BC 2014.09.27 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 27, 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 October 29, 2014 was 92,953,709.





BRUNSWICK CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 27, 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
 
Nine Months Ended
(in millions, except per share data)
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Net sales
$
932.1

 
$
824.4

 
$
2,900.1

 
$
2,772.9

Cost of sales
672.9

 
596.8

 
2,093.3

 
2,018.4

Selling, general and administrative expense
134.9

 
135.0

 
402.8

 
389.0

Research and development expense
29.7

 
27.3

 
86.1

 
81.1

Restructuring, exit and impairment charges
0.9

 
2.6

 
4.0

 
10.7

Operating earnings
93.7

 
62.7

 
313.9

 
273.7

Equity earnings (loss)
0.7

 
(0.4
)
 
0.5

 
(1.4
)
Other income, net
1.2

 
0.5

 
3.5

 
1.4

Earnings before interest, loss on early extinguishment of debt and income taxes
95.6

 
62.8

 
317.9

 
273.7

Interest expense
(6.9
)
 
(8.2
)
 
(22.7
)
 
(34.1
)
Interest income
0.2

 
0.3

 
0.7

 
1.0

Loss on early extinguishment of debt

 
(0.3
)
 

 
(32.7
)
Earnings before income taxes
88.9

 
54.6

 
295.9

 
207.9

Income tax provision (benefit)
27.9

 
(2.6
)
 
98.7

 
29.8

Net earnings from continuing operations
61.0

 
57.2

 
197.2

 
178.1

 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
Earnings (loss) from discontinued operations, net of tax
(9.2
)
 
(1.0
)
 
0.2

 
8.3

Gain on disposal of discontinued operations, net of tax
52.6

 
1.6

 
52.6

 
1.6

  Net earnings from discontinued operations, net of tax
43.4

 
0.6

 
52.8

 
9.9

Net earnings
$
104.4

 
$
57.8

 
$
250.0

 
$
188.0

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Basic
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.65

 
$
0.63

 
$
2.11

 
$
1.96

Earnings from discontinued operations
0.46

 
0.00

 
0.56

 
0.11

Net earnings
$
1.11

 
$
0.63

 
$
2.67

 
$
2.07

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.64

 
$
0.61

 
$
2.07

 
$
1.90

Earnings from discontinued operations
0.46

 
0.00

 
0.56

 
0.11

Net earnings
$
1.10

 
$
0.61

 
$
2.63

 
$
2.01

 
 
 
 
 
 
 
 
Weighted average shares used for computation of:
 

 
 

 
 

 
 

Basic earnings per common share
93.7

 
91.3

 
93.5

 
91.0

Diluted earnings per common share
95.2

 
94.0

 
95.1

 
93.7

 
 
 
 
 
 
 
 
Comprehensive income
$
97.7

 
$
67.9

 
$
248.2

 
$
191.6

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.125

 
$

 
$
0.325

 
$


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)
September 27,
2014
 
December 31,
2013
 
September 28,
2013
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents, at cost, which approximates fair value
$
596.0

 
$
356.5

 
$
326.1

Short-term investments in marketable securities
0.8

 
12.7

 
22.3

Total cash, cash equivalents and short-term investments in marketable securities
596.8

 
369.2

 
348.4

Restricted cash
18.6

 
6.5

 
13.0

Accounts and notes receivable, less allowances of $20.9, $16.8 and $17.7
401.3

 
345.7

 
392.6

Inventories
 

 
 
 
 

Finished goods
392.8

 
367.2

 
341.9

Work-in-process
177.2

 
144.7

 
146.8

Raw materials
98.8

 
72.0

 
74.2

Net inventories
668.8

 
583.9

 
562.9

Deferred income taxes
139.2

 
137.6

 
18.9

Prepaid expenses and other
31.2

 
28.9

 
22.8

Current assets held for sale
39.3

 
36.8

 
43.9

Current assets
1,895.2

 
1,508.6

 
1,402.5

 
 
 
 
 
 
Property
 

 
 

 
 

Land
23.5

 
24.8

 
27.6

Buildings and improvements
324.3

 
320.2

 
344.7

Equipment
848.9

 
847.2

 
838.7

Total land, buildings and improvements and equipment
1,196.7

 
1,192.2

 
1,211.0

Accumulated depreciation
(852.5
)
 
(852.9
)
 
(883.4
)
Net land, buildings and improvements and equipment
344.2

 
339.3

 
327.6

Unamortized product tooling costs
97.0

 
80.6

 
76.7

Net property
441.2

 
419.9

 
404.3

 
 
 
 
 
 
Other assets
 

 
 
 
 

Goodwill
299.0

 
291.7

 
291.5

Other intangibles, net
46.8

 
35.4

 
36.1

Equity investments
39.9

 
41.3

 
41.1

Non-current deferred tax asset
294.1

 
377.0

 

Other long-term assets
39.9

 
37.6

 
37.1

Long-term assets held for sale
13.0

 
204.3

 
204.3

Other assets
732.7

 
987.3

 
610.1

 
 
 
 
 
 
Total assets
$
3,069.1

 
$
2,915.8

 
$
2,416.9

 
 
 
 
 
 
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)
September 27,
2014
 
December 31,
2013
 
September 28,
2013
Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Short-term debt, including current maturities of long-term debt
$
4.3

 
$
6.4

 
$
4.6

Accounts payable
326.1

 
297.6

 
310.7

Accrued expenses
515.0

 
529.4

 
494.9

Current liabilities held for sale
18.1

 
49.7

 
47.9

Current liabilities
863.5

 
883.1

 
858.1

 
 
 
 
 
 
Long-term liabilities
 

 
 

 
 

Debt
452.3

 
453.4

 
459.9

Deferred income taxes

 

 
94.6

Postretirement benefits
263.1

 
339.4

 
513.1

Other
203.8

 
192.3

 
193.1

Long-term liabilities held for sale
7.2

 
9.2

 
8.8

Long-term liabilities
926.4

 
994.3

 
1,269.5

 
 
 
 
 
 
Shareholders’ equity
 

 
 

 
 

Common stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares; outstanding: 92,943,000, 92,409,000 and 90,842,000 shares
76.9

 
76.9

 
76.9

Additional paid-in capital
395.7

 
393.0

 
426.2

Retained earnings
1,483.2

 
1,263.3

 
691.2

Treasury stock, at cost: 9,595,000, 10,129,000 and 11,696,000 shares
(273.3
)
 
(293.3
)
 
(353.5
)
Accumulated other comprehensive loss, net of tax
(403.3
)
 
(401.5
)
 
(551.5
)
Shareholders’ equity
1,279.2

 
1,038.4

 
289.3

 
 
 
 
 
 
Total liabilities and shareholders’ equity
$
3,069.1

 
$
2,915.8

 
$
2,416.9

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

5


BRUNSWICK CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)

 
Nine Months Ended
(in millions)
September 27,
2014
 
September 28,
2013
Cash flows from operating activities
 
 
 
Net earnings
$
250.0

 
$
188.0

Less: net earnings from discontinued operations, net of tax
52.8

 
9.9

Net earnings from continuing operations
197.2

 
178.1

Depreciation and amortization
58.4

 
52.7

Pension funding, net of expense
(61.5
)
 
(11.9
)
Gain on sale of property, plant and equipment, net

 
(6.0
)
Other long-lived asset impairment charges
0.2

 
3.4

Deferred income taxes
66.8

 
(5.1
)
Excess tax benefits from share-based compensation
(6.4
)
 
(14.9
)
Loss on early extinguishment of debt

 
32.7

Changes in certain current assets and current liabilities, excluding acquisitions
(150.6
)
 
(116.8
)
Income taxes
12.7

 
11.3

Other, net
5.9

 
17.0

Net cash provided by operating activities of continuing operations
122.7

 
140.5

 Net cash provided by (used for) operating activities of discontinued operations
1.2

 
(16.3
)
Net cash provided by operating activities
123.9

 
124.2

 
 
 
 
Cash flows from investing activities
 

 
 

Capital expenditures
(79.6
)
 
(79.3
)
Purchases of marketable securities

 
(21.6
)
Sales or maturities of marketable securities
11.9

 
143.1

Transfers to restricted cash
(12.1
)
 

Investments
(1.0
)
 
(0.3
)
Acquisition of businesses, net of cash acquired
(41.8
)
 

Proceeds from the sale of property, plant and equipment
5.6

 
7.4

Net cash (used for) provided by investing activities of continuing operations
(117.0
)
 
49.3

     Net cash provided by (used for) investing activities of discontinued operations
260.3

 
(3.2
)
     Net cash provided by investing activities
143.3

 
46.1

 
 
 
 
Cash flows from financing activities
 

 
 

Net payments of short-term debt

 
(1.7
)
Net proceeds from issuances of long-term debt

 
146.6

Payments of long-term debt including current maturities
(1.4
)
 
(258.5
)
Net premium paid on early extinguishment of debt

 
(24.6
)
Cash dividends paid
(30.2
)
 

Excess tax benefits from share-based compensation
6.4

 
14.9

Proceeds from stock compensation activity, net of withholdings
(0.3
)
 
(5.2
)
Other, net
(2.2
)
 

     Net cash used for financing activities of continuing operations
(27.7
)
 
(128.5
)
     Net cash used for financing activities of discontinued operations

 

     Net cash used for financing activities
(27.7
)
 
(128.5
)
 
 
 
 
Net increase in cash and cash equivalents
239.5

 
41.8

Cash and cash equivalents at beginning of period
356.5

 
284.3

 
 
 
 
Cash and cash equivalents at end of period
$
596.0

 
$
326.1


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

6


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

Interim Financial Statements.  The unaudited interim 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. 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 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 September 27, 2014, December 31, 2013, and September 28, 2013, the results of operations for the three months and nine months ended September 27, 2014 and September 28, 2013, and the cash flows for the nine months ended September 27, 2014 and September 28, 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, second and third quarters ending on the Saturday closest to the end of the first, second and third thirteen-week periods, respectively.  The first three quarters of fiscal year 2014 ended on March 29, 2014, June 28, 2014 and September 27, 2014, and the first three quarters of fiscal year 2013 ended on March 30, 2013, June 29, 2013 and September 28, 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 nine months ended September 27, 2014, or will be adopted in future periods.

Going Concern: In August 2014, the FASB amended the Accounting Standards Codification (ASC) to provide guidance on determining when and how an entity must disclose going concern uncertainties in its financial statements. The amendment requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date of issuance of an entity's financial statements. If there is substantial doubt about the entity's ability to continue as a going concern, an entity must provide certain footnote disclosures. The amendment is effective for fiscal years, and the interim periods thereafter, 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 effect on the Company's 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. 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 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

7

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


early adoption permitted only for disposals that have not been reported in financial statements previously issued. The Company did not early adopt this ASC amendment and 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.

Note 2 – Discontinued Operations

On July 17, 2014, the Company entered into an agreement to sell its retail bowling business to AMF Bowling Centers, Inc. In connection with its decision to sell its bowling centers, the Company announced in July 2014 its intention to divest its bowling products business. On December 31, 2012, the Board of Directors authorized the Company to exit its Hatteras and Cabo boat businesses. As a result of these actions, these businesses, which were previously recorded in the Bowling & Billiards segment and Boat segment, respectively, are being reported as discontinued operations in the Condensed Consolidated Statements of Comprehensive Income for all periods presented. The Company does not have or anticipate any significant continuing involvement or continuing cash flows associated with these businesses. The assets and liabilities of these businesses 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.

On September 18, 2014, the Company completed the sale of its retail bowling business to AMF Bowling Centers, Inc. as well as, in separate transactions, completed the sale of two retail bowling centers in California. The sales resulted in net cash proceeds of $264.3 million and an after-tax gain of $52.6 million. In connection with the sale of its retail bowling business, the Company recorded deferred income of $20.7 million related to a trademark license agreement with AMF Bowling Centers, Inc. which will be recognized in the results of operations from continuing operations over 5 years. In connection with the sale of its retail bowling business, the Company has retained certain liabilities and provided guarantees on certain leased bowling centers.

In August 2013, the Company completed the sale of its Hatteras and Cabo boat businesses resulting in an after-tax gain of $1.6 million.

The following table discloses the results of operations of the businesses reported as discontinued operations for the three months and nine months ended September 27, 2014 and September 28, 2013, respectively:
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Net sales
$
68.8

 
$
70.1

 
$
209.8

 
$
236.2

 
 
 
 
 
 
 
 
Earnings (loss) from discontinued operations before income taxes
(14.4
)
 
(1.4
)
 
$
0.3

 
7.3

Income tax provision (benefit)
(5.2
)
 
(0.4
)
 
0.1

 
(1.0
)
Earnings (loss) from discontinued operations, net of tax
(9.2
)
 
(1.0
)
 
0.2

 
8.3

Gain on disposal of discontinued operations, net of tax (A)
52.6

 
1.6

 
52.6

 
1.6

Net earnings from discontinued operations, net of tax
$
43.4

 
$
0.6

 
$
52.8

 
$
9.9


(A) The Gain on disposal of discontinued operations for the three months and nine months ended September 27, 2014, includes a pre-tax gain of $65.6 million and a net tax provision of $13.0 million. The Gain on disposal of discontinued operations for the three months and nine months ended September 28, 2013, includes a pre-tax loss of $1.4 million and a net tax benefit of $3.0 million.


8

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table reflects the summary of assets and liabilities held for sale as of September 27, 2014 for the bowling products business and as of December 31, 2013 and September 28, 2013, for the retail bowling and bowling products businesses:
(in millions)
September 27
2014
 
December 31,
2013
 
September 28
2013
Accounts and notes receivable, net
$
20.8

 
$
18.9

 
$
24.3

Net inventory
17.5

 
15.4

 
17.1

Prepaid expenses and other
1.0

 
2.5

 
2.5

Current assets held for sale
39.3

 
36.8

 
43.9

 
 
 
 
 
 
Net property
8.7

 
197.9

 
198.1

Other long-term assets
4.3

 
6.4

 
6.2

Long-term assets held for sale
13.0

 
204.3

 
204.3

Assets held for sale
$
52.3

 
$
241.1

 
$
248.2

 
 
 
 
 
 
Accounts payable
$
6.8

 
$
18.0

 
$
17.4

Accrued expenses
11.3

 
31.7

 
30.5

Current liabilities held for sale
18.1

 
49.7

 
47.9

 
 
 
 
 
 
Other liabilities
7.2

 
9.2

 
8.8

Long-term liabilities held for sale
7.2

 
9.2

 
8.8

Liabilities held for sale
$
25.3

 
$
58.9

 
$
56.7


Note 3 – Restructuring Activities

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.

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 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

9

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


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 to or incurred, as appropriate. The following table is a summary of the net expense associated with the restructuring, exit and impairment activities for the three months and nine months ended September 27, 2014 and September 28, 2013.  The 2014 charges consist of expenses related to actions initiated in 2014, 2013, 2012, 2010 and 2009. The 2013 charges consist of expenses related to actions initiated in 2013 and 2012.
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Restructuring activities:
 
 
 
 
 
 
 
Employee termination and other benefits
$
0.1

 
$

 
$
2.9

 
$
1.9

Current asset write-downs
0.3

 
0.7

 
0.5

 
1.0

Transformation and other costs:
 

 
 

 
 
 
 
Consolidation of manufacturing footprint
(0.1
)
 
1.9

 
0.9

 
5.1

Retention and relocation costs
0.1

 

 
0.2

 
0.4

Asset disposition actions:
 

 
 

 
 
 
 
Definite-lived asset impairments and (gains) on disposal
0.5

 

 
(0.5
)
 
2.3

Total restructuring, exit and impairment charges
$
0.9

 
$
2.6

 
$
4.0

 
$
10.7


The Company anticipates it may incur up to $1 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 nine months ended September 27, 2014 related to actions initiated in 2014, by reportable segment, are summarized below:
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 27,
2014
 
September 27,
2014
Boat
$
0.3

 
$
0.3

Corporate

 
2.7

Total
$
0.3

 
$
3.0


The following is a summary of the charges by category associated with the Company’s 2014 restructuring initiatives:
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 27,
2014
 
September 27,
2014
Restructuring activities:
 
 
 
Employee termination and other benefits
$

 
$
2.7

Asset disposition actions:
 

 
 

Definite-lived asset impairments
0.3

 
0.3

Total restructuring, exit and impairment charges
$
0.3

 
$
3.0

 

10

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


The restructuring, exit and impairment charges recorded in the nine months ended September 27, 2014 related to actions initiated in 2014, by reportable segment and category, are summarized below:
(in millions)
Boat
 
Corporate
 
Total
Employee termination and other benefits
$

 
$
2.7

 
$
2.7

Asset disposition actions
0.3

 

 
0.3

Total restructuring, exit and impairment charges
$
0.3

 
$
2.7

 
$
3.0


The following table summarizes the activity for restructuring, exit and impairment charges during the nine months ended September 27, 2014 related to actions initiated in 2014. The accrued costs as of September 27, 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 September 27, 2014
Employee termination and other benefits
$
2.7

 
$
(1.3
)
 
$
(0.3
)
 
$
1.1

Asset disposition actions:
 
 
 
 
 
 
 

  Definite-lived asset impairments
0.3

 
(0.3
)
 

 

Total restructuring, exit and impairment charges
$
3.0

 
$
(1.6
)
 
$
(0.3
)
 
$
1.1


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.

The restructuring, exit and impairment charges recorded in the three months and nine months ended September 27, 2014 and September 28, 2013, related to actions initiated in 2013, by reportable segment, are summarized below:
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Boat
$
1.1

 
$
2.5

 
$
2.5

 
$
7.4

Corporate

 

 

 
0.7

Total
$
1.1

 
$
2.5

 
$
2.5

 
$
8.1



11

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following is a summary of the charges by category associated with the Company’s 2013 restructuring initiatives:
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Restructuring activities:
 

 
 

 
 
 
 
Employee termination and other benefits
$
0.1

 
$

 
$
0.2

 
$
1.7

Current asset write-downs
0.3

 
0.7

 
0.5

 
1.0

Transformation and other costs:
 

 
 

 
 

 
 

Consolidation of manufacturing footprint
0.7

 
1.8

 
1.7

 
3.4

Retention and relocation costs
0.1

 

 
0.2

 
0.4

Asset disposition actions:
 

 
 

 
 

 
 

Definite-lived asset impairments and (gain) on disposal
(0.1
)
 

 
(0.1
)
 
1.6

Total restructuring, exit and impairment charges
$
1.1

 
$
2.5

 
$
2.5

 
$
8.1

 
The restructuring, exit and impairment charges recorded in the nine months ended September 27, 2014 related to actions initiated in 2013, by reportable segment and category, are summarized below:
(in millions)
Boat
 
Total
Employee termination and other benefits
$
0.2

 
$
0.2

Current asset write-downs
0.5

 
0.5

Transformation and other costs
1.9

 
1.9

Asset disposition actions
(0.1
)
 
(0.1
)
Total restructuring, exit and impairment charges
$
2.5

 
$
2.5


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

 
$
0.7

 
$
1.7

Current asset write-downs
1.0

 

 
1.0

Transformation and other costs
3.8

 

 
3.8

Asset disposition actions
1.6

 

 
1.6

Total restructuring, exit and impairment charges
$
7.4

 
$
0.7

 
$
8.1



12

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table summarizes the activity for restructuring, exit and impairment charges during the nine months ended September 27, 2014 related to actions initiated in 2013. The accrued costs as of September 27, 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)
Accrued Costs as of
Jan. 1, 2014
 
Costs/(Income) Recognized in 2014
 
Non-cash Charges
 
Net Cash (Payments)/Receipts
 
Accrued Costs as of September 27, 2014
Employee termination and other benefits
$
1.7

 
$
0.2

 
$

 
$
(1.6
)
 
$
0.3

Current asset write-downs

 
0.5

 
(0.8
)
 
0.3

 

Transformation and other costs:
 

 
 

 
 

 
 

 
 

Consolidation of manufacturing footprint

 
1.7

 

 
(1.6
)
 
0.1

Retention and relocation costs

 
0.2

 

 
(0.2
)
 

Asset disposition actions:
 

 
 
 
 
 
 
 
 

  Definite-lived asset impairments and (gain) on disposal

 
(0.1
)
 

 
0.1

 

Total restructuring, exit and impairment charges
$
1.7

 
$
2.5

 
$
(0.8
)
 
$
(3.0
)
 
$
0.4


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.

The restructuring, exit and impairment charges recorded in the three months and nine months ended September 27, 2014 and September 28, 2013, related to actions initiated in 2012, by reportable segment, are summarized below:
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Boat
$
(0.2
)
 
$
0.1

 
$
(0.2
)
 
$
2.6

Total
$
(0.2
)
 
$
0.1

 
$
(0.2
)
 
$
2.6


The following is a summary of the charges by category associated with the Company’s 2012 restructuring initiatives:
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Restructuring activities:
 
 
 
 
 
 
 
Employee termination and other benefits
$

 
$

 
$

 
$
0.2

Transformation and other costs:
 

 
 
 
 

 
 
Consolidation of manufacturing footprint
(0.8
)
 
0.1

 
(0.8
)
 
1.7

Asset disposition actions:
 

 
 
 
 

 
 
Definite-lived asset impairments
0.6

 

 
0.6

 
0.7

Total restructuring, exit and impairment charges
$
(0.2
)
 
$
0.1

 
$
(0.2
)
 
$
2.6

 

13

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table summarizes the activity for restructuring, exit and impairment charges during the nine months ended September 27, 2014 related to actions initiated in 2012. The accrued costs as of September 27, 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)
Accrued Costs as of
Jan. 1, 2014
 
Costs/(Income) Recognized in 2014
 
Non-cash Charges
 
Net Cash Payments
 
Accrued Costs as of September 27, 2014
Employee termination and other benefits
$
0.2

 
$

 
$

 
$
(0.2
)
 
$

Transformation and other costs:
 

 
 

 
 

 
 

 
 

Consolidation of manufacturing footprint
2.5

 
(0.8
)
 

 
(1.2
)
 
0.5

Asset disposition actions:
 

 
 
 
 
 
 
 
 

  Definite-lived asset impairments

 
0.6

 
(0.6
)
 

 

Total restructuring, exit and impairment charges
$
2.7

 
$
(0.2
)
 
$
(0.6
)
 
$
(1.4
)
 
$
0.5


Actions Initiated Before 2012

The Company recorded impairment charges in 2009 and 2010 relating to actions to divest non-strategic assets in its Boat segment. The Company recorded gains on disposal of $0.3 million and $1.3 million for the three months and nine months ended September 27, 2014, respectively, relating to the third quarter sale of the Company's Riverview plant in Knoxville, Tennessee, that was part of the Company's 2009 restructuring initiatives as well as the second quarter sale of a boat facility in Ashland City, Tennessee, that was part of the Company's 2010 restructuring initiatives.

Note 4 – Acquisitions

On July 31, 2014, the Company acquired 100 percent of privately held Bell Industries Recreational Products Group, Inc. (Bell), which is based in Eagan, Minnesota. Bell is a distributor of parts and accessories to the marine, recreational vehicle and powersports markets, serving primarily the Upper Midwest of the U.S. The Company believes this acquisition will allow the Company to solidify its footprint in the Upper Midwest with locations in Minnesota, Michigan and Wisconsin, enhance its growth of its parts and accessories businesses, expand the depth and breadth of its product portfolio and enable entry into attractive adjacent markets. Bell 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 Bell was $11.8 million. The preliminary recording of the fair value of the assets acquired resulted in $2.0 million of identifiable intangible assets for customer relationships and $0.8 million of goodwill, which are both deductible for tax purposes. The amounts assigned to Bell's customer relationships will be amortized over the estimated useful life of 8 years. 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.

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 $30.0 million, which included payments of $10.0 million to retire acquiree debt. During the third quarter of 2014, the fair value measurements of assets acquired were updated, which resulted in $11.9 million of identifiable intangible assets, including customer relationships, trade names and patents and proprietary technology for $6.1 million, $3.7 million and $2.1 million, respectively, and $8.4 million of goodwill, all of which are not deductible for tax purposes. These fair value assessments are estimates and are subject to further change within the measurement period. 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.


14

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


These acquisitions were not and would not have been material to the Company's net sales, results of operations or total assets during the three months and nine months ended September 27, 2014 and September 28, 2013, respectively. Accordingly, the Company's consolidated results from operations do not differ materially from historical performance as a result of these acquisitions, 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 expected to occur, gains and losses on the derivative are recorded in Cost of sales or Interest expense as appropriate.  There were no material adjustments as a result of ineffectiveness to the results of operations for the three months and nine months ended September 27, 2014 and September 28, 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 September 27, 2014, the term of derivative instruments hedging forecasted transactions ranged from one to 23 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.

15

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


Forward exchange contracts outstanding at September 27, 2014, December 31, 2013, and September 28, 2013 had notional contract values of $180.7 million, $158.0 million and $158.9 million, respectively.  Option contracts outstanding at September 27, 2014, December 31, 2013 and September 28, 2013 had notional contract values of $65.9 million, $60.9 million and $60.1 million, respectively.  The forward and options contracts outstanding at September 27, 2014, mature during 2014 and 2015 and mainly relate to the Euro, Japanese yen, Canadian dollar, Australian dollar, Brazilian real, Mexican peso, Swedish krona, British pound, Norwegian krone and New Zealand dollar. As of September 27, 2014, the Company estimates that during the next 12 months, it will reclassify approximately $2.2 million of net gains (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 September 27, 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 September 28, 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 September 27, 2014, December 31, 2013 and September 28, 2013. In connection with the issuance of $150.0 million of 4.625 percent Senior notes due 2021, in May 2013, the Company terminated $100.0 million notional value forward starting swaps, which resulted in a net deferred loss of $5.8 million, which 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 September 27, 2014, December 31, 2013 and September 28, 2013, the Company had $5.2 million, $5.3 million and $5.3 million, respectively, 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.  In the second quarter of 2013, the Company recognized $1.1 million of income associated with the gains originally deferred in Accumulated other comprehensive loss resulting from the difference between the amount of new debt issued and the original notional value of swaps terminated in July 2006. As of September 27, 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 September 27, 2014, December 31, 2013 and September 28, 2013 had notional contract values of $24.9 million, $26.2 million and $20.7 million, respectively.  The contracts outstanding mature through 2016.  The amount of gain or loss associated with the change in fair value of these instruments is 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 September 27, 2014, the Company estimates that during the next 12 months it will reclassify approximately $1.9 million in net gains (based on current prices) from Accumulated other comprehensive loss to Cost of sales.


16

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


As of September 27, 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
 
$
3.2

 
Accrued expenses
 
$
0.6

Commodity contracts
 
Prepaid expenses and other
 
1.4

 
Accrued expenses
 
0.1

Total
 
 
 
$
4.6

 
 
 
$
0.7

 
 
 
 
 
 
 
 
 
Derivatives Designated as Fair Value Hedges
 
 
 
 
 
 
 
 
Interest rate contracts
 
Prepaid expenses and other
 
$
2.4

 
Accrued expenses
 
$
3.4

Total
 
 
 
$
2.4

 
 
 
$
3.4

 
 
 
 
 
 
 
 
 
Other Hedging Activity
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other
 
$
1.2

 
Accrued expenses
 
$
0.2

Total
 
 
 
$
1.2

 
 
 
$
0.2


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
 
$
2.5

 
Accrued expenses
 
$
2.3

Commodity contracts
 
Prepaid expenses and other
 
0.0

 
Accrued expenses
 
1.2

Total
 
 
 
$
2.5

 
 
 
$
3.5

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

 
Accrued expenses
 
$
0.9

Total
 
 
 
$
0.1

 
 
 
$
0.9


As of September 28, 2013, the fair values of the Company’s derivative instruments were:
(in millions)
 
 
 
 
 
 
Derivative Assets
 
Derivative Liabilities
Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives Designated as Cash Flow Hedges
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other
 
$
1.6

 
Accrued expenses
 
$
2.8

Commodity contracts
 
Prepaid expenses and other
 
0.0

 
Accrued expenses
 
1.8

Total
 
 
 
$
1.6

 
 
 
$
4.6

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

 
Accrued expenses
 
$
1.4

Total
 
 
 
$
0.0

 
 
 
$
1.4



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 three months ended September 27, 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)
Interest rate contracts
 
$

 
Interest expense
 
$
(0.1
)
Foreign exchange contracts
 
3.0

 
Cost of sales
 
(0.4
)
Commodity contracts
 
0.9

 
Cost of sales
 
(0.2
)
Total
 
$
3.9

 
 
 
$
(0.7
)

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
 
$
1.1

Total
 
 
 
$
1.1


Other Hedging Activity
 
Location of Gain (Loss) on Derivatives
Recognized in Earnings
 
Amount of Gain (Loss) on Derivatives Recognized in Earnings
Foreign exchange contracts
 
Cost of sales
 
$
0.4

Foreign exchange contracts
 
Other income, net
 
1.0

Total
 
 
 
$
1.4


The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the nine months ended September 27, 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)
Interest rate contracts
 
$

 
Interest expense
 
$
(0.1
)
Foreign exchange contracts
 
2.1

 
Cost of sales
 
(0.9
)
Commodity contracts
 
1.5

 
Cost of sales
 
(1.9
)
Total
 
$
3.6

 
 
 
$
(2.9
)

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
 
$
1.4

Total
 
 
 
$
1.4


Other Hedging Activity
 
Location of Gain (Loss) on Derivatives
Recognized in Earnings
 
Amount of Gain (Loss) on Derivatives Recognized in Earnings
Foreign exchange contracts
 
Cost of sales
 
$
(2.0
)
Foreign exchange contracts
 
Other income, net
 
0.3

Total
 
 
 
$
(1.7
)

18

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months ended September 28, 2013 was:
(in millions)
 
 
 
 
 
 
Derivatives Designated as Cash Flow Hedging Instruments
 
Amount of Gain (Loss) on Derivatives Recognized in Accumulated Other Comprehensive Loss (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
Foreign exchange contracts
 
$
(3.0
)
 
Cost of sales
 
$
(0.3
)
Commodity contracts
 
0.1

 
Cost of sales
 
(0.9
)
Total
 
$
(2.9
)
 
 
 
$
(1.2
)
Other Hedging Activity
 
Location of Gain (Loss) on Derivatives
Recognized in Earnings
 
Amount of Gain (Loss) on Derivatives Recognized in Earnings
Foreign exchange contracts
 
Cost of sales
 
$
(1.6
)
Foreign exchange contracts
 
Other income, net
 
(0.3
)
Total
 
 
 
$
(1.9
)

The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the nine months ended September 28, 2013 was:
(in millions)
 
 
 
 
 
 
Derivatives Designated as Cash Flow Hedging Instruments
 
Amount of Gain (Loss) on Derivatives Recognized in Accumulated Other Comprehensive Loss (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
Interest rate contracts
 
$
(0.2
)
 
Interest expense
 
$
1.5

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

Other Hedging Activity
 
Location of Gain (Loss) on Derivatives
Recognized in Earnings
 
Amount of Gain (Loss) on Derivatives Recognized in Earnings
Foreign exchange contracts
 
Cost of sales
 
$
(0.9
)
Total
 
 
 
$
(0.9
)

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 September 27, 2014, December 31, 2013 and September 28, 2013, the fair value of the Company’s long-term debt was approximately $467.6 million, $461.6 million and $460.7 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

19

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


value of long-term debt, including current maturities, was $456.6 million, $459.8 million and $464.5 million as of September 27, 2014, December 31, 2013 and September 28, 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 Standards for Attestation Engagements Number 16, to understand the internal control environment at the Company's third party pricing providers.

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

The following table summarizes Brunswick’s financial assets and liabilities measured at fair value on a recurring basis as of September 27, 2014:
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
328.2

 
$
1.0

 
$

 
$
329.2

Short-term investments in marketable securities
0.8

 

 

 
0.8

Restricted cash
18.6

 

 

 
18.6

Derivatives

 
8.2

 

 
8.2

Total assets
$
347.6

 
$
9.2

 
$

 
$
356.8

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives
$

 
$
4.3

 
$

 
$
4.3

Other
7.8

 
44.1

 

 
51.9

Total liabilities
$
7.8

 
$
48.4

 
$

 
$
56.2



20

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 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

 
2.6

 

 
2.6

Total assets
$
127.0

 
$
74.2

 
$

 
$
201.2

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives
$

 
$
4.4

 
$

 
$
4.4

Other
4.4

 
46.6

 

 
51.0

Total liabilities
$
4.4

 
$
51.0

 
$

 
$
55.4


The following table summarizes Brunswick’s financial assets and liabilities measured at fair value on a recurring basis as of September 28, 2013:
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
150.9

 
$
9.9

 
$

 
$
160.8

Short-term investments in marketable securities
0.8

 
21.5

 

 
22.3

Restricted cash
13.0

 

 

 
13.0

Derivatives

 
1.6

 

 
1.6

Equity investments
0.6

 

 

 
0.6

Total assets
$
165.3

 
$
33.0

 
$

 
$
198.3

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives
$

 
$
6.0

 
$

 
$
6.0

Other
3.8

 
45.0

 

 
48.8

Total liabilities
$
3.8

 
$
51.0

 
$

 
$
54.8


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 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.  


21

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)


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, in addition to any shares reacquired by the Compa