Brunswick working to rebalance pipeline

LAKE FOREST, Ill. — Industry giant Brunswick Corp. is planning production cuts to improve its inventory pipeline for the 2007 model year, which began July 1, the company reported in its second quarter earnings release today. This came as no surprise, however, as the company warned of its plans earlier this month.

“Throughout the second quarter of 2006, we experienced declining retail demand for marine products, which has resulted in an increase in pipeline inventories,” said Brunswick Chairman and Chief Executive Officer Dustan E. McCoy. “At quarter end, there were 26 weeks of supply of boats and 21 weeks of supply of engines, up from 23 weeks for boats and 20 weeks for engines a year ago.”

Brunswick Corporation (NYSE: BC) reported today earnings from continuing operations of $0.99 per diluted share for the second quarter of 2006, compared with $1.12 per diluted share for the year-ago second quarter. Earnings from continuing operations for the second quarter of 2006 include a $0.06 per diluted share benefit from tax-related items.

“We are pleased with our second quarter results given the increasingly difficult economic environment in which consumers are deferring expenditures for discretionary items, a factor affecting retail demand especially for marine products,” said McCoy. “Total sales increased 1 percent in the quarter due to contributions from our boat and fitness equipment operations. If we exclude incremental sales from acquired businesses, however, organic sales actually declined 5 percent. Lower organic sales, a mix shift to lower-margin products along with higher raw material and component costs, partially offset by lower operating expense, were the primary drivers behind a reduction in operating margins to 9.0 percent in the second quarter of 2006 from 11.0 percent in the comparable quarter a year ago.”

For the quarter ended June 30, net sales increased 1 percent to $1,543.1 million, up from $1,531.6 million a year earlier. Operating earnings declined 18 percent to $138.2 million compared with $168.2 million in the year-ago quarter, and operating margins were 9.0 percent, down from 11.0 percent. Net earnings from continuing operations totaled $94.5 million, or $0.99 per diluted share, down from $111.0 million, or $1.12 per diluted share, for the second quarter of 2005.

During the second quarter of 2006, the company announced its decision to pursue the sale of substantially all of its Brunswick New Technologies (BNT) business unit. As a result, the portions of BNT proposed for sale are being accounted for as discontinued operations. For the second quarter of 2006, the company reported a net loss from discontinued operations of $11.3 million, or $0.12 per diluted share, compared with net earnings of $3.1 million, or $0.03 per diluted share, for the second quarter of 2005.

Boat segment operating margins take a hit

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. The Boat segment reported net sales for the second quarter of $769.7 million, up 3 percent compared with $745.5 million in the second quarter of 2005. Excluding incremental sales from acquired businesses, organic boat sales declined 7 percent. Operating earnings decreased to $53.1 million from $74.9 million reported in the second quarter of 2005, and operating margins were 6.9 percent, down from 10.0 percent.

“We reduced production and increased promotional efforts in select product lines to manage pipeline inventories during the quarter,” McCoy said. “The lower fixed cost absorption due to reduced production levels, coupled with the fact that we had lower sales in some of our higher-margin product lines, had an adverse effect on operating margins.”

Domestic outboard demand down

The Marine Engine segment, consisting of the Mercury Marine Group, reported net sales of $668.5 million in the second quarter of 2006, down 2 percent from $683.5 million in the year-ago quarter. Operating earnings in the second quarter decreased 9 percent to $94.7 million versus $103.5 million, and operating margins declined to 14.2 percent from 15.1 percent for the same quarter in 2005.

“The reduction in sales was primarily driven by a decline in our domestic outboard engine business, partially offset by increased sales of products outside of the United States,” McCoy said. “Operating margins were adversely affected by lower sales along with the shift in product mix to lower-margin, low-emission outboard engines. Approximately 91 percent of our U.S. outboard sales in the second quarter of 2006 came from low-emission engines, up from 71 percent in the year-ago quarter.”

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