Brunswick Corporation saw a 16% increase in net earnings on a 5% sales gain and a 12% increase in operating earnings in the second quarter of 2003. Diluted earnings per share rose to $0.59 compared with $0.51 per diluted share for the second quarter of 2002.
Commenting on the announcement, Brunswick Chairman and Chief Executive Officer George W. Buckley said, “Overall we had a very good second quarter with strong sales from the Brunswick Boat Group, which were up 12 percent, leading the way. We also achieved higher sales of marine engines in international markets, domestic commercial fitness equipment and from our retail bowling centers. The sales gain also reflects the impact of a weaker U.S. dollar. The benefit of higher boat sales, coupled with our ongoing cost reduction efforts across all of our business units, is evident in the 12 percent increase in operating earnings in the quarter. These factors helped offset the higher pension expense and health care costs we continue to experience. Operating margins improved to 8.1 percent from 7.7 percent a year ago.”
“During the quarter we completed three acquisitions that are significant to our growth strategy,” Buckley noted. “The purchase of Valley-Dynamo, the leading manufacturer of coin-operated pool, table hockey and foosball tables, will give us a line of new products and a strong position in a new distribution channel. Valley-Dynamo is also the leader in home table hockey and foosball tables, which are sold through specialty retailers, as are Brunswick’s billiards tables. The Brunswick Boat Group’s goal of building a dedicated boat parts and accessories (P&A) business will be aided by the acquisition of Land N Sea, the largest distributor of marine P&A in North America. We also purchased 70 percent of Navman, the New Zealand-based maker of global positioning system-based products, which will further support our efforts to more fully integrate marine electronics into our boats. These companies will benefit from Brunswick’s financial and market strengths, as well as our industry expertise. They, in turn, will help fuel our growth across the board.”
For the quarter ended June 30, 2003, the company reported net sales of $1,071.0 million, up 5 percent from $1,017.2 million a year earlier. Operating earnings rose to $87.2 million, up 12 percent from $77.9 million, and operating margins reached 8.1 percent versus 7.7 percent a year ago. Net earnings totaled $53.6 million, or $0.59 per diluted share, up 16 percent from $46.2 million, or $0.51 per diluted share, in the year-ago second quarter.
During the second quarter, the company made a $62 million payment (approximately $50 million after tax) to the Internal Revenue Service relating to a tax case that is currently under appeal. The company elected to make the payment to avoid accruing future interest costs. Consequently, the company lowered its effective tax rate to 35 percent from 36 percent.
For the six months ended June 30, 2003, the company had net sales of $2,005.5 million, up 6 percent from $1,883.9 million for the first half of 2002. Operating earnings reached $100.2 million for the first half of 2003, which includes a $25 million litigation charge recorded in the first quarter of 2003. Excluding the litigation charge, operating earnings were up 16 percent to $125.2 million in the first half of 2003 from $108.2 million for the same period a year ago. Net earnings for the first six months of 2003 reached $57.4 million, or $0.63 per diluted share, including the aforementioned litigation charge, which is equivalent to $0.18 per diluted share. Excluding the litigation charge, earnings for the first half of 2003 totaled $0.81 per diluted share. Net earnings for the year-ago period totaled $34.3 million, or $0.38 per diluted share. Included in the 2002 results is the cumulative effect of adoption of Financial Accounting Standards Board SFAS No. 142, “Goodwill and Other Intangible Assets.” Adoption of this accounting standard resulted in a non-cash, after-tax charge of $25.1 million, or $0.28 per diluted share, in the first quarter of 2002.
Marine Engine Segment
The Marine Engine segment, consisting of the Mercury Marine Group and Brunswick New Technologies (BNT), reported net sales of $521.9 million in the second quarter of 2003, up 3 percent from $505.8 million in the year-ago second quarter. Strong international sales and recent acquisitions offset the decline in domestic sales. Operating earnings in the second quarter were $64.2 million versus $77.8 million a year ago. Operating margins were 12.3 percent compared with 15.4 percent in the second quarter of 2002.
“Sales benefited from a strong performance in international markets, which were up 22 percent in the quarter,” Buckley noted. “By contrast, the U.S. outboard market remains challenging as many of our competitors continue to offer deep discounts. We lowered production to keep inventories in balance and ended the quarter with 19 weeks of supply of engines in the pipeline, the same as last year. The lower production volumes and shifts in product mix to low-emission outboards, along with higher pension and health care costs and investments in BNT, are the primary drivers behind the margin decline. We are beginning to see the impact of cost reduction actions taken in the second quarter, which will be even more evident in the second half of the year.”
“We continue to focus on new product development, and the technology transition from traditional carbureted two-stroke outboard engines to low-emission direct fuel injected (DFI) two-stroke and four-stroke products,” Buckley added. “We recently introduced a new 115-horsepower OptiMax DFI two-stroke and our Project “X” high-horsepower four-stroke outboard is on track for a spring 2004 launch. These products will further enhance our position in this important segment.”
Boat Segment
The Brunswick Boat Group comprises the Boat segment and includes the Sea Ray, Bayliner, Meridian, Maxum, Sealine, Hatteras, Boston Whaler, Trophy, Baja and Princecraft boat brands. The Boat segment reported sales for the second quarter of $418.9 million, up 12 percent compared with $373.3 million in the year-ago quarter. Operating earnings rose to $32.3 million, nearly triple the $11.0 million reported for the corresponding period last year. Operating margins in the second quarter improved to 7.7 percent from 2.9 percent a year ago.
“Nearly all of our boat brands posted strong sales growth in the quarter, with new products doing particularly well,” Buckley commented. “Retail markets remain challenging, especially in the larger boat segments; however, we continue to see good demand for our entry-level Bayliner 175 runabout, and new models from Sea Ray, Sealine and Boston Whaler. Higher volumes and global sourcing efforts, along with significant improvements at our US Marine division, are driving improvement in operating earnings and operating margins.”
“As we enter the 2004 model year, field inventories remain in excellent shape at 22 weeks of supply compared with 23 weeks a year ago. This is right where we want to be going into the seasonally-slower second half of the year,” Buckley explained.
Fitness Segment
The Fitness segment is comprised of the Life Fitness division, which manufacturers and sells Life Fitness, Hammer Strength and ParaBody fitness equipment, and operates Omni Fitness retail stores. Segment sales in the second quarter of 2003 totaled $105.1 million, up 1 percent from $103.6 million in the year-ago quarter. Operating earnings rose 33 percent to $5.3 million from $4.0 million, and operating margins were 5.0 percent, up from 3.9 percent in the second quarter of 2002.
“Life Fitness sales in the domestic commercial segment were up double digits in the second quarter with increases coming primarily from the regional health club and military markets,” Buckley said. “This strong performance helped offset weakness in international markets, as well as lower retail sales. We are beginning to see some signs of improvement in Asian markets, where SARS had virtually shut down health clubs and delayed expansion plans among clubs and hotel chains. Life Fitness continues to improve on its market-leading position with an onslaught of new product introductions, many of which include integrated electronics and features to enhance the users experience. We are poised to fully benefit as the negative effects of these market conditions eventually subside.”
Bowling & Billiards Segment
The Bowling & Billiards segment is comprised of the Brunswick retail bowling centers; bowling equipment and products; and billiards, table hockey and foosball tables. Segment sales in the second quarter of 2003 totaled $94.1 million, down 2 percent compared with $95.7 million in the year-ago quarter. Operating earnings were $1.9 million in the quarter versus an operating loss of $1.7 million in the comparable quarter in 2002. Segment operating margins improved to 2.0 percent in the second quarter compared with a negative 1.8 percent in the second quarter a year ago. Margins are historically low in the second and third quarters due to lower seasonal activity in retail bowling.
“Our retail bowling business recorded improved sales demonstrating the stability and resiliency of this business even during challenging economic times,” Buckley said. “Sales of bowling and billiards products were down quarter-over-quarter, as proprietors and distributors continued to take a wait-and-see attitude toward the economy. Cost reduction efforts and supply chain initiatives implemented over the past two years throughout this segment were major contributors to the improvement in operating earnings in the quarter.”
Commenting on the current year, Buckley said, “We remain on track to meet our earnings expectations for 2003. While the outlook remains mixed, consumers appear to believe the economy is stabilizing. Were not predicting an upturn, but were not expecting conditions to worsen. When we look at current marine market conditions, the low pipeline inventories, new products scheduled for launch, along with a few cents contributed from recent acquisitions and a lower effective tax rate, we are more comfortable that we can hit the higher end of our previously indicated range of $1.40 to $1.50 per diluted share for 2003, excluding the $0.18 per share litigation charge taken in the first quarter. Therefore, we are narrowing our EPS estimate to $1.45 to $1.50, compared with $1.14 reported for 2002. This would indicate earnings for the third quarter of between $0.35 and $0.40 per diluted share versus $0.26 per diluted share for the third quarter of 2002.”
Brunswick Corporation
Comparative Consolidated Statements of Income
(in millions, except per share data)
(unaudited)
Quarter Ended June 30
2003 2002 % Change
Net sales $1,071.0 $1,017.2 5%
Cost of sales 807.2 777.4
Selling, general and administrative
expense 176.6 161.9
Operating earnings 87.2 77.9 12%
Interest expense (10.1) (10.6) -5%
Other income 5.3 4.7
Earnings before income taxes 82.4 72.0 14%
Income tax provision 28.8 25.8
Net earnings $53.6 $46.2 16%
Earnings per common share:
Basic $0.59 $0.51 16%
Diluted $0.59 $0.51 16%
Average shares used for computation of:
Basic earnings per share 90.8 90.2 1%
Diluted earnings per share 91.3 91.4 0%
Effective tax rate 34.9% 35.8%
Brunswick Corporation
Selected Financial Information
(in millions)
(unaudited)
Segment Information
Quarter Ended June 30
Net Sales
%
2003 2002 Change
Marine Engine $521.9 $505.8 3%
Boat 418.9 373.3 12%
Marine eliminations (69.0) (61.2)
Total Marine 871.8 817.9 7%
Fitness 105.1 103.6 1%
Bowling & Billiards 94.1 95.7 -2%
Corporate/Other - -
Total $1,071.0 $1,017.2 5%
