Malibu Boats, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2015; comparisons are with the corresponding 2014 periods. The company designs, manufactures and sells Malibu- and Axis-brand performance sport boats through independent dealers. Results include its Australian subsidiary, acquired in October 2014.
Financial performance and position
| Metric | Three months ended Dec. 31, 2015 | Six months ended Dec. 31, 2015 |
|---|---|---|
| Net sales | $60.5 million; up 9.1% | $117.7 million; up 14.2% |
| Gross profit / margin | $15.9 million / 26.2%, versus 25.5% | $30.6 million / 26.0%, versus 25.5% |
| Operating income / margin | $9.0 million / 14.8%, versus 12.6% | $16.3 million / 13.8%, versus 10.0% |
| Net income | $5.7 million, versus $5.6 million | $9.7 million, versus $8.0 million |
| Net income attributable to Malibu Boats, Inc. | $5.1 million, versus $3.3 million | $8.7 million, versus $4.6 million |
| GAAP diluted earnings per share | $0.28, versus $0.21 | $0.48, versus $0.31 |
| Adjusted EBITDA (non-GAAP) / margin | $11.2 million / 18.5%, versus $10.4 million / 18.8% | $20.6 million / 17.5%, versus $18.5 million / 17.9% |
Quarterly unit volume rose 2.4% to 867 boats; six-month volume rose 11.3% to 1,692. Net sales per unit increased 6.5% for the quarter and 2.6% for the half year. Larger-model mix, optional features, trailers and the Australian business supported sales and gross margin. Adjusted EBITDA is a non-GAAP measure; the filing cautions it is not a substitute for GAAP results or a liquidity measure.
- Cash flow: Six-month operating cash flow was $13.6 million, versus cash use of $4.4 million; investing cash use was $3.5 million, and financing cash use was $3.5 million. Cash increased $6.5 million to $14.9 million.
- Liquidity: Current assets were $52.0 million and current liabilities $38.3 million at December 31, 2015, implying working capital of $13.7 million.
- Debt: Term debt was $75.5 million, including $7.5 million current maturities; the $25 million revolving facility had no borrowings. The company reported compliance with credit covenants. A $39.25 million notional interest-rate swap fixes a portion of exposure; it is not designated as a hedge.
- Balance sheet: Total assets were $199.9 million and liabilities $201.4 million, leaving a $1.4 million stockholders’ deficit. Tax receivable agreement liabilities totaled $96.6 million.
Changes versus the prior comparable periods
- Quarterly sales growth was driven in part by Australia, higher average selling prices and larger boats; U.S. unit volume was essentially flat year over year. For the six-month period, higher U.S. production and the Australian acquisition contributed to unit growth.
- Gross margin improved in both periods. Management cited larger-model mix, demand for options and trailers, new-model pricing, and trailer manufacturing integration.
- General and administrative expense declined, primarily reflecting lower legal and acquisition-related costs, partly offset by higher stock compensation. Six-month selling and marketing expense increased with event sponsorship and market research.
- Interest expense rose substantially year over year, principally due to the term loan entered into in April 2015. The six-month 2014 cash-flow comparison also includes the $20 million PCMW litigation settlement payment; management says operating cash flow excluding that payment decreased $2.0 million year over year.
Outlook, risks and notable items
- Management expects demand growth to continue but gave no specific revenue or earnings forecast. It said domestic demand growth had slowed and anticipated market share could be flat to slightly lower amid stronger competition.
- Management identified currency strength and weaker international markets—particularly Canada—commodity prices, consumer confidence, interest rates, credit availability, fuel costs, competition, product acceptance, labor and input costs, and dealer dependence as risks. The effects of oil-price declines, equity-market weakness and improved western U.S. precipitation were uncertain.
- Management expected existing cash, revolver availability and operating cash flow to cover anticipated needs for the next 12 months. Fiscal 2016 capital expenditures were estimated at approximately $6 million. It estimated about $3 million of tax receivable agreement payments and $7.5 million of term-loan principal due within 12 months.
- Effective with model year 2016, limited warranties increased to up to five years for both brands, compared with up to three years for Malibu and two years for Axis on earlier model years.
- Subsequent to quarter-end, the board authorized a stock repurchase program of up to $15 million for February 8, 2016–February 8, 2017, intended to be funded with cash on hand; repurchases are discretionary. A February 3 credit-agreement amendment permitted the program.
- Pending litigation includes a patent dispute with MasterCraft and a lawsuit by Great Wakes Boating; the company says it intends to defend its position. The Nautique patent litigation was settled in February 2015, including a $2.25 million payment to Malibu and future royalties under a license agreement.
- The filing notes an immaterial prior-period correction that reclassified $11.7 million between non-controlling interest and additional paid-in capital for fiscal 2015, with no change to total stockholders’ deficit.
Investor verification priorities
- Separate organic U.S. performance from growth attributable to the Australian acquisition, and monitor unit volumes, average selling prices and product mix.
- Track gross-margin and adjusted EBITDA trends, including the impact of competition, discounting, warranty costs and trailer manufacturing.
- Assess cash conversion and seasonal working-capital needs against debt amortization, planned capital spending and tax receivable agreement payments.
- Review covenant headroom, interest-rate exposure and the funding and actual execution of the authorized repurchase program.
- Monitor international demand and currency effects, market-share trends, pending litigation and the cost implications of the extended boat warranties.