MasterCraft Boat Holdings, Inc. 10-Q

Item 1. Financial Statements Unaudited Condensed Consolidated Statements of Operations 4 Unaudited Condensed Consolidated Balance Sheets 5 Unaudited Condensed Consolidated Statements of Stockholders’ Equity 6 Unaudited Condensed Consolidated Statements of Cash Flows 7 Notes to Unaudited Condensed Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 28 Item 4. Controls and Procedures 28 PART II OTHER INFORMATION Item 1. Legal Proceedings 29 Item 1A. Risk Factors 29 Item 2. Unregistered Sales of Securities and Use of Proceeds 29 Item 3. Defaults Upon Senior Securities 29 Item 4. Mine Safety Disclosures 29 Item 5. Other Information 29 Item 6. Exhibits, Financial Statement Schedules 30 SIGNATURES 31 2 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements can generally be identified by the use of statements that include words such as “could,” “may,” “might,” “will,” “expect,” “likely,” “believe,” “continue,” “anticipate,” “estimate,” “intend,” “plan,” “project” and other similar words or phrases. Forward-looking statements involve estimates and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. The forward-looking statements contained in this quarterly report on Form 10-Q are based on assumptions that we have made considering our industry experience and our perceptions of historical trends, current conditions, expected future developments and other important factors we believe are appropriate under the circumstances. As you read and consider this quarterly report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many important factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements, including but not limited to the following: the potential effects of the coronavirus (“COVID-19”) pandemic on the Company, general economic conditions, demand for our products, changes in consumer preferences, competition within our industry, our reliance on our network of independent dealers, our ability to manage our manufacturing levels and our fixed cost base, the successful introduction of our new products and the other important factors described under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, filed with the Securities and Exchange Commission (“SEC”) on September 11, 2020 (our “2020 Annual Report”). Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement contained in this quarterly report on Form 10-Q to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New important factors that could cause our business not to develop as we expect may emerge from time to time, and it is not possible for us to predict all of them. 3 MASTERCRAFT BOAT HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) Three Months Ended Six Months Ended January 3, December 29, January 3, December 29, 2021 2019 2021 2019 NET SALES $ 118,677 $ 99,628 $ 222,422 $ 209,417 COST OF SALES 89,404 78,486 166,919 162,742 GROSS PROFIT 29,273 21,142 55,503 46,675 OPERATING EXPENSES: Selling and marketing 2,989 4,343 5,896 8,407 General and administrative 8,352 5,477 17,284 13,262 Amortization of other intangible assets 987 987 1,974 1,974 Total operating expenses 12,328 10,807 25,154 23,643 OPERATING INCOME 16,945 10,335 30,349 23,032 OTHER EXPENSE: Interest expense 870 1,237 1,889 2,581 INCOME BEFORE INCOME TAX EXPENSE 16,075 9,098 28,460 20,451 INCOME TAX EXPENSE 3,574 2,219 6,392 4,949 NET INCOME $ 12,501 $ 6,879 $ 22,068 $ 15,502 EARNINGS PER SHARE: Basic $ 0.66 $ 0.37 $ 1.17 $ 0.83 Diluted $ 0.66 $ 0.37 $ 1.17 $ 0.83 WEIGHTED AVERAGE SHARES USED FOR COMPUTATION OF: Basic earnings per share 18,807,316 18,730,688 18,790,826 18,727,267 Diluted earnings per share 18,928,408 18,770,783 18,897,617 18,770,770 Notes to Unaudited Condensed Consolidated Financial Statements form an integral part of the condensed consolidated financial statements. 4 MASTERCRAFT BOAT HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) January 3, June 30, 2021 2020 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 12,074 $ 16,319 Accounts receivable, net of allowances of $ 164 and $ 247 , respectively 7,403 6,145 Income tax receivable 4,828 4,924 Inventories, net (Note 3) 34,570 25,636 Prepaid expenses and other current assets 3,696 3,719 Total current assets 62,571 56,743 Property, plant and equipment, net (Note 4) 55,976 40,481 Goodwill (Note 5) 29,593 29,593 Other intangible assets, net (Note 5) 61,874 63,849 Deferred income taxes 15,782 16,080 Deferred debt issuance costs, net 359 425 Other long-term assets 888 752 Total assets $ 227,043 $ 207,923 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 14,393 $ 10,510 Accrued expenses and other current liabilities (Note 6) 41,590 35,985 Current portion of long-term debt, net of unamortized debt issuance costs (Note 7) 9,739 8,932 Total current liabilities 65,722 55,427 Long-term debt, net of unamortized debt issuance costs (Note 7) 84,399 99,666 Unrecognized tax positions 4,548 3,683 Other long-term liabilities 373 277 Total liabilities 155,042 159,053 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $ .01 par value per share — authorized, 100,000,000 shares; issued and outstanding, 18,949,295 shares at January 3, 2021 and 18,871,637 shares at June 30, 2020 189 189 Additional paid-in capital 117,245 116,182 Accumulated deficit ( 45,433 ) ( 67,501 ) Total stockholders' equity 72,001 48,870 Total liabilities and stockholders' equity $ 227,043 $ 207,923 Notes to Unaudited Condensed Consolidated Financial Statements form an integral part of the condensed consolidated financial statements. 5 MASTERCRAFT BOAT HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Dollars in thousands) Additional Common Stock Paid-in Accumulated Shares Amount Capital Deficit Total Balance at June 30, 2020 18,871,637 $ 189 $ 116,182 $ ( 67,501 ) $ 48,870 Share-based compensation activity 80,701 — 486 — 486 Net income — — — 9,567 9,567 Balance at October 4, 2020 18,952,338 189 116,668 ( 57,934 ) 58,923 Share-based compensation activity ( 3,043 ) — 577 — 577 Net income — — — 12,501 12,501 Balance at January 3, 2021 18,949,295 $ 189 $ 117,245 $ ( 45,433 ) $ 72,001 Additional Common Stock Paid-in Accumulated Shares Amount Capital Deficit Total Balance at June 30, 2019 18,764,037 $ 188 $ 115,582 $ ( 43,454 ) $ 72,316 Share-based compensation activity 74,960 1 169 — 170 Net income — — — 8,623 8,623 Balance at September 29, 2019 18,838,997 189 115,751 ( 34,831 ) 81,109 Share-based compensation activity 33,169 — ( 78 ) — ( 78 ) Net income — — — 6,879 6,879 Balance at December 29, 2019 18,872,166 $ 189 $ 115,673 $ ( 27,952 ) $ 87,910 Notes to Unaudited Condensed Consolidated Financial Statements form an integral part of the condensed consolidated financial statements. 6 MASTERCRAFT BOAT HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Six Months Ended January 3, December 29, 2021 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 22,068 $ 15,502 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,599 5,053 Share-based compensation 1,283 544 Unrecognized tax benefits 865 367 Amortization of debt issuance costs 316 282 Changes in certain operating assets and liabilities ( 740 ) ( 2,777 ) Other, net 764 873 Net cash provided by operating activities 30,155 19,844 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 18,903 ) ( 11,491 ) Proceeds from disposal of property, plant and equipment — 14 Net cash used in investing activities ( 18,903 ) ( 11,477 ) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on revolving credit facility ( 30,000 ) — Borrowings on revolving credit facility 20,000 — Principal payments on long-term debt ( 4,710 ) ( 8,292 ) Other, net ( 787 ) ( 453 ) Net cash provided by financing activities ( 15,497 ) ( 8,745 ) NET CHANGE IN CASH AND CASH EQUIVALENTS ( 4,245 ) ( 378 ) CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD 16,319 5,826 CASH AND CASH EQUIVALENTS — END OF PERIOD $ 12,074 $ 5,448 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for interest $ 1,348 $ 2,025 Cash payments for income taxes 5,132 5,376 SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital expenditures in accounts payable and accrued expenses 594 427 Notes to Unaudited Condensed Consolidated Financial Statements form an integral part of the condensed consolidated financial statements. 7 MASTERCRAFT BOAT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unless stated otherwise dollars in thousands, except per share data) 1. ORGANIZATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES Organization — MasterCraft Boat Holdings, Inc. (“Holdings”) was formed on January 28, 2000, as a Delaware holding company and operates primarily through its wholly owned subsidiaries, MasterCraft Boat Company, LLC; MasterCraft Services, LLC; MasterCraft Parts, Ltd.; MasterCraft International Sales Administration, Inc.; and Aviara, LLC (collectively “MasterCraft”); Nautic Star, LLC and NS Transport, LLC (collectively “NauticStar”); and Crest Marine, LLC (“Crest”). Holdings and its subsidiaries collectively are referred to herein as the “Company.” Basis of Presentation — The Company’s fiscal year begins July 1 and ends June 30, with the interim quarterly reporting periods consisting of 13 weeks. Therefore, the fiscal quarter end will not always coincide with the date of the end of a calendar month. The unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s audited consolidated financial statements for the year ended June 30, 2020 and, in the opinion of management, reflect all adjustments considered necessary to present fairly the Company’s financial position as of January 3, 2021, its results of operations for the three and six months ended January 3, 2021 and December 29, 2019, its cash flows for the six months ended January 3, 2021 and December 29, 2019, and its statements of stockholders’ equity for the three and six months ended January 3, 2021 and December 29, 2019. All adjustments are of a normal, recurring nature. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the SEC for financial information have been condensed or omitted pursuant to such rules and regulations. The June 30, 2020 condensed consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by U.S. GAAP for complete financial statements. However, management believes that the disclosures in these condensed consolidated financial statements are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in our 2020 Annual Report on Form 10-K. Due to the seasonality of the Company’s business, the interim results are not necessarily indicative of the results that may be expected for the remainder of the fiscal year. COVID-19 Pandemic — To balance wholesale production with the then anticipated impacts to retail demand caused by the economic impacts of the COVID-19 pandemic, the Company reduced production in February 2020 and, in late March 2020, temporarily suspended manufacturing operations at all of the Company’s facilities to protect the health of employees and to comply with governmental mandates. The Company resumed operations at reduced production levels at our manufacturing facilities by mid-May. Since that time, our facilities have increased production rates above their pre-COVID levels. 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, the Company remains 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 remains uncertain and difficult to predict, as the response to the COVID-19 pandemic continues to evolve in many countries, including the United States and other markets where the Company and its suppliers operate. Capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it has caused economic downturns or recessions in the U.S. and other markets where the Company operates. Such economic disruption could have a material adverse effect on the Company’s business as retail demand for our products could decline which would in-turn reduce wholesale demand from the Company’s dealers. Policymakers around the world have responded and may continue to respond with fiscal and monetary policy actions to support the economy. The magnitude and overall effectiveness of these actions remain uncertain. 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 actions and stimulus measures adopted by local 8 and federal governments, the effects of the pandemic on the Company's consumers, dealers, suppliers and workforce, 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 or workforce disruptions and uncertain demand, impairment charge s , and the impact of any initiatives that the Company may undertake to address financial and operational challenges faced by it and its consumers, dealers, and suppliers. As of the date of issuance of these consolidated financial statements, the extent to which the COVID-19 p andemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain. There were no significant changes in or changes in the application of the Company’s significant or critical accounting policies or estimation procedures for the three and six months ended January 3, 2021 as compared with the significant accounting policies described in the Company’s audited consolidated financial statements for the fiscal year ended June 30, 2020. New Accounting Pronouncements Issued But Not Yet Adopted Income Taxes — In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by, among other things, eliminating certain existing exceptions related to the general approach in ASC 740 relating to franchise taxes, reducing complexity in the interim-period accounting for year-to-date loss limitations and changes in tax laws, and clarifying the accounting for transactions outside of business combination that result in a step-up in the tax basis of goodwill. The transition requirements are primarily prospective, and the effective date is for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements. Recently Adopted Accounting Standards Fair Value Measurements — In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement . This guidance modifies the disclosure requirements on fair value measurements in Topic 820 by removing disclosures regarding transfers between Level 1 and Level 2 of the fair value hierarchy, by modifying the measurement uncertainty disclosure, and by requiring additional disclosures for Level 3 fair value measurements, among others. The Company adopted this guidance for its fiscal year beginning July 1, 2020 . The adoption of this standard did not have an impact on the consolidated financial statements. Current Expected Credit Loss — In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) : Measurement of Credit Losses on Financial Instruments , which updated the ASC to use an impairment model that is based on expected losses rather than incurred losses. The Company adopted this guidance for its fiscal year beginning July 1, 2020 . The adoption of this standard did not have an impact on the consolidated financial statements . 2 . REVENUE RECOGNITION The following tables present the Company’s revenue by major product category for each reportable segment. Three Months Ended January 3, 2021 Three Months Ended December 29, 2019 MasterCraft NauticStar Crest Total MasterCraft NauticStar Crest Total Major Product Categories: Boats and trailers $ 80,806 $ 14,857 $ 20,757 $ 116,420 $ 66,332 $ 15,485 $ 16,097 $ 97,914 Parts 1,726 87 138 1,951 1,276 87 121 1,484 Other revenue 227 5 74 306 149 4 77 230 Total $ 82,759 $ 14,949 $ 20,969 $ 118,677 $ 67,757 $ 15,576 $ 16,295 $ 99,628 9 Six Months Ended January 3, 2021 Six Months Ended December 29, 2019 MasterCraft NauticStar Crest Total MasterCraft NauticStar Crest Total Major Product Categories: Boats and trailers $ 149,388 $ 27,073 $ 38,368 $ 214,829 $ 135,619 $ 33,319 $ 34,721 $ 203,659 Parts 6,271 211 529 7,011 4,707 246 301 5,254 Other revenue 464 7 111 582 344 6 154 504 Total $ 156,123 $ 27,291 $ 39,008 $ 222,422 $ 140,670 $ 33,571 $ 35,176 $ 209,417 Contract Liabilities As of June 30, 2020, the Company had $ 0.6 million of contract liabilities associated with customer deposits. During the six months ended January 3, 2021, all of this amount was recognized as revenue. As of January 3, 2021, total contract liabilities associated with customer deposits were $ 1.5 million, were reported in Accrued expenses and other current liabilities on the condensed consolidated balance sheet, and are expected to be recognized as revenue during the remainder of the year ended June 30, 2021. 3 . INVENTORIES Inventories consisted of the following: January 3, June 30, 2021 2020 Raw materials and supplies $ 24,258 $ 18,318 Work in process 5,822 3,866 Finished goods 6,558 4,876 Obsolescence reserve ( 2,068 ) ( 1,424 ) Total inventories $ 34,570 $ 25,636 4. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment, net consisted of the following: January 3, June 30, 2021 2020 Land and improvements $ 5,633 $ 3,030 Buildings and improvements 35,344 22,366 Machinery and equipment 39,445 38,262 Furniture and fixtures 2,665 2,229 Construction in progress 3,143 1,312 Total property, plant, and equipment 86,230 67,199 Less accumulated depreciation ( 30,254 ) ( 26,718 ) Property, plant, and equipment — net $ 55,976 $ 40,481 Merritt Island Facility During October 2020 we completed the purchase of certain real property located in Merritt Island, Florida, including a boat manufacturing facility, for a purchase price of $ 14.2 million (the “Merritt Island Facility”). The new Merritt Island Facility provides a dedicated manufacturing center for our Aviara brand. 10 5. GOODWILL AND OTHER INTANGIBLE ASSETS The carrying amounts of goodwill as of January 3, 2021 and June 30, 2020, attributable to each of the Company’s reportable segments, were as follows: Gross Amount Accumulated Impairment Losses Total MasterCraft $ 29,593 $ - $ 29,593 NauticStar 36,199 ( 36,199 ) - Crest 36,238 ( 36,238 ) - Total $ 102,030 $ ( 72,437 ) $ 29,593 The following table presents the carrying amount of Other intangible assets, net: January 3, June 30, 2021 2020 Gross Amount Accumulated Amortization / Impairment Other intangible assets, net Gross Amount Accumulated Amortization / Impairment Other intangible assets, net Amortized intangible assets Dealer networks $ 39,500 $ ( 11,761 ) $ 27,739 $ 39,500 $ ( 9,810 ) $ 29,690 Software 245 ( 110 ) 135 245 ( 86 ) 159 39,745 ( 11,871 ) 27,874 39,745 ( 9,896 ) 29,849 Unamortized intangible assets Trade names 49,000 ( 15,000 ) 34,000 49,000 ( 15,000 ) 34,000 Total other intangible assets $ 88,745 $ ( 26,871 ) $ 61,874 $ 88,745 $ ( 24,896 ) $ 63,849 Amortization expense related to Other intangible assets, net for the three and six months ended both January 3, 2021 and December 29, 2019 was $ 1.0 million and $ 2.0 million, respectively. Estimated amortization expense for the fiscal year ended June 30, 2021 is $ 4.0 million. 6 . ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consisted of the following: January 3, June 30, 2021 2020 Warranty $ 20,919 $ 20,004 Dealer incentives 9,456 9,180 Compensation and related accruals 4,120 1,488 Inventory repurchase contingent obligation 891 1,132 Self-insurance 599 704 Debt interest 226 — Other 5,379 3,477 Total accrued expenses and other current liabilities $ 41,590 $ 35,985 11 Accrued warranty liability activity was as follows for the six months ending: January 3, December 29, 2021 2019 Balance at the beginning of the period $ 20,004 $ 17,205 Provisions 4,469 3,858 Payments made ( 4,272 ) ( 4,332 ) Aggregate changes for preexisting warranties 718 1,764 Balance at the end of the period $ 20,919 $ 18,495 7 . LONG-TERM DEBT Long-term debt is as follows: January 3, June 30, 2021 2020 Revolving credit facility $ - $ 10,000 Term loans 95,283 99,993 Debt issuance costs on term loans ( 1,145 ) ( 1,395 ) Total debt 94,138 108,598 Less current portion of long-term debt 10,205 9,420 Less current portion of debt issuance costs on term loans ( 466 ) ( 488 ) Long-term debt, net of current portion $ 84,399 $ 99,666 On October 1, 2018, the Company 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 provides the Company with a $ 190.0 million senior secured credit facility, consisting of a $ 75.0 million term loan, and an $ 80.0 million term loan (together, the “Term Loans”), and a $ 35.0 million revolving credit facility (the “Revolving Credit Facility”). The Fourth Amended Credit Agreement is secured by substantially all the assets of the Company. Holdings is a guarantor on the Fourth Amended Credit Agreement and the Fourth Amended Credit Agreement contains covenants that restrict the ability of Holdings’ subsidiaries to make distributions to Holdings. The Term Loans will mature and all remaining amounts outstanding thereunder will be due and payable on October 1, 2023. Amendment No. 3 to Fourth Amended Credit Agreement On May 7, 2020, the Company entered into Amendment No. 3 to the Fourth Amended Credit Agreement (the “Amendment No. 3”). The changes effected by Amendment No. 3 include, among others, the temporary removal and replacement of the Company’s financial covenants, the addition of a 50 basis point floor on LIBOR, modifications to the range of applicable LIBOR and prime interest rate margins, and a revision of the Total Net Leverage Ratio calculation. Under Amendment No. 3, the Total Net Leverage Ratio covenant and Fixed Charge Coverage Ratio covenant of the Fourth Amended Credit Agreement are temporarily replaced with three separate covenants: (i) an Interest Coverage Ratio, (ii) a Minimum Liquidity threshold, and (iii) a Maximum Unfinanced Capital Expenditures limitation (the “Package of Financial Covenants”). The Package of Financial Covenants are in place through the quarter ended March 31, 2021, after which time the Total Net Leverage Ratio covenant and Fixed Charge Coverage Ratio covenant will be reinstated and the Package of Financial Covenants will sunset, and with the minimum liquidity covenant being tested on the last day of each fiscal month through May 31, 2021. In addition, the Total Net Leverage Ratio calculation was temporarily revised to include all unrestricted cash balances, without limitation, until June 30, 2021. As of January 3, 2021, the Company was in compliance with its financial covenants under Amendment No. 3 to the Fourth Amended Credit Agreement. Pursuant to the Amendment, the applicable interest, at the Company’s option, is at either the prime rate plus an applicable margin ranging from 0.5 % to 2.25 % or at a LIBOR rate, subject to a 50 basis point floor, plus an applicable margin ranging from 1.5 % to 3.25 %, 12 in each case based on the Company’s Total Net Leverage Ratio. As of January 3, 2021 the applicable margin for loans accruing interest at the prime rate was 1.00 % and the applicable margin for loans accruing interest at LIBOR was 2.00 %. Amendment No. 4 and Joinder to Fourth Amended Credit Agreement On October 26, 2020, the Company entered into Amendment No. 4 and Joinder to the Fourth Amended Credit Ageement (the “Amendment No. 4”). In conjunction with the new Merritt Island Facility purchase (see Note 4), the assets were organized in a new wholly-owned subsidiary of the Company. The changes effected by Amendment No. 4 add this new subsidiary as a borrower under the Fourth Amended Credit Agreement. Revolving Credit Facility During October 2020 the Company borrowed $ 20.0 million under its $ 35.0 million Revolving Credit Facility to fund the purchase of the Merrit Island Facility. The Company subsequently repaid all outstanding amounts and, as of January 3, 2021, the availability under the Revolving Credit Facility was $ 35.0 million. 8 . INCOME TAXES The Company’s consolidated interim effective tax rate is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items. The differences between the Company’s effective tax rates and the statutory federal tax rate of 21.0 % primarily relate to the inclusion of the state tax rate in the overall effective rate, the benefit of federal and state credits, and a permanent benefit associated with the foreign derived intangible income deduction, partially offset by a permanent add-back for Section 162(m) limitations. During the three months ended January 3, 2021 and December 29, 2019, the Company’s effective tax rates were 22.2 % and 24.4 %, respectively. During the six months ended January 3, 2021 and December 29, 2019, the Company’s effective tax rates were 22.5 % and 24.2 %, respectively. The Company’s effective tax rate for the three and six months ended January 3, 2021 is lower compared to the effective tax rate for the three and six months ended December 29, 2019, primarily due to an increase in the benefit of federal and state tax credits and a reduction in the effective state tax rate, partially offset by a decrease in the Company’s net permanent benefits, largely driven by changes in the foreign derived intangible income deduction and add-back for Section 162(m) limitations. 9 . EARNINGS PER SHARE The following table sets forth the computation of the Company’s earnings per share: Three Months Ended Six Months Ended January 3, December 29, January 3, December 29, 2021 2019 2021 2019 Net income $ 12,501 $ 6,879 $ 22,068 $ 15,502 Weighted average shares — basic 18,807,316 18,730,688 18,790,826 18,727,267 Dilutive effect of assumed exercises of stock options 13,950 22,629 14,025 25,052 Dilutive effect of assumed restricted share awards/units 107,142 17,466 92,766 18,451 Weighted average outstanding shares — diluted 18,928,408 18,770,783 18,897,617 18,770,770 Basic earnings per share $ 0.66 $ 0.37 $ 1.17 $ 0.83 Diluted earnings per share $ 0.66 $ 0.37 $ 1.17 $ 0.83 For the three and six months ended January 3, 2021 and December 29, 2019, an immaterial number of shares were excluded from the computation of diluted earnings per share as the effect would have been anti-dilutive. 13 10 . SHARE-BASED COMPENSATION The following table presents the components of share-based compensation expense by award type. Three Months Ended Six Months Ended January 3, December 29, January 3, December 29, 2021 2019 2021 2019 Restricted stock awards $ 388 $ 268 $ 805 $ 520 Performance stock units 255 ( 236 ) 478 15 Stock options — — — 9 Share-based compensation expense $ 643 $ 32 $ 1,283 $ 544 Restricted Stock Awards During the six months ended January 3, 2021, the Company granted 87,047 restricted stock awards (“RSAs”) to the Company’s non-executive directors, officers and certain other key employees. Generally, the shares of restricted stock granted during the six months ended January 3, 2021, vest pro-rata over three years for officers and certain other key employees and over one year for non-executive directors. The Company determined the fair value of the shares awarded by using the close price of our common stock as of the date of grant. The weighted average grant date fair value of RSAs granted in the six months ended January 3, 2021, was $ 19.96 per share. The following table summarizes the status of nonvested RSAs as of January 3, 2021, and changes during the six months then ended. Average Nonvested Grant-Date Restricted Fair Value Shares (per share) Nonvested at June 30, 2020 106,894 $ 18.01 Granted 87,047 19.96 Vested ( 53,670 ) 18.02 Forfeited ( 8,673 ) 19.29 Nonvested at January 3, 2021 131,598 19.21 As of January 3, 2021, there was $ 1.9 million of total unrecognized compensation expense related to nonvested RSAs. The Company expects this expense to be recognized over a weighted average period of 1.9 years. Performance Stock Units Performance stock units (“PSUs”) are a form of long-term incentive compensation awarded to executive officers and certain other key employees designed to directly align the interests of employees to the interests of the Company’s stockholders, and to create long-term stockholder value. The awards will be earned based on the Company’s achievement of certain performance criteria over a three-year performance period. The performance period for the awards commences on July 1 of the fiscal year in which they were granted and continue for a three-year period, ending on June 30 of the applicable year. The probability of achieving the performance criteria is assessed quarterly. Following the determination of the Company’s achievement with respect to the performance criteria, the number of shares awarded is subject to further adjustment based on the application of a total shareholder return (“TSR”) modifier. The grant date fair value is determined based on both the probability assessment of the Company achieving the performance criteria and an estimate of the expected TSR modifier. The TSR modifier estimate is determined using a Monte Carlo Simulation model, which considers the likelihood of numerous possible outcomes of long-term market performance. Compensation expense related to nonvested PSUs is recognized ratably over the performance period. 14 Supplemental PSUs On July 16, 2020, after consulting with outside compensation advisors and outside legal counsel, reviewing market data and benchmarking expected relative compensation to the market data, the Company’s Compensation Committee made the decision to grant additional PSUs under the Long-term Incentive Plan (“LTIP Program”) to certain of the Company’s officers, (the “Supplemental PSUs”). The “Performance Period” for the Supplemental PSUs is a two-year period commencing July 1, 2020 and ending June 30, 2022. The Supplemental PSUs were granted to attract and motivate key employees whose existing fiscal 2019 and fiscal 2020 PSU grants (the “Existing PSUs”) were unlikely to achieve minimum performance goals due to the unprecedented effects of the COVID-19 pandemic. The number of Supplemental PSUs that a grantee earns for the performance period will be determined by multiplying the target award by the product of (i) the Composite Payout Percentage and (ii) the Relative TSR Modifier. The “Composite Payout Percentage” is calculated based on the Company’s Total Market Share Percentage, Total Consumer Satisfaction Index Percentage and Total Dealer Inventory Turnover Percentage (each as defined in the Supplemental PSU Award Agreement). Following the determination of the Company’s achievement with respect to the Composite Payout Percentage over the Performance Period, the vesting of each award will be subject to adjustment based upon the application of a Relative TSR Modifier. The Supplemental PSUs are capped at 90 % of the Existing PSUs’ original fair value and would be reduced for any shares issuable upon satisfaction of the performance criteria pursuant to the Existing PSUs. The following table summarizes the status of nonvested PSUs as of January 3, 2021, and changes during the six months then ended. Average Nonvested Grant-Date Performance Fair Value Stock Units (per share) Nonvested at June 30, 2020 67,404 $ 20.02 Granted 121,914 19.99 Vested - - Forfeited ( 15,588 ) 20.25 Nonvested at January 3, 2021 173,730 19.98 As of January 3, 2021, there was $ 1.9 million of total unrecognized compensation expense related to nonvested PSUs. The Company expects this expense to be recognized over a weighted average period of 2.0 years. 11. SEGMENT INFORMATION The Company designs, manufactures, and markets recreational performance sport boats, luxury day boats, and outboard boats under three operating and reportable segments: MasterCraft, NauticStar, and Crest. The Company’s segments are defined by the Company’s operational and reporting structures. • The MasterCraft segment produces boats under two product brands, MasterCraft and Aviara, at its Vonore, Tennessee facility. MasterCraft boats are premium recreational performance sport boats primarily used for water skiing, wakeboarding, wake surfing, and general recreational boating. Aviara boats are luxury day boats primarily used for general recreational boating. Production of Aviara boats began during the year ended June 30, 2019 and the Company began selling these boats in July 2019. During the three months ended January 3, 2021, the Company began transitioning Aviara production to the Merritt Island, Facility. The Company anticipates all Aviara boats to be produced at the Merritt Island Facility by the end of fiscal 2021. • The NauticStar segment produces boats at its Amory, Mississippi facility. NauticStar’s boats are primarily used for saltwater fishing and general recreational boating. • The Crest segment produces pontoon boats at its Owosso, Michigan facility. Crest’s boats are primarily used for general recreational boating. 15 Each segment distributes its products through its own dealer network. The Chief Operating Decision Maker (“ CODM ”) , which is our Chief Executive Officer, regularly reviews the operating performance of each segment including measures of performance based on operating income. Each segment has its own management structure which is responsible for the operations of the segment and which is directly accountable to the CODM. The Company files a consolidated income tax return and does not allocate income taxes and other corporate-level expenses, including interest, to operating segments. All material corporate costs are included in the MasterCraft segment . Selected financial information for the Company’s reportable segments was as follows: For the Three Months Ended January 3, 2021 MasterCraft NauticStar Crest Consolidated Net sales $ 82,759 $ 14,949 $ 20,969 $ 118,677 Operating income (loss) 14,621 ( 326 ) 2,650 16,945 Depreciation and amortization 1,435 802 624 2,861 Purchases of property, plant and equipment 16,412 516 23 16,951 For the Six Months Ended January 3, 2021 MasterCraft NauticStar Crest Consolidated Net sales $ 156,123 $ 27,291 $ 39,008 $ 222,422 Operating income (loss) 27,982 ( 1,945 ) 4,312 30,349 Depreciation and amortization 2,735 1,616 1,248 5,599 Purchases of property, plant and equipment 18,121 759 23 18,903 For the Three Months Ended December 29, 2019 MasterCraft NauticStar Crest Consolidated Net sales $ 67,757 $ 15,576 $ 16,295 $ 99,628 Operating income (loss) 10,600 ( 673 ) 408 10,335 Depreciation and amortization 1,158 924 601 2,683 Purchases of property, plant and equipment 1,631 1,095 4,447 7,173 For the Six Months Ended December 29, 2019 MasterCraft NauticStar Crest Consolidated Net sales $ 140,670 $ 33,571 $ 35,176 $ 209,417 Operating income (loss) 22,807 ( 646 ) 871 23,032 Depreciation and amortization 2,177 1,725 1,151 5,053 Purchases of property, plant and equipment 4,365 1,914 5,212 11,491 The following table presents total assets for the Company’s reportable segments. January 3, 2021 June 30, 2020 Assets: MasterCraft $ 309,090 $ 294,139 NauticStar 40,918 36,720 Crest 40,048 40,077 Eliminations (a) ( 163,013 ) ( 163,013 ) Total assets $ 227,043 $ 207,923 (a) Represents the Company’s initial investment in NauticStar and Crest, which is included in total assets attributed to the MasterCraft segment. 16