MALIBU BOATS, INC. annual report, FY2018

Business context and reporting period

Malibu Boats, Inc. designs, manufactures and sells recreational powerboats under Malibu, Axis and Cobalt. This is its Form 10-K for the fiscal year ended June 30, 2018—not 2017 Q4 as indicated in the request metadata. Fiscal 2018 includes Cobalt from its July 6, 2017 acquisition; comparisons with fiscal 2017 therefore reflect a larger business.

Key financial metrics

Amounts below are in millions of dollars, except per-share data and percentages.

Metric	FY2018	FY2017
Net sales	$497.0	$281.9
Gross profit / margin	$120.3 / 24.2%	$75.0 / 26.6%
Operating income / margin	$70.1 / 14.1%	$39.4 / 14.0%
Net income	$31.0	$31.1
Net income attributable to Malibu Boats, Inc.	$27.6	$28.4
Basic / diluted EPS	$1.37 / $1.36	$1.59 / $1.58
Adjusted EBITDA / margin	$92.7 / 18.7%	$55.7 / 19.8%
Operating cash flow	$58.5	$35.9

• Sales increased 76.3%, and unit volume rose 64.9% to 6,292. Cobalt contributed $180.3 million of sales and 2,232 units. Excluding Cobalt, Malibu U.S. sales grew 13.2%.
• Average sales per unit rose 6.9% to $78,990, attributed to product mix, optional features and price increases.
• Gross margin declined 2.4 percentage points, reflecting Cobalt’s lower-margin mix and $1.5 million of acquired-inventory fair-value step-up expense. Adjusted EBITDA grew 66.4%, slower than sales, and its margin declined 1.1 percentage points.
• Fiscal 2018 income tax expense was $58.4 million, including a $44.5 million noncash adjustment associated with the Tax Cuts and Jobs Act and deferred-tax remeasurement. The reported effective tax rate was 65.4%; management cited an approximately 28% blended statutory rate for the year.
• Cash at June 30, 2018 was $61.6 million, versus $32.8 million a year earlier. Current assets were $133.9 million and current liabilities $65.4 million (working capital of $68.5 million).
• Term-loan principal was $110.0 million; there were no revolving borrowings and $35.0 million of revolving capacity at year-end. The term-loan rate was 4.09%. Cash less term debt was approximately $48.4 million net debt. The company reported compliance with credit covenants.
• Investing cash outflow was $135.9 million, primarily the $125.6 million cash cost of the Cobalt acquisition. Financing cash inflow was $106.2 million, including $55.3 million net proceeds from an equity offering and $105.0 million of term-loan borrowings, offset in part by a $50.0 million debt repayment.

Material changes and unusual items

• Cobalt’s acquisition expanded the product portfolio and materially increased sales, assets and debt. At year-end, goodwill was $32.2 million and other intangible assets were $94.2 million, largely reflecting acquired Cobalt assets.
• Other income included a $24.6 million reduction in the tax receivable agreement liability, principally following the federal corporate tax-rate reduction. This non-operating, tax-related benefit helped offset higher interest expense and influenced reported earnings.
• Net income attributable to Malibu Boats, Inc. declined 2.6% despite substantial sales and operating-income growth, principally because of higher income tax expense and share count. Basic EPS fell from $1.59 to $1.37.
• The company identified an immaterial prior-period equity presentation error and revised historical presentation; it said no amendment to prior filings was required and total stockholders’ equity was unchanged.
• Malibu had no boat repurchases under dealer floor-plan repurchase agreements in fiscal 2018 or 2017. The outstanding amount financed under agreements with repurchase obligations was $163.6 million at year-end; this is a contingent exposure, not reported debt.

Outlook, risks and contingencies

• Management said domestic performance-sport-boat demand continued to grow in calendar 2018 and expected demand for its products to continue, while cautioning that consumer confidence, interest rates, credit availability, fuel costs, weather, labor and material costs, competition and international weakness could affect results. The filing gives no specific revenue or earnings guidance.
• Management expected fiscal 2019 capital expenditures to exceed fiscal 2018, primarily for engine integration, tooling, capacity and, if completed, Pursuit integration. It believed cash, operating cash flow and borrowing capacity would fund operations for the next 12 months, including the Pursuit purchase.
• On August 21, 2018, after fiscal year-end, the company agreed to acquire Pursuit for $100 million, subject to customary conditions, with closing expected in the second quarter of fiscal 2019. A credit amendment increased potential revolving capacity from $35 million to $85 million, conditional in part on closing; the additional capacity carries a 0.30% annual ticking fee.
• Key risks include the cyclical, seasonal and discretionary nature of boat demand; dependence on independent dealers and their floor-plan financing; fixed manufacturing costs; engine and other supplier concentration; successful integration of Cobalt and any Pursuit acquisition; variable-rate debt; product warranty, liability and recall exposure; and foreign exchange, regulatory and weather risks.
• Warranty liabilities were $17.2 million, up from $10.1 million, partly reflecting Cobalt and extended Malibu/Axis warranty coverage. The company noted product-liability exposure but said it knew of no material uninsured product-liability claims at June 30, 2018.
• A former dealer’s Alberta lawsuit seeks more than $5 million; Malibu disputes liability and is defending the matter. The filing also describes a Cobalt patent judgment in its favor against Brunswick/Sea Ray. Management stated it did not believe pending claims would materially adversely affect results, subject to the disclosed litigation.
• The tax receivable agreement requires payment of 85% of specified realized tax benefits to pre-IPO owners. The recorded liability was $55.0 million, including $3.9 million current; payments may accelerate or exceed realized benefits in specified circumstances. Fiscal 2018 contractual-obligations disclosure estimated approximately $55.0 million of payments over time.
• The auditor expressed an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal control, as the company was still an emerging growth company. Management expected auditor attestation to begin for fiscal 2019.

Important facts for investors to verify

1. Separate organic Malibu/Axis growth from the acquisition-driven increase in consolidated sales, and assess Cobalt’s margins and integration performance.
2. Reconcile GAAP net income and EPS with adjusted EBITDA and adjusted fully distributed EPS, including the tax-law and tax receivable agreement adjustments.
3. Confirm completion, financing and integration results for the announced Pursuit acquisition, including actual borrowing and purchase-price adjustments.
4. Monitor gross-margin recovery, warranty reserves and claims, dealer inventories and floor-plan credit conditions, and the $163.6 million contingent repurchase exposure.
5. Review debt balances, interest-rate exposure, covenant headroom, capital spending and the timing and amount of tax receivable agreement payments.
6. Track the outcome and potential financial impact of the former-dealer lawsuit and any appeals or developments concerning the Cobalt patent judgment.