MasterCraft Boat Holdings, Inc. - Quarter Report: 2015 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

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FORM 10-Q

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☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 27, 2015

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                    to                                                  

 

Commission File Number 001-37502

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MCBC HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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100 Cherokee Cove Drive, Vonore, TN 37855

(Address of Principal Executive Office) (Zip Code)

 

(423) 884-2221

(Registrant’s telephone number, including area code)

 

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☑     Yes          ☐     No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

☑     Yes          ☐     No

    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

☐     Yes          ☑     No

As of November 2, 2015, there were 17,999,241 shares of the Registrant’s common stock, par value $0.01 per share, issued and outstanding.

 

 

 

 

 

TABLE OF CONTENTS

 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains certain "forward-looking statements" within the meaning of the federal securities laws. We use words such as "could," "may," "might," "will," "expect," "likely," "believe," "continue," "anticipate," "estimate," "intend," "plan," "project" and other similar expressions to identify some but not all forward-looking statements. Forward-looking statements involve estimates and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.

 

The forward-looking statements contained in this quarterly report on Form 10-Q are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other important factors we believe are appropriate under the circumstances. As you read and consider this quarterly report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many important factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements, including but not limited to the following: general economic conditions, demand for our products, changes in consumer preferences, competition within our industry, our reliance on our network of independent dealers, our ability to manage our manufacturing levels and our large fixed cost base, the successful introduction of our new products, and the other important factors described under the caption "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015, filed with the Securities and Exchange Commission (the “SEC”) on September 18, 2015. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements.

 

Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement contained in this quarterly report on Form 10-Q to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New important factors that could cause our business not to develop as we expect emerge from time to time, and it is not possible for us to predict all of them.

 

 

MCBC HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollar amounts in thousands, except share and per share data)

 

 

The notes form an integral part of the condensed consolidated financial statements.

 

 

 

 

MCBC HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except share and per share data)

 

 

The notes form an integral part of the condensed consolidated financial statements.

 

 

MCBC HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)  

(Dollar amounts in thousands, except share and per share data)

 

 

The notes form an integral part of the condensed consolidated financial statements.

 

 

MCBC HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Dollars amounts in thousands, except share and per share data)

 

 

The notes form an integral part of the condensed consolidated financial statements.

 

 

1.ORGANIZATION AND NATURE OF BUSINESS

 

MCBC Holdings, Inc. (“MCBC” or the “Company”) was formed on January 28, 2000, as a Delaware holding company that operates primarily through its wholly owned subsidiaries, MasterCraft Boat Company, LLC and MCBC Hydra Boats, LLC. MCBC and its subsidiaries collectively are referred to herein as the “Company”.

 

The Company is a designer and manufacturer of premium inboard tournament ski boats and luxury performance V-drive runabouts under the MasterCraft brand. The Company also leases a parts warehouse in the United Kingdom to expedite service, primarily to dealers and customers in the European Union.

2.BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

The Company's fiscal year begins July 1 and ends June 30, with the interim quarterly reporting periods consisting of 13 weeks. Therefore, the quarter end will not always coincide with the date of the end of the calendar month.

 

The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the results of operations and statements of financial position for the interim periods presented. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and the applicable rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for financial information have been condensed or omitted pursuant to such rules and regulations. The June 30, 2015 condensed consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by U.S. GAAP for complete financial statements. However, management believes that the disclosures in these condensed consolidated financial statements are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.  

 

The unaudited condensed consolidated financial statements have been prepared on the same basis as the Company's audited consolidated financial statements for the year ended June 30, 2015 and, in the opinion of management, reflect all adjustments considered necessary to present fairly the Company's financial position as of September 27, 2015 and results of its operations, and its cash flows for the three months ended September 27, 2015 and September 28, 2014 and statement of shareholders' equity for the three months ended September 27, 2015. All adjustments are of a normal recurring nature. Our interim operating results for the three months ended September 27, 2015 and September 28, 2014 are not necessarily indicative of the results to be expected in future operating quarters.

 

There have been no changes in the Company's significant accounting policies or critical accounting estimates for the three months ended September 27, 2015 as compared with the significant accounting policies described in the Company's audited consolidated financial statements for the financial year ended June 30, 2015.

 

Initial Public Offering — On July 22, 2015, the Company completed the initial public offering of its common stock, in which it issued and sold 6,071,429 shares of common stock (exclusive of 910,714 shares of common stock sold by the selling stockholders pursuant to the exercise of an overallotment option granted to the underwriters in connection with the offering) at a public offering price of $15.00 per share after giving effect to the 11.139-for-1 stock split consummated on July 22, 2015. The aggregate net proceeds received by the Company from our initial public offering were $81,762, after deducting $6,375 for underwriting discounts and commissions and $2,934 for offering expenses paid by the Company of which $827 were incurred during the three months ended September 27, 2015. These condensed consolidated financial statements give effect retrospectively to the stock split consummated on July 22, 2015.

 

Reclassifications — Certain amounts in prior periods have been reclassified to conform with the presentation adopted in the current period.

 

Recently Issued Accounting Standards — In July 2015, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2015-11, Simplifying the Measurement of Inventory.  This ASU changes the measurement principle for inventories valued under the First-In, First-Out ("FIFO") or weighted-average methods from the lower of cost or market to the lower of cost and net realizable value.  Net realizable value is defined by the FASB as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  This ASU does not change the measurement principles for inventories valued under the Last-In, First-Out ("LIFO") method.  The Company is currently evaluating the impact of adopting this ASC amendment.

 

In May 2014, the FASB and International Accounting Standards Board jointly issued new principles-based accounting guidance for revenue recognition that will supersede virtually all existing revenue guidance. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To achieve the core principle, the guidance establishes the following five steps: 1) identify the contract(s) with a customer, 2) identify the performance obligation in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also details the accounting treatment for costs to obtain or fulfill a contract. Lastly, disclosure requirements have been enhanced to provide sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB announced that the implementation date would be delayed by one year.   It will now be effective for annual and interim periods beginning after December 15, 2017.  Early adoption is now permitted for fiscal years beginning after December 15, 2016.  The Company is currently evaluating the impact this new guidance is expected to have on our financial position or results of operations and related disclosures.

3.INVENTORIES

 

Inventories at September 27, 2015 and June 30, 2015 consisted of the following:

 

 

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets at September 27, 2015 and June 30, 2015, consisted of the following:

 

 

5.ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities at September 27, 2015 and June 30, 2015, consisted of the following:

 

 

6. FAIR VALUE MEASUREMENTS

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 — Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

When determining the fair value measurements for assets or liabilities required or permitted to be recorded at and/or marked to fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in active markets, the Company looks to market observable data for similar assets.

 

The following tables summarize the basis used to measure certain financial assets and liabilities at fair value on a recurring basis in the consolidated balance sheets:

 

The Company classifies the common stock warrant within Level 3 because it was valued using valuation techniques using certain inputs that are unobservable in the market. Liabilities, measured at fair value on a recurring basis include the following as of September 27, 2015 and June 30, 2015

 

 

 

 

The Company had previously issued a common stock warrant for the purchase of 1,113,900 common shares. The strike price is $4.27 per share and is subject to adjustment based on stock splits, stock dividends and certain other events or transactions. The warrant will expire in June 2019 if not exercised.

 

As of June 30, 2015, the Company used an option pricing model to estimate the fair value of the warrant. Key inputs used in valuing the Company’s warrant include the Company’s stock price (estimated using a combination of the income and market approach), the Company’s stock price volatility, risk-free interest rate, and exercise price of the warrant. The estimated expected volatility was based on the volatility of common stock of a group of comparable, publicly traded companies. As of September 27, 2015, the Company estimated the common stock warrant assuming a hypothetical net exchange based on the Company’s closing stock price. The decrease in the amount of the warrant liability was primarily due to holders exchanging their warrants for common stock, as over 97% of warrants that were outstanding as of June 30, 2015 were exchanged during the three months ended September 27, 2015.

 

As of September 27, 2015, there have been 787,193 common shares issued in exchange of common stock warrants and there were 28,527 common stock warrants that remained outstanding for the purchase of common shares. The Company classifies the warrant as a liability and records the liability at the estimated fair value at each reporting date. At September 27, 2015 and June 30, 2015, the common stock warrant liability was $225 and $9,147, respectively.

 

The following table shows the reconciliation from the beginning to the ending balance for the Company’s common stock warrant liability measured at fair value on a recurring basis using significant unobservable inputs (i.e. Level 3):

 

 

At September 27, 2015 the Company estimated the common stock warrant assuming a hypothetical cashless net exchange based on the Company’s closing stock price on September 25, 2015. The Company estimated the common stock warrant using an option pricing model with the following assumptions at June 30, 2015

 

 

7. LONG-TERM DEBT

 

On July 22, 2015, the Company repaid all outstanding borrowings under its $75,000 term loan facility and its outstanding borrowings under its $30,000 revolving line of credit with the proceeds received from the IPO. As a result, the Company had no borrowings outstanding on the revolving line of credit as of September 27, 2015. As of June 30, 2015, the Company had borrowings of $8,189 outstanding on the revolving line of credit. Availability under the revolving line of credit is reduced by letters of credit. There were specified letters of credit outstanding of $1,175 at September 27, 2015 and June 30, 2015, respectively. The net revolving line of credit availability as of September 27, 2015 and June 30, 2015 was $28,825 and $20,636, respectively. As of September 27, 2015 the Company was in compliance with all of its debt covenants under its revolving credit facility.

 

As of September 27, 2015 and June 30, 2015, the Company's unamortized deferred financing costs were $371 and $425, respectively. These costs are being amortized over the term of its revolving line of credit. In connection with the repayment of the $75,000 term loan facility, the Company recorded a loss on debt extinguishment of $716, consisting of a charge of $676 to extinguish the debt discount and $40 in unamortized deferred financing costs.

 

8. INCOME TAXES

 

Our provision for income taxes as a percentage of pretax earnings ("effective tax rate") is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items. Tax expense was recorded for the three months ended September 27, 2015 despite having incurred a loss before income taxes due primarily to permanent differences relating to the change in fair value of the common stock warrant.

During the three months ended September 28, 2014 the effective tax rate was 63.2 percent. The rate was higher than the federal statutory rate primarily due to the permanent differences relating to the change in fair value of the common stock warrant. 

 

9. COMMITMENTS AND CONTINGENCIES

 

On June 29, 2015, Malibu Boats, LLC (“Malibu”) filed a complaint in the United States District Court for the Eastern District of Tennessee alleging that our Gen 2 Surf System and NXT Surf System infringe a Malibu patent relating to Malibu’s wake surf technology. The complaint seeks trebled damages in an unspecified amount, attorneys’ fees and an injunction against future infringement. On August 13, 2015, the Company filed a motion with the court for summary judgment. The court has not yet ruled on this motion. The Company does not believe that Malibu’s claims have merit and we intend to defend against these claims vigorously.

 

10. EARNINGS (LOSS) PER SHARE

 

The following table sets forth the computation of the Company’s (loss) earnings per share:

 

 

For the three months ended September 27, 2015, the weighted average shares that were anti-dilutive, and therefore excluded from the computation of diluted loss per share because their inclusion would have reduced the loss per share include options to purchase 200,000 shares of common stock, 724,721 restricted stock awards and warrants to purchase

456,213 shares of common stock. There were no anti-dilutive shares excluded from the dilutive shares outstanding for the three months ended September 28, 2014.

11.STOCK-BASED COMPENSATION

 

On July 16, 2015, the Company's board of directors amended and restated the Company's 2015 Equity Incentive Plan ("2015 Plan"), which became effective just prior to the closing of the Company's IPO, to among other things, increase the shares available for issuance under the 2015 Plan from 1,518,958 shares to 2,458,633 shares. The Plan provides for the grant of stock options, including incentive stock options, or ISOs, and nonqualified stock options, or NSOs, restricted stock, dividend equivalents, stock payments, restricted stock units, or RSUs, deferred stock, deferred stock units, performance awards, SARs, and cash awards. 

 

On May 29, 2015, the Company granted to certain employees 841,585 shares of restricted stock under the 2015 Plan at a per share fair value of $15.00, which was the initial public offering price. The award included performance conditions that were based on either an initial public offering or a change in control and until consummation of the event it was not considered probable for accounting purposes.  On July 24, 2015, the Company granted 47,146 shares of restricted stock under the 2015 Plan to certain non-employee directors at a per share fair value of $15.66, which was the closing price of the stock on July 24, 2015. For these restricted stock awards, the Company will recognize stock-based compensation on a straight-line basis through 181 days from the Company’s initial public offering date. During the three months ended September 27, 2015, the Company recognized $5,369 in stock-based compensation from these restricted stock awards.

 

On July 16, 2015, the Company granted 137,786 NSOs to certain employees at an option price equal to the $15.00 per share, which was the initial public offering price, which will vest in 25% increments on each of the first four anniversaries of the grant date. During the three months ended September 27, 2015, the Company recognized $56 in stock-based compensation from these NSOs.  We estimated the grant date fair value of stock options using the Black-Scholes pricing model assuming a risk-free interest rate of 1.93%, an expected term of 6.25 years, no dividend yield and a volatility rate of 56.7%. There was no stock-based compensation recognized for the three months ended September 28, 2014.

 

12. SEGMENT INFORMATION

 

The Company previously reported two operating and reportable segments: MasterCraft and Hydra-Sports. However, the manufacturing agreement with Hydra-Sports expired on June 30, 2015 and the Company did not renew it. The MasterCraft product brand consists of recreational performance boats primarily used for water skiing, wakeboarding and wake surfing, and general recreational boating. The Company distributes the MasterCraft product brand through its dealer network. Net sales outside of North America accounted for 7.9% and 9.1% of net sales for the three months ended September 27, 2015 and September 28, 2014, respectively.

 

For the three months ended September 27, 2015, the operating information for the reportable segments is shown as follows:

 

For the three months ended September 28, 2014, the operating information for the reportable segments is shown as follows:

 

 

ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis should be read together with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition, the statements in this discussion and analysis regarding industry outlook, our expectations regarding the performance of our business, anticipated financial results, liquidity and the other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in ”Cautionary Note Regarding Forward-Looking Statements” above and in "Risk Factors" set forth in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

 

Overview

 

We are a world-renowned innovator, designer, manufacturer, and marketer of premium recreational sport boats, with a leading market position in the U.S., a strong international presence, and dealers in 40 countries around the world. Our boats are used for water skiing, wakeboarding, and wake surfing, as well as general recreational boating. Our robust product portfolio of performance sport boats are manufactured to the highest standards of quality, performance, and styling.

 

We sell our boats through an extensive network of independent dealers in North America and internationally. We partner with 95 North American dealers with 136 locations and 48 international dealers with 58 locations throughout the rest of the world. For the three months ended September 27, 2015, 92.1% of our net sales were generated from North America and 7.9% of our net sales were generated from outside of North America.

 

Outlook

 

Our sales are impacted by general economic conditions, which affect the demand for our products, the demand for optional features, the availability of credit for our dealers and retail consumers, and overall consumer confidence. While the performance sport boat category has grown in recent years, new unit sales remain significantly below historical peaks. While there is no guarantee that our market will continue to grow, we believe that increased consumer demand and limited used boat inventory, present a long runway for future growth.

 

We believe our sales have grown as dealers and customers continue to recognize the superior quality, performance, styling, and value proposition of our recently released boats. We further believe that we are just starting to realize the market share benefits of the many recent initiatives that our new management team has implemented over the past two years. Our entire product portfolio will have been renewed in the last four years, giving us the newest overall product offering in the performance sport boat category. We believe these factors strongly position us for growth in the coming periods. In particular, we believe our newly-developed MasterCraft NXT line of entry-level boats has and will further increase our market share as it represents our first offering in this market segment, which we believe accounts for approximately one-third of the performance sport boat category. We also expect to see market share gains from the launch of several additional new models. We believe our broad offering of boat models and features will continue to attract customers from our competitors, particularly in the performance sport boat and sterndrive categories, and will drive increased unit volume and market share gains.  Our revamped manufacturing and product development processes led to operational efficiencies which we expect will to continue to drive significant margin expansion. 

 

Recent Transactions

 

On July 22, 2015, we completed the initial public offering of our common stock, in which we issued and sold 6,071,429 shares of common stock (exclusive of 910,714 shares of common stock sold by the selling stockholders pursuant to the exercise of an overallotment option granted to the underwriters in connection with the offering) at a public offering price of $15.00 per share after giving effect to the 11.139-for-1 stock split consummated on July 22, 2015. The aggregate net proceeds received by us from our initial public offering were $81.8 million, after deducting underwriting discounts and commissions and offering expenses paid by us. We used the proceeds from our initial public offering to repay all outstanding borrowings under our Term Loan Facility and our Revolving Credit Facility (each as more fully described under “—Liquidity and Capital Resources” below).  Share amounts for all periods have been adjusted retrospectively to give effect to the stock split consummated on July 22, 2015. 

 

During the three months ended September 27, 2015, we issued 787,193 common shares in exchange of common stock warrants.  As of September 27, 2015, there were 28,527 common stock warrants outstanding for the purchase of common shares.

 

Seasonality and Other Factors That Affect Our Business

 

Our operating results are subject to annual and seasonal fluctuations resulting from a variety of factors, including:

 

 

 

 

 

 

 

Key Performance Measures

 

 

 

 

 

 

 

Components of Results of Operations

 

Net Sales

 

We generate sales from the sale of boats, trailers, and accessories to our dealers. The substantial majority of our net sales are derived from the sale of boats, including optional features included at the time of the initial wholesale purchase of the boat. Net sales consist of the following:

 

 

 

 

 

 

Cost of Sales

 

Our cost of sales includes all of the costs to manufacture our products, including raw materials, components, supplies, direct labor, and factory overhead. For components and accessories manufactured by third-party vendors, our costs are the amounts invoiced to us by the vendors. Cost of sales includes shipping and handling costs, depreciation expense related to manufacturing equipment and facilities, and warranty costs associated with the repair or replacement of our boats under warranty.

 

Operating Expenses

 

Our operating expenses include selling and marketing costs, general and administrative costs, impairment losses and amortization costs. These items include personnel and related expenses, non-manufacturing overhead, and various other operating expenses. Further, selling and marketing expenditures include the cost of advertising and marketing materials. General and administrative expenses include, among other things, salaries, benefits, and other personnel related expenses for employees engaged in product development, engineering, finance, information technology, human resources, and executive management. Other costs include outside legal and accounting fees, investor relations, risk management (insurance), and other administrative costs.

 

Other Expense

 

Other expense includes interest expense, including related party amounts, and change in common stock warrant fair value. Interest expense, including related party amounts, consists of interest charged under our credit facilities, including interest

paid to funds affiliated with Wayzata Investment Partners, deferred financing fees, and debt issuance costs written off in connection with the pay down of amounts owed on our credit facilities.

 

Income Tax Expense (Benefit)

 

Our accounting for income tax expense (benefit) reflects management’s assessment of future tax assets and liabilities based on assumptions and estimates for timing, likelihood of realization, and tax laws existing at the time of evaluation. We record a valuation allowance, when appropriate, to reduce deferred tax assets to an amount that is more likely than not to be realized.

Results of Operations

 

The table below sets forth our results of operations for the periods presented. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods.

 

Three months ended September 27, 2015 Compared to Three months ended September 28, 2014

 

Net Sales.  Our net sales for the three months ended September 27, 2015 were $56.0 million, reflecting an increase of $3.6 million, or 6.8%, compared to $52.4 million for the three months ended September 28, 2014. The increase in net sales was primarily due to an increase in MasterCraft unit volume of 61 units, or 9.8%. Net sales per MasterCraft unit increased by 3.8%, primarily driven

by price increases and increased adoption of higher content option packages.  MasterCraft net sales, which exclude the terminated Hydra-Sports manufacturing contract, increased 14.6%, or $7.1 million to $56.0 million for the three months ended September 27, 2015 compared to $48.9 million for the three months ended September 28, 2014.

 

Cost of Sales.  Our cost of sales increased $0.5 million, or 1.3%, to $40.1 million for the three months ended September 27, 2015 compared to $39.6 million for the three months ended September 28, 2014. The increase in cost of sales resulted primarily from the 7.7% increase in unit volume, partially offset by a 6.0% decline in cost per unit. The reduction in cost per unit was primarily a result of lower material costs driven by engineering and manufacturing initiatives to reduce production costs. Overhead costs per unit were lower due to operating efficiencies and leverage on fixed costs.

 

Gross Profit.  For the three months ended September 27, 2015, our gross profit increased $3.0 million, or 23.4%, to $15.8 million compared to $12.8 million for the three months ended September 28, 2014. Gross margin increased to 28.3% for the three months ended September 28, 2015 compared to 24.4% for the three months ended September 28, 2014. The increase in gross margin resulted primarily from the cost reductions referenced above, increased sales of higher content option packages which increase average margins per unit, operating leverage from increased unit sales, and our replacement of lower margin Hydra-Sports production with higher margin MasterCraft production. 

 

Operating Expenses.  Selling and marketing expense increased $0.4 million, or 19.0%, to $2.5 million for the three months ended September 27, 2015 compared to $2.1 million for the three months ended September 28, 2014, driven primarily by an increase in marketing expenditures due to higher spend from our MasterCraft Throwdown wakeboarding competition televised by ESPN. General and administrative expense increased by $6.7 million, or 257.7%, to $9.3 million for the three months ended September 27, 2015 compared to $2.6 million for the three months ended September 28, 2014. This expected increase resulted primarily from $5.4 million of stock-based compensation, a $0.5 million increase in legal costs and an increase in fees and expenses related to our initial public offering and $0.5 million in costs associated with being a public company. Operating expenses, as a percentage of net sales, increased by 12 percentage points to 21.1% for the three months ended September 27, 2015 compared to 9.1% for the three months ended September 28, 2014 as a result of the increase in general and administrative expenses.

 

Other Expense.  Interest expense decreased $0.3 million, or 23.1%, to $1.0 million for the three months ended September 27, 2015 compared to $1.3 million for the three months ended September 28, 2014. This decrease was driven by lower interest expense as a result of repaying all our outstanding borrowings with the proceeds from our initial public offering. In connection with the repayment, the Company recorded a loss on debt extinguishment of $0.7 million in interest expense for the three months ended September 27, 2015. Change in common stock warrant fair value increased $0.4 million to $3.3 million for the three months ended September 27, 2015 compared to $2.9 million for the three months ended September 28, 2014. This increase was a result of an increase to the fair value of the common stock warrant. As of September 27, 2015, over 97% of the common stock warrants have been exchanged for shares.

 

Income Tax Expense.  Our income tax expense was $1.0 million for the three months ended September 27, 2015, reflecting a reported effective tax rate of (356%) and $2.4 million for the three months ended September 28, 2014, reflecting a reported effective tax rate of 63.2%.  Our reported effective tax rate during each of the three months ended September 27, 2015 and September 28, 2014, differs from the statutory federal income tax rate of 35% primarily due to permanent differences relating to the change in fair value of the common stock warrant.

 

Non-GAAP Measures

 

We define EBITDA as earnings before interest expense, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA further adjusted to eliminate certain non-cash charges and unusual items that we do not consider to be indicative of our ongoing operations, including change in common stock warrant fair value, fees and expenses related to the our initial public offering, our stock-based compensation and the results of operations of our terminated Hydra-Sports

manufacturing contract. We define Adjusted net income as net income (loss) adjusted to eliminate certain non-cash charges and unusual items that we do not consider to be indicative of our ongoing operations, including change in common stock warrant fair value, fees and expenses related to the Company’s initial public offering, our stock-based compensation and the results of operations of our terminated Hydra-Sports manufacturing contract and an adjustment for income tax expense at a normalized annual effective tax rate.  We define Adjusted EBITDA margin as Adjusted EBITDA expressed as a percentage of MasterCraft sales. Adjusted EBITDA, Adjusted net income and Adjusted EBITDA margin are not measures of net (loss) income or operating income as determined under accounting principles generally accepted in the United States, which we refer to as GAAP. Adjusted EBITDA and adjusted net income are not measures of performance in accordance with GAAP and should not be considered as an alternative to net income (loss) or operating cash flows determined in accordance with GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of cash flow for management’s discretionary use. We believe that the inclusion of EBITDA, Adjusted EBITDA and adjusted net income is appropriate to provide additional information to investors because securities analysts, noteholders and other investors use these non GAAP financial measures to assess our operating performance across periods on a consistent basis and to evaluate the relative risk of an investment in our securities. We use adjusted net income to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results prepared in accordance with GAAP, provides a more complete understanding of factors and trends affecting our business than GAAP alone measures.  We believe adjusted net income assists our board of directors, management and investors in comparing our net income on a consistent basis from period to period because it removes non-cash and non-recurring items.  Adjusted EBITDA and adjusted net income have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

 

In addition, because not all companies use identical calculations, our presentation of Adjusted EBITDA and adjusted net income may not be comparable to similarly titled measures of other companies, including companies in our industry.

 

The following table sets forth a reconciliation of Adjusted EBITDA to net (loss) income as determined in accordance with GAAP for the periods indicated:

 

 

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The following table sets forth a reconciliation of Adjusted net income to net (loss) income as determined in accordance with GAAP for the periods indicated:

 

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Liquidity and Capital Resources

 

Our primary liquidity and capital resource needs are to finance working capital and fund capital expenditures. Our principal source of funds is cash generated from operating activities. As of September 27, 2015, we had borrowing availability of $28.8 million under our Revolving Credit Facility. We believe our cash from operations, along with borrowings under our Revolving Credit Facility, will be sufficient to provide for our working capital and capital expenditures for at least the next 12 months. The following table summarizes the cash flows from operating, investing, and financing activities:

 

 

Operating Activities

 

Our net cash provided by operating activities increased by $0.5 million, or 20.8%, for the three months ended September 27, 2015 compared to the three months ended September 28, 2014, to $2.9 million from $2.4 million. This increase was primarily due to higher net income, adjusted for non-cash items, driven by increased revenue and our improved operating performance as described above in the results of operations.

 

Investing Activities

 

Net cash used in investing activities decreased $0.3 million, or 33.3%, for the three months ended September 27, 2015 compared to the three months ended September 28, 2014. This decrease was due to decreased capital expenditures.

 

Financing Activities

 

Net cash provided by financing activities increased to $4.4 million for the three months ended September 27, 2015 compared to the three months ended September 28, 2014. This increase was due to net proceeds of $83.9 million received from the issuance of common stock in connection with our initial public offering, offset by payments of $79.5 million on all of our long-term debt and revolving credit line.

 

Senior Secured Credit Facility.  On December 20, 2013, certain of our subsidiaries entered into a credit and guaranty agreement (the “Senior Secured Credit Facility”) with Fifth Third Bank, as the agent and letter of credit issuer, SunTrust Bank as the syndication agent and the other lenders party thereto. The Senior Secured Credit Facility provided, among other things, for (i) an initial term loan commitment of $25 million (the “Term Loan Facility”); and (ii) a revolving loan commitment of $10 million (the “Revolving Credit Facility”).

 

On November 25, 2014, we entered into a first amendment to the Senior Secured Credit Facility to, among other things, increase the Term Loan Facility to $50 million, repay all amounts outstanding under our Senior Secured PIK Notes with the additional borrowings under our Term Loan Facility and extend the maturity date to November 26, 2019.

 

Further, on March 13, 2015, we amended and restated the Senior Secured Credit Facility to, among other things, increase (i) the Term Loan Facility to $75 million; and (ii) commitments under the Revolving Credit Facility to $30 million. The Senior Secured Credit Facility bears interest, at our option, at either the prime rate plus an applicable margin ranging from 1% to 2% or adjusted LIBOR plus an applicable margin ranging from 3% to 4%, in each case determined according to a grid based on a senior leverage ratio. The Term Loan Facility is repayable in quarterly installments and the Senior Secured Credit Facility matures on November 26, 2019.

 

The Term Loan Facility and Revolving Credit Facility are secured by a first- priority security interest in substantially all of our assets. Obligations under the Term Loan Facility and Revolving Credit Facility are guaranteed by the Company and each of its domestic subsidiaries.

 

The Senior Secured Credit Facility, as amended, contains a number of covenants that, among other things, restrict our ability to, subject to specified exceptions, incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves; engage in businesses that are not in a related line of business; make loans, advances or guarantees; pay dividends or make other distributions; engage in transactions with affiliates; and make investments. We are also required to maintain a specified consolidated fixed charge coverage ratio and a specified total leverage ratio.

 

Events of default under the Senior Secured Credit Facility, include, but are not limited to payment defaults, covenant defaults, breaches of representations and warranties, cross-defaults to certain indebtedness, certain events of bankruptcy and insolvency, defaults under any security documents, and a change of control.

 

On July 22, 2015, we repaid all outstanding borrowings under our Term Loan Facility and our Revolving Credit Facility with the proceeds from our initial public offering.  The current net revolving line of credit availability is $28.8 million.  Our availability under the revolving line of credit is reduced by our outstanding letters of credit of $1.2 million. We remain subject to the covenants to maintain our Revolving Credit Facility, which expires on November 26, 2019. As of September 27, 2015 we were in compliance with all financial covenants and no event of default (as such term is defined in the Senior Secured Credit Facility) had occurred.

 

Off-Balance Sheet Arrangements

 

As of September 27, 2015, we did not have any off-balance sheet financings.

 

Emerging Growth Company

 

We are an emerging growth company, as defined in the JOBS Act. For as long as we are an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding stockholder advisory “say-on-pay” votes on executive compensation and stockholder advisory votes on golden parachute compensation.

 

The JOBS Act also provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Pursuant to Section 107 of the JOBS Act, we have irrevocably chosen to opt out of such extended transition period and, as a result, we will comply

with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not “emerging growth companies.”

 

We will continue to be an emerging growth company until the earliest to occur of (i) the last day of fiscal year during which we had total annual gross revenues of at least $1 billion (as indexed for inflation), (ii) the last day of fiscal year following the fifth anniversary of the closing of the IPO, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt, or (iv) the date on which we are deemed to be a “large accelerated filer,” as defined under the Exchange Act.

 

Critical Accounting Policies

 

As of September 27, 2015, there were no significant changes in or changes in the application of our critical accounting policies or estimation procedures from those presented in our Annual Report on Form 10-K.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Refer to our Annual Report on Form 10-K for a complete discussion on the Company’s market risk. There have been no material changes in market risk from those disclosed therein.

ITEM 4.CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

 

As of the end of the period covered by this Quarterly Report, we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 27, 2015.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the quarter ended September 27, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS.

 

Legal Proceedings

 

On June 29, 2015, Malibu Boats, LLC (“Malibu”) filed a complaint in the United States District Court for the Eastern District of Tennessee alleging that our Gen 2 Surf System and NXT Surf System infringe a Malibu patent relating to Malibu’s wake surf technology. The complaint seeks trebled damages in an unspecified amount, attorneys’ fees and an injunction against future infringement. On August 13, 2015, we filed a motion with the court for summary judgment.  The court has not yet ruled on this motion.  We do not believe that Malibu’s claims have merit and we intend to defend against these claims vigorously.

 

 

 

ITEM 1A.RISK FACTORS.

 

During the quarter ended September 27, 2015, there were no material changes to the risk factors disclosed in “Part I, Item 1A. Risk Factors” in our Annual Report filed on Form 10-K.

ITEM 2.UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS.

 

Unregistered Sales of Securities

 

During the first quarter of fiscal 2016, we issued a total of 787,193 shares of our common stock upon exercise of our outstanding common stock warrants. The holders of our outstanding common stock warrants exchanged primarily consist of certain current and former employees and certain investors prior to our acquisition by Wayzata Investment Partners LLC in June 2009. Each of the shares of common stock was issued pursuant to the exemption from registration contained in Section 3(a)(9) of the Securities Act of 1933, as amended.  The strike price for each of our common stock warrants, as adjusted to give effect to our 11.139-for-1 stock split consummated on July 22, 2015, was $4.27 per share of common stock, which was paid on a net share basis.  We did not receive any proceeds from the exercise of common stock warrants during the first quarter of fiscal 2016.

 

The strike price for each of our remaining common stock warrants outstanding is subject to adjustment based on stock splits, stock dividends and certain other events or transactions.  Each of our outstanding common stock warrants will expire in June 2019 if not exercised. 

 

Use of Proceeds

 

On July 22, 2015, we completed our initial public offering pursuant to a registration statement on Form S-1 (File No. 333-203815), which the SEC declared effective on July 16, 2015. Pursuant to the registration statement, we registered the offer and sale of 6,071,429 shares of common stock with an aggregate offering price of approximately $91.1 million. In our initial public offering, we issued and sold 6,071,429 shares of common stock (exclusive of 910,714 shares of common stock sold by the selling stockholders pursuant to the exercise of an overallotment option granted to the underwriters in connection with the offering) at a public offering price of $15.00 per share. The aggregate net proceeds received by us from our initial public offering were $81.8 million, after deducting underwriting discounts and commissions and offering

expenses paid by us.  All net proceeds received by us were used as described in our final prospectus filed with the SEC pursuant to Rule 424(b)(4) on July 17, 2015.

 

ITEM 3.DEFAULTS UPON SENIOR SECURITIES.

 

Not applicable.

 

 

ITEM 4.MINE SAFETY DISCLOSURES.

 

None.

ITEM 5.OTHER INFORMATION.

 

None.

ITEM 6.EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

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†Indicates management contract or compensatory plan.

*Filed herewith.

**Furnished herewith.