MALIBU BOATS, INC. annual report, FY2014

Business context and reporting period

Malibu Boats, Inc. designs, manufactures and sells performance sport boats under the Malibu and Axis brands through independent dealers. This is the Form 10-K for the fiscal year ended June 30, 2014—not a standalone 2013 fourth-quarter filing. The company completed its IPO in February 2014, so FY2014 results include a change in corporate structure and ownership; reported net income and per-share results are not directly comparable with pre-IPO periods.

Financial and operating performance

• Sales rose 14.3%; unit volume increased 8.9% to 2,910 and net sales per unit increased about 5.0%. Management attributed growth to demand, new Axis models, larger boats, pricing and optional features including Surf Gate.
• Gross margin improved 0.5 percentage points, reflecting volume, pricing/product mix and manufacturing cost reductions. Adjusted EBITDA increased 17.4%. Adjusted EBITDA is a non-GAAP measure and should not be treated as cash flow or a substitute for GAAP earnings.
• FY2014 operating results include a $20.0 million litigation-settlement charge and IPO-related costs. Consolidated net loss was $1.2 million; the net loss attributable to Malibu Boats, Inc. was $4.7 million, including the effect of non-controlling LLC interests and the post-IPO structure. Class A loss per share was $0.42 for the post-IPO period.
• Cash was $12.2 million at year-end; total assets were $84.8 million and total liabilities $56.7 million. No term debt or revolving borrowings were outstanding at June 30; the company had a $10 million revolving facility available, subject to covenants. Current liabilities were $43.0 million, including the $20.0 million litigation accrual; current assets were $34.3 million.
• Cash decreased $3.8 million during the year. The company reported $23.8 million of operating cash flow and $5.9 million of investing cash outflow. Financing cash outflow was $21.6 million, including $65.2 million in distributions to non-controlling LLC holders, partly offset by IPO proceeds and debt repayment.

Material changes, outlook and risks

• Compared with FY2013, net sales increased $23.9 million, but GAAP operating income fell sharply to a loss, principally because of the $20.0 million settlement charge and IPO-related expenses. Interest expense also rose, partly from debt extinguishment costs. The company repaid $63.4 million of debt using IPO proceeds; the revolving facility remained undrawn at year-end.
• In September 2014, the company agreed to pay $20.0 million in cash to settle litigation with Pacific Coast Marine Windshields Ltd. The settlement was accrued in FY2014 and was not included in the contractual-obligations table. The filing says payment was expected upon a definitive agreement, by or after September 29, 2014.
• Management expected favorable demand to continue into FY2015, citing U.S. performance sport boat registration growth, and highlighted redesigned 2015 models and product upgrades. No quantified company revenue or earnings guidance is provided. Management cautioned that colder Canadian weather and currency movements had slowed Canadian retail sales, and that broader growth depends on economic recovery.
• Management believed cash, borrowing capacity and operating cash flow would fund operations for the next 12 months, but said the settlement payment and potential Australian licensee acquisition could lead the company to seek additional financing. The proposed acquisition was subject to definitive documentation and targeted for the first half of FY2015.
• Key risks include discretionary consumer demand and boat financing, seasonality and fixed manufacturing costs, dealer health and floor-plan credit, repurchase commitments, dependence on suppliers (about 90% of FY2014 engines came from one supplier), competition, product liability and warranty exposure, and continued patent litigation with Nautique. The company also has a tax receivable agreement requiring payments to pre-IPO owners equal to 85% of specified realized tax benefits; the company estimated about $47.7 million of payments over 15 years relating to specified prior transactions, subject to assumptions.
• The July 2014 follow-on offering occurred after year-end: the company received $76.8 million net and used the proceeds to purchase LLC units. It increased the company’s LLC economic ownership to 68.8%; this subsequent transaction is not reflected in the June 30 balance sheet.
• The independent auditor issued an unqualified opinion on the financial statements. The filing did not include management’s internal-control assessment or auditor attestation, citing the transition period for a newly public company.

Important facts for investors to verify

• Whether and when the $20.0 million settlement was paid, and its effect on subsequent cash, revolver usage and liquidity.
• FY2014 GAAP loss versus adjusted EBITDA: reconcile the settlement, IPO costs, stock compensation and other adjustments, and assess recurring profitability.
• Actual FY2015 results against management’s qualitative demand outlook, including registrations, dealer inventories, unit volume, pricing and Canadian performance.
• Status, financing and final terms of the proposed Australian licensee acquisition.
• Current borrowing availability, covenant headroom, repurchase exposure under dealer floor-plan agreements and the timing and scale of tax receivable agreement payments.
• Developments in the Nautique patent dispute and any effect on the company’s intellectual property or products.