Brunswick’s Consumer Sales Sag in Q3

Brunswick Corporation reported consumer sales of its fitness and billiards products were flagging, indicating that if Americans are retreating to their dens, they are not diverting money into treadmills and foosball tables.

 

However, strong commercial demand caused fitness sales to rise 8% in the third quarter. The company marked down the value of its boat business, took restructuring charges and hoarded cash during the quarter.


Fitness segment sales increased 8% in the quarter to $161.6 million, up from $150.2 million in the year-ago quarter. Operating earnings for the quarter totaled $10.3 million, down from $11.8 million for the third quarter of 2007, and operating margins were 6.4% versus 7.9% a year ago.

 

CEO Dusty McCoy attributed this growth to new Life Fitness products such as the elevation series of cardio products or signature series of strength equipment.


The Bowling & Billiards segment third quarter sales totaled $111.1 million, down 3% compared with $114.6 million in the year-ago quarter.


“For the quarter, bowling retail sales were down in the low-single-digits, in part because there were fewer centers in operation versus a year ago,” remarked McCoy. “However, revenues from a growing number of Brunswick Zone XLs helped to mitigate the effect of this reduction.”

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Brunswick’s Consumer Sales Sag in Q3

Brunswick Corporation reported consumer sales of its fitness and billiards products were flagging, indicating that if Americans are retreating to their dens, they are not diverting money into treadmills and foosball tables. However, strong commercial demand caused fitness sales to rise 8% in the third quarter. The company marked down the value of its boat business, took restructuring charges and hoarded cash during the quarter.


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 $161.6 million, up from $150.2 million in the year-ago quarter. Operating earnings for the quarter totaled $10.3 million, down from $11.8 million for the third quarter of 2007, and operating margins were 6.4% versus 7.9% a year ago. The Fitness segment recorded $0.8 million in restructuring charges during the third quarter of 2008.


“Commercial equipment sales, which account for about 90 percent of Life Fitness business, were strong in all regions during the third quarter. This helped offset the drop in sales of consumer products in the United States,” McCoy said. “Operating earnings were down during the quarter, reflecting higher material prices and increased freight costs due to fuel surcharges from suppliers. These higher costs were partially offset by a reduction in operating expenses, as Life Fitness continues efforts to focus on reducing costs and improving productivity.”


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 2008 totaled $111.1 million, down 3% compared with $114.6 million in the year-ago quarter. For the third quarter, the segment had an operating loss of $10.4 million, which includes $13.6 million of goodwill and trade name impairments, and $1.8 million of restructuring charges. This compares with an operating loss of $0.2 million in the year-ago period.


“For the quarter, sales declines were most prevalent within our billiards operation, where consumers continue to defer purchases of discretionary products. Further, the industry is facing an overall decline in the coin-operated pool table market,” McCoy explained. “In an effort to address these concerns, we have implemented several cost-cutting and staff reduction moves in our bowling and billiards operations.


“For the quarter, bowling retail sales were down in the low-single digits, in part because there were fewer centers in operation versus a year ago, as six older centers were closed when their leases expired during the second quarter of 2008. However, revenues from a growing number of Brunswick Zone XLs helped to mitigate the effect of this reduction,” McCoy added. “Bowling capital equipment sales were up in the mid-teens for the quarter, benefiting from new center and modernization activity both within and outside of the United States.”



Consolidated financial results


For the quarter ended Sept. 27, 2008, consolidated net sales decreased to $1,038.8 million, down 22% from $1,326.2 million a year earlier, driven by a 28% drop in marine sales.

 

“The marine market in the United States is becoming increasingly challenging due to difficult economic conditions, financial market upheaval and tightening credit availability, on top of the continuing weak housing market,” said Brunswick chairman and CEO Dustan E. McCoy. “According to preliminary industry statistics in the United States, retail demand for boats in our key fiberglass segments dropped nearly 40 percent in the third quarter versus a year ago, and a slowdown in demand has spread to regions outside of the United States. Given this environment, limiting our loss from operations to 33 cents per diluted share before charges and ending the quarter with a significant cash balance is commendable and reflects the hard work of individuals across the entire Brunswick organization. Our cost reduction activities are taking hold and a relentless focus on managing the balance sheet is evident in our results.”

 

The company had an operating loss of $566.3 million for the third quarter of 2008. As previously announced, the company concluded that a significant portion of its goodwill and trade names was impaired, as prescribed by SFAS No. 142, Goodwill and Other Intangible Assets. Accordingly, the company recorded $374.0 million of goodwill and $121.1 million of trade name impairment charges, associated primarily with certain boat brands, in the third quarter of 2008. Both of these are non-cash charges.

 

The operating loss in the third quarter also includes $39.1 million of restructuring charges. In the third quarter of 2007, the company had an operating loss of $46.3 million, which included $66.4 million of trade name impairments and $4.7 million of restructuring charges.

But while the company was taking non cash impairment charges it was also building up cash, which totaled $342.9 million at the end of the quarter.


For the third quarter of 2008, the company reported a net loss from continuing operations of $591.4 million, or $6.70 per diluted share, as compared with a net loss of $23.7 million, or 27 cents per diluted share, from continuing operations for the third quarter of 2007. Diluted earnings per share for the third quarter of 2008 include goodwill and trade name impairment charges of $4.31 per diluted share, restructuring charges of 28 cents per diluted share, and a $1.78 per diluted share charge for special tax items, primarily related to the establishment of a deferred tax valuation allowance resulting from the cumulative losses reported by the company.

 

Diluted earnings per share for the third quarter of 2007, included 47 cents and 3 cents per diluted share of trade name impairment and restructuring charges, respectively, as well as 4 cents per diluted share benefit from special tax items.

 

                                    Brunswick Corporation
                    Comparative Consolidated Statements of Income
                           (in millions, except per share data)
                                       (unaudited)


                                   Three Months Ended
                            September 27, September 29,
                                            2008       2007         % Change

    Net sales                            $1,038.8   $1,326.2         -22%
    Cost of sales                           862.3    1,063.5         -19%
    Selling, general and administrative
     expense                                177.4      206.9         -14%
    Research and development expense         31.2       31.0           1%
    Goodwill impairment charges             374.0         –            NM
    Trade name impairment charges           121.1       66.4          82%
    Restructuring, exit and other
     impairment charges                      39.1        4.7           NM
      Operating earnings (loss)            (566.3)     (46.3)          NM
    Equity earnings (loss)                   (1.0)       3.0           NM
    Investment sale gain                      2.1         –            NM
    Other income (expense), net              (0.3)       7.5           NM
      Earnings (loss) before interest
       and income taxes                    (565.5)     (35.8)          NM
    Interest expense                        (12.7)     (12.8)          1%
    Interest income                           2.5        1.9          32%
      Earnings (loss) before income
       taxes                               (575.7)     (46.7)          NM
    Income tax (benefit) provision           15.7      (23.0)
      Net earnings (loss) from
       continuing operations               (591.4)     (23.7)          NM

    Discontinued operations:
      Earnings from discontinued
       operations, net of tax                  –         4.6           NM
      Gain on disposal of discontinued
       operations, net of tax                  –        21.0           NM
      Net earnings from discontinued
       operations                              –        25.6           NM

      Net earnings (loss)                 $(591.4)      $1.9           NM

    Earnings per common share:
      Basic
        Net earnings (loss) from
         continuing operations             $(6.70)    $(0.27)          NM
        Earnings from discontinued
         operations, net of tax                –        0.05           NM
        Gain on disposal of discontinued
         operations, net of tax                –        0.24           NM

        Net earnings (loss)                $(6.70)     $0.02           NM

      Diluted
        Net earnings (loss) from
         continuing operations             $(6.70)    $(0.27)          NM
        Earnings from discontinued
         operations, net of tax                –        0.05           NM
        Gain on disposal of discontinued
         operations, net of tax                –        0.24           NM

        Net earnings (loss)                $(6.70)     $0.02           NM

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