MASTERCRAFT BOAT HOLDINGS, INC. The following discussion and analysis should be read together with the sections entitled "Risk Factors," "Selected Financial Data," and the financial statements and the accompanying notes included elsewhere in this Form 10-K. In addition, the statements in this discussion and analysis regarding industry outlook, our expectations regarding the performance of our business, anticipated financial results, liquidity and the other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Cautionary Note Regarding Forward-Looking Statements" and in "Risk Factors" above. Our actual results may differ materially from those contained in or implied by any forward-looking statements. This section generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 are not included in this Annual Report on Form 10-K and can be found in Item 7 of the Company's Annual Report on Form 10-K for the year endedJune 30, 2020 , which was filed with theSEC onSeptember 11, 2020 . Key Performance Measures From time to time we use certain key performance measures in evaluating our business and results of operations and we may refer to one or more of these key performance measures in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." These key performance measures include:
• Unit sales volume - We define unit sales volume as the number of our boats
sold to our dealers during a period.
• Net sales per unit - We define net sales per unit as net sales divided by
unit sales volume.
• 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 (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. 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
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, includingthe 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 inFebruary 2020 , and, in lateMarch 2020 , temporarily suspended manufacturing operations at all of our facilities to protect the health of our employees and comply with governmental mandates. We resumed operations at reduced production levels at our manufacturing facilities bymid-May 2020 . As governmental restrictions were lifted and as a result of social distancing abilities, demand in theU.S. retail marine market accelerated inMay 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. 21 --------------------------------------------------------------------------------
Impact to Liquidity and Capital Resources
OnMarch 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. Additionally, onMay 7, 2020 , we entered into Amendment No. 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 ofJune 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 ofJune 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 ofJune 30, 2021 .
Outlook
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$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
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 includedGoodwill and other intangible asset impairment charges of$56.4 million , or$(3.01) per diluted share.
Merritt Island Facility and Aviara Transition
OnOctober 26, 2020 , we completed the purchase of certain real property located inMerritt Island, Florida , including an approximately 140,000-square-foot boat manufacturing facility, (the "Merritt Island Facility") for a purchase price of$14.2 million . We expanded our overall boat building capacity by moving all Aviara production to the Merritt Island Facility. While we believe this additional capacity will help facilitate Aviara's long-term growth, importantly, relocating Aviara production from ourVonore, Tennessee facility provided for an immediate increase in capacity and productivity for our MasterCraft brand. We began producing Aviara in the Merritt Island Facility in December and shipments from the new facility commenced in the third quarter of fiscal 2021. 22 --------------------------------------------------------------------------------
Results of Operations
The consolidated statements of operations presented below should be read together with "Selected Consolidated Financial Data," and our consolidated financial statements and related notes included elsewhere in this Form 10-K.
We derived the consolidated statements of operations for the fiscal years endedJune 30, 2021 and 2020 from our audited consolidated financial statements and related notes included elsewhere in this Form 10-K. Our historical results are not necessarily indicative of the results that may be expected in the future. 2021 vs. 2020 2021 2020 Change % Change (Dollars in thousands) Consolidated statements of operations: NET SALES$ 525,808 $ 363,073 $ 162,735 44.8 % COST OF SALES 395,837 287,717 108,120 37.6 % GROSS PROFIT 129,971 75,356 54,615 72.5 % OPERATING EXPENSES: Selling and marketing 13,021 15,981 (2,960 ) (18.5 %) General and administrative 37,049 25,557 11,492 45.0 % Amortization of other intangible assets 3,948 3,948 - 0.0 %Goodwill and other intangible asset impairment - 56,437 (56,437 ) (100.0 %) Total operating expenses 54,018 101,923 (47,905 ) (47.0 %) OPERATING INCOME (LOSS) 75,953 (26,567 ) 102,520 385.9 % OTHER EXPENSE: Interest expense 3,392 5,045 (1,653 ) 14.5 % Loss on extinguishment of debt 733 - 733 0.0 % INCOME (LOSS) BEFORE INCOME TAX EXPENSE 71,828 (31,612 ) 103,440 327.2 % INCOME TAX EXPENSE (BENEFIT) 15,658 (7,565 ) 23,223 (307.0 %) NET INCOME (LOSS)$ 56,170 $ (24,047 ) $ 80,217 333.6 % Additional financial and other data: Unit sales volume: MasterCraft 3,343 2,478 865 34.9 % NauticStar 1,387 1,191 196 16.5 % Crest 2,467 1,623 844 52.0 % Consolidated unit sales volume 7,197 5,292 1,905 36.0 % Net sales: MasterCraft$ 363,274 $ 246,455 $ 116,819 47.4 % NauticStar 59,846 54,930 4,916 8.9 % Crest 102,688 61,688 41,000 66.5 % Consolidated net sales$ 525,808 $ 363,073 $ 162,735 44.8 % Net sales per unit: MasterCraft$ 109 $ 99 $ 10 10.1 % NauticStar 43 46 (3 ) (6.5 %) Crest 42 38 4 10.5 % Consolidated net sales per unit 73 69 4 5.8 % Gross margin 24.7 % 20.8 % 390 bpts
Fiscal 2021 Compared to Fiscal 2020
• A
percent increase in sales volumes, a favorable mix of higher priced and
higher contented models, lower dealer incentives, and higher part sales
volume,
• a
increase in sales volume, lower dealer incentives, higher prices, and option
favorability, and
• a
sales volumes and higher prices, partially offset by unfavorable product
mix.
Gross Profit and Gross Margin. 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. The 23 --------------------------------------------------------------------------------
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
Operating Expenses. 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 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
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 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.
24
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Non-GAAP Measures
EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin
We define EBITDA as earnings before interest expense, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA further adjusted to eliminate certain non-cash charges or other items that we do not consider to be indicative of our core and/or ongoing operations. For the periods presented herein, these adjustments include Aviara transition costs, 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 (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 inthe United States , orU.S. GAAP. The Non-GAAP Measures are not measures of performance in accordance withU.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 withU.S. GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of cash flow. We believe that the inclusion of the Non-GAAP Measures is appropriate to provide additional information to investors because securities analysts and investors use the Non-GAAP Measures to assess our operating performance across periods on a consistent basis and to evaluate the relative risk of an investment in our securities. We use Adjusted Net Income and Adjusted Net Income per share to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results prepared in accordance withU.S. GAAP, provides a more complete understanding of factors and trends affecting our business than doesU.S. 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 (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 underU.S. GAAP. Some of these limitations are: • Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements;
• Adjusted EBITDA does not reflect our cash expenditures, or future
requirements for capital expenditures or contractual commitments;
• Adjusted EBITDA does not reflect changes in, or cash requirements for,
our working capital needs;
• Adjusted EBITDA does not reflect our tax expense or any cash requirements
to pay income taxes;
• Adjusted EBITDA does not reflect interest expense, or the cashrequirements necessary to service interest payments on our indebtedness;
and
• Adjusted Net Income, Adjusted Net Income per share, and Adjusted EBITDA
do not reflect the impact of earnings or charges resulting from matters
we do not consider to be indicative of our core and/or ongoing
operations, but may nonetheless have a material impact on our results of
operations.
In addition, because not all companies use identical calculations, our presentation of the Non-GAAP Measures may not be comparable to similarly titled measures of other companies, including companies in our industry.
25
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The following table presents a reconciliation of net income (loss) as determined
in accordance with
% of Net % of Net % of Net
(Dollars in thousands) 2021 sales 2020 sales 2019 sales
Net income (loss) $ 56,170 10.7 % $ (24,047 ) -6.6 % $ 21,354 4.6 %
Income tax expense (benefit) 15,658 (7,565 ) 5,392
Interest expense 3,392 5,045 6,513
Depreciation and amortization 11,630 10,527 7,787
EBITDA 86,850 16.5 % (16,040 ) -4.4 % 41,046 8.8 %
Share-based compensation 2,984 1,061 1,678
Aviara transition costs(a) 2,150 - -
Debt refinancing charges(b) 769 - -
Goodwill and other intangible asset
impairment(c) - 56,437 31,000
Aviara start-up costs(d) - 1,446 2,840
COVID-19 shutdown costs(e) - 1,394 -
Transaction expense(f) - - 2,377
Inventory step-up adjustment -
acquisition related(g) - - 382
Adjusted EBITDA $ 92,753 17.6 % $ 44,298 12.2 % $ 79,323 17.0 %
(a) Represents costs to transition production of the Aviara brand from
costs and costs not indicative of ongoing operations (such as training and
facility preparation).
(b) 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.
(c) Represents non-cash charges recorded in the NauticStar and Crest segments for
impairment of goodwill and trade name intangible assets. See Note 6 in Notes
to Consolidated Financial Statements for more information on the impairment
charges.
(d) Represents start-up costs associated with Aviara, a completely new boat brand
in an industry category previously not served by the Company. We began
selling the brand's first two models, the AV32 and the AV36, during the first
and second quarters of fiscal 2020, respectively. We expect to begin selling
one additional model, the AV40, in 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.
(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.
(f) Represents acquisition related costs and other integration costs associated
with our acquisition of Crest in fiscal 2019.
(g) 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.
26
-------------------------------------------------------------------------------- The following table sets forth a reconciliation of net income (loss) as determined in accordance withU.S. GAAP to Adjusted Net Income for the periods indicated: (Dollars in thousands) 2021 2020 2019 Net income (loss)$ 56,170 $ (24,047 ) $ 21,354 Income tax expense (benefit) 15,658 (7,565 )
5,392
Amortization of acquisition intangibles 3,842 3,842
3,385
Share-based compensation 2,984 1,061
1,678
Aviara transition costs(a) 2,150 - - Debt refinancing charges(b) 769 - -Goodwill and other intangible asset impairment(c) - 56,437 31,000 Aviara start-up costs(d) - 1,446 2,840 COVID-19 shutdown costs(e) - 1,394 - Transaction expense(f) - - 2,377 Inventory step-up adjustment - acquisition related(g) - -
382
Adjusted Net Income before income taxes 81,573 32,568
68,408
Adjusted income tax expense(h) 18,762 7,491
15,392
Adjusted Net Income$ 62,811 $ 25,077
Adjusted Net Income per share: Basic$ 3.34 $ 1.34 $ 2.84 Diluted$ 3.31 $ 1.34 $ 2.82 Weighted average shares used for the computation of: Basic Adjusted Net Income per share 18,805,464 18,734,482
18,653,892
Diluted Adjusted Net Income per share(i) 18,951,521 18,734,482 18,768,207
(a) Represents costs to transition production of the Aviara brand from
costs and costs not indicative of ongoing operations (such as training and
facility preparation).
(b) 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.
(c) Represents non-cash charges recorded in the NauticStar and Crest segments for
impairment of goodwill and trade name intangible assets. See Note 6 in Notes
to Consolidated Financial Statements for more information on the impairment
charges.
(d) Represents start-up costs associated with Aviara, a completely new boat brand
in an industry category previously not served by the Company. We began
selling the brand's first two models, the AV32 and the AV36, during the first
and second quarters of fiscal 2020, respectively. We expect to begin selling
one additional model, the AV40, in 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.
(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.
(f) Represents acquisition related costs and other integration costs associated
with our acquisition of Crest in fiscal 2019.
(g) 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.
(h) Reflects income tax expense at a tax rate of 23.0% for fiscal 2021, 23.0% for
fiscal 2020 and 22.5% for 2019.
(i) Represents 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.
27
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The following table presents the reconciliation of net income (loss) per diluted share to Adjusted net income per diluted share for the periods presented:
2021 2020 2019
Net income (loss) per diluted share$ 2.96 $ (1.28 ) $ 1.14 Impact of adjustments: Income tax expense (benefit) 0.83 (0.40 )
0.29
Amortization of acquisition intangibles 0.20 0.20
0.18
Share-based compensation 0.16 0.06
0.09
Aviara transition costs(a) 0.11 -
-
Debt refinancing charges(b) 0.04 -
-
Goodwill and other intangible asset impairment(c) - 3.01 1.65 Aviara start-up costs(d) - 0.08 0.15 COVID-19 shutdown costs(e) - 0.07 - Transaction expense(f) - - 0.12 Inventory step-up adjustment - acquisition related(g) - -
0.02
Adjusted Net Income per diluted share before income taxes 4.30 1.74
3.64
Impact of adjusted income tax expense on net income per diluted share before income taxes(h) (0.99 ) (0.40 )
(0.82 )
Adjusted Net Income per diluted share
(a) Represents costs to transition production of the Aviara brand from
costs and costs not indicative of ongoing operations (such as training and
facility preparation).
(b) 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.
(c) Represents non-cash charges recorded in the NauticStar and Crest segments for
impairment of goodwill and trade name intangible assets. See Note 6 in Notes
to Consolidated Financial Statements for more information on the impairment
charges.
(d) Represents start-up costs associated with Aviara, a completely new boat brand
in an industry category previously not served by the Company. We began
selling the brand's first two models, the AV32 and the AV36, during the first
and second quarters of fiscal 2020, respectively. We expect to begin selling
one additional model, the AV40, in 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.
(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.
(f) Represents acquisition related costs and other integration costs associated
with our acquisition of Crest fiscal 2019.
(g) 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.
(h) Reflects income tax expense at a tax rate of 23.0% for fiscal 2021, 23.0% for
fiscal 2020 and 22.5% for 2019.
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 restricted stock awards, performance stock units, and stock options. 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. The Company believes that, because its outstanding share-based compensation grants no longer result in a material amount of dilution of its earnings as was the case nearer to the date of our IPO, the adjustment methodology previously used no longer provides meaningful information to management or other users of its financial statements. This change resulted in an increase of$0.02 in the year endedJune 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 for the year endedJune 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. 28 --------------------------------------------------------------------------------
Liquidity and Capital Resources
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. Cash and cash equivalents totaled$39.3 million as ofJune 30, 2021 , an increase of$23.0 million from$16.3 million as ofJune 30, 2020 . Total debt as ofJune 30, 2021 andJune 30, 2020 was$93.1 million and$108.6 million , respectively. OnJune 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 ofJune 30, 2021 , we had$33.7 million outstanding under the facility, leaving$66.3 million of available borrowing capacity. Refer to Note 8 - Long-term Debt in the Notes to Consolidated Financial Statements for further details.
We believe our cash balance, cash from operations, and our ability to borrow, will be sufficient to provide for our liquidity and capital resource needs, including authorized stock repurchases.
The following table summarizes the cash flows from operating, investing, and financing activities: (Dollars in thousands) 2021 2020 2019 Total cash provided by (used in): Operating activities$ 68,538 $ 30,198 $ 55,886 Investing activities (27,832 ) (14,218 ) (95,786 ) Financing activities (17,773 ) (5,487 ) 37,817 Net change in cash$ 22,933 $ 10,493 $ (2,083 ) 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. 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
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 tomid-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$14.2 million , which primarily included capital expenditures. Our capital spending was focused on maintenance capital and purchasing the previously leased Crest Facility. Refer to Note 11 - Commitments and Contingencies in the Notes to Consolidated Financial Statements for further details. 29
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Net cash used for financing activities was
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet financing arrangements as of
Contractual Obligations As ofJune 30, 2021 , the Company's contractual cash obligations were as follows: Payments Due by Period Less than More than (Dollars in thousands) Total 1 year 1-3 years 3-5 years 5 years Long-Term Debt Obligations(1)$ 93,728 $ 3,000 $ 7,500 $ 83,228 $ - Interest on Long-Term Debt Obligations(2) 6,252 1,350 2,570 2,332 - Operating Lease Obligations 591 228 105 33 225 Purchase Obligations(3) 64,416 17,027 31,457 15,932 - Other 370 346 24 - -
Total Contractual Obligations(4)
(1) See Note 8 in Notes to Consolidated Financial Statements for additional
information regarding the Company's debt. "Long-Term Debt Obligations" refers
to future cash principal payments.
(2) Interest payments on variable rate debt instruments were calculated using
instruments.
(3) Purchase obligations represent agreements with suppliers and vendors entered
into as part of the normal course of business, including engine purchase
commitments.
(4) Unrecognized tax benefits of
because the Company cannot predict when open income tax years will close with
completed examinations. See Note 9 in Notes to Consolidated Financial
Statements.
Repurchase Obligations - The Company has reserves to cover potential losses associated with repurchase obligations based on historical experience and current facts and circumstances. We incurred no material impact from repurchase events during fiscal 2021, 2020, or 2019. An adverse change in retail sales, however, could require us to repurchase boats repossessed by floor plan financing companies upon an event of default by any of our dealers, subject in some cases to an annual limitation. 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.
Critical Accounting Policies
A "critical accounting policy" is one which is both important to the understanding of our financial condition and results of operations and requires management's most difficult, subjective, or complex judgments, often of the need to make estimates about the effect of matters that are inherently uncertain. Actual results could differ from those estimates and cause our reported net income (loss) to vary significantly from period to period. We believe that the policies listed below involve the greatest degree of judgment and complexity. Accordingly, we believe these are the most critical to understand in order to evaluate fully our financial condition and results of operations. For additional information regarding these policies, see Note 1 - Significant Accounting Policies in Notes to Consolidated Financial Statements.Goodwill and Other Intangible Assets - The Company does not amortize goodwill and other purchased intangible assets with indefinite lives. 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.
The Company reviews goodwill for impairment at its annual impairment testing date, which isJune 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. In performing this qualitative analysis, the Company considers various factors, including the effect of market or industry changes and the reporting units' actual results compared to projected results. 30 -------------------------------------------------------------------------------- If the fair value of a reporting unit does not meet the "more likely than not" criteria discussed above, the impairment test for goodwill is a quantitative test. This test involves comparing the fair value of the reporting unit with its carrying value. If the fair value exceeds the carrying value, goodwill is not considered impaired. 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 market approach. The income approach calculates the fair value of the reporting unit using a discounted cash flow approach. Internally forecasted future cash flows, which the Company believes reasonably approximate market participant assumptions, are discounted using a weighted average cost of capital ("Discount Rate") developed for each reporting unit. The Discount Rate is developed using market observable inputs, as well as considering 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 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 ofJune 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 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. Other Intangible Assets The Company's primary intangible assets other than goodwill are dealer networks and trade names acquired in business combinations. These intangible assets are initially valued using a methodology commensurate with the intended use of the asset. The dealer networks were valued using an income approach, which requires an estimate or forecast of the expected future cash flows from the dealer network through the application of the multi-period excess earnings approach. The fair value of trade names is measured using a relief-from-royalty approach, a variation of the income approach, which requires an estimate or forecast of the expected future cash flows. This method assumes the value of the trade name is the discounted cash flows of the amount that would be paid to third parties had the Company not owned the trade name and instead licensed the trade name from another company. The basis for future sales projections for these methods are based on internal revenue forecasts by reporting unit, which the Company believes represent reasonable market participant assumptions. 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 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. 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. 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 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
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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 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 . Our effective tax rates differ from the statutory rates,
primarily due to changes in the valuation allowance and non-deductible expenses,
as further described in Note 9 in Notes to Consolidated Financial Statements.
Significant judgment is required in evaluating our uncertain tax positions and
determining our provision for income taxes. Although we believe our reserves are
reasonable, we cannot provide assurance that the final tax outcome of these
matters will not be different from that which is reflected in our historical
income tax provisions and accruals. We adjust these reserves in light of
changing facts and circumstances, such as the closing of a tax audit or the
refinement of an estimate. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences will impact the
provision for income taxes in the period in which such determination is made.
The provision for income taxes includes the impact of reserve provisions and
changes to reserves that are considered appropriate, as well as the related net
interest.
Significant judgment is also required in determining any valuation allowance
recorded against deferred tax assets. 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 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. If future events cause us to conclude that it
is not more likely than not that we will be able to recover the value of our
deferred tax assets, we are required to establish a valuation allowance on
deferred tax assets at that time.
Revenue Recognition - The Company's revenue is derived primarily from the sale
of boats and trailers, marine parts, and accessories to its independent dealers.
The Company recognizes revenue when obligations under the terms of a contract
are satisfied and control over promised goods is transferred to a customer. For
the majority of sales, this occurs when the product is released to the carrier
responsible for transporting it to a customer. The Company typically receives
payment within 5 business days of shipment. Revenue is measured as the amount of
consideration it expects to receive in exchange for a product. The Company
offers dealer incentives that include wholesale rebates, retail rebates and
promotions, floor plan reimbursement or cash discounts, and other allowances
that are recorded as reductions of revenues in Net sales in the consolidated
statements of operations. The consideration recognized represents the amount
specified in a contract with a customer, net of estimated incentives the Company
reasonably expects to pay. The estimated liability and reduction in revenue for
dealer incentives is recorded at the time of sale. Subsequent adjustments to
incentive estimates are possible because actual results may differ from these
estimates if conditions dictate the need to enhance or reduce sales promotion
and incentive programs or if dealer achievement or other items vary from
historical trends. Accrued dealer incentives are included in Accrued expenses
and other current liabilities in the accompanying consolidated balance sheets.
Rebates and Discounts
Dealers earn wholesale rebates based on purchase volume commitments and achievement of certain performance metrics. The Company estimates the amount of wholesale rebates based on historical achievement, forecasted volume, and assumptions regarding dealer behavior. Rebates that apply to boats already in dealer inventory are referred to as retail rebates. The Company estimates the amount of retail rebates based on historical data for specific boat models adjusted for forecasted sales volume, product mix, dealer and consumer behavior, and assumptions concerning market conditions. The Company also utilizes various programs whereby it offers cash discounts or agrees to reimburse its dealers for certain floor plan interest costs incurred by dealers for limited periods of time, generally ranging up to nine months.
Other Revenue Recognition Matters
Dealers generally have no right to return unsold boats. Occasionally, the
Company may accept returns in limited circumstances and at the Company's
discretion under its warranty policy. 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
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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. The
estimated fair value takes into account our estimate of the loss we will incur
upon resale of any repurchases. The Company accrues the estimated fair value of
this obligation based on the age of inventory currently under floor plan
financing and estimated credit quality of dealers holding the inventory. 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. We incurred no material impact from repurchase events
during fiscal 2021, 2020, or 2019. 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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