MasterCraft Boat Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 29, 2019, the company’s fiscal first quarter of 2020. Comparative period was the three months ended September 30, 2018. The company designs, manufactures and markets recreational powerboats through the MasterCraft, NauticStar and Crest segments.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $109.8 million | $93.6 million | 17.2% |
| Gross profit | $25.5 million | $23.2 million | 10.0% |
| Gross margin | 23.3% | 24.8% | Down 150 basis points |
| Operating income | $12.7 million | $11.6 million | 9.4% |
| Net income | $8.6 million | $8.5 million | 1.9% |
| Diluted EPS | $0.46 | $0.45 | 2.2% |
| Adjusted EBITDA | $15.9 million | $15.0 million | 5.7% |
| Adjusted EBITDA margin | 14.5% | 16.0% | Down 150 basis points |
Interest expense increased 46.1% to $1.3 million, primarily because of additional term debt associated with the Crest acquisition. The effective tax rate increased to 24.0% from 20.8%, principally because the prior-year period benefited from favorable discrete tax adjustments.
Segment and Operating Developments
- Crest: Acquired October 1, 2018, contributed $18.9 million of sales, 526 units and $0.5 million of operating income in the quarter.
- MasterCraft: Sales declined 4.4% to $72.9 million, with unit volume down 12.6% to 741. Pricing, product mix and lower discounts partly offset lower volume.
- NauticStar: Sales increased 3.4% to $18.0 million despite a 7.0% decline in units, reflecting higher average selling prices and product mix.
- Consolidated unit volume increased 30.5% to 1,663, but consolidated sales per unit declined 10.8% because of Crest’s lower average selling price.
- The company began selling the new Aviara luxury day-boat brand, with the AV32 shipping during the quarter. Management expects the AV36 and AV40 models to launch later in fiscal 2020.
Cash Flow, Liquidity and Debt
- Operating cash flow was $5.2 million, compared with $3.4 million in the prior-year period.
- Capital expenditures were $4.3 million, resulting in investing cash usage of $4.3 million.
- Financing cash usage was $0.3 million, compared with $1.8 million in the prior-year period; the difference was primarily timing of scheduled debt repayments.
- Cash increased to $6.4 million from $5.8 million at June 30, 2019.
- Total debt was $113.9 million, including $9.2 million classified as current. The company had no revolving-credit borrowings and $35.0 million of revolver availability.
- The company stated that it was in compliance with its financial covenants and expects operating cash flow plus borrowing capacity to meet liquidity needs for at least the next 12 months.
Material Changes, Unusual Items and Outlook
- The Crest acquisition was the primary driver of consolidated sales growth but diluted gross margin and increased operating expenses and interest costs.
- Management is working to reduce MasterCraft dealer inventory following a weather-impacted summer selling season, contributing to lower unit volume.
- The company adopted ASC 842 lease accounting on July 1, 2019. The adoption added operating lease assets and liabilities but did not materially affect operations.
- The company exercised its option to purchase the Crest manufacturing facility and completed the $4.1 million purchase on October 24, 2019, funded with cash from operations.
- Adjusted EBITDA excludes share-based compensation, Aviara start-up costs and, in the prior-year period, Crest acquisition transaction expenses. These non-GAAP measures should not be viewed as substitutes for GAAP earnings or cash flow.
- Fiscal results are seasonal and the quarterly results are not necessarily indicative of the full fiscal year. No formal financial guidance is provided in the filing text.
Risks and Contingencies
- Key risks include economic conditions, consumer demand and preferences, competition, reliance on independent dealers, manufacturing and fixed-cost management, and successful new-product launches.
- NauticStar’s carrying value was equal to fair value at June 30, 2019 following prior-year impairment charges of $28.0 million for goodwill and $3.0 million for its trade name. Additional material impairment charges could be required if performance falls short of expectations; no triggering event was identified during the quarter.
- Warranty liabilities were $17.7 million at September 29, 2019, up from $13.5 million at September 30, 2018.
- The filing reports no legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet financing arrangements.
- Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of September 29, 2019.
Important Facts for Investors to Verify
- Whether Crest integration and the lower-margin Crest mix continue to pressure consolidated gross margins.
- Progress in normalizing MasterCraft dealer inventories and recovering MasterCraft unit volume.
- Aviara launch costs, model introductions and eventual contribution to sales and profitability.
- Debt repayment requirements, interest-rate exposure and continued compliance with credit-facility covenants.
- NauticStar operating performance and potential for further goodwill or trade-name impairment.
- Cash requirements for capital expenditures and the $4.1 million Crest facility purchase completed after quarter-end.