Malibu Boats, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended September 30, 2014, compared with the three months ended September 30, 2013. Malibu designs, manufactures and sells Malibu- and Axis-brand performance sport boats through independent dealers. The interim results are unaudited.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $47.659 million | $43.304 million |
| Gross profit / margin | $12.093 million / 25.4% | $11.021 million / 25.5% |
| Operating income / margin | $3.305 million / 6.9% | $6.340 million / 14.7% |
| Net income | $2.389 million | $5.179 million |
| Net income attributable to Malibu Boats, Inc. | $1.380 million | $0; the prior-period earnings were attributable to non-controlling LLC holders |
| Basic and diluted EPS | $0.09 | Not presented |
| Adjusted EBITDA / margin (non-GAAP) | $8.051 million / 16.9% | $8.156 million / 18.8% |
| Operating cash flow | $8.097 million | $7.740 million |
Sales increased 10.1%, reflecting unit volume growth of 1.8% to 673 boats and an 8.1% increase in sales per unit, primarily from higher prices and demand for options. Gross profit rose 9.7%, but higher material content and a less favorable mix of non-boat sales slightly reduced gross margin. Net income fell 53.9%; operating expenses increased materially, while lower interest expense partly offset the increase.
Liquidity, debt and balance sheet
- At September 30, cash was $17.810 million; current assets were $47.710 million and current liabilities were $53.641 million, implying negative working capital of about $5.931 million.
- No term-loan, revolving-credit or swingline balance was outstanding at quarter-end. The $65 million term loan had been repaid with IPO proceeds in February 2014. The revolving commitment was then $10 million.
- On October 1, the revolving commitment was increased to $30 million. On October 3, the company borrowed $20 million, used in part to fund the litigation settlement and Australian acquisition. The filing does not state the remaining revolver balance after that borrowing.
- Quarterly investing cash use was $1.465 million, principally for property and equipment. Cash increased $5.637 million to $17.810 million.
- Total liabilities were $101.436 million, including a $47.664 million payable under the tax receivable agreement. The company recorded a $56.802 million deferred tax asset associated with basis differences.
Developments, outlook and risks
- On October 23, 2014, Malibu acquired its Australian licensee, which held exclusive Australia and New Zealand distribution rights, for approximately $16.2 million: $13.3 million cash and 170,889 Class A shares. Purchase-price allocation was incomplete at the filing date.
- The company settled the PCMW windshield-related litigation for $20 million, paid October 6, 2014. The settlement charge had been recorded in fiscal 2014 Q4, not in the quarter reported here. The settlement released past and present claims; PCMW and Darren Bach agreed not to sue over then-existing intellectual-property rights.
- Litigation-related legal fees associated with PCMW and Nautique contributed to higher current-quarter G&A. The Nautique patent litigation remained pending, with trial scheduled for February 9, 2015; Nautique had also petitioned for inter partes review of one patent.
- Management reported strong retail demand and expected favorable demand to continue into fiscal 2015, while noting long-term prospects depend on the broader economic recovery. It cited growth in industry registrations and new or redesigned 2015-model-year products. No specific financial guidance was provided.
- Risks highlighted include consumer demand and confidence, interest rates, dealer and consumer credit availability, fuel and input costs, competition, product acceptance, reliance on independent dealers, and the ability to manage production and fixed costs. Boat sales are seasonal, with retail demand concentrated in the first and fourth fiscal quarters.
- Management said existing cash, revolver capacity and operating cash flows should meet anticipated needs for the next 12 months; capital spending was expected to be lower in FY2015 than FY2014. The company reported compliance with credit covenants at September 30.
Investor verification priorities
- Track whether unit growth and higher average selling prices persist, and whether margins recover from the quarter’s lower Adjusted EBITDA margin.
- Verify the post-quarter cash, revolver borrowings and integration costs associated with the Australian acquisition and $20 million settlement.
- Review the tax receivable agreement liability and related deferred tax assets, including the assumptions behind future tax benefits and payments.
- Monitor the Nautique patent case and any resulting legal expense or impact on the company’s intellectual-property position.