MALIBU BOATS, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto included herein. Malibu Boats, Inc. is a Delaware corporation with its principal offices in Loudon, Tennessee. We use the terms “Malibu,” the “Company,” “we,” “us,” “our” or similar references to refer to Malibu Boats, Inc., its subsidiary, Malibu Boats Holdings, LLC, or the LLC, and its subsidiary Malibu Boats, LLC, or Boats, LLC and its consolidated subsidiaries, including Cobalt Boats, LLC, PB Holdco, LLC, through which we acquired the assets of Pursuit, and MBG Holdco, Inc., through which we acquired all of the outstanding stock of Maverick Boat Group, Inc. Overview We are a leading designer, manufacturer and marketer of a diverse range of recreational powerboats, including performance sport boats, sterndrive and outboard boats. Our product portfolio of premium brands are used for a broad range of recreational boating activities including, among others, water sports, general recreational boating and fishing. Our passion for consistent innovation, which has led to propriety technology such as Surf Gate, has allowed us to expand the market for our products by introducing consumers to new and exciting recreational activities. We design products that appeal to an expanding range of recreational boaters and water sports enthusiasts whose passion for boating and water sports is a key component of their active lifestyle and provide consumers with a better customer-inspired experience. With performance, quality, value and multi-purpose features, our product portfolio has us well positioned to broaden our addressable market and achieve our goal of increasing our market share in the expanding recreational boating industry. We currently sell our boats under eight brands as shown in the table below, and we report our results of operations under three reportable segments (Malibu, Saltwater Fishing and Cobalt). See Note 16 to our unaudited interim condensed consolidated financial statements for more information about our reporting segments. % of Net Sales Segment Brands Six Months Ended December 31, 2022 Fiscal year ended June 30, 2022 Malibu Malibu 47.3% 50.0% Axis Saltwater Fishing Pursuit 30.9% 28.1% Maverick Cobia Pathfinder Hewes Cobalt Cobalt 21.8% 21.9% 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, functional simplicity and the option to upgrade key features. Retail prices of our Malibu and Axis boats typically range from $70,000 to $225,000. 22 Table of Contents Our Saltwater Fishing segment participates in the manufacturing, distribution, marketing and sale throughout the world of Pursuit boats and the Maverick Boat Group family of boats (Maverick, Cobia, Pathfinder and Hewes). Our Pursuit boats expand our product offerings into the saltwater outboard fishing market and include center console, dual console and offshore models. In December 2020, we acquired Maverick Boat Group and added Maverick, Cobia, Pathfinder and Hewes to our brands. Our Maverick Boat Group family of boats are highly complementary to Pursuit, expanding our saltwater outboard offerings with a strong focus in length segments under 30 feet. We are among the market leaders in the fiberglass outboard fishing boat category with the brands in our Saltwater Fishing segment. Retail prices for our Saltwater Fishing boats typically range from $45,000 to $1,300,000. 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 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 $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 of July 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. Since fiscal year 2020, our operations have been impacted by a variety of external factors, including COVID-19 and supply chain disruptions that we believe were driven by numerous factors, such as labor shortages, ongoing domestic logistical constraints, West Coast port challenges and rising prices for our suppliers, in part due to inflationary pressures. 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. We have implemented various initiatives during the time period to combat these factors including plant shut-downs, constrained production levels and surcharges. Dealer inventories were lower than historical levels throughout fiscal years 2021 and 2022, as a result of an increase in retail sales during fiscal year 2021, constrained production in the first half of fiscal year 2021, and our lower wholesale shipment levels during the second half of fiscal year 2020. Fiscal year 2022 retail demand continued at a strong pace, albeit at lower levels than the record fiscal year 2021 levels, in spite of limited inventory. During fiscal year 2022, year-over-year increases in wholesale production and decreases in retail demand levels relative to fiscal year 2021 combined to increase inventory levels modestly at our Malibu and Cobalt segment dealers by the end of the fiscal year. Dealer inventories continue to be 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. The future impact of 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 on our Form 10- K for the year ended June 30, 2022. On a consolidated basis, we achieved second quarter fiscal 2023 net sales, gross profit, net income and adjusted EBITDA of $338.7 million, $75.7 million, $36.4 million and $57.6 million, respectively, compared to $263.9 million, $63.6 million, $31.0 million and $48.1 million, respectively, for the second quarter of fiscal 2022. For the second quarter of fiscal 2023, net sales increased 28.4%, gross profit increased 19.0%, net income increased 17.5% and adjusted EBITDA increased 19.7% as compared to the second quarter of fiscal 2022. For the definition of adjusted EBITDA and a reconciliation to net income, see “GAAP Reconciliation of Non-GAAP Financial Measures.” Outlook During the COVID-19 pandemic, domestic retail demand for recreational powerboats increased to the highest levels seen by the industry in decades as consumers turned to boating as a form of outdoor, socially-distanced, recreation. Retail registration activity in the recreational powerboat market, however, began declining meaningfully in the second half of calendar year 2021 as a result of limited available inventory due to the strong sales activity during the pandemic and supply chain disruptions that began impacting production levels. During calendar year 2022, retail registration activity continued to decline at a lower year-over-year rate than the second half of calendar year 2021. The declines in retail registration activity in the recreational powerboat market during calendar year 2022 were also impacted by the increased retail demand in calendar year 2021, resulting in an abnormally high comparative period. We and our dealers have experienced similar impacts in retail demand, supply chain disruption and resulting low inventory levels as the industry. The combination of strong retail market activity in calendar years 2020 and 2021 along with supply chain 23 Table of Contents disruptions in calendar year 2021 that continued through calendar year 2022 depleted inventory levels at our dealers in calendar year 2022 below pre-COVID levels. Some of the operational challenges and supply chain disruptions we experienced included labor shortages, domestic logistical constraints, West Coast port challenges and rising prices for our suppliers, in part due to inflationary pressures. These operational challenges and supply chain constraints delayed our ability to add to depleted inventory levels throughout fiscal year 2022. While retail activity at our dealers was strong during much of fiscal year 2022, it may have been higher but for a lack of inventory. Current inventory levels at our dealers are still below pre-pandemic levels. The primary drivers for our restocking timing will be the retail demand for our products and our ability to increase production in light of ongoing supply chain challenges. Any meaningful increases or decreases in retail demand and improvements or degradations in supply chain logistics will be the key drivers of the speed of inventory restocking that will drive our wholesale production in the second half of fiscal year 2023. While retail activity at our dealers trended lower during the first half of fiscal year 2023, given low inventory levels at the beginning of the fiscal year, we expect wholesale demand to continue through the end of fiscal year 2023 and, with respect to certain brands, potentially beyond, in order to restock our dealer inventories. With respect to supply, we believe supply chain disruptions will continue to challenge some of our production output through at least the remainder of fiscal year 2023, with the ultimate duration and magnitude of these supply chain challenges being unknown. However, we have begun to notice incremental improvements across our supply chain. As a result, we believe our dealer inventory levels may begin to normalize in the second half of fiscal year 2023 for our Malibu and Cobalt segments and in the first half of fiscal 2024 for our Saltwater Fishing segment. We aim to increase our market share across the boating categories in which we compete through new product development, improved distribution, new models, and innovative features. Our industry however is highly competitive, and our competitors have become more aggressive in their product introductions, expanded their distribution capabilities, and launched surf systems competitive with our patented Surf Gate system. Further, our ability to 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 leading market position in performance sports boats. We also believe that our track record of expanding our market share with our Malibu and Axis brands is directly transferable to our Cobalt, Pursuit and Maverick Boat Group brands. While Cobalt, Pursuit and the Maverick Boat Group brands are market leaders in certain areas, we believe that enhancing new product development combined with diligent management of the Cobalt, Pursuit and Maverick Boat Group dealer networks will position us to meaningfully improve our share of the sterndrive and outboard markets over time. We have seen the impact of this strategy at Cobalt already as we have gained market share with the introduction of eight new products in the last twenty-four months. Our new product development efforts at Pursuit have begun to take shape and influence market share. We have begun the processes to improve product development efforts at Maverick Boat Group but those initiatives will take time and our ability to influence the number of near-term model introductions will be limited. As discussed above, our financial results and operations have been, and will continue to be, impacted by events outside of our control. For example, we have 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 fiscal year 2023 and likely beyond. To combat this, we implemented surcharges across all brands in fiscal year 2022 that were made permanent price increases at the beginning of fiscal year 2023, while working 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 instance, increasing interest rates, which we are currently experiencing, could reduce retail consumer appetite for our product or reduce the appetite or availability for credit for our dealers and retail consumers. Further, we believe a substantial increase or decrease in the price of oil, strength or weakness of the U.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. An additional variable that could affect our volumes is weather related events. For example, we recently shut down production in all of our Florida facilities as a precaution during hurricanes that made landfall in Florida during the first half of fiscal 2023. The downtime related to Hurricane Ian impacted the number of boats that we were able to ship at the end of the first quarter of fiscal year 2023. Our facilities were ultimately not meaningfully impacted by the hurricane, and we were able to restart production and shipments in the second fiscal quarter as we normally would. Retail demand may also be negatively impacted as a result of increasing interest rates and continuing concerns over inflation, all of which are outside of our control. 24 Table of Contents Factors Affecting Our Results of Operations We believe that our results of operations and our growth prospects are affected by a number of factors, such as the economic environment and consumer demand for our products, our ability to develop new products and innovate, our product mix, our ability to manage manufacturing costs, sales cycles and inventory levels, the strength of our dealer network, our ability to offer dealer financing and incentives and our vertical integration efforts. We discuss each of these factors in more detail under the heading “Item 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, 2022. 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. 25 Table of Contents Components of Results of Operations Net Sales We generate revenue from the sale of boats to our dealers. The substantial majority of our net sales are derived from the sale of boats, including optional features included at the time of the initial wholesale purchase of the boat. Net sales consists of the following: • Gross sales from: • Boat and trailer sales —consists of sales of boats and trailers to our dealer network. Nearly all of our boat sales include optional feature upgrades purchased by the consumer, which increase the average selling price of our boats; and • Parts and other sales— consists of sales of replacement and aftermarket boat parts and accessories to our dealer network; and consists of royalty income earned from license agreements with various boat manufacturers, including Nautique, Chaparral, Mastercraft, and Tige related to the use of our intellectual property. • Net sales are net of: • Sales returns —consists primarily of contractual repurchases of boats either repossessed by the floor plan financing provider from the dealer or returned by the dealer under our warranty program; and • Rebates and free flooring —consists of incentives, rebates and free flooring, we provide to our dealers based on sales of eligible products. For our Malibu and Cobalt segments, if a domestic dealer meets its monthly or quarterly commitment volume, as well as other terms of the dealer performance program, the dealer is entitled to a specified rebate. For our Saltwater Fishing segment, if a dealer meets its quarterly or annual retail volume goals, the dealer is entitled to a specific rebate applied to their wholesale volume purchased. For Malibu, Cobalt and select Saltwater Fishing models, our dealers that take delivery of current model year boats in the offseason, typically July through April in the U.S., are also entitled to have us pay the interest to floor the boat until the earlier of (1) the sale of the unit or (2) a date near the end of the current model year, which incentive we refer to as “free flooring.” From time to time, we may extend the flooring program to eligible models beyond the offseason period. Cost of Sales Our cost of sales includes all of the costs to manufacture our products, including raw materials, components, supplies, direct labor and factory overhead. For components and accessories manufactured by third-party vendors, such costs represent the amounts invoiced by the vendors. Shipping costs and depreciation expense related to manufacturing equipment and facilities are also included in cost of sales. Warranty costs associated with the repair or replacement of our boats under warranty are also included in cost of sales. Operating Expenses Our operating expenses include selling and marketing, general and administrative costs and amortization costs. Each of these items includes personnel and related expenses, supplies, non-manufacturing overhead, third-party professional fees and various other operating expenses. Further, selling and marketing expenditures include the cost of advertising and various promotional sales incentive programs. General and administrative expenses include, among other things, salaries, benefits and other personnel related expenses for employees engaged in product development, engineering, finance, information technology, human resources and executive management. Other costs include outside legal and accounting fees, investor relations, risk management (insurance) and other administrative costs. General and administrative expenses also include product development expenses associated with our vertical integration initiative and acquisition or integration related expenses. Amortization expenses are associated with the amortization of intangibles. Other Expense (Income), Net Other expense (income), net consists of interest expense and other income or expense, net. Interest expense consists of interest charged under our outstanding debt and amortization of deferred financing costs on our credit facilities. Other income or expense includes adjustments to our tax receivable agreement liability and sublease income. 26 Table of Contents Income Taxes Malibu Boats, Inc. is subject to U.S. federal and state income tax in multiple jurisdictions with respect to our allocable share of any net taxable income of the LLC. The LLC is a pass-through entity for federal purposes but incurs income tax in certain state jurisdictions. Maverick Boat Group is separately subject to U.S. federal and state income tax with respect to its net taxable income. Net Income Attributable to Non-controlling Interest As of each of December 31, 2022 and 2021, we had a 97.1% and a 97.2%, respectively, controlling economic interest and 100% voting interest in the LLC and, therefore, we consolidate the LLC's operating results for financial statement purposes. Net income attributable to non-controlling interest represents the portion of net income attributable to the non-controlling LLC members. 27 Table of Contents 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, 2022 2021 2022 2021 $ % Revenue $ % Revenue $ % Revenue $ % Revenue Net sales 338,732 100.0 % 263,887 100.0 % 640,943 100.0 % 517,384 100.0 % Cost of sales 263,078 77.7 % 200,336 75.9 % 490,684 76.6 % 394,081 76.2 % Gross profit 75,654 22.3 % 63,551 24.1 % 150,259 23.4 % 123,303 23.8 % Operating expenses: Selling and marketing 6,198 1.8 % 5,658 2.1 % 11,384 1.8 % 10,775 2.1 % General and administrative 19,057 5.6 % 15,987 6.1 % 38,277 6.0 % 32,078 6.2 % Amortization 1,715 0.5 % 1,719 0.7 % 3,431 0.5 % 3,575 0.7 % Operating income 48,684 14.4 % 40,187 15.2 % 97,167 15.1 % 76,875 14.8 % Other expense, net: Other expense (income), net 193 0.1 % (10) — % 263 — % (23) — % Interest expense 910 0.3 % 656 0.2 % 2,195 0.3 % 1,340 0.2 % Other expense, net 1,103 0.4 % 646 0.2 % 2,458 0.3 % 1,317 0.2 % Income before provision for income taxes 47,581 14.0 % 39,541 15.0 % 94,709 14.8 % 75,558 14.6 % Provision for income taxes 11,185 3.3 % 8,562 3.3 % 22,208 3.5 % 16,646 3.2 % Net income 36,396 10.7 % 30,979 11.7 % 72,501 11.3 % 58,912 11.4 % Net income attributable to non-controlling interest 1,234 0.3 % 1,088 0.4 % 2,456 0.4 % 2,077 0.4 % Net income attributable to Malibu Boats, Inc. 35,162 10.4 % 29,891 11.3 % 70,045 10.9 % 56,835 11.0 % Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 Unit Volumes % Total Unit Volumes % Total Unit Volumes % Total Unit Volumes % Total Volume by Segment Malibu 1,318 54.0 % 1,179 56.9 % 2,536 54.2 % 2,238 54.6 % Saltwater Fishing 593 24.3 % 469 22.6 % 1,141 24.4 % 954 23.3 % Cobalt 528 21.7 % 425 20.5 % 999 21.4 % 905 22.1 % Total units 2,439 100.0 % 2,073 100.0 % 4,676 100.0 % 4,097 100.0 % Net sales per unit $ 138,882 $ 127,297 $ 137,071 $ 126,284 Comparison of the Three Months Ended December 31, 2022 to the Three Months Ended December 31, 2021 Net Sales Net sales for the three months ended December 31, 2022 increased $74.8 million, or 28.4%, to $338.7 million as compared to the three months ended December 31, 2021. The increase in net sales was driven primarily by increased unit volumes across all three segments and inflation-driven year-over-year price increases, slightly offset by increased dealer flooring program costs resulting from higher interest rates and increased inventory levels as inventory levels began to move towards pre-COVID 28 Table of Contents levels. Unit volume for the three months ended December 31, 2022, increased 366 units, or 17.7%, to 2,439 units as compared to the three months ended December 31, 2021. Our unit volume increased primarily due to strong wholesale restocking demand across all segments. Net sales attributable to our Malibu segment increased $24.7 million, or 18.5%, to $158.1 million for the three months ended December 31, 2022, compared to the three months ended December 31, 2021. Unit volumes attributable to our Malibu segment increased 139 units for the three months ended December 31, 2022, compared to the three months ended December 31, 2021. The increase in net sales was driven by increased volume, inflation-driven year-over-year price increases and a favorable model mix, slightly offset by increased dealer flooring program costs. Net sales attributable to our Saltwater Fishing segment increased $30.3 million, or 40.3%, to $105.6 million, for the three months ended December 31, 2022, compared to the three months ended December 31, 2021. Unit volume increased 124 units for the three months ended December 31, 2022 compared to the three months ended December 31, 2021. The increase in net sales was driven by increased volume, inflation-driven year-over-year price increases and a favorable model mix. Net sales attributable to our Cobalt segment increased $19.8 million, or 35.9%, to $75.0 million for the three months ended December 31, 2022, compared to the three months ended December 31, 2021. Unit volumes attributable to Cobalt increased 103 units for the three months ended December 31, 2022 compared to the three months ended December 31, 2021. The increase in net sales was driven primarily by increased volume and inflation-driven year-over-year price increases, partially offset by increased dealer flooring program costs. Overall consolidated net sales per unit increased 9.1% to $138,882 per unit for the three months ended December 31, 2022, compared to the three months ended December 31, 2021. Net sales per unit for our Malibu segment increased 6.0% to $120,005 per unit for the three months ended December 31, 2022, compared to the three months ended December 31, 2021, driven by inflation-driven year-over-year price increases and a favorable model mix, partially offset by increased dealer flooring program costs. Net sales per unit for our Saltwater Fishing segment increased 11.0% to $178,052 per unit for the three months ended December 31, 2022 driven by inflation-driven year-over-year price increases and a favorable model mix. Net sales per unit for our Cobalt segment increased 9.4% to $142,009 per unit for the three months ended December 31, 2022, compared to the three months ended December 31, 2021, driven by inflation-driven year-over-year price increases, partially offset by increased dealer flooring program costs. Cost of Sales Cost of sales for the three months ended December 31, 2022 increased $62.7 million, or 31.3%, to $263.1 million as compared to the three months ended December 31, 2021. The increase in cost of sales was primarily driven by a 17.7% increase in volumes and increased prices due to inflationary pressures that have impacted prices on parts and components. In the Malibu segment, higher per unit material and labor costs contributed $7.9 million to the increase in cost of sales and were driven by increased prices due to inflationary pressures and by an increased mix of larger models that corresponded with higher net sales per unit. Within our Saltwater Fishing segment, higher per unit material and labor costs contributed $7.3 million to the increase in cost of sales and were driven by increased prices due to inflationary pressures and by an increased mix of larger models that corresponded with higher net sales per unit. In the Cobalt segment, higher per unit material and labor costs contributed $6.7 million to the increase in cost of sales and were driven by increased prices due to inflationary pressures and by an increased mix of larger models that corresponded with higher net sales per unit. Gross Profit Gross profit for the three months ended December 31, 2022 increased $12.1 million, or 19.0%, to $75.7 million compared to the three months ended December 31, 2021. The increase in gross profit was driven primarily by higher sales revenue partially offset by the increased cost of sales for the reasons noted above. Gross margin for the three months ended December 31, 2022 decreased 180 basis points from 24.1% to 22.3% driven primarily by increased dealer flooring program costs and increased mix of Cobalt and Saltwater Fishing segments and partially offset by better year-over-year performance in our Saltwater Fishing segment. Operating Expenses Selling and marketing expenses for the three months ended December 31, 2022 increased $0.5 million, or 9.5% to $6.2 million compared to the three months ended December 31, 2021. The increase was driven primarily by increased promotional events. As a percentage of sales, selling and marketing expenses decreased 30 basis points to 1.8% for the three months ended December 31, 2022 compared to 2.1% for the three months ended December 31, 2021. General and administrative expenses for the three months ended December 31, 2022 increased $3.1 million, or 19.2%, to $19.1 million as compared to the three months ended December 31, 2021 driven primarily by an increase in compensation and personnel-related expenses, an increase in 29 Table of Contents professional fees and an increase in travel related expenses. As a percentage of sales, general and administrative expenses decreased 50 basis points to 5.6% for the three months ended December 31, 2022 compared to 6.1% for the three months ended December 31, 2021. Amortization expense remained flat at $1.7 million for the three months ended December 31, 2022. Other Expense (Income), Net Other expense (income), net for the three months ended December 31, 2022 increased by $0.5 million, or 70.7% to $1.1 million, compared to the three months ended December 31, 2021. The increase in other expense (income) resulted primarily from increased interest expense due a higher average interest rate during the three months ended December 31, 2022 compared to the three months ended December 31, 2021. Provision for Income Taxes Our provision for income taxes for the three months ended December 31, 2022, increased $2.6 million, or 30.6%, to $11.2 million compared to the three months ended December 31, 2021. The increase primarily resulted from increased pre-tax earnings and increased state taxes. For the three months ended December 31, 2022 and 2021, our effective tax rate of 23.5% and 21.7%, respectively, exceeded the statutory federal income tax rate of 21% primarily due to the impact of U.S. state taxes. For the three months ended December 31, 2022, this increase in the effective tax rate over the statutory rate was partially offset by a windfall benefit generated by certain stock-based compensation, the benefits from the foreign derived intangible income deduction, the research and development tax credit, and the impact of non-controlling interests in the LLC. For the three months ended December 31, 2021, the increase in the effective tax rate over the statutory rate was partially offset by a windfall benefit generated by certain stock-based compensation. 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, 2022 and 2021, the weighted-average non-controlling interest attributable to ownership interests in the LLC not directly attributable to us was 2.9% and 2.8%, respectively. Comparison of the Six Months Ended December 31, 2022 to the Six Months Ended December 31, 2021 Net Sales Net sales for the six months ended December 31, 2022 increased $123.6 million, or 23.9%, to $640.9 million as compared to the six months ended December 31, 2021. The increase in net sales was driven by increased unit volumes across all three segments, inflation-driven year-over-year price increases and a favorable model mix, slightly offset by increased dealer flooring program costs resulting from higher interest rates and increased inventory levels as inventory levels began to move towards pre-COVID levels. Unit volume for the six months ended December 31, 2022, increased 579 units, or 14.1%, to 4,676 units as compared to the six months ended December 31, 2021. Our unit volume increased primarily due to strong wholesale restocking demand across all segments. Net sales attributable to our Malibu segment increased $51.6 million, or 20.5%, to $303.3 million for the six months ended December 31, 2022, compared to the six months ended December 31, 2021. Unit volumes attributable to our Malibu segment increased 298 units for the six months ended December 31, 2022, compared to the six months ended December 31, 2021. The increase in net sales was driven primarily by increased volume and inflation-driven year-over-year price increases, slightly offset by increased dealer flooring program costs. Net sales attributable to our Saltwater Fishing segment increased $45.9 million, or 30.2%, to $197.8 million, for the six months ended December 31, 2022, compared to the six months ended December 31, 2021. Unit volume increased 187 units for the six months ended December 31, 2022 compared to the six months ended December 31, 2021. The increase in net sales was driven by increased volume, inflation-driven year-over-year price increases and a favorable model mix. Net sales attributable to our Cobalt segment increased $26.1 million, or 22.9%, to $139.8 million for the six months ended December 31, 2022, compared to the six months ended December 31, 2021. Unit volumes attributable to Cobalt increased 94 units for the six months ended December 31, 2022 compared to the six months ended December 31, 2021. The increase in net sales was driven by increased volume, inflation-driven year-over-year price increases and a favorable model mix, partially offset by increased dealer flooring program costs. 30 Table of Contents Overall consolidated net sales per unit increased 8.5% to $137,071 per unit for the six months ended December 31, 2022, compared to the six months ended December 31, 2021. Net sales per unit for our Malibu segment increased 6.4% to $119,611 per unit for the six months ended December 31, 2022, compared to the six months ended December 31, 2021, driven by inflation-driven year-over-year price increases, slightly offset by increased dealer flooring program costs. Net sales per unit for our Saltwater Fishing segment increased 8.8% to $173,372 per unit for the six months ended December 31, 2022 driven by inflation-driven year-over-year price increases and a favorable model mix. Net sales per unit for our Cobalt segment increased 11.4% to $139,931 per unit for the six months ended December 31, 2022, compared to the six months ended December 31, 2021, driven by inflation-driven year-over-year price increases and a favorable model mix, slightly offset by increased dealer flooring program costs. Cost of Sales Cost of sales for the six months ended December 31, 2022 increased $96.6 million, or 24.5%, to $490.7 million as compared to the six months ended December 31, 2021. The increase in cost of sales was primarily driven by a 14.1% increase in volumes and increased prices due to inflationary pressures that have impacted prices on parts and components. In the Malibu segment, higher per unit material and labor costs contributed $11.8 million to the increase in cost of sales and were driven by increased prices due to inflationary pressures. Within our Saltwater Fishing segment, higher per unit material and labor costs contributed $9.6 million to the increase in cost of sales and were driven by increased prices due to inflationary pressures and by an increased mix of larger models that corresponded with higher net sales per unit. In the Cobalt segment, higher per unit material and labor costs contributed $11.8 million to the increase in cost of sales and were driven by increased prices due to inflationary pressures and by an increased mix of larger models that corresponded with higher net sales per unit. Gross Profit Gross profit for the six months ended December 31, 2022 increased $27.0 million, or 21.9%, to $150.3 million compared to the six months ended December 31, 2021. The increase in gross profit was driven primarily by higher sales revenue partially offset by the increased cost of sales for the reasons noted above. Gross margin for the six months ended December 31, 2022 decreased 40 basis points from 23.8% to 23.4% driven primarily by increased dealer flooring program costs and partially offset by better year-over-year performance in our Saltwater Fishing segment. Operating Expenses Selling and marketing expenses for the six months ended December 31, 2022 increased $0.6 million, or 5.7% to $11.4 million compared to the six months ended December 31, 2021. The increase was driven primarily by increased promotional events. As a percentage of sales, selling and marketing expenses decreased 30 basis points to 1.8% for the six months ended December 31, 2022 compared to 2.1% for the six months ended December 31, 2021. General and administrative expenses for the six months ended December 31, 2022 increased $6.2 million, or 19.3%, to $38.3 million as compared to the six months ended December 31, 2021 driven primarily by an increase in compensation and personnel-related expenses, an increase in professional fees and an increase in travel related expenses. As a percentage of sales, general and administrative expenses decreased 20 basis points to 6.0% for the six months ended December 31, 2022 compared to 6.2% for the six months ended December 31, 2021. Amortization expense for the six months ended December 31, 2022 decreased $0.1 million, or 4.0% to $3.4 million compared to the six months ended December 31, 2021 due to a decrease of amortization expense related to fully amortized intangibles. Other Expense (Income), Net Other expense (income), net for the six months ended December 31, 2022 increased by $1.1 million, or 86.6% to $2.5 million, compared to the six months ended December 31, 2021. The increase in other expense (income) resulted primarily from increased interest expense due to a higher average interest rate during the six months ended December 31, 2022 compared to the six months ended December 31, 2021. Provision for Income Taxes Our provision for income taxes for the six months ended December 31, 2022, increased $5.6 million, or 33.4%, to $22.2 million compared to the six months ended December 31, 2021. The increase primarily resulted from increased pre-tax earnings and increased state taxes. For the six months ended December 31, 2022 and 2021, our effective tax rate of 23.4% and 22.0%, respectively, exceeded the statutory federal income tax rate of 21% primarily due to the impact of U.S. state taxes. For the six months ended December 31, 2022 and 2021, this increase in the effective tax rate over the statutory rate was partially offset by a windfall benefit generated by certain stock-based compensation as well as the benefits from the foreign derived intangible income deduction, the research and development tax credit, and the impact of non-controlling interests in the LLC. 31 Table of Contents 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, 2022 and 2021, the weighted-average non-controlling interest attributable to ownership interests in the LLC not directly attributable to us was 2.9% and 2.8%, respectively. 32 Table of Contents 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 non-cash compensation expense. We define adjusted EBITDA margin as adjusted EBITDA divided by net sales. Adjusted EBITDA and adjusted EBITDA margin are not measures of net income as determined by GAAP. Management believes adjusted EBITDA and adjusted EBITDA margin allow investors to evaluate the Company’s operating performance and compare our results of operations from period to period on a consistent basis by excluding items that management does not believe are indicative of our core operating performance. Management uses adjusted EBITDA to assist in highlighting trends in our operating results without regard to our financing methods, capital structure and non-recurring or non-operating expenses. We exclude the items listed above from net income in arriving at adjusted EBITDA because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures, the methods by which assets were acquired and other factors. Adjusted EBITDA has limitations as an analytical tool and should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with GAAP or as an indicator of our liquidity. Certain items excluded from adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historical costs of depreciable assets. Our presentation of adjusted EBITDA and adjusted EBITDA margin should not be construed as an inference that our results will be unaffected by unusual or non-recurring items. Our computations of adjusted EBITDA and adjusted EBITDA margin may not be comparable to other similarly titled measures of other companies. The following table sets forth a reconciliation of net income as determined in accordance with GAAP to adjusted EBITDA and presentation of net income margin and adjusted EBITDA margin for the periods indicated (dollars in thousands): Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 Net income $ 36,396 $ 30,979 $ 72,501 $ 58,912 Provision for income taxes 11,185 8,562 22,208 16,646 Interest expense 910 656 2,195 1,340 Depreciation 5,388 4,613 10,684 9,531 Amortization 1,715 1,719 3,431 3,575 Stock-based compensation expense 1 2,016 1,598 3,651 2,856 Adjusted EBITDA $ 57,610 $ 48,127 $ 114,670 $ 92,860 Net Sales $ 338,732 $ 263,887 $ 640,943 $ 517,384 Net Income Margin 2 10.7 % 11.7 % 11.3 % 11.4 % Adjusted EBITDA Margin 2 17.0 % 18.2 % 17.9 % 17.9 % (1) Represents equity-based incentives awarded to certain of our employees under the Malibu Boats, Inc. Long-Term Incentive Plan and profit interests issued under the previously existing limited liability company agreement of the LLC. See Note 13 to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report. (2) 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. 33 Table of Contents Adjusted Fully Distributed Net Income We define Adjusted Fully Distributed Net Income as net income attributable to Malibu Boats, Inc. (i) excluding income tax expense, (ii) excluding the effect of non-recurring or non-cash items, (iii) assuming the exchange of all LLC Units into shares of Class A Common Stock, which results in the elimination of non-controlling interest in the LLC, and (iv) reflecting an adjustment for income tax expense on fully distributed net income before income taxes at our estimated effective income tax rate. Adjusted Fully Distributed Net Income is a non-GAAP financial measure because it represents net income attributable to Malibu Boats, Inc., before non-recurring or non-cash items and the effects of non-controlling interests in the LLC. We use Adjusted Fully Distributed Net Income to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results prepared in accordance with GAAP, provides a more complete understanding of factors and trends affecting our business than GAAP measures alone. We believe Adjusted Fully Distributed Net Income assists our board of directors, management and investors in comparing our net income on a consistent basis from period to period because it removes non-cash or non-recurring items, and eliminates the variability of non-controlling interest as a result of member owner exchanges of LLC Units into shares of Class A Common Stock. In addition, because Adjusted Fully Distributed Net Income is susceptible to varying calculations, the Adjusted Fully Distributed Net Income measures, as presented in this Quarterly Report, may differ from and may, therefore, not be comparable to similarly titled measures used by other companies. The following table shows the reconciliation of the numerator and denominator for net income available to Class A Common Stock per share to Adjusted Fully Distributed Net Income per Share of Class A Common Stock for the periods presented (in thousands except share and per share data): Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 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. $ 35,162 $ 29,891 $ 70,045 $ 56,835 Provision for income taxes 11,185 8,562 22,208 16,646 Acquisition related expenses 1 1,677 1,677 3,354 3,354 Stock-based compensation expense 2 2,016 1,598 3,651 2,856 Net income attributable to non-controlling interest 3 1,234 1,088 2,456 2,077 Fully distributed net income before income taxes 51,274 42,816 101,714 81,768 Income tax expense on fully distributed income before income taxes 4 12,441 10,190 24,717 19,461 Adjusted fully distributed net income $ 38,833 $ 32,626 $ 76,997 $ 62,307 34 Table of Contents Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 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: 20,404,583 20,900,201 20,432,216 20,875,091 Adjustments to weighted-average shares of Class A Common Stock: Weighted-average LLC Units held by non-controlling unit holders 5 600,919 600,919 600,919 600,919 Weighted-average unvested restricted stock awards issued to management 6 284,830 248,129 269,806 236,147 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: 21,290,332 21,749,249 21,302,941 21,712,157 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, 2022 2021 2022 2021 Net income available to Class A Common Stock per share $ 1.73 $ 1.43 $ 3.43 $ 2.72 Impact of adjustments: Provision for income taxes 0.55 0.41 1.09 0.80 Acquisition related expenses 1 0.08 0.08 0.16 0.16 Stock-based compensation expense 2 0.10 0.08 0.18 0.14 Net income attributable to non-controlling interest 3 0.06 0.05 0.12 0.10 Fully distributed net income per share before income taxes 2.52 2.05 4.98 3.92 Impact of income tax expense on fully distributed income before income taxes 4 (0.61) (0.49) (1.21) (0.93) Impact of increased share count 7 (0.08) (0.06) (0.15) (0.12) Adjusted Fully Distributed Net Income per Share of Class A Common Stock $ 1.83 $ 1.50 $ 3.62 $ 2.87 35 Table of Contents (1) For the three and six months ended December 31, 2022 and 2021, represents amortization of intangibles acquired in connection with the acquisitions of Maverick Boat Group, Pursuit and Cobalt. (2) Represents equity-based incentives awarded to certain of our employees under the Malibu Boats, Inc. Long-Term Incentive Plan and profit interests issued under the previously existing limited liability company agreement of the LLC. See Note 13 to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report. (3) 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. (4) Reflects income tax expense at an estimated normalized annual effective income tax rate of 24.3% and 23.8% of income before income taxes for the three and six months ended December 31, 2022 and 2021, respectively, assuming the conversion of all LLC Units into shares of Class A Common Stock. The estimated normalized annual effective income tax rate for fiscal year 2023 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. (5) 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. (6) 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. (7) 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 Table of Contents 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 our Florida facility used for Maverick 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 . On July 8, 2022, we entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement provides us with a revolving credit facility in an aggregate principal amount of up to $350.0 million. As of December 31, 2022, we had $71.7 million outstanding under our revolving credit facility and $1.5 million in outstanding letters of credit, with $276.8 million available for borrowing. The revolving credit facility matures on July 8, 2027. Assuming no additional repayments or borrowings on our revolving credit facility after December 31, 2022, our interest payments would be approximately $4.0 million within the next 12 months based on the interest rate at December 31, 2022 of 5.55%. See below under “Revolving Credit Facility” for additional information regarding our revolving credit facility, including the interest rate applicable to any borrowing under such facility. Tax Receivable Agreement . We entered into a tax receivable agreement with our pre-IPO owners at the time of our initial public offering. Under the tax receivables agreement, we pay the pre-IPO owners (or any permitted assignees) 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize, or in some circumstances are deemed to realize, as a result of an expected increase in our share of tax basis in LLC’s tangible and intangible assets, including increases attributable to payments made under the tax receivable agreement. These obligations will not be paid if we do not realize cash tax savings. We estimate that approximately $4.0 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 on April 15, 2023. Operating Lease Obligations . Lease commitments consist principally of leases for our manufacturing facilities. Our expected operating lease payments due within the next 12 months are $2.6 million and our total committed lease payments are $12.2 million as of December 31, 2022. Additional information regarding our operating leases is available in Note 10 of our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report. Purchase Obligations . In the ordinary course of business, we enter into purchase orders from a variety of suppliers, primarily for raw materials, in order to manage our various operating needs. The orders are expected to be purchased throughout fiscal year 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 of December 31, 2022, we had purchase orders in the amount of $148.5 million due within the next 12 months. Stock Repurchase Program . On November 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 “2021 Repurchase Program”) for the period from November 8, 2021 to November 8, 2022. During the six months ended December 31, 2022, we repurchased 143,759 shares of Class A Common Stock for $7.9 million in cash including related fees and expenses under the 2021 Repurchase Program which expired on November 8, 2022. On November 3, 2022, our Board of Directors authorized a stock repurchase program to allow for the repurchase of up to $100.0 million of our Class A Common Stock and the LLC's LLC Units (the “2022 Repurchase Program”) for the period from November 8, 2022 to November 8, 2023. As of December 31, 2022, $100.0 million was available to repurchase shares of Class A Common Stock and LLC Units under the 2022 Repurchase Program. We may repurchase shares of our common stock at any time or from time to time, without prior notice, subject to market conditions and other considerations. We have no obligation to repurchase any shares of our common stock under the share repurchase program. We intend to fund repurchases under the 2022 Repurchase Program from cash on hand. 37 Table of Contents 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 issue, Malibu Boats West, Inc., negligently failed to warn of a hazard posed by the 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 against Malibu Boats, LLC, with a potential maximum liability to Malibu Boats, LLC of $140.0 million, plus post-judgment interest at a rate of 6.25% per annum. Malibu Boats, LLC may also be required to pay prejudgment interest of approximately $8.0 million, if the Batchelder I Plaintiffs are successful on their appeal for such interest, and an award of reasonable attorneys' fees to the plaintiffs, which the plaintiffs claim should be approximately $56.0 million. The trial court postponed any ruling on the plaintiffs' contested motion for attorneys' fees pending the resolution of our post-trial motions and related appeals. On July 17, 2022, the trial court denied the post-trial motions of Malibu 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 stayed. We maintain product liability insurance applicable to this case with coverage limits of $26.0 million. At least one insurer has asserted potential coverage defenses and may dispute the scope of its obligation to us. In addition, we have potential claims against the insurers that we may decide to pursue with respect to this matter, but 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): Six Months Ended December 31, 2022 2021 Total cash provided by (used in): Operating activities $ 50,812 $ 57,966 Investing activities (22,339) (26,226) Financing activities (62,262) (28,153) Impact of currency exchange rates on cash balances (107) (231) (Decrease) increase in cash $ (33,896) $ 3,356 Operating Activities Net cash provided by operating activities was $50.8 million for the six months ended December 31, 2022, compared to $58.0 million for the six months ended December 31, 2021, a decrease of $7.2 million. The decrease in cash provided by operating activities resulted from an increase of $14.8 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) offset by a net decrease in operating assets and liabilities of $22.0 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 $22.3 million for the six months ended December 31, 2022, and $26.2 million for the six months ended December 31, 2021. Net cash used for investing activities for the six months ended December 31, 2022 was primarily related to decreased capital expenditures compared to the six months ended December 31, 2021. Financing Activities Net cash used in financing activities was $62.3 million for the six months ended December 31, 2022, compared to net cash used in financing activities of $28.2 million for the six months ended December 31, 2021, a change of $34.1 million. During the six months ended December 31, 2022, we repaid $23.1 million on our term loans and repaid $167.0 million of borrowings under our revolving credit facility and repurchased $7.9 million of our Class A Common Stock under our 2021 Repurchase Program. We also paid $2.9 million on taxes for shares withheld upon the vesting of restricted stock awards, paid $1.7 million in distributions to LLC Unit holders and paid $1.4 million in deferred financing costs. We received proceeds of $141.7 million under our amended revolving credit facility noted below. During the six months ended December 31, 2021, we repaid $20.0 38 Table of Contents million of borrowings under our revolving credit facility, we repurchased $5.2 million of our Class A Common Stock under our previously announced stock repurchase program. We repaid $0.6 million on our term loan, paid $2.0 million on taxes for shares withheld upon the vesting of restricted stock awards, and paid $1.2 million in distributions to LLC Unit holders and we received $1.0 million in proceeds from the exercise of stock options. Revolving Credit Facility We have a revolving credit facility in an aggregate principal amount of up to $350.0 million with a maturity date of July 8, 2027. As of December 31, 2022, we had $71.7 million outstanding under our revolving credit facility and $1.5 million in outstanding letters of credit, with $276.8 million available for borrowing. On July 8, 2022, we entered into our Credit Agreement with Truist Bank, as the administrative agent, swingline lender and issuing bank, that amended and restated our Prior Credit Agreement. The Credit Agreement increased the borrowing capacity of the revolving credit facility from $170.0 million to $350.0 million. We have the option to request that lenders increase the amount available under the revolving credit facility by, or obtain incremental term loans of, up to $200.0 million, subject to the terms of the Credit Agreement and only if existing or new lenders choose to provide additional term or revolving commitments. Our indirect subsidiary, Malibu Boats, LLC is the borrower under the Credit Agreement and its obligations are guaranteed by the LLC and, subject to certain exceptions, the present and future domestic subsidiaries of Malibu Boats, LLC, and all such obligations are secured by substantially all of the assets of the LLC, Malibu Boats, LLC and such subsidiary guarantors. Malibu Boats, Inc. is not a party to the Credit Agreement. All borrowings under the Credit Agreement bear interest at a rate equal to either, at our option, (i) the highest of the prime rate, the Federal Funds Rate plus 0.5%, or one-month Term SOFR plus 1% (the “Base Rate”) or (ii) SOFR, in each case plus an applicable margin ranging from 1.25% to 2.00% with respect to SOFR borrowings and 0.25% to 1.00% with respect to Base Rate borrowings. The applicable margin will be based upon the consolidated leverage ratio of the LLC and its subsidiaries. We are required to pay a commitment fee for the unused portion of the revolving credit facility, which will range from 0.15% to 0.30% per annum, depending on the LLC’s and its subsidiaries’ consolidated leverage ratio. The Credit Agreement contains certain customary representations and warranties, and notice requirements for the occurrence of specific events such as the occurrence of any event of default or pending or threatened litigation. The Credit Agreement also requires compliance with certain customary financial covenants consisting of a minimum ratio of EBITDA to interest expense and a maximum ratio of total debt to EBITDA. The Credit Agreement contains restrictive covenants regarding indebtedness, liens, fundamental changes, investments, dividends and distributions, disposition of assets, transactions with affiliates, negative pledges, hedging transactions, certain prepayments of indebtedness, accounting changes and governmental regulation. The Credit Agreement also contains customary events of default. If an event of default has occurred and continues beyond any applicable cure period, the administrative agent may (i) accelerate all outstanding obligations under the Credit Agreement or (ii) terminate the commitments, amongst other remedies. Additionally, the lenders are not obligated to fund any new borrowing under the Credit Agreement while an event of default is continuing. Repurchase Commitments Our dealers have arrangements with certain finance companies to provide secured floor plan financing for the purchase of our boats. These arrangements indirectly provide liquidity to us by financing dealer purchases of our products, thereby minimizing the use of our working capital in the form of accounts receivable. A majority of our sales are financed under similar arrangements, pursuant to which we receive payment within a few days of shipment of the product. We have agreed to repurchase products repossessed by the finance companies if a dealer defaults on its debt obligations to a finance company and the boat is returned to us, subject to certain limitations. Our financial exposure under these agreements is limited to the difference between the amounts unpaid by the dealer with respect to the repossessed product plus costs of repossession and the amount received on the resale of the repossessed product. During the six months ended December 31, 2022 and 2021, we did not repurchase any boats under our repurchase agreements. An adverse change in retail sales could require us to repurchase repossessed units upon an event of default by any of our dealers, subject to the annual limitation. 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 of Malibu 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 39 Table of Contents 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 the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, indicate that the continuation of U.S. LIBOR on the current basis cannot and will not be guaranteed after June 30, 2023. Moreover, it is possible that U.S. LIBOR will be discontinued or modified prior to June 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 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 As of December 31, 2022, 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 ended June 30, 2022. 40 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk Refer to our Annual Report on Form 10-K for the year ended June 30, 2022, for a complete discussion on the Company’s market risk. There have been no material changes in market risk from those disclosed in the Company's Form 10-K for the year ended June 30, 2022.