MasterCraft Boat Holdings, Inc. — Fiscal 2019 Second Quarter 10-Q Summary
Business Context and Reporting Period
The filing covers the 13-week quarter and six months ended December 30, 2018, compared with the periods ended December 31, 2017. MasterCraft designs, manufactures and markets premium recreational powerboats through three reportable segments: MasterCraft, NauticStar and Crest. Crest was acquired on October 1, 2018 for $81.7 million, expanding the company into premium pontoon boats.
Financial Performance and Key Metrics
| Metric | Three Months Ended Dec. 30, 2018 | Three Months Ended Dec. 31, 2017 | Six Months Ended Dec. 30, 2018 | Six Months Ended Dec. 31, 2017 |
|---|---|---|---|---|
| Net sales | $121.5 million | $78.4 million | $215.2 million | $143.5 million |
| Gross profit | $27.1 million | $19.9 million | $50.3 million | $38.1 million |
| Gross margin | 22.3% | 25.4% | 23.4% | 26.6% |
| Operating income | $14.7 million | $10.8 million | $26.3 million | $21.8 million |
| Net income | $10.2 million | $8.0 million | $18.7 million | $15.1 million |
| Diluted EPS | $0.54 | $0.43 | $0.99 | $0.81 |
| Adjusted EBITDA | $18.6 million | $13.7 million | $33.6 million | $26.7 million |
| Adjusted EBITDA margin | 15.3% | 17.5% | 15.6% | 18.6% |
Quarterly sales increased 55.0% and six-month sales increased 50.0%. Quarterly operating expenses rose 31.7% to $12.4 million, while six-month operating expenses rose 47.3% to $23.9 million. The six-month effective tax rate was 20.2%, compared with 25.5% in the prior-year period, primarily reflecting the Tax Cuts and Jobs Act.
- Quarterly segment sales were $76.4 million for MasterCraft, $19.2 million for NauticStar and $25.9 million for Crest.
- MasterCraft quarterly unit volume increased to 893 from 675; NauticStar volume declined to 480 from 526; Crest contributed 675 units.
- For the six months, MasterCraft sales were $152.6 million, NauticStar sales were $36.6 million and Crest sales were $25.9 million.
- Cash and cash equivalents were $18.5 million at December 30, 2018, versus $7.9 million at June 30, 2018.
- Six-month operating cash flow was $27.9 million, compared with $22.5 million in the prior-year period.
- Capital expenditures were $6.0 million, compared with $1.5 million, and acquisition payments were $81.7 million.
- Total debt was $146.2 million, including $148.0 million of gross term loans less $1.8 million of debt issuance costs. The company had no revolving-credit borrowings and $35.0 million of revolver availability.
Material Changes Versus the Prior Comparable Period
- Crest contributed $25.9 million of quarterly and six-month sales and added $35.6 million of goodwill and $35.2 million of identifiable intangible assets.
- MasterCraft sales benefited from favorable product mix, price increases and higher volume, partly influenced by an extra production week.
- NauticStar sales declined in the quarter because of a planned production pullback while its facility was retrofitted for larger models; management expects new models throughout calendar 2019.
- Gross margins declined because of Crest’s dilutive effect, higher warranty costs, increased retail incentives, the timing effects of the new revenue standard and the company’s decision to offset portions of retaliatory tariffs for Canadian and European dealers.
- Interest expense increased by $0.9 million in the quarter and $1.3 million for the six months because of additional debt used to fund the Crest acquisition.
- The company adopted ASC 606 effective July 1, 2018. Reported six-month sales and net income were $1.3 million and $1.1 million lower, respectively, than amounts presented without the new standard.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a clear numerical fiscal 2019 revenue or earnings guidance value in the filing. Management expects continued growth from product diversification, new models, dealer expansion, manufacturing efficiencies and integration of NauticStar and Crest, with potential margin expansion particularly at NauticStar and Crest. The company believes operating cash flow and revolver availability will fund working capital and capital expenditures for at least the next 12 months.
- Key risks include economic conditions, consumer demand and preferences, dealer dependence, competition, availability of consumer and dealer credit, manufacturing-level management, fixed costs, successful new-product launches, tariff effects and integration of acquired businesses.
- The company incurred $2.0 million of acquisition-related costs during the first six months, $0.8 million of new Aviara brand start-up costs and $0.8 million of stock-based compensation expense.
- Warranty estimates were corrected during the quarter. The filing describes a $1.125 million increase to earnings from one correction and a $1.350 million decrease from another, for a net $225,000 reduction in quarterly earnings and a corresponding increase in accrued liabilities. Management concluded the adjustments were immaterial to current and prior periods.
- The Crest purchase-price allocation remains preliminary and may change during the second half of fiscal 2019.
- The company expects adoption of the new lease standard on July 1, 2019 and expects a material balance-sheet effect from recognizing right-of-use assets and lease liabilities, although the quantitative impact was not yet available.
- As of December 30, 2018, the company reported compliance with debt covenants, no legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important Facts for Investors to Verify
- Verify the sustainability of sales growth after separating Crest acquisition-related growth, production timing and ASC 606 effects.
- Monitor gross-margin recovery, including warranty costs, dealer incentives, tariffs and the lower-margin contribution from Crest and NauticStar.
- Assess leverage, interest-rate exposure, term-loan amortization and covenant compliance following the Crest-funded debt increase.
- Evaluate the quality and final valuation of Crest’s goodwill and intangible assets, including the pending purchase-price allocation.
- Track NauticStar’s facility retrofit, larger-model launches and the integration of Crest.
- Review the impact of the warranty-estimate correction, ASC 606 adoption and the anticipated lease-accounting implementation.