What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-02-10 compared with 2020-11-12 · 112 added, 67 removed, 172 unchanged (51% of the section changed)

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COVID-19 Pandemic

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.

Demand for the Company’s products has been strong and, as a result of our employee’s committed efforts, disruptions to the Company’s production have been minimal since resuming operations in May 2020.

However, 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 remains 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 and our suppliers 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.

We resumed operations at reduced production levels at our manufacturing facilities by mid-May 2020.

Since that time, our facilities have increased production rates above their pre-COVID levels, and we plan further increases to meet strong retail demand.

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

Although all of our segments made progress, NauticStar’s performance lagged behind our other brands during the first and second quarters of fiscal 2021.

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

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

We and our dealers have historically utilized public boat shows, which typically occur from January through early April across North America, to showcase our newest models and features.

The COVID-19 pandemic has caused the cancellation of most large 2021 boat

In response, we ha ve l aunch ed a n online platform aimed at engaging with consumers during this dynamic boat show season.

This digital platform, named the MasterCraft Experience Digital Boat Show, is designed to bridge the gap between consumers seeking a safe, flexible avenue to research the MasterCraft brand and its products , and our dealer s looking to connect with consumers as the summer selling season approaches.

We also launch ed similar online experience s for the Crest and Aviara brand s , and in the near future plan to launch a platform for our NauticStar brand .

Impact to Liquidity and Capital Resources

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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.

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

See Note 7 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.

The performance of the business and our cash management activities provided the flexibility to repay the entire Revolving Credit Facility as of October 4, 2020.

As of January 3, 2021, 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.

Our facilitites are now running at production rates above their pre-COVID levels and we continue to ramp up production further.

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.

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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 $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.

Overview of Consolidated Results of Operations

Net sales were $118.7 million for the second quarter of 2021, which represented an increase of 19.1 percent as compared to the second quarter of 2020.

The increase was primarily due to higher sales volumes at each of our segments, a favorable mix of higher-priced and higher-contented models and lower dealer incentives.

Net sales were $222.4 million for the six months ended January 3, 2021, which represented an increase of 6.2 percent as compared to the six months ended December 29, 2020.

The increase was primarily the result of a favorable mix of higher-priced and higher-contented models and lower dealer incentives.

This favorability was partially offset by slightly lower sales volume, primarily during the fiscal first quarter.

G ross margin in creased by 340 basis points to 24.7 percent for the second quarter of 202 1 from 21.2 percent for the prior year period primarily due to favorable overhead absorption driven by higher sales volume , higher prices, lower dealer incentives and materials cost containment , partially offset by higher labor costs .

Gross margin increased by 270 basis points to 25.0 percent for the six months ended January 3, 2021 from 22.3 percent for the prior year period primarily due to lower dealer incentives and materials cost containment, and higher prices, partially offset by unfavorable overhead absorption and higher labor costs.

Net income was $12.5 million for the second quarter of 2021, compared to Net income of $6.9 million for the second quarter of 2020.

Diluted earnings per share was $0.66, compared to diluted earnings per share of $0.37 for the prior year period.

Net income was $22.1 million for the six months ended January 3, 2021, compared to Net income of $15.5 million for the prior year period.

Diluted earnings per share was $1.17, compared to diluted earnings per share of $0.83 for the prior year period.

Merritt Island Facility and Aviara Transition

On October 26, 2020, we completed the purchase of certain real property located in Merritt Island, Florida, including an approximately 140,000 sq.

boat manufacturing facility, (the “Merritt Island Facility”) for a purchase price 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.

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

Although the transition of Aviara’s production is still ongoing, we began producing Aviara in the Merritt Island Facility in December 2020.

Results of Operations

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Three Months Ended

September 29,

(Dollars in thousands)

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Consolidated net sales per unit

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 $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 .

Three Months Ended January 3, 2021 Compared to the Three Months Ended December 29, 2019

Net Sales for the second quarter were $118.7 million , an increase of $19.0 million, or 19.1 percent, compared to $99.6 million for the prior-year period.

The increase was primarily due to:

a $15.0 million increase for the MasterCraft segment driven by a 9.5 percent increase in sales volume, a favorable mix of higher-priced and higher-contented models, and lower dealer incentives,

a $4.7 million increase for the Crest segment resulting from a 36.9 percent increase in sales volume, higher prices, options favorability, and lower dealer incentives, partially offset by model mix, and

a $ 0.6 million decrease for the NauticStar segment primarily due to model mix, partially offset by a 5.3 percent increase in sales volume .

Gross Profit and Gross Margin.

Gross profit increased $8.1 million, or 38.5 percent, to $29.3 million compared to $21.1 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.

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

These increases were partially offset by higher labor costs at MasterCraft, NauticStar, and Crest as well as higher variable compensation costs and Aviara transition costs at MasterCraft.

We expect to realize higher labor costs for the full fiscal year due to changes, implemented in the first quarter of fiscal 2021, to our production employee compensation packages.

Gross margin increased due to favorable overhead absorption driven by higher sales volume, higher prices, lower dealer incentives and materials cost containment, partially offset by higher labor costs.

Operating Expenses.

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.

Operating expenses increased $1.5 million, or 14.1 percent, compared to the prior-year period primarily driven by higher general and administrative expenses, resulting from higher incentive compensation costs and additional investment related to product development.

This increase was partially offset by lower selling and marketing costs, primarily due to the timing of anticipated expense, which has been delayed by the COVID-19 pandemic until later in the fiscal year.

Interest Expense.

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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.

Our consolidated interim effective income tax rate decreased to 22.2 percent for the second quarter of 2021 from 24.4 percent for the prior-year period.

Six 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

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

Six Months Ended January 3, 2021 Compared to the Six Months Ended December 29, 2019

Net Sales for the six months ended January 3, 2021 were $222.4 million, an increase of $13.0 million, or 6.2 percent, compared to $209.4 million for the prior-year period.

The increase was primarily due to:

a $15.5 million increase for the MasterCraft segment, as the impact of slightly lower sales volume associated with our continued production ramp up was offset by a favorable mix of higher-priced and higher-contented models, lower dealer incentives, and higher parts sales volume,

a $3.8 million increase for the Crest segment primarily due to higher sales volume, lower dealer incentives, and higher prices, partially offset by model mix, and

a $6.3 million decrease for the NauticStar segment primarily due lower sales volume and model mix, partially offset by higher prices.

Gross Profit and Gross Margin.

Gross profit increased $8.8 million, or 18.9 percent, to $55.5 million compared to $46.7 million for the prior-year period.

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

These increases were partially offset by lower sales volume at MasterCraft and NauticStar, higher labor costs for each reportable segment, and higher variable compensation costs and Aviara transition costs at MasterCraft.

We expect to realize higher labor costs for the full fiscal year due to changes, implemented in the first quarter of fiscal 2021, to our production employee compensation packages.

Gross margin increased primarily due to lower dealer incentives and materials cost containment, and higher prices, partially offset by unfavorable overhead and higher labor costs.

Operating Expenses.

Operating expenses increased $1.5 million, or 6.4 percent, compared to the prior-year period due to higher general and administrative expenses, primarily driven by higher incentive compensation costs and additional investment related to information technology and product development.

Interest Expense.

Interest expense decreased $0.7 million, or 26.8 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 22.5 percent for the six months ended January 3, 2021 from 24.2 percent for the prior-year period.

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 Aviara transition costs and Aviara (new brand) startup costs, and non-cash share-based compensation.

For the periods presented herein, these adjustments include Aviara transition costs, 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 and adjusted for the impact to income tax expense (benefit) related to non-GAAP adjustments.

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.

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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 as determined in accor dance with U.S.

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

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

GAAP to EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin for the periods indicated:

Three Months Ended

September 29,

Six Months Ended

Income tax expense

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Three Months Ended

September 29,

Six Months Ended

(Dollars in thousands)

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Start-up costs presented for fiscal 2020 are related to the AV36 and AV40 models.

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).

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.

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Three Months Ended

September 29,

Six Months Ended

Net income per diluted share

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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.

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

Liquidity and Capital Resources

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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.

As of January 3, 2021, we had a cash balance of $12.1 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 Facility for a purchase price 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.

However, we are continuing to monitor the COVID-19 p andemic 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:

Three Months Ended

September 29,

Six Months Ended

(Dollars in thousands)

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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.

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.

Cash flows from working capital changes increased $2.0 million compared to the prior year quarter and included:

a $11.5 million increase attributable to Accounts payable driven by increasing production rates during the first half of fiscal 2021;

a $9.4 million increase related to Accrued expenses and other current liabilities largely from lower cash used for variable compensation and dealer incentives for the first half of fiscal 2021 compared to the first half of fiscal 2020;

a $10.5 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 half of fiscal 2021;

a $9.5 million decrease related to Accounts receivable primarily due to an improved collection cycle at Crest during the first half of fiscal 2020 and a larger build in receivables during first half of fiscal 2021 as compared to the same period in fiscal 2020 driven by relative sales volumes improvement.

Net cash used in investing activities increased $7.4 million due to higher capital expenditures, primarily the purchase of the Merritt Island Facility.

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

The Company repaid net borrowings of $10.0 million on its Revolving Credit Facility and $4.7 million of scheduled principal repayments on its term loans during the first half of fiscal 2021, compared to $2.3 million of scheduled repayments and $6.0 million of voluntary prepayments on long-term debt during the first half of fiscal 2020.

Off-Balance Sheet Arrangements

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

The Company did not have any off-balance sheet financing arrangements as of January 3, 2021.

Emerging Growth Company

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.

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

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.

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Critical Accounting Policies

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 .

As of January 3, 2021 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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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis