BC 2013.09.28 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 September 28, 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 October 29, 2013 was 90,947,278.




BRUNSWICK CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 28, 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
 
Nine Months Ended
(in millions, except per share data)
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Net sales
$
892.4

 
$
874.3

 
$
2,986.0

 
$
2,887.8

Cost of sales
654.1

 
641.3

 
2,184.2

 
2,132.7

Selling, general and administrative expense
143.1

 
135.5

 
414.2

 
406.6

Research and development expense
28.5

 
26.5

 
84.7

 
76.1

Restructuring, exit and impairment charges
3.1

 
14.3

 
12.7

 
15.3

Operating earnings
63.6

 
56.7

 
290.2

 
257.1

Equity loss
(0.3
)
 
(0.7
)
 
(1.3
)
 
(3.1
)
Other income (expense), net
0.5

 
(0.5
)
 
1.6

 
2.0

Earnings before interest, loss on early extinguishment of debt and income taxes
63.8

 
55.5

 
290.5

 
256.0

Interest expense
(8.6
)
 
(16.8
)
 
(35.6
)
 
(52.8
)
Interest income
0.3

 
0.5

 
1.0

 
2.2

Loss on early extinguishment of debt
(0.3
)
 
(7.5
)
 
(32.7
)
 
(11.9
)
Earnings before income taxes
55.2

 
31.7

 
223.2

 
193.5

Income tax provision (benefit)
(2.2
)
 
9.2

 
31.6

 
30.0

Net earnings from continuing operations
57.4

 
22.5

 
191.6

 
163.5

 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax
(1.2
)
 
(20.5
)
 
(5.2
)
 
(38.2
)
Gain on disposal of discontinued operations, net of tax
1.6

 
—

 
1.6

 
—

  Net earnings (loss) from discontinued operations, net of tax
0.4

 
(20.5
)
 
(3.6
)
 
(38.2
)
 


 


 
 
 
 
Net earnings
$
57.8

 
$
2.0

 
$
188.0

 
$
125.3

 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 

 
 

 
 

 
 

Basic
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.63

 
$
0.25

 
$
2.11

 
$
1.82

Earnings (loss) from discontinued operations
0.00

 
(0.23
)
 
(0.04
)
 
(0.42
)
Net earnings
$
0.63

 
$
0.02

 
$
2.07

 
$
1.40

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.61

 
$
0.24

 
$
2.05

 
$
1.77

Earnings (loss) from discontinued operations
0.00

 
(0.22
)
 
(0.04
)
 
(0.41
)
Net earnings
$
0.61

 
$
0.02

 
$
2.01

 
$
1.36

 
 
 
 
 
 
 
 
Weighted average shares used for computation of:
 

 
 

 
 

 
 

Basic earnings (loss) per common share
91.3

 
89.8

 
91.0

 
89.7

Diluted earnings (loss) per common share
94.0

 
92.5

 
93.7

 
92.3

 
 
 
 
 
 
 
 
Comprehensive income
$
67.9

 
$
23.1

 
$
191.6

 
$
143.1


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


3

BRUNSWICK CORPORATION
Condensed Consolidated Balance Sheets

(in millions)
September 28,
2013
 
December 31,
2012
 
September 29,
2012
 
(unaudited)
 
 
 
(unaudited)
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents, at cost, which approximates market
$
326.1

 
$
284.3

 
$
310.3

Short-term investments in marketable securities
22.3

 
92.3

 
97.5

Total cash, cash equivalents and short-term investments in marketable securities
348.4

 
376.6

 
407.8

Restricted cash
13.0

 
13.0

 
20.0

Accounts and notes receivable, less allowances of $22.5, $27.1 and $29.1
416.9

 
349.2

 
403.8

Inventories
 

 
 
 
 

Finished goods
356.2

 
363.3

 
320.2

Work-in-process
148.2

 
142.4

 
137.0

Raw materials
75.6

 
70.1

 
76.9

Net inventories
580.0

 
575.8

 
534.1

Deferred income taxes
18.9

 
18.8

 
15.0

Prepaid expenses and other
25.3

 
26.7

 
25.5

Current assets held for sale
—

 
—

 
54.5

Current assets
1,402.5

 
1,360.1

 
1,460.7

 
 
 
 
 
 
Property
 

 
 

 
 

Land
82.2

 
80.6

 
80.6

Buildings and improvements
561.6

 
564.3

 
551.4

Equipment
1,003.5

 
997.4

 
988.2

Total land, buildings and improvements and equipment
1,647.3

 
1,642.3

 
1,620.2

Accumulated depreciation
(1,121.7
)
 
(1,131.4
)
 
(1,130.4
)
Net land, buildings and improvements and equipment
525.6

 
510.9

 
489.8

Unamortized product tooling costs
76.8

 
70.5

 
65.6

Net property
602.4

 
581.4

 
555.4

 
 
 
 
 
 
Other assets
 

 
 
 
 

Goodwill
291.5

 
291.7

 
291.4

Other intangibles, net
36.1

 
38.1

 
39.7

Long-term investments in marketable securities
—

 
52.1

 
47.6

Equity investments
41.1

 
42.4

 
42.3

Other long-term assets
43.3

 
58.4

 
59.8

Long-term assets held for sale
—

 
—

 
11.0

Other assets
412.0

 
482.7

 
491.8

 
 
 
 
 
 
Total assets
$
2,416.9

 
$
2,424.2

 
$
2,507.9

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

4

BRUNSWICK CORPORATION
Condensed Consolidated Balance Sheets

(in millions)
September 28,
2013
 
December 31,
2012
 
September 29,
2012
 
(unaudited)
 
 
 
(unaudited)
Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Short-term debt, including current maturities of long-term debt
$
4.6

 
$
8.2

 
$
6.8

Accounts payable
328.1

 
334.4

 
332.2

Accrued expenses
525.4

 
576.2

 
549.9

Current liabilities held for sale
—

 
18.4

 
19.1

Current liabilities
858.1

 
937.2

 
908.0

 
 
 
 
 
 
Long-term liabilities
 

 
 

 
 

Debt
459.9

 
563.6

 
590.9

Deferred income taxes
94.6

 
92.7

 
85.0

Postretirement benefits
520.7

 
552.6

 
540.0

Other
194.3

 
197.5

 
195.4

Long-term liabilities held for sale
—

 
2.9

 
2.8

Long-term liabilities
1,269.5

 
1,409.3

 
1,414.1

 
 
 
 
 
 
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
426.2

 
440.8

 
439.4

Retained earnings
691.2

 
503.2

 
583.0

Treasury stock, at cost: 11,696,000, 12,907,000 and 13,044,000 shares
(353.5
)
 
(388.1
)
 
(390.5
)
Accumulated other comprehensive loss, net of tax
(551.5
)
 
(555.1
)
 
(523.0
)
Shareholders’ equity
289.3

 
77.7

 
185.8

 
 
 
 
 
 
Total liabilities and shareholders’ equity
$
2,416.9

 
$
2,424.2

 
$
2,507.9


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)

 
Nine Months Ended
(in millions)
September 28,
2013
 
September 29,
2012
Cash flows from operating activities
 
 
 
Net earnings
$
188.0

 
$
125.3

Less: net loss from discontinued operations, net of tax
(3.6
)
 
(38.2
)
Net earnings from continuing operations
191.6

 
163.5

Depreciation and amortization
64.7

 
67.7

Pension funding, net of expense
(11.9
)
 
(23.8
)
Gains on sale of property, plant and equipment, net
(6.0
)
 
(3.2
)
Other long-lived asset impairment charges
3.4

 
9.2

Deferred income taxes
(5.1
)
 
8.3

Loss on early extinguishment of debt
32.7

 
11.9

Changes in certain current assets and current liabilities
(129.1
)
 
(124.2
)
Income taxes
13.1

 
6.0

Other, net
4.3

 
19.7

Net cash provided by operating activities of continuing operations
157.7

 
135.1

 Net cash used for operating activities of discontinued operations
(33.5
)
 
(28.4
)
Net cash provided by operating activities
124.2

 
106.7

 
 
 
 
Cash flows from investing activities
 

 
 

Capital expenditures
(96.1
)
 
(65.8
)
Purchases of marketable securities
(21.6
)
 
(157.4
)
Sales or maturities of marketable securities
143.1

 
179.6

Investments
(0.3
)
 
2.4

Proceeds from the sale of property, plant and equipment
8.2

 
18.6

Other, net
1.3

 
3.0

Net cash provided by (used for) investing activities of continuing operations
34.6

 
(19.6
)
     Net cash provided by (used for) investing activities of discontinued operations
11.5

 
(2.8
)
     Net cash provided by (used for) investing activities
46.1

 
(22.4
)
 
 
 
 
Cash flows from financing activities
 

 
 

Net (payments) issuances of short-term debt
(1.7
)
 
0.8

Net proceeds from issuances of long-term debt
146.6

 
—

Payments of long-term debt including current maturities
(258.5
)
 
(103.2
)
Net premium paid on early extinguishment of debt
(24.6
)
 
(11.0
)
Net proceeds from stock compensation activity, including excess tax benefits
9.7

 
1.2

     Net cash used for financing activities of continuing operations
(128.5
)
 
(112.2
)
     Net cash used for financing activities of discontinued operations
—

 
—

     Net cash used for financing activities
(128.5
)
 
(112.2
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
41.8

 
(27.9
)
Cash and cash equivalents at beginning of period
284.3

 
338.2

 
 
 
 
Cash and cash equivalents at end of period
$
326.1

 
$
310.3


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, including the presentation of consolidated Net earnings adjusted for the net loss from discontinued operations in the Condensed Consolidated Statements of Cash Flows. Prior year conforming changes include changing the starting point of the Condensed Consolidated Statements of Cash Flows from "Net earnings from continuing operations" to "Net earnings" followed by "Less: net loss from discontinued operations, net of tax".

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 September 28, 2013, December 31, 2012, and September 29, 2012, the results of operations for the three months and nine months ended September 28, 2013 and September 29, 2012, and the cash flows for the nine months ended September 28, 2013 and September 29, 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 three quarters of fiscal year 2013 ended on March 30, 2013, June 29, 2013 and September 28, 2013, and the first three quarters of fiscal year 2012 ended on March 31, 2012, June 30, 2012 and September 29, 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, 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 nine months ended September 28, 2013, or will be adopted in future periods.

Unrecognized Tax Benefit: In July 2013, the FASB amended the Accounting Standards Codification (ASC) to provide guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance states that entities should present an unrecognized tax benefit as a reduction of a deferred tax asset for an NOL or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. The amendment is effective for fiscal years, and the interim periods within those years, beginning after December 15, 2013, with early adoption permitted. The Company is currently evaluating the impact that the adoption of the ASC amendment will have on the Company’s consolidated financial statements.

Comprehensive Income:  In February 2013, the FASB amended the 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

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


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.

Note 2 – Discontinued Operations

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.

In August 2013, the Company completed the sale of its Hatteras and Cabo boat businesses resulting in an after-tax gain of $1.6 million.
  
The following table discloses the results of operations of the Hatteras and Cabo businesses, including the gain on the disposal, reported as discontinued operations for the three months and nine months ended September 28, 2013 and September 29, 2012, respectively:
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Net sales
$
2.0

 
$
10.5

 
$
23.0

 
$
38.2

 
 
 
 
 
 
 
 
Loss from discontinued operations before income taxes
(2.0
)
 
(19.2
)
 
(8.0
)
 
(37.2
)
Income tax provision (benefit)
(0.8
)
 
1.3

 
(2.8
)
 
1.0

Loss from discontinued operations, net of tax
(1.2
)
 
(20.5
)
 
(5.2
)
 
(38.2
)
Gain on disposal of discontinued operations, net of tax (A)
1.6

 
—

 
1.6

 
—

Net earnings (loss) from discontinued operations, net of tax
$
0.4

 
$
(20.5
)
 
$
(3.6
)
 
$
(38.2
)

(A) The Gain on disposal of discontinued operations for the three months and nine months ended September 28, 2013, includes a pre-tax loss of $(1.4) million and a net tax benefit of $3.0 million.


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


There were no remaining net assets available for sale as of September 28, 2013. The following table reflects the summary of assets and liabilities held for sale as of December 31, 2012, for the Hatteras and Cabo businesses reported as discontinued operations:
(in millions)
December 31,
2012
Accounts and notes receivable, net
$
—

Net inventory
—

Current assets held for sale
—

 
 
Long-term assets held for sale
—

Assets held for sale (B)
$
—

 
 
Accounts payable
$
3.8

Accrued expenses
14.6

Current liabilities held for sale
18.4

 
 
Other liabilities
2.9

Long-term liabilities held for sale
2.9

Liabilities held for sale
$
21.3


(B) Assets held for sale at December 31, 2012 are shown net of reserves of $52.7 million.

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

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.

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


Intangible assets not subject to amortization are assessed for impairment at least annually and whenever events or changes in circumstances, such as announcements of restructuring activities, indicate that the carrying value may not be recoverable. The impairment test for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset. The fair value of trade names is measured using a relief-from-royalty approach, which assumes the value of the trade name is the discounted cash flows of the amount that would be paid to third parties had the Company not owned the trade name and instead licensed the trade name from another company.

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 activities for its European retail bowling centers and the closure of a marine electronics 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 and nine months ended September 28, 2013 and September 29, 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 2012, 2010, 2009 and 2008.
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Restructuring activities:
 
 
 
 
 
 
 
Employee termination and other benefits
$
0.1

 
$
0.7

 
$
2.4

 
$
0.4

Current asset write-downs
0.7

 
0.9

 
1.0

 
0.9

Transformation and other costs:
 

 
 

 
 
 
 
Consolidation of manufacturing footprint
1.9

 
1.5

 
5.1

 
5.2

Retention and relocation costs
—

 
—

 
0.4

 
—

Exit activities:
 

 
 

 
 
 
 
Employee termination and other benefits
0.3

 
—

 
0.9

 
—

Transformation and other costs:
 

 
 

 
 
 
 
Consolidation of manufacturing footprint
—

 
—

 
—

 
(0.2
)
Loss on sale of non-strategic assets
0.1

 
—

 
0.6

 
—

Asset disposition actions:
 

 
 

 
 
 
 
Trade name impairments
—

 
0.7

 
—

 
0.7

Definite-lived asset impairments on disposal
—

 
10.5

 
2.3

 
8.3

Total restructuring, exit and impairment charges
$
3.1

 
$
14.3

 
$
12.7

 
$
15.3

 
The Company anticipates it may incur between $2 million and $4 million of additional restructuring charges in 2013 primarily related to known restructuring activities initiated during 2013 and 2012 in the Boat and Bowling & Billiards segments.  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.


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


Actions Initiated in 2013

In the second quarter of 2013, the Company entered into an agreement to divest its European retail bowling centers in the Bowling & Billiards segment. The Company substantially completed this divestiture by the end of the third quarter of 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 suspended manufacturing at its Sykes Creek boat manufacturing facility in nearby Merritt Island, Florida at the end of June 2013. The Company recorded restructuring, exit and impairment charges in 2013 related to these actions.

The restructuring, exit and impairment charges recorded in the three months and nine months ended September 28, 2013, related to actions initiated in 2013, by reportable segment, are summarized below:
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 28,
2013
 
September 28,
2013
Boat
$
2.5

 
$
7.4

Bowling & Billiards
0.5

 
2.0

Corporate
—

 
0.7

Total
$
3.0

 
$
10.1


The following is a summary of the charges by category associated with the Company’s 2013 restructuring initiatives:
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 28,
2013
 
September 28,
2013
Restructuring activities:
 
 
 
Employee termination and other benefits
$
0.1

 
$
2.2

Current asset write-downs
0.7

 
1.0

Transformation and other costs:
 

 
 

Consolidation of manufacturing footprint
1.8

 
3.4

Retention and relocation costs
—

 
0.4

Exit activities:
 

 
 

Employee termination and other benefits
0.3

 
0.9

Transformation and other costs:
 

 
 

Loss on sale of non-strategic assets
0.1

 
0.6

Asset disposition actions:
 

 
 

Definite-lived asset impairments
—

 
1.6

Total restructuring, exit and impairment charges
$
3.0

 
$
10.1

 
The restructuring, exit and impairment charges recorded in the nine months ended September 28, 2013 related to actions initiated in 2013, by reportable segment and category, are summarized below:
(in millions)
Boat
 
Bowling & Billiards
 
Corporate
 
Total
Employee termination and other benefits
$
1.0

 
$
1.4

 
$
0.7

 
$
3.1

Current asset write-downs
1.0

 
—

 
—

 
1.0

Transformation and other costs
3.8

 
0.6

 
—

 
4.4

Asset disposition actions
1.6

 
—

 
—

 
1.6

Total restructuring, exit and impairment charges
$
7.4

 
$
2.0

 
$
0.7

 
$
10.1



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


The following table summarizes the activity for restructuring, exit and impairment charges during the nine months ended September 28, 2013 related to actions initiated in 2013. The accrued costs as of September 28, 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)/Gains
 
Net Cash Payments
 
Accrued Costs as of Sept. 28, 2013
Employee termination and other benefits
$
3.1

 
$
—

 
$
(0.8
)
 
$
2.3

Current asset write-downs
1.0

 
(1.0
)
 
—

 
—

Transformation and other costs:
 

 
 

 
 

 
 

Consolidation of manufacturing footprint
3.4

 
—

 
(2.6
)
 
0.8

Retention and relocation costs
0.4

 
—

 
(0.4
)
 
—

Loss on sale of non-strategic assets
0.6

 
0.7

 
(1.2
)
 
0.1

Asset disposition actions:
 
 
 
 
 
 
 

  Definite-lived asset impairments
1.6

 
(1.6
)
 
—

 
—

Total restructuring, exit and impairment charges
$
10.1

 
$
(1.9
)
 
$
(5.0
)
 
$
3.2


Actions Initiated in 2012

The Company recorded restructuring and impairment charges in 2012 relating to actions initiated in connection with the continued weakness in the fiberglass sterndrive boat market segments as well as the refinement of its North American boat product portfolio. As a result, the Company decided to exit 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. Long-lived asset impairment charges were also recorded in the third quarter of 2012 for certain European and Asia-Pacific boat brands as a result of weak powerboat demand in these regions.

The restructuring, exit and impairment charges recorded in the three months and nine months ended September 28, 2013 and September 29, 2012, related to actions initiated in 2012, by reportable segment, are summarized below:
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Boat
$
0.1

 
13.8

 
$
2.6

 
13.8

Fitness
—

 
0.1

 
—

 
0.1

Total
$
0.1

 
$
13.9

 
$
2.6

 
$
13.9


The following is a summary of the charges by category associated with the Company’s 2012 restructuring initiatives:
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Restructuring activities:
 
 
 
 
 
 
 
Employee termination and other benefits
$
—

 
$
0.7

 
$
0.2

 
$
0.7

Current asset write-downs
—

 
0.9

 
—

 
0.9

Transformation and other costs:
 

 
 
 
 

 
 
Consolidation of manufacturing footprint
0.1

 
1.1

 
1.7

 
1.1

Asset disposition actions:
 

 
 
 
 

 
 
Trade name impairments
—

 
0.7

 
—

 
0.7

Definite-lived asset impairments
—

 
10.5

 
0.7

 
10.5

Total restructuring, exit and impairment charges
$
0.1

 
$
13.9

 
$
2.6

 
$
13.9

 

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


The restructuring and impairment charges recorded in the nine months ended September 28, 2013 related to actions initiated in 2012, by reportable segment and category, are summarized below:
(in millions)
Boat
 
Total
Employee termination and other benefits
$
0.2

 
$
0.2

Transformation and other costs
1.7

 
1.7

Asset disposition actions
0.7

 
0.7

Total restructuring, exit and impairment charges
$
2.6

 
$
2.6


The restructuring and impairment charges recorded in the nine months ended September 29, 2012 related to actions initiated in 2012, by reportable segment and category, are summarized below:
(in millions)
Boat
 
Fitness
 
Total
Employee termination and other benefits
$
0.6

 
$
0.1

 
$
0.7

Current asset write-downs
0.9

 
—

 
0.9

Transformation and other costs
1.1

 
—

 
1.1

Asset disposition actions
11.2

 
—

 
11.2

Total restructuring, exit and impairment charges
$
13.8

 
$
0.1

 
$
13.9


The following table summarizes the activity for restructuring, exit and impairment charges during the nine months ended September 28, 2013 related to actions initiated in 2012. The accrued costs as of September 28, 2013 represent cash expenditures needed to satisfy remaining obligations, the majority of which are expected to be paid by the end of 2014 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 Sept. 28, 2013
Employee termination and other benefits
$
1.9

 
$
0.2

 
$
—

 
$
(1.8
)
 
$
0.3

Transformation and other costs:
 

 
 

 
 

 
 

 
 

Consolidation of manufacturing footprint
5.2

 
1.7

 
—

 
(4.0
)
 
2.9

Asset disposition actions:
 

 
 
 
 
 
 
 
 

  Definite-lived asset impairments
—

 
0.7

 
(0.7
)
 
—

 
—

Total restructuring, exit and impairment charges
$
7.1

 
$
2.6

 
$
(0.7
)
 
$
(5.8
)
 
$
3.2


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.


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


There were no restructuring charges recorded during the three months and nine months ended September 28, 2013, related to actions initiated between 2008 and 2011. The restructuring, exit and impairment charges recorded in the three months and nine months ended September 29, 2012, related to actions initiated between 2008 and 2011, by reportable segment, are summarized below:
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 29,
2012
 
September 29,
2012
Marine Engine
$
0.4

 
$
3.0

Boat
—

 
(1.4
)
Corporate
—

 
(0.2
)
Total
$
0.4

 
$
1.4


The following is a summary of the charges by category associated with the Company’s 2011, 2010, 2009 and 2008 restructuring initiatives:
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 29,
2012
 
September 29,
2012
Restructuring activities:
 
 
 
Employee termination and other benefits
$
—

 
$
(0.3
)
Transformation and other costs:
 

 
 

Consolidation of manufacturing footprint
0.4

 
4.1

Exit activities:
 

 
 

Transformation and other costs:
 

 
 

Consolidation of manufacturing footprint
—

 
(0.2
)
Asset disposition actions:
 

 
 

Definite-lived asset gains on disposal
—

 
(2.2
)
Total restructuring, exit and impairment charges
$
0.4

 
$
1.4

 
The restructuring, exit and impairment charges recorded in the nine months ended September 29, 2012, related to actions initiated between 2008 and 2011, by reportable segment and category, are summarized below:
 
(in millions)
Marine Engine
 
Boat
 
Corporate
 
Total
Employee termination and other benefits
$
(0.3
)
 
$
—

 
$
—

 
$
(0.3
)
Transformation and other costs
4.2

 
(0.1
)
 
(0.2
)
 
3.9

Asset disposition actions
(0.9
)
 
(1.3
)
 
—

 
(2.2
)
Total restructuring, exit and impairment charges
$
3.0

 
$
(1.4
)
 
$
(0.2
)
 
$
1.4



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


The following table summarizes the activity for restructuring, exit and impairment charges during the nine months ended September 28, 2013 related to actions initiated between 2008 and 2011.  The accrued costs as of September 28, 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 Sept. 28, 2013
Employee termination and other benefits
$
1.2

 
$
—

 
$
—

 
$
(0.7
)
 
$
0.5

Transformation and other costs:
 

 
 

 
 

 
 

 
 

Consolidation of manufacturing footprint
2.2

 
—

 
—

 
(1.0
)
 
1.2

Total restructuring, exit and impairment charges
$
3.4

 
$
—

 
$
—

 
$
(1.7
)
 
$
1.7


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 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 and nine months ended September 28, 2013 and September 29, 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 September 28, 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 September 28, 2013, the term of derivative instruments hedging forecasted transactions ranged from one to 21 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.


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


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 September 28, 2013 and December 31, 2012 had notional contract values of $159.6 million and $116.0 million, respectively.  Option contracts outstanding at September 28, 2013 and December 31, 2012 had notional contract values of $72.0 million and $69.7 million, respectively.  The forward and options contracts outstanding at September 28, 2013, mature during 2013 and 2014 and mainly relate to the Euro, Japanese yen, Canadian dollar, Mexican peso, Australian dollar, British pound, Brazilian real, Swedish krona, New Zealand dollar, Norwegian krone and Hungarian forint. As of September 28, 2013, the Company estimates that during the next 12 months, it will reclassify approximately $1.2 million of net losses (based on current rates) from Accumulated other comprehensive loss to Cost of sales.

Interest Rate. The Company enters into forward starting interest rate swaps to hedge the interest rate risk associated with anticipated debt issuances. There were no forward starting interest rate swaps outstanding at September 28, 2013. Forward starting interest rate swaps outstanding at December 31, 2012 had notional contract values of $100.0 million. In connection with the issuance of $150.0 million of 4.625 percent Senior notes due 2021 in May 2013, the Company terminated the $100.0 million notional value forward starting interest swaps, which resulted in a net deferred loss of $5.8 million, which was recorded as a component of Accumulated other comprehensive loss in the second quarter.

As of September 28, 2013 and December 31, 2012, the Company had $5.3 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 forward starting interest rate swaps terminated in July 2006, net of losses deferred on forward starting swaps terminated in August 2008 and the forward starting swaps terminated in May 2013 discussed above.  In the second quarter of 2013, the Company recognized $1.1 million of income associated with the gains originally deferred in Accumulated other comprehensive loss resulting from the difference between the amount of new debt issued and the original notional value of swaps terminated in July 2006. As of September 28, 2013, the Company estimates that during the next 12 months, it will reclassify approximately $0.1 million of net losses (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 September 28, 2013 and December 31, 2012 had notional contract values of $20.7 million and $26.0 million, respectively.  The contracts outstanding mature through 2015.  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 September 28, 2013, the Company estimates that during the next 12 months it will reclassify approximately $1.9 million in net losses (based on current prices) from Accumulated other comprehensive loss to Cost of sales.

As of September 28, 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
 
$
1.6

 
Accrued expenses
 
$
2.8

Commodity contracts
 
Prepaid expenses and other
 
—

 
Accrued expenses
 
1.8

Total
 
 
 
$
1.6

 
 
 
$
4.6

 
 
 
 
 
 
 
 
 
Other Hedging Activity
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other
 
$
—

 
Accrued expenses
 
$
1.4

Total
 
 
 
$
—

 
 
 
$
1.4



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


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 September 28, 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)
Foreign exchange contracts
 
(3.0
)
 
Cost of sales
 
(0.3
)
Commodity contracts
 
0.1

 
Cost of sales
 
(0.9
)
Total
 
$
(2.9
)
 
 
 
$
(1.2
)

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
 
$
(1.6
)
Foreign exchange contracts
 
Other income (expense), net
 
(0.3
)
Total
 
 
 
$
(1.9
)


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


The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the nine months ended September 28, 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
 
$
(0.2
)
 
Interest expense
 
$
1.5

Foreign exchange contracts
 
(1.0
)
 
Cost of sales
 
(3.2
)
Commodity contracts
 
(3.6
)
 
Cost of sales
 
(1.8
)
Total
 
$
(4.8
)
 
 
 
$
(3.5
)

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
)
Total
 
 
 
$
(0.9
)

The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months ended September 29, 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
 
$
(0.8
)
 
Interest expense
 
$
0.2

Foreign exchange contracts
 
(2.7
)
 
Cost of sales
 
0.6

Commodity contracts
 
3.0

 
Cost of sales
 
(1.4
)
Total
 
$
(0.5
)
 
 
 
$
(0.6
)

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
 
$
(0.4
)
Foreign exchange contracts
 
Other income (expense), net
 
(0.2
)
Total
 
 
 
$
(0.6
)


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


The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the nine months ended September 29, 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
 
$
(3.7
)
 
Interest expense
 
$
0.7

Foreign exchange contracts
 
(4.2
)
 
Cost of sales
 
0.4

Commodity contracts
 
0.1

 
Cost of sales
 
(3.5
)
Total
 
$
(7.8
)
 
 
 
$
(2.4
)

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
 
$
0.9

Foreign exchange contracts
 
Other income (expense), net
 
(0.2
)
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 September 28, 2013 and December 31, 2012, the fair value of the Company’s long-term debt was approximately $460.7 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 $464.5 million as of September 28, 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.

•
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

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


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 September 28, 2013:
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
150.9

 
$
9.9

 
$
—

 
$
160.8

Short-term investments in marketable securities
0.8

 
21.5

 
—

 
22.3

Restricted cash
13.0

 
—

 
—

 
13.0

Derivatives
—

 
1.6

 
—

 
1.6

Equity investments
0.6

 
—

 
—

 
0.6

Total assets
$
165.3

 
$
33.0

 
$
—

 
$
198.3

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives
$
—

 
$
6.0

 
$
—

 
$
6.0

Other
9.8

 
46.2

 
—

 
56.0

Total liabilities
$
9.8

 
$
52.2

 
$
—

 
$
62.0


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 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.

As discussed in Note 3 – Restructuring Activities, the Company has initiated various restructuring activities requiring 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,

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


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 September 28, 2013, 2.0 million shares remained available for grant.

Stock Options and SARs

Since the beginning of 2005, the Company has issued stock-settled SARs and has not issued any stock options. The Company has not issued SARs in 2013. During the three months and nine months ended September 29, 2012, the Company granted 0.0 million and 0.4 million SARs, respectively. In the three months and nine months ended September 28, 2013, there was $0.5 million and $2.4 million, respectively, of total expense after adjusting for forfeitures, due to amortization of SARs granted. In the three months and nine months ended September 29, 2012, there was $1.6 million and $4.9 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. During the three months and nine months ended September 28, 2013, the Company granted 0.0 million and 0.3 million stock awards, respectively. The Company granted 0.0 million and 0.3 million of stock awards during the three months and nine months ended September 29, 2012. 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, which is adjusted to fair value each reporting period through stock compensation expense. During the three months and nine months ended September 28, 2013, $2.7 million and $7.4 million, respectively, was charged to compensation expense for non-vested stock awards. During the three months and nine months ended September 29, 2012, $1.6 million and $4.3 million, respectively, was charged to compensation expense for non-vested stock awards.

As of September 28, 2013, the Company had $7.1 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plan. The Company expects this cost to be recognized over a weighted average period of 1.1 years.


21
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


Performance Awards

In both February 2013 and 2012, the Company granted 0.1 million performance shares 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 a 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 used to determine the performance awards, $1.7 million and $4.0 million, respectively, was charged to compensation expense for the three months and nine months ended September 28, 2013. In the three months and nine months ended September 29, 2012, $0.6 million and $1.7 million, respectively, was charged to compensation expense based upon projections of probable attainment of the CFROI measure and the projected TSR modifier used to determine the performance awards.

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.

As of September 28, 2013, the Company had $2.2 million of total unrecognized compensation cost related to performance awards. The Company expects this cost to be recognized over a weighted average period of 1.2 years. As of September 28, 2013, 15,400 share awards granted in 2012 remain unvested resulting in $0.2 million of total unrecognized compensation cost that the Company expects to be recognized over a weighted average period of 1.3 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.


22
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


Basic and diluted earnings (loss) per common share for the three months and nine months ended September 28, 2013, and for the comparable periods ended September 29, 2012, were calculated as follows:
 
Three Months Ended
 
Nine Months Ended
(in millions, except per share data)
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Net earnings from continuing operations
$
57.4

 
$
22.5

 
$
191.6

 
$
163.5

Net earnings (loss) from discontinued operations, net of tax
0.4

 
(20.5
)
 
(3.6
)
 
(38.2
)
Net earnings
$
57.8

 
$
2.0

 
$
188.0

 
$
125.3

 
 
 
 
 
 
 
 
Weighted average outstanding shares – basic
91.3

 
89.8

 
91.0

 
89.7

Dilutive effect of common stock equivalents
2.7

 
2.7

 
2.7

 
2.6

Weighted average outstanding shares – diluted
94.0

 
92.5

 
93.7

 
92.3

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.63

 
$
0.25

 
$
2.11

 
$
1.82

Discontinued operations
0.00

 
(0.23
)
 
(0.04
)
 
(0.42
)
Net earnings
$
0.63

 
$
0.02

 
$
2.07

 
$
1.40

 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.61

 
$
0.24

 
$
2.05