Brunswick Corporation reported net earnings of $20.5 million, or $0.22 per diluted share, for the fourth quarter of 2002, compared with a net loss of $2.6 million, or $0.03 per diluted share, for the year-ago quarter. Sales increased 29 percent to $928.0 million from $717.8 million, and operating earnings rose to $41.1 million, versus $6.8 million for the fourth quarter of 2001.
Commenting on the quarter, Brunswick Chairman and Chief Executive Officer George W. Buckley said, “We showed a significant improvement in sales compared with the year-ago quarter when we were curtailing wholesale shipments in our marine operations to reduce pipeline inventories. Our fitness equipment business also benefited from new products introduced in its seasonally strong fourth quarter. The leverage from significantly higher sales drove the company’s operating margins to 4.4 percent versus 0.9 percent for the year-ago quarter.”
“Looking at the year, all business units contributed to our excellent results,” Buckley continued. “For 2002, we reported a 19 percent increase in earnings per share on a 10 percent sales gain and 3 percent improvement in operating earnings. The sales increase was primarily due to higher marine engine sales and double-digit growth in fitness equipment as well as the incremental sales from boat companies acquired in 2001. Absent these acquisitions, sales were up 5 percent. Operating earnings benefited from higher volumes at Mercury and Life Fitness, cost reduction efforts and contributions from boat company acquisitions. Operating earnings were adversely affected by higher variable compensation, pension and insurance expense; an increase in the percentage of low-emission outboard engines and smaller boats in our marine product mix; and costs associated with the start- up of our financial services joint venture and the establishment of our global sourcing team. Higher joint venture income and lower interest expense also contributed to the increase in net earnings.”
“Our ability to generate significant free cash flow continues to be a highlight. Good working capital management combined with the increase in earnings resulted in $305 million of free cash flow for the year. Our balance sheet is in great shape with debt-to-total capital at year end at 35.9 percent compared with 36.6 percent a year earlier, giving us a lot of financial flexibility,” Buckley added.
For the year ended Dec. 31, 2002, the company had net sales of $3,711.9 million, up 10 percent from $3,370.8 million in 2001. Operating earnings rose 3 percent to $196.6 million, compared with $191.1 million a year earlier. Earnings before the cumulative effect of accounting changes, discussed below, reached $103.5 million, or $1.14 per diluted share, up from $84.7 million, or $0.96 per diluted share, for 2001. During the first quarter of 2001, the company adopted Financial Accounting Standards Board SFAS Nos. 133/138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” Including the non-cash cumulative effect of adopting this accounting standard, net earnings in 2001 totaled $81.8 million, or $0.93 per diluted share.
SFAS No. 142
Under Financial Accounting Standards Board SFAS No. 142, goodwill and certain other intangible assets are no longer amortized and deducted from earnings. The company said that under the prior accounting rules, in 2001 goodwill deductions totaled $0.03 and $0.12 per diluted share in the fourth quarter and for the year, respectively.
In accordance with SFAS No. 142, in the second quarter of 2002 the company completed its analysis of the fair value of the goodwill recorded on its balance sheet. As a result, a $25.1 million, or $0.28 per diluted share, non-cash charge was recorded in the second quarter as the cumulative effect of an accounting change. Generally Accepted Accounting Principles require this charge to be reflected as of Jan. 1, 2002. Including the effect of this charge, the company had net earnings of $78.4 million, or $0.86 per diluted share, for 2002. The charge covers the write-down of goodwill for bowling products businesses acquired in 1996 and 1998, and fitness equipment retail stores acquired beginning in 1999.
Marine Engine Segment
The Marine Engine segment, consisting of the Mercury Marine Group and Brunswick New Technologies, reported sales of $402.8 million in the fourth quarter of 2002, up 38 percent from $292.1 million in the year-ago fourth quarter. Operating earnings in the fourth quarter more than doubled to $16.7 million versus $7.9 million, and operating margins were 4.1 percent compared with 2.7 percent for the same quarter last year.
For the full year, Marine Engine segment sales rose 9 percent to $1,705.2 million, and operating earnings were down 1 percent to $170.9 million. Operating margins were 10.0 percent versus 11.1 percent in 2001.
“During 2001, we reduced wholesale shipments to reduce pipeline inventories. While we continued to experience weakness in the retail markets in 2002, our boat builder customers replenished inventories at higher rates,” Buckley said. “As a result, domestic sterndrive engine sales were up 16 percent to $441 million, and domestic outboard engine sales rose 9 percent to $465 million. Our international operations turned in a solid performance reporting an 8 percent sales gain to $508 million. Domestic parts and accessories sales increased 7 percent for the year to $243 million. During the year we continued to invest in several initiatives for future growth, including Project “X”, our game changing, high horsepower four-stroke outboard, as well as integrated marine electronics products. Spending for these efforts, along with the shift in product mix to low-emission outboard engines, had an adverse affect on operating margins.”
“While wholesale shipments improved, they were still below depressed retail sales, thus further reducing field inventories. Currently, inventory in the field represents 23 weeks of supply, compared with 24 weeks of supply at the same time a year ago,” Buckley noted.
The Brunswick Boat Group comprises the Boat segment and includes the Sea Ray, Bayliner, Maxum, Hatteras, Sealine, Meridian, Boston Whaler, Trophy, Baja and Princecraft boat brands. The Boat segment reported sales for the fourth quarter of $344.2 million, up 43 percent compared with $240.7 million in the year-ago fourth quarter. The Boat segment had operating earnings of $4.5 million compared with an operating loss of $16.6 million in the fourth quarter last year.
For 2002, Boat segment sales were up 12 percent to $1,405.3 million, and operating earnings rose 5 percent to $19.0 million. The sales gain was driven by the incremental sales from Hatteras, Sealine and Princecraft, all acquired in 2001. Excluding the acquired companies, Boat segment sales declined 2 percent. Operating margins were 1.4 percent in 2002 and 2001.
“Our Boat Group had a number of significant accomplishments in 2002,” Buckley noted. “The Bayliner brand was re-established as the leader in family boating with introduction of the Bayliner 175, an entry level boat, engine and trailer package with a suggested retail price of $9,995. We also launched Meridian yachts, a new line of pilothouse, sedan and aft cabin models ranging from 34 to 58 feet to meet the needs of boaters who spend more time on the water than at the dock.”
“For the industry, boats over 30 feet faced the most pressure in 2002 with a reported 28 percent decline at retail. The weak market for larger boats had the greatest impact on our Sea Ray division, which reduced wholesale shipments in an effort to keep pipeline inventories in balance. During the year we also started up our new manufacturing plant in Mexico and continued the reinvention of our US Marine division. Costs associated with these actions, along with the Meridian launch and lower production at Sea Ray, adversely affected operating margins for the year,” Buckley added.
“While retail market conditions remain sluggish, it is important to keep a close eye on pipeline inventories. Our wholesale shipments continued to track below retail sales. Consequently, field inventories currently represent 28 weeks of supply, compared with 32 weeks at this time last year,” Buckley commented.
The Recreation segment includes the Life Fitness exercise equipment and Brunswick Bowling and Billiards businesses. Segment sales in the fourth quarter of 2002 totaled $242.5 million, up 8 percent from $224.9 million in the fourth quarter a year ago. Operating earnings increased 56 percent to $36.9 million, up from $23.7 million, and operating margins were 15.2 percent versus 10.5 percent in the fourth quarter of 2001.
Recreation segment sales in 2002 increased 9 percent to $834.4 million, and operating earnings rose 86 percent to $66.3 million. Operating margins were 7.9 percent compared with 4.7 percent a year ago.
“Life Fitness had an excellent year reporting a 15 percent increase in sales to $457 million and a more than 50 percent increase in operating earnings,” Buckley said. “This strong performance was attributable to the introduction of 40 new products during the year, increased sales to the military and regional health club chains and market share gains. Our investment in technology will continue with 50 new products slated for introduction in 2003.”
“Brunswick Bowling and Billiards sales were up 3 percent for the year to $378 million. Credit for a significant improvement in operating earnings goes to our bowling capital equipment and products business,” Buckley noted. “The result of a lot of hard work to reduce costs, and improve products and supply chain management, turned a $25 million operating loss in 2001 into nearly break-even performance in 2002. We expect this business to be back in the black in 2003. In addition, our bowling retail and billiards businesses continued their strong operating performances in 2002.”
“In 2003, we will continue to execute our strategic plan: reduce costs to improve our competitive position, introduce a steady stream of innovative products, enhance our marketing and brand building efforts, improve our distribution channels, focus on our customers needs, and develop our people to strengthen our entire organization,” Buckley said. “This game plan has served us well as we managed through a tough market for marine products, and it will continue to guide us in 2003.”
“For planning purposes, we are assuming that the retail marine market will be relatively flat in 2003,” Buckley noted. “For reasons with which we are all familiar, we are not expecting much help from the economy. We still expect our marine sales will be up in the mid-single digits due to our boat builder customers and boat dealers replenishing inventories at slightly higher rates than in 2002 and the ramp-up of sales of new products. New product introductions are also expected to drive sales growth in our Recreation segment in the mid- to high-single digit range.”
“Pension expense is expected to be about $22 million higher in 2003 versus 2002. Good expense management and significantly reduced losses at our US Marine division are expected to result in improved operating margins overall for the company. We believe we can achieve earnings per share in the range of $1.40 to $1.60, compared with the $1.14 reported for 2002. This represents a 32 percent increase to the mid-point of the range,” Buckley said. “Making the same assumptions for the quarter, and with the usual caveats, earnings for the first quarter of 2003 are expected to be in the range of $0.20 to $0.22.”
Brunswick Corporation Comparative Consolidated Statements of Income (in millions, except per share data) (unaudited) Quarter Ended December 31 2002 2001 % Change Net sales $928.0 $717.8 29% Cost of sales 704.9 566.9 Selling, general and administrative expense 182.0 144.1 Operating earnings 41.1 6.8 NM Interest expense (10.8) (12.7) -15% Other income 1.8 0.6 Earnings before income taxes 32.1 (5.3) NM Income tax provision (benefit) 11.6 (2.7) Net earnings (loss) $20.5 ($2.6) NM Pro forma Information Reported net earnings (loss) $20.5 ($2.6) Goodwill and indefinite-lived intangible amortization (A) - 2.7 Adjusted net earnings $20.5 $0.1 Year Ended December 31 2002 2001 % Change (unaudited) Net sales $3,711.9 $3,370.8 10% Cost of sales 2,852.0 2,587.4 Selling, general and administrative expense 663.3 592.3 Operating earnings 196.6 191.1 3% Interest expense (43.3) (52.9) -18% Other income (expense) 8.3 (6.0) Earnings before income taxes 161.6 132.2 22% Income tax provision 58.1 47.5 Earnings before cumulative effect of change in accounting principle 103.5 84.7 22% Cumulative effect of change in accounting principle, net of tax (A) (25.1) (2.9) Net earnings $78.4 $81.8 -4% Pro forma Information Reported net earnings $78.4 $81.8 Goodwill and indefinite-lived intangible amortization (B) - 10.8 Adjusted net earnings $78.4 $92.6 Segment Information Quarter Ended December 31 Net Sales Operating Operating Earnings Margin % % 2002 2001 Change 2002 2001 Change 2002 2001 (unaudited) (unaudited) Marine Engine $402.8 $292.1 38% $16.7 $7.9 NM 4.1% 2.7% Boat 344.2 240.7 43% 4.5 (16.6) NM 1.3% -6.9% Marine eliminations (61.5) (39.9) - - Total Marine 685.5 492.9 39% 21.2 (8.7) NM 3.1% -1.8% Recreation 242.5 224.9 8% 36.9 23.7 56% 15.2% 10.5% Corporate/Other - - (17.0) (8.2) NM Total $928.0 $717.8 29% $41.1 $6.8 NM 4.4% 0.9% Year Ended December 31 Net Sales Operating Operating Earnings Margin % % 2002 2001 Change 2002 2001 Change 2002 2001 (unaudited) (unaudited) Marine Engine $1,705.2 $1,561.6 9% $170.9 $173.0 -1% 10.0% 11.1% Boat 1,405.3 1,251.3 12% 19.0 18.1 5% 1.4% 1.4% Marine eliminations (233.0) (207.9) - - Total Marine 2,877.5 2,605.0 10% 189.9 191.1 -1% 6.6% 7.3% Recreation 834.4 765.8 9% 66.3 35.7 86% 7.9% 4.7% Corporate/Other - - (59.6) (35.7) -67% Total $3,711.9 $3,370.8 10% $196.6 $191.1 3% 5.3% 5.7% NM= Not Meaningful