Business Context and Reporting Period
Winnebago Industries, Inc. manufactures recreational vehicles distributed primarily through independent dealers in the United States and Canada. This Form 10-Q covers the first quarter of Fiscal 2017, the three months ended November 26, 2016, compared with the three months ended November 28, 2015.
On November 8, 2016, Winnebago acquired 100% of Grand Design RV for preliminary consideration of $520.6 million, consisting of $396.6 million in cash and 4,586,555 Winnebago shares valued at $124.1 million at closing. Reporting was revised to two segments: Motorized and Towable.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net revenues | $245.3 million | $214.2 million | 14.5% increase |
| Gross profit | $28.9 million | $25.2 million | 14.4% increase |
| Gross margin | 11.8% | 11.8% | Flat |
| Operating income | $18.4 million | $12.8 million | 44.2% increase |
| Operating margin | 7.5% | 6.0% | 150 basis-point increase |
| Net income | $11.7 million | $8.6 million | 37.2% increase |
| Diluted EPS | $0.42 | $0.32 | 31.3% increase |
| Adjusted EBITDA | $14.7 million | $12.8 million | 14.8% increase |
| Operating cash flow | $(0.2) million | $(8.1) million | Improved |
Adjusted EBITDA excludes, among other items, postretirement health care benefit effects and Grand Design transaction costs. It is a non-GAAP measure and should be considered with GAAP results.
Segment Performance
- Motorized: Revenue was $195.1 million, down 1.1%; Adjusted EBITDA was $10.0 million, down 14.6%. Motorhome deliveries increased 4.1% to 2,000 units, but average selling price declined 2.9% to $95,046. Class A deliveries declined while Class B and C deliveries increased.
- Towable: Revenue was $50.2 million, up 197.2%; Adjusted EBITDA was $4.7 million, up from $1.1 million. Results included $25.8 million of Grand Design revenue after the acquisition closed, plus $7.5 million of growth in Winnebago-branded towables.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $25.6 million at November 26, 2016, down from $85.6 million at August 27, 2016.
- Total debt was $353.0 million, consisting of $53.0 million drawn under a $125.0 million ABL facility and $300.0 million under a seven-year term loan, less $10.7 million of debt issuance costs. The filing states that approximately $72.0 million remained available under the ABL, subject to borrowing-base availability.
- The ABL carried an interest rate of 2.4%; the term loan carried an interest rate of 5.5% at quarter-end. Management planned to enter into interest-rate swaps in January 2017, as required by the credit agreements.
- Working capital was $144.9 million, compared with $187.6 million at August 27, 2016.
- Capital expenditures were $3.6 million. Management estimated Fiscal 2017 capital expenditures of approximately $15 million to $17 million.
- Management expected cash on hand, collections, operating cash generation and ABL availability to satisfy operating requirements for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Grand Design materially expanded the Towable segment, increasing consolidated revenue, assets, goodwill and intangible assets. Grand Design contributed $25.8 million of revenue and $0.8 million of operating income during the post-closing period included in the quarter.
- Goodwill increased to $251.2 million from $1.2 million, and net intangible assets were $251.0 million at quarter-end. The preliminary purchase-price allocation remains subject to potentially significant measurement-period adjustments.
- Acquisition-related transaction costs were $5.5 million, and acquisition-related amortization was $2.1 million; neither item was present in the prior-year quarter.
- Postretirement health care benefit income increased operating results by $12.8 million, compared with $1.3 million in the prior-year quarter, primarily because the remaining retiree health care plan was terminated effective January 1, 2017.
- Interest expense increased to $1.1 million because of the new acquisition-related debt.
- Operating cash flow remained slightly negative, while investing cash outflow increased to $397.5 million, primarily reflecting the cash acquisition payment of $394.8 million net of cash acquired.
- Motorized market share declined to 18.1% from 20.7% based on rolling twelve-month data through October, while combined towable market share increased to 4.3% from 0.9%, including Grand Design.
Guidance, Outlook, Commentary and Risks
- Management cited continued North American RV industry growth. RVIA forecasts included 2017 wholesale shipment growth of 4.9% for towables and 2.8% for motorized products.
- Management stated that Towable shipments were expected to continue growing faster than the overall towables market during the remainder of Fiscal 2017.
- Motorized performance remained constrained by North Iowa production capacity, labor availability and the time required to deliver products. The company was investing in operational improvements and expanding manufacturing capacity, including its Junction City, Oregon facility.
- The Grand Design integration, achievement of expected synergies, retention of key personnel, customer and supplier relationships, and integration of systems and controls represent material execution risks.
- The company had substantial variable-rate debt and was subject to fixed-charge coverage and senior secured net leverage covenants. A 1.0 percentage-point change in debt rates was estimated to change Fiscal 2017 remaining interest expense by approximately $2.6 million.
- Dealer concentration is significant: two dealer organizations accounted for approximately 28% of consolidated revenue in the quarter. Dealer financial weakness could reduce sales and increase repurchase obligations.
- Total contingent exposure under dealer repurchase agreements was approximately $553.1 million, with an additional $9.0 million of exposure related to state-law inventory repurchase requirements. The accrued loss reserve was $1.3 million.
- The company had no recorded goodwill, indefinite-lived intangible or long-lived asset impairment in the quarter, but impairment testing depends on forecasts, discount rates, market conditions and other significant estimates.
- Internal controls were deemed effective at quarter-end, but the acquired Grand Design subsidiaries were being integrated and will be excluded from management’s next annual internal-control assessment to allow sufficient implementation time.
Important Facts for Investors to Verify
- Verify the final purchase-price allocation for Grand Design, including goodwill, intangible assets, deferred tax liabilities and any measurement-period adjustments.
- Monitor Grand Design integration, revenue and margin contribution, expected synergies and potential impairment of the $251.2 million of goodwill and $148.0 million indefinite-lived trade name.
- Track leverage, covenant compliance, mandatory excess-cash-flow repayments, variable interest rates and completion of the required interest-rate hedging.
- Reconcile reported earnings with normalized performance because of the $12.8 million postretirement benefit income and $5.5 million of acquisition transaction costs.
- Assess cash generation and liquidity after the acquisition, particularly given $25.6 million of cash, $353.0 million of debt and negative operating cash flow in the quarter.
- Evaluate motorized capacity constraints, market-share trends, backlog quality and the cancellation risk associated with dealer orders.
- Monitor dealer concentration, dealer credit quality and the potential cash impact of repurchase commitments.
- Confirm registration of the 4,586,555 acquisition-related shares and assess resulting dilution and potential selling pressure.