Business Context and Reporting Period
MCBC Holdings, Inc., operating primarily through MasterCraft Boat Company, designs and manufactures premium inboard tournament ski boats and luxury performance V-drive runabouts under the MasterCraft brand. The fiscal second quarter and six-month period ended January 1, 2017 are compared with periods ended December 27, 2015. The financial statements are unaudited and presented in thousands, except per-share data.
The company sells through independent dealers. For the six months, 92.3% of net sales came from North America and 7.7% from international markets. Results are seasonal, with sales generally concentrated during the peak boating season.
Financial Performance and Liquidity
| Metric | Three months ended Jan. 1, 2017 | Prior comparable period | Six months ended Jan. 1, 2017 | Prior comparable period |
|---|---|---|---|---|
| Net sales | $51.1 million | $55.2 million | $111.8 million | $111.2 million |
| Gross profit | $14.3 million | $15.4 million | $32.1 million | $31.2 million |
| Gross margin | 27.9% | 27.8% | 28.7% | 28.1% |
| Operating income | $7.0 million | $2.8 million | $18.7 million | $6.8 million |
| Net income | $4.0 million | $1.9 million | $11.0 million | $0.5 million |
| Diluted EPS | $0.22 | $0.10 | $0.59 | $0.03 |
| Adjusted EBITDA | $9.0 million | $10.5 million | $22.3 million | $21.2 million |
| Adjusted EBITDA margin | 17.6% | 19.1% | 20.0% | 19.1% |
Second-quarter unit volume declined 9.3% to 631 boats, while net sales per unit increased 2.5% to approximately $81,000. Six-month unit volume declined 2.1% to 1,349 boats, while net sales per unit increased 2.7% to approximately $83,000.
Six-month net cash provided by operating activities was $12.9 million, compared with $11.6 million in the prior period. Capital expenditures were $1.1 million, resulting in net cash used in investing activities of $1.1 million. Financing activities used $5.6 million, primarily reflecting $2.5 million of term-loan repayments and $3.1 million of revolving-credit repayments. Cash increased from $0.1 million at June 30, 2016 to $6.4 million at January 1, 2017.
At January 1, 2017, total debt was $46.7 million, consisting of a $47.5 million senior secured term loan net of issuance costs; the revolving facility had no borrowings outstanding. The $30 million revolving facility had approximately $29.8 million of availability after letters of credit. The company was in compliance with its debt covenants and stated that operating cash flow and available revolver capacity should fund working capital and capital expenditures for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales decreased 7.4%, primarily because of lower unit volume, partially offset by higher pricing and greater sales of higher-content options.
- Six-month sales increased 0.5%, with higher sales per unit offsetting lower unit volume.
- Gross margin improved by 10 basis points in the quarter and 60 basis points for the six months, driven primarily by product mix and higher-content options.
- Operating expenses declined substantially. Six-month general and administrative expense fell 53.3%, principally because the prior-year period included significantly higher stock-based compensation.
- Six-month operating income increased to $18.7 million from $6.8 million, and net income increased to $11.0 million from $0.5 million. The prior-year period included a $3.4 million non-cash increase in common-stock warrant fair value and substantial stock-based compensation.
- Adjusted EBITDA increased 5.3% for the six months but decreased 14.5% for the quarter; the corresponding margins were 20.0% and 17.6%, respectively.
- Stockholders’ equity improved from a deficit of $8.4 million at June 30, 2016 to positive equity of $2.8 million at January 1, 2017, primarily because of six-month net income.
Outlook, Commentary, Risks, and Unusual Items
Management expects continued growth from recently launched and renewed products, potential market-share gains, higher unit volume, and manufacturing and product-development efficiencies. It cites increased consumer demand, limited used-boat inventory, broader product offerings, and higher-content options as opportunities. No quantitative fiscal 2017 revenue, earnings, or margin guidance is provided in the filing.
Key risks include economic conditions, consumer demand and confidence, dealer access to credit, reliance on independent dealers, competition, changing consumer preferences, seasonality, weather, foreign-currency movements, manufacturing-level management, the company’s fixed-cost base, and successful new-product introductions.
Malibu Boats has two pending patent lawsuits concerning MasterCraft’s Gen 2 and NXT Surf Systems. Malibu seeks damages, potentially trebled, attorneys’ fees, and injunctions. MasterCraft filed motions for summary judgment; trials were scheduled for May 2017 and October 2017. The company disputes the claims but cannot assess the probability or reasonably estimate the amount of any potential loss.
Other notable items include $1.7 million of six-month litigation charges, $0.3 million of stock-based compensation, and $0.1 million of transaction expense. In September and December 2016, selling stockholders completed follow-on and secondary offerings totaling 7.6 million shares; the company received no proceeds but incurred offering costs. The filing states that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Investor Verification Priorities
- Verify the sustainability of improved gross margins and operating income as unit volume declined.
- Separate recurring operating performance from prior-period stock-based compensation, warrant fair-value changes, transaction costs, and litigation charges.
- Review debt-amortization requirements, interest-rate exposure, covenant compliance, and the availability of the revolving facility.
- Monitor the two Malibu patent cases, including potential damages, injunction risk, and trial developments.
- Assess dealer inventory, wholesale demand, seasonal sales patterns, and whether higher sales per unit can offset weaker unit volumes.
- Evaluate the impact and adoption timing of pending accounting standards, including revenue recognition, leases, inventory measurement, and stock compensation.