MarineMax, Inc. — Form 10-Q Summary
Business context and period: This filing covers the fiscal third quarter and nine months ended June 30, 2018, compared with the corresponding 2017 periods. MarineMax operates 63 recreational boat and yacht retail locations in 16 states and provides boat sales, service, brokerage, storage, financing and insurance services, and yacht charters.
Key financial results
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Nine months ended June 30, 2018 | Nine months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $361.3 million | $329.8 million | $868.8 million | $801.7 million |
| Gross profit | $90.7 million | $84.8 million | $219.2 million | $199.0 million |
| Gross margin | 25.1% | 25.7% | 25.2% | 24.8% |
| Income from operations | $26.6 million | $25.2 million | $46.2 million | $37.6 million |
| Interest expense | $2.5 million | $1.9 million | $7.9 million | $5.5 million |
| Net income | $17.4 million | $14.2 million | $27.8 million | $19.6 million |
| Diluted earnings per share | $0.75 | $0.57 | $1.21 | $0.78 |
For the quarter, revenue rose 9.5%, including comparable-store sales growth of 8.0%; acquired or newly opened stores contributed $4.9 million. For the nine months, revenue rose 8.3%, with comparable-store sales growth of 5.8%; acquired or newly opened stores contributed $20.7 million.
Quarterly gross margin declined as new boat sales made up a larger share of revenue, reducing the relative contribution of higher-margin brokerage, finance and insurance, and parts and accessories. Nine-month gross margin improved, reflecting better new and used boat margins and growth in higher-margin finance and insurance, service, and storage revenue. SG&A increased in dollars but fell as a percentage of revenue in both comparisons, reflecting operating leverage and efficiencies.
Cash flow, balance sheet and financing
- For the nine months, operating cash flow was $52.4 million, compared with cash used of $5.7 million in 2017. Management cited lower inventory, net income, insurance proceeds related to Hurricane Irma, and increases in customer deposits and accrued liabilities as contributors.
- Nine-month investing cash outflow was $12.4 million, versus $30.1 million in 2017, primarily for facility improvements, acquisitions, and hurricane-related capital improvements. Financing cash outflow was $19.8 million, versus $56.2 million of inflow in 2017, mainly reflecting lower short-term borrowings and acquisition consideration payments.
- At June 30, cash was $62.1 million; inventory was $379.4 million; and total assets were $655.9 million. Short-term borrowings were $232.8 million, total liabilities were $314.3 million, and shareholders’ equity was $341.6 million. The company reported no long-term debt.
- The inventory financing facility has a commitment of up to $350 million, subject to borrowing-base availability. Additional availability was approximately $36.2 million. The facility’s interest rate was 345 basis points above one-month LIBOR; the reported rate on borrowings was approximately 5.1%, versus 4.5% a year earlier. The company was in compliance with facility covenants.
- Cash and cash equivalents increased from $42.0 million at September 30, 2017 to $62.1 million at June 30, 2018. The company said existing capital resources should fund operations for at least 12 months, except for possible significant acquisitions.
Material changes, outlook and risks
- Interest expense increased 31.7% for the quarter and 43.0% for the nine months, primarily due to higher interest rates. Management estimated that a 100-basis-point increase in rates would add approximately $2.3 million to annual pretax interest expense, assuming no mitigating actions or additional manufacturer assistance.
- The effective tax rate fell to 27.9% for the quarter and 27.6% for the nine months, mainly reflecting the federal corporate tax rate reduction under the Tax Cuts and Jobs Act and, for the nine-month period, Hurricane Irma and Harvey employee-retention credits. Re-measurement of deferred tax assets added approximately $889,000 to tax expense.
- Brunswick announced in June 2018 that it would discontinue Sea Ray sport yacht and yacht models. Those models represented approximately 10% of MarineMax’s rolling 12-month revenue through June 30, 2018. Management believes its brand diversification can replace the revenue, but does not quantify the timing or expected financial effect. New Sea Ray and Boston Whaler boats together represented approximately 40% of fiscal 2017 revenue.
- Management cited a $1.2 million increase in non-recurring unusual costs within SG&A, as well as higher sales commissions, compensation, and health-care costs.
- Important risks include the cyclical and seasonal nature of recreational boating, sensitivity to discretionary consumer spending and weather, inventory aging and borrowing-base limits, variable-rate debt, supplier and brand concentration, and potential tariffs or other trade restrictions affecting imported yachts. Florida generated approximately 55% of fiscal 2017 revenue.
- Management reported no material adverse effect expected from ordinary-course legal proceedings. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- The company planned to adopt the new revenue recognition standard in fiscal 2019, expecting no material overall impact but accelerated recognition for certain parts and service obligations. It expected the new lease standard, planned for fiscal 2020, to materially increase recorded assets and liabilities due to operating leases.
Investor verification priorities
- Track the replacement of Sea Ray sport yacht and yacht revenue, including any changes in supplier arrangements and product availability.
- Verify comparable-store sales, new and used boat mix, and whether gross margins sustain the nine-month improvement despite the quarterly mix-related decline.
- Monitor inventory levels and aging, borrowing-base availability, covenant headroom, and the effect of further interest-rate increases.
- Assess whether operating cash generation is repeatable, given the contribution from inventory reduction and hurricane-related insurance proceeds.
- Review tariff developments affecting imported products, along with seasonal and weather-related exposure and the expected balance-sheet effect of lease accounting adoption.