Winnebago Industries, Inc. — Fiscal 2020 Second-Quarter Form 10-Q
Reporting period: Three and six months ended February 29, 2020, compared with February 23, 2019. Results are unaudited. Winnebago manufactures recreational vehicles and marine products, selling primarily through independent dealers in North America. The period includes Newmar Corporation from its November 8, 2019 acquisition.
Financial Performance and Position
| Metric | Q2 FY2020 | Q2 FY2019 | Six Months FY2020 | Six Months FY2019 |
|---|---|---|---|---|
| Net revenues | $626.8 million | $432.7 million | $1.215 billion | $926.3 million |
| Gross profit | $79.8 million | $66.4 million | $158.4 million | $137.4 million |
| Gross margin | 12.7% | 15.4% | 13.0% | 14.8% |
| Operating income | $29.6 million | $28.9 million | $53.5 million | $61.5 million |
| Operating margin | 4.7% | 6.7% | 4.4% | 6.6% |
| Net income | $17.3 million | $21.6 million | $31.3 million | $43.8 million |
| Diluted EPS | $0.51 | $0.68 | $0.95 | $1.38 |
| Adjusted EBITDA | $45.4 million | $34.5 million | $87.5 million | $72.9 million |
Q2 revenue increased 44.9%, while net income declined 20.0% and diluted EPS declined 25.0%. Six-month revenue rose 31.2%, but net income declined 28.4%. The principal earnings pressures were Newmar purchase-accounting effects, higher amortization, increased interest expense, acquisition costs, and a prior-year research and development tax benefit.
Segment performance: Q2 Towable revenue increased 13.1% to $283.5 million and Adjusted EBITDA increased 3.3% to $34.7 million. Motorhome revenue increased 97.7% to $325.5 million and Adjusted EBITDA increased 242.9% to $14.9 million, primarily reflecting Newmar and favorable product mix. Newmar contributed $138.4 million of Q2 revenue and a $2.6 million operating loss.
Cash flow and liquidity: Six-month operating cash flow was $119.2 million versus $51.9 million in the prior-year period. Capital expenditures were $19.1 million, and cash used for the Newmar acquisition was $264.3 million. Ending cash was $122.9 million versus $37.4 million at August 31, 2019. Working capital was $313.5 million versus $212.9 million at fiscal year-end.
Debt: Gross debt was $557.3 million, consisting primarily of a $257.3 million term loan and $300.0 million of 1.5% convertible senior notes due 2025. Reported long-term debt, net of discounts and issuance costs, was $464.8 million. The company had no borrowings under its $192.5 million ABL facility and was in compliance with debt covenants at February 29, 2020.
Balance sheet: Total assets were $1.572 billion and stockholders’ equity was $801.5 million. Goodwill increased to $348.9 million and net intangible assets to $415.3 million, largely due to the Newmar acquisition. The company adopted new lease accounting guidance, recording approximately $33.8 million of lease assets and $33.4 million of lease liabilities at adoption.
Material Changes Versus Prior Comparable Period
- Newmar was acquired for total consideration of $360.3 million, including $267.7 million of cash and 2.0 million Winnebago shares valued at $92.6 million.
- The acquisition increased motorhome scale and market share but also added amortization, inventory fair-value step-up, acquisition costs, interest expense, goodwill, and other intangible assets.
- Q2 gross margin fell 270 basis points to 12.7%; six-month gross margin fell 180 basis points to 13.0%.
- Q2 interest expense nearly doubled to $8.7 million; six-month interest expense increased 66.2% to $14.7 million.
- Six-month Adjusted EBITDA increased 19.9% to $87.5 million, despite lower GAAP net income.
- Towable deliveries increased 15.0% in Q2, while motorhome deliveries increased 22.7%. Towable backlog rose 22.3% to 9,790 units, and motorhome backlog rose 51.8% to 2,856 units.
- Rolling twelve-month industry wholesale shipments through January 2020 declined 11.4%, although Winnebago reported higher market share and retail demand as healthy.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide specific company revenue or earnings guidance. The cited RVIA calendar-year 2020 industry forecast ranged from a 6.4% decline to a 3.5% increase in wholesale shipments, with the most-likely case indicating a 1.0% increase.
Management stated that cash on hand, operating cash generation, and available ABL capacity were expected to satisfy short- and long-term operating requirements. The company declared a quarterly dividend of $0.11 per share on March 17, 2020.
After quarter-end, COVID-19 was declared a pandemic. On March 23, 2020, Winnebago announced a temporary suspension of production anticipated through April 12, 2020. Management stated that the effect on liquidity, financial condition, and results of operations was uncertain. Risks include production shutdowns, supply-chain disruption, reduced demand for discretionary products, dealer financing constraints, dealer inventory repurchase obligations, cyclical demand, interest-rate exposure, warranty costs, and Newmar integration and impairment risk.
The company’s contingent liability under dealer repurchase agreements was approximately $1.4 billion at February 29, 2020, supported by a $1.3 million accrued loss reserve. Additional restructuring expenses of approximately $0.3 million were expected in fiscal 2020. The company also entered into two post-quarter-end interest-rate swaps covering an incremental $50 million of variable-rate debt.
Investor Verification Priorities
- Assess the financial and operational impact of the COVID-19 production suspension, including subsequent liquidity, demand, backlog, and supply-chain developments.
- Separate Newmar’s contribution from organic growth and verify whether Newmar achieves expected profitability and synergies.
- Monitor gross-margin recovery as purchase-accounting inventory step-up and acquisition-related charges decline.
- Review debt maturities, convertible-note accounting and potential dilution, variable-rate exposure, and compliance with credit covenants.
- Evaluate the substantial dealer repurchase exposure relative to the reserve and dealer credit quality.
- Track goodwill and intangible-asset impairment risk following the Newmar acquisition.
- Confirm the sustainability of backlog, dealer inventories, market share, and consumer demand against broader RV industry trends.