MasterCraft Boat Holdings, Inc. — Fiscal 2019 First Quarter 10-Q
Business context and reporting period
MasterCraft designs, manufactures, and markets premium recreational powerboats through two reportable segments: MasterCraft performance sport boats and NauticStar outboard boats. The company sells through independent dealers in North America and internationally, with operations in 46 countries. The filing covers the 13 weeks ended September 30, 2018, compared with the 13 weeks ended October 1, 2017. NauticStar was acquired on October 2, 2017 and therefore contributed to the current quarter but not the prior-year reported period.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $93.6 million | $65.0 million | +44.0% |
| Gross profit | $23.2 million | $18.2 million | +27.7% |
| Gross margin | 24.8% | 27.9% | Down 310 basis points |
| Operating income | $11.6 million | $11.1 million | +4.9% |
| Net income | $8.5 million | $7.0 million | +20.1% |
| Diluted EPS | $0.45 | $0.38 | +18.4% |
| Adjusted EBITDA | $15.0 million | $13.0 million | +16.0% |
| Adjusted EBITDA margin | 16.0% | 19.9% | Down 390 basis points |
- MasterCraft generated $76.2 million of sales on 848 units; NauticStar generated $17.4 million on 426 units. Consolidated sales per unit were $74 thousand versus $84 thousand in the prior-year period, reflecting the addition of NauticStar.
- Operating expenses increased to $11.6 million from $7.1 million. Selling and marketing expense rose 56.7%, and general and administrative expense rose 56.2%.
- Interest expense increased to $0.9 million from $0.5 million. The effective tax rate declined to 20.8% from 33.4%, primarily due to the Tax Cuts and Jobs Act and related tax benefits.
- Cash provided by operating activities was $3.4 million, down from $10.2 million. Capital expenditures were $3.4 million versus $0.5 million, primarily for manufacturing infrastructure, expansion, molds, and equipment. Financing cash outflows were $1.8 million, including $1.7 million of debt principal payments.
- Cash declined to $6.1 million at September 30, 2018 from $7.9 million at June 30, 2018. Working capital included $21.7 million of inventory and $9.3 million of accounts receivable.
- At September 30, 2018, gross term debt was $75.0 million, or $73.6 million net of issuance costs. The revolving facility had no borrowings and $30.0 million of net availability. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue growth was driven by $17.4 million from NauticStar and a $11.2 million increase in MasterCraft sales, supported by higher volume, favorable product mix, and price increases.
- Gross margin contracted because of NauticStar’s dilutive mix, higher warranty costs, increased retail incentives, and the effect of new revenue-recognition accounting. These factors partly offset MasterCraft volume, mix, and pricing benefits.
- The company adopted ASC 606 on July 1, 2018 using the modified retrospective method. The adoption reduced opening accumulated equity by $3.1 million and increased reported first-quarter net sales by $0.5 million and net income by $0.4 million relative to the amounts without adoption.
- Operating expenses reflected the inclusion of NauticStar, increased headcount, new-brand startup costs, the timing of the annual dealer meeting, and Crest acquisition-related legal and advisory fees.
- Warranty liabilities increased to $13.5 million from $13.1 million at June 30, 2018.
Outlook, transactions, risks, and unusual items
Management cited increased consumer demand, limited used-boat inventory, recently released products, and improved manufacturing and product-development processes as potential drivers of continued growth and margin expansion. The filing does not provide a clear numerical fiscal 2019 revenue or earnings guidance range.
- On October 1, 2018, the company completed its approximately $80 million acquisition of Crest Marine, a pontoon-boat manufacturer. Purchase accounting had not been completed as of the filing date.
- On October 1, 2018, the company entered into a $190 million senior secured credit facility consisting of $75 million and $80 million term loans and a $35 million revolving facility. The new term loans mature October 1, 2023. The company paid $0.8 million of related fees.
- Management expects integration and transaction costs related to Crest, but the timing, nature, and amount of all such charges were not yet determinable. The company identified risks associated with managing the larger business, Crest underperformance, dealer and supplier relationships, warranty and product-liability claims, tariffs, seasonality, weather, competition, consumer demand, credit availability, and foreign exchange.
- Adjusted EBITDA and adjusted net income exclude selected acquisition costs, intangible amortization, stock-based compensation, and new-brand startup costs. These non-GAAP measures should not be viewed as substitutes for GAAP earnings or operating cash flow.
- The company stated that cash from operations and revolver borrowings should be sufficient for working capital and capital expenditures for at least the next 12 months, but operating cash flow weakened materially year over year.
- No legal proceedings or off-balance-sheet financings were reported. Disclosure controls were assessed as effective as of September 30, 2018.
Investor verification checklist
- Verify the standalone contribution, purchase accounting, debt financing, and integration costs associated with the Crest acquisition.
- Assess whether the gross-margin decline is temporary or reflects a sustained change in product mix, incentives, warranty costs, tariffs, or NauticStar economics.
- Reconcile ASC 606 effects, including dealer rebates, retail promotions, contract liabilities, and the $3.1 million opening equity adjustment.
- Monitor operating cash conversion, inventory levels, receivables, capital expenditures, and the company’s ability to service increased debt.
- Review covenant headroom and borrowing availability under the new credit agreement, including exposure to variable interest rates and LIBOR-based pricing.
- Evaluate seasonality, dealer concentration and health, consumer financing availability, economic conditions, and demand for recreational boats.
- Confirm the company’s future numerical guidance, if issued, and distinguish GAAP results from adjusted EBITDA and adjusted net income.