Item 1. Business
ITEM 1. BUSINESS
We are a leading designer, manufacturer, and marketer of recreational powerboats sold under a diversified portfolio of four brands, MasterCraft, Crest, NauticStar, and Aviara.
Through our four brands, we have leading market share positions in three of the fastest growing categories of the powerboat industry, ski/wake boats, outboard saltwater fishing, and pontoon boats, while entering the large, growing luxury day boat segment. As a leader in recreational marine, we strive to deliver the best on-water experience through innovative, high-quality products with a relentless focus on the consumer.
Our Segments
MasterCraft Segment
Our MasterCraft segment consists of our MasterCraft brand, which manufactures premium ski/wake boats. The MasterCraft brand was founded in 1968 and evolved over the next 50-plus years to become the most award-winning ski/wake boat manufacturer in the world. Today, MasterCraft participates in the fastest growing category within the powerboat industry by producing the industry’s premier competitive water ski, wakeboarding, and wake surfing performance boats. We believe the MasterCraft brand is known among boating enthusiasts for high performance, premier quality, and relentless innovation. We believe that the market recognizes MasterCraft as a premier brand in the powerboat industry due to the overall superior value proposition that our boats deliver to consumers. We work tirelessly every day to maintain this iconic brand reputation.
Crest Segment
Our Crest segment consists of our Crest brand, which manufactures pontoon boats. Crest participates in the second-fastest growing category in the powerboat industry. Crest, which we acquired in October 2018, was founded in 1957 and has grown to be one of the top producers of innovative, high-quality pontoon boats ranging from 20 to 29 feet. Crest’s long-standing reputation for high-quality, standard features and content, and innovation provides Crest with strong dealer and consumer bases in its core geographic markets.
NauticStar Segment
Our NauticStar segment consists of our NauticStar brand, which manufactures saltwater fishing boats, deck boats, and bay boats designed for a variety of uses, including recreational and competitive sport fishing in freshwater lakes or saltwater, and general recreational enjoyment. NauticStar participates in the third-fastest growing category in the powerboat industry. NauticStar, which we acquired in October 2017, was founded in 2002.
On August 9, 2022, we announced the Board of Directors was evaluating strategic alternatives for our NauticStar business, including a wide range of available alternatives to maximize shareholder value, with the intention of exiting the NauticStar business.
On September 2, 2022, we sold the NauticStar business. Pursuant to the terms of the purchase agreement, substantially all of the assets of NauticStar were sold, including, among other things, all of the issued and outstanding membership interests in its wholly-owned subsidiary NS Transport, LLC, all owned real property, equipment, inventory, intellectual property and accounts receivable, and the purchaser assumed certain liabilities of NauticStar, including, among other things, product liability and warranty claims.
Aviara Segment
Our Aviara segment consists of our Aviara brand, which manufactures luxury day boats. Aviara is a de novo brand, developed in-house, and focused on serving the luxury recreational day boat category of the powerboat industry. Introduced in February 2019, Aviara is currently focused on models between 30 feet and 40 feet in length and currently features three models utilizing both outboard and sterndrive propulsion. Aviara boats feature distinct European styling and offer an elevated open water experience by fusing progressive style and effortless comfort in its modern luxury vessels.
Unless the context otherwise requires, “MasterCraft,” “Crest,” “NauticStar,” and “Aviara,” as used herein, refers to our segments as described above.
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Our Products
We design, manufacture, and sell premium recreational inboard ski/wake, outboard, and sterndrive boats that we believe deliver superior performance for water skiing, wakeboarding, wake surfing, and fishing, as well as general recreational boating. In addition, we offer various accessories, including trailers and aftermarket parts.
Our MasterCraft portfolio of ProStar, XStar, X, XT, and NXT models are designed for the highest levels of performance, styling, and enjoyment for both recreational and competitive use. The XStar and X models are geared towards the consumer seeking the most premium and highest performance boating experience that we offer, and generally command a price premium over our competitors’ boats at retail prices ranging from approximately $175,000 to $300,000. The MasterCraft XT lineup is designed to offer ultimate flexibility to consumers with maximum customization and maximum performance at retail prices ranging from approximately $120,000 to $180,000. The NXT models offer the quality, performance, styling, and innovation of the MasterCraft brand to the entry-level consumer, with retail prices ranging from approximately $90,000 to $120,000. We have strategically designed and priced the MasterCraft NXT models to target the fast-growing entry-level consumer group that is distinct from our traditional consumer base, while maintaining our core MasterCraft brand attributes at profit margins comparable to our other offerings.
Our Crest portfolio of pontoon boats are designed for the ultimate in comfort and recreational pleasure boating. Crest has continued to grow market share as it expands its distribution footprint. Crest’s pontoon boats are designed to offer consumers the best in luxury, style and performance without compromise across a diverse model lineup ranging in length from 20 to 29 feet. The Signature Line is home to Crest’s Classic models. The Premium Line boasts three Caribbean models with sleek lines, available tower options, unique color combinations and top-quality construction. The Ultimate Luxury Line represents the pinnacle of lavish amenities, featuring the Continental, Continental NX, and Savannah models. This lineup anticipates every need with thoughtful options, an industry-first integrated dual windshield and premium upholstery and audio upgrades. Crest’s retail prices range from approximately $35,000 to $220,000.
Our NauticStar portfolio of bay boats, sport deck boats and offshore boats are designed for a variety of uses, including recreational and competitive sport fishing in freshwater lakes or saltwater, and general recreational enjoyment. NauticStar’s bay boats and offshore boats are geared towards the consumer seeking unmatched quality and features for fishability and family friendly comfort. The sport deck boat line caters to consumers seeking the drive and ride of a V-hull, large capacity, and the styling and efficiency of a runabout. NauticStar’s retail prices range from approximately $50,000 to $275,000. We believe all of the NauticStar models represent a tremendous value for consumers.
Our Aviara portfolio of luxury recreational day boats was designed in-house with the vision to create pleasure crafts that defy compromise. The Aviara brand drew on MasterCraft’s 50-plus year legacy of quality. Aviara’s boat designs were inspired by four product design principles – Progressive Style, Elevated Control, Modern Comfort and Quality Details. Aviara’s models consist of the AV32, a 32-foot luxury bowrider, the AV36, a 36-foot luxury bowrider, and the AV40, the brand’s flagship 40-foot luxury bowrider for the ultimate on-the-water experience. All models are available in either outboard or sterndrive propulsion, and Aviara’s retail prices range from approximately $430,000 to over $1,000,000. The AV32, AV36, and AV40 began selling in fiscal 2020, fiscal 2021, and fiscal 2022, respectively. In addition, we believe there will be significant model expansion opportunities for Aviara.
Our Dealer Network
Our products are sold through extensive networks of independent dealers in North America and internationally. We target our distribution to the market category’s highest performing dealers. The majority of our MasterCraft brand dealers are exclusive to our MasterCraft product lines within the ski/wake category, highlighting the commitment of our key dealers to the MasterCraft brand. Our other brands are generally served on a nonexclusive basis by their respective dealers.
We consistently review our distribution networks to identify opportunities to expand our geographic footprint and improve our coverage of the market. We constantly monitor the health and strength of our dealers by analyzing each dealer’s retail sales and inventory and have established processes to identify underperforming dealers in order to assist them in improving their performance, to allow us to switch to a more effective dealer, or to direct product to markets with the greatest retail demand. These processes also allow us to better monitor dealer inventory levels and product turns and contribute to a healthier dealer network that is better able to stock and sell our products. We believe our outstanding dealer networks and our proactive approach to dealer management allow us to distribute our products more efficiently than our competitors and will help us capitalize on growth opportunities as our industry volumes continue to increase.
For fiscal 2022, the Company’s top ten dealers accounted for approximately 30% of our net sales and none of our dealers individually accounted for more than 10% of our total net sales.
North America. In North America, our MasterCraft brand had a total of 112 dealers across 152 locations as of June 30, 2022. Our Crest brand had a total of 132 dealers across 161 locations in North America as of June 30, 2022. Our NauticStar brand had a total of 110 dealers across 119 locations in North America as of June 30, 2022. Our Aviara brand is sold through a distribution network consisting of one dealer with 79 locations as of June 30, 2022.
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Outside of North America. As of June 30, 202 2 , through our MasterCraft brand, we had a total of 41 international dealers and 41 locations . Our Crest brand had two international dealers in two locations. O ur NauticStar brand had two international dealer s in two location s . Aviara had no international dealer s . We define international dealers as those dealers with locations outside of North America. We are prese nt in Europe, Australia, South America, Africa, Asia, including Hong Kong and the Middle East. We generated 5 .0 %, 4. 5 %, and 4.8 % of our net sales outside of North America in fiscal 202 2 , 202 1 , and 20 20 , respectively.
Dealer Relations
We have developed a system of financial incentives for our dealers based on achievement of key benchmarks. In addition, we provide our dealers with comprehensive sales training and a complete set of technology-based tools designed to help dealers maximize performance. Our dealer incentive program has been refined through years of experience with some of the key elements including wholesale rebates, retail rebates and promotions, other allowances, and floor plan interest reimbursement or cash discounts to encourage balanced production throughout the year.
Beyond our incentive programs, we have developed a proprietary web-based management tool that is used by our dealers on a day-to-day basis to improve their own businesses as well as enhance communication with our factory and sales management teams. Our business-to-business application efficiently executes many critical functions, including warranty registrations, warranty claims, boat ordering and tracking, parts ordering, technical support, and inventory reporting. This system facilitates communication between our sales team and the dealer network and allows our manufacturing department to review consumer demand in real time.
Manufacturing
MasterCraft boats and trailers are manufactured and lake-tested at our 285,000 square-foot facility located in Vonore, Tennessee. We believe MasterCraft has the only boat manufacturing facility to achieve compliance with all three of the ISO 9001 (Quality Management Systems), 14001 (Environmental Management Systems), and 18001 (International Occupational Health and Safety Management System) standards. Crest boats are manufactured at our 150,000 square-foot facility located in Owosso, Michigan. NauticStar boats are manufactured at our 225,000 square-foot facility located in Amory, Mississippi. Aviara boats are manufactured at our 140,000 square-foot facility in Merritt Island, Florida.
The rigorous and consumer-centric attention to detail in the design and manufacturing of our products results in boats of high quality which provides an exceptional on water experience across all of our brands. Our dedication to quality permits our consumers to enjoy our products with confidence.
Our boats are built through a continuous flow manufacturing process that encompasses fabrication, assembly, quality management, and testing. We manufacture certain components and subassemblies for our boats, such as upholstery, and procure other components from third-party vendors and install them on the boat. We have several exclusive supplier partnerships for critical purchased components, such as aluminum billet, towers, and engine packages. For MasterCraft, we also build custom trailers that match the exact size and color of our boats.
Suppliers
We purchase a wide variety of raw materials from our supplier base, including resins, fiberglass, aluminum, lumber and steel, as well as product parts and components such as engines and electronic controls. We maintain long-term contracts with strategic suppliers and informal arrangements with other suppliers.
We are focused on working with our supply chain partners to enable cost improvement, world-class quality, and continuous product innovation. We have engaged our key suppliers in collaborative preferred supplier relationships and have developed processes including annual cost reduction targets, regular reliability projects, and extensive product testing requirements to ensure that our suppliers produce at lowest total cost and to the highest levels of quality expected of our brands. These collaborative efforts begin at the design stage, with our key suppliers integrated into design and development planning well in advance of launch, which allows us to control costs and to leverage the expertise of our suppliers in developing product innovations. We believe these collaborative relationships with our most important suppliers have contributed to our significant improvements in product quality, innovation, and profitability.
The most significant components used in manufacturing our boats, based on cost, are engine packages. For our MasterCraft brand, Ilmor Engineering, Inc. (“Ilmor”) is our exclusive engine supplier, and for our Crest brand, Mercury Marine (“Mercury”) is our largest engine supplier, while Yamaha Motor Corporation (“Yamaha”) is the largest engine supplier for our NauticStar brand. For our Aviara brand, Mercury provides outboard engines and Ilmor provides sterndrive engines. We maintain strong and long-standing relationships with Ilmor, Mercury, and Yamaha. During fiscal 2022, Ilmor was our largest overall supplier. In addition to ski/wake and sterndrive engines, Ilmor’s affiliates produce engines used in a number of leading racing boats and race cars. We work closely with Ilmor to
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remain at the forefront of engine design, performance, and manufacturing. W e believe our long-term relationship with our engine supplier partners is a key competitive advantage.
We have and continue to see supply chain disruptions that we believe are caused by evolving macroeconomic conditions, including, but not limited to, the dislocation in the labor and logistics markets, as well as upstream supply constraints. However, we have been successful in targeting dual sourcing of some key materials and components to help mitigate risks related to supply constraints.
Research and Development, Product Development and Engineering
We are strategically and financially committed to innovation, as reflected in our dedicated product development and engineering groups and evidenced by our track record of new product and feature introduction. As of June 30, 2022, our product development and engineering group includes 60 professionals. These individuals bring to our product development efforts significant expertise across core disciplines, including boat design, computer-aided design, naval engineering, electrical engineering, and mechanical engineering. They are responsible for execution of all facets of our new product and innovation strategy, starting with design and development of new boat models and innovative features, engineering these designs for manufacturing, and integrating new boats and features into production. Our product development and engineering functions work closely with our Strategic Portfolio Management Team which includes senior leadership from Sales, Marketing and Finance, all working together to develop our long-term product and innovation strategies.
We have structured processes to obtain consumer, dealer, and management feedback to guide our long-term product lifecycle and portfolio planning. In addition, extensive testing and coordination with our manufacturing groups are important elements of our product development process, which we believe enable us to leverage the lessons from past launches and minimize the risk associated with the release of new products. We have developed a strategy to launch several new models each year, which will allow us to renew our product portfolio with innovative offerings at a rate that we believe will be difficult for our competitors to match without significant additional capital investments. In addition to our product strategy, we manage a separate innovation development process which allows us to design innovative new features for our boats in a disciplined manner and to launch these innovations in a more rapid time frame and with higher quality. These enhanced processes have reduced the time to market for our new product pipeline. Our research and product development expense for fiscal 2022, 2021, and 2020 was $8.2 million, $6.8 million, and $5.2 million, respectively.
Intellectual Property
We rely on a combination of patent, trademark, and copyright protection, trade secret laws, confidentiality procedures, and contractual provisions to protect our rights in our brands, products, and proprietary technology. We also protect our vessel hull designs through vessel hull design registrations. This is an important part of our business and we intend to continue protecting our intellectual property. We currently hold more than 40 U.S. patents and more than 10 foreign patents, including utility and design patents for our transom surf seating, our DockStar handling system, and our SurfStar surf system technology among numerous other innovations. Provided that we comply with all statutory maintenance requirements, our patents are expected to expire between 2028 and 2040. We also have additional patent applications pending in the U.S. and worldwide. We also own in excess of 130 trademark registrations in various countries around the world, most notably for the MasterCraft, Crest, NauticStar, and Aviara names and/or logos, as well as numerous model names in MasterCraft’s Star Series, X, XT, and NXT product families, and we have several pending applications for additional registrations. Such trademarks may endure in perpetuity on a country-by-country basis provided that we comply with all statutory maintenance requirements, including continued use of each trademark in each such country. In addition, we own 38 registered U.S. copyrights. Finally, we have registered more than 35 vessel hull designs with the U.S. Copyright Office, the most recent of which will remain in force through 2027, and have 10 additional vessel hull designs pending.
Competitive Conditions and Position
We believe each of our brands are highly competitive and have a reputation for quality. We compete by operating, developing, and acquiring a diversified portfolio of leading brands focused on the fastest growing segments of the powerboat industry; focusing relentlessly on delivering the best overall ownership experience to consumers; developing and continuously improving highly efficient production techniques and methods which result in highly innovative products; distributing our products through extensive, consumer-driven independent dealer networks; and attracting, developing, and retaining high-performing employees.
Significant competition exists for each of our brands and the markets in which we compete range from being relatively concentrated for the ski/wake category, to being fragmented for the pontoon, and deck and saltwater fishing categories. As of December 2021, based on Statistical Surveys, Inc. (“SSI”) data with all states reporting, the top five brands accounted for approximately 72% of the ski/wake markets, approximately 52% for the pontoon market, and approximately 28% of the deck and saltwater fishing category. Market participants also range from small, single-product businesses to large, diversified companies. In addition, we compete indirectly with businesses that offer alternative leisure products and activities.
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In recent history, the MasterCraft brand has consistently competed for the leading market share position in the U.S. among manufacturers of premium ski/wake boats based on unit volume. As of December 202 1 , based on SSI data, the MasterCraf t brand has the #1 market share in the ski/wake category with 21. 3 %. As of December 202 1 , based on SSI data, the Crest brand has the # 9 market share in the pontoon category with 4.0 %. As of December 202 1 , based on SSI data, the NauticStar brand has the # 8 market share in the deck and saltwater fishing category with 4. 3 %. As of December 202 1 , based on SSI data, the Aviara brand has the # 7 market share in the 30-foot to 4 3 -foot bowrider category with 5.7 %.
Human Capital Resources
We have approximately 1,750 employees as of June 30, 2022, of whom 785 work at our MasterCraft facility in Tennessee, 360 work at our Crest facility in Michigan, 375 work at our NauticStar facility in Mississippi, and 230 work at our Aviara facility in Florida.
One of our four strategic priorities is developing a high-performing work organization and work environment that is consumer-focused and attracts and retains superior employees. We strive to offer our employees career-specific tools, training, resources, and support development opportunities. We utilize a talent management process, which includes performance appraisal and development planning. We are also deeply invested in attracting and developing the next generation of workforce talent to the boating industry. We’ve partnered with local community and technical colleges by developing training programs and donating boats and supplies to position graduates for jobs in the boating industry upon graduation.
Employee safety is always a top priority. We are focused on improving and innovating when it comes to the well-being of our dedicated workforce across our portfolio of brands. We take great care to ensure everyone at the Company is empowered to do their best work, in a safe and well-managed environment. We maintain clean, safe and healthy workplaces through our vigorous training programs and professional safety standards systems, including job hazard assessments and industrial hygiene and ventilation practices.
In 2022, we proudly completed a major milestone in workplace safety: over two million safe hours worked without a lost time incident, which continues to accumulate. Achieving two million safe hours worked without a lost time incident showcases the Company’s continuous commitment to safety, an essential element of the Company’s core values in delivering world-class boats.
Our compensation program is designed to facilitate high performance and generate results that will create value for our stockholders. We structure executive compensation to pay for performance, reward our executives with equity in the Company in order to align their interests with the interests of our stockholders and allow those employees to share in our stockholders’ success, which we believe creates a performance culture, maintains morale and attracts, motivates and retains top talent.
Environmental, Safety, and Regulatory Matters
Our operations are subject to extensive and frequently changing federal, state, local, and foreign laws and regulations, including those concerning product safety, environmental protection, and occupational health and safety. We believe that our operations and products are in compliance with these regulatory requirements. Historically, the cost of achieving and maintaining compliance with applicable laws and regulations has not been material. However, we cannot provide assurance that future costs and expenses required for us to comply with such laws and regulations, including any new or modified regulatory requirements, or to address newly discovered environmental conditions, will not have a material adverse effect on our business, financial condition, operating results, or cash flows.
We have not been notified of and are otherwise currently not aware of any contamination at our current or former facilities for which we could be liable under environmental laws or regulations and we currently are not undertaking any remediation or investigation activities in connection with any contamination. However, future spills or accidents or the discovery of currently unknown conditions or non-compliances may give rise to investigation and remediation obligations or related liabilities and damage claims, which may have a material adverse effect on our business, financial condition, operating results, or cash flows.
Other Information
We were incorporated under the laws of the State of Delaware under the name MCBC Holdings, Inc. on January 28, 2000. In July 2015, we completed an initial public offering of our common stock. Effective November 7, 2018, the name of the Company was changed from MCBC Holdings, Inc. to MasterCraft Boat Holdings, Inc. We maintain a website with the address www.mastercraft.com. We are not including the information contained in our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available, free of charge through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports as soon as reasonably practicable after we electronically file these materials with, or otherwise furnish them to, the SEC.
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