Malibu Boats, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2018 (fiscal 2018 Q3), filed May 2, 2018. The request metadata says “2017 Q3,” but the filing covers 2018 Q3.
Business context and performance
Malibu designs, manufactures and sells recreational powerboats under the Malibu, Axis and Cobalt brands. Cobalt was acquired on July 6, 2017; results include Cobalt from the acquisition date, making year-over-year comparisons materially affected by the acquisition.
- Quarter: Net sales rose 82.0% to $140.4 million, primarily reflecting Cobalt sales, with higher Malibu U.S. volume and pricing also contributing. Unit volume increased 69.4% to 1,786; sales per unit rose 7.4% to $78,628.
- Nine months: Net sales increased 73.3% to $358.3 million. Unit volume grew 63.1% to 4,584; sales per unit increased 6.2% to $78,173.
- For the nine months, Cobalt contributed $126.2 million of sales and 1,594 units; Malibu U.S. contributed $214.6 million and Malibu Australia $17.5 million.
Financial results and liquidity
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $140.4m vs. $77.1m | $358.3m vs. $206.8m |
| Gross profit / margin | $36.4m / 25.9%, vs. $21.4m / 27.7% | $86.8m / 24.2%, vs. $55.0m / 26.6% |
| Operating income / margin | $23.9m / 17.1%, vs. $13.0m / 16.9% | $50.6m / 14.1%, vs. $31.5m / 15.2% |
| Net income | $16.8m vs. $8.8m | $17.6m vs. $20.8m |
| Net income attributable to Malibu Boats, Inc. | $15.7m vs. $8.0m | $15.2m vs. $18.7m |
| Diluted earnings per share | $0.76 vs. $0.45 | $0.76 vs. $1.05 |
| Adjusted EBITDA (non-GAAP) | $28.5m vs. $16.8m | $66.8m vs. $40.3m |
- Quarter gross margin declined 180 basis points; nine-month gross margin declined 240 basis points. The filing cites acquisition mix and, for the nine-month period, $1.5 million of acquired-inventory fair-value step-up expense.
- Nine-month net income was affected by a $47.2 million non-cash tax expense provision associated with the Tax Cuts and Jobs Act. Other income included a $27.7 million reduction in the tax receivable agreement liability; these items materially distort comparisons with the prior year.
- Nine-month operating cash flow was $47.0 million, versus $30.6 million. Investing cash outflow was $133.7 million, including $125.6 million net cash paid for Cobalt. Financing cash inflow was $107.0 million, including term-loan proceeds and the stock offering. Cash increased $20.3 million to $53.2 million.
- At March 31, 2018, current assets were $124.1 million and current liabilities $66.2 million. Debt was $110.0 million principal, or $108.4 million net of unamortized issuance costs; no amount was drawn on the $35 million revolving facility. The term loans mature July 1, 2022, and the company reported covenant compliance.
- Management said cash, available revolver capacity and operating cash flow were expected to fund operations for the next 12 months. Fiscal 2018 capital expenditures were expected to exceed fiscal 2017 levels; planned engine-integration investment was approximately $18 million through fiscal 2019.
Outlook, risks and unusual items
- Management described continued demand growth in performance sport boats and expects demand to continue in performance sport, sterndrive and outboard markets. It reported 32.6% domestic performance sport boat market share in calendar 2017 and a Cobalt market-share gain of more than 100 basis points. No specific revenue or earnings guidance was provided.
- Management cited consumer confidence, interest rates and credit availability, fuel costs, product acceptance, dealer-network strength, competition, labor and materials costs, and oil prices and currency strength as factors that could affect demand and results. Cobalt integration and the engine-integration strategy are also execution risks.
- The Cobalt acquisition purchase-price allocation remained preliminary; management expected to finalize appraisals and working-capital adjustments by fiscal year-end, within the one-year measurement period.
- The company disclosed an unresolved claim by former dealer Wizard Lake seeking damages exceeding $5 million; Malibu denies liability and is defending the case. The filing also describes Cobalt’s patent judgment in its favor against Brunswick and Sea Ray. No units were repurchased under dealer floor-plan repurchase commitments during the reported periods, but $179.7 million of dealer financing was subject to such commitments at March 31, 2018.
- The filing reported effective disclosure controls as of March 31, 2018. The company was continuing to integrate Cobalt’s controls. Management disclosed an immaterial prior-period equity-accounting correction with no effect on total stockholders’ equity.
Important facts for investors to verify
- Separate underlying organic growth from the contribution of the Cobalt acquisition, including comparable segment volume, pricing and margins.
- Assess whether gross-margin pressure and the acquisition-related costs and amortization persist as integration proceeds.
- Track the Tax Act’s continuing effects on deferred taxes, effective tax rates and the tax receivable agreement; nine-month GAAP earnings include unusually large non-cash tax items.
- Monitor debt, covenant headroom, cash conversion, capital spending and the planned engine-integration investment.
- Review the final Cobalt purchase-price allocation and developments in the Wizard Lake litigation and dealer floor-plan exposure.