Switch to low-emission engines impacts Mercury’s margins

LAKE FOREST, Ill. – The marine engine segment of marine industry giant Brunswick Corp., consisting of the Mercury Marine Group and Brunswick New Technologies, saw sales and earnings increases for the four quarter and the year.

Margins, however, took a hit from the switch to low emission engines. Also offsetting increases in operating earnings were costs to ramp up Asian manufacturing plants, higher research and development expense for Brunswick New Technologies and lower production rates to maintain healthy inventory levels.

Because they are complex and their components cost more, low-emission engines have lower margins than the carbureted two- stroke engines they are replacing. In 2005, low-emission engines accounted for 82 percent of Mercury’s outboard sales compared with 59 percent a year earlier.

Brunswick’s marine engine segment reported sales of $634.2 million in the fourth quarter of 2005, up 8 percent from $584.6 million in the year-ago fourth quarter. Operating earnings in the fourth quarter were up 7 percent in the period to $36.8 million versus $34.3 million, and operating margins were 5.8 percent compared with 5.9 percent for the same quarter in 2004.

For the full year, marine engine segment sales rose 12 percent to $2,638.7 million from $2,353.2 million, and operating earnings were $260.7 million versus $243.2 million in 2004. Operating margins decreased for the year to 9.9 percent from 10.3 percent in 2004.

“Mercury Marine’s international sales set the pace for the year reporting a 10 percent increase to $791 million,” Brunswick CEO and Chairman Dusty McCoy said. “Meanwhile, our domestic engine operations posted single-digit sales gains with sterndrive engine sales rising 4 percent to $561 million. Our domestic outboard engine business, which continues to face the strongest competition, reported sales up 1 percent to $480 million. Sales of Mercury’s domestic parts and services were up 7 percent to $352 million. Finally, Brunswick New Technologies, with its Navman and Northstar brands, reported sales for the year of $356 million, up 76 percent.”

McCoy added that the company continues to adjust production rates to ensure inventory levels stay healthy.

“By carefully managing our business and reducing production where necessary, we ended 2005 with 26 weeks of supply of engines in the field, which is the same level we reported at the end of 2004 and appropriate for this time of the year,” he said.

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