Winnebago Industries, Inc. — Fiscal 2015 First-Quarter 10-Q Summary
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. This unaudited report covers the three months ended November 29, 2014, compared with the three months ended November 30, 2013. Fiscal 2015 and Fiscal 2014 are 52-week years.
Financial Performance and Position
| Metric | Q1 Fiscal 2015 | Q1 Fiscal 2014 | Change |
|---|---|---|---|
| Net revenues | $224.4 million | $222.7 million | 0.8% increase |
| Gross profit | $24.4 million | $26.0 million | 6.1% decrease |
| Gross margin | 10.9% | 11.7% | Down 80 basis points |
| Operating income | $14.4 million | $16.0 million | 9.8% decrease |
| Operating margin | 6.4% | 7.2% | Down 80 basis points |
| Net income | $9.9 million | $11.1 million | 11.2% decrease |
| Diluted EPS | $0.37 | $0.40 | Decrease of $0.03 |
| Operating cash flow | $(19.6) million | $(11.9) million | Greater use of cash |
Motorhome revenue declined 0.7% to $203.0 million, as a 1.3% increase in unit deliveries was more than offset by a 2.2% decrease in average selling price to $98,300. Towable revenue increased 29.2% to $13.6 million, supported by a 12.8% increase in deliveries and a 15.8% increase in average selling price to $25,100. Other manufactured-product revenue was substantially unchanged at $7.8 million.
Cost of goods sold increased to 89.1% of revenue from 88.3%. Management attributed the deterioration primarily to higher labor-related costs, including workers' compensation. Selling expense increased 8.6%, while general and administrative expense declined 6.9%. The effective tax rate increased to 31.5% from 30.8%.
Cash and cash equivalents were $27.8 million at November 29, 2014, down from $57.8 million at August 30, 2014. Inventory increased to $150.8 million from $112.8 million, and working capital was $173.3 million versus $172.0 million at fiscal year-end. Capital expenditures were $2.3 million during the quarter.
The company had no borrowings under its $35.0 million revolving credit facility. The facility was extended through May 28, 2019, bears interest at LIBOR plus 2.0% on borrowings, and may be expanded to $50.0 million subject to agreement. Management stated that cash, receivables collections, operating cash generation and available credit were expected to cover Fiscal 2015 operating requirements.
Material Changes Versus the Prior Comparable Period
- Revenue increased only modestly, while gross profit, operating income and net income declined because cost inflation and product mix reduced margins.
- Motorhome deliveries increased 1.3%, but the mix shifted toward lower-priced products, particularly more Class B and Class C units and lower-priced Class A diesel products.
- Towable deliveries and pricing improved significantly, although towables remained a relatively small portion of total revenue.
- Operating cash use increased to $19.6 million, principally because inventory consumed $38.3 million of cash compared with $10.4 million in the prior-year quarter.
- The company paid $2.4 million in dividends and repurchased $6.0 million of stock, or 272,254 shares, during the quarter. Approximately $7.6 million remained under the repurchase authorization.
- Motorhome dealer inventory rose 33.7% to 4,192 units, while towable inventory increased 5.7% to 1,682 units.
- Motorhome backlog declined 40.0% to 2,122 units, reflecting more timely delivery and increased production rates, according to management. Towable backlog increased 2.0% to 154 units.
Guidance, Outlook, Risks and Unusual Items
Management forecast Fiscal 2015 capital expenditures of approximately $15 million to $20 million, primarily for manufacturing equipment, facilities and information technology upgrades. The company expected to continue increasing production rates and believed new products, including the Brave, Tribute, Travato, Trend, Viva, Forza and Solei, could support retail demand.
Industry conditions were generally favorable. Through the first nine months of calendar 2014, Winnebago's North American motorhome retail market share increased to 20.8% from 18.3%, with retail registrations growing faster than the overall RV industry. However, the company cited constraints involving labor availability, chassis supply, overtime and workers' compensation costs.
Dealer concentration is significant: two dealer organizations represented 19.0% and 18.0% of quarterly revenue. The company had approximately $386.9 million of contingent dealer-inventory repurchase exposure, plus $5.8 million of incremental exposure related to certain state requirements. The accrued loss reserve for repurchase commitments was $1.1 million.
The company retained an obligation to repurchase up to 343 rental units previously delivered to Apollo, subject to specified conditions. During the quarter, the obligation was released for 124 units. The remaining lease investment and repurchase obligation were approximately $10.0 million and $10.2 million, respectively. The repurchase timing was subsequently extended to February 28, 2015.
Other risks include product warranty claims, dealer liquidity and creditworthiness, consumer demand, interest rates, fuel prices, component availability, sales cancellations, competition, labor constraints and economic conditions. Management reported no material changes to previously disclosed risk factors, no material impairments, and no material litigation expected to adversely affect financial position, results or liquidity. Disclosure controls were reported effective.
Most Important Facts for Investors to Verify
- Whether inventory growth converts into sales and operating cash flow without requiring elevated discounting or increasing repurchase losses.
- Whether gross margins recover from 10.9%, particularly as labor, workers' compensation and other variable costs remain elevated.
- The sustainability of motorhome demand given the 40.0% decline in backlog and the 33.7% increase in dealer inventory.
- Exposure to the two major dealer organizations and potential losses under the $386.9 million of repurchase commitments.
- The final economics and timing of the Apollo rental-unit repurchase arrangement through February 28, 2015.
- Liquidity after dividends, share repurchases and planned Fiscal 2015 capital expenditures, including continued availability under the revolving credit facility.
- Potential effects of chassis supply, labor availability, warranty claims, tax examinations and $2.9 million of unrecognized tax benefits.