MALIBU BOATS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited interim condensed consolidated financial statements and notes thereto
included herein.
Malibu Boats, Inc. is a Delaware corporation with its principal offices in
Loudon, Tennessee . We use the terms "Malibu," the "Company," "we," "us," "our"
or similar references to refer to Malibu Boats, Inc. , its subsidiary, Malibu
Boats Holdings, LLC , or the LLC, and its subsidiary Malibu Boats, LLC , or Boats,
LLC and its consolidated subsidiaries, including Cobalt Boats, LLC , PB Holdco,
LLC , through which we acquired the assets of Pursuit, and MBG Holdco, Inc. ,
through which we acquired all of the outstanding stock of Maverick Boat Group,
Inc. ("Maverick Boat Group ").
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-(Malibu; Axis; Cobalt; Pursuit;
Maverick; Cobia; Pathfinder; and Hewes), and we report our results of operations
under three reportable segments, (Malibu, Cobalt and Saltwater Fishing), as
shown in the table below. We revised our segment reporting to report our results
of operations under these three reportable segments in connection with our
acquisition of Maverick Boat Group on December 31, 2020. See Note 17 to
our unaudited interim condensed consolidated financial statements for more information about our reporting segments.
% of Total Revenues
Six months
ended December Fiscal year ended
Segment Brands 31, 2020 2020
Malibu Malibu 55.4% 54.3%
Axis
Cobalt Cobalt 24.4% 26.8%
Pursuit
Maverick
Saltwater Fishing Cobia 20.2% 18.9%
Pathfinder
Hewes
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 $60,000 to $210,000 .
Our Cobalt segment participates in the manufacturing, distribution, marketing
and sale throughout the world of Cobalt boats. Our Cobalt boats consist of mid
to large-sized luxury cruisers and bowriders that we believe offer the ultimate
experience in comfort, performance and quality. We are the market leader in the
United States in the 20' - 40' segment of the sterndrive boat category through
our Cobalt brand. Retail prices for our Cobalt boats typically range from
$60,000 to $450,000 .
Our Saltwater Fishing segment participates in the manufacturing, distribution,
marketing and sale throughout the world of Pursuit boats and the Maverick Boat
Group family of boats (Maverick, Cobia, Pathfinder and Hewes). Our Pursuit boats
expand our product offerings into the saltwater outboard fishing market and
include center console, dual console and offshore models. As noted below, we
recently acquired Maverick Boat Group and added Maverick, Cobia, Pathfinder and
Hewes to our brands. Our Maverick 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 $50,000 to
$1,200,000 .
We sell our boats through a dealer network that we believe is the strongest in
the recreational powerboat category. As of December 31, 2020 , our worldwide
distribution channel consisted of over 400 dealer locations globally. Our dealer
base is an important part of our consumers' experience, our marketing efforts
and our brands. We devote significant time and resources to find, develop and
improve the performance of our dealers and believe our dealer network gives us a
distinct competitive advantage.
On a consolidated basis, we achieved second quarter fiscal 2021 net sales, gross
profit, net income and adjusted EBITDA of $195.6 million , $49.5 million , $22.1
million and $39.1 million , respectively, compared to $180.1 million , $39.9
million , $17.6 million and $30.7 million , respectively, for the second quarter
of fiscal 2020. For the second quarter of fiscal 2021, net sales increased 8.6%,
gross profit increased 24.1%, net income increased 25.8% and adjusted EBITDA
increased 27.5% as compared to the second quarter of fiscal 2020. For the
definition of adjusted EBITDA and a reconciliation to net income, see "GAAP
Reconciliation of Non-GAAP Financial Measures."
Acquisition of Maverick Boat Group, Inc. and Related Financing
On December 31, 2020 , we acquired all of the outstanding shares of Maverick Boat
Group from its existing stockholders for a purchase price of $150.7 million . The
purchase price was subject to customary adjustments for the amounts of cash,
indebtedness and working capital in the business at the closing date and subject
to adjustment for certain capital expenditures made by Maverick Boat Group prior
to closing at our request. With two manufacturing facilities located in Fort
Pierce, Florida , Maverick Boat Group designs and manufactures center console,
dual console, flats and bay boats under four brand names -- Cobia, Pathfinder,
Maverick, and Hewes. We paid the purchase price with cash on hand and $90.0
million of borrowings under our credit facilities following an amendment to
increase the amount available under the credit facilities as described below.
On December 30, 2020 , our subsidiary, Boats, LLC , as the borrower, entered into
the Third Incremental Facility Amendment and Third Amendment to its existing
Second Amended and Restated Credit Agreement dated as of June 28, 2017 with
Truist Bank , as the administrative agent, swingline lender and issuing bank. The
third amendment added a $25.0 million incremental term loan facility with a
maturity date of July 1, 2024 and increased the borrowing capacity available
under the revolving credit facility by $50.0 million from $120.0 million to
$170.0 million . The $25.0 million incremental term loan made pursuant to the
third amendment is subject to quarterly amortization at a rate of 5.0% per year
through December 31, 2022 and at a rate of 7.5% per year through June 30, 2024
and accrues interest at the same rate as other loans under the Credit Agreement.
See "--Liquidity and Capital Resources--Loans and Commitments" below for more
information.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has impacted our operations and financial results since
the third quarter of fiscal year 2020 and continues to impact us. On March 24,
2020 , we elected to suspend operations at all of our facilities. The shut-down
continued into the fourth quarter of fiscal year 2020 with operations resuming
between late April and early May, 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. In
addition, we have been managing our production levels in anticipation of supply
chain constraints, which we have begun to experience in recent weeks. While our
net sales were negatively impacted during the second half of fiscal year 2020
because of lower production levels, retail sales improved during the summer
months as consumers turned to boating as a form of outdoor, socially distanced
recreation during the COVID-19 pandemic. The increase in retail sales during the
summer months combined with our lower wholesale shipment levels during the
second half of fiscal year 2020 resulted in lower inventory levels at our
dealers as of December 31, 2020 compared to last year. We expect these
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lower inventory levels, while having the potential to impact retail sales in the
near-term, will provide us strong order flow for our model year 2021 product,
unless broader economic activity meaningfully contracts and negatively impacts
customer demand.
In addition to our operations, the COVID-19 pandemic has impacted and continues
to impact the operations of our dealers and suppliers. While some of our dealers
and suppliers had to suspend their operations during the pandemic, many
continued to operate and we are not aware of any of our dealers or suppliers
that have closed permanently. Our suppliers have been impacted by COVID-19 and
continue to ramp production to meet increased demand for their products. As
mentioned, we have successfully managed our production levels to ensure that
challenges related to parts procurement do not impact operations and and we have
not experienced any significant shortages.
We believe we are well-positioned to withstand any further disruptions that may
occur as result of the ongoing pandemic. We have approximately $23.7 million of
cash on hand as of December 31, 2020 and approximately $103.8 million available
for borrowing under our revolving credit facility as of December 31, 2020 .
Further, we have a flexible cost structure that allows us to more closely align
our costs with wholesale shipments. The future impact of COVID-19 on our
financial condition and results of operations, however, will depend on a number
of factors, including factors that we may not be able to forecast at this time.
In addition, a recent resurgence of COVID-19 in certain parts of the world,
including the United States and parts of Europe , has resulted in the
re-imposition of certain restrictions and may lead to more restrictions being
implemented again to reduce the spread of COVID-19. These measures could result
in further interruptions to our operations and potentially a decrease in
consumer spending. See the risk factor "The COVID-19 pandemic is adversely
affecting, and is expected to continue to adversely affect, our operations, and
those of our dealers and suppliers, thereby adversely affecting our business,
financial condition and results of operations." under Part I. Item 1A. of our
Form 10-K for the year ended June 30, 2020 .
Outlook
Industry-wide marine retail registrations continue to recover from the years
following the global financial crisis. According to Statistical Surveys, Inc. ,
domestic retail registration volumes of performance sport boats, fiberglass
sterndrive and fiberglass outboards increased at a compound annual growth rate
of approximately 5.2% between 2011 and 2019, for the 50 reporting states. While
retail growth in powerboats was negatively impacted by weak retail sales in
March and April 2020 due to COVID-19, domestic retail demand growth for
powerboats accelerated during calendar year 2020, in part because consumers have
turned to boating as a form of outdoor, socially distanced recreation during the
COVID-19 pandemic. These increases have been led by growth in our core market,
performance sport boats, which produced a double-digit compound annual growth
rate between 2011 and 2019 and is primarily served by our Malibu and Axis
brands. Outboard boats and fiberglass sterndrive boats have seen their combined
market grow at a 4.5% compound annual growth rate between 2011 and 2019. 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. Despite the impact of COVID-19 early in the
year, the acceleration of demand growth during 2020 has been broad based across
recreational powerboat categories. We believe the year-over-year domestic retail
growth rates for 2020 in the performance sport boat, fiberglass outboard and
sterndrive segments will approach 20%, 8% and 9%, respectively.
The combination of continued strong retail market activity through 2020 and the
temporary suspension of our operations from March and into May 2020 depleted
inventory levels at our dealers below prior year levels and we expect to see
meaningful wholesale demand to restock our dealer inventories through fiscal
year 2021 and beyond. While we expect lower dealer inventory levels will support
fiscal year 2021 financial performance and believe that strength is likely to
provide support through fiscal year 2022, numerous other variables have the
potential to impact our volumes, both positively and negatively. For example, we
believe the substantial decrease in the price of oil, continued strength of the
U.S. dollar and recently implemented tariffs has resulted in reduced demand for
our boats in certain markets. To date, growth in our domestic market has offset
the significantly diminished demand from economies that are driven by the oil
industry and international 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
higher interest rates reducing retail consumer appetite for our product, the
availability of credit to our dealers and retail consumers, 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.
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Since 2008, we have increased our market share among manufacturers of
performance sport boats due to new product development, improved distribution,
new models, and innovative features. As the market for our product has
recovered, our competitors have become more aggressive in their product
introductions, increased their distribution and launched surf systems
competitive with our patented Surf Gate system. This competitive environment has
continued throughout the past few years, with strong performance from Malibu and
Axis in 2019 expanding our market share lead over our nearest competitors in the
performance sport boats category. However, we believe decreased dealer inventory
levels driven by strong retail growth in the second half of 2020 negatively
impacted market share and our ability to continue to add inventory at our
dealers is 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 position us to maintain and potentially expand our industry
leading market position in performance sports boats. 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 also believe our track record of expanding our market share due to new
product development, improved distribution, new models, and innovative features
is directly transferable to our Cobalt, Pursuit and Maverick Boat Group
acquisitions. While Cobalt, Pursuit and the Maverick 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 and Maverick product
offerings with different foot lengths, different boat types and different
propulsion technologies. Our new product development efforts at Cobalt, Pursuit
and Maverick 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 five new models of boats during the first
half of fiscal year 2021 and we have included Splash and Stow and a new
electronic flip down Swim Step for model year 2021 boats. 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 new 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 and
Maverick 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, such as the economic environment and consumer demand for
our products, our ability to develop new products and innovate, our product mix,
our ability to manage manufacturing costs, including through our vertical
integration efforts, sales cycles and inventory levels, the strength of our
dealer network and our ability to offer dealer financing and incentives. We
discuss each of these factors in more detail under the heading "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Our Results of Operations" in our Form 10-K for
the year ended June 30, 2020 . While we do not have control of all factors
affecting our results from operations, we work diligently to influence and
manage those factors which we can impact to enhance our results of operations.
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Components of Results of Operations
Net Sales
We generate revenue from the sale of boats to our dealers. The substantial
majority of our net sales are derived from the sale of boats, including optional
features included at the time of the initial wholesale purchase of the boat. Net
sales consists of the following:
•Gross sales from:
•Boat and trailer sales-consists of sales of boats and trailers to our dealer
network. Nearly all of our boat sales include optional feature upgrades
purchased by the consumer, which increase the average selling price of our
boats; and
•Parts and other sales-consists of sales of replacement and aftermarket boat
parts and accessories to our dealer network; and consists of royalty income
earned from license agreements with various boat manufacturers, including
Nautique, Chaparral, Mastercraft, and Tige related to the use of our
intellectual property.
•Net sales are net of:
•Sales returns-consists primarily of contractual repurchases of boats either
repossessed by the floor plan financing provider from the dealer or returned by
the dealer under our warranty program; and
•Rebates, free flooring and discounts-consists of incentives, rebates and free
flooring, we provide to our dealers based on sales of eligible products. For our
Malibu and Axis models, 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 Cobalt models, if a domestic
dealer meets its quarterly commitment volume, as well as other terms of the
dealer performance program, the dealer is entitled to a specified rebate. For
our Pursuit models, if a dealer meets its quarterly or annual volume goals, the
dealer is entitled to a specific rebate applied to their wholesale volume
purchased from Pursuit. For Malibu and Cobalt models and select Saltwater
Fishing models, our dealers that take delivery of current model year boats in
the offseason, typically July through April in the U.S. , are also entitled to
have us pay the interest to floor the boat until the earlier of (1) the sale of
the unit or (2) a date near the end of the current model year, which incentive
we refer to as "free flooring." From time to time, we may extend the flooring
program to eligible models beyond the offseason period.
Cost of Sales
Our cost of sales includes all of the costs to manufacture our products,
including raw materials, components, supplies, direct labor and factory
overhead. For components and accessories manufactured by third-party vendors,
such costs represent the amounts invoiced by the vendors. Shipping costs and
depreciation expense related to manufacturing equipment and facilities are also
included in cost of sales. Warranty costs associated with the repair or
replacement of our boats under warranty are also included in cost of sales.
Operating Expenses
Our operating expenses include selling and marketing, and general and
administrative costs. Each of these items includes personnel and related
expenses, supplies, non-manufacturing overhead, third-party professional fees
and various other operating expenses. Further, selling and marketing
expenditures include the cost of advertising and various promotional sales
incentive programs. General and administrative expenses include, among other
things, salaries, benefits and other personnel related expenses for employees
engaged in product development, engineering, finance, information technology,
human resources and executive management. Other costs include outside legal and
accounting fees, investor relations, risk management (insurance) and other
administrative costs.
Other Expense, Net
Other expense, net consists of interest expense and other income or expense,
net. Interest expense consists of interest charged under our outstanding debt,
interest on our interest rate swap arrangement and change in the fair value of
our interest rate swap we entered into on July 1, 2015 , which matured on March
31, 2020 , and amortization of deferred financing costs on our credit facilities.
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Income Taxes
Malibu Boats, Inc. is subject to U.S. federal and state income tax in multiple
jurisdictions with respect to our allocable share of any net taxable income of
the LLC. The LLC is a pass-through entity for federal purposes but incurs income
tax in certain state jurisdictions.
Net Income Attributable to Non-controlling Interest
As of December 31, 2020 and 2019, we had a 96.8% and 96.1% controlling economic
interest, respectively, and 100% voting interest in the LLC and, therefore, we
consolidate the LLC's operating results for financial statement purposes. Net
income attributable to non-controlling interest represents the portion of net
income attributable to the non-controlling LLC members.
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Results of Operations
The table below sets forth our unaudited interim consolidated results of
operations, expressed in thousands (except unit volume and net sales per unit)
and as a percentage of net sales, for the periods presented. Our unaudited
interim consolidated financial results for these periods are not necessarily
indicative of the consolidated financial results that we will achieve in future
periods. Certain totals for the table below will not sum to exactly 100% due to
rounding.
Three Months Ended December 31, Six Months Ended December 31,
2020 2019 2020 2019
$ % Revenue $ % Revenue $ % Revenue $ % Revenue
Net sales 195,647 100.0 % 180,112 100.0 % 376,631 100.0 % 352,192 100.0 %
Cost of sales 146,158 74.7 140,244 77.9 281,401 74.7 272,323 77.3
Gross profit 49,489 25.3 39,868 22.1 95,230 25.3 79,869 22.7
Operating expenses:
Selling and marketing 4,001 2.0 4,666 2.6 7,613 2.0 9,732 2.8
General and administrative 15,036 7.7 10,078 5.6 26,690 7.1 20,746 5.9
Amortization 1,524 0.8 1,537 0.9 3,048 0.8 3,121 0.9
Operating income 28,928 14.8 23,587 13.0 57,879 15.4 46,270 13.1
Other (income) expense, net:
Other income, net (12) - (9) - (22) - (19) -
Interest expense 445 0.2 957 0.5 1,001 0.3 2,124 0.6
Other expense, net 433 0.2 948 0.5 979 0.3 2,105 0.6
Income before provision for
income taxes 28,495 14.6 22,639 12.5 56,900 15.1 44,165 12.5
Provision for income taxes 6,348 3.2 5,041 2.8 12,715 3.4 9,885 2.8
Net income 22,147 11.4 17,598 9.7 44,185 11.7 34,280 9.7
Net income attributable to
non-controlling interest 922 0.5 876 0.5 1,867 0.5 1,699 0.5
Net income attributable to
Malibu Boats, Inc. 21,225 10.9 % 16,722 9.2 % 42,318 11.2 % 32,581 9.2 %
Three Months Ended December 31, Six Months Ended December 31,
2020 2019 2020 2019
Unit Volumes % Total Unit Volumes % Total Unit Volumes % Total Unit Volumes % Total
Volume by Segment
Malibu 1,101 63.2 % 1,101 61.0 % 2,132 63.1 % 2,115 59.9 %
Cobalt 489 28.1 561 31.1 947 28.1 1,131 32.0
Saltwater Fishing 152 8.7 142 7.9 298 8.8 285 8.1
Total units 1,742 100 % 1,804 100 % 3,377 100 % 3,531 100 %
Net sales per unit $ 112,312 $ 99,840 $ 111,528 $ 99,743
Comparison of the Three Months Ended December 31, 2020 to the Three Months Ended
December 31, 2019
Net Sales
Net sales for the three months ended December 31, 2020 increased $15.5 million ,
or 8.6%, to $195.6 million as compared to the three months ended December 31,
2019 . The increase in net sales was driven primarily by a favorable model mix in
our Malibu segment and increased unit volumes in our Saltwater Fishing segment.
Our acquisition of Maverick Boat Group closed on the last day of the quarter and
therefore did not impact our net sales for the three months ended December 31,
2020 . Unit
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volume for the three months ended December 31, 2020 , decreased 62 units, or
3.4%, to 1,742 units as compared to the three months ended December 31, 2019 .
Our unit volume decreased primarily due to continued lower production levels in
our Cobalt segment.
Net sales attributable to our Malibu segment increased $11.3 million , or 11.6%,
to $108.6 million for the three months ended December 31, 2020 , compared to the
three months ended December 31, 2019 . Unit volumes attributable to our Malibu
segment remained flat for the three months ended December 31, 2020 , compared to
the three months ended December 31, 2019 . The increase in net sales was driven
primarily by strong demand for our new, larger models and optional features.
Net sales attributable to our Cobalt segment decreased $1.5 million , or 3.1%, to
$47.4 million for the three months ended December 31, 2020 , compared to the
three months ended December 31, 2019 . Unit volumes attributable to Cobalt
decreased 72 units for the three months ended December 31, 2020 compared to the
three months ended December 31, 2019 . Our unit volumes, and as a result our net
sales, for our Cobalt segment decreased during the three months ended
December 31, 2020 driven by our lower production levels for our Cobalt segment.
The planned lower production rates were driven by our investment in the plant to
optimize efficiency and expand capacity, the introduction of two new Cobalt
models during the quarter, and challenges around labor and supply as a result of
the pandemic. While we are ahead of our planned production levels, we do not
expect unit volume in this segment will result in year-over-year gains until the
second half of this fiscal year. The decrease in our unit volumes for Cobalt was
partially offset by a favorable product mix of our Cobalt models impacting our
net sales per unit.
Net sales attributable to our Saltwater Fishing segment increased $5.7 million ,
or 17.0%, to $39.6 million , for the three months ended December 31, 2020 ,
compared to the three months ended December 31, 2019 . The increase was driven
primarily by sales of larger, more expensive models and unit volumes which
increased ten units for the three months ended December 31, 2020 compared to the
three months ended December 31, 2019 .
Overall consolidated net sales per unit increased 12.5% to $112,312 per unit for
the three months ended December 31, 2020 , compared to the three months ended
December 31, 2019 . Net sales per unit for our Malibu segment increased 11.6% to
$98,653 per unit for the three months ended December 31, 2020 , compared to the
three months ended December 31, 2019 , driven by higher sales of new, more
expensive models and optional features. Net sales per unit for our Cobalt
segment increased 11.2% to $97,092 per unit for the three months ended
December 31, 2020 , compared to the three months ended December 31, 2019 , driven
by higher sales of larger, more expensive models. Net sales per unit for our
Saltwater Fishing segment increased 9.3% to $260,211 per unit for the three
months ended December 31, 2020 driven primarily by sales of larger, more
expensive models.
Cost of Sales
Cost of sales for the three months ended December 31, 2020 increased $5.9
million , or 4.2%, to $146.2 million as compared to the three months ended
December 31, 2019 . 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 per unit material and labor costs contributed $4.5
million to the increase in cost of sales and were driven by an increased mix of
larger product that corresponded with higher per unit revenue. Within our
Saltwater Fishing segment, higher volumes drove $2.0 million of increase in cost
of sales which was also modestly impacted by higher per unit costs. Both the
Malibu and Saltwater Fishing segment cost of sales increases were partially
offset by a decrease in cost of sales at Cobalt that was driven by decreased
volume, but offset by per unit cost of sales increases driven by a mix of
larger, more expensive product.
Gross Profit
Gross profit for the three months ended December 31, 2020 increased $9.6
million , or 24.1%, to $49.5 million compared to the three months ended
December 31, 2019 . The increase in gross profit was driven primarily by higher
sales revenue with a more favorable product mix partially offset by the
increased cost of sales for the reasons noted above. Gross margin for the three
months ended December 31, 2020 increased 320 basis points from 22.1% to 25.3%.
Operating Expenses
Selling and marketing expenses for the three months ended December 31, 2020
decreased $0.7 million , or 14.3% to $4.0 million compared to the three months
ended December 31, 2019 primarily driven by decreased travel and promotional
events due mostly to restrictions imposed by COVID-19. As a percentage of sales,
selling and marketing expenses decreased 60 basis points compared to the same
period in the prior fiscal year. General and administrative expenses for the
three months ended December 31, 2020 , increased $5.0 million , or 49.2%, to $15.0
million as compared to the three months ended December 31, 2019 driven primarily
by acquisition related costs and higher legal expenses related to intellectual
property litigation. As a percentage of sales, general and administrative
expenses increased 210 basis points to 7.7% for the three months ended
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December 31, 2020 compared to the three months ended December 31, 2019 .
Amortization expense for the three months ended December 31, 2020 remained flat
at $1.5 million compared to the three months ended December 31, 2019 .
Other Expense, Net
Other expense, net for the three months ended December 31, 2020 decreased by
$0.5 million , or 54.3% to expense of $0.4 million , compared to the three months
ended December 31, 2019 primarily due to decreased interest expense. Interest
expense decreased due to a lower interest rate and lower average outstanding
debt during the three months ended December 31, 2020 compared to the three
months ended December 31, 2019 .
Provision for Income Taxes
Our provision for income taxes for the three months ended December 31, 2020 ,
increased $1.3 million , or 25.9%, to $6.3 million compared to the three months
ended December 31, 2019 . The increase primarily resulted from increased pre-tax
earnings. Our effective tax rate for both the three months ended December 31,
2020 and 2019, was 22.3% and exceeded the statutory federal income tax rate of
21% primarily due to the impact of U.S. state taxes. This increase in tax rate
was partially offset by a windfall benefit generated by certain stock based
compensation, the benefits of the foreign derived intangible income deduction,
the research and development tax credit, and the impact of non-controlling
interests in the LLC.
Non-controlling Interest
Non-controlling interest represents the ownership interests of the members of
the LLC other than us and the amount recorded as non-controlling interest in our
unaudited interim condensed consolidated statements of operations and
comprehensive income is computed by multiplying pre-tax income for the
applicable period, by the percentage ownership in the LLC not directly
attributable to us. For the three months ended December 31, 2020 and 2019, the
weighted average non-controlling interest attributable to ownership interests in
the LLC not directly attributable to us was 3.3% and 3.9%, respectively.
Comparison of the Six Months Ended December 31, 2020 to the Six Months Ended
December 31, 2019
Net Sales
Net sales for the six months ended December 31, 2020 increased $24.4 million , or
6.9%, to $376.6 million as compared to the six months ended December 31, 2019 .
The increase in net sales was driven primarily by a favorable model mix in our
Malibu segment and increased unit volumes in our Malibu and Saltwater Fishing
segments. Our acquisition of Maverick Boat Group closed on the last day of the
quarter and therefore did not impact our net sales for the six months ended
December 31, 2020 . Unit volume for the six months ended December 31, 2020 ,
decreased 154 units, or 4.4%, to 3,377 units as compared to the six months ended
December 31, 2019 . Our unit volume decreased primarily due to continued lower
production levels in our Cobalt segment.
Net sales attributable to our Malibu segment increased $25.2 million , or 13.8%,
to $208.4 million for the six months ended December 31, 2020 , compared to the
six months ended December 31, 2019 . Unit volumes attributable to our Malibu
segment increased 17 units for the six months ended December 31, 2020 , compared
to the six months ended December 31, 2019 . The increase in net sales and unit
volumes was driven primarily by strong demand for our new, larger models and
optional features.
Net sales attributable to our Cobalt segment decreased $7.2 million , or 7.2%, to
$92.0 million for the six months ended December 31, 2020 , compared to the six
months ended December 31, 2019 . Unit volumes attributable to Cobalt decreased
184 units for the six months ended December 31, 2020 compared to the six months
ended December 31, 2019 . Our unit volumes, and as a result our net sales, for
our Cobalt segment decreased during the six months ended December 31, 2020
driven by our lower production levels for our Cobalt segment at the end of
fiscal year 2020. The planned lower production rates were driven by our
investment in the plant to optimize efficiency and expand capacity, the
introduction of five new Cobalt models during the six months ended December 31,
2020 and challenges around labor and supply as a result of the pandemic. While
we are ahead of our planned production levels, we do not expect unit volume in
this segment will result in year-over-year gains until the second half of this
fiscal year. The decrease in our unit volumes for Cobalt was partially offset by
a favorable product mix of our Cobalt models impacting our net sales per unit.
Net sales attributable to our Saltwater Fishing segment increased $6.4 million ,
or 9.1%, to $76.2 million , for the six months ended December 31, 2020 , compared
to the six months ended December 31, 2019 . The increase was driven primarily by
increase in sales of larger, more expensive models and unit volumes which
increased 13 units for the six months ended December 31, 2020 compared to the
six months ended December 31, 2019 .
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Overall consolidated net sales per unit increased 11.8% to $111,528 per unit for
the six months ended December 31, 2020 , compared to the six months ended
December 31, 2019 . Net sales per unit for our Malibu segment increased 12.9% to
$97,771 per unit for the six months ended December 31, 2020 , compared to the six
months ended December 31, 2019 , driven by higher sales of new, more expensive
models and optional features. Net sales per unit for our Cobalt segment
increased 10.8% to $97,107 per unit for the six months ended December 31, 2020 ,
compared to the six months ended December 31, 2019 , driven by higher sales of
larger, more expensive models. Net sales per unit for our Saltwater Fishing
segment increased 4.4% to $255,782 per unit for the six months ended
December 31, 2020 driven by sales of larger, more expensive models.
Cost of Sales
Cost of sales for the six months ended December 31, 2020 increased $9.1 million ,
or 3.3%, to $281.4 million as compared to the six months ended December 31,
2019 . The increase in cost of sales was driven primarily by higher costs related
to higher net sales in our Malibu segment. In the Malibu segment, higher per
unit material and labor costs contributed $11.3 million to the increase in cost
of sales and were driven by an increased mix of larger product that corresponded
with higher per unit revenue. Within the Saltwater Fishing segment, higher
volumes contributed to an increase in cost of sales. Both the Malibu and
Saltwater Fishing segment cost of sales increases were partially offset by a
decrease in cost of sales at Cobalt that was driven by decreased volume, but
offset by per unit cost of sales increases driven by a mix of larger, more
expensive product.
Gross Profit
Gross profit for the six months ended December 31, 2020 increased $15.4 million ,
or 19.2%, to $95.2 million compared to the six months ended December 31, 2019 .
The increase in gross profit was driven primarily by higher sales revenue with a
more favorable product mix partially offset by the increased cost of sales for
the reasons noted above. Gross margin for the six months ended December 31, 2020
increased 260 basis points from 22.7% to 25.3%.
Operating Expenses
Selling and marketing expenses for the six months ended December 31, 2020 ,
decreased $2.1 million , or 21.8% to $7.6 million compared to the six months
ended December 31, 2019 primarily driven by decreased travel and promotional
events due mostly to restrictions imposed by COVID-19. As a percentage of sales,
selling and marketing expenses decreased 80 basis points compared to the same
period in the prior fiscal year. General and administrative expenses for the six
months ended December 31, 2020 , increased $5.9 million , or 28.7%, to $26.7
million as compared to the six months ended December 31, 2019 driven primarily
by acquisition related costs and higher legal expenses related to intellectual
property litigation. As a percentage of sales, general and administrative
expenses increased 120 basis points to 7.1% for the six months ended
December 31, 2020 compared to the six months ended December 31, 2019 .
Amortization expense for the six months ended December 31, 2020 decreased $0.1
million , or 2.3% to $3.0 million compared to the six months ended December 31,
2019 .
Other Expense, Net
Other expense, net for the six months ended December 31, 2020 decreased by $1.1
million , or 53.5% to expense of $1.0 million , compared to the six months ended
December 31, 2019 primarily due to decreased interest expense. Interest expense
decreased due to a lower interest rate and lower average outstanding debt during
the six months ended December 31, 2020 compared to the six months ended
December 31, 2019 .
Provision for Income Taxes
Our provision for income taxes for the six months ended December 31, 2020 ,
increased $2.8 million , or 28.6%, to $12.7 million compared to the six months
ended December 31, 2019 . The increase primarily resulted from increased pre-tax
earnings. For the six months ended December 31, 2020 and 2019, our effective tax
rate of 22.3% and 22.4%, respectively, exceeded the statutory federal income tax
rate of 21% primarily due to the impact of U.S. state taxes. This increase in
tax rate was partially offset by the benefits of the foreign derived intangible
income deduction, the research and development tax credit, and the impact of
non-controlling interests in the LLC.
Non-controlling Interest
Non-controlling interest represents the ownership interests of the members of
the LLC other than us and the amount recorded as non-controlling interest in our
unaudited interim condensed consolidated statements of operations and
comprehensive income is computed by multiplying pre-tax income for the
applicable period, by the percentage ownership in the LLC not directly
attributable to us. For the six months ended December 31, 2020 and 2019, the
weighted average non-controlling interest attributable to ownership interests in
the LLC not directly attributable to us was 3.3% and 3.9%, 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 and expenses related
to interruption to our engine supply during the labor strike by United Auto
Workers ("UAW") against General Motors. 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 adjusted EBITDA margin for the
periods indicated (dollars in thousands):
Three Months Ended December 31,
Six Months Ended
2020 2019 2020 2019
Net income $ 22,147 $ 17,598 $ 44,185 $ 34,280
Provision for income taxes 6,348 5,041 12,715 9,885
Interest expense 445 957 1,001 2,124
Depreciation 3,599 3,005 7,085 6,102
Amortization 1,524 1,537 3,048 3,121
Professional fees 1 673 41 2,238 376
Acquisition and integration
related expenses 2 2,577 - 2,577 -
Stock-based compensation
expense 3 1,800 813 2,611 1,490
UAW strike impact 4 - 1,687 - 1,687
Adjusted EBITDA $ 39,113 $ 30,679 $ 75,460 $ 59,065
Adjusted EBITDA Margin 20.0 % 17.0 % 20.0 % 16.8 %
(1) Represents legal and advisory fees related to our litigation with
Inc. See Note 16 to our unaudited interim condensed consolidated financial
statements included elsewhere in this Quarterly Report.
(2) For the three months and six months ended
advisory fees incurred in connection with our acquisition of
Inc. Long-Term Incentive Plan and profit interests issued under the previously
existing limited liability company agreement of the LLC. For more information, see
Note 14 to our unaudited interim condensed consolidated financial statements
included elsewhere in this Quarterly Report.
(4) For the three and six months ended
connection with interruption to our engine supply during the UAW strike against
General Motors. We purchase engines from
marine use for our 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.
33-------------------------------------------------------------------------------- Table of Contents 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 Quarterly Report, may differ from and may, therefore, not be comparable to similarly titled measures used by other companies. The following table shows the reconciliation of the numerator and denominator for net income available to Class A Common Stock per share to Adjusted Fully Distributed Net Income per Share of Class A Common Stock for the periods presented (in thousands except share and per share data): Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 2019 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. $ 21,225$ 16,722 $ 42,318 $ 32,581 Provision for income taxes 6,348 5,041 12,715 9,885 Professional fees 1 673 41 2,238 376 Acquisition and integration related expenses 2 3,651 1,074 4,724 2,147 Fair market value adjustment for interest rate swap 3 - 20 - 58 Stock-based compensation expense 4 1,800 813 2,611 1,490 UAW strike impact 5 - 1,687 - 1,687 Net income attributable to non-controlling interest 6 922 876 1,867 1,699 Fully distributed net income before income taxes 34,619 26,274 66,473 49,923 Income tax expense on fully distributed income before income taxes 7 8,170 6,174 15,688 11,732 Adjusted fully distributed net income $ 26,449$ 20,100 $ 50,785 $ 38,191 34
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Three Months Ended December 31, Six Months Ended December 31,
2020 2019 2020 2019
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: 20,717,359 20,591,241 20,684,644 20,710,681
Adjustments to weighted average shares of Class A Common Stock:Weighted-average LLC units held by non-controlling unit holders 8 700,732 830,152 707,497
830,152
Weighted-average unvested restricted stock awards issued to management 9 209,544 133,185 194,296
129,850
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: 21,627,635 21,554,578 21,586,437 21,670,683
The following table shows the reconciliation of net income available to Class A
Common Stock per share to Adjusted Fully Distributed Net Income per Share of
Class A Common Stock for the periods presented:
Three Months Ended December 31, Six Months Ended December 31,
2020 2019 2020 2019
Net income available to Class
A Common Stock per share $ 1.03 $ 0.81 $ 2.05 $ 1.57
Impact of adjustments:
Provision for income taxes 0.30 0.25 0.61 0.48
Professional fees 1 0.03 - 0.11 0.02
Acquisition and integration
related expenses 2 0.18 0.05 0.23 0.10
Fair market value adjustment
for interest rate swap 3 - - - -
Stock-based compensation
expense 4 0.09 0.04 0.13 0.07
UAW strike impact 5 - 0.08 - 0.08
Net income attributable to
non-controlling interest 6 0.04 0.04 0.09 0.08
Fully distributed net income
per share before income taxes 1.67 1.27 3.22 2.40
Impact of income tax expense
on fully distributed income
before income taxes 7 (0.39) (0.30) (0.75) (0.57)
Impact of increased share
count 10 (0.06) (0.04) (0.12) (0.07)
Adjusted Fully Distributed Net
Income per Share of Class A
Common Stock $ 1.22 $ 0.93 $ 2.35 $ 1.76
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(1) Represents legal and advisory fees related to our litigation with
See Note 16 to our unaudited interim condensed consolidated financial
statements included elsewhere in this Quarterly Report.
(2) For the three and six months ended
fees incurred in connection with the acquisition of
amortization of intangibles acquired in connection with the acquisition of Pursuit and
Cobalt. For the three and six months ended
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. See Note 14 to
our unaudited interim condensed consolidated financial statements included elsewhere
in this Quarterly Report.
(5) For the three and six months ended
connection with interruption to our engine supply during the UAW strike against
General Motors. We purchase engines from
marine use for our 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) 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. (7) Reflects income tax expense at an estimated normalized annual effective income tax
rate of 23.6% and 23.5% of income before income taxes for the three and six month
periods ended
LLC Units into shares of Class A Common Stock. The estimated normalized annual
effective income tax rate for fiscal year 2021 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. (8) 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. (9) 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. (10) 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.
36
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Liquidity and Capital Resources
Our primary sources of funds are cash provided by operating activities and
borrowings under our credit agreement. Our primary use of funds has been for
capital investments, repayments under our debt arrangements, acquisitions, cash
distributions
to members of the LLC and cash payments under our tax receivable agreement. The
following table summarizes the cash flows from operating, investing and
financing activities (dollars in thousands):
Six
Months Ended
2020 2019
Total cash (used in) provided by:
Operating activities $ 72,601 $ 52,509
Investing activities (161,952) (19,313)
Financing activities 79,138 (32,903)
Impact of currency exchange rates on cash balances 155 22
(Decrease) Increase in cash $ (10,058) $ 315
Comparison of the Six Months EndedDecember 31, 2020 to the Six Months EndedDecember 31, 2019 Operating Activities Net cash provided by operating activities was$72.6 million for the six months endedDecember 31, 2020 , compared to$52.5 million for the six months endedDecember 31, 2019 , an increase of$20.1 million . The increase in cash provided by operating activities primarily resulted from an increase of$11.7 million due to an increase 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 increase in operating assets and liabilities of$8.4 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$162.0 million for the six months endedDecember 31, 2020 , compared to$19.3 million for the six months endedDecember 31, 2019 , an increase of$142.7 million . The increase in cash used for investing activities was primarily related to the acquisition ofMaverick Boat Group onDecember 31, 2020 offset by a reduction in capital expenditures compared to the capital outlays for our expansion activities at our Pursuit and Cobalt plants in the six months endedDecember 31, 2019 . Financing Activities Net cash provided by financing activities was$79.1 million for the six months endedDecember 31, 2020 , compared to net cash used in financing activities of$32.9 million for the six months endedDecember 31, 2019 , a change of$112.0 million . During the six months endedDecember 31, 2020 , 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 the six months endedDecember 31, 2020 , we also repaid$8.8 million of borrowings under our revolving credit facility, 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$0.1 million in distributions to LLC unit holders and received$0.3 million in proceeds from the exercise of stock options. During the six months endedDecember 31, 2019 , we repurchased$11.1 million of our Class A Common Stock. We also repaid$20.0 million of borrowings under our revolving credit facility, paid$1.0 million in distributions to LLC unit holders and paid$0.8 million on taxes for shares withheld on upon the vesting of restricted stock awards. Loans and Commitments We amended our existing credit agreement onDecember 30, 2020 in connection with our acquisition ofMaverick Boat Group . As a result of that amendment, we currently have a revolving credit facility with borrowing capacity of up to$170.0 million and$100.0 million aggregate principal amount of term loans outstanding. As ofDecember 31, 2020 , we had$65.0 million outstanding under our revolving credit facility and$1.2 million in outstanding letters of credit, with$103.8 million available for borrowing. Our revolving credit facility matures onJuly 1, 2024 , the incremental term loan made onDecember 30, 2020 in a principal amount of$25.0 million (which we refer to as the incremental term loan) matures onJuly 1, 2024 and the remaining$75.0 million of term loans (which we refer to as the existing term loans, and together with the incremental term loan, the term loans) mature onJuly 1, 2022 . The revolving credit facility and term loans are governed by a credit agreement withBoats LLC as the borrower andTruist Bank , as the administrative agent, swingline lender and issuing bank. The obligations ofBoats LLC under the credit agreement are guaranteed by the LLC and, subject to certain exceptions, the present 37 -------------------------------------------------------------------------------- Table of Contents and future domestic subsidiaries ofBoats LLC , and all such obligations are secured by substantially all of the assets of the LLC,Boats LLC and such subsidiary guarantors.Malibu Boats, Inc. is not a party to the credit agreement. Borrowings under our 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 LIBOR plus 1% (the "Base Rate") or (ii) LIBOR, in each case plus an applicable margin ranging from 1.25% to 2.25% with respect to LIBOR borrowings and 0.25% to 1.25% with respect to Base Rate borrowings. The applicable margin will be based upon the consolidated leverage ratio of the LLC and its subsidiaries calculated on a consolidated basis. As ofDecember 31, 2020 , the interest rate on our term loans and revolving credit facility was 1.39%. We are required to pay a commitment fee for the unused portion of the revolving credit facility, which will range from 0.20% to 0.40% per annum, depending on the LLC's and its subsidiaries' consolidated leverage ratio. The credit agreement permits prepayment of the term loans without any penalties. The existing term loans require an amortization payment of approximately$3.0 million onMarch 31, 2022 and the balance of the existing term loans are due on the scheduled maturity date ofJuly 1, 2022 . The incremental term loan of$25.0 million is subject to quarterly amortization at a rate of 5.0% per year throughDecember 31, 2022 , 7.5% per year throughJune 30, 2024 and the balance of the incremental term loan is due on the scheduled maturity date ofJuly 1, 2024 . The credit agreement also requires prepayments from the net cash proceeds received byBoats LLC or any guarantors from certain asset sales and recovery events, subject to certain reinvestment rights, and from excess cash flow, subject to the terms and conditions of the credit agreement. The credit agreement contains certain customary representations and warranties, and notice requirements for the occurrence of specific events such as the occurrence of any event of default, or pending or threatened litigation. The credit agreement also requires compliance with certain customary financial covenants, including a minimum ratio of EBITDA to fixed charges and a maximum ratio of total debt to EBITDA. The credit agreement contains certain restrictive covenants, which, among other things, place limits on certain activities of the loan parties under the credit agreement, such as the incurrence of additional indebtedness and additional liens on property and limit the future payment of dividends or distributions. For example, the credit agreement generally prohibits the LLC,Boats LLC and the subsidiary guarantors from paying dividends or making distributions, including to us. The credit facility permits, however, (i) distributions based on a member's allocated taxable income, (ii) distributions to fund payments that are required under the LLC's tax receivable agreement, (iii) purchase of stock or stock options of the LLC from former officers, directors or employees of loan parties or payments pursuant to stock option and other benefit plans up to$3.0 million in any fiscal year, and (iv) share repurchase payments up to$35.0 million in any fiscal year subject to one-year carry forward and compliance with other financial covenants. In addition, the LLC may make dividends and distributions of up to$10.0 million in any fiscal year, subject to compliance with other financial covenants. Potential Impact of LIBOR Transition The Chief Executive of theU.K. Financial Conduct Authority (the "FCA"), which regulates the London Interbank Offered Rate, or LIBOR, has announced that theFCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. However, forU.S dollar LIBOR, it now appears that the relevant date may be deferred toJune 30, 2023 for certain tenors (including overnight and one, three, six and 12 months), at which time the LIBOR administrator has indicated that it intends to cease publication ofU.S. dollar LIBOR. Despite this potential deferral, the LIBOR administrator has advised that no new contracts usingU.S. dollar LIBOR should be entered into afterDecember 31, 2021 . These actions 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 . All of our$165.0 million of debt outstanding under our credit agreement as ofDecember 31, 2020 bears interest at a floating rate that uses LIBOR as the applicable reference rate to calculate the interest. Our credit agreement provides that, if it is publicly announced that the administrator of LIBOR has ceased or will cease to provide LIBOR, if it is publicly announced by the applicable regulatory supervisor that LIBOR is no longer representative or if either the administrative agent or lenders holding 50% of the aggregate principal amount of our revolving commitments and term loans elect, we and the administrative agent may amend our credit agreement to replace LIBOR with an alternate benchmark rate. This alternative benchmark rate may include a forward-looking term rate that is based on the secured overnight financing rate, also known as SOFR, published by theFederal Reserve Bank of New York . In addition, our tax receivable agreement provides that, 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. Our tax receivable agreement, however, does not provide for an alternative reference rate to LIBOR and, while we do not currently anticipate failing to pay any amounts owed under our tax receivable agreement, it is unclear how we would determine interest on any such amounts should we fail to pay as required under our tax receivable agreement. 38 -------------------------------------------------------------------------------- Table of Contents If the rate used to calculate interest on our outstanding floating rate debt under our credit agreement that currently uses LIBOR were to increase by 1.0% either as a result of an increase in LIBOR or the result of the use of the alternative benchmark rate, we would expect to incur additional interest expense on such indebtedness as ofDecember 31, 2020 of approximately$1.7 million on an annualized basis. While we do not expect the potential impact of any LIBOR transition to have a material effect on our financial results based on our currently outstanding debt, uncertainty as to the nature of potential changes to LIBOR, fallback provisions, alternative reference rates or other reforms could adversely impact our interest expense on our floating rate debt that currently uses LIBOR as the applicable reference rate. In addition, any alternative reference rates to LIBOR may result in interest that does not correlate over time with the payments that would have been made on our indebtedness if LIBOR was available in its current form. Further, the discontinuance or modification of LIBOR and uncertainty of an alternative reference rate may result in the increase in the cost of future indebtedness, which could have a material adverse effect on our financial condition, cash flow and results of operations. We intend to closely monitor the financial markets and the use of fallback provisions and alternative reference rates in anticipation of the discontinuance or modification ofU.S. LIBOR byJune 30, 2023 . Future Liquidity Needs and Capital Expenditures Management believes that our existing cash, borrowing capacity under our revolving credit facility and cash flows from operations will be sufficient to fund our operations for the next 12 months. We estimate that approximately$3.6 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, 2021 . Our future capital requirements 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 the COVID-19 pandemic and its impact on the general economy. Our liquidity needs during this uncertain time will depend on multiple factors, including our ability to continue operations and production of boats, the COVID-19 pandemic's effects on our dealers, suppliers and retail customers, the availability of sufficient amounts of financing, and our operating performance. Stock Repurchase Program OnAugust 27, 2020 , our Board of Directors authorized a stock repurchase program to allow for the repurchase of up to$50.0 million of our Class A Common Stock and the LLC's LLC Units (the "Repurchase Program") for the period fromSeptember 2, 2020 toJuly 1, 2021 . We intend to fund repurchases under the Repurchase Program from cash on hand. We did not repurchase any shares of our Class A Common Stock during the three and six months endedDecember 31, 2020 . As ofDecember 31, 2020 , we may repurchase up to$50.0 million in shares of Class A Common Stock and LLC Units under the program. 39 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Commitments As ofDecember 31, 2020 , our continuing contractual obligations were as follows: Payments Due by Period Less than 1 More than 5 Total Year 1-3 Years 3-5 Years Years Bank debt 1$ 165,000 $ 1,250 $ 77,656 $ 86,094 $ - Interest expense 2 5,926 2,330 2,992 604 - Operating leases 3 17,122 2,488 5,001 4,746 4,887 Purchase obligations 4 153,318 153,318 - - - Payments pursuant to tax receivable agreement 5 50,208 3,589 7,597 8,118 30,904 Total$ 391,574 $ 162,975 $ 93,246 $ 99,562 $ 35,791
(1) Principal payments on our outstanding bank debt per terms of our credit agreement,
which is comprised of a
facility, of which
additional borrowings or repayments under our revolving credit facility prior to its
maturity. The balance of outstanding term loans matures on
incremental term loan in a principal amount of
and the revolving credit facility matures on
loan bears interest at variable rates. We have calculated future interest obligations
based on the interest rate as of
liability for all leases with terms greater than 12 months as represented on the
balance sheet respective of maturity. (4) As part of the normal 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 2021 and 2022. (5) Reflects amounts owed under our tax receivables agreement that we entered into with
our pre-IPO owners at the time of our IPO. Under the tax receivables agreement, we pay
the pre-IPO owners (or any permitted assignees) 85% of the amount of cash savings, if
any, in
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.
Off Balance Sheet Arrangements In connection with our dealers' wholesale floor plan financing of boats, we have entered into repurchase arrangements with various lending institutions. The repurchase commitment is on an individual unit basis with a term from the date it is financed by the lending institution through payment date by the dealer, generally not exceeding two and a half years. Such arrangements are customary in the industry and our exposure to loss under such arrangements is limited by the resale value of the inventory which is required to be repurchased. Refer to Note 16 of our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report for further information on repurchase commitments. Seasonality Our dealers experience seasonality in their business. Retail demand for boats is seasonal, with a significant majority of sales occurring during peak boating season, which coincides with our first and fourth fiscal quarters. In order to minimize the impact of this seasonality on our business, we manage our manufacturing processes and structure dealer incentives to tie our annual volume rebates program to consistent ordering patterns, encouraging dealers to purchase our products throughout the year. In this regard, we may offer free flooring incentives to dealers from the beginning of our model year throughApril 30 of each year. Further, in the event that a dealer does not consistently order units throughout the year, such dealer's rebate is materially reduced. We may offer off-season retail promotions to our dealers in seasonally slow months, during and ahead of boat shows, to encourage retail demand. Critical Accounting Policies OnDecember 31, 2020 , we acquired all of the outstanding stock ofMaverick Boat Group and allocated the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Our valuation procedures include consultation with an independent adviser. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and 40 -------------------------------------------------------------------------------- Table of Contents 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. Management's 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. We expect to finalize these amounts during the second half of fiscal 2021. Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed, as more fully discussed in Note 4 of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. As ofDecember 31, 2020 , there were no other significant changes in the application of our critical accounting policies or estimation procedures from those presented in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2020 . Item 3. Quantitative and Qualitative Disclosures About Market Risk Refer to our Annual Report on Form 10-K for the year endedJune 30, 2020 , for a complete discussion on the Company's market risk. There have been no material changes in market risk from those disclosed in the Company's Form 10-K for the year endedJune 30, 2020 . Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. As of the end of the period covered by this Quarterly Report, we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as ofDecember 31, 2020 . Changes in Internal Control Over Financial Reporting OnDecember 31, 2020 , we acquired all of the outstanding stock ofMaverick Boat Group . Prior to the acquisition,Maverick Boat Group was a privately-held company and was not subject to the Sarbanes-Oxley Act of 2002, the rules and regulations of theSEC , or other corporate governance requirements applicable to public reporting companies. As part of our ongoing integration activities, we are continuing to incorporate our controls and procedures intoMaverick Boat Group and to augment our company-wide controls to reflect the risks that may be inherent in acquisitions of privately-held companies. Other than our integration ofMaverick Boat Group , there have been no changes in our internal control over financial reporting during the quarter endedDecember 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 41
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