Analysts suggest bankruptcy unlikely for Brunswick

LAKE FOREST, Ill. – Despite a net loss of $591.4 million on a 22-percent drop in sales in the third-quarter of 2008 and the addition of further restructuring measures to address economic conditions, analysts believe there is a low probability that Brunswick Corp. (NYSE: BC) will be forced to file for bankruptcy.

“The focus is now squarely on the balance sheet and liquidity,” said Edward Aaron of RBC Capital Markets in a statement today. “Management expects to finalize an amendment to the terms of its revolver (currently untapped) by the end of the year. In addition, the company is working on additional measures to divest/monetize assets in Q4.”

Earlier in the week, Aaron defended Brunswick’s solvency following the downgrade of its debt rating by Moody’s Investors Service, and he said today that RBC still holds that position.

“Factors supporting this view include a decent cash cushion ($343M), aggressive cost cutting measures, a significant spread between D&A and Capex, and a reduction in working capital needs,” he explained.

Tim Condor, managing director of Leisure Equity Research for Wachovia Capital Markets, also said Brunswick’s liquidity appears manageable in a statement issued today.

He said that once the company demonstrates that, such as by renegotiating its revolver before the end of the calendar year, “we expect the stock to quickly trade up to our '09 tangible book estimate of $8.05.”

Brunswick faced increased challenges in third quarter

While there were some bright spots in Brunswick Corp.’s portfolio during the third quarter, such as a rise in fitness segment sales, declining marine industry sales had the biggest impact on its overall results.

Total sales for the quarter were down 22 percent versus a year ago to approximately $1.0 billion, driven by a 28 percent drop in marine sales, the company reported yesterday.

"The marine market in the United States is becoming increasingly challenging due to difficult economic conditions, financial market upheaval and tightening credit availability, on top of the continuing weak housing market," said Brunswick Chairman and Chief Executive Officer Dustan E. McCoy. "According to preliminary industry statistics in the United States, retail demand for boats in our key fiberglass segments dropped nearly 40 percent in the third quarter versus a year ago, and a slowdown in demand has spread to regions outside of the United States.”

McCoy suggested that the company’s ability to limit its losses and end the quarter with cash on hand of $342.9 million “is commendable and reflects the hard work of individuals across the entire Brunswick organization.”

“Our cost reduction activities are taking hold and a relentless focus on managing the balance sheet is evident in our results," he added.

During the quarter, the company recorded $374.0 million of goodwill and $121.1 million of trade name impairment charges, associated primarily with certain of its boat brands.

Brunswick’s Boat Segment had net sales for the third quarter of 2008 of $392.5 million, down 36 percent from the third quarter of 2007, and an operating loss of $537.4 million.

"During the quarter, we continued to decrease production throughout our marine operations in an effort to reduce the number of boats held by our dealers," McCoy explained. "This included a month-long furlough, during which we halted production at virtually all of our U.S. fiberglass boat manufacturing plants. While this was the right thing to do, it resulted in sales for our major fiberglass brands being down 50 percent in the quarter. Reduced fixed-cost absorption on lower sales adversely affected operating earnings.

"While we reduced the number of fiberglass boats held by our dealers by 1,400 during the third quarter, there remain 36 weeks of supply of fiberglass boats in the pipeline, down one week from the end of June 2008, but up nine weeks compared with the end of September last year," McCoy said. "As announced earlier this month, we will begin closing or furloughing seven fiberglass boat plants in the fourth quarter to continue to address the pipeline inventory situation."

The Marine Engine segment reported net sales of $448.9 million in the third quarter of 2008, down 21 percent from the year-ago quarter, and an operating loss of $8.6 million.

"Sales were down in all business units in the Marine Engine segment in the quarter, most notably sales of sterndrive and outboard engines in the United States, which were down 39 percent," McCoy said. "Consistent with actions taken in the Boat Group, Mercury also cut production rates and instituted plant furloughs."

For the nine months ended Sept. 27, the company had net sales of $3,871.0 million, down 9 percent from the first nine months of 2007. The company had an operating loss of $573.2 million for the first three quarters of 2008, including $511.1 million of non-cash goodwill and trade name impairment charges and $128.4 million of restructuring charges.

For the first nine months of 2008, the company had a net loss from continuing operations of $584.1 million. This compares with net earnings from continuing operations of $67.5 million for the same period in 2007.

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