Business Context and Reporting Period
MCBC Holdings, Inc., operating primarily through MasterCraft Boat Company, designs and manufactures premium recreational performance boats sold through independent dealers in North America and internationally. The fiscal second quarter and six-month period ended December 27, 2015 are unaudited and compared with periods ended December 28, 2014. The Hydra-Sports manufacturing agreement expired June 30, 2015 and was not renewed; current-period operations therefore reflect only the MasterCraft brand.
For the six months ended December 27, 2015, 92.0% of sales came from North America and 8.0% from international markets. The company had 95 North American dealers and 48 international dealers.
Financial Performance and Liquidity
| Metric | Q2 FY2016 | Q2 FY2015 | Six Months FY2016 | Six Months FY2015 |
|---|---|---|---|---|
| Net sales | $55.2 million | $52.8 million | $111.2 million | $105.3 million |
| Gross profit | $15.4 million | $12.7 million | $31.2 million | $25.5 million |
| Gross margin | 27.8% | 24.0% | 28.1% | 24.2% |
| Operating income | $2.8 million | $8.0 million | $6.8 million | $16.0 million |
| Net income | $1.9 million | $1.5 million | $0.5 million | $2.9 million |
| Diluted EPS | $0.10 | $0.13 | $0.03 | $0.25 |
| Adjusted EBITDA | $10.5 million | $8.0 million | $21.2 million | $16.0 million |
| Adjusted EBITDA margin | 19.1% | 16.3% | 19.1% | 16.4% |
Q2 MasterCraft unit volume increased 7.4% to 696 boats, while MasterCraft sales per unit increased 3.9% to approximately $79,000. Six-month MasterCraft volume increased 8.6% to 1,378 units, and sales per unit increased 5.2% to approximately $81,000.
- Six-month operating cash flow was $11.6 million, compared with $16.4 million in the prior period.
- Capital expenditures were $1.5 million, compared with $1.7 million.
- Cash increased to $15.6 million at December 27, 2015 from $1.2 million at June 30, 2015.
- The company had no outstanding term debt or revolver borrowings at quarter-end. Revolver availability was $28.8 million after $1.2 million of letters of credit.
- Total assets were $103.1 million and stockholders’ equity was $64.6 million, compared with a stockholders’ deficit of $42.3 million at June 30, 2015.
Material Changes Versus the Prior Comparable Period
- Consolidated Q2 sales rose 4.5%, while comparable MasterCraft sales rose 12.2%; the difference reflects the discontinued Hydra-Sports manufacturing activity included in the prior year.
- Gross margin expanded 380 basis points in Q2 and 390 basis points for the six-month period, primarily from lower material and production costs, manufacturing efficiencies, operating leverage, higher-content options and the shift from Hydra-Sports to MasterCraft production.
- Operating expenses increased substantially. Q2 general and administrative expense rose to $9.6 million from $2.6 million, primarily because of $6.8 million in stock-based compensation and public-company costs. Six-month stock-based compensation was $12.2 million.
- Six-month operating income declined despite higher sales and gross profit because of increased operating expenses. The filing’s adjusted measures exclude stock compensation and other items and show higher adjusted EBITDA.
- The July 22, 2015 IPO generated $81.8 million of net proceeds. The company used IPO proceeds, together with other financing activity, to repay all outstanding term-loan and revolving-credit borrowings.
- More than 97% of the common stock warrants outstanding at June 30, 2015 were exchanged for shares. The warrant liability declined to $0.3 million from $9.1 million, and 26,143 warrants remained outstanding at December 27, 2015.
Outlook, Commentary, Risks and Unusual Items
Management expects continued growth from recently launched products, including the MasterCraft NXT entry-level line, additional new models, market-share gains, higher unit volume and operating efficiencies. Management also expects continued margin expansion, but provides no specific revenue, earnings or margin guidance in the filing.
Management identifies general economic conditions, consumer confidence, product demand and preferences, dealer reliance, dealer and consumer credit availability, competition, manufacturing levels and fixed costs, product launches, weather, seasonality and foreign currency movements as significant risks. Sales are seasonal, with the majority occurring during the peak boating season.
- Malibu Boats has alleged that the company’s Gen 2 Surf System and NXT Surf System infringe a patent relating to wake-surf technology. Malibu seeks trebled damages, attorneys’ fees and an injunction; the amount of damages is unspecified. The company filed a summary judgment motion, which had not been decided as of the filing date.
- Six-month income tax expense was affected by a 77.1% effective tax rate, primarily because warrant fair-value changes created permanent tax differences.
- Q2 included $6.8 million of stock-based compensation and a $0.1 million warrant fair-value expense. Six-month results included $3.4 million of warrant fair-value expense, $0.7 million of debt-extinguishment loss, $0.4 million of litigation-related charges and $0.1 million of IPO transaction expense.
- Management stated that cash from operations and revolver availability should fund working capital and capital expenditures for at least the next 12 months.
- The filing reports effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether MasterCraft’s unit growth, pricing and option mix continue after the Hydra-Sports comparison benefit expires.
- Whether gross-margin expansion and manufacturing efficiencies offset increased public-company, marketing and compensation costs.
- The cash conversion trend, including the reasons for lower operating cash flow and vendor-payment timing.
- The outcome and potential financial or operating impact of Malibu’s patent litigation.
- The company’s future use of the revolver, compliance with its covenants and any reaccumulation of debt.
- The sustainability of adjusted EBITDA, including the recurring nature of stock-based compensation and the reconciliation to GAAP results.
- The effect of seasonality, consumer demand, dealer financing conditions and broader recreational-boat market conditions on future results.