MarineMax, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended December 31, 2018. Comparisons are with the three months ended December 31, 2017, unless otherwise noted. MarineMax operates 63 retail locations in 16 states and sells, services and brokers boats and related products.
Key financial results
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $241.9 million | $236.9 million | +2.1% |
| Gross profit | $63.5 million | $59.2 million | +7.3% |
| Gross margin | 26.2% | 25.0% | +1.2 percentage points |
| SG&A expense | $54.5 million | $50.2 million | +8.6% |
| Operating income | $9.0 million | $9.0 million | Approximately flat |
| Interest expense | $2.5 million | $2.5 million | Down 1.0% |
| Net income | $4.9 million | $4.2 million | +16.6% |
| Diluted EPS | $0.21 | $0.19 | +10.5% |
Comparable-store sales increased 0.5%; stores outside the comparable-store base contributed approximately $3.9 million of the revenue increase. Management attributed improved gross margin primarily to stronger new- and used-boat margins and a greater contribution from higher-margin service and storage revenue. SG&A growth reflected acquisitions, new store openings and the restart of the British Virgin Islands charter operation after Hurricane Irma.
Net income benefited from a lower tax provision: the effective tax rate was 24.1%, versus 34.8% in the prior-year quarter. The prior-year period included an approximately $889,000 tax charge associated with remeasuring deferred tax assets after U.S. tax legislation lowered the federal corporate rate.
Cash flow, debt and liquidity
- Operating cash flow was negative $65.1 million, compared with negative $56.2 million. The principal use was inventory investment, which increased with the timing of boat receipts; lower accounts receivable and higher customer deposits partly offset working-capital uses.
- Investing cash flow was negative $3.0 million, mainly for property and equipment. Financing cash flow was positive $57.8 million, primarily from net short-term borrowings.
- Cash and cash equivalents were $38.6 million at December 31, 2018, down from $48.8 million at September 30, 2018. Inventory was $445.5 million.
- Short-term borrowings were $270.7 million; the company reported no long-term debt and approximately $60.1 million of additional borrowing availability. The borrowing facility commitment is up to $400 million, subject to borrowing-base availability.
- The facility’s outstanding borrowings carried an approximately 5.5% interest rate at quarter-end, compared with 4.7% a year earlier, and are variable-rate debt tied to LIBOR. Management estimated a 100-basis-point rate increase would add about $2.7 million of annual pretax interest expense, assuming no mitigating actions.
- Management said the company complied with its credit-facility covenants and believed existing capital resources would fund operations for at least 12 months, except in the case of possible significant acquisitions.
Changes, outlook and notable items
- Revenue recognition: MarineMax adopted ASC 606 on October 1, 2018 using the modified retrospective method, without restating comparative results. Adoption increased reported quarterly revenue by $807,000 and net income by $463,000 versus amounts calculated without the new standard; the opening retained-earnings adjustment was $399,000 after tax. Parts and service revenue is now recognized over time as work is performed.
- Leases: The company planned to adopt ASC 842 in fiscal 2020 and expected a material increase in balance-sheet assets and liabilities from recognizing operating lease right-of-use assets and liabilities.
- Growth plans: Acquisitions and new store openings remain strategic priorities, and management said it planned to accelerate growth as industry conditions improve. No numerical earnings or revenue guidance was provided.
- Product concentration: Sea Ray and Boston Whaler are significant brands. Brunswick announced it would discontinue Sea Ray sport yacht and yacht models, which represented approximately 10% of fiscal 2018 revenue. MarineMax said its brand diversification should help replace that revenue. New Azimut boats represented approximately 11% of fiscal 2018 revenue.
- Seasonality and other risks: The recreational boating business is seasonal, cyclical and weather-sensitive; winter quarters generally involve lower sales and higher inventory and borrowings outside Florida. Florida accounted for approximately 51% of fiscal 2018 revenue. The company also cited luxury-goods demand, consumer confidence, credit availability, manufacturer and dealer-agreement changes, and foreign exchange as risks.
- Credit agreement: The filing gives conflicting maturity dates for the October 2018 amended facility: the financial-statement note says October 2021, while the MD&A says October 2020. Both passages describe two additional one-year extensions subject to lender approval.
- Contingencies and controls: MarineMax was involved in ordinary-course legal matters and did not expect them to have a material adverse effect. Disclosure controls were assessed as effective at a reasonable-assurance level; no material change in internal control was reported.
Investor verification priorities
- Confirm the credit facility’s stated maturity date, given the October 2020/October 2021 discrepancy, and review borrowing-base availability and covenant headroom.
- Assess whether inventory growth and negative operating cash flow are seasonal and supported by demand, and track inventory aging, curtailments and borrowing needs.
- Evaluate the durability of gross-margin improvement against rising SG&A and the company’s modest comparable-store sales growth.
- Monitor replacement sales and manufacturer relationships following the planned discontinuation of Sea Ray sport yacht and yacht models, as well as exposure to major brands and Florida.
- Review the effects of ASC 606 on period-to-period comparability and the expected balance-sheet impact of ASC 842 adoption.