Brunswick Corporation reported sales grew 4 percent in the second quarter. The gains were led by its Fitness segment, with sales climbing 7 percent; followed by Marine Engine, ahead 4 percent; and Boat segment, up 3 percent. On a GAAP and as adjusted basis, operating earnings increased 3 percent from second quarter 2013.

Second-quarter highlights include:

• Net sales increased 4 percent versus second quarter 2013.
• Gross margin was 30 basis points higher versus prior year.
• On a GAAP and as adjusted basis, operating earnings increased 3 percent from second quarter 2013.
• Adjusted pretax earnings increased by 8 percent. On a GAAP basis, pretax earnings were up 47 percent.
• Diluted EPS, as adjusted, of $0.95; a $0.28 decrease compared to prior year. The decrease in diluted earnings per common share from continuing operations, as adjusted, reflects a higher year-over-year effective tax rate. On a GAAP basis, EPS was $0.93 per diluted share.

“Our second quarter revenues increased by 4 percent, with sales to the U.S. up 5 percent and international markets up one percent,” said Brunswick Chairman and Chief Executive Officer Dustan E. McCoy. “Our top line reflected growth in outboard boats and engines, parts and accessories, fitness equipment and bowling products, partially offset by revenue declines in fiberglass sterndrive/inboard boats and engines, as well as retail bowling centers.

“Our second quarter gross margin of 27.8 percent reflected an increase of 30 basis points from the prior year. Operating expenses increased by 7 percent during the quarter. A modest improvement in adjusted operating earnings, combined with lower net interest expense, led to an 8 percent increase in adjusted pretax earnings. This increase was more than offset by a higher effective tax rate, which resulted in our lower diluted earnings per common share, as adjusted,” McCoy said.

Second Quarter Results

For the second quarter of 2014, the company reported net sales of $1,139.8 million, up from $1,098.3 million a year earlier. For the quarter, the Company reported operating earnings of $141.3 million, which included $3.1 million of net restructuring, exit and impairment charges. In the second quarter of 2013, the company had operating earnings of $136.7 million, which included $4.0 million of restructuring, exit and impairment charges.

For the second quarter of 2014, Brunswick reported net earnings from continuing operations of $88.6 million, or $0.93 per diluted share, compared with net earnings from continuing operations of $79.3 million, or $0.85 per diluted share, for the second quarter of 2013. The diluted earnings per share for the second quarter of 2014 included $0.02 per diluted share of restructuring, exit and impairment charges. The diluted earnings per share for the second quarter of 2013 included $0.04 per diluted share of restructuring, exit and impairment charges, $0.32 per diluted share of losses on early extinguishment of debt and a $0.02 per diluted share of unfavorable special tax items.

Review of Cash Flow and Balance Sheet

Cash and marketable securities totaled $335.0 million at the end of the second quarter, down $34.2 million from year-end 2013 levels. This decrease mainly reflects net cash provided by operating activities of $77.0 million, less cash used for investing and financing activities of $99.3 million. Investing activities included $29.1 million for an acquisition completed during the second quarter of 2014.

Net debt (defined as total debt, less cash and marketable securities) at the end of the second quarter was $123.0 million, an increase of $32.4 million from year-end 2013 levels. The increase in net debt primarily reflects the decrease in total cash and marketable securities.

Marine Engine Segment

The Marine Engine segment, consisting of the Mercury Marine Group, including the marine parts and accessories businesses, reported net sales of $652.4 million in the second quarter of 2014, up 3 percent from $631.7 million in the second quarter of 2013. International sales, which represented 33 percent of total segment sales in the quarter, increased by 2 percent. For the quarter, the Marine Engine segment reported operating earnings of $122.5 million. This compares with operating earnings of $119.4 million in the second quarter of 2013.

Sales increases in the quarter were led by the segment’s outboard and parts and accessories businesses, partially offset by a decline in sterndrive engines. Higher sales contributed to the increase in operating earnings in the second quarter of 2014, which was partially offset by the absence of favorable insurance settlements received in the second quarter of 2013 and increased investments for long-term growth.

Boat Segment

The Boat segment is comprised of the Brunswick Boat Group, and includes 14 boat brands. The Boat segment reported net sales of $324.1 million for the second quarter of 2014, an increase of 4 percent compared with $310.9 million in the second quarter of 2013. International sales, which represented 35 percent of total segment sales in the quarter, were flat compared to the prior year period. For the second quarter of 2014, the Boat segment reported operating earnings of $19.9 million, including net restructuring charges of $0.4 million. This compares with operating earnings of $14.6 million in the second quarter of 2013, including restructuring charges of $2.5 million.

The increase in sales reflected growth in outboard boats, partially offset by declines in the segment’s fiberglass sterndrive/inboard boat categories. Operating earnings benefited from higher sales, lower restructuring charges and improved net operating efficiencies.

Fitness Segment

The Fitness segment is comprised of the Life Fitness Division, which designs, manufactures, and sells Life Fitness and Hammer Strength fitness equipment. Fitness segment sales in the second quarter of 2014 totaled $159.7 million, up 6 percent from $150.8 million in the second quarter of 2013. International sales, which represented 51 percent of total segment sales in the quarter, increased by 3 percent. For the quarter, the Fitness segment reported operating earnings of $18.7 million. This compares with operating earnings of $20.8 million in the second quarter of 2013.

The increase in sales reflected growth to U.S. health clubs, as well as modest net gains in international markets. The decrease in operating earnings in the second quarter of 2014, when compared with the same period of 2013, reflects the benefit from higher sales, which was more than offset by investments in growth initiatives.

Bowling & Billiards Segment

The Bowling & Billiards segment is comprised of Brunswick retail bowling centers, bowling equipment and products, and billiards tables and accessories. Segment sales in the second quarter of 2014 totaled $72.1 million, up 2 percent compared with $71.0 million in the year-ago quarter. International sales, which represented 15 percent of total segment sales in the quarter, decreased by 26 percent, primarily due to the reduction in sales resulting from the divestiture of its European retail bowling centers in 2013. For the quarter, the segment reported operating earnings of $3.3 million. This compares with operating earnings of $1.6 million in the second quarter of 2013, including restructuring charges of $1.5 million.

Sales increased in the quarter as a result of an improvement in bowling products sales, as well as gains in U.S. equivalent retail center sales, including the impact of the pilot centers. Partially offsetting these increases were a reduced retail center count and a decrease in billiards sales. The increase in operating earnings in the second quarter of 2014, when compared with 2013, was due to higher sales and lower restructuring charges.

Discontinued Operations – 2014 Subsequent Earnings Releases and Outlook

On July 17, 2014, the company announced (1) the signing of an agreement to sell its Retail Bowling business and (2) its intention to sell its Bowling Products business. Starting with the third quarter of 2014, these businesses will be reported as discontinued operations. The historical and future results of the Billiards business will be reflected in the company’s Fitness segment. As a result, the following outlook statements incorporate these future reporting changes.

2014 Outlook

“The U.S. marine market is unfolding consistent with our annual expectations and continues to benefit from solid growth in outboard boat and engine products, as well as in parts and accessories,” McCoy said. “In the fiberglass sterndrive/inboard boat category, which also affects sterndrive/inboard engine production, modest unit growth in boats greater than 30 feet is being more than offset by declines in boats under 30 feet. International marine markets, however, have experienced declines in retail sales, specifically in Canada and South America. Consequently, first-half global marine retail demand growth is below our annual expectations.

“Our Fitness segment continues to benefit from favorable health and fitness trends in the U.S. market. Outside of the U.S., demand trends have been mixed, with slight overall growth thus far during the year.

“During the second half of the year, we expect that our marine and fitness businesses will benefit from several new products being introduced into the marketplace or reaching full production rates. Market acceptance of these products has been excellent, and as a result, our plan reflects stronger revenue growth rates in the second half of 2014.

“With excellent growth being generated from new product introductions, combined with continuing solid outboard, parts and accessories and fitness market conditions, partially offset by a lower rate of growth from international markets, as well as continued weakness in global fiberglass sterndrive products, our current plan reflects a full-year growth rate in consolidated sales of 5 percent to 6 percent.

“Our full-year plan continues to reflect solid improvement in gross margin levels. In addition, as a result of our ongoing investments in growth initiatives, operating expenses are estimated to increase in 2014, however, on a percentage of sales basis, they are expected to be at slightly lower levels than 2013. The year-over-year rate of increase in operating expenses is expected to be slower in the second half of 2014.

“Our guidance continues to reflect another year of strong growth in adjusted operating earnings, as well as adjusted pretax earnings growth of 24 percent to 30 percent. Finally, we are revising our previously stated 2014 diluted earnings per common share, as adjusted, guidance to $2.25 to $2.35, which incorporates the recently announced divestiture of our bowling businesses and the associated discontinued operations treatment,” McCoy concluded.