Malibu Boats, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2014. The company designs, manufactures and sells Malibu- and Axis-brand performance sport boats through independent dealers. Results include the Australian licensee acquired on October 23, 2014, from that date forward.
Key financial results
| Metric | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2014 |
|---|---|---|
| Net sales | $55.5 million; up 26.3% | $103.1 million; up 18.2% |
| Gross profit / margin | $14.2 million / 25.5% | $26.3 million / 25.5% |
| Operating income / margin | $7.0 million / 12.6% | $10.3 million / 10.0% |
| Net income, consolidated | $5.6 million; up 6.8% | $8.0 million; down 23.4% |
| Net income attributable to Malibu Boats, Inc. | $3.3 million | $4.6 million |
| Adjusted EBITDA / margin | $10.4 million / 18.8% | $18.5 million / 17.9% |
| Operating cash flow | $(4.4) million for six months, versus $13.3 million provided in the prior-year period |
Quarterly sales volume rose 27.9% to 847 boats; six-month volume rose 14.9% to 1,520. Six-month sales per unit increased 2.9% to $67,857. The 2013 comparative earnings were entirely attributable to non-controlling LLC holders, as the IPO had not yet occurred; issuer-attributable earnings comparisons are therefore not directly comparable.
Financial position and material changes
- At December 31, cash was $12.0 million, current assets $43.3 million and current liabilities $32.3 million.
- Debt was $20.0 million under the revolving credit facility, with $10.0 million of stated undrawn availability. The facility matures in 2018; the company reported compliance with its covenants.
- Six-month investing cash outflow was $14.5 million, including $11.7 million paid for the Australian acquisition, net of acquired cash, and $2.9 million of capital expenditures. Financing provided $18.7 million, including $20.0 million of revolver borrowings.
- Gross margin declined from 26.6% to 25.5% for the quarter and from 26.0% to 25.5% year to date. Management attributed the decline to $0.6 million of Australian acquisition integration costs; excluding those costs, it said margins were flat against the comparable periods.
- General and administrative expense rose to $4.5 million for the quarter and $11.0 million year to date, reflecting litigation-related legal costs, acquisition expenses, higher stock compensation and public-company costs. Year-to-date G&A also included a substantial increase in litigation-related costs.
- The Australian acquisition had a preliminary purchase price of $16.2 million, funded with $13.3 million cash and $2.9 million in stock. Preliminary goodwill was $8.0 million; purchase accounting remained subject to revision. The acquired business contributed $4.4 million in sales and a reported $0.5 million net loss from acquisition through December 31.
- A follow-on offering generated $76.8 million net proceeds, which were used to purchase LLC units from existing holders. Malibu’s economic ownership of the LLC was 69.0% at period-end; the remainder was non-controlling interest.
Outlook, risks and unusual items
- Management expected the favorable demand environment to continue through fiscal 2015, citing strong retail demand and growth in industry registrations. It did not provide numerical company-specific revenue or earnings guidance.
- Management identified uncertainty around the effects of lower oil prices and a stronger U.S. dollar, as well as risks from interest rates, consumer confidence, consumer and dealer credit availability, fuel costs, competition, product acceptance, labor and component costs, and reliance on independent dealers.
- Cash operating outflow reflected, among other factors, payment of the $20.0 million PCMW litigation settlement and related legal costs. The settlement was recorded as a charge in the fiscal year ended June 30, 2014, although cash was paid in October 2014.
- After the reporting date, on February 6, 2015, Malibu settled its patent litigation with Nautique. Nautique agreed to pay $2.25 million and future royalties under a license; the parties agreed to dismiss the litigation and request termination of the patent challenge.
- The company recorded an $0.8 million out-of-period state deferred-tax adjustment, primarily related to Tennessee jobs tax credits, as a reduction of current-period tax expense. The six-month effective tax rate was 21.5%.
- The tax receivable agreement liability was $47.7 million at period-end, representing 85% of specified expected tax benefits; no amounts were then due. Certain changes of control or termination events could accelerate payments.
- The Australian acquisition increases exposure to foreign exchange movements. The company reported $79,000 of Australian-dollar transaction losses for both the quarter and six-month period and did not use derivatives to mitigate market risk.
- Management said existing cash, revolver availability and operating cash flows should meet anticipated needs for the next 12 months. It expected fiscal 2015 capital expenditures to be similar to fiscal 2014.
Important facts for investors to verify
- Whether sales growth and demand persist, and whether margin pressure from product costs and acquisition integration abates.
- Cash conversion and working-capital needs following negative operating cash flow, acquisition spending and litigation payments.
- Australian acquisition performance, integration progress and final purchase-price allocation.
- Revolver covenant headroom, variable-rate exposure and liquidity after the $20.0 million borrowing.
- Final economics and timing of the Nautique upfront payment and royalty stream, and any remaining litigation exposure.
- The realizability of deferred tax assets and the future cash burden of tax receivable agreement obligations.