What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-09-11 compared with 2019-09-13 · 285 added, 319 removed, 144 unchanged (81% of the section changed)

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In addition, the statements in this discussion and analysis regarding industry outlook, our expectations regarding 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 successful integration of NauticStar and Crest into our business and the risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements” and in “Risk Factors” above.

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.

Fiscal 2019 was a record year, with net sales of $466.4 million, an increase of 40.2% from fiscal 2018, primarily due to strong boat sales from our MasterCraft brand, the October 2018 acquisition of Crest, and the inclusion of NauticStar in our fiscal 2019 first quarter results.

Full year net income of $21.4 million was a decrease of 46.2% from fiscal 2018, with diluted earnings per share decreasing 46.2% to $1.14 per share.

The significant decrease was driven by the negative impact of a $31.0 million non-cash goodwill and other intangible asset impairment at NauticStar principally as a result of a decline, in the fiscal fourth quarter, in the outlook for sales and operating performance relative to our acquisition plan.

For more information regarding this impairment charge, see Note 8 in Notes to Consolidated Financial Statements.

NauticStar’s core industry category, the value-brand saltwater fishing boat segment, has experienced a recent slowing in demand, especially for boats less than 24 feet in length, which represent a material percentage of NauticStar’s current model mix.

The decrease in net income and diluted earnings per share were offset by the Crest acquisition, which added $76.6 million in net sales, and continued strong operating results at MasterCraft.

Recent Transactions

Acquisition of Crest Marine, LLC

On October 1, 2018, we completed the acquisition of Crest.

The purchase price was $81.7 million, including customary adjustments for the amount of working capital in the acquired business at the closing date.

A portion of the purchase price was deposited into an escrow account in order to secure certain post-closing obligations of the former members of Crest.

The Company’s results of operations presented herein include Crest’s results from October 1, 2018 through June 30, 2019.

Fourth Amended and Restated Credit Agreement

On October 1, 2018, we entered into a Fourth Amended and Restated Credit and Guaranty Agreement with a syndicate of certain financial institutions (the “Fourth Amended Credit Agreement”).

The Fourth Amended Credit Agreement replaced the Third Amended and Restated Credit Agreement, dated October 2, 2017.

The Fourth Amended Credit Agreement provides us with a $190 million senior secured credit facility, consisting of a $75 million term loan and an $80 million term loan (together, the “Term Loans”) and a $35 million revolving credit facility (the “Revolving Credit Facility”).

Proceeds from the $80 million term loan were used to fund a portion of the purchase price for the Crest acquisition.

This section generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019.

Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 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, 2019, which was filed with the SEC on September 13, 2019.

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 volume — We define unit 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 volume.

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.

Adjusted EBITDA — We define Adjusted EBITDA as earnings before interest expense, income taxes, depreciation, and amortization, as further adjusted to eliminate certain non-cash charges and unusual items that we do not consider to be indicative of our ongoing operations.

Adjusted EBITDA — We define Adjusted EBITDA as earnings before interest expense, 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 Adjusted EBITDA to net income, see “Non-GAAP Measures” below.

Adjusted Net Income — We define Adjusted Net Income as net income excluding income taxes adjusted to eliminate certain non-cash charges and unusual items that we do not consider to be indicative of our ongoing operations and an adjustment for income tax expense at a normalized annual effective tax rate.

Adjusted EBITDA margin — We define Adjusted EBITDA margin as Adjusted EBITDA divided by net sales, expressed as a percentage.

Adjusted Net Income — We define Adjusted Net Income as net income 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 (benefit) related to non-GAAP adjustments.

For a reconciliation of Adjusted Net Income, see “Non-GAAP Measures” below.

Components of Results of Operations

We generate sales from the sale of boats, trailers, and accessories to our dealers.

The substantial majority of our net sales are derived from the sale of boats, including optional features included at the time of the initial wholesale purchase of the boat.

Net sales consist of the following:

Gross sales, which are derived from:

Boat sales — sales of boats to our dealer network.

In addition, nearly all of our boat sales include optional feature upgrades, which increase the average selling price of our boats;

Trailers, parts and accessories, and other revenues — sales of boat trailers, replacement and aftermarket boat parts and accessories, and transportation charges to our dealer network.

Dealer programs and flooring subsidies — incentives, including rebates and subsidized flooring, we provide to our dealers to drive volume and level dealer purchases throughout the year.

If a dealer meets certain volume levels over the course of the year during certain defined periods, the dealer will be entitled to a specified rebate.

These rebates change annually and include volume and performance incentives.

Dealers who participate in our floor plan financing program may be entitled to have their flooring costs subsidized by us to promote dealer orders in the off-season.

Cost of Sales

Our cost of sales includes all of the costs to manufacture our products, including raw materials, components, supplies, direct labor, and factory overhead.

For components and accessories manufactured by third-party vendors, our costs are the amounts invoiced to us by the vendors.

Cost of sales includes shipping and handling costs, depreciation expense related to manufacturing equipment and facilities, and warranty costs associated with the repair or replacement of our boats under warranty.

Operating Expenses

Our operating expenses include selling and marketing costs, general and administrative costs, amortization of intangible assets and impairment losses.

These items include personnel and related expenses, non-manufacturing overhead, and various other operating expenses.

Further, selling and marketing expenditures include the cost of advertising and marketing materials.

General and administrative expenses include, among other things, salaries, benefits, and other personnel related expenses for employees engaged in product development, engineering, finance, information technology, human resources, and executive management.

Also included are outside legal and accounting fees, investor relations, risk management (insurance), and other administrative costs.

Other Expense

Other expense includes interest expense.

Interest expense consists of interest charged under our credit facilities, amortization of deferred debt issuance costs, and deferred debt issuance costs written off in connection with the pay down of amounts owed on our credit facilities.

Income Tax Expense

Our accounting for income tax expense reflects management’s assessment of future tax assets and liabilities based on assumptions and estimates for timing, likelihood of realization, and tax laws existing at the time of evaluation.

We record a valuation allowance, when appropriate, to reduce deferred tax assets to an amount that is more likely than not to be realized.

COVID-19 Pandemic

The outbreak of a novel coronavirus throughout the world, including the United States, during early calendar year 2020 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 our business is highly uncertain and difficult to predict, as the response to the COVID-19 Pandemic is still evolving in many countries, including the United States and other markets where we operate.

Capital markets and economies worldwide have been negatively impacted by the COVID-19 Pandemic, and it has caused economic downturns or recessions in the United States and other markets where we operate.

Policymakers around the world continue to respond with fiscal and monetary policy actions to support the economy.

The magnitude and overall effectiveness of these actions remains uncertain.

Impact to Operations

To balance wholesale production with the then anticipated impacts to retail demand caused by the economic impacts of the COVID-19 Pandemic, we reduced production in February 2020 and, in late March 2020, temporarily suspended manufacturing operations at all of our facilities to protect the health of our employees and comply with governmental mandates.

As a result of these actions, we temporarily laid off nearly all our hourly workforce.

We paid lump sum severance payments to certain of our laid off employees and provided for the temporary continuation of their healthcare benefits, resulting in charges totaling approximately $1.4 million during the fiscal third and fourth quarters (the “COVID-19 Shutdown Costs”).

We also initiated cash management strategies to conserve liquidity during the shutdown period.

We resumed operations at reduced production levels at our manufacturing facilities by mid-May 2020 and we are continuing to ramp up production.

Our facilities resumed operations with new temperature screening, social distancing, personal

protective equipment, and cleaning protocols to pr otect our employees and mitigate risk of further business interruption.

We continue to evaluate and monitor the health and safety of our employees and will adhere to federal and local government mandates and guidelines.

The disruptions caused by the COVID- 19 Pandemic , including the temporary manufacturing suspension and supplier and workforce constraints, resulted in a decline in wholesale unit sales volume of nearly 50% during the February 2020 to June 2020 period as compared to the same prior-year period .

An impairment of our goodwill and other intangible assets was triggered as of March 29, 2020, due to the economic outlook at that time, the significant declines in our share price, market volatility and the disruption in our operations.

As a result of the analysis, we recorded impairment charges totaling $56.4 million related to the NauticStar and Crest segments (the “Impairment Charges”).

The Impairment Charges were principally a result of a decline, in the fiscal third quarter, in market conditions, including our share price, and the outlook for retail and wholesale sales and operating performance, as of March 29, 2020, relative to our acquisition plans and annual impairment test performed as of June 30, 2019.

See Note 6 in Notes to Consolidated Financial Statements for more information regarding the Impairment Charges.

As governmental restrictions were lifted, demand in the U.S.

retail marine market accelerated in May and through June 2020 resulting in strong retail demand for our boats which we are seeing continue through the key summer selling season.

This increase in demand, coupled with our production shutdowns, pushed retail inventory levels for all our brands to record lows as of June 30, 2020.

We ended fiscal 2020 with retail inventory levels for our brands between 40 percent to 50 percent lower than at the end of fiscal 2019.

Impact to Liquidity and Capital Resources

On March 19, 2020, we drew $35.0 million on our revolving credit agreement as a precautionary measure in order to increase our 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, we entered into Amendment No.

3 (the “Amendment”) to the Fourth Amended & Restated Credit and Guarantee Agreement (the “Credit Facility”) to strengthen our financial flexibility.

Among other things, the changes effected by the Amendment provide temporary relief under our financial covenants.

See Note 8 in Notes to Consolidated Financial Statements for more information regarding these changes.

The performance of the business and our cash management activities provided the flexibility to repay $25.0 million of the revolving credit facility as of June 30, 2020 and we ended fiscal 2020 with what we believe to be a strong liquidity position.

As of June 30, 2020, we were in compliance with our financial covenants under the Amendment to the Credit Facility.

We believe strong marine retail demand, coupled with record low retail inventory levels for all our brands have created a growth opportunity for fiscal 2021 and potentially into future years.

We are continuing to ramp up production at our facilities and we expect this ramp up phase to continue through fiscal 2021 in order to meet strong wholesale demand as our dealers seek to satisfy current retail order flow and replenish their stock inventory.

As we navigate the unprecedented confluence of demand and disruption precipitated by the COVID-19 Pandemic, our production during this ramp up period will depend, in large part, on our suppliers’ capacity and our ability to grow and maintain a high-performing workforce.

Although the consumer responses to the COVID-19 Pandemic have thus far resulted in strong demand for our products, significant uncertainty exists in the economy as a result of the unpredictable outlook for the COVID-19 Pandemic.

The ultimate severity of the impact of the COVID-19 Pandemic on our 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 governments, the effects of the pandemic on our consumers, dealers, suppliers and workforce, and to the extent normal economic and operating conditions can resume and be sustained within the general economy, all of which are uncertain and cannot be predicted.

Our 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 or workforce disruptions and uncertain demand, additional manufacturing suspensions, additional other intangible asset impairment charges, and the impact of any initiatives that we may undertake to address financial and operational challenges faced by us and our consumers, dealers, and suppliers.

Please see Item 1A, “Risk Factors – Risks Related to Our Business – The COVID-19 Pandemic has had, and may continue to have, certain negative impacts on our business and those of our consumers, dealers and suppliers, and such impacts may have a material adverse effect on our operations and business” and “—General economic conditions, particularly in the U.S., affect our industry, demand for our products and our business, and results of operations.”

Overview of Results of Operations

Net sales were $363.1 million for fiscal 2020, a decrease of 22.2 percent from fiscal 2019, due to lower wholesale unit volumes as a result of the disruptions caused by the COVID-19 Pandemic, including our temporary manufacturing suspension, our pre- COVID-19 Pandemic effort to allow our dealers to right-size pipeline inventory levels, and pre- COVID-19 Pandemic softness in the overall saltwater fishing category.

This decline was partially offset by the inclusion of Crest, which was acquired during the second quarter of 2019, higher average wholesale prices for all our reportable segments, fiscal 2020 Aviara sales included in our MasterCraft segment, and lower dealer incentives.

Gross profit for fiscal 2020 decreased 33.4 percent from fiscal 2019, primarily due to lower wholesale unit sales volume for each reportable segment, higher depreciation expense, and $1.4 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 dealer incentives.

Gross margin decreased by 3.5 percentage points to 20.8 percent for fiscal 2020 from 24.3 percent for fiscal 2019, primarily due to lower overhead absorption driven by lower wholesale unit sales volume for each reportable segment, and $1.4 million of COVID-19 Shutdown Costs.

Net loss was $24.0 million for fiscal 2020, compared to Net income of $21.4 million for fiscal 2019.

Diluted net loss per share was $1.28, compared to Diluted net income per share of $1.14 for fiscal 2019.

Net loss for fiscal 2020 included Goodwill and other intangible asset impairment charges of $56.4 million, or $(3.01) per diluted share.

Net income for fiscal 2019 included Goodwill and other intangible asset impairment charges of $31.0 million, or $(1.65) per diluted share.

CEO Transition

On October 30, 2019, our Board of Directors appointed Frederick A.

Brightbill, Chairman of the Board of Directors, interim Chief Executive Officer.

On December 2, 2019, Mr.

Brightbill was named permanent Chief Executive Officer.

Brightbill replaced Terry McNew, who resigned on October 30, 2019.

Aviara Brand Launch

We began selling boats under the Aviara brand during the first quarter of fiscal 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 fiscal 2020 and the AV36 began selling during the second quarter of fiscal 2020.

In February 2020, we launched the third Aviara model, the AV40, which we expect to begin selling in the first half of fiscal 2021.

Aviara is built in our MasterCraft facility and is part of the MasterCraft reportable segment.

Results of Operations

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Our historical results are not necessarily indicative of the results that may be expected in the future.

For the Years Ended June 30,

(Dollars in thousands, except unit volumes)

Consolidated statement of operations :

(Dollars in thousands)

Consolidated statements of operations :

COST OF SALES

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General and administrative

Amortization of intangible assets

Amortization of other intangible assets

Goodwill and other intangible asset impairment

Total operating expenses

Operating income

OPERATING INCOME (LOSS)

OTHER EXPENSE:

Interest expense

Income before income tax expense

Income tax expense

INCOME (LOSS) BEFORE INCOME TAX EXPENSE

INCOME TAX EXPENSE (BENEFIT)

NET INCOME (LOSS)

Additional financial and other data:

MasterCraft net sales

NauticStar net sales

Crest net sales

Unit sales volume:

Consolidated unit sales volume

Consolidated net sales

MasterCraft sales

NauticStar sales

Consolidated sales

Fiscal 2019 Compared to Fiscal 2018

Net Sales for fiscal 2019 were $466.4 million, an increase of $133.7 million, or 40.2%, compared to $332.7 million for fiscal 2018.

The gain was primarily due to:

an increase at MasterCraft of $45.5 million, or 17.1%, primarily driven by an increase in unit sales volume, favorable product mix and price increases, offset by higher discounts to support our Canadian and European Union dealers impacted by retaliatory import tariffs;

the inclusion of Crest, which grew net sales by $76.6 million;

a net $11.6 million increase in net sales for NauticStar, driven by the inclusion of NauticStar in our fiscal 2019 first quarter results, partially offset by a decrease in volume due to softnes s in NauticStar’s core market.

Gross Profit.

Gross profit increased $22.8 million, or 25.2%, to $113.1 million compared to $90.4 million for fiscal 2018.

The increase was primarily due to:

an increase in MasterCraft unit sales volumes, price increases, and favorable product mix, offset by increased warranty costs and higher discounts to support Canadian and European Union dealers impacted by retaliatory import tariffs;

the inclusion of Crest, which contributed $13.6 million to gross profit;

and partially offset by

a net $1.2 million decrease in gross profit for NauticStar, primarily driven by a decrease in volume, partially offset by the inclusion of NauticStar in our fiscal 2019 first quarter results.

Given the above-mentioned factors, gross margin decreased to 24.3% for fiscal 2019 compared to 27.2% for fiscal 2018.

Operating Expenses.

Operating expenses increased $45.5 million, or 132.3%, to $79.9 million for fiscal 2019 compared to $34.4 million for fiscal 2018.

This increase resulted mainly from:

the $31.0 million goodwill and intangible asset impairment charge at NauticStar (see Note 8 in Notes to Consolidated Financial Statements for more information);

the inclusion of Crest, which increased operating expenses by $6.5 million;

an increase of $2.3 million in startup costs related to Aviara;

the incremental inclusion of NauticStar in our fiscal 2019 first quarter results, which added $1.9 million;

an increase of $1.9 million in intangible asset amortization, which includes the effects of both the NauticStar and Crest acquisitions, principally for dealer networks.

Operating expenses, as a percentage of net sales, increased by 6.8 percentage points to 17.1% for fiscal 2019 compared to 10.3% for fiscal 2018.

This increase resulted primarily from the $31.0 million goodwill and intangible asset impairment charge at NauticStar.

Excluding this non-cash impairment charge, acquisition-related and integration costs, and start-up costs for Aviara, operating expenses as a percentage of sales decreased 0.1 percentage points to 9.5% for fiscal 2019 compared to 9.6% for fiscal 2018.

Other Expense.

Interest expense increased $3.0 million or 87.5%, to $6.5 million for fiscal 2019 compared to $3.5 million for fiscal 2018.

The increase is due to increased borrowings for the Crest acquisition under the Fourth Amended Credit Agreement compared to the principal balance owed under the term loan component of the prior credit agreement during fiscal 2018.

Income Tax Expense.

Our results for fiscal 2018 reflect the impact of the enactment of the Tax Reform Act, which was signed into law on December 22, 2017.

The Tax Reform Act reduced federal corporate income tax rates and changed numerous other provisions.

As we have a June 30 fiscal year-end, the lower corporate federal income tax rate was phased in, resulting in a U.S.

federal statutory tax rate of 28.1% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years.

We have revalued our deferred tax assets and liabilities to the reduced rates based on the period in which those assets and liabilities are expected to reverse.

The incorporation of the changes resulting from the Tax Reform Act in our tax related accounts during fiscal 2018 resulted in a decrease to our year to date effective tax rate due to the revaluation of our deferred tax accounts.

The fiscal year ended June 30, 2018 included a year-to-date benefit of $0.6 million to reflect federal deferred taxes at the lower blended effective tax rate.

Our income tax expense was $5.4 million for fiscal 2019, reflecting a reported effective tax rate of 20.2%.

Our income tax expense was $12.9 million for fiscal 2018, reflecting a reported effective tax rate of 24.5%.

Our effective tax rate for fiscal 2019 was lower than the 21% statutory rate primarily due to the permanent benefit associated with the foreign derived intangible income deduction, which was primarily offset by the inclusion of the state tax rate in the overall effective rate.

Net sales per unit:

Consolidated net sales per unit

(a) Crest was acquired on October 1, 2018.

Fiscal 2020 Compared to Fiscal 2019

Our net sales for fiscal 2018 were $332.7 million, reflecting an increase of $104.1 million, or 45.5%, compared to $228.6 million for fiscal 2017.

The increase was primarily due to:

an increase of 16.5%, or $37.7 million, attributable to MasterCraft, primarily due to an increase in unit sales volume, reduced retail rebate activity, favorable product mix and price increases;

the inclusion of NauticStar increased net sales by 29.0%, or $66.4 million.

Gross Profit .

For fiscal 2018, our gross profit increased $26.9 million, or 42.4%, to $90.4 million compared to $63.5 million for fiscal 2017.

The increase was primarily due to:

an increase in MasterCraft unit sales volume, price increases, lower warranty costs and reduced retail rebate activity, partially offset by higher material costs;

the inclusion of NauticStar, which contributed $12.3 million to gross profit.

Gross margin decreased to 27.2% for fiscal 2018 compared to 27.8% for fiscal 2017.

The decrease in gross margin was primarily due to the dilutive effect from the inclusion of NauticStar, which was partially offset by increased gross margin of MasterCraft.

Net Sales for fiscal 2020 were $363.1 million, a decrease of $103.3 million, or 22.2 percent, compared to $466.4 million for fiscal 2019.

The decrease was primarily due to:

A $65.4 million decrease for the MasterCraft segment, primarily due to lower wholesale unit volumes for the MasterCraft brand as a result of our temporary manufacturing suspension and our pre- COVID-19 Pandemic effort to reduce dealer inventory levels, partially offset by a richer mix of higher-priced and higher-contented models and lower dealer incentives.

The lower dealer incentives were primarily related to discounts for our Canadian dealers as the Canadian retaliatory import tariffs on boats, first imposed in July 2018, were rescinded in May 2019 and lower rebates and discounts in the fiscal fourth quarter driven by strong retail demand.

Within the MasterCraft segment, the decrease for the MasterCraft brand was also partially offset by Aviara sales in fiscal 2020;

a $23.1 million decrease for the NauticStar segment primarily as a result of our temporary manufacturing suspension, our pre- COVID-19 Pandemic effort to allow our dealers to right-size pipeline inventory levels, and softness in the overall saltwater category during the first half of fiscal 2020, partially offset by higher prices;

a net $14.9 million decrease as the Crest acquisition in the second quarter of fiscal 2019 added net sales of $18.9 million for the first quarter of fiscal 2020 which was offset by a total $33.7 million period-over-period decrease attributable to the remaining quarters in fiscal 2020 primarily as a result of our temporary manufacturing suspensi on and our pre- COVID-19 P andemic effort to allow our dealers to right-size pipeline inventory levels, and higher pre-pandemic retail rebate discounts , partially offset by higher prices ;

Gross Profit and Gross Margin.

Gross profit decreased $37.8 million, or 33.4 percent, to $75.4 million compared to $113.1 million for the prior year.

The decrease was primarily due to lower wholesale unit sales volume for each reportable segment, higher depreciation expense, and $1.4 million in COVID-19 Shutdown Costs.

The higher depreciation expense was largely a result of investment in tooling for Aviara and NauticStar to support recent product launches and lineup expansion.

These decreases were partially offset by price increases for each reportable segment, $2.6 million of gross profit attributable to Crest’s first quarter of fiscal 2020 results, and lower dealer incentives.

Gross margin decreased primarily due to lower overhead absorption driven by lower wholesale unit sales volume for each reportable segment, higher warranty costs as a percentage of sales, and $1.4 million of COVID-19 Shutdown Costs.

Operating Expenses .

Operating expenses increased $4.4 million, or 14.8%, to $34.4 million for fiscal 2018 compared to $30.0 million for fiscal 2017.

This increase resulted mainly from:

the inclusion of NauticStar, which increased operating expenses by $5.6 million;

an increase in compensation costs;

an increase of $1.7 million for acquisition-related and integration costs,

and $0.6 million related to new brand startup costs;

partially offset by

a decrease of $5.9 million in patent litigation costs, which was settled during the fourth quarter of fiscal 2017.

Operating expenses, as a percentage of net sales, decreased by 2.8 percentage points to 10.3% for fiscal 2018 compared to 13.1% for fiscal 2017.

This favorable impact resulted from leverage experienced through significant net sales increases compared to the net increases in operating expenses.

Other Expense.

Interest expense increased $1.3 million or 56.3%, to $3.5 million for fiscal 2018 compared to $2.2 million for fiscal 2017.

The increase is due to increased borrowings under the Third Term Loan compared to the principal balance owed under the term loan component of the Prior Credit Agreement during fiscal 2017.

Income Tax Expense.

Our results for fiscal 2018 reflect the impact of the enactment of the Tax Reform Act, which was signed into law on December 22, 2017.

The Tax Reform Act reduced federal corporate income tax rates and changed numerous other provisions.

As we have a June 30 fiscal year-end, the lower corporate federal income tax rate will be phased in, resulting in a U.S.

federal statutory tax rate of 28.1% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years.

We have revalued our deferred tax assets and liabilities to the reduced rates based on the period in which those assets and liabilities are expected to reverse.

The fiscal year ended June 30, 2018 included a year-to-date benefit of $647 to reflect federal deferred taxes at the lower blended effective tax rate.

Our income tax expense was $12.9 million for fiscal 2018, reflecting a reported effective tax rate of 24.5%.

Our income tax expense was $11.7 million for fiscal 2017, reflecting a reported effective tax rate of 37.5%.

Our effective tax rate for fiscal 2018 was lower than the 28.1% statutory rate primarily due to the impact of the Tax Reform Act, and a permanent benefit associated with the domestic production activities deduction, which was partially offset by the inclusion of the state tax rate in the overall effective rate.

Operating expenses increased $22.1 million, or 27.6 percent, to $101.9 million for fiscal 2020 compared to $79.9 million for fiscal 2019.

The increase was primarily driven by additional goodwill and other intangible asset impairment charges related to our NauticStar and Crest segments recorded in fiscal 2020 as compared to fiscal 2019.

See Note 6 in Notes to Consolidated Financial Statements for more information on the impairment charges.

In addition, the inclusion of Crest’s results for the first quarter of fiscal 2020 added $2.2 million of operating expenses, as Crest was acquired in the second quarter of fiscal 2019.

This increase was partially offset by a $3.9 million decrease at our MasterCraft segment mainly due to lower acquisition-related costs, reduced Selling and marketing and General and administrative expense resulting from cost management initiatives, lower share-based compensation expense as a result of our CEO transition and lowered performance estimates related to our incentive-based compensation plan.

Interest Expense .

Interest expense decreased $1.5 million, or 22.5 percent, primarily driven by lower effective interest rates during the year compared to fiscal 2019.

Income Tax Expense (Benefit) .

Our consolidated effective income tax rate increased to 23.9 percent for fiscal 2020 from 20.2 percent for fiscal 2019, primarily due to favorable adjustments occurring in fiscal 2019, such as permanent benefits and changes in valuation allowances, which reduced the effective tax rate for fiscal 2019.

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 and other items that we do not consider to be indicative of our ongoing operations, including goodwill and intangible impairment charges, transaction expenses associated with acquisitions, acquisition related inventory step-up adjustment, certain litigation charges, an out-of-period adjustment to correct an immaterial error related to our

warranty reserve, new brand startup costs, and our stock-based compensation .

We define Adjusted EBITDA margin as Adjusted EBITDA expressed as a percenta ge of net sales.

We define Adjusted Net Income as net income adjusted to eliminate certain non-cash charges and other items that we do not consider to be indicative of our ongoing operations, including goodwill and intangible impairment charges , transactio n expenses associated with acquisition s , acquisition related inventory step - up adjustment, certain litigation charges, an out-of-period adjustment to correct an immaterial error related to our warranty reserve, new brand startup costs, amortization of acqu ired intangible assets, and our stock-based compensation.

Adjusted EBITDA, Adjusted EBITDA margin , and Adjusted Net Income are not measures of net income or operating income as determined under accounting principles generally accepted in the United State s, which we refer to as GAAP.

Adjusted EBITDA and Adjusted Net Income are not measures of performance in accordance with GAAP and should not be considered as an alternative to net income or operating cash flows determined in accordance with GAAP.

Additiona lly, Adjusted EBITDA is not intended to be a measure of cash flow for management’s discretionary use.

We believe that the inclusion of EBITDA, Adjusted EBITDA, Adjusted EBITDA margin and Adjusted Net Income is appropriate to provide additional information to investors because securities analysts, noteholders and other investors use these non - GAAP financial measures to assess our operating performance across periods on a consistent basis and to evaluate the relative risk of an investment in our securities.

W e use Adjusted Net Income to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results prepared in accordance with GAAP, provides a more complete understanding of fact ors and trends affecting our business than GAAP alone measures.

We believe Adjusted Net Income assists our board of directors, management and investors in comparing our net income on a consistent basis from period to period because it removes non-cash ite ms and items not indicative of our ongoing operations.

Adjusted EBITDA and Adjusted Net Income 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 GAAP.

Some of t hese limitations are:

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 charges, Aviara (new brand) startup costs, COVID-19 Shutdown Costs, transaction expenses associated with acquisitions and certain non-cash items including share-based compensation, an out-of-period adjustment to correct an immaterial error related to our warranty reserve, and acquisition-related inventory step-up adjustments.

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 and adjusted for the impact to income tax expense (benefit) related to non-GAAP adjustments.

For the periods presented herein, these adjustments include Goodwill and other intangible asset impairment charges, Aviara (new brand) startup costs, COVID-19 Shutdown Costs, transaction expenses associated with acquisitions, and certain non-cash items including other intangible asset amortization, share-based compensation, out-of-period adjustment to correct an immaterial error related to our warranty reserve, and acquisition-related inventory step-up adjustments.

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 generally accepted in the United States, or U.S.

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.

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 adjusts for the impact to income tax expense (benefit) related to non-GAAP adjustments.

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.

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;

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Adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest payments on our indebtedness;

Adjusted Net Income and Adjusted EBITDA do not reflect the impact of earnings or charges resulting from matters we do not consider to be indicative of our 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 Adjusted EBITDA and Adjusted Net Income may not be comparable to similarly titled measures of other companies, including companies in our industry.

The following table sets forth a reconciliation of net income as determined in accordance with U.S.

GAAP to Adjusted EBITDA for the periods indicated (unaudited):

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 m argin for the periods indicated:

(Dollars in thousands)

Income tax expense

Net income (loss)

Income tax expense (benefit)

Interest expense

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Goodwill and other intangible asset impairment (a)

Transaction expense (b)

Inventory step-up adjustment – acquisition related (c)

Litigation charge (d)

Warranty adjustment (e)

New brand startup costs (f)

Stock-based compensation

Aviara start-up costs (b)

COVID-19 Shutdown Costs (c)

Share-based compensation

Warranty adjustment (d)

Transaction expense (e)

Inventory step-up adjustment - acquisition related (f)

Adjusted EBITDA

Adjusted EBITDA margin

Represents a non-cash charge recorded in the NauticStar segment for a $28.0 million impairment of goodwill and a $3.0 million impairment of trade name.

Represents non-cash charges recorded in the NauticStar and Crest segments for impairment of goodwill and trade name intangible assets.

See Note 6 in Notes to Consolidated Financial Statements for more information on the impairment charges.

Represents acquisition related costs and other integration costs associated with our acquisition s of Crest and NauticStar in fiscal 2019 and 2018, respectively.

Represents post-acquisition adjustment to cost of goods sold for the fair value step up of inventory acquired all of which was sold during respective fiscal years.

Represents legal and advisory fees for our litigation with Malibu Boats, LLC for fiscal 2017, which includes settling the Malibu patent case in fiscal 2017.

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 the first half of fiscal 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.

Represents lump sum severance payments and costs related to temporary continuation of healthcare benefits for certain laid off employees, in connection with the COVID-19 Pandemic.

Represents an out-of-period adjustment to correct an immaterial error related to our warranty accrual calculation identified during the fiscal year ended June 30, 2018.

Represents startup costs associated with Aviara, a completely new boat brand in an industry category neither MasterCraft, NauticStar nor Crest serve.

Represents acquisition related costs and other integration costs associated with our acquisitions of Crest and NauticStar in fiscal 2019 and 2018, respectively.

Represents post-acquisition adjustment to cost of goods sold for the fair value step up of inventory acquired all of which was sold during respective fiscal years.

The following table sets forth a reconciliation of net income as determined in accordance with U.S.

GAAP to Adjusted Net Income for the periods indicated (unaudited):

(Dollars in thousands, except for shares and per share amounts)

Income tax expense

GAAP to Adjusted Net Income for the periods indicated:

(Dollars in thousands)

Net income (loss)

Income tax expense (benefit)

Goodwill and other intangible asset impairment (a)

Transaction expense (b)

Inventory step-up adjustment – acquisition related (c)

Litigation charge (d)

Warranty adjustment (e)

New brand startup costs (f)

Amortization of acquisition intangibles

Stock-based compensation

Aviara start-up costs (b)

COVID-19 Shutdown Costs (c)

Share-based compensation

Warranty adjustment (d)

Transaction expense (e)

Inventory step-up adjustment - acquisition related (f)

Adjusted Net Income before income taxes

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Adjusted Net Income

Pro-forma Adjusted Net Income per common share

Pro-forma weighted average shares used for the computation of:

Basic Adjusted Net Income per share (h)

Adjusted Net Income per share:

Weighted average shares used for the computation of:

Basic Adjusted Net Income per share

Diluted Adjusted Net Income per share (h)

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:

Weighted average shares used for computation of Basic earnings per share (i)

Dilutive effect of outstanding stock options (j)

Dilutive effect of outstanding restricted share awards/units (k)

Pro-forma weighted average shares used for the computation of Diluted Adjusted Net Income per share (l)

Represents a non-cash charge recorded in the NauticStar segment for a $28.0 million impairment of goodwill and a $3.0 million impairment of trade name.

Represents non-cash charges recorded in the NauticStar and Crest segments for impairment of goodwill and trade name intangible assets.

See Note 6 in Notes to Consolidated Financial Statements for more information on the impairment charges.

Represents fees, expenses and integration costs associated with our acquisitions of Crest and NauticStar in fiscal 2019 and 2018, respectively.

Represents post-acquisition adjustment to cost of goods sold for the fair value step up of inventory acquired all of which was sold during the respective fiscal years.