Winnebago Industries, Inc. — Fiscal 2018 First-Quarter 10-Q Summary
Reporting period: Three months ended November 25, 2017, compared with November 26, 2016. The quarter was the first quarter of Fiscal 2018. Winnebago manufactures motorized and towable recreational vehicles and distributes primarily through independent dealers in the United States and Canada.
Financial Results and Position
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net revenues | $450.0 million | $245.3 million | +83.5% |
| Gross profit | $62.8 million | $28.9 million | +117.6% |
| Gross margin | 14.0% | 11.8% | +220 bps |
| Operating income | $31.2 million | $18.4 million | +69.4% |
| Operating margin | 6.9% | 7.5% | Down 60 bps |
| Net income | $18.0 million | $11.7 million | +53.0% |
| Diluted EPS | $0.57 | $0.42 | +$0.15 |
| Adjusted EBITDA | $35.4 million | $14.7 million | +141.3% |
| Operating cash flow | $29.5 million | $(0.2) million | Improved |
Net income margin was approximately 4.0%, versus 4.8% in the prior-year quarter. Interest expense increased to $4.8 million from $1.1 million because of acquisition-related debt. The effective tax rate was 32.3%, compared with 32.4%; adoption of ASU 2016-09 reduced tax expense by approximately $0.6 million and increased EPS by approximately $0.02.
At November 25, 2017, cash and cash equivalents were $54.5 million, working capital was $156.9 million, and total debt before issuance-cost deductions was $279.8 million. The company had a $125.0 million ABL facility available, subject to borrowing-base availability, with no ABL borrowings outstanding at quarter end other than a $0.2 million letter of credit. The company was in compliance with its debt covenants.
Segment Performance and Material Changes
- Motorized: Revenue declined 2.4% to $190.4 million. Unit deliveries increased 1.0% to 2,019, but average selling price declined 4.0% to $91,246. Adjusted EBITDA fell 71.6% to $3.2 million because of new-product start-up costs, West Coast facility ramp-up expenses, higher direct-material costs, and lower revenue.
- Towable: Revenue increased 417.4% to $259.7 million and Adjusted EBITDA increased 805.3% to $32.3 million. The results primarily reflect the Grand Design acquisition, which contributed $221.2 million of revenue and $26.5 million of operating income in the quarter, as well as organic growth in Winnebago-branded towables.
- Grand Design acquisition: Winnebago acquired Grand Design on November 8, 2016, for $520.5 million, funded with cash, debt, and Winnebago shares. The acquisition substantially affects year-over-year comparisons and added approximately $195.4 million of incremental revenue in the quarter relative to the prior-year consolidated comparison.
- Gross margin improved primarily because of the greater Towable mix, favorable product mix, and improved Towable material efficiency. Motorized margins remained under pressure.
- Backlog increased to $591.8 million in aggregate, comprising $250.8 million for Motorized and $341.1 million for Towable. Backlog orders may be canceled or postponed without penalty and are not necessarily indicative of future sales.
Cash Flow, Capital Allocation, Debt and Liquidity
- Operating activities generated $29.5 million of cash. Capital expenditures were $5.4 million, and investing cash outflow was $5.3 million.
- Financing cash outflow was $5.6 million, including $4.3 million of debt repayment and $1.4 million of share repurchases. The company accrued a quarterly dividend of $0.10 per share and subsequently declared another $0.10 per-share dividend payable in January 2018.
- Inventory increased to $151.8 million from $142.3 million at fiscal year-end, while receivables declined to $116.8 million from $124.5 million.
- On December 8, 2017, after quarter end, the company repriced $260 million of Term Loan B debt to LIBOR plus 3.5% from LIBOR plus 4.5%. It also drew $19.7 million under the ABL to prepay Term Loan B, reduced certain ABL costs, and removed the requirement to hedge a portion of floating-rate exposure.
- Management expects cash on hand, operating cash flow, and available credit to fund short- and long-term operating requirements, including facility expansions, motorhome investments, and the ERP project.
Outlook, Commentary, Risks and Unusual Items
Management cited continued industry growth. Rolling twelve-month industry data through October 2017 showed wholesale shipments up 19.1% and retail registrations up 11.2% year over year. The cited RV industry forecast projected 2018 wholesale shipments to increase 3.0%, with Towable shipments up 2.5% and Motorized shipments up 6.5%. No company-specific earnings or revenue guidance was provided.
- Grand Design facility expansion was expected to increase production during Fiscal 2018; expansion of the Winnebago-branded Towable facility was expected to be completed in early Fiscal 2019.
- The ERP initiative had incurred cumulative costs of $25.8 million through the quarter, with total project costs expected to be approximately $38 million. Management expects approximately 40% of costs to be expensed and 60% capitalized.
- Key risks include interest-rate increases, availability of credit and liquidity, consumer demand, labor and component availability, material costs, chassis availability, dealer inventory and credit quality, cancellations, competition, ERP execution, acquisition integration, debt covenants, and substantially higher dealer repurchase commitments.
- Dealer repurchase commitments totaled approximately $768.7 million at quarter end, up from $713.1 million at August 26, 2017. The related loss reserve was $0.8 million. Management believes resale value, historical loss experience, and diversification across dealers reduce the risk of material losses.
- Prior-year results included $12.8 million of postretirement health-care benefit income and $5.5 million of acquisition transaction costs, making year-over-year operating expense comparisons less comparable.
- Routine litigation was disclosed; management did not believe it was reasonably likely to have a material adverse effect, although litigation outcomes remain uncertain.
Important Facts for Investors to Verify
- Separate the recurring operating performance of Winnebago and Grand Design from acquisition-related effects and prior-year postretirement benefit income.
- Monitor Motorized profitability, including product start-up costs, West Coast facility ramp-up costs, material inflation, and lower average selling prices.
- Verify the effect of the December 2017 debt repricing, ABL draw, hedge changes, and future interest-rate movements on cash interest expense.
- Assess whether backlog and industry forecasts convert into shipments and cash generation, recognizing that backlog may be canceled or delayed.
- Track inventory growth, dealer inventory levels, warranty costs, and the $768.7 million of contingent dealer repurchase exposure.
- Evaluate ERP implementation progress and total spending against the approximately $38 million expected project cost.