MCBC Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended December 31, 2017, compared with the periods ended January 1, 2017. MCBC designs and manufactures premium recreational boats through its MasterCraft and NauticStar segments, selling primarily through independent dealers. On October 2, 2017, the Company acquired NauticStar for approximately $80.5 million, including working-capital adjustments.
Financial performance and position
| Metric | Three months ended Dec. 31, 2017 | Three months ended Jan. 1, 2017 | Six months ended Dec. 31, 2017 | Six months ended Jan. 1, 2017 |
|---|---|---|---|---|
| Net sales | $78.4 million | $51.1 million | $143.5 million | $111.8 million |
| Gross profit | $19.9 million | $14.3 million | $38.1 million | $32.1 million |
| Gross margin | 25.4% | 27.9% | 26.6% | 28.7% |
| Operating income | $10.8 million | $7.0 million | $21.8 million | $18.7 million |
| Net income | $8.0 million | $4.0 million | $15.1 million | $11.0 million |
| Diluted EPS | $0.43 | $0.22 | $0.81 | $0.59 |
| Adjusted EBITDA | $13.6 million | $9.0 million | $26.6 million | $22.3 million |
| Adjusted EBITDA margin | 17.4% | 17.6% | 18.5% | 20.0% |
Six-month operating cash flow was $22.5 million, compared with $12.9 million in the prior-year period. Investing cash flow was $(80.5) million, primarily reflecting the NauticStar acquisition and $1.5 million of capital expenditures. Financing cash flow was $60.3 million, including $80.8 million of new long-term debt proceeds and $19.2 million of term-loan repayments. Cash increased to $6.3 million from $4.0 million at June 30, 2017.
At December 31, 2017, total debt was $95.0 million, consisting primarily of a $96.8 million senior secured term loan net of debt issuance costs. The Company had no revolving-credit borrowings and reported $29.3 million of revolver availability, reduced by $0.8 million of letters of credit. Management stated that cash from operations and available revolver borrowings should fund working capital and capital expenditures for at least the next 12 months. The Company was in compliance with its debt covenants.
Total assets increased to $168.6 million from $83.3 million at June 30, 2017, mainly because of the NauticStar acquisition. Goodwill increased to $66.8 million and intangible assets to $52.1 million. Inventories increased to $18.3 million from $11.7 million. Stockholders’ equity increased to $27.3 million from $11.8 million.
Material changes versus the prior comparable period
- Second-quarter sales increased 53.4% and six-month sales increased 28.3%, primarily because NauticStar contributed $20.2 million of sales and because MasterCraft unit volume, pricing and product mix improved.
- MasterCraft unit volume increased 7.0% in the quarter and 7.5% for the six-month period. NauticStar contributed 526 units for the six months, including 526 units in the second quarter.
- Gross margin declined 250 basis points in the quarter and 210 basis points for six months, principally because NauticStar’s gross margin was in the high-teens and diluted the consolidated margin. Higher material and shipping costs also affected margins.
- Operating expenses grew more slowly than sales, reducing operating expenses as a percentage of sales to 11.7% from 14.2% in the quarter and to 11.3% from 12.0% for six months.
- Interest expense increased to $1.1 million for the quarter and $1.6 million for six months because of the higher term-loan balance used to finance the acquisition.
- The Tax Cuts and Jobs Act produced a provisional net tax benefit, including a $651,000 discrete benefit from remeasuring deferred tax liabilities, partly offset by a $171,000 provisional expense. The six-month effective tax rate was 25.5%.
Guidance, outlook, risks and unusual items
Management cited increased consumer demand, limited used-boat inventory, recently released products, operational efficiencies and redesigned manufacturing and product-development processes as potential growth and margin-expansion drivers. The filing does not provide a clear quantitative fiscal 2018 revenue or earnings guidance figure, but management expects continued growth and margin expansion and anticipates an estimated annual effective tax rate of approximately 24% for fiscal 2019.
Key risks include economic conditions and consumer confidence, product demand and preferences, competition, dealer dependence, manufacturing capacity and fixed costs, successful new-product launches, seasonal demand, weather, foreign currency, dealer and consumer credit availability, and the integration of NauticStar. The NauticStar purchase-price allocation remains preliminary; valuation of acquired assets, liabilities and working-capital adjustments was expected to be finalized during the second half of fiscal 2018.
Unusual or nonrecurring items included $1.5 million of NauticStar acquisition and integration costs, a $501,000 acquisition-related inventory step-up adjustment, and increased amortization from acquired intangible assets. Prior-year adjusted results included $1.7 million of litigation-related charges; the related Malibu Boats litigation had been settled in the fourth quarter of fiscal 2017. The Company reported no legal proceedings for the current quarter and no off-balance-sheet financing arrangements.
The Company adopted inventory measurement and stock-compensation accounting updates during fiscal 2018 without a material impact. It expects to adopt the new revenue-recognition standard beginning July 1, 2018; the filing anticipates changes in the timing of dealer promotions and rebates but had not quantified the cumulative effect.
Important facts for investors to verify
- Whether NauticStar’s integration, preliminary purchase-price allocation, dealer network and expected synergies develop as planned.
- The sustainability of MasterCraft volume, pricing and product-mix gains and the extent to which NauticStar’s lower margin dilutes consolidated profitability.
- Debt-service capacity, covenant compliance, interest-rate exposure and the remaining availability under the $30 million revolving facility.
- Inventory growth, warranty accruals, dealer incentives and other working-capital requirements.
- Final tax effects under the Tax Cuts and Jobs Act and the eventual impact of the new revenue-recognition standard.
- Seasonality, dealer concentration, consumer financing conditions, weather, competition and demand for newly introduced models.