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 April 2, 2016
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 May 3, 2016 was 90,630,895.
BRUNSWICK CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
April 2, 2016
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION | Page | |
PART II – OTHER INFORMATION | ||
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
BRUNSWICK CORPORATION Condensed Consolidated Statements of Comprehensive Income (unaudited) | |||||||
Three Months Ended | |||||||
(in millions, except per share data) | April 2, 2016 | April 4, 2015 | |||||
Net sales | $ | 1,070.3 | $ | 985.7 | |||
Cost of sales | 788.2 | 726.9 | |||||
Selling, general and administrative expense | 147.7 | 140.0 | |||||
Research and development expense | 34.6 | 30.1 | |||||
Restructuring and integration charges | 3.8 | — | |||||
Operating earnings | 96.0 | 88.7 | |||||
Equity earnings | 0.8 | 1.0 | |||||
Other income, net | 1.0 | 1.7 | |||||
Earnings before interest and income taxes | 97.8 | 91.4 | |||||
Interest expense | (6.8 | ) | (7.0 | ) | |||
Interest income | 0.4 | 0.5 | |||||
Earnings before income taxes | 91.4 | 84.9 | |||||
Income tax provision | 28.2 | 28.3 | |||||
Net earnings from continuing operations | 63.2 | 56.6 | |||||
Discontinued operations: | |||||||
Earnings from discontinued operations, net of tax | 1.6 | 0.4 | |||||
Net earnings from discontinued operations, net of tax | 1.6 | 0.4 | |||||
Net earnings | $ | 64.8 | $ | 57.0 | |||
Earnings per common share: | |||||||
Basic | |||||||
Earnings from continuing operations | $ | 0.69 | $ | 0.60 | |||
Earnings from discontinued operations | 0.02 | 0.01 | |||||
Net earnings | $ | 0.71 | $ | 0.61 | |||
Diluted | |||||||
Earnings from continuing operations | $ | 0.68 | $ | 0.59 | |||
Earnings from discontinued operations | 0.02 | 0.01 | |||||
Net earnings | $ | 0.70 | $ | 0.60 | |||
Weighted average shares used for computation of: | |||||||
Basic earnings per common share | 91.8 | 93.8 | |||||
Diluted earnings per common share | 92.8 | 95.2 | |||||
Comprehensive income | $ | 73.0 | $ | 45.7 | |||
Cash dividends declared per share | $ | 0.15 | $ | 0.125 | |||
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) | April 2, 2016 | December 31, 2015 | April 4, 2015 | ||||||||
Assets | |||||||||||
Current assets | |||||||||||
Cash and cash equivalents, at cost, which approximates fair value | $ | 282.2 | $ | 657.3 | $ | 368.2 | |||||
Short-term investments in marketable securities | 0.8 | 11.5 | 57.8 | ||||||||
Total cash, cash equivalents and short-term investments in marketable securities | 283.0 | 668.8 | 426.0 | ||||||||
Restricted cash | 12.7 | 12.7 | 15.6 | ||||||||
Accounts and notes receivable, less allowances of $14.9, $13.8 and $16.2 | 526.3 | 398.1 | 473.7 | ||||||||
Inventories | |||||||||||
Finished goods | 481.8 | 444.4 | 437.4 | ||||||||
Work-in-process | 98.3 | 88.4 | 98.5 | ||||||||
Raw materials | 157.3 | 152.2 | 143.9 | ||||||||
Net inventories | 737.4 | 685.0 | 679.8 | ||||||||
Prepaid expenses and other | 50.0 | 39.8 | 40.9 | ||||||||
Current assets held for sale | — | — | 31.0 | ||||||||
Current assets | 1,609.4 | 1,804.4 | 1,667.0 | ||||||||
Property | |||||||||||
Land | 22.8 | 24.2 | 23.5 | ||||||||
Buildings and improvements | 378.4 | 351.8 | 333.8 | ||||||||
Equipment | 910.4 | 886.8 | 854.9 | ||||||||
Total land, buildings and improvements and equipment | 1,311.6 | 1,262.8 | 1,212.2 | ||||||||
Accumulated depreciation | (870.1 | ) | (861.4 | ) | (847.3 | ) | |||||
Net land, buildings and improvements and equipment | 441.5 | 401.4 | 364.9 | ||||||||
Unamortized product tooling costs | 108.9 | 103.8 | 99.0 | ||||||||
Net property | 550.4 | 505.2 | 463.9 | ||||||||
Other assets | |||||||||||
Goodwill | 380.3 | 298.7 | 296.0 | ||||||||
Other intangibles, net | 136.8 | 55.1 | 44.2 | ||||||||
Equity investments | 27.3 | 21.5 | 25.1 | ||||||||
Non-current deferred tax asset | 372.1 | 420.2 | 479.4 | ||||||||
Other long-term assets | 46.4 | 47.4 | 42.5 | ||||||||
Long-term assets held for sale | — | — | 11.9 | ||||||||
Other assets | 962.9 | 842.9 | 899.1 | ||||||||
Total assets | $ | 3,122.7 | $ | 3,152.5 | $ | 3,030.0 | |||||
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) | April 2, 2016 | December 31, 2015 | April 4, 2015 | ||||||||
Liabilities and shareholders’ equity | |||||||||||
Current liabilities | |||||||||||
Current maturities of long-term debt | $ | 4.8 | $ | 6.0 | $ | 5.0 | |||||
Accounts payable | 362.0 | 339.1 | 347.4 | ||||||||
Accrued expenses | 529.4 | 563.0 | 477.4 | ||||||||
Current liabilities held for sale | — | — | 15.5 | ||||||||
Current liabilities | 896.2 | 908.1 | 845.3 | ||||||||
Long-term liabilities | |||||||||||
Debt | 446.1 | 442.5 | 448.8 | ||||||||
Deferred income taxes | 2.3 | 12.3 | 4.1 | ||||||||
Postretirement benefits | 310.7 | 347.5 | 333.7 | ||||||||
Other | 162.1 | 160.8 | 193.6 | ||||||||
Long-term liabilities held for sale | — | — | 7.3 | ||||||||
Long-term liabilities | 921.2 | 963.1 | 987.5 | ||||||||
Shareholders’ equity | |||||||||||
Common stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares; outstanding: 90,712,000, 90,813,000 and 92,716,000 shares | 76.9 | 76.9 | 76.9 | ||||||||
Additional paid-in capital | 380.7 | 408.0 | 392.9 | ||||||||
Retained earnings | 1,711.7 | 1,660.4 | 1,512.7 | ||||||||
Treasury stock, at cost: 11,826,000, 11,725,000 and 9,822,000 shares | (398.1 | ) | (389.9 | ) | (293.5 | ) | |||||
Accumulated other comprehensive loss, net of tax | (465.9 | ) | (474.1 | ) | (491.8 | ) | |||||
Shareholders’ equity | 1,305.3 | 1,281.3 | 1,197.2 | ||||||||
Total liabilities and shareholders’ equity | $ | 3,122.7 | $ | 3,152.5 | $ | 3,030.0 | |||||
The Notes to Condensed Consolidated Financial Statements are an integral part of these consolidated statements. | |||||||||||
5
BRUNSWICK CORPORATION Condensed Consolidated Statements of Cash Flows (unaudited) | |||||||
Three Months Ended | |||||||
(in millions) | April 2, 2016 | April 4, 2015 | |||||
Cash flows from operating activities | |||||||
Net earnings | $ | 64.8 | $ | 57.0 | |||
Less: net earnings from discontinued operations, net of tax | 1.6 | 0.4 | |||||
Net earnings from continuing operations | 63.2 | 56.6 | |||||
Depreciation and amortization | 25.4 | 21.9 | |||||
Pension funding, net of expense | (32.2 | ) | (58.0 | ) | |||
Deferred income taxes | 20.1 | 19.4 | |||||
Excess tax benefits from share-based compensation | (7.4 | ) | (6.0 | ) | |||
Equity in earnings of unconsolidated affiliates, net of dividends | (0.8 | ) | (1.0 | ) | |||
Changes in certain current assets and current liabilities, excluding acquisitions | (153.1 | ) | (160.6 | ) | |||
Income taxes | (4.0 | ) | 4.6 | ||||
Other, net | (1.4 | ) | (2.8 | ) | |||
Net cash used for operating activities of continuing operations | (90.2 | ) | (125.9 | ) | |||
Net cash used for operating activities of discontinued operations | (3.0 | ) | (6.4 | ) | |||
Net cash used for operating activities | (93.2 | ) | (132.3 | ) | |||
Cash flows from investing activities | |||||||
Capital expenditures | (46.2 | ) | (33.8 | ) | |||
Purchases of marketable securities | — | (15.9 | ) | ||||
Sales or maturities of marketable securities | 10.7 | 41.3 | |||||
Investments | (3.6 | ) | (5.3 | ) | |||
Acquisition of businesses, net of cash acquired | (195.0 | ) | — | ||||
Proceeds from the sale of property, plant and equipment | 0.1 | 1.0 | |||||
Other, net | 1.3 | — | |||||
Net cash used for investing activities of continuing operations | (232.7 | ) | (12.7 | ) | |||
Net cash used for investing activities of discontinued operations | — | (0.2 | ) | ||||
Net cash used for investing activities | (232.7 | ) | (12.9 | ) | |||
Cash flows from financing activities | |||||||
Payments of long-term debt including current maturities | (0.1 | ) | (0.1 | ) | |||
Common stock repurchases | (40.0 | ) | (20.0 | ) | |||
Cash dividends paid | (13.6 | ) | (11.6 | ) | |||
Excess tax benefits from share-based compensation | 7.4 | 6.0 | |||||
Proceeds from share-based compensation activity | 11.6 | 3.7 | |||||
Tax withholding associated with shares issued for share-based compensation | (17.4 | ) | (7.8 | ) | |||
Net cash used for financing activities | (52.1 | ) | (29.8 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | 2.9 | (9.5 | ) | ||||
Net decrease in cash and cash equivalents | (375.1 | ) | (184.5 | ) | |||
Cash and cash equivalents at beginning of period | 657.3 | 552.7 | |||||
Cash and cash equivalents at end of period | $ | 282.2 | $ | 368.2 | |||
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. As indicated in Note 2 – Discontinued Operations, Brunswick's results as discussed in the financial statements reflect continuing operations only, unless otherwise noted.
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 2015 Annual Report on Form 10-K for the year ended December 31, 2015 (the 2015 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 April 2, 2016, December 31, 2015 and April 4, 2015, the results of operations for the three months ended April 2, 2016 and April 4, 2015, and the cash flows for the three months ended April 2, 2016 and April 4, 2015. 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 quarter ending on the Saturday closest to the end of the first thirteen-week period. The first quarter of fiscal year 2016 ended on April 2, 2016, and the first quarter of fiscal year 2015 ended on April 4, 2015.
Recent Accounting Pronouncements. The following are recent accounting pronouncements that have been adopted during 2016, or will be adopted in future periods.
Share-Based Compensation: In March 2016, the Financial Accounting Standards Board (FASB) amended the Accounting Standards Codification (ASC) to simplify the accounting for employee share-based payment transactions. Amendments related to the timing of excess tax benefit recognition, minimum statutory withholding requirements and forfeitures will be applied using a modified retrospective approach through a cumulative adjustment to equity as of the beginning of the period of adoption. Amendments to certain classifications on the statement of cash flows may be applied either prospectively or retrospectively, and amendments requiring the recognition of excess tax benefits and tax deficiencies in the income statement are to be applied prospectively. These amendments are to be applied for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. 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 condensed consolidated financial statements.
Recognition of Leases: In February 2016, the FASB amended the ASC to require lessees to recognize assets and liabilities on the balance sheet for all leases with terms greater than twelve months. Lessees will recognize expenses similar to current lease accounting. The amendment is to be applied using a modified retrospective method with certain practical expedients, and is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. 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 condensed consolidated financial statements.
Classification of Deferred Income Taxes: In November 2015, the FASB amended the ASC to require that deferred tax assets and liabilities be classified as non-current on the Condensed Consolidated Balance Sheets for all periods presented. The amendment may be applied either retrospectively or prospectively and is effective for fiscal years, and the interim periods thereafter, beginning after December 15, 2016, with early adoption permitted.
The Company early adopted this ASC amendment during the first quarter of 2016 which caused the Company to change its method of presentation for current deferred income taxes in the Condensed Consolidated Balance Sheets for all periods presented. Current deferred income tax assets of $180.5 million and $207.0 million as of December 31, 2015 and April 4, 2015, respectively, were reclassified to long-term. The reclassification of current deferred income tax liabilities did not have a material impact on the Company’s condensed consolidated financial statements.
7
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Measurement of Inventory: In July 2015, the FASB issued final guidance to simplify the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test. The guidance applies to inventories for which cost is determined by methods other than LIFO and the retail inventory method. The amendment is to be applied prospectively and is effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASC amendment, but does not expect it will have a material impact on the Company’s condensed consolidated financial statements.
Fair Value Disclosure: In May 2015, the FASB amended the ASC to update the presentation of certain investments measured at net asset value within the fair value hierarchy. The amendment requires these investments to be removed from the fair value hierarchy categorization and presented as a single reconciling line item between the fair value of investments reported on the Condensed Consolidated Balance Sheets and the amounts reported in the fair value hierarchy table. The amendment is to be applied retrospectively and is effective for fiscal years, and the interim periods within those years, beginning after December 15, 2015, with early adoption permitted. The Company adopted this amendment in 2016 and it did not have a material impact on the Company’s condensed consolidated financial statements.
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. In August 2015, the FASB amended the ASC to delay the effective date to fiscal years, and the interim periods within those years, beginning on or after January 1, 2018, from the original effective date of January 1, 2017, with early adoption permitted no earlier than 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 condensed consolidated financial statements.
8
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 2 – Discontinued Operations
The following table discloses the results of operations of the businesses reported as discontinued operations for the three months ended April 2, 2016 and April 4, 2015:
(in millions) | April 2, 2016 | April 4, 2015 | |||||
Net sales | $ | — | $ | 25.2 | |||
Earnings from discontinued operations before income taxes | $ | 2.6 | $ | 0.6 | |||
Income tax provision | 1.0 | 0.2 | |||||
Net earnings from discontinued operations, net of tax | $ | 1.6 | $ | 0.4 | |||
There were no assets and liabilities held for sale as of April 2, 2016 or December 31, 2015. The following table reflects the summary of assets and liabilities held for sale for the businesses reported as discontinued operations as of April 4, 2015:
(in millions) | April 4, 2015 | ||
Accounts and notes receivable, net | $ | 13.6 | |
Net inventory | 16.8 | ||
Prepaid expenses and other | 0.6 | ||
Current assets held for sale | 31.0 | ||
Net property | 8.6 | ||
Other long-term assets | 3.3 | ||
Long-term assets held for sale | 11.9 | ||
Assets held for sale | $ | 42.9 | |
Accounts payable | $ | 5.7 | |
Accrued expenses | 9.8 | ||
Current liabilities held for sale | 15.5 | ||
Other liabilities | 7.3 | ||
Long-term liabilities held for sale | 7.3 | ||
Liabilities held for sale | $ | 22.8 | |
9
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 3 – Restructuring and Integration Activities
The Company executed certain integration activities within the Fitness segment related to the acquisition of Cybex International, Inc. (Cybex) in the first quarter of 2016 as discussed in Note 4 –Acquisitions, resulting in the recognition of integration charges in the Condensed Consolidated Statements of Comprehensive Income during 2016.
The following table is a summary of the net expense associated with the Fitness segment integration activities for the three months ended April 2, 2016, as discussed above.
(in millions) | April 2, 2016 | ||
Integration activities: | |||
Employee termination and other benefits | $ | 1.9 | |
Professional fees | 1.4 | ||
Other | 0.5 | ||
Total integration charges | $ | 3.8 | |
During 2016, the Company made cash payments of $2.9 million relating to all restructuring and integration activities, including payments related to prior period restructuring activities. As of April 2, 2016, accruals remaining for all restructuring and integration activities totaled $2.4 million and are expected to be paid substantially during 2016.
Note 4 – Acquisitions
On January 20, 2016, the Company acquired 100 percent of privately held Cybex, a leading manufacturer of commercial fitness equipment, which is based in Medway, Massachusetts. Cybex offers a full line of cardiovascular and strength products and had unaudited sales in 2015 of approximately $169 million. The addition of Cybex expands the Fitness segment's participation in key markets, including commercial fitness, and adds to the Company's manufacturing footprint to meet current and future demand more effectively. Cybex also increases the breadth and depth of the segment's product portfolio. Cybex is managed within the Company's Fitness segment.
The following table is a summary of the assets acquired, liabilities assumed and net cash consideration paid for the Cybex acquisition during 2016:
(in millions) | Fair Value (B) | Useful Life | |||
Accounts and notes receivable | $ | 25.9 | |||
Inventory | 13.5 | ||||
Goodwill (A) | 81.9 | ||||
Trade names | 38.6 | Indefinite | |||
Customer relationships | 41.8 | 16 years | |||
Patents and proprietary technology | 3.1 | 5 years | |||
Property and equipment | 39.8 | ||||
Other assets | 6.0 | ||||
Total assets acquired | 250.6 | ||||
Total liabilities assumed | 55.6 | ||||
Net cash consideration paid | $ | 195.0 | |||
(A) The goodwill recorded for the acquisition of Cybex is not deductible for tax purposes.
(B) Due to the recent timing of this acquisition, these amounts are preliminary and are subject to change within the measurement period as the Company finalizes its fair value estimates.
This acquisition is not material to the Company's net sales, results of operations or total assets during any period presented. 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.
10
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
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. 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 each 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, the Company discontinues hedge accounting prospectively and immediately recognizes the gains and losses associated with those hedges. There were no material adjustments as a result of ineffectiveness to the results of operations for the three months ended April 2, 2016 and April 4, 2015. 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 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 currency exchange exposure mainly related to inventory purchase and sales transactions. The Company also enters into commodity swap agreements based on anticipated purchases of 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 April 2, 2016, the term of derivative instruments hedging forecasted transactions ranged from one to 15 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. Each period, the change in the fair value of the interest rate swap asset or liability is recorded in debt and the difference between the fixed interest payment and floating interest receipts is recorded as a net adjustment to interest expense.
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. In addition, other hedging activity includes commodity swap agreements that are used to hedge purchases of aluminum. These hedges do not qualify for hedge accounting. The commodity swap agreements are based on anticipated purchases of aluminum and are used to manage risk related to price changes. The change in the fair value of the aluminum derivative contract is 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.
11
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Forward exchange contracts outstanding at April 2, 2016, December 31, 2015 and April 4, 2015 had notional contract values of $232.1 million, $273.5 million and $148.0 million, respectively. Option contracts outstanding at April 2, 2016, December 31, 2015 and April 4, 2015 had notional contract values of $48.3 million, $51.0 million and $70.1 million, respectively. The forward and options contracts outstanding at April 2, 2016 mature during 2016 and 2017 and mainly relate to the Euro, Australian dollar, Canadian dollar, Japanese yen, Brazilian real, Swedish krona, Norwegian krone, Mexican peso, British pound, Hungarian forint and New Zealand dollar. As of April 2, 2016, the Company estimates that during the next 12 months, it will reclassify approximately $0.4 million of net losses (based on current rates) from Accumulated other comprehensive loss to Cost of sales.
Interest Rate. 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. As of April 2, 2016, December 31, 2015 and April 4, 2015, the outstanding swaps had notional contract values of $200.0 million, of which $150.0 million corresponds to the Company's 4.625 percent Senior notes due 2021 and $50.0 million corresponds to the Company's 7.375 percent Debentures due 2023. These instruments have been designated as fair value hedges, with the fair value recorded in long-term debt.
The Company also enters into forward-starting interest rate swaps from time to time to hedge the interest rate risk associated with anticipated debt issuances. There were no forward-starting interest rate swaps outstanding at April 2, 2016, December 31, 2015 or April 4, 2015.
As of April 2, 2016, December 31, 2015 and April 4, 2015, the Company had $5.1 million, $5.1 million and $5.2 million, respectively, of net deferred losses associated with all settled forward-starting interest rate swaps, which were included in Accumulated other comprehensive loss. As of April 2, 2016, the Company estimates that during the next 12 months, it will reclassify approximately $0.8 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 April 2, 2016, December 31, 2015 and April 4, 2015 had notional contract values of $7.6 million, $10.8 million and $23.9 million, respectively. The contracts outstanding mature through 2017. The amount of gain or loss associated with the change in fair value of these instruments is either recorded through earnings each period as incurred or, if designated as cash flow hedges, deferred in Accumulated other comprehensive loss and recognized in Cost of sales in the same period or periods during which the hedged transaction affects earnings. As of April 2, 2016, the Company estimates that during the next 12 months it will reclassify approximately $0.4 million in net losses (based on current prices) from Accumulated other comprehensive loss to Cost of sales.
12
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
As of April 2, 2016, December 31, 2015 and April 4, 2015 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 | ||||||||||||||||||||||||
April 2, 2016 | Dec. 31, 2015 | April 4, 2015 | April 2, 2016 | Dec. 31, 2015 | April 4, 2015 | |||||||||||||||||||||||
Derivatives Designated as Cash Flow Hedges | ||||||||||||||||||||||||||||
Foreign exchange contracts | Prepaid expenses and other | $ | 2.8 | $ | 5.9 | $ | 6.9 | Accrued expenses | $ | 3.9 | $ | 1.3 | $ | 0.9 | ||||||||||||||
Commodity contracts | Prepaid expenses and other | — | — | — | Accrued expenses | 0.3 | 0.5 | 2.5 | ||||||||||||||||||||
Total | $ | 2.8 | $ | 5.9 | $ | 6.9 | $ | 4.2 | $ | 1.8 | $ | 3.4 | ||||||||||||||||
Derivatives Designated as Fair Value Hedges | ||||||||||||||||||||||||||||
Interest rate contracts | Prepaid expenses and other | $ | 2.9 | $ | 2.1 | $ | 3.0 | Accrued expenses | $ | 2.0 | $ | 1.4 | $ | 1.7 | ||||||||||||||
Interest rate contracts | Other long-term assets | 6.5 | 4.0 | 4.9 | Other long-term liabilities | — | — | — | ||||||||||||||||||||
Total | $ | 9.4 | $ | 6.1 | $ | 7.9 | $ | 2.0 | $ | 1.4 | $ | 1.7 | ||||||||||||||||
Other Hedging Activity | ||||||||||||||||||||||||||||
Foreign exchange contracts | Prepaid expenses and other | $ | 0.3 | $ | 1.5 | $ | 1.0 | Accrued expenses | $ | 0.6 | $ | 0.2 | $ | 0.0 | ||||||||||||||
Commodity contracts | Prepaid expenses and other | — | — | — | Accrued expenses | 1.6 | 2.2 | — | ||||||||||||||||||||
Total | $ | 0.3 | $ | 1.5 | $ | 1.0 | $ | 2.2 | $ | 2.4 | $ | 0.0 | ||||||||||||||||
The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months ended April 2, 2016 and April 4, 2015 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) | |||||||||||||||
April 2, 2016 | April 4, 2015 | April 2, 2016 | April 4, 2015 | |||||||||||||||
Foreign exchange contracts | $ | (4.3 | ) | $ | 6.7 | Cost of sales | $ | 2.6 | $ | 2.6 | ||||||||
Commodity contracts | 0.0 | (2.7 | ) | Cost of sales | (0.2 | ) | (1.8 | ) | ||||||||||
Total | $ | (4.3 | ) | $ | 4.0 | $ | 2.4 | $ | 0.8 | |||||||||
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 | ||||||||
April 2, 2016 | April 4, 2015 | |||||||||
Interest rate contracts | Interest expense | $ | 0.8 | $ | 1.1 | |||||
13
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Other Hedging Activity | Location of Gain (Loss) on Derivatives Recognized in Earnings | Amount of Gain (Loss) on Derivatives Recognized in Earnings | ||||||||
April 2, 2016 | April 4, 2015 | |||||||||
Foreign exchange contracts | Cost of sales | $ | (4.8 | ) | $ | 6.2 | ||||
Foreign exchange contracts | Other income, net | 0.4 | 0.7 | |||||||
Commodity contracts | Cost of sales | (0.1 | ) | — | ||||||
Total | $ | (4.5 | ) | $ | 6.9 | |||||
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 approximate their fair values because of the short maturity of these instruments. At April 2, 2016, December 31, 2015 and April 4, 2015, the fair value of the Company’s long-term debt was approximately $462.1 million, $454.7 million and $470.7 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 $447.5 million, $448.5 million and $457.6 million as of April 2, 2016, December 31, 2015 and April 4, 2015, 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. |
• | 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. |
14
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of April 2, 2016:
(in millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets: | |||||||||||||||
Cash equivalents | $ | 9.4 | $ | — | $ | — | $ | 9.4 | |||||||
Short-term investments in marketable securities | 0.8 | — | — | 0.8 | |||||||||||
Restricted cash | 12.7 | — | — | 12.7 | |||||||||||
Derivatives | — | 12.5 | — | 12.5 | |||||||||||
Total assets | $ | 22.9 | $ | 12.5 | $ | — | $ | 35.4 | |||||||
Liabilities: | |||||||||||||||
Derivatives | $ | — | $ | 8.4 | $ | — | $ | 8.4 | |||||||
Other | 3.8 | 36.2 | — | 40.0 | |||||||||||
Total liabilities at fair value | $ | 3.8 | $ | 44.6 | $ | — | $ | 48.4 | |||||||
Liabilities measured at net asset value | 11.6 | ||||||||||||||
Total liabilities | $ | 60.0 | |||||||||||||
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2015:
(in millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets: | |||||||||||||||
Cash equivalents | $ | 131.3 | $ | 138.9 | $ | — | $ | 270.2 | |||||||
Short-term investments in marketable securities | 0.8 | 10.7 | — | 11.5 | |||||||||||
Restricted cash | 12.7 | — | — | 12.7 | |||||||||||
Derivatives | — | 13.5 | — | 13.5 | |||||||||||
Total assets | $ | 144.8 | $ | 163.1 | $ | — | $ | 307.9 | |||||||
Liabilities: | |||||||||||||||
Derivatives | $ | — | $ | 5.6 | $ | — | $ | 5.6 | |||||||
Other | 3.8 | 34.6 | — | 38.4 | |||||||||||
Total liabilities at fair value | $ | 3.8 | $ | 40.2 | $ | — | $ | 44.0 | |||||||
Liabilities measured at net asset value | 11.3 | ||||||||||||||
Total liabilities | $ | 55.3 | |||||||||||||
15
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of April 4, 2015:
(in millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Assets: | |||||||||||||||
Cash equivalents | $ | 111.3 | $ | 34.5 | $ | — | $ | 145.8 | |||||||
Short-term investments in marketable securities | 0.8 | 57.0 | — | 57.8 | |||||||||||
Restricted cash | 15.6 | — | — | 15.6 | |||||||||||
Derivatives | — | 15.8 | — | 15.8 | |||||||||||
Total assets | $ | 127.7 | $ | 107.3 | $ | — | $ | 235.0 | |||||||
Liabilities: | |||||||||||||||
Derivatives | $ | — | $ | 5.1 | $ | — | $ | 5.1 | |||||||
Other | 7.0 | 35.0 | — | 42.0 | |||||||||||
Total liabilities at fair value | $ | 7.0 | $ | 40.1 | $ | — | $ | 47.1 | |||||||
Liabilities measured at net asset value | 12.2 | ||||||||||||||
Total liabilities | $ | 59.3 | |||||||||||||
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 17 in the Notes to Consolidated Financial Statements in the 2015 Form 10-K for further discussion regarding the fair value measurements associated with the Company’s postretirement benefit plans.
Note 7 – Share-Based Compensation
Under the Brunswick Corporation 2014 Stock Incentive Plan (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 from treasury shares and from authorized, but unissued, shares of common stock, in addition to any shares reacquired by the Company through the forfeiture of past awards, or settlement of such awards in cash. As of April 2, 2016, 5.3 million shares remained available for 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 management and the Human Resources and Compensation Committee of the Board of Directors. The Company granted 0.3 million and 0.2 million of stock awards during the three months ended April 2, 2016 and April 4, 2015, 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 ended April 2, 2016 and April 4, 2015, the Company charged $1.6 million and $3.6 million, respectively, to compensation expense for non-vested stock awards.
As of April 2, 2016, there was $14.8 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 1.6 years.
Performance awards
In each of the first quarters of 2016 and 2015, the Company granted 0.1 million performance shares to certain senior executives. The 2016 and 2015 share awards are based on three performance measures: a cash flow return on investment (CFROI) measure, an operating margin (OM) measure and a total shareholder return (TSR) modifier. Performance shares are earned based on a three-year performance period commencing at the beginning of the calendar year of each grant. The performance shares are then subject to a TSR modifier based on stock returns measured against stock returns of 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 2016 and 2015, the Company granted 38,690 and 22,990 performance shares, respectively, to certain officers and certain senior managers based on the respective measures and performance periods described above but excluding a TSR modifier. Based on projections of probable
16
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
attainment of the performance measures and the projected TSR modifier used to determine the performance awards, $1.2 million was charged to compensation expense for both the three months ended April 2, 2016 and April 4, 2015.
The fair values of the senior executives' performance share award grants with a TSR modifier at the grant date in 2016 and 2015 were $38.54 and $56.17, respectively, which were estimated using the Monte Carlo valuation model, and incorporated the following assumptions:
2016 | 2015 | ||||
Risk-free interest rate | 0.8 | % | 1.0 | % | |
Dividend yield | 1.0 | % | 0.9 | % | |
Volatility factor | 40.8 | % | 39.2 | % | |
Expected life of award | 2.9 years | 2.9 years | |||
The fair value of the certain officers and certain senior managers' performance awards granted based solely on the CFROI performance factor was $37.76 and $52.39, which was equal to the stock price on the date of grant in 2016 and 2015, respectively, less the present value of dividend payments over the vesting period.
As of April 2, 2016, the Company had $6.5 million of total unrecognized compensation cost related to performance awards. The Company expects this cost to be recognized over a weighted average period of 1.5 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 with a 20 percent premium.
17
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 8 – Earnings per Common Share
Basic earnings per common share is calculated by dividing Net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated similarly, except that the calculation includes the dilutive effect of stock-settled SARs, non-vested stock awards and performance awards.
Basic and diluted earnings per common share for the three months ended April 2, 2016 and April 4, 2015 were calculated as follows:
(in millions, except per share data) | April 2, 2016 | April 4, 2015 | ||||||
Net earnings from continuing operations | $ | 63.2 | $ | 56.6 | ||||
Net earnings from discontinued operations, net of tax | 1.6 | 0.4 | ||||||
Net earnings | $ | 64.8 | $ | 57.0 | ||||
Weighted average outstanding shares – basic | 91.8 | 93.8 | ||||||
Dilutive effect of common stock equivalents | 1.0 | 1.4 | ||||||
Weighted average outstanding shares – diluted | 92.8 | 95.2 | ||||||
Basic earnings per common share: | ||||||||
Continuing operations | $ | 0.69 | $ | 0.60 | ||||
Discontinued operations | 0.02 | 0.01 | ||||||
Net earnings | $ | 0.71 | $ | 0.61 | ||||
Diluted earnings per common share: | ||||||||
Continuing operations | $ | 0.68 | $ | 0.59 | ||||
Discontinued operations | 0.02 | 0.01 | ||||||
Net earnings | $ | 0.70 | $ | 0.60 | ||||
As of April 2, 2016, the Company had 1.2 million SARs outstanding and exercisable. This compares with 2.3 million SARs outstanding, of which 2.2 million were exercisable, as of April 4, 2015. During the three months ended April 2, 2016 and April 4, 2015, there were no SARs outstanding for which the exercise price was greater than the average market price of the Company’s shares for the period then ended. Therefore, there were no non-dilutive SARs to exclude from the computation of diluted earnings per common share. Changes in average outstanding basic shares from April 4, 2015 to April 2, 2016 reflect the impact of SARs exercised and the vesting of stock and performance awards since the first quarter of 2015, net of the impact of common stock repurchases throughout 2015 and the first quarter of 2016.
18
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 9 – Commitments and Contingencies
Financial Commitments
The Company has entered into guarantees of indebtedness of third parties, primarily in connection with customer financing programs. Under these arrangements, the Company has guaranteed customer obligations to the financial institutions in the event of customer default, generally subject to a maximum amount that is less than total outstanding obligations. The Company has also extended guarantees to third parties that have purchased customer receivables from Brunswick and, in certain instances, has guaranteed secured term financing of its customers. Potential payments in connection with these customer financing arrangements generally extend over several years. The single year potential cash obligations associated with these customer financing arrangements as of April 2, 2016, December 31, 2015 and April 4, 2015 were $29.6 million, $30.7 million and $29.3 million, respectively. The maximum potential cash obligation associated with these customer financing arrangements as of April 2, 2016, December 31, 2015 and April 4, 2015 were $36.4 million, $36.8 million and $34.3 million, respectively.
In most instances, upon repurchase of the receivable or note, the Company receives rights to the collateral securing the financing. The Company’s risk under these arrangements is partially mitigated by the value of the collateral that secures the financing. The Company had $1.1 million accrued for potential losses related to recourse exposure at April 2, 2016, December 31, 2015 and April 4, 2015, respectively.
The Company has accounts receivable sale arrangements with third parties which are included in the guarantee arrangements discussed above. The Company treats the sale of receivables in which the Company retains an interest as a secured obligation as the transfers of the receivables under these arrangements do not meet the requirements of a “true sale.” Accordingly, the current portion of receivables underlying these arrangements of $25.6 million, $22.5 million and $21.6 million was recorded in Accounts and notes receivable and Accrued expenses as of April 2, 2016, December 31, 2015 and April 4, 2015, respectively. Further, the long-term portion of these arrangements of $25.2 million, $23.7 million and $20.1 million as of April 2, 2016, December 31, 2015 and April 4, 2015, respectively, was recorded in Other long-term assets and Other long-term liabilities.
The Company has also entered into arrangements with third-party lenders in which it has agreed, in the event of a customer default, to repurchase from the third-party lender those Brunswick products repossessed from the customer. These arrangements are typically subject to a maximum repurchase amount. The single year and maximum potential cash payments the Company could be required to make to repurchase collateral as of April 2, 2016, December 31, 2015 and April 4, 2015 were $60.4 million, $57.9 million and $58.2 million, respectively.
The Company’s risk under these repurchase arrangements is partially mitigated by the value of the products repurchased as part of the transaction. The Company had $1.2 million, $1.1 million and $1.0 million accrued for potential losses related to repurchase exposure at April 2, 2016, December 31, 2015 and April 4, 2015, respectively. The Company’s repurchase accrual represents the expected losses that could result from obligations to repurchase products, after giving effect to proceeds anticipated to be received from the resale of those products to alternative dealers.
The Company has recorded its estimated net liability associated with losses from these guarantee and repurchase obligations on its Condensed Consolidated Balance Sheets based on historical experience and current facts and circumstances. Historical cash requirements and losses associated with these obligations have not been significant, but could increase if dealer defaults exceed current expectations.
Financial institutions have issued standby letters of credit and surety bonds conditionally guaranteeing obligations on behalf of the Company totaling $6.1 million and $12.0 million, respectively, as of April 2, 2016. A large portion of these standby letters of credit and surety bonds are related to the Company’s self-insured workers’ compensation program as required by its insurance companies and various state agencies. The Company has recorded reserves to cover the anticipated liabilities associated with these programs. Under certain circumstances, such as an event of default under the Company’s revolving credit facility, or, in the case of surety bonds, a ratings downgrade, the Company could be required to post collateral to support the outstanding letters of credit and surety bonds. The Company was not required to post letters of credit as collateral against surety bonds as of April 2, 2016.
The Company has a collateral trust arrangement with insurance carriers and a trustee bank. The trust is owned by the Company, but the assets are pledged as collateral against workers’ compensation related obligations in lieu of other forms of collateral including letters of credit. In connection with this arrangement, the Company had $12.7 million, $12.7 million and $15.6 million of cash in the trust as of April 2, 2016, December 31, 2015 and April 4, 2015, respectively, which was classified as Restricted cash in the Company’s Condensed Consolidated Balance Sheets. In 2015, insurance carriers reduced the required collateral amount, which resulted in a transfer out of the trust.
19
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Product Warranties
The Company records a liability for product warranties at the time revenue is recognized. The liability is estimated using historical warranty experience, projected claim rates and expected costs per claim. The Company adjusts its liability for specific warranty matters when they become known and the exposure can be estimated. Product failure rates as well as material usage and labor costs incurred in correcting a product failure affect the Company's warranty liabilities. If actual costs differ from estimated costs, the Company must make a revision to the warranty liability. Changes in the Company's warranty liabilities due to improvements in the Company's experience and adjustments related to changes in estimates are included as Aggregate changes for preexisting warranties presented in the table below.
The following activity related to product warranty liabilities was recorded in Accrued expenses during the three months ended April 2, 2016 and April 4, 2015:
(in millions) | April 2, 2016 | April 4, 2015 | |||||
Balance at beginning of period | $ | 106.3 | $ | 110.6 | |||
Payments made | (13.3 | ) | (12.7 | ) | |||
Provisions/additions for contracts issued/sold | 16.1 | 17.5 | |||||
Aggregate changes for preexisting warranties | (3.3 | ) | (4.3 | ) | |||
Foreign currency translation | 0.6 | (2.4 | ) | ||||
Acquisitions | 6.4 | — | |||||
Balance at end of period | $ | 112.8 | $ | 108.7 | |||
Additionally, end users of the Company's products may purchase a contract from the Company that extends product warranty beyond the standard period. For certain extended warranty contracts in which the Company retains the warranty or administration obligation, a deferred liability is recorded based on the aggregate sales price for contracts sold. The deferred liability is reduced and revenue is recognized on a straight-line basis over the contract period during which costs are expected to be incurred. Deferred revenue associated with contracts sold by the Company that extend product protection beyond the standard product warranty period, not included in the table above, was $79.0 million, $78.3 million and $72.6 million at April 2, 2016, December 31, 2015 and April 4, 2015, respectively, and is recorded in Accrued expenses and Other long-term liabilities.
Legal and Environmental
The Company accrues for litigation exposure when it is probable that future costs will be incurred and such costs can be reasonably estimated. Adjustments to estimates are recorded in the period they are identified. Management does not believe that there is a reasonable possibility that a material loss exceeding the amounts already recognized for the Company’s litigation claims and matters, if any, has been incurred. However, the ultimate resolutions of these proceedings and matters are inherently unpredictable. In light of existing reserves, the Company's litigation claims, when finally resolved, are not expected, in the opinion of management, to have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.
There were no material changes during the three months ended April 2, 2016 to the legal and environmental commitments that were discussed in Note 13 in the Notes to Consolidated Financial Statements in the 2015 Form 10-K.
20
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 10 – Financing Receivables
The Company has recorded financing receivables, which are defined as a contractual right to receive money, as assets on its Condensed Consolidated Balance Sheets as of April 2, 2016, December 31, 2015 and April 4, 2015. Substantially all of the Company’s financing receivables are from commercial customers. The Company classifies its financing receivables into three categories: receivables repurchased under recourse provisions (Recourse Receivables); receivables sold to third-party finance companies (Third-Party Receivables) and customer notes and other (Other Receivables). Recourse Receivables are the result of the contingent recourse arrangements discussed in Note 9 – Commitments and Contingencies. Third-Party Receivables are accounts that have been sold to third-party finance companies, but do not meet the definition of a true sale, and are therefore recorded as an asset with an offsetting balance recorded as a secured obligation in Accrued expenses and Other long-term liabilities as discussed in Note 9 – Commitments and Contingencies. Other Receivables are mostly comprised of notes from customers, which are originated by the Company in the normal course of business. Financing receivables are carried at their face amounts less an allowance for doubtful accounts.
Due to the composition of the account portfolio, the Company does not believe that the credit risk posed by the Company's financing receivables is significant to its operations, financial condition or cash flows. There were no significant troubled debt restructurings during the three months ended April 2, 2016 and April 4, 2015, respectively.
The following are the Company’s financing receivables, excluding trade accounts receivable, as of April 2, 2016, December 31, 2015 and April 4, 2015:
(in millions) | April 2, 2016 | December 31, 2015 | April 4, 2015 | ||||||||
Recourse Receivables: | |||||||||||
Short-term | $ | 0.5 | $ | 0.2 | $ | 3.2 | |||||
Long-term | 0.1 | 0.1 | 0.9 | ||||||||
Allowance for doubtful accounts | (0.1 | ) | (0.2 | ) | (3.2 | ) | |||||
Total | 0.5 | 0.1 | 0.9 | ||||||||
Third-Party Receivables: | |||||||||||
Short-term | 25.6 | 22.5 | 21.6 | ||||||||
Long-term | 25.2 | 23.7 | 20.1 | ||||||||
Total | 50.8 | 46.2 | 41.7 | ||||||||
Other Receivables: | |||||||||||
Short-term | 6.1 | 7.8 | 12.3 | ||||||||
Long-term | 0.8 | 1.6 | 2.1 | ||||||||
Allowance for doubtful accounts | — | — | (0.2 | ) | |||||||
Total | 6.9 | 9.4 | 14.2 | ||||||||
Total Financing Receivables | $ | 58.2 | $ | 55.7 | $ | 56.8 | |||||
There was no significant activity in the allowance for doubtful accounts on financing receivables during the three months ended April 2, 2016 and April 4, 2015, respectively.
21
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 11 – Goodwill and Other Intangibles
A summary of changes in the Company's goodwill during the three months ended April 2, 2016, by segment, follows:
(in millions) | December 31, 2015 | Acquisitions | Impairments | Adjustments | April 2, 2016 | ||||||||||||||
Marine Engine | $ | 26.2 | $ | — | $ | — | $ | (0.2 | ) | $ | 26.0 | ||||||||
Fitness | 272.5 | 81.9 | — | (0.1 | ) | 354.3 | |||||||||||||
Total | $ | 298.7 | $ | 81.9 | $ | — | $ | (0.3 | ) | $ | 380.3 | ||||||||
A summary of changes in the Company's goodwill during the three months ended April 4, 2015, by segment, follows:
(in millions) | December 31, 2014 | Acquisitions | Impairments | Adjustments | April 4, 2015 | ||||||||||||||
Marine Engine | $ | 28.0 | $ | — | $ | — | $ | (1.0 | ) | $ | 27.0 | ||||||||
Fitness | 268.9 | — | — | 0.1 | 269.0 | ||||||||||||||
Total | $ | 296.9 | $ | — | $ | — | $ | (0.9 | ) | $ | 296.0 | ||||||||
Adjustments for the three months ended April 2, 2016 and April 4, 2015 relate to the effect of foreign currency translation on goodwill denominated in currencies other than the U.S. dollar. See Note 4 – Acquisitions for further details on the Company's acquisitions.
The Company's intangible assets, included within Other intangibles, net on the Condensed Consolidated Balance Sheets as of April 2, 2016 and April 4, 2015, are summarized below:
April 2, 2016 | April 4, 2015 | ||||||||||||||
(in millions) | Gross Amount | Accumulated Amortization | Gross Amount | Accumulated Amortization | |||||||||||
Intangible assets: | |||||||||||||||
Customer relationships | $ | 281.9 | $ | (227.0 | ) | $ | 234.3 | $ | (224.0 | ) | |||||
Trade names | 76.2 | — | 31.4 | — | |||||||||||
Other | 19.4 | (13.7 | ) | 15.5 | (13.0 | ) | |||||||||
Total | $ | 377.5 | $ | (240.7 | ) | $ | 281.2 | $ | (237.0 | ) | |||||
Other amortized intangible assets include patents, non-compete agreements and other intangible assets. See Note 4 – Acquisitions for further details on intangibles acquired during 2016. Gross amounts and related accumulated amortization amounts include adjustments related to the impact of foreign currency translation. Aggregate amortization expense for intangibles was $1.4 million and $0.8 million for the three months ended April 2, 2016 and April 4, 2015, respectively.
Note 12 – Segment Data
Brunswick is a manufacturer and marketer of leading consumer brands and has three operating and reportable segments: Marine Engine, Boat and Fitness. The Company’s segments are defined by management’s reporting structure and operating activities.
The Company evaluates performance based on business segment operating earnings. Segment operating earnings do not include the expenses of corporate administration, non-service related pension costs, pension settlement charges, impairments of equity method investments, earnings from unconsolidated equity affiliates, other expenses and income of a non-operating nature, interest expense and income, loss on early extinguishment of debt or provisions for income taxes.
As a result of freezing benefit accruals in its defined benefit pension plans, all remaining components of pension expense related to Interest cost, Expected return on plan assets, Amortization of net actuarial losses, Amortization of prior service cost and settlement charges are included in Pension - non-service costs.
22
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Corporate/Other results include items such as corporate staff and administrative costs. Corporate/Other total assets consist of mainly cash, cash equivalents and investments in marketable securities, restricted cash, income tax balances and investments in unconsolidated affiliates. Marine eliminations adjust for sales between the Marine Engine and Boat segments, primarily for the sale of engines and parts and accessories to various boat brands, which are consummated at established arm’s length transfer prices as the intersegment pricing for these engines and parts and accessories are based upon and consistent with selling prices to the Company's third party customers.
Operating Segments
The following table sets forth net sales and operating earnings (loss) of each of the Company's operating segments, which are also the Company's reportable segments, for the three months ended April 2, 2016 and April 4, 2015:
Net Sales | Operating Earnings (Loss) | ||||||||||||||
(in millions) | April 2, 2016 | April 4, 2015 | April 2, 2016 | April 4, 2015 | |||||||||||
Marine Engine | $ | 595.5 | $ | 562.2 | $ | 78.3 | $ | 74.2 | |||||||
Boat | 336.8 | 318.0 | 16.4 | 7.7 | |||||||||||
Marine eliminations | (80.3 | ) | (80.1 | ) | — | — | |||||||||
Total Marine | 852.0 | 800.1 | 94.7 | 81.9 | |||||||||||
Fitness | 218.3 | 185.6 | 20.1 | 25.8 | |||||||||||
Pension - non-service costs | — | — | (3.7 | ) | (3.0 | ) | |||||||||
Corporate/Other | — | — | (15.1 | ) | (16.0 | ) | |||||||||
Total | $ | 1,070.3 | $ | 985.7 | $ | 96.0 | $ | 88.7 | |||||||
The following table sets forth total assets of each of the Company's reportable segments:
Total Assets (A) | |||||||||||
(in millions) | April 2, 2016 | December 31, 2015 | April 4, 2015 | ||||||||
Marine Engine | $ | 1,122.3 | $ | 981.8 | $ | 1,023.5 | |||||
Boat | 398.0 | 379.7 | 402.5 | ||||||||
Total Marine | 1,520.3 | 1,361.5 | 1,426.0 | ||||||||
Fitness | 845.1 | 625.1 | 550.3 | ||||||||
Corporate/Other | 757.3 | 1,165.9 | 1,010.8 | ||||||||
Total | $ | 3,122.7 | $ | 3,152.5 | $ | 2,987.1 | |||||
(A) As of April 4, 2015, total assets reported on the Condensed Consolidated Balance Sheets included $31.0 million of current assets held for sale and $11.9 million of long-term assets held for sale.
23
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 13 – Comprehensive Income
Accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets includes prior service costs and credits and net actuarial gains and losses for defined benefit plans; foreign currency cumulative translation adjustments; and unrealized derivative gains and losses, all net of tax. Changes in the components of Accumulated other comprehensive loss, all net of tax, for the three months ended April 2, 2016 and April 4, 2015 were as follows:
(in millions) | April 2, 2016 | April 4, 2015 | |||||
Net earnings | $ | 64.8 | $ | 57.0 | |||
Other comprehensive income (loss): | |||||||
Foreign currency cumulative translation adjustment | 10.4 | (17.1 | ) | ||||
Net change in unamortized prior service credits | (0.1 | ) | (0.2 | ) | |||
Net change in unamortized actuarial losses | 2.5 | 3.7 | |||||
Net change in unrealized derivative losses | (4.6 | ) | 2.3 | ||||
Total other comprehensive income (loss) | 8.2 | (11.3 | ) | ||||
Comprehensive income | $ | 73.0 | $ | 45.7 | |||
The following table presents the changes in Accumulated other comprehensive loss by component, all net of tax, for the three months ended April 2, 2016:
(in millions) | Foreign currency translation | Prior service credits | Net actuarial losses | Net derivative losses | Total | ||||||||||||||
Beginning balance | $ | (56.4 | ) | $ | (4.7 | ) | $ | (407.1 | ) | $ | (5.9 | ) | $ | (474.1 | ) | ||||
Other comprehensive income (loss) before reclassifications (A) | 10.4 | — | (0.5 | ) | (2.9 | ) | 7.0 | ||||||||||||
Amounts reclassified from Accumulated other comprehensive loss (B) | — | (0.1 | ) | 3.0 | (1.7 | ) | 1.2 | ||||||||||||
Net current-period other comprehensive income (loss) | 10.4 | (0.1 | ) | 2.5 | (4.6 | ) | 8.2 | ||||||||||||
Ending balance | $ | (46.0 | ) | $ | (4.8 | ) | $ | (404.6 | ) | $ | (10.5 | ) | $ | (465.9 | ) | ||||
(A) The tax effects for the three months ended April 2, 2016 were $5.0 million for foreign currency translation, $(0.2) million for net actuarial losses arising during the period and $1.4 million for derivatives.
(B) See the table below for the tax effects for the three months ended April 2, 2016.
The following table presents the changes in Accumulated other comprehensive loss by component, all net of tax, for the three months ended April 4, 2015:
(in millions) | Foreign currency translation | Prior service credits | Net actuarial losses | Net derivative losses | Total | ||||||||||||||
Beginning balance | $ | (14.5 | ) | $ | (3.9 | ) | $ | (456.6 | ) | $ | (5.5 | ) | $ | (480.5 | ) | ||||
Other comprehensive income (loss) before reclassifications (A) | (17.1 | ) | — | 0.5 | 3.0 | (13.6 | ) | ||||||||||||
Amounts reclassified from Accumulated other comprehensive loss (B) | — | (0.2 | ) | 3.2 | (0.7 | ) | 2.3 | ||||||||||||
Net current-period other comprehensive income (loss) | (17.1 | ) | (0.2 | ) | 3.7 | 2.3 | (11.3 | ) | |||||||||||
Ending balance | $ | (31.6 | ) | $ | (4.1 | ) | $ | (452.9 | ) | $ | (3.2 | ) | $ | (491.8 | ) | ||||
(A) The tax effects for the three months ended April 4, 2015 were $5.0 million for foreign currency translation, $(0.4) million for net actuarial losses arising during the period and $(1.0) million for derivatives.
(B) See the table below for the tax effects for the three months ended April 4, 2015.
24
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table presents reclassification adjustments out of Accumulated other comprehensive loss during the three months ended April 2, 2016 and April 4, 2015:
Details about Accumulated other comprehensive loss components (in millions) | April 2, 2016 | April 4, 2015 | Affected line item in the statement where net income is presented | |||||||
Amortization of defined benefit items: | ||||||||||
Prior service credits | $ | 0.2 | $ | 0.3 | (A) | |||||
Net actuarial losses | (4.4 | ) | (5.2 | ) | (A) | |||||
(4.2 | ) | (4.9 | ) | Total before tax | ||||||
1.3 | 1.9 | Tax benefit | ||||||||
$ | (2.9 | ) | $ | (3.0 | ) | Net of tax | ||||
Amount of gain (loss) reclassified into earnings on derivative contracts: | ||||||||||
Foreign exchange contracts | $ | 2.6 | $ | 2.6 | Cost of sales | |||||
Commodity contracts | (0.2 | ) | (1.8 | ) | Cost of sales | |||||
2.4 | 0.8 | Total before tax | ||||||||
(0.7 | ) | (0.1 | ) | Tax provision | ||||||
$ | 1.7 | $ | 0.7 | Net of tax | ||||||
(A) These Accumulated other comprehensive loss components are included in the computation of net pension and other benefit costs. See Note 15 – Pension and Other Postretirement Benefits for additional details.
Note 14 – Income Taxes
The Company recognized an income tax provision from continuing operations for the three months ended April 2, 2016 of $28.2 million, which included a net charge of $0.1 million mainly associated with tax rate changes. The Company recognized an income tax provision from continuing operations for the three months ended April 4, 2015 of $28.3 million, which included a net benefit of $1.3 million primarily associated with adjustments made to deferred tax balances. The effective tax rate from continuing operations, which is calculated as the income tax benefit or provision as a percentage of pre-tax income, for the three months ended April 2, 2016 and April 4, 2015 was 30.9 percent and 33.3 percent, respectively, with the decrease primarily attributable to the benefit from the permanent extension of the U.S. R&D tax credit as well as the benefits from optimizing its international legal entity and cash management structure.
During the second quarter of 2015, the Company initiated an internal restructuring of its foreign entities, including the establishment of a European holding company. This restructuring is being undertaken to more effectively and efficiently manage the Company's foreign cash. The Company continued to implement this internal restructuring during the first quarter of 2016.
The Company has historically provided deferred taxes for the presumed ultimate repatriation to the U.S. of earnings from most of its non-U.S. subsidiaries and unconsolidated affiliates. As a result of the Company's internal restructuring of its foreign entities that was initiated in the second quarter of 2015, the Company determined during the first quarter of 2016 that the indefinite reinvestment assertion would be expanded to include three additional non-U.S. subsidiaries. No deferred income taxes have been provided as of April 2, 2016, December 31, 2015 or April 4, 2015 on the applicable undistributed earnings of the non-U.S. subsidiaries where the indefinite reinvestment assertion has been applied. If at some future date these earnings cease to be indefinitely reinvested, the Company may be subject to additional U.S. income taxes and foreign withholding and other taxes on such amounts. The Company continues to provide deferred taxes, as required, on the undistributed net earnings of foreign subsidiaries and unconsolidated affiliates that are not deemed to be indefinitely reinvested in operations outside the United States.
As of April 2, 2016, December 31, 2015 and April 4, 2015, the Company had $5.4 million, $4.8 million and $5.0 million of gross unrecognized tax benefits, including interest, respectively. The Company believes it is reasonably possible that the total amount of gross unrecognized tax benefits as of April 2, 2016 could decrease by approximately $1.9 million in the next 12 months due to settlements with taxing authorities or lapses in the statute of limitations. Due to the various jurisdictions in which the Company files tax returns and the uncertainty regarding the timing of the settlement of tax audits, it is possible that there could be other significant changes in the amount of unrecognized tax benefits in 2016, but the amount cannot be estimated.
25
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company is regularly audited by federal, state and foreign tax authorities. The Company has been audited by the Internal Revenue Service (IRS) through the 2012 tax year and all open issues have been resolved. Primarily as a result of filing amended returns, which were generated by the closing of federal income tax audits, the Company is still open to state and local tax audits in major tax jurisdictions dating back to the 2008 taxable year. Following the completion in the fourth quarter of 2015 of the 2008 through 2012 Germany tax audit, the Company is no longer subject to income tax examinations by any major foreign tax jurisdiction for years prior to 2013, except for potential 2012 affirmative claims in Germany.
Note 15 – Pension and Other Postretirement Benefits
The Company has defined contribution plans, qualified and nonqualified defined benefit pension plans and other postretirement benefit plans covering substantially all of its employees. The Company's contributions to its defined contribution plans include a match and an annual discretionary contribution and are based on various percentages of compensation, and in some instances are based on the amount of the employees' contributions to the plans. See Note 17 in the Notes to Consolidated Financial Statements in the 2015 Form 10-K for further details regarding these plans.
Pension and other postretirement benefit costs included the following components for the three months ended April 2, 2016 and April 4, 2015:
Pension Benefits | Other Postretirement Benefits | ||||||||||||||
(in millions) | April 2, 2016 | April 4, 2015 | April 2, 2016 | April 4, 2015 | |||||||||||
Interest cost | $ | 8.9 | $ | 11.9 | $ | 0.3 | $ | 0.5 | |||||||
Expected return on plan assets | (9.6 | ) | (13.9 | ) | — | — | |||||||||
Amortization of prior service credits | — | — | (0.2 | ) | (0.2 | ) | |||||||||
Amortization of net actuarial losses | 4.4 | 4.9 | — | 0.3 | |||||||||||
Net pension and other benefit costs | $ | 3.7 | $ | 2.9 | $ | 0.1 | $ | 0.6 | |||||||
Portions of Net pension and other benefit costs are recorded in Selling, general and administrative expenses as well as capitalized into inventory. Costs capitalized into inventory are eventually realized through Cost of sales in the Condensed Consolidated Statements of Comprehensive Income.
Pension expense in 2016 includes the impact of a change in methodology used to calculate the interest cost component of pension expense. In 2015 and prior years, the Company used a single-weighted average discount rate to calculate pension and postretirement interest costs. Beginning in 2016, the Company is utilizing a "spot rate approach" in the calculation of pension and postretirement interest costs to provide a more accurate measurement of interest costs. The spot rate approach applies separate discount rates for each projected benefit payment in the calculation of pension and postretirement interest costs. This calculation change is considered to be a change in accounting estimate and is being applied prospectively in 2016. The discount rates used to measure the 2016 interest costs are 3.58% and 3.30% for pensions and other postretirement benefits, respectively. The previous method would have used a discount rate for interest costs of 4.40% for pensions and 4.23% for other postretirement benefits, respectively. The decreased interest costs for the three months ended April 2, 2016, for pension and other postretirement benefits is approximately $2.0 million and $0.1 million, respectively, compared with the previous method. Additionally, pension expense in 2016 includes the impact of a decline in the assumed rate of return on plan assets, to 5.25% in 2016 compared with 6.00% in 2015, primarily due to shifts in asset allocations toward fixed income investments. For the three months ended April 2, 2016, pension expense increased by $1.4 million compared with the previous period as a result of the lower assumed rate of return on plan assets.
Employer Contributions and Benefit Payments. During the three months ended April 2, 2016 and April 4, 2015, the Company contributed $0.9 million and $0.9 million, respectively, to fund benefit payments to its nonqualified pension plan. During the three months ended April 2, 2016 and April 4, 2015, the Company contributed $35.0 million and $60.0 million to its qualified pension plans, respectively. Company contributions are subject to change based on market conditions, pension funding regulations and Company discretion.
Note 16 –Subsequent Events
On May 4, 2016, the Company's Board of Directors declared a quarterly dividend on its common stock of $0.15 per share. The dividend will be payable June 15, 2016 to shareholders of record as of May 24, 2016.
26
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in Management’s Discussion and Analysis are based on non-GAAP financial measures. Specifically, the discussion of Brunswick Corporation's (Brunswick or the Company) cash flows includes an analysis of free cash flows and total liquidity, the discussion of the Company's net sales includes comparisons of net sales on a constant currency basis and excluding acquisitions, and the discussion of the Company's earnings includes comparisons of diluted earnings per common share, as adjusted. A “non-GAAP financial measure” is a numerical measure of a registrant’s historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statements of comprehensive income, balance sheets or statements of cash flows of the issuer; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. Non-GAAP financial measures do not include operating and statistical measures.
The Company includes non-GAAP financial measures in Management’s Discussion and Analysis, as Brunswick’s management believes that these measures and the information they provide are useful to investors because they permit investors to view Brunswick’s performance using the same tools that management uses and to better evaluate the Company’s ongoing business performance.
Certain statements in Management’s Discussion and Analysis are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations that are subject to risks and uncertainties. Actual results may differ materially from expectations as of the date of this filing because of factors discussed in Part I, Item 1A – Risk Factors in Brunswick’s 2015 Annual Report on Form 10-K for the year ended December 31, 2015 (the 2015 Form 10-K).
Overview and Outlook
General
Net sales increased 9 percent during the first quarter of 2016 when compared with the first quarter of 2015 on a GAAP basis, 10 percent on a constant currency basis and 6 percent on a constant currency basis and excluding the impact of acquisitions. Marine Engine segment net sales increased due to strong growth in the marine service, parts and accessories businesses, which benefited from acquisitions, as well as solid increases in outboard engines, partially offset by declines in sterndrive engines. Boat segment net sales increased due to strong growth rates in fiberglass outboard boats and modest increases in fiberglass sterndrive and inboard boats, partially offset by slight declines in aluminum boats. Fitness segment net sales, excluding the impact of recent acquisitions, decreased slightly as increases in international sales were more than offset by slight declines in the U.S., as growth in local and federal governments and slight increases in sales to health clubs were more than offset by weakness in consumer channels. International net sales for the Company increased 3 percent in the first quarter of 2016 on a GAAP basis when compared with the first quarter of 2015. On a constant currency basis and excluding acquisitions, international net sales increased 2 percent in the first quarter of 2016 driven by increases in European and Asia-Pacific markets, partially offset by declines in other international markets.
Operating earnings in the first quarter of 2016 were $96.0 million, with an operating margin of 9.0 percent, which included integration charges of $3.8 million. In the first quarter of 2015, the Company reported operating earnings of $88.7 million, with an operating margin of 9.0 percent. The increase in operating earnings during the first quarter of 2016 when compared with the first quarter of 2015 reflected higher net sales, a favorable product mix related to recently launched products as well as savings related to sourcing initiatives and cost reductions, partially offset by integration costs and purchase accounting adjustments related to the Cybex acquisition, as well as an unfavorable impact from foreign exchange and increased spending on growth initiatives.
The Company continues to expect that 2016 will be another year of outstanding earnings growth with strong free cash flow generation. The Company is targeting 9 percent to 11 percent net sales growth when compared with 2015, which reflects the continuation of solid markets in the U.S. and Europe, the success of new products, market share gains and growth from completed acquisitions. Acquisitions are estimated to account for 5 percentage points of the growth rate in 2016. These factors are expected to be partially offset by weakness in certain international marine markets and a slight unfavorable impact from foreign exchange. The Company is planning for growth in outboard engine products and marine service, parts and accessories businesses. The Company also anticipates growth in the Boat segment, however the growth is expected to be at a lower rate versus 2015 as new product introductions replace existing products and revenue contributions are more balanced across the portfolio. Recently completed acquisitions and positive health and fitness trends ha