Winnebago Industries, Inc. — Fiscal 2017 Second-Quarter Form 10-Q
Reporting period: Three and six months ended February 25, 2017, compared with the corresponding periods ended February 27, 2016. Fiscal years end on the last Saturday of August. The financial statements are unaudited.
Business Context and Reporting Period
Winnebago manufactures motorized and towable recreational vehicles, distributing primarily through independent dealers in the United States and Canada. Following the November 8, 2016 acquisition of Grand Design RV, the Company reports two segments: Motorized and Towable.
Grand Design was acquired for $520.5 million, funded with $396.4 million of cash and 4.6 million Winnebago shares valued at $124.1 million at closing. The acquisition added $143.6 million of second-quarter revenue and $169.4 million of six-month revenue.
Key Financial Metrics
| Metric | Q2 Fiscal 2017 | Q2 Fiscal 2016 | Six Months Fiscal 2017 | Six Months Fiscal 2016 |
|---|---|---|---|---|
| Net revenue | $370.5 million | $225.7 million | $615.8 million | $439.9 million |
| Gross profit | $49.3 million | $25.3 million | $78.2 million | $50.5 million |
| Gross margin | 13.3% | 11.2% | 12.7% | 11.5% |
| Operating income | $28.4 million | $13.5 million | $46.8 million | $26.3 million |
| Net income | $15.3 million | $9.4 million | $27.0 million | $17.9 million |
| Diluted EPS | $0.48 | $0.35 | $0.91 | $0.66 |
| Adjusted EBITDA | $29.1 million | $13.3 million | $43.8 million | $26.1 million |
Second-quarter revenue increased 64.2%, net income increased 63.3%, and operating income increased 110.1%. Six-month revenue increased 40.0% and net income increased 50.8%. Adjusted EBITDA is a non-GAAP measure that excludes, among other items, postretirement benefit income and acquisition transaction costs.
As of February 25, 2017, cash and cash equivalents were $10.9 million, compared with $85.6 million at August 27, 2016. Working capital was $142.1 million, down from $187.6 million. Total debt was $340.0 million, consisting of $40.0 million drawn on the ABL and a $300.0 million term loan, net debt issuance costs of $329.5 million. Approximately $85.0 million remained available under the ABL, subject to borrowing-base availability.
Cash Flow, Liquidity, and Capital Structure
- Six-month operating cash flow was $5.1 million, compared with cash used of $8.8 million in the prior-year period.
- Investing cash usage was $400.9 million, primarily reflecting the $394.7 million cash consideration for Grand Design and $6.9 million of capital expenditures.
- Financing cash flow was $321.2 million, principally from $366.4 million of borrowings, partially offset by $26.4 million of repayments, $11.0 million of debt issuance costs, and $6.4 million of dividends.
- Management expected cash on hand, collections, operating cash generation, and ABL availability to fund operating requirements for the next 12 months.
- Fiscal 2017 capital expenditures were expected to be approximately $15 million to $17 million.
The term loan matures November 8, 2023 and requires scheduled quarterly amortization, mandatory prepayments under specified circumstances, and potential annual excess-cash-flow payments. The Company was in compliance with its debt covenants at February 25, 2017. An interest-rate swap effectively fixed the rate on $200.0 million of term debt at 6.32%; the swap expires December 8, 2020 and steps down over time.
Material Changes Versus the Prior Comparable Period
- Towable expansion: Towable second-quarter revenue increased 735.6% to $171.6 million, and Towable Adjusted EBITDA increased to $20.0 million from $1.6 million, primarily due to Grand Design and organic Winnebago towable growth.
- Motorized pressure: Motorized second-quarter revenue declined 3.0% to $198.9 million and Adjusted EBITDA declined 22.3% to $9.1 million. Units increased 3.6%, but average selling price declined 5.2% because of a less favorable mix and lower Class A volume.
- Margin improvement: Gross margin increased to 13.3% in the quarter and 12.7% for six months, aided by product mix, sourcing savings, and lower fixed costs as a percentage of revenue.
- Acquisition-related costs: Fiscal 2017 included $5.9 million of transaction costs and $12.4 million of amortization expense from acquired intangible assets.
- Retiree benefit plan termination: Termination of remaining postretirement health care benefits generated $12.0 million of benefit income in the quarter and $24.8 million for six months, materially affecting reported operating results and Adjusted EBITDA reconciliation.
- Share count: Diluted weighted-average shares increased 17.3% in the quarter and 10.3% for six months, primarily reflecting shares issued for the Grand Design acquisition.
Guidance, Outlook, Commentary, and Risks
Management cited continued growth in the North American RV industry and expected Towable growth to exceed overall industry projections for the remainder of Fiscal 2017. The filing references RVIA calendar-year 2017 shipment forecasts of 374,400 towable units and 57,700 motorized units, representing combined growth of 3.5% over 2016.
Motorized market share declined from 20.2% to 17.8% on a rolling twelve-month basis through January, while towable market share increased from 0.9% to 1.9% following the Grand Design acquisition. Motorized backlog declined 23.2% to 2,143 units, whereas Towable backlog increased to 8,490 units. Backlog orders may be cancelled or postponed without penalty and may not predict future sales.
Principal risks include integration of Grand Design, achievement of expected synergies, increased leverage and variable interest rates, compliance with debt covenants, dealer creditworthiness, dealer concentration, repurchase commitments, material and component costs, labor and chassis availability, consumer demand, fuel prices, competition, ERP implementation, and economic conditions.
Dealer repurchase exposure was approximately $640.2 million at February 25, 2017, with additional state-law-related exposure of $10.9 million. The related accrued loss reserve was $1.5 million. Two dealer organizations represented approximately 25.5% of six-month revenue, and the filing states that the loss or financial deterioration of either could materially affect results.
The acquisition accounting remained preliminary, particularly for tax-related balances. Goodwill was $245.4 million and acquired intangible assets were $240.7 million at February 25, 2017. No impairment losses were recorded during the period.
Investor Verification Checklist
- Verify the sustainability of results excluding the $24.8 million six-month postretirement benefit gain and acquisition-related items.
- Assess Grand Design integration, organic Towable growth, expected synergies, and the final purchase-price allocation.
- Monitor Motorized market share, Class A demand, ASP trends, backlog conversion, and Junction City ramp-up costs.
- Reconcile debt balances, ABL availability, scheduled amortization, excess-cash-flow prepayments, and leverage covenant compliance.
- Evaluate liquidity given only $10.9 million of cash, positive but modest operating cash flow, and substantial acquisition-related debt.
- Review dealer concentration, dealer credit quality, warranty costs, and the $640.2 million contingent repurchase exposure.
- Track variable-rate exposure, interest-rate swap terms, and the effect of higher interest rates on earnings and cash flow.
- Confirm the impact of the 4.6 million shares issued to Grand Design sellers and the related resale registration.