Boating Industry Intelligence You Can Profit From
LAKE FOREST, Ill. – Brunswick Corporation’s net boat and engine sales dropped six percent and four percent, respectively, in the second quarter of 2008 when compared to the same period last year, the company reported yesterday. Its boat sales declined from $732.8 million in the second quarter of 2007 to $687.9 million for the second quarter of 2008, while engine sales dipped to $643.5 million in the second quarter of 2008, from $669.6 million in the year-ago quarter.
Overall, the company reported a net loss of $6.0 million, or $0.07 per diluted share, for the second quarter of 2008, compared with net earnings of $56.9 million, or $0.63 per diluted share, from continuing operations for the same period a year ago. Both the second quarters of 2008 and 2007 include restructuring charges of $83.1 million, or $0.59 cents per diluted share, and $1.1 million, or $0.01 per diluted share, respectively, the company reported. The 2008 charges are primarily for costs associated with previously announced actions aimed at resizing the company and reducing fixed costs by $300 million versus 2007 spending levels by the end of 2009.
Despite the losses, both Brunswick chairman and CEO Dustan E. McCoy and analysts alike were pleased with the company’s performance.
“We commend our employees for the strong results that were achieved in the quarter during difficult economic conditions,” explained McCoy. “We believe these results underscore the inherent strengths of our brands, market position and operating and financial management expertise. They further reflect our employees’ ability to efficiently operate the business while making progress against restructuring and strategic initiatives designed to benefit Brunswick, our dealers and our shareholders over the long-term.”
“The company continues to execute relatively well, despite weak industry conditions,” wrote RBC Capital Markets analyst Edward Aaron in a report issued yesterday afternoon. “Long-term the stock is attractive, but the acceleration of the decline in the U.S. boat market as dealer inventories swell heading into the off-season, leaves us cautious nearer-term.”
“Brunswick is performing admirably under challenging conditions,” agrees Tim Conder, managing director of leisure equity research at Wachovia Capital Markets, LLC. “U.S. dealer bankruptcies will likely accelerate in the second half of 2008 [see Olympic Boats files for Chapter 11]. The issue here would be the impact of retail repossessions and troubled dealer inventory auctions negatively impacting a more limited pool of retail demand.
“The broader question is ‘What will be the shape of the U.S. marine recovery?’ We feel the answer to this is more gradual and protracted than most anticipate with the second half of 2009 the earliest for stabilization in the U.S. marine market and 2010 the earliest for the beginning of a sustainable gradual recovery.”
Second Quarter Results
For the quarter ended June 28, 2008, net sales decreased to $1,485.4 million, down 2 percent from $1,522.9 million a year earlier.
“Increased sales of commercial fitness equipment, bowling products and from our retail bowling centers, as well as 19 percent growth in non-U.S. sales, helped offset the decline in sales of marine products in the United States,” McCoy explained.
The company recorded an operating loss of $17.2 million for the second quarter of 2008, which includes the previously mentioned $83.1 million of restructuring charges, compared with operating earnings of $86.3 million in the year-ago quarter, including the $1.1 million of restructuring charges. The charges in both years were primarily for asset impairments, severance costs and plant shutdown expenses.
“The company continues to generate positive free cash flow, which provides us with significant liquidity and financial flexibility,” McCoy said. “At quarter end, we had $393 million of cash, up from $267 million at the end of the last quarter,”
Boats and engines
For the quarter, the boat segment had an operating loss of $37.7 million, including restructuring charges of $38.2 million, versus operating earnings of $19.3 million, including $1.0 million of restructuring charges, reported in the second quarter of 2007. Operating earnings for the marine engine segment, consisting of the Mercury Marine Group, in the second quarter decreased to $54.4 million versus $80.3 million, and operating margins declined to 8.5 percent from 12.0 percent for the same quarter in 2007.
“(Boat) sales outside of the United States for the segment were up 35 percent in the quarter, which helped offset the effect of both lower unit volume and exiting certain saltwater and high-performance brands,” McCoy said. “Sales also benefited from a shift in product mix, higher prices and contributions from Boston Whaler, Hatteras Yachts and several outboard boat brands. Meanwhile, overall operating earnings for the Boat Group were adversely affected by the restructuring charges, in addition to the effect of reduced fixed-cost absorption on lower production volume.
“The (engine) segment benefited from growth in non-U.S. sales, which were up 10 percent in the quarter, helping to offset the decline in domestic outboard and stern drive sales,” McCoy said. “As in the Boat segment, reduced fixed-cost absorption on lower production, primarily of stern drive engines, affected operating earnings for the Marine Engine segment.”
Looking ahead
“In addition to our continuing emphasis on introducing new and innovative products across all of our business units, our priorities for the remainder of 2008 are: (1) continuing to lower production levels to achieve reductions in pipeline inventories held by our marine dealers, (2) reducing spending across the company, and (3) implementing the company’s resizing and fixed-cost reduction initiatives announced last month,” McCoy said. “As we stated in June, most of our fiberglass boat plants will be shut down for one month during the third quarter. We have also reduced our capital expenditure budget for this year and halted all discretionary spending. Finally, progress continues on our strategic initiatives. While we have not provided specific earnings estimates, the magnitude of the scheduled production cuts will result in a loss for the second half of this year. Nevertheless, given what we know today, we expect to report positive earnings for the full year, excluding restructuring charges.
“What we are unable to predict is whether a change in market conditions would necessitate additional production cuts, or the possibility of further write-downs of goodwill or other intangibles. Heading into the second half, our cash position remains strong, and we are already close to reaching our year-end target of $400 million, which provides us with significant liquidity and financial flexibility.”
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