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WGO > SEC Filings for WGO > Form 10-K on 23-Oct-2012All Recent SEC Filings

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Form 10-K for WINNEBAGO INDUSTRIES INC


23-Oct-2012

Annual Report


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:
Executive Overview

Industry Outlook

Company Outlook

Results of Operations

Analysis of Financial Condition, Liquidity and Capital Resources

Contractual Obligations and Commercial Commitments

Critical Accounting Policies

New Accounting Pronouncements

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 %


Table of Contents

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:

                                                                                         Operating
                      Revenues               Gross Profit          Gross Margin        Income (Loss)         Operating Margin
(In thousands)    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.


Table of Contents

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
                                 Increase                                    Increase
(In units)   2011         2010  (Decrease)   Change      2011         2010  (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 )%

                                 Increase                                    Increase
(In units)   2012         2011  (Decrease)   Change      2012         2011  (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
                                    Increase
(In units)     2011          2010  (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.


Table of Contents

(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
                                                                                 Increase         %
(In units)                   August 25, 2012            August 27, 2011         (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.


Table of Contents

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   August 25,       % of       August 27,       % of        Increase         %
data)                      2012       Revenues(1)      2011       Revenues(1)   (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
                              August 25,    Product     August 27,    Product        Increase           %
(In units)                       2012      Mix % (1)       2011      Mix % (1)      (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.


Table of Contents

Net revenues consisted of the following:

                                                          Year Ended
                                                                            Increase       %
(In thousands)                  August 25, 2012       August 27, 2011      (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.


Table of Contents

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
                                                       Effective                   Effective
(In thousands)                              Amount       Rate          Amount        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 . . .

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