Winnebago Industries, Inc. — Fiscal 2015 Second-Quarter Form 10-Q
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 filing covers the three and six months ended February 28, 2015, compared with the periods ended March 1, 2014. Fiscal 2015 and Fiscal 2014 are 52-week years.
Financial performance and liquidity
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net revenues | $234.5 million | $228.8 million | $458.9 million | $451.5 million |
| Gross profit | $24.3 million | $22.8 million | $48.6 million | $48.8 million |
| Gross margin | 10.3% | 10.0% | 10.6% | 10.8% |
| Operating income | $11.9 million | $14.0 million | $26.4 million | $30.0 million |
| Operating margin | 5.1% | 6.1% | 5.8% | 6.7% |
| Net income | $8.1 million | $9.6 million | $18.0 million | $20.7 million |
| Diluted EPS | $0.30 | $0.35 | $0.67 | $0.74 |
Second-quarter revenue increased 2.5%, while six-month revenue increased 1.7%. Motorhome revenue increased 2.4% in the quarter and 0.9% year to date; towable revenue increased 11.8% and 19.4%, respectively. Q2 motorhome deliveries rose 2.4% to 2,104 units, and towable deliveries rose 5.2% to 605 units. Six-month motorhome deliveries increased 1.8%, while towable deliveries increased 8.7%.
Q2 gross margin improved to 10.3% from 10.0%, reflecting lower variable costs as a percentage of revenue and better fixed-cost absorption. Six-month gross margin declined to 10.6% from 10.8%, primarily due to higher labor-related costs, including workers’ compensation. General and administrative expense increased 50.8% in Q2 and 20.1% year to date, driven by ERP implementation, strategic sourcing, legal expense and equipment maintenance. Q2 also lacked the $629,000 real-estate gain recorded in the prior-year quarter.
Cash and cash equivalents were $7.9 million at February 28, 2015, compared with $57.8 million at August 30, 2014. Operating activities used $34.1 million in the first six months, compared with $29.5 million used in the prior-year period, primarily because of a $37.6 million inventory increase, higher receivables and prepaid assets, and income-tax-related cash use. Investing activities used $4.8 million, including $5.2 million of capital expenditures. Financing activities used $11.0 million, including $6.1 million of share repurchases and $4.9 million of dividends.
The company has a $35.0 million revolving credit facility, expandable to $50.0 million subject to agreement. It borrowed and repaid $22.0 million during the six-month period, but had no borrowings outstanding at February 28, 2015 or the filing date. Management stated that cash, collections, operating cash generation and credit availability were expected to satisfy Fiscal 2015 requirements. Working capital was $175.9 million at quarter-end.
Material changes versus the prior comparable period
- Revenue increased, but net income declined 15.6% in Q2 and 13.3% for the first six months.
- Operating income declined 14.9% in Q2 and 12.2% year to date because of higher operating expenses and the absence of the prior-year real-estate gain.
- Product mix shifted toward Class B and Class C motorhomes, reducing motorhome average selling price by 0.4% in Q2 and 1.2% year to date.
- Dealer inventory increased 22.3% for motorhomes and 5.9% for towables versus March 1, 2014.
- Motorhome backlog declined 21.6% to 2,275 units and towable backlog declined 36.9% to 130 units, which management attributed primarily to more timely deliveries, higher production rates and improved chassis supply.
- Cash dividends began in Fiscal 2015; the company paid $4.9 million during the first six months and declared another $0.09-per-share quarterly dividend payable May 6, 2015.
Guidance, outlook, risks and unusual items
Management cited improved industry demand, increased production, stronger Class B and Class C demand, new products and improved chassis availability. The revised industry forecasts referenced in the filing were approximately 45,000 2015 motorhome wholesale shipments and 319,700 towable wholesale shipments; these are industry forecasts, not company guidance.
The company expects Fiscal 2015 capital expenditures of approximately $15 million to $20 million, including approximately $5.4 million to purchase its leased Towables assembly facilities in Middlebury, Indiana. The ERP project is estimated at $12 million to $16 million over three years, with up to $3.0 million of incremental Fiscal 2015 general and administrative expense. The strategic sourcing project is expected to generate 30 to 50 basis points of gross-margin expansion when fully implemented, but will require additional expense through Fiscal 2016.
Material risks include dealer concentration, dealer credit deterioration, repurchase obligations, chassis and component availability, labor constraints, fuel prices, consumer demand, interest rates, credit availability, material costs, cancellations, competitive products and execution of ERP and strategic sourcing initiatives. Two dealer organizations represented 20.1% and 19.2% of first-half revenue. Contingent dealer inventory repurchase exposure was approximately $429.6 million, plus $6.5 million of additional state-law-related exposure; the accrued repurchase-loss reserve was $1.5 million.
The Apollo operating-lease repurchase obligations were fully released by February 28, 2015, with no related balance-sheet assets or liabilities remaining. In March 2015, Apollo placed a similar-sized order for the 2015 rental season structured as normal sales. Warranty liabilities were $9.9 million at quarter-end. Unrecognized tax benefits were $2.8 million, including $1.1 million of interest and penalties. Management reported no material changes to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls.
Most important facts for investors to verify
- Whether higher dealer inventory and lower backlog translate into retail sales growth or future production and pricing pressure.
- Cash conversion and working-capital requirements, particularly the elevated inventory balance and continued negative operating cash flow.
- Availability under the revolving credit facility and compliance with its fixed-charge and other covenants if liquidity tightens.
- Execution costs, capitalization and expected benefits of the ERP and strategic sourcing projects.
- Potential losses from the approximately $429.6 million of dealer repurchase commitments and related dealer-credit exposure.
- Sustainability of margin performance amid labor, warranty, chassis, material-cost and product-mix pressures.
- Effect of the planned Middlebury facility purchase and other Fiscal 2015 capital expenditures on liquidity.