Winnebago Industries, Inc. — Fiscal 2012 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended May 26, 2012, compared with May 28, 2011. Fiscal year ends on the last Saturday in August. The interim financial statements are unaudited.
Business Context
Winnebago manufactures motor homes in Iowa and travel trailers and fifth wheels through its Indiana towables operations. Products are sold primarily through independent dealers in the United States and Canada. The towables business, acquired through SunnyBrook in December 2010, began contributing positively to quarterly earnings during the period.
Key Financial Metrics
| Metric | Q3 FY2012 | Q3 FY2011 | 9M FY2012 | 9M FY2011 |
|---|---|---|---|---|
| Net revenues | $155.7 million | $135.6 million | $419.1 million | $365.9 million |
| Gross profit | $12.1 million | $8.7 million | $27.4 million | $31.2 million |
| Gross margin | 7.8% | 6.4% | 6.5% | 8.5% |
| Operating income | $3.5 million | $0.5 million | $3.0 million | $9.5 million |
| Net income | $3.9 million | $1.2 million | $4.1 million | $8.3 million |
| Diluted EPS | $0.13 | $0.04 | $0.14 | $0.28 |
| Operating cash flow | Not separately provided | Not separately provided | $11.7 million | $(14.1) million |
At May 26, 2012, cash and cash equivalents were $80.8 million, working capital was $118.7 million, and total assets were $243.9 million. Current liabilities were $57.0 million. The company had no borrowings under its $20.0 million revolving credit facility, of which up to $12.5 million was available without financial covenant restrictions subject to asset coverage. The facility expires October 13, 2012, and financing alternatives were under review.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue increased 14.9%, driven primarily by a $9.2 million increase in towables revenue and an $8.5 million increase in motor-home revenue.
- Motor-home deliveries were essentially flat at 1,280 units versus 1,283, but motor-home average selling price increased 7.4% to approximately $102,000.
- Towable deliveries nearly doubled to 646 units from 326, while towable average selling price increased to approximately $25,000 from $22,000.
- Third-quarter gross margin improved because higher production volumes increased fixed-cost absorption, partly offset by higher material costs.
- Nine-month revenue increased 14.6%, but gross profit declined 12.2% and net income declined 51.0%. The prior-year period benefited from a $3.5 million favorable physical inventory adjustment.
- Nine-month towable revenue increased to $40.9 million from $9.0 million, reflecting the SunnyBrook acquisition and expanded product offerings.
- Operating cash flow improved from a $14.1 million use in the prior-year period to $11.7 million provided, principally because the prior year included a $30.1 million inventory increase.
- Towables generated approximately $0.01 of third-quarter EPS, compared with an approximately $0.01 loss in the prior-year quarter.
Outlook, Risks, Contingencies, and Unusual Items
- Management was optimistic about the remainder of fiscal 2012 because of increased backlog, low dealer inventories, improved retail turns, and positive reception to new model-year products. Production rates were being increased gradually.
- At May 26, 2012, motor-home backlog was 1,237 units, with estimated revenue of $131.4 million, versus 642 units and $61.9 million a year earlier. Towable backlog was 505 units, with estimated revenue of $12.5 million, versus 164 units and $3.5 million.
- Management anticipated potentially reaching a three-year cumulative income position in the fourth quarter. If this occurred, the company expected a one-time, non-cash tax benefit of approximately $33 million to $35 million from reducing its deferred-tax-asset valuation allowance. This was an expectation, not a recognized benefit as of the filing date.
- Management cited consumer confidence, unemployment, fuel prices, credit availability, economic conditions, component availability, order cancellations, competition, and repurchase obligations as key risks.
- One dealer, FreedomRoads, accounted for 26.1% of nine-month consolidated revenue, creating significant customer concentration risk.
- Dealer-repurchase contingent exposure was approximately $169.0 million, plus $11.4 million of additional potential exposure related to certain state-law inventory repurchases. The associated loss reserve was $862,000.
- The company held $10.0 million par value of auction-rate securities. Approximately $9.7 million was classified as long-term and valued using Level 3 discounted-cash-flow assumptions; auctions may remain illiquid until maturity, potentially up to 30 years.
- Postretirement health-care and deferred-compensation liabilities totaled $71.6 million, including $37.7 million for postretirement health care. A January 2012 reduction in benefit caps reduced the health-care liability by approximately $4.6 million.
- The company received an unsolicited, non-binding and highly conditional $11.00-per-share cash proposal from North Street Capital. Management determined that the information provided was insufficient to deem the proposal credible as of the filing date.
- Routine litigation was not expected to have a material adverse effect. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the anticipated $33 million to $35 million deferred-tax valuation-allowance release was ultimately recorded in the fourth quarter.
- Renewal or replacement of the revolving credit facility expiring October 13, 2012.
- Conversion of the substantially higher motor-home and towable backlog into shipments, revenue, and cash flow, including cancellations or postponements.
- Future gross-margin performance given material inflation, discounting, product mix, and fixed-cost absorption.
- Liquidity and valuation developments for the $9.7 million of long-term auction-rate securities.
- Exposure to dealer concentration and potential losses under the approximately $180.4 million of combined repurchase-related exposure.
- Progress and sustained profitability of the towables operation following its first accretive quarter.