Winnebago Industries, Inc. Fiscal 2018 Form 10-K Summary
Reporting period: Fiscal year ended August 25, 2018; 52-week year. The filing includes unaudited fourth-quarter results for the quarter ended August 25, 2018. Winnebago manufactures motorhomes, towable RVs, specialty vehicles, and marine products and sells primarily through independent dealers in North America and selected international markets.
Business Context and Strategic Developments
- Reportable segments are Motorhome and Towable; Corporate/All Other includes specialty vehicles, Chris-Craft marine, and certain corporate expenses.
- Winnebago acquired Chris-Craft USA on June 4, 2018, diversifying into premium recreational powerboats. Chris-Craft contributed less than 1% of fiscal-year consolidated revenue and operating income because it was acquired late in the year.
- Grand Design RV, acquired in November 2016, was fully reflected in fiscal 2018 and remained the principal driver of Towable growth.
- Production capacity expansions were completed at two Grand Design facilities during fiscal 2018; Winnebago’s own towable expansion was expected to be completed in the first half of fiscal 2019.
Financial Performance
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net revenue | $2.017 billion | $1.547 billion | Up 30.4% |
| Gross profit | $299.8 million | $222.6 million | Up 34.7% |
| Gross margin | 14.9% | 14.4% | Up 50 basis points |
| Operating income | $160.4 million | $125.1 million | Up 28.2% |
| Operating margin | 8.0% | 8.1% | Down 10 basis points |
| Net income | $102.4 million | $71.3 million | Up 43.5% |
| Diluted earnings per share | $3.22 | $2.32 | Up 38.8% |
| Adjusted EBITDA | $181.7 million | $138.9 million | Up 30.9% |
The effective tax rate declined to 28.2% from 34.3%, primarily due to the Tax Cuts and Jobs Act. Fiscal 2018 included a provisional $3.6 million non-cash tax expense related to remeasurement of deferred tax balances.
Segment Results
- Motorhome: Revenue increased 0.9% to $860.7 million. Deliveries increased 3.1% to 9,548 units, but average selling price declined 2.0% to $89,879. Adjusted EBITDA fell 37.2% to $35.5 million, driven by higher material costs and costs and lower productivity associated with ramping the Junction City, Oregon Class A diesel facility.
- Towable: Revenue increased 64.6% to $1.128 billion. Deliveries increased 62.8% to 36,589 units, and Adjusted EBITDA increased 75.0% to $157.0 million. Growth reflected Grand Design’s full-year contribution, organic volume growth, new products, distribution expansion, purchasing and material efficiencies, and pricing.
- Backlog: Motorhome backlog was $157.6 million, up 29.0%; Towable backlog was $244.9 million, up 6.6%. Backlog orders may be cancelled or postponed by dealers and are not necessarily indicative of future sales.
Cash Flow, Liquidity, and Debt
- Cash provided by operating activities was $83.3 million, compared with $97.1 million in fiscal 2017. The decline primarily reflected increased inventory and working-capital needs supporting growth.
- Capital expenditures were $28.7 million. Investing cash outflow was $111.8 million, including $81.2 million for the Chris-Craft acquisition and capacity expansion spending.
- Cash decreased by $33.6 million during the year to $2.3 million at August 25, 2018. Working capital increased to $167.8 million from $147.0 million.
- Gross debt was $298.5 million, consisting of $260.0 million under the Term Loan and $38.5 million under the ABL; reported long-term debt net of issuance costs was $291.4 million.
- The Term Loan matures November 8, 2023. The company was in compliance with all credit agreement covenants at year-end. The ABL was subsequently increased from $125.0 million to $165.0 million on September 21, 2018.
- The company expected cash on hand, operating cash flow, and available borrowing capacity to fund operating requirements. Fiscal 2019 capital expenditures were expected to be approximately $40 million to $50 million.
- Fiscal 2018 dividends were $0.40 per share. The company repurchased 134,803 shares for $5.0 million and had approximately $66.0 million remaining under its board repurchase authorization at year-end.
Fourth-Quarter Results
| Metric | Q4 Fiscal 2018 | Q4 Fiscal 2017 |
|---|---|---|
| Net revenue | $536.2 million | $454.9 million |
| Gross profit | $83.8 million | $73.6 million |
| Operating income | $45.7 million | $43.5 million |
| Net income | $29.8 million | $24.9 million |
| Diluted EPS | $0.94 | $0.79 |
Outlook, Commentary, Risks, and Unusual Items
- RVIA’s most-likely calendar 2019 wholesale shipment forecast was 497,100 units, a 1.7% decline from 2018; the forecast cited higher inflation, interest rates, and production costs, partly offset by strong employment and wage growth.
- Management highlighted continued industry growth through August 2018, with combined North American wholesale shipments up 9.4% and retail registrations up 8.2% year over year.
- Key risks include the cyclical and seasonal nature of discretionary RV and marine purchases, consumer confidence, interest rates and credit availability, commodity and component costs, chassis availability, labor constraints, production ramp-up risks, dealer concentration, inventory levels, and competition.
- Dealer repurchase commitments totaled approximately $879.0 million at year-end, compared with $713.1 million in fiscal 2017. The associated loss reserve was $0.9 million.
- Warranty liabilities increased to $40.5 million from $30.8 million. A 10% change in warranty liability would have affected net income by approximately $2.8 million.
- The company recorded no goodwill, indefinite-lived intangible, or long-lived asset impairments in fiscal 2018. Goodwill totaled $274.4 million and indefinite-lived trade names totaled $177.3 million.
- The company continued phased implementation of its ERP system. Cumulative ERP investment was $32.1 million, of which $18.9 million was capitalized and $13.2 million expensed.
- Management and Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting; controls related to Chris-Craft were excluded from the fiscal 2018 assessment because of the recent acquisition.
Most Important Facts to Verify
- Whether Towable growth and margins remain sustainable after the full-year Grand Design contribution and facility expansions.
- Progress in restoring Motorhome profitability and productivity at the Oregon facility.
- Dealer inventory levels, backlog conversion, cancellations, and potential repurchase obligations.
- Debt paydown, borrowing-base availability, covenant compliance, and sensitivity to higher variable interest rates.
- Execution and integration of Chris-Craft, including its future revenue and profitability contribution.
- Impact of rising material, labor, freight, warranty, and production costs on gross margins and cash flow.
- Final tax effects of the Tax Cuts and Jobs Act and the company’s adoption of new revenue-recognition and lease accounting standards.