Winnebago Industries, Inc. — Fiscal 2023 Q3 Form 10-Q Summary
Reporting period: Three and nine months ended May 27, 2023, compared with May 28, 2022; balance sheet comparisons are to August 27, 2022. Results are unaudited. Winnebago manufactures and sells towable and motorhome RVs, marine products, specialty vehicles, and lithium-ion battery solutions primarily through independent dealers.
Financial Performance
| Metric | Q3 FY2023 | Q3 FY2022 | Change |
|---|---|---|---|
| Net revenues | $900.8 million | $1,458.1 million | -38.2% |
| Gross profit | $151.4 million | $273.0 million | -44.5% |
| Gross margin | 16.8% | 18.7% | -190 bps |
| Operating income | $80.5 million | $176.7 million | -54.5% |
| Operating margin | 8.9% | 12.1% | -320 bps |
| Net income | $59.1 million | $117.2 million | -49.6% |
| Diluted EPS | $1.71 | $3.57 | -52.1% |
| Adjusted EBITDA | $96.4 million | $191.7 million | -49.7% |
| Adjusted EBITDA margin | 10.7% | 13.1% | Declined |
For the first nine months, revenue was $2.72 billion, down 28.0%; gross profit was $458.6 million, down 36.2%; operating income was $243.2 million, down 47.1%; net income was $172.1 million, down 44.1%; diluted EPS was $4.95 versus $9.18; and Adjusted EBITDA was $281.8 million versus $509.7 million.
Segment Results
- Towable RV: Q3 revenue declined 52.3% to $384.1 million and Adjusted EBITDA declined 54.3% to $53.8 million. Deliveries fell 50.7% to 8,715 units. Nine-month revenue declined 48.9% to $1.07 billion, while backlog declined 83.2% to 5,297 units.
- Motorhome RV: Q3 revenue declined 27.5% to $374.4 million and Adjusted EBITDA declined 58.3% to $26.8 million. Deliveries fell 33.4% to 2,131 units. Nine-month backlog declined 69.7% to 4,595 units.
- Marine: Q3 revenue increased 1.9% to $129.0 million, but Adjusted EBITDA declined 12.5% to $17.3 million. Nine-month revenue increased 23.1% to $373.3 million and Adjusted EBITDA increased 15.9% to $50.2 million. Nine-month backlog declined 45.9% to 1,348 units.
Cash Flow, Liquidity, Debt and Capital Allocation
- Operating cash flow for the first nine months was $156.4 million, down from $245.2 million. The decline reflected lower profitability, partly offset by favorable working-capital changes.
- Capital expenditures were $68.0 million, and cash paid for the Lithionics acquisition was $87.5 million. Investing cash outflow was $154.4 million.
- Cash and cash equivalents were $225.9 million at May 27, 2023, compared with $282.2 million at fiscal year-end. Net cash decreased $56.3 million during the nine months.
- Long-term debt, net, was $591.7 million, consisting of $300.0 million of 6.25% Senior Secured Notes due 2028 and $300.0 million of 1.5% Convertible Notes due 2025, net of debt issuance costs.
- The $350.0 million ABL facility was undrawn, leaving $350.0 million of stated availability. Management believes operating cash flow, cash on hand and available borrowing capacity are sufficient for current liquidity needs.
- The company repurchased $24.9 million of common stock during the first nine months and had $330.0 million remaining under its authorization. It declared a quarterly dividend of $0.27 per share payable June 28, 2023.
Material Changes and Unusual Items
- On April 28, 2023, Winnebago acquired Lithionics, a lithium-ion battery solutions provider. The transaction added $30.3 million of goodwill and increased intangible assets; $3.1 million of transaction costs were expensed in Q3.
- Winnebago paid $22.0 million in the quarter to settle Barletta earnout obligations. The remaining Barletta earnout liability was $19.8 million at May 27, 2023, compared with $39.8 million at fiscal year-end.
- Adoption of ASU 2020-06 increased reported long-term debt by $43.8 million, reduced additional paid-in capital by $62.0 million, and increased beginning retained earnings by $29.0 million. The new diluted EPS method included approximately 4.7 million shares underlying the convertible notes, contributing to lower diluted EPS relative to basic EPS.
- Q3 operating expenses benefited from lower incentive compensation and amortization, partly offset by strategic investments and Lithionics transaction costs. The company also reported lower non-operating losses because the Barletta earnout fair-value adjustment was zero in Q3 versus $11.8 million in the prior-year quarter.
Outlook, Management Commentary and Risks
Management described ongoing pressure from inflation, rising interest rates and lower consumer spending on discretionary RV and marine products. The company is working with dealers to align field inventory with end-consumer demand and continues to produce and ship based on dealer orders. Management continues to believe in the long-term health of RV and marine demand, but the filing provides no specific revenue, earnings or margin guidance.
- Motorhome RV results were affected by productivity and operational-efficiency challenges associated primarily with an ERP implementation.
- A Mercedes-Benz Sprinter chassis recall temporarily suspended related retail sales and wholesale shipments in Q1; the remedy was implemented during Q2.
- Key risks include economic cyclicality, dealer financing availability, inventory normalization, dealer repurchase obligations, component and chassis availability, supplier concentration, material costs, warranty claims, acquisition integration, cybersecurity, product liability and debt obligations.
- Aggregate dealer inventory subject to repurchase agreements was approximately $2.07 billion at May 27, 2023, with a related loss reserve of $1.3 million.
- Product warranty reserves were $106.5 million at quarter-end. Management states that warranty and litigation reserves may prove inadequate if claims or service actions exceed estimates.
Investor Verification Items
- Verify whether RV and marine demand, dealer inventories and backlogs stabilize or continue to decline, particularly in Towable RV.
- Assess the effect of discounts, allowances, production volumes and ERP-related execution issues on gross and segment margins.
- Monitor cash generation and the ability to fund the $300.0 million convertible-note maturity in fiscal 2025 while maintaining dividends, buybacks and investment spending.
- Evaluate Lithionics integration, contribution to revenue and profitability, and the strategic benefits of vertical battery capabilities.
- Review exposure to dealer repurchase commitments, warranty claims, supplier concentration and chassis recalls.
- Consider the impact of the ASU 2020-06 diluted share count and the potential cash, share or combination settlement of the convertible notes.