MasterCraft Boat Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2019, compared with the three and nine months ended April 1, 2018. The filing is dated May 9, 2019. The requested “2018 Q3” period appears inconsistent with the filing, which covers fiscal 2019 third quarter.
Business Context
MasterCraft designs, manufactures, and markets recreational powerboats through three reportable segments: MasterCraft performance sport boats, NauticStar outboard boats, and Crest pontoon boats. Crest was acquired on October 1, 2018 for $81.7 million, expanding the company into the pontoon-boat market. The company sells primarily through independent dealers and generated 94.3% of nine-month sales in North America.
Financial Results and Key Metrics
| Metric | Three Months Ended March 31, 2019 | Prior Comparable Period | Nine Months Ended March 31, 2019 | Prior Comparable Period |
|---|---|---|---|---|
| Net sales | $128.4 million | $93.8 million | $343.6 million | $237.3 million |
| Gross profit | $31.4 million | $24.4 million | $81.6 million | $62.5 million |
| Gross margin | 24.4% | 26.0% | 23.8% | 26.3% |
| Operating income | $18.5 million | $15.2 million | $44.8 million | $37.0 million |
| Net income | $12.8 million | $11.5 million | $31.4 million | $26.5 million |
| Diluted EPS | $0.68 | $0.61 | $1.67 | $1.42 |
- Third-quarter sales increased 36.9%; nine-month sales increased 44.8%.
- Third-quarter operating margin was approximately 14.4%, compared with 16.2% in the prior-year period. Nine-month operating margin was approximately 13.0%, compared with 15.6%.
- Third-quarter net margin was approximately 9.9%; nine-month net margin was approximately 9.1%.
- Adjusted EBITDA was $21.9 million for the quarter and $55.5 million for the nine months. Adjusted EBITDA margin was 17.0% and 16.2%, respectively, versus 18.7% and 18.6% in the comparable periods.
- Nine-month effective tax rate was 21.4%, down from 23.2%, primarily reflecting the Tax Cuts and Jobs Act and discrete adjustments.
Segment Performance and Material Changes
- MasterCraft: Third-quarter sales increased 14.7% to $79.4 million, supported by an 8.0% increase in unit volume, favorable mix, pricing, lower retail rebate expense, and revenue-recognition timing. Nine-month sales increased 20.5% to $232.1 million.
- NauticStar: Third-quarter sales declined 11.8% to $21.7 million because of weaker demand for smaller boats, partially offset by larger, higher-priced models. Nine-month sales increased 30.2% to $58.3 million, reflecting the timing of the prior-year acquisition and favorable mix.
- Crest: Contributed $27.3 million of third-quarter sales and $53.3 million of nine-month sales. Crest reduced consolidated gross margin because of its lower margin profile relative to the legacy business.
- Consolidated gross margin declined primarily because of the inclusion of Crest and NauticStar, higher warranty costs, retail incentives, and the company’s decision to offset part of retaliatory import tariffs affecting Canadian and European dealers. Excluding Crest, third-quarter gross margin increased to 26.4% from 26.0%.
- Operating expenses increased due to the acquired businesses, additional personnel, acquisition-related costs, and Aviara launch expenses. Aviara startup costs were $0.9 million in the quarter and $1.7 million for the nine months.
- Interest expense increased to $1.9 million in the quarter and $4.8 million for the nine months because of higher borrowings associated with the acquisitions.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Nine-month operating cash flow was $39.6 million, compared with $36.3 million in the prior-year period.
- Investing cash use was $92.1 million, including $81.7 million for the Crest acquisition and $10.4 million of capital expenditures for manufacturing infrastructure, molds, and equipment.
- Financing cash flow was $50.1 million. The company issued $80.0 million of long-term debt and made $29.0 million of principal payments, including $22.7 million of voluntary term-loan repayments.
- Cash declined to $5.5 million at March 31, 2019 from $7.9 million at June 30, 2018. Accounts receivable increased to $17.7 million and inventories increased to $30.0 million.
- Total debt was $125.9 million, consisting primarily of a $127.6 million senior secured term loan net of $1.7 million of debt issuance costs. The term loans mature October 1, 2023.
- The company had no revolving-credit borrowings and $35.0 million of revolving availability at March 31, 2019. Management stated that operating cash flow and revolver availability should fund working capital and capital expenditures for at least the next 12 months.
- The company was in compliance with all debt covenants and had no off-balance-sheet financing arrangements.
Guidance, Outlook, Risks, and Unusual Items
- No specific quantified fiscal 2019 revenue, earnings, or margin guidance is provided in the filing. Management expects continued growth, market-share gains, margin expansion, and benefits from integrating NauticStar and Crest.
- Management views product diversification, healthy dealer inventory, consumer demand, manufacturing efficiencies, and new product development as growth drivers. The Aviara luxury day-boat brand launched its first model, the AV32, in February 2019.
- Key risks include economic conditions, consumer demand and preferences, competition, dealer dependence, manufacturing capacity and fixed costs, new-product execution, tariff impacts, acquisition integration, and availability of credit to dealers and consumers.
- The company adopted ASC 606 revenue recognition effective July 1, 2018. Adoption reduced reported third-quarter sales and net income by $0.6 million and $0.5 million, respectively, versus amounts calculated without adoption; the nine-month effect increased sales by $0.6 million and net income by $0.5 million.
- Crest purchase accounting remains preliminary. The acquisition generated $36.0 million of goodwill and $35.2 million of identifiable intangible assets, and fair-value allocations may change.
- The company recorded a $16.7 million warranty accrual at March 31, 2019. It also identified prior warranty-estimation errors during the second quarter; management concluded the resulting adjustments were immaterial.
- The company expects the new lease accounting standard, to be adopted July 1, 2019, to materially affect the balance sheet through recognition of right-of-use assets and lease liabilities, although the quantitative impact was not yet determined.
- Management stated that disclosure controls were effective at March 31, 2019. Crest was excluded from the annual internal-control effectiveness evaluation while integration work continued.
Investor Verification Items
- Verify the sustainability of sales growth after separating Crest acquisition contributions from organic growth.
- Monitor gross-margin recovery, particularly at NauticStar and Crest, and the effects of tariffs, warranty costs, dealer incentives, and product mix.
- Assess leverage, mandatory amortization, interest-rate exposure, covenant compliance, and remaining revolver availability.
- Review warranty reserves, inventory levels, accounts receivable growth, and seasonal working-capital requirements.
- Evaluate the final Crest purchase-price allocation and any resulting changes to goodwill, intangible assets, amortization, or deferred taxes.
- Reconcile GAAP results with Adjusted EBITDA and Adjusted Net Income, including acquisition costs, intangible amortization, stock compensation, and Aviara startup expenses.
- Track Aviara’s launch performance and the company’s ability to integrate Crest without further margin dilution.