Malibu Boats, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2017; comparisons are with the quarter ended September 30, 2016. Results include Cobalt from its July 6, 2017 acquisition. Dollar amounts are in millions unless otherwise noted.
Business context and results
Malibu designs, manufactures and sells recreational powerboats under the Malibu, Axis and Cobalt brands through independent dealers. Cobalt expanded the company into luxury sterndrive and outboard boats. The company reported three segments: Malibu U.S., Cobalt and Malibu Australia.
- Net sales rose 66.9% to $103.5 million, primarily reflecting $36.9 million of Cobalt sales. Total units increased 57.1% to 1,309; sales per unit rose 6.2% to $79,099.
- Gross profit increased 44.9% to $22.9 million, while gross margin fell to 22.1% from 25.5%. The filing attributes part of the decline to a $1.5 million fair-value step-up of Cobalt inventory sold during the quarter.
- Operating income increased to $11.0 million from $6.8 million. Net income was $6.4 million versus $4.2 million; net income attributable to Malibu Boats, Inc. was $5.9 million versus $3.8 million. Basic and diluted EPS each rose to $0.31 from $0.21.
- Adjusted EBITDA, a non-GAAP measure, was $17.7 million versus $9.9 million; adjusted EBITDA margin was 17.1% versus 15.9%. The measure excludes specified items, including acquisition and integration costs and engine-development spending.
- Operating cash flow was $5.0 million, down from $6.7 million. Capital expenditures were $1.8 million. Cash used in investing was $127.4 million, principally the $125.6 million net cash payment for Cobalt. Cash ended the quarter at $18.4 million, down from $32.8 million at June 30.
Financial position and material changes
- At September 30, cash was $18.4 million, current assets $83.5 million and current liabilities $57.1 million. Inventory was $42.8 million, up from $23.8 million at June 30.
- Term-loan principal was $110.0 million; the balance-sheet carrying value, net of issuance costs, was $108.2 million. The company also had a $35.0 million revolving facility with no borrowings outstanding. The term loans mature July 1, 2022; the reported interest rate was 3.73%. The company said it was in compliance with credit covenants.
- The August equity offering generated $55.3 million net proceeds. The company used $50.0 million to prepay term debt and applied the prepayment to defer scheduled principal payments until March 2022. Class A shares outstanding rose to 20.3 million at quarter-end from 17.9 million at June 30.
- Cobalt’s preliminary purchase-price allocation included $89.9 million of identifiable intangible assets and $19.8 million of goodwill. Valuations and working-capital adjustments remained subject to finalization within the measurement period.
- The tax receivable agreement liability was $85.0 million, including $4.3 million current. A $2.6 million increase in the estimated liability, driven by state-tax assumptions following the Cobalt acquisition, was recorded in other expense.
Outlook, commentary and risks
- Management stated that cash, available revolver capacity and operating cash flows should be sufficient for the next 12 months. It expected fiscal 2018 capital expenditures to exceed fiscal 2017 levels and estimated approximately $18 million of total investment through fiscal 2019 in its engine vertical-integration initiative.
- No specific revenue or earnings guidance was provided. Management expected demand growth to continue, but noted that performance-sport-boat retail demand growth in 2017 was slower than in 2012–2016. It cited consumer confidence, interest rates, dealer and retail credit availability, fuel costs, competition, international and oil-dependent markets, and labor and material costs as potential demand or cost factors.
- Management highlighted Cobalt integration and the execution of its product-development and engine-integration plans as important. Boat sales are seasonal, with retail demand concentrated in the company’s first and fourth fiscal quarters.
- Dealer floor-plan financing included $147.8 million of boats financed under repurchase commitments. No boats were repurchased and no reserve was recorded at quarter-end; a significant number of required repurchases could adversely affect results and liquidity.
- A former dealer, Wizard Lake Marine, sought damages exceeding $5.0 million; Malibu denied liability and was defending the case. The filing also describes a pending purchase-price adjustment tied to litigation involving Cobalt, Sea Ray and Brunswick. The MasterCraft patent litigation had been settled in May 2017, including a $2.5 million payment to Malibu and future royalties under a license agreement.
- The filing reported effective disclosure controls at September 30, while noting that Cobalt’s controls were being incorporated following the acquisition. Management reported no material changes to the risk factors in its latest Form 10-K.
Most important facts for investors to verify
- How much of reported sales and earnings growth is attributable to Cobalt, and how the combined business performs on a comparable basis.
- Final Cobalt purchase accounting, integration costs, and the acquired brand’s margins and cash generation.
- Whether gross margins recover after the acquired-inventory step-up and how engine-integration spending affects cash flow and returns.
- Debt, covenant headroom, working-capital needs, and liquidity after the acquisition and equity-funded debt prepayment.
- Potential exposure from dealer repurchase commitments, the Wizard Lake claim, Cobalt-related purchase-price adjustments, and the tax receivable agreement.