Brunswick Corporation reported today earnings from continuing operations of 99 cents per diluted share for the second quarter of 2006, compared with $1.12 per diluted share for the year-ago second quarter. Earnings from continuing operations for the second quarter of 2006 include a 6 cents per diluted share benefit from tax-related items.
“We are pleased with our second quarter results given the increasingly difficult economic environment in which consumers are deferring expenditures for discretionary items, a factor affecting retail demand especially for marine products,” said Brunswick Chairman and Chief Executive Officer Dustan E. McCoy. “Total sales increased 1 percent in the quarter due to contributions from our boat and fitness equipment operations. If we exclude incremental sales from acquired businesses, however, organic sales actually declined 5 percent. Lower organic sales, a mix shift to lower-margin products along with higher raw material and component costs, partially offset by lower operating expense, were the primary drivers behind a reduction in operating margins to 9.0 percent in the second quarter of 2006 from 11.0 percent in the comparable quarter a year ago.”
Second Quarter Results
For the quarter ended June 30, 2006, net sales increased 1% to $1,543.1 million, up from $1,531.6 million a year earlier. Operating earnings declined 18% to $138.2 million compared with $168.2 million in the year-ago quarter, and operating margins were 9.0%, down from 11.0%. Net earnings from continuing operations totaled $94.5 million, or 99 cents per diluted share, down from $111.0 million, or $1.12 per diluted share, for the second quarter of 2005. In the second quarter of 2006, the company recorded a tax benefit of 6 cents per diluted share resulting primarily from the resolution of a long-standing tax case with the Internal Revenue Service. Debt-to-total capital was 26.2% at quarter end as compared with 27.7% a year earlier, and cash totaled $310.6 million.
During the second quarter of 2006, the company announced its decision to pursue the sale of substantially all of its Brunswick New Technologies (BNT) business unit. As a result, the portions of BNT proposed for sale are being accounted for as discontinued operations. For the second quarter of 2006, the company reported a net loss from discontinued operations of $11.3 million, or 12 cents per diluted share, compared with net earnings of $3.1 million, or 3 cents per diluted share, for the second quarter of 2005.
The company said that during the second quarter of 2006, it acquired approximately 1.5 million shares of its common stock for approximately $56 million under a $500 million repurchase authorization. Over the past year, approximately 5.1 million shares have been acquired for about $193 million. Diluted shares outstanding averaged 95.5 million in the second quarter of 2006, down from 99.2 million for the second quarter of 2005.
Boat Segment
The Brunswick Boat Group comprises the Boat segment and produces fiberglass and aluminum boats and marine parts and accessories, as well as offers dealer management systems. The Boat segment reported net sales for the second quarter of $769.7 million, up 3% compared with $745.5 million in the second quarter of 2005. Excluding incremental sales from acquired businesses, organic boat sales declined 7%. Operating earnings decreased to $53.1 million from $74.9 million reported in the second quarter of 2005, and operating margins were 6.9%, down from 10.0%.
“We reduced production and increased promotional efforts in select product lines to manage pipeline inventories during the quarter,” McCoy said. “The lower fixed cost absorption due to reduced production levels, coupled with the fact that we had lower sales in some of our higher-margin product lines, had an adverse effect on operating margins.”
Marine Engine Segment
The Marine Engine segment, consisting of the Mercury Marine Group, reported net sales of $668.5 million in the second quarter of 2006, down 2% from $683.5 million in the year-ago quarter. Operating earnings in the second quarter decreased 9% to $94.7 million versus $103.5 million, and operating margins declined to 14.2% from 15.1% for the same quarter in 2005.
“The reduction in sales was primarily driven by a decline in our domestic outboard engine business, partially offset by increased sales of products outside of the United States,” McCoy said. “Operating margins were adversely affected by lower sales along with the shift in product mix to lower-margin, low-emission outboard engines. Approximately 91 percent of our U.S. outboard sales in the second quarter of 2006 came from low-emission engines, up from 71 percent in the year-ago quarter.”
Fitness Segment
The Fitness segment is comprised of the Life Fitness Division, which manufactures and sells Life Fitness, Hammer Strength and ParaBody fitness equipment. Fitness segment sales increased 8% in the quarter to $129.7 million, up from $120.4 million in the year-ago quarter. Operating earnings for the quarter totaled $7.4 million, up 45% from $5.1 million in the second quarter of 2005, and operating margins increased 150 basis points to 5.7% from 4.2% a year ago.
“Through its market drive and increasing focus on improving productivity, Life Fitness produced a quarter of both solid sales increases with improving margins,” McCoy explained. “Segment sales benefited from continued expansion of health clubs in both domestic and international markets. At the same time, our continued emphasis on containing operating expenses led to the operating margin improvement.”
Bowling & Billiards Segment
The Bowling & Billiards segment is comprised of the Brunswick retail bowling centers; bowling equipment and products; and billiards, Air Hockey and foosball tables. Segment sales in the second quarter of 2006 totaled $110.1 million, down 4% compared with $114.9 million in the year-ago quarter. Year-over-year operating earnings were $0.6 million in the second quarter versus $5.2 million, and operating margins fell to 0.5% compared with 4.5% in 2005.
“Segment sales were affected by a decline in sales of bowling equipment compared with a year ago. Quarterly product sales tend to fluctuate throughout the year as they are tied to the timing of new center openings by independent proprietors. The segment also reported lower billiards sales, reflecting customers desire to postpone discretionary purchases in these economic times,” McCoy commented. “Despite fewer centers versus a year ago, our bowling retail operation posted single-digit sales gains due to increased traffic at existing centers and the addition of two new Brunswick Zone XLs. Operating margins were adversely affected by lower equipment sales, new center start-up costs, as well as the costs associated with the closure of four bowling centers and renovation of a Massachusetts bowling center damaged by floods in the second quarter.”
Six-Month Results
For the six months ended June 30, 2006, the company had net sales of $2,956.4 million, up 3% from $2,874.1 million for the first half of 2005. Excluding contributions from acquired businesses, sales were down 3 percent. Operating earnings totaled $236.4 million for the first half of 2006, down from $267.0 million for the corresponding period in 2005, and operating margins declined to 8.0% versus 9.3% a year ago. Net earnings from continuing operations for the first six months of 2006 were $168.6 million, or $1.76 per diluted share, down from $205.0 million, or $2.07 per diluted share, for the same period in 2005. Results for the first half of 2006 include the 6 cents per diluted share tax benefit recorded in the second quarter, as noted above, and a 13 cents per diluted share tax benefit recorded in the first quarter. Results for the first half of 2005 include an after-tax gain of $31.5 million, equivalent to 32 cents per diluted share, recorded in the first quarter on the sale of MarineMax, Inc. stock.
For the first half of 2006, the company reported a net loss from discontinued operations of $18.0 million, or 19 cents per diluted share, compared with net earnings of $3.7 million, or 4 cents per diluted share, for the same period in 2005.
Looking Ahead
“Throughout the second quarter of 2006, we experienced declining retail demand for marine products, which has resulted in an increase in pipeline inventories. At quarter end, there were 26 weeks of supply of boats and 21 weeks of supply of engines, up from 23 weeks for boats and 20 weeks for engines a year ago,” McCoy said. “Managing pipelines is essential in a cyclical, as well as a seasonal, business. With the off-season quickly approaching, we cant rely solely on retail demand to rebalance the pipeline. So, we are planning further production cuts to manage pipelines for the 2007 model year, which began on July 1. As we previously announced, we are estimating that our 2006 earnings from continuing operations will fall in the range of $2.40 to $2.55 per diluted share, excluding tax-related benefits either already realized or expected for the year. That compares with the $3.13 per share we reported in 2005 from continuing operations, excluding tax-related benefits and the gain on the sale of MarineMax stock. The decline in earnings is primarily due to reduced sales and the impact of fixed cost absorption from production cuts needed to adjust pipeline inventories.”
“While we cant control market conditions, we will continue to operate our businesses in the most efficient manner possible and continue to execute relentlessly against our five key strategies: having new, high-quality products coming to the market faster than the competition; providing our dealers with profit opportunities not available elsewhere; be best cost in our industries; be global; and attract and retain talent,” McCoy added. “In doing so, we will achieve our long-term value creation objectives and better position the company to benefit our shareholders when industry conditions improve.”
Brunswick Corporation
Comparative Consolidated Statements of Income
(in millions, except per share data)
(unaudited)
Three Months Ended June 30
2006 2005 % Change
Net sales $1,543.1 $1,531.6 1%
Cost of sales 1,188.3 1,145.0 4%
Selling, general and administrative
expense 182.6 187.9 -3%
Research and development expense 34.0 30.5 11%
Operating earnings 138.2 168.2 -18%
Equity earnings 6.6 5.6 18%
Other income (expense), net (2.5) 0.1 NM
Earnings before interest and income taxes 142.3 173.9 -18%
Interest expense (14.2) (13.1) 8%
Interest income 2.4 3.5 -31%
Earnings before income taxes 130.5 164.3 -21%
Income tax provision 36.0 53.3
Net earnings from continuing operations 94.5 111.0 -15%
Net earnings (loss) from discontinued
operations, net of tax (11.3) 3.1 NM
Net earnings $83.2 $114.1 -27%
Earnings per common share:
Basic
Earnings from continuing operations $1.00 $1.13 -12%
Earnings (loss) from discontinued
operations (0.12) 0.03 NM
Net earnings $0.88 $1.16 -24%
Diluted
Earnings from continuing operations $0.99 $1.12 -12%
Earnings (loss) from discontinued
operations (0.12) 0.03 NM
Net earnings $0.87 $1.15 -24%
Weighted average number of shares
used for computation of:
Basic earnings per share 94.7 98.0 -3%
Diluted earnings per share 95.5 99.2 -4%
Effective tax rate (1) 27.6% 32.4%
Supplemental Information
Diluted earnings from continuing
operations $0.99 $1.12 -12%
Tax reserve reassessment (1) (0.06) - NM
Earnings from continuing operations,
as adjusted $0.93 $1.12 -17%
(1) The decrease in the effective tax rate for the second quarter of 2006
was primarily due to a tax reserve reassessment of $5.8 million.
