Winnebago Industries, Inc. — Fiscal 2014 Second-Quarter Form 10-Q
Reporting period: Quarter ended March 1, 2014; six months ended March 1, 2014. Fiscal 2014 first-half comparisons are against the six months ended March 2, 2013, which included 27 weeks versus 26 weeks in Fiscal 2014. The financial statements are unaudited.
Business Context and Reporting Period
Winnebago manufactures motorhomes in Iowa and travel trailers and fifth wheels in Indiana, distributing primarily through independent dealers in the United States and Canada. The company reported stronger demand, increased production, higher motorhome deliveries and improved operating leverage, while continuing to experience shortages of certain motorhome chassis.
Financial Performance and Liquidity
| Metric | Three months ended Mar. 1, 2014 | Three months ended Mar. 2, 2013 | Six months ended Mar. 1, 2014 | Six months ended Mar. 2, 2013 |
|---|---|---|---|---|
| Net revenue | $228.8 million | $177.2 million | $451.5 million | $370.7 million |
| Gross profit | $22.8 million | $17.2 million | $48.8 million | $37.9 million |
| Gross margin | 10.0% | 9.7% | 10.8% | 10.2% |
| Operating income | $14.0 million | $8.9 million | $30.0 million | $18.8 million |
| Operating margin | 6.1% | 5.0% | 6.7% | 5.1% |
| Net income | $9.6 million | $6.3 million | $20.7 million | $13.7 million |
| Diluted EPS | $0.35 | $0.22 | $0.74 | $0.48 |
- Second-quarter revenue increased 29.2%, operating income increased 58.2% and net income increased 52.6% year over year.
- First-half revenue increased 21.8%, operating income increased 59.6% and net income increased 51.6%.
- Motorhome deliveries increased 44.8% in the quarter and 37.5% in the first half. Motorhome average selling prices declined 9.8% and 10.0%, respectively, primarily because of product mix.
- Towable deliveries increased 4.9% in the quarter but declined 4.2% for the first half; towable average selling prices increased 9.4% and 5.8%, respectively.
- Six-month cash flow from operations was negative $29.5 million, compared with negative $26.1 million in the prior-year period. Receivables and prepaid assets used $40.1 million and inventories used $12.4 million of cash.
- Cash and cash equivalents declined to $16.3 million from $64.3 million at August 31, 2013. Financing cash use included $21.5 million of share repurchases. Investing activities provided $0.9 million, including proceeds from property and investment sales.
- The company had no borrowings under its $35.0 million revolving credit facility, which expires October 31, 2015. Management stated that available cash, collections, operating funds and credit availability should cover Fiscal 2014 requirements.
- Capital expenditures were $3.8 million in the first half; approximately $6.5 million of additional Fiscal 2014 capital expenditures are anticipated.
Material Changes Versus the Prior Comparable Period
- Higher production and volume improved fixed-cost absorption and increased gross margin by 60 basis points in the first half.
- First-half results benefited from revised dealer shipping terms, which accelerated recognition of approximately $51.7 million of revenue for units in transit. The prior-year period included an extra fiscal week that contributed approximately $13.8 million of revenue. Management estimated the net favorable comparison effect at $37.9 million.
- Operating expenses declined as a percentage of revenue to 4.2% from 5.2% in the first half, despite modest increases in general and administrative costs.
- The company recorded a $629,000 gain on the sale of a leased warehouse facility, compared with a $28,000 loss on the sale of an idled facility in the prior-year first half.
- Non-operating income declined by $578,000 because the prior-year period included proceeds related to company-owned life insurance.
- Share repurchases totaled approximately $21.5 million in the first half. Approximately 616,000 shares were repurchased in the second quarter, leaving $18.4 million under the authorization.
Guidance, Outlook, Risks and Unusual Items
- Management cited improved RV industry demand, stronger dealer response and increased retail registrations. A leased production facility began operating late in the second quarter to support higher production.
- As of March 1, 2014, motorhome backlog was 2,900 units, up 5.4% year over year, with estimated revenue of $260.1 million. Towable backlog was 206 units, down 45.9%, with estimated revenue of $4.9 million. Backlog orders may be canceled or postponed.
- Dealer inventories were 3,907 motorhomes, up 63.3%, and 1,772 towables, essentially unchanged year over year. Management attributed the motorhome increase partly to new product introductions and a 12% increase in dealer locations.
- Chassis shortages negatively affected first-half sales and earnings and were expected to continue through part of the third quarter.
- In the third quarter, approximately 500 rental units are scheduled for delivery to Apollo. One-third is expected to be recorded as conventional sales; the remaining two-thirds will be accounted for as an operating lease and may be repurchased in the first quarter of Fiscal 2015, subject to conditions.
- Dealer repurchase exposure was approximately $288.7 million, plus $18.4 million of incremental exposure associated with state-law inventory repurchase obligations. The accrued loss reserve was $2.0 million.
- Two dealer organizations represented 20.3% and 12.3% of first-half revenue. Loss of either dealer group or deterioration in dealer creditworthiness could adversely affect sales and increase repurchase obligations.
- Other identified risks include component availability, interest rates, consumer confidence, dealer liquidity, fuel prices, material costs, order cancellations, competition and information-technology disruptions. The filing reported no material change to previously disclosed risk factors.
- The company reported ordinary-course litigation with no expected material adverse effect, no material subsequent events and effective disclosure controls.
Investor Verification Points
- Determine how much of the revenue and earnings growth reflects sustainable unit demand versus the $37.9 million favorable shipping-term and fiscal-calendar comparison.
- Monitor chassis availability, production capacity, dealer inventory levels and cancellation trends.
- Assess the cash-flow impact of receivables, inventory growth and continued share repurchases given the $16.3 million cash balance.
- Review the accounting, repurchase obligations and resale economics for the Apollo rental-unit transaction.
- Evaluate dealer concentration and the $307.1 million of aggregate disclosed repurchase-related exposure, including the adequacy of the $2.0 million reserve.
- Track motorhome product mix and average selling prices, which declined despite substantial unit growth.