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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
 
 
 
 
x 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended February 26, 2011
 
or
 
 
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from _________________ to _________________
 
 
 
 
 
Commission File Number: 001-06403
 
WINNEBAGO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Iowa
 
 
42-0802678
(State or other jurisdiction of incorporation or organization)
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
P. O. Box 152, Forest City, Iowa
 
 
50436
(Address of principal executive offices)
 
 
(Zip Code)
 
 
 
 
 
 
 
(641) 585-3535
 
(Registrant's telephone number, including area code)
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer  x
 
 Non-accelerated filer o
 
 Smaller Reporting Company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of common stock, par value $0.50 per share, outstanding March 31, 2011 was 29,122,226.
 
WINNEBAGO INDUSTRIES, INC.
 
INDEX TO REPORT ON FORM 10-Q
 
 
 
 
 
Page
 
 
FINANCIAL INFORMATION
 
 
 
 
 
Condensed Financial Statements
 
 
 
Unaudited Consolidated Statements of Operations
 
 
Unaudited Consolidated Balance Sheets
 
 
Unaudited Consolidated Statements of Cash Flows
 
 
Unaudited Notes to Consolidated Financial Statements
 
 
 
 
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Quantitative and Qualitative Disclosures of Market Risk
 
 
 
 
 
Controls and Procedures
 
 
 
 
 
OTHER INFORMATION
 
 
 
 
 
Legal Proceedings
 
 
 
 
 
Risk Factors
 
 
 
 
 
Unregistered Sales of Equity Securities and Use of Funds
 
 
 
 
 
Exhibits
 
 
 
 
 
 
 
 
 
Table of Contents

Part I. FINANCIAL INFORMATION 
 
Item 1. Condensed Financial Statements 
 
Winnebago Industries, Inc.
Unaudited Consolidated Statements of Operations 
 
Quarter Ended
 
Six Months Ended
(In thousands, except per share data)
February 26,
2011
 
February 27,
2010
 
February 26,
2011
 
February 27,
2010
Net revenues
$
106,593
 
 
$
110,529
 
 
$
230,304
 
 
$
191,546
 
Cost of goods sold
95,269
 
 
105,745
 
 
207,781
 
 
186,238
 
Gross profit
11,324
 
 
4,784
 
 
22,523
 
 
5,308
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling
3,254
 
 
3,102
 
 
6,521
 
 
6,331
 
General and administrative
4,020
 
 
3,540
 
 
7,671
 
 
6,812
 
Gain on sale of asset held for sale
—
 
 
—
 
 
(644
)
 
—
 
Total operating expenses
7,274
 
 
6,642
 
 
13,548
 
 
13,143
 
 
 
 
 
 
 
 
 
Operating income (loss)
4,050
 
 
(1,858
)
 
8,975
 
 
(7,835
)
Other non-operating income
322
 
 
364
 
 
474
 
 
131
 
Income (loss) before income taxes
4,372
 
 
(1,494
)
 
9,449
 
 
(7,704
)
 
 
 
 
 
 
 
 
Provison (benefit) for taxes
1,057
 
 
(2,200
)
 
2,348
 
 
(7,066
)
Net income (loss)
$
3,315
 
 
$
706
 
 
$
7,101
 
 
$
(638
)
 
 
 
 
 
 
 
 
Income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.11
 
 
$
0.02
 
 
$
0.24
 
 
$
(0.02
)
Diluted
$
0.11
 
 
$
0.02
 
 
$
0.24
 
 
$
(0.02
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
29,118
 
 
29,080
 
 
29,115
 
 
29,077
 
Diluted
29,120
 
 
29,091
 
 
29,118
 
 
29,088
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        
See unaudited notes to consolidated financial statements.
 

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Winnebago Industries, Inc.
Unaudited Consolidated Balance Sheets 
(In thousands, except per share data)
February 26,
2011
 
August 28,
2010
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
62,787
 
 
$
74,691
 
Receivables, less allowance for doubtful accounts ($75 and $91, respectively)
20,870
 
 
18,798
 
Inventories
71,655
 
 
43,526
 
Prepaid expenses and other assets
4,828
 
 
4,570
 
Income taxes receivable
132
 
 
132
 
Total current assets
160,272
 
 
141,717
 
Property, plant, and equipment, net
24,427
 
 
25,677
 
Assets held for sale
1,201
 
 
4,254
 
Long-term investments
10,891
 
 
17,785
 
Investment in life insurance
23,254
 
 
23,250
 
Goodwill
1,228
 
 
—
 
Amortizable intangible assets
759
 
 
—
 
Other assets
16,878
 
 
14,674
 
Total assets
$
238,910
 
 
$
227,357
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
20,932
 
 
$
19,725
 
Income taxes payable
947
 
 
99
 
Accrued expenses:
 
 
 
Accrued compensation
12,709
 
 
10,529
 
Product warranties
8,068
 
 
7,634
 
Self-insurance
4,221
 
 
4,409
 
Accrued loss on repurchases
981
 
 
1,362
 
Promotional
1,599
 
 
1,817
 
Other
4,647
 
 
4,797
 
Total current liabilities
54,104
 
 
50,372
 
Long-term liabilities:
 
 
 
Unrecognized tax benefits
5,637
 
 
5,877
 
Postretirement health care and deferred compensation benefits
75,840
 
 
73,581
 
Total long-term liabilities
81,477
 
 
79,458
 
Contingent liabilities and commitments
 
 
 
Stockholders' equity:
 
 
 
Capital stock common, par value $0.50; authorized 60,000 shares, issued 51,776 shares
25,888
 
 
25,888
 
Additional paid-in capital
29,240
 
 
29,464
 
Retained earnings
427,776
 
 
420,675
 
Accumulated other comprehensive (loss) income
(1
)
 
1,242
 
Treasury stock, at cost (22,654 and 22,661 shares, respectively)
(379,574
)
 
(379,742
)
Total stockholders' equity
103,329
 
 
97,527
 
Total liabilities and stockholders' equity
$
238,910
 
 
$
227,357
 
 
See unaudited notes to consolidated financial statements.
 

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Winnebago Industries, Inc.
Unaudited Consolidated Statements of Cash Flows 
 
Six Months Ended
(In thousands)
February 26,
2011
 
February 27,
2010
Operating activities:
 
 
 
Net income (loss)
$
7,101
 
 
$
(638
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,845
 
 
3,296
 
Stock-based compensation
124
 
 
291
 
Deferred income taxes including valuation allowance
583
 
 
—
 
Postretirement benefit income and deferred compensation expense
690
 
 
624
 
Reduction for doubtful accounts
(10
)
 
(60
)
Increase in cash surrender value of life insurance policies
(300
)
 
(535
)
(Gain) loss on the sale or disposal of property
(708
)
 
1
 
Gain on life insurance
(372
)
 
—
 
Other
58
 
 
44
 
Change in assets and liabilities:
 
 
 
Inventories
(24,207
)
 
(12,974
)
Receivables and prepaid assets
(1,368
)
 
(8,347
)
Income taxes and unrecognized tax benefits
610
 
 
15,983
 
Accounts payable and accrued expenses
326
 
 
8,975
 
Postretirement and deferred compensation benefits
(1,854
)
 
(1,758
)
Net cash (used in) provided by operating activities
(16,482
)
 
4,902
 
 
 
 
 
Investing activities:
 
 
 
Proceeds from the sale of investments at par
6,450
 
 
4,700
 
Proceeds from life insurance
659
 
 
—
 
Purchases of property and equipment
(1,279
)
 
(943
)
Proceeds from the sale of property
3,793
 
 
46
 
Cash paid for acquisition, net of cash acquired
(4,694
)
 
—
 
Other
(461
)
 
(442
)
Net cash provided by investing activities
4,468
 
 
3,361
 
 
 
 
 
Financing activities:
 
 
 
Payments for purchases of common stock
(89
)
 
(249
)
Payments on ARS portfolio
—
 
 
(2,780
)
Proceeds from issuance of stock options
75
 
 
94
 
Other
124
 
 
(285
)
Net cash provided by (used in) financing activities
110
 
 
(3,220
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(11,904
)
 
5,043
 
Cash and cash equivalents at beginning of period
74,691
 
 
36,566
 
Cash and cash equivalents at end of period
$
62,787
 
 
$
41,609
 
 
 
 
 
Supplemental cash flow disclosure:
 
 
 
Income taxes paid
$
1,153
 
 
$
21
 
 
See unaudited notes to consolidated financial statements.

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Winnebago Industries, Inc.
Unaudited Notes to Consolidated Financial Statements 
 
General:
 
The "Company," "we," "our" and "us" are used interchangeably to refer to Winnebago Industries, Inc. and its subsidiaries, as appropriate to the context.
 
Note 1: Basis of Presentation 
 
In our opinion, the accompanying condensed unaudited consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the consolidated financial position as of February 26, 2011 and the consolidated results of operations for the second quarters and first six months of Fiscal 2011 and 2010, and consolidated cash flows for the first six months of Fiscal 2011 and 2010. The consolidated statement of operations for the first six months of Fiscal 2011 is not necessarily indicative of the results to be expected for the full year. The balance sheet data as of August 28, 2010 was derived from audited financial statements, but does not include all of the information and footnotes required by generally accepted accounting principles (GAAP) for complete financial statements. These interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto appearing in our Annual Report to Shareholders for the year ended August 28, 2010.
 
Note 2: New Accounting Pronouncements 
 
None
  
Note 3: Acquisition 
 
On December 29, 2010, through a newly formed, wholly owned subsidiary, Winnebago of Indiana, LLC, we purchased substantially all of the assets of SunnyBrook RV, Inc. ("SunnyBrook"), a manufacturer of travel trailer and fifth wheel recreation vehicles. The aggregate consideration paid was $5.6 million in cash including the repayment of $3.3 million of SunnyBrook commercial and shareholder debt on the transaction date. SunnyBrook operates as a wholly owned subsidiary referred to as Winnebago Industries Towables ("WT") and will continue to manufacture products under the SunnyBrook brands. In addition, WT plans to diversify the product line to include Winnebago brand trailer and fifth wheel products. The assets acquired include inventory, equipment and other tangible and intangible property and will be used in connection with the operation of WT business of manufacturing towable recreation vehicles. Also on December 29, 2010, we entered into a five year operating lease agreement for the SunnyBrook facilities. The operations of WT are included in our consolidated operating results from the date of its acquisition.
 
The following table summarizes the approximate fair value of the net assets acquired at the date of the closing:
(In thousands)
December 29, 2010
Current assets
$
5,773
 
Property, plant and equipment
337
 
Goodwill
1,228
 
Dealer network
535
 
Trademarks
196
 
Non-compete agreement
40
 
Current liabilities
(2,513
)
     Total fair value of net assets acquired
5,596
 
Less cash acquired
(902
)
     Total cash paid for acquisition less cash acquired
$
4,694
 
At December 29, 2010, the amortizable intangible assets had a weighted average useful life of 9.8 years. The dealer network was valued based on the Discounted Cash Flow Method and will be amortized on a straight line basis over 10 years. The trademarks were valued based on the Relief from Royalty Method and will be amortized on a straight line basis over 10 years. The non-compete agreement will be amortized on a straight line basis over 7 years. Goodwill is not subject to amortization. Pro forma financial information has not been presented due to its insignificance when compared to our total assets.
 
Note 4: Fair Value Measurements 
 
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a

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particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
 
The following table set forth, by level within the fair value hierarchy, our financial assets that were accounted for at fair value on a recurring basis at February 26, 2011 and August 28, 2010 according to the valuation techniques we used to determine their fair values:
 
 
 
Fair Value Measurements Using Inputs Considered As
(In thousands)
Fair Value at
February 26, 2011
Level 1
Quoted Prices in Active Markets for Identical Assets
Level 2
Significant Other Observable Inputs
Level 3
Significant Unobservable Inputs
Long-term investments
 
 
 
 
 
 
 
 
Student loan ARS
$
10,891
 
 
$
—
 
 
$
—
 
 
$
10,891
 
 
Assets that fund deferred compensation
 
 
 
 
 
 
 
 
Domestic equity funds
10,431
 
 
10,431
 
 
—
 
 
—
 
 
International equity funds
1,754
 
 
1,754
 
 
—
 
 
—
 
 
Fixed income
613
 
 
613
 
 
—
 
 
—
 
 
Total assets at fair value
$
23,689
 
 
$
12,798
 
 
$
—
 
 
$
10,891
 
 
 
 
 
Fair Value Measurements Using Inputs Considered As
(In thousands)
Fair Value at August 28, 2010
Level 1
Quoted Prices in Active Markets for Identical Assets
Level 2
Significant Other Observable Inputs
Level 3
Significant Unobservable Inputs
Long-term investments
 
 
 
 
 
 
 
 
Student loan ARS
$
17,785
 
 
$
—
 
 
$
—
 
 
$
17,785
 
 
Assets that fund deferred compensation
 
 
 
 
 
 
 
 
Domestic equity funds
8,735
 
 
8,735
 
 
—
 
 
—
 
 
International equity funds
1,569
 
 
1,569
 
 
—
 
 
—
 
 
Fixed income
650
 
 
650
 
 
—
 
 
—
 
 
Total assets at fair value
$
28,739
 
 
$
10,954
 
 
$
—
 
 
$
17,785
 
 
 
The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis, in the table above, that used significant unobservable inputs (Level 3):
 
Quarter Ended
 
Six Months Ended
(In thousands)
February 26,
2011
 
February 27,
2010
 
February 26, 2011
 
February 27, 2010
Balance at beginning of period
$
11,146
 
 
$
33,306
 
 
$
17,785
 
 
$
33,294
 
Transfer to Level 2
—
 
 
—
 
 
(5,250
)
 
(200
)
Net change included in other comprehensive income
(255
)
 
(58
)
 
(444
)
 
154
 
Sales
—
 
 
(4,500
)
 
(1,200
)
 
(4,500
)
Balance at end of period
$
10,891
 
 
$
28,748
 
 
$
10,891
 
 
$
28,748
 
 
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
 
Long-Term Investments
Our long-term investments are comprised of auction rate securities (ARS). Our ARS related investments (as described in Note 5) are classified as Level 3 as quoted prices were unavailable due to events described in Note 5. Due to limited market information, we utilized a discounted cash flow (DCF) model to derive an estimate of fair value at February 26, 2011. The assumptions used in preparing the DCF model included estimates with respect to the amount and timing of future interest and principal payments, forward projections of the interest rate benchmarks, the probability of full repayment of the principal considering the credit quality and guarantees in place and the rate of return required by investors to own such securities given the current liquidity risk associated with ARS.
 
Assets that Fund Deferred Compensation
Our assets that fund deferred compensation are primarily marketable equity securities and are measured at fair value using quoted market prices and primarily consist of equity-based mutual funds. They are classified as Level 1 as they are traded in an active market for which closing stock prices are readily available. These securities fund the Executive Share Option Plan, a deferred compensation program, and are presented as other assets in the accompanying balance sheets.
 
 
 

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Note 5: Investments 
 
We own investments in marketable securities that have been designated as "available for sale" in accordance with ASC 320, Investments-Debt and Equity Securities. Available for sale securities are carried at fair value with the unrealized gains and losses reported in "Accumulated Other Comprehensive Income", a component of stockholders' equity.
 
At February 26, 2011, we held $11.4 million (par value) of long-term investments comprised of tax-exempt ARS, which are variable-rate debt securities and have a long-term maturity with the interest rate being reset through Dutch auctions that are typically held every 7, 28 or 35 days. Prior to February 2008, these securities traded at par and are callable at par at the option of the issuer. Interest is typically paid at the end of each auction period or semiannually. The ARS we hold are AAA/Aaa rated with most collateralized by student loans guaranteed by the U.S. Government under the Federal Family Education Loan Program.
 
Since February 2008, most ARS auctions have failed and there is no assurance that future auctions will succeed and, as a result, our ability to liquidate our investment and fully recover the par value in the near term may be limited or nonexistent. We have no reason to believe that any of the underlying issuers of our ARS are presently at risk of payment default. We have continued to receive interest payments on the ARS in accordance with their terms. We believe we will ultimately be able to liquidate our ARS related investments without significant loss primarily due to the collateral securing our ARS. However, redemption could take until final maturity of the ARS (up to 30 years) to realize the par value of our investments. Due to the changes and uncertainty in the ARS market, we believe the recovery period for these investments is likely to be longer than 12 months and as a result, we have classified these investments as long-term as of February 26, 2011.
 
At February 26, 2011, there was insufficient observable ARS market information available to determine the fair value of our long-term ARS investments. Therefore, we estimated fair value by incorporating assumptions that market participants would use in their estimates of fair value. Some of these assumptions included credit quality, final stated maturities, estimates on the probability of the issue being called prior to final maturity, impact due to extended periods of maximum auction rates and broker quotes from independent evaluators. Based on this analysis, we recorded a temporary impairment of $509,000 related to our long-term ARS investments of $11.4 million (par value).
 
Note 6: Inventories 
 
Inventories consist of the following:
(In thousands)
February 26,
2011
 
August 28,
2010
Finished goods
$
39,722
 
 
$
21,200
 
Work-in-process
28,290
 
 
24,897
 
Raw materials
33,989
 
 
26,992
 
Total
102,001
 
 
73,089
 
LIFO reserve
(30,346
)
 
(29,563
)
Total inventories
$
71,655
 
 
$
43,526
 
 
Of the $102.0 million inventory at February 26, 2011, $96.9 million is valued on a last-in, first-out (LIFO) basis and WT inventory of $5.1 million is valued on a first-in, first-out (FIFO) basis.
 
Note 7: Property, Plant and Equipment and Assets Held for Sale 
 
Property, plant and equipment is stated at cost, net of accumulated depreciation and consists of the following:
(In thousands)
February 26,
2011
 
August 28,
2010
Land
$
772
 
 
$
772
 
Buildings
49,325
 
 
49,309
 
Machinery and equipment
90,176
 
 
89,304
 
Transportation equipment
8,920
 
 
9,109
 
 
149,193
 
 
148,494
 
Less accumulated depreciation
(124,766
)
 
(122,817
)
Total property, plant and equipment, net
$
24,427
 
 
$
25,677
 
 
During the first quarter of Fiscal 2011, an idled assembly facility in Charles City, Iowa (CCMF) classified as held for sale, was sold to CGS TIRES US, INC. (CGS). The sale was finalized on November 1, 2010 and generated $4.0 million in gross proceeds, selling costs of $256,000 and a gain of $644,000.
 
Assets held for sale as of February 26, 2011 of $1.2 million consisted of an idled fiberglass manufacturing facility in Hampton, Iowa.
 

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Note 8: Goodwill and Other Intangible Assets 
 
Goodwill and other intangible assets consist of the following:
 
February 26, 2011
 
August 28, 2010
(In thousands)
Cost
Accumulated Amortization
 
Cost
Accumulated Amortization
Goodwill
$
1,228
 
$
—
 
 
$
—
 
$
—
 
Dealer network
534
 
7
 
 
—
 
—
 
Trademarks
196
 
3
 
 
—
 
—
 
Non-compete agreement
40
 
1
 
 
—
 
—
 
Total
$
1,998
 
$
11
 
 
$
—
 
$
—
 
 
Goodwill and other intangible assets are the result of the acquisition of SunnyBrook RV, Inc. during the second quarter of Fiscal 2011, as more fully described in Note 3. Goodwill is not subject to amortization. Amortizable intangible assets are amortized on a straight-line basis. The weighted average remaining amortization period at February 26, 2011 is 9.7 years.
 
Goodwill is reviewed for impairment annually or whenever events or circumstances indicate a potential impairment. Intangible assets are also subject to impairment tests whenever events or circumstances indicate that the asset's carrying value may exceed its estimated fair value, at which time an impairment would be recorded.
 
Estimated amortization expense of intangible assets for the next five years is as follows:
(In thousands)
Amount
Year Ended:
2011
$
51
 
 
2012
79
 
 
2013
79
 
 
2014
79
 
 
2015
79
 
 
Note 9: Credit Facility 
 
On October 13, 2009, we entered into a Loan and Security Agreement (the "Loan Agreement") with Burdale Capital Finance, Inc., as Agent. The Loan Agreement provides for an initial $20.0 million revolving credit facility, based on eligible accounts receivable and eligible inventory, expiring on October 13, 2012, unless terminated earlier in accordance with its terms. The Loan Agreement contains no financial covenant restrictions for borrowings up to $12.5 million; provided that borrowings cannot exceed the Asset Coverage Amount (as defined in the Loan Agreement) divided by 2.25. The Loan Agreement also includes a framework to expand the size of the facility up to $50.0 million, based on mutually agreeable covenants to be determined at the time of expansion. No borrowings have been made under the Loan Agreement as of the date of this report.
 
Interest on loans made under the Loan Agreement will be based on the greater of LIBOR or a base rate of 2.0 percent plus a margin of 4.0 percent or the greater of prime rate or 4.25 percent plus a margin of 3.0 percent. The unused line fee associated with this Loan Agreement is 1.25 percent per annum. Additionally, under certain circumstances, we will be required to pay an early termination fee of 2 percent of the maximum credit available under the Loan Agreement if we terminate the Loan Agreement prior to October 13, 2011, and 1 percent thereafter until the expiration date of October 13, 2012.
 
Note 10: Warranty 
 
We provide a comprehensive 12-month/15,000-mile warranty on Class A, Class B and Class C motor homes and a 12-month warranty on our towables at the time of retail sale of our products. We also provide a 3-year/36,000-mile structural warranty on Class A and Class C sidewalls and floors. We have also incurred costs for certain warranty-type expenses which occurred after the normal warranty period. We have voluntarily agreed to pay such costs to help protect the reputation of our products and the goodwill of our customers. We record our warranty liabilities based on our estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. We also incur costs as a result of additional service actions not covered by our warranties, including product recalls and customer satisfaction actions.
 
 
 
 
 
 
 
 

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Changes in our product warranty liability are as follows:
 
Quarter Ended
 
Six Months Ended
(In thousands)
February 26,
2011
 
February 27,
2010
 
February 26,
2011
 
February 27,
2010
Balance at beginning of period
$
7,607
 
 
$
6,180
 
 
$
7,634
 
 
$
6,408
 
Provision
1,347
 
 
1,352
 
 
2,817
 
 
2,481
 
Claims paid
(886
)
 
(965
)
 
(2,383
)
 
(2,322
)
Balance at end of period
$
8,068
 
 
$
6,567
 
 
$
8,068
 
 
$
6,567
 
 
Note 11: Employee and Retiree Benefits 
 
Postretirement health care and deferred compensation benefits are as follows:
(In thousands)
February 26,
2011
 
August 28,
2010
Postretirement health care benefit cost
$
40,979
 
 
$
40,327
 
Non-qualified deferred compensation
25,004
 
 
25,372
 
Executive share option plan liability
10,599
 
 
8,698
 
SERP benefit liability
3,209
 
 
3,107
 
Executive deferred compensation
88
 
 
74
 
Total postretirement health care and deferred compensation benefits
79,879
 
 
77,578
 
Less current portion
(4,039
)
 
(3,997
)
Long-term postretirement health care and deferred compensation benefits
$
75,840
 
 
$
73,581
 
 
Postretirement Health Care Benefits
We provide certain health care and other benefits for retired employees hired before April 1, 2001, who have fulfilled eligibility requirements of age 55 with 15 years of continuous service. Retirees are required to pay a monthly premium for medical coverage based on years of service at retirement and then current age. Our postretirement health care plan currently is not funded. We use a September 1 measurement date for this plan. Net periodic postretirement benefit income consisted of the following components:
 
Quarter Ended
 
Six Months Ended
(In thousands)
February 26,
2011
 
February 27,
2010
 
February 26,
2011
 
February 27,
2010
Interest cost
$
477
 
 
$
494
 
 
$
953
 
 
$
988
 
Service cost
152
 
 
139
 
 
304
 
 
278
 
Net amortization and deferral
(776
)
 
(831
)
 
(1,552
)
 
(1,662
)
Net periodic postretirement benefit income
$
(147
)
 
$
(198
)
 
$
(295
)
 
$
(396
)
 
 
 
 
 
 
 
 
Payments for postretirement health care
$
299
 
 
$
278
 
 
$
605
 
 
$
461
 
 
For accounting purposes, we recognized income from the plan for the second quarter and the six months of both Fiscal 2011 and Fiscal 2010 due to the amortization of the cost savings from an amendment effective September 2004, which amended our postretirement health care benefit by establishing a maximum employer contribution amount.
 
Note 12: Contingent Liabilities and Commitments 
 
Repurchase Commitments
Generally, companies in the RV industry enter into repurchase agreements with lending institutions which have provided wholesale floorplan financing to dealers. Most dealers' RV's are financed on a "floorplan" basis under which a bank or finance company lends the dealer all, or substantially all, of the purchase price, collateralized by a security interest in the recreational vehicle purchased.
 
Our repurchase agreements provide that, in the event of default by the dealer on the agreement to pay the lending institution, we will repurchase the financed merchandise. The terms of these agreements, which can last up to 18 months, provide that our liability will be the lesser of remaining principal owed by the dealer or dealer invoice less periodic reductions based on the time since the date of the original invoice. Our liability cannot exceed 100 percent of the dealer invoice. Our contingent liability on these repurchase agreements was approximately $164.0 million and $155.5 million at February 26, 2011 and August 28, 2010, respectively.
 
In certain instances, we also repurchase inventory from our dealers due to state law or regulatory requirements that govern voluntary or involuntary relationship terminations. Although laws vary from state to state, some states have laws in place that require manufacturers of motor vehicles to repurchase current inventory if a dealership exits the business. Incremental repurchase exposure beyond existing repurchase agreements, related to dealer inventory in states that we have had historical experience of repurchasing inventory, totaled $8.2 million and $4.5 million at February 26, 2011 and August 28, 2010, respectively.

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Our risk of loss related to these repurchase commitments is reduced by the potential resale value of any products that are subject to repurchase and is spread over numerous dealers and lenders. The aggregate contingent liability related to our repurchase agreements represents all financed dealer inventory at the period reporting date subject to a repurchase agreement, net of the greater of periodic reductions per the agreement or dealer principal payments. Based on the repurchase exposure as previously described, we established an associated loss reserve. Accrued loss on repurchases were $981,000 as of February 26, 2011 and $1.4 million as of August 28, 2010.
 
A summary of repurchase activity is as follows:
 
Quarter Ended
 
Six Months Ended
(Dollars in thousands)
February 26,
2011
 
February 27,
2010
 
February 26,
2011
 
February 27,
2010
Inventory repurchased
 
 
 
 
 
 
 
Units
4
 
 
1
 
 
5
 
 
3
 
Dollars
$
84
 
 
$
61
 
 
$
150
 
 
$
220
 
Inventory resold
 
 
 
 
 
 
 
Units
4
 
 
2
 
 
5
 
 
4
 
Cash collected
$
65
 
 
$
106
 
 
$
126
 
 
$
252
 
Loss recognized
$
19
 
 
$
25
 
 
$
25
 
 
$
41
 
 
Litigation
We are involved in various legal proceedings which are ordinary routine litigation incidental to our business, some of which are covered in whole or in part by insurance. While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to this litigation, we believe that while the final resolution of any such litigation may have an impact on our results for a particular reporting period, the ultimate disposition of such litigation will not have any material adverse effect on our financial position, results of operations or liquidity.
 
Note 13: Income Taxes 
 
We account for income taxes under ASC Topic 740, Income Taxes, (ASC 740). The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns.
 
Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. Valuation allowances arise due to uncertainty of realizing deferred tax assets. As of February 26, 2011 and August 28, 2010, we have applied a full valuation allowance of $40.6 million and $41.8 million, respectively, against our deferred tax assets. ASC 740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence, using a “more-likely-than-not” standard. In making such assessments, significant weight is given to evidence that can be objectively verified. A company's current or previous losses are given more weight than its future outlook. Under that standard, our three-year historical cumulative loss was a significant negative factor. We have evaluated the sustainability of our deferred tax assets on our balance sheet which includes the assessment of cumulative income or losses over recent prior periods. Based on ASC 740 guidelines, we determined a full valuation allowance was appropriate as of February 26, 2011. We will continue to assess the likelihood that our deferred tax assets will be realizable at each reporting period and our valuation allowance will be adjusted accordingly, which could materially impact our financial position and results of operations.
 
We file tax returns in the U.S. federal jurisdiction, as well as various international and state jurisdictions. Our federal tax returns have been audited by the Internal Revenue Service (IRS) through Fiscal 2008. Our Fiscal 2009 federal income tax return is currently under examination by the IRS. Although certain years are no longer subject to examinations by the IRS and various state taxing authorities, net operating loss (NOL) carryforwards generated in those years may still be adjusted upon examination by the IRS or state taxing authorities if they either have been or will be used in a future period. A number of years may elapse before an uncertain tax position is audited and finally resolved, and it is often very difficult to predict the outcome of such audits. Periodically, various state and local jurisdictions conduct audits, therefore, a variety of years are subject to state and local jurisdiction review.
 
As of February 26, 2011, our unrecognized tax benefits were $5.6 million, all of which, if recognized, would positively affect our effective tax rate as all of the deferred tax assets associated with these positions have a full valuation allowance established against them. It is our policy to recognize interest and penalties accrued relative to unrecognized tax benefits as tax expense. As of February 26, 2011, we had accrued $2.5 million in interest and penalties. We do not anticipate any significant changes in unrecognized tax benefits within the next twelve months. Actual results may differ materially from this estimate.
 
 
 
 

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Table of Contents

Note 14: Income Per Share 
 
The following table reflects the calculation of basic and diluted income per share:
 
Quarter Ended
 
Six Months Ended
(In thousands, except per share data)
February 26,
2011
 
February 27,
2010
 
February 26,
2011
 
February 27,
2010
Income (loss) per share - basic:
 
 
 
 
 
 
 
  Net income (loss)
$
3,315
 
 
$
706
 
 
$
7,101
 
 
$
(638
)
  Weighted average shares outstanding
29,118
 
 
29,080
 
 
29,115
 
 
29,077
 
  Net income (loss) per share - basic
$
0.11
 
 
$
0.02
 
 
$
0.24
 
 
$
(0.02
)
 
 
 
 
 
 
 
 
Income (loss) per share - assuming dilution:
 
 
 
 
 
 
 
  Net income (loss)
$
3,315
 
 
$
706
 
 
$
7,101
 
 
$
(638
)
  Weighted average shares outstanding
29,118
 
 
29,080
 
 
29,115
 
 
29,077
 
  Dilutive impact of options and awards outstanding
2
 
 
11
 
 
3
 
 
11
 
  Weighted average shares and potential dilutive shares outstanding
29,120
 
 
29,091
 
 
29,118
 
 
29,088
 
  Net income (loss) per share - assuming dilution
$
0.11
 
 
$
0.02
 
 
$
0.24
 
 
$
(0.02
)
 
At the end of the second quarters of Fiscal 2011 and Fiscal 2010, there were options outstanding to purchase 923,731 shares and 951,615 shares, respectively, of common stock at an average price of $28.07 and $28.18, respectively, which were not included in the computation of diluted income per share because they are considered anti-dilutive under the treasury stock method per ASC 260.
 
Note 15: Comprehensive Income 
 
Comprehensive income, net of tax, consists of:
 
Quarter Ended
 
Six Months Ended
(In thousands)
February 26,
2011
 
February 27,
2010
 
February 26,
2011
 
February 27,
2010
Net income (loss)
$
3,315
 
 
$
706
 
 
$
7,101
 
 
$
(638
)
Amortization of prior service credit
(655
)
 
(652
)
 
(1,310
)
 
(1,304
)
Amortization of actuarial loss
171
 
 
137
 
 
343
 
 
274
 
Unrealized (depreciation) appreciation of investments
(159
)
 
(36
)
 
(276
)
 
97
 
Comprehensive income (loss)
$
2,672
 
 
$
155
 
 
$
5,858
 
 
$
(1,571
)
 
Note 16: Subsequent Event 
 
The Human Resources Committee of the Board of Directors of Winnebago Industries, Inc. recommended the award of, and on March 23, 2011, the full Board of Directors approved the award of, grants of 137,000 shares of our restricted common stock under the Winnebago Industries, Inc. 2004 Incentive Compensation Plan, as amended, to our key management group (approximately 60 employees). No restricted stock awards had been granted to key management since October 2007. The Board of Directors also granted 14,000 shares of our restricted common stock to the non-management members of the Board.
 
The value of the restricted stock is based on the closing price of our common stock on the date of grant, which was $13.49. The fair value of this award to employees is amortized on a straight-line basis over the requisite service period of three years or to an employee's eligible retirement date, if earlier; thus restricted stock awards are expensed immediately upon grant for retirement-eligible employees. Estimated non-cash stock compensation expense based on the restricted stock grants for the third quarter ending May 28, 2011 will be approximately $1.0 million and for the fourth quarter ending August 27, 2011 will be approximately$250,000.
 
We evaluated all other events or transactions occurring between the balance sheet date and the date of issuance of the financial statements that would require recognition or disclosure in the financial statements. There were no additional material subsequent events.
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 
 
It is suggested that this management's discussion be read in conjunction with the financial statements contained in this Form 10-Q as well as the Management's Discussion and Analysis and Risk Factors included in our Annual Report to Shareholders for the year ended August 28, 2010.
 
 
 

10
Table of Contents

Forward-Looking Information
 
Certain of the matters discussed in this Quarterly Report on Form 10-Q are “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. A number of factors could cause actual results to differ materially from these statements, including, but not limited to, interest rates and availability of credit, low consumer confidence, significant increase in repurchase obligations, inadequate liquidity or capital resources, availability and price of fuel, a further or continued 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, the effect of global tensions, integration of operations relating to mergers and acquisitions activities and other factors. Although we believe that the expectations reflected in the “forward-looking statements” are reasonable, we cannot guarantee future results, or 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. We undertake 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.
 
Executive Overview
 
Winnebago Industries, Inc. is a leading U.S. manufacturer of motor homes with a proud history of manufacturing recreation vehicles for more than 50 years. Our strategy is to manufacture quality motor homes in a profitable manner. We produce all of our motor homes in highly vertically integrated manufacturing facilities in the state of Iowa. We distribute our products through independent dealers throughout the United States and Canada, who then retail the products to the end consumer. We have led the industry with the highest market share in the U.S. of Class A and Class C motor homes combined for the past ten calendar years ending in 2010 according to the most recent Statistical Surveys, Inc. (Statistical Surveys) reporting. We held the number three retail market share position in Canada for calendar 2010, which is approximately 15 percent of the U.S. market. Our retail unit market share, as reported by Statistical Surveys, is as follows:
 
Month Ended
 
 
 
 
 
 
 
 
January 31,
 
Calendar Year
U.S. Retail:
2011
 
 
2010
 
 
2010
2009
2008
Class A gas
25.5
%
 
27.5
%
 
23.7
%
 
22.9
%
 
23.2
%
 
Class A diesel
16.0
%
 
11.6
%
 
15.2
%
 
11.4
%
 
8.1
%
 
Total Class A
20.8
%
 
18.2
%
 
19.5
%
 
16.6
%
 
15.3
%
 
Class C
19.5
%
 
16.1
%
 
17.9
%
 
22.7
%
 
22.8
%
 
Total Class A and C
20.3
%
 
17.5
%
 
18.8
%
 
19.1
%
 
18.3
%
 
 
 
 
 
 
 
 
 
 
 
 
Class B
—
%
 
17.3
%
 
15.9
%
 
18.1
%
 
3.5
%
 
 
 
Month Ended
 
 
 
 
 
 
 
 
January 31,
 
Calendar Year
Canadian Retail:
2011
 
 
2010
 
 
2010
2009
2008
Class A gas
15.8
%
 
14.3
%
 
14.9
%
 
13.8
%
 
18.4
%
 
Class A diesel
15.0
%
 
5.0
%
 
9.9
%
 
7.0
%
 
5.3
%
 
Total Class A
15.4
%
 
8.8
%
 
12.6
%
 
10.0
%
 
12.4
%
 
Class C
8.0
%
 
10.0
%
 
13.8
%
 
9.5
%
 
19.5
%
 
Total Class A and C
12.5
%
 
9.3
%
 
13.2
%
 
9.8
%
 
15.7
%
 
 
We have seen significant improvement in Fiscal 2011 in our operating performance. Our increased volume has allowed for greater absorption of our fixed costs and improved labor efficiencies, which had a favorable effect on our profit margins. Our average selling price has also increased 10.3 percent due to a stronger mix of higher priced product sold, which has also positively impacted our margins. With dealer inventories at what we believe are reasonable levels for the past few quarters and the aging of our dealer inventory improved as compared to last year, we were able to reduce the level of discounting and retail programs offered, which also had a positive effect on our margins. For the first six months of Fiscal 2011 compared to the same period in Fiscal 2010, our retail registrations are up nearly 20 percent and they were up nearly 22 percent in the second quarter of Fiscal 2011 compared to the same period in Fiscal 2010, which is a very encouraging trend.
 
 
 
 
 
 
 
 

11
Table of Contents

Certain key metrics for our Class A, B and C motor homes are provided in the table below:
 
 
 
 
 
As of Quarter End
(In units and presented in fiscal quarters, except as noted below)
Wholesale Deliveries
 
Retail Registrations
 
Dealer Inventory
 
Order Backlog
3rd Quarter 2009
620
 
 
1,214
 
 
2,324
 
 
382
 
4th Quarter 2009
605
 
 
1,235
 
 
1,694
 
 
940
 
1st Quarter 2010
794
 
 
921
 
 
1,567
 
 
1,521
 
2nd Quarter 2010
1,109
 
 
654
 
 
2,022
 
 
1,159
 
Rolling 12 months (Mar 2009 through Feb 2010)
3,128
 
 
4,024
 
 
 
 
 
 
 
 
 
 
 
 
 
3rd Quarter 2010
1,366
 
 
1,388
 
 
2,000
 
 
935
 
4th Quarter 2010
1,164
 
 
1,120
 
 
2,044
 
 
818
 
1st Quarter 2011
1,115
 
 
1,093
 
 
2,066
 
 
698
 
2nd Quarter 2011
909
 
 
796
 
 
2,179
 
 
957
 
Rolling 12 months (Mar 2010 through Feb 2011)
4,554
 
 
4,397
 
 
 
 
 
 
 
 
 
 
 
 
 
Key comparison increases (decreases):
Wholesale
Deliveries
 
Retail
Registrations
 
Dealer
Inventory
 
Order
Backlog
Rolling 12 month comparison (period ended Feb 2011 to period ended Feb 2010)
1,426
 
 
373
 
 
NA
 
 
NA
 
 
45.6
 %
 
9.3
 %
 
NA
 
 
NA
 
2nd quarter Fiscal 2011 as compared to 2nd quarter Fiscal 2010
(200
)
 
142
 
 
157
 
 
(202
)
 
(18.0
)%
 
21.7
 %
 
7.8
%
 
(17.4
)%
2nd quarter Fiscal 2011 as compared to 1st quarter Fiscal 2011
(206
)
 
(297
)
 
113
 
 
259
 
 
(18.5
)%
 
(27.2
)%
 
5.5
%
 
37.1
 %
 
On December 29, 2010, through a newly formed, wholly-owned subsidiary, Winnebago of Indiana, LLC, we purchased substantially all of the assets of SunnyBrook RV, Inc. ("SunnyBrook"), a manufacturer of travel trailer and fifth wheel recreation vehicles located in Middlebury, Indiana. The aggregate consideration paid was $5.6 million in cash including the repayment of $3.3 million of SunnyBrook commercial and shareholder debt on the transaction date. SunnyBrook operates as a wholly-owned subsidiary known as Winnebago Industries Towables ("WT") and will continue to manufacture products under the SunnyBrook brands consisting of Harmony, Brookside, Bristol Bay, Edgewater and Sunset Creek travel trailers and Harmony, Brookside, Bristol Bay, West Pointe, Big Dog and Titan fifth wheel trailers. In addition, WT plans to diversify the product line to include Winnebago brand trailer and fifth wheel products. See Note 3 for additional information on the acquisition.
 
Industry Outlook
 
The motorized RV market was significantly impacted by highly unstable market conditions in recent years. The tightening of the wholesale and retail credit markets, low consumer confidence, the effect of the global recession and uncertainty related to fuel prices placed enormous pressure on retail sales and as a result, dealers significantly reduced their inventory levels. Industry motor home wholesale shipments in the 20 years prior to Calendar 2008 averaged 58,000 units per year, similar to retail demand. In Calendar 2008, shipments dropped 49 percent to 28,300, the lowest deliveries on record since 1971 and then shipments dropped an additional 53 percent in Calendar 2009 to an unprecedented level of 13,200. Retail registrations fell during this same time frame, but not to the same magnitude, resulting in a significant reduction of dealer inventory levels.
 
Industry shipments improved dramatically in Calendar 2010 as compared to the prior year and only slightly outpaced retail demand as dealers restocked in the early part of the year. We attribute the recovery to the improvement in wholesale and retail credit availability and also a result of dealer inventory levels reaching equilibrium with retail demand. RVIA has forecasted that shipments in Calendar 2011 will increase by 6 percent to 26,900 units.
 

12
Table of Contents

Key statistics (including forecasted information) for the motor home industry are as follows:
 
US and Canada Industry Class A, B & C Motor Homes
 
Wholesale Shipments(1)
 
Retail Registrations(2)
 
Calendar Year
 
Calendar Year
(In units)
2010
 
 
2009
 
 
Increase
 
Change
 
2010
 
 
2009
 
 
Increase
 
Change
First quarter
5,700
 
 
2,400
 
 
3,300
 
 
137.5
%
 
4,900
 
 
4,800
 
 
100
 
 
2.1
 %
Second quarter
7,800
 
 
3,200
 
 
4,600
 
 
143.8
%
 
8,300
 
 
7,100
 
 
1,200
 
 
16.9
 %
Third quarter
6,200
 
 
3,300
 
 
2,900
 
 
87.9
%
 
6,000
 
 
5,800
 
 
200
 
 
3.4
 %
Fourth quarter
5,600
 
 
4,300
 
 
1,300
 
 
30.2
%
 
4,500
 
 
4,200
 
 
300
 
 
7.1
 %
Total
25,300
 
 
13,200
 
 
12,100
 
 
91.7
%
 
23,700
 
 
21,900
 
 
1,800
 
 
8.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In units)
2011
 
 
2010
 
 
Increase
 
Change
 
2011
 
 
2010
 
 
(Decrease)
 
Change
January
2,000
 
 
1,500
 
 
500
 
 
33.3
%
 
1,200
 
(4)
1,200
 
 
—
 
 
—
 %
February
2,100
 
 
2,000
 
 
100
 
 
5.0
%
 
 
 
1,600
 
 
(1,600
)
 
(100.0
)%
March - December
22,800
 
(3)
21,800
 
 
1,000
 
 
4.6
%
 
 
 
20,900
 
 
(20,900
)
 
(100.0
)%
Total
26,900
 
(3)
25,300
 
 
1,600
 
 
6.3
%
 
 
 
23,700
 
 
 
 
 
(1)    
Class A, B and C wholesale shipments as reported by RVIA, rounded to the nearest hundred.
(2)    
Class A, B and C U.S. retail registrations as reported by Statistical Surveys for the US and Canada combined, rounded to the nearest hundred.
(3)    
Based upon forecasted 2011 Class A, B and C wholesale shipments as reported by RVIA in the Spring 2011 issue of Roadsigns.
(4)    
Retail registrations for January 2011 as reported by Statistical Surveys do not include data for Maine and Minnesota. Statistical Surveys has not issued a projection for 2011 retail demand.
 
In the towable market, travel trailer and fifth wheel 2011 shipments are projected by RVIA to be up 9 percent in 2011 to 217,200 as compared to199,200 shipped in 2010.
 
Company Outlook
 
Due to cost reductions we made in the past few years during the recession, we have been profitable at much lower shipment volumes. This was evident during Fiscal 2010, as we were operationally profitable in the first two quarters of Fiscal 2010 and then profitable on a pre-tax basis in the last two quarters of Fiscal 2010 and our first two quarters of Fiscal 2011. These significantly improved operating results were primarily obtained during calendar year 2010, when industry shipments totaled only 25,300, less than half of the industry's historical shipment level.
 
Based on our results for the past four fiscal quarters, even if industry wholesale shipments in calendar 2011 are similar to 2010, we believe that we have demonstrated our ability to sustain current margins, maintain our liquidity, cover operations cost, recover fixed assets, and maintain physical capacity at present levels.
 
We believe retail sales will be the key driver to sustain our recovery and for continued growth going forward. We also believe that future dealer buying patterns will continue to be primarily based on retail demand, thus dealers are expected to order approximately one new unit as one is retailed. If there is significant growth in retail, then dealers may decide to increase their dealer inventory levels, however; our viewpoint is that dealers post-recession are much more cautious about their level of inventory and are more focused on their retail turn rate than they were as a group pre-recession. We plan to continue to focus on those same metrics, closely reviewing the aging of dealer inventory and retail turns by product series. Consistent with our current practice, we will continue to adjust our weekly production rate up or down based on market demand.

13
Table of Contents

Our unit order backlog is as follows:
 
As Of
 
February 26, 2011
 
February 27, 2010
 
(Decrease) Increase
 
Units
% (1)
 
Units
% (1)
 
Motor homes:
 
 
 
 
 
 
 
 
Class A gas
253
 
26.4
%
 
372
 
32.1
%
 
(119
)
(32.0
)%
Class A diesel
157
 
16.4
%
 
263
 
22.7
%
 
(106
)
(40.3
)%
Total Class A
410
 
42.8
%
 
635
 
54.8
%
 
(225
)
(35.4
)%
Class B
82
 
8.6
%
 
16
 
1.4
%
 
66
 
412.5
 %
Class C
465
 
48.6
%
 
508
 
43.8
%
 
(43
)
(8.5
)%
Total backlog
957
 
100.0
%
 
1,159
 
100.0
%
 
(202
)
(17.4
)%
 
 
 
 
 
 
 
 
 
Backlog approximate revenue dollars (in thousands) (2)
$
92,782
 
 
 
$110,916
 
 
$
(18,134
)
(16.3
)%
 
 
 
 
 
 
 
 
 
Towables:
 
 
 
 
 
 
 
 
Fifth wheel
87
 
57.6
%
 
—
 
—
 
 
87
 
100.0
 %
Travel trailer
64
 
42.4
%
 
—
 
—
 
 
64
 
100.0
 %
Total backlog
151
 
100.0
%
 
—
 
—
 
 
151
 
100.0
 %
 
 
 
 
 
 
 
 
 
Backlog approximate revenue dollars (in thousands) (2)
$
3,551
 
 
 
$
—
 
 
 
$
3,551
 
100.0
 %
 
(1)    
Percentages may not add due to rounding differences.
(2)    
We include in our backlog all accepted purchase orders from dealers to be shipped 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.
 
Results of Operations
 
Current Quarter Compared to the Comparable Quarter Last Year
 
The following is an analysis of changes in key items included in the consolidated statements of operations:
 
Quarter Ended
(In thousands, except percent
and per share data)
February 26,
2011
% of
Revenues*
 
February 27,
2010
% of
Revenues*
 
(Decrease)
Increase
%
Change
Net revenues
$
106,593
 
100.0
%
 
$
110,529
 
100.0
 %
 
$
(3,936
)
(3.6
)%
Cost of goods sold
95,269
 
89.4
%
 
105,745
 
95.7
 %
 
(10,476
)
(9.9
)%
Gross profit
11,324
 
10.6
%
 
4,784
 
4.3
 %
 
6,540
 
136.7
 %
Selling
3,254
 
3.1
%
 
3,102
 
2.8
 %
 
152
 
4.9
 %
General and administrative
4,020
 
3.8
%
 
3,540
 
3.2
 %
 
480
 
13.6
 %
Total operating expenses
7,274
 
6.8
%
 
6,642
 
6.0
 %
 
632
 
9.5
 %
Operating income (loss)
4,050
 
3.8
%
 
(1,858
)
(1.7
)%
 
5,908
 
318.0
 %
Other non-operating income
322
 
0.3
%
 
364
 
0.3
 %
 
(42
)
(11.5
)%
Income (loss) before income taxes
4,372
 
4.1
%
 
(1,494
)
(1.4
)%
 
5,866
 
392.6
 %
Provision (benefit) for taxes
1,057
 
1.0
%
 
(2,200
)
(2.0
)%
 
3,257
 
148.0
 %
Net income
$
3,315
 
3.1
%
 
$
706
 
0.6
 %
 
$
2,609
 
369.5
 %
 
 
 
 
 
 
 
 
 
Diluted income per share
$
0.11
 
 
 
$
0.02
 
 
 
$
0.09
 
450.0
 %
Fully diluted average shares outstanding
29,120
 
 
 
29,091
 
 
 
 
 
* Percentages may not add due to rounding differences.
 
 
 
 
 
 
 

14
Table of Contents

Unit deliveries and average sales price (ASP), net of discounts, consisted of the following:
 
Quarter Ended
(In units)
February 26,
2011
Product
Mix*
 
February 27,
2010
Product
Mix*
 
(Decrease)
Increase
%
Change
Motor homes:
 
 
 
 
 
 
 
 
Class A gas
331
 
36.4
%
 
378
 
34.1
%
 
(47
)
(12.4
)%
Class A diesel
218
 
24.0
%
 
254
 
22.9
%
 
(36
)
(14.2
)%
Total Class A
549
 
60.4
%
 
632
 
57.0
%
 
(83
)
(13.1
)%
Class B
—
 
—
%
 
64
 
5.8
%
 
(64
)
(100.0
)%
Class C
360
 
39.6
%
 
413
 
37.2
%
 
(53
)
(12.8
)%
Total deliveries
909
 
100.0
%
 
1,109
 
100.0
%
 
(200
)
(18.0
)%
 
 
 
 
 
 
 
 
 
ASP (in thousands)
$
107
 
 
 
$
96
 
 
 
$
11
 
12.1
 %
 
 
 
 
 
 
 
Towables:
 
 
 
 
 
 
 
 
Fifth wheel
21
 
24.7
%
 
—
 
—
%
 
21
 
100.0
 %
Travel trailer
64
 
75.3
%
 
—
 
—
%
 
64
 
100.0
 %
Total deliveries
85
 
100.0
%
 
—
 
—
%
 
85
 
100.0
 %
 
 
 
 
 
 
 
 
 
ASP (in thousands)
$
21
 
 
 
—
 
 
 
$
21
 
100.0
 %
* Percentages may not add due to rounding differences.
 
 
 
 
 
 
 
Net revenues for the second quarter of Fiscal 2011 decreased $3.9 million, or 3.6 percent, compared to the second quarter of Fiscal 2010, due to a decrease in motor home deliveries of 18.0 percent. The decrease was partially mitigated by the following positive items:
•    
Pricing and mix: Our motor home ASP increased 12.1 percent. This increase was primarily due to a shift to higher-priced product as our sales mix was more heavily weighted to higher-priced Class A product.
•    
Promotional incentives: Our retail and other incentives, which are deductions from gross revenues, decreased 1.0 percent (as a percent of net revenues). In the prior year, we had more retail incentive programs in place to help stimulate retail demand to move aged units at our dealers. Better retail market conditions and improved dealer inventory aging are the key reasons these types of promotional incentives are lower this year.
•    
Non-motor home revenues: with the acquisition of WT, we had revenues of $1.8 million in towable products and parts. Also, revenues for motor home parts and services and other manufactured parts increased 20.7 percent.
 
Cost of products sold was $95.3 million, or 89.4 percent of net revenues for the second quarter of Fiscal 2011 compared to $105.7 million, or 95.7 percent of net revenues for the comparable period a year ago due to the following:
•    
Most notably, cost of goods sold was positively affected by an inventory adjustment as a result of the annual physical work-in-process inventory performed in January 2011. The favorable adjustment was a result of lower actual inventory scrap and production material loss than recent historical experience, which had the effect of increasing gross profit and inventories by $3.5 million. During the past few years, when our production volumes and materials consumed were at their lowest point in our history, we incurred a much higher inventory scrap and production material loss as a percentage of materials consumed and, as a result, estimated that this higher loss percentage would continue. This did not turn out to be the case, as our materials consumed in the past year increased over 90 percent, which resulted in our inventory scrap and production material loss to decrease as a percentage, resulting in this favorable adjustment. We have now lowered our estimated scrap and inventory loss rate to be used prospectively. This adjustment favorably impacted our material, labor, variable overhead and fixed overhead costs as percentage of net revenues.
•    
Our variable costs (material, labor, variable overhead, delivery, and warranty) decreased to 81.5 percent from 86.4 percent as a percent of net revenues, which was primarily a result of the positive results of the work-in-process inventory adjustment in the second quarter of Fiscal 2011, as described above.
•    
Fixed overhead (manufacturing support labor, depreciation and facility costs) and research and development-related costs, decreased to 7.9 percent of net revenue compared to 9.3 percent last year, which was primarily caused by the positive result of the work-in-process inventory adjustment in the second quarter of Fiscal 2011, as described above.
 
Gross profit increased from 4.3 percent of net revenues in the second quarter of Fiscal 2010 compared to 10.6 percent of net revenues in the second quarter of Fiscal 2011. Excluding the effect of the physical inventory adjustment in the second quarter of Fiscal 2011, gross profit would have been 7.4 percent.
 
General and administrative expenses increased $480,000, or 13.6 percent, during the second quarter of Fiscal 2011 and, as a percentage of net revenues were 3.8 percent and 3.2 percent for the second quarters of Fiscal 2011 and Fiscal 2010, respectively. The expense increase was due primarily to an increase in legal expense and also operating expenses associated with WT.
 
The overall effective income tax rate for the second quarter of Fiscal 2011 was 24.2 percent compared to a benefit of 147.3 percent

15
Table of Contents

for the second quarter of Fiscal 2010. Most notably, the tax-exempt interest income in relation to projected pre-tax income and the sale of CCMF had positive impacts on our effective tax rate for the second quarter of Fiscal 2011. The sale of CCMF has a positive effect on our annual effective tax rate of approximately 4.8 percent, as this transaction resulted in a tax loss even though we incurred a gain for accounting purposes. Our tax benefit of 147.3 percent in the second quarter of Fiscal 2010 related to settlements of uncertain tax positions with various taxing jurisdictions and other adjustments to uncertain tax positions, as well as other tax planning initiatives occurring during the quarter.
 
Net income was $3.3 million, or $0.11 per diluted share, for the second quarter of Fiscal 2011, compared to a net income of $706,000, or $0.02 per diluted share, for the second quarter of Fiscal 2010. See Note 14.
 
Six Months Compared to the Comparable Six Months Last Year
 
The following is an analysis of changes in key items included in the consolidated statements of operations:
 
Six Months Ended
(In thousands, except percent
and per share data)
February 26,
2011
% of
Revenues*
 
February 27,
2010
% of
Revenues*
 
Increase
(Decrease)
%
Change
Net revenues
$
230,304
 
100.0
 %
 
$
191,546
 
100.0
 %
 
$
38,758
 
20.2
%
Cost of goods sold
207,781
 
90.2
 %
 
186,238
 
97.2
 %
 
21,543
 
11.6
%
Gross profit
22,523
 
9.8
 %
 
5,308
 
2.8
 %
 
17,215
 
324.3
%
Selling
6,521
 
2.8
 %
 
6,331
 
3.3
 %
 
190
 
3.0
%
General and administrative
7,671
 
3.3
 %
 
6,812
 
3.6
 %
 
859
 
12.6
%
Gain on sale of asset held for sale
(644
)
(0.3
)%
 
—
 
—
 
 
(644
)
NMF
 
Total operating expenses
13,548
 
5.9
 %
 
13,143
 
6.9
 %
 
405
 
3.1
%
Operating income (loss)
8,975
 
3.9
 %
 
(7,835
)
(4.1
)%
 
16,810
 
214.6
%
Other non-operating income
474
 
0.2
 %
 
131
 
0.1
 %
 
343
 
261.8
%
Income (loss) before income taxes
9,449
 
4.1
 %
 
(7,704
)
(4.0
)%
 
17,153
 
222.7
%
Provision (benefit) for taxes
2,348
 
1.0
 %
 
(7,066
)
(3.7
)%
 
9,414
 
133.2
%
Net income (loss)
$
7,101
 
3.1
 %
 
$
(638
)
(0.3
)%
 
$
7,739
 
NMF
 
 
 
 
 
 
 
 
 
 
Diluted income (loss) per share
$
0.24
 
 
 
$
(0.02
)
 
 
$
0.26
 
NMF
 
Fully diluted average shares outstanding
29,118
 
 
 
29,088
 
 
 
 
 
* Percentages may not add due to rounding differences.
 
 
 
 
 
 
 
Unit deliveries and ASP, net of discounts, consisted of the following:
 
Six Months Ended
(In units)
February 26,
2011
Product
Mix*
 
February 27,
2010
Product
Mix*
 
Increase
(Decrease)
%
Change
Motor homes:
 
 
 
 
 
 
 
 
Class A gas
720
 
35.6
%
 
613
 
32.2
%
 
107
 
17.5
 %
Class A diesel
488
 
24.1
%
 
434
 
22.8
%
 
54
 
12.4
 %
Total Class A
1,208
 
59.7
%
 
1,047
 
55.0
%
 
161
 
15.4
 %
Class B
1
 
0.0
%
 
126
 
6.6
%
 
(125
)
(99.2
)%
Class C
815
 
40.3
%
 
730
 
38.4
%
 
85
 
11.6
 %
Total deliveries
2,024
 
100.0
%
 
1,903
 
100.0
%
 
121
 
6.4
 %
 
 
 
 
 
 
 
 
 
ASP (in thousands)
$
105
 
 
 
$
95
 
 
 
$
11
 
10.3
 %
 
 
 
 
 
 
 
Towables:
 
 
 
 
 
 
 
 
Fifth wheel
21
 
24.7
%
 
—
 
—
%
 
21
 
100.0
 %