Brunswick reports 42-percent drop versus last year

LAKE FOREST, Ill. — Brunswick shared its fourth quarter results Thursday, reporting that sales of $837.7 million represent a 42 percent drop versus a year ago, primarily the result of marine sales that were down 50 percent.

The Brunswick Boat Group, which includes 17 boat brands as well as a marine parts and accessories business, reported fourth quarter sales of $293.7 million, down 54 percent from the fourth quarter of 2007. Similarly, the Mercury Marine Group, which represents the company’s engine brands, reported fourth quarter sales of $297.5 million, down 46 percent from a year ago.

Those numbers were “messy, but not much different from what we expected,” according to Edward Aaron, an analyst with RBC Capital Markets. Aaron said Brunswick’s losses were essentially in line with analyst predictions, despite lower than anticipated sales, which he said suggest that “the company is managing costs as well as one could expect, all things considered.”

Other analysts also treated the news as expected. Tim Conder, an analyst with Wachovia Capital Markets, called his firm’s 2009 earnings per share estimate of $1.59 “reasonable/slightly conservative” because although Brunswick faces additional restructuring charges for January plant closures versus Wachovia’s original estimates, he said boat sales could be modestly better than their assumption of a 50-percent decline.

Conder also said he was encouraged by comments that Brunswick only plans to pursue sale leasebacks if it makes financial sense, as there is no need to do this for cash, as well as the likelihood that once retail demand stabilizes, Brunswick will have to ramp up production at a 50-percent rate given 2009 production plans.

Brunswick expects lower sales again in 2009, particularly in the first half of the year, and will produce well below the rate of retail sales, according to Dusty McCoy, Brunswick’s chairman and chief executive officer.

“Although we have limited visibility to a very volatile marketplace entering the year, we expect our revenues to be lower in 2009 with higher relative percentage declines occurring in the first half of the year,” he said. “Our expectation of lower revenues reflects our view that retail demand will continue to decline, at least through the first six months of the year, and we are planning for production at rates well below the retail rate of decline.”

The company said profitability will also be affected by restructuring charges and pension-related expenditures, but those expenses will be mitigated somewhat by $200 million in cost savings.

“Our overall profitability versus 2008 will be affected by the expected lower production and sales levels, restructuring charges that will decline to approximately $50 million pretax and incremental pension-related expenses of $75 million pretax,” McCoy said. “Partially offsetting these factors will be nearly $200 million of net cost reductions resulting from the full-year effect of actions taken in 2008, as well as further cost reduction activities implemented and planned in 2009.”

The company’s cost-saving measures in 2008 included work furloughs, pay cuts, and layoffs in addition to shuttering plants and reducing production.

“We reduced production, brands, models, the manufacturing footprint, employees, functions, non-manufacturing facilities and other costs, while taking steps to improve productivity and effectiveness by such actions as moving multiple brands into single production facilities,” McCoy said.

Despite all that, “extremely depressed marine retail conditions necessitate further cuts,” according to Aaron of RBC Capital Markets. He noted that because of current market conditions, excess inventory and inventory aging are still big problems in the sales channel.

Brunswick executives stressed the importance of liquidity in 2009. The company ended 2008 with $317.5 million of cash without any borrowings under its revolving credit agreement, just slightly less than the $331.4 million of cash it had on hand at year-end 2007. The company hopes to have as much or more cash on hand at the end of 2009, thanks to working capital reductions of more than $100 million.

“Liquidity remains important, and although our earnings will be down significantly, we believe we can exit 2009 with cash at or above the amount that we reported on our balance sheet at year-end 2008, without increased borrowings. This net result will be reflective of our continued focus on managing our businesses for cash, which includes vigorous working capital management plans, primarily centered on reducing our overall inventory levels,” McCoy said.

That liquidity made Aaron of RBC Capital Markets optimistic about the long-term prospects for Brunswick’s stock. He wrote in an investment opinion:

“With the stock, it’s not a matter of ‘if’ but ‘when.’ It’s early for us to get aggressive with this stock, but our comfort level with the company’s liquidity position leaves us optimistic from a long-term perspective. We think the stock will become timely once the industry’s supply problem is fixed. We’re clearly not there yet, but we think it’s a matter of quarters, not years, from here.”

Brunswick’s stock price rose 5 percent to $3.08 in early trading today.

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