Winnebago Industries, Inc. — Fiscal 2019 First-Quarter 10-Q Summary
Business Context and Reporting Period
Winnebago manufactures recreational vehicles and marine products, selling primarily through independent dealers in the United States, Canada, and selected international markets. The report covers the three months ended November 24, 2018, compared with November 25, 2017. Fiscal 2019 is a 53-week year, with the additional week occurring in the fourth quarter.
Reportable segments are Motorhome and Towable. Corporate/All Other includes specialty vehicles, Chris-Craft marine operations, and certain corporate expenses.
Financial and Operating Highlights
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net revenue | $493.6 million | $450.0 million | +9.7% |
| Gross profit | $71.0 million | $62.8 million | +13.0% |
| Gross margin | 14.4% | 14.0% | +40 basis points |
| Operating income | $32.6 million | $31.2 million | +4.6% |
| Operating margin | 6.6% | 6.9% | Down 30 basis points |
| Net income | $22.2 million | $18.0 million | +23.4% |
| Diluted EPS | $0.70 | $0.57 | +$0.13 |
| Adjusted EBITDA | $38.5 million | $35.4 million | +8.6% |
| Adjusted EBITDA margin | 7.8% | 7.9% | Down 10 basis points |
Operating expenses increased 21.2% to $38.4 million, reflecting higher business investments, professional fees, and intangible amortization. The effective tax rate declined to 23.3% from 32.3%, primarily because of the Tax Cuts and Jobs Act.
Motorhome revenue declined 3.6% to $181.3 million as deliveries fell 9.9% to 1,819 units, although average selling price increased 8.2% and segment Adjusted EBITDA rose 144.4% to $12.0 million. Towable revenue increased 12.8% to $292.8 million as deliveries rose 8.2% to 9,385 units; however, Towable Adjusted EBITDA declined 7.7% to $30.8 million because of higher material and dealer program costs.
Cash Flow, Debt, and Liquidity
- Cash provided by operating activities was $54.2 million, compared with $29.5 million in the prior-year quarter, supported by higher earnings and improved working capital.
- Capital expenditures were $12.8 million, primarily for Towable capacity expansion, compared with $5.4 million in the prior-year quarter. The company also paid $0.7 million for an acquisition.
- Financing cash outflow was $42.6 million, including $172.2 million of credit-agreement repayments, $133.7 million of borrowings, $3.2 million of dividends, and $0.9 million of share repurchases.
- Cash declined to $0.7 million from $2.3 million at fiscal year-end. Working capital was $144.1 million, down from $167.8 million.
- Long-term debt was $253.3 million, consisting primarily of a $260.0 million term loan and minimal ABL borrowings. The ABL commitment was $165.0 million, and the company reported compliance with all debt covenants.
- Management expects cash on hand, operating cash generation, and available borrowing capacity to fund short- and long-term operating requirements.
Material Changes, Outlook, and Risks
Revenue growth was driven by Towable volume, higher selling prices, and the Chris-Craft acquisition completed in the fourth quarter of Fiscal 2018. Motorhome revenue was pressured by lower Class A and Class C demand, partly offset by strong Class B growth. Backlog declined in both Motorhome and Towable, while Towable dealer inventory increased 38.3% year over year.
Management reported that the RV industry continued to grow on a rolling twelve-month basis through October 2018, but the most likely RVIA forecast called for 2019 wholesale shipments to decline 5.4% from 2018. The filing does not provide specific company revenue or earnings guidance.
Key risks include cyclicality and seasonality, potential increases in interest rates, consumer and dealer credit availability, material and component inflation, sales-order cancellations, inventory and distribution-channel management, warranty and product-liability exposure, production disruptions, labor availability, ERP implementation costs and controls, debt covenant compliance, and the integration of acquisitions.
Dealer repurchase commitments totaled approximately $933.4 million at November 24, 2018, backed by an accrued loss reserve of approximately $0.9 million. Management believes resale values and diversified dealer and lender exposure substantially reduce the expected loss, but the obligation remains a material contingent exposure.
The company adopted the new revenue-recognition standard in the quarter without a material impact. It expects to adopt the new lease standard and the updated derivatives and hedging standard in Fiscal 2020; the impacts were still under evaluation.
Most Important Facts to Verify
- Whether the projected 2019 RV industry shipment decline affects Winnebago’s Towable growth, dealer inventory, and backlog conversion.
- Whether Towable material-cost and dealer-program pressures persist and offset volume growth.
- Motorhome demand trends, particularly Class A and Class C backlog and deliveries.
- Liquidity and covenant headroom given the low cash balance, variable-rate debt, and $260.0 million term-loan balance.
- Changes in the $933.4 million dealer repurchase exposure and adequacy of the related loss reserve.
- Capital spending requirements and completion of Towable capacity expansions and the ERP implementation.
- Warranty claims, recalls, customer satisfaction actions, and the adequacy of the $41.3 million product-warranty liability.
- Effects of the Chris-Craft acquisition and the company’s ability to integrate and grow its marine and specialty-vehicle operations.