Malibu Boats, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half ended December 31, 2018. Unless otherwise noted, financial amounts are in millions of dollars. The filing reports unaudited results.
Business context and reporting period
Malibu designs, manufactures and sells recreational powerboats through Malibu, Axis, Cobalt and Pursuit brands. It operates through Malibu U.S., Malibu Australia, Cobalt and Pursuit segments. The October 15, 2018 acquisition of Pursuit expanded the portfolio into fiberglass outboard fishing boats; Pursuit contributed results from the acquisition date.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2018 | Six months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Net sales | $165.8 | $114.4 | $289.3 | $217.9 |
| Gross profit / margin | $38.3 / 23.1% | $27.5 / 24.1% | $68.8 / 23.8% | $50.4 / 23.1% |
| Operating income / margin | $20.9 / 12.6% | $15.7 / 13.7% | $37.7 / 13.0% | $26.6 / 12.2% |
| Net income (loss) | $15.0 | $(5.6) | $27.0 | $0.8 |
| Net income (loss) attributable to Malibu | $14.3 | $(6.4) | $25.6 | $(0.5) |
| Diluted EPS | $0.68 | $(0.31) | $1.22 | $(0.03) |
| Adjusted EBITDA / margin | $29.4 / 17.7% | $20.6 / 18.0% | $52.3 / 18.1% | $38.3 / 17.6% |
Quarterly sales rose 45.0% and first-half sales rose 32.7%. Unit volume increased 18.2% in the quarter and 17.1% for the first half; consolidated net sales per unit increased 22.6% and 13.4%, respectively, reflecting price increases, optional-feature demand, and product mix. Pursuit supplied $29.9 million of sales and 111 units in the quarter and first half. Malibu cited demand for new Malibu models and optional features and for Cobalt R-series models.
Quarterly gross margin declined 100 basis points, mainly due to $0.9 million of expense from the fair-value step-up of Pursuit inventory sold. First-half gross margin improved 70 basis points, attributed primarily to Cobalt efficiencies. Adjusted EBITDA is a non-GAAP measure; the filing cautions it is not a substitute for GAAP earnings or a measure of liquidity.
Cash flow, balance sheet and debt
- First-half operating cash flow was $35.6 million, compared with $27.0 million a year earlier. Capital expenditures were $6.8 million.
- Investing cash outflow was $106.9 million, including the $100.1 million Pursuit purchase. Financing cash inflow was $33.7 million. Cash declined $37.7 million to $23.9 million from June 30, 2018.
- At December 31, 2018, total debt was $145.0 million principal ($143.7 million net of unamortized financing costs): $110.0 million term loans and $35.0 million revolving borrowings. The expanded revolver commitment is $85.0 million, leaving $50.0 million available. Borrowings were at 4.50% on that date and mature July 1, 2022; the company reported compliance with credit covenants.
- Current assets were $113.3 million and current liabilities $73.3 million. Inventory was $68.5 million, up from $44.3 million at June 30, 2018. The tax receivable agreement liability was $57.6 million, including $3.9 million current.
Material changes and unusual items
The Pursuit acquisition was funded with $50.1 million of cash and $50.0 million of revolver borrowings. Its preliminary allocation included $57.9 million of identifiable intangibles and $19.5 million of goodwill; valuation and working-capital adjustments remained subject to finalization. First-half acquisition-related costs were $2.8 million.
Comparisons of net income with the prior year are materially affected by unusual tax items. The prior-year quarter included a $30.3 million reduction in the tax receivable agreement liability recorded as other income and a $47.0 million non-cash tax expense associated with tax-law changes and deferred taxes. Thus, the reported change in GAAP net income does not solely reflect operating performance. ASC 606 was adopted July 1, 2018 with no material financial-statement impact.
Outlook, risks and contingencies
Management provided no specific revenue or earnings guidance. It expects existing cash, revolver availability and operating cash flow to fund operations for the next 12 months. Fiscal 2019 capital expenditures are expected to exceed fiscal 2018 levels, principally because of Pursuit. The engine vertical-integration strategy is expected to require approximately $18 million of total investment through fiscal 2019, funded with operating cash and revolver borrowings. Management described demand as continuing to grow but noted potential headwinds including tariffs, a strong U.S. dollar, weaker oil-driven and international markets, higher interest rates, consumer confidence, credit availability, competition, input and labor costs, and a possible prolonged federal shutdown.
Dealer floor-plan financing repurchase commitments covered $266.6 million of financed boats at period-end; no repurchase reserve was recorded. The company warns significant required repurchases could adversely affect results. It reported a patent dispute with Skier’s Choice, with trial set for October 2019, and a favorable amended judgment in its Cobalt patent case against Brunswick and Sea Ray. Management did not believe other pending claims would materially adversely affect the company. Disclosure controls were assessed as effective; Pursuit’s controls were still being integrated.
Important facts for investors to verify
- How much of sales and earnings growth is organic versus attributable to the Pursuit acquisition, and how Pursuit performs as a full-period contributor.
- Whether volume, pricing and mix remain supportive, and whether gross margins recover from the quarter’s Pursuit inventory step-up and other acquisition-related costs.
- Cash generation, seasonal inventory needs, capital spending and revolver usage; the filing notes marine retail demand is seasonal.
- Debt covenant headroom and variable-rate exposure, as well as the timing and cash-tax assumptions behind the tax receivable agreement liability.
- Potential exposure under dealer repurchase commitments, warranty claims and pending patent litigation.