Winnebago Industries, Inc. — Fiscal 2020 Q3 Form 10-Q
Reporting period: Quarter and nine months ended May 30, 2020, compared with May 25, 2019. Fiscal 2020 is a 52-week year. Winnebago manufactures motorhomes, towable recreational vehicles, marine products, and specialty vehicles, primarily sold through independent dealers in North America.
Financial Results and Key Metrics
| Metric | Q3 FY2020 | Q3 FY2019 | 9M FY2020 | 9M FY2019 |
|---|---|---|---|---|
| Net revenue | $402.5 million | $528.9 million | $1,617.7 million | $1,455.3 million |
| Gross profit | $32.0 million | $86.6 million | $190.4 million | $224.0 million |
| Gross margin | 8.0% | 16.4% | 11.8% | 15.4% |
| Operating income (loss) | $(8.2) million | $49.0 million | $45.4 million | $110.5 million |
| Net income (loss) | $(12.4) million | $36.2 million | $19.0 million | $79.9 million |
| Diluted EPS | $(0.37) | $1.14 | $0.57 | $2.52 |
| Adjusted EBITDA | $4.1 million | $55.9 million | $91.6 million | $128.8 million |
Q3 revenue declined 23.9%, while gross profit declined 63.0%. Gross margin fell 840 basis points because COVID-19-related volume reductions caused fixed-cost deleveraging. Operating expenses were $40.2 million, including $6.9 million of intangible amortization and $1.4 million of restructuring charges. Interest expense increased 89.8% to $8.4 million, primarily because of debt issued to finance the Newmar acquisition.
- Towable: Q3 revenue declined 45.5% to $188.9 million and Adjusted EBITDA declined 71.2% to $16.5 million. Unit deliveries declined 43.6% to 5,861.
- Motorhome: Q3 revenue increased 27.1% to $203.6 million, primarily reflecting Newmar, but Adjusted EBITDA fell to a $10.8 million loss from $0.4 million of income. Unit deliveries declined 20.4% to 1,562.
- Backlog: At May 30, 2020, towable backlog was 13,235 units valued at $417.2 million, and motorhome backlog was 4,131 units valued at $515.0 million. Backlog orders may be cancelled or postponed without penalty.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Nine-month operating cash flow was $162.4 million, compared with $82.8 million in the prior-year period, driven mainly by favorable working-capital changes.
- Capital expenditures were $28.6 million. Investing cash flow was $(289.4) million, including $261.0 million of cash paid for the Newmar acquisition.
- Cash and cash equivalents were $152.5 million at May 30, 2020, compared with $37.4 million at August 31, 2019. Working capital was $299.8 million versus $212.9 million.
- Gross debt was $553.5 million, consisting of a $253.5 million term loan and $300.0 million of 1.5% convertible senior notes due 2025. Reported long-term debt, net of discounts and issuance costs, was $465.0 million, including $13.7 million of current maturities.
- The company had no borrowings under its $192.5 million asset-based revolving credit facility and stated that it was in compliance with its debt covenants.
- The company paid $10.9 million of dividends during the first nine months and declared a $0.11 per-share quarterly dividend payable July 1, 2020. No shares were repurchased under the authorized repurchase program during the quarter.
Material Changes Versus the Prior Comparable Period
- COVID-19 caused temporary factory closures, dealer closures, lower consumer demand, and reduced production volumes during Q3. Facilities began reopening on a staggered basis late in the quarter, and most dealers had reopened by quarter-end.
- The November 8, 2019 acquisition of Newmar added $88.0 million of Q3 revenue and produced a $3.5 million operating loss in the quarter. For the nine-month period, Newmar contributed $262.1 million of revenue and a $7.3 million operating loss.
- Newmar increased goodwill by $73.1 million and intangible assets substantially, contributing to higher amortization. The acquisition also resulted in $9.8 million of acquisition-related costs and $4.8 million of inventory fair-value step-up expense during the first nine months.
- The company issued $300.0 million of convertible notes, purchased a $70.8 million convertible note hedge, and issued warrants generating $42.2 million. The notes, hedge, and warrants may affect future interest expense, dilution, and cash requirements.
- The company adopted new lease accounting guidance, recording approximately $33.8 million of lease assets and $33.4 million of lease liabilities at adoption, without a material impact on earnings or cash flow.
Outlook, Commentary, Risks, and Unusual Items
Management did not provide specific company revenue or earnings guidance and stated that the future financial effects of COVID-19 could not reasonably be estimated. Management expects manufacturing facilities to remain operational but noted that additional shutdowns, dealer disruptions, supply-chain problems, weaker consumer spending, recessionary conditions, or reduced access to financing could materially affect results.
Management implemented furloughs, layoffs, salary reductions of 10% to 25%, reduced purchased services and travel, working-capital controls, and lower discretionary capital spending. The company received approximately $4.0 million of CARES Act employee-retention tax credits and deferred $1.2 million of employer payroll taxes.
Industry forecasts cited in the filing projected 2020 North American RV wholesale shipments below 2019 levels, with the most-likely forecast down 20.8%. The company highlighted improved market share and stronger backlog at May 30, 2020, but cautioned that backlog is not a guaranteed measure of future sales.
- Dealer repurchase commitments were approximately $1.2 billion at May 30, 2020, supported by an estimated loss reserve of $1.2 million.
- Newmar integration, goodwill and intangible-asset impairment, warranty claims, product liability, dealer credit quality, and debt covenant compliance remain important risks.
- A 1% increase in interest rates was estimated to increase quarterly interest expense by approximately $2.5 million on variable-rate term-loan debt.
- The company reported no material litigation expected to adversely affect its financial position, results, or liquidity, although litigation outcomes remain uncertain.
- The company stated that no additional reorganization charges were expected during the remainder of Fiscal 2020, subject to future decisions.
Investor Verification Checklist
- Verify the pace and sustainability of post-pandemic dealer reopenings, production recovery, retail demand, and backlog conversion.
- Assess whether Newmar can achieve expected operating improvements and whether its operating losses, integration costs, amortization, and acquisition-related charges decline.
- Review debt maturities, variable-rate exposure, convertible-note settlement terms, potential warrant dilution, and continued compliance with credit covenants.
- Evaluate the approximately $1.2 billion of dealer repurchase exposure relative to dealer financial health and the adequacy of the related reserve.
- Monitor gross-margin recovery as production volumes normalize and fixed-cost deleveraging subsides.
- Review potential goodwill, intangible-asset, warranty, and other valuation risks in light of COVID-19-related uncertainty.
- Confirm that backlog growth translates into shipments and revenue, recognizing that dealers may cancel or postpone orders without penalty.