Winnebago Industries, Inc. — Fiscal 2020 First-Quarter 10-Q Summary
Reporting period: Three months ended November 30, 2019, compared with the three months ended November 24, 2018. The filing was signed December 20, 2019. Winnebago manufactures and sells recreational vehicles, towable units, motorhomes, marine products, and specialty vehicles through independent dealers.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net revenues | $588.5 million | $493.6 million | 19.2% increase |
| Gross profit | $78.6 million | $71.0 million | 10.7% increase |
| Gross margin | 13.4% | 14.4% | Down 100 basis points |
| Operating income | $23.9 million | $32.6 million | 26.8% decrease |
| Operating margin | 4.1% | 6.6% | Down 250 basis points |
| Net income | $14.1 million | $22.2 million | 36.5% decrease |
| Diluted EPS | $0.44 | $0.70 | Down $0.26 |
| Adjusted EBITDA | $42.0 million | $38.5 million | 9.3% increase |
| Cash flow from operations | $79.0 million | $54.2 million | 46.0% increase |
Revenue growth reflected organic growth in Towables and Motorhomes and the addition of Newmar. Profitability declined primarily because of $10.0 million of Newmar acquisition-related costs, $1.2 million of acquisition-related inventory step-up, increased amortization, higher interest expense, and unfavorable Motorhome mix. Adjusted EBITDA excludes acquisition-related costs, inventory step-up, restructuring expenses, and non-operating income.
At November 30, 2019, cash and cash equivalents were $101.3 million, working capital was $297.8 million, and the company had no borrowings under its $192.5 million ABL facility. Gross debt was $560.0 million, consisting of a $260.0 million term loan and $300.0 million of convertible notes; reported net debt carrying value was $463.5 million after discounts and issuance costs. Management stated that cash on hand, operating cash flow, and available ABL capacity should be sufficient for operating requirements.
Segment results and material changes
- Towables: Revenue increased 16.5% to $341.3 million, with unit deliveries up 12.9% to 10,599 and Adjusted EBITDA up 16.1% to $35.8 million. Segment margin remained 10.5%. Towable backlog declined 22.0% in units and 25.9% in dollars, partly reflecting smaller and more frequent dealer orders.
- Motorhomes: Revenue increased 24.6% to $225.9 million, supported by Newmar and higher average selling prices. Adjusted EBITDA declined 22.1% to $9.3 million, and margin fell to 4.1% from 6.6% because of unfavorable mix and higher SG&A, partially offset by Newmar and pricing.
- Newmar acquisition: On November 8, 2019, Winnebago acquired Newmar and related entities for preliminary consideration of $360.3 million, comprising $267.7 million cash and 2.0 million Winnebago shares valued at $92.6 million. Newmar contributed $35.7 million of revenue and a $1.3 million operating loss after closing.
- Balance sheet expansion: Total assets increased to $1.55 billion from $1.10 billion at August 31, 2019, primarily due to Newmar goodwill and intangible assets. Goodwill increased to $347.8 million and other intangible assets to $423.3 million.
- Cash flow and investing: Operating cash flow was $79.0 million, while investing cash flow was negative $270.7 million, including $264.3 million for Newmar and $6.6 million of capital expenditures. Financing activities provided $255.5 million, including $300.0 million of convertible-note proceeds.
Debt, accounting, outlook, and risks
Winnebago issued $300.0 million of 1.5% convertible senior notes due 2025. The initial conversion price was approximately $63.73 per share. Convertible-note hedge transactions were intended to reduce potential dilution, while warrants with an initial $96.20 strike price could dilute shareholders if the stock price exceeds that level. The company also exited its interest-rate swap during the quarter. A 1% change in rates was estimated to affect quarterly interest expense by approximately $2.6 million on the variable-rate term loan.
The company adopted the new lease standard on September 1, 2019, recording approximately $33.8 million of lease assets and $33.4 million of lease liabilities without a material earnings or cash-flow effect. It expects to adopt the credit-loss standard in fiscal 2021 and does not expect a material impact.
Industry wholesale RV shipments had declined over the prior rolling twelve months, although retail demand remained healthy. The most likely RVIA forecast cited in the filing projected 2020 wholesale shipments down 3.9% from 2019, with a conservative case of a 10.6% decline. No formal company revenue or earnings guidance was provided.
Key risks include RV industry cyclicality, dealer inventory and financing conditions, sales cancellations, component availability and costs, warranty claims, interest-rate exposure, debt covenants, potential dilution from convertible notes and warrants, Newmar integration and unknown liabilities, goodwill and intangible-asset impairment, facility expansion, ERP implementation, and the company’s approximately $1.29 billion of dealer-inventory repurchase commitments. The accrued loss reserve for repurchase commitments was $1.2 million.
Management expected approximately $0.5 million of additional fiscal 2020 restructuring costs related to moving diesel production from Oregon to Iowa, with anticipated savings expected to more than offset those costs. The Board declared a quarterly dividend of $0.11 per share payable January 29, 2020.
Important facts for investors to verify
- Whether Newmar integration delivers expected revenue growth, cost synergies, and improved Motorhome profitability.
- The final purchase-price allocation, including working-capital and tax adjustments, and the potential for goodwill or intangible-asset impairment.
- Debt covenant compliance, term-loan refinancing or repayment requirements, variable-rate exposure, and liquidity after the acquisition.
- The effect of convertible-note settlement terms, warrant transactions, and the 2.0 million shares issued to Newmar sellers on future dilution.
- RV wholesale and retail demand, dealer inventory levels, backlog quality, cancellations, and dealer financing availability.
- Adequacy of warranty reserves and the potential financial exposure from dealer repurchase commitments, product actions, litigation, and acquired Newmar liabilities.
- Whether gross-margin pressure, acquisition-related expenses, and higher amortization and interest costs persist beyond the first quarter.