BC 2012.03.31 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
 
Commission file number 1-1043
 
Brunswick Corporation
 
(Exact name of registrant as specified in its charter)
 
Delaware
 
36-0848180
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)

1 N. Field Court, Lake Forest, Illinois 60045-4811
 
(Address of principal executive offices, including zip code)

(847) 735-4700  
 
(Registrant’s telephone number, including area code)
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
The number of shares of Common Stock ($0.75 par value) of the registrant outstanding as of May 1, 2012, was 89,313,117.


BRUNSWICK CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2012
 
 
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


PART I – FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements


BRUNSWICK CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(unaudited)

 
Three Months Ended
(in millions,  except per share data)
March 31,
2012
 
April 2,
2011
Net sales
$
974.2

 
$
985.9

Cost of sales
738.2

 
749.6

Selling, general and administrative expense
143.6

 
140.6

Research and development expense
24.6

 
23.4

Restructuring, exit and impairment charges
0.2

 
5.3

Operating earnings
67.6

 
67.0

Equity earnings (loss)
(1.2
)
 
0.5

Other income, net
0.9

 
—

Earnings before interest, loss on early extinguishment of debt and income taxes
67.3

 
67.5

Interest expense
(18.1
)
 
(23.3
)
Interest income
1.0

 
0.8

Loss on early extinguishment of debt
—

 
(4.3
)
Earnings before income taxes
50.2

 
40.7

Income tax provision
10.5

 
13.2

Net earnings
$
39.7

 
$
27.5

 
 
 
 
Earnings per common share:
 

 
 

Basic
$
0.44

 
$
0.31

Diluted
$
0.43

 
$
0.30

 
 
 
 
Weighted average shares used for computation of:
 

 
 

Basic earnings per common share
89.5

 
89.1

Diluted earnings per common share
92.3

 
92.5

 
 
 
 
Comprehensive income
$
48.0

 
$
45.2


The Notes to Condensed Consolidated Financial Statements are an integral part of these consolidated statements.

1


BRUNSWICK CORPORATION
Condensed Consolidated Balance Sheets

(in millions)
March 31,
2012
 
December 31,
2011
 
April 2,
2011
 
(unaudited)
 
 
 
(unaudited)
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents, at cost, which approximates market
$
307.1

 
$
338.2

 
$
424.0

Short-term investments in marketable securities
63.9

 
76.7

 
76.8

Total cash, cash equivalents and short-term investments in marketable securities
371.0

 
414.9

 
500.8

Restricted cash
20.0

 
20.0

 
—

Accounts and notes receivable, less allowances of $28.3, $31.0 and $37.7
454.4

 
346.2

 
469.2

Inventories
 

 
 

 
 

Finished goods
299.1

 
292.0

 
292.1

Work-in-process
174.2

 
167.2

 
169.8

Raw materials
84.8

 
73.4

 
88.9

Net inventories
558.1

 
532.6

 
550.8

Deferred income taxes
15.0

 
14.8

 
16.2

Prepaid expenses and other
24.4

 
27.6

 
28.6

Current assets
1,442.9

 
1,356.1

 
1,565.6

 
 
 
 
 
 
Property
 

 
 

 
 

Land
81.9

 
83.6

 
88.9

Buildings and improvements
597.6

 
606.8

 
646.0

Equipment
1,015.3

 
1,055.1

 
1,076.8

Total land, buildings and improvements and equipment
1,694.8

 
1,745.5

 
1,811.7

Accumulated depreciation
(1,184.8
)
 
(1,229.0
)
 
(1,254.6
)
Net land, buildings and improvements and equipment
510.0

 
516.5

 
557.1

Unamortized product tooling costs
69.8

 
69.0

 
58.8

Net property
579.8

 
585.5

 
615.9

 
 
 
 
 
 
Other assets
 

 
 

 
 

Goodwill
291.2

 
290.3

 
292.5

Other intangibles, net
47.9

 
49.2

 
54.8

Long-term investments in marketable securities
55.9

 
92.9

 
47.9

Equity investments
46.9

 
47.7

 
56.2

Other long-term assets
67.4

 
72.3

 
90.5

Other assets
509.3

 
552.4

 
541.9

 
 
 
 
 
 
Total assets
$
2,532.0

 
$
2,494.0

 
$
2,723.4

 
 
 
 
 
 
The Notes to Condensed Consolidated Financial Statements are an integral part of these consolidated statements.

2

BRUNSWICK CORPORATION
Condensed Consolidated Balance Sheets

(in millions)
March 31,
2012
 
December 31,
2011
 
April 2,
2011
 
(unaudited)
 
 
 
(unaudited)
Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Short-term debt, including current maturities of long-term debt
$
7.3

 
$
2.4

 
$
1.8

Accounts payable
340.9

 
282.0

 
339.3

Accrued expenses
542.7

 
623.7

 
616.5

Current liabilities
890.9

 
908.1

 
957.6

 
 
 
 
 
 
Long-term liabilities
 

 
 

 
 

Debt
688.7

 
690.4

 
809.9

Deferred income taxes
84.5

 
81.8

 
75.2

Postretirement benefits
590.2

 
592.6

 
550.3

Other
195.3

 
190.2

 
207.0

Long-term liabilities
1,558.7

 
1,555.0

 
1,642.4

 
 
 
 
 
 
Shareholders’ equity
 

 
 

 
 

Common stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares
76.9

 
76.9

 
76.9

Additional paid-in capital
435.0

 
434.6

 
425.8

Retained earnings
497.4

 
457.7

 
417.8

Treasury stock, at cost: 13,264,000, 13,434,000 and 13,529,000 shares
(394.4
)
 
(397.5
)
 
(399.3
)
Accumulated other comprehensive loss, net of tax
(532.5
)
 
(540.8
)
 
(397.8
)
Shareholders’ equity
82.4

 
30.9

 
123.4

 
 
 
 
 
 
Total liabilities and shareholders’ equity
$
2,532.0

 
$
2,494.0

 
$
2,723.4


The Notes to Condensed Consolidated Financial Statements are an integral part of these consolidated statements.

3


BRUNSWICK CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)

 
Three Months Ended
(in millions)
March 31,
2012
 
April 2,
2011
Cash flows from operating activities
 
 
 
Net earnings
$
39.7

 
$
27.5

Depreciation and amortization
23.9

 
28.4

Pension expense, net of funding
5.3

 
7.2

Gains on sale of property, plant and equipment, net
(1.5
)
 
(7.4
)
Other long-lived asset impairment (gains) charges
(1.3
)
 
0.3

Deferred income taxes
2.8

 
3.1

Loss on early extinguishment of debt
—

 
4.3

Changes in certain current assets and current liabilities
(150.6
)
 
(169.6
)
Income taxes
3.0

 
5.2

Other, net
9.0

 
17.9

Net cash used for operating activities
(69.7
)
 
(83.1
)
 
 
 
 
Cash flows from investing activities
 

 
 

Capital expenditures
(17.5
)
 
(13.2
)
Purchases of marketable securities
(60.5
)
 
(39.7
)
Sales or maturities of marketable securities
109.5

 
20.0

Investments
(0.7
)
 
(0.4
)
Proceeds from the sale of property, plant and equipment
9.0

 
10.4

Other, net
—

 
2.8

Net cash provided by (used for) investing activities
39.8

 
(20.1
)
 
 
 
 
Cash flows from financing activities
 

 
 

Net issuances (payments) of short-term debt
0.3

 
(0.4
)
Payments of long-term debt including current maturities
(1.7
)
 
(19.1
)
Net premium paid on early extinguishment of debt
—

 
(4.3
)
Net proceeds from stock compensation activity, including excess tax benefits
0.2

 
4.2

Other, net
—

 
(4.6
)
Net cash used for financing activities
(1.2
)
 
(24.2
)
 
 
 
 
Net decrease in cash and cash equivalents
(31.1
)
 
(127.4
)
Cash and cash equivalents at beginning of period
338.2

 
551.4

 
 
 
 
Cash and cash equivalents at end of period
$
307.1

 
$
424.0


The Notes to Condensed Consolidated Financial Statements are an integral part of these consolidated statements.

4

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
 
Note 1 – Significant Accounting Policies

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

These financial statements should be read in conjunction with, and have been prepared in conformity with, the accounting principles reflected in the consolidated financial statements and related notes included in Brunswick’s 2011 Annual Report on Form 10-K (the 2011 Form 10-K).  These results include, in the opinion of management, all normal and recurring adjustments necessary to present fairly the financial position of Brunswick as of March 31, 2012, December 31, 2011, and April 2, 2011, the results of operations for the three months ended March 31, 2012 and April 2, 2011, and the cash flows for the three months ended March 31, 2012 and April 2, 2011.  Due to the seasonality of Brunswick’s businesses, the interim results are not necessarily indicative of the results that may be expected for the remainder of the year.

The Company maintains its financial records on the basis of a fiscal year ending on December 31, with the fiscal quarters spanning thirteen weeks and ending on the Saturday closest to the end of that thirteen-week period.  The first quarter of fiscal year 2012 ended on March 31, 2012, and the first quarter of fiscal year 2011 ended on April 2, 2011.

Recent Accounting Pronouncements.  The Company evaluates the pronouncements of various authoritative accounting organizations, primarily the Financial Accounting Standards Board (FASB), the SEC, and the Emerging Issues Task Force (EITF), to determine the impact of new pronouncements on GAAP and the impact on the Company.  The following are recent accounting pronouncements that have been adopted during the three months ended March 31, 2012, or will be adopted in future periods.

Fair Value Measurements:  In May 2011, the FASB amended the Accounting Standards Codification (ASC) to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards.  The amendment is effective for the first interim or annual period beginning on or after December 15, 2011.  The adoption of this amendment on January 1, 2012 did not have a material impact on the Company's consolidated results of operations and financial condition.

Comprehensive Income:  In June 2011, the FASB amended the ASC to increase the prominence of the items reported in other comprehensive income.  Specifically, the amendment to the ASC eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendment must be applied retrospectively and is effective for fiscal years and the interim periods within those years, beginning after December 15, 2011.  The Company disclosed comprehensive income on the Condensed Consolidated Statements of Comprehensive Income as a result of adopting this amendment.

Intangibles – Goodwill and Other:  In September 2011, the FASB amended the ASC to simplify how entities test goodwill for impairment.  The amendment to the ASC permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.  The Company elected to early adopt the ASC amendment in 2011 and was not required to perform the two-step goodwill impairment test.

Note 2 – Restructuring Activities

In November 2006, Brunswick announced restructuring initiatives designed to improve the Company’s cost structure, better utilize overall capacity and improve general operating efficiencies.  These initiatives reflected the Company’s response to a difficult marine market, which continued to decline through 2010 and led to expanded restructuring activities between 2007 and 2011 in order to improve performance and better position the Company for current market conditions and longer-term profitable growth.  These initiatives have resulted in the recognition of restructuring, exit and impairment charges in the Condensed Consolidated Statements of Comprehensive Income during 2012 and 2011.



5
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

The costs incurred under these initiatives include:

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

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

Asset Disposition Actions – These amounts mainly relate to sales of assets and impairments of:
•
Fixed assets
•
Tooling
•
Patents and proprietary technology
•
Dealer networks
 
Impairments of definite-lived assets are recognized when, as a result of the restructuring activities initiated, the carrying amount of the long-lived asset is not expected to be fully recoverable.  The impairments recognized were equal to the difference between the carrying amount of the asset and the estimated fair value of the asset, which was determined using observable inputs, including the use of appraisals from independent third parties, when available, and, when observable inputs were not available, based on the Company’s assumptions of the data that market participants would use in pricing the asset, based on the best information available in the circumstances.  Specifically, the Company used discounted cash flows to determine the fair value of the asset when observable inputs were unavailable.

The Company has reported restructuring and exit activities based on the specific driver of the cost and reflected the expense in the accounting period when the cost has been committed or incurred, as appropriate.  The Company considers actions related to the divestiture of its Sealine boat business, the divestiture of its Triton fiberglass boat business, the closure of a marine electronics business and the sale of the Valley-Dynamo business to be exit activities.  All other actions taken are considered to be restructuring activities.

The following table is a summary of the expense associated with the restructuring, exit and impairment activities for the three months ended March 31, 2012 and April 2, 2011.  The 2012 charges consist of expenses related to actions initiated in 2010, 2009 and 2008.  The 2011 charges consist of expenses related to actions initiated in 2011, 2010, 2009 and 2008:
 
Three Months Ended
(in millions)
March 31,
2012
 
April 2,
2011
Restructuring activities:
 
 
 
Employee termination and other benefits
$
(0.3
)
 
$
1.2

Transformation and other costs:
 

 
 

Consolidation of manufacturing footprint
1.8

 
3.9

Exit activities:
 

 
 

Transformation and other costs:
 

 
 

Consolidation of manufacturing footprint
—

 
0.6

Asset disposition actions:
 

 
 

Definite-lived asset impairments and (gains) on disposal
(1.3
)
 
(0.4
)
Total restructuring, exit and impairment charges
$
0.2

 
$
5.3

 
The Company anticipates it will incur between $5 million and $10 million of additional restructuring charges in 2012 primarily related to known restructuring activities initiated in 2011, 2010 and 2009.  The Company expects most of these charges will be incurred in the Marine Engine and Boat segments.  Reductions in demand for the Company’s products, or further opportunities to reduce costs, may result in additional restructuring, exit or impairment charges in 2012.

6
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


Actions Initiated in 2011 and 2010

There were no restructuring, exit and impairment charges recorded during 2012 for actions initiated during 2011. During 2011 and 2010, the Company continued its restructuring activities by disposing of non-strategic assets, consolidating manufacturing operations and reducing the Company’s global workforce.  In the third quarter of 2011, the Company divested its Sealine boat brand. Results of operations of Sealine are not material for the periods presented. In the second quarter of 2010, the Company reached a decision to consolidate its Cabo Yachts production into its Hatteras facility in New Bern, North Carolina.  Additionally, the Company finalized plans to divest its Triton fiberglass boat brand and completed an asset sale transaction in the third quarter of 2010. In the fourth quarter of 2010, the Company recognized exit charges related to the closure of a marine electronics business.

The restructuring, exit and impairment charges recorded in the three months ended March 31, 2012 and April 2, 2011, related to actions initiated in 2011 and 2010, by reportable segment, are summarized below:
 
Three Months Ended
(in millions)
March 31,
2012
 
April 2,
2011
Boat
$
(0.2
)
 
$
1.4

Corporate
—

 
0.1

Total
$
(0.2
)
 
$
1.5


The following is a summary of the charges by category associated with the Company’s 2011 and 2010 restructuring initiatives:
 
Three Months Ended
(in millions)
March 31,
2012
 
April 2,
2011
Restructuring activities:
 
 
 
Employee termination and other benefits
$
—

 
$
0.2

Transformation and other costs:
 

 
 

Consolidation of manufacturing footprint
0.1

 
0.7

Exit activities:
 

 
 

Transformation and other costs:
 

 
 

Consolidation of manufacturing footprint
(0.3
)
 
0.6

Total restructuring, exit and impairment charges
$
(0.2
)
 
$
1.5

 
The restructuring charges related to actions initiated in 2011 and 2010, by reportable segment, for the three months ended March 31, 2012, are summarized below:
(in millions)
Boat
 
Total
Transformation and other costs
$
(0.2
)
 
$
(0.2
)
Total restructuring, exit and impairment charges
$
(0.2
)
 
$
(0.2
)

The restructuring charges related to actions initiated in 2011 and 2010, by reportable segment, for the three months ended April 2, 2011, are summarized below:
 
(in millions)
Boat
 
Corporate
 
Total
Employee termination and other benefits
$
0.1

 
$
0.1

 
$
0.2

Transformation and other costs
1.3

 
—

 
1.3

Total restructuring, exit and impairment charges
$
1.4

 
$
0.1

 
$
1.5






7
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

The following table summarizes the activity for restructuring, exit and impairment charges related to actions initiated in 2011 and 2010 during the three months ended March 31, 2012.  The accrued amounts as of March 31, 2012 represent cash expenditures needed to satisfy remaining obligations.  The majority of the accrued costs is expected to be paid by the end of 2012 and is included in Accrued expenses in the Condensed Consolidated Balance Sheets.
(in millions)
Accrued Costs as of
Jan. 1, 2012
 
Gains  Recognized in 2012
 
Non-cash Gains (Charges)
 
Net Cash Payments
 
Accrued Costs as of March 31, 2012
Employee termination and other benefits
$
0.8

 
$
—

 
$
—

 
$
(0.6
)
 
$
0.2

Transformation and other costs:
 

 
 

 
 

 
 

 
 

Consolidation of manufacturing footprint
0.7

 
(0.2
)
 
0.3

 
(0.1
)
 
0.7

Retention and relocation costs
0.2

 
—

 
—

 
(0.1
)
 
0.1

Total restructuring, exit and impairment charges
$
1.7

 
$
(0.2
)
 
$
0.3

 
$
(0.8
)
 
$
1.0


Actions Initiated in 2009 and 2008

During the third quarter of 2009, the Company announced plans to reduce excess manufacturing capacity by relocating inboard and sterndrive production to Fond du Lac, Wisconsin and closing its Stillwater, Oklahoma plant.  This plant transition is expected to conclude in 2012. The Company also continued to consolidate the Boat segment’s manufacturing footprint in 2009 and began marketing for sale certain previously closed boat production facilities in the fourth quarter of 2009.  During 2008, the Company announced the closure of its boat production facilities in Cumberland, Maryland.  These actions in the Company’s marine businesses were designed to provide long-term cost savings by reducing its fixed-cost structure.

The restructuring, exit and impairment charges recorded in the three months ended March 31, 2012 and April 2, 2011, related to actions initiated in 2009 and 2008, by reportable segment, are summarized below:
 
Three Months Ended
(in millions)
March 31,
2012
 
April 2,
2011
Marine Engine
$
1.7

 
$
4.3

Boat
(1.3
)
 
(0.4
)
Corporate
—

 
(0.1
)
Total
$
0.4

 
$
3.8


The following is a summary of the charges by category associated with the 2009 and 2008 restructuring activities recognized during the three months ended March 31, 2012 and April 2, 2011:

 
Three Months Ended
(in millions)
March 31,
2012
 
April 2,
2011
Restructuring activities:
 
 
 
Employee termination and other benefits
$
(0.3
)
 
$
1.0

Transformation and other costs:
 

 
 

Consolidation of manufacturing footprint
2.0

 
3.2

Asset disposition actions:
 

 
 

Definite-lived asset impairments and (gains) on disposal
(1.3
)
 
(0.4
)
Total restructuring, exit and impairment charges
$
0.4

 
$
3.8








8
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

The restructuring charges related to actions initiated in 2009 and 2008, by reportable segment, for the three months ended March 31, 2012, are summarized below:
(in millions)
Marine
Engine
 
Boat
 
Total
Employee termination and other benefits
$
(0.3
)
 
$
—

 
$
(0.3
)
Transformation and other costs
2.0

 
—

 
2.0

Asset disposition actions
—

 
(1.3
)
 
(1.3
)
Total restructuring, exit and impairment charges
$
1.7

 
$
(1.3
)
 
$
0.4


The restructuring charges related to actions initiated in 2009 and 2008, by reportable segment, for the three months ended April 2, 2011, are summarized below:
(in millions)
Marine
Engine
 
Boat
 
Corporate
 
Total
Employee termination and other benefits
$
1.0

 
$
—

 
$
—

 
$
1.0

Transformation and other costs
3.3

 
—

 
(0.1
)
 
3.2

Asset disposition actions
—

 
(0.4
)
 
—

 
(0.4
)
Total restructuring, exit and impairment charges
$
4.3

 
$
(0.4
)
 
$
(0.1
)
 
$
3.8


The following table summarizes the activity for restructuring, exit and impairment charges related to actions initiated in 2009 and 2008 during the three months ended March 31, 2012.  The accrued amounts as of March 31, 2012 represent cash expenditures needed to satisfy remaining obligations.  The majority of the accrued costs is expected to be paid by the end of 2012 and is included in Accrued expenses in the Condensed Consolidated Balance Sheets.
(in millions)
Accrued Costs as of
Jan. 1, 2012
 
Costs/(Gains)  Recognized in 2012
 
Non-cash Charges
 
Net Cash Payments
 
Accrued Costs as of March 31, 2012
Employee termination and other benefits
$
9.3

 
$
(0.3
)
 
$
—

 
$
(3.4
)
 
$
5.6

Transformation and other costs:
 

 
 

 
 

 
 

 
 

Consolidation of manufacturing footprint
2.4

 
2.0

 
—

 
(2.1
)
 
2.3

Asset disposition actions:
 

 
 

 
 

 
 

 
 

Definite-lived asset impairments and (gains) on disposal
—

 
(1.3
)
 
1.3

 
—

 
—

Total restructuring, exit and impairment charges
$
11.7

 
$
0.4

 
$
1.3

 
$
(5.5
)
 
$
7.9


Note 3 – Financial Instruments

The Company operates globally, with manufacturing and sales facilities in various locations around the world.  Due to the Company’s global operations, the Company engages in activities involving both financial and market risks.  The Company utilizes normal operating and financing activities, along with derivative financial instruments, to minimize these risks.

Derivative Financial Instruments. The Company uses derivative financial instruments to manage its risks associated with movements in foreign currency exchange rates, interest rates and commodity prices.  Derivative instruments are not used for trading or speculative purposes.  For certain derivative contracts, on the date a derivative contract is entered into, the Company designates the derivative as a hedge of a forecasted transaction (cash flow hedge).  The Company formally documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction.  This process includes linking derivatives that are designated as hedges to specific forecasted transactions.  The Company also assesses, both at the hedge’s inception and monthly thereafter, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in the anticipated cash flows of the hedged item.  If the hedging relationship ceases to be highly effective, or it becomes probable that a forecasted transaction is no longer expected to occur, gains and losses on the derivative are recorded in Cost of sales or Interest expense as appropriate.  There were no material adjustments as a result of ineffectiveness to the results of operations for the three months ended March 31, 2012 and April 2, 2011. The fair market value of derivative financial instruments is determined through market-based valuations and may not be representative of the actual gains or losses that will be recorded when these instruments mature due to future fluctuations

9
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

in the markets in which they are traded.  The effects of derivative and financial instruments are not expected to be material to the Company’s financial position or results of operations when considered together with the underlying exposure being hedged.

Fair Value Hedges. During 2012 and 2011, the Company entered into foreign currency forward contracts to manage foreign currency exposure related to changes in the value of assets or liabilities caused by changes in foreign exchange rates.  The change in the fair value of the foreign currency derivative contract and the corresponding change in the fair value of the asset or liability of the Company are both recorded through earnings, each period as incurred.

Cash Flow Hedges. The Company enters into certain derivative instruments that qualify as cash flow hedges.  The Company executes both forward and option contracts, based on forecasted transactions, to manage foreign exchange exposure mainly related to inventory purchase and sales transactions.  The Company also enters into commodity swap agreements, based on anticipated purchases of aluminum, copper and natural gas, to manage risk related to price changes.  In addition, the Company enters into forward starting interest rate swaps to hedge the interest rate risk associated with the anticipated issuance of debt.

A cash flow hedge requires that as changes in the fair value of derivatives occur, the portion of the change deemed to be effective is recorded temporarily in Accumulated other comprehensive loss, an equity account, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  As of March 31, 2012, the term of derivative instruments hedging forecasted transactions ranged from one to 21 months. 
 
Foreign Currency. The Company enters into forward and option contracts to manage foreign exchange exposure related to forecasted transactions, and assets and liabilities that are subject to risk from foreign currency rate changes.  These include: product costs; revenues and expenses; associated receivables and payables; intercompany obligations and receivables; and other related cash flows.

Forward exchange contracts outstanding at March 31, 2012 and December 31, 2011 had notional contract values of $114.6 million and $112.1 million, respectively.  Option contracts outstanding at March 31, 2012 and December 31, 2011, had notional contract values of $110.4 million and $106.8 million, respectively.  The forward and options contracts outstanding at March 31, 2012, mature during 2012 and 2013 and mainly relate to the Euro, Canadian dollar, Mexican peso, British pound, Australian dollar, Japanese yen, Swedish krona, Norwegian krone, New Zealand dollar, and Hungarian forint.  As of March 31, 2012, the Company estimates that during the next 12 months, it will reclassify approximately $1.9 million of net losses (based on current rates) from Accumulated other comprehensive loss to Cost of sales.

Interest Rate. In the third quarter of 2011, the Company entered into forward starting interest rate swaps with a combined notional value of $50.0 million to hedge the interest rate risk associated with the anticipated debt refinancing in 2013 of the Company’s senior notes due in 2016.

As of March 31, 2012 and December 31, 2011, the Company had $1.3 million and $0.5 million, respectively, of net deferred gains associated with all forward starting interest rate swaps, which were included in Accumulated other comprehensive loss.  These amounts include gains deferred on $250.0 million of notional value forward starting interest rate swaps terminated in July 2006, net of losses deferred on $150.0 million of forward starting swaps, which were terminated in August 2008, and losses deferred on $50.0 million of notional value forward starting swaps, which were outstanding at March 31, 2012.  For the three months ended March 31, 2012, the Company recognized $0.2 million of income related to the net amortization of deferred gains and losses resulting from settled forward starting interest rate swaps.

Commodity Price. The Company uses commodity swaps to hedge anticipated purchases of aluminum, copper and natural gas.  Commodity swap contracts outstanding at March 31, 2012 and December 31, 2011 had notional values of $26.1 million and $27.1 million, respectively.  The contracts outstanding mature through 2013.  The amount of gain or loss associated with these instruments are deferred in Accumulated other comprehensive loss and are recognized in Cost of sales in the same period or periods during which the hedged transaction affects earnings.  As of March 31, 2012, the Company estimates that during the next 12 months, it will reclassify approximately $2.1 million in net losses (based on current prices) from Accumulated other comprehensive loss to Cost of sales.








10
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

As of March 31, 2012, the fair values of the Company’s derivative instruments were:
(in millions)
 
 
 
 
 
 
Derivative Assets
 
Derivative Liabilities
Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Foreign exchange contracts
 
Prepaid expenses and other
 
$
1.2

 
Accrued expenses
 
$
3.5

Commodity contracts
 
Prepaid expenses and other
 
0.2

 
Accrued expenses
 
2.2

Interest rate contracts
 
Prepaid expenses and other
 
—

 
Accrued expenses
 
1.4

Total
 
 
 
$
1.4

 
 
 
$
7.1


As of December 31, 2011, the fair values of the Company’s derivative instruments were:
(in millions)
 
 
 
 
 
 
Derivative Assets
 
Derivative Liabilities
Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Foreign exchange contracts
 
Prepaid expenses and other
 
$
3.9

 
Accrued expenses
 
$
1.5

Commodity contracts
 
Prepaid expenses and other
 
—

 
Accrued expenses
 
4.1

Interest rate contracts
 
 Prepaid expenses and other
 
—

 
        Accrued expenses
 
2.4

Total
 
 
 
$
3.9

 
 
 
$
8.0


The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 was: 
(in millions)
 
 
 
 
Fair Value Hedging Instruments
 
Location of (Loss) on Derivatives
Recognized in Earnings
 
Amount of (Loss) on Derivatives Recognized in Earnings
Foreign exchange contracts
 
Cost of sales
 
$
(0.6
)
Foreign exchange contracts
 
Other income, net
 
(0.1
)
Total
 
 
 
$
(0.7
)

Cash Flow Hedge Instruments
 
Amount of Gain (Loss) on Derivatives Recognized in Accumulated Other Comprehensive Loss (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
Interest rate contracts
 
$
(1.4
)
 
Interest expense
 
$
0.2

Foreign exchange contracts
 
(4.6
)
 
Cost of sales
 
0.2

Commodity contracts
 
1.2

 
Cost of sales
 
(0.8
)
Total
 
$
(4.8
)
 
 
 
$
(0.4
)

The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months ended April 2, 2011 was:
(in millions)
 
 
 
 
Fair Value Hedging Instruments
 
Location of (Loss) on Derivatives
Recognized in Earnings
 
Amount of (Loss) on Derivatives Recognized in Earnings
Foreign exchange contracts
 
Cost of sales
 
$
(1.3
)
Foreign exchange contracts
 
Other income, net
 
(0.1
)
Total
 
 
 
$
(1.4
)


11
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

Cash Flow Hedge Instruments
 
Amount of Gain (Loss) on Derivatives Recognized in Accumulated Other Comprehensive Loss (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
Interest rate contracts
 
$
—

 
Interest expense
 
$
0.3

Foreign exchange contracts
 
(4.9
)
 
Cost of sales
 
(1.7
)
Commodity contracts
 
1.6

 
Cost of sales
 
0.8

Total
 
$
(3.3
)
 
 
 
$
(0.6
)

Concentration of Credit Risk. The Company enters into financial instruments and invests a portion of its cash reserves in marketable debt securities with banks and investment firms with which the Company has business relationships and regularly monitors the credit ratings of its counterparties.  The Company sells a broad range of recreation products to a worldwide customer base and extends credit to its customers based upon an ongoing credit evaluation program.  The Company’s business units maintain credit organizations to manage financial exposure.  Credit risk assessments are performed on an individual account basis.  Accounts are not aggregated into categories for credit risk determinations.  There are no concentrations of credit risk resulting from accounts receivable that are considered material to the Company’s financial position.  Refer to Note 8 – Financing Receivables for more information.

Fair Value of Other Financial Instruments. The carrying values of the Company’s short-term financial instruments, including cash and cash equivalents, accounts and notes receivable and short-term debt, including current maturities of long-term debt, approximate their fair values because of the short maturity of these instruments.  At March 31, 2012, the fair value of the Company’s long-term debt was approximately $734.2 million and was determined using Level 1 inputs described in Note 4 – Fair Value Measurements, including quoted market prices or discounted cash flows based on quoted market rates for similar types of debt.  The carrying value of long-term debt, including current maturities, was $694.8 million as of March 31, 2012.

Note 4 – Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.  There is a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.
 
•
Level 1 - Quoted prices in active markets for identical assets or liabilities.  These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets or liabilities.

•
Level 2 - Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly.  These are typically obtained from readily available pricing sources for comparable instruments. The Company performs additional procedures to ensure its third party pricing sources are reasonable including: reviewing documentation explaining third parties' pricing methodologies and evaluating whether those methodologies were in compliance with GAAP; performing independent testing of period-end valuations and recent transactions against other available pricing sources; and reviewing available Service Organization Controls Reports, as defined in Statement on Standards for Attestation Engagements Number 16, to understand the internal control environment at the Company's third party pricing providers.

•
Level 3 - Unobservable inputs, where there is little or no market activity for the asset or liability.  These inputs reflect the reporting entity’s own assumptions of the data that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.









12
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

The following table summarizes Brunswick’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2012:
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
121.0

 
$
—

 
$
—

 
$
121.0

Short-term investments in marketable securities
3.1

 
60.8

 
—

 
63.9

Long-term investments in marketable securities
55.9

 
—

 
—

 
55.9

Restricted cash
20.0

 
—

 
—

 
20.0

Equity investments
0.4

 
—

 
—

 
0.4

Derivatives
—

 
1.4

 
—

 
1.4

Total assets
$
200.4

 
$
62.2

 
$
—

 
$
262.6

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives
$
—

 
$
7.1

 
$
—

 
$
7.1

Total liabilities
$
—

 
$
7.1

 
$
—

 
$
7.1


The following table summarizes Brunswick’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2011:
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
135.2

 
$
—

 
$
—

 
$
135.2

Short-term investments in marketable securities
5.5

 
71.2

 
—

 
76.7

Long-term investments in marketable securities
92.9

 
—

 
—

 
92.9

Restricted Cash
20.0

 
—

 
—

 
20.0

Equity investments
0.7

 
—

 
—

 
0.7

Derivatives
—

 
3.9

 
—

 
3.9

Total assets
$
254.3

 
$
75.1

 
$
—

 
$
329.4

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives
$
—

 
$
8.0

 
$
—

 
$
8.0

Total liabilities
$
—

 
$
8.0

 
$
—

 
$
8.0


Refer to Note 3 – Financial Instruments for additional information related to the fair value of derivative assets and liabilities by class.  In addition to the items shown in the table above, refer to Note 15 in the Company’s 2011 Form 10-K for further discussion regarding the fair value measurements associated with the Company’s postretirement benefit plans.

During the three months ended March 31, 2012 and April 2, 2011, the Company undertook various restructuring activities, as discussed in Note 2 – Restructuring Activities.  The restructuring activities required the Company to perform fair value measurements, on a non-recurring basis, of certain asset groups to test for potential impairments.  Certain of these fair value measurements indicated that the asset groups were impaired and, therefore, the assets were written down to fair value.  Once an asset has been impaired, it is not remeasured at fair value on a recurring basis; however, it is still subject to fair value measurements to test for recoverability of the carrying amount.  Other than the assets measured at fair value on a recurring basis, as shown in the table above, the definite-lived asset balances shown in the Condensed Consolidated Balance Sheets that were measured at fair value on a non-recurring basis were $5.5 million, of which $4.7 million and $0.8 million were measured as of December 31, 2011 and July 2, 2011, respectively.  Assets measured at fair value on a nonrecurring basis relate primarily to assets no longer being used.  Those balances were determined with the market approach using Level 2 inputs, including third-party appraisals of comparable property.




13
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 5 – Share-Based Compensation

Under the 2003 Stock Incentive Plan (Plan), the Company may grant stock options, stock appreciation rights (SARs), non-vested stock and other types of share-based awards to executives and other management employees.  Under the Plan, the Company may issue up to 13.1 million shares, from treasury shares and authorized, but unissued shares of common stock.  As of March 31, 2012, 2.1 million shares were available for grant.

SARs

Since the beginning of 2005, the Company has issued stock-settled SARs and has not issued any stock options.  During the three months ended March 31, 2012, and April 2, 2011, the Company granted 0.4 million and 0.9 million SARs, respectively.  In the three months ended March 31, 2012 and April 2, 2011, there was $1.8 million and $2.1 million, respectively, of total expense after adjusting for forfeitures, due to amortization of SARs granted.  

The weighted average fair values of individual SARs granted during the first quarters of 2012 and 2011 were $12.70 and $11.14, respectively.  The Company estimated the fair value of each grant on the date of grant using the Black-Scholes-Merton pricing model, utilizing the following weighted average assumptions for 2012 and 2011:
 
2012
 
2011
Risk-free interest rate
1.1
%
 
2.8
%
Dividend yield
0.2
%
 
0.2
%
Volatility factor
58.3
%
 
52.3
%
Weighted average expected life
5.2 – 6.7 years

 
5.2 – 6.7 years


Non-vested Stock Awards

During the three months ended March 31, 2012 and April 2, 2011, the Company granted 0.2 million and 0.2 million of stock awards, respectively.  The Company recognizes the cost of non-vested stock awards on a straight-line basis over the requisite service period.  During the three months ended March 31, 2012 and April 2, 2011, $1.4 million and $0.5 million, respectively, was charged to compensation expense from the amortization of previous grants.  

As of March 31, 2012, there was $8.3 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan.  That cost is expected to be recognized over a weighted average period of 1.6 years.

Performance Awards

In February 2012, the Company granted performance shares to certain senior executives. The performance portion of the award program consists of two performance measures - a cash flow return on investment (CFROI) measure and a total shareholder return (TSR) modifier. Target performance shares are earned during the one-year CFROI performance period, commencing January 1, 2012, and ending December 31, 2012. The target performance shares earned from CFROI performance are then subject to a TSR modifier based on performance against a predefined comparator group over the three-year performance period. Based upon current projections of probable attainment of the CFROI measure and the projected TSR modifier, $0.4 million was charged to compensation expense for the three months ended March 31, 2012.

The grant date fair value of the performance awards was $26.81, which was estimated using the Monte Carlo valuation model, and incorporated the following assumptions:

 
2012
Risk-free interest rate
0.4
%
Dividend yield
0.2
%
Volatility factor
67.9
%
Expected life of award
2.9 years




14
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

As of March 31, 2012, there was $2.5 million of total unrecognized compensation cost related to performance awards granted under the Plan.  That cost is expected to be recognized over a weighted average period of 1.4 years.

Director Awards

The Company issues stock awards to directors in accordance with the terms and conditions determined by the Nominating and Corporate Governance Committee of the Board of Directors.  One-half of each director’s annual fee is paid in Brunswick common stock, the receipt of which may be deferred until a director retires from the Board of Directors.  Each director may elect to have the remaining one-half paid either in cash, in Brunswick common stock distributed at the time of the award, or in deferred Brunswick common stock units with a 20 percent premium.  Prior to May 2009, each non-employee director also received an annual grant of restricted stock units, which is deferred until the director retires from the Board.
 
Note 6 – Earnings per Common Share

Basic earnings per common share is calculated by dividing Net earnings by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share is calculated similarly, except that the calculation includes the dilutive effect of SARs and stock options (collectively “options”) and non-vested stock awards.

Basic and diluted earnings per common share for the three months ended March 31, 2012 and April 2, 2011, were calculated as follows:
 
Three Months Ended
(in millions, except per share data)
March 31,
2012
 
April 2,
2011
Net earnings
$
39.7

 
$
27.5

 
 
 
 
Weighted average outstanding shares – basic
89.5

 
89.1

Dilutive effect of common stock equivalents
2.8

 
3.4

Weighted average outstanding shares – diluted
92.3

 
92.5

 
 
 
 
Basic earnings per common share
$
0.44

 
$
0.31

 
 
 
 
Diluted earnings per common share
$
0.43

 
$
0.30


As of March 31, 2012, the Company had 9.1 million options outstanding, of which 5.8 million were exercisable.  This compares with 9.5 million options outstanding, of which 4.5 million were exercisable, as of April 2, 2011.  During the three months ended March 31, 2012 and April 2, 2011, there were 2.3 million and 2.7 million weighted average shares of options outstanding, respectively, for which the exercise price, based on the average price, was greater than the average market price of the Company’s shares for the period then ended.  These options were not included in the computation of diluted earnings per common share because the effect would have been anti-dilutive.

Note 7 – Commitments and Contingencies

Financial Commitments

The Company has entered into guarantees of indebtedness of third parties, primarily in connection with customer financing programs.  Under these arrangements, the Company has guaranteed customer obligations to the financial institutions in the event of customer default, generally subject to a maximum amount that is less than total obligations outstanding.  The Company has also extended guarantees to third parties that have purchased customer receivables from Brunswick and, in certain instances, has guaranteed secured term financing of its customers.  Potential payments in connection with these customer financing arrangements generally extend over several years.  The potential cash obligations associated with these customer financing arrangements as of March 31, 2012 and April 2, 2011, were:

15
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

 
Single Year Obligation
 
Maximum Obligation
(in millions)
March 31,
2012
 
April 2,
2011
 
March 31,
2012
 
April 2,
2011
Marine Engine
$
7.6

 
$
5.9

 
$
7.6

 
$
5.9

Boat
2.4

 
1.9

 
2.4

 
1.9

Fitness
30.9

 
39.7

 
36.3

 
45.3

Bowling & Billiards
1.9

 
4.7

 
3.0

 
9.9

Total
$
42.8

 
$
52.2

 
$
49.3

 
$
63.0


In most instances, upon repurchase of the debt obligation, the Company receives rights to the collateral securing the financing.  The Company’s risk under these arrangements is partially mitigated by the value of the collateral that secures the financing.  The Company had $3.4 million and $5.6 million accrued for potential losses related to recourse exposure at March 31, 2012 and April 2, 2011, respectively.

The Company has also entered into arrangements with third-party lenders where it has agreed, in the event of a default by the customer, to repurchase from the third-party lender those Brunswick products repossessed from the customer.  These arrangements are typically subject to a maximum repurchase amount.  The potential cash payments the Company could be required to make to repurchase collateral as of March 31, 2012 and April 2, 2011, were:
 
Single Year Obligation
 
Maximum Obligation
(in millions)
March 31,
2012
 
April 2,
2011
 
March 31,
2012
 
April 2,
2011
Marine Engine
$
2.0

 
$
3.0

 
$
2.0

 
$
3.0

Boat
85.8

 
88.6

 
105.8

 
108.6

Bowling & Billiards
0.2

 
0.2

 
0.2

 
0.2

Total
$
88.0

 
$
91.8

 
$
108.0

 
$
111.8


The Company’s risk under these repurchase arrangements is partially mitigated by the value of the products repurchased as part of the transaction.  The Company had $1.9 million and $1.8 million accrued for potential losses related to repurchase exposure at March 31, 2012 and April 2, 2011, respectively.  The Company’s repurchase accrual represents the expected losses resulting from obligations to repurchase products, after giving effect to proceeds anticipated to be received from the resale of those products to alternative dealers.
 
The Company has recorded the fair value of its estimated net liability associated with losses from these guarantee and repurchase obligations on its Condensed Consolidated Balance Sheets based on historical experience and current facts and circumstances.  Historical cash requirements and losses associated with these obligations have not been significant, but could increase if dealer defaults exceed current expectations.

The Company has accounts receivable sale arrangements with third parties which are included in the guarantee arrangements discussed above.  The Company treats the sale of receivables in which the Company retains an interest as a secured obligation as these arrangements do not meet the requirements of a “true sale.”  Accordingly, the current portion of these arrangements of $40.6 million and $45.0 million was recorded in Accounts and notes receivable and Accrued expenses as of March 31, 2012 and December 31, 2011, respectively.  Further, the long-term portion of these arrangements of $29.5 million and $33.2 million as of March 31, 2012 and December 31, 2011, respectively, was recorded in Other long-term assets and Other long-term liabilities.

Financial institutions have issued standby letters of credit and surety bonds conditionally guaranteeing obligations on behalf of the Company totaling $44.3 million as of March 31, 2012.  A large portion of these standby letters of credit and surety bonds are related to the Company’s self-insured workers’ compensation program as required by its insurance companies and various state agencies.  The Company has recorded reserves to cover liabilities associated with these programs.  Under certain circumstances, such as an event of default under the Company’s revolving credit facility, or, in the case of surety bonds, a ratings downgrade below investment grade, the Company could be required to post collateral to support the outstanding letters of credit and surety bonds.  As the Company’s current long-term debt ratings are below investment grade, the Company has posted letters of credit totaling $8.1 million as collateral against $16.3 million of outstanding surety bonds as of March 31, 2012.

During the third quarter of 2011, the Company entered into a collateral trust arrangement with an insurance carrier and a trustee bank.  The trust is owned by the Company, but the assets are pledged as collateral against workers’ compensation related

16
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

obligations.  In connection with this arrangement, the Company transferred $20.0 million of cash into the trust, and canceled an equal amount of letters of credit which had been previously provided as collateral against these obligations.  The cash assets included in the trust are classified as Restricted cash on the Company’s Condensed Consolidated Balance Sheet.

Product Warranties

The Company records a liability for product warranties at the time revenue is recognized.  The liability is estimated using historical warranty experience, projected claim rates and expected costs per claim.  The Company adjusts its liability for specific warranty matters when they become known and the exposure can be estimated.  The Company’s warranty reserves are affected by product failure rates as well as material usage and labor costs incurred in correcting a product failure.  If actual costs differ from estimated costs, the Company must make a revision to the warranty reserve.

The following activity related to product warranty liabilities was recorded in Accrued expenses during the three months ended March 31, 2012 and April 2, 2011:
 
Three Months Ended
(in millions)
March 31,
2012
 
April 2,
2011
Balance at beginning of period
$
133.2

 
$
151.3

Payments made
(15.2
)
 
(16.4
)
Provisions/additions for contracts issued/sold
17.0

 
19.8

Aggregate changes for preexisting warranties
0.5

 
(0.1
)
Balance at end of period
$
135.5

 
$
154.6


Additionally, customers may purchase a contract from the Company that extends product warranty beyond the standard period in the Company’s Marine Engine, Boat and Fitness segments.  For certain extended warranty contracts in which the Company retains the warranty obligation, a deferred liability is recorded based on the aggregate sales price for contracts sold.  The deferred liability is reduced and revenue is recognized over the contract period during which costs are expected to be incurred.  Deferred revenue associated with contracts sold by the Company that extend product protection beyond the standard product warranty period, not included in the table above, was $42.4 million and $41.4 million at March 31, 2012 and December 31, 2011, respectively and is recorded in Accrued expenses and Other long-term liabilities.

Legal and Environmental

The Company accrues for litigation exposure based upon its assessment, made in consultation with counsel, of the likely range of exposure stemming from the claim.  Management does not expect, in light of existing reserves, that the Company’s litigation claims, when finally resolved, will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.  If current estimates for the cost of resolving any claims are later determined to be inadequate, results of operations could be adversely affected in the period in which additional provisions are required.

Aside from the discussion set forth under Part II, Item 1 "Legal Proceedings" of this report, there were no significant changes to the legal and environmental commitments that were discussed in Note 11 to the consolidated financial statements in the 2011 Form 10-K.
 














17
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


Note 8 – Financing Receivables

The Company has recorded financing receivables, which are defined as a contractual right to receive money, recognized as assets on its Condensed Consolidated Balance Sheets as of March 31, 2012, December 31, 2011 and April 2, 2011.  Substantially all of the Company’s financing receivables are for commercial customers.  The Company classifies its financing receivables into three categories: receivables repurchased under recourse provisions (Recourse Receivables); receivables sold to third-party finance companies (Third-Party Receivables) and customer notes and other (Other Receivables).  Recourse Receivables are the result of the contingent recourse arrangements discussed in Note 7 – Commitments and Contingencies.  Third-Party Receivables are accounts that have been sold to third-party finance companies, but do not meet the definition of a true sale, and are therefore recorded as an asset with an offsetting balance recorded as a secured obligation in Accrued expenses and Other long-term liabilities as discussed in Note 7 – Commitments and Contingencies.  Other Receivables are mostly comprised of notes from customers, which are originated by the Company in the normal course of business.  Financing receivables are carried at their face amounts less an allowance for doubtful accounts.

The Company sells a broad range of recreation products to a worldwide customer base and extends credit to its customers based upon an ongoing credit evaluation program.  The Company’s business units maintain credit organizations to manage financial exposure and perform credit risk assessments on an individual account basis.  Accounts are not aggregated into categories for credit risk determinations.  Due to the composition of the account portfolio, the Company does not believe that the credit risk posed by the Company’s financing receivables is significant to its operations or financial position.  There were no significant troubled debt restructurings during the three months ended March 31, 2012.

The following are the Company’s financing receivables, excluding trade accounts receivable contractually due within one year, by segment as of March 31, 2012:
(in millions)
Marine
 Engine
 
Boat
 
Fitness
 
Bowling & Billiards
 
Corporate
 
Total
Recourse Receivables:
 
 
 
 
 
 
 
 
 
 
 
Short-term
$
—

 
$
—

 
$
2.6

 
$
8.1

 
$
—

 
$
10.7

Long-term
—

 
—

 
1.6

 
4.8

 
—

 
6.4

Allowance for credit loss
—

 
—

 
(1.6
)
 
(6.4
)
 
—

 
(8.0
)
Total
—

 
—

 
2.6

 
6.5

 
—

 
9.1

 
 
 
 
 
 
 
 
 
 
 
 
Third-Party Receivables:
 

 
 

 
 

 
 

 
 

 
 

Short-term
5.1

 
2.7

 
32.6

 
0.2

 
—

 
40.6

Long-term
—

 
—

 
29.5

 
—

 
—

 
29.5

Allowance for credit loss
—

 
—

 
—

 
—

 
—

 
—

Total
5.1

 
2.7

 
62.1

 
0.2

 
—

 
70.1

 
 
 
 
 
 
 
 
 
 
 
 
Other Receivables:
 

 
 

 
 

 
 

 
 

 
 

Short-term
9.1

 
2.9

 
3.4

 
—

 
4.6

 
20.0

Long-term
4.0

 
0.6

 
0.4

 
—

 
—

 
5.0

Allowance for credit loss
—

 
(2.5
)
 
(0.4
)
 
—

 
—

 
(2.9
)
Total
13.1

 
1.0

 
3.4

 
—

 
4.6

 
22.1

 
 
 
 
 
 
 
 
 
 
 
 
Total Financing Receivables
$
18.2

 
$
3.7

 
$
68.1

 
$
6.7

 
$
4.6

 
$
101.3










18
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following are the Company’s financing receivables, excluding trade accounts receivable contractually due within one year, by segment as of December 31, 2011:
(in millions)
Marine
Engine
 
Boat
 
Fitness
 
Bowling & Billiards
 
Corporate
 
Total
Recourse Receivables:
 
 
 
 
 
 
 
 
 
 
 
Short-term
$
—

 
$
—

 
$
3.0

 
$
8.3

 
$
—

 
$
11.3

Long-term
—

 
—

 
1.2

 
4.9

 
—

 
6.1

Allowance for credit loss
—

 
—

 
(1.8
)
 
(6.6
)
 
—

 
(8.4
)
Total
—

 
—

 
2.4

 
6.6

 
—

 
9.0

 
 
 
 
 
 
 
 
 
 
 
 
Third-Party Receivables:
 

 
 

 
 

 
 

 
 

 
 

Short-term
8.3

 
2.9

 
33.6

 
0.2

 
—

 
45.0

Long-term
—

 
—

 
33.1

 
0.1

 
—

 
33.2

Allowance for credit loss
—

 
—

 
—

 
—

 
—

 
—

Total
8.3

 
2.9

 
66.7

 
0.3

 
—

 
78.2

 
 
 
 
 
 
 
 
 
 
 
 
Other Receivables:
 

 
 

 
 

 
 

 
 

 
 

Short-term
6.1

 
2.6

 
6.0

 
—

 
7.5

 
22.2

Long-term
4.1

 
0.8

 
0.4

 
—

 
0.4

 
5.7

Allowance for credit loss
—

 
(2.6
)
 
(0.4
)
 
—

 
—

 
(3.0
)
Total
10.2

 
0.8

 
6.0

 
—

 
7.9

 
24.9

 
 
 
 
 
 
 
 
 
 
 
 
Total Financing Receivables
$
18.5

 
$
3.7

 
$
75.1

 
$
6.9

 
$
7.9

 
$
112.1


The following table sets forth activity related to the allowance for credit loss on financing receivables during the three months ended March 31, 2012:
(in millions)
Boat
 
Fitness
 
Bowling & Billiards
 
Total
Recourse Receivables:
 
 
 
 
 
 
 
Beginning balance
$
—

 
$
1.8

 
$
6.6

 
$
8.4

Current period provision
—

 
0.8

 
—

 
0.8

Direct write-downs
—

 
—

 
(0.2
)
 
(0.2
)
Recoveries
—

 
(1.0
)
 
—

 
(1.0
)
Ending balance
$
—

 
$
1.6

 
$
6.4

 
$
8.0

 
 
 
 
 
 
 
 
Other Receivables:
 

 
 

 
 

 
 

Beginning balance
$
2.6

 
$
0.4

 
$
—

 
$
3.0

Current period provision
—

 
—

 
—

 
—

Direct write-downs
—

 
—

 
—

 
—

Recoveries
(0.1
)
 
—

 
—

 
(0.1
)
Ending balance
$
2.5

 
$
0.4

 
$
—

 
$
2.9









19
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table sets forth activity related to the allowance for credit loss on financing receivables during the three months ended April 2, 2011:
(in millions)
Boat
 
Fitness
 
Bowling & Billiards
 
Corporate
 
Total
Recourse Receivables:
 
 
 
 
 
 
 
 
 
Beginning balance
$
—

 
$
1.4

 
$
8.2

 
$
—

 
$
9.6

Current period provision
—

 
0.9

 
—

 
—

 
0.9

Direct write-downs
—

 
(0.1
)
 
(0.4
)
 
—

 
(0.5
)
Ending balance
$
—

 
$
2.2

 
$
7.8

 
$
—

 
$
10.0

 
 
 
 
 
 
 
 
 
 
Other Receivables:
 

 
 

 
 

 
 

 
 

Beginning balance
$
0.8

 
$
0.7

 
$
—

 
$
2.8

 
$
4.3

Recoveries
—

 
(0.1
)
 
—

 
(2.8
)
 
(2.9
)
Ending balance
$
0.8

 
$
0.6

 
$
—

 
$
—

 
$
1.4


Note 9 – Segment Data

Brunswick is a manufacturer and marketer of leading consumer brands and operates in four reportable segments: Marine Engine, Boat, Fitness and Bowling & Billiards.  The Company’s segments are defined by management’s reporting structure and operating activities.

During the first quarter of 2012, the Company realigned its global marine operations, which resulted in changes to the components of the Marine Engine and Boat reportable segments. Several Brunswick boat brands based in Europe and Asia, which include Quicksilver, Rayglass, Uttern and Valiant boats, each of which were previously included in the Marine Engine segment, are now managed and included as part of the Boat segment. Additionally, the Company started evaluating segment results exclusive of certain costs associated with its defined benefit pension plans. As a result of freezing benefit accruals in its defined benefit pension plans, the Company has elected to allocate only service related costs to the operating segment results and report all other components of pension expense on a separate line included in the segment tables presented below. As a result, Interest cost, Expected return on plan assets and Amortization of net actuarial losses previously reported in the Marine Engine and Bowling & Billiards segments, as well as Corporate/Other, are now being reported in Pension - non-service costs. Pension costs associated with Service cost and Amortization of prior service cost, while not significant, remain in the reporting segments as presented in the tables below. Segment results have been revised for all periods presented to reflect the change in Brunswick's reported segments.

The Company evaluates performance based on business segment operating earnings.  Operating earnings of segments do not include the expenses of corporate administration, non-service related pension costs, earnings from unconsolidated equity affiliates, other expenses and income of a non-operating nature, interest expense and income, loss on early extinguishment of debt or provisions for income taxes.

Corporate/Other results include items such as corporate staff and administrative costs.  Corporate/Other total assets consist of mainly cash, cash equivalents and investments in marketable securities, restricted cash, deferred and prepaid income tax balances and investments in unconsolidated affiliates.  Marine eliminations adjust for sales between the Marine Engine and Boat segments which are consummated at established arm’s length transfer prices.













20
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table sets forth net sales and operating earnings (loss) of each of the Company’s reportable segments for the three months ended March 31, 2012 and April 2, 2011:
 
Net Sales
 
Operating Earnings (Loss)
 
Three Months Ended
 
Three Months Ended
(in millions)
March 31,
2012
 
April 2,
2011
 
March 31,
2012
 
April 2,
2011
Marine Engine
$
489.4

 
$
501.1

 
$
47.9

 
$
57.7

Boat
306.4

 
303.5

 
2.8

 
(4.8
)
Marine eliminations
(68.6
)
 
(62.4
)
 
—

 
—

Total Marine
727.2

 
742.2

 
50.7

 
52.9

Fitness
157.1

 
156.4

 
23.7

 
23.4

Bowling & Billiards
89.9

 
87.3

 
14.4

 
14.2

Pension - non-service costs
—

 
—

 
(5.7
)
 
(7.6
)
Corporate/Other
—

 
—

 
(15.5
)
 
(15.9
)
Total
$
974.2

 
$
985.9

 
$
67.6

 
$
67.0


The following table sets forth total assets of each of the Company’s reportable segments:
 
Total Assets
(in millions)
March 31,
2012
 
December 31,
2011
Marine Engine
$
764.4

 
$
649.1

Boat
421.9

 
389.9

Total Marine
1,186.3

 
1,039.0

Fitness
530.0

 
551.7

Bowling & Billiards
252.6

 
251.6

Corporate/Other
563.1
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