MasterCraft Boat Holdings, Inc. — Fiscal 2023 Form 10-K
Reporting period: Fiscal year ended June 30, 2023. The filing is a fiscal-year 10-K, not a standalone fiscal 2022 fourth-quarter filing; quarterly data includes the quarter ended June 30, 2023 and comparative June 30, 2022 information. Results are presented primarily on a continuing-operations basis following the September 2, 2022 sale of NauticStar.
Business Context
MasterCraft designs, manufactures and markets recreational powerboats through the MasterCraft premium ski/wake, Crest pontoon and Aviara luxury day-boat brands. Products are sold primarily through independent dealers in North America and internationally. The top ten dealers represented approximately 40% of fiscal 2023 net sales, and one dealer represented 14.9%, or approximately $98.6 million.
The Company reported leading market positions in ski/wake boats, pontoon boats and luxury bowriders. Fiscal 2023 unit volume declined as the Company rebalanced dealer inventories amid slowing retail demand and higher interest rates.
Key Financial Metrics
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Net sales | $662.0 million | $641.6 million | Up 3.2% |
| Gross profit | $169.7 million | $168.2 million | Up 0.9% |
| Gross margin | 25.6% | 26.2% | Down 60 bps |
| Operating income | $116.9 million | $116.2 million | Up 0.6% |
| Net income from continuing operations | $90.5 million | $87.9 million | Up 2.9% |
| Continuing-operations diluted EPS | $5.09 | $4.72 | Up $0.37 |
| Adjusted EBITDA | $131.5 million | $130.5 million | Up 0.7% |
| Adjusted EBITDA margin | 19.9% | 20.3% | Down 40 bps |
| Operating cash flow from continuing operations | $136.8 million | $82.4 million | Up $54.4 million |
| Capital expenditures | $30.3 million | $12.3 million | Up $18.0 million |
Reported net income was $68.9 million, or $3.88 diluted EPS, after a $21.5 million net loss from discontinued operations, principally related to the NauticStar sale.
Segment Performance
| Segment | Fiscal 2023 Sales | Sales Change | Operating Income/(Loss) | Unit Volume Change |
|---|---|---|---|---|
| MasterCraft | $468.7 million | Up 0.6% | $101.3 million | Down 5.3% |
| Crest | $141.2 million | Up 0.3% | $20.1 million | Down 10.1% |
| Aviara | $52.1 million | Up 50.2% | $(4.5) million | Up 34.0% |
Consolidated unit sales declined 6.9% to 6,377 boats, while net sales per unit increased 10.6% to approximately $104,000, reflecting pricing, product mix and options. Aviara remained unprofitable but reduced its operating loss by approximately $4.5 million.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $19.8 million at June 30, 2023, compared with $34.2 million at June 30, 2022.
- Held-to-maturity securities totaled $91.6 million, consisting primarily of corporate bonds and U.S. Treasury bills maturing within one year.
- Term debt was $54.0 million before debt issuance costs, compared with $57.0 million a year earlier. The effective interest rate was 6.50% at June 30, 2023, versus 2.94% a year earlier.
- The $100.0 million revolving credit facility was undrawn and fully available. The credit agreement matures June 28, 2026, and the Company was in compliance with its financial covenants.
- Fiscal 2023 financing cash uses included $3.0 million of debt repayment and $22.9 million of share repurchases. Approximately $1.6 million remained under the existing repurchase authorization at year-end.
- On July 24, 2023, the board authorized a new $50 million repurchase program that becomes effective after the existing authorization expires.
- Management stated that cash, investments, operating cash flow and borrowing availability should be sufficient for expected liquidity and capital needs. No dividends are currently anticipated.
Material Changes Versus the Prior Comparable Period
- Sales increased modestly despite lower wholesale unit volume, primarily because of higher pricing. Dealer incentives increased as inventories, financing costs and retail competition rose.
- Gross margin contracted because of material, labor, overhead, insurance and warranty inflation; lower volume absorption; unfavorable model mix; and increased dealer incentives.
- Operating expenses rose 1.5%, although the prior-year period included a $1.1 million Aviara goodwill impairment charge.
- Interest expense increased $1.2 million because of higher variable interest rates, partly offset by $3.4 million of interest income from fixed-income investments.
- Operating cash flow improved substantially because of favorable working-capital changes, including lower accounts receivable and increased accrued liabilities.
- Investing cash use increased sharply because the Company invested $90.6 million net in held-to-maturity securities and spent $30.3 million on capital projects, including capacity expansion, tooling, facilities and information technology.
- The Company completed the NauticStar divestiture and recognized a $22.5 million pretax loss on sale. The related working-capital adjustment remains subject to arbitration and its outcome is uncertain.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific fiscal 2024 revenue, earnings or unit-volume guidance. Management described a slowing retail environment and continued pressure from higher interest rates, dealer inventories and competitive pricing. Aviara is expected to add a 28-foot model in fiscal 2024.
- Demand cyclicality: Boat purchases are discretionary and sensitive to consumer confidence, inflation, interest rates, credit availability, fuel prices and weather.
- Dealer concentration and inventory: Dealer health, floor-plan financing and inventory levels can materially affect wholesale shipments. The Company may be required to repurchase inventory from finance companies following dealer defaults; contractual obligations totaled approximately $53.1 million at June 30, 2023, while the recorded liability was $1.6 million.
- Supply chain: The Company relies on sole or limited-source suppliers for engines and other components. Fiscal 2023 included periodic shortages and cost increases.
- Interest-rate exposure: A hypothetical 1% change in interest rates would have changed fiscal 2023 interest expense by approximately $0.6 million.
- Warranty exposure: Warranty liability was $31.8 million at June 30, 2023, including $24.6 million for MasterCraft in the critical audit matter disclosure. Warranty costs increased because of prior model-year expenses.
- Commitments: The Company had $28.5 million of engine purchase commitments, including $19.5 million due within 12 months, and estimated future interest payments of $8.9 million on outstanding long-term debt.
- Impairment risk: Goodwill and indefinite-lived intangible assets are subject to impairment testing based on forecasts, discount rates and market multiples. Fiscal 2022 included a $1.1 million Aviara goodwill impairment; no fiscal 2023 goodwill impairment was recorded.
- Other risks: Manufacturing disruptions, labor shortages, product liability and recalls, cybersecurity incidents, regulatory changes, tariffs, environmental obligations and severe weather could adversely affect results.
Investor Verification Priorities
- Verify the sustainability of pricing and product-mix benefits as wholesale volume and retail demand weaken.
- Monitor gross margin recovery, dealer incentives, warranty claims and inventory levels.
- Assess Aviara’s path to profitability following its continued operating loss and capacity investments.
- Review the liquidity impact of the $91.6 million investment portfolio, capital expenditures, debt amortization and potential share repurchases.
- Evaluate exposure to dealer defaults and inventory repurchase obligations, particularly given dealer concentration and higher financing costs.
- Track the arbitration and potential working-capital adjustment related to the NauticStar sale.
- Confirm future engine supply, pricing and minimum-purchase obligations under the exclusive MasterCraft supplier contract through June 30, 2025.
- Distinguish continuing-operations performance from reported net income, which includes the NauticStar discontinued-operations loss.