What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-03 compared with 2021-11-10 · 86 added, 64 removed, 170 unchanged (47% of the section changed)

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This strong retail demand has created historically low dealer inventory levels which, in turn, has increased wholesale demand for our products.

Despite the rise in demand for our products, which led to a 38.8 percent increase in net sales year over year, supply chain disruption, production inefficiencies, and inflationary pressures impacted first quarter 2022 results.

Year over year, we have increased production rates to address wholesale demand.

While supply chain disruptions, production inefficiencies, and inflationary pressures have impacted the results for the three and six months ended January 2, 2022 as discussed below, net sales increased 36.4 percent for the first half of fiscal 2022 compared to the same prior-year period.

Supply Chain Disruptions.

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As a result, some of the materials and components that we use are in short supply.

To reduce the impact of supply chain disruptions on production, we have increased our raw materials safety stock where possible.

To reduce the impact of supply chain disruptions on production, we have increased our raw materials safety stock and pursued alternative sourcing of raw materials and components where possible.

Additionally, work in process has increased as a result of supply chain shortages delaying our ability to finish production units.

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Business processes have been altered to address completion of boats waiting on parts while maintaining normal production lines, resulting in increased labor costs.

Absenteeism and implementing COVID-19 mitigating procedures also burdened our work force as we continue to focus on ramp-up of production to meet unprecedented demand.

Absenteeism and implementing COVID-19 mitigating procedures also burdened our work force as we continue to focus on ramp-up of production.

Inflationary Pressures.

Inflationary pressures have increased the costs of raw materials and components used to build our products, negatively impacting our margins during the first quarter of 2022.

Inflationary pressures have increased the costs of raw materials and components used to build our products, negatively impacting our margins during the first half of 2022.

New model year price increases took effect for fiscal 2022;

however, these price increases did not fully offset the increased material costs caused by inflation.

In response to worsening inflationary pressures, we announced additional mid-cycle price increases that will be implemented during the second quarter and expect the price increases to offset the impact of inflation for the full year.

In response to worsening inflationary pressures, we began phasing in additional mid-cycle price increases during the second quarter of fiscal 2022.

As we continue to navigate the unprecedented confluence of demand and disruption precipitated by the COVID-19 pandemic, our production rates and results going forward will depend, in large part, on our and our suppliers’ capacity and ability to alleviate ongoing and changing risks.

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.

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

See “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” set forth in our 2021 Annual Report on Form 10-K.

Results of Operations

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

Consolidated Results

The table below presents our consolidated results of operations for the three and six months ended:

Three Months Ended

Six Months Ended

Consolidated statements of operations :

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Consolidated net sales per unit

Three Months Ended October 3, 2021 Compared to the Three Months Ended October 4, 2020

Consolidated Results

Net sales were $144.0 million for first quarter 2022, which represented an increase of 38.8 percent as compared to first quarter 2021.

Net sales in each segment benefited from increased volume as our dealers look to restock their inventories, which have been depleted by strong consumer demand for boats.

Net sales increased 34.4 percent and 36.4 percent during the second quarter and first six months of fiscal 2022, respectively, when compared with the same prior year periods.

Net sales in the MasterCraft, Crest, and Aviara segments benefited from increased sales volume as our dealers continue to have high retail demand and look to restock their inventories.

Higher prices, favorable model mix, and higher option sales were also favorable compared to the prior period.

Gross margin declined 440 basis points to 20.9 percent when compared to first quarter 2021 as supply chain disruption and inflationary pressures drove materials and labor costs higher, and overhead from the new Aviara facility created unfavorable overhead absorption.

Higher prices from model year changeover partially offset these headwinds.

Operating expenses were $16.1 million for the first quarter, up $3.3 million from the prior-year period.

Selling and marketing expense increased due to the timing of prior year expenses being impacted by the COVID-19 pandemic, resulting in lower costs for the first quarter of fiscal 2021.

General and administrative expense increased as we continued to make investments in research and development and information technology.

Gross margin percentage declined 260 basis points and 350 basis points during the second quarter and first six months of fiscal 2022, respectively, compared to the same prior year periods.

Higher revenues yielded a lower margin due to supply chain disruptions and inflationary pressures that drove material and labor costs higher.

Though we began phasing in mid-cycle price increases to offset these headwinds, the impact will not be fully realized until the second half of fiscal 2022.

In addition, overhead from the new Aviara facility created unfavorable overhead absorption.

Operating expense increased 18.8 percent and 22.1 percent during the second quarter and first six months of fiscal 2022 when compared to the same prior year periods.

Despite our increased costs, selling, general, and administrative expenses as a percentage of sales have decreased for the second quarter and first half of 2022 when compared to the same prior year periods.

Selling and marketing expense increased due to timing of prior-year expenses being impacted by the COVID-19 pandemic, resulting in lower costs for the second quarter and first half of fiscal 2021.

General and administrative expenses increased as a result of increased variable compensation costs and continued investments in information technology.

Additionally, an impairment charge related to the allocated goodwill associated with the Aviara segment was recorded in the first quarter of fiscal 2022, as discussed in Note 4 to the Unaudited Condensed Consolidated Financial Statements.

Interest expense decreased $0.6 million due to lower effective interest rates and lower average outstanding debt balances during the quarter compared to the prior-year period.

Interest expense decreased due to lower effective interest rates and lower average outstanding debt balances during the current year periods compared to the prior year periods.

Segment Results

Beginning with the first quarter of fiscal 2022 and as discussed in Note 1, our CODM began to manage our business, allocate resources, and evaluate performance based on the reportable segments of MasterCraft, Crest, NauticStar, and Aviara.

As discussed in Note 1 to our Unaudited Condensed Consoslidated Financial Statements and beginning with the first quarter of fiscal 2022, our CODM began to manage our business, allocate resources, and evaluate performance based on the reportable segments of MasterCraft, Crest, NauticStar, and Aviara.

MasterCraft Segment

The following table sets forth MasterCraft segment results for the three months ended:

The following table sets forth MasterCraft segment results for the three and six months ended:

Three Months Ended

Six Months Ended

Operating income

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Net sales per unit

Net sales increased $22.4 million, or 32.2 percent, to $92.0 million for first quarter 2022 compared to $69.6 million for the prior year period, primarily driven by an increase in sales volume.

Additionally, net sales benefited from higher prices, favorable model mix, and higher options sales.

Operating income for first quarter 2022 was $16.2 million, an increase of $1.8 million, compared to $14.4 million for first quarter 2021 driven by higher net sales, partially offset by the production inefficiencies from supply chain disruption, inflationary pressures, and higher sales and marketing costs compared to the COVID-impacted first quarter 2021.

Net sales increased 34.3 percent and 33.3 percent during the second quarter and first six months of fiscal 2022, respectively, when compared with the same prior year periods, primarily driven by an increase in sales volume and favorable model mix.

Additionally, net sales benefited from higher prices and higher option sales.

Operating income increased $4.6 million and $6.5 million during the second quarter and first half of fiscal 2022, respectively, when compared to the same prior year periods.

The increase was driven by higher net sales, and partially offset by inflationary pressures, the production inefficiencies from supply chain disruptions, and higher general and administrative costs.

Crest Segment

The following table sets forth Crest segment results for the three months ended:

The following table sets forth Crest segment results for the three and six months ended:

Three Months Ended

Six Months Ended

Operating income

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Net sales per unit

Net sales were $32.8 million for first quarter 2022, compared to $18.0 million for first quarter 2021, an increase of $14.7 million, or 81.7 percent as a result of higher sales volumes and higher prices.

Operating income increased 128.6 percent as compared to the prior year primarily as a result of higher net sales, partially offset by higher costs from supply chain disruption and inflationary pressures.

Net sales increased $8.7 million and $23.5 million during the second quarter and first half of fiscal 2022, respectively, when compared to the same prior year periods, as a result of higher sales volumes and higher prices.

Operating income for second quarter and first half of fiscal 2022 increased 75.0 percent and 95.6 percent, respectively, when compared to the same prior year periods.

The increase is primarily the result of higher net sales, partially offset by higher costs from inflationary pressures.

NauticStar Segment

The following table sets forth NauticStar segment results for the three months ended:

The following table sets forth NauticStar segment results for the three and six months ended:

Three Months Ended

Six Months Ended

Operating loss

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Net sales per unit

Net sales increased by $1.0 million, or 8.2 percent, to $13.4 million for first quarter 2022 compared to $12.3 million for first quarter 2021 due to higher option sales, higher prices, and increased volume.

Operating loss was $2.3 million for first quarter 2022 compared to an operating loss of $1.6 million for the prior year period.

Net sales were $15.1 million and $28.4 million for the second quarter and first six months of fiscal 2022, respectively.

Net sales benefited from higher prices and higher option sales, and was offset by decreased sales volume, when compared to the same prior year periods.

Operating loss was $3.1 million and $5.4 million for the second quarter and first six months of fiscal 2022, respectively, when compared to the same prior year periods.

Higher costs from inflationary pressures, supply chain disruptions, and labor challenges offset higher net sales.

Aviara Segment

The following table sets forth Aviara segment results for the three months ended:

The following table sets forth Aviara segment results for the three and six months ended:

Three Months Ended

Six Months Ended

Operating loss

Goodwill impairment

Purchases of property, plant and equipment

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Net sales per unit

Net sales increased $2.1 million, or 55.2 percent to $5.9 million for first quarter 2022 compared to $3.8 million for the prior year period due to an increase in unit sales volume attributed to increased capacity from the new Merritt Island facility.

During first quarter 2022, all Aviara boats were manufactured in our 140,000 square foot Merritt Island, Florida facility, which we purchased in October 2020 for $14.2 million.

During first quarter 2021, Aviara boats were produced in our MasterCraft facility in Vonore, Tennessee.

As a result of this transition to Merritt Island, overhead costs attributable to Aviara increased significantly which creates a dilutive near-term impact on Aviara’s margins and profitability.

Operating loss was $3.6 million for first quarter 2022 compared to an operating loss of $1.0 million for first quarter 2021 as a result of ramp up related inefficiencies in the Merritt Island facility, including higher overhead costs associated with the new facility and a goodwill impairment charge.

Net sales increased $4.7 million and $6.7 million during the second quarter and first six months of fiscal 2022, respectively, when compared to the same prior year periods, due to an increase in unit sales volume attributed to increased capacity from the new Merritt Island facility and favorable model mix.

During the second quarter and first six months of 2022, all Aviara boats were manufactured in our 140,000 square foot Merritt Island, Florida facility, which we purchased in October 2020 for $14.2 million.

During the second quarter and first six months of 2021, the production of Aviara boats at our MasterCraft facility in Vonore, Tennessee, was winding down and transitioning to the Merritt Island facility.

As a result of this transition, overhead costs attributable to Aviara increased significantly which creates a dilutive near-term impact on Aviara’s margins and profitability.

Operating loss increased $0.3 million and $2.9 million for the second quarter and first half of fiscal 2022, respectively, when compared to the same prior year periods, as a result of ramp up related inefficiencies in the Merritt Island facility, including higher overhead costs associated with the new facility.

Additionally, a goodwill impairment charge was recorded during the first quarter of fiscal 2022.

See Note 4 in Notes to Unaudited Condensed Consolidated Financial Statements for more information on the impairment charge.

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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 related to non-GAAP adjustments.

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 reflecting income tax expense on adjusted net income before income taxes at our estimated annual effective tax rate.

For the periods presented herein, these adjustments include Aviara transition costs and certain non-cash items including goodwill impairment, other intangible asset amortization, and share-based compensation.

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

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

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

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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 adjust s for the impact to income tax expense 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 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 reflecting income tax expense on adjusted net income before income taxes at our estimated annual effective tax rate.

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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Three Months Ended

Six Months Ended

Income tax expense

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Depreciation and amortization

Goodwill impairment (a)

Share-based compensation

Goodwill impairment (a)

Aviara transition costs (b)

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Three Months Ended

Six Months Ended

(Dollars in thousands, except per share data)

Income tax expense

Goodwill impairment (a)

Amortization of acquisition intangibles

Share-based compensation

Amortization of acquisition intangibles

Goodwill impairment (a)

Aviara transition costs (b)

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Three Months Ended

Six Months Ended

Net income per diluted share

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Income tax expense

Goodwill impairment (a)

Amortization of acquisition intangibles

Share-based compensation

Amortization of acquisition intangibles

Goodwill impairment (a)

Aviara transition costs (b)

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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.

Cash and cash equivalents totaled $11.7 million as of October 3, 2021, a decrease of $27.6 from $39.3 million as of June 30, 2021.

Total debt as of October 3, 2021 and June 30, 2021 was $84.4 million and $93.1 million, respectively.

Our working capital was impacted by the $22.1 million increase in inventory during the first quarter of fiscal 2022 mainly due to an increase in raw materials to support higher production volumes and to increase safety stock to manage supply chain risk.

Cash and cash equivalents totaled $13.6 million as of January 2, 2022, a decrease of $25.6 million from $39.3 million as of June 30, 2021.

Total debt as of January 2, 2022 and June 30, 2021 was $73.7 million and $93.1 million, respectively.

Our working capital was impacted by the $24.9 million increase in inventory during the first half of fiscal 2022 mainly due to an increase in raw materials to support higher production volumes and to increase safety stock to manage supply chain risk.

Work in process has increased due to supply chain disruptions.

As of October 3, 2021, we had $25.7 million outstanding under the Revolving Credit Facility, leaving $74.3 of available borrowing capacity.

As of January 2, 2022, we had $15.7 million outstanding under the Revolving Credit Facility, leaving $84.3 million of available borrowing capacity.

Refer to Note 7 — Long Term Debt in the Notes to Unaudited Condensed Consolidated Financial Statements for further details.

On June 24, 2021, the board of directors of the Company authorized a stock repurchase program that allows for the repurchase of up to $50.0 million of our common stock during the three-year period ending June 24, 2024.

During the quarter ending October 3, 2021, the Company repurchased 58,379 shares of common stock for $1.5 million in cash, including related fees and expenses.

During the six months ending January 2, 2022 the Company repurchased 414,675 shares of common stock for $11.4 million in cash, including related fees and expenses.

We are continuing to monitor the impact of supply chain disruptions, production inefficiencies, and inflationary pressures on our business.

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

Three Months Ended

Six Months Ended

(Dollars in thousands)

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Net change in cash

First Quarter 2022 Cash Flow

Net cash used in operating activities for first quarter 2022 was $13.6 million mainly due to working capital usage, partially offset by net income.

Working capital usage primarily consisted of an increase in inventory, accounts receivable, and a decrease in accrued expenses and other current liabilities.

Partially offsetting the working capital usage was an increase in accounts payable.

As discussed above, inventory increased $22.1 million for first quarter 2022.

Accounts receivables increased as a result of timing in customer payments.

Accrued expenses and other current liabilities decreased because of continued strong retail demand without the need for rebates and higher payments related to variable compensation costs.

Accounts payable increased mainly due to the increase in inventory safety stock.

Six Months Ended January 2, 2022 Cash Flow

Net cash provided by operating activities for the first half of 2022 was $12.2 million mainly due to net income, partially offset by working capital usage.

Working capital usage primarily consisted of an increase in inventory and a decrease in accounts payable.

Partially offsetting the working capital usage was a decrease in accounts receivable and an increase in accrued expenses and other current liabilities.

As discussed above, inventory increased $24.9 million for first half of 2022.

Accounts payable decreased as a result of the timing of purchases and payment of invoices.

Accounts receivable decreased as a result of timing of customer payments.

Accrued expenses and other current liabilities increased due to an increase in customer deposits, as described in Note 2 – Revenue Recognition, and warranty costs, partially offset by the payment in the first quarter of fiscal 2022 of variable compensation that was accrued at June 30, 2021.

Net cash used for investing activities was $6.7 million, which included capital expenditures.

Our capital spending was focused on expanding our capacity and maintenance capital.

Net cash used for financing activities was $10.4 and related to net payments of long-term debt of $8.8 million and funding of the stock repurchase program totaling $1.5 million.

First Quarter 2021 Cash Flow

Net cash provided by operating activities in first quarter 2021 totaled $7.3 million primarily due to net income and an increase in accounts payable, partially offset by an increase in inventory and accounts receivable.

Accounts payables and inventory increased due to increased production.

Accounts receivables increased due to an increase in sales.

Net cash used for investing activities was $2.0 million, which consisted of capital expenditures.

Net cash used for financing activities was $31.1 million, which included net payments of $19.5 million on long-term debt and funding of the stock repurchase program totaling $11.4 million.

Six Months Ended January 3, 2021 Cash Flow

Net cash provided by operating activities in first quarter 2021 totaled $30.2 million primarily due to net income, an increase in accrued expenses and other current liabilities, and an increase in accounts payable, partially offset by an increase in inventory and accounts receivable.

Accrued expenses and other current liabilities increased due to timing of variable compensation costs and an increase in customer deposits.

Accounts payable and inventory increased as a result of increased production.

Accounts receivable increased as a result of increased sales.

Net cash used for investing activities was $18.9 million, which consisted of capital expenditures, including the purchase of the Merritt Island, Florida manufacturing facility.

Net cash used for financing activities was $15.5 million and related primarily to payments of long-term debt.

Contractual Obligations

In October 2021, we signed a new supplier agreement to purchase marine outboard engines during fiscal 2022.

During the term of the agreement, we committed to purchasing a minimum annual gross dollar value of $27.0 million in engines.

Except for the new purchase agreement and the net repayment of debt of $19.5 million during the six months ended January 2, 2022, there were no material changes to our contractual obligations disclosed in “Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.

Off Balance Sheet Arrangements

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

The Company did not have any off balance sheet financing arrangements as of January 2, 2022.

Critical Accounting Policies

As of October 3, 2021 there were no significant changes in or changes in the application of our critical accounting policies or estimation procedures from those presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, which was filed with the SEC on September 2, 2021 .

As of January 2, 2022 there were no significant changes in or changes to the application of our critical accounting policies or estimation procedures from those presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, which was filed with the SEC on September 2, 2021 .

QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis