Edgar Filing: BRUNSWICK CORP

BC 2012.09.29 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 29, 2012



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 1-1043

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 31, 2012 was 89,525,734.

BRUNSWICK CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 29, 2012

TABLE OF CONTENTS



PART I – FINANCIAL INFORMATION		Page

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 29, 2012 (unaudited), and October 1, 2011 (unaudited)	1

	Condensed Consolidated Balance Sheets as of September 29, 2012 (unaudited), December 31, 2011, and October 1, 2011 (unaudited)	2

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 2012 (unaudited), and October 1, 2011 (unaudited)	4

	Notes to Condensed Consolidated Financial Statements (unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4.	Controls and Procedures	47


PART II – OTHER INFORMATION

Item 1A.	Risk Factors	48

Item 6.	Exhibits	48

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 29, 2012			October 1, 2011			September 29, 2012			October 1, 2011
Net sales	$	884.8		$	876.7		$	2,926.0		$	2,958.9
Cost of sales	653.0			673.9			2,180.9			2,245.0
Selling, general and administrative expense	139.2			128.9			418.3			412.3
Research and development expense	26.9			25.1			77.5			72.9
Restructuring, exit and impairment charges	28.2			13.2			29.4			18.2
Operating earnings	37.5			35.6			219.9			210.5
Equity loss	(0.7		)	(0.2		)	(3.1		)	(0.4		)
Other income (expense), net	(0.5		)	(0.6		)	2.0			0.3
Earnings before interest, loss on early extinguishment of debt and income taxes	36.3			34.8			218.8			210.4
Interest expense	(16.8		)	(19.3		)	(52.8		)	(63.8		)
Interest income	0.5			0.9			2.2			2.6
Loss on early extinguishment of debt	(7.5		)	(11.7		)	(11.9		)	(16.9		)
Earnings before income taxes	12.5			4.7			156.3			132.3
Income tax provision	10.5			—			31.0			30.8
Net earnings	$	2.0		$	4.7		$	125.3		$	101.5

Earnings per common share:
Basic	$	0.02		$	0.05		$	1.40		$	1.14
Diluted	$	0.02		$	0.05		$	1.36		$	1.10

Weighted average shares used for computation of:
Basic earnings per common share	89.8			89.4			89.7			89.3
Diluted earnings per common share	92.5			91.8			92.3			92.3

Comprehensive income (loss)	$	23.1		$	(24.2	)	$	143.1		$	103.7

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

BRUNSWICK CORPORATION Condensed Consolidated Balance Sheets

(in millions)	September 29, 2012			December 31, 2011			October 1, 2011
	(unaudited)						(unaudited)
Assets
Current assets
Cash and cash equivalents, at cost, which approximates market	$	310.3		$	338.2		$	384.5
Short-term investments in marketable securities	97.5			76.7			74.1
Total cash, cash equivalents and short-term investments in marketable securities	407.8			414.9			458.6
Restricted cash	20.0			20.0			20.0
Accounts and notes receivable, less allowances of $29.1, $31.0 and $33.3	411.1			346.2			389.0
Inventories
Finished goods	323.2			292.0			282.7
Work-in-process	175.4			167.2			164.4
Raw materials	82.1			73.4			81.9
Net inventories	580.7			532.6			529.0
Deferred income taxes	15.0			14.8			8.8
Prepaid expenses and other	26.1			27.6			29.0
Current assets	1,460.7			1,356.1			1,434.4

Property
Land	81.5			83.6			85.0
Buildings and improvements	566.2			606.8			616.1
Equipment	1,001.4			1,055.1			1,058.5
Total land, buildings and improvements and equipment	1,649.1			1,745.5			1,759.6
Accumulated depreciation	(1,153.5		)	(1,229.0		)	(1,244.8		)
Net land, buildings and improvements and equipment	495.6			516.5			514.8
Unamortized product tooling costs	69.5			69.0			66.2
Net property	565.1			585.5			581.0

Other assets
Goodwill	291.4			290.3			291.0
Other intangibles, net	41.0			49.2			51.1
Long-term investments in marketable securities	47.6			92.9			88.1
Equity investments	42.3			47.7			53.9
Other long-term assets	59.8			72.3			78.3
Other assets	482.1			552.4			562.4

Total assets	$	2,507.9		$	2,494.0		$	2,577.8

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

BRUNSWICK CORPORATION Condensed Consolidated Balance Sheets

(in millions)	September 29, 2012			December 31, 2011			October 1, 2011
	(unaudited)						(unaudited)
Liabilities and shareholders’ equity
Current liabilities
Short-term debt, including current maturities of long-term debt	$	6.8		$	2.4		$	2.1
Accounts payable	337.2			282.0			302.0
Accrued expenses	564.0			623.7			598.5
Current liabilities	908.0			908.1			902.6

Long-term liabilities
Debt	590.9			690.4			701.2
Deferred income taxes	85.0			81.8			85.2
Postretirement benefits	540.0			592.6			505.6
Other	198.2			190.2			193.8
Long-term liabilities	1,414.1			1,555.0			1,485.8

Shareholders’ equity
Common stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares	76.9			76.9			76.9
Additional paid-in capital	439.4			434.6			432.0
Retained earnings	583.0			457.7			491.8
Treasury stock, at cost: 13,044,000, 13,434,000 and 13,459,000 shares	(390.5		)	(397.5		)	(398.0		)
Accumulated other comprehensive loss, net of tax	(523.0		)	(540.8		)	(413.3		)
Shareholders’ equity	185.8			30.9			189.4

Total liabilities and shareholders’ equity	$	2,507.9		$	2,494.0		$	2,577.8

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

BRUNSWICK CORPORATION Condensed Consolidated Statements of Cash Flows (unaudited)

	Nine Months Ended
(in millions)	September 29, 2012			October 1, 2011
Cash flows from operating activities
Net earnings	$	125.3		$	101.5
Depreciation and amortization	71.2			79.3
Pension funding, net of expense	(23.8		)	(18.3		)
Gains on sale of property, plant and equipment, net	(3.2		)	(9.8		)
Other long-lived asset impairment charges (gains)	23.0			(0.9		)
Deferred income taxes	8.3			14.2
Loss on early extinguishment of debt	11.9			16.9
Changes in certain current assets and current liabilities	(133.2		)	(130.1		)
Income taxes	7.0			4.7
Other, net	20.2			23.7
Net cash provided by operating activities	106.7			81.2

Cash flows from investing activities
Capital expenditures	(68.6		)	(57.9		)
Purchases of marketable securities	(157.4		)	(222.6		)
Sales or maturities of marketable securities	179.6			163.0
Transfers to restricted cash	—			(20.0		)
Investments	2.4			(0.9		)
Proceeds from the sale of property, plant and equipment	18.6			22.5
Other, net	3.0			13.2
Net cash used for investing activities	(22.4		)	(102.7		)

Cash flows from financing activities
Net issuances of short-term debt	0.8			0.1
Payments of long-term debt including current maturities	(103.2		)	(130.1		)
Net premium paid on early extinguishment of debt	(11.0		)	(14.9		)
Net proceeds from stock compensation activity, including excess tax benefits	1.2			4.1
Other, net	—			(4.6		)
Net cash used for financing activities	(112.2		)	(145.4		)

Net decrease in cash and cash equivalents	(27.9		)	(166.9		)
Cash and cash equivalents at beginning of period	338.2			551.4

Cash and cash equivalents at end of period	$	310.3		$	384.5

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

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 – Significant Accounting Policies

Interim Financial Statements. The unaudited interim 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.

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 2011 Annual Report on Form 10-K for the year ended December 31, 2011 (the 2011 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 29, 2012, December 31, 2011, and October 1, 2011, the results of operations for the three months and nine months ended September 29, 2012 and October 1, 2011, and the cash flows for the nine months ended September 29, 2012 and October 1, 2011. 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 and ending on the Saturday closest to the end of that thirteen-week period. The first three quarters of fiscal year 2012 ended on September 29, 2012, June 30, 2012 and March 31, 2012 and the first three quarters of fiscal year 2011 ended on October 1, 2011, July 2, 2011 and April 2, 2011.

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 (EITF), 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 29, 2012, or will be adopted in future periods.

Fair Value Measurements: In May 2011, the FASB amended the Accounting Standards Codification (ASC) to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards. The amendment is effective for the first interim or annual period beginning on or after December 15, 2011. The adoption of this amendment on January 1, 2012 did not have a material impact on the Company's consolidated results of operations and financial condition.

Comprehensive Income: In June 2011, the FASB amended the ASC to increase the prominence of the items reported in other comprehensive income. Specifically, the amendment to the ASC eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment must be applied retrospectively and is effective for fiscal years and the interim periods within those years, beginning after December 15, 2011. The Company disclosed comprehensive income on the Condensed Consolidated Statements of Comprehensive Income as a result of adopting this amendment.

Intangibles – Goodwill and Other: In September 2011, the FASB amended the ASC to simplify how entities test goodwill for impairment. The amendment to the ASC permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company elected to early adopt the ASC amendment in 2011 and was not required to perform the two-step goodwill impairment test.

In July 2012, the FASB amended the ASC to simplify how entities test indefinite-lived intangible assets for impairment. The amendment to the ASC permits entities to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If based on this assessment, the Company concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then performing the quantitative impairment test is unnecessary. The amendment is effective for annual and interim indefinite-lived intangible assets impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company will adopt this amendment in 2013 and does not expect a material impact on the Company's consolidated results of operations and financial condition.

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 2 – Restructuring Activities

In November 2006, Brunswick announced restructuring initiatives designed to improve the Company’s cost structure, better utilize overall capacity and improve general operating efficiencies. These initiatives, as well as restructuring activities initiated between 2007 and 2012, reflected the Company’s response to a difficult marine market, which continued to decline in certain markets and product categories through the third quarter of 2012. These initiatives have resulted in the recognition of restructuring, exit and impairment charges in the Condensed Consolidated Statements of Comprehensive Income during 2012 and 2011.

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 the use of appraisals from independent third parties, when available, and, when observable inputs were not available, based on the Company’s assumptions of the data that market participants would use in pricing the asset, based on the best 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.

Intangible assets not subject to amortization are assessed for impairment at least annually and whenever events or changes in circumstances, such as announcements of restructuring activities, indicate that the carrying value may not be recoverable. The impairment test for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset. The fair value of trade names is measured using a relief-from-royalty approach, which assumes the value of the trade name is the discounted cash flows of the amount that would be paid to third parties had the Company not owned the trade name and instead licensed the trade name from another company.

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 or incurred, as appropriate. The Company considers actions related to the divestiture of its Sealine boat business, the divestiture of its Triton fiberglass boat business, the closure of a marine electronics business and the sale of the Valley-Dynamo business to be exit activities. All other actions taken are considered to be restructuring activities.

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following table is a summary of the expense associated with the restructuring, exit and impairment activities for the three months and nine months ended September 29, 2012 and October 1, 2011. The 2012 charges consist of expenses related to actions initiated in 2012, 2010, 2009 and 2008. The 2011 charges consist of expenses related to actions initiated in 2011, 2010, 2009 and 2008:



	Three Months Ended					Nine Months Ended
(in millions)	September 29, 2012		October 1, 2011			September 29, 2012			October 1, 2011
Restructuring activities:
Employee termination and other benefits	$	0.9	$	1.3		$	0.8		$	2.9
Current asset write-downs	0.9		—			0.9			—
Transformation and other costs:
Consolidation of manufacturing footprint	1.4		3.5			5.1			11.3
Exit activities:
Transformation and other costs:
Consolidation of manufacturing footprint	—		9.8			(0.2		)	10.4
Asset disposition actions:
Trade name impairments	1.2		—			1.2			—
Definite-lived asset impairments and (gains) on disposal	23.8		(1.4		)	21.6			(6.4		)
Total restructuring, exit and impairment charges	$	28.2	$	13.2		$	29.4		$	18.2

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. The Company expects most of these charges will be incurred in the Boat and Marine Engine segments. Reductions in demand for the Company’s products, further refinement of its product portfolio or further opportunities to reduce costs, may result in additional restructuring, exit or impairment charges in future periods.

Actions Initiated in 2012

In connection with the preparation of the financial statements included in this Quarterly Report on Form 10-Q, the Company determined that it would record restructuring charges mainly due to continued weakness in the luxury sportfishing convertible, motoryacht and fiberglass sterndrive boat market segments as well as the refinement of its North American boat product portfolio. The Company recorded $13.8 million of impairment charges associated with its Hatteras and Cabo boat brands as the carrying value of their long-lived assets are not expected to be recovered through future cash flows. The Company also recorded $6.1 million of impairment charges associated with its decision to close its Knoxville, Tennessee production facility and $2.2 million of restructuring charges to consolidate fiberglass cruiser manufacturing and exit Bayliner cruisers in the U.S. and European markets. Long-lived asset impairment charges were also recorded in the third quarter of 2012 for certain European and Asia-Pacific boat brands as a result of weak powerboat demand in these regions.

The restructuring, exit and impairment charges recorded in the three months and nine months ended September 29, 2012, related to actions initiated in 2012, by reportable segment, are summarized below:



	Three Months Ended		Nine Months Ended
(in millions)	September 29, 2012		September 29, 2012
Boat	$	27.7	$	27.9
Fitness	0.1		0.1
Total	$	27.8	$	28.0

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 29, 2012		September 29, 2012
Restructuring activities:
Employee termination and other benefits	$	0.9	$	1.1
Current asset write-downs	0.9		0.9
Transformation and other costs:
Consolidation of manufacturing footprint	1.0		1.0
Asset disposition actions:
Trade name impairments	1.2		1.2
Definite-lived asset impairments	23.8		23.8
Total restructuring, exit and impairment charges	$	27.8	$	28.0

The restructuring charges related to actions initiated in 2012, by reportable segment, for the nine months ended September 29, 2012, are summarized below:



(in millions)	Boat		Fitness		Total
Employee termination and other benefits	$	1.0	$	0.1	$	1.1
Current asset write-downs	0.9		—		0.9
Transformation and other costs	1.0		—		1.0
Asset disposition actions	25.0		—		25.0
Total restructuring, exit and impairment charges	$	27.9	$	0.1	$	28.0

The following table summarizes the activity for restructuring, exit and impairment charges related to actions initiated in 2012 during the nine months ended September 29, 2012. The accrued costs as of September 29, 2012, represent cash expenditures needed to satisfy remaining obligations, the majority of which are expected to be paid by the end of 2013 and are included in Accrued expenses in the Condensed Consolidated Balance Sheets.



(in millions)	Costs Recognized in 2012		Non-cash Charges			Net Cash Payments			Accrued Costs as of Sept. 29, 2012
Employee termination and other benefits	$	1.1	$	—		$	(0.1	)	$	1.0
Current asset write-downs	0.9		(0.9		)	—			—
Transformation and other costs:
Consolidation of manufacturing footprint	1.0		(0.3		)	—			0.7
Asset disposition actions:
Trade name impairments	1.2		(1.2		)	—			—
Definite-lived asset impairments	23.8		(23.8		)	—			—
Total restructuring, exit and impairment charges	$	28.0	$	(26.2	)	$	(0.1	)	$	1.7

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

Actions Initiated in 2011 and 2010

There were no restructuring, exit and impairment charges recorded during 2012 for actions initiated during 2011. During 2011 and 2010, the Company continued its restructuring activities by disposing of non-strategic assets, consolidating manufacturing operations and reducing the Company’s global workforce. In the third quarter of 2011, the Company divested its Sealine boat brand. Results of operations of Sealine are not material for the periods presented. In the second quarter of 2010, the Company reached a decision to consolidate its Cabo Yachts production into its Hatteras facility in New Bern, North Carolina. Additionally, the Company finalized plans to divest its Triton fiberglass boat brand and completed an asset sale transaction in the third quarter of 2010. In the fourth quarter of 2010, the Company recognized exit charges related to the closure of a marine electronics business.

The restructuring, exit and impairment charges recorded in the three months and nine months ended September 29, 2012 and October 1, 2011, related to actions initiated in 2011 and 2010, by reportable segment, are summarized below:



	Three Months Ended				Nine Months Ended
(in millions)	September 29, 2012		October 1, 2011		September 29, 2012			October 1, 2011
Marine Engine	$	—	$	—	$	—		$	(0.2	)
Boat	—		9.0		(0.1		)	9.8
Fitness	—		—		—			0.1
Bowling & Billiards	—		0.1		—			0.1
Corporate	—		—		—			0.1
Total	$	—	$	9.1	$	(0.1	)	$	9.9

The following is a summary of the charges by category associated with the Company’s 2011 and 2010 restructuring initiatives:



	Three Months Ended					Nine Months Ended
(in millions)	September 29, 2012		October 1, 2011			September 29, 2012			October 1, 2011
Restructuring activities:
Employee termination and other benefits	$	—	$	0.1		$	—		$	0.1
Transformation and other costs:
Consolidation of manufacturing footprint	—		0.5			0.1			1.7
Exit activities:
Transformation and other costs:
Consolidation of manufacturing footprint	—		9.6			(0.2		)	10.2
Asset disposition actions:
Definite-lived asset gains on disposal	—		(1.1		)	—			(2.1		)
Total restructuring, exit and impairment charges	$	—	$	9.1		$	(0.1	)	$	9.9

The restructuring charges related to actions initiated in 2011 and 2010, by reportable segment, for the nine months ended September 29, 2012, are summarized below:



(in millions)	Boat			Total
Transformation and other costs	$	(0.1	)	$	(0.1	)
Total restructuring, exit and impairment charges	$	(0.1	)	$	(0.1	)

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

The restructuring charges related to actions initiated in 2011 and 2010, by reportable segment, for the nine months ended October 1, 2011, are summarized below:



(in millions)	Marine Engine			Boat			Fitness		Bowling & Billiards		Corporate		Total
Employee termination and other benefits	$	(0.2	)	$	0.1		$	—	$	0.1	$	0.1	$	0.1
Transformation and other costs	—			11.8			0.1		—		—		11.9
Asset disposition actions	—			(2.1		)	—		—		—		(2.1		)
Total restructuring, exit and impairment charges	$	(0.2	)	$	9.8		$	0.1	$	0.1	$	0.1	$	9.9

The following table summarizes the activity for restructuring, exit and impairment charges related to actions initiated in 2011 and 2010 during the nine months ended September 29, 2012. The accrued costs as of September 29, 2012, represent cash expenditures needed to satisfy remaining obligations, the majority of which are expected to be paid by the end of 2013 and are included in Accrued expenses in the Condensed Consolidated Balance Sheets.



(in millions)	Accrued Costs as of Jan. 1, 2012		Gains Recognized in 2012			Non-cash Gains		Net Cash Payments			Accrued Costs as of Sept. 29, 2012
Employee termination and other benefits	$	0.8	$	—		$	—	$	(0.1	)	$	0.7
Transformation and other costs:
Consolidation of manufacturing footprint	0.7		(0.1		)	0.3		(0.1		)	0.8
Retention and relocation costs	0.2		—			—		(0.2		)	—
Total restructuring, exit and impairment charges	$	1.7	$	(0.1	)	$	0.3	$	(0.4	)	$	1.5

Actions Initiated in 2009 and 2008

During the third quarter of 2009, the Company 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 plant transition was completed in the second quarter of 2012. The Company also continued to consolidate the Boat segment’s manufacturing footprint in 2009 and began marketing for sale certain previously closed boat production facilities in the fourth quarter of 2009. During 2008, the Company announced the closure of its boat production facilities in Cumberland, Maryland. These actions in the Company’s marine businesses were designed to provide long-term cost savings by reducing its fixed-cost structure.

The restructuring, exit and impairment charges recorded in the three months and nine months ended September 29, 2012 and October 1, 2011, related to actions initiated in 2009 and 2008, by reportable segment, are summarized below:



	Three Months Ended					Nine Months Ended
(in millions)	September 29, 2012		October 1, 2011			September 29, 2012			October 1, 2011
Marine Engine	$	0.4	$	4.2		$	3.0		$	8.4
Boat	—		(0.3		)	(1.3		)	(0.2		)
Bowling & Billiards	—		0.2			—			0.2
Corporate	—		—			(0.2		)	(0.1		)
Total	$	0.4	$	4.1		$	1.5		$	8.3

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following is a summary of the charges by category associated with the 2009 and 2008 restructuring activities recognized during the three months and nine months ended September 29, 2012 and October 1, 2011:



	Three Months Ended					Nine Months Ended
(in millions)	September 29, 2012		October 1, 2011			September 29, 2012			October 1, 2011
Restructuring activities:
Employee termination and other benefits	$	—	$	1.2		$	(0.3	)	$	2.8
Transformation and other costs:
Consolidation of manufacturing footprint	0.4		3.0			4.0			9.6
Exit activities:
Transformation and other adjustments:
Consolidation of manufacturing footprint	—		0.2			—			0.2
Asset disposition actions:
Definite-lived asset gains on disposal	—		(0.3		)	(2.2		)	(4.3		)
Total restructuring, exit and impairment charges	$	0.4	$	4.1		$	1.5		$	8.3

The restructuring charges related to actions initiated in 2009 and 2008, by reportable segment, for the nine months ended September 29, 2012, are summarized below:



(in millions)	Marine Engine			Boat			Corporate			Total
Employee termination and other benefits	$	(0.3	)	$	—		$	—		$	(0.3	)
Transformation and other costs	4.2			—			(0.2		)	4.0
Asset disposition actions	(0.9		)	(1.3		)	—			(2.2		)
Total restructuring, exit and impairment charges	$	3.0		$	(1.3	)	$	(0.2	)	$	1.5

The restructuring charges related to actions initiated in 2009 and 2008, by reportable segment, for the nine months ended October 1, 2011, are summarized below:



(in millions)	Marine Engine			Boat			Bowling & Billiards		Corporate			Total
Employee termination and other benefits	$	2.8		$	—		$	—	$	—		$	2.8
Transformation and other costs	9.7			—			0.2		(0.1		)	9.8
Asset disposition actions	(4.1		)	(0.2		)	—		—			(4.3		)
Total restructuring, exit and impairment charges	$	8.4		$	(0.2	)	$	0.2	$	(0.1	)	$	8.3

The following table summarizes the activity for restructuring, exit and impairment charges related to actions initiated in 2009 and 2008 during the nine months ended September 29, 2012. The accrued costs as of September 29, 2012, represent cash expenditures needed to satisfy remaining obligations, the majority of which are expected to be paid by the end of 2013 and are included in Accrued expenses in the Condensed Consolidated Balance Sheets.



(in millions)	Accrued Costs as of Jan. 1, 2012		Costs/(Gains) Recognized in 2012			Non-cash Gains		Net Cash Payments			Accrued Costs as of Sept. 29, 2012
Employee termination and other benefits	$	9.3	$	(0.3	)	$	—	$	(7.2	)	$	1.8
Transformation and other costs:
Consolidation of manufacturing footprint	2.4		4.0			—		(4.7		)	1.7
Asset disposition actions:
Definite-lived asset impairments and (gains) on disposal	—		(2.2		)	2.2		—			—
Total restructuring, exit and impairment charges	$	11.7	$	1.5		$	2.2	$	(11.9	)	$	3.5

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 3 – 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 29, 2012 and October 1, 2011. The fair market 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.

Fair Value Hedges. During 2012 and 2011, the Company entered into foreign currency forward contracts 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.

Cash Flow Hedges. The Company enters into certain derivative instruments that 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. In addition, 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 29, 2012, the term of derivative instruments hedging forecasted transactions ranged from one to 17 months.

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 include: product costs; revenues and expenses; associated receivables and payables; intercompany obligations and receivables; and other related cash flows.

Forward exchange contracts outstanding at September 29, 2012 and December 31, 2011 had notional contract values of $107.6 million and $112.1 million, respectively. Option contracts outstanding at September 29, 2012 and December 31, 2011, had notional contract values of $102.2 million and $106.8 million, respectively. The forward and options contracts outstanding at September 29, 2012 mature during 2012 and 2013 and mainly relate to the Euro, Canadian dollar, Japanese yen, Australian dollar, Mexican peso, British pound, New Zealand dollar, Norwegian krone, Swedish krona, and Hungarian forint. As of September 29, 2012, the Company estimates that during the next 12 months, it will reclassify approximately $1.7 million of net losses (based on current rates) from Accumulated other comprehensive loss to Cost of sales.

Interest Rate. The Company enters into forward starting interest rate swaps to hedge the interest rate risk associated with the anticipated refinancing in 2013 of the Company's senior notes due in 2016. Forward starting interest rate swaps outstanding at September 29, 2012 and December 31, 2011 had notional contract values of $100.0 million and $50.0 million, respectively.

As of September 29, 2012 and December 31, 2011, the Company had $3.9 million of net deferred losses and $0.5 million of net deferred gains, respectively, associated with all forward starting interest rate swaps, which were included in Accumulated other

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

comprehensive loss. These amounts include gains deferred on $250.0 million of notional value forward starting interest rate swaps terminated in July 2006, net of losses deferred on $150.0 million of forward starting swaps, which were terminated in August 2008, and losses deferred on $100.0 million of notional value forward starting swaps, which were outstanding at September 29, 2012. As of September 29, 2012, the Company estimates that during the next 12 months, it will reclassify approximately $0.9 million of net gains 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 29, 2012 and December 31, 2011 had notional contract values of $30.1 million and $27.1 million, respectively. The contracts outstanding mature through 2014. The amount of gain or loss associated with these instruments are deferred in Accumulated other comprehensive loss and are recognized in Cost of sales in the same period or periods during which the hedged transaction affects earnings. As of September 29, 2012, the Company estimates that during the next 12 months it will reclassify approximately $0.8 million in net losses (based on current prices) from Accumulated other comprehensive loss to Cost of sales.

As of September 29, 2012, 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
Foreign exchange contracts	Prepaid expenses and other	$	0.7	Accrued expenses	$	2.4
Commodity contracts	Prepaid expenses and other	0.8		Accrued expenses	1.5
Interest rate contracts	Prepaid expenses and other	—		Accrued expenses	6.1
Total		$	1.5		$	10.0

As of December 31, 2011, 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
Foreign exchange contracts	Prepaid expenses and other	$	3.9	Accrued expenses	$	1.5
Commodity contracts	Prepaid expenses and other	—		Accrued expenses	4.1
Interest rate contracts	Prepaid expenses and other	—		Accrued expenses	2.4
Total		$	3.9		$	8.0

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 29, 2012 was:



(in millions)
Fair Value Hedging Instruments	Location of (Loss) on Derivatives Recognized in Earnings	Amount of (Loss) on Derivatives Recognized in Earnings
Foreign exchange contracts	Cost of sales	$	(0.4	)
Foreign exchange contracts	Other income (expense), net	(0.2		)
Total		$	(0.6	)



Cash Flow Hedge 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	$	(0.8	)	Interest expense	$	0.2
Foreign exchange contracts	(2.7		)	Cost of sales	0.6
Commodity contracts	3.0			Cost of sales	(1.4		)
Total	$	(0.5	)		$	(0.6	)

The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the nine months ended September 29, 2012 was:



(in millions)
Fair Value Hedging Instruments	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
Foreign exchange contracts	Other income (expense), net	(0.2		)
Total		$	0.7



Cash Flow Hedge 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	$	(3.7	)	Interest expense	$	0.7
Foreign exchange contracts	(4.2		)	Cost of sales	0.4
Commodity contracts	0.1			Cost of sales	(3.5		)
Total	$	(7.8	)		$	(2.4	)

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 October 1, 2011 was:



(in millions)
Fair Value Hedging Instruments	Location of Gain (Loss) on Derivatives Recognized in Earnings	Amount of Gain (Loss) on Derivatives Recognized in Earnings
Foreign exchange contracts	Cost of sales	$	1.2
Foreign exchange contracts	Other income (expense), net	0.2
Total		$	1.4



Cash Flow Hedge 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	$	(2.5	)	Interest expense	$	0.2
Foreign exchange contracts	3.9			Cost of sales	(3.3		)
Commodity contracts	(2.5		)	Cost of sales	0.9
Total	$	(1.1	)		$	(2.2	)

The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the nine months ended October 1, 2011 was:



(in millions)
Fair Value Hedging Instruments	Location of Gain (Loss) on Derivatives Recognized in Earnings	Amount of Gain (Loss) on Derivatives Recognized in Earnings
Foreign exchange contracts	Cost of sales	$	(1.1	)
Foreign exchange contracts	Other income (expense), net	0.1
Total		$	(1.0	)



Cash Flow Hedge 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	$	(2.5	)	Interest expense	$	0.7
Foreign exchange contracts	(2.8		)	Cost of sales	(9.4		)
Commodity contracts	(1.3		)	Cost of sales	2.8
Total	$	(6.6	)		$	(5.9	)

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 8 – 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 29, 2012, the fair value of the Company’s long-term debt was approximately $636.7 million and was determined using Level 1 and Level 2 inputs described in

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 4 – Fair Value Measurements, including quoted market prices or discounted cash flows based on quoted market rates for similar types of debt. The carrying value of long-term debt, including current maturities, was $595.9 million as of September 29, 2012.

Note 4 – 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 29, 2012:



(in millions)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	166.7	$	—	$	—	$	166.7
Short-term investments in marketable securities	0.8		96.7		—		97.5
Long-term investments in marketable securities	47.6		—		—		47.6
Restricted cash	20.0		—		—		20.0
Equity investments	0.9		—		—		0.9
Derivatives	—		1.5		—		1.5
Total assets	$	236.0	$	98.2	$	—	$	334.2

Liabilities:
Derivatives	$	—	$	10.0	$	—	$	10.0
Total liabilities	$	—	$	10.0	$	—	$	10.0

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, 2011:



(in millions)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	135.2	$	—	$	—	$	135.2
Short-term investments in marketable securities	5.5		71.2		—		76.7
Long-term investments in marketable securities	92.9		—		—		92.9
Restricted Cash	20.0		—		—		20.0
Equity investments	0.7		—		—		0.7
Derivatives	—		3.9		—		3.9
Total assets	$	254.3	$	75.1	$	—	$	329.4

Liabilities:
Derivatives	$	—	$	8.0	$	—	$	8.0
Total liabilities	$	—	$	8.0	$	—	$	8.0

Refer to Note 3 – Financial Instruments for additional information related to the fair value of derivative assets and liabilities by class. In addition to the items shown in the table above, refer to Note 15 in the Company’s 2011 Form 10-K for further discussion regarding the fair value measurements associated with the Company’s postretirement benefit plans.

During the three months and nine months ended September 29, 2012 and October 1, 2011, the Company undertook various restructuring activities, as discussed in Note 2 – Restructuring Activities. The restructuring activities required 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. Other than the assets measured at fair value on a recurring basis, as shown in the table above, the definite-lived asset balances shown in the Condensed Consolidated Balance Sheets that were measured at fair value on a non-recurring basis were $28.3 million, of which $22.8 million, $4.7 million and $0.8 million were measured as of September 29, 2012, December 31, 2011 and July 2, 2011, respectively. Those balances were primarily determined with the market approach using Level 2 inputs, including third-party appraisals of comparable property.

Note 5 – Share-Based Compensation

Under the 2003 Stock Incentive Plan (Plan), the Company may grant stock options, stock appreciation rights (SARs), non-vested stock and other types of share-based awards to executives and other management employees. Under the Plan, the Company may issue up to 13.1 million shares from treasury shares and from authorized, but unissued, shares of common stock. As of September 29, 2012, 2.2 million shares were available for grant.

SARs

Since the beginning of 2005, the Company has issued stock-settled SARs and has not issued any stock options. During the three months and nine months ended September 29, 2012, the Company granted 0.0 million and 0.4 million SARs, respectively. During the three months and nine months ended October 1, 2011, the Company granted 0.2 million and 1.1 million SARs, respectively. In the three months and nine months ended September 29, 2012, there was $1.7 million and $5.2 million, respectively, of total expense after adjusting for forfeitures due to amortization of SARs granted. In the three months and nine months ended October 1, 2011, there was $2.9 million and $9.0 million, respectively, of total expense after adjusting for forfeitures due to amortization of SARs granted.

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

The weighted average fair values of individual SARs granted during the first three quarters of 2012 and 2011 were $12.70 and $10.60, respectively. The Company estimated the fair value of each grant on the date of grant using the Black-Scholes-Merton pricing model, utilizing the following weighted average assumptions for 2012 and 2011:



	2012		2011
Risk-free interest rate	1.1	%	2.5	%
Dividend yield	0.2	%	0.2	%
Volatility factor	58.3	%	53.7	%
Weighted average expected life	5.2 – 6.7 years		5.2 – 6.7 years

Non-Vested Stock Awards

During the three months and nine months ended September 29, 2012, the Company granted 0.0 million and 0.3 million stock awards, respectively. The Company granted 0.0 million and 0.2 million of stock awards during the three months and nine months ended October 1, 2011, respectively. The Company recognizes the cost of non-vested stock awards on a straight-line basis over the requisite service period. During the three months and nine months ended September 29, 2012, $1.6 million and $4.3 million, respectively, was charged to compensation expense from the amortization of outstanding grants. During the three months and nine months ended October 1, 2011, $0.8 million and $2.6 million, respectively, was charged to compensation expense from the amortization of outstanding grants.

As of September 29, 2012, there was $5.1 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.1 years.

Performance Awards

In February 2012, the Company granted performance shares to certain senior executives. The share awards are based on two performance measures - a cash flow return on investment (CFROI) measure and a total shareholder return (TSR) modifier. Target performance shares are earned during the one-year CFROI performance period, commencing January 1, 2012, and ending December 31, 2012. The target performance shares earned from CFROI performance are then subject to a TSR modifier based on performance against a predefined comparator group over the three-year performance period. Based upon current projections of probable attainment of the CFROI measure and the projected TSR modifier, $0.6 million and $1.7 million was charged to compensation expense for the three months and nine months ended September 29, 2012, respectively.

The grant date fair value of the performance awards was $26.81, which was estimated using the Monte Carlo valuation model, and incorporated the following assumptions:



	2012
Risk-free interest rate	0.4	%
Dividend yield	0.2	%
Volatility factor	67.9	%
Expected life of award	2.9 years

As of September 29, 2012, there was $1.1 million of total unrecognized compensation cost related to performance awards granted under the Plan. That cost is expected to be recognized over a weighted average period of 0.9 years.

Director Awards

The Company issues stock awards to directors in accordance with the terms and conditions determined by the Nominating and Corporate Governance Committee of the Board of Directors. One-half of each director’s annual fee is paid in Brunswick common stock, the receipt of which may be deferred until a director retires from the Board of Directors. Each director may elect to have the remaining one-half paid in cash, in Brunswick common stock distributed at the time of the award, or in deferred Brunswick common stock units with a 20 percent premium. Prior to May 2009, each non-employee director also received an annual grant of restricted stock units, which is deferred until the director retires from the Board.

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 6 – Earnings per Common Share

Basic earnings per common share is calculated by dividing Net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated similarly, except that the calculation includes the dilutive effect of SARs and stock options (collectively “options”), non-vested stock awards and performance awards.

Basic and diluted earnings per common share for the three months and nine months ended September 29, 2012, and for the comparable periods ended October 1, 2011, were calculated as follows:



	Three Months Ended				Nine Months Ended
(in millions, except per share data)	September 29, 2012		October 1, 2011		September 29, 2012		October 1, 2011
Net earnings	$	2.0	$	4.7	$	125.3	$	101.5

Weighted average outstanding shares – basic	89.8		89.4		89.7		89.3
Dilutive effect of common stock equivalents	2.7		2.4		2.6		3.0
Weighted average outstanding shares – diluted	92.5		91.8		92.3		92.3

Basic earnings per common share	$	0.02	$	0.05	$	1.40	$	1.14

Diluted earnings per common share	$	0.02	$	0.05	$	1.36	$	1.10

As of September 29, 2012, the Company had 8.4 million options outstanding, of which 5.7 million were exercisable. This compares with 9.4 million options outstanding, of which 4.8 million were exercisable, as of October 1, 2011. During the three months and nine months ended September 29, 2012, there were 2.2 million and 2.3 million weighted average shares of options outstanding, respectively, for which the exercise price, based on the average price, was greater than the average market price of the Company’s shares for the period then ended. These options were not included in the computation of diluted earnings per common share because the effect would have been anti-dilutive. This compares to 4.7 million and 2.9 million anti-dilutive weighted average shares of options outstanding that were excluded from the corresponding periods ended October 1, 2011.

Note 7 – Commitments and Contingencies

Financial Commitments

The Company has entered into guarantees of indebtedness of third parties, primarily in connection with customer financing programs. Under these arrangements, the Company has guaranteed customer obligations to the financial institutions in the event of customer default, generally subject to a maximum amount that is less than total obligations outstanding. The Company has also extended guarantees to third parties that have purchased customer receivables from Brunswick and, in certain instances, has guaranteed secured term financing of its customers. Potential payments in connection with these customer financing arrangements generally extend over several years. The potential cash obligations associated with these customer financing arrangements as of September 29, 2012 and October 1, 2011 were:



	Single Year Obligation				Maximum Obligation
(in millions)	September 29, 2012		October 1, 2011		September 29, 2012		October 1, 2011
Marine Engine	$	4.1	$	6.2	$	4.1	$	6.2
Boat	2.5		2.3		2.5		2.3
Fitness	26.9		36.4		31.5		42.0
Bowling & Billiards	1.2		2.9		2.0		5.3
Total	$	34.7	$	47.8	$	40.1	$	55.8

In most instances, upon repurchase of the debt obligation, the Company receives rights to the collateral securing the financing. The Company’s risk under these arrangements is partially mitigated by the value of the collateral that secures the financing. The Company had $2.7 million and $5.0 million accrued for potential losses related to recourse exposure at September 29, 2012 and October 1, 2011, respectively.

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Company has also entered into arrangements with third-party lenders where it has agreed, in the event of a default by the customer, to repurchase from the third-party lender those Brunswick products repossessed from the customer. These arrangements are typically subject to a maximum repurchase amount. The potential cash payments the Company could be required to make to repurchase collateral as of September 29, 2012 and October 1, 2011 were:



	Single Year Obligation				Maximum Obligation
(in millions)	September 29, 2012		October 1, 2011		September 29, 2012		October 1, 2011
Marine Engine	$	1.5	$	1.6	$	1.5	$	1.6
Boat	81.0		85.5		101.0		105.5
Bowling & Billiards	—		0.1		—		0.1
Total	$	82.5	$	87.2	$	102.5	$	107.2

The Company’s risk under these repurchase arrangements is partially mitigated by the value of the products repurchased as part of the transaction. The Company had $2.1 million and $1.7 million accrued for potential losses related to repurchase exposure at September 29, 2012 and October 1, 2011, respectively. The Company’s repurchase accrual represents the expected losses resulting from obligations to repurchase products, after giving effect to proceeds anticipated to be received from the resale of those products to alternative dealers.

The Company has recorded its estimated net liability associated with losses from these guarantee and repurchase obligations on its Condensed Consolidated Balance Sheets based on historical experience and current facts and circumstances. Historical cash requirements and losses associated with these obligations have not been significant, but could increase if dealer defaults exceed current expectations.

The Company has accounts receivable sale arrangements with third parties which are included in the guarantee arrangements discussed above. The Company treats the sale of receivables in which the Company retains an interest as a secured obligation as these arrangements do not meet the requirements of a “true sale.” Accordingly, the current portion of these arrangements of $39.2 million and $45.0 million was recorded in Accounts and notes receivable and Accrued expenses as of September 29, 2012 and December 31, 2011, respectively. Further, the long-term portion of these arrangements of $23.9 million and $33.2 million as of September 29, 2012 and December 31, 2011, respectively, was recorded in Other long-term assets and Other long-term liabilities.

Financial institutions have issued standby letters of credit and surety bonds conditionally guaranteeing obligations on behalf of the Company totaling $44.9 million as of September 29, 2012. A large portion of these standby letters of credit and surety bonds are related to the Company’s self-insured workers’ compensation program as required by its insurance companies and various state agencies. The Company has recorded reserves to cover liabilities associated with these programs. Under certain circumstances, such as an event of default under the Company’s revolving credit facility, or, in the case of surety bonds, a ratings downgrade below investment grade, the Company could be required to post collateral to support the outstanding letters of credit and surety bonds. As the Company’s current long-term debt ratings are below investment grade, the Company has posted letters of credit totaling $6.2 million as collateral against $19.0 million of outstanding surety bonds as of September 29, 2012.

During the third quarter of 2011, the Company entered into a collateral trust arrangement with an insurance carrier and a trustee bank. The trust is owned by the Company, but the assets are pledged as collateral against workers’ compensation related obligations. In connection with this arrangement, the Company transferred $20.0 million of cash into the trust, and canceled an equal amount of letters of credit which had been previously provided as collateral against these obligations. The cash assets included in the trust are classified as Restricted cash on the Company’s Condensed Consolidated Balance Sheet.

Product Warranties

The Company records a liability for product warranties at the time revenue is recognized. The liability is estimated using historical warranty experience, projected claim rates and expected costs per claim. The Company adjusts its liability for specific warranty matters when they become known and the exposure can be estimated. The Company’s warranty reserves are affected by product failure rates as well as material usage and labor costs incurred in correcting a product failure. If actual costs differ from estimated costs, the Company must make a revision to the warranty reserve.

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following activity related to product warranty liabilities was recorded in Accrued expenses during the nine months ended September 29, 2012 and October 1, 2011:



	Nine Months Ended
(in millions)	September 29, 2012			October 1, 2011
Balance at beginning of period	$	133.2		$	151.3
Payments made	(56.6		)	(63.7		)
Provisions/additions for contracts issued/sold	48.5			51.8
Aggregate changes for preexisting warranties	(2.2		)	(0.6		)
Warranty liability assumed from joint venture	7.4			—
Balance at end of period	$	130.3		$	138.8

In the second quarter of 2012, the Company assumed its share of the warranty liability from Cummins MerCruiser Diesel Marine LLC, the joint venture between Brunswick’s Mercury Marine division and Cummins Marine, a division of Cummins Inc., in connection with the dissolution of the joint venture as discussed in Note 10 – Investments.

Additionally, customers in the Company's Marine Engine, Boat and Fitness segments may purchase a contract from the Company that extends product warranty beyond the standard period. For certain extended warranty contracts in which the Company retains the warranty or administration obligation, a deferred liability is recorded based on the aggregate sales price for contracts sold. The deferred liability is reduced and revenue is recognized over the contract period during which costs are expected to be incurred. Deferred revenue associated with contracts sold by the Company that extend product protection beyond the standard product warranty period, not included in the table above, was $47.9 million and $41.4 million at September 29, 2012 and December 31, 2011, respectively, and is recorded in Accrued expenses and Other long-term liabilities.

Legal and Environmental

The Company accrues for litigation exposure based upon its assessment, made in consultation with counsel, of the likely range of exposure stemming from the claim. Management does not expect, in light of existing reserves, that the Company’s litigation claims, when finally resolved, will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. If current estimates for the cost of resolving any claims are later determined to be inadequate, results of operations could be adversely affected in the period in which additional provisions are required.

Aside from the discussion set forth under Part II, Item 1 "Legal Proceedings" of the Quarterly Report on Form 10-Q for the period ended March 31, 2012, there were no significant changes to the legal and environmental commitments that were discussed in Note 11 to the consolidated financial statements in the 2011 Form 10-K.

Note 8 – Financing Receivables

The Company has recorded financing receivables, which are defined as a contractual right to receive money, recognized as assets on its Condensed Consolidated Balance Sheets as of September 29, 2012, December 31, 2011 and October 1, 2011. Substantially all of the Company’s financing receivables are for commercial customers. The Company classifies its financing receivables into three categories: receivables repurchased under recourse provisions (Recourse Receivables); receivables sold to third-party finance companies (Third-Party Receivables) and customer notes and other (Other Receivables). Recourse Receivables are the result of the contingent recourse arrangements discussed in Note 7 – Commitments and Contingencies. Third-Party Receivables are accounts that have been sold to third-party finance companies, but do not meet the definition of a true sale, and are therefore recorded as an asset with an offsetting balance recorded as a secured obligation in Accrued expenses and Other long-term liabilities as discussed in Note 7 – Commitments and Contingencies. Other Receivables are mostly comprised of notes from customers, which are originated by the Company in the normal course of business. Financing receivables are carried at their face amounts less an allowance for doubtful accounts.

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. Due to the composition of the account portfolio, the Company does not believe that the credit risk posed by the Company’s financing receivables is significant to its operations or financial position. There were no significant troubled debt restructurings during the three months or nine months ended September 29, 2012.

BRUNSWICK CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following are the Company’s financing receivables, excluding trade accounts receivable contractually due within one year, by segment as of September 29, 2012:

(in millions)

Marine

Engine

Boat