Business context and reporting period
Malibu Boats, Inc. designs, manufactures and sells performance sport boats under its Malibu and Axis brands through independent dealers. This unaudited Form 10-Q covers the fiscal second quarter and six months ended December 31, 2016; comparisons are with the corresponding 2015 periods. Dollar figures below are in millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended Dec. 31, 2016 | Six months ended Dec. 31, 2016 |
|---|---|---|
| Net sales | $67.7 (+11.8%) | $129.7 (+10.1%) |
| Gross profit / margin | $17.8 / 26.3% | $33.6 / 25.9% |
| Operating income / margin | $11.7 / 17.2% | $18.4 / 14.2% |
| Net income | $7.7 | $12.0 |
| Net income attributable to Malibu Boats, Inc. | $6.9; diluted EPS $0.39 | $10.7; diluted EPS $0.60 |
| Adjusted EBITDA and margin (non-GAAP) | $13.6 / 20.1% | $23.5 / 18.1% |
For the quarter, consolidated net income rose 35.3%; adjusted EBITDA rose 22.0%. For the six months, net income rose 23.4%; adjusted EBITDA rose 13.9%. Quarterly unit volume increased 6.6% to 924 boats, and net sales per unit rose 4.9% to $73,226. Six-month unit volume increased 3.8% to 1,757, and sales per unit rose 6.1% to $73,809.
For the six months, operating cash flow was $22.2, capital expenditures were $5.4, and financing cash outflow was $16.9. Cash was $25.9 at December 31, 2016. Long-term debt was $55.1 net of debt issuance costs, with no current maturities; the $25.0 revolving facility was undrawn, and $0.1 of letters of credit had been issued. The company reported compliance with credit agreement covenants. Total liabilities included $94.1 payable under the tax receivable agreement.
Material changes versus prior comparable periods
- Quarterly sales growth reflected higher volume, price increases, a richer mix of newer, higher-priced Malibu models, and lower discounts; increased rebate expense partly offset these factors. Six-month growth also reflected demand for optional features.
- Quarterly gross margin improved 0.1 percentage point to 26.3%; six-month margin declined 0.1 point to 25.9%. Higher labor, material content and warranty costs weighed on the six-month result.
- Operating income increased to $11.7 for the quarter and $18.4 for the six months. Lower interest expense and a favorable change in the interest-rate swap’s fair value contributed to the reported results.
- Operating cash flow rose from $13.6 to $22.2 for the six months. Investing outflow increased to $5.4, while financing outflow rose to $16.9, principally reflecting debt repayments.
- Term debt fell from $72.0 principal at June 30, 2016 to $55.9 at December 31, after a $15.0 prepayment in August and a $1.1 excess-cash-flow payment in October.
Outlook, commentary, risks and unusual items
Management expected the performance-sport-boat market to continue growing at a healthy rate in 2017, potentially more slowly than recently. It cited continuing domestic demand and new products, while noting weaker international demand, particularly in Canada, South America, South Africa and Europe, as well as possible effects from currency strength, commodity prices, oil prices, consumer confidence and credit availability. Management stated that cash, revolving capacity and operating cash flow should cover anticipated needs for the next 12 months.
The engine-integration strategy is expected to require approximately $18.0 of investment over three years, including capital spending and working capital. Fiscal 2017 capital expenditures were expected to be significantly higher than in fiscal 2016. The company signed a General Motors engine supply agreement for model years 2019–2023 and expects to continue buying from its two existing suppliers for at least model years 2017 and 2018. Beginning as early as model year 2019, Malibu expects to integrate GM engines for marine use and rely solely on GM for engine supply; execution, higher fixed costs and supplier concentration are stated risks.
Unusual and contingent items include a $1.33 reduction in the Marine Power litigation accrual after the court amended its judgment to $1.94; Marine Power appealed, and Malibu also appealed. Wizard Lake Marine sought $8.72 in damages, which Malibu disputed. Malibu’s patent litigation with MasterCraft remained ongoing; the PTO declined to institute review of one patent, while a separate reexamination request remained pending. The filing reported no repurchases under dealer floor-plan agreements during the quarter or six-month period. Warranty expense for the six months rose to $3.64 from $2.54, and the warranty liability was $9.20, partly reflecting coverage expanded to as much as five years for model-year 2016 boats.
The $13.6 quarterly and $23.5 six-month adjusted EBITDA figures are non-GAAP measures; the filing cautions they are not substitutes for GAAP results or measures of liquidity. The reported results also include swap fair-value changes recognized in earnings because the swap was not designated as a hedge.
Important facts for investors to verify
- Whether volume, model mix and pricing can sustain growth while rebates, warranty costs and manufacturing expenses affect margins.
- Progress, total cost and returns of the engine-integration investment, including GM supply terms, marine-engine integration capability and supplier concentration.
- Cash generation, capital spending and debt repayment needs, including continued compliance with credit covenants.
- Resolution and potential financial effects of the Marine Power, Wizard Lake and MasterCraft matters, and any change in related accruals or legal costs.
- Timing and amount of tax receivable agreement payments; the recorded liability was $94.1, with approximately $4.2 expected to be due within 12 months.
- Whether management’s 2017 market outlook is borne out, given international weakness, currency and commodity exposure, seasonality and consumer-financing conditions.