MasterCraft Boat Holdings, Inc. — Fiscal 2020 Second-Quarter 10-Q
Business context and reporting period
MasterCraft designs, manufactures and markets recreational powerboats through three reportable segments: MasterCraft, NauticStar and Crest. The filing covers the three and six months ended December 29, 2019, compared with December 30, 2018. The company’s fiscal year ends June 30, and results are seasonal.
Key financial metrics
| Metric | Three months ended Dec. 29, 2019 | Year-over-year change | Six months ended Dec. 29, 2019 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $99.6 million | (18.0%) | $209.4 million | (2.7%) |
| Gross profit | $21.1 million | (21.9%) | $46.7 million | (7.2%) |
| Gross margin | 21.2% | Down 110 bps | 22.3% | Down 110 bps |
| Operating income | $10.3 million | (29.8%) | $23.0 million | (12.5%) |
| Net income | $6.9 million | (32.5%) | $15.5 million | (16.9%) |
| Diluted EPS | $0.37 | From $0.54 | $0.83 | From $0.99 |
| Adjusted EBITDA | $13.6 million | From $18.6 million | $29.4 million | From $33.6 million |
| Adjusted EBITDA margin | 13.6% | From 15.3% | 14.1% | From 15.6% |
Six-month net cash provided by operating activities was $19.8 million, versus $27.9 million in the prior-year period. Investing cash flow used $11.5 million, including $11.5 million of capital expenditures. Financing cash flow used $8.7 million, primarily reflecting $8.3 million of term-loan principal payments. Cash declined to $5.4 million from $5.8 million at June 30, 2019.
At December 29, 2019, total debt was $105.7 million, including $96.7 million of long-term debt net of current maturities and issuance costs. The company had no borrowings under its $35.0 million revolving facility and was in compliance with its financial covenants. Management stated that operating cash flow and available borrowing capacity should meet liquidity needs for at least the next 12 months.
Material changes versus the prior comparable period
- Unit sales fell 28.1% in the quarter and 5.6% year to date, primarily because of production cuts and efforts to reduce dealer inventories following a weather-impacted summer selling season. Saltwater-market weakness particularly affected NauticStar.
- Quarterly sales declined across all segments: MasterCraft decreased 11.3%, NauticStar 18.9% and Crest 37.2%. For the six-month period, Crest sales increased 35.6% because Crest was acquired on October 1, 2018, while MasterCraft and NauticStar declined.
- Average sales per unit increased 15.3% in the quarter, reflecting price increases and a richer mix, but the improvement did not offset lower volumes.
- Gross margin contracted because lower production reduced overhead absorption. Lower warranty costs, reduced Canadian dealer discounts and pricing actions partially offset the pressure.
- Operating expenses decreased 12.5% in the quarter, partly due to lower acquisition-related costs, lower variable compensation and a $0.5 million reversal of share-based compensation following an executive resignation.
- Interest expense declined 39.4% in the quarter, reflecting approximately $31.0 million of voluntary term-loan prepayments over the preceding 12 months and lower effective interest rates.
Outlook, commentary, risks and unusual items
- The company began selling its new Aviara luxury day-boat brand in fiscal 2020. The AV32 and AV36 models were launched during the first and second quarters, respectively; management expected to introduce the AV40 in late fiscal 2020. Aviara startup costs are excluded from certain non-GAAP measures.
- On October 24, 2019, the company purchased the Crest manufacturing facility for $4.1 million using operating cash. The purchase replaced the related lease assets and liabilities with property, plant and equipment.
- The company adopted ASC 842 lease accounting on July 1, 2019. The adoption had no material income-statement effect and added recognized operating lease assets and liabilities.
- The company had previously recorded $28.0 million of NauticStar goodwill impairment and $3.0 million of NauticStar trade-name impairment in fiscal 2019. No new impairment-triggering events were identified during the reported periods, but additional impairment could be required if performance or valuation assumptions deteriorate.
- Key risks include economic conditions, consumer demand and preferences, competition, dealer dependence, production and fixed-cost management, product launches, supplier disruptions and international supply-chain exposure. The filing specifically notes potential effects from infectious diseases and epidemics, including the coronavirus outbreak.
- No legal proceedings were reported, and management stated there were no material changes to previously disclosed market risks. The filing text does not provide formal full-year revenue or earnings guidance.
Important facts for investors to verify
- Whether dealer inventory reductions and production cuts have stabilized and when unit volumes are expected to recover.
- Whether NauticStar’s saltwater-category weakness and Crest’s quarterly sales decline persist.
- The pace of Aviara model launches, startup spending and contribution to consolidated margins.
- Liquidity under continued seasonal weakness, including cash balances, term-loan amortization and availability under the revolving facility.
- Supplier continuity, warranty accruals, dealer incentives and inventory-obsolescence reserves.
- The sustainability of reported margins after excluding non-GAAP adjustments such as acquisition-intangible amortization, Aviara startup costs and share-based compensation.