Brunswick profits hit hard

LAKE FOREST, Ill. – While marine industry giant Brunswick Corp. (NYSE: BC) only reported a slight decline in overall sales during the second quarter, the impact of a 10-percent decline in U.S. marine product sales was clearly reflected in the company’s profitability.

Its net earnings from continuing operations were $58.9 million, down from $94.5 million, for the second quarter of 2006, the company reported in a recent statement.

"We are pleased with our second quarter results given the increasingly difficult economic environment in which consumers are deferring expenditures for large ticket discretionary items, a factor affecting retail demand for marine products in the United States," said Brunswick Chairman and Chief Executive Officer Dustan E. McCoy. "Double-digit sales growth in marine products in non-U.S. markets, boat parts and accessories and commercial fitness equipment helped to offset a 10 percent decline in marine product sales in the United States."

For the quarter ended June 30, overall net sales decreased slightly to $1,522.9 million, down from $1,543.1 million a year earlier. Operating earnings declined to $89.3 million compared with $138.2 million in the year-ago quarter, and operating margins were 5.9 percent, down from 9.0 percent.

"Lower wholesale unit shipments across our marine portfolio, coupled with lower fixed-cost absorption on reduced production and additional funds for retail and dealer promotional support were the primary drivers behind the reduction in operating earnings," McCoy said.

Boat Segment

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The Brunswick Boat Group, which produces fiberglass and aluminum boats and marine parts and accessories, and offers dealer management systems, reported net sales for the second quarter of $732.8 million, down 5 percent from $769.7 million in the second quarter of 2006. Operating earnings decreased to $19.3 million from $53.1 million reported in the second quarter of 2006, and operating margins were 2.6 percent, down from 6.9 percent.

"Our boat parts and accessories business and boat sales outside the United States were bright spots, each posting double-digit increases in the quarter. This was more than offset by the decline in boat sales in the U.S., where we continue to contend with a number of factors that have contributed to a challenging marine market. Higher interest rates, weak housing markets and higher prices for fuel, food and other essentials have continued to erode consumers' disposable income. Further, the depressed housing situation is most pronounced in Florida and California, which are two of the nation's largest boating markets," McCoy said. "To manage our pipeline inventories, we have reduced shipments to our dealers; however, fixed-cost absorption on lower production and higher promotional spending to spur demand have had an adverse effect on operating earnings."

The company quoted weak June retail sales figures in Florida and California, which saw sales figures decline 22 percent and 37 percent, respectively from the same month last year.

Marine Engine Segment

The Marine Engine segment, consisting of the Mercury Marine Group, reported net sales of $669.6 million in the second quarter of 2007, slightly higher than the $668.5 million in the year-ago quarter. Operating earnings in the second quarter decreased to $83.3 million versus $94.7 million, and operating margins declined to 12.4 percent from 14.2 percent for the same quarter in 2006.

"Higher segment sales of products outside of the United States, where we reported double-digit sales increases in all regions, helped to offset lower domestic outboard and sterndrive sales," McCoy said. "The adverse effect on operating earnings of fixed-cost absorption on lower production was somewhat offset by improved operating efficiencies resulting from restructuring and cost-reduction efforts."

Noting that the company noted that outboard engine sales, which weakened before the rest of the marine segment, should be up year over year in the second half of the year, Edward M. Aaron of equity research firm RBC Capital Markets reported that “this leaves us more comfortable that the broader marine business will return to positive comps around this time next year.”

Six-Month Results

For the six months ended June 30, the company had net sales of $2,909.0 million, down 2 percent from $2,956.4 million for the first half of 2006. Operating earnings totaled $142.3 million for the first half of 2007, down from $236.4 million for the corresponding period in 2006, and operating margins declined to 4.9 percent versus 8.0 percent a year ago.

Net earnings from continuing operations for the first six months of 2007 were $93.2 million, or $1.02 per diluted share, down from $168.6 million, or $1.76 per diluted share, for the same period in 2006. Results include $0.02 per diluted share and $0.19 per diluted share of tax-related benefits in the first six months of 2007 and 2006, respectively.

"As we look at the second half of 2007, we continue to focus on managing our marine pipeline inventories," McCoy said. "At the end of the 2007 model year on June 30, we had 26 weeks of supply of boats, flat from a year ago, and 26 weeks of supply of engines, up 5 weeks from a year ago, in the pipeline. We did not have sufficient sell through at retail to bring pipelines down to acceptable levels for this time of the selling season, despite reducing production and wholesale shipments in the quarter. Therefore, we will be further reducing production through the 2008 model year. As a result, we estimate that for 2007, we will report net earnings per diluted share from continuing operations in the range of $1.20 to $1.35, as we announced last week."

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