MALIBU BOATS, INC. - Quarter Report: 2023 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) | ||||||||||||||
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||||
For the quarterly period ended September 30, 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, Tennessee 37774 | 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 October 25, 2023: | 20,397,303 | shares | ||||||
Class B Common Stock, par value $0.01, outstanding as of October 25, 2023: | 12 | shares | ||||||
TABLE OF CONTENTS
| Page | ||||||||
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 and management’s objectives for future operations. 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 ability to execute our manufacturing strategy; 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; 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, 2023, filed with the Securities and Exchange Commission on August 29, 2023, 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.
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Part I - Financial Information
Item 1. Financial Statements
MALIBU BOATS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In thousands, except share and per share data)
| Three Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net sales | $ | 255,830 | $ | 302,211 | |||||||
| Cost of sales | 199,036 | 227,606 | |||||||||
| Gross profit | 56,794 | 74,605 | |||||||||
| Operating expenses: | |||||||||||
| Selling and marketing | 5,752 | 5,186 | |||||||||
| General and administrative | 20,705 | 19,220 | |||||||||
| Amortization | 1,715 | 1,716 | |||||||||
| Operating income | 28,622 | 48,483 | |||||||||
| Other expense, net: | |||||||||||
| Other (income) expense, net | (10) | 70 | |||||||||
| Interest expense | 884 | 1,285 | |||||||||
| Other expense, net | 874 | 1,355 | |||||||||
| Income before provision for income taxes | 27,748 | 47,128 | |||||||||
| Provision for income taxes | 6,978 | 11,023 | |||||||||
| Net income | 20,770 | 36,105 | |||||||||
| Net income attributable to non-controlling interest | 511 | 1,222 | |||||||||
| Net income attributable to Malibu Boats, Inc. | $ | 20,259 | $ | 34,883 | |||||||
| Comprehensive income: | |||||||||||
| Net income | $ | 20,770 | $ | 36,105 | |||||||
| Other comprehensive (loss) income: | |||||||||||
| Change in cumulative translation adjustment | (751) | (1,436) | |||||||||
| Other comprehensive (loss) | (751) | (1,436) | |||||||||
| Comprehensive income | 20,019 | 34,669 | |||||||||
| Less: comprehensive income attributable to non-controlling interest | 493 | 1,173 | |||||||||
| Comprehensive income attributable to Malibu Boats, Inc. | $ | 19,526 | $ | 33,496 | |||||||
| Weighted-average shares outstanding used in computing net income per share: | |||||||||||
| Basic | 20,586,487 | 20,459,849 | |||||||||
| Diluted | 20,684,230 | 20,632,727 | |||||||||
| Net income available to Class A Common Stock per share: | |||||||||||
| Basic | $ | 0.98 | $ | 1.70 | |||||||
| Diluted | $ | 0.98 | $ | 1.69 | |||||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements (Unaudited).
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MALIBU BOATS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share and per share data)
| September 30, 2023 | June 30, 2023 | ||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash | $ | 45,462 | $ | 78,937 | |||||||
| Trade receivables, net | 64,846 | 68,381 | |||||||||
| Inventories, net | 174,128 | 171,189 | |||||||||
| Prepaid expenses and other current assets | 12,083 | 7,827 | |||||||||
| Total current assets | 296,519 | 326,334 | |||||||||
| Property, plant and equipment, net | 237,548 | 204,792 | |||||||||
| Goodwill | 100,389 | 100,577 | |||||||||
| Other intangible assets, net | 219,717 | 221,458 | |||||||||
| Deferred tax assets | 58,566 | 62,573 | |||||||||
| Other assets | 9,668 | 10,190 | |||||||||
| Total assets | $ | 922,407 | $ | 925,924 | |||||||
| Liabilities | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 37,995 | $ | 40,402 | |||||||
| Accrued expenses | 109,478 | 187,078 | |||||||||
| Income taxes and tax distribution payable | 839 | 847 | |||||||||
| Payable pursuant to tax receivable agreement, current portion | 4,111 | 4,111 | |||||||||
| Total current liabilities | 152,423 | 232,438 | |||||||||
| Deferred tax liabilities | 28,650 | 28,453 | |||||||||
| Other liabilities | 9,468 | 9,926 | |||||||||
| Payable pursuant to tax receivable agreement, less current portion | 39,354 | 39,354 | |||||||||
| Long-term debt | 65,000 | — | |||||||||
| Total liabilities | 294,895 | 310,171 | |||||||||
| Stockholders' Equity | |||||||||||
Class A Common Stock, par value $0.01 per share, 100,000,000 shares authorized; 20,404,413 shares issued and outstanding as of September 30, 2023; 20,603,822 issued and outstanding as of June 30, 2023 | 202 | 204 | |||||||||
Class B Common Stock, par value $0.01 per share, 25,000,000 shares authorized; 12 shares issued and outstanding as of September 30, 2023 and June 30, 2023 | — | — | |||||||||
Preferred Stock, par value $0.01 per share; 25,000,000 shares authorized; no shares issued and outstanding as of September 30, 2023 and June 30, 2023 | — | — | |||||||||
| Additional paid in capital | 78,194 | 86,321 | |||||||||
| Accumulated other comprehensive loss | (5,091) | (4,340) | |||||||||
| Accumulated earnings | 545,956 | 525,697 | |||||||||
| Total stockholders' equity attributable to Malibu Boats, Inc. | 619,261 | 607,882 | |||||||||
| Non-controlling interest | 8,251 | 7,871 | |||||||||
| Total stockholders’ equity | 627,512 | 615,753 | |||||||||
| Total liabilities and stockholders' equity | $ | 922,407 | $ | 925,924 | |||||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements (Unaudited).
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MALIBU BOATS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
(In thousands, except number of Class B shares)
| Class A Common Stock | Class B Common Stock | Additional Paid In Capital | Accumulated Other Comprehensive Loss | Accumulated Earnings | Non-controlling Interest in LLC | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | 20,603 | $ | 204 | 12 | $ | — | $ | 86,321 | $ | (4,340) | $ | 525,697 | $ | 7,871 | $ | 615,753 | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 20,259 | 511 | 20,770 | |||||||||||||||||||||||||||||||||||||||||
| Stock based compensation, net of withholding taxes on vested equity awards | — | — | — | — | 1,443 | — | — | — | 1,443 | |||||||||||||||||||||||||||||||||||||||||
| Issuances of equity for services | — | — | — | — | 47 | — | — | — | 47 | |||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (199) | (2) | — | — | (9,617) | — | — | — | (9,619) | |||||||||||||||||||||||||||||||||||||||||
| Distributions to LLC Unit holders | — | — | — | — | — | — | — | (114) | (114) | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | (751) | — | (17) | (768) | |||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | 20,404 | $ | 202 | 12 | $ | — | $ | 78,194 | $ | (5,091) | $ | 545,956 | $ | 8,251 | $ | 627,512 | ||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid In Capital | Accumulated Other Comprehensive Loss | Accumulated Earnings | Non-controlling Interest in LLC | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | 20,501 | $ | 203 | 10 | $ | — | $ | 85,294 | $ | (3,507) | $ | 421,184 | $ | 10,394 | $ | 513,568 | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 34,883 | 1,222 | 36,105 | |||||||||||||||||||||||||||||||||||||||||
| Stock based compensation, net of withholding taxes on vested equity awards | (12) | — | — | — | 743 | — | — | — | 743 | |||||||||||||||||||||||||||||||||||||||||
| Issuances of equity for services | — | — | — | — | 67 | — | — | — | 67 | |||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (144) | (1) | — | — | (7,867) | — | — | — | (7,868) | |||||||||||||||||||||||||||||||||||||||||
| Distributions to LLC Unit holders | — | — | — | — | — | — | — | (696) | (696) | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | (1,436) | — | (43) | (1,479) | |||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 20,345 | $ | 202 | 10 | $ | — | $ | 78,237 | $ | (4,943) | $ | 456,067 | $ | 10,877 | $ | 540,440 | ||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements (Unaudited).
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MALIBU BOATS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
| Three Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating activities: | |||||||||||
| Net income | $ | 20,770 | $ | 36,105 | |||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||||||
| Non-cash compensation expense | 1,460 | 1,635 | |||||||||
| Non-cash compensation to directors | 297 | 290 | |||||||||
| Depreciation | 6,324 | 5,296 | |||||||||
| Amortization | 1,715 | 1,716 | |||||||||
| Deferred income taxes | 4,199 | 1,137 | |||||||||
| Other items, net | 533 | 617 | |||||||||
| Change in operating assets and liabilities: | |||||||||||
| Trade receivables | 3,501 | 5,153 | |||||||||
| Inventories | (3,217) | (25,714) | |||||||||
| Prepaid expenses and other assets | (4,549) | (3,784) | |||||||||
| Accounts payable | (1,995) | 7,154 | |||||||||
| Income taxes payable | 675 | 8,846 | |||||||||
| Accrued expenses | (77,650) | (6,195) | |||||||||
| Other liabilities | (474) | (567) | |||||||||
| Net cash (used in) provided by operating activities | (48,411) | 31,689 | |||||||||
| Investing activities: | |||||||||||
| Purchases of property, plant and equipment | (39,527) | (12,362) | |||||||||
| Net cash used in investing activities | (39,527) | (12,362) | |||||||||
| Financing activities: | |||||||||||
| Proceeds from revolving credit facility | 75,000 | 121,700 | |||||||||
| Principal payments on long-term borrowings | — | (23,125) | |||||||||
| Payments on revolving credit facility | (10,000) | (147,000) | |||||||||
| Payment of deferred financing costs | — | (1,362) | |||||||||
| Cash paid for withholding taxes on vested restricted stock | — | (871) | |||||||||
| Distributions to LLC Unit holders | (776) | (1,045) | |||||||||
| Repurchase and retirement of common stock | (9,619) | (7,868) | |||||||||
| Net cash provided by (used in) financing activities | 54,605 | (59,571) | |||||||||
| Effect of exchange rate changes on cash | (142) | (449) | |||||||||
| Changes in cash | (33,475) | (40,693) | |||||||||
| Cash—Beginning of period | 78,937 | 83,744 | |||||||||
| Cash—End of period | $ | 45,462 | $ | 43,051 | |||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for interest | $ | 95 | $ | 1,056 | |||||||
| Cash paid for income taxes | 579 | 760 | |||||||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements (Unaudited).
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MALIBU BOATS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per unit and share and per share data)
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies
Organization
Malibu Boats, Inc. (“MBI” and, 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, 2023, 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
There are no new accounting pronouncements that are expected to have a significant impact on the Company's consolidated financial statements and related disclosures.
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2. Revenue Recognition
The following tables disaggregate the Company's revenue by major product type and geography:
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||
| Malibu | Saltwater Fishing | Cobalt | Consolidated | ||||||||||||||||||||
| Revenue by product: | |||||||||||||||||||||||
| Boat and trailer sales | $ | 99,439 | $ | 92,252 | $ | 57,104 | $ | 248,795 | |||||||||||||||
| Part and other sales | 5,566 | 370 | 1,099 | 7,035 | |||||||||||||||||||
| Net Sales | $ | 105,005 | $ | 92,622 | $ | 58,203 | $ | 255,830 | |||||||||||||||
| Revenue by geography: | |||||||||||||||||||||||
| North America | $ | 97,055 | $ | 91,865 | $ | 57,456 | $ | 246,376 | |||||||||||||||
| International | 7,950 | 757 | 747 | 9,454 | |||||||||||||||||||
| Net Sales | $ | 105,005 | $ | 92,622 | $ | 58,203 | $ | 255,830 | |||||||||||||||
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||
| Malibu | Saltwater Fishing | Cobalt | Consolidated | ||||||||||||||||||||
| Revenue by product: | |||||||||||||||||||||||
| Boat and trailer sales | $ | 140,163 | $ | 91,893 | $ | 63,630 | $ | 295,686 | |||||||||||||||
| Part and other sales | 5,005 | 340 | 1,180 | 6,525 | |||||||||||||||||||
| Net Sales | $ | 145,168 | $ | 92,233 | $ | 64,810 | $ | 302,211 | |||||||||||||||
| Revenue by geography: | |||||||||||||||||||||||
| North America | $ | 130,650 | $ | 88,941 | $ | 62,281 | $ | 281,872 | |||||||||||||||
| International | 14,518 | 3,292 | 2,529 | 20,339 | |||||||||||||||||||
| Net Sales | $ | 145,168 | $ | 92,233 | $ | 64,810 | $ | 302,211 | |||||||||||||||
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
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on the portion of the LLC Units owned by such Unit holders. The ownership of the LLC is summarized as follows:
| As of September 30, 2023 | As of June 30, 2023 | ||||||||||||||||||||||
| Units | Ownership % | Units | Ownership % | ||||||||||||||||||||
| Non-controlling LLC Unit holders ownership in Malibu Boats Holdings, LLC | 455,919 | 2.2 | % | 455,919 | 2.2 | % | |||||||||||||||||
| Malibu Boats, Inc. ownership in Malibu Boats Holdings, LLC | 20,404,413 | 97.8 | % | 20,603,822 | 97.8 | % | |||||||||||||||||
| 20,860,332 | 100.0 | % | 21,059,741 | 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 three months ended September 30, 2023, the Company did not cause the LLC to issue any LLC Units to the Company. During the three months ended September 30, 2023, 133 LLC Units were canceled in connection with the reversal of previously vested awards and the retirement of 133 treasury shares in accordance with the LLC Agreement. Also during the three months ended September 30, 2023, 199,276 LLC Units were redeemed and canceled by the LLC in connection with the purchase and retirement of 199,276 treasury shares under the Company's stock repurchase program that expires on November 8, 2023.
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 September 30, 2023 and June 30, 2023, tax distributions payable to non-controlling LLC Unit holders were $114 and $776, respectively. During the three months ended September 30, 2023 and 2022, tax distributions paid to the non-controlling LLC Unit holders were $776 and $1,045, 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.
4. Inventories
Inventories, net consisted of the following:
| As of September 30, 2023 | As of June 30, 2023 | ||||||||||
| Raw materials | $ | 136,266 | $ | 142,948 | |||||||
| Work in progress | 25,585 | 19,222 | |||||||||
| Finished goods | 12,277 | 9,019 | |||||||||
| Total inventories | $ | 174,128 | $ | 171,189 | |||||||
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5. Property, Plant and Equipment
Property, plant and equipment, net consisted of the following:
| As of September 30, 2023 | As of June 30, 2023 | ||||||||||
| Land | $ | 4,905 | $ | 4,905 | |||||||
| Building and leasehold improvements | 119,442 | 119,324 | |||||||||
| Machinery and equipment | 107,498 | 103,362 | |||||||||
| Furniture and fixtures | 12,819 | 12,672 | |||||||||
| Construction in process | 82,132 | 47,482 | |||||||||
| 326,796 | 287,745 | ||||||||||
| Less: Accumulated depreciation | (89,248) | (82,953) | |||||||||
| Property, plant and equipment, net | $ | 237,548 | $ | 204,792 | |||||||
Depreciation expense was $6,324 and $5,296 for the three months ended September 30, 2023 and 2022, respectively, substantially all of which was recorded in cost of sales.
6. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the three months ended September 30, 2023 were as follows:
| Malibu | Saltwater Fishing | Cobalt | Consolidated | ||||||||||||||||||||
Goodwill as of June 30, 2023 | $ | 12,072 | $ | 68,714 | $ | 19,791 | $ | 100,577 | |||||||||||||||
| Effect of foreign currency changes on goodwill | (188) | — | — | (188) | |||||||||||||||||||
Goodwill as of September 30, 2023 | $ | 11,884 | $ | 68,714 | $ | 19,791 | $ | 100,389 | |||||||||||||||
The components of other intangible assets were as follows:
| As of September 30, 2023 | As of June 30, 2023 | Estimated Useful Life (in years) | Weighted-Average Remaining Useful Life (in years) | ||||||||||||||||||||
| Definite-lived intangibles: | |||||||||||||||||||||||
| Dealer relationships | $ | 131,659 | $ | 131,725 | 15-20 | 15.4 | |||||||||||||||||
| Patent | 2,600 | 2,600 | 15 | 8.8 | |||||||||||||||||||
| Trade name | 100 | 100 | 15 | 6.7 | |||||||||||||||||||
| Non-compete agreement | 45 | 46 | 10 | 1.1 | |||||||||||||||||||
| Total | 134,404 | 134,471 | |||||||||||||||||||||
| Less: Accumulated amortization | (32,887) | (31,213) | |||||||||||||||||||||
| Total definite-lived intangible assets, net | 101,517 | 103,258 | |||||||||||||||||||||
| Indefinite-lived intangible: | |||||||||||||||||||||||
| Trade name | 118,200 | 118,200 | |||||||||||||||||||||
| Total other intangible assets, net | $ | 219,717 | $ | 221,458 | |||||||||||||||||||
Amortization expense recognized on all amortizable intangibles was $1,715 and $1,716 for the three months ended September 30, 2023 and 2022, respectively.
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Estimated future amortization expenses as of September 30, 2023 are as follows:
| Fiscal years ending June 30: | Amount | |||||||
| Remainder of 2024 | $ | 5,088 | ||||||
| 2025 | 6,799 | |||||||
| 2026 | 6,797 | |||||||
| 2027 | 6,797 | |||||||
| 2028 | 6,797 | |||||||
| 2029 and thereafter | 69,239 | |||||||
| $ | 101,517 | |||||||
7. Accrued Expenses
Accrued expenses consisted of the following:
| As of September 30, 2023 | As of June 30, 2023 | ||||||||||
| Warranties | $ | 41,597 | $ | 41,709 | |||||||
| Dealer incentives | 18,517 | 14,996 | |||||||||
| Accrued compensation | 17,188 | 19,671 | |||||||||
| Current operating lease liabilities | 2,324 | 2,324 | |||||||||
| Litigation settlement | — | 100,000 | |||||||||
| Accrued legal and professional fees | 21,866 | 1,899 | |||||||||
| Customer deposits | 4,202 | 4,054 | |||||||||
| Other accrued expenses | 3,784 | 2,425 | |||||||||
| Total accrued expenses | $ | 109,478 | $ | 187,078 | |||||||
Litigation settlement represents the settlement of product liability cases in June 2023 for $100,000. Accrued legal and professional fees includes approximately $21,000 in insurance coverage proceeds that are subject in certain cases to reservations of rights by the insurance carriers. The proceeds will be considered a liability in accrued expenses until the resolution of the litigation. For more information, refer to Note 15 of our condensed consolidated financial statements included elsewhere in this report.
8. Product Warranties
The Company's Malibu and Axis brand boats have a limited warranty for a period up to five years. The Company's 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
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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. Accordingly, the Company has less historical claims experience for warranty years and , 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 September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Beginning balance | $ | 41,709 | $ | 38,673 | |||||||
| Add: Warranty expense | 6,414 | 6,405 | |||||||||
| Less: Warranty claims paid | (6,526) | (5,679) | |||||||||
| Ending balance | $ | 41,597 | $ | 39,399 | |||||||
9. Financing
Outstanding debt consisted of the following:
| As of September 30, 2023 | As of June 30, 2023 | ||||||||||
| Term loan | $ | — | $ | — | |||||||
| Revolving credit loan | 65,000 | — | |||||||||
| Total debt | 65,000 | — | |||||||||
| Less current maturities | — | — | |||||||||
| Long-term debt less current maturities | $ | 65,000 | $ | — | |||||||
Long-Term Debt
On July 8, 2022, Boats LLC entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”) which provides Boats LLC with a revolving credit facility in an aggregate principal amount of up to $350,000. As of September 30, 2023, the Company had $65,000 outstanding under its revolving credit facility and $1,578 in outstanding letters of credit, with $283,422 available for borrowing. The revolving credit facility matures on July 8, 2027. 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 $200,000, 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 is based upon the consolidated leverage ratio of the LLC and its subsidiaries. As of September 30, 2023, the interest rate on the Company’s revolving credit facility was 6.72%. The Company is required to pay a commitment fee for any unused portion of the revolving credit facility which ranges 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
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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, share repurchases, 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 September 30, 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 September 30, 2023 | As of June 30, 2023 | ||||||||||||||||||
| Assets | ||||||||||||||||||||
| Right-of-use assets | $ | 8,358 | $ | 8,808 | ||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current operating lease liabilities | $ | 2,324 | $ | 2,324 | ||||||||||||||||
| Long-term operating lease liabilities | 7,317 | 7,843 | ||||||||||||||||||
| Total lease liabilities | $ | 9,641 | $ | 10,167 | ||||||||||||||||
| Classification | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | ||||||||||||||||||
Operating lease costs (1) | Cost of sales | $ | 705 | $ | 667 | |||||||||||||||
| Selling and marketing, and general and administrative | 240 | 219 | ||||||||||||||||||
| Sublease income | Other (income) expense, net | (10) | (10) | |||||||||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | Cash flows from operating activities | 664 | 623 | |||||||||||||||||
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(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 September 30, 2023 and 2022 was 4.34 years and 5.31 years, respectively. As of September 30, 2023 and 2022, the weighted-average discount rate determined based on the Company's incremental borrowing rate is 3.69% and 3.64%, respectively.
Future annual minimum lease payments for the following fiscal years as of September 30, 2023 are as follows:
| Amount | ||||||||
| Remainder of 2024 | $ | 1,992 | ||||||
| 2025 | 2,370 | |||||||
| 2026 | 2,274 | |||||||
| 2027 | 2,258 | |||||||
| 2028 | 1,505 | |||||||
| 2029 and thereafter | 1 | |||||||
| Total | 10,400 | |||||||
| Less: imputed interest | (759) | |||||||
| Present value of lease liabilities | $ | 9,641 | ||||||
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 September 30, 2023 | As of June 30, 2023 | ||||||||||
| Beginning fiscal year balance | $ | 43,465 | $ | 45,541 | |||||||
| Additions (reductions) to tax receivable agreement: | |||||||||||
| Exchange of LLC Units for Class A Common Stock | — | 1,710 | |||||||||
| Adjustment for change in estimated state tax rate or benefits | — | 188 | |||||||||
| Payments under tax receivable agreement | — | (3,974) | |||||||||
| 43,465 | 43,465 | ||||||||||
| Less: current portion under tax receivable agreement | (4,111) | (4,111) | |||||||||
| Ending balance | $ | 39,354 | $ | 39,354 | |||||||
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
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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 September 30, 2023 and June 30, 2023, the Company recorded deferred tax assets of $118,148 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 due by April 15, 2024.
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 September 30, 2023 and June 30, 2023, the Company maintained a total valuation allowance of $16,895 and $16,876, 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 three months ended September 30, 2023 relating to the Inflation Reduction Act.
For the three months ended September 30, 2023 and 2022, the Company's effective tax rate was 25.1% and 23.4%, respectively. For the three months ended September 30, 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. For the three months ended September 30, 2023, this increase in tax rate was partially offset by the benefit of the foreign derived intangible income deduction. For the three months ended September 30, 2022, this increase in tax rate was partially offset by a windfall benefit generated by certain stock-based compensation as well as the benefit of the foreign derived intangible income deduction.
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
13
rights, restricted stock, restricted stock units, dividend equivalent awards and performance awards. As of September 30, 2023, 403,182 shares remain available for future issuance under the long term incentive plan.
The following is a summary of the changes in the Company's stock options for the three months ended September 30, 2023:
| Shares | Weighted-Average Exercise Price/Share | ||||||||||
Total outstanding options as of June 30, 2023 | 17,973 | $ | 37.55 | ||||||||
| Options granted | — | — | |||||||||
| Options exercised | — | — | |||||||||
Outstanding options as of September 30, 2023 | 17,973 | 37.55 | |||||||||
Exercisable as of September 30, 2023 | 17,973 | $ | 37.55 | ||||||||
The following is a summary of the changes in non-vested restricted stock units and restricted stock awards for the three months ended September 30, 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, 2023 | 324,824 | $ | 57.98 | ||||||||
| Granted | 802 | 58.66 | |||||||||
| Vested | (802) | 58.66 | |||||||||
| Forfeited | (3,026) | 56.72 | |||||||||
Total Non-vested Restricted Stock Units and Restricted Stock Awards as of September 30, 2023 | 321,798 | $ | 57.99 | ||||||||
Stock-based compensation expense attributable to the Company's share-based equity awards was $1,460 and $1,635 for the three months ended September 30, 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 months ended September 30, 2023 include 802 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
14
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 September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Basic: | |||||||||||
| Net income attributable to Malibu Boats, Inc. | $ | 20,259 | $ | 34,883 | |||||||
| Shares used in computing basic net income per share: | |||||||||||
| Weighted-average Class A Common Stock | 20,322,239 | 20,215,758 | |||||||||
| Weighted-average participating restricted stock units convertible into Class A Common Stock | 264,248 | 244,091 | |||||||||
| Basic weighted-average shares outstanding | 20,586,487 | 20,459,849 | |||||||||
| Basic net income per share | $ | 0.98 | $ | 1.70 | |||||||
| Diluted: | |||||||||||
| Net income attributable to Malibu Boats, Inc. | $ | 20,259 | $ | 34,883 | |||||||
| Shares used in computing diluted net income per share: | |||||||||||
| Basic weighted-average shares outstanding | 20,586,487 | 20,459,849 | |||||||||
| Restricted stock units granted to employees | 65,118 | 90,924 | |||||||||
| Stock options granted to employees | 5,409 | 14,767 | |||||||||
| Market performance awards granted to employees | 27,216 | 67,187 | |||||||||
Diluted weighted-average shares outstanding 1 | 20,684,230 | 20,632,727 | |||||||||
| Diluted net income per share | $ | 0.98 | $ | 1.69 | |||||||
1 The Company excluded 470,262 and 628,436 potentially dilutive shares from the calculation of diluted net income per share for the three months ended September 30, 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 $400,747 and $385,448 as of September 30, 2023 and June 30, 2023, 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 months ended September 30, 2023 and 2022, there were no repurchases and as of September 30, 2023, the Company has not been notified about any probable repossessions. Therefore, the Company did not carry a reserve for repurchases as of September 30, 2023 consistent with June 30, 2023.
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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 September 30, 2023 and June 30, 2023, 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, the Company 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 June 30, 2023, the Company had deposited approximately $7,800 in escrow pursuant to the Purchase Agreement. On July 25, 2023, the transaction closed and the Company paid the remaining $25,500 balance of the purchase price. In addition to the purchase price, the Company has incurred approximately $5,300 of capital expenditures through September 30, 2023 to update the facility to meet its operational needs and expects to incur additional capital expenditures of approximately $14,100 with respect to the facility.
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 believes there are no product liability claims as of September 30, 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. Management does not believe there are any pending claims (asserted or unasserted) as of September 30, 2023 that would have a material adverse impact on the Company's results of operations, financial condition or cash flows.
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Legal Proceedings
Insurance Litigation
MBI and its indirect subsidiary Boats LLC were 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”). Boats LLC was 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” and, together with the Batchelder I Plaintiffs, the “Batchelder Plaintiffs”) v. Malibu Boats, LLC v. Dennis Michael Ficarra; Superior Court of Rabun County, Civil Action File No. 2022-CV-0034 (the “Batchelder II Matter” and, together with the Batchelder I Matter, the “Batchelder Matters”). On June 30, 2023, MBI and Boats LLC entered into a Confidential General Release and Settlement Agreement (the “Settlement Agreement”) with the Batchelder Plaintiffs in settlement of the Batchelder Matters and all matters related to the Batchelder Matters. Pursuant to the Settlement Agreement, among other things, Malibu Boats, Inc., or Boats LLC, as the case may be, paid (or caused to be paid) to the Batchelder Plaintiffs and their agents a total of $100,000, of which (a) $40,000 was paid to the Batchelder Plaintiffs and their agents promptly following the execution of the Settlement Agreement and (b) $60,000 was placed in an escrow account and held by the Escrow Agent pursuant to the terms of an Escrow Agreement. All conditions for releasing the $60,000 placed in the escrow account have been satisfied.
MBI and its subsidiaries, including Boats LLC, maintain liability insurance applicable to the Batchelder Matters described above with coverage up to $26,000. As of September 30, 2023, the Company had received approximately $21,000 in insurance coverage proceeds, subject in certain cases to reservations of rights by the insurance carriers. The Company contends that the insurance carriers are responsible for the entirety of the $100,000 settlement amount and related expenses, and therefore, the insurers’ payments to date are well below what they should have tendered to Boats LLC. Accordingly, on July 3, 2023, Boats LLC filed a complaint against Federal Insurance Company and Starr Indemnity & Liability Company alleging that the insurers unreasonably failed to comply with their obligations by refusing, negligently, and in bad faith, to settle covered claims within their available policy limits prior to trial. The Company intends to vigorously pursue its claims against its insurers to recover the full $100,000 settlement amount and expenses (less any monies already tendered without reservation by the carriers). However, the Company cannot predict the outcome of such litigation.
16. Segment Reporting
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 months ended September 30, 2023, or (b) attributed assets equal to 10% of total assets as of September 30, 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 months ended September 30, 2023 and 2022, respectively, and the Company’s financial position at September 30, 2023 and June 30, 2023, respectively:
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||
| Malibu | Saltwater Fishing | Cobalt | Consolidated | ||||||||||||||||||||
| Net sales | $ | 105,005 | $ | 92,622 | $ | 58,203 | $ | 255,830 | |||||||||||||||
| Income before provision for income taxes | $ | 11,937 | $ | 8,995 | $ | 6,816 | $ | 27,748 | |||||||||||||||
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||
| Malibu | Saltwater Fishing | Cobalt | Consolidated | ||||||||||||||||||||
| Net sales | $ | 145,168 | $ | 92,233 | $ | 64,810 | $ | 302,211 | |||||||||||||||
| Income before provision for income taxes | $ | 27,916 | $ | 10,260 | $ | 8,952 | $ | 47,128 | |||||||||||||||
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| As of September 30, 2023 | As of June 30, 2023 | ||||||||||
| Assets | |||||||||||
| Malibu | $ | 235,411 | $ | 249,447 | |||||||
| Saltwater Fishing | 437,102 | 432,806 | |||||||||
| Cobalt | 249,894 | 243,671 | |||||||||
| Total assets | $ | 922,407 | $ | 925,924 | |||||||
17. Subsequent Events
On October 26, 2023, the Company's Board of Directors authorized a stock repurchase program to allow for the repurchase of up to $100,000 of its Class A Common Stock and the LLC's LLC Units (the “2023 Repurchase Program”) for the period from November 8, 2023 to November 8, 2024. The Company intends to fund repurchases under the 2023 Repurchase Program from cash on hand.
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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 | Three Months Ended September 30, 2023 | Fiscal year ended June 30, 2023 | |||||||||||
| Malibu | Malibu | 41.0% | 45.8% | |||||||||||
| Axis | ||||||||||||||
| Saltwater Fishing | Pursuit | 36.2% | 32.4% | |||||||||||
| Maverick | ||||||||||||||
| Cobia | ||||||||||||||
| Pathfinder | ||||||||||||||
| Hewes | ||||||||||||||
| Cobalt | Cobalt | 22.8% | 21.8% | |||||||||||
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 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 $80,000 to $300,000.
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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 $1,400,000.
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 $75,000 to $625,000.
We sell our boats through a dealer network that we believe is the strongest in the recreational powerboat category. As of June 30, 2023, 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.
On a consolidated basis, we achieved first quarter fiscal 2024 net sales, gross profit, net income and adjusted EBITDA of $255.8 million, $56.8 million, $20.8 million and $39.0 million, respectively, compared to $302.2 million, $74.6 million, $36.1 million and $57.1 million, respectively, for the first quarter of fiscal 2023. For the first quarter of fiscal 2024, net sales decreased 15.3%, gross profit decreased 23.9%, net income decreased 42.5% and adjusted EBITDA decreased 31.7% as compared to the first quarter of fiscal 2023. For the definition of adjusted EBITDA and a reconciliation to net income, see “GAAP Reconciliation of Non-GAAP Financial Measures.”
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.
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.
Current inventory levels have now stabilized to pre-pandemic levels across all of our segments. While retail activity at our dealers trended lower during fiscal year 2023, given low inventory levels at the beginning of the fiscal year, we continued to experience strong wholesale demand throughout the first three quarters of fiscal year 2023. Now, as channel inventory is normalized, we believe wholesale demand will be directly dependent on the underlying retail activity for our products into the first half of fiscal year 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 maintain inventory levels at our dealers will be important to sustain 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.
As discussed above, our financial results and operations have been, and could continue to be, impacted by events outside of our control, 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. Numerous other variables also have the potential to impact our volumes, both positively and negatively. For instance, elevated 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.
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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 7. 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, 2023. 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.
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Components of Results of Operations
Net Sales
We generate revenue from the sale of boats to our dealers. The substantial majority of our net sales are derived from the sale of boats, including optional features included at the time of the initial wholesale purchase of the boat. Net sales consists of the following:
•Gross sales from:
•Boat 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, Net
Other expense, 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.
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Income Taxes
Malibu Boats, Inc. is subject to U.S. federal and state income tax in multiple jurisdictions with respect to our allocable share of any net taxable income of the LLC. 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 September 30, 2023 and 2022, we had a 97.8% and a 97.1%, 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.
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Results of Operations
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 September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| $ | % Revenue | $ | % Revenue | ||||||||||||||||||||
| Net sales | 255,830 | 100.0 | % | 302,211 | 100.0 | % | |||||||||||||||||
| Cost of sales | 199,036 | 77.8 | % | 227,606 | 75.3 | % | |||||||||||||||||
| Gross profit | 56,794 | 22.2 | % | 74,605 | 24.7 | % | |||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling and marketing | 5,752 | 2.2 | % | 5,186 | 1.7 | % | |||||||||||||||||
| General and administrative | 20,705 | 8.1 | % | 19,220 | 6.4 | % | |||||||||||||||||
| Amortization | 1,715 | 0.7 | % | 1,716 | 0.6 | % | |||||||||||||||||
| Operating income | 28,622 | 11.2 | % | 48,483 | 16.0 | % | |||||||||||||||||
| Other expense, net: | |||||||||||||||||||||||
| Other (income) expense, net | (10) | — | % | 70 | — | % | |||||||||||||||||
| Interest expense | 884 | 0.4 | % | 1,285 | 0.4 | % | |||||||||||||||||
| Other expense, net | 874 | 0.4 | % | 1,355 | 0.4 | % | |||||||||||||||||
| Income before provision for income taxes | 27,748 | 10.8 | % | 47,128 | 15.6 | % | |||||||||||||||||
| Provision for income taxes | 6,978 | 2.7 | % | 11,023 | 3.7 | % | |||||||||||||||||
| Net income | 20,770 | 8.1 | % | 36,105 | 11.9 | % | |||||||||||||||||
| Net income attributable to non-controlling interest | 511 | 0.2 | % | 1,222 | 0.4 | % | |||||||||||||||||
| Net income attributable to Malibu Boats, Inc. | 20,259 | 7.9 | % | 34,883 | 11.5 | % | |||||||||||||||||
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Unit Volumes | % Total | Unit Volumes | % Total | ||||||||||||||||||||
| Volume by Segment | |||||||||||||||||||||||
| Malibu | 804 | 47.3 | % | 1,218 | 54.4 | % | |||||||||||||||||
| Saltwater Fishing | 491 | 29.0 | % | 548 | 24.5 | % | |||||||||||||||||
| Cobalt | 403 | 23.7 | % | 471 | 21.1 | % | |||||||||||||||||
| Total units | 1,698 | 100.0 | % | 2,237 | 100.0 | % | |||||||||||||||||
| Net sales per unit | $ | 150,665 | $ | 135,097 | |||||||||||||||||||
Comparison of the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022
Net Sales
Net sales for the three months ended September 30, 2023 decreased $46.4 million, or 15.3%, to $255.8 million as compared to the three months ended September 30, 2022. The decrease in net sales was driven primarily by decreased unit volumes across all segments resulting primarily from decreased retail demand and increased dealer flooring program costs across all segments resulting from higher interest rates and increased inventory levels, partially offset by a favorable model mix across all segments and inflation-driven year-over-year price increases. Unit volume for the three months ended September 30, 2023, decreased 539 units, or 24.1%, to 1,698 units as compared to the three months ended September 30, 2022. Our unit
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volume decreased primarily due to lower wholesale shipments across all segments driven by lower retail activity during the period.
Net sales attributable to our Malibu segment decreased $40.2 million, or 27.7%, to $105.0 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. Unit volumes attributable to our Malibu segment decreased 414 units for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to lower wholesale shipments driven by lower retail activity during the 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 $0.4 million, or 0.4%, to $92.6 million, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. Unit volume decreased 57 units for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in net sales was driven by inflation-driven year-over-year price increases and a favorable model mix, partially offset by a decrease in units and increased dealer flooring program costs.
Net sales attributable to our Cobalt segment decreased $6.6 million, or 10.2%, to $58.2 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. Unit volumes attributable to Cobalt decreased 68 units for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The decrease in net sales was driven primarily 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.
Overall consolidated net sales per unit increased 11.5% to $150,665 per unit for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. Net sales per unit for our Malibu segment increased 9.6% to $130,603 per unit for the three months ended September 30, 2023, compared to the three months ended September 30, 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 12.1% to $188,640 per unit for the three months ended September 30, 2023 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 Cobalt segment increased 5.0% to $144,424 per unit for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, driven by a favorable model mix and inflation-driven year-over-year price increases, partially offset by increased dealer flooring program costs.
Cost of Sales
Cost of sales for the three months ended September 30, 2023 decreased $28.6 million, or 12.6%, to $199.0 million as compared to the three months ended September 30, 2022. The decrease in cost of sales was primarily driven by a 15.3% decrease in net sales due to lower unit volumes, partially offset by higher per unit material and labor costs of $7.5 million, $7.1 million, and $2.5 million for the Malibu, Saltwater Fishing and Cobalt segments, respectively. The increase in per unit material and labor costs was primarily driven by increased prices due to inflationary pressures and a favorable model mix that corresponds to higher net sales per unit in our Malibu and Cobalt segments, partially offset by unfavorable model mix in our Saltwater Fishing segment.
Gross Profit
Gross profit for the three months ended September 30, 2023 decreased $17.8 million, or 23.9%, to $56.8 million compared to the three months ended September 30, 2022. The decrease in gross profit was driven primarily by lower net sales partially offset by the decreased cost of sales for the reasons noted above. Gross margin for the three months ended September 30, 2023 decreased 250 basis points from 24.7% to 22.2% 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 September 30, 2023 increased $0.6 million, or 10.9% to $5.8 million compared to the three months ended September 30, 2022. The increase was driven primarily by increased promotional events and an increase in personnel-related expenses. As a percentage of sales, selling and marketing expenses increased 50 basis points to 2.2% for the three months ended September 30, 2023 compared to 1.7% for the three months ended September 30, 2022. General and administrative expenses for the three months ended September 30, 2023 increased $1.5 million, or 7.7%, to $20.7 million as compared to the three months ended September 30, 2022 driven primarily by an increase in personnel-related expenses. As a percentage of sales, general and administrative expenses increased 170 basis points to 8.1%
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for the three months ended September 30, 2023 compared to 6.4% for the three months ended September 30, 2022. Amortization expense remained flat at $1.7 million for the three months ended September 30, 2023.
Other Expense, Net
Other expense, net for the three months ended September 30, 2023 decreased by $0.5 million, or 35.5% to $0.9 million, compared to the three months ended September 30, 2022. The decrease in other expense resulted primarily from decreased interest expense during the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
Provision for Income Taxes
Our provision for income taxes for the three months ended September 30, 2023, decreased $4.0 million, or 36.7%, to $7.0 million compared to the three months ended September 30, 2022. The decrease primarily resulted from decreased pre-tax earnings. For the three months ended September 30, 2023 and 2022, our effective tax rate of 25.1% and 23.4%, respectively, exceeded the statutory federal income tax rate of 21% primarily due to the impact of U.S. state taxes. For the three months ended September 30, 2023, this increase in tax rate was partially offset by the benefit of the foreign derived intangible income deduction. For the three months ended September 30, 2022, this increase in tax rate was partially offset by a windfall benefit generated by certain stock-based compensation as well as the benefit of the foreign derived intangible income deduction.
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 September 30, 2023 and 2022, the weighted-average non-controlling interest attributable to ownership interests in the LLC not directly attributable to us was 2.2% and 2.9%, respectively.
26
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 certain professional fees and 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 September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net income | $ | 20,770 | $ | 36,105 | |||||||
| Provision for income taxes | 6,978 | 11,023 | |||||||||
| Interest expense | 884 | 1,285 | |||||||||
| Depreciation | 6,324 | 5,296 | |||||||||
| Amortization | 1,715 | 1,716 | |||||||||
Professional fees 1 | 857 | — | |||||||||
Stock-based compensation expense 2 | 1,460 | 1,635 | |||||||||
| Adjusted EBITDA | $ | 38,988 | $ | 57,060 | |||||||
| Net Sales | $ | 255,830 | $ | 302,211 | |||||||
Net Income Margin 3 | 8.1 | % | 11.9 | % | |||||||
Adjusted EBITDA Margin 3 | 15.2 | % | 18.9 | % | |||||||
| (1) | For the three months ended September 30, 2023, represents legal and advisory fees related to product liability cases that were settled for $100.0 million in June 2023. | ||||
| (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) | 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. | ||||
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Adjusted Fully Distributed Net Income
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 September 30, | |||||||||||
| 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. | $ | 20,259 | $ | 34,883 | |||||||
| Provision for income taxes | 6,978 | 11,023 | |||||||||
Professional fees 1 | 857 | — | |||||||||
Acquisition related expenses 2 | 1,677 | 1,677 | |||||||||
Stock-based compensation expense 3 | 1,460 | 1,635 | |||||||||
Net income attributable to non-controlling interest 4 | 511 | 1,222 | |||||||||
| Fully distributed net income before income taxes | 31,742 | 50,440 | |||||||||
Income tax expense on fully distributed income before income taxes 5 | 7,777 | 12,276 | |||||||||
| Adjusted fully distributed net income | $ | 23,965 | $ | 38,164 | |||||||
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| Three Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| 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: | 20,586,487 | 20,459,849 | |||||||||
| Adjustments to weighted-average shares of Class A Common Stock: | |||||||||||
Weighted-average LLC Units held by non-controlling unit holders 6 | 455,919 | 600,919 | |||||||||
Weighted-average unvested restricted stock awards issued to management 7 | 232,584 | 254,781 | |||||||||
| 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: | 21,274,990 | 21,315,549 | |||||||||
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 September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net income available to Class A Common Stock per share | $ | 0.98 | $ | 1.70 | |||||||
| Impact of adjustments: | |||||||||||
| Provision for income taxes | 0.34 | 0.54 | |||||||||
Professional fees 1 | 0.04 | — | |||||||||
Acquisition related expenses 2 | 0.08 | 0.08 | |||||||||
Stock-based compensation expense 3 | 0.07 | 0.08 | |||||||||
Net income attributable to non-controlling interest 4 | 0.02 | 0.06 | |||||||||
| Fully distributed net income per share before income taxes | 1.53 | 2.46 | |||||||||
Impact of income tax expense on fully distributed income before income taxes 5 | (0.38) | (0.60) | |||||||||
Impact of increased share count 8 | (0.02) | (0.07) | |||||||||
| Adjusted Fully Distributed Net Income per Share of Class A Common Stock | $ | 1.13 | $ | 1.79 | |||||||
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| (1) | For the three months ended September 30, 2023, represents legal and advisory fees related to product liability cases that were settled for $100.0 million in June 2023. | ||||
| (2) | For the three months ended September 30, 2023 and 2022, represents amortization of intangibles acquired in connection with the acquisitions of Maverick Boat Group, Pursuit and Cobalt. | ||||
| (3) | 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. | ||||
| (4) | 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. | ||||
| (5) | Reflects income tax expense at an estimated normalized annual effective income tax rate of 24.5% and 24.3% of income before income taxes for the three months ended September 30, 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 2024 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. | ||||
| (6) | 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. | ||||
| (7) | 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. | ||||
| (8) | 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. | ||||
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Liquidity and Capital Resources
Overview and Primary Sources of Cash
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. In the first quarter of fiscal year 2024, we had a one-time payment of $100.0 million with respect to a settlement agreement entered in connection with the settlement of all Batchelder-related product liability matters. We borrowed $75.0 million under the revolving credit facility to fund a portion of that payment and, subsequently, repaid $10.0 million under the revolving credit facility during the first quarter of fiscal year 2024. See Note 15 to our unaudited interim condensed consolidated financial statements for more information about the settlement of the product liability matters.
Material Cash Requirements
Capital Expenditures. For fiscal year 2023, we incurred approximately $54.8 million in capital expenditures related to the completion of our Tooling Design Center as well as new models, capacity enhancements and vertical integration initiatives. We expect capital expenditures between $70.0 million and $80.0 million for fiscal year 2024 primarily for the outfitting of our Roane County property and 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. On July 25, 2023, the transaction closed and we paid the $25.5 million balance of the purchase price. In addition to the purchase price, we have incurred approximately $5.3 million of capital expenditures through September 30, 2023 to update the facility to meet our operational needs and expect to incur additional capital expenditures of approximately $14.1 million with respect to the facility.
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 September 30, 2023, we had $65.0 million outstanding under our revolving credit facility and $1.6 million in outstanding letters of credit, with $283.4 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 September 30, 2023, our interest payments would be approximately $4.4 million within the next 12 months based on the interest rate at September 30, 2023 of 6.72%. 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 $4.1 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 is due on April 15, 2024.
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 $2.6 million and our total committed lease payments are $10.4 million as of September 30, 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 2024 and 2025. 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 September 30, 2023, we had purchase orders in the amount of $76.3 million due within the next 12 months.
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Stock Repurchase Program. 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 for the period from November 8, 2022 to November 8, 2023. During the three months ended September 30, 2023, we repurchased 199,276 shares of Class A Common Stock for $9.6 million in cash including related fees and expenses. As of September 30, 2023, $90.4 million was available to repurchase shares of Class A Common Stock and LLC Units under the 2022 Repurchase Program. On October 26, 2023, our Board of Directors authorized a new 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 for the period from November 8, 2023 to November 8, 2024. 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 stock repurchases 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. 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.
The following table summarizes the cash flows from operating, investing and financing activities (dollars in thousands):
| Three Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Total cash (used in) provided by: | |||||||||||
| Operating activities | $ | (48,411) | $ | 31,689 | |||||||
| Investing activities | (39,527) | (12,362) | |||||||||
| Financing activities | 54,605 | (59,571) | |||||||||
| Impact of currency exchange rates on cash balances | (142) | (449) | |||||||||
| (Decrease) in cash | $ | (33,475) | $ | (40,693) | |||||||
Operating Activities
Net cash used in operating activities was $48.4 million for the three months ended September 30, 2023, compared to net cash provided by operating activities of $31.7 million for the three months ended September 30, 2022, a change of $80.1 million. The decrease in cash provided by operating activities resulted from a decrease of $11.5 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) coupled with net decrease in operating assets and liabilities of $68.6 million related to a one-time payment of $100.0 million with respect to a settlement agreement entered in connection with all Batchelder-related product liability matters as well as 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 $39.5 million for the three months ended September 30, 2023, and $12.4 million for the three months ended September 30, 2022. Net cash used for investing activities for the three months ended September 30, 2023 was primarily related to increased capital expenditures compared to the three months ended September 30, 2022.
Financing Activities
Net cash provided by financing activities was $54.6 million for the three months ended September 30, 2023, compared to net cash used in financing activities of $59.6 million for the three months ended September 30, 2022, a change of $114.2 million. During the three months ended September 30, 2023, we borrowed $65.0 million, net of repayments, under our revolving credit facility and repurchased $9.6 million of our Class A Common Stock under our current stock repurchase program. We also paid $0.8 million in distributions to LLC Unit holders. During the three months ended September 30, 2022, we repaid $23.1 million on our term loans, repaid $25.3 million, net of borrowings, under our revolving credit facility and repurchased $7.9 million of our Class A Common Stock under our prior stock repurchase program. We also paid $0.9 million
32
on taxes for shares withheld upon the vesting of restricted stock awards, paid $1.0 million in distributions to LLC Unit holders and paid $1.4 million in deferred financing costs.
Revolving Credit Facility
On July 8, 2022, Boats LLC entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”) which provides Boats LLC with a revolving credit facility in an aggregate principal amount of up to $350.0 million. As of September 30, 2023 the Company had $65.0 million outstanding under its revolving credit facility and $1.6 million in outstanding letters of credit, with $283.4 million available for borrowing. The revolving credit facility matures on July 8, 2027. 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, share repurchases, 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 three months ended September 30, 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.
Critical Accounting Policies
As of September 30, 2023, there were no 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, 2023.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to our Annual Report on Form 10-K for the year ended June 30, 2023, 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, 2023.
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 September 30, 2023.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II - Other Information
Item 1. Legal Proceedings
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 September 30, 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, 2023.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
Unregistered Sales of Equity Securities
None.
Repurchase of Class A Common Stock
This table provides information with respect to purchases by us of shares of our Class A Common Stock under our Repurchase Program during the quarter ended September 30, 2023 (in thousands except share and per share data).
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan (1) | ||||||||||||||||||||||
| July 1, 2023 through July 31, 2023 | — | $ | — | — | $ | 100,000 | ||||||||||||||||||||
| August 1, 2023 through August 31, 2023 | — | — | — | 100,000 | ||||||||||||||||||||||
| September 1, 2023 through September 30, 2023 | 199,276 | 48.27 | 199,276 | 90,381 | ||||||||||||||||||||||
| Total | 199,276 | $ | 48.27 | 199,276 | $ | 90,381 | ||||||||||||||||||||
(1) 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 for the period from November 8, 2022 to November 8, 2023. Upon repurchase, the shares were classified as treasury stock and then subsequently retired. In accordance with the terms of the LLC’s limited liability company agreement, an equal number of LLC Units were also canceled. As of September 30, 2023, we may repurchase up to an additional $90.4 million in shares of Class A Common Stock and LLC Units under this program. On October 26, 2023, our Board of Directors authorized a new 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 for the period from November 8, 2023 to November 8, 2024. Our share repurchase programs do not obligate us to repurchase a minimum amount of shares. Under the programs, shares of Class A Common Stock may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
35
Item 6. Exhibits
| Exhibit No. | Description | |||||||
Certificate of Incorporation of Malibu Boats, Inc. 1 | ||||||||
Amended and Restated Bylaws of Malibu Boats, Inc. 2 | ||||||||
Certificate of Formation of Malibu Boats Holdings, LLC 1 | ||||||||
First Amended and Restated Limited Liability Company Agreement of Malibu Boats Holdings, LLC, dated as of February 5, 2014 3 | ||||||||
First Amendment, dated as of February 5, 2014, to First Amended and Restated Limited Liability Company Agreement of Malibu Boats Holdings, LLC 4 | ||||||||
Second Amendment, dated as of June 27, 2014, to First Amended and Restated Limited Liability Company Agreement of Malibu Boats Holdings, LLC 5 | ||||||||
| Description of Class A Common Stock | ||||||||
Form of Class A Common Stock Certificate 1 | ||||||||
Form of Class B Common Stock Certificate 1 | ||||||||
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 | ||||||||
Exchange Agreement, dated as of February 5, 2014, by and among Malibu Boats, Inc. and the Members of Malibu Boats 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 September 30, 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 September 30, 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.
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SIGNATURES
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.
| October 31, 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) | |||||||||||
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