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 30, 2013
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 001-01043
____________
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)
N/A
(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 April 30, 2013 was 90,456,082.
BRUNSWICK CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 30, 2013
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 30, 2013 | March 31, 2012 | |||||
Net sales | $ | 995.3 | $ | 959.6 | |||
Cost of sales | 733.4 | 721.4 | |||||
Selling, general and administrative expense | 139.1 | 138.6 | |||||
Research and development expense | 27.3 | 24.1 | |||||
Restructuring, exit and impairment charges | 5.6 | 0.2 | |||||
Operating earnings | 89.9 | 75.3 | |||||
Equity loss | (1.2 | ) | (1.2 | ) | |||
Other income, net | 2.2 | 0.9 | |||||
Earnings before interest, loss on early extinguishment of debt and income taxes | 90.9 | 75.0 | |||||
Interest expense | (14.4 | ) | (18.1 | ) | |||
Interest income | 0.4 | 1.0 | |||||
Loss on early extinguishment of debt | (0.1 | ) | — | ||||
Earnings before income taxes | 76.8 | 57.9 | |||||
Income tax provision | 21.9 | 10.9 | |||||
Net earnings from continuing operations | 54.9 | 47.0 | |||||
Discontinued operations: | |||||||
Loss from discontinued operations, net of tax | (5.1 | ) | (7.3 | ) | |||
Net loss from discontinued operations, net of tax | (5.1 | ) | (7.3 | ) | |||
Net earnings | $ | 49.8 | $ | 39.7 | |||
Earnings (loss) per common share: | |||||||
Basic | |||||||
Earnings from continuing operations | $ | 0.61 | $ | 0.52 | |||
Loss from discontinued operations | (0.06 | ) | (0.08 | ) | |||
Net earnings | $ | 0.55 | $ | 0.44 | |||
Diluted | |||||||
Earnings from continuing operations | $ | 0.59 | $ | 0.51 | |||
Loss from discontinued operations | (0.06 | ) | (0.08 | ) | |||
Net earnings | $ | 0.53 | $ | 0.43 | |||
Weighted average shares used for computation of: | |||||||
Basic earnings (loss) per common share | 90.6 | 89.5 | |||||
Diluted earnings (loss) per common share | 93.5 | 92.3 | |||||
Comprehensive income | $ | 46.7 | $ | 48.0 | |||
The Notes to Condensed Consolidated Financial Statements are an integral part of these consolidated statements.
3
BRUNSWICK CORPORATION Condensed Consolidated Balance Sheets | |||||||||||
(in millions) | March 30, 2013 | December 31, 2012 | March 31, 2012 | ||||||||
(unaudited) | (unaudited) | ||||||||||
Assets | |||||||||||
Current assets | |||||||||||
Cash and cash equivalents, at cost, which approximates market | $ | 242.0 | $ | 284.3 | $ | 307.1 | |||||
Short-term investments in marketable securities | 34.7 | 92.3 | 63.9 | ||||||||
Total cash, cash equivalents and short-term investments in marketable securities | 276.7 | 376.6 | 371.0 | ||||||||
Restricted cash | 13.0 | 13.0 | 20.0 | ||||||||
Accounts and notes receivable, less allowances of $25.4, $27.1 and $28.3 | 471.7 | 349.2 | 440.8 | ||||||||
Inventories | |||||||||||
Finished goods | 369.2 | 363.3 | 298.0 | ||||||||
Work-in-process | 160.4 | 142.4 | 145.2 | ||||||||
Raw materials | 75.2 | 70.1 | 79.1 | ||||||||
Net inventories | 604.8 | 575.8 | 522.3 | ||||||||
Deferred income taxes | 18.7 | 18.8 | 15.0 | ||||||||
Prepaid expenses and other | 26.5 | 26.7 | 24.0 | ||||||||
Current assets held for sale | — | — | 49.8 | ||||||||
Current assets | 1,411.4 | 1,360.1 | 1,442.9 | ||||||||
Property | |||||||||||
Land | 80.4 | 80.6 | 81.0 | ||||||||
Buildings and improvements | 565.9 | 564.3 | 583.0 | ||||||||
Equipment | 1,008.0 | 997.4 | 1,002.0 | ||||||||
Total land, buildings and improvements and equipment | 1,654.3 | 1,642.3 | 1,666.0 | ||||||||
Accumulated depreciation | (1,141.8 | ) | (1,131.4 | ) | (1,166.3 | ) | |||||
Net land, buildings and improvements and equipment | 512.5 | 510.9 | 499.7 | ||||||||
Unamortized product tooling costs | 65.6 | 70.5 | 60.5 | ||||||||
Net property | 578.1 | 581.4 | 560.2 | ||||||||
Other assets | |||||||||||
Goodwill | 290.5 | 291.7 | 291.2 | ||||||||
Other intangibles, net | 37.4 | 38.1 | 42.5 | ||||||||
Long-term investments in marketable securities | 28.5 | 52.1 | 55.9 | ||||||||
Equity investments | 42.9 | 42.4 | 46.9 | ||||||||
Other long-term assets | 55.3 | 58.4 | 67.4 | ||||||||
Long-term assets held for sale | — | — | 25.0 | ||||||||
Other assets | 454.6 | 482.7 | 528.9 | ||||||||
Total assets | $ | 2,444.1 | $ | 2,424.2 | $ | 2,532.0 | |||||
The Notes to Condensed Consolidated Financial Statements are an integral part of these consolidated statements. | |||||||||||
4
BRUNSWICK CORPORATION Condensed Consolidated Balance Sheets | |||||||||||
(in millions) | March 30, 2013 | December 31, 2012 | March 31, 2012 | ||||||||
(unaudited) | (unaudited) | ||||||||||
Liabilities and shareholders’ equity | |||||||||||
Current liabilities | |||||||||||
Short-term debt, including current maturities of long-term debt | $ | 6.8 | $ | 8.2 | $ | 7.3 | |||||
Accounts payable | 376.9 | 334.4 | 332.7 | ||||||||
Accrued expenses | 506.6 | 576.2 | 529.7 | ||||||||
Current liabilities held for sale | 10.4 | 18.4 | 21.2 | ||||||||
Current liabilities | 900.7 | 937.2 | 890.9 | ||||||||
Long-term liabilities | |||||||||||
Debt | 562.9 | 563.6 | 688.7 | ||||||||
Deferred income taxes | 96.3 | 92.7 | 84.5 | ||||||||
Postretirement benefits | 549.1 | 552.6 | 590.2 | ||||||||
Other | 201.5 | 197.5 | 192.2 | ||||||||
Long-term liabilities held for sale | 3.0 | 2.9 | 3.1 | ||||||||
Long-term liabilities | 1,412.8 | 1,409.3 | 1,558.7 | ||||||||
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 | 429.4 | 440.8 | 435.0 | ||||||||
Retained earnings | 553.0 | 503.2 | 497.4 | ||||||||
Treasury stock, at cost: 12,117,000, 12,907,000 and 13,264,000 shares | (370.5 | ) | (388.1 | ) | (394.4 | ) | |||||
Accumulated other comprehensive loss, net of tax | (558.2 | ) | (555.1 | ) | (532.5 | ) | |||||
Shareholders’ equity | 130.6 | 77.7 | 82.4 | ||||||||
Total liabilities and shareholders’ equity | $ | 2,444.1 | $ | 2,424.2 | $ | 2,532.0 | |||||
The Notes to Condensed Consolidated Financial Statements are an integral part of these consolidated statements.
5
BRUNSWICK CORPORATION Condensed Consolidated Statements of Cash Flows (unaudited) | |||||||
Three Months Ended | |||||||
(in millions) | March 30, 2013 | March 31, 2012 | |||||
Cash flows from operating activities | |||||||
Net earnings from continuing operations | $ | 54.9 | $ | 47.0 | |||
Depreciation and amortization | 21.6 | 22.7 | |||||
Pension expense, net of funding | 4.0 | 5.3 | |||||
Gains on sale of property, plant and equipment, net | (5.3 | ) | (1.5 | ) | |||
Other long-lived asset impairment charges (gains) | 2.3 | (1.3 | ) | ||||
Deferred income taxes | 2.1 | 2.8 | |||||
Loss on early extinguishment of debt | 0.1 | — | |||||
Changes in certain current assets and current liabilities | (175.9 | ) | (148.4 | ) | |||
Income taxes | 10.8 | 3.4 | |||||
Other, net | (8.4 | ) | 8.3 | ||||
Net cash used for operating activities of continuing operations | (93.8 | ) | (61.7 | ) | |||
Net cash used for operating activities of discontinued operations | (14.4 | ) | (8.0 | ) | |||
Net cash used for operating activities | (108.2 | ) | (69.7 | ) | |||
Cash flows from investing activities | |||||||
Capital expenditures | (21.2 | ) | (16.7 | ) | |||
Purchases of marketable securities | — | (60.5 | ) | ||||
Sales or maturities of marketable securities | 80.6 | 109.5 | |||||
Investments | (2.3 | ) | (0.7 | ) | |||
Proceeds from the sale of property, plant and equipment | 6.1 | 9.0 | |||||
Net cash provided by investing activities of continuing operations | 63.2 | 40.6 | |||||
Net cash used for investing activities of discontinued operations | — | (0.8 | ) | ||||
Net cash provided by investing activities | 63.2 | 39.8 | |||||
Cash flows from financing activities | |||||||
Net (payments) issuances of short-term debt | (0.8 | ) | 0.3 | ||||
Payments of long-term debt including current maturities | (1.4 | ) | (1.7 | ) | |||
Net premium paid on early extinguishment of debt | (0.1 | ) | — | ||||
Net proceeds from stock compensation activity, including excess tax benefits | 5.0 | 0.2 | |||||
Net cash provided by (used for) financing activities of continuing operations | 2.7 | (1.2 | ) | ||||
Net cash provided by financing activities of discontinued operations | — | — | |||||
Net cash provided by (used for) financing activities | 2.7 | (1.2 | ) | ||||
Net decrease in cash and cash equivalents | (42.3 | ) | (31.1 | ) | |||
Cash and cash equivalents at beginning of period | 284.3 | 338.2 | |||||
Cash and cash equivalents at end of period | $ | 242.0 | $ | 307.1 | |||
The Notes to Condensed Consolidated Financial Statements are an integral part of these consolidated statements.
6
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 2012 Annual Report on Form 10-K for the year ended December 31, 2012 (the 2012 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 30, 2013, December 31, 2012, and March 31, 2012, the results of operations for the three months ended March 30, 2013 and March 31, 2012, and the cash flows for the three months ended March 30, 2013 and March 31, 2012. 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 2013 ended on March 30, 2013, and the first quarter of fiscal year 2012 ended on March 31, 2012.
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 30, 2013, or will be adopted in future periods.
Comprehensive Income: In February 2013, the FASB amended the Accounting Standards Codification (ASC) to require entities to provide information about amounts reclassified out of other comprehensive income by component. The Company is required to present, either on the face of the financial statements or in the notes, the amounts reclassified from other comprehensive income to the respective line items in the Condensed Consolidated Statements of Comprehensive Income. This amendment is effective for interim and annual periods beginning after December 15, 2012. Refer to Note 12 – Comprehensive Income for the Company's disclosures as a result of adopting this amendment.
Offsetting Assets and Liabilities: In January 2013, the FASB amended the ASC to provide additional guidance on the scope of disclosures about offsetting assets and liabilities. The additional guidance provided that only recognized derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions would be subject to disclosure requirements. This amendment is effective for interim and annual periods beginning on or after January 1, 2013, and retrospective application is required. The adoption of this amendment did not have an impact on the Company's disclosure or the Company's consolidated results of operations and financial condition.
Intangibles – Goodwill and Other: In July 2012, the FASB amended the ASC to simplify how entities test indefinite-lived intangible assets 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 indefinite-lived intangible asset is impaired. If based on this assessment, the Company concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then performing the quantitative impairment test is unnecessary. The amendment is effective for annual and interim indefinite-lived intangible assets impairment tests performed for fiscal years beginning after September 15, 2012. The Company adopted this amendment in 2013 and it did not have a material impact on the Company's consolidated results of operations and financial condition.
7
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 2 – Discontinued Operations
As a result of continued weakness in the luxury sportfishing convertible and motoryacht boat market segments, on December 31, 2012 the Board of Directors authorized the Company to exit its Hatteras and Cabo boat businesses. As a result, these businesses, which were previously reported in the Company's Boat segment, are being reported as discontinued operations and are reported in separate lines in the Condensed Consolidated Statements of Comprehensive Income for all periods presented. The assets and liabilities of these businesses to be sold meet the accounting criteria to be classified as held for sale and have been aggregated and reported on separate lines of the Condensed Consolidated Balance Sheets for all periods presented.
The following table discloses the results of operations of the Hatteras and Cabo businesses reported as discontinued operations for the three months ended March 30, 2013 and March 31, 2012, respectively:
(in millions) | March 30, 2013 | March 31, 2012 | |||||
Net sales | $ | 10.7 | $ | 14.6 | |||
Loss from discontinued operations before income taxes | (6.5 | ) | (7.7 | ) | |||
Income tax benefit | (1.4 | ) | (0.4 | ) | |||
Net loss from discontinued operations, net of tax | $ | (5.1 | ) | $ | (7.3 | ) | |
The following table reflects the summary of assets and liabilities held for sale as of March 30, 2013 and December 31, 2012, for the Hatteras and Cabo businesses reported as discontinued operations:
(in millions) | March 30, 2013 | December 31, 2012 | |||||
Current assets held for sale | $ | — | $ | — | |||
Long-term assets held for sale | — | — | |||||
Assets held for sale (A) | $ | — | $ | — | |||
Accounts payable | $ | — | $ | 3.8 | |||
Accrued expenses | 10.4 | 14.6 | |||||
Current liabilities held for sale | 10.4 | 18.4 | |||||
Other liabilities | 3.0 | 2.9 | |||||
Long-term liabilities held for sale | 3.0 | 2.9 | |||||
Liabilities held for sale | $ | 13.4 | $ | 21.3 | |||
(A) Assets held for sale at March 30, 2013 and December 31, 2012 are shown net of reserves of $53.9 million and $52.7 million, respectively.
Note 3 – Restructuring Activities
Since November 2006, Brunswick has announced and implemented a number of 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 and resulted in the recognition of restructuring, exit and impairment charges in the Condensed Consolidated Statements of Comprehensive Income during 2013 and 2012.
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 |
8
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 |
• | Trade names |
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 closure of a marine electronics business to be an exit activity. 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 30, 2013 and March 31, 2012. The 2013 charges consist of expenses related to actions initiated in 2013 and 2012. The 2012 charges consist of expenses related to actions initiated in 2010, 2009 and 2008.
(in millions) | March 30, 2013 | March 31, 2012 | |||||
Restructuring activities: | |||||||
Employee termination and other benefits | $ | 1.8 | $ | (0.3 | ) | ||
Current asset write-downs | 0.3 | — | |||||
Transformation and other costs: | |||||||
Consolidation of manufacturing footprint | 1.1 | 2.1 | |||||
Retention and relocation costs | 0.1 | — | |||||
Exit activities: | |||||||
Transformation and other costs: | |||||||
Consolidation of manufacturing footprint | — | (0.3 | ) | ||||
Asset disposition actions: | |||||||
Definite-lived asset impairments and (gains) on disposal | 2.3 | (1.3 | ) | ||||
Total restructuring, exit and impairment charges | $ | 5.6 | $ | 0.2 | |||
The Company anticipates it will incur between $5 million and $7 million of additional restructuring charges in 2013 primarily related to known restructuring activities initiated during 2013 and 2012 in the Boat segment. Reductions in demand for the Company’s products, further refinement of its product portfolio or further opportunities to consolidate manufacturing facilities and reduce costs, may result in additional restructuring, exit or impairment charges in future periods.
9
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Actions Initiated in 2013
The Company announced in the first quarter of 2013 the consolidation of its yacht and motoryacht production at its Palm Coast, Florida manufacturing plant. As a result, the Company will suspend manufacturing at its Sykes Creek boat manufacturing facility in nearby Merritt Island, Florida at the end of June 2013. The Company recorded restructuring charges in 2013 related to these actions.
The restructuring, exit and impairment charges recorded in the three months ended March 30, 2013, related to actions initiated in 2013, by reportable segment, are summarized below:
(in millions) | March 30, 2013 | ||
Boat | $ | 3.1 | |
Corporate | 0.7 | ||
Total | $ | 3.8 | |
The following is a summary of the charges by category associated with the Company’s 2013 restructuring initiatives:
(in millions) | March 30, 2013 | ||
Restructuring activities: | |||
Employee termination and other benefits | $ | 1.7 | |
Current asset write-downs | 0.3 | ||
Transformation and other costs: | |||
Consolidation of manufacturing footprint | 0.1 | ||
Retention and relocation costs | 0.1 | ||
Asset disposition actions: | |||
Definite-lived asset impairments | 1.6 | ||
Total restructuring, exit and impairment charges | $ | 3.8 | |
The restructuring charges recorded in the three months ended March 30, 2013 related to actions initiated in 2013, by reportable segment, are summarized below:
(in millions) | Boat | Corporate | Total | ||||||||
Employee termination and other benefits | $ | 1.0 | $ | 0.7 | $ | 1.7 | |||||
Current asset write-downs | 0.3 | — | 0.3 | ||||||||
Transformation and other costs | 0.2 | — | 0.2 | ||||||||
Asset disposition actions | 1.6 | — | 1.6 | ||||||||
Total restructuring, exit and impairment charges | $ | 3.1 | $ | 0.7 | $ | 3.8 | |||||
10
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes the activity for restructuring, exit and impairment charges during the three months ended March 30, 2013 related to actions initiated in 2013. The accrued costs as of March 30, 2013 represent cash expenditures needed to satisfy remaining obligations, the majority of which are expected to be paid by the end of 2013 and are included in Accrued expenses in the Condensed Consolidated Balance Sheets.
(in millions) | Costs Recognized in 2013 | Non-cash Charges | Net Cash Payments | Accrued Costs as of Mar. 30, 2013 | |||||||||||
Employee termination and other benefits | $ | 1.7 | $ | — | $ | — | $ | 1.7 | |||||||
Current asset write-downs | 0.3 | (0.3 | ) | — | — | ||||||||||
Transformation and other costs: | |||||||||||||||
Consolidation of manufacturing footprint | 0.1 | — | (0.1 | ) | — | ||||||||||
Retention and relocation costs | 0.1 | — | (0.1 | ) | — | ||||||||||
Asset disposition actions: | |||||||||||||||
Definite-lived asset impairments | 1.6 | (1.6 | ) | — | — | ||||||||||
Total restructuring, exit and impairment charges | $ | 3.8 | $ | (1.9 | ) | $ | (0.2 | ) | $ | 1.7 | |||||
Actions Initiated in 2012
The Company recorded restructuring charges in 2012 relating to actions initiated in connection with the continued weakness in the fiberglass sterndrive boat market segments. As a result, the Company decided to no longer sell and market Bayliner cruisers in the U.S. and European markets and to further reduce the Company's manufacturing footprint by closing its Knoxville, Tennessee production facility and consolidate its fiberglass cruiser manufacturing into other boat production facilities.
The restructuring, exit and impairment charges recorded in the three months ended March 30, 2013, related to actions initiated in 2012, by reportable segment, are summarized below. There were no restructuring charges recorded during the three months ended March 31, 2012, related to actions initiated in 2012.
(in millions) | March 30, 2013 | ||
Boat | $ | 1.8 | |
Total | $ | 1.8 | |
The following is a summary of the charges by category associated with the Company’s 2012 restructuring initiatives:
(in millions) | March 30, 2013 | ||
Restructuring activities: | |||
Employee termination and other benefits | $ | 0.1 | |
Transformation and other costs: | |||
Consolidation of manufacturing footprint | 1.0 | ||
Asset disposition actions: | |||
Definite-lived asset impairments | 0.7 | ||
Total restructuring, exit and impairment charges | $ | 1.8 | |
11
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
The restructuring charges recorded in the three months ended March 30, 2013 related to actions initiated in 2012, by reportable segment, are summarized below:
(in millions) | Boat | Total | |||||
Employee termination and other benefits | $ | 0.1 | $ | 0.1 | |||
Transformation and other costs | 1.0 | 1.0 | |||||
Asset disposition actions | 0.7 | 0.7 | |||||
Total restructuring, exit and impairment charges | $ | 1.8 | $ | 1.8 | |||
The following table summarizes the activity for restructuring, exit and impairment charges during the three months ended March 30, 2013 related to actions initiated in 2012. The accrued costs as of March 30, 2013 represent cash expenditures needed to satisfy remaining obligations, the majority of which are expected to be paid by the end of 2013 and are included in Accrued expenses in the Condensed Consolidated Balance Sheets.
(in millions) | Accrued Costs as of Jan. 1, 2013 | Costs Recognized in 2013 | Non-cash Charges | Net Cash Payments | Accrued Costs as of Mar. 30, 2013 | ||||||||||||||
Employee termination and other benefits | $ | 1.9 | $ | 0.1 | $ | — | $ | (0.9 | ) | $ | 1.1 | ||||||||
Transformation and other costs: | |||||||||||||||||||
Consolidation of manufacturing footprint | 5.2 | 1.0 | — | (1.5 | ) | 4.7 | |||||||||||||
Asset disposition actions: | |||||||||||||||||||
Definite-lived asset impairments | — | 0.7 | (0.7 | ) | — | — | |||||||||||||
Total restructuring, exit and impairment charges | $ | 7.1 | $ | 1.8 | $ | (0.7 | ) | $ | (2.4 | ) | $ | 5.8 | |||||||
Actions Initiated in 2011, 2010, 2009 and 2008
During 2011 and 2010, the Company continued its restructuring activities by consolidating manufacturing operations, reducing the Company’s global workforce and disposing of non-strategic assets including the exit of a marine electronics business in the fourth quarter of 2010.
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 was completed in the second quarter of 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.
There were no restructuring charges recorded during the three months ended March 30, 2013, related to actions initiated between 2008 and 2011. The restructuring, exit and impairment charges recorded in the three months ended March 31, 2012, related to actions initiated between 2008 and 2011, by reportable segment, are summarized below:
(in millions) | March 31, 2012 | ||
Marine Engine | $ | 1.7 | |
Boat | (1.5 | ) | |
Total | $ | 0.2 | |
12
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following is a summary of the charges by category associated with the Company’s 2011, 2010, 2009 and 2008 restructuring initiatives:
(in millions) | March 31, 2012 | ||
Restructuring activities: | |||
Employee termination and other benefits | $ | (0.3 | ) |
Transformation and other costs: | |||
Consolidation of manufacturing footprint | 2.1 | ||
Exit activities: | |||
Transformation and other costs: | |||
Consolidation of manufacturing footprint | (0.3 | ) | |
Asset disposition actions: | |||
Definite-lived asset impairments and (gains) on disposal | (1.3 | ) | |
Total restructuring, exit and impairment charges | $ | 0.2 | |
The restructuring charges recorded in the three months ended March 31, 2012, related to actions initiated in 2011, 2010, 2009 and 2008, by reportable segment, are summarized below:
(in millions) | Marine Engine | Boat | Total | ||||||||
Employee termination and other benefits | $ | (0.3 | ) | $ | — | $ | (0.3 | ) | |||
Transformation and other costs | 2.0 | (0.2 | ) | 1.8 | |||||||
Asset disposition actions | — | (1.3 | ) | (1.3 | ) | ||||||
Total restructuring, exit and impairment charges | $ | 1.7 | $ | (1.5 | ) | $ | 0.2 | ||||
The following table summarizes the activity for restructuring, exit and impairment charges during the three months ended March 30, 2013 related to actions initiated between 2008 and 2011. The accrued costs as of March 30, 2013 represent cash expenditures needed to satisfy remaining obligations, the majority of which are expected to be paid by the end of 2015 and are included in Accrued expenses in the Condensed Consolidated Balance Sheets.
(in millions) | Accrued Costs as of Jan. 1, 2013 | Costs Recognized in 2013 | Non-cash Charges | Net Cash Payments | Accrued Costs as of Mar. 30, 2013 | ||||||||||||||
Employee termination and other benefits | $ | 1.2 | $ | — | $ | — | $ | (0.5 | ) | $ | 0.7 | ||||||||
Transformation and other costs: | |||||||||||||||||||
Consolidation of manufacturing footprint | 2.2 | — | — | (0.2 | ) | 2.0 | |||||||||||||
Total restructuring, exit and impairment charges | $ | 3.4 | $ | — | $ | — | $ | (0.7 | ) | $ | 2.7 | ||||||||
Note 4 – 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
13
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 30, 2013 and March 31, 2012. 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 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. Use of derivative financial instruments exposes the Company to credit risk with its counterparties when the fair value of a derivative contract is an asset. The Company mitigates this risk by entering into derivative contracts with highly rated counterparties. The maximum amount of loss due to counterparty credit risk is limited to the asset value of derivative financial instruments at March 30, 2013.
Cash Flow Hedges. The Company enters into certain derivative instruments that are designated and 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 30, 2013, the term of derivative instruments hedging forecasted transactions ranged from one to 23 months.
Other Hedging Activity. The Company has entered into certain foreign currency forward contracts that have not been designated as a hedge for accounting purposes. These contracts are used 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.
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 exposures 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 30, 2013 and December 31, 2012 had notional contract values of $109.1 million and $116.0 million, respectively. Option contracts outstanding at March 30, 2013 and December 31, 2012 had notional contract values of $72.8 million and $69.7 million, respectively. The forward and options contracts outstanding at March 30, 2013, mature during 2013 and 2014 and mainly relate to the Euro, Japanese yen, Canadian dollar, Australian dollar, Mexican peso, British pound, Swedish krona, New Zealand dollar, Hungarian forint and Norwegian krone. As of March 30, 2013, the Company estimates that during the next 12 months, it will reclassify approximately $2.3 million of net losses (based on current rates) from Accumulated other comprehensive loss to Cost of sales.
Interest Rate. The Company entered into forward starting interest rate swaps to hedge the interest rate risk associated with anticipated debt issuances. Forward starting interest rate swaps outstanding at March 30, 2013 and December 31, 2012 both had notional contract values of $100.0 million.
As of March 30, 2013 and December 31, 2012, the Company had $3.0 million and $3.7 million of net deferred losses, respectively, 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 $100.0 million of notional value forward starting swaps, which were outstanding at March 30, 2013. As of March 30, 2013, the Company estimates that during the next 12 months, it will reclassify approximately $1.3 million of net gains (based on current rates) resulting from settled forward starting interest rate swaps from Accumulated other comprehensive loss to Interest expense.
Commodity Price. The Company uses commodity swaps to hedge anticipated purchases of aluminum, copper and natural gas. Commodity swap contracts outstanding at March 30, 2013 and December 31, 2012 had notional contract values of $26.8 million and $26.0 million, respectively. The contracts outstanding mature through 2015. The amount of gain or loss associated
14
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 30, 2013, the Company estimates that during the next 12 months it will reclassify approximately $1.3 million in net losses (based on current prices) from Accumulated other comprehensive loss to Cost of sales.
As of March 30, 2013, 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 | ||||||||
Derivatives Designated as Cash Flow Hedges | ||||||||||||
Foreign exchange contracts | Prepaid expenses and other | $ | 2.4 | Accrued expenses | $ | 3.5 | ||||||
Commodity contracts | Prepaid expenses and other | 0.1 | Accrued expenses | 1.8 | ||||||||
Interest rate contracts | Prepaid expenses and other | 0.4 | Accrued expenses | 5.0 | ||||||||
Total | $ | 2.9 | $ | 10.3 | ||||||||
Other Hedging Activity | ||||||||||||
Foreign exchange contracts | Prepaid expenses and other | $ | 0.1 | Accrued expenses | $ | 0.4 | ||||||
Total | $ | 0.1 | $ | 0.4 | ||||||||
As of December 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 | ||||||||
Derivatives Designated as Cash Flow Hedges | ||||||||||||
Foreign exchange contracts | Prepaid expenses and other | $ | 0.8 | Accrued expenses | $ | 3.7 | ||||||
Commodity contracts | Prepaid expenses and other | 0.7 | Accrued expenses | 1.0 | ||||||||
Interest rate contracts | Prepaid expenses and other | 0.1 | Accrued expenses | 5.8 | ||||||||
Total | $ | 1.6 | $ | 10.5 | ||||||||
Other Hedging Activity | ||||||||||||
Foreign exchange contracts | Prepaid expenses and other | $ | — | Accrued expenses | $ | 0.2 | ||||||
Total | $ | — | $ | 0.2 | ||||||||
The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 30, 2013 was:
(in millions) | ||||||||||
Derivatives Designated as Cash Flow Hedging 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 | $ | 1.0 | Interest expense | $ | 0.3 | |||||
Foreign exchange contracts | (0.2 | ) | Cost of sales | (1.3 | ) | |||||
Commodity contracts | (1.7 | ) | Cost of sales | (0.4 | ) | |||||
Total | $ | (0.9 | ) | $ | (1.4 | ) | ||||
15
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Other Hedging Activity | Location of Gain (Loss) on Derivatives Recognized in Earnings | Amount of Gain (Loss) on Derivatives Recognized in Earnings | ||||
Foreign exchange contracts | Cost of sales | $ | 0.9 | |||
Foreign exchange contracts | Other income, net | 0.1 | ||||
Total | $ | 1.0 | ||||
The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 was:
(in millions) | ||||||||||
Derivatives Designated as Cash Flow Hedging 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 | ) | ||||
Other Hedging Activity | Location of Gain (Loss) on Derivatives Recognized in Earnings | Amount of Gain (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 | ) | |||
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 recreational 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. There are no concentrations of credit risk resulting from accounts receivable that are considered material to the Company’s financial position. Refer to Note 9 – 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 30, 2013 and December 31, 2012, the fair value of the Company’s long-term debt was approximately $606.5 million and $605.1 million, respectively, and was determined using Level 1 and Level 2 inputs described in Note 5 – 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 $568.8 million as of March 30, 2013.
Note 5 – 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. |
16
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
• | 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. |
The following table summarizes Brunswick’s financial assets and liabilities measured at fair value on a recurring basis as of March 30, 2013:
(in millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets: | |||||||||||||||
Cash equivalents | $ | 101.7 | $ | — | $ | — | $ | 101.7 | |||||||
Short-term investments in marketable securities | 7.8 | 26.9 | — | 34.7 | |||||||||||
Long-term investments in marketable securities | 28.5 | — | — | 28.5 | |||||||||||
Restricted cash | 13.0 | — | — | 13.0 | |||||||||||
Derivatives | — | 3.0 | — | 3.0 | |||||||||||
Equity investments | 0.8 | — | — | 0.8 | |||||||||||
Total assets | $ | 151.8 | $ | 29.9 | $ | — | $ | 181.7 | |||||||
Liabilities: | |||||||||||||||
Derivatives | $ | — | $ | 10.7 | $ | — | $ | 10.7 | |||||||
Other | 7.4 | 41.6 | — | 49.0 | |||||||||||
Total liabilities | $ | 7.4 | $ | 52.3 | $ | — | $ | 59.7 | |||||||
The following table summarizes Brunswick’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012:
(in millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets: | |||||||||||||||
Cash equivalents | $ | 94.7 | $ | 12.7 | $ | — | $ | 107.4 | |||||||
Short-term investments in marketable securities | 7.9 | 84.4 | — | 92.3 | |||||||||||
Long-term investments in marketable securities | 52.1 | — | — | 52.1 | |||||||||||
Restricted Cash | 13.0 | — | — | 13.0 | |||||||||||
Derivatives | — | 1.6 | — | 1.6 | |||||||||||
Equity investments | 0.8 | — | — | 0.8 | |||||||||||
Total assets | $ | 168.5 | $ | 98.7 | $ | — | $ | 267.2 | |||||||
Liabilities: | |||||||||||||||
Derivatives | $ | — | $ | 10.7 | $ | — | $ | 10.7 | |||||||
Other | 8.7 | 36.0 | — | 44.7 | |||||||||||
Total liabilities | $ | 8.7 | $ | 46.7 | $ | — | $ | 55.4 | |||||||
Refer to Note 4 – Financial Instruments for additional information related to the fair value of derivative assets and liabilities by class. Other liabilities shown in the tables above include certain deferred compensation plans of the Company as well as cash-settled non-vested stock units as discussed in Note 6 – Share-Based Compensation. In addition to the items shown in the tables
17
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
above, refer to Note 16 in the Company's 2012 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 30, 2013 and March 31, 2012 the Company undertook various restructuring activities, as discussed in Note 3 – 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 tables 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 $17.9 million, of which $7.4 million, $3.2 million and $7.3 million, were measured as of March 30, 2013, December 31, 2012 and September 29, 2012, respectively. Those balances were primarily determined with the market approach using Level 2 inputs, including third-party appraisals of comparable property.
Note 6 – 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 from authorized, but unissued, shares of common stock. As of March 30, 2013, 1.9 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. The Company did not issue SARs in the first quarter of 2013. During the three months ended March 31, 2012, the Company granted 0.4 million SARs. In the three months ended March 30, 2013 and March 31, 2012, there was $1.3 million and $1.7 million, respectively, of total expense after adjusting for forfeitures, due to amortization of SARs granted.
The weighted average fair value of individual SARs granted during the first quarter of 2012 was $12.70. The Company estimated the fair value of the grant on the date of grant using the Black-Scholes-Merton pricing model, utilizing the following weighted average assumptions for 2012:
2012 | ||
Risk-free interest rate | 1.1 | % |
Dividend yield | 0.2 | % |
Volatility factor (A) | 58.3 | % |
Weighted average expected life | 5.2 - 6.7 years | |
(A) The Company uses a combination of implied and historical volatility in calculating the fair value of each grant.
Non-vested stock awards
The Company grants both stock-settled and cash-settled non-vested stock units and awards to key employees as determined by the Human Resources and Compensation Committee of the Board of Directors. During both the three months ended March 30, 2013 and March 31, 2012, the Company granted 0.2 million stock awards. The Company recognizes the cost of non-vested stock awards on a straight-line basis over the requisite service period. Additionally, cash-settled non-vested stock units and awards are recorded as a liability in the balance sheet and adjusted to fair value each reporting period through stock compensation expense. See Note 5 – Fair Value Measurements for further discussion. During the three months ended March 30, 2013 and March 31, 2012, $2.5 million and $1.4 million, respectively, was charged to compensation expense for non-vested stock awards.
As of March 30, 2013, there was $11.2 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.
18
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Performance Awards
In February 2013 and 2012, the Company granted 0.1 million and 0.1 million performance shares, respectively, to certain senior executives. The share awards are based on 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 at the beginning of the calendar year of each grant. The target performance shares earned from CFROI performance are then subject to a TSR modifier based on performance against a predefined comparator group over a three-year performance period which starts at the beginning of the calendar year of each grant. Additionally, in February 2013, the Company granted 26,000 performance shares to non-executive officers and certain senior managers based solely on the CFROI measure utilizing the same one-year performance period mentioned above. Based upon projections of probable attainment of the CFROI measure and the projected TSR modifier of the performance awards, $0.8 million and $0.4 million, respectively, was charged to compensation expense for the three months ended March 30, 2013 and March 31, 2012.
The fair values of the senior executives' performance awards with a TSR modifier at the grant date in 2013 and 2012 were $35.93 and $26.81, respectively, which were estimated using the Monte Carlo valuation model, and incorporated the following assumptions:
2013 | 2012 | ||||
Risk-free interest rate | 0.4 | % | 0.4 | % | |
Dividend yield | 0.1 | % | 0.2 | % | |
Volatility factor | 53.0 | % | 67.9 | % | |
Expected life of award | 2.9 years | 2.9 years | |||
The fair value of the non-executive officers and certain senior managers' performance awards granted based solely on the CFROI performance factor was $34.65, which was equal to the stock price on the date of grant.
As of March 30, 2013, there was $5.3 million of total unrecognized compensation cost related to performance awards granted in 2013. That cost is expected to be recognized over a weighted average period of 1.4 years. As of March 30, 2013, 22,000 share awards granted in 2012 remain unvested resulting in $0.3 million of total unrecognized compensation cost that is expected to be recognized over a weighted average period of 1.6 years.
Director Awards
The Company issues stock awards to non-employee 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 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 7 – Earnings (Loss) per Common Share
Basic earnings (loss) per common share is calculated by dividing Net earnings (loss) 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 stock-settled SARs and stock options (collectively “options”), non-vested stock awards and performance awards.
19
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Basic and diluted earnings (loss) per common share for the three months ended March 30, 2013 and March 31, 2012, were calculated as follows:
Three Months Ended | |||||||
(in millions, except per share data) | March 30, 2013 | March 31, 2012 | |||||
Net earnings from continuing operations | $ | 54.9 | $ | 47.0 | |||
Net loss from discontinued operations, net of tax | (5.1 | ) | (7.3 | ) | |||
Net earnings | $ | 49.8 | $ | 39.7 | |||
Weighted average outstanding shares – basic | 90.6 | 89.5 | |||||
Dilutive effect of common stock equivalents | 2.9 | 2.8 | |||||
Weighted average outstanding shares – diluted | 93.5 | 92.3 | |||||
Basic earnings (loss) per common share: | |||||||
Continuing operations | $ | 0.61 | $ | 0.52 | |||
Discontinued operations | (0.06 | ) | (0.08 | ) | |||
Net earnings | $ | 0.55 | $ | 0.44 | |||
Diluted earnings (loss) per common share: | |||||||
Continuing operations | $ | 0.59 | $ | 0.51 | |||
Discontinued operations | (0.06 | ) | (0.08 | ) | |||
Net earnings | $ | 0.53 | $ | 0.43 | |||
As of March 30, 2013, the Company had 6.9 million options outstanding, of which 5.1 million were exercisable. This compares with 9.1 million options outstanding, of which 5.8 million were exercisable, as of March 31, 2012. During the three months ended March 30, 2013 and March 31, 2012, there were 1.0 million and 2.3 million average shares of options outstanding, respectively, for which the exercise 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. Changes in average outstanding basic shares from March 31, 2012 to March 30, 2013, reflect the impact of options exercised in the first quarter of 2013.
Note 8 – 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 30, 2013 and March 31, 2012 were:
Single Year Obligation | Maximum Obligation | ||||||||||||||
(in millions) | March 30, 2013 | March 31, 2012 | March 30, 2013 | March 31, 2012 | |||||||||||
Marine Engine | $ | 5.9 | $ | 7.6 | $ | 5.9 | $ | 7.6 | |||||||
Boat | 2.3 | 2.4 | 2.3 | 2.4 | |||||||||||
Fitness | 25.3 | 30.9 | 29.6 | 36.3 | |||||||||||
Bowling & Billiards | 0.8 | 1.9 | 1.4 | 3.0 | |||||||||||
Total | $ | 34.3 | $ | 42.8 | $ | 39.2 | $ | 49.3 | |||||||
20
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 $1.8 million and $3.4 million accrued for potential losses related to recourse exposure at March 30, 2013 and March 31, 2012, 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 reductions in single and maximum year obligations in the table below reflect changes to maximum repurchase terms in the Boat segment, which were agreed to in the first quarter of 2013. The potential cash payments the Company could be required to make to repurchase collateral as of March 30, 2013 and March 31, 2012 were:
Single Year Obligation | Maximum Obligation | ||||||||||||||
(in millions) | March 30, 2013 | March 31, 2012 | March 30, 2013 | March 31, 2012 | |||||||||||
Marine Engine | $ | 2.2 | $ | 2.0 | $ | 2.2 | $ | 2.0 | |||||||
Boat | 71.5 | 85.8 | 73.0 | 105.8 | |||||||||||
Bowling & Billiards | 0.2 | 0.2 | 0.2 | 0.2 | |||||||||||
Total | $ | 73.9 | $ | 88.0 | $ | 75.4 | $ | 108.0 | |||||||
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 $1.9 million accrued for potential losses related to repurchase exposure at March 30, 2013 and March 31, 2012, respectively. The Company’s repurchase accrual represents the expected losses that could result 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 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 the transfers of the receivables under these arrangements do not meet the requirements of a “true sale.” Accordingly, the current portion of these arrangements of $34.4 million and $36.8 million was recorded in Accounts and notes receivable and Accrued expenses as of March 30, 2013 and December 31, 2012, respectively. Further, the long-term portion of these arrangements of $22.1 million and $24.1 million as of March 30, 2013 and December 31, 2012, 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 $45.2 million as of March 30, 2013. 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 the anticipated 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 $6.2 million as collateral against $14.3 million of outstanding surety bonds as of March 30, 2013.
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 obligations. In connection with this arrangement, the Company transferred $20.0 million of cash into the trust during the third quarter of 2011, and canceled an equal amount of letters of credit which had been previously provided as collateral against these obligations. During the fourth quarter of 2012, the insurance carrier reduced the required collateral amount to $13.0 million, which resulted in a $7.0 million transfer of cash from Restricted cash to Cash and cash equivalents in the Company's Condensed Consolidated Balance Sheets. The remaining cash assets included in the trust are classified as Restricted cash in the Company’s Condensed Consolidated Balance Sheets.
21
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Product Warranties
The Company records a liability for product warranties at the time revenue is recognized. The liability is estimated using historical warranty experience, projected claim rates and expected costs per claim. The Company adjusts its liability for specific warranty matters when they become known and the exposure can be estimated. The Company’s warranty liabilities 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 liability.
The following activity related to product warranty liabilities was recorded in Accrued expenses during the three months ended March 30, 2013 and March 31, 2012:
(in millions) | March 30, 2013 | March 31, 2012 | |||||
Balance at beginning of period | $ | 127.7 | $ | 129.9 | |||
Payments made | (13.3 | ) | (14.4 | ) | |||
Provisions/additions for contracts issued/sold | 13.5 | 16.1 | |||||
Aggregate changes for preexisting warranties | (1.1 | ) | 0.5 | ||||
Balance at end of period | $ | 126.8 | $ | 132.1 | |||
Additionally, customers in the Company's Marine Engine, Boat and Fitness segments may purchase a contract from the Company that extends product warranty beyond the standard period. For certain extended warranty contracts in which the Company retains the warranty or administration 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 $49.8 million and $49.4 million at March 30, 2013 and December 31, 2012, 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.
There were no significant changes to the legal and environmental commitments that were discussed in Note 12 to the consolidated financial statements in the 2012 Form 10-K.
Note 9 – 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 30, 2013 and March 31, 2012. 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 8 – 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 8 – 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 recreational 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
22
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 30, 2013.
The following are the Company’s financing receivables, excluding trade accounts receivable contractually due within one year, by segment as of March 30, 2013:
(in millions) | Marine Engine | Boat | Fitness | Bowling & Billiards | Corporate | Total | |||||||||||||||||
Recourse Receivables: | |||||||||||||||||||||||
Short-term | $ | — | $ | — | $ | 1.2 | $ | 6.8 | $ | — | $ | 8.0 | |||||||||||
Long-term | — | — | 0.5 | 5.2 | — | 5.7 | |||||||||||||||||
Allowance for credit loss | — | — | (0.9 | ) | (5.5 | ) | — | (6.4 | ) | ||||||||||||||
Total | — | — | 0.8 | 6.5 | — | 7.3 | |||||||||||||||||
Third-Party Receivables: | |||||||||||||||||||||||
Short-term | 4.7 | 1.7 | 28.0 | — | — | 34.4 | |||||||||||||||||
Long-term | — | — | 22.1 | — | — | 22.1 | |||||||||||||||||
Allowance for credit loss | — | — | — | — | — | — | |||||||||||||||||
Total | 4.7 | 1.7 | 50.1 | — | — | 56.5 | |||||||||||||||||
Other Receivables: | |||||||||||||||||||||||
Short-term | 12.6 | 1.8 | 1.5 | — | 0.3 | 16.2 | |||||||||||||||||
Long-term | 3.6 | 0.6 | 0.3 | — | — | 4.5 | |||||||||||||||||
Allowance for credit loss | — | (1.3 | ) | (0.2 | ) | — | — | (1.5 | ) | ||||||||||||||
Total | 16.2 | 1.1 | 1.6 | — | 0.3 | 19.2 | |||||||||||||||||
Total Financing Receivables | $ | 20.9 | $ | 2.8 | $ | 52.5 | $ | 6.5 | $ | 0.3 | $ | 83.0 | |||||||||||
23
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, 2012:
(in millions) | Marine Engine | Boat | Fitness | Bowling & Billiards | Corporate | Total | |||||||||||||||||
Recourse Receivables: | |||||||||||||||||||||||
Short-term | $ | — | $ | — | $ | 1.2 | $ | 7.0 | $ | — | $ | 8.2 | |||||||||||
Long-term | — | — | 0.6 | 5.3 | — | 5.9 | |||||||||||||||||
Allowance for credit loss | — | — | (0.9 | ) | (5.4 | ) | — | (6.3 | ) | ||||||||||||||
Total | — | — | 0.9 | 6.9 | — | 7.8 | |||||||||||||||||
Third-Party Receivables: | |||||||||||||||||||||||
Short-term | 4.3 | 3.2 | 29.3 | — | — | 36.8 | |||||||||||||||||
Long-term | — | — | 24.1 | — | — | 24.1 | |||||||||||||||||
Allowance for credit loss | — | — | — | — | — | — | |||||||||||||||||
Total | 4.3 | 3.2 | 53.4 | — | — | 60.9 | |||||||||||||||||
Other Receivables: | |||||||||||||||||||||||
Short-term | 9.2 | 3.1 | 1.3 | — | 0.9 | 14.5 | |||||||||||||||||
Long-term | 3.7 | 0.6 | 0.4 | — | — | 4.7 | |||||||||||||||||
Allowance for credit loss | — | (2.8 | ) | (0.2 | ) | — | — | (3.0 | ) | ||||||||||||||
Total | 12.9 | 0.9 | 1.5 | — | 0.9 | 16.2 | |||||||||||||||||
Total Financing Receivables | $ | 17.2 | $ | 4.1 | $ | 55.8 | $ | 6.9 | $ | 0.9 | $ | 84.9 | |||||||||||
The following table sets forth activity related to the allowance for credit loss on financing receivables during the three months ended March 30, 2013:
(in millions) | Boat | Fitness | Bowling & Billiards | Total | |||||||||||
Recourse Receivables: | |||||||||||||||
Beginning balance | $ | — | $ | 0.9 | $ | 5.4 | $ | 6.3 | |||||||
Current period provision | — | 0.1 | 0.1 | 0.2 | |||||||||||
Direct write-downs | — | — | — | — | |||||||||||
Recoveries | |||||||||||||||