QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-36290
MALIBU BOATS, INC.
(Exact Name of Registrant as specified in its charter)
Delaware
5075 Kimberly Way, Loudon, Tennessee37774
46-4024640
(State or other jurisdiction of incorporation or organization)
(Address of principal executive offices, including zip code)
(I.R.S. Employer Identification No.)
(865) 458-5478
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, par value $0.01
MBUU
Nasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☑
Class A Common Stock, par value $0.01, outstanding as of April 28, 2023:
20,624,712
shares
Class B Common Stock, par value $0.01, outstanding as of April 28, 2023:
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Form 10-Q are forward-looking statements, including statements regarding demand for our products and expected industry trends, our business strategy and plans, our prospective products or products under development, our vertical integration initiatives, our acquisition strategy; the effects of macroeconomic conditions and the COVID-19 pandemic on us. In particular, many of the statements under the heading “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” constitute forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” the negative of these terms, or by other similar expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. These statements are only predictions, involving known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Such factors include, but are not limited to: general industry, economic and business conditions; our large fixed cost base; increases in the cost of, or unavailability of, raw materials, component parts and transportation costs; disruptions in our suppliers’ operations; our reliance on third-party suppliers for raw materials and components and any interruption of our informal supply arrangements; our reliance on certain suppliers for our engines and outboard motors; our ability to meet our manufacturing workforce needs; exposure to workers' compensation claims and other workplace liabilities; our ability to grow our business through acquisitions and integrate such acquisitions to fully realize their expected benefits; our growth strategy which may require us to secure significant additional capital; our ability to protect our intellectual property; disruptions to our network and information systems; our success at developing and implementing a new enterprise resource planning system; risks inherent in operating in foreign jurisdictions; the effects of the COVID-19 pandemic on us; a natural disaster, global pandemic or other disruption at our manufacturing facilities; increases in income tax rates or changes in income tax laws; our dependence on key personnel; our ability to enhance existing products and market new or enhanced products; the continued strength of our brands; the seasonality of our business; intense competition within our industry; increased consumer preference for used boats or the supply of new boats by competitors in excess of demand; competition with other activities for consumers’ scarce leisure time; changes in currency exchange rates; inflation and increases in interest rates; an increase in energy and fuel costs; our reliance on our network of independent dealers and increasing competition for dealers; the financial health of our dealers and their continued access to financing; our obligation to repurchase inventory of certain dealers; our exposure to claims for product liability and warranty claims; changes to U.S. trade policy, tariffs and import/export regulations; any failure to comply with laws and regulations including environmental, workplace safety and other regulatory requirements; our holding company structure; covenants in our credit agreement governing our revolving credit facility which may limit our operating flexibility; our variable rate indebtedness which subjects us to interest rate risk; our obligation to make certain payments under a tax receivables agreement; and any failure to maintain effective internal control over financial reporting or disclosure controls or procedures. We discuss many of these factors, risks and uncertainties in greater detail under the heading “Item 1A. Risk Factors” in our Form 10-K for the year ended June 30, 2022, filed with the Securities and Exchange Commission on August 25, 2022, as such disclosures may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission, including subsequent annual reports on Form 10-K and quarterly reports on Form 10-Q.
You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Actual results may differ materially from those suggested by the forward-looking statements for various reasons. Except as required by law, we assume no obligation to update forward-looking statements for any reason after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations.
Class A Common Stock, par value $0.01 per share, 100,000,000 shares authorized; 20,624,712 shares issued and outstanding as of March 31, 2023; 20,501,081 issued and outstanding as of June 30, 2022
204
203
Class B Common Stock, par value $0.01 per share, 25,000,000 shares authorized; 12 shares issued and outstanding as of March 31, 2023; 10 shares issued and outstanding as of June 30, 2022
—
—
Preferred Stock, par value $0.01 per share; 25,000,000 shares authorized; no shares issued and outstanding as of March 31, 2023 and June 30, 2022
—
—
Additional paid in capital
84,802
85,294
Accumulated other comprehensive loss
(4,127)
(3,507)
Accumulated earnings
543,117
421,184
Total stockholders' equity attributable to Malibu Boats, Inc.
623,996
503,174
Non-controlling interest
9,275
10,394
Total stockholders’ equity
633,271
513,568
Total liabilities and stockholders' equity
$
882,169
$
851,326
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements (Unaudited).
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per unit and per share data)
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies
Organization
Malibu Boats, Inc. (together with its subsidiaries, the “Company” or "Malibu"), a Delaware corporation formed on November 1, 2013, is the sole managing member of Malibu Boats Holdings, LLC, a Delaware limited liability company (the "LLC"). The Company operates and controls all of the LLC's business and affairs and, therefore, pursuant to Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) Topic 810, Consolidation, consolidates the financial results of the LLC and its subsidiaries, and records a non-controlling interest for the economic interest in the Company held by the non-controlling holders of units in the LLC ("LLC Units"). The LLC was formed in 2006. The LLC, through its wholly owned subsidiary, Malibu Boats, LLC, (“Boats LLC”), is engaged in the design, engineering, manufacturing and marketing of innovative, high-quality, recreational powerboats that are sold through a world-wide network of independent dealers. The Company sells its boats under eight brands -- Malibu, Axis, Pursuit, Maverick, Cobia, Pathfinder, Hewes and Cobalt brands. The Company reports its results of operations under three reportable segments -- Malibu, Saltwater Fishing and Cobalt.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim condensed financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and disclosures of results of operations, financial position and changes in cash flow in conformity with GAAP for complete financial statements. Such statements should be read in conjunction with the audited consolidated financial statements and notes thereto of Malibu and subsidiaries for the year ended June 30, 2022, included in the Company's Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Units and shares are presented as whole numbers while all dollar amounts are presented in thousands, unless otherwise noted.
Principles of Consolidation
The accompanying unaudited interim condensed consolidated financial statements include the operations and accounts of the Company and all subsidiaries thereof. All intercompany balances and transactions have been eliminated upon consolidation.
Recent Accounting Pronouncements
In March 2020, the FASB issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting, which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The elective amendments provide expedients to contract modification, affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by this guidance apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. Per ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, this guidance is not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2024. The guidance can be applied immediately through December 31, 2024. The Company will adopt this standard when LIBOR is discontinued and does not expect a material impact to its financial condition, results of operations or disclosures based on the current debt portfolio and capital structure.
There are no other new accounting pronouncements that are expected to have a significant impact on the Company's consolidated financial statements and related disclosures.
The following tables disaggregate the Company's revenue by major product type and geography:
Three Months Ended March 31, 2023
Nine Months Ended March 31, 2023
Malibu
Saltwater Fishing
Cobalt
Consolidated
Malibu
Saltwater Fishing
Cobalt
Consolidated
Revenue by product:
Boat and trailer sales
$
167,979
$
122,058
$
79,246
$
369,283
$
463,153
$
319,314
$
216,706
$
999,173
Part and other sales
4,592
603
641
5,836
12,752
1,165
2,972
16,889
Net Sales
$
172,571
$
122,661
$
79,887
$
375,119
$
475,905
$
320,479
$
219,678
$
1,016,062
Revenue by geography:
North America
$
158,676
$
120,541
$
77,148
$
356,365
$
430,250
$
313,636
$
211,415
$
955,301
International
13,895
2,120
2,739
18,754
45,655
6,843
8,263
60,761
Net Sales
$
172,571
$
122,661
$
79,887
$
375,119
$
475,905
$
320,479
$
219,678
$
1,016,062
Three Months Ended March 31, 2022
Nine Months Ended March 31, 2022
Malibu
Saltwater Fishing
Cobalt
Consolidated
Malibu
Saltwater Fishing
Cobalt
Consolidated
Revenue by product:
Boat and trailer sales
$
174,377
$
93,435
$
71,213
$
339,025
$
418,339
$
244,856
$
183,713
$
846,908
Part and other sales
4,443
224
595
5,262
12,186
771
1,806
14,763
Net Sales
$
178,820
$
93,659
$
71,808
$
344,287
$
430,525
$
245,627
$
185,519
$
861,671
Revenue by geography:
North America
$
165,499
$
93,004
$
70,172
$
328,675
$
383,991
$
240,919
$
176,612
$
801,522
International
13,321
655
1,636
15,612
46,534
4,708
8,907
60,149
Net Sales
$
178,820
$
93,659
$
71,808
$
344,287
$
430,525
$
245,627
$
185,519
$
861,671
Boat and Trailer Sales
Consists of sales of boats and trailers to the Company's dealer network, net of sales returns, discounts, rebates and free flooring incentives. Boat and trailer sales also includes optional boat features. Sales returns consist of boats returned by dealers under the Company's warranty program. Rebates, free flooring and discounts are incentives that the Company provides to its dealers based on sales of eligible products.
Part and Other Sales
Consists primarily of parts and accessories sales, royalty income and clothing sales. Parts and accessories sales include replacement and aftermarket boat parts and accessories sold to the Company's dealer network. Royalty income is earned from license agreements with various boat manufacturers, including Nautique, Chaparral, Mastercraft, and Tige related to the use of the Company's intellectual property.
3. Non-controlling Interest
The non-controlling interest on the unaudited interim condensed consolidated statements of operations and comprehensive income represents the portion of earnings or loss attributable to the economic interest in the Company's subsidiary, the LLC, held by the non-controlling LLC Unit holders. Non-controlling interest on the unaudited interim condensed consolidated balance sheets represents the portion of net assets of the Company attributable to the non-controlling LLC Unit holders, based
on the portion of the LLC Units owned by such Unit holders. The ownership of the LLC is summarized as follows:
As of March 31, 2023
As of June 30, 2022
Units
Ownership %
Units
Ownership %
Non-controlling LLC Unit holders ownership in Malibu Boats Holdings, LLC
455,919
2.2
%
600,919
2.8
%
Malibu Boats, Inc. ownership in Malibu Boats Holdings, LLC
20,624,712
97.8
%
20,501,081
97.2
%
21,080,631
100.0
%
21,102,000
100.0
%
Issuance of Additional LLC Units
Under the first amended and restated limited liability company agreement of the LLC, as amended (the "LLC Agreement"), the Company is required to cause the LLC to issue additional LLC Units to the Company when the Company issues additional shares of Class A Common Stock. Other than in connection with the issuance of Class A Common Stock in connection with an equity incentive program, the Company must contribute to the LLC net proceeds and property, if any, received by the Company with respect to the issuance of such additional shares of Class A Common Stock. The Company must cause the LLC to issue a number of LLC Units equal to the number of shares of Class A Common Stock issued such that, at all times, the number of LLC Units held by the Company equals the number of outstanding shares of Class A Common Stock. During the nine months ended March 31, 2023, the Company caused the LLC to issue a total of 309,394 LLC Units to the Company in connection with (i) the Company's issuance of Class A Common Stock to a non-employee director for her services, (ii) the issuance of Class A Common Stock for the vesting of awards granted under the Malibu Boats, Inc. Long-Term Incentive Plan (the "Incentive Plan") and (iii) the issuance of restricted Class A Common Stock granted under the Incentive Plan, (iv) the issuance of Class A Common Stock to LLC Unit holders in exchange of their LLC Units and (v) the issuance of Class A Common Stock for the exercise of options granted under the Incentive Plan. During the nine months ended March 31, 2023, 38,598 LLC Units were canceled in connection with the vesting of share-based equity awards to satisfy employee tax withholding requirements, 3,406 LLC Units were canceled in connection with the vesting of stock awards with a market condition that were deemed to not be achieved and the retirement of 42,004 treasury shares in accordance with the LLC Agreement. Also during the nine months ended March 31, 2023, 143,759 LLC Units were redeemed and canceled by the LLC in connection with the purchase and retirement of 143,759 treasury shares under the Company'sstock repurchase program that expired on November 8, 2022.
Distributions and Other Payments to Non-controlling Unit Holders
Distributions for Taxes
As a limited liability company (treated as a partnership for income tax purposes), the LLC does not incur significant federal, state or local income taxes, as these taxes are primarily the obligations of its members. As authorized by the LLC Agreement, the LLC is required to distribute cash, to the extent that the LLC has cash available, on a pro rata basis, to its members to the extent necessary to cover the members’ tax liabilities, if any, with respect to their share of LLC earnings. The LLC makes such tax distributions to its members based on an estimated tax rate and projections of taxable income. If the actual taxable income of the LLC multiplied by the estimated tax rate exceeds the tax distributions made in a calendar year, the LLC may make true-up distributions to its members, if cash or borrowings are available for such purposes. As of March 31, 2023 and June 30, 2022, tax distributions payable to non-controlling LLC Unit holders were $971 and $1,045, respectively. During the nine months ended March 31, 2023 and 2022, tax distributions paid to the non-controlling LLC Unit holders were $2,429 and $1,697, respectively.
Other Distributions
Pursuant to the LLC Agreement, the Company has the right to determine when distributions will be made to LLC members and the amount of any such distributions. If the Company authorizes a distribution, such distribution will be made to the members of the LLC (including the Company) pro rata in accordance with the percentages of their respective LLC Units.
Property, plant and equipment, net consisted of the following:
As of March 31, 2023
As of June 30, 2022
Land
$
4,905
$
4,905
Building and leasehold improvements
98,983
81,030
Machinery and equipment
91,792
82,469
Furniture and fixtures
11,846
10,805
Construction in process
68,112
52,852
275,638
232,061
Less: Accumulated depreciation
(77,201)
(61,343)
Property, plant and equipment, net
$
198,437
$
170,718
Depreciation expense was $5,463 and $4,848 for the three months ended March 31, 2023 and 2022, respectively, and $16,147 and $14,379 for the nine months ended March 31, 2023 and 2022, respectively, substantially all of which was recorded in cost of sales.
Changes in the carrying amount of goodwill for the nine months ended March 31, 2023 were as follows:
Malibu
Saltwater Fishing
Cobalt
Consolidated
Goodwill as of June 30, 2022
$
12,299
$
68,714
$
19,791
$
100,804
Effect of foreign currency changes on goodwill
(174)
—
—
(174)
Goodwill as of March 31, 2023
$
12,125
$
68,714
$
19,791
$
100,630
The components of other intangible assets were as follows:
As of March 31, 2023
As of June 30, 2022
Estimated Useful Life (in years)
Weighted-Average Remaining Useful Life (in years)
Definite-lived intangibles:
Dealer relationships
$
131,744
$
131,806
15-20
15.9
Patent
2,600
2,600
15
9.3
Trade name
100
100
15
7.2
Non-compete agreement
47
48
10
1.6
Total
134,491
134,554
Less: Accumulated amortization
(29,528)
(24,450)
Total definite-lived intangible assets, net
104,963
110,104
Indefinite-lived intangible:
Trade name
118,200
118,200
Total other intangible assets, net
$
223,163
$
228,304
Amortization expense recognized on all amortizable intangibles was $1,680 and $1,682 for the three months ended March 31, 2023 and 2022, respectively, and $5,111 and $5,257 for the nine months ended March 31, 2023 and 2022, respectively.
The estimated future amortization of definite-lived intangible assets is as follows:
Malibu and Axis brand boats have a limited warranty for a period up to five years. Cobalt brand boats have (1) a structural warranty of up to ten years which covers the hull, deck joints, bulkheads, floor, transom, stringers, and motor mount and (2) a five year bow-to-stern warranty on all components manufactured or purchased (excluding hull and deck structural components), including canvas and upholstery. Gelcoat is covered up to three years for Cobalt and one year for Malibu and Axis. Pursuit brand boats have (1) a limited warranty for a period of up to five years on structural components such as the hull, deck and defects in the gelcoat surface of the hull bottom and (2) a bow-to-stern warranty of two years (excluding hull and deck structural components). Maverick, Pathfinder and Hewes brand boats have (1) a limited warranty for a period of up to five years on structural components such as the hull, deck and defects in the gelcoat surface of the hull bottom and (2) a bow-to-stern warranty of one year (excluding hull and deck structural components). Cobia brand boats have (1) a limited warranty for a period of up to ten years on structural components such as the hull, deck and defects in the gelcoat surface of the hull bottom and (2) a bow-to-stern warranty of three years (excluding hull and deck structural components). For each boat brand, there are certain materials, components or parts of the boat that are not covered by the Company’s warranty and certain components or parts that are separately warranted by the manufacturer or supplier (such as the engine). Engines that the Company manufactures for Malibu and Axis models have a limited warranty of up to five years or five-hundred hours.
The Company’s standard warranties require it or its dealers to repair or replace defective products during the warranty period at no cost to the consumer. The Company estimates warranty costs it expects to incur and records a liability for such costs at the time the product revenue is recognized. The Company utilizes historical claims trends and analytical tools to develop the estimate of its warranty obligation on a per boat basis, by brand and warranty year. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. The Company assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Beginning in model year 2016, the Company increased the term of its limited warranty for Malibu brand boats from three years to five years and for Axis brand boats from two years to five years. Beginning in model year 2018, the Company increased the term of its bow-to-stern warranty for Cobalt brand boats from three years to five years. As a result of these changes, all of the Company’s Malibu, Axis and Cobalt brand boats with historical claims experience that are no longer covered under warranty had warranty terms shorter than the current warranty term of five years. Accordingly, the Company has limited historical claims experience for warranty years four and five, and as such, these estimates give rise to a higher level of estimation uncertainty. Future warranty claims may differ from the Company’s estimate of the warranty liability, which could lead to changes in the Company’s warranty liability in future periods.
Changes in the Company’s product warranty liability, which is included in accrued expenses on the unaudited interim condensed consolidated balance sheets, were as follows:
Three Months Ended March 31,
Nine Months Ended March 31,
2023
2022
2023
2022
Beginning balance
$
40,513
$
36,396
$
38,673
$
35,035
Add: Warranty expense
5,893
5,472
18,980
15,180
Less: Warranty claims paid
(5,386)
(4,176)
(16,633)
(12,523)
Ending balance
$
41,020
$
37,692
$
41,020
$
37,692
9. Financing
Outstanding debt consisted of the following:
As of March 31, 2023
As of June 30, 2022
Term loans
$
—
$
23,125
Revolving credit loan
21,700
97,000
Less unamortized debt issuance costs
(1,440)
(508)
Total debt
20,260
119,617
Less current maturities
—
1,563
Long-term debt less current maturities
$
20,260
$
118,054
Long-Term Debt
As of March 31, 2023, the Company had a revolving credit facility with borrowing capacity of up to $350,000. As of March 31, 2023, the Company had $21,700 outstanding under its revolving credit facility and $1,529 in outstanding letters of credit, with $326,771 available for borrowing. The revolving credit facility matures on July 8, 2027.
On July 8, 2022, Boats LLC entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”) that amended and restated its second amended and restated credit agreement dated as of June 28, 2017 (the “Prior Credit Agreement”). The Credit Agreement increased the borrowing capacity of the revolving credit facility from $170,000 to $350,000. Boats LLC has the option to request that lenders increase the amount available under the revolving credit facility by, or obtain incremental term loans of, up to $200,000, subject to the terms of the Credit Agreement and only if existing or new lenders choose to provide additional term or revolving commitments.
The obligations of Boats LLC under the Credit Agreement are guaranteed by the LLC, and, subject to certain exceptions, the present and future domestic subsidiaries of Boats LLC, and all such obligations are secured by substantially all of the assets of the LLC, Boats LLC and such subsidiary guarantors. Malibu Boats, Inc. is not a party to the Credit Agreement.
Borrowings under the Credit Agreement bear interest at a rate equal to either, at the Company's option, (i) the highest of the prime rate, the Federal Funds Rate (as defined in the Credit Agreement) plus 0.5%, or one-month Term SOFR (as defined in the Credit Agreement) plus 1% (the “Base Rate”) or (ii) SOFR (as defined in the Credit Agreement), in each case plus an applicable margin ranging from 1.25% to 2.00% with respect to SOFR borrowings and 0.25% to 1.00% with respect to Base Rate borrowings. The applicable margin will be based upon the consolidated leverage ratio of the LLC and its subsidiaries. As of March 31, 2023, the interest rate on the Company’s term loans and revolving credit facility was 6.12%. The Company is required to pay a commitment fee for any unused portion of the revolving credit facility which will range from 0.15% to 0.30% per annum, depending on the LLC’s and its subsidiaries’ consolidated leverage ratio.
The Credit Agreement contains certain customary representations and warranties, and notice requirements for the occurrence of specific events such as the occurrence of any event of default or pending or threatened litigation. The Credit Agreement also requires compliance with certain customary financial covenants consisting of a minimum ratio of EBITDA to interest expense and a maximum ratio of total debt to EBITDA. The Credit Agreement contains certain customary restrictive covenants regarding indebtedness, liens, fundamental changes, investments, dividends and distributions, disposition of assets, transactions with affiliates, negative pledges, hedging transactions, certain prepayments of indebtedness, accounting changes
and governmental regulation. For example, the Credit Agreement generally prohibits the LLC, Boats LLC and the subsidiary guarantors from paying dividends or making distributions, including to the Company. The credit facility permits, however, (i) distributions based on a member’s allocated taxable income, (ii) distributions to fund payments that are required under the LLC’s tax receivable agreement, (iii) purchase of stock or stock options of the LLC from former officers, directors or employees of loan parties or payments pursuant to stock option and other benefit plans up to $5,000 in any fiscal year, and (iv) repurchases of the Company's outstanding stock and LLC Units. In addition, the LLC may make unlimited dividends and distributions if its consolidated leverage ratio is 2.75 or less and certain other conditions are met, subject to compliance with certain financial covenants.
The Credit Agreement also contains customary events of default. If an event of default has occurred and continues beyond any applicable cure period, the administrative agent may (i) accelerate all outstanding obligations under the Credit Agreement or (ii) terminate the commitments, amongst other remedies. Additionally, the lenders are not obligated to fund any new borrowing under the Credit Agreement while an event of default is continuing.
Covenant Compliance
As of March 31, 2023, the Company was in compliance with the financial covenants contained in the Credit Agreement.
10. Leases
The Company leases certain manufacturing facilities, warehouses, office space, land, and equipment. The Company determines if a contract is a lease or contains an embedded lease at the inception of the agreement. Leases with an initial term of 12 months or less are not recorded on the unaudited interim condensed consolidated balance sheets. The Company does not separate non-lease components from the lease components to which they relate, and instead accounts for each separate lease and non-lease component associated with that lease component as a single lease component for all underlying asset classes. The Company's lease liabilities do not include future lease payments related to options to extend or terminate lease agreements as it is not reasonably certain those options will be exercised.
Other information concerning the Company's operating leases accounted for under ASC Topic 842, Leases is as follows:
Classification
As of March 31, 2023
As of June 30, 2022
Assets
Right-of-use assets
Other assets
$
9,311
$
10,659
Liabilities
Current operating lease liabilities
Accrued expenses
$
2,314
$
2,121
Long-term operating lease liabilities
Other liabilities
8,432
10,062
Total lease liabilities
$
10,746
$
12,183
Classification
Three Months Ended March 31, 2023
Three Months Ended March 31, 2022
Nine Months Ended March 31, 2023
Nine Months Ended March 31, 2022
Operating lease costs (1)
Cost of sales
$
697
$
690
$
2,010
$
1,953
Selling and marketing, and general and administrative
212
214
668
645
Sublease income
Other expense (income), net
10
10
29
29
Cash paid for amounts included in the measurement of operating lease liabilities
Cash flows from operating activities
641
631
1,886
1,890
(1)Includes short-term leases, which are insignificant, and are not included in the lease liability.
The lease liability for operating leases that contain variable escalating rental payments with scheduled increases that are based on the lesser of a stated percentage increase or the cumulative increase in an index, are determined using the stated percentage increase.
The weighted-average remaining lease term as of March 31, 2023 and 2022 was 4.80 years and 5.74 years, respectively. As of March 31, 2023 and 2022, the weighted-average discount rate determined based on the Company's incremental borrowing rate is 3.67% and 3.63%, respectively.
Future annual minimum lease payments for the following fiscal years as of March 31, 2023 are as follows:
Amount
Remainder of 2023
$
670
2024
2,652
2025
2,347
2026
2,255
2027
2,255
2028 and thereafter
1,505
Total
11,684
Less: imputed interest
(938)
Present value of lease liabilities
$
10,746
11. Tax Receivable Agreement Liability
The Company has a Tax Receivable Agreement with the pre-IPO owners of the LLC that provides for the payment by the Company to the pre-IPO owners (or their permitted assignees) of 85% of the amount of the benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis and (ii) certain other tax benefits related to the Company entering into the Tax Receivable Agreement, including those attributable to payments under the Tax Receivable Agreement. These contractual payment obligations are obligations of the Company and not of the LLC. The Company's Tax Receivable Agreement liability was determined on an undiscounted basis in accordance with ASC 450, Contingencies, since the contractual payment obligations were deemed to be probable and reasonably estimable.
For purposes of the Tax Receivable Agreement, the benefit deemed realized by the Company is computed by comparing the actual income tax liability of the Company (calculated with certain assumptions) to the amount of such taxes that the Company would have been required to pay had there been no increase to the tax basis of the assets of the LLC as a result of the purchases or exchanges, and had the Company not entered into the Tax Receivable Agreement.
The following table reflects the changes to the Company's tax receivable agreement liability:
As of March 31, 2023
As of June 30, 2022
Beginning fiscal year balance
$
45,541
$
48,214
Additions (reductions) to tax receivable agreement:
Exchange of LLC Units for Class A Common Stock
1,717
—
Adjustment for change in estimated tax rate
—
1,025
Payments under tax receivable agreement
—
(3,698)
47,258
45,541
Less: current portion under tax receivable agreement
(3,958)
(3,958)
Ending balance
$
43,300
$
41,583
The Tax Receivable Agreement further provides that, upon certain mergers, asset sales or other forms of business combinations or other changes of control, the Company (or its successor) would owe to the pre-IPO owners of the LLC a lump-sum payment equal to the present value of all forecasted future payments that would have otherwise been made under the Tax Receivable Agreement that would be based on certain assumptions, including a deemed exchange of LLC Units and that the Company would have sufficient taxable income to fully utilize the deductions arising from the increased tax basis and other tax benefits related to entering into the Tax Receivable Agreement. The Company also is entitled to terminate the Tax Receivable Agreement, which, if terminated, would obligate the Company to make early termination payments to the pre-IPO owners of
the LLC. In addition, a pre-IPO owner may elect to unilaterally terminate the Tax Receivable Agreement with respect to such pre-IPO owner, which would obligate the Company to pay to such existing owner certain payments for tax benefits received through the taxable year of the election.
When estimating the expected tax rate to use in order to determine the tax benefit expected to be recognized from the Company’s increased tax basis as a result of exchanges of LLC Units by the pre-IPO owners of the LLC, the Company continuously monitors changes in its overall tax posture, including changes resulting from new legislation and changes as a result of new jurisdictions in which the Company is subject to tax.
As of March 31, 2023 and June 30, 2022, the Company recorded deferred tax assets of $118,534 and $115,952, respectively, associated with basis differences in assets upon acquiring an interest in the LLC and pursuant to making an election under Section 754 of the Internal Revenue Code of 1986 (the "Internal Revenue Code"), as amended. The aggregate Tax Receivable Agreement liability represents 85% of the tax benefits that the Company expects to receive in connection with the Section 754 election. In accordance with the Tax Receivable Agreement, the next annual payment is anticipated approximately 75 days after filing the federal tax return, which was filed on March 15, 2023.
12. Income Taxes
The Company is taxed as a C corporation for U.S. income tax purposes and is therefore subject to both federal and state taxation at a corporate level. The LLC continues to operate in the United States as a partnership for U.S. federal income tax purposes. Maverick Boat Group is separately subject to U.S. federal and state income tax with respect to its net taxable income.
Income taxes are computed in accordance with ASC Topic 740, Income Taxes, and reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, such deferred tax assets will be adjusted through the Company’s provision for income taxes in the period in which this determination is made.
As of March 31, 2023 and June 30, 2022, the Company maintained a total valuation allowance of $16,591 and $15,663, respectively, against deferred tax assets related to state net operating losses and future amortization deductions (with respect to the Section 754 election) that are reported in the Tennessee corporate tax return without offsetting income, which is taxable at the LLC. These also include a valuation allowance in the amount of $580 related to foreign tax credit carryforward that is not expected to be utilized in the future.
The Company’s consolidated interim effective tax rate is based upon expected annual income from operations, statutory tax rates and tax laws in the various jurisdictions in which the Company operates. Significant or unusual items, including those related to the change in U.S. tax law as well as other adjustments to accruals for tax uncertainties, are recognized in the quarter in which the related event occurs. On August 16, 2022, the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) was signed into law. The Inflation Reduction Act contains significant business tax provisions, including an excise tax on stock buybacks (1% for transactions beginning January 1, 2023), increased funding for IRS tax enforcement, expanded energy incentives promoting clean energy investment, and a 15% corporate minimum tax on certain large corporations. The effects of the new legislation are recognized upon enactment. The Company did not recognize any significant impact to income tax expense for the nine months ended March 31, 2023 relating to the Inflation Reduction Act.
For the three months ended March 31, 2023 and 2022, the Company's effective tax rate was 23.3% and 22.7%, respectively. For the nine months ended March 31, 2023 and 2022, the Company's effective tax rate was 23.4% and 22.3%, respectively. For the three and nine months ended March 31, 2023 and 2022, the Company's effective tax rate exceeded the statutory federal income tax rate of 21% primarily due to the impact of U.S. state taxes. In both periods, the increase in the effective tax rate over the statutory federal income tax rate was partially offset by a windfall benefit generated by certain stock-based compensation, the benefits from the foreign derived intangible income deduction, the research and development tax credit, and the impact of non-controlling interests in the LLC.
13. Stock-Based Compensation
The Company adopted a long term incentive plan which became effective on January 1, 2014, and reserves for issuance up to 1,700,000 shares of Malibu Boats, Inc. Class A Common Stock for the Company’s employees, consultants, members of its board of directors and other independent contractors at the discretion of the compensation committee. Incentive stock awards authorized under the Incentive Plan include unrestricted shares of Class A Common Stock, stock options, stock appreciation
rights, restricted stock, restricted stock units, dividend equivalent awards and performance awards. As of March 31, 2023, 339,841 shares remain available for future issuance under the long term incentive plan.
On November 3, 2022, under the Incentive Plan, the Company granted approximately 61,000 restricted service based stock units and 35,000 restricted service based stock awards to key employees under the Incentive Plan. The grant date fair value of these awards was $5,028 based on a stock price of $52.25 per share on the date of grant. Approximately 64% of the awards vest ratably over three years and approximately 36% of the awards vest ratably over four years. Stock-based compensation expense attributable to the service based units and awards is amortized on a straight-line basis over the requisite service period.
On November 3, 2022, under the Incentive Plan, the Company granted to key employees a target amount of approximately 26,000 restricted stock awards with a performance condition. The number of shares that will ultimately be issued, if any, is based on the attainment of a specified amount of earnings during the fiscal year ending June 30, 2025. The maximum number of shares that can be issued if an elevated earnings target is met is approximately 40,000. The grant date fair value of the awards were estimated to be $1,380, based on a stock price of $52.25. Compensation costs associated with the performance awards are recognized over the requisite service period based on probability of achievement in accordance with ASC Topic 718, Compensation—Stock Compensation.
On November 3, 2022, under the Incentive Plan, the Company granted to key employees a target amount of approximately 26,000 stock awards with a market condition. The number of shares that will ultimately be issued, if any, is based on a total shareholder return ("TSR") computation that involves comparing the movement in the Company's stock price to movement in a market index from the grant date through November 3, 2025. The maximum number of shares that can be issued if an elevated TSR target is met is approximately 53,000. The grant date fair value of the awards were estimated to be $1,808, which is estimated using a Monte Carlo simulation. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair market value for the stock award. Compensation costs are recognized over the requisite service period based on probability of achievement in accordance with ASC Topic 718, Compensation—Stock Compensation.
The following is a summary of the changes in the Company's stock options for the nine months ended March 31, 2023:
Shares
Weighted-Average Exercise Price/Share
Total outstanding options as of June 30, 2022
49,223
$
40.46
Options granted
—
—
Options exercised
(3,125)
42.13
Outstanding options as of March 31, 2023
46,098
40.34
Exercisable as of March 31, 2023
46,098
$
40.34
The following is a summary of the changes in non-vested restricted stock units and restricted stock awards for the nine months ended March 31, 2023:
Number of Restricted Stock Units and Restricted Stock Awards Outstanding
Weighted-Average Grant Date Fair Value
Total Non-vested Restricted Stock Units and Restricted Stock Awards as of June 30, 2022
369,649
$
55.75
Granted
212,217
52.26
Vested
(165,615)
45.92
Forfeited
(19,326)
59.61
Total Non-vested Restricted Stock Units and Restricted Stock Awards as of March 31, 2023
396,925
$
57.80
Stock-based compensation expense attributable to the Company's share-based equity awards was $1,751 and $1,691 for the three months ended March 31, 2023 and 2022, respectively, and $5,402 and $4,547 for the nine months ended March 31, 2023 and 2022, respectively. Stock-based compensation expense attributed to share-based equity awards issued under the Incentive Plan is recognized on a straight-line basis over the terms of the respective awards and is included in general and administrative expense in the Company's unaudited interim condensed consolidated statements of operations and comprehensive income.
Awards vesting during the three and nine months ended March 31, 2023 include 1,271 and 18,688 fully vested restricted stock units issued to non-employee directors for their service as directors for the Company.
14. Net Earnings Per Share
Basic net income per share of Class A Common Stock is computed by dividing net income attributable to the Company's earnings by the weighted-average number of shares of Class A Common Stock outstanding during the period. The weighted-average number of shares of Class A Common Stock outstanding used in computing basic net income per share includes fully vested restricted stock units awarded to directors that are entitled to participate in distributions to common stockholders through receipt of additional units of equivalent value to the dividends paid to Class A Common Stock holders.
Diluted net income per share of Class A Common Stock is computed similarly to basic net income per share except the weighted-average shares outstanding are increased to include additional shares from the assumed exercise of any common stock equivalents using the treasury method, if dilutive. The Company's LLC Units and non-qualified stock options are considered common stock equivalents for this purpose. The number of additional shares of Class A Common Stock related to these common stock equivalents and stock options are calculated using the treasury stock method.
Stock awards with a performance condition that are based on the attainment of a specified amount of earnings are only included in the computation of diluted earnings per share to the extent that the performance condition would be achieved based on the current amount of earnings, and only if the effect would be dilutive.
Stock awards with a market condition that are based on the performance of the Company's stock price in relation to a market index over a specified time period are only included in the computation of diluted earnings per share to the extent that the shares would be issued based on the current market price of the Company's stock in relation to the market index, and only if the effect would be dilutive.
Basic and diluted net income per share of Class A Common Stock has been computed as follows (in thousands, except share and per share amounts):
Three Months Ended March 31,
Nine Months Ended March 31,
2023
2022
2023
2022
Basic:
Net income attributable to Malibu Boats, Inc.
$
51,888
$
52,878
$
121,933
$
109,713
Shares used in computing basic net income per share:
Weighted-average Class A Common Stock
20,272,141
20,535,856
20,212,076
20,607,085
Weighted-average participating restricted stock units convertible into Class A Common Stock
261,508
241,656
253,458
235,955
Basic weighted-average shares outstanding
20,533,649
20,777,512
20,465,534
20,843,040
Basic net income per share
$
2.53
$
2.54
$
5.96
$
5.26
Diluted:
Net income attributable to Malibu Boats, Inc.
$
51,888
$
52,878
$
121,933
$
109,713
Shares used in computing diluted net income per share:
Basic weighted-average shares outstanding
20,533,649
20,777,512
20,465,534
20,843,040
Restricted stock units granted to employees
63,544
80,475
68,064
114,746
Stock options granted to employees
14,714
57,836
13,790
72,666
Market performance awards granted to employees
67,724
67,050
61,580
67,050
Diluted weighted-average shares outstanding 1
20,679,631
20,982,873
20,608,968
21,097,502
Diluted net income per share
$
2.51
$
2.51
$
5.92
$
5.20
1 The Company excluded (i) 494,972 and 660,113 potentially dilutive shares from the calculation of diluted net income per share for the three months ended March 31, 2023 and 2022, respectively, and (ii) 531,519 and 660,113 potentially dilutive shares from the calculation of diluted net income per share for the nine months ended March 31, 2023 and 2022, respectively.
The shares of Class B Common Stock do not share in the earnings or losses of Malibu Boats, Inc. and are therefore not included in the calculation. Accordingly, basic and diluted net income per share of Class B Common Stock have not been presented.
15. Commitments and Contingencies
Repurchase Commitments
In connection with its dealers’ wholesale floor plan financing of boats, the Company has entered into repurchase agreements with various lending institutions. The reserve methodology used to record an estimated expense and loss reserve in each accounting period is based upon an analysis of likely repurchases based on current field inventory and likelihood of repurchase. Subsequent to the inception of the repurchase commitment, the Company evaluates the likelihood of repurchase and adjusts the estimated loss reserve accordingly. When a potential loss reserve is recorded, it is presented in accrued liabilities in the accompanying unaudited interim condensed consolidated balance sheets. If the Company were obligated to repurchase a significant number of units under any repurchase agreement, its business, operating results and financial condition could be adversely affected. The total amount financed under the floor financing programs with repurchase obligations was $467,994 and $183,953 as of March 31, 2023 and June 30, 2022, respectively.
Repurchases and subsequent sales are recorded as a revenue transaction. The net difference between the repurchase price and the resale price is recorded against the loss reserve and presented in cost of sales in the accompanying unaudited interim condensed consolidated statements of operations and comprehensive income. During the three and nine months ended March 31, 2023 and 2022, there were no repurchases and as of March 31, 2023, the Company has not been notified about any probable repossessions. Therefore, the Company did not carry a reserve for repurchases as of March 31, 2023 consistent with June 30, 2022.
The Company has collateralized receivables financing arrangements with a third-party floor plan financing provider for
European dealers. Under terms of these arrangements, the Company transfers the right to collect a trade receivable to the financing provider in exchange for cash but agrees to repurchase the receivable if the dealer defaults. Since the transfer of the receivable to the financing provider does not meet the conditions for a sale under ASC Topic 860, Transfers and Servicing, the Company continues to report the transferred trade receivable in other current assets with an offsetting balance recorded as a secured obligation in accrued expenses in the Company's unaudited interim condensed consolidated balance sheets. As of March 31, 2023 and June 30, 2022, the Company had no financing receivables recorded in other current assets and accrued expenses related to these arrangements.
Roane County Property Purchase
On March 28, 2023, we entered into a Purchase and Sale Agreement (the “Purchase Agreement”) to purchase certain real property, improvements and other assets from the seller for a cash purchase price of approximately $33,300. As of March 31, 2023, we have deposited approximately $7,800 in escrow pursuant to the Purchase Agreement. The approximately $25,500 balance of the purchase price is due upon the closing of the transaction. The transaction is expected to close in the first quarter of fiscal year 2024.
Contingencies
Product Liability
The Company is engaged in a business that exposes it to claims for product liability and warranty claims in the event the Company’s products actually or allegedly fail to perform as expected or the use of the Company’s products results, or is alleged to result, in property damage, personal injury or death. Although the Company maintains product and general liability insurance of the types and in the amounts that the Company believes are customary for the industry, the Company is not fully insured against all such potential claims. The Company may have the ability to refer claims to its suppliers and their insurers to pay the costs associated with any claims arising from the suppliers’ products. The Company’s insurance covers such claims that are not adequately covered by a supplier’s insurance and provides for excess secondary coverage above the limits provided by the Company’s suppliers.
The Company may experience legal claims in excess of its insurance coverage or claims that are not covered by insurance, either of which could adversely affect its business, financial condition and results of operations. Adverse determination of material product liability and warranty claims made against the Company could have a material adverse effect on its financial condition and harm its reputation. In addition, if any of the Company's products are, or are alleged to be, defective, the Company may be required to participate in a recall of that product if the defect or alleged defect relates to safety. These and other claims that the Company faces could be costly to the Company and require substantial management attention. Refer to Note 8 for discussion of warranty claims. The Company insures against product liability claims and except as disclosed below, believes there are no product liability claims as of March 31, 2023 that will have a material adverse impact on the Company’s results of operations, financial condition or cash flows.
Litigation
Certain conditions may exist which could result in a loss, but which will only be resolved when future events occur. The Company, in consultation with its legal counsel, assesses such contingent liabilities, and such assessments inherently involve an exercise of judgment. If the assessment of a contingency indicates that it is probable that a loss has been incurred, the Company accrues for such contingent loss when it can be reasonably estimated. If the assessment indicates that a potentially material loss contingency is not probable but reasonably estimable, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. If the assessment of a contingency deemed to be both probable and reasonably estimable involves a range of possible losses, the amount within the range that appears at the time to be a better estimate than any other amount within the range would be accrued. When no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued even though the minimum amount in the range is not necessarily the amount of loss that will be ultimately determined. Estimates of potential legal fees and other directly related costs associated with contingencies are not accrued but rather are expensed as incurred. Except as disclosed below, management does not believe there are any pending claims (asserted or unasserted) as of March 31, 2023 that would have a material adverse impact on the Company's results of operations, financial condition or cash flows.
Legal Proceedings
Batchelder Matters
The Company and its indirect subsidiary Boats LLC are defendants in the product liability case Batchelder et al. v. Malibu Boats, LLC, f/k/a Malibu Boats, Inc.; Malibu Boats West, Inc., et. al., Superior Court of Rabun County, Georgia, Civil Action
Case No. 2016-CV-0114-C (the "Batchelder I Matter"), brought by, among others, Stephan Paul Batchelder and Margaret Mary Batchelder as Administrators of the Estate of Ryan Paul Batchelder, deceased (“Batchelder I Plaintiffs”). The Batchelder I Plaintiffs also sued the manufacturer of the boat at issue in the case, Malibu Boats West, Inc. (“West”). West is not, and has never been, a subsidiary of the Company but was a separate legal entity whose assets were purchased by Boats LLC in 2006. The case involves a personal injury accident in 2014 involving a 2000 model year boat that was manufactured by West. On August 28, 2021, the jury rejected the Batchelder I Plaintiffs’ design defect claims and found that the driver of the boat was 75% at fault for the accident. Notwithstanding those findings, the jury found that Boats LLC and West negligently failed to warn of a hazard posed by the boat and that such failure was a proximate cause of the death of the decedent. The jury also found that Boats LLC is a legal successor of, and responsible for the liabilities of, West. The jury awarded compensatory damages of $80,000 and apportioned 15% of such damages to Boats LLC and 10% of such damages to West. In addition, the jury awarded $80,000 of punitive damages against Boats LLC and $40,000 of punitive damages against West. Based on the jury’s finding of successor liability, the trial court entered judgment for the full amount of the verdict against Boats LLC, with a potential maximum liability to Boats LLC of $140,000, plus post-judgment interest at a rate of 6.25% per annum.
The Batchelder I Plaintiffs also filed motions, after the judgment, seeking orders requiring Boats LLC to pay pre-judgment interest and a portion of their attorney fees. They claimed they are owed attorneys' fees of approximately $56,000. The Company opposed both motions, arguing that the Batchelder I Plaintiffs have no right either to pre-judgment interest or to reimbursement of their attorneys’ fees, and in the alternative that the amount of attorneys’ fees sought was unreasonable. The trial court denied the Batchelder I Plaintiffs’ motion for prejudgment interest and held that ruling on the Batchelder I Plaintiffs’ motion for attorneys’ fees would be premature, indicating that it would decide whether the Batchelder I Plaintiffs have the right to attorneys’ fees, and if so what amount is reasonable, if still necessary upon the resolution of the Company’s post-trial motions and any related appeals. The Batchelder I Plaintiffs have appealed the trial court’s order denying their motion for prejudgment interest, which amount totals approximately $8,000.
On July 17, 2022, the trial court denied Boats LLC’s post-trial motions. Boats LLC has since filed a notice of appeal. Pending resolution of the appeals process, the payment of any damages in this matter is stayed. Based on the current status of the process, the Company believes a loss is reasonably possible and that the potential range of loss could be from $0 to $140,000, plus post-judgment interest at 6.25% per annum. The Company may also be required to pay prejudgment interest of approximately $8,000, if the Batchelder I Plaintiffs are successful on their appeal for such interest, and an award of reasonable attorneys' fees to the Batchelder I Plaintiffs, which the Batchelder I Plaintiffs claim should be approximately $56,000. As noted above, the trial court postponed any ruling on the Batchelder I Plaintiffs' contested motion for attorneys' fees pending the resolution of the Company's post-trial motions and any related appeals. The Company and Boats LLC maintain product liability insurance applicable to this case with coverage limits of $26,000. At least one insurer has asserted potential coverage defenses and may dispute the scope of its obligation to the Company and Boats LLC. In addition, the Company and Boats LLC have potential claims against the insurers that they may decide to pursue with respect to this matter, but the Company cannot provide any assurance that it will pursue those claims or be successful if it does. The Company did not carry a reserve for loss as of March 31, 2023.
The Company is also a defendant in a related product liability case, Stephan Paul Batchelder and Margaret Mary Batchelder, as Natural Guardians of Josh Patrick Batchelder, a minor; Darin Batchelder, individually, and as Natural Guardian of Zach Batchelder, a minor; and Kayla Batchelder (the “Batchelder II Plaintiffs”) v. Malibu Boats, LLC v. Dennis Michael Ficarra; State Court of Rabun County, Civil Action File No. 2022-CV-0034. The complaint was filed on February 9, 2022 as a purported renewal of earlier claims by the Batchelder II Plaintiffs that were dismissed without prejudice. The case involves claims by the Batchelder II Plaintiffs of their own alleged bodily injury and emotional distress stemming from the same accident involving the alleged swamping of the boat manufactured and sold by West that is the subject of the Batchelder I Matter. As noted above, West is not, and has never been, a subsidiary of the Company but was a separate legal entity whose assets were purchased by the Company in 2006. Four Batchelder II Plaintiffs (including three children) seek damages for personal injury and punitive damages, alleging that the accident was caused by a design defect and a failure to warn. The Batchelder II Plaintiffs were all dismissed without prejudice from the Batchelder I Matter shortly before the trial for the Batchelder I Matter, however, and thus the new complaint is a renewal action of the original complaint. The Company believes that the allegations in this case are unfounded and denies that there was a design defect or a duty to warn, that the Batchelder II Plaintiffs suffered the alleged injuries, or that any defect in the boat or failure to warn was a legal cause of the alleged injuries. The Company also contends that the incident was caused by the negligence of the driver of the boat and has filed a Third-Party Complaint against the driver, Dennis Ficarra, based on his negligence. The Company is unable to provide any reasonable evaluation of the likelihood that a loss will be incurred or any reasonable estimate of the range of possible loss.
The Company has three reportable segments, Malibu, Saltwater Fishing and Cobalt. The Malibu segment participates in the manufacturing, distribution, marketing and sale of Malibu and Axis performance sports boats throughout the world. The Saltwater Fishing segment participates in the manufacturing, distribution, marketing and sale throughout the world of Pursuit boats and the Maverick Boat Group brand boats (Maverick, Cobia, Pathfinder and Hewes). The Cobalt segment participates in the manufacturing, distribution, marketing and sale of Cobalt boats throughout the world.
There is no country outside of the United States from which the Company (a) derived net sales equal to 10% of total net sales for the three and nine months ended March 31, 2023, or (b) attributed assets equal to 10% of total assets as of March 31, 2023. Net sales are attributed to countries based on the location of the dealer. The following tables present financial information for the Company’s reportable segments for the three and nine months ended March 31, 2023 and 2022, respectively, and the Company’s financial position at March 31, 2023 and June 30, 2022, respectively:
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
The following discussion and analysis should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto included herein.
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 Malibu Boats, Inc., its subsidiary, Malibu Boats Holdings, LLC, or the LLC, and its subsidiary Malibu Boats, LLC, or Boats, LLC and its consolidated subsidiaries, including Cobalt Boats, LLC, PB Holdco, LLC, through which we acquired the assets of Pursuit, and MBG Holdco, Inc., through which we acquired all of the outstanding stock of Maverick Boat Group, Inc.
Overview
We are a leading designer, manufacturer and marketer of a diverse range of recreational powerboats, including performance sport boats, sterndrive and outboard boats. Our product portfolio of premium brands are used for a broad range of recreational boating activities including, among others, water sports, general recreational boating and fishing. Our passion for consistent innovation, which has led to propriety technology such as Surf Gate, has allowed us to expand the market for our products by introducing consumers to new and exciting recreational activities. We design products that appeal to an expanding range of recreational boaters and water sports enthusiasts whose passion for boating and water sports is a key component of their active lifestyle and provide consumers with a better customer-inspired experience. With performance, quality, value and multi-purpose features, our product portfolio has us well positioned to broaden our addressable market and achieve our goal of increasing our market share in the expanding recreational boating industry.
We currently sell our boats under eight brands as shown in the table below, and we report our results of operations under three reportable segments (Malibu, Saltwater Fishing and Cobalt). See Note 16 to our unaudited interim condensed consolidated financial statements for more information about our reporting segments.
% of Net Sales
Segment
Brands
Nine Months Ended March 31, 2023
Fiscal year ended June 30, 2022
Malibu
Malibu
46.8%
50.0%
Axis
Saltwater Fishing
Pursuit
31.6%
28.1%
Maverick
Cobia
Pathfinder
Hewes
Cobalt
Cobalt
21.6%
21.9%
Our Malibu segment participates in the manufacturing, distribution, marketing and sale throughout the world of Malibu and Axis performance sports boats. Our flagship Malibu boats offer our latest innovations in performance, comfort and convenience, and are designed for consumers seeking a premium performance sport boat experience. We are the market leader in the United States in the performance sport boat category through our Malibu and Axis Wake Research boat brands. Our Axis boats appeal to consumers who desire a more affordable performance sport boat product but still demand high performance, functional simplicity and the option to upgrade key features. Retail prices of our Malibu and Axis boats typically range from $70,000 to $225,000.
Our Saltwater Fishing segment participates in the manufacturing, distribution, marketing and sale throughout the world of Pursuit boats and the Maverick Boat Group family of boats (Maverick, Cobia, Pathfinder and Hewes). Our Pursuit boats expand our product offerings into the saltwater outboard fishing market and include center console, dual console and offshore models. In December 2020, we acquired Maverick Boat Group and added Maverick, Cobia, Pathfinder and Hewes to our brands. Our Maverick Boat Group family of boats are highly complementary to Pursuit, expanding our saltwater outboard offerings with a strong focus in length segments under 30 feet. We are among the market leaders in the fiberglass outboard fishing boat category with the brands in our Saltwater Fishing segment. Retail prices for our Saltwater Fishing boats typically range from $45,000 to $1,300,000.
Our Cobalt segment participates in the manufacturing, distribution, marketing and sale throughout the world of Cobalt boats. Our Cobalt boats consist of mid to large-sized luxury cruisers and bowriders that we believe offer the ultimate experience in comfort, performance and quality. We are the market leader in the United States in the 20’ - 40’ segment of the sterndrive boat category through our Cobalt brand. Retail prices for our Cobalt boats typically range from $65,000 to $525,000.
We sell our boats through a dealer network that we believe is the strongest in the recreational powerboat category. As of July 1, 2022, our worldwide distribution channel consisted of over 400 dealer locations globally. Our dealer base is an important part of our consumers’ experience, our marketing efforts and our brands. We devote significant time and resources to find, develop and improve the performance of our dealers and believe our dealer network gives us a distinct competitive advantage.
Since fiscal year 2020, our operations have been impacted by a variety of external factors, including COVID-19 and supply chain disruptions that we believe were driven by numerous factors, such as labor shortages, ongoing domestic logistical constraints, West Coast port challenges and rising prices for our suppliers, in part due to inflationary pressures. Such supply chain disruptions along with increased costs for raw materials, parts and components, shipping and labor, are having industry-wide impacts affecting us and our suppliers, dealers and customers. We have implemented various initiatives during the time period to combat these factors including plant shut-downs, constrained production levels and surcharges.
Dealer inventories were lower than historical levels throughout fiscal years 2021 and 2022, as a result of an increase in retail sales during fiscal year 2021, constrained production in the first half of fiscal year 2021, and our lower wholesale shipment levels during the second half of fiscal year 2020. Fiscal year 2022 retail demand continued at a strong pace, albeit at lower levels than the record fiscal year 2021 levels, in spite of limited inventory. During fiscal year 2022, year-over-year increases in wholesale production and decreases in retail demand levels relative to fiscal year 2021 combined to increase inventory levels modestly at our Malibu and Cobalt segment dealers by the end of the fiscal year. Dealer inventories began fiscal year 2023 below historical levels and over the course of the year have continued to normalize towards historical levels. We currently believe the Malibu and Cobalt inventory at our dealers is near historical seasonally adjusted levels and that the Saltwater Fishing inventory will approach historical seasonally adjusted levels shortly.
The future impact of ongoing supply chain disruptions on our financial condition and results of operations may result in further constrained production and increased costs and will depend on a number of factors, including factors that we may not be able to forecast at this time. See the risk factors around COVID-19 impact, supply chain disruptions and increases in costs under Part I. Item 1A on our Form 10- K for the year ended June 30, 2022.
On a consolidated basis, we achieved third quarter fiscal 2023 net sales, gross profit, net income and adjusted EBITDA of $375.1 million, $98.6 million, $53.5 million and $79.3 million, respectively, compared to $344.3 million, $97.1 million, $54.8 million and $79.8 million, respectively, for the third quarter of fiscal 2022. For the third quarter of fiscal 2023, net sales increased 9.0%, gross profit increased 1.5%, net income decreased 2.5% and adjusted EBITDA decreased 0.6% as compared to the third quarter of fiscal 2022. For the definition of adjusted EBITDA and a reconciliation to net income, see “GAAP Reconciliation of Non-GAAP Financial Measures.”
Recent Developments
Resignation of Chief Financial Officer and Secretary
On April 14, 2023, Wayne Wilson notified the Company of his resignation as Chief Financial Officer and Secretary of the Company. Mr. Wilson’s resignation as Chief Financial Officer and Secretary was effective April 19, 2023. Mr. Wilson will actively serve in an advisory role and assist with the transition through May 12, 2023.
Appointment of Interim Chief Financial Officer
In connection with Mr. Wilson’s resignation, on April 18, 2023, the Board of Directors (the “Board”) of the Company appointed David Black, the Company’s Corporate Controller, to serve as the Company’s Interim Chief Financial Officer, with
such appointment effective April 19, 2023. Mr. Black will perform the functions of the Company’s principal financial officer and principal accounting officer. The Company has initiated a search process to identify and appoint a new permanent Chief Financial Officer and Secretary.
Appointment of New Director
On April 28, 2023, the Board appointed Nancy Taylor to serve on the Board as an independent Class III director, to serve until the Company’s 2025 annual meeting of stockholders and until her successor is duly elected or qualified. The Board also appointed Ms. Taylor to serve on the Audit Committee and the Nominating and Governance Committee of the Board.
Outlook
During the COVID-19 pandemic, domestic retail demand for recreational powerboats increased to the highest levels seen by the industry in decades as consumers turned to boating as a form of outdoor, socially-distanced, recreation. Retail registration activity in the recreational powerboat market, however, began declining meaningfully in the second half of calendar year 2021 as a result of limited available inventory due to the strong sales activity during the pandemic and supply chain disruptions that began impacting production levels. During calendar year 2022, retail registration activity continued to decline at a lower year-over-year rate than the second half of calendar year 2021. The declines in retail registration activity in the recreational powerboat market during calendar year 2022 were also impacted by the increased retail demand in calendar year 2021, resulting in an abnormally high comparative period.
We and our dealers have experienced similar impacts in retail demand, supply chain disruption and resulting low inventory levels as the industry. The combination of strong retail market activity in calendar years 2020 and 2021 along with supply chain disruptions in calendar year 2021 that continued through calendar year 2022 depleted inventory levels at our dealers in calendar year 2022 below pre-COVID levels. Some of the operational challenges and supply chain disruptions we experienced included labor shortages, domestic logistical constraints, West Coast port challenges and rising prices for our suppliers, in part due to inflationary pressures. These operational challenges and supply chain constraints delayed our ability to add to depleted inventory levels throughout fiscal year 2022. While retail activity at our dealers was strong during much of fiscal year 2022, it may have been higher but for a lack of inventory.
Current inventory levels at our dealers are normalizing to pre-pandemic levels across all segments. While retail activity at our dealers trended lower during the first half of fiscal year 2023, given low inventory levels at the beginning of the fiscal year, we continued to experience strong wholesale demand through the third quarter of fiscal year 2023. As channel inventory becomes more normalized, we believe wholesale demand will become more directly dependent on the underlying retail activity for our products. As a result, we believe our wholesale demand in the upcoming quarters will largely be driven by the retail activity for our products during our fourth fiscal quarter of 2023 and into the first fiscal quarter of 2024.
We aim to increase our market share across the boating categories in which we compete through new product development, improved distribution, new models, and innovative features. Our industry, however, is highly competitive, and our competitors have become more aggressive in their product introductions, expanded their distribution capabilities, and launched surf systems competitive with our patented Surf Gate system. Further, our ability to increase inventory levels at our dealers will be important to maintain and grow our market share across our brands. We believe our new product pipeline, strong dealer network and ability to increase production will allow us to maintain, and potentially expand, our leading market position in performance sports boats. We also believe that our track record of expanding our market share with our Malibu and Axis brands is directly transferable to our Cobalt, Pursuit and Maverick Boat Group brands. While Cobalt, Pursuit and the Maverick Boat Group brands are market leaders in certain areas, we believe that enhancing new product development combined with diligent management of the Cobalt, Pursuit and Maverick Boat Group dealer networks will position us to meaningfully improve our share of the sterndrive and outboard markets over time. We have seen the impact of this strategy at Cobalt already as we have gained market share with the introduction of eight new products in the last twenty-four months. Our new product development efforts at Pursuit have begun to take shape and influence market share. We have begun the processes to improve product development efforts at Maverick Boat Group but those initiatives will take time and our ability to influence the number of near-term model introductions will be limited.
As discussed above, our financial results and operations have been, and will continue to be, impacted by events outside of our control. For example, we have experienced elevated raw material, components and transportation costs, partly due to inflationary pressures, and we anticipate those costs to remain at elevated levels for the remainder of fiscal year 2023 and likely beyond. To combat this, we implemented surcharges across all brands in fiscal year 2022 that were made permanent price increases at the beginning of fiscal year 2023, while we worked aggressively to minimize incremental price increases to lessen any volume impact associated with increased prices. Numerous other variables also have the potential to impact our volumes, both positively and negatively. For instance, increasing interest rates, which we are currently experiencing, could reduce retail consumer appetite for our product or reduce the appetite or availability for credit for our dealers and retail consumers. Further,
we believe a substantial increase or decrease in the price of oil, strength or weakness of the U.S. dollar and tariffs can result in greater or reduced demand for our boats in certain markets. Consumer confidence, expanded or eroded, is a variable that can also impact demand for our products in both directions. Other challenges that could impact demand for recreational powerboats include, fuel costs, a meaningful reduction in the value of global or domestic equity markets, 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. An additional variable that could affect our volumes is weather related events. For example, we shut down production in all our Florida facilities as a precaution during hurricanes that made landfall in Florida during the first half of fiscal 2023. The downtime related to Hurricane Ian impacted the number of boats that we were able to ship at the end of the first quarter of fiscal year 2023. Our facilities were ultimately not meaningfully impacted by the hurricane, and we were able to restart production and shipments in the second fiscal quarter as we normally would.
Factors Affecting Our Results of Operations
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, our ability to offer dealer financing and incentives and our vertical integration efforts. We discuss each of these factors in more detail under the heading “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations--Factors Affecting Our Results of Operations” in our Form 10-K for the year ended June 30, 2022. While we do not have control of all factors affecting our results from operations, we work diligently to influence and manage those factors which we can impact to enhance our results of operations.
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 and trailer sales—consists of sales of boats and trailers to our dealer network. Nearly all of our boat sales include optional feature upgrades purchased by the consumer, which increase the average selling price of our boats; and
•Parts and other sales—consists of sales of replacement and aftermarket boat parts and accessories to our dealer network; and consists of royalty income earned from license agreements with various boat manufacturers, including Nautique, Chaparral, Mastercraft, and Tige related to the use of our intellectual property.
•Net sales are net of:
•Sales returns—consists primarily of 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 and free flooring—consists of incentives, rebates and free flooring, we provide to our dealers based on sales of eligible products. For our Malibu and Cobalt segments, if a domestic dealer meets its monthly or quarterly commitment volume, as well as other terms of the dealer performance program, the dealer is entitled to a specified rebate. For our Saltwater Fishing segment, if a dealer meets its quarterly or annual retail volume goals, the dealer is entitled to a specific rebate applied to their wholesale volume purchased. For Malibu, Cobalt and select Saltwater Fishing models, our dealers that take delivery of current model year boats in the offseason, typically July through April in the U.S., are also 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.” From time to time, we may extend the flooring program to eligible models beyond the offseason period.
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, general and administrative costs and amortization 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. General and administrative expenses also include product development expenses associated with our vertical integration initiative and acquisition or integration related expenses. Amortization expenses are associated with the amortization of intangibles.
Other Expense (Income), Net
Other expense (income), net consists of interest expense and other income or expense, net. Interest expense consists of interest charged under our outstanding debt and amortization of deferred financing costs on our credit facilities. Other income or expense includes adjustments to our tax receivable agreement liability and sublease income.
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. The LLC is a pass-through entity for federal purposes but incurs income tax in certain state jurisdictions. Maverick Boat Group is separately subject to U.S. federal and state income tax with respect to its net taxable income.
Net Income Attributable to Non-controlling Interest
As of each of March 31, 2023 and 2022, we had a 97.8% and a 97.2%, respectively, controlling economic interest and 100% voting interest in the LLC and, therefore, we consolidate the LLC's operating results for financial statement purposes. Net income attributable to non-controlling interest represents the portion of net income attributable to the non-controlling LLC members.
The table below sets forth our unaudited interim consolidated results of operations, expressed in thousands (except unit volume and net sales per unit) and as a percentage of net sales, for the periods presented. Our unaudited interim consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that we will achieve in future periods. Certain totals for the table below will not sum to exactly 100% due to rounding.
Three Months Ended March 31,
Nine Months Ended March 31,
2023
2022
2023
2022
$
% Revenue
$
% Revenue
$
% Revenue
$
% Revenue
Net sales
375,119
100.0
%
344,287
100.0
%
1,016,062
100.0
%
861,671
100.0
%
Cost of sales
276,545
73.7
%
247,166
71.8
%
767,229
75.5
%
641,247
74.4
%
Gross profit
98,574
26.3
%
97,121
28.2
%
248,833
24.5
%
220,424
25.6
%
Operating expenses:
Selling and marketing
7,176
1.9
%
6,773
2.0
%
18,560
1.8
%
17,548
2.0
%
General and administrative
19,455
5.2
%
17,129
5.0
%
57,732
5.7
%
49,207
5.7
%
Amortization
1,680
0.4
%
1,682
0.4
%
5,111
0.5
%
5,257
0.7
%
Operating income
70,263
18.8
%
71,537
20.8
%
167,430
16.5
%
148,412
17.2
%
Other expense, net:
Other (income) expense, net
(110)
—
%
(10)
—
%
153
—
%
(33)
—
%
Interest expense
649
0.2
%
650
0.2
%
2,844
0.3
%
1,990
0.2
%
Other expense, net
539
0.2
%
640
0.2
%
2,997
0.3
%
1,957
0.2
%
Income before provision for income taxes
69,724
18.6
%
70,897
20.6
%
164,433
16.2
%
146,455
17.0
%
Provision for income taxes
16,272
4.4
%
16,064
4.7
%
38,480
3.8
%
32,710
3.8
%
Net income
53,452
14.2
%
54,833
15.9
%
125,953
12.4
%
113,745
13.2
%
Net income attributable to non-controlling interest
1,564
0.4
%
1,955
0.6
%
4,020
0.4
%
4,032
0.5
%
Net income attributable to Malibu Boats, Inc.
51,888
13.8
%
52,878
15.3
%
121,933
12.0
%
109,713
12.7
%
Three Months Ended March 31,
Nine Months Ended March 31,
2023
2022
2023
2022
Unit Volumes
% Total
Unit Volumes
% Total
Unit Volumes
% Total
Unit Volumes
% Total
Volume by Segment
Malibu
1,338
50.7
%
1,457
56.9
%
3,874
53.0
%
3,695
55.5
%
Saltwater Fishing
718
27.2
%
551
21.5
%
1,859
25.4
%
1,505
22.6
%
Cobalt
581
22.1
%
554
21.6
%
1,580
21.6
%
1,459
21.9
%
Total units
2,637
100.0
%
2,562
100.0
%
7,313
100.0
%
6,659
100.0
%
Net sales per unit
$
142,252
$
134,382
$
138,939
$
129,399
Comparison of the Three Months Ended March 31, 2023 to the Three Months Ended March 31, 2022
Net Sales
Net sales for the three months ended March 31, 2023 increased $30.8 million, or 9.0%, to $375.1 million as compared to the three months ended March 31, 2022. The increase in net sales was driven primarily by increased unit volumes in our Saltwater Fishing and Cobalt segments, a favorable model mix across all segments and inflation-driven year-over-year price increases, partially offset by lower unit volumes in the Malibu segment. Unit volume for the three months ended March 31,
2023, increased 75 units, or 2.9%, to 2,637 units as compared to the three months ended March 31, 2022. Our unit volume increased primarily due to strong wholesale restocking demand across our Cobalt and Saltwater Fishing segments.
Net sales attributable to our Malibu segment decreased $6.3 million, or 3.5%, to $172.6 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. Unit volumes attributable to our Malibu segment decreased 119 units for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily as a result of reduced wholesale restocking demand as channel inventory becomes more normalized combined with lower retail activity, accentuated by an abnormally high comparative period. The decrease in net sales was driven by a decrease in units and increased dealer flooring program costs, partially offset by a favorable model mix and inflation-driven year-over-year price increases.
Net sales attributable to our Saltwater Fishing segment increased $29.0 million, or 31.0%, to $122.7 million, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. Unit volume increased 167 units for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The increase in net sales was driven by increased volume, inflation-driven year-over-year price increases and a favorable model mix.
Net sales attributable to our Cobalt segment increased $8.1 million, or 11.3%, to $79.9 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. Unit volumes attributable to Cobalt increased 27 units for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The increase in net sales was driven primarily by increased volume, inflation-driven year-over-year price increases and a favorable model mix.
Overall consolidated net sales per unit increased 5.9% to $142,252 per unit for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. Net sales per unit for our Malibu segment increased 5.1% to $128,977 per unit for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, driven by a favorable model mix and inflation-driven year-over-year price increases, partially offset by increased dealer flooring program costs. Net sales per unit for our Saltwater Fishing segment increased 0.5% to $170,837 per unit for the three months ended March 31, 2023 driven by inflation-driven year-over-year price increases, offset by an unfavorable model mix. Net sales per unit for our Cobalt segment increased 6.1% to $137,499 per unit for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, driven by a favorable model mix and inflation-driven year-over-year price increases.
Cost of Sales
Cost of sales for the three months ended March 31, 2023 increased $29.4 million, or 11.9%, to $276.5 million as compared to the three months ended March 31, 2022. The increase in cost of sales was primarily driven by a 2.9% increase in volumes, a mix shift to Saltwater Fishing and Cobalt and increased component costs. In the Malibu segment, while we experienced higher per unit material and labor costs, the volume decrease more than offset the $5.5 million increase in cost of sales related to higher per unit rates. Within our Saltwater Fishing segment, higher per unit material and labor costs contributed $2.7 million to the increase in cost of sales and were driven by increased prices due to inflationary pressures and offset by an unfavorable model mix. In the Cobalt segment, higher per unit material and labor costs contributed $4.4 million to the increase in cost of sales and were driven by increased prices due to inflationary pressures and by an increased mix of larger models that corresponded with higher net sales per unit.
Gross Profit
Gross profit for the three months ended March 31, 2023 increased $1.5 million, or 1.5%, to $98.6 million compared to the three months ended March 31, 2022. The increase in gross profit was driven primarily by higher sales revenue partially offset by the increased cost of sales for the reasons noted above. Gross margin for the three months ended March 31, 2023 decreased 190 basis points from 28.2% to 26.3% driven primarily by increased mix of the Saltwater Fishing segment and increased dealer flooring program costs.
Operating Expenses
Selling and marketing expenses for the three months ended March 31, 2023 increased $0.4 million, or 6.0% to $7.2 million compared to the three months ended March 31, 2022. The increase was driven primarily by increased promotional events. As a percentage of sales, selling and marketing expenses decreased 10 basis points to 1.9% for the three months ended March 31, 2023 compared to 2.0% for the three months ended March 31, 2022. General and administrative expenses for the three months ended March 31, 2023 increased $2.3 million, or 13.6%, to $19.5 million as compared to the three months ended March 31, 2022 driven primarily by an increase in compensation and personnel-related expenses, an increase in professional fees and an increase in travel related expenses. As a percentage of sales, general and administrative expenses increased 20 basis points to 5.2% for the three months ended March 31, 2023 compared to 5.0% for the three months ended March 31, 2022. Amortization expense remained flat at $1.7 million for the three months ended March 31, 2023.
Other expense (income), net for the three months ended March 31, 2023 decreased by $0.1 million, or 15.8% to $0.5 million, compared to the three months ended March 31, 2022. The decrease in other expense (income) resulted primarily from increased other income during the three months ended March 31, 2023 compared to the three months ended March 31, 2022.
Provision for Income Taxes
Our provision for income taxes for the three months ended March 31, 2023, increased $0.2 million, or 1.3%, to $16.3 million compared to the three months ended March 31, 2022. The increase primarily resulted from increased state taxes. For the three months ended March 31, 2023 and 2022, our effective tax rate of 23.3% and 22.7%, respectively, exceeded the statutory federal income tax rate of 21% primarily due to the impact of U.S. state taxes. This increase in the effective tax rate in both periods was partially offset by a windfall benefit generated by certain stock-based compensation, as well as the benefits of the foreign derived intangible income deduction, the research and development tax credit, and the impact of non-controlling interests in the LLC.
Non-controlling Interest
Non-controlling interest represents the ownership interests of the members of the LLC other than us and the amount recorded as non-controlling interest in our unaudited interim condensed consolidated statements of operations and comprehensive income is computed by multiplying pre-tax income for the applicable period, by the percentage ownership in the LLC not directly attributable to us. For the three months ended March 31, 2023 and 2022, the weighted-average non-controlling interest attributable to ownership interests in the LLC not directly attributable to us was 2.5% and 2.8%, respectively.
Comparison of the Nine Months Ended March 31, 2023 to the Nine Months Ended March 31, 2022
Net Sales
Net sales for the nine months ended March 31, 2023 increased $154.4 million, or 17.9%, to $1,016.1 million as compared to the nine months ended March 31, 2022. The increase in net sales was driven by increased unit volumes across all three segments, inflation-driven year-over-year price increases and a favorable model mix, partially offset by increased dealer flooring program costs resulting from higher interest rates and increased inventory levels as inventory levels move towards pre-COVID levels. Unit volume for the nine months ended March 31, 2023, increased 654 units, or 9.8%, to 7,313 units as compared to the nine months ended March 31, 2022. Our unit volume increased primarily due to strong wholesale restocking demand across all segments.
Net sales attributable to our Malibu segment increased $45.4 million, or 10.5%, to $475.9 million for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022. Unit volumes attributable to our Malibu segment increased 179 units for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022. The increase in net sales was driven primarily by increased volume and inflation-driven year-over-year price increases, partially offset by increased dealer flooring program costs.
Net sales attributable to our Saltwater Fishing segment increased $74.9 million, or 30.5%, to $320.5 million, for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022. Unit volume increased 354 units for the nine months ended March 31, 2023 compared to the nine months ended March 31, 2022. The increase in net sales was driven by increased volume, inflation-driven year-over-year price increases and a favorable model mix.
Net sales attributable to our Cobalt segment increased $34.2 million, or 18.4%, to $219.7 million for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022. Unit volumes attributable to Cobalt increased 121 units for the nine months ended March 31, 2023 compared to the nine months ended March 31, 2022. The increase in net sales was driven by increased volume, inflation-driven year-over-year price increases and a favorable model mix, partially offset by increased dealer flooring program costs.
Overall consolidated net sales per unit increased 7.4% to $138,939 per unit for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022. Net sales per unit for our Malibu segment increased 5.4% to $122,846 per unit for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022, driven by inflation-driven year-over-year price increases, partially offset by increased dealer flooring program costs. Net sales per unit for our Saltwater Fishing segment increased 5.6% to $172,393 per unit for the nine months ended March 31, 2023 driven by inflation-driven year-over-year price increases, partially offset by an unfavorable model mix. Net sales per unit for our Cobalt segment increased 9.3% to $139,037 per unit for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022, driven by inflation-driven year-over-year price increases and a favorable model mix, partially offset by increased dealer flooring program costs.
Cost of sales for the nine months ended March 31, 2023 increased $126.0 million, or 19.6%, to $767.2 million as compared to the nine months ended March 31, 2022. The increase in cost of sales was primarily driven by a 9.8% increase in volumes and increased prices due to inflationary pressures that have impacted prices on parts and components. In the Malibu segment, higher per unit material and labor costs contributed $16.8 million to the increase in cost of sales and were driven by increased prices due to inflationary pressures. Within our Saltwater Fishing segment, higher per unit material and labor costs contributed $12.3 million to the increase in cost of sales and were driven by increased prices due to inflationary pressures and by an increased mix of larger models that corresponded with higher net sales per unit. In the Cobalt segment, higher per unit material and labor costs contributed $16.2 million to the increase in cost of sales and were driven by increased prices due to inflationary pressures and by an increased mix of larger models that corresponded with higher net sales per unit.
Gross Profit
Gross profit for the nine months ended March 31, 2023 increased $28.4 million, or 12.9%, to $248.8 million compared to the nine months ended March 31, 2022. The increase in gross profit was driven primarily by higher sales revenue partially offset by the increased cost of sales for the reasons noted above. Gross margin for the nine months ended March 31, 2023 decreased 110 basis points from 25.6% to 24.5% driven primarily by an increased mix of the Saltwater Fishing segment and increased dealer flooring program costs and partially offset by better year-over-year performance in our Saltwater Fishing segment.
Operating Expenses
Selling and marketing expenses for the nine months ended March 31, 2023 increased $1.0 million, or 5.8% to $18.6 million compared to the nine months ended March 31, 2022. The increase was driven primarily by increased promotional events. As a percentage of sales, selling and marketing expenses decreased 20 basis points to 1.8% for the nine months ended March 31, 2023 compared to 2.0% for the nine months ended March 31, 2022. General and administrative expenses for the nine months ended March 31, 2023 increased $8.5 million, or 17.3%, to $57.7 million as compared to the nine months ended March 31, 2022 driven primarily by an increase in compensation and personnel-related expenses, an increase in professional fees and an increase in travel related expenses. As a percentage of sales, general and administrative expenses remained flat at 5.7% for the nine months ended March 31, 2023. Amortization expense for the nine months ended March 31, 2023 decreased $0.1 million, or 2.8% to $5.1 million compared to the nine months ended March 31, 2022 due to a decrease of amortization expense related to fully amortized intangibles.
Other Expense (Income), Net
Other expense (income), net for the nine months ended March 31, 2023 increased by $1.0 million, or 53.1% to $3.0 million, compared to the nine months ended March 31, 2022. The increase in other expense (income) resulted primarily from increased interest expense due to a higher average interest rate during the nine months ended March 31, 2023 compared to the nine months ended March 31, 2022.
Provision for Income Taxes
Our provision for income taxes for the nine months ended March 31, 2023, increased $5.8 million, or 17.6%, to $38.5 million compared to the nine months ended March 31, 2022. The increase primarily resulted from increased pre-tax earnings and increased state taxes. For the nine months ended March 31, 2023 and 2022, our effective tax rate of 23.4% and 22.3%, respectively, exceeded the statutory federal income tax rate of 21% primarily due to the impact of U.S. state taxes. This increase in the effective tax rate in both periods was partially offset by a windfall benefit generated by certain stock-based compensation, as well as the benefits of the foreign derived intangible income deduction, the research and development tax credit, and the impact of non-controlling interests in the LLC.
Non-controlling Interest
Non-controlling interest represents the ownership interests of the members of the LLC other than us and the amount recorded as non-controlling interest in our unaudited interim condensed consolidated statements of operations and comprehensive income is computed by multiplying pre-tax income for the applicable period, by the percentage ownership in the LLC not directly attributable to us. For the nine months ended March 31, 2023 and 2022, the weighted-average non-controlling interest attributable to ownership interests in the LLC not directly attributable to us was 2.7% and 2.8%, respectively.
GAAP Reconciliation of Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures that are used by management as well as by investors, commercial bankers, industry analysts and other users of our financial statements.
We define adjusted EBITDA as net income before interest expense, income taxes, depreciation, amortization and non-cash, non-recurring or non-operating expenses, including non-cash compensation expense.We define adjusted EBITDA margin as adjusted EBITDA divided by net sales. Adjusted EBITDA and adjusted EBITDA margin are not measures of net income as determined by GAAP. Management believes adjusted EBITDA and adjusted EBITDA margin allow investors to evaluate the Company’s operating performance and compare our results of operations from period to period on a consistent basis by excluding items that management does not believe are indicative of our core operating performance. Management uses adjusted EBITDA to assist in highlighting trends in our operating results without regard to our financing methods, capital structure and non-recurring or non-operating expenses. We exclude the items listed above from net income in arriving at adjusted EBITDA because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures, the methods by which assets were acquired and other factors. Adjusted EBITDA has limitations as an analytical tool and should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with GAAP or as an indicator of our liquidity. Certain items excluded from adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historical costs of depreciable assets. Our presentation of adjusted EBITDA and adjusted EBITDA margin should not be construed as an inference that our results will be unaffected by unusual or non-recurring items. Our computations of adjusted EBITDA and adjusted EBITDA margin may not be comparable to other similarly titled measures of other companies.
The following table sets forth a reconciliation of net income as determined in accordance with GAAP to adjusted EBITDA and presentation of net income margin and adjusted EBITDA margin for the periods indicated (dollars in thousands):
Three Months Ended March 31,
Nine Months Ended March 31,
2023
2022
2023
2022
Net income
$
53,452
$
54,833
$
125,953
$
113,745
Provision for income taxes
16,272
16,064
38,480
32,710
Interest expense
649
650
2,844
1,990
Depreciation
5,463
4,848
16,147
14,379
Amortization
1,680
1,682
5,111
5,257
Stock-based compensation expense 1
1,751
1,691
5,402
4,547
Adjusted EBITDA
$
79,267
$
79,768
$
193,937
$
172,628
Net Sales
$
375,119
$
344,287
$
1,016,062
$
861,671
Net Income Margin 2
14.2
%
15.9
%
12.4
%
13.2
%
Adjusted EBITDA Margin 2
21.1
%
23.2
%
19.1
%
20.0
%
(1)
Represents equity-based incentives awarded to certain of our employees under the Malibu Boats, Inc. Long-Term Incentive Plan and profit interests issued under the previously existing limited liability company agreement of the LLC. See Note 13 to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report.
(2)
We calculate net income margin as net income divided by net sales and we define adjusted EBITDA margin as adjusted EBITDA divided by net sales.
We define Adjusted Fully Distributed Net Income as net income attributable to Malibu Boats, Inc. (i) excluding income tax expense, (ii) excluding the effect of non-recurring or non-cash items, (iii) assuming the exchange of all LLC Units into shares of Class A Common Stock, which results in the elimination of non-controlling interest in the LLC, and (iv) reflecting an adjustment for income tax expense on fully distributed net income before income taxes at our estimated effective income tax rate. Adjusted Fully Distributed Net Income is a non-GAAP financial measure because it represents net income attributable to Malibu Boats, Inc., before non-recurring or non-cash items and the effects of non-controlling interests in the LLC.
We use Adjusted Fully Distributed Net Income to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results prepared in accordance with GAAP, provides a more complete understanding of factors and trends affecting our business than GAAP measures alone.
We believe Adjusted Fully Distributed Net Income assists our board of directors, management and investors in comparing our net income on a consistent basis from period to period because it removes non-cash or non-recurring items, and eliminates the variability of non-controlling interest as a result of member owner exchanges of LLC Units into shares of Class A Common Stock.
In addition, because Adjusted Fully Distributed Net Income is susceptible to varying calculations, the Adjusted Fully Distributed Net Income measures, as presented in this Quarterly Report, may differ from and may, therefore, not be comparable to similarly titled measures used by other companies.
The following table shows the reconciliation of the numerator and denominator for net income available to Class A Common Stock per share to Adjusted Fully Distributed Net Income per Share of Class A Common Stock for the periods presented (in thousands except share and per share data):
Three Months Ended March 31,
Nine Months Ended March 31,
2023
2022
2023
2022
Reconciliation of numerator for net income available to Class A Common Stock per share to Adjusted Fully Distributed Net Income per Share of Class A Common Stock:
Net income attributable to Malibu Boats, Inc.
$
51,888
$
52,878
$
121,933
$
109,713
Provision for income taxes
16,272
16,064
38,480
32,710
Acquisition related expenses 1
1,641
1,641
4,995
4,995
Stock-based compensation expense 2
1,751
1,691
5,402
4,547
Net income attributable to non-controlling interest 3
1,564
1,955
4,020
4,032
Fully distributed net income before income taxes
73,116
74,229
174,830
155,997
Income tax expense on fully distributed income before income taxes 4
Reconciliation of denominator for net income available to Class A Common Stock per share to Adjusted Fully Distributed Net Income per Share of Class A Common Stock:
Weighted-average shares outstanding of Class A Common Stock used for basic net income per share:
20,533,649
20,777,512
20,465,534
20,843,040
Adjustments to weighted-average shares of Class A Common Stock:
Weighted-average LLC Units held by non-controlling unit holders 5
516,322
600,919
573,132
600,919
Weighted-average unvested restricted stock awards issued to management 6
290,450
268,387
276,587
246,737
Adjusted weighted-average shares of Class A Common Stock outstanding used in computing Adjusted Fully Distributed Net Income per Share of Class A Common Stock:
21,340,421
21,646,818
21,315,253
21,690,696
The following table shows the reconciliation of net income available to Class A Common Stock per share to Adjusted Fully Distributed Net Income per Share of Class A Common Stock for the periods presented:
Three Months Ended March 31,
Nine Months Ended March 31,
2023
2022
2023
2022
Net income available to Class A Common Stock per share
$
2.53
$
2.54
$
5.96
$
5.26
Impact of adjustments:
Provision for income taxes
0.79
0.77
1.88
1.57
Acquisition related expenses 1
0.08
0.08
0.24
0.24
Stock-based compensation expense 2
0.09
0.08
0.27
0.22
Net income attributable to non-controlling interest 3
0.08
0.09
0.20
0.19
Fully distributed net income per share before income taxes
3.57
3.56
8.55
7.48
Impact of income tax expense on fully distributed income before income taxes 4
(0.87)
(0.85)
(2.08)
(1.78)
Impact of increased share count 7
(0.11)
(0.10)
(0.26)
(0.22)
Adjusted Fully Distributed Net Income per Share of Class A Common Stock
For the three and nine months ended March 31, 2023 and 2022, represents amortization of intangibles acquired in connection with the acquisitions of Maverick Boat Group, Pursuit and Cobalt.
(2)
Represents equity-based incentives awarded to certain of our employees under the Malibu Boats, Inc. Long-Term Incentive Plan and profit interests issued under the previously existing limited liability company agreement of the LLC. See Note 13 to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report.
(3)
Reflects the elimination of the non-controlling interest in the LLC as if all LLC members had fully exchanged their LLC Units for shares of Class A Common Stock.
(4)
Reflects income tax expense at an estimated normalized annual effective income tax rate of 24.3% and 23.8% of income before income taxes for the three and nine months ended March 31, 2023 and 2022, respectively, assuming the conversion of all LLC Units into shares of Class A Common Stock. The estimated normalized annual effective income tax rate for fiscal year 2023 is based on the federal statutory rate plus a blended state rate adjusted for the research and development tax credit, the foreign derived intangible income deduction, and foreign income taxes attributable to our Australian subsidiary.
(5)
Represents the weighted-average shares outstanding of LLC Units held by non-controlling interests assuming they were exchanged into Class A Common Stock on a one-for-one basis.
(6)
Represents the weighted-average unvested restricted stock awards included in outstanding shares during the applicable period that were convertible into Class A Common Stock and granted to members of management.
(7)
Reflects impact of increased share counts assuming the exchange of all weighted-average shares outstanding of LLC Units into shares of Class A Common Stock and the conversion of all weighted-average unvested restricted stock awards included in outstanding shares granted to members of management.
Our primary uses of cash have been for funding working capital and capital investments, repayments under our debt arrangements, acquisitions, cash distributions to members of the LLC, cash payments under our tax receivable agreement and stock repurchases under our stock repurchase program. For both the short term and the long term, our sources of cash to meet these needs have primarily been operating cash flows, borrowings under our revolving credit facility and short and long-term debt financings from banks and financial institutions. We believe that our cash on hand, cash generated by operating activities and funds available under our revolving credit facility will be sufficient to finance our operating activities for at least the next twelve months and beyond.
Material Cash Requirements
Capital Expenditures. For fiscal year 2022, we incurred approximately $55.1 million in capital expenditures related to the expansion of our Florida facility used for Maverick Boats Group as well as new models, capacity enhancements and vertical integration initiatives. Excluding the Roane County property purchase and related improvements described below, we expect capital expenditures between $50.0 million and $60.0 million for fiscal year 2023 primarily for investments in new models, capacity enhancements and vertical integration initiatives. Other investment opportunities, such as potential strategic acquisitions, may require additional funding.
Roane County Property Purchase and Related Improvements. On March 28, 2023, we entered into a Purchase and Sale Agreement (the “Purchase Agreement”) to purchase certain real property, improvements and other assets from the seller for a cash purchase price of approximately $33.3 million. As of March 31, 2023, we have deposited approximately $7.8 million in escrow pursuant to the Purchase Agreement, and expect to pay the approximately $25.5 million balance of the purchase price upon the closing of the transaction within the next 12 months. We also expect to incur additional capital expenditures of approximately $15.0 million to make changes to the facility to meet our operational needs.
Principal and Interest Payments. On July 8, 2022, we entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement provides us with a revolving credit facility in an aggregate principal amount of up to $350.0 million. As of March 31, 2023, we had $21.7 million outstanding under our revolving credit facility and $1.5 million in outstanding letters of credit, with $326.8 million available for borrowing. The revolving credit facility matures on July 8, 2027. Assuming no additional repayments or borrowings on our revolving credit facility after March 31, 2023, our interest payments would be approximately $1.4 million within the next 12 months based on the interest rate at March 31, 2023 of 6.12%. See below under “Revolving Credit Facility” for additional information regarding our revolving credit facility, including the interest rate applicable to any borrowing under such facility.
Tax Receivable Agreement. We entered into a tax receivable agreement with our pre-IPO owners at the time of our initial public offering. Under the tax receivables agreement, we pay the pre-IPO owners (or any permitted assignees) 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize, or in some circumstances are deemed to realize, as a result of an expected increase in our share of tax basis in LLC’s tangible and intangible assets, including increases attributable to payments made under the tax receivable agreement. These obligations will not be paid if we do not realize cash tax savings. We estimate that approximately $4.0 million will be due under the tax receivable agreement within the next 12 months. In accordance with the tax receivable agreement, the next payment is anticipated to occur approximately 75 days after filing the federal tax return which was filed on March 15, 2023.
Operating Lease Obligations. Lease commitments consist principally of leases for our manufacturing facilities. Our expected operating lease payments due within the next 12 months are $2.7 million and our total committed lease payments are $11.7 million as of March 31, 2023. Additional information regarding our operating leases is available in Note 10 of our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report.
Purchase Obligations. In the ordinary course of business, we enter into purchase orders from a variety of suppliers, primarily for raw materials, in order to manage our various operating needs. The orders are expected to be purchased throughout fiscal year 2023 and 2024. We or the vendor can generally terminate the purchase orders at any time. These purchase orders do not contain any termination payments or other penalties if cancelled. As of March 31, 2023, we had purchase orders in the amount of $146.1 million due within the next 12 months.
Stock Repurchase Program. During the nine months ended March 31, 2023, we repurchased 143,759 shares of Class A Common Stock for $7.9 million in cash including related fees and expenses under our prior repurchase program which expired on November 8, 2022. On November 3, 2022, our Board of Directors authorized a stock repurchase program to allow for the repurchase of up to $100.0 million of our Class A Common Stock and the LLC's LLC Units (the “2022 Repurchase Program”)
for the period from November 8, 2022 to November 8, 2023. As of March 31, 2023, $100.0 million was available to repurchase shares of Class A Common Stock and LLC Units under the 2022 Repurchase Program. We may repurchase shares of our common stock at any time or from time to time, without prior notice, subject to market conditions and other considerations. We have no obligation to repurchase any shares of our common stock under the share repurchase program. We intend to fund repurchases under the 2022 Repurchase Program from cash on hand.
Our future capital requirements beyond the next 12 months will depend on many factors, including the general economic environment in which we operate and our ability to generate cash flow from operations, which are more uncertain as a result of inflation, increasing interest rates, increasing fuel prices, ongoing supply chain disruptions and the continuing impact of COVID-19. Our liquidity needs during this uncertain time will depend on multiple factors, including our ability to continue operations and production of boats, the performance of our dealers and suppliers, the impact of the general economy on our dealers, suppliers and retail customers, the availability of sufficient amounts of financing, and our operating performance. In addition, as noted elsewhere, a jury recently found that our subsidiary, Malibu Boats, LLC, and another entity that was the manufacturer of the boat at issue, Malibu Boats West, Inc., negligently failed to warn of a hazard posed by the boat and that such failure was a proximate cause of the death of a passenger in the boat. Based on the jury’s finding of successor liability, the trial court entered judgment for the full amount of the verdict against Malibu Boats, LLC, with a potential maximum liability to Malibu Boats, LLC of $140.0 million, plus post-judgment interest at a rate of 6.25% per annum. Malibu Boats, LLC may also be required to pay prejudgment interest of approximately $8.0 million, if the Batchelder I Plaintiffs are successful on their appeal for such interest, and an award of reasonable attorneys' fees to the plaintiffs, which the plaintiffs claim should be approximately $56.0 million. The trial court postponed any ruling on the plaintiffs' contested motion for attorneys' fees pending the resolution of our post-trial motions and related appeals. On July 17, 2022, the trial court denied the post-trial motions of Malibu Boats, LLC, and we have since filed a notice of appeal. Pending resolution of the appeals process, the payment of any damages in this matter is stayed. We maintain product liability insurance applicable to this case with coverage limits of $26.0 million. At least one insurer has asserted potential coverage defenses and may dispute the scope of its obligation to us. In addition, we have potential claims against the insurers that we may decide to pursue with respect to this matter, but we cannot provide any assurance that we will pursue those claims or be successful if we do. If the outcome of the case is ultimately unfavorable to us after appeal, we would need to pay for any final judgment in excess of the amount paid by our insurance providers.
The following table summarizes the cash flows from operating, investing and financing activities (dollars in thousands):
Nine Months Ended March 31,
2023
2022
Total cash provided by (used in):
Operating activities
$
107,990
$
119,042
Investing activities
(43,505)
(46,636)
Financing activities
(112,847)
(56,932)
Impact of currency exchange rates on cash balances
(224)
13
(Decrease) increase in cash
$
(48,586)
$
15,487
Operating Activities
Net cash provided by operating activities was $108.0 million for the nine months ended March 31, 2023, compared to $119.0 million for the nine months ended March 31, 2022, a decrease of $11.1 million. The decrease in cash provided by operating activities resulted from an increase of $12.5 million in net income (after consideration of non-cash items included in net income, primarily related to depreciation, amortization, deferred tax assets and non-cash compensation) offset by a net decrease in operating assets and liabilities of $23.6 million related to the timing of collections of accounts receivables, payments for accruals and payables, and purchases of inventory.
Investing Activities
Net cash used in investing activities was $43.5 million for the nine months ended March 31, 2023, and $46.6 million for the nine months ended March 31, 2022. Net cash used for investing activities for the nine months ended March 31, 2023 was primarily related to increased capital expenditures compared to the nine months ended March 31, 2022. We also acquired certain assets of AmTech, LLC and BTR, LLC related to our wire harness operations during the nine months ended March 31, 2022.
Net cash used in financing activities was $112.8 million for the nine months ended March 31, 2023, compared to net cash used in financing activities of $56.9 million for the nine months ended March 31, 2022, a change of $55.9 million. During the nine months ended March 31, 2023, we repaid $23.1 million on our term loans and repaid $217.0 million of borrowings under our revolving credit facility and repurchased $7.9 million of our Class A Common Stock under our prior repurchase program. We also paid $2.9 million on taxes for shares withheld upon the vesting of restricted stock awards, paid $2.4 million in distributions to LLC Unit holders and paid $1.4 million in deferred financing costs. We received proceeds of $141.7 million under our amended revolving credit facility noted below and received $0.1 million in proceeds from the exercise of stock options. During the nine months ended March 31, 2022, we repaid $20.0 million of borrowings under our revolving credit facility and repurchased $30.2 million of our Class A Common Stock under our previously announced stock repurchase program. We also repaid $3.9 million on our term loans, paid $2.1 million on taxes for shares withheld upon the vesting of restricted stock awards, paid $1.7 million in distributions to LLC Unit holders and received $1.0 million in proceeds from the exercise of stock options.
Revolving Credit Facility
We have a revolving credit facility in an aggregate principal amount of up to $350.0 million with a maturity date of July 8, 2027. As of March 31, 2023, we had $21.7 million outstanding under our revolving credit facility and $1.5 million in outstanding letters of credit, with $326.8 million available for borrowing.
On July 8, 2022, we entered into our Credit Agreement with Truist Bank, as the administrative agent, swingline lender and issuing bank, that amended and restated our Prior Credit Agreement. The Credit Agreement increased the borrowing capacity of the revolving credit facility from $170.0 million to $350.0 million. We have the option to request that lenders increase the amount available under the revolving credit facility by, or obtain incremental term loans of, up to $200.0 million, subject to the terms of the Credit Agreement and only if existing or new lenders choose to provide additional term or revolving commitments.
Our indirect subsidiary, Malibu Boats, LLC is the borrower under the Credit Agreement and its obligations are guaranteed by the LLC and, subject to certain exceptions, the present and future domestic subsidiaries of Malibu Boats, LLC, and all such obligations are secured by substantially all of the assets of the LLC, Malibu Boats, LLC and such subsidiary guarantors. Malibu Boats, Inc. is not a party to the Credit Agreement.
All borrowings under the Credit Agreement bear interest at a rate equal to either, at our option, (i) the highest of the prime rate, the Federal Funds Rate plus 0.5%, or one-month Term SOFR plus 1% (the “Base Rate”) or (ii) SOFR, in each case plus an applicable margin ranging from 1.25% to 2.00% with respect to SOFR borrowings and 0.25% to 1.00% with respect to Base Rate borrowings. The applicable margin will be based upon the consolidated leverage ratio of the LLC and its subsidiaries. We are required to pay a commitment fee for the unused portion of the revolving credit facility, which will range from 0.15% to 0.30% per annum, depending on the LLC’s and its subsidiaries’ consolidated leverage ratio.
The Credit Agreement contains certain customary representations and warranties, and notice requirements for the occurrence of specific events such as the occurrence of any event of default or pending or threatened litigation. The Credit Agreement also requires compliance with certain customary financial covenants consisting of a minimum ratio of EBITDA to interest expense and a maximum ratio of total debt to EBITDA. The Credit Agreement contains restrictive covenants regarding indebtedness, liens, fundamental changes, investments, dividends and distributions, disposition of assets, transactions with affiliates, negative pledges, hedging transactions, certain prepayments of indebtedness, accounting changes and governmental regulation.
The Credit Agreement also contains customary events of default. If an event of default has occurred and continues beyond any applicable cure period, the administrative agent may (i) accelerate all outstanding obligations under the Credit Agreement or (ii) terminate the commitments, amongst other remedies. Additionally, the lenders are not obligated to fund any new borrowing under the Credit Agreement while an event of default is continuing.
Repurchase Commitments
Our dealers have arrangements with certain finance companies to provide secured floor plan financing for the purchase of our boats. These arrangements indirectly provide liquidity to us by financing dealer purchases of our products, thereby minimizing the use of our working capital in the form of accounts receivable. A majority of our sales are financed under similar arrangements, pursuant to which we receive payment within a few days of shipment of the product. We have agreed to repurchase products repossessed by the finance companies if a dealer defaults on its debt obligations to a finance company and the boat is returned to us, subject to certain limitations. Our financial exposure under these agreements is limited to the difference between the amounts unpaid by the dealer with respect to the repossessed product plus costs of repossession and the
amount received on the resale of the repossessed product. During the nine months ended March 31, 2023 and 2022, we did not repurchase any boats under our repurchase agreements. An adverse change in retail sales could require us to repurchase repossessed units upon an event of default by any of our dealers, subject to the annual limitation.
Potential Impact of LIBOR Transition
Malibu Boats, Inc. is required to make a good faith effort to ensure that it has sufficient cash available to make any required payments under the tax receivable agreement. The limited liability company agreement of the LLC requires the LLC to make “tax distributions” which, in the ordinary course, will be sufficient to pay the actual tax liability of Malibu Boats, Inc. and to fund required payments under the tax receivable agreement. If for any reason the LLC is not able to make a tax distribution in an amount that is sufficient to make any required payment under the tax receivable agreement or we otherwise lack sufficient funds, interest would accrue on any unpaid amounts at LIBOR, plus 500 basis points until they are paid. Recent actions taken by the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, indicate that the continuation of U.S. LIBOR on the current basis cannot and will not be guaranteed after June 30, 2023. Moreover, it is possible that U.S. LIBOR will be discontinued or modified prior to June 30, 2023. Our tax receivable agreement, however, does not provide for an alternative reference rate to LIBOR and, while we do not currently anticipate failing to pay any amounts owed under our tax receivable agreement, it is unclear how we would determine interest on any such amounts should we fail to pay as required under our tax receivable agreement.
Critical Accounting Policies
As of March 31, 2023, there were no other significant changes in the application of our critical accounting policies or estimation procedures from those presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to our Annual Report on Form 10-K for the year ended June 30, 2022, for a complete discussion on the Company’s market risk. There have been no material changes in market risk from those disclosed in the Company's Form 10-K for the year ended June 30, 2022.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and interim chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this Quarterly Report, we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and interim chief financial officer, of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our chief executive officer and interim chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2023.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The discussion of legal matters under the section entitled "Legal Proceedings" is incorporated by reference from Note 15 of our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report.
Item 1A. Risk Factors
During the quarter ended March 31, 2023, there were no material changes to the risk factors discussed in Part I, Item 1A. "Risk Factors” of our Annual Report on Form 10-K for the year ended June 30, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
In a series of transactions on February 6 and February 7, 2023, in connection with the exchange of limited liability company interests of the LLC by a member of the LLC, the Company issued a total of 5,000 shares of its Class A Common Stock, par value $0.01 per share for nominal consideration to such member in reliance on the exemption under Section 4(a)(2) of the Securities Act.
In a series of transactions on February 7 and February 8, 2023, in connection with the exchange of limited liability company interests of the LLC by a member of the LLC, the Company issued a total of 140,000 shares of its Class A Common Stock, par value $0.01 per share for nominal consideration to such member in reliance on the exemption under Section 4(a)(2) of the Securities Act.
Exchange Agreement, dated as of February 5, 2014, by and among Malibu Boats, Inc. and Affiliates of Black Canyon Capital LLC and Horizon Holdings, LLC 3
Tax Receivable Agreement, dated as of February 5, 2014, by and among Malibu Boats, Inc., Malibu Boats Holdings, LLC and the Other Members of Malibu Boats Holdings, LLC 3
Certificate of the Chief Executive Officer of Malibu Boats, Inc. pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certificate of the Interim Chief Financial Officer of Malibu Boats, Inc. pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer and Interim Chief Financial Officer of Malibu Boats, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 were formatted in Inline XBRL: (i) Condensed Consolidated Statements of Operations and Comprehensive Income, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL (Included as Exhibit 101).
(1) Filed as an exhibit to Amendment No. 1 to the Company’s registration statement on Form S-1 (Registration No. 333-192862) filed on January 8, 2014.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 001-36290) filed on February 7, 2023.
(3) Filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 001-36290) filed on February 6, 2014.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q/A (File No. 001-36290) filed on May 13, 2014.
(5) Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 001-36290) filed on June 27, 2014.
(6) Filed as an exhibit to the Company’s Annual Report on Form 10-K (File No. 001-36290) filed on August 26, 2021.
(7) Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 001-36290) filed on April 3, 2023.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
May 3, 2023
MALIBU BOATS, INC.
By:
/s/ Jack Springer
Jack Springer,
Chief Executive Officer
(Principal Executive Officer)
By:
/s/ David Black
David Black,
Interim Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
