Business context and reporting period
Malibu Boats, Inc. designs, manufactures and sells recreational powerboats through its Malibu, Axis, Cobalt and Pursuit brands and a global independent-dealer network. This Form 10-Q covers the quarter and six months ended December 31, 2019, corresponding to fiscal 2020 Q2 and the first half of fiscal 2020—not calendar-year 2019 Q2. Comparisons are with the periods ended December 31, 2018. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $180.1 million; up 8.6% | $352.2 million; up 21.7% |
| Gross profit / margin | $39.9 million / 22.1%; margin down 1.0 percentage point | $79.9 million / 22.7%; margin down 1.1 percentage points |
| Operating income / margin | $23.6 million / 13.0% | $46.3 million / 13.1% |
| Net income | $17.6 million; up 17.3% | $34.3 million; up 26.9% |
| Net income attributable to Malibu Boats, Inc. | $16.7 million; diluted EPS $0.81 | $32.6 million; diluted EPS $1.57 |
| Adjusted EBITDA (non-GAAP) | $30.7 million; margin 17.0%, versus 17.7% | $59.1 million; margin 16.8%, versus 18.1% |
For the six months, operating cash flow was $52.5 million, investing cash outflow $19.3 million and financing cash outflow $32.9 million; cash increased $0.3 million to $27.7 million. Capital expenditures were $19.3 million. At December 31, current assets were $126.1 million and current liabilities $81.5 million. Debt principal was $95.0 million ($75.0 million term loan and $20.0 million revolver); reported debt net of issuance costs was $93.8 million. The company reported $1.17 million in letters of credit and a 3.01% borrowing rate. Long-term debt maturities are in 2022 and 2024. The filing states the company was in covenant compliance.
Material changes versus prior comparable periods
- Quarterly sales growth reflected higher Cobalt and Pursuit unit sales and price increases; Malibu unit volume was nearly flat. Total quarterly units rose 2.5% to 1,804, while sales per unit increased 6.0% to $99,840.
- First-half sales and unit volume rose 21.7% and 7.8%, respectively. Growth includes Pursuit, acquired October 15, 2018, so the prior-year half included only part of the period; the filing attributes much of the increase to this comparison and acquisition.
- Gross margin declined in both periods. Management cited Pursuit integration and $1.7 million of costs from engine-supply disruption during the UAW strike at General Motors. The strike-related amount is included as an adjustment in reported Adjusted EBITDA.
- Interest expense fell to $1.0 million for the quarter and $2.1 million for the half, from $1.8 million and $3.0 million, respectively, reflecting lower interest rates and debt.
- Cash from operations increased by $16.9 million year over year for the half. Investing cash outflow was substantially lower than in the prior year, which included the $100.1 million Pursuit acquisition payment; current-period capital spending increased to $19.3 million.
- The company repurchased $11.1 million of shares in the half and had $23.9 million remaining under its $35.0 million authorization at December 31, 2019.
Outlook, commentary, risks and unusual items
Management provided no specific numerical sales or earnings guidance. It expects existing cash, revolver capacity and operating cash flows to fund operations for the next 12 months; expects fiscal 2020 capital expenditures to exceed fiscal 2019, mainly for Cobalt and Pursuit facility expansions, tooling and capacity; and anticipated approximately $3.6 million of tax-receivable-agreement payments within 12 months.
Management described domestic performance-sport-boat demand as continuing to grow but at a decelerating rate. It cited elevated competitive dealer inventory and potential near-term headwinds to wholesale shipments, market share and margins. Other demand and execution risks discussed include economic and consumer-confidence changes, interest rates and credit availability, fuel costs, tariffs, currency strength, weather, competition, dealer dependence, labor and raw-material costs, and successful product launches and acquisition integration. The company also noted risks associated with floating-rate debt and the transition away from LIBOR; a 1 percentage point rate increase would add approximately $0.9 million in annual interest expense based on debt outstanding at period-end.
Other notable exposures include $290.9 million of dealer floor-plan financing subject to repurchase commitments; no repurchase reserve was recorded at December 31, 2019. The company is pursuing patent litigation against Skier’s Choice, which denies the claims and asserts patent invalidity; consolidated cases were scheduled for trial beginning September 29, 2020. The filing says management did not believe other pending claims would materially affect the company. The tax receivable agreement liability was $53.8 million. Adoption of the new lease standard resulted in $17.0 million of operating lease liabilities at December 31, 2019 and was reported as having no material impact on results, equity or cash flows.
Important facts for investors to verify
- Separate organic performance from Pursuit acquisition-related growth, particularly in the six-month comparison.
- Track whether gross-margin pressure from the UAW strike, Pursuit integration, product mix and costs persists or reverses.
- Assess dealer inventory, retail demand and wholesale shipments against management’s comments on decelerating market growth.
- Review cash conversion, elevated capital spending, share repurchases and remaining revolver availability alongside debt and covenant terms.
- Monitor dealer floor-plan repurchase exposure, warranty accruals, patent litigation and tax-receivable-agreement payments.
- Consider that Adjusted EBITDA is a company-defined non-GAAP measure and is not a substitute for GAAP earnings or cash flow.