MALIBU BOATS, INC. quarterly report, Q2 FY2018

Malibu Boats, Inc. — Q2 Fiscal 2018 Form 10-Q

Reporting period: Quarter and six months ended December 31, 2017. Unaudited results; fiscal year ends June 30. Malibu designs, manufactures and sells recreational powerboats under Malibu, Axis and Cobalt brands through independent dealers. Results include Cobalt from its July 6, 2017 acquisition.

Financial performance

Quarterly sales rose 69.0%, reflecting Cobalt sales of $39.4m and 510 boats, as well as higher Malibu U.S. and Australia sales. Total quarterly unit volume increased 61.1% to 1,489; sales per unit rose 4.9% to $76,812. Cobalt represented 35.0% of first-half sales. Malibu U.S. first-half sales increased 9.3% and Australia sales increased 8.7%.

Gross margin fell 2.3 percentage points in the quarter, primarily reflecting Cobalt’s product mix; first-half margin also included $1.5m of acquired-inventory fair-value step-up expense. Adjusted EBITDA increased, but its margin declined. The reported GAAP loss was heavily affected by tax-law-related noncash charges and should not be read as a straightforward measure of operating performance.

Cash, debt and liquidity

• Cash was $36.7m at December 31, 2017, versus $32.8m at June 30, 2017. Current assets were $96.6m and current liabilities $56.8m.
• Six-month operating cash flow was $27.0m, compared with $22.2m a year earlier. Capital expenditures were $4.9m.
• Investing cash outflow was $130.5m, including $125.6m for the Cobalt acquisition, net of acquired cash. Financing cash inflow was $107.3m.
• Term-loan principal was $110.0m (carrying value $108.3m); no revolver borrowings were outstanding and $35.0m of revolving capacity was available. The stated term-loan rate was 3.42% at period-end; maturity is July 2022. A $50.0m optional prepayment was applied to defer scheduled principal installments, with none due until March 2022. The company reported covenant compliance.
• Management said cash, revolver availability and operating cash flow should be sufficient for the next 12 months. Fiscal 2018 capital expenditures were expected to exceed the prior year; the engine vertical-integration strategy was expected to require about $18.0m in total investment through fiscal 2019.

Material changes, outlook and risks

• Cobalt acquisition: Purchase consideration was $130.5m, mostly cash-funded. Preliminary allocation included $89.9m of identifiable intangibles and $19.8m of goodwill; valuation and working-capital adjustments remained subject to finalization.
• Tax Act: The December 2017 U.S. corporate tax-rate reduction prompted a $47.0m noncash provisional income-tax expense, including deferred-tax remeasurement. The company also recorded $30.3m of second-quarter other income from reducing its tax receivable agreement liability; the six-month reduction was $27.7m. Consequently, the quarter showed $30.3m of other income and a $50.6m tax provision despite a pretax profit of $45.0m. Management expected a normalized adjusted fully distributed tax rate of 23%–24% for periods after January 1, 2018; this is not GAAP guidance.
• Management cited continued demand in performance sport boats and expected demand to continue in performance sport, sterndrive and outboard markets. It noted potential effects from consumer confidence, interest rates, dealer and retail credit availability, fuel costs, oil prices, currency strength, competition, product acceptance, labor and materials costs, and dealer-network execution. Management said recent tax legislation could support consumer demand.
• Key execution risks include integrating Cobalt, realizing its growth potential, managing seasonal production and inventory, and funding the engine initiative. Dealer floor-plan arrangements carried $165.8m of financing subject to repurchase commitments; no boats were repurchased and no reserve was recorded at period-end.
• Legal matters include a Canadian former dealer lawsuit seeking more than $5.0m, which Malibu is defending, and a Cobalt patent case in which a court entered an amended jury-verdict judgment in Cobalt’s favor against Brunswick and Sea Ray. The filing does not provide a clear value for potential recovery or remaining exposure in that case.
• The company disclosed an immaterial correction to prior-period equity allocations; it did not change total stockholders’ equity. Management reported disclosure controls were effective and no material change to previously disclosed risk factors.

Important facts for investors to verify

• How much of sales and volume growth is attributable to the Cobalt acquisition versus organic growth, and whether Cobalt’s margins improve.
• The final Cobalt purchase-price allocation, working-capital adjustments and integration costs.
• The eventual cash-tax and deferred-tax effects of the Tax Act, and future tax receivable agreement payments; the recorded liability was $55.8m at December 31, 2017.
• Whether operating cash flow and available borrowing capacity support planned capital spending and the approximately $18.0m engine strategy investment.
• Dealer inventory, floor-plan repurchase exposure, and developments in the Wizard Lake and Cobalt patent proceedings.
• Adjusted EBITDA is a company-defined non-GAAP measure; review its reconciliation and exclusions alongside GAAP results.