service parts in Wisconsin.
In addition to its marine engine operations, Mercury Marine serves markets outside of the United States with a wide range of aluminum, fiberglass and inflatable boats produced either by, or for, Mercury Marine in China, New Zealand, Poland, Portugal, and Vietnam. These boats, which are marketed under the brand names Arvor, Guernsey, Legend, Mercury, Protector, Quicksilver, Uttern and Valiant, are typically equipped with engines manufactured by Mercury Marine and often include other parts and accessories supplied by Mercury Marine. Mercury Marine also has an equity ownership interest in a company that manufactures boats under the brand names Aquador, Bella and Flipper in Finland.
Mercury Marine’s parts and accessories businesses include: Attwood, Land ‘N’ Sea, Benrock, Kellogg Marine and Diversified Marine Products. These businesses are the leading distributors of marine parts and accessories throughout North America, offering same-day or next-day service to a broad array of marine service facilities.
Inter-company sales to the Company’s Boat segment represented approximately 7 percent of Mercury Marine sales in 2009. Domestic demand for the Marine Engine segment’s products is seasonal, with sales generally highest in the second calendar quarter of the year.
The Boat segment consists of the Brunswick Boat Group (Boat Group), which manufactures and markets fiberglass pleasure boats, luxury sportfishing convertibles and motoryachts, offshore and aluminum fishing boats, and pontoon and deck boats. The Company believes that its Boat Group, which had net sales of $615.7 million during 2009, has the largest dollar sales and unit volume of pleasure boats in the world.
The Boat Group manages most of Brunswick’s boat brands; evaluates and enhances the Company’s boat portfolio; promotes recreational boating services and activities to enhance the consumer experience and dealer profitability; and speeds the introduction of new technologies into boat manufacturing processes.
The Boat Group is comprised of the following boat brands: Cabo sportfishing express boats and convertibles; Hatteras luxury sportfishing convertibles and motoryachts; Sea Ray yachts, sport yachts, sport cruisers and runabouts; Bayliner sport cruisers and runabouts; Meridian motoryachts; Sealine yachts and sport cruisers; Boston Whaler, Lund, Triton and Trophy fiberglass fishing boats; and Crestliner, Cypress Cay, Harris, Lowe, Lund, Princecraft and Triton aluminum fishing, utility, pontoon and deck boats. The Boat Group also includes a commercial and governmental sales unit that sells products to commercial customers, as well as the United States government and state, local and foreign governments. The Boat Group procures most of its outboard engines, gasoline sterndrive engines and gasoline inboard engines from Brunswick’s Marine Engine segment. The Boat Group also purchases a portion of its diesel engines from CMD.
The Boat Group has active manufacturing facilities in California, Florida, Indiana, Minnesota, Missouri, North Carolina, Tennessee, Canada, China, Mexico, Portugal and the United Kingdom, as well as additional inactive manufacturing facilities in Florida, Maryland, Minnesota, North Carolina, Ohio, Oregon, Tennessee and Washington. The Boat Group also utilizes contract manufacturing facilities in Poland and has an agreement with a local boat builder to manufacture boats in Argentina. During 2009 the Boat Group continued its 2008 restructuring activities by reducing its workforce, consolidating manufacturing operations and disposing of non-strategic assets. In the first quarter of 2009, the Company announced and completed the shutdown of its Riverview plant in Knoxville, Tennessee, and completed the closure of its Pipestone, Minnesota facility. Further, in the fourth quarter of 2009, the Company reached a decision to sell its properties in Cape Canaveral, Florida and Navassa, North Carolina. The Navassa, North Carolina property was mothballed during 2008. Brunswick also sold all of the capital stock of the Albemarle Boats business on December 31, 2008. In 2008, Brunswick announced the closure of certain boat manufacturing plants in Merritt Island, Florida; Cumberland, Maryland; Bucyrus, Ohio; Swansboro, North Carolina; Roseburg, Oregon; and Arlington, Washington.
The Boat Group’s products are sold to end-users through a global network of approximately 1,750 dealers and distributors, each of which carries one or more of Brunswick’s boat brands. Sales to the Boat Group’s largest dealer, MarineMax Inc., which has multiple locations and carries a number of the Boat Group’s product lines, represented approximately 16 percent of Boat Group sales in 2009. Domestic demand for pleasure boats is seasonal, with sales generally highest in the second calendar quarter of the year.
Brunswick’s Fitness segment is comprised of its Life Fitness division (Life Fitness), which designs, manufactures and markets a full line of reliable, high-quality cardiovascular fitness equipment (including treadmills, total body cross-trainers, stair climbers and stationary exercise bicycles) and strength-training equipment under the Life Fitness and Hammer Strength brands.
The Company believes that its Fitness segment, which had net sales of $496.8 million during 2009, is the world’s largest manufacturer of commercial fitness equipment and a leading manufacturer of high-end consumer fitness equipment. Life Fitness’ commercial sales are primarily made to health clubs, fitness facilities operated by professional sports teams, the military, governmental agencies, corporations, hotels, schools and universities. Commercial sales are made to customers either directly, through domestic dealers, or through international distributors. Consumer products are sold through specialty retailers and on Life Fitness’ Web site.
The Fitness segment’s principal manufacturing facilities are located in Illinois, Kentucky, Minnesota and Hungary. Life Fitness distributes its products worldwide from regional warehouses and production facilities. Demand for Life Fitness products is seasonal, with sales generally highest in the first and fourth calendar quarters of the year.
Bowling & Billiards Segment
The Bowling & Billiards segment is comprised of the Brunswick Bowling & Billiards division (BB&B), which had net sales of $337.0 million during 2009. The Company believes BB&B is the leading full-line designer, manufacturer and marketer of bowling products. BB&B also designs and markets a full line of high-quality consumer billiard tables, Air Hockey table games, foosball tables and related accessories. In addition, BB&B operates 100 bowling centers in the United States, Canada and Europe.
BB&B’s bowling products business designs, manufactures and markets a wide variety of bowling products, including capital equipment, which includes automatic pinsetters, bowling balls and after-market products. Through licensing and manufacturing arrangements, BB&B also offers bowling pins and a wide array of bowling consumer products, including bowling shoes, bags and accessories.
BB&B retail bowling centers offer bowling and, depending on size and location, may also offer the following activities and facilities: billiards, video games, redemption and other games of skill, laser tag, pro shops, meeting and party rooms, snack bars, restaurants and cocktail lounges. Of the 100 bowling centers, 44 have been converted into Brunswick Zones, which are modernized bowling centers that offer an array of family-oriented entertainment activities. BB&B has further enhanced the Brunswick Zone concept with expanded Brunswick Zone family entertainment centers, branded Brunswick Zone XL, which are larger than typical Brunswick Zones and feature multiple-venue entertainment offerings. BB&B operates 11 Brunswick Zone XL centers. In 2008, BB&B exited a joint venture that operated 14 additional centers in Japan, and in which BB&B had been a partner since 1960.
BB&B’s billiards business was established in 1845 and is Brunswick’s oldest enterprise. BB&B designs and/or markets billiard tables, Air Hockey table games, foosball tables, balls and cues, as well as game room furniture and related accessories, under the Brunswick and Contender brands. The Company believes it has the largest dollar sales volume of slate U.S. style pocket billiards tables in the world. These products are sold worldwide in both commercial and consumer billiards markets. BB&B also operated Valley-Dynamo, a leading manufacturer of commercial and consumer billiards tables, Air Hockey table games and foosball tables. The Valley-Dynamo business was sold in the second quarter of 2009, although the Company retained the intellectual property rights to the Air Hockey trademark.
BB&B’s primary manufacturing and distribution facilities are located in Hungary, Mexico, Michigan and Wisconsin.
Brunswick’s bowling and billiards products are sold through a variety of channels, including distributors, dealers, mass merchandisers, bowling centers and retailers, and directly to consumers on the Internet and through other outlets. BB&B’s sales are seasonal with sales generally highest in the first and fourth calendar quarters of the year.
On April 27, 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 devices (PND) and wireless fleet tracking business. As a result, Brunswick reclassified the operations of BNT to discontinued operations and shifted reporting for the retained businesses from the Marine Engine segment to the Boat, Marine Engine and Fitness segments.
In March 2007, Brunswick completed the sales of BNT’s marine electronics and PND businesses to Navico International Ltd. and MiTAC International Corporation, respectively, for net proceeds of $40.6 million. A $4.0 million after-tax gain was recognized with the divestiture of these businesses in 2007.
In July 2007, the Company completed the sale of BNT’s wireless fleet tracking business to Navman Wireless Holdings L.P. for net proceeds of $28.8 million, resulting in an after-tax gain of $25.8 million.
The Company completed the divestiture of the BNT discontinued operations during 2007. The Company recognized a net asset impairment of $85.6 million, after-tax, in the fourth quarter of 2006, prior to the disposition of the BNT businesses, and recorded 2007 gains of $29.8 million, after-tax, on the BNT business sales. As a result, the financial impact to the Company of the BNT dispositions was a net loss of $55.8 million, after-tax.
A Company subsidiary, Brunswick Financial Services Corporation (BFS), has a 49 percent ownership interest in a joint venture, Brunswick Acceptance Company, LLC (BAC). CDF Ventures, LLC (CDFV), a subsidiary of GE Capital Corporation, owns the remaining 51 percent of the joint venture. Under the terms of the joint venture agreement, BAC provides secured wholesale floorplan financing to the Company’s engine and boat dealers. BAC also purchased and serviced a portion of Mercury Marine’s domestic accounts receivable relating to its boat builder and dealer customers, but this program was terminated in May 2009. The Company replaced this program with the Mercury Receivables ABL Facility, which is discussed in Note 14 – Debt in the Notes to Consolidated Financial Statements.
The term of the BAC joint venture extends through June 30, 2014. The joint venture agreement contains provisions allowing for the renewal or purchase at the end of this term. Alternatively, either partner may terminate the agreement at the end of its term.
Refer to Note 9 – Financial Services in the Notes to Consolidated Financial Statements for more information about the Company’s financial services.
Brunswick depends on distributors, dealers and retailers (Dealers) for the majority of its boat sales and significant portions of its sales of marine engine, fitness and bowling and billiards products. Brunswick has over 15,000 Dealers serving its business segments worldwide. Brunswick’s marine Dealers typically carry boats, engines and related parts and accessories.
Brunswick owns Attwood, Land ‘N’ Sea, Benrock, Kellogg Marine and Diversified Marine Products, which are the primary parts and accessories distribution platforms for the Company’s Marine Engine segment. These businesses are the leading distributors of marine parts and accessories throughout North America, with 14 distribution warehouses located throughout the United States and Canada offering same-day or next-day service to a broad array of marine service facilities.
Brunswick’s Dealers are independent companies or proprietors that range in size from small, family-owned businesses to a large, publicly-traded corporation with substantial revenues and multiple locations. Some Dealers sell Brunswick’s products exclusively, while others also carry competitors’ products. Brunswick works with its boat dealer network to improve quality, distribution and delivery of parts and accessories to enhance the boating customer’s experience.
Demand for a significant portion of Brunswick’s products is seasonal, and a number of Brunswick’s Dealers are relatively small or highly-leveraged. As a result, many Dealers require financial assistance to support their businesses, allowing them to provide stable channels for Brunswick’s products. In addition to the financing offered by BAC, the Company provides its Dealers with assistance, including incentive programs, loans, loan guarantees and inventory repurchase commitments, under which the Company is obligated to repurchase inventory from a finance company in the event of a Dealer's default. The Company believes that these arrangements are in its best interest; however, the financial support that the Company provides to its Dealers does expose the Company to credit and business risk. Brunswick’s business units, along with BAC, maintain active credit operations to manage this financial exposure, and the Company continually seeks opportunities to sustain and improve the financial health of its various distribution channel partners. Refer to Note 11 – Commitments and Contingencies in the Notes to Consolidated Financial Statements for further discussion of these arrangements.
Brunswick’s sales from continuing operations to customers in markets other than the United States were $1,168.7 million (42 percent of net sales), $2,058.5 million (44 percent of net sales) and $2,016.4 million (36 percent of net sales) in 2009, 2008 and 2007, respectively. The Company transacts most of its sales in non-U.S. markets in local currencies, and the cost of its products is generally denominated in U.S. dollars. Strengthening or weakening of the U.S. dollar affects the financial results of Brunswick’s non-U.S. operations.
Raw Materials and Supplies
Brunswick purchases a wide variety of raw materials from its supplier base, including oil, aluminum, steel and resins, as well as product parts and components, such as engine blocks and boat windshields. The prices for these raw materials, parts and components fluctuate depending on market conditions. Significant increases in the cost of such materials would increase the Company’s production and operating costs. This could reduce the Company’s profitability if the Company cannot recoup the increased costs through increased product prices.
As a result of recent worldwide economic conditions and the reduced demand for raw materials, parts, supplies and goods, a number of Brunswick’s suppliers made the decision to slow or temporarily cease production in 2008 and 2009. Additionally, many of the Company’s suppliers have elected to reduce the size of their workforces. As Brunswick’s manufacturing operations continue to increase production in 2010, the Company’s need for raw materials and supplies will likewise increase. Brunswick’s suppliers must be prepared to resume operations and, in many cases, must recall or hire additional workers in order to fulfill the orders placed by Brunswick and other customers. During this transition period, the Company has experienced some delayed delivery of and shortages of certain materials, parts and supplies that are essential to its manufacturing operations. The Company will continue to address this issue by identifying alternative suppliers, working to secure adequate inventories of critical supplies and continually monitoring its supplier base.
Additionally, some components used in Brunswick’s manufacturing processes, including engine blocks and boat windshields, are available from a sole supplier or a limited number of suppliers. Financial difficulties or solvency problems that these or other suppliers currently face or may face in the future could adversely affect their ability to supply Brunswick with the parts and components it needs, which could significantly disrupt Brunswick’s operations.
The Company also continues to expand its global procurement operations to leverage its purchasing power across its divisions and to improve supply chain and cost efficiencies. The Company attempts to manage its commodity price risk by using derivatives to hedge a portion of its raw material purchases.