Winnebago Industries, Inc. — Fiscal 2016 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended May 28, 2016, compared with the comparable periods ended May 30, 2015. Fiscal years are 52 weeks and end on the last Saturday in August. Winnebago manufactures motorhomes, travel trailers and fifth-wheel products, primarily distributed through independent dealers.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | 9M FY2016 | 9M FY2015 |
|---|---|---|---|---|
| Net revenue | $272.1 million | $266.5 million | $712.0 million | $725.5 million |
| Gross profit | $30.3 million | $28.2 million | $80.8 million | $76.8 million |
| Gross margin | 11.1% | 10.6% | 11.3% | 10.6% |
| Operating income | $20.6 million | $16.1 million | $46.9 million | $42.5 million |
| Operating margin | 7.6% | 6.0% | 6.6% | 5.9% |
| Net income | $14.4 million | $11.5 million | $32.4 million | $29.5 million |
| Diluted EPS | $0.53 | $0.43 | $1.20 | $1.09 |
Third-quarter revenue increased 2.1%, operating income increased 27.8%, and net income increased 25.5%. Nine-month revenue declined 1.9%, but operating income rose 10.2% and net income rose 9.7%. Improved gross margins reflected sourcing savings, product mix and the exit from outside aluminum sales, partly offset by higher warranty expense.
Segment and operating developments
- Third-quarter motorhome deliveries increased 12.4% to 2,917 units; motorhome revenue increased 3.5% to $245.8 million. Motorhome average selling price declined 8.0% to $83,758, primarily because of more lower-priced rental units and fewer high-end Class A products.
- Third-quarter towable deliveries increased 62.4% to 1,205 units, and towable revenue increased 27.6% to $25.4 million. Towable average selling price declined 21.3% to $21,177 due to a shift toward lower-priced products.
- Other manufactured-product revenue declined $8.2 million in the quarter and $14.5 million for nine months because the Company exited outside aluminum sales to focus labor resources on RV production.
- For nine months, motorhome deliveries increased 2.1%, but motorhome revenue declined 2.0% because average selling price fell 3.9%. Towable deliveries increased 57.2% and revenue increased 28.6%.
- Motorized retail market share declined to 19.5% from 20.9% for the rolling twelve months ended April. Management cited North Iowa capacity constraints and lost share in selected product categories.
- Backlog at May 28, 2016 decreased 33.6% for motorhomes to 1,513 units, while towable backlog increased 130.2% to 412 units. Backlog orders may be canceled or postponed without penalty.
Cash flow, balance sheet and liquidity
- Cash provided by operating activities was $31.7 million for nine months, compared with $18.6 million in the prior-year period.
- Capital expenditures were $19.9 million, including approximately $9.7 million for Oregon property and $8.4 million for the ERP system. Management expected fourth-quarter fiscal 2016 capital expenditures of approximately $4 million to $6 million.
- Cash and cash equivalents were $71.3 million at May 28, 2016, compared with $70.2 million at August 29, 2015.
- Inventory increased to $130.1 million from $112.2 million at fiscal year-end, contributing to working-capital use.
- The Company had no outstanding borrowings and access to a $35.0 million revolving credit facility, expandable to $50.0 million subject to agreement. Management expected available cash, operating cash flow and borrowing capacity to meet operating requirements for the next 12 months.
- Dividends paid during the first nine months totaled $8.2 million, or $0.30 per share. A subsequent quarterly dividend of $0.10 per share was declared on June 15, 2016. Share repurchases totaled $3.1 million, with approximately $4.0 million remaining under the authorization.
Material changes, unusual items and outlook
- A postretirement health-care plan amendment reduced the related liability by $28.6 million, reduced deferred tax assets by $10.9 million and increased accumulated other comprehensive income by $17.7 million. Benefits were discontinued for retirees age 65 and older beginning January 1, 2016, subject to a limited health reimbursement arrangement.
- The Company recorded a $2.75 million favorable Australian trademark litigation settlement in third-quarter general and administrative expense. Knott agreed to cease using the Winnebago name and logos, and related proceedings were terminated.
- The new ERP system went live for finance, towables and human resources/payroll. Motorhome manufacturing and operations remain to be enabled; completion is planned for fiscal 2017. Total planned investment is $25 million, of which $15.5 million had been incurred cumulatively through the third quarter.
- Management expected towable growth to exceed overall market projections for the remainder of fiscal 2016. Motorhome growth remained constrained by capacity, although operational improvements, product mix, cost containment and pricing initiatives were being pursued.
- RVIA industry forecasts cited in the filing projected 2016 wholesale unit growth of 2.2% and 2017 growth of 2.2% for combined towable and motorized products.
- Management identified risks including interest rates, consumer confidence, dealer credit, repurchase obligations, labor and component availability, material costs, fuel prices, economic conditions, order cancellations, competition, ERP implementation, acquisitions and business interruptions.
- Two dealer organizations represented approximately 31% of nine-month revenue in aggregate. The loss or financial deterioration of either dealer organization could materially affect sales and repurchase exposure. Total repurchase commitments were approximately $419.0 million at May 28, 2016, with a $1.1 million accrued loss reserve.
Important facts for investors to verify
- Whether motorhome capacity investments reverse the decline in market share and backlog.
- Whether strong towable unit growth can offset lower towable average selling prices and reduced motorhome pricing.
- Inventory growth, warranty costs and dealer liquidity, including the potential impact of $419.0 million of repurchase commitments.
- Progress, remaining spending and operational effects of the ERP implementation and Oregon expansion.
- The sustainability of improved margins after the $2.75 million legal settlement, favorable tax credit and other unusual items.
- Actual future capital expenditures, cash generation, dividends and share repurchases relative to available liquidity and credit-agreement covenants.