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BC > SEC Filings for BC > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for BRUNSWICK CORP

Form 10-Q for BRUNSWICK CORP


31-Jul-2014

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 discussion of 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 2013 Form 10-K.

Overview and Outlook

Discontinued Operations

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

On July 17, 2014, the Company entered into an agreement to sell its retail bowling business. In connection with its decision to sell is bowling centers, the Company announced in July 2014 its intention to divest its bowling products business. As discussed in Note 18 - Subsequent Events in the Notes to Condensed Consolidated Financial Statements, these businesses will be reported as discontinued operations beginning in the third quarter of 2014, as they did not meet the discontinued operations reporting criteria in the second quarter of 2014. Additionally, beginning in the third quarter of 2014, the historical and current results of the billiards business will be reflected in the Company's Fitness segment. The Company's outlook statements incorporate these future reporting changes.

General

Net sales during the second quarter of 2014 increased 4 percent to $1,139.8 million from $1,098.3 million when compared to the second quarter of 2013, driven by increases across all of the Company's segments. Marine Engine segment sales increased due to an increase in outboard engine sales and higher sales in the marine service, parts and accessories businesses in the U.S. and Europe, partially offset by a decline in sterndrive engine sales. Boat segment sales increased, driven by a favorable shift in mix across most of its outboard boat lines, resulting in higher average selling prices, including the introduction of new larger, higher priced products by the segment's European outboard brands, partially offset by lower global wholesale unit shipments and a decline in sales of fiberglass sterndrive and inboard boat products. Fitness segment net sales reflected strong growth in the U.S. to health clubs, as well as modest net sales growth in international markets. Bowling & Billiards segment net sales increased as a result of gains in bowling products sales, as well as in U.S. equivalent retail bowling center sales, including increases at pilot centers, partially offset by a reduced retail bowling center count, particularly in Europe as the segment divested its European retail bowling centers in 2013, and a decrease in billiards sales. International sales for the Company increased 1 percent in the second quarter of 2014 when compared with the second quarter of 2013, driven primarily by increased demand in European markets, partially offset by sales declines in Canadian and Latin American markets.

Net sales during the first six months of 2014 increased 1 percent to $2,109.0 million from $2,093.6 million during the first six months of 2013, due to the same factors described above for the quarterly periods in the Company's Marine Engine, Boat and Fitness segments. Additionally, Marine Engine, Boat and Bowling & Billiards segment net sales were adversely affected by comparatively harsher weather trends in many North American markets during the first quarter of 2014. Fitness segment net sales


also benefited from sales growth in the U.S. to local and federal governments during the first half of 2014. Partially offsetting were sales decreases in the Bowling & Billiards segment for the first half of 2014 when compared with the same prior year period as a result of reduced retail bowling center count and lower billiards sales, partially offset by gains in bowling product sales and gains in U.S. equivalent retail bowling centers, including increases at pilot centers. International sales for the Company decreased 1 percent in the first half of 2014 when compared with the same prior year period. This was driven mainly by sales decreases in Canadian and Latin American markets offset by sales increases in European markets for certain of the Company's products.

Operating earnings in the second quarter of 2014 were $141.3 million, with an operating margin of 12.4 percent. These results included $3.1 million of net restructuring, exit and impairment charges recorded during the second quarter of 2014. In the second quarter of 2013, the Company reported operating earnings of $136.7 million, with an operating margin of 12.4 percent, which included restructuring, exit and impairment charges of $4.0 million. Operating earnings in the first six months of 2014 were $236.0 million, with an operating margin of 11.2 percent. These results included $3.1 million of net restructuring, exit and impairment charges recorded during the first six months of 2014. In the first six months of 2013, the Company reported operating earnings of $226.6 million, with an operating margin of 10.8 percent, which included restructuring, exit and impairment charges of $9.6 million. The improvement in operating earnings during the quarter and year-to-date periods of 2014, when compared with the same periods in 2013, reflected lower restructuring charges and higher gross margins, which included favorable warranty expense comparisons, and the benefits from successful cost-reduction activities and net improvements in operating efficiencies. These factors were partially offset by the absence of a $5.5 million gain on the sale of real estate in the Marine Engine segment in the first quarter of 2013, spending on company-wide investments in strategic initiatives, and the absence of favorable insurance settlements received in the Fitness and Marine Engine segments in the first quarter of 2013 and the second quarter of 2013, respectively.

During the three months and six months ended June 28, 2014, the Company lowered interest expense by $4.1 million and $10.0 million, respectively, when compared with the three months and six months ended June 29, 2013, due to debt retirements completed during 2013 and lower average outstanding debt levels at a lower average interest rate during the comparable periods.

The Company's 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 six months ended June 28, 2014, was 34.0 percent and 34.3 percent, respectively. The effective tax rate from continuing operations for the three months and six months ended June 29, 2013, was 13.0 percent and 20.1 percent, respectively. The increase in the Company's 2014 effective tax rate is primarily due to no longer being in a full valuation allowance reserve position against a significant portion of its federal deferred tax assets and against certain state deferred tax assets due to the sustained positive operating performance of its U.S. operations and the expectation of future taxable income. See Note 15 - Income Taxes in the Notes to Condensed Consolidated Financial Statements for further discussion.

In the first half of 2014, the U.S. marine market unfolded consistent with the Company's annual expectations and continues to benefit from solid growth in outboard boat and engine products, as well as in the marine service, parts and accessories businesses. In the fiberglass sterndrive and inboard boat categories, which also affect sterndrive and inboard engine production, modest year-to-date unit growth in boats greater than 30 feet is being more than offset by declines in boats under 30 feet. Additionally, marine markets were adversely affected by comparatively harsher weather trends in many North American markets during the first quarter of 2014. International marine markets, however, have experienced declines in retail sales, specifically in Canada and South America. Consequently, first half global marine retail demand growth was below the Company's annual expectations. The Company's Fitness segment continues to benefit from favorable health and fitness trends in the U.S. market. Outside of the U.S., Fitness segment demand trends have been mixed, with slight overall growth during 2014.

During the second half of 2014, the Company expects the Marine Engine, Boat and Fitness segments will benefit from new products being introduced into the marketplace or reaching full production rates and sales growth continuing from solid outboard, parts and accessories and fitness market conditions, along with growth in certain international markets. As a result, the Company anticipates stronger revenue growth rates in the second half of 2014 when compared to the first half of 2014 and is planning for full-year 2014 revenue to grow 5 percent to 6 percent when compared with 2013, with growth expected in all of the Company's segments.

The Company is planning to have higher earnings before income taxes in 2014 resulting from increased revenue and solid improvements in gross margins levels, with improvements in gross margins levels in the second half of 2014 being slightly higher than the first half of 2014. Operating expenses, including research and development expenditures, are projected to be higher in 2014 when compared with 2013, but slightly lower on a percentage of sales basis, as the Company increases investment spending to support long-term growth initiatives. The Company expects net earnings in 2014 to benefit from restructuring activities completed in 2012 and 2013 as well as from lower restructuring, exit and impairment charges, net interest and pension expenses.


The Company is also planning for its effective tax rate to increase in 2014 to an estimated 34 percent. As a result of this significant year-over-year increase in the effective tax rate, the Company expects earnings per common share to be lower in 2014 when compared to 2013.

Restructuring Activities

The restructuring, exit and impairment charges recorded in the Condensed
Consolidated Statements of Comprehensive Income during 2014 and 2013 by
reportable segment, are summarized below:
                           Three Months Ended                 Six Months Ended
                         June 28,          June 29,        June 28,         June 29,
(in millions)              2014              2013            2014             2013
Boat                $     0.4             $     2.5    $     0.4           $     7.4
Bowling & Billiards         -                   1.5            -                 1.5
Corporate                 2.7                     -          2.7                 0.7
Total               $     3.1             $     4.0    $     3.1           $     9.6

In the second quarter of 2014, certain executive positions were restructured within the Company. The Company does not anticipate incurring any additional restructuring charges in 2014 related to this action and will achieve annual savings between $1 million and $2 million, with the full benefit being realized in 2015. Future cost savings will primarily be reflected in Selling, general and administrative expenses as reported in the Company's Condensed Consolidated Statements of Comprehensive Income.

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 anticipates its Boat segment may incur approximately $1 million to $2 million of additional restructuring charges in 2014 related to this action and will achieve annual savings between $1 million and $2 million, with the full benefit being realized in 2015. Future cost savings will primarily be reflected in Cost of sales as reported in the Company's Condensed Consolidated Statements of Comprehensive Income.

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 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. The Company anticipates its Boat segment will achieve annual savings between $10 million and $12 million, with full benefits from this action 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. The Company has experienced a reduction in Net sales due to associated reductions in models and lower production volumes during the transition.

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 completed its divestiture activities during the fourth quarter of 2013.

See Note 3 - Restructuring Activities in the Notes to Condensed Consolidated Financial Statements for further details. As discussed above, the Company anticipates it may incur between $1 million and $2 million of additional restructuring charges in 2014 primarily related to known restructuring activities initiated during 2013 in the Boat segment.

Matters Affecting Comparability

The following events have occurred during the three months and six months ended June 28, 2014 and June 29, 2013, 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 second quarter of 2014, the Company recorded net charges of $3.1 million related to restructuring activities as compared with $4.0 million in the second quarter of 2013.


Restructuring charges during the first six months of 2014 were $3.1 million, as compared with $9.6 million in the first six months of 2013. 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 first six months of 2014.

Interest expense and loss on early extinguishment of debt. The Company recorded interest expense of $8.5 million and $12.6 million during the three months ended June 28, 2014 and June 29, 2013, respectively. The Company recorded interest expense of $17.0 million and $27.0 million during the six months ended June 28, 2014 and June 29, 2013, respectively. Interest expense decreases in 2014 compared with the same periods in 2013 were the result of lower average outstanding debt levels at a lower average interest rate during the comparable periods. These improvements were the result of debt reduction actions completed during 2013.

Additionally, the Company repurchased $249.8 million and $250.8 million of debt during the three months and six months ended June 29, 2013, respectively. The Company recorded a loss on early extinguishment of debt in the three months and six months ended June 29, 2013 of $32.3 million and $32.4 million, respectively. There were no debt repurchases or losses on early extinguishment of debt during the first half of 2014. See Note 17 - Debt in the Notes to Condensed Consolidated Financial Statements for further details.

Tax items. The Company recognized an income tax provision from continuing operations for the three months ended June 28, 2014 of $45.7 million, which included a net charge of $0.1 million mainly associated with the impact of tax reserve changes. The Company recognized an income tax provision from continuing operations for the six months ended June 28, 2014 of $76.1 million, which included a net charge of $0.5 million mainly associated with the impact of tax rate changes. The Company recognized an income tax provision from continuing operations for the three months ended June 29, 2013 of $11.9 million, which included a net charge of $2.2 million mainly associated with the reassessment of tax reserves and valuation allowance adjustments primarily related to stock-based compensation. The Company recognized an income tax provision from continuing operations for the six months ended June 29, 2013 of $33.8 million, which included a net charge of $13.3 million mainly associated with valuation allowance adjustments primarily related to stock-based compensation and the reassessment of tax reserves. 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 six months ended June 28, 2014, was 34.0 percent and 34.3 percent, respectively. The effective tax rate from continuing operations for the three months and six months ended June 29, 2013, was 13.0 percent and 20.1 percent, respectively. The increase in the Company's 2014 effective tax rate is primarily due to no longer being in a full valuation allowance reserve position against a significant portion of its federal deferred tax assets and against certain state deferred tax assets due to the sustained positive operating performance of its U.S. operations and the expectation of future taxable income. See Note 15 - 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:
                                                                              2014 vs. 2013
                                            Three Months Ended             Increase/(Decrease)
                                          June 28,       June 29,
(in millions, except per share data)        2014           2013              $               %
Net sales                               $  1,139.8     $  1,098.3     $      41.5             3.8  %
Gross margin (A)                             317.2          301.6            15.6             5.2  %
Restructuring, exit and impairment
charges                                        3.1            4.0            (0.9 )         (22.5 )%
Operating earnings                           141.3          136.7             4.6             3.4  %
Net earnings from continuing operations       88.6           79.3             9.3            11.7  %

Diluted earnings per common share from
continuing operations                   $     0.93     $     0.85     $      0.08             9.4  %

Expressed as a percentage of Net sales:
Gross margin                                  27.8 %         27.5 %                       30 bpts
Selling, general and administrative
expense                                       12.6 %         12.0 %                       60 bpts
Research and development expense               2.5 %          2.6 %                     (10) bpts
Restructuring, exit and impairment
charges                                        0.3 %          0.4 %                     (10) bpts
Operating margin                              12.4 %         12.4 %                        0 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.

The Company's net sales increased in the second quarter of 2014 when compared to the same prior year period due to sales increases across all segments. Marine Engine segment sales increased due to an increase in outboard engine sales, higher sales in the marine service, parts and accessories businesses in the U.S. and Europe, partially offset by declines in sterndrive engine sales. Boat segment sales increases were driven by the benefits from a favorable shift in mix across most of its outboard boat lines, resulting in higher average selling prices, including the introduction of new larger, higher priced products by the segment's European brands, partially offset by lower global wholesale unit shipments and a decline in sales of fiberglass sterndrive and inboard boat products in the second quarter of 2014 when compared to the second quarter of 2013. Fitness segment net sales reflected strong sales growth in the U.S. to health clubs, as well as modest net sales growth in international markets. Bowling & Billiards net sales increased as a result of gains in bowling products sales, as well as sales growth in U.S. equivalent retail bowling centers, including increases at pilot centers, partially offset by a reduced retail bowling center count and a decrease in billiards sales. International sales for the Company increased 1 percent in the second quarter of 2014 when compared with the second quarter of 2013. This was driven primarily by increased demand for certain Marine Engine and Boat segment products in European markets, offset by sales declines in Canadian and Latin American markets.

The gross margin percentage increased in the second quarter of 2014 when compared with the same prior year period, with the majority of the increase coming from the Marine Engine, Boat and Bowling & Billiards segments. The increase reflects benefits from successful cost-reduction activities and net improvements in operating efficiencies.

Selling, general and administrative expense increased as a percentage of net sales during the second quarter of 2014, when compared with the second quarter of 2013, mainly due to increased spending on company-wide investments in strategic initiatives and the absence of favorable insurance settlements received in the Marine Engine segment in the second quarter of 2013.

Research and development expense remained relatively flat in the second quarter of 2014 when compared with the second quarter of 2013 as the Company continued to incur investment spending to support long-term growth initiatives during both periods.


During the second quarter of 2014, the Company recorded net restructuring charges of $3.1 million compared with $4.0 million in the second quarter of 2013. See Note 3 - Restructuring Activities in the Notes to Condensed Consolidated Financial Statements for further details.

Interest expense decreased $4.1 million in the second quarter of 2014 compared with the same period in 2013 as a result of lower average outstanding debt levels at a lower average interest rate during the comparable period.

The Company recognized an income tax provision from continuing operations for the three months ended June 28, 2014 of $45.7 million, which included a net charge of $0.1 million mainly associated with the impact of tax reserve changes. The Company recognized an income tax provision from continuing operations of $11.9 million for the second quarter of 2013, which included a net charge of $2.2 million mainly associated with the reassessment of tax reserves and valuation allowance adjustments primarily related to stock-based compensation. The effective tax rate from continuing operations for the second quarters of 2014 and 2013, was 34.0 percent and 13.0 percent, respectively. The increase in the Company's 2014 effective tax rate is primarily due to no longer being in a full valuation allowance reserve position against a significant portion of its federal deferred tax assets and against certain state deferred tax assets due to the sustained positive operating performance of its U.S. operations and the availability of expected future taxable income. See Note 15 - Income Taxes in the Notes to Condensed Consolidated Financial Statements for further discussion.

Operating earnings, Net earnings from continuing operations and Diluted earnings per common share from continuing operations increased during the second quarter of 2014 when compared with the second quarter of 2013 due to the factors discussed in the preceding paragraphs. Partially offsetting the positive factors affecting Diluted earnings per common share from continuing operations noted above is an increase in weighted average shares outstanding from the impact of options exercised since the beginning of 2013, primarily related to an increase in the Company's stock price.

Diluted earnings per common share from continuing operations, as adjusted - defined as Diluted earnings per common share from continuing operations, excluding the earnings or loss per share impact for Restructuring, exit and impairment charges from continuing operations, Loss on early extinguishment of debt and special tax items - decreased by $0.28 per share, or 23 percent, to $0.95 per share for the second quarter of 2014 when compared with $1.23 per share for the same period in 2013. The decrease in diluted earnings per common share from continuing operations, as adjusted, is primarily due to a higher year-over-year effective tax rate in 2014 when compared to 2013. In 2014, Restructuring, exit and impairment charges from continuing operations were $0.02 per share. In 2013, Restructuring, exit and impairment charges from continuing operations were $0.04 per share, Loss on early extinguishment of debt was $0.32 per share and special tax items were a net provision of $0.02 per share.

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