Business Context and Reporting Period
Winnebago Industries, Inc. is a manufacturer of recreational vehicles and marine products, distributed primarily through independent dealers in the U.S., Canada, and internationally for marine products. This unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2019 ended May 25, 2019. Fiscal 2019 is a 53-week year, with the additional week in the fourth quarter.
Reportable segments are Motorhome and Towable. Corporate/All Other includes specialty vehicles, Chris-Craft marine, and certain corporate costs. Chris-Craft was acquired in the fourth quarter of fiscal 2018.
Key Financial Metrics
| Metric | Q3 FY2019 | Q3 FY2018 | 9M FY2019 | 9M FY2018 |
|---|---|---|---|---|
| Net revenues | $528.9 million | $562.3 million | $1.455 billion | $1.481 billion |
| Gross profit | $86.6 million | $85.5 million | $224.0 million | $216.0 million |
| Gross margin | 16.4% | 15.2% | 15.4% | 14.6% |
| Operating income | $49.0 million | $48.3 million | $110.5 million | $114.7 million |
| Net income | $36.2 million | $32.5 million | $79.9 million | $72.6 million |
| Diluted EPS | $1.14 | $1.02 | $2.52 | $2.28 |
| Adjusted EBITDA | $55.9 million | $53.4 million | $128.8 million | $128.2 million |
| Adjusted EBITDA margin | 10.6% | 9.5% | 8.9% | 8.7% |
Q3 revenue declined 5.9%, while gross profit increased 1.3% and net income increased 11.2%. The nine-month revenue decline was 1.7%, while net income increased 10.1%. The effective tax rate was 19.4% in Q3 versus 26.4% in the prior-year quarter, and 18.9% for the nine-month period versus 28.2% previously.
Segment Performance
- Motorhome: Q3 revenue declined 34.6% to $160.2 million and Adjusted EBITDA declined 96.7% to $0.4 million. Unit deliveries fell 31.3% to 1,962, reflecting lower Class A and Class C volume, unfavorable mix, competitive pricing, promotional pressure, and a temporary chassis-supply disruption affecting certain Class B models.
- Towable: Q3 revenue increased 10.8% to $346.8 million and Adjusted EBITDA increased 26.0% to $57.2 million. Unit deliveries rose 6.5% to 10,401, while average selling price increased 4.7% to $33,318, supported by volume and prior pricing actions.
- Corporate/All Other: Q3 revenue was $21.9 million, compared with $4.4 million in the prior-year period, primarily reflecting the addition of Chris-Craft and specialty-vehicle activity.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Operating cash flow for the first nine months was $82.8 million, compared with $61.0 million in the prior-year period.
- Investing cash outflow was $30.5 million, including $31.7 million of capital expenditures, versus $17.9 million of investing outflow and $18.1 million of capital expenditures previously. Increased spending primarily supported Towable capacity expansion.
- Financing cash outflow was $50.5 million, including $32.9 million of net credit-agreement repayments, $10.2 million of dividends, and $7.7 million of share repurchases.
- Cash and cash equivalents were $4.2 million at May 25, 2019, compared with $2.3 million at August 25, 2018. Working capital was $186.2 million, compared with $167.8 million at fiscal year-end.
- Total debt was $259.6 million, consisting of $260.0 million of term debt and $5.6 million of ABL borrowings, net of $6.1 million of debt issuance costs. The company was in compliance with all credit-agreement covenants.
- The company stated that cash on hand, operating cash generation, and available borrowing capacity are expected to cover short- and long-term operating requirements.
- At May 25, 2019, the company had $60.3 million remaining under its share-repurchase authorizations and approved a quarterly dividend of $0.11 per share payable July 3, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue pressure was concentrated in Motorhomes, partly offset by Towable growth and the Chris-Craft acquisition.
- Gross margin improved by 120 basis points in Q3 and 80 basis points for the nine-month period, driven primarily by Towable volume, pricing, and favorable product mix.
- Operating expenses increased due to Chris-Craft and higher business investments; nine-month SG&A increased 11.5% and amortization increased 21.7%.
- Motorhome backlog declined 3.8% in units and 5.6% in dollars year over year. Towable backlog declined 28.9% in units and 24.2% in dollars, partly reflecting added capacity and dealer inventory rebalancing.
- Retail market share for the rolling twelve months through April increased to 8.1% for towables from 6.7% and to 9.0% overall from 7.9%; motorhome share was 16.0% versus 16.1%.
Guidance, Outlook, Risks, and Unusual Items
- Management cited a challenging RV environment, including dealer inventory rationalization, slower industry growth, competitive pricing, higher interest rates, and potential credit constraints. The filing presents RVIA calendar-year 2019 wholesale shipment forecasts ranging from a 10.9% to 18.2% decline from 2018, with the most likely case down 13.9%.
- The company is relocating diesel production from Junction City, Oregon, to Forest City, Iowa. Restructuring charges were $1.1 million in Q3 and $1.3 million for the nine-month period. Additional charges of approximately $1.0 million are expected in Q4 fiscal 2019 and $1.0 million in fiscal 2020. Management estimates approximately $4.0 million of annual cost savings upon completion, with the full annual benefit expected in fiscal 2021.
- Towable capacity expansion continued; the Winnebago towables expansion was completed in Q3, while the final Grand Design facility is expected to be completed in mid-fiscal 2020.
- Dealer repurchase commitments were approximately $1.0 billion at May 25, 2019, versus $879.0 million at August 25, 2018. The related loss reserve was approximately $0.9 million. Actual exposure is reduced by resale values and diversified across dealers and lenders.
- Product warranty liabilities were $43.6 million at May 25, 2019, compared with $37.4 million at May 26, 2018. Management notes that recalls and customer-satisfaction actions could cause warranty costs and reserves to vary.
- Key disclosed risks include cyclicality and seasonality, dealer and consumer demand, inventory and distribution management, chassis and component availability, material costs, interest rates, debt covenants, production disruptions, warranty and product liability claims, ERP implementation, data security, and acquisition integration.
- No material subsequent events, non-financial-asset impairments, material changes in risk factors, or material changes in contractual obligations were reported.
Important Facts for Investors to Verify
- Whether Motorhome volume, backlog, margins, and chassis availability recover after the reported declines.
- Whether Towable growth and pricing can offset Motorhome weakness and broader dealer inventory normalization.
- Progress, cost overruns, and realized savings from the diesel-production relocation and facility expansions.
- Cash conversion, capital-expenditure requirements, debt repayments, covenant headroom, and liquidity given the low cash balance.
- Potential exposure from approximately $1.0 billion of dealer repurchase commitments and the adequacy of warranty reserves.
- The sustainability of earnings benefits from the lower tax rate and favorable R&D-related discrete tax items.