MALIBU BOATS, INC.
Overview 36
Impact of the COVID-19 Pandemic 37
Outlook 38
Factors Affecting Our Results of Operations 39
Components of Results of Operations 41
Results of Operations 42
GAAP Reconciliation of Non-GAAP Financial Measures 47
Liquidity and Capital Resources 51
Critical Accounting Policies 55
New Accounting Pronouncements 56
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,
Cobalt and Saltwater Fishing. We revised our segment reporting effective
December 31, 2020 to account for our acquisition of Maverick Boat Group and to
conform to changes in our internal management reporting based on our boat
manufacturing operations. Prior to December 31, 2020 , we had three reportable
segments, Malibu, Pursuit and Cobalt. All segment information in the
accompanying consolidated financial statements has been revised to conform to
our current reporting segments for comparison purposes. Additional segment
information is contained in Note 19 - Segment Reporting, in the notes to our
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K.
% of Total Revenues
Fiscal Year Ended June 30,
Segment Brands 2022 2021 2020
Malibu Malibu 50.0% 52.2% 54.3%
Axis
Pursuit
Maverick
Saltwater Fishing Cobia 28.1% 26.2% 18.9%
Pathfinder
Hewes
Cobalt Cobalt 21.9% 21.6% 26.8%
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 Wake Research boat
brands. Our Axis boats appeal to consumers who desire a more affordable
performance sport boat product but still demand high performance,
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functional simplicity and the option to upgrade key features. Retail prices of
our Malibu and Axis boats typically range from
Our Saltwater Fishing segment participates in the manufacturing, distribution, marketing and sale throughout the world of Pursuit boats and theMaverick 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. We recently acquiredMaverick Boat Group inDecember 2020 and added Maverick, Cobia, Pathfinder and Hewes to our brands. OurMaverick Boat Group family of boats are highly complementary to Pursuit, expanding our saltwater outboard offerings with a strong focus in length segments under 30 feet. We are among the market leaders in the fiberglass outboard fishing boat category with the brands in our Saltwater Fishing segment. Retail prices for our Saltwater Fishing boats typically range from$45,000 to$1,300,000 . Our Cobalt segment participates in the manufacturing, distribution, marketing and sale throughout the world of Cobalt boats. Our Cobalt boats consist of mid to large-sized luxury cruisers and bowriders that we believe offer the ultimate experience in comfort, performance and quality. We are the market leader inthe United States in the 20' - 40' segment of the sterndrive boat category through our Cobalt brand. Retail prices for our Cobalt boats typically range from$65,000 to$525,000 . We sell our boats through a dealer network that we believe is the strongest in the recreational powerboat category. As ofJuly 1, 2022 , our worldwide distribution channel consisted of over 400 dealer locations globally. Our dealer base is an important part of our consumers' experience, our marketing efforts and our brands. We devote significant time and resources to find, develop and improve the performance of our dealers and believe our dealer network gives us a distinct competitive advantage. We achieved fiscal year 2022 net sales, net income and adjusted EBITDA of$1,214.9 million ,$163.4 million and$246.5 million , respectively, which were an increase from$926.5 million ,$114.3 million and$190.1 million , respectively, for fiscal year 2021. For the definition of adjusted EBITDA and a reconciliation to net income, see "GAAP Reconciliation of Non-GAAP Financial Measures."
Impact of the COVID-19 Pandemic
Our operations have continued to be impacted by a variety of external factors. The COVID-19 pandemic has impacted our operations and financial results since the third quarter of fiscal year 2020 and continues to have an impact on us. We elected to suspend operations at all of our facilities fromMarch 2020 until late April and earlyMay 2020 , depending on the facility. As a result, we were not able to ship boats to our dealers during the period of shut-down, which negatively impacted our net sales for the second half of fiscal year 2020. During the first half of fiscal 2021, we constrained our production levels to allow our supply chain to more fully recover from the impacts of COVID-19 in preparation of higher wholesale manufacturing volumes that we planned for the second half of fiscal 2021. While our net sales for fiscal year 2021 were impacted by our lower production levels, retail sales improved during fiscal year 2021 as consumers turned to boating as a form of outdoor, socially-distanced recreation during the COVID-19 pandemic. The increase in retail sales during fiscal year 2021 combined with our lower wholesale shipment levels during the second half of fiscal year 2020 and constrained production in the first half of fiscal year 2021 resulted in lower inventory levels at our dealers throughout fiscal year 2021 and continued into fiscal year 2022. Fiscal year 2022 retail demand continued at a strong pace, albeit at lower levels than the record fiscal year 2021 levels, and in spite of limited inventory. Increases in fiscal year 2022 wholesale production combined with lower retail demand levels, as compared to fiscal year 2021, have combined to increase inventory levels modestly at our Malibu and Cobalt segment dealers at the end of fiscal year 2022. Saltwater Fishing segment dealers remain low on inventory. Dealer inventories continue to be well below historical levels and a full recovery to historical inventory levels will depend on the ability of our supply chain to provide materials to us timely and the level of retail demand during the upcoming year. Additionally, we experienced supply chain disruptions throughout fiscal year 2022 that we believe were driven by numerous factors, including labor shortages, ongoing domestic logistical constraints,West Coast port challenges and rising prices to our suppliers, in part due to inflationary pressures. Such supply chain disruptions along with increased costs for raw materials, parts and components, shipping and labor, are having industry-wide impacts affecting us and our suppliers, dealers and customers. The future impact of COVID-19 and ongoing supply chain disruptions on our financial condition and results of operations may result in further constrained production and increased costs and will depend on a number of factors, including factors that we may not be able to forecast at this time. See the risk factors around COVID-19 impact, supply chain disruptions and increases in costs under Part I. Item 1A. of this Form 10-K 37
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Outlook
Industry-wide marine retail registrations continue to recover from the years following the global financial crisis. According toStatistical Surveys, Inc. , domestic retail registration volumes of performance sport boats, fiberglass sterndrive and fiberglass outboards increased at a compound annual growth rate of approximately 5% between 2011 and 2021, for the 50 reporting states. Within the recreational powerboat categories, the performance sport boats category, which we primarily serve with our Malibu and Axis brands, has produced a double-digit compound annual growth rate between 2011 and 2021. Outboard boats and fiberglass sterndrive boats have seen their combined market grow at a 4% compound annual growth rate between 2011 and 2021. This combined growth has been driven primarily by the outboard market. We target the outboard market with our Pursuit, Cobia, Pathfinder, Maverick and Hewes brands, as well as our Cobalt brand, which is a new entrant to the outboard market, and we plan to meaningfully expand our share of the fiberglass outboard category in the future. We cater to the sterndrive market through our Cobalt brand. While the market for sterndrive propulsion, particularly in lower foot length products, has been challenged, Cobalt's performance continues to be helped by the higher foot length product market it serves, which has grown, and through gains in market share by Cobalt. Although retail growth in powerboats was negatively impacted by weak retail sales in March andApril 2020 due to COVID-19, domestic retail demand growth for powerboats accelerated during calendar year 2020, in part because consumers turned to boating as a form of outdoor, socially-distanced recreation during the COVID-19 pandemic. Despite the impact of COVID-19 early in 2020, the increased demand during 2020 was broad based across recreational powerboat categories leading to the highest growth rate the industry has seen in decades. We continued to see strong year-over-year retail growth during the first half of 2021. However, beginning inMay 2021 , we experienced lower growth and in certain markets year-over-year decreases in retail registrations driven by the lack of available inventory at our dealers and the high growth in those months during 2020. Retail registration activity declined meaningfully during the second half of calendar 2021 versus the comparable period in 2020 given the limited available inventory and the strong sales activity and resulting destocking in 2020 and the first half of 2021. The domestic retail market decreased year-over-year during calendar 2021 for the performance sport boat segment by 2%, while the fiberglass outboard and sterndrive segments were down a combined 7%, in line with expectations given the prior year retail environment. However, when compared to the pre-COVID market conditions of calendar year 2019, the performance sport boat segment and the combined fiberglass outboard and sterndrive segments increased 21% and 3%, respectively, in calendar year 2021 despite depleted channel inventory levels. The first half of calendar 2022 has continued to show year over year decreases in retail registration activity, much of which are in the double digits against significantly high comparative periods due to increased retail demand in the first half of calendar 2021. We believe that despite recent retail registration declines, retail activity at our dealers continued to be strong during much of fiscal year 2022 and but for a lack of inventory may have been higher. We believe the second half of 2022 will show year over year increases as the second half of calendar 2021 was significantly affected by decreased retail demand due to the lack of available dealer inventory. The combination of strong retail market activity through 2020 and into early 2021 and supply chain disruptions experienced in 2021 and continuing through 2022 have depleted our inventory levels at our dealers below pre-COVID levels throughout 2021 and 2022. Operational challenges and supply chain constraints created by severe winter weather delayed our ability to add to depleted inventory levels in the second half of fiscal 2021. We experienced an increase in supply chain disruptions throughout fiscal 2022 that we believe were driven by numerous factors, including labor shortages, ongoing domestic logistical constraints,West Coast port challenges and rising prices to our suppliers, in part due to inflationary pressures. The duration of these challenges is unknown, and they may meaningfully impact our ability to restock our dealers' inventories in a timely manner. We believe supply chain disruptions will continue to challenge wholesale production output through at least the remainder of calendar 2022. As a result of lower dealer inventory levels and lower wholesale production volumes due to the foregoing factors, we expect to see meaningful wholesale demand to restock our dealer inventories into fiscal 2023 and potentially beyond, but the primary driver of restocking timing will be retail activity. We expect lower dealer inventory levels will support our wholesale shipments and financial performance in the first half of fiscal year 2023 and retail activity will be the key driver of wholesale production in the second half of fiscal 2023. The duration of such heightened dealer restocking demand may be extended by our suppliers' inability to increase production to match our desired wholesale production targets, however, it may alternatively be reduced if retail activity deteriorates materially from existing levels. We have also experienced elevated raw material, components and transportation costs, partly due to inflationary pressures, and we anticipate those costs to remain at elevated levels for the remainder of calendar year 2022 and likely beyond. To combat this, we implemented a surcharge across all brands effectiveDecember 1, 2021 . We do not believe the surcharges impacted our wholesale shipments in fiscal 2022. We believe our competitors have increased prices at similar rates to us and we have therefore not been at a competitive disadvantage from a pricing perspective. At the beginning of fiscal 2023, we made our surcharges permanent price changes and have worked aggressively to minimize incremental price increases to lessen any volume impact associated with increased prices. Numerous other variables also have the potential to impact our volumes, both positively and negatively. For example, increasing interest rates that we are currently experiencing could reduce retail consumer appetite for our product or reduce the appetite or availability for credit for our dealers and retail consumers. Further, we believe 38
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a substantial increase or decrease in the price of oil, strength or weakness of theU.S. dollar and tariffs can result in greater or reduced demand for our boats in certain markets. Consumer confidence, expanded or eroded, is a variable that can also impact demand for our products in both directions. Other challenges that could impact demand for recreational powerboats include, fuel costs, a meaningful reduction in the value of global or domestic equity markets, the continued acceptance of our new products in the recreational boating market, our ability to compete in the competitive power boating industry, and the costs of labor and certain of our raw materials and key components. Retail demand may be negatively impacted in the second half of calendar year 2022 as a result of rising gas prices (albeit falling the past several months), increasing interest rates and continuing concerns over inflation, all of which are outside of our control. Since 2008, we have increased our market share among manufacturers of performance sport boats with new product development, improved distribution, new models, and innovative features. However, our market remains highly competitive and our competitors have become more aggressive in their product introductions, increased their distribution and launched surf systems competitive with our patented Surf Gate system. Notwithstanding this increasingly competitive environment, we expanded our market share lead in 2019 in the performance sport boats category over our nearest competitors. We believe decreased dealer inventory levels driven by strong retail growth and competitive new product introductions led to a reduction in our market share through 2021; however, we continue to maintain the leading market share in the performance sport boat category. In addition, we continue to be the market share leader in both the premium and value-oriented product sub-categories for performance sports boats, we continue to maintain the number one market share position inthe United States for the 24'-29' segment of the sterndrive boat category, and we have the number two market share position in the outboard fiberglass fishing market. Our ability to continue to increase inventory levels at our dealers will be important to maintain and grow our market share across our brands. We believe our new product pipeline, strong dealer network and ability to increase production will allow us to maintain and potentially expand our industry leading market position in performance sports boats. We believe that our track record of expanding our market share with our Malibu and Axis brands due to new product development, improved distribution, new models, and innovative features is directly transferable to our Cobalt,Pursuit andMaverick Boat Group acquisitions. We have seen the impact of this strategy at Cobalt as we have realized growing market share with the introduction of ten new products in the last twenty-one months. While Cobalt, Pursuit and the Maverick Boat Group brands are market leaders in certain areas, we believe our experience positions us to execute a strategy to drive enhanced share by expanding the Cobalt,Pursuit andMaverick Boat Group product offerings with different foot lengths, different boat types and different propulsion technologies. Our new product development efforts atPursuit andMaverick Boat Group will take time and our ability to influence near-term model introductions is limited, but we have already begun to execute on this strategy. With respect to Cobalt, we introduced four new models during fiscal year 2022 and six new models of boats during fiscal year 2021. For the Pursuit brand, our focus has been on expanding the award-winning Dual Console, Sport and Offshore product offerings that continue to combine innovative features and dependable performance in refined designs that accommodate a broad array of activities on the water, including the Electric Sliding Entertainment Center on the S 378. Our newest acquisition,Maverick Boat Group , is in the very early stages of integration into the business and meaningful product and innovation changes will be developed for coming years. We believe enhancing new product development combined with diligent management of the Cobalt,Pursuit andMaverick Boat Group dealer networks will position us to meaningfully improve our share of the sterndrive and outboard markets over time.
Factors Affecting Our Results of Operations
We believe that our results of operations and our growth prospects are affected by a number of factors, which we discuss below.
Economic Environment and Consumer Demand
Our product sales are impacted by general economic conditions, which affect the demand for our products, the demand for optional features, the availability of credit for our dealers and retail consumers, and overall consumer confidence. Consumer spending, especially purchases of discretionary items, tends to decline during recessionary periods and tends to increase during expansionary periods. The recreational powerboat industry has shown continued growth from 2010 through 2021 based on retail sales. While there is still some uncertainty surrounding the COVID-19 pandemic, on-going supply chain disruptions, and rising prices to our suppliers, in part due to inflationary pressures, we believe we are well positioned strategically in the recreational powerboat market with brands that are market leaders in their segments. Inflation has impacted the prices of our materials and our labor costs, which has had a negative impact on our gross margin and our operations. In particular, the market prices of certain materials and components used in manufacturing our products, especially resins that are made with hydrocarbon, feedstocks, copper, aluminum and stainless steel, are increasing. To combat this, we implemented a surcharge across all brands effectiveDecember 1, 2021 . These surcharges could have negatively impacted retail demand, but we do not believe they have impacted our wholesale shipments in fiscal 2022. Further, new boat 39
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buyers often finance their purchases. Efforts to stop or limit inflation are resulting in higher interest rates that translate into an increased cost of boat ownership. We have seen increased interest rates for our customers in the first half of calendar year 2022. We expect higher than recent years' levels of inflation to persist for the foreseeable future. Should inflation and increased interest rates continue at elevated rates, we may experience less retail demand because prospective consumers may choose to forgo or delay their purchases or buy a less expensive or used boat. We intend to minimize the effect of inflation through selective price increases, cost reductions and improved productivity.
New Product Development and Innovation
Our long-term revenue prospects are based in part on our ability to develop new products and technological enhancements that meet the demands of existing and new consumers. Developing and introducing new boat models and features that deliver improved performance and convenience are essential to leveraging the value of our brands. By introducing new boat models, we are able to appeal to a new and broader range of consumers and focus on underserved or adjacent segments of the broader powerboat category. To keep product fresh and at the forefront of technological innovation in the boating industry, we aim to introduce a number of new boat models per year. We also believe we are able to capture additional value from the sale of each boat through the introduction of new features, which results in increased average selling prices and improved margins. We allocate most of our product development costs to new model and feature designs, usually with a specific consumer base and market in mind. We use industry data to analyze our markets and evaluate revenue potential from each major project we undertake. Our product development cycle, or the time from initial concept to volume production, can be up to two years. As a result, our development costs, which may be significant, may not be offset by corresponding new sales during the same periods. Once new designs and technologies become available to our consumers, we typically realize revenue from these products from one year up to 15 years. We may not, however, realize our revenue expectations from each innovation. We believe our close communication with our consumers, dealers and sponsored athletes regarding their future product desires enhances the efficiency of our product development expenditures.
Product Mix
Leveraging our robust product offering and features to enhance our sales growth and gross margins. Our product mix, as it relates to our brands, types of boats and features, not only makes our offerings attractive to consumers but also helps drive higher sales and margins. Historically, we have been able to realize higher sales and margins when we sell larger boats compared to our smaller boats, our premium brands compared to our entry-level brands and our boats that are fully-equipped with optional features. We intend to continue to develop new features and models and maintain an attractive product mix that optimizes sales growth and margins.
Ability to Manage Manufacturing Costs, Sales Cycles and Inventory Levels
Our results of operations are affected by our ability to manage our manufacturing costs effectively and to respond to changing sales cycles. Our product costs vary based on the costs of supplies and raw materials, as well as labor costs. We have implemented various initiatives to reduce our cost base and improve the efficiency of our manufacturing process. We are continuously monitoring and reviewing our manufacturing processes to identify improvements and create additional efficiencies. Our ability to maintain production is dependent upon our suppliers delivering sufficient amounts of components, raw materials and parts to manufacture our products and on time to meet our production schedules. Historically, we have not entered into long-term agreements with suppliers of our raw materials and components other than for our engines and outboard motors. Any number of factors, including labor disruptions, weather events, the occurrence of a contagious disease or illness, contractual or other disputes, unfavorable economic or industry conditions, delivery delays or other performance problems or financial difficulties or solvency problems, could disrupt our suppliers' operations and lead to uncertainty in our supply chain or cause supply disruptions for us, which could, in turn, disrupt our operations. We have experienced supply chain disruptions since fiscal year 2020 related to numerous factors, including COVID-19, severe weather events, labor shortages, ongoing domestic logistical constraints,West Coast port challenges and rising prices to suppliers, in part due to inflationary pressures. If we continue to experience supply disruptions or they intensify, we may not be able to develop alternate sourcing quickly or at all. Any material disruption of our production schedule caused by an unexpected shortage of components, raw materials or parts could cause us not to be able to meet customer demand, to alter production schedules or suspend production entirely, which could cause a loss of revenues, which could materially and adversely affect our results of operations. We completed the expansion of our facility inFlorida forMaverick Boat Group in the last quarter of fiscal year 2022. We expect this expanded facility will allow us to continue improving the manufacturing process and increase volume at this location. We rely on our insights into the market gleaned from dealer inventory levels, industry reports about anticipated demand for our products in the upcoming sales cycle and our own estimates and assumptions in formulating our manufacturing 40
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plan for the following fiscal year. Throughout our consumer sales cycle, which reaches its peak from March through August of each year, we adjust our manufacturing activities in order to adapt to variability in demand.
Dealer Network, Dealer Financing and Incentives
We rely on our dealer network to distribute and sell our products. We believe we have developed the strongest distribution network in the performance sport boat category. To improve and expand our network and compete effectively for dealers, we regularly monitor and assess the performance of our dealers and evaluate dealer locations and geographic coverage in order to identify potential market opportunities. Our acquisitions of Cobalt,Pursuit andMaverick Boat Group has allowed us to expand into each of their strong dealer networks as well. We intend to continue to add dealers in new territories inthe United States as well as internationally, which we believe will result in increased unit sales. Our dealers are exposed to seasonal variations in consumer demand for boats. We address anticipated demand for our products and manage our manufacturing in order to mitigate seasonal variations. We also use our dealer incentive programs to encourage dealers to order in the off-season by providing floor plan financing relief, which typically permits dealers to take delivery of current model year boatsbetween July 1 and April 30 on an interest-free basis for a specified period. We also offer our dealers other incentives, including rebates, seasonal discounts, promotional co-op arrangements and other allowances. We facilitate floor plan financing programs for many of our dealers by entering into repurchase agreements with certain third-party lenders, which enable our dealers, under certain circumstances, to establish lines of credit with the third-party lenders to purchase inventory. Under these floor plan financing programs, a dealer draws on the floor plan facility upon the purchase of our boats and the lender pays the invoice price of the boats. We will continue to review and refine our dealer incentive offerings and monitor any exposures arising under these arrangements.
Vertical Integration
We have vertically integrated a number of key components of our manufacturing process, including the manufacturing of boat trailers, towers and tower accessories, machined and billet parts, soft grip flooring, and most recently, wiring harnesses. We began producing our own engines, branded as Malibu Monsoon engines, in our Malibu and Axis boats for model year 2019. We believe our vertical integration initiatives will reduce our reliance on third-party suppliers while reducing the risk that a change in cost or production from any third-party supplier could adversely affect our business. In fiscal year 2022, we acquired a facility to begin manufacturing our own wiring harnesses. As a result of this acquisition, we reduced the risk of production delays due to delays in receipt of wiring harnesses from third-party suppliers.
Vertical integration of key components of our boats gives us the ability to increase incremental margin per boat sold by reducing our cost base and improving the efficiency of our manufacturing process. Additionally, it allows us to have greater control over design, consumer customization options, construction quality, and our supply chain. We continually review our manufacturing process to identify opportunities for additional vertical integration investments across our portfolio of premium brands.
Components of Results of Operations
We generate revenue from the sale of boats to our dealers. The substantial majority of our net sales are derived from the sale of boats, including optional features included at the time of the initial wholesale purchase of the boat. Net sales consists of the following:
•Gross sales from:
•Boat and trailer sales-consists of sales of boats and trailers to our dealer network. Nearly all of our boat sales include optional feature upgrades purchased by the consumer, which increase the average selling price of our boats; and
•Parts and other sales-consists of sales of replacement and aftermarket boat parts and accessories to our dealer network; and consists of royalty income earned from license agreements with various boat manufacturers, including Nautique, Chaparral, Mastercraft, and Tige related to the use of our intellectual property.
•Net sales are net of:
•Sales returns-consists primarily of contractual repurchases of boats either
repossessed by the floor plan financing provider from the dealer or returned by
the dealer under our warranty program; and
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•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 theU.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. For more information, see "Item 1. Business - Dealer Management."
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 (Income) Expense, Net
Other (income) expense, net consists of interest expense and other income or expense, net. Interest expense consists of interest charged under our outstanding debt, interest on our interest rate swap arrangement and change in the fair value of our interest rate swap we entered into onJuly 1, 2015 , which matured onMarch 31, 2020 , 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 toU.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 toU.S. federal and state income tax with respect to its net taxable income.
Net Income Attributable to Non-controlling Interest
As ofJune 30, 2022 and 2021, we had a 97.2% 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 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 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.
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Fiscal Year Ended June 30,
2022 2021 2020
$ % Revenue $ % Revenue $ % Revenue
Net sales 1,214,877 100.0 % 926,515 100.0 % 653,163 100.0 %
Cost of sales 904,826 74.5 % 690,030 74.5 % 503,893 77.2 %
Gross profit 310,051 25.5 % 236,485 25.5 % 149,270 22.8 %
Operating expenses:
Selling and marketing 22,900 1.9 % 17,540 1.9 % 17,917 2.8 %
General and administrative 66,371 5.4 % 61,915 6.6 % 39,912 6.1 %
Amortization 6,957 0.6 % 7,255 0.8 % 6,131 0.9 %
Operating income 213,823 17.6 % 149,775 16.2 % 85,310 13.0 %
Other expense (income), net:
Other expense (income), net 983 0.1 % (1,015) (0.1) % (2,310) (0.4) %
Interest expense 2,875 0.2 % 2,529 0.3 % 3,888 0.6 %
Other expense (income), net 3,858 0.3 % 1,514 0.2 % 1,578 0.2 %
Income before provision for income
taxes 209,965 17.3 % 148,261 16.0 % 83,732 12.8 %
Provision for income taxes 46,535 3.8 % 33,979 3.7 % 19,076 2.9 %
Net income 163,430 13.5 % 114,282 12.3 % 64,656 9.9 %
Net income attributable to
non-controlling interest 5,798 0.5 % 4,441 0.5 % 3,094 0.5 %
Net income attributable to Malibu
Boats, Inc. 157,632 13.0 % 109,841 11.8 % 61,562 9.4 %
Fiscal Year Ended June 30,
2022 2021 2020
Unit Volumes % Total Unit Volumes % Total Unit Volumes % Total
Volume by Segment
Malibu 5,173 55.9 % 4,841 59.1 % 3,980 61.8 %
Saltwater Fishing 1 2,035 22.0 % 1,428 17.5 % 508 7.9 %
Cobalt 2,047 22.1 % 1,916 23.4 % 1,956 30.3 %
Total Units 9,255 8,185 6,444
Net sales per unit $ 131,267 $ 113,197 $ 101,360 (1) We acquired all of the outstanding stock of
Comparison of the Fiscal Year Ended
Net sales for fiscal year 2022 increased$288.4 million , or 31.1%, to$1,214.9 million , compared to fiscal year 2021. The increase in net sales was driven primarily by increased unit volumes across all three segments, year-over-year price increases and a favorable model mix. We recognized an increase in net sales and volumes across all three segments during fiscal year 2022. Unit volume for fiscal year 2022 increased 1,070 units, or 13.1%, to 9,255 units compared to fiscal year 2021. Net sales attributable to our Malibu segment increased$124.0 million , or 25.6%, to$607.6 million for fiscal year 2022 compared to fiscal year 2021. Unit volumes attributable to our Malibu segment increased 332 units for fiscal year 2022 compared to fiscal year 2021. The increase in net sales was driven by year-over-year price increases, a favorable model mix and increased volume resulting from strong demand for our Malibu and Axis model boats. Net sales from our Saltwater Fishing segment increased$99.0 million , or 40.8%, to$341.9 million for fiscal year 2022 compared to fiscal year 2021. Unit volumes increased 607 units for fiscal year 2022 compared to fiscal year 2021. The increase in net sales was driven primarily by the acquisition ofMaverick Boat Group onDecember 31, 2020 , year-over-year price 43
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increases and a favorable model mix. The increase in unit volumes resulted
primarily from our addition of the
Net sales from our Cobalt segment increased$65.4 million , or 32.7%, to$265.4 million for fiscal year 2022 compared to fiscal year 2021. Unit volumes attributable to Cobalt increased 131 units for fiscal year 2022 compared to fiscal year 2021. The increase in net sales was driven primarily by a favorable model mix, year-over-year price increases and increased volume. We experienced increased volume at Cobalt as a result of our prior year investments in the Cobalt facilities to optimize efficiency and expand capacity. Our overall net sales per unit increased 16.0% to$131,267 per unit for fiscal year 2022 compared to fiscal year 2021. Net sales per unit for our Malibu segment increased 17.6% to$117,445 per unit for fiscal year 2022 compared to fiscal year 2021, primarily driven by year-over-year price increases and a favorable model mix. Net sales per unit for our Saltwater Fishing segment decreased 1.2% to$168,025 per unit for fiscal year 2022 compared to fiscal year 2021, primarily driven by mix of models due mostly to the inclusion of lower priced models from our acquisition ofMaverick Boat Group onDecember 31, 2020 . Net sales per unit for our Cobalt segment increased 24.2% to$129,655 per unit for fiscal year 2022 compared to fiscal year 2021, driven primarily by a favorable model mix and year-over-year price increases.
Cost of Sales
Cost of sales for fiscal year 2022 increased$214.8 million , or 31.1%, to$904.8 million compared to fiscal year 2021. The increase in cost of sales was driven by higher costs related to higher net sales in all our segments and increased prices due to supply chain disruptions and inflationary pressures that have impacted prices on parts and components. In the Malibu segment, higher per unit material and labor costs contributed$66.7 million to the increase in cost of sales and were driven by an increased mix of larger products that corresponded with higher net sales per unit. Within our Saltwater Fishing segment, higher per unit material and labor costs contributed$87.3 million to the increase in cost of sales and were driven by the acquisition ofMaverick Boat Group onDecember 31, 2020 and an increased mix of larger products that corresponded with higher net sales per unit. In the Cobalt segment, higher per unit material and labor costs contributed$44.8 million to the increase in cost of sales and were driven by an increased mix of larger products that corresponded with higher net sales per unit. Gross Profit Gross profit for fiscal year 2022 increased$73.6 million , or 31.1%, compared to fiscal year 2021. The increase in gross profit was driven primarily by higher sales revenue with a more favorable product mix and the contribution ofMaverick Boat Group partially offset by the increased cost of sales for the reasons noted above. Gross margin remained flat at 25.5% in fiscal year 2022.
Operating Expenses
Selling and marketing expense for fiscal year 2022 increased$5.4 million , or 30.6% to$22.9 million compared to fiscal year 2021. The increase was driven primarily by incremental selling and marketing expenses from the acquisition ofMaverick Boat Group , increased compensation and personnel-related expenses, increased travel and promotional events that resumed in fiscal year 2022 after being suspended for COVID-19 during the early portion of fiscal year 2021. As a percentage of sales, selling and marketing expense remained flat at 1.9% for fiscal year 2022. General and administrative expense for fiscal year 2022 increased$4.5 million , or 7.2%, to$66.4 million compared to fiscal year 2021. The increase in general and administrative expenses was driven primarily by an increase in compensation and personnel-related expenses, travel related expenses, information technology infrastructure expenses, incremental general and administrative expenses due to the acquisition ofMaverick Boat Group , facility maintenance expenses and insurance expenses partially offset by lower professional fees and a decrease in acquisition expenses related to the acquisition ofMaverick Boat Group onDecember 31, 2020 . As a percentage of sales, general and administrative expenses decreased 120 basis points to 5.4% for fiscal year 2022 compared to 6.6% for fiscal year 2021. Amortization expense for fiscal year 2022 decreased$0.3 million , or 4.1%, to$7.0 million compared to fiscal year 2021, due to a decrease of amortization expense related to fully amortized intangibles.
Other Expense (Income), Net
Other expense, net for fiscal year 2022 increased by$2.3 million , or 154.8% to$3.9 million as compared to fiscal year 2021. In fiscal year 2022, we increased our tax receivable agreement liability by$1.0 million that resulted in a corresponding amount being recognized as other expense during the same period, compared to fiscal year 2021, when we reduced our tax receivable agreement liability by$0.1 million that resulted in a corresponding amount being recognized as other income during fiscal year 2021. Our interest expense increased by$0.3 million during fiscal year 2022 compared to fiscal year 2021 due to higher average interest rates on outstanding debt. 44
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Provision for Income Taxes
Our provision for income taxes for fiscal year 2022 increased$12.6 million , or 37.0% to$46.5 million compared to fiscal year 2021. This increase was primarily driven by higher pre-tax earnings and increasedU.S. state taxes. For fiscal year 2022, our effective tax rate of 22.2% differed from the statutory federal income tax rate of 21% primarily due to the impact ofU.S. state taxes. This increase in tax rate was partially offset by a windfall benefit generated by certain stock-based compensation, as well as the benefits of the research and development tax credit, and the impact of non-controlling interests in the LLC. For fiscal year 2021, our effective tax rate of 22.9% differed from the statutory federal income tax rate of 21% primarily due to the impact ofU.S. state taxes, and partially offset by 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 consolidated statements of operations and comprehensive income is computed by multiplying pre-tax income for the applicable fiscal year by the percentage ownership in the LLC not directly attributable to us. For fiscal years 2022 and 2021, the weighted average non-controlling interest attributable to ownership interests in the LLC not directly attributable to us was 2.8% and 3.1%, respectively.
Comparison of the Fiscal Year Ended
Net sales for fiscal year 2021 increased$273.4 million , or 41.9%, to$926.5 million , compared to fiscal year 2020. Unit volume for fiscal year 2021 increased 1,741 units, or 27.0%, to 8,185 units compared to fiscal year 2020. The increase in net sales was driven primarily by a favorable model mix in our Malibu and Cobalt segment and increased unit volume in our Malibu and Saltwater fishing segments. The increase in unit volume for our Saltwater Fishing segment was due mostly to our acquisition ofMaverick Boat Group onDecember 31, 2020 . Net sales attributable to our Malibu segment increased$128.8 million , or 36.3%, to$483.5 million for fiscal year 2021 compared to fiscal year 2020. Unit volumes attributable to our Malibu segment increased 861 units for fiscal year 2021 compared to fiscal year 2020. The increase in net sales and unit volumes was driven primarily by strong demand for our new, larger models and optional features. Net sales from our Saltwater Fishing segment increased$119.3 million , or 96.5%, to$242.9 million for fiscal year 2021 compared to fiscal year 2020. Unit volumes increased 920 units for fiscal year 2021 compared to fiscal year 2020. The increase in net sales was driven primarily by the increased volumes at Pursuit and due to the acquisition ofMaverick Boat Group onDecember 31, 2020 . Net sales from our Cobalt segment increased$25.3 million , or 14.5%, to$200.1 million for fiscal year 2021 compared to fiscal year 2020. Unit volumes attributable to Cobalt decreased 40 units for fiscal year 2021 compared to fiscal year 2020. The increase in net sales was driven by a favorable product mix of our Cobalt models impacting net sales per unit, offset by lower volume. Our unit volumes for our Cobalt segment decreased during fiscal year 2021 because of lower production levels related to our investment in the Cobalt facilities to optimize efficiency and expand capacity, the introduction of six new Cobalt models during fiscal year 2021 and challenges around labor and supply as a result of the pandemic and severe winter weather. Our overall net sales per unit increased 11.7% to$113,197 per unit for fiscal year 2021 compared to fiscal year 2020. Net sales per unit for our Malibu segment increased 12.1% to$99,881 per unit for fiscal year 2021 compared to fiscal year 2020, primarily driven by higher sales of new, more expensive models and optional features. Net sales per unit for our Saltwater Fishing segment decreased 30.1% to$170,108 per unit for fiscal year 2021 compared to fiscal year 2020, primarily driven by mix of models due to the acquisition ofMaverick Boat Group onDecember 31, 2020 . Net sales per unit for our Cobalt segment increased 16.9% to$104,424 per unit for fiscal year 2021 compared to fiscal year 2020, driven by higher sales of larger, more expensive models and optional features. Cost of Sales Cost of sales for fiscal year 2021 increased$186.1 million , or 36.9%, to$690.0 million compared to fiscal year 2020. The increase in cost of sales was driven by higher costs related to higher net sales in our Malibu and Saltwater Fishing segments. In the Malibu segment, higher material and labor costs contributed$70.4 million to the increase in cost of sales and were driven by an increased mix of larger product that corresponded with higher net sales per unit. Within our Saltwater Fishing segment, higher volumes, primarily related to the acquisition ofMaverick Boat Group , drove$83.7 million of increase in cost of sales which was also modestly impacted by higher per unit costs. In the Cobalt segment, higher material and labor costs contributed 45
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Gross Profit
Gross profit for fiscal year 2021 increased$87.2 million , or 58.4%, compared to fiscal year 2020. The increase in gross profit was driven primarily by higher sales revenue with a more favorable product mix and the contribution ofMaverick Boat Group partially offset by the increased cost of sales for the reasons noted above. Gross margin increased 270 basis points from 22.8% in fiscal 2020 to 25.5% in fiscal year 2021.
Operating Expenses
Selling and marketing expense for fiscal year 2021 decreased$0.4 million , or 2.1% to$17.5 million compared to fiscal year 2020. The decrease was driven primarily by decreased travel and promotional events due mostly to restrictions imposed by COVID-19 offset by incremental selling and marketing expenses with the acquisition ofMaverick Boat Group . As a percentage of sales, selling and marketing expense decreased 90 basis points from 2.8% for fiscal year 2020 to 1.9% for fiscal year 2021. General and administrative expense for fiscal year 2021 increased$22.0 million , or 55.1%, to$61.9 million compared to fiscal year 2020. The increase in general and administrative expenses was driven primarily by acquisition and integration related costs, compensation, higher legal expenses related to intellectual property litigation and incremental general and administrative expenses due to the acquisition ofMaverick Boat Group . As a percentage of sales, general and administrative expenses increased 50 basis points to 6.6% for fiscal year 2021 compared to 6.1% for fiscal year 2020. Amortization expense for fiscal year 2021 increased$1.1 million , or 18.3%, to$7.3 million compared to fiscal year 2020, due to additional amortization from intangible assets acquired as a result of the acquisition ofMaverick Boat Group onDecember 31, 2020 . Other (Income) Expense, Net Other expense, net for fiscal year 2021 decreased by$0.1 million , or 4.1% to$1.5 million as compared to fiscal year 2020. In fiscal year 2021, we reduced our tax receivable agreement liability by$0.1 million that resulted in a corresponding amount being recognized as other income during the same period, compared to fiscal year 2020, when we reduced our tax receivable agreement liability by$1.7 million that resulted in a corresponding amount being recognized as other income during fiscal year 2020. Our interest expense decreased by$1.3 million during fiscal year 2021 compared to fiscal year 2020 due to lower interest rates on outstanding debt.
Provision for Income Taxes
Our provision for income taxes for fiscal year 2021 increased$14.9 million , or 78.1% to$34.0 million compared to fiscal year 2020. This increase was primarily driven by higher pre-tax earnings and increasedU.S. state taxes. For fiscal year 2021, our effective tax rate of 22.9% differed from the statutory federal income tax rate of 21% primarily due to the impact ofU.S. state taxes, and partially offset by the impact of non-controlling interests in the LLC. For fiscal year 2020, our effective tax rate of 22.8% differed from the statutory federal income tax rate of 21% primarily due to the impact ofU.S. state taxes, and partially offset by 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
consolidated statements of operations and comprehensive income is computed by
multiplying pre-tax income for the applicable fiscal year by the percentage
ownership in the LLC not directly attributable to us. For fiscal years 2021 and
2020, the weighted average non-controlling interest attributable to ownership
interests in the LLC not directly attributable to us was 3.1% and 3.8%,
respectively.
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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, acquisition and integration-related expenses, non- cash compensation expense, expenses related to interruption to our engine supply during the labor strike byUnited Auto Workers ("UAW") against General Motors and adjustments to our tax receivable agreement liability. 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): Fiscal Year Ended June 30, 2022 2021 2020 Net income$ 163,430 $ 114,282 $ 64,656 Provision for income taxes 46,535 33,979 19,076 Interest expense 2,875 2,529 3,888 Depreciation 19,365 15,636 12,249 Amortization 6,957 7,255 6,131 Professional fees 1 - 5,817 1,013 Acquisition and integration related expenses 2 - 5,112 - Stock-based compensation expense 3. 6,342 5,581 3,042 UAW strike impact 4 - - 2,564 Adjustment to tax receivable agreement liability 5 1,025 (88) (1,672) Adjusted EBITDA$ 246,529 $ 190,103 $ 110,947 Net Sales$ 1,214,877 $ 926,515 $ 653,163 Net Income Margin 6 13.5 % 12.3 % 9.9 % Adjusted EBITDA Margin 6 20.3 % 20.5 % 17.0 % 47
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Table of Contents (1) For fiscal years 2021 and 2020, represents legal and advisory fees related to our
litigation with
consolidated financial statements included elsewhere in this Annual Report.
(2) For fiscal year ended
connection with our acquisition of
Integration related expenses for fiscal year 2021 include post-acquisition adjustments
to cost of goods sold of
from
existing limited liability company agreement of the LLC. For more information, refer to
Note 15 of our consolidated financial statements included elsewhere in this Annual
Report.
(4) For fiscal year ended
interruption to our engine supply during the UAW strike against General Motors. We
purchase engines from
Malibu and Axis boats. During the UAW strike, General Motors suspended delivery of
engine blocks to us and we incurred costs by entering into purchase agreements with two
suppliers for additional engines to supplement our inventory of engine blocks for
Malibu and Axis boats. (5) For fiscal year 2022, we recognized other expense from an adjustment in our tax
receivable agreement liability due to an increase in the state tax rate used in
computing our future tax obligations and in turn, an increase in the future benefit we
expect to pay under our tax receivable agreement with pre-IPO owners. For fiscal years
2021 and 2020, respectively, we recognized other income from an adjustment in our tax
receivable agreement liability as a result of a decrease in the estimated tax rate used
in computing our future tax obligations and in turn, a decrease in the future tax
benefit we expect to pay under our tax receivable agreement with pre-IPO owners. Refer
to Note 12 of our consolidated financial statements included elsewhere in this Annual
Report.
(6) 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.
Adjusted Fully Distributed Net Income
We define Adjusted Fully Distributed Net Income as net income attributable toMalibu 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 toMalibu 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 Annual 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): 48
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Fiscal Year Ended June 30,
2022 2021 2020
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. $ 157,632 $ 109,841 $ 61,562
Provision for income taxes 46,535 33,979 19,076
Professional fees 1 - 5,817 1,013
Acquisition and integration related expenses 2 6,653 10,558 4,262
Fair value adjustment for interest rate swap 3 - - 68
Stock-based compensation expense 4 6,342 5,581 3,042
UAW strike impact 5 - - 2,564
Adjustment to tax receivable agreement liability 6 1,025 (88) (1,672)
Net income attributable to non-controlling
interest 7 5,798 4,441 3,094
Fully distributed net income before income taxes 223,985 170,129 93,009
Income tax expense on fully distributed income 53,308 40,150 21,857
before income taxes 8
Adjusted Fully Distributed Net Income $ 170,677 $ 129,979 $ 71,152
Fiscal Year Ended June 30,
2022 2021 2020
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: 20,749,237 20,752,652 20,662,750
Adjustments to weighted average shares of Class A
Common Stock:
Weighted-average LLC units held by
non-controlling unit holders 9 600,919 665,217 806,943
Weighted-average unvested restricted stock awards
issued to management 10 252,135 212,579 155,433
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: 21,602,291 21,630,448 21,625,126
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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Fiscal Year Ended June 30,
2022 2021 2020
Net income available to Class A Common Stock per
share $ 7.60 $ 5.29 $ 2.98
Impact of adjustments:
Provision for income taxes 2.24 1.64 0.92
Professional fees 1 - 0.28 0.05
Acquisition and integration related expenses 2 0.32 0.51 0.21
Fair value adjustment for interest rate swap 3 - - -
Stock-based compensation expense 4 0.31 0.27 0.15
UAW strike impact 5 - - 0.12
Adjustment to tax receivable agreement liability 6 0.05 - (0.08)
Net income attributable to non-controlling
interest 7 0.28 0.21 0.15
Fully distributed net income per share before
income taxes 10.80 8.20 4.50
Impact of income tax expense on fully distributed
income before income taxes 8 (2.57) (1.93) (1.06)
Impact of increased share count 11 (0.32) (0.26) (0.15)
Adjusted Fully Distributed Net Income per Share of Class A Common Stock
$
7.91
(1) For fiscal years 2021 and 2020, represents legal and advisory fees related to our
litigation with
consolidated financial statements included elsewhere in this Annual Report. (2) For fiscal year 2022, represents amortization of intangibles acquired in connection
with the acquisition of
represents legal and advisory fees incurred in connection with the acquisition of
acquisition of
for fiscal year 2021 include post-acquisition adjustments to cost of goods sold of
Group, which was sold during the third quarter of fiscal 2021. For fiscal year 2020,
represents amortization of intangibles acquired in connection with the acquisition of
Pursuit and Cobalt. (3) Represents the change in the fair value of our interest rate swap entered into on July
1, 2015. The swap matured on
previously existing limited liability company agreement of the LLC. For more
information, refer to Note 15 of our consolidated financial statements included
elsewhere in this Annual Report.
(5) For fiscal year ended
interruption to our engine supply during the UAW strike against General Motors. We
purchase engines from
Malibu and Axis boats. During the UAW strike, General Motors suspended delivery of
engine blocks to us and we incurred costs by entering into purchase agreements with
two suppliers for additional engines to supplement our inventory of engine blocks for
Malibu and Axis boats. (6) For fiscal year 2022, we recognized other expense from an adjustment in our tax
receivable agreement liability due to an increase in the state tax rate used in
computing our future tax obligations and in turn, an increase in the future benefit we
expect to pay under our tax receivable agreement with pre-IPO owners. For fiscal years
2021 and 2020, respectively, we recognized other income from an adjustment in our tax
receivable agreement liability as a result of a decrease in the estimated tax rate
used in computing our future tax obligations and in turn, a decrease in the future tax
benefit we expect to pay under our tax receivable agreement with pre-IPO owners. Refer
to Note 12 of our consolidated financial statements included elsewhere in this Annual
Report.
(7) 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. (8) Reflects income tax expense at an estimated normalized annual effective income tax
rate of 23.8% of income before taxes for fiscal year 2022, 23.6% for fiscal year 2021,
and 23.5% of income before taxes for fiscal year 2020, in each case assuming the
conversion of all LLC Units into shares of Class A Common Stock. The estimated
normalized annual effective income tax rate for fiscal years 2022, 2021 and 2020 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. (9) 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. (10) 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. (11) 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.
Material Cash Requirements
Capital Expenditures. For fiscal year 2022, we incurred approximately$55.1 million in capital expenditures related to the expansion of ourFlorida facility used forMaverick Boats Group as well as new models, capacity enhancements and vertical integration initiatives. We expect capital expenditures between$65.0 million and$70.0 million for fiscal year 2023 primarily for investments in new models, capacity enhancements and vertical integration initiatives. Other investment opportunities, such as potential strategic acquisitions, may require additional funding. Principal and Interest Payments. InJune 2022 , we fully repaid the$72.0 million of outstanding term loans that matured onJuly 1, 2022 by drawing on our existing revolving credit facility. As ofJune 30, 2022 , we maintained a revolving credit facility with a borrowing capacity of$170.0 million , of which,$97.0 million was outstanding. OnJuly 8, 2022 , we entered into a Third Amended and Restated Credit Agreement (the "Amended Credit Agreement") that amended and restated our second amended and restated credit agreement dated as ofJune 28, 2017 (the "Prior Credit Agreement"). The Amended Credit Agreement provides us a revolving credit facility in an aggregate principal amount of up to$350.0 million (of which$121.7 million was drawn onJuly 8, 2022 to refinance the loans under our Prior Credit Agreement as well as to pay certain fees and expenses related to entering into the Amended Credit Agreement) with a maturity date ofJuly 8, 2027 . Assuming no additional repayments or borrowings on our revolving credit facility afterJuly 8, 2022 , our interest payments would be approximately$3.3 million for fiscal year 2023 based on the interest rate atJuly 8, 2022 of 2.75%. 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, inU.S. federal, state and local income tax or franchise tax that we actually realize, or in some circumstances are deemed to realize, as a result of an expected increase in our share of tax basis in LLC's tangible and intangible assets, including increases attributable to payments made under the tax receivable agreement. These obligations will not be paid if we do not realize cash tax savings. We estimate that approximately$4.0 million will be due under the tax receivable agreement within the next 12 months. In accordance with the tax receivable agreement, the next payment is anticipated to occur approximately 75 days after filing the federal tax return which is due onApril 15, 2023 . Operating Lease Obligations. Lease commitments consist principally of leases for our manufacturing facilities. For fiscal year 2023, our expected operating lease payments will be$2.5 million and our total committed lease payments are$13.4 million as ofJune 30, 2022 . Additional information regarding our operating leases is available in Note 11, Leases, of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Purchase Obligations. In the ordinary course of business, we enter into purchase orders from a variety of suppliers, primarily for raw materials, in order to manage our various operating needs. The orders are expected to be purchased throughout fiscal year 2023. 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 ofJune 30, 2022 , we had purchase orders in the amount of$139.1 million due within the next 12 months. Stock Repurchase Program. OnNovember 3, 2021 , our Board of Directors authorized a stock repurchase program to allow for the repurchase of up to$70.0 million of our Class A Common Stock and the LLC's LLC Units (the "Repurchase Program") for the period fromNovember 8, 2021 toNovember 8, 2022 . During the fiscal year endedJune 30, 2022 , we repurchased 554,995 shares of Class A Common Stock for$34.6 million in cash including related fees and expenses. As ofJune 30, 2022 ,$35.4 million was available to repurchase shares of Class A Common Stock and LLC Units under the 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 51
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and other considerations. We have no obligation to repurchase any shares of our common stock under the share repurchase program.
Our future capital requirements beyond the next 12 months will depend on many factors, including the general economic environment in which we operate and our ability to generate cash flow from operations, which are more uncertain as a result of inflation, increasing interest rates, increasing fuel prices, ongoing supply chain disruptions and the continuing impact of COVID-19. Our liquidity needs during this uncertain time will depend on multiple factors, including our ability to continue operations and production of boats, the performance of our dealers and suppliers, the impact of the general economy on our dealers, suppliers and retail customers, the availability of sufficient amounts of financing, and our operating performance. In addition, as noted elsewhere, a jury recently found that our subsidiary,Malibu Boats, LLC , and another entity that was the manufacturer of the boat at question,Malibu Boats West, Inc. , negligently failed to warn of a hazard posed by the relevant boat and that such failure was a proximate cause of the death of a passenger in the boat. Based on the jury's finding of successor liability, the trial court entered judgment for the full amount of the verdict againstMalibu Boats, LLC , with a potential maximum liability toMalibu Boats, LLC of$140 million , plus post-judgment interest at a rate of 6.25% per annum.Malibu Boats, LLC may also be required to pay an award of reasonable attorney's fees to the plaintiffs, which the plaintiffs claim should be approximately$56 million . The trial court has postponed any ruling on the plaintiffs' contested motion for attorney's fees pending the resolution of our post-trial motions and related appeals. OnJuly 17, 2022 , the trial court denied the post-trial motions ofMalibu Boats, LLC , and we have since filed a notice of appeal. Pending resolution of the appeals process, the payment of any damages in this matter is expected to be stayed. While we maintain product liability insurance applicable to this case, such insurance coverage may be limited to$26 million . Further, while we have other claims that we may decide to pursue with respect to this matter, we cannot provide any assurance that we will pursue those claims or be successful if we do. If the outcome of the case is ultimately unfavorable to us after appeal, we would need to pay for any final judgment in excess of the amount paid by our insurance providers.
The following table summarizes the cash flows from operating, investing and financing activities (dollars in thousands):
Fiscal Year
Ended
2022 2021 2020
Total cash provided by (used in): Operating activities$ 164,846 $ 131,314 $ 94,141 Investing activities (61,621) (181,095) (40,394) Financing activities (60,380) 57,346 (47,323) Impact of currency exchange rates on cash balances (580) 127 (29) Increase in cash$ 42,265 $ 7,692 $ 6,395
Comparison of the Fiscal Year Ended
Operating Activities Net cash provided by operating activities was$164.8 million for fiscal year 2022, compared to$131.3 million for the same period in 2021, an increase of$33.5 million . The increase in cash provided by operating activities primarily resulted from an increase of$51.7 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) and a net decrease in operating assets and liabilities of$18.2 million related to the timing of collections of accounts receivables, payments for accruals and payables, and purchases of inventory. Investing Activities Net cash used in investing activities was$61.6 million for fiscal year 2022 compared to$181.1 million for the same period in 2021, a decrease of cash used in investing activities of$119.5 million . The decrease in cash used in investing activities was primarily related to the acquisition ofMaverick Boat Group onDecember 31, 2020 , partially offset by an increase in capital expenditures and capital outlays related to our expansion activities at our Maverick facility in fiscal year 2022 compared to the capital expenditures in fiscal year 2021. Financing Activities
Net cash used in financing activities was
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loans that matured onJuly 1, 2022 . Also during fiscal year 2022, we repaid$20.0 million of borrowings under our revolving credit facility, we repaid a total of$76.3 million on our term loans, repurchased$34.6 million of our Class A Common Stock under our previously announced stock repurchase program, paid$2.1 million on taxes for shares withheld upon the vesting of restricted stock awards, paid$2.7 million in distributions to LLC unit holders and received$3.3 million in proceeds from the exercise of stock options. During fiscal year, 2021, we received proceeds of$25.0 million from a new incremental term loan and$65.0 million from additional borrowings under our revolving credit facility to fund the acquisition ofMaverick Boat Group . During fiscal year 2021, we also repaid$28.8 million of borrowings under our revolving credit facility, we repaid$0.6 million on our term loan, paid$1.2 million on taxes for shares withheld upon the vesting of restricted stock awards, paid$0.6 million in deferred financing costs, paid$1.8 million in distributions to LLC unit holders and received$0.3 million in proceeds from the exercise of stock options.
Comparison of the Fiscal Year Ended
Operating Activities Net cash from operating activities was$131.3 million for fiscal year 2021, compared to$94.1 million for the same period in 2020, an increase of$37.2 million . The increase in cash provided by operating activities primarily resulted from an increase of$56.4 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) and a net decrease in operating assets and liabilities of$19.2 million related to the timing of collections of accounts receivables, payments for accruals and payables, and purchases of inventory. Investing Activities Net cash used for investing activities was$181.1 million for fiscal year 2021 compared to$40.4 million for the same period in 2020, an increase of$140.7 million . The increase in cash used for investing activities was primarily related to the acquisition ofMaverick Boat Group onDecember 31, 2020 , partially offset by a reduction in capital expenditures compared to the capital outlays for our expansion activities at our Pursuit and Cobalt plants in fiscal year 2020. Financing Activities Net cash provided by financing activities was$57.3 million for fiscal year 2021 compared to net cash used by financing activities of$47.3 million for fiscal year 2020, a change of$104.6 million . During fiscal year, 2021, we received proceeds of$25.0 million from a new incremental term loan and$65.0 million from additional borrowings under our revolving credit facility to fund the acquisition ofMaverick Boat Group . During fiscal year 2021, we also repaid$28.8 million of borrowings under our revolving credit facility, we repaid$0.6 million on our term loan, paid$1.2 million on taxes for shares withheld upon the vesting of restricted stock awards, paid$0.6 million in deferred financing costs, paid$1.8 million in distributions to LLC unit holders and received$0.3 million in proceeds from the exercise of stock options. During fiscal year 2020, we received$103.8 million in proceeds from our credit facility primarily to provide financial flexibility in light of the uncertainty resulting from the COVID-19 pandemic. During fiscal year 2020, we repaid$135 million of borrowings under our revolving credit facility, repurchased$13.8 million of our Class A Common Stock under our previously announced stock repurchase program, paid$0.8 million on taxes for shares withheld on restricted stock vestings, paid$1.8 million in distributions to LLC unit holders and we received$0.4 million in proceeds from the exercise of stock options.
Revolving Credit Facility
OnJuly 8, 2022 , we entered into our Amended Credit Agreement withTruist Bank , as the administrative agent, swingline lender and issuing bank, that amended and restated our Prior Credit Agreement. The Amended Credit Agreement provides us a revolving credit facility in an aggregate principal amount of up to$350.0 million (of which$121.7 million was drawn onJuly 8, 2022 to refinance the loans under the Prior Credit Agreement as well as to pay certain fees and expenses related to entering into the Amended Credit Agreement) with a maturity date ofJuly 8, 2027 . Prior to entering into the Amended Credit Agreement, we repaid$72.0 million of outstanding term loans under the Prior Credit Agreement inJune 2022 by drawing on our revolving credit facility under the Prior Credit Agreement. Our indirect subsidiary,Malibu Boats, LLC is the borrower under the Amended Credit Agreement and its obligations are guaranteed by the LLC and, subject to certain exceptions, the present and future domestic subsidiaries ofMalibu 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. was not a party to the Prior Credit Agreement and is not a party to the Amended Credit Agreement. 53
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All borrowings under the Amended 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 Amended 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 Amended 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 Amended Credit Agreement contains restrictive covenants regarding indebtedness, liens, fundamental changes, investments, restricted payments, disposition of assets, transactions with affiliates, negative pledges, hedging transactions, certain prepayments of indebtedness, accounting changes and governmental regulation. The Amended Credit Agreement also contains customary events of default. Events of default under the Amended Credit Agreement include (subject to grace periods in certain instances): (i) the failure by anyLoan Party to timely make payments due under the Amended Credit Agreement; (ii) material misrepresentations or misstatements in any representation or warranty by anyLoan Party when made; (iii) failure by anyLoan Party to comply with the covenants under the Amended Credit Agreement and other related agreements; (iv) certain defaults under a specified amount of other indebtedness of Loan Parties; (v) insolvency or bankruptcy-related events with respect to the Loan Parties; (vi) certain undischarged, non-appealable judgments against Loan Parties; (vii) certain ERISA- related events reasonably expected to result in liability above a specified threshold to Loan Parties taken as a whole; (viii) any loan documents or a material part of the liens under the loan documents ceasing to be, or being asserted by anyLoan Party not to be, in full force and effect; (ix) any obligations under the loan documents ceasing to constitute senior indebtedness; and (x) the occurrence of a change of control. 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 Amended Credit Agreement or (ii) terminate the commitments, amongst other remedies. Additionally, the lenders are not obligated to fund any new borrowing under the Amended 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. For fiscal year 2022, we did not repurchase any boats under our repurchase agreements. For fiscal year 2021, we did not repurchase any boats under our repurchase agreements. For fiscal year 2020, we repurchased two units from a lender of one of our former dealers and those units were subsequently resold in fiscal year 2020 above their cost and at a minimal margin loss. 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. Refer to Note 17 to the audited consolidated financial statements included elsewhere in this Annual Report for further information on repurchase commitments.
Potential Impact of LIBOR Transition
Malibu Boats, Inc. is required to make a good faith effort to ensure that it has sufficient cash available to make any required payments under the tax receivable agreement. The limited liability company agreement of the LLC requires the LLC to make "tax distributions" which, in the ordinary course, will be sufficient to pay the actual tax liability ofMalibu Boats, Inc. and to fund required payments under the tax receivable agreement. If for any reason the LLC is not able to make a tax distribution in an amount that is sufficient to make any required payment under the tax receivable agreement or we otherwise lack sufficient funds, interest would accrue on any unpaid amounts at LIBOR, plus 500 basis points until they are paid. Recent actions taken by the Chief Executive of theU.K. Financial Conduct Authority (the "FCA"), which regulates LIBOR, indicate that the continuation ofU.S. LIBOR on the current basis cannot and will not be guaranteed afterJune 30, 2023 . Moreover, it is possible thatU.S. LIBOR will be discontinued or modified prior toJune 30, 2023 . Our tax receivable agreement, however, does not provide for an alternative reference rate to LIBOR and, while we do not currently anticipate failing to pay any amounts owed 54
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under our tax receivable agreement, it is unclear how we would determine interest on any such amounts should we fail to pay as required under our tax receivable agreement.
Critical Accounting Policies and Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses and cash flows, and related disclosure of contingent assets and liabilities. Our estimates include those related to business combinations, revenue recognition, income taxes, tax receivable agreement liability, and warranty claims. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. We believe that of our significant accounting policies, which are described in the notes to our audited consolidated financial statements appearing elsewhere in this Annual Report, the accounting policies listed below involve a greater degree of judgment and complexity. Accordingly, we believe these are the most critical to understand and evaluate fully our financial condition and results of operations. Business Combinations We account for business acquisitions under ASC 805, Business Combinations. The total purchase consideration for an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities assumed at the acquisition date. Costs that are directly attributable to the acquisition are expensed as incurred. Identifiable assets (including intangible assets) and liabilities assumed in an acquisition are measured initially at their fair values at the acquisition date. We recognize goodwill if the fair value of the total purchase consideration and any noncontrolling interests is in excess of the net fair value of the identifiable assets acquired and the liabilities assumed. We include the results of operations of the acquired business in the consolidated financial statements beginning on the acquisition date. We recognized goodwill of$49.2 million as a result of our acquisition ofMaverick Boat Group inDecember 2020 and goodwill of$0.3 million as a result of our acquisition ofAmTech, LLC inFebruary 2022 . We had goodwill outstanding of$100.8 million as ofJune 30, 2022 . When determining such fair values, we make significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include but are not limited to projected future cash flows, dealer attrition and discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates and changes could be significant. Furthermore, our estimates might change as additional information becomes available.
Revenue Recognition
Revenue is recognized as performance obligations under the terms of contracts
with customers are satisfied; this occurs when control of promised goods (boats,
parts, or other) is transferred to the customer. Revenue is measured as the
amount of consideration we expect to receive in exchange for transferring goods
or providing services. We generally manufacture products based on specific
orders from dealers and often ship completed products only after receiving
credit approval from financial institutions. The amount of consideration we
receive and revenue we recognize varies with changes in marketing incentives and
rebates we offer to our dealers and their customers.
Dealers generally have no rights to return unsold boats. From time to time,
however, we may accept returns in limited circumstances and at our discretion
under our warranty policy, which generally limits returns to instances of
manufacturing defects. We may be obligated, in the event of default by a dealer,
to accept returns of unsold boats under our repurchase commitment to floor
financing providers, who are able to obtain such boats through foreclosure. We
accrue returns when a repurchase and return, due to the default of one of our
dealers, is determined to be probable and the return is reasonably estimable.
Historically, product returns resulting from repurchases made under the
floorplan financing program have not been material and the returned boats have
been subsequently resold above their cost. Our financial exposure is limited to
the difference between the amount paid to the finance companies and the amount
received on the resale of the repossessed product. Refer to Note 9 and Note 17
related to our product warranty and repurchase commitment obligations,
respectively.
Revenue from boat part sales is recorded as the product is shipped from our
location, which is free on board shipping point. Revenue associated with sales
of materials, parts, boats or engine products sold under our exclusive
manufacturing and distribution agreement with our Australian subsidiary are
eliminated in consolidation. Revenue associated with sales to the independent
representative responsible for international sales is recognized in accordance
with free on board shipping point terms, the point at which the risks of
ownership and loss pass to the representative. A fixed percentage discount is
earned by the independent representative at the time of shipment to the
representative as a reduction in the price of the boat and is recorded in
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our consolidated statement of operations as a reduction in sales.
We earn royalties on boats shipped with our proprietary wake surfing technology under licensing agreements with various marine manufacturers. Royalty income is recognized when products are used or sold with our patented technology by these other boat manufacturers and industry suppliers. The usage of our technology satisfies the performance obligation in the contract.
Product Warranties
Our standard warranties require us or our dealers to repair or replace defective products during the warranty period at no cost to the consumer. We estimate warranty costs we expect to incur and record a liability for such costs at the time the product revenue is recognized. We utilize historical claims trends and analytical tools to develop the estimate of our warranty obligation on a per boat basis, by brand and warranty year. Factors that affect our warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. We assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. Beginning with model year 2016, we increased the term of our 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, we increased the term of our bow-to-stern warranty for Cobalt brand boats from three years to five years. As a result of these changes, all of our Malibu, Axis and Cobalt brand boats with historical claims experience that are no longer covered under warranty had warranty terms shorter than the current warranty term of five years. Accordingly, we have little historical claims experience for warranty years four and five, and as such, these estimates give rise to a higher level of estimation uncertainty. Future warranty claims may differ from our estimate of the warranty liability, which could lead to changes in the Company's warranty liability in future periods. A hypothetical change of a 10% increase or decrease to our estimate of the warranty liability as ofJune 30, 2022 would have affected net income for the fiscal year endedJune 30, 2022 by approximately$3.9 million . Refer to Note 9 to the audited consolidated financial statements included elsewhere in this Annual Report for further information on warranties.
New Accounting Pronouncements
See "Part II, Item 8. Financial Statements and Supplementary Data-Note 1-Organization, Basis of Presentation, and Summary of Significant Accounting Policies-New Accounting Pronouncements."
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