Malibu Boats, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2013. The operating results are those of Malibu Boats Holdings, LLC, the business historically operated by the company; Malibu Boats, Inc. was formed in November 2013 and had no operations at period-end. The statements are unaudited. The IPO and recapitalization closed after the reporting period, on February 5, 2014.
Financial performance
| Metric | Three months ended Dec. 31, 2013 | Prior year | Six months ended Dec. 31, 2013 | Prior year |
|---|---|---|---|---|
| Net sales | $43.9 million | $37.8 million | $87.2 million | $71.0 million |
| Gross profit / margin | $11.7 million / 26.6% | $9.3 million / 24.6% | $22.7 million / 26.0% | $17.2 million / 24.2% |
| Operating income | $5.8 million | $4.2 million | $12.2 million | $5.2 million |
| LLC net income | $5.2 million | $3.8 million | $10.4 million | $4.4 million |
| Adjusted EBITDA (non-GAAP) | $8.7 million | $6.8 million | $16.9 million | $12.3 million |
| Adjusted EBITDA margin | 19.8% | 18.0% | 19.3% | 17.3% |
Quarterly sales rose 16.2% and six-month sales rose 22.9%. Management attributed growth to higher unit volumes, higher average selling prices and a more favorable mix of larger boats and optional features. Units sold increased 10.1% for the quarter and 14.9% for the six-month period; average selling price per unit increased approximately 5.5% and 6.9%, respectively. LLC earnings are pre-entity-level income tax because the LLC was taxed as a partnership; pro forma public-company earnings include taxes and noncontrolling interests.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $13.3 million, capital expenditures were $2.3 million, and financing cash outflow was $22.4 million. Cash declined $11.4 million to $4.5 million at December 31, 2013.
- At December 31, LLC debt totaled approximately $63.4 million, including $59.3 million of long-term debt and $4.1 million of current maturities. The LLC had no revolver borrowings and reported compliance with its debt covenants.
- Current assets of $24.5 million were below current liabilities of $25.6 million. Inventory was $16.0 million, up from $11.6 million at June 30, 2013.
- After quarter-end, IPO proceeds funded repayment of all $63.4 million owed under the credit facilities and term loans. The pro forma December 31 balance sheet shows $7.1 million cash and no debt, but is illustrative rather than the company’s actual December 31 balance sheet.
- Six-month member distributions were $61.2 million, compared with $15.4 million in the prior-year period. A further $3.2 million tax distribution was made in January 2014.
IPO, material changes and outlook
The February 2014 IPO sold 8.2 million Class A shares at $14 per share. The company received $99.5 million net of underwriting discounts and commissions, before offering expenses. It used $69.8 million to acquire LLC units, with the LLC using proceeds to repay debt, pay a $3.75 million management-agreement termination fee and fund general corporate purposes; the company used the remaining $29.8 million to acquire units from existing owners. Following the transaction, Malibu Boats, Inc. held a 49.3% economic interest but controlled 100% of the LLC’s voting power and consolidated its results. Existing LLC owners retained a 50.7% economic interest.
Management expected the favorable demand trend to continue into fiscal 2014, citing a 13% rise in domestic inboard sport-boat registrations in the 41 states reported through December 2013. This is an industry indicator, not company-specific revenue guidance. Management noted retail sales remained below 2007 levels and that longer-term prospects depend on the broader economic recovery. New and redesigned models, including Axis offerings and Surf Gate availability on Axis boats, were identified as growth opportunities.
- Management expected fiscal 2014 capital expenditures of approximately $5.0 million, including $1.1 million over the next two quarters for a facility expansion. It estimated $2.0–$3.0 million in annual incremental public-company costs, excluding long-term incentive compensation.
- The filing reports approximately $0.6 million of strategic and financial restructuring costs through the second quarter, up to $1.0 million of additional costs expected in the third quarter, and approximately $1.8 million of one-time stock compensation charges expected in connection with the IPO and recapitalization.
- Risks identified include consumer demand and confidence, interest rates, dealer and consumer credit availability, competition, dealer-network reliance, production and inventory management, fuel costs, and labor and material costs. Boat sales are seasonal.
Risks, contingencies and unusual items
- In the Pacific Coast Marine Windshields litigation, an appellate court reversed a prior summary judgment favorable to Malibu on a design-patent claim in January 2014. Other claims and defenses remained; the company said it intended to defend the case. Malibu also pursued patent litigation against Nautique relating to wake-surfing technology.
- Product warranty liability was $5.9 million at December 31, 2013. Dealer floor-plan repurchase agreements create potential exposure, although no boats were repurchased and no reserve was recorded at period-end.
- The Tax Receivable Agreement generally requires payments to existing LLC owners of 85% of specified realized or deemed tax benefits. The pro forma balance sheet records a $15.4 million payable; actual benefits and payments may vary, and certain transactions or termination can accelerate payments.
- The filing’s pro forma financial statements assume the IPO and related transactions occurred earlier and are not forecasts or a representation of actual public-company results. Adjusted EBITDA and adjusted fully distributed net income are non-GAAP measures and are not substitutes for GAAP results or liquidity measures.
Investor verification priorities
- Confirm post-IPO ownership, voting control, LLC-unit exchange mechanics and the effect of potential exchanges on share count and noncontrolling interests.
- Track sales volumes, pricing, product mix, margins and dealer inventory to assess whether reported growth and demand trends continue.
- Verify post-IPO cash, debt repayment, ongoing liquidity, capital spending and cash needs, including member distributions and Tax Receivable Agreement payments.
- Monitor the patent disputes, warranty costs and any changes in floor-plan repurchase exposure.
- Reconcile GAAP earnings to non-GAAP measures and distinguish actual results from pro forma amounts and one-time IPO-related costs.