Winnebago Industries, Inc. — Fiscal 2013 Third-Quarter Form 10-Q
Reporting period: Quarter ended June 1, 2013; nine months ended June 1, 2013. Fiscal 2013 includes 53 weeks, versus 52 weeks in fiscal 2012; the comparable nine-month periods were 40 weeks and 39 weeks, respectively. Winnebago manufactures motorhomes in Iowa and travel trailers and fifth wheels in Indiana, distributing primarily through independent dealers in the United States and Canada.
Financial Performance
| Metric | Q3 FY2013 | Q3 FY2012 | 9M FY2013 | 9M FY2012 |
|---|---|---|---|---|
| Net revenues | $218.2 million | $155.7 million | $588.9 million | $419.1 million |
| Gross profit | $21.2 million | $12.1 million | $59.1 million | $27.4 million |
| Gross margin | 9.7% | 7.8% | 10.0% | 6.5% |
| Operating income | $10.2 million | $3.5 million | $29.1 million | $3.0 million |
| Operating margin | 4.7% | 2.3% | 4.9% | 0.7% |
| Net income | $7.7 million | $3.9 million | $21.3 million | $4.1 million |
| Diluted EPS | $0.27 | $0.13 | $0.76 | $0.14 |
- Third-quarter revenue increased 40.1%, while nine-month revenue increased 40.5%. Motorhome revenue drove the increase, rising 49.6% in the quarter and 48.8% year to date.
- Motorhome deliveries increased 54.5% in the quarter and 48.5% for the nine months. Motorhome average selling price declined 3.7% in the quarter but was essentially flat for the nine months.
- Towable revenue declined 6.4% in the quarter and 4.0% for the nine months. Unit deliveries increased, but lower average selling prices more than offset the volume growth.
- Cost of goods sold declined to 90.3% of revenue in the quarter and 90.0% for the nine months, compared with 92.2% and 93.5%, respectively, in the prior periods. Management attributed the improvement to production efficiencies, greater fixed-cost absorption, lower material costs and reduced discounting.
Cash Flow, Liquidity and Capital Structure
- Cash used in operating activities was $6.9 million for the first nine months, compared with $11.7 million of operating cash flow in the prior-year period. Inventory growth used $26.3 million of cash, and changes in receivables, prepaid expenses and other assets used $10.8 million.
- Cash and cash equivalents were $42.4 million at June 1, 2013, down from $62.7 million at August 25, 2012. Working capital increased to $141.6 million from $126.1 million.
- Investing cash outflow was $2.1 million, including $3.3 million of capital expenditures. Financing cash outflow was $11.2 million, primarily reflecting $11.1 million of share repurchases.
- The company entered into a $35.0 million revolving credit facility with GECC expiring October 31, 2015, with potential expansion to $50.0 million. No borrowings had been made, and the company reported compliance with the agreement.
- Management expects cash on hand, operating cash flow and credit availability to cover operating requirements. Capital expenditures for the remainder of fiscal 2013 were expected to be approximately $1.4 million.
Material Changes and Operating Developments
- Motorhome backlog increased 130.1% year over year to 2,846 units, representing approximately $292.3 million of revenue. Towable backlog declined 12.3% to 443 units, representing approximately $9.6 million of revenue.
- Motorhome production increased 47.5% per production day in the quarter. Dealer inventory increased as management prepared for the stronger summer selling season.
- Towables generated a $3.0 million operating loss for the first nine months, compared with a $115,000 loss in the prior-year period. Management cited elevated warranty claims, lower production and unfavorable overhead variances.
- Management appointed a new Towables president, centralized warranty and service leadership, idled one towable assembly plant in February 2013 and expected production at that facility to resume in the fourth quarter.
- Share repurchases totaled approximately $11.1 million for the first nine months. Approximately $41.4 million remained under the $60 million authorization at June 1, 2013.
Outlook, Risks and Unusual Items
- Management reported stronger demand, improved dealer confidence and a growing motorhome backlog, but stated that backlog orders may be canceled or postponed without penalty and may not accurately predict future sales.
- Key risks include consumer confidence and credit availability, interest rates, fuel prices, component and material costs, labor and chassis availability, sales cancellations, competitive product introductions and general economic conditions.
- Dealer concentration is significant: two dealer organizations represented 26.9% and 13.6% of nine-month fiscal 2013 revenue. Dealer financial deterioration could reduce sales and increase repurchase obligations.
- Contingent dealer inventory repurchase exposure was approximately $244.9 million, plus $7.4 million of additional state-law-related exposure. The accrued loss reserve was $1.3 million.
- The company held $9.4 million of auction-rate securities at par value. Because auctions may fail, liquidity could be limited, and recovery could take many years. The company recorded a $409,000 temporary unrealized impairment in accumulated other comprehensive income.
- Warranty liability increased to $8.4 million from $7.0 million at fiscal year-end. Higher claim frequency, parts costs or dealer labor rates could materially affect results.
- The effective tax rate was 26.3% in the quarter and 28.4% for the nine months, compared with tax benefits in the prior-year periods, primarily because of higher pretax income and fewer uncertain-tax-position benefits.
- The company reported $4.8 million of unrecognized tax benefits, including $2.0 million of accrued interest and penalties. The IRS was reviewing the fiscal 2011 federal tax return.
- No material legal proceedings, subsequent events other than the disclosed auction-rate-security transactions, or impairment of goodwill, intangible assets or property were reported.
Investor Verification Items
- Verify whether motorhome backlog converts to shipments and revenue without significant cancellations or delays.
- Assess whether Towables operations return to profitability after the warranty, production and management changes.
- Monitor inventory levels, operating cash conversion and working-capital requirements as production expands.
- Review dealer concentration, dealer credit quality and the potential cash impact of repurchase commitments.
- Evaluate liquidity and valuation risk associated with the auction-rate securities.
- Reconcile future tax payments and uncertain tax positions with the reported effective tax rate.