posted 11-14-2013 09:23 AM ET (US)        

"Inter-company [sic] sales to the Company's Boat segment represented approximately 12 percent of Mercury Marine's sales in 2012."

The sales of the Mercury Marine unit consist of three major sectors:

--outboard engines

--sterndrive engines

--parts and accessories

That the total sales volume of products in these three sectors to the boat group operating unit only totals 12-percent comes as a bit of a surprise. Because there are three different types of product included in that total, we cannot see exactly what percentage of any of the three is included. For example, we cannot be certain that outboard engines are sold on inter-company sales at any particular rate.

The total composition of the Mercury Marine unit sales is broken down as follows in a recent presentation to investors:

--outboard engines are 43-percent of sales

--parts and accessories are 43-percent of sales

--sterndrive engines are 14-percent of sales

I believe that the inter-company sales may consist of different proportions, with a tendency for outboard engines to be a larger percentage. I base this on the following assumptions:

--the boat group has more hulls powered by outboards than by sterndrives; this tends to increase the percentage of outboards in the mix;

--in a building a new boat, it is likely that the engine cost is greater than the parts and accessories cost, at least for the parts and accessories that will be purchased by the boat group from the Mercury Marine unit.

posted 11-14-2013 01:41 PM ET (US)         

I do know, from personal experience, that Mercury is not very well represented in Georgia, Florida, and South Carolina salt water boating. Maybe Mercury is incredibly popular among fresh water boaters in other parts of the country?

posted 11-14-2013 02:26 PM ET (US)            

And Jim, in response to your aside erroneously accusing me of "hyper-sensitivity to mandatory-tie-in-sales", I used your excellent search engine in an attempt to link "prj" with that phrase. While I did find that I used that phrase once, 3 1/2 years ago, I'm quite confident that you've confused me with someone else, as I literally have no opinion about Brunswick's policy in that regard. And its a rare topic that I have no opinion on, of that I'm certain.

posted 11-14-2013 08:50 PM ET (US)         

"The Marine Engine segment manufactures and markets a full range of outboard engines, sterndrive engines, inboard engines and marine parts and accessories, which are principally sold directly to boat builders, including Brunswick's Boat segment, or through marine retail dealers and distributors worldwide. The Company's engine manufacturing plants are located mainly in the United States, China and Japan, with sales mainly to North American, European and Asian markets.

"The Boat segment designs, manufactures and markets fiberglass pleasure boats, offshore fishing boats, aluminum fishing boats, pontoon boats and deck boats, which are sold primarily through dealers. The Boat segment's products are manufactured primarily in the United States. Sales to the segment's largest boat dealer, MarineMax, which has multiple locations, comprised approximately 16 percent, 18 percent and 17 percent of Boat segment sales in 2012, 2011 and 2010, respectively."

posted 11-15-2013 06:19 AM ET (US)            

I would agree with this, it's pretty rare to see anything else. One noteable point is that these units are often not very visible physically on many boats, being buried under molded in swim platforms. So for casual obersvers like us, it's not as though we can scan a marine from the deck of the coffee shop above and with one glance take in the entire marina population of engines by brand.

Boats driven by I/O power represent a compeltely different segment than the ones that many of us here are interested in. With this said, the "family cruiser" market sells a lot of boats.

The history of I/O is an interesting one, worth a Google when you are bored one day. Volvo essentially invented it, and Mercury embraced it in the USA. There were some interesting shenanigans at the beginning, so if you are interested in the history of these things it's worth doing a little research.

Dave

posted 11-15-2013 09:32 AM ET (US)            

Although the boat group had net sales of $1-billion (as mentioned previously), the operating earnings from those sales were a $28.5-million loss. In contrast, the marine engine group enjoyed operating earnings or profit of $243.8-million on their net sales of $1.99-billion.

If we look at the results in 2012 we see that owning all those boat builders allowed Brunswick to lose $28.5-million in their operation of them, and provided the engine group with only 12-percent of their sales.

What we do not know is how Brunswick handles the transfer of the engines to itself. For example, let us say there is an outboard engine that Brunswick would normally sell for $10,000 to a regular customer, say a dealer or an independent boat builder. We can see that the operating margin for the marine engine unit is about 12-percent (i.e., 243.8/1990). That means that our hypothetical $10,000 outboard will generate about $1,200 operating earnings for the engine unit.

If the engine unit sells the engine to the boat unit for $10,000, the profit goes into the engine unit. If the engine unit sells the engine to the boat group at a discounted price, then the boat group may be able to make a profit on the engine when it sells the engine as part of a new boat it built.

I don't see any mention of how these sales are handled. If I were the manager of the engine unit, I would want the profit for building and selling the engine to be recorded under the engine unit. I suspect that is how the accounting is done.

posted 11-15-2013 10:56 AM ET (US)            

You could sell 90 percent of your engines to sister companies at an extremely low margin and still only record 12% as a $ sales percentage.

I am not saying that is what happened, but I am saying, as someone who has worked statistics to tell stories my client wants them to tell...that they can be spun to tell whatever you want them to tell.

posted 11-15-2013 11:08 AM ET (US)            

"There are lies, damn lies, and then there are statistics."

Creative accounting can put a lot of spin on numbers, too.

There is another aspect to having an engine maker own its own boat companies, too: it makes the engine maker a competitor of other independent boat builders. The independent boat builder may be resistive to buying an engine when he thinks that purchase is going to help his competitors in the boat building business. For example, look at some of the best of the independent boat builders like Grady-White, Pursuit, and Edgewater. They all tend to use outboard engines that are not made by Brunswick. Is that because they see Brunswick as a competitor in the boat building business?

The other outboard engine manufacturers as a group do not tend to own boat building companies. Independent boat builders do not see those engine brands as being made by boat-building competitors.

posted 11-15-2013 11:55 AM ET (US)         

On the Engine side,with the debt and low equity position of Brunswick, they have very little room to invest in new technology/engine upgrading and keeping up with new emissions regulations/competition from other engines.

I think they may be in a position where they have to decide to downsize some more to get rid of debt and invest in Engines or Boats, but they likely do not have enough for both. They make more money from engines so they are more likely to keep that and sell off Boats, like they did with Hatteras and Cabo. Getting out of more Boat lines would also mean maybe selling engines to other boat builders? Plus they could make it part of the deal that a buyer has to continue to buy a certain number or percentage of Mercury engines going forward for say 5 years?

So what are they most likely to sell next? Which asset would be easy to sell, and give them any sort of return in this buyer's market?

On the Boat side, I would guess that Boston Whaler is the brand that would be most likely to be sold.

posted 11-15-2013 09:40 PM ET (US)            

"But, as I explained, I suspect the actual percentage of outboards sold to the boat group, is higher."

And adds:

"Dave--you are right. There is an old saying:
"There are lies, damn lies, and then there are statistics."
Creative accounting can put a lot of spin on numbers, too. "

Jim H, This is just silly talk. Brunswick is a $3.7 billion dollar company audited by Ernst & Young. Your suspicions of higher intercompany sales are unfounded and conjecture at best. Nor is there any creative accounting here, US GAAP is US GAAP....unless of course you are accusing Brunswick of intentional material misstatements of the financial statements and/or accusing E&Y of failure in detecting such.

Come on Jim...

posted 11-15-2013 10:56 PM ET (US)            

As for accounting practices, I have no expertise. If Brunswick wanted to be transparent about the price they sold Cabo and Hatteras, all they would have to include in their annual report is a simple statement that said something like this:

"We bought Cabo and Hatteras for $xxx-million, and we sold them for $yyy-million, takling a $zzz profit/loss."

When there is no clear statement like that, it causes me to wonder what those figures were. Why should I have to hire an accounting firm to explain the financial statement's various ledger entries to understand such a simple matter? That is what I mean by "creative accounting."

As for the manner in which the information about the sale has been presented in the financial ledgers, I read it as Brunswick sold the boat builders for $1.6-million. Now you tell me that is completely wrong, but that is what it looks like to me. Brunswick could eliminate all the confusion if they just stated clearly what the buy price and sell price was. Then I find out that a year ago they wrote off millions in anticipation of a lower sales price. Buoy's analysis seems to ignore that information.

As for the cost at which they transfer the engines from one group to another, is Buoy telling me that there is a standard method for doing this required in accounting that they must adhere to? If there is, then what is that standard?

As for "Come on, jim..." I am just expressing my confusion and curiosity. The financial statements for me are hard to read to find the information I am interesting in knowing. Is there some intrinsic harm in me asking about this information?

Who drew the line that cannot be crossed with questions about statements in a financial report?

I am sure all the columns add up, but those columns do not give me the information I am interested in. So I speculate.

posted 11-16-2013 08:19 AM ET (US)         

They are required to disclose details of transactions that are meaningful to their financial position, so they only disclosed they sold Hatteras and Cabo for a gain of $1.6 million. Anything more than that would be optional, and nice to know for those of us who are curious.

Like Goodwill, they only have to disclose the current totals, not the individual balances for those assets, so no way to know a carrying value for those individual assets that make up Goodwill, or for the individual write down amounts for those $700 million in write downs, unless for some reason they decide to disclose it.

Until you get disclosure, you can only speculate and we do a pretty good job of that.

In the meantime, Brunswick are trying to raise some money, given the state of their balance sheet and income statement, I wouldn't be investing any of my money. Might as well buy some Blackberry shares.