MasterCraft Boat Holdings, Inc. — Fiscal 2022 Second-Quarter 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended January 2, 2022, compared with January 3, 2021. MasterCraft operates four reportable segments: MasterCraft, Crest, NauticStar, and Aviara, distributing boats through independent dealer networks. The company’s fiscal year ends June 30, and interim results are seasonal.
Marine retail demand remained strong, but supply-chain disruptions, production inefficiencies, labor challenges, inflation, and the transition of Aviara production to the Merritt Island, Florida facility affected costs and profitability.
Financial performance and liquidity
| Metric | Three months ended Jan. 2, 2022 | Year-over-year change | Six months ended Jan. 2, 2022 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $159.5 million | 34.4% | $303.5 million | 36.4% |
| Gross profit | $35.2 million | 20.2% | $65.3 million | 17.7% |
| Gross margin | 22.1% | Down 260 bps | 21.5% | Down 350 bps |
| Operating income | $20.6 million | 21.3% | $34.6 million | 14.0% |
| Operating margin | 12.9% | Down from 14.3% | 11.4% | Down from 13.6% |
| Net income | $15.4 million | 23.2% | $25.8 million | 16.9% |
| Diluted EPS | $0.81 | Up from $0.66 | $1.36 | Up from $1.17 |
| Adjusted EBITDA | $25.0 million | Up from $21.3 million | $44.4 million | Up from $38.3 million |
| Adjusted EBITDA margin | 15.7% | Down from 17.9% | 14.6% | Down from 17.2% |
Six-month operating cash flow was $12.2 million, compared with $30.2 million in the prior-year period. Capital expenditures were $6.7 million, compared with $18.9 million, while financing activities used $31.1 million, including $19.5 million of net debt repayments and $11.4 million of share repurchases. Cash declined to $13.6 million from $39.3 million at June 30, 2021.
Debt totaled $73.7 million at January 2, 2022, down from $93.1 million at June 30, 2021. Revolver borrowings were $15.7 million, with $84.3 million of remaining availability. The company was in compliance with its debt covenants; the credit agreement matures June 28, 2026. Management stated that cash, operating cash flow, and borrowing capacity are expected to be sufficient for liquidity needs and authorized repurchases.
Inventory increased to $78.4 million from $53.5 million, primarily due to higher raw-material safety stock and work in process delayed by supply-chain shortages. Working capital usage was a significant factor reducing operating cash flow.
Material changes versus the prior comparable period
- Sales growth was driven by higher unit volumes, pricing, favorable model mix, and increased option sales. Consolidated unit volume rose 11.4% in the quarter and 20.4% year to date.
- MasterCraft sales increased 34.3% for the quarter and 33.3% year to date; Crest sales increased 41.7% and 60.2%, respectively; Aviara sales increased 143.5% and 96.0%. NauticStar sales increased only 0.8% and 4.2% because lower volume offset pricing and option benefits.
- Gross margin contracted because material and labor costs rose, production was disrupted, and new-facility overhead was under-absorbed. Price increases implemented during fiscal 2022 did not initially offset inflation.
- NauticStar’s operating loss widened to $3.1 million for the quarter and $5.4 million for the first half, compared with losses of $0.3 million and $1.9 million, respectively.
- Aviara remained loss-making, with operating losses of $2.3 million for the quarter and $5.9 million year to date. The company recorded a $1.1 million goodwill impairment charge in the first quarter after reallocating goodwill and testing the Aviara reporting unit.
- The company repurchased 414,675 shares for $11.4 million during the first six months. Approximately $38.6 million remained available under the $50.0 million authorization.
- Beginning in fiscal 2022, the company changed its reportable segments to MasterCraft, Crest, NauticStar, and Aviara and recast prior-period segment information.
Outlook, commentary, risks, and unusual items
- Management reported historically low dealer inventories and continued strong retail demand, supporting wholesale demand and higher production rates.
- Additional mid-cycle price increases began phasing in during the second quarter, with the company stating that their full benefit was expected in the second half of fiscal 2022. The filing does not provide formal full-year revenue or earnings guidance.
- Key risks include continuing COVID-19 effects, supply shortages, production inefficiencies, inflation, labor absenteeism, changing consumer demand, competition, dealer dependence, manufacturing capacity, and the ability to manage fixed costs.
- The company committed to a minimum annual gross purchase value of $27.0 million for marine outboard engines during fiscal 2022.
- Accrued warranty liabilities were $24.1 million at January 2, 2022, up from $22.3 million at June 30, 2021. Litigation accruals were not material, and management did not expect existing litigation to have a material adverse effect.
- Non-GAAP results exclude or adjust for items such as share-based compensation, acquisition-related amortization, Aviara transition costs, and goodwill impairment. These measures should not be viewed as substitutes for GAAP results or cash flow.
- Disclosure controls and procedures were assessed as effective, and the company reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether supply-chain constraints, inflation, labor challenges, and production inefficiencies improve enough to restore gross margins.
- Whether Aviara achieves sustained profitability after the Merritt Island production transition and whether additional impairment charges arise.
- Whether NauticStar’s operating losses narrow and whether its lower unit volumes persist.
- Inventory levels, work-in-process conversion, dealer inventory replenishment, and the resulting effect on operating cash flow.
- The pace of price realization and whether pricing offsets material and labor-cost inflation.
- Compliance with leverage and fixed-charge covenants while the company continues debt repayments and share repurchases.
- The company’s ability to meet the $27.0 million minimum engine-purchase commitment and other supplier obligations.
- The sustainability and comparability of adjusted EBITDA and adjusted earnings after excluding transition, impairment, amortization, and share-based compensation items.