Winnebago Industries, Inc. — Fiscal 2017 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended May 27, 2017, compared with May 28, 2016. The fiscal year ends on the last Saturday of August. The filing is unaudited.
Business Context
Winnebago manufactures recreational vehicles through two reporting segments: Motorized products and services, and Towable products and services. The Towable segment includes Grand Design RV, acquired on November 8, 2016. The acquisition expanded Winnebago’s towable product portfolio, dealer base and manufacturing footprint.
Grand Design was acquired for $520.5 million, consisting of $396.4 million in cash and $124.1 million of Winnebago common stock. Grand Design contributed $196.9 million of revenue in the third quarter and $366.3 million for the post-acquisition nine-month period.
Financial Performance
| Metric | Q3 FY2017 | Q3 FY2016 | 9M FY2017 | 9M FY2016 |
|---|---|---|---|---|
| Net revenues | $476.4 million | $272.1 million | $1,092.2 million | $712.0 million |
| Gross profit | $70.8 million | $30.3 million | $149.0 million | $80.8 million |
| Gross margin | 14.9% | 11.1% | 13.6% | 11.3% |
| Operating income | $34.9 million | $20.6 million | $81.6 million | $46.9 million |
| Net income | $19.4 million | $14.4 million | $46.4 million | $32.4 million |
| Diluted EPS | $0.61 | $0.53 | $1.52 | $1.20 |
| Adjusted EBITDA | $47.3 million | $17.7 million | $91.1 million | $43.8 million |
Third-quarter revenue increased 75.1%, gross profit increased 134.0%, operating income increased 69.3%, and net income increased 34.3%. Nine-month revenue increased 53.4%, while net income increased 43.5%. The third-quarter net margin was approximately 4.1%, compared with 5.3% in the prior-year quarter; the decline reflected acquisition-related amortization, interest expense and transaction costs despite higher operating profit.
Gross-margin improvement was driven primarily by the higher mix of Towable revenue, favorable Towable product mix and improved warranty experience. Motorized margins were pressured by the ramp-up of the Junction City, Oregon facility and higher personnel costs.
Segment Results
| Segment | Q3 Revenue | Q3 Adjusted EBITDA | 9M Revenue | 9M Adjusted EBITDA |
|---|---|---|---|---|
| Motorized | $241.7 million, down 2.0% | $12.6 million, down 22.3% | $635.7 million, down 2.1% | $31.7 million, down 20.0% |
| Towable | $234.7 million, up 824.2% | $34.7 million, up $33.2 million | $456.5 million, up 626.7% | $59.3 million, up $55.2 million |
Motorized unit deliveries declined 4.3% in the quarter, although average selling price increased 2.6%. For the first nine months, Motorized units increased 0.4%, but average selling price declined 1.3% because of product mix. Towable deliveries increased 518.3% in the quarter and 400.0% for the nine months, primarily because of Grand Design and organic growth.
Cash Flow, Liquidity and Capital Structure
- Cash provided by operating activities was $67.4 million for the first nine months, compared with $31.7 million in the prior-year period.
- Cash used in investing activities was $403.5 million, primarily reflecting the $394.7 million cash cost of the Grand Design acquisition. Capital expenditures were $9.7 million.
- Cash provided by financing activities was $275.0 million, including $366.4 million of borrowings and $69.4 million of repayments.
- Cash and cash equivalents were $24.4 million at May 27, 2017, down from $85.6 million at August 27, 2016. Working capital declined to $120.8 million from $187.6 million.
- Total debt was $297.0 million, net of $10.1 million of unamortized debt issuance costs. The $125.0 million ABL facility was undrawn at quarter-end, subject to borrowing-base availability.
- The Term Loan bears a variable rate; the rate was 5.6% at May 27, 2017. An interest-rate swap effectively fixed the rate on $200.0 million of Term Loan debt at 6.32%.
- Management expects cash on hand, collections, operating cash flow and ABL availability to meet operating requirements for the next 12 months. Remaining FY2017 capital expenditures are expected to be approximately $5 million to $7 million.
The company was in compliance with its debt covenants at May 27, 2017. Contractual debt maturities total $297.0 million, with the principal balance due at maturity on November 8, 2023 subject to scheduled and mandatory repayments.
Material Changes and Unusual Items
- The Grand Design acquisition materially changed the company’s scale, segment mix, goodwill, intangible assets and leverage. Goodwill increased to $245.4 million and other intangible assets were $230.5 million at quarter-end.
- Grand Design acquisition-related amortization was $10.2 million in the quarter and $22.6 million for the nine months. Acquisition transaction costs were $0.5 million and $6.4 million, respectively.
- The company terminated its postretirement health care plan effective January 1, 2017. This generated $24.8 million of benefit income for the first nine months and eliminated the related liability.
- The prior-year quarter included a favorable $2.75 million legal settlement, which did not recur.
- The ERP project was paused during the quarter for evaluation and implementation-partner changes, then continued following Board approval. Total project costs are expected to be approximately $38 million; cumulative costs were $23.5 million at quarter-end.
Guidance, Outlook and Risks
Management expects Towable growth to continue above overall industry projections for the remainder of fiscal 2017. Industry forecasts cited in the filing projected 2017 wholesale RV shipments to increase 10.1% over 2016, including 9.5% growth in Towables and 14.4% growth in Motorized units.
Key risks include integration of Grand Design, realization and timing of cost synergies, debt covenant and leverage compliance, rising interest rates, consumer demand and credit availability, labor and component availability, material costs, production inefficiencies at Junction City, ERP implementation, dealer liquidity, warranty claims and potential repurchase obligations.
Contingent liabilities under dealer repurchase agreements and applicable state requirements were approximately $749.2 million at May 27, 2017, compared with $417.2 million at August 27, 2016, primarily due to Grand Design. The related loss reserve was $1.0 million. Two dealer organizations accounted for approximately 22% of first-nine-month revenue, creating customer concentration risk.
Backlog increased to $412.0 million at May 27, 2017, consisting of $142.0 million in Motorized and $270.0 million in Towable orders. The filing cautions that orders may be canceled or postponed without penalty and backlog may not accurately predict future sales.
Important Facts for Investors to Verify
- Whether Grand Design integration, expected synergies and Towable growth continue to offset Motorized revenue and profitability pressure.
- Cash generation, mandatory debt repayments, leverage ratios and compliance with the Term Loan and ABL covenants.
- Exposure to variable interest rates after the swap’s scheduled reductions and the impact of higher rates on earnings and cash flow.
- The magnitude and timing of ERP spending, implementation risks and expected benefits.
- Dealer credit quality, concentration and the potential cash impact of the $749.2 million repurchase exposure.
- Warranty claims, production ramp-up costs at Junction City and the sustainability of the reported gross-margin improvement.
- The effect of acquisition-related amortization, transaction costs and other nonrecurring items when assessing recurring earnings.