MALIBU BOATS, INC. 10-Q

Item 1A. Risk Factors Other than the risk noted below, there were no material changes during the quarter ended March 31, 2020, to the risk factors discussed in Part I, Item 1A. "Risk Factors” of our Annual Report on Form 10-K for the year ended June 30, 2019. 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. The COVID-19 pandemic has significantly impacted health and economic conditions throughout the United States. As the pandemic continues to grow, consumer fear about becoming ill with the virus and recommendations and/or mandates from federal, state and local authorities to avoid large gatherings of people or self-quarantine have increased. As a result of the pandemic, we suspended operations at all of our facilities on March 24, 2020. We have since resumed operations at our Loudon, Tennessee facility (Malibu and Axis boats) on April 20, 2020, our Neodesha, Kansas facility (Cobalt boats) on April 27, 2020 and our Fort Pierce, Florida facility (Pursuit boats) on May 4, 2020. The disruption we experienced during our temporary closure has resulted in a reduction in our production of boats that we will not recover this fiscal year, in part due to a potential decrease in consumer demand for recreational boats as a result of the economic impact of the pandemic. The temporary shutdown of our facilities also resulted in delays for delivery of our boats to dealers and inability to receive supplies from our vendors. . As a result, we recognized a decrease of $17.6 million, or 8.8%, in net sales and a decrease of 298 units sold, or 14.2%, for the three months ended March 31, 2020 compared to the same period last year.We cannot assure you that we will not have to suspend our operations again, whether voluntarily or as a result of federal, state or local mandates, and such closures could extend for a longer term than the prior shutdown of our facilities. We expect the COVID-19 pandemic to negatively impact our financial results, more significantly in the fourth quarter of fiscal year 2020 and beyond as compared to the third quarter of fiscal year 2020. Further, the pandemic could have a stronger impact on our results for the fiscal year 2021 because our dealers have traditionally experienced stronger sales of our products during the spring and summer months, which, if meaningfully impacted, would result in our dealers having excess inventory and likely result in reduced wholesale shipments during fiscal year 2021. As shelter-in-place orders began in the spring and could be extended through the summer, we expect sales of our boats to be negatively impacted. While we cannot predict the ultimate impact of the COVID-19 virus on our business at this time, the pandemic and related efforts to mitigate the pandemic could impact our business in a number of ways, including but not limited to: • decreasing consumer confidence as a result of the economic impact of the pandemic, which could result in a decrease in consumer demand for recreational boats; • disrupting our manufacturing processes, as has already occurred with the temporary closures of our facilities and the delay of supplies being received; • adversely impacting the financial health of our dealers who typically require financing to purchase our boats; • adversely impacting the business of our suppliers, which could result in among other things, delays for delivery of raw materials and components needed for the production of our boats; • impacting our ability to maintain our workforce during this uncertain time; • increasing employee absenteeism due to fear of infection; • increasing possible lawsuits or regulatory actions due to COVID-19 spread in the workplace; • suffering from reputational risk if we experience COVID-19 spread in our workplace; • adversely impacting the productivity of management and our employees that are working remotely, including impacting our ability to maintain our financial reporting processes and related controls and our ability to manage complex accounting issues presented by the COVID-19 pandemic, such as impairment analysis. Any or all of these items may occur, which individually or in the aggregate, may have a material adverse effect on our business, financial condition, results of operations and cash flows. These risks could accelerate or intensify depending on the 46 Table of Contents severity and length of the pandemic. In addition, if a resurgence of the COVID-19 virus occurs after the initial outbreak subsides, these factors will be exacerbated. Given that the COVID-19 pandemic has caused a significant economic slowdown it appears increasingly likely that it could cause a global recession, which could be of an unknown duration and as a result we expect sales of our boats to be negatively impacted. If general economic conditions deteriorate further we cannot predict the duration or strength of an economic recovery, either in the United States or in the specific markets where we sell our products. Further, consumers often finance purchases of our boats and accordingly, consumer credit market conditions also influence demand for our boats. If credit conditions worsen, as is likely in response to the COVID-19 pandemic, and adversely affect the ability of consumers to finance potential purchases at acceptable terms and interest rates, it could result in a decrease in the sales of our products. In late March 2020, we elected to draw the remaining available funds of $98.8 million from our revolving credit facility to ensure we maintain financial flexibility in light of the current uncertainty resulting from the COVID-19 pandemic. As of May 5, 2020, we had approximately $113.0 million of cash on hand, with no available amounts for borrowing under our revolving credit facility. Our cash position will depend on multiple factors, including our ability to continue operations and production of boats, the COVID-19 pandemic’s effects on our dealers and customers, the availability of sufficient amounts of financing, and our operating performance. Further, our dealers may seek credit support or other assurances from us that could affect our costs of doing business or liquidity. As a result of the impacts of the COVID-19 pandemic, we may be required to raise additional capital and such additional debt financing may not be available on commercially reasonable terms, if at all. Our dealers have also experienced disruptions to their operations, including temporary closures during which they are unable to sell our boats. Because we sell nearly all of our products through dealers, the financial health of our dealers is critical to our success. The ability of our dealers to purchase our boats may be materially impacted depending on the length and severity of the pandemic, including the impact on general economic conditions and consumer confidence. If our dealers suffer material economic harm during the pandemic, the dealers may no longer be able to continue in business or, even if they are, they may not able to maintain their payment obligations under their floor plan financing arrangements and the boats could be repossessed by the floor plan financing provider and returned to us. If boats are returned to us, it would have an adverse impact on our net sales and could result in downward pressure on pricing of our boats. In addition, our dealers rely on continued access to adequate financing sources on a timely basis on reasonable terms, which is typically provided through floor plan financing. Access to floor plan financing generally facilitates our dealers’ ability to purchase boats from us, and their financed purchases reduce our working capital requirements. If floor plan financing becomes less available to our dealers as a result of the COVID-19 pandemic, our sales and our working capital levels would be adversely affected. In addition to our dealers, our suppliers have also experienced temporary closures, thereby impacting our ability to receive certain components and materials that are essential to the construction of our boats. We may experience delays in production of our products if we do not receive sufficient supplies of materials for production of boats or if we are required to replace one or more suppliers, which could cause a decrease in boats available for sale or an increase in our cost of sales, either of which would adversely affect our business, financial condition and results of operations. Our financial and accounting teams, along with certain other departments, have been able to work remotely during this time and many continue to work remotely. Remote working arrangements could impact employees’ productivity. While we have resumed operations at all of our facilities, we have continued to implement safety precautions, including enhanced and more frequent cleaning of our facilities, providing facemasks to each employee, enforcing social distancing guidelines and screening employees for potential symptoms. These additional safety precautions may also impact the productivity and profitability at our facilities. In addition, we may experience higher levels of absenteeism during the pandemic due to the fear of becoming ill. As a result of the COVID-19 outbreak, we are also currently evaluating the impact on long-lived assets for possible impairment. We did not record an impairment charge during the third quarter of fiscal year 2020. However, depending on future events, we may be required to record future impairment charges. In addition, depending on the ongoing impact of the pandemic, we may also be required to reserve for incremental credit losses and/or repurchase commitments. Any material increase in our reserves could have a corresponding effect on our results of operations. The ultimate magnitude of COVID-19, including the extent of its impact on our financial condition and results of operations, which could be material, will depend on all of the factors noted above, including other factors that we may not be able to forecast at this time. While we expect the impacts of COVID-19 to have an adverse effect on our business, financial condition and results of operations, we are unable to predict the extent of these impacts at this time. 47 Table of Contents Any potential government crisis relief assistance could impose significant limitations on our corporate activities, may dilute our stockholders and may not be on terms favorable to us. Numerous government-sponsored crisis relief programs have been implemented and others are being considered. If any government agrees to provide crisis relief assistance that we accept, it may impose certain requirements on the recipients of the aid including restrictions on executive officer compensation, share buybacks, dividends, prepayment of debt, limitations on debt, and other similar restrictions that will apply for a period of time after the aid is repaid or redeemed in full. We cannot assure you that any such government crisis relief assistance will not significantly limit our corporate activities or be on terms that are favorable to us. Such restrictions and terms could adversely impact our business and operations. In addition, such funding could involve the issuance of warrants, which will be dilutive to our stockholders.