MasterCraft Boat Holdings, Inc. 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read together with the sections entitled “Risk Factors” and the financial statements and the accompanying notes included elsewhere in this Form 10-K. In addition, the statements in this discussion and analysis regarding the performance expectations of our business, anticipated financial results, liquidity and the other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements” and in “Risk Factors” above. Our actual results may differ materially from those contained in or implied by any forward-looking statements. This section generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 are not included in this Annual Report on Form 10-K and can be found in Item 7 of the Company’s Annual Report on Form 10-K for the year ended June 30, 2022 , which was filed with the SEC on September 9, 2022. Key Performance Measures From time to time we use certain key performance measures in evaluating our business and results of operations and we may refer to one or more of these key performance measures in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These key performance measures include: • Unit sales volume — We define unit sales volume as the number of our boats sold to our dealers during a period. • Net sales per unit — We define net sales per unit as net sales divided by unit sales volume. • Gross margin — We define gross margin as gross profit divided by net sales, expressed as a percentage. • Net income margin — We define net income margin as net income from continuing operations divided by net sales, expressed as a percentage. • Adjusted EBITDA — We define Adjusted EBITDA as net income from continuing operations, before interest, income taxes, depreciation, and amortization (“EBITDA”), as further adjusted to eliminate certain non-cash charges and unusual items that we do not consider to be indicative of our core/ongoing operations. For a reconciliation of EBITDA to Adjusted EBITDA, see “Non-GAAP Measures” below. • Adjusted EBITDA margin — We define Adjusted EBITDA margin as Adjusted EBITDA divided by net sales, expressed as a percentage. For a reconciliation of Adjusted EBITDA margin to net income margin, see “Non-GAAP Measures” below. • Adjusted Net Income — We define Adjusted Net Income as net income from continuing operations, adjusted to eliminate certain non-cash charges and other items that we do not consider to be indicative of our core/ongoing operations and adjusted for the impact to income tax expense related to non-GAAP adjustments. For a reconciliation of net income from continuing operations to Adjusted Net Income, see “Non-GAAP Measures” below. Discontinued Operations On September 2, 2022, the Company completed the sale of its NauticStar business. This business, which was previously reported as the Company's NauticStar segment until fiscal 2023, is being reported as discontinued operations for all periods presented. The Company's results for all periods presented, as discussed in Management's Discussion and Analysis, are presented on a continuing operations basis with prior year amounts recast to provide comparability. See Note 3 in Notes to Consolidated Financial Statements for more information on Discontinued Operations. Fiscal 2023 Overview Net sales were up slightly during fiscal 2023 when compared to fiscal 2022. The increase was primarily due to higher pricing to offset inflationary cost pressures, partially offset by a decrease in wholesale volume, dealer incentives and less favorable model mix. We achieved our goal of rebalancing dealer inventories; however, due to a slowing retail environment, the number of wholesale units sold were lower when compared to prior year. Model mix trended towards smaller-sized models as more boats were sold as inventory stock versus retail-sold boats. Also, because of increased dealer inventories, higher interest rates, and an increasingly competitive retail environment, dealer incentives, which include floor plan financing costs and other incentives, have increased. Gross margin declined during fiscal 2023 when compared to fiscal 2022. Offsetting the increased net sales discussed above were increased expenses related to material, labor and overhead inflation. Other contributory expenses included increased insurance premiums and warranty-related costs. Overall, including the impact of dealer incentives in net sales noted above, the gross margin percentage declined 60 basis points. 21 Operating expenses slightly increased during fiscal 2023 when compared to fiscal 2022. Total selling, general and administrative expenses as a percentage of net sales remained relatively flat during fiscal 2023 when compared to the same prior year period. Results of Operations We derived the consolidated statements of operations for the fiscal years ended June 30, 2023 and 2022 from our audited consolidated financial statements and related notes included elsewhere in this Form 10-K. Our historical results are not necessarily indicative of the results that may be expected in the future. Consolidated Results 2023 2022 Change % Change (Dollar amounts in thousands) Consolidated statements of operations : NET SALES $ 662,046 $ 641,609 $ 20,437 3.2 % COST OF SALES 492,333 473,419 18,914 4.0 % GROSS PROFIT 169,713 168,190 1,523 0.9 % OPERATING EXPENSES: Selling and marketing 13,808 12,869 939 7.3 % General and administrative 37,034 36,070 964 2.7 % Amortization of other intangible assets 1,956 1,956 — 0.0 % Goodwill impairment — 1,100 (1,100 ) — Total operating expenses 52,798 51,995 803 1.5 % OPERATING INCOME 116,915 116,195 720 0.6 % OTHER INCOME (EXPENSE): Interest expense (2,679 ) (1,471 ) (1,208 ) 82.1 % Interest income 3,351 — 3,351 — INCOME BEFORE INCOME TAX EXPENSE 117,587 114,724 2,863 2.5 % INCOME TAX EXPENSE 27,135 26,779 356 1.3 % NET INCOME FROM CONTINUING OPERATIONS $ 90,452 $ 87,945 $ 2,507 2.9 % Additional financial and other data: Unit sales volume: MasterCraft 3,407 3,596 (189 ) (5.3 %) Crest 2,836 3,156 (320 ) (10.1 %) Aviara 134 100 34 34.0 % Consolidated unit sales volume 6,377 6,852 (475 ) (6.9 %) Net sales: MasterCraft $ 468,656 $ 466,027 $ 2,629 0.6 % Crest 141,247 140,859 388 0.3 % Aviara 52,143 34,723 17,420 50.2 % Consolidated net sales $ 662,046 $ 641,609 $ 20,437 3.2 % Net sales per unit: MasterCraft $ 138 $ 130 $ 8 6.2 % Crest 50 45 5 11.1 % Aviara 389 347 42 12.1 % Consolidated net sales per unit 104 94 10 10.6 % Gross margin 25.6 % 26.2 % (60) bps Net Sales. Net Sales increased 3.2 percent for fiscal 2023 when compared to fiscal 2022. The increase was a result of higher prices, partially offset by decreased sales volumes, increased dealer incentives, and less favorable model mix. Dealer incentives include higher floor plan financing costs as a result of increased dealer inventories and interest rates, and other incentives as the retail environment becomes more competitive. Gross Margin. Gross Margin percentage declined 60 basis points during fiscal 2023 when compared to fiscal 2022. Lower margins were the result of higher costs related to material and overhead inflation, higher costs from dealer incentives, lower absorption due to decreased sales volumes, less favorable model mix, and increased warranty costs related to prior model year expenses, partially offset by higher prices and improved production efficiencies. Operating Expenses . Operating expenses increased 1.5 percent during fiscal 2023 when compared to the same prior year period. During fiscal 2022, a $1.1 million goodwill impairment charge was recorded in the Aviara segment, as discussed in Note 7 in the Notes to 22 Consolidated Financial Statements. Selling, general and administrative expenses as a percentage of net sales were relatively flat during fiscal 2023 when compared to the same prior year period. Interest Expense. Interest expense increased $1.2 million primarily due to higher effective interest rates. Interest Income. Interest income of $3.4 million during fiscal 2023 is derived from investments in fiscal 2023 in a portfolio of fixed income securities as part of the Company's cash management strategy. Income Tax Expense. Our consolidated effective income tax rate decreased to 23.1 percent for fiscal 2023 from 23.3 percent for fiscal 2022. See Note 10 in Notes to Consolidated Financial Statements for more information. Segment Results MasterCraft Segment The following table sets forth MasterCraft segment results for the fiscal years ended: (Dollar amounts in thousands) 2023 2022 Change % Change Net sales $ 468,656 $ 466,027 $ 2,629 0.6 % Operating income 101,324 105,341 (4,017 ) (3.8 %) Purchases of property, plant and equipment 17,414 6,642 10,772 162.2 % Unit sales volume 3,407 3,596 (189 ) (5.3 %) Net sales per unit $ 138 $ 130 $ 8 6.2 % Net sales increased 0.6 percent during fiscal 2023, when compared to fiscal 2022. The increase was primarily driven by higher selling prices, partially offset by decreased sales volumes, less favorable model mix, and increased dealer incentives. Operating income decreased 3.8 percent during fiscal 2023, when compared to the same prior year period. The overall decrease was driven by higher costs from inflationary pressures, higher dealer incentives, less favorable model mix, decreased sales volumes, and increased warranty costs related to prior model year expenses, partially offset by favorable pricing. Purchases of property, plant, and equipment increased $10.8 million during fiscal 2023, when compared to fiscal 2022. The increase was due to capital spending focused on facility enhancements, strategic initiatives, and information technology. Crest Segment The following table sets forth Crest segment results for the fiscal years ended: (Dollar amounts in thousands) 2023 2022 Change % Change Net sales $ 141,247 $ 140,859 $ 388 0.3 % Operating income 20,106 19,892 214 1.1 % Purchases of property, plant and equipment 7,149 4,193 2,956 70.5 % Unit sales volume 2,836 3,156 (320 ) (10.1 %) Net sales per unit $ 50 $ 45 $ 5 11.1 % Net sales increased 0.3 percent during fiscal 2023, when compared to fiscal 2022, as a result of higher prices, and favorable model mix and options, partially offset by decreased unit volume and increased dealer incentives. Operating income increased 1.1 percent during fiscal 2023, when compared to the same prior year period. The increase was primarily due to higher selling prices, and favorable model mix and options, partially offset by higher costs from inflationary pressures, decreased unit volume, and increased dealer incentives. Purchases of property, plant, and equipment increased $3.0 million during fiscal 2023, when compared to the same prior-year period. The increase was primarily due to capital spending focused on capacity expansion. 23 Aviara Segment The following table sets forth Aviara segment results for the fiscal years ended: (Dollar amounts in thousands) 2023 2022 Change % Change Net sales $ 52,143 $ 34,723 $ 17,420 50.2 % Operating loss (4,515 ) (9,038 ) 4,523 50.0 % Goodwill impairment — 1,100 (1,100 ) — Purchases of property, plant and equipment 5,760 1,461 4,299 294.3 % Unit sales volume 134 100 34 34.0 % Net sales per unit $ 389 $ 347 $ 42 12.1 % Net sales increased 50.2 percent during fiscal 2023, when compared to fiscal 2022, mainly due to increased sales volume and higher selling prices, partially offset by higher dealer incentives. Operating loss decreased 50.0 percent for fiscal 2023, when compared to fiscal 2022. The change was primarily a result of higher prices, improved production efficiencies, and increased sales volume, partially offset by higher costs from inflationary pressures, and increased dealer incentives. Additionally, a goodwill impairment charge was recorded during the first quarter of fiscal 2022. Purchases of property, plant, and equipment increased $4.3 million during fiscal 2023, when compared to fiscal 2022. The increase was due to capital spending focused on capacity expansion and tooling. Non-GAAP Measures EBITDA, Adjusted EBITDA, EBITDA Margin, and Adjusted EBITDA Margin We define EBITDA as net income from continuing operations, before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA further adjusted to eliminate certain non-cash charges or other items that we do not consider to be indicative of our core and/or ongoing operations. For the periods presented herein, these adjustments include share-based compensation, business development consulting costs, goodwill impairment, Aviara transition costs, and debt refinancing charges, as described in more detail below. We define EBITDA margin and Adjusted EBITDA margin as EBITDA and Adjusted EBITDA, respectively, expressed as a percentage of Net sales. Adjusted Net Income and Adjusted Net Income Per Share We define Adjusted Net Income and Adjusted Net Income per share as net income from continuing operations adjusted to eliminate certain non-cash charges or other items that we do not consider to be indicative of our core and/or ongoing operations and reflecting income tax expense on adjusted net income before income taxes at our estimated annual effective tax rate. For the periods presented herein, these adjustments include other intangible asset amortization, share-based compensation, business development consulting costs, goodwill impairment, Aviara transition costs, and debt refinancing charges. EBITDA, Adjusted EBITDA, EBITDA margin, Adjusted EBITDA margin, Adjusted Net Income, and Adjusted Net Income per share, which we refer to collectively as the Non-GAAP Measures, are not measures of net income or operating income as determined under accounting principles generally accepted in the United States, or U.S. GAAP. The Non-GAAP Measures are not measures of performance in accordance with U.S. GAAP and should not be considered as an alternative to net income, net income per share, or operating cash flows determined in accordance with U.S. GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of cash flow. We believe that the inclusion of the Non-GAAP Measures is appropriate to provide additional information to investors because securities analysts and investors use the Non-GAAP Measures to assess our operating performance across periods on a consistent basis and to evaluate the relative risk of an investment in our securities. We use Adjusted Net Income and Adjusted Net Income per share to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results prepared in accordance with U.S. GAAP, provides a more complete understanding of factors and trends affecting our business than does U.S. GAAP measures alone. We believe Adjusted Net Income and Adjusted Net Income per share assists our board of directors, management, investors, and other users of the financial statements in comparing our net income on a consistent basis from period to period because it removes certain non-cash items and other items that we do not consider to be indicative of our core and/or ongoing operations and reflecting income tax expense on adjusted net income before income taxes at our estimated annual effective tax rate. The Non-GAAP Measures have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are: 24 • Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and the Non-GAAP Measures do not reflect any cash requirements for such replacements; • The Non-GAAP Measures do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; • The Non-GAAP Measures do not reflect changes in, or cash requirements for, our working capital needs; • The Non-GAAP Measures do not reflect our tax expense or any cash requirements to pay income taxes; • The Non-GAAP Measures do not reflect interest expense, or the cash requirements necessary to service interest payments on our indebtedness; and • The Non-GAAP Measures do not reflect the impact of earnings or charges resulting from matters we do not consider to be indicative of our core and/or ongoing operations, but may nonetheless have a material impact on our results of operations. In addition, because not all companies use identical calculations, our presentation of the Non-GAAP Measures may not be comparable to similarly titled measures of other companies, including companies in our industry. Due to the effects of discontinued operations, as discussed above in “Part I, Item 1. Business,” the Company's non-GAAP financial measures are presented on a continuing operations basis, for all periods presented. The following table presents a reconciliation of net income from continuing operations as determined in accordance with U.S. GAAP to EBITDA and Adjusted EBITDA, and net income from continuing operations margin (expressed as a percentage of net sales) to Adjusted EBITDA margin (expressed as a percentage of net sales) for the periods indicated: % of Net % of Net % of Net 2023 sales 2022 sales 2021 sales Net income from continuing operations $ 90,452 13.7% $ 87,945 13.7% $ 58,438 12.5% Income tax expense 27,135 26,779 16,080 Interest expense 2,679 1,471 3,392 Interest income (3,351 ) — — Depreciation and amortization 10,569 9,731 8,368 EBITDA 127,484 19.3% 125,926 19.6% 86,278 18.5% Share-based compensation 3,656 3,510 2,932 Business development consulting costs (a) 312 — — Goodwill impairment (b) — 1,100 — Aviara transition costs (c) — — 2,150 Debt refinancing charges (d) — — 769 Adjusted EBITDA $ 131,452 19.9% $ 130,536 20.3% $ 92,129 19.8% (a) Represents non-recurring third-party costs associated with business development activities, primarily relating to consulting costs for evaluation and execution of internal growth and other strategic initiatives. The evaluation and execution of the internal growth and other strategic initiatives is a bespoke initiative, and the costs associated therewith do not constitute normal recurring cash operating expenses necessary to operate the Company's business. (b) Represents a non-cash charge recorded in the Aviara segment for impairment of goodwill. (c) Represents costs to transition production of the Aviara brand from Vonore, Tennessee to Merritt Island, Florida. Costs include duplicative overhead costs and costs not indicative of ongoing operations (such as training and facility preparation). (d) Represents loss recognized upon refinancing the Company’s debt in fiscal 2021. The loss is comprised of unamortized debt issuance costs related to the previously existing credit facility and third-party legal costs associated with the refinancing. 25 The following table sets forth a reconciliation of net income from continuing operations as determined in accordance with U.S. GAAP to Adjusted Net Income for the periods indicated: 2023 2022 2021 (Dollars in thousands, except per share) Net income from continuing operations $ 90,452 $ 87,945 $ 58,438 Income tax expense 27,135 26,779 16,080 Amortization of acquisition intangibles 1,849 1,849 1,849 Share-based compensation 3,656 3,510 2,932 Business development consulting costs (a) 312 — — Goodwill impairment (b) — 1,100 — Aviara transition costs (c) — — 2,150 Debt refinancing charges (d) — — 769 Adjusted Net Income before income taxes 123,404 121,183 82,218 Adjusted income tax expense (e) 28,383 27,872 18,910 Adjusted Net Income $ 95,021 $ 93,311 $ 63,308 Adjusted Net Income per share: Basic $ 5.39 $ 5.06 $ 3.37 Diluted $ 5.35 $ 5.01 $ 3.34 Weighted average shares used for the computation of (e) : Basic Adjusted Net Income per share 17,618,797 18,455,226 18,805,464 Diluted Adjusted Net Income per share 17,765,117 18,636,512 18,951,521 The following table presents the reconciliation of net income from continuing operations per diluted share to Adjusted net income per diluted share for the periods presented: 2023 2022 2021 Net income from continuing operations per diluted share $ 5.09 $ 4.72 $ 3.08 Impact of adjustments: Income tax expense 1.53 1.44 0.85 Amortization of acquisition intangibles 0.10 0.10 0.10 Share-based compensation 0.21 0.19 0.15 Business development consulting costs (a) 0.02 — — Goodwill impairment (b) — 0.06 — Aviara transition costs (c) — — 0.11 Debt refinancing charges (d) — — 0.04 Adjusted Net Income per diluted share before income taxes 6.95 6.51 4.33 Impact of adjusted income tax expense on net income per diluted share before income taxes (e) (1.60 ) (1.50 ) (0.99 ) Adjusted Net Income per diluted share 5.35 $ 5.01 $ 3.34 (a) Represents non-recurring third-party costs associated with business development activities, primarily relating to consulting costs for evaluation and execution of internal growth and other strategic initiatives. The evaluation and execution of the internal growth and other strategic initiatives is a bespoke initiative, and the costs associated therewith do not constitute normal recurring cash operating expenses necessary to operate the Company's business. (b) Represents a non-cash charge recorded in the Aviara segment for impairment of goodwill. (c) Represents costs to transition production of the Aviara brand from Vonore, Tennessee to Merritt Island, Florida. Costs include duplicative overhead costs and costs not indicative of ongoing operations (such as training and facility preparation). (d) Represents loss recognized upon refinancing the Company’s debt in fiscal 2021. The loss is comprised of unamortized debt issuance costs related to the previously existing credit facility and third-party legal costs associated with the refinancing. (e) Reflects income tax expense at a tax rate of 23.0% for each period presented. 26 Liquidity and Capital Resources Our primary liquidity and capital resource needs are to finance working capital, fund capital expenditures, service our debt, fund potential acquisitions, and fund our stock repurchase program. Our principal sources of liquidity are our cash balance, held-to-maturity securities, cash generated from operating activities, our revolving credit agreement and the refinancing and/or new issuance of long-term debt. Cash and cash equivalents totaled $19.8 million as of June 30, 2023, a decrease of $14.4 million from $34.2 million as of June 30, 2022. Held-to-maturity securities totaled $91.6 million as of June 30, 2023. As of June 30, 2022, there were no outstanding held-to-maturity securities. As of June 30, 2023, we had no amounts outstanding under the Revolving Credit Facility, leaving $100.0 million of available borrowing capacity. Total debt outstanding under the Term Loan as of June 30, 2023 and June 30, 2022 was $53.7 million and $56.5 million, respectively. Refer to Note 9 — Long Term Debt in the Notes to Consolidated Financial Statements for further details. On June 24, 2021, the board of directors of the Company authorized a stock repurchase program that allows for the repurchase of up to $50.0 million of our common stock during the three-year period ending June 24, 2024. During fiscal 2023 and fiscal 2022, the Company repurchased 872,055 shares and 975,161 shares of common stock for $22.9 million and $25.5 million, respectively, in cash, including related fees and expenses. As of June 30, 2023, there was $1.6 million of availability remaining under the stock repurchase program. On July 24, 2023, the board of directors of the Company authorized a new share repurchase program under which the Company may repurchase up to $50 million of its outstanding shares of common stock. The new authorization will become effective upon the expiration of the Company's existing $50 million share repurchase authorization. We believe our cash balance, investments, cash from operations, and our ability to borrow, will be sufficient to provide for our liquidity and capital resource needs. The following table and discussion below relate to our cash flows from continuing operations for operating, investing, and financing activities: 2023 2022 2021 Total cash provided by (used in): Operating activities $ 136,824 $ 82,378 $ 73,961 Investing activities (120,933 ) (12,296 ) (25,219 ) Financing activities (27,148 ) (62,540 ) (17,773 ) Net change in cash from continuing operations $ (11,257 ) $ 7,542 $ 30,969 Fiscal 2023 Cash Flow from Continuing Operations Net cash provided by operating activities was $136.8 million, primarily due to net income, as well as reductions of working capital. Working capital is defined as accounts receivable, income tax receivable, inventories, and prepaid expenses and other current assets net of accounts payable, income tax payable, and accrued expenses and other current liabilities as presented in the consolidated balance sheets, excluding the impact of acquisitions and non-cash adjustments. Favorable working capital change primarily consisted of an increase in accrued expenses and other current liabilities, and a decrease in accounts receivable, offset by a decrease in accounts payable, and an increase in prepaid expenses and other current assets. Accrued expenses and other current liabilities increased as a result of an increase in warranty costs and dealer incentives. Accounts receivable decreased primarily as a result of lower sales at the end of the period compared to the end of the prior-year period. Accounts payable decreased as a result of decreased production levels. Prepaid and other current assets increased primarily as a result of higher general insurance premiums. Net cash used in investing activities was $120.9 million, due to net investments in held-to-maturity securities of $90.6 million and $30.3 million of capital expenditures. Our capital spending was focused on tooling, capacity expansion, strategic initiatives, and information technology. Net cash used in financing activities was $27.1 million, which included net payments of $3.0 million on long-term debt and $22.9 million of stock repurchases. Fiscal 2022 Cash Flow from Continuing Operations Net cash provided by operating activities was $82.4 million, mainly due to net income, partially offset by working capital usage. Working capital usage primarily consisted of an increase in inventory, accounts receivable and prepaid and other current assets, partially offset an increase in accrued expenses and other current liabilities and accounts payable. Inventory increased due to an increase in raw materials to support higher production volumes and to increase safety stock to manage supply chain risk. Accounts receivable increased due to increased sales. Prepaid and other current assets increased due to higher general insurance premiums. Accrued expenses and other 27 current liabilities increased due to an increase in warranty costs and dealer incentives. Accounts payable increased as a result of increased production levels. Net cash used in investing activities was $12.3 million, which included capital expenditures. Our capital spending was focused on expanding our capacity, maintenance capital, and investments in information technology. Net cash used in financing activities was $62.5 million, which included net payments of $36.7 million on long-term debt and $25.5 million of stock repurchases. Off-Balance Sheet Arrangements The Company did not have any off-balance sheet financing arrangements as of June 30, 2023. Contractual Obligations As of June 30, 2023, the Company’s material cash obligations were as follows: Long-Term Debt Obligations — See Note 9 – Long-Term Debt in the accompanying Notes to Consolidated Financial Statements for further information. Interest on Long-Term Debt Obligations — As of June 30, 2023, the Company has estimated total interest payments on its outstanding long-term debt obligations of $8.9 million, of which $4.0 million is due during the next 12 months. Interest on variable rate debt instruments was calculated using interest rates in effect for our borrowings as of June 30, 2023 and holding them constant for the life of the instrument. Purchase Commitments — As of June 30, 2023, the Company is committed to purchasing $28.5 million of engines, of which $19.5 million is committed during the next 12 months. See Note 12 in the accompanying Notes to Consolidated Financial Statements for more information. Repurchase Obligations — The Company has reserves to cover potential losses associated with repurchase obligations based on historical experience and current facts and circumstances. We incurred no material impact from repurchase events during fiscal 2023, 2022, or 2021. An adverse change in retail sales, however, could require us to repurchase boats repossessed by floor plan financing companies upon an event of default by any of our dealers, subject in some cases to an annual limitation. See Note 12 in the accompanying Notes to Consolidated Financial Statements for more information. In addition to the above, we have unrecognized tax benefits that are not reflected here because the Company cannot predict when open income tax years will close with completed examinations. See Note 10 in Notes to Consolidated Financial Statements for more information. Application of Critical Accounting Policies and Estimates Significant accounting policies are described in the notes to the consolidated financial statements. In the application of these policies, certain estimates are made that may have a material impact on our financial condition and results of operations. Actual results could differ from those estimates and cause our reported net income to vary significantly from period to period. For additional information regarding these policies, see Note 1 – Significant Accounting Policies in Notes to Consolidated Financial Statements. Asset Impairment Goodwill The Company reviews goodwill for impairment at its annual impairment testing date, which is June 30, and whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying value. As part of the impairment tests, the Company may perform a qualitative, rather than quantitative, assessment to determine whether the fair values of its reporting units are “more likely than not” to be greater than their carrying values. In performing this qualitative analysis, the Company considers various factors, including the effect of market or industry changes and the reporting units' actual results compared to projected results. If the fair value of a reporting unit does not meet the "more likely than not" criteria discussed above, the impairment test for goodwill is a quantitative test. This test involves comparing the fair value of the reporting unit with its carrying value. If the fair value exceeds the carrying value, goodwill is not considered impaired. If the carrying amount exceeds the fair value then the goodwill is considered impaired and an impairment loss is recognized in an amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the carrying amount of the goodwill allocated to that reporting unit. 28 The Company calculates the fair value of its reporting units considering both the income approach and market approach. The income approach calculates the fair value of the reporting unit using a discounted cash flow method. Internally forecasted future cash flows, which the Company believes reasonably approximate market participant assumptions, are discounted using a weighted average cost of capital (“Discount Rate”) developed for each reporting unit. The Discount Rate is developed using market observable inputs, as well as considering whether or not there is a measure of risk related to the specific reporting unit’s forecasted performance. Fair value under the market approach is determined for each reporting unit by applying market multiples for comparable public companies to the reporting unit’s financial results. The key judgements in these calculations are the assumptions used in determining the reporting unit’s forecasted future performance, including revenue growth and operating margins, as well as the perceived risk associated with those forecasts in determining the Discount Rate, along with selecting representative market multiples. As discussed further in Note 7 to the Consolidated Financial Statements, during the year ended June 30, 2022, the Company performed a quantitative test and recognized a $1.1 million goodwill impairment charge related to its Aviara reporting unit. As of June 30, 2023, only the MasterCraft reporting unit has a goodwill balance. The fair value of this reporting unit substantially exceeds its carrying value. Other Intangible Assets The Company's primary intangible assets other than goodwill are dealer networks and trade names acquired in business combinations. These intangible assets are initially valued using a methodology commensurate with the intended use of the asset. The dealer networks were valued using an income approach, which requires an estimate or forecast of the expected future cash flows from the dealer network through the application of the multi-period excess earnings approach. The fair value of trade names is measured using a relief-from-royalty approach, a variation of the income approach, which requires an estimate or forecast of the expected future cash flows. This method assumes the value of the trade name is the discounted cash flows of the amount that would be paid to third parties had the Company not owned the trade name and instead licensed the trade name from another company. The basis for future sales projections for these methods are based on internal revenue forecasts by reporting unit, which the Company believes represent reasonable market participant assumptions. The future cash flows are discounted using an applicable Discount Rate as well as any potential risk premium to reflect the inherent risk of holding a standalone intangible asset. The key judgements in these fair value calculations, as applicable, are: assumptions used in developing internal revenue growth and dealer expense forecasts, assumed dealer attrition rates, the selection of an appropriate royalty rate, as well as the perceived risk associated with those forecasts in determining the Discount Rate. The costs of amortizable intangible assets, including dealer networks, are recognized over their expected useful lives, approximately ten years for the dealer networks, using the straight-line method. Intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate long-lived assets as described below. Intangible assets not subject to amortization are assessed for impairment at least annually and whenever events or changes in circumstances indicate that it is more likely than not that an asset may be impaired. As part of the annual test, the Company may perform a qualitative, rather than quantitative, assessment to determine whether each trade name intangible asset is “more likely than not” impaired. In performing this qualitative analysis, the Company considers various factors, including macroeconomic events, industry and market events and cost related events. If the “more likely than not” criteria is not met, the impairment test for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset. As discussed further in Note 3 to the Consolidated Financial Statements, during the year ended June 30, 2022, the Company recognized $18.5 million in intangible asset impairment charges related to its indefinite lived intangible asset and its dealer network intangible asset within the NauticStar reporting unit. These charges are included in the loss from discontinued operations. Long-Lived Assets The Company assesses the potential for impairment of its long-lived assets if facts and circumstances, such as declines in sales, earnings, or cash flows or adverse changes in the business climate, suggest that they may be impaired. A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life will also trigger a review for impairment. The Company performs its assessment by comparing the book value of the asset groups to the estimated future undiscounted cash flows associated with the asset groups. If any impairment in the carrying value of its long-lived assets is indicated, the assets would be adjusted to an estimate of fair value. As discussed further in Note 3 to the Consolidated Financial Statements, during the year ended June 30, 2022, the Company recognized $5.3 million in long-lived asset impairment charges related to its NauticStar reporting unit. Product Warranties — The Company offers warranties on the sale of certain products for periods of between one and five years from the date of retail sale. These 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 record as a liability the amount 29 of such costs at the time the product revenue is recognized. The key judgements that affect our estimate for 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 actual claims are determined or as changes in the obligations become reasonably estimable. We also adjust our liability for specific warranty matters when they become known and exposure can be estimated. Future warranty claims may differ from our estimate of the warranty liability, which could lead to changes in the Company’s warranty liability in future periods. Income Taxes— We are subject to income taxes in the United States of America and the United Kingdom. Our effective tax rates differ from the statutory rates, primarily due to a change in state taxes as a result of selling NauticStar, as further described in Note 10 in Notes to Consolidated Financial Statements. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, we cannot provide assurance that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest. Revenue Recognition — The Company’s revenue is derived primarily from the sale of boats and trailers, marine parts, and accessories to its independent dealers. The Company recognizes revenue when obligations under the terms of a contract are satisfied and control over promised goods is transferred to a customer. For substantially all sales, this occurs when the product is released to the carrier responsible for transporting it to a customer. The Company typically receives payment from the floor plan financing providers within 5 business days of shipment. Revenue is measured as the amount of consideration we expect to receive in exchange for a product. The Company offers dealer incentives that include wholesale rebates, retail rebates and promotions, floor plan reimbursement or cash discounts, and other allowances that are recorded as reductions of revenues in net sales in the consolidated statements of operations. The consideration recognized represents the amount specified in a contract with a customer, net of estimated incentives the Company reasonably expects to pay. The estimated liability and reduction in revenue for dealer incentives is recorded at the time of sale. Subsequent adjustments to incentive estimates are possible because actual results may differ from these estimates if conditions dictate the need to enhance or reduce sales promotion and incentive programs or if dealer achievement or other items vary from historical trends. Accrued dealer incentives are included in Accrued expenses and other current liabilities in the accompanying consolidated balance sheets. Rebates and Discounts Dealers earn wholesale rebates based on purchase volume commitments and achievement of certain performance metrics. The Company estimates the amount of wholesale rebates based on historical achievement, forecasted volume, and assumptions regarding dealer behavior. Rebates that apply to boats already in dealer inventory are referred to as retail rebates. The Company estimates the amount of retail rebates based on historical data for specific boat models adjusted for forecasted sales volume, product mix, dealer and consumer behavior, and assumptions concerning market conditions. The Company also utilizes various programs whereby it offers cash discounts or agrees to reimburse its dealers for certain floor plan interest costs incurred by dealers for limited periods of time, generally ranging up to nine months. Other Revenue Recognition Matters Dealers generally have no right to return unsold boats. Occasionally, the Company may accept returns in limited circumstances and at the Company’s discretion under its warranty policy. The Company may be obligated, in the event of default by a dealer, to accept returns of unsold boats under its repurchase commitment to floor plan financing providers, who are able to obtain such boats through foreclosure. The repurchase commitment is on an individual unit basis with a term from the date it is financed by the lending institution through the payment date by the dealer, generally not exceeding 30 months. The Company accounts for these arrangements as guarantees and recognizes a liability based on the estimated fair value of the repurchase obligation. The estimated fair value takes into account our estimate of the loss we will incur upon resale of any repurchases. The Company accrues the estimated fair value of this obligation based on the age of inventory currently under floor plan financing and estimated credit quality of dealers holding the inventory. Inputs used to estimate this fair value include significant unobservable inputs that reflect the Company’s assumptions about the inputs that market participants would use and, therefore, this liability is classified within Level 3 of the fair value hierarchy. We incurred no material impact from repurchase events during fiscal 2023, 2022, or 2021. See Note 12 in Notes to Consolidated Financial Statements for more information on repurchase obligations. 30 New Accounting Pronouncements See “Part II, Item 8. Financial Statements and Supplementary Data — Note 1 — Significant Accounting Policies — New Accounting Pronouncements.” ITEM 7A. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK. Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in foreign exchange rates, interest rates, and commodity prices. Changes in these factors could cause fluctuations in the results of our operations and cash flows. In the ordinary course of business, we are primarily exposed to inflation and interest rate risks. We rely on third parties to supply raw materials used in the manufacturing process, including resins, fiberglass, aluminum, lumber, and steel, as well as product parts and components. The prices for these raw materials, parts, and components fluctuate depending on market conditions and, in some instances, commodity prices or trade policies, including tariffs. Substantial increases in the prices of raw materials, parts, and components would increase our operating costs, and could reduce our profitability if we are unable to recoup the increased costs through higher product prices or improved operating efficiencies. As of June 30, 2023, we had $54.0 million of long-term debt outstanding, bearing interest at the effective interest rate of 6.50%. See Note 9 in Notes to Consolidated Financial Statements for more information regarding our long-term debt. A hypothetical 1% increase or decrease in interest rates would have resulted in a $0.6 million change to our interest expense for fiscal 2023. ITEM 8. FINANCIAL STATEMENT S AND SUPPLEMENTARY DATA. The financial statements and supplementary financial information required to be filed under this Item 8 are presented in Part IV, Item 15 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUN TANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.