MasterCraft Boat (MCFT) - 2022 Q4 - Annual Report

Part I Item 1. Business MasterCraft Boat Holdings is a leading designer and manufacturer of recreational powerboats across four brands, distributing through a global dealer network Our Segments and Products The company operates four distinct brand segments targeting specific powerboat categories, with a recent strategic exit from the NauticStar business - The company operates a diversified portfolio of four brands: MasterCraft, Crest, NauticStar, and Aviara, targeting leading positions in the ski/wake, pontoon, and outboard saltwater fishing categories, while also entering the luxury day boat segment[19][20] - On August 9, 2022, the company announced it was evaluating strategic alternatives for its NauticStar business, with the intention of exiting it; the sale was completed on September 2, 2022[24][25] Product Portfolio and Retail Price Ranges | Brand | Product Type | Retail Price Range (Approx.) | | :--- | :--- | :--- | | MasterCraft | Premium ski/wake boats | $90,000 - $300,000 | | Crest | Pontoon boats | $35,000 - $220,000 | | NauticStar | Saltwater fishing, deck, bay boats | $50,000 - $275,000 | | Aviara | Luxury day boats | $430,000 - >$1,000,000 | Dealer Network and Manufacturing Products are sold through an extensive independent dealer network and produced in four dedicated, brand-specific manufacturing facilities - The company's top ten dealers accounted for approximately 30% of net sales in fiscal 2022, with no single dealer representing more than 10%[35] - The company operates four manufacturing facilities: MasterCraft in Vonore, TN (285,000 sq-ft); Crest in Owosso, MI (150,000 sq-ft); NauticStar in Amory, MS (225,000 sq-ft); and Aviara in Merritt Island, FL (140,000 sq-ft)[41] Dealer Network Locations as of June 30, 2022 | Brand | North America Dealers | North America Locations | International Dealers | International Locations | | :--- | :--- | :--- | :--- | :--- | | MasterCraft | 112 | 152 | 41 | 41 | | Crest | 132 | 161 | 2 | 2 | | NauticStar | 110 | 119 | 2 | 2 | | Aviara | 1 | 79 | 0 | 0 | Suppliers, R&D, and Competition The company relies on key suppliers like Ilmor Engineering, invests in R&D, and holds a 1 market share in the ski/wake category - Ilmor Engineering, Inc is the exclusive engine supplier for the MasterCraft brand and was the company's largest overall supplier in fiscal 2022[46] Research and Product Development Expense | Fiscal Year | Expense (in millions) | | :--- | :--- | | 2022 | $8.2 | | 2021 | $6.8 | | 2020 | $5.2 | Market Share by Brand (as of Dec 2021, based on SSI data) | Brand | Category | Market Share | Rank | | :--- | :--- | :--- | :--- | | MasterCraft | Ski/Wake | 21.3% | 1 | | Crest | Pontoon | 4.0% | 9 | | NauticStar | Deck & Saltwater Fishing | 4.3% | 8 | | Aviara | 30-43ft Bowrider | 5.7% | 7 | Item 1A. Risk Factors The company faces significant risks from economic downturns, supply chain dependencies, dealer network stability, and potential asset impairment - The business is cyclical and highly sensitive to economic conditions, as consumers may defer spending on non-essential items like recreational boats during periods of economic uncertainty[64] - The company relies on a complex global supply chain and has sole or limited suppliers for critical components like engines, windshields, and towers, making it vulnerable to disruptions and price fluctuations[86][87] - Substantially all sales are through a network of independent dealers; the loss of key dealers, dealer consolidation, or the financial instability of dealers could materially harm the business[95] - As of June 30, 2022, the company had $54.5 million in goodwill and indefinite-lived intangible assets (approximately 18% of total assets), which are subject to impairment risk if future operating performance declines[122] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments - None[138] Item 2. Properties The company owns four primary manufacturing facilities in Tennessee, Michigan, Mississippi, and Florida for its respective brands Owned Manufacturing Facilities as of June 30, 2022 | Brand | Location | Facility Size (sq-ft) | | :--- | :--- | :--- | | MasterCraft | Vonore, TN | 285,000 | | Crest | Owosso, MI | 150,000 | | NauticStar | Amory, MS | 225,000 | | Aviara | Merritt Island, FL | 140,000 | Item 3. Legal Proceedings Details regarding legal proceedings are available in Note 10 to the Consolidated Financial Statements - For a discussion of the Company's legal proceedings, see Part IV – Item 15 – Note 10 Commitments and Contingencies to the Company's Consolidated Financial Statements[140] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[141] Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ under "MCFT" and it executed a $25.5 million stock repurchase in fiscal 2022 - The company's common stock is traded on the NASDAQ Global Market under the symbol "MCFT"[144] - The company does not currently anticipate declaring or paying cash dividends on its common stock[145] - During fiscal year 2022, the company repurchased approximately $25.5 million of its common stock, leaving approximately $24.5 million available under its repurchase program[146] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2022 saw record net sales of $707.9 million, though margins were pressured by inflation and impairment charges Consolidated Results of Operations Net sales grew 34.6% to $707.9 million, but operating income was flat due to a 180 basis point margin decline and impairment charges - Gross margin declined by 180 basis points in fiscal 2022, primarily due to supply chain disruptions, labor challenges, and inflationary pressures that increased material and overhead costs, most pronounced at the NauticStar segment[164][165] - Operating expenses increased by 56.4% in fiscal 2022, mainly driven by impairment charges of $24.9 million ($1.1M for Aviara goodwill, $23.8M for NauticStar intangibles and fixed assets)[166] Consolidated Financial Highlights (Fiscal Year Ended June 30) | Metric (in thousands, except %) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $707,862 | $525,808 | 34.6% | | Gross Profit | $162,362 | $129,971 | 24.9% | | Operating Income | $77,857 | $75,953 | 2.5% | | Net Income | $58,214 | $56,170 | 3.6% | | Consolidated Unit Sales | 8,217 | 7,197 | 14.2% | Segment Results The MasterCraft and Crest segments drove profit growth, while NauticStar and Aviara recorded operating losses due to impairments MasterCraft Segment Performance (FY2022 vs FY2021) | Metric (in thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $466,027 | $350,812 | 32.8% | | Operating Income | $105,341 | $73,354 | 43.6% | Crest Segment Performance (FY2022 vs FY2021) | Metric (in thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $140,859 | $102,688 | 37.2% | | Operating Income | $19,892 | $13,605 | 46.2% | NauticStar & Aviara Segment Performance (FY2022) | Segment | Net Sales (in thousands) | Operating Loss (in thousands) | Impairments (in thousands) | | :--- | :--- | :--- | :--- | | NauticStar | $66,253 | $(38,338) | $23,833 | | Aviara | $34,723 | $(9,038) | $1,100 | Non-GAAP Measures Adjusted EBITDA grew to $121.1 million and Adjusted Net Income reached $84.6 million, excluding impairments and other items Reconciliation of Net Income to Adjusted EBITDA (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Net income | $58,214 | $56,170 | | Adjustments: | | | | Interest, Taxes, D&A | $33,257 | $30,680 | | Impairments | $24,933 | $0 | | Share-based compensation | $3,458 | $2,984 | | Other adjustments | $1,216 | $2,919 | | Adjusted EBITDA | $121,078 | $92,753 | Reconciliation of Net Income to Adjusted Net Income (in thousands, except per share) | | 2022 | 2021 | | :--- | :--- | :--- | | Net income | $58,214 | $56,170 | | Adjustments (pre-tax) | $33,488 | $9,745 | | Tax effect of adjustments | $(8,117) | $(3,004) | | Adjusted Net Income | $84,603 | $62,811 | | Adjusted Net Income per diluted share | $4.54 | $3.31 | Liquidity and Capital Resources The company maintained strong liquidity with $73.3 million in operating cash flow, used for debt repayment and stock repurchases - Financing activities in FY2022 included $36.7 million in net payments on long-term debt and $25.5 million in stock repurchases[206] - As of June 30, 2022, the company had repaid all amounts on its Revolving Credit Facility, leaving $100.0 million of available borrowing capacity[202] Cash Flow Summary (Fiscal Year Ended June 30, in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Operating activities | $73,311 | $68,538 | | Investing activities | $(15,820) | $(27,832) | | Financing activities | $(62,540) | $(17,773) | | Net change in cash | $(5,049) | $22,933 | Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are inflation impacting material costs and interest rate fluctuations on its $57.0 million of debt - The company is primarily exposed to inflation risk, which increases the cost of raw materials, and interest rate risk on its variable-rate debt[235][236] - As of June 30, 2022, the company had $57.0 million of long-term debt; a hypothetical 1% increase or decrease in interest rates would have resulted in a $0.7 million change to interest expense for fiscal 2022[237] Item 9A. Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal controls were effective as of June 30, 2022 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[241] - Management concluded that internal control over financial reporting was effective as of June 30, 2022, based on the criteria set forth by COSO; this was audited and confirmed by the independent registered public accounting firm[243][244] Item 9B. Other Information The company completed the sale of its NauticStar business on September 2, 2022, expecting a loss between $20.0 and $23.0 million - The company completed the sale of its NauticStar business on September 2, 2022, and expects to record a loss on sale between $20.0 million and $23.0 million[246] Part III Items 10-14. Directors, Executive Compensation, Security Ownership, and Accountant Fees Information on directors, compensation, ownership, and accountant fees is incorporated by reference from the 2022 proxy statement - Information required by Items 10, 11, 12, 13, and 14 will be included in the Proxy Statement for the 2022 annual meeting of stockholders and is incorporated herein by reference[250][251][252] Part IV Item 15. Exhibits, Financial Statement Schedules This section contains the audited financial statements, which received an unqualified opinion with a critical audit matter on warranty liability - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements and the company's internal control over financial reporting as of June 30, 2022[266][277] - The auditor identified the accrued warranty liability for the MasterCraft brand as a Critical Audit Matter due to the significant management judgments required to estimate future claim rates and costs[272] Consolidated Balance Sheet Summary (as of June 30, in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Total Current Assets | $146,110 | $110,227 | | Total Assets | $297,052 | $276,460 | | Total Current Liabilities | $93,172 | $74,289 | | Total Liabilities | $153,404 | $168,672 | | Total Stockholders' Equity | $143,648 | $107,788 | Consolidated Statement of Operations Summary (Year Ended June 30, in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Sales | $707,862 | $525,808 | $363,073 | | Gross Profit | $162,362 | $129,971 | $75,356 | | Operating Income (Loss) | $77,857 | $75,953 | $(26,567) | | Net Income (Loss) | $58,214 | $56,170 | $(24,047) | | Diluted EPS | $3.12 | $2.96 | $(1.28) |