Winnebago Industries, Inc. — Fiscal 2018 Second-Quarter 10-Q Summary
Business context and reporting period
Winnebago manufactures recreational vehicles through two reportable segments: Motorized and Towable. The unaudited filing covers the three and six months ended February 24, 2018, compared with February 25, 2017. Fiscal years end on the last Saturday in August.
Grand Design, acquired on November 8, 2016 for $520.5 million, continued to materially expand the Towable segment. The company distributes primarily through independent dealers in the United States and Canada.
Key financial metrics
| Metric | Three months ended Feb. 24, 2018 | Year-over-year change | Six months ended Feb. 24, 2018 | Year-over-year change |
|---|---|---|---|---|
| Net revenues | $468.4 million | +26.4% | $918.4 million | +49.1% |
| Gross profit | $67.7 million | +37.2% | $130.5 million | +66.9% |
| Gross margin | 14.4% | Up from 13.3% | 14.2% | Up from 12.7% |
| Operating income | $35.3 million | +24.2% | $66.4 million | +42.0% |
| Operating margin | 7.5% | Down from 7.7% | 7.2% | Down from 7.6% |
| Net income | $22.1 million | +44.6% | $40.0 million | +48.2% |
| Diluted EPS | $0.69 | Up from $0.48 | $1.26 | Up from $0.91 |
| Adjusted EBITDA | $39.4 million | Up from $29.1 million | $74.8 million | Up from $43.8 million |
Six-month net cash provided by operating activities was $15.0 million, compared with $5.1 million in the prior-year period. Capital expenditures were $11.7 million, primarily for Towable capacity expansion. Cash and cash equivalents were $27.4 million at February 24, 2018, down from $35.9 million at August 26, 2017.
Gross debt was $279.7 million, consisting of $260.0 million under the Term Loan and $19.7 million under the ABL, or $271.1 million net of debt issuance costs. The company reported $105.3 million of additional borrowing availability under the ABL, subject to borrowing-base requirements, and compliance with all debt covenants.
Working capital increased to $177.1 million from $147.0 million at fiscal year-end. Inventory increased to $178.0 million from $142.3 million, while receivables increased to $157.4 million from $124.5 million.
Material changes versus the prior comparable period
- Towable revenue increased 55.2% in the quarter and 137.2% for the six-month period. Six-month Towable revenue benefited from the Grand Design acquisition and organic volume growth.
- Motorized revenue increased 1.5% in the quarter but declined 0.4% for the six-month period. Motorized Adjusted EBITDA declined 62.7% in the quarter and 67.2% for the six-month period.
- Towable Adjusted EBITDA increased 93.8% in the quarter and 210.1% for the six-month period, reflecting higher volume, fixed-cost leverage, cost savings, product penetration and distribution expansion.
- Motorized unit deliveries increased 4.9% in the quarter and 3.0% for six months, but average selling prices declined approximately 4.6% and 4.3%, respectively, due primarily to product mix.
- Towable unit deliveries increased 56.7% in the quarter and 131.1% for six months. Towable backlog was 9,342 units valued at $302.6 million, up 10.0% in units and 15.5% in dollars year over year.
- Prior-year results included $12.0 million of quarterly and $24.8 million of six-month postretirement health-care benefit income related to plan termination. Prior-year results also included $0.5 million and $5.9 million of acquisition-related transaction costs, respectively, and higher intangible amortization.
- The gross margin improvement reflected Towable growth and cost savings, partly offset by Motorized ramp-up costs for the West Coast facility and new-product start-up expenses.
- The December 2017 debt amendment reduced the Term Loan spread by 1.0 percentage point to LIBOR plus 3.5% and reduced the ABL spread by 0.25 percentage point.
Guidance, outlook, commentary and risks
Management stated that cash on hand, operating cash generation and available credit are expected to satisfy short- and long-term operating requirements. Planned investments include motorhome facilities, Towable facilities and the ERP system.
RVIA industry forecasts cited in the filing projected 2018 wholesale unit growth of 6.9% for Towables and 8.3% for Motorized products, or 7.0% combined. Management reported favorable industry demand, employment and disposable-income trends, while noting slowly rising interest rates and other economic factors.
A Grand Design expansion facility was completed in January 2018, a second facility was expected in the third quarter of Fiscal 2018, and the Winnebago-branded Towable expansion was expected to be completed in early Fiscal 2019. Total ERP project costs were expected to be approximately $38.0 million; cumulative costs were $27.5 million at quarter-end.
The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21%. The six-month effective tax rate declined to 29.5% from 33.4%, although the company recorded a provisional $1.4 million non-cash tax expense for deferred-tax remeasurement and stated that its tax analysis remained incomplete.
Key risks include interest-rate increases, dealer credit and repurchase obligations, consumer demand and credit availability, labor and component shortages, material costs, product cancellations, competition, facility ramp-up execution, ERP implementation, debt covenant compliance and integration or other unexpected acquisition-related costs.
Dealer inventory repurchase commitments were approximately $923.2 million at February 24, 2018, compared with $713.1 million at August 26, 2017. The related loss reserve was $0.9 million. The company was involved in ordinary litigation and did not expect a material adverse effect, but noted the inherent uncertainty of legal proceedings.
Most important facts for investors to verify
- Whether Towable volume growth and Grand Design expansion continue to offset Motorized margin pressure and lower Motorized average selling prices.
- The conversion of the sizable Towable backlog into shipments and revenue, recognizing that dealer orders may be canceled or postponed.
- Inventory and receivables growth, operating cash-flow conversion and the company’s ability to fund capacity expansion and ERP investments.
- Interest-rate exposure on the $260.0 million Term Loan, including the remaining interest-rate swap protection and potential effects on earnings and cash flow.
- The scale and potential realization of the $923.2 million dealer repurchase exposure relative to the $0.9 million reserve.
- Final tax accounting under the Tax Cuts and Jobs Act and any resulting revisions to deferred-tax balances or effective tax rates.
- Progress toward completing the Towable facilities, ramping the West Coast Motorized operation and implementing the ERP system within the stated cost expectations.