WINNEBAGO INDUSTRIES INC annual report, FY2015

Winnebago Industries, Inc. Fiscal 2015 Form 10-K Summary

Business Context and Reporting Period

Winnebago manufactures motorized and towable recreation vehicles, primarily for leisure travel, and related parts, commercial vehicles and other manufactured products. The company has one reportable segment, the RV market, and sells primarily through independent dealers in the United States and Canada.

This annual report covers the 52-week fiscal year ended August 29, 2015. Fiscal 2014 also contained 52 weeks; fiscal 2013 contained 53 weeks. The filing includes fourth-quarter results for the quarter ended August 29, 2015.

Financial and Operating Metrics

Metric	Fiscal 2015	Fiscal 2014	Change
Net revenues	$976.5 million	$945.2 million	3.3%
Gross profit	$104.9 million	$104.0 million	0.8%
Gross margin	10.7%	11.0%	Down 30 basis points
Operating income	$59.4 million	$63.9 million	Down 7.0%
Operating margin	6.1%	6.8%	Down 70 basis points
Net income	$41.2 million	$45.1 million	Down 8.5%
Diluted EPS	$1.52	$1.64	Down 7.3%
Cash flow from operations	$45.2 million	$23.2 million	Up $22.0 million

Motorhome revenue was $872.9 million, up 2.3%, supported by a 3.9% increase in deliveries to 9,097 units. Class B and Class C deliveries increased, while Class A deliveries declined 22.9%.
Towable revenue increased 23.3% to $71.7 million. Deliveries increased 6.4% to 2,670 units, and average selling price increased 15.9% to approximately $27,012.
Other manufactured-product revenue declined 4.9% to $31.9 million.
Total motorhome average selling price declined 1.7% because of a product-mix shift toward lower-priced Class B and Class C models, although average selling prices increased within each product category.
Fiscal fourth-quarter revenue was $251.0 million, gross profit was $28.1 million, operating income was $16.9 million and net income was $11.7 million. Fourth-quarter gross margin was 11.2% and operating margin was 6.7%.
Cash and cash equivalents were $70.2 million at year-end, up from $57.8 million. Working capital was $184.6 million, compared with $172.0 million.
Capital expenditures were $16.6 million. Fiscal 2016 capital expenditures were expected to be approximately $20 million to $30 million.
The company had no borrowings outstanding at the filing date under its $35 million revolving credit facility, which can be expanded to $50 million by agreement. The facility expires May 28, 2019 and bears interest based on LIBOR plus 2.0%.
Total assets were $362.2 million and stockholders’ equity was $221.0 million at August 29, 2015.
The company paid $9.8 million in dividends and repurchased approximately 300,000 shares for $6.5 million during the fiscal year. Quarterly dividends were $0.09 per share; a $0.10 quarterly dividend was declared on October 14, 2015.

Material Changes Versus the Prior Comparable Period

Revenue growth was modest, but profitability declined as gross margin fell from 11.0% to 10.7% and operating margin fell from 6.8% to 6.1%.
Cost of goods sold increased to 89.3% of revenue from 89.0%, primarily because of higher warranty and recall-related reserves and increased workers’ compensation expense.
General and administrative expense increased 15.2% to $25.8 million, including ERP and strategic-sourcing costs, higher legal and product-liability expenses, and costs associated with the former CEO’s retirement agreement.
Towables operating income approximately doubled to $2.6 million from $1.3 million, aided by higher revenue, new Toy Hauler products, distribution expansion, operating leverage and lower raw-material costs.
Operating cash flow increased substantially to $45.2 million from $23.2 million, primarily because of favorable working-capital changes, including lower receivables.
Motorhome backlog revenue declined 9.4% to $156.4 million, while towable backlog revenue increased 64.6% to $6.2 million. Backlog orders may be canceled or postponed without penalty.
Dealer motorhome inventory increased 2.3% to 4,072 units; towable inventory declined 3.4% to 1,663 units.
The company purchased the Middlebury, Indiana towable facilities for $5.4 million and a Waverly, Iowa facility for $850,000 to support capacity and labor availability.
The company initiated a three-year ERP implementation with an estimated total cost of $12 million to $16 million. Fiscal 2015 costs were $5.8 million, including $3.3 million capitalized and $2.5 million expensed.
Management began exiting the bus and aluminum-extrusion operations, with completion expected by the end of the second quarter of fiscal 2016, to redeploy labor toward higher-margin motorhome production.

Guidance, Outlook, Risks and Unusual Items

Management expected flat to modest motorized-delivery growth in fiscal 2016, broadly consistent with the industry’s projected approximately 3% growth. It expected towables to grow faster than the overall towable market through new products and distribution expansion.
Management expected modest motorized labor-efficiency improvements and anticipated strategic sourcing benefits of approximately 30 to 50 basis points of gross-margin expansion once the project is completed, expected by June 2016.
Fiscal 2015 included a $462,000 impairment charge on the corporate aircraft. Fiscal 2014 included a $629,000 gain on the sale of a warehouse, making year-over-year operating comparisons less comparable.
The company recorded $1.3 million of net lease revenue from Apollo rental units in fiscal 2015. The fiscal 2015 Apollo order did not include a repurchase obligation; the prior-year arrangement had included such an obligation.
Contingent dealer-inventory repurchase obligations were approximately $386.0 million, compared with $363.8 million in the prior year. The accrued loss reserve was $1.3 million. Fiscal 2015 included 62 repurchased units and a $1.1 million loss.
Two dealer organizations represented approximately 17.9% and 15.0% of fiscal 2015 revenue. The loss or deterioration of either dealer could materially affect results.
Three floorplan financing institutions held 67% of financed dealer inventory. Changes in dealer financing availability, interest rates or the proposed restructuring of GE Capital could affect demand and liquidity.
Key risks include cyclical and seasonal demand, consumer confidence, fuel prices, raw-material costs, labor shortages, chassis availability, supplier concentration, warranty and recall costs, product liability, regulatory compliance, information-system disruptions and competition.
A September 2015 postretirement healthcare amendment was expected to reduce long-term postretirement liabilities by approximately $29 million in fiscal 2016, with the reduction recorded through accumulated other comprehensive income and amortized into earnings over approximately 6.9 years.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that internal controls were effective as of August 29, 2015.

Investor Verification Checklist

Verify whether the planned exit from bus and aluminum-extrusion operations improves production capacity, gross margin and operating income.
Monitor ERP implementation costs, capitalization versus expense treatment, execution risk and the remaining estimated $6 million to $10 million of project spending.
Assess warranty, recall and product-liability claims against the $11.3 million warranty reserve and $6.2 million self-insurance accrual.
Track dealer inventory, backlog conversion, cancellations and the financial condition of the two large dealer organizations.
Evaluate the potential cash exposure from the $386.0 million of contingent repurchase commitments and the adequacy of the $1.3 million reserve.
Confirm fiscal 2016 motorhome and towable volume growth, labor availability and expected strategic-sourcing savings.
Review postretirement-benefit accounting after the announced plan amendment and its expected $29 million liability reduction.
Reconcile cash generation with capital expenditures, dividends, share repurchases and any future use of the revolving credit facility.