LAKE FOREST, Ill. – Sales were up 10 percent for Brunswick’s Boat Group and 3 percent for its Marine Engine segment in the first quarter of 2006, the company reported yesterday.
On a pro forma basis, the Boat segment reported sales for the first quarter of $751.0 million, up from $680.7 million in the first quarter of 2005. Operating earnings were $48.4 million, down from $49.1 million for the quarter, and operating margins were 6.4 percent compared with 7.2 percent in the prior year.
“The sales gain for the segment was driven by acquisitions as organic sales, which excludes boat brands that were not in our portfolio in the year-ago quarter, fell by a little less than 1 percent,” said Brunswick Chairman and Chief Executive Officer Dustan E. McCoy. “Marine retail was down in the first quarter when compared with very robust demand in the first quarter of 2005. As a result, we placed tremendous focus on managing the pipeline to ensure that we do not build up unnecessary inventory at our dealers. Consequently, we reduced production levels in certain of our brands to accomplish that. Pipeline inventories of boats totaled 31 weeks of supply at quarter end, unchanged from the same date a year ago.”
McCoy said the higher mix of sales from acquired businesses, which have lower margins than Brunswick’s core brands, as well as the impact of fixed-cost absorption from lower production, led to the reduction in operating margins.
The Brunswick Boat Group comprises the Boat segment and produces fiberglass and aluminum boats and marine parts and accessories, as well as offers dealer management systems.
Marine Engine segment
The Marine Engine segment, consisting of the Mercury Marine Group, reported pro forma sales of $557.2 million in the first quarter of 2006, up from $543.2 million in the year-ago first quarter. Operating earnings in the first quarter declined to $44.9 million versus $52.0 million, and operating margins declined to 8.1 percent compared with 9.6 percent for the same quarter in 2005.
McCoy said segment sales during the quarter benefited from increased sales of sterndrive engines and parts and accessories in the United States, partially offset by slightly lower outboard sales. But he said operating earnings were affected by the outboard engine technology transition.
“As we have previously disclosed, we discontinued selling traditional carbureted two-stroke outboard engines in North America beginning July 1, 2005,” McCoy said. “Our current product offerings of low-emission outboards now account for practically all of our outboard product mix as we complete this technology transition. Approximately 97 percent of our U.S. outboard sales in the first quarter of 2006 came from low-emission engines, up from 65 percent in the year-ago first quarter. The lower margins on these products, along with the fixed-cost absorption impact from lower production levels to maintain pipeline inventories, are largely behind the decline in Marine Engine segment operating earnings and margins.”
Brunswick’s operating earnings are expected to increase in the second half of this year as the company marks the anniversary of the transition date and as it begins to realize more savings from its lower-cost manufacturing facilities in Asia, where Brunswick is currently ramping up production, according to McCoy.
“The company’s pipeline management efforts are paying off,” McCoy said. “We had 28 weeks of supply of engines in the pipeline at the end of the first quarter of 2006, down one week compared with the same time a year ago. We will continue to manage our production to keep pipelines at healthy levels as we move into the spring selling season.”
Overall, Brunswick Corp. reported net earnings of $67.4 million, or $0.70 per diluted share, for the first quarter of 2006, on sales of $1,458.0 million and operating earnings of $87.2 million. Diluted earnings per share in 2006 include a $0.13 per-share benefit from tax-related items. For the year-ago first quarter, the company reported net earnings of $94.6 million, or $0.96 per diluted share, on sales of $1,401.1 million and operating earnings of $99.1 million. Diluted earnings per share for 2005 included a $0.32 per diluted share gain on the sale of securities.
In light of the company’s previously announced decision to sell substantially all of its Brunswick New Technologies business unit, the company said it would present its first quarter results excluding these businesses, as well as the tax-related benefit and the gain on the sale of securities noted above, as the company believes the pro forma (non- GAAP) numbers are more representative of the financial performance of its ongoing operations.
On this basis, the company reported pro forma diluted earnings per share of $0.64 for the first quarter of 2006 compared with $0.63 for the year-ago first quarter. Sales increased 5 percent to $1,413.3 million from $1,342.5 million in the quarter, and operating earnings declined slightly to $98.2 million from $98.8 million.
“The 5 percent sales growth from ongoing operations was driven primarily by contributions from boat companies acquired subsequent to the first quarter last year, as well as increased sales from our Bowling & Billiards and fitness segments,” McCoy said. “Excluding the benefit of acquisitions, sales were down slightly. The decline in operating earnings was primarily due to lower production to reduce marine pipelines and the shift in product mix to low-emission outboard engines.”
As the start of the boat-selling season begins, Brunswick believes that retail demand overall for the full year will be flat to down slightly, given the continued weakness the company saw at retail in the first quarter.
“In the second quarter, we estimate our marine operating earnings will be down when compared with the strong 18 percent increase we reported in the second quarter of 2005,” McCoy said. “This is primarily due to our decision to make additional production cuts in the quarter in select products to continue to manage pipeline inventories. This will contribute to lower operating margins for the quarter and the full year due to the impact of lower fixed-cost absorption.
“Margins will also be affected by the low-emission outboard transition. When we factor in the decision to sell substantially all of our BNT business unit, total corporate sales for the year are estimated to be up in the low- to mid-single digits, compared with pro forma sales for 2005.
“Therefore, we are estimating that diluted earnings per share for 2006 will be in the range of $3.00 to $3.15. This is compared with pro forma EPS of $3.13 for 2005, which excludes the gain on the sale of securities mentioned earlier, as well as tax-related benefits. For the second quarter, earnings per diluted share are estimated in the range of $0.90 to $0.97, as compared with $1.12 for the year-ago second quarter.”
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