Malibu Boats, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2020, compared with the periods ended March 31, 2019. The filing covers 2020 Q3, notwithstanding the request metadata indicating 2019 Q3. Dollar amounts below are in millions unless stated otherwise.
Business context and results
Malibu designs, manufactures and sells recreational powerboats through independent dealers under the Malibu, Axis, Cobalt and Pursuit brands. The quarter was affected by a COVID-19-related shutdown of all manufacturing facilities beginning March 24, 2020.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $182.3, down 8.8% from $199.9 | $534.5, up 9.3% from $489.2 |
| Unit volume | 1,796, down 14.2% from 2,094 | 5,327, down 0.8% from 5,370 |
| Gross profit / margin | $45.8 / 25.1%; prior year $49.7 / 24.9% | $125.7 / 23.5%; prior year $118.5 / 24.2% |
| Operating income | $30.1, down 1.4% from $30.6 | $76.4, up 11.9% from $68.3 |
| Net income attributable to Malibu Boats, Inc. | $22.8, up from $21.1 | $55.4, up from $46.7 |
| Diluted EPS | $1.09, versus $1.01 | $2.66, versus $2.23 |
| Adjusted EBITDA (non-GAAP) | $36.4; margin 20.0%, versus $37.8 and 18.9% | $95.5; margin 17.9%, versus $90.0 and 18.4% |
Cash flow, debt and liquidity
- Nine-month operating cash flow was $74.2, compared with $46.4 a year earlier. Investing cash outflow was $30.1, including capital expenditures; the prior-year outflow of $110.8 included the Pursuit acquisition.
- Cash was $134.2 at March 31, 2020, versus $27.4 at June 30, 2019. Management reported approximately $113.0 of cash at May 5, 2020.
- Debt principal was $193.8 at March 31: $118.8 drawn on the $120.0 revolving facility and a $75.0 term loan. The balance-sheet carrying amount was $192.7 after unamortized debt costs. The company drew $98.8 of remaining revolver availability in March; by May 5, no borrowing capacity remained. The reported interest rate at March 31 was 2.24%.
- The company was in compliance with credit covenants at March 31. Management said existing cash and operating cash flows were expected to fund operations for the next 12 months, while noting heightened uncertainty from COVID-19.
Material changes and management commentary
- Quarterly sales and unit volume declined across all three segments. Management attributed the main impact to the final week of lost production and shipments during the shutdown; lower planned Cobalt production to reduce dealer inventory also contributed. Higher average selling prices partly offset the volume decline.
- For the nine-month period, higher revenue reflected a full nine months of Pursuit results versus six months in the prior-year period, along with product mix and price increases. Nine-month gross margin fell 70 basis points, primarily due to Pursuit integration and $2.6 of costs related to the UAW strike affecting engine supply.
- Facilities resumed operations at Loudon on April 20, Neodesha on April 27 and Fort Pierce on May 4. Management expected a larger pandemic impact in fiscal Q4 and potentially fiscal 2021, citing reduced seasonal retail demand, possible dealer inventory and lower wholesale shipments. The company said it had confirmed customer orders it targeted to deliver before Memorial Day, but provided no quantified earnings or sales guidance.
- Management cited flexible costs, market position and liquidity as supports, while saying the duration and severity of the pandemic and its financial effects could not be estimated. It was monitoring dealer retail activity and supplier conditions; it had not yet experienced a meaningful supply delay.
- The company repurchased $13.8 of stock during the nine months under a $35.0 program, with $21.2 remaining at March 31. Fiscal 2020 capital expenditures were expected to exceed fiscal 2019, largely for Cobalt and Pursuit facility expansions.
Risks, contingencies and unusual items
- COVID-19 risks include renewed shutdowns, weaker consumer demand and financing access, dealer distress or boat returns, supplier disruption, workforce impacts, and possible incremental credit-loss, repurchase or asset-impairment charges. No impairment charge was recorded in Q3; management was evaluating long-lived assets.
- Dealer floor-plan financing arrangements carried $327.8 of balances subject to repurchase commitments at March 31. No repurchases or probable repossessions had been reported, and no repurchase reserve was recorded.
- Variable-rate debt exposes the company to interest-rate risk. A 100-basis-point rate increase was estimated to add approximately $1.9 in annual interest expense. The filing also discusses uncertainty from the planned transition away from LIBOR.
- The company is pursuing patent litigation against Skier’s Choice concerning wake-surfing technology; trial was scheduled to begin September 29, 2020. The defendant denied liability and asserted patent-invalidity counterclaims. Management said it intended to pursue the case and considered the counterclaims without merit.
- The tax receivable agreement liability was $52.5, including $3.5 current, and generally requires payment to former owners of 85% of specified realized or deemed tax benefits. The filing describes possible accelerated payments following certain change-of-control events.
- The interest-rate swap matured March 31, 2020. The company recorded $2.6 of UAW-strike-related engine supply costs over the nine months and $1.7 of other income from a reduction in its estimated tax receivable agreement liability.
Key investor verification points
- Track subsequent-quarter sales, unit volumes, dealer retail registrations and inventory to assess how shutdowns and seasonal demand affected wholesale shipments.
- Verify cash levels, operating cash flow, revolver availability, debt and covenant headroom after the full revolver draw.
- Monitor dealer floor-plan financing, repurchase exposure, supplier continuity and any changes in reserves or asset-impairment assessments.
- Assess the sustainability of margins and earnings, including the effects of Pursuit integration, price and product mix, and the company’s non-GAAP EBITDA adjustments.
- Follow the patent litigation, tax receivable agreement payments and LIBOR transition, including any resulting cash, interest or contingent-liability effects.