S-1 1 d621288ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on December 13, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

MALIBU BOATS, INC.

(Exact Name of Registrant as specified in its charter)

 

 

 

Delaware   3730   46-4024640

(State or other jurisdiction of

incorporation or organization)

 

(Primary standard industrial

classification code number)

 

(I.R.S. Employer

Identification No.)

5075 Kimberly Way

Loudon, Tennessee 37774

(865) 458-5478

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Jack D. Springer

Chief Executive Officer

5075 Kimberly Way

Loudon, Tennessee 37774

(865) 458-5478

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

J. Chase Cole, Esq.

Waller Lansden Dortch & Davis, LLP

511 Union Street, Suite 2100

Nashville, Tennessee 37219

(615) 244-6380

 

Anna T. Pinedo, Esq.

Morrison & Foerster LLP

1290 Avenue of the Americas

New York, New York 10104

(212) 468-8179

 

 

Approximate date of commencement of propose sale to the public: As soon as practicable after effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   þ  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

  Proposed Maximum Aggregate  

Offering Price(1)(2)

 

Amount of

  Registration Fee(3)  

Class A Common Stock, $0.01 par value

  $115,000,000   $14,812

 

 

(1) Includes shares of Class A Common Stock to be sold by the selling stockholders and shares to be sold upon exercise of the underwriters’ allotment option.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended, or the Securities Act.
(3) Calculated pursuant to Rule 457(o) under the Securities Act based on the proposed maximum offering price.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated December 13, 2013

PRELIMINARY PROSPECTUS

            Shares

 

LOGO

MALIBU BOATS, INC.

Class A Common Stock

 

 

This is the initial public offering of Class A Common Stock of Malibu Boats, Inc. No public market currently exists for our shares. Malibu Boats, Inc. is a newly-formed holding company that will hold an interest in, and be the sole managing member of, Malibu Boats Holdings, LLC.

We are selling              shares of our Class A Common Stock and the selling stockholders identified in this prospectus are offering              shares of our Class A Common Stock. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders. We intend to use a portion of the net proceeds from this offering to purchase equity interests in Malibu Boats Holdings, LLC from our existing owners. We expect that the initial public offering price will be between $             and $             per share. We have applied to list our Class A Common Stock on the Nasdaq Global Market under the symbol “MBUU.”

Immediately following this offering, the holders of our Class A Common Stock will collectively own 100% of the economic interest in Malibu Boats, Inc., which will own approximately     % of the economic interest in Malibu Boats Holdings, LLC. Immediately following this offering, the holders of our Class A Common Stock will collectively have approximately     % of the voting power of Malibu Boats, Inc., and holders of our Class B Common Stock will collectively have approximately     % of the voting power of Malibu Boats, Inc.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act and, as such, may elect to comply with certain reduced public company reporting requirements after this offering.

Investing in our Class A Common Stock involves a high degree of risk. See “Risk Factors” beginning on page 18.

 

 

 

     Per
Share
     Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds to us, before expenses

   $         $     

Proceeds to selling stockholders, before expenses

   $         $     

 

 

We and the selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to              additional shares of Class A Common Stock to cover over-allotments.

Neither the Securities and Exchange Commission, or the SEC, nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Class A Common Stock to purchasers on or about                     , 2014.

 

 

 

RAYMOND JAMES   WELLS FARGO SECURITIES

 

 

 

SUNTRUST ROBINSON HUMPHREY   BMO CAPITAL MARKETS

The date of this prospectus is                     , 2014.


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     18   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     35   

USE OF PROCEEDS

     36   

DIVIDEND POLICY

     38   

CAPITALIZATION

     39   

DILUTION

     40   

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

     43   

SELECTED CONSOLIDATED FINANCIAL DATA

     51   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     54   

BUSINESS

     70   

HISTORY AND FORMATION TRANSACTIONS

     88   

MANAGEMENT

     95   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     106   

PRINCIPAL AND SELLING STOCKHOLDERS

     113   

DESCRIPTION OF CAPITAL STOCK

     117   

SHARES ELIGIBLE FOR FUTURE SALE

     122   

MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

     125   

UNDERWRITING

     130   

LEGAL MATTERS

     136   

EXPERTS

     136   

WHERE YOU CAN FIND MORE INFORMATION

     136   

INDEX TO FINANCIAL STATEMENTS

     F-1   

GLOSSARY OF SELECTED TERMS

     A-1   

 

 

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by us or on our behalf in connection with this offering. We have not, the selling stockholders have not and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, the selling stockholders are not and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

No action is being taken in any jurisdiction outside the United States to permit a public offering of the Class A Common Stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction.

 

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Unless otherwise expressly indicated or the context otherwise requires:

 

  Ÿ  

we use the terms “Malibu Boats,” the “Company,” “we,” “us,” “our” or similar references to refer (1) prior to the consummation of the offering transactions described under “History and Formation Transactions—Organizational Structure,” to Malibu Boats Holdings, LLC, or the LLC, and its consolidated subsidiaries and (2) after the offering transactions described under “History and Formation Transactions—Organizational Structure,” to Malibu Boats, Inc. and its consolidated subsidiaries;

 

  Ÿ  

we refer to the owners of membership interests in the LLC immediately prior to the offering transactions, collectively, as our “existing owners”;

 

  Ÿ  

references to “fiscal year” refer to the fiscal year of Malibu Boats, which ends on June 30. Fiscal years 2012 and 2013 for the LLC ended on June 30, 2012 and 2013, respectively. Fiscal year 2014 will end on June 30, 2014;

 

  Ÿ  

we use the term “performance sport boat category” to refer to our industry category, primarily consisting of fiberglass boats equipped with inboard propulsion and ranging from 19 feet to 26 feet in length, which we believe most closely corresponds to (1) the inboard ski/wakeboard category, as defined and tracked by the National Marine Manufacturers Association, or NMMA, and (2) the inboard skiboat category, as defined and tracked by Statistical Surveys, Inc., or SSI; and

 

  Ÿ  

references to certain market and industry data presented in this prospectus are determined as follows: (1) U.S. boat sales and unit volume for the overall powerboat industry and any powerboat category during any calendar year are based on retail boat market data from the NMMA; (2) U.S. market share and unit volume for the overall powerboat industry and any powerboat category during any calendar year ended December 31 are based on comparable same-state retail boat registration data from SSI, as reported by the 50 states for which data was available as of the date of this prospectus; (3) U.S. market share and unit volume for the overall powerboat industry and any powerboat category during any interim period ended June 30, including our fiscal year, are based on comparable same-state retail boat registration data from SSI, as reported by the 47 states for which data was available as of the date of this prospectus; (4) U.S. market share and unit volume for the overall powerboat industry and any powerboat category during any interim period ended September 30 are based on comparable same-state retail boat registration data from SSI, as reported by the 47 states for which data was available as of the date of this prospectus; and (5) market share among U.S. manufacturers of exports to international markets of boats in any powerboat category for any period is based on data from the Port Import Export Reporting Service, available through September 30, 2013, and excludes such data for Australia and New Zealand.

 

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PROSPECTUS SUMMARY

This summary highlights the information contained elsewhere in this prospectus, and is qualified in its entirety by reference to the more detailed information and financial statements appearing elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We include a glossary of some of the terms used in this prospectus as Appendix A. Before investing in our Class A Common Stock, you should read this entire prospectus, including the information set forth under the heading “Risk Factors” and the financial statements and the notes thereto.

Our Company

We are a leading designer, manufacturer and marketer of performance sport boats, having the #1 market share position in the United States since 2010. Our boats are used for water sports, including water skiing, wakeboarding and wake surfing, as well as general recreational boating. Since inception in 1982, we believe we have been a consistent innovator in the powerboat industry, designing products that appeal to an expanding range of recreational boaters and water sports enthusiasts whose passion for boating and water sports is a key aspect of their lifestyle. We believe many of our innovations, such as our proprietary Surf Gate technology launched in 2012, expand the market for our products by introducing consumers to new and exciting recreational activities. We believe that our boats are increasingly versatile, allowing consumers to use them for a wide range of activities that enhance the experience of a day on the water with family and friends. We believe that the performance, quality, value and multi-purpose features of our boats position us to achieve our goal of increasing our market share in the expanding recreational boating market.

We sell our high performance boats under two brands—Malibu and Axis Wake Research, or Axis. Our flagship Malibu brand boats offer our latest innovations in performance, comfort and convenience, and are designed for consumers seeking a premium boating experience. Retail prices of our Malibu boats typically range from $55,000 to $120,000. We launched our Axis brand of boats in 2009 to appeal to consumers who desire a more affordable product but still demand high performance, functional simplicity and the option to upgrade key features. Retail prices of our Axis boats typically range from $40,000 to $75,000.

All of our boats are built and tested at our corporate headquarters near Knoxville, Tennessee. Our boats are constructed of fiberglass, equipped with inboard propulsion systems and available in a range of sizes and hull designs. We employ experienced product development and engineering teams that enable us to offer a range of models across each of our brands while consistently introducing innovative features in our product offerings. Our engineering team closely collaborates with our manufacturing personnel in order to improve product quality and process efficiencies. The results of this collaboration are reflected in our achievement of higher margins than those of any public company in the powerboat industry and receipt of numerous industry awards, including the Watersports Industry Association’s Innovation of the Year in 2010 and 2013.

We sell our boats through a dealer network that we believe is the strongest in the performance sport boat category. As of September 30, 2013, our distribution channel consisted of 116 independent dealers in North America operating in 139 locations and 49 independent dealer locations across 36 countries outside of North America. Our boats are the exclusive performance sport boats offered by the majority of our dealers. Additionally, we have an exclusive licensee in Australia that we believe is the largest performance sport boat manufacturer in that country. Our

 

 

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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.

We have experienced significant growth in net sales and profitability over the last several years. For our fiscal year ended June 30, 2013, net sales and adjusted EBITDA were $167.0 million and $31.8 million, respectively, reflecting compound annual growth rates, or CAGRs, of 29.2% and 100.3%, respectively, over the period since fiscal year 2011. For the three months ended September 30, 2013, our net sales and adjusted EBITDA were $43.3 million and $8.2 million, an increase of 30.6% and 48.4%, respectively, compared to the three months ended September 30, 2012.

Our Strengths

#1 Market Share Position in Performance Sport Boat Category. We held the number one market share position in the United States among manufacturers of performance sport boats for 2010, 2011, 2012 and the nine months ended September 30, 2013. We have grown our U.S. market share from 23.2% in 2008, the year prior to the arrival of our current Chief Executive Officer and Chief Financial Officer, to 30.6% in 2012. The following table reflects our U.S. market share in the performance sport boat category compared to the market share of our competitors for the periods shown:

 

Manufacturer/Brand(s)

   U.S. Market Share in Performance Sport Boat  Category  
   2008     2012     Nine Months Ended
September 30, 2013
 

Malibu Boats/Malibu and Axis

     23.2     30.6     32.9

MasterCraft Boat Company, LLC/MasterCraft

     23.8        21.7        19.7   

Correct Craft, Inc./Nautique

     15.2        14.5        15.5   

Skier’s Choice, Inc./Supra and Moomba

     16.5        14.7        12.9   

All others

     21.3        18.5        19.0   
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0

In addition, our 40.1% market share of performance sport boat exports to international markets in the 12 months ended September 30, 2013 was the highest among U.S. manufacturers.

Performance Sport Boat Category Taking Share. As the recovery in the general economy and overall powerboat industry has continued, the performance sport boat category in which we participate has experienced one of the highest growth rates. New unit sales of performance sport boats in the United States increased by 13% from 2011 to 2012, while new unit sales of all other powerboats in the United States increased 10% over the same period. This trend continued in 2013, as new unit sales of performance sport boats and all other powerboats in the United States increased by 11% and 2%, respectively, during the nine months ended September 30, 2013. We believe this is largely attributable to increased innovation in the features, designs and layouts of performance sport boats, which has improved the performance, functionality and versatility of these boats versus other recreational powerboats, particularly the larger category of sterndrive boats. We believe that we have been at the forefront of product innovation and will continue to appeal to a broader consumer base that values our boats not only for water sports, but also for general recreational boating and leisure activities. We believe that our market-leading position within our expanding category will create continued growth opportunities for us.

 

 

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Poised to Take Advantage of the Performance Sport Boat Market Recovery. With our leading and growing market share in our category, we believe that we are well-positioned to take advantage of the ongoing recovery in the powerboat market. While the performance sport boat category grew 13% in 2012, new unit sales remained significantly below historical peaks. As illustrated in the chart below, the 5,500 new units sold in 2012 were 53% below the average annual new unit sales volume of 11,714 observed between 2001 and 2007 and 58% below the 13,100 new units sold in 2006. While there is no guarantee that the market will continue to grow or return to historical sales levels, we believe we are in the early stages of a recovery that presents significant opportunity for growth.

 

LOGO

Even if the performance sport boat market does not reach previous peak levels, we believe that our #1 market share position in a category that is growing faster than the overall powerboat industry, our investments in the Company during and subsequent to the economic downturn, and our innovative product offering should drive superior performance.

Industry-leading Product Design and Innovation. We believe that our innovation in the design of new boat models and new features has been a key to our success, helping us increase our market share within our category and generally broaden the appeal of our products among recreational boaters. As a result of the features we have introduced, we believe that our boats are used for an increasingly wide range of activities and are increasingly easier to use, while maintaining the high performance characteristics that consumers expect. Additionally, by introducing new boat models in a range of price points, sizes, bow and hull designs, and optional performance features, we have enhanced consumers’ ability to select a boat suited to their individual preferences. Our commitment to, and consistency in, developing new boat models and introducing new features are reflected in several notable achievements, including:

 

  Ÿ  

release of our patented Surf Gate technology in 2012, which allows users to surf on either side of the boat’s wake, generates a better quality surf wave and was the Watersports Industry Association’s Innovation of the Year in 2013;

 

 

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  Ÿ  

launch of the Axis brand of boats in 2009, designed from the ground up to be an entry-level product, which has already captured a 6.0% share of the U.S. market in our category; and

 

  Ÿ  

introduction of the patented Power Wedge in 2006, which gives boaters the ability to customize the size and shape of the boat’s wake with the push of a button.

Strong Dealer Network. We have worked diligently with our dealers to develop the strongest distribution network in the performance sport boat category. We believe that our distribution network of 139 North American dealer locations and 49 international dealer locations allows us to distribute our products more broadly and effectively than our competitors. For fiscal year 2013, our dealers held the #1 market share position for the performance sport boat category in 75 of 133 U.S. markets. We have nominal dealer concentration, with our largest dealer responsible for less than 6.0% of our unit volume and our top ten dealers representing 36.1% of our unit volume in fiscal year 2013. We continually review our geographic coverage to identify opportunities for expansion and improvement, and have added 33 new North American dealer locations in the past five years to address previously underserved markets. In addition, we have strengthened our dealer network by replacing 36 dealer locations in the past five years, 18 of which were converted from selling one of our competitor’s products.

Highly Recognized Brands. We believe our Malibu and Axis brands are widely recognized in the powerboat industry, which helps us reach a growing number of target consumers. For over 30 years, our Malibu brand has generated a loyal following of recreational boaters and water sports enthusiasts who value the brand’s premium performance and features. Our Axis brand has grown rapidly as consumers have been drawn to its more affordable price point and available optional features. We believe that the appeal of our high performance and innovative products with athletes and enthusiasts contributes to our brand awareness with dealers and with consumers. We are able to build on this brand recognition and support through a series of marketing initiatives coordinated with our dealers or executed directly by us. Many of our marketing efforts are conducted on a grass-roots level domestically and internationally. Key grass-roots initiatives include: production and distribution of water sports videos; online and social marketing; on-the-water events; athlete, tournament and water sport facility sponsorships; and participation and product placement at important industry events. Additionally, our boats, their innovative features, our sponsored athletes and our dealers all frequently win industry awards, which we believe further boosts our brand recognition and reputation for excellence. We believe our marketing strategies and accomplishments enhance our profile in the industry, strengthen our credibility with consumers and dealers and increase the appeal of our brands.

Compelling Margins and Cash Flow. Our margins are higher than those of any public company in the powerboat industry. In recent years, we have implemented a number of initiatives to reduce our cost base and improve the efficiency of our manufacturing process. Re-engineering the manufacturing process in our Tennessee facility has reduced labor hours per boat produced, and close collaboration between our product development and manufacturing teams has improved production throughput and product quality. Further, vertical integration of tower and tower accessory production has allowed us to increase incremental margin per boat sold. As a result of these and other initiatives, adjusted EBITDA for fiscal year 2013 grew 59.9% on net sales growth of 18.5%, as compared to fiscal year 2012. Our high margins, combined with our low capital expenditure requirements and a highly efficient working capital cycle, allow us to generate significant excess cash flow. We believe our strong cash flow increases our financial stability and provides us with more flexibility to invest in growth initiatives.

 

 

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Highly Experienced Management Team. Our experienced management team has demonstrated its ability to identify, create and integrate new product innovations, improve financial performance, optimize operations, enhance our distribution model and recruit top industry talent. Our Chief Executive Officer, Jack Springer, joined Malibu Boats in 2009 and has assembled an executive team with strong, complementary talents and experience. This team has led a workforce that we believe has produced superior results, including market share gains, sales growth and profitability improvement in each year since 2009.

Our Strategy

We intend to capitalize on the ongoing recovery in the powerboat market through the following strategies:

Continue to Develop New and Innovative Products in Our Core Markets. We intend to continue developing and introducing new and innovative products—both new boat models to better address a broader range of consumers and new features to deliver better performance, functionality, convenience, comfort and safety to our consumers. We believe that new products and features are important to the growth of our market share, the continued expansion of our category and our ability to maintain attractive margins.

Our product development strategy consists of a two-pronged approach. First, we seek to introduce new boat models to target unaddressed or underserved segments of the performance sport boat category, while also updating and refreshing our existing boat models regularly. For example, we introduced Axis-branded boats starting in 2009 to address the entry-level segment of our category, and we launched the Malibu Wakesetter MXZ product line in 2012 to enter the premium “picklefork” bow design segment of our market. Second, we seek to develop and integrate innovative new features into our boats, such as Surf Gate, Malibu Touch Command and Power Wedge. We intend to continue releasing new products and features multiple times during the year, which we believe enhances our reputation as a leading-edge boat manufacturer and provides us with a competitive advantage.

Capture Additional Share from Adjacent Boating Categories. Our culture of innovation has enabled us to expand the market for our products by attracting consumers from other categories, most notably from the sterndrive category. We intend to continue to enhance the performance, comfort and versatility of our products in order to further target crossover consumers seeking high-performance powerboats for general recreational activity. For example, we believe that one of our newest boat models, the Wakesetter 24MXZ, appeals to a broader range of recreational boaters by offering the performance benefits of our products, including superior drivability and water sports versatility, while also providing greater seating capacity, a roomy, plush interior and extensive storage space to allow an increased number of family and friends to spend time together on the water.

Further Strengthen Our Dealer Network. Our goal is to achieve and maintain leading market share in each of the markets in which we operate. We continually assess our distribution network and take the actions necessary to achieve our goal. We intend to strengthen our current footprint by selectively recruiting market-leading dealers who currently sell our competitors’ products. In addition, we plan to continue expanding our dealer network in certain geographic areas to increase consumer access and service in markets where it makes strategic sense. In the past five years, we have added 33 new dealer locations in the United States and Canada to provide incremental geographic coverage. We believe our targeted initiatives to enhance and grow our dealer network will increase unit sales in the future.

 

 

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Accelerate International Expansion. Based on our U.S. leadership position, brand recognition, diverse, innovative product offering and distribution strengths, we believe that we are well-positioned to increase our international sales. Our 40.1% market share of performance sport boat exports to international markets in the 12 months ended September 30, 2013 was the highest among U.S. manufacturers. Our unit sales outside of North America, however, represented less than 5.0% of our total sales volume in fiscal year 2013. We believe we will increase our international sales both by promoting our products in developed markets where we have a well-established dealer base, such as Western Europe, and by penetrating new and emerging markets where we expect rising consumer incomes to increase demand for recreational products, such as Asia and South America.

Our Market Opportunity

During 2012, retail sales of new powerboats in the United States totaled $5.8 billion. Of the powerboat categories defined and tracked by the NMMA, our core market corresponds most directly to the inboard ski/wakeboard category, which we refer to as the performance sport boat category. We believe our addressable market also includes similar and adjacent powerboat categories identified by the NMMA, including sterndrive boats, outboard boats and jet boats. For 2012, retail sales of new performance sport boats, sterndrive boats, outboard boats and jet boats in the United States were $375 million, $883 million, $2.6 billion and $160 million, respectively. As a result, we believe the total addressable market for our products in the United States alone is over $4 billion.

We believe we are well-positioned to benefit from several trends underway in our addressable market, including:

 

  Ÿ  

improving macroeconomic environment driving increased consumer demand for boats;

 

  Ÿ  

improved dealer inventory positions; and

 

  Ÿ  

increasing ages of used boats driving new boat sales.

For more information, see “Business—Market Opportunity.”

Our Structure

Malibu Boats, Inc. intends to use a portion of the proceeds from this offering to purchase newly-issued units of Malibu Boats Holdings, LLC, or the LLC Units, from the LLC for an aggregate of $             million. The LLC will use these proceeds (1) to pay down substantially all of the amounts owed on our credit facilities and term loans, (2) to pay Malibu Boats Investor, LLC, an affiliate, a fee of $3.75 million upon the consummation of this offering in connection with the termination of our management agreement and (3) for other general corporate purposes, as further described under “Use of Proceeds.” Malibu Boats, Inc. will use all of the remaining proceeds from this offering, or $             million (or $             million if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders), to purchase LLC Units from existing owners, as described under “History and Formation Transactions—Organizational Structure—Offering Transactions.” After the offering, Malibu Boats, Inc. will hold          LLC Units, representing a     % equity interest in the LLC.

Malibu Boats, Inc. is a Delaware corporation formed to serve as a holding company that will hold an interest in the LLC. Malibu Boats, Inc. has not engaged in any business or other activities

 

 

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other than in connection with its formation. The board of directors of Malibu Boats, Inc. includes four affiliates of the LLC. Our five director nominees who have been appointed and have agreed to become directors immediately following the completion of this offering are independent under the corporate governance standards under the rules of the Nasdaq Global Market, or Nasdaq, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. For more information, see “Management—Executive Officers and Directors.” Following this offering, Malibu Boats, Inc. will remain a holding company with an equity interest in the LLC. Malibu Boats, Inc. will become the sole managing member of the LLC, will operate and control all of its business and affairs and will consolidate its financial results. The limited liability company agreement of the LLC will be amended and restated to, among other things, modify its capital structure by replacing the different classes of interests currently held by our existing owners with a single new class of LLC Units and to provide that the conduct, control and management of the LLC shall be vested exclusively in Malibu Boats, Inc., as sole managing member. The other members of the LLC will not have the right to remove the sole managing member for any reason.

We and our existing owners will also enter into an exchange agreement under which (subject to the terms of the exchange agreement) they will have the right to exchange their LLC Units for shares of our Class A Common Stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications, or for cash (except in the event of a change in control), at our election. For more information, see “Certain Relationships and Related Party Transactions—Exchange Agreement.”

Holders of our Class A Common Stock and our Class B Common stock will have voting power over Malibu Boats, Inc., the sole managing member of the LLC, at a level that is consistent with their overall equity ownership of our business. In connection with the offering, Malibu Boats, Inc. will issue to each holder of a LLC Unit, for nominal consideration, one share of Class B Common Stock of Malibu Boats, Inc. each of which provides its owner with no economic rights but entitles the holder to one vote on matters presented to stockholders of Malibu Boats, Inc. for each LLC Unit held by such holder, as described in “Description of Capital Stock—Common Stock—Voting Rights.” Holders of our Class A Common Stock and Class B Common Stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.

As a result of these transactions:

 

  Ÿ  

the investors in this offering will collectively own              shares of our Class A Common Stock (or              shares of Class A Common Stock if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders);

 

  Ÿ  

our existing owners will hold          LLC Units, representing     % of the economic interest in the LLC (or              LLC Units, representing     % if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders);

 

  Ÿ  

the investors in this offering will collectively have     % of the voting power in Malibu Boats, Inc. (or     % if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders);

 

 

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  Ÿ  

our existing owners, through their holdings of our Class B Common Stock, will collectively have     % of the voting power in Malibu Boats, Inc. (or     % if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders); and

 

  Ÿ  

Malibu Boats, Inc. will hold          LLC Units (or          LLC Units if the underwriters exercise in full their over-allotment option to purchase additional shares of Class A Common Stock from us and the selling stockholders), representing     % of the economic interest in the LLC (or     % if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders) and will exercise exclusive control over the LLC, as its sole managing member.

We intend to enter into a voting agreement with certain affiliates. Under the voting agreement, Black Canyon Management LLC will be entitled to nominate to our board of directors a number of designees equal to (1) 20% of the total number of directors comprising our board of directors at such time as long as Black Canyon Management LLC and its affiliates and Messrs. Springer, Wilson and Anderson together beneficially own 15% or more of the voting power of the shares of Class A Common Stock and Class B Common Stock entitled to vote generally in the election of directors, voting together as a single class, and (2) 10% of the total number of directors comprising the board of directors at such time as long as Black Canyon Management LLC and its affiliates and Messrs. Springer, Wilson and Anderson together beneficially own more than 5% but less than 15% of the voting power of the shares of Class A Common Stock and Class B Common Stock entitled to vote generally in the election of directors, voting together as a single class. For purposes of calculating the number of directors that Black Canyon Management LLC is entitled to nominate pursuant to this formula, any fractional amounts would be rounded up to the nearest whole number and the calculation would be made on a pro forma basis, taking into account any increase in the size of the board of directors (e.g., one and one-third (1 1/3) directors equates to two directors). In addition, Black Canyon Management LLC will have the right to remove and replace its director-designees at any time and for any reason and to nominate any individual(s) to fill any such vacancies. Messrs. Springer, Wilson and Anderson will be required to vote any of their LLC Units in favor of the director or directors nominated by Black Canyon Management LLC. After the offering, Black Canyon Management LLC and its affiliates and Messrs. Springer, Wilson and Anderson together will beneficially own    % of the voting power of the shares of Class A Common Stock and Class B Common Stock.

 

 

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The diagram below depicts our organizational structure immediately following this offering and assumes all the shares offered hereby are sold, including the over-allotment:

 

LOGO

In connection with the offering, Malibu Boats, Inc. will enter into a tax receivable agreement with our existing owners that provides for the payment from time to time by Malibu Boats, Inc. to our existing owners of 85% of the amount of the benefits, if any, that Malibu Boats, Inc. is deemed to realize as a result of (1) increases in tax basis resulting from the purchases or exchanges of LLC Units and (2) certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. The actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including the timing of the purchases or exchanges, the price of shares of our Class A Common Stock at the time of the purchase or exchange, the extent to which such purchases or exchanges are taxable, and the amount and timing of our income. For more information, see “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

 

 

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Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding stockholder advisory “say-on-pay” votes on executive compensation and stockholder advisory votes on golden parachute compensation.

Under the JOBS Act, we will remain an “emerging growth company” until the earliest of:

 

  Ÿ  

the last day of the fiscal year during which we have total annual gross revenue of $1 billion or more;

 

  Ÿ  

the last day of the fiscal year following the fifth anniversary of the completion of this offering;

 

  Ÿ  

the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; and

 

  Ÿ  

the date on which we are deemed to be a “large accelerated filer” under the Exchange Act (we will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (1) more than $700 million in outstanding common equity held by our non-affiliates and (2) been public for at least 12 months; the value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter).

The JOBS Act also provides that an “emerging growth company” can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. Pursuant to Section 107 of the JOBS Act, we have chosen to “opt out” of such extended transition period and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not “emerging growth companies.” Under the JOBS Act, our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Summary of Risk Factors

Our business is subject to risks, as discussed more fully in the section entitled “Risk Factors” beginning on page 18. You should carefully consider all of the risks discussed in the “Risk Factors” section before investing in our Class A Common Stock. In particular, the following factors may have an adverse effect on our business, which could cause a decrease in the price of our Class A Common Stock and result in a loss of all or a portion of your investment:

 

  Ÿ  

general economic conditions, particularly in the United States, affect our industry, demand for our products, and our business and results of operations;

 

  Ÿ  

our annual and quarterly financial results are subject to significant fluctuations depending on various factors, many of which are beyond our control;

 

 

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  Ÿ  

we depend on our network of independent dealers, face increasing competition for dealers and have little control over their activities;

 

  Ÿ  

our success depends, in part, upon the financial health of our dealers and their continued access to financing;

 

  Ÿ  

we may be required to repurchase inventory of certain dealers;

 

  Ÿ  

if we fail to manage our manufacturing levels while still addressing the seasonal retail pattern for our products, our business and margins may suffer;

 

  Ÿ  

we have a large fixed cost base that will affect our profitability if our sales decrease;

 

  Ÿ  

our industry is characterized by intense competition, which affects our sales and profits;

 

  Ÿ  

our sales may be adversely impacted by increased consumer preference for used boats or the supply of new boats by competitors in excess of demand; and

 

  Ÿ  

our sales and profitability depend, in part, on the successful introduction of new products.

Corporate and Other Information

We were originally formed as a limited liability company in the State of Delaware in 2006. Following this offering, Malibu Boats, Inc. will be a holding company with an equity interest in the LLC. Our principal executive offices are located at 5075 Kimberly Way, Loudon, Tennessee 37774. Our telephone number is (865) 458-5478. Our website address is www.malibuboats.com. The reference to our website is an inactive textual reference only, and the information that can be accessed through our website is not part of this prospectus, and investors should not rely on any such information in deciding whether to purchase our Class A Common Stock.

This prospectus includes our trademarks, such as “Surf Gate” and “Wakesetter,” which are protected under applicable intellectual property laws and are the property of Malibu Boats. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.

Conflicts of Interest

SunTrust Bank, an affiliate of SunTrust Robinson Humphrey, Inc., one of the underwriters in this offering, is expected to receive more than 5% of the net proceeds of this offering in connection with the repayment of a portion of our credit facilities and term loans. See “Use of Proceeds.” Accordingly, this offering is being made in compliance with the requirements of Financial Industry Regulatory Authority, or FINRA, Rule 5121. As required by FINRA Rule 5121, SunTrust Robinson Humphrey, Inc. will not confirm sales to any account over which it exercises discretionary authority without the specific written approval of the accountholder. See “Underwriting—Conflicts of Interest.”

 

 

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THE OFFERING

 

Class A Common Stock offered by us

             shares.

 

Class A Common Stock offered by selling stockholders

             shares.

 

Overallotment option offered by us and selling stockholders

             shares.

 

Class A Common Stock to be outstanding after the offering

             shares (or              shares if all outstanding LLC Units held by our existing owners were exchanged for newly-issued shares of Class A Common Stock on a one-for-one basis).

 

Class B Common Stock outstanding after the offering

             shares, or one share for every holder of LLC Units.

 

Price per share of Class A Common Stock

$        

 

Use of proceeds

The proceeds to Malibu Boats, Inc. from this offering, before deducting underwriting discounts, will be approximately $         million (or $         million if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders).

 

  Malibu Boats, Inc. intends to use $         million of these proceeds to purchase LLC Units from the LLC, and will cause the LLC to use these proceeds (1) to pay down substantially all of the amounts owed on our credit facilities and term loans, (2) to pay Malibu Boats Investor, LLC, an affiliate, a fee of $3.75 million upon the consummation of this offering in connection with the termination of our management agreement and (3) for other general corporate purposes. Management will have significant flexibility in applying the net proceeds of the offering. See “Use of Proceeds.” We will not receive any of the proceeds from the sale of shares of Class A Common Stock offered by the selling stockholders.

 

 

Malibu Boats, Inc. intends to use all of the remaining proceeds from this offering, or $         million, (or $         million if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders) to purchase LLC Units from our existing owners, as described under “History and Formation Transactions—Organizational Structure—Offering Transactions.” We will only purchase LLC Units from members of senior management, however, if the underwriters exercise their over-allotment option to purchase additional

 

 

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shares of Class A Common Stock. We will not retain any of the proceeds used to purchase LLC Units from our existing owners. See “Principal and Selling Stockholders” for information regarding the proceeds from this offering that will be paid to our named executive officers.

 

Voting rights

Holders of our Class A Common Stock and our Class B Common stock will have voting power over Malibu Boats, Inc., the sole managing member of the LLC, at a level that is consistent with their overall equity ownership of our business. Each share of our Class A Common Stock entitles its holder to one vote on all matters to be voted on by stockholders generally.

 

  After the offering, each existing owner of the LLC will hold one share of Class B Common Stock. The shares of Class B Common Stock have no economic rights but entitle the holder to a number of votes on matters presented to stockholders of Malibu Boats, Inc. that is equal to the aggregate number of LLC Units held by such holder. See “Description of Capital Stock—Common Stock—Voting Rights.”

 

  Holders of our Class A Common Stock and Class B Common Stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.

 

  We intend to enter into a voting agreement with certain affiliates. Under the voting agreement, Black Canyon Management LLC will be entitled to nominate to our board of directors up to 20% of the total number of directors comprising our board of directors. See “Certain Relationships and Related Party Transactions—Voting Agreement.”

 

Exchange rights of holders of LLC Units

Prior to the closing of this offering, we will enter into an exchange agreement with our existing owners so that they may (subject to the terms of the exchange agreement) exchange their LLC Units for shares of Class A Common Stock of Malibu Boats, Inc. on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications, or for cash (except in the event of a change in control), at our election.

 

Risk factors

Investing in our Class A Common Stock involves a high degree of risk. Before buying any shares, you should read the discussion of material risks of investing in our Class A Common Stock in “Risk Factors” beginning on page 18.

 

 

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Proposed Nasdaq symbol

MBUU

In this prospectus, unless otherwise indicated, the number of shares of Class A Common Stock outstanding and the other information based thereon does not reflect:

 

  Ÿ  

             shares of Class A Common Stock issuable upon exercise of the underwriters’ option to purchase additional shares of Class A Common Stock from us and the selling stockholders;

 

  Ÿ  

             shares of Class A Common Stock issuable upon exchange of              LLC Units (or, if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders,              shares of Class A Common Stock issuable upon exchange of              LLC Units); and

 

  Ÿ  

             shares of Class A Common Stock that will be available for future grant under our Long-Term Incentive Plan, or the Incentive Plan, which will become effective on the date of the completion of this offering.

 

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

The summary historical consolidated financial data and other data of the LLC below should be read together with “History and Formation Transactions—Organizational Structure,” “Selected Consolidated Financial Data,” “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes, all included elsewhere in this prospectus.

We have derived the consolidated statement of income data for the fiscal years ended June 30, 2011, 2012 and 2013 and our consolidated balance sheet data as of June 30, 2011, 2012 and 2013 from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the consolidated statement of income data for the three months ended September 30, 2012 and 2013 and our consolidated balance sheet data as of September 30, 2013 from our unaudited consolidated financial statements included elsewhere in this prospectus. Certain of the measures set forth below are not measures recognized under generally accepted accounting principles in the United States, or GAAP. For a discussion of management’s reasons for presenting such data and a reconciliation to comparable financial measures calculated in accordance with GAAP, see “—GAAP Reconciliation of Non-GAAP Financial Measures.” Our historical results are not necessarily indicative of the results that may be expected in the future.

 

     Fiscal Year Ended June 30,     Three Months Ended
September 30,
 
     2011     2012     2013     2012     2013  
     (Dollars in thousands, except per share data)  

Consolidated statement of income data:

          

Net sales

   $ 99,984      $ 140,892      $ 167,012      $ 33,159        $43,304   

Cost of sales

     83,730        110,849        123,412        25,291        32,283   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     16,254        30,043        43,600        7,868        11,021   

Operating expenses:

          

Selling and marketing

     3,621        4,071        4,937        1,076        1,432   

General and administrative

     6,194        8,307        14,177        4,512        1,955   

Amortization

     5,178        5,178        5,178        1,294        1,294   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,261        12,487        19,308        986        6,340   

Other expense, net

     (1,804     (1,381     (1,324     (347     (1,161
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (543   $ 11,106      $ 17,984      $ 639        $  5,179   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic (loss) earnings per unit:

          

Class A Units

   $ (0.01   $ 0.26      $ 0.43      $ 0.02      $ 0.12   

Class B Units

   $ (0.01   $ 0.39      $ 0.43      $ 0.02      $ 0.12   

Class M Units

   $ (0.01   $ 0.12      $ 0.43      $ 0.02      $ 0.12   

Diluted (loss) earnings per unit:

          

Class A Units

   $ (0.01   $ 0.25      $ 0.42      $ 0.02      $ 0.12   

Class B Units

   $ (0.01   $ 0.39      $ 0.42      $ 0.02      $ 0.12   

Class M Units

   $ (0.01   $ 0.12      $ 0.42      $ 0.02      $ 0.12   

Supplemental pro forma net income available to Class A Common Stock per share (unaudited)(1):

          

Basic

       $          $     

Diluted

       $          $     

 

 

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     Fiscal Year Ended June 30,     Three Months
Ended

September 30,
 
     2011     2012     2013     2012     2013  
     (Dollars in thousands, except per share data)  

Consolidated balance sheet data:

          

Total assets

   $ 60,033      $ 64,725      $ 65,927      $ 59,447        $57,219   

Total liabilities

     45,566        39,280        45,913        48,726        89,755   

Total members’ equity (deficit)

     14,467        25,445        20,014        10,721        (32,536

Additional financial and other data:

          

Unit volume

     1,860        2,482        2,672        550        661   

Gross margin

     16.3     21.3     26.1     23.7     25.5

Adjusted EBITDA(2)

   $ 7,918      $ 19,863      $ 31,758      $ 5,496        $  8,155   

Adjusted EBITDA margin(2)

     7.9     14.1     19.0     16.6     18.8

 

(1) Pro forma basic and diluted net income per share were computed by dividing the pro forma net income attributable to the holders of Class A Common Stock by the              shares of Class A Common Stock that we will issue and sell in this offering (assuming that the underwriters do not exercise their option to purchase an additional              shares of Class A Common Stock to cover over-allotments). The shares of Class B Common Stock do not share in our earnings and, therefore, are not included in the weighted average number of shares outstanding or net income available per share.
(2) Adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. For definitions of adjusted EBITDA and adjusted EBITDA margin and a reconciliation of each to net income, see “—GAAP Reconciliation of Non-GAAP Financial Measures.”

GAAP Reconciliation of Non-GAAP Financial Measures

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 earnings before interest expense, income taxes, depreciation, amortization and non-cash, non-recurring and non-operating expenses, including severance and relocation, management fees and expenses, certain professional fees and non-cash compensation expense. We define adjusted EBITDA margin as adjusted EBITDA divided by net sales. Adjusted EBITDA and adjusted EBITDA margin are not measures of net income as determined by GAAP. Management believes adjusted EBITDA and adjusted EBITDA margin are useful because they allow management to evaluate our operating performance and compare the results of our operations from period to period and against our peers without regard to our financing methods, capital structure and non-recurring and 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.

 

 

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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:

 

     Fiscal Year Ended June 30,     Three Months Ended
September 30,
 
     2011     2012     2013         2012             2013      
     (Dollars in thousands)  

Consolidated statement of income data:

          

Net (loss) income

   $ (543   $ 11,106      $ 17,984      $ 639      $ 5,179   

Interest expense

     1,815        1,433        1,334        350        1,164   

Depreciation and amortization

     6,000        6,072        6,268        1,616        1,589   

Severance and relocation(1)

     112        181        192        192          

Management fees and expenses(2)

     27        87        2,896        2,099        22   

Professional fees(3)

     389        852        2,957        568        169   

Non-cash compensation expense(4)

     118        132        127        32        32   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 7,918      $ 19,863      $ 31,758      $ 5,496      $ 8,155   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA margin

     7.9     14.1     19.0     16.6     18.8

 

(1) Represents one-time employment related expenses, including a severance payment to a former executive, and costs to relocate certain departments from California to our Tennessee facility.
(2) Represents management fees and expenses paid pursuant to our management agreement with Malibu Boats Investor, LLC, an affiliate, which will be terminated upon the consummation of this offering. A portion of the management fees in fiscal year 2013 and all of the management fees in the three months ended September 30, 2012 reflect the payment of management fees pursuant to an amendment to the management agreement in July 2012. For more information about the management fees, see “Certain Relationships and Related Party Transactions—Management Agreement.”
(3) Represents legal and advisory fees related to our refinancing activities and legal expenses related to our litigation with Pacific Coast Marine Windshields Ltd. and Nautique Boat Company, Inc. For more information about this litigation, see “Business—Legal Proceedings.”
(4) Represents equity-based incentives awarded to certain of our employees.

 

 

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RISK FACTORS

Investing in our Class A Common Stock involves a high degree of risk. You should carefully consider the following risk factors, as well as other information in this prospectus, before deciding whether to invest in shares of our Class A Common Stock. The occurrence of any of the events described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the trading price of our Class A Common Stock may decline and you may lose all or part of your investment.

Risks Related to Our Business

General economic conditions, particularly in the United States, affect our industry, demand for our products, and our business and results of operations.

General economic conditions continue to be challenging as the economy recovers from the effects of the financial crisis that led to the last recession in the United States. Demand for new performance sport boats has been significantly influenced by weak economic conditions, low consumer confidence and high unemployment and increased market volatility worldwide, especially in the United States. In times of economic uncertainty and contraction, consumers tend to have less discretionary income and to defer or avoid expenditures for discretionary items, such as our products. Sales of our products are highly sensitive to personal discretionary spending levels, and our success depends on general economic conditions and overall consumer confidence and personal income levels. Any deterioration in general economic conditions that diminishes consumer confidence or discretionary income may reduce our sales and adversely affect our business, financial condition and results of operations. We cannot predict the duration or strength of an economic recovery, either in the United States or in the specific markets where we sell our products.

Consumers often finance purchases of our products. Although consumer credit markets have improved, consumer credit market conditions continue to influence demand, especially for boats, and may continue to do so. There continue to be fewer lenders, tighter underwriting and loan approval criteria and greater down payment requirements than in the past. If credit conditions worsen, and adversely affect the ability of consumers to finance potential purchases at acceptable terms and interest rates, it could result in a decrease in the sales of our products.

Our annual and quarterly financial results are subject to significant fluctuations depending on various factors, many of which are beyond our control.

Our sales and operating results can vary significantly from quarter to quarter and year to year depending on various factors, many of which are beyond our control. These factors include, but are not limited to:

 

  Ÿ  

seasonal consumer demand for our products;

 

  Ÿ  

discretionary spending habits;

 

  Ÿ  

changes in pricing in, or the availability of supply in, the used powerboat market;

 

  Ÿ  

variations in the timing and volume of our sales;

 

  Ÿ  

the timing of our expenditures in anticipation of future sales;

 

  Ÿ  

sales promotions by us and our competitors;

 

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  Ÿ  

changes in competitive and economic conditions generally;

 

  Ÿ  

consumer preferences and competition for consumers’ leisure time;

 

  Ÿ  

impact of unfavorable weather conditions;

 

  Ÿ  

changes in the cost or availability of our labor; and

 

  Ÿ  

increased fuel prices.

As a result, our results of operations may decline quickly and significantly in response to changes in order patterns or rapid decreases in demand for our products. We anticipate that fluctuations in operating results will continue in the future.

We depend on our network of independent dealers, face increasing competition for dealers and have little control over their activities.

Substantially all of our sales are derived from our network of independent dealers. We have agreements with the dealers in our network that typically provide for one-year terms, although some agreements have a term of up to three years. For fiscal year 2013, our top ten dealers accounted for 36.1% of our total units sold. The loss of a significant number of these dealers could have a material adverse effect on our financial condition and results of operations. The number of dealers supporting our products and the quality of their marketing and servicing efforts are essential to our ability to generate sales. Competition for dealers among performance sport boat manufacturers continues to increase based on the quality, price, value and availability of the manufacturer’s products, the manufacturer’s attention to customer service and the marketing support that the manufacturer provides to the dealers. We face intense competition from other performance sport boat manufacturers in attracting and retaining dealers, and we cannot assure you that we will be able to attract or retain relationships with qualified and successful dealers. We cannot assure you that we will be able to maintain or improve our relationship with our dealers or our market share position. A substantial deterioration in the number of dealers or quality of our network of dealers would have a material adverse effect on our business, financial condition and results of operations.

Our success depends, in part, upon the financial health of our dealers and their continued access to financing.

Because we sell nearly all of our products through dealers, their financial health is critical to our success. Our business, financial condition and results of operations may be adversely affected if the financial health of the dealers that sell our products suffers. Their financial health may suffer for a variety of reasons, including a downturn in general economic conditions, rising interest rates, higher rents, increased labor costs and taxes, compliance with regulations and personal financial issues.

In addition, our dealers require adequate liquidity to finance their operations, including purchases of our products. Dealers are subject to numerous risks and uncertainties that could unfavorably affect their liquidity positions, including, among other things, continued access to adequate financing sources on a timely basis on reasonable terms. These sources of financing are vital to our ability to sell products through our distribution network. Access to floor plan financing generally facilitates our dealers’ ability to purchase boats from us, and their financed purchases reduce our working capital requirements. If floor plan financing were not available to our dealers, our sales and our working capital levels would be adversely affected. The availability and terms of financing offered by our dealers’ floor plan financing providers will continue to be influenced by:

 

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their ability to access certain capital markets and to fund their operations in a cost-effective manner;

 

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the performance of their overall credit portfolios;

 

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their willingness to accept the risks associated with lending to dealers; and

 

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the overall creditworthiness of those dealers.

We may be required to repurchase inventory of certain dealers.

Many of our dealers have floor plan financing arrangements with third-party finance companies that enable the dealers to purchase our products. In connection with these agreements, we may have an obligation to repurchase our products from a finance company under certain circumstances, and we may not have any control over the timing or amount of any repurchase obligation nor have access to capital on terms acceptable to us to satisfy any repurchase obligation. This obligation is triggered if a dealer defaults on its debt obligations to a finance company, the finance company repossesses the boat and the boat is returned to us. Our obligation to repurchase a repossessed boat for the unpaid balance of our original invoice price for the boat is subject to reduction or limitation based on the age and condition of the boat at the time of repurchase, and in certain cases by an aggregate cap on repurchase obligations associated with a particular floor financing program. If we were obligated to repurchase a significant number of units under any repurchase agreement, our business, operating results and financial condition could be adversely affected.

If we fail to manage our manufacturing levels while still addressing the seasonal retail pattern for our products, our business and margins may suffer.

The seasonality of retail demand for our products, together with our goal of balancing production throughout the year, requires us to manage our manufacturing and allocate our products to our dealer network to address anticipated retail demand. Our dealers must manage seasonal changes in consumer demand and inventory. If our dealers reduce their inventories in response to weakness in retail demand, we could be required to reduce our production, resulting in lower rates of absorption of fixed costs in our manufacturing and, therefore, lower margins. As a result, we must balance the economies of level production with the seasonal retail sales pattern experienced by our dealers. Failure to adjust manufacturing levels adequately may have a material adverse effect on our financial condition and results of operations.

We have a large fixed cost base that will affect our profitability if our sales decrease.

The fixed cost levels of operating a powerboat manufacturer can put pressure on profit margins when sales and production decline. Our profitability depends, in part, on our ability to spread fixed costs over a sufficiently large number of products sold and shipped, and if we make a decision to reduce our rate of production, gross or net margins could be negatively affected. Consequently, decreased demand or the need to reduce production can lower our ability to absorb fixed costs and materially impact our financial condition or results of operations.

Our industry is characterized by intense competition, which affects our sales and profits.

The performance sport boat category, and the powerboat industry as a whole, is highly competitive for consumers and dealers. We also compete against consumer demand for used boats. Competition affects our ability to succeed in both the markets we currently serve and new markets that we may enter in the future. Competition is based primarily on brand name, price, product selection and product performance. We compete with several large manufacturers that may have greater financial, marketing and other resources than we do and who are represented by dealers in the markets in which we now operate and into which we plan to expand. We also compete with a

 

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variety of small, independent manufacturers. We cannot assure you that we will not face greater competition from existing large or small manufacturers or that we will be able to compete successfully with new competitors. Our failure to compete effectively with our current and future competitors would adversely affect our business, financial condition and results of operations.

Our sales may be adversely impacted by increased consumer preference for used boats or the supply of new boats by competitors in excess of demand.

During the economic downturn, we observed a shift in consumer demand toward purchasing more used boats, primarily because prices for used boats are typically lower than retail prices for new boats. If this were to continue or occur again, it could have the effect of reducing demand among retail purchasers for our new boats. Also, while we have taken steps designed to balance production volumes for our boats with demand, our competitors could choose to reduce the price of their products, which could have the effect of reducing demand for our new boats. Reduced demand for new boats could lead to reduced sales by us, which could adversely affect our business, results of operations or financial condition.

Our sales and profitability depend, in part, on the successful introduction of new products.

Market acceptance of our products depends on our technological innovation and our ability to implement technology in our boats. Our sales and profitability may be adversely affected by difficulties or delays in product development, such as an inability to develop viable or innovative new products. Our failure to introduce new technologies and product offerings that our markets desire could adversely affect our business, financial condition and results of operations. Also, we have been able to achieve higher margins in part as a result of the introduction of new features or enhancements to our existing boat models. If we fail to introduce new features or those we introduce fail to gain market acceptance, our margins may suffer.

In addition, some of our direct competitors and indirect competitors may have significantly more resources to develop and patent new technologies. It is possible that our competitors will develop and patent equivalent or superior technologies and other products that compete with ours. They may assert these patents against us and we may be required to license these patents on unfavorable terms or cease using the technology covered by these patents, either of which would harm our competitive position and may materially adversely affect our business.

We also cannot be certain that our products or technologies have not infringed or will not infringe the proprietary rights of others. Any such infringement could cause third parties, including our competitors, to bring claims against us, resulting in significant costs and potential damages.

We compete with a variety of other activities for consumers’ scarce leisure time.

Our boats are used for recreational and sport purposes, and demand for our boats may be adversely affected by competition from other activities that occupy consumers’ leisure time and by changes in consumer life style, usage pattern or taste. Similarly, an overall decrease in consumer leisure time may reduce consumers’ willingness to purchase and enjoy our products.

Our success depends upon the continued strength of our brands and the value of our brands and sales of our products could be diminished if we, the athletes who use our products or the sports and activities in which our products are used, are associated with negative publicity.

We believe that our brands are significant contributors to the success of our business and that maintaining and enhancing our brands are important to expanding our consumer and dealer base. Failure to continue to protect our brands may adversely affect our business, financial condition and results of operations.

 

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Negative publicity, including that resulting from severe injuries or death occurring in the sports and activities in which our products are used, could negatively affect our reputation and result in restrictions, recalls or bans on the use of our products. Further, actions taken by athletes associated with our products that harm the reputations of those athletes could also harm our brand image and adversely affect our financial condition. If the popularity of the sports and activities for which we design, manufacture and sell products were to decrease as a result of these risks or any negative publicity, sales of our products could decrease, which could have an adverse effect on our net revenue, profitability and operating results. In addition, if we become exposed to additional claims and litigation relating to the use of our products, our reputation may be adversely affected by such claims, whether or not successful, including by generating potential negative publicity about our products, which could adversely impact our business and financial condition.

We may not be able to execute our manufacturing strategy successfully, which could cause the profitability of our products to suffer.

Our manufacturing strategy is designed to improve product quality and increase productivity, while reducing costs and increasing flexibility to respond to ongoing changes in the marketplace. To implement this strategy, we must be successful in our continuous improvement efforts, which depend on the involvement of management, production employees and suppliers. Any inability to achieve these objectives could adversely impact the profitability of our products and our ability to deliver desirable products to our consumers.

Our ability to meet our manufacturing workforce needs is crucial to our results of operations and future sales and profitability.

We rely on the existence of an available hourly workforce to manufacture our boats. We cannot assure you that we will be able to attract and retain qualified employees to meet current or future manufacturing needs at a reasonable cost, or at all. Although none of our employees is currently covered by collective bargaining agreements, we cannot assure you that our employees will not elect to be represented by labor unions in the future. Additionally, competition for qualified employees could require us to pay higher wages to attract a sufficient number of employees. Significant increases in manufacturing workforce costs could materially adversely affect our business, financial condition or results of operations.

We rely on third-party suppliers and may be unable to obtain adequate raw materials and components.

We depend on third-party suppliers to provide components and raw materials essential to the construction of our boats. Historically, we have not entered into long-term agreements with our suppliers, but have developed 90-day forecast models with our major suppliers to minimize disruptions in our supply chain. While we believe that our relationships with our current suppliers are sufficient to provide the materials necessary to meet present production demand, we cannot assure you that these relationships will continue or that the quantity or quality of materials available from these suppliers will be sufficient to meet our future needs, irrespective of whether we successfully implement our growth strategy. In particular, the availability and cost of engines used in the manufacture of our boats are critical. For fiscal year 2013, we purchased nearly 100% of the engines for our boats from a single supplier. If we are required to replace this supplier or the supplier of any other key components or raw materials, it could cause a decrease in products available for sale or an increase in the cost of goods sold, either of which could adversely affect our business, financial condition and results of operations.

 

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We depend upon key personnel and we may not be able to retain them nor to attract, assimilate and retain highly qualified employees in the future.

Our future success will depend in significant part upon the continued service of our senior management team and our continuing ability to attract, assimilate and retain highly qualified and skilled managerial, product development, manufacturing, marketing and other personnel. The loss of the services of any members of our senior management or other key personnel or the inability to hire or retained qualified personnel in the future could adversely affect our business, financial condition and results of operations.

We may attempt to grow our business through acquisitions or strategic alliances and new partnerships, which we may not be successful in completing or integrating.

We may in the future explore acquisitions and strategic alliances that will enable us to acquire complementary skills and capabilities, offer new products, expand our consumer base, enter new product categories or geographic markets and obtain other competitive advantages. We cannot assure you, however, that we will identify acquisition candidates or strategic partners that are suitable to our business, obtain financing on satisfactory terms, complete acquisitions or strategic alliances or successfully integrate acquired operations into our existing operations. Once integrated, acquired operations may not achieve anticipate levels of sales or profitability, or otherwise perform as expected. Acquisitions also involve special risks, including risks associated with unanticipated challenges, liabilities and contingencies, and diversion of management attention and resources from our existing operations.

Our reliance upon patents, trademark laws and contractual provisions to protect our proprietary rights may not be sufficient to protect our intellectual property from others who may sell similar products and may lead to costly litigation. We are currently, and may be in the future, party to lawsuits and other intellectual property rights claims that are expensive and time consuming.

We hold patents and trademarks relating to various aspects of our products and believe that proprietary technical know-how is important to our business. Proprietary rights relating to our products are protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or trademarks or are maintained in confidence as trade secrets. We cannot be certain that we will be issued any patents from any pending or future patent applications owned by or licensed to us or that the claims allowed under any issued patents will be sufficiently broad to protect our technology. In the absence of enforceable patent or trademark protection, we may be vulnerable to competitors who attempt to copy our products, gain access to our trade secrets and know-how or diminish our brand through unauthorized use of our trademarks, all of which could adversely affect our business.

In addition, others may initiate litigation or other proceedings to challenge the validity of our patents, or allege that we infringe their patents, or they may use their resources to design comparable products that do not infringe our patents. We may incur substantial costs if our competitors initiate litigation to challenge the validity of our patents, or allege that we infringe their patents, or if we initiate any proceedings to protect our proprietary rights. Further, we may need to engage in future litigation to enforce intellectual property rights to protect trade secrets or to determine the validity and scope of proprietary rights of others. If the outcome of any such litigation is unfavorable to us, our business, financial condition and results of operations could be adversely affected.

We are currently a party to two legal proceedings arising from intellectual property matters. We are a plaintiff in a lawsuit alleging infringement by a competitor of our patent rights in certain wake surfing technology. We also are a defendant in a lawsuit alleging patent infringement and

 

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related claims in connection with windshields installed in our boats that we purchased from a third-party supplier. For more information, see “Business—Legal Proceedings.” Although we do not believe that either of these lawsuits will have a material adverse effect on our business, financial condition or results of operations, we cannot predict their outcome, and an unfavorable outcome could have an adverse impact on our business, financial condition or results of operation. Regardless of the outcome of such litigation or similar litigation in the future, it could significantly increase our costs and divert management’s attention from operation of our business, which could adversely affect our financial condition and results of operations.

Product liability, warranty and recall claims may materially affect our financial condition and damage our reputation.

We are engaged in a business that exposes us to claims for product liability and warranty claims in the event our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in property damage, personal injury or death. Although we maintain product and general liability insurance of the types and in the amounts that we believe are customary for the industry, we are not fully insured against all such potential claims. We may experience legal claims in excess of our insurance coverage or claims that are not covered by insurance, either of which could adversely affect our business, financial condition and results of operations. Adverse determination of material product liability and warranty claims made against us could have a material adverse effect on our financial condition and harm our reputation. In addition, if any of our products are, or are alleged to be, defective, we may be required to participate in a recall of that product if the defect or alleged defect relates to safety. These and other claims we face could be costly to us and require substantial management attention.

Our international markets require significant management attention, expose us to difficulties presented by international economic, political, legal and business factors, and may not be successful or produce desired levels of sales and profitability.

We currently sell our products throughout the world. Our total sales outside North America (including licensing royalties from our Australian licensee) were approximately 10% or less of our total revenue for fiscal years 2012 and 2013. International markets have, and will continue to be, a focus for sales growth. We believe many opportunities exist in the international markets, and over time we intend for international sales to comprise a larger percentage of our total revenue. Several factors, including weakened international economic conditions, could adversely affect such growth. The expansion of our existing international operations and entry into additional international markets require significant management attention. Some of the countries in which we market and our distributors or licensee sell our products are to some degree subject to political, economic or social instability. Our international operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions. These risks include, but are not limited to:

 

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increased costs of customizing products for foreign countries;

 

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unfamiliarity with local demographics, consumer preferences and discretionary spending patterns;

 

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the imposition of additional foreign governmental controls or regulations, including rules relating to environmental, health and safety matters and regulations and other laws applicable to publicly-traded companies, such as the Foreign Corrupt Practices Act, or the FCPA;

 

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new or enhanced trade restrictions and restrictions on the activities of foreign agents, representatives and distributors;

 

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the imposition of increases in costly and lengthy import and export licensing and other compliance requirements, customs duties and tariffs, license obligations and other non-tariff barriers to trade;

 

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the relative strength of the U.S. dollar compared to local currency, making our products less price-competitive relative to products manufactured outside of the United States;

 

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laws and business practices favoring local companies;

 

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longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; and

 

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difficulties in enforcing or defending intellectual property rights.

Our international operations may not produce desired levels of total sales, or one or more of the foregoing factors may harm our business, financial condition or results of operations.

An increase in energy costs may adversely affect our business, financial condition and results of operations.

Higher energy costs result in increases in operating expenses at our manufacturing facility and in the expense of shipping products to our dealers. In addition, increases in energy costs may adversely affect the pricing and availability of petroleum-based raw materials, such as resins and foams, that are used in our products. Also, higher fuel prices may have an adverse effect on demand for our boats, as they increase the cost of ownership and operation.

We are subject to U.S. and other anti-corruption laws, trade controls, economic sanctions and similar laws and regulations, including those in the jurisdictions where we operate. Our failure to comply with these laws and regulations could subject us to civil, criminal and administrative penalties and harm our reputation.

Doing business on a worldwide basis requires us to comply with the laws and regulations of various foreign jurisdictions. These laws and regulations place restrictions on our operations, trade practices, partners and investment decisions. In particular, our operations are subject to U.S. and foreign anti-corruption and trade control laws and regulations, such as the FCPA, export controls and economic sanctions programs, including those administered by the U.S. Treasury Department’s Office of Foreign Assets Control, or the OFAC. As a result of doing business in foreign countries and with foreign partners, we are exposed to a heightened risk of violating anti-corruption and trade control laws and sanctions regulations.

The FCPA prohibits us from providing anything of value to foreign officials for the purposes of obtaining or retaining business or securing any improper business advantage. It also requires us to keep books and records that accurately and fairly reflect our transactions.

Economic sanctions programs restrict our business dealings with certain sanctioned countries, persons and entities. In addition, because we act through dealers and distributors, we face the risk that our dealers, distributors or consumers might further distribute our products to a sanctioned person or entity, or an ultimate end-user in a sanctioned country, which might subject us to an investigation concerning compliance with OFAC or other sanctions regulations.

 

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Violations of anti-corruption and trade control laws and sanctions regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment. We cannot assure you that all of our local, strategic or joint partners will comply with these laws and regulations, in which case we could be held liable for actions taken inside or outside of the United States, even though our partners may not be subject to these laws. Such a violation could materially and adversely affect our reputation, business, results of operations and financial condition. Our continued international expansion, including in developing countries, and our development of new partnerships and joint venture relationships worldwide, could increase the risk of FCPA or OFAC violations in the future.

If we are unable to comply with environmental and other regulatory requirements, our business may be exposed to material liability or fines.

Our operations are subject to extensive regulation, including product safety, environmental and health and safety requirements, under various federal, state, local and foreign statutes, ordinances and regulations. While we believe that we are in material compliance with all applicable federal, state, local and foreign regulatory requirements, we cannot assure you that we will be able to continue to comply with applicable regulatory requirements. The failure to comply with applicable regulatory requirements could cause us to incur significant fines or penalties or could materially increase the cost of operations. In addition, legal requirements are constantly evolving, and changes in laws, regulations or policies, or changes in interpretations of the foregoing, could also increase our costs or create liabilities where none exists today.

As with boat construction in general, our manufacturing processes involve the use, handling, storage and contracting for recycling or disposal of hazardous substances and wastes. The failure to manage or dispose of such hazardous substances and wastes properly could expose us to material liability or fines. Also, the components to our boats may become subject to more stringent environmental regulations. For example, boat engines may be subject to more stringent emissions standards, which could increase the cost of our engines and our products, which, in turn, may reduce consumer demand for our products.

A natural disaster or other disruption at our manufacturing facilities could adversely affect our business, financial condition and results of operations.

We rely on the continuous operation of manufacturing facilities in Tennessee and California. Any natural disaster or other serious disruption to our facilities due to fire, flood, earthquake or any other unforeseen circumstances could adversely affect our business, financial condition and results of operations. The occurrence of any disruption at our manufacturing facilities may have an adverse effect on our productivity and profitability, during and after the period of the disruption. These disruptions may also cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage. Although we maintain property, casualty and business interruption insurance of the types and in the amounts that we believe are customary for the industry, we are not fully insured against all potential natural disasters or other disruptions to our manufacturing facilities.

Increases in income tax rates or changes in income tax laws or enforcement could have a material adverse impact on our financial results.

Changes in domestic and international tax legislation could expose us to additional tax liability. Although we monitor changes in tax laws and work to mitigate the impact of proposed changes, such changes may negatively impact our financial results. In addition, any increase in individual income

 

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tax rates, such as those implemented at the beginning of 2013, would negatively affect our potential consumers’ discretionary income and could decrease the demand for our products.

Our credit facilities contain covenants which may limit our operating flexibility; failure to comply with covenants may restrict our access to these.

In the past, we have relied upon our existing credit facilities to provide us with adequate liquidity to operate our business. The availability of borrowing amounts under our credit facilities are dependent upon compliance with the debt covenants set forth in our credit agreement. Violation of those covenants, whether as a result of operating losses or otherwise, could result in our lenders restricting or terminating our borrowing ability under our credit facilities. If our lenders reduce or terminate our access to amounts under our credit facilities, we may not have sufficient capital to fund our working capital and other needs and we may need to secure additional capital or financing to fund our operations or to repay outstanding debt under our credit facilities. We cannot assure you that we will be successful in ensuring our availability to amounts under our credit facilities or in connection with raising additional capital and that any amount, if raised, will be sufficient to meet our cash needs or on terms as favorable as have historically been available to us. If we are not able to maintain our borrowing availability under our credit facilities or raise additional capital when needed, our business and operations will be materially and adversely affected.

Risks Related to Our Organizational Structure

Our only material asset after completion of this offering will be our interest in the LLC, and we are accordingly dependent upon distributions from the LLC to pay taxes, make payments under the tax receivable agreement or pay dividends.

Malibu Boats, Inc. is a holding company and has no material assets other than our ownership of LLC Units. Malibu Boats, Inc. will have no independent means of generating revenue. We intend to cause the LLC to make distributions to its unit holders in an amount sufficient to cover all applicable taxes at assumed tax rates, payments under the tax receivable agreement and dividends, if any, declared by us. To the extent that we need funds, and the LLC is restricted from making such distributions under applicable law or regulation or under the terms of its financing arrangements, or is otherwise unable to provide such funds, it could materially adversely affect our liquidity and financial condition. For example, our credit agreement prohibits the LLC, Malibu Boats, LLC and Malibu Domestic International Sales Corp. from paying dividends or making distributions, subject to a number of exceptions, including distributions based on a member’s allocated taxable income, payments pursuant to stock option and other benefit plans, dividends and distributions within the loan parties and dividends payable solely in interests of classes of securities. In addition, after June 30, 2014, the LLC may make dividends and distributions of up to $4,000,000 in any fiscal year, subject to compliance with other financial covenants. We plan to enter an amendment to the credit agreement prior to the closing of the offering that will permit distributions to fund payments that are required under the tax receivable agreement.

We will be required to pay our existing owners for certain tax benefits we may claim arising in connection with this offering and related transactions, and the amounts we may pay could be significant.

Malibu Boats, Inc. intends to use a portion of the proceeds from this offering to purchase LLC Units from our existing owners. We will enter into a tax receivable agreement with our existing owners that provides for the payment by us to our existing owners of 85% of the tax benefits, if any, that we are deemed to realize as a result of (1) the increases in tax basis resulting from our purchases or exchanges of LLC Units and (2) certain other tax benefits related to our entering into

 

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the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. For more information, see “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

We expect that the payments that we may make under the tax receivable agreement may be substantial. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding tax receivable agreement payments. There may be a material negative effect on our liquidity if distributions to us by the LLC are not sufficient to permit us to make payments under the tax receivable agreement after we have paid taxes. For example, we may have an obligation to make tax receivable agreement payments for a certain amount while receiving distributions from the LLC in a lesser amount, which would negatively affect our liquidity. The payments under the tax receivable agreement are not conditioned upon our existing owners’ continued ownership of us.

We are required to make a good faith effort to ensure that we have sufficient cash available to make any required payments under the tax receivable agreement. The limited liability company agreement of the LLC requires the LLC to make “tax distributions” which, in the ordinary course, will be sufficient to pay our actual tax liability and to fund required payments under the tax receivable agreement. If for any reason the LLC is not able to make a tax distribution in an amount that is sufficient to make any required payment under the tax receivable agreement or we otherwise lack sufficient funds, interest would accrue on any unpaid amounts at the London Interbank Offered Rate, or LIBOR, plus 500 basis points until they are paid.

In certain cases, payments under the tax receivable agreement to our existing owners may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement.

The tax receivable agreement provides that, in the event that we exercise our right to early termination of the tax receivable agreement, or in the event of a change in control or a material breach by us of our obligations under the tax receivable agreement, the tax receivable agreement will terminate, and we will be required to make 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, which lump-sum payment would be based on certain assumptions, including those relating to our future taxable income. The change in control payment and termination payments to the existing owners could be substantial and could exceed the actual tax benefits that we receive as a result of acquiring LLC Units from the existing owners because the amounts of such payments would be calculated assuming that we would have been able to use the potential tax benefits each year for the remainder of the amortization periods applicable to the basis increases, and that tax rates applicable to us would be the same as they were in the year of the termination. In these situations, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity. There can be no assurance that we will be able to finance our obligations under the tax receivable agreement.

Payments under the tax receivable agreement will be based on the tax reporting positions that we determine. Although we are not aware of any issue that would cause the Internal Revenue Service, or the IRS, to challenge a tax basis increase, Malibu Boats, Inc. will not be reimbursed for any payments previously made under the tax receivable agreement. As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of the benefits that Malibu Boats, Inc. actually realizes in respect of (1) the increases in tax basis resulting from our purchases or exchanges of LLC Units and (2) certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

 

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We intend to enter a voting agreement with Black Canyon Management LLC, which will provide it with rights to nominate a number of designees to our board of directors.

We intend to enter into a voting agreement with certain affiliates. Under the voting agreement, Black Canyon Management LLC will be entitled to nominate to our board of directors a number of designees equal to (1) 20% of the total number of directors comprising our board of directors at such time as long as Black Canyon Management LLC and its affiliates and Messrs. Springer, Wilson and Anderson together beneficially own 15% or more of the voting power of the shares of Class A Common Stock and Class B Common Stock entitled to vote generally in the election of directors, voting together as a single class, and (2) 10% of the total number of directors comprising the board of directors at such time as long as Black Canyon Management LLC and its affiliates and Messrs. Springer, Wilson and Anderson together beneficially own more than 5% but less than 15% of the voting power of the shares of Class A Common Stock and Class B Common Stock entitled to vote generally in the election of directors, voting together as a single class. In addition, Black Canyon Management LLC will have the right to remove and replace its director-designees at any time and for any reason and to nominate any individuals to fill any such vacancies. Messrs. Springer, Wilson and Anderson will be required to vote any of their LLC Units in favor of the director or directors nominated by Black Canyon Management LLC. Although affiliates of Black Canyon Management LLC are selling shares of Class A Common Stock in this offering and selling LLC Units to Malibu Boats, Inc., Black Canyon Management LLC will continue to own at least     % of the voting power (or     % if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders) of the shares of Class A Common Stock and Class B Common Stock, voting together as a single class. It is possible that the interests of Black Canyon Management LLC may in some circumstances conflict with our interests and the interests of our other stockholders.

Risks Related to Our Offering

A significant portion of the proceeds from this offering will be used to purchase LLC Units from our existing owners, including members of our senior management if the underwriters exercise their over-allotment option.

We intend to use $         million of the proceeds from this offering (or $         million if the underwriters exercise in full their option to purchase additional shares of Class A Common stock from us and the selling stockholders) to purchase LLC Units from our existing owners, including members of our senior management, as described under “History and Formation Transactions—Organizational Structure—Offering Transactions.” We will only purchase LLC Units from members of senior management, however, if the underwriters exercise their over-allotment option to purchase additional shares of Class A Common Stock. We will not retain any of the proceeds used to purchase LLC Units from our existing owners.

Our stock price may be volatile and you may be unable to sell your shares at or above the offering price.

The offering price for our Class A Common Stock was determined by negotiations between us, the selling stockholders and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of our Class A Common Stock could be subject to wide fluctuations in response to the many risk factors listed in this section, and others beyond our control, including:

 

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general economic, market and industry conditions

 

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actual or anticipated fluctuations in our financial condition and results of operations;

 

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addition or loss of consumers or dealers;

 

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actual or anticipated changes in our rate of growth relative to our competitors;

 

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additions or departures of key personnel;

 

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failure to introduce new products, or for those products to achieve market acceptance;

 

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disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain intellectual property protection for our technologies;

 

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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

 

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fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

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changes in applicable laws or regulations;

 

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issuance of new or updated research or reports by securities analysts;

 

  Ÿ  

sales of our Class A Common Stock by us or our stockholders;

 

  Ÿ  

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; and

 

  Ÿ  

the expiration of contractual lock-up agreements with our executive officers, directors and stockholders.

Further, the stock markets may experience extreme price and volume fluctuations that can affect the market prices of equity securities. These fluctuations can be unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, could harm the market price of our Class A Common Stock.

If the market price of our Class A Common Stock after this offering does not exceed the offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.

No public market for our Class A Common Stock currently exists and an active trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market for our Class A Common Stock. An active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them, or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

 

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If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our Class A Common Stock will depend on the research and reports that securities or industry analysts public about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish research or reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

Future sales of our Class A Common Stock in the public market could cause our share price to fall.

Sales of a substantial number of shares of our Class A Common Stock in the public market after this offering, or the perception that these sales might occur, could depress the market price of our Class A Common Stock and could impair our ability to raise capital through the sale of additional equity securities. Upon the closing of this offering, we will have             shares of Class A Common Stock outstanding, assuming no exercise of the underwriters’ option to purchase additional shares.

All of the Class A Common Stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act. Assuming the sale of all shares of Class A Common Stock in this offering, including all of the shares subject to the over-allotment option,             shares of Class A Common Stock outstanding after this offering will be restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers for at least 180 days after the date of this prospectus, subject to certain extensions.

Our senior management may invest or spend the proceeds of this offering in ways with which you may not agree, or in ways which may not yield a positive return.

The proceeds to Malibu Boats, Inc. from this offering, before deducting underwriting discounts, will be approximately $         million (or $         million if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders). Malibu Boats, Inc. intends to use $         million of the net proceeds from this offering to purchase LLC Units from the LLC, and will cause the LLC to use these proceeds (1) to pay down substantially all of the amounts owed on our credit facilities and term loans, (2) to pay Malibu Boats Investor, LLC, an affiliate, a fee of $3.75 million upon the consummation of this offering in connection with the termination of our management agreement and (3) for other general corporate purposes. Our management team will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not improve our results of operations or increase our market value.

Our governing documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

Our certificate of incorporation and bylaws to be effective upon the completion of this offering contain certain provisions that could delay or prevent a change in control. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include, without limitation:

 

  Ÿ  

a classified board structure;

 

  Ÿ  

a requirement that stockholders must provide advance notice to propose nominations or have other business considered at a meeting of stockholders;

 

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  Ÿ  

supermajority stockholder approval to amend our bylaws or certain provisions in our certificate of incorporation; and

 

  Ÿ  

authorization of blank check preferred stock.

In addition, the provisions of Section 203 of the Delaware general Corporate Law will govern us upon completion of this offering. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding Class A Common Stock, from engaging in certain business combinations without the approval of substantially all of our stockholders for a certain period of time.

These and other provisions in our certificate of incorporation, bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our Class A Common Stock in the future and result in the market price being lower than it would be without these provisions. For more information, see “Description of Capital Stock—Anti-Takeover Provisions” in this prospectus.

Because our initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding Class A Common Stock, new investors will incur immediate and substantial dilution.

The offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our Class A Common Stock based on the expected total value of our total assets, less our goodwill and other intangible assets, less our total liabilities immediately following this offering. Therefore, if you purchase shares of our Class A Common Stock in this offering, you will experience immediate and substantial dilution of $         per share in the price you pay for our Class A Common Stock compared to the pro forma as adjusted net tangible book value as of September 30, 2013. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

We currently do not intend to pay dividends on our Class A Common Stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our Class A Common Stock appreciates.

We currently do not plan to declare or pay dividends on shares of our Class A Common Stock in the foreseeable future. Consequently, your only opportunity to achieve a return on the shares you purchase in this offering will be if the market price of our Class A Common Stock appreciates and you sell your shares at a profit. We cannot assure you that the price of our Class A Common Stock in the market after this offering will ever exceed the price that you pay.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A Common Stock less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging public companies, which includes, among other things:

 

  Ÿ  

exemption from the auditor attestation requirements under Section 404 of the Sarbanes-Oxley Act;

 

  Ÿ  

reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements;

 

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  Ÿ  

exemption from the requirements of holding non-binding stockholder votes on executive compensation arrangement; and

 

  Ÿ  

exemption from any public rules requiring mandatory audit firm rotation and auditor discussion and analysis and, unless the SEC otherwise determines, any future audit rules that may be adopted by the Public Company Accounting Oversight Board.

We could be an emerging growth company until the last day of the fiscal year following the fifth anniversary after our initial public or until the earliest of (1) the last day of the fiscal year in which we have annual gross revenue of $1 billion or more, (2) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt or (3) the date on which we are deemed to be a large accelerated filer under the federal securities laws. We will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (a) more than $700 million in outstanding common equity held by our non-affiliates and (b) been public for at least 12 months. The value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter.

Under the JOBS Act, emerging growth companies are also permitted to elect to delay adoption of new or revised accounting standards until companies that are not subject to periodic reporting obligations are required to comply, if such accounting standards apply to non-reporting companies. We have made an irrevocable decision to opt out of this extended transition period for complying with new or revised accounting standards.

We cannot predict if investors will find our Class A Common Stock less attractive if we rely on these exemptions. If some investors find our Class A Common Stock less attractive as a result, there may be less active trading market for our Class A Common Stock and our stock price may be more volatile.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to comply with the laws and regulations affecting public companies, particularly after we are no longer an emerging growth company.

We have never operated as a public company. As a public company, particularly after we cease to qualify as an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements, in order to comply with the rules and regulations imposed by the Sarbanes-Oxley Act, as well as rules implemented by the SEC and Nasdaq. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives and our legal and accounting compliance costs will increase. It is likely that we will need to hire additional staff in the areas of investor relations, legal and accounting to operate as a public company. We also expect that these new rules and regulations may make it more difficult and expensive for us to obtain director and liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

For example, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls over financial reporting and disclosure controls and procedures. In particular, as a public company, we will be required to perform system and process evaluations and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial

 

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reporting, as required by Section 404 of the Sarbanes-Oxley Act. As described elsewhere in this prospectus, as an emerging growth company, we will not need to comply with the auditor attestation provisions of Section 404 for several years. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and management time on compliance-related issues. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause our stock price to decline.

When the available exemptions under the JOBS Act, as described elsewhere in this prospectus, cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus are forward-looking statements, including statements regarding our future financial position, sources of revenue, demand for our products, our strengths, business strategy and plans, prospective products or products under development, costs, timing and likelihood of success, gross margins, non-GAAP financial measures and management’s objectives for future operations. In particular, many of the statements under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” constitute forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” the negative of these terms, or by other similar expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. These statements are only predictions, involving known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. We discuss many of these factors, risks and uncertainties in greater detail under the heading “Risk Factors” and elsewhere in this prospectus. These factors expressly qualify forward-looking statements attributable to us or persons acting on our behalf.

You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Actual results may differ materially from those suggested by the forward-looking statements for various reasons, including those discussed under “Risk Factors” in this prospectus. Except as required by law, we assume no obligation to update forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

 

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USE OF PROCEEDS

We estimate that the net proceeds of the sale by us of our Class A Common Stock in this offering will be $         million (or $         million if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders), based on an assumed initial public offering price of $         per share, which is the midpoint of the range listed on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease the net proceeds to us from the offering by $         (or $         million if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders), assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and offering expenses payable by us.

We intend to use $         million of the net proceeds from this offering to purchase newly-issued LLC Units from the LLC, and we will cause the LLC to use these proceeds (1) to pay down substantially all of the amounts owed on our credit facilities and term loans, (2) to pay Malibu Boats Investor, LLC, an affiliate, a fee of $3.75 million upon the consummation of this offering in connection with the termination of our management agreement, as described under “Certain Relationships and Related Party Transactions—Management Agreement” and (3) for other general corporate purposes. On July 16, 2013, we entered into a credit agreement with a syndicate of banks led by SunTrust Bank that includes a revolving credit facility, swingline credit facility, letter of credit facility and term loans. The proceeds from the credit agreement, in conjunction with cash on the balance sheet, were used to repay our then-existing term and revolving loans, pay equity distributions of $53.8 million and deferred financing and related fees of $1.0 million. As of September 30, 2013, we had an aggregate total of $64.2 million outstanding under the term loans and the applicable rate for the term loans was 3.19%. The maturity date of the term loans is July 16, 2018. SunTrust Bank, an affiliate of one of the underwriters, will receive a portion of the proceeds from this offering. Accordingly, this offering is being made in compliance with FINRA Rule 5121. See “Underwriting—Conflicts of Interest.”

We intend to use all of the remaining proceeds from this offering, or $         million (or $         million if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders), to purchase LLC Units from our existing owners at a purchase price per unit equal to the initial public offering price per share of Class A Common Stock in this offering, as described under “History and Formation Transactions—Organizational Structure—Offering Transactions.” We will only purchase LLC Units from members of senior management, however, if the underwriters exercise their over-allotment option to purchase additional shares of Class A Common Stock. We will not retain any of the proceeds used to purchase LLC Units from our existing owners. See “Principal and Selling Stockholders” for information regarding the proceeds from this offering that will be paid to our directors and named executive officers.

Management will have significant flexibility in applying the net proceeds of the offering. The amount and timing of our actual spending for these purposes may vary significantly from our plans and will depend on a number of factors, including our future revenue, cash generated by operations and other factors described under the section “Risk Factors.” We may find it necessary or advisable to use portions of the proceeds for other purposes.

The selling stockholders may offer up to             shares of Class A Common Stock in the offering (or              shares of Class A Common Stock if the underwriters exercise in full their option

 

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to purchase additional shares of Class A Common Stock from us and the selling stockholders). We will not receive any proceeds from the sale of shares by the selling stockholders. We will, however, bear the costs, other than underwriting discounts and commissions, associated with the sale of shares by the selling stockholders. For more information, see “Principal and Selling Stockholders.”

 

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DIVIDEND POLICY

Malibu Boats, Inc. has never declared or paid any cash dividends on its capital stock. We currently anticipate that we will retain all of our future earnings for use in the expansion and operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable law and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. In addition, our credit facility restricts our ability to pay dividends on our capital stock in certain cases.

Following the offering, Malibu Boats, Inc. will be a holding company and will have no material assets other than its ownership of LLC Units. We intend to cause the LLC to make distributions to us in an amount sufficient to cover cash dividends, if any, declared by us. If the LLC makes such distributions to Malibu Boats, Inc., the other holders of LLC Units will be entitled to receive equivalent distributions on a pro rata basis.

 

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CAPITALIZATION

The table below sets forth our capitalization as of September 30, 2013:

 

  Ÿ  

on a historical basis for the LLC; and

 

  Ÿ  

on a pro forma basis for Malibu Boats, Inc., giving effect to the transactions described under “History and Formation Transactions,” including the application of the proceeds from this offering as described in “Use of Proceeds” assuming the offering prices at the midpoint of the price range set forth on the cover of this prospectus.

You should read this table together with “History and Formation Transactions,” “Use of Proceeds,” “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.

 

    As of September 30, 2013  
    Actual     Pro Forma(1)  
    (Unaudited)  
    (In thousands, except share data)  

Cash

  $ 4,697      $                
 

 

 

   

 

 

 

Total debt, including current maturities

    64,243     

Total members’ deficit/stockholders’ equity:

   

Members’ equity

   

Class A Units, 37,000 units authorized, 36,742 units issued and outstanding

    (32,759  

Class B Units, 3,885 units authorized, issued and outstanding

    (7,800  

Class M Units, 2,658 units authorized, 1,549 units issued and outstanding

    (3,069  

Stockholders’ equity

   

Class A Common Stock, par value $0.01 per share, 100,000,000 shares authorized on a pro forma basis;                 shares issued and outstanding on an as adjusted basis

        

Class B Common Stock, par value $0.01 per share, 25,000,000 shares authorized on a pro forma basis;                 shares issued and outstanding on an as adjusted basis

        

Preferred Stock, par value $0.01 per share; 25,000,000 shares authorized on a pro forma basis;             shares issued and outstanding on a pro forma basis

        

Additional paid-in capital

        

Accumulated earnings

    11,092     
 

 

 

   

 

 

 

Total (deficit) equity

    (32,536  
 

 

 

   

 

 

 

Non-controlling interests

        
 

 

 

   

 

 

 

Total members’/stockholders’ (deficit) equity attributable to the Company

    (32,536  

Total capitalization

  $ 31,707      $     
 

 

 

   

 

 

 

 

(1) A $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease, as applicable, cash, additional paid-in capital, total members’/stockholders’ equity attributable to us, total equity and total capitalization by $        , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us.

 

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DILUTION

If you invest in shares of our Class A Common Stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of Class A Common Stock and the pro forma net tangible book value per share of Class A Common Stock after this offering. Dilution results from the fact that the per share offering price of the shares of Class A Common Stock is substantially in excess of the pro forma net tangible book value per share attributable to our existing owners.

Our pro forma net tangible book value as of September 30, 2013 was $        , or $         per share of Class A Common Stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, and pro forma net tangible book value per share of Class A Common Stock represents pro forma net tangible book value divided by the number of shares of Class A Common Stock outstanding, after giving effect to the Recapitalization and Offering Transactions described under “History and Formation Transactions—Organizational Structure” and assuming that all of the holders of LLC Units (other than Malibu Boats, Inc.) exchanged their LLC Units for newly-issued shares of Class A Common Stock on a one-for-one basis.

After giving effect to the Offering Transactions, as described in “History and Formation Transactions—Organizational Structure—Offering Transactions,” including the application of the proceeds from this offering as described in “Use of Proceeds,” and assuming an initial public offering price per share of $        , the mid-point of the range listed on the cover of this prospectus, our pro forma net tangible book value as of September 30, 2013 would have been $        , or $         per share of Class A Common Stock. This represents an immediate increase in net tangible book value of $         per share of Class A Common Stock to our existing owners and an immediate dilution in net tangible book value of $         per share of Class A Common Stock to investors in this offering. The following table illustrates this dilution per share of Class A Common Stock, assuming the underwriters do not exercise their option to purchase additional shares of Class A Common Stock from us or the selling stockholders:

 

Assumed initial public offering price per share of Class A Common Stock

      $               

Pro forma net tangible book value per share as of September 30, 2013, before giving effect to this offering

   $                   

Increase in pro forma net tangible book value per share attributable to investors purchasing shares in this offering

   $        
  

 

 

    

Pro forma as adjusted net tangible book value per share after giving effect to this offering

      $     
     

 

 

 

Dilution in pro forma net tangible book value per share to investors purchasing shares in this offering

      $     
     

 

 

 

A $1.00 increase in the initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, would increase our pro forma as adjusted net tangible book value per share after this offering by approximately $         and would increase dilution per share to new investors by approximately $        , assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same.

A $1.00 decrease in the initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, would decrease our pro forma as adjusted net tangible book value per share after this offering by approximately $         and would decrease dilution per share to new investors by approximately $        , assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same.

 

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A $2.00 increase in the initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, would increase our pro forma as adjusted net tangible book value per share after this offering by approximately $         and would increase dilution per share to new investors by approximately $        , assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same.

A $2.00 decrease in the initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, would decrease our pro forma as adjusted net tangible book value per share after this offering by approximately $         and would decrease dilution per share to new investors by approximately $        , assuming that the number shares offered by us, as set forth on the cover of this prospectus, remains the same.

If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $         per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $         per share.

The table below summarizes on a pro forma as adjusted basis as of September 30, 2013, assuming that all of the holders of LLC Units (other than Malibu Boats, Inc.) exchanged their LLC Units for shares of Class A Common Stock on a one-for-one basis:

 

  Ÿ  

the total number of shares of Class A Common Stock purchased from us;

 

  Ÿ  

the total consideration paid to us, assuming an initial public offering price of $         per share (before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering); and

 

  Ÿ  

the average price per share paid by existing owners and by new investors purchasing shares in this offering.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
      Number    Percent     Amount      Percent    

Existing owners

               $                             $                

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100.0   $           100.0   $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease the total consideration paid to us by new investors by $         million and increase or decrease the percent of total consideration paid to us by new investors by approximately     %, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same.

If the underwriters exercise their option to purchase additional shares in full, the number of shares held by the existing owners after this offering would be reduced to     % of the total number of shares of our Class A Common Stock outstanding, and the number of shares held by new investors would be                     or     % of the total number of shares of our Class A Common Stock outstanding.

 

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Except as otherwise indicated, the amounts set forth above are based on             shares of Class A Common Stock outstanding as of September 30, 2013, and exclude:

 

  Ÿ  

             shares of Class A Common Stock issuable upon exercise of the underwriters’ option to purchase additional shares of Class A Common Stock from us and the selling stockholders;

 

  Ÿ  

             shares of Class A Common Stock issuable upon exchange of                      LLC Units; and

 

  Ÿ  

             shares of Class A Common Stock that will be available for future grant under our Incentive Plan, which will become effective on the date of the completion of this offering.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The unaudited pro forma consolidated statements of income for the fiscal year ended June 30, 2013 and for the three months ended September 30, 2013 present our consolidated results of operations giving pro forma effect to the Recapitalization and Offering Transactions described under “History and Formation Transactions—Organizational Structure” and the use of the estimated net proceeds from this offering as described under “Use of Proceeds,” as if such transactions occurred on July 1, 2012. The unaudited pro forma consolidated balance sheet as of September 30, 2013 presents our consolidated financial position giving pro forma effect to the Recapitalization and Offering Transactions described under “History and Formation Transactions—Organizational Structure” and the use of the estimated net proceeds from this offering as described under “Use of Proceeds,” as if such transaction occurred on September 30, 2013. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions on the historical financial information of the LLC.

The unaudited pro forma consolidated financial information should be read together with “History and Formation Transactions—Organizational Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, all included elsewhere in this prospectus.

The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position of Malibu Boats, Inc. that would have occurred had we operated as a public company during the periods presented. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our results of operations or financial position had the Recapitalization and Offering Transactions described under “History and Formation Transactions—Organizational Structure” and the use of the estimated net proceeds from this offering as described under “Use of Proceeds” occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date.

The pro forma adjustments principally give effect to:

 

  Ÿ  

the credit facilities and term loans from the syndicate of banks led by SunTrust Bank in the aggregate principal amount of $65 million entered into as of July 16, 2013;

 

  Ÿ  

the payment to Malibu Boats Investor, LLC, an affiliate, of $3.75 million upon the consummation of this offering in connection with the termination of our management agreement;

 

  Ÿ  

the Recapitalization and Offering Transactions;

 

  Ÿ  

the purchase by Malibu Boats, Inc. of LLC Units with the proceeds of this offering calculated at the midpoint of the range listed on the cover of this prospectus;

 

  Ÿ  

the offering and the estimated use of net proceeds as described under “Use of Proceeds”;

 

  Ÿ  

in the case of the unaudited pro forma consolidated statements of income, a provision for corporate income taxes on the income attributable to Malibu Boats, Inc. at an effective rate of 34.4%, which includes a provision for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state and local tax jurisdiction;

 

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  Ÿ  

adjustments that give effect to the tax receivable agreement as described in “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” and executed in connection with the Recapitalization and Offering Transactions; and

 

  Ÿ  

payments due to the existing owners as set forth in the tax receivable agreement equal to 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income and franchise tax that we actually realize (or are deemed to realize in the case of certain payments required to be made upon certain occurrences under the tax receivable agreement) as a result of the increases in the tax basis of the LLC’s assets attributable to Malibu Boats, Inc.’s purchase of LLC Units from the existing owners and of certain other tax benefits related to our entering into the tax receivable agreement.

The unaudited pro forma consolidated financial information presented assumes no exercise by the underwriters of the option to purchase up to an additional              shares of Class A common stock from us or the selling stockholders. Further, the unaudited pro forma consolidated financial information presented assumes that the shares of our Class A Common Stock to be sold in this offering are sold at $         per share of Class A Common Stock, which is the midpoint of the price range indicated on the front cover of this prospectus. For more information regarding how certain aspects of the Offering Transactions could be affected by an initial public offering price per share of our Class A Common Stock at the low-, mid- and high-points of the price range indicated on the front cover of this prospectus, see “Dilution.”

 

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MALIBU BOATS, INC.

Unaudited Pro Forma Consolidated Statement of Income

Fiscal Year Ended June 30, 2013

 

    Malibu Boats
Holdings, LLC
Historical (1)
    Pro Forma
Adjustments

(Unaudited)
          Malibu Boats,
Inc. (2) Pro
Forma
 
    (In thousands, except share data)  

Net sales

  $ 167,012      $                     $                

Cost of sales

    123,412         
 

 

 

   

 

 

     

 

 

 

Gross profit

    43,600         

Operating expenses:

       

Selling and marketing

    4,937         

General and administrative

    14,177          (3  

Amortization

    5,178         
 

 

 

   

 

 

     

 

 

 

Operating income

    19,308         

Other income (expenses):

       

Other

    10         

Interest expense

    (1,334       (4  
 

 

 

   

 

 

     

 

 

 

Other expense

    (1,324      
 

 

 

   

 

 

     

 

 

 

Income before non-controlling interest and income taxes

    17,984         

Non-controlling interest

             (5  

Provision for income taxes

             (6  

Net income attributable to members and stockholders

  $ 17,984      $          $     
 

 

 

   

 

 

     

 

 

 

Basic earnings per unit:

       

Class A Units

  $ 0.43         

Class B Units

  $ 0.43         

Class M Units

  $ 0.43         

Diluted earnings per unit:

       

Class A Units

  $ 0.42         

Class B Units

  $ 0.42         

Class M Units

  $ 0.42         

Basic and diluted weighted average units used in computing earnings per unit:

       

Class A Units

    36,742         

Class B Units

    3,885         

Class M Units

    1,421         

Proforma earnings available to Class A Common Stock per share:

       

Basic

            

Dilutive

            

Proforma basic and diluted weighted average shares used in computing earnings per share:

       

Basic

        $   

Dilutive

        $   
        $   

 

(1)

We have historically operated our business through the LLC. As of June 30, 2013, the LLC held all of our assets and liabilities and Malibu Boats, Inc. did not have any assets or liabilities and did not conduct operations. Accordingly, the

 

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  unaudited pro forma consolidated statement of income for the fiscal year ended June 30, 2013 presents the historical results of the LLC as a starting point for the pro forma amounts.
(2) As a newly formed entity, Malibu Boats, Inc. will have no results of operations until the completion of this offering.
(3) Upon consummation of the offering, we will terminate our existing management agreement with Malibu Boats Investor, LLC. The adjustment represents the removal of the management fees incurred during the period.
(4) As described in “Use of Proceeds,” we will pay down substantially all of the amounts owned on our credit facilities and term loans with the proceeds from the offering. This adjustment represents the removal of interest expense associated with the term loans incurred during the period.
(5) After the Recapitalization and Offering Transactions, as described in “History and Formation Transactions—Organizational Structure,” our only material asset will be the ownership of             % of the LLC Units and our only business will be to act as the sole managing member of the LLC. Therefore, pursuant to FASB ASC 810, “Consolidations,” or ASC Topic 810, we will consolidate the financial results of the LLC into our financial statements. The ownership interests of the other members of the LLC will be accounted for as a non-controlling interest in our consolidated financial statements after this offering. Immediately following this offering, the non-controlling interest will be             %. Net income attributable to the non-controlling interest represents             %, or $             of net income of $             for the fiscal year ended June 30, 2013. These amounts have been determined based on an initial public offering price of $             , the mid-point of the range listed on the cover of this prospectus, and the assumption that the underwriter’s option to purchase additional shares is not exercised.
(6) Following the Recapitalization and Offering Transactions, we will be subject to U.S. federal income taxes, in addition to state, local and foreign taxes, with respect to our allocable share of any net taxable income of the LLC that will result in higher income taxes. As a result, the pro forma statement of income reflects an adjustment to our provision for corporate income taxes to reflect an effective rate of 34.4%, which includes provisions for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state, local and/or foreign jurisdiction. State taxes, stock compensation and the domestic production activities deduction have impacted the effective rate calculation. The estimated effective tax rate for fiscal year 2014 is expected to range between 34.4% and 35.4%, which is consistent with the pro forma effective income tax rate.

 

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MALIBU BOATS, INC.

Unaudited Pro Forma Consolidated Statement of Income

Three Months Ended September 30, 2013

 

     Malibu Boats
Holdings, LLC
Historical (1)
    Pro Forma
Adjustments
           Malibu Boats,
Inc. (2) Pro
Forma
 
     (In thousands, except share data)  

Net sales

   $ 43,304      $                      $                

Cost of sales

     32,283          
  

 

 

   

 

 

      

 

 

 

Gross profit

     11,021          

Operating expenses:

         

Selling and marketing

     1,432          

General and adminstrative

     1,955           (3  

Amortization

     1,294          
  

 

 

   

 

 

      

 

 

 

Operating income

     6,340          

Other income (expense):

         

Other

     3          

Interest expense

     (1,164        (4  
  

 

 

   

 

 

      

 

 

 

Other expense

     (1,161       
  

 

 

   

 

 

      

 

 

 

Income before non-controlling interest and provision for income taxes

     5,179          

Non-controlling interest

               (5  

Provision for income taxes

               (6  

Net income attributable to members and stockholders

   $ 5,179      $           $     
  

 

 

   

 

 

      

 

 

 

Basic and diluted earnings per unit:

         

Class A Units

   $ 0.12          

Class B Units

   $ 0.12          

Class M Units

   $ 0.12          

Basic and diluted weighted average units used in computing earnings per unit

         

Class A Units

     36,742          

Class B Units

     3,885          

Class M Units

     1,549          

Proforma earnings available to Class A Common Stock per share:

         

Basic

          $   

Dilutive

          $   

Proforma basic and diluted weighted average units used in computing earnings per share:

         

Basic

              

Dilutive

              

 

(1) We have historically operated our business through the LLC. As of September 30, 2013, the LLC held all of our assets and liabilities and Malibu Boats, Inc. did not have any assets or liabilities and did not conduct operations. Accordingly, the unaudited pro forma consolidated statement of income for the three months ended September 30, 2013 presents the historical results of the LLC as a starting point for the pro forma amounts.
(2) As a newly formed entity, Malibu Boats, Inc. will have no results of operations until the completion of this offering.

 

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(3) Upon consummation of the offering, we will terminate our existing management agreement with Malibu Boats Investor, LLC. The adjustment represents the removal of the management fees incurred during the period.
(4) As described in “Use of Proceeds,” we will pay down substantially all of the amounts owned on our credit facilities and term loans with the proceeds from the offering. This adjustment represents the removal of interest expense associated with the term loans incurred during the period.
(5) After the Recapitalization and Offering Transactions, as described in “History and Formation Transactions—Organizational Structure,” our only material asset will be the ownership of             % of the LLC Units and our only business will be to act as the sole managing member of the LLC. Therefore, pursuant to ASC Topic 810 we will consolidate the financial results of the LLC into our financial statements. The ownership interests of the other members of the LLC will be accounted for as a non-controlling interest in our consolidated financial statements after this offering. Immediately following this offering, the non-controlling interest will be             %. Net income attributable to the non-controlling interest represents             %, or $             of net income of $             for the three months ended September 30, 2013. These amounts have been determined based on an initial public offering price of $             , the mid-point of the range listed on the cover of this prospectus, and the assumption that the underwriter’s option to purchase additional shares is not exercised.
(6) Following the Recapitalization and Offering Transactions, we will be subject to U.S. federal income taxes, in addition to state, local and foreign taxes, with respect to our allocable share of any net taxable income of the LLC that will result in higher income taxes. As a result, the pro forma statement of income reflects an adjustment to our provision for corporate income taxes to reflect an effective rate of 34.4%, which includes provisions for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state, local and/or foreign jurisdiction. State taxes, stock compensation and the domestic production activities deduction have impacted the effective rate calculation. The estimated effective tax rate for fiscal year 2014 is expected to range between 34.4% and 35.4%, which is consistent with the pro forma effective income tax rate.

 

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MALIBU BOATS, INC.

Unaudited Pro Forma Consolidated Balance Sheet

September 30, 2013

 

    Malibu Boats
Holdings,
LLC
Historical (1)
    Pro Forma
Adjustments
      Malibu Boats,
Inc. (2)
Pro Forma
    (In thousands, except share data)

Assets:

       

Current assets:

       

Cash

  $ 4,697        (3) (4)  

Trade receivables, net

    6,653         

Inventories, net

    15,288         

Prepaid expenses

    418         
 

 

 

   

 

   

 

Total current assets

    27,056         

Property and equipment, net

    7,230         

Goodwill

    5,718         

Other intangible assets, net

    16,241         

Debt issuance costs, net

    965        (5)  

Deferred tax asset

           (6)  

Other assets

    9         
 

 

 

   

 

   

 

Total assets

    57,219         
 

 

 

   

 

   

 

Liabilities:

       

Current liabilities:

       

Current maturities of long-term debt

    3,712        (5)  

Accounts payable

    13,944         

Accrued expenses

    11,426        (4)  
 

 

 

   

 

   

 

Total current liabilities

    29,082         

Deferred gain on sale-leaseback

    142         

Payable pursuant to tax receivable agreement

           (6)  

Long-term debt, less current maturities

    60,531        (5)  
 

 

 

   

 

   

 

Total liabilities

  $ 89,755         
 

 

 

   

 

   

 

Equity:

       

Class A Common Stock, par value $0.01 per share; 100,000,000 shares authorized;                 shares issued and outstanding on a pro forma basis

  $        (7)  

Class B Common Stock, par value $0.01 per share; 25,000,000 shares authorized;                 shares issued and outstanding on a pro forma basis

           (7)  

Preferred Stock, par value $0.01 per share; 25,000,000 shares authorized;                 shares issued and outstanding on a pro forma basis

           (7)  

Class A Units, 37,000 units authorized, 36,742 units issued and outstanding

    (32,759     (7)  

Class B Units, 3,885 units authorized, issued and outstanding

    (7,800     (7)  

Class M Units, 2,658 units authorized, 1,549 units issued and outstanding

    (3,069     (7)  

Additional paid-in capital

           (7)  

Accumulated earnings

    11,092         
 

 

 

   

 

   

 

Total (deficit) equity

    (32,536      

Non-controlling interest

           (8)  
 

 

 

   

 

   

 

Total members’ and stockholders’ (deficit) equity

    (32,536      
 

 

 

   

 

   

 

Total liabilities and equity

  $ 57,219         
 

 

 

   

 

   

 

 

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(1) We have historically operated our business through the LLC. As of September 30, 2013, the LLC held all of our assets and liabilities and Malibu Boats, Inc. did not have any assets or liabilities and did not conduct operations. Accordingly, the unaudited pro forma consolidated balance sheet as of September 30, 2013 presents the historical financial condition of the LLC as a starting point for the pro forma amounts.

 

(2) As a newly formed entity, Malibu Boats, Inc. will have no material assets until the completion of this offering.

 

(3) Reflects the net effect on cash of the receipt of net proceeds of $     million, as described in “Use of Proceeds.”

 

(4) As described in “Use of Proceeds,” Malibu Boats, Inc. will pay Malibu Boats Investor, LLC, an affiliate, a non-recurring fee of $3.75 million upon the consummation of the offering in connection with the termination of our management agreement.

 

(5) As described in “Use of Proceeds,” we will pay down substantially all of the amounts owed on our credit facilities and term loans with the proceeds from the offering. In connection with the pay down, debt issuance costs associated with the term loans will be written off to interest expense.

 

(6) Reflects the effects of the tax receivable agreement, pursuant to which Malibu Boats, Inc. will be required to make cash payments to the existing owners equal to 85% of the amount of cash savings, if any, in U.S. federal, state and local tax that Malibu Boats, Inc. actually realizes, or, in some circumstances, is deemed to realize, as a result of certain future tax benefits to which Malibu Boats, Inc. may become entitled. These tax benefit payments are not necessarily conditioned upon one or more of the existing owners maintaining a continued ownership interest in either the LLC or Malibu Boats, Inc. Malibu Boats, Inc. expects to benefit from the remaining 15% of cash savings, if any, that it may actually realize.

 

     As a result, on a cumulative basis, the net effect of accounting for income taxes and the tax receivable agreement will be a net increase in stockholders’ equity of     % of the estimated realizable tax benefit. The amounts to be recorded for both the deferred tax assets and the liability for our obligations under the tax receivable agreement have been estimated. All of the effects of changes in any of our estimates after the date of the purchase will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income.

 

(7) Reflects (i) the Recapitalization and Offering Transactions, as described under “History and Formation Transactions—Organizational Structure,” (ii) the issuance of Class B Common Stock in connection with the Recapitalization and Offering Transactions, and (iii) the issuance of Class A Common Stock in connection with this offering, net of offering expenses.

 

(8) After the Recapitalization and Offering Transactions, as described in “History and Formation Transactions—Organizational Structure,” our only material asset will be the ownership of     % of the LLC Units and our only business will be to act as the sole managing member of the LLC. Therefore, pursuant to ASC Topic 810, we will consolidate the financial results of the LLC into our financial statements. The ownership interests of the other members of the LLC will be accounted for as a non-controlling interest in our consolidated financial statements after this offering. Immediately following this offering, the non-controlling interest will be     %. This amount has been determined based on an initial public offering price of $     , the mid-point of the range listed on the cover of this prospectus, and the assumption that the underwriter’s option to purchase additional shares is not exercised.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The summary historical consolidated financial data and other data of the LLC below should be read together with “History and Formation Transactions—Organizational Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes, all included elsewhere in this prospectus.

We have derived the consolidated statement of income data for the fiscal years ended June 30, 2011, 2012 and 2013 and our consolidated balance sheet data as of June 30, 2011, 2012 and 2013 from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the consolidated statement of income data for the three months ended September 30, 2012 and 2013 and our consolidated balance sheet data as of September 30, 2013 from our unaudited consolidated financial statements included elsewhere in this prospectus. Certain of the measures set forth below are not measures recognized under GAAP. For a discussion of management’s reasons for presenting such data and a reconciliation to comparable financial measures calculated in accordance with GAAP, see “—GAAP Reconciliation of Non-GAAP Financial Measures.” Our historical results are not necessarily indicative of the results that may be expected in the future. Additionally, our results of operations for the interim period ended September 30, 2013 are not necessarily indicative of the results to be obtained for the full fiscal year.

 

     Fiscal Year Ended June 30,     Three Months  Ended
September 30,
 
      2011     2012     2013     2012     2013  
     (Dollars in thousands, except per share data)  

Consolidated statement of income data:

          

Net sales

   $ 99,984      $ 140,892      $ 167,012      $ 33,159        $43,304   

Cost of sales

     83,730        110,849        123,412        25,291        32,283   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     16,254        30,043        43,600        7,868        11,021   

Operating expenses:

          

Selling and marketing

     3,621        4,071        4,937        1,076        1,432   

General and administrative

     6,194        8,307        14,177        4,512        1,955   

Amortization

     5,178        5,178        5,178        1,294        1,294   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,261        12,487        19,308        986        6,340   

Other expense, net

     (1,804     (1,381     (1,324     (347     (1,161
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (543   $ 11,106      $ 17,984      $ 639        $  5,179   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic (loss) earnings per unit:

          

Class A Units

   $ (0.01   $ 0.26      $ 0.43      $ 0.02      $ 0.12   

Class B Units

   $ (0.01   $ 0.39      $ 0.43      $ 0.02      $ 0.12   

Class M Units

   $ (0.01   $ 0.12      $ 0.43      $ 0.02      $ 0.12   

Diluted (loss) earnings per unit:

          

Class A Units

   $ (0.01   $ 0.25      $ 0.42      $ 0.02      $ 0.12   

Class B Units

   $ (0.01   $ 0.39      $ 0.42      $ 0.02      $ 0.12   

Class M Units

   $ (0.01   $ 0.12      $ 0.42      $ 0.02      $ 0.12   

Supplemental pro forma net income available to Class A Common Stock per share (unaudited)(1):

          

Basic

       $          $     

Diluted

       $          $     

 

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     Fiscal Year Ended June 30,     Three Months  Ended
September 30,
 
      2011     2012     2013     2012     2013  
     (Dollars in thousands, except per share data)  

Consolidated balance sheet data:

          

Total assets

   $ 60,033      $ 64,725      $ 65,927      $ 59,447        $57,219   

Total liabilities

     45,566        39,280        45,913        48,726        89,755   

Total members’ equity (deficit)

     14,467        25,445        20,014        10,721        (32,536

Additional financial and other data:

          

Unit volume

     1,860        2,482        2,672        550        661   

Gross margin

     16.3     21.3     26.1     23.7     25.5

Adjusted EBITDA(2)

   $ 7,918      $ 19,863      $ 31,758      $ 5,496        $  8,155   

Adjusted EBITDA margin(2)

     7.9     14.1     19.0     16.6     18.8

 

(1) Pro forma basic and diluted net income per share were computed by dividing the pro forma net income attributable to the holders of Class A Common Stock by the              shares of Class A Common Stock that we will issue and sell in this offering (assuming that the underwriters do not exercise their option to purchase an additional              shares of Class A Common Stock to cover over-allotments). The shares of Class B Common Stock do not share in our earnings and, therefore, are not included in the weighted average number of shares outstanding or net income available per share.
(2) Adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. For definitions of adjusted EBITDA and adjusted EBITDA margin and a reconciliation of each to net income, see “—GAAP Reconciliation of Non-GAAP Financial Measures.”

GAAP Reconciliation of Non-GAAP Financial Measures

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 earnings before interest expense, income taxes, depreciation, amortization and non-cash, non-recurring and non-operating expenses, including severance and relocation, management fees and expenses, certain professional fees and non-cash compensation expense. We define adjusted EBITDA margin as adjusted EBITDA divided by net sales. Adjusted EBITDA and adjusted EBITDA margin are not measures of net income as determined by GAAP. Management believes adjusted EBITDA and adjusted EBITDA margin are useful because they allow management to evaluate our operating performance and compare the results of our operations from period to period and against our peers without regard to our financing methods, capital structure and non-recurring and 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.

 

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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:

 

     Fiscal Year Ended June 30,     Three Months  Ended
September 30,
 
     2011     2012     2013         2012             2013      
     (Dollars in thousands)  

Consolidated statement of income data:

          

Net (loss) income

   $ (543   $ 11,106      $ 17,984      $ 639      $ 5,179   

Interest expense

     1,815        1,433        1,334        350        1,164   

Depreciation and amortization

     6,000        6,072        6,268        1,616        1,589   

Severance and relocation(1)

     112        181        192        192          

Management fees and expenses(2)

     27        87        2,896        2,099        22   

Professional fees(3)

     389        852        2,957        568        169   

Non-cash compensation expense(4)

     118        132        127        32        32   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 7,918      $ 19,863      $ 31,758      $ 5,496      $ 8,155   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA margin

     7.9     14.1     19.0     16.6     18.8

 

(1) Represents one-time employment related expenses, including a severance payment to a former executive, and costs to relocate certain departments from California to our Tennessee facility.
(2) Represents management fees and expenses paid pursuant to our management agreement with Malibu Boats Investor, LLC, an affiliate, which will be terminated upon the consummation of this offering. A portion of the management fees in fiscal year 2013 and all of the management fees in the three months ended September 30, 2012 reflect the payment of management fees pursuant to an amendment to the management agreement in July 2012. For more information about the management fees, see “Certain Relationships and Related Party Transactions—Management Agreement.”
(3) Represents legal and advisory fees related to our refinancing activities and legal expenses related to our litigation with Pacific Coast Marine Windshields Ltd. and Nautique Boat Company, Inc. For more information about this litigation, see “Business—Legal Proceedings.”
(4) Represents equity-based incentives awarded to certain of our employees.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes appearing elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results may differ materially from those currently anticipated and expressed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.

Overview

We are a leading designer, manufacturer and marketer of performance sport boats, having the #1 market share position in the United States since 2010. Our boats are used for water sports, including water skiing, wakeboarding and wake surfing, as well as general recreational boating. Since inception in 1982, we have been a consistent innovator in the powerboat industry, designing products that appeal to an expanding range of recreational boaters and water sports enthusiasts whose passion for boating and water sports is a key aspect of their lifestyle. We believe many of our innovations, such as our proprietary Surf Gate technology launched in 2012, expand the market for our products by introducing consumers to new and exciting recreational activities. We believe that our boats are increasingly versatile, allowing consumers to use them for a wide range of activities that enhance the experience of a day on the water with family and friends. We believe that the performance, quality, value and multi-purpose features of our boats position us to achieve our goal of increasing our market share in the expanding recreational boating market.

We sell our boats through a dealer network that we believe is the strongest in the performance sport boat category. As of September 30, 2013, our distribution channel consisted of 116 independent dealers in North America operating 139 locations and 49 independent dealer locations across 36 countries outside of North America. Our boats are the exclusive performance sport boats offered by the majority of our dealers. Additionally, we have an exclusive licensee in Australia that we believe is the largest performance sport boat manufacturer in that country. 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.

We have undergone significant growth since we were founded in 1982 and began building custom ski boats in a small shop in Merced, California. In 2006, we were acquired by an investor group, including affiliates of Black Canyon Capital LLC, Horizon Holdings, LLC and then-current management. Beginning in 2009, under the leadership of new management, we implemented several measures designed to improve our cost structure, increase our operating leverage, enhance our product offerings and brands, and strengthen our dealer network. Jack Springer, our Chief Executive Officer, and Wayne Wilson, our Chief Financial Officer, helped lead us successfully through the volume declines experienced during the economic recession. Despite the downturn, we continued to build on our legacy of innovation and invested in product development and process improvements. For example, we:

 

  Ÿ  

introduced the Axis brand in 2009 for consumers seeking a performance sport boat at a more affordable price;

 

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acquired Titan Wake Accessories in 2009 in order to bring tower manufacturing in-house, and subsequently designed and introduced the G3 Tower;

 

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  Ÿ  

released the first picklefork bow design under the Malibu brand in 2012 to fill a specific gap within our product portfolio, quickly followed by two additional Malibu picklefork models;

 

  Ÿ  

enhanced our manufacturing efficiencies through process improvements and product engineering, including moving from batch to continuous flow manufacturing; and

 

  Ÿ  

introduced our patented Surf Gate technology in 2012, which allows users to surf on either side of the boat’s wake, generates a better quality surf wave and was the Watersports Industry Association’s Innovation of the Year in 2013.

In addition, we initiated a disciplined process of reviewing, assessing and expanding our dealer network. We grew our dealer network in North America by 33 dealer locations from 2009 to 2013 and also improved the overall performance of our dealers. During this period, we initiated a more disciplined approach of monitoring dealer inventory levels relative to market demand in order to align production levels more closely with retail sales levels at our dealers. As a result of these collective initiatives, we have a rationalized cost base with a high growth product portfolio that achieved fiscal year 2013 net sales and adjusted EBITDA of $167.0 million and $31.8 million, respectively, representing CAGRs of 29.2% and 100.3%, respectively, from fiscal year 2011. For the three months ended September 30, 2013, our net sales and adjusted EBITDA were $43.3 million and $8.2 million, respectively, an increase of 30.6% and 48.4%, respectively, compared to the three months ended September 30, 2012. For a discussion of adjusted EBITDA, see “Selected Consolidated Financial Data—GAAP Reconciliation of Non-GAAP Financial Measures.”

Factors Affecting Our Results of Operations

We believe that our results of operations and our growth prospects are affected by a number of factors, which we discuss below.

Economic Environment and Consumer Demand

Our product sales are impacted by general economic conditions, which affect the demand for our products, the demand for optional features, the availability of credit for our dealers and retail consumers, and overall consumer confidence. Consumer spending, especially purchases of discretionary items, tends to decline during recessionary periods and tends to increase during expansionary periods. The recreational boating industry was adversely affected by the economic downturn, and is now beginning to recover. IBISWorld projects U.S. powerboat manufacturer sales will grow at a CAGR of 6.5% between 2012 and 2017. In recent years, the performance sport boat category has grown faster than the overall powerboat market. In 2012, domestic sales of new performance sport boats increased by 13% compared to 2011, while new unit sales of all other powerboats grew 10% over the same period. More recently, for the states reporting registrations for January through September, new unit sales of performance sport boats increased 11% for the nine-month period in 2013 compared to the same period in 2012, while new unit sales of all other powerboats increased 2% over the same period. While there is no guarantee that our market will continue to grow, we expect to benefit from the recovery in the boating industry and from improved consumer confidence levels.

New Product Development and Innovation

Our long-term revenue prospects are based in part on our ability to develop new products and technological enhancements that meet the demands of existing and new consumers. Developing and introducing new boat models and features that deliver improved performance and

 

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convenience is essential to leveraging the value of our Malibu and Axis brands. By introducing new boat models, we are able to appeal to a new and broader range of consumers and focus on underserved or adjacent segments of the broader powerboat category. We introduced nine new boat models since the beginning of model year 2011. We believe we also are able to capture additional value from the sale of each boat through the introduction of new features, which we believe permits us to raise average selling prices and enhances our margins. We allocate most of our product development costs to new model and feature designs, usually with a specific consumer base and market in mind. We use industry data to analyze our markets and evaluate revenue potential from each major project we undertake. Our product development cycle, or the time from initial concept to volume production, can be up to two years. As a result, our development costs, which may be significant, may not be offset by corresponding new sales during the same periods. Once new designs and technologies become available to our consumers, we typically realize revenue from these products from one year up to 15 years. We may not, however, realize our revenue expectations from each innovation. We believe our close communication with our consumers, dealers and sponsored athletes regarding their future product desires enhances the efficiency of our product development expenditures.

Product Mix

Historically, we have been successful in leveraging our robust product offering and features to enhance our sales growth and gross margins. Our product mix, as it relates to our brands, types of boats and features, not only makes our offerings attractive to consumers but also helps drive higher sales and margins. Typically, we are able to realize higher sales and margins when we sell larger boats compared to our smaller boats, our premium Malibu brand compared to our entry-level Axis brand and our boats that are fully-equipped with optional features. We will strive to continue to develop new features and models and maintain an attractive product mix that optimizes sales growth and margins.

Our Ability to Manage Manufacturing Costs, Sales Cycles and Inventory Levels

Our results of operations are affected by our ability to manage our manufacturing costs effectively and to respond to changing sales cycles. Our product costs vary based on the costs of supplies and raw materials, as well as labor costs. We have implemented various initiatives to reduce our cost base and improve the efficiency of our manufacturing process. For example, we re-engineered the manufacturing process in our Tennessee facility to reduce labor hours per boat produced and the amount of re-work required. We continuously monitor and review our manufacturing processes to identify improvements and create additional efficiencies. We rely on our insights into the market gleaned from dealer inventory levels, industry reports about anticipated demand for our products in the upcoming sales cycle and our own estimates and assumptions in formulating our manufacturing plan for the following fiscal year. Throughout our consumer sales cycle, which reaches its peak from March through August each year, we adjust our manufacturing activities in order to adapt to variability in demand.

Dealer Network, Dealer Financing and Incentives

We rely on our dealer network to distribute and sell our products. We believe we have developed the strongest distribution network in the performance sport boat category. To improve and expand our network and compete effectively for dealers, we regularly monitor and assess the performance of our dealers and evaluate dealer locations and geographic coverage in order to identify potential market opportunities. As a result of management’s strategic initiatives, we have sold an increasing number of units to dealers in new territories in the United States and Canada not previously covered prior to 2009. We intend to continue to add dealers in new territories in the United States as well as internationally, which we believe will result in increased unit sales.

 

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Our dealers are exposed to seasonal variations in consumer demand for boats. As discussed above under “—Our Ability to Manage Manufacturing Costs, Sales Cycles and Inventory Levels,” we address anticipated demand for our products and manage our manufacturing in order to mitigate seasonal variations. We also use our dealer incentive programs to encourage dealers to order in the off-season by providing floor plan financing relief, which typically permits dealers to take delivery of current model year boats between July 1 and April 30 on an interest-free basis for a specified period. We also offer our dealers other incentives, including rebates, seasonal discounts, promotional co-op arrangements and other allowances. We facilitate floor plan financing programs for many of our dealers by entering into repurchase agreements with certain third-party lenders, which enable our dealers, under certain circumstances, to establish lines of credit with the third-party lenders to purchase inventory. Under these floor plan financing programs, a dealer draws on the floor plan facility upon the purchase of our boats and the lender pays the invoice price of the boats. Since July 1, 2010, we have not repurchased any units from lenders. We will continue to review and refine our dealer incentive offerings and monitor any exposures arising under these arrangements.

Components of Results of Operations

Net Sales

We generate revenue from the sale of boats to our dealers. The substantial majority of our net sales are derived from the sale of boats, including optional features included at the time of the initial wholesale purchase of the boat. Net sales consists of the following:

 

  Ÿ  

Gross sales from:

 

  Ÿ  

Boat sales—sales of boats to our dealer network. In addition, nearly all of our boat sales include optional feature upgrades purchased by the consumer, such as Surf Gate, which increase the average selling price of our boats;

 

  Ÿ  

Trailers, parts and accessories sales—sales of boat trailers and replacement and aftermarket boat parts and accessories to our dealer network and Australian licensee; and

 

  Ÿ  

Royalty income—licensing fees and royalties that we earn as a result of our contractual relationship with our Australian licensee, which has the exclusive right to manufacture and distribute our products in Australia and New Zealand.

 

  Ÿ  

Net sales are net of:

 

  Ÿ  

Sales returns—primarily 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

 

  Ÿ  

Rebates, free flooring and discounts—incentives, including rebates and free flooring, we provide to our dealers based on sales of eligible products. If a dealer meets its annual commitment volume as well as other terms of the rebate program, the dealer is entitled to a specified rebate. Dealers who participate in our floor financing program may be entitled to have their flooring costs covered by us to promote dealer orders in the offseason. For more information, see “Business—Dealer Management.”

 

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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 costs include, among other things, product development and engineering expenditures.

Other Expense, Net

Other expense, net consists of interest expense and other income or expense, net. Interest expense consists of interest charged under our credit agreement.

Income Taxes

The LLC is currently taxed as a partnership for federal income tax purposes. Therefore, we have not been subject to entity-level federal income taxation, and the members of the LLC pay taxes with respect to their allocable share of our net taxable income. Following the reorganization and this offering, all of the earnings of Malibu Boats, Inc. will be subject to federal income taxation.

We will be subject to U.S. federal and state income tax in multiple jurisdictions. Some of these jurisdictions have higher statutory tax rates than others. Accordingly, our effective tax rates will vary depending on the relative proportion of income in various states, changes in the valuation of our deferred tax assets and liabilities and changes in tax laws. We anticipate that our effective tax rate in fiscal year 2014 will be between 34.4% and 35.4%.

 

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Results of Operations

The table below sets forth our results of operations for the periods presented. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods.

 

     Fiscal Year Ended June 30,     Three Months Ended
September 30,
 
     2011     2012     2013     2012     2013  
     (Dollars in thousands)  

Consolidated statement of income data:

          

Net sales

   $ 99,984      $ 140,892      $ 167,012      $ 33,159      $ 43,304   

Cost of sales

     83,730        110,849        123,412        25,291        32,283   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     16,254        30,043        43,600        7,868        11,021   

Operating expenses:

          

Selling and marketing

     3,621        4,071        4,937        1,076        1,432   

General and administrative

     6,194        8,307        14,177        4,512        1,955   

Amortization

     5,178        5,178        5,178        1,294        1,294   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,261        12,487        19,308        986        6,340   

Other expense, net

     (1,804     (1,381     (1,324     (347     (1,161
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (543   $ 11,106      $ 17,984      $ 639      $ 5,179   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other data:

          

Unit volume

     1,860        2,482        2,672        550        661   

The following table sets forth our gross profit as well as our operating and other income and expenses and other information for the periods presented, expressed as a percentage of net sales:

 

     Fiscal Year Ended June 30,     Three Months  Ended
September 30,
 
           2011               2012               2013               2012               2013       

Net sales

     100.0     100.0     100.0     100.0     100.0

Cost of sales

     83.7        78.7        73.9        76.3        74.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     16.3        21.3        26.1        23.7        25.5   

Operating expenses:

          

Selling and marketing

     3.6        2.9        3.0        3.2        3.3   

General and administrative

     6.2        5.9        8.5        13.6        4.5   

Amortization

     5.2        3.7        3.1        3.9        3.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1.3        8.8        11.5        3.0        14.7   

Other expense, net

     (1.8     (1.0     (0.8     (1.0     (2.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (0.5 )%      7.8     10.7     2.0     12.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Three Months Ended September 30, 2013 to the Three Months Ended September 30, 2012

Net Sales. Our net sales for the three months ended September 30, 2013 were $43.3 million, reflecting an increase of $10.1 million, or 30.6%, compared to the same period in 2012. Unit volume

 

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for the three months ended September 30, 2013 was 661, a 20.2% increase compared to the same period in 2012. The volume increase in 2013 was attributable to strong, continued consumer demand for our boats, bolstered by the introduction of our new models and features. Net sales per unit increased approximately 9% for the three months ended September 30, 2013 compared to the same period in 2012, primarily because of increased sales prices on new boat models and increased sales of larger boats, including the Wakesetter 24 MXZ, introduced in fiscal year 2013, and Axis A24, introduced early in fiscal year 2014, as well as increased sales of our Surf Gate system, which became available on the Axis brand during 2013.

Cost of Sales. Our cost of sales increased 27.6% to $32.3 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The increase in cost of sales resulted primarily from the 20.2% increase in unit volume and higher material cost per unit, driven by increased sales of higher-content boats such as the Wakesetter 24 MXZ.

Gross Profit. For the three months ended September 30, 2013, our gross profit increased 40.1% to $11.0 million compared to the same period during 2012. Gross profit, as a percentage of net sales, increased 170 basis points to 25.5% for the three months ended September 30, 2013 compared to the same period in 2012. These increases resulted primarily from continued production efficiencies on increased volumes, higher average selling prices driven by price increases and increased sales of larger boats and optional features and continued product cost reduction efforts.

Operating Expenses. Selling and marketing expense increased $0.5 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 primarily because of increased marketing costs associated with increased sales volumes. General and administrative expense decreased $2.6 million for the three months ended September 30, 2013, compared to the three months ended September 30, 2012, largely attributable to reduced management fees paid to Malibu Boats Investor, LLC, an affiliate, in 2012. In light of the economic downturn, Malibu Boats Investor, LLC agreed to eliminate its management fees for the period from July 1, 2008 through December 31, 2012, in order to preserve our cash. Subsequently, we amended the management agreement to make a management fee payment in the amount of $2.1 million during the three months ended September 30, 2012.

Other Expense, Net. Interest expense increased $0.8 million to $1.2 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. This increase was driven by higher debt balances associated with our July 2013 refinancing.

Comparison of the Fiscal Year Ended June 30, 2013 to the Fiscal Year Ended June 30, 2012

Net Sales. Our net sales for fiscal year 2013 were $167.0 million, an increase of $26.1 million, or 18.5%, compared to fiscal year 2012. Unit volume for fiscal year 2013 was 2,672, an 8% increase compared to fiscal year 2012. The volume increase was attributable to increased consumer demand for our products. Net sales per unit increased approximately 10% for fiscal year 2013 compared to fiscal year 2012, primarily because of increased sales prices on new boat models and the introduction of two new boat models during fiscal year 2013, including our most expensive model, the Wakesetter 24 MXZ, as well as the introduction of our Surf Gate system as an option for consumers of our Malibu boats beginning in fiscal year 2013.

Cost of Sales. For fiscal year 2013, our cost of sales increased 11.3% to $123.4 million compared to fiscal year 2012. The increase in cost of sales resulted primarily from the 8% increase in unit volume and a richer mix of products sold with additional features, offset somewhat by continued realization of labor efficiencies.

 

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Gross Profit. For fiscal year 2013, our gross profit increased 45.1% to $43.6 million compared to fiscal year 2012. Our gross profit, as a percentage of net sales, increased 480 basis points to 26.1% for fiscal year 2013 compared to fiscal year 2012. These increases resulted primarily from continued production efficiencies on increased volumes, higher average selling prices driven by price increases and increased sales of new boat models and optional features, and continued product cost reductions.

Operating Expenses. Our operating expenses for fiscal year 2013 increased 38.4% to $24.3 million compared to fiscal year 2012. Operating expenses as a percentage of sales for fiscal year 2013 increased 200 basis points to 14.5% percent compared to fiscal year 2012. The increase in operating expenses for 2013 was primarily attributable to increased general and administrative expense, comprised of payments made pursuant to our management agreement with Malibu Boats Investor, LLC, which will be terminated upon the consummation of this offering, and increased legal expenditures related to ongoing litigation. In addition, dealer incentives and sales expenses increased during fiscal year 2013 compared to fiscal year 2012 as a result of increased sales.

Other Expense, Net. Interest expense decreased by $0.1 million to $1.3 million in fiscal year 2013 compared to $1.4 million in fiscal year 2012. This decrease was a result of lower interest rates on our borrowings, despite our July 2012 refinancing of our credit facilities and subsequent higher average borrowing balances. For more information about the 2012 refinancing of our credit facilities, see “—Liquidity and Capital Resources—Comparison of the Fiscal Year Ended June 30, 2013 to the Fiscal Year Ended June 30, 2012—Financing Activities.” We experienced a modest decrease in other income over these periods, driven by a reduction in interest income.

Comparison of the Fiscal Year Ended June 30, 2012 to the Fiscal Year Ended June 30, 2011

Net Sales. Our net sales for fiscal year 2012 were $140.9 million, an increase of $40.9 million, or 40.9%, compared to fiscal year 2011. Unit volume for fiscal year 2012 was 2,482, a 33% increase compared to fiscal year 2011. The volume increase was attributable to increased consumer demand for our products, including market growth and market share growth. Net sales per unit increased approximately 6% for fiscal year 2012 compared to fiscal year 2011, primarily because of increased sales prices on new boat models and the introduction of our Wakesetter 22 MXZ, a larger premium priced model.

Cost of Sales. For fiscal year 2012, our cost of sales increased 32.4% to $110.8 million compared to fiscal year 2011. The increase in cost of sales resulted primarily from the 33% increase in unit volume and a richer mix of products sold with additional features, offset somewhat by continued realization of labor efficiencies.

Gross Profit. For fiscal year 2012, our gross profit increased 84.8% to $30.0 million compared to fiscal year 2011. Our gross profit, as a percentage of net sales, increased 510 basis points to 21.3% for fiscal year 2012 compared to fiscal year 2011. These increases resulted largely from the impact of new operational management who was able to achieve a combination of increased labor efficiencies, driven by higher volume and line optimization strategies, and decreased materials costs, attributable to reduced waste from enhanced process controls, among other items.

Operating Expenses. Our operating expenses for fiscal year 2012 increased 17.1% to $17.6 million compared to fiscal year 2011. Operating expenses as a percentage of sales for fiscal year 2012 decreased 250 basis points to 12.5% compared to fiscal year 2011. The increase in operating expenses for 2012 was broad-based across both general and administrative and selling and marketing expenses, but was primarily driven by increased expenditures on personnel, travel, consulting services and professional fees, including those related to ongoing litigation.

 

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Other Expense, Net. Interest expense decreased by $0.4 million to $1.4 million in fiscal year 2012 compared to $1.8 million in fiscal year 2011. This decrease was primarily a result of lower average borrowing balances under our former credit facility.

Quarterly Results of Operations

The table below sets forth our unaudited quarterly consolidated statements of income data for each of the five quarters in the period ended September 30, 2013. The unaudited quarterly consolidated statements of income data were prepared on a basis consistent with the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the quarterly financial information reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The historical results presented below are not necessarily indicative of the results to be expected for any future period, and the results for any interim period may not necessarily indicative of the results of operations for a full year.

 

    Three Months Ended  
    June 30,
2011
    Sep. 30,
2011
    Dec. 31,
2011
    March 31,
2012
    June 30,
2012
    Sept. 30,
2012
    Dec. 31,
2012
    March 31,
2013
    June 30,
2013
    Sept. 30,
2013
 
    (In thousands)  

Net sales

  $ 38,428      $ 31,984      $ 33,568      $ 36,263      $ 39,077      $ 33,159      $ 37,818      $ 47,062      $ 48,973      $ 43,304   

Cost of sales

    32,023        25,716        26,730        28,755        29,648        25,291        28,524        34,562        35,035        32,283   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    6,405        6,268        6,838        7,508        9,429        7,868        9,294        12,500        13,938        11,021   

Operating expenses:

                   

Selling and marketing

    949        1,864        1,059        682        466        1,076        1,194        1,523        1,144        1,432   

General and administrative

    2,179        1,672        1,675        2,247        2,713        4,511        2,641        4,150        2,875        1,955   

Amortization

    1,294        1,294        1,294        1,295        1,295        1,294        1,294        1,295        1,295        1,294   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    4,422        4,830        4,028        4,224        4,474        6,881        5,129        6,968        5,314        4,681   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    1,983        1,438        2,810        3,284        4,955        987        4,165        5,532        8,624        6,340   

Other expense, net

    (422     (372     (352     (301     (356     (346     (398     (332     (248     (1,161
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 1,561      $ 1,066      $ 2,458      $ 2,983      $ 4,599      $ 641      $ 3,767      $ 5,200      $ 8,376      $ 5,179   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Liquidity and Capital Resources

Our primary sources of funds have been cash provided by operating activities and borrowings under our credit agreement. Our primary use of funds has been for repayments under our credit arrangements, capital investments and cash distributions to members of the LLC. The following table summarizes the cash flows from operating, investing and financing activities:

 

     Fiscal Year Ended June 30,     Three Months Ended
September 30,
(Unaudited)
 
     2011     2012     2013     2012     2013  
     (In thousands)  

Total cash provided by (used in):

          

Operating activities

   $ 6,613      $ 15,495      $ 25,899      $ 3,021      $ 7,740   

Investment activities

     (1,302     (2,651     (2,878     (314     (878

Financing activities

     (6,154     (7,132     (21,861     (8,601     (18,122
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash

   $ (843   $ 5,712      $ 1,160      $ (5,894   $ (11,260

Comparison of the Three Months Ended September 30, 2013 to the Three Months Ended September 30, 2012

Operating Activities. Cash provided by operating activities for the three months ended September 30, 2013 was $7.7 million compared to $3.0 million for the three months ended September 30, 2012. The increase in cash provided by operating activities was primarily attributable to an increase in net income of $4.5 million in connection with higher volumes and profit margins as a result of the introduction of a new boat, the Wakesetter 24 MXZ, and our new Surf Gate system. The change in working capital requirements for the three months ended September 30, 2013 compared to the three months ended September 30, 2012, consisted principally of a $0.8 million increase in inventory purchases and accounts payable associated with increased volume and an increase of $0.2 million in prepaid expenses. These increases were offset by a $0.6 million decrease in accounts receivable as a result of the timing of collections and a $0.7 million decrease in accrued expenses attributable to our rebate accrual. The decrease in working capital was offset by an increase of $0.5 million for the write-off of debt issuance costs as a result of our refinancing in July 2013.

Investing Activities. Net cash used for investing activities was $0.9 million for the three months ended September 30, 2013 compared to $0.3 million for the same period in 2012, an increase of $0.6 million. Our cash used for investing activities for the three months ended September 30, 2012 and 2013 primarily related to investments in new property and equipment, including molds. Management expects our capital expenditures for fiscal year 2014 to be higher than typical at approximately $5.0 million, an increase from fiscal year 2013 capital expenditures of $2.9 million. This expected increase is primarily driven by investments to expand our Tennessee facility and increase production capacity to accommodate future growth.

Financing Activities. Net cash used for financing activities was $18.1 million for the three months ended September 30, 2013 compared to $8.6 million for the three months ended September 30, 2012, an increase of $9.5 million. Our use of cash from financing activities for the three months ended September 30, 2013 primarily consisted of distributions to members of the LLC, including tax distributions, in the aggregate amount of $57.8 million financed by cash on hand as well as our July 2013 refinancing. Our use of cash from financing activities for the three months ended September 30, 2012 primarily consisted of distributions to members of the LLC, including tax distributions, that were financed by our July 2012 refinancing and cash on hand.

 

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Comparison of the Fiscal Year Ended June 30, 2013 to the Fiscal Year Ended June 30, 2012

Operating Activities. Cash provided by operating activities for the fiscal year ended June 30, 2013 was $25.9 million compared to $15.5 million for the fiscal year ended June 30, 2012. The increase in cash provided by operating activities primarily resulted from an increase in net income of $6.9 million, which was attributable to higher volumes and profit margins as a result of the introduction of a new, higher margin boat, the Wakesetter 24 MXZ, and our new Surf Gate system. The change in working capital requirements for the fiscal year ended June 30, 2013 compared to the fiscal year ended June 30, 2012 consisted principally of a $3.5 million increase resulting from the timing of collections of accounts receivable offset by net cash used of $0.5 million for inventory purchases associated with higher volumes and related timing of accounts payable disbursements. Accrued expense increased $0.7 million as a result of additional warranty reserves for an increased number of warrantable boats, partially offset by a decrease in prepaid expense of $0.4 million resulting from the timing of recognition. The balance of the increase in cash provided from operating activities of $0.1 million was a result of increased depreciation expense attributable to new capital expenditures during the fiscal year ended June 30, 2013.

Investing Activities. Net cash used for investing activities was $2.9 million for fiscal year 2013 compared to $2.7 million for fiscal year 2012. Our cash used for investing activities for fiscal years 2012 and 2013 primarily related to the purchase of property and equipment.

Financing Activities. Net cash used for financing activities was $21.9 million for fiscal year 2013 compared to $7.1 million for fiscal year 2012. Our financing activities for fiscal year 2013 primarily consisted of distributions to members of the LLC financed by our July 2012 refinancing as well as ongoing tax distributions. The proceeds from the July 2012 refinancing were used to repay existing term and revolving loans that were due August 2012, pay equity distributions of $15.4 million, deferred financing and related fees of $0.7 million and management fees of $2.1 million in connection with the payment of management fees to Malibu Boats Investor, LLC, an affiliate, pursuant to an amendment to the management agreement in July 2012. Our financing activities for fiscal year 2012 primarily consisted of principal repayments of a prior credit facility.

Comparison of the Fiscal Year Ended June 30, 2012 to the Fiscal Year Ended June 30, 2011

Operating Activities. Cash provided by operating activities for the fiscal year ended June 30, 2012 was $15.5 million compared to $6.6 million for the fiscal year ended June 30, 2011. The increase in cash provided by operating activities was primarily attributable to an increase in net income of $11.6 million resulting from higher volumes and profit margins in connection with the introduction of a new, higher margin boat, the Wakesetter 22 MXZ, as well as various initiatives to maximize manufacturing line efficiencies and improve the sourcing of materials. The change in working capital requirements for the fiscal year ended June 30, 2012 compared to the fiscal year ended June 30, 2011 consisted principally of a $3.7 million decrease attributable to the timing of collections of accounts receivable and $0.2 million in net cash used for inventory purchases associated with higher volumes and timing of accounts payable disbursements for these purchases. Accrued expenses increased $0.9 million as a result of additional warranty reserves for increased number of warrantable boats and rebates. Further, prepaid expenses increased $0.2 million as a result of amortization of insurance costs and $0.1 million was attributable to increased depreciation expense on new capital expenditures during the fiscal year ended June 30, 2012.

Investing Activities. Net cash used for investing activities was $2.7 million for fiscal year 2012 compared to $1.3 million for fiscal year 2011. Our cash used for investing activities for fiscal years 2011 and 2012 primarily related to the purchase of property and equipment.

 

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Financing Activities. Net cash used for financing activities was $7.1 million for fiscal year 2012 compared to $6.2 million for fiscal year 2011. Our financing activities for fiscal year 2012 and 2011 primarily consisted of principal repayments of a prior credit facility that was due August 2012.

Loans and Commitments

We have lending arrangements with several financial institutions pursuant to a credit agreement with a syndicate of banks led by SunTrust Bank. Borrowings under our credit agreement bear interest at a rate equal to either, at our option, Bank Prime or LIBOR plus the applicable margin, as defined in our credit agreement. As of September 30, 2013, our credit agreement included the following facilities:

 

  Ÿ  

Revolving Credit Facility. We have access to a revolving credit facility from a bank syndicate led by SunTrust Bank in the principal amount of $10 million due on or before July 16, 2018. As of September 30, 2013, we had no outstanding balance under the revolving credit facility.

 

  Ÿ  

Swingline Credit Facility. We received a swingline line of credit from SunTrust Bank in the principal amount of up to $2 million due on or before July 16, 2018. Any amounts drawn under the swingline line of credit reduce the capacity under the revolving credit facility. As of September 30, 2013, we had no outstanding balance under the swingline facility.

 

  Ÿ  

Letter of Credit Facility. We have access to a letter of credit from SunTrust Bank in the principal amount of up to $3 million. Any amounts drawn under the letter of credit reduce the capacity under the revolving credit facility. As of September 30, 2013, we had no drawn amounts from the line of credit.

 

  Ÿ  

Term Loans. We received a term loan from each of the banks in the syndicate in the aggregate principal amount of $65 million due on or before July 16, 2018. As of September 30, 2013, we had an aggregate total of $64.2 million outstanding under the term loans.

The applicable rate for the term loans was 3.19%, as of September 30, 2013. An increase or decrease of 1.0% in this applicable rate would have resulted in an increase or decrease of $0.3 million in our interest expense for fiscal year 2013.

Our credit agreement permits prepayment without any penalties. Our credit agreement contains certain customary representations and warranties, and notice requirements for the occurrence of specific events such as pending or threatened labor disputes, litigation or judgments over a certain amount. Our credit agreement also contains certain restrictive covenants, which, among other things, place limits on our activities and those of our subsidiaries, the incurrence of additional indebtedness and additional liens on property and limit the future payment of dividends or distributions. For example, our credit agreement prohibits the LLC, Malibu Boats, LLC and Malibu Domestic International Sales Corp. from paying dividends or making distributions, subject to a number of exceptions, including distributions based on a member’s allocated taxable income, payments pursuant to stock option and other benefit plans, dividends and distributions within the loan parties and dividends payable solely in interests of classes of securities. In addition, after June 30, 2014, the LLC may make dividends and distributions of up to $4,000,000 in any fiscal year, subject to compliance with other financial covenants. We plan to enter an amendment to the credit agreement prior to the closing of the offering that will permit distributions to fund payments that are required under the tax receivable agreement. Our credit

 

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agreement specifies permitted liens, permitted investments and permitted debt. Affirmative covenants governing the timing of monthly, quarterly and annual financial reporting are also included in the credit agreement. Our lending arrangements are secured by substantially all of our assets pursuant to a security agreement. As of September, 30, 2013, we were in compliance with all covenants in the credit agreement and security agreement.

Future Liquidity Needs

We believe that our existing cash, credit facilities and cash flows from our operating activities will be sufficient to meet our anticipated future cash needs. Our future capital requirements will depend on many factors, including our growth rate and the timing and extent of operating expenses.

Contractual Obligations and Commitments

As of September 30, 2013, 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
 
     (In thousands)  

Long-term debt, including interest(1)

   $ 66,235       $ 3,773       $ 12,576       $ 49,886       $   

Notes payable-equipment, including interest

     57         57                           

Operating leases(2)

     30,117         1,877         3,753         3,847         20,640   

Purchase obligations(3)

     15,866         15,866                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 112,275       $ 21,573       $ 16,329       $ 53,733       $ 20,640   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Because interest rates under our credit agreement are based on LIBOR and are subject to fluctuation, future interest payments have been estimated based on an interest rate of 3.19%, which was the applicable rate for the term loans as of September 30, 2013. For more information about long-term debt, see “—Loans and Commitments.”
(2) We sold our two primary manufacturing and office facilities for a total of $18.3 million in 2008, which resulted in a gain of $0.7 million. Simultaneous with the sale, we entered into an agreement to lease back the buildings for an initial term of 20 years. The net gain of $0.2 million has been deferred and is being amortized in proportion to rent charged over the initial lease term.
(3) 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 majority of the orders are expected to be purchased throughout fiscal year 2014.

Our dealers have arrangements with certain finance companies to provide secured floor plan financing for the purchase of our products. These arrangements indirectly provide liquidity to us by financing dealer purchases of our products, thereby minimizing the use of our working capital in the form of accounts receivable. A majority of our sales are financed under similar arrangements, pursuant to which we receive payment within a few days of shipment of the product. We have agreed to repurchase products repossessed by the finance companies if a dealer defaults on its debt obligations to a finance company and the boat is returned to us, subject to certain limitations. Our financial exposure under these agreements is limited to the difference between the amounts unpaid by the dealer with respect to the repossessed product plus costs of repossession and the amount received on the resale of the repossessed product. No losses have been incurred under these agreements in the past three fiscal years. An adverse change in retail sales, however, could require us to repurchase repossessed units upon an event of default by any of our dealers, subject to the annual limitation.

 

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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, including offering free flooring incentives and seasonal promotions and tying our volume rebates to consistent ordering patterns, to encourage dealers to purchase our products throughout the year. As a result of these efforts, our operating results are less sensitive to seasonal variations than retail sales of our products. For fiscal year 2013, our quarterly net sales as a percentage of annual net sales were 19.9%, 22.6%, 28.2% and 29.3% for the first through fourth fiscal quarters, respectively.

Inflation

The market prices of certain materials and components used in manufacturing our products, especially resins that are made with hydrocarbon feedstocks, copper, aluminum and stainless steel, can be volatile. Historically, however, inflation has not had a material effect on our results of operations. Significant increases in inflation, particularly those related to wages and increases in the cost of raw materials, could have an adverse impact on our business, financial condition and results of operations.

New boat buyers often finance their purchases. Inflation typically results in higher interest rates that could translate into an increased cost of boat ownership. Should inflation and increased interest rates occur, prospective consumers may choose to forego or delay their purchases or buy a less expensive boat in the event credit is not available to finance their boat purchases.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses and cash flows, and related disclosure of contingent assets and liabilities. Our estimates include those related to goodwill, revenue recognition, rebates, equity-based compensation, product repurchases and warranty claims. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

We believe that of our significant accounting policies, which are described in the notes to our consolidated financial statements appearing elsewhere in this prospectus, the accounting policies listed below involve a greater degree of judgment and complexity. Accordingly, we believe these are the most critical to understand and evaluate fully our financial condition and results of operations.

Goodwill

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill amounts are not amortized, but rather are evaluated for potential impairment on an annual basis, as of June 30, unless circumstances indicate the need for impairment testing between the annual tests in accordance with the provisions of Financial Accounting Standards Board

 

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Accounting Standards Codification Topic 350, “Intangibles—Goodwill and Other.” If this assessment indicates the possibility of impairment, the income approach to test for goodwill impairment would be used unless circumstances indicate that a better estimate of fair value was available. Under the income approach, management calculates the fair value of each reporting unit based on the present value of estimated future cash flows. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then management determines the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference. We did not recognize any goodwill impairment charges in the fiscal years ended June 30, 2012 and 2013.

Revenue Recognition

We generally manufacture products based on specific orders from dealers and often ship completed products only after receiving credit approval from third-party financial institutions or those participating in floor financing programs. Revenue associated with sales to dealers financed through either source is primarily recorded when all of the following conditions have been met:

 

  Ÿ  

an order for a product has been received;

 

  Ÿ  

a common carrier signs the delivery ticket accepting responsibility for the product; and

 

  Ÿ  

the product is removed from our property for delivery.

These conditions are generally met when title passes, which is when boats are shipped to dealers in accordance with shipping terms, which are primarily free on board shipping point.

Dealers generally have no rights to return unsold boats. From time to time, however, we may accept returns in limited circumstances and at our discretion under our warranty policy. We may be obligated to accept returns of unsold boats under our repurchase commitment to floor financing providers.

Revenue from boat part sales is recorded as the product is shipped from our location, which is a free on board shipping point. Revenue associated with sales of materials, parts, boats or engine products sold under our exclusive manufacturing and distribution agreement with our Australian licensee are recognized under free-on-board port of disembarkment terms, the point at which the risks of ownership and loss pass to the licensee. We also earn royalties from our Australian licensee, which are accrued on a monthly basis based on the licensee’s gross sales. Royalties earned are paid to us on a quarterly basis.

Rebates, Promotions, Floor Financing and Incentives

We provide for various structured dealer rebate and sales promotions incentives, which are recognized as a reduction in net sales, at the time of sale to the dealer. Examples of such programs include rebates, seasonal discounts, promotional co-op arrangements and other allowances. Dealer rebates and sales promotion expenses are estimated based on current programs and historical achievement and/or usage rates. Actual results may differ from these estimates if market conditions dictate the need to enhance or reduce sales promotion and incentive programs or if dealer achievement or other items vary from historical trends. Free floor financing incentives are estimated at the time of sale to the dealer based on the expected expense to us over the term of the free flooring period and are recognized as a reduction in sales.

 

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Equity-Based Compensation

We account for stock-based compensation, which includes profits interests granted to employees and directors pursuant to the LLC’s current limited liability company agreement in accordance with FASB ASC Topic 718, “Compensation—Stock Compensation,” or ASC Topic 718. ASC Topic 718 requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the grant date fair value of the award.

Repurchase Commitments

In connection with our dealers’ wholesale floor plan financing of boats, we have entered into repurchase agreements 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 agreements are customary in the industry and our exposure to loss under such agreements is limited by the resale value of the inventory which is required to be repurchased. No units were repurchased for the fiscal years ended June 30, 2012 and 2013 or the three months ended September 30, 2012 and 2013.

Product Warranties

We provide a limited warranty for a period of up to three years for our products. Our standard warranties require us or our dealers to repair or replace defective products during the warranty period at no cost to the consumer. We estimate the costs that may be incurred under our basic limited warranty and records as a liability in the amount of such costs at the time the product revenue is recognized. Factors that affect our warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary. We utilize historical trends and analytical tools to assist in determining the appropriate warranty liability.

Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our financial condition through adverse changes in financial market prices and rates and inflation. Changes in these factors could cause fluctuations in our results of operations and cash flows. In the ordinary course of business, we are primarily exposed to interest rate risks. We manage our exposure to these market risks through regular operating and financing activities. We have also attempted to reduce our market risks through hedging instruments such as interest rate swaps.

 

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BUSINESS

Our Company

We are a leading designer, manufacturer and marketer of performance sport boats, having the #1 market share position in the United States since 2010. Our boats are used for water sports, including water skiing, wakeboarding and wake surfing, as well as general recreational boating. Since inception in 1982, we believe we have been a consistent innovator in the powerboat industry, designing products that appeal to an expanding range of recreational boaters and water sports enthusiasts whose passion for boating and water sports is a key aspect of their lifestyle. We believe many of our innovations, such as our proprietary Surf Gate technology launched in 2012, expand the market for our products by introducing consumers to new and exciting recreational activities. We believe that our boats are increasingly versatile, allowing consumers to use them for a wide range of activities that enhance the experience of a day on the water with family and friends. We believe that the performance, quality, value and multi-purpose features of our boats position us to achieve our goal of increasing our market share in the expanding recreational boating market.

We sell our high performance boats under two brands—Malibu and Axis. Our flagship Malibu brand boats offer our latest innovations in performance, comfort and convenience, and are designed for consumers seeking a premium boating experience. Retail prices of our Malibu boats typically range from $55,000 to $120,000. We launched our Axis brand of boats in 2009 to appeal to consumers who desire a more affordable product but still demand high performance, functional simplicity and the option to upgrade key features. Retail prices of our Axis boats typically range from $40,000 to $75,000.

All of our boats are built and tested at our corporate headquarters near Knoxville, Tennessee. Our boats are constructed of fiberglass, equipped with inboard propulsion systems and available in a range of sizes and hull designs. We employ experienced product development and engineering teams that enable us to offer a range of models across each of our brands while consistently introducing innovative features in our product offerings. Our engineering team closely collaborates with our manufacturing personnel in order to improve product quality and process efficiencies. The results of this collaboration are reflected in our achievement of higher margins than those of any public company in the powerboat industry and receipt of numerous industry awards, including the Watersports Industry Association’s Innovation of the Year in 2010 and 2013.

We sell our boats through a dealer network that we believe is the strongest in the performance sport boat category. As of September 30, 2013, our distribution channel consisted of 116 independent dealers in North America operating 139 locations in North America and 49 independent dealer locations across 36 countries outside of North America. Our boats are the exclusive performance sport boats offered by the majority of our dealers. Additionally, we have an exclusive licensee in Australia that we believe is the largest performance sport boat manufacturer in that country. 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.

We have experienced significant growth in net sales and profitability over the last several years. For fiscal year 2013, net sales and adjusted EBITDA were $167.0 million and $31.8 million, respectively, reflecting CAGRs of 29.2% and 100.3%, respectively, over the period since fiscal year 2011. For the three months ended September 30, 2013, our net sales and adjusted EBITDA were $43.3 million and $8.2 million, respectively, an increase of 30.6% and 48.4%, respectively, compared to the three months ended September 30, 2012.

 

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Our Market Opportunity

During 2012, retail sales of new powerboats in the United States totaled $5.8 billion. Of the powerboat categories defined and tracked by the NMMA, our core market corresponds most directly to the inboard ski/wakeboard category, which we refer to as the performance sport boat category. We believe our addressable market also includes similar and adjacent powerboat categories identified by the NMMA, which totaled over $4 billion of sales in 2012. The following table illustrates the size of our addressable market in units and retail sales for 2012:

 

Powerboat Category

   Unit Sales      Retail Sales  
     (Dollars in millions)  

Outboard

     128,800       $ 2,626   

Sterndrive

     16,500         883   

Performance sport boat

     5,500         375   

Jet boat

     4,500         160   
  

 

 

    

 

 

 

Total addressable market

     155,300       $ 4,044   

We believe we are well-positioned to benefit from several trends underway in our addressable market, including:

Improving Macroeconomic Environment Driving Increased Consumer Demand for Boats. Following the economic downturn, the recreational boating industry has grown and is projected to continue to recover. While domestic sales of new performance sport boats in 2012 grew to approximately 5,500 units, they remained 58% below the category’s 2006 sales volume of 13,100. IBISWorld projects that total U.S. powerboat manufacturer sales will grow at a CAGR of 6.5% from 2012 to 2017. While there is no guarantee that these projected growth rates will be achieved in the future, we believe the recreational boating industry has significant opportunity for growth from increased consumer demand and will continue to benefit from improved economic conditions.

Improved Dealer Inventory Positions. Boat manufacturers in our addressable market and industry-wide have been focused on clearing aged inventory from the retail channel over the past few years, driving the current inventory of new boats that are over a year old at dealerships to normalized and healthy levels. If retail sales levels continue to improve, we expect our dealers to place more wholesale orders from us in order to meet this demand. Lower dealer inventory positions also mitigate the potential effects of a decline in retail sales on wholesale volumes.

Increasing Ages of Used Boats Driving New Boat Sales. In 2012, new powerboats accounted for approximately one out of six powerboat sales in the United States compared to an average of approximately one out of four between 2002 and 2008. We believe the shift toward purchasing more used boats during the economic downturn helped cause the average age of powerboats in use to increase from 15 years in 1997 to over 20 years today. As the powerboat industry continues its ongoing recovery and older boats reach the end of their usable lives, we expect consumer purchases of new boats to shift back toward historic levels benefiting new boat manufacturers.

 

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Our Strengths

#1 Market Share Position in Performance Sport Boat Category. We held the number one market share position in the United States among manufacturers of performance sport boats for 2010, 2011, 2012 and the nine months ended September 30, 2013. We have grown our U.S. market share from 23.2% in 2008, the year prior to the arrival of our current Chief Executive Officer and Chief Financial Officer, to 30.6% in 2012. The following table reflects our U.S. market share in the performance sport boat category compared to the market share of our competitors for the periods shown:

 

Manufacturer/Brand(s)

   U.S. Market Share in Performance Sport Boat  Category  
           2008                     2012             Nine Months  Ended
September 30, 2013
 

Malibu Boats/Malibu and Axis

     23.2     30.6     32.9

MasterCraft Boat Company, LLC/MasterCraft

     23.8        21.7        19.7   

Correct Craft, Inc./Nautique

     15.2        14.5        15.5   

Skier’s Choice, Inc./Supra and Moomba

     16.5        14.7        12.9   

All others

     21.3        18.5        19.0   
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0

In addition, our 40.1% market share of performance sport boat exports to international markets in the 12 months ended September 30, 2013 was the highest among U.S. manufacturers.

Performance Sport Boat Category Taking Share. As the recovery in the general economy and overall powerboat industry has continued, the performance sport boat category in which we participate has experienced one of the highest growth rates. New unit sales of performance sport boats in the United States increased by 13% from 2011 to 2012, while new unit sales of all other powerboats in the United States increased 10% over the same period. This trend continued in 2013, as new unit sales of performance sport boats and all other powerboats in the United States increased by 11% and 2%, respectively, during the nine months ended September 30, 2013. We believe this is largely attributable to increased innovation in the features, designs and layouts of performance sport boats, which has improved the performance, functionality and versatility of these boats versus other recreational powerboats, particularly the larger category of sterndrive boats. We believe that we have been at the forefront of product innovation and will continue to appeal to a broader consumer base that values our boats not only for water sports, but also for general recreational boating and leisure activities. We believe that our market-leading position within our expanding category will create continued growth opportunities for us.

 

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Poised to Take Advantage of the Performance Sport Boat Market Recovery. With our leading and growing market share in our category, we believe that we are well-positioned to take advantage of the ongoing recovery in the powerboat market. While the performance sport boat category grew 13% in 2012, new unit sales remained significantly below historical peaks. As illustrated in the chart below, the 5,500 new units sold in 2012 were 53% below the average annual new unit sales volume of 11,714 observed between 2001 and 2007 and 58% below the 13,100 new units sold in 2006. While there is no guarantee that the market will continue to grow or return to historical sales levels, we believe we are in the early stages of a recovery that presents significant opportunity for growth.

 

LOGO

Even if the performance sport boat market does not reach previous peak levels, we believe that our #1 market share position in a category that is growing faster than the overall powerboat industry, our investments in the Company during and subsequent to the economic downturn, and our innovative product offering should drive superior performance.

Industry-leading Product Design and Innovation. We believe that our innovation in the design of new boat models and new features has been a key to our success, helping us increase our market share within our category and generally broaden the appeal of our products among recreational boaters. As a result of the features we have introduced, we believe that our boats are used for an increasingly wide range of activities and are increasingly easier to use, while maintaining the high performance characteristics that consumers expect. Additionally, by introducing new boat models in a range of price points, sizes, bow and hull designs, and optional performance features, we have enhanced consumers’ ability to select a boat suited to their individual preferences. Our commitment to, and consistency in, developing new boat models and introducing new features are reflected in several notable achievements, including:

 

  Ÿ  

release of our patented Surf Gate technology in 2012, which allows users to surf on either side of the boat’s wake, generates a better quality surf wave and was the Watersports Industry Association’s Innovation of the Year in 2013;

 

  Ÿ  

launch of the Axis brand of boats in 2009, designed from the ground up to be an entry-level product, which has already captured a 6.0% share of the U.S. market in our category; and

 

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  Ÿ  

introduction of the patented Power Wedge in 2006, which gives boaters the ability to customize the size and shape of the boat’s wake with the push of a button.

Strong Dealer Network. We have worked diligently with our dealers to develop the strongest distribution network in the performance sport boat category. We believe that our distribution network of 139 North American dealer locations and 49 international dealer locations allows us to distribute our products more broadly and effectively than our competitors. For fiscal year 2013, our dealers held the #1 market share position for the performance sport boat category in 75 of 133 U.S. markets. We have nominal dealer concentration, with our largest dealer responsible for less than 6.0% of our unit volume and our top ten dealers representing 36.1% of our unit volume in fiscal year 2013. We continually review our geographic coverage to identify opportunities for expansion and improvement, and have added 33 new dealer locations in the past five years to address previously underserved markets. In addition, we have strengthened our dealer network by replacing 36 dealer locations in the past five years, 18 of which were converted from selling one of our competitor’s products.

Highly Recognized Brands. We believe our Malibu and Axis brands are widely recognized in the powerboat industry, which helps us reach a growing number of target consumers. For over 30 years, our Malibu brand has generated a loyal following of recreational boaters and water sports enthusiasts who value the brand’s premium performance and features. Our Axis brand has grown rapidly as consumers have been drawn to its more affordable price point and available optional features. We believe that the appeal of our high performance and innovative products with athletes and enthusiasts contributes to our brand awareness with dealers and with consumers. We are able to build on this brand recognition and support through a series of marketing initiatives coordinated with our dealers or executed directly by us. Many of our marketing efforts are conducted on a grass-roots level domestically and internationally. Key grass-roots initiatives include: production and distribution of water sports videos; online and social marketing; on-the-water events; athlete, tournament and water sport facility sponsorships; and participation and product placement at important industry events. Additionally, our boats, their innovative features, our sponsored athletes and our dealers all frequently win industry awards, which we believe further boosts our brand recognition and reputation for excellence. We believe our marketing strategies and accomplishments enhance our profile in the industry, strengthen our credibility with consumers and dealers and increase the appeal of our brands.

Compelling Margins and Cash Flow. Our margins are higher than those of any public company in the powerboat industry. In recent years, we have implemented a number of initiatives to reduce our cost base and improve the efficiency of our manufacturing process. Re-engineering the manufacturing process in our Tennessee facility has reduced labor hours per boat produced, and close collaboration between our product development and manufacturing teams has improved production throughput and product quality. Further, vertical integration of tower and tower accessory production has allowed us to increase incremental margin per boat sold. As a result of these and other initiatives, adjusted EBITDA for fiscal year 2013 grew 59.9% on net sales growth of 18.5%, as compared to fiscal year 2012. Our high margins, combined with our low capital expenditure requirements and a highly efficient working capital cycle, allow us to generate significant excess cash flow. We believe our strong cash flow increases our financial stability and provides us with more flexibility to invest in growth initiatives.

Highly Experienced Management Team. Our experienced management team has demonstrated its ability to identify, create and integrate new product innovations, improve financial performance, optimize operations, enhance our distribution model and recruit top industry talent. Our Chief Executive Officer, Jack Springer, joined Malibu Boats in 2009 and has assembled an executive team with strong, complementary talents and experience. This team has

 

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led a workforce that we believe has produced superior results, including market share gains, sales growth and profitability improvement in each year since 2009.

Our Strategy

We intend to capitalize on the ongoing recovery in the powerboat market through the following strategies:

Continue to Develop New and Innovative Products in Our Core Markets. We intend to continue developing and introducing new and innovative products—both new boat models to better address a broader range of consumers and new features to deliver better performance, functionality, convenience, comfort and safety to our consumers. We believe that new products and features are important to the growth of our market share, the continued expansion of our category and our ability to maintain attractive margins.

Our product development strategy consists of a two-pronged approach. First, we seek to introduce new boat models to target unaddressed or underserved segments of the performance sport boat category, while also updating and refreshing our existing boat models regularly. For example, we introduced Axis-branded boats starting in 2009 to address the entry-level segment of our category, and we launched the Malibu Wakesetter MXZ product line in 2012 to enter the premium “picklefork” bow design segment of our market. Second, we seek to develop and integrate innovative new features into our boats, such as Surf Gate, Malibu Touch Command and Power Wedge. We intend to continue releasing new products and features multiple times during the year, which we believe enhances our reputation as a leading-edge boat manufacturer and provides us with a competitive advantage.

Capture Additional Share from Adjacent Boating Categories. Our culture of innovation has enabled us to expand the market for our products by attracting consumers from other categories, most notably from the sterndrive category. We intend to continue to enhance the performance, comfort and versatility of our products in order to further target crossover consumers seeking high-performance powerboats for general recreational activity. For example, we believe that one of our newest boat models, the Wakesetter 24MXZ, appeals to a broader range of recreational boaters by offering the performance benefits of our products, including superior drivability and water sports versatility, while also providing greater seating capacity, a roomy, plush interior and extensive storage space to allow an increased number of family and friends to spend time together on the water.

Further Strengthen Our Dealer Network. Our goal is to achieve and maintain leading market share in each of the markets in which we operate. We continually assess our distribution network and take the actions necessary to achieve our goal. We intend to strengthen our current footprint by selectively recruiting market-leading dealers who currently sell our competitors’ products. In addition, we plan to continue expanding our dealer network in certain geographic areas to increase consumer access and service in markets where it makes strategic sense. In the past five years, we have added 33 new dealer locations in the United States and Canada to provide incremental geographic coverage. We believe our targeted initiatives to enhance and grow our dealer network will increase unit sales in the future.

Accelerate International Expansion. Based on our U.S. leadership position, brand recognition, diverse, innovative product offering and distribution strengths, we believe that we are well-positioned to increase our international sales. Our 40.1% market share of performance sport boat exports to international markets in the 12 months ended September 30, 2013 was the highest among U.S. manufacturers. Our unit sales outside of North America, however, represented less

 

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than 5.0% of our total sales volume in fiscal year 2013. We believe we will increase our international sales both by promoting our products in developed markets where we have a well-established dealer base, such as Western Europe, and by penetrating new and emerging markets where we expect rising consumer incomes to increase demand for recreational products, such as Asia and South America.

We have taken a number of steps to enhance our international presence and our ability to drive sales in developed and emerging markets. Over the past three fiscal years, we added eight new international dealers, bringing our total number of dealer locations to 49 outside of North America. Historically, the majority of our boats have been distributed to international markets through third parties. In 2013, we restructured our agreements with those parties to provide for direct sales coverage of key markets, including Central America, South America, Asia (excluding the Middle East) and most of Africa. In Australia, we work closely with a licensed manufacturer to maintain and grow what we believe is our leading market share position while also pursuing opportunities to improve our unit economics. To better manage and optimize international sales, we have added dedicated company resources and increased our sales and marketing activity, including international dealer meetings, dealer service schools, regional marketing campaigns and promotional visits by water sport athletes.

Our Products and Brands

We design, manufacture and sell performance sport boats that we believe deliver superior performance for water sports, including wakeboarding, water skiing and wake surfing, as well as general recreational boating. We market our boats under two brands:

 

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Malibu, our flagship brand, dates to our inception in 1982, primarily targeting consumers seeking a premium boating experience and offering our latest innovations in performance, comfort and convenience; and

 

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Axis, which we launched as a new brand in 2009, targets a younger demographic and provides them with a more affordably priced, entry-level boat that provides high performance, functional simplicity and the option to upgrade key features.

In addition, we offer various accessories and aftermarket parts.

Boat Models

We believe our boats are renowned for their performance, design, innovative technology, quality and ability to provide consumers a high-quality boating experience at varying price points. We currently offer a number of performance sport boat models across our two brands, which provide consumers with a variety of options across length, hull type, bow type, horsepower and seating capacity in addition to customizable designs and features available for upgrade across our models. The following table provides an overview of our most popular product offerings by brand:

 

Brand

  Series   Number of
Models
  Lengths   Hull Types   Bow Types   Maximum
Power
  Maximum
Capacity
(persons)
  Retail  Price
Range

(In thousands)
 

Malibu

  Wakesetter   7   20’-25’   Wake,

Cut Diamond,

Diamond

  Traditional,

Picklefork

  555 hp   13-18     $55-$120   

Malibu

  Response   3   20’-21’   Cut Diamond   Traditional   450 hp   8-9     $35-$70   

Axis

  Axis   4   20’-24’   Wake   Picklefork   450 hp   11-17     $40-$75   

 

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  Ÿ  

Malibu Wakesetter. Introduced in 1998, the Wakesetter series is our premium boat series and the top selling series within the performance sport boat category. The Wakesetter series is designed for consumers seeking the highest-performance water sport and boating experience. Wakesetter offers consumers a highly-customizable boat with our most innovative technologies, premium features, newest graphics, color options and interior finishes. Demonstrating Wakesetter’s industry-leading performance and market position, the Wakesetter 23 LSV model was the best-selling boat in the performance sport boat category for fiscal years 2009 through 2013 and the Wakesetter 22 MXZ model was the official performance sport boat of the 2013 Red Bull Wake Open.

 

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Malibu Response. The Response series, created in 1995, was designed for consumers who desire a high-performance water ski boat. Primarily because of its direct drive engine setup, the Response series produces the smallest wake of any of our boats and is designed to accommodate both professional and recreational skiers by allowing for a range of speeds and line lengths. Demonstrating Response’s reputation for high-performance and quality, the Response TXI model is the boat of choice for Regina Jaquess, the holder of the women’s slalom world record.

 

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Axis. After the continued success with our Wakesetter series, we identified a market opportunity in entry-level performance sport boats and, in 2009, launched our Axis brand. We designed Axis for consumers who desire a lower price point, but who still demand high performance, functional simplicity and the option to upgrade their boats to have key features such as Surf Gate. The Axis series currently has four available models and we plan to refine these models continually as well as add new ones as we build out the brand. We believe the Axis series successfully provides consumers with a high quality water sport and boating experience at an attractive price, as evidenced by its #6 market position in the performance sport boat category after only four years on the market.

Innovative Features

In addition to the standard features included on all of our boats, we offer consumers the ability to upgrade our base models by adding certain of our full line of innovative features designed to enhance performance, functionality and the overall boating experience. Our innovative features drive our high average selling prices. Some of these include:

 

  Ÿ  

Surf Gate. Introduced in July 2012 and initially patented in September 2013, Surf Gate is available as an optional feature on all Malibu Wakesetter models and Axis brand boats. Surf Gate has revolutionized the increasingly popular sport of wake surfing. Prior to Surf Gate, boaters needed to empty ballast tanks on one side of the boat and shift passengers around to lean the boat to create a larger, more pronounced surf-quality wake. By employing precisely engineered and electronically controlled panels, Surf Gate alleviates this time-consuming and cumbersome process, allowing boaters to easily surf behind an evenly weighted boat without the need to wait for ballast changes. Recent enhancements to Surf Gate have improved upon the system’s actuators, allowing for easier and faster transfer, as well as the installation of an indicator horn and optional light signaling, which alert riders to wave transfers. In 2013, the Watersports Industry Association named Surf Gate as Innovation of the Year.

 

  Ÿ  

Manual Wedge/Power Wedge. Our patented Manual Wedge and Power Wedge allow riders to customize their wakes by simulating up to 1,200 pounds of ballast weight in the transom of their boats. Used in conjunction with Surf Gate, wake surfers are able to customize the size and shape of the wave. The Manual Wedge is available on all Malibu and Axis brand

 

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boats. Unlike our Manual Wedge, the Power Wedge, available exclusively on our Malibu line, is fully automated and integrated within the Malibu Touch Command system, increasing functionality and ease-of-use for the driver.

 

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G3 Tower. Our G3 Towers, available on Malibu brand boats, are fully customizable with speakers, power lights and racks, enhancing the overall style, performance and functionality of our boats. Our G3 Tower can easily be folded down by one person with its weightless, gas spring-assisted design, making the G3 Tower safe and easy to store. We are the only manufacturer of performance sport boats that produces towers in-house, allowing us to control this critical design element of our boats.

 

  Ÿ  

Electronic Dashboard Controls. Every boat in our Wakesetter series is equipped with our MaliView and Malibu Touch Command systems, which function as an electronic command center that enhances the driver’s experience by providing simple and quick control of all systems on board, including the Power Wedge and Surf Gate systems, rider presets, music, lighting and navigation.

We also offer an array of less technological, but nonetheless value-added boat features such as gelcoat upgrades, upholstery upgrades, engine drivetrain enhancements (such as silent exhaust tips, propeller upgrades and closed cooling engine configuration), sound system upgrades, Bimini tops, boat covers and trailers which further increase the level of customization afforded to consumers.

Our Dealer Network

We rely on independent dealers to sell our products. We establish performance criteria that our dealers must meet as part of their dealer agreements to ensure our dealer network remains the strongest in the industry. As a member of our network, dealers in North America may qualify for floor plan financing programs, rebates, seasonal discounts, promotional co-op payments and other allowances. We believe our dealer network is the most extensive in the performance sport boat category. The majority of our dealers, including eight in our top ten markets, are exclusive to Malibu and Axis brand boats within the performance sport boat category, highlighting the commitment of our key dealers to our boats.

North America

In North America, we had a total of 139 dealer locations as of September 30, 2013. Of these locations, 16% sell our products exclusively, 60% are multi-line locations that only carry non-competitive brands and products and 24% sell our brands as well as other performance sport boat brands. Approximately 35% of our dealer locations have been with us for over ten years. For fiscal year 2013, our dealers held the #1 market share position for the performance sport boat category in 75 of 133 U.S. markets.

We consistently review our distribution network to identify opportunities to expand our geographic footprint and improve our coverage of the market. Over the past five years, we have added 33 new dealer locations to serve previously underserved markets in North America, and these new dealers have sold over 475 additional units over the last five fiscal years. In addition, we have strengthened our dealer network by replacing 36 dealer locations in the past five years, 18 of which were converted from selling one of our competitor’s products. We believe our outstanding dealer network allows us to distribute our products more efficiently than our competitors.

We do not have a significant concentration of sales among our dealers. For fiscal year 2013, our top ten dealers accounted for 36.1% of our units sold and none of our dealers accounted for more than 6.0% of our total sales volume.

 

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We believe that our strong market position in each region of the United States will help us capitalize on growth opportunities as our industry continues to recover from the economic downturn. In particular, we expect to generate continued growth in the southwestern United States (which includes California), a region that experienced the most pronounced decline in sales of new performance sport boats and where we have our highest regional market share. The following graph provides a comparison of the number of units sold by U.S. geographic region during fiscal year 2006, when the market was generally at its pre-recession peak, and fiscal year 2013, as well as our U.S. market share in the performance sport boat category for fiscal year 2013:

 

LOGO

International

Less than 5.0% of our unit volume for fiscal year 2013 was generated outside of North America. For these international sales, we rely in part on our relationship with an independent representative, which is responsible for dealer arrangements in Europe, the Middle East and South Africa. We have had a relationship with this independent representative for over 17 years and offer the representative a discount based on the sale of eligible products. In 2013, we restructured our agreement with this representative and our Australian licensee to allow for direct coverage by us of Central America, South America and most of Asia and Africa. In Europe, we had a total of 31 independent dealer locations in 20 countries as of September 30, 2013. In Asia, 12 independent dealer locations marketed our boats in 11 countries as of September 30, 2013. In the rest of the world (other than Australia), we engaged six independent dealer locations in five countries as of September 30, 2013. In Australia, as discussed below, we have a direct relationship with a licensee.

Australia License

Our Malibu and Axis lines have been manufactured and sold in Australia by an exclusive licensee, Malibu Boats Pty Ltd, since 1995. This licensing arrangement has contributed significantly to our large market share in the Australian market, where we believe our brands outsold our most significant competitors at a three-to-one ratio during the 12 months ended September 30, 2013.

 

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We entered into an Exclusive Manufacture and Distribution Agreement with Malibu Boats Pty Ltd. in 2006, as subsequently amended. The agreement has a term of 15 years, with a 15-year automatic renewal period, and is generally terminable for cause with 30 days’ prior notice. Pursuant to the agreement, Malibu Boats Pty Ltd has the exclusive right to manufacture and distribute Malibu and Axis products and spare parts in Australia and New Zealand. We sell to Malibu Boats Pty Ltd certain materials that it requires to manufacture Malibu and Axis products and we also sell complete boats for resale in the covered territory. Further, we have granted a license to Malibu Boats Pty Ltd to display our trademarks and brand names on the products it manufactures under the agreement. We also provide Malibu Boats Pty Ltd with certain marketing assistance. On a quarterly basis, we receive royalties on the gross revenue from the sale of Malibu and Axis products sold by Malibu Boats Pty Ltd. Pursuant to the agreement, Malibu Boats Pty Ltd agrees to, among other things:

 

  Ÿ  

refrain from selling or distributing any of our competitors’ products;

 

  Ÿ  

maintain design and quality control standards prescribed by us;

 

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promote and demonstrate Malibu and Axis products to consumers; and

 

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indemnify us for certain claims.

Dealer Management

Our relationship with our dealers is governed through dealer agreements. Each dealer agreement has a finite term lasting between one and three years. Our dealer agreements also are typically terminable without cause by the dealer at any time and by us with 90 days’ prior notice. We may also generally terminate these agreements immediately for cause upon certain events. Pursuant to our dealer agreements, the dealers typically agree to, among other things:

 

  Ÿ  

represent our products at specified boat shows;

 

  Ÿ  

market our products only to retail end users in a specific geographic territory;

 

  Ÿ  

promote and demonstrate our products to consumers;

 

  Ÿ  

place a specified minimum number of orders of our products during the term of the agreement in exchange for rebate eligibility that varies according to the level of volume they commit to purchase;

 

  Ÿ  

provide us with regular updates regarding the number and type of our products in their inventory;

 

  Ÿ  

maintain a service department to service our products, and perform all appropriate warranty service and repairs; and

 

  Ÿ  

indemnify us for certain claims.

Our dealer network, including all additions, renewals, non-renewals or terminations, is managed by our sales personnel. Our sales team operates using a semi-annual dealer review process involving our senior management team. Each individual dealer is reviewed semi-annually with a broad assessment across multiple key elements, including the dealer’s geographic region, market share and customer service ratings, to identify underperforming dealers for remediation and to manage the transition process when non-renewal or termination is a necessary step.

 

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We have developed a system of financial incentives for our dealers based on customer satisfaction and achievement of best practices. Our dealer incentive program has been refined through nearly 30 years of experience and provides the following key elements:

 

  Ÿ  

Rebates. Our dealers agree to an annual commitment volume that places each dealer into a certain rebate tier and determines its prospective rebate percentage. If a dealer meets its annual commitment volume as well as other terms of the rebate program, the dealer is entitled to the specified rebate. Failure to meet the commitment volume may result in partial or complete forfeiture of the dealer’s rebate.

 

  Ÿ  

Co-op. Dealers of the Malibu product line may earn certain co-op reimbursements upon reaching a specified level of qualifying expenditures.

 

  Ÿ  

Free flooring. Our dealers that take delivery of current model year boats in the offseason, typically July through April, are 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. This program is an additional incentive to encourage dealers to order in the offseason and helps us balance our seasonal production.

Our dealer incentive programs are also structured to promote more evenly distributed ordering throughout the fiscal year, which allows us to achieve better level-loading of our production and thereby generate plant operating efficiencies. In addition, these programs offer further rewards for dealers who are exclusive to Malibu and Axis in our performance sport boat category.

Floor Plan Financing

Our North American dealers often purchase boats through floor plan financing programs with third-party floor plan financing providers. During fiscal year 2013, approximately 80% of our domestic shipments were made pursuant to floor plan financing programs through which our dealers participate. These programs allow dealers to establish lines of credit with third-party lenders to purchase inventory. Under these programs, a dealer draws on the floor plan facility upon the purchase of our boats and the lender pays the invoice price of the boats. As is typical in our industry, we have entered into repurchase agreements with certain floor plan financing providers to our dealers. Under the terms of these arrangements, in the event a lender repossesses a boat from a dealer that has defaulted on its floor financing arrangement and is able to deliver the repossessed boat to us, we are obligated to repurchase the boat from the lender. Our obligation to repurchase such repossessed products for the unpaid balance of our original invoice price for the boat is subject to reduction or limitation based on the age and condition of the boat at the time of repurchase, and in certain cases by an aggregate cap on repurchase obligations associated with a particular floor financing program.

Our exposure under repurchase agreements with third-party lenders is mitigated by our ability to reposition inventory with a new dealer in the event that a repurchase event occurs. The primary cost to us of a repurchase event is any loss on the resale of a repurchased unit, which is often less than 10.0% of the repurchase amount. Since July 1, 2010, we have repurchased zero units under repurchase agreements.

Marketing and Sales

As of September 30, 2013, we employed seven specialized and dedicated sales professionals. We believe that providing a high level of service to our dealers and end consumers is essential to maintaining our excellent reputation. Our sales personnel receive training on the latest Malibu

 

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Boats products and technologies, as well as training on our competitors’ products and technologies, and attend trade shows to increase their market knowledge. This training is then passed along to our dealers to ensure a consistent marketing message and leverage our marketing expenditures. We enjoy strong brand awareness, as evidenced by our substantial market share.

Our marketing strategy focuses on strengthening and promoting the Malibu and Axis brands in the recreational boating marketplace. An important element of our marketing strategy involves specialized promotions at competitive water sports events, and individual and team sponsorships. Our leading position in the performance sport boat category is supported by our sponsorship of some of the most prestigious water sports competitions, including the Red Bull Wake Open, Malibu Open and World Wakeboard Association Riders Experience, which we believe positively influences the purchasing habits of enthusiasts and other consumers seeking high-performance products. These events feature the most popular figures in water sports, drawing large audiences of enthusiasts to a variety of sites around the country. Further, we sponsor a team of elite male and female athletes from the professional water sports tours. Team Malibu includes legendary wakeboarders such as Phil Soven, named “King of Wake” at the 2013 Surf Expo, Dallas Friday, winner of the 2004 ESPY for “Best Female Action Sports Athlete,” Raph Derome, winner of WakeWorld.com’s “Rail Rider of the Year” for 2013, and Amber Wing, winner of TransWorld’s “Best Women’s Rider” for 2013. We believe that the performance of our products has been demonstrated by, and our brands benefit from, the success of professional athletes who use our products.

In addition to our website and traditional marketing channels, such as print advertising and tradeshows, we maintain an active digital advertising and social media platform, including use of Facebook and Twitter to increase brand awareness, foster loyalty and build a community of users. In addition, we benefit from the various Malibu and Axis user-generated videos and photos that are uploaded to websites including YouTube, Vimeo and Instagram. As strategies and marketing plans are developed for our products, our internal marketing and communications group works to ensure brand cohesion and consistency. We believe that our marketing initiatives, as well as our strategic focus on product innovation, performance and quality attracts aspiring and enthusiast consumers to our brands and products.

Product Development and Engineering

We are strategically and financially committed to innovation, as reflected in our dedicated product development and engineering group and evidenced by our track record of new product introduction. Our product development and engineering group spans both our Tennessee headquarters and our California facility and comprises 11 professionals. These individuals bring to our product development efforts significant expertise across core disciplines, including boat design, computer-aided design, electrical engineering and mechanical engineering. They are responsible for execution of all facets of our new product strategy, including designing new and refreshed boat models and new features, engineering these designs for manufacturing and integrating new features into our boats. In addition, our Chief Executive Officer and Chief Operating Officer are actively involved in the product development process and integration into manufacturing.

We take a disciplined approach to the management of our product development strategy. We use a formalized phase gate process, overseen by a dedicated project manager, to develop, evaluate and implement new product ideas for both boat models and innovative features. Application of the phase gate process requires management to establish an overall timeline that is sub-divided into milestones, or “gates,” for product development. Setting milestones at certain intervals in the product development process ensures that each phase of development occurs in an organized manner and enables management to become aware of and address any issues in timely fashion,

 

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which facilitates on-time, on-target release of new products with expected return on investment. Extensive testing and coordination with our manufacturing group are important elements of our product development process, which we believe enable us to minimize the risk associated with the release of new products. Our phase gate process also facilitates our introduction of new boat models and features throughout the year, which we believe provides us with a competitive advantage in the marketplace. Finally, in addition to our process for managing new product introductions in a given fiscal year, we also engage in longer-term product lifecycle and product portfolio planning.

Manufacturing

Our manufacturing efforts are led by our Chief Operating Officer, who brings 30 years of experience in the manufacture of performance sport boats, supported by a workforce of 365 employees as of September 30, 2013. We manufacture all of our boats at our Tennessee facility, and we manufacture towers, tower accessories and stainless steel and aluminum billet at our California facility.

Our boats are built through a continuous flow manufacturing process that encompasses fabrication, assembly, quality management and testing. Each boat is produced over a seven-day cycle that includes the fabrication of the hull and deck through gelcoat application and fiberglass lamination, grinding and hole cutting, installation of components, rigging, finishing, detailing and on-the-water testing. We manufacture certain components and subassemblies for our boats, such as upholstery, stainless steel and aluminum billet and towers. We procure other components, such as engines and electronic controls, from third-party vendors and install them on the boat.

We acquired our tower and tower accessory manufacturing capability in 2009 through the acquisition of certain assets of Titan Wake Accessories, which had been one of our suppliers. Tower-related manufacturing occurs in our Merced-based machine shop, where we use multiple computer-controlled machines to cut all of the aluminum parts required for tower assembly. We are the only performance sport boat company that manufacturers towers in-house. We believe that the vertical integration of these components is a distinct competitive advantage that allows us to control key design elements of our boats and generate higher margins.

We are committed to continuous improvement in our operations, and our efforts in this regard have resulted in higher gross margins. Specifically, we have increased labor efficiency, reduced cost of materials and reduced warranty claims. Our production engineers evaluate and seek to optimize the configuration of our production line given our production volumes and model mix. We use disciplined mold maintenance procedures to maintain the usable life of our molds and to reduce surface defects that would require rework. We have instituted scrap material reduction and recovery processes, both internally and with our supplier base, helping to manage our material costs. Finally, we have implemented a quality management system to ensure that proper procedures and control measures are in place to deliver consistent, high-quality product, especially as our production volumes have increased.

We focus on worker safety in our operations. From July 1, 2012 through September 30, 2013, we recorded 762,094 consecutive man-hours without a lost-time accident in our Tennessee facility, an accomplishment that has reduced workers’ compensation claims and warranty costs, as our most experienced employees continue to remain on the job.

Suppliers

We purchase a wide variety of raw materials from our supplier base, including resins, fiberglass, hydrocarbon feedstocks and steel, as well as product parts and components, such as engines and electronic controls, through a sales order process.

 

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We belong to Independent Boat Buildings, Inc., or IBBI, a 22-member marine purchasing cooperative and sit on its board of directors. Membership in IBBI is limited to top-tier manufacturers and is not only helpful for procuring materials, but also helps us stay abreast of technological developments and industry best practices. Although we purchase certain supplies, such as fiberglass and resins, through the IBBI cooperative agreement, we maintain informal arrangements with third-party suppliers outside of the IBBI agreement for other raw materials and components, which we believe ensures that our boats are constructed using the best available components and raw materials.

We have not experienced any material shortages in any of our raw materials, product parts or components. Temporary shortages, when they do occur, usually involve manufacturers of these products adjusting model mixes, introducing new product lines or limiting production in response to an industry-wide reduction in boat demand.

The most significant component used in manufacturing our boats, based on cost, are engines. We maintain a strong and long-standing relationship with our primary supplier of engines, and we have also developed a relationship with a second supplier from whom we expect to source approximately 10% of our engines for fiscal year 2014. As is typical in our industry, our engine suppliers are marinizers of engines that they procure from larger engine block manufacturers, such as General Motors Corporation.

Insurance and Product Warranties

We carry various insurance policies, including policies to cover general products liability, workers’ compensation and other casualty and property risks, to protect against certain risks of loss consistent with the exposures associated with the nature and scope of our operations. Our policies are generally based on our safety record as well as market trends in the insurance industry and are subject to certain deductibles, limits and policy terms and conditions.

We provide limited product warranties, generally covering periods from 12 to 36 months for Malibu brand boats and 12 to 24 months for Axis brand boats. During the warranty period, we reimburse dealers and Malibu Boats authorized service facilities for all or a portion of the cost of repair or replacement performed on the products (mainly composed of parts or accessories provided by us and labor costs incurred by dealers or Malibu Boats authorized service facilities). 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 trailers, among other components.

Intellectual Property

We rely on a combination of patent, trademark and copyright protection, trade secret laws, confidentiality procedures and contractual provisions to protect our rights in our brand, products and proprietary technology. This is an important part of our business and we intend to continue protecting our intellectual property. We currently hold 13 U.S. patents, with two additional patents in Canada and Australia, and have seven patents pending (12 patent applications are pending in various countries including the United States, Canada, Australia and Europe).

We own 26 registered trademarks in various countries around the world, and we have made applications for four additional registrations. Such trademarks may endure in perpetuity on a country-by-country basis, provided that we comply with all statutory maintenance requirements, including continued use of each trademark in each such country. We currently do not own any registered copyrights.

 

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Competition

The powerboat industry, including the performance sport boat category, is highly competitive for consumers and dealers. Competition affects our ability to succeed in the markets we currently serve and new markets that we may enter in the future. We compete with several large manufacturers that may have greater financial, marketing and other resources than we do. We compete with large manufacturers who are represented by dealers in the markets in which we now operate and into which we plan to expand. We also compete with a wide variety of small, independent manufacturers. Competition in our industry is based primarily on brand name, price and product performance. For more information, see “Risk Factors—Risks Related to Our Business—Our industry is characterized by intense competition, which affects our sales and profits.”

Environmental, Safety and Regulatory Matters

Certain materials used in our manufacturing, including the resins used in production of our boats, are toxic, flammable, corrosive or reactive and are classified by the federal and state governments as “hazardous materials.” Control of these substances is regulated by the Environmental Protection Agency, or EPA, and state pollution control agencies. The Occupational Safety and Health Administration, or OSHA, standards limit the amount of emissions to which an employee may be exposed without the need for respiratory protection or upgraded plant ventilation. Our facilities are regularly inspected by OSHA and by state and local inspection agencies and departments. We believe that our facilities comply in all material aspects with these regulations. Although capital expenditures related to compliance with environmental laws are expected to increase, we do not currently anticipate any material expenditure will be required to continue to comply with existing environmental or safety regulations in connection with our existing manufacturing facilities.

Powerboats sold in the United States must be manufactured to meet the standards of certification required by the United States Coast Guard. In addition, boats manufactured for sale in the European Community must be certified to meet the European Community’s imported manufactured products standards. These certifications specify standards for the design and construction of powerboats. We believe that all of our boats meet these standards. In addition, safety of recreational boats is subject to federal regulation under the Boat Safety Act of 1971, which requires boat manufacturers to recall products for replacement of parts or components that have demonstrated defects affecting safety. We have instituted recalls for defective component parts produced by certain of our third-party suppliers. None of the recalls has had a material adverse effect on our Company.

The EPA has adopted regulations stipulating that many marine propulsion engines meet an air emission standard that requires fitting a catalytic converter to the engine. These regulations also require, among other things, that engine manufacturers provide a warranty that their engines meet EPA emission standards. The engines used in our products are subject to these regulations. This regulation has increased the cost to manufacture our products.

Employees

We believe we maintain excellent relations with our employees, treating them as business partners and focusing on building careers. As of September 30, 2013, more than 20% of our employees had been with us for ten or more years. As of September 30, 2013, we employed 408 people, 333 of whom work at our facilities in Tennessee, 68 of whom work at our California site and seven who work remotely. As of September 30, 2013, approximately 16% of our employees

 

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were salaried and 84% were hourly workers. None of our employees are represented by a labor union and, since our founding in 1982, we have never experienced a labor-related work stoppage. Since 2012, we have engaged an outside consultant to assist with employee training, in order to provide our employees a path for upward mobility and develop leadership skills applicable to their day-to-day responsibilities.

Facilities

Tennessee

Our boats are manufactured and tested on the lake at the site of our 144,000 square-foot primary manufacturing facility located in Loudon, Tennessee. Our primary facility is leased pursuant to a lease agreement that has a term through March 31, 2028, with the option to extend for three additional terms of ten years each. We also lease:

 

  Ÿ  

23,460 square feet of warehouse and office space located in Loudon pursuant to a lease agreement that has a term through December 31, 2014, with an additional renewal term of two years; and

 

  Ÿ  

approximately 20,000 square feet of warehouse space in Lenoir City, Tennessee pursuant to a lease agreement currently in effect for renewable two-month periods through July 31, 2014.

We also own 16.7 acres of land in Loudon, Tennessee that is available for future expansion of our operations.

California

We lease a 150,000 square-foot facility in Merced, California pursuant to a lease agreement that has a term through March 31, 2028, with the option to extend for three additional terms of ten years each. Our Merced site houses both our product development team that focus on design innovations as well as our tower and tower accessory manufacturing operations. The components assembled at this site are delivered to our facilities in Tennessee and our Australian partner.

Legal Proceedings

The nature of our business ordinarily results in a certain amount of claims, litigation and legal and administrative proceedings. Although we have developed policies and procedures to minimize the impact of legal noncompliance and other disputes, litigation and regulatory actions present an ongoing risk. Our insurance has deductibles and will likely not cover all litigation or other proceedings or the costs of defense. When and as we determine we have meritorious defenses to the claims asserted against us, we vigorously defend against such claims. We will consider settlement of claims when, in management’s judgment and in consultation with counsel, it is in the best interests of the Company to do so. Although we are not currently involved in any outstanding litigation that we believe, individually or in the aggregate, will have a material adverse effect on our business, financial condition or results of operations, we cannot predict the outcome of any pending litigation, and an unfavorable outcome could have an adverse impact on our business, financial condition or results of operations.

On August 27, 2010, Pacific Coast Marine Windshields Ltd., or PCMW, filed suit against us and certain third parties, including Marine Hardware, Inc., a third-party supplier of windshields to us. PCMW was a significant supplier of windshields to us through 2008, when we sought an

 

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alternative vendor of windshields in response to defective product supplied by PCMW. PCMW’s latest amended complaint alleges, among other things, infringement of a design patent and two utility patents related to marine windshields, copyright infringement and misappropriation of trade secrets. We denied any liability arising from the causes of action alleged by PCMW and filed a counter claim alleging PCMW’s infringement of one of our patents, conversion of two of the patents asserted against us, unfair competition and breach of contract. In December 2012, the court granted partial summary judgment in our favor, holding that we did not infringe the design patent asserted against us. While PCMW has appealed the court’s decision, it has dismissed all remaining claims against us, other than the claims of copyright infringement and misappropriation of trade secrets. The remaining matters are stayed pending resolution of PCMW’s appeal. We believe that PCMW’s claims are without merit and intend to vigorously defend the lawsuit at both the trial court and appellate levels.

On October 31, 2013, we filed suit against Nautique Boat Company, Inc., or Nautique, in the U.S. District Court for the Eastern District of Tennessee claiming infringement of two of our patents. These patents relate to our proprietary wake surfing technology. This lawsuit is a re-filing of a California patent infringement lawsuit against Nautique that we dismissed without prejudice on October 31, 2013. Nautique filed for declaratory judgment in the U.S. District Court for the Middle District of Florida, claiming that it has not infringed the patents involved in the suit. In this lawsuit, we allege that Nautique manufactured, used, promoted, offered for sale and sold boats with certain equipment in violation of our patent rights. We intend to vigorously pursue this litigation to enforce our rights in the patented technology.

 

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HISTORY AND FORMATION TRANSACTIONS

Company History

In 1982, a group of six friends who shared a common passion for waterskiing decided to start building custom ski boats in a small shop in Merced, California. Robert Alkema founded the Company and chose the Malibu Boats brand name. During our first year of operation, Malibu Boats built two boats per week using a single-hull design and each boat, with its blended gel coat design, had a distinct California flair. Only two years later, we were building over 400 boats per year. By 1988, the California plant was manufacturing at full capacity. To satisfy increased demand, we opened a second plant in Tennessee and by the end of 1988 were building almost 1,000 boats annually. That year also marked the year we received our first Product Excellence award from Powerboat magazine.

Growth continued throughout the early 1990s and, in 1992, we built a new production facility near Knoxville, Tennessee to accommodate increased demand east of the Mississippi. During that time, we became the first boat manufacturer to use computers in our initial boat designs and introduced a new, patented, fiberglass engine chassis system that eliminated vibration and noise associated with the drivetrain.

Water sports evolved in the late 1990s and wakeboarding quickly gained in popularity. To capitalize on this growing trend, we introduced the WakeSetter model and the wakeboarding-focused Manual Wedge feature, which created an enhanced, “rampy” wake without the need for ballast tanks.

In 1999, we sponsored The Malibu Open water ski championships, which quickly became a premier event for slalom, trick and jump waterskiing. Shortly thereafter, the Malibu Just Ride wakeboard series, the first wakeboard-specific event that did not include water skiing, kicked off in the United States in 2001.

By 2003, we had captured the leading market share position in the performance sport boat category.

In 2006, we were acquired by an investor group, including affiliates of Black Canyon Capital LLC, Horizon Holdings, LLC and then-current management. In 2008 and 2009, we, like almost every manufacturer in the marine industry, experienced significant volume declines as a result of the global recession. In the midst of the recession, in May 2009, Jack Springer took over as our interim Chief Executive Officer and became Chief Executive Officer in February 2010. Wayne Wilson became our Chief Financial Officer in November 2009. In 2011, Ritchie Anderson joined our senior management team as Vice President of Operations and was later named Chief Operating Officer. This highly talented team with complementary skill sets has been instrumental in leading our company out of the recession, achieving #1 market share and developing our strategies for continued growth.

Organizational Structure

Malibu Boats Inc. was incorporated as a Delaware corporation on November 1, 2013 to serve as a holding company that will hold an interest in Malibu Boats Holdings, LLC. The certificate of incorporation of Malibu Boats, Inc. authorizes two classes of common stock, Class A Common Stock and Class B Common Stock, each having the terms described in “Description of Capital Stock.” In addition, our certificate of incorporation authorizes shares of undesignated preferred stock, the rights, preferences and privileges of which may be designated from time to time by our

 

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board of directors. The board of directors of Malibu Boats, Inc. will include four affiliates of the LLC. We expect that, prior to closing of this offering, five additional directors who are independent under the corporate governance standards under the rules of Nasdaq and the Exchange Act will be appointed to the board of directors. For more information, see “Management—Executive Officers and Directors.”

Following this offering, Malibu Boats, Inc. will remain a holding company with a controlling equity interest in the LLC. Malibu Boats, Inc. will operate and control all of the business and affairs and will consolidate the financial results of the LLC. Prior to the closing of the offering, the limited liability company agreement of the LLC will be amended and restated to, among other things, modify its capital structure by replacing the different classes of interests currently held by our existing owners with a single new class of LLC Units. We and our existing owners will also enter into an exchange agreement under which (subject to the terms of the exchange agreement) they will have the right to exchange their LLC Units for shares of our Class A Common Stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications, or for cash (except in the event of a change in control), at our election. In addition, pursuant to the limited liability company agreement of the LLC, Malibu Boats, Inc., as managing member of the LLC, will have the right to require all members to exchange their LLC Units for Class A Common Stock in accordance with the terms of the exchange agreement, subject to the consent of Black Canyon Management LLC and the holders of a majority of outstanding LLC Units other than those held by Malibu Boats, Inc.

 

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The following diagram depicts our organizational structure immediately following this offering and assumes all the shares offered hereby are sold, including the over-allotment:

 

LOGO

Recapitalization

Immediately prior to the offering, LLC Units will be allocated among our existing owners pursuant to the distribution provisions of the former limited liability company agreement of the LLC based upon the liquidation value of the LLC, assuming it was liquidated at the time of this offering with a value implied by the initial public offering price of the shares of Class A Common Stock sold in this offering. Immediately prior to the offering, there will be              LLC Units issued and outstanding.

We refer to the foregoing transactions as the “Recapitalization.”

 

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Holders of our Class A Common Stock and our Class B Common stock will have voting power over Malibu Boats, Inc., the sole managing member of the LLC, at a level that is consistent with their overall equity ownership of our business. In connection with the Recapitalization, Malibu Boats, Inc. will issue to each existing owner, for nominal consideration, one share of Class B Common Stock of Malibu Boats, Inc., each of which provides its owner with no economic rights but entitles the holder to one vote on matters presented to stockholders of Malibu Boats, Inc. for each LLC Unit held by such holder, as described in “Description of Capital Stock—Common Stock—Voting Rights.” Holders of our Class A Common Stock and Class B Common Stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.

We and the holders of LLC Units will enter into an exchange agreement under which, subject to the terms of the exchange agreement, they (or certain permitted transferees thereof) have the right to exchange their LLC Units for shares of our Class A Common Stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications, or for cash (except in the event of a change in control), at our election. For more information, see “Certain Relationships and Related Party Transactions—Exchange Agreement.”

Offering Transactions

At the time of this offering, Malibu Boats, Inc. intends to purchase newly-issued LLC Units from the LLC and outstanding LLC Units from our existing owners, in each case at a purchase price per unit equal to the initial public offering price per share of Class A Common Stock in this offering. We will only purchase LLC Units from members of senior management, however, if the underwriters exercise their over-allotment option to purchase additional shares of Class A Common Stock. We will not retain any of the proceeds used to purchase LLC Units from our existing owners. The LLC will bear or reimburse Malibu Boats, Inc. for all of the expenses of this offering, including the underwriters’ fees. See “Principal and Selling Stockholders” for information regarding the proceeds from this offering that will be paid to our named executive officers.

Further, immediately prior to the offering, two beneficial owners of LLC Units will merge with and into two newly-formed subsidiaries of Malibu Boats, Inc. As a result of these mergers, the sole stockholders of each of the two merging entities will receive shares of Class A Common Stock in exchange for shares of capital stock of the merging entities. The two former sole stockholders of the merging entities will be selling stockholders in this offering.

As described above, we intend to use a portion of the proceeds from this offering to purchase LLC Units from our existing owners. In addition, the holders of LLC Units (other than Malibu Boats, Inc.) may (subject to the terms of the exchange agreement) exchange their LLC Units for shares of Class A Common Stock of Malibu Boats, Inc. on a one-for-one basis, or for cash (except in the event of a change in control), at our election. As a result of both the initial purchase of LLC Units from the existing owners and subsequent purchases or exchanges, Malibu Boats, Inc. will become entitled to a proportionate share of the existing tax basis of the assets of the LLC at such time. In addition, the initial purchase of LLC Units from the existing owners and subsequent purchases or exchanges are expected to result in increases in the tax basis of the assets of the LLC that otherwise would not have been available. These increases in tax basis may reduce the amount of tax that Malibu Boats, Inc. would otherwise be required to pay in the future. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. We will enter into a tax receivable agreement with our existing owners that provides for the payment by Malibu Boats, Inc. to our existing owners of 85% of the amount of the benefits, if any, that Malibu Boats, Inc. is deemed to

 

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realize as a result of (1) increases in tax basis and (2) certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. These payment obligations are obligations of Malibu Boats, Inc. and not of the LLC. We estimate that the tax basis of the assets of the LLC at the time of this offering will be $        . Of such tax basis,     % will be attributable to Malibu Boats, Inc. (or     % if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders) and     % will be attributable to our existing owners (or     % if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders). For more information, see “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

In connection with its acquisition of LLC Units, Malibu Boats, Inc. will become the sole managing member of the LLC and, through the LLC, operate our business. Accordingly, although Malibu Boats Inc. will initially have a     % economic interest in the LLC, Malibu Boats, Inc. will have 100% of the voting power and control the management of the LLC after the close of this offering. We refer to the foregoing transactions as the “Offering Transactions.” As a result of the Offering Transactions:

 

  Ÿ  

the investors in this offering will collectively own              shares of our Class A Common Stock (or              shares of Class A Common Stock if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders);

 

  Ÿ  

Malibu Boats, Inc. will hold              LLC Units (or              LLC Units if the underwriters exercise in full their over-allotment option to purchase additional shares of Class A Common Stock from us and the selling stockholders), representing     % of the economic interest in the LLC (or     % if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders);

 

  Ÿ  

our existing owners will hold              LLC Units, representing     % of the economic interest in the LLC (or              LLC Units, representing     % if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders);

 

  Ÿ  

the investors in this offering will collectively have     % of the voting power in Malibu Boats, Inc. (or     % if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders); and

 

  Ÿ  

our existing owners, through their holdings of our Class B Common Stock, will collectively have     % of the voting power in Malibu Boats, Inc. (or     % if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us and the selling stockholders).

Our post-offering organizational structure will allow our existing owners to retain their equity ownership in the LLC, an entity that is classified as a partnership for U.S. federal income tax purposes, in the form of LLC Units. Investors in this offering will, by contrast, hold their equity ownership in Malibu Boats, Inc., a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes, in the form of shares of Class A Common Stock. We believe that our existing owners generally will find it advantageous to hold their equity interests in an entity that is not taxable as a corporation for U.S. federal income tax purposes. Our existing owners, like Malibu Boats, Inc., will incur U.S. federal, state and local income taxes on their proportionate share of any taxable income of the LLC.

 

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As noted above, prior to the closing of the offering, we will enter into an exchange agreement with our existing owners that entitles them to exchange their LLC Units for shares of our Class A Common Stock on a one-for-one basis, subject to customary conversion rate adjustments, or for cash (except in the event of a change in control), at our election. The exchange agreement will provide, however, that such exchanges must be for a minimum of the lesser of 1,000 LLC Units or such lesser amount as we determine to be acceptable. The exchange agreement will also provide that an existing owner will not have the right to exchange LLC Units if Malibu Boats, Inc. determines that such exchange would be prohibited by law or regulation or would violate other agreements with Malibu Boats, Inc. to which the existing owner may be subject or any of our written policies. The exchange agreement will also provide that Malibu Boats, Inc. may impose additional restrictions on exchanges that it determines to be necessary or advisable so that the LLC is not treated as a “publicly traded partnership” for U.S. federal income tax purposes. In addition, pursuant to the limited liability company agreement of the LLC, Malibu Boats, Inc., as managing member of the LLC, will have the right to require all members to exchange their LLC Units for Class A Common Stock in accordance with the terms of the exchange agreement, subject to the consent of Black Canyon Management LLC and the holders of a majority of outstanding LLC Units other than those held by Malibu Boats, Inc.

Our existing owners will also hold shares of Class B Common Stock of Malibu Boats, Inc. Although these shares have no economic rights, they will allow our existing owners to exercise voting power over Malibu Boats, Inc., the managing member of the LLC, at a level that is consistent with their overall equity ownership of our business. Under the certificate of incorporation of Malibu Boats, Inc., each holder of Class B Common Stock will be entitled to one vote for each LLC Unit held by such holders. Accordingly, as our existing owners sell LLC Units to us as part of the Offering Transactions or subsequently exchange LLC Units for shares of Class A Common Stock of Malibu Boats, Inc. pursuant to the exchange agreement, the voting power afforded to them by their shares of Class B Common Stock is automatically and correspondingly reduced.

Holding Company Structure

Malibu Boats, Inc. will be a holding company with a controlling equity interest in the LLC. As the sole managing member of the LLC, Malibu Boats, Inc. will operate and control all of the business and affairs of the LLC and, through the LLC, conduct our business.

Malibu Boats, Inc. will consolidate the financial results of the LLC, and the ownership interest of the other members of the LLC will be reflected as a non-controlling interest in Malibu Boats, Inc.’s consolidated financial statements.

Pursuant to the limited liability company agreement of the LLC, Malibu Boats, Inc. will have the right to determine when distributions will be made to the members of the LLC and the amount of any such distributions. If Malibu Boats, Inc. authorizes a distribution, such distribution will be made to the members of the LLC (including Malibu Boats, Inc.) pro rata in accordance with the percentages of their respective limited liability company interests.

The holders of LLC Units, including Malibu Boats, Inc., will incur U.S. federal, state and local income taxes on their proportionate share of any taxable income of the LLC. Net profits and net losses of the LLC will generally be allocated to its members (including Malibu Boats, Inc.) pro rata in accordance with the percentages of their respective limited liability company interests. The limited liability company agreement will provide for cash distributions to the holders of LLC Units if Malibu Boats, Inc. determines that the taxable income of the LLC will give rise to taxable income for its members. In accordance with the limited liability company agreement, we intend to cause the LLC to make cash distributions to the holders of LLC Units for purposes of funding their tax

 

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obligations in respect of the income of the LLC that is allocated to them. Generally, these tax distributions will be computed based on our estimate of the taxable income of the LLC allocable to such holder of LLC Units multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident in Los Angeles, California (taking into account the nondeductibility of certain expenses and the character of our income). For purposes of determining the taxable income of the LLC, such determination will be made by generally disregarding any adjustment to the taxable income of any member of the LLC that arises under the tax basis adjustment rules of the Internal Revenue Code of 1986, as amended, or the Code, and is attributable to the acquisition by such member of an interest in the LLC in a sale or exchange transaction. For more information, see “Certain Relationships and Related Party Transactions—Malibu Boats Holdings, LLC Limited Liability Company Agreement.”

 

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MANAGEMENT

Executive Officers, Directors and Director Nominees

The following table sets forth certain information about our executive officers, directors and persons who are not yet directors but have been appointed and agreed to become directors immediately following the completion of this offering, whom we refer to as our director nominees:

 

Name

   Age   

Principal Position

Jack D. Springer

   52   

Chief Executive Officer and Director

Wayne R. Wilson

   33   

Chief Financial Officer

Ritchie L. Anderson

   48   

Chief Operating Officer

Dan L. Gasper

   51   

Vice President of Product Design

Deborah S. Kent

   49   

Vice President of Human Resources

Michael K. Hooks

   51   

Chairman of the Board and Director

Mark W. Lanigan

   53   

Director

Phillip S. Estes

   54   

Director

James R. Buch

   60   

Director Nominee

Ivar S. Chhina

   51   

Director Nominee

Michael J. Connolly

   48   

Director Nominee

Peter E. Murphy

   51   

Director Nominee

John E. Stokely

   61   

Director Nominee

There are no family relationships between or among any of our executive officers, directors or director nominees. Set forth below is additional information concerning our executive officers, directors and director nominees.

Jack D. Springer, Chief Executive Officer and Director. Mr. Springer was our interim Chief Executive Officer beginning in May 2009 and became our Chief Executive Officer in February 2010. From June 2003 to February 2010, Mr. Springer was a partner and managing director with Qorval, LLC, a private consultancy that provides strategic leadership and executive management across various industries. As a result of his role with Qorval, Mr. Springer has served as Chief Executive Officer at Diamondback Tactical LLLP, a manufacturer of tactical armor systems for federal, state and local law enforcement agencies and defense contractors, as Chief Restructuring Offer of American Plastics, Inc., a thermoform plastics manufacturer for the restaurant and hospitality industry and as interim Chief Executive Officer of Allen White Inc., a furniture manufacturer and wholesaler. While at Qorval, Mr. Springer was also Chief Integration Officer at Nautic Global Group from 2004 to 2007, during which time he was responsible for the integration of two boat manufacturers. Mr. Springer received a B.A. in Accountancy from the University of Texas of the Permian Basin. Based on his perspective and experience as our Chief Executive Officer, as well as his depth of his experience in the boat manufacturing industry and as a chief executive, we believe that Mr. Springer is qualified to serve on our board of directors.

Wayne R. Wilson, Chief Financial Officer. Mr. Wilson has served as our Chief Financial Officer since November 2009. From September 2008 to November 2009, Mr. Wilson served on the LLC’s executive board. Prior to joining Malibu Boats, Mr. Wilson was a vice president of Black Canyon Capital LLC where he was employed since its founding in 2004. While at Black Canyon Capital, he was responsible for due diligence and execution of numerous acquisitions and financings. Prior to joining Black Canyon Capital, Mr. Wilson was an investment banker at Credit Suisse First Boston,

 

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where he gained experience advising and financing companies across a range of industries. Mr. Wilson received a B.A. in Business Economics from the University of California, Los Angeles.

Ritchie L. Anderson, Chief Operating Officer. Mr. Anderson has served as our Chief Operating Officer since September 2013 and joined Malibu Boats in July 2011 as our Vice President of Operations. Prior to joining Malibu Boats, Mr. Anderson was Vice President of Operations at MasterCraft Boat Company, where he spent 28 years in production management. While at MasterCraft, he held various roles in operations that included management responsibility for manufacturing, supply chain, quality, customer service, environmental and safety. Mr. Anderson has 30 years of experience in the boat manufacturing industry.

Dan L. Gasper, Vice President of Product Design. Mr. Gasper has served as our Vice President of Product Design since September 2013. Mr. Gasper joined Malibu in 1988 and has worked in manufacturing, quality, engineering and design. He has been designing our products for nearly 25 years and has led our design efforts for over a decade.

Deborah S. Kent, Vice President of Human Resources. Ms. Kent has served as our Vice President of Human Resources since September 2013 after joining Malibu Boats in January 2011 as our Director of Human Resources. Prior to that, Ms. Kent was Vice President of Human Resources at IdleAire, Inc., a company that provides in-cab services to truckers through centralized systems at truck stops around the United States, where she began serving as the Director of Employment and Employee Relations in 2004. Ms. Kent received a B.S. in Education from East Central University and a M.S. in Adult Education from the University of Central Oklahoma.

Michael K. Hooks, Chairman of the Board and Director. Mr. Hooks has been a director of the LLC since 2006. He was a co-founder and has been a managing director of Black Canyon Capital LLC since 2004. Previously, Mr. Hooks was a co-head of the Los Angeles office of Credit Suisse First Boston and a managing director in the Los Angeles office of Donaldson, Lufkin & Jenrette. Mr. Hooks also serves on the boards of directors of JDC Healthcare, Saunders & Associates and TASI Holdings, each of which is a private company. He previously served on the boards of directors of Virgin America, Logan’s Roadhouse and Switchcraft, each of which is a private company, as well as the Supervisory Board of Pfeiffer Vacuum Technology, at the time a public company listed on the New York Stock Exchange. Mr. Hooks received a degree in Economics from Princeton University and an M.B.A. with distinction from the Wharton School of Business. Based on his extensive experience as an investment banker advising companies on their financing and strategic alternatives, his experience as a private equity manager working with companies and their management teams to grow and improve their businesses, and his deep knowledge of Malibu Boats given his seven-year tenure as a board member, we believe Mr. Hooks is qualified to serve on our board of directors.

Mark W. Lanigan, Director. Mr. Lanigan has been a director of the LLC since 2006. He was a co-founder and has been a managing director of Black Canyon Capital LLC since 2004. Mr. Lanigan was formerly a co-head of the Los Angeles office and a member of the Investment Banking Executive Board of Credit Suisse First Boston and head of the Los Angeles office of Donaldson, Lufkin & Jenrette. He also serves on the boards of directors of JDC Healthcare and Saunders & Associates, and previously served on the boards of directors of Virgin America and Archway Marketing Services, all of which are private companies. Mr. Lanigan graduated summa cum laude, Phi Beta Kappa with a degree in Economics from Colgate University and received a J.D. degree from Harvard Law School and an M.B.A. from Harvard Business School. We believe Mr. Lanigan is qualified to serve on our board of directors based on his extensive experience as an investment banker advising companies on their financing and strategic alternatives, his experience as a private equity manager working with companies and their management teams to grow and improve their business