Brunswick Corporation net earnings were $72.9 million, or 75 cents per diluted share, for the third quarter of 2004, compared with $37.9 million, or 41 cents per diluted share, for the year-ago quarter. The company said that earnings
in the 2004 third quarter benefited by approximately $0.10 per diluted share
from completion of a tax audit, discussed below. Operating earnings in the
third quarter of 2004 rose 59 percent on a 23 percent sales gain.
“Led by our marine and fitness equipment units, we had another excellent
quarter of solid sales growth,” commented Brunswick Chairman and Chief
Executive Officer George W. Buckley. “Higher unit volumes due to market
growth and the success of new products, strength in international markets and
contributions from acquisitions completed earlier this year were the primary
drivers behind the 23 percent sales gain. Excluding sales from companies that
were not in the portfolio a year ago, sales were up 14 percent in the third
quarter. Through effective cost management and higher unit volumes, we
leveraged our top-line growth into a 59 percent increase in operating earnings
to $99.3 million and a 180 basis point improvement in operating margins.”
“We again ended the quarter with our balance sheet in excellent shape.
Debt-to-total capital was 30.7 percent at quarter end, compared with 33.3
percent a year earlier, and cash reached $493.1 million. This provides us
with the financial flexibility to make additional acquisitions and
investments, advance our core businesses and capitalize on opportunities to
carry out our growth strategy,” Buckley said.
“Our third quarter results were achieved despite an increasingly
competitive global marketplace and disruptions caused by the four hurricanes
that hit Florida and impacted much of the Southeastern United States,” Buckley
added. “Fortunately, their immediate effect on Brunswick was minimized
through the grit and determination of our dedicated employees. We estimate
that interruptions to our sales and production efforts during those trying
weeks cost Brunswick about $0.05 in earnings per diluted share in the third
quarter.”
“Although the storms have passed, we probably haven't seen the end of
their impact on our business,” Buckley continued. “The fourth quarter is
seasonally the slowest for marine retail sales, and the sales effect of the
hurricanes will likely linger for a while longer. As you would expect, people
will probably be more focused on rebuilding and repairing their homes and
getting their lives back together than on repairing or replacing their boats.
Once repairs have been made to the infrastructure, such as damaged docks and
marinas, there will, however, be a longer-term new boat and repair part sales
opportunity. Our objective is to get a disproportionate share of that
opportunity. The replacement cycle will most likely be layered in over
several quarters. Further, industry estimates are still being compiled and,
at this time, we don't know how many boats were totally destroyed versus
damaged. Insurance industry estimates of sailboat and powerboat repairs and
replacements from all four hurricanes exceed $680 million, excluding damage
that occurred in the Caribbean and to the marine infrastructure. With many
moving parts, these things are difficult to predict accurately, but we have
assumed some lingering hurricane impact in our current-year earnings
estimate.”
Third Quarter Results
For the quarter ended Sept. 30, 2004, net sales increased 23% to
$1,273.2 million, up from $1,036.3 million a year earlier. Operating earnings
rose to $99.3 million compared with $62.5 million in the year-ago quarter, and
operating margins improved to 7.8 percent from 6.0 percent. Net earnings
totaled $72.9 million, or $0.75 per diluted share, up 92 percent from
$37.9 million, or $0.41 per diluted share, for the third quarter of 2003.
Tax Provision for 2004
The company said that, during the third quarter, the Internal Revenue
Service completed its routine audit of tax years 1998 through 2001. Following
the completion of the examination of this four-year period, Brunswick reduced
its tax reserves and, consequently, its tax provision by approximately
$10 million in the third quarter of 2004. This is equivalent to approximately
$0.10 per diluted share in the quarter. Further, during the third quarter,
Brunswick reduced its projected tax rate for the year to 32.5 percent from
33 percent, excluding the impact of the audits. This was due to effective tax
planning and a higher-than-anticipated tax benefit from export sales. As a
result of these items, the company's effective tax rate was 20.5 percent and
29.1 percent for the quarter and nine months ended Sept. 30, 2004,
respectively.
In addition, as a result of the extension of the research and development
tax credit by Congress in early October, the company said it expects to reduce
further its full-year tax rate to 32 percent in the fourth quarter of 2004.
This excludes the impact of the audits, noted above.
Marine Engine Segment
The Marine Engine segment, consisting of the Mercury Marine Group and
Brunswick New Technologies (BNT), reported sales of $575.5 million in the
third quarter of 2004, up 15 percent from $500.8 million in the year-ago third
quarter. Operating earnings in the third quarter increased 16 percent to
$70.7 million versus $60.9 million, and operating margins were up slightly to
12.3 percent as compared with 12.2 percent for the same quarter in 2003.
“Our outboard and sterndrive engine sales increased during the quarter in
both the domestic and international markets,” Buckley said. “Parts and
accessories sales, however, while up in the quarter, were adversely affected
by the unprecedented hurricane activity throughout the Southeast. Mother
Nature kept people off the water, not using their boats, and subsequently not
requiring the usual complement of maintenance and replacement parts and
products.”
“In the quarter, BNT again recorded strong sales growth along with
positive overall operating margins. This was primarily due to the
contributions from Navman, a producer of global positioning system-based
products,” Buckley noted.
“We continue to see strong demand for our Verado family of
high-horsepower, four-stroke outboard engines, which are designed to meet
low-emission requirements while maintaining the high-performance
characteristics of traditional two-stroke outboards,” Buckley explained.
“Operating margins, however, were adversely affected by the typical start-up
costs associated with the introduction of Verado, the transition to
low-emission outboards that carry lower margins, expenses related to our China
manufacturing plant currently under construction, as well as by higher
research and development spending, primarily for BNT and new Verado models to
be released next year. Margin improvement will continue to be a focus in our
Marine Engine segment as we seek to mitigate the cost pressures through
effective cost management, global sourcing and applying the principles of Lean
Six Sigma to improve productivity. Our China plant and our expanded Japanese
manufacturing plant are scheduled to come on line late in the first quarter
next year, which will gradually help improve our margins,” Buckley said.
Boat Segment
The Brunswick Boat Group comprises the Boat segment and includes the Sea
Ray, Bayliner, Maxum, Hatteras, Sealine, Meridian, Boston Whaler, Trophy,
Baja, Crestliner, Lowe, Lund and Princecraft boat brands and the Land 'N' Sea
and Attwood marine parts and accessories distribution and manufacturing
businesses. The Boat segment reported sales for the third quarter of
$567.3 million, up 40 percent compared with $404.5 million in the third
quarter of 2003. Operating earnings increased to $36.1 million, more than
quadruple the $8.2 million reported in the third quarter of 2003, and
operating margins increased by 440 basis points, rising to 6.4 percent for the
quarter from 2.0 percent a year ago. About half of the sales gain was due to
incremental sales from acquisitions, primarily the aluminum boat brands
purchased in April of this year. Nevertheless, Boat segment sales absent
acquisitions were up a healthy 18 percent for the quarter, even with the
hurricane impact.
The significant improvement in operating margins was the result of a
number of factors, including higher unit volumes and a richer product mix.
The Boat segment also benefited from the turnaround at US Marine as the
division reported its third consecutive quarter of profitability.
“The hurricanes had a significant impact on the Boat segment,” Buckley
noted. “We shut down our Sea Ray and Boston Whaler plants on the East Coast
of Florida for each of the hurricanes, losing several production days. In
addition, our Land 'N' Sea distribution facility in Lake Suzy, Fla., was
virtually destroyed by Hurricane Charley. We are grateful that all of our
employees made it safely through the storms and are pleased to report that our
boat plants are all operational, and our Land 'N' Sea customers are being
serviced from our other distribution centers.”
Fitness Segment
The Fitness segment is comprised of the Life Fitness division, which
manufactures and sells Life Fitness, Hammer Strength and ParaBody fitness
equipment, and operates Omni Fitness retail stores. Segment sales in the
third quarter of 2004 reached $132.2 million, up 26 percent from
$105.1 million in the year-ago quarter. Operating earnings for the quarter
totaled $8.4 million compared with $8.7 million in the third quarter of 2003,
and operating margins were 6.4 percent compared with 8.3 percent a year ago.
“Life Fitness continued to build sales momentum during the quarter, with
gains in the commercial segment being driven by the success of our new
strength products and increased sales to the military,” Buckley said.
“Further, the success of new Life Fitness consumer products released during
the quarter helped advance sales.”
“Operating margins in this segment continue to be under pressure from
significantly higher steel prices, a competitive pricing environment in the
European market, and a shift in product mix towards hot selling, but lower
margin, strength equipment,” Buckley explained. “The year-over-year margin
gap is narrowing as we continue to improve efficiency in U.S.-based
manufacturing and restructure our overall manufacturing footprint. Our new
Hungarian cardiovascular equipment plant is on schedule to open in the first
quarter of next year where material costs, as well as labor, are significantly
lower than in the United States. Local manufacturing will help us reduce
shipping costs and improve delivery times on cardiovascular products to better
serve our European customers.”
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 third quarter of 2004 totaled
$106.6 million, up 9 percent compared with $97.5 million in the year-ago
quarter. Operating earnings rose to $4.0 million in the third quarter versus
$0.1 million, and operating margins improved to 3.8 percent compared with 0.1
percent in 2003.
“The quarter again saw double-digit sales gains in our bowling products
group, where our new Vector scoring system and popular new bowling balls, like
the Inferno, continue to sell well,” Buckley said. “Billiards sales were up
for the quarter, with good growth in our traditional tables business, driven
by the popularity of new models. Always a reliable and consistent performer,
our bowling retail centers also posted solid growth, despite the hurricanes
shutting down some of our centers for several days during the quarter.”
“We believe our family friendly approach to bowling is a key ingredient to
the success of our new bowling entertainment centers, building on our popular
Brunswick Zone concept. These centers are nearly twice the size of our
traditional Brunswick Zones and feature expanded recreation options in
addition to bowling,” Buckley said. “The two we opened during the second
quarter in suburban Chicago and Denver continue to perform at or above our
forecasts.”
Nine-Month Results
For the nine months ended Sept. 30, 2004, the company had net sales of
$3,895.5 million, up 28 percent from $3,041.8 million for the first three
quarters of 2003. Excluding contributions from acquired businesses, sales
were up 16 percent. Operating earnings totaled $317.3 million for the first
nine months of 2004, up from $162.7 million reported for the corresponding
period in 2003, and operating margins reached 8.1 percent versus 5.3 percent a
year ago. Operating earnings for the first nine months of 2003 include a
$25.0 million litigation charge ($16.0 million after tax) recorded in the
first quarter of 2003. Excluding the litigation charge, operating earnings
were $187.7 million, and operating margins were 6.2 percent for the first nine
months of 2003.
Net earnings for the first nine months of 2004 reached $211.0 million, or
$2.18 per diluted share, up from $95.3 million, or $1.04 per diluted share,
for the same period in 2003. Excluding the previously mentioned litigation
charge, net earnings for the nine months of 2003 totaled $111.3 million, or
$1.22 per diluted share. Results for 2004 also benefited from a 29.1 percent
effective tax rate for the nine-month period. This lower tax rate was due to
the same factors that affected the tax rate for the third quarter of 2004,
discussed above.
Looking Ahead
“2004 is shaping up to be a record year for Brunswick, resulting from the
efforts of our entire team to successfully execute our growth strategy,”
Buckley said. “Innovative new products and acquisitions are driving top-line
growth, and effective cost management and operational improvements are leading
to higher operating margins. Consequently, we are estimating diluted EPS for
2004 in the range of $2.70 to $2.75 per share. While this is above our
previous estimate of $2.60 to $2.68 per share, keep in mind that this new
estimate includes approximately $0.10 per share related to the completion of
the four-year tax return audit. In addition, we have factored into our
estimate some carryover impact of the hurricanes, which will be somewhat
offset by the lower full-year tax rate, as discussed previously.”
Brunswick Corporation
Comparative Consolidated Statements of Income
(in millions, except per share data)
(unaudited)
Quarter Ended September 30
2004 2003 % Change
Net sales $1,273.2 $1,036.3 23%
Cost of sales 956.2 781.2 22%
Selling, general and administrative
expense 186.5 162.6 15%
Research and development expense 31.2 30.0 4%
Operating earnings 99.3 62.5 59%
Interest expense (12.1) (10.1) 20%
Other income 4.4 5.9 -25%
Earnings before income taxes 91.6 58.3 57%
Income tax provision 18.7 20.4
Net earnings $72.9 $37.9 92%Earnings per common share:
Basic $0.76 $0.42 81%
Diluted $0.75 $0.41 83%Average shares used for computation of:
Basic earnings per share 96.2 91.2 5%
Diluted earnings per share 97.7 92.3 6%Effective tax rate (a) 20.5% 35.0%
