LAKE FOREST, Ill. – With boat sales for the year expected to be down at least 5 percent, it’s no surprise that Brunswick Corp.’s (NYSE: BC) sales and earnings have taken a hit.
The boating industry giant, which also participates in the fitness and bowling/billiards industry, reported a decline in net sales from continuing operations for the quarter ended Sept. 30 of 1 percent to $1,337.8 million, down from $1,351.1 million a year earlier.
Operating earnings decreased 27 percent to $74.3 million compared with $102.1 million in the year-ago quarter, and operating margins were 5.6 percent, down from 7.6 percent.
Net earnings from continuing operations for the third quarter of 2006 totaled $50.4 million, down from $82.4 million, for the third quarter of 2005.
The company’s Brunswick New Technologies business unit, which is up for sale, is being accounted for as a discontinued operation. For the third quarter, the company reported a net loss from discontinued operations of $13.9 million, or $0.15 per diluted share, compared with net earnings of $6.0 million, or $0.06 per diluted share for the third quarter of 2005.
“We were pleased with our results for the quarter, especially in light of a challenging marine market,” Brunswick Chairman and Chief Executive Officer Dustan E. McCoy said. “The most important consideration when operating in a cyclical industry is to manage pipeline inventories. As previously announced, we cut production in certain product lines in the third quarter to make pipeline corrections. Reducing production volumes was the right thing to do; however, lower fixed-cost absorption on lower production had an adverse effect on operating margins and earnings.”
Boat sales down 5 percent
The Boat segment, which includes the Brunswick Boat Group’s fiberglass and aluminum boats, marine parts and accessories, and dealer management systems, reported net sales for the third quarter of $679.2 million, down 1 percent compared with $685.5 million in the third quarter of 2005. Excluding incremental sales from acquired businesses, organic boat sales declined 5 percent. Operating earnings decreased to $24.8 million from $37.9 million reported in the third quarter of 2005, and operating margins were 3.7 percent, down from 5.5 percent.
“During the quarter, we saw sales gains in boat parts and accessories as well as some of our larger models,” McCoy said. “Significant declines were seen in sales of our smaller freshwater boat lines that are sold primarily in the upper Midwest where regional economic issues have affected discretionary spending among purchasers of these boats. The margin decline was driven by an unfavorable mix shift away from our higher-margin cruiser business as we work to rebalance these pipelines, as well as lower fixed-cost absorption due to reduced production levels.”
Outboards see double digit decline
The Marine Engine segment, consisting of the Mercury Marine Group, reported net sales of $536.5 million in the third quarter of 2006, down from $555.0 million in the year-ago quarter. Operating earnings in the third quarter decreased to $50.4 million versus $61.2 million, while operating margins declined to 9.4 percent from 11.0 percent for the same quarter in 2005.
“Stronger sales in Mercury’s international operations during the quarter helped to offset lower year-over-year domestic sales, particularly in the outboard category, which was down double digits for the quarter,” McCoy explained. “Segment results reflect both the tough operating climate and the effect of reducing production rates in some product areas during the quarter. We will continue to adjust production rates as needed to manage pipeline inventories through the model year. Operating margins were adversely affected by lower sales along with lower fixed-cost absorption on reduced production.”
Production cuts planned
For the nine months ended Sept. 30, the company had net sales from continuing operations of $4,294.2 million, up 2 percent from $4,225.2 million for the first three quarters of 2005. Excluding contributions from acquired businesses, sales were down 3 percent. Operating earnings totaled $310.7 million for the first nine months of 2006, down from $369.1 million for the corresponding period in 2005, and operating margins were 7.2 percent versus 8.7 percent a year ago. Net earnings from continuing operations for the first nine months of 2006 totaled $219.0 million, compared with $287.4 million for the same period in 2005.
For the first nine months of 2006, the company reported a net loss from discontinued operations of $31.9 million, compared with net earnings of $9.7 million for the comparable period a year ago.
“The decline in retail demand for marine products we experienced in the first half of 2006 continued into the third quarter with retail demand down in the high-single digits, which has resulted in an increase in pipeline inventories. At quarter end there were 27 weeks of supply of boats and 20 weeks of supply of engines, up from 22 weeks for boats and 19 weeks for engines a year ago,” McCoy said.
He added that because it’s now the off-season and Brunswick can’t rely on retail demand to rebalance the pipeline, “we are planning further production cuts to manage pipelines for the 2007 model year, which runs through June 30 next year.”
“We are estimating that our 2006 earnings from continuing operations will be in the range of $2.40 to $2.46 per share, excluding non-recurring tax benefits. That compares with the $3.13 per share we reported in 2005 from continuing operations, excluding non-recurring tax benefits and the gain on the MarineMax stock sale. The year-over-year decline in earnings is primarily due to reduced sales, a mix shift to lower-margin products, and the effect of fixed-cost absorption from production cuts needed to adjust pipeline inventories,” he stated.
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