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| HZO > SEC Filings for HZO > Form 10-Q on 9-Feb-2009 | All Recent SEC Filings |
9-Feb-2009
Quarterly Report
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
include statements relating to our future economic performance, plans and
objectives for future operations, and projections of revenue and other financial
items that are based on our beliefs as well as assumptions made by and
information currently available to us. Actual results could differ materially
from those currently anticipated as a result of a number of factors, including
those listed under "Business-Risk Factors" in our Annual Report on Form 10-K for
the fiscal year ended September 30, 2008.
General
We are the largest recreational boat retailer in the United States with
fiscal 2008 revenue in excess of $880 million. Through 75 retail locations in 22
states, we sell new and used recreational boats and related marine products,
including engines, trailers, parts, and accessories. We also arrange related
boat financing, insurance, and extended warranty contracts; provide boat repair
and maintenance services; offer yacht and boat brokerage services; and, where
available, offer slip and storage accommodations.
MarineMax was incorporated in January 1998. We commenced operations with
the acquisition of five independent recreational boat dealers on March 1, 1998.
Since the initial acquisitions in March 1998, we have significantly expanded our
operations through the acquisition of 20 recreational boat dealers, two boat
brokerage operations, and two full-service yacht repair facilities. As a part of
our acquisition strategy, we frequently engage in discussions with various
recreational boat dealers regarding their potential acquisition by us. Potential
acquisition discussions frequently take place over a long period of time and
involve difficult business integration and other issues, including, in some
cases, management succession and related matters. As a result of these and other
factors, a number of potential acquisitions that from time to time appear likely
to occur do not result in binding legal agreements and are not consummated.
General economic conditions and consumer spending patterns can negatively
impact our operating results. Unfavorable local, regional, national, or global
economic developments or uncertainties regarding future economic prospects could
reduce consumer spending in the markets we serve and adversely affect our
business. Economic conditions in areas in which we operate dealerships,
particularly Florida in which we generated 46%, 44%, and 43% of our revenue
during fiscal 2006, 2007, and 2008, respectively, can have a major impact on our
operations. Local influences, such as corporate downsizing and military base
closings, also could adversely affect our operations in certain markets.
In an economic downturn, consumer discretionary spending levels generally
decline, at times resulting in disproportionately large reductions in the sale
of luxury goods. Consumer spending on luxury goods also may decline as a result
of lower consumer confidence levels, even if prevailing economic conditions are
favorable. Although we have expanded our operations during periods of stagnant
or modestly declining industry trends, the cyclical nature of the recreational
boating industry or the lack of industry growth could adversely affect our
business, financial condition, or results of operations in the future. Any
period of adverse economic conditions or low consumer confidence has a negative
effect on our business.
Lower consumer spending resulting from a downturn in the housing market and
other economic factors adversely affected our business in fiscal 2007 and
continued weakness in consumer spending resulting from substantial weakness in
the financial markets and deteriorating economic conditions had a very
substantial negative effect on our business in fiscal 2008. These conditions
caused us to defer our acquisition program, slow our new store openings, reduce
our inventory purchases, engage in inventory reduction efforts, close some of
our retail locations, and reduce our headcount. We cannot predict the length or
severity of these unfavorable economic or financial conditions or the extent to
which they will adversely affect our operating results nor can we predict the
effectiveness of the measures we have taken to address this environment or
whether additional measures will be necessary.
Although economic conditions have adversely affected our operating results,
we have capitalized on our core strengths to substantially outperform the
industry and deliver market share gains. Our ability to deliver an increase in
market share supports the alignment of our retailing strategies with the desires
of consumers. We believe the steps we have taken to preserve and grow market
share will yield an increase in future revenue. As general economic trends
improve, we expect our core strengths and retailing strategies will position us
to capitalize on growth opportunities as they occur and will allow us to emerge
from this challenging environment with greater earnings potential.
Application of Critical Accounting Policies
We have identified the policies below as critical to our business operations
and the understanding of our results of operations. The impact and risks related
to these policies on our business operations is discussed throughout
Management's Discussion and Analysis of Financial Condition and Results of
Operations when such policies affect our reported and expected financial
results.
In the ordinary course of business, we make a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. The results form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ
significantly from those estimates under different assumptions and conditions.
We believe that the following discussion addresses our most critical accounting
policies, which are those that are most important to the portrayal of our
financial condition and results of operations and require our most difficult,
subjective, and complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.
Revenue Recognition
We recognize revenue from boat, motor, and trailer sales, and parts and
service operations at the time the boat, motor, trailer, or part is delivered to
or accepted by the customer or service is completed. We recognize commissions
earned from a brokerage sale at the time the related brokerage transaction
closes. We recognize revenue from slip and storage services on a straight-line
basis over the term of the slip or storage agreement. We recognize commissions
earned by us for placing notes with financial institutions in connection with
customer boat financing when we recognize the related boat sales. We also
recognize marketing fees earned on credit life, accident and disability, and
hull insurance products sold by third-party insurance companies at the later of
customer acceptance of the insurance product as evidenced by contract execution
or when the related boat sale is recognized. We also recognize commissions
earned on extended warranty service contracts sold on behalf of third-party
insurance companies at the later of customer acceptance of the service contract
terms, as evidenced by contract execution or recognition of the related boat
sale.
Certain finance and extended warranty commissions and marketing fees on
insurance products may be charged back if a customer terminates or defaults on
the underlying contract within a specified period of time. Based upon our
experience of repayments and defaults, we maintain a chargeback allowance that
was not material to our financial statements taken as a whole as of December 31,
2008. Should results differ materially from our historical experiences, we would
need to modify our estimate of future chargebacks, which could have a material
adverse effect on our operating margins.
Vendor Consideration Received
We account for consideration received from our vendors in accordance with
Emerging Issues Task Force Issue No. 02-16, "Accounting by a Customer (Including
a Reseller) for Certain Consideration Received from a Vendor" (EITF 02-16).
EITF 02-16 most significantly requires us to classify interest assistance
received from manufacturers as a reduction of inventory cost and related cost of
sales as opposed to netting the assistance against our interest expense incurred
with our lenders. Pursuant to EITF 02-16, amounts received by us under our co-op
assistance programs from our manufacturers are netted against related
advertising expenses.
Inventories
Inventory costs consist of the amount paid to acquire the inventory, net of
vendor consideration and purchase discounts, the cost of equipment added,
reconditioning costs, and transportation costs relating to acquiring inventory
for sale. We state new boat, motor, and trailer inventories at the lower of
cost, determined on a specific-identification basis, or market. We state used
boat, motor, and trailer inventories, including trade-in's, at the lower of
cost, determined on a specific-identification basis, or market. We state parts
and accessories at the lower of cost, determined on the first-in, first-out
basis, or market. We utilize our historical experience, the aging of the
inventories, and our consideration of current market trends as the basis for
determining lower of cost or market valuation allowance. As of December 31, 2008
our lower of cost or market valuation allowance was not material to the
consolidated financial statements taken as a whole. If events occur and market
conditions change, causing the fair value to fall below carrying value, the
lower of cost or market valuation allowance could increase.
Valuation of Goodwill and Other Intangible Assets
We account for goodwill and identifiable intangible assets in accordance
with Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). Under this standard, we assess the impairment of
goodwill and identifiable intangible assets at least annually and whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. The first step in the assessment is the estimation of fair value.
If step one indicates that impairment potentially exists, we perform the second
step to measure the amount of impairment, if any. Goodwill and identifiable
intangible asset impairment exists when the estimated fair value is less than
its carrying value.
During the three months ended June 30, 2008, we experienced a significant
decline in stock market valuation driven primarily by weakness in the marine
retail industry and an overall soft economy, which hindered our financial
performance. Accordingly, we completed a step one analysis (as noted above) and
estimated the fair value of the reporting unit as prescribed by SFAS 142, which
indicated potential impairment. As a result, we completed a fair value analysis
of indefinite lived intangible assets and a step two goodwill impairment
analysis, as required by SFAS 142. We determined that all indefinite lived
intangible assets and goodwill were impaired and recorded a non-cash charge of
$121.1 million based on our assessment. We will not be required to make any
current or future cash expenditures as a result of this impairment charge.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" (SFAS 144), requires that
long-lived assets, such as property and equipment and purchased intangibles
subject to amortization, be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of the asset is measured by comparison of its
carrying amount to undiscounted future net cash flows the asset is expected to
generate. If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the asset
exceeds its fair market value. Estimates of expected future cash flows represent
our best estimate based on currently available information and reasonable and
supportable assumptions. Any impairment recognized in accordance with SFAS 144
is permanent and may not be restored. As of September 30, 2008, we had not
recognized any impairment of long-lived assets in connection with SFAS 144 based
on our reviews.
During the three months ended June 30, 2008, we experienced a significant
decline in stock market valuation driven primarily by weakness in the marine
retail industry and an overall soft economy, which has hindered our financial
performance. As a result of this weakness, we realized a goodwill and intangible
asset impairment charge, as noted above. Based on these events, we reviewed the
valuation of our investment in Gulfport in accordance with APB 18 and
recoverability of the assets contained within the joint venture. APB 18 requires
that a loss in value of an investment which is other than a temporary decline
should be recognized. We reviewed our investment and assets contained within the
Gulfport joint venture, which consists of land, buildings, equipment, and
goodwill. As a result, we determined that our investment in the joint venture
was impaired and recorded a non-cash charge of $1.0 million based on our
assessment. We will not be required to make any current or future cash
expenditures as a result of this impairment charge.
Income Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) and
Financial Accounting Standard Board Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48). Under SFAS 109, we recognize deferred tax
assets and liabilities for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. We measure deferred tax assets
and liabilities using enacted tax rates expected to apply to taxable income in
the years in which we expect those temporary differences to be recovered or
settled. We record valuation allowances to reduce our deferred tax assets to the
amount expected to be realized by considering all available positive and
negative evidence.
Substantially all of our goodwill and intangibles were deductible for tax
purposes. During the year ended September 30, 2008, we wrote-off all of our
goodwill and indefinite lived intangible assets. The write-off combined with
other timing differences, gave rise to a net operating loss, which resulted in a
net deferred tax asset of approximately $41.3 million. Pursuant to SFAS 109, we
must consider all positive and negative evidence regarding the realization of
deferred tax assets, including past operating results and future sources of
taxable income. Under the provisions of SFAS 109, we determined that our net
deferred tax asset needed to be reserved given recent earnings and industry
trends. Accordingly, recording of the valuation allowance resulted in a non-cash
charge of approximately $39.2 million.
Stock-Based Compensation
Upon adoption of SFAS 123R, we used the Black-Scholes valuation model for
valuing all stock-based compensation and shares granted under the ESPP. We
measure compensation for restricted stock awards and restricted stock units at
fair value on the grant date based on the number of shares expected to vest and
the quoted market price of our common stock. We recognize compensation cost for
all awards in earnings, net of estimated forfeitures, on a straight-line basis
over the requisite service period for each separately vesting portion of the
award.
Consolidated Results of Operations
The following discussion compares the three months ended December 31, 2008
with the three months ended December 31, 2007 and should be read in conjunction
with the Condensed Consolidated Financial Statements, including the related
notes thereto, appearing elsewhere in this Report.
Three Months Ended December 31, 2008 Compared with Three Months Ended
December 31, 2007
Revenue. Revenue decreased $115.0 million, or 53.4%, to $100.2 million for
the three months ended December 31, 2008 from $215.3 million for the three
months ended December 31, 2007. Of this decrease, $114.3 million was
attributable to a 52% decline in comparable-store sales and approximately
$700,000 was attributable to stores opened that are not eligible for inclusion
in the comparable-store base for the three months ended December 31, 2008. The
decline in our comparable-store sales was due to softer economic conditions,
which adversely impacted our retail sales.
Gross Profit. Gross profit decreased $24.4 million, or 50.7%, to
$23.7 million for the three months ended December 31, 2008 from $48.1 million
for the three months ended December 31, 2007. Gross profit as a percentage of
revenue increased to 23.7% for the three months ended December 31, 2008 from
22.4% for the three months ended December 31, 2007. The increase in gross profit
as a percentage of revenue was driven by the shift in product mix of new boat
sales and an increase in our higher margin service and parts business.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses decreased $14.3 million, or 26.9%, to $38.9 million for
the three months ended December 31, 2008 from $53.2 million for the three months
ended December 31, 2007. The overall decrease in selling, general, and
administrative expenses was due primarily to the decline in personnel costs,
resulting from reductions in workforce, reduced commissions, reductions in
manager bonuses, and reductions in marketing and travel and entertainment
expenses. Selling, general, and administrative expenses as a percentage of
revenue increased approximately 14.1% to 38.8% for the three months ended
December 31, 2008 from 24.7% for the three months ended December 31, 2007, as a
result of the decline in same-store sales.
Interest Expense. Interest expense decreased $1.8 million, or 31%, to
$4.1 million for the three months ended December 31, 2008 from $5.9 million for
the three months ended December 31, 2007. The decrease was primarily a result of
decreased borrowings on our credit facility and mortgages coupled with the more
favorable interest rate environment. Interest expense as a percentage of revenue
increased to 4.1% for the three months ended December 31, 2008 from 2.7% for the
three months ended December 31, 2007 due to the overall decline in revenue.
Income Tax Benefit. Income tax benefit increased $352,000, or 7.8%, to
$4.9 million for the three months ended December 31, 2008 from $4.5 million for
the three months ended December 31, 2007. Our effective income tax rate
decreased to approximately 25.4% for the three months ended December 31, 2008,
from 41.4% for the three months ended December 31, 2007, primarily due to the
limitation on our net operating loss carry back coupled with changes in our
valuation allowances associated with our deferred tax assets.
Liquidity and Capital Resources
Our cash needs are primarily for working capital to support operations,
including new and used boat and related parts inventories, off-season liquidity,
and growth through acquisitions and new store openings. We regularly monitor the
aging of our inventories and current market trends to evaluate our current and
future inventory needs. We also use this evaluation in conjunction with our
review of our current and expected operating performance and expected growth to
determine the adequacy of our financing needs. These cash needs have
historically been financed with cash generated from operations and borrowings
under our credit facility. Our ability to utilize our credit facility to fund
operations depends upon the collateral levels and compliance with the covenants
of the credit facility. Turmoil in the credit markets and weakness in the retail
markets may interfere with our ability to remain in compliance with the
covenants of the credit facility and therefore utilize the credit facility to
fund operations. At December 31, 2008, we were in compliance with all of the
credit facility covenants. We currently depend upon dividends and other payments
from our dealerships and our credit facility to fund our current operations and
meet our cash needs. Currently, no agreements exist that restrict this flow of
funds from our dealerships.
For the three months ended December 31, 2007, cash used in operating
activities approximated $69.9 million. For the three months ended December 31,
2007, cash used in operating activities was primarily used to increase
inventories to ensure appropriate inventory levels and decrease accounts payable
to tax authorities, partially offset by decreased accounts receivable from our
manufacturers. For the three months ended December 31, 2008, cash provided by
operating activities approximated $28.3 million. For the three months ended
December 31, 2008, cash provided by operating activities was primarily generated
by the reductions in inventories and accounts receivable partially offset by net
loss, decreased customer deposits and accrued expenses.
For the three months ended December 31, 2007 and 2008, cash used in investing
activities approximated $2.4 million and $1.1 million, respectively, and was
primarily used to purchase property and equipment associated with improving and
relocating existing retail facilities.
For the three months ended December 31, 2007, cash provided by financing
activities approximated $64.7 million. For the three months ended December 31,
2007, cash provided by financing activities was primarily attributable to net
borrowings of short-term borrowings as a result of increased inventory levels
and net proceeds from common shares issued upon the exercise of stock options
and stock purchases under our Employee Stock Purchase Plan, partially offset by
repayments of long-term debt. For the three months ended December 31, 2008, cash
used in financing activities approximated $42.6 million. For the three months
ended December 31, 2008, cash used in financing activities was primarily
attributable to net repayments of short-term borrowings as a result of decreased
inventory levels and net proceeds from stock purchases under our Employee Stock
Purchase Plan.
During December 2008, we entered into an amendment of our second amended and
restated credit and security agreement originally entered into in June 2006. The
amendment modified the amount of borrowing availability, financial covenants,
inventory advance rates, and the collateral that secures the borrowings. With
the amendment, the credit facility provides us a line of credit with asset-based
borrowing availability of up to $425 million, stepping down to $350 million by
September 30, 2009 and $300 million by May 31, 2010. However, the amendment also
contains a provision that allows us to obtain commitments from existing or
additional lenders, thereby increasing the capacity of the credit facility, up
to $500 million, and enables us to obtain advances of up to $20 million against
certain of our owned real estate. Amounts under the credit facility may be used
for working capital and inventory financing, with the amount of permissible
borrowings determined pursuant to a borrowing base formula. The credit facility
also permits approved-vendor floorplan borrowings of up to $20 million. The
amendment replaces the fixed
charge coverage ratio with an interest coverage ratio for years ending on or
after September 30, 2010; it includes a cumulative earnings before interest,
taxes, depreciation, and amortization, or EBITDA (as defined in the agreement),
covenant for each quarter; it modifies the current ratio requirements; it
reduces the amount of allowable capital expenditures; it requires approval for
any stock repurchases; and it requires approval for acquisitions. The amended
credit facility provides for interest at the London Interbank Offered Rate
(LIBOR) plus 425 basis points through September 30, 2010 and thereafter at LIBOR
plus 150 to 400 basis points, pursuant to a performance pricing grid based upon
our interest coverage ratio, as defined. Borrowings under the credit facility
are secured by our inventory, accounts receivable, equipment, furniture,
fixtures, and real estate. The amended credit facility matures in May 2011, with
two one-year renewal options, subject to lender approval. As of December 31,
2008, we were in compliance with all of the credit facility covenants.
As of December 31, 2008, our indebtedness totaled approximately $329 million
associated with financing our inventory and working capital needs. At
December 31, 2007 and 2008, the interest rate on the outstanding short-term
borrowings was 6.1% and 5.7%, respectively. At December 31, 2008, our additional
available borrowings under our credit facility were approximately $40 million.
We issued a total of 79,120 shares of our common stock in conjunction with
our Incentive Stock Plans and Employee Stock Purchase Plan during the three
months ended December 31, 2008 in exchange for approximately $410,000 in cash.
Our Incentive Stock Plans provide for the grant of incentive and non-qualified
stock options to acquire our common stock, the grant of restricted stock awards
and restricted stock units, the grant of common stock, the grant of stock
appreciation rights, and the grant of other cash awards to key personnel,
directors, consultants, independent contractors, and others providing valuable
services to us. Our Employee Stock Purchase Plan is available to all our regular
employees who have completed at least one year of continuous service.
Except as specified in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in the attached unaudited
condensed consolidated financial statements, we have no material commitments for
capital for the next 12 months. We believe that our existing capital resources
will be sufficient to finance our operations for at least the next 12 months,
except for possible significant acquisitions.
Impact of Seasonality and Weather on Operations
Our business, as well as the entire recreational boating industry, is highly
seasonal, with seasonality varying in different geographic markets. With the
exception of Florida, we generally realize significantly lower sales and higher
levels of inventories, and related short-term borrowings, in the quarterly
periods ending December 31 and March 31. The onset of the public boat and
recreation shows in January stimulates boat sales and allows us to reduce our
inventory levels and related short-term borrowings throughout the remainder of
the fiscal year. Our business could become substantially more seasonal as we
acquire dealers that operate in colder regions of the United States.
Our business is also subject to weather patterns, which may adversely affect
our results of operations. For example, drought conditions (or merely reduced
rainfall levels) or excessive rain may close area boating locations or render
boating dangerous or inconvenient, thereby curtailing customer demand for our
products. In addition, unseasonably cool weather and prolonged winter conditions
may lead to a shorter selling season in certain locations. Hurricanes and other
storms could result in disruptions of our operations or damage to our boat
. . .
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