Business Context and Reporting Period
MCBC Holdings, Inc. designs and manufactures premium recreational sport boats under the MasterCraft brand, selling primarily through independent North American and international dealers. The unaudited quarter ended October 1, 2017 represents the first quarter of fiscal 2018; the comparable period ended October 2, 2016. The filing was signed November 9, 2017.
MasterCraft reported 775 units sold versus 718 in the prior-year quarter. North America generated 88.3% of sales and international markets generated 11.7%.
Financial Performance and Liquidity
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $65.0 million | $60.7 million | 7.2% increase |
| Gross profit | $18.2 million | $17.8 million | 2.0% increase |
| Gross margin | 27.9% | 29.3% | Down 140 basis points |
| Operating income | $11.1 million | $11.6 million | 4.9% decrease |
| Net income | $7.0 million | $7.0 million | 0.9% increase |
| Diluted EPS | $0.38 | $0.38 | Flat |
| Adjusted EBITDA | $12.9 million | $13.3 million | 2.8% decrease |
| Adjusted EBITDA margin | 19.9% | 21.9% | Down 200 basis points |
Cost of sales increased 9.3% to $46.9 million, exceeding sales growth because of higher unit volume, model-year changeover costs and costs associated with significant new features on 2018 models. Operating expenses increased 15.0% to $7.1 million, including higher dealer training, promotional, acquisition-related, legal and advisory costs. Operating margin was approximately 17.0%, compared with 19.2% in the prior-year quarter. The effective tax rate was 33.4%, below the 35% statutory rate primarily because of the domestic production activities deduction.
Cash flow from operations was $10.2 million, compared with $5.0 million in the prior-year quarter, primarily reflecting timing-related increases in accounts payable and lower income-tax payments. Capital expenditures were $0.5 million. Financing cash outflows were $1.0 million, including $1.0 million of term-loan principal payments. Cash increased by $8.6 million to $12.7 million at October 1, 2017.
At quarter-end, total debt was $33.6 million, consisting of $34.2 million of senior secured term debt net of $0.6 million of issuance costs; the revolving facility had no borrowings. Revolver availability was $29.8 million, net of letters of credit. The company stated that operating cash flow and revolver availability should fund working capital and capital expenditures for at least the next 12 months, and it was in compliance with debt covenants.
Total assets were $95.0 million and stockholders’ equity was $19.0 million at October 1, 2017. Accounts receivable increased to $6.7 million from $3.5 million at June 30, 2017, while inventories were broadly stable at $11.6 million.
Material Changes Versus the Prior Comparable Period
- Unit volume increased 7.9%, while net sales per unit declined to approximately $84,000 from $85,000 because of unfavorable product mix, partially offset by favorable pricing.
- Gross profit grew modestly, but gross margin declined 140 basis points due to unfavorable mix and model-year transition costs.
- Selling and marketing expense increased 33.3% to $2.7 million, primarily from dealer training and promotional activity for the redesigned 2018 MasterCraft XStar.
- General and administrative expense increased 5.9% to $4.3 million, including $0.9 million of additional NauticStar acquisition-related legal and advisory costs, partly offset by lower Malibu litigation costs.
- Adjusted EBITDA and adjusted net income declined to $12.9 million and $7.5 million, respectively, from $13.3 million and $7.6 million.
- Operating cash generation more than doubled, primarily because of working-capital timing and lower cash taxes; this improvement may not recur.
Outlook, Transactions, Risks and Unusual Items
Management cited increased consumer demand, limited used-boat inventory, recently released products and operational improvements as potential drivers of future growth and margin expansion. No quantitative fiscal 2018 revenue, earnings or margin guidance is provided in the filing.
On October 2, 2017, after the reporting date, the company acquired NauticStar, LLC for an aggregate stated purchase price of $79.8 million, subject to customary adjustments. NauticStar expands the company into saltwater fishing and outboard-propulsion markets. Purchase-accounting valuation of acquired assets and assumed liabilities was not complete when the filing was issued.
To finance the acquisition, the company entered into a new $145 million senior secured credit facility comprising a $115 million term loan and a $30 million revolver. The term loan matures October 2, 2022. The stated current margins were 1.25% over prime or 2.25% over adjusted LIBOR. The company paid $1.3 million of related fees and subsequently made a voluntary $10.0 million term-loan payment on October 17, 2017.
Key risks include seasonal demand, economic and consumer-credit conditions, dealer dependence, competition, product mix, manufacturing and fixed-cost management, weather, foreign exchange, successful new-product launches, and integration of NauticStar. Management expects acquisition-related transaction and integration costs, but the timing and amount of future integration charges were not clear. Warranty liabilities were $12.5 million at quarter-end, with $1.3 million of provisions and $1.1 million of payments during the quarter.
The company adopted inventory measurement guidance and stock-compensation guidance in the quarter without a material impact. It expects to adopt the revenue-recognition standard beginning July 1, 2018; retail promotions and rebates may be recorded earlier, changing timing but not expected cumulative revenue per transaction. No legal proceedings were reported as outstanding.
Investor Verification Items
- Verify the completed NauticStar purchase accounting, acquired operating results, synergies, integration costs and any subsequent goodwill or intangible-asset balances.
- Reconcile the new $115 million term loan, the October 17 $10.0 million repayment, interest expense and compliance with revised leverage covenants.
- Assess whether the quarter’s working-capital-driven increase in operating cash flow is sustainable, particularly given the rise in receivables and accounts payable.
- Monitor gross-margin recovery after the 2018 model-year changeover and the effect of product mix, pricing and promotional activity.
- Evaluate warranty claims, dealer incentives, inventory obsolescence and the $12.5 million accrued warranty liability.
- Confirm the timing and balance-sheet effect of adopting the new revenue-recognition standard and the impact of retail promotions and rebates.