Document
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, 2018
 or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     

Commission file number 001-01043
____________
 smallhiresa92.jpg
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.)

26125 N. Riverwoods Blvd., Suite 500, Mettawa, Illinois 60045-3420
 
(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 every Interactive Data File required to be submitted 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 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  
Smaller reporting company
o
 
 
 
 
Emerging growth company
o
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
The number of shares of Common Stock ($0.75 par value) of the registrant outstanding as of October 29, 2018 was 86,740,007.




BRUNSWICK CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 29, 2018
 
 
TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

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,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net sales
$
1,298.0

 
$
1,141.5

 
$
3,910.3

 
$
3,653.8

Cost of sales
953.1

 
827.1

 
2,905.7

 
2,668.3

Selling, general and administrative expense
199.6

 
157.9

 
531.9

 
472.5

Research and development expense
36.3

 
35.5

 
113.3

 
108.6

Restructuring, exit, integration and impairment charges
17.7

 
6.8

 
56.3

 
27.7

Operating earnings
91.3

 
114.2

 
303.1

 
376.7

Equity earnings
1.6

 
1.5

 
4.0

 
5.2

Other expense, net
(0.8
)
 
(1.0
)
 
(3.3
)
 
(1.4
)
Earnings before interest and income taxes
92.1

 
114.7

 
303.8

 
380.5

Interest expense
(13.1
)
 
(6.6
)
 
(28.0
)
 
(19.9
)
Interest income
1.0

 
0.9

 
2.3

 
1.8

Transaction financing charges
(5.1
)
 
—

 
(5.1
)
 
—

Earnings before income taxes
74.9

 
109.0

 
273.0

 
362.4

Income tax provision
4.9

 
30.0

 
51.1

 
99.1

Net earnings
$
70.0

 
$
79.0

 
$
221.9

 
$
263.3

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 

 
 

Basic
$
0.80

 
$
0.89

 
$
2.53

 
$
2.94

Diluted
$
0.80

 
$
0.88

 
$
2.51

 
$
2.91

 
 
 
 
 
 
 
 
Weighted average shares used for computation of:
 
 
 
 
 

 
 

Basic earnings per common share
87.3

 
89.1

 
87.7

 
89.7

Diluted earnings per common share
87.9

 
89.8

 
88.3

 
90.5

 
 
 
 
 
 
 
 
Comprehensive income
$
72.5

 
$
90.7

 
$
225.0

 
$
285.9

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.19

 
$
0.165

 
$
0.57

 
$
0.495

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



3
Table of Contents

BRUNSWICK CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
(in millions)
September 29,
2018
 
December 31,
2017
 
September 30,
2017
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents, at cost, which approximates fair value
$
302.4

 
$
448.8

 
$
391.1

Restricted cash
9.5

 
9.4

 
10.7

Short-term investments in marketable securities
0.8

 
0.8

 
0.8

Total cash and short-term investments in marketable securities
312.7

 
459.0

 
402.6

Accounts and notes receivable, less allowances of $10.1, $9.2 and $10.2
577.8

 
485.3

 
476.4

Inventories
 
 
 
 
 
Finished goods
579.2

 
521.3

 
530.5

Work-in-process
106.9

 
119.3

 
126.7

Raw materials
212.7

 
187.1

 
191.4

Net inventories
898.8

 
827.7

 
848.6

Prepaid expenses and other
76.9

 
74.7

 
49.1

Current assets
1,866.2

 
1,846.7

 
1,776.7

 
 
 
 
 
 
Property
 

 
 

 
 

Land
24.0

 
25.1

 
25.0

Buildings and improvements
446.2

 
412.8

 
414.6

Equipment
1,072.5

 
1,027.7

 
1,008.9

Total land, buildings and improvements and equipment
1,542.7

 
1,465.6

 
1,448.5

Accumulated depreciation
(944.1
)
 
(895.8
)
 
(888.4
)
Net land, buildings and improvements and equipment
598.6

 
569.8

 
560.1

Unamortized product tooling costs
132.0

 
136.2

 
146.3

Net property
730.6

 
706.0

 
706.4

 
 
 
 
 
 
Other assets
 

 
 

 
 

Goodwill
768.4

 
425.3

 
426.3

Other intangibles, net
670.3

 
149.1

 
165.5

Equity investments
26.4

 
25.1

 
21.7

Deferred income tax asset
99.9

 
165.6

 
256.1

Other long-term assets
49.1

 
40.4

 
46.5

Other assets
1,614.1

 
805.5

 
916.1

 
 
 
 
 
 
Total assets
$
4,210.9

 
$
3,358.2

 
$
3,399.2

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

4
Table of Contents

BRUNSWICK CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)

(in millions)
September 29,
2018
 
December 31,
2017
 
September 30,
2017
Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Short-term debt and current maturities of long-term debt
$
338.8

 
$
5.6

 
$
4.2

Accounts payable
477.2

 
420.5

 
397.3

Accrued expenses
668.6

 
609.0

 
578.6

Current liabilities
1,484.6

 
1,035.1

 
980.1

 
 
 
 
 
 
Long-term liabilities
 

 
 

 
 

Debt
891.0

 
431.8

 
437.6

Postretirement benefits
75.5

 
220.8

 
226.5

Other
201.7

 
187.6

 
184.9

Long-term liabilities
1,168.2

 
840.2

 
849.0

 
 
 
 
 
 
Shareholders’ equity
 

 
 

 
 

Common stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares; outstanding: 86,740,000, 87,537,000 and 87,687,000 shares
76.9

 
76.9

 
76.9

Additional paid-in capital
365.9

 
374.4

 
371.5

Retained earnings
2,110.5

 
1,966.8

 
2,100.2

Treasury stock, at cost: 15,798,000, 15,001,000 and 14,851,000 shares
(638.5
)
 
(575.4
)
 
(566.5
)
Accumulated other comprehensive loss, net of tax
(356.7
)
 
(359.8
)
 
(412.0
)
Shareholders’ equity
1,558.1

 
1,482.9

 
1,570.1

 
 
 
 
 
 
Total liabilities and shareholders’ equity
$
4,210.9

 
$
3,358.2

 
$
3,399.2

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

5
Table of Contents

BRUNSWICK CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
Nine Months Ended
(in millions)
September 29,
2018
 
September 30,
2017
Cash flows from operating activities
 
 
 
Net earnings
$
221.9

 
$
263.3

Stock compensation expense
13.2

 
14.4

Depreciation and amortization
104.8

 
83.2

Pension (funding), net of expense
(157.0
)
 
(51.0
)
Asset impairment charges
41.2

 
9.8

Deferred income taxes
28.4

 
50.0

Changes in certain current assets and current liabilities
(56.6
)
 
(100.6
)
Long-term extended warranty contracts and other deferred revenue
12.2

 
12.8

Fitness business separation costs
12.9

 
—

Cash paid for Fitness business separation costs
(6.8
)
 
—

Income taxes
17.1

 
(16.5
)
Other, net
2.7

 
(10.3
)
Net cash provided by operating activities of continuing operations
234.0

 
255.1

Net cash used for operating activities of discontinued operations
—

 
(0.3
)
Net cash provided by operating activities
234.0

 
254.8

 
 
 
 
Cash flows from investing activities
 

 
 

Capital expenditures
(124.8
)
 
(153.4
)
Sales or maturities of marketable securities
—

 
35.0

Investments
(2.2
)
 
4.5

Acquisition of businesses, net of cash acquired
(910.0
)
 
(15.5
)
Proceeds from the sale of property, plant and equipment
6.5

 
8.0

Other, net
(0.2
)
 
(0.5
)
Net cash used for investing activities
(1,030.7
)
 
(121.9
)
 
 
 
 
Cash flows from financing activities
 

 
 

Net proceeds from issuances of short-term debt
298.9

 
—

Net proceeds from issuances of long-term debt
497.7

 
—

Payments of long-term debt including current maturities
(0.7
)
 
(1.3
)
Common stock repurchases
(75.0
)
 
(120.0
)
Cash dividends paid
(49.6
)
 
(44.0
)
Proceeds from share-based compensation activity
1.4

 
6.1

Tax withholding associated with shares issued for share-based compensation
(12.5
)
 
(14.5
)
Other, net
(6.2
)
 
—

Net cash provided by (used for) financing activities
654.0

 
(173.7
)
 
 
 
 
Effect of exchange rate changes
(3.6
)
 
9.0

Net decrease in Cash and cash equivalents and Restricted cash
(146.3
)
 
(31.8
)
Cash and cash equivalents and Restricted cash at beginning of period
458.2

 
433.6

 
 
 
 
Cash and cash equivalents and Restricted cash at end of period
311.9

 
401.8

     Less: Restricted cash
9.5

 
10.7

Cash and cash equivalents at end of period
$
302.4

 
$
391.1

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

 
 
 

6
Table of Contents

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

Interim Financial Statements. The unaudited interim condensed consolidated financial statements of Brunswick Corporation (Brunswick or the Company) have been prepared pursuant to Securities and Exchange Commission (SEC) rules and regulations. 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 2017 Annual Report on Form 10-K for the year ended December 31, 2017 (the 2017 Form 10-K). These results include, in management's opinion, all normal and recurring adjustments necessary to present fairly Brunswick's financial position, results of operations and cash flows. 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 approximately thirteen weeks. The first quarter ends on the Saturday closest to the end of the first thirteen-week period. The second and third quarters are thirteen weeks in duration and the fourth quarter is the remainder of the year. The third quarter of fiscal year 2018 ended on September 29, 2018 and the third quarter of fiscal year 2017 ended on September 30, 2017.

As a result of the Company's June 25, 2018 announcement ending the sale process for its Sea Ray business, starting in the second quarter of 2018, the results of the Sea Ray business are reported in continuing operations. Refer to the Form 8-K dated July 19, 2018 and Note 3 – Discontinued Operations in the Notes to Condensed Consolidated Financial Statements for further information.

On March 1, 2018, the Company announced that its Board of Directors authorized proceeding with a spin-off of its Fitness
business. Following the proposed transaction, the Fitness business will be an independent, standalone, publicly-traded company, which will be formally named at a later date. The proposed transaction is anticipated to be tax-free to Brunswick shareholders and is expected to be completed in the first quarter of 2019, or as promptly thereafter as practicable. The Company is also evaluating other separation options, including a sale of the business.

Recently Adopted Accounting Standards

Presentation of Benefit Costs: In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which amended the Accounting Standards Codification (ASC) related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The amendment requires entities to present the current-service-cost component with other current compensation costs in the income statement within income from operations and present the other components outside of income from operations. The Company adopted this amendment retrospectively during the first quarter of 2018. As a result, $1.1 million and $1.4 million were reclassified from Cost of sales and Selling, general and administrative expense, respectively, to Other income (expense), net for the three months ended September 30, 2017. The Company reclassified $3.2 million and $4.2 million from Cost of sales and Selling, general and administrative expense, respectively, to Other income (expense), net for the nine months ended September 30, 2017. The Company elected to apply the practical expedient that permits the use of previously disclosed service cost and other costs from the prior year postretirement benefits footnote in the comparative periods as appropriate estimates when retrospectively changing the presentation of these costs.

Statement of Cash Flows Classifications: In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which amended the ASC to add and/or clarify guidance on the classification of certain transactions in the statement of cash flows. The Company adopted this amendment during the first quarter of 2018. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

Revenue Recognition: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (new revenue standard), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. On January 1, 2018, the Company adopted the new revenue standard and all related amendments for all contracts using the modified retrospective method. The Company did not elect to separately evaluate contract modifications occurring before the

7
Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    

adoption date. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the January 1, 2018 balance of retained earnings. Prior period information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The Company recognizes revenue in accordance with the terms of sale, primarily upon shipment to customers. Under the new revenue standard, estimated costs associated with retail sales promotions anticipated to be offered to customers within the Company's Boat segment are recognized at the time of sale, whereas under previous guidance, these promotions were recorded at the later of when the program was communicated to the customer or the time of sale. In addition, certain Fitness segment customer contracts offer incentives in the form of rebates settled with free product. These rebates are deemed to be separate performance obligations under the new revenue standard, and the revenue associated with the product rebates is deferred and recognized upon customer redemption. Under previous guidance, these product rebates were recorded in Cost of sales at the time of product sale. These impacts result in a change in the timing of when certain promotions and rebates are recorded, however, the total amount of cumulative revenue recognized over the life of the contract remains unchanged.
The cumulative effect of the changes made to the Company's Condensed Consolidated Balance Sheets as of January 1, 2018 for the adoption of the new revenue standard was as follows:
(in millions)
Balance as of December 31, 2017
 
Adjustments Due to ASC 606
 
Balance as of January 1, 2018
Assets
 
 
 
 
 
Accounts and notes receivable
$
485.3

 
$
1.2

 
$
486.5

Deferred income tax asset
165.6

 
9.3

 
174.9

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Accrued expenses
609.0

 
39.1

 
648.1

 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
Retained earnings
1,966.8

 
(28.6
)
 
1,938.2

The impact to the Company's Condensed Consolidated Statements of Comprehensive Income and Condensed Consolidated Balance Sheets as of and for the three and nine months ended September 29, 2018 as a result of applying the new revenue standard was as follows:
 
Three Months Ended September 29, 2018
(in millions)
As Reported
 
Effect of Change
 
Balances without adoption of ASC 606
Net sales
$
1,298.0

 
$
(15.7
)
 
$
1,282.3

Cost of sales
953.1

 
(6.2
)
 
946.9

 
 
 
 
 
 
Earnings before income taxes
74.9

 
(9.5
)
 
65.4

Income tax provision
4.9

 
(1.7
)
 
3.2

Net earnings
$
70.0

 
$
(7.8
)
 
$
62.2



8
Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    

 
Nine Months Ended September 29, 2018
(in millions)
As Reported
 
Effect of Change
 
Balances without adoption of ASC 606
Net sales
$
3,910.3

 
$
(10.8
)
 
$
3,899.5

Cost of sales
2,905.7

 
(6.2
)
 
2,899.5

 
 
 
 
 
 
   Earnings before income taxes
273.0

 
(4.6
)
 
268.4

Income tax provision
51.1

 
(0.9
)
 
50.2

Net earnings
$
221.9

 
$
(3.7
)
 
$
218.2

 
As of September 29, 2018
 
As Reported
 
Effect of Change
 
Balances without adoption of ASC 606
Assets
 
 
 
 
 
Accounts and notes receivable
$
577.8

 
$
(1.2
)
 
$
576.6

Deferred income tax asset
99.9

 
(8.1
)
 
91.8

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Accrued expenses
668.6

 
(34.5
)
 
634.1

 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
Retained earnings
2,110.5

 
25.2

 
2,135.7

Revenue is recognized as performance obligations under the terms of contracts with customers are satisfied; this occurs when control of promised goods (engines, engine parts and accessories, boats, and fitness equipment) is transferred to the customer. The Company recognizes revenue related to the sale of extended warranty contracts that extend the coverage period beyond the standard warranty period over the life of the extended warranty period.
Revenue is measured as the amount of consideration expected to be entitled in exchange for transferring goods or providing services. The Company has excluded sales, value add, and other taxes collected concurrent with revenue-producing activities from the determination of the transaction price for all contracts. The Company has elected to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment activity. For all contracts with customers, the Company has not adjusted the promised amount of consideration for the effects of a significant financing component as the period between the transfer of the promised goods and the customer's payment is expected to be one year or less.
Recently Issued Accounting Standards

Cloud Computing Arrangements: In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendment is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASC amendment, but does not expect it will have a material impact on its consolidated financial statements.

Tax Effects in Other Comprehensive Income: In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which permits companies to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 on items within AOCI to retained earnings. The ASU also requires certain new disclosures. The amendment is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASC amendment, but does not expect it will have a material impact on its consolidated financial statements.

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Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    


Hedge Accounting: In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, to simplify the application of hedge accounting and to better align an entity's risk management activities with the financial reporting of hedging relationships. The amendment is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASC amendment, but does not expect it will have a material impact on its consolidated financial statements.

Recognition of Leases: In February 2016, the FASB issued ASU 2016-02, Leases, (new leasing standard), which amended the ASC to require lessees to recognize assets and liabilities on the balance sheet for all leases with terms greater than twelve months. Lessees will recognize expenses similar to current lease accounting. The amendment is to be applied using a modified retrospective method with certain practical expedients, and is effective for fiscal years and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The Company plans to elect the practical expedients upon transition that will retain the lease classification and initial direct costs for any leases that exist prior to adoption. The Company will also not reassess whether any contracts entered into prior to adoption are leases.

In July, 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, which amended the ASC to provide relief from implementing certain aspects of the new leasing standard. The amendment provides an additional (and optional) transition method to adopt the new leasing standard where an entity initially applies the new leasing standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to elect this option and as a result, will not restate its condensed consolidated financial statements on the date of initial application. The Company anticipates the adoption of the standard will result in the recognition of approximately $85.0 million to $130.0 million in right-of-use assets and lease obligations on the Condensed Consolidated Balance Sheets and will not materially impact results on the Condensed Consolidated Statements of Comprehensive Income.

Note 2 – Revenue Recognition
    
The following tables present the Company's revenue for the three months and nine months ended September 29, 2018 into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors:
 
Three Months Ended September 29, 2018
 
Marine Engine
 
Boat
 
Fitness
 
Total
Geographic Markets
 
 
 
 
 
 
 
United States
$
573.8

 
$
264.2

 
$
131.9

 
$
969.9

Europe
87.1

 
22.4

 
46.4

 
155.9

Asia-Pacific
60.7

 
9.1

 
45.2

 
115.0

Canada
51.3

 
19.7

 
7.2

 
78.2

Rest-of-World
29.8

 
7.2

 
23.3

 
60.3

Marine eliminations
(81.3
)
 
—

 
—

 
(81.3
)
Total
$
721.4

 
$
322.6

 
$
254.0

 
$
1,298.0

 
 
 
 
 
 
 
 
Major Product Lines
 
 
 
 
 
 
 
Propulsion
$
394.6

 
$
—

 
$
—

 
$
394.6

Parts & Accessories
408.1

 
—

 
—

 
408.1

Aluminum Freshwater Boats
—

 
131.5

 
—

 
131.5

Recreational Fiberglass Boats
—

 
104.3

 
—

 
104.3

Saltwater Fishing Boats
—

 
86.8

 
—

 
86.8

Commercial Cardio Fitness Equipment
—

 
—

 
145.8

 
145.8

Commercial Strength Fitness Equipment
—

 
—

 
92.4

 
92.4

Consumer Fitness Equipment
—

 
—

 
15.8

 
15.8

Marine eliminations
(81.3
)
 
—

 
—

 
(81.3
)
Total
$
721.4

 
$
322.6

 
$
254.0

 
$
1,298.0


10
Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    

 
Nine Months Ended September 29, 2018
 
Marine Engine
 
Boat
 
Fitness
 
Total
Geographic Markets
 
 
 
 
 
 
 
United States
$
1,644.7

 
$
818.8

 
$
385.9

 
$
2,849.4

Europe
298.1

 
107.5

 
145.7

 
551.3

Asia-Pacific
161.6

 
23.0

 
126.2

 
310.8

Canada
119.6

 
124.6

 
21.4

 
265.6

Rest-of-World
100.1

 
20.1

 
71.4

 
191.6

Marine eliminations
(258.4
)
 
—

 
—

 
(258.4
)
Total
$
2,065.7

 
$
1,094.0

 
$
750.6

 
$
3,910.3

 
 
 
 
 
 
 
 
Major Product Lines
 
 
 
 
 
 
 
Propulsion
$
1,199.9

 
$
—

 
$
—

 
$
1,199.9

Parts & Accessories
1,124.2

 
—

 
—

 
1,124.2

Aluminum Freshwater Boats
—

 
465.0

 
—

 
465.0

Recreational Fiberglass Boats
—

 
372.5

 
—

 
372.5

Saltwater Fishing Boats
—

 
256.5

 
—

 
256.5

Commercial Cardio Fitness Equipment
—

 
—

 
421.3

 
421.3

Commercial Strength Fitness Equipment
—

 
—

 
273.2

 
273.2

Consumer Fitness Equipment
—

 
—

 
56.1

 
56.1

Marine eliminations
(258.4
)
 
—

 
—

 
(258.4
)
Total
$
2,065.7

 
$
1,094.0

 
$
750.6

 
$
3,910.3


For product sales, the Company transfers control and recognizes revenue at the time the product ships from a manufacturing or distribution facility ("free on board shipping point"), or at the time the product arrives at the customer's facility ("free on board destination"). When the shipping terms are "free on board shipping point", the customer obtains control and is able to direct the use of, and obtain substantially all of the benefits from, the products at the time the products are shipped. For shipments provided under “free on board destination”, control transfers to the customer upon delivery. Payment terms vary but are generally due within 30 days of transferring control. For the Company's Boat and Marine Engine segments, most product sales are wholesale financed by customers through the Company's joint venture, Brunswick Acceptance Company, LLC (BAC), or other lending institutions, and payment is typically due in the month of shipment. For further information on the BAC joint venture, refer to Note 10 – Financial Services, in the Notes to Consolidated Financial Statements in the 2017 Form 10-K. In addition, periodically the Company may require the customer to provide up front cash deposits in advance of performance.
The Company also sells separately priced extended warranty contracts that extend the coverage period beyond the standard warranty period included with the product sale. When determining an appropriate allocation of the transaction price to the extended warranty performance obligation, the Company uses an observable price to determine the stand-alone selling price. Extended warranties typically range from an additional 1 year to 3 years. The Company receives payment at the inception of the contract and recognizes revenue over the extended warranty coverage period. This time-elapsed method is used to measure progress because the Company, on average, satisfies its performance obligation evenly over the warranty period.
For certain customers within the Fitness segment, the Company provides rebate incentives settled in free product. These rebates provide the customer with a material right which would not have been received without entering into the contract and, therefore, represent a separate performance obligation to which revenue is allocated based on the products' stand-alone selling price. This revenue is deferred and recognized at a point in time upon rebate redemption, with a commensurate charge to Cost of sales for related product costs. The Company also provides product installation services to certain customers for which the Company recognizes revenue at the time of installation, using an observable price to determine the stand-alone selling price.     
As of January 1, 2018, $170.8 million of contract liabilities associated with extended warranties, customer deposits, and product rebates were reported in Accrued expenses and Other Long-term liabilities, and $14.5 million and $63.0 million of this amount was recognized as revenue during the three and nine months ended September 29, 2018, respectively. The revenue recognized primarily related to customer deposits. As of September 29, 2018, total contract liabilities were $181.6 million. The total amount of the transaction price allocated to unsatisfied performance obligations as of September 29, 2018 is $156.9 million for contracts greater than one year. The Company expects to recognize approximately $16.8 million of this amount in 2018, $72.4

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Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    

million in 2019, and $67.7 million thereafter. Contract assets as of January 1, 2018 and September 29, 2018 were not material. In addition, costs to obtain and fulfill contracts during the period were not material.
The amount of consideration received can vary, primarily because of customer incentive or rebate arrangements. In addition, the Company provides customers the right to return eligible products under certain circumstances. The Company estimates variable consideration based on the expected value of total consideration to which customers are likely to be entitled based on historical experience and projected market expectations. Included in the estimate, is an assessment as to whether any variable consideration is constrained. Revenue estimates are adjusted at the earlier of a change in the expected value of consideration or when the consideration becomes fixed.

Note 3 – Discontinued Operations

On December 5, 2017, the Board of Directors authorized the Company to exit its Sea Ray business, including the Meridian brand, as a result of, among other things, a material change in strategic direction and a review of the expected future cash flows, market conditions and business trends. The Company engaged in a thorough sales process and determined that the offers received did not reflect an appropriate value for the brand. As a result, the Board of Directors authorized the Company to end the sale process for its Sea Ray business. This action was announced on June 25, 2018. As part of this action, the Company decided to restructure the businesses, including discontinuing Sea Ray Sport Yacht and Yacht models and winding down yacht production, while reinventing Sea Ray Sport Boat and Sport Cruiser operations. The winding down of Sea Ray Sport Yacht and Yacht operations was largely completed as of the third quarter of 2018.

Due to the change in the plan of sale discussed above, the Sea Ray long-lived assets were measured at the lower of their carrying amount before being classified as held for sale, adjusted for any depreciation expense that would have been recognized had the assets been continuously classified as held and used, or their fair value at the date of the subsequent decision not to sell. As a result, the Company recorded a charge of $3.3 million, $2.4 million after-tax, for an impairment of long-lived assets for the three months ended September 29, 2018 and $12.7 million, $9.7 million after-tax, for the nine months ended September 29, 2018. The Company used independent market appraisals (a Level 2 input) to estimate the fair value of the two yacht manufacturing facilities. Additionally, the Company utilized experience from similar historical disposals and internal expertise related to current marketplace conditions (Level 3 inputs) to estimate the fair value of specific fixed assets related to the production of yacht models to be discontinued. The reassessment indicated that the carrying value, which included $3.8 million of catch-up depreciation for the period the assets were classified as held for sale, was greater than the fair value.

In connection with the wind down of Sea Ray Sport Yacht and Yacht operations, the Company recorded $0.3 million and $15.8 million for the three months and nine months ended September 29, 2018, respectively, as a reduction of revenue related to estimated retail sales promotions payable to customers to support the sale of sport yachts and yachts in the dealer pipeline. Further, the Company recorded charges necessary to facilitate the wind down of yacht production as discussed in Note 5 – Restructuring, Exit, Integration and Impairment Activities.

The assets and liabilities of the Sea Ray business, which were previously reported as held for sale, have been reclassified to assets and liabilities in the Condensed Consolidated Balance Sheets for all periods presented. Additionally, the results of these businesses are no longer presented as discontinued operations in the Condensed Consolidated Statements of Cash Flows, the Condensed Consolidated Statements of Comprehensive Income and the Notes to Condensed Consolidated Financial Statements in any period presented.
    
Note 4 – Acquisitions
    
On August 9, 2018, the Company completed its acquisition of the Global Marine Business of Power Products Holdings, LLC (Power Products) for $910.0 million in cash, on a cash-free, debt-free basis. Brunswick used a combination of 364-day, three-year and five-year term loans (Term Loans), totaling $800 million, along with cash on hand, to finance the acquisition as described in Note 16 – Debt in the Notes to Condensed Consolidated Financial Statements.

Power Products is a leading provider of electrical products to marine and other recreational and specialty vehicle markets. The acquisition advances Brunswick’s leadership by adding integrated electrical systems solutions to the marine market and an array of other mobile, specialty vehicle and industrial applications. Power Products is managed as part of the Marine Engine segment.



12
Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    

The Company accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations, with Brunswick being the acquiring entity, and reflects estimates and assumptions deemed appropriate by Company management. Transaction costs related to the acquisition were expensed as incurred within Selling, general and administrative expense and totaled $10.5 million and $13.0 million for the three months and nine months ended September 29, 2018, respectively. The net sales and operating loss of Power Products consolidated into Brunswick's financial statements since the date of acquisition were $33.3 million and $1.0 million, respectively, for both the three months and nine months ended September 29, 2018. The operating loss included $9.4 million of purchase accounting amortization.

Due to the recent timing of this acquisition, the purchase price allocation for the assets acquired and liabilities assumed is preliminary and subject to change within the allowed measurement period as the Company finalizes its fair value estimates. The following table is a summary of the assets acquired, liabilities assumed and net cash consideration paid for the Power Products acquisition during 2018:
(in millions)
Fair Value
 
Useful Life
Accounts and notes receivable
$
38.3

 
 
Inventory
64.3

 
 
Goodwill (A)
344.2

 
 
Trade names
111.0

 
Indefinite
Customer relationships
430.0

 
15 years
Property and equipment
11.0

 
 
Other assets
5.6

 
 
Total assets acquired
1,004.4

 
 
 
 
 
 
Accounts payable
23.5

 
 
Accrued expenses
16.2

 
 
Deferred tax liabilities
54.7

 
 
Total liabilities assumed
94.4

 
 
 
 
 
 
Net cash consideration paid
$
910.0

 
 
(A) The goodwill recorded for the acquisition of Power Products is not deductible for tax purposes.
 
Pro Forma Financial Information (Unaudited)

Prior to the acquisition, Power Products utilized a fiscal year ending August 31, and Brunswick’s fiscal year ends on December 31 of each year. As the Brunswick and Power Products fiscal years differ by more than 93 days, pursuant to Rule 11-02(c)(3) of Regulation S-X, Power Products’ historical unaudited financial information was adjusted for the purpose of presenting the Unaudited Pro Forma Net sales and Net earnings for the three months and nine months ended September 30, 2017. The Unaudited Pro Forma Net sales and Net earnings for the three months ended September 30, 2017 was prepared using Power Products’ historical unaudited Net sales and Net earnings for the three months ended November 30, 2017. The Unaudited Pro Forma Net sales and Net earnings for the nine months ended September 30, 2017 was prepared using Power Products’ historical unaudited Net sales and Net earnings for the nine months ended November 30, 2017. 

The pro forma information has been prepared as if the Power Products acquisition and the related debt financing had occurred on January 1, 2017. These pro forma results are based on estimates and assumptions which the Company believes to be reasonable. They are not the results that would have been realized had the acquisition actually occurred on January 1, 2017 and are not necessarily indicative of Brunswick's consolidated results of net earnings in future periods. The pro forma results include adjustments primarily related to interest expense on the Term Loans and amortization of intangible assets. Additionally, the pro forma adjustments include the following non-recurring amounts:

(A) Transaction costs and;
(B) Expense related to the estimated fair value adjustment to inventory recognized as part of the application of purchase accounting.

13
Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    

 
Three Months Ended
 
Nine Months Ended
(in millions)
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Pro forma Net sales
$
1,323.4

 
$
1,191.1

 
$
4,060.5

 
$
3,814.5

Pro forma Net earnings
90.3

 
74.9

 
245.2

 
231.4


Note 5 – Restructuring, Exit, Integration and Impairment Activities

In the third quarter of 2018, the Company recorded an impairment charge for the Cybex trade name as a result of declining operating performance and projected declines in sales. The Company used a relief-from-royalty analysis, using Level 3 inputs, to assess the fair value of the Cybex trade name. The impairment charge was recorded within the Fitness segment.

In the second quarter of 2018, the Company ended the sale process of its Sea Ray business and as a result of a change in the plan of sale, recorded an impairment of long-lived assets as discussed in Note 3 – Discontinued Operations. During the second and third quarters of 2018, the Company recorded additional charges in connection with the wind down of Sport Yacht and Yacht production, mainly relating to inventory write-downs, increased warranty liabilities and employee severance and retention bonuses. The Company also incurred transaction costs during the sale process. These costs were partially offset by the reversal of the valuation allowance in the second quarter of 2018 for estimated transaction costs which was recorded when the assets and liabilities of Sea Ray were initially reclassified as held for sale.

In 2018 and 2017, the Company executed headcount reductions in the Fitness and Boat segments aimed at improving general operating efficiencies.

In 2018 and 2017, the Company recorded charges within Corporate related to the transition of certain corporate officers.

In 2018 and 2017, the Company executed integration activities within the Fitness segment related to its acquisition of Cybex.

In the first quarter of 2017, the Company announced the closure of its boat manufacturing facility in Joinville, Santa Catarina, Brazil, as a result of continued market weakness due partially to unfavorable foreign currency impacts in the region. As a result, the Company recorded restructuring, exit, integration and impairment charges, including the write-down of inventory. The facility manufactured certain Bayliner and Sea Ray boat models for the Latin American market. The long-lived assets at this facility were previously fully impaired.


14
Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    

The following table is a summary of the expense associated with the restructuring, exit, integration and impairment activities for the three months ended September 29, 2018 and September 30, 2017, as discussed above:
 
September 29, 2018
 
September 30, 2017
(in millions)
Fitness
 
Boat
 
Total
 
Fitness
 
Total
Restructuring and exit activities:
 
 
 
 
 
 
 
 
 
Employee termination and other benefits
$
0.3

 
$
1.7

 
$
2.0

 
$
1.6

 
$
1.6

Current asset write-downs (gains on disposal)
(0.1
)
 
3.2

 
3.1

 
2.6

 
2.6

Professional fees
—

 
1.2

 
1.2

 
—

 
—

Other
—

 
—

 
—

 
0.4

 
0.4

Asset disposition and impairment actions:
 
 
 
 
 
 
 
 
 
Trade name impairment
8.1

 
—

 
8.1

 
—

 
—

Definite-lived and other asset impairments
—

 
3.3

 
3.3

 
—

 
—

Integration activities:
 
 
 
 
 
 
 
 
 
Employee termination and other benefits
—

 
—

 
—

 
0.4

 
0.4

Professional fees
—

 
—

 
—

 
1.6

 
1.6

Other
—

 
—

 
—

 
0.2

 
0.2

Total restructuring, exit, integration and impairment charges
$
8.3

 
$
9.4

 
$
17.7

 
$
6.8

 
$
6.8

 
 
 
 
 
 
 
 
 
 
Total cash payments for restructuring, exit, integration and impairment charges (A)
$
0.7

 
$
7.4

 
$
8.3

 
$
3.1

 
$
4.1

Accrued charges at end of the period (B)
$
0.6

 
$
11.5

 
$
12.8

 
$
7.0

 
$
10.4

(A) Total cash payments for the three months ended September 29, 2018 also include $0.2 million of payments for Corporate restructuring, exit, integration and impairment charges. Total cash payments for the three months ended September 30, 2017 also include $0.7 million and $0.3 million of payments for Boat and Corporate restructuring, exit, integration and impairment charges, respectively. Cash payments may include payments related to prior period charges.
(B) Restructuring, exit, integration and impairment charges accrued as of September 29, 2018 also include $0.7 million of Corporate charges. Restructuring, exit, integration and impairment charges accrued as of September 30, 2017 also include $2.8 million and $0.6 million of Boat and Corporate charges, respectively. The accrued charges are expected to be paid during 2018 and 2019.

The following table is a summary of the expense associated with the restructuring, exit, integration and impairment activities for the nine months ended September 29, 2018 and September 30, 2017, as discussed above:

15
Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    

 
September 29, 2018
 
September 30, 2017
(in millions)
Corporate
 
Fitness
 
Boat
 
Total
 
Corporate
 
Fitness
 
Boat
 
Total
Restructuring and exit activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee termination and other benefits
$
0.7

 
$
1.5

 
$
8.4

 
$
10.6

 
$
2.4

 
$
3.7

 
$
2.6

 
$
8.7

Current asset write-downs (gains on disposal)
—

 
(0.7
)
 
18.7

 
18.0

 
—

 
2.6

 
7.2

 
9.8

Professional fees
—

 
—

 
4.7

 
4.7

 
—

 
—

 
0.8

 
0.8

Other
—

 
—

 
6.0

 
6.0

 
—

 
0.4

 
1.0

 
1.4

Asset disposition and impairment actions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trade name impairment
—

 
8.1

 
—

 
8.1

 
—

 
—

 
—

 
—

Definite-lived and other asset impairments
—

 
0.4

 
12.7

 
13.1

 
—

 
—

 
—

 
—

Valuation allowance reversal
—

 
—

 
(5.0
)
 
(5.0
)
 
—

 
—

 
—

 
—

Integration activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee termination and other benefits
—

 
0.0

 
—

 
0.0

 
—

 
2.4

 
—

 
2.4

Professional fees
—

 
0.7

 
—

 
0.7

 
—

 
4.2

 
—

 
4.2

Other
—

 
0.1

 
—

 
0.1

 
—

 
0.4

 
—

 
0.4

Total restructuring, exit, integration and impairment charges
$
0.7

 
$
10.1

 
$
45.5

 
$
56.3

 
$
2.4

 
$
13.7

 
$
11.6

 
$
27.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash payments for restructuring, exit, integration and impairment charges (A)
$
0.5

 
$
6.5

 
$
8.6

 
$
15.6

 
$
1.0

 
$
8.0

 
$
3.5

 
$
12.5

Accrued charges at end of the period (B)
$
0.7

 
$
0.6

 
$
11.5

 
$
12.8

 
$
0.6

 
$
7.0

 
$
2.8

 
$
10.4

(A) Cash payments may include payments related to prior period charges.
(B) The accrued charges are expected to be paid during 2018 and 2019.

Note 6 – Financial Instruments

The Company operates globally with manufacturing and sales facilities 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. See Note 14 in the Notes to Consolidated Financial Statements in the 2017 Form 10-K for further details regarding the Company's financial instruments and hedging policies.

Foreign Currency Derivatives. Forward exchange contracts outstanding at September 29, 2018, December 31, 2017 and September 30, 2017 had notional contract values of $358.4 million, $312.6 million and $294.7 million, respectively. Option contracts outstanding at September 29, 2018, December 31, 2017 and September 30, 2017 had notional contract values of $27.2 million, $18.0 million and $18.0 million, respectively. The forward and option contracts outstanding at September 29, 2018 mature through 2020 and mainly relate to the Euro, Japanese Yen, Canadian dollar and Brazilian real. As of September 29, 2018, the Company estimates that during the next 12 months, it will reclassify approximately $4.3 million of net gains (based on current rates) from Accumulated other comprehensive loss to Cost of sales.

Interest Rate Derivatives. The Company enters into fixed-to-floating interest rate swaps to convert a portion of its long-term debt from fixed to floating rate debt. As of September 29, 2018, December 31, 2017 and September 30, 2017, the outstanding swaps had notional contract values of $200.0 million, of which $150.0 million corresponds to the Company's 4.625 percent Senior notes due 2021 and $50.0 million corresponds to the Company's 7.375 percent Debentures due 2023. These instruments have been designated as fair value hedges, with the fair value recorded in long-term debt.

As of September 29, 2018, December 31, 2017 and September 30, 2017, the Company had $2.7 million, $3.4 million and $3.7 million, respectively, of net deferred losses associated with all settled forward-starting interest rate swaps, which were designated as cash flow hedges with gains and losses included in Accumulated other comprehensive loss. As of September 29,

16
Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    

2018, the Company estimates that during the next 12 months, it will reclassify approximately $0.6 million of net losses resulting from settled forward-starting interest rate swaps from Accumulated other comprehensive loss to Interest expense.

As of September 29, 2018, December 31, 2017 and September 30, 2017, 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
 
 
 
 
Sep 29,
2018
 
Dec 31,
2017
 
Sep 30,
2017
 
 
 
Sep 29,
2018
 
Dec 31,
2017
 
Sep 30,
2017
Derivatives Designated as Cash Flow Hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other
 
$
4.8

 
$
2.5

 
$
1.7

 
Accrued expenses
 
$
0.9

 
$
5.5

 
$
10.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives Designated as Fair Value Hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
Prepaid expenses and other
 
$
0.0

 
$
2.1

 
$
2.9

 
Accrued expenses
 
$
0.1

 
$
1.8

 
$
2.3

Interest rate contracts
 
Other long-term assets
 
—

 
0.7

 
2.3

 
Other long-term liabilities
 
4.0

 
0.3

 
—

Total
 
 
 
$
0.0

 
$
2.8

 
$
5.2

 
 
 
$
4.1

 
$
2.1

 
$
2.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Hedging Activity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other
 
$
1.1

 
$
0.7

 
$
0.3

 
Accrued expenses
 
$
0.7

 
$
0.1

 
$
0.3


The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 29, 2018 and September 30, 2017 was: 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives Designated as Cash Flow Hedging Instruments
 
Amount of Gain (Loss) on Derivatives Recognized in Accumulated Other Comprehensive Loss (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
Sep 29,
2018
 
Sep 30,
2017
 
Sep 29,
2018
 
Sep 30,
2017
 
 
 
Sep 29,
2018
 
Sep 30,
2017
 
Sep 29,
2018
 
Sep 30,
2017
Interest rate contracts
 
$
—

 
$
—

 
$
—

 
$
—

 
Interest expense
 
$
(0.2
)
 
$
(0.3
)
 
$
(0.7
)
 
$
(0.8
)
Foreign exchange contracts
 
1.2

 
(10.4
)
 
5.4

 
(15.3
)
 
Cost of sales
 
0.7

 
(0.9
)
 
(3.8
)
 
1.2

Total
 
$
1.2

 
$
(10.4
)
 
$
5.4

 
$
(15.3
)
 
 
 
$
0.5

 
$
(1.2
)
 
$
(4.5
)
 
$
0.4


Derivatives Designated as Fair Value Hedging Instruments
 
Location of Gain (Loss) on Derivatives
Recognized in Earnings
 
Amount of Gain (Loss) on Derivatives Recognized in Earnings
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
Sep 29,
2018
 
Sep 30,
2017
 
Sep 29,
2018
 
Sep 30,
2017
Interest rate contracts
 
Interest expense
 
$
0.1

 
$
0.5

 
$
0.1

 
$
1.6



17
Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    

Other Hedging Activity
 
Location of Gain (Loss) on Derivatives
Recognized in Earnings
 
Amount of Gain (Loss) on Derivatives Recognized in Earnings
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
Sep 29,
2018
 
Sep 30,
2017
 
Sep 29,
2018
 
Sep 30,
2017
Foreign exchange contracts
 
Cost of sales
 
$
0.7

 
$
(4.9
)
 
$
8.1

 
$
(11.8
)
Foreign exchange contracts
 
Other expense, net
 
0.1

 
(0.1
)
 
0.8

 
(1.1
)
Total
 
 
 
$
0.8

 
$
(5.0
)
 
$
8.9

 
$
(12.9
)
    
Fair Value of Other Financial Instruments. The carrying values of the Company’s short-term financial instruments, including cash and cash equivalents and accounts and notes receivable approximate their fair values because of the short maturity of these instruments. At September 29, 2018, December 31, 2017 and September 30, 2017, the fair value of the Company’s debt was approximately $1,279.8 million, $492.1 million and $492.8 million, respectively, and was determined using Level 1 and Level 2 inputs described in Note 7 – Fair Value Measurements in the Notes to Consolidated Financial Statements in the 2017 Form 10-K. The carrying value of debt, including short-term debt and current maturities of long-term debt, was $1,238.3 million, $439.1 million and $441.8 million as of September 29, 2018, December 31, 2017 and September 30, 2017, respectively.


18
Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    

Note 7 – Fair Value Measurements

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 29, 2018:
(in millions)
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Short-term investments in marketable securities
$
0.8

 
$
—

 
$
0.8

Restricted cash
9.5

 
—

 
9.5

Derivatives
—

 
5.9

 
5.9

Total assets
$
10.3

 
$
5.9

 
$
16.2

 
 
 
 
 
 
Liabilities:
 

 
 

 
 

Derivatives
$
—

 
$
5.7

 
$
5.7

Deferred compensation
4.2

 
30.9

 
35.1

Total liabilities at fair value
$
4.2

 
$
36.6

 
$
40.8

Liabilities measured at net asset value
 
 
 
 
11.0

Total liabilities
 
 
 
 
$
51.8


The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2017:
(in millions)
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Cash equivalents
$
34.4

 
$
—

 
$
34.4

Short-term investments in marketable securities
0.8

 
—

 
0.8

Restricted cash
9.4

 
—

 
9.4

Derivatives
—

 
6.0

 
6.0

Total assets
$
44.6

 
$
6.0

 
$
50.6

 
 
 
 
 
 
Liabilities:
 

 
 

 
 

Derivatives
$
—

 
$
7.7

 
$
7.7

Deferred compensation
4.0

 
30.1

 
34.1

Total liabilities at fair value
$
4.0

 
$
37.8

 
$
41.8

Liabilities measured at net asset value
 
 
 
 
11.8

Total liabilities
 
 
 
 
$
53.6



19
Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017:
(in millions)
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Cash equivalents
$
0.4

 
$
34.0

 
$
34.4

Short-term investments in marketable securities
0.8

 
—

 
0.8

Restricted cash
10.7

 
—

 
10.7

Derivatives
—

 
7.2

 
7.2

Total assets
$
11.9

 
$
41.2

 
$
53.1

 
 
 
 
 
 
Liabilities:
 

 
 

 
 

Derivatives
$
—

 
$
13.1

 
$
13.1

Deferred compensation
4.0

 
28.4

 
32.4

Total liabilities at fair value
$
4.0

 
$
41.5

 
$
45.5

Liabilities measured at net asset value
 
 
 
 
11.2

Total liabilities
 
 
 
 
$
56.7


In addition to the items shown in the tables above, refer to Note 17 in the Notes to Consolidated Financial Statements in the 2017 Form 10-K for further discussion regarding the fair value measurements associated with the Company’s postretirement benefit plans.

Note 8 – Share-Based Compensation

Under the Brunswick Corporation 2014 Stock Incentive Plan, the Company may grant stock options, stock appreciation rights (SARs), non-vested stock awards and performance awards to executives, other employees and non-employee directors from treasury shares and from authorized, but unissued, shares of common stock initially available for grant, in addition to: (i) the forfeiture of past awards; (ii) shares not issued upon the net settlement of SARs; or (iii) shares delivered to or withheld by the Company to pay the withholding taxes related to awards. As of September 29, 2018, 5.2 million shares remained available for grant.

Non-vested Stock Awards

The Company grants both stock-settled and cash-settled non-vested stock units and awards to key employees as determined by management and the Human Resources and Compensation Committee of the Board of Directors. The Company granted a nominal number of stock awards during the three months ended September 29, 2018 and September 30, 2017. The Company granted 0.3 million and 0.2 million of stock awards during the nine months ended September 29, 2018 and September 30, 2017, respectively. The Company recognizes the cost of non-vested stock units and awards on a straight-line basis over the requisite vesting period. Additionally, cash-settled non-vested stock units and awards are recorded as a liability on the balance sheet and adjusted to fair value each reporting period through stock compensation expense. During the three months and nine months ended September 29, 2018, the Company charged $4.0 million and $9.9 million, respectively, and charged $2.9 million and $8.5 million during the three months and nine months ended September 30, 2017, respectively, to compensation expense for non-vested stock awards.

As of September 29, 2018, there was $16.5 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. The Company expects this cost to be recognized over a weighted average period of 1.3 years.

Performance Awards

In February of 2018 and 2017, the Company granted 0.1 million performance shares to certain senior executives. Performance share awards are based on three performance measures: a cash flow return on investment (CFROI) measure, an operating margin (OM) measure and a total shareholder return (TSR) modifier. Performance shares are earned based on a three-year performance period commencing at the beginning of the calendar year of each grant. The performance shares earned are then subject to a TSR modifier based on stock returns measured against stock returns of a predefined comparator group over a three-year performance

20
Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    

period. Additionally, in February 2018 and 2017, the Company granted 24,490 and 26,300 performance shares, respectively, to certain officers and certain senior managers based on the respective measures and performance periods described above but excluding the TSR modifier. During the three months and nine months ended September 29, 2018, the Company charged $2.1 million and $3.3 million, respectively, and charged $2.8 million and $5.9 million for the three months and nine months ended September 30, 2017, respectively, to compensation expense based on projections of probable attainment of the performance measures and the projected TSR modifier used to determine the performance awards.

The fair values of the senior executives' performance share award grants with a TSR modifier for grants in 2018 and 2017 were $61.59 and $64.82, respectively, which were estimated using the Monte Carlo valuation model, and incorporated the following assumptions:
 
2018
 
2017
Risk-free interest rate
2.4
%
 
1.5
%
Dividend yield
1.3
%
 
1.1
%
Volatility factor
38.9
%
 
38.3
%
Expected life of award
2.9 years

 
2.9 years


The fair value of the certain officers' and certain senior managers' performance awards granted based solely on the CFROI and OM performance factors was $57.19 and $58.77 in 2018 and 2017, respectively, which was equal to the stock price on the date of grant in 2018 and 2017, respectively, less the present value of expected dividend payments over the vesting period.

As of September 29, 2018, the Company had $5.1 million of total unrecognized compensation cost related to performance awards. The Company expects this cost to be recognized over a weighted average period of 1.0 years.

Director Awards

The Company issues stock awards to non-employee directors in accordance with the terms and conditions determined by the Nominating and Corporate Governance Committee of the Board of Directors. A portion 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 portion paid in cash, in Brunswick common stock distributed at the time of the award or in deferred Brunswick common stock with a 20 percent premium.


21
Table of Contents
BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)

    

Note 9 – Earnings per Common Share

Basic earnings per common share is calculated by dividing Net earnings by the weighted average outstanding shares which includes certain vested, unissued equity awards during the period. Diluted earnings per common share is calculated similarly, except that the calculation includes the dilutive effect of stock-settled SARs, non-vested stock awards and performance awards.

Basic and diluted earnings per common share for the three months and nine months ended September 29, 2018 and September 30, 2017 were calculated as follows:
 
Three Months Ended
 
Nine Months Ended
(in millions, except per share data)
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net earnings
$
70.0

 
$
79.0

 
$
221.9

 
$
263.3

 
 
 
 
 
 
 
 
Weighted average outstanding shares-basic
87.3

 
89.1

 
87.7

 
89.7

Dilutive effect of common stock equivalents
0.6

 
0.7

 
0.6

 
0.8

Weighted average outstanding shares-diluted
87.9

 
89.8

 
88.3

 
90.5

 
 
 
 
 
 
 
 
Basic earnings per common share:
$
0.80

 
$
0.89

 
$
2.53

 
$
2.94

Diluted earnings per common share:
$
0.80

 
$
0.88

 
$
2.51

 
$
2.91


Share awards that were not included in the computation of diluted earnings per share because their inclusion was anti-dilutive were immaterial for all periods presented.