MasterCraft Boat (MCFT) - 2020 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements, including operations, balance sheets, cash flows, and related accounting notes - The Company's fiscal year runs from July 1 to June 30, with interim results subject to seasonality[25][27] - The Company adopted ASC 842 (Leases) on July 1, 2019, recognizing operating lease assets and liabilities for leases over twelve months, with no material impact on statements of operations[29][31] Unaudited Condensed Consolidated Statements of Operations (Three Months Ended) | Metric (in thousands) | Dec 29, 2019 | Dec 30, 2018 | | :-------------------- | :----------- | :----------- | | NET SALES | $99,628 | $121,541 | | COST OF SALES | $78,486 | $94,467 | | GROSS PROFIT | $21,142 | $27,074 | | OPERATING INCOME | $10,335 | $14,722 | | NET INCOME | $6,879 | $10,188 | | Basic EPS | $0.37 | $0.55 | | Diluted EPS | $0.37 | $0.54 | Unaudited Condensed Consolidated Statements of Operations (Six Months Ended) | Metric (in thousands) | Dec 29, 2019 | Dec 30, 2018 | | :-------------------- | :----------- | :----------- | | NET SALES | $209,417 | $215,182 | | COST OF SALES | $162,742 | $164,906 | | GROSS PROFIT | $46,675 | $50,276 | | OPERATING INCOME | $23,032 | $26,332 | | NET INCOME | $15,502 | $18,652 | | Basic EPS | $0.83 | $1.00 | | Diluted EPS | $0.83 | $0.99 | Unaudited Condensed Consolidated Balance Sheets (Assets) | Asset (in thousands) | Dec 29, 2019 | June 30, 2019 | | :------------------- | :----------- | :------------ | | Cash and cash equivalents | $5,448 | $5,826 | | Total current assets | $45,338 | $54,364 | | Property, plant and equipment, net | $41,562 | $33,636 | | Goodwill | $74,030 | $74,030 | | Other intangible assets, net | $77,824 | $79,799 | | Total assets | $245,818 | $248,773 | Unaudited Condensed Consolidated Balance Sheets (Liabilities & Equity) | Liability/Equity (in thousands) | Dec 29, 2019 | June 30, 2019 | | :------------------------------ | :----------- | :------------ | | Total current liabilities | $57,434 | $68,546 | | Long-term debt, net | $96,683 | $105,016 | | Total liabilities | $157,908 | $176,457 | | Total stockholders' equity | $87,910 | $72,316 | | Total liabilities and stockholders' equity | $245,818 | $248,773 | Unaudited Condensed Consolidated Statements of Cash Flows (Six Months Ended) | Cash Flow Activity (in thousands) | Dec 29, 2019 | Dec 30, 2018 | | :-------------------------------- | :----------- | :----------- | | Net cash provided by operating activities | $19,844 | $27,861 | | Net cash used in investing activities | $(11,477) | $(87,746) | | Net cash provided by (used in) financing activities | $(8,745) | $70,470 | | NET CHANGE IN CASH AND CASH EQUIVALENTS | $(378) | $10,585 | | CASH AND CASH EQUIVALENTS — END OF PERIOD | $5,448 | $18,494 | Revenue by Major Product Category and Segment (Three Months Ended Dec 29, 2019) | Category/Segment (in thousands) | MasterCraft | NauticStar | Crest | Total | | :------------------------------ | :---------- | :--------- | :---- | :---- | | Boats and trailers | $66,332 | $15,485 | $16,097 | $97,914 | | Parts | $1,276 | $87 | $121 | $1,484 | | Other revenue | $149 | $4 | $77 | $230 | | Total | $67,757 | $15,576 | $16,295 | $99,628 | Revenue by Major Product Category and Segment (Six Months Ended Dec 29, 2019) | Category/Segment (in thousands) | MasterCraft | NauticStar | Crest | Total | | :------------------------------ | :---------- | :--------- | :---- | :---- | | Boats and trailers | $135,619 | $33,319 | $34,721 | $203,659 | | Parts | $4,707 | $246 | $301 | $5,254 | | Other revenue | $344 | $6 | $154 | $504 | | Total | $140,670 | $33,571 | $35,176 | $209,417 | - The Company purchased the Crest manufacturing facility for $4.1 million on October 24, 2019, by exercising a purchase option from a related party[40][55] Goodwill by Segment (in thousands) | Segment | Gross Amount | Accumulated Impairment Losses | Total | | :---------- | :----------- | :---------------------------- | :---- | | MasterCraft | $29,593 | $- | $29,593 | | NauticStar | $36,199 | $(28,000) | $8,199 | | Crest | $36,238 | $- | $36,238 | | Total | $102,030 | $(28,000) | $74,030 | - Amortization expense for other intangible assets was $1.0 million for the three months ended December 29, 2019, and $2.0 million for the six months ended December 29, 2019, with estimated amortization for fiscal year 2020 at $4.0 million[46] - The Company's effective tax rate increased to 24.4% for Q2 2020 (vs. 19.7% in Q2 2019) and 24.2% for the six months ended Dec 29, 2019 (vs. 20.2% in prior year), primarily due to favorable discrete adjustments in the prior year[61] Share-Based Compensation Expense (in thousands) | Award Type | Three Months Ended Dec 29, 2019 | Three Months Ended Dec 30, 2018 | | :-------------------- | :------------------------------ | :------------------------------ | | Restricted stock awards | $268 | $260 | | Performance stock units | $(236) | $97 | | Stock options | $- | $47 | | Total | $32 | $404 | - Approximately $0.5 million of share-based compensation expense was reversed during the three months ended December 29, 2019, due to the forfeiture of nonvested RSAs and PSUs following an executive officer's resignation[65] - The Company operates in three reportable segments: MasterCraft (performance sport boats, luxury day boats), NauticStar (saltwater fishing and recreational boats), and Crest (pontoon boats)[73][74][75][76] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's analysis of financial condition, operations, non-GAAP measures, liquidity, and critical accounting policies - Net sales for Q2 2020 decreased by 18.0% to $99.6 million, primarily due to lower wholesale unit volumes driven by production cuts in response to a challenging retail market[86] - Gross profit for Q2 2020 decreased by 21.9%, mainly due to lower unit sales volume across all segments, partially offset by price increases, lower Canadian dealer discounts, and reduced MasterCraft warranty costs[88][95][96] - Net income for Q2 2020 was $6.9 million, a 32.5% decrease, with diluted EPS at $0.37, down 31.5% from the prior year[90] - Operating expenses decreased by 12.5% in Q2 2020, driven by lower acquisition-related costs for Crest, reduced share-based compensation due to an executive officer's resignation, and lower variable compensation[97] - Interest expense decreased by 39.4% in Q2 2020 due to $31.0 million in voluntary term loan prepayments over the last twelve months and lower effective interest rates[98] - The Aviara brand, a new luxury day boat line, began selling its AV32 model in Q1 2020 and AV36 in Q2 2020, with an AV40 model expected in late fiscal 2020, and is part of the MasterCraft segment[92][115] Consolidated Unit Sales Volume (Three Months Ended) | Segment | Dec 29, 2019 | Dec 30, 2018 | Change | % Change | | :---------- | :----------- | :----------- | :----- | :------- | | MasterCraft | 716 | 893 | (177) | (19.8%) | | NauticStar | 337 | 480 | (143) | (29.8%) | | Crest | 420 | 675 | (255) | (37.8%) | | Consolidated| 1,473 | 2,048 | (575) | (28.1%) | Consolidated Net Sales by Segment (Three Months Ended) | Segment | Dec 29, 2019 (in thousands) | Dec 30, 2018 (in thousands) | Change (in thousands) | % Change | | :---------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | MasterCraft | $67,757 | $76,397 | $(8,640) | (11.3%) | | NauticStar | $15,576 | $19,196 | $(3,620) | (18.9%) | | Crest | $16,295 | $25,948 | $(9,653) | (37.2%) | | Consolidated| $99,628 | $121,541 | $(21,913) | (18.0%) | Adjusted EBITDA and Margin | Metric | Three Months Ended Dec 29, 2019 (in thousands) | Three Months Ended Dec 30, 2018 (in thousands) | Six Months Ended Dec 29, 2019 (in thousands) | Six Months Ended Dec 30, 2018 (in thousands) | | :------------------ | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net income | $6,879 | $10,188 | $15,502 | $18,652 | | EBITDA | $13,018 | $16,645 | $28,085 | $29,691 | | Adjusted EBITDA | $13,557 | $18,613 | $29,444 | $33,641 | | Adjusted EBITDA Margin | 13.6% | 15.3% | 14.1% | 15.6% | - Net cash provided by operating activities decreased by 28.8% to $19.8 million for the six months ended December 29, 2019, primarily due to unfavorable working capital usage and lower operating income[123][124] - Net cash used in investing activities decreased significantly by 86.9% to $11.5 million, mainly due to the prior year's $81.7 million Crest acquisition, with current period outlays including the Crest manufacturing facility purchase, expansion, molds, and equipment[123][125] - Net financing cash flow decreased by 112.4% to $(8.7) million, primarily due to lower proceeds from long-term debt issuance compared to the prior year when $80 million was raised for the Crest acquisition, with $8.3 million in principal payments, including $6.0 million in voluntary prepayments[123][126] - The Company had $35.0 million in borrowing availability under its Revolving Credit Facility as of December 29, 2019, with no outstanding borrowings[51][123] Overview Overview of Q2 2020 performance, noting decreases in sales and profit, and the launch of the new Aviara brand - Net sales for the second quarter of 2020 decreased by 18.0% to $99.6 million, primarily due to lower wholesale unit volumes resulting from production cuts in response to a challenging retail market environment, including weather impacts and softness in the saltwater category[86] - Gross profit for the second quarter of 2020 decreased by 21.9%, mainly due to lower unit sales volume across all segments, partially offset by price increases, lower sales discounts for Canadian dealers, and reduced warranty costs for the MasterCraft segment[88] - Net income for the second quarter of 2020 was $6.9 million, a 32.5% decrease compared to the prior year, with diluted net income per share at $0.37, down 31.5%[90] - The Aviara brand, a new luxury day boat line, began selling its AV32 model in Q1 2020 and AV36 in Q2 2020, with an AV40 model expected in late fiscal 2020, and is part of the MasterCraft reportable segment[92] Results of Operations Analyzes consolidated operations for three and six months, detailing changes in sales, gross profit, and operating expenses Consolidated Statements of Operations (Three Months Ended) | Metric (in thousands) | Dec 29, 2019 | Dec 30, 2018 | Change | % Change | | :-------------------- | :----------- | :----------- | :----- | :------- | | NET SALES | $99,628 | $121,541 | $(21,913) | (18.0%) | | GROSS PROFIT | $21,142 | $27,074 | $(5,932) | (21.9%) | | OPERATING INCOME | $10,335 | $14,722 | $(4,387) | (29.8%) | | NET INCOME | $6,879 | $10,188 | $(3,309) | (32.5%) | Consolidated Statements of Operations (Six Months Ended) | Metric (in thousands) | Dec 29, 2019 | Dec 30, 2018 | Change | % Change | | :-------------------- | :----------- | :----------- | :----- | :------- | | NET SALES | $209,417 | $215,182 | $(5,765) | (2.7%) | | GROSS PROFIT | $46,675 | $50,276 | $(3,601) | (7.2%) | | OPERATING INCOME | $23,032 | $26,332 | $(3,300) | (12.5%) | | NET INCOME | $15,502 | $18,652 | $(3,150) | (16.9%) | - Net sales decrease for the three months ended December 29, 2019, was primarily driven by: MasterCraft segment ($8.6 million decrease due to lower unit sales volume, partially offset by Aviara sales and higher-priced models), Crest segment ($9.7 million decrease due to lower unit sales volume), and NauticStar segment ($3.6 million decrease due to lower unit sales volume, partially offset by larger products and higher average wholesale prices)[94][100] - Net sales decrease for the six months ended December 29, 2019, was primarily due to: MasterCraft segment ($12.0 million decrease), NauticStar segment ($3.0 million decrease), partially offset by a $9.2 million net increase from the Crest acquisition (adding $18.9 million in Q1 2020, offset by $9.7 million decrease in Q2 2020)[102] - Operating expenses for the six months ended December 29, 2019, decreased by $0.3 million, primarily due to a $2.3 million decrease in the MasterCraft segment (lower acquisition-related costs, share-based compensation, and variable compensation), partially offset by $2.2 million added from Crest's Q1 2020 results[105][110] Non-GAAP Measures Explains the Company's use of non-GAAP financial measures, detailing adjustments and providing comparative data - The Company uses non-GAAP financial measures like EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, and Adjusted Net Income per share to provide additional information to investors, aligning with management's internal metrics and facilitating consistent performance comparisons[107][108][109] - Adjustments to GAAP measures include Aviara brand startup costs, transaction expenses from acquisitions, and non-cash items such as share-based compensation and acquisition-related inventory step-up adjustments[107][108] Adjusted Net Income and Adjusted Net Income per share | Metric | Three Months Ended Dec 29, 2019 | Three Months Ended Dec 30, 2018 | Six Months Ended Dec 29, 2019 | Six Months Ended Dec 30, 2018 | | :-------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Net income | $6,879 | $10,188 | $15,502 | $18,652 | | Adjusted Net Income | $8,160 | $12,097 | $18,273 | $22,308 | | Adjusted Net Income per share (Basic) | $0.44 | $0.65 | $0.98 | $1.20 | | Adjusted Net Income per share (Diluted) | $0.43 | $0.64 | $0.96 | $1.18 | Liquidity and Capital Resources Details liquidity needs, capital sources, borrowing availability, and changes in operating, investing, and financing cash flows - Primary liquidity needs are for working capital, capital expenditures, and debt service, with funds sourced from operating activities and long-term debt refinancing/issuance[123] - As of December 29, 2019, the Company had $35.0 million in borrowing availability under its Revolving Credit Facility, with no outstanding borrowings[51][123] - Net cash provided by operating activities decreased by $8.0 million (28.8%) for the six months ended December 29, 2019, primarily due to unfavorable working capital usage and lower operating income[123][124] - Net cash used in investing activities decreased by $76.3 million (86.9%) for the six months ended December 29, 2019, mainly due to the prior year's $81.7 million Crest acquisition, with current period investing including the purchase of the Crest manufacturing facility[123][125] - Net financing cash flow decreased by $79.2 million (112.4%) for the six months ended December 29, 2019, primarily due to lower proceeds from long-term debt issuance compared to the prior year's $80 million for the Crest acquisition, with $8.3 million in principal payments, including $6.0 million of voluntary prepayments[123][126] Off-Balance Sheet Arrangements Confirms the absence of any off-balance sheet financing arrangements as of the reporting date - The Company did not have any off-balance sheet financing arrangements as of December 29, 2019[127] Contractual Obligations Details the impact of the Crest manufacturing facility purchase on operating lease obligations - The Company completed the purchase of the leased Crest manufacturing facility on October 24, 2019, impacting its operating lease obligations[128] - Operating Lease Obligations were reduced by: $0.3 million (less than 1 year), $0.7 million (1-3 years), $0.7 million (4-5 years), and $1.8 million (more than 5 years)[131] Emerging Growth Company Discusses the Company's status as an emerging growth company and its election on accounting standard transition periods - The Company is an emerging growth company under the JOBS Act, allowing it to take advantage of certain exemptions from reporting requirements, such as auditor attestation and reduced executive compensation disclosures[129] - The Company has irrevocably opted out of the extended transition period for complying with new or revised accounting standards, meaning it will comply on the same dates as non-emerging growth companies[132] Critical Accounting Policies States no significant changes in critical accounting policies or estimation procedures from the prior fiscal year - As of December 29, 2019, there were no significant changes in the Company's critical accounting policies or estimation procedures from those presented in its Annual Report on Form 10-K for the fiscal year ended June 30, 2019[133] Item 3. Quantitative and Qualitative Disclosures About Market Risk Refers to the Annual Report on Form 10-K for market risk disclosures, with no material changes reported - There have been no material changes in market risk from those disclosed in the Annual Report on Form 10-K for the fiscal year ended June 30, 2019[134] Item 4. Controls and Procedures Confirms effective disclosure controls and procedures, with no material changes in internal control over financial reporting - The Company's disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of December 29, 2019[135][136] - No material changes in internal control over financial reporting occurred during the quarter ended December 29, 2019[137] PART II – OTHER INFORMATION Item 1. Legal Proceedings No legal proceedings to report for the period - No legal proceedings to report[139] Item 1A. Risk Factors No material changes to risk factors, except for updated emphasis on third-party supplier dependence and global disruption - No material changes to risk factors disclosed in the Annual Report on Form 10-K, except for an updated risk regarding dependence on third-party suppliers[140] - A new risk factor highlights the dependence on third-party suppliers for components and raw materials, noting potential disruptions from changes in economic, political, and welfare conditions in various countries, including the inability of suppliers to meet demands due to infectious diseases and epidemics like the coronavirus outbreak[140] Item 2. Unregistered Sales of Securities and Use of Proceeds No unregistered sales of securities or use of proceeds to report - No unregistered sales of securities and use of proceeds to report[141] Item 3. Defaults Upon Senior Securities No defaults upon senior securities to report - No defaults upon senior securities to report[142] Item 4. Mine Safety Disclosures No mine safety disclosures to report - No mine safety disclosures to report[143] Item 5. Other Information No other information to report - No other information to report[144] Item 6. Exhibits, Financial Statement Schedules Lists all exhibits and financial statement schedules filed, including organizational documents and certifications - The report includes various exhibits such as Amended and Restated Certificate of Incorporation, By-laws, Letter Agreement, Offer Letter, Rule 13a-14(a)/15d-14(a) Certifications, Section 1350 Certifications, and XBRL Instance Documents[146] SIGNATURES - The report was signed by Frederick A. Brightbill, Chief Executive Officer, and Timothy M. Oxley, Chief Financial Officer, on February 5, 2020[150]