Winnebago Industries, Inc. — Fiscal 2016 Second-Quarter Form 10-Q
Reporting period: Three and six months ended February 27, 2016, compared with the comparable periods ended February 28, 2015. The interim financial statements are unaudited. Winnebago manufactures motorhomes and towable recreational vehicles, primarily selling through independent dealers in the United States and Canada.
Financial Highlights
| Metric | Three Months | Six Months |
|---|---|---|
| Net revenue | $225.7 million | $439.9 million |
| Gross profit | $25.3 million; 11.2% margin | $50.5 million; 11.5% margin |
| Operating income | $13.5 million; 6.0% margin | $26.3 million; 6.0% margin |
| Net income | $9.4 million | $17.9 million |
| Diluted EPS | $0.35 | $0.66 |
| Net cash used in operating activities | Not separately provided | $8.8 million |
- Second-quarter revenue declined 3.8%, while gross profit increased 4.2%, operating income increased 13.0%, and net income increased 15.5% year over year.
- Six-month revenue declined 4.2%; gross profit increased 3.9%, while operating income decreased 0.5% and net income decreased 0.4%.
- Gross-margin improvement reflected product mix and strategic sourcing savings, partly offset by labor-related manufacturing and warranty costs.
- Cash and cash equivalents were $36.9 million at February 27, 2016, down from $70.2 million at August 29, 2015. Working capital was $170.3 million, versus $184.6 million at fiscal year-end.
- The company had no outstanding borrowings and access to a $35.0 million asset-based revolving credit facility, with potential expansion to $50.0 million subject to agreement.
- Six-month investing cash usage was $16.1 million, primarily reflecting $16.4 million of capital expenditures. Financing cash usage was $8.5 million, including $5.5 million of dividends and $3.1 million of share repurchases.
- Inventory increased to $134.2 million from $112.2 million at August 29, 2015, contributing materially to operating cash usage.
Material Changes Versus the Prior Comparable Period
- Product mix: Second-quarter motorhome deliveries decreased 3.4% to 2,033 units, while towable deliveries increased 57.7% to 954 units. Six-month motorhome deliveries declined 4.4% to 3,954 units, while towable deliveries increased 53.8% to 1,770 units.
- Revenue mix: Second-quarter motorhome revenue declined 4.5% to $202.7 million, towable revenue increased 33.8% to $20.5 million, and other manufactured-product revenue declined 64.5% to $2.4 million as aluminum-related contracts neared completion.
- Average selling prices: Towable ASP declined 16.2% in the quarter and 16.7% year to date, primarily due to a shift toward lower-priced products. Motorhome ASP declined less than 1% in both periods.
- Operating expenses: Six-month selling, general and administrative expenses increased 9.0%, driven mainly by wage-related costs and $2.1 million of additional ERP implementation expense.
- Postretirement benefits: A plan amendment reduced the postretirement health-care liability by $28.6 million, reduced deferred tax assets by $10.9 million, and increased accumulated other comprehensive income by $17.7 million. Benefits were discontinued for retirees age 65 and older beginning January 1, 2016, subject to a 2016 health reimbursement contribution of up to $700,000.
- Capital investment: The company acquired Oregon property for approximately $10 million to expand West Coast motorhome and service operations and expects an additional $4 million to $7 million of related investment and start-up costs during the remainder of fiscal 2016.
Guidance, Outlook, Risks and Unusual Items
- Management expects towable growth to exceed overall market projections for the remainder of fiscal 2016, supported by new products and expanded distribution.
- Motorhome demand remains strong, but manufacturing constraints have limited unit growth. The company is moving wire-harness production, redeploying labor from low-margin bus and aluminum operations, and transitioning selected Class A diesel production to Oregon.
- Motorhome backlog increased 22.7% to 2,792 units, representing approximately $253.5 million of revenue. Towable backlog increased to 168 units, but associated estimated revenue declined 19.0% to $3.3 million. Backlog orders may be cancelled or postponed without penalty.
- Fiscal 2016 capital expenditures are expected to be approximately $20 million to $30 million, including maintenance, ERP investment, and West Coast capacity expansion.
- The ERP implementation is expected to be completed in fiscal 2017. Cumulative investment was $11.8 million against total planned investment of $25.0 million.
- Key risks include dealer concentration, dealer liquidity and repurchase obligations, consumer demand, credit availability, labor and component availability, material costs, warranty claims, manufacturing execution, ERP implementation, and economic conditions.
- Two dealer organizations represented approximately 37.6% of six-month revenue. Contingent repurchase exposure was approximately $434.7 million, with a $1.0 million accrued loss reserve.
- An Australian court awarded damages likely to exceed $5.0 million plus attorneys’ fees in litigation involving unauthorized use of the Winnebago name. The defendant appealed, making the timing and likelihood of recovery uncertain.
- The company reported no material changes to previously disclosed risk factors and stated that available cash, collections, operating funds, and credit availability should be sufficient for fiscal 2016 requirements.
Investor Verification Checklist
- Verify whether motorhome manufacturing initiatives and the Oregon facility improve production capacity, backlog conversion, and margins.
- Monitor inventory growth and operating cash flow, particularly the effect of seasonal dealer stocking and production transitions.
- Assess whether towable volume growth offsets lower towable ASPs and declining motorhome deliveries.
- Review dealer concentration, dealer credit quality, and the $434.7 million of contingent repurchase exposure.
- Track ERP spending, implementation completion, and any effects on internal controls or operating efficiency.
- Confirm the timing and ultimate recoverability of the Australian litigation award and the effect of planned capital expenditures on liquidity.