Brunswick reports strong 1Q

LAKE FOREST, Ill. – With combined engine and boat sales up 21 percent during the period, net earnings for Brunswick Corp. rose to $94.6 million, or $0.96 per diluted share, for the first quarter of 2005, up from net earnings of $48.0 million, or $0.50 per diluted share, for the year-ago quarter, the company said in a release this morning.

Brunswick’s net earnings rose for the 2005 first quarter, ended March 31, rose to $94.6 million, a 97 percent gain over the $48.0 million the company made during the same period in 2004.

Results for the first quarter included a $0.32 per diluted share gain on the sale of securities. The company said operating earnings increased 26 percent on a 17 percent sales gain in the first quarter.

“Once again our marine operating units led the way with combined engine and boat sales up 21 percent during the period,” Brunswick chairman and CEO George W. Buckley said. “The sales gain was driven by strong dealer response to new product introductions as well as continued strength in international markets.

Buckley said acquisitions played a role in Brunswick’s sales increase in the quarter.

“Excluding sales from business units we didn’t own in the first quarter last year, sales rose 10 percent, illustrating the strong performance delivered by our base operations,” he said. “Further, we continue to look for more effective ways to leverage our top-line growth down to the bottom line. Higher volumes combined with our focus on effective cost management resulted in an increase in operating margins to 7.1 percent, up from 6.5 percent a year ago. In addition, we continued to maintain a strong balance sheet, with debt-to-total capital at 28.9 percent at quarter end compared with 30.4 percent a year earlier. This provides us with the financial flexibility to invest in our ongoing businesses, while seeking attractive acquisitions.”

First quarter results
Brunswick said net sales increased 17 percent for the quarter to $1,401.1 million, up from $1,199.6 million a year earlier.

Operating earnings rose to $99.1 million compared with $78.5 million in the year-ago quarter, and operating margins improved to 7.1 percent from 6.5 percent. Net earnings totaled $94.6 million, or $0.96 per diluted share, up from $48.0 million, or $0.50 per diluted share, for the first quarter of 2004.

As previously announced, during the first quarter of 2005 the company completed the sale of approximately 1.9 million shares of MarineMax, Inc., stock. The sale resulted in a pre-tax gain of $38.7 million, equivalent to $0.32 per diluted share in the quarter.

Engine sales up 15 percent
The Marine Engine segment, consisting of the Mercury Marine Group and Brunswick New Technologies, reported sales of $605.6 million in the first quarter of 2005, up 15 percent from $527.9 million in the year-ago first quarter. Operating earnings in the first quarter advanced 22 percent to $52.0 million versus $42.6 million, and operating margins increased to 8.6 percent compared with 8.1 percent for the same quarter in 2004.

“We continue to see strong demand for our new products, which is driving sales growth in the segment,” Buckley said. “During the first quarter we extended our Verado family of supercharged four-stroke outboard engines with the launch of the 135-, 150- and 175- horsepower models. BNT, particularly our Navman unit, also contributed to segment sales growth in the quarter. We are beginning to see the results of Navman’s accelerated research and development investments as well as its increasing presence in markets around the world.”

Buckley said the first-quarter opening of Mercury’s new 174,000-square-foot production facility in China – which produces four-stroke outboard engines between 40 and 60 horsepower – as well as the opening of a new 275,000-square-foot facility in Japan with joint venture partner Tohatsu, where 2.5 to 30 horsepower four-stroke outboards are made, are also very positive developments.

“Worker training and production validation have been completed, and the plants have now begun production,” Buckley said. “As the year continues, we expect the plants will ramp up volume and, in turn, increase our cost competitiveness in these market segments.”

Boat segment sales jump 32 percent
The Brunswick Boat Group comprises the boat segment, which produces fiberglass and aluminum boats as well as marine parts and accessories. The boat segment reported sales for the first quarter of $677.5 million, up 32 percent compared with $512.0 million in the first quarter of 2004. Operating earnings increased 55 percent to $49.5 million, up from $32.0 million, and operating margins were up 100 basis points to 7.3 percent from 6.3 percent.

“The success of new products contributed to the sales gain with double-digit growth reported by Sea Ray, Boston Whaler, Sealine, Princecraft and Baja,” Buckley said. “The boat parts and accessories business also reported sales gains during the quarter. A portion of the Boat segment sales gain was due to the acquisition of the Crestliner, Lowe, Lund and Sea Pro brands, which were not included in the prior-year quarter. Excluding incremental sales from these acquisitions, Boat segment sales were up 17 percent. Higher volumes and effective cost management accounted for the significant improvement in operating margins.”

Buckley again reiterated Brunswick’s strategy of “covering the waterfront” by “filling in the white spaces” to gain or strengthen its participation in certain market segments. He said Brunswick continues to see strong demand for its Bayliner 175 and Bayliner 185 entry-level runabouts, and that the opening of a second Brunswick boat plant in Mexico, has doubled its capacity to produce models in that family.

Outlook
“We continue to be very encouraged by the trends we are seeing in the marine market, especially as we enter the spring selling season,” Buckley said. “Our marine pipeline inventories are at 31 weeks of supply for boats and 29 weeks of supply for engines, up three weeks and five weeks, respectively from a year ago, representing a return to more normal levels.”

Buckley said the pipeline build is due to a number of factors, including higher dealer inventories in international markets in response to strong demand and the introduction of new boat models, both in the U.S. and abroad. He also noted that retail sales in the first quarter of 2004 were exceptionally high, resulting in a rapid draining of pipeline inventories “to almost unprecedented low levels at this time last year. The current level of inventories represents our dealers’ expectations for growth in retail demand this year. In addition, a healthier pipeline will help us avoid the shortage of popular new models that we experienced in some categories last year.”

Brunswick raises estimate
“While always being cognizant of the influence of underlying economic and stock market conditions, we remain on track for another very good year,” Buckley said. “Given our performance in the first quarter, we are raising our estimate for the year by $0.05 to $3.52 to $3.67 per diluted share, which includes the $0.32 gain on the stock sale. This compares with $2.77 per diluted share for 2004. For the second quarter, we are estimating earnings in the range of $1.08 to $1.13 per diluted share, compared with $0.93 per diluted share for the year-ago second quarter.”

Brunswick said its new estimate assumes sales growth for the year of between 12 percent and 13 percent and operating margin improvement of between 90 and 110 basis points. Versus its previous estimate, this represents a one percent increase in the rate of sales growth and 10 to 20 basis points higher operating margin expansion.

Analyst reaction
Gary Cooper, an analyst with Banc of America Securities Equity Research, said he expected share of Brunswick Corp. to be strong this morning based on the raised guidance. Cooper said Brunswick’s first quarter EPS of $0.64 exceeded Wall Street’s consensus by $0.04 and Banc of America’s estimate by $0.05.

Commenting on Brunswick’s increased FY05 guidance, Cooper said:

“Excluding the gain on sale, BC increased its full-year FY05 guidance to $3.20-3.35 from its prior guidance of $3.15-3.30. However, note that BC effectively reduced its 2Q05-4Q05 guidance by $0.01-0.02 given that the company exceeded the midpoint of its original 1Q05 guidance of $0.55-0.60 by $0.065. BC’s pro forma full-year guidance of $3.20-3.35 compares to the FY05 Street estimate of $3.29 and our estimate of $3.28.

“At roughly 13.6x the midpoint of BC’s pro forma FY05 guidance, we believe shares of BC are fairly valued given the uncertain outlook for consumer spending.”

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