Business Context and Reporting Period
MCBC Holdings, Inc. (now MasterCraft Boat Holdings, Inc.) designs, manufactures and markets premium recreational boats under the MasterCraft and NauticStar brands. This Form 10-K covers the fiscal year ended June 30, 2018; it is not a quarterly filing for 2017 Q4. NauticStar was acquired on October 2, 2017, creating two reportable segments and materially changing year-over-year comparability.
MasterCraft produces performance sport boats for skiing, wakeboarding and wake surfing. NauticStar produces outboard bay, deck and offshore center-console boats. Products are sold primarily through independent dealers in North America and internationally.
Financial Performance and Key Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net sales | $332.7 million | $228.6 million | +45.5% |
| Gross profit | $90.4 million | $63.5 million | +42.4% |
| Gross margin | 27.2% | 27.8% | Down 0.6 percentage points |
| Operating income | $56.0 million | $33.5 million | +67.0% |
| Net income | $39.7 million | $19.6 million | +102.6% |
| Diluted EPS | $2.12 | $1.05 | +101.9% |
| Adjusted EBITDA | $64.0 million | $43.5 million | +47.3% |
| Adjusted EBITDA margin | 19.2% | 19.0% | Up 0.2 percentage points |
- MasterCraft sales were $266.3 million, compared with $228.6 million in fiscal 2017. NauticStar contributed $66.4 million from the acquisition date through fiscal year-end.
- Unit volume was 3,068 MasterCraft boats, up from 2,790, and 1,687 NauticStar boats. Consolidated sales per unit declined to $70 thousand from $82 thousand because of the addition of NauticStar’s lower-priced product mix.
- MasterCraft operating income was $49.4 million; NauticStar operating income was $6.6 million.
- Cash provided by operating activities was $49.4 million, compared with $26.2 million in fiscal 2017. Capital expenditures were $5.3 million.
- Cash used in investing activities was $85.7 million, primarily reflecting the $80.5 million cash acquisition of NauticStar.
- Cash increased to $7.9 million from $4.0 million. The company reported $30.0 million of unused revolving-credit availability at June 30, 2018.
- Total debt was $75.2 million, including $76.7 million of gross senior secured term debt less $1.5 million of unamortized issuance costs. The term loan matures October 2, 2022.
- Total assets were $176.9 million and stockholders’ equity was $52.5 million at June 30, 2018, compared with $83.3 million and $11.8 million, respectively, at June 30, 2017.
Material Changes Versus the Prior Comparable Period
- The NauticStar acquisition expanded the business into the outboard-boat market and accounted for approximately 29.0% of fiscal 2018 consolidated sales.
- The company entered into a $145 million senior secured credit facility, consisting of a $115 million term loan and a $30 million revolver. It made $35.0 million of voluntary term-loan repayments during fiscal 2018.
- MasterCraft sales increased 16.5%, supported by higher unit volume, price increases, favorable product mix and reduced retail rebate activity.
- Gross margin declined because NauticStar had a lower margin profile, although operating expense leverage improved consolidated operating profitability.
- General and administrative expense declined 3.4%, primarily because fiscal 2017 included $5.9 million of patent-litigation costs. Fiscal 2018 included $1.7 million of acquisition-related legal and advisory costs and $0.6 million of new-brand startup costs.
- The effective tax rate declined to 24.5% from 37.5%, partly due to the Tax Cuts and Jobs Act and the resulting deferred-tax revaluation.
- Fiscal 2018 included a $1.033 million favorable out-of-period warranty adjustment. Management concluded the error was immaterial to current and prior periods.
Outlook, Risks, Contingencies and Unusual Items
Management expects continued growth from consumer demand, limited used-boat inventory, new products, and operational improvements. Management also expects NauticStar manufacturing and product-development improvements to support future margin expansion. No quantitative revenue or earnings guidance is provided.
- Results are seasonal and sensitive to weather, consumer confidence, discretionary spending, interest rates, credit availability and fuel prices.
- Substantially all sales depend on independent dealers; the top ten dealers represented approximately 33% of fiscal 2018 gross sales.
- Dealer floor-plan financing supports sales and working capital. The company may be required to repurchase repossessed inventory; the maximum potential obligation under floor-plan agreements was approximately $129.5 million at June 30, 2018, although no units were repurchased during fiscal 2018.
- The company relies heavily on key engine suppliers. Ilmor supplied all MasterCraft inboard engines, while Yamaha was the primary NauticStar outboard-engine supplier. Exclusive supply agreements generally run through June 30, 2023 and contain minimum-purchase requirements.
- Integration of NauticStar presents execution, cost and operational risks. NauticStar represented approximately 49.7% of consolidated assets at June 30, 2018 and was excluded from management’s internal-control assessment under the SEC’s acquisition transition provisions.
- Goodwill increased to $65.8 million, including $36.2 million related to NauticStar. No goodwill or intangible-asset impairment was recorded.
- The company had no off-balance-sheet financings and reported compliance with its debt covenants. It does not expect to pay dividends in the foreseeable future.
- The company expects fiscal 2019’s normalized effective tax rate to be approximately 24%. Adoption of the new revenue-recognition standard was expected to reduce retained earnings by approximately $2.5 million to $3.5 million after tax, subject to finalization.
Important Facts for Investors to Verify
- Separate the organic MasterCraft performance from the partial-year NauticStar contribution when assessing growth, margins and cash generation.
- Review the final purchase-price allocation, integration costs, goodwill and intangible-asset amortization associated with NauticStar.
- Monitor gross-margin trends as NauticStar becomes a larger portion of consolidated sales.
- Reconcile GAAP net income with Adjusted EBITDA and Adjusted Net Income, including acquisition, warranty, stock-compensation and startup adjustments.
- Assess debt repayment requirements, variable-rate exposure and compliance with credit-facility covenants.
- Evaluate dealer concentration, dealer liquidity and the potential exposure from floor-plan repurchase commitments.
- Confirm the final retained-earnings impact and disclosure changes from adoption of the new revenue-recognition standard.
- Monitor warranty accruals and the effect of the $1.033 million fiscal 2018 warranty correction on comparability.