Winnebago Industries, Inc. — Fiscal 2014 Third-Quarter Form 10-Q
Reporting period: Quarter ended May 31, 2014. The quarter included 13 weeks, compared with 14 weeks in the comparable quarter ended June 1, 2013. The first nine months included 39 weeks versus 40 weeks in the prior-year period. Winnebago manufactures motorhomes and towable recreational vehicles in the United States and distributes primarily through independent dealers.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Change |
|---|
| Net revenue | $247.7 million | $218.2 million | 13.5% |
| Gross profit | $26.5 million | $21.2 million | 24.9% |
| Gross margin | 10.7% | 9.7% | +100 bps |
| Operating income | $15.6 million | $10.2 million | 52.1% |
| Operating margin | 6.3% | 4.7% | +160 bps |
| Net income | $11.4 million | $7.7 million | 48.6% |
| Diluted EPS | $0.42 | $0.27 | 55.6% |
| Metric | 9M FY2014 | 9M FY2013 | Change |
|---|
| Net revenue | $699.2 million | $588.9 million | 18.7% |
| Gross profit | $75.3 million | $59.1 million | 27.3% |
| Gross margin | 10.8% | 10.0% | +80 bps |
| Operating income | $45.6 million | $29.1 million | 57.0% |
| Net income | $32.1 million | $21.3 million | 50.6% |
| Diluted EPS | $1.16 | $0.76 | 52.6% |
- Third-quarter motorhome revenue increased 13.6% to $221.2 million, primarily from a 17.8% increase in reported motorhome deliveries to 2,331 units. Motorhome average selling price declined 4.1% to $93,900 because of product mix.
- Towable revenue increased 11.9% to $17.2 million, supported by an 11.5% increase in average selling price and a 2.0% increase in deliveries.
- Nine-month motorhome deliveries increased 29.6%, while motorhome average selling price declined 7.6%. Towable deliveries declined 1.8%, offset by an 8.1% increase in average selling price.
- Cost of goods sold declined to 89.3% of revenue in the quarter and 89.2% for the nine months, reflecting favorable product mix, pricing, and improved fixed-cost absorption from higher production levels.
- The effective tax rate increased to 30.3% in the quarter and 30.7% for the nine months, compared with 26.3% and 28.4%, respectively, primarily because of lower relative tax-credit and tax-exempt-income benefits.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $50.5 million at May 31, 2014, down from $64.3 million at August 31, 2013. Working capital increased to $162.5 million from $153.5 million.
- Nine-month operating cash flow was $10.2 million, compared with cash used of $6.9 million in the prior-year period. Receivables and prepaid assets increased $26.3 million, and inventories increased $6.1 million.
- Investing cash use was $1.6 million, including $7.0 million of capital expenditures, partly offset by property-sale proceeds, investment sales, and life-insurance proceeds.
- Financing cash use was $22.3 million, primarily reflecting $24.3 million of share repurchases. The company repurchased approximately $1.9 million of additional shares between May 31 and the filing date.
- The company had no borrowings under its credit facility. The amended GECC revolving facility provides $35.0 million of availability, with a framework to expand to $50.0 million, and was extended through May 28, 2019. Management stated that available cash, collections, operating cash flow and credit availability should cover fiscal 2014 requirements.
- Management expects approximately $4.0 million of capital expenditures during the remainder of fiscal 2014, primarily for manufacturing equipment, facilities and information technology.
Material changes and unusual items
- During the quarter, Winnebago delivered 520 rental units to Apollo. Up to 343 units are subject to repurchase and are accounted for as operating leases rather than ordinary sales. The balance sheet included a $16.5 million net investment in operating leases and a $16.1 million repurchase obligation; $100,000 of net lease revenue was recognized in the quarter. Most subject units are expected to be repurchased in the first quarter of fiscal 2015.
- A revised dealer shipping arrangement accelerated recognition of approximately $25.3 million of revenue for units in transit during the first nine months. The prior-year period also included an extra fiscal week, producing a net favorable comparison effect of approximately $11.5 million.
- A $629,000 gain was recognized on the sale of a leased warehouse facility during the second quarter.
- Motorhome backlog declined 17.2% year over year to 2,357 units, while towable backlog declined 31.6% to 303 units. Management attributed the lower backlog principally to improved production rates and chassis availability.
- Dealer inventory increased 44.2% for motorhomes and 8.1% for towables. Management believes the motorhome inventory increase is consistent with improved retail demand, new product introductions and a 9.5% increase in dealer locations.
Outlook, risks and contingencies
- Management reported improved Ford Class A chassis supply during the third quarter after shortages and quality issues had constrained production earlier in fiscal 2014. Chassis and component availability remain important operating risks.
- Industry forecasts cited in the filing projected 2014 wholesale shipments of approximately 46,500 motorhomes and 288,500 towables, with 2015 forecasts of approximately 47,300 and 298,400, respectively. These are external industry forecasts, not company guidance.
- Key risks include consumer demand, dealer liquidity and creditworthiness, interest rates, fuel prices, credit availability, material and component costs, order cancellations, competitive products, information-technology breaches and economic conditions.
- Dealer repurchase commitments totaled approximately $361.4 million at May 31, 2014, plus $7.0 million of additional potential exposure under certain state laws. The accrued loss reserve was $1.4 million.
- Warranty liabilities were $8.9 million. Higher dealer labor rates, parts costs or warranty-claim frequency could adversely affect results.
- The company identified a new risk related to lower-than-anticipated residual values for rental motorhomes subject to repurchase, which could reduce profitability when units are returned and resold.
- Management stated that ordinary-course litigation is not expected to have a material adverse effect on financial position, results of operations or liquidity. No material subsequent events were reported.
- Disclosure controls were deemed effective, and there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and margin improvement persist after adjusting for the revised shipping terms, the 52-/53-week calendar difference and Apollo rental-unit accounting.
- The timing, volume and realized resale values of Apollo units repurchased in fiscal 2015, including any gain or loss versus recorded estimates.
- Dealer inventory levels, backlog conversion and the effect of lower backlog on future production and revenue.
- Actual exposure and loss experience under the $361.4 million of dealer repurchase commitments.
- Chassis availability, warranty claims, component costs and the sustainability of fixed-cost absorption benefits.
- Cash generation after share repurchases and capital expenditures, including remaining share-repurchase authorization of approximately $15.6 million at May 31, 2014.
