UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K |
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended August 25, 2012; 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 | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
P.O. Box 152, Forest City, Iowa | 50436 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number, including area code: (641) 585‑3535
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock ($.50 par value) | The New York Stock Exchange, Inc. | |
Chicago Stock Exchange, Inc. | ||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K 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 Act). Yes o No x
Aggregate market value of the common stock held by non-affiliates of the registrant: $265,927,566 (28,170,293 shares at the closing price on the New York Stock Exchange of $9.44 on February 24, 2012).
Common stock outstanding on October 9, 2012: 28,339,894 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the registrant's December 2012 Annual Meeting of Shareholders, scheduled to be held December 18, 2012, are incorporated by reference into Part II and Part III of this Annual Report on Form 10-K where indicated.
1
Winnebago Industries, Inc.
2012 Form 10-K Annual Report
Table of Contents
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
Item 15. | ||
ii
Glossary
The following terms and abbreviations appear in the text of this report and are defined as follows:
ARS | Auction Rate Securities |
ASC | Accounting Standards Codification |
ASP | Average Sales Price |
ASU | Accounting Standards Update |
CCMF | Charles City Manufacturing Facility |
COLI | Company Owned Life Insurance |
DCF | Discounted Cash Flow |
EBITDA | Earnings Before Interest, Tax, Depreciation, and Amortization |
EPS | Earnings Per Share |
FASB | Financial Accounting Standards Board |
FIFO | First In, First Out |
GAAP | Generally Accepted Accounting Principles |
IRS | Internal Revenue Service |
LIBOR | London Interbank Offered Rate |
LIFO | Last In, First Out |
Loan Agreement | Loan and Security Agreement dated October 13, 2009 by and between Winnebago Industries, Inc. and Wells Fargo Bank, National Association, as successor to Burdale Capital Finance, Inc., as Agent |
MVA | Motor Vehicle Act |
NMF | Non-Meaningful Figure |
NOL | Net Operating Loss |
NYSE | New York Stock Exchange |
OEM | Original Equipment Manufacturing |
OSHA | Occupational Safety and Health Administration |
ROE | Return on Equity |
ROIC | Return on Invested Capital |
RV | Recreation Vehicle |
RVIA | Recreation Vehicle Industry Association |
SEC | U.S. Securities and Exchange Commission |
SERP | Supplemental Executive Retirement Plan |
SIR | Self-Insured Retention |
Stat Surveys | Statistical Surveys, Inc. |
SunnyBrook | SunnyBrook RV, Inc. |
Towables | Winnebago of Indiana, LLC, a wholly-owned subsidiary of Winnebago Industries, Inc. |
US | United States of America |
Wells Fargo | Wells Fargo Bank, National Association |
XBRL | eXtensible Business Reporting Language |
iii
WINNEBAGO INDUSTRIES, INC.
FORM 10‑K
Report for the Fiscal Year Ended August 25, 2012
Forward-Looking Information
Certain of the matters discussed in this Annual Report on Form 10-K 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, increases in interest rates, availability of credit, low consumer confidence, significant increase in repurchase obligations, inadequate liquidity or capital resources, availability and price of fuel, a slowdown in the economy, increased material and component costs, 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 which may be disclosed throughout this Annual Report on Form 10-K. Although we believe that the expectations reflected in the "forward-looking statements" are reasonable, we 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. 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 NYSE. We advise you, however, to consult any further disclosures made on related subjects in future quarterly reports on Form 10-Q and current reports on Form 8-K that are filed or furnished with the SEC.
PART I
Item 1. Business
General
The "Company," "Winnebago Industries," "we," "our" and "us" are used interchangeably to refer to Winnebago Industries, Inc. and its subsidiary, Winnebago of Indiana, LLC, as appropriate in the context.
Winnebago Industries, Inc., headquartered in Forest City, Iowa, is a leading United States manufacturer of RVs used primarily in leisure travel and outdoor recreation activities. We sell motor homes through independent dealers under the Winnebago, Itasca and Era brand names.
On December 29, 2010 we purchased substantially all of the assets of SunnyBrook, a manufacturer of travel trailers and fifth wheel RVs. The aggregate consideration paid was $4.7 million, net of cash acquired, including the repayment of $3.3 million of SunnyBrook commercial and shareholder debt on the closing date. Also on December 29, 2010, we entered into a five-year operating lease agreement for the SunnyBrook facilities. The operations of Towables are included in our consolidated operating results from the date of its acquisition. Towables will continue to manufacture products under the SunnyBrook brands. In addition, Towables has begun to diversify its product line by including Winnebago brand trailer and fifth wheel products. The primary reason for the acquisition was diversification outside of the motorized market while utilizing the Winnebago brand strength in the towable market allowing for the potential of revenue and growth.
Other products manufactured by us consist primarily of OEM parts, including extruded aluminum and other component products for other manufacturers and commercial vehicles.
We were incorporated under the laws of the state of Iowa on February 12, 1958, and adopted our present name on February 28, 1961. Our executive offices are located at 605 West Crystal Lake Road in Forest City, Iowa. Our telephone number is (641) 585-3535.
Available Information
Our website, located at www.winnebagoind.com, provides additional information about us. On our website, you can obtain, free of charge, this and prior year Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all of our other filings with the SEC. Our recent press releases are also available on our website. Our website also contains important information regarding our corporate governance practices. Information contained on our website is not incorporated into this Annual Report on Form 10-K. You may also read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website that contains reports, proxy statements and other information that is filed electronically with the SEC. The website can be accessed at www.sec.gov.
1
Principal Products
Net revenues by major product classes were as follows:
Year Ended (1) | |||||||||||||||||||||||||||||
(In thousands) | August 25, 2012 | August 27, 2011 | August 28, 2010 | August 29, 2009 | August 30, 2008 | ||||||||||||||||||||||||
Motor homes (2) | $ | 483,532 | 83.1 | % | $ | 443,232 | 89.3 | % | $ | 415,277 | 92.4 | % | $ | 178,619 | 84.5 | % | $ | 555,671 | 91.9 | % | |||||||||
Towables (3) | 56,784 | 9.8 | % | 16,712 | 3.4 | % | — | — | % | — | — | % | — | — | % | ||||||||||||||
Motor home parts and services | 12,661 | 2.2 | % | 13,105 | 2.6 | % | 13,655 | 3 | % | 12,559 | 5.9 | % | 16,923 | 2.8 | % | ||||||||||||||
Other manufactured products | 28,702 | 4.9 | % | 23,369 | 4.7 | % | 20,552 | 4.6 | % | 20,341 | 9.6 | % | 31,758 | 5.3 | % | ||||||||||||||
Total net revenues | $ | 581,679 | 100.0 | % | $ | 496,418 | 100.0 | % | $ | 449,484 | 100.0 | % | $ | 211,519 | 100.0 | % | $ | 604,352 | 100.0 | % | |||||||||
(1) | The fiscal year ended August 30, 2008 contained 53 weeks; all other fiscal years contained 52 weeks. |
(2) | Motor home unit revenue less discounts, sales promotions and incentives, and accrued loss on repurchase adjustments. |
(3) | Includes towable units and parts. |
Motor Homes. A motor home is a self-propelled mobile dwelling used primarily as temporary living quarters during vacation and camping trips, or to support some other active lifestyle. The RVIA classifies motor homes into three types which are defined as follows:
• | Class A models are conventional motor homes constructed directly on medium- and heavy-duty truck chassis, which include the engine and drivetrain components. The living area and driver's compartment are designed and produced by the motor home manufacturer. We manufacture Class A motor homes with gas and diesel engines. |
• | Class B models are panel-type vans to which sleeping, kitchen, and/or toilet facilities are added. These models may also have a top extension to provide more headroom. We manufacture Class B motor homes with diesel engines. |
• | Class C models are motor homes built on van-type chassis onto which the motor home manufacturer constructs a living area with access to the driver's compartment. We manufacture Class C motor homes with gas and diesel engines. |
We manufacture and sell Class A and C motor homes under the Winnebago and Itasca brand names and Class B motor homes under the Era brand name. Our product offerings for the 2013 model year are as follows:
Type | Winnebago | Itasca | Era |
Class A (gas) | Vista, Sightseer, Adventurer | Sunstar, Sunova, Suncruiser | |
Class A (diesel) | Via, Journey, Tour | Reyo, Meridian, Ellipse | |
Class B | Era | ||
Class C | Access, Access Premier, Aspect, View, View Profile | Impulse, Impulse Silver, Cambria, Navion, Navion iQ | |
Motor homes generally provide living accommodations for up to seven people and include kitchen, dining, sleeping and bath areas, and in some models, a lounge. Optional equipment accessories include, among other items, generators, home theater systems, king-size beds, and UltraLeatherTM upholstery and a wide selection of interior equipment. With the purchase of any new motor home, we offer a comprehensive 12-month/15,000-mile warranty on the coach and, for Class A and C motor homes, a 3-year/36,000-mile structural warranty on sidewalls and floors.
Our Class A, B and C motor homes are sold by dealers in the retail market with manufacturer's suggested retail prices ranging from approximately $70,000 to $366,000, depending on size and model, plus optional equipment and delivery charges. Our motor homes range in length from 24 to 42 feet.
Unit sales of our motor homes for the last five fiscal years were as follows:
Year Ended (1) | ||||||||||||||||||||||||
Units | August 25, 2012 | August 27, 2011 | August 28, 2010 | August 29, 2009 | August 30, 2008 | |||||||||||||||||||
Class A | 2,579 | 55.6 | % | 2,436 | 55.4 | % | 2,452 | 55.3 | % | 822 | 37.4 | % | 3,029 | 47.3 | % | |||||||||
Class B | 319 | 6.9 | % | 103 | 2.3 | % | 236 | 5.3 | % | 149 | 6.8 | % | 140 | 2.2 | % | |||||||||
Class C | 1,744 | 37.6 | % | 1,856 | 42.2 | % | 1,745 | 39.4 | % | 1,225 | 55.8 | % | 3,238 | 50.5 | % | |||||||||
Total motor homes | 4,642 | 100.0 | % | 4,395 | 100.0 | % | 4,433 | 100.0 | % | 2,196 | 100.0 | % | 6,407 | 100.0 | % | |||||||||
(1) | The fiscal year ended August 30, 2008 contained 53 weeks; all other fiscal years contained 52 weeks. |
Towable RVs. A towable is a non-motorized vehicle that connects to a ball hitch mounted on the tow vehicle and is used as temporary living quarters for recreational travel. We manufacture and sell conventional travel trailers which are towed by means of
2
a hitch attached to the frame of the towing vehicle and fifth wheel trailers which are constructed with a raised forward section that is connected to the vehicle with a special fifth wheel hitch.
Our towable product offerings for the 2013 model year are as follows:
Type | Sunnybrook | Winnebago |
Travel trailer | Sunset Creek Sport, Raven, Remington | Winnebago One, Winnebago Minnie, Winnebago Ultra |
Fifth wheel | Raven, Remington | Winnebago Lite Five |
Our travel trailers and fifth wheels are sold by dealers in the retail market with manufacturer's suggested retail prices ranging from approximately $16,000 to $48,000, depending on size and model, plus optional equipment and delivery charges. Our towables range in length from 18 to 37 feet. All new units purchased receive a comprehensive 12-month warranty. Unit sales of our towables were 1,372 travel trailers and 966 fifth wheels for Fiscal 2012 and 575 travel trailers and 194 fifth wheels for Fiscal 2011.
Motor Home Parts and Services. Motor home parts and service activities represent revenues generated by service work we perform for retail customers at our Forest City, Iowa facility and parts we sell to our dealers. As of August 25, 2012, our parts inventory was approximately $2.4 million and is located in a 450,000-square foot warehouse with what we believe to be the most sophisticated distribution and tracking system in the industry. Our competitive strategy is to provide proprietary manufactured parts through our dealer network, which we believe increases customer satisfaction and the value of our motor homes.
Other Manufactured Products. We manufacture aluminum extrusions which are sold to approximately 80 customers. To a limited extent, we manufacture other component parts sold to outside manufacturers. We also manufacture commercial vehicles which are motor home shells, primarily custom designed for the buyer's special needs and requirements, such as law enforcement command centers and mobile medical and dental clinics. These commercial vehicles are sold through our dealer network.
Production
We generally produce motor homes and towables to order from dealers. We have the ability to increase our capacity by scheduling overtime and/or hiring additional production employees or to decrease our capacity through the use of shortened workweeks and/or reducing head count. We have long been known as an industry leader in innovation as each year we introduce new or redesigned products. These changes generally include new floor plans and sizes as well as design and decor modifications.
Our motor homes are produced in the state of Iowa at two different campuses. Our Forest City facilities have been designed to provide vertically integrated production line manufacturing. We also operate an assembly plant and a cabinet products manufacturing facility in Charles City, Iowa. Our motor home bodies are made from various materials and structural components which are typically laminated into rigid, lightweight panels. Body designs are developed with computer design and analysis and subjected to a variety of tests and evaluations to meet our standards and requirements. We manufacture a number of components utilized in our motor homes, with the principal exceptions being chassis, engines, generators and appliances.
Most of our raw materials such as steel, aluminum, fiberglass and wood products are obtainable from numerous sources. Certain parts, especially motor home chassis, are available from a small group of suppliers. We are currently purchasing Class A and C chassis from Ford Motor Company, Mercedes-Benz USA (a Daimler company) and Mercedes-Benz Canada (a Daimler company) and Class A chassis from Freightliner Custom Chassis Corporation (a Daimler company). Class B chassis are purchased from Mercedes-Benz USA and Mercedes-Benz Canada. In Fiscal 2012, only three vendors, Ford Motor Company, Freightliner Custom Chassis Corporation and Mercedes-Benz (USA and Canada combined) individually accounted for more than 10% of our raw material purchases and approximating 42% in the aggregate.
Our towables are produced at an assembly plant located in Middlebury, Indiana. The majority of components are comprised of frames, appliances and furniture and are purchased from suppliers.
Backlog
As of August 25, 2012, we had a backlog for our motor homes of 1,473 units with an approximate revenue value of $163.7 million. In comparison as of August 27, 2011, our backlog was 681 units with an approximate revenue value of $74.7 million. As of August 25, 2012, we had a backlog for our towables of 411 units with an approximate revenue value of $8.8 million. In comparison as of August 27, 2011, our backlog was 293 units with an approximate revenue value of $6.7 million. A more detailed description of our motor home and towable order backlog is included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Distribution and Financing
We market our RVs on a wholesale basis to a diversified independent dealer organization located throughout the US and, to a limited extent, in Canada. Foreign sales, including Canada, were 10% or less of net revenues during each of the past three fiscal years. See Note 15 to our Financial Statements of this Annual Report on Form 10-K.
3
As of August 25, 2012 and August 27, 2011, our motor home dealer organization in the US and Canada included approximately 235 and 225 dealer locations, respectively. We have a number of dealers that carry our Winnebago, Itasca and Era brands; we count each motor home dealer location only once regardless of how many of our brands are offered at each such dealer location. Our towable dealer organization consisted of 232 and 172 dealer locations as of August 25, 2012 and August 27, 2011, respectively, across the US and Canada. Many of our towable dealerships also carry more than one of the towable product lines, but each dealership is counted only once in the number of towable dealer locations. One of our dealer organizations, FreedomRoads, LLC, accounted for 26% of our net revenue for Fiscal 2012, as they sold our products in 62 of their dealership locations across 26 US states.
We have sales and service agreements with dealers which generally have a term of ten years but are subject to annual review. Many of the dealers are also engaged in other areas of business, including the sale of automobiles, trailers or boats, and many dealers carry one or more competitive lines of recreation vehicles. We continue to place high emphasis on the capability of our dealers to provide complete service for our recreation vehicles. Dealers are obligated to provide full service for owners of our recreation vehicles or, in lieu thereof, to secure such service from other authorized providers.
We advertise and promote our products through national RV magazines, the distribution of product brochures, the Go RVing national advertising campaign sponsored by RVIA, direct-mail advertising campaigns, various national promotional opportunities and on a local basis through trade shows, television, radio and newspapers, primarily in connection with area dealers.
Recreation vehicle sales to dealers are made on cash terms. Most dealers 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 merchandise purchased. As is customary in the recreation vehicle industry, we typically enter into a repurchase agreement with a lending institution financing a dealer's purchase of our product upon the lending institution's request and after completion of a credit check of the dealer involved. Our repurchase agreements provide that for up to 18 months after a unit is financed, in the event of default by the dealer on the agreement to pay the lending institution and repossession of the unit(s) by the lending institution, we will repurchase the financed merchandise. Our maximum exposure for repurchases varies significantly from time to time, depending upon general economic conditions, seasonal shipments, competition, dealer organization, gasoline availability and access to and the cost of financing. See Note 11.
Competition
The RV market is highly competitive with many other manufacturers selling products which compete directly with our products. Some of our competitors are much larger than us most notably in the towable RV market, which may provide them additional purchasing power. Also, some of our competitors went through Chapter 11 bankruptcy protection during calendar 2009 and their assets were purchased without many of their liabilities (e.g. warranty, product liability, workers' compensation), which we believe reduced their cost structure as compared to ours. The competition in the RV industry is based upon design, price, quality and service of the products. We believe our principal competitive advantages are our brand strength, product quality and our service after the sale. We also believe that our motor home products have historically commanded a price premium as a result of these competitive advantages.
Seasonality
The primary use of RVs for leisure travel and outdoor recreation has historically led to a peak retail selling season concentrated in the spring and summer months. Our sales of RVs are generally influenced by this pattern in retail sales, but can also be affected by the level of dealer inventory. Our products are generally manufactured against orders from dealers.
Regulations, Trademarks and Patents
We are subject to a variety of federal, state and local laws and regulations, including the MVA, under which the National Highway Traffic Safety Administration may require manufacturers to recall recreation vehicles that contain safety-related defects, and numerous state consumer protection laws and regulations relating to the operation of motor vehicles, including so-called "Lemon Laws." We are also subject to regulations established by OSHA. Our facilities are periodically inspected by federal and state agencies, such as OSHA. We are a member of RVIA, a voluntary association of RV manufacturers which promulgates RV safety standards. We place an RVIA seal on each of RVs to certify that the RVIA standards have been met. We believe that our products and facilities comply in all material respects with the applicable vehicle safety, consumer protection, RVIA and OSHA regulations and standards.
Our operations are subject to a variety of federal and state environmental laws and regulations relating to the use, generation, storage, treatment, emission and disposal of hazardous materials and wastes and noise pollution. We believe that we currently are in compliance with applicable environmental laws and regulations in all material aspects.
We have several registered trademarks associated with our motor homes which include: Access, Adventurer, Aspect, Cambria, Chalet, Destination, Ellipse, Era, Impulse, Itasca, Journey, Latitude, Meridian, Navion, Outlook, Reyo, Rialta, Sightseer, Spirit, Suncruiser, Sundancer, Sunova, Sunrise, Sunstar, Tour, Vectra, Via, View, Vista, Voyage, and Winnebago. Winnebago of Indiana, LLC also has several registered trademarks associated with their towable products which include: Bristol Bay, Brookside, Sunnybrook, Sunset Creek, West Pointe, and Raven. We believe that our trademarks and trade names are significant to our
4
business and we will vigorously protect them against infringement. We are not dependent upon any patents or technology licenses of others for the conduct of our business.
Research and Development
Research and development expenditures are expensed as incurred. During Fiscal 2012, 2011 and 2010, we spent approximately $3.4 million, $3.3 million and $3.2 million, respectively on research and development activities.
Human Resources
At the end of Fiscal 2012, 2011 and 2010, we employed approximately 2,380, 2,130 and 1,950 persons, respectively. None of our employees are covered under a collective bargaining agreement. We believe our relations with our employees are good.
Executive Officers of the Registrant
Name | Office (Year First Elected an Officer) | Age |
Randy J. Potts (1) | Chairman of the Board, Chief Executive Officer and President (2006) | 53 |
Steven Scott Degnan | Vice President, Sales and Product Management (2012) | 47 |
Scott C. Folkers | Vice President, General Counsel & Secretary (2012) | 50 |
Robert L. Gossett | Vice President, Administration (1998) | 61 |
Daryl W. Krieger | Vice President, Manufacturing (2010) | 49 |
Sarah N. Nielsen | Vice President, Chief Financial Officer (2005) | 39 |
William J. O'Leary | Vice President, Product Development (2001) | 63 |
Donald L. Heidemann | Treasurer and Director of Finance (2007) | 40 |
(1) Director
Officers are elected annually by the Board of Directors. There are no family relationships between or among any of the Corporate Officers or Directors of the Company.
Mr. Potts has over 29 years of experience with Winnebago Industries. He has been Chairman of the Board since January 2012, Chief Executive Officer since June 2011, and President since January 2011. Prior to that time, he served as Senior Vice President, Strategic Planning from November 2009 to June 2011, Vice President, Manufacturing from October 2006 to November 2009, Director of Manufacturing from February 2006 to October 2006 and as General Manager of Manufacturing Services from November 2000 to February 2006.
Mr. Degnan joined Winnebago Industries in May 2012, as Vice President of Sales and Product Management. Prior to joining Winnebago Industries, Mr. Degnan served as vice president of sales for Riverside, California's MVP RV from 2010 to 2012. He also previously served in management and sales positions with Coachmen RV from 2008 to 2010, with National RV from 2007 to 2008, and Fleetwood Enterprises from 1987 to 2007.
Mr. Folkers joined Winnebago Industries in August 2010, as assistant general counsel. He was elected to the position of Vice President, General Counsel and Secretary in June 2012. Prior to joining Winnebago Industries, Mr. Folkers was employed as in‑house counsel for John Morrell & Co., in Sioux Falls, SD from 1998 to 2010. Mr. Folkers is a member of the Iowa Bar Association.
Mr. Gossett has over 13 years of experience with Winnebago Industries. He has been Vice President, Administration since joining the Company in 1998.
Mr. Krieger has over 28 years of experience with Winnebago Industries. He has been Vice President, Manufacturing since May 2010. Prior to that time, he served as Director of Manufacturing from November 2009 to May 2010 and General Manager - Fabrication from February 2002 to November 2009.
Ms. Nielsen has seven years of experience with Winnebago Industries. She has been Vice President and Chief Financial Officer since November 2005. Ms. Nielsen joined the Company in August 2005 as Director of Special Projects and Training. Prior to joining Winnebago Industries, she was employed as a senior audit manager at Deloitte & Touche LLP, where she worked from 1995 to 2005. Ms. Nielsen is a Certified Public Accountant.
Mr. O'Leary has over 40 years of experience with Winnebago Industries. He has been Vice President, Product Development since 2001.
Mr. Heidemann has five years of experience with Winnebago Industries. He was elected to the position of Treasurer in August 2007 and added Director of Finance responsibilities in August 2011. Prior to joining Winnebago Industries, Mr. Heidemann served in various treasury positions for Select Comfort Corporation from 2003 to July 2007 and served in various treasury positions for Rent-A-Center Incorporated from 1998 to 2003.
5
Item 1A. Risk Factors
The following risk factors should be considered carefully in addition to the other information contained in this Annual Report on Form 10-K. The risks and uncertainties described below are not the only ones we face, but represent the most significant risk factors that we believe may adversely affect the RV industry and our business, operations or financial position. The risks and uncertainties discussed in this report are not exclusive and other risk factors that we may consider immaterial or do not anticipate may emerge as significant risks and uncertainties.
Risks Related to Our Business
Competition
The market for recreation vehicles is very competitive. Competition in this industry is based upon price, design, value, quality and service. There can be no assurance that existing or new competitors will not develop products that are superior to our recreation vehicles or that achieve better consumer acceptance, thereby adversely affecting market share, sales volume and profit margins. Some of our competitors are much larger than us, most notably in the towable recreation vehicle market, which may provide them additional purchasing power. Also, some of our competitors went through Chapter 11 bankruptcy proceedings and their assets were purchased without many of their liabilities (e.g. warranty, product liability, workers' compensation) which we believe lowered their cost structure as compared to ours. These competitive pressures may continue to have a material adverse effect on our results of operations.
General Economic Conditions and Certain Other External Factors
Companies within the recreation vehicle industry are subject to volatility in operating results due primarily to general economic conditions. Specific factors affecting the recreation vehicle industry include:
• | overall consumer confidence and the level of discretionary consumer spending; |
• | employment trends; |
• | the adverse impact of global tensions on consumer spending and travel-related activities; and |
• | adverse impact on margins of increases in raw material costs which we are unable to pass on to customers without negatively affecting sales. |
Credit Availability and Interest Rates to Dealers and Retail Purchasers
Our business is affected by the availability and terms of the financing to dealers. Generally, recreation vehicle dealers finance their purchases of inventory with financing provided by lending institutions. Two financial flooring institutions held 80% of our total financed dealer inventory dollars that were outstanding at August 25, 2012. In the event that either or both of these lending institutions limit or discontinue dealer financing, we could experience a material adverse effect on our results of operations. Our business is also affected by the availability and terms of financing to retail purchasers. Retail buyers purchasing a motor home or towable may elect to finance their purchase through the dealership or a financial institution of their choice. Substantial increases in interest rates or decreases in the general availability of credit for our dealers or for the retail purchaser may have an adverse impact upon our business and results of operations.
Maintaining Adequate Liquidity and Capital Resources
We have historically generated revenues from our operations to pay operating expenses, buy back stock and, prior to Fiscal 2009, pay cash dividends. We have taken a number of steps, as discussed in “Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Analysis of Financial Condition, Liquidity and Resources” below, to maintain our cash position and ensure liquidity. However, challenging market conditions that reduce demand for our products could weaken our liquidity position and materially adversely affect net revenues available for anticipated cash needs. To the extent the initiatives we undertake are not successful or we are unable to successfully implement alternative actions, our ability to cover both short-term and long-term operation requirements would be significantly adversely affected.
Cyclicality and Seasonality
The recreation vehicle industry has been characterized by cycles of growth and contraction in consumer demand, reflecting prevailing economic and demographic conditions, which affect disposable income for leisure-time activities. Consequently, the results for any prior period may not be indicative of results for any future period.
Seasonal factors, over which we have no control, also have an effect on the demand for our products. Demand in the recreation vehicle industry generally declines over the winter season, while sales are generally highest during the spring and summer months. Also, unusually severe weather conditions in some markets may impact demand.
Integration of Acquisitions
In Fiscal 2011 we made an acquisition of a towable manufacturer. The integration and introduction of new models of recreation vehicles is important to our future growth. We may incur unexpected expenses and the acceptance of a new product line is uncertain. We may not be able to obtain efficiencies of scale in back office processes or obtain expected purchasing efficiencies
6
via increased volume from mutual suppliers.
Potential Loss of a Large Dealer Organization
One of our dealer organizations, FreedomRoads, LLC, accounted for 26% of our net revenue for Fiscal 2012, as they sold our products in 62 of their dealership locations across 26 US states. The loss of this dealer organization could have a significant adverse effect on our business. In addition, deterioration in the liquidity or creditworthiness of FreedomRoads, LLC could negatively impact our sales and could trigger repurchase obligations under our repurchase agreements.
Potential Repurchase Liabilities
In accordance with customary practice in the RV industry, upon request we enter into formal repurchase agreements with lending institutions financing a dealer's purchase of our products. In these repurchase agreements we agree, in the event of a default by an independent dealer in its obligation to a lender and repossession of the unit(s) by the lending institution, to repurchase units at declining prices over the term of the agreements, which can last up to 18 months. The difference between the gross repurchase price and the price at which the repurchased product can then be resold, which is typically at a discount to the gross repurchase price, represents a potential expense to us. In certain instances, we also repurchase inventory from our dealers due to state law or regulatory requirements that govern voluntary or involuntary terminations. If we are obligated to repurchase a substantially larger number of RVs in the future, this would increase our costs and could have a material adverse effect on our results of operations.
Fuel Availability and Price Volatility
Gasoline or diesel fuel is required for the operation of motorized recreation vehicles. There can be no assurance that the supply of these petroleum products will continue uninterrupted or that the price or tax on these petroleum products will not significantly increase in the future. Fuel shortages and substantial increases in fuel prices have had a material adverse effect on the recreation vehicle industry as a whole in the past and could have a material adverse effect on us in the future.
Dependence on Suppliers
Most of our RV components are readily available from numerous sources. However, a few of our components are produced by a small group of quality suppliers. In the case of motor home chassis, Ford Motor Company, Freightliner Custom Chassis Corporation and Mercedes-Benz (USA and Canada) are our major suppliers. Our relationship with our chassis suppliers is similar to our other supplier relationships in that no special contractual commitments are engaged in by either party. Historically, chassis suppliers resort to an industry-wide allocation system during periods when supply is restricted. These allocations have been based on the volume of chassis previously purchased. Sales of motor homes rely on chassis and are affected accordingly. Decisions by our suppliers to decrease production, production delays, or work stoppages by the employees of such suppliers could have a material adverse effect on our ability to produce motor homes and ultimately, on the results of operations.
Warranty Claims
We receive warranty claims from our dealers in the ordinary course of our business. Although we maintain reserves for such claims, which to date have been adequate, there can be no assurance that warranty expense levels will remain at current levels or that such reserves will continue to be adequate. A significant increase in warranty claims exceeding our current warranty expense levels could have a material adverse effect on our results of operations, financial condition and cash flows.
In addition to the costs associated with the contractual warranty coverage provided on our products, we also occasionally incur costs as a result of additional service actions not covered by our warranties, including product recalls and customer satisfaction actions. Although we estimate and reserve for the cost of these service actions, there can be no assurance that expense levels will remain at current levels or such reserves will continue to be adequate.
Product Liability
We are subject, in the ordinary course of business, to litigation including a variety of warranty, "Lemon Law" and product liability claims typical in the recreation vehicle industry. We have an insurance policy covering product liability, however, we are self-insured for a portion of product liability claims. We cannot be certain that our insurance coverage will be sufficient to cover all future claims against us, which may have a material adverse effect on our results of operations and financial condition. Any increase in the frequency and size of these claims, as compared to our experience in prior years, may cause the premium that we are required to pay for insurance to rise significantly. It may also increase the amounts we pay in punitive damages, not all of which are covered by our insurance. In addition, if these claims rise to a level of frequency or size that are significantly higher than similar claims made against our competitors, our reputation and business may be harmed.
Information Systems and Web Applications
We rely on our information systems and web applications to support our business operations, including but not limited to procurement, supply chain, manufacturing, distribution, warranty administration, invoicing and collection of payments. We use information systems to report and audit our operational results. Additionally, we rely upon information systems in our sales,
7
marketing, human resources and communication efforts. Due to our reliance on our information systems, our business processes may be negatively impacted in the event of substantial disruption of service. Further, misuse, leakage or falsification of information could result in a violation of privacy laws and damage our reputation which could, in turn, have a negative impact on our results.
Government Regulation
We are subject to numerous federal, state and local regulations governing the manufacture and sale of our products, including the provisions of the MVA, and the safety standards for recreation vehicles and components which have been established under the Motor Vehicle Act by the Department of Transportation. The MVA authorizes the National Highway Traffic Safety Administration to require a manufacturer to recall and repair vehicles which contain certain hazards or defects. Any major recalls of our vehicles, voluntary or involuntary, could have a material adverse effect on our results of operations, financial condition and cash flows. While we believe we are substantially in compliance with the foregoing laws and regulations as they currently exist, amendments to any of these regulations or the implementation of new regulations could significantly increase the cost of manufacturing, purchasing, operating or selling our products and could have a material adverse effect on our results of operations. In addition, our failure to comply with present or future regulations could result in fines being imposed on us, potential civil and criminal liability, suspension of sales or production or cessation of operations.
We are also subject to federal and numerous state consumer protection and unfair trade practice laws and regulations relating to the sale, transportation and marketing of motor vehicles, including so-called "Lemon Laws." Federal and state laws and regulations also impose upon vehicle operators various restrictions on the weight, length and width of motor vehicles, including motor homes that may be operated in certain jurisdictions or on certain roadways. Certain jurisdictions also prohibit the sale of vehicles exceeding length restrictions.
Finally, federal and state authorities also have various environmental control standards relating to air, water, noise pollution and hazardous waste generation and disposal which affect us and our operations. Failure by us to comply with present or future laws and regulations could result in fines being imposed on us, potential civil and criminal liability, suspension of production or operations, alterations to the manufacturing process, or costly cleanup or capital expenditures, any or all of which could have a material adverse effect on our results of operations.
Risks Related to Our Company
Anti-takeover Effect
Provisions of our articles of incorporation, by-laws, the Iowa Business Corporation Act and provisions in our credit facilities that we may enter into from time to time could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial by our shareholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal manufacturing, maintenance and service operations are conducted in multi-building complexes owned or leased by us. The following sets forth our material facilities as of August 25, 2012:
Location | Facility Type/Use | # of Buildings | Owned or Leased | Square Footage | ||
Forest City, Iowa | Manufacturing, maintenance, service and office | 30 | Owned | 1,558,000 | ||
Forest City, Iowa | Warehouse | 4 | Owned | 702,000 | ||
Charles City, Iowa | Manufacturing | 2 | Owned | 161,000 | ||
Hampton, Iowa | Assets Held for Sale (Manufacturing) | 2 | Owned | 135,000 | ||
Middlebury, Indiana | Manufacturing and office | 4 | Leased | 277,000 | ||
42 | 2,833,000 | |||||
The facilities that we own in Forest City, Charles City and Hampton are located on approximately 500 acres of land. We lease 244,000 square feet of our warehouse facilities in Forest City to others. Most of our buildings are of steel or steel and concrete construction and are protected from fire with high‑pressure sprinkler systems, dust collector systems, automatic fire doors and alarm systems. We believe that our facilities and equipment are well maintained, in excellent condition and suitable for the purposes for which they are intended.
Subsequent to August 25, 2012, on August 30, 2012, the Hampton facility held for sale was sold, as further described in Note 6.
In January 2011, we entered into a five-year lease agreement with FFT Land Management for real property consisting of four buildings and approximately 30 acres of land located in Middlebury, Indiana. The buildings are being utilized to manufacture
8
towable trailers. See further discussion in Note 19.
Under terms of our credit facility, as further described in Note 8, we have encumbered substantially all of our real property for the benefit of the lender under such facility.
Item 3. Legal Proceedings
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. We believe, 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.
Item 4. Mine Safety Disclosure
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the New York and Chicago Stock Exchanges with the ticker symbol of WGO.
Below are the New York Stock Exchange high, low and closing prices of Winnebago Industries, Inc. common stock for each quarter of Fiscal 2012 and Fiscal 2011:
Fiscal 2012 | High | Low | Close | Fiscal 2011 | High | Low | Close | |||||||||||||
First Quarter | $ | 8.95 | $ | 6.02 | $ | 6.07 | First Quarter | $ | 12.25 | $ | 8.35 | $ | 10.54 | |||||||
Second Quarter | 10.51 | 6.15 | 9.44 | Second Quarter | 16.60 | 10.20 | 14.22 | |||||||||||||
Third Quarter | 10.65 | 8.14 | 9.08 | Third Quarter | 15.77 | 11.25 | 11.52 | |||||||||||||
Fourth Quarter | 11.46 | 8.50 | 11.01 | Fourth Quarter | 11.74 | 6.31 | 7.14 | |||||||||||||
Holders
Shareholders of record as of October 9, 2012: 3,343
Dividends Paid Per Share
On October 15, 2008, our Board of Directors suspended future cash dividend payments in order to conserve capital and to maintain liquidity. No dividends have been paid since the first quarter of Fiscal 2009.
Our credit facility, as further described in Note 8, also contained covenants that limited our ability, among other things, to pay cash dividends without the consent of Wells Fargo, as Agent and the lenders thereunder, in their sole discretion.
Issuer Purchases of Equity Securities
Our credit facility, as further described in Note 8, contained covenants that limited our ability, among other things, except for limited purchases of our common stock from employees, to make distributions or payments with respect to or purchases of our common stock without consent. On July 2, 2012, we obtained a letter of consent from our former lender Wells Fargo, waiving the restriction on repurchasing common stock and allowing repurchases up to $35.0 million.
On December 19, 2007, the Board of Directors authorized the repurchase of outstanding shares of our common stock, depending on market conditions, for an aggregate consideration of up to $60 million. There is no time restriction on this authorization. During Fiscal 2012, approximately 628,000 shares were repurchased under the authorization, at an aggregate cost of approximately $6.6 million. Approximately 38,000 of these shares were repurchased from employees who vested in Winnebago Industries shares during the fiscal year and elected to pay their payroll tax via shares as opposed to cash. As of August 25, 2012, there was approximately $52.6 million remaining under this authorization.
9
This table provides information with respect to purchases by us of shares of our common stock during each fiscal month of the fourth quarter of Fiscal 2012:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | |||||||||
5/27/12 - 06/30/12 | 1,623 | $ | 8.63 | 1,623 | (1) | $ | 58,888,000 | ||||||
07/01/12 - 07/28/12 | 279,418 | $ | 10.40 | 279,418 | $ | 55,983,000 | |||||||
07/29/12 - 08/25/12 | 311,143 | $ | 10.74 | 311,143 | $ | 52,640,000 | |||||||
Total | 592,184 | $ | 10.57 | 592,184 | (1) | $ | 52,640,000 | ||||||
Equity Compensation Plan Information
The following table provides information as of August 25, 2012 with respect to shares of our common stock that may be issued under our existing equity compensation plans:
(a) | (b) | (c) | |||||||
(Adjusted for the 2-for-1 Stock Split on March 5, 2004) Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in (a)) | ||||||
Equity compensation plans approved by shareholders | 727,664 | (1) | $ | 29.08 | 3,008,232 | (2) | |||
Equity compensation plans not approved by shareholders (3) | 117,535 | (4) | 12.38 | — | (5) | ||||
Total | 845,199 | $ | 26.75 | 3,008,232 | |||||
(1) | This number includes 568,126 stock options granted under the 2004 Incentive Compensation Plan, as amended (the "Plan"). Also included are 159,538 options granted under the 1997 Stock Option Plan. |
(2) | This number represents stock options available for grant under the Plan as of August 25, 2012. The Plan replaced the 1997 Stock Option Plan effective January 1, 2004. No new grants may be made under the 1997 Stock Option Plan. Any stock options previously granted under the 1997 Stock Option Plan will continue to be exercisable in accordance with their original terms and conditions. |
(3) | Our sole equity compensation plan not previously submitted to our shareholders for approval is the Directors' Deferred Compensation Plan. The Board of Directors may terminate the Directors' Deferred Compensation Plan at any time. If not terminated earlier, the Directors' Deferred Compensation Plan will automatically terminate on June 30, 2013. For a description of the key provisions of the Directors' Deferred Compensation Plan, see the information in our Proxy Statement for the Annual Meeting of Shareholders scheduled to be held December 18, 2012 under the caption "Director Compensation," which information is incorporated by reference herein. |
(4) | Represents shares of common stock issued to a trust which underlie stock units, payable on a one-for-one basis, credited to stock unit accounts as of August 25, 2012 under the Directors' Deferred Compensation Plan. |
(5) | The table does not reflect a specific number of stock units which may be distributed pursuant to the Directors' Deferred Compensation Plan. The Directors' Deferred Compensation Plan does not limit the number of stock units issuable thereunder. The number of stock units to be distributed pursuant to the Directors' Deferred Compensation Plan will be based on the amount of the director's compensation deferred and the per share price of our common stock at the time of deferral. |
10
Performance Graph
The following graph compares our five-year cumulative total shareholder return (including reinvestment of dividends) with the cumulative total return on the Standard & Poor's 500 Index and a peer group. The peer group companies consisting of Thor Industries, Inc., Polaris Industries, Inc. and Brunswick Corporation were selected by us as they also manufacture recreation products. It is assumed in the graph that $100 was invested in our common stock, in the Standard & Poor's 500 Index and in the stocks of the peer group companies on August 26, 2006 and that all dividends received within a quarter were reinvested in that quarter. In accordance with the guidelines of the SEC, the shareholder return for each entity in the peer group index has been weighted on the basis of market capitalization as of each annual measurement date set forth in the graph.
Base Period | |||||||||||||||||
Company/Index | 8/25/07 | 8/30/08 | 8/29/09 | 8/28/10 | 8/27/11 | 8/25/12 | |||||||||||
Winnebago Industries, Inc. | 100.00 | 42.57 | 44.03 | 34.29 | 27.06 | 43.01 | |||||||||||
S&P 500 Index | 100.00 | 88.57 | 72.99 | 77.05 | 86.86 | 106.38 | |||||||||||
Peer Group | 100.00 | 65.93 | 61.03 | 75.09 | 103.08 | 156.62 | |||||||||||
Item 6. Selected Financial Data (See pages 63 and 64)
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in eight sections:
• |
• |
• |
• |
• |
• |
• |
• |
Our MD&A should be read in conjunction with the Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Executive Overview
Winnebago Industries, Inc. is a leading US manufacturer of RVs with a proud history of manufacturing RV products for more than 50 years. We produce all of our motor homes in vertically integrated manufacturing facilities in Iowa and we produce all travel trailer and fifth wheels ("towables") in Indiana. We distribute our products primarily through independent dealers throughout the US and Canada, who then retail the products to the end consumer.
Our retail unit market share, as reported by Stat Surveys, is as follows:
Through August 31 | Calendar Year | |||||||||||
US Retail Motorized: | 2012 | 2011 | 2011 | 2010 | 2009 | |||||||
Class A gas | 22.9 | % | 22.3 | % | 22.2 | % | 23.7 | % | 22.9 | % | ||
Class A diesel | 20.0 | % | 17.2 | % | 17.6 | % | 15.2 | % | 11.4 | % | ||
Total Class A | 21.7 | % | 20.1 | % | 20.2 | % | 19.5 | % | 16.6 | % | ||
Class C | 17.5 | % | 16.6 | % | 17.5 | % | 17.9 | % | 22.7 | % | ||
Total Class A and C | 19.7 | % | 18.5 | % | 19.0 | % | 18.8 | % | 19.1 | % | ||
Class B | 16.0 | % | 4.7 | % | 7.7 | % | 15.6 | % | 18.1 | % | ||
Through July 31 | Calendar Year | |||||||||||
Canadian Retail Motorized: | 2012 | 2011 | 2011 | 2010 | 2009 | |||||||
Class A gas | 14.6 | % | 16.3 | % | 16.5 | % | 14.9 | % | 13.8 | % | ||
Class A diesel | 16.0 | % | 19.3 | % | 18.0 | % | 9.9 | % | 7.0 | % | ||
Total Class A | 15.1 | % | 17.5 | % | 17.1 | % | 12.6 | % | 10.0 | % | ||
Class C | 13.1 | % | 17.0 | % | 15.9 | % | 13.8 | % | 9.5 | % | ||
Total Class A and C | 14.0 | % | 17.2 | % | 16.5 | % | 13.2 | % | 9.8 | % | ||
Class B | 11.5 | % | 3.0 | % | 7.1 | % | 4.8 | % | 2.3 | % | ||
Through July 31 | Calendar Year | ||||||||
US Retail Towables: | 2012 | 2011 | 2011 | ||||||
Travel trailer | 0.8 | % | 0.6 | % | 0.6 | % | |||
Fifth wheel | 1.0 | % | 0.4 | % | 0.5 | % | |||
Total towables | 0.8 | % | 0.6 | % | 0.6 | % | |||
Through July 31 | Calendar Year | ||||||||
Canadian Retail Towables: | 2012 | 2011 | 2011 | ||||||
Travel trailer | 0.4 | % | 0.3 | % | 0.4 | % | |||
Fifth wheel | 1.0 | % | 0.5 | % | 0.5 | % | |||
Total towables | 0.5 | % | 0.3 | % | 0.4 | % | |||
12
Presented in fiscal quarters, certain key metrics are shown below:
Class A, B & C Motor Homes | Travel Trailers & Fifth Wheels | |||||||||||||||||
As of Quarter End | As of Quarter End | |||||||||||||||||
Wholesale | Retail | Dealer | Order | Wholesale | Retail | Dealer | Order | |||||||||||
(In units) | Deliveries | Registrations | Inventory | Backlog | Deliveries | Registrations | Inventory | Backlog | ||||||||||
Q1 | 1,115 | 1,093 | 2,066 | 698 | — | — | — | — | ||||||||||
Q2 | 909 | 796 | 2,179 | 957 | 85 | 100 | 905 | 151 | ||||||||||
Q3 | 1,283 | 1,394 | 2,068 | 642 | 326 | 203 | 1,028 | 164 | ||||||||||
Q4 | 1,088 | 1,198 | 1,958 | 681 | 358 | 420 | 966 | 293 | ||||||||||
Fiscal 2011 | 4,395 | 4,481 | 769 | 723 | ||||||||||||||
Q1 | 1,040 | 1,053 | 1,945 | 618 | 435 | 255 | 1,146 | 460 | ||||||||||
Q2 | 1,001 | 872 | 2,074 | 1,004 | 562 | 332 | 1,376 | 417 | ||||||||||
Q3 | 1,280 | 1,414 | 1,940 | 1,237 | 646 | 652 | 1,370 | 505 | ||||||||||
Q4 | 1,321 | 1,334 | 1,927 | 1,473 | 695 | 700 | 1,365 | 411 | ||||||||||
Fiscal 2012 | 4,642 | 4,673 | 2,338 | 1,939 | ||||||||||||||
Highlights of Fiscal 2012:
Revenues were higher for Fiscal 2012 as compared to Fiscal 2011 with increased motor home and towable deliveries and
increased average selling prices for all RV products due to the mix of higher priced products delivered. Operating income for Fiscal 2012 was lower as compared to the prior period most notably due to increased inflationary pressures and higher discounts incurred during the first half of Fiscal 2012 and the fact that Fiscal 2011 results included a $3.5 million pre-tax benefit from the results of an annual physical inventory of work-in-process, due to lower actual inventory scrap and production loss. Quarterly results for the past two fiscal years are illustrated as follows:
(In thousands) | Revenues | Gross Profit | Gross Margin | Operating Income (Loss) | Operating Margin | |||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||
Q1 | $ | 131,837 | $ | 123,711 | $ | 8,496 | $ | 11,199 | 6.4 | % | 9.1 | % | $ | 627 | $ | 4,925 | 0.5 | % | 4.0 | % | ||||||||||
Q2 | 131,600 | 106,593 | 6,846 | 11,324 | 5.2 | % | 10.6 | % | (1,164 | ) | 4,050 | (0.9 | )% | 3.8 | % | |||||||||||||||
Q3 | 155,709 | 135,568 | 12,071 | 8,703 | 7.8 | % | 6.4 | % | 3,527 | 538 | 2.3 | % | 0.4 | % | ||||||||||||||||
Q4 | 162,533 | 130,546 | 16,267 | 8,528 | 10.0 | % | 6.5 | % | 6,536 | 1,766 | 4.0 | % | 1.4 | % | ||||||||||||||||
Total | $ | 581,679 | $ | 496,418 | $ | 43,680 | $ | 39,754 | 7.5 | % | 8.0 | % | $ | 9,526 | $ | 11,279 | 1.6 | % | 2.3 | % | ||||||||||
Overall business started off weak in the first two quarters of Fiscal 2012, similar to the last two quarters of Fiscal 2011. As a result, our first quarter operating margin was negatively impacted by lower plant utilization due to shortened work weeks and our second quarter was negatively impacted by a higher level of discounts and sales incentives incurred. However, we saw marked improvement in motor home product demand in the second half of Fiscal 2012, through increased sales orders and retail registration activity, thus we began to increase our weekly production rate in the third and fourth quarters in response. The growth in motor home unit shipments of 5.6% in Fiscal 2012 occurred primarily as a result of increased deliveries in our fourth fiscal quarter. This overall growth is supported by increased retail demand experienced in Fiscal 2012.
For Fiscal 2012, Towables generated operating loss of $744,000 compared to an operating loss of $1.5 million in Fiscal 2011. Notably, we encountered operational challenges with this subsidiary in the fourth quarter of 2012 after reporting its first operationally profitable quarter for the third fiscal quarter. We are working to correct the operational headwinds through personnel and process changes and still believe this subsidiary can provide significant growth opportunity in future years.
13
Industry Outlook
Key statistics 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) | 2011 | 2010 | Increase (Decrease) | Change | 2011 | 2010 | Increase (Decrease) | Change | ||||||||||||
Q1 | 6,900 | 5,700 | 1,200 | 21.1 | % | 5,100 | 5,000 | 100 | 2.0 | % | ||||||||||
Q2 | 7,800 | 7,800 | — | — | % | 8,200 | 8,400 | (200 | ) | (2.4 | )% | |||||||||
Q3 | 5,300 | 6,200 | (900 | ) | (14.5 | )% | 6,100 | 6,100 | — | — | % | |||||||||
Q4 | 4,800 | 5,500 | (700 | ) | (12.7 | )% | 4,600 | 4,600 | — | — | % | |||||||||
Total | 24,800 | 25,200 | (400 | ) | (1.6 | )% | 24,000 | 24,100 | (100 | ) | (0.4 | )% | ||||||||
(In units) | 2012 | 2011 | Increase (Decrease) | Change | 2012 | 2011 | Increase (Decrease) | Change | ||||||||||||
Q1 | 6,900 | 6,900 | — | — | % | 5,700 | 5,100 | 600 | 11.8 | % | ||||||||||
Q2 | 7,600 | 7,800 | (200 | ) | (2.6 | )% | 8,100 | 8,200 | (100 | ) | (1.2 | )% | ||||||||
July | 2,000 | 1,700 | 300 | 17.6 | % | 2,500 | 2,100 | 400 | 19.0 | % | ||||||||||
August | 2,500 | 1,900 | 600 | 31.6 | % | 1,900 | (4 | ) | 2,000 | |||||||||||
September | 1,900 | (3) | 1,700 | 200 | 11.8 | % | (5 | ) | 2,000 | |||||||||||
Q3 | 6,400 | (3) | 5,300 | 1,100 | 20.8 | % | (5 | ) | 6,100 | |||||||||||
Q4 | 5,100 | (3) | 4,800 | 300 | 6.3 | % | (5 | ) | 4,600 | |||||||||||
Total | 26,000 | (3) | 24,800 | 1,200 | 4.8 | % | 24,000 | |||||||||||||
(1) | Class A, B and C wholesale shipments as reported by RVIA, rounded to the nearest hundred. |
(2) | Class A, B and C retail registrations as reported by Stat Surveys for the US and Canada combined, rounded to the nearest hundred. |
(3) | Monthly and quarterly 2012 Class A, B and C wholesale shipments for September and the third and fourth calendar quarters are based upon the forecast prepared by Dr. Richard Curtin of the University of Michigan Consumer Survey Research Center for RVIA and reported in the RoadSigns RV Fall 2012 Industry Forecast Issue. The revised RVIA annual 2012 wholesale shipment forecast is 25,100 and the annual forecast for 2013 is 25,500. |
(4) | U.S. retail registrations for Class A, B and C for August, 2012. Canadian retail registrations are not yet available. |
(5) | Stat Surveys has not issued a projection for 2012 retail demand for this period. |
The size of the motorized retail market for each of the past three calendar years has been less than half of what the industry norms had been prior to the recession that began in December 2007.
Key statistics for the towable industry are as follows:
US and Canada Travel Trailer & Fifth Wheel Industry | |||||||||||||||||||||
Wholesale Shipments(1) | Retail Registrations(2) | ||||||||||||||||||||
Calendar Year | Calendar Year | ||||||||||||||||||||
(In units) | 2011 | 2010 | Increase (Decrease) | Change | 2011 | 2010 | Increase | Change | |||||||||||||
Q1 | 54,200 | 49,300 | 4,900 | 9.9 | % | 33,400 | 31,100 | 2,300 | 7.4 | % | |||||||||||
Q2 | 66,000 | 62,300 | 3,700 | 5.9 | % | 75,000 | 69,400 | 5,600 | 8.1 | % | |||||||||||
Q3 | 47,500 | 48,600 | (1,100 | ) | (2.3 | )% | 59,400 | 57,200 | 2,200 | 3.8 | % | ||||||||||
Q4 | 45,200 | 39,000 | 6,200 | 15.9 | % | 29,500 | 28,300 | 1,200 | 4.2 | % | |||||||||||
Total | 212,900 | 199,200 | 13,700 | 6.9 | % | 197,300 | 186,000 | 11,300 | 6.1 | % | |||||||||||
(In units) | 2012 | 2011 | Increase | Change | 2012 | 2011 | Increase | Change | |||||||||||||
Q1 | 60,400 | 54,200 | 6,200 | 11.4 | % | 38,600 | 33,400 | 5,200 | 15.6 | % | |||||||||||
Q2 | 71,100 | 66,000 | 5,100 | 7.7 | % | 79,000 | 75,000 | 4,000 | 5.3 | % | |||||||||||
July | 19,600 | 15,100 | 4,500 | 29.8 | % | 22,900 | 22,500 | 400 | 1.8 | % | |||||||||||
August | 21,000 | 18,100 | 2,900 | 16.0 | % | (4 | ) | 20,900 | |||||||||||||
September | 16,500 | (3 | ) | 14,300 | 2,200 | 15.4 | % | (4 | ) | 16,000 | |||||||||||
Q3 | 57,100 | (3 | ) | 47,500 | 9,600 | 20.2 | % | (4 | ) | 59,400 | |||||||||||
Q4 | 48,200 | (3 | ) | 45,200 | 3,000 | 6.6 | % | (4 | ) | 29,500 | |||||||||||
Total | 236,800 | (3 | ) | 212,900 | 23,900 | 11.2 | % | 197,300 | |||||||||||||
(1) | Towable wholesale shipments as reported by RVIA, rounded to the nearest hundred. |
(2) | Towable retail registrations as reported by Stat Surveys for the US and Canada combined, rounded to the nearest hundred. |
14
(3) | Monthly and quarterly 2012 towable wholesale shipments for September and the third and fourth calendar quarters are based upon the forecast prepared by Dr. Richard Curtin of the University of Michigan Consumer Survey Research Center for RVIA and reported in the RoadSigns RV Fall 2012 Industry Forecast Issue. The revised annual 2012 wholesale shipment forecast is 234,700 and the annual forecast for 2013 is 238,400. |
(4) | Statistical Surveys has not issued a projection for 2012 retail demand for this period. |
The towable retail market has not been as negatively impacted in recent years as the motorized market. The size of the towable market was nearly nine times larger than the motorized market on a unit basis in Calendar 2011. This is primarily due to the fact that average price of a towable unit is considerably less than a motor home.
Company Outlook
Based on our profitable operating results in Fiscal 2012 and Fiscal 2011, we believe that we have demonstrated our ability to maintain our liquidity, cover operations costs, recover fixed assets, and maintain physical capacity at present levels. Now that we have entered into the towable market, we have the potential to grow revenues and earnings in a market significantly larger than the motorized market.
As evidenced in the table below, our sales order backlog at the end of Fiscal 2012 significantly increased as compared to the end of Fiscal 2011. It has also increased sequentially from the end of our Fiscal 2012 third quarter, as previously illustrated. We believe the increase is a result of the positive dealer response to our new 2013 model year products introduced in late spring and increased retail registration activity of our products this past summer. As a result of the improved demand, we ramped up production throughout the fourth quarter of Fiscal 2012. We will continue to increase production during Fiscal 2013 to meet the growing demand for our products, while managing constraints as they present themselves in relation to labor and component parts.
We believe that the level of our dealer inventory at the end of Fiscal 2012 is lower than what it should be given the improved retail demand and increased sales order backlog of our product.
Our unit order backlog was as follows:
As Of | |||||||||||||||||
(In units) | August 25, 2012 | August 27, 2011 | Increase (Decrease) | % Change | |||||||||||||
Class A gas | 642 | 43.6 | % | 230 | 33.8 | % | 412 | 179.1 | % | ||||||||
Class A diesel | 333 | 22.6 | % | 177 | 26.0 | % | 156 | 88.1 | % | ||||||||
Total Class A | 975 | 66.2 | % | 407 | 59.8 | % | 568 | 139.6 | % | ||||||||
Class B | 118 | 8.0 | % | 71 | 10.4 | % | 47 | 66.2 | % | ||||||||
Class C | 380 | 25.8 | % | 203 | 29.8 | % | 177 | 87.2 | % | ||||||||
Total motor home backlog(1) | 1,473 | 100.0 | % | 681 | 100.0 | % | 792 | 116.3 | % | ||||||||
Travel trailer | 306 | 74.5 | % | 187 | 63.8 | % | 119 | 63.6 | % | ||||||||
Fifth wheel | 105 | 25.5 | % | 106 | 36.2 | % | (1 | ) | (0.9 | )% | |||||||
Total towable backlog(1) | 411 | 100.0 | % | 293 | 100.0 | % | 118 | 40.3 | % | ||||||||
Approximate backlog revenue in thousands | |||||||||||||||||
Motor home | $ | 163,725 | $ | 74,704 | $ | 89,021 | 119.2 | % | |||||||||
Towable | $ | 8,776 | $ | 6,669 | $ | 2,107 | 31.6 | % | |||||||||
(1) | 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 dealer at any time without penalty and, therefore, backlog may not necessarily be an accurate measure of future sales. |
Impact of Inflation
Materials cost is the primary component in the cost of our products. Historically, the impact of inflation on our operations has not been significantly detrimental, as we have usually been able to adjust our prices to reflect the inflationary impact on the cost of manufacturing our products. While we have historically been able to pass on these increased costs, in the event we are unable to continue to do so due to market conditions, future increases in manufacturing costs could have a material adverse effect on our results of operations.
15
Results of Operations
Fiscal 2012 Compared to Fiscal 2011
The following is an analysis of changes in key items included in the statements of operations for the fiscal year ended August 25, 2012 compared to the fiscal year ended August 27, 2011:
Year Ended | |||||||||||||||
(In thousands, except percent and per share data) | August 25, 2012 | % of Revenues(1) | August 27, 2011 | % of Revenues(1) | Increase (Decrease) | % Change | |||||||||
Net revenues | $ | 581,679 | 100.0 | % | $ | 496,418 | 100.0 | % | $ | 85,261 | 17.8 | % | |||
Cost of goods sold | 537,999 | 92.5 | % | 456,664 | 92.0 | % | 81,335 | 17.8 | % | ||||||
Gross profit | 43,680 | 7.5 | % | 39,754 | 8.0 | % | 3,926 | 9.9 | % | ||||||
Selling | 16,837 | 2.9 | % | 14,251 | 2.9 | % | 2,586 | 18.1 | % | ||||||
General and administrative | 17,267 | 3.0 | % | 14,263 | 3.0 | % | 3,004 | 21.1 | % | ||||||
Assets held for sale impairment and (gain), net | 50 | — | % | (39 | ) | — | % | 89 | NMF | ||||||
Operating expenses | 34,154 | 5.9 | % | 28,475 | 5.7 | % | 5,679 | 19.9 | % | ||||||
Operating income | 9,526 | 1.6 | % | 11,279 | 2.3 | % | (1,753 | ) | — | % | |||||
Non-operating income | 581 | 0.1 | % | 658 | 0.1 | % | (77 | ) | (11.7 | )% | |||||
Income before income taxes | 10,107 | 1.7 | % | 11,937 | 2.4 | % | (1,830 | ) | (15.3 | )% | |||||
(Benefit) provision for taxes | (34,865 | ) | (6.0 | )% | 94 | — | % | (34,959 | ) | NMF | |||||
Net income | $ | 44,972 | 7.7 | % | $ | 11,843 | 2.4 | % | $ | 33,129 | 279.7 | % | |||
Diluted income per share | $ | 1.54 | $ | 0.41 | $ | 1.13 | 275.6 | % | |||||||
Diluted average shares outstanding | 29,207 | 29,148 | |||||||||||||
(1) Percentages may not add due to rounding differences.
Unit deliveries and ASP, net of discounts, consisted of the following:
Year Ended | |||||||||||||||
(In units) | August 25, 2012 | Product Mix % (1) | August 27, 2011 | Product Mix % (1) | Increase (Decrease) | % Change | |||||||||
Motor homes: | |||||||||||||||
Class A gas | 1,648 | 35.5 | % | 1,518 | 34.5 | % | 130 | 8.6 | % | ||||||
Class A diesel | 931 | 20.1 | % | 918 | 20.9 | % | 13 | 1.4 | % | ||||||
Total Class A | 2,579 | 55.6 | % | 2,436 | 55.4 | % | 143 | 5.9 | % | ||||||
Class B (2) | 319 | 6.9 | % | 103 | 2.3 | % | 216 | 209.7 | % | ||||||
Class C | 1,744 | 37.6 | % | 1,856 | 42.2 | % | (112 | ) | (6.0 | )% | |||||
Total motor home deliveries | 4,642 | 100.0 | % | 4,395 | 100.0 | % | 247 | 5.6 | % | ||||||
ASP (in thousands) | $ | 105 | $ | 102 | $ | 4 | 3.4 | % | |||||||
Towables: | |||||||||||||||
Travel trailer | 1,372 | 58.7 | % | 575 | 74.8 | % | 797 | 397.9 | % | ||||||
Fifth wheel | 966 | 41.3 | % | 194 | 25.2 | % | 772 | 138.6 | % | ||||||
Total towable deliveries | 2,338 | 100.0 | % | 769 | 100.0 | % | 1,569 | 204.0 | % | ||||||
ASP (in thousands) | $ | 24 | $ | 21 | $ | 3 | 12.6 | % | |||||||
(1) Percentages may not add due to rounding differences.
(2) Increase in Class B deliveries in Fiscal 2012 is due to the fact that we did not produce this product during model year 2011 but resumed
production for model year 2012 in the last quarter of Fiscal 2011.
16
Net revenues consisted of the following:
Year Ended | |||||||||||||||||
(In thousands) | August 25, 2012 | August 27, 2011 | Increase (Decrease) | % Change | |||||||||||||
Motor homes (1) | $ | 483,532 | 83.1 | % | $ | 443,232 | 89.3 | % | $ | 40,300 | 9.1 | % | |||||
Towables (2) | 56,784 | 9.8 | % | 16,712 | 3.4 | % | 40,072 | 100.0 | % | ||||||||
Motor home parts and services | 12,661 | 2.2 | % | 13,105 | 2.6 | % | (444 | ) | (3.4 | )% | |||||||
Other manufactured products | 28,702 | 4.9 | % | 23,369 | 4.7 | % | 5,333 | 22.8 | % | ||||||||
Total net revenues | $ | 581,679 | 100.0 | % | $ | 496,418 | 100.0 | % | $ | 85,261 | 17.2 | % | |||||
(1) | Motor home unit revenue less discounts, sales promotions and incentives, and accrued loss on repurchase adjustments. |
(2) | Includes towable units and parts. |
The increase in motor home net revenues of $40.3 million or 9.1% was attributed to both an increase in motor home ASP of 3.4% and a 5.6% increase in unit deliveries when compared to Fiscal 2011. The increase in motor home ASP was primarily a result of more higher-priced Class A diesel units sold in Fiscal 2012.
Towables revenues were $56.8 million in Fiscal 2012. SunnyBrook, which was acquired in the second quarter of Fiscal 2011, had revenues of $16.7 million in Fiscal 2011.
Cost of goods sold was $538.0 million, or 92.5% of net revenues for Fiscal 2012 compared to $456.7 million, or 92.0% of net revenues for Fiscal 2011 due to the following:
• | Total variable costs (materials, direct labor, variable overhead, delivery expense and warranty), as a percent of net revenues, increased to 85.3% this year from 84.0% last year which was due to inflationary commodity pressures experienced in the first half of the fiscal year that were not passed on. Also impacting our variable costs were the following two significant items: |
◦ | In Fiscal 2011, our variable costs were positively impacted by a $3.5 million favorable inventory adjustment as a result of the annual physical inventory. This adjustment in the aggregate favorably impacted our material, labor, variable overhead and fixed overhead costs by 0.7% as a percentage of net revenues in Fiscal 2011. |
◦ | Our variable costs were favorably impacted by $613,000, or 0.1%, of net revenues for Fiscal 2012 due to a LIFO inventory gain as a result of deflation, as compared to LIFO inventory expense of $2.1 million, or 0.4%, of net revenues for Fiscal 2011. |
• | Fixed overhead (manufacturing support labor, depreciation and facility costs) and research and development-related costs decreased to 7.1% of net revenues compared to 8.0% for Fiscal 2011. With similar spending levels, the difference was due primarily to increased revenues in Fiscal 2012. |
• | All factors considered, gross profit decreased from 8.0% to 7.5% of net revenues. |
Selling expenses increased $2.6 million, or 18.1%, in Fiscal 2012. The expense increase was primarily due to selling expenses associated with Towables and increases in advertising expenses. As a percent of net revenues, selling expenses were 2.9% in both Fiscal 2012 and Fiscal 2011.
General and administrative expenses increased $3.0 million, or 21.1%, in Fiscal 2012. This increase was due primarily to increases of $2.1 million in incentives and increases in Towable operating expenses, partially offset by a reduction of legal expenses. As a percent of net revenues, general and administrative expenses were 3.0% and 2.9% in Fiscal 2012 and Fiscal 2011, respectively.
During Fiscal 2011 we realized a gain of $644,000 on the sale of an idled assembly facility (CCMF) and recorded an impairment of $605,000 on our Hampton facility, both assets held for sale. In the fourth quarter of Fiscal 2012 we recorded an additional impairment of $50,000 on the Hampton facility. See Note 6.
Non-operating income decreased $77,000 or 11.7%, in Fiscal 2012. This difference is primarily due to lower investment income. We also received proceeds from COLI policies in both Fiscal 2012 and Fiscal 2011. See Note 13.
17
The overall effective income tax rate for this year was a benefit of (345.0)% compared to an expense of 0.8% last year. The following table breaks down the two aforementioned tax rates:
Year Ended | |||||||||||
August 25, 2012 | August 27, 2011 | ||||||||||
(In thousands) | Amount | Effective Rate | Amount | Effective Rate | |||||||
Tax expense on current operations | $ | 2,914 | 28.8 | % | $ | 2,597 | 21.7 | % | |||
Valuation allowance decrease | (37,681 | ) | (372.8 | )% | (2,013 | ) | (16.8 | )% | |||
Uncertain tax positions settlements and adjustments | (159 | ) | (1.6 | )% | (490 | ) | (4.1 | )% | |||
Amended tax returns | 61 | 0.6 | % | — | — | % | |||||
Total (benefit) provision for taxes | $ | (34,865 | ) | (345.0 | )% | $ | 94 | 0.8 | % | ||
Tax expense on current operations
The primary reason for the increase in the overall effective tax expense rate on current operations is lower income tax credits and an increase in state taxes for this year compared to last year. Significant permanent deductions are income tax credits and tax-free income from COLI and student loan-related tax exempt securities. For further discussion of income taxes (which includes a reconciliation of the US statutory income tax rate to our effective tax rate), see Note 12.
Valuation allowance decrease
At the end of the fourth quarter of Fiscal 2012, we re-established almost all remaining deferred tax assets due to the fact that we are now in a three-year historical cumulative income position as opposed to a three-year historical loss position and that we have a positive future outlook. This resulted in a non-cash tax benefit of $37.7 million through the reduction of our valuation allowance. For further discussion of deferred tax assets (which includes a table of all types of deferred tax assets), see Note 12.
During the fourth quarter of Fiscal 2011, we re-established a portion of our deferred tax assets due to the taxable earnings achieved in Fiscal 2011 which increased the likelihood of realizing a portion of gross deferred tax assets in the future. This resulted in a tax benefit of $649,000 through the reduction of our valuation allowance. Also, the sale of CCMF resulted in a tax loss even though we incurred a gain for accounting purposes and we were able to utilize the associated deferred tax assets of $685,000 as a current tax deduction and reduce the related valuation allowance accordingly. We were also able to utilize NOLs and tax credit deferred tax assets established in the prior year of $479,000 due to taxable income earned in Fiscal 2011 and reduce the related valuation allowance accordingly.
Uncertain tax positions settlements and adjustments
During Fiscal 2012, benefits of $159,000 were recorded as a result of adjustments to uncertain tax positions. During Fiscal 2011, benefits of $490,000 were recorded as a result of adjustments to uncertain tax positions. For further discussion of income taxes, see Note 12.
Net income and diluted income per share were $45.0 million and $1.54 per share, respectively, for Fiscal 2012. In Fiscal 2011, the net income was $11.8 million and diluted income was $0.41 per share.
18
Fiscal 2011 Compared to Fiscal 2010
The following is an analysis of changes in key items included in the statements of operations for the fiscal year ended August 27, 2011 compared to the fiscal year ended August 28, 2010:
Year Ended | |||||||||||||||
(In thousands, except percent and per share data) | August 27, 2011 | % of Revenues(1) | August 28, 2010 | % of Revenues(1) | Increase (Decrease) | % Change | |||||||||
Net revenues | $ | 496,418 | 100.0 | % | $ | 449,484 | 100.0 | % | $ | 46,934 | 10.4 | % | |||
Cost of goods sold | 456,664 | 92.0 | % | 423,217 | 94.2 | % | 33,447 | 7.9 | % | ||||||
Gross profit | 39,754 | 8.0 | % | 26,267 | 5.8 | % | 13,487 | 51.3 | % | ||||||
Selling | 14,251 | 2.9 | % | 12,724 | 2.8 | % | 1,527 | 12.0 | % | ||||||
General and administrative | 14,263 | 2.9 | % | 13,023 | 2.9 | % | 1,240 | 9.5 | % | ||||||
Assets held for sale impairment and gain, net | (39 | ) | — | % | — | — | % | (39 | ) | NMF | |||||
Operating expenses | 28,475 | 5.7 | % | 25,747 | 5.7 | % | 2,728 | 10.6 | % | ||||||
Operating income | 11,279 | 2.3 | % | 520 | 0.1 | % | 10,759 | NMF | |||||||
Non-operating income | 658 | 0.1 | % | 222 | — | % | 436 | 196.4 | % | ||||||
Income before income taxes | 11,937 | 2.4 | % | 742 | 0.2 | % | 11,195 | NMF | |||||||
Provision (benefit) for taxes | 94 | — | % | (9,505 | ) | (2.1 | )% | 9,599 | 101.0 | % | |||||
Net income | $ | 11,843 | 2.4 | % | $ | 10,247 | 2.3 | % | $ | 1,596 | 15.6 | % | |||
Diluted income per share | $ | 0.41 | $ | 0.35 | $ | 0.06 | 17.1 | % | |||||||
Diluted average shares outstanding | 29,148 | 29,101 | |||||||||||||
(1) | Percentages may not add due to rounding differences. |
Unit deliveries and ASP, net of discounts, consisted of the following:
Year Ended | |||||||||||||||
(In units) | August 27, 2011 | Product Mix %(1) | August 28, 2010 | Product Mix %(1) | Increase (Decrease) | % Change | |||||||||
Motor homes: | |||||||||||||||
Class A gas | 1,518 | 34.5 | % | 1,483 | 33.4 | % | 35 | 2.4 | % | ||||||
Class A diesel | 918 | 20.9 | % | 969 | 21.9 | % | (51 | ) | (5.3 | )% | |||||
Total Class A | 2,436 | 55.4 | % | 2,452 | 55.3 | % | (16 | ) | (0.7 | )% | |||||
Class B | 103 | 2.3 | % | 236 | 5.3 | % | (133 | ) | (56.4 | )% | |||||
Class C | 1,856 | 42.2 | % | 1,745 | 39.4 | % | 111 | 6.4 | % | ||||||
Total motor home deliveries | 4,395 | 100.0 | % | 4,433 | 100.0 | % | (38 | ) | (0.9 | )% | |||||
ASP (in thousands) | $ | 102 | $ | 96 | $ | 6 | 6.3 | % | |||||||
Towables: | |||||||||||||||
Travel trailer | 575 | 74.8 | % | ||||||||||||
Fifth wheel | 194 | 25.2 | % | ||||||||||||
Total towable deliveries | 769 | 100.0 | % | ||||||||||||
ASP (in thousands) | $ | 21 | |||||||||||||
(1) | Percentages may not add due to rounding differences. |
19
Net revenues consisted of the following:
Year Ended | |||||||||||||||||
(In thousands) | August 27, 2011 | August 28, 2010 | Increase (Decrease) | % Change | |||||||||||||
Motor homes (1) | $ | 443,232 | 89.3 | % | $ | 415,277 | 92.4 | % | $ | 27,955 | 6.7 | % | |||||
Towables (2) | 16,712 | 3.4 | % | — | — | % | 16,712 | 100.0 | % | ||||||||
Motor home parts and services | 13,105 | 2.6 | % | 13,655 | 3.0 | % | (550 | ) | (4.0 | )% | |||||||
Other manufactured products | 23,369 | 4.7 | % | 20,552 | 4.6 | % | 2,817 | 13.7 | % | ||||||||
Total net revenues | $ | 496,418 | 100.0 | % | $ | 449,484 | 100.0 | % | $ | 46,934 | 10.4 | % | |||||
(1) | Motor home unit revenue less discounts, sales promotions and incentives, and accrued loss on repurchase adjustments. |
(2) | Includes towable units and parts. |
The increase in motor home net revenues of $28.0 million or 6.7% in Fiscal 2011 was entirely attributed to an increase in motor home ASP, which was also 6.7%, as unit deliveries were essentially flat compared to Fiscal 2010. The increase in motor home ASP was primarily a result of more higher-priced Class A diesel units sold in Fiscal 2011.
Towables revenues of $16.7 million were incremental in Fiscal 2011 and represented revenue since the SunnyBrook acquisition date of December 29, 2010.
Cost of goods sold was $456.7 million, or 92.0% of net revenues for Fiscal 2011 compared to $423.2 million, or 94.2% of net revenues for Fiscal 2010 due to the following:
• | Total variable costs (materials, direct labor, variable overhead, delivery expense and warranty), as a percent of net revenues, decreased to 84.0% in Fiscal 2011 from 85.2% in Fiscal 2010 which was primarily a result of increased sales volume. Also impacting our variable costs were the following two significant items: |
◦ | Our variable costs were positively impacted by an inventory adjustment as a result of the annual physical inventory performed in the second quarter of Fiscal 2011. The favorable adjustment was the 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. Conversely, a negative inventory adjustment of $600,000 was recorded in the fourth quarter of Fiscal 2011 as a result of a Towables physical inventory. These adjustments in the aggregate favorably impacted our material, labor, variable overhead and fixed overhead costs by 0.6% as a percentage of net revenues. |
◦ | Our variable costs were unfavorably impacted by $2.1 million, or 0.4%, of net revenues in Fiscal 2011 due to LIFO inventory expense, as compared to a LIFO inventory gain on liquidation of $783,000, or 0.2%, of net revenues in Fiscal 2010. This increase was due to inflation and higher inventory levels in Fiscal 2011. |
• | Fixed overhead (manufacturing support labor, depreciation and facility costs) and research and development-related costs decreased to 8.0% of net revenues compared to 8.9% in Fiscal 2010. With similar spending levels, the difference was due primarily to increased revenues in Fiscal 2011. |
• | All factors considered, gross profit increased to 8.0% of net revenues in Fiscal 2011 from 5.8% of net revenues in Fiscal 2010. |
Selling expenses increased $1.5 million, or 12.0%, in Fiscal 2011. The expense increase was primarily due to operating expenses associated with Towables and increases in advertising and wage-related expenses. As a percent of net revenues, selling expenses were 2.9% and 2.8% in Fiscal 2011 and Fiscal 2010, respectively.
General and administrative expenses increased $1.2 million, or 9.5%, in Fiscal 2011. This increase was due primarily to increases in wage-related expenses of $1.4 million and legal expenses of $1.1 million, partially offset by a decrease in product liability expenses of $830,000. As a percent of net revenues, general and administrative expenses were flat year over year at 2.9%.
In the first quarter of Fiscal 2011 we realized a gain of $644,000 on the sale of CCMF, an idled assembly facility in Charles City, Iowa, one of our assets held for sale. Conversely, an impairment of $605,000 was recorded in the third quarter of Fiscal 2011 on our Hampton facility. See Note 6.
Non-operating income increased $436,000 or 196.4%, in Fiscal 2011. This difference is primarily the result of incurring a one-time expense of $375,000 in Fiscal 2010 to terminate a credit and security agreement with Wells Fargo. We also received proceeds from COLI policies during Fiscal 2011, partially offset by lower investment income. See Note 13.
20
The overall effective income tax rate for Fiscal 2011 was an expense of 0.8% compared to a benefit of 1,281.0% for Fiscal 2010. The following table breaks down the two aforementioned tax rates:
Year Ended | |||||||||||
August 27, 2011 | August 28, 2010 | ||||||||||
(In thousands) | Amount | Effective Rate | Amount | Effective Rate | |||||||
Tax expense on current operations | $ | 2,597 | 21.7 | % | $ | 667 | 89.9 | % | |||
Valuation allowance decrease | (2,013 | ) | (16.8 | )% | (5,456 | ) | (735.3 | )% | |||
Uncertain tax positions settlements and adjustments | (490 | ) | (4.1 | )% | (3,195 | ) | (430.6 | )% | |||
Amended state returns and other items | — | — | % | (1,521 | ) | (205.0 | )% | ||||
Total provision (benefit) for taxes | $ | 94 | 0.8 | % | $ | (9,505 | ) | (1,281.0 | )% | ||
Tax expense on current operations
The primary reason for the decrease in the overall effective tax expense rate on current operations was the relationship between our higher pre-tax income in Fiscal 2011 relative to the permanent financial accounting to taxable income (loss) adjustments for Fiscal 2011 compared to Fiscal 2010. Significant permanent deductions were income tax credits and tax-free income from COLI and student loan-related tax exempt securities. For further discussion of income taxes (which includes a reconciliation of the US statutory income tax rate to our effective tax rate), see Note 12.
Valuation allowance decrease
During the fourth quarter of Fiscal 2011, we re-established a portion of our deferred tax assets due to the taxable earnings achieved in Fiscal 2011 which increased the likelihood of realizing a portion of gross deferred tax assets in the future. This resulted in a tax benefit of $649,000 through the reduction of our valuation allowance. Also, the sale of CCMF resulted in a tax loss even though we incurred a gain for accounting purposes and we were able to utilize the associated deferred tax assets of $685,000 as a current tax deduction and reduce the related valuation allowance accordingly. We were also able to utilize NOLs and tax credit deferred tax assets established in the prior year of $479,000 due to taxable income earned in Fiscal 2011 and reduce the related valuation allowance accordingly.
At the end of Fiscal 2009, we had established a valuation allowance on all deferred tax assets and NOL carryforward assets associated with Fiscal 2009. In Fiscal 2010, the President of the United States signed into law the Worker, Homeownership, and Business Assistance Act of 2009, which expanded the carryback period from two to five years, allowing us to carryback all Fiscal 2009 NOL. As a result, we recorded a total tax benefit of $5.8 million in Fiscal 2010 and reduced the associated valuation allowance due to this beneficial tax law change. The remaining change in valuation allowance was a result of increases in other deferred tax assets, such as additional NOLs and tax credit carryforward deferred tax assets established during the year.
Uncertain tax positions settlements and adjustments
During Fiscal 2011, benefits of $490,000 were recorded as a result of adjustments to uncertain tax positions. During Fiscal 2010, benefits of $3.2 million were recorded as a result of favorable settlements with various taxing jurisdictions and other adjustments to uncertain tax positions. Of this amount, $1.7 million resulted from the reduction of reserves associated with unrecognized tax benefits as a result of a positive resolution of the federal IRS tax audit on our income tax returns for Fiscal 2006 through Fiscal 2008. Benefits of $1.5 million were recorded a result of tax planning initiatives recognized during Fiscal 2010. For further discussion of income taxes, see Note 12.
Net income and diluted income per share were $11.8 million and $0.41 per share, respectively, for Fiscal 2011. In Fiscal 2010, net income was $10.2 million and diluted income was $0.35 per share.
Analysis of Financial Condition, Liquidity and Resources
Cash and cash equivalents decreased $6.6 million during Fiscal 2012 and totaled $62.7 million as of August 25, 2012. The significant liquidity events that occurred during Fiscal 2012 were:
• | Generated income before tax of $10.1 million. |
• | Increase in inventory of $17.3 million: The increase was primarily a result of increased work-in-process and raw material inventory due to increased production levels, and higher average cost per unit due to the mix of product ordered by our dealers. |
• | Stock repurchases of approximately $6.6 million. |
In Fiscal 2012, we had in place a $20 million revolving credit facility, as described in further detail in Note 8, that allowed us to borrow up to $12.5 million without financial covenant restrictions if there was adequate asset coverage. We had sufficient asset coverage in accounts receivable and inventory at the end of Fiscal 2012 to access the entire $12.5 million without financial covenant restrictions. The facility also included a framework to expand the size of the facility up to $50 million, based on mutually agreeable covenants to be determined at the time of expansion. The credit facility expired in October 2012. We are evaluating other alternatives and expect to have a new credit facility in place before the end of calendar 2012.
We filed a Registration Statement on Form S-3, which was declared effective by the SEC on March 31, 2010. Subject to market
21
conditions, we have the ability to offer and sell up to $35 million of our common stock in one or more offerings pursuant to the Registration Statement. The Registration Statement will be available for use for three years from its effective date. We currently have no plans to offer and sell the common stock registered under the Registration Statement; however, it does provide another potential source of liquidity in addition to the alternatives already in place.
Working capital at August 25, 2012 and August 27, 2011 was $126.1 million and $113.5 million, respectively, an increase of $12.5 million. We currently expect cash on hand, funds generated from operations and the availability under a credit facility to be sufficient to cover both short-term and long-term operating requirements. We anticipate capital expenditures in Fiscal 2013 of approximately $6.1 million, primarily for manufacturing equipment and facilities.
In addition to the $6.6 million of share repurchases in Fiscal 2012, we have purchased an additional 396,000 shares for $4.7 million as of October 12, 2012 in accordance with our Board's repurchase authorization described above and a stock repurchase plan under SEC Rule 10b5-1. We believe our common stock has been an attractive value at recent trading levels. If we continue to believe the common stock is trading at attractive levels we may purchase additional shares in Fiscal 2013.
Operating Activities
Cash provided by operating activities was $115,000 for the fiscal year ended August 25, 2012 compared to cash used in operating activities of $10.1 million for the fiscal year ended August 27, 2011, and cash provided by operating activities of $33.0 million for the fiscal year ended August 28, 2010. The combination of net income of $45.0 million in Fiscal 2012 and changes in non-cash charges (e.g., depreciation, LIFO, stock-based compensation, deferred income taxes) provided $15.9 million of operating cash compared to $21.0 million in Fiscal 2011 and $16.6 million in Fiscal 2010. In Fiscal 2012, changes in assets and liabilities (primarily inventory increases) used an additional $15.8 million of operating cash. In Fiscal 2011, changes in assets and liabilities (primarily inventory increases) used an additional $31.1 million of operating cash. In Fiscal 2010, changes in assets and liabilities (primarily income tax refunds) provided an additional $16.4 million of operating cash.
Investing Activities
Cash used in investing activities of $118,000 in Fiscal 2012 was due primarily to capital spending of $2.2 million and was offset by proceeds of $1.7 million from COLI policies and ARS redemptions of $1.1 million. In Fiscal 2011, cash provided by investing activities of $4.2 million was primarily due to ARS redemptions of $7.2 million, partially offset by the acquisition of Towables for $4.7 million and capital spending of $2.1 million. During Fiscal 2010, cash provided by investing activities of $14.3 million was primarily due to ARS redemptions of $15.9 million, partially offset by capital spending of $1.9 million.
Financing Activities
Cash used in financing activities of $6.6 million for the fiscal year ended August 25, 2012 was primarily due to $6.6 million in repurchases of our stock. Cash provided by financing activities for the fiscal year ended August 27, 2011 was $500,000. Cash used in financing activities for the fiscal year ended August 28, 2010 was $9.2 million, primarily consisting of $9.1 million for repayments on borrowings from our ARS portfolio,
Contractual Obligations and Commercial Commitments
Our principal contractual obligations and commercial commitments as of August 25, 2012 were as follows:
Payments Due By Period | |||||||||||||||
(In thousands) | Total | Fiscal 2013 | Fiscal 2014-2015 | Fiscal 2016-2017 | More than 5 Years | ||||||||||
Postretirement health care obligations (1) | $ | 45,132 | $ | 1,249 | $ | 3,102 | $ | 3,772 | $ | 37,009 | |||||
Deferred compensation obligations (1) | 23,732 | 2,752 | 5,166 | 4,471 | 11,343 | ||||||||||
Executive share option obligations (1) | 7,798 | 410 | 2,043 | 2,629 | 2,716 | ||||||||||
Supplemental executive retirement plan benefit obligations (1) | 3,342 | 480 | 407 | 356 | 2,099 | ||||||||||
Operating leases (2) | 1,866 | 958 | 908 | — | — | ||||||||||
Contracted services | 15 | 15 | — | — | — | ||||||||||
Unrecognized tax benefits (3) | 5,228 | — | — | — | — | ||||||||||
Total contractual cash obligations | $ | 87,113 | $ | 5,864 | $ | 11,626 | |||||||||