Correspondence 0000014930-22-000174 from BRUNSWICK CORP (BC, BC-PA, BC-PB, BC-PC) (CIK 0000014930) (BC)
BRUNSWICK CORP (BC, BC-PA, BC-PB, BC-PC) (CIK 0000014930)
Date: Dec. 5, 2022 · CIK: 0000014930 · Accession: 0000014930-22-000174
AI Filing Summary & Sentiment
File numbers found in text: 001-01043
Referenced dates: November 18, 2022
Letter
VIA EDGAR Division of Corporation Finance Office of Technology United States Securities and Exchange Commission Re: Brunswick Corporation Form 10-K for Fiscal Year Ended December 31, 2021 Filed February 22, 2018 File No. 001-01043
Dear Ms. Collins:
This letter is Brunswick Corporation’s response to the comment letter from the staff (the “Staff”) of the Division of Corporation Finance of the Securities and Exchange Commission (the “Commission”) dated November 18, 2022. We have reproduced below the Staff’s comments together with Brunswick’s responses.
Due to the commercially sensitive nature of certain information contained herein, this response letter is also a request for confidential treatment of the portions of this letter bracketed below (designated by “[***]”) pursuant to the Commission’s confidential treatment procedure under Rule 83 (17 C.F.R. § 200.83).
Form 10-K for Fiscal Year Ended December 31, 2021
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations, page 32
1.We note your disclosure for the “summary of Adjusted operating earnings and Adjusted diluted earnings per common share.” Please revise to clarify that this is a “reconciliation” of your non-GAAP measures and consider clearly labeling each measure, both here and in the Form 8-K earnings releases as non-GAAP rather than “adjusted” so that the intent of this disclosures is clear.
Response:
In response to the Staff’s comment, the Company will revise its table to “Reconciliation of Non-GAAP Measures” in future filings.
FOIA Confidential Treatment Request by
Brunswick Corporation Pursuant to Rule 83 (17 C.F.R. 200.83)
2. You state that net sales increased during fiscal 2021 compared to 2020 due to increased volume from strong global demand for marine products, market share gains and higher pricing. You refer to the segment discussion for further details on the drivers of net sales changes, however, such disclosure refers to the “factors affecting all of [y]our segments as previously mentioned.” Please revise to include both a quantitative and qualitative discussion of the various factors, including any offsetting factors, that impacted each of your consolidated and segment revenues. For example, include a quantified discussion regarding the impact of price versus volume on your net sales, and if specific products had a significant impact, either positively or negatively on the segment net sales growth, revise to disclose as such. Refer to Item 303(b) of Regulation S-K.
Response:
The Company acknowledges the Staff’s comment regarding revisions to include both quantitative and qualitative discussions of the various factors, including any offsetting factors, impacting consolidated and segment revenues. Beginning with our Annual Report on Form 10-K for fiscal year end December 31, 2022 (“Form 10-K”), we will provide additional disclosures describing and, to the extent possible, quantifying the material factors impacting revenue. An example of revised quantitative disclosures representing factors impacting consolidated revenues is presented below. Similar disclosures will be made for each segment.
With respect to qualitative discussions, the Company believes it has adequately disclosed the material qualitative factors in the following disclosure on page 32 of its 2021 Form 10-K:
“Sales in each segment benefited from increased volume due to strong global demand for marine products, market share gains, and higher pricing.”
We will continue to disclose material qualitative factors in future filings as well.
3. We note your disclosures that “excluding certain one-time items presented above,” selling general and administrative expense (SG&A) as a percentage of sales was lower in fiscal 2021. Please tell us what the one-time items is referring to and to the extent you are adjusting for non-GAAP items, revise to include a discussion of your GAAP SG&A with greater prominence. Refer to Question 102.10 of the non-GAAP C&DIs. In addition, you cite several factors that impacted your SG&A expenses such as increased spending on sales and marketing, ACES programs, growth initiatives, and variable compensation costs. Where a material change from period-to-period is due to two or more factors, including any offsetting factors, revise to describe the underlying reasons for such changes in both quantitative and qualitative terms. Similar revisions should be made to your gross margin discussion.
Response:
FOIA Confidential Treatment Request by
Brunswick Corporation Pursuant to Rule 83 (17 C.F.R. 200.83)
In response to the Staff’s comment, the “one time” items refer to the summary of one-time items included on page 32 within the summary of Adjusted operating earnings. In future filings, we plan to eliminate this disclosure. An example of our revised disclosure can be found on page 29 of our Quarterly Report on Form 10-Q for the third quarter of 2022, which discloses the following:
“Selling, general and administrative expense (SG &A) increased during the third quarter and nine months ended October 1, 2022 when compared with the same prior year period, primarily due to the businesses acquired during 2021. SG&A as a percentage of sales was lower in the third quarter of 2022 and higher in the nine months ended October 1, 2022 compared with the same prior year period. The decrease in the third quarter of 2022 was driven by increased net sales and the benefit from cost-containment measures. The increase in the nine months ended October 1, 2022 reflects the impact of 2021 acquisitions, increased spending on sales and marketing, ACES ("Autonomy, Connectivity, Electrification and Shared access") programs, and other growth initiatives, partially offset by increased net sales. Research and development expense increased in 2022 versus 2021, reflecting continued investment in new products in all segments.”
Regarding gross margin, beginning with our 2022 Form 10-K, we will provide additional disclosures describing and, to the extent possible, quantifying the material factors impacting gross margin. An example of revised disclosures is presented as follows:
“Gross margin percentage increased 60 basis points in 2021 when compared to 2020, driven by increased sales (100 bps), acquisitions (10 bps), and favorable changes in foreign exchange rates (10 bps), partially offset by increased manufacturing costs, including material and labor inflation (60 bps).”
Regarding SG&A expenses, we currently disclose the factors impacting these line items in the order of relative significance, including consideration of offsetting impacts. The Company’s disclosures have included quantitative and qualitative information and the underlying reason for material changes, to the extent such information has been deemed material to investors’ understanding of business trends. For the periods presented, there were no such individual items deemed material. We will continue to disclose material factors in future filings.
4. We note that during each of the last three fiscal years and to date in fiscal 2022 you implemented various strategic initiatives to improve your cost structure, general operating efficiencies and utilization of production capacity. Your discussion of restructuring activities on page 33 provides a cross reference to Note 4. Please tell us how your current disclosures address the disclosure guidance in SAB Topic 5.P.4, or revise as necessary.
Response:
The Company acknowledges the Staff’s comment regarding the disclosure requirements in SAB Topic 5.P.4. We concluded the restructuring charges of $0.8 million, $4.1 million, and $18.8 million in 2021, 2020, and 2019, respectively, were immaterial to the consolidated financial statements as they represented 0.1%, 0.8%, and 4.0% of operating earnings in 2021, 2020, and 2019, respectively. We also concluded the likely effects the related actions would have on our financial position, future operating results, and liquidity were not material. Activities executed in prior periods were complete and the benefits realized prior to the year ended December 31, 2021. As such, we concluded the disclosures in SAB Topic 5.P.4 were not material or meaningful. In the event material restructuring activities occur in future periods, we will include the disclosures required by SAB Topic 5.P.4.
FOIA Confidential Treatment Request by
Brunswick Corporation Pursuant to Rule 83 (17 C.F.R. 200.83)
Liquidity and Capital Resources, page 41
5. We note your disclosure regarding the dollar amount of future contractual cash obligations as of December 31, 2021. Please revise to also include a quantified discussion of the cash requirements related to the credit facility fee as discussed in Note 16. To the extent that such amounts are already reflected in the amounts disclosed, please revise and clarify accordingly. Refer to Item 303(b)(1) of Regulation S-K.
Response:
The Company acknowledges the Staff’s comment regarding our future contractual cash obligations disclosure and the cash requirements related to our credit facility fee. The credit facility fee per annum is 15 basis points of the total facility or $0.75 million. The maximum potential facility fee is $1.8 million using the 35 basis point maximum rate. We concluded the credit facility fees are not material future cash requirements as they represented .05% and 0.4%, using the maximum fee of $1.8 million, of total future contractual cash obligations and obligations coming due within one year, respectively. In the event the credit facility fees become material, we will include disclosure consistent with the requirements in Item 303(b)(1) of Regulation S-K.
Critical Accounting Estimates, page 42
6. Your Critical Accounting Estimates appear to repeat your accounting policy disclosures in the notes to the consolidated financial statements. Please revise to explain why each critical accounting estimate is subject to uncertainty and, to the extent the information is material and reasonably available, how much each estimate and/or assumption has changed over a relevant period, and the sensitivity of the reported amounts to the material methods, assumptions and estimates underlying its calculation. Refer to Item 303(b)(3) of Regulation S-K.
Response:
The Company acknowledges the Staff’s comment. We will revise the description of our critical accounting estimates beginning with our 2022 Form 10-K as requested by the Staff. The change during the fiscal year ended December 31, 2021, and the associated sensitivity of the reported amounts relating to each estimate, was not material. We will continue to evaluate any reasonably likely changes that could impact our critical accounting estimates and provide disclosure as needed in future filings. An example of our revised disclosures is presented as follows:
Warranty Reserves
We record an estimated liability for product warranties at the time revenue is recognized. The liability is estimated using historical warranty experience, projected claim rates and expected costs per claim. We exercise judgment when determining the appropriate historical periods to projected claim rates and expected costs per claim. Further, these estimates are subject to uncertainty as historical warranty experience may not be consistent with future warranty claims. We adjust our liability for specific warranty matters when they become known and the exposure can be estimated. Our warranty liabilities are affected by product failure rates as well as material usage and labor costs incurred in correcting a product failure. If actual costs differ from estimated costs, we must make a revision to the warranty liability, which could have an adverse impact on our results of operations and cash flows.
FOIA Confidential Treatment Request by
Brunswick Corporation Pursuant to Rule 83 (17 C.F.R. 200.83)
Notes to Consolidated Financial Statements
Note 6. Segment Information, page 73
7. We note that the Engine Parts and Accessories and Advanced Systems Group operating segments have been aggregated into a single reportable segment, Parts & Accessories. Please provide us with an analysis of each of the criteria in ASC 280-10-50-11 to support such aggregation. Also, tell us how the acquisitions and integrations of Navico and RELiON impacted your evaluation, if at all.
Response:
We regularly reassess our segment presentation and document our conclusions based on the considerations outlined in ASC 280. In response to the request from the Staff, we have summarized our operating segment aggregation analysis for the year-ended December 31, 2021 below. The Company’s contemporaneous documentation and accounting analysis is also available.
•Criterion 1 – Aggregation is consistent with the objectives and basic principles of ASC 280
The Engine Parts & Accessories (“Engine P&A”) operating segment sells and distributes a wide range of marine parts and accessories to both original equipment manufacturers (“OEM”) and aftermarket channels. The Advanced Systems Group (“ASG”) operating segment sells and distributes many similar products within its portfolio of brands and also sells to both OEM and aftermarket customers.
Given that both operating segments have similar customers, similar products, and operate within the same industry subject to the same macro-economic environment and external factors, we have concluded that aggregating the Engine P&A and ASG operating segments is appropriate and consistent with the guidance in ASC 280. Further, the Company does not believe that providing disaggregated information would materially impact an investor’s view or understanding of our financial performance.
We also considered that Engine P&A and ASG have separate segment managers. The chief operating decision maker (“CODM”) believes that having separate individuals responsible for the Engine P&A and ASG segments will provide additional focus on each operating segment from an operational perspective. However, the CODM also believes it is important that the two operating segments work together to drive synergies and growth given their inter-dependence on one another. This is the reason the segment managers’ compensation is partially based on the combined segment results. Given that the CODM’s rationale for having separate segment managers for these operating segments is to increase focus within each of the operating segments as opposed to fundamental differences in the businesses that need to be evaluated separately, the Company does not believe that the fact that each operating segment has a segment manager (rather than one segment manager over both operating segments) is a reason that precludes aggregation.
•Criterion 2 – The segments have similar economic characteristics
The Engine P&A and ASG operating segments have similar economic characteristics. Overall, both segments operate within the same industry and are impacted by similar macroeconomic factors. Both operating segments are impacted heavily by the recreational boating market, OEM and aftermarket retail customer behavior, as well as seasonal weather conditions. The assembled workforce is also similar between both segments whereby no particular segment has a more or less unique labor force highly specialized in manufacturing and production.
FOIA Confidential Treatment Request by
Brunswick Corporation Pursuant to Rule 83 (17 C.F.R. 200.83)
While ASC 280-10-50-11 specifies that segments with similar economic characteristics would be expected to have similar long-term average gross margins, it does not describe other factors an entity may use to evaluate economic char
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FOIA Confidential Treatment Request by
Brunswick Corporation Pursuant to Rule 83 (17 C.F.R. 200.83)
December 5, 2022
VIA EDGAR
U.S. Securities and Exchange Commission
Division of Corporation Finance
Office of Technology
United States Securities and Exchange Commission
100 F Street NE
Washington, D.C. 20549
Attn: Kathleen Collins
Chen Chen
Re: Brunswick Corporation
Form 10-K for Fiscal Year Ended December 31, 2021
Filed February 22, 2018
File No. 001-01043
Dear Ms. Collins:
This letter is Brunswick Corporation’s response to the comment letter from the staff (the “Staff”) of the Division of Corporation Finance of the Securities and Exchange Commission (the “Commission”) dated November 18, 2022. We have reproduced below the Staff’s comments together with Brunswick’s responses.
Due to the commercially sensitive nature of certain information contained herein, this response letter is also a request for confidential treatment of the portions of this letter bracketed below (designated by “[***]”) pursuant to the Commission’s confidential treatment procedure under Rule 83 (17 C.F.R. § 200.83).
Form 10-K for Fiscal Year Ended December 31, 2021
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations, page 32
1.We note your disclosure for the “summary of Adjusted operating earnings and Adjusted diluted earnings per common share.” Please revise to clarify that this is a “reconciliation” of your non-GAAP measures and consider clearly labeling each measure, both here and in the Form 8-K earnings releases as non-GAAP rather than “adjusted” so that the intent of this disclosures is clear.
Response:
In response to the Staff’s comment, the Company will revise its table to “Reconciliation of Non-GAAP Measures” in future filings.
FOIA Confidential Treatment Request by
Brunswick Corporation Pursuant to Rule 83 (17 C.F.R. 200.83)
2. You state that net sales increased during fiscal 2021 compared to 2020 due to increased volume from strong global demand for marine products, market share gains and higher pricing. You refer to the segment discussion for further details on the drivers of net sales changes, however, such disclosure refers to the “factors affecting all of [y]our segments as previously mentioned.” Please revise to include both a quantitative and qualitative discussion of the various factors, including any offsetting factors, that impacted each of your consolidated and segment revenues. For example, include a quantified discussion regarding the impact of price versus volume on your net sales, and if specific products had a significant impact, either positively or negatively on the segment net sales growth, revise to disclose as such. Refer to Item 303(b) of Regulation S-K.
Response:
The Company acknowledges the Staff’s comment regarding revisions to include both quantitative and qualitative discussions of the various factors, including any offsetting factors, impacting consolidated and segment revenues. Beginning with our Annual Report on Form 10-K for fiscal year end December 31, 2022 (“Form 10-K”), we will provide additional disclosures describing and, to the extent possible, quantifying the material factors impacting revenue. An example of revised quantitative disclosures representing factors impacting consolidated revenues is presented below. Similar disclosures will be made for each segment.
With respect to qualitative discussions, the Company believes it has adequately disclosed the material qualitative factors in the following disclosure on page 32 of its 2021 Form 10-K:
“Sales in each segment benefited from increased volume due to strong global demand for marine products, market share gains, and higher pricing.”
We will continue to disclose material qualitative factors in future filings as well.
3. We note your disclosures that “excluding certain one-time items presented above,” selling general and administrative expense (SG&A) as a percentage of sales was lower in fiscal 2021. Please tell us what the one-time items is referring to and to the extent you are adjusting for non-GAAP items, revise to include a discussion of your GAAP SG&A with greater prominence. Refer to Question 102.10 of the non-GAAP C&DIs. In addition, you cite several factors that impacted your SG&A expenses such as increased spending on sales and marketing, ACES programs, growth initiatives, and variable compensation costs. Where a material change from period-to-period is due to two or more factors, including any offsetting factors, revise to describe the underlying reasons for such changes in both quantitative and qualitative terms. Similar revisions should be made to your gross margin discussion.
Response:
FOIA Confidential Treatment Request by
Brunswick Corporation Pursuant to Rule 83 (17 C.F.R. 200.83)
In response to the Staff’s comment, the “one time” items refer to the summary of one-time items included on page 32 within the summary of Adjusted operating earnings. In future filings, we plan to eliminate this disclosure. An example of our revised disclosure can be found on page 29 of our Quarterly Report on Form 10-Q for the third quarter of 2022, which discloses the following:
“Selling, general and administrative expense (SG &A) increased during the third quarter and nine months ended October 1, 2022 when compared with the same prior year period, primarily due to the businesses acquired during 2021. SG&A as a percentage of sales was lower in the third quarter of 2022 and higher in the nine months ended October 1, 2022 compared with the same prior year period. The decrease in the third quarter of 2022 was driven by increased net sales and the benefit from cost-containment measures. The increase in the nine months ended October 1, 2022 reflects the impact of 2021 acquisitions, increased spending on sales and marketing, ACES ("Autonomy, Connectivity, Electrification and Shared access") programs, and other growth initiatives, partially offset by increased net sales. Research and development expense increased in 2022 versus 2021, reflecting continued investment in new products in all segments.”
Regarding gross margin, beginning with our 2022 Form 10-K, we will provide additional disclosures describing and, to the extent possible, quantifying the material factors impacting gross margin. An example of revised disclosures is presented as follows:
“Gross margin percentage increased 60 basis points in 2021 when compared to 2020, driven by increased sales (100 bps), acquisitions (10 bps), and favorable changes in foreign exchange rates (10 bps), partially offset by increased manufacturing costs, including material and labor inflation (60 bps).”
Regarding SG&A expenses, we currently disclose the factors impacting these line items in the order of relative significance, including consideration of offsetting impacts. The Company’s disclosures have included quantitative and qualitative information and the underlying reason for material changes, to the extent such information has been deemed material to investors’ understanding of business trends. For the periods presented, there were no such individual items deemed material. We will continue to disclose material factors in future filings.
4. We note that during each of the last three fiscal years and to date in fiscal 2022 you implemented various strategic initiatives to improve your cost structure, general operating efficiencies and utilization of production capacity. Your discussion of restructuring activities on page 33 provides a cross reference to Note 4. Please tell us how your current disclosures address the disclosure guidance in SAB Topic 5.P.4, or revise as necessary.
Response:
The Company acknowledges the Staff’s comment regarding the disclosure requirements in SAB Topic 5.P.4. We concluded the restructuring charges of $0.8 million, $4.1 million, and $18.8 million in 2021, 2020, and 2019, respectively, were immaterial to the consolidated financial statements as they represented 0.1%, 0.8%, and 4.0% of operating earnings in 2021, 2020, and 2019, respectively. We also concluded the likely effects the related actions would have on our financial position, future operating results, and liquidity were not material. Activities executed in prior periods were complete and the benefits realized prior to the year ended December 31, 2021. As such, we concluded the disclosures in SAB Topic 5.P.4 were not material or meaningful. In the event material restructuring activities occur in future periods, we will include the disclosures required by SAB Topic 5.P.4.
FOIA Confidential Treatment Request by
Brunswick Corporation Pursuant to Rule 83 (17 C.F.R. 200.83)
Liquidity and Capital Resources, page 41
5. We note your disclosure regarding the dollar amount of future contractual cash obligations as of December 31, 2021. Please revise to also include a quantified discussion of the cash requirements related to the credit facility fee as discussed in Note 16. To the extent that such amounts are already reflected in the amounts disclosed, please revise and clarify accordingly. Refer to Item 303(b)(1) of Regulation S-K.
Response:
The Company acknowledges the Staff’s comment regarding our future contractual cash obligations disclosure and the cash requirements related to our credit facility fee. The credit facility fee per annum is 15 basis points of the total facility or $0.75 million. The maximum potential facility fee is $1.8 million using the 35 basis point maximum rate. We concluded the credit facility fees are not material future cash requirements as they represented .05% and 0.4%, using the maximum fee of $1.8 million, of total future contractual cash obligations and obligations coming due within one year, respectively. In the event the credit facility fees become material, we will include disclosure consistent with the requirements in Item 303(b)(1) of Regulation S-K.
Critical Accounting Estimates, page 42
6. Your Critical Accounting Estimates appear to repeat your accounting policy disclosures in the notes to the consolidated financial statements. Please revise to explain why each critical accounting estimate is subject to uncertainty and, to the extent the information is material and reasonably available, how much each estimate and/or assumption has changed over a relevant period, and the sensitivity of the reported amounts to the material methods, assumptions and estimates underlying its calculation. Refer to Item 303(b)(3) of Regulation S-K.
Response:
The Company acknowledges the Staff’s comment. We will revise the description of our critical accounting estimates beginning with our 2022 Form 10-K as requested by the Staff. The change during the fiscal year ended December 31, 2021, and the associated sensitivity of the reported amounts relating to each estimate, was not material. We will continue to evaluate any reasonably likely changes that could impact our critical accounting estimates and provide disclosure as needed in future filings. An example of our revised disclosures is presented as follows:
Warranty Reserves
We record an estimated liability for product warranties at the time revenue is recognized. The liability is estimated using historical warranty experience, projected claim rates and expected costs per claim. We exercise judgment when determining the appropriate historical periods to projected claim rates and expected costs per claim. Further, these estimates are subject to uncertainty as historical warranty experience may not be consistent with future warranty claims. We adjust our liability for specific warranty matters when they become known and the exposure can be estimated. Our warranty liabilities are affected by product failure rates as well as material usage and labor costs incurred in correcting a product failure. If actual costs differ from estimated costs, we must make a revision to the warranty liability, which could have an adverse impact on our results of operations and cash flows.
FOIA Confidential Treatment Request by
Brunswick Corporation Pursuant to Rule 83 (17 C.F.R. 200.83)
Notes to Consolidated Financial Statements
Note 6. Segment Information, page 73
7. We note that the Engine Parts and Accessories and Advanced Systems Group operating segments have been aggregated into a single reportable segment, Parts & Accessories. Please provide us with an analysis of each of the criteria in ASC 280-10-50-11 to support such aggregation. Also, tell us how the acquisitions and integrations of Navico and RELiON impacted your evaluation, if at all.
Response:
We regularly reassess our segment presentation and document our conclusions based on the considerations outlined in ASC 280. In response to the request from the Staff, we have summarized our operating segment aggregation analysis for the year-ended December 31, 2021 below. The Company’s contemporaneous documentation and accounting analysis is also available.
•Criterion 1 – Aggregation is consistent with the objectives and basic principles of ASC 280
The Engine Parts & Accessories (“Engine P&A”) operating segment sells and distributes a wide range of marine parts and accessories to both original equipment manufacturers (“OEM”) and aftermarket channels. The Advanced Systems Group (“ASG”) operating segment sells and distributes many similar products within its portfolio of brands and also sells to both OEM and aftermarket customers.
Given that both operating segments have similar customers, similar products, and operate within the same industry subject to the same macro-economic environment and external factors, we have concluded that aggregating the Engine P&A and ASG operating segments is appropriate and consistent with the guidance in ASC 280. Further, the Company does not believe that providing disaggregated information would materially impact an investor’s view or understanding of our financial performance.
We also considered that Engine P&A and ASG have separate segment managers. The chief operating decision maker (“CODM”) believes that having separate individuals responsible for the Engine P&A and ASG segments will provide additional focus on each operating segment from an operational perspective. However, the CODM also believes it is important that the two operating segments work together to drive synergies and growth given their inter-dependence on one another. This is the reason the segment managers’ compensation is partially based on the combined segment results. Given that the CODM’s rationale for having separate segment managers for these operating segments is to increase focus within each of the operating segments as opposed to fundamental differences in the businesses that need to be evaluated separately, the Company does not believe that the fact that each operating segment has a segment manager (rather than one segment manager over both operating segments) is a reason that precludes aggregation.
•Criterion 2 – The segments have similar economic characteristics
The Engine P&A and ASG operating segments have similar economic characteristics. Overall, both segments operate within the same industry and are impacted by similar macroeconomic factors. Both operating segments are impacted heavily by the recreational boating market, OEM and aftermarket retail customer behavior, as well as seasonal weather conditions. The assembled workforce is also similar between both segments whereby no particular segment has a more or less unique labor force highly specialized in manufacturing and production.
FOIA Confidential Treatment Request by
Brunswick Corporation Pursuant to Rule 83 (17 C.F.R. 200.83)
While ASC 280-10-50-11 specifies that segments with similar economic characteristics would be expected to have similar long-term average gross margins, it does not describe other factors an entity may use to evaluate economic char