Malibu Boats, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended September 30, 2016; comparisons are with the three months ended September 30, 2015 unless noted. The company designs, manufactures and markets Malibu- and Axis-brand performance sport boats through independent dealers, with U.S. and Australia reporting segments.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change or context |
|---|---|---|---|
| Net sales | $62.0 million | $57.2 million | Up 8.4% |
| Gross profit / margin | $15.8 million / 25.5% | $14.7 million / 25.7% | Profit up 7.6%; margin down 0.2 percentage points |
| Operating income / margin | $6.8 million / 10.9% | $7.3 million / 12.7% | Income down 6.7% |
| Net income | $4.2 million | $4.0 million | Up 6.2%; includes $0.45 million attributable to non-controlling interests |
| Net income attributable to Malibu Boats, Inc. | $3.8 million; $0.21 per diluted share | $3.6 million; $0.20 per diluted share | Up 6.2% |
| Adjusted EBITDA (non-GAAP) | $9.9 million; 15.9% margin | $9.4 million; 16.5% margin | Up 4.4%; margin down 0.6 percentage points |
| Operating cash flow | $6.7 million | $5.6 million | Up $1.1 million |
| Capital expenditures, net | $0.8 million | $1.3 million | Lower year over year |
Boat volume increased 1.0% to 833 units, while sales per unit rose 7.3% to $74,455. The higher average reflected price increases, fewer discounts and a mix shift toward the higher-priced Malibu brand. U.S. external sales were $56.5 million and Australia sales were $5.5 million.
Balance sheet, debt and liquidity
- At September 30, 2016, cash was $16.3 million, down from $25.9 million at June 30, 2016. Current assets were $58.8 million and current liabilities were $44.3 million.
- Term-loan principal was $57.0 million, compared with $72.0 million at June 30, after a $15.0 million voluntary prepayment in August. The balance-sheet carrying amount of total debt was $56.1 million, net of deferred financing costs. No revolving or swingline borrowings were outstanding; the revolving facility provides $25.0 million of capacity, subject to its terms. The company reported compliance with credit covenants.
- Financing cash outflow was $15.4 million, primarily reflecting the term-loan prepayment. The company also reported a $1.1 million excess-cash-flow loan payment on October 28, 2016, after quarter-end.
- The tax receivable agreement liability totaled $93.8 million, including $4.2 million current and $89.6 million long-term. The agreement generally requires payments to pre-IPO owners equal to 85% of specified tax benefits; the next annual payment was anticipated after the March 15, 2017 federal tax return filing.
- Management stated that cash, revolving borrowing capacity and operating cash flow should be sufficient for anticipated needs over the next 12 months. Fiscal 2017 capital expenditures are expected to be significantly higher than in fiscal 2016, including investment in an adjacent facility, tooling and production capacity; no dollar forecast was provided.
Period changes and management commentary
- Revenue growth was driven by higher production and unit volume, increased optional-feature demand, pricing and product mix. Gross margin nevertheless edged lower, primarily because of higher labor costs and product mix-related costs.
- Operating income declined despite sales growth. General and administrative expense rose 31.1% to $6.1 million, mainly because of legal costs related to ongoing litigation.
- Net interest expense fell, reflecting the lower average loan balance after the prepayment and a favorable $0.245 million change in the interest-rate swap’s fair value. The swap is not designated as a hedge; fair-value changes are recorded in earnings.
- Management described domestic retail demand as continuing to grow, but at a slower pace than in 2013–2015. It cited weaker international demand, a strong U.S. dollar, weaker commodity-driven economies and reduced demand in parts of the U.S. affected by lower oil prices. The company said lower wholesale shipments in prior quarters had reduced dealer inventories and should help shipments better track retail demand. These statements are commentary, not quantified financial guidance.
- Management expected new model introductions and its dealer network to support market position and expressed the view that domestic market share could increase in calendar 2016. It also noted competitive product launches and competitors’ efforts to compete with its Surf Gate system.
Risks, contingencies and unusual items
- Litigation with MasterCraft over two wake-surfing patents remained active. MasterCraft had challenged one patent before the Patent and Trademark Office; institution of review had not yet been decided. The company reported a $1.069 million of professional fees in the quarter, identified as legal and advisory fees related to the MasterCraft litigation.
- Former Canadian dealer Wizard Lake sought $8.717 million in damages in a lawsuit alleging, among other claims, breach of contract and misrepresentation. Malibu denied liability and planned to defend the case. The Great Wakes lawsuit was voluntarily dismissed without prejudice in June 2016.
- In the Marine Power litigation, a judgment was rendered against the company; a $3.268 million charge was recorded in the quarter ended June 30, 2016. Post-trial motions were pending, and the company said it would consider an appeal depending on their outcome.
- Dealer floor-plan repurchase commitments could create losses if dealers default, although no units were repurchased in the quarter and no reserve was recorded at September 30, 2016.
- Product warranties were extended, effective with model year 2016, to up to five years for both brands; warranty liabilities rose to $8.7 million from $7.2 million a year earlier.
- The filing reported no material changes to previously disclosed risk factors or market risks. Management concluded disclosure controls were effective at a reasonable assurance level, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue and unit growth can continue while gross, operating and adjusted EBITDA margins remain under pressure.
- Whether dealer inventory and retail demand develop as management expects, particularly in international markets and regions affected by currency, commodity and oil-price changes.
- The outcome and potential financial impact of the MasterCraft, Wizard Lake and Marine Power matters, including litigation costs and any appeals or counterclaims.
- Cash generation after the $15.0 million debt prepayment, the subsequent $1.1 million payment, expected higher capital spending and future tax receivable agreement payments.
- Term-loan covenant headroom, variable-rate exposure and the earnings impact of interest-rate-swap fair-value changes.