Fitness financials: Life Fitness slumping member of Brunswick family

With price pressures from steel continuing, Life Fitness was described as having “recent operational challenges,” by George Buckley, CEO and chairman of its parent, Brunswick Corporation (NYSE: BC) in the company’s 1Q earnings call.

Brunswick’s fitness division, including Life Fitness and its Parabody and Hammer Strength segments, showed pre-tax earnings down $2.8 million, down partly due to steel prices, but also due to lower margins, demand shifts to lower-margin and lower-cost strength products, and other in-house factors such as high costs of freight and installation, Buckley said during the company’s call April 26. Operating earnings for the quarter for fitness were $6.4 million, down 3 percent from 9.2 million in the year-ago quarter, while operating margins were 5 percent, down from 7 percent.

Buoyed by its boat and marine divisions, Brunswick reported today net earnings of $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. Results for the first quarter of 2005 include 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. For the quarter ended March 31, 2005, the company reported that net sales increased 17 percent 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. This was the 11th-consecutive quarter with year-over-year operating margin improvements, Buckley said.

In fitness, things weren’t quite as bright, with sales in the first quarter down 2 percent or $127.5 million, from $130.6 million in the year-ago quarter. Brunswick said that the sales decline is attributable to Brunswick’s sale of the Omni Fitness retail stores, which was completed in late 2004. Excluding Omni sales in the year-ago quarter, fitness equipment sales were up 5 percent. Segment operating earnings for the first quarter of 2005 totaled $6.4 million compared with $9.2 million for the year-ago quarter, and operating margins were 5.0 percent compared with 7.0 percent a year ago.

Demand is still high, Buckley said, with the international market growing stronger and holding its own more than domestically, despite recent price pressures in the United Kingdom. He said the emphasis for the rest of 2005 for fitness will be controlling costs. New Life Fitness President Peter Hamilton will “put hard pressure,” as Buckley described it, on controlling costs. In January, Hamilton, who had been in charge of Brunswick’s bowling and billiards segment since 200, replaced Kevin Grodzki, who became president of the Mercury Marine’s MerCruiser operations.

“Looking ahead, we have to be sensible,” he said about the entire Brunswick family. “We have tried to be hard-working, but we aren’t magicians.”

Buckley said the company was raising its 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, it is 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.

SNEWS® View: The personnel shuffle at Life Fitness wasn’t complete with the move of Grodzki earlier this year. Under Hamilton’s iron cost fist, there will be a hard look at jobs and duties, which will mean other employees may feel the crunch — as they already have — while others may get piled with additional job duties, since we doubt new hires will happen immediately.

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