2014 Q1 10Q

 

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 November 30, 2013
 
or
 
 
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from _________________ to _________________
 
 
 
 
 
Commission File Number: 001-06403
 

WINNEBAGO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Iowa
 
 
42-0802678
(State or other jurisdiction of incorporation or organization)
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
P. O. Box 152, Forest City, Iowa
 
 
50436
(Address of principal executive offices)
 
 
(Zip Code)
 
 
 
 
 
 
 
(641) 585-3535
 
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x 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 January 2, 2014 was 27,718,043.
 



Winnebago Industries, Inc.
Table of Contents

 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A
Item 2.
Item 6.
 
 
 



Table of Contents

Glossary


The following terms and abbreviations appear in the text of this report and are defined as follows:
3M
3M Company
AOCI
Accumulated Other Comprehensive Income (Loss)
ARS
Auction Rate Securities
ASC
Accounting Standards Codification
ASP
Average Sales Price
ASU
Accounting Standards Update
COLI
Company Owned Life Insurance
Credit Agreement
Credit Agreement dated as of October 31, 2012 by and between Winnebago Industries, Inc. and Winnebago of Indiana, LLC, as Borrowers, and General Electric Capital Corporation, as Agent
DCF
Discounted Cash Flow
FASB
Financial Accounting Standards Board
FIFO
First In, First Out
GAAP
Generally Accepted Accounting Principles
GECC
General Electric Capital Corporation
IRS
Internal Revenue Service
LIBOR
London Interbank Offered Rate
LIFO
Last In, First Out
NMF
Non-Meaningful Figure
NYSE
New York Stock Exchange
RV
Recreation Vehicle
RVIA
Recreation Vehicle Industry Association
SEC
U.S. Securities and Exchange Commission
SERP
Supplemental Executive Retirement Plan
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
XBRL
eXtensible Business Reporting Language



1

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

Winnebago Industries, Inc.
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)

 
Three Months Ended
(In thousands, except per share data)
November 30,
2013
 
December 1,
2012
Net revenues
$
222,670

 
$
193,554

Cost of goods sold
196,708

 
172,807

Gross profit
25,962

 
20,747

Operating expenses:
 
 
 
Selling
4,333

 
4,961

General and administrative
5,623

 
5,812

Loss on sale of asset held for sale

 
28

Total operating expenses
9,956

 
10,801

Operating income
16,006

 
9,946

Non-operating income
91

 
614

Income before income taxes
16,097

 
10,560

Provision for taxes
4,951

 
3,169

Net income
$
11,146

 
$
7,391

 
 
 
 
Income per common share:
 
 
 
Basic
$
0.40

 
$
0.26

Diluted
$
0.40

 
$
0.26

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
27,851

 
28,301

Diluted
27,971

 
28,361

 
 
 
 
Net income
$
11,146

 
$
7,391

Other comprehensive (loss) income:
 
 
 
Amortization of prior service credit
  (net of tax of $482 and $442)
(800
)
 
(734
)
Amortization of net actuarial loss
  (net of tax of $99 and $149)
164

 
253

Unrealized appreciation (depreciation) of investments
  (net of tax of $91 and $0)
151

 
(1
)
Total other comprehensive loss
(485
)
 
(482
)
Comprehensive income
$
10,661

 
$
6,909


See notes to consolidated financial statements.



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Table of Contents

Winnebago Industries, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share data)
November 30,
2013
 
August 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
49,737

 
$
64,277

Receivables, less allowance for doubtful accounts ($152 and $152)
42,944

 
29,145

Inventories
122,478

 
112,541

Prepaid expenses and other assets
8,356

 
8,277

Income taxes receivable and prepaid
132

 
1,868

Deferred income taxes
8,155

 
7,742

Total current assets
231,802

 
223,850

Property, plant and equipment, net
21,057

 
20,266

Long-term investments

 
2,108

Investment in life insurance
25,299

 
25,051

Deferred income taxes
25,007

 
25,649

Goodwill
1,228

 
1,228

Other assets
10,520

 
10,993

Total assets
$
314,913

 
$
309,145

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
27,316

 
$
28,142

Income taxes payable
2,623

 

Accrued expenses:
 
 
 
Accrued compensation
15,207

 
22,101

Product warranties
8,345

 
8,443

Self-insurance
4,455

 
4,531

Accrued loss on repurchases
1,610

 
1,287

Promotional
2,988

 
1,910

Other
4,465

 
3,940

Total current liabilities
67,009

 
70,354

Long-term liabilities:
 
 
 
Unrecognized tax benefits
3,830

 
3,988

Postretirement health care and deferred compensations benefits
63,485

 
64,074

Total long-term liabilities
67,315

 
68,062

Contingent liabilities and commitments


 


Stockholders' equity:
 
 
 
Capital stock common, par value $0.50;
   authorized 60,000 shares, issued 51,776 shares
25,888

 
25,888

Additional paid-in capital
31,071

 
29,334

Retained earnings
520,589

 
509,443

Accumulated other comprehensive income
364

 
849

Treasury stock, at cost (23,945 and 23,917 shares)
(397,323
)
 
(394,785
)
Total stockholders' equity
180,589

 
170,729

Total liabilities and stockholders' equity
$
314,913

 
$
309,145


See notes to consolidated financial statements.

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Table of Contents

Winnebago Industries, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended
(In thousands)
November 30,
2013
 
December 1,
2012
Operating activities:
 
 
 
Net income
$
11,146

 
$
7,391

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
984

 
1,147

LIFO expense
431

 
352

Stock-based compensation
952

 
687

Deferred income taxes including valuation allowance
366

 
(40
)
Postretirement benefit income and deferred compensation expense
(139
)
 
221

Provision for doubtful accounts

 
3

Loss (gain) on disposal of property
8

 
(3
)
Gain on life insurance

 
(509
)
Increase in cash surrender value of life insurance policies
(286
)
 
(383
)
Change in assets and liabilities:
 
 
 
Inventories
(10,368
)
 
(19,621
)
Receivables, prepaid and other assets
(13,928
)
 
(4,107
)
Income taxes and unrecognized tax benefits
4,584

 
3,195

Accounts payable and accrued expenses
(4,675
)
 
2,521

Postretirement and deferred compensation benefits
(970
)
 
(1,177
)
Net cash used in operating activities
(11,895
)
 
(10,323
)
 
 
 
 
Investing activities:
 
 
 
Proceeds from the sale of investments, at par
2,350

 

Proceeds from life insurance

 
974

Purchases of property and equipment
(1,693
)
 
(1,273
)
Proceeds from the sale of property
1

 
566

Repayments of COLI borrowings

 
(1,371
)
Other
153

 
129

Net cash provided by (used in) investing activities
811

 
(975
)
 
 
 
 
Financing activities:
 
 
 
Payments for purchases of common stock
(5,561
)
 
(7,177
)
Proceeds from exercise of stock options
2,080

 

Other
25

 
(133
)
Net cash used in financing activities
(3,456
)
 
(7,310
)
 
 
 
 
Net decrease in cash and cash equivalents
(14,540
)
 
(18,608
)
Cash and cash equivalents at beginning of period
64,277

 
62,683

Cash and cash equivalents at end of period
$
49,737

 
$
44,075

 
 
 
 
Supplement cash flow disclosure:
 
 
 
Income taxes paid, net of refunds
$

 
$
13


See notes to consolidated financial statements.

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Table of Contents

Winnebago Industries, Inc.
Notes to Consolidated Financial Statements
(Unaudited)


Note 1: Basis of Presentation
The "Company," "we," "our" and "us" are used interchangeably to refer to Winnebago Industries, Inc. and its wholly-owned subsidiary, Winnebago of Indiana, LLC, as appropriate in the context.

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; our website is www.winnebagoind.com. Our common stock trades on the NYSE under the symbol “WGO.”

In our opinion, the accompanying condensed unaudited consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly our consolidated financial position as of November 30, 2013 and the consolidated results of operations and comprehensive income and consolidated cash flows for the first three months of Fiscal 2014 and 2013. The consolidated statement of operations and comprehensive income for the first three months of Fiscal 2014 is not necessarily indicative of the results to be expected for the full year. The consolidated balance sheet data as of August 31, 2013 was derived from audited financial statements, but does not include all of the information and footnotes required by GAAP for complete financial statements. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the fiscal year ended August 31, 2013.

Fiscal Period
We follow a 52-/53-week fiscal year, ending the last Saturday in August. Fiscal 2014 is a 52-week year; the first quarter ending November 30, 2013 had 13 weeks. Fiscal 2013 was a 53-week fiscal year; the first quarter ending December 1, 2012 had 14 weeks.

New Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740), which requires entities to present unrecognized tax benefits as a liability and not combine it with deferred tax assets to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date. ASU 2013-11 will become effective for fiscal years beginning after December 15, 2013 (our Fiscal 2015). We are currently evaluating the impact on our consolidated financial statements.

Note 2: Concentration Risk

One of our dealer organizations accounted for 19.8% and 28.0% of our consolidated net revenue for the first three months of Fiscal 2014 and Fiscal 2013, respectively. A second dealer organization accounted for 11.2% and 10.4% of our consolidated net revenue for the first three months of Fiscal 2014 and Fiscal 2013, respectively. The loss of these dealer organizations could have a significant adverse effect on our business. In addition, deterioration in the liquidity or creditworthiness of these dealers could negatively impact our sales and could trigger repurchase obligations under our repurchase agreements.

Note 3: Investments and Fair Value Measurements
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
We account for fair value measurements in accordance with ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measurement and expands disclosure about fair value measurement. 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.

Cash Equivalents
The carrying value of cash equivalents approximates fair value as original maturities are less than three months. Our cash equivalents are comprised of money market funds traded in an active market with no restrictions.


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Table of Contents

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 November 30, 2013 and August 31, 2013 according to the valuation techniques we used to determine their fair values:
 
 
Fair Value at
November 30,
2013
 
Fair Value Measurements
Using Inputs Considered As
(In thousands)
 
 
Level 1 Quoted Prices in Active Markets for Identical Assets
 
Level 2 Significant Other
Observable Inputs
 
Level 3 Significant
Unobservable Inputs
Assets that fund deferred compensation:
 
 
 
 
 
 
 
 
  Domestic equity funds
 
$
6,502

 
$
6,502

 
$

 
$

  International equity funds
 
762

 
762

 

 

  Fixed income funds
 
257

 
257

 

 

Total assets at fair value
 
$
7,521

 
$
7,521

 
$

 
$


 
 
Fair Value at
August 31,
2013
 
Fair Value Measurements
Using Inputs Considered As
(In thousands)
 
 
Level 1 Quoted Prices in Active Markets for Identical Assets
 
Level 2 Significant Other
Observable Inputs
 
Level 3 Significant
Unobservable Inputs
Long-term investments:
 
 
 
 
 
 
 
 
  Student loan ARS
 
$
2,108

 
$

 
$

 
$
2,108

Assets that fund deferred compensation:
 
 
 
 
 
 
 
 
  Domestic equity funds
 
7,127

 
7,127

 

 

  International equity funds
 
742

 
742

 

 

  Fixed income funds
 
287

 
287

 

 

Total assets at fair value
 
$
10,264

 
$
8,156

 
$

 
$
2,108


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
(In thousands)
 
November 30,
2013
 
December 1,
2012
Balance at beginning of period
 
$
2,108

 
$
9,074

Transfer to Level 2
 

 
(250
)
Net change included in other comprehensive income
 
242

 
(1
)
Sales
 
(2,350
)
 

Balance at end of period
 
$

 
$
8,823

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Long-Term Investments
Our long-term investments were comprised of ARS. Our long-term ARS investments were classified as Level 3, as quoted prices were unavailable and there was insufficient observable ARS market information available to determine the fair value of our ARS investments. Due to limited market information, we utilized a DCF model to derive an estimate of fair value for the ARS for prior periods. 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. During the first quarter of Fiscal 2014 we redeemed our last ARS holding at par value of $2.4 million.



 


6

Table of Contents

Assets that Fund Deferred Compensation
Our assets that fund deferred compensation are marketable equity securities measured at fair value using quoted market prices and primarily consist of equity-based mutual funds. They are classified as Level 1 as they are traded in an active market for which closing stock prices are readily available. These securities fund the Executive Share Option Plan (see Note 8), a deferred compensation program, and are presented as other assets in the accompanying balance sheets.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Our non-financial assets, which include goodwill and property, plant and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required, we must evaluate the non-financial asset for impairment. If an impairment did occur, the asset is required to be recorded at the estimated fair value. During the first three months of Fiscal 2014, no impairments were recorded for non-financial assets.

Note 4: Inventories
Inventories consist of the following:
(In thousands)
 
November 30,
2013
 
August 31,
2013
Finished goods
 
$
47,822

 
$
43,927

Work-in-process
 
49,451

 
46,257

Raw materials
 
55,481

 
52,201

Total
 
152,754

 
142,385

LIFO reserve
 
(30,276
)
 
(29,844
)
Total inventories
 
$
122,478

 
$
112,541

The above value of inventories, before reduction for the LIFO reserve, approximates replacement cost. Of the $152.8 million and $142.4 million inventory at November 30, 2013 and August 31, 2013, respectively, $143.1 million and $136.1 million is valued on a LIFO basis. Towables inventory of $9.7 million and $6.3 million at November 30, 2013 and August 31, 2013, respectively, is valued on a FIFO basis.

Note 5: Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation and consists of the following:
(In thousands)
 
November 30,
2013
 
August 31,
2013
Land
 
$
757

 
$
757

Buildings and building improvements
 
50,570

 
50,297

Machinery and equipment
 
92,014

 
91,224

Transportation
 
9,032

 
9,044

Total property, plant and equipment, gross
 
152,373

 
151,322

Less accumulated depreciation
 
(131,316
)
 
(131,056
)
Total property, plant and equipment, net
 
$
21,057

 
$
20,266


On December 19, 2013 3M exercised an option to purchase warehouse facilities that 3M had leased from us since 1980. Net proceeds from the sale were $2.2 million, resulting in a gain of approximately $630,000. We received lease payments of $860,000 and recorded depreciation charges of $148,000 in Fiscal 2013 related to these warehouse facilities.

Note 6: Credit Facilities
On October 31, 2012, we entered into the Credit Agreement with GECC. The Credit Agreement provides for an initial $35.0 million revolving credit facility based on the Company's eligible inventory and expires on October 31, 2015, unless terminated earlier in accordance with its terms. There is no termination fee associated with the Credit Agreement.
The Credit Agreement contains no financial covenant restrictions for borrowings where we have excess borrowing availability under the facility of greater than $5.0 million. The Credit Agreement requires us to comply with a fixed charge ratio if excess borrowing availability under the facility is less than $5.0 million. In addition the Credit Agreement also includes a framework to expand the size of the facility up to $50.0 million, based on mutually agreeable terms at the time of the expansion. Interest on loans made under the new facility will be based on LIBOR plus a margin of 3.0%. The initial unused line fee associated with the Credit Agreement is 0.5% per annum and has the ability to be lowered based upon facility usage.

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Table of Contents

The Credit Agreement contains typical affirmative representations and covenants for a credit agreement of this size and nature. Additionally, the Credit Agreement contains negative covenants limiting our ability, among other things, to incur debt, grant liens, make acquisitions, make certain investments, pay certain dividends and distributions, engage in mergers, consolidations or acquisitions and sell certain assets. Obligations under the Credit Agreement are secured by a security interest in all of our accounts and other receivables, chattel paper, documents, deposit accounts, instruments, equipment, inventory, investment property, leasehold interest, cash and cash equivalents, letter-of-credit rights, most real property and fixtures and certain other business assets.
As of the date of this report, we are in compliance with all terms of the Credit Agreement, and no borrowings have been made thereunder.
Note 7: Warranty

We provide our motorhome customers a comprehensive 12-month/15,000-mile warranty on our Class A, B and C motorhomes, and a 3-year/36,000-mile structural warranty on Class A and C sidewalls and floors. We provide a comprehensive 12-month warranty on all towable products. 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. Estimated costs related to product warranty are accrued at the time of sale and are based upon past warranty claims and unit sales history and adjusted as required to reflect actual costs incurred, as information becomes available. A significant increase in dealership labor rates, the cost of parts or the frequency of claims could have a material adverse impact on our operating results for the period or periods in which such claims or additional costs materialize.

Changes in our product warranty liability are as follows:
 
 
Quarter Ended
(In thousands)
 
November 30,
2013
 
December 1,
2012
Balance at beginning of period
 
$
8,443

 
$
6,990

Provision
 
2,770

 
2,486

Claims paid
 
(2,868
)
 
(1,927
)
Balance at end of period
 
$
8,345

 
$
7,549


Note 8: Employee and Retiree Benefits
Postretirement health care and deferred compensation benefits are as follows:
(In thousands)
 
November 30,
2013
 
August 31,
2013
Postretirement health care benefit cost
 
$
36,468

 
$
36,244

Non-qualified deferred compensation
 
22,014

 
22,366

Executive share option plan liability
 
6,506

 
6,959

SERP benefit liability
 
2,914

 
2,876

Executive deferred compensation
 
175

 
105

Officer stock-based compensation
 
286

 
543

Total postretirement health care and deferred compensation benefits
 
68,363

 
69,093

Less current portion
 
(4,878
)
 
(5,019
)
Long-term postretirement health care and deferred compensation benefits
 
$
63,485

 
$
64,074

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 at age 55 with 15 years of continuous service. We use a September 1 measurement date for this plan and our postretirement health care plan currently is not funded. Changes in the postretirement benefit plan include:
In Fiscal 2005, we established dollar caps on the amount that we will pay for postretirement health care benefits per retiree on an annual basis so that we were not exposed to continued medical inflation. Retirees are required to pay a monthly premium in excess of the employer dollar caps for medical coverage based on years of service and age at retirement.
In January 2012 the employer established dollar caps were reduced by 10%, which reduced our liability for postretirement health care by $4.6 million and is being amortized as prior service credit over 7.8 years.
In January 2013 the employer established dollar caps were further reduced by 10%, which reduced our liability for postretirement health care by approximately $4.3 million and is being amortized as prior service credit over 7.5 years.
In October 2013, our Board of Directors approved an additional reduction in the employer dollar caps to be effective in January 2014 whereby the employer established dollar caps for postretirement health care benefits per eligible employee will be

8

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reduced by 10%, which is estimated to reduce our liability for postretirement health care by approximately $3.6 million and will be amortized as prior service credit over 7.3 years.

Net periodic postretirement benefit income consisted of the following components:
 
 
Quarter Ended
(In thousands)
 
November 30,
2013
 
December 1,
2012
Interest cost
 
$
395

 
$
394

Service cost
 
101

 
152

Amortization of prior service benefit
 
(1,281
)
 
(1,176
)
Amortization of net actuarial loss
 
260

 
396

Net periodic postretirement benefit income
 
$
(525
)
 
$
(234
)
 
 
 
 
 
Payments for postretirement health care
 
$
273

 
$
291

 
Note 9: Stock-Based Compensation Plans
We have a 2004 Incentive Compensation Plan approved by shareholders (as amended, the "Plan") in place which allows us to grant or issue non-qualified stock options, incentive stock options, share awards and other equity compensation to key employees and to non-employee directors.
On October 16, 2013 and October 10, 2012 the Board of Directors granted an aggregate of 84,200 and 155,600 shares, respectively, of restricted common stock to our key employees and non-employee directors. The value of the restricted stock award is determined using the intrinsic value method which, in this case, is based on the number of shares granted and the closing price of our common stock on the date of grant.
Stock-based compensation expense was $952,000 and $687,000 during the first quarters of Fiscal 2014 and 2013, respectively. Of the $952,000 in Fiscal 2014, $704,000 related to the October 16, 2013 grant of 84,200 shares. The remainder is related to the amortization of previously granted restricted stock awards, as well as non-employee director stock units issued in lieu of director fees. Compensation expense is recognized over the requisite service period of the award or over a period ending with the employee's eligible retirement date, if earlier.
Note 10: Contingent Liabilities and Commitments
Repurchase Commitments
Generally, manufacturers in the RV industry enter into repurchase agreements with lending institutions which have provided wholesale floorplan financing to dealers. Most dealers' RVs 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 recreation vehicles 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 generally 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 contingent liability on these repurchase agreements was approximately $274.5 million and $232.9 million at November 30, 2013 and August 31, 2013, 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 recreation 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 $4.9 million and $5.0 million at November 30, 2013 and August 31, 2013, respectively.
Our risk of loss related to our repurchase commitments is significantly reduced by the potential resale value of any products that are subject to repurchase and is spread over numerous dealers and lenders. The aggregate contingent liability related to our repurchase agreements represents all financed dealer inventory at the period reporting date subject to a repurchase agreement, net of the greater of periodic reductions per the agreement or dealer principal payments. Based on the repurchase exposure as previously described, we established an associated loss reserve. Our accrued losses on repurchases were $1.6 million as of November 30, 2013 and $1.3 million as of August 31, 2013.

9

Table of Contents

A summary of repurchase activity is as follows:
 
 
Quarter Ended
(Dollars in thousands)
 
November 30,
2013
 
December 1,
2012
Inventory repurchased:
 
 
 
 
Units
 
14

 

Dollars
 
$
325

 
$

Inventory resold:
 
 
 
 
Units
 
14

 

Cash collected
 
$
257

 
$

Loss recognized
 
$
68

 
$

Units in ending inventory
 

 


We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our loss reserve for repurchase commitments. A hypothetical change of a 10% increase or decrease in our significant repurchase commitment assumptions at November 30, 2013 would have affected net income by approximately $290,000.

Litigation
We are involved in various legal proceedings which are ordinary 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.
Note 11: Income Taxes
We account for income taxes under ASC 740, Income Taxes. 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. 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. Based on ASC 740 guidelines, as of November 30, 2013 and August 31, 2013, we have applied a valuation allowance of $1.4 million and $1.6 million, respectively, against our deferred tax assets. We will continue to assess the likelihood that our deferred tax assets will be realizable at each reporting period and our valuation allowance will be adjusted accordingly, which could materially impact our financial position and results of operations.

We file tax returns in the US federal jurisdiction, as well as various international and state jurisdictions. Although certain years are no longer subject to examinations by the IRS and various state taxing authorities, net operating loss 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. Due to such carryback claims, our federal returns from Fiscal 2004 to present continue to be subject to review by the IRS. Periodically, various state and local jurisdictions conduct audits, therefore, a variety of years are subject to state and local jurisdiction review.

As of November 30, 2013, our unrecognized tax benefits were $2.1 million, of which if realized $2.7 million could have a positive impact on the overall effective tax rate. It is our policy to recognize interest and penalties accrued relative to unrecognized tax benefits as tax expense. As of November 30, 2013, we had accrued $1.7 million in interest and penalties which are not included in the unrecognized tax benefits of $2.1 million. We do not anticipate any significant changes in unrecognized tax benefits within the next twelve months. Actual results may differ materially from this estimate.


10

Table of Contents

Note 12: Earnings Per Share
The following table reflects the calculation of basic and diluted income per share:
 
 
Quarter Ended
(In thousands, except per share data)
 
November 30,
2013
 
December 1,
2012
Income per share - basic
 
 
 
 
Net income
 
$
11,146

 
$
7,391

Weighted average shares outstanding
 
27,851

 
28,301

Net income per share - basic
 
$
0.40

 
$
0.26

 
 
 
 
 
Income per share - assuming dilution
 
 
 
 
Net income
 
$
11,146

 
$
7,391

Weighted average shares outstanding
 
27,851

 
28,301

Dilutive impact of awards and options outstanding
 
120

 
60

Weighted average shares and potential dilutive shares outstanding
 
27,971

 
28,361

Net income per share - assuming dilution
 
$
0.40

 
$
0.26


At the end of the first quarters of Fiscal 2014 and Fiscal 2013, there were options outstanding to purchase 364,042 shares and 689,328 shares, respectively, of common stock at an average price of $32.36 and $29.57, 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, Earnings Per Share.

Note 13: Comprehensive Income

Changes in AOCI by component, net of tax, were:
 
Quarter Ended
 
November 30, 2013
 
December 1, 2012
(In thousands)
Defined Benefit
Pension Items
Unrealized Gains and Losses on Available-
for-Sale Securities
Total
 
Defined Benefit
Pension Items
Unrealized Gains and Losses on Available-
for-Sale Securities
Total
Balance at beginning of period
$
1,000

$
(151
)
$
849

 
$
(3,326
)
$
(360
)
$
(3,686
)
 
 
 
 
 
 
 
 
OCI before reclassifications

151

151

 

(1
)
(1
)
Amounts reclassified from AOCI
(636
)

(636
)
 
(481
)

(481
)
Net current-period OCI
(636
)
151

(485
)
 
(481
)
(1
)
(482
)
 
 
 
 
 
 
 
 
Balance at end of period
$
364

$

$
364

 
$
(3,807
)
$
(361
)
$
(4,168
)

Reclassifications out of AOCI in net periodic benefit costs, net of tax, were:
 
 
 
 
Quarter Ended
(In thousands)
 
Location on Consolidated Statements of Operations and Comprehensive Income
 
November 30, 2013
 
December 1, 2012
Amortization of prior service credit
 
Cost of goods sold
 
$

 
$
(637
)
 
 
Operating expenses
 
(800
)
 
(97
)
 
 
 
 
(800
)
 
(734
)
 
 
 
 
 
 
 
Amortization of net actuarial loss
 
Cost of goods sold
 

 
220

 
 
Operating expenses
 
164

 
33

 
 
 
 
164

 
253

 
 
 
 
 
 
 
Total
 
 
 
$
(636
)
 
$
(481
)


11

Table of Contents

Note 14: Subsequent Event

We evaluated all events or transactions occurring between the balance sheet date for the quarterly period ended November 30, 2013 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 in Note 5.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This management's discussion should be read in conjunction with the Condensed Unaudited Financial Statements contained in this Form 10-Q as well as the Management's Discussion and Analysis and Risk Factors included in our Annual Report on Form 10‑K for the fiscal year ended August 31, 2013.

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, 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 report. Although we believe that the expectations reflected in the “forward-looking statements” are reasonable, we cannot guarantee future results, or levels of activity, performance or achievements. Undue reliance should not be placed on these “forward-looking statements,” which speak only as of the date of this report. We undertake no obligation to publicly update or revise any “forward-looking statements” whether as a result of new information, future events or otherwise, except as required by law or the rules of the NYSE.

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 motorhomes in vertically integrated manufacturing facilities in Iowa and we produce all of our travel trailer and fifth wheels in Indiana. We distribute our products primarily through independent dealers throughout the US and Canada, who then retail the products to the end consumer.

12

Table of Contents

Our retail unit market share, as reported by Stat Surveys based on state records, is illustrated below. Note that this data is subject to adjustment and is continuously updated.
 
 
Through October 31
 
Calendar Year
US Retail Motorized:
 
2013
2012
 
2012
2011
2010
Class A gas
 
22.5
%
23.6
%
 
24.2
%
22.2
%
23.7
%
Class A diesel
 
17.9
%
19.4
%
 
19.4
%
17.6
%
15.2
%
Total Class A
 
20.7
%
21.8
%
 
22.2
%
20.2
%
19.5
%
Class C
 
16.9
%
17.8
%
 
18.3
%
17.4
%
17.9
%
Total Class A and C
 
19.0
%
20.0
%
 
20.5
%
19.0
%
18.8
%
 
 
 
 
 
 
 
 
Class B
 
17.6
%
17.1
%
 
17.6
%
7.9
%
15.6
%
 
 
 
 
 
 
 
 
 
 
Through October 31
 
Calendar Year
Canadian Retail Motorized:
 
2013
2012
 
2012
2011
2010
Class A gas
 
13.5
%
15.2
%
 
15.3
%
16.5
%
14.9
%
Class A diesel
 
14.8
%
16.7
%
 
17.3
%
18.0
%
9.9
%
Total Class A
 
14.0
%
15.8
%
 
16.1
%
17.1
%
12.6
%
Class C
 
11.7
%
14.6
%
 
14.9
%
15.9
%
13.8
%
Total Class A and C
 
12.7
%
15.2
%
 
15.5
%
16.5
%
13.2
%
 
 
 
 
 
 
 
 
Class B
 
20.1
%
12.1
%
 
12.7
%
7.1
%
4.8
%
 
 
US
 
Canadian
 
 
Through October 31
 
Calendar Year
 
Through October 31
 
Calendar Year
Retail Towables:
 
2013
2012
 
2012
2011
 
2013
2012
 
2012
2011
Travel trailer
 
1.0
%
0.8
%
 
0.8
%
0.6
%
 
0.9
%
0.6
%
 
0.6
%
0.5
%
Fifth wheel
 
0.8
%
1.1
%
 
1.1
%
0.5
%
 
1.4
%
1.6
%
 
1.5
%
0.6
%
Total towables
 
0.9
%
0.9
%
 
0.9
%
0.6
%
 
1.0
%
0.8
%
 
0.9
%
0.5
%

Presented in fiscal quarters, certain key metrics are shown below:
 
 
Class A, B & C Motorhomes
 
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
Q2 2012
 
1,001

872

2,074

1,004

 
562

332

1,376

417

Q3 2012
 
1,280

1,414

1,940

1,237

 
646

652

1,370

505

Q4 2012
 
1,321

1,334

1,927

1,473

 
695

700

1,365

411

Q1 2013
 
1,534

1,416

2,045

2,118

 
557

367

1,555

687

Rolling 12 months
 
5,136

5,036

 
 
 
2,460

2,051

 
 
Dec 2011-Nov 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Q2 2013
 
1,419

1,072

2,392

2,752

 
548

328

1,775

381

Q3 2013
 
1,978

1,736

2,634

2,846

 
713

846

1,642

443

Q4 2013
 
1,890

1,870

2,654

3,409

 
717

748

1,611

221

Q1 2014
 
2,005

1,524

3,135

3,534

 
484

504

1,591

151

Rolling 12 months
 
7,292

6,202

 


 
2,462

2,426

 
 
Dec 2012-Nov 2013
 
 
 




 
 
 
 
 


13

Table of Contents

Industry Outlook
Key statistics for the motorhome industry are as follows:
 
US and Canada Industry Class A, B & C Motorhomes
 
Wholesale Shipments(1)
 
Retail Registrations(2)
 
Calendar Year
 
Calendar Year
 
 
 
 
(Decrease)

 
 
 
 
 
 
 
(In units)
2012

 
2011

Increase

Change

 
2012

 
2011

Increase

Change

Q1
6,869

 
6,888

(19
)
(0.3
)%
 
5,706

 
5,114

592

11.6
%
Q2
7,707

 
7,868

(161
)
(2.0
)%
 
8,206

 
8,140

66

0.8
%
Q3
6,678

 
5,267

1,411

26.8
 %
 
6,916

 
6,102

814

13.3
%
Q4
6,944

 
4,807

2,137

44.5
 %
 
4,922

 
4,623

299

6.5
%
Total
28,198

 
24,830

3,368

13.6
 %
 
25,750

 
23,979

1,771

7.4
%
 
 
 
 
 
 
 
 
 
 
 
 
(In units)
2013

 
2012

Increase

Change

 
2013

 
2012

Increase

Change

Q1
8,500

 
6,869

1,631

23.7
 %
 
7,137

 
5,706

1,431

25.1
%
Q2
10,972

 
7,707

3,265

42.4
 %
 
10,890

 
8,206

2,684

32.7
%
Q3
9,469

  
6,678

2,791

41.8
 %
 
9,052

 
6,916

2,136

30.9
%
October
3,454

 
2,506

948

37.8
 %
 
2,558

 
1,910

648

33.9
%
November
3,037

 
2,295

742

32.3
 %
 
 
(4)
1,636





December
3,104

(3) 
2,143

961

44.8
 %
 


(4)
1,376





Q4
9,595

(3) 
6,944

2,651

38.2
 %
 
 
(4)
4,922

 
 
Total
38,536

(3) 
28,198

10,338

36.7
 %
 


 
25,750




(1) 
Class A, B and C wholesale shipments as reported by RVIA.
(2) 
Class A, B and C retail registrations as reported by Stat Surveys for the US and Canada combined.
(3) 
Monthly and quarterly 2013 Class A, B and C wholesale shipments 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 Winter 2013 Industry Forecast Issue. The revised RVIA annual 2013 and 2014 wholesale shipment forecast is 38,100 and 41,900 respectively.
(4) 
Stat Surveys has not issued a projection for retail demand for this period.
    
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)
2012

 
2011

Increase

Change

 
2012

 
2011

Increase

Change

Q1
60,402

 
54,132

6,270

11.6
%
 
39,093

 
33,698

5,395

16.0
%
Q2
71,095

 
65,987

5,108

7.7
%
 
83,990

 
79,155

4,835

6.1
%
Q3
56,601

 
47,547

9,054

19.0
%
 
67,344

 
63,014

4,330

6.9
%
Q4
54,782

 
45,266

9,516

21.0
%
 
32,469

 
30,044

2,425

8.1
%
Total
242,880

 
212,932

29,948

14.1
%
 
222,896

 
205,911

16,985

8.2
%
 
 
 
 
 
 
 
 
 
 
 
 
(In units)
2013

 
2012

Increase

Change

 
2013

 
2012

Increase

Change

Q1
66,745

 
60,402

6,343

10.5
%
 
42,852

 
39,093

3,759

9.6
%
Q2
79,935

 
71,095

8,840

12.4
%
 
94,526

 
83,990

10,536

12.5
%
Q3
61,251

 
56,601

4,650

8.2
%
 
79,321

 
67,344

11,977

17.8
%
October
24,383

 
21,374

3,009

14.1
%
 
16,871

 
14,812

2,059

13.9
%
November
17,932

 
17,480

452

2.6
%
 
 
(4)
10,083





December
18,448

(3)
15,928

2,520

15.8
%
 
 
(4)
7,574





Q4
60,763

(3)
54,782

5,981

10.9
%
 
 
(4)
32,469

 
 
Total
268,694

(3)
242,880

25,814

10.6
%
 


 
222,896




(1) 
Towable wholesale shipments as reported by RVIA.
(2) 
Towable retail registrations as reported by Stat Surveys for the US and Canada combined.
(3) 
Monthly and quarterly 2013 towable wholesale shipments 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 Winter 2013 Industry Forecast Issue. The revised RVIA annual 2013 and 2014 wholesale shipment forecast is 263,900 and 279,100 respectively.
(4)
Stat Surveys has not issued a projection for retail demand for this period.


14

Table of Contents

Company Outlook
Our motorized dealer backlog is an indicator of demand for our product in the current marketplace. We have experienced positive growth in this measure for eight consecutive fiscal quarters. We believe the increase is a result of the overall growth of the RV industry coupled with positive dealer response and increased retail registration activity of our products.

As a result of the improved demand, we have been increasing our production rates and recently leased an additional production facility. In addition to the increased production capacity, we also expect to have increased access to Class A gas chassis late in our second fiscal quarter. Recently the availability of these chassis has been limited.

Another positive outcome of the increased demand is an improved sales incentive environment. Coupled with the operating leverage within our business model, we are able to achieve stronger operating margins. During the first quarter of Fiscal 2014 we achieved operating margins of 7.2%, an increase of 2.1% when compared to the first quarter of Fiscal 2013.

Our motorized sales order backlog of 3,534 as of November 30, 2013 represents orders to be shipped in the next two quarters.

We believe that the level of our dealer inventory at the end of the first quarter of Fiscal 2014 is aligned with current market conditions given the improved retail demand and increased sales order backlog of our product.

Our unit order backlog was as follows:
 
As Of
(In units)
November 30, 2013
 
December 1, 2012
 
Increase
(Decrease)
%
Change
Class A gas
1,382

39.1
%
 
884

41.7
%
 
498

56.3
 %
Class A diesel
521

14.7
%
 
389

18.4
%
 
132

33.9
 %
Total Class A
1,903

53.8
%
 
1,273

60.1
%
 
630

49.5
 %
Class B
317

9.0
%
 
111

5.2
%
 
206

185.6
 %
Class C
1,314

37.2
%
 
734

34.7
%
 
580

79.0
 %
Total motorhome backlog(1)
3,534

100.0
%
 
2,118

100.0
%
 
1,416

66.9
 %
 
 
 
 
 
 
 
 
 
Travel trailer
117

77.5
%
 
557

81.1
%
 
(440
)
(79.0
)%
Fifth wheel
34

22.5
%
 
130

18.9
%
 
(96
)
(73.8
)%
Total towable backlog(1)
151

100.0
%
 
687

100.0
%
 
(536
)
(78.0
)%
 
 
 
 
 
 
 
 
 
Approximate backlog revenue in thousands
 
 
 
 
 
 
 
Motorhome
$
340,703

 
 
$
226,457

 
 
$
114,246

50.4
 %
Towable
$
3,401

 
 
$
14,049

 
 
$
(10,648
)
(75.8
)%
(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 cancelled or postponed at the option of the purchaser and, therefore, backlog may not necessarily be an accurate measure of future sales.


15

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)
 
November 30,
2013
% of
Revenues(1)
 
December 1,
2012
% of
Revenues(1)
 
Increase
(Decrease)
%
Change
Net revenues
 
$
222,670

100.0
%
 
$
193,554

100.0
%
 
$
29,116

15.0
 %
Cost of goods sold
 
196,708

88.3
%
 
172,807

89.3
%
 
23,901

13.8
 %
Gross profit
 
25,962

11.7
%
 
20,747

10.7
%
 
5,215

25.1
 %
 
 
 
 
 
 
 
 
 
 
Selling
 
4,333

1.9
%
 
4,961

2.6
%
 
(628
)
(12.7
)%
General and administrative
 
5,623

2.5
%
 
5,812

3.0
%
 
(189
)
(3.3
)%
Loss on sale of asset held for sale
 

%
 
28

%
 
(28
)
(100.0
)%
Operating expenses
 
9,956

4.5
%
 
10,801

5.6
%
 
(845
)
(7.8
)%
 
 
 
 
 
 
 
 
 
 
Operating income
 
16,006

7.2
%
 
9,946

5.1
%
 
6,060

60.9
 %
Non-operating income
 
91

%
 
614

0.3
%
 
(523
)
(85.2
)%
Income before income taxes
 
16,097

7.2
%
 
10,560

5.5
%
 
5,537

52.4
 %
Provision for taxes
 
4,951

2.2
%
 
3,169

1.6
%
 
1,782

56.2
 %
Net income
 
$
11,146

5.0
%
 
$
7,391

3.8
%
 
$
3,755

50.8
 %
 
 
 
 
 
 
 
 
 
 
Diluted income per share
 
$
0.40

 
 
$
0.26

 
 
$
0.14

53.8
 %
Diluted average shares outstanding
 
27,971

 
 
28,361

 
 
(390
)
(1.4
)%
(1) Percentages may not add due to rounding differences.
Unit deliveries and ASP, net of discounts, consisted of the following:
 
 
Quarter Ended
(In units)
 
November 30,
2013
Product
Mix % (1)
 
December 1,
2012
Product
Mix % (1)
 
Increase
(Decrease)
%
Change
Motorhomes:
 
 
 
 
 
 
 
 
 
Class A gas
 
710

35.4
%
 
620

40.4
%
 
90

14.5
 %
Class A diesel
 
397

19.8
%
 
345

22.5
%
 
52

15.1
 %
Total Class A
 
1,107

55.2
%
 
965

62.9
%
 
142

14.7
 %
Class B
 
102

5.1
%
 
90

5.9
%
 
12

13.3
 %
Class C
 
796

39.7
%
 
479

31.2
%
 
317

66.2
 %
Total motorhome deliveries
 
2,005

100.0
%
 
1,534

100.0
%
 
471

30.7
 %
 
 
 
 
 
 
 
 
 
 
ASP (in thousands)
 
$
100.5

 
 
$
111.9

 
 
$
(11.5
)
(10.2
)%
 
 
 
 
 
 
 
 
 
 
Towables:
 
 
 
 
 
 
 
 
 
Travel trailer
 
407

84.1
%
 
408

73.2
%
 
(1
)
(0.2
)%
Fifth wheel
 
77

15.9
%
 
149

26.8
%
 
(72
)
(48.3
)%
Total towable deliveries
 
484

100.0
%
 
557

100.0
%
 
(73
)
(13.1
)%
 
 
 
 
 
 
 
 
 
 
ASP (in thousands)
 
$
21.6

 
 
$
21.4

 
 
$
0.2

1.2
 %
(1) Percentages may not add due to rounding differences.


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Table of Contents

Net revenues consisted of the following:
 
 
Quarter Ended
(In thousands)
 
November 30,
2013
 
December 1,
2012
 
Increase
(Decrease)
%
Change
Motorhomes (1)
 
$
204,385

91.8
%
 
$
173,828

89.8
%
 
$
30,557

17.6
 %
Towables (2)
 
10,531

4.7
%
 
12,071

6.2
%
 
(1,540
)
(12.8
)%
Other manufactured products
 
7,754

3.5
%
 
7,655

4.0
%
 
99

1.3
 %
Total net revenues
 
$
222,670

100.0
%
 
$
193,554

100.0
%
 
$
29,116

15.0
 %
(1) 
Motorhome unit revenue less discounts, sales promotions and incentives, and accrued loss on repurchase adjustments.
(2) 
Includes towable units and parts.

Motorhome net revenues increased $30.6 million or 17.6% in the first quarter of Fiscal 2014. The increase was attributed primarily to a 30.7% increase in unit deliveries driven by higher dealer and retail consumer demand, partially offset by a decrease in motorhome ASP of 10.2% as compared to the first quarter of Fiscal 2013. The decrease in ASP was primarily due to a shift in class A diesel product to lower price points, a higher percent of Class C unit sales and a lower percent of class A gas unit sales in the first quarter of Fiscal 2014.

The decrease in Towables revenues of $1.5 million or 12.8% was attributed to a 13.1% decrease in unit deliveries with ASPs comparable to the first quarter of Fiscal 2013.

One contributing factor to the increase in unit deliveries during the quarter relates to revised shipping terms with our dealers. Effective in the first quarter of Fiscal 2014, we entered into revised dealer agreements to change our shipping terms so that title and risk of loss passes to our dealers upon acceptance of the unit by an independent transportation company for delivery which is standard industry practice. As a result of this term change, an additional $21.4 million of revenue was recognized in the quarter, which represented units in possession of the transportation company in-transit to the dealer. In Fiscal 2013, such revenues would have been recognized in the second fiscal quarter. Conversely, due to our 52/53 week fiscal year convention, the first quarter of Fiscal 2013 had an extra week in the quarter as compared to the first quarter of Fiscal 2014 resulting in an additional $13.8 million of revenue recognized in the prior year first quarter. The net effect of these two timing items resulted in a positive impact of $7.6 million when comparing the first quarter of Fiscal 2014 to the first quarter of Fiscal 2013.

Cost of goods sold was $196.7 million, or 88.3% of net revenues for the first quarter of Fiscal 2014 compared to $172.8 million, or 89.3% of net revenues for the first quarter of Fiscal 2013 due to the following:
Total variable costs (materials, direct labor, variable overhead, delivery expense and warranty), as a percent of net revenues, decreased to 83.2% this year from 83.7%.
Fixed overhead (manufacturing support labor, depreciation and facility costs) and research and development-related costs decreased to 5.2% of net revenues compared to 5.6% for Fiscal 2013. This difference was primarily due to significantly higher production levels in Fiscal 2014 which resulted in higher absorption of fixed overhead costs.
All factors considered, gross profit increased from 10.7% to 11.7% of net revenues.
Selling expenses decreased to 1.9% from 2.6% of net revenues in the first quarter of Fiscal 2014 compared to Fiscal 2013, respectively. Selling expenses decreased $628,000, or 12.7%, in the first quarter of Fiscal 2014 compared to the same period in Fiscal 2013. The expense decrease was primarily due to advertising expenses associated with timing of the Louisville show which occurred in the first quarter of Fiscal 2013 and will occur in the second quarter of Fiscal 2014.
General and administrative expenses were 2.5% and 3.0% of net revenues in the first quarter of Fiscal 2014 and Fiscal 2013, respectively. General and administrative expenses decreased $189,000, or 3.3% in the first quarter of Fiscal 2014 compared to the same period in Fiscal 2013. This decrease was due primarily to a decrease in legal expenses of $527,000, partially offset by increased stock compensation expense of $209,000 in Fiscal 2014.
Non-operating income decreased $523,000 or 85.2%, in the first quarter of Fiscal 2014 compared to the same period in Fiscal 2013. This difference is primarily due to proceeds from COLI policies in Fiscal 2013.
The overall effective income tax provision rate for the first quarter of Fiscal 2014 was 30.8% compared to the tax provision rate of 30.0% for the first quarter of Fiscal 2013. The increase in tax rate for the first quarter of Fiscal 2014 is primarily a result of the increased level of pretax book income earned during the quarter and a reduced level (in comparison to book income) of benefits recorded for tax free and dividend income as well as uncertain tax positions during the quarter.
Net income and diluted income per share were $11.1 million and $0.40 per share, respectively, for the first quarter of Fiscal 2014. In the first quarter of Fiscal 2013, net income was $7.4 million and diluted income was $0.26 per share.


17

Table of Contents

Analysis of Financial Condition, Liquidity and Resources
Cash and cash equivalents decreased $14.5 million during the first three months of Fiscal 2014 and totaled $49.7 million as of November 30, 2013. Significant liquidity events that occurred during the first three months of Fiscal 2014 were:
Increase in receivables and prepaid assets of $13.9 million
Generation of net income of $11.1 million
Increases in inventories of $10.4 million
Stock repurchases of approximately $5.6 million partially offset by $2.1 million of proceeds from the exercise of stock options
On October 31, 2012, we entered into the Credit Agreement with GECC. The Credit Agreement provides for an initial $35.0 million revolving credit facility based on our eligible inventory and expires on October 31, 2015 unless terminated earlier in accordance with its terms. There is no termination fee associated with the Credit Agreement.
The Credit Agreement contains no financial covenant restrictions for borrowings where we have excess borrowing availability under the facility of greater than $5.0 million. The Credit Agreement requires us to comply with a fixed charge ratio if excess borrowing availability under the facility is less than $5.0 million. In addition, the Credit Agreement also includes a framework to expand the size of the facility up to $50.0 million, based on mutually agreeable terms at the time of the expansion. See Note 6 to the financial statements.
We filed a Registration Statement on Form S-3, which was declared effective by the SEC on May 9, 2013. Subject to market 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 November 30, 2013 and August 31, 2013 was $164.8 million and $153.5 million, respectively, an increase of $11.3 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 during the balance of Fiscal 2014 of approximately $10.2 million, primarily for manufacturing equipment and facilities and IT upgrades.
We made share repurchases of $5.6 million in the first three months of Fiscal 2014. If we believe the common stock is trading at attractive levels and reflects a prudent use of our capital, we may purchase additional shares in the remainder of Fiscal 2014. See Part II, Item 2 of this Form 10-Q.
Operating Activities
Cash used in operating activities was $11.9 million for the three months ended November 30, 2013 compared to $10.3 million for the three months ended December 1, 2012. In Fiscal 2014 the combination of net income of $11.1 million and changes in non-cash charges (e.g., depreciation, LIFO, stock-based compensation, deferred income taxes) provided $13.5 million of operating cash. Changes in assets and liabilities (primarily increases in inventory and receivables) used $25.4 million of operating cash. In the first three months of Fiscal 2013, the combination of net income of $7.4 million and changes in non-cash charges (e.g., depreciation, LIFO, stock-based compensation, deferred income taxes) provided $8.9 million of operating cash. Changes in assets and liabilities (primarily an increase in inventories) used $19.2 million of operating cash.
Investing Activities
Cash provided by investing activities of $811,000 for the three months ended November 30, 2013 was due primarily to proceeds from the sale of investments of $2.4 million and was partially offset by capital spending of $1.7 million. In the three months ended December 1, 2012, cash used in investing activities of $975,000 was due primarily to payments of COLI borrowings of $1.4 million, and capital spending of $1.3 million, and was partially offset by proceeds of $1.0 million from COLI policies and proceeds of $566,000 from the sale of property.
Financing Activities
Cash used in financing activities of $3.5 million for the three months ended November 30, 2013 was primarily due to $5.6 million in repurchases of our stock partially offset by proceeds of $2.1 million from the exercise of stock options. Cash used in financing activities of $7.3 million for the three months ended December 1, 2012 was primarily due to $7.2 million in repurchases of our stock.
 
Significant Accounting Policies

We describe our significant accounting policies in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2013. We discuss our critical accounting estimates in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended August 31, 2013. We refer to these disclosures for a detailed

18

Table of Contents

explanation of our significant accounting policies and critical accounting estimates. There has been no significant change in our significant accounting policies or critical accounting estimates since the end of Fiscal 2013.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

None

Item 4. Controls and Procedures
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