Brunswick 3Q Loss Narrows on Lower Charge

For the quarter, Brunswick reported a net loss of $114.3 million, or
$1.29 per diluted share, as compared with a net loss of $729.1 million,
or $8.26 per diluted share, for the third quarter of 2008. The diluted
loss per share for the third quarter of 2009 included restructuring
charges of $0.32 per diluted share and a $0.24 per diluted share
benefit from special tax items. Diluted earnings per share for the
third quarter of 2008 included $4.59 per diluted share of impairment
and restructuring charges, and $3.34 per diluted share of non-cash
charges for special tax items.

“We continue to make great strides in improving our overall liquidity position, reducing our marine dealer pipeline and executing our cost reduction program,” said Brunswick's Chairman and Chief Executive Officer Dustan E. McCoy. “These significant accomplishments have been achieved against a global marine market that has experienced its lowest level of demand in more than 45 years.

“Our overall liquidity at the end of the third quarter was $740 million, $222 million higher than existed at the end of 2008. During the quarter, we retired notes maturing in 2011, which eliminates any material debt maturities over the next three years.

“As we entered 2009, we established as one of our top priorities an inventory management and pipeline reduction strategy that was intended to assist our dealers through this very difficult period. By producing fewer units than we sold at wholesale, and selling lower amounts at wholesale than our dealers are retailing, we have been able to reduce the number of boats on dealers' showrooms as well as in our factory yards to extremely low levels. This strategy of taking all reasonable actions to maintain the health of our dealers has thus far led to very manageable levels of dealer exits, and any related Brunswick boat repurchase obligations.

“The factors that affected our revenues and earnings in the previous two quarters of 2009 continued into the third, including lower overall unit sales levels across our entire company, combined with higher discounts and incentives to facilitate retail boat sales, particularly of older boat models. During the third quarter, the company continued to experience reduced fixed-cost absorption and higher pension and bad debt expenses. Offsetting these factors were cost savings generated from our successful and ongoing fixed-cost reduction activities and lower restructuring charges, along with the absence of large impairment and tax charges incurred in the third quarter of last year,” McCoy said.

Review of Cash Flow and Balance Sheet

During the quarter, the company issued $350 million of senior secured notes due in 2016. The net proceeds from this financing of approximately $330 million were used to retire $149 million of senior notes due in 2011, and $12 million of senior notes due in 2013. Also in the quarter, the company reduced its borrowings under the Mercury Marine ABL facility by $74 million, and ended the period with no borrowings under this facility.

Cash and cash equivalents were $624 million at the end of the third quarter, up $307 million from year-end 2008 levels. The company's increased cash position resulted primarily from a change in certain current assets and current liabilities, net financing activities and net tax refunds, partially offset by net losses experienced in the nine-month period and pension contributions. The change in certain current assets and current liabilities was largely the result of reductions of the company's inventory and accounts and notes receivable, partially offset by decreased accounts payable and lower accrued expenses.

Net debt (defined as total debt, less cash and cash equivalents) was $292 million, down $122 million from year-end 2008 levels. The company's total liquidity (defined as cash and cash equivalents, plus amounts available under its asset-backed lending facilities) totaled $740 million, up $222 million from year-end 2008 levels.

Marine Engine Segment

The Marine Engine segment, consisting of the Mercury Marine Group, including the marine service, parts and accessories businesses, reported net sales of $363.5 million in the third quarter of 2009, down 29 percent from $515.2 million in the year-ago third quarter. International sales, which represented 41 percent of total segment sales in the quarter, declined by 27 percent. For the quarter, the Marine Engine segment reported an operating loss of $13.4 million, including restructuring charges of $18.8 million. This compares with an operating loss of $9.7 million in the year-ago quarter, which included $18.6 million of impairment and restructuring charges.

Sales were off across all Marine Engine operations, with sterndrive engines experiencing a greater sales decline than outboard engines. Sales from the segment's domestic marine service, parts and accessories businesses, which represented 35 percent of total segment sales in the quarter, were down mid-single digits, as boat usage and the purchase of parts and accessories remained relatively stable.

Mercury's manufacturing facilities continued to cut production rates and take plant furloughs during the quarter in response to lower retail demand and to reduce pipeline levels. Lower sales, reduced fixed-cost absorption on lower production and higher bad debt expense had an adverse effect on operating earnings, which were partially offset by Mercury Marine's expense reductions.

Boat Segment

The Boat segment is comprised of the Brunswick Boat Group and includes 17 boat brands. The Boat segment reported net sales for the third quarter of 2009 of $118.2 million, down 62 percent compared with $314.2 million in the third quarter of 2008. International sales, which represented 43 percent of total segment sales in the quarter, decreased by 60 percent during the period. For the third quarter of 2009, the Boat segment reported an operating loss of $86.7 million, including restructuring charges of $6.6 million. This compares with an operating loss of $536.3 million, including impairment and restructuring charges of $491.6 million, in the third quarter of 2008.

Boat manufacturing facilities also continued to significantly cut production rates and take plant furloughs during the quarter to address inventory levels held by the company and its dealers. Lower sales, reduced fixed-cost absorption on lower production volumes and higher discounts and incentives to support retail sales by dealers had an adverse effect on operating earnings, which were partially offset by the Boat Group's expense reductions and the absence of impairment charges incurred in the third quarter of 2008.

Fitness Segment

The Fitness segment is comprised of the Life Fitness Division, which manufactures and sells Life Fitness and Hammer Strength fitness equipment. Fitness segment sales in the third quarter of 2009 totaled $126.8 million, down 22 percent from $161.6 million in the year-ago quarter. International sales, which represented 55 percent of total segment sales in the quarter, declined by 15 percent. For the quarter, the Fitness segment reported operating earnings of $12.5 million, including $0.4 million of restructuring charges. This compares with operating earnings of $10.3 million, including restructuring charges of $0.8 million, in the third quarter of 2008.

Commercial equipment sales, which account for the largest percentage of Fitness segment sales, declined in the quarter as gym and fitness club operators remained cautious about ordering equipment. Sales of consumer exercise equipment were also down, although at lower rates than sales of commercial equipment. Higher operating earnings in the third quarter of 2009, when compared with 2008, reflect actions taken by Life Fitness to reduce expenses, which were partially offset by the unfavorable effect of lower sales.

Bowling & Billiards Segment

The Bowling & Billiards segment is comprised of Brunswick retail bowling centers; bowling equipment and products; and billiards tables and accessories. Segment sales in the third quarter of 2009 totaled $77.5 million, down 30 percent compared with $111.1 million in the year-ago quarter. For the quarter, the segment reported an operating loss of $3.8 million, including restructuring charges of $0.8 million. This compares with an operating loss of $10.4 million, including impairment and restructuring charges of $15.4 million in the third quarter of 2008.

For the quarter, retail bowling equivalent-center sales declined by a high single-digit percentage. The bowling products and billiards businesses experienced greater sales declines, as bowling center operators and retail billiards customers remained cautious about purchases. Operating losses reflected the unfavorable effect of the reduced sales, which was partially offset by Bowling & Billiards' cost reduction activities and the absence of impairment charges incurred in the third quarter of 2008.

Outlook

“As we enter the fourth quarter of 2009 and begin planning for 2010, our near-term operating and financial strategies will continue to be focused on maintaining strong liquidity without additional borrowing, taking all reasonable actions to protect our dealer network, and positioning ourselves to take advantage of improvements in economic conditions as they occur,” McCoy said.

“Strategic actions pertaining to our inventory management and pipeline reduction strategy will continue during the fourth quarter, with a target to further reduce the number of boats in our backyard and to minimize the seasonal growth in pipeline inventories. These actions should continue to negatively affect our sales and earnings as they have in the previous three quarters.

“As we enter 2010, the majority of our boat and engine manufacturing facilities will begin to ramp up production. This is primarily the result of dealer inventories being at historically low levels, which means we will need to increase our wholesale shipments of boats and engines to meet retail demand. Increased production combined with higher wholesale shipments should provide improved revenue and reduced losses throughout 2010.

“In addition, the cash generated from improving EBITDA, combined with continued tight working capital management as well as a continued focus on our cost management programs, should enable us to maintain strong levels of liquidity throughout 2010.

“During the third quarter, in our continuing efforts to evaluate our manufacturing footprint, brands, models, and cost and operating structures, we made a strategic decision to consolidate Mercury Marine's two largest U.S. manufacturing operations. The consolidation of manufacturing operations in Fond du Lac, Wis., is expected to generate the highest returns with the lowest execution risk.

“As a result of this decision, we will transition during the next 24 months our manufacturing operations from Stillwater, Okla., to our facility in Wisconsin. This consolidation, combined with the net fixed-cost reductions achieved over the past two years, should help uniquely position Brunswick for continued market leadership in our marine and recreation businesses,” McCoy concluded.