MasterCraft reports fiscal 2017 Q3 results

MasterCraft (NASDAQ:MCFT) announced financial results for its fiscal 2017 third quarter ended April 2, 2017.

Highlights:

• Net sales for the third quarter increased to $58.5 million, up 2.6 percent from $57.0 million in the prior-year period, while net sales year-to-date rose to $170.3 million, up 1.2 percent from $168.2 million in the prior-year period.
• Gross margin declined 230 basis points to 25.5 percent for the third quarter, down from 27.8 percent in the prior-year period, and decreased 40 basis points year-to date to 27.6 percent from 28.0 percent in the prior-year period.
• Net income for the third quarter totaled $2.2 million, down from $4.9 million in the prior-year period. Net income totaled $13.3 million for the year-to-date period, up from $5.4 million in the prior-year period.
• Diluted earnings per share declined to $0.12 for the third quarter, from $0.26 in the prior-year period, and was up year-to-date to $0.71 per share compared to $0.30 in the prior-year period.
• Adjusted EBITDA, a non-GAAP measure, decreased for the third quarter to $9.6 million from $10.1 million in the prior-year period and increased year-to-date to $31.9 million from $31.3 million in the prior-year period.
• Fully diluted pro forma Adjusted net income per share, a non-GAAP measure, declined to $0.28 for the third quarter, versus $0.31 in the prior-year period and grew year to date to $0.95 per share compared to $0.94 in the prior-year period.
• Third-quarter working capital management continued to be outstanding as evidenced by a cash conversion cycle of 4.8 days, improved from 5.4 days in the prior-year period.
• Exceptionally high retail demand in connection with the company’s winter sales program reduced dealer pipeline inventory, setting the stage for a strong fiscal 2018.
• MasterCraft settled its patent dispute with Malibu Boats

“We were pleased to see strong growth in retail demand during the quarter. Market reception for our recently released XT20 and XT21 has been strong and this series continues to set new industry standards in premium features and towboat performance,” Terry McNew, MasterCraft’s president and chief executive officer, said. “For the quarter and year-to-date, we delivered gains in net sales, reduced dealer pipeline inventory, as well as continued to improve on our already outstanding working capital management.”

Third-quarter results

Net sales for the third quarter ended April 2, 2017, rose $1.5 million, or 2.6 percent, to $58.5 million from $57.0 million for the prior-year period. The increase reflected a rise in unit sales volume of 40 units, or 5.7 percent, and favorable pricing and product mix, partially offset by the rebates associated with exceptionally high retail demand from our winter sales program.

Gross profit for the third quarter, decreased $0.9 million, or 5.8 percent, to $14.9 million, versus $15.8 million in the prior-year period. Gross margin decreased to 25.5 percent from 27.8 percent for the prior-year period. The decreases resulted from rebates associated with exceptionally high retail demand from our winter sales program, partially offset by price increases and sales of higher content option packages.

“Our winter sales program exceeded our expectations due to several factors. For the first time, we established nationally advertised pricing on selected models, which drove increased traffic to our dealerships. Additional dealer training enhanced tracking of sales leads and improved the dealers’ ‘close ratio’ significantly,” said McNew. “Retail rebates also contributed to the success of retail demand during the quarter. Importantly, all these factors improved our dealer pipeline inventory setting the stage for a strong 2018 fiscal year.”

Selling and marketing expense increased $0.5 million, or 21.2 percent, to $2.7 million for the third quarter ended April 2, 2017, compared to the year-earlier quarter primarily due to the timing of product launch and promotion activities. General and administrative expense totaled $7.9 million versus $6.1 million for the prior-year period. This increase resulted mainly from an increase of $3.9 million for legal and advisory fees related to the company’s litigation with Malibu Boats, which includes a $2.5 million charge to settle the Malibu patent case, partially offset by a $1.1 million reduction in stock-based compensation costs.

Fiscal third-quarter net income totaled $2.2 million, versus $4.9 million in the year-earlier quarter. Adjusted net income was $5.3 million, or $0.28 per share, on a pro forma, fully diluted weighted average share count of 18.7 million shares. This compares with adjusted net income of $5.8 million, or $0.31 per share, in the prior-year period.

EBITDA was $5.1 million, compared to $8.4 million in the prior-year period primarily due to increased litigation costs and retail rebates. Adjusted EBITDA margin declined 130 basis points to 16.4 percent, from 17.7 percent in the prior-year period, stemming from the higher retail rebates. Adjusted EBITDA was $9.6 million, a 4.8 percent decrease from $10.1 million in the prior-year period. 

Year-to-date third-quarter 2017 results

Net sales for the fiscal year-to-date period ended April 2, 2017, increased $2.1 million, or 1.2 percent, to $170.3 million from $168.2 million in the prior-year period. The increase was primarily due to price increases, sales of higher content option packages, and an increase in unit volume of 11 units, or 0.5 percent, partially offset by rebates associated with high retail demand from the company’s winter sales program.

Gross profit for the year-to-date period ended April 2, 2017 was flat at $47.0 million versus the prior-year period. Gross margin stood at 27.6 percent from 28.0 percent in the prior-year period.

Selling and marketing expense declined $0.4 million, or 5.2 percent, to $7.2 million for the nine-month period. This decrease resulted mainly from reduced spending on the MasterCraft Throwdown event, as well as reductions in selling and marketing expenditures tied to the timing of new product launch and promotion activity. General and administrative expense totaled $16.8 million versus $25.0 million for the prior-year period. This decrease resulted mainly from a $13.0 million decrease in stock-based compensation costs, partially offset by an increase of $5.2 million in legal and advisory fees related to the company’s litigation with Malibu Boats, which includes a $2.5 million charge to settle the Malibu patent case.

Fiscal nine-month year-to-date net income totaled $13.3 million, up from $5.4 million in the prior-year period, reflecting reduced stock-based compensation costs. Adjusted net income increased to $17.8 million, or $0.95 per share, on a pro forma, fully diluted weighted average share count of 18.7 million shares. This compares favorably with adjusted net income of $17.7 million, or $0.94 per share, in the prior-year period.

In December 2016, MasterCraft completed two secondary offerings for a total of 2,995,000 shares of its common stock held by affiliates of Wayzata Investment Partners. No shares were sold by the company in either offering, and the company did not receive any proceeds from the sale of any of the shares. Wayzata Investment Partners has now divested of all outstanding shares of MasterCraft’s common stock acquired in connection with the company’s initial public offering.

EBITDA increased to $25.4 million from $13.5 million in the prior-year period. Adjusted EBITDA margin increased 10 basis points to 18.7 percent, from 18.6 percent in the prior-year period. Adjusted EBITDA was $31.9 million, a 2.0 percent increase from $31.3 million in the prior-year period.

Litigation settlement

MasterCraft and Malibu Boats entered into a settlement agreement to settle the lawsuits filed by Malibu alleging infringement by MasterCraft of two of Malibu’s patents. Under the terms of the Settlement Agreement, MasterCraft will make a one-time payment of $2.5 million and entered into a license agreement related to certain of Malibu’s patents. The parties agreed to dismiss all claims in the patent litigation.

“We are pleased to have this dispute behind us and look forward to building on MasterCraft’s legacy of award-winning products. While we felt strongly about our position in this dispute, we know there is significant cost and uncertainty associated with the judicial process, and as a result, we view this settlement as a positive outcome for MasterCraft,” said McNew. “We look forward to MasterCraft’s continued role in advancing our market segment for the benefit of both MasterCraft and the entire industry.”

Outlook

“MasterCraft has delivered solid performance and we’re optimistic about prospects for our fiscal 2017 fourth quarter. Equally important, we continue to deliver best-in-class working capital management, which provides opportunities to enhance shareholder return in a variety of ways and is a hallmark of a well-managed company,” said McNew. “Looking ahead, we remain committed to our five-pronged growth strategy: developing new and innovative products; further penetrating the entry-level and mid-line segment of the performance sport boat category; capturing share from adjacent boating categories; strengthening our dealer network; and driving margin expansion through continuous operational excellence.”

For the fiscal year ending June 30, 2017, MasterCraft reiterates its forecast for net sales growth in the low- to mid-single digits and continued growth in Adjusted EBITDA margin with a forecast approaching 19 percent. Net sales growth will result in continued growth in net income, EBITDA and Adjusted net income, despite increased interest expense due to the refinancing completed in the fourth quarter of fiscal 2016.

MasterCraft held a live conference call and webcast to discuss fiscal second-quarter results May 11, at 5:00 p.m. ET. For an audio replay of the conference call, dial 855-859-2056 (domestic) or 404-537-3406 (international) and enter audience passcode 7643288. The audio replay will be available until 11:59 p.m. ET on Thursday, May 25.