As Brunswick Corp. announced that operating earnings were at their highest nine-month level since 2006, chairman and CEO Dustan E. McCoy told investors that he hoped the company’s quarterly earnings statements will become increasingly “boring.”
“We want to get away from big swings in this business,” McCoy told investors and analysts Thursday during Brunswick’s third-quarter earnings call. “I hope as you watch you will become more and more comfortable that we will continue to perform and grow the top and bottom line without worrying too much about overall economic conditions.”
Brunswick’s retail sales, up overall about 9 percent for the year to date, compared with the marine industry’s 1 percent increase for the same period, rose “significantly more than 9 percent on a year-over-year basis” in the third quarter, McCoy said.
McCoy attributed Brunswick’s ability to outperform the market in a traditionally slow boat sales quarter — while providing fewer discounts and promotions than in 2010 — to the strong dealers that comprise the company’s distribution network.
“I do have a concern, and that concern is that maybe we don’t have enough in the pipeline on smaller [and aluminum] product, but our guys are working hard to make sure we’re well-positioned for 2012,” McCoy said.
Brunswick reported an increase in net sales for the third quarter and said it swung from a loss a year earlier to a profit for the quarter this year.
Brunswick reported net sales of $876.7 million, up 8 percent from $815.4 million in the quarter last year. Operating earnings improved by $10.4 million.
The company reported net earnings of $4.7 million, or 5 cents a diluted share, compared with a loss of $7.2 million, or 8 cents a share, last year.
Excluding restructuring charges, loss on early extinguishment of debt and special tax items in 2011 and 2010, net earnings were 33 cents and 7 cents a diluted share, respectively.
Debt was reduced by $84 million, to the lowest level in more than seven years, and the company reported cash and marketable securities of $546.7 million.
“Our third-quarter results reflected higher shipments of engines and boats that were supported by solid retail growth experienced at our dealers,” McCoy said.
For the quarter, the company reported operating earnings of $35.6 million, which included restructuring and exit charges of $13.2 million. In the third quarter of 2010, Brunswick had operating earnings of $25.2 million, which included $12.2 million of restructuring, exit and impairment charges.
Diluted earnings per share for the third quarter of 2011 included restructuring and exit charges of 14 cents a diluted share, loss on early extinguishment of debt of 13 cents a diluted share and a 1-cent-a-diluted share expense from special tax items. Earnings per diluted share for the third quarter of 2010 included 14 cents a share of restructuring, exit and impairment charges and a 1-cent-a-diluted-share loss on early extinguishment of debt.
Brunswick expects to see solid growth opportunities from its plan, announced in September, for Mercury to assume future responsibility for international sales, service distribution and support for the Cummins MerCruiser Diesel lineup of high-speed diesel marine engine systems, including the TDI Volkswagen engines, McCoy said Thursday.
The company hopes to maximize opportunities not only in the recreational market, but also in commercial and government sectors, McCoy said.
“More people are beginning to understand these under-350-hp engines perform as well or better than gasoline engines, and that’s especially true in Europe,” McCoy said. “This TDI engine will do well in commercial and government [sectors], but we think the demand is going to be significant outside those areas and in the recreational environment as well.”
Since announcing the venture in September at the Genoa Boat Show, “we’ve got folks lining up for the engines,” McCoy said. “It permits us to serve non-U.S. markets who prefer diesel in a much more effective way.”
The marine engine segment reported net sales of $467.2 million in the quarter, up 9 percent from $429.2 million in the 2010 quarter. International sales represented 39 percent of the total segment sales in the quarter and increased by 12 percent.
The segment reported operating earnings of $44.5 million, which included $4.2 million of restructuring charges. This compares with operating earnings of $49 million in the third quarter of 2010, which included $1.7 million of restructuring charges.
The segment’s outboard engine category experienced its greatest percentage of sales growth during the quarter. The decline in operating earnings reflects higher material costs, a less favorable product mix and higher variable compensation costs and restructuring charges, as well as an increase in research and development spending. Partially offsetting those factors were benefits from higher sales and cost reductions.
Brunswick will ramp up its production of aluminum boats and fiberglass boats under 24 feet, McCoy said. The company would like to begin 2012 with about 17,000 units, instead of the 15,000 to 16,000 units that was projected earlier.
“We have moved that up so we can keep our dealers in boats as they go into the selling season,” McCoy said. “Above 24 feet, we’ve got our hands around that and they continue to run at record lows.”
The boat segment reported net sales of $209.2 million, equal to the $209.2 million reported in the third quarter of 2010. International sales represented 29 percent of the total segment sales, decreasing by 16 percent from the third quarter last year.
The boat segment reported an operating loss of $17.9 million, including restructuring charges of $8.7 million, compared with an operating loss of $26.3 million in 2010, which included restructuring charges of $10.2 million.
Boat segment production and wholesale unit shipments increased during the quarter in response to solid retail demand. Revenue growth from increases in wholesale unit shipments was partially offset by the timing of the sale of Brunswick’s Sealine brand on Aug. 31.
A greater sales mix of smaller boats and lower sales to non-U.S. markets also had a negative effect on sales during the quarter. Increased fixed-cost absorption and cost reductions had a positive effect on the segment’s improved quarterly results.
Wells Fargo analyst Timothy Conder reiterated his rating of outperform for Brunswick’s stock. He said the company’s strong third-quarter results “demonstrate powerful leverage” in the company’s business model.
“All else equal, industry new boat demand should resume growing in 2012, and Brunswick should continue posting solid market share gains,” he said.
The marine retail market for 2011 is unfolding generally as expected, with aluminum and fiberglass outboard boat markets experiencing solid growth and fiberglass sterndrive boat markets continuing to decline, albeit at a more moderate pace, McCoy said.
McCoy expects 2011 earnings per share to be in the range of 65 to 75 cents.
“As we look forward to 2012, we continue to believe that the global economic and marine market outlook will remain challenging,” McCoy said. “As a result, our entire organization is focused on maintaining its favorable cost position and generating continued revenue and earnings growth through a focus on organic growth initiatives.”
— Reagan Haynes