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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
 
x 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended February 27, 2010
or
 
 
o 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from to
 
 
WINNEBAGO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
Commission File Number: 001-06403
 
 
 
Iowa
 
42-0802678
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification No.)
 
 
 
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
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
 
Non-accelerated filer o
 
Smaller Reporting Company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
The number of shares of common stock, par value $0.50 per share, outstanding April 06, 2010 was 29,087,689.
 
 
 
 
 
WINNEBAGO INDUSTRIES, INC.
 
INDEX TO REPORT ON FORM 10-Q
 
 
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

PART I. FINANCIAL INFORMATION
 
ITEM 1. Condensed Financial Statements
 
Winnebago Industries, Inc.
Unaudited Statements of Operations
 
Quarter Ended
Six Months Ended
(In thousands, except per share data)
February 27,
2010
February 28,
2009
February 27,
2010
February 28,
2009
 
 
 
 
 
 
 
 
 
Net revenues
$
110,529
 
 
$
31,808
 
 
$
191,546
 
 
$
101,206
 
 
Cost of goods sold
105,745
 
 
43,600
 
 
186,238
 
 
121,892
 
 
Gross profit (deficit)
4,784
 
 
(11,792
)
 
5,308
 
 
(20,686
)
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Selling
3,102
 
 
2,816
 
 
6,331
 
 
6,481
 
 
General and administrative
3,540
 
 
4,003
 
 
6,812
 
 
8,334
 
 
Total operating expenses
6,642
 
 
6,819
 
 
13,143
 
 
14,815
 
 
 
 
 
 
 
 
 
 
 
Operating loss
(1,858
)
 
(18,611
)
 
(7,835
)
 
(35,501
)
 
Financial income
364
 
 
633
 
 
131
 
 
1,157
 
 
Loss before income taxes
(1,494
)
 
(17,978
)
 
(7,704
)
 
(34,344
)
 
 
 
 
 
 
 
 
 
 
Benefit for taxes
(2,200
)
 
(7,597
)
 
(7,066
)
 
(14,367
)
 
Net income (loss)
$
706
 
 
$
(10,381
)
 
$
(638
)
 
$
(19,977
)
 
 
 
 
 
 
 
 
 
 
Income (loss) per common share:
 
 
 
 
 
 
 
 
Basic
$
0.02
 
 
$
(0.36
)
 
$
(0.02
)
 
$
(0.69
)
 
Diluted
$
0.02
 
 
$
(0.36
)
 
$
(0.02
)
 
$
(0.69
)
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
29,080
 
 
29,037
 
 
29,077
 
 
29,032
 
 
Diluted
29,091
 
 
29,046
 
 
29,088
 
 
29,041
 
 
 
 
 
 
 
 
 
 
 
Dividends paid per common share
$
—
 
 
$
—
 
 
$
—
 
 
$
0.12
 
 
        
See unaudited notes to financial statements.
 

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Winnebago Industries, Inc.
Unaudited Balance Sheets
(In thousands, except per share data)
February 27,
2010
August 29,
2009
 
 
 
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
41,609
 
 
$
36,566
 
 
Short-term investments
9,000
 
 
13,500
 
 
Receivables, less allowance for doubtful accounts ($110 and $185, respectively)
20,344
 
 
11,717
 
 
Inventories
59,824
 
 
46,850
 
 
Prepaid expenses and other assets
2,844
 
 
3,425
 
 
Income taxes receivable
559
 
 
17,356
 
 
Total current assets
134,180
 
 
129,414
 
 
Property, plant, and equipment, net
25,646
 
 
28,040
 
 
Assets held for sale
6,515
 
 
6,515
 
 
Long-term investments
19748
 
 
19794
 
 
Investment in life insurance
22,999
 
 
22,451
 
 
Other assets
15,888
 
 
14,252
 
 
Total assets
$
224,976
 
 
$
220,466
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
$
17,110
 
 
$
10,370
 
 
Short-term ARS borrowings
6,320
 
 
9,100
 
 
Income taxes payable
231
 
 
299
 
 
Accrued expenses:
 
 
 
 
Accrued compensation
11,889
 
 
10,204
 
 
Product warranties
6,567
 
 
6,408
 
 
Self-insurance
4,855
 
 
5,356
 
 
Accrued loss on repurchases
1,409
 
 
1,199
 
 
Promotional
2,666
 
 
2,270
 
 
Other
5,067
 
 
4,748
 
 
Total current liabilities
56,114
 
 
49,954
 
 
Long-term liabilities:
 
 
 
 
Unrecognized tax benefits
8,014
 
 
9,012
 
 
Postretirement health care and deferred compensation benefits
70,273
 
 
69,169
 
 
Total long-term liabilities
78,287
 
 
78,181
 
 
Contingent liabilities and commitments
Stockholders' equity:
 
 
 
 
Stockholders' equity:
 
 
 
 
Capital stock common, par value $0.50; authorized 60,000 shares, issued 51,776 shares
25,888
 
 
25,888
 
 
Additional paid-in capital
29,517
 
 
29,726
 
 
Retained earnings
409,790
 
 
410,428
 
 
Accumulated other comprehensive income
5,607
 
 
6,540
 
 
Treasury stock, at cost (22,690 shares)
(380,227
)
 
(380,251
)
 
Total stockholders' equity
90,575
 
 
92,331
 
 
Total liabilities and stockholders' equity
$
224,976
 
 
$
220,466
 
 
 
See unaudited notes to financial statements.
 

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Winnebago Industries, Inc.
Unaudited Statements of Cash Flows
 
Six Months Ended
(In thousands)
February 27,
2010
February 28,
2009
Operating activities:
 
 
 
 
Net loss
$
(638
)
 
$
(19,977
)
 
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation
3,296
 
 
4,146
 
 
Stock-based compensation
291
 
 
526
 
 
Postretirement benefit income and deferred compensation expenses
624
 
 
711
 
 
(Reduction) provision for doubtful accounts
(60
)
 
18
 
 
Deferred income taxes
—
 
 
(503
)
 
Increase in cash surrender value of life insurance policies
(535
)
 
(513
)
 
Loss on disposal of property
1
 
 
29
 
 
Other
44
 
 
111
 
 
Change in assets and liabilities:
 
 
 
 
Inventories
(12,974
)
 
37,818
 
 
Receivables and prepaid assets
(8,347
)
 
1,290
 
 
Income taxes receivable and unrecognized tax benefits
15,983
 
 
(12,756
)
 
Accounts payable and accrued expenses
8,975
 
 
(11,734
)
 
Postretirement and deferred compensation benefits
(1,758
)
 
(1,424
)
 
Net cash provided by (used in) operating activities
4,902
 
 
(2,258
)
 
 
 
 
 
 
Investing activities:
 
 
 
 
Proceeds from the sale of investments at par
4,700
 
 
8,500
 
 
Purchases of property and equipment
(943
)
 
(1,344
)
 
Proceeds from the sale of property
46
 
 
214
 
 
Other
(442
)
 
(958
)
 
Net cash provided by investing activities
3,361
 
 
6,412
 
 
 
 
 
 
 
Financing activities:
 
 
 
 
Payments for purchase of common stock
(249
)
 
(162
)
 
Payments of cash dividends
—
 
 
(3,489
)
 
(Payments) borrowings on ARS portfolio
(2,780
)
 
9,100
 
 
Proceeds from exercise of stock options
94
 
 
—
 
 
Other
(285
)
 
—
 
 
Net cash (used in) provided by financing activities
(3,220
)
 
5,449
 
 
 
 
 
 
 
Net increase in cash and cash equivalents
5,043
 
 
9,603
 
 
Cash and cash equivalents at beginning of period
36,566
 
 
17,851
 
 
Cash and cash equivalents at end of period
$
41,609
 
 
$
27,454
 
 
 
 
 
 
 
Supplemental cash flow disclosure:
 
 
 
 
Income taxes (refunded) paid
$
(23,534
)
 
$
123
 
 
 
See unaudited notes to financial statements.

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Winnebago Industries, Inc.
Unaudited Notes to Financial Statements
 
General:
 
The "Company," "we," "our" and "us" are used interchangeably to refer to Winnebago Industries, Inc.
 
NOTE 1: Basis of Presentation
 
In our opinion, the accompanying condensed unaudited financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position as of February 27, 2010 and the results of operations for the quarter and six months ended February 27, 2010 and February 28, 2009, and cash flows for the six months ended February 27, 2010 and February 28, 2009. The statement of operations for the six months ended February 27, 2010 is not necessarily indicative of the results to be expected for the full year. The balance sheet data as of August 29, 2009 was derived from audited financial statements, but does not include all of the information and footnotes required by generally accepted accounting principles (GAAP) for complete financial statements. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto appearing in our Annual Report to Shareholders for the year ended August 29, 2009.
 
NOTE 2: New Accounting Pronouncements
 
On January 21, 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, amending Accounting Standards Codification (ASC) 820 (formerly Statement of Financial Accounting Standards No. 157) to add new requirements. The new requirements are disclosures about transfers into and out of Levels 1 and 2 measurements (as defined in Note 3) and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements (as defined in Note 3). ASU 2010-06 clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The new guidance became effective for our second quarter of Fiscal 2010, except for the requirement to provide Level 3 activity on a gross basis. That requirement will be effective starting in the first fiscal year beginning after December 15, 2010 (our Fiscal 2012).
 
On February 24, 2010, the FASB issued ASU 2010-09, which amends ASC 855 to address certain implementation issues related to an entity's requirement to perform and disclose subsequent events procedures. ASU 2010-09 requires entities that make filings with the Securities and Exchange Commission (SEC) to evaluate subsequent events through the date the financial statements are issued. The new guidance became effective immediately for financial statements that are issued or available to be issued. See Note 14.
 
NOTE 3: Fair Value Measurements
 
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
 

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The following tables set forth by level within the fair value hierarchy, our financial assets that were accounted for at fair value on a recurring basis at February 27, 2010 and August 29, 2009 according to the valuation techniques we used to determine their fair values:
 
 
 
Fair Value Measurements
Using Inputs Considered As
(In thousands)
Fair Value at
February 27,
2010
Level 1
Quoted Prices
in Active
Markets for
Identical Assets
Level 2
Significant
Other
Observable
Inputs
Level 3
Significant
Unobservable
Inputs
Cash and cash equivalents
$
41,609
 
 
$
41,609
 
 
$
—
 
 
$
—
 
 
Short-term investments (includes Put Rights)
9,000
 
 
—
 
 
—
 
 
9,000
 
 
Long-term investments
19,748
 
 
—
 
 
—
 
 
19,748
 
 
Assets that fund deferred compensation
11,410
 
 
11,410
 
 
—
 
 
—
 
 
 
 
 
 
Fair Value Measurements
Using Inputs Considered As
(In thousands)
Fair Value at
August 29,
2009
Level 1
Quoted Prices
in Active
Markets for
Identical Assets
Level 2
Significant
Other
Observable
Inputs
Level 3
Significant
Unobservable
Inputs
Cash and cash equivalents
$
36,566
 
 
$
36,566
 
 
$
—
 
 
$
—
 
 
Short-term investments (includes Put Rights)
13,500
 
 
—
 
 
—
 
 
13,500
 
 
Long-term investments
19,794
 
 
—
 
 
—
 
 
19,794
 
 
Assets that fund deferred compensation
10,858
 
 
10,858
 
 
—
 
 
—
 
 
 
The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3):
 
Quarter Ended
Six Months Ended
(In thousands)
February 27, 2010
February 28, 2009
February 27, 2010
February 28, 2009
Balance at beginning of period
$
33,306
 
 
$
32,750
 
 
$
33,294
 
 
$
37,538
 
 
Net realized gain (loss) included in earnings
—
 
 
167
 
 
—
 
 
(27
)
 
Net change included in other comprehensive income
(58
)
 
559
 
 
154
 
 
1,365
 
 
Sales
(4,500
)
 
—
 
 
(4,700
)
 
(5,400
)
 
Balance at end of period
$
28,748
 
 
$
33,476
 
 
$
28,748
 
 
$
33,476
 
 
 
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
 
Cash Equivalents
The carrying value of cash equivalents approximates fair value as maturities are less than three months. Our cash equivalents are comprised of money market funds traded in an active market with no restrictions and are classified as Level 1.
 
Long-Term and Short-Term Investments
Our debt securities are comprised of Auction Rate Securities (ARS) and Put Rights (each as defined and described in Note 4). Our short-term and long-term ARS related investments are classified as Level 3 as quoted prices were unavailable due to events described in Note 4. Due to limited market information, we utilized a discounted cash flow (DCF) model to derive an estimate of fair value at February 27, 2010. The assumptions used in preparing the DCF model included estimates with respect to the amount and timing of future interest and principal payments, forward projections of the interest rate benchmarks, the probability of full repayment of the principal considering the credit quality and guarantees in place, and the rate of return required by investors to own such securities given the current liquidity risk associated with ARS.
 

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Marketable Equity Securities
Our marketable equity securities are measured at fair value using quoted market prices and primarily consist of equity-based mutual funds. They are classified as Level 1 as they are traded in an active market for which closing stock prices are readily available. These securities fund the deferred compensation program and are presented as other assets in the accompanying balance sheets.
 
NOTE 4: Investments
 
We own investments in marketable securities that have been designated as available for sale or trading securities in accordance with ASC Topic 320, Investments-Debt and Equity Securities. At February 27, 2010, we held $29 million (par value) of investments comprised of tax-exempt ARS, which are variable-rate debt securities and have a long-term maturity with the interest rate being reset through Dutch auctions.
 
Since February 2008, most ARS auctions have failed for these securities and there is no assurance that future auctions will succeed and, as a result, our ability to liquidate our investment and fully recover the par value in the near term may be limited or nonexistent. We have no reason to believe that any of the underlying issuers of our ARS are presently at risk of default. As of the date of this report, we have continued to receive interest payments on the ARS in accordance with their terms. We believe we will ultimately be able to liquidate our ARS related investments without significant loss primarily due to the collateral securing our ARS and the legal settlement agreement we previously entered into with UBS AG (UBS). Our UBS settlement allows for a portion of our ARS to be redeemed at par as early as June 30, 2010. However, the remaining portfolio could take until final maturity of the ARS (up to 25 years) to realize the par value of our investments. Due to the changes and uncertainty in the ARS market, we believe the recovery period for these investments is likely to be longer than 12 months and as a result, we have classified these investments as long-term as of February 27, 2010. Our short-term ARS investments of $9 million relate to the UBS portion of our portfolio including the rights to require UBS to purchase (the Put Rights) at par value at any time during a two-year sale period beginning June 30, 2010.
 
The terms of the UBS settlement agreement also allowed us to borrow on a portion of our portfolio at no net cost and as a result, we borrowed $6.3 million under this arrangement, which is presented as short-term ARS borrowings on our balance sheet. We have the ability to maintain the no net cost loans until the securities are liquidated or they reach the June 2010 put date. During the second fiscal quarter, UBS elected to redeem one security that had a par value of $4.5 million. Terms of the settlement agreement required us to repay a portion of the outstanding borrowings. This requirement resulted in a $2.8 million reduction to our short-term borrowings with the remaining $1.7 million being returned to us in cash. In addition, short-term ARS investments of $200,000 not part of the UBS portfolio were redeemed by the issuer at par in December 2009.
 
At February 27, 2010, there was insufficient observable ARS market information available to determine the fair value of our ARS investments, including the Put Rights. We recorded a temporary impairment of $252,000 related to our long-term ARS investments of $20.0 million (par value) that were not part of the UBS settlement as of February 27, 2010.
 
NOTE 5: Inventories
 
Inventories are valued at the lower of cost or market, with cost being determined under the last-in, first-out (LIFO) method and market defined as net realizable value.
 
Inventories consist of the following:
(In thousands)
February 27,
2010
August 29,
2009
Finished goods
$
28,999
 
 
$
18,709
 
 
Work-in-process
32,431
 
 
24,982
 
 
Raw materials
29,137
 
 
33,505
 
 
 
90,567
 
 
77,196
 
 
LIFO reserve
(30,743
)
 
(30,346
)
 
Total inventories
$
59,824
 
 
$
46,850
 
 
 

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NOTE 6: Property, Plant and Equipment
 
Property, plant and equipment is stated at cost, net of accumulated depreciation and consists of the following:
(In thousands)
February 27, 2010
August 29,
2009
Land
$
772
 
 
$
772
 
 
Buildings
49,352
 
 
49,220
 
 
Machinery and equipment
91,642
 
 
92,625
 
 
Transportation equipment
3,368
 
 
3,457
 
 
 
145,134
 
 
146,074
 
 
Less accumulated depreciation
(119,488
)
 
(118,034
)
 
Total property, plant and equipment, net
$
25,646
 
 
$
28,040
 
 
 
NOTE 7: Credit Facility
 
On October 13, 2009, we entered into a Loan and Security Agreement (the "Loan Agreement") with Burdale Capital Finance, Inc., as Agent. The Loan Agreement provides for an initial $20.0 million revolving credit facility, based on eligible accounts receivable and eligible inventory, expiring on October 13, 2012, unless terminated earlier in accordance with its terms. The Loan Agreement contains no financial covenant restrictions for borrowings up to $12.5 million; provided that borrowings cannot exceed the Asset Coverage Amount (as defined in the Loan Agreement) divided by 2.25. The Loan Agreement also includes a framework to expand the size of the facility up to $50.0 million, based on mutually agreeable covenants to be determined at the time of expansion. No borrowings have been made under the Loan Agreement as of the date of this report. We intend to use any loan proceeds from the Loan Agreement for working capital and for other general corporate purposes, if needed.
 
Interest on loans made under the Loan Agreement will be based on the greater of LIBOR or a base rate of 2.0 percent plus a margin of 4.0 percent or the greater of prime rate or 4.25 percent plus a margin of 3.0 percent. The unused line fee associated with this Loan Agreement is 1.25 percent per annum. Additionally, under certain circumstances, we will be required to pay an early termination fee ranging from 1 - 3 percent of the maximum credit available under the Loan Agreement if we terminate the Loan Agreement prior to October 13, 2012.
 
NOTE 8: Warranty
 
We provide our motor home customers a comprehensive 12-month/15,000-mile warranty on the Class A, Class B and Class C coaches, and a 3-year/36,000-mile structural warranty on Class A and Class C sidewalls and floors. We have also incurred costs for certain warranty-type expenses which occurred after the normal warranty period. We have voluntarily agreed to pay such costs to help protect the reputation of our products and the goodwill of our customers. We record our warranty liabilities based on our estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. We also incur costs as a result of additional service actions not covered by our warranties, including product recalls and customer satisfaction actions.
 
Changes in our product warranty liability are as follows:
 
Quarter Ended
 
Six Months Ended
(In thousands)
February 27, 2010
February 28, 2009
 
February 27,
2010
February 28,
2009
Balance at beginning of period
$
6,180
 
 
$
8,705
 
 
 
$
6,408
 
 
$
9,859
 
 
Provision
1,352
 
 
428
 
 
 
2,481
 
 
1,580
 
 
Claims paid
(965
)
 
(1,581
)
 
 
(2,322
)
 
(3,887
)
 
Balance at end of period
$
6,567
 
 
$
7,552
 
 
 
$
6,567
 
 
$
7,552
 
 
 

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NOTE 9: Employee and Retiree Benefits
 
Postretirement health care and deferred compensation benefits are as follows:
(In thousands)
February 27,
2010
August 29,
2009
Postretirement health care benefit cost
$
36,117
 
 
$
35,312
 
 
Non-qualified deferred compensation
25,716
 
 
26,092
 
 
Executive share option plan liability
9,041
 
 
8,444
 
 
SERP benefit liability
3,355
 
 
3,259
 
 
Executive deferred compensation
68
 
 
59
 
 
Total postretirement health care and deferred compensation benefits
74,297
 
 
73,166
 
 
Less current portion
(4,024
)
 
(3,997
)
 
Long-term postretirement health care and deferred compensation benefits
$
70,273
 
 
$
69,169
 
 
 
Postretirement Health Care Benefits
We provide certain health care and other benefits for retired employees hired before April 1, 2001, who have fulfilled eligibility requirements of age 55 with 15 years of continuous service. Retirees are required to pay a monthly premium for medical coverage based on years of service at retirement and then current age. Our postretirement health care plan currently is not funded. We use a September 1 measurement date for this plan.
 
Net periodic postretirement health care benefit income consisted of the following components:
 
Quarter Ended
Six Months Ended
(In thousands)
February 27,
2010
February 28,
2009
February 27,
2010
February 28,
2009
Interest cost
$
495
 
 
$
530
 
 
$
989
 
 
$
1,060
 
 
Service cost
138
 
 
147
 
 
278
 
 
295
 
 
Net amortization and deferral
(831
)
 
(874
)
 
(1,662
)
 
(1,749
)
 
Net periodic postretirement benefit income
$
(198
)
 
$
(197
)
 
$
(395
)
 
$
(394
)
 
 
 
 
 
 
 
 
 
 
Payments for postretirement health care
$
278
 
 
$
217
 
 
$
461
 
 
$
409
 
 
 
For accounting purposes, we recognized income from the plan for both the second quarter and six months of both Fiscal 2010 and Fiscal 2009 due to the amortization of the cost savings from an amendment effective September 2004, which amended our postretirement health care benefit by establishing a maximum employer contribution amount.
 
NOTE 10: Contingent Liabilities and Commitments
 
Repurchase Commitments
Generally, companies in the RV industry enter into repurchase agreements with lending institutions which have provided wholesale floorplan financing to dealers. Most dealers' motor homes 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 motor homes purchased.
 
Our repurchase agreements provide that, in the event of default by the dealer on the agreement to pay the lending institution, we will repurchase the financed merchandise. The terms of these agreements, which can last up to 18 months, provide that our liability will be the lesser of remaining principal owed by the dealer or dealer invoice less periodic reductions based on the time since the date of the original invoice. Our liability cannot exceed 100 percent of the dealer invoice. Our contingent liability on these repurchase agreements was approximately $129.4 million and $90.6 million at February 27, 2010 and August 29, 2009, respectively.
 
In certain instances, we also repurchase inventory from our dealers due to state law or regulatory requirements that govern voluntary or involuntary relationship terminations. Although laws vary from state to state, some states have laws in place that require manufacturers of motor vehicles to repurchase current inventory if a dealership exits the business. Incremental repurchase exposure beyond existing repurchase agreements, related to dealer inventory in states that we have had historical experience of repurchasing inventory, totaled $3.4 million and $3.1 million at February 27, 2010 and August 29, 2009, respectively.
 

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Based on the repurchase exposure as previously described, we established an associated loss reserve. Accrued loss on repurchases was $1.4 million as of February 27, 2010 and $1.2 million as of August 29, 2009. A summary of recent repurchase activity is as follows:
 
Quarter Ended
Six Months Ended
(Dollars in thousands)
February 27,
2010
February 28,
2009
February 27,
2010
February 28,
2009
Inventory repurchased
 
 
 
 
 
 
 
 
Units
1
 
 
18
 
 
3
 
 
72
 
 
Dollars
$
61
 
 
$
1,559
 
 
$
220
 
 
$
6,468
 
 
Inventory resold
 
 
 
 
 
 
 
 
Units
2
 
 
28
 
 
4
 
 
70
 
 
Cash collected
$
106
 
 
$
1,906
 
 
$
252
 
 
$
5,243
 
 
Loss recognized
$
25
 
 
$
477
 
 
$
41
 
 
$
956
 
 
 
Litigation
We are involved in various legal proceedings which are ordinary routine litigation incidental to our business, some of which are covered in whole or in part by insurance. While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to this litigation, we believe that while the final resolution of any such litigation may have an impact on our results for a particular reporting period, the ultimate disposition of such litigation will not have any material adverse effect on our financial position, results of operations or liquidity.
 
NOTE 11: Income Taxes
 
We account for income taxes under ASC Topic 740, Income Taxes, (ASC 740). The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns.
 
Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. Valuation allowances arise due to uncertainty of realizing deferred tax assets. As of February 27, 2010, and August 29, 2009, we have applied a full valuation allowance of $44.6 million and $45.3 million, respectively, against our deferred tax assets. ASC 740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence, using a “more-likely-than-not” standard. In making such assessments, significant weight is given to evidence that can be objectively verified. A company's current or previous losses are given more weight than its future outlook. Under that standard, our three-year historical cumulative loss was a significant negative factor. This loss, combined with uncertain near-term market and economic conditions, reduced our ability to rely on our projections of any future taxable income in determining whether a valuation allowance is appropriate. Accordingly, we have concluded that a full valuation allowance on our deferred tax assets was needed. We will continue to assess the likelihood that our deferred tax assets will be realizable, and our valuation allowance will be adjusted accordingly, which could materially impact our financial position and results of operations.
 
On November 6, 2009, the President of the United States signed into law the Worker, Homeownership, and Business Assistance Act of 2009, which expands the net operating loss (NOL) carryback period from two to five years, allowing us to carryback all Fiscal 2009 NOLs. As a result, we recorded a tax benefit of $4.8 million related to the portion of the 2009 NOL that was previously not able to be carried back and reduced the associated valuation allowance. We filed our carryback tax return in December 2009 and received our federal refund of $21.9 million during our second quarter of Fiscal 2010.
 
We file tax returns in the U.S. federal jurisdiction, as well as various international and state jurisdictions. Our federal income tax returns for Fiscal 2006 through Fiscal 2008 were under examination by the IRS as of the end of the second quarter of 2010. Subsequent to quarter end, we received notification from the IRS that their exam was complete; no material adjustments were noted as a result of the exam. Although certain years are no longer subject to examinations by the IRS and various state taxing authorities, NOL carryforwards generated in those years may still be adjusted upon examination by the IRS or state taxing authorities if they either have been or will be used in a future period. A number of years may elapse before an uncertain tax position is audited and finally resolved, and it is often very difficult to predict the outcome of such audits. Periodically, various state and local jurisdictions conduct audits, therefore, a variety of other years are subject to state and local jurisdiction review.
 

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As of February 27, 2010, our total unrecognized tax benefits were $8.0 million, all of which, if recognized, would positively affect our effective tax rate as all of the deferred tax assets associated with these positions have a full valuation allowance established against them. It is our policy to recognize interest and penalties accrued relative to unrecognized tax benefits into tax expense. As of February 27, 2010, we had accrued $2.7 million in interest and penalties. Changes in our total unrecognized tax benefits are as follows:
 
Six Months Ended
(In thousands)
February 27,
2010
February 28,
2009
Balance at beginning of period
$
(9,012
)
 
$
(9,470
)
 
Gross increases - tax positions in a prior period
(123
)
 
33
 
 
Gross decreases - tax positions in a prior period
805
 
 
288
 
 
Gross increases - current period tax positions
(100
)
 
206
 
 
Settlements
416
 
 
—
 
 
Lapse of statute of limitations
—
 
 
—
 
 
Balance at end of period
$
(8,014
)
 
$
(8,943
)
 
 
We anticipate there could be a potential decrease in unrecognized tax benefits of approximately $2.0 million within the next twelve months from expected settlements or payments of uncertain tax positions. Actual results may differ materially from this estimate.
 
NOTE 12: Income Per Share
 
The following table reflects the calculation of basic and diluted income per share:
 
Quarter Ended
Six Months Ended
(In thousands, except per share data)
February 27,
2010
February 28,
2009
February 27,
2010
February 28,
2009
Income (loss) per share - basic:
 
 
 
 
 
 
 
 
Net income (loss)
$
706
 
 
$
(10,381
)
 
$
(638
)
 
$
(19,977
)
 
Weighted average shares outstanding
29,080
 
 
29,037
 
 
29,077
 
 
29,032
 
 
Net income (loss) per share - basic
$
0.02
 
 
$
(0.36
)
 
$
(0.02
)
 
$
(0.69
)
 
 
 
 
 
 
 
 
 
 
Income (loss) per share - assuming dilution:
 
 
 
 
 
 
 
 
Net income (loss)
$
706
 
 
$
(10,381
)
 
$
(638
)
 
$
(19,977
)
 
Weighted average shares outstanding
29,080
 
 
29,037
 
 
29,077
 
 
29,032
 
 
Dilutive impact of options and awards outstanding
11
 
 
9
 
 
11
 
 
9
 
 
Weighted average shares and potential dilutive shares outstanding
29,091
 
 
29,046
 
 
29,088
 
 
29,041
 
 
Net income (loss) per share - assuming dilution
$
0.02
 
 
$
(0.36
)
 
$
(0.02
)
 
$
(0.69
)
 
 
At the end of the second quarters of Fiscal 2010 and Fiscal 2009, there were options outstanding to purchase 951,615 shares and 1,018,732 shares, respectively, of common stock at an average price of $28.18 and $27.30, respectively, which were not included in the computation of diluted income per share because they are considered anti-dilutive under the treasury stock method per ASC 260.
 
NOTE 13: Comprehensive Income
 
Comprehensive income, net of tax, consists of:
 
Quarter Ended
Six Months Ended
(In thousands)
February 27,
2010
February 28,
2009
February 27,
2010
February 28,
2009
Net income (loss)
$
706
 
 
$
(10,381
)
 
$
(638
)
 
$
(19,977
)
 
Change in temporary impairment of investments, net of tax
(36
)
 
388
 
 
97
 
 
851
 
 
Amortization of prior service credit
(652
)
 
(656
)
 
(1,304
)
 
(1,289
)
 
Amortization of actuarial loss
137
 
 
110
 
 
274
 
 
216
 
 
Comprehensive income (loss)
$
155
 
 
$
(10,539
)
 
$
(1,571
)
 
$
(20,199
)
 
 

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NOTE 14: Subsequent Event
 
We filed a shelf registration statement on Form S-3 (the Registration Statement) which was declared effective by the SEC on March 31, 2010. We have the ability to offer to sell up to $35 million of our common stock in one or more offerings pursuant to the Registration Statement. Currently, there are no plans to offer and sell the common stock under the Registration Statement; however, we believe that it will provide us with the flexibility to act on an expedited basis to access another source of liquidity in addition to the alternatives already in place. The terms of any offering under the Registration Statement will be established at the time of such offering. 
 
We evaluated all events or transactions occurring between the balance sheet date and the date of issuance of the financial statements that would require recognition or disclosure in the financial statements. There were no material subsequent events, except as described above.
 
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
It is suggested that this management's discussion be read in conjunction with the Management's Discussion and Analysis included in our Annual Report to Shareholders for the year ended August 29, 2009.
 
Forward-Looking Information
 
Certain of the matters discussed in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. A number of factors could cause actual results to differ materially from these statements, including, but not limited to, interest rates and availability of credit, low consumer confidence, significant increase in repurchase obligations, inadequate liquidity or capital resources, availability and price of fuel, a further or continued slowdown in the economy, availability of chassis and other key component parts, sales order cancellations, slower than anticipated sales of new or existing products, new product introductions by competitors, the effect of global tensions, and other factors which may be disclosed throughout this report. 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 New York Stock Exchange.
 
Executive Overview
Winnebago Industries, Inc. is the leading U.S. manufacturer of motor homes with a proud history of manufacturing recreation vehicles for more than 50 years. Our strategy is to manufacture quality motor homes in a profitable manner. We produce all of our motor homes in highly vertically integrated manufacturing facilities in the state of Iowa. We primarily distribute our products through independent dealers throughout the United States and Canada, who then retail the products to the end consumer. In Calendar 2009, we led the industry in combined retail unit market share of Class A and Class C motor homes in the U.S., a position that we have held for the past nine calendar years. In Calendar 2009, we held the number three position in retail unit market share for Class B motor homes.
 
Our retail market share, as reported by Statistical Surveys, Inc. (Statistical Surveys), for the past three calendar years is as follows:
 
Calendar Year
 
2009
2008
2007
Class A gas
23.0
%
 
23.3
%
 
22.1
%
 
Class A diesel
11.2
%
 
8.1
%
 
9.0
%
 
Total Class A
16.6
%
 
15.4
%
 
15.3
%
 
Class C
22.9
%
 
23.0
%
 
24.0
%
 
Total Class A and C
19.2
%
 
18.5
%
 
18.7
%
 
 
 
 
 
 
 
 
Class B
17.9
%
 
3.7
%
 
—
%
 
 
Industry Outlook
As evidenced below, the motorized RV market has been significantly impacted by highly unstable market conditions in the past two years, both from a wholesale and a retail perspective. The tightening of the wholesale and retail credit markets, low consumer confidence, the effect of the global recession and uncertainty related to fuel prices have placed pressure on retail sales and as a result, dealers have significantly reduced their inventory levels.

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Table of Contents

We believe that the bottom of dealer inventory levels was reached during the fourth calendar quarter of 2009, as industry shipments finally began to increase over the prior year in the months of November and December. Retail registrations did not show that same trend, but were approaching nearly flat comparisons over the prior year in the months of November and December of 2009. The current industry outlook for Calendar 2010 per the Recreational Vehicle Industry Association (RVIA) is for wholesale shipments to be at a level similar to the retail activity in Calendar 2009. Prospective retail demand must improve to support this wholesale shipment forecast.
 
Key statistics for the motor home industry are as follows:
 
Industry A & C Motor Home Wholesale Shipments(1) Calendar Year
 
Industry A & C Motor Home Retail Registrations(2) Calendar Year
(In units)
2008
 
2007
 
Decrease
 
Change
 
2008
 
2007
 
Decrease
 
Change
First Quarter
10,400
 
 
13,600
 
 
(3,200
)
 
(23.5
)%
 
8,400
 
 
11,000
 
 
(2,600
)
 
(23.6
)%
Second Quarter
8,600
 
 
15,000
 
 
(6,400
)
 
(42.7
)%
 
9,400
 
 
14,600
 
 
(5,200
)
 
(35.6
)%
Third Quarter
4,600
 
 
12,400
 
 
(7,800
)
 
(62.9
)%
 
6,000
 
 
11,700
 
 
(5,700
)
 
(48.7
)%
Fourth Quarter
2,800
 
 
11,300
 
 
(8,500
)
 
(75.2
)%
 
3,900
 
 
8,000
 
 
(4,100
)
 
(51.2
)%
Total
26,400
 
 
52,300
 
 
(25,900
)
 
(49.5
)%
 
27,700
 
 
45,300
 
 
(17,600
)
 
(38.9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In units)
2009
 
2008
 
(Decrease)
Increase
 
Change
 
2009
 
2008
 
Decrease
 
Change
First Quarter
2,200
 
 
10,400
 
 
(8,200
)
 
(78.8
)%
 
4,200
 
 
8,400
 
 
(4,200
)
 
(50.0
)%
Second Quarter
2,900
 
 
8,600
 
 
(5,700
)
 
(66.3
)%
 
5,800
 
 
9,400
 
 
(3,600
)
 
(38.3
)%
Third Quarter
2,900
 
 
4,600
 
 
(1,700
)
 
(37.0
)%
 
4,700
 
 
6,000
 
 
(1,300
)
 
(21.7
)%
Fourth Quarter
4,000
 
 
2,800
 
 
1,200
 
 
42.9
%
 
3,500
 
 
3,900
 
 
(400
)
 
(10.3
)%
Total
12,000
 
 
26,400
 
 
(14,400
)
 
(54.5
)%
 
18,200
 
 
27,700
 
 
(9,500
)
 
(34.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2010
 
2009
 
Increase
 
Change
 
2010
 
2009
 
Decrease
 
Change
January
1,400
 
 
600
 
 
800
 
 
133.3
%
 
900
 
(4)
1,100
 
 
(200
)
 
(18.2
)%
February
1,800
 
 
700
 
 
1,100
 
 
157.1
%
 
 
 
1,400
 
 
 
 
 
March - December
15,000
 
(3)
10,700
 
 
4,300
 
 
40.2
%
 
 
 
15,700
 
 
 
 
 
Total
18,200
 
(3)
12,000
 
 
6,200
 
 
51.7
%
 
 
 
18,200
 
 
 
 
 
(1)
Class A and C wholesale shipments as reported by RVIA, rounded to the nearest hundred.
(2)
Class A and C U.S. retail registrations as reported by Statistical Surveys, rounded to the nearest hundred. Note that retail registrations for Georgia and New Mexico are no longer included for 2009, 2008 and 2007 as complete data was not reported.
(3)
Based upon forecasted 2010 Class A and C wholesale shipments as reported by RVIA in the Roadsigns Spring 2010 issue.
(4)
Retail registrations for January 2010 as reported by Statistical Surveys do not include data for Georgia and New Mexico. Statistical Surveys has not issued a projection for 2010 retail demand.
 
Company Outlook
Similar to the overall motor home industry, after two years of declining motor home shipments, we have seen improvements in recent quarters in our business as dealers began to re-order product. During the second half of Calendar 2009, we saw a substantial growth in our backlog, which we attributed to the very low level of dealer inventories and the strong acceptance of our Model Year 2010 product lineup. As a result of the increased order activity, we hired approximately 350 hourly employees during the first quarter of Fiscal 2010 and began to increase our weekly production rates in October 2009. This production ramp-up allowed us to ship an additional 315 units in our second quarter as compared to our first quarter of Fiscal 2010, an increase of nearly 40 percent. Note that our dealers' inventories increased for the first time in two years during our second fiscal quarter of Fiscal 2010. While we are encouraged with these improvements, the economic outlook remains uncertain and we believe retail sales will be the key driver to sustain our recovery and for continued growth going forward.
 

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Table of Contents

All of our key metrics for Class A, B and C motor homes, as previously discussed, are evidenced in the table below:
 
 
 
 
 
As of Quarter End
(In units and presented in fiscal quarters)
Wholesale
Deliveries
Retail
Registrations
Dealer
Inventory
Order
Backlog
 
3rd Quarter 2008
1,627
 
 
2,123
 
 
4,341
 
 
1,147
 
 
4th Quarter 2008
928
 
 
1,606
 
 
3,663
 
 
596
 
 
1st Quarter 2009
656
 
 
1,050
 
 
3,269
 
 
338
 
 
2nd Quarter 2009
315
 
 
666
 
 
2,918
 
 
335
 
 
Rolling 12 months (March 2008 Through February 2009)
3,526
 
 
5,445
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3rd Quarter 2009
620
 
 
1,214
 
 
2,324
 
 
382
 
 
4th Quarter 2009
605
 
 
1,235
 
 
1,694
 
 
940
 
 
1st Quarter 2010
794
 
 
921
 
 
1,567
 
 
1,521
 
 
2nd Quarter 2010
1,109
 
 
654
 
 
2,022
 
 
1,159
 
 
Rolling 12 months (March 2009 Through February 2010)
3,128
 
 
4,024
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Key Comparisons:
Wholesale
Deliveries
Retail
Registrations
Dealer
Inventory
Order
Backlog
Rolling 12 month comparison (February 2010 to February 2009)
(398
)
 
(1,421
)
 
(896
)
 
824
 
 
 
(11.3
)%
 
(26.1
)%
 
(30.7
)%
 
246.0
%
 
 
 
 
 
 
 
 
 
 
2nd quarter 2010 as compared to 2nd quarter 2009
794
 
 
(12
)
 
(896
)
 
824
 
 
 
252.1
%
 
(1.8
)%
 
(30.7
)%
 
246.0
%
 
 
 
 
 
 
 
 
 
 
2nd quarter 2010 as compared to 1st quarter 2010
315
 
 
(267
)
 
455
 
 
(362
)
 
 
39.7
%
 
(29.0
)%
 
29.0
%
 
(23.8
)%
 
 
Order backlog for our motor homes and dealer inventory levels is as follows:
 
As Of
 
February 27, 2010
February 28, 2009
 
 
 
 
 
Units
Product
Mix
Units
Product
Mix
Increase
(Decrease)
Change
Class A gas
372
 
 
32.1
%
 
67
 
 
20.0
%
 
305
 
 
455.2
%
Class A diesel
263
 
 
22.7
%
 
27
 
 
8.1
%
 
236
 
 
874.1
%
Total Class A
635
 
 
54.8
%
 
94
 
 
28.1
%
 
541
 
 
575.5
%
Class B
16
 
 
1.4
%
 
9
 
 
2.7
%
 
7
 
 
77.8
%
Class C
508
 
 
43.8
%
 
232
 
 
69.2
%
 
276
 
 
119.0
%
Total backlog
1,159
 
 
100.0
%
 
335
 
 
100.0
%
 
824
 
 
246.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Total approximate revenue dollars (in thousands) (1)
$
110,916
 
 
 
 
$
27,389
 
 
 
 
$
83,527
 
 
305.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Dealer inventory (units)
2,022
 
 
 
 
2,918
 
 
 
 
(896
)
 
(30.7
)%
(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 purchaser at any time without penalty and, therefore, backlog may not necessarily be an accurate measure of future sales.
 

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Table of Contents

Results of Operations
 
Current Quarter Compared to the Comparable Quarter Last Year
 
The following is an analysis of changes in key items included in the statements of operations:
 
Quarter Ended
(In thousands, except percent
and per share data)
February 27,
2010
% of
Revenues
February 28,
2009
% of
Revenues
Increase
(Decrease)
%
Change
Net revenues
$
110,529
 
 
100.0
%
 
$
31,808
 
 
100.0
%
 
$
78,721
 
 
247.5
%
 
Cost of goods sold
105,745
 
 
95.7
%
 
43,600
 
 
137.1
%
 
62,145
 
 
142.5
%
 
Gross profit (deficit)
4,784
 
 
4.3
%
 
(11,792
)
 
(37.1
)%
 
16,576
 
 
140.6
%
 
Selling
3,102
 
 
2.8
%
 
2,816
 
 
8.8
%
 
286
 
 
10.2
%
 
General and administrative
3,540
 
 
3.2
%
 
4,003
 
 
12.6
%
 
(463
)
 
(11.6
)%
 
Total operating expenses
6,642
 
 
6.0
%
 
6,819
 
 
21.4
%
 
(177
)
 
(2.6
)%
 
Operating loss
(1,858
)
 
(1.7
)%
 
(18,611
)
 
(58.5
)%
 
16,753
 
 
90.0
%
 
Financial income
364
 
 
0.3
%
 
633
 
 
2.0
%
 
(269
)
 
(42.5
)%
 
Loss before income taxes
(1,494
)
 
(1.4
)%
 
(17,978
)
 
(56.5
)%
 
16,484
 
 
91.7
%
 
Benefit for taxes
(2,200
)
 
(2.0
)%
 
(7,597
)
 
(23.9
)%
 
5,397
 
 
71.0
%
 
Net income (loss)
$
706
 
 
0.6
%
 
$
(10,381
)
 
(32.6
)%
 
$
11,087
 
 
106.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted income (lose) per share
$
0.02
 
 
 
 
$
(0.36
)
 
 
 
$
0.38
 
 
105.6
%
 
Fully diluted average shares outstanding
29,091
 
 
 
 
29,046
 
 
 
 
45
 
 
0.2
%
 
 
Unit deliveries consisted of the following:    
 
Quarter Ended
(In units)
February 27,
2010
Product
Mix
February 28,
2009
Product
Mix
Increase
%
Change
Class A gas
378
 
 
34.1
%
 
77
 
 
24.4
%
 
301
 
 
390.9
%
 
Class A diesel
254
 
 
22.9
%
 
45
 
 
14.3
%
 
209
 
 
464.4
%
 
Total Class A
632
 
 
57.0
%
 
122
 
 
38.7
%
 
510
 
 
418.0
%
 
Class B
64
 
 
5.8
%
 
8
 
 
<