MasterCraft Boat Holdings, Inc. — Fiscal Third Quarter 2020 Form 10-Q
Reporting period: Three and nine months ended March 29, 2020, compared with March 31, 2019. The request identifies “2019 Q3,” but the filing is for fiscal 2020 third quarter. MasterCraft designs, manufactures, and markets recreational powerboats through the MasterCraft, NauticStar, and Crest segments.
Key Financial Metrics
| Metric | Three Months Ended | Change | Nine Months Ended | Change |
|---|---|---|---|---|
| Net sales | $102.6 million | Down 20.1% | $312.0 million | Down 9.2% |
| Gross profit | $21.3 million | Down 32.2% | $67.9 million | Down 16.8% |
| Gross margin | 20.7% | Down 370 bps | 21.8% | Down 200 bps |
| Operating income (loss) | $(47.2) million | Prior year: $18.5 million | $(24.1) million | Prior year: $44.8 million |
| Net income (loss) | $(36.7) million | Prior year: $12.8 million | $(21.2) million | Prior year: $31.4 million |
| Diluted EPS | $(1.96) | Prior year: $0.68 | $(1.13) | Prior year: $1.67 |
| Adjusted EBITDA | $14.0 million | Prior year: $21.9 million | $43.4 million | Prior year: $55.5 million |
| Adjusted EBITDA margin | 13.6% | Prior year: 17.0% | 13.9% | Prior year: 16.2% |
Cash Flow, Liquidity, and Balance Sheet
- Cash provided by operating activities was $23.9 million for the nine-month period, down from $39.6 million.
- Capital expenditures were $13.6 million, compared with $10.4 million in the prior-year period.
- Cash increased to $41.0 million at March 29, 2020, from $5.8 million at June 30, 2019. The increase included a $35.0 million revolving-credit draw.
- Total debt was $138.4 million, including $35.0 million outstanding under the revolver, compared with $113.7 million at June 30, 2019. Long-term debt, net of current portion, was $129.4 million.
- The Company had no remaining borrowing availability under the revolving credit facility at March 29, 2020. It reported compliance with its financial covenants at quarter-end.
- Total assets were $250.3 million and stockholders’ equity was $51.4 million at March 29, 2020.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because of lower wholesale unit volumes, dealer inventory-right-sizing, production cuts, and the emerging COVID-19 disruption. Consolidated unit sales declined 28.5% in the quarter and 14.4% for the nine months.
- Quarterly sales decreased across all segments: MasterCraft declined 11.2%, NauticStar 34.6%, and Crest 34.5%. Nine-month sales declined 9.0%, 18.1%, and 0.4%, respectively.
- Average sales per unit increased 11.3% in the quarter and 4.7% for the nine months, reflecting higher-priced or higher-contented models and pricing actions.
- Gross margin contracted because of lower fixed-cost absorption, higher sales discounts, lower volume, and $1.5 million of COVID-19 shutdown costs.
- The Company recorded a $56.4 million non-cash goodwill and trade-name impairment charge related to NauticStar and Crest. This comprised $44.4 million of goodwill and $12.0 million of trade-name impairment.
- After the impairment, no goodwill remained assigned to NauticStar or Crest; MasterCraft goodwill was $29.6 million. Management stated that the MasterCraft reporting unit’s estimated fair value exceeded carrying value by approximately 165%.
- Interest expense declined 41.8% for the quarter and 24.1% for the nine months due to prior voluntary term-loan prepayments and lower effective rates.
- The Company purchased the Crest manufacturing facility for $4.1 million in October 2019, using cash from operations.
- Aviara sales began in fiscal 2020. The AV32 and AV36 had launched by the filing date, and the AV40 was expected to begin selling in the first fiscal quarter of 2021.
Outlook, Risks, and Unusual Items
- The Company suspended manufacturing at all facilities in late March 2020 and temporarily laid off nearly all hourly employees. It intended to resume operations at Crest and NauticStar facilities on May 11, 2020, and at the MasterCraft facility on May 12, 2020, subject to health, safety, and government requirements.
- Management estimated COVID-19 shutdown costs of approximately $1.5 million, including severance and temporary healthcare benefits.
- On May 7, 2020, the Company amended its credit agreement to temporarily replace leverage and fixed-charge coverage covenants with interest coverage, minimum liquidity, and maximum unfinanced capital-expenditure covenants. The replacement package was scheduled to remain in effect through the quarter ended March 31, 2021, with certain liquidity testing continuing through May 31, 2021.
- Management stated that cash, operating cash flow, and borrowing capacity were expected to satisfy liquidity needs for at least the next 12 months, but emphasized substantial uncertainty from COVID-19. The filing does not provide formal full-year revenue or earnings guidance.
- The Company forecast a modest recovery in reporting-unit results later in fiscal 2021, but acknowledged that additional goodwill or intangible-asset impairments could result from adverse changes in demand, forecasts, market conditions, or discount rates.
- Principal risks include prolonged pandemic effects, lower consumer and dealer demand, supply-chain and logistics disruptions, delayed receivable collections, facility reopening difficulties, dealer concentration, fixed manufacturing costs, and covenant or liquidity pressure.
Important Facts for Investors to Verify
- Assess post-quarter COVID-19 sales, production, dealer inventory, and facility-reopening trends, as the March 29 results capture only the early pandemic impact.
- Review the amended credit agreement, minimum liquidity requirements, interest coverage requirements, borrowing costs, and debt maturities in October 2023.
- Monitor cash burn, working-capital needs, inventory levels, receivable collections, and the absence of remaining revolver availability at quarter-end.
- Evaluate whether NauticStar and Crest can recover sufficiently to avoid further impairment charges and whether MasterCraft’s reported valuation cushion remains intact.
- Separate GAAP results from management’s non-GAAP measures; adjusted EBITDA excludes impairment, shutdown costs, Aviara start-up costs, amortization, and other items.
- Verify the commercial traction and costs associated with the Aviara product launch, including the planned AV40 launch in fiscal 2021.