MasterCraft Dumps Ailing Boat Unit After Paying Consultant $1.2 Million to Fix It

Shares have fallen 21.3% since our Exclusive Report detailing how inadequate warranty accruals would pressure margins.

September 15, 2022

MasterCraft Boat Holdings (MCFT), a powerboat manufacturer, has dumped its sport fishing brand NauticStar, but not before wasting 2% of FY22 net income trying to fix the ailing unit. Acquired 5-years ago, MasterCraft sold NauticStar a week prior to filing its latest annual report, for a loss of between $20-$23 million. The sale came after MasterCraft recorded an impairment charge of $23.8 million related to NauticStar.

Though NauticStar sells into the third fastest growing powerboat category, MasterCraft couldn’t ring out inefficiencies or turn a profit on the unit— it reported negative operating income of $38 million in FY22. Before selling it, MasterCraft paid a consultant $1.2 million to right the NauticStar ship to no avail.

Notably, MasterCraft added the consulting fee back to Adjusted EBITDA.

We raise the issue as we believe it provides insight into management’s judgment. In addition to the loss on the sale and impairment, NauticStar recorded the following operating income since it was acquired in October 2017:

—FY22 ($38.3 million)
—FY21 ($2.6 million)
—FY20 ($17.6 million)
—FY19 ($27.7 million)
—FY18 $6.6 million

NauticStar was profitable immediately after MasterCraft acquired it but never again. Though MasterCraft— a self-proclaimed industry leader— couldn’t solve the “throughput” issues afflicting NauticStar, management thought a third-party consultant could Throwing good money after bad seems unwise when NauticStar’s operating loss after five years— $79.6 million— is nearly identical to the price MasterCraft paid to acquire the brand.

In February 2022, paid subscribers of DuDil+ received our Exclusive Report which revealed what we believe are inadequate warranty accruals at MasterCraft. The company has a history of misstating warranty liabilities and fired its auditor after three warranty related accounting errors. The current auditor has flagged MasterCraft’s warranty accrual as a critical audit matter.

Like we suspected, MasterCraft cited increased warranty costs as negatively impacting FY22 cash flow. The company’s warranty provision spiked 41.8% in FY22, far outpacing sales growth of 34.6%. However, MasterCraft’s warranty accrual balance growth of 22.8% lagged sales growth. As a percentage of revenue, MasterCraft’s warranty accrual balance is also well below the 5-year average calculated in our report.

We estimated MasterCraft should accrue at least $29.5 million in FY22 warranty expense— the company accrued $27.4 million. Unless the company has significantly improved its manufacturing processes— which worsened in the case of NauticStar— we see more warranty trouble in MasterCraft’s future.

Shares of MasterCraft have declined 21.3% since our Exclusive was published.

Related: MPX, MBUU

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