Business Context and Reporting Period
Winnebago Industries, Inc. manufactures motorhomes in Iowa and travel trailers and fifth wheels in Indiana, distributing primarily through independent dealers in the United States and Canada. This unaudited Form 10-Q covers the quarter and six months ended March 2, 2013. Fiscal 2013 is a 53-week year; the six-month period contained 27 weeks versus 26 weeks in the comparable Fiscal 2012 period.
Financial Performance and Position
| Metric | Quarter Ended March 2, 2013 | Prior-Year Quarter | Six Months Ended March 2, 2013 | Prior-Year Six Months |
|---|---|---|---|---|
| Net revenues | $177.2 million | $131.6 million | $370.7 million | $263.4 million |
| Gross profit / margin | $17.2 million / 9.7% | $6.8 million / 5.2% | $37.9 million / 10.2% | $15.3 million / 5.8% |
| Operating income (loss) | $8.9 million | $(1.2) million | $18.8 million | $(0.5) million |
| Net income (loss) | $6.3 million | $(0.9) million | $13.7 million | $0.1 million |
| Diluted EPS | $0.22 | $(0.03) | $0.48 | $0.00 |
- Quarterly revenue increased 34.6%; six-month revenue increased 40.7%.
- Motorhome revenue rose 44.4% in the quarter and 48.4% for the six months, driven by higher deliveries, improved average selling prices and reduced discounts.
- Quarterly motorhome deliveries increased 41.8% to 1,419 units; six-month deliveries increased 44.7% to 2,953 units. Motorhome average selling price increased 2.1% in the quarter and 2.7% for the six months.
- Towable revenue declined 17.8% in the quarter and 2.4% for the six months. Towable deliveries increased 10.8% for the six months, but lower average selling prices offset the volume growth.
- Operating margin improved to 5.0% in the quarter and 5.1% for the six months, compared with negative operating margins in the prior-year comparable periods. Management attributed the improvement primarily to higher production, improved overhead absorption, lower material costs and reduced promotional activity.
- Cash used in operating activities was $26.1 million for the six months, compared with $11.4 million of cash provided in the prior-year period. The principal use was a $37.4 million inventory increase, together with higher receivables and other assets.
- Cash and cash equivalents declined to $26.2 million at March 2, 2013, from $62.7 million at August 25, 2012. Working capital was $130.5 million, compared with $126.1 million at fiscal year-end.
- Capital expenditures were $2.4 million for the six months; management expected approximately $3.7 million of additional Fiscal 2013 capital expenditures.
- The company had no borrowings under its $35.0 million GECC revolving credit facility. The facility expires October 31, 2015 and may be expanded to $50.0 million subject to agreement.
- Six-month financing cash use was $8.5 million, primarily from $8.4 million of share repurchases. Approximately $44.2 million remained available under the repurchase authorization at March 2, 2013.
Material Changes Versus the Prior Comparable Period
- Demand and production improved substantially from the weak first half of Fiscal 2012. Management reported higher dealer demand, reduced reliance on sales incentives and increased production rates.
- Motorhome backlog increased to 2,752 units, with estimated backlog revenue of $277.3 million, versus 1,004 units and $104.0 million at the comparable prior-year quarter-end.
- Towables remained underperforming. The segment generated a $2.2 million operating loss in the first six months versus a $0.5 million loss in the prior-year period, primarily because of increased warranty costs and unfavorable overhead variances.
- Warranty expense increased materially; the warranty liability was $8.1 million at March 2, 2013, versus $6.5 million at the comparable prior-year quarter-end.
- Management reduced towable production capacity temporarily by idling one assembly plant, appointed a new Towables President and centralized warranty and service leadership.
- Inventory increased to $123.9 million from $87.1 million at August 25, 2012, largely reflecting finished goods prepared for delivery and units in transit.
- The company repurchased approximately 69,000 shares during the quarter at an average price of $18.31 per share.
Guidance, Outlook, Risks and Unusual Items
Management expected cash on hand, operating cash generation and available credit capacity to be sufficient for short- and long-term operating requirements. It also indicated that additional share repurchases could occur if the stock traded at attractive levels. Industry forecasts cited in the filing projected 2013 growth in motorhome and towable wholesale shipments, but the filing did not provide formal company revenue or earnings guidance.
- Backlog is not a firm sales commitment because dealers may cancel or postpone orders without penalty.
- Dealer concentration is significant: one dealer organization represented 26.2% of six-month revenue and a second represented 13.4%. Dealer financial distress could reduce sales and trigger repurchase obligations.
- Contingent dealer inventory repurchase exposure was approximately $227.8 million, plus $6.7 million of incremental exposure under certain state requirements. The accrued loss reserve was $1.1 million.
- Warranty claims, recalls, service actions, dealership labor rates and parts costs could adversely affect results. Management specifically noted escalating negative towable warranty experience.
- The company held $9.4 million par value of auction-rate securities, classified as long-term. Auctions have generally failed since 2008, and recovery of par value could take up to 29 years. The securities had an estimated fair value of $8.7 million and an unrealized temporary impairment of $665,000 before tax in accumulated other comprehensive income.
- Other risks identified include consumer confidence, interest rates, credit availability, fuel prices, material and component availability, order cancellations, competition, economic conditions and liquidity.
- The company recorded a $28,000 loss on the sale of an idled fiberglass facility and reported no material subsequent events.
Important Facts for Investors to Verify
- Whether strong motorhome backlog converts into shipments and cash collections without significant cancellations or dealer inventory buildup.
- Whether the $37.4 million inventory increase reverses through operating cash flow and whether liquidity remains adequate as production expands.
- Whether towable management changes, plant idling and warranty actions restore segment profitability.
- Trends in warranty claims, repurchase reserves and the $227.8 million contingent dealer repurchase exposure.
- The liquidity, valuation and ultimate recovery timing of the auction-rate securities.
- Compliance with the GECC credit facility, including fixed-charge requirements if borrowing availability declines or repurchases exceed specified thresholds.
- Potential changes in tax valuation allowances, unrecognized tax benefits and the ongoing IRS review of the Fiscal 2011 federal return.