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Pramod Thammaiah

BC AT A GLANCE

P/E ► -1.53   EV/EBITDA ► -8.08   ROA ► -18.1% VERY LOW ROE ► -80.6% VERY LOW Debt to Equity ► 7.58 VERY HIGH Current Ratio ► 1.77 AVG Interest Coverage Ratio ► -5.55 LOW

 

 

 

 

 

 

Brunswick Corporation (NYSE: BC) sells leisure products such as boats, foosball tables, air hockey tables, bowling and billiards equipment, and fitness equipment. BC also owns and operates bowling centers in several countries and billiards stores in the U.S. Its marine division, which markets and sells outboard engines and boats, is five times the size of its nearest competitor, and BC commands more than 35% market share in boats and more than 50% in engines. ^[1]

Recently, however, the U.S. boating industry has seen a major decline in sales, and Brunswick has felt the effects of this trend. BC offers a diverse set of boating products, from the low end of the market to the yachts in its Hatteras and Meridian brands, and the decline in consumer demand has negatively affected sales numbers across all its products in the past three years. Also contributing to Brunswick's struggles is a continued rise in used boat sales, which now make up over 60% of total sales in the marine industry.

The decline in the boating business certainly impacts Brunswick's balance sheet, as 80% of its revenues come from the marine segment, but the diversity of its portfolio may help it to withstand the current down-cycle. Health & Wellness is a rapidly growing industry where Brunswick owns three recognized brands, Life Fitness, Hammer Strength, and ParaBody, and the firm's sales of fitness equipment grew 10% in Q32007 over the same period in 2006. Bowling and billiards sales, meanwhile, remained flat and continued to account for 8.5% of the company's total revenues. These two sectors lend stability to the company in a period of high volatility in marine sales.

Business Financials

Brunswick makes money by selling its boats, marine engines, fitness equipment, and bowling & billiards merchandise through 7,000 independent dealers (ranging from small proprietors to large publicly traded companies) and directly to consumers through the Internet. The first chart shows the breakdown of net sales from each of Brunswick's divisions in 2006. Boats and Marine Engines are the two biggest groups with 46.3% and 36.71% of net sales respectively. Fitness and Bowling & Billiards are smaller with 9.59% and 7.41% of net sales respectively.

The Boat group had net sales of $2,864.4 million during 2006, with the largest dollar sales and unit volume of pleasure boats in the world. Brunswick's brands include: Albemarle, Cabo, Hatteras, Sea Ray, Sealine, Bayliner, Maxum, Meridian, Boston Whaler, Sea Pro, Sea Boss, Palmetto, Triton, Trophy, Laguna, Baja, Crestliner, Harris, Lowe, Lund, Princecraft and Kayton.^[2] Brunswick sells its boats through a network of approximately 2,300 dealers, who each carry one or more of Brunswick's brands.

The Marine Engine group had net sales of $2,271.3 million in 2006 with the largest dollar sales volume of recreational marine engines in the world. Brunswick sells marine engines under the following brands: Mercury, Mercury MerCruiser, Mariner, Mercury Racing, Mercury SportJet and Mercury Jet Drive. This group also sells engines to the Boat group, indicating some vertical integration in Brunswick. Demand for marine engines is seasonal and is usually highest in the second quarter of the year. ^[3]

The Fitness group consists of three brands: Life Fitness, Hammer Strength and ParaBody. This group had net sales of $593.1 million during 2006 and is the world’s largest manufacturer of commercial fitness equipment. It mainly sells its product to health clubs and fitness facilities run by sports teams, universities, corporations, and hotels. ^[4]

The last group is Bowling and Billiards. It had net sales of $458.3 million during 2006. This group manufactures bowling balls, pinsetters, ball returns, bowling shoes, billiards tables, air hockey tables, foosball tables, and related accessories. The group also operates 107 bowling centers in the U.S., Canada, and Europe under the brand Brunswick Zone.^[5]

The below chart shows BC's total revenue and operating income from 2002 to 2007. As the chart shows, total revenue increased from 2002 to 2004. From 2005 to 2007 growth slowed and total revenue remained relatively constant. However, Operating Income peaked in 2005 and has declined in 2006 and 2007. This points to greater cost and less profit margin for the company. This can attributed to rising production costs (from rising prices of raw materials) and lower demand in the boating industry.^[6]

Key Trends and Forces

• The US Marine Industry is in decline.: Since 2000, the US Marine Industry has seen a steady decrease in demand for its products. Brunswick attributes this decline to two factors: lack of disposable income and higher boat prices. Although the average amount of disposable income has increased since 2000, the rate of growth has slowed, and the price of necessities such as food, clothing,gasoline, and healthcare have increased. This has negatively impacted consumer willingness to purchase the types of products Brunswick sells. The other factor is that boat prices have been rising. This has been caused by increasing low-emission regulations and rising input costs (such as oil, aluminum, and copper). The following chart shows the decline of the US Marine Industry since 2000:

• The cost of raw materials is rising.: Brunswick gets its raw materials from a variety of sources and thus, is not that susceptible to sudden supply shocks. It uses oil, aluminum, steel and resins in its manufacturing processes. As a result, Brunswick has been feeling the effects of the rising oil prices, aluminum prices, steel prices, and other raw materials since 2006.^[7] For example, rising costs of oil based products such as resins and foam make it more expensive to manufacture marine products. Also, rising energy costs make operating bowling centers more expensive because the costs of air-conditioning, heating, and electricity rise. ^[8]

• Possibility of recession: Brunswick's main products (boats, engines, fitness equipment, and recreational items) rely on discretionary spending from consumers. As a result, Brunswick is especially vulnerable to fluctuations in consumer confidence and discretionary income. Their products would be considered luxury consumption because people will not buy Brunswick's products if they are worried about their economic well-being. Most people consider boats, buying fitness equipment, and bowling & billiards accessories as luxury goods, not necessities. Also, rising interest rates make it more difficult for dealers and consumers to finance purchases of boats and marine engines. As a result, sales of Brunswick's marine products are negatively affected.^[9]

• Asian competition: Low-priced competition can cut BC’s profit margin, and manufacturers in Asian countries with developing economies have traditionally priced aggressively to compete with Brunswick. They are able to do this because of low labor costs and fewer regulations. Lately, the group that has been most significantly affected is the Marine Engine group. As a result, Brunswick Corporation's profits are reduced because they must lower their prices. It also becomes extremely difficult when compounded with the other trend of the rising cost of raw materials. Brunswick is often unable to pass on rising costs to consumers because of Asian competition.^[10]

• Potential distribution problems: Brunswick relies on approximately 7,000 independent third-party dealers to sell its products. If these dealers experience lower profit margins from higher costs or lower prices, then this would adversely affect Brunswick's profits. Higher costs can result from rising interest rates, higher rents, labor costs, taxes, and compliance with new regulations. If dealers are unable to operate profitably, then it is possible that they will no longer be part of Brunswick's distribution network. In this case, Brunswick will have a difficult time selling its products to consumers. ^[11]

• Poor weather conditions will deter people from boating.: Weather conditions can have a significant impact on the sale of Brunswick's products. The marine engines and boats groups generally have stronger sales in the spring and summer. Good weather during this time encourages people to go boating, and this helps Brunswick reach customers. However, bad weather such as excessive rainfall, drought, and cool temperatures can reduce demand, and in years with heavy precipitation Brunswick's sales suffer. Also, hurricanes can disrupt Brunswick's distribution network, like they did in 2004 and 2005 in the U.S. Atlantic and Gulf coasts. Severely inclement weather on weekends, holidays, and the winter (times when demand for bowling is high) can hurt sales from the bowling & billiards group. ^[12]

Competition

Brunswick has many competitors but no one company competes with it in all four sectors (boats, marine engines, fitness equipment, and bowling & billiards equipment). Brunswick is a market leader all four areas. It is the largest manufacturer of recreational boats by dollar sales and unit volume, and the largest manufacturer of marine engines. Brunswick's fitness brands - Life Fitness, Hammer Strength, and ParaBody - also make Brunswick the largest producer of commercial exercise equipment.

In the boating and marine engines industry it faces competition from Genmar Holdings, Yamaha Motor (YAMHF), Marine Products (MPX), Fountain Powerboat Industries (FPB), Challenger Powerboats, Inc (CPBI), and others. The Industry is extremely fragmented with hundreds of different brands. Brunswick, however, controls 35% of the market share in boating, and over 50% of the market for the sale of outboard engines.

The bowling industry is highly fragmented with small business, but Brunswick must compete with market leader AMF Bowling, Inc. (AMBWQ) which owns and operates 340 centers in the United States, compared to BC's 107 locations. Bowl America Incorporated (BWLA) is another competitor. The Bowling Industry is extremely fragmented with the biggest two companies owning 400+ centers and the next three largest companies owning a combined total of 50 centers. The total number of bowling centers is 5,498. ^[13]

In the fitness equipment industry companies such as Nautilus Group (NLS) and Cybex International (CYBI) compete with Brunswick. Brunswick is the largest manufacturer of commercial fitness equipment and is a leader in the manufacture of consumer fitness equipment. Life Fitness is a leading brand and is found in many gyms nationwide.

One clear difference Brunswick has amongst its competitors is that it has many different products. Therefore, it is less vulnerable to downturns in one sector. For example, a decline in the bowling industry would impact Brunswick's competitors significantly, while Brunswick could absorb the losses because of its wide base.

Notes

1. ↑ Brunswick Corp. (BC) 10-K, Fiscal year 2006, "Business", p.1
2. ↑ 10-K BC 2006 10-K, Item 1, p. 2.
3. ↑ 10-K BC 2006 10-K, Item 1, p. 3.
4. ↑ 10-K BC 2006 10-K, Item 1, p. 3.
5. ↑ 10-K BC 2006 10-K, Item 1, p. 4.
6. ↑ Data from Google Finance
7. ↑ Brunswick Corp. (BC) 10-K, Fiscal year 2006, "Raw Materials", p.6
8. ↑ Brunswick Corp. (BC) 10-K, Fiscal year 2006, "Risk Factors", p.10
9. ↑ 10-K BC 2006 10-K, Item 1, p.9-11.]
10. ↑ 10-K BC 2006 10-K, Item 1, p.9-11.
11. ↑ 10-K, Fiscal year 2006, "Risk Factors", p.9.]
12. ↑ 10-K BC 2006 10-K, Item 1, p.10.]
13. ↑ pg.3-4 Sandy Hansell & Associates, Inc.