For the third quarter Brunswick Corporation reported a 1% decrease in net sales to $1.34 billion, down from $1.35 billion last year. Net earnings from continuing operations totaled $50.4 million, or 54 cents per diluted share, down 28.8% from $82.4 million, or 83 cents 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. Sales for the quarter were down 1 percent to $1.3 billion with gains from our Fitness and Bowling & Billiards segments and growth in international markets more than offset by a decline in domestic marine sales. Excluding incremental sales from acquired businesses, our organic sales declined 3 percent. A combination of a mix shift to lower- margin products; reduced fixed-cost absorption on lower production; and higher operating expenses due to acquisitions, inflation, and increased research and development spending on strategic initiatives led to the decline in operating margins to 5.6 percent for the third quarter compared with 7.6 percent a year ago.”


Third Quarter Results

For the quarter ended Sept. 30, 2006, net sales from continuing operations decreased 1% to $1,337.8 million, down from $1,351.1 million a year earlier. Operating earnings decreased 27% to $74.3 million compared with $102.1 million in the year-ago quarter, and operating margins were 5.6%, down from 7.6%. Net earnings from continuing operations for the third quarter of 2006 totaled $50.4 million, or 54 cents per diluted share, down from $82.4 million, or 83 cents per diluted share, for the third 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 business unit, which is being accounted for as a discontinued operation. For the third quarter of 2006, the company reported a net loss from discontinued operations of $13.9 million, or 15 cents per diluted share, compared with net earnings of $6.0 million, or 6 cents per diluted share for the third quarter of 2005.

The company said that during the third quarter of 2006, it acquired 1.5 million shares of its common stock for approximately $46 million under a $500 million repurchase authorization. Since the beginning of the year, approximately 4.6 million shares have been acquired for about $163 million. Diluted shares outstanding averaged 93.7 million in the third quarter of 2006, down from 99.3 million for the third quarter of 2005.


Tax Benefits

In the third quarter of 2006, the company recorded a tax benefit of approximately 6 cents per diluted share, primarily due to a claim for interest on open audits. In the third quarter of 2005, the company determined that earnings from certain of its foreign subsidiaries would be indefinitely reinvested outside of the United States, resulting in a change in the application of APB 23, “Accounting for Income Taxes – Special Areas,” effective July 1, 2005. Further, the company said it had refined its tax planning strategies for research and foreign export tax benefits. These actions benefited earnings from continuing operations by 14 cents per diluted share and earnings from discontinued operations by 2 cents per diluted share in the third quarter of 2005.


Boat Segment

The Boat segment is comprised of the Brunswick Boat Group, which 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 third quarter of 2006 of $679.2 million, down 1% compared with $685.5 million in the third quarter of 2005. Excluding incremental sales from acquired businesses, organic boat sales declined 5%. Operating earnings decreased to $24.8 million from $37.9 million reported in the third quarter of 2005, and operating margins were 3.7%, down from 5.5%.

“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.”


Marine Engine Segment

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% from 11.0% 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.”


Fitness Segment

The Fitness segment is comprised of the Life Fitness Division, which manufactures and sells Life Fitness, Hammer Strength and ParaBody fitness equipment. Fitness equipment sales increased 7% in the third quarter of 2006 to $136.6 million, up from $127.4 million in the year-ago quarter. Fitness segment operating earnings for the quarter totaled $12.6 million, down from $14.2 million in the third quarter of 2005, and operating margins were 9.2% compared with 11.1% a year ago.

“The sales gain was driven primarily by a double-digit increase in international sales,” McCoy said. “Margins in Europe are lower than in the United States, which, along with a mix shift to lower-margin strength equipment and higher research and development spending for new products, led to the decline in operating margins.”


Bowling & Billiards Segment

The Bowling & Billiards segment is comprised of the Brunswick retail bowling centers; bowling equipment and products; and billiards, Air Hockey and foosball tables. Segment sales in the third quarter of 2006 totaled $113.4 million, up 1% compared with $111.9 million in the year-ago quarter. Operating earnings decreased in the third quarter to $3.1 million versus $5.7 million, and operating margins were 2.7% compared with 5.1% in 2005.

“Sales gains posted by bowling retail centers offset a single-digit decline in billiards products, which is also affected by lower discretionary spending by its customers,” McCoy said. “Costs for moving certain manufacturing operations to Mexico contributed to the segment's lower operating earnings for the quarter. Our transition of bowling ball manufacturing to Reynosa, Mexico, is almost complete, and, as previously announced, we are beginning the move of Valley-Dynamo coin-operated billiards table manufacturing to an adjacent location in Reynosa.”


Looking Ahead

“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. “As we have said, managing pipelines is essential in a cyclical, as well as a seasonal, business. We are now in the off-season, and we can't rely solely on retail demand to rebalance the pipeline. So, 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. Our 2006 estimate also assumes that Congress extends the research and development tax credit retroactive to the first of the year, which would reduce our effective tax rate for the full year to about 31 percent, excluding tax-related benefits. Should Congress fail to take action, our earnings estimate range would be adversely affected by about $0.06 per share.”

“As we go forward, we will continue to execute relentlessly against our five key strategies: get the product right, get the distribution right, be best cost in our industries, be global, and attract and retain talent,” McCoy added. “We can't control market conditions, but we will take actions necessary to operate our businesses in the most efficient manner possible. In doing so, we will achieve our long-term value creation objectives and better position the company to benefit our shareholders when industry conditions improve.”

 Brunswick Corporation
    Comparative Consolidated Statements of Income
    (in millions, except per share data)
    (unaudited)
                                              Three Months Ended September 30
                                               2006         2005      % Change

    Net sales                                $1,337.8     $1,351.1      -1%
    Cost of sales                             1,048.9      1,045.6       0%
    Selling, general and administrative
     expense                                    182.5        173.3       5%
    Research and development expense             32.1         30.1       7%
    Operating earnings                           74.3        102.1     -27%
    Equity earnings                               2.9          3.3     -12%
    Other income (expense), net                   0.5         (0.2)       NM
    Earnings before interest and income taxes    77.7        105.2     -26%
    Interest expense                            (15.7)       (13.5)     16%
    Interest income                               5.0          3.9      28%
    Earnings before income taxes                 67.0         95.6     -30%
    Income tax provision                         16.6         13.2
    Net earnings from continuing operations      50.4         82.4     -39%

    Net earnings (loss) from discontinued
     operations, net of tax                     (13.9)         6.0        NM

    Net earnings                                $36.5        $88.4     -59%

    Earnings per common share:
    Basic
      Earnings from continuing operations       $0.54        $0.84     -36%
      Earnings (loss) from discontinued
       operations                               (0.15)        0.06        NM

      Net earnings                              $0.39        $0.90     -57%

    Diluted
      Earnings from continuing operations       $0.54        $0.83     -35%
      Earnings (loss) from discontinued
       operations                               (0.15)        0.06        NM

      Net earnings                              $0.39        $0.89     -56%

    Weighted average number of shares
     used for computation of:
    Basic earnings per share                     93.2         98.1      -5%
    Diluted earnings per share                   93.7         99.3      -6%

    Effective tax rate  (1)                     24.8%        13.9%

    Supplemental Information
    Diluted earnings from continuing
     operations                                 $0.54        $0.83     -35%
    Non-recurring tax benefits  (1)             (0.06)       (0.14)       NM
    Earnings from continuing operations,
     as adjusted                                $0.48        $0.69     -30%


    (1) The increase in the effective tax rate for the third quarter of 2006
        was primarily due to lower non-recurring tax benefits of $5.2 million,
        compared with $13.9 million in the third quarter of 2005.