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BC > SEC Filings for BC > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for BRUNSWICK CORP

Form 10-Q for BRUNSWICK CORP


2-Nov-2012

Quarterly Report


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 the Company's cash flows includes an analysis of free cash flows, net debt and total liquidity, and the discussion of the Company's earnings includes a presentation of operating earnings excluding restructuring, exit and impairment charges and diluted earnings per common share, as adjusted. GAAP refers to generally accepted accounting principles in the United States. 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 financial measures (including those that are 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 Item 1A - Risk Factors in the 2011 Form 10-K.

Overview and Outlook

General

The Company continued to successfully execute its business strategy and experienced modest revenue and operating earnings growth in the third quarter of 2012, despite challenging global economic conditions. The U.S. marine market improved overall, yet weak economic conditions in Europe reduced consumer confidence and European demand. Net sales increased one percent during the third quarter of 2012, to $884.8 million from $876.7 million in the third quarter of 2011, driven by the Company's Marine Engine segment, partially offset by decreases in net sales for the Boat, Fitness and Bowling & Billiards segments. The Marine Engine segment's increased sales resulted from strong growth in its U.S. outboard engine and marine service, parts and accessories businesses. Net sales to European markets in the third quarter of 2012 declined by $22.2 million or 18.6 percent when compared with the third quarter of 2011. This decline affected all of the Company's segments, with $5.2 million of the decline being associated with the absence of sales from the Company's former Sealine boat brand, which was divested in August 2011. The Boat segment's net sales were negatively affected by weaker global demand for fiberglass sterndrive boats, partially offset by strong demand for aluminum and outboard powered fiberglass boats. A decrease in the Fitness segment's sales to international and hospitality customers and lower revenues across all businesses in the Bowling & Billiards segment also reduced sales for the third quarter 2012.

Net sales during the nine months ended September 29, 2012 decreased one percent to $2,926.0 million from $2,958.9 million in the comparable period in 2011 due to the same factors outlined herein for the third quarter of 2012. The increase in Marine Engine segment net sales were more than offset by decreases in net sales across the other segments in the nine months ended September 29, 2012. Net sales to European markets were lower during the nine months ended September 29, 2012 by $114.9 million or 23.4 percent when compared to the same period in the prior year. The absence of $37.2 million of net sales in 2011 from the divested Sealine boat brand in the first nine months of 2012 contributed to this decrease in European sales. Also contributing to lower net sales during the first nine months of 2012 were lower sterndrive engine sales due to weak global demand and the absence of a large order from one of Fitness' major customer categories in the first half of 2011.

Operating earnings in the third quarter of 2012 were $37.5 million, with an operating margin of 4.2 percent. These results included $28.2 million of restructuring, exit and impairment charges recorded during the third quarter of 2012. In the third quarter of 2011, the Company recorded quarterly operating earnings of $35.6 million, with an operating margin of 4.1 percent, which included restructuring, exit and impairment charges of $13.2 million. Excluding restructuring, exit and impairment charges, operating earnings improved 34.6 percent compared with the third quarter of 2011 with operating margins of 7.4 percent in the third quarter 2012. The improvement in operating earnings during the third quarter of 2012 when compared with the same period in 2011 reflects improved production and operating efficiencies, realized benefits from successful cost-reduction efforts and reduced depreciation and pension expense, partially offset by increased company-wide investments in growth initiatives, higher restructuring, exit and impairment charges and higher warranty costs.


Operating earnings during the nine months ended September 29, 2012 were $219.9 million, with an operating margin of 7.5 percent. These results included $29.4 million of restructuring, exit and impairment charges recorded during the first nine months of 2012. In the nine months ended October 1, 2011, the Company recorded operating earnings of $210.5 million, with an operating margin of 7.1 percent, which included $18.2 million of restructuring, exit and impairment charges. Excluding restructuring, exit and impairment charges, operating earnings improved 9.0 percent from 2011 with operating margins of 8.5 percent for the nine months ended 2012. The improvement in operating earnings during the year-to-date period for 2012 when compared with the same period in 2011 was driven by the same factors outlined above for the third quarter, except the Company experienced lower year-to-date warranty costs in 2012 than in the same period for 2011.

The Company benefited from debt retirements completed during 2011 and 2012, which yielded reductions in interest expense of $2.5 million and $11.0 million in the three months and nine months ended September 29, 2012, respectively, when compared with the same prior year periods. The Company repurchased $77.5 million and $99.2 million of debt during the three and nine months ended September 29, 2012, respectively, and recorded losses on early extinguishment of debt of $7.5 million and $11.9 million during those same periods. During the three months ended October 1, 2011, the Company recorded a loss on early extinguishment of debt of $11.7 million in connection with the retirement of $85.0 million of notes. During the nine months ended October 1, 2011, the Company recorded a loss on early extinguishment of debt of $16.9 million in connection with the retirement of $128.7 million of notes.

The Company recognized an income tax provision for the three months ended September 29, 2012 of $10.5 million, which included a net charge of $2.2 million primarily related to the reassessment of tax reserves. The Company recognized an income tax provision for the nine months ended September 29, 2012 of $31.0 million, which included a net tax charge of $0.5 million associated with the reassessment of tax reserves and unfavorable valuation allowance adjustments primarily related to stock-based compensation, partially offset by the benefit of the release of valuation allowances for entities that were no longer in a cumulative three-year loss position. The Company recognized an immaterial income tax provision and a $30.8 million tax provision for the three months and nine months ended October 1, 2011, respectively, which included a net tax charge of $0.5 million and a net tax benefit of $1.6 million, respectively, primarily related to the reassessment of tax reserves. In certain jurisdictions, the Company continues to be in a cumulative loss position over the last three years for book purposes and therefore the realization of certain deferred tax assets remains uncertain. As a result, the Company continues to adjust its valuation allowances related to these jurisdictions as deferred tax assets increase or decrease, resulting in effectively no recorded tax benefit for those jurisdictions with operating losses, or no tax expense for those jurisdictions with operating income and loss carryforwards. However, an income tax provision or benefit is still recorded in jurisdictions where entities are not in a cumulative loss position. The effective tax rate, which is calculated as the income tax provision as a percentage of pretax income, for the three months and nine months ended September 29, 2012 was 84.0 percent and 19.8 percent, respectively. The effective tax rate for the three months and nine months ended October 1, 2011 was less than one percent and 23.3 percent, respectively.

In spite of challenging economic conditions, the Company is planning for sales and earnings growth in the fourth quarter of this year when compared with 2011. The Company expects to see continued improvement in the domestic marine market, particularly in aluminum boats and outboard engines, and steady fundamentals in its U.S. fitness and bowling businesses, which the Company expects to be offset with continued challenges for the global fiberglass sterndrive boat product categories and weak European market demand. Gross margins will continue to benefit from cost reductions and improvements in operating efficiencies. Each business segment will continue to concentrate its efforts on maintaining a favorable cost position and generating growth through market share gains and the execution of organic growth initiatives. Reductions in interest expense and lower depreciation and pension expense, when compared with 2011, will also contribute to earnings growth. As a result, for the full year 2012, the Company is targeting modest consolidated revenue growth along with a strong increase in operating earnings. In addition, the restructuring actions taken in the third quarter of 2012 are expected to improve operating earnings in the future.


Restructuring Activities
The restructuring, exit and impairment charges recorded in the Condensed
Consolidated Statements of Comprehensive Income during 2012 and 2011, by
reportable segment, are summarized below:
                           Three Months Ended                  Nine Months Ended
                      September 29,       October 1,     September 29,      October 1,
(in millions)              2012              2011            2012              2011
Marine Engine       $      0.4           $       4.2    $        3.0       $       8.2
Boat                      27.7                   8.7            26.5               9.6
Fitness                    0.1                     -             0.1               0.1
Bowling & Billiards          -                   0.3               -               0.3
Corporate                    -                     -            (0.2 )               -
Total               $     28.2           $      13.2    $       29.4       $      18.2

See Note 2 - Restructuring Activities in the Notes to Condensed Consolidated Financial Statements for further details. The Company anticipates it will incur between $5 million and $10 million of additional restructuring charges in 2012 primarily related to known restructuring activities initiated in 2012, 2010 and 2009.

Matters Affecting Comparability

The following events have occurred during the three months and nine months ended September 29, 2012 and October 1, 2011, which the Company believes affect the comparability of the results of operations:

Restructuring, exit and impairment charges. The Company implemented initiatives to improve its cost structure, better utilize overall capacity and improve general operating efficiencies. During the third quarter of 2012, the Company recorded a charge of $28.2 million related to restructuring and impairment activities as compared with a charge of $13.2 million in the third quarter of 2011, related to restructuring, exit and impairment activities. The third quarter 2012 charges were primarily related to continued weakness in the luxury sportfishing convertible, motoryacht and fiberglass sterndrive boat market segments, the refinement of the Company's North American boat product portfolio and the decision to exit Bayliner cruisers in the U.S. and European markets. Long-lived asset impairment charges were also recorded for certain European and Asia-Pacific boat brands as a result of weak powerboat demand in these regions. Restructuring, exit and impairment charges during the first nine months of 2012 were $29.4 million, as compared with $18.2 million in 2011. See Note 2 - Restructuring Activities in the Notes to Condensed Consolidated Financial Statements for further details.

Gain on sale of distribution facility. In the first quarter of 2011, the Company recognized a $6.8 million gain on the sale of a distribution facility in Australia in Selling, general and administrative expense on the Condensed Consolidated Statements of Comprehensive Income. There was no comparable gain included in Selling, general and administrative expense in the nine months ended September 29, 2012.

Interest expense and loss on early extinguishment of debt. The Company reported interest expense of $16.8 million and $19.3 million during the three months ended September 29, 2012 and October 1, 2011, respectively. The Company reported interest expense of $52.8 million and $63.8 million during the nine months ended September 29, 2012 and October 1, 2011, respectively. Interest expense decreases in 2012 compared with the same periods in 2011 were primarily the result of lower average outstanding debt levels.

Additionally, the Company repurchased $77.5 million and $99.2 million of debt during the three months and nine months ended September 29, 2012, respectively, compared with $85.0 million and $128.7 million during the three months and nine months ended October 1, 2011, respectively. The Company recorded losses on early extinguishment of debt in the three months and nine months ended September 29, 2012 of $7.5 million and $11.9 million, respectively. During the three months and nine months ended October 1, 2011, the Company recorded losses on early extinguishment of debt of $11.7 million and $16.9 million, respectively. See Note 15 - Debt in the Notes to Condensed Consolidated Financial Statements for further details.

Tax items. The Company recognized an income tax provision of $10.5 million and $31.0 million for the three months and nine months ended September 29, 2012, respectively. The Company recognized an immaterial income tax provision for the three months ended October 1, 2011, and an income tax provision of $30.8 million for the nine months ended October 1, 2011. The effective tax rate, which is calculated as the income tax provision as a percentage of pretax income, for the three months and nine months ended September 29, 2012, was 84.0 percent and 19.8 percent, respectively. The effective tax rate for the three months


and nine months ended October 1, 2011 was less than one percent and 23.3 percent, respectively. The reduction in the Company's effective tax rate for the first nine months of 2012 when compared with the first nine months of 2011 reflects expectations that a higher percentage of 2012 pretax income will be derived from domestic sources, which will not require a corresponding tax provision. See Note 13 - Income Taxes in Notes to Condensed Consolidated Financial Statements for further details.

Results of Operations

Consolidated

The following table sets forth certain amounts, ratios and relationships
calculated from the Condensed Consolidated Statements of Comprehensive Income
for the three months ended:
                                                                                       2012 vs. 2011
                                                   Three Months Ended               Increase/(Decrease)
                                              September 29,      October 1,
(in millions, except per share data)              2012              2011               $              %
Net sales                                   $        884.8      $     876.7     $       8.1           0.9  %
Gross margin (A)                                     231.8            202.8            29.0          14.3  %
Restructuring, exit and impairment charges            28.2             13.2            15.0            NM
Operating earnings                                    37.5             35.6             1.9           5.3  %
Net earnings                                           2.0              4.7            (2.7 )       (57.4 )%

Diluted earnings per common share           $         0.02      $      0.05     $     (0.03 )       (60.0 )%

Expressed as a percentage of Net sales:
Gross margin                                          26.2 %           23.1 %                    310 bpts
Selling, general and administrative expense           15.7 %           14.7 %                    100 bpts
Research and development expense                       3.0 %            2.9 %                     10 bpts
Restructuring, exit and impairment charges             3.2 %            1.5 %                    170 bpts
Operating margin                                       4.2 %            4.1 %                     10 bpts


__________

bpts = basis points
NM = not meaningful

(A) Gross margin is defined as Net sales less Cost of sales as presented in the Condensed Consolidated Statements of Comprehensive Income.

Net sales increased slightly in the third quarter of 2012 due to revenue growth in the Marine Engine segment, partially offset by the lower sales in the Boat, Fitness and Bowling & Billiards segments. The Marine Engine segment had increased sales in the U.S. outboard engine and marine service, parts and accessories businesses. Net sales to European markets in the third quarter of 2012 declined by $22.2 million, or 18.6 percent, when compared with the third quarter of 2011, due mainly to economic conditions in Europe. This decline in European sales affected all of the Company's segments, with $5.2 million of the decline being associated with the absence of sales from the Company's former Sealine boat brand, which was divested in August 2011. Net sales were also negatively affected by weaker global demand for fiberglass sterndrive boats, partially offset by strong demand for aluminum and outboard powered fiberglass boats. Additionally, lower international sales included the impact of unfavorable foreign currency translation. The Fitness segment's increase in U.S. health club and consumer sales during the quarter was more than offset by the decrease in sales to international and hospitality customers. The Bowling & Billiards segment also experienced a decrease in net sales across each of its businesses.

The increase in gross margin percentage in the third quarter of 2012 compared with the same period last year was mainly due to improved operating efficiencies and successful cost-reduction activities across all of the Company's segments, particularly in the Marine Engine segment.

Selling, general and administrative expense increased as a percentage of net sales during the three months ended September 29, 2012, when compared with the three months ended October 1, 2011, as a result of increased spending for company-wide growth initiatives partially offset by the realization of successful cost-reduction efforts.


Research and development expense increased as a percentage of net sales during the three months ended September 29, 2012, when compared with the three months ended October 1, 2011, as a result of increased spending for company-wide investments in growth initiatives.

During the third quarter of 2012, the Company incurred higher restructuring, exit and impairment charges than in the third quarter of 2011. Restructuring charges during the third quarter of 2012 included charges recorded for: the impairment of long-lived assets associated with its Hatteras and Cabo boat brands; the Company's decisions to close its Knoxville, Tennessee production facility, consolidate fiberglass cruiser manufacturing and exit Bayliner cruisers in the U.S. and European markets; the impairment of long-lived assets for certain European and Asia-Pacific boat brands; and the consolidation of the Company's marine engine production in Fond du Lac, Wisconsin. The restructuring, exit and impairment charges recorded in the third quarter of 2011 included a loss on the divestiture of the Company's Sealine boat brand as well as charges recorded for the continued consolidation of the Company's marine engine production in Fond du Lac, Wisconsin. See Note 2 - Restructuring Activities in the Notes to Condensed Consolidated Financial Statements for further details.

The Company recognized equity losses of $0.7 million and $0.2 million in the third quarters of 2012 and 2011, respectively, which reflects increased losses in the Company's marine joint ventures.

Interest expense decreased $2.5 million in the third quarter of 2012 compared with the same period in 2011, primarily as a result of the Company's debt retirement activities, which lowered average outstanding debt levels during the third quarter of 2012 when compared with the third quarter of 2011.

The Company repurchased $77.5 million of debt during the three months ended September 29, 2012 and recorded a loss on early extinguishment of debt of $7.5 million. During the three months ended October 1, 2011, the Company recorded a loss on early extinguishment of debt of $11.7 million in connection with the retirement of $85.0 million of notes.

The Company recognized an income tax provision for the three months ended September 29, 2012 of $10.5 million, which included a charge of $2.2 million primarily related to the reassessment of tax reserves. The Company recognized an immaterial income tax provision for the three months ended October 1, 2011, which included a charge of $0.5 million related primarily to the reassessment of tax reserves. In certain jurisdictions, the Company continues to be in a cumulative loss position over the last three years for book purposes and the realization of certain deferred tax assets remains uncertain. As a result, the Company continues to adjust its valuation allowances related to these jurisdictions as deferred tax assets increase or decrease, resulting in effectively no recorded tax benefit for those jurisdictions with operating losses, or no tax expense for those jurisdictions with operating income and loss carryforwards. However, an income tax provision or benefit is still recorded in jurisdictions where entities are not in a cumulative loss position. The effective tax rate, which is calculated as the income tax provision as a percentage of pretax income, for the three months ended September 29, 2012, and October 1, 2011, was 84.0 percent and less than one percent, respectively.

Operating earnings increased and Net earnings and Diluted earnings per common share decreased in the third quarter of 2012 when compared with the same period in 2011 primarily due to the factors discussed in the preceding paragraphs above.

Diluted earnings per common share, as adjusted - defined as Diluted earnings per common share, excluding the earnings or loss per share impact for Restructuring, exit and impairment charges, Loss on early extinguishment of debt and special tax items - increased by $0.10 per share, or 30.3 percent, to $0.43 per share for the third quarter of 2012 when compared with the third quarter of 2011. For the three months ended September 29, 2012, Restructuring, exit and impairment charges were $0.31 per share, Loss on early extinguishment of debt was $0.08 per share and special tax item charges totaled $0.02 per share. In the three months ended October 1, 2011, Restructuring, exit and impairment charges were $0.14 per share, Loss on early extinguishment of debt was $0.13 per share and special tax item charges totaled $0.01 per share.


The following table sets forth certain amounts, ratios and relationships calculated from the Condensed Consolidated Statements of Comprehensive Income for the nine months ended:

                                                                                       2012 vs. 2011
                                                   Nine Months Ended                Increase/(Decrease)
                                             September 29,      October 1,
(in millions, except per share data)              2012             2011               $               %
Net sales                                   $      2,926.0     $   2,958.9     $     (32.9 )         (1.1 )%
Gross margin (A)                                     745.1           713.9            31.2            4.4  %
Restructuring, exit and impairment charges            29.4            18.2            11.2           61.5  %
Operating earnings                                   219.9           210.5             9.4            4.5  %
Net earnings                                         125.3           101.5            23.8           23.4  %

Diluted earnings per common share           $         1.36     $      1.10     $      0.26           23.6  %

Expressed as a percentage of Net sales:
Gross margin                                          25.5 %          24.1 %                     140 bpts
Selling, general and administrative expense           14.3 %          13.9 %                      40 bpts
Research and development expense                       2.6 %           2.5 %                      10 bpts
Restructuring, exit and impairment charges             1.0 %           0.6 %                      40 bpts
Operating margin                                       7.5 %           7.1 %                      40 bpts


__________

bpts = basis points

(A) Gross margin is defined as Net sales less Cost of sales as presented in the Condensed Consolidated Statements of Comprehensive Income.

Net sales decreased slightly during the nine months ending September 29, 2012 due to declines in net sales in the Boat, Fitness and Bowling & Billiards segments partially offset by increased net sales in the Marine Engine segment. The same factors contributing to the changes in the Company's third quarter net sales also affected the segments' year-to-date net sales. Net sales to European markets were lower during the nine months ended September 29, 2012 by $114.9 million or 23.4 percent when compared to the same period in the prior year. The absence of $37.2 million of net sales in 2011 from the divested Sealine boat brand in the first nine months of 2012 contributed to this decrease in European sales. In addition to the factors noted above for the third quarter, net sales were lower during the first nine months of 2012 due to weak global demand for sterndrive engines and the absence of a large order from one of Fitness' major customer categories in the first half of 2011.

The increase in gross margin percentage in the first nine months of 2012 compared with the same period last year was driven by the same factors outlined above for net sales, partially offset by the operating inefficiencies resulting from sterndrive engine production ramp-up issues experienced in the first quarter of 2012.

. . .

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