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MBUU > SEC Filings for MBUU > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for MALIBU BOATS, INC.

Form 10-Q for MALIBU BOATS, INC.


12-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Some of the information in this Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, certain statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations", may constitute forward-looking statements. In some cases you can identify these "forward-looking statements" by words like "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of those words and other comparable words. Any such forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results to vary materially from our future results, performance or achievements, or those of our industry, expressed or implied in such forward-looking statements. Such factors include, among others, general industry, economic and business conditions, demand for our products, changes in consumer preferences, competition within our industry, our reliance on our network of independent dealers, our ability to manage our manufacturing levels and our large fixed cost base, and the successful introduction of our new products, as well as other factors affecting us discussed under the heading "Risk Factors" in Amendment No. 3 to our Registration Statement on Form S-1 filed with the Securities and Exchange Commission ("SEC") on January 22, 2014 ("Form S-1"). Many of these risks and uncertainties are outside our control, and there may be other risks and uncertainties which we do not currently anticipate because they relate to events and depend on circumstances that may or may not occur in the future. We do not intend and undertake no obligation to update any forward-looking information to reflect actual results or future events or circumstances.
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included herein.
Overview
We are a leading designer, manufacturer and marketer of performance sport boats. Our boats are used for water sports, including water skiing, wakeboarding and wake surfing, as well as general recreational boating. We earn revenue and generate profits from the sale of our high performance boats under two brands-Malibu and Axis. Our flagship Malibu brand boats offer our latest innovations in performance, comfort and convenience, and are designed for consumers seeking a premium boating experience. Our Axis brand of boats are designed to appeal to consumers who desire a more affordable product but still demand high performance, functional simplicity and the option to upgrade key features. We continued to focus on innovation and invest in product development to expand the market for our products by introducing consumers to new and exciting recreational activities.
We offer our boats for sale through an extensive network of independent dealers in North America and throughout the world. Additionally, we offer our boats throughout an exclusive licensee in Australia that is one of the largest performance sport boat manufacturer in that country. Our boats are the exclusive performance sport boats offered by the majority of our dealers.
For three months ended March 31, 2014, net sales and adjusted EBITDA increased 6.9% and 12.9%, respectively, while gross margin as a percentage of sales was flat compared to the three months ended March 31, 2013. For nine months ended March 31, 2014, net sales, gross margin as a percentage of sales, and adjusted EBITDA increased 16.5%, 1.2%, and 26.9%, respectively, compared to the nine months ended March 31, 2013. For three and nine months ended March 31, 2014, net
(loss) income decreased 119.0% and 2.0%, respectively, compared to the three and nine months ended March 31, 2013. The decreases in the three and nine month periods were largely due to one time charges in connection with our initial public offering. For the definition of adjusted EBITDA and a reconciliation to net income, see "-GAAP Reconciliation of Non-GAAP Financial Measures." Malibu Boats, Inc. is a Delaware corporation with its principal offices in Loudon, Tennessee. We use the terms "Malibu," the "Company," "we," "us," "our" or similar references to refer to (i) Malibu Holdings, LLC, or the LLC, and its consolidated subsidiaries prior to the recapitalization of the LLC and initial public offering of Malibu Boats, Inc.'s Class A Common Stock, par value $0.01 per share ("Class A Common Stock") as described below under "Recapitalization and Initial Public Offering," and (ii) Malibu Boats, Inc. and its consolidated subsidiaries after the Recapitalization and IPO, which were completed on February 5, 2014.
Recapitalization and Initial Public Offering


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On February 5, 2014, immediately prior to the closing of our initial public offering of Class A Common Stock, a new single class of LLC Units of the LLC was allocated among the pre-IPO owners of the LLC in exchange for their prior membership interests of the LLC pursuant to the distribution provisions of the former limited liability company agreement of the LLC based upon the liquidation value of the LLC, assuming it was liquidated at the time of our initial public offering with a value implied by the initial public offering price of the shares of Class A Common Stock sold in the initial public offering. Immediately prior to the closing of our initial public offering, 17,071,424 LLC Units were issued and outstanding. In addition, 34 shares of Class B Common Stock were issued, one to each existing LLC Unit holders. Further, on February 4, 2014, two holders of membership interests in the LLC merged with and into two newly formed subsidiaries of Malibu Boats, Inc. As a result of these mergers, the sole stockholders of each of the two merging entities received shares of Class A Common Stock in exchange for shares of capital stock of the merging entities. Also, we redeemed for nominal consideration the initial 100 shares of Class A Common Stock issued to our initial stockholder in connection with our formation. We refer to the foregoing transactions as the "Recapitalization." On February 5, 2014, we completed our initial public offering, or IPO, of 8,214,285 shares of Class A Common Stock at a price to the public of $14.00 per share, of which 7,642,996 shares were issued and sold by us and 571,289 shares were sold by selling stockholders. This included 899,252 shares issued and sold by us and 172,175 shares sold by selling stockholders pursuant to the over-allotment option granted to the underwriters, which was exercised concurrently with the closing of the IPO. The aggregate gross proceeds from the IPO were $115.0 million. Of these proceeds, we received $99.5 million and the selling stockholders received $7.4 million, after deducting $8.1 million in underwriting discounts and commissions. With the proceeds we received, $69.8 million was used to purchase newly issued LLC Units from the LLC, which the LLC then used (i) to pay down all of the amounts owed under the LLC's credit facilities and term loans in the amount of $63.4 million, (ii) to pay Malibu Boats Investor, LLC, an affiliate of the LLC, a fee of $3.8 million in connection with the termination of the LLC's management agreement upon consummation of the IPO, and (iii) for general corporate purposes in the remaining amount of approximately $2.7 million. In connection with the repayment of the LLC's credit facilities and term loans, debt issuance costs associated with the term loans were written off to interest expense. The balance of the net proceeds of approximately $29.8 million was used to purchase units of Malibu Boats Holdings, LLC (the "LLC Units") directly from the existing holders of LLC Units.
We incurred strategic and financial restructuring expenses in connection with the Recapitalization and IPO of approximately $1.2 million through the fiscal third quarter of 2014. We may incur additional strategic and financial restructuring expenses in the fiscal fourth quarter of 2014. In addition, we anticipate future ongoing incremental expenses associated with being a public company to approximate between $2.0 million and $3.0 million on an annual basis, excluding compensation expense related to the long term incentive plan established in connection with the Recapitalization and IPO. Outlook

Although industry-wide retail boat sales remain lower than they were in 2007, prior to the financial crisis, sales volumes expanded during fiscal 2013, and we expect this trend to continue into fiscal 2014. According to Statistical Surveys, Inc., as of December 2013, domestic retail registrations of performance sport boats for 50 reporting states increased 11% over calendar year 2012. This followed domestic performance sport boat registration growth of approximately 13% in 2012 as compared to 2011. As of March 31, 2014, domestic retail registrations of performance sport boats for 22 reporting states increased 12% compared to the same period in 2013 accordingly to Statistical Surveys, Inc. While performance sport boat and overall boat industry sales in the U.S. for the three months ended March 31, 2014 likely have been negatively affected by colder weather in much of the country, we expect the favorable demand environment for our product to continue, with long-term prospects depending on the strength of the broader economic recovery.

Since 2008, we have increased our market share among manufacturers of performance sport boats annually due to new product development, redesigned models, and innovative features. For the 2014 model year which began on July 1, 2013, we redesigned the Wakesetter 23 LSV model and expanded our product offerings, including the introduction of two new models under the Axis brand doubling the number of models offered. In addition, Surf Gate was added as an available feature on our Axis boats. We expect these new and redesigned models and feature offerings, combined with our recognized brand names and dealer base, to position us for further growth within our industry.

As with other boat manufacturers in our industry, we face broader challenges that could impact demand. These include higher interest rates reducing retail consumer appetite for our product, consumer confidence, the availability of credit to our dealers and consumers, fuel costs, the continued acceptance of our new products in the recreational boating market, our ability to compete in the competitive power boating industry, and the costs of labor and certain of our raw materials and key components.
Factors Affecting Our Results of Operations


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We believe that our results of operations and our growth prospects are affected by a number of factors, such as the economic environment and consumer demand for our products, our ability to develop new products and innovate, our product mix, our ability to manage manufacturing costs, sales cycles and inventory levels, the strength of our dealer network and our ability to offer dealer financing and incentives.
Components of Results of Operations
Net Sales
We generate revenue from the sale of boats to our dealers. The substantial majority of our net sales are derived from the sale of boats, including optional features included at the time of the initial wholesale purchase of the boat. Net sales consists of the following:

Gross sales from:

          Boat sales-sales of boats to our dealer network. In addition, nearly
           all of our boat sales include optional feature upgrades purchased by
           the consumer, such as Surf Gate, which increase the average selling
           price of our boats;



          Trailers, parts and accessories sales-sales of boat trailers and
           replacement and aftermarket boat parts and accessories to our dealer
           network and Australian licensee; and



          Royalty income-licensing fees and royalties that we earn as a result
           of our contractual relationship with our Australian licensee, which
           has the exclusive right to manufacture and distribute our products in
           Australia and New Zealand.

Net sales are net of:

          Sales returns-primarily contractual repurchases of boats either
           repossessed by the floor plan financing provider from the dealer or
           returned by the dealer under our warranty program; and



          Rebates, free flooring and discounts-incentives, including rebates and
           free flooring, we provide to our dealers based on sales of eligible
           products. If a dealer meets its annual commitment volume as well as
           other terms of the rebate program, the dealer is entitled to a
           specified rebate. Our dealers that take delivery of current model year
           boats in the offseason, typically July through April, are entitled to
           have us pay the interest to floor the boat until the earlier of (1)
           the sale of the unit or (2) a date near the end of the current model

year, which incentive we refer to as "free flooring."

Cost of Sales
Our cost of sales includes all of the costs to manufacture our products, including raw materials, components, supplies, direct labor and factory overhead. For components and accessories manufactured by third-party vendors, such costs represent the amounts invoiced by the vendors. Shipping costs and depreciation expense related to manufacturing equipment and facilities are also included in cost of sales. Warranty costs associated with the repair or replacement of our boats under warranty are also included in cost of sales. Operating Expenses
Our operating expenses include selling and marketing, and general and administrative costs. Each of these items includes personnel and related expenses, supplies, non-manufacturing overhead, third-party professional fees and various other operating expenses. Further, selling and marketing expenditures include the cost of advertising and various promotional sales incentive programs. General and administrative expenses include, among other things, salaries, benefits and other personnel related expenses for employees engaged in product development, engineering, finance, information technology, human resources and executive management. Other costs include outside legal and accounting fees, investor relations, risk management (insurance) and other administrative costs.
Other Expense, Net
Other expense, net consists of interest expense and other income or expense, net. Interest expense consists of interest charged under our credit agreement, debt issuance costs written off in connection with the pay down of all the amounts owed on the credit facilities and term loan, and settlement of our interest rate swap.


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Income Taxes
Malibu Boats, Inc. is subject to U.S. federal and state income tax in multiple jurisdictions with respect to our allocable share of any net taxable income of the LLC after the IPO on February 5, 2014. The LLC is a pass-through entity for federal purposes but incurs income tax in certain state jurisdictions. The provision for income taxes reflects an estimated effective income tax rate attributable to Malibu Boats, Inc.'s share of income after the completion of the IPO. The Company's provision for income taxes reflects a reported effective tax rate of 0.8%, which differs from the statutory federal income tax rate of 35% primarily due to the impact of the non-controlling interest and state income taxes attributable to the LLC. The Company's effective tax rate also reflects the impact of state taxes and the Company's share of the LLC's permanent items such as stock compensation expense attributable to profits interests and the domestic production activities deduction.
Net Income (Loss) Attributable to Non-controlling Interest In connection with the Recapitalization and IPO, we obtained a 49.3% controlling economic and 100% voting interest in the LLC and, therefore, we consolidate the LLC's operating results for financial statement purposes. Net income
(loss)attributable to non-controlling interest represents the portion of net income (loss) attributable to the LLC members.

Results of Operations
The table below sets forth our results of operations, expressed in thousands
(except unit volume) and as a percentage of net sales, for the periods
presented. Our financial results for these periods are not necessarily
indicative of the financial results that we will achieve in future periods.
Certain totals for the table below will not sum to exactly 100% due to rounding.

                                                           Malibu Boats, Inc. and Subsidiaries
                                  Three Months Ended March 31,                             Nine Months Ended March 31,
                                 2014                        2013                       2014                        2013
                            $         % Revenue         $        % Revenue         $         % Revenue         $         % Revenue
Net sales                 50,293        100.0  %      47,062       100.0  %      137,535       100.0  %      118,039       100.0  %
Cost of sales             36,892         73.4  %      34,561        73.4  %      101,417        73.7  %       88,376        74.9  %
Gross profit              13,401         26.6  %      12,501        26.6  %       36,118        26.3  %       29,663        25.1  %
Operating expenses:
Selling and
marketing                  1,512          3.0  %       1,524         3.2  %        4,454         3.2  %        3,794         3.2  %
General and
administrative            10,299         20.5  %       4,150         8.8  %       15,322        11.1  %       11,302         9.6  %
Amortization               1,294          2.6  %       1,294         2.7  %        3,883         2.8  %        3,883         3.3  %
Operating income             296          0.6  %       5,533        11.8  %       12,459         9.1  %       10,684         9.1  %
Other income
(expense):
Other                          -            -  %           3           -  %            9           -  %            8           -  %
Interest expense          (1,207 )       (2.4 )%        (335 )      (0.7 )%       (2,980 )      (2.2 )%       (1,085 )      (0.9 )%
Other expense, net        (1,207 )       (2.4 )%        (332 )      (0.7 )%       (2,971 )      (2.2 )%       (1,077 )      (0.9 )%
Net (loss) income
before provision
for income taxes            (911 )       (1.8 )%       5,201        11.1  %        9,488         6.9  %        9,607         8.1  %
Provision for
income taxes                  76          0.2  %           -           -  %           76         0.1  %            -           -  %
Net (loss) income           (987 )       (2.0 )%       5,201        11.1  %        9,412         6.8  %        9,607         8.1  %
Non-controlling
interest                    (617 )       (1.2 )%       5,201        11.1  %        9,782         7.1  %        9,607         8.1  %
Net loss
attributable to
Malibu Boats, Inc.          (370 )       (0.7 )%           -           -  %         (370 )      (0.3 )%            -           -  %

Unit Volumes                 788                         766                       2,111                       1,917
Net Sales Price per
Unit                  $       64                   $      61                  $       65                  $       62

Comparison of the Three Months Ended March 31, 2014 to the Three Months Ended March 31, 2013
Net Sales
Our net sales for the three months ended March 31, 2014 were $50.3 million, reflecting an increase of $3.2 million, or 6.9%, compared to the same period in 2013. Unit volume for the three months ended March 31, 2014 was 788 units, a 2.9% increase compared to the same period in 2013. The volume increase in the third quarter of fiscal 2014 was attributable to


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strong, continued consumer demand for our boats, bolstered by the introduction of our new models and features. Net sales price per unit increased approximately 3.9% for the three months ended March 31, 2014 compared to the same period in 2013, primarily because of increased sales prices on new boat models and increased sales of larger boats, including the Wakesetter 23 LSV, remodeled in fiscal year 2014, and Axis A24, introduced early in fiscal year 2014, as well as increased sales of our Surf Gate system, which became available on the Axis brand in July 2013.
Cost of Sales
Our cost of sales increased 6.7% to $36.9 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The increase in cost of sales resulted primarily from the 2.9% increase in unit volume and higher material cost per unit, driven by increased material content per unit. Gross Profit
For the three months ended March 31, 2014, our gross profit increased 7.2% to $13.4 million compared to the same period during 2013. Gross margin increased slightly to 26.6% for the three months ended March 31, 2014 compared to the same period in 2013. The increase in gross profit resulted primarily from increased volumes and higher average selling prices due to options, features, and new boat models.
Operating Expenses
Selling and marketing expense for the three month period ended March 31, 2014 compared to the three months ended March 31, 2013 was slightly lower at $1.5 million due to timing of promotional efforts. General and administrative expense increased $6.1 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, largely attributable to one time charges for the termination of the management agreement, stock compensation charges attributable to the modification of awards granted in 2012, and additional professional fees associated with our Recapitalization and IPO transactions. Other Expense, Net
Interest expense increased $0.9 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. This increase was primarily driven by deferred financing costs written off in connection with the pay down of our term loan as part of the Recapitalization and IPO transactions. Provision for Income Taxes

Malibu Boats, Inc. is subject to U.S. federal and state income tax in multiple jurisdictions with respect to our allocable share of any net taxable income of the LLC after the IPO on February 5, 2014. The LLC is a pass-through entity for federal purposes but incurs income tax in certain state jurisdictions. The provision for income taxes reflects an estimated effective income tax rate attributable to Malibu Boats, Inc.'s share of income after the completion of the IPO. The Company's provision for income taxes was $0.1 million for the three months ended March 31, 2014 reflecting a reported effective tax rate of 0.8%, which differs from the statutory federal income tax rate of 35% primarily due to the impact of the non-controlling interest and state income taxes attributable to the LLC. The Company's effective tax rate also reflects the impact of state taxes and the Company's share of the LLC's permanent items such as stock compensation expense attributable to profits interests and the domestic production activities deduction.
Non-controlling interest
Non-controlling interest represents the ownership interests of the other members of the LLC after the Recapitalization and IPO. The non-controlling interest was 50.7% following the IPO through March 31, 2014. The amount of non-controlling interest is computed by multiplying pre-tax loss during this period by the percentage ownership in the LLC not directly attributable to us, or 50.7%. All of the pre-tax income for the three months ended March 31, 2013 was attributed to the non-controlling interest.
Comparison of the Nine Months Ended March 31, 2014 to the Nine Months Ended March 31, 2013
Net Sales
Our net sales for the nine months ended March 31, 2014 were $137.5 million, reflecting an increase of $19.5 million, or 16.5%, compared to the same period in 2013. Unit volume for the nine months ended March 31, 2014 was 2,111 units, a 10.1% increase compared to the same period in 2013. The volume increase for the nine months ended March 31, 2014 was attributable to strong, continued consumer demand for our boats, bolstered by the introduction of our new models and features. Net sales


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price per unit increased approximately 5.8% for the nine months ended March 31, 2014 compared to the same period in 2013, primarily because of increased sales prices on new boat models and increased sales of larger boats, including the Wakesetter 23 LSV remodeled in fiscal year 2014, and Axis A24, introduced early in fiscal year 2014, as well as increased sales of our Surf Gate system, which became available on the Axis brand during July 2013. Cost of Sales
Our cost of sales increased 14.8% to $101.4 million for the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013. The increase in cost of sales resulted primarily from the 10.1% increase in unit volume and higher material cost per unit.
Gross Profit
For the nine months ended March 31, 2014, our gross profit increased 21.8%, to $36.1 million compared to the same period during 2013. Gross profit, as a percentage of net sales, increased 1.2% to 26.3% for the nine months ended March 31, 2014 compared to the same period in 2013. These increases resulted primarily from production efficiencies on increased volumes, higher average selling prices driven by price increases and increased sales of larger boats and optional features and product cost reduction efforts. Operating Expenses
Selling and marketing expense increased $0.7 million for the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013 primarily because of increased marketing costs associated with increased sales volumes. General and administrative expense increased $4.0 million for the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013, largely attributable to increased headcount and one time charges such as the termination of the management agreement, stock compensation charges attributable to the modification of awards granted in 2012, and additional professional fees associated with the Company's Recapitalization and IPO. In light of the economic downturn, Malibu Boats Investor, LLC agreed to eliminate its management fees for the period from July 1, 2008 through December 31, 2012, in order to preserve our cash. Subsequently, we amended the management agreement to make a management fee payment in the amount of $2.1 million during the nine months ended March 31, 2013.
Other Expense, Net
Interest expense increased $1.9 million for the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013. This increase was driven by deferred financing costs written off in connection with the pay down of our term . . .

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