pdf equity analysis and valuation - texas tech...

1

Equity Analysis and Valuation Analysis Team

Oscar Aguilar Bayle Butler

Bryan Fetterman Reece Macdonald Jonathan Warren

Joshua Yueng

2

Contents Executive Summary .................................................................................................................................... 6

Industry Analysis ........................................................................................................................................ 7

Firm Overview ........................................................................................................................................... 14

FIVE FORCES MODEL ........................................................................................................................... 18

Rivalry among existing firms ............................................................................................................... 18

Threat of New Entrants ....................................................................................................................... 31

Threat of Substitute Products ............................................................................................................. 35

Bargaining Power of Customers ......................................................................................................... 38

Bargaining Power of Suppliers ............................................................................................................ 41

Accounting Analysis .................................................................................................................................. 55

Key Accounting Policies ....................................................................................................................... 55

Research and Development ................................................................................................................ 56

Currency Risk ........................................................................................................................................ 57

Operating and Capital Leases ............................................................................................................. 59

Goodwill .................................................................................................................................................. 60

Warranties ............................................................................................................................................. 62

Accounting Flexibility ................................................................................................................................ 62


Operating Leases .................................................................................................................................. 64

Goodwill .................................................................................................................................................. 64

Warranties ............................................................................................................................................. 66

3

Evaluate Accounting Strategy ................................................................................................................. 67


Currency Risk ........................................................................................................................................ 68


Goodwill .................................................................................................................................................. 70

Warranties ............................................................................................................................................. 72

Quality of Disclosure ................................................................................................................................ 75



Goodwill .................................................................................................................................................. 76

Warranties ............................................................................................................................................. 78

Quantitative Analysis ................................................................................................................................ 78

Sales Manipulation Diagnostics ........................................................................................................... 79

Net Sales/Cash from Sales .................................................................................................................. 79

Net Sales/Net Accounts Receivable ................................................................................................... 80

Net Sales/Warranty Liabilities ............................................................................................................. 81

Net Sales/Deferred Revenue ............................................................................................................... 82

Net Sales/Inventory .............................................................................................................................. 83

Sales Diagnostics Conclusion .............................................................................................................. 84

Expense Manipulation Diagnostics ......................................................................................................... 86

CFFO/OI ................................................................................................................................................. 87

CFFO/NOA .............................................................................................................................................. 89

Total Accruals/Sales ............................................................................................................................. 90

Expense Diagnostics Conclusion ......................................................................................................... 91

Potential Red Flags ................................................................................................................................... 92

4


Goodwill .................................................................................................................................................. 93

Sales and Expense Manipulation Ratios ............................................................................................ 94

Undo Distortions ................................................................................................................................... 94

Goodwill .................................................................................................................................................. 97

Appendices .............................................................................................................................................. 178

Sales Manipulation Diagnostics ......................................................................................................... 178

Expense Manipulation Diagnostics ................................................................................................... 179

Liquidity Ratios .................................................................................................................................... 180

Profitability Ratios ............................................................................................................................... 182

Capital Structure Ratios ..................................................................................................................... 183

Weighted Average Cost of Debt ....................................................................................................... 185

Weighted Average Cost of Capital ................................................................................................... 185

Forecasted Income Statement .......................................................................................................... 187

Common Size Income Statement ..................................................................................................... 188

Forecasted Income Statement .......................................................................................................... 189

Common Size Income Statement ..................................................................................................... 190

Forecasted Balance Sheet ................................................................................................................. 191

Common Size Balance Sheet ............................................................................................................ 192

Forecasted Balance Sheet ................................................................................................................. 193

Common Size Balance Sheet ............................................................................................................ 194

Statements of Cash Flows ................................................................................................................. 195

Statements of Cash Flows ................................................................................................................. 196

Weighted Average Cost of Equity..................................................................................................... 197

3 Month Rates ........................................................................................................... 197

5

2 Year Rates .............................................................................................................. 199 5 Year Rates .............................................................................................................. 202 7 Year Rates .............................................................................................................. 204 10 Year Rates ............................................................................................................ 207

Business and Industry Analysis ........................................................................................................ 210

Five Forces Model ............................................................................................................................... 211

Industry Growth .................................................................................................................................. 212

Concentration of Competitors ........................................................................................................... 212

Economies of Scale ............................................................................................................................. 213

Excess Capacity ................................................................................................................................... 214

Price Sensitivity & Relative Bargaining Power ................................................................................ 215

Research and Development .............................................................................................................. 215

Quality and Brand Image .................................................................................................................. 215

Goodwill ................................................................................................................................................ 216

Warranties: .......................................................................................................................................... 219

Operating Leases: ............................................................................................................................... 220

Undo Distortions: .................................................................................................................................... 220

Operating Leases ....................................................................................................... 220 Method of Comparables.............................................................................................. 221 Discounted Dividends Approach .................................................................................. 222 Discounted Free Cash Flows Approach ........................................................................ 223 Residual Income Approach ......................................................................................... 224 AEG Approach ........................................................................................................... 225 Long Run Residual Income Approach .......................................................................... 226 Long Run Residual Income Approach (restated) ........................................................... 228

References ............................................................................................................................................... 230

6

Executive Summary Investment Recommendation: Overvalued Sell

as of November 1, 2008

BC: NYSE(11/01/08):$3.59 52 Week Range: $20.39-$3.47

2007 2008(f) As-stated Re-

stated 2008(f) Revenue: 5671.2 4819.82 BV Per Share: 10.24 9.48 10.22

Market Capitalization: 3,152.68 Return on Equity: 4.25% - 2.73% Shares Outstanding: 184.91 Return on Assets: 1.79% - 1.18%

Dividend Yield: 1.90% - - Method of Comparables

AVG Ind RAW Adj P/Et 11.56 2.11 - P/Ef 17.25 10.51 - P/B 7.57 77.46 71.74 DPS/P 0.08 0.02 - PEG 0.56 0.14 - P/FCF 51.03 59.56 65.56 P/EBITBDA 0.25 75.81 87.66 EV/EBITDA 13.31 9.41 4.37

Altman Z‐scores 2003 2004 2005 2006 2007

As-stated 2.18 2.29 2.47 2.72 2.72 Re-stated 2.17 2.40 2.68 2.60 2.43

Intrinsic Value Cost of Capital

As-stated Re-stated As-

stated Re-

stated Discounted Dividends: 2.59 - Back Door Ke 15% 14%

Free Cash Flows: - - Published Residual Income: 5.92 5.08 Cost of Debt 6.2% 6.3%

Long Run Residual Income: 2.30 0.98 WACC(bt) 10.67% 10.58% Abnormal Earnings Growth: 4.71 4.70

Period Month beta Ke R2 Upper Ke Lower Ke3 months 72 1.13 14.19 0.19 18.52 9.86 2 years 72 1.13 15.50 0.19 19.83 11.17 5 years 72 1.12 15.44 0.18 19.79 11.10 7 years 72 1.12 15.42 0.18 19.77 11.07 10 years 72 1.12 15.40 0.18 19.75 11.05

7

Industry Analysis Brunswick was founded in 1845 solely as a billiards manufacturer. In the 160+

years since then, Brunswick has vastly expanded its operations across industries and

now is one of the largest companies in the world, dealing mainly in the fitness and

marine industries. While still a leader in the billiards and bowling industry, the

company’s focus and financial resources have been shifted to marine and fitness. It is a

global company with operations based in the U.S.A, Europe, South America, Canada,

Africa, and the Middle East. Many of Brunswick’s products can be found through online

dealers as well, further increasing its distribution network.

The main competitors Brunswick faces in the fitness industry are ICON Health,

Cybex, and Nautilus. In the marine industry the main competitors are foreign

companies: Honda Motor Corp. and Yamaha Motor Corp. Since these two companies

are foreign they do not follow the same disclosure policies as U.S companies. This

made comparing their positions in the marine industry quite difficult. Other competitors

based in the U.S are Marine Products and Fountain Powerboat Industries. Most of the

products in the fitness industry are very similar so the switching costs are low for the

customer. In attempt to lower the threat of substitute products in this industry, firms

must compete on a cost leadership strategy. Differentiation exists in the fitness

industry. However, this is not the focus, but rather a strategy implemented after cost

leadership in order to maintain its market share acquired through its cost leadership

strategies. In the marine industry, it is also common to compete on cost, however; the

smaller companies must focus on differentiation or target a market niche to be

competitive with the larger companies since they cannot compete on cost due to

economies of scale. For example, Fountain Powerboats hold a very small portion of the

overall marine market, but dominate the high performance boat market by using

superior molds and plugs to create the highest quality hulls. More capital is invested

into research and development in the marine industry than the fitness. This is because

it is necessary to keep up with the latest technology to avoid becoming obsolete and to

deal with changing industry regulations.

To gain a competitive advantage companies in the fitness industry, a firm must

8

focus on cost leadership, utilizing economies of scale. Since fitness products perform

the same function, little differentiation exists between products. In the marine industry,

a cost leadership strategy is effective as well, with economies of scale and low

distribution costs as the focus. Differentiation is also effective in this fragmented

industry with the focus on quality and research and development. Brunswick benefits

greatly from its large size. It is able to achieve economies of scale because they are

able to produce products from different industries together, at a single manufacturing

plant. This allows them to spread their large fixed costs across many different units of

production, decreasing the total cost of the products to customers. Also, Brunswick

benefits from its many distribution channels. With so many large facilities all over the

world, transportation costs are lowered significantly compared to companies only based

in the U.S.A. Furthermore, Brunswick differentiates it products by coming out with lines

to target market niches. For example, they have a line of luxury super yachts to appeal

to the high end market and lead the industry in recreational products such as fitness

equipment. In the fitness and marine industries, most companies try to focus on one

strategy; however, Brunswick uses a mix of cost leaderships and differentiation.

Accounting Analysis

It is important to understand that a firm’s accounting methods have the ability to

distort the perceived value of the company. Generally Accepted Accounting Principles

(GAAP) enables firms with a cushion to manipulate numbers to appear favorable. The

average shareholder may look at the balance sheet and income statement without

giving any thought to the firms accounting policies. When valuing any firm it is

essential to do a full accounting analysis, on both its policies and its quality and level of

disclosure. An area that appears to be lacking quality disclosure could indicate

management trying to sweep the issue under the rug by not drawing attention to it.

Certain areas exist that are common places to look for accounting distortions.

For example, research and development is recorded as an expense, therefore none of

the future benefits are recorded. This could lead to assets and net income being

understated if the firm relies heavily on R&D. Brunswick spends more capital than any

9

of its competitors on R&D, so it is reasonable to conclude that their net income may be

higher if R&D could be capitalized. Brunswick did not have any significant distortions as

a result of this area, but it did in operating leases and goodwill.

Brunswick has no capital leases, only operating leases which are an off-balance

sheet transaction. This means that no asset or liability is recorded, just an operating

expense in the income statement. This can be used to appear in a more favorable

position to creditors and investors because retained earnings will appear higher. While it

is common practice in both industries to rely heavily on operating leases, Brunswick has

a considerably larger amount. Their operating leases are equal about 13% of total long

term liabilities. This is a suspiciously high number, and a serious lack of disclosure

relating to operating leases, which together raise a red flag. No information is given

regarding their length of leases or their interest rates paid. In order to account for this

manipulation, operating leases were converted to capital leases, and the adjusted

statements are used for valuation purposes.

Goodwill that is not impaired properly can cause assets, owner’s equity, and net

income to be overstated. Brunswick has a large amount of goodwill as a result of their

aggressive growth strategy of buying out other firms. Brunswick’s goodwill makes up

over 15% of its total assets, which is a very high amount. Goodwill is impaired by 20%

to get a more accurate valuation. The two red flags, operating leases and goodwill,

have been adjusted and the new statements are used get a more accurate valuation of

the firm.

Financial Analysis, Forecast Financials, and Cost of Capital Estimation

In order to accurately value a firm, a variety of financial ratios are used and

compared with competitors in the same industry. The ratios will be a measure of one

of the following categories: liquidity, profitability, and capital structure and growth.

Liquidity ratios are a measure of the ability of a firm to meet its short term debt

obligations. These are ratios that lenders pay close attention to, since they want to

10

know that the company they are lending to is going to be able to pay it back in a full

and timely manner. Profitability ratios measure how well a firm is able to make a profit,

and how well their revenues can cover their costs. Also, capital structure and growth

ratios are often used by creditors. It is important to understand the capital structure

(the amount financed by debt and equity) because it indicates the ability of a firm to

generate revenues to cover its short term obligations. Growth ratios give an estimate

of future profitability, and capital structure ratios show a firm’s financing choices.

LIQUIDITY 5 yr Avg. Adj. 5yr Avg. Trend Industry 5 yr avg. Industry trend

Current Ratio 1.64 N/A Stabilizing 2.03 Decreasing Quick Ratio 1.34 N/A Stabilizing 1.06 Decreasing

Working Capital TO 6.69 N/A Stabilizing 6.1 Decreasing Accts Receivable TO 10.87 N/A Increasing 19.4 Decreasing

Days Sales Outstanding 33.79 N/A Decreasing 61.22 Decreasing Inventory TO 5.06 N/A Stabilizing 7.21 Decreasing

Days Supply Inventory 72.19 N/A Stabilizing 57.02 Stabilizing Cash‐to‐Cash Cycle 106 N/A Stabilizing 116.12 Stabilizing

The liquidity ratios show that overall Brunswick appears to be in a better financial

position to lenders than most of its competitors. Brunswick has a current ratio below

the industry average but a quick asset ratio of 1.34, which is higher than the industry

average. This lets lenders know that Brunswick will be able to pay off its debts, even if

it can’t sell off its inventory in time. Also, Brunswick appears to be the leader in its

industries when it comes to collecting on accounts receivable, which further improves

the firms’ liquidity. However, Brunswick appears to have trouble clearing out inventory.

They take an average of 25 days longer to turnover inventory than competitors. It is

important to note that all of Brunswick’s ratios are either stabilizing or actually

improving, which show it is less volatile than the industry as a whole.

11

PROFITABILITY

5 yr Avg. Adj. 5yr Avg. Trend Industry 5 yr avg. Industry trendGross Profit Margin 0.25 N/A Decreasing 0.28 Decreasing

Operating Expense Ratio 0.16 N/A Stabilizing 0.21 Stabilizing Operating Profit Margin 0.06 0.23 Decreasing 0.06 Decreasing

Net Profit Margin 0.05 0.02 Decreasing 0.03 Decreasing Asset Turnover 1.34 1.31 Decreasing 2.13 Stabilizing Return on Assets 0.06 0.03 Decreasing 0.07 Decreasing Return on Equity 0.15 0.09 Decreasing 0.18 Decreasing

Looking at these profitability measures, we can draw a couple of conclusions.

First, the entire industry appears to have decreasing trends. This is likely because of

the poor state of the economy, which started the decreasing trend around 2006 and

has lasted until present day. When comparing the data, we can see that Brunswick is

close to the industry average in most categories and follows the same trends. The asset

turnover for the industry is much higher than for Brunswick. This could be due to the

large amount of inventory that they hold, which affected the days supply inventory and

the inventory turnover measures. Notice, the operating profit margin jumped up

considerably in the adjusted measure. This is due to the capitalization of operating

leases. Prior to capitalization, operating leases are recorded completely as operating

expenses. After capitalization, capital leases principal, not the interest, is recorded as

an operating expense. Overall, we see that after undoing Brunswick’s accounting

distortions we get less favorable measures of profitability.

CAPITAL STRUCTURE

5 yr Avg. Adj. 5yr Avg. Trend Industry 5 yr avg. Industry trendDebt to Equity 1.65 1.71 Stabilizing 2.96 Stabilizing

Times Interest Earned 6.73 4.01 Decreasing 11.31 Decreasing Debt Service Margin 0.29 N/A Stabilizing 4.13 Increasing

It’s important to note that perhaps the median, rather than the mean, would

have been appropriate for these measures. The industry average is skewed due to

large differences among firms. The debt-to-equity ratio is fairly low among all firms,

which indicate they finance assets mainly through equity funds. The firms in the

12

industry appear to maintain a stable capital structure and Brunswick appears to be

performing about as adequately as its competitors.

GROWTH

5 yr Avg. Adj. 5yr Avg. Trend Industry 5 yr avg. Industry trendInternal Growth Rate 6% 4% Decreasing 5.75% Decreasing

Sustainable Growth Rate 15% 11% Decreasing 14.75% Decreasing

Due to the current state of the economy, one should not be surprised by the

decreasing trends in growth rates. Brunswick is very close to the industry average,

which leads us to conclude that the decline in growth rates is due to systematic risk,

not Brunswick specifically. Once again, we see that the restated financials lead to less

favorable results.

The next step was to forecast the financial statements of the company using the

liquidity, profitability, capital structure, and growth rate measure previously discussed.

We also had to take into account the poor state of our economy. In order to do this,

recession data from 2001 was used to get an estimate on the effect and length of time

of this current state. First, the income statement is forecasted since it reflects revenues

and expenses, therefore, future expectations should be reasonably estimated based on

educated assumptions. Forecasting sales is one of the most important things to start

with. We used the average sales growth rate for the first three quarters of 2008 to

forecast the last quarter. Brunswick came out of the last recession fairly quickly posting

a 10.67% increase in sales growth the following year in 2002. A similar percentage is

used to forecast sales during the initial recovery of the economy in 2009. In 2010

through 2017, we will use a constant 10.7% increase in net sales growth, which

represents the net sales growth in 2002 following the recession. With the asset

turnover ratio discussed earlier, we are able to forecast assets. According to our

forecasts, net sales are going to roughly double over the next ten years. It is important

for investors to analyze this because it gives an idea of where the firm is in terms of

profitability. Operating income was forecasted based on the forced common size

percentage of 6%. After that, net income was forecasted based on forced common

13

size percentages. In 2008, we used the common size percentage for the previous

recession. For 2009 to 2017, we used the common size percentage of the average of

the 2002 and 2003 net income as a percentage of sales, which is 2.69%. Also, ratios

such as asset turnover, current ratio, and PP&E turnover were used to forecast and link

financial statements together. Also, we forecasted the restated financial statements. It

is important to note that these forecasts are subject estimation error. The statement of

cash flows is particularly difficult to forecast due to the inability to locate trends and an

inability to form accurate estimates.

VALUATIONS

After analyzing the industry, accounting policies, and forecasting financials, the

last step is to value the firm. This is done by calculating a fair market share price using

models that fall into two categories: method of comparables and intrinsic valuations.

When analyzing the models, we incorporate a margin of safety of 15% to the stated

share price of $3.59. This gives us a range of $3.05 to $4.13 for fairly valued price per

share. Therefore, if the calculated price per share is under $3.05, then the stock would

be overvalued. If it is over $4.13, then it is undervalued. We used a 15% margin of

error because of the difficulty in accurately forecasting.

First, the method of comparables is used to value Brunswick. The key idea of

these models is to compare the firm being analyzed to the industry in which it operates.

For Brunswick, this can be more challenging as they operate in three different

industries. Also, many of the competing firms have negative cash flows, which leads to

skewed industry averages (outliers) and unusable models. We use competitor’s ratios

to find an industry average and any firm with drastically different numbers is called an

outlier, and is thrown out. This industry average is used to find the implied price per

share by multiplying it by Brunswick’s own factors. This method does have serious

flaws since it is not supported by theory and leaves little room for interpretation.

Further, the fact that Brunswick encompasses more than one industry decreases the

reliability of the method of comparables. We see the volatility of these methods in the

vast differences of the computed price to the stated price.

14

The second and more accurate method used is the intrinsic valuation models.

The intrinsic models contain more theory based assumptions, while the method of

comparables focuses on historical data. Intrinsic valuations take into account the

potential profitability of the specific firm that is being valued. We use the forecasted

financial statements to predict Brunswick’s future performance and calculate their

present day value. Then, we went through sensitivity analysis, which manipulates the

discount and perpetuity growth rates to see how different estimates would provide

different valuations. While close attention was paid to all the intrinsic valuations, the

residual income showed the most explanatory power, therefore, it is the most heavily

weighted. These valuations lead to the conclusion that Brunswick is an overvalued

company. It appears that its long term stability makes it a wise investment in these

shaky economic times.

Business and Industry Analysis

Firm Overview

Brunswick Corporation is a global manufacturer of recreational products including

marine boats, marine engines, fitness equipment, and bowling and billiards equipment.

The firm was founded in 1845 by John Moses Brunswick. Today Brunswick is a publicly

held corporation that is based out of Delaware. It currently has locations in The United

States, Europe, Canada, Pacific Rim, Latin America, Africa, and the Middle East. The

company is divided into three different operating segments: Marine products industry

(i.e. boat and engines), fitness industry, and bowling & billiard industry

(www.brunswick.com). The tables below show the five year history of net sales and

operating earnings of the different industries.

Net Sales of Brunswick Industries 2003 2004 2005 2006 2007

15

(in millions) Fitness 486.6 558.3 551.4 593.1 653.7

Marine products 4,991.80 4,232.90 4,592.40 4,613.90 4,570.80Bowling and Billiards 392.4 442.4 464.5 458.3 446.9

Total 5,870.8 5,233.6 5,608.3 5,665.3 5,671.4

Operating Earnings for BC Industries 2003 2004 2005 2006 2007 (in millions)

Fitness 29.8 45.2 56.1 57.8 59.7 Marine Products 235 392.6 443 329.4 102.3

Bowling and Billiards 25.6 41.7 37.2 22.1 16.5 Total 290.4 479.5 536.3 409.3 178.5

As the charts show, Brunswick’s overall net sales has staggered between an

average growth-rate of 2.5% in the past three years. The company experienced a sharp

decline in 2004 which may have been caused by a lack of consumer demand for

expensive recreational products. The same concept holds true as to why operating

earnings have shown a decline over the past two years. This may have been an early

sign to the current economic conditions that are plaguing the global market today.

Competitors

The main competitors in the marine industry are Fountain Powerboats, Marine

Products, Yamaha, and Honda Motor Co. The competitors in the fitness industry are

Nautilus, Cybex International, and ICON Health. In the bowling & billiards industry, the

competitors are Bowl American Incorporated, Dave & Buster’s, and AMF Bowling

(Brunswick 10K). Due to the unique operating characteristics of both foreign companies

Yamaha and Honda it is quite difficult to use them as a benchmark of comparison

because they operate in so many different industries. They both manufacture

automobiles, motorcycles, and various other recreational vehicles and motors.

Moreover, the lack of disclosure among foreign firms is quite poor which we will discuss

later. The following tables indicate the total assets and net sales for Brunswick and its

competitors in their respective industries. By understanding what each industry has

16

done over the past few years it can help guide investor decisions and identify potential

red flags when analyzing a specific firm.

Marine Industry:

Total Asset (millions) 2003 2004 2005 2006 2007

Honda Power Products 294.170

Brunswick Marine 1,708.81 2,249.90 2,934.20 2,435.20 2,474.7

Yamaha Marine Products 145.014 138.804 169.938 205.168 214.953

Fountain Power Boat 25.929 30.621 33.034 37.860 33.416

Marine Products 86.314 104.734 108.805 120.179 118.726

Total Sales (in thousands)

HMC Power Products 315.000 331.540 332.975 370.621 N/A

Brunswick Marine 3,525,800.0 4,624,300.0 4,592,400.0 4,613,900.0 4,570,800.0

Yamaha Marine Products 211.540 177.880 249.844 266.524 289.867

Fountain Power Boat 52,557.0 59,296.96 71,182.07 79,226.22 68,829.99

Marine Products 193,980.0 252,418.0 272,057.0 261,378.0 244,273.0

The graph above tells us that the marine industry has seen volatility in the total

amount of sales over the past five years. For the most part however it stays relatively

consistent with a growing percent of sales that is declining to a zero growth rate. One

may assume the reason for this, is that it may be slowing down as a result of the

economy starting to slip into a recession. Therefore, because marine products are a

very expensive luxury item for consumers people are starting to buy less of these items.

The chart on the following page will show how well the fitness industry has performed

over the past five years

Fitness Industry:

17

Net Sales (in millions) 2003 2004 2005 2006 2007

Brunswick Corporation 486.60 558.30 551.40 593.10 653.70

Cybex International 0.09 0.10 0.11 0.13 0.15

ICON Health 898.20 961.10 871 852.20 N/A

Nautilus 0.50 0.52 0.61 0.62 0.50

Industry Net Sales 1,385.39 1,520.03 1,423.12 1,446.04 654.35

% change 4.26 9.72 -6.38 1.61 -54.75

Total Assets (in millions) 2003 2004 2005 2006 2007



ICON Health 465.10 558.50 460.70 380.80 N/A

Nautilus 0.31 0.36 0.41 0.42 0.39

The chart above has shown that the fitness industry has experienced much of

the same volatility the marine industry has too. The fitness industry has tittered

between a positive and negative growth rate over the past five years ending in 2007

with an industry growth rate of roughly -54%. A possible explanation for this may be

because the economy is starting to fall into a severe recession in 2008.

From both of theses charts a very similar picture can be painted. It’s understood

that both of theses industries fall into the same category in the sense they are both

luxury items. When people have an increased amount of disposable income they are

more inclined to spend money on these types of products. However, when the economy

started to show signs of a recession over the past year sales declined radically as a

result.

18

FIVE FORCES MODEL

The amount of profitability a firm can achieve can directly be related to the price

a firm charges for a product relative to the cost to produce it. However, there are many

factors that play a role in determining the price of a product other than the cost to

produce it such as the degree of competition they face within the industry. Michael

Porter’s five forces model enables analysts to begin the initial stages of valuing a

company. The five forces model consists of different components that measure the

degree of competition in a specific industry. This competition model directly ties to the

industry and competitor profitability. Firm value is based on a company’s ability to

generate excess returns on investments that exceed the cost of capital. The other side

of the model addresses bargaining power of customers and suppliers. These five

components together produce a model that enables analysts to gain clear

understanding of the degree of competition within an industry. Brunswick Corporation

degree of competition is as followed:

Competitive Force Fitness Marine Rivalry among existing firms High Moderate to High

Threat of new entrants Low to Moderate Low Threat of substitute Products Moderate Moderate

Bargaining Power of Customers High Low to Moderate Bargaining Power of Suppliers Low Low

Rivalry among existing firms

When measuring industry competition, it is essential to consider rivalry among

existing firms. In most industries profitability is greatly influenced by the rivalry

amongst firms. If an industry has low competition, firms will focus on things like

innovation and goodwill. On the other hand, if an industry has high competition

amongst firms, firms will engage in price competition in order to be profitable. This first

force, rivalry among existing firms, can be segregated into different components such

19

as industry growth, competitor concentration, differentiation, switching costs,

economies of scale, learning economies, excess capacity, and exit barriers.

Industry Growth If an industry is contracting, firms will attempt to grow by grabbing market share

from other players usually by price wars. On the other hand, if an industry is growing

rapidly, firms usually do not attempt to steal market share in order to grow. When this

is the case, firms will engage in strategic pricing strategies to lower the cost of their

product, yet at the same time still being able to cover their marginal costs (i.e. Firms

will try to set price until marginal benefit and marginal price are equal). In order to

measure the growth of an industry, net sales are the primary focal point. The following

is a graph showing industry net sales as well as Brunswick net sales in the fitness

industry from 2003 to 2007.

% Change In Sales 2003 2004 2005 2006 2007 Brunswick Corporation 6.55 14.73 -1.24 7.56 10.22

Net Sales

20

Cybex International 16.28 9.09 10.85 10.71 15.43 ICON Health 3.08 7 -9.37 -2.16 N/A

Nautilus -14.68 5.01 15.93 1.65 -18.76Industry % change 4.26 9.72 -6.38 1.61 -54.75

As the graphs above indicate, revenues for the fitness industry show mixed

signals. In 2007, two competitors experienced gains of over ten percent during fiscal

year 2007. On the other hand, Nautilus experienced losses of over ten percent during

the same fiscal year. The 2007 industry growth is skewed due to ICON health not filing

a 2007 10K. Overall, potential for industry growth remains positive. The fitness

category has more participants than any athletic category. Currently, forty four percent

of Americans exercise on a regular basis (regular meaning exercising more than fifty

days per year) with an additional fifteen percent being opposed to exercising. “This

means roughly forty percent of the U.S. population is the target of opportunity for the

fitness industry” (U.S. Fitness Industry: Treadmills are #1 Attraction).

The following graphs show the current growth trends of the marine industry. An

indicator of the industry’s growth can be found through net sales because it reflects the

consumers’ ability to purchase marine recreational products.

21

The trends above prove that the marine industry has recently seen a decrease in

industry sales. One reason could be that consumer discretionary spending is tight right

now; therefore, customers are less willing to spend their money on recreational

products. However, it is important to recognize that all competitors are experiencing

decreases in net sales; no one firm is performing significantly better than the others.

22

Concentration of Competitors The number of firms within an industry and their relative size determine the

degree of concentration. If the sizes and market share of the firms are comparable,

firms will usually collude with each other to price their products. On the other hand, if

the industry is fragmented relative to size and market share, then firms will engage in

destructive pricing strategies.

Fitness:

Market Share

(as a % of Total Industry Sales) 2003 2004 2005 2006 2007 Brunswick Corporation 35.12 36.73 38.75 41.02 99.9

Cybex International 0.01 0.01 0.01 0.01 0.02 ICON Health 64.83 63.23 61.2 58.93 N/A

Nautilus 0.04 0.03 0.04 0.04 0.08 Industry Sales (in millions) 1385.39 1520.03 1423.1 1446 654.35

The market share for fiscal year 2006 indicates fragmented concentration levels

of the industry. As shown above, the market share is large for Brunswick and ICON

health, however, the other two competitors hold less than one percent of the market.

It is important to point out that Brunswick captured market share from ICON health

23

during the fiscal year 2006. Brunswick grew over seven percent while ICON health

contracted over two percent. With each competitor maintaining scattered market share

over the past five years, we can conclude that the fitness industry is high concentration

and relatively high price competition.

Marine Industry

Market share in % Sales 2007 Brunswick 94%

Fountain Powerboats 1% Yamaha 0%

Marine Products 5%

“Marine boats and engines is a fragmented industry”, (Marine Products’ 2007 10-

K). This means that the marine industry will have pricing wars. As the graphs above

show, industry leaders such as Brunswick hold dominant market share because of their

global competitiveness and low cost manufacturing processes, therefore enabling the

company to charge competitive prices.

Levels of Differentiation

24

If the production process of competitors is similar, the industry is classified as

low degree of differentiation. A low degree of differentiation means that customers will

switch from one competitor to the next simply on the basis of price. Hence, these firms

are said to be extremely price competitive. In the fitness industry, competitors offer

similar products that provide the same functions. As a result, this industry is classified

as having low levels of differentiation, which means it is price competitive. In the

marine recreational products industry many products can be fairly similar to each other.

Due to this factor firms’ tend to protect themselves by having certain patents or

trademarks on their products and brand names. These slight differences can create

consumer preferences which helps add to the value of the product. The overall

differentiation in recreational boats and engines is low.

Economies of Scale “If a steep learning curve or other types of scale economies exists in an industry,

size becomes an important factor for firms”, (Palepu and Healy, 2-3). A larger

production capability creates an advantage over a competitor producing large quantities

at cheaper prices. This enables a firm to sell its product at a lower price than

competitors, often eliminating smaller competition. In the marine and fitness

industries, most firms produce specialized products that require a large initial

investment in order to mass produce. Thus, small to medium size competitors will

struggle to succeed or capture sizeable market share from dominant competitors. One

measure for production assets is the total assets held by each competitor relative to

industry size. The following tables and graph illustrate this further for both the fitness

and marine industries respectively.

Fitness:

25

Total Assets (in millions) 2003 2004 2005 2006 2007 Brunswick Corporation 635.90 667.90 674.50 693.10 695.40

Cybex International 0.53 0.54 0.56 0.73 0.98 ICON Health 465.10 558.50 460.70 380.80 380.80

Nautilus 0.31 0.36 0.41 0.42 0.39

Fitness

The table and graph above follows economies of scale. Brunswick Corporation

and ICON health prove to be industry giants over other competitors such as Cybex

International and Nautilus. They hold far more total assets, therefore having the

capacity to mass produce domestically and internationally and gain dominating market

share.

Marine:

26

Marine

Total Asset (in millions) 2003 2004 2005 2006 2007

Honda Power products N/A N/A N/A 294,170 N/A

Brunswick Marine 1,708.81 2,249.90 934.2 2,474.70 2,435.20

Yamaha Marine Products 1,372.38 1313.56 2,364.38 1947.59 21051.19

Fountain Power Boat Industry 13,381,819 17,134,786 13,023,588 12,460,218 7,648,996

Marine Products 86,314 104,734 108,805 120,179 118,726

Industry Net Sales 13,471,214.19 17,243,083.46 13,135,691.58 12,878,989.29 7,791,208.39

% Changes 0.11% 28.00% 0.00% 0.47% ‐0.93%

Brunswick % change ‐69.15% 31.66% ‐58.48% 165.00% ‐99.17%

Total Sales (in thousands) 2003 2004 2005 2006 2007

HMC Power Products 315,000 331,540 332,975 370,621 N/A

Brunswick Marine 526 4,592.40 4,592.40 4,613.90 4,570.80

Yamaha Marine Products 2,001.85 1,987.64 2,364.35 2,522.28 2,743.13

Fountain Power Boat 52,557,084 59,296,964 71,182,069 79,226,224 68,829,987

Marine Products 193,980 252,418 272,057 261,378 244,273

The table above represents the total assets held by four main competitors in the

marine industry. In the marine recreational products industry many products can be

fairly similar to each other. Due to this factor firms’ tend to protect themselves by

having certain patents or trademarks on their products and brand names. These slight

differences can create consumer preferences which helps add to the value of the

product. The overall differentiation in recreational boats and engines is low.

Switching Cost The degree of switching costs directly relates to direct competition and

commitment to the industry. In a high switching cost industry, such as the fitness

industry, it creates a commitment to specialize within the industry. In other words, the

product produced will not be sold to different industries. In the fitness industry,

competitor’s production lines will produce extremely customized machines that are

directed for one purpose. Companies will still compete against each other in price for

similar machines, however, industry giants prove to prevail. Brunswick has a high

industry asset percentage, therefore, we can generalize that Brunswick competes in an

27

industry with high switching costs. As for the marine boats and engines markets the

degree of switching costs are moderate. Primarily due to the ability of some firms

being able to coordinate their assets efficiently compared to those who can not easily

switch their assets into another type of industry.

Learning Economies The marine and fitness industries have a high level of learning economies. Most

firms in these industries need highly skilled blue collar workers with a high level of

education or industry experience. This is due to the complex nature of manufacturing

boats, engines, and health equipment. For example, one of Brunswick’s manufacturing

facilities is highly automated. It is capable of making both fitness equipment and marine

products from the same factory. Highly educated workers are needed to operate the

machines and when needed, they can switch the machines to produce whichever

product they need to. By doing this allows them to save costs on building extra

manufacturing plants and allows them to produce only what is necessary. Therefore,

the highly technological manufacturing process depends on man hours. Hence,

employees need a good background in engineering, some kind of applied physical

science, and craftsmen with raw materials to be a successful worker in this industry.

Other important activities that companies with large learning economies engage in are

research and development and securing patents. In the marine industry, excluding HMC

and Yamaha for reasons of poor disclosure, had an average R&D expense over the past

five years of $107.18 million.

Furthermore, the fitness industry had an average R&D expense for the past five

years of $41.34 million. This is a significant amount because these firms realize the

importance of product innovation in both industries. Especially as their competitors are

constantly looking for new and better product designs to manufacture and sell. Once

these firms develop new products or further enhance old ones they often patent them

so competitors can’t use them. For example, firms in the marine industry often patent

such things like: inboard/outboard engine designs, drive-trains, and motor mounts.

Some common patents firms in the fitness industry utilize are certain characteristics like

28

equipment designs and styles. Overall, it is important for firms with large learning

economies to invest in R&D, patents, and highly skilled employees as it may help them

gain competitive advantage over their competitors.

Fixed-Variable Cost Industry costs can be variable and fixed. Variable costs are defined as costs that

in total change in direct proportion to changes in volume of activity. These costs often

are incurred in the manufacturing process as the costs of goods sold. Fix costs tend to

be costs that will not change in direct proportion to changes in the volume of activity.

These typically encompass PP&E, SG&A, and R&D. If a company can save money on

certain fixed costs, it will open more funds in areas such as research and development.

Fixed costs are often what handicap smaller companies from competing or gaining

market share from larger companies. If a firm has a high fixed to variable cost ratio,

firms will reduce prices to utilize all production resources and lower average cost per

unit in order to capture market share.

In the fitness industry, fixed assets and labor are essential in producing quality

products that work correctly over a long period. Fixed assets are high so firms reduce

prices to utilize all resources. The marine industry typically has high fixed costs with

high variable costs too. This is due to the large facilities needed to build hulls and

engines, and the amount of raw materials they must purchase in order to manufacture

their products. For example, Fountain Powerboat Industries has about 40 to 45 plants

in different states (Fountain Powerboat Industries 10-K). The size of these facilities can

range from 10,000 square feet to 106,000 square feet. Do to the size of these

manufacturing plants the fixed costs for electricity, mechanical equipment, specialized

tools, skilled labor, and other fixed costs tend to be high in this industry. Furthermore,

Brunswick also had a fair amount of their fixed costs in manufacturing facilities alone.

Their average fixed costs in the past five years have been roughly 12% of sales. Also,

because firms need a good deal of raw materials like aluminum, steel, plastic, fiber

glass, wood and other raw materials they tend to have high variable costs because they

29

are at the mercy of their suppliers costs. Take Brunswick for example. For the past five

years they have had an average variable cost of goods sold of roughly 86% of total

sales.

In most cases firms view having an excess or too large an inventory to be a bad

idea because of the costs associated with such. If a high excess capacity exists, firms

will cut prices to decrease inventory to avoid surpluses of inventory on their books. If a

low excess capacity exists, demand will exceed supply, enabling firms to overcome

aggressive pricing. In the fitness industry, many public and private firms compete to

sell new technologies. The overall industry seems to be growing at different paces for

different competitors; however, the ability to mass produce products globally proves to

be a significant factor in the fitness industry. In the marine industry, one determinate

that can affect the excess capacity is weather and economic conditions. If there is good

weather, customer demands for marine products may increase, where as bad weather

may decline the demand for marine products.

The same holds true for economic conditions. Because marine products are such

a high cost luxury item people are more inclined to buy them when times are good.

However, when times are not good sales have the tendency to decline dramatically. In

2008, the financial crisis has sent the marine industry into a downward spiral. In a press

release in October 2008 Dustan E. McCoy CEO. of Brunswick stated ”The poor economy

and the accompanying weak consumer sentiment have pressured marine markets,

eroding the demand for boats and engines these past few months at a swifter pace

than originally anticipated.” In an attempt to lower their excess capacity Brunswick

planes to reduce their fixed costs by $300 million by 2009. They are speeding up this

process and plan to shut down 4 manufacturing facilities which will put 1,450 hourly

and salary paid employees looking for work by next year (Boating Industry Canada).

This is important for firms to understand because it can allow them to control their

assets more effectively. A good measure of a firm’s excess capacity is to determine

the net sales to property, plant, and equipment ratio

Net Sales/ PP&E 2003 2004 2005 2006 2007

30

Brunswick Corporation 5.76 6.78 6.86 6.6 6.38 Cybex International 6.55 7.64 9.46 9.72 4.3

ICON Health 18414 16421 11685 19205 N/A Marine Products 10.05 13.75 15.77 15.71 15.32

Fountain Powerboats 3.25 3.73 4.14 4.63 4.19

As the chart above shows the ratios from 2003 to 2005 are increasing for all

companies except Icon Health. This is due to a rising amount of sales in proportion to

an increasing amount of PP&E. However, from 2006 to 2007 the ratios go on a decline.

This is due to a decrease in the amount of sales for each firm while the amount

invested in PP&E remained unchanged.

Exit Barriers “Exit barriers are high when the assets are specialized or if there are regulations

which make exit costly”, (Palepu and Healy, 2-3). Exit barriers may take the form of

legal obligations or most commonly the liquidation of assets to the extent that they can

leave the market. Firms tend to have high exit barriers when they have many fixed

costs to run production assets. The more investment a firm has in its long term assets,

the longer they will stay in the industry despite taking yearly losses. Firms would rather

take yearly losses because leaving the industry would prove to be more costly. In the

fitness and marine industries, many of the assets are extremely specialized or, in other

words, this industry has high exit barriers.

Conclusion Rivalry among firms proves to be vital when measuring competitors. Industry

growth, concentration of competitors, differentiation, economies of scale, excess

capacity, and exit barriers need to be evaluated to gain a perspective of the actual and

potential competition within the industry. The fitness and marine industry prove to

have moderate to large economies of scale, switching costs, and exit barriers. On the

other hand, the industry has low growth rates, differentiation, and concentration. In

31

these industries, production assets are extremely specialized, therefore the rivalry

amongst firms is high competitive.

Threat of New Entrants

Three potential sources of competition exist in an industry. The threat of new

entrants is the second competitive force. New firms are eager to venture into a new

industry to increase the potential for earning abnormal profits because of the threats of

new entrants. It can potentially limit the pricing of the preexisting firms in the industry.

Also, the easier a new firm can enter into an industry, the more of a possibility it has to

be profitable. However, it is not easy for new entrants to jump into a new industry and

be competitive. Several barriers have to be overcome in order to surpass a profitable

firm. The barriers to the threat of new entrants include; economies of scale, first mover

advantage, access to channels of distribution and relationships, and legal barriers.

These barriers tend to weed out the threat of new entrants. The threat of new

entrants will always be an ongoing process for any industry especially for the fitness

and marine industries. In the following sections, the threat of new entrant’s barriers

will be analyzed for both industries. Also it will reveal how the top firms in each

industry have been able to overcome these barriers and stay the top profitable firms in

their respective industry.

Economies of scale

An economy of scale is the process of decreasing unit production cost as the

size of operations increase. In the fitness and marine industries, economies of scale are

the ability of a firm to have the lowest cost possible, while being able to manufacturer

large amounts of finished products. Firms already existing have been able to achieve

this by outsourcing much of their manufacturing needs to other countries, allowing

them to have lower final product costs to attract many buyers. One way Brunswick

helps cut costs in this aspect is that they use a number of manufacturing facilities for

both fitness and marine products, primarily because both products have highly

32

automated manufacturing processes. This is a big barrier for new entrants because the

amount of capital it takes to mass produce a product without the benefit of having the

access to the channels of distribution and relationships. Due to the economies of scale

and the position of older firms in the industry, new firms do pose little threat of

entrance in both industries.

First Mover Advantage

First Mover Advantage is defined as “the advantage gained by the initial

occupant pioneering firm of a market segment” (www.wikipedia.com). This advantage

enables the first entrant to gain control of resources. Followers may not be able to

match such resources, which allow the firms to be more profitable and have a

competitive advantage over the “follower firms”.

According to Lieberman and Montgomery, three sources or mechanisms lead to

First Mover Advantage; technology leadership, control over resources, and buyer-

switching cost. In both industries, technology leadership plays a big role. For example,

Brunswick uses technology to make their manufacturing process more efficient by using

highly automated machines that can produce either fitness products or marine products

very easily. This further helps cut cost by reducing the quantity of machines they need

to purchase. Being able to keep unit production cost to a minimum proves to be one of

the main sources of technology leadership; hence, why most of the new firms will not

make it in these industries. The top firms keep production cost low by cutting down

unnecessary expenditures in each segment by outsourcing their manufacturing

processes to other countries and utilizing technology.

Another way the major firms maintain technology leadership is the amount of

money each invests in research and development. This allows the firms to not only be

able to research and test new ideas for new fitness equipment and new motor designs,

but to find new and cheaper ways to manufacture the equipment. The chart below

represents the average amount of money that is invested in research and development

by the top firms in both industries. Figures were taken from the 10-Ks of each of the

33

top firms and averaged together over the past five years to get the overall amount of

money invested.

As the graph above shows both industries spend a high amount of money in

R&D. The marine and fitness industries over the past five years have been increasing

the amount of money they are investing. One can assume the significant difference in

the quantity spent between the two industries is due to the complex nature of marine

products to fitness equipment. However, both industries see the importance of R&D as

they are spending increasing amounts of money.

The last part of technology leadership is the acquisition of patents for new

innovations of fitness and marine products. Original firms enjoy this because it makes

it even harder for follower firms to be competitive in an industry where technology is

constantly changing. The second source of first mover advantage is control over

resources. First movers have an advantage over a new entering firm by controlling the

necessary resources needed to compete in that industry. The top resources for the

fitness industry are positioning and placing equipment in major sporting good stores

and fitness facilities. As for the marine industry, one of their resources is having patents

on a majority of their engines and boat products. The top firms in both industries have

a leading edge over the new firms due to their brand recognition, personal ties to

34

consumers, and legal patents. The last source of first mover advantage is buyer-

switching cost. Buyer-switching cost is the advantage the first firm gets by attracting

customers first. As a result, follower firms have to invest more money and time in their

product to attract them away from the first mover firms, which in the end drive up their

prices. Therefore, new comers will struggle to get into the mainstream of the fitness

industry.

The institution market is mostly controlled by the first movers and comprised of

fitness centers, universities, government agencies, and military. With many institutions

having pre-existing ties and contractual agreements with first mover firms, it’s harder

for new firms to attract new customers. Due to the first movers’ advantage, follower

firms pose little threat to pre-existing firms in the fitness and marine industries.

Access to Channels of Distribution and Relationships

Creating new channels of distribution and relationships prove to be a big part of

any industry. The new channels give a firm an advantage over competitors who have

not made these connections. The older firms hold an advantage over new firms trying

to enter because of the access to the channels. They allow a firm to cut cost and

potentially increase productivity by being able to outsource and operate in the most

efficient way. New firms struggle to create new channels because of the extra funds

spent trying to create these ties. As this is the case for the marine industry. According

to Brunswick’s 10k their sole supplier of engine blocks for their engine segment comes

from General Motors. This is a key distribution channel for Brunswick which adds to

their advantage over new firms attempting to enter into the market. The institutional

market makes up the biggest part of fitness sales. As a result, many of the older firms

have set contractual agreements and position rights with these institutions making it

hard for the new firms to be competitive in this market. The biggest barrier for new

firms trying to gain access to these channels is the amount of capital it costs to gain

them. Furthermore, without these healthy relationships, new firms will struggle to be

as productive in marketing their product to the mainstream. These relationships to both

industries pose a moderate threat to new entrants.

35

Legal Barriers

Legal Barriers are the last barrier to the threat of new entrants. Because the

profitability of the fitness and marine industry is based on new technology and

innovations of their respective products, new entrants struggle to produce new products

due to patents and trademarks of the existing firms. For example, ICON Health has

one hundred and ninety five patents for their products (ICON Health, 10K). Older firms

have an advantage because they are aware of consumer preferences and new

technology. Along with patents, both industries have several safety and environmental

regulations and standards to abide by in order for their product to be eligible for sale.

An example of this would be that the U.S. government sets certain emission and

environmental standards on marine engines, and in order for them to produce and sell

engines they must meet the certain expectations set forth. Therefore, problems,

especially lawsuits, for less experienced firms exist. In conclusion, legal barriers show

potential problems to new entrants. As long as the new firms can stay parallel with

new technology and make new innovations to their product, they will be able to patent

their product and be competitive with existing firms in either industry.

Conclusion

In the fitness and marine industries, the threat of new entrants is minimal. Due

to the barriers that new firms face, many will struggle to succeed. A firm can enter the

industry in two ways and still be competitive amongst the top firms. One way is making

connections through the right channels that give a firm the best economies of scale.

The other is to be a leader in technology and innovations that will make a product

superior to competitors.

Threat of Substitute Products

36

Any industry faces potential substitute products, but in a specialized segment,

such as fitness equipment, that threat is lower than in many of the broader ones. The

functions of the products can be very specific with a relatively small number of

substitutes. However, with little product differentiation and low switching costs, many

of the products share similar functions so they must compete for the customer on a

cost basis. The marine industry acts in the same way because boats and boat options

are very similar to one another. Therefore, the marine industry competes on a cost

basis. The threat of substitute products depends on the relative price as far as

performance is concerned, and the customer’s willingness to switch.

Marine and fitness industries encompass many products with each facing some

form of threat from substitute products. It’s important to understand that not only do

the different industries face different forms of threats, but also the different segments

within that industry.

Relative Price and Performance

For firms that want to be leaders in the fitness industry it is important for them

to develop products that perform as good or better than existing products. This allows

them to compete with on relative price and performance. For example, Brunswick

recently introduced a treadmill line that features seamless iPod integration in their

consoles (Brunswick 10k, 2007). While most firms’ sales are made to health clubs and

fitness facilities buying large quantities, which allow them to choose the best price

available. If the equipment performs the similar functions, then customers are going to

want the one at a lower cost. Therefore, when firms incorporate new performance

characteristics, it may allow them to sell their product for a higher price. This is

important because a very high level of cost competition exists in the fitness industry.

For the smaller clients, such as private gyms and households, competition is not

quite as cost based. A simple substitute for cardio equipment could be going outside

and running or riding a bike. To attract these customers, low product cost is important.

If the price is low enough, the customer could choose the convenience of doing cardio

in their air conditioned home over running outside. Also, a variety of high end products

37

compete with others based off innovation and performance rather than cost. The threat

of substitute goods for this type of target market is smaller than for customers

purchasing in bulk.

In the marine industry boats can be separated into two different categories:

smaller recreational boats and yachts. The smaller boats, fishing boats, and powerboats

have more available substitutes with slightly lower levels of differentiation; therefore

the threat is greater in those areas. This can cause price competition against other

large boat dealers and the specialized dealers such as Fountain Powerboats Inc. While

customers want products that are capable of quality performance, if the perceived trade

off of price for quality is not great, they will definitely go with the cheaper product.

However, with the luxury boat line, the level of competition is lower than other

segments because of the differentiation between products. Substitute products are

going to be performance or luxury based, not price based. This can be viewed as a

good thing for companies that offer both types of boats, because it can help diversify

funds. For example, if a firm is a leading seller on their smaller boats line, then they can

use some of the excess profits to plow back into their less profitable line. By doing this

may allow the firm to produce a superior line of yachts and increase sells’.

The marine engine portion of the marine industry competes against substitute

products on technology and performance rather than cost. In this industry, the threat

of new technology can make old engines obsolete or less valued. Here, in the United

States and other foreign countries are customers who demand the best performance.

Therefore, it is quite common for firms to patent their products and designs to help

assure that their competitors can’t use the same features. This is important because it

creates differentiation which allows the firm to charge a higher price.

Customer willingness to switch

Brand loyalty does not usually exist in the fitness industry. With low switching

costs for the customer, it is essential to keep prices low to maintain a suitable market

share. Furthermore, firms compete on a cost basis and satisfy customers with superior

38

product innovation and performance. Also, some customers may not be as quick to

jump to the lowest price if it means sacrificing technology or quality.

If a firm holds a large market share in the marine industry, the switching costs

for the customers can be quite high in some cases, while relatively low in others. As

stated before, the marine industry can be broken into two categories. Customers in the

market for smaller recreational boats are more willing to switch products because the

level of competition is high and more substitutes are closely related in these product

lines. However the switching costs can still be high with regards to the high end line

yachts. This is due to customer preferences, because people who are willing to spend

such high amounts of money on a yacht will be more likely to switch brands on the

basis of specific product features.

The switching costs for the marine engine segment can be high because of

product differentiation between different types of motors. Therefore, whoever has the

best technology and quality motors at the lowest price is ultimately going to keep the

customer. Also, many engines are sold independently to engine dealers. These engine

dealers switching costs are lower, and they will always choose the best perceived value.

Conclusion

To be successful in the fitness industry, a firm needs large chains as customers

as well as a significant amount of individual consumers. This is a highly competitive

market with little differentiation and low switching cost for the customers, therefore the

level of price competition is quite high. In the marine industry product differentiation

accompanied by aggressive pricing tactics is essential to have a good market share.

The overall threat of substitutes in the marine industry is moderate.

Bargaining Power of Customers

Bargaining power in both industries can be directly influenced by the structure of

each industry. The industry structure flows from suppliers of raw materials to

manufacturing firms who sell to customers. Customers in both industries have the

39

ability to purchase products in both a bulk fashion or on an individual basis. Bargaining

power directly affects profitability on both sides. Suppliers with high bargaining power

produce products that have few substitutes. Customers with high bargaining power can

bargain on price. In the fitness and marine industries, suppliers have low bargaining

power because of the various equipment substitutes. Also, suppliers of raw materials

tend to sell in bulk which gives more bargaining power to the firm purchasing them.

Customers have high bargaining power because they can choose which substitutes fit

their budget. Due to the customer bargaining power, the firms in these industries must

compete on price.

Price Sensitivity

Customers are more sensitive to price when few substitutes are offered, or there

are small switching costs. If a firm has high switching costs, then they can charge high

prices regardless if they lose customers. If a firm has low switching costs, customers

can seek alternatives, which means firms have to charge low prices to compete. In the

fitness industry, low switching costs exists. Customers can easily seek out of other

equipment to meet their needs and budget. When ordering fitness equipment for a

new gym, it would be pointless for a place like Gold’s Gym to pay more for a Brunswick

product than an ICON health product. The products are very similar and provide similar

results. Differentiation is moderate due to smaller private products; however, key

competitor’s products are similar. The number and volume of buyers are unlimited

with the spread of fitness corporations and household use.

In the marine industry, price sensitivity of customers relies heavily on both the

cost of the product and most important the quality (value) that customers are looking

for. When switching costs (the cost a consumer experiences to switch brands) are

relatively low and easy to achieve, then price sensitivity is higher and relies more on

product differentiation. Buyers ask themselves two things; what features am I looking

for and what am I willing to spend on a boat. An important aspect to understand with

boats is that they are long term investments. In order to get quality product

differentiation producers manufacture a wide variety of boat sizes, accessories, and

40

inboard/outboard engines. All of these three factors affect the price in which the boat

will be sold. As a customer, a person can negotiate with producers to get just exactly

what they are looking for. By doing this, it allows producers and customers to compete

with prices of similar (quality) boats, but also to allow a wide range a differentiation.

Relative Bargaining Power

Relative bargaining power determines the point to which customers can force

price to decrease. When we look at this power, we determine the cost each party will

suffer if business is broken. In the fitness industry, large customers are usually fitness

corporations, but independent gymnasiums, and households still hold business value. It

is harder for fitness corporations to seek alternatives because fewer companies can

produce the amount and diversification they need. However, it would still cost the

supplier more if business was broken because alternatives still exist. Therefore,

customers have the upper hand when it comes to relative bargaining power. Industry

market share remains the focus with corporate clients. Independent gymnasiums and

households have more relative bargaining power because of the number of private

fitness that companies that specifically target this sector. All together, bargaining

power of customers is high because of low switching costs and alternatives.

In the marine industry, customers’ bargaining power can be determined by a

number of different variables like the amount of customers in the boat market relative

to suppliers, volume of purchases by a single customer, availability of competitors’

products, and switching costs associated in a particular market. The bargaining power

of customers is fairly moderate; due to many competitors in the industry trying to gain

a competitive advantage over one another in terms of price and quality. Since most of

the industry’s customers are dealers, customer’s low switching costs allow them to

negotiate fairly lower prices. Furthermore, due to the nature of such an investment,

many customers only buy limited amounts of boats for a longer period of time. As a

result, this limits the amount of return customers and increases the importance of

keeping each potential dealer.

Conclusion

41

In the fitness and marine industries, customers have significant bargaining power

over companies. The various alternatives and low switching costs enable customers to

readily take their funds to other competitors. With corporate clients, orders usually are

in bulk which makes them hold more bargaining power because it would be that much

more costly to the supplier. All in all, in the fitness industry, the customers have the

upper hand in bargaining power.

Number of Suppliers Switching Costs Differentiation Price Sensitivity Price Sensitive Price Sensitive Low Price Sensitivity

Relative Bargaining Power High High Low

Bargaining Power of Suppliers

The bargaining power of suppliers is based up on the demand for their product

and the number of suppliers in the industry. Many outside forces affect the demand in

the economy for luxury items like boats i.e. rising oil and gas prices, favorable economic

conditions, overall consumer confidence and discretionary income levels (Brunswick

10k). If the industry has many suppliers, suppliers are not powerful. On the other

hand, if the industry only has few suppliers, suppliers have more bargaining power.

Also, the more product demanded will directly affect the number of suppliers. More

demand means more suppliers, and vice versa. In the fitness and marine industries,

many suppliers and alternatives exist; therefore suppliers have little amounts of

bargaining power. Demand is still manageable due to low positive growth rates, but as

stated earlier, it is more beneficial for companies in this industry to take yearly losses

than shut down.

Price Sensitivity

The fitness industry proves to be price sensitive because of the large amounts of

alternatives and numerous suppliers. Corporate clients are the money makers for the

larger firms and often they alone will compete for market share. For example, Gold’s

42

Gym has a contract with ICON health that expires in six months and states that for

every store Gold’s Gym opens, they must buy an allotted amount of equipment for

ICON. At the same time, Gold’s Gym plans to open ten more stores, or fitness facilities,

in the next three years. At the time of near expiration, competitor’s like Brunswick will

make offer equipment of the same quality, but slightly cheaper. In this industry, price

sensitivity is a result of low switching costs. Except this switching costs deals with the

cost that a customer receives if they opt to switch suppliers. For example, most fitness

equipment consists of steel. If this was the main cost of the company, the company

would need to research prices from steel suppliers. Ultimately, the fitness industry is

price sensitive because of the abundance of alternatives and low switching costs from

suppliers and even suppliers of suppliers.

While the marine industry focuses on differentiation among products to enhance

product sales, this enables suppliers to be less price sensitive than they would be if all

manufactures sold the exact same types of marine products. While switching costs are

low causing producers to be price sensitive, certain patents and trademarks allow

companies to differentiate their products. This allows companies to enhance the quality

of their products and allows them to charge higher prices. Furthermore, the greater

number of dealerships in the market adds to an increased market share competition.

This leads dealers to be fairly price conscious. For example, suppliers don’t want to shy

any potential customers away to a similar product that may not be as high in quality,

but offered at a lesser cost to the customer. Few customer switching cost,

differentiation between products and a higher volume of marine suppliers contributes

suppliers bring fairly price sensitive.

Relative Bargaining Power

The more profitable the relationship between the customer and supplier, the less

bargaining power exists between the two. Relative bargaining power deals with the

cost of the customer-supplier relationship. The lower the cost, the less relative

bargaining power will exist because it is more profitable for customer and supplier to do

business. As the switching costs decrease, the bargaining power of the customer

43

increases. As the switching costs increase, the bargaining power of the supplier

increases.

In the fitness industry, the supplier has little bargaining power, which is partly

due by low switching costs and prevalent alternatives. In addition, suppliers lack

bargaining power due to large amounts of suppliers within the industry. As the number

of suppliers increase, the lower the bargaining power for suppliers. Gold’s gym among

others can do thorough research to ensure they are getting quality and price. Price is

where suppliers compete to gain market share. Finally, one way a supplier can increase

its bargaining power is forward integration. Forward integration is “the expansions of a

business’ products and/or services to related areas in order to more directly fulfill the

customer's needs” (www.investorwords.com). For example, Brunswick could by the

supplier who provides them with steel to make all their products. This would reduce

costs, therefore giving them a production advantage over competitors.

In the marine industry, a fine line distinguishes who has more bargaining power

over one another. For example, if a particular customer is in the market for a specific

boat with certain features that are only offered by one or two suppliers, then the

bargaining power for the supplier will be higher. However, if a particular customer is

indifferent of certain features and does not care switching to another supplier (i.e. low

switching cost), then the supplier loses bargaining power. Also, the number of

suppliers relative to the number of customers in the market reduces the bargaining

power of suppliers. Ultimately, product differentiation helps increase suppliers

bargaining power over certain customers. Yet factors like low switching costs for

customers and the high number of competitors forces suppliers to have fairly lower

bargaining power over their customers.

Number of Suppliers Switching Costs Differentiation Price Sensitivity Price Sensitive Price Sensitive Moderate Price Sensitivity

Relative Bargaining Power Low Low High

44

Conclusion

All together, high price sensitivity and low bargaining power give suppliers low

bargaining power. Low switching costs give more bargaining power to customers.

Suppliers will directly compete with each other for market share. Aggressive pricing

strategies to obtain market share will determine the price for industry products.

ANALYSIS OF KEY SUCCESSS FACTORS FOR VALUE CREATION IN THE

INDUSTRY

A firm’s profitability is also influenced by its strategic position, or the angle is

takes at competing in the industry. Business strategies provide direction and focus to

firms; it is crucial for firms to identify specific business strategies relative to their

industry. Two of the basic types of business strategies are cost leadership and

differentiation. The fitness and marine industries are driven primarily by cost

leadership; however, differentiation is also prevalent. Therefore, both perspectives are

important and how each plays different roles in the industry.

Cost Leadership

As previously stated, the fitness and marine industries produce similar products

with many alternatives and low switching costs relative to their industries. As a result,

firms must focus on cost leadership strategy, or in other words, compete on price in

order to gain market share. Key components that lead to cost leadership are as

followed: economies of scale, efficient production, lower input costs, cost control, and

research and development.

45

Economies of Scale and Efficient Production Processes

The fitness industry mass produces products though efficient production

processes; the industry has high economies of scale due to their production assets.

The increase in products will decrease the average cost per unit, therefore, giving that

firm a competitive edge through efficient production processes. When the average cost

per unit decreases, it allows firm’s to charge lower prices and capture additional market

share in the price sensitive market.

Firms in the marine industry have strong economies of scale. Large firms such as

Yamaha, Honda, and Brunswick have the ability to purchase high amounts of raw

material at discounted prices. Small firms such as Fountain Powerboat Industries, Inc,

have the better ability to manage labor costs. Brunswick Corporation, Honda, and

Yamaha are able to produce larger quantities than smaller competitors so they are able

to spread their fixed cost over a much greater number of units. This decreases the cost

of good sold per unit. In the marine industry, efficient production is limited because

some processes are not as automated as others (i.e. quality control and product

testing). More specifically boats need to be checked for balance to have good buoyancy

and engines need to meet government regulations on emissions output. The industry

does not really compete on simpler product designs because boats and engines have

specific requirements and are complex in nature. Overall, the industry is limited with

efficient production and simpler produce designs activities.

Lower Input Costs

One way a firm can lower total costs is to create a price sensitive market with

their suppliers by purchasing large quantities of raw materials. As stated earlier, the

primary material used in the fitness and marine industry is steel and fiber glass. These

firms can exercise control over suppliers because of low switching costs and the

bargaining power of the firms in each industry. Also, firms can choose to use the power

of forward integration to eliminate middleman costs. Usually, in a price sensitive

industry, material suppliers, such as steel and fiber glass, are forced to compete with

each other on price to maximize profitability.

46

Cost Control

In order to compete in the fitness industry, firms must cut prices when needed

to maintain their competitive advantage in the price sensitive market. Due to highly

specialized production assets, this industry holds a high fixed to variable cost ratio.

Therefore, any unnecessary costs are holding the company down from increasing

competitive advantage. Slight cost cuts allow company to cut overall cost just enough

to help capture competitor market share. This can be done by taking the amount of

money saved and plowing it back into other areas of the company like R&D. Take for

example Brunswick. They are currently reducing $300 million in fixed costs by closing 4

manufacturing facilities. They can then take those savings and utilize them in areas that

can help them become more profitable. In the marine industry, costs control can be

very difficult to maintain because of the high cost to make a boat or engine. Plus, the

marine industry is fragmented. Small firms are able to control labor costs better than

larger ones because of their relative sizes, but are not as capable in controlling the cost

of raw materials. The opposite occurs for large firms. Larger firms are able to utilize

their size and purchase higher quantities of materials at a discounted price.

Differentiation

Differentiation is the act of setting one firm apart from another by a way of

improved business process, brand image, and many other things. In order for firms to

compete with competitors, three things must be done. First, one or more attributes of

a product customers value must be identified. Next, a unique angle must be taken to

meet those certain attributes. Finally, a firm must value the product at a lower price

than the customer is willing to pay for the differentiated project. The key is that the

attribute must set the company apart and fit the needs of customers at the same time.

In the fitness industry, usually low manufacturing costs and production efficiency

47

provide differentiation. A high level of differentiation exists in the marine industry since

most companies have a hard time competing on cost. Differentiation in any industry

must have quality products, variety products, customer service, flexible delivery time,

trademarks, research and development, and limited cost on innovation and creativity

(Palepu & Healy). Another example would be in the automotive industry, with regards

to things like brand image, quality, and research and development. Hence the

difference in the experience when driving a Cadillac as opposed to a Honda.

Quality

Quality is linked to the product’s level of grade. In the fitness industry, quality is

extremely important because the machines are high specialized to perform specific

fitness functions. If a corporate firm chooses a supplier to purchase fitness equipment

from, it is instilling trust and liability in those products. Personnel are going to use

these machines so they must perform at a high level to ensure safety and desired

results. For example, if Gold’s Gym realizes an increase in machine maintenance on its

books, the firm will, most likely switch suppliers to offset this rise in cost. With regards

to the marine industry quality is important to the extent that the firm wants repeat

customers. If a customer spends a significant amount of money on a poor product they

will be less inclined to purchase that brand again. Therefore, they want to keep quality

costs at a minimum but still meet consumer quality expectations.

Product Variety

In the fitness industry, companies that can produce a variety of products from

free weights, machines, treadmills, etc. are more valuable to the industry. For

example, ICON health produces multiple fitness equipment and captures dominating

market share. On the other hand, companies that are limited to household fitness

equipment are limited to the variety, which limits market share. The same holds true for

the marine industry. By offering more than just one type of product they are able to tap

into the market share of the different variety of boats like fishing boats, recreational

boats, and yachts.

48

Research and Development

Research and development drives innovation in products and manufacturing

technologies. It deals with the introduction of new products and enhancing existing

products. In this fitness industry, product and design are key components of

differentiation. Large competitors spend millions each year in research and development

with the goal of designing new products that can be sold before competitors. The

following is a chart that explains the amount of R&D as a percentage of total sales in

each industry.

2003 2004 2005 2006 2007

Fitness Industry: 2.15% 2.39% 2.67% 2.81% 4.65%

Marine Industry: 2.58% 1.98% 1.96% 2.02% 2.06%

The chart above explains that the fitness industry spends a considerable amount

more in R&D in relation to their sales. The ratios are increasing from 2003 to 2007 at a

steady rate. As for the marine industry there is some validity that is caused by an

increase in the amount of marine sales in retrospect to R&D expenses in 2004 to 2005.

In 2006, Brunswick and ICON health alone spent twenty six million dollars on research

and development (Brunswick 10K, ICON health 10K). Along with the revenues, new

technologies can influence brand imaging by sending messages to customers that the

company is constantly improving products to meet consumer needs.

Creative Product Appearance

Product appearance is related to the reaction of consumers when viewing

products. In the fitness industry, product appearance plays a key role in differentiation.

Products must have innovative designs to look up to date. For example, new machines

need to look new and specify directions for all intended uses muscles being worked.

49

Owners and users desire machines that look and feel reliable. This is why you often see

fitness gyms constantly changing their facilities. For example, a local fitness gym in

Flower Mound (Health and Athletic Center) just recently did a complete makeover of

their facility. When asked as to why they were doing so they replied that it was in order

to keep up with the new gyms (Lifetime Fitness) that where offering the latest in fitness

equipment. Their sharp decline in memberships was directly related to the fact that

people want the latest in fitness equipment. The same holds true for the marine

industry. If product appearance is better from product to product, the one that provides

the best appearance will gain differentiation. This is why you see new models of boats

from year to year. People are less inclined to buy last years model when the new one

provides new things like improved sound systems, passenger towers, and better engine

designs that offer more power. This is further supported by the fact that companies

spend large amounts of money on research and development; to constantly keep up

with the latest in product appearance and performance.

Conclusion

Cost leadership is the single most important strategy in creating a competitive

advantage. Industry customers desire quality machines at low prices. However,

differentiation also provides a competitive advantage. If a product or process is better

than competitors, a firm will have differentiation in that industry. In the fitness

industry, low cost and differentiation together combine to control market share. In the

marine industry, recreational boats and engines depend on some cost leadership, but

heavily on differentiation. Cost leadership strategy allows firms to control some cost;

but cost is necessary to make boats and engines and some of the raw material cannot

be purchased at a discount. Differentiation plays big role in the industry, allowing small

and big firms to compete together.

FIRM COMPETITIVE ANALYSIS

50

Although many business strategies exist, the two general strategies are cost

leadership and differentiation. After performing an industry analysis of the success

factors and competitive strategies of the fitness industry, Brunswick Corporation can be

categorized to be a cost leader. Brunswick strives to obtain quality and innovation

globally at the right cost (www.brunswick.com).

Economies of Scale

Brunswick Corporation produces highly specialized equipment. They are able to

buy high volumes of raw material to help minimize the input costs and receive large

orders. Brunswick had the highest net sales in the industry for both boats and engines.

With mass unit production, their fixed costs are spread out over the mass. Brunswick

also operates in three different industries; however, their production assets can perform

operations in multiple industries. For example, Brunswick’s production asset molds

steel into different shapes so therefore it can be used to mold steel for fitness

equipment and boats. These assets are what make Brunswick because by having this

competitive advantage, it lowers their production cost which rolls over to overall price of

product. Below is a chart that represents the amount invested in PP&E for all of

Brunswick’s competitors.

Net PP&E (in millions) 2003 2004 2005 2006 2007

Brunswick Corporation 706.1 746.3 817 858.7 888.8


ICON Health 0.0488 0.0585 0.0745 0.0444 N/A

Fountain Powerboats 16.17 15.91 17.18 17.11 16.43

Marine Products 17.76 18.36 17.25 16.64 15.94

As the table shows, Brunswick net property, plant, and equipment dominant all

other competitors. Granted it competes in three industries, but Brunswick production

assets allow them to be industry leaders in all three by being extremely efficient. By

being efficient, it has allowed Brunswick to lower prices and maximize growth in the

industry.

51

Another way that Brunswick capitalizes on their overall size is their ability to

spend large amounts of money on capital expenditures and acquisitions. Below is a

chart that shows how much money Brunswick spent on capital expenditures and

acquisitions over the past five years.

(in millions) 2003 2004 2005 2006 2007

Capital Expenditures 157.7 163.8 223.8 205.1 207.7

Acquisitions 140 248.2 130.3 86.2 6.2

As time goes on Brunswick has increased the amount of money spent on capital

expenditures and decreased the amount spent in acquisitions. Some of the various

capital expenditures and acquisitions they take part in are purchasing manufacturing

plants, marinas, and research. By purchasing manufacturing plants it enables them to

increase flexibility, productivity, and efficiency with regards to production. Also, by

expensing money to research allows them to develop new software and other

information technology resources.

Cost Control/ Input Costs

Brunswick Corporation has experienced growth despite the slowing on consumer

spending on recreational products. Brunswick has a competitive advantage because of

their low global cost of manufacturing products. Brunswick achieves this by having

production assets that can do multiple operations for different industry products. Also,

it has production plants in multiple segments of the world, which decrease the amount

of transportation cost of materials and products.

However, one indication might hint that the price of steel could increase due to a

global demand for steel (www.wallstreetjournal.com). If the price of steel increases,

input costs will increase, and firms will have to be extremely careful to not lose market

share when resetting prices to offset the increase. Spot prices for steel are up $649

from last year. U.S. Steel Corporation’s stock is up 4.38%. The graph below dictates

the price of stock for U.S. Steel Corporation.

52

As the graph shows, the price of stock has recently decreased due to a decrease

in demand for steel, which translates to lower input costs for the fitness and marine

industries.

Product Variety

Brunswick Corporation competes in four different industries; therefore the firm

offers a variety of products. In this fitness industry, Brunswick operates under the

brands Life Fitness, Hammer Strength, and ParaBody. Each of these brands offers

different fitness equipment ranging from elliptical machines, treadmills, strength

machines, and free weights. In the marine industry, Brunswick operates under the

brands such as Sea Ray, Mercury, and Mariner. Under these brands, Brunswick

operates using the cost leadership strategy. This strategy allows Brunswick to compete

with competitors using its own products to its advantage. In other words, Brunswick’s

different brand names and products to compete against each other to control market

price and capture market share.

Research and Development

Brunswick Corporation considers research and development important in

recreational sports. “The company strives to improve its competitive position in all of

its segments by continuously investing in research and development to drive innovation

in its products and manufacturing technologies” (Brunswick, 10K). Brunswick spent

53

over one hundred million dollars in research and development in 2007. They pride

themselves in low cost manufacturing, productivity, and efficiency. Recently, Brunswick

has taken on programs such as Strategic Bill of Materials Program and Product Platform

Development, aimed to render new product designs and improve existing ones. As the

table below shows, research and development are a small percentage of Brunswick’s

net sales, however, it is still deemed important in all industries that Brunswick competes

in.

Brunswick R&D Percent of Sales 2003 2004 2005 2006 2007 2.86% 2.51% 2.20% 2.33% 2.37%

As the chart shows, over the past three years the percentage is increasing. This

is due to the fact that Brunswick spent more money on R&D in relation to the growth in

sales. Moreover, the number of sales increases as the amount spent on R&D increases

proving that the improvements accomplished with R&D are paying off.

Quality and Brand Image

Brunswick Corporation strives to differentiate the firm by instilling the highest

quality in their products for the lowest price. The high quality in all of their products

have enabled Brunswick to diverse as industry leaders in four different types of

recreational sports. Many schools and fitness corporations have chosen Brunswick for

their fitness needs because of the brand image. For example, Texas Tech has

Brunswick products such, as Hammer Strength machines and free weights, all over the

recreational center. One way firms can achieve getting their products in places such as

this is through aggressive advertising. Below is a chart that represents the amount of

advertising costs relative to the quantity of sales in both the marine and fitness

industries for the past five years.

2003 2004 2005 2006 2007 Brunswick: 1.52% 1.40% 1.28% 1.30% 1.37%

54

As the chart above shows, Brunswick spends on average 1.37% on advertising

with respect to total sells over the past five years. This was taken by dividing total

advertising costs for both marine and fitness products and dividing by the number of

sales in both industries. From 2003 to 2005 the percentage is declining because the

amount of sales in increasing more than the amount of money spent on advertising.

This could mean that the advertising expenditures are paying off quite considerably.

However, over the last two years the percentage starts to increase. This is due to a

decrease in sales in proportion to advertising costs. On reason for this may be that the

economy is starting to see slight signs of the financial crises that hit in 2008 and

therefore reduced the amount of discretionary spending they were willing to spend on

luxury items.

Also, in the marine industry, many dealer firms and households combine trust

with Brunswick’s boats and engines because of brand image. Brand image and quality

help Brunswick differentiate itself from its competitors. One way consumers can relate

quality with their product is with warranties. Many companies sell warranties to help

ensure product quality for extended periods of time. For example, Brunswick spent on

average $126 million on warranties over the past five years. Another method of creating

brand image along with quality is a company slogan. For example, with its business

slogan, “Genuine Ingenuity”, Brunswick’s brand image is producing quality, clever

products at low prices.

Conclusion

Brunswick definitely has sustainable competitive advantages in both cost

leadership and differentiation in the fitness and marine industries. Brunswick’s sheer

size and huge amount of sales allow them to have both economies of scale and scope

when other companies in the industry cannot. It would take a huge amount of capital

invested to compete with Brunswick. Brunswick’s large size also enables them to

achieve a competitive advantage of lower input costs and low distribution costs. They

are able to purchase larger amounts of raw materials at a lower price so input costs go

down. The many facilities located worldwide reduce distribution costs and distance the

55

materials and products must travel. They also have advantages in terms of

differentiation, like with their large product variety and efficient delivery. Companies in

this industry realize they cannot compete with the large variety of products, so they try

to specialize and find market segments. Brunswick is possibly the only firm in this

industry that is able to compete favorably in both competitive strategies, so they use a

mixed strategy.

Accounting Analysis

Accounting analysis reflects how correctly a firm’s accounting is represented on

financial statements. According to Palepu and Healy, “Accounting analysis is used to

evaluate the degree to which a firm’s accounting captures its underlying business

reality” (Palepu and Healy). Inaccurate numbers lead to distortions of financial

statements. An accurate accounting analysis will eliminate these distortions through six

steps. First, key accounting policies need to be determined based upon the industry

and firms business strategies. Second, the amount of flexibility used in the accounting

operations needs to be recognized. Third, a firm’s accounting policies need to be

indentified to understand the benefits from their accounting flexibility. Next, the firm’s

quality of disclosure needs to be identified to derive the quality and underlying business

reality of the financial statements. After that, red flags need to identified and noted.

Finally, necessary adjustments need to be made to offset management and policy

distortions.

Key Accounting Policies

Key success factors often enable a firm to have competitive advantage over

competitors. These factors are directly linked to key accounting policies. Therefore, it

is vital for an analyst to identify and evaluate the accounting policies to measure those

key factors and risks. As stated in the competitive analysis, Brunswick’s key success

factors are cost control, economies of scale, product variety, brand image, research and

56

development. Some accounting policies that could be used to distort financial

statements are as followed: capital and operating leases, research and development,

pension liabilities, and currency risks. Key accounting policies and success factors need

to be analyzed to capture the overall disclosure a firm’s financial statements.

Research and Development Research and development plays a key role in capturing competitive advantage.

However, research and development has large risks associated with it due to failed

products and obsolete research. GAAP rules require research and development to be

recorded as an expense because of the uncertainty of gains or losses. As a result,

expenses will be overstated, and assets, equity, and net income will be understated.

Brunswick is an industry leader in research and development for fitness and marine

products. In 2007, Brunswick spent 835 million dollars on research and development

(Brunswick, 10K). The tables below prove that Brunswick spends millions of dollars on

research and development, and they outspend other industry competitors. As a result

of larger amounts of research and development, Brunswick’s expenses will be higher,

which causes net income to appear lower. When net income appears lower, investors

could possibly avoid investing despite the benefits of research and development.

Research and Development 2003 2004 2005 2006 2007 (in millions)

Boat 25.6 27.2 36.1 38 39.8 Marine Engine 70 82 67.3 70.3 68.1

Fitness 16.9 16 14.2 18.4 21.6 Bowling & Billiards 5.7 5.9 5.9 5.5 5

The table above shows the Brunswick’s breakdown of research and development

in each segment. Brunswick spends majority of its research and development in the

marine industry. However, we can look at competitors to analyze how each industry

utilizes research and development. In order to this, we will take research and

development as a percent of sales.

57

Research and Development 2003 2004 2005 2006 2007 Brunswick-Marine Engine 70 82 67.3 70.3 68.1

Brunswick-Fitness 16.9 16 14.2 18.4 21.6 ICON health-fitness 11.6 13.9 12.4 11.6 N/A

Fountain Powerboats-marine 1.6 1.9 2.4 1.9 1.8 R&D as a Percent of Sales 2003 2004 2005 2006 2007 Brunswick-Marine Engine 1.99% 1.77% 1.32% 1.37% 1.35%

Brunswick-Fitness 3.47% 2.87% 2.58% 3.10% 3.30% ICON health-fitness 1.29% 1.45% 1.42% 1.36% N/A

Fountain Powerboats-marine 3.04% 3.20% 3.37% 2.40% 2.61%

The table above indicates the fitness and marine industries hold percentages

between one and three. In the marine industry, research and development mainly

deals with the enhancement of hulls, molds, and small part productions. In the fitness

industry, research and development deals with new product developments and

updating existing equipment. Brunswick can conclude that their research and

development expenses will raise future revenues. However, this only accounts for the

products being developed or sold at that particular time. Certain firms will try to adjust

by taking advantage on improvements they have made in their future asset

developments such as Brunswick’s product lines.

In conclusion, GAAP requires that research and development to be recognized as

an expense. These rules cause expenses to be overstated and net income to be

understated. Given that Brunswick is one of the leaders of research and development

in its respective industries, it can be concluded that they have the most understated net

income by incurring these costs.

Currency Risk In today’s international market place, currency fluctuations can have extreme

impacts on the success or failure of international firms such as Brunswick. The ability

of a firm to manage its currency risk appropriately can be achieved in a number of

ways. As stated in Brunswick’s 10-K, “The company uses derivative financial

58

instruments to manage its risks associated with movements in foreign currency

exchange rates, interest rates, and commodity prices. These instruments are used in

accordance with the guidelines established by GAAP and by a firm’s management. All

derivative securities are recorded at fair market value.” Brunswick’s ability to manage

successful hedging activities has significantly improved the amount of risk they have

encountered over the past five years. In fact, “There were no material adjustments as

a result of ineffectiveness to the results of operations for the years ended December

31st, 2007, 2006, and 2005 (Brunswick 10-K).”

Firms like Brunswick not only sell products in foreign markets, but also have a

growing number of their manufacturing processes in foreign countries. Therefore, it is

important to realize how much money one can save from managing exchange rates. In

2007 alone, Brunswick had $2,016.4 million in foreign sales, which accounted for 36%

of their total net sales in 2007 (Brunswick 10-K). Furthermore, in 2007 translation

adjustments from cash flows amounted to a net gain of $12 million and their hedging

activities on derivatives accumulated a loss of $ 8.5 million. This loss was the first real

loss on hedging activities for Brunswick over the last five years, which is still “pennies”

compared to their overall performance for the year ending December 31st, 2007. In

order to better understand how these activities work for Brunswick and competitors,

one must know exactly how they manage their activities dealing with foreign currency,

interest rates, and commodity prices.

When dealing primarily with assets and liabilities, Brunswick uses forward

exchange and options contracts to manage the exposure of foreign currency (Brunswick

10-K). Forward exchange contracts are used to lock-in fixed exchange rates. Options

contracts are widely used to help manage and diversify risk away from the firm that

arises from interest rate fluctuations. According to Brunswick 10-K, on 31 December,

2007, the firm had an outstanding balance of $5 and $1.4 million in futures and options

exchange contracts, respectively. Another way Brunswick helps manage its risk from

long-term debt associated with manufacturing processes is to use “Fixed-to-Floating”

and “Floating-to-Fixed” interest rate swaps, which had a value of $50 million as of 2007

and 2006 respectively (Brunswick 10-K). Lastly, one unique characteristic of Brunswick

59

is that they also manage their commodity prices and energy costs with futures and

commodity swap contracts. Engaging in these activities helps the firm to manage risk

associated with purchasing raw materials from suppliers and save on energy costs (i.e.

natural gas) to run their operating facilities.

Due to the volatile conditions of the global and U.S. economy such as the low

value of the U.S. dollar to the Euro, Brunswick’s ability to recognize the importance in

derivative securities has enabled them to successfully mitigate the risk from foreign

currency exchange rates and can be considered to be a very useful key accounting

policy.

Operating and Capital Leases In the marine industry, a heavy amount of operating leases is used. In the

fitness industry, both capital and operating leases are present. A firm’s use of

operating leases can manipulate its balance sheet, potentially understating both assets

and liabilities. Operating leases are not recorded on the balance sheet, which can

mislead investors. They are solely the property of the leaser and are basically just

rented out to the lessee. This asset is used and profited from, but it is never actually

recorded as an asset nor is the liability to pay for it. Instead, it is recorded as an

operating expense on the income statement. “In a capital lease, the lessee assumes

some of the risks of ownership and enjoys some of the benefits” (cr-ny.com). So both

an asset and a liability are recorded on the balance sheet. Companies may have the

incentive to use operating leases to appear in a better financial position, both to

investors and creditors.

Brunswick appears to have taken the operating lease route; they have a

substantial amount of operating leases and zero capital leases. However, in the marine

industry, this does not seem too unusual. Fountain Powerboats also has no capital

leases, and Yamaha Motors chose not to disclose any information regarding leases

because they deemed them to be insignificant. This leads an analyst to think that

perhaps they may be hiding balance sheet liabilities behind a large number of operating

leases, while having the luxury of keeping that information to themselves.

60

In the fitness industry, Brunswick’s competitors use both operating and capital

leases. The ratio of operating to capital leases is very high and coincidentally

Brunswick’s two main competitors in the fitness industry have no more capital lease

obligations after 2009. Brunswick appears to have a policy of either owning the asset if

there is no way around a capital lease, or using an operating lease when able to.

Goodwill Brunswick Corporation is a diversified corporation, which competes in multiple

industries. The marine and fitness industries are the two main industries they compete

in. The evaluation of the firm’s goodwill will give an indication how well they compete

in each industry.

Goodwill occurs when firms buy other firms to increase production, value, or

grab market share. Initial goodwill is the difference from the purchase price and the

fair market value of total asset minus total liabilities. The difference in the purchase

price and net assets has the assumption that future cash flows will greater than extra

amount of dollars over the market value net assets.

Marine Industry’s Goodwill (millions)

2002 2003 2004 2005 2006 2007 Brunswick 189.5 236.6 300.2 336.9 376.7 390

Fountain Powerboats 0.36 0.74 0.67 0.65 1.07 0.65 Marine Product 3.308 3.308 3.308 3.308 3.308 3.308

The table shows the change in goodwill for the past six years. Brunswick has

accumulated large amounts of goodwill especially in the past three years. Brunswick’s

growth could indicate the demand for marine products was high. Brunswick acquired

several firms to satisfy customer needs.

Fountain Powerboats has small amounts of accumulated goodwill compared to

Brunswick or Marine Products. Fountain Powerboats adjusted goodwill periodically.

Fountain Powerboats small amount of goodwill can indicate they do not acquire

61

companies. They could be constructing facilities or buying property, plant, and

equipment at fair market value. In other words, they focus on other activities to

compete against competitors.

Marine Products did not adjust goodwill in the past six years. The table

indicates Marine Products overstated their goodwill. Marine Products has not invested

in any intangible assets that relates to goodwill; Marine Products has not acquired

companies or buying patents for engines or boat designs.

The fitness industry has some similarities to marine industry. Brunswick is one of

biggest companies in the industry.

Fitness Industry’s Goodwill (millions)

2002 2003 2004 2005 2006 2007 Brunswick 261.9 265.6 267.4 265.9 272.3 274

ICON Health 5.62 5.62 5.07 5.72 6.52 6.52 Cybex Int. 11.25 11.25 11.25 11.25 11.25 11.25

Brunswick’s goodwill has increased in small increments. Brunswick’s acquisition

in the fitness industry has been small. On the other hand, ICON Health has adjusted

goodwill. Between 2003 and 2004, goodwill adjustments could have changed by selling

off some of its assets. ICON’s book value net assets have decreased for a short period,

which makes goodwill impaired. The 2007 goodwill is a static number because ICON

Health did not submit a 10-K in 2008. Cybex International did not report any changes

in goodwill. The goodwill has to be an overvalued number.

Brunswick’s Goodwill over Plant, Property, and Equipment 2002 2003 2004 2005 2006 2007

Goodwill 452.8 515.1 624.8 617.3 663.6 678.9 Net property 792.7 827.1 876.4 953.3 1,015 1,053

GW/NP 0.57 0.62 0.71 0.65 0.65 0.64

62

In the last three years, Brunswick has recorded slow growth rates in goodwill.

Brunswick could have gained large amounts of market share, which leaves little growth

in the market. On the same note, Brunswick’s goodwill has increased each year.

Brunswick may have not adjusted enough goodwill; however, the acquisitions of firms

relates to the growth in goodwill. Property, plant, and equipment have increased

during the past six years. It has grown bigger than goodwill, which makes goodwill

look small compare to property, plant, and equipment.

Warranties

Brunswick Corporation competes in three industries in which products need

warranty. Brunswick competes in billiards, marine, and fitness industries. The main

two industries are marine and fitness industries. Evaluating product warranties can

help understand how competitors compete in the marine and fitness industries. A

warranty is a seller’s promise to replace, repair, or refund a product to a buyer. A

buyer usually will return a product for quality or performance. A seller will sell a

product to buyer; the seller recognizes warrant liability, sale, and cash. This method is

called accrual basis (Warfield page 635). A buyer will credit cash and debit inventory.

Brunswick’s competitors do a little more in some areas. Cybex International lists

its warranties on their balance sheet, income statement, and cash flow statements.

ICON Health does same as Brunswick by hiding its number in the balance sheet. All

competitors use different types of warranty titles such as warranty obligations or

warranty reserves. They all break-down the warranty calculations. Neither Brunswick

nor competitors breakdown extend warranties from regular warranties. This could be a

concern if warranties and extend warrant differ in cost and the method of accounting.

Accounting Flexibility

Accounting flexibility refers to the leeway managers have to alter the true value

in financial statements. The financial statements must be consistent. “If managers

have little flexibility in choosing accounting policies related to key success factors,

accounting data is likely to be less informative for understanding the firm’s economics.

In contrast, if managers have considerable flexibility in choosing policies, accounting

63

numbers have the potential to be informative, depending on how managers exercise

this flexibility” (Palepu and Healy). GAAP gives firms opportunities to present their

information in an informative manner; however, this flexibility can lead to distortions of

financial statements to boost investment interest. The following information will

identify the flexibility of Brunswick’s key accounting policies.

Research and Development GAAP has specific regulations on research and development. First, it requires

research and development to be recognized as an expense. As a result, firms overstate

expenses, which cause net income to fall. Also, research and development is required

to be expensed at the time it occurs. Hence, revenues have not been earned, yet

expenses for future revenues increase at the time the projects take place. This allows

firms to gradually capitalize research and development to future assets.

The accounting flexibility of research and development expenses within the

marine and fitness industries is limited to new equipment developments and upgrading

existing products. In the marine industry, upgrading existing projects would consist of

finding new entertainment options, more powerful or quieter engines, and other add-

ons.

In conclusion, disclosure of the firm’s research and development expenses is

somewhat limited. Financial statements are general in saying that they expense it to

create new products and upgrade existing ones in a certain account. Limited flexibility

in recording research and development expenses exists in the fitness and marine

industries; the lack of flexibility translates into the lack of understanding of firm’s

economics.

Currency Risk

In comparison to other key accounting policies, the flexibility given to managers

of international firms can be “severely constrained by accounting standards and

conventions” (Palepu & Healy). Due to the standards set by GAAP and the consistent

monitoring of the SEC, it leaves very little wiggle room for managers to choose how to

64

record international business activities. In the case of Brunswick, a large portion of

their success comes from their management of current market derivative securities.

Under GAAP rules, such assets must be recorded at fair market values on their income

statements. Furthermore, currency exchange and interest rates are public information.

Anyone who is interested in seeing how an international company manages their

foreign currency risk can do so. Due to the unique characteristics of government

policies and the availability of information to investors, the amount of accounting

flexibility managers have in regards to foreign exchange risk is severely limited.

Operating Leases

All firms have some flexibility in using capital or operating leases and will most

likely use an operating lease if able to do so. Certain leases must be classified as

capital if they meet certain terms, but these terms are all subjective and subject to

manipulation. Most of the time one can legally classify a lease as operating. As earlier

stated, capital leases are recorded as an asset, and the lease payments are recorded as

a liability. Operating leases affect only the income statement. If one operating lease is

used, this understatement of liabilities will lead to an understatement of expenses,

which can overstate both net income and retained earnings. These are two bottom

lines that many investors look at. By choosing an operational lease, it offers the

flexibility of not having to commit long term to an asset. This eliminates the risk of an

asset losing value rapidly due to economic conditions, new technology, etc.

A company as large as Brunswick will be able to record a larger dollar amount of

operating leases without affecting the balance sheet as much. On the other hand,

smaller firms like Fountain Powerboats, whom doesn’t have billions of dollars in both

assets and liabilities, will be affected more.

Goodwill The flexibility of goodwill accounting policies has room to be managed. GAAP

does not require firms to always impair goodwill. For example, plant assets have to be

depreciated every year because accountants presume the value of an asset decreases

every year after the purchase. This concept does not apply to goodwill. The goodwill

65

impairment has decreased in current year assets to prior year assets. If current assets

continue to grow every year, goodwill never decreases. Goodwill will increase when

firms purchase other firms. GAAP allows firms to impair goodwill for long periods of

time. GAAP has changed the rules from amortizing goodwill to testing goodwill every

year.

Accountants have to figure fair market value of net assets for year testing.

Next, accountants have to calculate prior year fair market value of the firm. They must

include goodwill in the calculation. If the current year fair market value for the firm is

greater than prior carrying value of net assets, goodwill has not been impaired. If the

present year carrying value of the entity is smaller than the prior year, then goodwill

has been impaired.

Accountants have to evaluate implied goodwill. The current year fair market

value of the entity minus current year carrying value without goodwill equals the

implied goodwill. Accountants will impair the amount of implied goodwill to the current

year goodwill. An accountant will debit an impairment account and net goodwill on the

balance sheet.

Brunswick’s goodwill growth in each industry is different. Marine industry

goodwill has been growing in large amounts except for 2007. Brunswick may be a

dominating firm; however, they have room to grow in the marine industry. Fitness

industry goodwill is growing at very slow pace. Fitness goodwill growth can be an

indication that Brunswick has little room to grow in fitness industry. Brunswick has

made goodwill a key accounting policy. Brunswick’s strategy is to acquire firms in the

marine and fitness industries to increase goodwill every year. Brunswick has increased

its national and global market share with their new firms. When acquisition occurs,

Brunswick buys the firm’s patents, molds, boat designs, facilities, labor, and raw

material. Brunswick has gained large amounts of assets that drive their input down,

increase production, and increase economies of scale. One of Brunswick’s drivers is to

create value through acquisition. After doing the accounting analysis of Brunswick’s

goodwill, the analysis reveals goodwill is being overstated. Looking at the consolidated

66

balance sheet, goodwill does not look significant compared to total assets, liabilities or

equity.

Brunswick’s Balance Sheet (millions)

2007 2006 2005 2004 2003 2002

Goodwill 678.9 663.6 617.3 624.8 515.1 452.8

Total assets 4,365.60 4,450.30 4,621.50 4,346.40 3,602.50 3,314.70

Total liabilities and equity 4,365.60 4,450.30 4,621.50 4,346.40 3,602.50 3,314.70

When taking goodwill over total assets, goodwill is approximately fifteen percent.

As discussed previously, goodwill in the marine and fitness industries have larger

percentages. If goodwill is fifteen percent or more, a good investor or analyst will

impair good for 20%. The threshold percentage gives a fair picture of how a company

operates.

Warranties The accounting flexibility for warranties has some bending to incur in the

accounting. Firms can choose from couple of methods to account for warranties. Cash

bias method, expense warranty approach, and sales-warranty approach are three

different methods to account for warranties (Warfield page 635-6). Cash bias method

allows a firm to expense warranties when cash is paid for warranties. Expense

warranty approach is an accrual method (Warfield page 635). A firm sells a product to

a buyer; and product cost and warranty is not separate from selling price. Sales must

credit a current liability and debit an expense. Sales-warranty approach allows firms to

sell individual warranties separately (Warfield pg. 636). The difference in all the

approaches is the timing of warranties and recognizing liabilities and expense. It’s

difficult to hide a warranty because a sale must occur. The most flexibility in a

warranty is the cost. Firms can estimate high cost or low cost for warranties.

Assets Liabilities Equity Revenue Expense N. I. N U U N O U

67

Firms might want to overestimate warranty cost. Assets and revenues will be

neutral. Firm’s liabilities and equity will be understated. Revenue Expense will be

overstated, and net income will be understated. This over and under test can reveal

changes in two most important financial statements.

Evaluate Accounting Strategy

Actual accounting strategies used by companies are a good assessment of the

level of disclosure and accounting policy choices among firms. Managers can choose to

practice aggressive or conservative accounting strategies. Aggressive accounting

strategies can possibly lead to higher revenues, while conservative accounting

strategies are linked to lower revenues. Also, GAAP allows firms the luxury of

disclosure. High levels of disclosure provide a clear view of the true value of the firm.

On the other hand, low levels of disclosure can be confusing and often lead to bias

assumptions; Firms that attain maximum accounting flexibility are considered to have

low disclosure. Brunswick uses a mixed accounting strategy. While they practice

segment reporting, certain areas of accounting information are painfully general. All in

all, investors should be able to value a firm based on their current accounting strategy

and disclosure.

Research and Development In the fitness and marine industries, research and development is very small

compared to total assets and sales. The financial reports lack disclosure and flexibility

with GAAP being partially responsible. GAAP states that research and development

must be recognized as an expense, when in reality it could act as an asset. When

research and developed is recognized as an expense, expenses are overstated and net

income is understated. As a result, financial reports are less accurate. One resolution

68

to this inaccurate measure would be to capitalize research and development as an asset

over the advancement of developing projects.

In the fitness and marine industries, low amounts of disclosure exist. Actual

numbers are the only relevant information stated on financial statements. For example,

Brunswick’s financial statements include, “the company strives to improve its

competitive position in all of its segments by continuously investing in research and

development to drive innovation in its products and manufacturing technologies.

Brunswick’s research and development investments support the introduction of new

products and enhancements of existing products (Brunswick 10K). This statement

portrays that Brunswick industries have low levels of disclosure, therefore limiting the

amount of relevant information in the financial statements. However, other firms will

add what account the expense is recognized in. For example, Cybex International

included that they recognize their research and development expense in the selling,

general, and administrative account (Cybex International, 10K).

In conclusion, in the fitness and marine industries, low amounts of flexibility and

disclosure exists, which leads to standard financial statements. Firms can practice

either aggressive or conservative accounting practices based on manager’s influence.

Brunswick could capitalize developing products to assets overtime, which would boost

the level of assets of the financial statements. However, research and development is

still recognized as expense, which tells us that they are more conservative than

aggressive in their accounting strategy.

Currency Risk As discussed earlier, it can be hard for a firm with a significant portion of their

business overseas to distort the quality of their financial information. This is due to the

strict standards and conventions set by regulatory agencies and the availability of

information to the public. Most of Brunswick’s currency risk is managed through

forward exchange and option contracts, forward lock agreements, interest rate swaps

(i.e. Fixed-to-Floating), and commodity swaps. Because these risk management

strategies are so successful, Brunswick is very forth coming in how they present their

69

financial information. Due to a high nature of voluntary disclosure and government

regulation, Brunswick has a very straight-forward and open accounting strategy in

regards to currency risk.

Operating Leases

Brunswick has no capital leases and will only use an operating lease for an asset

in which they do not own. This was very surprising to find in such a large corporation.

Operating leases make up a significant portion of Brunswick’s contractual obligations.

Contractual Obligations Total year 1 years 1-3 years 3-5 >5 years Long Term Debt (LTD) 728.2 0.8 251.5 151.8 324.1

Interest payment on LTD 469 42.5 67.5 50 309.1 Operating Leases 201.6 49.2 76.7 40.2 35.5

Purchase Obligations 248.6 242.5 4 1.8 N/A Deferred Mgt compensation 58 9.2 15.3 7.3 26.2

Other Tax Liabilities 2.9 1.2 1.7 N/A N/A Other LT liabilities 210.3 23.9 78.3 21.9 86.2

Total Contractual Liabilities 1918.3 369.3 494.9 273 781.1 *in millions

This total of 201.6 million dollars was kept off the balance sheet. This is an

aggressive accounting strategy with several implications. It can mislead investors into

believing that the value of retained earnings, and thus the company’s stock, is higher

than it really is. Since nothing is recorded as an asset or liability, the debt to equity

ratio and return on assets will be higher than if using a capital lease. The debt

covenant and solvency ratios will be favorable to creditors. Also, no recognition of

depreciation is recorded on an operating lease, so expenses will appear lower.

Brunswick’s main competitors follow the same strategy of heavy use of operating

leases, but to a lesser extent. Fountain powerboats have no capital leases either,

although operating leases make up a much smaller portion of liabilities than with

Brunswick Corporation. Marine Products has a ratio of operating lease obligations to

70

total liabilities closer to Brunswick’s, but they also use capital leases. Cybex

International and ICON Health use small amounts of capital leases and larger amounts

of operating leases, but once again, it is not a significant portion of their total liabilities.

Brunswick appears to be the most aggressive company in their industries when it comes

to classifying their assets as operating leases. A trend exists in most of the other

companies of decreasing obligations of capital leases and an increase of operating

leases. All in all, it appears that at least one or two of Brunswick’s competitors are

following the strategy of eliminating all of their capital leases in favor of operating

leases or owning the asset. This will cause the same favorable distortions we see in

Brunswick.

Goodwill The comparison between goodwill and total assets can indicate relative amounts

of goodwill. The comparison between goodwill and total assets indicates how much

goodwill is not being impaired over long period of time.

Marine Industry’s Goodwill/Total Assets (millions)

2002 2003 2004 2005 2006 2007 Brunswick Goodwill 189.5 236.6 300.2 336.9 376.7 390

Total Asset 1,550.60 1,734.40 2,249.90 2,293.10 2,435.20 2,474.700.12 0.14 0.13 0.15 0.15 0.16

Fountain Power Goodwill 0.36 0.74 0.67 0.65 1.07 0.65 Total Asset 26.53 25.93 30.06 33.03 37.86 33.42

1% 3% 2% 2% 3% 2% Marine Product Goodwill 3.308 3.308 3.308 3.308 3.308 3.308

Total Asset 71.063 86.314 109.734 108.805 124.179 118.726

Brunswick’s average goodwill over total assets is 14%. Fountain Powerboats

average is 2%. Marine Products average is 3%. These averages are taken over a six

year period. Comparing each firm to each other may not be a good analysis, however,

the above chart shows how significant Brunswick’s goodwill is in the accounting books.

Brunswick has millions of dollars in goodwill, while Fountain Powerboats has smaller

71

amounts. Marine Products falls between Brunswick and Fountain Powerboats. The

wide range of goodwill shows how big the firms are relative to each other.

The chart above has a correlation with goodwill and total asset growth.

Brunswick’s goodwill has grown with total assets. As goodwill or total assets grow each

year, both increase to a certain degree. The growth in goodwill has increased more

than total assets. Goodwill has doubled in first three years, and total assets have

increased approximately by 1.5 times for the past six years. Acquiring firms is a proven

strategy Brunswick uses to compete in the marine industry. Brunswick is able to use

more raw materials and equipment to lower input cost and increase economy of scale.

They are able to buy or create patents and designs to compete in brand image.

Fountain Powerboat’s goodwill over total assets shows goodwill is not a

significant accounting policy. This is also the trend for Marine Products. They both

compete with different activities to stay competitive in the marine industry.

The goodwill over total assets chart shows how much goodwill has not been

impaired.

Fitness Industry’s Goodwill/Total Assets (millions)


Total Asset 577.1 635.9 667.9 678.5 693.10 695.40 45% 42% 40% 39% 39% 39%

ICON Health Goodwill 5.62 5.62 5.07 5.72 6.52 6.52 Total Asset 423.20 465.10 558.50 460.70 380.80 380.80

1% 1% 1% 1% 2% 2% Cybex Int. Goodwill 11.25 11.25 11.25 11.25 11.25 11.25

Total Asset 53.36 53.39 54.49 55.67 73.38 98.13 21% 21% 21% 20% 15% 11%

Brunswick’s goodwill is approximately 41% of total assets in the fitness industry.

ICON Health’s average over the six years is 1%, and Cybex’s average is 18%.

Comparing these three firms is difficult because ICON and Cybex do not use the

acquisition strategy to increase economy of scale or decrease input costs. They do not

buy patents or designs to compete in brand image.

72

Brunswick’s characteristics in the marine industry also hold in fitness industry.

Fitness goodwill is not as large as marine goodwill. Brunswick’s fitness goodwill is

greater than other firms. Brunswick’s fitness goodwill and total assets has grown at

smaller rates.

ICON Health’s goodwill did not grow for first two years. They impaired goodwill

once during six periods. The concern is not goodwill, but total assets. Total assets

have decreased the past 3 years by least 100 million each year. This could explain why

ICON Health did not submit a 2007 10-K.

Cybex International has never adjusted goodwill. Goodwill appears large during

the early 2000s because total assets have increased in small increments; however,

goodwill appears smaller over time because total assets increased while goodwill stayed

constant. Cybex did not impair goodwill because total assets would grow slower and be

a smaller total amount.

Warranties To begin evaluating and comparing Brunswick’s warranties, an analyst needs to

know how many products were sold in each industry per year. Brunswick’s competitors

only compete in one of two industries; Brunswick competes in both industries. ICON

Health and Cybex International compete in the fitness industry. Fountain Powerboat

and Marine Products compete in the marine industry. Due to the segmentation of these

companies, it may be difficult for analyst to compare apples with apples.

73

Brunswick’s Sales (millions)

(in millions) 2003 2004 2005 2006 2007 Marine 3525.8 4450.8 5084 5135.7 5048.4

86.77% 87.99% 90.67% 90.66% 89.02%Fitness 486.6 558.8 551.4 593.1 653.7

11.97% 11.05% 9.83% 10.47% 11.53%Total Sales 4063.6 5058.1 5606.9 5665 5671.2

100% 100% 100% 100% 100% Operating Earnings-Marine 29.8 45.2 56.1 57.8 59.7 Operating Earnings-Fitness 235 392.6 443 329.4 102.3

Marine industry dominates most of the sales by average of eighty eight percent

for the past six years. The fitness industry takes up an average of eleven percent in the

past six years. However, note that the fitness sector dominates in operating earnings

compared to marine operating earnings. Breaking down the sales of Brunswick’s

marine and fitness industries can allow us to allocate percentage of sales multiplied by

total warranties to equal industry warranties per year.

Marine Industry Warranties (millions)

2002 2003 2004 2005 2006 2007 Brunswick 141.03 154.36 144.84 140.82 145.96 145.90

Fountain Powerboats 0.87 0.90 0.71 0.74 0.63 0.94 Marine Products 1.94 2.85 3.80 4.27 5.34 4.77

The chart shows how much bigger Brunswick is compared to their competitors.

Brunswick sells larger amounts of products compared to their competitors, therefore

Brunswick will need more warranties to cover the sold products; this large warranty

liability is an estimate. If there are large warranties on Brunswick’s books, an analyst

would check if they were estimating warranties and deferring payment on warranties.

Looking at the competitors, the chart above shows competitors do not have a lot

of returns, and they do not sell a lot of product compared to Brunswick. Also, the

74

numbers show how big of a difference warranties is between Fountain and Marine

Products. This can indicate low concentration in the marine industry.

These large amounts of liabilities also go with the types of product Brunswick is

selling. Brunswick is selling boats and engines. Both of these products depend on

warranties because manufacturers and dealers cannot sell product that cannot be sold

to retailers or end users. Sometimes, dealers or manufacturers have to get a third-

party to factor their inventory. Factor means a third party buys the products from

Brunswick, and the dealer or manufacturer must pay interest and value of the inventory

back to the third-party. A third-party will have less incentive to purchase the product

for the dealer or manufacturer if there was no warranty. Brunswick must offer

warranties to incur sales. Warranties are necessary for Brunswick to be successful in

the marine industry.

In addition, the fitness industry is one of main industries Brunswick competes in.

It would be logical to look at warranties associated with fitness and compare them to

fitness competitors.

Fitness Warranty (millions)

2002 2003 2004 2005 2006 2007

Brunswick 20.71 21.30 18.18 15.27 16.86 18.89 Cybex International 1.85 1.76 2.24 2.88 3.20 4.21

ICON Health 1.29 2.64 2.84 3.63 4.18 4.18

The chart shows a different picture. Brunswick is a dominating firm in fitness

industry; however, Brunswick is not as big of a giant relative to competitors that it is in

the marine industry. Fitness products do not cost as much as marine products and

offer a wider range of products. Some of Brunswick’s products are “treadmills, total

body cross-trainers, stair climbers, stationary exercise bicycles, and strength-training

equipment (BC 2007 10-K).” This is probably why Brunswick’s warranties cost is not as

big as the marine warranties.

Brunswick carries large amount warranties in both industries. Brunswick has

high sales that made warranties be a key accounting policy. Brunswick needs

75

warranties to sale products to customers. Warranties help with brand image.

Customers know that Brunswick will replace or repair their product. This relieves risk

for customers to purchase Brunswick products and gives incentive to use more

Brunswick products.

Quality of Disclosure

GAAP requires certain levels of disclosure for different information on firm’s

financial statements. A company can disclose as much information they feel necessary,

but it must present the necessary information GAAP requires. The more information a

firm presents, the smoother the valuation process. Also, they require quantitative

analysis on the data they present in these statements. Evaluating this disclosure is a

necessary step in evaluating a company. Brunswick discloses enough information;

however, some aspects are less disclosed than others. For example, research and

development and inventory expenses are vaguely stated.

Research and Development In the fitness and marine industries, research and development expenses are

weakly disclosed. At most, firms choose to release the expenses accounts research and

development is recognized in; however, some firms such as Brunswick choose to

vaguely state research and development to create new products and update existing

ones. One reason could be to hide new product developments to avoid reverse

engineering. On the other hand, some companies choose to disclose more than others.

For example, Cybex International reports that “research and development costs are

expensed as incurred. Research activities include the design on new products and

related enhancements and are performed by both internal and external resources”

(Cybex International 10-K). In these industries, no one company significantly reports

more relevant information than another. The most disclosure is found in the Fountain

Powerboats and Nautilus.

Brunswick has low amounts of disclosure. Brunswick reveals that it incurred

eight nine million dollars in research and development in 2007. Sixty eight million was

76

directed toward the marine industry, and twenty one million directed toward the fitness

industry (Brunswick 10-K). Although Brunswick poorly explains the research and

development elements, they consider high amounts of research and development as an

asset because of future revenues. As a result to poor amounts of disclosure, Brunswick

makes research and development a poor evaluation when valuing the firm.

Operating Leases The quality of disclosure pertaining to Brunswick’s use of operating leases could

leave a potential investor inspired. After analyzing contractual obligation s in the

Brunswick 10-K, it is evident that there is a large amount of money being spent on

operating leases, while recording no capital leases at all. The last capital lease

obligation for the company was in 2005. One unique thing is that none of Brunswick’s

annual reports from then to now have they explained anywhere why the company has

opted to not lease any assets this way. They do give the amount of the operating lease

obligations for the next five years, but still leave many things in the poorly disclosed.

No discount rate is provided, and it’s unclear how they are able to use operating leases

as long as 99 years without that being 75% of the assets useful life.

The management discussion and analysis is seriously lacking in this area. They

simply give the numbers for the next few years and no explanation to why they have

chosen to use such a large amount of operating leases. This lack of disclosure could

mean that the company is trying not to draw attention to this questionable accounting

strategy.

Goodwill

Brunswick’s disclosure in the 10-K’s has good detail how Brunswick allocates its

goodwill for each industry. Brunswick gives an overall goodwill amount in the balance

sheet. In addition, Brunswick breaks down the goodwill within each industry.

Brunswick allocates the acquisition amount to each industry and shows impairment

adjustments for goodwill. Brunswick allows outsiders to see the increase or decrease in

goodwill.

77

Brunswick’s disclosure shows a two step process to acquire a firm. Brunswick

purchases a little less than majority stake in firm. They choose to wait and see if a firm

is profitable. After that, they acquire the remaining shares of the firms. Brunswick

disclosed an “earnings target” (Brunswick, 10-K). An earning target is supposed to be

a payment to the former owners of the acquired firm for meeting sale performance

after purchase.

Brunswick’s competitors disclose goodwill in their 10-K’s. They discuss how

goodwill is prescribed by GAAP. They show goodwill on the balance sheet and

impairment on the income statement. The competitors do not disclose goodwill as well;

Competitor’s goodwill is not significant.

Accountants or managers have the ability to manage goodwill. Accountants can

manage impairment or goodwill. They can control goodwill by overstating other assets

to make goodwill never decrease. If total net assets never decrease, goodwill will never

be a significant factor. In other words, goodwill will always be overstated. Brunswick’s

balance sheet or income statement could be misleading. Managers or accountants do

not adjust goodwill.

Assets Liabilities Equity Revenue Expense N. I. O N O N U O

Brunswick has an aggressive goodwill accounting policy. Their strategy of

purchasing firms has made goodwill large in marine and fitness industries. In 2007,

Brunswick’s marine goodwill is approximately fourteen percent, and the fitness industry

is forty one percent. They do not worry about the consequence of paying extra

amounts to buy firms. Brunswick never takes cost into account in the accounting

books. The income statement shows a different picture. Net income drops by a

considerable amount so net income would be negative for some firms.

Brunswick 10-Ks are very clear. Brunswick gives plenty of information as to how

goodwill is managed. They break down acquisitions and goodwill into each industry.

Also, they disclose gross amounts of goodwill and adjust the amount of goodwill.

78

However, they may not impair enough goodwill. When comparing Brunswick

transparency to competitor’s transparency of 10-K’s, competitor’s goodwill is not as

detailed as Brunswick. Competitors use minimum transparency for goodwill.

Warranties Brunswick’s disclosure for warranties in the 10-K is okay. Brunswick breaks

down accrued expense, which has product warranties. Product warranties are current

liabilities. Then, Brunswick goes in depth how they calculated total warranties. They

began with previous year total warranties. Then, Brunswick deducts the amount paid

for warranties followed by adding warranties issued. Last, Brunswick adjusts for

existing warranties if they are under or over estimated. The new total warrant liabilities

are calculated. The down side is they hide these numbers in the balance sheet, income

statement, and cash flows statement. They hide the numbers under accrued expense

in the balance sheet for short-term liabilities. They hide long-term warranties in "other”

under long-term debt. Also, Brunswick never added up short or long- term debt.

Brunswick does not allow investors to read their financial statements easily.

Quality of Disclosure R & D Currency Risk Leases Goodwill Warranties Brunswick Corporation Low Moderate Low High Low-Moderate Fountain Powerboats Low-Moderate Moderate Low Low Moderate

Marine Products Low-Moderate Moderate Low Low Moderate Cybex International Low-Moderate Moderate Low Low Moderate

ICON Health - Moderate Low Low Moderate *Nautilus has a low to moderate disclosure.

Quantitative Analysis

Financial statements provide essential information which reflects a firm’s

accounting policies and true value. The presence of GAAP allows managers the

flexibility to choose the amount and way they want to present their financial

information. This flexibility is designed to enable managers to present their information

79

more clearly due to insider information. Some managers opt to use this GAAP flexibility

to make their financial statements or true value look better to investors. For this

reason, from an investor standpoint, investors need to be aware of the current

accounting policies of the companies they choose to invest in. Diagnostic ratios are

important to look at to help investors determine a firm’s value or be able to recognize

accounting distortions.

In order to measure how accurate financial statements are, two quantitative

measures can be looked at. First, sales manipulation diagnostics can be looked at to

determine potential red flags. Ratios such as cash from sales, accounts receivable, and

inventory can be looked at to determine the true value of sales or revenues. Second,

expense manipulation diagnostics such as asset turnover and total accruals over sales

can be measured to determine unexplained changes in reported expenses. Together,

these ratios determine the accuracy of the financial statements.

Sales Manipulation Diagnostics

Sales manipulation directly relates to altering revenues to make them look better

or worse. For this reason, the focus will be on the balance sheets and income

statements of Brunswick and their competitors. The following ratios will be analyzed to

determine the accuracy of these financial statements: net sales over cash from sales,

net sales over account receivable, net sales over inventory, and net sales over warranty

liabilities. Together these ratios will help provide information to identify possible

distortions (i.e. Red-flags) on the financial statements.

Net Sales/Cash from Sales The net sales over cash from sales ratio is directly related to the amount of cash

the firm received from sales compared to the revenue they recognized from sales in the

given period. The cash from sales aspect of this ratio is found from the amount of

change in accounts receivable from one period to the next. If net sales increase, then

cash from sales must increase. This ratio should be very close to one because for every

80

item sold they wish to receive an equal amount of cash. Large differences in year to

year ratios could indicate possible distortions in the financial statements of a company.

The graph above illustrates the trends of industry net sales over cash from sales

ratios in which Brunswick competes. Brunswick as well as their competition all stay

within the range of one, with only ICON health skewing off a bit more than others.

However, in the fitness and marine industries, a dominant trend exists between firms.

Firms tend to collect cash on their sales with a ratios being close to one. Due to the

trend there is no reason for a red flag to be raised in this section of analysis.

Net Sales/Net Accounts Receivable In order to assess whether reported sales are supported by accounts receivable,

we will focus on the net sales over accounts receivables ratio. If sales are closely linked

to accounts receivable, lower ratios are expected. If sales are not closely related to

accounts receivable, higher ratios are expected. In the fitness and marine industries,

products are differentiated and often bought in bulk from customers. The graph below

indicates net sales over accounts receivables for Brunswick and competitors.

81

We can conclude that sales are supported by accounts receivables. In the

fitness industry, ratios have increased and decreased across the industry. As the graph

shows, Brunswick maintains a near constant ratio at just over ten. At the same time,

ICON Health and Cybex maintain near constant ratios at just over five. On the other

hand, the marine industry has higher ratios. Over the past five years, Fountain

Powerboats holds ratios between eighteen and thirty-two. On the other hand, Marine

Products ratio does not follow the trend. Their ratios are experiencing huge fluctuations

far above the industry averages. Overall, the fitness industry shows outstanding trends

that indicate sales are supported by accounts receivables. Ratios are held consistent

and react similarly each year to competitors. In the marine industry, sales are

supported by accounts receivable, just not as much as in the fitness industry.

Net Sales/Warranty Liabilities Net sales over warranty liabilities assess whether net sales are supported by

warranty liabilities. Trends would indicate that the industries use warranties to back

sales. The following graph shows net sales over warranty liabilities for Brunswick and

their top competitors.

82

The above graph indicates no relevant trends in net sales over warranty

liabilities. Each firm is experiencing different patterns of increasing and decreasing

ratios over the past five years. Brunswick has doubled from the fifties to over a

hundred, while ICON health has experienced the exact opposite. Cybex experienced

huge gains fluctuations over the past five years. Overall, warranties are present in the

fitness and marine industries. Due to the volatility of this ratio, we can conclude firms

could be manipulating financials.

Net Sales/Deferred Revenue

Another revenue manipulation ratio that helps assess the quality of accounting

information is the net sales over deferred revenue ratio. In the fitness industry, the

quality of disclosure is non-existent. The marine industry is a little better with

Brunswick and Marine Products being the only firms to report deferred revenues.

83

The chart above reflects the unreliable trend for Brunswick and Marine Products.

Again, this is due to the lack of disclosure by leading competitors and both of these

firms in 2003. The only thing the graph does reveal is that both firms do manage their

sales with earned revenues. Overall, due to the lack of disclosure of deferred revenues

by Brunswick and their competitors, the accuracy of this ratio is unreliable.

Net Sales/Inventory The net sales over inventory ratio indicates if a firm’s inventory supports sales.

If the industry has close ratios over a period, then inventory supports sales. On the

other hand, if no trends are found, inventory may not support the reported sales for the

given period.

84

As the graph above shows, the fitness and marine industries have weak trends.

Brunswick and ICON health ratios are consistent over the past five years, which

indicates inventory does support sales. Both firms operate with a ratio around six. On

the other hand, Fountain Powerboats, Cybex, and Marine Products year to year ratios

do not indicate inventory supports sales. Over the past five years, both firms have

experience different levels of inventory each year, which could indicate sales are not

related to inventory. Therefore as a whole, we cannot accurately conclude that

inventory supports sales in the fitness and marine industries. The ratio is not a good

basis for analysis.

Sales Diagnostics Conclusion The overall story told by the sales diagnostic ratios suggests that Brunswick does

a very accurate job in reporting of their financial statements. At no time does Brunswick

skew from the industry norms. Industry wide net sales over cash from sales all hover

around the expectable level of 1 which suggests that firms are receiving cash at a

reasonable time from when products are sold. Yet there are a few possible red flags

and causes for concern that exist among the both industries. One cause for concern

lays with the lack of disclosure among the industry for nets sales over deferred

revenues. All companies fail to disclose the amount of deferred revenues over the last

85

five years except for Brunswick and Marine Products who only disclose information for

the past 4 years. Additionally, the ratio of net sales over accounts receivable seems to

be very important for firms and suggests an industry wide trend as well as individual

firm segmentation. A possible red flag exists for Fountain Powerboats as they do not

follow the industry trend in this particular ratio. Lastly, the net sales over inventory ratio

suggests a possible red flag for distortions as most firms follow a very volatile pattern

that does not suggest an industry trend. Overall, Brunswick does a quality job in

reporting on their financial statements as they seem to be the most consistent. Yet

there are some red flags that should be raised among their competitors.

Sales Manipulation Diagnostics

Brunswick Corporation 2003 2004 2005 2006 2007 Sales/ Cash from Sales 1.01 0.98 0.99 0.99 0.98

Sales/ Account Receivables 10.72 11.19 10.79 11.64 9.96 Sales/ Inventory 6.43 6.59 6.90 6.65 6.29

Sales/ Deferred Revenues N/A 121.60 80.62 80.85 70.13 Sales/ Warranty Liabilities 54.00 70.80 84.24 87.20 107.59

ICON Health 2003 2004 2005 2006 2007 Sales/ Cash from Sales 0.98 0.98 1.06 0.99 N/A

Sales/ Account Receivables 5.13 5.51 7.06 6.74 N/A Sales/ Inventory 5.55 5.59 5.71 5.63 N/A

Sales/ Deferred Revenues N/A N/A N/A N/A N/A Sales/ Warranty Liabilities 34.04 34.85 30.69 23.50 N/A

Cybex International 2003 2004 2005 2006 2007 Sales/ Cash from Sales 0.99 0.98 0.97 0.98 0.99


Sales/ Deferred Revenues N/A N/A N/A N/A N/A Sales/ Warranty Liabilities 33.94 64.32 48.48 101.70 88.20

Marine Products 2003 2004 2005 2006 2007 Sales/ Cash from Sales 0.98 1.01 0.99 1.00 0.99


Sales/ Deferred Revenues N/A 41.8 113.51 65.29 64.17 Sales/ Warranty Liabilities 67.81 66.39 63.67 49.09 51.38

86

Fountain Powerboats 2003 2004 2005 2006 2007 Sales/ Cash from Sales 1.02 0.97 1.01 0.98 0.99


Sales/ Deferred Revenues N/A N/A N/A N/A N/A Sales/ Warranty Liabilities 15.87 21.42 24.96 32.49 29.12

Expense Manipulation Diagnostics

In addition to sales manipulation diagnostics, expense manipulation diagnostics

prove to be a means of studying trends. These ratios can be used to analyze the

trends from the statement of cash flows and income statements for each firm. The

following ratios will be analyzed to identify potential red flags in the expense ratios:

asset turnover, changes in cash flows from operations over operating income, and total

accruals over sales. By finding and illustrating these ratios, we will be able to compare

the differences in Brunswick and competitors.

Asset Turnover

The ratio of asset turnover is net sales over total assets. We will analyze the

asset turnover in the fitness and marine industries to determine the accuracy of the

financial reports. For example, if a firm reports a ten million dollar advertising expense

as a deferred marketing cost, the firm recognizes that as an asset instead of an

expense on the financial statements. The graph below represents the asset turnover

ratios for Brunswick and competitors for the past five years.

87

The graph above shows mild trends in asset turnover in the fitness and marine

industries. Marine Products, Brunswick, and Cybex all experienced increases in ratios in

2003 to 2005 followed by decreases in 2006 to 2007. Therefore, we can conclude that

assets are important to sales in the fitness and marine industries. On the other hand,

Fountain Powerboats experienced extremely rare increase in ratio from 2003-2005.

Fountain Powerboats ratio could have increased due to increases in sales, decreases in

assets, or expenses not being deferred on the balance sheet.

Fountain Powerboats 2003 2004 2005 2006 2007 Net Sales 52.6 59.3 71.2 79.2 68.9

Total Assets 13.38 17.13 13.02 12.46 7.65 Sales/Assets 3.93 3.46 5.47 6.36 9.01

CFFO/OI Another expense manipulation ratio is cash flow from operations over operating

income. This ratio allows an analyst to interpret a firm’s quality of earnings. If the

ratios are fairly consistent, it could indicate cash flows from operations support

operating income. The following graph is the raw ratio year to year. The ratios are not

consistent to any degree over the past five years. Brunswick has experienced a one

Asset Turnover

88

hundred percent decrease, while competitors such as Cybex and Marine Products have

experienced extreme increases and decreases. This volatility indicates cash flows from

operations do not support operating income.

The graph below is the change in CFFO/OI from year to year. One would expect

to see fluctuations based upon the raw ratios from the above graph. The graph does

indicate fluctuations over the past five years for each firm.

89

The above graphs indicate weak trends in CFFO and operating income in the

fitness and marine industries. The only relation is that Brunswick and Marine Products

are keeping their ratios near zero. Other than that, the rest of competitors are each

experiencing different increases and decreases in CFFO/OI. Therefore, in the marine

and fitness industries, operating income and CFFO are mixed and could be inaccurately

disclosed.

CFFO/NOA This ratio is found by dividing cash flow from operations by net operating assets.

Net operating assets consist of plant, property, and equipment (PP&E). This ratio gives

a better understanding as to how well a firm’s net operating assets can generate cash.

Higher ratios indicate net operating assets support revenues.

CFFO/NOA

90

The graph below is the change in CFFO/NOA.

The graphs above indicate trends exist in CFFO/NOA. Brunswick, ICON Health,

Cybex International raw ratios increased and decreased from year to year. Fountain

Powerboats line is identical to ICON health in the line graph, just at lower ratios. The

change in CFFO/OI for Brunswick and Marine Product is near one. On the other hand,

the rest of the competitors each experienced different changes year to year. Therefore,

the fitness industry shows a good relation between CFFO and net operating assets year

to year, which could indicate that this information is accurately disclosed within the

industry. As one firm’s ratio increased, other competitors increased in the same

fashion.

Total Accruals/Sales This ratio is calculated by taking total accruals over sales. This ratio could

indicate if accruals are supported by sales. An analyst would like to see this ratio

consistently around one. The graph below represents the total accruals over sales for

Brunswick and competitors over the last five years.

Change in CFFO/NOA

91

The graph above represents a good trend for total accruals over sales in the

fitness and marine industries. Excluding ICON Health, each firm’s ratio increases and

decreases in specific years across the board; however, Fountain Powerboats and Cybex

experienced much larger ratio decreases in the years of 2004 and 2006. Cybex,

Brunswick, and Marine Products all have consistent ratios between zero and one. ICON

Health has a constant ratio near zero. All in all, in the marine and fitness industries,

total accruals over sales prove to have a definite trend. As ratios increased and

decreased over the past five years, each firms’ total accruals over sales ratios’ have

acted similarly, which indicates no manipulation.

Expense Diagnostics Conclusion From the previous expense diagnostic ratios, one can conclude that Brunswick is

an industry leader in cost control. The quality of disclosure among all firms is for the

most part good. No potential red flags were found in Asset Turnover, CFFO over Net

Operating Assets, and Total Accruals over Sales ratios; all showed relevant industry

trends. However, the CFFO over Operating Income ratio suggests inaccuracy among

competitors of Brunswick (i.e. ICON, Cybex, and Fountain Powerboats). These firms

show a significant amount of volatility over the past five years, yet Brunswick and

92

Marine Products do not. Therefore a potential red flag could be raised for Brunswick’s

competitors (i.e. Icon, Cybex, and Fountain Powerboats).

Expense Manipulation Diagnostics

Brunswick Corporation 2003 2004 2005 2006 2007 Asset Turnover 1.71 1.57 1.36 1.13 0.93

CFFO/OI 1.78 1.04 0.92 0.92 2.93 CFFO/NOA 0.48 0.47 0.45 0.31 0.30

Total Accruals/Sales 0.06 0.03 0.01 0.03 0.04

ICON Health 2003 2004 2005 2006 2007 Asset Turnover 1.93 1.72 1.89 2.24 N/A

CFFO/OI 0.41 0.09 -1.23 0.22 N/A CFFO/NOA 0.68 0.12 0.50 0.09 N/A

Total Accruals/Sales 3.78E-05 0.000217 3.12E-05 4.2E-05 N/A

Cybex International 2003 2004 2005 2006 2007 Asset Turnover 0.18 0.19 0.21 0.17 0.15

CFFO/OI 0.30 0.65 2.43 0.53 1.06 CFFO/NOA 0.04 0.37 0.53 0.40 0.27

Total Accruals/Sales 0.02 0.01 0.06 -0.12 0.00

Marine Products 2003 2004 2005 2006 2007 Asset Turnover 2.24 2.41 2.50 2.18 2.06

CFFO/OI 0.62 0.82 0.54 0.89 0.74 CFFO/NOA 0.96 1.60 1.12 1.44 1.03

Total Accruals/Sales -0.01 0.02 0.01 0.01 -0.04

Fountain Powerboats 2003 2004 2005 2006 2007 Asset Turnover 3.93 3.46 5.47 6.36 9.01

CFFO/OI 1.60 -2.26 3.35 1.22 0.75 CFFO/NOA 0.21 -0.26 0.34 0.16 -0.13

Total Accruals/Sales 0.05 -0.08 0.07 0.00 0.04 Potential Red Flags

The accounting analysis can reveal red flags, which are unexplained increases or

decreases in asset and expense accounts. Red flags capture analyst’s attention during

93

examinations. For this reason, it is vital to examine all financial statements in a

relevant time period to locate red flags. After red flags are found, analysts can adjust

accounts to reflect a more accurate picture for the company.

Operating Leases

Concern must be raised as a result of Brunswick’s leasing accounting strategy. It

just seems illogical that almost all of their competitors use both types of leases, and

Brunswick, a massive corporation, limits itself to one type. It appears that Brunswick’s

assets and liabilities are both understated because of the heavy use of operating leases.

Their total operating leases are equal to 12.95% of long term liabilities and 8.15% of

their total liabilities. With Brunswick being such a large corporation, it could translate

into millions of dollars of increased liabilities, assets, and expenses if they switched to

capital leases.

The main competitors in Brunswick’s industries all have a percentage of

operating leases to long term liabilities that are around or lower than 1%. The

exception is Marine Products. In the five years before 2007, it also had a percentage

that was below one, but in 2007 operating lease commitments increased dramatically to

total over 22%. This large increase is against the industry standard and should not be

considered part of the trend. It is most likely because Marine Products added new

facilities that they were able to classify as operating leases rather than capital leases.

Brunswick has the largest dollar amount and second largest percent amount of

operating leases compared to liabilities. A significant amount of distortion could be in

any of the ratios that investors and creditors use that deal with asset turnover and

productivity. Also, distortion of ratios could in liabilities ratios; however, the effect on

current liabilities is much smaller.

Goodwill Brunswick’s goodwill raised some red flags. Brunswick’s goodwill needs to be

adjusted to reflect more accurate accounts. By not impairing goodwill correctly,

expenses are understated and assets are overstated. When expenses are understated,

net income will be overstated. As stated earlier, Brunswick’s goodwill is approximately

41% of total assets in the fitness industry and 15% in the marine industry. When

94

comparing that to other firms, it is a huge red flag. However, firms such as ICON and

Cybex do not use acquisition strategy to increase economy of scale or decrease input

costs. Also, they do not buy patents or designs to compete in brand image.

Sales and Expense Manipulation Ratios

Throughout the manipulation ratios, few red flags were raised. Brunswick may

have some red flags in warranties. Brunswick’s warranties in the marine industry have

been consistent over the past six years. Brunswick’s sales have increased in large

amounts, except the past couple of years. Brunswick may be underestimating their

warranties. In the fitness industry, Brunswick has a high amount of warranties for the

first two years while having low sales during those years. Brunswick may have been

overestimating there warranties early. In last five years, sales have increased and

warranties have decreased. You still with us Mark. Other ratios that are causes for

concern are net sales over inventory and deferred revenues. The quality of disclosure

of deferred revenues was very poor for all companies except Brunswick and Marine

Products, whom only failed to record amounts in 2003. Furthermore, sales over

inventory raised potential red flags as Brunswick’s competitors do not follow the

industry trend of Brunswick and Nautilus; they show significant volatility from year to

year. Also, a red flag could be raised in looking at CFFO over Operating Income.

Fountain Powerboats, Cybex, and ICON all show volatility that differs from the industry

norm, as they may be overstating or understating their cash flows from operations from

period to period.

Undo Distortions

After finding red flags, it is vital to restate the financial statements to provide a

more accurate picture of the firm. If a firm understates expenses, net income will be

overstated, but liabilities, assets, expenses, and revenues will all be affected. Also, a

firm can choose take “big bathes” to overstate expenses and understate earnings.

Firms often do this to make the next year performance or the current year loss look

better than it really is. As a result, analysts must do the proper adjustments to undo

95

the distortions in the financial statements to portray a more accurate picture to

investors.

Operating Leases

Brunswick could potentially have large distortions on the balance sheet due to its

heavy use of operating leases. In order to undo these distortions, we will treat all of

Brunswick’s operating leases as capital leases and analyze the effects on assets,

liabilities, and certain ratios. The first step is to find the present value of all the future

payments on lease obligations. The discount rate used was Brunswick’s average cost of

long term debt, which was found to be 6.5%. In order to see the capitalization effects

accurately, we discounted the future minimum lease payments listed on the 10K.

Anything that is due past the five year period, Brunswick treats it as having a lease

obligation of ten years.

The cost of capital should be around competitors in the industry. We can use

information from the Cybex 10K to figure out an appropriate interest rate. Cybex gives

its average interest rate on capital loans for each year 2002-2007, and we applied the

interest rates to the applicable years. This portion is shown as interest expense on the

income statement, but not included in operating income. After amortizing the loan, the

remaining principal is included on the income statement under operating income. We

can now undo some of the distortions caused by such a large amount of operating

leases. The following chart shows how this would affect the 2008 balance sheet.

Assets (in millions) Adjusted Unadjusted % change

Total Current Assets 2114.3 2114.3 None Net Property 1052.8 1052.8 None

Goodwill 678.9 678.9 None Other Intangibles 245.6 245.6 None

Investments 132.1 132.1 None Other Long Term Assets 303.24 141.9 113.70%

Total Other Assets 1366.8 1198.5 13.46% Total Assets 4526.9 4365.6 3.70%

96

The present value of future rent payments was found to be 161.34 million. This

amount is added in with other long term assets, and total assets increased. This

increase of 3.7% in total assets is worth over four billion dollars, just from changing to

capital leases. The chart below shows the effect this has on liabilities. The lease

payments due within a year are treated as current liabilities.

Liabilities Adjusted Unadjusted % Increase

Total Current Liabilities 1342.4 1296.2 3.56%

Long Term Debt 842.5 727.4 15.89% Deferred Income Taxes 12.3 1.3 None Postretirement Benefits 192.8 192.8 None

Other 244 244 None Total LT Liabilities 1291.6 1176.5 9.79%

Total Liabilities 2634 2472.7 6.52%

There is no effect on equity. As stated earlier, we can see that there would be

an increase in total liabilities of 6.52% and an increase in long term liabilities of 9.79%.

These increases in liabilities will have an effect on the debt to equity ratio and could

mislead lenders. The affects on asset and capital turnover should not be significant.

With the way operating leases are structured, Brunswick had a 1.31 debt to equity ratio

according to their balance sheet. According to the new balance sheet with the

operating leases changed to capital leases, the new ratio is about 1.4.

Overall we see a large dollar amount difference when switching to capital leases;

however, percentage-wise nothing significant changes except for the long term

liabilities amount on the balance sheet. Due to Brunswick’s enormous size, these small

percentage changes add up to hundreds of millions of dollars being kept off the books.

We also see the effect on the debt to equity ratio, which increases by .09. All in all,

Brunswick appears to be in a favorable position to lenders before the capitalization of

the operating leases.

97

Goodwill

Undoing the accounting for goodwill begins with Brunswick’s balance sheet.

Take goodwill from 2002 to 2007 and impair goodwill for twenty percent per year.

Brunswick, ICON, and Cybex Raw Balance Sheets (millions)


Total Asset 577.1 635.9 667.9 678.5 693.10 695.40 45% 42% 40% 39% 39% 39%



Total Asset 53.36 53.39 54.49 55.67 73.38 98.13 21% 21% 21% 20% 15% 11%

The raw balance sheet showed increases for all six years. Brunswick’s goodwill

jump about 30 million during the first three years. In 2005, Brunswick impairs goodwill

during the six periods. Then, Brunswick’s goodwill jumps up to forty million. The next

year, goodwill increased only about 12 million. The last three years has been volatile

for Brunswick.

98

In the adjusted balance, the Brunswick’s picture changes from the raw balance

sheet.

Brunswick’s Adjusted Balance Sheet (millions) 2002 2003 2004 2005 2006 2007

Current assets 1,660.20 1,715.20 2,098.70 2,235.00 2,078.40 2,114.30Net property 792.7 827.1 876.4 953.3 1,015 1,053 Goodwill 452.8 515.1 624.8 617.3 663.6 678.9 Impairment effect -90.56 -103.02 -124.96 -123.46 -132.72 -135.78 Goodwill, net 362.24 412.08 499.84 493.84 530.88 543.12 Other assets 409.00 545.10 746.50 815.90 693.40 519.60 Total Assets 3,224.14 3,499.48 4,221.44 4,498.04 4,317.58 4,229.82Current liabilities 1,005.60 1,101.80 1,253.80 1,305.20 1,293.20 1,296.20L-T Liabilities 1207.3 1177.7 1380.3 1337.5 1285.3 1176.5 Common stock 76.9 76.9 76.9 76.9 76.9 76.9 Additional paid-in capital 308.9 310 358.8 368.3 378.7 409 Retained earnings 1,112.70 1,202.00 1,413.70 1,741.80 1,820.70 1,888.40Impairment effect -90.56 -103.02 -124.96 -123.46 -132.72 -135.78 Goodwill, net 1022.1 1099 1288.7 1618.3 1688 1752.6 Unearned compensation and other -22.2 -10.1 -6.3 -6.1 0.00 0.00 Treasury stock -228.7 -183.6 -76.5 -136 -315.5 -428.7 Total AOC loss -145.8 -72.2 -54.3 -66.1 -89 -52.7 Shareholders’ equity 1,011.24 1,219.98 1,587.34 1,855.34 1,739.08 1,757.12Total Liabilities and Equity 3,224.14 3,499.48 4,221.44 4,498.04 4,317.58 4,229.82

Brunswick still has increases in goodwill during the six years. The adjusted

balance sheet gives a clear picture how strong Brunswick’s strategy acquisition has an

effect on the balance sheet. Brunswick is now paying a premium price for firm.

Next, an analyst needs to see how the income statement is affected by impairing

goodwill for twenty percent. Analysts will create an impairment account that will deduct

net income.

Brunswick’s Adjusted Income Statement (millions) 2002 2003 2004 2005 2006 2007

Net sales 3711.9 4128.7 5058.1 5606.9 5665 5671.2 Cost of sales 2852 3131.6 3809.6 4285.3 4439.3 4528.1 Gross Profit 859.9 997.1 1248.5 1321.6 1225.7 1143.1 (Non-)Operating Expense 698.3 796 875.2 835.7 916 1050.4 Earnings before income taxes 161.6 201.1 373.3 485.9 309.7 92.7

99

Brunswick’s Adjusted Balance Sheet (millions)

2002 2003 2004 2005 2006 2007 Net sales 3711.9 4128.7 5058.1 5606.9 5665 5671.2 Cost of sales 2852 3131.6 3809.6 4285.3 4439.3 4528.1 Gross Profit 859.9 997.1 1248.5 1321.6 1225.7 1143.1 (Non-)Operating Expense 698.3 796 875.2 835.7 916 1050.4 Earnings before income taxes 161.6 201.1 373.3 485.9 309.7 92.7 Impairment effect -90.56 -103.02 -124.96 -123.46 -132.72 -135.78 Adjusted Earnings before income taxes 71.04 98.08 248.34 362.44 176.98 -43.08

The impairment effect changes the net income by least 90 million dollars for each

year. 90 million dollars or greater can decrease net income significantly. Any of the

competitors would literally close business. As the impairment increases every year, net

income decreases. Brunswick’s net income did decrease, but it did stay positive until

2007. Brunswick may be paying too much to acquire a firm; it might have just taken

six years to see the effect.

The impairment effect in the balance sheet and income statement allow investors

to see a clear picture of Brunswick. Impairment effects allow the cost of acquisition to

be seen on paper.

Financial Analysis, Forecast Financials, and Cost of Capital Estimation

In order to determine a firm’s value, an analyst should look at financial

statements of the firm and its competitors. Analyzing the financial statements of

Brunswick and its competitors consists of three steps: ratio analysis, forecasting, and

calculating the cost of capital. Ratio analysis pulls and compares items from the income

statement, balance sheet, or statement of cash flows to portray information about how

a firm is performing. This information helps analyze the liquidity, profitability, and

capital structure ratios for Brunswick and competitors. These ratios will lead us to the

second step, which is forecasting the financial statements. Ratios such as the current

ratio and asset turnover will be used to forecast current liabilities and total assets for

100

the next ten years. Finally, the last step is to assess the firm’s cost of capital in order to

understand the firms and competitor trends and value. Together, these three steps will

effectively analyze the industry trends and valuation of Brunswick.

Financial Analysis

Analysts use a series of ratios: to help breakdown a firm’s financial statements,

to help understand industry trends, and to better assess a firm’s true value. The ratios

are separated into groups: liquidity, profitability, and capital structure. Together, we

will use these ratios to evaluate Brunswick and its competitor’s profitability, trends, and

overall value.

Liquidity Ratio Analysis

Liquidity ratios measure a firm’s ability to maintain sufficient short-term

resources to meet its obligations in a timely manner. The liquidity ratios are as

followed: current ratio, quick asset ratio, inventory turnover, days supply inventory,

receivables turnover, days sales outstanding, and working capital turnover. Firms

generally prefer higher liquidity ratios, as it indicates that the firm has the resources to

readily pay off short-term obligations.

Current Ratio The current ratio, also known as cash asset ratio, demonstrates a firm’s ability to

pay off its short term liabilities with short term assets. Hence, the ratio computation is

current assets over current liabilities. Ratios under one could indicate a firm would be

unable to pay off short term obligations if they were due at that point. In the fitness

and marine industries, Brunswick holds a consistent ratio at slightly under two.

Although competitor’s ratios fluctuate, the industry’s current ratio trend is between one

and two. However, Fountain Powerboats has experienced increases up to five and

decreases down to three. All in all, these ratios indicate that Brunswick and competitors

are capable of paying off short term obligations.

101

Current Ratio 2003 2004 2005 2006 2007 AVG Brunswick 1.56 1.67 1.71 1.61 1.63 1.64

Marine Products 5.05 4.70 5.08 5.48 2.91 4.50 ICON 2.08 1.39 1.34 0.64 N/A 1.36 Cybex 0.83 1.14 1.17 1.56 1.77 1.17

Fountain Powerboats 0.66 1.84 1.18 1.29 0.97 1.10 Quick Asset Ratio

Also called the acid test ratio, the quick asset ratio is, “a test that indicates

whether a firm has enough short-term assets to cover its immediate liabilities without

selling inventory” (investopedia.com). Inventory may not be able to be converted to

cash as quickly due to various reasons such as seasonal fluctuations. Firms generally

prefer ratios higher than one. This indicates it has more assets that can be readily

converted to cash than it does liabilites. In the fitness and marine industries, the quick

asset ratio generally fluctuates between zero and one and a half. Brunswick operates

between one and one and a half, which indicates they have the resources to cover their

debt without selling inventory. On the other hand, ICON, Cybex, and Fountain

Powerboats posted ratios of less than one, which indicates the firm’s could not have

enough short term assets to cover short-term liabilites without accessing their

inventories.

102

Quick Asset Ratio 2003 2004 2005 2006 2007 AVG Brunswick 1.22 1.40 1.44 1.27 1.40 1.34


Fountain Powerboats 0.28 1.11 0.56 0.60 0.44 0.54 Working Capital Turnover The working capital turnover ratio measures a firm’s short-term financial health.

Net working capital is a firm’s current assets minus current liablilities. The ratio is

computed by taking a firm’s net sales over net working capital. This ratio can give

investors an idea of the efficiency of a firm’s operations and the amount of funds that

are tied to inventory. Higher ratios indicate that a firm sells large amounts of products

compared to the amount of funds it requires to sell the products. According to the

graph below, Brunswick holds a relatively constant working capital turnover at seven.

Also, over the past five years, trends exists in the fitness and marine industries. Cybex

and Fountain Powerboast have experienced huge increases and decreases. Others

firms such as Brunswick and ICON health have stayed at lower ratios over the past five

years.

103

A/R Turnover The accounts recievable ratio is an accounting measure used to measure a firm's

effectiveness in extending credit and collecting debts. The receivables turnover ratio

measures how efficiently a firm uses its assets (investopedia.com). A higher ratio

indicates that a firm quickly collects receivables. In the fitness and marine industries,

Brunswick’s ratio is relatively steady around eleven. Brunswick has a higher ratio than

competitors, which indicates it extends credit and collects debt quicker. Furthermore,

the fitness and marine industries hold a strong trend with ICON, Cybex, and Marine

Products holding ratios between five and seven. This trend could indicate the target

amount of time the industry desires to collect debts. On the other hand, Fountain

Powerboats again experienced huge increases and decreases over the past five years,

which could indicate financial instability.

Working Capital Turnover 2003 2004 2005 2006 2007 AVG Brunswick 6.73 6.19 6.37 7.21 6.93 6.69

Marine Products 4.22 4.07 4.44 3.42 6.76 4.63 ICON 5.31 10.06 8.75 -4.63 N/A 4.87 Cybex -18.48 31.17 25.60 9.03 8.06 8.60

Fountain Powerboats -13.15 10.44 36.29 20.30 -200.30 -25.98

104

A/R Turnover 2003 2004 2005 2006 2007 AVG Brunswick 9.25 11.03 11.23 11.34 11.51 10.87


Fountain Powerboats 26.08 14.33 32.42 23.26 18.66 21.18 Days Sales Outstanding The days sales outstanding ratio measures the number of days its takes for a

firm to collect cash after the sale. Generally, firms desire to collect cash quickly to

reinvest the revenues or use the cash to buy more assets.

105

DSO 2003 2004 2005 2006 2007 AVG Brunswick 39.46 33.09 32.50 32.19 31.71 33.79


Fountain Powerboats 14.00 25.47 11.26 15.69 19.56 19.27

As the graph above shows, an inverse relationship exists between days sales

outstanding and receivables turnover. The two ratios for ICON, Cybex, and Marine

Products experience inverse increases and decreases over the past five years. For

example, in 2005, ICON Health expiernced an twenty-six percent decrease in

receivables turnover and an identical inverse of an twenty-six percent increase in day

sales outstanding. Brunswick adheres to the trend holding a relatively constant ratio

around one month. The industry average, excluding Fountain Powerboats, is around

two months. Brunswick holds a huge advantage because it collects its receivables twice

as fast as competitors, which means they can reinvest faster in the firm.

Inventory Turnover Inventory turnover is related to the number of times inventory is sold and

purchased in a given year. The ratio itelf is cost of good sold over inventory. Lower

106

ratios indicate poor sales and surplus inventories. On the other hand, higher ratios

imply strong sales. Excess inventory is not prefered because inventory has a rate of

return of zero and can become obsolete. In the fitness and marine industries,

Brunswick is slightly lower than other competitors, excluding ICON. ICON and

Brunswick hold ratios around five, while Marine Products and Cybex hold ratios between

six to eight. This could indicate that Cybex and Marine products experienced stronger

sales or inefficient buying over the past five years. In 2005, ICON experienced almost

ten percent negative sales growth, which explains the decrease in inventory turnover.

Inventory Turnover 2003 2004 2005 2006 2007 AVG Brunswick 5.02 4.98 5.14 5.15 4.99 5.06


Fountain Powerboats 12.73 10.58 9.31 9.51 8.99 10.46 Days Supply Inventory The days supply in inventory represents the total number of days it takes firms

to turnover inventory. This ratio is computed by taking the number of days in the year

over inventory turnover. The higher the ratio, the longer it takes for inventory to be

107

sold. The lower the ratio, the less time it takes for inventory to turnover. In the fitness

and marine industries, Brunswick is higer than all competitors except ICON. Brunswick

turns over inventory at an average of just over seventy days. On the other hand,

Marine Products, Cybex, and later Fountain Powerboats all turnover inventory between

forty and sixty days. We can conclude that Brunswick is not as efficient in selling

inventory as competitors, exluding ICON. ICON is the least efficient in selling inventory,

with an average of almost three months over 2003-2006. Again, the 2005 inventory

level experience a huge increase due to the signifcant decrease in sales.

DSI 2003 2004 2005 2006 2007 AVG Brunswick 72.71 73.35 70.95 70.87 73.09 72.19


Fountain Powerboats 28.68 34.49 39.20 38.40 40.61 35.45 Cash to Cash Cycle The cash to cash cycle relates to the amount of time it takes inputs to be

converted into cash flows. According to investopedia.com, “The cash conversion

cycle attempts to measure the amount of time each input dollar is tied up in the

108

production and sales process before it is converted into cash through sales to

customers” (investopedia.com). In order to compute this cycle, we take days supply

inventory and add that to the days sales outstanding. The lower the number, the

shorter the time it takes a firm to convert inputs to cash flows. In the fitness and

marine industries, Brunswick and Cybex hold numbers around 100 days. Fountain

Powerboats converts inputs to cash the quickiest holding a number at just around 50.

Therefore, Fountain Powerboats can convert inputs to cash in half the number of days

that it takes Brunswick and Cybex. On the other hand, it takes ICON and Marine

Products an average of 150 days to convert inputs to cash, which is three times that of

Fountain Powerboats.

Cash to Cash cycle 2003 2004 2005 2006 2007 AVGBrunswick 112.2 106.4 103.5 103.1 104.8 106.0Marine Products 104.2 283.8 122.6 141.1 132.1 156.8ICON Health 141.0 145.9 188.5 136.6 N/A 153.0Cybex 104.2 100.6 104.5 102.1 105.0 102.9Fountain Powerboats 42.7 60.0 50.5 54.1 60.2 51.8

Conclusion The liquidity ratios enable us to compare Brunswick to other competitors in the

industry. Brunswick holds a slighly better level of liquidity than its competitos.

109

Brunswick’s current ratio and quick asset ratio is higher than competitors at around one

and a half. Brunswick’s operating efficiency relates to inventory and receivables

turnover rates. Brunswick’s inventory turnover is lower than most competitors, which

indicates lower effieciency in inventory management. On the other hand, Brunswick’s

receivables turnover is higher than competitors, which indicates Brunswick collect its

receivables in half the time competitors do. Furthermore, Brunswick’s working capital

turnover and cash to cash cyle are average compared to competitors. It takes

Brunswick and others roughly 70 days to convert inputs to cash flows.

Ratio Performance Trend Current Ratio Over-performed Stable

Quick Asset Ratio Over-performed Stable, decreasing Working Capital Turnover Average Stable

Receivables Turnover Over-performed Stable Inventory Turnover Under-performed Stable Cash to Cash cycle Average Stable

Overall Average Stable

Overall, despite some of ICON fluctuations due to decreased 2005 sales, the

industry levels are fairly stable over the past five years. The fitness and marine

industries have good trends in short term financial health. Based on the above ratios,

Brunswick and competitors are able to pay off short term obligations without accessing

inventories and collect debt in a reasonable manner. Also, the industries sell small

amounts of product compared to the amount of funds that is required to sell the

product. With the exception of ICON Health, Brunswick and competitors liquidity is not

a concern to the stable environment of the the liquidity ratios. Brunwick performs

slightly above the industry averages.

Profitability Ratio Analysis

Profitability analysis is is used to asses a firm’s ability to generate profits. The

profitability ratio analysis includes the following ratios: gross profit margin, operating

expense ratio, operating profit margin, net profit margin, asset turnover, return on

assets, and return on equity. The first four ratios assess operating efficiency, and the

110

last three ratios assess how asset productivity is related to generating revenues. All

ratios are taken based on a percentage of sales, therefore, higher percentages indicate

firm’s have greater ability to generate profits from sales.

Gross Profit Margin

The gross profit margin ratio relates to gross profit over sales. Gross profit is

computed by taking net sales minus cost of goods sold. This ratio indicates the

operating efficiency of a firm. Higher ratios indicates a firm is efficient at covering

expenses and managing inventory. In the fitness and marine industries, the graph

below shows a trend in gross profit margin. Since 2004, Brunswick and Marine

Products have experienced identical decreases through 2007. During this time, ratios

decreased roughly 15 percent. Also, Fountain Powerboats follows the decreasing trend,

decreasing roughly 13 percent. Cybex and ICON do not directly follow industry trend,

however, ICON experienced a ratio decrease before the 2005 decrease in sales.

Overall, net sales are increasing in the fitness and marine industries, however, gross

profit margin ratios are decreasing due to cost of goods sold increases (selling and

adminsirative expenses).

111

Gross Profit Margin 2003 2004 2005 2006 2007 AVG Brunswick 0.27 0.32 0.27 0.21 0.20 0.25


Fountain Powerboats 0.23 0.19 0.18 0.18 0.11 0.18 Operating Expense Ratio

The operation expense ratio is determined by taking the firm’s selling and

administrative expenses over sales. This ratio relates to the portion of a firm’s sales that

are being spent on operating expenses. Smaller ratios indicates a greater ability to

make profit due to less operating expenses. In the marine industy, Brunswick, Fountain

Powerboats, and Marine Products hold ratios between 10 and 18 percent. The fitness

industry experienced the highest ratios. Cybex and ICON hold ratios at an average of

32 and 25 percent respectively. Brunswick proves to be consistent with the marine

industry in operating expense ratio.

112

Operating Expense Ratio 2003 2004 2005 2006 2007 AVG Brunswick 0.17 0.19 0.15 0.13 0.15 0.16


Fountain Powerboats 0.17 0.16 0.15 0.15 0.15 0.16 Operating Profit Margin Operating profit margin is used to assess operating efficiency. This ratio is

calculated by taking a firm’s operating income over sales. Operating income is gross

profit minus selling and administrative expeneses. Higher operating profit margins are

related to lower amounts of operating expenses. In the marine and fitness industries,

trends exists in operating profit margin. Over the past four years, the marine industry

has experienced decreases of eight percent. In 2007, Brunswick had its lowest ratio in

five years at two percent. On the other hand, ICON and Cybex experienced decreases

in 2005 followed by increases in 2006. After 2006, it is hard to tell industry trends due

to the extinction of ICON.

113

Operating Profit Margin 2003 2004 2005 2006 2007 AVG Brunswick 0.05 0.09 0.09 0.05 0.02 0.06

Marine Products 0.17 0.18 0.14 0.10 0.09 0.14 ICON 0.08 0.07 -0.03 0.02 N/A 0.04 Cybex 0.02 0.08 0.03 0.09 0.07 0.06

Fountain Powerboats 0.06 0.03 0.03 0.03 -0.03 0.02 Adjusted Brunswick 0.24 0.25 0.24 0.22 0.20 0.23

Net Profit Margin

The net profit margin is calculated by taking a firms net income over sales. This

ratio measures how much profit a firm makes for every dollar of sales. Firms prefer

higher ratios because it is directly related to earnings, performance, and cost control.

Net Profit Margin 2003 2004 2005 2006 2007 AVG Brunswick 0.04 0.07 0.07 0.04 0.01 0.05

Marine Products 0.11 0.12 0.10 0.07 0.06 0.09 ICON 0.03 0.02 -0.11 -0.06 N/A -0.03 Cybex -0.02 0.04 0.00 0.17 0.08 0.05

Fountain Powerboats 0.02 0.01 0.01 0.03 -0.06 0.00 Adjusted Brunswick 0.02 0.03 0.05 0.02 0.00 0.02

114

In the fitness and marine industires, net profit margin have decreased for

Brunswick and competitors. Marine Products and Cybex have higher ratios than

Brunswick, however, the main picture is that all existing firms experienced decreases in

ratios from 2006 to 2007. Firms have seen decreases in net income, which all could be

due to the recession state in the economy.

Asset Turnover

Asset turnover directly links a firm’s income statements to its balance sheet.

Asset turnover measures the productivity of the use of assets, or how efficiently a firm

generates revenue using assets. This ratio is calculated by taking sales over total

assets for the previous year (lag relationship). Higher ratios indicate better

performance or high sales for every dollar the firm invested in assets. In the fitness

and marine industries, firms have large inventories and expensive manufacturing costs;

therefore it is important to be able to measure how well they generate sales from

assets.

In these industries, the average asset turnover is around two, but roughly they

are making $1 to $3 on every $1 invested in assets respectively. Again, in 2006, all

existing firms experienced declines in asset turnover, which indicates firms experienced

115

increased levels of inventory. Since 2002, Brunswick has experienced a 66 percent

increase in net inventories. Between 2006 and 2007, Brunswick net inventories

increased forty five million dollars alone.

Asset Turnover 2003 2004 2005 2006 2007 AVG Brunswick 1.71 1.57 1.36 1.13 0.93 1.34


Fountain Powerboats 1.98 1.78 2.32 2.40 1.82 2.06 Adjusted Brunswick 1.24 1.44 1.36 1.22 1.28 1.31

Return on Assets

Return on Assets is also a good indicator of potential profitability. This ratio is

used to measure how profitable a company is relative to its total assets. Return on

assets give investors an idea of how efficient a firm uses it assets to generate earnings

(answers.com). It is computed by taking net income over total assets from the

previous year.

116

According to the graph, the ftness and marine industries have seen recent

decreases in return on assets. Bruwswick and Marine Products have both been

decreasing since 2005. This graph looks very similar to the net profit margin graph,

which both relate to net income. Brunswick is average compared to other firms in the

industries. Brunswick’s only benefit from its ROA ratio is it will not look as risky to

investors because of its stability, unlike the other firms who have experience large ratio

changes. After restating Brunswick’s financial statements, return on assets decreased

three percent.

ROA 2003 2004 2005 2006 2007 AVG Brunswick 0.04 0.07 0.09 0.06 0.02 0.06


Fountain Powerboats 0.03 0.02 0.02 0.07 -0.13 0.00 Adjusted Brunswick 0.02 0.05 0.07 0.03 -0.01 0.03

Return on Equity “Return on Equity is the starting point for a systematic analysis of a firm’s

performance. It is a comprehensive indicator of a firm’s performance because it

provides an indication of how well managers are employing the funds invested by the

firm’s shareholders to generate returns” (Palepu & Healy). Return on equity is

measured taking net income over total shareholders equity. This ratio can be broken

down to connect a firm’s financial leverage to return on equity. The graph belows

shows the return on equity for Brunswick and competitors over the past five years.

117

From the graph we can see that the firms ROE ratios stay average with their

other profitability ratios. Brunswicks has lower ratios then Cybex and Marine products,

however, it is average amongst the industry. This profitability ratio is consistent with

the rest of the ratios related to net income. Again, we see all exisiting decrease

between 2006 and 2007, with Fountain Powerboats and Cybex experiencing huge ratio

fluctuatons. After we restated Brunswick’s financial statements, return on equity

decreased by six percent.

ROE 2003 2004 2005 2006 2007 AVG Brunswick 0.13 0.20 0.23 0.13 0.04 0.15


Fountain Powerboats 0.22 0.12 0.13 0.37 -0.55 0.06 Adjusted Brunswick 0.07 0.14 0.20 0.07 -0.01 0.09

Conclusion

Profitability ratios are used to measure a firm’s ability to generate earnings

relative revenues, income, and assets. After calculating these ratios, we can conclude

that Brunswick generally performs close to the industry average, except in asset

118

turnover. Brunswick’s asset turnover is below industry average; however, it could be

the inventory increases in the fitness and marine segments. As the graphs indicate,

Brunswick never shows large increases or decreases relative to their ability to generate

earnings and manage expense. We can conclude that profitability ratios are related to

the current state of the economy, which explains the decreasing trend in most ratios.

Also, between 2006 and 2007, Brunswick and competitors have experienced increased

inventory levels, which decrease the profitability ratios.

Ratio Performance Trend

Gross Profit Margin average decreasing Operating Expense Ratio average stable Operating Profit Margin average decreasing

Net Profit Margin average decreasing Asset Turnover under-performed decreasing

Return on Assets average decreasing Return on Equity average decreasing

Overall average decreasing Capital Structure Ratios

Capital structure ratios are directly related to how a firm finances their assets. A

firm can choose to finance through debt or equity. Debt is borrowing money from a

lender, and equity is selling stock to investors. The three ratios are as followed: debt to

equity ratio, times interest earned, and the debt service margin. Together, these ratios

can measure a firm’s financial leverage and ability to cover liabilities.

Debt to Equity One measure of a firm’s financial leverage is the debt to equity ratio. The

difference between debt and equity financing determines the amount of default risk for

that firm. Higher ratios mean that a firm has chosen to finance aggressively with debt,

which results in higher default risk. Positive and negatives are both associated with

119

financial with debt. Negatives include paying off debt holders and interest, and the

positives include that the firm has less shareholders and dividend payments.

DEBT TO EQUITY RATIO 2003 2004 2005 2006 2007 AVG Brunswick 2.07 1.99 1.54 1.3 1.32 1.65



According to the graph above, the fitness and marine industries experienced a

trend in debt to equity. Brunswick, ICON , and Marine Powerboats hold steady ratios of

between zero and two. This ratio indicates that the firms use more equity than debt to

finance assets. Cybex experienced a ratio of 20 in 2003 due to introducing new fitness

technologies. By 2007, Cybex’s ratio decreased closer to norm at three, which indicates

they are following industry trends. Overall, in the fitness and marine industries, firms

have low debt to equity ratios, which indicates they have a balanced capital structure.

Brunswick is kind of at the upper end of the corner; the ratio average states they have

1.65 liabilities for every dollar of equity.

120

Times Interest Earned Times interest earned assess the many times a firm’s earning can cover what

they pay in interest. This ratio is calculated by taking operating income over interest

expense. It is very volatile due to changing interest rates, acquiring new debt, and

finishing payments on older loans. The following is a graph of the times interest ratio

of Brunswick and competitors over the past five years.

TIMES INTEREST EARNED 2003 2004 2005 2006 2007 AVG Brunswick 5.11 9.77 10.59 6.41 1.77 6.73

Marine Products 45.5 71.41 60.28 20.25 8.88 41.26 ICON 2.7 2.98 1.22 -0.67 N/A 1.25 Cybex 0.5 1.89 0.84 3.74 6.23 2.64

Fountain Powerboats -2.58 1.76 1.46 2.25 -2.42 0.09 Adjusted Brunswick 1.41 2.61 5.72 7.17 3.11 4.01

According to the graph, the fitness and marine industries do not have a relevant

trend in times interest earned. Over the past five years, Brunswick has experienced

ratios between one and ten. Marine Prodcuts experienced huge increases and

decreases, ranging from eight to seventy. Cybex, Fountan Powerboats, and ICON also

experienced various ratios. In the past three years, Brunswick has experienced a huge

ratio decrease to 1.77 in 2007. This indicates Brunswick earns 1.77 times more than

121

what they pay in interest. All in all, in the fitness and marine industries, Brunswick and

competitors experienced different sizes of change at different periods in time.

Debt Service Margin The debt service margin is related to the ability of a firm to pay their current

portion of long term debt, through cash provided by operations. The ratio is calculated

by taking cash flows from operations of the current period over the current notes

payable from the previous period. The higher the ratio is the better off a firm can pay

debt obligations. The debt service margin is also very volatile because current portions

of long term debt can vary from year to year. The following graph is the debt service

margin for Brunswick and competitors over the past five years.

DEBT SERVICE MARGIN 2003 2004 2005 2006 2007 AVG Brunswick 0.33 0.35 0.31 0.24 0.24 0.29

Marine Products 18.32 18.39 11.33 13.78 16.12 15.59 ICON -0.31 0.08 -0.28 -0.03 N/A -0.11 Cybex 0.03 0.36 0.79 1.33 2.42 0.99

Fountain Powerboats 0.34 -0.46 0.33 0.18 -0.14 0.05

The graph above indicates a small trend of low debt service margins in the

fitness and marine industries. Over the past five years, Brunswick and Cybex maintain

122

ratios of under one. Brunswick’s ratio remained constant in 2006 and 2007 at .24, with

a five year average of .29. This ratio is decent because it never has gone negative,

which indicates cash flows from operations has had the abiltity to pay off current

portions of debt.

On the other hand, ICON and Fountain Powerboats have struggled to pay their

current portion of long term debt through cash provided by operations, which is

indicated by negative ratios in certain years. Marine Products experienced an five year

average debt service margin of fifteen, which could indicate they have higher amounts

of current portion of long term debt due.

Conclusion

The capital structure ratios assess whether a firm or industry is financed through

debt or equity. In the fitness and marine industries, large differences in these ratios

exists, except in the debt to equity ratio. Firms maintain low debt to equity ratios,

which indicates they finance assets through issuing equity to investors. Brunswick debt

to equity ratio is in between zero and two, while competitors range between zero and

five. These ratios indicate the fitness and marine industries maintain a balanced capital

structure. Overall, Brunswick is performing adequately compared to industry

competitors.

Ratio Performance Trend Debt to Equity average stable

Times Interest Earned over-performed decreasing Debt Service Margin under-performed stable

Overall average stable Z-Scores

Altman’s Z-Score weighs five different variables to compute a firm’s score. This

score indicates the possibility of bankruptcy and helps with evaluating a firm’s credit

risk. If a company has a Z-Score of less that 1.81, the firm is condisered bankrupt at

that point. If a firm has a Z-Score of 1.81 to 2.67, it is considered neutral with some

risk due to higher amounts of credit risk. If a firm has a Z-Score of greater than 2.67,

123

the firm is consider to have lower amounts of bankruptcy and credit risk. The graph

below indicates the fitness and marine industries generally have low scores, excluding

Marine Products, which scored below five. In these industries, generally, transactions

are based on a credit line due to the higher prices of the products, which results in

more risk of bankruptcy. Cybex’s score is between four and five and Fountain

Powerboats is slightly over two. ICON’s score gradually decreased to one, which

indicates this firm went bankrupt. This could be a partial explaniation as to why ICON

did not file a 2007 10K. On the other hand, Marine Products’ score is between seven

and eight, which indicates they have low credit and bankruptcy risks. Overall, in the

fitness and marine industries, Z-Scores are generally low mainly due to credit risks

because most transactions are credit based.

Brunswick scores an average of 2.5, which indicates they have significant risk

due to higher amounts of credit risk. Furthermore, this explains why Brunswick’s captial

structure are relatively low. The debt to equity ratio represents Brunswick has

considerable debt, and the debt service margin indicates they have significant current

portions of long-term debt due. The times interest earned ratio indicates interest

expense is high.

124

Z-Score 2003 2004 2005 2006 2007 AVG Brunswick 2.18 2.29 2.47 2.72 2.72 2.72



Firm Growth Rate Ratios

A firm’s growth rate is very important when assessing its long time reliability.

We will focus on two types of growth rates: sustainable growth rate (SGR) and internal

growth rate (IGR). Internal growth rates refer to the potential growth for a firm using

only internal funding. Sustainable growth rates refer to potential growth if a firm uses

leverage as well as internal funding.

Internal Growth Rate

Internal Growth Rate measures the maximum amount a firm can grow without

any outside funding, which means all new capital is taken from the cash flows. When

trying to value potential growth, IGR gives a general idea of expected growth within the

firm; investors can use IGR to determine the potential growth of a firm among its

industry. The internal growth rate is calculated by taking a firm’s return on assets

multiplied by the firm’s plowback ratio. The plowback ratio is simply one minus the

divident payout ratio.

125

According to the graph, Brunswick and compeitors hold a wide range of growth

rates, however, it is important to recognize the decrease in all existing firms between

2006 and 2007. This indicates that industry growth is being restricted by the current

state of the economy. Brunswick is performing average relative to the industry with an

average of five percent over the past five years. On the other hand, Cybex and Marine

Products are experiencing higher growth rates of ten percent, however, they are still

following decreasing industry trends. In the fitness and marine industries, operating

efficiency in the industry is related to the performance of the market.

Sustainable Growth Rate Sustainable Growth rate is the amount a firm can grow using financial leverage.

It is calculated by taking a firm’s internal growth rate multiplied by one plus the debt to

equity ratio. In other words, the rate at which a firm can increase assets and still

maintain cost of capital.

IGR 2003 2004 2005 2006 2007 AVG Brunswick 4% 7% 9% 6% 2% 6%

Marine Products 20% 20% 17% 10% 8% 15% ICON 6% 5% -20% -11% N/A -5% Cybex 6% 0% 36% 13% 10% 13%

Fountain Powerboats 3% 2% 2% 7% -13% 0% Adjusted Brunswick 5% 7% 3% -1% 3% 4%

126

SGR 2003 2004 2005 2006 2007 AVG Brunswick 12% 22% 23% 13% 4% 15%

Marine Products 25% 27% 21% 13% 10% 19% ICON 13% 10% -37% -21% N/A -9% Cybex 58% 0% 124% 21% 19% 44%

Fountain Powerboats 19% 12% 11% 38% -56% 5% Adjusted Brunswick 16% 22% 10% -3% 10% 11%

According to the graph, Brunswick sustainable growth rate is average among

competitors at about two percent. The fitness and marine industries experienced large

fluctuations over the past five years, it is important to recognize the decreasing trend in

SGR, which could because of the present state of the economy. Therefore, we can

conclude that Brunswick and competitors sustainable growth rates are related to

present state of the market.

Conclusion Over the past five years, the fitness and marine industries have experienced

large flucuations in growth rates. Brunswick’s growth rates are average at one to two

percent compared to competitors. We can conclude in these industries, growth rates

127

are directly related to the performance of the economy. Currently, the economy is in a

weak state, which indicates the decreasing trend in growth rates.

Financial Statement Forecasting

Forecasting is related to estimating future financial data based on present and

historical financial statements. We can not predict the expectations or actions of the

market, therefore, forecasting is just an educated guess of the future financials. The

income statement, balance sheet, and statement of cash flows for Brunswick were

forcasted ten years to predict future assets, earnings, and equity. The trends found in

ratios and previous recession rates.

Income Statement The income statement is the first and most signifcant financial statement used

when forecasting financial data. The income statement reflects revenues and

expenses, therefore, future expectations should be reasonably estimated based on

educated assumptions and easy to understand. Previous income statements have been

spliced together to determine red flags in the data that would negatively effect the

quality of the forecasted data. After that, a common size income statement was

created based on percentages of net sales.

First, net sales growth needed to be calculated to forecast the net sales growth.

In order to forecast Brunswick’s net sales, we looked at the first three quarters of net

sales in 2008 and data from the previous 2001 recession. According to Brunswick

Chairman and CEO Dustan E. McCoy, “The poor economy and the accompanying weak

consumer reaction have pressured marine markets, eroding the demand for boats and

engines these past few months at a swifter pace than originally anticipated.”

(www.boatingindustrycanada.com). The Brunwick 10Qs state that net sales for the first

three quarters have been over one billion dollars totaling 3.8 billion dollars. However,

in the third quarter, Brunswick endured a 30% decrease in net sales, giving them a

total of barely over one billion in net sales. The average of the percent changes of the

128

first three quarter net sales was -8.7%. Therefore, this is the percentage we used to

forecast the fourth quarter 2008 net sales. We multiplied 1.04 billion dollars by the

average percent change of -8.7%, which gave us a total of roughly 9.5 million dollars

for fourth quarter net sales and 4.8 billion net sales for 2008.

(in millions) 2007 Q4 Q1 Q2 Q3 Q1 to Q3 Forecasted Q4 Total Revenue 1436.0 1346.8 1485.4 1038.8 3871.0 948.8

Quarterly Percent Change N/A -6.2% 10.3% -30.1% -8.7% -8.7%

Also,we found Brunswick experienced a 11.6% decrease in net sales as a result

of the 2001 depression. However, Brunswick came out of the recession fairly quickly

posting a 10.67% increase in sales growth the following year. Therefore, in 2009, we

estimated a 11.6% decrease in net sales growth because we expect the economy to be

as good as the economy was in the heart of the 2001 recession. In 2010 through 2017,

we will use a constant 10.7% incease in net sales growth, which represents the net

sales growth in 2002 following the recession.

The next item we forecasted was operating income. We looked at the average

of the 2002 to 2006 operating income and found it was roughly 6%. 2007 was not

averaged to make our forecast more accurate because of the extremely small

percentage compared to other years. Therefore, we forced a 6% operating income on

the common size income statement to forecast operating income in dollars from 2008

to 2017; We multipled the forecasted net sales by 6% for each given year to forecast

the dollar amount of operating income.

Next, gross profit was forecasted based upon the same average percentage

decrease in net sales and the average gross proft from 2002 to 2007 as a percentage of

sales. We forecasted 2008 fourth quarter gross profit by taking the third quarter gross

profit multiplied -8.7%. This gave us a gross profit of 787 million dollars in 2008 fourth

quarter and 3.9 billion for the year 2008. After that, we used the gross profit average

from 2002 to 2007 to forecast gross profit for 2009 to 2017; the average gross profit

as a percentage of net sales was 23.05%. So we took our forecasted net sales

129

multiplied by this percentage to forecast the dollar amount gross profit for 2009 to

2017. From here, we simply filled in the forecasted cost of good sold by subtracting

forecasted gross profit from forecasted net sales for each given year.

Also, research and development was forecasted. We took the average R&D as a

percentage of sales over 2002 to 2007 to forecast 2008-2017 research and

development. The six year average was 2.55%. This percentage was multiplied by net

sales to obtain the forecasted research and development.

Finally, net income is the last item forecasted on the income statement. We

looked at the previous three quarters for 2008. In the third quarter of 2008, Brunswick

included a non-recurring expense of 534 million dollars, due to restructuring charges.

Therefore, we looked at the recession data from 2001 to forecast 2008 net income with

the non-recurring expense of 2008 factored in. The common size income statements

reveal that Brunswick experienced a 1.07% growth in net income during the recession

in 2001. In order to forecast 2008 net income, we took our forecasted net sales

mutiplied by this percentage, which gave us roughly 51 million dollars. We believe this

is the best means of gaining an decent forecast for net income. For 2009 to 2017, we

forecasted net income based upon the average of the 2002 and 2003 net income as a

percentage of sales, which is 2.69%. We figured the common size income statement to

be 2.69% of sales to forecast the dollar amounts of forecasted net incomes for 2009-

2017. The growth rates during the years 2003-2007 were held out due to the high

volatility in the common size pecentage of net income. Note, if one takes 2017 net

income divided by 2008 net income, we get a number of 5.02. This number is

significantly higher than the 2017/2008 net sales number (1.99) due to the 543 million

dollar restructing charge (non-recurring expense) in 2008.

130

BRUNSWICK CORPORATIONForecasted Income StatementStatement of Income Data:

Actual Finances Forecasted FinancialsFiscal year 2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017(In millions, except per share data)

recession ‐11.60%Net sales 3711.90 4128.70 5229.30 5923.80 5665.00 5671.20 post‐recession 10.70% 4819.82 4260.72 4716.62 5221.29 5779.97 6398.43 7083.06 7840.95 8679.93 9608.68Cost of Sales 2852.00 3131.60 3915.10 4499.20 4439.30 4528.10 80.00% 3909.11 3278.70 3629.52 4017.88 4447.79 4923.70 5450.54 6033.75 6679.36 7394.05Gross Profit 859.90 997.10 1314.20 1424.60 1225.70 1143.10 23.05% 910.71 982.02 1087.10 1203.41 1332.18 1474.72 1632.52 1807.20 2000.57 2214.63Selling, general and administrative expense 560.50 632.50 782.40 801.30 752.30 835.00 787.81 638.68 707.02 782.67 866.42 959.12 1061.75 1175.36 1301.12 1440.34Research and development expense 102.80 118.20 131.10 144.70 132.20 134.50 2.55% 122.91 108.65 120.27 133.14 147.39 163.16 180.62 199.94 221.34 245.02Litigation charge 25.00 66.40

Operating income 196.60 221.40 400.70 478.60 341.20 107.20 6.00% 289.19 255.64 283.00 313.28 346.80 383.91 424.98 470.46 520.80 576.52Equity earnings 9.90 18.10 18.10 14.90 21.30Investment sale gain 38.70Other expense, net 8.30 0.60 5.20 1.40 1.90 7.80Earnings before interest and income taxes 103.50 230.70 413.60 534.00 354.20 136.30Interest expense 43.30 41.00 45.20 53.20 60.50 52.30

Interest income 11.40 10.10 15.00 16.00 8.70Earnings before income taxes 161.60 201.10 378.50 495.80 309.70 92.70Income tax provision 58.10 65.90 108.70 110.40 46.50 13.10

1.07%Net income 78.40 135.20 269.80 385.40 263.20 79.60 2.69% 51.58 114.76 127.04 140.63 155.68 172.33 190.77 211.19 233.78 258.80

131

Common Size Income Statement Actual Finances Forecasted Financials

Fiscal year 2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

IGR 0.02 0.03 0.06 0.08 0.04 0.01SGR 0.07 0.08 0.19 0.19 0.10 0.01

recession ‐11.60%Sales Growth Percent 10.12% 11.23% 26.66% 13.28% ‐4.37% 0.11% post recession 10.67%Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of sales 76.83% 75.85% 74.87% 75.95% 78.36% 79.84% 81.10% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95%Gross Profit 23.17% 24.15% 25.13% 24.05% 21.64% 20.16% 23.05% 18.90% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05%Selling, general and administrative expense 15.10% 15.32% 14.96% 13.53% 13.28% 14.72% 16.35% 14.99% 14.99% 14.99% 14.99% 14.99% 14.99% 14.99% 14.99% 14.99%Research and development expense 2.77% 2.86% 2.51% 2.44% 2.33% 2.37% 2.55% 2.55% 2.55% 2.55% 2.55% 2.55% 2.55% 2.55% 2.55% 2.55% 2.55%Litigation charge 0.00% 0.61% 0.00% 0.00% 0.00% 1.17%

Operating earnings 5.30% 5.36% 7.66% 8.08% 6.02% 1.89% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%Equity earnings 0.00% 0.24% 0.35% 0.31% 0.26% 0.38%Investment sale gain 0.00% 0.00% 0.00% 0.65% 0.00% 0.00%Other expense, net 0.22% 0.01% 0.10% 0.02% 0.03% 0.14%Earnings before interest and income taxes 2.79% 5.59% 7.91% 9.01% 6.25% 2.40%Interest expense 1.17% 0.99% 0.86% 0.90% 1.07% 0.92%

Interest income 0.00% 0.28% 0.19% 0.25% 0.28% 0.15%Earnings before income taxes 4.35% 4.87% 7.24% 8.37% 5.47% 1.63%Income tax provision 1.57% 1.60% 2.08% 1.86% 0.82% 0.23%

Net earnings 2.11% 3.27% 5.16% 6.51% 4.65% 1.40% 2.69% 1.07% 2.69% 2.69% 2.69% 2.69% 2.69% 2.69% 2.69% 2.69% 2.69%

132

Restated Income Statement After forecasting the income statement, we forecasted the restated income

statement with the impairments of goodwill and capital leases. The goodwill and capital

lease impairment significantly lowerd Brunswick’s net income, however, the same

process was used to forecast the restated income statement as the original income

statement. Note, after adjustments were made, the forced common size operating

income and net income percentages decreased to 3.58% and 2.01% respectively.

133

BRUNSWICK CORPORATIONForecasted Income StatementStatement of Income Data:

Adjusted Income Statement Forecasted FinancialsFiscal year 2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017(In millions)

‐11.60%Net sales 3711.90 4128.70 5229.30 5923.80 5665.00 5671.20 10.70% 4819.82 4260.72 4716.62 5221.29 5779.97 6398.43 7083.06 7840.95 8679.93 9608.68Cost of Sales 2852.00 3131.60 3915.10 4499.20 4439.30 4528.10 3909.11 3278.70 3629.52 4017.88 4447.79 4923.70 5450.54 6033.75 6679.36 7394.05Gross Profit 859.90 997.10 1314.20 1424.60 1225.70 1143.10 23.05% 910.71 982.02 1087.10 1203.41 1332.18 1474.72 1632.52 1807.20 2000.57 2214.63SG&A Exp 560.50 632.50 782.40 801.30 752.30 835.00Operating lease conversion 43.3 48.2 53.2 44.5 50.5 53.40SG&A Net 517.20 584.30 729.20 756.80 701.80 781.60R &D Exp. 102.80 118.20 131.10 144.70 132.20 134.50Litigation charge 25.00 66.40Impairment effect ‐90.56 ‐103.02 ‐124.96 ‐123.46 ‐132.72 ‐135.78Ammoritzation of capital leases 53.24 51.14 51.66 49.97 50.50 49.48 60Operating earnings 96.10 115.44 277.28 349.67 208.48 ‐24.66 4% 172.60 152.58 168.91 186.98 206.99 229.13 253.65 280.79 310.84 344.10Equity earnings 9.90 18.10 18.10 14.90 21.30Investment sale gain 38.70Other expense, net 8.30 0.60 5.20 1.40 1.90 7.80EBIT 87.80 124.74 290.18 405.07 221.48 ‐11.16Captial lease interest effect 6.76 8.86 8.34 10.03 9.50 10.52Interest expense 43.30 41.00 45.20 53.20 60.50 52.30Interest income 11.40 10.10 15.00 16.00 8.70Earnings before income taxes 44.50 95.14 255.08 366.87 176.98 ‐54.76Income tax provision 18.51 33.35 86.20 60.17 60.17 ‐20.33 1%Net earnings 25.99 61.79 168.87 306.70 116.80 ‐34.43 2% 51.58 85.63 94.79 104.93 116.16 128.59 142.35 157.58 174.44 193.11

134

Common Size Income Statement Actual Finances Forecasted Financials

Fiscal year 2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

IGR 0.01 0.04 0.06 0.02 0.00 0.02SGR 0.16 0.22 0.10 ‐0.03 0.10

Sales Growth PercentNet sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of Sales 76.83% 75.85% 74.87% 75.95% 78.36% 79.84% 81.10% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95%Gross Profit 23.17% 24.15% 25.13% 24.05% 21.64% 20.16% 23.05% 18.90% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05%Selling, general and administrative expense 15.10% 15.32% 14.96% 13.53% 13.28% 14.72%Operating lease conversion 1.17% 1.17% 1.02% 0.75% 0.89% 0.94%SG&A Net 13.93% 14.15% 13.94% 12.78% 12.39% 13.78%Research and development expense 2.77% 2.86% 2.51% 2.44% 2.33% 2.37%Litigation charge 0.00% 0.61% 0.00% 0.00% 0.00% 1.17%Impairment effect ‐2.44% ‐2.50% ‐2.39% ‐2.08% ‐2.34% ‐2.39%Ammoritzation of capital leases 1.43% 1.24% 0.99% 0.84% 0.89% 0.87%Operating earnings 2.59% 2.80% 5.30% 5.90% 3.68% ‐0.43% 3.58% 3.58% 3.58% 3.58% 3.58% 3.58% 3.58% 3.58% 3.58% 3.58%Equity earnings 0.00% 0.24% 0.35% 0.31% 0.26% 0.38%Investment sale gain 0.00% 0.00% 0.00% 0.65% 0.00% 0.00%Other expense, net 0.22% 0.01% 0.10% 0.02% 0.03% 0.14%Earnings before interest and income taxes 2.37% 3.02% 5.55% 6.84% 3.91% ‐0.20% 3.58%Captial lease interest effect 0.18% 0.21% 0.16% 0.17% 0.17% 0.19%Interest expense 1.17% 0.99% 0.86% 0.90% 1.07% 0.92%Interest income 0.00% 0.28% 0.19% 0.25% 0.28% 0.15%Earnings before income taxes 1.20% 2.30% 4.88% 6.19% 3.12% ‐0.97%Income tax provision 0.50% 0.81% 1.65% 1.02% 1.06% ‐0.36%Net earnings 0.70% 1.50% 3.23% 5.18% 2.06% ‐0.61% 2.01% 1.07% 2.01% 2.01% 2.01% 2.01% 2.01% 2.01% 2.01% 2.01% 2.01%

135

Balance Sheet Next, the balance sheet was forecasted to show the future expectations of

Brunswisk’s assets and equity. We used ratios that link the balance sheet and income

statement to compile an accurate forecast. Asset turnover is the primary link between

the income statement and balance sheet. We averaged the asset turnover ratio in 2006

and 2007 to forecast future total assets, which gaves us an asset turnover of 1.31.

Over the past five years, Brunswick has experienced a decreasing trend in asset

turnover. Therefore, our only reasonable forecast is to forecast a constant asset

turnover of 1.31 to attempt to measure the forecasted decreasing trend thru 2018.

Also, current liabilities were forecasted based on the current ratio. Current ratio

is current assets over current liabilities. The forecasted current assets are forecasted

based on the 2002 to 2006 average current assets as a percentage of sales. The

average of current assets over the past six years is 49.15% of total assets. Over the

past six years, the current ratio is a stable measure, therefore, we took the six year

average current ratio of 1.64 to forecast future current liabilities . In order to forecast

current liabilities, we took forecasted assets over the forecasted current ratio.

After that, we forecasted total shareholder’s equity to forecast retained earnings.

In order to forecast retained earning, we use the previous forecasted numbers. We use

the net income from the forecasted income statement and dividends from the current

statement of cash flows. Retained earnings is calculated by taking the beginning

balance of retained earning, adding to net income and subtracting dividends.

Forecasted total stakeholder’s equity is forecasted by taking the previous stakeholder’s

equity and adding the change in retained earnings. After getting this number, we can

forecast total stockholder’s equity.

Finally, total liabilities can be forecasted based upon the basic accounting

equation (assets=liabilities + equity). Assets were forecasted based upon asset

turnover, and equity was forecasted based upon the change in forecasted retained

earnings. Therefore, total liabilities can be forecasted by taking the difference between

the two. In addition, accounts receiveable and PP&E were also forecasted on the

balance sheet. Over the past six years, accounts receivable turnover and PP&E

136

turnover have had relatively constant ratios of five, eleven, and twenty respectively. In

order to forecast these assets , we took the average of each turnover over the six year

period to get averages of 10.87 and 5.39.

137

BRUNSWICK CORPORATION

(In millions) Actual Finances Forecasted Financials2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

AssetsCurrent assetsCash and cash equivalents, at cost, which approximates market 351.40 345.90 499.80 487.70 283.40 331.40 9.91Accounts and notes receivable, net 401.40 374.40 463.20 522.40 492.30 572.40 10.87 486.47 391.97 433.91 480.34 531.74 588.63 651.62 721.34 798.52 883.96Finished goods 272.50 325.30 389.90 426.20 410.40 446.70Work‐in‐process 201.60 205.70 260.50 298.50 308.40 323.40Raw materials 72.80 92.80 136.40 149.90 143.10 136.60Net inventories 546.90 623.80 786.80 874.60 861.90 906.70Prepaid income taxes 305.10 302.30 292.70 274.80 249.90 249.90Prepaid expenses and other 55.40 68.80 56.20 75.50 85.40 53.90Total Current Assets 1660.20 1715.20 2098.70 2235.00 2078.40 2114.30 49.15% 1805.54 1596.10 1766.88 1955.93 2165.22 2396.90 2653.37 2937.28 3251.56 3599.48Land 68.30 70.30 68.80 76.70 91.70 103.50Buildings and improvements 478.20 505.70 548.50 609.20 631.60 697.40Equipment 998.20 1042.50 1071.80 1125.30 1181.70 1205.70

Total land, buildings and improvements and equipment 1544.70 1618.50 1689.10 1811.20 1905.00 2006.60Accumulated depreciation ‐871.00 ‐912.40 ‐942.80 ‐994.20 ‐1046.30 ‐1117.80

Net land, buildings and improvements and equipment 673.70 706.10 746.30 817.00 858.70 888.80Unamortized product tooling costs 119.00 121.00 130.10 153.20 156.20 164.00Net PP&E 792.70 827.10 876.40 970.20 1014.90 1052.80 5.39 894.75 790.96 875.59 969.28 1072.99 1187.80 1314.90 1455.59 1611.34 1783.75Other assetsGoodwill 452.80 515.10 624.80 661.80 663.60 678.90Other intangibles 117.50 184.60 328.00 361.30 322.60 245.60Investments 95.40 148.10 182.90 143.60 142.90 132.10Other long‐term assets 196.10 212.40 235.60 249.60 195.10 141.90Other assets 1198.50 1357.00 1416.30 1371.30 1060.20 861.80 50.85%Total Non‐Current Assets 1654.50 1887.30 2247.70 2386.50 2371.90 2251.30 1867.99 1651.30 1827.99 2023.59 2240.11 2479.80 2745.14 3038.87 3364.03 3723.98Total Assets 3314.70 3602.50 4346.40 4621.50 4450.30 4365.60 asset turnover 1.31 3673.53 3247.40 3594.87 3979.52 4405.33 4876.70 5398.51 5976.15 6615.60 7323.46

Liabilities and shareholders’ equityCurrent liabilitiesShort‐term debt, including current maturities of long‐term debt 28.90 23.80 10.70 1.10 0.70 0.80Accounts payable 291.20 321.30 387.90 472.20 448.60 437.30Accrued expenses 685.50 756.70 855.20 831.90 748.90 858.10Current liabilities 1005.60 1101.80 1253.80 1305.20 1198.20 1296.20 current ratio 1.64 1100.94 973.23 1077.36 1192.64 1320.26 1461.52 1617.91 1791.02 1982.66 2194.81Debt 589.50 583.80 728.40 723.70 725.70 727.40Income taxes 144.10 167.60 180.30 147.50 86.30 12.30Postretirement and postemployment benefits 306.90 232.00 236.30 215.60 224.20 192.80Other 166.80 194.30 235.30 250.70 240.40 244.00Long‐term liabilities 1207.30 1177.70 1380.30 1337.50 1276.60 1176.50 679.00 315.05 483.14 666.36 866.18 1084.22 1322.26 1576.94 1850.30 2145.97Total Liabilites 2212.90 2279.50 2634.10 2642.70 2474.80 2472.70 1779.93 1288.28 1560.51 1859.00 2186.43 2545.74 2940.17 3367.96 3832.96 4340.78

Shareholders’ equityCommon stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares 76.90 76.90 76.90 76.90 76.90 76.90Additional paid‐in capital 308.90 310.00 358.80 368.30 378.70 409.00Retained earnings 1112.70 1202.00 1413.70 1741.90 1820.70 1888.40 1889.09 1954.62 2029.86 2116.02 2214.40 2326.46 2453.84 2603.69 2778.13 2941.17Treasury stock, at cost: 10,408,000 and 12,377,000 shares ‐228.60 ‐183.60 ‐76.50 ‐136.00 ‐315.50 ‐428.70Unamortized ESOP expense and other ‐22.20 ‐10.10 ‐6.30 ‐6.20 0.00 0.00Accumulated other comprehensive income (loss): Foreign currency translation ‐9.90 9.50 32.20 14.10 38.80 50.80Minimum pension liability ‐136.50 ‐90.70 ‐97.70 ‐88.00 ‐121.70 ‐92.60Unrealized investment gains 2.70 11.40 23.20 ‐0.10 ‐0.20 1.50Unrealized losses on derivatives ‐2.10 ‐2.40 ‐12.00 7.90 5.30 ‐3.20Total accumulated other comprehensive loss ‐145.80 ‐72.20 ‐54.30 ‐66.10 ‐89.00 ‐52.70Shareholders’ equity 1101.80 1323.00 1712.30 1978.80 1871.80 1892.90 1893.59 1959.12 2034.36 2120.52 2218.90 2330.96 2458.34 2608.19 2782.63 2982.69

Total liabilities and shareholders’ equity 3314.70 3602.50 4346.40 4621.50 4450.30 4365.60 3673.53 3247.40 3594.87 3979.52 4405.33 4876.70 5398.51 5976.15 6615.60 7323.46

Forecasted Balance Sheet

138

Common Size Balance Sheet Actual Finances Forecasted Financials

2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017AssetsCurrent assetsCash and cash equivalents 8.05% 7.77% 10.81% 11.22% 7.87% 10.00%Accounts and notes receivable, net 9.19% 8.41% 10.02% 12.02% 13.67% 17.27% 13.24% 12.07% 12.07% 12.07% 12.07% 12.07% 12.07% 12.07% 12.07% 12.07%Finished goods 6.24% 7.31% 8.44% 9.81% 11.39% 13.48%Work‐in‐process 4.62% 4.62% 5.64% 6.87% 8.56% 9.76%Raw materials 1.67% 2.09% 2.95% 3.45% 3.97% 4.12%Net inventories 12.53% 14.02% 17.02% 20.12% 23.93% 27.35%Prepaid income taxes 6.99% 6.79% 6.33% 6.32% 6.94% 7.54%Prepaid expenses and other 1.27% 1.55% 1.22% 1.74% 2.37% 1.63%Total Current Assets 38.03% 38.54% 45.41% 51.42% 57.69% 63.79% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15%Land 1.56% 1.58% 1.49% 1.76% 2.55% 3.12%Buildings and improvements 10.95% 11.36% 11.87% 14.02% 17.53% 21.04%Equipment 22.87% 23.43% 23.19% 25.89% 32.80% 36.37%

Total land, buildings and improvements and equipment 35.38% 36.37% 36.55% 41.67% 52.88% 60.54%Accumulated depreciation ‐19.95% ‐20.50% ‐20.40% ‐22.87% ‐29.04% ‐33.72%

Net land, buildings and improvements and equipment 15.43% 15.87% 16.15% 18.80% 23.84% 26.81%Unamortized product tooling costs 2.73% 2.72% 2.82% 3.52% 4.34% 4.95%Net PPE 18.16% 18.59% 18.96% 22.32% 28.17% 31.76% 24.36% 24.36% 24.36% 24.36% 24.36% 24.36% 24.36% 24.36% 24.36% 24.36%Other assetsGoodwill 10.37% 11.57% 13.52% 15.23% 18.42% 20.48%Other intangibles 2.69% 4.15% 7.10% 8.31% 8.95% 7.41%Investments 2.19% 3.33% 3.96% 3.30% 3.97% 3.99%Other long‐term assets 4.49% 4.77% 5.10% 5.74% 5.42% 4.28%Other assets 27.45% 30.49% 30.65% 31.55% 29.43% 26.00%Total Noncurrent Assets 49.91% 52.39% 51.71% 51.64% 53.30% 51.57% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85%Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Liabilities and shareholders’ equityCurrent liabilitiesShort‐term debt, including current maturities of long‐term debt 1.31% 1.04% 0.41% 0.04% 0.03% 0.03%Accounts payable 13.16% 14.10% 14.73% 17.87% 18.13% 17.69%Accrued expenses 30.98% 33.20% 32.47% 31.48% 30.26% 34.70%Current liabilities 45.44% 48.34% 47.60% 49.39% 48.42% 52.42% 61.85% 75.54% 69.04% 64.16% 60.38% 57.41% 55.03% 53.18% 51.73% 50.56%Debt 26.64% 25.61% 27.65% 27.38% 29.32% 29.42%Income taxes 6.51% 7.35% 6.84% 5.58% 3.49% 0.50%Postretirement and postemployment benefits 13.87% 10.18% 8.97% 8.16% 9.06% 7.80%Other 7.54% 8.52% 8.93% 9.49% 9.71% 9.87%Long‐term liabilities 54.56% 51.66% 52.40% 50.61% 51.58% 47.58% 38.15% 24.46% 30.96% 35.84% 39.62% 42.59% 44.97% 46.82% 48.27% 49.44%Total Liabilites 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Shareholders’ equityCommon stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares 6.98% 5.81% 4.49% 3.89% 4.11% 4.06%Additional paid‐in capital 28.04% 23.43% 20.95% 18.61% 20.23% 21.61%Retained earnings 100.99% 90.85% 82.56% 88.03% 97.27% 99.76% 99.76% 99.77% 99.78% 99.79% 99.80% 99.81% 99.82% 99.83% 99.84% 98.61%Treasury stock, at cost: 10,408,000 and 12,377,000 shares ‐20.75% ‐13.88% ‐4.47% ‐6.87% ‐16.86% ‐22.65%Unamortized ESOP expense and other ‐2.01% ‐0.76% ‐0.37% ‐0.31% 0.00% 0.00%Accumulated other comprehensive income (loss): Foreign currency translation ‐0.90% 0.72% 1.88% 0.71% 2.07% 2.68%Minimum pension liability ‐12.39% ‐6.86% ‐5.71% ‐4.45% ‐6.50% ‐4.89%Unrealized investment gains 0.25% 0.86% 1.35% ‐0.01% ‐0.01% 0.08%Unrealized losses on derivatives ‐0.19% ‐0.18% ‐0.70% 0.40% 0.28% ‐0.17%Total accumulated other comprehensive loss ‐13.23% ‐5.46% ‐3.17% ‐3.34% ‐4.75% ‐2.78%Shareholders’ equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

139

Restated Balance Sheet Brunswick reported goodwill of rougly 16% of total assets. On the restated

balance sheet, impaired 3% in order to gain a more accurate picture on the balance

sheet. In order to link the restated balance sheet to the income statement, we used

the same asset turnover to forecast the restated balance sheet. In order to forecast

the restated balance sheet, the same process was used as the original balance sheet

with adjusted ratios.

140

BRUNSWICK CORPORATION


AssetsCurrent assets

Cash and cash equivalents, at cost, which approximates market 351.40 345.90 499.80 487.70 283.40 331.40 9.91Accounts and notes receivable, net 401.40 374.40 463.20 522.40 492.30 572.40 10.71 486.47 397.92 440.50 487.63 539.81 597.57 661.51 732.29 810.64 897.38Finished goods 272.50 325.30 389.90 426.20 410.40 446.70Work‐in‐process 201.60 205.70 260.50 298.50 308.40 323.40Raw materials 72.80 92.80 136.40 149.90 143.10 136.60Net inventories 546.90 623.80 786.80 874.60 861.90 906.70Prepaid income taxes 305.10 302.30 292.70 274.80 249.90 249.90Prepaid expenses and other 55.40 68.80 56.20 75.50 85.40 53.90Total Current Assets 1660.20 1715.20 2098.70 2235.00 2078.40 2114.30 0.49 1811.40 1601.28 1772.62 1962.29 2172.25 2404.69 2661.99 2946.82 3262.13 3611.18Land 68.30 70.30 68.80 76.70 91.70 103.50Buildings and improvements 478.20 505.70 548.50 609.20 631.60 697.40Equipment 998.20 1042.50 1071.80 1125.30 1181.70 1205.70Total land, buildings and improvements and equipment 1544.70 1618.50 1689.10 1811.20 1905.00 2006.60Accumulated depreciation ‐871.00 ‐912.40 ‐942.80 ‐994.20 ‐1046.30 ‐1117.80

Net land, buildings and improvements and equipment 673.70 706.10 746.30 817.00 858.70 888.80

Leased Assets 103.72 135.88 127.84 153.86 145.65 161.34Unamortized product tooling costs 119.00 121.00 130.10 153.20 156.20 164.00

896.42 962.98 1004.24 1124.06 1160.55 1214.14Net property 792.70 827.10 876.40 970.20 1014.90 1052.80 3.33 1064.41 940.94 1041.62 1153.08 1276.46 1413.04 1564.23 1731.60 1916.89 2121.99Other assetsGoodwill 452.80 515.10 624.80 661.80 663.60 678.90Impairment effect ‐90.56 ‐103.02 ‐124.96 ‐123.46 ‐132.72 ‐135.78Goodwill,net 362.24 412.08 499.84 538.34 530.88 543.12Other intangibles 117.50 184.60 328.00 361.30 322.60 245.60Investments 95.40 148.10 182.90 143.60 142.90 132.10Other long‐term assets 196.10 212.40 235.60 249.60 195.10 141.90Other assets 771.24 957.18 1246.34 1292.84 1191.48 1062.72Total Noncurrent Assets 1667.66 1920.16 2250.58 2416.90 2352.03 2276.86 0.51 1874.06 1656.67 1833.93 2030.16 2247.39 2487.86 2754.06 3048.74 3374.96 3736.08Total Assets 3327.86 3635.36 4349.28 4651.90 4430.43 4391.16 1.31 3685.46 3257.95 3606.55 3992.45 4419.64 4892.54 5416.05 5995.56 6637.09 7347.26

Liabilities and shareholders’ equityCurrent liabilitiesShort‐term debt, including current maturities of long‐term debt 28.90 23.80 10.70 1.10 0.70 0.80Accounts payable 291.20 321.30 387.90 472.20 448.60 437.30Accrued expenses 685.50 756.70 855.20 831.90 748.90 858.10Current liabilities 1005.60 1101.80 1253.80 1305.20 1198.20 1296.20 1.66 1091.21 964.63 1067.84 1182.10 1308.59 1448.61 1603.61 1775.19 1965.14 2175.41Debt 589.50 583.80 728.40 723.70 725.70 727.40Income taxes 144.10 167.60 180.30 147.50 86.30 12.30Postretirement and postemployment benefits 306.90 232.00 236.30 215.60 224.20 192.80Other 166.80 194.30 235.30 250.70 240.40 244.00Long term leased liabilities 103.72 135.88 127.84 153.86 145.65 161.34Long‐term liabilities 1207.30 1177.70 1380.30 1337.50 1276.60 1337.84Total Liabilites 2212.90 2279.50 2634.10 2642.70 2474.80 2634.04 1931.53 1467.62 1773.22 2108.66 2476.99 2881.57 3326.12 3809.39 4335.81 4911.61

Shareholders’ equityCommon stock 76.90 76.90 76.90 76.90 76.90 76.90Additional paid‐in capital 308.90 310.00 358.80 368.30 378.70 409.00Retained earnings 1112.70 1202.00 1413.70 1741.90 1820.70 1888.40Impairment effect ‐90.56 ‐103.02 ‐124.96 ‐123.46 ‐132.72 ‐135.78Leased effect ‐18.24 ‐3.54 ‐3.66 ‐6.87 ‐1.90 ‐3.88Retained earnings, net 1003.90 1095.44 1285.08 1611.57 1686.08 1748.74 1749.43 1785.83 1828.83 1879.29 1938.15 2006.47 2085.43 2181.67 2296.78 2431.14Treasury stock, at cost: 10,408,000 and 12,377,000 shares ‐228.60 ‐183.60 ‐76.50 ‐136.00 ‐315.50 ‐428.70Unamortized ESOP expense and other ‐22.20 ‐10.10 ‐6.30 ‐6.20 0.00 0.00Accumulated other comprehensive income (loss): Foreign currency translation ‐9.90 9.50 32.20 14.10 38.80 50.80Minimum pension liability ‐136.50 ‐90.70 ‐97.70 ‐88.00 ‐121.70 ‐92.60Unrealized investment gains 2.70 11.40 23.20 ‐0.10 ‐0.20 1.50Unrealized losses on derivatives ‐2.10 ‐2.40 ‐12.00 7.90 5.30 ‐3.20Total accumulated other comprehensive loss ‐145.80 ‐72.20 ‐54.30 ‐66.10 ‐89.00 ‐52.70Shareholders’ equity 993.10 1216.44 1583.68 1848.47 1737.18 1753.24 1753.93 1790.33 1833.33 1883.79 1942.65 2010.97 2089.93 2186.17 2301.28 2435.64Total liabilities and shareholders’ equity 3206.00 3495.94 4217.78 4491.17 4211.98 4387.28 3685.46 3257.95 3606.55 3992.45 4419.64 4892.54 5416.05 5995.56 6637.09 7347.26


141

Common Size Balance Sheet Actual Finances Forecasted Financials

2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017AssetsCurrent assetsCash and cash equivalents, at cost, which approximates market 11% 10% 11% 10% 6% 8%Accounts and notes receivable, net 12% 10% 11% 11% 11% 13% 13% 12% 12% 12% 12% 12% 12% 12% 12% 12%Inventories 8% 9% 9% 9% 9% 10%Finished goods 6% 6% 6% 6% 7% 7%Work‐in‐process 2% 3% 3% 3% 3% 3%Raw materials 16% 17% 18% 19% 19% 21%Net inventories

9% 8% 7% 6% 6% 6% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15%Prepaid income taxes 2% 2% 1% 2% 2% 1%Prepaid expenses and other 50% 47% 48% 48% 47% 48%Total Current Assets 50% 47% 48% 48% 47% 48% 48.07%

50% 53% 52% 52% 53% 52% 51.93%Property 2% 2% 2% 2% 2% 2%Land 14% 14% 13% 13% 14% 16%Buildings and improvements 30% 29% 25% 24% 27% 27%Equipment 46% 45% 39% 39% 43% 46%Total land, buildings and improvements and equipment ‐26% ‐25% ‐22% ‐21% ‐24% ‐25%Leased Assets 20% 19% 17% 18% 19% 20%Accumulated depreciation 3% 4% 3% 3% 3% 4%Net land, buildings and improvements and equipment 4% 3% 3% 3% 4% 4%Unamortized product tooling costs 27% 26% 23% 24% 26% 28% 28.88% 28.88% 28.88% 28.88% 28.88% 28.88% 28.88% 28.88% 28.88% 28.88%Net property 24% 23% 20% 21% 23% 24%

Other assets 0% 0% 0% 0% 0% 0%Goodwill 14% 14% 14% 14% 15% 15%Impairment effect ‐3% ‐3% ‐3% ‐3% ‐3% ‐3%Goodwill,net 11% 11% 11% 12% 12% 12%Other intangibles 4% 5% 8% 8% 7% 6%Investments 3% 4% 4% 3% 3% 3%Other long‐term assets 6% 6% 5% 5% 4% 3%Other assets 23% 26% 29% 28% 27% 24% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85%Total assets 100% 100% 100% 100% 100% 100% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Liabilities and shareholders’ equityCurrent liabilitiesShort‐term debt, including current maturities of long‐term debt 1% 1% 0% 0% 0% 0%Accounts payable 13% 14% 15% 18% 18% 17%Accrued expenses 31% 33% 32% 31% 30% 33%Current liabilities 45% 48% 48% 49% 48% 49% 56% 66% 60% 56% 53% 50% 48% 47% 45% 44%Debt 27% 26% 28% 27% 29% 28%Income taxes 7% 7% 7% 6% 3% 0%Postretirement and postemployment benefits 14% 10% 9% 8% 9% 7%Other 8% 9% 9% 9% 10% 9%Long term leased liabilities 5% 6% 5% 6% 6% 6%Long‐term liabilities 55% 52% 52% 51% 52% 51%Total Liabilites 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Shareholders’ equityCommon stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares 8% 6% 5% 4% 4% 4%Additional paid‐in capital 31% 25% 23% 20% 22% 23%Retained earnings 112% 99% 89% 94% 105% 108%Impairment effect ‐9% ‐8% ‐8% ‐7% ‐8% ‐8%Retained earnings, net 101% 90% 81% 87% 97% 100% 99.74% 99.75% 99.75% 99.76% 99.77% 99.78% 99.78% 99.79% 99.80% 99.82%Treasury stock, at cost: 10,408,000 and 12,377,000 shares ‐23% ‐15% ‐5% ‐7% ‐18% ‐24%Unamortized ESOP expense and other ‐2% ‐1% 0% 0% 0% 0%Accumulated other comprehensive income (loss): 0% 0% 0% 0% 0% 0%Foreign currency translation ‐1% 1% 2% 1% 2% 3%Minimum pension liability ‐14% ‐7% ‐6% ‐5% ‐7% ‐5%Unrealized investment gains 0% 1% 1% 0% 0% 0%Unrealized losses on derivatives 0% 0% ‐1% 0% 0% 0%Total accumulated other comprehensive loss ‐15% ‐6% ‐3% ‐4% ‐5% ‐3%Shareholders’ equity 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Total liabilities and shareholders’ equity 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

142

Statement of Cash Flows The statement of cash flows is the most difficult financial statement to forecast,

due to the volitality from year to year. However, it is still important for analysts to

assess it to gain an idea of the future cash flows. The statement of cash flows is

segregated into three categories: cash flows from operations, cash flows from investing

activities, and cash flows from financing activities.

Cash flows from operations indicates a firm’s operating efficiency. In order to

forecast cash flow from operations, we considered the trends in operating cash flows

over net sales. Over the past six years, this ratio has been the fluctuating, but it is

relatively more stable than CFFO/operating income and CFFO/net income. Therefore,

we will forecast CFFO using of 2005 and 2006 CFFO/net sales. During this time, the

ratio held constant at .06. Also, cash flows from investing activities were forecasted.

We took the average of CFFO/noncurrent assets from 2004 to 2007 to find the best

measurement available, which is -.10. After that, we took our forecasted total

noncurrent assets for each given year multiplied by this average to assume the cash

flows from investing activities. After that, we forcasted cash flows from financing

activities, or the alternate CFFI. Here, we took the plant, property, and equipment from

the previous year minus the PPE from the current year. Since we already forecasted

PPE on the balance sheet, this ratio is easy to forecast.

The most important thing we need to recognize is the high amounts of volatilty

of statement of cash flows forecasts. The three forecasting ratios we calculated were

very poor measures to forecast statement of cash flows, hence the assumptions we

made to forecast CFFO. The only accurate thing we can forecast is dividend growth.

Dividend growth was forecasted as a portion of net income. Overall, dividends is the

only relevant forecastable measures. The other ratios and financial data is filled with

volatility, therefore, the forecasts are subject to huge amounts of error.

143

BRUNSWICK CORPORATIONStatements of Cash Flows(in millions) Adjusted Cash Flows Forecasted Cash Flows

2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Cash flows from operating activities Net earnings 78.40 135.20 269.80 385.40 263.20 79.60 51.58 114.76 127.04 140.63 155.68 172.33 190.77 211.19 233.78 252.49 Less: net earnings (loss) from discontinued operations 0.00 0.00 0.00 14.30 ‐129.30 32.00 ‐35.19 Net earnings from continuing operations 78.40 135.20 263.80 371.10 263.20 79.60 248.28 Depreciation and amortization 148.40 150.60 153.60 156.30 167.30 180.10 180.51Change in accounting principle, net of tax 25.10 25.10 Changes in noncash current assets and current liabilities Change in accounts and notes receivable ‐35.10 61.60 ‐72.00 ‐9.50 ‐4.30 ‐45.90 ‐36.45 Change in inventory 35.10 ‐31.50 ‐103.90 ‐22.80 ‐28.70 ‐42.90 ‐62.50 Change in prepaid expenses and other ‐9.70 ‐10.00 7.70 0.90 0.80 3.30 7.89 Change in accounts payable 71.00 6.00 40.30 29.70 9.50 ‐13.50 ‐18.43 Change in accrued expenses 29.50 74.70 74.50 ‐51.90 ‐70.10 102.50 6.95 Income taxes 64.30 ‐19.50 50.10 ‐3.10 ‐25.50 6.40 ‐23.95 Impairment charges 6.00 28.00 10.30 0.00 0.00 66.40 39.22

Other, net ‐0.20 ‐49.10 38.80 8.10 11.31 Net cash provided by operating activities of continuing operations 412.80 395.10 424.40 421.60 351.00 344.10 343.64 Net cash used for operating activities of discontinued operations 0.00 0.00 ‐9.20 11.30 ‐35.70 ‐29.80 ‐34.13 Net cash provided by operating activities 412.80 395.10 415.20 432.90 315.30 314.30 0.06 267.69 236.64 261.96 289.99 321.01 355.36 393.39 435.48 482.07 309.51Cash flows from investing activities Capital expenditures ‐112.60 ‐159.80 ‐163.80 ‐223.80 ‐205.10 ‐207.70 ‐245.94 Acquisitions of businesses, net of cash acquired ‐8.90 ‐39.30 ‐248.20 ‐130.30 ‐86.20 ‐6.20 ‐87.45 Investments ‐21.20 ‐177.30 ‐16.20 ‐18.10 6.10 4.10 30.38 Proceeds from investment sale 0.00 0.00 0.00 57.90 0.00 0.00 15.44 Proceeds from the sale of property, plant and equipment 13.20 7.50 13.40 13.40 7.20 10.10 9.16 Other, net ‐0.20 ‐3.00 2.00 ‐1.20 ‐0.40 25.60 17.16 Net cash used for investing activities of continuing operations ‐129.70 ‐371.90 ‐412.80 ‐302.10 ‐278.40 ‐174.10 ‐261.25 Net cash provided by (used for) investing activities of discontinued operations 0.00 0.00 ‐27.10 ‐20.70 ‐5.50 75.60 40.51 Net cash used for investing activities ‐129.70 ‐371.90 ‐439.90 ‐322.80 ‐283.90 ‐98.50 ‐0.04 ‐202.97 ‐179.43 ‐198.63 ‐219.88 ‐243.41 ‐269.45 ‐298.28 ‐330.20 ‐365.53 ‐404.64

Cash flows from financing activities Net repayments of commercial paper and other short‐term debt ‐9.40 1.80 ‐8.80 ‐0.60 ‐0.20 0.00 2.05 Net proceeds from issuance of long‐term debt 0.00 0.00 152.30 1.30 250.30 0.70 127.77 Payments of long‐term debt including current maturities ‐26.20 ‐24.50 ‐6.30 ‐6.70 ‐251.10 ‐0.90 ‐107.99 Cash dividends paid ‐45.10 ‐45.90 ‐58.10 ‐57.30 ‐55.00 ‐52.60 50.89 49.24 51.79 54.47 57.30 60.27 63.40 61.34 59.34 95.76 Stock repurchases 0.00 0.00 0.00 ‐76.00 ‐195.60 ‐125.80 ‐195.41 Stock options exercised 40.30 39.90 99.50 17.10 15.90 10.80 7.06 Net cash used for financing activities of continuing operations ‐40.40 ‐28.70 178.60 ‐122.20 ‐235.70 ‐167.80 ‐225.25 Net cash used for financing activities of discontinued operations 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Net cash used for financing activities ‐40.40 ‐28.70 178.60 ‐122.20 ‐235.70 ‐167.80 ‐212.88 ‐255.92 ‐307.67 ‐369.88 ‐444.67 ‐534.58 ‐642.67 ‐772.62 ‐928.84 ‐1116.65Net increase (decrease) in cash and cash equivalents 242.70 ‐5.50 153.90 ‐12.10 ‐204.30 48.00 ‐136.47Cash and cash equivalents at January 1 108.50 351.40 345.90 499.80 487.70 283.40 489.85Cash and cash equivalents at December 31 351.20 345.90 499.80 487.70 283.40 331.40 353.37

0.11 Net cash provided by operating activities 413.00 395.10 415.20 432.90 315.30 314.30 0.06 267.69 236.64 261.96 289.99 321.01 355.36 393.39 435.48 482.07 309.45 Net cash used for investing activities ‐129.70 ‐371.90 ‐439.90 ‐322.80 ‐283.90 ‐98.50 ‐0.04 ‐202.97 ‐179.43 ‐198.63 ‐219.88 ‐243.41 ‐269.45 ‐298.28 ‐330.20 ‐365.53 ‐404.64 Net cash used for financing activities ‐40.40 ‐28.70 178.60 ‐122.20 ‐235.70 ‐167.80 ALT. CFFI ‐212.88 ‐255.92 ‐307.67 ‐369.88 ‐444.67 ‐534.58 ‐642.67 ‐772.62 ‐928.84 ‐1116.65 CFFO/Sales 0.11 0.10 0.08 0.07 0.06 0.06 0.07 0.06 0.04CFFO/Net Income 5.27 2.92 1.54 1.12 1.20 3.95 1.45CFFO/Operating Income 2.10 1.78 1.04 0.90 0.92 2.93 0.95 1.34CFFI/Sales ‐0.03 ‐0.09 ‐0.09 ‐0.06 ‐0.05 ‐0.02 ‐0.04FCF(1) 283.30 23.20 ‐24.70 110.10 31.40 215.80 64.72 57.21 63.33 70.11 77.61 85.91 95.10 105.28 116.54 88.71FCF(2) 513.01 542.53 613.16 695.50 791.74 904.52 1036.99 1192.92 1376.83

Total Dividends 45.10 45.90 58.10 57.30 55.00 52.60 0.97 50.89 49.24 51.79 54.47 57.30 60.27 63.40 61.34 59.34 58.74CFFI/non‐current asset ‐0.08 ‐0.20 ‐0.20 ‐0.14 ‐0.12 ‐0.04 ‐0.13 ‐0.10 ‐0.11

144

Restated Statement of Cash Flows The restated statement of cash flows was forecated in the same manner as the

original statement of cash flows. Note, the numbers for CFFO and CFFI changed, which

changed the forecast measures (CFFO/Sales and CFFI/noncurrent assets) to .056 and -

.08 respectively. Again, The most important thing we need to recognize is the three

forecasting ratios we calculated were very poor measures to forecast statement of cash

flows, hence the assumptions we made to forecast CFFO.

145

BRUNSWICK CORPORATIONStatements of Cash Flows(in millions) Adjusted Cash Flows Forecasted Cash Flows

2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Cash flows from operating activities Net earnings 25.99 61.79 174.87 321.00 ‐12.50 ‐2.43 51.58 85.63 94.79 104.93 116.16 128.59 142.35 157.58 174.44 193.11 Less: net earnings (loss) from discontinued operations 0.00 0.00 0.00 14.30 ‐129.30 32.00 Net earnings from continuing operations 25.99 61.79 174.87 306.70 116.80 ‐34.43 Depreciation and amortization 148.40 150.60 153.60 156.30 167.30 180.10Change in accounting principle, net of tax 25.10 Changes in noncash current assets and current liabilities Change in accounts and notes receivable ‐35.10 61.60 ‐72.00 ‐9.50 ‐4.30 ‐45.90 Change in inventory 35.10 ‐31.50 ‐103.90 ‐22.80 ‐28.70 ‐42.90 Change in prepaid expenses and other ‐9.70 ‐10.00 7.70 0.90 0.80 3.30 Change in accounts payable 71.00 6.00 40.30 29.70 9.50 ‐13.50 Change in accrued expenses 29.50 74.70 74.50 ‐51.90 ‐70.10 102.50 Income taxes 64.30 ‐19.50 50.10 ‐3.10 ‐25.50 6.40 Impairment charges 6.00 28.00 10.30 0.00 0.00 66.40Goodwill Impairment effect 90.56 103.02 124.96 123.46 132.72 135.78 Other, net ‐0.20 0.00 0.00 ‐49.10 38.80 8.10 Net cash provided by operating activities of continuing operations 450.95 424.71 460.43 480.66 337.32 365.85 Net cash used for operating activities of discontinued operations 0.00 0.00 ‐9.20 11.30 ‐35.70 ‐29.80 Net cash provided by operating activities 450.95 424.71 451.23 491.96 301.62 336.05 0.06 271.1129 239.6638 265.3078 293.6957 325.1212 359.9091 398.4194 441.0503 488.2427 540.4846

Cash flows from investing activities Capital expenditures ‐112.60 ‐159.80 ‐163.80 ‐223.80 ‐205.10 ‐207.70 Acquisitions of businesses, net of cash acquired ‐8.90 ‐39.30 ‐248.20 ‐130.30 ‐86.20 ‐6.20 Investments ‐21.20 ‐177.30 ‐16.20 ‐18.10 6.10 4.10 Proceeds from investment sale 0.00 0.00 0.00 57.90 0.00 0.00 Proceeds from the sale of property, plant and equipment 13.20 7.50 13.40 13.40 7.20 10.10 Other, net ‐0.20 ‐3.00 2.00 ‐1.20 ‐0.40 25.60 Net cash used for investing activities of continuing operations ‐129.70 ‐371.90 ‐412.80 ‐302.10 ‐278.40 ‐174.10 Net cash provided by (used for) investing activities of discontinued operations 0.00 0.00 ‐27.10 ‐20.70 ‐5.50 75.60 Net cash used for investing activities ‐129.70 ‐371.90 ‐439.90 ‐322.80 ‐283.90 ‐98.50 ‐0.04 ‐195.966 ‐173.234 ‐191.77 ‐212.289 ‐235.004 ‐260.15 ‐287.986 ‐318.8 ‐352.912 ‐390.674

Cash flows from financing activities Net repayments of commercial paper and other short‐term debt ‐9.40 1.80 ‐8.80 ‐0.60 ‐0.20 0.00 Net proceeds from issuance of long‐term debt 0.00 0.00 152.30 1.30 250.30 0.70 Payments of long‐term debt including current maturities ‐26.20 ‐24.50 ‐6.30 ‐6.70 ‐251.10 ‐0.90 Cash dividends paid ‐45.10 ‐45.90 ‐58.10 ‐57.30 ‐55.00 ‐52.60 Stock repurchases 0.00 0.00 0.00 ‐76.00 ‐195.60 ‐125.80 Stock options exercised 40.30 39.90 99.50 17.10 15.90 10.80 Net cash used for financing activities of continuing operations ‐40.40 ‐28.70 178.60 ‐122.20 ‐235.70 ‐167.80 Net cash used for financing activities of discontinued operations 0.00 0.00 0.00 0.00 0.00 0.00 Net cash used for financing activities ‐40.40 ‐28.70 178.60 ‐122.20 ‐235.70 ‐167.80 ‐212.876 ‐255.92 ‐307.667 ‐369.877 ‐444.666 ‐534.577 ‐642.669 ‐772.617 ‐928.84 ‐1116.65Net increase (decrease) in cash and cash equivalents 280.85 24.11 189.93 46.96 ‐217.98 69.75Cash and cash equivalents at January 1 108.50 351.40 345.90 499.80 487.70 283.40Cash and cash equivalents at December 31 389.35 375.51 535.83 546.76 269.72 353.15

0.107 Net cash provided by operating activities 450.95 424.71 451.23 491.96 301.62 336.05 271.11 239.66 265.31 293.70 325.12 359.91 398.42 441.05 488.24 540.48 Net cash used for investing activities ‐129.7 ‐371.9 ‐439.9 ‐322.8 ‐283.9 ‐98.5 ‐195.97 ‐173.23 ‐191.77 ‐212.29 ‐235.00 ‐260.15 ‐287.99 ‐318.80 ‐352.91 ‐390.67 Net cash used for financing activities ‐40.4 ‐28.7 178.6 ‐122.2 ‐235.7 ‐167.8 ALT. CFFI ‐212.88 ‐255.92 ‐307.67 ‐369.88 ‐444.67 ‐534.58 ‐642.67 ‐772.62 ‐928.84 ‐1116.65 CFFO/Sales 0.12 0.10 0.09 0.08 0.05 0.06 0.07 0.05625CFFO/Net Income 17.35 6.87 2.63 1.50 ‐26.99 ‐150.70CFFO/Operating Income 4.69 3.68 1.63 1.41 1.45 ‐13.63 1.49

CFFI/Sales ‐0.03494 ‐0.09008 ‐0.08412 ‐0.05449 ‐0.05011 ‐0.01737 ‐0.04 ‐0.03374CFFI/non‐current asset ‐0.07777 ‐0.19368 ‐0.19546 ‐0.13356 ‐0.1207 ‐0.04326 ‐0.10 ‐0.08198

146

Forecasting Conclusion After forecasting the original and restated financial statements, an accurate

picture of Brunswick’s future was given as to the direction of the firm. We took into

account the 2001 recession and the first three quarters of 2008 to forecast financials.

According to our forecasts, net sales are going to roughly double over the next ten

years. It is important for investors to analyze this because it gives an idea where the

firm is in terms of profitablity. Operating income was forecasted based on the a forced

common size percentage of 6%. After that, net income was forecasted based on a

forced common size percentages. In 2008, we used the common size percentage for

the previous recession. For 2009 to 2017, we used the common size percentage of the

average of the 2002 and 2003 net income as a percentage of sales, which is 2.69%.

Also, ratios such as asset turnover, current ratio, and PP&E turnover were used to

forecast and link financial statements together. Finally, we compared our findings to

yahoo finance financial data. Yahoo finance seems to take a more conservative

approach to forecasting future financials. Overall, forecasting financials is the best

educated guess based on historical informaton. It is subject to huge error, however,

we feel the three restated financial statements reveal an accurate picture of Brunswick

and the industry performances.

Estimating Cost of Capital Cost of Equity The cost of equity is the required rate of return a firm should make in order to

make investors happy; it is the rate an investor desires for bearing the risk of holding a

firm’s equity. If a firm goes bankrupt, the debtholders are paid off before equity

holders. So, the cost of debt is lower than the cost of equity because the default risk is

much bigger. An accurate way to determine the cost of equity is to use the Capital

Asset Pricing Model. This model describes the connection between risk and expected

return. CAPM has three individual elements: risk free rate, beta, and the market risk

premium. The model is defined as the following:

147

Cost of Equity=Risk free rate + Beta*(Market risk-Risk free rate)

Beta represents the sensitivity of the firm relative to the market. It also

captures a firm’s systematic risk due to market volatility. Beta is found by running a

regression analysis using stock returns and risk premiums. A beta of greater than one

indicates that a firm’s security is more volatile than the market. A beta of less than one

indicates that a firm’s security is less volatile than the market. According to Yahoo

Finance, Brunswick’s beta is 2.32.

The market risk premium (Market risk-Risk free rate) is the last part of the

equation, which is the return on the market minus the risk free rate or the minimum

desired return investors demand. The market return was estimated by using the S&P

500 index, and the risk free rate was found using information from the St. Louis Federal

Reserves. This information contains a yield curve that represent risk free rates at a

point in time. As the time to maturity increases, the yield curve gets steeper because

longer maturities require more return due to higher risk.

The most difficult part of the CAPM is running the regressional analysis to find

beta. In order to calculate Brunswick’s cost of equity, we found the treasury yields,

which were gathered from the St. Louis Federal Reserve website. These yields included

the 3 month, 6 month, 2 year, 5 year, and 10 year. Also, we analyzed monthly stock

prices over the past 84 months for Brunswick and the S&P 500 index. We used a 95%

confidence level, which indicates we are 95% sure the beta will fall in the upper or

lower betas. Adjusted R^2 is another key component to estimate beta and is relevant,

because it adjusts for observations. The adjusted R^2 explains the explanatory power

the beta possesses.

3 month 2 year Months Beta Adjusted R^2 Months Beta Adjusted R^2

72 1.13 0.1883 72 1.13 0.186660 1.26 0.1776 60 1.25 0.175448 1.08 0.137 48 1.08 0.136336 0.95 0.0929 36 0.95 0.092524 0.92 0.0739 24 0.96 0.0737

148

5 year 7 year Months Beta Adjusted R^2 Months Beta Adjusted R^2

72 1.12 0.1837 72 1.12 0.182560 1.24 0.1721 60 1.24 0.170848 1.07 0.1359 48 1.07 0.135736 0.95 0.0925 36 0.94 0.092524 0.91 0.0736 24 0.91 0.0735

10 year Months Beta Adjusted R^2

72 1.12 0.181660 1.23 0.183848 1.07 0.135536 0.94 0.092424 0.91 0.0734

Through our regression analysis, it was determined that the most accurate

measure would be to use the three month risk free rate. The risk structure for each

observation is fairly similar due to the betas varying between .91 to 1.2. Each beta is

very stable across the yield curve, but the three month risk free rate (72 observations)

rendered the highest explanatory power for beta with an adjusted R^2 of .1883 for

seventy-two observations; with this information we had a beta of 1.13.

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept -

0.005441166 0.0089024-

0.611202176 0.543045519-

0.023196443 0.01231411X Variable 1 1.133997912 0.271303986 4.179805569 8.30427E-05 0.592899181 1.675096644

Furthermore, with all of the components of the CAPM calculated, we had a value

of 13.09% for Brunswick’s cost of equity before adjustments. The lower and lower

bounds on the cost of equity (using 95% confidence interval) are 4.7% and 17.4%

respectively. The upper and lower bounds represent where cost of equity should be.

With all this informational, potential investors of Brunswick can conclude that for every

dollar they invest into Brunswick, they can expect a return on equity of $.13. For an

investors horizon, Brunswick should be viewed as a long term investment, due to the

betas staying very similar across the yield curve regardless of time. This is further

supported in the next few paragraphs (cost of debt & WACC) by the theory that

Rf<Kd<WACC<Ke. The cost of equity is greater than all other values. However, a more

149

accurate way to solve for the cost of equity is to adjust for the size premium for

Brunswick (i.e. spread).

Cost of Equity=Risk free rate + Beta*(Market risk-Risk free rate) + spread

According to the class “hymnal” (Palepu & Healy), the size premium would

roughly be 1.1% due to Brunswick large size and diversified products. This adjustment

gave Brunswick an adjusted cost of equity of 14.1%.

Alternative Cost of Equity

After finding our beta, we calculated cost of equity of 13.09% using the CAPM

model. However, we also used an alternate method to get cost of equity using the

back door method. In this model, we found our cost of equity to be 14.18%. The

alternative method states that the cost of equity is 1.09% higher than CAPM cost of

equity. As a result, we feel the CAPM model is the best model to value the cost of

equity. This model will portray an more accurate measure of the risk in investing in

Brunswick.

Firm ROE P/B-1 Growth rate P/B Ke Brunswick 0.0485 0.06 3.10% 0.16 14.18%

Cost of Debt Firms borrow funds to finance assest and maintain capital structure. The cost of

debt is related to the total weighted average of long term and short term interest rates

for a firm’s liabilities. When a firm liquidates, debt holders are the first people to be

reimbursed, therefore, they hold less risk than equity holders. Cost of equity will

always be higher than the cost of debt due to higher default risk.

First, in order to calculate the cost of debt, an analyst needs to find the

approopriate weights for each liability. After that, the weight needs to be multiplied by

interest rates stated in the Brunswick 10K. Brunswick has good quality of disclosure of

debt. In 2007, Brunswick’s current liability rate was 52.42% of total liabilities. Interest

150

rates for current portions of accounts payable were obtained from St. Louis Federal

Reserve. As of October 1, 2008, the 90 day non-financial AA commercial paper rate is

2.13%. For accrued expenses excluding benefits plans, we recognized a rate of 4.3%.

For compensation of benefits plans, we used a 6.7 % rate, which is the Brunswick’s

discount rate for benefits plans mulitplied by the growth rate for benefits plans.

Brunswick’s long term portion of liabilities has a total weight of 47.58%. Long

term liabilities include debt, post-retirement benefits, and deffered income taxes. For

accounts payable and other long term liabilities, we used the Moody's Seasoned Baa

Corporate Bond Yield, which was 6.5% as of December 2007. Overally, Brunswick’s

quality of disclosure of long term rates is good. Deffered income taxes were stated at

4.3%, and post-retirement benefits were stated at 6.71%. Other long term liabilities

were recorded at 6.50%. The total weight rate for current and long term liabilities

together is the weighted average cost of debt. We found Brunswick’s weight average

cost of debt to be 6.17%. After adjusting financial statements, we found weighted

average cost of debt 6.26%.

Liabilities Rate Weight Weight Rate 2007

Current maturities of LTD 6.33% 0.00003 0.00% 0.8 Accounts Payable 6.50% 0.177 1.15% 473.3 Accrued Expenses 4.75% 0.347 1.65% 858.1

Total Current Liabilities 1296.1

Long Term Debt 7.42% 0.294 2.18% 727.4 Post-retirement Benefits 6.71% 0.078 0.52% 192.8 Deferred Income Taxes 4.02% 0.005 0.02% 12.3

Other LT liabilities 6.50% 0.099 0.64% 244.0

Total Liabilities 6.17% 2472.7

151

Weighted Average Cost of Capital According to Palepu & Healy, it is vital to figure out the rate at which a firm will

pay in order to finance their assets. One way to calculate the Weighted Average Cost

of Capital. The formula that expresses this method is as follows:

WACC= (% debt financing * cost of debt)+(% equity financing * cost of equity).

Using this method, we calculated a before tax WACC of 10.67%. Before tax

WACC was figured using a cost of equity of 14.19% and a cost of debt of 6.17%.

However, this estimated WACC would be more percise by adjusting the cost of debt for

long term lease liabilities. Therefore, the new cost of debt is 6.27%. Also, the adjusted

cost of equity will be used because we believe this is a better measure for Brunswick.

This change created a new WACC before taxes of 10.58%. Yet, this is not the most

accurate measure of WACC because we are not taking into consideration the corprate

tax rate of 35%. In order to do this, we take the WACC times 1 minus the tax rate of

35%, which gave us a WACC after tax adjusted of 9.72%. After we restated our

financials statements, we found a adjusted WACC after taxes of 9.59%. We feel these

calculations are reasonable as they stay in line with the theory

Rf<Kd<WACCat<WACCbt<Ke.

MVD/MVA Cost of Debt Tax rate MVE/MVA Cost of Equity WACCWACC(bt) 43.96% 6.17% 56.04% 14.19% 10.67%

Adj WACC(bt) 45.52% 6.27% 54.48% 14.19% 10.58%WACC(at) 43.96% 6.17% 65.00% 56.04% 14.19% 9.72%

Adj WACC(at) 45.52% 6.27% 65.00% 54.48% 14.19% 9.59%

Upper WACC MVD/MVA Cost of Debt Tax rate MVE/MVA Cost of Equity WACCWACC(bt) 43.96% 6.17% 56.04% 17.42% 12.47%


Adj WACC(at) 45.52% 6.27% 65.00% 54.48% 17.42% 11.35%Lower WACC MVD/MVA Cost of Debt Tax rate MVE/MVA Cost of Equity WACC

WACC(bt) 43.96% 6.17% 56.04% 9.86% 8.24% Adj WACC(bt) 45.52% 6.27% 54.48% 9.86% 8.23%

WACC(at) 43.96% 6.17% 65.00% 56.04% 9.86% 7.29% Adj WACC(at) 45.52% 6.27% 65.00% 54.48% 9.86% 7.23%

152

Valuation Analysis Method of Comparables

The method of comparables is one of six valuation models an analyst can

perform in order to determine the value of a firm. More specifically, it helps determine

whether a firm is overvalued, undervalued, or fairly valued with regards to their current

stock price. The key idea of this model is that it compares the firm being analyzed to

the industry in which it operates. In Brunswick’s case, this can be more challenging

due to the firm operating in three different industries. This model is commonly used

because it is an easy model to run because it simply involves calculating various items

found in the financial statements of the firm. However, these models are not perfect

and do have limitations such as not targeting key value drivers of a firm leaving little

room for interpretation. With this in mind, it is important for an analyst to understand

the firm and what creates its value. Furthermore, the analyst must make a decision as

to how big of margin they must use in order to determine the final value. For

Brunswick, we decided to use a safety margin of 15%. This means that if the price

calculated by these models falls on or between 15% of the published share price for

Brunswick of $3.59, then it will be fairly valued.

Price/Earnings Trailing

The P/E trailing ratio is the first of eight methods of comparables. It is a very

easy ratio to compute and is often used to quickly determine the value of the firm. The

price is calculated by multiplying previous year earnings per share with industry average

P/E ratio. The earnings per share are calculated by dividing net income from the

previous year by the total number of shares outstanding. This ratio has limitations

because it is calculated using past financial information rather than forward looking

information. Therefore, this valuation ratio can be somewhat inconsistent for future

period computations. Furthermore, Fountain Powerboats and ICON Health were

153

outliers so we did not include them in the industry valuation. Below is a chart that

explains this in further detail.

FP MP CI IH Industry Avg Price Price AdjP/Et - 15.46 7.66 - 11.56 6.98 -

As the chart above shows, the industry average P/E trailing had a value of

$11.56. With this value, we were able to compute a share price for Brunswick by

multiplying $11.56 by the earnings per share for Brunswick of $.60. This gave us the

share price of $6.98. If we assume our 15% margin, then Brunswick would be

considered an undervalued firm according to this model.

Price/Earnings Forecast

The second comparable ratio computed was forecasted price to earnings ratio.

This ratio is a more accurate than P/E trailing because it uses forward earnings. The

P/E forecasting is more favorable for short term computations. The ratio is calculated

similar to the trailing P/E ratio, except that it utilizes forward looking earnings per share

that we calculated earlier in our forecasted financials. Therefore, the price is calculated

by multiplying the forecasted one year earnings per share with industry average P/E

ratio. This gave Brunswick a price per share of $4.81. Below is a chart that further

explains this model.

FP MP CI IH Industry Avg Price Price Adj P/Ef N/A 26.75 7.74 - 17.25 4.81 -

As the chart shows, the industry average P/E had a value of 17.24. Fountain

Powerboats or ICON Health were outliers. We then multiplied that value by Brunswick’s

forecasted earnings per share of $0.28 to get a price per share of $4.81. If we assume

a 15% margin of our observed share price of $3.59, then Brunswick would be

considered undervalued.

154

Price/Book

The next method of comparables we calculated is the price to book value ratio.

This ratio is important because it compares the market value of the firm’s stock price to

its book value. This ratio is calculated by dividing the price per share by the book value

of equity per share. In order to get the appropriate share price, we took an average of

the P/B ratios, excluding Brunswick. We exclude Brunswick because we want the result

to represent the industry, and by including Brunswick, the end result will favor

Brunswick. After that, we take the industry average P/B ratio and multiply that by

Brunswick’s book value of equity per share to get a current share price. Below is a

chart that further explains this model.

FP MP CI IH Industry Avg Price Price Adj P/B 20.00 2.07 0.63 - 7.57 77.46 71.74

As the chart above shows, the industry had an average P/B of 7.57. With this

value we were able to calculate a price per share by multiplying the industry average by

the book value of equity for Brunswick of $10.24. This gave Brunswick a price per

share of $77.46. With an observed share price of $3.59, the calculated share price falls

outside the 15% margin, and therefore Brunswick is undervalued according to this

method of comparable. However, after we adjusted for the impairment and

amortization of capital leases, we calculated a share price of $71.74. Yet, this still

outside our margin, and Brunswick would still be considered undervalued.

Price Earnings Growth (PEG)

After that, another method of comparables ratio we used to determine the value

of Brunswick was the Price Earnings Growth (P.E.G) ratio. Some of the key

components of this ratio are the EPS that we previously calculated for each firm and

their respective 5 year earnings growth. The PEG ratio is calculated by dividing the P/E

ratio for each competitor in the industry by their expected 5 year growth in earnings.

An appropriate PEG value should be close to 1. Once you calculate a PEG value for

each firm, one must average them in order to find the price per share for Brunswick.

155

We took the industry average PEG value and multiplied that by our firm’s five year

growth rate and our EPS.

FP MP CI IH Industry Avg Price Price AdjPEG - - 0.56 0.56 0.87 -

The PEG ratio is a more complete model than the price earnings ratio because it

accounts for the specific firms future growth rates. However, it is not particularly useful

for this valuation since the industry average consists of only one company. This is

because the other competitors either had negative earnings, or were outliers. According

to this model Brunswick’s price per share should be about $.87. This implies that

Brunswick’s stock is overvalued.

Price/EBITDA

Also, another method of comparables is the price over EBITDA ratio. EBITDA is

an abbreviation for a firm’s earnings before interest, taxes, depreciation, and

amortization. Some analysts prefer to use EBITDA because it is a measure that focuses

on a firms “cash” flow from operations. However, it can be somewhat misleading as it

may include some expense items in SG&A and COGS that are not cash related. This

ratio can show how the cash flows from operations uphold the firm’s market value of

equity. In order to calculate this ratio, we must first find the market capitalization rate

for each firm (I.E. Price) by multiplying the price per share for the firm by the number

of shares outstanding. After that, we must divide that number by the firms EBITDA.

Once this was done for all firms, we took an industry average P/EBITDA, excluding

Brunswick. We multiplied the industry average by Brunswick’s EBITDA.

FP MP CI IH Industry Avg Price Price AdjP/EBITDA 0.03 0.31 1.94 - 0.24 75.81 87.66

156

This is an example of the unreliability of comparables for valuation. According to

this model Brunswick’s stock is severely understated. Note, the adjusted price is higher

than the unadjusted. This is mainly because the conversion of operating leases to

capital leases. Rather than just being expensed, they have become amortized, which

will increase a firm’s EBITDA.

EV/EBITDA

The enterprise value (EV), price time share minus book value of liabilities, over

earnings before interest, taxes, depreciation, and amortization (EBITDA) is a helpful

method of comparable because it deals with the debt free value of the firm. This is

important to some investors because the value of debt can mislead some investors to

the true value of the firm. Also, this model ignores the capital structure of the firm (I.E.

Debt).

FP MP CI IH Industry Avg Price Price AdjEV/EBITDA 18.79 11.18 9.98 - 13.31 9.41 4.37

To find the price, an analyst must calculate the industry average EV/EBITDA.

Then, multiply Brunswick’s EBITDA by industry average EV/EBITDA (13.31), and then

subtract book value of liabilities. Then, we divide by shares outstanding to get a price

per share of 9.41 and 4.37 respectively. The adjusted price changes because

amortizing capital leases and impairing goodwill. Brunswick’s price is undervalued

compare to observed price.

Price to Free Cash Flows

The next method of comparables used to determine the value of a firm is the

price over free cash flows. This is a good valuation measure because it can represent

how well a firm’s value of equity is supported by its free cash flows. The ratio consists

of two key components, which are the firms market capital (I.E. Price) and the free

157

cash flows. In order to compute the price to free cash flows method of comparables,

these must be calculated correctly.

First, we calculated the market capital for each firm by multiplying the price per

share by the number of shares outstanding. Second, we found the free cash flows for

each firm by taking the cash flows from operations and add/subtract any cash flows

from investing activities. Once this is all done, we must take an average of Brunswick’s

competitors Price/FCF ratios. Finally we take that average and multiply that by

Brunswick’s free cash flow. This is then divided by the total number of shares

outstanding to get a price per share.

FP MP CI IH Industry Avg Price Price Adj P to FCF - - 51.03 51.031 59.56 65.56

Once again, this model is not reliable due to competitors having negative cash

flows. Only Cybex is used, which means the marine industry is completely ignored. We

get a price of $59.56, and an adjusted price of $65.56, which suggests that Brunswick

is an extremely undervalued stock.

Dividends/Price

The final method of comparable ratio is the dividend to price per share ratio,

more commonly referred to as the “dividend payout ratio”. One important factor that

must be present in order for this ratio to work is that the company being valued must

pay dividends. Brunswick has paid dividends since their foundation, and therefore this

ratio will work for our valuation.

This ratio is computed very easy by dividing the dividend per share by the price

per share. We do this for all firms who pay dividend in the industry and then take an

average Dividend/Price per Share. Finally, we take the dividend per share for

Brunswick and divide that by the industry average Dividend/Price per share.

FP MP CI IH Industry Avg Price Price Adj DPS/P - 0.03 0.12 - 0.08 0.02 -

158

We were not able to use Fountain Powerboat Industries because they pay no

dividends. According to this model, Brunswick’s stock should be priced at around two

cents and is extremely overvalued. There is no adjusted price because the impairment

of goodwill and amortization of leases will not have any effect on dividends.

Conclusion

As we have discussed previously, the method of comparables can be very easily

computed for a firm and their industry because it simply involves calculating various

items found in the financial statements of the firm. However, these models are not

perfect and do have limitations such as not targeting key value drivers of a firm leaving

little room for an analysts interpretation. Overall, there was a mixture of results; six of

the eight ratios determined that Brunswick is an undervalued firm. The remaining two

stated that Brunswick is an overvalued firm. Again, it is important to understand that

these ratios are not supported by theory and are a way to quickly determine a rough

estimate of a firms’ value.

Intrinsic Valuation Models

In comparison to the method of comparables, the intrinsic valuation models

reflect the value of the firm more accurately. The intrinsic models contain more theory

based assumptions while the method of comparables focuses on historical data. The

intrinsic models are as followed: dividend discount model, discounted free cash flows

model, residual income model, abnormal growth model, and the long-run residual

income model. Together these models enable us to value Brunswick by using different

forecasts such as future net income, free cash flows, and dividends.

Discounted Dividend Model

The discount dividends model attempts to determine the value of a firm by

calculating an estimated share price based upon future dividends and cost of equity.

159

This model has the lowest explanatory power of 5% due to the logical flaws it

possesses. First, future dividends are extremely hard to accurately forecast.

Furthermore, the model assumes an investor will hold onto a stock based solely on the

amount of dividends or payback period. In reality, most investors do not choose to

hold stock based upon dividends because of the volatility from year to year. This model

has very low reliability when valuing a firm; however, we are including it in our analysis

because Brunswick does pay dividends.

In order to calculate this method of comparable, we must first forecast the

dividend per share for Brunswick for the next ten years. We forecasted this by taking

the change of dividends in the past ten years. Then, we took each value back to its

present value using a 14% Ke as the discount rate. After that, we summed them up to

get a year by year present value dividend per share of $1.56. The next step was to find

the present value of the terminal perpetuity, which begins in 2018. The terminal value

of the perpetuity for Brunswick was $.76. This was calculated by taking year eleven

forecasted dividend per share divided by the cost of equity, minus the growth rate from

year ten. We use year ten growth rate because the perpetuity is stated in year ten

value, which will start in year eleven. Next, we calculated the model price of dividends

for Brunswick by adding the two values together for a value of $2.32. Finally, we had

to calculate a time consistent price per share. In order to do this, we took the future

value of the initial stock price, which was $3.59 for Brunswick as of 12/31/07. We took

this price multiplied by (1+Ke) up to the (10/12) to get it in current terms. We found a

time consistent share price for Brunswick of $2.67. The chart below explains the

sensitivity of the discounted dividends model with regards to growth rates and costs of

equity.

160

Discounted Dividends Model

G

Ke

0 0.01 0.02 0.03 0.04 0.05 0.06 9.86% 2.67 2.8 2.95 3.15 3.41 3.79 4.36 11.50% 2.56 2.65 2.76 2.9 3.07 3.3 3.61 13.00% 2.49 2.56 2.65 2.75 2.88 3.03 3.24 14.10% 2.45 2.51 2.59 2.67 2.77 2.9 3.06 16.00% 2.4 2.45 2.5 2.57 2.65 2.74 2.84 17.50% 2.37 2.41 2.46 2.51 2.58 2.65 2.73 18.52% 2.35 2.39 2.43 2.48 2.54 2.6 2.67

Overvalued: Less than $3.05 $3.05 < Fairly Valued <

$4.13 Undervalued: Greater than

$4.13

As the chart shows, if we assume a 15% confidence interval with regard to the

accuracy of forecasts, Brunswick is an overvalued firm. Moreover, this table further

explains how sensitive stock prices are to changes in both the growth rates and the cost

of equity. As the growth rates increased the stock prices increased too. Yet, as the

cost of equity increases, the value of the stock decreases. In conclusion, although this

model is limited and offers low explanatory power, it is still compatible and suggests

Brunswick is an overvalued firm.

Discounted Free Cash Flows Model

The discounted free cash flow model is a valuation method based upon the

present value of future cash flows and the present value of the perpetuity. The

discounted free cash flows model is the only model that uses WACC before tax rather

than cost of equity, and it has an explanatory power of between 10-15%. The major

components include cash flows from operations and investing, book value of debt and

equity, and weighted average cost of capital before taxes. WACC before taxes is used

to avoid double taxation due to net income, which is an after tax account, being

included in CFFO.

161

First, an analyst must subtract CFFI from CFFO for each period to get the free

cash flows of the firm. Then, one must discount back these cash flows by multiplying

each one by their present value factor using the WACC before taxes as the discount

rate. Together, these periods represent the present value year by year free cash flows.

After that, the present value of the perpetuity is found by using the WACC before taxes

as the appropriate discount rate. In order to calculate this, an analyst must forecast

eleven years and take that value back ten years to get the present value of the

perpetuity. All in all, the discounted free cash flows model reveals a reasonable value

for equity for the next ten years.

Using a WACCbt of 10.67%, we found the present value of the free cash flows

year by year. We take the sum of them to get the total present value of year by year

cash flows (479.43). The next step was to add the present value of the terminal value

perpetuity in present term dollars (1897.85). Together, these two numbers equal

Brunswick’s market value of assets (2377.28). This model also contains the forecasted

book value of liabilities (2472.70). In order to find the market value of equity (-95.42),

we subtracted the book value of liabilities from the market value of assets. Then we

divided the market value of equity by the number of shares outstanding, which equals

the share price as of December 30, 2007. Since we are valuing Brunswick in current

terms, we need to get the time consistent price. We multiplied the price by 1+WACCbt

and then raised that number up to 10/12 in order to get price in current terms. We

calculated an estimated share price of $3.59, and a time consistent price estimated at -

$ 0.56. According to this model, Brunswick is an overvalued firm.

162

FCF Growth Model

g

0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10

8.24% N/A N/A N/A N/A N/A 4.38 18.01 141.44 N/A N/A

9.00% N/A N/A N/A N/A N/A N/A 5.60 22.86 N/A N/A

9.50% N/A N/A N/A N/A N/A N/A 1.54 10.40 54.74 N/A

WACCbt 10.67% N/A N/A N/A N/A N/A N/A N/A N/A 6.31 33.86

11.10% N/A N/A N/A N/A N/A N/A N/A N/A 1.97 14.76

11.90% N/A N/A N/A N/A N/A N/A N/A N/A N/A 2.41

12.47% N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

*Observed Share Price $3.59

Overvalued < $3.05

$3.05 < Fairly Valued > $4.13

Undervalued > $4.13

FCF Growth Model (restated)

g

0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10

8.23% N/A N/A N/A N/A 2.13 8.04 23.61 177.04 N/A N/A

9.00% N/A N/A N/A N/A N/A 2.14 8.82 28.86 N/A N/A

9.50% N/A N/A N/A N/A N/A N/A 4.11 14.40 65.88 N/A

WACC(bt) 10.58% N/A N/A N/A N/A N/A N/A N/A 2.21 10.91 49.40

11.10% N/A N/A N/A N/A N/A N/A N/A N/A 4.64 19.49



163

The charts above show the sensitivity analysis for the discount free cash flow

model. Using our estimated WACCbt of 10.67%, we calculated a share price of -$ 0.56

or $0.00 because stock prices cannot be negative. We also included a restated chart

for this model with an adjusted WACCbt of 10.58%, which gave us no changes in the

observed share price or any other numbers in the value boxes. It’s important to note

this model is very sensitive to changes in the growth rates and its effects on the

terminal value of the perpetuity. Again, the restated sensitivity analysis indicates

Brunswick is an overvalued firm. Due to these conditions, the model has low

explanatory power and will have little influence in our final valuation of Brunswick.

Residual Income

The residual income model is more reliable than previous models due to the fact

it is less sensitive to changes in the terminal value of perpetuity growth rate. It has an

explanatory power of roughly 50%, which is significantly higher than other models. The

Residual Income Model explanatory power can be seen by taking book value of equity

at year zero and dividing it by sum of year by year present value residual income.

Then, terminal value of perpetuity is divided the book valued of equity at year zero.

Brunswick’s explanatory power in the sum of present value of calculated Residual

Income ranges from 20% to 60%. We feel this is good because the forecast net

income and equity carry the value of the firm rather than terminal value of perpetuity.

Brunswick’s explanatory power for terminal value of perpetuity for adjusted and

unadjusted Residual Income model ranges from 1.46% to 3.66%. This is important

because Free Cash Flow Model and Discount Dividend Model have approximately 50%

explanatory power in their terminal value of perpetuities. This is unfavorable because

forecasted present value free cash flows and dividends have intrinsic value.

The key calculations in the residual income model are as followed: forecasted net

income, forecasted total dividends, cost of equity, book value of equity, and a

perpetuity growth rate.

164

In order to run this model, an analyst must start by calculating the book value of

equity in the base year 2007. To get next year’s equity, we add the current year

difference between net income and dividends to the previous year book value of equity.

The normal benchmark income is calculated by taking the previous year’s book value of

equity multiplied by the appropriate discount rate, which for this model is the cost of

equity. After that, we calculate the residual income by taking the current year net

income less the normal benchmark income. Next, we multiplied each year by the

present value factor.

To find the terminal value of perpetuity, an analyst must forecast Residual

Income one more year after the last period forecasted; if an analyst forecasted ten

years, he/she must forecast one more year which would be the eleventh year. We

forecasted the Residual Income in the perpetuity by taking the Residual Income change

in the past periods calculated. Next, an analyst must take the average Residual Income

change and multiple it by the last year calculated Residual Income. Then, an analyst

takes forecasted Residual Incomes divided the difference between cost of equity and

the negative growth rate. Last, the perpetuity Residual Income is multiplied by the

present factor of previous year.

After that, an analyst takes the sum of all the present value of Residual Income

calculated netted it with terminal value of the perpetuity. Then, add total present value

of Residual Income calculated and terminal value of the perpetuity to book value of

equity in period or year zero. The sum of the present values of Residual Income

calculated, terminal value of perpetuity, and book of equity in period or year zero

(BVEo) equals Market Value of Equity in year zero (MVEo). The MVEo is divided by the

outstanding shares to get the price in year zero. In order to get a time consistent price,

we multiplied (1+Ke) up to the power of numerical month (10) the observe price used

divided by 12 for number months in a year. We take that number multiplied by

165

Residual Income model price in year zero. Now, the Residual Income Model price and

observe price can be compare to see if firm is under, over, or fairly valued. For

Brunswick, the benchmark income, net income, and residual income, present value

factor for each period are calculated on the below diagram.

Residual Model (millions)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Net Income 112 52 115 127 141 156 172 191 211 234 259

Normal Income 351 351 351 363 377 393 411 432 455 483 515 Residual Income ‐239 ‐299 ‐236 ‐236 ‐236 ‐237 ‐239 ‐241 ‐244 ‐249 ‐257 ‐260

PV factor 1 0.84 0.71 0.6 0.51 0.43 0.36 0.3 0.26 0.22 0.18 YBY PV RI ‐252 ‐168 ‐142 ‐120 ‐101 ‐86 ‐73 ‐63 ‐54 ‐47

‐911

Looking at the diagram, when cost of equity is .185 and -.1 growth rate,

Brunswick never met their cost of equity for each forecasted year. The perpetuity

Residual Income (-911) was also negative. An analyst can determine if firm is making

money or destroying money by the value of Residual Income. If the Residual Income is

negative, a firm never met their cost equity, thus the firm is destroying money. If the

Residual Income is positive, a firm has surpassed their cost of equity, or making money.

This is why the Residual Income model has a negative growth rate component. Firms

cannot always surpass their cost of equity or never meet their cost of equity. With a

negative growth rate, a firm can have a negative Residual Income that decreases to

zero to recover Residual Income loss. A firm with positive Residual Income with a

negative growth rate will decrease to zero to slow down Residual Income growth.

After looking diagram above, an analyst change the value of cost equity and

negative growth rate to see what cost of equity and negative growth rate will give fairly

value price.

166

Residual Income Model

g -0.1 -0.2 -0.3 -0.4 -0.5

Lower Ke 0.099 8.66 8.71 8.74 8.76 8.77 0.115 7.29 7.47 7.56 7.61 7.65 0.13 6.28 6.51 6.64 6.72 6.77

Ke 0.141 5.65 5.92 6.06 6.15 6.21 0.16 4.76 5.04 5.20 5.30 5.37 0.175 4.20 4.47 4.63 4.74 4.81

Upper Ke 0.185 3.87 4.13 4.29 4.40 4.47

We used lower Ke and upper Ke from the regression model. The growth rate

range is -.1 to -.5. A red block with a number means overvalued; a white block with a

number means fairly value; a blue block with a number is undervalued. If the price is

greater than $4.13, then price is undervalued. If the price is between $3.05 and $4.13,

then price fairly valued. If price is less than $3.05, then price is overvalued. The fairly

valued price is determined by 15% plus or minus the observed price. Looking at the

chart, Brunswick needs a higher Ke with slow growth rate. The closest fairly valued to

observe price was $3.87 and $4.13. The higher Ke will the firm get to observed price.

The diagram below used the same values for undervalued, fairly valued, and

undervalued. The Ke and growth rate did not change as input. The difference from

this adjusted model and unadjusted model was adjustment in net income and equity.

An analyst impairing goodwill and amortizing capital lease in financial statement.

Impairing goodwill and amortizing capital lease decrease required Ke.

167

Residual Income Model (restated)

g -0.1 -0.2 -0.3 -0.4 -0.5

Lower Ke 0.099 7.24 7.35 7.41 7.44 7.46 0.115 6.15 6.34 6.44 6.50 6.54 0.13 5.34 5.57 5.69 5.77 5.82

Ke 0.141 4.83 5.08 5.21 5.29 5.35 0.16 4.11 4.36 4.50 4.59 4.65 0.175 3.65 3.89 4.03 4.12 4.19

Upper Ke 0.185 3.38 3.61 3.75 3.84 3.90

After adjusting the balance sheet and income statement, the picture does not

change as much for the Residual Income Model. The adjusted Brunswick financials still

does not meet required Ke. The required Ke decreased compared to unadjusted

Residual Income Model. The required Ke for unadjusted financials was upper Ke with

slow growth rate. On the other hand, in the adjusted Residual Income Model, the

range changed to Ke and upper Ke with any growth rate, approximately.

In conclusion, the Residual Income Model has good explanatory power. The

growth rate does not have great impact on the terminal value of perpetuity. Brunswick

requires a high cost of equity with slow growth rate. In the adjusted model,

Brunswick’s required cost of equity decreased. The growth rate speed does not matter.

Brunswick may need to take more impairment for goodwill and capitalize leases to

adjust proper value of total assets, which will affect the value of equity.

Abnormal Earnings Growth Model (A.E.G.)

The Abnormal Earning Growth Model expresses the value of a firm’s equity as

book value plus discounted expectations of future abnormal earnings (Palepu and

Healy). The Abnormal Earnings Growth Model is the analog to Residual Income model.

The change in Residual Income for each year equal AEG in same year. The model only

uses forecasted net income. It provides a basis for forward P/E multiple with special

168

“E”. The special “E” adjusted for time and adds value (Dr. Moore’s notes). The growth

rate is negative.

The AEG Model begins with core net income, which is net income not

forecasted. The total wealth or abnormal earnings equal forecasted net income plus

dividend reinvested, giving us a cumulative dividend net income. The dividends

reinvested or “DRIP” equal Ke times previous year dividends. The assumption here is

that the investor will reinvest dividends and receive returns equal to the cost of equity.

The benchmark income is calculated by taking the previous year’s net income

multiplied by one plus the cost of equity. Next, we take total wealth minus the normal

or benchmark income to get A.E.G for the current year. As with previous models, each

AEG value must be multiplied by its present value factor in order to take back to year

one. Then, the present values of year by year AEG are added up to equal total present

value of year by year AEG.

The last part of AEG model is the terminal value of the A.E.G. perpetuity. The

perpetuity is forecasted by the average change in AEG for the number of periods

forecasted. For example, Brunswick’s AEG model used 10 periods; an analyst will take

ten average percent change in AEG. The average changes in AEG are added to one

and multiplied by the last year calculated AEG in order to get perpetuity AEG

numerator.

Usually, an analyst uses static percent of last couple years or average change in

AEG calculated. This means an analyst found a pattern in the change AEG with upper

and lower Ke and growth rate; an analyst guesses approximate AEG by saying it is

approximately 85% or some sensible percent to the pattern change in upper and lower

Ke and growth rate. In Brunswick’s AEG model, we link the percent change in AEG with

perpetuity AEG numerator. Whenever an analyst does sensitivity analysis by changing

Ke or growth rate, the AEG perpetuity numerator will adjust appropriately to pattern the

169

change AEG. Then, we must find the terminal value of perpetuity AEG by dividing by

the difference in Ke and growth rate and multiply that number by previous year present

value factor.

We took the sum of terminal value of perpetuity AEG, present value of year by

year A.E.G, and core income to get total adjusted earnings. Then, the market value of

equity is calculated by taking the total adjusted earnings and dividing it by the cost of

equity. After that, an analyst must take that amount and divide it by the number of

shares outstanding to reveal firm’s price per share. Finally, we must adjust the price

per share to be time consistent with observed price. A firm’s AEG calculated price per

share multiplied by (1+Ke) up to the (10/12) to get it in current terms.

A.E.G. should equal the change in residual income from year to year as long as

the same cost of equity is used and net forecasted net income and dividends flow

through equity.

Change RI 63.08 3.04 2.98 2.90 2.79 2.64 2.45 1.47 0.42AEG Check Figure 63.08 3.04 2.98 2.90 2.79 2.64 2.45 1.47 0.42

In order to estimate the intrinsic value of Brunswick, we conducted a sensitivity

analysis of the A.E.G. model using costs of equity and growth rates. This sensitivity

analysis for AEG will see if the Ke and growth calculated is appropriate. More

specifically, it will identify if Brunswick needs a bigger Ke or smaller Ke with slower or

faster growth rate to recover losses in not meeting the cost of equity or bring down the

cost equity to surpass the cost of equity.

We used lower Ke and upper Ke from the regression model. The growth rate

range is -.1 to -.5. A red block with a number means overvalued; a white block with a

number means fairly value; a Blue block with a number is undervalued. If the price is

greater than $4.13, then price is undervalued. If the price is between $3.05 and $4.13,

then price fairly valued. If price is less than $3.05, then price is overvalued. The fairly

valued price is determined by 15% plus or minus the observed price.

170

AEG Model

-0.1 -0.2 -0.3 -0.4 -0.5 Lower Ke 0.099 8.87 8.63 8.51 8.44 8.39

0.115 6.78 6.68 6.63 6.60 6.58 0.13 5.45 5.42 5.40 5.39 5.39

Ke 0.141 4.72 4.71 4.71 4.71 4.71 0.16 4.31 4.18 4.10 4.05 4.02

0.175 2.83 2.96 3.03 3.08 3.11 Upper Ke 0.185 2.86 2.90 2.92 2.93 3.47

In Brunswick’s AEG model, majority of calculated price is undervalued.

Brunswick is underperforming their cost of equity when approximately less than .16 and

any growth rate. When growth increases negatively and Ke increases, Brunswick’s

value gets closer to observed priced or fairly valued. This means Brunswick is meeting

the required Ke. When Brunswick is overvalued, the firm is surpassing the require Ke

and needs a faster growth rate to bring it up to zero or required Ke.

AEG Model

-0.1 -0.2 -0.3 -0.4 -0.5 Lower Ke 0.099 8.71 8.19 7.93 7.77 7.67

0.115 6.81 6.51 6.36 6.27 6.20 0.13 5.56 5.40 5.31 5.26 5.22

Ke 0.141 4.84 4.75 4.70 4.67 4.65 0.16 3.90 3.89 3.88 3.88 3.88

0.175 3.33 3.37 3.39 3.40 3.41 Upper Ke 0.185 3.01 3.07 3.10 3.13 3.14

In the adjusted AEG model, the sensitivity analysis changes slightly. Brunswick

has a wider range of fairly valued prices with moderate Ke to high Ke at any growth

rate. Most of AEG calculated prices are undervalued. The adjustment in the income

statement gives a better picture because Brunswick is meeting their required Ke

roughly. It appears Brunswick can roughly meet required Ke if Ke is approximately

between .16 and .185 with almost any growth rate.

171

In conclusion, AEG non-adjusted and adjusted Models show Brunswick is an

overvalued firm. In non-adjusted sensitivity analysis, Brunswick requires higher Ke than

calculated Ke and higher growth to meet require Ke. In adjusted sensitivity analysis,

Brunswick requires higher Ke than the calculated Ke found through the regression

model.

Long Run Residual Growth Model

Earnings have a more accurate growth in the long run compared to dividend

payments because of the volatility in dividends; therefore, we use the long run residual

model to calculate equity value of Brunswick. The long run residual model differs from

the residual model in that it uses return on equity with dividends instead of net income

times the cost of equity. We computed a forecasted return on equity of 10% for the

original financial statements. This figure was calculated by taking net income divided

by the previous year’s book value of equity.

To compute the long run residual income, we use the following equation to

obtain market value of equity:

MVE = BVE * (1+ (ROE-Ke)

(Ke – g) For this valuation model, we used our Ke of 14.10% from our computed capital asset

pricing model. The growth rate we used was 9%. After we found our market value of

equity (371.16) and divide by the number of shares outstanding, it gives us a model

price as of December 30, 2007. In order to get a time consistent price, we multiplied

the model price by (1+Ke) and raised that number to 10/12. We calculated a time

consistent price of $2.24. Finally, a sensitivity analysis was run by fluctuating cost of

equity, return on equity, and growth rates. According to this model and financials, we

calculated an estimated share price of $2.24, which indicates Brunswick is overvalued.

172

Long Run Residual Income Model

ROE 0.00 0.00 0.00 0.00 0.08 0.09 0.10

9.86% N/A N/A N/A 4.39 6.34 8.88 11.42 11.50% N/A N/A N/A 3.23 4.67 6.53 8.40 13.00% N/A N/A N/A 2.36 3.77 4.34 6.80

Ke 14.10% N/A N/A N/A 2.30 3.32 3.86 5.98 16.00% N/A N/A N/A 1.91 2.75 3.74 4.96 17.50% N/A N/A N/A 1.69 2.44 3.41 4.39 18.52% N/A N/A N/A 1.57 2.26 3.17 3.54

g

0.00 0.02 0.04 0.06 0.07 0.08 0.09 9.86% 8.12 7.37 6.10 4.39 0.90 N/A N/A 11.50% 7.05 6.17 4.83 3.23 0.58 N/A N/A 13.00% 6.31 5.39 4.07 2.61 0.44 N/A N/A

Ke 14.10% 5.86 4.94 3.66 2.30 0.37 N/A N/A 16.00% 5.24 4.33 3.12 1.91 0.30 N/A N/A 17.50% 4.84 3.95 2.80 1.30 0.26 N/A N/A 18.52% 4.61 3.74 2.63 1.57 0.24 N/A N/A

ROE

0.00% 2.41% 4.82% 7.23% 8.00% 9.00% 10.00%0.00% N/A 1.95 3.91 5.86 6.48 7.29 8.10 2.00% N/A 0.39 2.66 4.94 5.67 6.61 7.55 4.00% N/A N/A 0.93 3.66 4.53 5.66 6.79

g 5.50% N/A N/A N/A 2.30 3.32 4.65 5.98 7.00% N/A N/A N/A 0.37 1.61 3.22 4.83 8.00% N/A N/A N/A N/A N/A 1.87 3.75 9.00% N/A N/A N/A N/A N/A N/A 2.24


Overvalued < $3.05 $3.05 < Fairly Valued >

$4.13

Undervalued > $4.13

173

In order to understand the effects of the restated return on equity and growth, it

is necessary to run this valuation model using the restated financials. The calculations

were performed the same way as the original financials using a restated return on

equity of 12% and restated growth of 6%. Ke was held constant at 14.1%. The time

consistent price for the restated long run residual income model was $7.71, which

indicates Brunswick is undervalued. Long Run Residual Income Model (restated)

ROE 0.06 0.07 0.08 0.09 0.10 0.11 0.12

9.86% N/A 2.11 5.53 7.73 10.66 13.58 16.51 11.50% N/A 1.45 3.82 5.33 7.35 9.37 11.39 13.00% N/A 1.14 2.99 4.18 5.76 7.34 8.92

Ke 14.10% N/A 0.98 2.59 3.61 4.98 6.35 7.71 16.00% N/A 0.80 2.11 2.94 4.05 5.17 6.28 17.50% N/A 0.70 1.84 2.57 3.54 4.52 5.49 18.52% N/A 0.65 1.70 2.37 3.27 4.17 5.07

g 0.00 0.01 0.02 0.03 0.04 0.05 0.06

9.86% 7.36 7.03 6.62 6.09 5.38 4.38 2.11 11.50% 6.39 6.01 5.55 4.98 4.26 3.32 1.45 13.00% 5.72 5.32 4.85 4.28 3.59 2.73 1.14

Ke 14.10% 5.31 4.91 4.44 3.89 3.23 2.42 0.98 16.00% 4.75 4.35 3.89 3.37 2.75 2.03 0.80 17.50% 4.39 4.00 3.55 3.05 2.47 1.80 0.70 18.52% 4.18 3.79 3.36 2.87 2.32 1.68 0.65

ROE 6.25% 7.08% 8.25% 9.00% 10.00% 11.00% 12.00%

0.0% 4.69 5.31 6.19 6.76 7.51 8.26 9.01 1.0% 4.24 4.91 5.86 6.46 7.27 8.08 8.89 2.0% 3.72 4.44 5.47 6.12 7.00 7.87 8.75

g 3.0% 3.10 3.89 5.01 5.72 6.67 7.63 8.58 4.0% 2.36 3.23 4.45 5.24 6.29 7.34 8.38 5.0% 1.45 2.42 3.78 4.65 5.82 6.98 8.14 6.4% 0 0.98 2.59 3.61 4.98 6.35 7.71

174


Overvalued < $3.05 $3.05 < Fairly Valued >

$4.13

Undervalued > $4.13

After reviewing the sensitivity analysis tables for the original and restated

models, it is almost impossible to judge whether the stock is overvalued or undervalued

based up on the long run residual income model. The differences in prices seem

unreasonable and suggest this model should have little significance in the final valuation

of Brunswick.

Analyst Recommendation

After extensive research and analysis, we concluded that Brunswick Corporation

is an overvalued firm. Our conclusion was based up a complete analysis of the industry

characteristics, key accounting policies, and financial statements. From these

observations, we forecasted Brunswick’s financial statements from 2008 to 2017.

According to those forecasted financials, we incorporated the method of comparables

and intrinsic valuations to determine the overall performance of Brunswick. In our

opinion, we conclude that Brunswick does not meet their expectations held by the

market. Overall, we believe it is in the best interest of shareholder’s to sell Brunswick

stock.

In order to value any firm, the industry and business environment need to be

carefully analyzed to gain an understanding of what drives value. The fitness and

marine industries follow a mixed strategy. Most of the products in the fitness industry

are very similar, which makes the switching costs low for the customer. In attempt to

lower the threat of substitute products in this industry, companies must compete on a

cost leadership strategy. In the fitness industry, the differentiation strategy exists.

175

However, this is not the focus, but rather a strategy implemented after cost leadership

in order to maintain its market share acquired through its cost leadership strategies. In

the marine industry, it is also common to compete on cost. Smaller companies must

focus on differentiation or target a market niche to be competitive with the larger

companies since they cannot compete on cost due to economies of scale. More

amounts of capital are invested into research and development in the marine industry

than the fitness. This is because it is necessary to keep up with the latest technology

and performance to avoid becoming obsolete and to deal with changing industry

regulations.

To gain a competitive advantage, companies in the fitness industry must focus

on cost leadership, utilizing economies of scale. Since fitness products perform the

same function, little differentiation exists. In the marine industry, a cost leadership

strategy is effective as well, with economies of scale and low distribution costs as the

focal points. Differentiation is also effective in this fragmented industry with the focus

on quality and research and development. Brunswick benefits greatly from its large

size. It is able to achieve economies of scale because they are able to produce

products from different industries together at a single manufacturing plant. This allows

them to spread large amounts of fixed costs across many different units of production,

which decreases the total cost of the products to customers. Also, Brunswick benefits

from its many distribution channels. With so many large facilities all over the world,

transportation costs are lowered significantly compared to companies only based in the

U.S.A. Brunswick also differentiates it products by coming out with lines to target

market niches.

When valuing any firm it is essential to do a full accounting analysis, on both its

policies and its quality and level of disclosure. Operating leases, research and

development, goodwill, and currency risk are all critical accounting factors that could be

distorted by a firm’s management in order to artificially increase earnings to appear

more appealing to investors. In the case of Brunswick, goodwill and operating leases

were proven to be distorted. Brunswick has no capital leases, only operating leases

which are an off-balance sheet transaction. This means that no asset or liability is

176

recorded, just an operating expense in the income statement. This can be used to

appear in a more favorable position to creditors and investors because retained

earnings will appear higher. While it is common practice in both industries to rely

heavily on operating leases, Brunswick has a considerably larger amount. Their

operating leases are equal to about 13% of total long term liabilities. This is a

suspiciously high number, and a serious problem exists in disclosure related to

operating leases, which together raise a red flag. No information is given regarding

their length of leases or their interest rates paid.

On the same note, goodwill that is not impaired properly can cause assets,

owner’s equity, and net income to be overstated. Brunswick has a large amount of

goodwill as a result of their aggressive growth strategy of buying out other firms.

Brunswick’s goodwill makes up over 15% of its total assets, which is a very high

amount. Goodwill is impaired by 20% to get a more accurate valuation. The two red

flags, operating leases and goodwill, have been adjusted and the new statements are

used get a more accurate valuation of the firm.

After we understand key success factors and accounting policies, we analyzed

operating performance based upon inputs measuring Brunswick’s liquidity, profitability,

and capital structure. Liquidity ratios are a measure of the ability of a firm to meet its

short term debt obligations. These are ratios that lenders pay close attention to since

they want to know that the company they are lending to is going to be able to pay it

back in a full and timely manner. Profitability ratios measure how well firms are able to

make a profit, and how well their revenues can cover their costs. Capital structure and

growth ratios are also often used by creditors. It is important to understand the capital

structure (the amount financed by debt and equity), and the ability of a firm to

generate revenues to cover expenses to access its riskiness. Overall, Brunswick’s

operating efficiency is more effective than its competitors. In terms of liquidity, their

quick asset ratio and accounts receivable are more liquid than competitors. Also,

Brunswick’s ratios are either stabilizing or actually improving, which show it is less

volatile then the industry as a whole. Their profitability ratios prove that Brunswick is

very close to the industry average and follows industry trends. Brunswick’s capital

177

structure is also very close to the industry average. The decline in growth rates leads

us to believe this is due to systematic risk, not Brunswick specifically.

The most important part of the valuation process proves to be the valuation

methods. As a whole, the valuation models were fragmented, however, the majority of

the intrinsic models suggested Brunswick is an overvalued firm. The method of

comparables indicated Brunswick was not overvalued, but it is a relatively poor method

of valuation when estimating a firm’s value. The intrinsic valuations are more reliable,

and we are able to gain a better understanding of Brunswick’s true value from them.

The AEG and long run residual income model indicated Brunswick is an overvalued firm.

On the other hand, the residual income was the only model that suggested Brunswick

was fair valued using the upper Ke and a -.1 growth rate. Overall, the fitness and

marine industries possess the potential to be profitable firms in the future. The current

economy state is taking a huge role on these industries, which leads us to believe

industry performance will increase. However, we still believe that Brunswick is worth

less than its current market value.

178

Appendices

Sales Manipulation Diagnostics:

Brunswick Corporation 2003 2004 2005 2006 2007 Sales/ Cash from Sales 1.01 0.98 0.99 0.99 0.98

Sales/ Account Receivables 10.72 11.19 10.79 11.64 9.96

Sales/ Inventory 6.43 6.59 6.90 6.65 6.29 Sales/ Deferred Revenues N/A 121.60 80.62 80.85 70.13

Sales/ Warranty Liabilities 54.00 70.80 84.24 87.20 107.59

ICON Health 2003 2004 2005 2006 2007 Sales/ Cash from Sales 0.98 0.98 1.06 0.99 N/A

Sales/ Account Receivables 5.13 5.51 7.06 6.74 N/A

Sales/ Inventory 5.55 5.59 5.71 5.63 N/A Sales/ Deferred Revenues N/A N/A N/A N/A N/A

Sales/ Warranty Liabilities 34.04 34.85 30.69 23.50 N/A

Cybex International 2003 2004 2005 2006 2007 Sales/ Cash from Sales 0.99 0.98 0.97 0.98 0.99


Sales/ Inventory 11.98 12.91 12.38 13.19 10.61 Sales/ Deferred Revenues N/A N/A N/A N/A N/A


Marine Products 2003 2004 2005 2006 2007 Sales/ Cash from Sales 0.98 1.01 0.99 1.00 0.99


Sales/ Inventory 8.87 9.74 10.13 8.86 7.39 Sales/ Deferred Revenues N/A 41.8 113.51 65.29 64.17


179

Fountain Powerboats 2003 2004 2005 2006 2007 Sales/ Cash from Sales 1.02 0.97 1.01 0.98 0.99


Sales/ Inventory 15.03 12.62 10.95 11.31 10.28 Sales/ Deferred Revenues N/A N/A N/A N/A N/A


Expense Manipulation Diagnostics:

Brunswick Corporation 2003 2004 2005 2006 2007

Asset Turnover 1.71 1.57 1.36 1.13 0.93 CFFO/OI 1.78 1.04 0.92 0.92 2.93

CFFO/NOA 0.48 0.47 0.45 0.31 0.30 Total Accruals/Sales 0.06 0.03 0.01 0.03 0.04

ICON Health 2003 2004 2005 2006 2007 Asset Turnover 1.93 1.72 1.89 2.24 N/A

CFFO/OI 0.41 0.09 -1.23 0.22 N/A CFFO/NOA 0.68 0.12 0.50 0.09 N/A

Total Accruals/Sales 3.78E-

05 0.000217 3.12E-054.2E-

05 N/A

Cybex International 2003 2004 2005 2006 2007 Asset Turnover 0.18 0.19 0.21 0.17 0.15

CFFO/OI 0.30 0.65 2.43 0.53 1.06 CFFO/NOA 0.04 0.37 0.53 0.40 0.27

Total Accruals/Sales 0.02 0.01 0.06 -0.12 0.00

Marine Products 2003 2004 2005 2006 2007 Asset Turnover 2.24 2.41 2.50 2.18 2.06

CFFO/OI 0.62 0.82 0.54 0.89 0.74 CFFO/NOA 0.96 1.60 1.12 1.44 1.03

Total Accruals/Sales -0.01 0.02 0.01 0.01 -0.04

180

Fountain

Powerboats 2003 2004 2005 2006 2007 Asset Turnover 3.93 3.46 5.47 6.36 9.01

CFFO/OI 1.60 -2.26 3.35 1.22 0.75 CFFO/NOA 0.21 -0.26 0.34 0.16 -0.13

Total Accruals/Sales 0.05 -0.08 0.07 0.00 0.04 Liquidity Ratios:

Current Ratio 2003 2004 2005 2006 2007 AVG Brunswick 1.56 1.67 1.71 1.61 1.63 1.64



Quick Asset Ratio 2003 2004 2005 2006 2007 AVG

Brunswick 1.22 1.4 1.44 1.27 1.4 1.34 Marine Products 2.78 2.86 2.83 3.4 0.83 2.4

ICON 1.04 0.7 0.67 0.24 N/A 0.66 Cybex 0.49 0.74 0.72 0.87 0.92 0.67


Working Capital

Turnover 2003 2004 2005 2006 2007 AVG Brunswick 6.73 6.19 6.37 7.21 6.93 6.69

Marine Products 4.22 4.07 4.44 3.42 6.76 4.63 ICON 5.31 10.06 8.75 ‐4.63 N/A 4.87

Cybex ‐

18.48 31.17 25.6 9.03 8.06 8.6

Fountain Powerboats ‐

13.15 10.44 36.29 20.3 ‐200.3 ‐25.98

181

A/R Turnover 2003 2004 2005 2006 2007 AVG Brunswick 9.25 11.03 11.23 11.34 11.51 10.87



DSO 2003 2004 2005 2006 2007 AVG

Brunswick 39.46 33.09 32.5 32.19 31.71 33.79 Marine Products 48.86 233.29 74.29 87.71 69 103.96

ICON 64.16 63.21 79.94 51.69 N/A 64.75 Cybex 55.66 56.08 58.33 58.37 52.36 56.97

Fountain Powerboats 14 25.47 11.26 15.69 19.56 19.27

Inventory Turnover 2003 2004 2005 2006 2007 AVG


ICON 4.75 4.41 3.36 4.3 N/A 4.21 Cybex 7.53 8.19 7.9 8.34 6.93 7.5


DSI 2003 2004 2005 2006 2007 AVG


ICON 76.88 82.73 108.55 84.88 N/A 88.26 Cybex 48.49 44.56 46.18 43.76 52.65 49.21


Cash to Cash cycle 2003 2004 2005 2006 2007 AVGBrunswick 112.2 106.4 103.5 103.1 104.8 106Marine Products 104.2 283.8 122.6 141.1 132.1 156.8ICON Health 141 145.9 188.5 136.6 153Cybex 104.2 100.6 104.5 102.1 105 102.9Fountain Powerboats 42.7 60 50.5 54.1 60.2 51.8

182

Profitability Ratios:

Gross Profit Margin 2003 2004 2005 2006 2007 AVG Brunswick 0.27 0.32 0.27 0.21 0.2 0.25



Operating Expense Ratio 2003 2004 2005 2006 2007 AVG Brunswick 0.17 0.19 0.15 0.13 0.15 0.16



Operating Profit Margin 2003 2004 2005 2006 2007 AVG


ICON 0.08 0.07 ‐0.03 0.02 N/A 0.04 Cybex 0.02 0.08 0.03 0.09 0.07 0.06

Fountain Powerboats 0.06 0.03 0.03 0.03 ‐0.03 0.02 Adjusted Brunswick 0.24 0.25 0.24 0.22 0.2 0.23

Net Profit Margin 2003 2004 2005 2006 2007 AVG


ICON 0.03 0.02 ‐0.11 ‐0.06 N/A ‐0.03 Cybex ‐0.02 0.04 0 0.17 0.08 0.05

Fountain Powerboats 0.02 0.01 0.01 0.03 ‐0.06 0 Adjusted Brunswick 0.02 0.03 0.05 0.02 0 0.02

183

Asset Turnover 2003 2004 2005 2006 2007 AVG Brunswick 1.71 1.57 1.36 1.13 0.93 1.34

Marine Products 2.73 2.92 2.48 2.4 1.97 2.5 ICON 2.39 2.07 1.56 1.85 N/A 1.97 Cybex 1.69 1.94 2.1 2.28 2 2


ROA 2003 2004 2005 2006 2007 AVG


ICON 0.06 0.05 ‐0.2 ‐0.11 N/A ‐0.05 Cybex ‐0.03 0.06 0 0.36 0.13 0.1

Fountain Powerboats 0.03 0.02 0.02 0.07 ‐0.13 0 Adjusted Brunswick 0.02 0.05 0.07 0.03 ‐0.01 0.03

ROE 2003 2004 2005 2006 2007 AVG


ICON 0.06 0.05 ‐0.2 ‐0.11 N/A ‐0.05 Cybex ‐0.73 0.54 0 1.24 0.21 0.25

Fountain Powerboats 0.22 0.12 0.13 0.37 ‐0.55 0.06 Adjusted Brunswick 0.07 0.14 0.2 0.07 ‐0.01 0.09

Capital Structure Ratios: DEBT TO EQUITY RATIO 2003 2004 2005 2006 2007 AVG


ICON 0.99 1.05 0.89 0.98 N/A 0.78 Cybex 19.7 6.43 2.5 1.71 0.94 6.26


184

TIMES INTEREST EARNED 2003 2004 2005 2006 2007 AVG


ICON 2.7 2.98 1.22 ‐0.67 N/A 1.25 Cybex 0.5 1.89 0.84 3.74 6.23 2.64

Fountain Powerboats ‐2.58 1.76 1.46 2.25 ‐2.42 0.09 Adjusted Brunswick 1.41 2.61 5.72 7.17 3.11 4.01

DEBT SERVICE MARGIN 2003 2004 2005 2006 2007 AVG Brunswick 0.33 0.35 0.31 0.24 0.24 0.29

Marine Products 18.32 18.39 11.33 13.78 16.12 15.59 ICON ‐0.31 0.08 ‐0.28 ‐0.03 N/A ‐0.11 Cybex 0.03 0.36 0.79 1.33 2.42 0.99

Fountain Powerboats 0.34 ‐0.46 0.33 0.18 ‐0.14 0.05

Z‐Score 2003 2004 2005 2006 2007 AVG


ICON 2.58 2.65 2.18 1.04 N/A 2.11 Cybex 2.55 3.48 3.59 4.6 3.73 3.59


IGR 2003 2004 2005 2006 2007 AVG

Brunswick 4% 7% 9% 6% 2% 6% Marine Products 20% 20% 17% 10% 8% 15%

ICON 6% 5% ‐20% ‐11% N/A ‐5% Cybex 6% 0% 36% 13% 10% 13%

Fountain Powerboats 3% 2% 2% 7% ‐13% 0% Adjusted Brunswick 5% 7% 3% ‐1% 3% 4%

185

SGR 2003 2004 2005 2006 2007 AVG Brunswick 12% 22% 23% 13% 4% 15%

Marine Products 25% 27% 21% 13% 10% 19% ICON 13% 10% ‐37% ‐21% N/A ‐9% Cybex 58% 0% 124% 21% 19% 44%

Fountain Powerboats 19% 12% 11% 38% ‐56% 5% Adjusted Brunswick 16% 22% 10% ‐3% 10% 11%

Weighted Average Cost of Debt:

Liabilities Rate Weight Weight Rate 2007

Current maturities of LTD 6.33% 0.00003 0.00% 0.8

Accounts Payable 6.50% 0.177 1.15% 473.3 Accrued Expenses 4.75% 0.347 1.65% 858.1

Total Current Liabilities 1296.1

Long Term Debt 7.42% 0.294 2.18% 727.4 Post‐retirement Benefits 6.71% 0.078 0.52% 192.8 Deferred Income Taxes 4.02% 0.005 0.02% 12.3

Other LT liabilities 6.50% 0.099 0.64% 244

Total Liabilities 6.17% 2472.7 Weighted Average Cost of Capital:

MVD/MVA Cost of Debt Tax rate MVE/MVA Cost of Equity WACC WACC(bt) 43.96% 6.17% 56.04% 14.19% 10.67%


Adj WACC(at) 45.52% 6.27% 65.00% 54.48% 14.19% 9.59%

186

Upper WACC MVD/MVA Cost of Debt Tax rate MVE/MVA Cost of Equity WACC WACC(bt) 43.96% 6.17% 56.04% 17.42% 12.47%


Adj WACC(at) 45.52% 6.27% 65.00% 54.48% 17.42% 11.35% Lower WACC MVD/MVA Cost of Debt Tax rate MVE/MVA Cost of Equity WACCWACC(bt) 43.96% 6.17% 56.04% 9.86% 8.24%

Adj WACC(bt) 45.52% 6.27% 54.48% 9.86% 8.23% WACC(at) 43.96% 6.17% 65.00% 56.04% 9.86% 7.29%

Adj WACC(at) 45.52% 6.27% 65.00% 54.48% 9.86% 7.23%

187

Forecasted Income Statement: BRUNSWICK CORPORATIONForecasted Income StatementStatement of Income Data:

Actual Finances Forecasted FinancialsFiscal year 2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017(In millions, except per share data)

recession ‐11.60%Net sales 3711.90 4128.70 5229.30 5923.80 5665.00 5671.20 post‐recession 10.70% 4819.82 4260.72 4716.62 5221.29 5779.97 6398.43 7083.06 7840.95 8679.93 9608.68Cost of Sales 2852.00 3131.60 3915.10 4499.20 4439.30 4528.10 80.00% 3909.11 3278.70 3629.52 4017.88 4447.79 4923.70 5450.54 6033.75 6679.36 7394.05Gross Profit 859.90 997.10 1314.20 1424.60 1225.70 1143.10 23.05% 910.71 982.02 1087.10 1203.41 1332.18 1474.72 1632.52 1807.20 2000.57 2214.63Selling, general and administrative expense 560.50 632.50 782.40 801.30 752.30 835.00 787.81 638.68 707.02 782.67 866.42 959.12 1061.75 1175.36 1301.12 1440.34Research and development expense 102.80 118.20 131.10 144.70 132.20 134.50 2.55% 122.91 108.65 120.27 133.14 147.39 163.16 180.62 199.94 221.34 245.02Litigation charge 25.00 66.40

Operating income 196.60 221.40 400.70 478.60 341.20 107.20 6.00% 289.19 255.64 283.00 313.28 346.80 383.91 424.98 470.46 520.80 576.52Equity earnings 9.90 18.10 18.10 14.90 21.30Investment sale gain 38.70Other expense, net 8.30 0.60 5.20 1.40 1.90 7.80Earnings before interest and income taxes 103.50 230.70 413.60 534.00 354.20 136.30Interest expense 43.30 41.00 45.20 53.20 60.50 52.30

Interest income 11.40 10.10 15.00 16.00 8.70Earnings before income taxes 161.60 201.10 378.50 495.80 309.70 92.70Income tax provision 58.10 65.90 108.70 110.40 46.50 13.10

1.07%Net income 78.40 135.20 269.80 385.40 263.20 79.60 2.69% 51.58 114.76 127.04 140.63 155.68 172.33 190.77 211.19 233.78 258.80

188

Common Size Income Statement: Common Size Income Statement

Actual Finances Forecasted FinancialsFiscal year 2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

IGR 0.02 0.03 0.06 0.08 0.04 0.01SGR 0.07 0.08 0.19 0.19 0.10 0.01

recession ‐11.60%Sales Growth Percent 10.12% 11.23% 26.66% 13.28% ‐4.37% 0.11% post recession 10.67%Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of sales 76.83% 75.85% 74.87% 75.95% 78.36% 79.84% 81.10% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95%Gross Profit 23.17% 24.15% 25.13% 24.05% 21.64% 20.16% 23.05% 18.90% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05%Selling, general and administrative expense 15.10% 15.32% 14.96% 13.53% 13.28% 14.72% 16.35% 14.99% 14.99% 14.99% 14.99% 14.99% 14.99% 14.99% 14.99% 14.99%Research and development expense 2.77% 2.86% 2.51% 2.44% 2.33% 2.37% 2.55% 2.55% 2.55% 2.55% 2.55% 2.55% 2.55% 2.55% 2.55% 2.55% 2.55%Litigation charge 0.00% 0.61% 0.00% 0.00% 0.00% 1.17%

Operating earnings 5.30% 5.36% 7.66% 8.08% 6.02% 1.89% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%Equity earnings 0.00% 0.24% 0.35% 0.31% 0.26% 0.38%Investment sale gain 0.00% 0.00% 0.00% 0.65% 0.00% 0.00%Other expense, net 0.22% 0.01% 0.10% 0.02% 0.03% 0.14%Earnings before interest and income taxes 2.79% 5.59% 7.91% 9.01% 6.25% 2.40%Interest expense 1.17% 0.99% 0.86% 0.90% 1.07% 0.92%

Interest income 0.00% 0.28% 0.19% 0.25% 0.28% 0.15%Earnings before income taxes 4.35% 4.87% 7.24% 8.37% 5.47% 1.63%Income tax provision 1.57% 1.60% 2.08% 1.86% 0.82% 0.23%

Net earnings 2.11% 3.27% 5.16% 6.51% 4.65% 1.40% 2.69% 1.07% 2.69% 2.69% 2.69% 2.69% 2.69% 2.69% 2.69% 2.69% 2.69%

189

Forecasted Income Statement: BRUNSWICK CORPORATIONForecasted Income StatementStatement of Income Data:

Adjusted Income Statement Forecasted FinancialsFiscal year 2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017(In millions)

‐11.60%Net sales 3711.90 4128.70 5229.30 5923.80 5665.00 5671.20 10.70% 4819.82 4260.72 4716.62 5221.29 5779.97 6398.43 7083.06 7840.95 8679.93 9608.68Cost of Sales 2852.00 3131.60 3915.10 4499.20 4439.30 4528.10 3909.11 3278.70 3629.52 4017.88 4447.79 4923.70 5450.54 6033.75 6679.36 7394.05Gross Profit 859.90 997.10 1314.20 1424.60 1225.70 1143.10 23.05% 910.71 982.02 1087.10 1203.41 1332.18 1474.72 1632.52 1807.20 2000.57 2214.63SG&A Exp 560.50 632.50 782.40 801.30 752.30 835.00Operating lease conversion 43.3 48.2 53.2 44.5 50.5 53.40SG&A Net 517.20 584.30 729.20 756.80 701.80 781.60R &D Exp. 102.80 118.20 131.10 144.70 132.20 134.50Litigation charge 25.00 66.40Impairment effect ‐90.56 ‐103.02 ‐124.96 ‐123.46 ‐132.72 ‐135.78Ammoritzation of capital leases 53.24 51.14 51.66 49.97 50.50 49.48 60Operating earnings 96.10 115.44 277.28 349.67 208.48 ‐24.66 4% 172.60 152.58 168.91 186.98 206.99 229.13 253.65 280.79 310.84 344.10Equity earnings 9.90 18.10 18.10 14.90 21.30Investment sale gain 38.70Other expense, net 8.30 0.60 5.20 1.40 1.90 7.80EBIT 87.80 124.74 290.18 405.07 221.48 ‐11.16Captial lease interest effect 6.76 8.86 8.34 10.03 9.50 10.52Interest expense 43.30 41.00 45.20 53.20 60.50 52.30Interest income 11.40 10.10 15.00 16.00 8.70Earnings before income taxes 44.50 95.14 255.08 366.87 176.98 ‐54.76Income tax provision 18.51 33.35 86.20 60.17 60.17 ‐20.33 1%Net earnings 25.99 61.79 168.87 306.70 116.80 ‐34.43 2% 51.58 85.63 94.79 104.93 116.16 128.59 142.35 157.58 174.44 193.11

190

Common Size Income Statement: Common Size Income Statement

Actual Finances Forecasted FinancialsFiscal year 2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

IGR 0.01 0.04 0.06 0.02 0.00 0.02SGR 0.16 0.22 0.10 ‐0.03 0.10

Sales Growth PercentNet sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of Sales 76.83% 75.85% 74.87% 75.95% 78.36% 79.84% 81.10% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95% 76.95%Gross Profit 23.17% 24.15% 25.13% 24.05% 21.64% 20.16% 23.05% 18.90% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05% 23.05%Selling, general and administrative expense 15.10% 15.32% 14.96% 13.53% 13.28% 14.72%Operating lease conversion 1.17% 1.17% 1.02% 0.75% 0.89% 0.94%SG&A Net 13.93% 14.15% 13.94% 12.78% 12.39% 13.78%Research and development expense 2.77% 2.86% 2.51% 2.44% 2.33% 2.37%Litigation charge 0.00% 0.61% 0.00% 0.00% 0.00% 1.17%Impairment effect ‐2.44% ‐2.50% ‐2.39% ‐2.08% ‐2.34% ‐2.39%Ammoritzation of capital leases 1.43% 1.24% 0.99% 0.84% 0.89% 0.87%Operating earnings 2.59% 2.80% 5.30% 5.90% 3.68% ‐0.43% 3.58% 3.58% 3.58% 3.58% 3.58% 3.58% 3.58% 3.58% 3.58% 3.58%Equity earnings 0.00% 0.24% 0.35% 0.31% 0.26% 0.38%Investment sale gain 0.00% 0.00% 0.00% 0.65% 0.00% 0.00%Other expense, net 0.22% 0.01% 0.10% 0.02% 0.03% 0.14%Earnings before interest and income taxes 2.37% 3.02% 5.55% 6.84% 3.91% ‐0.20% 3.58%Captial lease interest effect 0.18% 0.21% 0.16% 0.17% 0.17% 0.19%Interest expense 1.17% 0.99% 0.86% 0.90% 1.07% 0.92%Interest income 0.00% 0.28% 0.19% 0.25% 0.28% 0.15%Earnings before income taxes 1.20% 2.30% 4.88% 6.19% 3.12% ‐0.97%Income tax provision 0.50% 0.81% 1.65% 1.02% 1.06% ‐0.36%Net earnings 0.70% 1.50% 3.23% 5.18% 2.06% ‐0.61% 2.01% 1.07% 2.01% 2.01% 2.01% 2.01% 2.01% 2.01% 2.01% 2.01% 2.01%

191

Forecasted Balance Sheet: BRUNSWICK CORPORATION


AssetsCurrent assetsCash and cash equivalents, at cost, which approximates market 351.40 345.90 499.80 487.70 283.40 331.40 9.91Accounts and notes receivable, net 401.40 374.40 463.20 522.40 492.30 572.40 10.87 486.47 391.97 433.91 480.34 531.74 588.63 651.62 721.34 798.52 883.96Finished goods 272.50 325.30 389.90 426.20 410.40 446.70Work‐in‐process 201.60 205.70 260.50 298.50 308.40 323.40Raw materials 72.80 92.80 136.40 149.90 143.10 136.60Net inventories 546.90 623.80 786.80 874.60 861.90 906.70Prepaid income taxes 305.10 302.30 292.70 274.80 249.90 249.90Prepaid expenses and other 55.40 68.80 56.20 75.50 85.40 53.90Total Current Assets 1660.20 1715.20 2098.70 2235.00 2078.40 2114.30 49.15% 1805.54 1596.10 1766.88 1955.93 2165.22 2396.90 2653.37 2937.28 3251.56 3599.48Land 68.30 70.30 68.80 76.70 91.70 103.50Buildings and improvements 478.20 505.70 548.50 609.20 631.60 697.40Equipment 998.20 1042.50 1071.80 1125.30 1181.70 1205.70

Total land, buildings and improvements and equipment 1544.70 1618.50 1689.10 1811.20 1905.00 2006.60Accumulated depreciation ‐871.00 ‐912.40 ‐942.80 ‐994.20 ‐1046.30 ‐1117.80

Net land, buildings and improvements and equipment 673.70 706.10 746.30 817.00 858.70 888.80Unamortized product tooling costs 119.00 121.00 130.10 153.20 156.20 164.00Net PP&E 792.70 827.10 876.40 970.20 1014.90 1052.80 5.39 894.75 790.96 875.59 969.28 1072.99 1187.80 1314.90 1455.59 1611.34 1783.75Other assetsGoodwill 452.80 515.10 624.80 661.80 663.60 678.90Other intangibles 117.50 184.60 328.00 361.30 322.60 245.60Investments 95.40 148.10 182.90 143.60 142.90 132.10Other long‐term assets 196.10 212.40 235.60 249.60 195.10 141.90Other assets 1198.50 1357.00 1416.30 1371.30 1060.20 861.80 50.85%Total Non‐Current Assets 1654.50 1887.30 2247.70 2386.50 2371.90 2251.30 1867.99 1651.30 1827.99 2023.59 2240.11 2479.80 2745.14 3038.87 3364.03 3723.98Total Assets 3314.70 3602.50 4346.40 4621.50 4450.30 4365.60 asset turnover 1.31 3673.53 3247.40 3594.87 3979.52 4405.33 4876.70 5398.51 5976.15 6615.60 7323.46

Liabilities and shareholders’ equityCurrent liabilitiesShort‐term debt, including current maturities of long‐term debt 28.90 23.80 10.70 1.10 0.70 0.80Accounts payable 291.20 321.30 387.90 472.20 448.60 437.30Accrued expenses 685.50 756.70 855.20 831.90 748.90 858.10Current liabilities 1005.60 1101.80 1253.80 1305.20 1198.20 1296.20 current ratio 1.64 1100.94 973.23 1077.36 1192.64 1320.26 1461.52 1617.91 1791.02 1982.66 2194.81Debt 589.50 583.80 728.40 723.70 725.70 727.40Income taxes 144.10 167.60 180.30 147.50 86.30 12.30Postretirement and postemployment benefits 306.90 232.00 236.30 215.60 224.20 192.80Other 166.80 194.30 235.30 250.70 240.40 244.00Long‐term liabilities 1207.30 1177.70 1380.30 1337.50 1276.60 1176.50 679.00 315.05 483.14 666.36 866.18 1084.22 1322.26 1576.94 1850.30 2145.97Total Liabilites 2212.90 2279.50 2634.10 2642.70 2474.80 2472.70 1779.93 1288.28 1560.51 1859.00 2186.43 2545.74 2940.17 3367.96 3832.96 4340.78

Shareholders’ equityCommon stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares 76.90 76.90 76.90 76.90 76.90 76.90Additional paid‐in capital 308.90 310.00 358.80 368.30 378.70 409.00Retained earnings 1112.70 1202.00 1413.70 1741.90 1820.70 1888.40 1889.09 1954.62 2029.86 2116.02 2214.40 2326.46 2453.84 2603.69 2778.13 2941.17Treasury stock, at cost: 10,408,000 and 12,377,000 shares ‐228.60 ‐183.60 ‐76.50 ‐136.00 ‐315.50 ‐428.70Unamortized ESOP expense and other ‐22.20 ‐10.10 ‐6.30 ‐6.20 0.00 0.00Accumulated other comprehensive income (loss): Foreign currency translation ‐9.90 9.50 32.20 14.10 38.80 50.80Minimum pension liability ‐136.50 ‐90.70 ‐97.70 ‐88.00 ‐121.70 ‐92.60Unrealized investment gains 2.70 11.40 23.20 ‐0.10 ‐0.20 1.50Unrealized losses on derivatives ‐2.10 ‐2.40 ‐12.00 7.90 5.30 ‐3.20Total accumulated other comprehensive loss ‐145.80 ‐72.20 ‐54.30 ‐66.10 ‐89.00 ‐52.70Shareholders’ equity 1101.80 1323.00 1712.30 1978.80 1871.80 1892.90 1893.59 1959.12 2034.36 2120.52 2218.90 2330.96 2458.34 2608.19 2782.63 2982.69

Total liabilities and shareholders’ equity 3314.70 3602.50 4346.40 4621.50 4450.30 4365.60 3673.53 3247.40 3594.87 3979.52 4405.33 4876.70 5398.51 5976.15 6615.60 7323.46


192

Common Size Balance Sheet: Common Size Balance Sheet

Actual Finances Forecasted Financials2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

AssetsCurrent assetsCash and cash equivalents 8.05% 7.77% 10.81% 11.22% 7.87% 10.00%Accounts and notes receivable, net 9.19% 8.41% 10.02% 12.02% 13.67% 17.27% 13.24% 12.07% 12.07% 12.07% 12.07% 12.07% 12.07% 12.07% 12.07% 12.07%Finished goods 6.24% 7.31% 8.44% 9.81% 11.39% 13.48%Work‐in‐process 4.62% 4.62% 5.64% 6.87% 8.56% 9.76%Raw materials 1.67% 2.09% 2.95% 3.45% 3.97% 4.12%Net inventories 12.53% 14.02% 17.02% 20.12% 23.93% 27.35%Prepaid income taxes 6.99% 6.79% 6.33% 6.32% 6.94% 7.54%Prepaid expenses and other 1.27% 1.55% 1.22% 1.74% 2.37% 1.63%Total Current Assets 38.03% 38.54% 45.41% 51.42% 57.69% 63.79% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15%Land 1.56% 1.58% 1.49% 1.76% 2.55% 3.12%Buildings and improvements 10.95% 11.36% 11.87% 14.02% 17.53% 21.04%Equipment 22.87% 23.43% 23.19% 25.89% 32.80% 36.37%

Total land, buildings and improvements and equipment 35.38% 36.37% 36.55% 41.67% 52.88% 60.54%Accumulated depreciation ‐19.95% ‐20.50% ‐20.40% ‐22.87% ‐29.04% ‐33.72%

Net land, buildings and improvements and equipment 15.43% 15.87% 16.15% 18.80% 23.84% 26.81%Unamortized product tooling costs 2.73% 2.72% 2.82% 3.52% 4.34% 4.95%Net PPE 18.16% 18.59% 18.96% 22.32% 28.17% 31.76% 24.36% 24.36% 24.36% 24.36% 24.36% 24.36% 24.36% 24.36% 24.36% 24.36%Other assetsGoodwill 10.37% 11.57% 13.52% 15.23% 18.42% 20.48%Other intangibles 2.69% 4.15% 7.10% 8.31% 8.95% 7.41%Investments 2.19% 3.33% 3.96% 3.30% 3.97% 3.99%Other long‐term assets 4.49% 4.77% 5.10% 5.74% 5.42% 4.28%Other assets 27.45% 30.49% 30.65% 31.55% 29.43% 26.00%Total Noncurrent Assets 49.91% 52.39% 51.71% 51.64% 53.30% 51.57% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85%Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Liabilities and shareholders’ equityCurrent liabilitiesShort‐term debt, including current maturities of long‐term debt 1.31% 1.04% 0.41% 0.04% 0.03% 0.03%Accounts payable 13.16% 14.10% 14.73% 17.87% 18.13% 17.69%Accrued expenses 30.98% 33.20% 32.47% 31.48% 30.26% 34.70%Current liabilities 45.44% 48.34% 47.60% 49.39% 48.42% 52.42% 61.85% 75.54% 69.04% 64.16% 60.38% 57.41% 55.03% 53.18% 51.73% 50.56%Debt 26.64% 25.61% 27.65% 27.38% 29.32% 29.42%Income taxes 6.51% 7.35% 6.84% 5.58% 3.49% 0.50%Postretirement and postemployment benefits 13.87% 10.18% 8.97% 8.16% 9.06% 7.80%Other 7.54% 8.52% 8.93% 9.49% 9.71% 9.87%Long‐term liabilities 54.56% 51.66% 52.40% 50.61% 51.58% 47.58% 38.15% 24.46% 30.96% 35.84% 39.62% 42.59% 44.97% 46.82% 48.27% 49.44%Total Liabilites 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Shareholders’ equityCommon stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares 6.98% 5.81% 4.49% 3.89% 4.11% 4.06%Additional paid‐in capital 28.04% 23.43% 20.95% 18.61% 20.23% 21.61%Retained earnings 100.99% 90.85% 82.56% 88.03% 97.27% 99.76% 99.76% 99.77% 99.78% 99.79% 99.80% 99.81% 99.82% 99.83% 99.84% 98.61%Treasury stock, at cost: 10,408,000 and 12,377,000 shares ‐20.75% ‐13.88% ‐4.47% ‐6.87% ‐16.86% ‐22.65%Unamortized ESOP expense and other ‐2.01% ‐0.76% ‐0.37% ‐0.31% 0.00% 0.00%Accumulated other comprehensive income (loss): Foreign currency translation ‐0.90% 0.72% 1.88% 0.71% 2.07% 2.68%Minimum pension liability ‐12.39% ‐6.86% ‐5.71% ‐4.45% ‐6.50% ‐4.89%Unrealized investment gains 0.25% 0.86% 1.35% ‐0.01% ‐0.01% 0.08%Unrealized losses on derivatives ‐0.19% ‐0.18% ‐0.70% 0.40% 0.28% ‐0.17%Total accumulated other comprehensive loss ‐13.23% ‐5.46% ‐3.17% ‐3.34% ‐4.75% ‐2.78%Shareholders’ equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

193

Forecasted Balance Sheet: BRUNSWICK CORPORATION


AssetsCurrent assets

Cash and cash equivalents, at cost, which approximates market 351.40 345.90 499.80 487.70 283.40 331.40 9.91Accounts and notes receivable, net 401.40 374.40 463.20 522.40 492.30 572.40 10.71 486.47 397.92 440.50 487.63 539.81 597.57 661.51 732.29 810.64 897.38Finished goods 272.50 325.30 389.90 426.20 410.40 446.70Work‐in‐process 201.60 205.70 260.50 298.50 308.40 323.40Raw materials 72.80 92.80 136.40 149.90 143.10 136.60Net inventories 546.90 623.80 786.80 874.60 861.90 906.70Prepaid income taxes 305.10 302.30 292.70 274.80 249.90 249.90Prepaid expenses and other 55.40 68.80 56.20 75.50 85.40 53.90Total Current Assets 1660.20 1715.20 2098.70 2235.00 2078.40 2114.30 0.49 1811.40 1601.28 1772.62 1962.29 2172.25 2404.69 2661.99 2946.82 3262.13 3611.18Land 68.30 70.30 68.80 76.70 91.70 103.50Buildings and improvements 478.20 505.70 548.50 609.20 631.60 697.40Equipment 998.20 1042.50 1071.80 1125.30 1181.70 1205.70Total land, buildings and improvements and equipment 1544.70 1618.50 1689.10 1811.20 1905.00 2006.60Accumulated depreciation ‐871.00 ‐912.40 ‐942.80 ‐994.20 ‐1046.30 ‐1117.80

Net land, buildings and improvements and equipment 673.70 706.10 746.30 817.00 858.70 888.80

Leased Assets 103.72 135.88 127.84 153.86 145.65 161.34Unamortized product tooling costs 119.00 121.00 130.10 153.20 156.20 164.00

896.42 962.98 1004.24 1124.06 1160.55 1214.14Net property 792.70 827.10 876.40 970.20 1014.90 1052.80 3.33 1064.41 940.94 1041.62 1153.08 1276.46 1413.04 1564.23 1731.60 1916.89 2121.99Other assetsGoodwill 452.80 515.10 624.80 661.80 663.60 678.90Impairment effect ‐90.56 ‐103.02 ‐124.96 ‐123.46 ‐132.72 ‐135.78Goodwill,net 362.24 412.08 499.84 538.34 530.88 543.12Other intangibles 117.50 184.60 328.00 361.30 322.60 245.60Investments 95.40 148.10 182.90 143.60 142.90 132.10Other long‐term assets 196.10 212.40 235.60 249.60 195.10 141.90Other assets 771.24 957.18 1246.34 1292.84 1191.48 1062.72Total Noncurrent Assets 1667.66 1920.16 2250.58 2416.90 2352.03 2276.86 0.51 1874.06 1656.67 1833.93 2030.16 2247.39 2487.86 2754.06 3048.74 3374.96 3736.08Total Assets 3327.86 3635.36 4349.28 4651.90 4430.43 4391.16 1.31 3685.46 3257.95 3606.55 3992.45 4419.64 4892.54 5416.05 5995.56 6637.09 7347.26

Liabilities and shareholders’ equityCurrent liabilitiesShort‐term debt, including current maturities of long‐term debt 28.90 23.80 10.70 1.10 0.70 0.80Accounts payable 291.20 321.30 387.90 472.20 448.60 437.30Accrued expenses 685.50 756.70 855.20 831.90 748.90 858.10Current liabilities 1005.60 1101.80 1253.80 1305.20 1198.20 1296.20 1.66 1091.21 964.63 1067.84 1182.10 1308.59 1448.61 1603.61 1775.19 1965.14 2175.41Debt 589.50 583.80 728.40 723.70 725.70 727.40Income taxes 144.10 167.60 180.30 147.50 86.30 12.30Postretirement and postemployment benefits 306.90 232.00 236.30 215.60 224.20 192.80Other 166.80 194.30 235.30 250.70 240.40 244.00Long term leased liabilities 103.72 135.88 127.84 153.86 145.65 161.34Long‐term liabilities 1207.30 1177.70 1380.30 1337.50 1276.60 1337.84Total Liabilites 2212.90 2279.50 2634.10 2642.70 2474.80 2634.04 1931.53 1467.62 1773.22 2108.66 2476.99 2881.57 3326.12 3809.39 4335.81 4911.61

Shareholders’ equityCommon stock 76.90 76.90 76.90 76.90 76.90 76.90Additional paid‐in capital 308.90 310.00 358.80 368.30 378.70 409.00Retained earnings 1112.70 1202.00 1413.70 1741.90 1820.70 1888.40Impairment effect ‐90.56 ‐103.02 ‐124.96 ‐123.46 ‐132.72 ‐135.78Leased effect ‐18.24 ‐3.54 ‐3.66 ‐6.87 ‐1.90 ‐3.88Retained earnings, net 1003.90 1095.44 1285.08 1611.57 1686.08 1748.74 1749.43 1785.83 1828.83 1879.29 1938.15 2006.47 2085.43 2181.67 2296.78 2431.14Treasury stock, at cost: 10,408,000 and 12,377,000 shares ‐228.60 ‐183.60 ‐76.50 ‐136.00 ‐315.50 ‐428.70Unamortized ESOP expense and other ‐22.20 ‐10.10 ‐6.30 ‐6.20 0.00 0.00Accumulated other comprehensive income (loss): Foreign currency translation ‐9.90 9.50 32.20 14.10 38.80 50.80Minimum pension liability ‐136.50 ‐90.70 ‐97.70 ‐88.00 ‐121.70 ‐92.60Unrealized investment gains 2.70 11.40 23.20 ‐0.10 ‐0.20 1.50Unrealized losses on derivatives ‐2.10 ‐2.40 ‐12.00 7.90 5.30 ‐3.20Total accumulated other comprehensive loss ‐145.80 ‐72.20 ‐54.30 ‐66.10 ‐89.00 ‐52.70Shareholders’ equity 993.10 1216.44 1583.68 1848.47 1737.18 1753.24 1753.93 1790.33 1833.33 1883.79 1942.65 2010.97 2089.93 2186.17 2301.28 2435.64Total liabilities and shareholders’ equity 3206.00 3495.94 4217.78 4491.17 4211.98 4387.28 3685.46 3257.95 3606.55 3992.45 4419.64 4892.54 5416.05 5995.56 6637.09 7347.26


194

Common Size Balance Sheet: Common Size Balance Sheet

Actual Finances Forecasted Financials2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

AssetsCurrent assetsCash and cash equivalents, at cost, which approximates market 11% 10% 11% 10% 6% 8%Accounts and notes receivable, net 12% 10% 11% 11% 11% 13% 13% 12% 12% 12% 12% 12% 12% 12% 12% 12%Inventories 8% 9% 9% 9% 9% 10%Finished goods 6% 6% 6% 6% 7% 7%Work‐in‐process 2% 3% 3% 3% 3% 3%Raw materials 16% 17% 18% 19% 19% 21%Net inventories

9% 8% 7% 6% 6% 6% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15% 49.15%Prepaid income taxes 2% 2% 1% 2% 2% 1%Prepaid expenses and other 50% 47% 48% 48% 47% 48%Total Current Assets 50% 47% 48% 48% 47% 48% 48.07%

50% 53% 52% 52% 53% 52% 51.93%Property 2% 2% 2% 2% 2% 2%Land 14% 14% 13% 13% 14% 16%Buildings and improvements 30% 29% 25% 24% 27% 27%Equipment 46% 45% 39% 39% 43% 46%Total land, buildings and improvements and equipment ‐26% ‐25% ‐22% ‐21% ‐24% ‐25%Leased Assets 20% 19% 17% 18% 19% 20%Accumulated depreciation 3% 4% 3% 3% 3% 4%Net land, buildings and improvements and equipment 4% 3% 3% 3% 4% 4%Unamortized product tooling costs 27% 26% 23% 24% 26% 28% 28.88% 28.88% 28.88% 28.88% 28.88% 28.88% 28.88% 28.88% 28.88% 28.88%Net property 24% 23% 20% 21% 23% 24%

Other assets 0% 0% 0% 0% 0% 0%Goodwill 14% 14% 14% 14% 15% 15%Impairment effect ‐3% ‐3% ‐3% ‐3% ‐3% ‐3%Goodwill,net 11% 11% 11% 12% 12% 12%Other intangibles 4% 5% 8% 8% 7% 6%Investments 3% 4% 4% 3% 3% 3%Other long‐term assets 6% 6% 5% 5% 4% 3%Other assets 23% 26% 29% 28% 27% 24% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85% 50.85%Total assets 100% 100% 100% 100% 100% 100% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Liabilities and shareholders’ equityCurrent liabilitiesShort‐term debt, including current maturities of long‐term debt 1% 1% 0% 0% 0% 0%Accounts payable 13% 14% 15% 18% 18% 17%Accrued expenses 31% 33% 32% 31% 30% 33%Current liabilities 45% 48% 48% 49% 48% 49% 56% 66% 60% 56% 53% 50% 48% 47% 45% 44%Debt 27% 26% 28% 27% 29% 28%Income taxes 7% 7% 7% 6% 3% 0%Postretirement and postemployment benefits 14% 10% 9% 8% 9% 7%Other 8% 9% 9% 9% 10% 9%Long term leased liabilities 5% 6% 5% 6% 6% 6%Long‐term liabilities 55% 52% 52% 51% 52% 51%Total Liabilites 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Shareholders’ equityCommon stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares 8% 6% 5% 4% 4% 4%Additional paid‐in capital 31% 25% 23% 20% 22% 23%Retained earnings 112% 99% 89% 94% 105% 108%Impairment effect ‐9% ‐8% ‐8% ‐7% ‐8% ‐8%Retained earnings, net 101% 90% 81% 87% 97% 100% 99.74% 99.75% 99.75% 99.76% 99.77% 99.78% 99.78% 99.79% 99.80% 99.82%Treasury stock, at cost: 10,408,000 and 12,377,000 shares ‐23% ‐15% ‐5% ‐7% ‐18% ‐24%Unamortized ESOP expense and other ‐2% ‐1% 0% 0% 0% 0%Accumulated other comprehensive income (loss): 0% 0% 0% 0% 0% 0%Foreign currency translation ‐1% 1% 2% 1% 2% 3%Minimum pension liability ‐14% ‐7% ‐6% ‐5% ‐7% ‐5%Unrealized investment gains 0% 1% 1% 0% 0% 0%Unrealized losses on derivatives 0% 0% ‐1% 0% 0% 0%Total accumulated other comprehensive loss ‐15% ‐6% ‐3% ‐4% ‐5% ‐3%Shareholders’ equity 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Total liabilities and shareholders’ equity 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

195

Statements of Cash Flows: BRUNSWICK CORPORATIONStatements of Cash Flows(in millions) Adjusted Cash Flows Forecasted Cash Flows

2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Cash flows from operating activities Net earnings 78.40 135.20 269.80 385.40 263.20 79.60 51.58 114.76 127.04 140.63 155.68 172.33 190.77 211.19 233.78 252.49 Less: net earnings (loss) from discontinued operations 0.00 0.00 0.00 14.30 ‐129.30 32.00 ‐35.19 Net earnings from continuing operations 78.40 135.20 263.80 371.10 263.20 79.60 248.28 Depreciation and amortization 148.40 150.60 153.60 156.30 167.30 180.10 180.51Change in accounting principle, net of tax 25.10 25.10 Changes in noncash current assets and current liabilities Change in accounts and notes receivable ‐35.10 61.60 ‐72.00 ‐9.50 ‐4.30 ‐45.90 ‐36.45 Change in inventory 35.10 ‐31.50 ‐103.90 ‐22.80 ‐28.70 ‐42.90 ‐62.50 Change in prepaid expenses and other ‐9.70 ‐10.00 7.70 0.90 0.80 3.30 7.89 Change in accounts payable 71.00 6.00 40.30 29.70 9.50 ‐13.50 ‐18.43 Change in accrued expenses 29.50 74.70 74.50 ‐51.90 ‐70.10 102.50 6.95 Income taxes 64.30 ‐19.50 50.10 ‐3.10 ‐25.50 6.40 ‐23.95 Impairment charges 6.00 28.00 10.30 0.00 0.00 66.40 39.22

Other, net ‐0.20 ‐49.10 38.80 8.10 11.31 Net cash provided by operating activities of continuing operations 412.80 395.10 424.40 421.60 351.00 344.10 343.64 Net cash used for operating activities of discontinued operations 0.00 0.00 ‐9.20 11.30 ‐35.70 ‐29.80 ‐34.13 Net cash provided by operating activities 412.80 395.10 415.20 432.90 315.30 314.30 0.06 267.69 236.64 261.96 289.99 321.01 355.36 393.39 435.48 482.07 309.51Cash flows from investing activities Capital expenditures ‐112.60 ‐159.80 ‐163.80 ‐223.80 ‐205.10 ‐207.70 ‐245.94 Acquisitions of businesses, net of cash acquired ‐8.90 ‐39.30 ‐248.20 ‐130.30 ‐86.20 ‐6.20 ‐87.45 Investments ‐21.20 ‐177.30 ‐16.20 ‐18.10 6.10 4.10 30.38 Proceeds from investment sale 0.00 0.00 0.00 57.90 0.00 0.00 15.44 Proceeds from the sale of property, plant and equipment 13.20 7.50 13.40 13.40 7.20 10.10 9.16 Other, net ‐0.20 ‐3.00 2.00 ‐1.20 ‐0.40 25.60 17.16 Net cash used for investing activities of continuing operations ‐129.70 ‐371.90 ‐412.80 ‐302.10 ‐278.40 ‐174.10 ‐261.25 Net cash provided by (used for) investing activities of discontinued operations 0.00 0.00 ‐27.10 ‐20.70 ‐5.50 75.60 40.51 Net cash used for investing activities ‐129.70 ‐371.90 ‐439.90 ‐322.80 ‐283.90 ‐98.50 ‐0.04 ‐202.97 ‐179.43 ‐198.63 ‐219.88 ‐243.41 ‐269.45 ‐298.28 ‐330.20 ‐365.53 ‐404.64

Cash flows from financing activities Net repayments of commercial paper and other short‐term debt ‐9.40 1.80 ‐8.80 ‐0.60 ‐0.20 0.00 2.05 Net proceeds from issuance of long‐term debt 0.00 0.00 152.30 1.30 250.30 0.70 127.77 Payments of long‐term debt including current maturities ‐26.20 ‐24.50 ‐6.30 ‐6.70 ‐251.10 ‐0.90 ‐107.99 Cash dividends paid ‐45.10 ‐45.90 ‐58.10 ‐57.30 ‐55.00 ‐52.60 50.89 49.24 51.79 54.47 57.30 60.27 63.40 61.34 59.34 95.76 Stock repurchases 0.00 0.00 0.00 ‐76.00 ‐195.60 ‐125.80 ‐195.41 Stock options exercised 40.30 39.90 99.50 17.10 15.90 10.80 7.06 Net cash used for financing activities of continuing operations ‐40.40 ‐28.70 178.60 ‐122.20 ‐235.70 ‐167.80 ‐225.25 Net cash used for financing activities of discontinued operations 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Net cash used for financing activities ‐40.40 ‐28.70 178.60 ‐122.20 ‐235.70 ‐167.80 ‐212.88 ‐255.92 ‐307.67 ‐369.88 ‐444.67 ‐534.58 ‐642.67 ‐772.62 ‐928.84 ‐1116.65Net increase (decrease) in cash and cash equivalents 242.70 ‐5.50 153.90 ‐12.10 ‐204.30 48.00 ‐136.47Cash and cash equivalents at January 1 108.50 351.40 345.90 499.80 487.70 283.40 489.85Cash and cash equivalents at December 31 351.20 345.90 499.80 487.70 283.40 331.40 353.37

0.11 Net cash provided by operating activities 413.00 395.10 415.20 432.90 315.30 314.30 0.06 267.69 236.64 261.96 289.99 321.01 355.36 393.39 435.48 482.07 309.45 Net cash used for investing activities ‐129.70 ‐371.90 ‐439.90 ‐322.80 ‐283.90 ‐98.50 ‐0.04 ‐202.97 ‐179.43 ‐198.63 ‐219.88 ‐243.41 ‐269.45 ‐298.28 ‐330.20 ‐365.53 ‐404.64 Net cash used for financing activities ‐40.40 ‐28.70 178.60 ‐122.20 ‐235.70 ‐167.80 ALT. CFFI ‐212.88 ‐255.92 ‐307.67 ‐369.88 ‐444.67 ‐534.58 ‐642.67 ‐772.62 ‐928.84 ‐1116.65 CFFO/Sales 0.11 0.10 0.08 0.07 0.06 0.06 0.07 0.06 0.04CFFO/Net Income 5.27 2.92 1.54 1.12 1.20 3.95 1.45CFFO/Operating Income 2.10 1.78 1.04 0.90 0.92 2.93 0.95 1.34CFFI/Sales ‐0.03 ‐0.09 ‐0.09 ‐0.06 ‐0.05 ‐0.02 ‐0.04FCF(1) 283.30 23.20 ‐24.70 110.10 31.40 215.80 64.72 57.21 63.33 70.11 77.61 85.91 95.10 105.28 116.54 88.71FCF(2) 513.01 542.53 613.16 695.50 791.74 904.52 1036.99 1192.92 1376.83

Total Dividends 45.10 45.90 58.10 57.30 55.00 52.60 0.97 50.89 49.24 51.79 54.47 57.30 60.27 63.40 61.34 59.34 58.74CFFI/non‐current asset ‐0.08 ‐0.20 ‐0.20 ‐0.14 ‐0.12 ‐0.04 ‐0.13 ‐0.10 ‐0.11

196

Statements of Cash Flows: BRUNSWICK CORPORATIONStatements of Cash Flows(in millions) Adjusted Cash Flows Forecasted Cash Flows

2002 2003 2004 2005 2006 2007 Assume Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Cash flows from operating activities Net earnings 25.99 61.79 174.87 321.00 ‐12.50 ‐2.43 51.58 85.63 94.79 104.93 116.16 128.59 142.35 157.58 174.44 193.11 Less: net earnings (loss) from discontinued operations 0.00 0.00 0.00 14.30 ‐129.30 32.00 Net earnings from continuing operations 25.99 61.79 174.87 306.70 116.80 ‐34.43 Depreciation and amortization 148.40 150.60 153.60 156.30 167.30 180.10Change in accounting principle, net of tax 25.10 Changes in noncash current assets and current liabilities Change in accounts and notes receivable ‐35.10 61.60 ‐72.00 ‐9.50 ‐4.30 ‐45.90 Change in inventory 35.10 ‐31.50 ‐103.90 ‐22.80 ‐28.70 ‐42.90 Change in prepaid expenses and other ‐9.70 ‐10.00 7.70 0.90 0.80 3.30 Change in accounts payable 71.00 6.00 40.30 29.70 9.50 ‐13.50 Change in accrued expenses 29.50 74.70 74.50 ‐51.90 ‐70.10 102.50 Income taxes 64.30 ‐19.50 50.10 ‐3.10 ‐25.50 6.40 Impairment charges 6.00 28.00 10.30 0.00 0.00 66.40Goodwill Impairment effect 90.56 103.02 124.96 123.46 132.72 135.78 Other, net ‐0.20 0.00 0.00 ‐49.10 38.80 8.10 Net cash provided by operating activities of continuing operations 450.95 424.71 460.43 480.66 337.32 365.85 Net cash used for operating activities of discontinued operations 0.00 0.00 ‐9.20 11.30 ‐35.70 ‐29.80 Net cash provided by operating activities 450.95 424.71 451.23 491.96 301.62 336.05 0.06 271.1129 239.6638 265.3078 293.6957 325.1212 359.9091 398.4194 441.0503 488.2427 540.4846

Cash flows from investing activities Capital expenditures ‐112.60 ‐159.80 ‐163.80 ‐223.80 ‐205.10 ‐207.70 Acquisitions of businesses, net of cash acquired ‐8.90 ‐39.30 ‐248.20 ‐130.30 ‐86.20 ‐6.20 Investments ‐21.20 ‐177.30 ‐16.20 ‐18.10 6.10 4.10 Proceeds from investment sale 0.00 0.00 0.00 57.90 0.00 0.00 Proceeds from the sale of property, plant and equipment 13.20 7.50 13.40 13.40 7.20 10.10 Other, net ‐0.20 ‐3.00 2.00 ‐1.20 ‐0.40 25.60 Net cash used for investing activities of continuing operations ‐129.70 ‐371.90 ‐412.80 ‐302.10 ‐278.40 ‐174.10 Net cash provided by (used for) investing activities of discontinued operations 0.00 0.00 ‐27.10 ‐20.70 ‐5.50 75.60 Net cash used for investing activities ‐129.70 ‐371.90 ‐439.90 ‐322.80 ‐283.90 ‐98.50 ‐0.04 ‐195.966 ‐173.234 ‐191.77 ‐212.289 ‐235.004 ‐260.15 ‐287.986 ‐318.8 ‐352.912 ‐390.674

Cash flows from financing activities Net repayments of commercial paper and other short‐term debt ‐9.40 1.80 ‐8.80 ‐0.60 ‐0.20 0.00 Net proceeds from issuance of long‐term debt 0.00 0.00 152.30 1.30 250.30 0.70 Payments of long‐term debt including current maturities ‐26.20 ‐24.50 ‐6.30 ‐6.70 ‐251.10 ‐0.90 Cash dividends paid ‐45.10 ‐45.90 ‐58.10 ‐57.30 ‐55.00 ‐52.60 Stock repurchases 0.00 0.00 0.00 ‐76.00 ‐195.60 ‐125.80 Stock options exercised 40.30 39.90 99.50 17.10 15.90 10.80 Net cash used for financing activities of continuing operations ‐40.40 ‐28.70 178.60 ‐122.20 ‐235.70 ‐167.80 Net cash used for financing activities of discontinued operations 0.00 0.00 0.00 0.00 0.00 0.00 Net cash used for financing activities ‐40.40 ‐28.70 178.60 ‐122.20 ‐235.70 ‐167.80 ‐212.876 ‐255.92 ‐307.667 ‐369.877 ‐444.666 ‐534.577 ‐642.669 ‐772.617 ‐928.84 ‐1116.65Net increase (decrease) in cash and cash equivalents 280.85 24.11 189.93 46.96 ‐217.98 69.75Cash and cash equivalents at January 1 108.50 351.40 345.90 499.80 487.70 283.40Cash and cash equivalents at December 31 389.35 375.51 535.83 546.76 269.72 353.15

0.107 Net cash provided by operating activities 450.95 424.71 451.23 491.96 301.62 336.05 271.11 239.66 265.31 293.70 325.12 359.91 398.42 441.05 488.24 540.48 Net cash used for investing activities ‐129.7 ‐371.9 ‐439.9 ‐322.8 ‐283.9 ‐98.5 ‐195.97 ‐173.23 ‐191.77 ‐212.29 ‐235.00 ‐260.15 ‐287.99 ‐318.80 ‐352.91 ‐390.67 Net cash used for financing activities ‐40.4 ‐28.7 178.6 ‐122.2 ‐235.7 ‐167.8 ALT. CFFI ‐212.88 ‐255.92 ‐307.67 ‐369.88 ‐444.67 ‐534.58 ‐642.67 ‐772.62 ‐928.84 ‐1116.65 CFFO/Sales 0.12 0.10 0.09 0.08 0.05 0.06 0.07 0.05625CFFO/Net Income 17.35 6.87 2.63 1.50 ‐26.99 ‐150.70CFFO/Operating Income 4.69 3.68 1.63 1.41 1.45 ‐13.63 1.49

CFFI/Sales ‐0.03494 ‐0.09008 ‐0.08412 ‐0.05449 ‐0.05011 ‐0.01737 ‐0.04 ‐0.03374CFFI/non‐current asset ‐0.07777 ‐0.19368 ‐0.19546 ‐0.13356 ‐0.1207 ‐0.04326 ‐0.10 ‐0.08198

197

Weighted Average Cost of Equity:

3 Month Rates Summery Output – 24

Regression Statistics Multiple R 0.446914653 R Square 0.199732707 Adjusted R Square 0.188300317 Standard Error 0.075180442 Observations 72

ANOVA

Df SS MS F Significance

F Regression 1 0.098746546 0.098746546 17.4707746 8.30427E-05 Residual 70 0.395646924 0.005652099Total 71 0.49439347

Coefficients Standard

Error t Stat P-value Lower 95% Upper 95%

Intercept -

0.005441166 0.0089024-

0.611202176 0.543045519-

0.023196443 0.01231411X Variable 1 1.133997912 0.271303986 4.179805569 8.30427E-05 0.592899181 1.675096644

Summary Output-36


ANOVA

df SS MS F Significance

F Regression 1 0.083365 0.083365 13.73912 0.00047117 Residual 58 0.351926 0.006068Total 59 0.43529



Intercept -0.00694 0.010058 -0.69045 0.492668 -0.0270766 0.013188X Variable 1 1.260564 0.340084 3.706631 0.000471 0.57981311 1.941315

198

Summary Output-48 Regression Statistics

Multiple R 0.446914653 R Square 0.199732707 Adjusted R Square 0.188300317 Standard Error 0.075180442 Observations 72

ANOVA


F Regression 1 0.098746546 0.098746546 17.47077 8.30427E-05Residual 70 0.395646924 0.005652099Total 71 0.49439347


Error t Stat P-value Lower 95%

Intercept -

0.005441166 0.0089024-

0.611202176 0.543046-

0.023196443X Variable 1 1.133997912 0.271303986 4.179805569 8.3E-05 0.592899181

Summary Ouput-60


ANOVA df SS MS F Significance F

Regression 1 0.033707 0.033707 4.586311709 0.039479132Residual 34 0.249883 0.00735Total 35 0.28359




199

Summary Output-72 Regression Statistics

Multiple R 0.337838 R Square 0.114134 Adjusted R Square 0.073868 Standard Error 0.098059 Observations 24

ANOVA





Intercept -0.02214 0.020479 -1.08122 0.291308 -0.06461 0.020329X Variable 1 0.919977 0.546439 1.683586 0.1064 -0.21327 2.053223

2 Year Rates Summary Output-24

Regression Statistics Multiple R 0.445000433R Square 0.198025385Adjusted R Square 0.186568605Standard Error 0.075260596Observations 72

ANOVA


F Regression 1 0.097902457 0.097902 17.28456 8.98E-05Residual 70 0.396491013 0.005664Total 71 0.49439347

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept -0.005014569 0.008902808 -0.56326 0.57506 -0.02277 0.012742X Variable 1 1.128886493 0.271532072 4.15747 8.98E-05 0.587333 1.67044

200

Summary Output-36


ANOVA





Intercept -

0.006503631 0.010069755 -0.64586 0.520919-

0.026660435 0.013653173X Variable 1 1.253292033 0.340495737 3.680786 0.000512 0.571715769 1.934868296

Summary Output-48


ANOVA






201

Summary Output-60


ANOVA






Summary Output-72


ANOVA df SS MS F Significance F

Regression 1 0.027221 0.027221 2.83052 0.1066293 Residual 22 0.211576 0.009617Total 23 0.238797


Error t Stat P-value Lower 95% Intercept -0.02209 0.020488 -1.07831 0.292577 -0.064580985 X Variable 1 0.916822 0.544944 1.682415 0.106629 -0.213322751

202



ANOVA






Summary Output-36


ANOVA






203

Summary Output-48


ANOVA






Summary Output-60


ANOVA






204

Summary Output-72


ANOVA








ANOVA






205

Summary Output-36


ANOVA






Summary Output-48


ANOVA




Error t Stat P-value Lower 95% Intercept -0.01884 0.011296 -1.66814 0.102083 -0.04158 X Variable 1 1.070341 0.369752 2.894751 0.005785 0.326068

206

Summary Output-60


ANOVA






Summary Output-72


ANOVA






207



ANOVA






Summary Output-36


ANOVA






208

Summary Output-48


ANOVA






Summary Output-60


ANOVA






209

Summary Output-72


ANOVA






3 month 2 year Months Beta Adjusted R^2 Months Beta Adjusted R^2

72 1.13 0.1883 72 1.13 0.1866 60 1.26 0.1776 60 1.25 0.1754 48 1.08 0.137 48 1.08 0.1363 36 0.95 0.0929 36 0.95 0.0925 24 0.92 0.0739 24 0.96 0.0737

5 year 7 year Months Beta Adjusted R^2 Months Beta Adjusted R^2

72 1.12 0.1837 72 1.12 0.1825 60 1.24 0.1721 60 1.24 0.1708 48 1.07 0.1359 48 1.07 0.1357 36 0.95 0.0925 36 0.94 0.0925 24 0.91 0.0736 24 0.91 0.0735

10 year Months Beta Adjusted R^2

72 1.12 0.1816 60 1.23 0.1838 48 1.07 0.1355 36 0.94 0.0924 24 0.91 0.0734

210

Business and Industry Analysis: Net Sales of Brunswick

Industries 2003 2004 2005 2006 2007

(in millions)

Fitness 486.60 558.30 551.40 593.10 653.70

Marine products 4,991.80 4,232.90 4,592.40 4,613.90 4,570.80

Bowling and Billiards 392.40 442.40 464.50 458.30 446.90

Total 5,870.80 5,233.60 5,608.30 5,665.30 5,671.40

Operating Earnings for BC

Industries 2003 2004 2005 2006 2007

(in millions)

Fitness 29.80 45.20 56.10 57.80 59.70

Marine Products 235 392.60 443 329.40 102.30

Bowling and Billiards 25.60 41.70 37.20 22.1 16.50

Total 290.40 479.50 536.30 409.30 178.50

211

Marine Industry:

Total Asset (millions) 2003 2004 2005 2006 2007 Honda Power Products 294.17 Brunswick Marine 1,708.81 2,249.90 2,934.20 2,435.20 2,474.70

Yamaha Marine Products 145.014 138.804 169.938 205.168 214.953 Fountain Power Boat 25.929 30.621 33.034 37.86 33.416 Marine Products 86.314 104.734 108.805 120.179 118.726

Total Sales (in thousands) HMC Power Products 315 331.54 332.975 370.621 N/A

Brunswick Marine 3,525,800.0

0 4,624,300.

00 4,592,400.0

0 4,613,900.0

0 4,570,800.0

0 Yamaha Marine Products 211.54 177.88 249.844 266.524 289.867 Fountain Power Boat 52,557.00 59,296.96 71,182.07 79,226.22 68,829.99 Marine Products 193,980.00 252,418.00 272,057.00 261,378.00 244,273.00

Fitness Industry:

Net Sales (in millions) 2003 2004 2005 2006 2007 Brunswick Corporation 486.6 558.3 551.4 593.1 653.7 Cybex International 0.09 0.1 0.11 0.13 0.15

ICON Health 898.2 961.1 871 852.2 N/A Nautilus 0.5 0.52 0.61 0.62 0.5

Industry Net Sales 1,385.39 1,520.03 1,423.12 1,446.04 654.35 % change 4.26 9.72 ‐6.38 1.61 ‐54.75

Total Assets (in millions) 2003 2004 2005 2006 2007 Brunswick Corporation 635.9 667.9 674.5 693.1 695.4 Cybex International 0.53 0.54 0.56 0.73 0.98

ICON Health 465.1 558.5 460.7 380.8 N/A Nautilus 0.31 0.36 0.41 0.42 0.39

Five Forces Model:

Competitive Force Fitness Marine

Rivalry among existing firms High Moderate to High

Threat of new entrants Low to Moderate Low

Threat of substitute Products Moderate Moderate

Bargaining Power of Customers High Low to Moderate

Bargaining Power of Suppliers Low Low

212

Industry Growth:

% Change In Sales 2003 2004 2005 2006 2007

Brunswick Corporation 6.55 14.73 -1.24 7.56 10.22


ICON Health 3.08 7.00 -9.37 -2.16 N/A

Nautilus -14.68 5.01 15.93 1.65 -18.76

Industry % change 4.26 9.72 -6.38 1.61 -54.75

Concentration of Competitors:

Fitness:

Market Share

(as a % of Total Industry

Sales) 2003 2004 2005 2006 2007



ICON Health 64.83 63.23 61.20 58.93 N/A

Nautilus 0.04 0.03 0.04 0.04 0.08

Industry Sales (in millions) 1385.39 1520.03 1423.12 1446.04 654.35

Marine Industry:

Market share in % Sales 2007

Brunswick 94%

Fountain Powerboats 1%

Yamaha 0%

Marine Products 5%

213

Economies of Scale:

Net PP&E (in millions) 2003 2004 2005 2006 2007

Brunswick Corporation 706.1 746.3 817 858.7 888.8


ICON Health 0.0488 0.0585 0.0745 0.0444 N/A

Fountain Power Boats 16.17 15.91 17.18 17.11 16.43

Marine Products 17.76 18.36 17.25 16.64 15.94

Fitness:

Total Assets (in millions) 2003 2004 2005 2006 2007



ICON Health 465.1 558.5 460.7 380.8 380.8

Nautilus 0.311935 0.359641 0.413286 0.424942 0.39084

214

Marine:

Marine Total Asset (in millions) 2003 2004 2005 2006 2007 Honda Power products N/A N/A N/A 294,170 N/A

Brunswick Marine 1,708.81 2,249.90 934.2 2,474.70 2,435.20 Yamaha Marine Products 1,372.38 1313.56 2,364.38 1947.59 21051.19 Fountain Power Boat

Industry 13,381,819 17,134,786 13,023,588 12,460,218 7,648,996 Marine Products 86,314 104,734 108,805 120,179 118,726 Industry Net Sales 13,471,214.19 17,243,083.46 13,135,691.58 12,878,989.29 7,791,208.39

% Changes 0.001092117 0.279994752 0 0.004681648 ‐0.00934133

Brunswick % change ‐0.691531 0.316647257 ‐0.584781546 1.65 ‐

0.991721794

Total Sales (in thousands) 2003 2004 2005 2006 2007

HMC Power Products 315,000 331,540 332,975 370,621 N/A Brunswick Marine 526 4,592.40 4,592.40 4,613.90 4,570.80

Yamaha Marine Products 2,001.85 1,987.64 2,364.35 2,522.28 2,743.13 Fountain Power Boat 52,557,084 59,296,964 71,182,069 79,226,224 68,829,987 Marine Products 193,980 252,418 272,057 261,378 244,273

(In Millions) 2003 2004 2005 2006 2007

Capital Expenditures 157.7 163.8 223.8 205.1 207.7 Acquisitions 140 248.2 130.3 86.2 6.2

Excess Capacity:

Net Sales/PP&E

2003

2004

2005

2006

2007


Cybex International 6.55 7.64 9.46 9.72 4.3 ICON Health 18414.42 16421.2 11685.47 19204.51 N/A

Marine Products 10.05 13.75 15.77 15.71 15.32 Fountain Powerboats 3.25 3.73 4.14 4.63 4.19

215

Price Sensitivity & Relative Bargaining Power:

Research and Development:

Brunswick R&D Percent of Sales 2003 2004 2005 2006 2007 2.86% 2.51% 2.20% 2.33% 2.37%

Research and Development 2003 2004 2005 2006 2007 (in millions)

Boat 25.6 27.2 36.1 38 39.8 Marine Engine 70 82 67.3 70.3 68.1

Fitness 16.9 16 14.2 18.4 21.6 Bowling & Billiards 5.7 5.9 5.9 5.5 5

Research and Development 2003 2004 2005 2006 2007 Brunswick-Marine Engine 70 82 67.3 70.3 68.1

Brunswick-Fitness 16.9 16 14.2 18.4 21.6 ICON health-fitness 11.6 13.9 12.4 11.6 N/A

Fountain Powerboats-marine 1.6 1.9 2.4 1.9 1.8 R&D as a Percent of Sales Brunswick-Marine Engine 1.99% 1.77% 1.32% 1.37% 1.35%

Brunswick-Fitness 3.47% 2.87% 2.58% 3.10% 3.30% ICON health-fitness 1.29% 1.45% 1.42% 1.36% N/A

Fountain Powerboats-marine 3.04% 3.20% 3.37% 2.40% 2.61%

Quality and Brand Image:

2003 2004 2005 2006 2007 Brunswick: 1.52% 1.40% 1.28% 1.30% 1.37%

Number of Suppliers Switching Cost Differentiation

Price Sensitivity Price Sensitive Price Sensitive Moderate Price Sensitivity

Relative Bargaining Power Low Low Moderate

216

Goodwill:

Brunswick’s Adjusted Balance Sheet (millions)

2002 2003 2004 2005 2006 2007 Current assets 1,660.20 1,715.20 2,098.70 2,235.00 2,078.40 2,114.30Net property 792.7 827.1 876.4 953.3 1,015 1,053 Goodwill 452.8 515.1 624.8 617.3 663.6 678.9 Impairment effect -90.56 -103.02 -124.96 -123.46 -132.72 -135.78 Goodwill, net 362.24 412.08 499.84 493.84 530.88 543.12 Other assets 409.00 545.10 746.50 815.90 693.40 519.60 Total Assets 3,224.14 3,499.48 4,221.44 4,498.04 4,317.58 4,229.82Current liabilities 1,005.60 1,101.80 1,253.80 1,305.20 1,293.20 1,296.20L-T Liabilities 1207.3 1177.7 1380.3 1337.5 1285.3 1176.5 Common stock 76.9 76.9 76.9 76.9 76.9 76.9 Additional paid-in capital 308.9 310 358.8 368.3 378.7 409 Retained earnings 1,112.70 1,202.00 1,413.70 1,741.80 1,820.70 1,888.40Impairment effect -90.56 -103.02 -124.96 -123.46 -132.72 -135.78 Goodwill, net 1022.1 1099 1288.7 1618.3 1688 1752.6 Unearned compensation and other -22.2 -10.1 -6.3 -6.1 0.00 0.00 Treasury stock -228.7 -183.6 -76.5 -136 -315.5 -428.7 Total AOC loss -145.8 -72.2 -54.3 -66.1 -89 -52.7 Shareholders’ equity 1,011.24 1,219.98 1,587.34 1,855.34 1,739.08 1,757.12Total Liabilities and Equity 3,224.14 3,499.48 4,221.44 4,498.04 4,317.58 4,229.82

Brunswick, ICON, and Cybex Raw Balance Sheets (millions)


Total Asset 577.1 635.9 667.9 678.5 693.10 695.40 45% 42% 40% 39% 39% 39%



Total Asset 53.36 53.39 54.49 55.67 73.38 98.13 21% 21% 21% 20% 15% 11%

Assets Liabilities Equity Revenue Expense N. I.

O N O N U O

217

Marine Industry’s Goodwill (millions)

2002 2003 2004 2005 2006 2007 Brunswick 189.5 236.6 300.2 336.9 376.7 390

Fountain Powerboats 0.36 0.74 0.67 0.65 1.07 0.65 Marine Product 3.308 3.308 3.308 3.308 3.308 3.308

Fitness Industry’s Goodwill (millions)

2002 2003 2004 2005 2006 2007 Brunswick 261.9 265.6 267.4 265.9 272.3 274 ICON Health 5.62 5.62 5.07 5.72 6.52 6.52 Cybex Int. 11.25 11.25 11.25 11.25 11.25 11.25

Brunswick’s Goodwill over Plant, Property, and Equipment 2002 2003 2004 2005 2006 2007

Goodwill 452.8 515.1 624.8 617.3 663.6 678.9 Net property 792.7 827.1 876.4 953.3 1,015 1,053

GW/NP 0.57 0.62 0.71 0.65 0.65 0.64

Brunswick’s Balance Sheet (millions)

2007 2006 2005 2004 2003 2002

Goodwill 678.9 663.6 617.3 624.8 515.1 452.8

Total assets 4,365.60 4,450.30 4,621.50 4,346.40 3,602.50 3,314.70

Total liabilities and equity 4,365.60 4,450.30 4,621.50 4,346.40 3,602.50 3,314.70

218

Fitness Industry’s Goodwill/Total Assets (millions)


Total Asset 577.1 635.9 667.9 678.5 693.10 695.40 45% 42% 40% 39% 39% 39%



Total Asset 53.36 53.39 54.49 55.67 73.38 98.13 21% 21% 21% 20% 15% 11%

Marine Industry’s Goodwill/Total Assets (millions)


Total Asset 1,550.60 1,734.40 2,249.90 2,293.10 2,435.20 2,474.700.12 0.14 0.13 0.15 0.15 0.16

Fountain Power Goodwill 0.36 0.74 0.67 0.65 1.07 0.65 Total Asset 26.53 25.93 30.06 33.03 37.86 33.42

1% 3% 2% 2% 3% 2% Marine Product Goodwill 3.308 3.308 3.308 3.308 3.308 3.308

Total Asset 71.063 86.314 109.734 108.805 124.179 118.726

Brunswick’s Adjusted Income Statement (millions) 2002 2003 2004 2005 2006 2007

Net sales 3711.9 4128.7 5058.1 5606.9 5665 5671.2 Cost of sales 2852 3131.6 3809.6 4285.3 4439.3 4528.1 Gross Profit 859.9 997.1 1248.5 1321.6 1225.7 1143.1 (Non-)Operating Expense 698.3 796 875.2 835.7 916 1050.4 Earnings before income taxes 161.6 201.1 373.3 485.9 309.7 92.7

219

Brunswick’s Adjusted Balance Sheet (millions) 2002 2003 2004 2005 2006 2007

Net sales 3711.9 4128.7 5058.1 5606.9 5665 5671.2 Cost of sales 2852 3131.6 3809.6 4285.3 4439.3 4528.1 Gross Profit 859.9 997.1 1248.5 1321.6 1225.7 1143.1 (Non-)Operating Expense 698.3 796 875.2 835.7 916 1050.4 Earnings before income taxes 161.6 201.1 373.3 485.9 309.7 92.7 Impairment effect -90.56 -103.02 -124.96 -123.46 -132.72 -135.78 Adjusted Earnings before income taxes 71.04 98.08 248.34 362.44 176.98 -43.08

Warranties:

Assets Liabilities Equity Revenue Expense N. I. N U U N O U

Quality of Disclosure R & D

Currency Risk Leases Goodwill Warranties

Brunswick Corporation Low Moderate Low High Low to

Moderate

Fountain Powerboats Low -

Moderate Moderate Low Low Moderate

Marine Products Low-

Moderate Moderate Low Low Moderate

Cybex International Low-

Moderate Moderate Low Low Moderate ICON Health - Moderate Low Low Moderate

*Nautilus has a low to moderate disclosure.

Brunswick’s Sales (millions)

(in millions) 2003 2004 2005 2006 2007 Marine 3525.8 4450.8 5084 5135.7 5048.4

86.77% 87.99% 90.67% 90.66% 89.02%Fitness 486.6 558.8 551.4 593.1 653.7

11.97% 11.05% 9.83% 10.47% 11.53%Total Sales 4063.6 5058.1 5606.9 5665 5671.2

100% 100% 100% 100% 100% Operating Earnings-Marine 29.8 45.2 56.1 57.8 59.7 Operating Earnings-Fitness 235 392.6 443 329.4 102.3

220

Marine Industry Warranties (millions)

2002 2003 2004 2005 2006 2007 Brunswick 141.03 154.36 144.84 140.82 145.96 145.90

Fountain Powerboats 0.87 0.90 0.71 0.74 0.63 0.94 Marine Products 1.94 2.85 3.80 4.27 5.34 4.77

Fitness Warranty (millions)

2002 2003 2004 2005 2006 2007

Brunswick 20.71 21.30 18.18 15.27 16.86 18.89 Cybex International 1.85 1.76 2.24 2.88 3.20 4.21

ICON Health 1.29 2.64 2.84 3.63 4.18 4.18 Operating Leases:

Contractual Obligations Total year 1 years 1-3 years 3-5 >5 years Long Term Debt (LTD) 728.2 0.8 251.5 151.8 324.1

Interest payment on LTD 469.0 42.5 67.5 50.0 309.1 Operating Leases 201.6 49.2 76.7 40.2 35.5

Purchase Obligations 248.6 242.5 4.0 1.8 N/A Deferred Mgt compensation 58.0 9.2 15.3 7.3 26.2

Other Tax Liabilities 2.9 1.2 1.7 N/A N/A Other LT liabilities 210.3 23.9 78.3 21.9 86.2

Total Contractual Liabilities 1918.3 369.3 494.9 273.0 781.1 Undo Distortions:

Operating Leases:

Assets (in millions) Adjusted Unadjusted % change

Total Current Assets 2114.3 2114.3 None Net Property 1052.8 1052.8 None Goodwill 678.9 678.9 None

Other Intangibles 245.6 245.6 None Investments 132.1 132.1 None

Other Long Term Assets 303.24 141.9 113.70% Total Other Assets 1366.8 1198.5 13.46%

Total Assets 4526.9 4365.6 3.70%

221

Liabilities Adjusted Unadjusted % Increase

Total Current Liabilities 1342.4 1296.2 3.56% Long Term Debt 842.5 727.4 15.89%

Deferred Income Taxes 12.3 1.3 None Postretirement Benefits 192.8 192.8 None

Other 244 244 None Total LT Liabilities 1291.6 1176.5 9.79% Total Liabilities 2634 2472.7 6.52%

Method of Comparables

FP MP CI IH Industry Avg Price Price AdjP/Et - 15.46 7.66 - 11.56 6.98 -

FP MP CI IH Industry Avg Price Price Adj

P/Ef 0.00 26.75 7.74 - 17.25 4.81 -

FP MP CI IH Industry Avg Price Price Adj P/B 20.00 2.07 0.63 - 7.57 77.46 71.74


PEG - - 0.56 0.56 0.87 -

FP MP CI IH Industry Avg Price Price AdjP/EBITDA 0.03 0.31 1.94 - 0.24 75.81 87.66


EV/EBITDA 18.79 11.18 9.98 - 13.31 9.41 4.37

FP MP CI IH Industry Avg Price Price Adj P to FCF - - 51.03 51.03 59.56 65.56


DPS/P - 0.03 0.12 - 0.08 0.02 -

222

Discounted Dividends Approach

Discounted Dividends Approach WACC(bt) 0.11 Kd 0.06 Ke 0.14Perp

Relevant Valuation Item 0 1 2 3 4 5 6 7 8 9 10 112007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

DPS (Dividends Per Share) 0.32 0.28 0.27 0.28 0.29 0.31 0.33 0.34 0.33 0.32 0.34 0.34PV Factor 1.00 0.88 0.77 0.67 0.59 0.52 0.45 0.40 0.35 0.31 0.27PVDPS 0.24 0.20 0.19 0.17 0.16 0.15 0.14 0.12 0.10 0.09TPVDPS for 10 yrs 1.56 1.82PVDPS Perp 0.49Calculated Share Price (12/31/07) 2.04Calculated Share Price (11/1/08) 2.35

Observed Share Price 11/1/2008 $3.59Cost of Equity (You Derive) 0.185Perpetuity Growth Rate (g) 0.00

Range PPSFairly value 1.15 $4.13Fairly value 0.85 $3.05 0 0.01 0.02 0.03 0.04 0.05 0.06

lower Ke 9.86% 2.67 2.8 2.95 3.15 3.41 3.79 4.3611.50% 2.56 2.65 2.76 2.9 3.07 3.3 3.6113.00% 2.49 2.56 2.65 2.75 2.88 3.03 3.2414.10% 2.45 2.51 2.59 2.67 2.77 2.9 3.0616.00% 2.4 2.45 2.5 2.57 2.65 2.74 2.8417.50% 2.37 2.41 2.46 2.51 2.58 2.65 2.73

Upper Ke 18.52% 2.35 2.39 2.43 2.48 2.54 2.6 2.67

Forecasted

g

Ke

Overvalued: Less than $3.05 $3.05 < Fairly Valued < $4.13 Undervalued: Greater than $4.13

223

Discounted Free Cash Flows Approach Free Cash Flow WACC(BT) 10.6% Kd 6.2% Ke 12.9% Shares 184.908

Perp

0 1 2 3 4 5 6 7 8 9 10 11

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

CFO 314.30 267.69 236.64 261.96 289.99 321.01 355.36 393.39 435.48 482.07 533.66

CFI -98.50 (202.97) (179.43) (198.63) (219.88) (243.41) (269.45) (298.28) (330.20) (365.53) (404.64)

FCF Firm's Assets 215.80 64.72 57.21 63.33 70.11 77.61 85.91 95.10 105.28 116.54 129.02 136.76

PV Factor (WACC) 1.00 0.92 0.85 0.79 0.73 0.67 0.62 0.57 0.53 0.49 0.45

PV YBY Free Cash Flows 59.79 48.83 49.94 51.08 52.24 53.43 54.64 55.88 57.15 58.45

Total PV YBY FCF 541.43 6107.95

PVFCF Perp 2767.31

Calculated Market Value of Assets(12/31/07) 3308.74 gBook Value Debt (12/31/07) 2472.70 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10Calculated Market Value of Equity(12/31/07) 836.04 8.24% N/A N/A N/A N/A N/A 4.38 18.01 141.44 N/A N/Adivide by Shares to Get PPS at 12/31 4.52 9.00% N/A N/A N/A N/A N/A N/A 5.60 22.86 N/A N/ATime consistent Price (11/1/08) 4.83 9.50% N/A N/A N/A N/A N/A N/A 1.54 10.40 54.74 N/AOberved Share Price (11/1/08) 3.59 WACCbt 10.67% N/A N/A N/A N/A N/A N/A N/A N/A 6.31 33.86

11.10% N/A N/A N/A N/A N/A N/A N/A N/A 1.97 14.7611.90% N/A N/A N/A N/A N/A N/A N/A N/A N/A 2.41

Range PPS 12.47% N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AFairly value 1.15 4.13

Fairly value 0.85 3.05

WACC(BT) 0.082

Perp Growth Rate 0.060 Adj. Free Cash Flow WACC(BT) 10.66% Kd 6.17% Ke 12.95% Shares 184.91

Perp0 1 2 3 4 5 6 7 8 9 10 11

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017CFFO 336.05 271.11 239.66 265.31 293.70 325.12 359.91 398.42 441.05 488.24 540.48CFFI -98.50 -195.97 -173.23 -191.77 -212.29 -235.00 -260.15 -287.99 -318.80 -352.91 -390.67FCF Firm's Assets 237.55 75.15 66.43 73.54 81.41 90.12 99.76 110.43 122.25 135.33 149.81 155.80

PV Factor (WACC) 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00PV YBY Free Cash Flows 237.55 75.15 66.43 73.54 81.41 90.12 99.76 110.43 122.25 135.33 149.81Total PV YBY FCF 1004.22 -3895.08PVFCF Perp -3895.08Calculated Market Value of Assets(12/31/07) -2890.86 gBook Value Debt (12/31/07) 2472.70 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10Calculated Market Value of Equity(12/31/07) -5363.56 8.23% N/A N/A N/A N/A 2.13 8.04 23.61 177.04 N/A N/Adivide by Shares to Get PPS at 12/31 -29.01 9.00% N/A N/A N/A N/A N/A 2.14 8.82 28.86 N/A N/ATime consistent Price (11/1/08) -29.01 9.50% N/A N/A N/A N/A N/A N/A 4.11 14.40 65.88 N/AOberved Share Price (11/1/08) 3.59 WACC(bt) 10.58% N/A N/A N/A N/A N/A N/A N/A 2.21 10.91 49.40

11.10% N/A N/A N/A N/A N/A N/A N/A N/A 4.64 19.4911.90% N/A N/A N/A N/A N/A N/A N/A N/A N/A 5.16

WACC(BT) 0.00% 12.34% N/A N/A N/A N/A N/A N/A N/A N/A N/A 1.41Perp Growth Rate 4.00%

224

Residual Income Approach

WACC(BT) 0.107 Kd 0.06 Ke 0.141 Shares 184.908Perp

0 1 2 3 4 5 6 7 8 9 10 112007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net Income (Millions) 111.60 51.58 114.76 127.04 140.63 155.68 172.33 190.77 211.19 233.78 258.80Total Dividends (Millions) 60.00 50.89 49.24 51.79 54.47 57.30 60.27 63.40 61.34 59.34 62.42Book Value Equity (Millions) 1,892.90 1,893.59 1,959.12 2,034.36 2,120.52 2,218.90 2,330.96 2,458.34 2,608.19 2,782.63 2,979.01

RI% 38.65% -29.29% -2.00% -2.00% -1.98% -1.94% -1.88% -1.78% -1.08% -0.31% -0.36%

Annual Normal Income (Benchmark) 266.90 266.90 267.00 276.24 286.85 298.99 312.86 328.67 346.63 367.75 392.35Annual Residual Income -155.299 -215.32 -152.24 -149.20 -146.22 -143.32 -140.53 -137.89 -135.44 -133.97 -133.55 -133.07pv factor 1.000 0.876 0.768 0.673 0.590 0.517 0.453 0.397 0.348 0.305 0.267YBY PV RI -188.71 -116.94 -100.44 -86.27 -74.11 -63.69 -54.77 -47.15 -40.87 -35.71

-390.2298Change RI -60.02 63.08 3.04 2.98 2.90 2.79 2.64 2.45 1.47 0.42Book Value Equity (Millions) 1,892.90 100.00%Total PV of YBY RI -808.652 -42.72% -0.1 -0.2 -0.3 -0.4 -0.5Terminal Value Perpetuity -104.343 -5.51% Lower Ke 0.099 8.66 8.71 8.74 8.76 8.77MVE 12/31/07 979.91 51.77% 0.115 7.29 7.47 7.56 7.61 7.65Model Price on 12/31/07 5.30 0.13 6.28 6.51 6.64 6.72 6.77Model Price on 11/1/08 5.92 Ke 0.141 5.65 5.92 6.06 6.15 6.21Observed Share Price (11/1/08) 3.59 0.16 4.76 5.04 5.20 5.30 5.37Cost of Equity (Ke) 0.141 0.175 4.20 4.47 4.63 4.74 4.81Perpetuity Growth Rate (g) -0.2 Upper Ke 0.185 3.87 4.13 4.29 4.40 4.47

225

Adj Residual Income WACC(BT) 10.7% Kd 6.2% Ke 14.1% Shares 184.908Perp

Relevant Valuation Item 0 1 2 3 4 5 6 7 8 9 10 112007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net Income (Millions) -2.43 51.58 85.63 94.79 104.93 116.16 128.59 142.35 157.58 174.44 193.11Total Dividends (Millions) 60.00 50.89 49.24 51.79 54.47 57.30 60.27 63.40 61.34 59.34 62.42Book Value Equity (Millions) 1753.24 1753.93 1790.33 1833.33 1883.79 1942.65 2010.97 2089.93 2186.17 2301.28 2431.97

33.95 4.03 4.08 4.11 4.13 4.13 4.10 3.29 2.44 7.81RI % -21.64% -17.35% -2.49% -2.59% -2.68% -2.76% -2.84% -2.90% -2.40% -1.82% -5.95%

Annual Normal Income (Becnhmark) 247.21 247.21 247.30 252.44 258.50 265.61 273.91 283.55 294.68 308.25 324.48Annual Residual Income(ARI) -249.63 -195.62 -161.68 -157.64 -153.57 -149.45 -145.32 -141.20 -137.10 -133.81 -131.37 -123.56pv factor 1.00 0.88 0.77 0.67 0.59 0.52 0.45 0.40 0.35 0.31 0.27YBY PV RI -171.45 -124.19 -106.13 -90.60 -77.28 -65.86 -56.08 -47.72 -40.82 -35.13

-362.339Change in ARI 54.01 33.95 4.03 4.08 4.11 4.13 4.13 4.10 3.29 2.44Book Value Equity (Millions) 1753.24 100.00%Total PV of YBY RI -815.26 -46.50%Terminal Value Perpetuity -96.89 -5.53%MVE 12/31/07 841.09 47.97%divide by shares 184.91 -0.1 -0.2 -0.3 -0.4 -0.5Model Price on 12/31/07 4.55 Lower Ke 0.099 7.24 7.35 7.41 7.44 7.46Model Price on 11/1/08 5.08 0.115 6.15 6.34 6.44 6.50 6.54

0.13 5.34 5.57 5.69 5.77 5.82Observed Share Price (11/1/08) 3.59 Ke 0.141 4.83 5.08 5.21 5.29 5.35Cost of Equity (Ke) 0.141 0.16 4.11 4.36 4.50 4.59 4.65Perpetuity Growth Rate (g) -0.2 0.175 3.65 3.89 4.03 4.12 4.19

Upper Ke 0.185 3.38 3.61 3.75 3.84 3.90

MVEo/BVEo 0.48

AEG Approach

WACC(BT) 10.7% Kd 6.2% Ke 14.1% Shares 184.908

-1.94 -0.95 -0.02 -0.03 -0.04 -0.05 -0.07 -0.40 -0.71 -0.470 1 2 3 4 5 6 7 8 9 10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net Income (Millions) 111.60 51.58 114.76 127.04 140.63 155.68 172.33 190.77 211.19 233.78 258.80Total Dividends (Millions) 60.00 50.89 49.24 51.79 54.47 57.30 60.27 63.40 61.34 59.34 62.42Dividends Reinvested (Drip) 8.46 7.18 6.94 7.30 7.68 8.08 8.50 8.94 8.65 8.37Cum-Dividend Earnings 60.04 121.93 133.98 147.93 163.36 180.41 199.27 220.13 242.43 267.17Normal Earnings Benchmark 127.34 58.86 130.94 144.95 160.46 177.63 196.63 217.67 240.96 266.75Abnormal Earning Growth (AEG) -67.29 63.08 3.04 2.98 2.90 2.79 2.64 2.45 1.47 0.42 0.22

PV Factor 1.00 0.88 0.77 0.67 0.59 0.52 0.45 0.40 0.35 0.31PV of AEG -67.29 55.28 2.34 2.01 1.71 1.44 1.20 0.97 0.51 0.13

0.35Residual Income Check Figure 63.08 3.04 2.98 2.90 2.79 2.64 2.45 1.47 0.42

Core Net Income 111.60 1.00Total PV of AEG at YR 2008 -1.71 -0.02 -0.1 -0.2 -0.3 -0.4 -0.5Continuing (Terminal) Value 0.11 0.00 Lower Ke 0.099 8.87 8.63 8.51 8.44 8.39Total Adjusted Earnings 110.00 0.99 0.115 6.78 6.68 6.63 6.60 6.58Model Market Value Equity(12/31/2007) 780.13 0.13 5.45 5.42 5.40 5.39 5.39Model MVE per Share(12/31/2007) 4.22 Ke 0.141 4.72 4.71 4.71 4.71 4.71Model MVE per Share(11/01/2008) 4.71 0.16 4.31 4.18 4.10 4.05 4.02Observed Share Price (11/1/2008) 3.59 0.175 2.83 2.96 3.03 3.08 3.11Ke 14% Upper Ke 0.185 2.86 2.90 2.92 2.93 3.47g -50%

226

WACC(BT) 10.7% Kd 6.2% Ke 14.1% Shares 184.91

-0.88 0.01 0.01 0.00 0.00 -0.01 -0.20 -0.26 -0.170 1 2 3 4 5 6 7 8 9 10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net Income (Millions) -2.43 51.58 85.63 94.79 104.93 116.16 128.59 142.35 157.58 174.44 193.11Total Dividends (Millions) 60.00 50.89 49.24 51.79 54.47 57.30 60.27 63.40 61.34 59.34 62.42Dividends Reinvested (Drip) 8.46 7.18 6.94 7.30 7.68 8.08 8.50 8.94 8.65 8.37Cum-Dividend Earnings 60.04 92.80 101.73 112.24 123.84 136.67 150.85 166.52 183.09 201.48Normal Earnings -2.77 58.86 97.70 108.16 119.73 132.54 146.72 162.42 179.80 199.04Abnormal Earning Growth (AEG) 62.81 33.95 4.03 4.08 4.11 4.13 4.13 4.10 3.29 2.44 1.30

PV Factor 1.00 0.88 0.77 0.67 0.59 0.52 0.45 0.40 0.35 0.31PV of AEG 62.81 29.75 3.10 2.75 2.43 2.14 1.87 1.63 1.15 0.74

3.80Residual Income Check Figure 33.95 4.03 4.08 4.11 4.13 4.13 4.10 3.29 2.44Core Net Income -2.43Total PV of AEG at YR 2008 108.36Continuing (Terminal) Value 3.80 -0.1 -0.2 -0.3 -0.4 -0.5Total Adjusted Earnings 109.73 lower Ke 0.099 8.71 8.19 7.93 7.77 7.67Model Market Value Equity(12/31/2007) 778.21 0.115 6.81 6.51 6.36 6.27 6.20Model MVE per Share(12/31/2007) 4.21 0.13 5.56 5.40 5.31 5.26 5.22Model MVE per Share(11/01/2008) 4.70 Ke 0.141 4.84 4.75 4.70 4.67 4.65Observed Share Price (11/1/2008) 3.59 0.16 3.90 3.89 3.88 3.88 3.88Ke 0.141 0.175 3.33 3.37 3.39 3.40 3.41g -0.2 Upper Ke 0.185 3.01 3.07 3.10 3.13 3.14

Long Run Residual Income Approach

BVEo 1892.9 ROE 0.07 Ke 0.141 g 0.06 MVE 12/31/07 380.56 divide by shares 184.91 Model Price on 12/31/07 2.06 Model Price on 11/1/08 2.30 Observed Share Price (11/1/2008) 3.59

227

ROE 0.00 0.00 0.00 0.00 0.08 0.09 0.10

9.86% N/A N/A N/A 4.39 6.34 8.88 11.42 11.50% N/A N/A N/A 3.23 4.67 6.53 8.40 13.00% N/A N/A N/A 2.36 3.77 4.34 6.80

Ke 14.10% N/A N/A N/A 2.30 3.32 3.86 5.98 16.00% N/A N/A N/A 1.91 2.75 3.74 4.96 17.50% N/A N/A N/A 1.69 2.44 3.41 4.39 18.52% N/A N/A N/A 1.57 2.26 3.17 3.54

g

0.00 0.02 0.04 0.06 0.07 0.08 0.09 9.86% 8.12 7.37 6.10 4.39 0.90 N/A N/A 11.50% 7.05 6.17 4.83 3.23 0.58 N/A N/A 13.00% 6.31 5.39 4.07 2.61 0.44 N/A N/A

Ke 14.10% 5.86 4.94 3.66 2.30 0.37 N/A N/A 16.00% 5.24 4.33 3.12 1.91 0.30 N/A N/A 17.50% 4.84 3.95 2.80 1.30 0.26 N/A N/A 18.52% 4.61 3.74 2.63 1.57 0.24 N/A N/A

ROE 0.00% 2.41% 4.82% 7.23% 8.00% 9.00% 10.00%

0.00% N/A 1.95 3.91 5.86 6.48 7.29 8.10 2.00% N/A 0.39 2.66 4.94 5.67 6.61 7.55 4.00% N/A N/A 0.93 3.66 4.53 5.66 6.79

g 5.50% N/A N/A N/A 2.30 3.32 4.65 5.98 7.00% N/A N/A N/A 0.37 1.61 3.22 4.83 8.00% N/A N/A N/A N/A N/A 1.87 3.75 9.00% N/A N/A N/A N/A N/A N/A 2.24

228

Long Run Residual Income Approach (restated)

BVEo 1,753.24ROE 0.07Ke 0.141g 0.06MVE 12/31/07 163.11divide by shares 184.91Model Price on 12/31/07 0.88Model Price on 11/1/08 0.98Observed Share Price (11/1/2008) 3.59

ROE

0.06 0.07 0.08 0.09 0.10 0.11 0.12 9.86% N/A 2.11 5.53 7.73 10.66 13.58 16.51 11.50% N/A 1.45 3.82 5.33 7.35 9.37 11.39 13.00% N/A 1.14 2.99 4.18 5.76 7.34 8.92

Ke 14.10% N/A 0.98 2.59 3.61 4.98 6.35 7.71 16.00% N/A 0.80 2.11 2.94 4.05 5.17 6.28 17.50% N/A 0.70 1.84 2.57 3.54 4.52 5.49 18.52% N/A 0.65 1.70 2.37 3.27 4.17 5.07

G 0.00 0.01 0.02 0.03 0.04 0.05 0.06

9.86% 7.36 7.03 6.62 6.09 5.38 4.38 2.11 11.50% 6.39 6.01 5.55 4.98 4.26 3.32 1.45 13.00% 5.72 5.32 4.85 4.28 3.59 2.73 1.14

Ke 14.10% 5.31 4.91 4.44 3.89 3.23 2.42 0.98 16.00% 4.75 4.35 3.89 3.37 2.75 2.03 0.80 17.50% 4.39 4.00 3.55 3.05 2.47 1.80 0.70 18.52% 4.18 3.79 3.36 2.87 2.32 1.68 0.65

229

ROE 6.25% 7.08% 8.25% 9.00% 10.00% 11.00% 12.00%

0.0% 4.69 5.31 6.19 6.76 7.51 8.26 9.01 1.0% 4.24 4.91 5.86 6.46 7.27 8.08 8.89 2.0% 3.72 4.44 5.47 6.12 7.00 7.87 8.75

g 3.0% 3.10 3.89 5.01 5.72 6.67 7.63 8.58 4.0% 2.36 3.23 4.45 5.24 6.29 7.34 8.38 5.0% 1.45 2.42 3.78 4.65 5.82 6.98 8.14 6.4% 0 0.98 2.59 3.61 4.98 6.35 7.71

230

References

1. Brunswick Corporation, Inc. (SEE) 2003-2008 10-K

2. Business Analysis & Valuations, Palepu &Healy

3. Reuters

4. Wall Street Journal

5. Yahoo Finance

6. Cybex International (SEE) 2003-2007 10-K

7. ICON Health (SEE) 2003-2007 10-K

8. Nautilus (SEE) 2003-2007 10-K

9. Dr. Moore’s class notes

10. Wikipidia.com

11. Investopidia.com

pdf equity analysis and valuation - texas tech...

Documents