MasterCraft Boat (MCFT) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements, including operations, balance sheets, equity, and cash flows, highlighting a significant decline in net sales and net loss due to impairment and COVID-19 Unaudited Condensed Consolidated Statements of Operations Three Months Ended March 29, 2020 vs. March 31, 2019 | Metric | March 29, 2020 ($, thousands) | March 31, 2019 ($, thousands) | Change ($, thousands) | % Change | | :--------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------- | | NET SALES | 102,562 | 128,390 | (25,828) | (20.1%) | | GROSS PROFIT | 21,274 | 31,357 | (10,083) | (32.2%) | | OPERATING INCOME (LOSS) | (47,177) | 18,464 | (65,641) | (355.5%) | | NET INCOME (LOSS) | (36,713) | 12,763 | (49,476) | (387.7%) | | Basic Net Income (Loss) Per Share | (1.96) | 0.68 | | | | Diluted Net Income (Loss) Per Share| (1.96) | 0.68 | | | Nine Months Ended March 29, 2020 vs. March 31, 2019 | Metric | March 29, 2020 ($, thousands) | March 31, 2019 ($, thousands) | Change ($, thousands) | % Change | | :--------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------- | | NET SALES | 311,979 | 343,572 | (31,593) | (9.2%) | | GROSS PROFIT | 67,949 | 81,633 | (13,684) | (16.8%) | | OPERATING INCOME (LOSS) | (24,145) | 44,796 | (68,941) | (153.9%) | | NET INCOME (LOSS) | (21,211) | 31,415 | (52,626) | (167.5%) | | Basic Net Income (Loss) Per Share | (1.13) | 1.68 | | | | Diluted Net Income (Loss) Per Share| (1.13) | 1.67 | | | Unaudited Condensed Consolidated Balance Sheets Balance Sheet Highlights (March 29, 2020 vs. June 30, 2019) | Metric | March 29, 2020 ($, thousands) | June 30, 2019 ($, thousands) | Change ($, thousands) | | :--------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Cash and cash equivalents | 40,991 | 5,826 | 35,165 | | Total current assets | 98,980 | 54,364 | 44,616 | | Goodwill | 29,593 | 74,030 | (44,437) | | Other intangible assets, net | 64,836 | 79,799 | (14,963) | | Total assets | 250,268 | 248,773 | 1,495 | | Total current liabilities | 65,924 | 68,546 | (2,622) | | Long-term debt, net | 129,429 | 105,016 | 24,413 | | Total liabilities | 198,912 | 176,457 | 22,455 | | Total stockholders' equity | 51,356 | 72,316 | (20,960) | Unaudited Condensed Consolidated Statements of Stockholders' Equity Stockholders' Equity Changes (June 30, 2019 to March 29, 2020) | Metric | June 30, 2019 ($, thousands) | March 29, 2020 ($, thousands) | Change ($, thousands) | | :------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Stockholders' Equity | 72,316 | 51,356 | (20,960) | | Accumulated Deficit | (43,454) | (64,665) | (21,211) | - The decrease in total stockholders' equity is primarily due to a net loss of $36.7 million for the quarter ended March 29, 2020, and a cumulative net loss of $21.2 million for the nine months ended March 29, 2020[19] Unaudited Condensed Consolidated Statements of Cash Flows Cash Flow Summary (Nine Months Ended March 29, 2020 vs. March 31, 2019) | Activity | March 29, 2020 ($, thousands) | March 31, 2019 ($, thousands) | Change ($, thousands) | | :--------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Net cash provided by operating activities | 23,900 | 39,552 | (15,652) | | Net cash used in investing activities | (13,576) | (92,111) | 78,535 | | Net cash provided by financing activities | 24,841 | 50,111 | (25,270) | | NET CHANGE IN CASH AND CASH EQUIVALENTS | 35,165 | (2,448) | 37,613 | | Cash and cash equivalents — End of Period | 40,991 | 5,461 | 35,530 | - The significant increase in cash and cash equivalents at the end of the period is primarily due to a $35.0 million draw on the revolving credit facility as a precautionary measure against the COVID-19 pandemic[22][60][101] Notes to Unaudited Condensed Consolidated Financial Statements 1. Organization, Basis of Presentation, and Significant Accounting Policies - The Company operates in three reportable segments: MasterCraft, NauticStar, and Crest, focusing on recreational powerboats[25] - The COVID-19 pandemic has caused widespread business disruption, leading to the suspension of manufacturing operations in late March 2020 and temporary layoffs, with operations expected to resume in May 2020[28][30] - The Company adopted ASC 842 (Leases) on July 1, 2019, recognizing operating lease assets and liabilities of $3.9 million each on the balance sheet[33][34] 2. Revenue Recognition Net Sales by Segment and Product Category (Three Months Ended March 29, 2020) | Major Product Categories | MasterCraft ($, thousands) | NauticStar ($, thousands) | Crest ($, thousands) | Total ($, thousands) | | :----------------------- | :------------------------- | :------------------------ | :------------------- | :------------------- | | Boats and trailers | 68,684 | 14,053 | 17,696 | 100,433 | | Parts | 1,705 | 103 | 136 | 1,944 | | Other revenue | 142 | — | 43 | 185 | | Total | 70,531 | 14,156 | 17,875 | 102,562 | Net Sales by Segment and Product Category (Nine Months Ended March 29, 2020) | Major Product Categories | MasterCraft ($, thousands) | NauticStar ($, thousands) | Crest ($, thousands) | Total ($, thousands) | | :----------------------- | :------------------------- | :------------------------ | :------------------- | :------------------- | | Boats and trailers | 204,303 | 47,372 | 52,417 | 304,092 | | Parts | 6,411 | 349 | 437 | 7,197 | | Other revenue | 487 | 6 | 197 | 690 | | Total | 211,201 | 47,727 | 53,051 | 311,979 | - Contract liabilities for customer deposits decreased from $0.8 million as of June 30, 2019, to $0.4 million as of March 29, 2020, with the recognized amount contributing to revenue during the nine-month period[42] 3. Related Party Transactions - The Company purchased the Crest manufacturing facility from Crest Marine Real Estate LLC, a related party, for $4.1 million on October 24, 2019, exercising a purchase option[43][66] - Crest purchased $1.8 million of fiberglass component parts from a supplier that ceased being a related party on January 31, 2020, following a divestment of minority ownership interest[44] 4. Inventories Inventories (March 29, 2020 vs. June 30, 2019) | Category | March 29, 2020 ($, thousands) | June 30, 2019 ($, thousands) | Change ($, thousands) | | :-------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Raw materials and supplies | 24,028 | 20,034 | 3,994 | | Work in process | 5,898 | 4,571 | 1,327 | | Finished goods | 8,982 | 7,207 | 1,775 | | Obsolescence reserve | (1,749) | (1,152) | (597) | | Total inventories | 37,159 | 30,660 | 6,499 | 5. Accrued Expenses and Other Current Liabilities Accrued Expenses and Other Current Liabilities (March 29, 2020 vs. June 30, 2019) | Category | March 29, 2020 ($, thousands) | June 30, 2019 ($, thousands) | Change ($, thousands) | | :--------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Warranty | 19,318 | 17,205 | 2,113 | | Dealer incentives | 11,172 | 12,623 | (1,451) | | Compensation and related accruals | 2,757 | 3,494 | (737) | | Floor plan interest | 2,570 | 2,060 | 510 | | Insurance premium financing | 941 | — | 941 | | Total | 42,912 | 41,421 | 1,491 | Warranty Liabilities Activity (Nine Months Ended March 29, 2020 vs. March 31, 2019) | Activity | March 29, 2020 ($, thousands) | March 31, 2019 ($, thousands) | | :--------------------------------- | :----------------------------- | :----------------------------- | | Balance at the beginning of the period | 17,205 | 13,077 | | Provisions | 5,828 | 5,735 | | Payments made | (5,921) | (5,223) | | Balance at the end of the period | 19,318 | 16,733 | 6. Goodwill and Other Intangible Assets - The Company recorded goodwill and other intangible asset impairment charges totaling $56.4 million during the three months ended March 29, 2020, primarily due to a decline in market conditions and outlook, exacerbated by the COVID-19 pandemic[50][52] Impairment Charges by Segment (Three and Nine Months Ended March 29, 2020) | Asset Type | NauticStar ($, thousands) | Crest ($, thousands) | Consolidated ($, thousands) | | :--------- | :------------------------ | :------------------- | :-------------------------- | | Goodwill | 8,199 | 36,238 | 44,437 | | Trade name | 5,000 | 7,000 | 12,000 | | Total | 13,199 | 43,238 | 56,437 | - As a result of the impairment, goodwill for NauticStar and Crest segments was reduced to zero, while MasterCraft's goodwill remained unimpaired[54][159] 7. Long-Term Debt Long-Term Debt (March 29, 2020 vs. June 30, 2019) | Category | March 29, 2020 ($, thousands) | June 30, 2019 ($, thousands) | | :--------------------------------- | :----------------------------- | :----------------------------- | | Revolver | 35,000 | - | | Senior secured term loans | 104,703 | 115,349 | | Debt issuance costs on term loans | (1,270) | (1,608) | | Total debt | 138,433 | 113,741 | | Long-term debt, net of current portion | 129,429 | 105,016 | - On March 19, 2020, the Company drew $35.0 million on its revolving credit facility as a precautionary measure due to COVID-19 uncertainty, resulting in $35.0 million outstanding and no remaining borrowing availability as of March 29, 2020[60][101][145] - On May 7, 2020, the Company amended its credit agreement to temporarily replace financial covenants with an Interest Coverage Ratio, Minimum Liquidity threshold, and Maximum Unfinanced Capital Expenditures limitation through March 31, 2021, and revised interest rate margins[61][62][175][176] 8. Leases - Upon adopting ASC 842 on July 1, 2019, the Company recognized $3.9 million in operating lease assets and liabilities; the Crest Facility lease was reclassified to a finance lease and subsequently purchased for $4.1 million on October 24, 2019[33][65][66] Lease Assets and Liabilities (March 29, 2020) | Category | Classification | Amount ($, thousands) | | :--------------------------------- | :----------------------------- | :-------------------- | | Operating lease assets | Operating lease assets | 779 | | Current operating lease liabilities| Accrued expenses and other current liabilities | 334 | | Non-current operating lease liabilities | Operating lease liabilities | 445 | | Total lease liabilities | | 779 | - Total operating lease cost for the nine months ended March 29, 2020, was $0.4 million, with a weighted-average discount rate of 4.73% and a remaining lease term of 2.36 years[68][69] 9. Income Taxes - The CARES Act, signed on March 27, 2020, restored net operating loss carryback rules and modified interest expense limits, but the Company has not identified any material effect on its financial statements[72] Effective Tax Rates | Period | March 29, 2020 | March 31, 2019 | | :-------------------- | :------------- | :------------- | | Three Months Ended | 23.9% | 23.1% | | Nine Months Ended | 23.7% | 21.4% | - The higher effective tax rates for the three and nine months ended March 29, 2020, compared to the prior year, are primarily due to favorable discrete adjustments in the prior periods[73] 10. Net Income (Loss) Per Share Net Income (Loss) Per Share | Metric | Three Months Ended March 29, 2020 | Three Months Ended March 31, 2019 | Nine Months Ended March 29, 2020 | Nine Months Ended March 31, 2019 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net income (loss) | (36,713) | 12,763 | (21,211) | 31,415 | | Basic net income per share | (1.96) | 0.68 | (1.13) | 1.68 | | Diluted net income (loss) per share| (1.96) | 0.68 | (1.13) | 1.67 | - The net loss per share for both the three and nine months ended March 29, 2020, reflects the significant goodwill and intangible asset impairment charges recorded during the period[74][111] 11. Share-Based Compensation Share-Based Compensation Expense ($, thousands) | Award Type | Three Months Ended March 29, 2020 | Three Months Ended March 31, 2019 | Nine Months Ended March 29, 2020 | Nine Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Restricted stock awards | 378 | 50 | 898 | 667 | | Performance stock units | (219) | 116 | (204) | 341 | | Stock options | - | 205 | 9 | 151 | | Total | 159 | 371 | 703 | 1,159 | - Share-based compensation expense was lowered by approximately $0.4 million for the three months ended March 29, 2020, due to a reduced probability of attaining Performance Stock Units (PSUs) performance criteria[77] - As of March 29, 2020, there was $1.6 million of unrecognized compensation expense for nonvested RSAs (expected over 1.7 years) and $0.3 million for nonvested PSUs (expected over 2.0 years)[80][84] 12. Segment Information - The Company operates in three segments: MasterCraft (performance sport boats, luxury day boats including Aviara), NauticStar (saltwater fishing and recreational boats), and Crest (pontoon boats)[85][86][87][88] Net Sales by Segment ($, thousands) | Segment | Three Months Ended March 29, 2020 | Three Months Ended March 31, 2019 | Nine Months Ended March 29, 2020 | Nine Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | MasterCraft | 70,531 | 79,431 | 211,201 | 232,062 | | NauticStar | 14,156 | 21,652 | 47,727 | 58,255 | | Crest | 17,875 | 27,307 | 53,051 | 53,255 | | Consolidated | 102,562 | 128,390 | 311,979 | 343,572 | Operating Income (Loss) by Segment ($, thousands) | Segment | Three Months Ended March 29, 2020 | Three Months Ended March 31, 2019 | Nine Months Ended March 29, 2020 | Nine Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | MasterCraft | 11,062 | 14,620 | 33,869 | 37,563 | | NauticStar | (15,246) | 1,544 | (15,892) | 2,698 | | Crest | (42,993) | 2,300 | (42,122) | 4,535 | | Consolidated | (47,177) | 18,464 | (24,145) | 44,796 | 13. Acquisition - The Company acquired Crest, a pontoon boat manufacturer, on October 1, 2018, and its results have been included in consolidated operations since then[92] Unaudited Pro Forma Financial Results (Crest Acquisition as if July 1, 2017) | Metric | Three Months Ended March 31, 2019 ($, thousands) | Nine Months Ended March 31, 2019 ($, thousands) | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net sales | 128,390 | 364,565 | | Net income | 12,765 | 32,944 | | Basic earnings per share | 0.68 | 1.77 | | Diluted earnings per share | 0.68 | 1.76 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion of the Company's financial condition and results of operations, highlighting the significant impact of the COVID-19 pandemic on sales, profitability, and liquidity, including non-GAAP financial measures and critical accounting policies Overview - The COVID-19 pandemic led to the suspension of manufacturing operations in late March 2020, temporary layoffs, and a $35.0 million draw on the revolving credit facility to preserve financial flexibility[99][101] - The Company recorded $56.4 million in goodwill and other intangible asset impairment charges related to the NauticStar and Crest segments due to declining market conditions and outlook[103] Key Financial Overview (Q3 2020 vs Q3 2019) | Metric | Q3 2020 ($, millions) | Q3 2019 ($, millions) | Change (%) | | :-------------------- | :-------------------- | :-------------------- | :--------- | | Net Sales | 102.6 | 128.4 | (20.1%) | | Gross Profit | 21.3 | 31.4 | (32.2%) | | Net Income (Loss) | (36.7) | 12.8 | (387.7%) | | Diluted EPS | (1.96) | 0.68 | | - The Aviara brand, launched in fiscal 2020, began selling its AV32 and AV36 models, with the AV40 expected in Q1 fiscal 2021, contributing to the MasterCraft segment[112] Results of Operations Consolidated Results of Operations (Three Months Ended March 29, 2020 vs. March 31, 2019) | Metric | March 29, 2020 ($, thousands) | March 31, 2019 ($, thousands) | Change ($, thousands) | % Change | | :--------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------- | | NET SALES | 102,562 | 128,390 | (25,828) | (20.1%) | | GROSS PROFIT | 21,274 | 31,357 | (10,083) | (32.2%) | | OPERATING INCOME (LOSS) | (47,177) | 18,464 | (65,641) | (355.5%) | | NET INCOME (LOSS) | (36,713) | 12,763 | (49,476) | (387.7%) | - Net sales decreased by 20.1% for the quarter, driven by lower unit sales volume across all segments due to production cuts in anticipation of COVID-19 impact and dealer inventory right-sizing, partially offset by Aviara sales and higher MasterCraft average wholesale prices[105][115][116] - Operating expenses increased by 430.9% for the quarter, primarily due to the $56.4 million impairment charges[118] Consolidated Results of Operations (Nine Months Ended March 29, 2020 vs. March 31, 2019) | Metric | March 29, 2020 ($, thousands) | March 31, 2019 ($, thousands) | Change ($, thousands) | % Change | | :--------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------- | | NET SALES | 311,979 | 343,572 | (31,593) | (9.2%) | | GROSS PROFIT | 67,949 | 81,633 | (13,684) | (16.8%) | | OPERATING INCOME (LOSS) | (24,145) | 44,796 | (68,941) | (153.9%) | | NET INCOME (LOSS) | (21,211) | 31,415 | (52,626) | (167.5%) | - Nine-month net sales decreased by 9.2%, primarily due to lower unit sales volume across segments and softness in the saltwater fishing category, partially offset by Aviara sales and lower sales discounts for Canadian dealers[106][123][130] - Nine-month operating expenses increased by 150.0%, mainly due to the $56.4 million impairment charges, partially offset by lower acquisition-related costs and incentive compensation at MasterCraft[126] Non-GAAP Measures - The Company uses non-GAAP measures like EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, and Adjusted Net Income per share to provide additional insights into core operating performance by excluding certain non-cash charges or non-recurring items[97][128][129][131] Adjusted EBITDA ($, thousands) | Metric | Three Months Ended March 29, 2020 | Three Months Ended March 31, 2019 | Nine Months Ended March 29, 2020 | Nine Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net income (loss) | (36,713) | 12,763 | (21,211) | 31,415 | | EBITDA | (44,545) | 20,555 | (16,459) | 50,246 | | Goodwill and other intangible asset impairment | 56,437 | - | 56,437 | - | | COVID-19 Shutdown costs | 1,506 | - | 1,506 | - | | Aviara start-up costs | 398 | 937 | 1,213 | 1,700 | | Share-based compensation | 159 | 371 | 703 | 1,159 | | Adjusted EBITDA | 13,955 | 21,890 | 43,400 | 55,531 | | Adjusted EBITDA Margin | 13.6% | 17.0% | 13.9% | 16.2% | Adjusted Net Income ($, thousands) | Metric | Three Months Ended March 29, 2020 | Three Months Ended March 31, 2019 | Nine Months Ended March 29, 2020 | Nine Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net income (loss) | (36,713) | 12,763 | (21,211) | 31,415 | | Adjusted Net Income | 8,622 | 14,641 | 26,895 | 36,948 | | Adjusted Net Income per share (Diluted) | 0.46 | 0.78 | 1.42 | 1.96 | Liquidity and Capital Resources - The Company's primary liquidity needs are for working capital, capital expenditures, and debt service, funded by operating activities and long-term debt[145] - Net cash provided by operating activities decreased by 39.6% for the nine months ended March 29, 2020, primarily due to unfavorable working capital usage and lower operating income[146][147] - Net cash used in investing activities decreased significantly by 85.3% due to the absence of a major acquisition comparable to the prior year's Crest acquisition ($81.7 million)[146][149] - Net cash provided by financing activities decreased by 50.4%, mainly due to lower proceeds from long-term debt issuance compared to the prior year's funding for the Crest acquisition, despite a $35.0 million draw on the revolving credit facility[146][150] Critical Accounting Policies - The Company reviews goodwill and other intangibles for impairment annually in the fourth quarter and whenever events indicate impairment, using income and market approaches[157][158] - An interim impairment analysis as of March 29, 2020, resulted in the impairment of all goodwill for the NauticStar and Crest reporting units, while MasterCraft's goodwill remained unimpaired[159] - Key uncertainties in fair value calculations include assumptions for revenue growth, operating margins, discount rates, customer attrition rates, and royalty rates, which could lead to future impairment charges if adverse changes occur[158][160] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes in market risk from those disclosed in the Company's 2019 Annual Report - No material changes in market risk have occurred since the 2019 Annual Report[161] Item 4. Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures as of March 29, 2020, and reports no material changes in internal control over financial reporting during the quarter - The Company's disclosure controls and procedures were effective at a reasonable assurance level as of March 29, 2020[165] - There have been no material changes in internal control over financial reporting during the quarter ended March 29, 2020[166] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section states that there are no legal proceedings to report - No legal proceedings to report[168] Item 1A. Risk Factors This section highlights the significant negative impacts and uncertainties posed by the COVID-19 pandemic on the Company's business, operations, supply chain, and financial condition, noting that the full extent of the impact cannot be reasonably estimated - The COVID-19 pandemic has had, and may continue to have, material adverse effects on the Company's operations, business, customers, dealers, and suppliers[169] - Impacts include mandatory business closures, travel restrictions, supply chain disruptions, uncertain demand, potential delays in receivable payments, and additional goodwill/intangible asset impairment charges[169][170] - The severity and duration of the pandemic's impact are uncertain and cannot be predicted, making it challenging to estimate the future financial impact, which could be material and prolonged[171] Item 2. Unregistered Sales of Securities and Use of Proceeds This section indicates no unregistered sales of securities or use of proceeds to report - No unregistered sales of securities or use of proceeds to report[172] Item 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities to report - No defaults upon senior securities to report[173] Item 4. Mine Safety Disclosures This section indicates no mine safety disclosures to report - No mine safety disclosures to report[174] Item 5. Other Information This section details the Amendment No. 3 to the Fourth Amended and Restated Credit and Guaranty Agreement, which temporarily modifies the Company's financial covenants and interest rate margins in response to market uncertainties - On May 7, 2020, the Company entered into Amendment No. 3 to its credit agreement, temporarily replacing Total Net Leverage Ratio and Fixed Charge Coverage Ratio covenants with an Interest Coverage Ratio, Minimum Liquidity threshold, and Maximum Unfinanced Capital Expenditures limitation until March 31, 2021[175] - The amendment also added a 50 basis point floor on LIBOR and modified applicable LIBOR and prime interest rate margins[175][176] Item 6. Exhibits, Financial Statement Schedules This section lists the exhibits filed with the quarterly report, including corporate governance documents, the Third Amendment to the Credit Agreement, and certifications - Key exhibits include corporate organizational documents, Amendment No. 3 to the Fourth Amended and Restated Credit and Guaranty Agreement, and certifications from the CEO and CFO[179] SIGNATURES Signatures This section contains the signatures of the Company's Chief Executive Officer and Chief Financial Officer, certifying the report's submission - The report is signed by Frederick A. Brightbill, Chief Executive Officer, and Timothy M. Oxley, Chief Financial Officer, on May 8, 2020[183]