Malibu Boats, Inc. — Form 10-Q Summary
Business context and period. This report covers the three months ended September 30, 2019, Malibu’s fiscal first quarter of 2020. The company designs, manufactures and sells recreational powerboats through independent dealers under the Malibu, Axis, Cobalt and Pursuit brands. Pursuit was acquired in October 2018, so the current-quarter results include Pursuit while the year-earlier reported results do not.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $172.1 million | $123.5 million | +39.4% |
| Gross profit | $40.0 million | $30.5 million | +31.1% |
| Gross margin | 23.2% | 24.7% | Down 1.5 percentage points |
| Operating income | $22.7 million | $16.8 million | |
| Net income | $16.7 million | $12.0 million | +38.8% |
| Net income attributable to Malibu Boats, Inc. | $15.9 million | $11.3 million | |
| Diluted earnings per share | $0.76 | $0.54 | |
| Adjusted EBITDA (non-GAAP) | $28.4 million | $22.9 million | +24.0% |
| Adjusted EBITDA margin (non-GAAP) | 16.5% | 18.5% | Down 2.0 percentage points |
Net sales rose primarily because of the Pursuit acquisition, higher Malibu and Axis demand, and year-over-year price increases. Total boat units increased 13.9% to 1,727, while consolidated sales per unit rose 22.3% to $99,641; the latter comparison reflects the addition of Pursuit’s higher-priced boats as well as price and product mix. Malibu segment sales grew 14.2%; Cobalt sales grew 3.9% despite lower unit volume. Pursuit contributed $36.0 million in sales and 143 units.
Gross margin fell mainly due to the integration of Pursuit. Management reported that gross profit increased with higher unit volumes, while cost of sales also rose substantially, including from Pursuit. Operating income was 13.2% of sales versus 13.6% a year earlier.
Cash flow, balance sheet and capital
- Operating cash flow: $27.7 million, compared with $13.2 million a year earlier. The company attributed the increase to higher earnings and favorable timing in operating assets and liabilities.
- Investing cash flow: $10.7 million used, primarily for capital expenditures and expansion at the Cobalt and Pursuit plants, versus $2.2 million used in the prior-year quarter.
- Financing cash flow: $11.9 million used, including $11.1 million to repurchase shares. Cash increased $5.0 million to $32.3 million.
- Debt: $115.0 million of principal outstanding: $75.0 million in term loans and $40.0 million drawn on the revolver. The balance sheet reports debt net of issuance costs of $113.7 million. The stated borrowing rate was 3.27%. No term-loan principal payments are scheduled before March 2022 under the described repayment schedule; the term loan matures in July 2022 and the revolver in July 2024.
- Liquidity: The revolving facility has $120.0 million of capacity. At quarter-end, $40.0 million was drawn and $1.2 million of letters of credit were outstanding. Cash was $32.3 million. Management said existing cash, revolver capacity and operating cash flow should be sufficient for the next 12 months.
- Working capital and obligations: Inventories were $75.3 million, up from $67.8 million at June 30, 2019. The tax receivable agreement liability was $53.8 million, including a $3.6 million current portion; management anticipated approximately $3.6 million of payments within 12 months.
- Capital returns: The company repurchased 383,404 shares for $11.1 million, or an average $29.01 per share, under a $35.0 million program running through July 1, 2020. Approximately $23.9 million remained available at quarter-end.
Outlook, risks and notable items
- Management expected industry demand to continue growing, but at a slower pace than in recent years. It warned that higher competitive dealer inventories, amid decelerating market growth and continued industry wholesale shipments, could pressure near-term wholesale shipments, market share and margins.
- Management cited possible demand and operating pressures from oil-price declines, a strong U.S. dollar, tariffs, interest rates, consumer confidence, dealer and retail credit availability, fuel costs, competition, labor and raw-material costs, and acceptance of new products. It noted that domestic growth had offset weaker demand in some oil-dependent and international markets.
- Management expected fiscal 2020 capital expenditures to exceed fiscal 2019 spending, primarily for Cobalt and Pursuit facility expansion, tooling and production capacity. No specific revenue or earnings guidance was provided.
- After quarter-end, the company entered into supplier purchase agreements for additional engines to supplement inventory during labor strikes at General Motors, which supplies engine blocks for Malibu and Axis boats.
- Dealer floor-plan repurchase commitments covered $211.3 million of financed boats at September 30. The company reported no reserve for these commitments; a significant number of required repurchases could adversely affect results and financial condition.
- Malibu’s patent litigation against Skier’s Choice over wake-surf technology was pending; the cases were stayed while a motion to consolidate was considered. Skier’s Choice denied liability and challenged patent validity. The company said it intended to pursue the litigation vigorously.
- The company adopted the new lease accounting standard on July 1, 2019, recognizing $17.4 million of lease liabilities at quarter-end. Management said adoption did not materially affect results, equity or cash flows. The filing reported compliance with credit covenants and effective disclosure controls.
Important facts for investors to verify
- How much of reported sales and earnings growth reflects Pursuit’s inclusion versus organic demand, pricing and product mix; reported prior-period results do not include Pursuit.
- Whether lower gross and adjusted EBITDA margins persist as Pursuit is integrated and competitive dealer inventories remain elevated.
- Whether the company’s expansion spending and engine supply arrangements support growth without materially weakening cash generation or margins.
- The extent of potential exposure under the $211.3 million of dealer floor-plan repurchase commitments, and any developments in the Skier’s Choice litigation.
- Available revolver capacity, covenant headroom, scheduled debt service and the timing and amount of tax receivable agreement payments.