Winnebago Industries, Inc. — Fiscal 2014 First-Quarter Form 10-Q
Reporting period: Thirteen weeks ended November 30, 2013, compared with fourteen weeks ended December 1, 2012. Winnebago manufactures motorhomes in Iowa and travel trailers and fifth wheels in Indiana, distributing primarily through independent dealers in the United States and Canada. The interim financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 Fiscal 2014 | Q1 Fiscal 2013 | Change |
|---|---|---|---|
| Net revenues | $222.7 million | $193.6 million | 15.0% |
| Gross profit | $26.0 million | $20.7 million | 25.1% |
| Gross margin | 11.7% | 10.7% | +1.0 percentage point |
| Operating income | $16.0 million | $9.9 million | 60.9% |
| Operating margin | 7.2% | 5.1% | +2.1 percentage points |
| Net income | $11.1 million | $7.4 million | 50.8% |
| Diluted EPS | $0.40 | $0.26 | 53.8% |
| Cash flow from operations | $(11.9) million | $(10.3) million | Use increased |
| Cash and equivalents | $49.7 million | $44.1 million at prior-year quarter-end | Current quarter decreased $14.5 million from August 31, 2013 |
Business Performance and Material Changes
- Motorhome revenue increased 17.6% to $204.4 million, driven by a 30.7% increase in deliveries to 2,005 units. Average selling price declined 10.2% to approximately $100,500 because of product-mix changes, including more Class C units and lower-priced Class A diesel products.
- Towable revenue declined 12.8% to $10.5 million as deliveries fell 13.1% to 484 units; average selling price increased 1.2% to approximately $21,600.
- Revenue included a $21.4 million benefit from revised dealer shipping terms that recognized units when accepted by an independent transportation company. The prior-year quarter included an extra fiscal week, contributing approximately $13.8 million of prior-year revenue. Management estimated the net comparison benefit at $7.6 million.
- Gross margin improved as variable costs declined to 83.2% of revenue from 83.7%, while fixed overhead and research and development costs declined to 5.2% from 5.6% due to higher production levels and improved fixed-cost absorption.
- Selling expense declined 12.7%, primarily because of advertising timing related to the Louisville show. General and administrative expense declined 3.3%, partly due to lower legal expense, while stock-based compensation increased.
- Non-operating income fell 85.2% to $91,000 because the prior-year period benefited from proceeds from company-owned life insurance policies.
Liquidity, Capital Resources and Debt
- Cash decreased $14.5 million during the quarter to $49.7 million. Operating cash use reflected increases of $10.4 million in inventories and $13.9 million in receivables, prepaid assets and other assets.
- Working capital increased to $164.8 million from $153.5 million at August 31, 2013.
- The company had no borrowings under its $35.0 million revolving credit facility with General Electric Capital Corporation. The facility expires October 31, 2015 and may be expanded to $50.0 million by mutual agreement. Borrowings bear interest at LIBOR plus 3.0%, and the facility is secured by substantial business assets.
- Management stated that cash on hand, internally generated funds and credit availability are expected to meet short- and long-term operating requirements.
- Capital expenditures for the remainder of Fiscal 2014 were expected to be approximately $10.2 million, primarily for manufacturing equipment, facilities and information technology.
- Investing cash flow was positive $811,000, including $2.4 million from redemption of the company’s remaining auction-rate securities, partially offset by $1.7 million of capital expenditures.
- Financing cash use was $3.5 million, including $5.6 million of share repurchases, partially offset by $2.1 million from stock-option exercises.
Guidance, Outlook, Risks and Unusual Items
- Management reported eight consecutive quarters of motorized dealer-backlog growth and stated that it was increasing production rates and had leased an additional production facility.
- Management expected improved access to Class A gas chassis late in the second fiscal quarter after recent availability constraints.
- Motorhome backlog was 3,534 units at November 30, 2013, up 66.9% year over year, with estimated backlog revenue of $340.7 million. Towable backlog declined 78.0% to 151 units, with estimated backlog revenue of $3.4 million. Orders may be cancelled or postponed.
- Dealer inventory was considered aligned with current market conditions, according to management. Industry forecasts cited in the filing projected 2014 wholesale shipments of 41,900 motorhomes and 279,100 towables.
- Repurchase commitments for dealer floorplan financing increased to approximately $274.5 million from $232.9 million at August 31, 2013. The company carried a $1.6 million accrued loss reserve. A 10% change in significant assumptions would have affected net income by approximately $290,000.
- Two dealer organizations represented 19.8% and 11.2% of quarterly revenue. Their financial deterioration or loss could adversely affect sales and increase repurchase obligations.
- Key risks include consumer demand and credit availability, interest rates, fuel prices, material and component costs, chassis availability, order cancellations, competition and increased repurchase obligations.
- The company recorded no impairment charges and reported no material changes to previously disclosed risk factors. Ordinary litigation was not expected to have a material adverse effect.
- The Board approved an additional 10% reduction in postretirement health-care benefit caps effective January 2014, expected to reduce the liability by approximately $3.6 million, amortized over approximately 7.3 years.
- The company repurchased 210,167 shares for $5.6 million during the quarter, leaving $34.4 million under the repurchase authorization.
Important Facts for Investors to Verify
- Assess the sustainability of the reported revenue and margin growth after adjusting for the shipping-term change and the prior-year extra fiscal week.
- Monitor whether motorhome backlog converts to deliveries and revenue, particularly given the substantial decline in towable backlog.
- Track chassis availability, production expansion costs and whether higher volumes continue to provide fixed-cost leverage.
- Evaluate the liquidity impact of inventory and receivables growth and the company’s ability to generate positive operating cash flow.
- Review dealer concentration, floorplan-financing repurchase exposure and the adequacy of the $1.6 million repurchase-loss reserve.
- Confirm the status and terms of the undrawn credit facility, including borrowing availability and fixed-charge requirements if availability falls below $5.0 million.
- Consider the effect of share repurchases, postretirement obligations, warranty claims and tax-position changes on future cash needs and earnings.