Business context and reporting period
Malibu Boats, Inc. designs, manufactures and sells recreational powerboats under the Malibu, Axis, Cobalt and Pursuit brands. This Form 10-K reports the fiscal year ended June 30, 2019—not a standalone calendar fourth quarter. FY2019 includes Pursuit from its October 15, 2018 acquisition; FY2018 includes Cobalt from its July 6, 2017 acquisition.
Key financial metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $684.0 million | $497.0 million | +37.6% |
| Unit volume | 7,362 | 6,292 | +17.0% |
| Net sales per unit | $92,912 | $78,990 | +17.6% |
| Gross profit / margin | $166.3 million / 24.3% | $120.3 million / 24.2% | Margin +0.1 percentage point |
| Operating income / margin | $98.1 million / 14.3% | $70.1 million / 14.1% | Income +40.0% |
| Net income | $69.7 million | $31.0 million | +125.1% |
| Net income attributable to Malibu Boats, Inc. | $66.1 million; diluted EPS $3.15 | $27.6 million; diluted EPS $1.36 | |
| Adjusted EBITDA (non-GAAP) / margin | $125.9 million / 18.4% | $92.7 million / 18.7% | EBITDA +35.8%; margin -0.3 percentage point |
| Cash from operating activities | $81.5 million | $58.5 million | +$23.0 million |
| Cash and cash equivalents at year-end | $27.4 million | $61.6 million | -$34.2 million |
| Debt at year-end | $115.0 million principal; $113.6 million carrying value | $110.0 million principal; $108.5 million carrying value |
At June 30, 2019, the company had a $75 million term loan and $40 million drawn on its $120 million revolving facility, plus $0.7 million of letters of credit. The reported interest rate was 3.65%; debt is variable-rate. Current assets were $127.7 million and current liabilities $75.3 million. The company reported $451.3 million in total assets and $210.4 million in total equity.
Material changes versus the prior comparable period
- Revenue growth reflected the Pursuit acquisition, higher volumes at Malibu U.S. and Cobalt, and price increases. Pursuit contributed $102.8 million of sales and 406 units after acquisition. FY2019 sales mix included Malibu U.S. 51.0%, Cobalt 30.2%, Pursuit 15.0% and Malibu Australia 3.8%.
- Gross margin edged up as comparable businesses benefited from operating-efficiency initiatives, partly offset by $0.9 million of Pursuit inventory fair-value step-up expense. Adjusted EBITDA margin declined despite higher adjusted EBITDA.
- Net income comparability was affected by unusually high FY2018 tax expense: that year included a $44.5 million non-cash tax charge related to the Tax Cuts and Jobs Act. FY2018 also included $24.6 million of other income from a reduction in the tax receivable agreement liability; FY2019 recorded only a small net adjustment.
- Cash used in investing was $118.0 million, including $100.1 million for Pursuit and $17.9 million of capital expenditures. FY2019 operating cash flow increased, but inventory purchases and working-capital timing used cash.
- In May 2019, the company converted $35 million of term debt to revolver borrowings, increased the revolver capacity by $35 million, and extended its maturity to July 2024. Term-loan maturity is July 2022.
Outlook, commentary and risks
- Management expects demand growth to continue at a slower pace than in the prior eight years; performance-sport-boat growth has decelerated, and the overall fiberglass outboard market contracted modestly in 2019, although larger outboard models relevant to Pursuit continued to grow. No numerical FY2020 revenue or earnings guidance is provided.
- Management expects FY2020 capital expenditures to exceed FY2019, primarily for Cobalt and Pursuit facility expansions, tooling and capacity. It stated that existing cash, revolver availability and operating cash flow should fund operations for the next 12 months.
- The company plans to use its own marinized engines in all Malibu and Axis models in FY2020. It had invested about $18 million in the initiative through FY2019; the strategy brings execution, fixed-cost and supplier-concentration risks. General Motors supplies engine blocks; Yamaha is contracted to supply at least 90% of outboards for pre-equipped Pursuit and Cobalt boats, subject to purchase targets.
- Key business risks include discretionary consumer demand, weaker market growth, weather and seasonality, interest rates and consumer/dealer financing, tariffs and foreign exchange, supplier and labor availability, dealer concentration, acquisition integration, warranty/product liability, and the company’s fixed-cost base. Sales to OneWater Marine-controlled dealers were about 15% of consolidated sales.
- The company accepted returns of eight boats tied to two former dealers during FY2019; the boats were resold above cost in FY2020. Repurchase exposure is also supported by floor-plan agreements; $239.3 million of dealer financing was subject to repurchase obligations at year-end. No repurchase reserve was recorded at June 30, 2019.
- Warranty liability was $23.8 million, up from $17.2 million. KPMG identified the estimate of future warranty costs, including years four and five where historical experience is limited, as a critical audit matter.
- Litigation includes pending patent-infringement actions against Skier’s Choice, with a first trial scheduled for January 2020, and a former dealer’s Alberta lawsuit seeking more than $5 million. Management says it is defending the claims; the filing does not provide a clear estimate of potential loss.
- The tax receivable agreement requires payment of 85% of specified tax benefits to pre-IPO owners. The estimated obligation was $53.8 million at year-end; management estimated approximately $3.6 million due within 12 months. Change-of-control or early-termination provisions could accelerate payments.
- A $35 million share repurchase program was authorized for July 2019–July 2020; no shares had been repurchased under it by June 30, 2019. The company does not anticipate paying dividends in the foreseeable future.
Most important facts for investors to verify
- Separate organic growth and pricing from acquisition-driven growth, particularly Pursuit’s partial-year contribution and the performance of each segment.
- Track retail demand, dealer inventory and financing conditions, order patterns, and the company’s exposure to major dealers and OneWater.
- Assess FY2020 engine integration execution, manufacturing costs, facility-expansion spending and the resulting impact on margins and cash flow.
- Review debt availability, variable-rate exposure, covenant compliance and the timing and funding of tax receivable agreement payments.
- Monitor warranty claims and reserves, the fuel-pump recall, and the status and potential financial exposure of pending litigation.
- Note that management and the auditor reported effective internal controls, but Pursuit was excluded from the FY2019 internal-control assessment and was expected to be integrated into scope in FY2020.