Jan 29, 2009
Executives
Bruce J. Byots - Vice President, Corporate and Investor Relations Dustan E.
McCoy - Chairman and Chief Executive Officer Peter B. Hamilton - Senior Vice President and Chief Financial Officer
Analysts
Edward Aaron - RBC Capital Markets Hayley Wolff - Rochdale Securities Timothy Conder - Wachovia-Wells Fargo John Harloe - Barrow, Hanley, Mewhinney & Strauss Justin L. Boisseau - Gates Capital Management
Operator
Good morning and welcome to Brunswick Corporation's 2008 fourth quarter earnings conference call. All participants are in a listen-only mode until the question and answer period.
Today's meeting will be recorded. If you have objections you may disconnect at this time.
I would now like to introduce Bruce Byots, Vice President of Corporate and Investor Relations. You may begin.
Bruce J. Byots
Good morning and thank you for joining us. On the call this morning is Dusty McCoy, Brunswick's Chairman and CEO and Peter Hamilton, our CFO.
Before we begin with our prepared remarks, I would like to remind everyone that during this call our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations.
For the details on the factors to consider, please refer to our 10-K, latest 10-Q and today's press release. All these documents are available on our website at brunswick.com.
I would now like to turn it over to Dusty.
Dustan E. McCoy
Thank you, Bruce. Good morning everyone and thank you for joining us today.
You've seen our results for the 2008 fourth quarter and full year. Our results reflect a difficult year that 2008 was for Brunswick and our fourth quarter reflected the deteriorating global economic conditions.
We've reported a net loss from continuing operations in the quarter of $0.75 per share. There are a few significant favorable and unfavorable items in our numbers that we've described more fully in our press release and we'll also comment on further in our prepared remarks this morning.
The reality of the global economic conditions place Brunswick in a harsh operating environment. Demand is down and there are no factors on the near horizon which will improve demand.
Therefore, it is important that we execute well around three principles. First, we must maintain strong liquidity.
Second, we will take actions necessary to maintain the health of our dealer network. And third, we will continue to position our businesses to emerge from the global economic crisis stronger than before.
We ended the year with $317.5 million of cash on our balance sheet compared to $331 million at year-end 2007. We ended the year with no borrowings under our recently amended revolving credit facility and we did not draw on the facility at any point during the year.
Our revolving credit agreement provides us an important financial safety net for our operating cash requirements. Our strong cash performance in 2008 is the result of the execution of a myriad of operating actions throughout our company.
Our employees have also significantly contributed to our cash position through salary actions, furloughs, bonus decisions and other measures which have directly impacted their pay and benefits. These significant contributions range from workers in our assembly lines to the staff professionals here in our corporate office.
As we think about our dealer network, we start with the understanding that the declining demand in main products at the retail level significantly impacts dealer health. In declining markets our dealers require less product on their showing floors and we must work in concert with them to manage their declining inventory needs.
As a result, we produce and sell at wholesale into the dealer network fewer boats than are sold at retail. Of course, this dynamic results in significant burdens on our earnings as markets are falling and we saw the impact of these dynamics on our 2008 fourth quarter and full year results.
Based upon the U.S. market data for the first, second and third quarters of 2008, industry fiberglass stern drive and inboard product retail unit demand fell 28% in the first quarter, 36% in the second quarter and 21% in the third quarter.
Preliminary industry data for the fourth quarter saw industry retail unit demand fell 48%. As we look at the outboard fiberglass boat, retail unit demand on the same basis, industry demand fell 20% in the first quarter, 24% in the second quarter and 33% in the third quarter.
Preliminary industry data for the fourth quarter show industry retail unit demand for outboard fiberglass boats fell 41%. Aluminum product demand based on final industry data was down 17% in the first quarter; 23% in the second quarter; and 22% in the third quarter.
Preliminary data for the fourth quarter show industry unit retail demand was down 30%. In this market backdrop, our 2008 sales declined 17% across Brunswick and our marine sales declined nearly 21%.
In the fourth quarter our sales declined 42% and our marine sales declined 50%. These sales levels and the resulting impact on our earnings are difficult to endure in the short term.
But they are having a positive impact in our effort to reduce the dealer pipeline, which of course is important for our long-term success. During 2008, we reduced the dealer pipeline by 6700 units, a 22% reduction.
We ended the year with 34.5 weeks of product in the pipeline on a trailing 12 months retail basis, compared to 34 weeks at the end of 2007, which is a remarkable achievement given the dramatic retail declines. I would like to thank and commend our dealers for their aggressive inventory management during a very difficult 2008.
Early on 2008, we amended our agreement with GE related to our Brunswick Acceptance Corporation dealer floor plan financing joint venture to extend the term of the winter through 2014. In the fourth quarter, we reached an agreement with GE on a revised covenant and do not expect that any covenant will be an issue during the term of the agreement.
Now that we've obtained the floor plan financing, it's important to us in our dealer network, and as we see lenders leave the marine floor plan market, we believe we are providing an important competitive advantage to our dealers. As we discuss that of our bulk dealers, we should comment on Brunswick's contention obligations to repurchase a certain percentage of our boats sold to dealers to floor-plan financing, whether through our BAC joint venture or other floor plan providers.
Looking specifically at financing statistics, total domestic floor plan outstandings were down over 20% at year-end 2008 versus 2007. This is a function of the overall slow down in marine markets as well as our actions in 2008 to sell fewer boats to our dealers than they retail.
A challenge our dealers face, however, is their inventory of boats more than 12 months in age which comprised approximately 40% of the domestic floor-plan financing at the end of 2008 versus 20% at the end of 2007. In raw dollars, boats financed that are greater than one year of age increased by approximately 70 million versus this time last year.
Age product is an area of keen focus and we're working closely with our dealers to get aged product retail sold. This is not a material issue for about one half of our dealers who have little or no product finance that is aged greater than 18 months.
And as you are aware the company has obligations to repurchase inventory from floor-plan lenders in the event to use default under obligations. The maximum liability associated with these obligations at year end is $260 million and $170 million over a two year period if we had to purchase every boat covered by repurchase obligations.
Of course, our actual experience is expected to be significantly below this level. We actively work to manage this risk by closely monitoring the current status of our dealers and taking actions to avert and mitigate losses.
These actions include providing assistance on retail incentives, curtailing shipments of product or redistributing product to other dealers. Historically, the expenditures were likely to repurchases had been manageable even during times of market stress.
For 2008, we repurchased about $16 million of inventory related to these obligations including slightly over $5 million related to the Olympic Boat which declared bankruptcy in the third quarter. A substantial portion of that inventory was successfully transitioned to other dealers prior to year end.
As we work with our dealers, product finance that is less than 12 months old has declined significantly year-over-year. This decline is a direct result of the significant reduction in wholesale shipments in 2008.
Of course, this means the risk of adding to the population of aged product is decreasing. And we will continue to manage wholesale shipments to keep dealer inventories in line.
These are trying times for our boat dealers, but we believe that our dealer base is the strongest in the industry backed up by the most stable and extensive financing program in the industry. These are powerful resources for Brunswick that provide a competitive advantage in these weak markets.
And even more so in the recovery that we are on to. The difficult economic conditions in which we are operating require that we aggressively manage our operations to reduce costs, to ensure our liquidity and to position the company to emerge from these economic conditions stronger than ever.
Till these ends we have executed a wide ranging and comprehensive set of actions in 2008. During 2008, we achieved actual net fix cost reductions affecting both cost of sales and SG&A of approximately $160 million, not including the amount saved by not paying bonuses in 2008.
In 2008, we have reduced our total company workforce by 27% and our marine operations and corporate functions we reduced our total workforce about 40% and with actions we have announced so for in 2009 this reduction will reach 46% in those portions of our company. These actions are painful and disruptive for the individuals involve and for our organization.
But we have no choice but to size our workforce to demand, because they are both plans and now falls in other three. Our operating boat manufacturing footprint has been cut in half in 2007 and 2008.
And so we have moved from 28 plants down to 14. As a result, our boat manufacturing plants now manufacturing common types of boats over multiple brands rather than a single brand over multiple types of boats.
Even after this footprint realignment, we believe we can increase production by nearly 100% from today's rates when markets recover. We reduced the number of boat borrowings in the manufacture to better utilize on footprint and to reduce complexity and attain the cost.
We exited brands and product categories or segments with limited or no growth or profit potential. We exit or sold rather non-strategic businesses or assets.
We consolidated functions and removed layers of management. All these actions taken together, position Brunswick to be stronger when global economic conditions improve.
Before turning the call over to Peter, I want to mention the performance of our fitness in Bowling & Billiards businesses. These businesses are important to Brunswick and often get overlooked.
These businesses contributed significant earnings and cash flow to Brunswick in 2008. Sales in our fitness business were down 2% for the year but were down 20% in the fourth quarter.
The fourth quarter results reflect continued weakness in the consumer portion of the business, but were more impacted by a slowing in the commercial portion of the business as clubs, schools and hotels, proper back spending for new equipment as the year ended. For 2008, our Bowling & Billiards sales were flat, but we did see an 8% decline in sales in the fourth quarter as the billiards business continue to experience significant declines and our same center sales declined in the quarter, reflecting consumers pessimism.
I'll now turn the call over to Peter.
Peter B. Hamilton
Thanks Dusty. I'll begin by reviewing our cash flows in the quarter and then provide more detail on some of the major considerations affecting our 2008 and 2009 financials.
Cash declined by $25 million in the fourth quarter. Our cash flows benefited in the quarter by approximately $33 million of proceeds from asset sales and business dispositions.
However, this benefit was more than offset by cash restructuring charges of $43 million and nearly $10 million in fees in connection with the amendment of our revolving credit agreement. Now as Dusty has explained, our objective is to exit 2009 with greater cash balances than year-end 2008 without incurring additional borrowings.
Here are some of the significant data points that will be factors in our ability to achieve this goal. D&A is estimated to be about $155 million in 2009.
We will reduce capital spending to approximately $60 million versus $102 million in 2008. Taxes will be a cash generator of about $67 million in 2009 primarily from an expected refund.
The refund comes from carrying back our losses in 2008 to our '07 and '06 returns, which were years in which we paid taxes. Based on our current 2009 restructuring plans, we anticipate restructuring charges of about $50 million during the year, a majority of which will be cash.
This compares to approximately $100 million of cash restructuring in 2008. Cash contributions to our defined benefit pension plan will increase from approximately $3 million in 2008 to between $25 million and $30 million in '09.
I will elaborate further on pensions in a moment. And finally, we expect to generate more than 100 million from working capital in '09 as we dial back production and relieve inventories and collect receivables.
Now Brunswick traditionally uses cash in the first quarter as our operations prepare for the marine selling season, and although we believe that sales will be muted this year, we nevertheless expect that the company will consume cash during the first quarter of this year. Turning now to the company's defined benefit pension plans, which have recently become a more volatile factor in our earnings and in our cash planning.
Entering 2008, our plans were nearly fully funded. At the end of the third quarter of 2008, despite reductions in global equity markets, the funding of our plans decreased only slightly.
However, as you are aware, the fourth quarter brought two dynamics that have led to a significant decline in our funding status. First, after rising through the close of Q3, the discount rate used to size our pension obligation declined to 6.25%, thereby increasing our liabilities.
And second, equity markets took another material lag down in the fourth quarter, reducing the value of our assets. The net result was we exited 2008 with plans that were under funded by about $433 million.
The effect on our '09 P&L is considerable. Pension cost is estimated at nearly $90 million versus $14 million in 2008.
Cash contribution requirements are also expected to increase but not to the same magnitude as expense. We are currently planning for contributions in the $25 million to $30 million range in '09, although a portion of these contributions could be deferred in 2010, if necessary.
In 2008, we made contributions of approximately $3 million. I would note that our defined benefit salary plan has been closed to new entrants since 1999.
This was a critical step in capping the growth of our liabilities. Growth in assets will be a function at the eventual uplift in equity markets and our annual cash contributions to the fund.
Moving now to our tax provision. For 2008, Brunswick ended the year providing tax expense on an operating loss.
This negative tax rate of 25% resulted from having to book a consolidated tax provision of $155.9 million despite the company incurring a consolidated pre-tax loss of more than $632 million. Usually, you would expect to see a tax benefit on a loss which works to reduce the after-tax loss.
However, as a result of having to set up evaluation allowance of $338 million against the company's deferred tax assets, we reported a tax provision versus a tax benefit on a pre-tax loss. In other words, the evaluation allowance booked in 2008 more than offset the tax benefit booked against our pre-tax.
The evaluation allowances as you may recall is required because we are in a three year cumulative pre-tax loss position for 2006 to '08, resulting from our third quarter non-cash goodwill and intangible impairment charges. In this situation, the company is required to establish evaluation allowance against these differed tax assets, because FAS 109 accounting does not permit us to anticipate future income to utilize these future tax deductions.
Evaluation allowance against our differed tax assets is primarily a book earnings issue and does not impact cash flow. Now as soon as the company no longer has a cumulative three year pre-tax loss, we will begin to see the reversal of evaluation allowance back into income.
Looking to 2009, however, we do expect to generate taxable losses. Therefore, we will book further evaluation allowances against our deferred tax assets in this year 2009.
This will increase the company's tax provision resulting in no tax benefit for 2009 pre-tax for losses. For 2009 our pre-tax loss will essentially be our after-tax loss with the exception of potential state and foreign taxes happened to be provided.
In conclusion, I would like to review the year-end balance sheet for a moment. The changes versus year-end 2007 were considerable, but consistent with the business environment and the accounting events we did occur in 2008.
Receivables were reduced by nearly $128 million are narrowly in our engine and fitness businesses. Inventories dropped by $95 million with a reduction of that evenly split between the engine and the boat businesses.
Payables were $136 million lower with a majority of the reduction again about evenly split between the engine and the boat segments. Third, income tax assets dropped nearly $147 million, resulting from the FAS 109 evaluation allowance this was non-cash.
A reduction of nearly $550 million in goodwill and other intangibles was a function of FAS 142 impairment accounting, again non-cash. Investments were about $57 million lower, reflecting the sale of the company's interest in its Japanese Bowling joint venture and a return of $20 million in equity from our marine financing joint venture.
Our crude expenses decreased by about $161 million as a result of reduced dealer allowances, product quality and company incentive compensation. Approximately $315 million increase in long-term liabilities is just primarily a function of revaluing our pension obligations.
And finally, more than 1.1 billion reduction in shareholders equity resulted from a combination of goodwill intangible impairments, the tax evaluation allowance and the pension revaluation. Looking back, it was quite a year.
I'll turn the call now back to Dusty to wrap it up.
Dustan E. McCoy
Thanks Peter. We've given you our perspective on 2009 in our news release.
And although we are there in the new year, it still has limited visibility in what is a very volatile marketplace. We nevertheless would like to share with you a few important facts.
We are planning for revenues to be lower in 2009 with higher relative percentage declines occurring in the first half of the year. We are planning for overall profitability as compared to 2008 to be negatively affected by these expected lower sales.
In addition, certain factors Peter just reviewed with you, specifically pension expense, the resumption of variable compensation and reduced production and wholesale shipments will lower our earnings in '09. Partially offsetting these factors will be the full year effect of cost reductions implemented in '08 as well as further reductions implemented and planned for 2009.
We believe our net fixed cost reductions for 2009 will be nearly $200 million in addition to the $160 million in reductions we realized in 2008. We are well prepared and positioned to continue to manage our business for cash and we can exit 2009 with cash at or above the amount we reported at this year end.
We will continue to carefully and periodically evaluate our overall resizing efforts as market conditions evolve. Evaluate capital spending requirements and cost saving opportunities and explore additional opportunities to monetize non-core assets.
And when this economic downturn subsides, we will be well positioned to compete and prosper, which will enable us to accomplish our ultimate goal of significantly improving shareholder value. In closing, I would like to note that we make and sell products using recreational activity and our bowling retail business provides a recreational experience.
And we do these things very well as evidenced by our leading market share in all of our businesses. And even in today's economic conditions, we want to lead product innovation and continue to do so.
As examples, our New Sea Ray 43 Sundancer and our Skyhook positioning system from our Cummins MerCruiser joint venture were recently named best of the year products by a leading industry publication. Consumer spending will return and we intend to remain the market leader in any conditions.
Thank you, and we'll be happy now to take your questions.
Operator
Okay, thank you. (Operator Instructions) We have Ed Aaron, RBC Capital Markets.
Your line is open.
Edward Aaron - RBC Capital Markets
Thanks. Good morning guys and congratulations for testing the absolute limit of my accounting knowledge.
Peter Hamilton
I am surprised you could stay awake.
Edward Aaron - RBC Capital Markets
So Dusty if you assume the current levels of demand holds is going forward. You are cutting a lot of your business, but obviously I think it's impossible to cut fast enough for what's happening out there.
And there is a point at which you finally catch up fair to speak and supply matches demand and you're back step one-to-one replenishment level, if current demand holds when do you foresee that that would happen?
Dustan McCoy
Current demand holds, well first we are not planning on current demand holding it, what we believe will reduce some in 2009 especially in the first half.
Edward Aaron - RBC Capital Markets
I meant the current run rates. So if you take what the last couple of months have been and you're sort of seen, and apply the seasonality to it.
Is that... is obviously the first half of the year it's going to be considerably down.
Let me have some kind of current, concurrent levels. Are you assuming that it gets worse from where it is the last couple of months?
Dustan McCoy
I think I am probably just trying to understand your question correctly and then let me see if I am heading in the right direction. Our goal even in a down market in 2009 is to exit 2009, so that we have pipelines much closer to what we would view as our deal.
And frankly our plan is to get in to our deal in most of our businesses. If that works to occur then and the market where to flat, we are going to need to make significant numbers of...
have a significant increase in the number of boats and engines that we make it, actually quite significant. So we have made a decision in 2009 to continue to produce at levels that are dramatically lower than even the sort of retail levels you saw in the fourth quarter.
And in general thinking that we are... we might need to, if the market were to flatten, increase production by way north of 50% quickly in order to get on an even keel basis.
Is that what you are looking for?
Edward Aaron - RBC Capital Markets
Yeah that's very helpful. But do you think that the on your current outlook that your sales in the second half of the year would be back in the positive territory on a year-over-year basis?
I guess when you talk of anniversary out of furloughs?
Dustan McCoy
Ed they could be, but we are not looking much past to first half right now. And I want to make sure that we get our dealers position as best we can, so what we think it's going to be a difficult selling season.
Edward Aaron - RBC Capital Markets
Understandable. And then I wanted maybe to talk little bit more about the floor plan financing environment, we've been kind of hearing a lot of talk about more of the small boat builders and smaller dealers who are struggling with that, and you have this long-term relationship with GE, which seems to be an asset.
I mean do you expect that this is ultimately going to really provide a meaningful boost to your overall market share? And is there any scenario out there, I know you have a deal with them through 2014, but is there any scenario that you can envision where for one reason or another GE basically expects this space just to get that would be a still kind of devastating to the overall industry, just trying to figure out there's any even remote possibility that it would happen?
Dustan McCoy
Well I can't read GE's mind and can't tell you that there's any scenario. All I can tell you is what our deal is with them and what our agreement is with them.
And our judgment is certainly in our relationship they're committed to working with us, committed to moving forward and committed to providing funds. In terms of whether we believe the arrangement can't be a long-term competitive advantage, the answer is yes; in the current lending environment although I am actually quite hopeful that as we watch economic conditions unfold and see banks looking for other lending institutions, looking for good space to go into, we'll reach a point where for competitive regions, some or more vulnerable lenders will stay.
This market is beginning to improve. There is an opportunity for us to move in in order to compete with GE, and they'll do so.
But right now certainly GE owns a very large percentage of the market and that's why it's important to us that in our agreement we feel that they're committed to go forward with us.
Edward Aaron - RBC Capital Markets
Okay, thanks for taking my question.
Dustan McCoy
No problem.
Operator
Okay, thank you. And next Hayley Wolff of Rochdale Securities.
Your line is open.
Hayley Wolff - Rochdale Securities
Hi guys.
Dustan McCoy
Hi Hayley.
Hayley Wolff - Rochdale Securities
A couple of quick questions. I'm on the road right now; it's hard to listen.
The repurchase obligation that you guys talked about, is there any sense that if they are mostly... (inaudible) model your '07, do they begin to roll off as you get over the next four months, say?
Your obligations would be substantially lower against the first quarter earnings reported?
Peter Hamilton
Hayley, yes, there will be some rolling off, but I do not believe our total obligation would get substantially lower in the first quarter.
Hayley Wolff - Rochdale Securities
Okay. Is there a period, I mean what level is that in to the second quarter?
Peter Hamilton
No, because I think the amount of product out there, that far out is relatively small, it's tough as more in between current and that taking up a lot of them floor-planning.
Hayley Wolff - Rochdale Securities
And then in terms of cash usage in the first quarter, would you moderately tap into your revolver in the first quarter or do you see yourself as being self funding?
Peter Hamilton
We're actually not planning to tap in, any time during the year.
Hayley Wolff - Rochdale Securities
Okay. And then last question kind of touching on what Ed talked about, given that if we do get...
we expect to see declines in the first half, who knows what happens in the second half? But is there a sense of there is so little '08 inventory out there that any I mean that approaches, same provision with dealers really need to start order because the product will be shown on current at that point?
Dustan McCoy
Well there is...cumulative pricing point there is a substantially less current product unit pipeline right now than is normal. I think as the dealers get to work off the older, I guess if the market flattens or does anything, there is going to need to be a substantial retail and its going to be interesting because on a task for us, our supply chain system in order to meet what could be demand if when the market finally levels out.
Hayley Wolff - Rochdale Securities
Now, will your keep the amount of your changeover in September, October or you will attack to July?
Dustan McCoy
Right now it is currently July. And I am not ready to say it right now, Hayley what is the best thing to do on now and year over.
Hayley Wolff - Rochdale Securities
Okay, right. Thanks, guys.
Dustan McCoy
You're welcome.
Operator
All right, thank you. And next Tim Conder, Wachovia Wells Fargo.
Your line is open.
Timothy Conder - Wachovia-Wells Fargo
Thank you. Dusty, just to follow on the roll off there.
Can you just remind us, is there something regarding 18 month provision where your repurchase obligation if the dealer goes bankrupt, is that the roll off point in the 18 months?
Dustan McCoy
Well, no. Our obligations go beyond 18 months, but they're quite low once we get past that point.
Peter Hamilton
And Tim, we are capped at a certain level and the contingent liability number that Dusty set forth is the result of that cap.
Timothy Conder - Wachovia-Wells Fargo
Okay, okay. And by the way Peter, thank you for going through all that....
all the detail was very helpful that both of you gentlemen laid out.
Peter Hamilton
It seemed to bore Dusty, so I am glad.
Timothy Conder - Wachovia-Wells Fargo
No, no, no it's helpful, thank you. Are you basically implying from a modeling perspective roughly a 0% effective tax, did I understand you right or did I misunderstand something there?
Peter Hamilton
We'll actually have a modest tax provision Tim because we make money in some foreign jurisdictions and will have some state taxes. At the federal level, it overly simplifies it but every dollar we lose evaluation allowance would put up against it, so we'll net to zero on the tax line.
Timothy Conder - Wachovia-Wells Fargo
Okay.
Peter Hamilton
We expect a modest tax provision as opposed to what you would ordinarily expect, the benefit.
Timothy Conder - Wachovia-Wells Fargo
Okay. And then you talked about potentially monetizing some other things, gentlemen there in your commentary.
Can you maybe give us an update on sale lease back transaction, things that you were exploring regarding the recreational centers and the headquarters?
Peter Hamilton
We continue Tim to explore sell or lease backs of appropriate bowling centers. And we are going to decide whether to do that or not to do that on the basis of whether it is a wise financing decision.
We don't think it is money that we need for liquidity purposes, so we're only going to do it if we feel that's it's an appropriate inclusion in our overall capital structure and same answer for the office building.
Timothy Conder - Wachovia-Wells Fargo
Okay.
Peter Hamilton
The market is so tumultuous out there that we are going to have to look hard before we do either.
Timothy Conder - Wachovia-Wells Fargo
And gentlemen, continuing the line of questioning of coming through the dark tunnel and starting to see some potential from positive rays at some point here. Dusty in your commentary regarding the less than 12 months inventory, it would seem then that there is not much of your new leading type of products in the channel at all, and that would imply Zeus, the Axius those types products.
On those products in particular which can be a little bit better margins for you, how was your ability to ramp up when the need arises on those products in particular?
Dustan McCoy
First, let me give a little bit of perspective, even though our product, our newer product is down in terms of the amount in finance, a much, much higher percentage of that is Zeus actually is another new technology product than would be normal technology, that's number one. Number two, we're quite comfortable that we'll be able to ramp up and meet demand and believe as demand comes up, that we'll need to be right there with all of this new product and new technology but there will be some thing that consumers would be looking for and that's what we are planning for.
So Tim as an example, in our boat businesses we're spending lots and lots of time right now even with our limited capital spending focused on getting the new technology in as much of our product line of as we can, and any new product that we're doing. We are continuing to develop new products, we'll all have the new technology and it also where it's applicable.
Timothy Conder - Wachovia-Wells Fargo
Okay, okay. So you are saying but what's actually in the channel there is not that much because of the open to buy flooring being clogged up with the some what other the long ranging products?
Dustan McCoy
What I am actually saying that the percentage is much higher of new product and new technology than old technology.
Timothy Conder - Wachovia-Wells Fargo
Okay, okay.
Dustan McCoy
But as the consumers are looking for that and the dealers are doing a good job of selling.
Timothy Conder - Wachovia-Wells Fargo
Okay, okay, okay, that's good. Okay, and then this is probably a very difficult question to answer if can at all.
By your estimates, what would you think at this point or may be by the middle of the year, how much of your competitive or your competitors effectively out of commission and may not ever come back and therefore we all know that the overall market has shrunk and we'll probably not get back to where it was even in the last 10 years. But I would think that your piece of a pie as the market does recover with some of your competitive situation taking care of by this downturn so to speak that your opportunity here is very substantial.
Dustan McCoy
Tim I don't have any idea, number one. Number two, well it is worth commenting that, while there are boat businesses that our competitors in our boat businesses, there are also customers of our Mercury business and we treat them as so, and want to help them succeed.
Timothy Conder - Wachovia-Wells Fargo
Okay. Okay, that's fair, that's fair.
Thank you, gentlemen.
Dustan McCoy
You're welcome Tim.
Operator
All right, thank you. Next, John Harloe, Barrow Hanley.
Your line is open.
John Harloe - Barrow, Hanley, Mewhinney & Strauss
Hi everybody, how are you doing?
Dustan McCoy
Hi John.
John Harloe - Barrow, Hanley, Mewhinney & Strauss
In your earnings release, how I reversed your variable compensation accruals but there was not a discussion of that in the verbal part of your conference call, and I am sort of baffled this to what that is, how it may affect your operating income numbers by line of business? Where it is in the income statement?
Dustan McCoy
What it is John is we made the decision not to pay any variable compensation in 2008, and for 2008 performance and that is a 2009 cash item. But of course it's an earnings had on in 2008.
And what we try to callout is I think we even gave in the press release John the EPS impact of that.
John Harloe - Barrow, Hanley, Mewhinney & Strauss
You did.
Dustan McCoy
That was just $0.56. And then what we are building into our plan for 2009 is a return of variable compensation if we can hit all of our operating targets and if we generate sufficient cash.
And what we are... again attempting to make sure that everyone knew is there was a $0.56 benefit in 2008 that will not be that benefit perhaps in 2009.
John Harloe - Barrow, Hanley, Mewhinney & Strauss
What is the pre-tax number?
Dustan McCoy
We are looking quickly.
John Harloe - Barrow, Hanley, Mewhinney & Strauss
Okay.
Dustan McCoy
Yeah 80.
John Harloe - Barrow, Hanley, Mewhinney & Strauss
80 million?
Dustan McCoy
Yes.
John Harloe - Barrow, Hanley, Mewhinney & Strauss
And how... if you are trying to see what your operating performance was by line of business excluding that?
Dustan McCoy
The July and...
John Harloe - Barrow, Hanley, Mewhinney & Strauss
Indicated across your line of business.
Peter Hamilton
Yeah how is it spread? Well it's a, it is a spread across each of our segments depending upon those segment's variable comp and the reversal that occurred to that variable comp.
So all of the segments in this fourth quarter are benefited by that from the P&L point of view.
Dustan McCoy
And in order to help you as to how we divide the $0.56 I think that's what you're looking for?
John Harloe - Barrow, Hanley, Mewhinney & Strauss
Yes, in fact $80 million and kind of go back across a lot of business. And then just can we get the amount of ability to judge your performance in terms of cost cutting which on it's before the 80 million it's pretty impressive.
I'm sure it would be afterwards there.
Dustan McCoy
But John, it was 60 million not including the 80.
Peter Hamilton
In this year.
John Harloe - Barrow, Hanley, Mewhinney & Strauss
Okay. I'll tell you what, I'd like to call back and if somebody walk me through that, but I've got one more question, can I ask it now?
Dustan McCoy
Of course.
John Harloe - Barrow, Hanley, Mewhinney & Strauss
When I look at the 12 month cash flow statement and compare to the nine months on the income tax is another. There's a big swing in the number which implies something occurred in the fourth quarter that was pretty large and I am baffled at that.
You guys have done a pretty good of baffling with me on the accounting?
Peter Hamilton
Well we have endeavor John to...
John Harloe - Barrow, Hanley, Mewhinney & Strauss
How are doing....
Peter Hamilton
Take the confusing accounting and make it simple, but the swing is as a result of applying this valuation allowance, it comes from FAS 109 to our results in the fourth quarter and so it's...
John Harloe - Barrow, Hanley, Mewhinney & Strauss
Is that a bigger source of cash as it implies looking the number side by side?
Peter Hamilton
No, the whole valuation allowance FAS 109 situation has nothing to do with cash or tax booked cash.
John Harloe - Barrow, Hanley, Mewhinney & Strauss
Okay. Let me ask you one other small question.
If the government were to change, do you carry back from two years to five years, what would that do for press concerns of bringing cash on to the balance sheet?
Peter Hamilton
That would enable us to take losses incurred in this year '09 and carry them back to another way the legislation is currently drafted in another three years, right, which would result in a cash tax refund in the year 2010?
John Harloe - Barrow, Hanley, Mewhinney & Strauss
And that may a part to what number?
Peter Hamilton
It's very hard to say at this point because it's depending on our '09 performance but it could be as much as $70 million.
John Harloe - Barrow, Hanley, Mewhinney & Strauss
$70 million. Okay, thanks a lot.
Dustan McCoy
Thank you, John.
John Harloe - Barrow, Hanley, Mewhinney & Strauss
Thank you, Dusty.
Operator
Thank you. Next we have Justin L.
Boisseau, Gates Capital Management. Your line is open.
Justin Boisseau - Gates Capital Management
Yes I guess a follow-up here, I have a similar question. Do you happen to have to the allocation of the $81.2 million SG&A add back for the fourth quarters; how it's allocated among the segment?
Peter Hamilton
It will be in our.... you get to see it in our 10-K.
Justin Boisseau - Gates Capital Management
Okay, okay. And then next question again on the tax side, I think you said understanding its rough numbers, just to carry back were changed to five years.
Did I understand you just say it will be about $70 million benefit?
Peter Hamilton
Yes.
Justin Boisseau - Gates Capital Management
And that is in addition to I think you said a $67 million benefit you already expecting in to '09?
Dustan McCoy
Yes well that benefit that we referred to in our commentary is for a tax refund that has already been filed and that we expect to receive in the first half of the year '09. And that carries our losses back two years.
If this legislation goes through as planned, we could carry back another three years and we would get the cash benefit of that in 2010.
Justin Boisseau - Gates Capital Management
Got it. And finally other, or how much would you estimate in terms of dollars.
Do you have a non-core assets remained to be sold?
Dustan McCoy
One I want to comment on that, if you're thinking of from a proceeds perspective, it will not be dramatic and it will be in double-digits but it's not going to be a dramatic number.
Justin Boisseau - Gates Capital Management
Okay. Thanks.
Dustan McCoy
You are welcome.
Operator
Thank you. We are showing no further questions at this time.
Dustan McCoy
I thank everyone for joining us today. Thanks for working through with us what are actually quite difficult accounting issues.
I hope we've provided you with the best understanding that we possibly could of a complicated set of numbers so that you can build your models and understand how we are performing. Thanks, and with that we'll sign off.