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 32,921,864 shares of $0.50 par value common stock outstanding on July 7, 2005.
PART I. FINANCIAL INFORMATIONItem 1. Financial Statements.
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For accounting purposes, the Company is recognizing income from the plan in Fiscal 2005 due to the amortization of the cost savings from the September 2004 amendment. However, the Company is still obligated to pay the cost of previously accrued and earned retiree benefits and paid approximately $456,000 and $509,000 of such benefits for the 39 weeks ended May 28, 2005 and May 29, 2004, respectively.
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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 decline in consumer confidence, 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 (RV) 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 310 dealer locations as of May 28, 2005 and May 29, 2004.
Motorized RV revenues represented 60 percent of the RV industry in calendar 2004. 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. Winnebago Industries has been able to maintain its market share even though there are recent indications that industry-wide motor home production has exceeded market demand, causing an industry-wide imbalance of motor home inventory. The Company will continue to monitor its inventories on hand to ensure that production is in line with market demand.
For the calendar years 2004 and 2003, the Company’s dealers retailed 11,622 and 10,786 Winnebago Industries’ motor homes, respectively. These retail sales accounted for approximately 19.0 percent of the total U.S. motor home retail registrations, according to Statistical Survey data for each of these calendar years.
While market share is important, the Company’s 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 require the Company to make assumptions, estimates and judgments that affect the amounts reported. Actual results could differ from estimates in amounts that may be material to the financial statements. Critical accounting estimates made in preparing these financial statements are described below.
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. The agreements to which the Company is a party 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 is 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 7 of the Unaudited 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. (See Note 5 of the Unaudited Notes to Condensed Consolidated Financial Statements.) 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.
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 the 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 May 28, 2005 compared to the 13-week period ended May 29, 2004.
Net revenues for the 13 weeks ended May 28, 2005 decreased 17.8 percent to $255.0 million compared to $310.2 million for the quarter ended May 29, 2004. Unit deliveries decreased 21.4 percent as follows:
The reductions in revenues and unit deliveries were due to lower retail demand and an industry-wide oversupply of motor homes during the quarter ended May 28, 2005 when compared to the quarter ended May 29, 2004. Also contributing to the reduction in revenues was a higher level of discounts during the period ended May 28, 2005 when compared to May 29, 2004. The percentage decrease in unit sales was greater than the percentage decrease in revenues because of an increase in the average sale price per unit in the third quarter of Fiscal 2005.
Gross profit as a percentage of net revenues was lower during the 13 weeks ended May 28, 2005 (13.8 percent) when compared to the comparable period ended May 29, 2004 (14.8 percent). When comparing the two quarters, lower production volume and lower production efficiencies offset partially by increased pricing impacted the gross profit percentage during the period ended May 28, 2005.
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Selling expenses decreased 9.5 percent ($0.5 million) during the 13 weeks ended May 28, 2005, to $4.3 million compared to $4.8 million for the 13 weeks ended May 29, 2004. However, selling expenses increased to 1.7 percent of net revenues during the period ended May 28, 2005 from 1.5 percent during the comparable period ended May 29, 2004. The decrease in dollars was due primarily to a reduction in sales employee incentive compensation costs.
General and administrative expenses decreased 65.6 percent during the 13 weeks ended May 28, 2005, to $4.5 million compared to $13.2 million for the 13 weeks ended May 29, 2004; and to 1.8 percent of net revenues for the 13 weeks ended May 28, 2005 compared to 4.2 percent for the 13 weeks ended May 29, 2004. The decreases in dollars and percentage were due primarily to a $7.3 million charge the Company recorded in the third quarter of Fiscal 2004 in connection with the settlement of a lawsuit. A reduction of approximately $1.3 million in management incentive compensation costs in the third quarter of Fiscal 2005 also contributed to the decreases.
Financial income increased 107.9 percent during the 13 weeks ended May 28, 2005 to $761,000 from $366,000 for the 13 weeks ended May 29, 2004. The increase in financial income during the third quarter of Fiscal 2005 was due to more cash being available for investing than during the third quarter of Fiscal 2004. Also, the average rate the Company earned on investments during the Fiscal 2005 period was significantly higher than the average rate earned during the Fiscal 2004 period.
The overall effective income tax rate decreased to 35.2 percent for the 13 weeks ended May 28, 2005 from 37.8 percent for the 13 weeks ended May 29, 2004. The decrease was primarily due to a decrease in nondeductible losses in Winnebago Health Care Management Company.
Net income decreased by 0.7 percent and earnings per diluted share increased by 2.0 percent when comparing the 13 weeks ended May 28, 2005 to the 13 weeks ended May 29, 2004. The increase in earnings per diluted share was due to a lower number of outstanding shares of common stock during the 13 weeks ended May 28, 2005, as a result of common stock repurchased by the Company. (See Note 10 of the Unaudited Notes to Condensed Consolidated Financial Statements.)
Current Year-to-Date Compared to the Same Period Last Year
The following is an analysis of changes in key items included in the consolidated statements of income for the 39-week period ended May 28, 2005 compared to the 39-week period ended May 29, 2004.
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Net revenues for the 39 weeks ended May 28, 2005 decreased 8.5 percent to $760.5 million compared to $831.2 million for the 39 weeks ended May 29, 2004. Unit deliveries consisted of the following:
The reductions in revenues and unit deliveries were due to lower retail demand and an industry-wide oversupply of motor homes during the 39 weeks ended May 28, 2005 when compared to the 39 weeks ended May 29, 2004. Also contributing to the reduction in revenues was a higher level of discounts during the period ended May 28, 2005 when compared to May 29, 2004. The percentage decrease in unit sales was greater than the percentage decrease in revenues because of an increase in the average sale price per unit in the period ended May 28, 2005.
Gross profit as a percentage of net revenues was lower during the 39 weeks ended May 28, 2005 (13.7 percent) when compared to the comparable period ended May 29, 2004 (14.5 percent). When comparing the two year-to-date periods, lower production volume, lower production efficiencies and a physical inventory adjustment offset partially by favorable pricing impacted the gross profit percentage during the period ended May 28, 2005. Unfavorably impacting gross profit for the 39 weeks ended May 29, 2004 was the recording of a reserve of approximately $1.9 million (representing .2 percent of net revenues) associated with a product recall.
Selling expenses decreased by 2.6 percent ($0.4 million) during the 39 weeks ended May 28, 2005, to $13.4 million (1.7 percent of net revenues) compared to $13.8 million (1.7 percent of net revenues for the 39 weeks ended May 29, 2004). The decrease in dollars was due primarily to a reduction in sales employee incentive compensation costs offset partially by increased advertising costs.
General and administrative expenses decreased 36.3 percent during the 39 weeks ended May 28, 2005, to $15.9 million (2.1 percent of net revenues) compared to $25.0 million (3.0 percent of net revenues) for the 39 weeks ended May 29, 2004. The decreases in dollars and percentage were due primarily to a $7.3 million charge the Company recorded in the 39 weeks ended May 29, 2004 in connection with the settlement of a lawsuit. A reduction of approximately $1.6 million in management incentive compensation costs for the 39 weeks ended May 28, 2005 also contributed to the decreases.
Financial income increased 98.9 percent during the 39 weeks ended May 28, 2005 to $1.9 million from $1.0 million for the 39 weeks ended May 29, 2004. The increase in financial income during the first three quarters of Fiscal 2005 was due to more cash being available for investing than during the first three quarters 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 overall effective income tax rate decreased to 35.5 percent for the 39 weeks ended May 28, 2005 from 37.6 percent for the 39 weeks ended May 29, 2004. The decrease was primarily due to a decrease in nondeductible losses in Winnebago Health Care Management Company.
Net income and earnings per diluted share decreased by 3.8 percent and 1.4 percent, respectively, when comparing the 39 weeks ended May 28, 2005 to the 39 weeks ended May 29, 2004. The difference in percentages was due primarily to a lower number of outstanding shares of the Company’s common stock during the 39 weeks ended May 28, 2005, as a result of common stock repurchased by the Company. (See Note 10 of the Unaudited Notes to Condensed Consolidated Financial Statements.)
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The Company meets its working capital, capital equipment and other cash requirements with funds generated from operations.
At May 28, 2005, working capital was $185.3 million, an increase of $20.5 million from August 28, 2004‘s amount of $164.8 million.
Net cash provided by operating activities for the 39 weeks ended May 28, 2005 was $76.4 million compared to $78.9 million for the 39 weeks ended May 29, 2004. The major items affecting cash from operations were as follows:
Changes in cash flows from operating activities for the 39 weeks ended May 28, 2005 were due primarily to:
Decreases in receivables and other assets were due to the dealer’s payment for unit deliveries, during the first quarter of Fiscal 2005, recorded as receivables as of the fiscal year-end, and a return to a more normal receivables level.
Decreases in accounts payable and accrued expenses were due to the payment of Fiscal 2004 employee incentive programs and a reduction in payables owed to the Company’ vendors.
Changes in cash flows from operating activities for the 39 weeks ended May 29, 2004 were due primarily to:
Decreases in receivables and other assets were due to the dealers’ payment for unit deliveries.
The increase in accounts payable balances was due primarily to increases in the Company’s production schedule.
Increases in inventories were due primarily to a larger number of chassis in the Company’s inventory and an increase in finished goods units of approximately 330 units at May 29, 2004.
The primary uses of cash for investing activities were for capital equipment requirements of $6.7 million for the 39-week period ended May 28, 2005 compared to $7.7 million during the 39-week period ended May 29, 2004.
The Company purchased $196.4 million of short-term investments and received proceeds of $143.5 million from the sale or maturity of short-term investments during the 39 weeks ended May 28, 2005. During the 39 weeks ended May 29, 2004 the Company purchased $123.3 million of short-term investments and received proceeds of $132.0 million from the sale or maturity of short-term investments.
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Cash used by financing activities for the period ended May 28, 2005 was $26.8 million for the Company’s common stock repurchases and $7.1 million for the payment of cash dividends offset partially by $3.2 million from the proceeds of the issuance of treasury stock under employee benefit plans. Primary uses of cash in financing activities for the period ended May 29, 2004 were $74.3 million for Company’s common stock repurchases and $5.2 million for the payment of cash dividends offset partially by $4.5 million cash provided from the proceeds of the issuance of treasury stock.
On May 28, 2005 the Company’s cash and cash equivalents balance was $10.3 million and available-for-sale securities – short-term investments was $104.0 million. Estimated demands at May 28, 2005 on the Company’s liquid assets for the remainder of Fiscal 2005 include $2.6 million for capital expenditures, primarily for production equipment, and $2.3 million for payments of cash dividends. On June 16, 2004, the Board of Directors authorized the repurchase of outstanding shares of the Company’s common stock, depending on market conditions, for an aggregate of up to $30 million. As of May 28, 2005, 971,331 shares had been repurchased for an aggregate consideration of approximately $30 million which terminates this authorization. On June 15, 2005, the Board of Directors authorized the repurchase of outstanding shares of the Company’s common stock, depending on market conditions, for an aggregate of up to $30 million.
Management currently expects its cash on hand and funds from operations to be sufficient to cover both short-term and long-term operation requirements.
Order backlog for the Company’s motor homes was as follows:
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. As a result of a weaker backlog and industry-wide softness in the motor home market, the Company will continue to adjust its factory schedule as necessary to correspond to the demand for its products.
Long-term 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.
As of May 28, 2005, the Company had $114.3 million of cash and short-term investments consisting of $10.3 million of cash and cash equivalents and available-for-sale securities of $104.0 million. Taking into account the credit risk criteria of our investments policies, the primary market risk associated with these investments is 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 for the typical Dutch auction period (an average of 45 days) and based upon historical experience does not believe there are significant risks of a failed Dutch auction. Therefore, the Company would not expect to recognize a material adverse impact in income or cash flows in the event of a decline in value due to an increase in market interest rates.
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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.
Subsequent to the issuance of its unaudited consolidated financial statements for the 13 and 26 weeks ended February26, 2005, the Company identified an error in its annual physical inventory adjustment recorded during the second quarter of Fiscal 2005, due to a formula error in an electronic spreadsheet. As a result of the identified error, Management and the Audit Committee of the Board of Directors concluded a restatement of the Company’s financial statements included in the Form 10-Q for the quarter ended February 26, 2005 was necessary. This restatement was completed with the filing of Form 10-Q/A on May 27, 2005. The Company has evaluated and documented its internal controls over financial reporting, including the controls over electronic spreadsheets. The Company has implemented improved controls over all significant electronic spreadsheets supporting financial statements as of the end of the third quarter of Fiscal 2005.
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 the Company’s Quarterly Report on Form 10-Q for the period ended May 28, 2005. Based on that evaluation, they concluded that the Company’s disclosure controls and procedures were effective in achieving the objectives for which they were designed.
Furthermore, except for improvements in controls described above, there have been no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this 10-Q that have materially affected, or are reasonably likely to materially affect, its internal controls 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 condensed consolidated balance sheet of Winnebago Industries, Inc. and subsidiaries (the “Company”) as of May 28, 2005, and the related condensed consolidated statements of income for the 13- and 39-week periods ended May 28, 2005 and May 29, 2004, and of cash flows for the 39-week periods ended May 28, 2005 and May 29, 2004. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews 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 and 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 reviews, 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 the 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 condensed 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 LLP
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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 consideration of up to $30 million. There was no time restriction on this authorization. As of May 28, 2005, 971,331 shares had been repurchased for an aggregate consideration of approximately $30.0 million which terminated this authorization.
On June 15, 2005, the Board of Directors authorized the repurchase of outstanding shares of the Company’s common stock, depending on market conditions and at the discretion of management, for an aggregate consideration of up to $30 million. There is no time restriction on this authorization.
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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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