MasterCraft Boat Holdings, Inc. — Fiscal 2016 First Quarter 10-Q
Reporting period: Three months ended September 27, 2015, compared with September 28, 2014. The company designs and manufactures premium recreational sport boats under the MasterCraft brand and sells through independent dealers in 40 countries. North America represented 92.1% of quarterly sales.
Financial highlights
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $56.0 million | $52.4 million | +6.8% |
| Gross profit | $15.8 million | $12.8 million | +23.4% |
| Gross margin | 28.3% | 24.4% | +390 basis points |
| Operating income | $4.0 million | $8.0 million | −50.0% |
| Net income (loss) | $(1.3) million | $1.4 million | Decline |
| Basic EPS | $(0.08) | $0.13 | Decline |
| Adjusted EBITDA | $10.7 million | $8.0 million | +33.1% |
| Adjusted EBITDA margin | 19.1% | 16.4% | +270 basis points |
MasterCraft unit volume increased 9.8% to 682 boats, while MasterCraft sales per unit increased 3.8% to approximately $82,000. Cost of sales increased only 1.3%, reflecting lower material costs, manufacturing efficiencies and fixed-cost leverage.
Cash flow, liquidity and capital structure
- Operating cash flow was $2.9 million, compared with $2.4 million in the prior-year quarter.
- Capital expenditures were $0.6 million, compared with $0.9 million.
- Cash increased to $7.8 million from $1.2 million at June 30, 2015.
- The July 2015 IPO generated $81.8 million of net proceeds. Proceeds were used to repay all $75.0 million of term debt and $8.2 million outstanding under the revolving facility.
- No borrowings were outstanding at September 27, 2015. Revolving-credit availability was $28.8 million, net of $1.2 million of letters of credit, and the company was in compliance with its covenants.
- Stockholders’ equity improved to $55.9 million from a $42.3 million deficit at June 30, 2015, primarily because of the IPO and warrant-related share issuance.
Material changes versus the prior comparable period
- Gross margin expanded because of production-cost reductions, higher-content option packages, operating leverage and replacement of lower-margin Hydra-Sports production with MasterCraft production.
- Hydra-Sports sales ended; the related manufacturing agreement expired June 30, 2015 and was not renewed. Prior-year quarterly sales included $3.6 million from Hydra-Sports.
- General and administrative expense rose to $9.3 million from $2.6 million, including $5.4 million of stock-based compensation, higher legal costs, IPO-related costs and approximately $0.5 million of public-company costs.
- The company recognized a $0.7 million loss on debt extinguishment and a $3.3 million non-cash increase in common-stock-warrant fair value.
- More than 97% of outstanding warrants were exchanged for 787,193 common shares; the remaining warrant liability was $0.2 million at quarter-end versus $9.1 million at June 30, 2015.
Outlook, commentary and risks
Management expects growth from recently introduced models, including the entry-level NXT line, market-share gains, higher option content and continued manufacturing efficiencies. Management described increased consumer demand and limited used-boat inventory as potential growth drivers, but provided no specific quantitative revenue or earnings guidance.
Results remain subject to seasonality, economic conditions, consumer confidence, dealer and retail-credit availability, weather, competition, foreign-exchange movements, consumer preferences and the company’s ability to manage production and its fixed-cost base. The company relies on independent dealers and has significant warranty-related accruals, including $10.4 million at quarter-end.
Malibu Boats has alleged that the company’s Gen 2 Surf System and NXT Surf System infringe a patent. Malibu seeks trebled damages, attorneys’ fees and an injunction; the amount of damages is unspecified. MasterCraft filed a summary-judgment motion, which had not been decided as of the filing.
Income-tax expense was $1.0 million despite a pretax loss, primarily because warrant fair-value changes created permanent tax differences. Quarterly results may not be indicative of future periods because of seasonality.
Investor verification points
- Verify whether gross-margin expansion and manufacturing efficiencies persisted after the first post-IPO quarter.
- Assess recurring operating expenses separately from the $5.4 million stock-based compensation charge and IPO-related costs.
- Monitor dealer inventory, unit volume, pricing, option adoption and demand during the seasonal boating period.
- Review the outcome and potential financial exposure of the Malibu patent litigation.
- Confirm continued access to the revolving facility, covenant compliance and the company’s ability to generate operating cash flow without term debt.
- Reconcile non-GAAP Adjusted EBITDA and adjusted net income to GAAP results, particularly the treatment of warrant valuation, stock compensation, litigation and transaction costs.