Brunswick expects more production reduction

LAKE FOREST, Ill. – Though its marine sales and earnings are down, Brunswick Corp.’s (NYSE: BC) top executive is pleased with its fourth quarter performance, given soft marine market conditions.

“While sales from our marine operations were down 2 percent in their seasonally slow fourth quarter, the decline was partially offset by 9 percent growth from our fitness equipment business and sales gains at our bowling retail centers, which are seasonally stronger at this time of the year,” said Brunswick Chairman and Chief Executive Officer Dustan E. McCoy. “These results demonstrate that we are continuing to make fundamental changes in our operating abilities and are a testament to the strength of our brands, the soundness of our strategy and the talents, abilities and commitment of our employees around the world.”

During an earnings conference call, however, he warned 2007 would be the industry’s most challenging since 2007, and Brunswick wouldn’t be immune to the effects.

Nonmarine businesses soften sales and earnings fall

For the quarter ended Dec. 31, 2006, the company reported net sales from continuing operations of $1,370.8 million, down slightly from $1,381.7 million a year earlier. Excluding incremental sales from acquired businesses, sales declined 2 percent in the quarter.

Operating earnings for the fourth quarter of 2006 totaled $30.5 million, as compared with $99.6 million in the year-ago quarter, and operating margins were 2.2 percent compared with 7.2 percent in the year-ago period.

Contributing to the decline in both operating earnings and operating margins was an $18.9 million pre-tax restructuring charge recorded during the quarter for severance costs, asset write-downs and other costs associated with work force reductions, plant shutdowns and distribution realignment actions announced in November 2006, the company pointed out.

Net earnings from continuing operations were $44.2 million, or $0.47 per diluted share, down from $83.7 million, or $0.85 per diluted share, for the fourth quarter of 2005.

For the fourth quarter of 2006, the company reported a net loss from discontinued operations – which consists of its Brunswick New Technologies business unit, which is for sale – of $97.4 million, or $1.04 per diluted share, compared with net earnings of $4.6 million, or $0.05 per diluted share, for the fourth quarter of 2005. The company said in December that proceeds from the sale of BNT were expected to be less than its book value at that time, and as a result, the company also recorded $85.6 million of asset impairment charges, equivalent to $0.92 per diluted share, in the fourth quarter of 2006.

For the year ended Dec. 31, the company had net sales from continuing operations of $5,665.0 million, up 1 percent from $5,606.9 million in 2005. Excluding the benefit of acquisitions, sales were down 3 percent.

Operating earnings from continuing operations totaled $341.2 million for the year, down from $468.7 million in 2005, and operating margins were 6.0 percent versus 8.4 percent a year ago. Net earnings from continuing operations for 2006 were $263.2 million, or $2.78 per diluted share, compared with $371.1 million, or $3.76 per diluted share, in 2005.

For 2006, the company reported a net loss from discontinued operations of $129.3 million, or $1.37 per diluted share, compared with net earnings of $14.3 million, or $0.14 per diluted share for 2005. The net loss for 2006 includes the previously mentioned $85.6 million, or $0.91 per diluted share, of asset impairment charges.

Boat segment sales down

The boat segment, which includes 19 boat brands, as well as a marine parts and accessories business, reported net sales for the fourth quarter of $664.5 million, down 1 percent compared with $671.7 million in the fourth quarter of 2005. Excluding contributions from 2006 acquisitions, boat segment sales decreased 4 percent in the quarter.

Operating earnings for the boat segment decreased to $9.3 million, down from $30.6 million reported in the fourth quarter of 2005, and operating margins declined to 1.4 percent from 4.6 percent.

Approximately $4.2 million of the previously mentioned $18.9 million restructuring charge was recorded in the boat segment during the fourth quarter of 2006 for plant closures, work force reductions and other cost-cutting measures, according to the company.

For 2006, boat segment sales were up 3 percent to $2,864.4 million from $2,783.4 million in 2005. Excluding incremental sales from acquisitions, boat segment sales were down 4 percent for the year.

Operating earnings for the boat segment were $135.6 million, down from $192.5 million in 2005, and operating margins were 4.7 percent compared with 6.9 percent a year ago.

“For the year, our increase in boat sales was completely driven by acquisitions,” McCoy explained. “During 2006 we acquired Cabo Yachts and Diversified Marine and also had the benefit of a full year’s ownership of Kellogg Marine and our Triton and HarrisKayot boat brands. The reduction in operating margins was primarily due to lower production in most of our boat brands to manage pipeline inventories and a shift in product mix to lower-margin boats.”

Marine engine segment also down

The marine engine segment, consisting of the Mercury Marine Group, reported net sales of $511.3 million in the fourth quarter of 2006, down 2 percent from $519.8 million in the year-ago fourth quarter.

Operating earnings in the fourth quarter declined to $3.8 million versus $33.8 million, and operating margins were 0.7 percent compared with 6.5 percent for the same quarter in 2005.

During the fourth quarter of 2006, approximately $9.5 million of the $18.9 million restructuring charge was recorded in the marine engine segment, primarily for severance costs.

For the full year, marine engine segment net sales were down 1 percent to $2,271.3 million from $2,300.6 million, and operating earnings were $193.8 million versus $250.5 million in 2005. Operating margins decreased for the year to 8.5 percent from 10.9 percent in 2005.

“Sales growth for the year was driven by contributions from Mercury Marine’s non-U.S. markets,” McCoy said. “Mercury’s international sales totaled nearly $822 million in 2006, up from approximately $791 million the previous year. Meanwhile, in our U.S. markets, sterndrive engine sales totaled $554 million for 2006 as compared with $561 million in 2005. The U.S. outboard engine business was off about 10 percent, coming in at $434 million in sales for the year, down from $480 million in 2005, reflecting the difficult U.S. marine market, as well as successful efforts to reduce pipeline inventories. Sales of Mercury’s domestic parts and services were up slightly to $353 million versus $352 million in 2006 and 2005, respectively.”

The company said that the decrease in segment operating earnings was largely due to fixed-cost absorption as a result of lower production rates to reduce pipeline inventory levels. Other contributing factors were costs to ramp up Asian manufacturing plants, higher research and development expense and the full-year impact of the mix shift to low-emission outboard engines, as well as the previously mentioned restructuring charge.

Brunswick to reduce production in 2007

As Brunswick looks to the immediate future, reducing pipeline inventories is among its goals. McCoy said the company finished the year with “34 weeks of supply of boats in the pipeline … up from 31 weeks at the end of 2005, whereas engines were flat at 26 weeks of supply.”

“For our planning purposes, we are not counting on an increase in retail demand this year to reduce field inventories,” he commented. “We are assuming marine retail demand will be down in the low- to mid-single digits. Therefore, we will be reducing production through at least the first half of 2007 to shrink pipelines. Reduced fixed-cost absorption on lower production will adversely affect sales and earnings.”

McCoy expects sales to be flat in 2007, with declines in marine business offset by growth in the company’s other segments.

“Despite the challenges of a soft marine market, we continue to execute against our strategy, emphasizing the critical need to: get the product right, get the distribution right, be best cost in our industries, be global and attract and retain talent,” McCoy continued. “This has enabled us to grow through the ups and downs of the marine cycles and produce higher peak and trough earnings than in prior cycles.”

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