Brunswick reports strong gains in sales, earnings

LAKE FOREST, Ill. – Two hurricanes and near-record high fuel prices weren’t enough to stop Brunswick Corp. from posting strong gains in sales and earnings for the third quarter ended Sept. 30, the company reported in a release this morning.

Analysts at Bank of America said the “quality” of those earnings was mixed, however, due in part to increases in inventory.

Brunswick’s Marine Engine segment, consisting of the Mercury Marine Group and Brunswick New Technologies, reported net sales of $643.4 million in the third quarter of 2005, up 12 percent from $575.5 million in the year-ago quarter. Operating earnings in the third quarter decreased 8 percent to $64.9 million versus $70.7 million, while operating margins declined to 10.1 percent from 12.3 percent for the same quarter in 2004.

“BNT and Mercury’s international operations led the sales gain for the segment during the quarter,” said George W. Buckley, Brunswick chairman and CEO. “BNT sales were up 82 percent for the period, with Navman once again the source of this growth, nearly doubling its sales from the year-ago quarter. Navman continues to expand its offerings of GPS-based land navigation products, as well as its marine electronics products.

“Though Hurricanes Katrina and Rita caused disruptions, outboard and sterndrive sales still grew in single digits during the quarter. We are also working through the migration of our customers from conventional two-stroke outboard engines to low-emission outboards, which are a growing percentage of our sales mix. Low-emission engines accounted for 95 percent of Mercury’s outboard sales during the third quarter, up from 63 percent a year ago. This transition affects operating margins for the segment as low-emission engines are more technically complex, have higher-cost components and, consequently, lower margins.”

Buckley noted the importance of managing pipeline inventories in a cyclical business, and said that while retail demand “remains robust,” Brunswick “selectively reduced production rates in some product areas during the quarter” in order to ensure that production remained aligned with wholesale demand.

“Due to the seasonal nature of the marine industry, we would typically see inventories begin to build during the third quarter from levels at the end of June,” Buckley said. “In this quarter, however, engine pipeline inventories declined by one week to 19 weeks of supply at the end of September, a very healthy level for this time of the year. As we announced last month, we will adjust production rates as needed to ensure that inventories remain healthy.”

Boat segment sales up 20 percent

Brunswick’s Boat segment – consisting of the Brunswick Boat Group, which is comprised of 19 boat brands, and other parts and accessories distribution and manufacturing businesses – reported net sales for the third quarter of $682.7 million, up 20 percent compared with $567.3 million in the third quarter of 2004.

Brunswick said boat segment sales for the quarter benefited from the Albemarle, Sea Pro, Triton, Kellogg Marine and HarrisKayot acquisitions, all made since the end of 2004.

Excluding the sales of these businesses, organic boat segment sales increased 7 percent in the quarter. Operating earnings increased to $38.0 million as compared with $36.1 million reported in the third quarter of 2004, and operating margins were 5.6 percent, down from 6.4 percent.

“Sales gains in the boat segment were again led by several of our leading brands, including Sea Ray, Boston Whaler and Hatteras,” Buckley said. “All showed double-digit sales increases as did the Boat Group’s parts and accessories business. As we enter the marine off-season when retail activity slows, we are carefully adjusting production rates on selected brands to ensure production remains consistent with current market conditions.”

Buckley said that at the end of the third quarter boat pipeline inventories stood at 22 weeks of supply, down one week from 23 weeks at the end of June, and was the same trend Brunswick saw on the engine side of its business. He also noted that boat pipelines are down one week from 23 weeks of supply at the end of the third quarter of 2004.

“Our goal is to position ourselves and our boat customers, just like our engine customers, in the best possible manner as we prepare for the spring selling season,” Buckley said. “We aim to have healthy pipelines and fresh product for our dealers to address consumer desires.”

Overall results

Brunswick’s net sales increased 13 percent in the third quarter, to $1,434.6 million, up from $1,273.2 million a year earlier. Operating earnings rose 7 percent to $105.9 million compared with $99.3 million in the year-ago quarter, and operating margins were down slightly to 7.4 percent from 7.8 percent. Net earnings totaled $88.4 million, or $0.89 per diluted share, up 21 percent from $72.9 million, or $0.75 per diluted share, for the third quarter of 2004. The company said that net earnings and diluted earnings per share in both 2005 and 2004 benefited from lower tax provisions.

“We reported a good third quarter with sales up 13 percent,” Buckley said. “When you factor in the combined effects of high fuel prices, lower consumer confidence and two hurricanes, we are very pleased with our results.

Buckley said that sales growth was driven by strong contributions from Brunswick New Technologies, good performance from Brunswick’s marine businesses and acquisitions completed since the end of 2004.

“Excluding acquisitions, our organic sales growth was 7 percent, led by significant gains from some of our most established boat brands,” Buckley said. “Operating earnings rose 7 percent in the third quarter, and operating margins declined slightly by 40 basis points to 7.4 percent. This was primarily due to higher investment spending to expand our global manufacturing footprint and to develop new products, the shift in product mix to low emission outboard engines, and the impact of lower production rates to maintain pipeline inventories at healthy levels as we enter the off-season.”

The company said that during the third quarter of 2005, it repurchased 375,000 shares of Brunswick common stock at an average price of $41.90 per share. To date in the fourth quarter of 2005, the company has repurchased an additional 1 million shares of common stock at an average price of $37.80 per share.

Year-to-date results also up

For the nine months ended Sept. 30, Brunswick said it had net sales of $4,434.3 million, up 14 percent from $3,895.5 million for the first three quarters of 2004.

Excluding contributions from acquired businesses, sales were up 9 percent, led by new gains. Operating earnings totaled $376.7 million for the first nine months of 2005, up 19 percent from the $317.3 million for the corresponding period in 2004, and operating margins were 8.5 percent versus 8.1 percent a year ago.

Net earnings for the first nine months of 2005 increased 41 percent to $297.1 million, or $3.00 per diluted share, from $211.0 million, or $2.18 per diluted share, for the same period in 2004.

Buckley said that as Brunswick approaches the end of the year, it continues to see strong retail demand for marine products, consistent with its assumption that retail would be up in the mid-single digits for the year.

“While we will keep a watchful eye on pipeline inventories as we enter the off-season, we remain confident that we are on track for another record earnings year for Brunswick, and we expect continued growth next year,” Buckley said.

Buckley said that Brunswick was maintaining its previously announced estimate of earnings for 2005.

Analysts reaction

Banc of America Securities Equity Research analyst Gary Cooper issued a release in reaction to Brunswick’s report.

Cooper said Banc of America remains Neutral on Brunswick but expects shares to react favorably.

“The combination of EPS upside despite driven by positive tax benefit should provide a lift to the stock which has been down recently,” Cooper wrote. “Guidance was unchanged and inventory continues to build. We believe Street estimates for FY06 may be too high.”

Cooper said the quality of Brunswick’s earnings was mixed.

“Inventory increased +19 percent and DSIs grew +3 days to 76 days in 3Q05,” he wrote. “On the other hand, accounts payable increased +31 percent and days outstanding grew +5 days to 37 days. Accounts receivable increased +13 percent and DSOs were relatively flat at 31 days. Cash from operations improved to $141 million in 3Q05, from $80 million last year.”

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