Company Quick10K Filing
Quick10K
Malibu Boats
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$41.93 21 $874
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-K 2017-06-30 Annual: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-K 2016-06-30 Annual: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-K 2015-06-30 Annual: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-K 2014-06-30 Annual: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-07-16 Officers
8-K 2019-07-01 Officers, Other Events
8-K 2019-06-18 Other Events
8-K 2019-05-14 Enter Agreement, Exhibits
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-02-06 Earnings, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-11-02 Shareholder Vote
8-K 2018-10-15 M&A, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-09-12 Regulation FD, Exhibits
8-K 2018-09-09 Sale of Shares, Officers
8-K 2018-09-06 Earnings, Exhibits
8-K 2018-08-21 Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-08-02 Sale of Shares
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HEP Holly Energy Partners 2,860
FIZZ National Beverage 2,570
GTX Garrett Motion 1,360
ATRO Astronics 1,300
SYBX Synlogic 210
FTNW FTE Networks 32
TECR Techcare 0
CCPTV Cole Credit Property Trust V 0
MBUU 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 q32019-exhibit311.htm
EX-31.2 q32019-exhibit312.htm
EX-32 q32019-exhibit32.htm

Malibu Boats Earnings 2019-03-31

MBUU 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 mbuu-3312019x10qq3.htm 10-Q Document

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
Commission file number: 001-36290
 
malibulogoprinta23.jpg
MALIBU BOATS, INC.
(Exact Name of Registrant as specified in its charter)
Delaware
 
5075 Kimberly Way
Loudon, Tennessee 37774
 
46-4024640
(State or other jurisdiction of
incorporation or organization)
 
(Address of principal executive offices,
including zip code)
 
(I.R.S. Employer
Identification No.)
 
 
(865) 458-5478
 
 
 
 
(Registrant’s telephone number,
including area code)
 
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
¨
  
Accelerated filer
 
þ
 
 
 
 
Non-accelerated filer
 
¨  
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
þ
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ
 
 
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
 
 
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, par value $0.01
MBUU
Nasdaq Global Select Market
 
Class A Common Stock, par value $0.01, outstanding as of May 8, 2019:
20,851,097

shares
Class B Common Stock, par value $0.01, outstanding as of May 8, 2019:
15

shares

1


TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


Part I - Financial Information


Item 1. Financial Statements
MALIBU BOATS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In thousands, except share and per share data)

 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2019
 
2018
 
2019
 
2018
Net sales
$
199,918

 
$
140,429

 
$
489,194

 
$
358,343

Cost of sales
150,196

 
104,066

 
370,656

 
271,541

Gross profit
49,722

 
36,363

 
118,538

 
86,802

Operating expenses:
 

 
 

 
 

 
 

Selling and marketing
5,273

 
3,263

 
13,372

 
9,974

General and administrative
12,324

 
7,862

 
32,527

 
22,371

Amortization
1,563

 
1,291

 
4,381

 
3,903

Operating income
30,562

 
23,947

 
68,258

 
50,554

Other (income) expense, net:
 

 
 

 
 

 
 

Other income, net
(712
)
 
(17
)
 
(746
)
 
(27,753
)
Interest expense
1,750

 
923

 
4,765

 
4,136

Other (income) expense, net
1,038

 
906

 
4,019

 
(23,617
)
Income before provision for income taxes
29,524

 
23,041

 
64,239

 
74,171

Provision for income taxes
7,321

 
6,245

 
15,023

 
56,545

Net income
22,203

 
16,796

 
49,216

 
17,626

Net income attributable to non-controlling interest
1,104

 
1,124

 
2,562

 
2,452

Net income attributable to Malibu Boats, Inc.
$
21,099

 
$
15,672

 
$
46,654

 
$
15,174

 
 
 
 
 
 
 
 
Comprehensive income:
Net income
$
22,203

 
$
16,796

 
$
49,216

 
$
17,626

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in cumulative translation adjustment
99

 
(268
)
 
(672
)
 
(34
)
Other comprehensive income (loss), net of tax
99

 
(268
)
 
(672
)
 
(34
)
Comprehensive income, net of tax
22,302

 
16,528

 
48,544

 
17,592

Less: comprehensive income attributable to non-controlling interest, net of tax
1,111

 
1,104

 
2,527

 
2,464

Comprehensive income attributable to Malibu Boats, Inc., net of tax
$
21,191

 
$
15,424

 
$
46,017

 
$
15,128

 
 
 
 
 
 
 
 
Weighted average shares outstanding used in computing net income per share:
Basic
20,901,547

 
20,544,488

 
20,805,912

 
20,050,958

Diluted
21,007,933

 
20,657,010

 
20,943,548

 
20,135,064

Net income available to Class A Common Stock per share:
 
 
 
 
 
 
 
Basic
$
1.01

 
$
0.76

 
$
2.24

 
$
0.76

Diluted
$
1.01

 
$
0.76

 
$
2.23

 
$
0.76


The accompanying notes are an integral part of the Condensed Consolidated Financial Statements (Unaudited).

2


MALIBU BOATS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)

 
March 31, 2019
 
June 30, 2018
Assets
 

 
 

Current assets
 

 
 

Cash
$
15,489

 
$
61,623

Trade receivables, net
38,811

 
24,625

Inventories, net
74,043

 
44,268

Prepaid expenses and other current assets
4,979

 
3,298

Income tax receivable
137

 
100

Total current assets
133,459

 
133,914

Property, plant and equipment, net
61,515

 
40,845

Goodwill
51,474

 
32,230

Other intangible assets, net
147,655

 
94,221

Deferred tax assets
62,078

 
64,105

Other assets
251

 
453

Total assets
$
456,432

 
$
365,768

Liabilities
 

 
 

Current liabilities
 

 
 

Accounts payable
$
31,815

 
$
24,349

Accrued expenses
46,232

 
35,685

Income taxes and tax distribution payable
1,067

 
1,420

Payable pursuant to tax receivable agreement, current portion
3,932

 
3,932

Total current liabilities
83,046

 
65,386

Deferred tax liabilities
232

 
341

Payable pursuant to tax receivable agreement, less current portion
53,082

 
51,114

Long-term debt
128,769

 
108,487

Other long-term liabilities
1,405

 
569

Total liabilities
266,534

 
225,897

Commitments and contingencies (See Note 16)


 


Stockholders' Equity
 

 
 

Class A Common Stock, par value $0.01 per share, 100,000,000 shares authorized; 20,851,097 shares issued and outstanding as of March 31, 2019; 20,555,348 issued and outstanding as of June 30, 2018
207

 
204

Class B Common Stock, par value $0.01 per share, 25,000,000 shares authorized; 15 shares issued and outstanding as of March 31, 2019; 17 shares issued and outstanding as of June 30, 2018

 

Preferred Stock, par value $0.01 per share; 25,000,000 shares authorized; no shares issued and outstanding as of March 31, 2019 and June 30, 2018

 

Additional paid in capital
112,286

 
108,360

Accumulated other comprehensive loss
(2,656
)
 
(1,984
)
Accumulated earnings
74,441

 
27,789

Total stockholders' equity attributable to Malibu Boats, Inc.
184,278

 
134,369

Non-controlling interest
5,620

 
5,502

Total stockholders’ equity
189,898

 
139,871

Total liabilities and stockholders' equity
$
456,432

 
$
365,768

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements (Unaudited).

3


MALIBU BOATS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
(In thousands, except number of Class B shares)
 
 
 
Class A Common Stock
 
Class B Common Stock
 
Additional Paid In Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated Earnings
 
Non-controlling Interest in LLC
 
Total Stockholders' Equity
 
 
Shares
Amount
 
Shares
Amount
 
 
 
 
 
Balance at June 30, 2018
 
20,555

$
204

 
17

$

 
$
108,360

 
$
(1,984
)
 
$
27,789

 
$
5,502

 
$
139,871

Net income
 


 


 

 

 
46,654

 
2,562

 
49,216

Stock based compensation, net of withholding taxes on vested equity awards
 
53

1

 


 
667

 

 

 

 
668

Issuances of equity for services
 


 


 
729

 

 

 

 
729

Issuance of equity for exercise of options
 
29


 


 
749

 

 

 

 
749

Increase in payable pursuant to the tax receivable agreement
 


 


 
(2,676
)
 

 

 

 
(2,676
)
Increase in deferred tax asset from step-up in tax basis
 


 


 
3,321

 

 

 

 
3,321

Exchange of LLC Units for Class A Common Stock
 
214

2

 


 
1,136

 

 

 
(1,136
)
 
2

Cancellation of Class B Common Stock
 


 
(2
)

 

 

 

 

 

Distributions to LLC Unit holders
 


 


 

 

 
(2
)
 
(1,277
)
 
(1,279
)
Foreign currency translation adjustment
 


 


 

 
(672
)
 

 
(31
)
 
(703
)
Balance at March 31, 2019
 
20,851

$
207

 
15

$

 
$
112,286

 
$
(2,656
)
 
$
74,441

 
$
5,620

 
$
189,898


The accompanying notes are an integral part of the Condensed Consolidated Financial Statements (Unaudited).


4


MALIBU BOATS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Nine Months Ended March 31,
 
2019
 
2018
Operating activities:
 
 
 
Net income
$
49,216

 
$
17,626

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Non-cash compensation expense
1,866

 
1,410

Non-cash compensation to directors
606

 
622

Depreciation and amortization
11,483

 
9,005

Amortization of deferred financing costs
282

 
1,138

Deferred income taxes
5,252

 
48,436

Adjustment to tax receivable agreement liability
(707
)
 
(27,702
)
Other items, net
114

 
(349
)
Change in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Trade receivables
(14,067
)
 
(9,485
)
Inventories
(21,592
)
 
(5,625
)
Prepaid expenses and other assets
(1,234
)
 
(1,455
)
Accounts payable
7,780

 
6,839

Income taxes receivable and payable
(350
)
 
2,846

Accrued expenses and other liabilities
7,762

 
3,664

Net cash provided by operating activities
46,411

 
46,970

Investing activities:
 
 
 
Purchases of property, plant and equipment
(10,728
)
 
(8,146
)
Payment for acquisition, net of cash acquired
(100,073
)
 
(125,552
)
Net cash used in investing activities
(110,801
)
 
(133,698
)
Financing activities:
 
 
 
Principal payments on long-term borrowings

 
(50,000
)
Proceeds from long-term borrowings

 
105,000

Proceeds from revolving credit facility
55,000

 

Payments on revolving credit facility
(35,000
)
 

Payment of deferred financing costs

 
(1,148
)
Proceeds from issuance of Class A Common Stock in offering, net of underwriting discounts

 
55,317

Payments of costs directly associated with offering

 
(650
)
Proceeds received from exercise of stock option
749

 

Cash paid for withholding taxes on vested restricted stock
(1,190
)
 
(543
)
Distributions to LLC Unit holders
(1,228
)
 
(940
)
Net cash provided by financing activities
18,331

 
107,036

Effect of exchange rate changes on cash
(75
)
 
26

Changes in cash
(46,134
)
 
20,334

Cash—Beginning of period
61,623

 
32,822

Cash—End of period
$
15,489

 
$
53,156

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
4,302

 
$
3,130

Cash paid for income taxes
8,877

 
4,185

Non-cash investing and financing activities:
 
 
 
Establishment of deferred tax assets from step-up in tax basis
3,321

 
2,734

Establishment of amounts payable under tax receivable agreements
2,676

 
1,484

Exchange of LLC Units by LLC Unit holders for Class A common stock
1,136

 
806

Tax distributions payable to non-controlling LLC Unit holders
559

 
686

Capital expenditures in accounts payable
711

 
640


The accompanying notes are an integral part of the Condensed Consolidated Financial Statements (Unaudited).

5


MALIBU BOATS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per unit and per share data)
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies
Organization
Malibu Boats, Inc. (together with its subsidiaries, the “Company” or "Malibu"), a Delaware corporation formed on November 1, 2013, is the sole managing member of Malibu Boats Holdings, LLC, a Delaware limited liability company (the "LLC"). The Company operates and controls all of the LLC's business and affairs and, therefore, pursuant to Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) Topic 810, Consolidation, consolidates the financial results of the LLC and its subsidiaries, and records a non-controlling interest for the economic interest in the Company held by the non-controlling holders of units in the LLC ("LLC Units"). Malibu Boats Holdings, LLC was formed in 2006 with Malibu's acquisition by an investor group, including affiliates of Black Canyon Capital LLC, Horizon Holdings, LLC and then-current management. The LLC, through its wholly owned subsidiary, Malibu Boats, LLC, is engaged in the design, engineering, manufacturing and marketing of innovative, high-quality, recreational powerboats that are sold through a world-wide network of independent dealers. On July 6, 2017, the Company acquired all outstanding units of Cobalt Boats, LLC (“Cobalt”) further expanding the Company's product offering across a broader segment of the recreational boating industry including performance sport boats, sterndrive and outboard boats. As a result of the acquisition, the Company consolidates the financial results of Cobalt. On October 15, 2018, our subsidiary Malibu Boats, LLC, purchased the assets of Pursuit Boats ("Pursuit") from S2 Yachts, Inc., expanding the Company's product offering into the fiberglass outboard fishing boat market. As a result of the acquisition, the Company consolidates the financial results of Pursuit. Refer to Note 4. The Company reports its results of operations under four reportable segments: Malibu U.S., Malibu Australia, Cobalt and Pursuit, based on their boat manufacturing operations.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim condensed financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and disclosures of results of operations, financial position and changes in cash flow in conformity with GAAP for complete financial statements. Such statements should be read in conjunction with the audited consolidated financial statements and notes thereto of Malibu Boats, Inc. and subsidiaries for the year ended June 30, 2018, included in the Company's Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments considered necessary to present fairly the Company’s financial position at March 31, 2019, and the results of its operations for the three and nine month periods ended March 31, 2019 and March 31, 2018, and its cash flows for the nine month periods ended March 31, 2019 and March 31, 2018. Operating results for the three and nine months ended March 31, 2019, are not necessarily indicative of the results that may be expected for the full year ending June 30, 2019. Units and shares are presented as whole numbers while all dollar amounts are presented in thousands, unless otherwise noted.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the operations and accounts of the Company and all subsidiaries thereof. All intercompany balances and transactions have been eliminated upon consolidation.
Pursuit Acquisition
On October 15, 2018, our subsidiary Malibu Boats, LLC, purchased the assets of Pursuit from S2 Yachts, Inc. for a purchase price of $100,073. Pursuit, located in Fort Pierce, Florida, is a leader in the saltwater outboard fishing boat market through its offering of 15 models of offshore, dual console and center console boats.
Recent Accounting Pronouncements
On July 1, 2018, the Company adopted the new accounting standard, ASC Topic 606, Revenue from Contracts with Customers, and all the related amendments (“ASC 606”) and applied the provisions of the standard to all contracts using the modified retrospective method. The cumulative effect of adopting the new revenue standard was immaterial and no adjustment has been recorded to the opening balance of retained earnings. Prior year information has not been restated and continues to be reported under the accounting standards in effect for those periods. Substantially all of the Company’s revenue continues to be recognized at a point in time when the product is either shipped or received from the Company's facilities and control of the product is transferred to the customer.  New controls and processes designed to meet the requirements of the standard were

6


implemented, and the required new disclosures are presented in Note 2. The adoption of ASC Topic 606 did not have a material impact on the amounts reported in the Company's unaudited condensed consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued Accounting Standards Update (ASU) 2016‑02, Leases (Topic 842).  The amendments in this update create ASC Topic 842, Leases, and supersede the requirements in ASC Topic 840, Leases.  ASC Topic 842 requires lessees to recognize on the balance sheet a right‑of‑use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. In June 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvement, which provides entities with an additional (optional) transition method to adopt the new lease standard.  Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The new leases standard is effective for fiscal years beginning after December 15, 2018. Early application is permitted. The Company is currently developing a project plan to guide the implementation of ASU 2016-02. The Company is making progress on this plan including surveying the Company’s businesses, assessing the Company’s portfolio of leases and compiling information on active leases. The Company is currently identifying and implementing appropriate changes to its policies, business processes, systems and controls to support lease accounting and disclosures under Topic 842. The Company does not expect that its results of operations or cash flows will be materially impacted by this standard. The Company expects to record right of use assets and lease liabilities on its consolidated balance sheets upon adoption of this standard, which may be material.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This guidance provides specific classification of how certain cash receipts and cash payments are presented in the statement of cash flows. The ASU was applied using a retrospective transition method. The adoption of this ASU on July 1, 2018 did not have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The guidance clarifies the definition of a business that provides a two-step analysis in the determination of whether an acquisition or derecognition is a business or an asset. The update removes the evaluation of whether a market participant could replace any missing elements and provides a framework to assist entities in evaluating whether both an input and a substantive process are present. This guidance will be applied on a prospective basis for transactions that occur after the effective date. The adoption of this ASU on July 1, 2018 did not have a material impact on the Company's consolidated financial statements.
There are no other new accounting pronouncements that are expected to have a significant impact on the Company's consolidated financial statements and related disclosures.
2. Revenue Recognition
The following table disaggregates the Company's revenue by major product type and geography:
 
Three Months Ended March 31, 2019
 
Nine Months Ended March 31, 2019
 
Malibu US
 
Cobalt
 
Pursuit
 
Malibu Australia
 
Consolidated
 
Malibu US
 
Cobalt
 
Pursuit
 
Malibu Australia
 
Consolidated
Revenue by product:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Boat and trailer sales
$
98,836

 
$
55,619

 
$
36,276

 
$
5,545

 
$
196,276

 
$
245,944

 
$
148,418

 
$
66,128

 
$
18,226

 
$
478,716

Part and other sales
2,764

 
422

 
182

 
274

 
3,642

 
7,607

 
1,729

 
257

 
885

 
10,478

Total revenue
$
101,600

 
$
56,041

 
$
36,458

 
$
5,819

 
$
199,918

 
$
253,551

 
$
150,147

 
$
66,385

 
$
19,111

 
$
489,194

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue by geography:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
$
96,394

 
$
53,820

 
$
34,711

 
$

 
$
184,925

 
$
246,534

 
$
141,965

 
$
61,544

 
$

 
$
450,043

International
5,206

 
2,221

 
1,747

 
5,819

 
14,993

 
7,017

 
8,182

 
4,841

 
19,111

 
39,151

Total revenue
$
101,600

 
$
56,041

 
$
36,458

 
$
5,819

 
$
199,918

 
$
253,551

 
$
150,147

 
$
66,385

 
$
19,111

 
$
489,194

Boat and Trailer Sales

7


Consists of sales of boats and trailers to the Company's dealer network, net of sales returns, discounts, rebates and free flooring incentives. Boat and trailer sales also includes optional boat features. Sales returns consist of boats returned by dealers under our warranty program. Rebates, free flooring and discounts are incentives that the Company provides to its dealers based on sales of eligible products.
Part and Other Sales
Consists primarily of parts and accessories sales, royalty income and clothing sales. Parts and accessories sales include replacement and aftermarket boat parts and accessories sold to the Company's dealer network. Royalty income is earned from license agreements with various boat manufacturers, including Nautique, Chaparral, Mastercraft, and Tige related to the use of the Company's intellectual property.
3. Non-controlling Interest
The non-controlling interest on the unaudited condensed consolidated statement of operations and comprehensive income represents the portion of earnings attributable to the economic interest in the Company's subsidiary, Malibu Boats Holdings, LLC, held by the non-controlling LLC Unit holders. Non-controlling interest on the unaudited condensed consolidated balance sheets represents the portion of net assets of the Company attributable to the non-controlling LLC Unit holders, based on the portion of the LLC Units owned by such Unit holders. The ownership of Malibu Boats Holdings, LLC is summarized as follows:
 
As of March 31, 2019
 
As of June 30, 2018
 
Units
 
Ownership %
 
Units
 
Ownership %
Non-controlling LLC Unit holders ownership in Malibu Boats Holdings, LLC
830,152

 
3.8
%
 
1,043,186

 
4.8
%
Malibu Boats, Inc. ownership in Malibu Boats Holdings, LLC
20,851,097

 
96.2
%
 
20,555,348

 
95.2
%
 
21,681,249

 
100.0
%
 
21,598,534

 
100.0
%
Issuance of Additional LLC Units
Under the first amended and restated limited liability agreement of the LLC, as amended (the "LLC Agreement"), the Company is required to cause the LLC to issue additional LLC Units to the Company when the Company issues additional shares of Class A Common Stock. Other than in connection with the issuance of Class A Common Stock in connection with an equity incentive program, the Company must contribute to the LLC net proceeds and property, if any, received by the Company with respect to the issuance of such additional shares of Class A Common Stock. The Company must cause the LLC to issue a number of LLC Units equal to the number of shares of Class A Common Stock issued such that, at all times, the number of LLC Units held by the Company equals the number of outstanding shares of Class A Common Stock. During the nine months ended March 31, 2019, the Company caused the LLC to issue a total of 319,956 LLC Units to the Company in connection with (i) the Company's issuance of Class A Common Stock to a non-employee director for his services, (ii) the issuance of Class A Common Stock for the vesting of awards granted under the Malibu Boats, Inc. Long-Term Incentive Plan (the "Incentive Plan"), (iii) the issuance of Class A Common Stock to LLC Unit holders for exchange of their LLC Units, and (iv) the issuance of Class A Common Stock for the exercise of vested stock options granted under the Incentive Plan. During the nine months ended March 31, 201924,207 LLC Units were canceled in connection with the vesting of share-based equity awards to satisfy employee tax withholding requirements and the retirement of 24,207 treasury shares in accordance with the LLC Agreement.
Distributions and Other Payments to Non-controlling Unit Holders
Distributions for Taxes
As a limited liability company (treated as a partnership for income tax purposes), Malibu Boats Holdings, LLC does not incur significant federal, state or local income taxes, as these taxes are primarily the obligations of its members. As authorized by the LLC Agreement, the LLC is required to distribute cash, to the extent that the LLC has cash available, on a pro rata basis, to its members to the extent necessary to cover the members’ tax liabilities, if any, with respect to their share of LLC earnings. The LLC makes such tax distributions to its members based on an estimated tax rate and projections of taxable income. If the actual taxable income of the LLC multiplied by the estimated tax rate exceeds the tax distributions made in a calendar year, the LLC may make true-up distributions to its members, if cash or borrowings are available for such purposes. As of March 31, 2019 and June 30, 2018, tax distributions payable to non-controlling LLC Unit holders were $559 and $511, respectively. During the nine months ended March 31, 2019 and 2018, tax distributions paid to the non-controlling LLC Unit holders were $1,228 and $963, respectively.

8


Other Distributions
Pursuant to the LLC Agreement, the Company has the right to determine when distributions will be made to LLC members and the amount of any such distributions. If the Company authorizes a distribution, such distribution will be made to the members of the LLC (including the Company) pro rata in accordance with the percentages of their respective LLC units.
4. Acquisitions
Pursuit
On October 15, 2018, the Company completed its acquisition of the assets of Pursuit. The aggregate purchase price for the transaction was $100,073, funded with cash and borrowings under the Company's credit agreement. The aggregate purchase price was subject to certain adjustments, including customary adjustments for the amount of working capital in the business at the closing date. The Company accounted for the transaction in accordance with ASC 805, Business Combinations.
The total consideration given to the former owners of Pursuit has been allocated to the assets acquired and liabilities assumed based on estimates of fair value as of the date of the acquisition. The preliminary measurements of fair value were determined based upon estimates utilizing the assistance of third party valuation specialists, and are subject to change within the measurement period (up to one year from the acquisition date). The Company expects appraisals of tangible and intangible assets and working capital adjustments to be finalized during fourth quarter of fiscal 2019.
The following table summarizes the preliminary purchase price allocation based on the estimated fair values of the assets acquired and liabilities of Pursuit assumed at the acquisition date:
Consideration:
 
Cash consideration paid
$
100,073

 
 
Recognized preliminary amounts of identifiable assets acquired and (liabilities assumed), at fair value:
 
Inventories
$
8,332

Other current assets
350

Property, plant and equipment
17,454

Identifiable intangible assets
57,900

Current liabilities
(3,488
)
Fair value of assets acquired and liabilities assumed
80,548

Goodwill
19,525

Total purchase price
$
100,073

The preliminary fair value estimates for the Company's identifiable intangible assets acquired as part of the acquisition are as follows:
 
Estimates of Fair Value
 
Estimated Useful Life (in years)
Definite-lived intangibles:
 
 
 
Dealer relationships
$
25,400

 
20
Total definite-lived intangibles
25,400

 
 
Indefinite-lived intangible:
 
 
 
Trade name
32,500

 
 
Total intangible assets
$
57,900

 
 
The value allocated to inventories reflects the estimated fair value of the acquired inventory based on the expected sales price of the inventory, less an estimated cost to complete and a reasonable profit margin. The fair value of the identifiable intangible assets were determined based on the following approaches:
Dealer Relationships - The value associated with Pursuit's dealer relationships is attributed to its long standing dealer distribution network. The estimate of fair value assigned to this asset was determined using the income approach, which requires an estimate or forecast of the expected future cash flows from the dealer relationships

9


through the application of the multi-period excess earnings approach. The estimated remaining useful life of dealer relationships is approximately twenty years.
Trade Name - The value attributed to Pursuit's trade name was determined using a variation of the income approach called the relief from royalty method, which requires an estimate or forecast of the expected future cash flows. The trade name has an indefinite life.
The fair value of the definite-lived intangible assets are being amortized using the straight-line method to general and administrative expenses over their estimated useful lives. Indefinite-lived intangible assets are not amortized, but instead are evaluated for potential impairment on an annual basis in accordance with the provisions of ASC Topic 350, Intangibles—Goodwill and Other. The weighted average useful life of identifiable definite-lived intangible assets acquired was 20 years. Goodwill of $19,525 arising from the acquisition consists of expected synergies and cost savings as well as intangible assets that do not qualify for separate recognition. The indefinite-lived intangible asset and goodwill acquired are expected to be deductible for income tax purposes.
Acquisition-related costs of $2,846, which were incurred by the Company in the first nine months of fiscal year 2019 related to the Pursuit acquisition, were expensed in the period incurred, and are included in general and administrative expenses in the consolidated statement of operations and comprehensive income for the nine months ended March 31, 2019.
Pro Forma Financial Information (unaudited):
The following unaudited pro forma consolidated results of operations for the three and nine months ended March 31, 2019 and 2018, assumes that the acquisition of Pursuit occurred as of July 1, 2017. The unaudited pro forma financial information combines historical results of Malibu and Pursuit, with adjustments for depreciation and amortization attributable to preliminary fair value estimates on acquired tangible and intangible assets for the respective periods. Non-recurring pro forma adjustments associated with the fair value step up of inventory were included in the reported pro forma cost of sales and earnings. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal year 2018 or the results that may occur in the future:
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
 
2019
 
2018
 
2019
 
2018
Net sales
 
$
199,918

 
$
176,387

 
$
530,836

 
$
451,687

Net income
 
22,203

 
21,285

 
53,223

 
18,853

Net income attributable to Malibu Boats, Inc.
 
21,099

 
19,838

 
50,430

 
16,066

Basic earnings per share
 
$
1.01

 
$
0.97

 
$
2.42

 
$
0.80

Diluted earnings per share
 
$
1.01

 
$
0.96

 
$
2.41

 
$
0.80

Cobalt
On July 6, 2017, the Company completed its acquisition of Cobalt. The aggregate purchase price for the transaction was $130,525, consisting of $129,525 funded with cash and borrowings under the Company's credit agreement and $1,000 in equity equal to 39,262 shares of the Company's Class A Common Stock based on the closing stock price of $25.47 per share on June 27, 2017. The aggregate purchase price was subject to certain adjustments, including customary adjustments for the amount of working capital in the business at the closing date and subject to adjustment for any judgment or settlement in connection with a pending litigation matter between Cobalt and Sea Ray Boats, Inc. and Brunswick Corporation. William Paxson St. Clair, Jr., a former owner of Cobalt, was appointed as a director to the Company's Board of Directors and as President of Cobalt. The Company accounted for the transaction in accordance with ASC 805, Business Combinations.
The total consideration given to the former members of Cobalt has been allocated to the assets acquired and liabilities assumed based on estimates of fair value as of the date of the acquisition. The measurements of fair value were determined based upon estimates utilizing the assistance of third party valuation specialists.

10


The following table summarizes the purchase price allocation based on the estimated fair values of the assets acquired and liabilities of Cobalt assumed at the acquisition date:
Consideration:
 
Cash consideration paid
$
129,525

Equity consideration paid
1,000

Fair value of total consideration transferred
$
130,525

 
 
Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value:
 
Cash
$
3,973

Accounts receivable
2,329

Inventories
14,343

Other current assets
363

Property, plant and equipment
12,934

Identifiable intangible assets
89,900

Current liabilities
(13,108
)
Fair value of assets acquired and liabilities assumed
110,734

Goodwill
19,791

Total purchase price
$
130,525

The fair value estimates for the Company's identifiable intangible assets acquired as part of the acquisition are as follows:
 
Estimates of Fair Value
 
Estimated Useful Life (in years)
Definite-lived intangibles:
 
 
 
Dealer relationships
$
56,300

 
20
Patent
2,600

 
15
Total definite-lived intangibles
58,900

 
 
Indefinite-lived intangible:
 
 
 
Trade name
31,000

 
 
Total intangible assets
$
89,900

 
 
The value allocated to inventories reflects the estimated fair value of the acquired inventory based on the expected sales price of the inventory, less an estimated cost to complete and a reasonable profit margin. The fair value of the identifiable intangible assets were determined based on the following approaches:
Dealer Relationships - The value associated with Cobalt's dealer relationships is attributed to its long standing dealer distribution network. The estimate of fair value assigned to this asset was determined using the income approach, which requires an estimate or forecast of the expected future cash flows from the dealer relationships through the application of the multi-period excess earnings approach. The estimated remaining useful life of dealer relationships is approximately twenty years.
Patent - The value associated with the patented technology was based on financial projections and the patent's estimated remaining legal life of approximately fifteen years using a variation of the income approach called the royalty savings method.
Trade Name - The value attributed to Cobalt's trade name was determined using a variation of the income approach called the relief from royalty method, which requires an estimate or forecast of the expected future cash flows. The trade name has an indefinite life.
The fair value of the definite-lived intangible assets are being amortized using the straight-line method to general and administrative expenses over their estimated useful lives. Indefinite-lived intangible assets are not amortized, but instead are evaluated for potential impairment on an annual basis in accordance with the provisions of ASC Topic 350, Intangibles—Goodwill and Other. The weighted average useful life of identifiable definite-lived intangible assets acquired was 19.8 years. Goodwill of $19,791 arising from the acquisition consists of expected synergies and cost savings as well as intangible assets

11


that do not qualify for separate recognition. The indefinite-lived intangible asset and goodwill acquired are deductible for income tax purposes.
Pro Forma Financial Information (unaudited):
The following unaudited pro forma consolidated results of operations for the three months and nine months ended March 31, 2019 and 2018, assumes that the acquisition of Cobalt occurred as of July 1, 2016. The unaudited pro forma financial information combines historical results of Malibu and Cobalt, with adjustments for depreciation and amortization attributable to preliminary fair value estimates on acquired tangible and intangible assets for the respective periods. Non-recurring pro forma adjustments associated with the fair value step up of inventory were included in the reported pro forma cost of sales and earnings. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal year 2017 or the results that may occur in the future:
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
 
2019
 
2018
 
2019
 
2018
Net sales
 
$
199,918

 
$
140,429

 
$
489,194

 
$
358,343

Net income
 
22,203

 
16,796

 
49,216

 
17,626

Net income attributable to Malibu Boats, Inc.
 
21,099

 
15,672

 
46,654

 
15,174

Basic earnings per share
 
$
1.01

 
$
0.76

 
$
2.24

 
$
0.76

Diluted earnings per share
 
$
1.01

 
$
0.76

 
$
2.23

 
$
0.76

5. Inventories
Inventories, net consisted of the following:
 
As of March 31, 2019
 
As of June 30, 2018
Raw materials
$
51,798

 
$
28,851

Work in progress
12,933

 
6,164

Finished goods
9,312

 
9,253

Total inventories
$
74,043

 
$
44,268

6. Property, Plant and Equipment
Property, plant and equipment, net consisted of the following:
 
 
As of March 31, 2019
 
As of June 30, 2018
Land
 
$
2,194

 
$
634

Building and leasehold improvements
 
28,883

 
20,110

Machinery and equipment
 
44,254

 
32,471

Furniture and fixtures
 
6,275

 
4,667

Construction in process
 
6,312

 
5,636

 
 
87,918

 
63,518

Less: Accumulated depreciation
 
(26,403
)
 
(22,673
)
Property, plant and equipment, net
 
$
61,515

 
$
40,845

During the first quarter of fiscal 2019 and the first quarter of fiscal 2018, the Company disposed of various molds for models not currently in production with zero net book value and historical costs of $3,285 and $2,122, respectively. Depreciation expense was $2,744 and $1,685 for the three months ended March 31, 2019 and 2018, and $7,102 and $5,102 for the nine months ended March 31, 2019 and 2018, respectively, substantially all of which was recorded in cost of sales.
7. Goodwill and Other Intangible Assets

12


Changes in the carrying amount of goodwill for the nine months ended March 31, 2019 were as follows:
Goodwill as of June 30, 2018
$
32,230

Addition related to the acquisition of Pursuit
19,525

Effect of foreign currency changes on goodwill
(281
)
Goodwill as of March 31, 2019
$
51,474

The components of other intangible assets were as follows:
 
As of March 31, 2019
 
As of June 30, 2018
 
Estimated Useful Life (in years)
 
Weighted Average Remaining Useful Life (in years)
Definite-lived intangibles:
 
 
 
 
 
 
 
Reacquired franchise rights
$
1,277

 
$
1,333

 
5
 
0.6
Dealer relationships
111,364

 
86,062

 
8-20
 
18.5
Patent
3,986

 
3,986

 
12-15
 
13.3
Trade name
24,667

 
24,667

 
15
 
2.5
Non-compete agreement
50

 
52

 
10
 
5.6
Backlog
89

 
93

 
0.3
 
0.0
Total
141,433

 
116,193

 
 
 
 
Less: Accumulated amortization
(57,278
)
 
(52,972
)
 
 
 
 
Total definite-lived intangible assets, net
84,155


63,221

 
 
 
 
Indefinite-lived intangible:
 
 
 
 
 
 
 
Trade name
63,500

 
31,000

 
 
 
 
Total other intangible assets, net
$
147,655

 
$
94,221

 
 
 
 
Amortization expense recognized on all amortizable intangibles was $1,563 and $1,291 for the three months ended March 31, 2019 and 2018, respectively and $4,381 and $3,903 for the nine months ended March 31, 2019 and 2018.
The estimated future amortization of definite-lived intangible assets is as follows:
Fiscal years ending June 30:
 
 
Remainder of 2019
$
1,576

 
2020
6,139

 
2021
6,059

 
2022
4,558

 
2023
4,421

 
Thereafter
61,402

 
 
$
84,155

8. Accrued Expenses
Accrued expenses consisted of the following:
 
As of March 31, 2019
 
As of June 30, 2018
Warranties
$
22,085

 
$
17,217

Dealer incentives
8,914

 
5,770

Accrued compensation
10,525

 
9,034

Accrued legal and professional fees
705

 
915

Accrued interest
194

 
242

Other accrued expenses
3,809

 
2,507

Total accrued expenses
$
46,232

 
$
35,685


13



9. Product Warranties
Effective for model year 2016, the Company began providing a limited warranty for a period up to five years for both Malibu and Axis brand boats. For model years prior to 2016, the Company provided a limited warranty for a period of up to three years and two years for its Malibu and Axis brands, respectively. For Cobalt boats, the Company provides a structural warranty of up to ten years which covers the hull, deck joints, bulkheads, floor, transom, stringers, and motor mount. In addition, the Company provides a five year bow-to-stern warranty on all components manufactured or purchased (excluding hull and deck structural components), including canvas and upholstery. For Pursuit boats, the Company provides a structural warranty of up to five years which covers structural defects in materials and workmanship on the deck and hull. Gelcoat is covered up to three years for Cobalt and one year for Malibu and Axis. In each of our brands, some materials, components or parts of the boat that are not covered by our limited product warranties are separately warranted by their manufacturers or suppliers. These other warranties include warranties covering engines and other components.
The Company’s standard warranties require the Company or its dealers to repair or replace defective products during such warranty period at no cost to the consumer. The Company estimates the costs that may be incurred under its limited warranty and records a liability for such costs at the time the product revenue is recognized. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. The Company assesses the adequacy of its recorded warranty liabilities by brand on a quarterly basis and adjusts the amounts as necessary. The Company utilizes historical claims trends and analytical tools to assist in determining the appropriate warranty liability.
Changes in the Company’s product warranty liability, which is included in accrued expenses on the unaudited condensed consolidated balance sheets, were as follows: 
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
 
2019
 
2018
 
2019
 
2018
Beginning balance
 
$
20,943

 
$
15,517

 
$
17,217

 
$
10,050

Add: Warranty expense
 
2,918

 
2,927

 
8,941

 
7,652

          Additions for acquisitions
 

 

 
1,872

 
4,404

Less: Warranty claims paid
 
(1,776
)
 
(1,586
)
 
(5,945
)
 
(5,248
)
Ending balance
 
$
22,085

 
$
16,858

 
$
22,085

 
$
16,858

10. Financing
Outstanding debt consisted of the following:
 
As of March 31, 2019
 
As of June 30, 2018
Term loans
$
110,000

 
$
110,000

Revolving credit loan
20,000

 

     Less unamortized debt issuance costs
(1,231
)
 
(1,513
)
Total debt
128,769

 
108,487

     Less current maturities

 

Long-term debt less current maturities
$
128,769

 
$
108,487

Long-Term Debt
Credit Agreement. On June 28, 2017, Malibu Boats, LLC as the borrower ("Boats LLC"), entered into the Second Amended and Restated Credit Agreement with SunTrust Bank, as the administrative agent, swingline lender and issuing bank, to refinance the prior credit facility and to provide funds for the purchase of Cobalt. It provided Boats LLC with a term loan facility in an aggregate principal amount of $160,000 ($55,000 of which was drawn on June 28, 2017 to refinance our previous credit facility and $105,000 of which was drawn on July 6, 2017 to fund the payment of the purchase price for the Cobalt acquisition and to pay certain fees and expenses related to entering into the Credit Agreement and a revolving credit facility of up to $35,000. On August 17, 2017, Boats LLC made a voluntary principal payment on the term loans in the amount of $50,000 with a portion of the net proceeds from the Company’s equity offering completed on August 14, 2017. On August 21, 2018, in connection with the acquisition of Pursuit, Boats LLC entered into the First Incremental Facility Amendment and First

14


Amendment to the Second Amended and Restated Credit Agreement dated as of June 28, 2017 (as amended, the “Credit Agreement”). The amendment increased the amount available under the revolving credit facility by $50,000 (the “Incremental Revolving Commitment”) from $35,000 to $85,000. Each of the term loans and the revolving credit facility are scheduled to mature on July 1, 2022. In connection with the completion of the acquisition of Pursuit, the Company borrowed $50,000 under its revolving credit facility on October 15, 2018.

Borrowings under the Credit Agreement bear interest at a rate equal to either, at Boats LLC's 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 1.75% to 3.00% with respect to LIBOR borrowings and 0.75% to 2.00% 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. Boats LLC is required to pay a commitment fee for the unused portion of the revolving credit facility which ranges from 0.25% to 0.50% per annum, depending on the LLC’s and its subsidiaries’ consolidated leverage ratio. Boats LLC was also required to pay a ticking fee at a rate of 0.30% per annum on the $50,000 Incremental Revolving Commitment from August 21, 2018 until the date that the conditions for the lenders to provide the Incremental Revolving Commitment were met, which occurred on October 15, 2018, the closing date of the Company's purchase of assets of Pursuit. The Company is not a party to the Credit Agreement, and the obligations of Boats LLC under the Credit Agreement are guaranteed by the LLC, and, subject to certain exceptions, the present and future domestic subsidiaries of Boats LLC, and all such obligations are secured by substantially all of the assets of the LLC, Boats LLC and such subsidiary guarantors pursuant to the Second Amended and Restated Security Agreement, by and among Boats LLC, the LLC, the subsidiary guarantors, and SunTrust Bank, as administrative agent, dated as of June 28, 2017, and other collateral documents. The weighted average interest rate on the term loan was 4.3% for the nine months ended March 31, 2019.
    
The Credit Agreement permits prepayment of the term loan facilities without penalty. The $55,000 term loan is subject to quarterly installments of approximately $700 per quarter until March 31, 2019, then approximately $1,000 per quarter until June 30, 2021, and approximately $1,400 per quarter through March 31, 2021. The $105,000 term loan is subject to quarterly installments of approximately $1,300 per quarter until March 31, 2019, then approximately $2,000 per quarter until June 30, 2021, and approximately $2,600 per quarter through March 31, 2022. The Company used proceeds from an offering on August 14, 2017 to repay $50,000 on its term loans under the Credit Agreement and exercised its option to apply the prepayment to principal installments through December 31, 2021, and a portion of principal installments due on March 31, 2022. Accordingly, no principal payments are required under the Credit Agreement until March 31, 2022, and as such, all borrowings as of June 30, 2018 and March 31, 2019, are reflected as noncurrent. The $50,000 repayment resulted in a write-off of deferred financing costs of $829 which was included in amortization expense on the condensed consolidated statement of operations and comprehensive income. The balance of both term loans is due on the scheduled maturity date of July 1, 2022. The Credit Agreement is also subject to prepayments from the net cash proceeds received by Boats 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 the Company. 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 $2,000 in any fiscal year, and (iv) share repurchase payments up to $20,000 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 $6,000 in any fiscal year, subject to compliance with other financial covenants.

In connection with entering into the Credit Agreement, the Company capitalized $2,074 in deferred financing costs during fiscal 2018. These costs, in addition to the unamortized balance related to costs associated with the Company's previous credit facility of $671, are being amortized over the term of the Credit Agreement into interest expense using the effective interest method and presented as a direct offset to the total debt outstanding as of March 31, 2019 and June 30, 2018.
Covenant Compliance

15


As of March 31, 2019, the Company was in compliance with the covenants contained in the Credit Agreement.
Interest Rate Swap
On July 1, 2015, the Company entered into a five year floating to fixed interest rate swap with an effective start date of July 1, 2015. The swap is based on a one-month LIBOR rate versus a 1.52% fixed rate on a notional value of $39,250, which was equal to 50% of the outstanding balance of the term loan at the time of the swap arrangement. Under ASC Topic 815, Derivatives and Hedging, all derivative instruments are recorded on the unaudited condensed consolidated balance sheets at fair value as either short term or long term assets or liabilities based on their anticipated settlement date. Refer to Fair Value Measurements in Note 12. The Company has elected not to designate its interest rate swap as a hedge for accounting purposes; therefore, changes in the fair value of the derivative instrument are being recognized in earnings in the Company's unaudited condensed consolidated statements of operations and comprehensive income. For the three months ended March 31, 2019 and 2018 the Company recorded a loss of $93 and a gain of $138, respectively, and for the the nine months ended March 31, 2019 and 2018, the Company recorded a loss of $225 and a gain of $341, respectively, for the change in fair value of the interest rate swap, which is included in interest expense in the unaudited condensed consolidated statements of operations and comprehensive income.
11. Tax Receivable Agreement Liability
The Company has a tax receivable agreement with the pre-IPO owners of the LLC that provides for payment by the Company to the pre-IPO owners (or their permitted assignees) of 85% of the amount of the benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis and (ii) certain other tax benefits related to the Company entering into the tax receivable agreement, including those attributable to payments under the tax receivable agreement. These contractual payment obligations are obligations of the Company and not of the LLC. The Company's tax receivable agreement liability was determined on an undiscounted basis in accordance with ASC 450, Contingencies, since the contractual payment obligations were deemed to be probable and reasonably estimable. The tax receivable agreement further provides that, upon certain mergers, asset sales or other forms of business combinations or other changes of control, the Company (or its successor) would owe to the pre-IPO owners of the LLC a lump-sum payment equal to the present value of all forecasted future payments that would have otherwise been made under the tax receivable agreement that would be based on certain assumptions, including a deemed exchange of LLC Units and that the Company would have sufficient taxable income to fully utilize the deductions arising from the increased tax basis and other tax benefits related to entering into the tax receivable agreement. The Company also is entitled to terminate the tax receivable agreement, which, if terminated, would obligate the Company to make early termination payments to the pre-IPO owners of the LLC. In addition, a pre-IPO owner may elect to unilaterally terminate the tax receivable agreement with respect to such pre-IPO owner, which would obligate the Company to pay to such existing owner certain payments for tax benefits received through the taxable year of the election.

For purposes of the tax receivable agreement, the benefit deemed realized by the Company will be computed by comparing the actual income tax liability of the Company (calculated with certain assumptions) to the amount of such taxes that the Company would have been required to pay had there been no increase to the tax basis of the assets of the LLC as a result of the purchases or exchanges, and had the Company not entered into the tax receivable agreement.
The following table reflects the changes to the Company's tax receivable agreement liability:
 
As of March 31, 2019
 
As of June 30, 2018
Payable pursuant to tax receivable agreement
$
55,046

 
$
82,291

Additions (reductions) to tax receivable agreement:
 
 
 
Exchange of LLC Units for Class A Common Stock
2,675

 
1,685

Adjustment for change in estimated tax rate
(707
)
 
(24,637
)
Payments under tax receivable agreement

 
(4,293
)
 
57,014

 
55,046

Less current portion under tax receivable agreement
(3,932
)
 
(3,932
)
Payable pursuant to tax receivable agreement, less current portion
$
53,082

 
$
51,114

When estimating the expected tax rate to use in order to determine the tax benefit expected to be recognized from the Company’s increased tax basis as a result of exchanges of LLC Units by the pre-IPO owners of the LLC, the Company

16


continuously monitors changes in its overall tax posture, including changes resulting from new legislation and changes as a result of new jurisdictions in which the Company is subject to tax.
During the second quarter of fiscal 2018, the U.S. Congress enacted tax legislation called the Tax Cuts and Jobs Act of 2017 ("the Tax Act") on December 22, 2017, which, among other provisions, lowered the Company's U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. The Tax Act lowered the estimated tax rate used to compute the Company's future tax obligations and, in turn, reduced the future tax benefit expected to be realized by the Company related to increased tax basis from previous sales and exchanges of LLC Units by pre-IPO owners of the LLC. The change in the underlying tax-rate assumptions used to estimate the tax receivable agreement liability, resulted in a decrease in the tax receivable agreement liability of $30,317 during the second quarter of fiscal 2018.
Also, during the first quarter of fiscal 2018, the Company acquired Cobalt, which expanded the Company's footprint into new state tax jurisdictions. This change in the Company's state tax posture increased the estimated tax rate used in computing the Company's future tax obligations and, in turn, increased the future tax benefit expected to be realized by the Company related to increased tax basis from previous sales and exchanges of LLC Units by pre-IPO owners of the LLC. The change in the underlying tax-rate assumptions used to estimate the tax receivable agreement liability resulted in an increase in the tax receivable agreement liability of $6,047 during the first quarter of fiscal 2018. These amounts are included in other (income) expense, net in the accompanying unaudited condensed consolidated statements of operations and comprehensive income. Additionally, during the second quarter of fiscal 2019, the Company analyzed the impact of the Pursuit acquisition on its state footprint and determined that there was an immaterial change to the estimated tax rate used in computing the Company's future tax obligations.
As of March 31, 2019 and June 30, 2018, the Company had deferred tax assets of $110,451 and $107,293, respectively, associated with basis differences in assets upon acquiring an interest in Malibu Boats Holdings, LLC and pursuant to making an election under Section 754 of the Internal Revenue Code of 1986 (the "Internal Revenue Code"), as amended. The aggregate tax receivable agreement liability represents 85% of the tax benefits that the Company expects to receive in connection with the Section 754 election. In accordance with the tax receivable agreement, the next annual payment is anticipated approximately 75 days after filing the federal tax return which was filed on March 14, 2019.
12. Fair Value Measurements
In determining the fair value of certain assets and liabilities, the Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As defined in ASC Topic 820, Fair Value Measurements and Disclosures, fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price). Financial assets and financial liabilities recorded on the unaudited condensed consolidated balance sheets at fair value are categorized based on the reliability of inputs to the valuation techniques as follows:
Level 1—Financial assets and financial liabilities whose values are based on unadjusted quoted prices in active markets for identical assets.
Level 2—Financial assets and financial liabilities whose values are based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in non-active markets; or valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.
Level 3—Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.
The hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

17


Assets and liabilities that had recurring fair value measurements were as follows:
 
Fair Value Measurements at Reporting Date Using
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
As of March 31, 2019:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Interest rate swap not designated as cash flow hedge
$
193

 
$

 
$
193

 
$

Total assets at fair value
$
193

 
$

 
$
193

 
$

 
 
 
 
 
 
 
 
As of June 30, 2018:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Interest rate swap not designated as cash flow hedge
$
418

 
$

 
$
418

 
$

Total assets at fair value
$
418

 
$

 
$
418

 
$

Fair value measurements for the Company’s interest rate swap are classified under Level 2 because such measurements are based on significant other observable inputs. There were no transfers of assets or liabilities between Level 1 and Level 2 as of March 31, 2019 or June 30, 2018.
The Company’s nonfinancial assets and liabilities that have nonrecurring fair value measurements include property, plant and equipment, goodwill and intangibles.
In assessing the need for goodwill impairment, management relies on a number of factors, including operating results, business plans, economic projections, anticipated future cash flows, transactions and marketplace data. Accordingly, these fair value measurements fall in Level 3 of the fair value hierarchy. The Company generally uses projected cash flows, discounted as necessary, to estimate the fair values of property, plant and equipment and intangibles using key inputs such as management’s projections of cash flows on a held-and-used basis (if applicable), management’s projections of cash flows upon disposition and discount rates. Accordingly, these fair value measurements fall in Level 3 of the fair value hierarchy. These assets and certain liabilities are measured at fair value on a nonrecurring basis as part of the Company’s impairment assessments and as circumstances require.
13. Income Taxes
Malibu Boats, Inc. is taxed as a C corporation for U.S. income tax purposes and is therefore subject to both federal and state taxation at a corporate level. The LLC continues to operate in the United States as a partnership for U.S. federal income tax purposes.
Income taxes are computed in accordance with ASC Topic 740, Income Taxes, and reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, such deferred tax assets will be adjusted through the Company’s provision for income taxes in the period in which this determination is made.
As of March 31, 2019 and June 30, 2018, the Company maintained a valuation allowance of $13,298 and $12,716, respectively, against deferred tax assets related to state net operating losses and future amortization deductions (with respect to the Section 754 election) that are reported in the Tennessee corporate tax return without offsetting income, which is taxable at the LLC. The increase in the valuation allowance is due to the exchanges of LLC Units into Class A common stock by certain LLC Unit holders during the nine months ended March 31, 2019. Also as of March 31, 2019, a valuation allowance was recorded in the amount of $761 related to foreign tax credit carryforward that is not expected to be utilized in the future.
On December 22, 2017, the Tax Act was enacted which, among a number of its provisions, lowered the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. The Company’s consolidated interim effective tax rate is based upon expected annual income from operations, statutory tax rates and tax laws in the various jurisdictions in which the Company

18


operates. Significant or unusual items, including those related to the change in U.S. tax law noted above as well as other adjustments to accruals for tax uncertainties, are recognized in the quarter in which the related event occurs.

On October 15, 2018, the Company completed its acquisition of Pursuit. This did not have a significant impact to the effective tax rate. For the three months ended March 31, 2019 and 2018, the Company's effective tax rate was 24.8% and 27.1%, respectively. For the nine months ended March 31, 2019 and 2018, the Company's effective tax rate was 23.4% and 76.2%, respectively. For the three months ended March 31, 2019, the Company's effective tax rate exceeded the statutory federal income tax rate of 21% primarily due to the impact of U.S. state taxes and remeasurement of deferred taxes. This increase 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. For the three and nine months ended March 31, 2018, the principal differences in the Company's effective tax rate with the blended statutory federal income tax rate of approximately 28% relates to the remeasurement of deferred taxes. Additionally, the Company's effective tax rate for the three months ended March 31, 2018 is related to impact of the non-controlling interests in the LLC, a pass-through entity for U.S. federal tax purposes, state income taxes attributable to the LLC, and the benefit of deductions under Section 199 of the Internal Revenue Code.
14. Stock-Based Compensation
The Company adopted a long term incentive plan which became effective on January 1, 2014, and reserves for issuance up to 1,700,000 shares of Malibu Boats, Inc. Class A Common Stock for the Company’s employees, consultants, members of its board of directors and other independent contractors at the discretion of the compensation committee. Incentive stock awards authorized under the Incentive Plan include unrestricted shares of Class A Common Stock, stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent awards and performance awards. As of March 31, 2019, 854,974 shares remain available for future issuance under the long term incentive plan. Readers should refer to Note 13 to the fiscal 2018 audited consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2018, for additional information related to the Company's awards and the Incentive Plan.
On August 22, 2018, the Company granted 50,000 options to certain key employees to purchase from the Company shares of Class A Common Stock at a price of $42.13 per share. The term of the options commenced on August 22, 2018 and will expire on August 21, 2024, the day before the sixth anniversary of the grant date. Under the terms of the agreements, the awards will vest ratably over four years on each anniversary of their grant date. At August 22, 2018, the fair value of the option awards was $733 and was estimated using the Black-Scholes option-pricing model with the following assumptions: risk-free rate of 2.7%, expected volatility of 38.4%, expected term of 4.25 years, and no dividends. Stock-based compensation expense attributable to the service based options is amortized on a straight-line basis over the requisite service period. Compensation costs associated with performance based option awards are recognized over the requisite service period based on probability of achievement in accordance with ASC Topic 718, Compensation—Stock Compensation.
On November 1, 2018, the Company granted 35,000 restricted stock units and 48,000 restricted stock awards to key employees under the Incentive Plan. The grant date fair value of these awards was $3,474 based on a stock price of $41.85 per share on the date of grant. Under the terms of the agreements, 71% of the awards will vest ratably over four years beginning on November 6, 2019 and approximately 29% of the awards will vest in tranches based on the achievement of annual or cumulative performance targets. Compensation costs associated with performance based awards are recognized over the requisite service period based on probability of achievement in accordance with ASC Topic 718, Compensation—Stock Compensation.
On January 14, 2019, the Company granted 19,973 options to certain key employees to purchase from the Company shares of Class A Common Stock at a price of $37.55 per share. The term of the options commenced on January 14, 2019 and will expire on January 13, 2025, the day before the sixth anniversary of the grant date. Under the terms of the agreements, the awards will vest ratably over four years on each anniversary of their grant date. At January 14, 2019, the fair value of the option awards was $263 and was estimated using the Black-Scholes option-pricing model with the following assumptions: risk-free rate of 2.53%, expected volatility of 39.0%, expected term of 4.25 years, and no dividends. Stock-based compensation expense attributable to the service based options is amortized on a straight-line basis over the requisite service period. Compensation costs associated with performance based option awards are recognized over the requisite service period based on probability of achievement in accordance with ASC Topic 718, Compensation—Stock Compensation.
Risk-free interest rate. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve at the date of grant.

19


Expected term. The Company used the simplified method to estimate the expected term of stock options. The simplified method assumes that employees will exercise share options evenly between the period when the share options are vested and ending on the date when the share options would expire. 
Expected volatility. The Company determined expected volatility based on its historical volatility calculated using daily observations of the closing price of its publicly traded common stock.
Expected dividend. The Company has not estimated any dividend yield as the Company currently does not pay a dividend and does not anticipate paying a dividend over the expected term.
The following is a summary of the changes in the Company's stock options for the nine months ended March 31, 2019:
 
 
March 31, 2019
 
 
 
Shares
 
Price or range per share
 
Weighted Average Exercise Price/Share
 
Total outstanding options at June 30, 2018
 
144,000

 
$27.24
 
$
27.24

 
Options granted
 
69,973

 
37.55 - 42.13
 
40.82

 
Options exercised
 
(28,500
)
 
(25.85) - (30.87)
 
(26.29
)
 
Outstanding options at end of period
 
185,473

 
25.85 - 42.13
 
32.51

 
Exercisable at end of period
 
7,500

 
$30.87
 
$
30.87

 
The following is a summary of the changes in non-vested restricted stock units and restricted stock awards for the nine months ended March 31, 2019:
 
Number of Restricted Stock Units and Restricted Stock Awards Outstanding
 
Weighted Average Grant Date Fair Value
Total Non-vested Restricted Stock Units and Restricted Stock Awards as of June 30, 2018
227,154

 
$
20.84

Granted
105,952

 
41.66

Vested
(100,217
)
 
(22.81
)
Forfeited
(4,424
)
 
(25.00
)
Total Non-vested Restricted Stock Units and Restricted Stock Awards as of March 31, 2019
228,465

 
$
29.56

Stock compensation expense attributable to the Company's share-based equity awards was $735 and $560 for the three months ended March 31, 2019 and 2018, respectively, and $1,866 and $1,410 for the nine months ended March 31, 2019 and 2018, respectively. Stock compensation expense attributed to share-based equity awards issued under the Incentive Plan is recognized on a straight-line basis over the terms of the respective awards and is included in general and administrative expense in the Company's unaudited condensed consolidated statement of operations and comprehensive income. Awards vesting during the nine months ended March 31, 2019, include 16,294 fully vested restricted stock units issued to non-employee directors for their service as directors for the Company.
15. Net Earnings Per Share
Basic net income per share of Class A Common Stock is computed by dividing net income attributable to the Company's earnings by the weighted average number of shares of Class A Common Stock outstanding during the period. The weighted average number of shares of Class A Common Stock outstanding used in computing basic net income per share includes fully vested restricted stock units awarded to directors that are entitled to participate in distributions to common shareholders through receipt of additional units of equivalent value to the dividends paid to Class A Common Stock holders.

Diluted net income per share of Class A Common Stock is computed similarly to basic net income per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of any common stock equivalents using the treasury method, if dilutive. The Company’s LLC Units and non-qualified stock options are considered common stock equivalents for this purpose. The number of additional shares of Class A Common Stock related to these common stock equivalents and stock options are calculated using the treasury stock method.


20


Basic and diluted net income per share of Class A Common Stock has been computed as follows (in thousands, except share and per share amounts):
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2019
 
2018
 
2019
 
2018
Basic:
 
 
 
 
 
 
 
Net income attributable to Malibu Boats, Inc.
$
21,099

 
$
15,672

 
$
46,654

 
$
15,174

Shares used in computing basic net income per share:
 
 
 
 
 
 
 
Weighted-average Class A Common Stock
20,710,202

 
20,371,072

 
20,621,522

 
19,886,970

Weighted-average participating restricted stock units convertible into Class A Common Stock
191,345

 
173,416

 
184,390

 
163,988

Basic weighted-average shares outstanding
20,901,547

 
20,544,488

 
20,805,912

 
20,050,958

Basic net income per share
$
1.01

 
$
0.76

 
$
2.24

 
$
0.76

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Net income attributable to Malibu Boats, Inc.
$
21,099

 
$
15,672

 
$
46,654

 
$
15,174

Shares used in computing diluted net income per share:
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
20,901,547

 
20,544,488

 
20,805,912

 
20,050,958

Restricted stock units granted to employees
101,271

 
112,522

 
126,239

 
84,106

Stock options granted to employees
5,115

 

 
11,397

 

Diluted weighted-average shares outstanding 1
21,007,933

 
20,657,010

 
20,943,548

 
20,135,064

Diluted net income per share
$
1.01

 
$
0.76

 
$
2.23

 
$
0.76

1 The Company excluded (i) 946,875 and 1,238,727 potentially dilutive shares from the calculation of diluted net income per share for the three months ended March 31, 2019 and 2018, respectively, and (ii) 930,125 and 1,233,227 potentially dilutive shares from the calculation of diluted net income per share for the nine months ended March 31, 2019 and 2018, respectively, as these units would have been antidilutive.
The shares of Class B Common Stock do not share in the earnings or losses of Malibu Boats, Inc. and are therefore not included in the calculation. Accordingly, basic and diluted net earnings per share of Class B Common Stock has not been presented.
16. Commitments and Contingencies
Repurchase Commitments
In connection with its dealers’ wholesale floor plan financing of boats, the Company has entered into repurchase agreements with various lending institutions. The reserve methodology used to record an estimated expense and loss reserve in each accounting period is based upon an analysis of likely repurchases based on current field inventory and likelihood of repurchase. Subsequent to the inception of the repurchase commitment, the Company evaluates the likelihood of repurchase and adjusts the estimated loss reserve accordingly. When a potential loss reserve is recorded it is presented in accrued liabilities in the accompanying unaudited condensed consolidated balance sheet. If the Company were obligated to repurchase a significant number of units under any repurchase agreement, its business, operating results and financial condition could be adversely affected. The total amount financed under the floor financing programs with repurchase obligations was $320,897 and $163,626 as of March 31, 2019 and June 30, 2018, respectively.

Repurchases and subsequent sales are recorded as a revenue transaction. The net difference between the repurchase price and the resale price is recorded against the loss reserve and presented in cost of sales in the accompanying unaudited condensed consolidated statements of operations and comprehensive income. The Company did not carry a reserve for repurchases as of March 31, 2019 and June 30, 2018.

The Company has collateralized receivables financing arrangements with a third-party floor plan financing provider for European dealers. Under terms of these arrangements, the Company transfers the right to collect a trade receivable to the financing provider in exchange for cash but agrees to repurchase the receivable if the dealer defaults. Since the transfer of the receivable to the financing provider does not meet the conditions for a sale under ASC Topic 860, Transfers and Servicing, the

21


Company continues to report the transferred trade receivable in other current assets with an offsetting balance recorded as a secured obligation in accrued expenses in the Company's unaudited condensed consolidated balance sheet. As of March 31, 2019 and June 30, 2018, the Company had financing receivables of $589 and $453, respectively, recorded in other current assets and accrued expenses related to these arrangements.
Contingencies
Certain conditions may exist which could result in a loss, but which will only be resolved when future events occur. The Company, in consultation with its legal counsel, assesses such contingent liabilities, and such assessments inherently involve an exercise of judgment. If the assessment of a contingency indicates that it is probable that a loss has been incurred, the Company accrues for such contingent loss when it can be reasonably estimated. If the assessment indicates that a potentially material loss contingency is not probable but reasonably estimable, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. If the assessment of a contingency deemed to be both probable and reasonably estimable involves a range of possible losses, the amount within the range that appears at the time to be a better estimate than any other amount within the range would be accrued. When no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued even though the minimum amount in the range is not necessarily the amount of loss that will be ultimately determined.
Estimates of potential legal fees and other directly related costs associated with contingencies are not accrued but rather are expensed as incurred. Except as disclosed below under "Legal Proceedings," management does not believe there are any pending claims (asserted or unasserted) at March 31, 2019 (unaudited) or June 30, 2018 that may have a material adverse impact on the Company’s financial condition, results of operations or cash flows.
Legal Proceedings
On January 12, 2018, the Company filed suit against Skier’s Choice, Inc., or "Skier’s Choice," in the U.S. District Court for the Eastern District of Tennessee, seeking monetary and injunctive relief. The Company's complaint alleges Skier’s Choice’s infringement of three utility patents - U.S. Patent Nos. 9,260,161, 8,578,873, and 9,199,695 - related to wake surfing technology. Skier’s Choice denied liability arising from the causes of action alleged in the Company's complaint and filed counterclaims alleging invalidity of the asserted patents. The parties are currently engaged in discovery. The Company intends to vigorously pursue this litigation to enforce its rights in its patented technology and believes that Skier’s Choice’s counterclaims are without merit.  Trial is set for October 21, 2019.

On January 21, 2015, Cobalt, a wholly owned indirect subsidiary of the Company, filed a patent infringement lawsuit against the Brunswick Corporation and its subsidiary Sea Ray Boats, Inc. alleging that certain of the Sea Ray's branded boats infringed upon Cobalt's patented submersible swim step technology (U.S. Patent No. 8,375,880). On October 31, 2017, the US District Court in the Eastern District of Virginia entered an amended judgment on the jury verdict in favor of Cobalt.
17. Segment Information
The following tables present financial information for the Company’s reportable segments for the three and nine months ended March 31, 2019 and 2018, respectively, and the Company’s financial position at March 31, 2019 and June 30, 2018, respectively:

22


 
Three Months Ended March 31, 2019
 
Nine Months Ended March 31, 2019
 
Malibu US
 
Cobalt
 
Pursuit
 
Malibu Australia
 
Eliminations
 
Total
 
Malibu U.S.
 
Cobalt
 
Pursuit
 
Malibu Australia
 
Eliminations
 
Total
Net sales
$
106,803

 
$
56,041

 
$
36,458

 
$
5,819

 
$
(5,203
)
 
$
199,918

 
$
264,510

 
$
150,147

 
$
66,385

 
$
19,111

 
$
(10,959
)
 
$
489,194

Affiliate (or intersegment) sales
5,203

 

 

 

 
(5,203
)
 

 
10,959

 

 

 

 
(10,959
)
 

Net sales to external customers
101,600

 
56,041

 
36,458

 
5,819

 

 
199,918

 
253,551

 
150,147

 
66,385

 
19,111

 

 
489,194

Income before provision for income taxes
$
19,776

 
$
7,202

 
$
2,568

 
$
305

 
$
(327
)
 
$
29,524

 
$
38,855

 
$
19,466

 
$
5,089

 
$
1,222

 
$
(393
)
 
$
64,239

 
Three months ended March 31, 2018
 
Nine Months Ended March 31, 2018
 
Malibu US
 
Cobalt
 
Pursuit
 
Malibu Australia
 
Eliminations
 
Total
 
Malibu U.S.
 
Cobalt
 
Pursuit
 
Malibu Australia
 
Eliminations
 
Total
Net sales
$
88,160

 
$
49,922

 
$

 
$
4,826

 
$
(2,479
)
 
$
140,429

 
$
221,418

 
$
126,207

 
$

 
$
17,514

 
$
(6,796
)
 
$
358,343

Affiliate (or intersegment) sales
2,479

 

 

 

 
(2,479
)
 

 
6,796

 

 

 

 
(6,796
)
 

Net sales to external customers
85,681

 
49,922

 

 
4,826

 

 
140,429

 
214,622

 
126,207

 

 
17,514

 

 
358,343

Income before provision for income taxes
$
16,245

 
$
6,720

 
$

 
$
203

 
$
(127
)
 
$
23,041

 
$
60,963

 
$
11,912

 
$

 
$
1,439

 
$
(143
)
 
$
74,171

 
As of March 31, 2019
 
As of June 30, 2018
Assets
 

 
 

Malibu U.S.
$
377,034

 
$
327,181

Cobalt
153,413

 
157,616

Pursuit
112,228

 

Malibu Australia
24,072

 
20,128

Eliminations
(210,315
)
 
(139,157
)
Total assets
$
456,432

 
$
365,768


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

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Some of the information in this Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, may constitute forward-looking statements. In some cases you can identify these “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. Any such forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results to vary materially from our future results, performance or achievements, or those of our industry, expressed or implied in such forward-looking statements. Such factors include, among others: the impact of our recent acquisition of the assets of Pursuit Boats ("Pursuit"); our ability to grow our business through acquisitions or strategic alliances and new partnerships; general industry, economic and business conditions; demand for our products; changes in consumer preferences; competition within our industry; our reliance on our network of independent dealers; our ability to manage our manufacturing levels and our large fixed cost base; the successful introduction of our new products; and the success of our engines integration strategy as well as other factors affecting us discussed under the heading “Item 1A-Risk Factors” appearing in the Company’s Annual Report on Form 10-K for the year ended June 30, 2018, filed with the Securities and Exchange Commission (“SEC”) on September 6, 2018 ("Form 10-K"). Many of these risks and uncertainties are outside our control, and there may be other risks and uncertainties which we do not currently anticipate because they relate to events and depend on circumstances that may or may not occur in the future. We do not intend and undertake no obligation to update any forward-looking information to reflect actual results or future events or circumstances.
The following discussion and analysis should be read in conjunction with the unaudited 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 and its consolidated subsidiaries, including Cobalt Boats, LLC and PB Holdco, LLC, through which we acquired the assets of Pursuit.
Overview
We are a leading designer, manufacturer and marketer of a diverse range of recreational powerboats, including performance sport boats, sterndrive and outboard boats. Malibu Boats, Inc. is the market leader in the performance sport boat category through our Malibu and Axis Wake Research boat brands, the leader in the 20’ - 40’ segment of the sterndrive boat category through our Cobalt brand and in a leading position in the fiberglass outboard fishing boat market with our Pursuit brand. 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 four brands—Malibu; Axis; Cobalt; and Pursuit. 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. Retail prices of our Malibu boats typically range from $55,000 to $180,000. We launched our Axis boats in 2009 to 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 Axis boats typically range from $55,000 to $105,000. 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. Retail prices for our Cobalt boats typically range from $55,000 to $750,000. Our recent acquisition of Pursuit expands our product offerings into the saltwater outboard fishing market and includes center console, dual console and offshore models. Retail prices for our Pursuit boats typically range from $80,000 to $800,000.
We sell our boats through a dealer network that we believe is the strongest in the recreational powerboat industry. As of July 1, 2018, our distribution channel consisted of over 300 dealer locations globally. Our acquisition of Pursuit has added approximately 40 new dealers. 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.

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On a consolidated basis, we achieved third quarter fiscal 2019 net sales, gross profit, net income and adjusted EBITDA of $199.9 million, $49.7 million, $22.2 million and $37.8 million, respectively, compared to $140.4 million, $36.4 million, $16.8 million and $28.5 million, respectively, for the third quarter of fiscal 2018. For the third quarter of fiscal 2019, net sales increased 42.4%, gross profit increased 36.7%, net income increased 32.2% and adjusted EBITDA increased 32.4% as compared to the third quarter of fiscal 2018. On a consolidated basis, for the first nine months of fiscal 2019 net sales, gross profit, net income and adjusted EBITDA of $489.2 million, $118.5 million, $49.2 million and $90.0 million, respectively, compared to $358.3 million, $86.8 million, $17.6 million and $66.8 million, respectively, for the for the first nine months of fiscal 2018. For the first nine months of fiscal 2019, net sales increased 36.5%, gross profit increased 36.6%, net income increased 179.2% and adjusted EBITDA increased 34.8% as compared to the first nine months of fiscal 2018. Our results for fiscal 2019 include Pursuit since our acquisition of Pursuit on October 15, 2018. For the definition of adjusted EBITDA and a reconciliation to net income, see “GAAP Reconciliation of Non-GAAP Financial Measures.”
We currently report our results of operations under four reportable segments: Malibu U.S., Malibu Australia, Cobalt and Pursuit, based on our boat manufacturing operations. The Malibu U.S. and Malibu Australia segments participate in the manufacturing, distribution, marketing and sale of Malibu and Axis performance sport boats. The Malibu U.S. segment primarily serves markets in North America, South America, Europe, and Asia while the Malibu Australia operating segment principally serves the Australian and New Zealand markets. Our Cobalt segment participates in the manufacturing, distribution, marketing and sale of Cobalt boats throughout the world. Our Pursuit segment participates in the manufacturing, distribution, marketing and sale of Pursuit boats throughout the world. Malibu U.S. is our largest segment and represented 51.8% and 59.9% of our net sales for the nine months ended March 31, 2019 and March 31, 2018, respectively. Cobalt represented 30.7% and 35.2% of our net sales for the nine months ended March 31, 2019 and March 31, 2018, respectively. We completed the acquisition of Pursuit on October 15, 2018 and Pursuit represented 13.6% of our net sales for the nine months ended March 31, 2019 . Malibu Australia represented 3.9% and 4.9% of our net sales for the nine months ended March 31, 2019 and March 31, 2018, respectively. See Note 17 to our unaudited condensed consolidated financial statements for more information about our reporting segments.
Acquisition of Pursuit
On October 15, 2018, we completed our acquisition of assets of the Pursuit Boats division of S2 Yachts, Inc., pursuant to an asset purchase agreement dated as of August 21, 2018. We paid an aggregate purchase price of $100.1 million. A portion of the purchase price was deposited into an escrow account to secure certain post-closing obligations of the sellers. We paid the purchase price for the acquisition with $50.1 million of cash on hand and $50.0 million of borrowings under our revolving credit facility.
As noted, we borrowed $50.0 million under our revolving credit facility to fund a portion of the purchase price of Pursuit. Our subsidiary, Malibu Boats, LLC, as the borrower, entered into the First Incremental Facility Amendment and First Amendment to its existing Second Amendment and Restated Credit Agreement dated as of June 28, 2017 (as amended, the "Credit Agreement"). The amendment increased the amount available under the revolving credit facility by $50.0 million (the “Incremental Revolving Commitment”) from $35.0 million to $85.0 million. The availability of the Incremental Revolving Commitment was subject to the satisfaction of certain conditions set forth in the amendment, including the closing of the acquisition of the assets of Pursuit. Malibu was required to pay a ticking fee at a rate of 0.30% per annum on the $50.0 million Incremental Revolving Commitment until the conditions for the lenders to provide the Incremental Revolving Commitment were met, which occurred on October 15, 2018, the closing date of the acquisition. Revolving loans made pursuant to the amendment have terms and conditions identical to revolving loans under the Credit Agreement.
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 6.0% between 2011 and 2018, for the 50 reporting states. This has been led by growth in our core market, performance sport boats, having produced a double digit compound annual growth rate over that period. Domestic retail demand growth has continued in performance sport boats for calendar year 2018 and, in fact, has accelerated versus 2017. Fiberglass sterndrive and outboard boats, the target markets for our Cobalt and Pursuit branded products, have seen their combined market grow at a 5.4% compound annual growth rate between 2011 and 2018. That growth has been driven by the outboard market where Pursuit is focused and Cobalt is a new entrant and where we plan to meaningfully expand our market share in the future. While Cobalt’s primary market for sterndrive propulsion has been challenged, their performance has been helped by strength in larger sterndrive boats and market share gains. We expect the growing demand for our products to continue, and there are numerous variables that have the potential to impact our volumes, both positively and negatively. For example, we believe the substantial decrease in the price of oil, broad 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

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domestic market has offset significantly diminished demand from economies that are driven by the oil industry and international markets. Consumer confidence, expanded or eroded, is a variable that could also impact demand in both directions. Additionally, we are monitoring the possibility of another federal government shutdown in the United States, as we believe a prolonged shutdown could result in a negative impact on our business. 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.
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 begun to compete with our patented Surf Gate system. This competitive environment has continued throughout the past few years, but we continue to maintain a strong lead over our nearest competitor in terms of market position and believe that we are well positioned to maintain our industry leading position given our strong dealer network and new product pipeline. In addition, we continue to be the market share leader in both the premium and value-oriented product sub-categories.
We 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 and Pursuit acquisitions. While Cobalt and Pursuit are market leaders in certain areas, we believe our experience positions us to execute a strategy to drive enhanced share by expanding both the Cobalt and Pursuit product offerings with different foot lengths, different boat types and different propulsion technologies. Our new product development efforts at Cobalt and Pursuit will take time and our ability to influence near-term model introductions is limited, but we have already begun to execute on this strategy. We believe enhancing new product development combined with diligent management of the Cobalt and Pursuit dealer networks positions 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. 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 primarily generate revenue from sales to our dealers. The substantial majority of our net sales are derived from the sale of boats and trailers, including optional features added at the time of the initial wholesale purchase of the boat. Net sales consists of the following:
Gross sales from: