What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-12 compared with 2020-05-08 · 141 added, 265 removed, 98 unchanged (81% of the section changed)

2 unchanged sentences

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.

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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

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.

We continue to be 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.

Impact to Operations

To balance wholesale production with the 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.

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

MasterCraft, NauticStar and Crest each achieved a steady increase in production during the first quarter of fiscal 2021.

Although all of our segments made progress, NauticStar’s performance lagged behind our other brands during the first quarter.

In August 2020, we announced that Scott Womack had been named President of NauticStar.

We believe NauticStar will greatly benefit from Mr.

Womack’s years of executive leadership, manufacturing experience and proven dedication to operational excellence.

Impact to Liquidity and Capital Resources

During March 2020, we drew $35.0 million on our Revolving Credit Facility 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 6 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 the entire R evolving C redit F acility as of October 4 , 2020.

As of October 4 , 2020, we were in compliance with our financial covenants under the Amendment to the Credit Facility.

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

We continue 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.

Additionally, our ability to grow and retain a high-performing workforce will be critical to meeting our production objectives.

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 impact of the COVID-19 pandemic on our business is uncertain and will depend on a number of factors, including, the duration, spread and severity, the remedial action and stimulus measures adopted by local, state and federal governments, the effects of the pandemic on our consumers, dealers, suppliers and workforce, and the extent to which normal economic and operating conditions can resume and be sustained within the general economy.

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.

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.

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.

Net sales were $103.7 million for the first quarter of 2021, which represented a decrease of 5.5 percent as compared to the first quarter of 2020.

The decrease was primarily due to lower sales volumes as we continue to ramp up production at each of our segments.

Partially offsetting the impact of lower volumes was lower dealer incentives, a favorable mix of higher-priced and higher-contented models, and higher parts sales volume for MasterCraft and Crest.

Gross profit for the first quarter of 2021 increased 2.7 percent, primarily due to lower dealer incentives, higher prices, favorable model mix, and higher parts sales volume at MasterCraft and Crest.

These increases were partially offset by lower unit sales volume for each reportable segment and higher labor costs at MasterCraft and NauticStar.

Gross margin increased by 200 basis points to 25.3 percent for the first quarter of 2021 from 23.3 percent for the first quarter of 2020 primarily due to lower dealer incentives and materials costs as a percentage of sales, partially offset by lower overhead absorption driven by lower sales volume and higher labor costs as a percentage of sales.

Net income was $9.6 million for the first quarter of 2021, compared to Net income of $8.6 million for the first quarter of 2020.

Diluted earnings per share was $0.51, compared to diluted net income per share of $0.46 for the prior year period.

Merritt Island Facility Purchase

On August 13, 2020, we entered into an agreement to purchase certain real property located in Merritt Island, Florida, including an approximately 140,000 sq.

boat manufacturing facility, (the “Merritt Island Facility”).

On October 26, 2020 we completed this purchase for a total cost of $14.2 million.

We are expanding our overall boat building capacity by moving all Aviara production to the Merritt Island Facility.

While we believe this additional capacity will help facilitate Aviara’s long-term growth, importantly, we also believe that removing Aviara production from our Vonore, Tennessee facility will allow for an immediate increase in capacity and productivity for our MasterCraft brand.

The transition of Aviara’s production has already begun and we expect to begin producing Aviara in the Merritt Island Facility by early third quarter of fiscal 2021.

Results of Operations

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Three Months Ended

(Dollars in thousands)

Consolidated statements of operations :

COST OF SALES

OPERATING EXPENSES:

Selling and marketing

General and administrative

Amortization of other intangible assets

Goodwill and other intangible asset impairment

Total operating expenses

OPERATING INCOME (LOSS)

OTHER EXPENSE:

Interest expense

INCOME (LOSS) BEFORE INCOME TAX EXPENSE

INCOME TAX EXPENSE (BENEFIT)

NET INCOME (LOSS)

Additional financial and other data:

Unit sales volume:

Consolidated unit sales volume

Consolidated net sales

Net sales per unit:

Consolidated net sales per unit

Gross margin percentage

Three Months Ended March 29, 2020 Compared to the Three Months Ended March 31, 2019

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;

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.

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.

The table below presents our consolidated results of operations for the nine months ended:

Nine Months Ended

September 29,

(Dollars in thousands)

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Amortization of other intangible assets

Goodwill and other intangible asset impairment

Total operating expenses

OPERATING INCOME (LOSS)

OPERATING INCOME

OTHER EXPENSE:

Interest expense

INCOME (LOSS) BEFORE INCOME TAX EXPENSE

INCOME TAX EXPENSE (BENEFIT)

NET INCOME (LOSS)

INCOME BEFORE INCOME TAX EXPENSE

INCOME TAX EXPENSE

Additional financial and other data:

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Consolidated net sales per unit

Gross margin percentage

Crest was acquired on October 1, 2018.

Nine months Ended March 29, 2020 Compared to the Nine months Ended March 31, 2019

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.

Three Months Ended October 4, 2020 Compared to the Three Months Ended September 29, 2019

Net Sales for the first quarter were $103.7 million , a decrease of $6.0 million, or 5.5 percent, compared to $109.8 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;

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.

a $5.7 million decrease for the NauticStar segment primarily due to primarily due to lower sales volume, as NauticStar continues to ramp up production,

an $0.8 million decrease for the Crest segment primarily due to lower sales volume, as Crest continues to ramp up production, partially offset by favorable mix and higher-priced models, and

a $ 0.5 million in crease for the MasterCraft segment, as the impact of lower sales volume associated with our continued production ramp up was offset by lower dealer incentives, a favorable mix of higher-priced and higher-contented models, and higher parts sales volume .

Gross Profit and Gross Margin.

Gross profit increased $0.7 million, or 2.7 percent, to $26.2 million compared to $25.5 million for the prior-year period.

The increase was primarily a result of higher prices, lower dealer incentives and higher parts revenue at MasterCraft and Crest and favorable model and options mix at MasterCraft.

These increases were partially offset by lower unit sales volume for each reportable segment and higher labor costs at MasterCraft and NauticStar.

We expect to continue to realize higher labor costs for the full fiscal year due to changes, implemented in the first quarter, to our production employee compensation package at MasterCraft.

Gross margin increased primarily due to lower dealer incentives and materials costs as a percentage of sales, and higher prices, partially offset by lower overhead absorption driven by lower sales volume and higher labor costs as a percentage of sales.

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 .

Operating expenses were flat compared to the prior-year period as lower Selling and marketing costs, primarily due to timing of anticipated marketing spend within the year, were offset by higher General and administrative expenses, primarily driven by additional spend related to product development and variable compensation costs.

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.

Interest expense decreased $0.3 million, or 24.2 percent primarily due to lower effective interest rates and lower average outstanding debt balances during the quarter compared to the prior-year period.

Income Tax Expense.

Our consolidated interim effective income tax rate decreased to 22.8 percent for the first quarter of 2021 from 24.0 percent for first quarter of 2020.

Non-GAAP Measures

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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.

For the periods presented herein, these adjustments include Aviara transition costs and Aviara (new brand) startup costs, and non-cash share-based compensation.

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

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

For the periods presented herein, these adjustments include Aviara transition costs, Aviara (new brand) startup costs, and certain non-cash items including other intangible asset amortization and share-based compensation.

EBITDA, Adjusted EBITDA, Adjusted EBITDA m argin, 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 consid ered 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 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 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.

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.

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 adjust s 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:

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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:

The following table presents a reconciliation of net income as determined in accor dance with U.S.

GAAP to EBITDA, Adjusted EBITDA and Adjusted EBITDA M argin for the periods indicated:

Three Months Ended

Nine Months Ended

Net income (loss)

Income tax expense (benefit)

September 29,

Income tax expense

Interest expense

Depreciation and amortization

Goodwill and other intangible asset impairment (a)

COVID-19 Shutdown costs (b)

Aviara start-up costs (c)

Share-based compensation

Transaction expense (d)

Inventory step-up adjustment - acquisition related (e)

Aviara start-up costs (a)

Aviara transition costs (b)

Adjusted EBITDA

Adjusted EBITDA Margin

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.

Represents costs associated with the COVID-19 pandemic.

Costs include lump sum severance payments and temporary continuation of healthcare benefits for laid off employees.

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.

We expect to begin selling one additional model, the AV40, after the Aviara transition of production to the new Merritt Island facility in Florida.

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.

Represents fees, expenses, and integration costs associated with our acquisition of Crest in fiscal 2019.

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.

Represents costs to transition production of the Aviara brand from Vonore, Tennessee to Merritt Island, Florida.

Costs include duplicative overhead costs and costs not indicative of ongoing operations (such as training and facility preparation).

We expect to incur such costs until Aviara production is fully transitioned, which we expect will be completed during fiscal 2021.

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

GAAP to Adjusted Net Income for the periods indicated:

Three Months Ended

Nine Months Ended

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

Net income (loss)

Income tax expense (benefit)

Goodwill and other intangible asset impairment (a)

COVID-19 Shutdown costs (b)

September 29,

(Dollars in thousands)

Income tax expense

Amortization of acquisition intangibles

Aviara start-up costs (c)

Aviara start-up costs (a)

Aviara transition costs (b)

Share-based compensation

Transaction expense (d)

Inventory step-up adjustment - acquisition related (e)

Adjusted Net Income before income taxes

Adjusted income tax expense (f)

Adjusted income tax expense (c)

Adjusted Net Income

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Basic Adjusted Net Income per share

Diluted Adjusted Net Income per share (g)

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.

Represents costs associated with the COVID-19 pandemic.

Costs include lump sum severance payments and temporary continuation of healthcare benefits for laid off employees.

Diluted Adjusted Net Income per share

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.

We expect to begin selling one additional model, the AV40, after the Aviara transition of production to the new Merritt Island facility in Florida.

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.

Represents fees, expenses, and integration costs associated with our acquisition of Crest in fiscal 2019.

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.

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.

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.

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

Weighted average shares used for computation of Basic earnings per share

Dilutive effect of outstanding stock options (a)

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

Weighted average shares used for the computation of Diluted Adjusted Net Income per share

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.

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:

Represents costs to transition production of the Aviara brand from Vonore, T ennessee to Merritt Island , Florida.

Costs include duplicat ive overhead costs and costs not indicative of ongoing operations (such as training and facility preparation).

We expect to incur such costs until Aviara production is fully transitioned , which we expect will be completed during fiscal 2021.

Reflects income tax expense at an income tax rate of 23.0% for each period presented.

The following table presents the reconciliation of net income per diluted share to Adjusted net income per diluted share for the periods presented:

Three Months Ended

Nine Months Ended

Net income (loss) per diluted share

September 29,

Net income per diluted share

Impact of adjustments:

Income tax expense (benefit)

Goodwill and other intangible asset impairment (a)

COVID-19 Shutdown costs (b)

Income tax expense

Amortization of acquisition intangibles

Aviara start-up costs (c)

Aviara start-up costs (a)

Aviara transition costs (b)

Share-based compensation

Transaction expense (d)

Inventory step-up adjustment - acquisition related (e)

Adjusted Net Income per diluted share before income taxes

Impact of adjusted income tax expense on net income per diluted share before income taxes (f)

Impact of increased share count (g)

Adjusted Net Income per diluted weighted average share

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.

Represents costs associated with the COVID-19 pandemic.

Costs include lump sum severance payments and temporary continuation of healthcare benefits for laid off employees.

Impact of adjusted income tax expense on net income per diluted share before income taxes (c)

Adjusted Net Income per diluted share

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.

We expect to begin selling one additional model, the AV40, after the Aviara transition of production to the new Merritt Island facility in Florida.

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.

Represents fees, expenses, and integration costs associated with our acquisition of Crest in fiscal 2019.

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.

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.

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.

Represents costs to transition production of the Aviara brand from Vonore, Tennessee to Merritt Island, Florida.

Costs include duplicative overhead costs and costs not indicative of ongoing operations (such as training and facility preparation).

We expect to incur such costs until Aviara production is fully transitioned, which we expect will be completed during fiscal 2021.

Reflects income tax expense at an income tax rate of 23.0% for each period presented.

Change in Non-GAAP Financial Measure

Prior to fiscal year-end 2020, the Company’s calculation of a diluted per share amount of Adjusted Net Income included an adjustment to fully dilute this non-GAAP measure for all outstanding share-based compensation grants.

This additional dilution was incorporated by adjusting the GAAP measure, Weighted Average Shares Used for the Computation of Basic earnings per share, as presented on the Consolidated Statements of Operations, to include a dilutive effect for all outstanding RSAs, PSUs, and stock options.

Beginning with the fiscal year-end 2020 presentation and for all subsequent periods, the Company will no longer include this additional dilution impact in its calculation of Adjusted Net Income per diluted share.

The Company has instead utilized the Weighted Average Shares Used for the Computation of Basic and Diluted earnings per share as presented on the Consolidated Statements of Operations to calculate Adjusted Net Income per diluted share for all periods presented herein.

The Company believes that, because its outstanding share-based compensation grants no longer result in a material amount of dilution of its earnings as was the case nearer to the date of our IPO, the adjustment methodology previously used no longer provides meaningful information to management or other users of its financial statements.

This change resulted in an increase of $0.01 in the three months ended September 29, 2019 in the amount of Adjusted Net Income per diluted share from what was previously reported.

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.

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.

Our principal sources of liquidity are our cash balance, cash generated from operating activities, our Revolving Credit Facility and the refinancing and/or new issuance of long-term debt.

As of October 4, 2020, we had a cash balance of $8.9 million in addition to $35.0 million of available borrowing capacity under the Revolving Credit Facility.

During October 2020, the Company completed the purchase of the Merritt Island, Florida for a total cost of $14.2 million.

See Note 11 in Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding this transaction.

We believe our cash balance, cash from operations, and availability under the Revolving Credit Facility will be sufficient to provide for our liquidity and capital resource needs.

However, we are continuing to monitor the COVID-19 pandemic and its impact on our business, dealers, consumers and industry as a whole.

The following table summarizes the cash flows from operating, investing, and financing activities:

The following table summarizes our cash flows from operating, investing, and financing activities:

Nine Months Ended

Three Months Ended

September 29,

(Dollars in thousands)

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Net change in cash

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

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.

Net cash provided by operating activities increased primarily due to higher operating income partially offset by additional working capital usage.

Cash flows from working capital changes were generally flat compared to the prior year quarter and included:

a $10.1 million decrease related to Accounts receivable primarily due to a larger increase in receivables during first quarter of fiscal 2021 as compared to the same period in fiscal 2020 driven by relative sales volumes improvement and the impact of an improved Crest collection cycle during the first quarter of fiscal 2020;

a $3.5 million decrease attributable to Inventories mainly as a result of an increase in raw materials and work-in-process driven by increasing production during the first quarter of fiscal 2021;

a $5.7 million increase attributable to Accounts payable driven by increasing production during the first quarter of fiscal 2021;

a $5.0 million increase related to Accrued expenses and other current liabilities largely from lower cash used for variable compensation and dealer incentives for the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020;

a $3.0 million increase related to Income tax activity as overpayments from fiscal 2020 were used to reduce cash requirements for income taxes in the first quarter of fiscal 2021.

Net cash used in investing activities decreased $2.3 million primarily due to lower capital expenditures.

Financing cash flow decreased primarily as the result of higher repayments of debt during the first quarter of fiscal 2021 as compared to the same period of the prior year.

The Company repaid $10.0 million on its Revolving Credit Facility and $2.4 million of scheduled principal repayments on its term loans during the first quarter of fiscal 2021.

The Company had no principal repayments on long-term

debt during the first quarter of fiscal 2020 due to the Company’s fiscal quarter ending on September 29, 2019, prior to the scheduled quarterly principal repayment due on September 30, 2019.

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.

The Company did not have any off-balance sheet financing arrangements as of October 4, 2020.

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.

We are currently an emerging growth company, as defined in the JOBS Act.

We will continue to be an emerging growth company until June 30, 2021, which is the last day of our fiscal year following the fifth anniversary of the date of completion of our initial public offering.

As a result, beginning with our annual reporting requirements related to fiscal 2021, we may no longer take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding stockholder advisory “say-on-pay” votes on executive compensation and stockholder advisory votes on golden parachute compensation.

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.

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.

As of October 4, 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 Annual Report on Form 10-K for the fiscal year ended June 30, 2020, which was filed with the SEC on September 11, 2020 .

QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis