MasterCraft to complete restructuring, restart boat building

VONORE, Tenn. – After going into “crisis cash management mode” about four months ago, MasterCraft Boat Co. has secured a path back to “more normal operations” without going to bankruptcy court, something CEO John Dorton says is good news for the company, as well as its customers, dealers and suppliers.

In a letter to suppliers dated June 5, Dorton wrote that the past nine months have been “very challenging,” with unit shipments dropping about 58 percent between fiscal 2008 and 2009. In response, the company laid off the majority of its workforce, significantly curtailed production and dramatically reduced remaining employees’ wages and benefits, as well as “other draconian measures” intended to conserve cash and weather the economic storm.

Now it expects to complete a comprehensive restructuring of its balance sheet through an exchange of its senior secured debt, made possible through the support of Wayzata Investment Partners LLC, which will become the company’s controlling shareholder, and through new agreements it is signing with suppliers regarding the money it owes them.

“This restructuring has significantly reduced the company’s debt obligations and provides MasterCraft with ample liquidity to continue designing and manufacturing…,” the company reported in a statement today.

In an interview this weekend, Dorton explained that the biggest risks MasterCraft has been facing are the number of dealers going out of business, the lack of incentives for dealers to order new boats on floor plan and its buy-back obligations.

“If you took that threat away, we wouldn’t have to send the letter to the suppliers,” he explained, “but we have millions of dollars of inventory in the field, and then you get a phone call that so and so has gone out of trust, be prepared to come and pick up the boats. We found a way at low production volumes to … even be profitable, but we’ve got these mines out there floating in the water in the form of dealer repossessions that are scary.”

Agreement to close this week

The first part of its plan involves restructuring its balance sheet through an agreement in principle to convert its existing bond debt into a combination of equity in the company and a revised debt load, which will require very little cash debt service going forward, Dorton explained in the letter.

“Wayzata has agreed to provide MasterCraft with additional liquidity to effectuate the restructuring and provide financing going forward,” Dorton wrote. “Following the restructuring and liquidity injection, MasterCraft will be significantly delevered, will have virtually no debt service obligations, and will have one of the strongest financial profiles in the industry.”

The restructuring agreement with Wayzata – a Minneapolis-based investment firm with more than $5 billion in assets – is expected to close this week. He explained that because it is taking place out of court, MasterCraft’s customers, employees and creditors are much better off.

“In the event of a bankruptcy, the full amount due the bondholders and the costs of the legal process would have had to be paid before trade creditors such as your firm received any payment on your receivables from MasterCraft,” Dorton wrote in the letter.

Suppliers asked for help

While Wayzata is providing “the bulk of the necessary funding” required for MasterCraft to restructure, the boat builder must produce the remainder from working capital and the profit it makes on its initial boat orders, Dorton explained.

To do that, MasterCraft has asked suppliers to agree to receive their past due payables balance either through “Staged Repayment” or “Discounted Immediate Payment.” Under the first option, MasterCraft will make an initial payment by the end of July and then spread out the remaining payments over the next year. Under the second option, suppliers will accept a percentage of the full balance owed in one lump sum in July.

“Some needed the cash upfront to order raw goods,” Dorton said in the interview. “Others, if they were healthier, they agreed to stretch out the payments.”

In addition, MasterCraft told its suppliers it would need “to continue our normal trade terms with your firm for all future orders.”

“We recognize that neither of these plans is a perfect outcome for your firm, but it is critical that we reach an agreement on these amounts due in order to move forward with our restructuring,” he wrote. “Ultimately, we are confident this is a far better outcome than what the results of a bankruptcy would have been, and truly believe that this restructuring will create a stronger MasterCraft making us a better partner for our customers, dealers and suppliers in the future.”

Most of the company’s suppliers seem to agree. Dorton said they’ve responded to its request for help with a positive attitude.

Boat building to resume July 6

This restructuring process will allow the company to begin building boats again starting on July 6, Dorton suggested, and as a result, MasterCraft will bring back some of the employees it laid off and begin to pay for the product suppliers provide to the company.

“We have a very conservative view of demand for 2010,” said MasterCraft Senior VP of Sales and Marketing Scott Crutchfield in the statement. “However, we’ve been seeing strengthening retail activity in key domestic and international markets. In response, we are proactively working with each of our dealers and their markets to ensure we are capitalizing on all available opportunities without loading up the pipelines, especially in markets that are still struggling.”

MasterCraft plans to build boats to meet dealer demand, which will translate into new demand projections and orders being sent to MasterCraft’s suppliers, Dorton stated.

The company currently has two months worth of orders to build. In addition, the boat builder is tallying up orders for the first half of the year from the virtual dealer meeting it held last week. Instead of spending three quarters of a million dollars on assembling its dealers, it spent a few thousand on four-hour webinars it held for dealers in each region.

“We all enjoy getting together, but they appreciated us saving them time and money and the factory time and money,” he said in the interview. “We kept the dealers in the showroom and off airplanes.”

During the webinar, dealers not only learned about product features, pricing and programs, they viewed a video conference concerning MasterCraft’s restructuring plan.

“Generally, they were very cooperative,” said Dorton in the interview. “Some markets are stronger than others. Repurchased and buy-back boats, once we flush them out of the system, we’ll be a lot stronger. There’s isn’t a whole lot of ‘09 product out there. This time next year, if the market is anywhere near decent, we should be rocking and rolling.”

While its production rate will continue to be lower than in recent years, Dorton suggested MasterCraft’s market share has continued to rise despite recent challenges, increasing from 22 percent to 28 percent. In addition, he said in the statement that the company is outperforming the industry when it comes to inventory management, with zero stock boats at the factory and 35-percent-less inventory in its dealer network than last year.

“This is a good outcome compared to many we all read about in the papers these days,” he concluded, “… one that will not be available to many of our competitors who are facing similar challenges.”

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