What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-09-02 compared with 2020-09-11 · 179 added, 202 removed, 227 unchanged (63% of the section changed)

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Gross margin — We define gross margin as gross profit divided by net sales, expressed as a percentage.

Net income margin — We define net income (loss) margin as net income divided by net sales, expressed as a percentage.

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

For a reconciliation of Adjusted EBITDA to net income, see “Non-GAAP Measures” below.

For a reconciliation of Adjusted EBITDA to net income (loss), see “Non-GAAP Measures” below.

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

Adjusted Net Income — We define Adjusted Net Income as net income adjusted to eliminate certain non-cash charges and other items that we do not consider to be indicative of our core/ongoing operations and adjusted for the impact to income tax expense (benefit) related to non-GAAP adjustments.

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

For a reconciliation of Adjusted EBITDA margin to net income margin, see “Non-GAAP Measures” below.

Adjusted Net Income — We define Adjusted Net Income as net income (loss) adjusted to eliminate certain non-cash charges and other items that we do not consider to be indicative of our core/ongoing operations and adjusted for the impact to income tax expense (benefit) related to non-GAAP adjustments.

For a reconciliation of Adjusted Net Income to net income (loss), see “Non-GAAP Measures” below.

COVID-19 Pandemic

The outbreak of a novel coronavirus throughout the world, including the United States, during early calendar year 2020 caused widespread business and economic disruption through mandated and voluntary business closings and restrictions on the movement and activities of people (“COVID-19 Pandemic”).

We are subject to risks and uncertainties as a result of the COVID-19 Pandemic.

The extent of the impact of the COVID-19 Pandemic on our business is highly uncertain and difficult to predict, as the response to the COVID-19 Pandemic is still evolving in many countries, including the United States and other markets where we operate.

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

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

The magnitude and overall effectiveness of these actions remains uncertain.

Though the Company has been impacted by supply chain disruptions as a result of the COVID-19 pandemic, demand for our products has been strong and, as a result of our employees’ committed efforts, our facilities are now running at production rates above their pre-COVID-19 levels.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As governmental restrictions were lifted and as a result of social distancing abilities, demand in the U.S.

retail marine market accelerated in May 2020, and has remained elevated, driving dealer inventory levels to historic lows, which remain at depressed levels despite our increased production rates being above pre-COVID-19 levels.

Additionally, the Company’s operations have been impacted by supply chain disruptions.

To reduce the impact of supply chain disruptions on production, the Company has increased its safety stock.

Impact to Liquidity and Capital Resources

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Additionally, on May 7, 2020, we entered into Amendment No.

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

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

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

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

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

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

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

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

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

The ultimate severity of the impact of the COVID-19 Pandemic on our business will depend on a number of factors, including, but not limited to, the duration, spread, severity, and impact of the pandemic, the remedial action and stimulus measures adopted by local and federal governments, the effects of the pandemic on our consumers, dealers, suppliers and workforce, and to the extent normal economic and operating conditions can resume and be sustained within the general economy, all of which are uncertain and cannot be predicted.

Our future results of operations, cash flows, and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain or workforce disruptions and uncertain demand, additional manufacturing suspensions, additional other intangible asset impairment charges, and the impact of any initiatives that we may undertake to address financial and operational challenges faced by us and our consumers, dealers, and suppliers.

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

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

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

See Note 8 in Notes to Consolidated Financial Statements for more information regarding these changes, including sunsetting of the temporary relief provisions.

The performance of the business and our cash management activities provided the flexibility to repay the entire $35.0 million revolving credit facility during the first quarter of fiscal 2021.

Since that time, our strong operating performance has continued which has allowed us to refinance our debt and build our cash balance to $39.3 million as of June 30, 2021.

The refinancing allowed us to reduce our borrowing under our term loan by $33.7 million by drawing that same amount on our revolving credit agreement, which leaves us with $66.3 million of availability under the revolving credit agreement as of June 30, 2021.

These actions provide us with the flexibility to expedite principal payments on total debt.

We were in compliance with our financial covenants as of June 30, 2021.

We believe strong marine retail demand coupled with abnormally low dealer inventory levels for all our brands has created a growth opportunity, and as a result, we plan to further increase production rates, which are already above their pre-COVID-19 levels.

However, as we navigate the unprecedented confluence of demand and disruption precipitated by the COVID-19 pandemic, our production rates going forward will depend, in large part, on our suppliers’ capacity and ability to remain open if infection rates increase.

Additionally, demand for raw materials and components used in the production of our products has surged.

As a result, some of the materials and components that we use, including certain resins, fiberglass, aluminum, lumber and steel, are in short supply.

Our ability to grow also requires our Company to retain a high-performing workforce which will be critical to meeting our production objectives.

We will continue to actively monitor the impact of the COVID-19 pandemic and may take further actions to alter business operations as may be required by government authorities, or that are determined to be in the best interest of our employees, dealers, suppliers, and stakeholders.

The full extent of the impact of the COVID-19 pandemic on our business, operations, and financial results will depend on evolving factors that we cannot predict.

See Item 1A “Risk Factors — Risks Relating to Our Business — Actual or potential public health emergencies, epidemics, or pandemics, such as the current coronavirus (“COVID-19”) pandemic, could have a material adverse effect on our business, results of operations, or financial condition.”

Overview of Results of Operations

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

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

Gross profit for fiscal 2020 decreased 33.4 percent from fiscal 2019, primarily due to lower wholesale unit sales volume for each reportable segment, higher depreciation expense, and $1.4 million in COVID-19 Shutdown Costs.

This decline was partially offset by price increases for each reportable segment, the inclusion of Crest’s first quarter 2020 results, and lower dealer incentives.

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

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

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

Net sales were $525.8 million for fiscal 2021, an increase of 44.8 percent from fiscal 2020, which was impacted by, among other things, the COVID-19 pandemic.

The increase was primarily the result of higher sales volumes, higher prices, and lower dealer incentives, partially offset by the impact of model mix.

Gross margin increased 390 basis points to 24.7 percent from fiscal 2020, primarily due to higher prices, higher sales volume, and lower dealer incentives.

The increase was partially offset by costs associated with the transition of production of our Aviara brand to the Merritt Island, Florida facility and increased labor and material costs.

Net income was $56.2 million for fiscal 2021, compared to Net loss of $24.0 million for fiscal 2020.

Diluted net income per share was $2.96, compared to Diluted net loss per share of $1.28 for fiscal 2020.

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

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

CEO Transition

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

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

On December 2, 2019, Mr.

Brightbill was named permanent Chief Executive Officer.

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

Aviara Brand Launch

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

Aviara boats are designed, engineered, and manufactured to meet the exacting specifications of consumers seeking the ultimate luxury recreational day boat experience.

The brand’s first model, the AV32, began selling during the first quarter of fiscal 2020 and the AV36 began selling during the second quarter of fiscal 2020.

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

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

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-square-foot boat manufacturing facility, (the “Merritt Island Facility”) for a purchase price of $14.2 million.

We expanded 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, relocating Aviara production from our Vonore, Tennessee facility provided for an immediate increase in capacity and productivity for our MasterCraft brand.

We began producing Aviara in the Merritt Island Facility in December and shipments from the new facility commenced in the third quarter of fiscal 2021.

Results of Operations

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Interest expense

Loss on extinguishment of debt

INCOME (LOSS) BEFORE INCOME TAX EXPENSE

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Consolidated net sales per unit

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

Fiscal 2021 Compared to Fiscal 2020

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

The decrease was primarily due to:

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

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

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

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

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

Net Sales for fiscal 2021 were $525.8 million, an increase of $162.7 million, or 44.8 percent, compared to $363.1 million for fiscal 2020.

The increase was primarily due to:

A $116.8 million increase for the MasterCraft segment driven by a 47.4 percent increase in sales volumes, a favorable mix of higher priced and higher contented models, lower dealer incentives, and higher part sales volume,

a $41.0 million increase for the Crest segment resulting from a 66.5 percent increase in sales volume, lower dealer incentives, higher prices, and option favorability, and

a $4.9 million increase for the NauticStar segment, primarily due to higher sales volumes and higher prices, partially offset by unfavorable product mix.

Gross Profit and Gross Margin.

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

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

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

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

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

Gross profit increased $54.6 million, or 72.5 percent, to $130.0 million compared to $75.4 million for the prior year.

Gross margin increased 390 basis points to 24.7 percent in fiscal 2021 from 20.8 percent in fiscal 2020.

increase was primarily due to higher prices, higher sales volume and lower dealer incentives.

The increase was partially offset by costs to transition production of our Aviara brand to the Merritt Island, Florida facility and increased labor and material costs.

Operating Expenses .

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

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

Operating expenses decreased $47.9 million, or 47.0 percent, to $54.0 million for fiscal 2021 compared to $101.9 million for fiscal 2020.

The decrease was primarily driven by $56.4 million of goodwill and other intangible asset impairment charges related to our NauticStar and Crest segments recorded in fiscal 2020.

There were no impairment charges in fiscal 2021.

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

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

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

In addition, the Company had lower selling and marketing costs in fiscal 2021 primarily due to the impacts of the COVID-19 pandemic.

The decrease was partially offset by higher general and administrative expenses resulting from higher incentive compensation costs and additional investments related to product development and information technology.

Interest Expense .

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

Interest expense decreased $1.7 million, or 14.5 percent, primarily driven by lower effective interest rates and lower average outstanding debt balances during fiscal 2021.

Loss on Extinguishment of Debt .

Loss on extinguishment of debt totaling $0.7 million was recognized upon refinancing the Company’s debt in fiscal 2021.

The loss is comprised of unamortized debt issuance costs related to the previously existing credit facility.

See Note 8 in Notes to Consolidated Financial Statements for more information on the Company’s debt refinancing.

Income Tax Expense (Benefit) .

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

Our consolidated effective income tax rate decreased to 21.8 percent for fiscal 2021 from 23.9 percent for fiscal 2020.

See Note 9 in Notes to Consolidated Financial Statements for more information.

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

For the periods presented herein, these adjustments include Aviara transition costs, debt refinancing charges, goodwill and other intangible asset impairment charges, Aviara (new brand) startup costs, COVID-19 shutdown costs, transaction expenses associated with an acquisition and certain non-cash items including share-based compensation and acquisition-related inventory step-up adjustments.

We define Adjusted EBITDA margin as Adjusted EBITDA expressed as a percentage of Net sales.

Adjusted Net Income and Adjusted Net Income Per Share

We define Adjusted Net Income and Adjusted Net Income per share as net income adjusted to eliminate certain non-cash charges or other items that we do not consider to be indicative of our core and/or ongoing operations and adjusted for the impact to income tax expense (benefit) related to non-GAAP adjustments.

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

EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income, and Adjusted Net Income per share, which we refer to collectively as the Non-GAAP Measures, are not measures of net income or operating income as determined under accounting principles generally accepted in the United States, or U.S.

We define Adjusted Net Income and Adjusted Net Income per share as net income (loss) 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, debt refinancing charges, goodwill and other intangible asset impairment charges, Aviara (new brand) startup costs, COVID-19 shutdown costs, transaction expenses associated with an acquisition, 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 (loss) or operating income (loss) as determined under accounting principles generally accepted in the United States, or U.S.

The Non-GAAP Measures are not measures of performance in accordance with U.S.

GAAP and should not be considered as an alternative to net income, net income per share, or operating cash flows determined in accordance with U.S.

GAAP and should not be considered as an alternative to net income (loss), net income (loss) 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.

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GAAP measures alone.

We believe Adjusted Net Income and Adjusted Net Income per share assists our board of directors, management, investors, and other users of the financial statements in comparing our net income on a consistent basis from period to period because it removes certain non-cash items and other items that we do not consider to be indicative of our core and/or ongoing operations and adjusts for the impact to income tax expense (benefit) related to non-GAAP adjustments.

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 (loss) on a consistent basis from period to period because it removes certain non-cash items and other items that we do not consider to be indicative of our core and/or ongoing operations and adjusts for the impact to income tax expense (benefit) related to non-GAAP adjustments.

The Non-GAAP Measures have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S.

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

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

GAAP to EBITDA and Adjusted EBITDA, and net income margin (expressed as a percentage of net sales) to Adjusted EBITDA margin (expressed as a percentage of net sales) for the periods indicated:

(Dollars in thousands)

% of Net sales

Net income (loss)

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Depreciation and amortization

Goodwill and other intangible asset impairment (a)

Aviara start-up costs (b)

COVID-19 Shutdown Costs (c)

Share-based compensation

Warranty adjustment (d)

Transaction expense (e)

Inventory step-up adjustment - acquisition related (f)

Aviara transition costs (a)

Debt refinancing charges (b)

Goodwill and other intangible asset impairment (c)

Aviara start-up costs (d)

COVID-19 shutdown costs (e)

Transaction expense (f)

Inventory step-up adjustment - acquisition related (g)

Adjusted EBITDA

Adjusted EBITDA margin

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).

Represents loss recognized upon refinancing the Company’s debt.

The loss is comprised of unamortized debt issuance costs related to the previously existing credit facility and third-party legal costs associated with the refinancing.

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

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We began selling the brand’s first two models, the AV32 and the AV36, during the first and second quarters of fiscal 2020, respectively.

We expect to begin selling one additional model, the AV40, in the first half of fiscal 2021.

We expect to begin selling one additional model, the AV40, in fiscal 2022.

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

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

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

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

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

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

Represents acquisition related costs and other 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 sets forth a reconciliation of net income (loss) as determined in accordance with U.S.

GAAP to Adjusted Net Income for the periods indicated:

2 unchanged sentences

Income tax expense (benefit)

Goodwill and other intangible asset impairment (a)

Amortization of acquisition intangibles

Aviara start-up costs (b)

COVID-19 Shutdown Costs (c)

Share-based compensation

Warranty adjustment (d)

Transaction expense (e)

Inventory step-up adjustment - acquisition related (f)

Aviara transition costs (a)

Debt refinancing charges (b)

Goodwill and other intangible asset impairment (c)

Aviara start-up costs (d)

COVID-19 shutdown costs (e)

Transaction expense (f)

Inventory step-up adjustment - acquisition related (g)

Adjusted Net Income before income taxes

Adjusted income tax expense (g)

Adjusted income tax expense (h)

Adjusted Net Income

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Basic Adjusted Net Income per share

Diluted Adjusted Net Income per share (h)

Diluted Adjusted Net Income per share (i)

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).

Represents loss recognized upon refinancing the Company’s debt.

The loss is comprised of unamortized debt issuance costs related to the previously existing credit facility and third-party legal costs associated with the refinancing.

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

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We began selling the brand’s first two models, the AV32 and the AV36, during the first and second quarters of fiscal 2020, respectively.

We expect to begin selling one additional model, the AV40, in the first half of fiscal 2021.

We expect to begin selling one additional model, the AV40, in fiscal 2022.

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

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

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

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

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

Represents acquisition related costs and other 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 a tax rate of 23.0% for fiscal 2021, 23.0% for fiscal 2020 and 22.5% for 2019.

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Income tax expense (benefit)

Goodwill and other intangible asset impairment (a)

Amortization of acquisition intangibles

Aviara start-up costs (b)

COVID-19 Shutdown Costs (c)

Share-based compensation

Warranty adjustment (d)

Transaction expense (e)

Inventory step-up adjustment - acquisition related (f)

Aviara transition costs (a)

Debt refinancing charges (b)

Goodwill and other intangible asset impairment (c)

Aviara start-up costs (d)

COVID-19 shutdown costs (e)

Transaction expense (f)

Inventory step-up adjustment - acquisition related (g)

Adjusted Net Income per diluted share before income taxes

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

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

Adjusted Net Income per diluted share

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).

Represents loss recognized upon refinancing the Company’s debt.

The loss is comprised of unamortized debt issuance costs related to the previously existing credit facility and third-party legal costs associated with the refinancing.

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

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We began selling the brand’s first two models, the AV32 and the AV36, during the first and second quarters of fiscal 2020, respectively.

We expect to begin selling one additional model, the AV40, in the first half of fiscal 2021.

We expect to begin selling one additional model, the AV40, in fiscal 2022.

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

Start-up costs presented for fiscal 2019 are related to the launch of the Aviara brand and the three initial Aviara models which had not yet begun selling.

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

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

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

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

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

Represents acquisition related costs and other integration costs associated with our acquisition of Crest 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 a tax rate of 23.0% for fiscal 2021, 23.0% for fiscal 2020 and 22.5% for 2019.

Reflects the impact of rounding in the other adjustments presented.

Change in Non-GAAP Financial Measure

Prior to fiscal year 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 (loss) 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 2020 presentation in this Annual Report on Form 10-K for all periods presented, the Company will no longer include this additional dilution impact in its calculation of Adjusted Net Income per diluted share.

Beginning with the fiscal year 2020 presentation, the Company no longer includes 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 (loss) per share as presented on the Consolidated Statements of Operations to calculate Adjusted Net Income per diluted share for all periods presented herein.

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This change resulted in an increase of $0.02 in the year ended June 30, 2020 in the amount of Adjusted Net Income per diluted share from what would have been reported using the previous methodology.

The change also resulted in an increase of $0.01 in each of the years ended June 30, 2019 and 2018 in the amount of Adjusted Net Income per diluted share from what was previously reported.

The change also resulted in an increase of $0.01 for the year ended June 30, 2019 in the amount of Adjusted Net Income per diluted share from what was previously reported.

In addition, the fiscal 2019 amount for Transaction expense, in the reconciliation of net income (loss) per diluted share to Adjusted net income per diluted share, decreased by $0.01 from what was previously reported as a result of a change in the presentation of the impact of rounding.

Liquidity and Capital Resources

Our primary liquidity and capital resource needs are to finance working capital, fund capital expenditures, and service our debt.

Our primary liquidity and capital resource needs are to finance working capital, fund capital expenditures, service our debt, and fund our stock repurchase program.

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

On March 19, 2020, we drew $35.0 million on our revolving credit agreement as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 Pandemic.

The performance of the business and our cash management activities provided the flexibility to repay $25.0 million of the revolving credit facility on June 30, 2020.

As of June 30, 2020, we had a cash balance of $16.3 million in addition to $25.0 million of available borrowing capacity under the revolving credit facility.

Additionally, on May 7, 2020, we 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 8 in Notes to Consolidated Financial Statements for more information regarding these changes.

On August 13, 2020, the Company entered into an agreement to purchase certain real and personal property located in Merritt Island, Florida, for $14.0 million (the “Purchase Agreement”).

The Purchase Agreement is subject to customary closing conditions and closing is expected to occur in October 2020.

The Company expects to use liquidity sources existing as of June 30, 2020 to fund this purchase.

See Note 7 in Notes to Consolidated Financial Statements for more information regarding the Purchase Agreement.

We believe our cash balance, cash from operations, and our ability to borrow, 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.

Please see Item 1A, “Risk Factors – Risks Related to Our Business – The COVID-19 Pandemic has had, and may continue to have, certain negative impacts on our business and those of our consumers, dealers and suppliers, and such impacts may have a material adverse effect on our operations and business.” The following table summarizes the cash flows from operating, investing, and financing activities:

Cash and cash equivalents totaled $39.3 million as of June 30, 2021, an increase of $23.0 million from $16.3 million as of June 30, 2020.

Total debt as of June 30, 2021 and June 30, 2020 was $93.1 million and $108.6 million, respectively.

On June 28, 2021, we refinanced our debt and entered into a new credit agreement increasing the capacity under our revolving credit facility from $35.0 million to $100.0 million.

As of June 30, 2021, we had $33.7 million outstanding under the facility, leaving $66.3 million of available borrowing capacity.

Refer to Note 8 – Long-term Debt in the Notes to Consolidated Financial Statements for further details.

We believe our cash balance, cash from operations, and our ability to borrow, will be sufficient to provide for our liquidity and capital resource needs, including authorized stock repurchases.

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

(Dollars in thousands)

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Net change in cash

Our net cash provided by operating activities decreased by $25.7 million, or 46.0%, to $30.2 million for fiscal 2020 from $55.9 million in fiscal 2019.

This decrease was primarily due to a decrease in operating income, net of non-cash expense items, and unfavorable working capital usage.

Fiscal 2021 Cash Flow

Net cash provided by operating activities in fiscal 2021 totaled $68.5 million versus $30.2 million in fiscal 2020.

The increase is primarily due to higher net earnings, net of non-cash items, partially offset by changes in working capital that were affected by production ramp-up activities as we experienced an increase in retail demand.

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 consolidated balance sheets, excluding the impact of acquisitions and non-cash adjustments.

Cash flows from working capital changes decreased primarily due to:

a $12.1 million decrease related to Accrued expenses and other current liabilities as a result of changes in the timing of dealer incentive payments, higher retail sales in June 2020 as compared to June 2019 which lowered certain accrued dealer incentives, and lower accrued payroll as a result of lower incentive compensation accruals;

a $3.0 million decrease related to Income tax receivable is primarily due to the decreased taxable income between the comparable periods;

a $3.9 million decrease attributable to Accounts payable as a result of lower production levels in June 2020 as compared to June 2019 and the timing of vendor payments;

partially offset by a $8.1 million increase related to Accounts receivable primarily due to lower sales volumes in June 2020 as compared to June 2019 and an improved collection cycle for Crest;

a $5.2 million increase attributable to Inventories as high wholesale demand resulted in low finished goods levels, while lower production rates in June 2020 as compared to June 2019 resulted in lower raw materials and work-in-process inventories.

Net cash used in investing activities decreased primarily due to the $81.7 million Crest acquisition being included in our 2019 cash flows.

Capital outlays of $14.2 million during the year ended June 30, 2020 included the purchase of the Crest manufacturing facility, expansion activities, molds, and equipment.

See Note 1 1 in Notes to Consolidated Financial Statements for additional information regardi ng the Crest facility purchase.

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, we borrowed all available funds under our Revolving Credit Facility, $35.0 million, as a precautionary measure in response to the COVID-19 Pandemic and we had repaid $25.0 million as of June 30, 2020.

During the year ended June 30, 2020, we also made $15.4 million of principal payments on our term loans, including $6.0 million of voluntary prepayments.

See Note 8 in Notes to Consolidated Financial Statements for more information regarding our debt and liquidity.

Accounts receivable increased $5.9 million primarily due to increased sales across all segments.

Inventory increased $28.6 million, driven by increases to support higher production volumes and to increase safety stock to manage supply chain risk.

Accounts payable increased $13.4 million primarily due to timing of payments and higher production activities.

Accrued expenses and other current liabilities increased $12.2 million primarily driven by share-based compensation related to higher net earnings and higher warranty reserves for the increased sales volumes.

Net cash used for investing activities was $27.8 million, which primarily included capital expenditures.

Our capital spending was focused on expanding our capacity by purchasing the Merritt Island Facility for $14.2 million, capital related to the Aviara transition to the Merritt Island Facility, and maintenance capital.

Net cash used for financing activities was $17.8 million and primarily related to net payments of long-term debt.

Fiscal 2020 Cash Flow

In fiscal 2020, net cash provided by operating activities totaled $30.2 million versus $55.9 million in fiscal 2019.

This comparison reflects the economic impacts of the COVID-19 pandemic where production was reduced, and temporarily suspended from late March to mid-May 2020.

Accounts receivable decreased $6.3 million primarily due to reduced sales.

Inventory decreased $4.8 million driven by lower production activities.

Accounts payable decreased $6.9 million due to timing of payments and lower production activities.

Accrued expenses and other current liabilities decreased $5.6 million driven by reduced dealer incentives and share-based compensation related to lower sales and financial results.

Net cash used for investing activities was $14.2 million, which primarily included capital expenditures.

Our capital spending was focused on maintenance capital and purchasing the previously leased Crest Facility.

Refer to Note 11 – Commitments and Contingencies in the Notes to Consolidated Financial Statements for further details.

Net cash used for financing activities was $5.5 million and primarily related to net payments of long-term debt .

Off-Balance Sheet Arrangements

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See Note 11 in Notes to Consolidated Financial Statements included elsewhere in this Form 10-K for more information related to our obligations under floor plan financing agreements.

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 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 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 offer ing .

The market prices of certain materials and components used in manufacturing our products, especially resins that are made with hydrocarbon feedstocks, copper, aluminum, and stainless steel, can be volatile.

Historically, however, inflation has not had a material effect on our results of operations.

Significant increases in inflation, particularly those related to wages and increases in the cost of raw materials, could have an adverse impact on our business, financial condition, and results of operations.

New boat buyers often finance their purchases.

Inflation typically results in higher interest rates that could translate into an increased cost of boat ownership.

Should inflation and increased interest rates occur, prospective consumers may choose to forego or delay their purchases or buy a less expensive boat in the event credit is not available to finance their boat purchases.

Critical Accounting Policies

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Goodwill and Other Intangible Assets — The Company does not amortize goodwill and other purchased intangible assets with indefinite lives.

All of the Company’s goodwill and other intangible assets relate to our MasterCraft, NauticStar, or Crest reporting units (see Note 13 in Notes to Consolidated Financial Statements).

The Company’s intangible assets with finite lives consist primarily of dealer networks and are carried at their estimated fair values at the time of acquisition, less accumulated amortization.

Amortization is recognized on a straight-line basis over the estimated useful lives of the respective assets (see Note 6 in Notes to Consolidated Financial Statements).

Intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate long-lived assets described below.

Goodwill results from the excess of purchase price over the net assets of businesses acquired.

The Company reviews goodwill for impairment annually, at fiscal yearend, and whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying value.

The Company reviews goodwill for impairment at its annual impairment testing date, which is June 30, and whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying value.

As part of the annual test, the Company may perform a qualitative, rather than quantitative, assessment to determine whether the fair values of its reporting units are “more likely than not” to be greater than their carrying values.

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If the carrying amount exceeds the fair value then the goodwill is considered impaired and an impairment loss is recognized in an amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the carrying amount of the goodwill allocated to that reporting unit.

The Company calculates the fair value of its reporting units considering both the income approach and mar ket approach.

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 discount ed 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 whether or not there is a measure of risk related to the specific reporti ng unit’s forecasted performance.

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 whether or not there is a 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 mar ket multiples.

The key judgements 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 of June 30, 2021, only the Mastercraft reporting unit has a goodwill balance.

The fair value of this reporting unit substantially exceeds its carrying value.

However, it is possible that the Company’s assumptions regarding the key uncertainties in this fair value calculation could change in the near term.

However, it is possible that the Company’s assumptions regarding the key judgements in this fair value calculation could change in the future.

If actual results differ from the Company’s assumptions, it is possible that the MasterCraft reporting unit could incur goodwill impairment charges in future periods.

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The future cash flows are discounted using an applicable Discount Rate as well as any potential risk premium to reflect the inherent risk of holding a standalone intangible asset.

The key uncertainties in these fair value calculations, as applicable, are:

The key judgements in these fair value calculations, as applicable, are:

assumptions used in developing internal revenue growth and dealer expense forecasts, assumed dealer attrition rates, the selection of an appropriate royalty rate, as well as the perceived risk associated with those forecasts in determining the Discount Rate.

The costs of amortizable intangible assets, including dealer networks, are recognized over their expected useful lives, approximately ten years for the dealer networks, using the straight-line method.

Intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate long-lived assets described below.

Intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate long-lived assets.

Intangible assets not subject to amortization are assessed for impairment at least annually and whenever events or changes in circumstances indicate that it is more likely than not that an asset may be impaired.

The impairment test for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying amount.

As part of the annual test, the Company may perform a qualitative, rather than quantitative, assessment to determine whether each trade name intangible asset is “more likely than not” impaired.

In performing this qualitative analysis, the Company considers various factors, including macroeconomic events, industry and market events and cost related events.

If the “more likely than not” criteria is not met, the impairment test for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying amount.

An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset.

During the third quarter of fiscal 2020, impairment charges were incurred for the NauticStar and Crest trade name-related intangible assets.

As of our fiscal year end, which is our annual impairment testing date under ASC 360, there have been favorable changes in circumstances as compared to those existing as of the end of the third quarter, such as strong marine retail demand coupled with record low retail inventory levels that have created a growth opportunity in the near term, which we believe indicates that it is not more likely than not that the current carrying values of these assets are higher than the fair values.

Changes in assumptions and estimates such as declines in projected results, however, may affect the fair value of our intangible assets and could result in additional impairment charges in future periods.

During fiscal 2020, impairment charges were incurred for the NauticStar and Crest trade name-related intangible asset, as well as during fiscal 2019 for the NauticStar trade name-related intangible asset.

As of fiscal year-end 2021, which is our annual impairment testing date under ASC 350, there were favorable changes in circumstances as compared to those existing in fiscal 2020, such as strong marine retail demand coupled with record low retail inventory levels that have created a growth opportunity, which we believe indicates that it is not more likely than not that the current carrying values of these assets are higher than the fair values.

Changes in assumptions and estimates such as declines in projected results, however, may affect the fair value of these intangible assets and could result in additional impairment charges in future periods.

Product Warranties — The Company offers warranties on the sale of certain products for periods of between one and five years.

These warranties require us or our dealers to repair or replace defective products during the warranty period at no cost to the

We estimate the costs that may be incurred under our basic limited warranty and record as a liability the amount of such costs at the time the product revenue is recognized.

The key judgements that affect our estimate for warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim.

We periodically assess the adequacy of the recorded warranty liabilities and adjust the amounts as actual claims are determined or as changes in the obligations become reasonably estimable.

We also adjust our liability for specific warranty matters when they become known and exposure can be estimated.

Future warranty claims may differ from our estimate of the warranty liability, which could lead to changes in the Company’s warranty liability in future periods.

Income Taxes— We are subject to income taxes in the United States of America and the United Kingdom.

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In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies.

In the event that we change our determin ation as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

Realization of our deferred tax assets is dependent on generating sufficient taxable income in future periods.

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The Company may be obligated, in the event of default by a dealer, to accept returns of unsold boats under its repurchase commitment to floor financing providers, who are able to obtain such boats through foreclosure.

The repurchase commitment is on an individual unit basis with a term from the date it is financed by the lending institution through the payment date by the dealer, generally not exceeding 30 months.

The repurchase commitment is on an individual unit basis with a term from the date it is financed by the lending

institution through the payment date by the dealer, generally not exceeding 30 months.

The Company accounts for these arrangements as guarantees and recognizes a liability based on the estimated fair value of the repurchase obligation.

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Inputs used to estimate this fair value include significant unobservable inputs that reflect the Company’s assumptions about the inputs that market participants would use and, therefore, this liability is classified within Level 3 of the fair value hierarchy.

Product Warranties — The Company offers warranties on the sale of certain products for periods of between one and five years.

These warranties require us or our dealers to repair or replace defective products during the warranty period at no cost to the consumer.

We estimate the costs that may be incurred under our basic limited warranty and record as a liability the amount of such costs at the time the product revenue is recognized.

The key uncertainties that affect our estimate for warranty liability include anticipated rates of warranty claims and cost per claim.

We periodically assess the adequacy of the recorded warranty liabilities and adjust the amounts as actual claims are determined or as changes in the obligations become reasonably estimable.

Repurchase Agreements — In connection with our dealers’ wholesale floor plan financing of boats, we have entered into repurchase agreements with various lending institutions.

The repurchase commitment is on an individual unit basis with a term from the date it is financed by the lending institution through payment date by the dealer, generally not exceeding 30 months.

Such agreements are customary in the industry and our exposure to loss under such agreements is limited by the resale value of the inventory which is required to be repurchased.

We incurred no material impact from repurchase events during fiscal 2021, 2020, or 2019.

QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK.

Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in foreign exchange rates, interest rates, and commodity prices.

Changes in these factors could cause fluctuations in the results of our operations and cash flows.

In the ordinary course of business, we are primarily exposed to interest rate risks.

As of June 30, 2020, we had $108.6 million of long-term debt outstanding, bearing interest at the effective interest rate of 3.75%.

See Note 8 in Notes to Consolidated Financial Statements for more information regarding our long-term debt.

A hypothetical 1% increase or decrease in interest rates would have resulted in a $1.8 million change to our interest expense for fiscal 2020.

FINANCI AL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements and supplementary financial information required to be filed under this Item 8 are presented in Part IV, Item 15 of this Form 10-K.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

See Note 11 in Notes to Consolidated Financial Statements for more information on repurchase obligations.

New Accounting Pronouncements

See “Part II, Item 8.

Financial Statements and Supplementary Data — Note 1 — Significant Accounting Policies — New Accounting Pronouncements.”

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What changed 10-K

Item 7. Management’s Discussion and Analysis