UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
MASTERCRAFT BOAT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
001-37502
(Commission
File Number)
06-1571747
(I.R.S. Employer
Identification No.)
100 Cherokee Cove Drive, Vonore, TN 37885
(Address of Principal Executive Office) (Zip Code)
(423) 884-2221
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Trading
Symbol(s)
MCFT
Name of each exchange on which registered
NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
☐ Yes
☐ Yes
☑ No
☑ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☑ Yes
☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☑ Yes
☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
☐
☐
☑
Accelerated filer
Smaller reporting company
☑
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☑
Indicate by check mark whether the registrant has filed a report on and attestation to its managements assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
☐ Yes
☑ No
The aggregate market value of the outstanding common stock, other than shares held by persons who may be deemed affiliates of the registrant, as of the last business day of the registrants
most recently completed second fiscal quarter, which ended December 29, 2019 and based on the closing sale price as reported on the NASDAQ Global Select Market system, was
approximately $286,400,000. As of September 4, 2020, there were 18,872,119 shares of the Registrants common stock, par value $0.01 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2020 annual meeting of stockholders, which will be filed no later than 120 days after the close of the registrants fiscal year ended June 30, 2020, are
incorporated by reference into Part III of this report.
MASTERCRAFT BOAT HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2020
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
BASIS OF PRESENTATION
PART I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Principal Accountant Fees and Services
PART IV
Item 15.
Item 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. All statements contained in this Form 10-K that do not relate to matters of historical fact should be considered
forward-looking statements, including but not limited to statements regarding our expected market share, business strategy, dealer
network, anticipated financial results, and liquidity, as well as statements regarding the ongoing COVID-19 Pandemic. We use words
such as could, may, might, will, expect, likely, believe, continue, anticipate, estimate, intend, plan,
project, and other similar expressions to identify some forward-looking statements, but not all forward-looking statements include
these words. All of our forward-looking statements involve estimates and uncertainties that could cause actual results to differ
materially from those expressed in the forward-looking statements. Accordingly, any such statements are qualified in their entirety by
reference to the information described under the caption Risk Factors and elsewhere in this Form 10-K.
The forward-looking statements contained in this Form 10-K are based on assumptions that we have made in light of our industry
experience and our perceptions of historical trends, current conditions, expected future developments, and other factors we believe are
appropriate under the circumstances. You should understand that these statements are not guarantees of performance or results. They
involve risks, uncertainties (many of which are beyond our control), and assumptions. Although we believe that these forward-looking
statements are based on reasonable assumptions, you should be aware that many important factors could affect our actual operating
and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking
statements. We believe these important factors include, but are not
those described under Risk Factors and
Managements Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K and our other filings
with the Securities and Exchange Commission (SEC). Should one or more of these risks or uncertainties materialize, or should any
of these assumptions prove incorrect, our actual operating and financial performance may vary in material respects from the
performance projected in these forward-looking statements. In addition, new important factors that could cause our business not to
develop as we expect may emerge from time to time.
limited to,
Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no
obligation to update any forward-looking statement contained in this Form 10-K to reflect events or circumstances after the date on
which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. The forward-looking statements
contained herein should not be relied upon as representing our views as of any date subsequent to the filing date of this Form 10-K.
BASIS OF PRESENTATION
Our fiscal year begins on July 1 and ends on June 30 with the interim quarterly reporting periods consisting of thirteen weeks.
Therefore, the quarter end will not always coincide with the date of the end of the calendar month. We refer to our fiscal years based
on the calendar-year in which they end. Accordingly, references to fiscal 2020, fiscal 2019 and fiscal 2018 represent our financial
results for the fiscal years ended June 30, 2020, June 30, 2019 and June 30, 2018, respectively. For ease of reference, we identify our
fiscal years in this Form 10-K by reference to the period from July 1 to June 30 of the year in which the fiscal year ends. For example,
fiscal 2020 refers to our fiscal year ended June 30, 2020.
MasterCraft Boat Holdings, Inc. (the Company), a Delaware corporation, operates primarily through its wholly-owned subsidiaries,
MasterCraft Boat Company, LLC, MasterCraft Services, LLC, MasterCraft Parts, Ltd., and MasterCraft International Sales
Administration, Inc (collectively MasterCraft); Nautic Star, LLC and NS Transport, LLC (collectively NauticStar); and Crest
Marine, LLC (Crest). Unless the context otherwise requires, the Company and its subsidiaries collectively are referred to as the
Company, we, or us in this Form 10-K.
1
ITEM 1. BUSINESS
PART I
We are a leading designer, manufacturer, and marketer of recreational powerboats sold under four brands MasterCraft, NauticStar,
Crest, and Aviara. We operate under three operating and reportable segments: MasterCraft, NauticStar, and Crest. The MasterCraft
segment includes both our MasterCraft and Aviara brands.
Our MasterCraft brand is a world-renowned innovator, designer, manufacturer, and marketer of premium performance sport boats,
with a leading market position in the U.S., and a strong international presence consisting of dealers in 37 countries around the world.
MasterCraft boats are used for water skiing, wakeboarding, wake surfing, as well as general recreational boating. We believe that
MasterCraft is the most recognized brand name in the performance sport boat category.
In October 2017 we acquired NauticStar, a leading manufacturer and distributor of high-quality outboard bay boats, deck boats and
offshore center console boats. NauticStars product portfolio provides diversification and expands our direct addressable market into
the outboard category, the largest powerboat industry category in terms of retail units, according to the National Marine Manufacturers
Association (NMMA).
In October 2018 we acquired Crest, a leading manufacturer of pontoon boats, providing us with additional product diversification and
direct addressable market expansion. The pontoon category is also one of the fastest growing segments in the powerboat industry and
participates in the outboard category.
In February 2019 we introduced a new brand, Aviara, specifically designed, engineered and manufactured to meet the exacting
specifications of consumers seeking the ultimate luxury recreational day boat experience. The brands first model, the AV32, began
selling during the first quarter of 2020 and the AV36 began selling during the second quarter of 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. With three models ranging from 32
40 feet in length, using both outboard and sterndrive propulsion, the Aviara brand continues our track record of product
diversification and addressable market expansion, both through acquisitions and utilization of our in-house product development
capabilities. Aviara is built in our MasterCraft facility and is part of the MasterCraft reportable segment. Through our four brands, we
operate in three of the fastest growing segments of the powerboat industry performance sport boats, outboard saltwater fishing and
pontoon boats while entering the large, growing luxury day boat segment.
We are committed to delivering an extraordinary boating experience to our consumers. From pioneering innovations that improve
enjoyment on the water to offering products that promote rapid development of skills, our mission is to help our consumers generate
memories that will last a lifetime. We utilize a comprehensive product development process in order to build the most relevant and
exciting products for our consumers, year after year. We believe that our commitment to quality is unsurpassed, and we engage in
operational excellence to deploy flexible and effective production systems that ensure we design and build the highest quality boats in
the market.
All of our boats, from hull to upholstery, are hand-crafted by our skilled workforce at our corporate headquarters near Knoxville,
Tennessee, and our facilities in Amory, Mississippi and Owosso, Michigan. In recent years, we have made significant investments in
improving design, engineering, manufacturing, and operational processes as we strive to be the most efficient boat manufacturer in the
industry.
We believe our MasterCraft facility is the only boat manufacturing plant to achieve compliance with all three of the International
Standard for Organization (ISO) 9001 (Quality Management Systems), 14001 (Environmental Management Systems), and 18001
(International Occupational Health and Safety Management System) standards. MasterCrafts industry-leading operations result in
world-class quality, which enables us to offer a five-year factory warranty and results in MasterCraft boats typically maintaining
higher aftermarket resale value than our competitors boats.
We sell our boats through an extensive network of independent dealers in North America and internationally. Our MasterCraft boats
are the exclusive performance sport boats offered by the majority of our dealers. Since the acquisitions of NauticStar and Crest, and
the introduction of our Aviara brand, we have expanded our dealer network over the past years. We devote significant time and
resources to find, develop, and improve the performance of our dealers. We continuously cultivate and strengthen our dealer
relationships with marketing, training, and service programs designed to increase our dealers sales and profitability. We believe the
strength of our dealer network and our proactive efforts to help our dealers improve their businesses give us a distinct competitive
advantage in our industry.
2
Our History
MasterCraft was founded in 1968 when we built our first custom hull ski boat in a two-stall horse barn on a farm in Maryville,
Tennessee. Dissatisfied with the large wakes and pull of other ski boats, we designed a hull that had the smallest wake in the industry:
smooth and low at slalom and jump speeds yet well-defined at trick speeds. Our roots in performance water ski boats were reinforced
as we evolved over the next 50 years to produce leading performance-oriented boats in the wakeboarding and wake surfing categories.
Today, we continue to produce the industrys premier competitive water ski, wakeboarding, and wake surfing performance boats that
also address our consumers needs for versatility, flexibility, fun, and functionality.
NauticStar, which we acquired in October 2017, was founded in 2002 and is located in Amory, Mississippi. With many years of boat
manufacturing experience, and a 200,000 square-foot manufacturing facility, NauticStar has a reputation for reliability, quality and
consistency, with a loyal network of dealers and consumers including professional and sport fishermen, and recreational and pleasure
boating enthusiasts.
Crest, which we acquired in October 2018, was founded in 1957 and is located on approximately 55 acres in Owosso, Michigan. With
nearly 150,000 square feet of manufacturing floor space, Crest is one of the top producers of innovative, high-quality pontoon boats
ranging from 20 to 29 feet.
Aviara is a de novo brand, developed in-house, and focused on serving the luxury recreational day boat segment of the powerboat
industry. Introduced at the Miami Boat Show in February 2019, Aviara currently features three models utilizing both outboard and
sterndrive propulsion. The brands first model, the AV32 began selling during the first quarter of 2020 and the AV36 began selling
during the second quarter of 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 creates an elevated open water experience by fusing progressive style and effortless comfort in
its modern luxury vessels.
Our Market Opportunity
During calendar 2019, retail sales of new powerboats in the U.S. totaled $11.0 billion. Of the powerboat categories tracked by the
NMMA, our MasterCraft brand corresponds most directly to the inboard ski/wakeboard category, which we refer to as the
performance sport boat category. The category that most directly corresponds to our NauticStar and Crest brand is the outboard
category. Aviara directly corresponds to the outboard and sterndrive categories. Given our product diversification driven by
acquisitions and internal product development, we believe our addressable market also includes similar and adjacent powerboat
categories identified by the NMMA, including inboard cruiser boats and jet boats.
We believe we are well-positioned to benefit from several trends underway in our addressable market, including:
•
•
•
•
performance sport boats are taking a greater share of the overall fiberglass powerboat category;
outboard boats are taking a greater share of the overall powerboat category;
premium bowriders between 30 40 in length, both outboard and sterndrive, are taking a greater share of the overall
fiberglass powerboat category; and
ease-of-use and performance innovations have accelerated product cycles driving consumer demand for new products.
In addition, as a result of the COVID-19 Pandemic, consumers have been turning to boating as a safe recreational alternative that
allows for social distancing while enjoying the outdoors. However, our marketplace continues to evolve as a result of the COVID-19
Pandemic and could change further in the future. Please see Item 1A, Risk Factors Risks Relating 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.
According to the NMMA, new unit sales of performance sport boats in the U.S. increased at a compound annual growth rate
(CAGR) of 9.7% from calendar 2015 to 2019 while new unit sales of all outboard boats grew at a CAGR of 4.3% in the U.S. over
the same period. Total new unit sales of powerboats in the U.S. (excluding personal watercraft and jet boats) increased at a CAGR of
3.9% from 2015 to 2019. We believe the performance sport boat and outboard boat categories have grown at a faster rate than the rest
of the powerboat industry due to increased innovation in the features, designs, and layouts of performance sport boats and outboard
propulsion boats. These innovations have improved the performance, functionality, and versatility of these boats as compared with
other recreational boats, particularly boats in the sterndrive category, which have not experienced the same degree of innovation. We
believe inboard boats are superior to sterndrive boats for tow sports such as water skiing, wakeboarding, and wake surfing for several
reasons, including (i) the larger and more propulsive wakes that only inboard engine configurations can enable, (ii) enhanced rider
safety as a result of the location of the inboard propeller underneath the boat instead of protruding from the stern, as is generally the
case with boats in the sterndrive category, and (iii) relatively more passenger and storage space due to the location of the inboard
engine housing. We believe outboard boats are superior to sterndrive boats for recreational boating uses such as fishing and family
boating for several reasons, including (i) relatively more passenger and storage space due to the location of the outboard engine
housing, (ii) engine noise is significantly reduced in an outboard engine compared to a sterndrive engine, (iii) outboard engines are
easier to access and maintain compared to a sterndrive engine, and (iv) outboard engines perform better and have greater durability in
saltwater conditions.
3
The expanding popularity of boating has also contributed to the strong volumes. We believe we are well-positioned to benefit from the
increased popularity of recreational boating and the resulting larger prospective consumer base.
Our Strengths
Iconic MasterCraft Brand Synonymous with Quality, Innovation, and Performance. We believe the MasterCraft brand is well-known
among boating enthusiasts for high performance, premier quality, and relentless innovation. We believe that the market recognizes
MasterCraft as a premier brand in the powerboat industry due to the overall superior value proposition that our boats deliver to our
consumers. The MasterCraft brand is built on a carefully crafted set of defining principles, including Legacy, Power, Precision and
Progression. We work tirelessly every day to maintain our iconic brand reputation relative to our competition. The rigorous attention
to detail with which we design and manufacture our products results in high quality boats that command significant resale premiums
to comparable competitor boats.
Leading Market Share Position in Performance Sport Boat, Outboard, and Pontoon Categories.
In recent history, we have
consistently held a leading market share position in the U.S. among manufacturers of premium performance sport boats based on unit
volume. According to the Statistical Surveys, Inc. (SSI), our performance sport boat U.S. market share in December 2019 was
21.6%. Per SSI, our U.S. market share for deck boats and saltwater fishing boats in the 15 35 segment, sold by our NauticStar
brand, was 4.5%. Per SSI, Crests pontoon boat market share was 3.6%. As of December 2019, based on SSI data, MasterCraft has the
#1 market share, by brand, in the performance sport boat segment; NauticStar has the #6 market share, by brand, in the highly-
fragmented deck and saltwater fishing segment; and Crest has the #8 market share, by brand, in the highly-fragmented pontoon
segment. We believe our sales will grow as dealers and consumers continue to recognize the superior quality, performance, styling,
and value of our recently released boats and that we are just starting to realize the market share benefits of the many recent new
product offerings and product enhancement initiatives that our management team has implemented during the past several years.
Industry-Leading Product Design and Innovation. We believe that our innovation in the design of new boat models and new features
has been a key to our success, helping us maintain our market share, command higher price points, and generally broaden the appeal
of our products among recreational and fishing boaters. As a result of the features we have introduced, we believe that our boats are
used for an increasingly wide range of activities. Our commitment to consistently developing new boat models and introducing new
features is reflected in several notable recent achievements, including NMMA Innovation Awards for our MasterCraft ProStar water
skiing boat, Gen 2 integrated surf system, X24 performance tow boat, and the DockStar Handling System. Our entire MasterCraft
product portfolio has been renewed in the past five years, giving us the newest overall product offering in the performance sport boat
category. Since acquiring NauticStar, we have introduced several new models, with future plans to introduce several new models over
the coming years. At Crest, we are designing and engineering new models that we believe will drive innovation in the pontoon
segment. Our Aviara brand, designed and engineered completely in-house, features several new innovations that we plan to introduce
to the marketplace over the coming years.
Highly Efficient Product Development and Manufacturing. We believe that a key to our success has been our renewed focus on
operational improvements and world-class business processes. We believe our new product development capabilities are industry-
leading and enable us to consistently create unique high-performance hull shapes and product features in shorter design iterations and
at lower development costs than our competitors. These capabilities enable us to precisely design custom hulls and performance
features that enhance each boats unique performance characteristics and increase our speed to market with exciting new
products. Our acquisition of NauticStar and Crest allows us to leverage this internal product development and manufacturing
expertise to capitalize on operational improvement opportunities at our Amory, Mississippi and Owosso, Michigan facilities. Our
Aviara brand, which is built in our existing MasterCraft facility, has benefited from the industry-leading quality, safety, and
manufacturing process we have in place there.
Strong Dealer Network. We have worked extensively with our dealers to develop what we believe is one of the strongest dealer
networks in the performance sport boat and outboard categories. We target our distribution to the market segments highest
performing dealers. We have established operating processes focused on optimizing dealers financial performance and service, and
with a track record of balancing wholesale inventory and retail sales we are better able to monitor dealer inventory, allowing for more
transparent sales estimates and strong dealer relationships. Transparent and thorough warranty programs encourage consumers to
continue to visit our dealers for servicing, creating additional opportunities for boat trade-ins and purchases of accessories, thereby
improving our dealers sales rates and financial health. These actions have strengthened our existing dealer network and are driving
increased interest from new potential dealers who want to join the MasterCraft, NauticStar and Crest platforms. For our Aviara brand,
we have partnered with MarineMax, the largest marine dealership in the U.S., to market our luxury recreational day boats. We believe
introducing a new brand with an established dealer base provides the Aviara brand with instant credibility and the greatest opportunity
for long-term success in the marketplace.
4
Differentiated Sales and Marketing Capabilities. We believe our marketing efforts support each of our brand promises by focusing on
superior value proposition and differentiating the performance and features of our boats. Our marketing efforts are conducted using an
array of strategies, which include digital advertising, social media engagement, advertisements in endemic media and the sponsorship
of boating and water sport events. To highlight our MasterCraft performance credibility and generate additional brand excitement, we
sponsor a number of nationally ranked athletes, and social influencers. We believe our superior sales and marketing capabilities
effectively communicate our performance, styling, quality, authenticity, and lifestyle, resulting in increased overall consumer
engagement.
Highly Experienced Executive Team. We have a highly seasoned and effective executive team. With extensive boating industry
experience, our management team has proven its ability to develop and integrate new product lines, enhance operations, strengthen
our distribution network, and recruit industry talent. Senior management additions over the past few years have driven improvements
to our manufacturing, quality, and product development systems and processes, which have collectively accelerated performance
improvements. Our Chief Executive Officer, Frederick Brightbill, has nearly 20 years of boating industry experience and has served as
a member of our Board of Directors since 2009, including as Chairman since 2015. On December 3rd, 2019, Mr. Brightbill was
appointed as the permanent Chief Executive Officer. Mr. Brightbill previously served as President of the Aluminum Boat Group at
Brunswick Corporation and in various leadership roles at Mercury Marine, including President of the Outboard Business Unit and
Integrated Operations Division. Tim Oxley, our Chief Financial Officer, has spent 30 years in the boating industry, including 14 years
with the Company, following 16 years with Brunswick Corporation where he served as Chief Financial Officer of several operating
divisions. In addition to Messrs. Brightbill and Oxley, the other members of our senior leadership team, collectively, have over 115
years of experience in the boating industry.
Our Strategy
Continue to Develop New and Innovative Products. As a leading innovator, designer, manufacturer, and marketer, we strive to design
new and inventive products that appeal to a broad consumer base for all of our premium brands. Since fiscal 2013, we have
successfully launched a number of new products and features with best-in-class quality leading to increased sales and significant
margin expansion. Our process involves each department in collaborative full team product launches that enable us to release
several new models per year, per brand, while maintaining superior quality and controlling costs. Product development and innovation
are the life blood of successful boat manufacturers and we will continue to invest significant resources to ensure a pipeline of new
products to meet the needs of our consumers.
Capture Additional Share from Adjacent Boating Categories. Our NauticStar, Crest, and Aviara brands provide us with direct access
to the outboard and sterndrive categories, with outboards representing the largest category of the powerboat industry with $7.7 billion
of sales in 2019, per the NMMA, and provides diversification from our existing MasterCraft product portfolio. The additions of
NauticStar, Crest, and Aviara, combined with our culture of innovation, enhances our ability to introduce new products with increased
versatility, functionality, and performance to a more expansive consumer base that values boats for competitive and recreational
fishing, and general recreational boating purposes. Ultimately, the versatile boating experience delivered by our brands allows us to
attract consumers from other boating categories, most notably from the sterndrive categories. We intend to further enhance the
performance, comfort, and versatility of our products to target additional consumers seeking high performance water sport, fishing and
general recreational activity.
Effectively Monitor Dealer Inventory and Further Strengthen Our Dealer Network. Our goal is to achieve and maintain a leading
market share in each of the markets in which we operate. We view our dealers as our partners and product champions. Therefore, we
devote significant time and resources to finding high quality dealers and developing and improving their performance over time. We
actively monitor field inventory levels, as demonstrated by healthy and consistent inventory retail turns and balanced wholesale and
retail unit sales, which leads to better margins and improved financial health for our dealers. Additionally, our predictable new product
development cycles across our portfolio ensure that our dealers have high quality, compelling, and relevant products to sell to their
customers. We believe the quality and trust in our dealer relationships are more beneficial to our long-term success than the quantity
of dealers. We continue to leverage that dealer base while proactively developing strategies that will strengthen our overall network.
For example, we intend to strengthen our current footprint by selectively recruiting market-leading dealers. We believe our targeted
initiatives to enhance and grow our dealer network will increase unit sales in the future.
Continued Focus on Sales in International Markets. We currently have an extensive international dealer network with 66
international locations in 37 countries around the world. We believe MasterCraft is the most well-known brand in the performance
sport boat category globally, and that NauticStar, Crest, and Aviara have the potential for global growth. Based on our brand
recognition, innovative product offerings, and distribution strengths, we believe we are well positioned to leverage our reputation and
capture additional international sales. Continuing retaliatory tariffs in the European Union and unfavorable exchange rates in other
parts of the world are a current headwind. We believe that we will maintain our international sales by promoting our new products in
developed markets where we have a well-established dealer base. Net sales outside of North America represented 4.8% of net sales in
fiscal 2020.
5
Our Products
We design, manufacture, and sell premium recreational performance sport boats, outboard, and sterndrive boats that we believe
deliver superior performance for water skiing, wakeboarding, wake surfing, and fishing, as well as general recreational boating. In
addition, we offer various accessories, including trailers and aftermarket parts. We market our boats under four brands: MasterCraft,
NauticStar, Crest, and Aviara.
Our MasterCraft portfolio of ProStar, XStar, X, XT and NXT models are designed for the highest levels of performance, styling, and
enjoyment for both recreational and competitive use. The XStar and X models are geared towards the consumer seeking the most
premium and highest performance boating experience that we offer, and generally command a price premium over our competitors
boats at retail prices ranging from approximately $160,000 to $190,000. The MasterCraft XT models were introduced in July 2016
with retail prices ranging from approximately $100,000 to $140,000. Unveiled in January 2014, the MasterCraft NXT models
introduced the quality, performance, styling, and innovation of the MasterCraft brand to the entry-level consumer, with retail prices
ranging from approximately $ 75,000 to $95,000. We have strategically designed and priced the MasterCraft NXT models to target the
fast-growing entry-level consumer group that is distinct from our traditional consumer base, while maintaining our core MasterCraft
brand attributes at profit margins comparable to our other offerings.
Our NauticStar portfolio of Bay Boats, Sport Deck Boats and Offshore Boats are designed for a variety of uses, including recreational
and competitive sport fishing in freshwater lakes or saltwater, and general recreational enjoyment. NauticStars Bay Boats and
Offshore Boats are geared towards the consumer seeking unmatched quality and features for fishability and family friendly comfort.
The Sport Deck Boat line caters to consumers seeking the drive and ride of a V-hull, large capacity, and the styling and efficiency of a
runabout. NauticStars retail prices range from approximately $35,000 to $300,000. We believe all of the NauticStar models represent
a tremendous value for consumers.
Our Crest portfolio of pontoon boats are designed for the ultimate in comfort and recreational pleasure boating. Crest has continued to
grow market share as it expands its distribution footprint. Crests pontoon boats are designed to offer consumers the best in luxury,
style and performance without compromise across a diverse product portfolio. Crests retail prices range from approximately $30,000
to $160,000.
Our Aviara portfolio of luxury recreational day boats was designed in-house with the vision to create pleasure crafts that defy
compromise. The Aviara brand drew on MasterCrafts 50-year legacy of quality and is built in our award-winning MasterCraft
facility. Aviaras boat designs were inspired by our four product design principles Progressive Style, Elevated Control, Modern
Comfort and Quality Details. Aviaras models consist of the AV32, a 32-foot luxury bowrider, the AV36, a 36-foot luxury bowrider,
and the AV40, the brands flagship 40-foot luxury bowrider for the ultimate on-the-water experience. All models are available in
either outboard or sterndrive propulsion, and Aviaras retail prices range from approximately $345,000 to $670,000.
Our Dealer Network
We rely on an extensive network of independent dealers to sell our products in North America and internationally. For MasterCraft,
NauticStar, Crest, and Aviara, we target our distribution to the market segments highest performing dealers. The majority of our
MasterCraft dealers are exclusive to our MasterCraft product lines within the performance sport boat category, highlighting the
commitment of our key dealers to the MasterCraft brand. We establish performance criteria that our dealers must meet as part of their
dealer agreements to ensure the continued quality of our dealer network. As members of our network, dealers may qualify for
wholesale rebates, retail rebates and promotions, floor plan reimbursement or cash discounts, and other allowances.
We consistently review our distribution network to identify opportunities to expand our geographic footprint and improve our
coverage of the market. We constantly monitor the health and strength of our dealers by analyzing each dealers retail sales and
inventory and have established processes to identify underperforming dealers in order to assist them in improving their performance or
to allow us to switch to a more effective dealer. These processes also allow us to better monitor dealer inventory levels and product
turns and contribute to a healthier dealer network that is better able to stock and sell our products. We believe our outstanding dealer
network and our proactive approach to dealer management allow us to distribute our products more efficiently than our competitors
and will help us capitalize on growth opportunities as our industry volumes continue to increase.
For fiscal 2020 the Companys top ten dealers accounted for approximately 30% of our net sales and none of our dealers accounted for
more than 5% of our total net sales.
North America. In North America, our MasterCraft brand, had a total of 132 dealers across 141 locations as of June 30, 2020. Our
NauticStar brand had a total of 67 dealers across 82 locations in North America as of June 30, 2020. Our Crest brand had a total of 116
dealers across 130 locations in North America as of June 30, 2020. We do not have a significant concentration of sales among our
MasterCraft, NauticStar or Crest dealers. Our Aviara brand is sold through a distribution network consisting of one dealer with 59
locations.
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Outside of North America. As of June 30, 2020, through our MasterCraft brand, we had a total of 41 international dealers and 41
locations and through our NauticStar brand we had eight international dealers in 41 locations. We are present in Europe, Australia,
Africa, Asia, including Hong Kong and the Middle East. We generated 4.8%, 5.2%, and 7.5% of our net sales outside of North
America in fiscal 2020, 2019, and 2018, respectively.
Dealer Relations
We have developed a system of financial incentives for our dealers based on achievement of key benchmarks. In addition, we provide
our dealers with comprehensive sales training and a complete set of technology-based tools designed to help dealers maximize
performance. Our dealer incentive program has been refined through years of experience with some of the key elements including
wholesale rebates, retail rebates and promotions, other allowances, and floor plan reimbursement or cash discounts to encourage
balanced production throughout the year.
Beyond our incentive programs, we have developed a proprietary web-based management tool that is used by our dealers on a day-to-
day basis to improve their own businesses as well as enhance communication with our factory and sales management teams. Our
business-to-business application efficiently executes many critical functions, including warranty registrations, warranty claims, boat
ordering and tracking, parts ordering, technical support, and inventory reporting. This system facilitates communication between our
sales team and the dealer network and allows our manufacturing department to review consumer demand in real time.
Sales Cycles and Floor Plan Financing
We manage our annual sales plan through distinct buying periods. Our rebates are tiered so that dealers have a financial incentive to
take the stocking risk for boats purchased prior to the traditional retail selling season (April - June). These incentives, accompanied by
floor plan subsidies for up to nine months from the date of invoice, drive level loading of production. During this first part of the
model year, many of the dealers orders are standard configurations for their showrooms. In the second part of the model year, more
boats are customized by retail consumers. Many of these custom orders are placed during boat shows, which typically occur from
January through early April across North America.
We offer our dealers the opportunity to purchase boats with cash or through floor plan financing programs with third-party floor plan
financing providers. The floor plan financing programs allow dealers to establish lines of credit with third-party lenders to purchase
inventory. Upon purchase of a boat, dealers draw on the floor plan facility and the lenders pay the invoice price of the boat directly to
us typically within 5 business days. Consistent with industry practice, we offer various manufacturer-sponsored floor plan interest
programs under which we agree to reimburse our dealers for certain floor plan interest costs incurred for up to nine months from the
date of invoice. In some cases, cash discounts are offered as an alternative to floor plan subsidies. These programs encourage dealers
to rapidly replenish inventories during the spring and summer retail season, maintain sufficient inventories during the non-peak
season, and balance wholesale purchases throughout the year.
Pursuant to the terms of the floor plan financing, if a dealer defaults on the terms of its credit line, we agree to repurchase new
inventory repossessed from dealerships. Our obligation to repurchase such repossessed products for the unpaid balance of our original
invoice price for the boat is subject to reduction or limitation based on the age and condition of the boat at the time of repurchase, and
in certain cases, by an aggregate cap on repurchase obligations associated with a particular floor plan financing program. We incurred
no material impact from repurchase events during fiscal 2020, 2019, or 2018.
Marketing and Sales
Marketing
We believe that our differentiated marketing capabilities and our multi-channel, content-driven marketing strategies align with our
strategic focus on product innovation, performance, and quality to attract aspiring and enthusiast consumers to our brands and
products. These sales and marketing efforts allow us to more effectively launch and support our products, help drive actionable sales
leads for our dealers, and reinforce our MasterCraft, NauticStar, Crest, and Aviara brand and lifestyle attributes.
Our over 50-year history of manufacturing and design leadership has made MasterCraft one of the most well-known and iconic brands
in the boating industry. We believe the MasterCraft brand is widely recognized even among non-enthusiasts. Similarly, Crests nearly
60-year history has led to the brand being strongly recognized within the boating industry. Our NauticStar brand is relatively young
compared to MasterCraft but has quickly established itself as a strong brand dedicated to innovation, style and quality. We are focused
on enhancing the power of our brands through a multifaceted marketing strategy. Our addressable market is targeted through a variety
of specialized means, ranging from event sponsorships to far-reaching strategic alliances.
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We have created a unified print and digital advertising strategy that is refreshed each year, featuring the unique attributes of each of
our products while maintaining focus on the MasterCraft, NauticStar, Crest, and Aviara brands. We maintain a meaningful presence
for our product lines in several endemic water sports and boating publications. Given the prevalence of our products in the markets
these publications target, we also benefit from significant unpaid impressions in these industry publications, as our boats frequently
appear in feature stories and advertisements for other products. In addition to these traditional marketing channels, in the last several
years we have created an active and highly successful digital advertising and social media platform, including the use of Facebook,
Twitter, Instagram, YouTube, and Vimeo, among others, to deliver content to our target audience, increase awareness of our brands,
foster loyalty, and build a community of MasterCraft, NauticStar, Crest and Aviara enthusiasts. In addition, we benefit from numerous
user-generated videos and photos that are uploaded to these websites and social media platforms. An important component of this
strategy has been our investment in our own mastercraft.com, nauticstarboats.com, crestpontoonboats.com, and aviaraboats.com
websites. The sites are designed to allow significant interaction between us and our consumer base through marketing content
delivery, message boards, news and event postings, and product updates and specifications. Our popular Design-a-Boat
functionality allows consumers to design a customized boat and request a dealer quote. The custom design can be transmitted directly
to our closest independent dealer as well as our in-house concierge who follows up directly with our dealer leads for MasterCraft and
Aviara.
Our leading position in the performance sport boat category is further supported by our sponsorship of some of the most recognizable
and successful athletes and influencers in water sports, as well as a number of highly visible competitions and events around the
world. Our activities in this area serve to deepen the penetration of our brands within the professional and enthusiast community,
while also supporting the growth of watersports. The events which we sponsor and in which we and our dealers participate feature the
most popular figures in wakeboarding and water skiing, drawing large audiences of enthusiasts to a variety of sites around the country.
Furthermore, we sponsor top ranked professional wakeboarding athletes, water ski jumpers, and water skiers. In addition to the
advertising generated by the athletes success in their sports, we also leverage our sponsorship of these athletes by having them attend
boat shows and dealer events and appear in creative media events, in which they garner public relations interest, build our MasterCraft
brand, and in many cases help sell our products directly to consumers.
Sales
Our sales organizations primary role is to monitor our network of existing dealers and work with them to increase sales of our
products, as well as identifying and recruiting new and replacement dealers that we believe will provide enhanced sales and customer
service for our end consumers. We employ proactive processes to monitor the health and performance of our dealers, and to help them
improve their businesses and their sales of our products. Our strategy is to improve the individual market shares of each of our dealers
in their respective markets, and to add new dealers in new markets or replace dealers in existing markets where we believe we can
achieve improved market share and customer service. We utilize regular performance reviews to drive improvement
in
underperforming dealers and to determine how to transition to new dealers when necessary. In addition, we employ a number of tools
to assist our dealers in improving their performance, including product, sales, and service training, marketing materials and content,
and direct interaction with prospective consumers such as our factory concierge service. We encourage and expect our sales
representatives to serve as advisors to our dealers, and believe this proactive sales approach leads to better dealer relationships and
higher sales of our products.
Manufacturing
All of our MasterCraft and Aviara boats are designed, manufactured, and lake-tested in our Vonore, Tennessee facility. All of our
NauticStar boats are manufactured in our Amory, Mississippi facility. All of our Crest boats are manufactured in our Owosso,
Michigan facility. We believe MasterCraft has the only boat manufacturing facility to achieve compliance with all three of the
ISO 9001 (Quality Management Systems), 14001 (Environmental Management Systems), and 18001 (International Occupational
Health and Safety Management System) standards.
The rigorous attention to detail in the design and manufacturing of our products results in boats of high quality which affords our
customers a great on water experience across all of our brands. Our dedication to quality allows us to offer some of the longest and
most inclusive warranty terms in the industry allowing our customers to enjoy our products with confidence.
Our boats are built through a continuous flow manufacturing process that encompasses fabrication, assembly, quality management,
and testing. We manufacture certain components and subassemblies for our boats, such as upholstery, and procure other components
from third-party vendors and install them on the boat. We have several exclusive supplier partnerships for critical purchased
components, such as aluminum billet, towers, and engine packages. For MasterCraft, we also build custom trailers that match the
exact size and color of our boats.
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Research and Development, Product Development and Engineering
We are strategically and financially committed to innovation, as reflected in our dedicated product development and engineering
groups and evidenced by our track record of new product introduction. At MasterCraft and Aviara, our product development and
engineering group comprises 24 professionals. At NauticStar, our product development and engineering group comprises five
professionals. At Crest, our product development and engineering group comprises five professionals. These individuals bring to our
product development efforts significant expertise across core disciplines, including boat design, computer-aided design, naval
engineering, electrical engineering, and mechanical engineering. They are responsible for execution of all facets of our new product
strategy, starting with design and development of new boat models and innovative features, engineering these designs for
manufacturing, and integrating new boats and innovations into production without disruption, at high quality, on time and on budget.
Our product development and engineering functions work closely with our Strategic Portfolio Management Team which includes
senior leadership from Sales, Marketing and Finance, all working together to develop our long-term product and innovation strategies.
We take a disciplined approach to the management of our product development strategy. We have structured processes to obtain
voices of the consumer, dealer, and management to guide our long-term product lifecycle and portfolio planning. In addition,
extensive testing and coordination with our manufacturing group are important elements of our product development process, which
we believe enable us to leverage the lessons from past launches and minimize the risk associated with the release of new products. We
have developed a strategy to launch several new models a year, which will allow us to renew our product portfolio with innovative
offerings at a rate that we believe will be difficult for our competitors to match without significant additional capital investments. In
addition to our new product strategy, we manage a separate innovation development process which allows us to design innovative new
features for our boats in a disciplined manner and to launch these innovations in a more rapid time frame and with higher quality.
These enhanced processes have reduced the time to market for our new product pipeline. Our research and product development
expense for fiscal 2020, 2019 and 2018 was $5.2 million, $5.6 million, and $4.9 million, respectively.
Intellectual Property
We rely on a combination of patent, trademark, and copyright protection, trade secret laws, confidentiality procedures, and contractual
provisions to protect our rights in our brands, products, and proprietary technology. We also protect our vessel hull designs through
vessel hull design registrations. This is an important part of our business and we intend to continue protecting our intellectual property.
We currently hold 34 U.S. patents and six foreign patents, including utility and design patents for our transom surf seating, our
DockStar handling system, and our Gen 2 surf system technology. Provided that we comply with all statutory maintenance
requirements, our patents are expected to expire between 2021 and 2037. We also have 14 pending U.S. patent applications and ten
pending foreign patent applications. We also own in excess of 100 trademark registrations in various countries around the world, most
notably for the MasterCraft, NauticStar, Crest, and Aviara names and/or logos, as well as numerous model names in MasterCrafts
Star Series, X, XT, and NXT product families, and we have several pending applications for additional registrations. Such trademarks
may endure in perpetuity on a country-by-country basis provided that we comply with all statutory maintenance requirements,
including continued use of each trademark in each such country. In addition, we own 38 registered U.S. copyrights. Finally, we have
registered more than 40 vessel hull designs with the U.S. Copyright Office, the most recent of which will remain in force through
2027.
From time to time, we are involved in intellectual property litigation, either accusing third parties of infringing our intellectual
property rights, or defending against third-party claims that we are infringing the intellectual property of others. We are not currently
involved in any outstanding intellectual property litigation that we believe, individually or in the aggregate, will have a material
adverse effect on our business, financial condition, results of operations, or cash flows. However, we cannot predict the outcome of
any pending or future litigation, and an unfavorable outcome could have an adverse impact on our business, financial condition,
results of operations, or cash flows.
Suppliers
We purchase a wide variety of raw materials from our supplier base, including resins, fiberglass, aluminum and steel, as well as
product parts and components such as engines and electronic controls. We maintain long-term contracts with preferred suppliers and
informal arrangements with other suppliers.
We are focused on working with our supply chain partners to enable cost improvement, world-class quality, and continuous product
innovation. We have engaged our key suppliers in collaborative preferred supplier relationships and have developed processes
including annual cost reduction targets, regular reliability projects, and extensive product testing requirements to ensure that our
suppliers produce at lowest total cost and to the highest levels of quality expected of our brands. These collaborative efforts begin at
the design stage, with our key suppliers integrated into design and development planning well in advance of launch, which allows us
to control costs and to leverage the expertise of our suppliers in developing product innovations. We believe these collaborative
relationships with our most important suppliers have contributed to our significant improvements in product quality, innovation, and
profitability.
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The most significant components used in manufacturing our boats, based on cost, are engine packages. For our MasterCraft brand,
Ilmor Engineering, Inc. (Ilmor) is MasterCrafts exclusive engine supplier, and for our NauticStar brand, Yamaha Motor
Corporation (Yamaha) is our largest engine supplier, while Mercury Marine (Mercury) is Crests largest engine supplier.
For
our Aviara brand, Mercury also provides outboard engines and Ilmor provides sterndrive engines. We maintain strong and long-
standing relationships with Ilmor, Yamaha, and Mercury. During the year ended June 30, 2020, Ilmor was our largest overall supplier.
In addition to performance sport boat and sterndrive engines, Ilmors affiliates produce engines used in a number of leading racing
boats and race cars. Ilmor maintains a full-time customer service and warranty representative at our MasterCraft office, resulting in
extremely efficient management of all engine-related matters, mitigating potential warranty risk. We work closely with Ilmor to
remain at the forefront of engine design, performance, and manufacturing. Engine packages are the most expensive single component
in the MasterCraft, Aviara, NauticStar and Crest boat-building process and we believe our long-term relationship with our engine
supplier partners is a key competitive advantage.
Transportation
We utilize third party logistics and transportation services along with a fleet of leased tractor trailers at NauticStar, to deliver our boats
to our dealer network. A select few dealers near our manufacturing facilities have elected to manage transportation and arrange for
boats to be picked up directly from our manufacturing facilities. International shipments are transferred to a third-party logistics
provider who schedules them for shipment via ocean freight to their destination country.
Information Technology
We continue to make investments in information systems and technology. Our information systems and technology strategy support
automation and integration of our business processes and strategic planning initiatives, including not only our internal information
management and communications processes but also our marketing and dealer management efforts. Our Information Systems and
Technology team is integral to our marketing and sales front office initiatives, helping us to develop stronger engagement between us,
our dealers and our end consumers. We will continue to invest in our information systems and our IT infrastructure in order to
leverage current and future technologies to support our product development, operations, and marketing strategies.
Insurance and Product Warranties
We purchase insurance to cover standard risks in our industry, including policies that cover general product liability, workers
compensation, auto liability, and other casualty and property risks. Our insurance rates are based on our safety record as well as trends
in the insurance industry. We also maintain workers compensation insurance and auto insurance policies that are retrospective in that
the cost per year will vary depending on the frequency and severity of claims in the policy year.
We face an inherent risk of exposure to product liability claims in the event that, among other things, the use of our products results in
injury. With respect to product liability coverage, we carry customary insurance coverage. Our coverage involves self-insured
retentions with primary and excess liability coverage above the retention amount. We have the ability to refer claims to our suppliers
and their insurers to pay the costs associated with any claims arising from such suppliers products. Our insurance covers claims that
are not adequately covered by a suppliers insurance and provides for excess secondary coverage above the limits provided by our
suppliers.
We provide product warranties for all of our boat models. During the warranty period, we reimburse dealers and authorized service
facilities for all or a portion of the cost of repair or replacement performed on the products. Some materials, components or parts of
the boat that are not covered by our product warranties are separately warranted by their manufacturers or suppliers. These other
warranties include warranties covering engines, among other components.
Competition
The powerboat industry, including the performance sport boat, outboard, and sterndrive categories, are highly fragmented, resulting in
intense competition for consumers and dealers. Competition affects our ability to succeed in both the market segments we currently
serve and new market segments that we may enter in the future. We compete with several large manufacturers that may have greater
financial, marketing, and other resources than we do. We also compete with a wide variety of small privately held independent
manufacturers. Competition in our industry is based primarily on brand name, price, innovative features, design, and product
performance. Please see Item 1A, Risk Factors Risks Related to Our Business Our industry is characterized by intense
competition, which affects our sales and profits.
10
Seasonality
Our operating results are subject to annual and seasonal fluctuations resulting from a variety of factors, including:
•
•
•
•
•
seasonal variations in retail demand for boats, with a significant majority of sales occurring during peak boating season,
which we attempt to manage by providing incentive programs and floor plan subsidies to encourage dealer purchases
throughout the year, which may include offering off-season retail promotions to our dealers in seasonally slow months,
during and ahead of boat shows, to encourage retail demand;
product mix, which is driven by boat model mix and higher option order rates; while sales of all our boats generate
comparable margins, sales of larger boats and boats with optional content generally produce higher absolute profits;
inclement weather, which can affect production at our manufacturing facilities as well as consumer demand;
competition from other recreational boat manufacturers; and
general economic conditions.
Environmental, Safety, and Regulatory Matters
Our operations are subject to extensive and frequently changing federal, state, local, and foreign laws and regulations, including those
concerning product safety, environmental protection, and occupational health and safety. We believe that our operations and products
are in compliance with these regulatory requirements. Historically, the cost of achieving and maintaining compliance with applicable
laws and regulations has not been material. However, we cannot provide assurance that future costs and expenses required for us to
comply with such laws and regulations, including any new or modified regulatory requirements, or to address newly discovered
environmental conditions, will not have a material adverse effect on our business, financial condition, operating results, or cash flows.
We have not been notified of and are otherwise currently not aware of any contamination at our current or former facilities for which
we could be liable under environmental laws or regulations and we currently are not undertaking any remediation or investigation
activities in connection with any contamination. However, future spills or accidents or the discovery of currently unknown conditions
or non-compliances may give rise to investigation and remediation obligations or related liabilities and damage claims, which may
have a material adverse effect on our business, financial condition, operating results, or cash flows.
The regulatory programs that impact our business include the following:
Hazardous Substance and Waste Regulations
Certain materials used in our manufacturing, including the resins used in production of our boats, are toxic, flammable, corrosive, or
reactive and are classified by the federal and state governments as hazardous materials. Control of these substances is regulated by
the Environmental Protection Agency (EPA) and state pollution control agencies under the Federal Resource Conservation and
Recovery Act, and related state programs. Storage of these materials must be maintained in appropriately labeled and monitored
containers, and disposal of wastes requires completion of detailed waste manifests and recordkeeping requirements. Any failure by us
to properly store or dispose of our hazardous materials could result in liability, including fines, penalties, or obligations to investigate
and remediate any contamination originating from our operations.
OSHA
The Occupational Safety and Health Administration (OSHA) Act imposes standards of conduct for and regulates workplace safety,
including limits on the amount of emissions to which an employee may be exposed without the need for respiratory protection or
upgraded plant ventilation. Our facilities are regularly inspected by OSHA and by state and local inspection agencies and departments.
We believe that our facilities comply in all material aspects with these regulations. We have made a considerable investment in safety
awareness programs and provide ongoing safety training for all of our employees. We have implemented a program that requires
frequent safety inspections of our facilities by managers and an internal safety committee. The safety committee, which is led by a
dedicated health and safety professional, prepares a monthly action plan based on its findings.
Clean Air Act
The Clean Air Act (the CAA) and corresponding state rules regulate emissions of air pollutants. Because our manufacturing
operations involve molding and coating of fiberglass materials, which involves the emission of certain volatile organic compounds,
hazardous air pollutants, and particulate matter, we are required to maintain and comply with a CAA operating permit (or Title V
permit). Our Title V Permit requires us to monitor our emissions and periodically certify that our emissions are within specified limits.
To date, we have not had material difficulty complying with those limits.
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In addition to the regulation of our manufacturing operations, the EPA has adopted regulations stipulating that many marine
propulsion engines meet an air emission standard that requires fitting a catalytic converter to the engine. The engines used in our
products, all of which are manufactured by third parties, are warranted by the manufacturers to be in compliance with the EPAs
emission standards. The additional cost of complying with these regulations has increased our cost to purchase the engines and,
accordingly, has increased the cost to manufacture our products.
If we are not able to pass these additional costs along to our consumers, it may have a negative impact on our business and financial
condition.
Boat Safety Standards
Powerboats sold in the U.S. must be manufactured to meet the standards of certification required by the U.S. Coast Guard. In addition,
boats manufactured for sale in the European Union must be certified to meet the European Unions imported manufactured products
standards. These certifications specify standards for the design and construction of powerboats. We believe that all our boats meet
these standards. In addition, safety of recreational boats is subject to federal regulation under the Boat Safety Act of 1971, which
requires boat manufacturers to recall products for replacement of parts or components that have demonstrated defects affecting safety.
In the past, we have instituted recalls for defective component parts produced by us or certain of our third-party suppliers. None of
these recalls has had a material adverse effect on the Company.
Employees
We believe we maintain excellent relations with our employees, treating them as business partners and focusing on building their
careers. We have approximately 884 employees as of June 30, 2020, 480 of whom work at our MasterCraft/Aviara facility in
Tennessee, 218 of whom work at our NauticStar facility in Mississippi, and 186 of whom work at our Crest facility in Michigan. None
of our employees are represented by a labor union, and since MasterCrafts founding in 1968, we have never experienced a labor-
related work stoppage.
Other Information
We were incorporated under the laws of the State of Delaware under the name MCBC Holdings, Inc. on January 28, 2000. In July
2015, we completed an initial public offering of our common stock. Effective November 7, 2018, the name of the Company was
Inc. We maintain a website with the address
changed from MCBC Holdings,
www.mastercraft.com. We are not including the information contained in our website as part of, or incorporating it by reference into,
this Annual Report on Form 10-K. We make available, free of charge through our website, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports as soon as reasonably practicable after we
electronically file these materials with, or otherwise furnish them to, the SEC.
to MasterCraft Boat Holdings,
Inc.
ITEM 1A. RISK FACTORS.
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as other
information in this Form 10-K, before deciding whether to invest in shares of our common stock. The occurrence of any of the events
described below could harm our business, financial condition, results of operations, and growth prospects. In such an event, the
trading price of our common stock may decline, and you may lose all or part of your investment.
Risks Relating 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 COVID-19 Pandemic has significantly impacted worldwide economic conditions and could have a material adverse effect on our
operations and business and those of our consumers, dealers and suppliers. In response to the COVID-19 Pandemic, governmental
authorities, including in many of the jurisdictions in which we operate, have taken measures to limit the spread of the outbreak,
including mandatory business closures, travel restrictions, quarantines, declarations of states of emergency, stay-at-home or
shelter-in-place orders and social distancing protocols, in addition to seeking voluntary facility closures and other restrictions. These
actions and the potential resurgence or enhancement of these actions could materially adversely affect our ability, and our consumers,
dealers and suppliers ability, to adequately staff, manage and maintain their respective businesses. Furthermore, our future results of
operations, cash-flows and liquidity could be adversely impacted by the COVID-19 Pandemic due to delays in payments of
outstanding receivable amounts beyond normal payment terms, supply chain disruptions, uncertain demand and additional goodwill
and other intangible asset impairment charges.
12
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 mandated shutdowns. 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 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 protect our employees and
mitigate risk of further business interruption.
The COVID-19 Pandemic has impacted our supply chain, particularly as a result of mandatory shutdowns in locations where products
are manufactured. It is also possible that we could experience future disruptions to our supply chain that are significant as well as
significant deterioration in macroeconomic factors that typically affect us, such as consumer spending and demand for our products. In
addition, we have experienced and are likely to continue to experience disruptions in manufacturing and logistics due to the COVID-
19 Pandemic, and we may experience disruptions in manufacturing or logistics in the future due to inconsistent and unanticipated
order patterns, our inability to develop long-term relationships with key suppliers, other diseases or pandemics or unforeseen natural
disasters or public health emergencies. Further, if there are future closures we may face obstacles and delays in re-opening our
manufacturing facilities as we may have to hire and train a substantial number of new employees as some of the employees that we
have temporarily laid off may seek or have found other employment.
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.
In addition, the COVID-19 Pandemic has caused a significant economic slowdown, which could cause a global recession, which we
expect would negatively impact the sale of our boats. If general economic conditions deteriorate further we cannot predict the duration
or strength of an economic recovery, either in the United States or in the specific markets where we sell our products. Further,
consumers often finance purchases of our boats from dealers and accordingly, consumer credit market conditions also influence
demand for our boats from dealers. If credit conditions worsen and adversely affect the ability of consumers to finance potential
purchases at acceptable terms and interest rates, it could result in a decrease in the sales of our products.
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.
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. While the performance of the business and our cash management activities provided the
flexibility to repay $25.0 million of the Credit Facility as of June 30, 2020, as a result of the COVID-19 Pandemic, we may be
required to raise additional capital and any such additional debt financing that may be needed, beyond the $25.0 million of borrowing
availability on the Credit Facility, may not be available on commercially reasonable terms, if at all.
The 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 actions and stimulus measures adopted by local and federal
governments, the effects of the pandemic on our consumers and suppliers, and to the extent normal economic and operating conditions
can resume, all of which are uncertain and cannot be predicted. The inherent uncertainty surrounding COVID-19, due in part to
rapidly changing governmental directives, public health challenges and progress, and market reactions thereto, also makes it more
challenging for our management to estimate the potential impact and the future performance of our business. Accordingly, the
anticipated negative financial impact to our operating results cannot be reasonably estimated at this time, but could be material and
last for an extended period of time.
General economic conditions, particularly in the U.S., affect our industry, demand for our products and our business, and results
of operations.
Demand for premium sport boats, outboard boats, and sterndrive boats can be, and in the past has been, significantly influenced by
weak economic conditions, low consumer confidence, high unemployment, and increased market volatility worldwide, especially in
the U.S. In times of economic uncertainty and contraction, consumers tend to have less discretionary income and tend to defer or
avoid expenditures for discretionary items, such as our products. Sales of our products are highly sensitive to personal discretionary
spending levels. Our business is cyclical in nature and its success is impacted by economic conditions, the overall level of consumer
confidence and discretionary income levels. Any substantial deterioration in general economic conditions (including as a result of the
COVID-19 Pandemic) that diminishes consumer confidence or discretionary income may reduce our sales and materially adversely
affect our business, financial condition and results of operations. Corporate restructurings, layoffs, declines in the value of investments
and residential real estate, higher fuel and energy prices, higher interest rates, and increases in federal and state taxation may also each
materially adversely affect our business, financial condition, and results of operations.
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Consumers often finance purchases of our products, and as a result, consumer credit market conditions influence demand for our
boats. If credit conditions worsen (including as a result of the COVID-19 Pandemic), and adversely affect the ability of consumers to
finance potential purchases at acceptable terms and interest rates, it could result in a decrease in the sales of our products.
Our annual and quarterly financial results are subject to significant fluctuations depending on various factors, many of which are
beyond our control.
Our sales and operating results can vary significantly from quarter to quarter and year to year depending on various factors, many of
which are beyond our control. These factors include, but are not limited to:
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seasonal consumer demand for our products;
discretionary spending habits;
changes in pricing in, or the availability of supply in, the used powerboat market;
failure to maintain a premium brand image;
disruption in the operation of our manufacturing facilities, including those as a result of the COVID-19 Pandemic;
variations in the timing and volume of our sales;
the timing of our expenditures in anticipation of future sales;
sales promotions by us and our competitors;
changes in competitive and economic conditions generally;
consumer preferences and competition for consumers leisure time, including those as a result of the COVID-19 Pandemic;
impact of unfavorable weather conditions;
changes in trade policy or the imposition of additional tariffs;
civil insurrection or social unrest (such as the recent protests and social movements across several North American cities);
changes in the cost or availability of our labor; and
increased fuel prices.
Due to these and other factors, our results of operations may decline quickly and significantly in response to changes in order patterns
or rapid decreases in demand for our products. We anticipate that fluctuations in operating results will continue in the future.
Unfavorable weather conditions may have a material adverse effect on our business, financial condition, and results of operations,
especially during the peak boating season.
Adverse weather conditions in any year in any particular geographic region may adversely affect sales in that region, especially during
the peak boating season. Sales of our products are generally stronger just before and during spring and summer, which represent the
peak boating months in most of our markets, and favorable weather during these months generally has a positive effect on consumer
demand. Conversely, unseasonably cool weather, excessive rainfall, reduced rainfall levels, or drought conditions during these periods
may close area boating locations or render boating dangerous or inconvenient, thereby generally reducing consumer demand for our
products. Our annual results would be materially and adversely affected if our net sales were to fall below expected seasonal levels
during these periods. We may also experience more pronounced seasonal fluctuation in net sales in the future as we continue to
expand our businesses. Additionally, to the extent that unfavorable weather conditions are exacerbated by global climate change or
otherwise, our sales may be affected to a greater degree than we have previously experienced. There can be no assurance that weather
conditions will not have a material effect on the sales of any of our products.
Our results after acquisitions may suffer if we do not effectively manage our expanded operations following our recent
acquisitions.
The size of our business has increased significantly as a result of our acquisitions. Our future success depends, in part, on our ability to
including challenges related to the
manage this expanded business, which will pose substantial challenges for management,
management and monitoring of additional operations and associated increased costs and complexity. There can be no assurances we
will be successful or that we will realize the expected benefits currently anticipated from these or any other acquisitions.
The acquisitions may underperform relative to our expectations.
We may not be able to maintain the levels of revenue, earnings or operating efficiency as a combined business that MasterCraft,
NauticStar, and Crest have previously achieved or might achieve separately. The business and financial performance of the
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acquisitions are subject to certain risks and uncertainties, including the risk of the loss of, or changes to, its relationships with its
dealers and suppliers, increased product liability and warranty claims, and negative publicity or other events that could diminish the
value of the NauticStar or Crest brand, which in turn could also adversely affect the MasterCraft brand. If we are unable to achieve the
same growth, revenues and profitability that our acquisitions have achieved in the past, our business, financial condition, results of
operations, or cash flows could be adversely affected.
In relation to such acquisitions, we recognized significantly higher amounts of intangible assets, including goodwill. These intangible
assets are subject to impairment testing and an impairment of our 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 COVID-19 Pandemic. 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. This impairment
charge, along with the impairment charge recognized in fiscal 2019 related to NauticStar, resulted in the elimination of all goodwill
associated with the NauticStar and Crest acquisitions. However as of June 30, 2020, there was $47.5 million of intangible assets other
than goodwill remaining on our consolidated balance sheet. We could continue to incur a significant impact to our financial statements
in the form of impairment charges related to these remaining intangible assets if assumptions and expectations related to our
acquisitions are not realized.
We depend on our network of independent dealers and face increasing competition for dealers.
Substantially all of our sales are derived from our network of independent dealers. Our agreements with dealers in our networks
typically provide for one-year terms, although some agreements have longer terms. The loss of one or more of these dealers could
have a material adverse effect on our financial condition and results of operations. The number of dealers supporting our products and
the quality of their marketing and servicing efforts are essential to our ability to generate sales. Competition for dealers among
performance sport boat manufacturers continues to increase based on the quality, price, value, and availability of the manufacturers
products, the manufacturers attention to customer service, and the marketing support that the manufacturer provides to the dealers.
We face intense competition from other premium performance sport, outboard, and sterndrive boat manufacturers in attracting and
retaining dealers (some of whom also sell products from other premium performance sport, outboard, and sterndrive boat
manufacturers), affecting our ability to attract or retain relationships with qualified and successful dealers. Although our management
believes that the quality of our products in the premium performance sport, outboard boat, sterndrive boat industries should permit us
to maintain our relationships with our dealers and our market share position, there can be no assurance that we will be able to maintain
or improve our relationships with our dealers or our market share position. In addition, independent dealers in the powerboat industry
have experienced significant consolidation in recent years, which could result in the loss of one or more of our dealers in the future if
the surviving entity in any such consolidation purchases similar products from a competitor. A substantial deterioration in the number
of dealers or quality of our network of dealers would have a material adverse effect on our business, financial condition, results of
operations, and cash flows.
Our success depends, in part, on the financial health of our dealers and their continued access to financing.
Because we sell nearly all of our products through dealers, their financial health is critical to our success. Our business, financial
condition, and results of operations may be adversely affected if the financial health of the dealers that sell our products suffers. Their
financial health may suffer for a variety of reasons, including a downturn in general economic conditions, rising interest rates, higher
rents, increased labor costs and taxes, compliance with regulations, and personal financial issues (all of which may be negatively
impacted by the COVID-19 Pandemic).
In addition, our dealers require adequate liquidity to finance their operations, including purchases of our products. Dealers are subject
to numerous risks and uncertainties that could unfavorably affect their liquidity positions, including, among other things, continued
access to adequate financing sources on a timely basis on reasonable terms. These sources of financing are vital to our ability to sell
products through our distribution network. Access to floor plan financing generally facilitates our dealers ability to purchase boats
from us, and their financed purchases reduce our working capital requirements. If floor plan financing were not available to our
dealers or if the cost of the financing increases, our sales and our working capital levels would be adversely affected. The availability
and terms of financing offered by our dealers floor plan financing providers will continue to be influenced by:
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their ability to access certain capital markets and to fund their operations in a cost-effective manner;
changes in interest rates;
the performance of their overall credit portfolios;
their willingness to accept the risks associated with lending to dealers; and
the overall creditworthiness of those dealers.
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We may be required to repurchase inventory of certain dealers.
Many of our dealers have floor plan financing arrangements with third-party finance companies that enable the dealers to purchase our
products. In connection with these agreements, we may have an obligation to repurchase our products from a finance company under
certain circumstances, and we may not have any control over the timing or amount of any repurchase obligation nor have access to
capital on terms acceptable to us to satisfy any repurchase obligation. This obligation is triggered if a dealer defaults on its debt
obligations to a finance company, the finance company repossesses the boat and the boat is returned to us. Our obligation to
repurchase a repossessed boat for the unpaid balance of our original invoice price for the boat is subject to reduction or limitation
based on the age and condition of the boat at the time of repurchase, and in certain cases, by an aggregate cap on repurchase
obligations associated with a particular floor plan financing program. In addition, applicable laws regulating dealer relations may also
require us to repurchase our products from our dealers under certain circumstances, and we may not have any control over the timing
or amount of any repurchase obligation nor have access to capital on terms acceptable to us to satisfy any repurchase obligation. If we
were obligated to repurchase a significant number of units under any repurchase agreement or under applicable dealer laws, our
business, operating results, financial condition and cash flows could be adversely affected.
If we fail to manage our manufacturing levels while still addressing the seasonal retail pattern for our products, our business and
margins may suffer.
The seasonality of retail demand for our products, together with our goal of balancing production throughout the year, requires us to
manage our manufacturing and allocate our products to our dealer network to address anticipated retail demand. Our dealers must
manage seasonal changes in consumer demand and inventory. If our dealers reduce their inventories in response to weakness in retail
demand, we could be required to reduce our production, resulting in lower rates of absorption of fixed costs in our manufacturing and,
therefore, lower margins. As a result, we must balance the economies of level production with the seasonal retail sales pattern
experienced by our dealers. In addition, 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. Failure to adjust manufacturing levels adequately may have a material adverse
effect on our financial condition, results of operations, and cash flows.
Our sales and profitability depend, in part, on the successful introduction of new products.
Market acceptance of our products depends on our technological innovation and our ability to implement technology in our boats. Our
sales and profitability may be adversely affected by difficulties or delays in product development, such as an inability to develop
viable or innovative new products. In February 2019 we introduced a new brand, Aviara, with sales beginning in the first quarter of
2020. Our failure to introduce new technologies and product offerings that consumers desire, including our new Aviara models, could
adversely affect our business, financial condition, results of operations, and cash flows. Also, our ability to achieve higher margins, in
part, relies on the introduction of new features or enhancements to our existing boat models. If we fail to introduce new features or
those we introduce fail to gain market acceptance, our margins may suffer.
In addition, some of our direct competitors and indirect competitors may have significantly more resources to develop and patent new
technologies. It is possible that our competitors will develop and patent equivalent or superior technologies and other products that
compete with ours. They may assert these patents against us and we may be required to license these patents on unfavorable terms or
cease using the technology covered by these patents, either of which would harm our competitive position and may materially
adversely affect our business.
We also cannot be certain that our products or features have not infringed or will not infringe the proprietary rights of others. Any
such infringement could cause third parties, including our competitors, to bring claims against us, resulting in significant costs and
potential damages.
We have a fixed cost base that will affect our profitability if our sales decrease.
The fixed cost levels of operating a powerboat manufacturer can put pressure on profit margins when sales and production decline.
Our profitability depends, in part, on our ability to spread fixed costs over a sufficiently large number of products sold and shipped,
and if we make a decision to reduce our rate of production, gross or net margins could be negatively affected. Consequently, decreased
demand or the need to reduce production can lower our ability to absorb fixed costs and materially impact our financial condition or
results of operations.
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Our industry is characterized by intense competition, which affects our sales and profits.
The premium performance sport boat, outboard, and sterndrive boat categories and the powerboat industry as a whole are highly
competitive for consumers and dealers. We also compete against consumer demand for used boats. Competition affects our ability to
succeed in both the markets we currently serve and new markets that we may enter in the future. Competition is based primarily on
brand name, price, product selection, and product performance. We compete with several large manufacturers that may have greater
financial, marketing, and other resources than we do and who are represented by dealers in the markets in which we now operate and
into which we plan to expand. We also compete with a variety of small, independent manufacturers. We cannot provide assurance that
we will not face greater competition from existing large or small manufacturers or that we will be able to compete successfully with
new competitors. Our failure to compete effectively with our current and future competitors would adversely affect our business,
financial condition, and results of operations.
Our sales may be adversely impacted by increased consumer preference for used boats or the supply of new boats by competitors in
excess of demand.
During the economic downturn that commenced in 2008, we observed a shift in consumer demand toward purchasing more used
boats, primarily because prices for used boats are typically lower than retail prices for new boats. If this were to occur again (including
as a result of the COVID-19 Pandemic), it could have the effect of reducing demand among retail purchasers for our new boats. Also,
while we have taken steps designed to balance production volumes for our boats with demand, our competitors could choose to reduce
the price of their products, which could have the effect of reducing demand for our new boats. Reduced demand for new boats could
lead to reduced sales by us, which could adversely affect our business, results of operations, and financial condition.
Our international markets require significant management attention, expose us to difficulties presented by international economic,
political, legal, and business factors, and may not be successful or produce desired levels of sales and profitability.
We currently sell our products throughout the world. International markets have been, and will continue to be, a focus for sales
growth. We believe many opportunities exist in the international markets, and over time we intend for international sales to comprise a
larger percentage of our total revenue. Several factors, including weakened international economic conditions, could adversely affect
such growth and there can be no assurance that we will be able to sustain our current international sales levels in the future. The
expansion of our existing international operations and entry into additional international markets require significant management
attention. Some of the countries in which we market, and in which our distributors or licensee(s) sell our products, are subject to
political, economic, or social instability. Our international operations expose us and our representatives, agents, and distributors to
risks inherent in operating in foreign jurisdictions. These risks include, but are not limited to:
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increased costs of customizing products for foreign countries;
unfamiliarity with local demographics, consumer preferences, and discretionary spending patterns;
difficulties in attracting consumers due to a reduced level of consumer familiarity with our brand;
competition with new, unfamiliar competitors;
the imposition of additional foreign governmental controls or regulations, including rules relating to environmental, health,
and safety matters and regulations, and other laws applicable to publicly-traded companies, such as the Foreign Corrupt
Practices Act, or the FCPA;
new or enhanced trade restrictions and restrictions on the activities of foreign agents, representatives, and distributors;
the imposition of increases in costly and lengthy import and export licensing and other compliance requirements, customs
duties and tariffs, license obligations, and other non-tariff barriers to trade;
changes to the U.S.s participation in, withdrawal out of, renegotiation of certain international trade agreements or other
major trade related issues including the non-renewal of expiring favorable tariffs granted to developing countries, tariff
quotas, and retaliatory tariffs, trade sanctions, new or onerous trade restrictions, embargoes and other stringent government
controls;
the relative strength of the U.S. dollar compared to local currency, making our products less price-competitive relative to
products manufactured outside of the U.S.;
laws and business practices favoring local companies;
longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal
systems;
difficulties in enforcing or defending intellectual property rights; and
insurrection or war that may disrupt or limit our relationships with our foreign consumers.
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Our international operations may not produce desired levels of total sales, or one or more of the foregoing factors may harm our
business, financial condition, or results of operations.
International tariffs could materially and adversely affect our business and results of operations.
The current political landscape has introduced significant uncertainty with respect to future trade regulations and existing international
trade agreements, as shown by the recent U.S.-initiated renegotiation of the North America Free Trade Agreement, and Brexit in
Europe. This uncertainty includes the possibility of imposing additional tariffs or penalties on products manufactured outside the U.S
and the potential for increased trade barriers between the UK and the European Union. The institution of global trade tariffs carries the
risk of negatively affecting global economic conditions, which could have a negative impact on our business and results of operations.
In addition, U.S. initiated tariffs on certain foreign goods, including raw materials, commodities, and products manufactured outside
the United States that are used in our manufacturing processes may cause our manufacturing cost to rise, which would have a negative
impact on our business and results of operations.
Fluctuations in foreign currency exchange rates could result in declines in our reported sales and net earnings.
The changing relationships of primarily the U.S. dollar to the Canadian dollar, the Australian dollar, the Euro, the British pound
sterling, the Japanese yen, and certain other foreign currencies have from time to time had a negative impact on our results of
operations. Fluctuations in the value of the U.S. dollar relative to these foreign currencies can adversely affect the price of our
products in foreign markets and the costs we incur to import certain components for our products. We will often attempt to offset these
higher prices with increased discounts, which can lead to reduced net sales per unit.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase
significantly.
Borrowings under our revolving credit facility and term loans are at variable rates of interest and expose us to interest rate risk.
Reference rates used to determine the applicable interest rates for our debt are currently at relatively low levels. If interest rates
increase, the debt service obligations on our indebtedness will increase even if the amount borrowed remains the same, and our net
income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Please see Part II, Item
7A, Quantitative and Qualitative Disclosures about Market Risk for discussion of our market risk related to interest rates.
The Chief Executive of the U.K. Financial Conduct Authority (the FCA), which regulates LIBOR, has announced that the FCA will
no longer persuade or compel banks to submit rates for the calculation of LIBOR after calendar year 2021. That announcement
indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after calendar year 2021. Moreover, it
is possible that LIBOR will be discontinued or modified prior to the end of calendar year 2021. All of our $108.6 million of debt
outstanding under our credit agreement as of June 30, 2020 bears interest at a floating rate that uses either LIBOR or the prime rate as
the reference rate to calculate our interest rate. Our credit agreement provides that, if the administrative agent has determined that
adequate means do not exist for ascertaining LIBOR or that LIBOR does not adequately and fairly reflect the cost to lenders for
making, funding or maintaining their loans, then all of our outstanding loans under the credit agreement will be converted into loans
that accrue interest at the prime rate. Further, the lenders under our credit agreement will no longer be obligated to make loans using
LIBOR as the reference rate.
Uncertainty as to the nature of potential changes to LIBOR, fallback provisions, alternative reference rates or other reforms could
adversely impact our interest expense on our floating rate debt that currently uses LIBOR as the applicable reference rate. Further, the
discontinuance or modification of LIBOR and the use of the prime rate may result in an increase in the cost of future indebtedness,
which could have a material adverse effect on our financial condition, cash flow and results of operations. We intend to closely
monitor the financial markets and the use of fallback provisions and alternative reference rates in anticipation of the discontinuance or
modification of LIBOR by the end of calendar year 2021.
We compete with a variety of other activities for consumers scarce leisure time.
Our boats are used for recreational and sport purposes, and demand for our boats may be adversely affected by competition from other
activities that occupy consumers leisure time and by changes in consumer lifestyle, usage pattern, or taste. Similarly, an overall
decrease in consumer leisure time may reduce consumers willingness to purchase and enjoy our products.
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Our success depends on the continued strength of our brands and the value of our brands, and sales of our products could be
diminished if we, the athletes who use our products, or the sports and activities in which our products are used are associated with
negative publicity.
We believe that our brands are a significant contributor to the success of our business and that maintaining and enhancing our brands
is important to expanding our consumer and dealer base. Failure to continue to protect our brands may adversely affect our business,
financial condition, and results of operations.
Negative publicity, including that resulting from severe injuries or death occurring in the sports and activities in which our products
are used, could negatively affect our reputation and result in restrictions, recalls, or bans on the use of our products. Further, actions
taken by athletes associated with our products that harm the reputations of those athletes could also harm our brand image and
adversely affect our financial condition. If the popularity of the sports and activities for which we design, manufacture, and sell
products were to decrease as a result of these risks or any negative publicity, sales of our products could decrease, which could have
an adverse effect on our net sales, profitability, and operating results. In addition, if we become exposed to additional claims and
litigation relating to the use of our products, our reputation may be adversely affected by such claims, whether or not successful,
including by generating potential negative publicity about our products, which could adversely impact our business and financial
condition.
We may not be able to execute our manufacturing strategy successfully, which could cause the profitability of our products to
suffer.
Our manufacturing strategy is designed to improve product quality and increase productivity, while reducing costs and increasing
flexibility to respond to ongoing changes in the marketplace. To implement this strategy, we must be successful in our continuous
improvement efforts, which depend on the involvement of management, production employees, and suppliers. Any inability to achieve
these objectives could adversely impact the profitability of our products and our ability to deliver desirable products to our consumers.
Our ability to meet our manufacturing workforce needs is crucial to our results of operations and future sales and profitability.
We rely on the existence of an available hourly workforce to manufacture our boats. We cannot provide assurance that we will be able
to attract and retain qualified employees to meet current or future manufacturing needs at a reasonable cost, or at all. Although none of
our employees are currently covered by collective bargaining agreements, we cannot provide assurance that our employees will not
elect to be represented by labor unions in the future, which could increase our labor costs. Additionally, competition for qualified
employees could require us to pay higher wages to attract a sufficient number of employees. Significant increases in manufacturing
workforce costs could materially adversely affect our business, financial condition, or results of operations.
We rely on third-party suppliers and, in particular, suppliers of the engine packages used in the manufacturing of our boats.
We depend on third-party suppliers to provide components and raw materials essential to the construction of our boats. While we
believe that our relationships with our current suppliers are sufficient to provide the materials necessary to meet present production
demand, we cannot provide assurance that these relationships will continue or that the quantity or quality of materials available from
these suppliers will be sufficient to meet our future needs, irrespective of whether we successfully implement our growth strategy. Our
suppliers ability to provide the components and raw materials essential to the construction of our boats may also be adversely
impacted as a result of the COVID-19 Pandemic. As production increases, our need for raw materials and supplies will increase. Our
suppliers must be prepared to ramp up operations and, in many cases, hire additional workers and/or expand capacity in order to fulfill
the orders placed by us and other consumers. Operational and financial difficulties that our suppliers may face in the future could
adversely affect their ability to supply us with the parts and components we need, which could significantly disrupt our operations.
The availability and cost of engines used in the manufacture of our boats are especially critical. For fiscal 2020, we purchased all of
the inboard engine packages for our MasterCraft brand boats from Ilmor. We also maintain a strong and long-standing relationship
with our primary supplier of NauticStar engine packages, Yamaha, and our primary supplier of Crest engine packages, Mercury.
While we believe that our relationships with these suppliers are sufficient to provide the materials necessary to meet present
production demand, there can be no assurance that these relationships will continue or that the quantity or quality of the engines
provided will be sufficient to meet our future needs, irrespective of whether we successfully implement our growth strategy. If we are
required to replace these suppliers, it could cause a decrease in products available for sale or an increase in the cost of goods sold,
either of which could adversely affect our business, financial condition, and results of operations. In addition to the risk of interruption
of our engine supply, these suppliers could potentially exert significant bargaining power over price, quality, warranty claims, or other
terms relating to the engines we use. We are required to purchase a minimum volume of engines from Ilmor annually. In addition,
MasterCraft could be required to pay a penalty to Ilmor in order to maintain exclusivity if annual purchases under the agreement fail to
meet a certain threshold. While these minimums are significantly below our current volumes, there can be no assurance that we will
continue to meet these minimums in the future.
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Termination or interruption of informal supply arrangements could have a material adverse effect on our business or results of
operations.
We have informal supply arrangements with some of our suppliers, including the sole supplier of our gas and ballast tanks. In the
event of a termination of a supply arrangement, there can be no assurance that alternate supply arrangements will be made on
satisfactory terms. If we need to enter into supply arrangements on unsatisfactory terms, or if there are any delays to our supply
arrangements, it could adversely affect our business and operating results.
We depend on key personnel and we may not be able to retain them or attract, assimilate, and retain highly qualified employees in
the future.
Our future success will depend in significant part on the continued service of our senior management team and our continuing ability
to attract, assimilate, and retain highly qualified and skilled managerial, product development, manufacturing, marketing, and other
personnel. The loss of the services of any members of our senior management or other key personnel or the inability to hire or retain
qualified personnel in the future could adversely affect our business, financial condition, and results of operations.
We may attempt to grow our business through additional acquisitions or strategic alliances and new partnerships, which we may
not be successful in completing or integrating.
We may in the future explore acquisitions and strategic alliances that will enable us to acquire complementary skills and capabilities,
offer new products, expand our consumer base, enter new product categories or geographic markets, and obtain other competitive
advantages. We cannot provide assurance, however, that we will identify acquisition candidates or strategic partners that are suitable
to our business, obtain financing on satisfactory terms, complete acquisitions or strategic alliances, or successfully integrate acquired
operations into our existing operations. Once integrated, acquired operations may not achieve anticipated levels of sales or
profitability, or otherwise perform as expected. Acquisitions also involve special risks, including risks associated with unanticipated
challenges, liabilities and contingencies, and diversion of management attention and resources from our existing operations. Similarly,
our partnership with leading franchises from other industries to market our products or with third-party technology providers to
introduce new technology to the market may not achieve anticipated levels of consumer enthusiasm and acceptance, or achieve
anticipated levels of sales or profitability, or otherwise perform as expected.
Our intellectual property rights may be inadequate to protect our business.
We attempt to protect our intellectual property through a combination of patent, trademark, copyright, protected design, and trade
secret laws. We hold patents, trademarks, copyrights, and design rights relating to various aspects of our products and believe that
proprietary technical know-how is important
to our business. Proprietary rights relating to our products are protected from
unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents, trademarks, or copyrights,
to the extent they are protected designs, or to the extent they are maintained in confidence as trade secrets.
We cannot be certain that we will be issued any patents from any pending or future patent applications owned by or licensed to us, or
that the claims allowed under any issued patents will be sufficiently broad to protect our technology. Further, the patents we own
could be challenged, invalidated, or circumvented by others. Further, we cannot provide assurance that competitors will not infringe
our patents, or that we will have adequate resources to enforce our patents.
We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar
technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we
require employees, consultants, advisors, and collaborators to enter into confidentiality agreements. We cannot provide assurance that
these agreements will provide meaningful protection for our trade secrets, know-how, or other proprietary information in the event of
any unauthorized use, misappropriation, or disclosure of such trade secrets, know-how, or other proprietary information. If we are
unable to maintain the proprietary nature of our technologies, we could be materially adversely affected.
Further, we have attempted to protect certain of our vessel hull designs by seeking to register those designs with the U.S. Copyright
Office. We cannot provide assurance that our applications will be approved. If approved, protection of the vessel design lasts
ten years. However, our protected vessel hull designs could be challenged, invalidated, or circumvented by others. Further, we cannot
provide assurance that competitors will not infringe our designs, or that we will have adequate resources to enforce our rights.
We rely on our trademarks, trade names, and brand names to distinguish our products from the products of our competitors and have
registered or applied to register many of these trademarks. We cannot provide assurance that our trademark applications will be
approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event
that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand
recognition, and could require us to devote resources to advertising and marketing new brands. Further, we cannot provide assurance
that competitors will not infringe our trademarks, or that we will have adequate resources to enforce our trademarks.
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If third parties claim that we infringe on their intellectual property rights, our financial condition could be adversely affected.
We face the risk of claims that we have infringed third parties intellectual property rights. Any claims of patent or other intellectual
property infringement, even those without merit, could be expensive and time consuming to defend, cause us to cease making,
licensing, or using products that incorporate the challenged intellectual property, require us to redesign, reengineer, or rebrand our
products, if feasible, divert managements attention and resources, or require us to enter into royalty or licensing agreements in order
to obtain the right to use a third partys intellectual property. Any royalty or licensing agreements, if required, may not be available to
us on acceptable terms or at all. A successful claim of infringement against us could result in our being required to pay significant
damages, enter into costly license or royalty agreements, or stop the sale of certain products, any of which could have a negative
impact on our business, financial condition, and results of operations. While we are not currently involved in any outstanding
intellectual property litigation that we believe, individually or in the aggregate, will have a material adverse effect on our business,
financial condition, or results of operations, we cannot predict the outcome of any pending litigation and an unfavorable outcome
could have an adverse impact on our business, financial condition, or results of operations.
Product liability, warranty, personal injury, property damage, and recall claims may materially affect our financial condition and
damage our reputation.
We are engaged in a business that exposes us to claims for product liability and warranty claims in the event our products actually or
allegedly fail to perform as expected, or the use of our products results, or is alleged to result, in property damage, personal injury, or
death. We have in the past incurred such liabilities and may in the future be exposed to liability for such claims. Although we maintain
product and general liability insurance of the types and in the amounts that we believe are customary for the industry, we are not fully
insured against all such potential claims. We may experience legal claims in excess of our insurance coverage or claims that are not
covered by insurance, either of which could adversely affect our business, financial condition, and results of operations. Adverse
determination of material product liability and warranty claims made against us could have a material adverse effect on our financial
condition and harm our reputation. In addition, if any of our products are, or are alleged to be, defective, we may be required to
participate in a recall of that product if the defect or alleged defect relates to safety. These and other claims we may face could be
costly to us and require substantial management attention.
Significant product repair and/or replacement due to product warranty claims or product recalls could have a material adverse
impact on our results of operations.
We provide a limited warranty for our products. We may provide additional warranties related to certain promotional programs, as
well as warranties in certain geographical markets as determined by local regulations and market conditions.
Although we employ quality control procedures, sometimes a product is distributed that needs repair or replacement. Our standard
warranties require us or our dealers to repair or replace defective products during such warranty periods at no cost to the consumer.
Historically, product recalls have been administered through our dealers and distributors. The repair and replacement costs we could
incur in connection with a recall could adversely affect our business. In addition, product recalls could harm our reputation and cause
us to lose consumers, particularly if recalls cause consumers to question the safety or reliability of our products.
The nature of our business exposes us to workers compensation claims and other workplace liabilities.
Certain materials we use require our employees to handle potentially hazardous or toxic substances. While our employees who handle
these and other potentially hazardous or toxic materials receive specialized training and wear protective clothing, there is still a risk
that they, or others, may be exposed to these substances. Exposure to these substances could result in significant injury to our
employees and damage to our property or the property of others, including natural resource damage. Our personnel are also at risk for
other workplace- related injuries, including slips and falls. We have in the past been, and may in the future be, subject to fines,
penalties, and other liabilities in connection with any such injury or damage. Although we currently maintain what we believe to be
suitable and adequate insurance in excess of our self-insured amounts, we may be unable to maintain such insurance on acceptable
terms or such insurance may not provide adequate protection against potential liabilities.
We may be subject to information technology system failures, network disruptions, and breaches in data security.
We use many information technology systems and their underlying infrastructure to operate our business. In addition to the
disruptions that may occur from interruptions in our information technology systems, cybersecurity threats and sophisticated and
targeted cyberattacks pose a risk to our information technology systems. We have established security policies, processes, and
defenses designed to help identify and protect against intentional and unintentional misappropriation or corruption of our information
technology systems and information and disruption of our operations. Despite these efforts, our information technology systems may
be damaged, disrupted, or shut down due to attacks by unauthorized access, malicious software, computer viruses, undetected
intrusion, hardware failures, or other events, and in these circumstances our disaster recovery plans may be ineffective or inadequate.
These breaches or intrusions could lead to business interruption, exposure of proprietary or confidential information, data corruption,
21
damage to our reputation, exposure to legal and regulatory proceedings, and other costs. A security breach might also lead to
violations of privacy laws, regulations, trade guidelines or practices related to our customers and associates and could result in
potential claims from customers, associates, shareholders, or regulatory agencies. Such events could adversely impact our reputation,
business, financial position, results of operations, and cash flows. In addition, we could be adversely affected if any of our significant
customers or suppliers experiences any similar events that disrupt their business operations or damage their reputation.
While we maintain monitoring practices and protections of our information technology to reduce these risks and test our systems on an
ongoing basis for potential threats, there can be no assurance that these efforts will prevent a cyber-attack or other security breach. We
carry cybersecurity insurance to help mitigate the financial exposure and related notification procedures in the event of intentional
intrusion; however, there can be no assurance that our insurance will adequately protect against potential losses that could adversely
affect our business.
An increase in energy costs may materially adversely affect our business, financial condition, and results of operations.
Higher energy costs result in increases in operating expenses at our manufacturing facility and in the expense of shipping products to
our dealers. In addition, increases in energy costs may adversely affect the pricing and availability of petroleum-based raw materials,
such as resins and foams that are used in our products. Also, higher fuel prices may have an adverse effect on demand for our boats, as
they increase the cost of ownership and operation.
We are subject to U.S. and other anti-corruption laws, trade controls, economic sanctions, and similar laws and regulations,
including those in the jurisdictions where we operate. Our failure to comply with these laws and regulations could subject us to
civil, criminal, and administrative penalties and harm our reputation.
Doing business on a worldwide basis requires us to comply with the laws and regulations of various foreign jurisdictions. These laws
and regulations place restrictions on our operations, trade practices, partners, and investment decisions. In particular, our operations
are subject to U.S. and foreign anti-corruption and trade control laws and regulations, such as the FCPA, export controls, and
economic sanctions programs, including those administered by the U.S. Treasury Departments Office of Foreign Assets Control, or
OFAC. As a result of doing business in foreign countries and with foreign partners, we are exposed to a heightened risk of violating
anti-corruption and trade control laws and sanctions regulations.
The FCPA prohibits us from providing anything of value to foreign officials for the purpose of obtaining or retaining business or
securing any improper business advantage. It also requires us to keep books and records that accurately and fairly reflect our
transactions.
Economic sanctions programs restrict our business dealings with certain sanctioned countries, persons, and entities. In addition,
because we act through dealers and distributors, we face the risk that our dealers, distributors, or consumers might further distribute
our products to a sanctioned person or entity, or an ultimate end-user in a sanctioned country, which might subject us to an
investigation concerning compliance with OFAC or other sanctions regulations.
Violations of anti-corruption and trade control laws and sanctions regulations are punishable by civil penalties, including fines, denial
of export privileges, injunctions, asset seizures, debarment from government contracts, and revocations or restrictions of licenses, as
well as criminal fines and imprisonment. We cannot provide assurance that all of our local, strategic, or joint partners will comply
with these laws and regulations, in which case we could be held liable for actions taken inside or outside of the U.S., even though our
partners may not be subject to these laws. Such a violation could materially and adversely affect our reputation, business, results of
operations and financial condition. Our continued international expansion, including in developing countries, and our development of
new partnerships and joint venture relationships worldwide increase the risk of FCPA or OFAC violations in the future.
If we are unable to comply with environmental and other regulatory requirements, our business may be exposed to material
liability and/or fines.
Our operations are subject to extensive and frequently changing federal, state, local, and foreign laws and regulations, including those
concerning product safety, environmental protection, and occupational health and safety. Some of these laws and regulations require
us to obtain permits and limit our ability to discharge hazardous materials into the environment. If we fail to comply with these
requirements, we may be subject to civil or criminal enforcement actions that could result in the assessment of fines and penalties,
obligations to conduct remedial or corrective actions, or, in extreme circumstances, revocation of our permits or injunctions preventing
some or all of our operations. In addition, the components of our boats must meet certain regulatory standards, including stringent air
emission standards for boat engines. Failure to meet these standards could result in an inability to sell our boats in key markets, which
would adversely affect our business. Moreover, compliance with these regulatory requirements could increase the cost of our products,
which in turn, may reduce consumer demand.
22
While we believe that we are in material compliance with applicable federal, state, local, and foreign regulatory requirements, and
hold all licenses and permits required thereunder, we cannot provide assurance that we will, at all times, be able to continue to comply
with applicable regulatory requirements. Compliance with increasingly stringent regulatory and permit requirements may, in the
future, cause us to incur substantial capital costs and increase our cost of operations, or may limit our operations, all of which could
have a material adverse effect on our business or financial condition.
As with most boat construction businesses, our manufacturing processes involve the use, handling, storage, and contracting for
recycling or disposal of hazardous substances and wastes. The failure to manage or dispose of such hazardous substances and wastes
properly could expose us to material liability or fines, including liability for personal injury or property damage due to exposure to
hazardous substances, damages to natural resources, or for the investigation and remediation of environmental conditions. Under
environmental laws, we may be liable for remediation of contamination at sites where our hazardous wastes have been disposed or at
our current or former facilities, regardless of whether such facilities are owned or leased or whether the environmental conditions were
created by us, a prior owner or tenant, or a third-party. While we do not believe that we are presently subject to any such liabilities, we
cannot assure you that environmental conditions relating to our prior, existing, or future sites or operations or those of predecessor
companies will not have a material adverse effect on our business or financial condition.
Negative public perception of our products or restrictions on the access or the use of our products in certain locations could
materially adversely affect our business or results of operations.
Demand for our products depends in part on their acceptance by the public. Public concerns about the environmental impact of our
products or their perceived safety could result in diminished public perception of the products we sell. Government, media, or activist
pressure to limit emissions could also negatively impact consumers perceptions of our products. Any decline in the public acceptance
of our products could negatively impact their sales or lead to changes in laws, rules and regulations that prevent access to certain
locations or restrict use or manner of use in certain areas or during certain times, which could also negatively impact sales. Any
material decline in the public acceptance of our products could impact our ability to retain existing consumers or attract new ones
which, in turn, could have a material adverse effect on our business, results of operations or financial condition.
Natural disasters, environmental disasters, the effects of climate change, pandemics, or other disruptions, or civil insurrection or
social unrest at our manufacturing facilities or in other regions of the United States could adversely affect our business, financial
condition, and results of operations.
We rely on the continuous operation of our manufacturing facilities in Vonore, Tennessee, Armory, Mississippi, and Owosso,
Michigan for the production of our products. Any natural disaster or other serious disruption to our facilities due to fire, snow, flood,
earthquake, pandemics, civil insurrection or social unrest or any other unforeseen circumstance could adversely affect our business,
financial condition, and results of operations. Changes in climate could adversely affect our operations by limiting or increasing the
costs associated with equipment or fuel supplies. In addition, adverse weather conditions, such as increased frequency and/or severity
of storms, or floods could impair our ability to operate by damaging our facilities and equipment or restricting product delivery to
customers. The occurrence of any disruption at our manufacturing facilities, even for a short period of time, may have an adverse
effect on our productivity and profitability, during and after the period of the disruption. These disruptions may also cause personal
injury and loss of life, severe damage to or destruction of property and equipment, and environmental damage. Although we maintain
property, casualty, and business interruption insurance of the types and in the amounts that we believe are customary for the industry,
we are not fully insured against all potential natural disasters or other disruptions to our manufacturing facilities.
In addition, we have dealers and third-party suppliers located in regions of the United States that have been and may be exposed to
damaging storms, such as hurricanes and tornados, floods and environmental disasters. Although preventative measures may help to
mitigate damage, the damage and disruption resulting from natural and environmental disasters may be significant. Such disasters can
disrupt our consumers, dealers, or suppliers, which can interrupt our operational processes and our sales and profits.
Increases in income tax rates or changes in income tax laws or enforcement could have a material adverse impact on our financial
results.
Changes in domestic and international tax legislation could expose us to additional tax liability. Although we monitor changes in tax
laws and work to mitigate the impact of proposed changes, such changes may negatively impact our financial results. In addition,
increases in individual income tax rates would negatively affect our potential consumers discretionary income and could decrease the
demand for our products.
23
Our credit facilities contain covenants which may limit our operating flexibility; failure to comply with covenants may result in our
lenders restricting or terminating our ability to borrow under such credit facilities.
In the past, we have relied on our existing credit facilities to provide us with adequate liquidity to operate our business. The
availability of borrowing amounts under our credit facilities is dependent on compliance with the debt covenants set forth in our credit
agreement. Violation of those covenants, whether as a result of operating losses or otherwise, could result in our lenders restricting or
terminating our borrowing ability under our credit facilities. If our lenders reduce or terminate our access to amounts under our credit
facilities, we may not have sufficient capital to fund our working capital and other needs, and we may need to secure additional capital
or financing to fund our operations or to repay outstanding debt under our credit facilities. We cannot provide assurance that we will
be successful in ensuring the availability of amounts under our credit facilities or in raising additional capital, or that any amount, if
raised, will be sufficient to meet our cash needs or will be on terms as favorable as those which have been available to us historically.
If we are not able to maintain our ability to borrow under our credit facilities, or to raise additional capital when needed, our business
and operations will be materially adversely affected.
Risks Relating to Ownership of our Common Stock
Shareholders may be diluted by future issuances of common stock in connection with our incentive plans, acquisitions, or
otherwise; future sales of such shares in the public market, or the expectations that such sales may occur, could lower our stock
price.
Our amended and restated certificate of incorporation authorizes us to issue shares of common stock and options, rights, warrants, and
appreciation rights relating to common stock for the consideration and on the terms and conditions established by our board of
directors in its sole discretion, whether in connection with acquisitions or otherwise.
Any common stock that we issue, including under our 2015 Incentive Award Plan or other equity incentive plans that we may adopt in
the future, would dilute the percentage ownership of holders of our common stock.
Our common stock price may be volatile or may decline regardless of our operating performance.
It is possible that an active trading market for our common stock will not be sustained, which could make it difficult for investors to
sell their shares of our common stock at an attractive price or at all.
Volatility in the market price of our common stock may prevent investors from being able to sell their shares at or above the price they
paid for them. Many factors, which are outside our control, may cause the market price of our common stock to fluctuate significantly,
including those described elsewhere in this Risk Factors section and this Form 10-K, as well as the following:
•
•
•
•
•
•
our operating and financial performance and prospects;
our quarterly or annual earnings or those of other companies in our industry compared to market expectations;
conditions that impact demand for our services;
future announcements concerning our business or our competitors businesses;
the publics reaction to our press releases, other public announcements, and filings with the SEC;
coverage by or changes in financial estimates by securities analysts or failure to meet their expectations;
• market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
•
•
•
•
•
•
•
•
strategic actions by us or our competitors, such as acquisitions or restructurings;
changes in laws or regulations that adversely affect our industry or us;
changes in accounting standards, policies, guidance, interpretations, or principles;
changes in senior management or key personnel;
issuances, exchanges or sales, or expected issuances, exchanges or sales of our capital stock;
changes in our dividend policy;
adverse resolution of new or pending litigation against us; and
changes in general market, economic, and political conditions in the U.S. and global economies or financial markets,
including those resulting from the COVID-19 Pandemic, natural disasters, terrorist attacks, acts of war, civil insurrection and
social unrest, and responses to such events.
24
As a result, volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or
above the price they paid for it or at all. These broad market and industry factors may materially reduce the market price of our
common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading
volume of our common stock is low. As a result, investors may suffer a loss on their investment.
We do not intend to pay dividends on our common stock for the foreseeable future.
While we have paid dividends in the past, we presently have no intention to pay dividends on our common stock at any time in the
foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and
will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions, and
other factors that our board of directors may deem relevant. Certain of our debt instruments contain covenants that restrict the ability
of our subsidiaries to pay dividends to us. In addition, we will be permitted under the terms of our debt instruments to incur additional
indebtedness, which may restrict or prevent us from paying dividends on our common stock. Furthermore, our ability to declare and
pay dividends may be limited by instruments governing future outstanding indebtedness we may incur.
Delaware law and certain provisions in our amended and restated certificate of incorporation may prevent efforts by our
stockholders to change the direction or management of our Company.
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third
party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. In addition, our amended
and restated certificate of incorporation and our amended and restated by-laws currently contain provisions that may make the
acquisition of our company more difficult without the approval of our board of directors, including, but not limited to, the following:
•
•
our board of directors will be classified into three classes until our 2022 annual meeting of stockholders;
only our board of directors may call special meetings of our stockholders; and
• we require advance notice and duration of ownership requirements for stockholder proposals.
These provisions could discourage, delay, or prevent a transaction involving a change in control of our company. These provisions
could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and cause us to
take other corporate actions they desire. In addition, because our board of directors is responsible for appointing the members of our
management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our
management team.
For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements,
including those relating to accounting standards and disclosure about our executive compensation, that apply to other public
companies.
We are an emerging growth company, as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. As such, we
are eligible to 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, (i) not being required to comply with the auditor attestation
requirements of Section 404(b) of the Sarbanes-Oxley Act, (ii) reduced disclosure obligations regarding executive compensation in
our periodic reports and proxy statements, and (iii) exemptions from the requirements of holding a non-binding advisory vote on
executive compensation and of stockholder approval of any golden parachute payments not previously approved. We have elected to
adopt these reduced disclosure requirements. We cannot predict if investors will find our common stock less attractive as a result of
our taking advantage of these exemptions and as a result, there may be a less active trading market for our common stock and our
stock price may be more volatile.
We will remain an emerging growth company until June 30, 2021, which is the last day of our fiscal year following the fifth
anniversary of the date of completion of our initial public offering.
The obligations associated with being a public company require significant resources and management attention, which may divert
us from our business operations.
As a result of our initial public offering, we are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley
Act. The Exchange Act requires that we file annual, quarterly, and current reports with respect to our business and financial condition.
The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for
financial reporting. As a result, we have and will continue to incur significant legal, accounting, and other expenses that we did not
previously incur.
25
In addition, the need to establish the corporate infrastructure demanded of a public company may divert managements attention from
implementing our business strategy, which could prevent us from improving our business, results of operations, and financial
condition. We have made, and will continue to make, changes to our internal controls, including information technology controls, and
procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the
measures we take may not be sufficient to satisfy our obligations as a public company. If we do not continue to develop and
implement the right processes and tools to manage our changing enterprise and maintain our culture, our ability to compete
successfully and achieve our business objectives could be impaired, which could negatively impact our business, financial condition,
and results of operations. In addition, we cannot predict or estimate the amount of additional costs we may incur to comply with these
requirements. We anticipate that these costs will be material to our general and administrative expenses.
Furthermore, as a public company, we have and will continue to incur additional legal, accounting, and other expenses that have not
been reflected in our historical financial statements. In addition, rules implemented by the SEC and NASDAQ have imposed various
requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and changes
in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these
compliance initiatives. These rules and regulations result in our incurring legal and financial compliance costs and will make some
activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more
expensive for us to maintain director and officer liability insurance, and we may be required to accept reduced policy limits and
coverage or incur substantially higher costs to maintain the same or similar coverage. As a result, it may be more difficult for us to
attract and retain qualified people to serve on our board of directors, on our board committees, or as executive officers.
Our failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act as a public company could have a material adverse effect on our business and share price.
Prior to the completion of our initial public offering, we had not operated as a public company and were not required to independently
comply with Section 404(a) of the Sarbanes-Oxley Act. Section 404(a) of the Sarbanes-Oxley Act requires annual management
assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we file with
the SEC. We were required to meet these standards in the course of preparing our financial statements as of and for the year ended
June 30, 2016, and our management is required to report on the effectiveness of our internal control over financial reporting for such
year and annually thereafter. Additionally, once we are no longer an emerging growth company, our independent registered public
accounting firm will be required pursuant to Section 404(b) of the Sarbanes-Oxley Act to attest to the effectiveness of our internal
control over financial reporting on an annual basis. The rules governing the standards that must be met for our management to assess
our internal control over financial reporting are complex and require significant documentation, testing, and possible remediation.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance with generally accepted accounting principles. We are currently in
the process of reviewing, documenting, and testing our internal control over financial reporting. We may encounter problems or delays
in implementing any changes necessary to make a favorable assessment of our internal control over financial reporting. In addition,
we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable
attestation in connection with the attestation to be provided by our independent registered public accounting firm after we cease to be
an emerging growth company. If we cannot favorably assess the effectiveness of our internal control over financial reporting, or if our
independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls after we
cease to be an emerging growth company, investors could lose confidence in our financial information and the price of our common
stock could decline.
Additionally, the existence of any material weakness or significant deficiency may require management to devote significant time and
incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not be able to
remediate any such material weaknesses or significant deficiencies in a timely manner. The existence of any material weakness in our
internal control over financial reporting could also result in errors in our financial statements that could require us to make out of
period adjustments, restate our financial statements, cause us to fail to meet our reporting obligations, and cause stockholders to lose
confidence in our reported financial information, all of which could materially and adversely affect our business and share price.
If securities analysts do not publish research or reports about our company, or if they issue unfavorable commentary about us or
our industry or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock depends in part on the research and reports that third-party securities analysts publish about
our company and our industry. We may be unable or slow to attract research coverage and if one or more analysts cease coverage of
our company, we could lose visibility in the market. In addition, one or more of these analysts could downgrade our common stock or
issue other negative commentary about our company or our industry. As a result of one or more of these factors, the trading price of
our common stock could decline.
26
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
As of June 30, 2020, all our MasterCraft and Aviara boats are manufactured and lake-tested at our 250,000-square-foot manufacturing
facility located on approximately 60 acres of lakefront land in Vonore, Tennessee. In addition, we own a 35,000 square-foot facility in
Vonore where we manufacture trailers, and we lease a 3,000 square-foot warehouse facility in West Yorkshire, England for
warehousing of parts. All our NauticStar boats are manufactured in our 200,000-square-foot manufacturing facility located on 17 acres
of land in Amory, Mississippi. All our Crest boats are manufactured in a more than 140,000-square-foot manufacturing facility located
on approximately 63 acres in Owosso, Michigan.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
27
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock has been publicly traded on the NASDAQ Global Market under the symbol MCFT since July 17, 2015. Prior to
that time, there was no public market for our common stock. On September 10, 2020, the last reported sale price on the NASDAQ
Global Market of our common stock was $17.91 per share. As of September 4, 2020, we had approximately 6,700 holders of record of
our common stock.
Capital Allocation Policy
We presently intend to retain our earnings, if any, to finance the development and growth of our business and operations and do not
anticipate declaring or paying cash dividends on our common stock, or repurchasing stock, in the foreseeable future. Any future
determination as to the declaration and payment of dividends, or the repurchase of stock, if any, will be at the discretion of our board
of directors and will depend on then-existing conditions, including our operating results, financial condition, contractual restrictions,
capital requirements, business prospects, and other factors our board of directors may deem relevant. See Item 1A Risk Factors
Risks Relating to Ownership of Our Common Stock.
Stock Performance Graph
This performance graph shall not be deemed soliciting material or to be filed with the SEC for purposes of Section 18 of the
Exchange Act of 1934, or otherwise subject to the liabilities under that section, and shall not be deemed to be incorporated by
reference into any filing of ours under the Securities Act or the Exchange Act.
The following stock performance graph illustrates the cumulative total shareholder return on our common stock for the period from
July 17, 2015 (the first day of trading for our common stock) to June 30, 2020, as compared to the Russell 2000 Index and the Dow
Jones US Recreational Products Index.
28
The comparison assumes (i) a hypothetical investment of $100 in our common stock and the two above mentioned indices on July 17,
2015 and (ii) the full reinvestment of all dividends. The comparisons in the graph are not intended to be indicative of possible future
performance of our common stock.
$270
$220
$170
$120
$70
Jun-15
Comparison of Five-Year Month Cumulative Total
Return*
Among MasterCraft, the Russell 2000 Index and
the Dow Jones US Recreational Products Index
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
MasterCraft
Russell 2000
Dow Jones US Recreational Products
* $100 invested on 7/17/15 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30, 2020.
Source: Russell Investment Group
Source: Dow Jones & Company
Securities Authorized for Issuance Under Equity Compensation Plans
For information regarding securities authorized for issuance under our equity compensation plans, see Note 10Share-Based
Compensation in Item 8 and Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical consolidated financial data and other data of MasterCraft Boat Holdings, Inc. set forth below should be read
together with Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated
financial statements and related notes, each of which is included elsewhere in this Form 10-K. In particular, certain matters may
significantly impact comparability between the years presented, including certain of those matters discussed in the footnotes to the
table below.
29
We derived the consolidated statement of operations for the fiscal years ended June 30, 2020, 2019 and 2018 and our consolidated
balance sheet data as of June 30, 2020 and 2019 from our audited consolidated financial statements and related notes included
elsewhere in this Form 10-K. We derived the consolidated statement of operations for the fiscal years ended June 30, 2017 and June
30, 2016 and our consolidated balance sheet data as of June 30, 2018, June 30, 2017 and June 30, 2016 from audited consolidated
financial statements, which are not included in this Form 10-K. Our historical results are not necessarily indicative of the results that
may be expected in the future.
(Dollars in thousands, except for per share amounts)
Consolidated statements of operations:
2020
As of and for the Fiscal Years Ended June 30,
2018
2019
2017
2016
NET SALES..................................................................................... $
COST OF SALES ............................................................................
GROSS PROFIT..............................................................................
OPERATING EXPENSES:
Selling and marketing...................................................................
General and administrative...........................................................
Amortization of intangible assets .................................................
Goodwill and other intangible asset impairment (1) ...................................
Total operating expenses ..............................................................
OPERATING INCOME (LOSS).....................................................
OTHER EXPENSE:
Interest expense ............................................................................
Change in common stock warrant fair value ................................
Other income ................................................................................
INCOME (LOSS) BEFORE INCOME TAX EXPENSE ...............
INCOME TAX EXPENSE (BENEFIT) ..........................................
NET INCOME (LOSS).................................................................... $
WEIGHTED AVERAGE SHARES USED FOR
COMPUTATION OF:
Basic.................................................................................................
Diluted..............................................................................................
18,734,482
18,734,482
Net income (loss) per common share:
Basic................................................................................................. $
Diluted..............................................................................................
Cash dividends declared per common share .................................. $
Consolidated balance sheet data:
Total assets....................................................................................... $
Total liabilities .................................................................................
Current portion of long-term debt....................................................
Long-term debt.................................................................................
Total debt......................................................................................
Total stockholders equity (deficit) ..................................................
Additional financial and other data (unaudited):
Unit sales volume:
MasterCraft...................................................................................
NauticStar(2) ..................................................................................
Crest(2)...........................................................................................
Consolidated unit sales volume.................................................
Net sales:
MasterCraft................................................................................... $
NauticStar(2) ..................................................................................
Crest(2)...........................................................................................
Consolidated net sales ............................................................... $
Net sales per unit:
MasterCraft................................................................................... $
NauticStar(2) ..................................................................................
Crest(2)...........................................................................................
Consolidated net sales per unit..................................................
Gross margin ....................................................................................
Adjusted EBITDA(3)......................................................................... $
Adjusted Net Income(3) .................................................................... $
Adjusted EBITDA margin(3) ............................................................
$
363,073
287,717
75,356
$
466,381
353,254
113,127
$
332,725
242,361
90,364
$
228,634
165,158
63,476
221,600
160,521
61,079
15,981
25,557
3,948
56,437
101,923
(26,567)
5,045
(31,612)
(7,565)
(24,047)
(1.28)
(1.28)
17,670
27,706
3,492
31,000
79,868
33,259
6,513
26,746
5,392
21,354
18,653,892
18,768,207
1.14
1.14
$
$
13,011
19,773
1,597
34,381
55,983
3,474
52,509
12,856
39,653
18,619,793
18,714,531
2.13
2.12
$
$
9,380
20,474
107
29,961
33,515
2,222
31,293
11,723
19,570
18,592,885
18,620,708
1.05
1.05
$
$
$
$
$
$
$
$
207,923
159,053
8,932
99,666
108,598
48,870
2,478
1,191
1,623
5,292
246,455
54,930
61,688
363,073
99
46
38
69
20.8%
44,298
25,077
12.2%
$
$
$
$
$
$
248,773
176,457
8,725
105,016
113,741
72,316
3,435
1,831
2,078
7,344
311,830
77,995
76,556
466,381
91
43
37
64
24.3%
79,323
53,016
17.0%
$
$
$
$
$
$
176,924
124,402
5,069
70,087
75,156
52,522
3,068
1,687
4,755
266,319
66,406
332,725
87
39
70
27.2%
64,028
40,440
19.2%
$
$
$
$
$
$
83,321
71,560
3,687
30,790
34,477
11,761
2,790
2,790
228,634
228,634
82
82
27.8%
43,476
24,335
19.0%
$
$
$
$
$
$
9,685
29,162
221
39,068
22,011
1,280
3,425
(1,212)
18,518
8,308
10,210
17,849,319
18,257,007
0.57
0.56
4.30
82,533
90,912
7,885
44,342
52,227
(8,379)
2,742
2,742
221,600
221,600
81
81
27.6%
41,227
23,362
18.6%
(1) During fiscal 2020, we recognized goodwill and other intangible asset impairment charges in our NauticStar and Crest segments. During fiscal 2019, we
recognized goodwill and other intangible asset impairment charges in our NauticStar segment. See Note 6 in Notes to Consolidated Financial Statements.
(2) During fiscal 2019 and 2018, the Company acquired Crest and NauticStar, respectively, as described in Note 3 in Notes to Consolidated Financial Statements.
(3) Adjusted EBITDA, Adjusted Net Income and Adjusted EBITDA margin are non-GAAP financial measures. For definitions of our non-GAAP measures and a
reconciliation of each to net income, see Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
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 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018
items and year-to-year comparisons between 2019 and 2018 are not included in this Annual Report on Form 10-K and can be found
in Item 7 of the Companys Annual Report on Form 10-K for the year ended June 30, 2019, which was filed with the SEC on
September 13, 2019.
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 Managements 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.
•
•
•
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.
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.
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.
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
31
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 protect 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.
Impact to Liquidity and Capital Resources
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.
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.
Outlook
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.
32
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 Crests 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 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. Mr. 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
brands 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.
33
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 ended June 30, 2020 and 2019 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.
2020
2019
Change
% Change
2020 vs. 2019
(Dollars in thousands)
Consolidated statements of operations:
NET SALES....................................................................................................
COST OF SALES ...........................................................................................
GROSS PROFIT.............................................................................................
OPERATING EXPENSES:
Selling and marketing..................................................................................
General and administrative..........................................................................
Amortization of other intangible assets .......................................................
Goodwill and other intangible asset impairment.........................................
Total operating expenses .............................................................................
OPERATING INCOME (LOSS)....................................................................
OTHER EXPENSE:
Interest expense ...........................................................................................
INCOME (LOSS) BEFORE INCOME TAX EXPENSE ..............................
INCOME TAX EXPENSE (BENEFIT) .........................................................
NET INCOME (LOSS)...................................................................................
Additional financial and other data:
Unit sales volume:
MasterCraft..................................................................................................
NauticStar ....................................................................................................
Crest(a) ..........................................................................................................
Consolidated unit sales volume................................................................
Net sales:
MasterCraft..................................................................................................
NauticStar ....................................................................................................
Crest(a) ..........................................................................................................
Consolidated net sales ..............................................................................
Net sales per unit:
MasterCraft..................................................................................................
NauticStar ....................................................................................................
Crest(a) ..........................................................................................................
Consolidated net sales per unit.................................................................
Gross margin ...................................................................................................
$
$
$
$
$
(a) Crest was acquired on October 1, 2018.
Fiscal 2020 Compared to Fiscal 2019
$
$
$
$
$
363,073
287,717
75,356
15,981
25,557
3,948
56,437
101,923
(26,567)
5,045
(31,612)
(7,565)
(24,047)
2,478
1,191
1,623
5,292
246,455
54,930
61,688
363,073
99
46
38
69
20.8%
$
$
$
$
$
466,381
353,254
113,127
17,670
27,706
3,492
31,000
79,868
33,259
6,513
26,746
5,392
21,354
3,435
1,831
2,078
7,344
311,830
77,995
76,556
466,381
91
43
37
64
24.3%
(103,308 )
(65,537..)
(37,771..)
(1,689....)
(2,149....)
456 ........
25,437 ...
22,055 ...
(59,826)
(1,468)
(58,358)
(12,957)
(45,401)
(957)
(640)
(455)
(2,052)
(65,375)
(23,065)
(14,868)
(103,308)
8
3
1
5
-350 bpts
(22.2%)
(18.6%)
(33.4%)
(9.6%)
(7.8%)
13.1%
82.1%
27.6%
(179.9%)
(22.5%)
(218.2%)
(240.3%)
(212.6%)
(27.9%)
(35.0%)
(21.9%)
(27.9%)
(21.0%)
(29.6%)
(19.4%)
(22.2%)
8.8%
7.0%
2.7%
7.8%
Net Sales. 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;
•
34
•
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 suspension and our pre- COVID-19
Pandemic effort to allow our dealers to right-size pipeline inventory levels, and higher pre-pandemic retail rebate discounts,
partially offset by higher prices;
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 Crests 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.
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. See Note 6 in Notes to Consolidated
Financial Statements for more information on the impairment charges. In addition, the inclusion of Crests 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.
Interest Expense.
the year compared to fiscal 2019.
Interest expense decreased $1.5 million, or 22.5 percent, primarily driven by lower effective interest rates during
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.
35
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 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. 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. GAAP. 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. 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 with U.S. GAAP, provides a more complete understanding of factors and trends affecting our
business than does U.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 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. 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 cash requirements 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.
36
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 margin for the periods indicated:
(Dollars in thousands)
Net income (loss) ..................................................................................... $
Income tax expense (benefit)....................................................................
Interest expense ........................................................................................
Depreciation and amortization..................................................................
EBITDA ...................................................................................................
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) ................................
Adjusted EBITDA .................................................................................. $
Adjusted EBITDA margin .....................................................................
2020
2019
2018
(24,047)
(7,565)
5,045
10,527
(16,040)
56,437
1,446
1,394
1,061
44,298
$
$
21,354
5,392
6,513
7,787
41,046
31,000
2,840
1,678
2,377
382
79,323
$
$
39,653
12,856
3,474
5,086
61,069
561
1,186
(1,033)
1,744
501
64,028
12.2%
17.0%
19.2%
(a) 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.
(b) 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 brands 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. 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.
(c) 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.
(d) 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.
(f) 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.
37
The following table sets forth a reconciliation of net income as determined in accordance with U.S. GAAP to Adjusted Net Income for
the periods indicated:
2020
2019
2018
(Dollars in thousands)
Net income (loss).............................................................................. $
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) ........................
Adjusted Net Income before income taxes....................................
Adjusted income tax expense(g).........................................................
Adjusted Net Income ...................................................................... $
(24,047) $
(7,565)
56,437
3,842
1,446
1,394
1,061
32,568
7,491
25,077
$
Adjusted Net Income per share:
Basic ............................................................................................... $
Diluted ............................................................................................ $
1.34
1.34
$
$
Weighted average shares used for the computation of:
21,354
5,392
31,000
3,385
2,840
1,678
2,377
382
68,408
15,392
53,016
2.84
2.82
$
$
$
$
39,653
12,856
1,490
561
1,186
(1,033)
1,744
501
56,958
16,518
40,440
2.17
2.16
Basic Adjusted Net Income per share ............................................
Diluted Adjusted Net Income per share(h) ......................................
18,734,482
18,734,482
18,653,892
18,768,207
18,619,793
18,714,531
(a) 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.
(b) 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 brands 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. 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.
(c) 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.
(d) 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.
(f) 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.
(g) Reflects income tax expense at a tax rate of 23.0% for fiscal 2020, 22.5% for fiscal 2019 and 29% for 2018.
(h) 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.
38
The following table presents the reconciliation of net income (loss) per diluted share to Adjusted net income per diluted share for the
periods presented:
Net income (loss) per diluted share ..................................................... $
Impact of adjustments:
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) ...........................
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).................................................................
Adjusted Net Income per diluted share .............................................. $
2020
2019
2018
(1.28)
$
1.14
$
(0.40)
3.01
0.20
0.08
0.07
0.06
1.74
0.29
1.65
0.18
0.15
0.09
0.12
0.02
3.64
(0.40)
1.34
$
(0.82)
2.82
$
2.12
0.69
0.08
0.03
0.06
(0.06)
0.09
0.03
3.04
(0.88)
2.16
(a) 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.
(b) 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 brands 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. 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.
(c) 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.
(d) 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.
(e)
(f) 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.
(g) Reflects income tax expense at a tax rate of 23.0% for fiscal 2020, 22.5% for fiscal 2019 and 29% for 2018.
(h) Reflects the impact of rounding in the other adjustments presented.
Change in Non-GAAP Financial Measure
Prior to fiscal year 2020, the Companys 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. 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 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. 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.
39
Liquidity and Capital Resources
Our primary liquidity and capital resource needs are to finance working capital, fund capital expenditures, and service our debt. 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:
(Dollars in thousands)
Total cash provided by (used in):
2020
2019
2018
Operating activities .....................................................................................
Investing activities ......................................................................................
Financing activities .....................................................................................
Net change in cash........................................................................................
$
$
30,198
(14,218)
(5,487)
10,493
$
$
55,886
(95,786)
37,817
(2,083)
$
$
49,397
(85,720)
40,194
3,871
Cash Flow
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. 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; and
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.
40
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 11 in Notes to Consolidated Financial Statements for additional information
regarding 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.
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet financing arrangements as of June 30, 2020.
Contractual Obligations
As of June 30, 2020, the Companys contractual cash obligations were as follows:
(Dollars in thousands)
Long-Term Debt Obligations(1).............................................. $
Interest on Long-Term Debt Obligations(2)............................
Operating Lease Obligations..................................................
Purchase Obligations(3) ..........................................................
Other ......................................................................................
Total Contractual Obligations(4) ...................................... $
Total
109,993
11,843
530
82,848
315
205,529
$
$
Payments Due by Period
Less than
1 year
1-3 years
3-5 years
More than
5 years
9,420
4,105
245
16,325
183
30,278
$
$
24,335
6,995
284
31,365
132
63,111
$
$
76,238
743
1
35,158
112,140
$
$
(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 June 30, 2020 interest rates and holding them constant for the life of the 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 $3.7 million are not reflected in this table 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 2020,
2019, or 2018. 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.
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.
41
We will continue to be an emerging growth company until June 30, 2021, which is the last day of our fiscal year following the fifth
anniversary of the date of completion of our initial public offering.
Inflation
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
A critical accounting policy is one which is both important to the understanding of our financial condition and results of operations
and requires managements 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. All of the Companys goodwill and other intangible assets relate to our MasterCraft, NauticStar, or Crest reporting
units (see Note 13 in Notes to Consolidated Financial Statements). The Companys 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
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. 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.
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 units 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 units forecasted performance. Fair value
under the market approach is determined for each unit by applying market multiples for comparable public companies to the units
financial results. The key uncertainties in these calculations are the assumptions used in determining the reporting units 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.
42
As of June 30, 2020, 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 Companys assumptions regarding the key uncertainties in this fair value
calculation could change in the near term. If actual results differ from the Companys 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 uncertainties 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 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. 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.
Income TaxesWe 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.
43
Revenue Recognition The Companys 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 Companys 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
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 Companys 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 2020, 2019, or 2018.
ITEM 7A. QUANTITATIVE AND QUALITATIVE 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.
44
ITEM 8. FINANCIAL 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this Form 10-K Annual Report, we carried out an evaluation under the supervision and with the
participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our
disclosure controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer have concluded
that our disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2020.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process to provide reasonable assurance
regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in
the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our chief executive officer and chief financial officer, assessed the effectiveness of our internal control
over financial reporting as of June 30, 2020. In making this assessment, we used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework (2013) . Based on such assessment
our management has concluded that, as of June 30, 2020, our internal control over financial reporting is effective based on those
criteria.
This annual report does not include an attestation report from our registered public accounting firm regarding internal control over
financial reporting. Management's assessment of the effectiveness of internal controls over financial reporting was not subject to
attestation by our registered public accounting firm pursuant to rules of the SEC that permit emerging growth companies, which we
are, to provide only management's assessment in this annual report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), during the
period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
45
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item 10 will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item 12 will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item 14 will be included in the Proxy Statement and is incorporated herein by reference.
46
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
PART IV
a. Documents included in this report:
1. Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
1. Financial Statement Schedules
F-1
F-3
F-4
F-5
F-6
F-7
Financial statement schedules have been omitted because they are either not required, not applicable or the information
required to be presented is included in our financial statements and related notes.
2. Exhibits
The following documents are filed as a part of this annual report on Form 10-K or are incorporated by reference to
previous filings, if so indicated:
Exhibit
No.
2.1
2.2
3.1
3.2
3.3
3.4
4.1
4.2
10.1
10.2
10.3
Description
Membership Interest Purchase Agreement, dated October
2, 2017 among MCBC Holdings, Inc., Nautic Star, LLC
and each of the other parties thereto
Interest
Purchase Agreement,
Membership
dated
September 10, 2018 among MCBC Holdings, Inc., all of
the Members of Crest Marine, LLC and Patrick Fenton,
as Representative for the Members of Crest Marine, LLC
Form
8-K
File No.
001!37502
Exhibit
2.1
Filing Date
10/2/17
Filed
Herewith
8-K
001-37502
2.1
10/1/18
Amended and Restated Certificate of Incorporation of
MCBC Holdings, Inc.
10-K
001-37502
Certificate of Amendment to Amended and Restated
Certificate of Incorporation of MasterCraft Boat
Holdings, Inc.
10-Q
001-37502
3.1
3.2
9/18/15
11/9/18
Certificate of Amendment
of
Certificate
Holdings, Inc.
Incorporation
to Amended and Restated
of MasterCraft Boat
8-K
001-37502
3.1
10/25/19
Fourth Amended and Restated By-laws of MasterCraft
Boat Holdings, Inc.
8-K
001-37502
3.2
10/25/19
Common
Holdings, Inc.
stock
certificate
of MasterCraft Boat
S-1/A 333-203815
4.1
7/15/15
of Registrants
Description
Securities Registered
Pursuant to Section 12 of the Securities Exchange Act of
1934
*
MCBC Holdings, Inc. 2010 Equity Incentive Plan
S-1/A 333-203815
MCBC Holdings, Inc. 2015 Incentive Award Plan
S-1/A 333-203815
10.2
10.4
6/25/15
7/15/15
Form of Restricted Stock Award Agreement and Grant
Notice under 2015 Incentive Award Plan (employee)
S-1/A 333-203815
10.10
7/1/15
47
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
21.1
23.1
23.2
31.1
31.2
32.1
32.2
Form of Stock Option Agreement and Grant Notice
under 2015 Incentive Award Plan (employee)
S-1/A 333-203815
10.12
7/7/15
Form of Restricted Stock Award Grant Notice under
2015 Incentive Award Plan (director)
S-1/A 333-203815
10.13
7/7/15
Senior Executive Incentive Bonus Plan
10-K
001-37502
Non-Employee Director Compensation Policy
10-K
001-37502
10.8
10.7
10.1
9/18/15
9/13/19
7/2/18
8-K
001-37502
Employment Agreement between MasterCraft Boat
Company, LLC and Terry McNew, effective as of July 1,
2018
Employment Agreement between MasterCraft Boat
Company, LLC and Timothy M. Oxley, effective as of
July 1, 2018
Employment Agreement Between Crest Marine, LLC
and Patrick May
Form of Indemnification Agreement for directors and
officers
Form of Performance Stock Unit Award Agreement
under 2015 Incentive Award Plan
Fourth Amended and Restated Credit and Guaranty
Agreement, dated October 1, 2018, by and among
MasterCraft Boat Holdings,
a guarantor,
MasterCraft Boat Company, LLC, MasterCraft Services,
LLC, MasterCraft International Sales Administration,
Inc., Nautic Star, LLC, NS Transport, LLC, and Crest
Marine LLC as borrowers, Fifth Third Bank as the agent
and letter of credit issuer, and the lenders party thereto
Inc.
as
8-K
001-37502
10.2
7/2/18
10-K
001-37502
10.10
9/13/19
S-1/A 333-203815
10.9
7/7/15
8-K
001-37502
10.1
8/26/16
8-K
001-37502
10.1
10/1/18
Amendment No. 3 to the Fourth Amended and Restated
Credit and Guaranty Agreement
10-Q
001-37502
10.1
5/8/20
Letter Agreement, dated October 30, 2019
Offer Letter, dated December 2, 2019
Offer Letter, dated July 16, 2020
Form of PSU Award Agreement
8-K
8-K
8-K
8-K
001-37502
001-37502
001-37502
001-37502
10.1
10.1
10.1
10.1
10/30/19
12/3/19
8/3/20
7/22/20
List of subsidiaries of MasterCraft Boat Holdings, Inc .
Consent of Deloitte & Touche LLP,
registered public accounting firm
Consent of BDO USA, LLP,
public accounting firm
independent
independent
registered
Rule 13a-14(a)/15d-14(a) Certification
Executive Officer
of
Principal
Rule 13a-14(a)/15d-14(a) Certification
Financial Officer
of
Principal
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer
101.INS
XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
48
*
*
*
*
*
**
**
*
*
101.CAL XBRL Taxonomy Extension Calculation Linkbase
Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase
Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Document
Indicates management contract or compensatory plan.
*
Filed herewith.
** Furnished herewith.
ITEM 16. FORM 10-K SUMMARY.
Not Applicable.
*
*
*
*
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 11, 2020
MASTERCRAFT BOAT HOLDINGS, INC.
By:
/s/ FREDERICK A. BRIGHTBILL
Chief Executive Officer (Principal Executive Officer) and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
September 11, 2020
September 11, 2020
September 11, 2020
September 11, 2020
September 11, 2020
September 11, 2020
September 11, 2020
September 11, 2020
/s/ FREDERICK A. BRIGHTBILL
Frederick A. Brightbill
Chief Executive Officer (Principal Executive Officer) and
Chairman of the Board
/s/ TIMOTHY M. OXLEY
Timothy M. Oxley
/s/ W. PATRICK BATTLE
W. Patrick Battle
/s/ JACLYN BAUMGARTEN
Jaclyn Baumgarten
/s/ DONALD C. CAMPION
Donald C. Campion
/s/ TJ CHUNG
TJ Chung
/s/ ROCH LAMBERT
Roch Lambert
/s/ PETER G. LEEMPUTTE
Peter G. Leemputte
Chief Financial Officer (Principal Financial and Accounting
Officer), Treasurer and Secretary
Director
Director
Director
Director
Director
Director
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of MasterCraft Boat Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of MasterCraft Boat Holdings, Inc. and subsidiaries (the "Company")
as of June 30, 2020, the related consolidated statements of operations, stockholders' equity, and cash flows, for the year ended June 30,
2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of June 30, 2020, and the results of its operations and its cash
flows for the year ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no
such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audit provides a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
September 11, 2020
We have served as the Company's auditor since 2019.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
MasterCraft Boat Holdings, Inc. and Subsidiaries
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of MasterCraft Boat Holdings, Inc. and subsidiaries (the Company)
as of June 30, 2019, the related consolidated statements of operations, stockholders equity, and cash flows for each of the two years in
the period ended June 30, 2019, and the related notes (collectively referred to as the consolidated financial statements). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30,
2019, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2019, in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on the Companys consolidated financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States)
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
(PCAOB) and are required to be independent with respect to the
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
Atlanta, Georgia
September 13, 2019
F-2
MASTERCRAFT BOAT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................................................................................. $
Accounts receivable, net of allowances of $247 and $281, respectively......................................................
Income tax receivable ...................................................................................................................................
Inventories, net (Note 4) ...............................................................................................................................
Prepaid expenses and other current assets ....................................................................................................
Total current assets.....................................................................................................................................
Property, plant and equipment, net (Note 5) ....................................................................................................
Goodwill (Note 6) ............................................................................................................................................
Other intangible assets, net (Note 6) ................................................................................................................
Deferred income taxes (Note 9) .......................................................................................................................
Deferred debt issuance costs, net .....................................................................................................................
Other long-term assets......................................................................................................................................
Total assets ....................................................................................................................................................... $
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................................................................................................... $
Income tax payable .......................................................................................................................................
Accrued expenses and other current liabilities (Note 7) ...............................................................................
Current portion of long-term debt, net of unamortized debt issuance costs (Note 8)...................................
Total current liabilities ...............................................................................................................................
Long term debt, net of unamortized debt issuance costs (Note 8) ................................................................
Unrecognized tax positions (Note 9) ............................................................................................................
Other long-term liabilities .............................................................................................................................
Total liabilities .................................................................................................................................................
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value per share authorized, 100,000,000 shares; issued and outstanding,
18,871,637 shares at June 30, 2020 and 18,764,037 shares at June 30, 2019 ..............................................
Additional paid-in capital..............................................................................................................................
Accumulated deficit ......................................................................................................................................
Total stockholders' equity ..........................................................................................................................
Total liabilities and stockholders' equity.......................................................................................................... $
As of June 30
2020
2019
$
$
$
16,319
6,145
4,924
25,636
3,719
56,743
40,481
29,593
63,849
16,080
425
752
207,923
10,510
35,985
8,932
55,427
99,666
3,683
277
159,053
5,826
12,463
951
30,660
4,464
54,364
33,636
74,030
79,799
6,240
451
253
248,773
17,974
426
41,421
8,725
68,546
105,016
2,895
176,457
189
116,182
(67,501)
48,870
207,923
$
188
115,582
(43,454)
72,316
248,773
The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
F-3
MASTERCRAFT BOAT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
NET SALES...........................................................................................................................
COST OF SALES ..................................................................................................................
GROSS PROFIT....................................................................................................................
OPERATING EXPENSES:
Selling and marketing .........................................................................................................
General and administrative .................................................................................................
Amortization of other intangible assets ..............................................................................
Goodwill and other intangible asset impairment ................................................................
Total operating expenses ....................................................................................................
OPERATING INCOME (LOSS)...........................................................................................
OTHER EXPENSE:
Interest expense...................................................................................................................
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) .................................
INCOME TAX EXPENSE (BENEFIT)................................................................................
NET INCOME (LOSS)..........................................................................................................
EARNINGS (LOSS) PER SHARE:
Basic.................................................................................................................................
Diluted .............................................................................................................................
WEIGHTED AVERAGE SHARES USED FOR COMPUTATION OF:
For the Years Ended June 30
2019
2018
2020
$
$
$
$
363,073
287,717
75,356
15,981
25,557
3,948
56,437
101,923
(26,567)
5,045
(31,612)
(7,565)
(24,047)
(1.28)
(1.28)
$
$
$
$
$
466,381
353,254
113,127
332,725
242,361
90,364
17,670
27,706
3,492
31,000
79,868
33,259
6,513
26,746
5,392
21,354
1.14
1.14
$
$
$
13,011
19,773
1,597
34,381
55,983
3,474
52,509
12,856
39,653
2.13
2.12
Basic earnings (loss) per share.........................................................................................
Diluted earnings (loss) per share .....................................................................................
18,734,482
18,734,482
18,653,892
18,768,207
18,619,793
18,714,531
The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
F-4
MASTERCRAFT BOAT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollar amounts in thousands, except share data)
Balance at June 30, 2017 .........................................................................
Share-based compensation activity............................................................
Net income .................................................................................................
Balance at June 30, 2018 .........................................................................
Adoption of accounting standards .............................................................
Share-based compensation activity............................................................
Net income .................................................................................................
Balance at June 30, 2019 .........................................................................
Share-based compensation activity (Note 10) ...........................................
Net income (loss) .......................................................................................
Balance at June 30, 2020 .........................................................................
Common Stock
Shares
18,637,445
44,893
18,682,338
81,699
18,764,037
107,600
18,871,637
Amount
186
$
1
187
1
188
1
189
$
Additional
Paid-in
Capital
$ 112,945
1,107
114,052
1,530
115,582
600
$ 116,182
Accumulated
Deficit
$
$
(101,370)
39,653
(61,717)
(3,091)
21,354
(43,454)
(24,047)
(67,501)
Total
$ 11,761
1,108
39,653
52,522
(3,091)
1,531
21,354
72,316
601
(24,047)
$ 48,870
The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
F-5
MASTERCRAFT BOAT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................................................................................................ $
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization .....................................................................................................
Share-based compensation ...........................................................................................................
Deferred income taxes..................................................................................................................
Unrecognized tax benefits............................................................................................................
Amortization of debt issuance costs.............................................................................................
Goodwill and other intangible asset impairment .........................................................................
Changes in certain operating assets and liabilities .......................................................................
Accounts receivable ..................................................................................................................
Inventories.................................................................................................................................
Prepaid expenses and other current assets ................................................................................
Income tax receivable ...............................................................................................................
Accounts payable ......................................................................................................................
Accrued expenses and other current liabilities..........................................................................
Other, net......................................................................................................................................
Net cash provided by operating activities ..............................................................................
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired ..........................................................................
Purchases of property, plant and equipment ................................................................................
Proceeds from disposal of property, plant and equipment ...........................................................
Net cash used in investing activities ......................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ...................................................................................
Principal payments on long-term debt .........................................................................................
Borrowings on revolving credit facility .......................................................................................
Principal payments on revolving credit facility ...........................................................................
Proceeds from insurance premium financing...............................................................................
Principal payments on insurance premium financing ..................................................................
Other, net......................................................................................................................................
Net cash provided (used) by financing activities ...................................................................
NET CHANGE IN CASH AND CASH EQUIVALENTS ............................................................
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD...........................................
CASH AND CASH EQUIVALENTS END OF PERIOD......................................................... $
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest ........................................................................................................... $
Cash payments for income taxes..................................................................................................
SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital expenditures in accounts payable and accrued expenses.................................................
For the Years Ended June 30
2019
2018
2020
(24,047)
$
21,354
$
39,653
10,527
1,061
(9,840)
788
572
56,437
6,291
4,752
695
(3,973)
(6,874)
(5,527)
(664)
30,198
(14,241)
23
(14,218)
(15,357)
35,000
(25,000)
1,130
(468)
(792)
(5,487)
10,493
5,826
16,319
4,841
6,146
318
$
$
7,787
1,678
(6,734)
913
553
31,000
(1,835)
(449)
(1,464)
(951)
(2,995)
6,609
420
55,886
(81,729)
(14,064)
7
(95,786)
80,000
(41,306)
(877)
37,817
(2,083)
7,909
5,826
5,526
12,437
908
$
$
5,086
1,186
557
(1,199)
496
(211)
(2,754)
(763)
2,847
4,720
(221)
49,397
(80,511)
(5,305)
96
(85,720)
80,832
(39,320)
(1,318)
40,194
3,871
4,038
7,909
2,976
13,549
733
The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
F-6
MASTERCRAFT BOAT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, dollars in thousands, except per share data and per unit data)
1. SIGNIFICANT ACCOUNTING POLICIES
Organization MasterCraft Boat Holdings, Inc. (Holdings) was formed on January 28, 2000, as a Delaware holding company and
operates primarily through its wholly owned subsidiaries, MasterCraft Boat Company, LLC; MasterCraft Services, LLC; MasterCraft
Parts, Ltd.; and MasterCraft International Sales Administration, Inc. (collectively MasterCraft); Nautic Star, LLC and NS Transport,
LLC (collectively NauticStar); and Crest Marine, LLC (Crest). The Company acquired NauticStar on October 2, 2017 and Crest
on October 1, 2018. Holdings and its subsidiaries collectively are referred to herein as the Company.
Segment Information Operating segments are identified as components of an enterprise about which discrete financial information
is available for evaluation by the chief operating decision maker in making decisions on how to allocate resources and assess
performance. The Company views its operations in three operating segments based on its operations and management structures:
MasterCraft, NauticStar, and Crest (see Note 13).
Basis of Presentation The accompanying financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP). The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries from the dates of their acquisitions.
Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Holdings has no independent operations and no material assets, other than its wholly owned equity interests of MasterCraft,
NauticStar, and Crest, which totaled $163.0 million as of June 30, 2020 and 2019, and no material liabilities. As of June 30, 2020,
Holdings had no material contingencies, long-term obligations, or guarantees other than a guarantee of the Companys subsidiaries
long-term debt (see Note 8).
Use of Estimates The preparation of the Companys consolidated financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and
related disclosures. The Company bases these estimates on historical results and various other assumptions believed to be reasonable.
The Companys most significant financial statement estimates include warranty liability, dealer incentives liability, fair value of share-
based compensation, inventory repurchase contingent obligation, unrecognized tax positions, impairment of long-lived assets and
intangible assets subject to amortization, impairment of goodwill and indefinite-lived intangible assets, and potential litigation claims
and settlements. Actual results could differ from those estimates.
Reclassifications Certain historical amounts have been reclassified in the accompanying consolidated financial statements to
conform to the current presentation.
Revenue Recognition The Companys 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.
F-7
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.
Shipping and Handling Costs
Shipping and handling costs includes those costs incurred to transport product to customers and internal handling costs, which relate to
activities to prepare goods for shipment. The Company has elected to account for shipping and handling costs associated with
outbound freight after control over a product has transferred to a customer as a fulfillment cost. The Company includes shipping and
handling costs, including costs billed to customers, in Cost of sales in the consolidated statements of operations.
Contract Liabilities
A contract liability is created when customers prepay for goods prior to the Company transferring those goods to the customer. The
contract liability is reduced once control of the goods is transferred to the customer. The difference between the opening and closing
balances of the Companys contract liabilities primarily results from the timing difference between the Companys performance and
the point at which it receives pre-payment from the customer.
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 Companys 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
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 Companys assumptions about
the inputs that market participants would use and, therefore, this liability is classified within Level 3 of the fair value hierarchy.
The Company has excluded sales and other taxes assessed by a governmental authority in connection with revenue-producing
activities from the determination of the transaction price for all contracts. The Company has not adjusted Net sales for the effects of a
significant financing component because the period between the transfer of the promised goods and the customer's payment is
expected to be one year or less.
Accounts Receivable Accounts receivable represents amounts billed to customers under credit terms customary in its industry. The
Company normally does not charge interest on its accounts receivable. The Company determines its allowance for doubtful accounts
by considering a number of factors, including the length of time trade accounts receivable are past due, the Companys previous loss
history, the customers current ability to pay its obligation to the Company, and the condition of the general economy and the industry
as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on
such receivables are credited to bad debt recovery. Amounts recorded as bad debt expense, write-offs, and recoveries were not
material for the years ended June 30, 2020, 2019, and 2018.
Cash and Cash Equivalents The Company considers all highly-liquid investments with an original maturity of three months or less
to be cash and cash equivalents. The Companys cash deposits may at times exceed federally insured amounts. The Company had no
cash equivalents at June 30, 2020 and 2019.
Concentrations of Credit and Business Risk Financial instruments that potentially subject the Company to concentrations of credit
risk primarily consist of trade receivables. Credit risk on trade receivables is mitigated as a result of the Companys use of trade letters
of credit, dealer floor plan financing arrangements, and the geographically diversified nature of the Companys customer base.
F-8
Supplier Concentrations
The Company is dependent on the ability of its suppliers to provide products on a timely basis and on favorable pricing terms. The
loss of certain principal suppliers or a significant reduction in product availability from principal suppliers could have a material
adverse effect on the Company. Business risk insurance is in place to mitigate the business risk associated with sole suppliers for
sudden disruptions such as those caused by natural disasters.
The Company is dependent on third-party equipment manufacturers, distributors, and dealers for certain parts and materials utilized in
the manufacturing process. During the years ended June 30, 2020, 2019, and 2018 the Company purchased all engines for its
MasterCraft performance sport boats under a supply agreement with a single vendor. Total purchases to this vendor were $27.6
million, $39.3 million, and $34.7 million for the years ended June 30, 2020, 2019, and 2018, respectively. During the years ended June
30, 2020 and 2019, the Company purchased a majority of engines for its NauticStar boats under a supply agreement with one vendor.
Total purchases from this vendor were $15.2 million, $23.7 million, and $19.7 million for the years ended June 30, 2020. 2019, and
2018, respectively. During the years ended June 30, 2020 and 2019, the Company purchased a majority of the engines for its Crest
boats under a supply agreement with a single vendor. Total purchases from this vendor were $15.5 million and $20.4 million for the
years ended June 30, 2020 and 2019, respectively.
Inventories Inventories are valued at the lower of cost or net realizable value and are shown net of an inventory allowance in the
consolidated balance sheet. Inventory cost includes material, labor, and manufacturing overhead and is determined based on the first-
in, first-out (FIFO) method. Provisions are made as necessary to reduce inventory amounts to their net realizable value or to provide
for obsolete inventory.
Property, Plant, and Equipment Property, plant, and equipment are recorded at historical cost less accumulated depreciation and
are depreciated on a straight-line basis over the estimated useful lives. Repairs and maintenance are charged to operations as incurred,
and expenditures for additions and improvements that increase the assets useful life are capitalized.
Ranges of asset lives used for depreciation purposes are:
Buildings and improvements ................................................................................................................................
Machinery and equipment.....................................................................................................................................
Furniture and fixtures............................................................................................................................................
7 -
3 -
3 -
40years
7years
7years
Goodwill and Other Intangible Assets The Company does not amortize goodwill and other purchased intangible assets with
indefinite lives. The Companys 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). 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. All of the Companys goodwill and
other intangible assets relate to our MasterCraft, NauticStar, or Crest reporting units (see Note 13).
Goodwill
Goodwill results from the excess of purchase price over the net identifiable 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. 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.
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 units 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 by considering both the income approach and market approach. The
income approach calculates the fair value of the reporting unit using a discounted cash flow method. 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 observable market inputs,
F-9
as well as considering whether or not there is a measure of risk related to the specific reporting units forecasted performance. Fair
value under the market approach is determined for each unit by applying market multiples for comparable public companies to the
units financial results. The key uncertainties in these calculations are the assumptions used in determining the reporting units
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.
During the years ended June 30, 2020 and 2019, the Company performed quantitative impairment tests for all three reporting units and
determined that goodwill attributable to the NauticStar and Crest reporting units was impaired. As a result, the Company recognized
associated impairment charges during each of those fiscal years (see Note 6). The Company recognized no impairments related to
goodwill for the year ended June 30, 2018.
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 uncertainties 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 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. An impairment loss is recognized for the amount by which the carrying
value exceeds the fair value of the asset.
During the years ended June 30, 2020 and 2019, the Company performed quantitative impairment tests for intangible assets and
determined that trade names attributable to the NauticStar and Crest were impaired. As a result, the Company recognized associated
impairment charges during each of those fiscal years (see Note 6). The Company recognized no impairments related to other
intangible assets for the year ended June 30, 2018.
Long-Lived Assets Other than Intangible Assets The Company assesses the potential for impairment of its long-lived assets if
facts and circumstances, such as declines in sales, earnings, or cash flows or adverse changes in the business climate, suggest that they
may be impaired. The Company performs its review by comparing the book value of the assets to the estimated future undiscounted
cash flows associated with the assets. If any impairment in the carrying value of its long-lived assets is indicated, the assets would be
adjusted to an estimate of fair value. The Company incurred no such impairments during the years ended June 30, 2020, 2019, and
2018.
Income Taxes Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax
assets and liabilities. The Company records its global tax provision based on the respective tax rules and regulations for the
jurisdictions in which it operates. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences
between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be
realized. Significant judgment is required in evaluating the need for and magnitude of appropriate valuation allowances against
deferred tax assets. The realization of these assets is dependent on generating future taxable income.
F-10
A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit
is recorded.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
In determining the amount of current and deferred tax the Company takes into account the impact of uncertain tax positions and
whether additional taxes, interest and penalties may be due. The Company believes that its accruals for tax liabilities are adequate for
all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment
relies on estimates and assumptions and may involve a series of judgments about future events. New information may become
available that causes the Company to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax
liabilities will have an impact on tax expense in the period that such a determination is made. The income tax effects of the differences
we identify are classified as deferred tax assets and liabilities in our consolidated balance sheets.
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. Factors that affect our 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.
Research and Development Research and development expenditures are expensed as incurred. Research and development expense
for the years ended June 30, 2020, 2019, and 2018 was $5.2 million, $5.6 million, and $4.9 million, respectively, and is included in
Operating expenses in the consolidated statements of operations.
Self-Insurance The Company is self-insured for certain losses relating to product liability claims and employee medical claims.
The Company has purchased stop-loss coverage in order to limit its exposure to any significant levels under these plans. Losses are
accrued based on the Companys estimates of the aggregate liability for self-insured claims incurred using certain actuarial
assumptions followed in the insurance industry and the Companys historical experience.
Deferred Debt Issuance Costs Certain costs incurred to obtain financing are capitalized and amortized over the term of the related
debt using the effective interest method. For the years ended June 30, 2020, 2019, and 2018 the Company incurred deferred financing
costs of $0.3 million, $0.7 million, and $1.2 million, respectively. For the years ended June 30, 2020, 2019, and 2018 the Company
recorded related amortization expense of $0.6 million, $0.6 million, and $0.5 million, respectively.
Share-Based Compensation The Company records amounts for all share-based compensation, including grants of restricted stock
awards, performance stock units, and nonqualified stock options over the vesting period in the consolidated statements of operations
based on their fair values at the date of the grant. Forfeitures of share-based compensation, if any, are recognized as they occur. Share-
based compensation costs are included in Selling, general and administrative expense in the consolidated statements of Operations.
See Note 10 Share-Based Compensation for a description of the Company's accounting for share-based compensation plans.
Advertising Advertising costs are expensed when the advertising first takes place. Advertising expense recognized during the years
ended June 30, 2020, 2019, and 2018, was $7.0 million, $9.3 million, and $6.8 million, respectively, and is included in Selling and
marketing expenses in the consolidated statements of operations.
Fair Value Measurements The Company measures certain of its financial assets and liabilities at fair value and utilizes the
established framework for measuring fair value and disclosing information about fair value measurements. Fair value is the exchange
price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that
may be used to measure fair values:
Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of
the measurement date.
Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
F-11
Level 3 Significant unobservable inputs that reflect a companys own assumptions about the inputs that market participants would
use in pricing an asset or liability.
When measuring fair value, the Company considers the principal or most advantageous market in which it would transact and
considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to
active and observable markets to price identical assets. When identical assets are not traded in active markets, the Company looks to
market observable data for similar assets. The Companys most significant financial asset or liability measured at fair value on a
recurring basis is its inventory repurchase contingent obligation (see Revenue Recognition - Other Revenue Recognition Matters
and Note 11).
Fair Value of Financial Instruments The carrying amounts of the Companys financial instruments, consisting of cash and cash
equivalents, accounts receivable, accounts payable and other liabilities, approximate their estimated fair values due to the relative
short-term nature of the amounts. The carrying amount of debt approximates fair value due to variable interest rates at customary
terms and rates the Company could obtain in current financing.
Earnings Per Common Share Basic earnings per common share reflects reported earnings divided by the weighted average
number of common shares outstanding during the reporting period. Diluted earnings per common share include the effect of dilutive
stock options and restricted share awards, unless inclusion would not be dilutive.
Postretirement Benefits The Company has a defined contribution plan and makes contributions including matching and
discretionary contributions which are based on various percentages of compensation, and in some instances are based on the amount
of the employees' contributions to the plans. The expense related to the defined contribution plans was $1.2 million, $1.2 million, and
$0.8 million for the years ended June 30, 2020, 2019, and 2018, respectively. Comparability between the years ended June 30, 2019
and 2018 was impacted, primarily, by the acquisition of Crest and NauticStar during the years ended June 30, 2019 and 2018,
respectively (See Note 3).
COVID-19 Pandemic The outbreak of a novel coronavirus throughout the world, including the United States, during early calendar
year 2020 has 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 the Company's business is highly uncertain and
difficult to predict, as the response to the COVID-19 Pandemic is rapidly evolving in many countries, including the United States and
other markets where the Company operates. It is expected that many of the Company's consumers, dealers, and suppliers could be
impacted by these closings and restrictions which could materially and adversely affect demand for our products, our ability to obtain
or deliver inventory, and our ability to collect accounts receivables as our dealers and financing counterparties face higher liquidity
and solvency risk. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19
Pandemic, and it has caused economic downturns or recessions in the U.S. and other markets where the Company operates. Such
economic disruption could have a material adverse effect on our business as retail demand for our products could decline which would
in-turn reduce wholesale demand from our dealers. Policymakers around the world have responded with fiscal and monetary policy
actions to support the economy. The magnitude and overall effectiveness of these actions remains uncertain.
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 this action, the Company
temporarily laid off nearly all of its hourly workforce. We resumed operations at all our manufacturing facilities by mid-May 2020.
Our facilities resumed operations with new temperature screening, social distancing, personal protective equipment, and cleaning
protocols to protect our employees and mitigate risk of further business interruption. The Company continues to evaluate and monitor
the health and safety of its employees and will adhere to federal and local government mandates and guidelines.
The severity of the impact of the COVID-19 Pandemic on the Company's business will depend on a number of factors, including, but
not limited to, the duration, spread, severity, and impact of the pandemic, the remedial actions and stimulus measures adopted by local
and federal governments, the effects of the pandemic on the Company's consumers, dealers, suppliers and workforce, and to the extent
normal economic and operating conditions can resume, all of which are uncertain and cannot be predicted. The Company's future
results of operations, cash flows, and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts
beyond normal payment terms, supply chain or workforce disruptions and uncertain demand, additional goodwill and other intangible
asset impairment charges (see Note 6), and the impact of any initiatives that the Company may undertake to address financial and
operational challenges faced by it and its consumers, dealers, and suppliers. As of the date of issuance of these consolidated financial
statements, the extent to which the COVID-19 Pandemic may materially impact the Company's financial condition, liquidity, or
results of operations is uncertain.
F-12
New Accounting Pronouncements Issued And Adopted
Leases In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases, (ASC 842) which,
among other things, requires lessees to recognize assets and liabilities on the balance sheet for all operating leases. On July 1, 2019,
the Company adopted ASC 842 and all related amendments. The Company elected the optional transition method provided by the
FASB in ASU 2018-11, Leases (Topic 842): Targeted Improvements, and as a result, has not restated its consolidated financial
statements for prior periods presented. The Company has elected the package of practical expedients upon transition which allowed
the Company to retain the lease classification for any leases that existed prior to adoption, to not reassess whether any contracts
entered into prior to adoption are leases, and to not reassess initial direct costs for any leases that existed prior to adoption. In addition,
the Company elected not to record on the consolidated balance sheet any lease with a term of twelve months or less.
ASC 842 did not have a material impact on the Company's consolidated statements of operations. The cumulative effect of the
changes made to the Company's consolidated balance sheet as of July 1, 2019 for the adoption of ASC 842 was as follows:
Balance as of
June 30, 2019
Adjustments
Due to ASC 842
Balance as of
July 1, 2019
Assets
Other long-term assets........................................................................... $
253
$
3,931
$
4,184
Current liabilities
Accrued expenses and other current liabilities......................................
41,421
547
41,968
Long-term liabilities
Other long-term liabilities .....................................................................
3,384
3,384
The Company leases various equipment under operating lease arrangements. The Company determines if an arrangement is a lease at
lease inception. Operating lease right-of-use (ROU) assets and operating lease liabilities are recognized based on the present value
of the future minimum lease payments over the lease term at the commencement date. Because the rates implicit in the Company's
lease contracts are not readily determinable, the Company uses its incremental borrowing rate based on information available at the
commencement date in determining the present value of future payments. The incremental borrowing rate is estimated to approximate
the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is
located. The operating lease ROU asset also includes any initial direct costs and lease payments made prior to lease commencement
and excludes lease incentives incurred.
The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise
that option. Operating lease expense is recognized on a straight-line basis over the lease term. The Company may enter into lease
agreements that contain both lease and non-lease components, which it has elected to account for as a single lease component for all
asset classes. See Note 11 for information regarding the Companys leases.
Share-Based Compensation In June 2018, the Financial Accounting Standards Board issued ASU 2018-07, CompensationStock
Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This guidance provides clarity and
reduces complexity when applying the guidance in Topic 718, CompensationStock Compensation to the term or condition of share-
based payments to nonemployees. ASU 2018-07 is effective for annual reporting periods, and interim periods therein, beginning after
December 15, 2018. The Company adopted this guidance for its fiscal year beginning July 1, 2019. The adoption of this standard did
not have a material impact on the consolidated financial statements.
New Accounting Pronouncements Issued But Not Yet Adopted
Fair Value Measurements In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure
FrameworkChanges to the Disclosure Requirements for Fair Value Measurement. This guidance modifies the disclosure
requirements on fair value measurements in Topic 820 by removing disclosures regarding transfers between Level 1 and Level 2 of
the fair value hierarchy, by modifying the measurement uncertainty disclosure, and by requiring additional disclosures for Level 3 fair
value measurements, among others. The amendments are effective for all entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. The Company does not expect the adoption of this new guidance to have a material
impact on the consolidated financial statements.
F-13
Current Expected Credit Loss In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial
Instruments, which updated the ASC to use an impairment model that is based on expected losses rather than incurred losses. The
Company will adopt this guidance for its fiscal year beginning July 1, 2020. Our evaluation of this guidance is substantially complete,
and the adoption of this standard is not expected to have a material impact on the consolidated financial statements.
2. REVENUE RECOGNITION
The following table presents the Companys revenue by major product category for each reportable segment.
Year Ended June 30, 2020
MasterCraft NauticStar Crest(a)
Total
Year Ended June 30, 2019
MasterCraft NauticStar Crest(a)
Total
Major Product Categories:
Boats and trailers .............................. $
Parts ..................................................
Other revenue ...................................
Total .................................................... $
236,108
9,731
616
246,455
$
$
54,473
448
9
54,930
$ 60,888
591
209
$ 61,688
$ 351,469
10,770
834
$ 363,073
$
$
301,010
9,471
1,349
311,830
$
$
77,896
85
14
77,995
$ 75,742
498
316
$ 76,556
$ 454,648
10,054
1,679
$ 466,381
(a) Crest was acquired on October 1, 2018.
Sales outside of North America accounted for 4.8%, 5.2%, and 7.5% of the Companys net sales for the years ended June 30, 2020,
2019, and 2018, respectively. The Company had no significant concentrations of sales to individual dealers or in countries outside of
North America during the years ended June 30, 2020, 2019, and 2018.
Contract Liabilities
As of June 30, 2019, the Company had $0.8 million of contract liabilities associated with customer deposits. During the year ended
June 30, 2020, all of this amount was recognized as revenue. As of June 30, 2020, total contract liabilities were $0.6 million, were
reported in Accrued expenses and other current liabilities on the consolidated balance sheet and are expected to be recognized as
revenue during the year ended June 30, 2021.
See Note 1 for a description of the Companys significant revenue recognition policies.
3. ACQUISITIONS
Fiscal 2019 Acquisition
On October 1, 2018, the Company completed its acquisition of Crest for $81.7 million. Crest, a manufacturer of pontoons, expands the
Companys product portfolio. Proceeds from the $80.0 term loan (see Note 8) were used to fund this acquisition.
The following table is a summary of the assets acquired, liabilities assumed, and net cash consideration paid for Crest during fiscal
2019:
Accounts receivable .........................................................................................................................................
Inventories ........................................................................................................................................................
Other current assets ..........................................................................................................................................
Property, plant and equipment .........................................................................................................................
Identifiable intangible assets(a) .........................................................................................................................
Current liabilities..............................................................................................................................................
Fair value of assets acquired and liabilities assumed .......................................................................................
Goodwill(a) ........................................................................................................................................................
Net cash consideration paid ........................................................................................................................
$
$
(a) The goodwill and other intangible assets recorded for the Crest acquisition are deductible for tax purposes.
Fair Value
5,215
9,853
179
1,840
35,245
(6,841)
45,491
36,238
81,729
F-14
Fair Value
Estimated Useful
Life (in years)
Definite-lived intangible assets:
Dealer network............................................................................................................... $
Software .........................................................................................................................
Indefinite-lived intangible asset:
Trade name.....................................................................................................................
Total identifiable intangible assets .......................................................................... $
18,000
245
17,000
35,245
10
5
Related Party Transactions
In connection with the operations of Crest, the Company made rental payments to Crest Marine Real Estate LLC (Real Estate) for a
manufacturing facility, storage and office building (the Crest Facility). One of the minority owners of Real Estate is a member of the
Crest management team. The lease was to expire on September 30, 2028, and was subject to four consecutive, five-year renewal
periods. The lease terms included an option for the Company to purchase the Crest Facility for an amount equal to its fair market
value, as determined by appraisals and negotiation between the Company and Real Estate (the Purchase Option). The annual rent
under the lease was $0.3 million for the first five years of the lease term, and was to increase to $0.4 million for the remaining five
years. Additionally, at the beginning of each of the optional renewal terms the rent was to be adjusted based on the change in the
Consumer Price Index. In accordance with the Purchase Option, on October 24, 2019 the Company purchased the Crest Facility for
$4.1 million. See Note 11 for additional information regarding the purchase.
Crest purchases fiberglass component parts from a supplier whose minority owner was the same member of the Crest management
team that has a minority ownership interest in Real Estate. On January 31, 2020 this minority ownership interest was divested and this
supplier ceased being a related party. During the period beginning July 1, 2019 and ending January 31, 2020, the Company purchased
$1.8 million of products from the supplier. During the year ended June 30, 2019, the Company purchased $2.8 million of products
from the supplier.
Pro Forma Financial Information
The following unaudited pro forma consolidated results of operations for the fiscal years ended June 30, 2019 and 2018, assumes that
the acquisition of NauticStar (acquired on October 2, 2017) and Crest (acquired on October 1, 2018) occurred as of the beginning of
the earliest period presented in the consolidated financial statements. The unaudited pro forma financial information combines
historical results of MasterCraft, NauticStar, and Crest with adjustments for depreciation and amortization attributable to fair value
estimates on acquired tangible and intangible assets for the respective periods. Non-recurring pro forma adjustments associated with
the fair value step up of inventory were included in the reported pro forma cost of sales and earnings. The unaudited pro forma
financial information is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at
the beginning of fiscal year 2018, or the results that may occur in the future:
Net sales ...........................................................................................................................$
Net income ....................................................................................................................... $
Basic earnings per share ...................................................................................................$
Diluted earnings per share................................................................................................$
487,374
21,619
1.16
1.15
$
$
$
$
423,630
38,269
2.06
2.04
Fiscal Years Ended
2019
2018
4. INVENTORIES
Inventories consisted of the following:
Raw materials and supplies ............................................................................................ $
Work in process..............................................................................................................
Finished goods................................................................................................................
Obsolescence reserve .....................................................................................................
Total inventories .......................................................................................................... $
18,318
3,866
4,876
(1,424)
25,636
$
$
20,034
4,571
7,207
(1,152)
30,660
As of June 30,
2020
2019
F-15
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment, net consisted of the following:
As of June 30,
2020
2019
Land and improvements ............................................................................................... $
Buildings and improvements........................................................................................
Machinery and equipment ............................................................................................
Furniture and fixtures ...................................................................................................
Construction in progress...............................................................................................
Total property, plant, and equipment.........................................................................
Less accumulated depreciation.....................................................................................
Property, plant, and equipment, net........................................................................... $
3,030
22,366
38,262
2,229
1,312
67,199
(26,718)
40,481
$
$
1,901
15,652
29,804
1,719
4,866
53,942
(20,306)
33,636
Depreciation expense for the years ended June 30, 2020, 2019, and 2018 was $6.6 million, $4.3 million, and $3.5 million,
respectively.
Subsequent Event
On August 13, 2020, the Company entered into an agreement to purchase certain real and personal property located in Merritt Island,
Florida, including a 140,000 sq. ft. boat manufacturing facility, (the Property) for $14.0 million (the Purchase Agreement). The
Company plans to use the Property to expand its boat building capacity. 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.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Other Intangible Asset Impairment
The current economic environment, including the significant share price and market volatility, as well as disruptions to supply chains
resulting from the COVID-19 Pandemic, triggered an interim impairment analysis for the Companys intangible assets including
goodwill. As a result of this analysis, the Company recorded impairment charges totaling $56.4 million during the three months ended
March 29, 2020 related to the NauticStar and Crest segments. As of June 30, 2020, our annual impairment test date, the Company
performed a qualitative assessment and identified no events or circumstances that indicated that there existed a more likely than not
probability of impairment of goodwill and other intangible assets.
The impairment charges recorded for each segment are detailed below and are included in Goodwill and other intangible asset
impairment on the consolidated statement of operations. The impairment recorded in fiscal 2020 was principally a result of a decline,
in the fiscal third quarter, in market conditions, including our share price, and the then current outlook for sales and operating
performance relative to the Companys acquisition plans and impairment test performed as of June 30, 2019.
During our fiscal 2019 annual assessment of intangible assets including goodwill, the Company recorded impairment charges of $31.0
million related to the NauticStar segment. The impairment was principally a result of a decline, in the fiscal fourth quarter, in the
outlook for sales and operating performance relative to our acquisition plan.
See Note 1 for a discussion of the methods used to determine the fair value of goodwill and other intangible assets. In assessing the
need for goodwill and intangible impairment, management utilizes a number of estimates, including operating results, business plans,
economic projections, anticipated future cash flows, transactions and marketplace data. Accordingly, these fair value measurements
fall in Level 3 of the fair value hierarchy.
F-16
Goodwill and other intangible asset impairment charges for the years ended June 30, 2020 and 2019 were as follows:
Goodwill ....................................................................... $
Trade name ...................................................................
Total........................................................................ $
8,199
5,000
13,199
$
$
36,238
7,000
43,238
NauticStar
2020
Crest
2019
Consolidated
44,437
$
12,000
56,437
$
NauticStar
$
$
28,000
3,000
31,000
Consolidated
28,000
$
3,000
31,000
$
While the extent and duration of the economic impact from the COVID-19 pandemic remain unclear, changes in assumptions and
estimates may affect the fair value of goodwill and other intangible assets and could result in additional impairment charges in future
periods.
Goodwill
The carrying amounts of goodwill as of June 30, 2020 and 2019, attributable to each of the Companys reportable segments, were as
follows:
2020
Accumulated
Impairment
Losses
Gross
Amount
MasterCraft ......................................................... $
NauticStar ...........................................................
Crest ....................................................................
Total.............................................................. $
29,593
36,199
36,238
102,030
$
$
$
-
(36,199)
(36,238)
(72,437) $
Other Intangible Assets
2019
Accumulated
Impairment
Losses
Gross
Amount
$
$
29,593
36,199
36,238
102,030
$
$
$
-
(28,000)
-
(28,000) $
Total
29,593
8,199
36,238
74,030
Total
29,593
-
-
29,593
The following table presents the carrying amount of Other intangible assets, net as of June 30, 2020 and 2019.
Amortized intangible assets ................................
Dealer networks ............................................ $
Software........................................................
Gross
Amount
39,500
245
39,745
Unamortized intangible assets
Trade names..................................................
Total other intangible assets ............................... $
49,000
88,745
2020
Accumulated
Amortization
/ Impairment
Other
intangible
assets, net
2019
Accumulated
Amortization
/ Impairment
Other
intangible
assets, net
Gross
Amount
$
$
(9,810) $
(86)
(9,896)
29,690
159
29,849
(15,000)
(24,896) $
34,000
63,849
$
$
39,500
245
39,745
49,000
88,745
$
$
(5,909) $
(37)
(5,946)
33,591
208
33,799
(3,000)
(8,946) $
46,000
79,799
Amortization expense related to Other intangible assets, net for years ended June 30, 2020, 2019 and 2018 was $3.9, $3.5, and $1.6
million, respectively.
F-17
The following table presents estimated future amortization expense for the next five fiscal years and thereafter.
Fiscal years ending June 30,
2021 ....................................................................................................................................................................
2022 ....................................................................................................................................................................
2023 ....................................................................................................................................................................
2024 ....................................................................................................................................................................
2025 ....................................................................................................................................................................
and thereafter ......................................................................................................................................................
Total .................................................................................................................................................................
$
$
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
As of June 30,
2020
2019
Warranty......................................................................................................................... $
Dealer incentives ............................................................................................................
Compensation and related accruals ................................................................................
Floor plan interest...........................................................................................................
Inventory repurchase contingent obligation ...................................................................
Self-insurance.................................................................................................................
Debt interest ...................................................................................................................
Other...............................................................................................................................
Total accrued expenses and other current liabilities.................................................... $
20,004
8,448
1,488
732
1,132
704
3,477
35,985
$
$
Accrued warranty liability activity was as follows:
Balance at the beginning of the period........................................................................... $
Provisions .......................................................................................................................
Additions for Crest acquisition ......................................................................................
Payments made...............................................................................................................
Aggregate changes for preexisting warranties ...............................................................
Balance at the end of the period .................................................................................. $
17,205
7,039
(7,634)
3,394
20,004
$
$
For the Years Ended June 30,
2019
2020
3,950
3,950
3,950
3,806
3,793
10,400
29,849
17,205
12,623
3,494
2,060
1,936
606
405
3,092
41,421
13,077
8,056
990
(7,198)
2,280
17,205
Insurance Premium Financing
On March 27, 2020, the Company executed an insurance premium financing agreement of $1.1 million with a premium finance
company in order to finance certain of its annual insurance premiums. Beginning on April 1, 2020, the financing agreement is payable
in eleven monthly installments of principal and interest of approximately $0.1 million. The agreement bears interest at 3.6%. The
balance of the insurance premium financing as of June 30, 2020 was $0.7 million and is recorded in Accrued expenses and other
current liabilities.
F-18
8. LONG-TERM DEBT
Long-term debt outstanding was as follows:
As of June 30,
2020
2019
Revolving credit facility................................................................................................. $
Term loans......................................................................................................................
Debt issuance costs on term loans..................................................................................
Total debt.....................................................................................................................
Less current portion of long-term debt...........................................................................
Less current portion of debt issuance costs on term loans .............................................
Long-term debt, net of current portion ........................................................................ $
10,000
99,993
(1,395)
108,598
9,420
(488)
99,666
$
$
115,349
(1,608)
113,741
9,167
(442)
105,016
Previously Existing Credit Facility
On October 2, 2017, the Company entered into a Third Amended and Restated Credit and Guaranty Agreement with a syndicate of
certain financial institutions (the Third Amended Credit Agreement). The Third Amended Credit Agreement replaced and paid off
the Companys Prior Credit Agreement, dated May 27, 2016. The Third Amended Credit Agreement provided the Company with a
$145.0 million senior secured credit facility, consisting of a $115.0 million term loan and a $30.0 million revolving credit facility. A
portion of the proceeds from the Third Amended Credit Agreement were used for the Companys acquisition of NauticStar.
The Third Amended Credit Agreement bore interest, at the Companys option, at either the prime rate plus an applicable margin
ranging from 0.75% to 1.75% or at an adjusted LIBOR plus an applicable margin ranging from 1.75% to 2.75%, in each case based on
the Companys Total Net Leverage Ratio.
Current Credit Facility
On October 1, 2018, the Company entered into a Fourth Amended and Restated Credit and Guaranty Agreement with a syndicate of
certain financial institutions (the Fourth Amended Credit Agreement), which replaced the credit facility discussed above. The
Fourth Amended Credit Agreement provides the Company with a $190.0 million senior secured credit facility, consisting of a $75.0
million term loan, and an $80.0 million term loan (together, the Term Loans), and a $35.0 million revolving credit facility (the
Revolving Credit Facility). Proceeds from the $80.0 million term loan were used to fund the Crest acquisition. The Fourth Amended
Credit Agreement is secured by substantially all the assets of the Company. Holdings is a guarantor on the Fourth Amended Credit
Agreement and the Fourth Amended Credit Agreement contains covenants that restrict the ability of Holdings subsidiaries to make
distributions to Holdings. The Term Loans will mature and all remaining amounts outstanding thereunder will be due and payable on
October 1, 2023.
F-19
Amendment to Fourth Amended Credit Agreement
On May 7, 2020, the Company entered into Amendment No. 3 to the Fourth Amended Credit Agreement (the Amendment). The
changes effected by the Amendment include, among others, the temporary removal and replacement of the Companys financial
covenants, the addition of a 50 basis point floor on LIBOR, modifications to the range of applicable LIBOR and prime interest rate
margins, and a revision of the Total Net Leverage Ratio calculation. Under the Amendment, the Total Net Leverage Ratio covenant
and Fixed Charge Coverage Ratio covenant of the Fourth Amended Credit Agreement are temporarily replaced with three separate
covenants: (i) an Interest Coverage Ratio, (ii) a Minimum Liquidity threshold, and (iii) a Maximum Unfinanced Capital Expenditures
limitation (the Package of Financial Covenants). The Package of Financial Covenants are in place through the quarter ended March
31, 2021, at which time the Total Net Leverage Ratio covenant and Fixed Charge Coverage Ratio covenant will be reinstated and the
Package of Financial Covenants will sunset, and with the minimum liquidity covenant being tested on the last day of each fiscal month
through May 31, 2021. In addition, the Total Net Leverage Ratio calculation was temporarily revised to include all unrestricted cash
balances, without limitation, until June 30, 2021.
Pursuant to the Amendment, the Companys debt bore interest at LIBOR, subject to a 50 basis point floor, plus 3.25% through June
30, 2020. Beginning on July 1, 2020, the applicable margin, at the Companys option, is at either the prime rate plus an applicable
margin ranging from 0.5% to 2.25% or at an adjusted LIBOR rate plus an applicable margin ranging from 1.5% to 3.25%, in each case
based on the Companys Total Net Leverage Ratio.
As of June 30, 2020 and 2019, the effective interest rate on borrowings outstanding was 3.75% and 4.48%, respectively.
Revolving Credit Facility
On March 19, 2020, the Company drew $35.0 million on its Revolving Credit Facility as a precautionary measure in order to increase
its cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 Pandemic.
As of June 30, 2020, the Company had $10.0 million of borrowings outstanding on its Revolving Credit Facility and the availability
under the Revolving Credit Facility was $25.0 million.
All amounts outstanding under the Revolving Credit Facility mature in October 2023. As of June 30, 2020, the Company was in
compliance with its financial covenants under the Amendment to the Fourth Amended Credit Agreement.
Maturities for the Term Loans and Revolving Credit Facility subsequent to June 30, 2020 are as follows:
2021...............................................................................................................................................................
2022...............................................................................................................................................................
2023...............................................................................................................................................................
2024...............................................................................................................................................................
Total............................................................................................................................................................
$
$
9,420
11,775
12,560
76,238
109,993
F-20
9. INCOME TAXES
Earnings before income taxes by jurisdiction were all in the U.S. except for income of approximately $0.1 million during each of the
years ended June 30, 2020, 2019 and 2018.
For the years ended June 30, the components of the provision for income taxes are as follows:
Current income tax expense:
Federal................................................................................................... $
State.......................................................................................................
Benefit of current year tax credits.........................................................
Total current tax expense ................................................................... $
Deferred tax (benefit) expense:
Federal................................................................................................... $
State.......................................................................................................
Total deferred tax (benefit) expense...................................................
Income tax (benefit) expense ................................................................ $
2020
2019
2018
2,096
666
(554)
2,208
$
$
(8,887) $
(886)
(9,773)
(7,565) $
10,405
1,892
(171)
12,126
$
$
(5,837) $
(897)
(6,734)
5,392
$
12,140
276
(117)
12,299
525
32
557
12,856
The difference between the statutory and the effective federal tax rate for the periods below is attributable to the following:
2020
2019
2018
Statutory income tax rate..........................................................................
21.00%
State taxes (net of federal income tax benefit and valuation
allowance)..............................................................................................
Tax credits .............................................................................................
Revalue of deferred taxes for change in federal tax rate .......................
Change in valuation allowance..............................................................
Permanent differences ...........................................................................
Uncertain tax positions ..........................................................................
Other ......................................................................................................
Effective income tax rate..........................................................................
1.67%
4.49%
(0.74%)
(2.49%)
23.93%
21.00%
2.48%
(3.39%)
(0.57%)
(2.54%)
3.10%
0.08%
20.16%
28.06%
2.32%
(0.44%)
(1.23%)
(2.41%)
(1.73%)
(0.09%)
24.48%
F-21
As of June 30, 2020, and 2019, a summary of the significant components of the Companys deferred tax assets and liabilities was as
follows:
Deferred tax assets:
Goodwill and other intangible asset basis difference .................................................. $
Warranty reserves ........................................................................................................
Accrued selling ............................................................................................................
Unrecognized tax benefits ...........................................................................................
Stock compensation.....................................................................................................
Repurchase agreements ...............................................................................................
State net operating loss ................................................................................................
Foreign net operating loss ...........................................................................................
Credits..........................................................................................................................
Other ............................................................................................................................
Valuation allowance ....................................................................................................
Total deferred tax assets .................................................................................................
Deferred tax liabilities:
Depreciation.................................................................................................................
Other ............................................................................................................................
Total deferred tax liabilities ...........................................................................................
Net deferred tax assets.................................................................................................... $
2020
2019
13,776
4,616
850
566
402
261
14
63
65
570
(65)
21,118
(4,839)
(199)
(5,038)
16,080
$
$
2,306
3,848
1,354
520
704
427
144
79
48
(81)
9,349
(3,037)
(72)
(3,109)
6,240
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (the
CARES Act). Among the changes to the U.S. federal income tax rules, the CARES Act included a revision to depreciation rules
enacted as part of the Tax Cuts and Jobs Act of 2017. In addition to impacting the current fiscal year, the CARES Act results in the
ability to retroactively apply these regulations to certain assets placed in service during the years ended June 30, 2018 and 2019. The
Company has evaluated the impacts of the aforementioned provisions and incorporated the necessary changes to tax depreciation
methods. We have not identified any material effect on results of operations, financial condition, or cash flows.
The Tax Cuts and Jobs Act (Tax Reform Act), which became effective December 22, 2017, overhauled U.S. corporate income tax
law by lowering the U.S. federal corporate income tax rate from 35% to 21% (blended rate in year one for fiscal year filers),
implementing a territorial tax system, imposing a one time deemed repatriation tax on all untaxed offshore earnings, and
adding/modifying/deleting several major tax deductions significant to the Company.
As of June 30, 2020, the Company has state net operating loss (NOL) carryforwards of $0.3 million that expire in varying years
ranging from June 30, 2024 to June 30, 2029, and foreign NOL carryforwards of $0.3 million that can be carried forward indefinitely.
However, the Company determined that it is more likely than not that the benefit from certain state and foreign NOL carryforwards
will not be realized. In recognition of this risk, the Company has provided a partial valuation allowance on the deferred tax assets
relating to these state and foreign NOL carryforwards.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding accrued amounts for interest and
penalties, is as follows:
Balance at July 1............................................................................................................. $
Additions based on tax positions related to the current year .......................................
Additions for tax positions of prior years ....................................................................
Reductions for tax positions of prior years ..................................................................
Settlements of tax positions from prior years ..............................................................
Balance at June 30 .......................................................................................................... $
2,504
110
713
(164)
(170)
2,993
$
$
1,711
889
473
(25)
(544)
2,504
2020
2019
F-22
Of this total, $2.1 million and $1.9 million as of June 30, 2020 and 2019, respectively, represent the amount of unrecognized tax
benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The total amount of interest and
penalties recorded in the consolidated statements of operations for the years ended June 30, 2020, and 2019 was an expense of $0.3
million and $0.1 million, respectively. The amounts accrued for interest and penalties at June 30, 2020 and 2019 were $0.7 million and
$0.4 million respectively and is presented in unrecognized tax positions on the accompanying consolidated balance sheets.
In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. As
of June 30, 2020, the Company has not made a provision for U.S. or additional foreign withholding taxes on investments in foreign
subsidiaries that are indefinitely reinvested. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends
and under certain other circumstances.
The Company and its subsidiaries are subject to U.S. federal income tax, as well as various other state income taxes and foreign
income taxes. The Company is no longer subject to examination by taxing authorities for years before June 30, 2017. The Company
expects the total amount of unrecognized benefits to increase by approximately $0.2 million in the next twelve months. The Company
records unrecognized tax benefits as liabilities and adjusts these liabilities when its judgment changes as a result of the evaluation of
new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result
in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be
reflected as increases or decreases to income tax expense in the period in which new information is available.
10. SHARE-BASED COMPENSATION
The 2015 Incentive Award Plan (2015 Plan) provides for the grant of stock options, including incentive stock options, and
nonqualified stock options (NSOs), restricted stock, dividend equivalents, stock payments, restricted stock units, restricted stock
awards (RSAs), deferred stock, deferred stock units, performance awards, stock appreciation rights, performance stock units
(PSUs), and cash awards. As of June 30, 2020, there were 1,485,683 shares available for issuance under the 2015 Plan.
The following table presents the components of share-based compensation expense by award type for the years ended June 30, 2020,
2019 and 2018.
Restricted stock awards ............................................................................ $
Performance stock units............................................................................
Stock options ............................................................................................
Share-based compensation expense ....................................................... $
1,285
(233)
9
1,061
$
$
913
563
201
1,677
$
$
616
355
215
1,186
2020
2019
2018
Adjustment to Share-Based Compensation
In conjunction with the resignation of an executive officer in October 2019, approximately $0.5 million of share-based compensation
expense recognized in prior periods was reversed during fiscal 2020 for RSAs and PSUs that were forfeited. Additionally, based upon
current economic trends, the probability of attaining the performance criteria of the PSUs has been lowered. The amount of
compensation cost the Company recognizes over the requisite service period is based on the Companys best estimate of the
achievement of the performance conditions. The amount of compensation expense is adjusted on a cumulative basis; therefore, this
adjustment lowered the amount of share-based compensation expense recognized during the year ended June 30, 2020.
The following table presents the income tax benefit related to share-based compensation expense recognized by award type.
Restricted stock awards ............................................................................ $
Performance stock units............................................................................
Stock options ............................................................................................
Share-based compensation expense ....................................................... $
290
(53)
2
239
$
$
217
134
48
399
$
$
190
110
66
366
2020
2019
2018
F-23
Restricted Stock Awards
Beginning in the year ended June 30, 2018, all RSAs granted to non-employee directors vest over the remainder of that fiscal year,
and all RSAs granted to employees vest over a period of between one to three years. Generally, non-vested RSAs are forfeited if
employment is terminated prior to vesting. RSAs are granted at a per share fair value equal to the market value of the Companys
common stock on the grant date. The Company recognizes the cost of non-vested RSAs ratably over the requisite service period.
The total grant date fair value of RSAs vested during the years ended June 30, 2020, 2019, and 2018 was $1.0 million , $0.7 million
and $0.4 million, respectively.
A summary of RSA activity for the years ended June 30, 2020, 2019 and 2018, is as follows:
Total Non-vested Restricted Stock Awards at June 30, 2017 ........................................
Granted ........................................................................................................................
Vested ..........................................................................................................................
Forfeited ......................................................................................................................
Total Non-vested Restricted Stock Awards at June 30, 2018 ........................................
Granted ........................................................................................................................
Vested ..........................................................................................................................
Forfeited ......................................................................................................................
Total Non-vested Restricted Stock Awards at June 30, 2019 ........................................
Granted ........................................................................................................................
Vested ..........................................................................................................................
Forfeited ......................................................................................................................
Total Non-vested Restricted Stock Awards at June 30, 2020 ........................................
Number of Restricted
Stock Awards
Weighted Average
Grant Date Fair
Value
$
26,417
47,651
(25,870)
(4,888)
43,310
51,995
(33,093)
(8,408)
53,804
138,457
(50,570)
(34,797)
106,894
12.22
19.88
16.79
15.89
17.28
26.79
21.54
23.08
22.94
17.41
20.09
20.24
18.01
As of June 30, 2020, there was $1.2 million of total unrecognized compensation expense related to non-vested RSAs. The Company
expects this expense to be recognized over a weighted average period of 1.71 years.
Performance Stock Units
During the years ended June 30, 2020, 2019, and 2018, the Company granted performance shares to certain employees. The awards
will be earned based on the Companys achievement of certain performance criteria over a three-year performance period. The
performance period for the awards commence on July 1 of the fiscal year in which they were granted and continue for a three-year
period, ending on June 30 of the applicable year. The probability of achieving the performance criteria is assessed quarterly.
Following the determination of the Companys achievement with respect to the performance criteria, the amount of shares awarded
will be subject to adjustment based on the application of a total shareholder return (TSR) modifier. The grant date fair value is
determined based on both the assessment of the probability of the Companys achieving the performance criteria and an estimate of
the expected TSR modifier. The TSR modifier estimate is determined by using a Monte Carlo Simulation model, which considers the
likelihood of all possible outcomes of long-term market performance. The amount of compensation cost the Company recognizes
over the requisite service period is based on managements best estimate of the achievement of the performance criteria.
The fair value of PSUs vested during the year ended June 30, 2020 and 2019 was $0.2 million and $0.4 million. No PSUs vested
during the years ended June 30, 2018.
F-24
A summary of PSU activity for the years ending June 30, 2020, 2019 and 2018, is as follows:
Total Non-vested Performance Stock Units at June 30, 2017........................................
Granted ........................................................................................................................
Forfeited ......................................................................................................................
Total Non-vested Performance Stock Units at June 30, 2018........................................
Granted ........................................................................................................................
Vested ..........................................................................................................................
Forfeited ......................................................................................................................
Total Non-vested Performance Stock Units at June 30, 2019........................................
Granted ........................................................................................................................
Vested ..........................................................................................................................
Forfeited ......................................................................................................................
Total Non-vested Performance Stock Units at June 30, 2020........................................
Number of
Performance Stock
Units
Weighted Average
Grant Date Fair
Value
$
40,612
26,416
(7,700)
59,328
35,122
(32,373)
(11,456)
50,621
72,048
(8,383)
(46,882)
67,404
11.85
19.62
14.42
14.98
25.70
11.85
19.73
23.34
18.18
19.40
20.82
20.02
As of June 30, 2020, there was $0.2 million of total unrecognized compensation expense related to non-vested PSUs. The Company
expects this expense to be recognized over a weighted average period of 2.0 years.
Nonqualified Stock Options
In July 2015, the Company granted 137,786 NSOs to certain employees. As of July 2019, all outstanding options were fully vested
and exercisable. The fair value of NSOs vested during each of the years ended June 30, 2020, 2019, and 2018 was $0.2 million.
A summary of NSO activity for the years ending June 30, 2020, 2019, and 2018 is as follows:
Outstanding at June 30, 2017 ...................................................
Granted ..................................................................................
Exercised ...............................................................................
Forfeited or expired ...............................................................
Outstanding at June 30, 2018 ...................................................
Granted ..................................................................................
Exercised ...............................................................................
Forfeited or expired ...............................................................
Outstanding at June 30, 2019 ...................................................
Granted ..................................................................................
Exercised ...............................................................................
Forfeited or expired ...............................................................
Outstanding at June 30, 2020 ...................................................
Shares
116,328
-
(10,905)
(12,298)
93,125
-
(10,563)
(1,703)
80,859
-
(48,467)
-
32,392
Fully vested and exercisable at June 30, 2020 .........................
32,392
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Yrs.)
Aggregate
Intrinsic
Value
$
10.70
8.1 $
1,030
10.70
10.70
10.70
10.70
10.70
10.70
10.70
-
10.70
10.70
7.1
1,700
6.1
5.1
5.1
719
270
270
F-25
11. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has lease agreements for certain personal and real property. Leases with an initial lease term of 12 months or less are
not recorded on the balance sheet. Our lease agreements do not include any significant renewal options. Our lease agreements do not
contain any material residual value guarantees or material restrictive covenants.
Upon adoption of ASC 842 on July 1, 2019, the Companys most significant lease was for the Crest manufacturing facility, which was
classified as an operating lease. This lease included a purchase option for the Company to acquire the premises. During the three
months ended September 29, 2019, the decision was made to exercise the purchase option which resulted in $2.8 million of operating
lease assets and liabilities being reclassified to finance lease assets and liabilities on the September 29, 2019 condensed consolidated
balance sheet. In addition, the decision to exercise the purchase option resulted in the remeasurement of the related lease balances
which added $1.3 million of additional finance lease assets and finance lease liabilities to the September 29, 2019 condensed
consolidated balance sheet.
In accordance with the purchase option, on October 24, 2019 the Company completed the purchase of the Crest manufacturing facility
for $4.1 million. Upon completion of this purchase, the Company recognized approximately $4.1 million in Property, plant and
equipment, net and derecognized approximately $4.1 million of both Finance lease assets and Accrued expenses and other current
liabilities. The purchase price of the Crest Facility was determined by appraisal and negotiation between the Company and the seller,
whose minority ownership included a member of the Crest management team. The Company funded the purchase by utilizing cash
from operations.
Total lease cost, including immaterial amounts of variable and short-term lease cost, for the year ended June 30, 2020 was $0.5
million and was primarily recognized in Cost of sales. As of June 30, 2020, the total weighted-average discount rate and remaining
lease term for the Company's operating leases were 4.73% and 2.26 years, respectively. For the year ended June 30, 2020, total
operating cash flows related to operating leases were $0.5 million. As of June 30, 2020, future payments due under the Companys
operating leases total $0.5 million and are immaterial in each of the next five years.
Prior to the adoption of ASC 842, future minimum rental payments under all non-cancelable operating leases with remaining lease
terms in excess of one year at June 30, 2019, were as follows:
2020...................................................................................................................................................................... $
2021......................................................................................................................................................................
2022......................................................................................................................................................................
2023......................................................................................................................................................................
2024......................................................................................................................................................................
Thereafter.............................................................................................................................................................
Total .................................................................................................................................................................. $
703
690
628
402
402
1,806
4,631
Repurchase Obligations
Under certain conditions, the Company is obligated to repurchase new inventory repossessed from dealerships by financial institutions
that provide credit to the Companys dealers. See Note 1 for more information regarding the terms and accounting policies related to
this obligation. The maximum obligation of the Company under such floor plan agreements totaled approximately $131.4 million as of
June 30, 2020. We incurred no material impact from repurchase events during the years ended June 30, 2020, 2019, and 2018. The
Company recorded a repurchase liability of $1.1 million and $1.9 million as of June 30, 2020 and 2019, respectively.
Purchase Commitments
The Company is engaged in an exclusive contract with a single vendor to provide engines for its MasterCraft performance sport boats.
This contract makes this vendor the only supplier to MasterCraft for in-board engines and expires June 30, 2023. The Company is
obligated to purchase a minimum number of engines for each model year under this contract. The Company could also be required to
pay a penalty to this vendor in order to maintain exclusivity if annual purchases under the agreement fail to meet a certain volume
threshold.
Legal Proceedings
F-26
The Company is involved in certain claims and legal actions arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters is not expected to have a material adverse effect on the Companys financial condition, results
of operations or cash flows.
12. EARNINGS PER SHARE
The factors used in the earnings per share computation are as follows:
Net income (loss) ...................................................................................... $
Weighted average shares basic.............................................................
Dilutive effect of assumed exercises of stock options ..............................
Dilutive effect of assumed restricted share awards/units..........................
Weighted average outstanding shares diluted ......................................
Basic net income (loss) per share.............................................................. $
Diluted net income (loss) per share........................................................... $
2020
(24,047) $
18,734,482
18,734,482
(1.28) $
(1.28) $
2019
21,354
18,653,892
45,799
68,516
18,768,207
1.14
1.14
$
$
$
2018
39,653
18,619,793
38,835
55,904
18,714,531
2.13
2.12
For the year ended June 30, 2020, the dilutive effect of approximately 45,000 outstanding RSAs, PSUs and NSOs have been excluded
from the calculation of diluted earnings per share as the effect would have been anti-dilutive because of the net loss for the year ended
June 30, 2020. For the years ended June 30, 2019 and 2018, an immaterial number of shares were excluded from the computation of
diluted earnings per share as the effect would have been anti-dilutive.
13. SEGMENT INFORMATION
The Company designs, manufactures, and markets recreational performance sport boats, luxury day boats, and outboard boats under
three operating and reportable segments: MasterCraft, NauticStar, and Crest. The Companys segments are defined by the Companys
operational and reporting structures.
•
•
•
The MasterCraft segment produces boats under two product brands, MasterCraft and Aviara, at its Vonore, Tennessee
facility.
MasterCraft boats are premium recreational performance sport boats primarily used for water skiing,
wakeboarding, wake surfing, and general recreational boating. Aviara boats are luxury day boats primarily used for general
recreational boating. Production of Aviara boats began during the year ended June 30, 2019 and the Company began selling
these boats in July 2019.
The NauticStar segment produces boats at its Amory, Mississippi facility. NauticStars boats are primarily used for saltwater
fishing and general recreational boating.
The Crest segment produces pontoon boats at its Owosso, Michigan facility. Crests boats are primarily used for general
recreational boating.
Each segment distributes its products through its own dealer network. The Companys chief operating decision maker (CODM)
regularly reviews the operating performance of each segment including measures of performance based on operating income. Each
segment has its own management structure which is responsible for the operations of the segment and which is directly accountable to
the CODM. The Company files a consolidated income tax return and does not allocate income taxes and other corporate-level
expenses, including interest, to operating segments. All material corporate costs are allocated to the MasterCraft segment.
Selected financial information for the Companys reportable segments was as follows:
Net sales..........................................................................
Operating income (loss)..................................................
Depreciation and amortization........................................
Goodwill and other intangible asset impairment ............
Purchases of property, plant and equipment...................
MasterCraft
246,455
$
33,229
4,679
6,193
For the Year Ended June 30, 2020
NauticStar
Crest(a)
$
$
54,930
(17,681)
3,454
13,199
2,804
61,688
(42,115)
2,394
43,238
5,244
Consolidated
363,073
$
(26,567)
10,527
56,437
14,241
F-27
Net sales..........................................................................
Operating income (loss)..................................................
Depreciation and amortization........................................
Goodwill and other intangible asset impairment ............
Purchases of property, plant and equipment...................
Net sales..........................................................................
Operating income (loss)..................................................
Depreciation and amortization........................................
Purchases of property, plant and equipment...................
(a) Crest was acquired on October 1, 2018.
(b) NauticStar was acquired on October 2, 2017.
MasterCraft
311,830
$
53,989
3,481
11,730
For the Year Ended June 30, 2019
NauticStar
Crest(a)
$
$
77,995
(27,785)
2,684
31,000
2,069
76,556
7,055
1,622
265
Consolidated
466,381
$
33,259
7,787
31,000
14,064
For the Year Ended June 30, 2018
MasterCraft
266,319
$
49,363
3,283
4,234
NauticStar(b)
66,406
$
6,620
1,803
1,071
Crest
$
Consolidated
332,725
55,983
5,086
5,305
$
The following table presents total assets for the Companys reportable segments as of June 30, 2020, and 2019.
Assets:
MasterCraft ......................................................................................................
NauticStar ........................................................................................................
Crest .................................................................................................................
Eliminations .....................................................................................................
Total assets..........................................................................................................
$
$
294,139
36,720
40,077
(163,013)
207,923
$
$
273,046
52,761
85,979
(163,013)
248,773
2020
2019
14. QUARTERLY FINANCIAL REPORTING (UNAUDITED)
The Company maintains its financial records on the basis of a fiscal year ending on June 30, with the fiscal quarters equaling thirteen
weeks. The following tables set forth summary quarterly financial information for the years ended June 30, 2020 and 2019. Due to
effects of rounding, the quarterly results presented may not sum to the fiscal year results presented.
Net sales......................................................................... $
Gross profit....................................................................
Goodwill and other intangible asset impairment(a)........
Operating income (loss) ................................................
Net income (loss)........................................................... $
Basic earnings (loss) per common share ....................... $
Diluted earnings (loss) per common share .................... $
Weighted average shares used for computation of:
Fiscal Quarter Ended
June 30,
2020
March 29,
2020
December 29,
2019
September 29,
2019
Fiscal Year
Ended
June 30,
2020
51,094
7,407
(2,422)
(2,836)
(0.15)
(0.15)
$
$
$
$
102,562
21,274
56,437
(47,177)
(36,713)
(1.96)
(1.96)
$
$
$
$
99,628
21,142
10,335
6,879
0.37
0.37
$
$
$
$
109,789
25,533
12,697
8,623
0.46
0.46
$
$
$
$
363,073
75,356
56,437
(26,567)
(24,047)
(1.28)
(1.28)
Basic earnings per common share ..............................
Diluted earnings per common share ...........................
18,743,915
18,743,915
18,739,480
18,739,480
18,730,688
18,770,783
18,723,845
18,770,756
18,734,482
18,734,482
F-28
Net sales......................................................................... $
Gross profit....................................................................
Goodwill and other intangible asset impairment(a)........
Operating income (loss) ................................................
Net income (loss)........................................................... $
Basic earnings (loss) per common share ....................... $
Diluted earnings (loss) per common share .................... $
Weighted average shares used for computation of:
Fiscal Quarter Ended
June 30,
2019
March 31,
2019
December 30,
2018(b)
September 30,
2018
Fiscal Year
Ended
June 30,
2019
122,809
31,493
31,000
(11,538)
(10,062)
(0.54)
(0.54)
$
$
$
$
128,390
31,357
18,464
12,763
0.68
0.68
$
$
$
$
121,541
27,074
14,722
10,188
0.55
0.54
$
$
$
$
93,641
23,203
11,611
8,465
0.45
0.45
$
$
$
$
466,381
113,127
31,000
33,259
21,354
1.14
1.14
Basic earnings per common share ..............................
Diluted earnings per common share ...........................
18,658,701
18,658,701
18,657,719
18,756,605
18,653,111
18,772,322
18,646,039
18,768,764
18,653,892
18,768,207
(a) Goodwill and other intangible asset impairment charges are discussed in Note 6.
(b) Crest was acquired on October 1, 2018.
F-29