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BC > SEC Filings for BC > Form 10-Q on 31-Oct-2013All Recent SEC Filings

Show all filings for BRUNSWICK CORP

Form 10-Q for BRUNSWICK CORP


31-Oct-2013

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 Part I, Item 1A - Risk Factors in the 2012 Form 10-K.

Overview and Outlook

General

Net sales during the third quarter of 2013 increased 2 percent to $892.4 million from $874.3 million in the third quarter of 2012, driven by increases in the Company's Marine Engine and Fitness segments, partially offset by decreases in net sales for the Company's Boat and Bowling & Billiards segments. The increase in Marine Engine net sales reflected gains in the marine service, parts and accessories businesses, partially offset by declines in outboard engine sales as differences in backorder trends between years created challenging sales comparisons, as well as lower sterndrive engine sales. Fitness segment net sales experienced a solid increase reflecting strong gains in international markets and growth in sales to U.S. health club and hospitality customers. Boat segment net sales decreased during the third quarter of 2013 mainly due to wholesale shipment declines in fiberglass sterndrive boats, reflecting the Company's strategy to reduce associated pipeline inventories in response to continued weak retail demand and to prepare for new product introductions. Partially offsetting this factor was higher sales volumes of aluminum and fiberglass outboard boats. Bowling & Billiards net sales decreased as a result of a lower retail bowling center count and a decrease in U.S. equivalent retail bowling center sales, partially offset by higher revenues in the segment's bowling products business. Net sales during the nine months ended September 28, 2013 increased 3 percent to $2,986.0 million from $2,887.8 million for the nine months ended September 29, 2012 due to many of the same factors contributing to the increase in third quarter sales except for: outboard engine sales in the Marine Engine segment increased due to the favorable demand environment in the aluminum and fiberglass outboard boat markets and the Bowling & Billiards segment experienced decreases in bowling products sales, partially offset by higher U.S. equivalent retail bowling center sales. International sales for the Company increased 5 percent in the third quarter of 2013 when compared with the third quarter of 2012 and increased 2 percent in the first nine months of 2013 when compared with the first nine months of 2012. These increases were driven primarily by higher sales to Europe and Latin America for certain of the Company's products.

Operating earnings in the third quarter of 2013 were $63.6 million, with an operating margin of 7.1 percent, which included $3.1 million of restructuring, exit and impairment charges. In the three months ended September 29, 2012, the Company reported operating earnings of $56.7 million, with an operating margin of 6.5 percent, which included restructuring, exit and impairment charges of $14.3 million. Operating earnings during the nine months ended September 28, 2013 were $290.2 million, with an operating margin of 9.7 percent, which included $12.7 million of restructuring, exit and impairment charges. In the nine months ended September 29, 2012, the Company reported operating earnings of $257.1 million, with an operating margin of 8.9 percent, which included restructuring, exit and impairment charges of $15.3 million. The improvement in operating earnings during the quarter and year-to-date periods of 2013, when compared with the same periods in 2012, reflect increased sales volumes, lower restructuring, exit and impairment charges, benefits realized from successful cost-reduction efforts and improved operating efficiencies. The improvement in operating earnings during the first nine months of 2013 can also be attributed to a $5.5 million gain on the sale of real estate in the Marine Engine segment recorded in the first quarter of 2013. These factors were partially


offset by increased spending on company-wide investments in strategic initiatives and the absence of favorable legal and insurance settlements reached in the Boat segment in the second quarter of 2012.

During the three months and nine months ended September 28, 2013, the Company benefited from debt retirements completed during 2012 and through the third quarter of 2013, which lowered interest expense by $8.2 million and $17.2 million when compared with the three months and nine months ended September 29, 2012, respectively. The Company repurchased $6.5 million and $257.3 million of debt during the three months and nine months ended September 28, 2013, respectively, and recorded losses on early extinguishment of debt of $0.3 million and $32.7 million, respectively. During the three months and nine months ended September 29, 2012, the Company recorded a loss on early extinguishment of debt of $7.5 million and $11.9 million, respectively, in connection with the retirement of $77.5 million and $99.2 million of notes.

The Company recognized an income tax benefit from continuing operations for the three months ended September 28, 2013 of $2.2 million, which included a net benefit of $4.3 million mainly associated with the reassessment of tax reserves as well as unfavorable valuation allowance adjustments primarily related to stock-based compensation. The Company recognized an income tax provision from continuing operations for the nine months ended September 28, 2013 of $31.6 million, which included a net charge of $9.0 million mainly associated with unfavorable valuation allowance adjustments primarily related to stock-based compensation and the reassessment of tax reserves. The Company recognized an income tax provision from continuing operations of $9.2 million for the three months ended September 29, 2012, which included a charge of $2.3 million primarily related to the reassessment of tax reserves. The Company recognized an income tax provision from continuing operations of $30.0 million for the nine months ended September 29, 2012, which included a net tax charge of $0.1 million. The net tax charge included 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. The effective tax rate from continuing operations, which is calculated as the income tax benefit or provision as a percentage of pretax income, for the three months and nine months ended September 28, 2013 was (4.0) percent and 14.2 percent, respectively. The effective tax rate from continuing operations for the three months and nine months ended September 29, 2012 was 29.0 percent and 15.5 percent, respectively. Due to the Company's three years of cumulative book losses in certain jurisdictions and the uncertainty of the realization of certain deferred tax assets, the Company continues to adjust its valuation allowances as deferred tax assets increase or decrease, resulting in effectively no recorded tax benefit for those jurisdictions with operating losses. In those jurisdictions with operating income and loss or credit carryforwards, the Company is recording minimal or no tax expense. However, an income tax provision or benefit is still recorded for those entities that are not in a cumulative loss position.

The Company is targeting 4 percent sales growth in 2013 when compared with 2012, driven by the strength of its global brands and anticipated contributions from its growth initiatives. For operating plans in the marine segments for the remainder of 2013, the Company is anticipating that the uneven recovery in the U.S. powerboat market will continue, with outboard boat and engine products and global marine service, parts and accessories businesses generating solid growth. The Company is planning for market conditions in the sterndrive fiberglass boat category to remain unchanged, which will affect both fiberglass sterndrive boat and sterndrive engine sales and production. Positive health and wellness trends, combined with exciting new products, have positioned the Fitness segment to continue its strong growth in net sales and deliver excellent results again in 2013. Additionally, the Company's Bowling & Billiards segment should further benefit from operating efficiencies.

For the year, the Company expects a solid improvement to gross margin as a percentage of sales versus the level achieved in 2012. The Company's organic growth platform will benefit from increased investments in capital projects and research and development programs, along with the higher selling, general and administrative expenses to support them, which is expected to result in full year operating expenses as a percentage of sales to be comparable to 2012 levels. Net earnings in 2013 are also expected to benefit from previously announced marine plant consolidation activities and lower restructuring, exit and impairment charges, net interest and pension expenses. As a result, the Company expects to report higher earnings per share in 2013 versus 2012.

The Company is planning for its effective tax rate in 2013 to be approximately 10 percent after adjusting for the impact of one-time pretax charges such as debt extinguishment losses and restructuring charges, as well as non-recurring special tax items. In certain jurisdictions, the Company is either in or just emerging from a cumulative three-year loss position, which is significant negative evidence when evaluating the realizability of its deferred tax assets. In the Company's judgment, this and other negative evidence continues to outweigh the positive evidence of profitability in 2011, 2012 and the first nine months of 2013, thereby requiring the Company to continue to maintain full valuation allowances for certain entities in the third quarter of 2013. The Company will continue to evaluate the need to maintain these valuation reserves against the deferred tax assets. To the extent positive evidence trends continue and the Company's final plans for 2014 and future long-term forecasts show sustained profitability, the Company's conclusion regarding the need for full valuation allowances could change, making it possible that a significant portion of the Company's $723.4 million of deferred tax asset valuation allowance balances as of September 28, 2013 could be


reversed by the end of 2013. Any deferred tax asset valuation allowance reversals would be considered a special, non-cash, tax item and excluded from the Company's projected effective tax rate for 2013 as described above.

Discontinued Operations

On December 31, 2012, the Board of Directors authorized the Company to exit its Hatteras and Cabo boat businesses. In August 2013, the Company completed the sale of its Hatteras and Cabo boat businesses. In this Quarterly Report on Form 10-Q, the Company is reporting the results of the Hatteras and Cabo businesses, which were previously reported in the Boat segment, as discontinued operations for all periods presented. The Company's results, as discussed in Management's Discussion and Analysis, reflect continuing operations only, unless otherwise noted.

Restructuring Activities

The restructuring, exit and impairment charges recorded in the Condensed
Consolidated Statements of Comprehensive Income during 2013 and 2012 by
reportable segment, are summarized below:
                                                Three Months Ended                        Nine Months Ended
                                         September 28,       September 29,         September 28,        September 29,
(in millions)                                2013                2012                  2013                 2012
Marine Engine                          $             -     $           0.4     $             -         $         3.0
Boat                                               2.6                13.8                10.0                  12.4
Fitness                                              -                 0.1                   -                   0.1
Bowling & Billiards                                0.5                   -                 2.0                     -
Corporate                                            -                   -                 0.7                  (0.2 )
Total                                  $           3.1     $          14.3     $          12.7         $        15.3

In the second quarter of 2013, the Company entered into an agreement to divest its European retail bowling centers in the Bowling & Billiards segment. The Company substantially completed this divestiture by the end of the third quarter of 2013. The Company anticipates its Bowling & Billiards segment may incur approximately $0.5 million of additional restructuring charges in 2013 related to this action and will achieve annual savings between $1 million and $2 million, with the full benefit being realized in 2014. Future cost savings will be reflected in Cost of sales and Selling, general and administrative expense as reported in the Company's Condensed Consolidated Statements of Comprehensive Income; however, the Company also expects a reduction in Net sales as a result of these actions.

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 Merritt Island, Florida as of the end of June 2013. The Company anticipates its Boat segment may incur between $1 million and $3 million of additional restructuring charges in 2013 related to this action and will achieve annual savings between $3 million and $5 million, with the full benefit being realized in 2014. Future cost savings will primarily be reflected in Cost of sales as reported in the Company's Condensed Consolidated Statements of Comprehensive Income.

In the third quarter of 2012, the Company reached a decision 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. Those actions were initiated in connection with the continued weakness in the fiberglass sterndrive boat market segments. The Company anticipates its Boat segment may incur approximately $1 million of additional restructuring charges in 2013 related to this action and will achieve annual savings between $10 million and $12 million, with full benefits being realized in 2014. Future cost savings will primarily be reflected in Cost of sales as reported in the Company's Condensed Consolidated Statements of Comprehensive Income; however, the Company would also expect a reduction in Net sales due to associated reductions in models and lower production volumes during the transition as a result of these actions.

Restructuring charges in the Marine Engine segment during 2012 included costs associated with the Company's announced plans to reduce excess manufacturing capacity by relocating inboard and sterndrive production to Fond du Lac, Wisconsin and closing its Stillwater, Oklahoma plant. This action resulted in $39.9 million of restructuring charges between 2009 and the completion of this plant transition in 2012. The Company substantially achieved its ongoing annual savings run rate target, when compared with 2009, of approximately $40 million by the end of 2012 with the benefit reflected as a reduction in Cost of sales, Selling, general and administrative expense and Research and development expense as reported in the Company's Condensed Consolidated Statements of Comprehensive Income.


During 2012, the Company continued its restructuring activities by disposing of non-strategic assets, consolidating manufacturing operations and reducing the Company's global workforce, which has resulted in permanent cost savings, mainly in the Company's Boat and Marine Engine segments. These cost savings have been reflected through a reduction in Cost of sales, Selling, general and administrative expense and Research and development expense as reported in the Company's Condensed Consolidated Statements of Comprehensive Income.

See Note 3 - Restructuring Activities in the Notes to Condensed Consolidated Financial Statements for further details. The Company anticipates it may incur between $2 million and $4 million of additional restructuring charges in 2013 primarily related to known restructuring activities initiated during 2013 and 2012.

Matters Affecting Comparability

The following events have occurred during the three and nine months ended September 28, 2013 and September 29, 2012, which the Company believes affect the comparability of the results of operations:

Restructuring, exit and impairment charges. The Company is executing restructuring initiatives designed to improve its cost structure, better utilize overall capacity and improve general operating efficiencies. During the third quarter of 2013, the Company recorded charges of $3.1 million related to restructuring activities as compared with $14.3 million in the third quarter of 2012. Restructuring charges during the first nine months of 2013 were $12.7 million, as compared with $15.3 million in the first nine months of 2012. See Note 3 - Restructuring Activities in the Notes to Condensed Consolidated Financial Statements for further details.

Gain on sale of real estate. In the first quarter of 2013, the Company's Marine Engine segment recognized a $5.5 million gain on the sale of real estate in Selling, general and administrative expense on the Condensed Consolidated Statements of Comprehensive Income. There was no comparable gain in the Marine Engine segment in the nine months ended September 29, 2012.

Interest expense and loss on early extinguishment of debt. The Company recorded interest expense of $8.6 million and $16.8 million during the three months ended September 28, 2013 and September 29, 2012, respectively. The Company recorded interest expense of $35.6 million and $52.8 million during the nine months ended September 28, 2013 and September 29, 2012, respectively. Interest expense decreases in 2013 compared with the same periods in 2012 were the result of lower average outstanding debt levels at a lower average interest rate.

Additionally, the Company repurchased $6.5 million and $257.3 million of debt during the three and nine months ended September 28, 2013, respectively, compared with $77.5 million and $99.2 million during the three and nine months ended September 29, 2012, respectively. The Company recorded losses on early extinguishment of debt in the three months and nine months ended September 28, 2013 of $0.3 million and $32.7 million, respectively. During the three months and nine months ended September 29, 2012, the Company recorded losses on early extinguishment of debt of $7.5 million and $11.9 million, respectively. See Note
16 - Debt in the Notes to Condensed Consolidated Financial Statements for further details.

Tax items. The Company recognized an income tax benefit from continuing operations for the three months ended September 28, 2013 of $2.2 million, which included a net benefit of $4.3 million mainly associated with the reassessment of tax reserves as well as unfavorable valuation allowance adjustments primarily related to stock-based compensation. The Company recognized an income tax provision from continuing operations for the nine months ended September 28, 2013 of $31.6 million, which included a net charge of $9.0 million mainly associated with unfavorable valuation allowance adjustments primarily related to stock-based compensation and the reassessment of tax reserves. The Company recognized an income tax provision from continuing operations of $9.2 million for the three months ended September 29, 2012, which included a charge of $2.3 million primarily related to the reassessment of tax reserves. The Company recognized an income tax provision from continuing operations of $30.0 million for the nine months ended September 29, 2012, which included a net tax charge of $0.1 million. The net tax charge included 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. The effective tax rate from continuing operations, which is calculated as the income tax benefit or provision as a percentage of pretax income, for the three months and nine months ended September 28, 2013 was (4.0) percent and 14.2 percent, respectively. The effective tax rate from continuing operations for the three months and nine months ended September 29, 2012 was 29.0 percent and 15.5 percent, respectively. See Note 14 - Income Taxes in the 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:
                                                                                       2013 vs. 2012
                                                Three Months Ended                  Increase/(Decrease)
                                          September 28,      September 29,
(in millions, except per share data)          2013               2012                $                %
Net sales                               $        892.4      $       874.3     $      18.1              2.1  %
Gross margin (A)                                 238.3              233.0             5.3              2.3  %
Restructuring, exit and impairment
charges                                            3.1               14.3           (11.2 )          (78.3 )%
Operating earnings                                63.6               56.7             6.9             12.2  %
Net earnings from continuing operations           57.4               22.5            34.9               NM

Diluted earnings per common share from
continuing operations                   $         0.61      $        0.24     $      0.37               NM

Expressed as a percentage of Net sales:
Gross margin                                      26.7 %             26.6 %                        10 bpts
Selling, general and administrative
expense                                           16.0 %             15.5 %                        50 bpts
Research and development expense                   3.2 %              3.0 %                        20 bpts
Restructuring, exit and impairment
charges                                            0.3 %              1.6 %                     (130) bpts
Operating margin                                   7.1 %              6.5 %                        60 bpts


__________

NM = not meaningful
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.

The Company's net sales increased in the third quarter of 2013 when compared to the same prior year period as the Company's Marine Engine and Fitness segments experienced sales growth, partially offset by sales decreases in the Boat and Bowling & Billiards segments. The increase in Marine Engine net sales reflected gains in the marine service, parts and accessories businesses partially offset by decreases in outboard engine sales due to differences in backorder trends between years, which created challenging sales comparisons, as well as lower sterndrive engine sales. Fitness segment net sales increased reflecting strong gains in international markets and growth in sales to U.S. health club and hospitality customers. Boat segment net sales decreased during the third quarter of 2013 mainly due to wholesale shipment declines in fiberglass sterndrive boats, reflecting the Company's strategy to reduce associated pipeline inventories in response to continued weak retail demand and to prepare for new product introductions. Partially offsetting this factor was higher sales volumes of aluminum and fiberglass outboard boats. Bowling & Billiards net sales decreased as a result of a reduced retail bowling center count and lower U.S. equivalent retail bowling center sales, partially offset by higher sales in the segment's bowling products business. International sales for the Company increased 5 percent in the third quarter of 2013 when compared with the third quarter of 2012. This was driven primarily by increased demand for certain Fitness, Boat and Marine Engine segment products in Europe and Latin America.

The gross margin percentage increased slightly in the third quarter of 2013 when compared with the same prior year period reflecting benefits from successful cost-reduction efforts and improved operating efficiencies.

Selling, general and administrative expense increased as a percentage of net sales during the three months ended September 28, 2013, when compared with the comparable period ended September 29, 2012, mainly due to spending on company-wide investments in strategic initiatives partially offset by the realization of successful cost-containment efforts.

Research and development expense increased $2.0 million, or 8 percent, in the third quarter of 2013 when compared with the third quarter of 2012 as the Company continued to invest in programs to support its growth initiatives.


During the third quarter of 2013, the Company recorded restructuring charges of $3.1 million compared with $14.3 million in the third quarter of 2012. See Note
3 - Restructuring Activities in the Notes to Condensed Consolidated Financial Statements for further details.

The Company recognized equity losses of $0.3 million and $0.7 million in the third quarter of 2013 and 2012, respectively, which were related to the Company's marine joint ventures.

Interest expense decreased $8.2 million in the third quarter of 2013 compared with the same period in 2012, as a result of lower average outstanding debt levels at a lower average interest rate when compared with the third quarter of . . .

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