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Brunswick Reports Q2 2013 Earnings

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Photo Credit: Sea Ray

By Tom Kaiser
July 25, 2013
Filed under Features, News, Top Stories

Outboards are strong, while fiberglass sterndrives continue trailing overall market

Citing strong performance in its outboard engine, fitness equipment and U.S. bowling segments, Brunswick Corporation (NYSE: BC) reported positive second quarter 2013 financial results.

Net sales increased 4 percent versus second quarter 2012. Gross margin was 60 basis points higher versus the previous year, and adjusted operating earnings increased 12 percent from second quarter 2012. On a GAAP basis, operating earnings rose 9 percent.

Screen Shot 2013-07-25 at 10.06.51 AM“We reported continued gains in sales, margins and earnings reflecting our ability to execute against our growth and debt reduction plans in spite of challenging market conditions in certain of our businesses,” said Brunswick chairman and CEO Dustan McCoy. “Revenue in the quarter increased 4 percent and was led by growth in outboard marine products, marine parts and accessories, fitness equipment and US retail bowling. Partially offset by declines in fiberglass sterndrive inboard boats and in our bowling products business.”

Headwinds for the marine side of the business included continued difficulty from weather in the United States, softness in the European market and a fiberglass sterndrive market that remains weaker than the rest of the marine market.

Diluted earnings per common share from continuing operations, as adjusted, of 
$1.23; a $0.19 increase versus the same period of 2012. On a GAAP basis, $0.85 per diluted share, a $0.17 decrease from prior year.

Screen Shot 2013-07-25 at 10.09.36 AM“Our second quarter results reflected solid top-line growth combined with improvements in operating and net earnings, as adjusted,” said McCoy. “Revenue growth in the quarter was led by outboard marine products, marine parts and accessories, fitness equipment, and U.S. retail bowling, partially offset by declines in fiberglass sterndrive/inboard boats and in our bowling products business.

“Our second quarter gross margin of 27.5 percent reflected an increase of 60 basis points from the prior year. Operating expenses increased by 2 percent, due to higher research and development expense primarily associated with company-wide investments in growth initiatives. Lower net interest expense and a reduced effective tax rate (excluding the impact of restructuring charges, losses on early extinguishment of debt and special tax items) during the quarter also contributed to our higher diluted earnings per common share, as adjusted,” McCoy said.

On Jan. 3, 2013, the Company announced its intention to exit its Hatteras and CABO boat businesses. As a result, these businesses continue to be reported as discontinued operations for all periods presented in this release and all figures reflect continuing operations only, unless otherwise noted.

A reconciliation of GAAP to non-GAAP financial measures is provided in the supplemental information sections of the consolidated financial statements accompanying this release.

Second Quarter Results

For the second quarter of 2013, the Company reported net sales of $1,098.3 million, up from $1,053.9 million a year earlier. For the quarter, the Company reported operating earnings of $136.7 million, which included $4.0 million of restructuring, exit and impairment charges. In the second quarter of 2012, the Company had operating earnings of $125.1 million, which included $0.8 million of restructuring, exit and impairment charges.

For the second quarter of 2013, Brunswick reported net earnings from continuing operations of $79.3 million, or $0.85 per diluted share, compared with net earnings from continuing operations of $94.0 million, or $1.02 per diluted share, for the second quarter of 2012. 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 of losses on early extinguishment of debt and a $0.02 per diluted share charge from special tax items.
The diluted earnings per share for the second quarter of 2012 included $0.05 per diluted share of losses on early extinguishment of debt and a $0.03 per diluted share benefit from special tax items.

Review of Cash Flow and Balance Sheet

Cash and marketable securities totaled $330.2 million at the end of the second quarter, down $98.5 million from year-end 2012 levels. This decrease primarily reflects net cash used for financing activities of $124.9 million. During the second quarter of 2013, the Company redeemed approximately $250 million of its 11.25 percent Senior Secured Notes due in 2016. The retirement of these notes was funded using the combination of the proceeds from the issuance of $150 million of 4.625 percent Senior Notes due 2021 and cash and marketable securities.

Net debt (defined as total debt, less cash and marketable securities) at the end of the second quarter was $142.2 million, a decrease of $0.9 million from year-end 2012 levels.

Marine Engine Segment

The Marine Engine segment, consisting of the Mercury Marine Group, including the marine parts and accessories businesses, reported net sales of $631.7 million in the second quarter of 2013, up 7 percent from $591.2 million in the second quarter of 2012. International sales, which represented 33 percent of total segment sales in the quarter, increased by 3 percent. For the quarter, the Marine Engine segment reported operating earnings of $119.4 million. This compares with operating earnings of $104.9 million in the second quarter of 2012, which included $0.9 million of restructuring charges.

Sales increases in the quarter were led by the segment’s outboard and parts and accessories businesses. Higher sales, a favorable product mix, improved cost and operating efficiencies and a decrease in restructuring charges contributed to the increase in operating earnings in the second quarter of 2013. Partially offsetting these favorable factors were the effects of increased investments for long-term growth and higher warranty expense due to a more favorable warranty adjustment in the prior year period.

Boat Segment

The Boat segment is comprised of the Brunswick Boat Group, and includes 15 boat brands. The Boat segment reported net sales of $310.9 million for the second quarter of 2013, an increase of one percent compared with $308.7 million in the second quarter of 2012. International sales, which represented 37 percent of total segment sales in the quarter, increased by 2 percent during the period. For the second quarter of 2013, the Boat segment reported operating earnings of $14.6 million, including restructuring charges of $2.5 million. This compares with operating earnings of $18.7 million in the second quarter of 2012, including restructuring charges of $0.1 million.

The slight increase in sales reflected growth in outboard boats, almost entirely offset by declines in the segment’s fiberglass sterndrive/inboard boat categories. Higher restructuring, exit and impairment charges, increased investments for long-term growth and the absence of second quarter 2012 favorable legal and insurance settlements had a negative effect on the segment’s quarterly operating earnings. Partially offsetting these factors were the benefits from successful cost reduction activities.

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 2013 totaled $150.8 million, up 5 percent from $143.3 million in the second quarter of 2012. International sales, which represented 51 percent of total segment sales in the quarter, increased by 10 percent. For the quarter, the Fitness segment reported operating earnings of $20.8 million. This compares with operating earnings of $19.9 million in the second quarter of 2012.

The increase in sales reflected gains in international markets and growth to U.S. health club and hospitality customers. The increase in operating earnings in the second quarter of 2013, when compared with 2012, reflects the benefit from higher sales, partially 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 2013 totaled $71.0 million, down 2 percent compared with $72.6 million in the year-ago quarter. International sales, which represented 20 percent of total segment sales in the quarter, decreased by 21 percent. For the quarter, the segment reported operating earnings of $1.6 million, including restructuring charges of $1.5 million. This compares with operating earnings of $2.4 million in the second quarter of 2012.

Sales decreased in the quarter as a result of lower bowling products sales and a reduced retail center count. Partially offsetting these declines was an increase in U.S. equivalent retail center sales. The decrease in operating earnings in the second quarter of 2013, when compared with 2012, was due to higher restructuring charges and lower sales, partially offset by higher retail bowling operating margins.

2013 Outlook

“Notwithstanding the uneven marine market conditions, we are increasing our expectation for 2013 diluted earnings per share from continuing operations, as adjusted, to a range of $2.55 to $2.65 per diluted share,” McCoy said. “This reflects our solid performance in the first half of the year, a favorable outcome to the recent debt refinancing activity and a lower-than-anticipated tax rate.

“Our operating plans for the remainder of the year reflect a continuation of the uneven recovery in the U.S. powerboat market, with outboard boat and engine products and global parts and accessories businesses, which have performed well in the first half, generating solid growth. Our assumptions continue to reflect weak market conditions, as well as further pipeline reductions in the fiberglass sterndrive/inboard boat categories, which will affect both fiberglass boat and sterndrive engine sales and production.

“Positive health and wellness trends, combined with exciting new products, have positioned our fitness business to continue its strong top-line performance and deliver excellent results again in 2013, and our bowling business should further benefit from operating enhancements and capitalizing on its competitive advantages.

“We are now targeting approximately a 4 percent growth rate in overall revenue in 2013, consistent with our first half performance. Our current plan reflects a solid improvement in gross margin levels for the year. Our organic growth platform will benefit from increased 2013 investments in capital projects and research and development programs, along with the SG&A to support them. As a result of these initiatives, full- year operating expenses, as a percentage of sales, are expected to be comparable to 2012 levels.

“For the full-year, we expect to generate positive free cash flow generally consistent with prior year performance, and due to the successful execution of our debt reduction plan, 2013 net interest expense should be lower than 2012 by approximately $23 million,” McCoy concluded.

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