MALIBU BOATS, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 effects of the COVID-19 pandemic on us; general industry, economic and business conditions; our ability to grow our business through acquisitions and integrate such acquisitions to fully realize their expected benefits; our reliance on our network of independent dealers and increasing competition for dealers; our large fixed cost base; intense competition within our industry; increased consumer preference for used boats or the supply of new boats by competitors in excess of demand; the successful introduction of new products; our ability to execute our manufacturing strategy successfully; the success of our engines integration strategy; and other factors affecting us discussed under the heading “Part II. Item 1A - Risk Factors” appearing elsewhere in this Quarterly Report on Form 10-Q and “Part I. "Item 1A-Risk Factors” appearing in our Annual Report on Form 10-K for the year ended June 30, 2019, filed with the Securities and Exchange Commission (“SEC”) on August 29, 2019 ("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 interim condensed consolidated financial statements and notes thereto included herein. 25 Table of Contents 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. We are the market leader in the United States in the performance sport boat category through our Malibu and Axis Wake Research boat brands, the leader in the United States 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 $60,000 to $190,000. 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 $60,000 to $110,000. 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 $60,000 to $770,000. 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 category. As of July 1, 2019, our worldwide distribution channel consisted of over 350 dealer locations globally. Our dealer base is an important part of our consumers’ experience, our marketing efforts and our brands. We devote significant time and resources to find, develop and improve the performance of our dealers and believe our dealer network gives us a distinct competitive advantage. Impact of the COVID-19 Pandemic The COVID-19 pandemic has significantly impacted health and economic conditions throughout the United States. The COVID-19 pandemic has impacted our operations and financial results and we expect it to continue to impact our operations and financial results, including during any recovery period. As a result of the pandemic, we elected to suspend operations at all of our facilities on March 24, 2020. We have since resumed operations at our Loudon, Tennessee facility (Malibu and Axis boats) on April 20, 2020, our Neodesha, Kansas facility (Cobalt boats) on April 27, 2020 and our Fort Pierce, Florida facility (Pursuit boats) on May 4, 2020. We also elected to draw the remaining available funds of $98.8 million from our revolving credit facility in late March 2020 to ensure we maintain financial flexibility in light of the current uncertainty resulting from the COVID-19 pandemic. Our financial results for the third quarter of fiscal year 2020 were impacted by the COVID-19 pandemic primarily due to the temporary shutdown of our facilities that affected the last week of the third fiscal quarter. We were not able to ship boats to our dealers during the suspension of our operations, which negatively impacted our net sales. As a result, both net sales and unit sales declined by $17.6 million, or 8.8% and 298 units, or 14.2%, respectively, for the three months ended March 31, 2020 compared to the same period last year. We experienced a decrease in net sales for each of our Malibu/Axis, Cobalt, and Pursuit brands for the three months ended March 31, 2020 compared to the same period last year. While costs of sales also declined, we still recognized a decrease in gross profit of $3.9 million, or 7.8%, for the third quarter of fiscal year 2020 compared to the same period last year, primarily related to declines in sales volumes resulting from our suspension of operations which impacted the last week of our third quarter of fiscal year 2020. In addition to our operations, the COVID-19 pandemic has also impacted our dealers and suppliers, which could cause further disruptions to our business. While some of our dealers have had to suspend their operations during the pandemic, many of our dealers continue to operate and we are not aware of any that have closed permanently. We are expecting to build and 26 Table of Contents ship substantially all confirmed orders to our dealers that are for retail customers who have requested delivery prior to Memorial Day weekend. Our dealers rely on continued access to adequate financing sources, which is typically provided through floor plan financing. If floor plan financing becomes less available to our dealers as a result of the COVID-19 pandemic, our sales and potentially our working capital levels could be adversely affected. In addition, if our dealers are not able to maintain their payment obligations under their floor plan financing arrangements, the boats could be repossessed by the floor plan financing provider and returned to us, which would have an adverse impact on our net sales and may result in downward pressure on pricing of our boats. Some of our dealers have informed us that their financing sources have provided relief for our dealers through interest payment deferrals and curtailments. We are also evaluating ways in which we may be able to support our dealers with respect to their financing obligations, but we currently have no definitive plans. In addition to our dealers, many of our suppliers have also experienced temporary closures. If our suppliers are delayed in resuming their operations, it could impact our ability to receive certain components and materials that are essential to the construction of our boats. To date, we have not experienced a meaningful impact from a delay in our supplies. However, if we do not receive sufficient supplies of materials for production of boats, we may experience delays in our production of boats which could result in a decrease in boats available for sale and an increase in our cost of sales. We believe we are well-positioned to withstand the current economic environment. We have approximately $113.0 million of cash on hand as of May 5, 2020. Further, we have a flexible cost structure that allows us to more closely align our costs with expected lower wholesale shipments that will likely result from the COVID-19 pandemic and related economic recovery. While we expect our leading market share positions, flexible cost structure and liquidity position will help us to navigate through these uncertain times, we expect the COVID-19 pandemic will have a larger impact on our results of operations for our fourth quarter of fiscal year 2020 and beyond than that which has been reflected in our results for our third quarter of fiscal year 2020. Further, the pandemic could have a stronger impact on our results for the fiscal year 2021 because our dealers have traditionally experienced stronger sales of our products during the spring and summer months, which, if meaningfully impacted, would result in our dealers having excess inventory and likely result in reduced wholesale shipments during fiscal year 2021. As shelter-in-place orders began around the start of the spring and could be extended through the summer, we expect that sales of our boats for this year’s boating season will be negatively impacted. Going forward, given that the COVID-19 pandemic has caused a significant economic slowdown it appears increasingly likely that it could cause a global recession, which could be of an unknown duration, and as a result we expect sales of our boats to be adversely impacted by any such economic slowdown. The ultimate impact of COVID-19 on our financial condition and results of operations will depend on all of the factors noted above, including other factors that we may not be able to forecast at this time. See the risk factor “ The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, and those of our dealers and suppliers, thereby adversely affecting our business, financial condition and results of operations.” under Part II. Item 1A. of this Quarterly Report on Form 10-Q. While we expect the impacts of COVID-19 to have an adverse effect on our business, financial condition and results of operations, we are unable to predict the extent of these impacts at this time. Outlook Industry-wide marine retail registrations continued to recover from the years following the global financial crisis through 2019. According to Statistical Surveys, Inc., domestic retail registration volumes of performance sport boats, fiberglass sterndrive and fiberglass outboards increased at a compound annual growth rate of approximately 5.2% between 2011 and 2019, for the 50 reporting states. 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. Fiberglass sterndrive and outboard boats, the target markets for our Cobalt and Pursuit branded products, have seen their combined market grow at a 4.5% compound annual growth rate between 2011 and 2019. That growth has been driven by the outboard market, where Pursuit is focused and Cobalt is a newer entrant and where we plan to meaningfully expand our market share in the future. While sterndrive propulsion, Cobalt's primary market, has been challenged, Cobalt's performance continues to be helped by market share gains and they continued to see registration growth through 2019. During 2019 the fiberglass outboard market had actually begun a minor contraction (down 0.3%). However, in foot lengths 23 feet and greater, where Pursuit and Cobalt compete, the market continued to grow. While domestic retail registrations performance sport boats, fiberglass sterndrive and fiberglass outboards continued to grow in 2019, the growth rate decreased compared to 2018. We believe the lower market growth rates in 2019 were largely driven by negative seasonal weather trends in key months for retail boat sales and the back half of the year represented more robust retail growth. Strong retail sales in the latter part of 2019 positioned us and our dealers well heading into 2020. Early boat show results were reasonably strong despite lower retail registration data through March and we felt poised for a strong fiscal and calendar 2020. However, the onset of the COVID-19 pandemic and the resulting decrease in economic activity has meaningfully changed the landscape and left us in a position of uncertainty as to where the market is headed. We are aggressively monitoring retail activity at our dealers, internal warranty registrations, retail registrations with states, and flooring liquidation activity. We believe that March and April retail registrations will be lower compared to the same period last year. The temporary suspension of our operations for the COVID-19 pandemic allowed us to reduce the amount of inventory shipped to our dealers, which will 27 Table of Contents give our dealers the opportunity to decrease their inventory levels in preparation for a potentially smaller retail market. While we expect a decrease in retail registrations in March and April and a potentially smaller retail market as a result of the COVID-19 pandemic, we also have a meaningful order book of confirmed orders for retail customers, most of which we are targeting to deliver before Memorial Day. We will we continue to monitor retail activity closely in the upcoming months. We believe we are well positioned to manage the current environment with our variable cost structure and strong capital structure. We will also continue to focus on our key strategies of innovation, vertical integration and world class manufacturing. We have increased our market share among manufacturers of performance sport boats since 2008 due to new product development, improved distribution, new models, and innovative features. As the market for our product recovered, our competitors became more aggressive in their product introductions, increased their distribution and begun to compete with our patented Surf Gate system. This competitive environment has continued the past few years, but we continue to maintain a strong lead over our nearest competitor in terms of market position and we believe the current market conditions present us with another opportunity to distinguish ourselves from our competitors. We also believe that we are well positioned to maintain and expand our industry leading position given our strong dealer network and new product pipeline. Within the performance sport boats market, we also 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 through 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 teams have been focused on new product development efforts at Cobalt and Pursuit and our goal of introducing a meaningful amount of new product over the next two years. We believe enhancing new product development combined with diligent management of the Cobalt and Pursuit dealer networks, even in the face of adverse market conditions, 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. 28 Table of Contents Components of Results of Operations Net Sales We generate revenue from sales of boats to our dealers. The substantial majority of our net sales are derived from the sale of boats, including optional features added at the time of the initial wholesale purchase of the boat. Net sales consists of the following: • Gross sales from: • Boat and trailer sales —consists of sales of boats and trailers to our dealer network. Nearly all of our boat sales include optional feature upgrades purchased by the consumer, which increase the average selling price of our boats; and • Parts and other sales— consists of sales of replacement and aftermarket boat parts and accessories to our dealer network; and consists of royalty income earned from license agreements with various boat manufacturers, including Nautique, Chaparral, Mastercraft, and Tige related to the use of our intellectual property. • Net sales are net of: • Sales returns —consists primarily of contractual repurchases of boats either repossessed by the floor plan financing provider from the dealer or returned by the dealer under our warranty program; and • Rebates, free flooring and discounts —consists of incentives, rebates and free flooring, we provide to our dealers based on sales of eligible products. For our Malibu and Axis models, if a domestic dealer meets its monthly or quarterly commitment volume, as well as other terms of the dealer performance program, the dealer is entitled to a specified rebate. Cobalt dealers are entitled to volume-based discounts taken at the time of invoice. For our Pursuit models, if a dealer meets its quarterly or annual retail volume goals, the dealer is entitled to a specific rebate applied to their wholesale volume purchased from Pursuit. For Malibu and Cobalt models and select Pursuit models, our dealers that take delivery of current model year boats in the offseason, typically July through April in the U.S., are also entitled to have us pay the interest to floor the boat until the earlier of (1) the sale of the unit or (2) a date near the end of the current model year, which incentive we refer to as “free flooring.” From time to time, we may extend the flooring program to eligible models beyond the offseason period. Cost of Sales Our cost of sales includes all of the costs to manufacture our products, including raw materials, components, supplies, direct labor and factory overhead. For components and accessories manufactured by third-party vendors, such costs represent the amounts invoiced by the vendors. Shipping costs and depreciation expense related to manufacturing equipment and facilities are also included in cost of sales. Warranty costs associated with the repair or replacement of our boats under warranty are also included in cost of sales. Operating Expenses Our operating expenses include selling and marketing, and general and administrative costs. Each of these items includes personnel and related expenses, supplies, non-manufacturing overhead, third-party professional fees and various other operating expenses. Further, selling and marketing expenditures include the cost of advertising and various promotional sales incentive programs. General and administrative expenses include, among other things, salaries, benefits and other personnel related expenses for employees engaged in product development, engineering, finance, information technology, human resources and executive management. Other costs include outside legal and accounting fees, investor relations, risk management (insurance) and other administrative costs. General and administrative expenses also include product development expenses associated with our engines vertical integration initiative and acquisition or integration related expenses. Other (Income) Expense, Net Other (income) expense, net consists of interest expense and other income or expense, net. Interest expense consists of interest charged under our outstanding debt, interest on our interest rate swap arrangement and change in the fair value of our interest rate swap we entered into on July 1, 2015, which matured on March 31,2020, and amortization of deferred financing costs on our credit facilities. Other income expense, net consists mostly of adjustments to our tax receivable agreement liability. Income Taxes 29 Table of Contents Malibu Boats, Inc. is subject to U.S. federal and state income tax in multiple jurisdictions with respect to our allocable share of any net taxable income of the LLC. The LLC is a pass-through entity for federal purposes but incurs income tax in certain state jurisdictions. The provision for income taxes reflects an estimated effective income tax rate attributable to Malibu Boats, Inc.'s share of income. The estimated effective income tax rate used to determine the provision for income taxes typically differs from the statutory federal income tax rate due to the impact of state taxes, our ability to utilize certain tax credits and the impact of the non-controlling interests in the LLC. Our effective tax rate also reflects the impact of our share of the LLC's permanent items such as stock compensation expense attributable to profits interests. Net Income Attributable to Non-controlling Interest As of March 31, 2020 and 2019, we had a 96.3% and 96.2% controlling economic interest, respectively, and 100% voting interest in the LLC and, therefore, we consolidate the LLC's operating results for financial statement purposes. Net income attributable to non-controlling interest represents the portion of net income attributable to the non-controlling LLC members. Segment Reporting Effective July 1, 2019, we revised our segment reporting to conform to changes in our internal management reporting based on our boat manufacturing operations. Segment information has been revised for comparison purposes for all periods presented in the condensed consolidated financial statements. We now have three reportable segments, Malibu, Cobalt and Pursuit. The Malibu segment participates in the manufacturing, distribution, marketing and sale of Malibu and Axis performance sports boats throughout the world. The Cobalt and Pursuit segments participate in the manufacturing, distribution, marketing and sale of Cobalt and Pursuit boats, respectively, throughout the world. Malibu is our largest segment and represented 53.5% and 55.7% of our net sales for the nine months ended March 31, 2020 and March 31, 2019, respectively. Cobalt represented 27.1% and 30.7% of our net sales for the nine months ended March 31, 2020 and March 31, 2019, respectively. We completed the acquisition of Pursuit on October 15, 2018 and Pursuit represented 19.4% and 13.6% of our net sales for the nine months ended March 31, 2020 and March 31, 2019. See Note 18 to our unaudited interim condensed consolidated financial statements for more information about our reporting segments. 30 Table of Contents Results of Operations The table below sets forth our unaudited interim consolidated results of operations, expressed in thousands (except unit volume and net sales per unit) and as a percentage of net sales, for the periods presented. Our unaudited interim consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that we will achieve in future periods. Certain totals for the table below will not sum to exactly 100% due to rounding. Three Months Ended March 31, Nine Months Ended March 31, 2020 2019 2020 2019 $ % Revenue $ % Revenue $ % Revenue $ % Revenue Net sales 182,310 100.0 % 199,918 100.0 % 534,502 100.0 % 489,194 100.0 % Cost of sales 136,461 74.9 % 150,196 75.1 % 408,784 76.5 % 370,656 75.8 % Gross profit 45,849 25.1 % 49,722 24.9 % 125,718 23.5 % 118,538 24.2 % Operating expenses: Selling and marketing 4,572 2.5 % 5,273 2.6 % 14,304 2.7 % 13,372 2.7 % General and administrative 9,643 5.3 % 12,324 6.2 % 30,389 5.7 % 32,527 6.6 % Amortization 1,501 0.8 % 1,563 0.8 % 4,622 0.9 % 4,381 0.9 % Operating income 30,133 16.5 % 30,562 15.3 % 76,403 14.2 % 68,258 14.0 % Other (income) expense, net: Other income, net (1,660) (0.9) % (712) (0.4) % (1,679) (0.3) % (746) (0.2) % Interest expense 940 0.5 % 1,750 0.9 % 3,064 0.5 % 4,765 1.0 % Other (income) expense, net (720) (0.4) % 1,038 0.5 % 1,385 0.2 % 4,019 0.8 % Income before provision for income taxes 30,853 16.9 % 29,524 14.8 % 75,018 14.0 % 64,239 13.2 % Provision for income taxes 6,987 3.8 % 7,321 3.7 % 16,872 3.2 % 15,023 3.1 % Net income 23,866 13.1 % 22,203 11.1 % 58,146 10.8 % 49,216 10.1 % Net income attributable to non-controlling interest 1,088 0.6 % 1,104 0.6 % 2,787 0.5 % 2,562 0.5 % Net income attributable to Malibu Boats, Inc. 22,778 12.5 % 21,099 10.5 % 55,359 10.3 % 46,654 9.6 % Three Months Ended March 31, Nine Months Ended March 31, 2020 2019 2020 2019 Unit Volumes % Total Unit Volumes % Total Unit Volumes % Total Unit Volumes % Total Volume by Segment Malibu 1,139 63.4 % 1,306 62.4 % 3,254 61.1 % 3,343 62.3 % Cobalt 521 29.0 % 645 30.8 % 1,652 31.0 % 1,773 33.0 % Pursuit 1 136 7.6 % 143 6.8 % 421 7.9 % 254 4.7 % Total units 1,796 2,094 5,327 5,370 Net sales per unit $ 101,509 $ 95,472 $ 100,338 $ 91,098 (1) We acquired substantially all of the assets of Pursuit on October 15, 2018. Comparison of the Three Months Ended March 31, 2020 to the Three Months Ended March 31, 2019 Net Sales Net sales for the three months ended March 31, 2020 decreased $17.6 million, or 8.8%, to $182.3 million as compared to the three months ended March 31, 2019. Unit volume for the three months ended March 31, 2020, decreased 298 units, or 14.2%, to 1,796 units as compared to the three months ended March 31, 2019. The decrease in net sales and unit volumes was driven primarily by the precautionary suspension of operations at all of our manufacturing facilities commencing on March 24, 31 Table of Contents 2020 as a result of the COVID-19 pandemic. As a result of our suspension of operations, we were not able to ship boats to our dealers during the last week of the fiscal quarter, which negatively impacted our net sales for the quarter. In addition to the pandemic, but to a lesser effect, we also had planned lower production rates at Cobalt to reduce wholesale shipments and dealer inventories that negatively impacted sales versus the prior year period. This decrease was partially offset by a higher average selling price due to model mix and year-over-year price increases. Net sales attributable to our Malibu segment decreased $4.8 million, or 4.5%, to $102.6 million for the three months ended March 31, 2020, compared to the three months ended March 31, 2019. Unit volumes attributable to our Malibu segment decreased 167 units for the three months ended March 31, 2020, compared to the three months ended March 31, 2019. The decrease in net sales and unit volumes was driven primarily by the precautionary suspension of operations at our Malibu and Axis facilities commencing on March 24, 2020 as a result of the COVID-19 pandemic. This decrease was partially offset by mix of our new larger models and year-over-year price increases on all of our Malibu and Axis models. Net sales from our Cobalt segment decreased $10.0 million, or 17.9%, to $46.0 million for the three months ended March 31, 2020, compared to the three months ended March 31, 2019. Unit volumes attributable to Cobalt decreased 124 units for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The decrease in net sales and unit volumes were driven primarily by the precautionary suspension of operations at our Cobalt facility commencing on March 24, 2020 as a result of the COVID-19 pandemic. In addition to the pandemic, but to a lesser effect, we also had planned lower production rates at Cobalt to reduce wholesale shipments and dealer inventories that negatively impacted sales versus the prior year period. The decrease was partially offset by year-over-year price increases on our Cobalt models. Net sales from our Pursuit segment decreased $2.8 million, or 7.6%, to $33.7 million, for the three months ended March 31, 2020, compared to the three months ended March 31, 2019. Unit volumes attributable to Pursuit decreased seven units for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The decrease in net sales and unit volumes were driven primarily by the precautionary suspension of operations at our Pursuit facility commencing on March 24, 2020 as a result of the COVID-19 pandemic. Additionally, the decrease in Pursuit net sales was driven by the lower average selling price due to the mix of models sold partially offset by year-over-year price increases on our Pursuit models. Overall consolidated net sales per unit increased 6.3% to $101,509 per unit for the three months ended March 31, 2020, compared to the three months ended March 31, 2019. Net sales per unit for our Malibu segment increased 9.5% to $90,083 per unit for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, driven by higher sales of new, more expensive models and optional features and year-over-year price increases. Net sales per unit for our Cobalt segment increased 1.7% to $88,345 per unit for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, driven by year-over-year price increases. Net sales per unit for Pursuit segment decreased 2.9% to $247,632 for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, driven by a lower average selling price due to the mix of models sold offset slightly by year-over-year price increases. Cost of Sales Cost of sales for the three months ended March 31, 2020 decreased $13.7 million, or 9.1%, to $136.5 million as compared to the three months ended March 31, 2019. The decrease in cost of sales was driven primarily by the precautionary suspension of operations at all of our manufacturing facilities commencing on March 24, 2020 as a result of the COVID-19 pandemic. Gross Profit Gross profit for the three months ended March 31, 2020 decreased $3.9 million, or 7.8%, to $45.8 million compared to the three months ended March 31, 2019. The decrease in gross profit was driven primarily by lower sales revenue due to the precautionary suspension of operations at all of our manufacturing facilities commencing on March 24, 2020 as a result of the COVID-19 pandemic. Gross margin for the three months ended March 31, 2020 increased 20 basis points from 24.9% to 25.1%. Operating Expenses Selling and marketing expenses for the three months ended March 31, 2020, decreased $0.7 million, or 13.3% to $4.6 million compared to the three months ended March 31, 2019. As a percentage of sales, selling and marketing expenses decreased 10 basis points compared to the same period in the prior fiscal year. General and administrative expenses for the three months ended March 31, 2020, decreased $2.7 million, or 21.8%, to $9.6 million as compared to the three months ended March 31, 2019, due primarily to a decrease in incentive compensation for the three months ended March 31, 2020. In addition, we incurred acquisition related expenses in the three months ended March 31, 2019 for our acquisition of Pursuit. As a percentage of sales, general and administrative expenses decreased 90 basis points to 5.3% for the three months ended 32 Table of Contents March 31, 2020 compared to the three months ended March 31, 2019. Amortization expense for the three months ended March 31, 2020 remained flat at $1.5 million compared to the three months ended March 31, 2019. Other (Income) Expense, Net Other (income) expense, net for the three months ended March 31, 2020 changed by $1.7 million to income of $0.7 million as compared to expense of $1.0 million, for the three months ended March 31, 2019 primarily due to decreased interest expense and a $1.7 million reduction in our tax receivable agreement liability, which resulted in us recognizing a corresponding amount as other income during the period. The reduction of our tax receivable agreement liability decreased the future tax benefit we expect to pay under our tax receivable agreements with our pre-IPO owners. Interest expense decreased due to a lower interest rate and lower average outstanding debt during the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019. We expect our interest expense to increase in the fourth quarter of fiscal year 2020 because of our borrowing of $98.8 million under our revolving credit facility in March to provide us financial flexibility during the COVID-19 pandemic. Provision for Income Taxes Our provision for income taxes for the three months ended March 31, 2020, decreased $0.3 million, or 4.6%, to $7.0 million compared to the three months ended March 31, 2019. This decrease was primarily driven by remeasurement of deferred taxes in prior year, partially offset by increased consolidated earnings this year. For the three months ended March 31, 2020, our effective tax rate of 22.6% exceeded the statutory federal income tax rate of 21% primarily due to the impact of U.S. state taxes. This increase was partially offset by the benefits of the foreign derived intangible income deduction, the research and development tax credit, a windfall benefit generated by certain stock based compensation, and the impact of non-controlling interests in the LLC. For the three months ended March 31, 2019, our effective tax rate of 24.8% exceeded the statutory federal income tax rate of 21% 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. Non-controlling Interest Non-controlling interest represents the ownership interests of the members of the LLC other than us and the amount recorded as non-controlling interest in our unaudited interim condensed consolidated statements of operations and comprehensive income is computed by multiplying pre-tax income for the applicable period, by the percentage ownership in the LLC not directly attributable to us. For the three months ended March 31, 2020 and 2019, the weighted average non-controlling interest attributable to ownership interests in the LLC not directly attributable to us was 3.8% and 3.9%, respectively. Comparison of the Nine Months Ended March 31, 2020 to the Nine Months Ended March 31, 2019 Net Sales Net sales for the nine months ended March 31, 2020 increased $45.3 million, or 9.3%, to $534.5 million as compared to the nine months ended March 31, 2019. Unit volume for the nine months ended March 31, 2020, decreased 43 units, or 0.8%, to 5,327 units as compared to the nine months ended March 31, 2019. The increase in net sales was primarily driven by an increase in unit volumes due to the acquisition of Pursuit on October 15, 2018, as well as increased mix for our Malibu and Axis brands coupled with year-over-year price increases across all brands. This increase was partially offset by a decrease in unit volumes at Cobalt and Malibu for the nine months ended March 31, 2020 due primarily to the precautionary suspension of operations at all of our manufacturing facilities commencing on March 24, 2020 as a result of the COVID-19 pandemic. Net sales attributable to our Malibu segment increased $13.2 million, or 4.8%, to $285.8 million for the nine months ended March 31, 2020, compared to the nine months ended March 31, 2019. Unit volumes attributable to our Malibu segment decreased 89 units for the nine months ended March 31, 2020, compared to the nine months ended March 31, 2019. The increase in net sales for Malibu was driven primarily by higher sales for new, more expensive models and optional features, which led to a higher net sales per unit for Malibu and Axis models. This increase was partially offset by a decrease in unit volumes for the nine months ended March 31, 2020 due primarily to the precautionary suspension of operations at our Malibu and Axis facilities commencing on March 24, 2020 as a result of the COVID-19 pandemic. Net sales from our Cobalt segment decreased $5.0 million, or 3.3%, to $145.2 million for the nine months ended March 31, 2020, compared to the nine months ended March 31, 2019. Unit volumes attributable to Cobalt decreased 121 units for the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019. The decreases in net sales and unit volume was primarily driven by the precautionary suspension of operations at our Cobalt facility commencing on March 24, 2020 as a result of the COVID-19 pandemic. The decrease in net sales was partially offset by year-over-year price increases on our Cobalt models. 33 Table of Contents Net sales from our Pursuit segment increased $37.1 million, or 55.9% to $103.5 million for the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019. Unit volumes attributable to Pursuit increased 167 units for the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019. The increase in Pursuit net sales resulted from a full nine months of sales from Pursuit in the first nine months of fiscal 2020 compared to a partial six months in the first nine months of fiscal 2019 and year-over-year price increases, partially offset by the lower average selling price due to the mix of models sold and the precautionary suspension of operations at our Pursuit facility commencing on March 24, 2020 as a result of the COVID-19 pandemic. We acquired the assets of Pursuit on October 15, 2018. Overall consolidated net sales per unit increased 10.1% to $100,338 per unit for the nine months ended March 31, 2020, compared to the nine months ended March 31, 2019 driven by a higher mix of Pursuit models which have a higher average selling price per unit than our other brands, sold in the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019 since the acquisition of Pursuit on October 15, 2018. Net sales per unit for our Malibu segment increased 7.7% to $87,834 per unit for the nine months ended March 31, 2020, compared to the nine months ended March 31, 2019, driven by higher sales for new, more expensive models and optional features and year-over-year price increases. Net sales per unit for our Cobalt segment increased 3.8% to $87,877 per unit for the nine months ended March 31, 2020, compared to the nine months ended March 31, 2019, driven by year-over-year price increases. Net sales per unit for Pursuit segment decreased 5.9% to $245,886 for the nine months ended March 31, 2020, compared to the nine months ended March 31, 2019, driven by lower average selling price due to the mix of models sold offset slightly by year-over-year price increases. Cost of Sales Cost of sales for the nine months ended March 31, 2020 increased $38.1 million, or 10.3%, to $408.8 million as compared to the nine months ended March 31, 2019. The increase in cost of sales was driven primarily by incremental costs associated with the inclusion of Pursuit for the first full nine months, as opposed to a partial six months in the same period in the prior fiscal year, as well as, a higher cost of sales per unit that corresponded with an increase in average selling price. Gross Profit Gross profit for the nine months ended March 31, 2020 increased $7.2 million, or 6.1%, to $125.7 million compared to the nine months ended March 31, 2019. The increase in gross profit was due to a higher gross profit per unit. Gross margin for the nine months ended March 31, 2020 decreased 70 basis points from 24.2% to 23.5% over the same period in the prior fiscal year primarily due to the integration of Pursuit and $2.6 million in costs related to the United Auto Workers' ("UAW") strike against General Motors. Operating Expenses Selling and marketing expenses for the nine months ended March 31, 2020, increased $0.9 million, or 7.0%, to $14.3 million compared to the nine months ended March 31, 2019 due primarily to the incremental expenses attributable to Pursuit. As a percentage of sales, selling and marketing expenses remained flat compared to the same period in the prior fiscal year. General and administrative expenses for the nine months ended March 31, 2020, decreased $2.1 million, or 6.6%, to $30.4 million as compared to the nine months ended March 31, 2019, largely due to expenses related to the acquisition of Pursuit in the nine months ended March 31, 2019 that were not incurred during the nine months ended March 31, 2020, partially offset by incremental general and administrative expenses attributable to Pursuit during the nine months ended March 31, 2020. As a percentage of sales, general and administrative expenses decreased 90 basis points from 6.6% to 5.7% for the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019. Amortization expense for the nine months ended March 31, 2020, increased $0.2 million, or 5.5% to $4.6 million compared to the nine months ended March 31, 2019 due to additional amortization expense related to intangibles acquired as part of the Pursuit acquisition. Other (Income) Expense, Net Other (income) expense, net for the nine months ended March 31, 2020 decreased $2.6 million, or 65.5%, to $1.4 million compared to the nine months ended March 31, 2019 due to lower interest expense on our outstanding debt and a $1.7 million adjustment to our tax receivable agreement liability, which resulted in us recognizing a corresponding amount as other income during the period. The reduction of our tax receivable agreement liability decreased the future tax benefit we expect to pay under our tax receivable agreements with our pre-IPO owners. Interest expense decreased due to a lower interest rate and lower average outstanding debt during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019. Provision for Income Taxes Our provision for income taxes for the nine months ended March 31, 2020, increased $1.8 million, or 12.3%, to $16.9 million compared to the nine months ended March 31, 2019. This increase was primarily due to increased consolidated 34 Table of Contents earnings, including Pursuit for the nine months ended March 31, 2020, and a remeasurement of deferred taxes for the same period in the prior fiscal year. For the nine months ended March 31, 2020, our effective tax rate of 22.5% exceeded the statutory federal income tax rate of 21% primarily due to the impact of U.S. state taxes. This increase was partially offset by the benefits of the foreign derived intangible income deduction, the research and development tax credit, a windfall benefit generated by certain stock based compensation, and the impact of non-controlling interests in the LLC . For the nine months ended March 31, 2019, our effective tax rate of 23.4% exceeded the statutory federal income tax rate of 21% 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. Non-controlling Interest Non-controlling interest represents the ownership interests of the members of the LLC other than us and the amount recorded as non-controlling interest in our unaudited interim condensed consolidated statements of operations and comprehensive income is computed by multiplying pre-tax income for the applicable period, by the percentage ownership in the LLC not directly attributable to us. For the nine months ended March 31, 2020 and 2019, the weighted average non-controlling interest attributable to ownership interests in the LLC not directly attributable to us was 3.8% and 4.1%, respectively. 35 Table of Contents GAAP Reconciliation of Non-GAAP Financial Measures Adjusted EBITDA Adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures that are used by management as well as by investors, commercial bankers, industry analysts and other users of our financial statements. We define adjusted EBITDA as net income before interest expense, income taxes, depreciation, amortization and non-cash, non-recurring or non-operating expenses, including certain professional fees, acquisition and integration related expenses, non- cash compensation expense, expenses related to our engine development initiative, expenses related to interruption to our engine supply during the labor strike by UAW against General Motors and adjustments to our tax receivable agreement liability. We define adjusted EBITDA margin as adjusted EBITDA divided by net sales. Adjusted EBITDA and adjusted EBITDA margin are not measures of net income as determined by GAAP. Management believes adjusted EBITDA and adjusted EBITDA margin allow investors to evaluate the company’s operating performance and compare our results of operations from period to period on a consistent basis by excluding items that management does not believe are indicative of our core operating performance. Management uses Adjusted EBITDA to assist in highlighting trends in our operating results without regard to our financing methods, capital structure and non-recurring or non-operating expenses. We exclude the items listed above from net income in arriving at adjusted EBITDA because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures, the methods by which assets were acquired and other factors. Adjusted EBITDA has limitations as an analytical tool and should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with GAAP or as an indicator of our liquidity. Certain items excluded from adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historical costs of depreciable assets. Our presentation of adjusted EBITDA and adjusted EBITDA margin should not be construed as an inference that our results will be unaffected by unusual or non-recurring items. Our computations of adjusted EBITDA and adjusted EBITDA margin may not be comparable to other similarly titled measures of other companies. The following table sets forth a reconciliation of net income as determined in accordance with GAAP to adjusted EBITDA and adjusted EBITDA margin for the periods indicated (dollars in thousands): Three Months Ended March 31, Nine Months Ended March 31, 2020 2019 2020 2019 Net income $ 23,866 $ 22,203 $ 58,146 $ 49,216 Provision for income taxes 6,987 7,321 16,872 15,023 Interest expense 940 1,750 3,064 4,765 Depreciation 2,938 2,744 9,040 7,102 Amortization 1,501 1,563 4,622 4,381 Professional fees 1 124 189 500 572 Acquisition and integration related expenses 2 — 1,051 — 4,960 Stock-based compensation expense 3 816 735 2,306 1,866 Engine development 4 — 932 — 2,871 UAW strike impact 5 877 — 2,564 — Adjustments to tax receivable agreement liability 6 (1,650) (707) (1,650) (707) Adjusted EBITDA $ 36,399 $ 37,781 $ 95,464 $ 90,049 Adjusted EBITDA Margin 20.0 % 18.9 % 17.9 % 18.4 % 36 Table of Contents (1) Represents legal and advisory fees related to our litigation with Skier's Choice, Inc. See Note 17 to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report. (2) For the three months and nine months ended March 31, 2019, represents legal and advisory fees incurred in connection with our acquisition of Pursuit on October 15, 2018 and integration costs related to our acquisitions of Pursuit and Cobalt. Integration related expenses for the nine months ended March 31, 2019 include post-acquisition adjustments to cost of goods sold of $0.9 million for the fair value step up of Pursuit inventory acquired, most of which was sold during the second quarter of fiscal 2019. (3) Represents equity-based incentives awarded to key employees under the Malibu Boats, Inc. Long-Term Incentive Plan and profit interests issued under the previously existing limited liability company agreement of the LLC. For more information, see Note 15 to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report. (4) Represents costs incurred in connection with our vertical integration of engines including product development costs and supplier transition performance incentives. (5) For the three and nine months ended March 31, 2020, represents costs incurred in connection with interruption to our engine supply during the UAW strike against General Motors. We purchase engines from General Motors LLC that we then prepare for marine use for our Malibu and Axis boats. During the UAW strike, General Motors suspended delivery of engine blocks to us and we incurred costs by entering into purchase agreements with two suppliers for additional engines to supplement our inventory of engine blocks for Malibu and Axis boats. (6) For the three and nine months ended March 31, 2020 and March 31, 2019 we recognized other income from an adjustment in our tax receivable agreement liability as a result of a decrease in the estimated tax rate used in computing our future tax obligations and in turn, a decrease in the future tax benefit we expect to pay under our tax receivable agreement with pre-IPO owners. 37 Table of Contents Adjusted Fully Distributed Net Income We define Adjusted Fully Distributed Net Income as net income attributable to Malibu Boats, Inc. (i) excluding income tax expense, (ii) excluding the effect of non-recurring or non-cash items, (iii) assuming the exchange of all LLC units into shares of Class A Common Stock, which results in the elimination of non-controlling interest in the LLC, and (iv) reflecting an adjustment for income tax expense on fully distributed net income before income taxes at our estimated effective income tax rate. Adjusted Fully Distributed Net Income is a non-GAAP financial measure because it represents net income attributable to Malibu Boats, Inc., before non-recurring or non-cash items and the effects of non-controlling interests in the LLC. We use Adjusted Fully Distributed Net Income to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results prepared in accordance with GAAP, provides a more complete understanding of factors and trends affecting our business than GAAP measures alone. We believe Adjusted Fully Distributed Net Income assists our board of directors, management and investors in comparing our net income on a consistent basis from period to period because it removes non-cash or non-recurring items, and eliminates the variability of non-controlling interest as a result of member owner exchanges of LLC Units into shares of Class A Common Stock. In addition, because Adjusted Fully Distributed Net Income is susceptible to varying calculations, the Adjusted Fully Distributed Net Income measures, as presented in this Quarterly Report, may differ from and may, therefore, not be comparable to similarly titled measures used by other companies. The following table shows the reconciliation of the numerator and denominator for net income available to Class A Common Stock per share to Adjusted Fully Distributed Net Income per Share of Class A Common Stock for the periods presented (in thousands except share and per share data): Three Months Ended March 31, Nine Months Ended March 31, 2020 2019 2020 2019 Reconciliation of numerator for net income available to Class A Common Stock per share to Adjusted Fully Distributed Net Income per Share of Class A Common Stock: Net income attributable to Malibu Boats, Inc. $ 22,778 $ 21,099 $ 55,359 $ 46,654 Provision for income taxes 6,987 7,321 16,872 15,023 Professional fees 1 124 189 500 572 Acquisition and integration related expenses 2 1,053 2,217 3,200 8,015 Fair market value adjustment for interest rate swap 3 10 93 68 225 Stock-based compensation expense 4 816 735 2,306 1,866 Engine development 5 — 932 — 2,871 UAW strike impact 6 877 — 2,564 — Adjustments to tax receivable agreement liability 7 (1,650) (707) (1,650) (707) Net income attributable to non-controlling interest 8 1,088 1,104 2,787 2,562 Fully distributed net income before income taxes 32,083 32,983 82,006 77,081 Income tax expense on fully distributed income before income taxes 9 7,539 7,949 19,271 18,577 Adjusted fully distributed net income $ 24,544 $ 25,034 $ 62,735 $ 58,504 38 Table of Contents Three Months Ended March 31, Nine Months Ended March 31, 2020 2019 2020 2019 Reconciliation of denominator for net income available to Class A Common Stock per share to Adjusted Fully Distributed Net Income per Share of Class A Common Stock: Weighted average shares outstanding of Class A Common Stock used for basic net income per share: 20,630,741 20,901,547 20,684,034 20,805,912 Adjustments to weighted average shares of Class A Common Stock: Weighted-average LLC units held by non-controlling unit holders 10 805,822 838,496 822,042 896,808 Weighted-average unvested restricted stock awards issued to management 11 181,015 132,549 146,905 129,844 Adjusted weighted average shares of Class A Common Stock outstanding used in computing Adjusted Fully Distributed Net Income per Share of Class A Common Stock: 21,617,578 21,872,592 21,652,981 21,832,564 The following table shows the reconciliation of net income available to Class A Common Stock per share to Adjusted Fully Distributed Net Income per Share of Class A Common Stock for the periods presented: Three Months Ended March 31, Nine Months Ended March 31, 2020 2019 2020 2019 Net income available to Class A Common Stock per share $ 1.11 $ 1.01 $ 2.68 $ 2.24 Impact of adjustments: Provision for income taxes 0.34 0.35 0.82 0.72 Professional fees 1 — 0.01 0.02 0.03 Acquisition and integration related expenses 2 0.05 0.11 0.15 0.39 Fair market value adjustment for interest rate swap 3 — — — 0.01 Stock-based compensation expense 4 0.04 0.04 0.11 0.09 Engine development 5 — 0.05 — 0.14 UAW strike impact 6 0.04 — 0.12 — Adjustment to tax receivable agreement liability 7 (0.08) (0.03) (0.08) (0.03) Net income attributable to non-controlling interest 8 0.05 0.05 0.13 0.12 Fully distributed net income per share before income taxes 1.55 1.59 3.95 3.71 Impact of income tax expense on fully distributed income before income taxes 9 (0.37) (0.38) (0.94) (0.89) Impact of increased share count 12 (0.05) (0.06) (0.12) (0.14) Adjusted Fully Distributed Net Income per Share of Class A Common Stock $ 1.13 $ 1.15 $ 2.89 $ 2.68 39 Table of Contents (1) Represents legal and advisory fees related to our litigation with Skier's Choice, Inc. See Note 17 to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report. (2) For the three months and nine months ended March 31, 2020, represents amortization of intangibles acquired in connection with the acquisition of Pursuit and Cobalt. For the three and nine months ended March 31, 2019, represents legal and advisory fees incurred in connection with our acquisition of Pursuit on October 15, 2018 and integration costs related to our acquisitions of Pursuit and Cobalt. Integration related expenses for the nine months ended March 31, 2019 include post-acquisition adjustments to cost of goods sold of $0.9 million for the fair value step up of inventory acquired at Pursuit, most of which was sold during the second quarter of fiscal 2019. In addition, for the three and nine months ended March 31, 2019, integration related expenses includes $0.4 million and $0.8 million respectively, in depreciation and amortization associated with our fair value step up of property, plant and equipment and intangibles acquired in connection with the acquisition of Pursuit. Also, for the three and nine months ended March 31, 2019, integration related expenses includes $0.7 million and $2.2 million, respectively, in amortization associated with our fair value step up of intangibles acquired in connection with the acquisition of Cobalt. (3) Represents the change in the fair value of our interest rate swap entered into on July 1, 2015. The swap matured on March 31, 2020. (4) Represents equity-based incentives awarded to certain of our employees under the Malibu Boats, Inc. Long-Term Incentive Plan and profit interests issued under the previously existing limited liability company agreement of the LLC. See Note 15 to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report. (5) Represents costs incurred in connection with our vertical integration of engines including product development costs and supplier transition performance incentives. (6) For the three and nine months ended March 31, 2020, represents costs incurred in connection with interruption to our engine supply during the UAW strike against General Motors. We purchase engines from General Motors LLC that we then prepare for marine use for our Malibu and Axis boats. During the UAW strike, General Motors suspended delivery of engine blocks to us and we incurred costs by entering into purchase agreements with two suppliers for additional engines to supplement our inventory of engine blocks for Malibu and Axis boats. (7) For the three and nine months ended March 31, 2020 and March 31, 2019 we recognized other income from an adjustment in our tax receivable agreement liability as a result of a decrease in the estimated tax rate used in computing our future tax obligations and in turn, a decrease in the future tax benefit we expect to pay under our tax receivable agreement with pre-IPO owners. (8) Reflects the elimination of the non-controlling interest in the LLC as if all LLC members had fully exchanged their LLC Units for shares of Class A Common Stock. (9) Reflects income tax expense at an estimated normalized annual effective income tax rate of 23.5% and 24.1% of income before income taxes for the three and nine month periods ended March 31, 2020 and 2019, respectively, assuming the conversion of all LLC Units into shares of Class A Common Stock. The estimated normalized annual effective income tax rate for fiscal year 2020 is based on the federal statutory rate plus a blended state rate adjusted for the research and development tax credit, the foreign derived intangible income deduction, and foreign income taxes attributable to our Australian subsidiary. (10) Represents the weighted average shares outstanding of LLC Units held by non-controlling interests assuming they were exchanged into Class A Common Stock on a one-for-one basis. (11) Represents the weighted average unvested restricted stock awards included in outstanding shares during the applicable period that were convertible into Class A Common Stock and granted to members of management. (12) Reflects impact of increased share counts assuming the exchange of all weighted average shares outstanding of LLC Units into shares of Class A Common Stock and the conversion of all weighted average unvested restricted stock awards included in outstanding shares granted to members of management. 40 Table of Contents Liquidity and Capital Resources Our primary sources of funds are cash provided by operating activities and borrowings under our credit agreement. Our primary use of funds has been for acquisitions, repayments under our debt arrangements, capital investments, cash distributions to members of the LLC and cash payments under our tax receivable agreement. As noted above, we elected to draw the remaining available funds of $98.8 million from our revolving credit facility in late March. As of May 5, 2020, we had approximately $113.0 million of cash on hand, with no available amounts for borrowing under our revolving credit facility. Our cash position going forward will depend on multiple factors, including our ability to continue operations and production of boats, the COVID-19 pandemic’s effects on our dealers and customers, the availability of sufficient amounts of financing, and our operating performance. Further, our dealers may seek credit support or other assurances from us that could affect our costs of doing business or liquidity. The following table summarizes the cash flows from operating, investing and financing activities (dollars in thousands): Nine Months Ended March 31, 2020 2019 Total cash provided by (used in): Operating activities $ 74,181 $ 46,411 Investing activities (30,143) (110,801) Financing activities 63,098 18,331 Impact of currency exchange rates on cash balances (366) (75) Increase (decrease) in cash $ 106,770 $ (46,134) Comparison of the Nine Months Ended March 31, 2020 to the Nine Months Ended March 31, 2019 Operating Activities Net cash provided by operating activities was $74.2 million for the nine months ended March 31, 2020, compared to $46.4 million for the nine months ended March 31, 2019, an increase of $27.8 million. The increase in cash provided by operating activities primarily resulted from a net increase in operating assets and liabilities of $13.2 million related to the timing of collections of accounts receivables, payments for accruals and payables, and purchases of inventory and an increase of $14.6 million due to increases in net income (after consideration of non-cash items included in net income, primarily related to depreciation, amortization, deferred tax assets and non-cash compensation). Investing Activities Net cash used for investing activities was $30.1 million for the nine months ended March 31, 2020, compared to $110.8 million for the nine months ended March 31, 2019, a decrease of $80.7 million. The decrease in cash used for investing activities was primarily related to our acquisition of Pursuit in the nine months ended March 31, 2019, partially offset by the increase in capital outlays for our expansion activities at our Pursuit and Cobalt plants and normal purchases for manufacturing infrastructure, molds and equipment for the nine months ended March 31, 2020. Financing Activities Net cash provided by financing activities was $63.1 million for the nine months ended March 31, 2020, compared to net cash provided by financing activities of $18.3 million for the nine months ended March 31, 2019, an increase of $44.8 million. For the nine months ended March 31, 2020, we received $103.8 million in proceeds from our credit facility primarily to provide financial flexibility in light of the current uncertainty resulting from the COVID-19 pandemic. We repurchased $13.8 million of our Class A Common Stock under our previously announced stock repurchase program. We repaid $25.0 million of revolving debt and we paid $1.4 million in distributions to LLC unit holders and $0.8 million on taxes for shares withheld on restricted stock vestings and we received $0.4 million in proceeds from the exercise of stock options during the nine months ended March 31, 2020. During the nine months ended March 31, 2019, we received $55.0 million in proceeds from our credit facility primarily to fund the acquisition of Pursuit, we repaid $35.0 million of revolving debt borrowed for the Pursuit acquisition, we paid $1.2 million in distributions to LLC unit holders and $1.2 million on taxes for shares withheld on restricted stock vestings and we received $0.7 million proceeds from the exercise of stock options. Loans and Commitments We currently have a revolving credit facility with borrowing capacity of up to $120.0 million and a $75.0 million term loan outstanding. As of March 31, 2020, we had $118.8 million outstanding under our revolving credit facility and $1.2 million in outstanding letters of credit. On March 19, 2020 we elected to draw the remaining available funds of $98.8 million from the 41 Table of Contents revolving credit facility to provide financial flexibility in light of the current uncertainty resulting from the COVID-19 pandemic. The revolving credit facility matures on July 1, 2024 and the term loan matures on July 1, 2022. The revolving credit facility and term loan are governed by a credit agreement with Malibu Boats, LLC (“Boats LLC”) as the borrower and Truist Financial Corp. (formerly known as SunTrust Bank), as the administrative agent, swingline lender and issuing bank. The obligations of Boats LLC under the credit agreement are guaranteed by Malibu Boats Holdings, 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 Malibu Boats Holdings LLC, Boats LLC and such subsidiary guarantors. Malibu Boats, Inc. is not a party to the credit agreement. Borrowings under our credit agreement bear interest at a rate equal to either, at our option, (i) the highest of the prime rate, the Federal Funds Rate plus 0.5%, or one-month LIBOR plus 1% (the “Base Rate”) or (ii) LIBOR, in each case plus an applicable margin ranging from 1.25% to 2.25% with respect to LIBOR borrowings and 0.25% to 1.25% with respect to Base Rate borrowings. The applicable margin will be based upon the consolidated leverage ratio of Malibu Boats Holdings, LLC and its subsidiaries calculated on a consolidated basis. As of March 31, 2020, the interest rate on our term loan and revolving credit facility was 2.24%. We are required to pay a commitment fee for the unused portion of the revolving credit facility, which will range from 0.20% to 0.40% per annum, depending on Malibu Boats Holdings, LLC’s and its subsidiaries’ consolidated leverage ratio. The credit agreement permits prepayment of the term loan without any penalties. On August 17, 2017 we made a voluntary principal payment on the term loan in the amount of $50.0 million with a portion of the net proceeds from our equity offering completed on August 14, 2017. We exercised our option to apply the prepayment in forward order to principal installments on our term loan through December 31, 2021 and a portion of the principal installments due on March 31, 2022. As a result, the term loan is subject to a quarterly installment of approximately $3.0 million on March 31, 2022 and the balance of the term loan 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. As of March 31, 2020, the outstanding principal amount of our term loan and revolving credit facility was $193.8 million. 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 Malibu Boats Holdings, 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 $2.0 million in any fiscal year, and (iv) share repurchase payments up to $35.0 million in any fiscal year subject to one-year carry forward and compliance with other financial covenants. In addition, the LLC may make dividends and distributions of up to $10.0 million in any fiscal year, subject to compliance with other financial covenants. Potential Impact of LIBOR Transition The Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rate, or LIBOR, has announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. That announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Moreover, it is possible that LIBOR will be discontinued or modified prior to 2021. All of our $193.8 million of debt outstanding under our credit agreement as of March 31, 2020 bears interest at a floating rate that uses LIBOR as the applicable reference rate to calculate the interest. Our credit agreement provides that, if the administrative agent has determined that adequate means do not exist for ascertaining LIBOR or that LIBOR does not adequately and fairly reflect the cost to lenders for making, funding or maintaining their loans, then all of our outstanding loans under the credit agreement will be converted into loans that accrue interest at the alternative Base Rate described above under “Loans and Commitments” on the last day of such interest period that determination is made. Further, the lenders under our credit agreement will no longer be obligated to make loans using LIBOR as the applicable reference rate. In addition, our tax receivable agreement provides that, if for any reason the LLC is not able to make a tax distribution in an amount that is sufficient to make any required payment under the tax receivable agreement or we otherwise lack sufficient 42 Table of Contents funds, interest would accrue on any unpaid amounts at LIBOR plus 500 basis points until they are paid. Our tax receivable agreement, however, does not provide for an alternative reference rate to LIBOR and, while we do not currently anticipate failing to pay any amounts owed under our tax receivable agreement, it is unclear how we would determine interest on any such amounts should we fail to pay as required under our tax receivable agreement. If the rate used to calculate interest on our outstanding floating rate debt under our credit agreement that currently uses LIBOR were to increase by 1.0% either as a result of an increase in LIBOR or the result of the use of the alternative Base Rate, we would expect to incur additional interest expense on such indebtedness as of March 31, 2020 of approximately $1.9 million on an annualized basis. While we do not expect the potential impact of any LIBOR transition to have a material effect on our financial results based on our currently outstanding debt, uncertainty as to the nature of potential changes to LIBOR, fallback provisions, alternative reference rates or other reforms could adversely impact our interest expense on our floating rate debt that currently uses LIBOR as the applicable reference rate. In addition, any alternative reference rates to LIBOR may result in interest that does not correlate over time with the payments that would have been made on our indebtedness if LIBOR was available in its current form. Further, the discontinuance or modification of LIBOR and uncertainty of an alternative reference rate may result in the increase in the cost of future indebtedness, which could have a material adverse effect on our financial condition, cash flow and results of operations. We intend to closely monitor the financial markets and the use of fallback provisions and alternative reference rates in 2020 in anticipation of the discontinuance or modification of LIBOR by the end of 2021. Future Liquidity Needs and Capital Expenditures Management believes that our existing cash and cash flows from operations will be sufficient to fund our operations for the next 12 months. Our future capital requirements will depend on many factors, including the general economic environment in which we operate and our ability to generate cash flow from operations, which are more uncertain as a result of the COVID-19 pandemic and its impact on the general economy. Our liquidity needs during this uncertain time will depend on multiple factors, including our ability to continue operations and production of boats, the COVID-19 pandemic’s effects on our dealers and customers, the availability of sufficient amounts of financing, and our operating performance. We estimate that approximately $3.5 million will be due under the tax receivable agreement within the next 12 months. In accordance with the tax receivable agreement, the next payment is anticipated to occur approximately 75 days after filing the federal tax return which was filed on March 13, 2020. Management expects minimal effect on our future liquidity and capital resources. Management expects our capital expenditures for fiscal year 2020 to be higher than our 2019 capital expenditures primarily driven by facility expansion projects at Cobalt and Pursuit. Capital expenditures for fiscal year 2020 are expected to consist primarily of the completion of ongoing projects, new tooling, and expenditures to increase production capacity to accommodate future growth. Stock Repurchase Program On June 18, 2019, our Board of Directors authorized a stock repurchase program to allow for the repurchase of up to $35.0 million of our Class A Common Stock and the LLC's LLC Units (the “Repurchase Program”) for the period from July 1, 2019 to July 1, 2020. We intend to fund repurchases under the Repurchase Program from cash on hand. During the nine months ended March 31, 2020, we repurchased 483,679 shares of Class A Common Stock for $13.8 million in cash including related fees and expenses. As of March 31, 2020, we may repurchase up to an additional $21.2 million in shares of Class A Common Stock and LLC Units under the program. 43 Table of Contents Contractual Obligations and Commitments Since June 30, 2019, we borrowed a net $78.8 million under our revolving credit facility to provide financial flexibility in light of the current uncertainty resulting from the COVID-19 pandemic. As of March 31, 2020, we had $118.8 million outstanding under our revolving credit facility and $75.0 million outstanding on our term loans. As of March 31, 2020, our continuing contractual obligations were as follows: Payments Due by Period Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Bank debt 1 $ 193,800 $ — $ 75,000 $ 118,800 $ — Interest expense 2 19,788 5,704 9,719 4,365 — Operating leases 3 18,785 2,555 4,744 4,908 6,578 Purchase obligations 4 67,673 67,673 — — — Payments pursuant to tax receivable agreement 5 52,544 3,477 7,300 7,727 34,040 Total $ 352,590 $ 79,409 $ 96,763 $ 135,800 $ 40,618 (1) Principal payments on our outstanding bank debt per terms of our Credit Agreement, which is comprised of a $75.0 million term loan and $120.0 million revolving credit facility, of which $118.8 million was outstanding as of March 31, 2020. Assumes no additional borrowings or repayments under our revolving credit facility prior to its maturity. The term loan matures on July 1, 2022 and the revolving credit facility matures on July 1, 2024. (2) Interest payments on our outstanding term loans and borrowings under our revolving credit facility under our Credit Agreement. Our term loan and revolving credit facility bear interest at variable rates. We have calculated future interest obligations based on the interest rate as of March 31, 2020. (3) Pursuant to the adoption of ASC Topic 842, Leases , as of July 1, 2019 our lease liability for all leases with terms greater than 12 months as represented on the balance sheet respective of maturity. (4) As part of the normal course of business, we enter into purchase orders from a variety of suppliers, primarily for raw materials, in order to manage our various operating needs. The orders are expected to be purchased throughout fiscal year 2020. (5) Reflects amounts owed under our tax receivables agreement that we entered into with our pre-IPO owners at the time of our IPO. Under the tax receivables agreement, we pay the pre-IPO owners (or any permitted assignees) 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize, or in some circumstances are deemed to realize, as a result of an expected increase in our share of tax basis in LLC’s tangible and intangible assets, including increases attributable to payments made under the tax receivable agreement. These obligations will not be paid if we do not realize cash tax savings. Off Balance Sheet Arrangements In connection with our dealers’ wholesale floor plan financing of boats, we have entered into repurchase arrangements with various lending institutions. The repurchase commitment is on an individual unit basis with a term from the date it is financed by the lending institution through payment date by the dealer, generally not exceeding two and a half years. Such arrangements are customary in the industry and our exposure to loss under such arrangements is limited by the resale value of the inventory which is required to be repurchased. Refer to Note 17 of our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report for further information on repurchase commitments. Seasonality Our dealers experience seasonality in their business. Retail demand for boats is seasonal, with a significant majority of sales occurring during peak boating season, which coincides with our first and fourth fiscal quarters. In order to minimize the impact of this seasonality on our business, we manage our manufacturing processes and structure dealer incentives to tie our annual volume rebates program to consistent ordering patterns, encouraging dealers to purchase our products throughout the year. In this regard, we may offer free flooring incentives to dealers. Further, in the event that a dealer does not consistently order units throughout the year, such dealer’s rebate is materially reduced. We may offer off-season retail promotions to our dealers in seasonally slow months, during and ahead of boat shows, to encourage retail demand. Critical Accounting Policies As of March 31, 2020, there were no other significant changes in the application of our critical accounting policies or estimation procedures from those presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019. 44 Table of Contents