Business Context and Reporting Period
Winnebago Industries, Inc. manufactures recreational vehicles and marine products, including towables, motorhomes, boats, and specialty vehicles, primarily distributed through independent dealers in North America. This unaudited Form 10-Q covers the first quarter of Fiscal 2021, the three months ended November 28, 2020, compared with the three months ended November 30, 2019.
The results include Newmar Corporation, acquired on November 8, 2019. Reportable segments are Towable and Motorhome; Corporate/All Other includes marine, specialty vehicles, and corporate expenses.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net revenue | $793.1 million | $588.5 million | +34.8% |
| Gross profit | $137.0 million | $78.6 million | +74.3% |
| Gross margin | 17.3% | 13.4% | +390 bps |
| Operating income | $85.0 million | $23.9 million | +255.8% |
| Operating margin | 10.7% | 4.1% | +660 bps |
| Net income | $57.4 million | $14.1 million | +308.2% |
| Diluted EPS | $1.70 | $0.44 | +286.4% |
| Adjusted EBITDA | $89.3 million | $42.0 million | +112.4% |
| Adjusted EBITDA margin | 11.3% | 7.1% | +420 bps |
Revenue growth reflected organic unit growth, pricing actions and the inclusion of Newmar. Gross margin benefited from operating leverage, pricing and productivity initiatives, partly offset by Newmar mix.
Segment Performance
- Towable: Revenue was $454.9 million, up 33.3%; Adjusted EBITDA was $63.1 million, up 76.5%. Unit deliveries increased 34.1% to 14,214.
- Motorhome: Revenue was $322.4 million, up 42.7%; Adjusted EBITDA was $30.3 million, up 225.2%. Unit deliveries increased 23.8% to 2,330.
- Corporate/All Other: Revenue was $15.8 million versus $21.3 million, while Adjusted EBITDA was a loss of $4.2 million versus a loss of $3.1 million.
Cash Flow, Liquidity and Capital Structure
| Item | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Operating cash flow | $(2.7) million | $79.0 million |
| Investing cash flow | $(1.1) million | $(270.7) million |
| Financing cash flow | $(15.8) million | $255.5 million |
| Capital expenditures | $8.7 million | $6.6 million |
| Ending cash | $272.9 million | $101.3 million |
Operating cash flow was negative despite higher earnings, primarily because inventory increased by $80.5 million and receivables increased by $10.4 million. Net inventories rose to $263.1 million from $182.9 million at August 29, 2020.
At November 28, 2020, gross debt was $600.0 million and reported long-term debt, net of discounts and issuance costs, was $516.5 million. Debt consisted of $300.0 million of 6.25% senior secured notes due 2028 and $300.0 million of 1.5% convertible notes due 2025. The $192.5 million ABL facility was undrawn. Management stated that cash, operating cash flow and available borrowing capacity were expected to satisfy current liquidity requirements.
Working capital was $475.0 million, compared with $413.2 million at August 29, 2020. The company repurchased $11.6 million of common stock and paid $4.0 million of dividends during the quarter. A $0.12-per-share dividend was declared for payment in January 2021.
Material Changes Versus the Prior Comparable Period
- Revenue, gross profit, operating income, net income and diluted EPS increased substantially, supported by strong RV demand, higher volumes, pricing and Newmar results.
- Gross margin improved to 17.3% from 13.4%, while operating expenses declined 5.0% to $52.0 million.
- The prior-year period included $9.95 million of acquisition-related costs and $1.18 million of acquisition-related fair-value inventory step-up; no such costs were incurred in Q1 FY2021.
- Q1 FY2021 included a $3.6 million gain on the sale of Junction City, Oregon property and $0.1 million of restructuring expense.
- Interest expense increased 64.3% to $9.9 million, primarily due to financing related to the Newmar acquisition.
- Backlog increased sharply: Towable backlog reached $865.4 million versus $242.9 million, and Motorhome backlog reached $1.71 billion versus $384.2 million.
- Dealer inventory declined 29.2% for Towables and 58.9% for Motorhomes, reflecting strong retail demand and constrained inventory.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific company revenue, earnings or margin guidance. Management cited RVIA calendar-year 2021 industry wholesale shipment forecasts ranging from 490,300 to 515,400 units, representing growth of 15.7% to 21.7% over 2020 actual shipments of 423,600 units.
Management reported that COVID-19 had not disrupted manufacturing during the quarter and that demand benefited from consumer perceptions of RV travel as a safer alternative. However, supply shortages, particularly affecting Newmar, remained an issue. Potential renewed dealer closures, recessionary conditions, reduced consumer spending, vaccine-driven changes in travel preferences, labor and component availability, and raw-material costs could adversely affect results.
Other material exposures include approximately $760.7 million of dealer inventory repurchase commitments, product warranty obligations of $70.5 million, debt covenant and refinancing risk, possible dilution from convertible notes and warrants, cyclical and seasonal demand, Newmar integration and performance, ERP implementation costs, litigation, and potential warranty or product liability claims.
The company stated that it did not expect additional reorganization charges during the remainder of Fiscal 2021. It adopted the CECL credit-loss standard in the quarter without a material financial statement impact. Disclosure controls were deemed effective, and management reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether elevated backlog converts into shipments and cash flow without material cancellations, production delays or margin erosion.
- Inventory growth and the effect of supply shortages, dealer inventory levels and working-capital absorption on operating cash flow.
- The sustainability of Q1 gross-margin expansion after pricing benefits, productivity gains and unusually strong demand.
- Newmar’s ongoing revenue, profitability, integration progress and potential exposure to motorhome mix effects.
- Liquidity, debt maturities, covenant compliance and refinancing requirements for the $300.0 million convertible notes due 2025 and $300.0 million senior secured notes due 2028.
- Potential obligations under $760.7 million of dealer repurchase commitments and the adequacy of the $0.9 million related loss reserve.
- The duration and economic effects of COVID-19, including supply constraints, dealer shutdowns and changes in consumer travel behavior.
- The impact of the $3.6 million property-sale gain and the absence of prior-year acquisition costs when assessing recurring earnings.