Business Context and Reporting Period
Winnebago Industries, Inc. manufactures motorhomes and towable recreation vehicles, primarily distributed through independent dealers in the United States and Canada. This unaudited Form 10-Q covers the first quarter of Fiscal 2016, the three months ended November 28, 2015, compared with November 29, 2014. Both fiscal years contain 52 weeks.
Financial Performance and Position
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net revenue | $214.2 million | $224.4 million | Down 4.5% |
| Gross profit | $25.2 million | $24.4 million | Up 3.5% |
| Gross margin | 11.8% | 10.9% | Up 90 basis points |
| Operating income | $12.8 million | $14.4 million | Down 11.7% |
| Operating margin | 6.0% | 6.4% | Down 40 basis points |
| Net income | $8.6 million | $9.9 million | Down 13.5% |
| Diluted EPS | $0.32 | $0.37 | Down $0.05 |
| Cash used in operating activities | $8.1 million | $19.6 million | Improved by $11.6 million |
- Motorhome revenue declined 5.7% to $191.5 million, reflecting a 5.4% decrease in deliveries to 1,921 units. Class A deliveries declined 19.0%, partly offset by growth in Class B and Class C units.
- Towable revenue increased 24.1% to $16.9 million as deliveries rose 49.5% to 816 units. Average selling price declined 17.5% because of a shift toward lower-priced travel trailers.
- Other manufactured product revenue decreased 24.6% to $5.8 million.
- Gross margin improved due to product mix, lower workers’ compensation expense, strategic sourcing savings, and improved fixed-cost absorption. Warranty expense and labor-related manufacturing inefficiencies partially offset these benefits.
- Operating expenses increased 25.6% to $12.5 million. General and administrative expense rose 42.7%, primarily because of $1.4 million of incremental ERP implementation costs and higher professional and legal fees.
- The effective tax rate increased to 33.6% from 31.5%, primarily because fewer tax-planning benefits were recorded.
- Cash and cash equivalents were $55.7 million at November 28, 2015, compared with $70.2 million at August 29, 2015. Working capital was $178.2 million, down from $184.6 million.
- Inventory increased to $136.4 million from $112.2 million, contributing $24.1 million of operating cash use. Capital expenditures were $3.1 million.
- The company had no outstanding borrowings and access to a $35.0 million revolving credit facility, expandable to $50.0 million subject to agreement. Management stated that available liquidity should cover Fiscal 2016 requirements.
- Financing cash outflows included $2.7 million of dividends and $705,000 of share repurchases. The quarterly dividend was $0.10 per share.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings declined despite improved gross profit and gross margin, mainly because of lower motorhome volume and substantially higher operating expenses.
- Motorhome backlog increased 13.7% to 2,412 units, with estimated backlog revenue of $222.1 million. Towable backlog increased 102.6% to 312 units, with estimated backlog revenue of $7.2 million. Dealer orders may be cancelled or postponed without penalty.
- Motorhome dealer inventory decreased 1.8% to 4,115 units, while towable dealer inventory increased 9.3% to 1,838 units. Management reported a retail turn rate above 2.2 turns.
- The company adopted the new deferred-tax presentation standard prospectively, reclassifying $8.1 million of current deferred-tax assets to noncurrent. There was no income-statement impact.
- A postretirement health-care plan amendment reduced the related liability by $28.6 million, reduced deferred tax assets by $10.9 million, and increased accumulated other comprehensive income by $17.7 million. This noncash benefit drove comprehensive income to $25.4 million versus $9.3 million in the prior-year quarter.
- ERP implementation costs increased the cumulative project investment to $8.6 million. The total estimated ERP cost increased from $16 million to $25 million, with completion still expected in Fiscal 2017.
Guidance, Outlook, Risks and Unusual Items
- Management expects flat to modest motorhome delivery growth in Fiscal 2016, broadly consistent with an industry growth projection of approximately 3%. It expects towables to grow faster than the overall towables market through new products and distribution expansion.
- The company expects Fiscal 2016 capital expenditures of approximately $20 million to $30 million, including facility maintenance, ERP investment, and capacity expansion.
- Winnebago purchased land and buildings in Junction City, Oregon, for approximately $5.7 million after quarter-end. It plans to invest $15 million to $20 million to move selected diesel production to the facility and expand capacity in Iowa.
- The company is exiting bus operations and expects to exit aluminum extrusion operations by the end of Fiscal 2016 to redeploy labor toward higher-margin motorhome production.
- The strategic sourcing initiative is expected to produce gross-margin expansion of 30 to 50 basis points when completed, anticipated by June 2016.
- Repurchase commitments related to dealer floorplan financing were approximately $390.5 million, with additional state-law exposure of $7.3 million. The accrued loss reserve was $1.2 million.
- Two dealer organizations represented 35.1% of quarterly revenue in aggregate. Loss of, or financial deterioration at, either dealer could adversely affect sales and trigger repurchase obligations.
- Product warranty costs, labor availability, component costs, consumer demand, dealer credit, interest rates, fuel prices, ERP execution, and capacity expansion remain key risks.
- An Australian court awarded damages to Winnebago related to unauthorized use of its name by Knott Investments. The award is expected to exceed $5.0 million plus attorneys’ fees; an appeal was anticipated. The filing does not provide a clear recognized receivable or income amount.
- The company reported no material changes to previously disclosed risk factors and stated that ordinary litigation is not expected to materially affect financial position, results, or liquidity.
Important Facts for Investors to Verify
- Whether motorhome production constraints and the shift toward Class B and C products are temporary or represent a sustained mix change.
- Whether towable volume growth can offset lower average selling prices and support the company’s margin objectives.
- Progress, final cost, and operational benefits of the $25 million ERP project and the strategic sourcing program.
- Inventory normalization and the effect of working-capital investment on operating cash flow.
- Execution and return on investment of the Oregon facility and planned $15 million to $20 million capacity expansion.
- Potential exposure from $390.5 million of dealer repurchase commitments and concentration in two dealer organizations.
- Final resolution and accounting treatment of the Australian damages award and any appeal.