MasterCraft Boat Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read together with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition, the statements in this discussion and analysis regarding our expectations concerning the performance 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” above and in “Risk Factors” set forth in our 2019 Annual Report on Form 10-K, our Fiscal Second Quarter Quarterly Report and elsewhere in this Quarterly Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Certain statements in the following discussions are based on non-GAAP financial measures. A “non-GAAP financial measure” is a numerical measure of a registrant’s historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with U.S. GAAP in the statements of operations, balance sheets or statements of cash flows of the issuer; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. Non-GAAP financial measures do not include operating and statistical measures. The Company includes non-GAAP financial measures in Management’s Discussion and Analysis, as the Company’s management believes that these measures and the information they provide are useful to users of the financial statements, including investors, because they permit users of the financial statements to view the Company’s performance using the same tools that management utilizes and to better evaluate the Company’s ongoing business performance. In order to better align the Company’s reported results with the internal metrics used by the Company's management to evaluate business performance as well as to provide better comparisons to prior periods and peer data, non-GAAP measures exclude the impact of purchase accounting amortization related to business acquisitions. Overview COVID-19 Pandemic The outbreak of a novel coronavirus throughout the world, including the United States, during early calendar year 2020 has caused widespread business and economic disruption through mandated and voluntary business closings and restrictions on the movement and activities of people (“COVID-19 Pandemic”). We are subject to risks and uncertainties as a result of the COVID-19 Pandemic. The extent of the impact of the COVID-19 Pandemic on the Company's business is highly uncertain and difficult to predict, as the response to the COVID-19 Pandemic is rapidly evolving in many countries, including the United States and other markets where the Company operates. It is expected that many of the Company's customers, dealers, and suppliers could be impacted by these closings and restrictions which could materially and adversely affect demand for our products, our ability to obtain or deliver inventory, and our ability to collect accounts receivable as customers face higher liquidity and solvency risk. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 Pandemic, and it is possible that it could cause an economic downturn, recession, or depression. Such economic disruption could have a material adverse effect on our business as retail demand for our products could decline which would in-turn reduce wholesale demand from our dealers. Policymakers around the world have responded with fiscal and monetary policy actions to support the economy. The magnitude and overall effectiveness of these actions remains uncertain. To protect the health of its manufacturing employees and to balance wholesale production with retail demand, the Company suspended operations at its manufacturing facilities for all of its brands in late March 2020. As a result of this action, the Company temporarily laid off nearly all of its hourly workforce. The Company paid lump sum severance payments to laid off employees and provided for the temporary continuation of their healthcare benefits. These actions are estimated to have cost approximately $1.5 million during the fiscal 2020 third quarter (the “COVID-19 Shutdown Costs”). After further evaluation, the Company intends to resume operations at its Owosso, Michigan facility (Crest Marine boats) on May 11, 2020, its Amory, Mississippi facility (NauticStar boats) on May 11, 2020, and its Vonore, Tennessee facility (MasterCraft and Aviara boats) on May 12, 2020. As the Company resumes its operations, it will 22 continue to evaluate and monitor the health and safety of its employees and will adhere to federa l and local government mandates and guidelines. On March 19, 2020, the Company drew $35.0 million on its revolving credit agreement as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 Pandemic. In the event of an extended manufacturing operation suspension or lower retail demand environment, the proceeds from this draw-down will be used in an effort to ensure the ongoing viability of operations and to protect our customers and stakeholders. Additionally, on May 7, 2020, the Company entered into Amendment No. 3 to the Fourth Amended & Restated Credit and Guarantee Agreement (the “Amendment”) to strengthen our financial flexibility. Among other things, the changes effected by the Amendment provide temporary relief under our financial covenants. See Note 7 in Notes to Condensed Consolidated Financial Statements for more information regarding these changes. The current economic environment, including the significant declines in share price, market volatility and the disruption to our supply chain, has also triggered an interim impairment analysis for our intangible assets including goodwill. As a result of our analysis, we recorded an impairment charges totaling $56.4 million related to the NauticStar and Crest segments (the “Impairment Charges”). The impairment was principally a result of a decline, in the fiscal third quarter, in market conditions, including our share price, and the outlook for sales and operating performance relative to our acquisition plans and impairment test performed as of June 30, 2019. See Note 6 in Notes to Condensed Consolidated Financial Statements for more information regarding the Impairment Charges. The severity of the impact of the COVID-19 Pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration, spread, severity, and impact of the pandemic, the remedial action and stimulus measures adopted by local and federal governemnts, the effects of the pandemic on the Company's customers, dealers, and suppliers, and to the extent normal economic and operating conditions can resume, all of which are uncertain and cannot be predicted. The Company's future results of operations, cash flows, and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, additional goodwill and other intangible asset impairment charges, and the impact of any initiatives that the Company may undertake to address financial and operational challenges faced by it and its customers, dealers, and suppliers. As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 Pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain. Overview of Results of Operations Net sales were $102.6 million for the third quarter of 2020, which represented a decrease of 20.1 percent as compared to the third quarter of 2019, due to lower wholesale unit volumes primarily as a result of production cuts in anticipation of potential impact on retail demand from the COVID-19 pandemic and our continued effort to allow our dealers to right-size pipeline inventory levels. Partially offsetting this decline was Aviara sales included in our MasterCraft segment, and higher average wholesale prices for the MasterCraft brand. Net sales were $312.0 million for the nine months ended March 29, 2020, which represented a decrease of 9.2 percent as compared to the nine months ended March 31, 2019, primarily for the same reasons described above for the quarterly period and softness in the overall saltwater fishing category. This decline was partially offset by Aviara sales included in our MasterCraft segment, higher average wholesale prices for both the MasterCraft brand and NauticStar, and lower sales discounts for our Canadian dealers related to import tariff support. Gross profit for the third quarter of 2020 decreased 32.2 percent, primarily due to lower unit sales volume for each reportable segment, $1.5 million in COVID-19 Shutdown Costs and higher sales discounts. This decline was partially offset by price increases for each reportable segment. Gross margin percentage decreased by 3.7 percentage points to 20.7 percent for the third quarter of 2020 from 24.4 percent for the third quarter of 2019 primarily due to lower overhead absorption resulting from lower unit sales volume and $1.5 million of transitory COVID-19 Shutdown Costs and higher sales discounts. Gross profit for the nine months ended March 29, 2020 decreased 16.8 percent, primarily due to lower unit sales volume for each reportable segment and $1.5 million in COVID-19 Shutdown Costs . This decline was partially offset by price increases for each reportable segment, the inclusion of Crest’s first quarter 2020 results, and lower sales discounts attributable to the MasterCraft brand. Gross margin 23 percentage decreased by 2.0 percentage points to 21.8 percent for the nine months ended March 29, 2020 from 23.8 percent for the nine months ended March 31, 2019 , primarily due to lower overhead absorptio n driven by lower unit sales volume for each reportable segment, $1.5 million of transitory COVID-19 Shutdown Costs, and the inclusion of Crest’s first quarter 2020 results . Net loss was $(36.7) million for the third quarter of 2020, compared to Net income of $12.8 million for the third quarter of 2019. Diluted net loss per share was $(1.96), compared to diluted net income per share of $0.68 for the prior year period. Net loss was $(21.2) million for the nine months ended March 29, 2020, compared to Net income of $31.4 million for the nine months ended March 31, 2019. Diluted net loss per share was $(1.13), compared to Net income per share of $1.67 for the prior year period. Net loss for the three and nine months ended March 29, 2020 included Goodwill and other intangible asset impairment charges of $56.4, or $(3.01) per diluted share. Aviara Brand Launch We began selling boats under the Aviara brand during the first quarter of 2020. Aviara boats are designed, engineered, and manufactured to meet the exacting specifications of consumers seeking the ultimate luxury recreational day boat experience. The brand’s first model, the AV32, began selling during the first quarter of 2020 and the AV36 began selling during the second quarter of 2020. In February 2020, we launched the third Aviara model, the AV40, which we expect to begin selling in the first quarter of fiscal 2021. Aviara is built in our MasterCraft facility and is part of the MasterCraft reportable segment. 24 Results of Operations The table below presents our consolidated results of operations for the three months ended: Three Months Ended March 29, March 31, 2020 vs. 2019 2020 2019 Change % Change (Dollars in thousands) Consolidated statements of operations : NET SALES $ 102,562 $ 128,390 $ (25,828 ) (20.1 %) COST OF SALES 81,288 97,033 (15,745 ) (16.2 %) GROSS PROFIT 21,274 31,357 (10,083 ) (32.2 %) OPERATING EXPENSES: Selling and marketing 4,933 5,210 (277 ) (5.3 %) General and administrative 6,094 6,696 (602 ) (9.0 %) Amortization of other intangible assets 987 987 - 0.0 % Goodwill and other intangible asset impairment 56,437 — 56,437 Total operating expenses 68,451 12,893 55,558 430.9 % OPERATING INCOME (LOSS) (47,177 ) 18,464 (65,641 ) (355.5 %) OTHER EXPENSE: Interest expense 1,086 1,867 (781 ) (41.8 %) INCOME (LOSS) BEFORE INCOME TAX EXPENSE (48,263 ) 16,597 (64,860 ) (390.8 %) INCOME TAX EXPENSE (BENEFIT) (11,550 ) 3,834 (15,384 ) (401.3 %) NET INCOME (LOSS) $ (36,713 ) $ 12,763 $ (49,476 ) (387.7 %) Additional financial and other data: Unit sales volume: MasterCraft 713 868 (155 ) (17.9 %) NauticStar 313 485 (172 ) (35.5 %) Crest 461 728 (267 ) (36.7 %) Consolidated unit sales volume 1,487 2,081 (594 ) (28.5 %) Net sales: MasterCraft $ 70,531 $ 79,431 $ (8,900 ) (11.2 %) NauticStar 14,156 21,652 (7,496 ) (34.6 %) Crest 17,875 27,307 (9,432 ) (34.5 %) Consolidated net sales $ 102,562 $ 128,390 $ (25,828 ) (20.1 %) Net sales per unit: MasterCraft $ 99 $ 92 $ 7 7.6 % NauticStar 45 45 - 0.0 % Crest 39 38 1 2.6 % Consolidated net sales per unit 69 62 7 11.3 % Gross margin percentage 20.7 % 24.4 % -370 bpts Three Months Ended March 29, 2020 Compared to the Three Months Ended March 31, 2019 Net Sales. Net Sales for the third quarter were $102.6 million , a decrease of $25.8 million, or 20.1 percent, compared to $128.4 million for the prior-year period. The decrease was primarily due to: • an $8.9 million decrease for the MasterCraft segment, due to lower unit sales volume for our MasterCraft brand as we proactively decreased unit production in anticipation of potential impact on retail demand from the COVID-19 Pandemic, reduced unit production as we continued to right-size our dealer inventory levels, and higher retail rebate discounts, partially offset by a richer mix of higher-priced and higher-contented models. Within the MasterCraft segment, the decrease for the MasterCraft brand was partially offset by Aviara sales in 2020; 25 • a $ 9. 4 million and a $7.5 million decrease for the Crest and NauticStar segment s , respectively, primarily due to lower unit sales volume as we proactively decreased unit production in anticipation of potential impact on retail demand from the COVID-19 Pandemic, reduced unit production as we continued to right-size our dealer inventory levels , and higher retail rebate discounts. Gross Profit and Gross Margin Percentage. Gross profit decreased $10.1 million, or 32.2 percent, to $21.3 million compared to $31.4 million for the prior-year period . The decrease was primarily driven by lower unit sales volume for each reportable segment, $1.5 million of COVID-19 Shutdown Costs, and higher retail rebate discounts. These decreases were partially offset by price increases for MasterCraft and Crest. Gross margin percentage decreased primarily due to lower overhead absorption driven by lower unit sales volume for each reportable segment, $1.5 million of transitory COVID-19 Shutdown Costs, and higher retail rebate discounts . Operating Expenses. Operating expenses increased $55.6 million, or 430.9 percent, to $68.5 million for the third quarter compared to $12.9 million for the prior-year period. This increase was primarily due to the $56.4 of Impairment Charges and was partially offset by lower variable compensation costs. Interest Expense. Interest expense decreased $0.8 million, or 41.8 percent, as $16.0 million of voluntary prepayments on our term loans over the last twelve months have resulted in lower average debt balances, and lower effective interest rates during the quarter compared to the prior-year period. Income Tax Expense (Benefit). Our consolidated interim effective income tax rate increased to 23.9 percent for the third quarter of 2020 from 23.1 percent for third quarter 2019, primarily due to favorable discrete adjustments for the second quarter of 2019, which reduced the interim effective tax rate for that period. 26 The table below presents our consolidated results of operations for the nine months ended: Nine Months Ended March 29, March 31, 2020 vs. 2019 2020 2019 Change % Change (Dollars in thousands) Consolidated statements of operations : NET SALES $ 311,979 $ 343,572 $ (31,593 ) (9.2 %) COST OF SALES 244,030 261,939 (17,909 ) (6.8 %) GROSS PROFIT 67,949 81,633 (13,684 ) (16.8 %) OPERATING EXPENSES: Selling and marketing 13,340 13,757 (417 ) (3.0 %) General and administrative 19,356 20,576 (1,220 ) (5.9 %) Amortization of other intangible assets 2,961 2,504 457 18.3 % Goodwill and other intangible asset impairment 56,437 — 56,437 Total operating expenses 92,094 36,837 55,257 150.0 % OPERATING INCOME (LOSS) (24,145 ) 44,796 (68,941 ) (153.9 %) OTHER EXPENSE: Interest expense 3,667 4,829 (1,162 ) (24.1 %) INCOME (LOSS) BEFORE INCOME TAX EXPENSE (27,812 ) 39,967 (67,779 ) (169.6 %) INCOME TAX EXPENSE (BENEFIT) (6,601 ) 8,552 (15,153 ) (177.2 %) NET INCOME (LOSS) $ (21,211 ) $ 31,415 $ (52,626 ) (167.5 %) Additional financial and other data: Unit sales volume: MasterCraft 2,170 2,609 (439 ) (16.8 %) NauticStar 1,046 1,391 (345 ) (24.8 %) Crest (a) 1,407 1,403 4 0.3 % Consolidated unit sales volume 4,623 5,403 (780 ) (14.4 %) Net sales: MasterCraft $ 211,201 $ 232,062 $ (20,861 ) (9.0 %) NauticStar 47,727 58,255 (10,528 ) (18.1 %) Crest (a) 53,051 53,255 (204 ) (0.4 %) Consolidated net sales $ 311,979 $ 343,572 $ (31,593 ) (9.2 %) Net sales per unit: MasterCraft $ 97 $ 89 $ 8 9.0 % NauticStar 46 42 4 9.5 % Crest (a) 38 38 - 0.0 % Consolidated net sales per unit 67 64 3 4.7 % Gross margin percentage 21.8 % 23.8 % -200 bpts (a) Crest was acquired on October 1, 2018. Nine months Ended March 29, 2020 Compared to the Nine months Ended March 31, 2019 Net Sales. Net Sales for the nine months ended March 29, 2020 were $312.0 million, a decrease of $31.6 million, or 9.2 percent, compared to $343.6 million for the prior-year period. The decrease was primarily due to: • a $20.9 million decrease for the MasterCraft segment, primarily due to lower unit sales volume for our MasterCraft brand as we continued to right-size our dealer inventory levels and proactively decreased unit production in March 2020 in response to the COVID-19 Pandemic, partially offset by a richer mix of higher-priced and higher-contented models and lower sales discounts. The lower sales discounts were primarily related to our Canadian dealers as the Canadian retaliatory import tariffs on boats, first imposed in July 2018, were rescinded in May 2019. Within the MasterCraft segment, the decrease for the MasterCraft brand was partially offset by Aviara sales in 2020; 27 • a $ 10.5 million decrease for the NauticStar segment primarily for the same reasons described above for the quarterly period as well as softness in the overall saltwater fishing category , partially offset by a shift to higher-priced models ; • a net $0.2 million decrease as the Crest acquisition in October 2018 added net sales of $18.9 million for the first quarter of 2020 which was offset by a total $19.1 million period-over-period decrease attributable to the second and third quarters of 2020 as we continued to right-size our dealer inventory levels and proactively decreased unit production in March 2020 in response to the COVID-19 Pandemic. Gross Profit and Gross Margin Percentage. Gross profit decreased $13.7 million, or 16.8 percent, to $67.9 million compared to $81.6 million for the prior-year period. The decrease was primarily due to lower unit sales volume for each reportable segment and $1.5 million in COVID-19 Shutdown Costs . These decreases were partially offset by price increases for each reportable segment, $2.6 million of gross profit attributable to Crest’s first quarter 2020 results and lower sales discounts attributable to the MasterCraft brand. Gross margin percentage decreased primarily due to lower overhead absorption driven by lower unit sales volume for each reportable segment, $1.5 million of transitory COVID-19 Shutdown Costs, and the inclusion of Crest’s first quarter 2020 results, as Crest generates a lower gross margin percentage than our MasterCraft segment. Operating Expenses. Operating expenses increased $55.3 million, or 150.0 percent, to $92.1 million for the nine months ended March 29, 2020 compared to $36.8 million for the prior-year period. The increase was primarily driven by the $56.4 of Impairment Charges and the inclusion of Crest which added $2.2 million related to the first quarter 2020. This increase was partially offset by a $2.8 million decrease at our MasterCraft segment mainly due to lower acquisition-related costs, lower incentive compensation costs, and lower share-based compensation expense as a result of our CEO transition and lower estimated payouts related to our Performance Stock Units . Interest Expense. Interest expense decreased $1.2 million, or 24.1 percent, primarily for the same reasons described above for the quarterly period . Income Tax Expense (Benefit). Our consolidated interim effective income tax rate increased to 23.7 percent for the nine months ended March 29, 2020 from 21.4 percent for the nine months ended March 31, 2019 , primarily due to favorable discrete adjustments for the nine months ended March 31, 2019, which reduced the interim effective tax rate for that period. Non-GAAP Measures EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin We define EBITDA as earnings before interest expense, 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 Goodwill and other intangible asset impairment, COVID-19 Shutdown Costs, Aviara (new brand) startup costs, transaction expenses associated with acquisitions and certain non-cash items including share-based compensation, and an acquisition-related inventory step-up adjustment. We define Adjusted EBITDA Margin as Adjusted EBITDA 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 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 Goodwill and other intangible asset impairment, COVID-19 Shutdown Costs, Aviara (new brand) startup costs, transaction expenses associated with acquisitions, and certain non-cash items including other intangible asset amortization, share-based compensation, and an acquisition-related inventory step-up adjustment. EBITDA, Adjusted EBITDA, 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 28 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 consid ered 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 for management’s discretionary use. 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 N on-GAAP M easures to assess our operating performance across periods on a consistent basis and to evaluate th e 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 r esults 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 dir ectors, manag ement , investors , and other users of the financial statemen t s in comparing our net income on a consistent basis from period to period because it removes non-cash items and items not indicative of our core and/or ongoing operations. The Non-GAA P 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: • Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements; • Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA does not reflect our tax expense or any cash requirements to pay income taxes; • Adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest payments on our indebtedness; and • Adjusted Net Income, Adjusted Net Income per share, and Adjusted EBITDA 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. The following table presents a reconciliation of net income (loss) as determined in accordance with U.S. GAAP to EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin for the periods indicated: Three Months Ended Nine Months Ended March 29, March 31, March 29, March 31, 2020 2019 2020 2019 Net income (loss) $ (36,713 ) $ 12,763 $ (21,211 ) $ 31,415 Income tax expense (benefit) (11,550 ) 3,834 (6,601 ) 8,552 Interest expense 1,086 1,867 3,667 4,829 Depreciation and amortization 2,632 2,091 7,686 5,450 EBITDA (44,545 ) 20,555 (16,459 ) 50,246 Goodwill and other intangible asset impairment (a) 56,437 - 56,437 - COVID-19 Shutdown costs (b) 1,506 - 1,506 - Aviara start-up costs (c) 398 937 1,213 1,700 Share-based compensation 159 371 703 1,159 Transaction expense (d) - 27 - 2,044 Inventory step-up adjustment - acquisition related (e) - - - 382 Adjusted EBITDA $ 13,955 $ 21,890 $ 43,400 $ 55,531 Adjusted EBITDA Margin 13.6 % 17.0 % 13.9 % 16.2 % (a) Represents non-cash charges recorded in the NauticStar and Crest segments for impairments of goodwill and trade name. See Note 6 in Notes to Condensed Consolidated Financial Statements for more information regarding these impairment charges. 29 (b) Represents costs associated with the COVID-19 pandemic. Costs include lump sum severance payments and temporary continuation of healthcare benefits for laid off employees. (c) Represents start-up costs associated with Aviara, a completely new boat brand in an industry category previously not served by the Company. We began selling the brand’s first two models, the AV32 and the AV36, during the first and second quarters of fiscal 2020, respectively. We expect to begin selling one additional model, the AV40, in first fiscal quarter of 2021. Start-up costs presented for fiscal 2020 are related to the AV36 and AV40 models. Start-up costs presented for fiscal 2019 are related to the launch of the Aviara brand and the three initial Aviara models which had not yet begun selling. We expect to adjust EBITDA for Aviara start-up costs through fiscal 2020. (d) Represents fees, expenses, and integration costs associated with our acquisition of Crest in fiscal 2019. (e) Represents post-acquisition adjustment to cost of goods sold for the fair value step-up of inventory acquired, all of which was sold during fiscal 2019. The following table presents a reconciliation of net income (loss) as determined in accordance with U.S. GAAP to Adjusted Net Income for the periods indicated: Three Months Ended Nine Months Ended March 29, March 31, March 29, March 31, 2020 2019 2020 2019 (Dollars in thousands, except share and per share amounts) Net income (loss) $ (36,713 ) $ 12,763 $ (21,211 ) $ 31,415 Income tax expense (benefit) (11,550 ) 3,834 (6,601 ) 8,552 Goodwill and other intangible asset impairment (a) 56,437 - 56,437 - COVID-19 Shutdown costs (b) 1,506 - 1,506 - Amortization of acquisition intangibles 960 960 2,882 2,423 Aviara start-up costs (c) 398 937 1,213 1,700 Share-based compensation 159 371 703 1,159 Transaction expense (d) - 27 - 2,044 Inventory step-up adjustment - acquisition related (e) - - - 382 Adjusted Net Income before income taxes 11,197 18,892 34,929 47,675 Adjusted income tax expense (f) 2,575 4,251 8,034 10,727 Adjusted Net Income $ 8,622 $ 14,641 $ 26,895 $ 36,948 Adjusted Net Income per share: Basic $ 0.46 $ 0.78 $ 1.44 $ 1.98 Diluted $ 0.46 $ 0.78 $ 1.42 $ 1.96 Weighted average shares used for the computation of: Basic Adjusted Net Income per share 18,739,480 18,657,719 18,731,338 18,652,289 Diluted Adjusted Net Income per share (g) 18,947,877 18,849,136 18,952,577 18,857,600 (a) Represents non-cash charges recorded in the NauticStar and Crest segments for impairments of goodwill and trade name. See Note 6 in Notes to Condensed Consolidated Financial Statements for more information regarding these impairment charges. (b) Represents costs associated with the COVID-19 pandemic. Costs include lump sum severance payments and temporary continuation of healthcare benefits for laid off employees. (c) Represents start-up costs associated with Aviara, a completely new boat brand in an industry category previously not served by the Company. We began selling the brand’s first two models, the AV32 and the AV36, during the first and second quarters of fiscal 2020, respectively. We expect to begin selling one additional model, the AV40, in first fiscal quarter of 2021. Start-up costs presented for fiscal 2020 are related to the AV36 and AV40 models. Start-up costs presented for fiscal 2019 are related to the launch of the Aviara brand and the three initial Aviara models which had not yet begun selling. We expect to adjust net income (loss) for Aviara start-up costs through fiscal 2020. (d) Represents fees, expenses, and integration costs associated with our acquisition of Crest in fiscal 2019. (e) Represents post-acquisition adjustment to cost of goods sold for the fair value step-up of inventory acquired, all of which was sold during fiscal 2019. (f) Reflects income tax expense at an estimated annual effective income tax rate of 23.0% for fiscal 2020 and 22.5% for the prior-year period. (g) See table below for reconciliation of weighted average shares used for computation of Basic earnings per share to weighted average shares used for Diluted Adjusted Net Income per share. 30 T he following table presents the r econciliation of weighted average shares used for computation of Basic earnings per share to weighted average shares used for Diluted Adjusted Net income per share: Three Months Ended Nine Months Ended March 29, March 31, March 29, March 31, 2020 2019 2020 2019 Weighted average shares used for computation of Basic earnings per share 18,739,480 18,657,719 18,731,338 18,652,289 Dilutive effect of outstanding stock options (a) - 42,525 10,711 48,289 Dilutive effect of outstanding restricted share awards/units (b) 208,397 148,892 210,528 157,022 Weighted average shares used for the computation of Diluted Adjusted Net Income per share 18,947,877 18,849,136 18,952,577 18,857,600 (a) Represents the dilutive effect of stock options calculated using the treasury stock method, but instead of using the average market price, the market price on the last business day of the period is used. (b) Represents the dilutive effect of restricted stock awards (“RSAs”) and performance stock units (“PSUs”) assuming the total outstanding awards/unit at each period end are fully dilutive. The following table presents the reconciliation of net income (loss) per diluted share to Adjusted net income per diluted weighted average share for the periods presented: Three Months Ended Nine Months Ended March 29, March 31, March 29, March 31, 2020 2019 2020 2019 Net income (loss) per diluted share $ (1.96 ) $ 0.68 $ (1.13 ) $ 1.67 Impact of adjustments: Income tax expense (benefit) (0.62 ) 0.20 (0.35 ) 0.46 Goodwill and other intangible asset impairment (a) 3.01 - 3.01 - COVID-19 Shutdown costs (b) 0.08 - 0.08 - Amortization of acquisition intangibles 0.05 0.05 0.15 0.13 Aviara start-up costs (c) 0.02 0.05 0.06 0.09 Share-based compensation 0.01 0.02 0.04 0.06 Transaction expense (d) - - - 0.11 Inventory step-up adjustment - acquisition related (e) - - - 0.02 Adjusted Net Income per diluted share before income taxes 0.59 1.00 1.86 2.54 Impact of adjusted income tax expense on net income per diluted share before income taxes (f) (0.14 ) (0.22 ) (0.43 ) (0.58 ) Impact of increased share count (g) 0.01 - (0.01 ) - Adjusted Net Income per diluted weighted average share $ 0.46 $ 0.78 $ 1.42 $ 1.96 (a) Represents non-cash charges recorded in the NauticStar and Crest segments for impairments of goodwill and trade name. See Note 6 in Notes to Condensed Consolidated Financial Statements for more information regarding these impairment charges. (b) Represents costs associated with the COVID-19 pandemic. Costs include lump sum severance payments and temporary continuation of healthcare benefits for laid off employees. (c) Represents start-up costs associated with Aviara, a completely new boat brand in an industry category previously not served by the Company. We began selling the brand’s first two models, the AV32 and the AV36, during the first and second quarters of fiscal 2020, respectively. We expect to begin selling one additional model, the AV40, in first fiscal quarter of 2021. Start-up costs presented for fiscal 2020 are related to the AV36 and AV40 models. Start-up costs presented for fiscal 2019 are related to the launch of the Aviara brand and the three initial Aviara models which had not yet begun selling. We expect to adjust net income for Aviara start-up costs through fiscal 2020. (d) Represents fees, expenses, and integration costs associated with our acquisition of Crest in fiscal 2019. (e) Represents post-acquisition adjustment to cost of goods sold for the fair value step-up of inventory acquired, all of which was sold during fiscal 2019. (f) Reflects income tax expense at an estimated annual effective income tax rate of 23.0% for fiscal 2020 and 22.5% for the prior-year period. (g) Reflects the impact of increased share counts giving effect to the exchange of all RSAs, the vesting of all PSUs and for the dilutive effect of stock options included in outstanding shares and rounding. 31 Liquidity and Capital Resources Our primary liquidity and capital resource needs are to finance working capital, fund capital expenditures, and service our debt. Our principal sources of funds are cash generated from operating activities and the refinancing and/or new issuance of long-term debt. On March 19, 2020, the Company drew $35.0 million on its revolving credit agreement as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 Pandemic. Additionally, on May 7, 2020, the Company entered into Amendment No. 3 to the Fourth Amended & Restated Credit and Guarantee Agreement (the “Amendment”) to strengthen our financial flexibility. Among other things, the changes effected by the Amendment provide temporary relief under our financial covenants. See Note 7 in Notes to Condensed Consolidated Financial Statements for more information regarding these changes. As of March 29, 2020, we had no remaining borrowing availability under the Revolving Credit Facility. We believe our cash balance and cash from operations, along with the ability to borrow, will be sufficient to provide for our liquidity and capital resource needs for at least the next 12 months. However, we are continuing to monitor the COVID-19 Pandemic and its impact on our business, customers and industry as a whole. See Part II, Item 1A. Risk Factors. The following table summarizes our cash flows from operating, investing, and financing activities: Nine Months Ended March 29, March 31, 2020 vs. 2019 2020 2019 Change % Change (Dollars in thousands) Total cash provided by (used in): Operating activities $ 23,900 $ 39,552 $ (15,652 ) (39.6 %) Investing activities (13,576 ) (92,111 ) 78,535 (85.3 %) Financing activities 24,841 50,111 (25,270 ) (50.4 %) Net change in cash $ 35,165 $ (2,448 ) 37,613 (1536.5 %) Operating Activities Net cash provided by operating activities decreased primarily due to unfavorable working capital usage and lower operating income. 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 condensed consolidated balance sheets, excluding the impact of acquisitions and non-cash adjustments. Cash flows from working capital changes decreased $12.7 million primarily due to: • a $7.4 million decrease related to Accrued expenses and other current liabilities largely from higher dealer incentive spending, timing of dealer incentive payments, and lower accrued payroll as a result of lower incentive compensation accruals; • a $7.2 million decrease attributable to Inventories mainly as a result of the production slowdown in March 2020 in response to the COVID-19 Pandemic, growth in inventory balances as a result of the introduction of the Aviara brand, and an increase in certain raw materials as a precautionary measure in response to potential supply chain disruptions resulting from the COVID-19 Pandemic; • a $4.3 million decrease related to Income tax receivable is primarily due to the decreased taxable income between the comparable periods; • a $3.4 million decrease attributable to Accounts payable as a result of lower production levels in March 2020 as compared to March 2019 and the timing of vendor payments; • partially offset by a $9.4 million increase related to Accounts receivable primarily due to lower sales volumes in March 2020 as compared to March 2019 and an improved collection cycle for Crest. Investing Activities 32 Net cash used in investing activities decreased primarily due to the 2019 Crest acquisition for $81.7 million. Capital outlays during the nine months ended March 29, 2020 included the purchase of the Crest manufacturing facility, expansion activities, molds, and equipment. See Note 8 in Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding the Crest facility purchase. Financing Activities Net financing cash flow decreased primarily as the result of lower proceeds from the issuance of long-term debt. The Crest acquisition, completed during the second quarter of 2019, was funded using $80.0 million of proceeds from the issuance of long-term debt. On March 20, 2020, the Company borrowed all available funds under its Revolving Credit Facility, $35.0 million, precautionary measure in order to increase its cash position and preserve financial flexibility in light of the uncertainty in the global markets resulting from the COVID-19 Pandemic. During the nine months ended March 29, 2020, the Company made $10.6 million of principal payments on its term loans, including $6.0 million of voluntary prepayments. Off-Balance Sheet Arrangements The Company did not have any off-balance sheet financing arrangements as of March 29, 2020. Contractual Obligations During the first quarter of 2020, the Company elected to exercise its option to purchase the leased Crest manufacturing facility and on October 24, 2019 the purchase was completed. See Note 8 in Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding this purchase. As a result of this purchase, the Company’s Operating Lease Obligations, as presented in the Contractual Obligations table in our 2019 Annual Report on Form 10-K were impacted as follows: • Payments due in Less than 1 year were reduced by $0.3 million, • Payments due in 1-3 years were reduced by $0.7 million, • Payments due in 4-5 years were reduced by $0.7 million, and • Payments due in More than 5 years were reduced by $1.8 million. Emerging Growth Company We are an emerging growth company, as defined in 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. 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 for complying with new or revised accounting standards. Pursuant to Section 107 of the JOBS Act, we have irrevocably 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.” We will continue to be an emerging growth company until the earliest to occur of (i) the last day of fiscal year during which we had total annual gross revenues of at least $1.07 billion, (ii) the last day of the fiscal year following the fifth anniversary of the closing of the IPO, June 30, 2021, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt, or (iv) the date on which we are deemed to be a “large accelerated filer,” as defined under the Exchange Act. 33 Critical Accounting Policies Except as noted below, as of March 29, 2020, there were no significant changes in or changes in the application of our critical accounting policies or estimation procedures from those presented in our 2019 Annual Report. We review goodwill and other intangibles for impairment on a reporting unit basis annually during the fourth quarter of each year, using a measurement date of June 30th, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Reporting units for the purpose of goodwill impairment testing are the same as our operating segments (MasterCraft, NauticStar and Crest). 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 approach. 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 the measure of risk related to the specific reporting unit’s forecasted performance. Fair value under the market approach is determined for each unit by applying market multiples for comparable public companies to the unit’s financial results. The key uncertainties 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 in Note 6 in our Notes to Unaudited Condensed Consolidated Financial Statements, we performed an interim impairment analysis related to goodwill and intangible assets in connection with our preparation of our financial statements for the three months ended March 29, 2020. Based on the results of this impairment analysis, which indicated the carrying values of our NauticStar and Crest reporting units were in excess of fair values, all goodwill recorded for these reporting units was impaired. We concluded there was no impairment of goodwill for MasterCraft. The fair value of the MasterCraft reporting unit exceeds the carrying value by approximately 165% as of the March 29, 2020 impairment test. If our assessment of the relevant facts and circumstances changes, or the actual performance falls short of the expected results, impairment charges may be required. Currently, the Company forecasts a modest recovery in the reporting units’ results later in fiscal year 2021. Indefinite-lived and definite-lived intangible assets acquired in October 2017 and October 2018 related to the NauticStar and Crest acquisitions, respectively, are derived from the value of the business acquired. A portion of these values were also impaired as a result of the March 29, 2020 impairment test. Given the recent impairment, there is no difference between the carrying value and fair value of the trade name intangibles. The key uncertainties in the fair value calculations for our indefinite-lived and definite-lived intangible assets, as applicable , are: assumptions used in developing internal revenue growth and customer expense forecasts, assumed customer attrition rates, and the selection of an appropriate royalty rate, as well as the perceived risk associated with those forecasts in determining the discount rate. In the event of significant adverse changes in these assumptions, we may have to recognize a non-cash impairment of intangibles, which could have a material adverse effect on our financial condition and results of operations. ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK. Refer to our 2019 Annual Report for a complete discussion of the Company’s market risk. There have been no material changes in market risk from those disclosed therein.