10-Q 1 bc2018063010-q.htm FORM 10-Q 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 June 30, 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
____________
 smallhiresa84.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 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, 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  (Do not check if a smaller reporting company)
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 July 30, 2018 was 86,722,762.





BRUNSWICK CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2018
 
 
TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 



PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements


BRUNSWICK CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(unaudited)

 
Three Months Ended
 
Six Months Ended
(in millions, except per share data)
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Net sales
$
1,400.9

 
$
1,352.0

 
$
2,612.3

 
$
2,512.3

Cost of sales
1,051.2

 
982.1

 
1,952.6

 
1,841.2

Selling, general and administrative expense
168.8

 
156.6

 
332.3

 
314.6

Research and development expense
39.4

 
36.5

 
77.0

 
73.1

Restructuring, exit, integration and impairment charges
34.8

 
5.7

 
38.6

 
20.9

Operating earnings
106.7

 
171.1

 
211.8

 
262.5

Equity earnings
1.4

 
1.4

 
2.4

 
3.7

Other income (expense), net
(2.5
)
 
0.3

 
(2.5
)
 
(0.4
)
Earnings before interest and income taxes
105.6

 
172.8

 
211.7

 
265.8

Interest expense
(8.2
)
 
(6.7
)
 
(14.9
)
 
(13.3
)
Interest income
0.6

 
0.4

 
1.3

 
0.9

Earnings before income taxes
98.0

 
166.5

 
198.1

 
253.4

Income tax provision
19.0

 
47.1

 
46.2

 
69.1

Net earnings
$
79.0

 
$
119.4

 
$
151.9

 
$
184.3

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 

 
 

Basic
$
0.90

 
$
1.33

 
$
1.73

 
$
2.05

Diluted
$
0.90

 
$
1.32

 
$
1.72

 
$
2.03

 
 
 
 
 
 
 
 
Weighted average shares used for computation of:
 
 
 
 
 

 
 

Basic earnings per common share
87.6

 
89.8

 
87.8

 
90.0

Diluted earnings per common share
88.2

 
90.6

 
88.5

 
90.8

 
 
 
 
 
 
 
 
Comprehensive income
$
68.6

 
$
123.1

 
$
152.5

 
$
195.2

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.19

 
$
0.165

 
$
0.38

 
$
0.33

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



3


BRUNSWICK CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
(in millions)
June 30,
2018
 
December 31,
2017
 
July 1,
2017
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents, at cost, which approximates fair value
$
435.9

 
$
448.8

 
$
437.2

Restricted cash
9.4

 
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
446.1

 
459.0

 
448.7

Accounts and notes receivable, less allowances of $10.0, $9.2 and $10.2
578.1

 
485.3

 
524.6

Inventories
 
 
 
 
 
Finished goods
508.6

 
521.3

 
489.4

Work-in-process
111.8

 
119.3

 
106.3

Raw materials
194.9

 
187.1

 
173.6

Net inventories
815.3

 
827.7

 
769.3

Prepaid expenses and other
47.1

 
74.7

 
35.2

Current assets
1,886.6

 
1,846.7

 
1,777.8

 
 
 
 
 
 
Property
 

 
 

 
 

Land
25.2

 
25.1

 
26.9

Buildings and improvements
435.9

 
412.8

 
398.6

Equipment
1,050.9

 
1,027.7

 
1,001.4

Total land, buildings and improvements and equipment
1,512.0

 
1,465.6

 
1,426.9

Accumulated depreciation
(934.0
)
 
(895.8
)
 
(885.4
)
Net land, buildings and improvements and equipment
578.0

 
569.8

 
541.5

Unamortized product tooling costs
138.1

 
136.2

 
140.7

Net property
716.1

 
706.0

 
682.2

 
 
 
 
 
 
Other assets
 

 
 

 
 

Goodwill
424.0

 
425.3

 
417.6

Other intangibles, net
144.1

 
149.1

 
161.7

Equity investments
30.0

 
25.1

 
22.5

Deferred income tax asset
169.5

 
165.6

 
272.8

Other long-term assets
50.7

 
40.4

 
49.1

Other assets
818.3

 
805.5

 
923.7

 
 
 
 
 
 
Total assets
$
3,421.0

 
$
3,358.2

 
$
3,383.7

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

4


BRUNSWICK CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)

(in millions)
June 30,
2018
 
December 31,
2017
 
July 1,
2017
Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Current maturities of long-term debt
$
4.7

 
$
5.6

 
$
5.8

Accounts payable
426.4

 
420.5

 
393.8

Accrued expenses
679.7

 
609.0

 
586.2

Current liabilities
1,110.8

 
1,035.1

 
985.8

 
 
 
 
 
 
Long-term liabilities
 

 
 

 
 

Debt
429.0

 
431.8

 
438.2

Postretirement benefits
180.6

 
220.8

 
233.7

Other
199.6

 
187.6

 
178.2

Long-term liabilities
809.2

 
840.2

 
850.1

 
 
 
 
 
 
Shareholders’ equity
 

 
 

 
 

Common stock; authorized: 200,000,000 shares, $0.75 par value; issued: 102,538,000 shares; outstanding: 86,792,000, 87,537,000 and 88,776,000 shares
76.9

 
76.9

 
76.9

Additional paid-in capital
361.8

 
374.4

 
365.9

Retained earnings
2,056.9

 
1,966.8

 
2,035.9

Treasury stock, at cost: 15,746,000, 15,001,000 and 13,762,000 shares
(635.4
)
 
(575.4
)
 
(507.2
)
Accumulated other comprehensive loss, net of tax
(359.2
)
 
(359.8
)
 
(423.7
)
Shareholders’ equity
1,501.0

 
1,482.9

 
1,547.8

 
 
 
 
 
 
Total liabilities and shareholders’ equity
$
3,421.0

 
$
3,358.2

 
$
3,383.7

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

5


BRUNSWICK CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
Six Months Ended
(in millions)
June 30,
2018
 
July 1,
2017
Cash flows from operating activities
 
 
 
Net earnings
$
151.9

 
$
184.3

Stock compensation expense
7.2

 
8.7

Depreciation and amortization
62.6

 
55.2

Pension (funding), net of expense
(33.3
)
 
(37.5
)
Asset impairment charges
25.3

 
7.2

Deferred income taxes
12.9

 
35.0

Changes in certain current assets and current liabilities
(65.8
)
 
(88.8
)
Long-term extended warranty contracts and other deferred revenue
8.2

 
8.8

Fitness business separation costs
4.2

 

Cash paid for Fitness business separation costs
(1.8
)
 

Income taxes
35.8

 
10.8

Other, net
(6.3
)
 
(11.9
)
Net cash provided by operating activities of continuing operations
200.9

 
171.8

Net cash used for operating activities of discontinued operations

 
(0.3
)
Net cash provided by operating activities
200.9

 
171.5

 
 
 
 
Cash flows from investing activities
 

 
 

Capital expenditures
(90.3
)
 
(107.9
)
Sales or maturities of marketable securities

 
35.0

Investments
(5.8
)
 
2.0

Proceeds from the sale of property, plant and equipment
0.2

 
7.8

Other, net
(0.2
)
 
(0.5
)
Net cash used for investing activities
(96.1
)
 
(63.6
)
 
 
 
 
Cash flows from financing activities
 

 
 

Payments of long-term debt including current maturities
(0.3
)
 
(0.3
)
Common stock repurchases
(70.0
)
 
(60.0
)
Cash dividends paid
(33.1
)
 
(29.4
)
Proceeds from share-based compensation activity
1.2

 
5.8

Tax withholding associated with shares issued for share-based compensation
(12.0
)
 
(14.2
)
Net cash used for financing activities
(114.2
)
 
(98.1
)
 
 
 
 
Effect of exchange rate changes
(3.5
)
 
4.5

Net (decrease) increase in Cash and cash equivalents and Restricted cash
(12.9
)
 
14.3

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
445.3

 
447.9

     Less: Restricted cash
9.4

 
10.7

Cash and cash equivalents at end of period
$
435.9

 
$
437.2

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

 
 
 

6


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 second quarter of fiscal year 2018 ended on June 30, 2018 and the second quarter of fiscal year 2017 ended on July 1, 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.

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, $1.0 million and $1.5 million were reclassified from Cost of sales and Selling, general and administrative expense, respectively, to Other income (expense), net for the three months ended July 1, 2017. The Company reclassified $2.1 million and $2.8 million from Cost of sales and Selling, general and administrative expense, respectively, to Other income (expense), net for the six months ended July 1, 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 amendment is to be applied retrospectively and is effective for fiscal years, and the interim periods within those years, beginning after December 15, 2017, with early adoption permitted. 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

7

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
    

the modified retrospective method. The Company did not elect to separately evaluate contract modifications occurring before the 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 six months ended June 30, 2018 as a result of applying the new revenue standard was as follows:
 
Three Months Ended June 30, 2018
(in millions)
As Reported
 
Effect of Change
 
Balances without adoption of ASC 606
Net sales
$
1,400.9

 
$
9.7

 
$
1,410.6

Cost of sales
1,051.2

 
(0.9
)
 
1,050.3

 
 
 
 
 
 
Earnings before income taxes
98.0

 
10.6

 
108.6

Income tax provision
19.0

 
2.0

 
21.0

Net earnings
$
79.0

 
$
8.6

 
$
87.6



8

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
    

 
Six Months Ended June 30, 2018
(in millions)
As Reported
 
Effect of Change
 
Balances without adoption of ASC 606
Net sales
$
2,612.3

 
$
4.9

 
$
2,617.2

Cost of sales
1,952.6

 
(0.1
)
 
1,952.5

 
 
 
 
 
 
   Earnings before income taxes
198.1

 
5.0

 
203.1

Income tax provision
46.2

 
0.8

 
47.0

Net earnings
$
151.9

 
$
4.2

 
$
156.1

 
As of June 30, 2018
 
As Reported
 
Effect of Change
 
Balances without adoption of ASC 606
Assets
 
 
 
 
 
Accounts and notes receivable
$
578.1

 
$
1.4

 
$
579.5

Deferred income tax asset
169.5

 
(10.5
)
 
159.0

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Accrued expenses
679.7

 
(33.5
)
 
646.2

 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
Retained earnings
2,056.9

 
24.4

 
2,081.3

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

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.

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.


9

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
    

Recognition of Leases: In February 2016, the FASB issued ASU 2016-02, Leases, 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 is currently evaluating the impact that the adoption of the new standard will have on its condensed consolidated financial statements.

Note 2 – Revenue Recognition
    
The following table presents the Company's revenue for the three months and six months ended June 30, 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 June 30, 2018
 
Marine Engine
 
Boat
 
Fitness
 
Total
Geographic Markets
 
 
 
 
 
 
 
United States
$
594.4

 
$
279.9

 
$
132.4

 
$
1,006.7

Europe
113.2

 
42.0

 
45.9

 
201.1

Asia-Pacific
50.5

 
6.9

 
38.9

 
96.3

Canada
39.4

 
58.1

 
7.1

 
104.6

Rest-of-World
36.8

 
8.0

 
27.9

 
72.7

Marine eliminations
(80.5
)
 

 

 
(80.5
)
Total
$
753.8

 
$
394.9

 
$
252.2

 
$
1,400.9

 
 
 
 
 
 
 
 
Major Product Lines
 
 
 
 
 
 
 
Propulsion
$
426.3

 
$

 
$

 
$
426.3

Parts & Accessories
408.0

 

 

 
408.0

Aluminum Freshwater Boats

 
170.4

 

 
170.4

Recreational Fiberglass Boats

 
140.5

 

 
140.5

Saltwater Fishing Boats

 
84.0

 

 
84.0

Commercial Cardio Fitness Equipment

 

 
141.4

 
141.4

Commercial Strength Fitness Equipment

 

 
91.7

 
91.7

Consumer Fitness Equipment

 

 
19.1

 
19.1

Marine eliminations
(80.5
)
 

 

 
(80.5
)
Total
$
753.8

 
$
394.9

 
$
252.2

 
$
1,400.9


10

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
    

 
Six Months Ended June 30, 2018
 
Marine Engine
 
Boat
 
Fitness
 
Total
Geographic Markets
 
 
 
 
 
 
 
United States
$
1,070.9

 
$
554.6

 
$
254.0

 
$
1,879.5

Europe
211.0

 
85.1

 
99.3

 
395.4

Asia-Pacific
100.9

 
13.9

 
81.0

 
195.8

Canada
68.3

 
104.9

 
14.2

 
187.4

Rest-of-World
70.3

 
12.9

 
48.1

 
131.3

Marine eliminations
(177.1
)
 

 

 
(177.1
)
Total
$
1,344.3

 
$
771.4

 
$
496.6

 
$
2,612.3

 
 
 
 
 
 
 
 
Major Product Lines
 
 
 
 
 
 
 
Propulsion
$
805.3

 
$

 
$

 
$
805.3

Parts & Accessories
716.1

 

 

 
716.1

Aluminum Freshwater Boats

 
333.5

 

 
333.5

Recreational Fiberglass Boats

 
268.2

 

 
268.2

Saltwater Fishing Boats

 
169.7

 

 
169.7

Commercial Cardio Fitness Equipment

 

 
275.5

 
275.5

Commercial Strength Fitness Equipment

 

 
180.8

 
180.8

Consumer Fitness Equipment

 

 
40.3

 
40.3

Marine eliminations
(177.1
)
 

 

 
(177.1
)
Total
$
1,344.3

 
$
771.4

 
$
496.6

 
$
2,612.3


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 $18.4 million and $48.5 million of this amount was recognized as revenue during the three and six months ended June 30, 2018, respectively. The revenue recognized primarily related to customer deposits. As of June 30, 2018, total contract liabilities were $182.4 million. The total amount of the transaction price allocated to unsatisfied performance obligations as of June 30, 2018 is $158.8 million for contracts greater than one year. The Company expects to recognize approximately $35.3 million of this amount in 2018, $57.6 million in 2019, and $65.9

11

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
    

million thereafter. Contract assets as of January 1, 2018 and June 30, 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. As a result, the Company recognized a decrease to revenue from prior period for the three months ended June 30, 2018 of $12.5 million, primarily related to additional retail sales promotions for Sport Yacht and Yacht operations.

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, including discontinuing Sea Ray Sport Yacht and Yacht models and winding down yacht production in the third quarter of 2018, while reinventing Sea Ray Sport Boat and Sport Cruiser operations.

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 $9.4 million, $7.3 million after-tax, for an impairment of long-lived assets in the second quarter of 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 a $15.5 million 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 at the date of announcement. 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
    
Effective June 28, 2018, the Company entered into a definitive agreement to acquire Power Products – Global Marine & Mobile (Power Products) business for $910 million in cash. The acquisition is expected to close mid-August of 2018, subject to certain conditions. Power Products is a privately held manufacturing and distribution company based in Menomonee Falls, Wisconsin, with approximately $233 million of sales for the trailing 12-month period ending March 31, 2018. Power Products manufactures and distributes a broad portfolio of products, including battery and power management and digital switching, to marine and other recreational and specialty vehicle markets. The group also manufactures and distributes a broad and diverse portfolio of marine and transportation parts and accessories. Power Products will be managed as part of the Marine Engine segment.


12

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
    

Note 5 – Restructuring, Exit, Integration and Impairment Activities

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. The Company recorded 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 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 International, Inc. As of June 30, 2018, all Cybex integration activities were complete.

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.

The following table is a summary of the expense associated with the restructuring, exit, integration and impairment activities for the three months ended June 30, 2018 and July 1, 2017, as discussed above:
 
June 30, 2018
 
July 1, 2017
(in millions)
Corporate
 
Fitness
 
Boat
 
Total
 
Fitness
 
Boat
 
Total
Restructuring and exit activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee termination and other benefits
$
0.7

 
$
0.4

 
$
4.7

 
$
5.8

 
$
2.1

 
$
0.4

 
$
2.5

Current asset write-downs (gains on disposal)

 
(0.2
)
 
15.5

 
15.3

 

 

 

Professional fees

 

 
2.9

 
2.9

 

 

 

Other

 

 
6.0

 
6.0

 

 
0.8

 
0.8

Asset disposition and impairment actions:
 
 
 
 
 
 
 
 
 
 
 
 
 
Definite-lived and other asset impairments

 
0.4

 
9.4

 
9.8

 

 

 

Disposal group valuation allowance reversal

 

 
(5.0
)
 
(5.0
)
 

 

 

Integration activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee termination and other benefits

 

 

 

 
0.9

 

 
0.9

Professional fees

 

 

 

 
1.4

 

 
1.4

Other

 

 

 

 
0.1

 

 
0.1

Total restructuring, exit, integration and impairment charges
$
0.7

 
$
0.6

 
$
33.5

 
$
34.8

 
$
4.5

 
$
1.2

 
$
5.7

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

 
$
3.8

 
$
1.0

 
$
4.8

 
$
1.4

 
$
1.3

 
$
2.9

Accrued charges at end of the period (B)
$
0.9

 
$
1.0

 
$
16.0

 
$
17.9

 
$
5.9

 
$
3.5

 
$
10.3

(A) Total cash payments for the three months ended June 30, 2017 also include $0.2 million of payments for Corporate restructuring, exit, integration and impairment charges. Cash payments may include payments related to prior period charges.
(B) Restructuring, exit, integration and impairment charges accrued as of June 30, 2017 also include $0.9 million of Corporate charges. The accrued charges are expected to be paid during 2018 and 2019.


13

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 six months ended June 30, 2018 and July 1, 2017, as discussed above:
 
June 30, 2018
 
July 1, 2017
(in millions)
Corporate
 
Fitness
 
Boat
 
Total
 
Corporate
 
Fitness
 
Boat
 
Total
Restructuring and exit activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee termination and other benefits
$
0.7

 
$
1.2

 
$
6.7

 
$
8.6

 
$
2.4

 
$
2.1

 
$
2.6

 
$
7.1

Current asset write-downs (gains on disposal)

 
(0.6
)
 
15.5

 
14.9

 

 

 
7.2

 
7.2

Professional fees

 

 
3.5

 
3.5

 

 

 
0.8

 
0.8

Other

 

 
6.0

 
6.0

 

 

 
1.0

 
1.0

Asset disposition and impairment actions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Definite-lived and other asset impairments

 
0.4

 
9.4

 
9.8

 

 

 

 

Valuation allowance reversal

 

 
(5.0
)
 
(5.0
)
 

 

 

 

Integration activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee termination and other benefits

 
0.0

 

 
0.0

 

 
2.0

 

 
2.0

Professional fees

 
0.7

 

 
0.7

 

 
2.6

 

 
2.6

Other

 
0.1

 

 
0.1

 

 
0.2

 

 
0.2

Total restructuring, exit, integration and impairment charges
$
0.7

 
$
1.8

 
$
36.1

 
$
38.6

 
$
2.4

 
$
6.9

 
$
11.6

 
$
20.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash payments for restructuring, exit, integration and impairment charges (A)
$
0.3

 
$
5.8

 
$
1.2

 
$
7.3

 
$
0.7

 
$
4.9

 
$
2.8

 
$
8.4

Accrued charges at end of the period (B)
$
0.9

 
$
1.0

 
$
16.0

 
$
17.9

 
$
0.9

 
$
5.9

 
$
3.5

 
$
10.3

(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 June 30, 2018, December 31, 2017 and July 1, 2017 had notional contract values of $333.1 million, $312.6 million and $309.3 million, respectively. Option contracts outstanding at June 30, 2018 and December 31, 2017 both had notional contract values of $18.0 million. There were no options contracts outstanding at July 1, 2017. The forward and option contracts outstanding at June 30, 2018 mature through 2019 and mainly relate to the Euro, Canadian dollar, Japanese yen and Australian dollar. As of June 30, 2018, the Company estimates that during the next 12 months, it will reclassify approximately $3.4 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 the Company's long-term debt from fixed to floating rate debt. As of June 30, 2018, December 31, 2017 and July 1, 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 June 30, 2018, December 31, 2017 and July 1, 2017, the Company had $2.9 million, $3.4 million and $4.0 million, respectively, of net deferred losses associated with all settled forward-starting interest rate swaps, which were designated as cash

14

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
    

flow hedges with gains and losses included in Accumulated other comprehensive loss. As of June 30, 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 June 30, 2018, December 31, 2017 and July 1, 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
 
 
 
 
Jun 30,
2018
 
Dec 31,
2017
 
Jul 1,
2017
 
 
 
Jun 30,
2018
 
Dec 31,
2017
 
Jul 1,
2017
Derivatives Designated as Cash Flow Hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other
 
$
5.7

 
$
2.5

 
$
2.0

 
Accrued expenses
 
$
1.7

 
$
5.5

 
$
3.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives Designated as Fair Value Hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
Prepaid expenses and other
 
$
2.1

 
$
2.1

 
$
2.1

 
Accrued expenses
 
$
2.1

 
$
1.8

 
$
1.7

Interest rate contracts
 
Other long-term assets
 

 
0.7

 
3.3

 
Other long-term liabilities
 
3.1

 
0.3

 

Total
 
 
 
$
2.1

 
$
2.8

 
$
5.4

 
 
 
$
5.2

 
$
2.1

 
$
1.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Hedging Activity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other
 
$
1.4

 
$
0.7

 
$
0.3

 
Accrued expenses
 
$
0.1

 
$
0.1

 
$
0.3


The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2018 and July 1, 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
 
Six Months Ended
 
 
 
Three Months Ended
 
Six Months Ended
 
 
Jun 30,
2018
 
Jul 1,
2017
 
Jun 30,
2018
 
Jul 1,
2017
 
 
 
Jun 30,
2018
 
Jul 1,
2017
 
Jun 30,
2018
 
Jul 1,
2017
Interest rate contracts
 
$

 
$

 
$

 
$

 
Interest expense
 
$
(0.2
)
 
$
(0.2
)
 
$
(0.5
)
 
$
(0.5
)
Foreign exchange contracts
 
7.8

 
(2.4
)
 
4.2

 
(4.9
)
 
Cost of sales
 
(1.9
)
 
1.1

 
(4.5
)
 
2.1

Total
 
$
7.8

 
$
(2.4
)
 
$
4.2

 
$
(4.9
)
 
 
 
$
(2.1
)
 
$
0.9

 
$
(5.0
)
 
$
1.6


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
 
Six Months Ended
 
 
 
 
Jun 30,
2018
 
Jul 1,
2017
 
Jun 30,
2018
 
Jul 1,
2017
Interest rate contracts
 
Interest expense
 
$
(0.2
)
 
$
0.5

 
$
(0.0
)
 
$
1.1



15

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
 
Six Months Ended
 
 
 
 
Jun 30,
2018
 
Jul 1,
2017
 
Jun 30,
2018
 
Jul 1,
2017
Foreign exchange contracts
 
Cost of sales
 
$
11.1

 
$
(3.0
)
 
$
7.4

 
$
(6.9
)
Foreign exchange contracts
 
Other income (expense), net
 
1.8

 
(0.3
)
 
0.7

 
(1.0
)
Total
 
 
 
$
12.9

 
$
(3.3
)
 
$
8.1

 
$
(7.9
)
    
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 June 30, 2018, December 31, 2017 and July 1, 2017, the fair value of the Company’s long-term debt was approximately $491.4 million, $492.1 million and $499.3 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 long-term debt, including current maturities, was $438.8 million, $439.1 million and $443.1 million as of June 30, 2018, December 31, 2017 and July 1, 2017, respectively.


16

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 June 30, 2018:
(in millions)
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Short-term investments in marketable securities
$
0.8

 
$

 
$
0.8

Restricted cash
9.4

 

 
9.4

Derivatives

 
9.2

 
9.2

Total assets
$
10.2

 
$
9.2

 
$
19.4

 
 
 
 
 
 
Liabilities:
 

 
 

 
 

Derivatives
$

 
$
7.0

 
$
7.0

Deferred compensation
3.9

 
30.0

 
33.9

Total liabilities at fair value
$
3.9

 
$
37.0

 
$
40.9

Liabilities measured at net asset value
 
 
 
 
10.3

Total liabilities
 
 
 
 
$
51.2


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



17

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 July 1, 2017:
(in millions)
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Cash equivalents
$
1.4

 
$

 
$
1.4

Short-term investments in marketable securities
0.8

 

 
0.8

Restricted cash
10.7

 

 
10.7

Derivatives

 
7.7

 
7.7

Total assets
$
12.9

 
$
7.7

 
$
20.6

 
 
 
 
 
 
Liabilities:
 

 
 

 
 

Derivatives
$

 
$
5.2

 
$
5.2

Deferred compensation
4.6

 
29.9

 
34.5

Total liabilities at fair value
$
4.6

 
$
35.1

 
$
39.7

Liabilities measured at net asset value
 
 
 
 
11.3

Total liabilities
 
 
 
 
$
51.0


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 June 30, 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 June 30, 2018 and did not grant any stock awards during the three months ended July 1, 2017. The Company granted 0.3 million and 0.2 million of stock awards during the six months ended June 30, 2018 and July 1, 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 six months ended June 30, 2018, the Company charged $3.4 million and $5.9 million, respectively, and charged $2.8 million and $5.6 million during the three months and six months ended July 1, 2017, respectively, to compensation expense for non-vested stock awards.

As of June 30, 2018, there was $18.4 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 1.5 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

18

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 six months ended June 30, 2018, the Company charged $1.7 million and $1.2 million, respectively, and charged $1.8 million and $3.1 million for the three months and six months ended July 1, 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 June 30, 2018, the Company had $6.8 million of total unrecognized compensation cost related to performance awards. The Company expects this cost to be recognized over a weighted average period of 1.3 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.


19

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 six months ended June 30, 2018 and July 1, 2017 were calculated as follows:
 
Three Months Ended
 
Six Months Ended
(in millions, except per share data)
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Net earnings
$
79.0

 
$
119.4

 
$
151.9

 
$
184.3

 
 
 
 
 
 
 
 
Weighted average outstanding shares-basic
87.6

 
89.8

 
87.8

 
90.0

Dilutive effect of common stock equivalents
0.6

 
0.8

 
0.7

 
0.8

Weighted average outstanding shares-diluted
88.2

 
90.6

 
88.5

 
90.8

 
 
 
 
 
 
 
 
Basic earnings per common share:
$
0.90

 
$
1.33

 
$
1.73

 
$
2.05

 
 
 
 
 
 
 
 
Diluted earnings per common share:
$
0.90

 
$
1.32

 
$
1.72

 
$
2.03


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.

Note 10 – Commitments and Contingencies

There were no material changes during the three months and six months ended June 30, 2018 to the financial commitments or the legal and environmental commitments that were discussed in Note 13 in the Notes to Consolidated Financial Statements in the 2017 Form 10-K.

Product Warranties and Extended Warranties

The following activity related to product warranty liabilities was recorded in Accrued expenses during the six months ended June 30, 2018 and July 1, 2017:
(in millions)
June 30,
2018
 
July 1,
2017
Balance at beginning of period
$
127.2

 
$
112.6

Payments made
(36.4
)
 
(34.1
)
Provisions/additions for contracts issued/sold
39.1

 
38.0

Aggregate changes for preexisting warranties
7.5

 
(0.3
)
Foreign currency translation
(0.8
)
 
1.0

Other
0.3

 
(1.7
)
Balance at end of period
$
136.9

 
$
115.5


The following activity related to deferred revenue for extended product warranty contracts was recorded in Accrued expenses and Other long-term liabilities during the six months ended June 30, 2018 and July 1, 2017:

20

BRUNSWICK CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
    

(in millions)
June 30,
2018
 
July 1,
2017
Balance at beginning of period
$
112.1

 
$
90.6

Extended warranty contracts sold
30.7

 
26.0

Revenue recognized on existing extended warranty contracts
(18.7
)
 
(14.5
)
Foreign currency translation
(0.4
)
 
0.3

Balance at end of period
$
123.7

 
$
102.4


Note 11 – Goodwill and Other Intangibles

Changes in the Company's goodwill during the six months ended June 30, 2018, by segment, are summarized below:
(in millions)
December 31,
2017
 
Acquisitions
 
Impairments
 
Adjustments
 
June 30,
2018
Marine Engine
$
31.7

 
$

 
$

 
$
(0.4
)
 
$
31.3

Boat
2.2