Malibu Boats, Inc.: Form 10-Q for the period ended Dec 31, 2023

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.

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.

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 second quarter fiscal 2024 net sales, gross profit, net income and adjusted EBITDA of $211.1 million, $37.5 million, $10.1 million and $22.9 million, respectively, compared to $338.7 million, $75.7 million, $36.4 million and $57.6 million, respectively, for the second quarter of fiscal 2023. For the second quarter of fiscal 2024, net sales decreased 37.7%, gross profit decreased 50.5%, net income decreased 72.1% and adjusted EBITDA decreased 60.2% as compared to the second 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 are now above pre-pandemic levels across most of our segments as retail activity slowed at a more rapid pace than wholesale shipments. Now, as channel inventory is slightly above normalized levels, we believe wholesale demand will be directly dependent on the underlying retail activity for our products in the second half of fiscal year 2024. We have experienced a softening in retail demand during the first half of fiscal year 2024, in particular in entry level and lower priced boats, which we expect will continue into the second half of fiscal year 2024. In response, we are recalibrating our wholesale production to match retail demand.

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. We believe our strong brands, 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 inflationary pressures, supply chain disruptions, rising prices for our suppliers and labor shortages. 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 and expect to continue to experience in the near term, has reduced retail consumer appetite for our product and reduced the appetite and availability for credit for our dealers and retail consumers.

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.

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.

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 December 31, 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.

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.

Comparison of the Three Months Ended December 31, 2023 to the Three Months Ended December 31, 2022

Net Sales

Net sales for the three months ended December 31, 2023 decreased $127.7 million, or 37.7%, to $211.1 million as compared to the three months ended December 31, 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 in our Malibu and Saltwater Fishing segments and inflation-driven year-over-year price increases. Unit volume for the three months ended December 31, 2023, decreased 1,066 units, or 43.7%, to 1,373 units as compared to the three months ended

December 31, 2022. Our unit 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 $81.8 million, or 51.7%, to $76.4 million for the three months ended December 31, 2023, compared to the three months ended December 31, 2022. Unit volumes attributable to our Malibu segment decreased 712 units for the three months ended December 31, 2023, compared to the three months ended December 31, 2022, primarily due to lower wholesale shipments driven by lower retail activity during the period and elevated dealer channel inventory levels. 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 decreased $22.9 million, or 21.6%, to $82.7 million, for the three months ended December 31, 2023, compared to the three months ended December 31, 2022. Unit volume decreased 188 units for the three months ended December 31, 2023 compared to the three months ended December 31, 2022. 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 Cobalt segment decreased $23.0 million, or 30.7%, to $52.0 million for the three months ended December 31, 2023, compared to the three months ended December 31, 2022. Unit volumes attributable to Cobalt decreased 166 units for the three months ended December 31, 2023 compared to the three months ended December 31, 2022. The decrease in net sales was driven primarily by a decrease in units and increased dealer flooring program costs, partially offset by inflation-driven year-over-year price increases.

Overall consolidated net sales per unit increased 10.7% to $153,732 per unit for the three months ended December 31, 2023, compared to the three months ended December 31, 2022. Net sales per unit for our Malibu segment increased 5.0% to $126,056 per unit for the three months ended December 31, 2023, compared to the three months ended December 31, 2022, driven by a favorable model mix and inflation-driven year-over-year price increases, partially offset by increased dealer flooring program costs. Net sales per unit for our Saltwater Fishing segment increased 14.7% to $204,279 per unit for the three months ended December 31, 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 1.1% to $143,511 per unit for the three months ended December 31, 2023, compared to the three months ended December 31, 2022, driven by inflation-driven year-over-year price increases, partially offset by increased dealer flooring program costs and unfavorable model mix.

Cost of Sales

Cost of sales for the three months ended December 31, 2023 decreased $89.5 million, or 34.0%, to $173.6 million as compared to the three months ended December 31, 2022. The decrease in cost of sales was primarily driven by a 37.7% decrease in net sales due to lower unit volumes, partially offset by higher per unit material and labor costs of $4.2 million and $7.0 million for the Malibu and Saltwater Fishing segments, respectively. The increase in per unit material and labor costs was primarily driven by increased prices due to inflationary pressures and a model mix that corresponds to higher cost per unit in our Malibu and Saltwater Fishing segments.

Gross Profit

Gross profit for the three months ended December 31, 2023 decreased $38.2 million, or 50.5%, to $37.5 million compared to the three months ended December 31, 2022. The decrease in gross profit was driven primarily by lower net sales partially offset by decreased cost of sales for the reasons noted above. Gross margin for the three months ended December 31, 2023 decreased 450 basis points from 22.3% to 17.8% driven primarily by fixed cost deleverage due to lower sales, 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 December 31, 2023 decreased $0.6 million, or 9.5% to $5.6 million compared to the three months ended December 31, 2022. The decrease was driven primarily by a decrease in marketing events. As a percentage of sales, selling and marketing expenses increased 90 basis points to 2.7% for the three months ended December 31, 2023 compared to 1.8% for the three months ended December 31, 2022. General and administrative expenses for the three months ended December 31, 2023 decreased $3.6 million, or 19.0%, to $15.4 million as compared to the three months ended December 31, 2022 driven primarily by a decrease in personnel-related expenses, partially offset by increased information technology costs and professional fees. As a percentage of sales, general and administrative expenses increased 170 basis points to 7.3% for the three months ended December 31, 2023 compared to 5.6% for the three months ended December 31, 2022. Amortization expense remained flat at $1.7 million for the three months ended December 31, 2023.

Other Expense, Net

Other expense, net for the three months ended December 31, 2023 decreased by $0.4 million, or 40.0% to $0.7 million, compared to the three months ended December 31, 2022. The decrease in other expense resulted primarily from decreased interest expense during the three months ended December 31, 2023 compared to the three months ended December 31, 2022.

Provision for Income Taxes

Our provision for income taxes for the three months ended December 31, 2023, decreased $7.3 million, or 65.1%, to $3.9 million compared to the three months ended December 31, 2022. The decrease primarily resulted from decreased pre-tax earnings. For the three months ended December 31, 2023 and 2022, our effective tax rate of 27.8% and 23.5%, 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 December 31, 2023, this increase in the effective tax rate was also driven by a shortfall expense generated by certain stock-based compensation. For the three months ended December 31, 2022, the increase in the effective tax rate over the statutory federal income tax rate was partially offset by a windfall benefit generated by certain stock-based compensation as well as the benefits from the foreign derived intangible income deduction, the research and development tax credit, and the impact of non-controlling interests in the LLC.

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 December 31, 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.

Comparison of the Six Months Ended December 31, 2023 to the Six Months Ended December 31, 2022

Net Sales

Net sales for the six months ended December 31, 2023 decreased $174.0 million, or 27.2%, to $466.9 million as compared to the six months ended December 31, 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 six months ended December 31, 2023, decreased 1,605 units, or 34.3%, to 3,071 units as compared to the six months ended December 31, 2022. Our unit 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 $121.9 million, or 40.2%, to $181.4 million for the six months ended December 31, 2023, compared to the six months ended December 31, 2022. Unit volumes attributable to our Malibu segment decreased 1,126 units for the six months ended December 31, 2023, compared to the six months ended December 31, 2022, primarily due to lower wholesale shipments driven by lower retail activity during the period and elevated dealer channel inventory levels. 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 decreased $22.5 million, or 11.4%, to $175.4 million, for the six months ended December 31, 2023, compared to the six months ended December 31, 2022. Unit volume decreased 245 units for the six months ended December 31, 2023 compared to the six months ended December 31, 2022. The decrease in net sales was driven by a decrease in units and increased dealer flooring program costs, partially offset by favorable model mix and inflation-driven year-over-year price increases.

Net sales attributable to our Cobalt segment decreased $29.6 million, or 21.2%, to $110.2 million for the six months ended December 31, 2023, compared to the six months ended December 31, 2022. Unit volumes attributable to Cobalt decreased 234 units for the six months ended December 31, 2023 compared to the six months ended December 31, 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 10.9% to $152,036 per unit for the six months ended December 31, 2023, compared to the six months ended December 31, 2022. Net sales per unit for our Malibu segment increased 7.6% to $128,648 per unit for the six months ended December 31, 2023, compared to the six months ended December 31, 2022, driven by a favorable model mix and inflation-driven year-over-year price increases, partially offset by increased dealer flooring program costs. Net sales per unit for our Saltwater Fishing segment increased 12.9% to $195,710 per unit for the six months ended

December 31, 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 2.9% to $143,992 per unit for the six months ended December 31, 2023, compared to the six months ended December 31, 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 six months ended December 31, 2023 decreased $118.0 million, or 24.1%, to $372.6 million as compared to the six months ended December 31, 2022. The decrease in cost of sales was primarily driven by a 27.2% decrease in net sales due to lower unit volumes, partially offset by higher per unit material and labor costs of $11.3 million, $13.4 million, and $2.0 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 model mix that corresponds to higher cost per unit across all of our segments.

Gross Profit

Gross profit for the six months ended December 31, 2023 decreased $56.0 million, or 37.3%, to $94.3 million compared to the six months ended December 31, 2022. The decrease in gross profit was driven primarily by lower net sales due to lower unit volumes partially offset by the decreased cost of sales for the reasons noted above. Gross margin for the six months ended December 31, 2023 decreased 320 basis points from 23.4% to 20.2% driven by fixed cost deleverage due to lower sales, increased mix of the Saltwater Fishing segment and increased dealer flooring program costs.

Operating Expenses

Selling and marketing expenses remained flat at $11.4 million for the six months ended December 31, 2023 As a percentage of sales, selling and marketing expenses increased 60 basis points to 2.4% for the six months ended December 31, 2023 compared to 1.8% for the six months ended December 31, 2022. General and administrative expenses for the six months ended December 31, 2023 decreased $2.1 million, or 5.6%, to $36.1 million as compared to the six months ended December 31, 2022 driven primarily by a decrease in personnel-related expenses partially offset by increased information technology expenses. As a percentage of sales, general and administrative expenses increased 170 basis points to 7.7% for the six months ended December 31, 2023 compared to 6.0% for the six months ended December 31, 2022. Amortization expense remained flat at $3.4 million for the six months ended December 31, 2023.

Other Expense, Net

Other expense, net for the six months ended December 31, 2023 decreased by $0.9 million, or 37.5% to $1.5 million, compared to the six months ended December 31, 2022. The decrease in other expense resulted primarily from decreased interest expense during the six months ended December 31, 2023 compared to the six months ended December 31, 2022.

Provision for Income Taxes

Our provision for income taxes for the six months ended December 31, 2023, decreased $11.3 million, or 51.0%, to $10.9 million compared to the six months ended December 31, 2022. The decrease primarily resulted from decreased pre-tax earnings. For the six months ended December 31, 2023 and 2022, our effective tax rate of 26.0% 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 six months ended December 31, 2023, this increase in the effective tax rate was also driven by a shortfall expense generated by certain stock-based compensation. For the six months ended December 31, 2022, the increase in the effective tax rate over the statutory federal income tax rate was partially offset by a windfall benefit generated by certain stock-based compensation as well as the benefits from the foreign derived intangible income deduction, the research and development tax credit, and the impact of non- controlling interests in the LLC.

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 six months ended December 31, 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.

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):

(1) For the three and six months ended December 31, 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):

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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:

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(1) For the three and six months ended December 31, 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 and six months ended December 31, 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 and six months ended December 31, 2023 and 2022, respectively, assuming the conversion of all LLC Units into shares of Class A Common Stock. The estimated normalized annual effective income tax rate for fiscal year 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 and $30.0 million under the revolving credit facility during the first quarter and second quarter, respectively, 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, (of which we have incurred approximately $53.0 million through the first half of 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 $11.5 million of capital expenditures through December 31, 2023 to update the facility to meet our operational needs and expect to incur additional capital expenditures of approximately $7.9 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 December 31, 2023, we had $35.0 million outstanding under our revolving credit facility and $1.6 million in outstanding letters of credit, with $313.4 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 December 31, 2023, our interest payments would be approximately $2.3 million within the next 12 months based on the interest rate at December 31, 2023 of 6.41%. 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 $9.7 million as of December 31, 2023. Additional information regarding our operating leases is available in Note 10 of our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report.

Purchase Obligations. In the ordinary course of business, we enter into purchase orders from a variety of suppliers, primarily for raw materials, in order to manage our various operating needs. The orders are expected to be purchased throughout fiscal year 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 December 31, 2023, we had purchase orders in the amount of $68.0 million due within the next 12 months.

Stock Repurchase Program.Our Board of Directors authorized a stock repurchase program (the"2022 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. Between July 1, 2023 and November 8, 2023, we repurchased 261,962 shares of Class A Common Stock for $12.4 million in cash including related fees and expenses under the 2022 Repurchase Program which expired on November 8, 2023. On October 26, 2023, our Board of Directors authorized a new stock repurchase program (the"2023 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. Between November 8, 2023 and December 31, 2023, we repurchased 163,445 shares of Class A Common Stock for $7.3 million in cash including related fees and expenses under the 2023 Repurchase Program. As of December 31, 2023, $92.9 million remained available under the 2023 Repurchase Program. We may repurchase shares of our common stock at any time or from time to time, without prior notice, subject to market conditions and other considerations. We have no obligation to repurchase any shares of our common stock under the share repurchase program. We intend to fund 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):

Operating Activities

Net cash provided by operating activities was $15.7 million for the six months ended December 31, 2023, compared to net cash provided by operating activities of $50.8 million for the six months ended December 31, 2022, a change of $35.1 million. The decrease in cash provided by operating activities resulted from a decrease of $34.1 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 $1.0 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 $52.1 million for the six months ended December 31, 2023, and $22.3 million for the six months ended December 31, 2022. Net cash used for investing activities for the six months ended December 31, 2023 was primarily related to increased capital expenditures compared to the six months ended December 31, 2022.

Financing Activities

Net cash provided by financing activities was $13.2 million for the six months ended December 31, 2023, compared to net cash used in financing activities of $62.3 million for the six months ended December 31, 2022, a change of $75.4 million. During the six months ended December 31, 2023, we borrowed $35.0 million, net of repayments, under our revolving credit facility and repurchased $19.7 million of our Class A Common Stock under our current stock repurchase program. We also paid $1.2 million on taxes for shares withheld upon the vesting of restricted stock awards and paid $0.9 million in distributions to LLC Unit holders. During the six months ended December 31, 2022, we repaid $23.1 million on our term loans, repaid $167.0 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 $2.9 million on taxes for shares withheld upon the vesting of restricted stock awards, paid $1.7 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 December 31, 2023 the Company had $35.0 million outstanding under its revolving credit facility and $1.6 million in outstanding letters of credit, with $313.4 million available for borrowing. The revolving credit facility matures on July 8, 2027. Boats LLC has the option to request that lenders increase the amount available under the revolving credit facility by, or obtain incremental term loans of, up to $200.0 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 six months ended December 31, 2023 and 2022, we did not repurchase any boats under our repurchase agreements. An adverse change in retail sales could require us to repurchase repossessed units upon an event of default by any of our dealers, subject to the annual limitation.

Critical Accounting Policies

As of December 31, 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.

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.

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 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 chief financial officer, of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2023.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During the quarter ended December 31, 2023, there were no material changes to the risk factors discussed in Part I, Item 1A. "Risk Factors” of our Annual Report on Form 10-K for the year ended June 30, 2023.