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| HZO > SEC Filings for HZO > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
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 economic 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 the 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,
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 March 31,
2009. 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-ins, 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. During the six months ended
March 31, 2009, we incurred losses and increased our inventory reserves for
expected losses associated with market declines in brands we no longer carry by
approximately $4.9 million. As of March 31, 2009, 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 adversely affected 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 March 31, 2009, we had not
recognized any impairment of long-lived assets in connection with SFAS 144 based
on our reviews.
We are party to a joint venture in Gulfport Marina, LLC (Gulfport) that
operates a marina and service operation. 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 adversely affected 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 issued 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 and six months ended March 31,
2009 with the three and six months ended March 31, 2008 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 March 31, 2009 Compared with Three Months Ended March 31,
2008
Revenue. Revenue decreased $103.7 million, or 44.4%, to $129.6 million for
the three months ended March 31, 2009 from $233.3 million for the three months
ended March 31, 2008. Of this decrease, $88.5 million was attributable to a 41%
decline in comparable-store sales and approximately $15 million, net, was
attributable to stores closed that are not eligible for inclusion in the
comparable-store base for the three months ended March 31, 2009. The decline in
our comparable-store sales was due to the widely reported soft economic
conditions and difficult retail financing environment, which have adversely
impacted our retail sales.
Gross Profit. Gross profit decreased $34.8 million, or 63.8%, to
$19.7 million for the three months ended March 31, 2009 from $54.5 million for
the three months ended March 31, 2008. Gross profit as a percentage of revenue
decreased to 15.2% for the three months ended March 31, 2009 from 23.4% for the
three months ended March 31, 2008. The decrease in gross profit as a percentage
of revenue was the result of increased margin pressure in the current soft
economic environment. During the three months ended March 31, 2009 we incurred
losses and increased our inventory reserves by approximately $4.1 million for
actual and expected losses associated with market value declines in brands we no
longer carry. Additionally, gross profit was negatively impacted by the
difficult retail financing environment, which has resulted in a reduction in the
percentage of units financed and accordingly, finance income.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses decreased $19.8 million, or 35.3%, to $36.4 million for
the three months ended March 31, 2009 from $56.2 million for the three months
ended March 31, 2008. The decrease in selling, general, and administrative
expenses was primarily attributable to cost-cutting initiatives, including
reductions in workforce, reduced personnel costs, and reductions in the level of
our marketing expenditures. Additionally, we incurred approximately $900,000 in
store closing costs, as we adjust the number of store locations we maintain
given the current economic environment.
Interest Expense. Interest expense decreased $2.2 million, or 36.6%, to
$3.8 million for the three months ended March 31, 2009 from $6.0 million for the
three months ended March 31, 2008. The decrease in interest expense was
primarily the result of a more favorable interest rate environment and reduced
average borrowings on our line of credit. Interest expense as a percentage of
revenue increased to 2.9% for the three months ended March 31, 2009 from 2.6%
for the three months ended March 31, 2008, due to the significant drop in
revenue.
Income Tax Benefit. Income tax benefit decreased $4.0 million to $151,000 for
the three months ended March 31, 2009 from $4.2 million for the three months
ended March 31, 2008. Our effective income tax rate decreased significantly to
approximately 1% for the three months ended March 31, 2009 from 54.3% for the
three months ended March 31, 2008 based on significantly lower 2009 earnings and
the limitation on our net operating loss carry back which limited the tax
benefit we were able to record and changes in our valuation allowances
associated with our deferred tax assets.
Six Months Ended March 31, 2009 Compared with Six Months Ended March 31, 2008
Revenue. Revenue decreased $218.7 million, or 48.8%, to $229.8 million for
the six months ended March 31, 2009 from $448.5 million for the six months ended
March 31, 2008. Of this decrease, $196.9 million was attributable to a decline
in comparable-store sales and approximately $22 million was attributable to
stores closed that were not eligible for inclusion in the comparable-store base
for the six months ended March 31, 2009. The decline in our comparable-store
sales was due to softer economic conditions and difficult retail financing
environment, which have adversely impacted our retail sales. While revenue
generated from service, parts, and accessories declined during the six months
ended March 31, 2009, they have done so at a lower rate than boat sales.
Gross Profit. Gross profit decreased $59.2 million, or 57.7%, to
$43.4 million for the six months ended March 31, 2009 from $102.6 million for
the six months ended March 31, 2008. Gross profit as a percentage of revenue
decreased to 18.9% for the six months ended March 31, 2009 from 22.9% for the
six months ended March 31, 2008. The decrease in gross profit as a percentage of
revenue was a result increased margin pressure given the current soft economic
environment. The decrease in gross profit as a percentage of revenue was
partially offset by the shift in product mix of boat sales to our higher margin
service, parts and accessories business. Additionally, during the six months
ended March 31, 2009, we incurred losses and increased our inventory reserves
for expected losses associated with market declines in brands we no longer carry
by approximately $4.9 million.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses decreased $34.2 million, or 31.2%, to $75.2 million for
the six months ended March 31, 2009 from $109.4 million for the six months ended
March 31, 2008. Selling, general, and administrative expenses as a percentage of
revenue increased approximately 830 basis points to 32.7% for the six months
ended March 31, 2009 from 24.4% for the six months ended March 31, 2008. The
increase in selling, general, and administrative expenses as a percentage of
revenue was due to the lack of leverage caused by the decline in
comparable-store sales for the six months ending March 31, 2009. During the six
months ended March 31, 2009, selling, general, and administrative expenses
included approximately $1.3 million in store closing costs, as we reduce the
number of store locations to the current economic environment.
Interest Expense. Interest expense decreased $4.0 million, or 33.8%, to
$7.8 million for the six months ended March 31, 2009 from $11.8 million for the
six months ended March 31, 2008. The decrease in interest expense was primarily
the result of the more favorable interest rate environment and reduced average
borrowings on our line of credit. Interest expense as a percentage of revenue
increased to 3.4% for the six months ended March 31, 2009 from 2.6% for the six
months ended March 31, 2008, because of the significant drop in revenue.
Income Tax Benefit. Income tax benefit decreased $3.7 million to $5.0 million
for the six months ended March 31, 2009 from $8.7 million for the six months
ended March 31, 2008. Our effective income tax rate decreased to
approximately 12.7% for the six months ended March 31, 2009 from approximately
46.7% for the six months ended March 31, 2008, primarily due to the limitation
on our net operating loss carry back which limited the tax benefit we were able
to record and 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 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
March 31, 2009, 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 six months ended March 31, 2009, cash provided in operating
activities approximated $63.8 million. For the six months ended March 31, 2008,
cash used in operating activities approximated $92.9 million. For the six months
ended March 31, 2009, cash provided in operating activities was primarily due to
a decrease in inventory levels and an increase in accounts payable. This was
partially offset by the net loss for the period. For the six months ended
March 31, 2008, cash used in operating activities was primarily used to increase
inventories to ensure appropriate inventory levels, decrease accounts payable to
tax authorities, and a decrease customer deposits.
For the six months ended March 31, 2009 and 2008, cash used in investing
activities approximated $1.5 million and $5.0 million, respectively, and was
primarily used to purchase property and equipment associated with improving and
relocating existing retail facilities.
For the six months ended March 31, 2009, cash used by financing activities
approximated $77.6 million and was primarily attributable to net repayments of
short-term borrowings as a result of decreased inventory levels. For the six
months ended March 31, 2008, cash provided by financing activities approximated
$91.7 million and 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 the ESPP, partially offset by repayments of long-term debt.
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
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