MasterCraft Boat Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the 13-week quarter ended October 4, 2020, the first quarter of fiscal 2021, compared with the quarter ended September 29, 2019. MasterCraft designs, manufactures and markets recreational performance, luxury day, fishing and pontoon boats through the MasterCraft, NauticStar and Crest segments. The results were affected by COVID-19-related production suspensions and the subsequent production ramp-up.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $103.7 million | $109.8 million | Down 5.5% |
| Gross profit | $26.2 million | $25.5 million | Up 2.7% |
| Gross margin | 25.3% | 23.3% | Up 200 bps |
| Operating income | $13.4 million | $12.7 million | Up 5.6% |
| Net income | $9.6 million | $8.6 million | Up 10.9% |
| Diluted EPS | $0.51 | $0.46 | Up $0.05 |
| Adjusted EBITDA | $17.0 million | $15.9 million | Up 6.8% |
| Adjusted EBITDA margin | 16.3% | 14.5% | Up 180 bps |
| Operating cash flow | $7.4 million | $5.2 million | Up $2.1 million |
| Capital expenditures | $2.0 million | $4.3 million | Down $2.3 million |
Sales volume declined 16.3% to 1,392 units, while consolidated sales per unit increased 13.6% to approximately $75 thousand. MasterCraft sales increased 0.6% to $73.4 million, while NauticStar sales declined 31.4% to $12.3 million and Crest sales declined 4.5% to $18.0 million. NauticStar reported a $1.6 million operating loss, compared with $0.03 million of operating income in the prior-year quarter; MasterCraft operating income increased to $13.4 million and Crest operating income increased to $1.7 million.
At October 4, 2020, cash and cash equivalents were $8.9 million, compared with $16.3 million at June 30, 2020. Total current assets were $60.9 million and total current liabilities were $60.5 million. Inventories increased to $32.6 million from $25.6 million as production ramped up. Total debt was $96.4 million, including $9.4 million classified as current, compared with $108.6 million at June 30, 2020. The revolving credit facility was fully repaid, leaving $35.0 million of availability.
Material Changes Versus the Prior Comparable Period
- Revenue decreased because production and unit volumes remained below the prior-year level during the ramp-up following COVID-19-related shutdowns.
- Gross profit and margins improved due to lower dealer incentives, higher pricing, favorable product and options mix, lower materials costs as a percentage of sales and higher parts revenue.
- Operating expenses were essentially flat: selling and marketing expenses declined 28.5%, offset by a 14.7% increase in general and administrative expenses related primarily to product development and variable compensation.
- Interest expense declined 24.2% because of lower interest rates and lower average debt balances.
- Operating cash flow improved, but financing cash flow was negative $12.8 million because the Company repaid $10.0 million on its revolving facility and $2.4 million of term-loan principal.
- The Company incurred $0.18 million of Aviara transition costs in the quarter. Prior-year results included $0.31 million of Aviara start-up costs.
- The Company purchased the Merritt Island, Florida facility in October 2020 for $14.2 million. The approximately 140,000-square-foot facility is intended to house Aviara production and increase MasterCraft capacity at the Vonore facility.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative fiscal 2021 revenue or earnings guidance in the filing. Management stated that strong marine retail demand and unusually low dealer inventories created a growth opportunity, with production expected to continue ramping through fiscal 2021 to meet wholesale demand and replenish dealer inventory.
The production ramp depends substantially on supplier capacity and the Company’s ability to recruit and retain manufacturing personnel. Management expects higher labor costs for the full fiscal year following changes to the MasterCraft production employee compensation package. Aviara production was expected to begin at the Merritt Island facility by early third quarter of fiscal 2021, with transition costs expected to continue during fiscal 2021.
COVID-19 remains the principal uncertainty. Potential adverse effects include renewed manufacturing suspensions, supply-chain or workforce disruptions, delayed dealer payments, weaker consumer demand, additional intangible-asset impairment charges and reduced liquidity. The Company also relies on independent dealers, faces seasonal demand, and remains exposed to competition, changing consumer preferences and general economic conditions.
The May 2020 credit agreement amendment temporarily replaced certain leverage and fixed-charge covenants with interest-coverage, minimum-liquidity and capital-expenditure covenants. The temporary package applies through the quarter ending March 31, 2021, after which the prior covenants are scheduled to return. The Company reported compliance with its covenants as of October 4, 2020.
Important Facts for Investors to Verify
- Whether production and unit volumes recover as expected, particularly at NauticStar.
- Whether strong retail demand persists and converts into dealer replenishment and wholesale orders.
- The effect of supplier constraints, labor availability and higher production labor costs on margins.
- The cash and debt impact of the $14.2 million Merritt Island facility purchase and related Aviara transition costs.
- Compliance with the amended credit agreement’s liquidity and other financial covenants as temporary relief expires.
- Potential renewed COVID-19 disruptions, demand deterioration, receivables delays or impairment charges.
- The sustainability of margin expansion after excluding non-GAAP items such as intangible amortization, share-based compensation and Aviara transition costs.