Registrant’s telephone number, including area code: (641) 585-3535
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No .
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No .
There were 33,680,619 shares of $.50 par value common stock outstanding on December 27, 2004.
See Unaudited Condensed Notes to Condensed Consolidated Financial Statements.
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*Adjusted for 2-for-1 stock split on March 5, 2004.
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This Quarterly Report on Form 10-Q contains statements which may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties, including, but not limited to, reactions to actual or threatened terrorist attacks, availability and price of fuel, a significant increase in interest rates, a slowdown in the economy, availability of chassis and other key component parts, sales order cancellations, slower than anticipated sales of new or existing products, new product introductions by competitors, and other factors which may be disclosed throughout this report.
Although management believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date of this report. Winnebago Industries undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law or the rules of the New York Stock Exchange.
It is suggested that this management’s discussion be read in conjunction with the Management’s Discussion and Analysis included in the Company’s Annual Report to Shareholders for the year ended August 28, 2004.
Winnebago Industries, Inc. headquartered in Forest City, Iowa, is the leading United States (U.S.), manufacturer of motor homes, self-contained recreation vehicles used primarily in leisure travel and outdoor recreation activities. Winnebago Industries was incorporated under the laws of the state of Iowa on February 12, 1958, and adopted its present name on February 28, 1961.
The Company’s products are subjected to what the Company believes is the most rigorous testing in the RV Industry. The Company markets its recreation vehicles on a wholesale basis to approximately 305 dealer locations as of November 27, 2004 and November 29, 2003.
Motorized RV revenues represented 60 percent of the RV industry in calendar 2003. For this reason and because we believe there are further growth opportunities in this segment, Winnebago Industries has continued to focus on the motorized segment of the RV industry. The continuation of an improved RV market and positive acceptance of our new motor home products have contributed to the record earnings during the first quarter ended November 27, 2004.
For the calendar year-to-date as of October 31, 2004 and October 31, 2003, the Company’s dealers retailed 10,430 and 9,483 Winnebago Industries’ motor homes, respectively. These retail sales accounted for approximately 19.3 percent and 19.0 percent share, respectively, of the total U.S. motor home retail registrations, according to Statistical Survey data.
While market share is important, the Company has made a point of stating that its primary goal is to be the most profitable public company in the RV industry. The Company measures profitability by using five guidelines: Return on Average Total Assets (ROA), Return on Average Net Equity (ROE), Return on Average Invested Capital (ROIC), operating margin as a percent of sales and net profit margin as a percent of sales. (See page 3 of the Company’s 2004 Annual Report to Shareholders.)
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In preparing the consolidated financial statements, the Company follows accounting principles generally accepted in the United States of America, which in many cases requires the Company to make assumptions, estimates and judgments that affect the amounts reported. Many of these policies are straightforward. There are, however, some policies that are critical because they are important in determining the financial condition and results of operations. These policies are described below and some may involve management judgments due to the sensitivity of the methods, assumptions and estimates necessary in determining the related income statement, asset and/or liability amounts.
Revenue. Generally, revenues for motor homes are recorded when all of the following conditions are met: an order for a product has been received from a dealer; written or verbal approval for payment has been received from the dealer’s floor plan financial institution; and the product is delivered to the dealer who placed the order. Sales are generally made to dealers who finance their purchases under floor plan financing arrangements with banks or finance companies.
Revenues for the Company’s original equipment manufacturing (OEM) components and recreation vehicle related parts are recorded as the products are shipped from the Company’s location. The title of ownership transfers on these products as they leave the Company’s location due to the freight terms of F.O.B. – Forest City, Iowa.
Repurchase Commitments. Companies in the recreation vehicle industry enter into repurchase agreements with lending institutions which have provided wholesale floor-plan financing to dealers. These agreements provide that, in the event of default by the dealer on the agreement to pay the lending institution, the Company will repurchase the financed merchandise. The agreements also provide that the Company’s liability will not exceed 100 percent of the dealer invoice and provide for periodic liability reductions based on the time since the date of the original invoice. These repurchase obligations generally expire upon the earlier to occur of (i) the dealer’s sale of the financed unit or (ii) one year from the date of the original invoice. The Company’s ultimate exposure under these repurchase agreements are reduced by the proceeds received upon the resale of any repurchased unit. The gross repurchase obligation will vary depending on the season and the level of dealer inventories. Past losses under these agreements have not been significant and lender repurchase obligations have been funded out of working capital. (See Note 6 of the Unaudited Condensed Notes to Condensed Consolidated Financial Statements.)
Warranty. The Company offers a variety of warranties on its products ranging from one to three years in length. Estimated costs related to product warranty are accrued at the time of sale and included in cost of sales. Estimated costs are based upon past warranty claims and unit sales history and adjusted as required to reflect actual costs incurred, as information becomes available. A significant increase in dealership labor rates, the cost of parts or the frequency of claims could have a material adverse impact on our operating results for the period or periods in which such claims or additional costs materialize. In addition to the costs associated with the contractual warranty coverage provided on our motor homes, we also incur costs as a result of additional service actions not covered by our warranties, including product recalls and customer satisfaction actions. (See Note 4 of the Unaudited Condensed Notes to Condensed Consolidated Financial Statements.)
Other. The Company has reserves for other loss exposures, such as litigation, taxes, product liability, worker’s compensation, employee medical claims, inventory and accounts receivable. The Company also has loss exposure on loan guarantees. Establishing loss reserves for these matters requires the use of estimates and judgment in regards to risk exposure and ultimate liability. The Company estimates losses under the programs using consistent and appropriate methods; however, changes in assumptions could materially affect the Company’s recorded liabilities for loss.
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Current Quarter Compared to Same Quarter Last Year
The following is an analysis of changes in key items included in the consolidated statements of income for the 13-week period ended November 27, 2004 compared to the 13-week period ended November 29, 2003.
Net revenues for the 13 weeks ended November 27, 2004 increased 4.4 percent to $266.1 million compared to $254.9 million for the quarter ended November 29, 2003. Unit deliveries consisted of the following:
Revenues increased 4.4 percent during the 13 weeks ended November, 27, 2004, while unit deliveries decreased 4.6 percent. The 12.7 percent increase in diesel deliveries, traditionally a higher priced unit, was the primary reason for the increase in revenues notwithstanding the decrease in unit deliveries.
Gross profit as a percentage of net revenues was lower during the 13 weeks ended November 27, 2004 (15.0 percent) when compared to the comparable period ended November 29, 2003 (15.5 percent). Unfavorably impacting gross profit in the period ended November 27, 2004, were lower production volume, a mix of lower margin products, and an increase in health care costs for the Company’s active employees. Partially offsetting this is the reduction in postretirement health care benefits due to an amendment in the Company’s plan.
General and administrative expenses decreased 3.2 percent during the 13 weeks ended November 27, 2004, to $5.6 million or 2.1 percent of net revenues, compared to $5.7 million or 2.2 percent of net revenues for the 13 weeks ended November 29, 2003. The decreases in percentage and dollars were due primarily to lower legal settlement costs in fiscal 2005.
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Financial income increased 63.0 percent during the 13 weeks ended November 27, 2004 to $494,000 from $303,000 for the 13 weeks ended November 29, 2003. The increase in financial income during the first quarter of fiscal 2005 was due to more cash being available for investing than during the first quarter of fiscal 2004. Also, the average rate the Company earned on investments during the fiscal 2005 period was higher than the average rate earned during the fiscal 2004 period.
The effective income tax rate decreased to 35.8 percent for the 13 weeks ended November 27, 2004 from 38.7 percent for the 13 weeks ended November 29, 2003. The decrease was primarily due to a decrease in non-deductible losses in the Winnebago Health Care Management Company.
Net income and earnings per diluted share increased by 8.2 percent and 14.0 percent, respectively, when comparing the 13 weeks ended November 27, 2004 to the 13 weeks ended November 29, 2003. The difference in percentages was primarily due to a lower number of outstanding shares of the Company’s common stock during the 13 weeks ended November 27, 2004, as a result of common stock repurchased by the Company. (See Note 10 of the Unaudited Condensed Notes to Condensed Consolidated Financial Statements.)
The Company meets its working capital, capital equipment and other cash requirements with funds generated from operations.
At November 27, 2004, working capital was $185.5 million, an increase of $20.7 million from August 28, 2004‘s amount of $164.8 million.
Net cash provided by operating activities for the 13 weeks ended November 27, 2004 was $27.9 million compared to $22.2 million for the 13 weeks ended November 29, 2003. The major items affecting cash from operations were as follows:
Changes in cash flows from operating activities for the quarter ended November 27, 2004 were due primarily to:
Decreases in receivables and other assets due to the payoffs of unit deliveries, recorded as receivables as of the fiscal year-end, during the first quarter of fiscal 2005.
Decreases in accounts payable and accrued expenses due to the payment of fiscal 2004 employee incentive programs and a reduction in payables owed to the Company’s vendors.
Increases in raw material and work in process inventory due primarily to the Company carrying a larger chassis inventory as of November 27, 2004.
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Changes in cash flows from operating activities for the quarter ended November 29, 2003 were due primarily to:
Decreases in receivables and other assets due to the payoffs of unit deliveries, recorded as receivables as of August 30, 2003, during the first quarter of fiscal 2004.
Decreases in work-in-process inventory were due primarily to start-up problems in a new motor home series during the period ended August 30, 2003.
Decreases in accounts payable and accrued expenses due to the payment of fiscal 2003 employee incentive programs and, to a lesser degree, a reduction in payables owed to the Company’s vendors
Increases in finished goods inventory offset partially by a decrease in raw material inventory due to a larger number of units in the Company’s finished goods in anticipation of a strong spring selling season.
The primary uses of cash for investing activities for the 13-week period ended November 27, 2004 were for capital equipment requirements of $1.5 million compared to $2.0 million during the 13-week period ended November 29, 2003.
Cash used by financing activities for the period ended November 27, 2004 was $2.4 million for the payment of cash dividends partially offset by $1.7 million from the proceeds for the issuance of common and treasury stock. Primary uses of cash in financing activities for the period ended November 29, 2003 were $64.0 million for the Company’s common stock repurchases, and $1.8 million for the payment of cash dividends, partially offset by $3.1 million cash provided from the proceeds for the issuance of treasury stock.
On November 27, 2004 the Company’s cash and cash equivalent balance was $101.3 million. Estimated demands at November 27, 2004 on the Company’s liquid assets for the remainder of fiscal 2005 include $9.4 million for capital expenditures, primarily for production equipment, and $7.1 million for cash dividends ($2.4 million payable January 5, 2005). On June 16, 2004, the Board of Directors authorized the repurchase of outstanding shares of the Company’s common stock, at the discretion of management, for an aggregate of up to $30 million. As of November 27, 2004, 116,800 shares had been repurchased for an aggregate consideration of approximately $3.4 million under this authorization.
Management currently expects its cash on hand and funds from operations to be sufficient to cover both short-term and long-term operation requirements.
Long-term growth demographics are favorable for the Company as its target market of consumers age 50 and older is expected to increase for the next 30 years. In addition to growth in the target market due to the aging of the baby boom generation, a study conducted in 2001 by the University of Michigan for the RV industry shows that the age of people interested in purchasing RVs is also expanding to include younger buyers under 35 years of age as well as older buyers over age 75 who are staying healthy and active much later in life. This study also shows an increased interest in owning RVs by a larger percentage of all U.S. households.
Order backlog for the Company’s motor homes was as follows:
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The Company includes in its backlog all accepted purchase orders from dealers shippable within the next six months. Orders in backlog can be canceled or postponed at the option of the purchaser at any time without penalty and, therefore, backlog may not necessarily be an accurate measure of future sales.
The backlog is lower this year than last year’s historic levels due in part to increased capacity as a result of Winnebago Industries’ new Charles City Manufacturing Facility and due to more traditional levels of dealer inventory.
As of November 27, 2004, the Company had an investment portfolio of short-term investments, which are classified as cash and cash equivalents of $101.3 million, of which $94.4 million are fixed income investments that are subject to interest rate risk and a decline in value if market interest rates increase. However, the Company has the ability to hold its fixed income investments until maturity (which approximates 45 days) and, therefore, the Company would not expect to recognize an adverse impact in income or cash flows in such an event.
The Company has established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 are recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
The Company’s Chief Executive Officer and its Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls, and procedures as of the end of the quarter covered by this 10-Q. Based on their evaluation, they concluded that its disclosure controls and procedures were effective in achieving the objectives for which they were designed.
Furthermore, there have been no changes in the Company’s internal controls over financial reporting during the fiscal quarter covered by this 10-Q that have materially affected, or are reasonably likely to material affect, its internal control over financial reporting.
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To the Board of Directors and Shareholders ofWinnebago Industries, Inc.Forest City, Iowa
We have reviewed the accompanying consolidated balance sheet of Winnebago Industries, Inc. and subsidiaries (the Company) as of November 27, 2004, and the related consolidated statements of income for the 13-week period and the condensed consolidated statements of cash flows for the 13-week periods ended November 27, 2004 and November 29, 2003, respectively. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with standards established by the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of August 28, 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated November 10, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of August 28, 2004 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLPDeloitte & Touche LLPMinneapolis, MinnesotaDecember 28, 2004
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PART II Other Information
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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