BC 2014.06.28 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 June 28, 2014
 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 July 29, 2014 was 92,890,544.




BRUNSWICK CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 28, 2014
 
 
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
 
Six Months Ended
(in millions, except per share data)
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Net sales
$
1,139.8

 
$
1,098.3

 
$
2,109.0

 
$
2,093.6

Cost of sales
822.6

 
796.7

 
1,526.7

 
1,530.1

Selling, general and administrative expense
143.8

 
132.0

 
284.8

 
271.1

Research and development expense
29.0

 
28.9

 
58.4

 
56.2

Restructuring, exit and impairment charges
3.1

 
4.0

 
3.1

 
9.6

Operating earnings
141.3

 
136.7

 
236.0

 
226.6

Equity earnings (loss)
0.1

 
0.2

 
(0.1
)
 
(1.0
)
Other income (expense), net
1.1

 
(1.1
)
 
2.3

 
1.1

Earnings before interest, loss on early extinguishment of debt and income taxes
142.5

 
135.8

 
238.2

 
226.7

Interest expense
(8.5
)
 
(12.6
)
 
(17.0
)
 
(27.0
)
Interest income
0.3

 
0.3

 
0.5

 
0.7

Loss on early extinguishment of debt
—

 
(32.3
)
 
—

 
(32.4
)
Earnings before income taxes
134.3

 
91.2

 
221.7

 
168.0

Income tax provision
45.7

 
11.9

 
76.1

 
33.8

Net earnings from continuing operations
88.6

 
79.3

 
145.6

 
134.2

 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
Earnings (loss) from discontinued operations, net of tax
—

 
1.1

 
—

 
(4.0
)
  Net earnings (loss) from discontinued operations, net of tax
—

 
1.1

 
—

 
(4.0
)
Net earnings
$
88.6

 
$
80.4

 
$
145.6

 
$
130.2

 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 

 
 

 
 

 
 

Basic
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.95

 
$
0.87

 
$
1.56

 
$
1.48

Earnings (loss) from discontinued operations
—

 
0.01

 
—

 
(0.05
)
Net earnings
$
0.95

 
$
0.88

 
$
1.56

 
$
1.43

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.93

 
$
0.85

 
$
1.53

 
$
1.43

Earnings (loss) from discontinued operations
—

 
0.01

 
—

 
(0.04
)
Net earnings
$
0.93

 
$
0.86

 
$
1.53

 
$
1.39

 
 
 
 
 
 
 
 
Weighted average shares used for computation of:
 

 
 

 
 

 
 

Basic earnings (loss) per common share
93.5

 
91.0

 
93.4

 
90.8

Diluted earnings (loss) per common share
95.1

 
93.6

 
95.0

 
93.6

 
 
 
 
 
 
 
 
Comprehensive income
$
92.0

 
$
77.0

 
$
150.5

 
$
123.7

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.10

 
$
—

 
$
0.20

 
$
—


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


3

BRUNSWICK CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)


(in millions)
June 28,
2014
 
December 31,
2013
 
June 29,
2013
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents, at cost, which approximates fair value
$
334.2

 
$
356.5

 
$
327.5

Short-term investments in marketable securities
0.8

 
12.7

 
2.7

Total cash, cash equivalents and short-term investments in marketable securities
335.0

 
369.2

 
330.2

Restricted cash
18.6

 
6.5

 
13.0

Accounts and notes receivable, less allowances of $22.6, $22.0 and $22.2
467.8

 
364.6

 
423.4

Inventories
 

 
 
 
 

Finished goods
393.6

 
379.9

 
321.8

Work-in-process
178.9

 
146.1

 
150.5

Raw materials
94.0

 
73.3

 
76.4

Net inventories
666.5

 
599.3

 
548.7

Deferred income taxes
138.0

 
137.6

 
18.3

Prepaid expenses and other
33.4

 
31.4

 
28.7

Current assets held for sale
—

 
—

 
18.3

Current assets
1,659.3

 
1,508.6

 
1,380.6

 
 
 
 
 
 
Property
 

 
 

 
 

Land
79.0

 
79.3

 
82.2

Buildings and improvements
547.2

 
538.6

 
564.4

Equipment
1,018.3

 
1,013.9

 
1,005.9

Total land, buildings and improvements and equipment
1,644.5

 
1,631.8

 
1,652.5

Accumulated depreciation
(1,107.9
)
 
(1,094.7
)
 
(1,134.6
)
Net land, buildings and improvements and equipment
536.6

 
537.1

 
517.9

Unamortized product tooling costs
94.7

 
80.7

 
75.5

Net property
631.3

 
617.8

 
593.4

 
 
 
 
 
 
Other assets
 

 
 
 
 

Goodwill
297.4

 
291.7

 
290.3

Other intangibles, net
47.0

 
35.4

 
36.7

Equity investments
42.3

 
41.3

 
41.7

Non-current deferred tax asset
312.2

 
377.0

 
—

Other long-term assets
45.4

 
44.0

 
48.0

Long-term assets held for sale
—

 
—

 
—

Other assets
744.3

 
789.4

 
416.7

 
 
 
 
 
 
Total assets
$
3,034.9

 
$
2,915.8

 
$
2,390.7

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

4

BRUNSWICK CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)

(in millions)
June 28,
2014
 
December 31,
2013
 
June 29,
2013
Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Short-term debt, including current maturities of long-term debt
$
5.0

 
$
6.4

 
$
6.0

Accounts payable
359.0

 
315.6

 
333.0

Accrued expenses
519.8

 
561.1

 
521.0

Current liabilities held for sale
—

 
—

 
17.0

Current liabilities
883.8

 
883.1

 
877.0

 
 
 
 
 
 
Long-term liabilities
 

 
 

 
 

Debt
453.0

 
453.4

 
466.4

Deferred income taxes
—

 
—

 
97.6

Postretirement benefits
325.6

 
347.3

 
535.5

Other
185.8

 
193.6

 
198.0

Long-term liabilities held for sale
—

 
—

 
2.7

Long-term liabilities
964.4

 
994.3

 
1,300.2

 
 
 
 
 
 
Shareholders’ equity
 

 
 

 
 

Common stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares; outstanding: 92,749,000, 92,409,000 and 90,506,000 shares
76.9

 
76.9

 
76.9

Additional paid-in capital
396.7

 
393.0

 
431.4

Retained earnings
1,390.3

 
1,263.3

 
633.4

Treasury stock, at cost: 9,789,000, 10,129,000 and 12,032,000 shares
(280.6
)
 
(293.3
)
 
(366.6
)
Accumulated other comprehensive loss, net of tax
(396.6
)
 
(401.5
)
 
(561.6
)
Shareholders’ equity
1,186.7

 
1,038.4

 
213.5

 
 
 
 
 
 
Total liabilities and shareholders’ equity
$
3,034.9

 
$
2,915.8

 
$
2,390.7

 
 
 
 
 
 
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)

 
Six Months Ended
(in millions)
June 28,
2014
 
June 29,
2013
Cash flows from operating activities
 
 
 
Net earnings
$
145.6

 
$
130.2

Less: net loss from discontinued operations, net of tax
—

 
(4.0
)
Net earnings from continuing operations
145.6

 
134.2

Depreciation and amortization
45.3

 
43.1

Pension funding, net of expense
(11.5
)
 
(3.0
)
Loss (gain) on sale of property, plant and equipment, net
0.2

 
(5.5
)
Other long-lived asset impairment charges (gains)
(0.6
)
 
2.3

Deferred income taxes
53.8

 
3.4

Excess tax benefits from share-based compensation
(3.9
)
 
(11.3
)
Loss on early extinguishment of debt
—

 
32.4

Changes in certain current assets and current liabilities, excluding acquisitions
(171.8
)
 
(104.8
)
Income taxes
11.7

 
13.5

Other, net
8.2

 
2.7

Net cash provided by operating activities of continuing operations
77.0

 
107.0

 Net cash used for operating activities of discontinued operations
—

 
(25.9
)
Net cash provided by operating activities
77.0

 
81.1

 
 
 
 
Cash flows from investing activities
 

 
 

Capital expenditures
(52.9
)
 
(61.3
)
Purchases of marketable securities
—

 
(1.9
)
Sales or maturities of marketable securities
11.9

 
143.1

Transfers to restricted cash
(12.1
)
 
—

Investments
(2.7
)
 
(0.8
)
Acquisition of business, net of cash acquired
(29.1
)
 
—

Proceeds from the sale of property, plant and equipment
3.2

 
7.0

Other, net
—

 
0.9

Net cash (used for) provided by investing activities of continuing operations
(81.7
)
 
87.0

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

 
—

     Net cash (used for) provided by investing activities
(81.7
)
 
87.0

 
 
 
 
Cash flows from financing activities
 

 
 

Net payments of short-term debt
—

 
(0.9
)
Net proceeds from issuances of long-term debt
—

 
146.6

Payments of long-term debt including current maturities
(0.6
)
 
(252.1
)
Net premium paid on early extinguishment of debt
—

 
(24.3
)
Cash dividends paid
(18.6
)
 
—

Excess tax benefits from share-based compensation
3.9

 
11.3

Proceeds from stock compensation activity, net of withholdings
(0.1
)
 
(5.5
)
Other, net
(2.2
)
 
—

     Net cash used for financing activities of continuing operations
(17.6
)
 
(124.9
)
     Net cash used for financing activities of discontinued operations
—

 
—

     Net cash used for financing activities
(17.6
)
 
(124.9
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(22.3
)
 
43.2

Cash and cash equivalents at beginning of period
356.5

 
284.3

 
 
 
 
Cash and cash equivalents at end of period
$
334.2

 
$
327.5


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 condensed 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 2013 Annual Report on Form 10-K for the year ended December 31, 2013 (the 2013 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 June 28, 2014, December 31, 2013, and June 29, 2013, the results of operations for the three months and six months ended June 28, 2014 and June 29, 2013, and the cash flows for the six months ended June 28, 2014 and June 29, 2013.  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, with the first and second quarters ending on the Saturday closest to the end of the first and second thirteen-week periods, respectively.  The first two quarters of fiscal year 2014 ended on March 29, 2014 and June 28, 2014, and the first two quarters of fiscal year 2013 ended on March 30, 2013 and June 29, 2013.

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 six months ended June 28, 2014, or will be adopted in future periods.

Revenue Recognition: In May 2014, the FASB and International Accounting Standards Board jointly issued a final standard on revenue recognition which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This standard will supersede most current revenue recognition guidance. Under the new standard, entities are required to identify the contract with a customer; identify the separate performance obligations in the contract; determine the transaction price; allocate the transaction price to the separate performance obligations in the contract; and recognize the appropriate amount of revenue when (or as) the entity satisfies each performance obligation. The standard is effective for fiscal years, and the interim periods within those years, beginning on or after January 1, 2017. Entities have the option of using either retrospective transition or a modified approach in applying the new standard. The Company is currently evaluating the approach it will use to apply the new standard and the impact that the adoption of the new standard will have on the Company’s consolidated financial statements.

Discontinued Operations: In April 2014, the FASB amended the Accounting Standards Codification (ASC) to raise the threshold for a disposal to qualify as a discontinued operation. Under the new guidance, a discontinued operation represents a strategic shift that has or will have a major effect on an entity's operations and financial results. The guidance also expands the disclosures for discontinued operations, including new disclosures related to individually material disposals that do not meet the definition of a discontinued operation. The amendment is effective for fiscal years, and the interim periods within those years, beginning after December 15, 2014, with early adoption permitted only for disposals that have not been reported in financial statements previously issued. The Company is currently evaluating what impact the adoption of the ASC amendment will have on the Company's consolidated financial statements.

Unrecognized Tax Benefit: In July 2013, the FASB amended the 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 adopted this amendment in 2014 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

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 at December 31, 2012 met 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 Company recorded a non-cash impairment charge of $52.7 million, $53.2 million after-tax, on these businesses for the year ended December 31, 2012. 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.

There were no sales or earnings from discontinued operations for the three months and six months ended June 28, 2014. The following table discloses the results of operations of the Hatteras and Cabo businesses reported as discontinued operations for the three months and six months ended June 29, 2013:
 
Three Months Ended
 
Six Months Ended
(in millions)
June 29,
2013
 
June 29,
2013
Net sales
$
10.3

 
$
21.0

 
 
 
 
Earnings (loss) from discontinued operations before income taxes
0.5

 
(6.0
)
Income tax benefit
(0.6
)
 
(2.0
)
Net earnings (loss) from discontinued operations, net of tax
$
1.1

 
$
(4.0
)

There were no assets held for sale as of June 28, 2014 and December 31, 2013. The following table reflects the summary of assets and liabilities held for sale as of June 29, 2013, for the Hatteras and Cabo businesses reported as discontinued operations:
(in millions)
June 29,
2013
Accounts and notes receivable, net
$
12.4

Net inventory
5.9

Current assets held for sale
18.3

 
 
Long-term assets held for sale
—

Assets held for sale (A)
$
18.3

 
 
Accrued expenses
$
17.0

Current liabilities held for sale
17.0

 
 
Other liabilities
2.7

Long-term liabilities held for sale
2.7

Liabilities held for sale
$
19.7


(A) Assets held for sale at June 29, 2013 are shown net of reserves of $50.4 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 the significant reduction in the marine market and resulted in the recognition of restructuring, exit and impairment charges in the Condensed Consolidated Statements of Comprehensive Income during 2014 and 2013.


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


The costs incurred under these initiatives include:

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

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

Asset Disposition Actions – These amounts mainly relate to sales of assets and impairments of:
•
Fixed assets
•
Tooling
•
Patents and proprietary technology
•
Dealer networks
•
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, was determined using the Company’s assumptions, including the data that market participants would use in pricing the asset, based on the best information available in the circumstances.  Specifically, the Company used discounted cash flows to determine the fair value of the asset when observable inputs were unavailable.

The Company has reported restructuring and exit activities based on the specific driver of the cost and reflected the expense in the accounting period when the cost has been committed or incurred, as appropriate.  The Company considers actions related to the divestiture activities for its European retail bowling centers in 2013 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 six months ended June 28, 2014 and June 29, 2013.  The 2014 charges consist of expenses related to actions initiated in 2014, 2013 and 2010. The 2013 charges consist of expenses related to actions initiated in 2013 and 2012.
 
Three Months Ended
 
Six Months Ended
(in millions)
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Restructuring activities:
 
 
 
 
 
 
 
Employee termination and other benefits
$
2.8

 
$
0.5

 
$
2.8

 
$
2.3

Current asset write-downs
0.5

 
—

 
0.2

 
0.3

Transformation and other costs:
 

 
 

 
 
 
 
Consolidation of manufacturing footprint
0.7

 
2.1

 
1.0

 
3.2

Retention and relocation costs
0.1

 
0.3

 
0.1

 
0.4

Exit activities:
 

 
 

 
 
 
 
Employee termination and other benefits
—

 
0.6

 
—

 
0.6

Transformation and other costs:
 

 
 

 
 
 
 
Loss on sale of non-strategic assets
—

 
0.5

 
—

 
0.5

Asset disposition actions:
 

 
 

 
 
 
 
Definite-lived asset impairments and (gain) on disposal
(1.0
)
 
—

 
(1.0
)
 
2.3

Total restructuring, exit and impairment charges
$
3.1

 
$
4.0

 
$
3.1

 
$
9.6



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


The Company anticipates it may incur between $1 million and $2 million of additional restructuring charges in 2014 primarily related to known restructuring activities initiated during 2013 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.

Actions Initiated in 2014

In the second quarter of 2014, certain executive positions were restructured within the Company. The Company recorded restructuring charges in 2014 related to this action.

The restructuring, exit and impairment charges recorded in the three months and six months ended June 28, 2014 related to actions initiated in 2014, by reportable segment, are summarized below:
 
Three Months Ended
 
Six Months Ended
(in millions)
June 28,
2014
 
June 28,
2014
Corporate
$
2.7

 
$
2.7

Total
$
2.7

 
$
2.7


The following is a summary of the charges by category associated with the Company’s 2014 restructuring initiatives:
 
Three Months Ended
 
Six Months Ended
(in millions)
June 28,
2014
 
June 28,
2014
Restructuring activities:
 
 
 
Employee termination and other benefits
$
2.7

 
$
2.7

Total restructuring, exit and impairment charges
$
2.7

 
$
2.7

 
The following table summarizes the activity for restructuring, exit and impairment charges during the six months ended June 28, 2014 related to actions initiated in 2014. The accrued costs as of June 28, 2014 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)
Costs Recognized in 2014
 
Non-cash Charges
 
Net Cash Payments
 
Accrued Costs as of June 28, 2014
Employee termination and other benefits
$
2.7

 
$
(1.3
)
 
$
(0.1
)
 
$
1.3

Total restructuring, exit and impairment charges
$
2.7

 
$
(1.3
)
 
$
(0.1
)
 
$
1.3


Actions Initiated in 2013

In the fourth quarter of 2013, the Company made the decision to outsource woodworking operations for its fiberglass sterndrive boats, which resulted in long-lived asset impairment charges. 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 and 2014 related to these actions.


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


The restructuring, exit and impairment charges recorded in the three months and six months ended June 28, 2014 and June 29, 2013, related to actions initiated in 2013, by reportable segment, are summarized below:
 
Three Months Ended
 
Six Months Ended
(in millions)
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Boat
$
1.4

 
$
1.8

 
$
1.4

 
$
4.9

Bowling & Billiards
—

 
1.5

 
—

 
1.5

Corporate
—

 
—

 
—

 
0.7

Total
$
1.4

 
$
3.3

 
$
1.4

 
$
7.1


The following is a summary of the charges by category associated with the Company’s 2013 restructuring initiatives:
 
Three Months Ended
 
Six Months Ended
(in millions)
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Restructuring activities:
 

 
 

 
 
 
 
Employee termination and other benefits
$
0.1

 
$
0.4

 
$
0.1

 
$
2.1

Current asset write-downs
0.5

 
—

 
0.2

 
0.3

Transformation and other costs:
 

 
 

 
 

 
 

Consolidation of manufacturing footprint
0.7

 
1.5

 
1.0

 
1.6

Retention and relocation costs
0.1

 
0.3

 
0.1

 
0.4

Exit activities:
 

 
 

 
 

 
 

Employee termination and other benefits
—

 
0.6

 
—

 
0.6

Transformation and other costs:
 

 
 

 
 

 
 

Loss on sale of non-strategic assets
—

 
0.5

 
—

 
0.5

Asset disposition actions:
 

 
 

 
 

 
 

Definite-lived asset impairments
—

 
—

 
—

 
1.6

Total restructuring, exit and impairment charges
$
1.4

 
$
3.3

 
$
1.4

 
$
7.1

 
The restructuring, exit and impairment charges recorded in the six months ended June 28, 2014 related to actions initiated in 2013, by reportable segment and category, are summarized below:
(in millions)
Boat
 
Total
Employee termination and other benefits
$
0.1

 
$
0.1

Current asset write-downs
0.2

 
0.2

Transformation and other costs
1.1

 
1.1

Total restructuring, exit and impairment charges
$
1.4

 
$
1.4


The restructuring, exit and impairment charges recorded in the six months ended June 29, 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

 
$
1.0

 
$
0.7

 
$
2.7

Current asset write-downs
0.3

 
—

 
—

 
0.3

Transformation and other costs
2.0

 
0.5

 
—

 
2.5

Asset disposition actions
1.6

 
—

 
—

 
1.6

Total restructuring, exit and impairment charges
$
4.9

 
$
1.5

 
$
0.7

 
$
7.1



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


The following table summarizes the activity for restructuring, exit and impairment charges during the six months ended June 28, 2014 related to actions initiated in 2013. The accrued costs as of June 28, 2014 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, 2014
 
Costs Recognized in 2014
 
Non-cash Charges
 
Net Cash (Payments)/Receipts
 
Accrued Costs as of June 28, 2014
Employee termination and other benefits
$
2.3

 
$
0.1

 
$
—

 
$
(1.5
)
 
$
0.9

Current asset write-downs
—

 
0.2

 
(0.5
)
 
0.3

 
—

Transformation and other costs:
 

 
 

 
 

 
 

 
 

Consolidation of manufacturing footprint
—

 
1.0

 
—

 
(1.0
)
 
—

Retention and relocation costs
—

 
0.1

 
—

 
(0.1
)
 
—

Loss on sale of non-strategic assets
0.7

 
—

 
—

 
—

 
0.7

Total restructuring, exit and impairment charges
$
3.0

 
$
1.4

 
$
(0.5
)
 
$
(2.3
)
 
$
1.6


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. In 2012, 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.

There were no restructuring, exit and impairment charges recorded during the three months and six months ended June 28, 2014, related to actions initiated in 2012. The restructuring, exit and impairment charges recorded in the three months and six months ended June 29, 2013, related to actions initiated in 2012, by reportable segment, are summarized below:
 
Three Months Ended
 
Six Months Ended
(in millions)
June 29,
2013
 
June 29,
2013
Boat
$
0.7

 
$
2.5

Total
$
0.7

 
$
2.5


The following is a summary of the charges by category associated with the Company’s 2012 restructuring initiatives:
 
Three Months Ended
 
Six Months Ended
(in millions)
June 29,
2013
 
June 29,
2013
Restructuring activities:
 
 
 
Employee termination and other benefits
$
0.1

 
$
0.2

Transformation and other costs:
 
 
 
Consolidation of manufacturing footprint
0.6

 
1.6

Asset disposition actions:
 
 
 
Definite-lived asset impairments
—

 
0.7

Total restructuring, exit and impairment charges
$
0.7

 
$
2.5

 

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


The following table summarizes the activity for restructuring, exit and impairment charges during the six months ended June 28, 2014 related to actions initiated in 2012. The accrued costs as of June 28, 2014 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, 2014
 
Costs Recognized in 2014
 
Non-cash Charges
 
Net Cash Payments
 
Accrued Costs as of June 28, 2014
Employee termination and other benefits
$
0.2

 
$
—

 
$
—

 
$
(0.2
)
 
$
—

Transformation and other costs:
 

 
 

 
 

 
 

 
 

Consolidation of manufacturing footprint
2.5

 
—

 
—

 
(0.8
)
 
1.7

Total restructuring, exit and impairment charges
$
2.7

 
$
—

 
$
—

 
$
(1.0
)
 
$
1.7


Actions Initiated Before 2012

The $1.0 million gain on disposal for the three months and six months ended June 28, 2014, relates to the sale of a boat facility in Ashland City, Tennessee, that was part of the Company's 2010 restructuring initiatives to divest of non-strategic assets in its Boat segment.

Note 4 – Acquisitions

On June 16, 2014, the Company acquired 100 percent of privately held Whale, which is based in Bangor, Northern Ireland, and is a manufacturer of water movement and heating systems for the marine, recreational vehicle, industrial and other markets. The Company believes this acquisition will allow the Company to more fully compete across a number of parts and accessories product categories, enable entry into attractive adjacent markets and expand the global presence of the marine service, parts and accessories businesses. Whale will be managed as part of the Company's marine service, parts and accessories businesses within the Marine Engine segment.

The net cash consideration paid by the Company to acquire Whale was $29.1 million, which included the payments of $10.0 million to retire acquiree debt. The preliminary recording of the fair value of the assets acquired resulted in $12.7 million of identifiable intangible assets and $5.4 million of goodwill, which will not be deductible for tax purposes. Included in the identifiable intangible assets were customer relationships, trade names and patents and proprietary technology for $6.4 million, $3.9 million and $2.4 million, respectively. The Company considers its trade names to be indefinite-lived intangible assets, whereas the amounts assigned to Whale's customer relationships and patent and proprietary technology will be amortized over the estimated useful life of 14 years and 5 years, respectively. Due to the recent timing of the acquisition, these amounts are estimates and are subject to change within the measurement period as the Company's fair value assessments are finalized.

This acquisition was not and would not have been material to the Company's net sales, results of operations or total assets during the three months and six months ended June 28, 2014 and June 29, 2013, respectively. Accordingly, the Company's consolidated results from operations do not differ materially from historical performance as a result of this acquisition, and therefore, pro-forma results are not presented.

Note 5 – 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 and six months ended June 28, 2014 and June 29, 2013. The fair 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.

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.  From time-to-time, 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 June 28, 2014, the term of derivative instruments hedging forecasted transactions ranged from one to 18 months. 

Fair Value Hedges. From time-to-time, the Company enters into fixed-to-floating interest rate swaps to convert a portion of the Company's long-term debt from fixed to floating rate debt. An interest rate swap is entered into with the expectation that the change in the fair value of the interest rate swap will offset the change in the fair value of the debt instrument attributable to changes in the benchmark interest rate.

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 June 28, 2014, December 31, 2013, and June 29, 2013 had notional contract values of $174.1 million, $159.1 million and $118.4 million, respectively.  Option contracts outstanding at June 28, 2014, December 31, 2013 and June 29, 2013 had notional contract values of $75.1 million, $71.9 million and $70.9 million, respectively.  The forward and options contracts outstanding at June 28, 2014, mature during 2014 and 2015 and mainly relate to the Euro, Canadian dollar, Japanese yen, Australian dollar, Brazilian real, Mexican peso, British pound, Swedish krona, Norwegian krone and New Zealand dollar. As of June 28, 2014, the Company estimates that during the next 12 months, it will reclassify approximately $1.1 million of net losses (based on current rates) from Accumulated other comprehensive loss to Cost of sales.

Interest Rate. In the second quarter of 2014, the Company entered into fixed-to-floating interest rate swaps to convert a portion of the Company's long-term debt from fixed to floating rate debt. As of June 28, 2014, the outstanding swaps had notional contract values of $200.0 million, of which $150.0 million correspond to the Company's 4.625 percent Senior notes due 2021 and $50.0 million correspond to the Company's 7.375 percent Debentures due 2023. There were no fixed-to-floating interest rate swaps outstanding as of December 31, 2013 and June 29, 2013. These instruments have been designated as fair value hedges, with the fair market value recorded in long-term debt as discussed in Note 17 – Debt.

The Company also 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 June 28, 2014, December 31, 2013 and June 29, 2013. 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 swaps, which resulted in a net deferred loss of $5.8 million, which

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


was recorded as a component of Accumulated other comprehensive loss and is being amortized to interest expense over the life of the related debt.

As of June 28, 2014, December 31, 2013 and June 29, 2013, the Company had $5.3 million of net deferred losses 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 forward starting swaps terminated in May 2013 discussed above.  During the three months and six months ended June 29, 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 June 28, 2014, the Company estimates that during the next 12 months, it will reclassify approximately $0.1 million of net losses 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 June 28, 2014, December 31, 2013 and June 29, 2013 had notional contract values of $25.1 million, $26.2 million and $20.8 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 June 28, 2014, the Company estimates that during the next 12 months it will reclassify approximately $0.9 million in net gains (based on current prices) from Accumulated other comprehensive loss to Cost of sales.

As of June 28, 2014, 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
 
$
1.0

 
Accrued expenses
 
$
1.4

Commodity contracts
 
Prepaid expenses and other
 
1.0

 
Accrued expenses
 
0.2

Total
 
 
 
$
2.0

 
 
 
$
1.6

 
 
 
 
 
 
 
 
 
Derivatives Designated as Fair Value Hedges
 
 
 
 
 
 
 
 
Interest rate contracts
 
Prepaid expenses and other
 
$
0.9

 
Accrued expenses
 
$
2.3

Total
 
 
 
$
0.9

 
 
 
$
2.3

 
 
 
 
 
 
 
 
 
Other Hedging Activity
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other
 
$
0.0

 
Accrued expenses
 
$
1.1

Total
 
 
 
$
0.0

 
 
 
$
1.1


As of December 31, 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
 
$
2.6

 
Accrued expenses
 
$
2.4

Commodity contracts
 
Prepaid expenses and other
 
0.0

 
Accrued expenses
 
1.2

Total
 
 
 
$
2.6

 
 
 
$
3.6

 
 
 
 
 
 
 
 
 
Other Hedging Activity
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 Prepaid expenses and other
 
$
0.1

 
Accrued expenses
 
$
0.9

Total
 
 
 
$
0.1

 
 
 
$
0.9


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


As of June 29, 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
 
$
4.2

 
Accrued expenses
 
$
1.9

Commodity contracts
 
Prepaid expenses and other
 
—

 
Accrued expenses
 
2.7

Total
 
 
 
$
4.2

 
 
 
$
4.6

 
 
 
 
 
 
 
 
 
Other Hedging Activity
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 Prepaid expenses and other
 
$
0.7

 
Accrued expenses
 
$
0.1

Total
 
 
 
$
0.7

 
 
 
$
0.1


The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months ended June 28, 2014 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
 
$
(0.9
)
 
Cost of sales
 
$
(0.1
)
Commodity contracts
 
1.7

 
Cost of sales
 
0.5

Total
 
$
0.8

 
 
 
$
0.4


Derivatives Designated as Fair Value Hedging Instruments
 
Location of Gain (Loss) on Derivatives
Recognized in Earnings
 
Amount of Gain (Loss) on Derivatives Recognized in Earnings
Interest rate contracts
 
Interest expense
 
$
0.3

Total
 
 
 
$
0.3


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
 
$
(1.9
)
Foreign exchange contracts
 
Other income (expense), net
 
(0.6
)
Total
 
 
 
$
(2.5
)


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


The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the six months ended June 28, 2014 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
 
$
(0.9
)
 
Cost of sales
 
$
(0.5
)
Commodity contracts
 
0.6

 
Cost of sales
 
(1.7
)
Total
 
$
(0.3
)
 
 
 
$
(2.2
)

Derivatives Designated as Fair Value Hedging Instruments
 
Location of Gain (Loss) on Derivatives
Recognized in Earnings
 
Amount of Gain (Loss) on Derivatives Recognized in Earnings
Interest rate contracts
 
Interest expense
 
$
0.3

Total
 
 
 
$
0.3


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
 
$
(2.4
)
Foreign exchange contracts
 
Other income (expense), net
 
(0.7
)
Total
 
 
 
$
(3.1
)

The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months ended June 29, 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
 
$
(1.2
)
 
Interest expense
 
$
1.2

Foreign exchange contracts
 
2.2

 
Cost of sales
 
(1.6
)
Commodity contracts
 
(2.0
)
 
Cost of sales
 
(0.5
)
Total
 
$
(1.0
)
 
 
 
$
(0.9
)
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
 
$
(0.2
)
Foreign exchange contracts
 
Other income (expense), net
 
0.2

Total
 
 
 
$
0.0



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 six months ended June 29, 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
 
2.0

 
Cost of sales
 
(2.9
)
Commodity contracts
 
(3.7
)
 
Cost of sales
 
(0.9
)
Total
 
$
(1.9
)
 
 
 
$
(2.3
)

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
 
$
0.7

Foreign exchange contracts
 
Other income (expense), net
 
0.3

Total
 
 
 
$
1.0


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 10 – 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 June 28, 2014, December 31, 2013 and June 29, 2013, the fair value of the Company’s long-term debt was approximately $469.9 million, $461.6 million and $476.0 million, respectively, and was determined using Level 1 and Level 2 inputs described in Note 6 – 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 $458.0 million, $459.8 million and $471.6 million as of June 28, 2014, December 31, 2013 and June 29, 2013, respectively.

Note 6 – 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

18
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 June 28, 2014:
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
140.6

 
$
1.0

 
$
—

 
$
141.6

Short-term investments in marketable securities
0.8

 
—

 
—

 
0.8

Restricted cash
18.6

 
—

 
—

 
18.6

Derivatives
—

 
2.9

 
—

 
2.9

Total assets
$
160.0

 
$
3.9

 
$
—

 
$
163.9

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives
$
—

 
$
5.0

 
$
—

 
$
5.0

Other
4.7

 
47.0

 
—

 
51.7

Total liabilities
$
4.7

 
$
52.0

 
$
—

 
$
56.7


The following table summarizes Brunswick’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2013:
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
119.7

 
$
59.7

 
$
—

 
$
179.4

Short-term investments in marketable securities
0.8

 
11.9

 
—

 
12.7

Restricted cash
6.5

 
—

 
—

 
6.5

Derivatives
—

 
2.7

 
—

 
2.7

Total assets
$
127.0

 
$
74.3

 
$
—

 
$
201.3

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives
$
—

 
$
4.5

 
$
—

 
$
4.5

Other
4.6

 
47.8

 
—

 
52.4

Total liabilities
$
4.6

 
$
52.3

 
$
—

 
$
56.9



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


The following table summarizes Brunswick’s financial assets and liabilities measured at fair value on a recurring basis as of June 29, 2013:
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
169.5

 
$
—

 
$
—

 
$
169.5

Short-term investments in marketable securities
0.8

 
1.9

 
—

 
2.7

Restricted cash
13.0

 
—

 
—

 
13.0

Derivatives
—

 
4.9

 
—

 
4.9

Equity investments
0.8

 
—

 
—

 
0.8

Total assets
$
184.1

 
$
6.8

 
$
—

 
$
190.9

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives
$
—

 
$
4.7

 
$
—

 
$
4.7

Other
7.5

 
38.6

 
—

 
46.1

Total liabilities
$
7.5

 
$
43.3

 
$
—

 
$
50.8


Refer to Note 5 – 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. In addition to the items shown in the tables above, refer to Note 16 in the Company's 2013 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, it is still subject to fair value measurements to test for recoverability of the carrying amount.  

Note 7 – Share-Based Compensation

On May 7, 2014, the Company's shareholders approved the Brunswick Corporation 2014 Stock Incentive Plan (Plan), which replaced the Company's 2003 Stock Incentive Plan. Under the Plan, the Company may grant stock options, stock appreciation rights (SARs), non-vested stock awards and performance awards to executives, other employees and non-employee directors, with 5.0 million shares from treasury shares and from authorized, but unissued, shares of common stock initially available for grant. As of June 28, 2014, 5.0 million shares remained available for grant.

Stock Options and SARs

Between 2005 and 2012, the Company issued stock-settled SARs and has not issued any stock options since 2004. The Company has not issued SARs in 2014 or 2013. In the three months and six months ended June 28, 2014, there was $0.5 million and $0.8 million, respectively, of total expense after adjusting for forfeitures, due to amortization of SARs granted. In the three months and six months ended June 29, 2013, there was $0.6 million and $1.9 million, respectively, of total expense after adjusting for forfeitures, due to amortization of SARs granted.

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 six months ended June 28, 2014, the Company granted 0.0 million and 0.3 million stock awards, respectively. The Company granted 0.0 million and 0.2 million of stock awards during the three months and six months ended June 29, 2013, respectively. The Company recognizes the cost of non-vested stock units and 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. During the three months and six months ended June 28, 2014, $2.8 million and $5.0 million, respectively, was charged to compensation expense for non-vested stock awards. During the three months and six months ended June 29, 2013, $2.1 million and $4.6 million, respectively, was charged to compensation expense for non-vested stock awards.

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


As of June 28, 2014, the Company had $11.5 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. The Company expects this cost to be recognized over a weighted average period of 1.3 years.

Performance Awards

The Company granted 0.2 million and 0.1 million performance shares to certain senior executives during the six months ended June 28, 2014 and June 29, 2013, respectively. 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 based on a one-year CFROI performance period, commencing at the beginning of the calendar year of each grant. The performance shares earned from CFROI performance are then subject to a TSR modifier based on stock price performance measured 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 2014 and 2013, the Company granted 24,600 and 26,000 performance shares, respectively, to non-executive officers and certain senior managers based solely on the CFROI measure utilizing the same one-year performance period mentioned above. Based on projections of probable attainment of the CFROI measure and the projected TSR modifier used to determine the performance awards, $2.3 million and $3.9 million was charged to compensation expense for the three months and six months ended June 28, 2014, respectively. In the three months and six months ended June 29, 2013, $1.5 million and $2.3 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 share award grants with a TSR modifier at the grant date in 2014 and 2013 were $41.38 and $35.93, respectively, which were estimated using the Monte Carlo valuation model, and incorporated the following assumptions:
 
2014
 
2013
Risk-free interest rate
0.6
%
 
0.4
%
Dividend yield
1.0
%
 
0.1
%
Volatility factor
43.7
%
 
53.0
%
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 $40.44 and $34.65, which was equal to the stock price on the date of grant in 2014 and 2013, respectively.

As of June 28, 2014, the Company had $4.2 million of total unrecognized compensation cost related to performance awards. The Company expects this cost to be recognized over a weighted average period of 1.1 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.  A portion 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 portion 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.


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


Note 8 – 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.

Basic and diluted earnings (loss) per common share for the three months and six months ended June 28, 2014 and June 29, 2013, were calculated as follows:
 
Three Months Ended
 
Six Months Ended
(in millions, except per share data)
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Net earnings from continuing operations
$
88.6

 
$
79.3

 
$
145.6

 
$
134.2

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

 
1.1

 
—

 
(4.0
)
Net earnings
$
88.6

 
$
80.4

 
$
145.6

 
$
130.2

 
 
 
 
 
 
 
 
Weighted average outstanding shares – basic
93.5

 
91.0

 
93.4

 
90.8

Dilutive effect of common stock equivalents
1.6

 
2.6

 
1.6

 
2.8

Weighted average outstanding shares – diluted
95.1

 
93.6

 
95.0

 
93.6

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.95

 
$
0.87

 
$
1.56

 
$
1.48

Discontinued operations
—

 
0.01

 
—

 
(0.05
)
Net earnings
$
0.95

 
$
0.88

 
$
1.56

 
$
1.43

 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.93

 
$
0.85

 
$
1.53

 
$
1.43

Discontinued operations
—

 
0.01

 
—