Brunswick Corporation reported adjusted operating earnings increased 45 percent in the third quarter on a 13 percent revenue gain. Fitness segment sales, including Life Fitness, and Marine Engine segment revenues, each grew 11 percent. Boat segment sales jumped 22 percent.
Highlights of the quarter include:
- Net sales increased 13 percent versus third quarter 2013; year-to-date sales increased 5 percent.
- Gross margin was 20 basis points higher versus prior year; year-to-date improvement of 60 basis points.
- Adjusted operating earnings increased 45 percent from third quarter 2013; year-to-date growth of 12 percent. On a GAAP basis, operating earnings increased 49 percent; year-to-date growth of 15 percent.
- Adjusted pretax earnings increased by 56 percent; year-to-date increased by 19 percent. On a GAAP basis, pretax earnings were up 63 percent; year-to-date up 42 percent.
- Diluted EPS, as adjusted, of 63 a share, a 5 cents a share increase compared to prior year; year-to-date a decrease of 32 cents a share. On a GAAP basis, third quarter EPS of 64 cents per diluted share. The changes in diluted earnings per common share from continuing operations includes a higher year-over-year effective tax rate.
“Our third quarter revenues increased by 13 percent, with U.S. sales up 15 percent and international markets up 10 percent,” said Brunswick Chairman and Chief Executive Officer Dustan E. McCoy. “Our top line reflected double-digit growth in each of our three segments. Our performance benefited from recent investments in growth initiatives with several new products being introduced into the marketplace along with increases in production rates and capacity. Sales growth was also driven by improvements in outboard boats and engines, marine parts and accessories, fiberglass sterndrive/inboard boats and fitness equipment, partially offset by revenue declines in sterndrive engines.
“Our third quarter gross margin of 27.8 percent reflected an increase of 20 basis points from the prior year. Operating expenses increased by one percent during the quarter. Strong improvement in adjusted operating earnings, combined with lower net interest expense and higher other income, led to a 56 percent increase in adjusted pretax earnings. This increase, combined with a partially offsetting higher effective tax rate, resulted in a 9 percent increase in our diluted earnings per common share, as adjusted,” McCoy said.
Discontinued Operations
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. On Sept. 18, 2014, the sale of the Retail Bowling business was completed. Starting with the third quarter of 2014, the historical and future results of these businesses are now reported as discontinued operations and the historical and future results of the Billiards business, which remains part of the Company, are now reflected in the Fitness segment. Therefore, for all periods presented in this release, all figures and outlook statements incorporate these changes and reflect continuing operations only, unless otherwise noted.
Third Quarter Results
For the third quarter of 2014, the Company reported net sales of $932.1 million, up from $824.4 million a year earlier. For the quarter, the Company reported operating earnings of $93.7 million, which included $0.9 million of net restructuring, exit and impairment charges. In the third quarter of 2013, the Company had operating earnings of $62.7 million, which included $2.6 million of restructuring, exit and impairment charges.
For the third quarter of 2014, Brunswick reported net earnings of $61.0 million, or $0.64 per diluted share, compared with net earnings of $57.2 million, or $0.61 per diluted share, for the third quarter of 2013. The diluted earnings per share for the third quarter of 2014 included $0.01 per diluted share of restructuring, exit and impairment charges and $0.02 per diluted share benefit from special tax items. The diluted earnings per share for the third quarter of 2013 included $0.02 per diluted share of restructuring, exit and impairment charges and $0.05 per diluted share benefit from special tax items.
Review of Cash Flow and Balance Sheet
Cash and marketable securities totaled $596.8 million at the end of the third quarter, up $227.6 million from year-end 2013 levels. This increase mainly reflects net proceeds received from the sale of the Retail Bowling business completed in the third quarter of 2014 (reported in discontinued operations). In addition, net cash provided by operating activities of $122.7 million, less cash used for investing and financing activities of $144.7 million, also affected cash and marketable securities balances. Investing activities included $41.8 million for acquisitions completed during the first nine months of 2014.
Marine Engine Segment
The Marine Engine segment, consisting of the Mercury Marine Group, including the marine parts and accessories businesses, reported net sales of $566.9 million in the third quarter of 2014, up 11 percent from $511.1 million in the third quarter of 2013. International sales, which represented 34 percent of total segment sales in the quarter, increased by 12 percent. For the quarter, the Marine Engine segment reported operating earnings of $93.3 million.
This compares with operating earnings of $75.2 million in the third 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, benefits from new products and continued favorable warranty experience contributed to the increase in operating earnings in the third quarter of 2014.
Boat Segment
The Boat segment is comprised of the Brunswick Boat Group, and includes 14 boat brands. The Boat segment reported net sales of $234.6 million for the third quarter of 2014, an increase of 22 percent compared with $191.7 million in the third quarter of 2013. International sales, which represented 29 percent of total segment sales in the quarter, increased by 5 percent compared to the prior year period. For the third quarter of 2014, the Boat segment reported an operating loss of $7.0 million, including net restructuring charges of $0.9 million. This compares with an operating loss of $16.9 million in the third quarter of 2013, including restructuring charges of $2.6 million.
The increase in sales reflected balanced growth between outboard and fiberglass sterndrive/inboard boats. The improvement in the segment’s operating loss was a result of higher sales and lower restructuring charges.
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 third quarter of 2014 totaled $189.0 million, up 11 percent from $170.7 million in the third quarter of 2013. International sales, which represented
52 percent of total segment sales in the quarter, increased by 10 percent. For the quarter, the Fitness segment reported operating earnings of $25.8 million. This compares with operating earnings of $25.3 million in the third quarter of 2013.
The increase in sales reflected growth to U.S. health clubs, hospitality and local and federal government customers, as well as net gains in international markets. The increase in operating earnings in the third quarter of 2014, when compared with the same period of 2013, reflects the benefit from higher sales, mostly offset by investments in growth initiatives.
2014 Outlook
“Pursuant to our strategy to grow in moderate economic conditions, all of our businesses have been investing heavily in growth for several quarters. Our third quarter results reflect the success of our growth investments and we are well-positioned to continue to generate sales and earnings growth throughout the remainder of 2014 and beyond,” McCoy said.
“Although category and regional strengths and weaknesses exist in the marine and fitness markets, the demonstrated resiliency of both marine participation and the overall commercial fitness market, and the continued successful execution of our growth strategy give us the confidence that we can achieve the financial targets outlined in our 2016 plan, absent any significant changes in global macroeconomic conditions.
“With the majority of the net proceeds received from the partially completed bowling divestitures, our enhanced strategic focus and financial strength provide our organization with an excellent platform to continue to successfully execute against, and in certain instances accelerate, our growth objectives, as well as enable us to return capital to our shareholders.
“During the fourth quarter, we expect our businesses will continue to benefit from several new product introductions along with increases in production rates and capacity. Market acceptance of these products has been excellent, and as a result, our plan reflects strong revenue growth rates in the fourth quarter 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 weaker demand in certain international markets, as well as continued declines in global fiberglass sterndrive products, our current plan reflects a full-year growth rate in consolidated sales of approximately 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 lower levels than 2013.
“Our guidance continues to reflect another year of strong growth in adjusted operating earnings, as well as adjusted pretax earnings growth of 28 percent to 31 percent. Finally, we are revising our previously stated 2014 diluted earnings per common share, as adjusted, guidance to $2.30 to $2.35,” McCoy concluded.
